Greetings, ladies and gentlemen, and welcome to ADDvantage Technologies Group's fiscal 2023 first quarter financial results. At this time, all participants are in listen-only mode. The question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star then zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Brett Maas of Hayden IR. Please go ahead, sir.
Thank you, operator. We're joined today by Joe Hart, President and CEO, as well as Michael Rutledge, the company's Chief Financial Officer. Before we begin today's call, I'd like to remind you that this conference call may contain forward-looking statements, which are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, among other things, statements regarding future events, such as the ability of ADDvantage Technologies and its subsidiaries to maintain strategic relationships and agreements with certain Original Equipment Manufacturer and multiple system operators, as well as future financial performance of ADDvantage Technologies. These statements involve a number of risks and uncertainties.
Participants are cautioned that these forward-looking statements are only predictions and may materially differ from the actual future events or results due to a variety of factors, such as those contained in ADDvantage Technologies' most recent report on Form 10-K on the file with the Securities and Exchange Commission. Financial information presented on this conference call should be considered in conjunction with the consolidated financial statements and notes included in the company's press release issued earlier today, and including ADDvantage Technologies' most recent report on Form 10-K. The guidance regarding anticipated future results on this call is based on limited information currently available on ADDvantage Technologies, which is subject to change. Although any such trends and factors that influence it may change, ADDvantage Technologies will not necessarily update this information, as the company will only provide guidance at certain points during the year.
Such information speaks only as of the date of this call. During this call, we may also present certain non-GAAP financial measures, such as non-GAAP net income and certain ratios that are used with these measures. In our press release and in the financial tables issued earlier today, which are located on our website at addvantagetechnologies.com, you will find a reconciliation of these non-GAAP financial measures with the closest GAAP financials and a discussion about why we believe the non-GAAP financial measures are relevant. These financial measures are included for the benefit of investors and should be considered in addition to and not instead of GAAP measures. I'd like to now turn the call over Joe Hart, President and CEO of ADDvantage Technologies. Joe, please go ahead.
Thank you, Brett, and thank you to everyone joining us on the call today. This was a challenging quarter. The March quarter is always a challenge for our wireless segment, due largely to winter weather in the Midwest. It is typically our slowest quarter. Compounding that was the sudden and precipitous decline in demand for our telco segment. For the last two years, our telco segment has been delivering robust growth, benefiting from several pandemic-related trends, such as the disrupted supply chain, the global chip shortage, and the remote workforce. Simply put, enterprises needed more telco equipment, from office phones to optical switches, to better support a workforce that was more distributed than ever. The chip shortage, supply chain constraints, and high cost to borrow made it difficult, and in some cases impossible, to buy new equipment.
Last year, this led to a large demand curve for used and refurbished network components. The result was overbuying in 2022 from network operators concerned that they wouldn't be able to get critical parts or spares for their network. Now that the OEMs have improved delivery intervals for new equipment, the operators have focused on burning off the excess inventory that they have built up of spares, which has had a significant impact on our business. We expect that inventory buildup will burn off at some point in the next few months, that our equipment business will normalize back to more historic levels during the second half of this year. In the meantime, our wireless segment continues to perform at normal levels with a slight decline in January due to winter weather.
As the weather improves, we are highly confident that our wireless revenue will accelerate significantly this year. We think we've only scratched the surface of the wireless opportunity. We continue to add experienced talent to our team, broadening our opportunities and improving our competitive position. Moreover, the wireless industry is facing unprecedented upheaval. Some of the largest service integrators who have served large carriers in many areas of the country are struggling. Some have had service issues, and one has failed. This has created greenfield opportunities for reliable partners, and we believe we will capture a meaningful share of the near-term CapEx spend. The overall opportunity is massive, and the new additions to our team bring established relationships and significant experience. The continuing 5G opportunity represents a multiyear growth opportunity for tower work, as the carriers are less than halfway complete with their initial 5G deployments.
Some of the carriers are announcing a brief pause or slowdown in their expansion plans, they continue to invest billions of dollars in their networks as they must deliver the capacity and coverage required by the ever-demanding wireless subscriber population. On the bright side, we benefited from the cost reduction initiatives we put in place last year. We again lowered our SG&A expenses, and we are poised for solid profitability as revenues normalize in the telco segment and increase in the wireless division in the second half of this year. Consolidated revenues decreased 38% from the same quarter a year ago, gross margins remained essentially flat, and our operating expenses decreased by $0.8 million. With that, I'll now turn the call over to Michael Rutledge, our CFO, to provide a more detailed review of our financial results. Michael, please go ahead.
Thank you, Joe. Consolidated sales decreased $9.1 million, or 38% to $14.7 million for the first quarter from $23.8 million for the three months ended March 31, 2022. The decrease was primarily due to a decrease of $7.9 million or 49% in telco revenue and a decrease of $1.2 million or 15% in wireless revenue. Gross profit was $3.4 million, with a 23% gross margin compared to a gross profit of [$5.0 million] or a 24% gross margin for the same period last year. Operating expenses decreased approximately $800,000 or 29% to $2.0 million, reflecting the previously announced cost reduction initiatives.
Consolidated selling, general and administrative, or SG&A expenses include overhead, which consists of personnel, insurance, professional services, communication, and other cost categories, decreased approximately $200,000 or 6% to $3.6 million for the three months ended March 31, 2023 from $3.9 million for the same period last year. Net loss for the quarter was $2.7 million or $0.21 per basic and diluted share, compared to a net loss of $1.4 million or $0.11 per basic and diluted share for the same quarter last year. Turning to our balance sheet. Cash and cash equivalents were $2.6 million at March 31, essentially unchanged from December 31, 2022.
In April, we entered into a securities purchase agreement issuing 13% secured promissory notes in the aggregate principal amount of $3.0 million convertible into shares of the common stock of the company, raising net proceeds of $2.9 million. As of March 31, 2023, the company had net inventories of $8.5 million. Outstanding debt as of March 31 was $1.7 million, consisting of vehicle financing leases. This concludes the financial overview segment of our remarks. I will now turn the call over to the operator to facilitate any questions.
Thank you very much, sir. Ladies and gentlemen, we will now be conducting the question and answer session. If you would like to ask a question, please press star then one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star two to leave the question queue. We ask that you please limit your questions to one. For participants making use of speaker equipment, it may be necessary to pick up your handset before pressing the star keys. The first question comes from George Basnar with The Property Investor.
Can you hear me?
Yes, we can hear you, George.
Okay. All right. Well, needless to say, it's this disappointing quarter, much more so than what we, you addressed in your last call. I'd like to know on the wireless area, are you going to be able to expand your, what you're operating besides getting on the towers? Is there anything going on in terms of tower development now? You implied that there's a lot of potential changes that have to be made in the past on towers to update to the 5G that's coming into the market on a regular basis. Are there things that you envision going on towers that are gonna give you even more work? Can you expand your base of operations in terms of the sort of this wireless area in general?
Thanks, George. This is Joe. Thank you for your question. Yes, there's a lot of, there's a lot of new aspects to the services that we perform on towers, that we think will improve the future for us. One of those is Fixed Wireless Access, where businesses and homes can directly get internet over fixed wireless, which is going into the cellular network. That gives us an opportunity. Small Cell, which is poles, light poles, streetlights, billboards, you know, basically, Street side architecture that allows you to put smaller cell sites right in residential and commercial areas and are less obtrusive rather than the big 200, 300 ft cell towers that exist. Both of those are, you know, a coming growth opportunity for us.
Some of the carriers are starting to announce their Fixed Wireless Access programs. The one in your geography, UScellular, is a big advocate of Fixed Wireless, we see a bright future in that. Also, as you increase the speed and the bandwidth from 3G to 4G to 5G, the cell sites need, you know, a tremendous amount of bandwidth. As people doing video streaming and data streaming, it requires a lot more bandwidth. The height of those antennas is slowly coming down from probably an average of about 220-240 ft, down more to the 150 ft, 180 foot level. What that does, it shrinks the diameter of the cell and then creates holes in the network. What happens there?
You see companies like Verizon, you know, announcing a big program to increase the number of new sites that they have out there. You know, we'll be doing a lot of new site construction for a number of the carriers. Recently, AT&T announced that as soon as the dual-band radios are available, they'll be relaunching and rejuvenating their whole C-band program for the new spectrum that they bought in the FCC auctions last year. We see, you know, quite a bit of opportunity developing beyond just the plain old climb the tower and upgrade the radios and antennas. There's a lot of opportunity out there. Maybe further down the road, we're looking at potentially expanding into the fiber-optic cable network services in some fashion. That's a little bit further down the road for us.
All right.
Hope that answers your question.
Okay. Could I just expand that question? Can you talk a little bit about the geographical coverage that you're involved now at relative to, say, a few months ago, and what you're looking at going forward state to state? Where are you really concentrating, and where would you like to go from here?
We, we serve basically the central region from north to south. We serve Illinois, Wisconsin, Michigan, Indiana, a little bit of Minnesota sometimes. It comes straight down through Arkansas, Oklahoma, Missouri, Kansas, all the way down to southern border of Texas. Last year, we branched out into Louisiana, Mississippi, and a little bit in Alabama. We expect that our geography of growth might be the Minnesota Northern Plains states, you know, including Iowa, Nebraska, and then also the southeastern states, you know, the Gulf, all the way over to Florida, Georgia, and potentially up into the Carolinas. We won't go there without a customer that is, you know, giving, awarding us business that takes us and, you know, really provides the opportunity for deployment.
Okay.
We're not just gonna go set up a storefront and wait for business.
Okay. Joe, can you identify the number of crews that you have working now as opposed to the end of the year, this past year? Where do you think you're going by, say, middle of the year?
I know we had a big rainstorm here this afternoon, George, so I might be off by a couple. You know, we're currently at about 30 crews, north to south. Towards the end of the year, we were, you know, with the Christmas holidays and the winter weather that hit in the Chicago area and that Great Lakes area, you know, we were probably down around 25, 24 for a few weeks there. We think this summer will probably hit a level of 50-55 crews. We expect our revenues to pick up here in the second half of the year, and that'll drive crew count.
Okay. All right. As far as the crew capability, are you finding it, the crews accessible, for your service, or is it hard getting crews?
No. It's, there are a lot of crews available as some of the carrier programs, hit a, either a completion point or a pause in their programs or a change in geography, whatever, might cause that. There are a lot of subcontractor crews available. The trickier part about internal crews is just making sure that you're adding really good internal crews, that you're just not picking up warm bodies.
Okay. If, if I could ask one other additional question. Can you just identify a little more specifically the number of shares that are out at this point in time and in terms of the most recent financing that you've accomplished and the conversion of that, where's the share count gonna go? Can you just give us a general idea?
Yeah. I'm gonna ask Michael Rutledge to answer that just so that I don't misspeak.
All right.
Yeah. Thanks. Thanks, Joe. George, as on the 10-Q, we disclosed that we have 14.9 million shares outstanding as of May 9th. As far as the conversion, potential conversion of the financing that we did in April, it's not our intent necessarily that any of those shares would convert. It will be tied to pricing that at the time that if the MasTec decided to convert that, it would determine how many shares they would get. Given the current share price, I'm not anticipating that they would want to convert, nor do we intend necessarily for them to convert. Determining that a number of shares at this point, we don't have that number.
You don't have the number beyond the 14.9 million, is that it?
That's correct. Like I said, we intend to pay the loan down, we don't have an intent to have the shares convert.
I see. I gotcha. I gotcha. Okay. Well, that's positive also. Well, hopefully, this all comes together. Thank you.
Ladies and gentlemen, we seem to have reached the end of the question and answer session. I will now turn the call back over to Joe Hart for closing remarks.
Thank you, operator. I just want to continuously remember to thank those folks that have invested in ADDvantage Technologies. We had a couple really great quarters late last year, and we're hitting a rough patch right now as the telephone equipment market for used product sort of readjusts itself and gets to a new normal. You know, we'll get through this. We have a good year ahead of us. The wireless growth looks.
Apologies, sir.
Go ahead.
Can I interrupt you there for a moment? I do apologize. We do have another question in the queue.
Okay.
Thank you. The next question comes from Richard McGlynn with A Private Investor.
Hello?
Yeah. Hi.
Hello. Yeah, George just touched on these convertible, this convertible promissory note with the $3 million here. I have some additional concerns about it. It basically is tied to the current share price of AEY. There are situations that As stated in the agreement, that if the price, the market price is below $1 a share, which is the floor price for it, that first off, that the shareholders would get an opportunity to vote on it. Is that gonna happen? If not, why not?
Yeah. Thank you for the question, Richard. We have an obligation to, as you pointed out, once the shares have been trading for below $1 for five consecutive days, which they have now, we have an obligation to request that the shareholders approve a potential sale of over 20% of the company should the debt be converted to shares. We have a legal obligation to do that, and we'll be doing that in the future.
When can we expect that? Also, the other-
It will be.
Aspect of the share price too is that if the stock is in danger or NASDAQ notifies you that they're gonna delist it from the national market because the price is below a dollar for 30 consecutive days, you guys will get a notification for that, and that is considered a default on this note, which could set a lot of items into play as far as what MasTec can do to convert the note, the principal. What does management have plans for concerning that possibility?
We have plans in the works to grow the business. We'll see where the share price goes from there. If the share price falls you know, stays below $1 and we get notified by NASDAQ, we'll have to deal with that as it comes. Right now we're focusing on-
It's halfway there already. It's 15 days that it's been underneath the dollar. It's 30 days usually by NASDAQ. They will notify you that the company's no longer in oh, what's the word? Compliance. I guess you will get... If I remember correctly, I think you possibly have 180 days to remedy the situation if the stock price doesn't get back up over a dollar again. As I say, you can see the stock's not heading in the right direction for sure. We're looking at a share price that we haven't seen with AEY in over 20 years.
I'm just kinda curious, even from the beginning when I first saw this note, what led to the, you know, necessity of coming up with a convertible like this at such generous terms, in my opinion. Now that I see what the earnings were for the first quarter there, it makes a little more sense. My concern is the liquidity situation for the company to continue, you know, operating as it has been and being able to have enough liquid cash around to keep business going at a rate, and, you know, that as planned. As I say, I'm very concerned like George was about the possible dilution to the current shareholders, this thing, because this loan could possibly issue.
I mean, MasTec could end up with close to 3 million shares, and I don't know if that includes the warrants in addition to that, and end up with, you know, 20% or more of the company outstanding shares at that point. Sue is.
Yeah, this is Richard, this is Joe Hart.
I mean, this is rather unusual, considering what we heard at the end of the, you know, the last earnings call, it's kind of broadsided. I'm just curious about this floor price issue and how it would trigger a default, which could possibly, I guess, make the conversion of shares available by MasTec possible at the floor price of $1 a share. Is that correct?
It is possible, but as I stated to George, it is not our intent to get to a point where the shares would be converted.
Well, it never is.
I mean, MasTec would only wanna convert if they thought we weren't gonna be able to pay. I don't think there's an advantage to them to take 20% or greater of the shares, when we're making regular payments on the loan.
Right.
The other thing is because the share price has declined.
Right
it now, it now could be a calculation that equals greater than the 20%, which meant that we must go to the shareholders to approve such a potential event. It's not something that we well, want to happen for sure, but, you know, by rule, we have to. As far as the NASDAQ, once we're ultimately notified that we've exceeded the 30-day sub $1 category, like you get 45, we get 45 days to submit a corrective action plan to cure on the stock price. Then we have a total of 180 days from date of notification to cure. Then if you're making progress, there's the potential for an additional 180 days after that. We don't envision that being a necessity.
We feel that we're going to have a much improved year compared to this recent quarter. You know, I will assure you, nothing. We didn't change anything from when we were really having a couple of great quarters in a row and our equipment business was, you know, growing like crazy and highly profitable, nicely profitable. Nothing changed on our side. It was just the total shutdown of ordering, mostly by the optical fiber network providers who had built up a stockpile of spares and standby equipment because they couldn't order new equipment from the OEMs.
Once the OEMs finally resolved the chip shortages, supply chain issues, et cetera, and the OEMs got the supply of new equipment back online, the fiber network providers decided to burn off that stockpile of spares that they had accumulated and just put a hold on any additional orders to companies like us until such time as they burned off that stockpile. We feel like that sometime in the next couple months, there's no way to know for sure. We are talking to the same people that, you know, helped us grow this business and order this equipment over the last two years. I mean, our equipment business tripled in revenue over the last 24 months. Those same customer contacts are saying, "Look, I need this, I need that. I need 10 of this, six of that, 12 of this, 20 of that.
I'm not allowed to order anything until the inventory level comes down to an acceptable level. Then as soon as they take that hold off, I'll be back ordering again. The only thing is we just have no control over when that gate's gonna open again. Our wireless division has been going along steadily, earning its, you know, earning revenue month after month. Margins have been good, and we get into our summer months here and people like George that have, sounds like you too, Richard, been here quite a while as an investor.
Long time.
Our summer months are really big months for us on the wireless side. We think this is going to normalize on the equipment side over the next few months, and we still believe we're gonna have a strong year on the wireless side. That will change things.
Was this note or this financing something that you guys were hit with happened to do suddenly because of the sudden drop off in the revenues from telco? You kinda had to.
Yeah.
get some liquidity.
That's exactly correct. The rapid decline from the telco business put us in a situation where working capital declined from 12/31. This was a way to bolster our working capital.
The first amortization payment on this note is what? Not till October? Is that correct?
Yeah. Six months out, yeah.
Okay. Each month it says I think I saw it in the filing. I guess you had five payments and then I guess the last one was supposed to finish up the, whatever the balance was with interest left on that. Okay. Liquidity, I mean, I don't know, you can tell me, tell us how liquidity is currently going on this, but you don't anticipate feel like you're gonna have a struggle with making those loan payments?
No, we don't. We intend to start paying those payments early. It is not our intent to get to a point where we're at the latter part of the agreement and making $500,000 payments a month.
All right. Okay. Well, as I say, being with the company, you know, and invested in this company for it seems like forever, maybe back to the last millennium. Yeah, you know, 20 years. As I say, it was shortly, I guess, after the earnings report came out that the stock went from $1.40, $1.40 down to $1 and teens and that, and then with this convertible note was filed and saw that it was diluted, then I thought, "People ain't gonna like this." Like I say, we've had a drop since, I guess mid-March or so, 40% and 20% of that's been since this note was, you know, filed, the dowel's on it because of what looks like a huge dilution possibility for the current shareholders, me included.
I got a pretty decent size holding in this company and big hopes for it, as all of us do. As I say, I just was mainly wanting to know how those issues, you know, the default that could be triggered by the share price, creating an issue with, you know, the delisting. The warrants, the 720,000 warrants, 720,000 warrant shares, those go on no matter what, right? If the thing's successfully paid off, those are still, MasTec still has the chance to redeem those or buy those for five years.
Approximately half of them, they'll keep. The other half, we pay off successfully, they return the warrants to us.
Which ones are that? The 250s or the 140?
Um-
Does it matter?
I-
Little bit of each.
No. It's the ones that are 140 that return to us.
Return to us. Okay. Well, then it's up to the market and business, hopefully getting back to firmer ground. All right. Well, those are my concerns, mainly. Don't wanna
Well.
Too much, but, you know, it's something that, I just felt like I wanted to get more clarification on it and maybe other shareholders would like to know too, so. I didn't want you to be the only one that called in.
Well, we appreciate the questions and we'll continue to monitor and evaluate, you know, what we do on a daily basis to do what's best for the shareholders.
That's what I depend on. All right.
Thank you. Thank you.
Input.
Thanks so much.
Thank you very much, sir. Ladies and gentlemen, we have now reached the end of the question and answer session. I will now turn the call back over to Joe Hart for closing remarks. Thank you, sir.
Thanks, operator. As I started to say earlier, you know, we thank you for your interest and your investment in ADDvantage Technologies. We feel that we have a bright future. You know, we're feeling that we're in a rough patch at the moment, this too shall pass. We know the cause of it, we know the cure for it. We feel that we're gonna be headed in the right direction here over these next few months, we'll hit full stride here as we hit June, July and move into the summer months. It's always our biggest time of the year, it's also our most profitable. We'll go into next year on a different growth trajectory. Thank you for joining the call today, that concludes our remarks.
Thank you, sir. Ladies and gentlemen, that concludes today's event. Thank you for attending. You may now disconnect your lines.