UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☒ | | | | | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED December 31, 2017September 30, 2023
OR
☐ | | | | | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM________________FROM ________________ TO ______________
Commission File number 1‑10799
1-10799
ADDvantage Technologies Group, Inc.
(Exact name of registrant as specified in its charter)
OKLAHOMA | 73‑1351610 | | | | | | | |
Oklahoma | | 73-1351610 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
1221 E. Houston | | |
Broken Arrow, Oklahoma 740121430 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 and posted on its corporate Web site, if any, 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, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” andfiler,” “smaller reporting company,” and “emerging growth company” in Rule12b-2Rule 12b-2 of the Exchange Act. |
Large accelerated filer☐£ Accelerated filer ☐£ Non-accelerated filer☐ (do not check if a smaller reporting company) ☒ 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 November 9, 2023 were 14,947,078.
| | |
Shares outstanding of the issuer's $.01 par value common stock as of January 31, 2018 were
10,225,995.
| |
Stock Options
All share-based payments to employees, including grants of employeeRestricted stock options, are recognized in the financial statements based on their grant date fair value over the requisite service period. Compensation expense for share-based awards is included in the operating, selling, general and administrative expense section of the Company’s consolidated condensed statements of income.
Stock options are valued at the date of the award, which does not precede the approval date, and compensation cost is recognized on a straight-line basis over the vesting period. Stock options granted to employees generally become exercisable over a three, four or five-year period from the date of grant and generally expire ten years after the date of grant. Stock options granted to the Board of Directors generally become exercisable on the date of grant and generally expire ten years after the grant.
A summary of the status of the Company's stock optionsnon-vested restricted share awards at December 31, 2017September 30, 2023 and changes during the three months then ended September 30, 2023 is presented below:in the following table (in thousands, except shares):
| | Shares | | | Wtd. Avg. Ex. Price | |
Outstanding at September 30, 2017 | | | 700,000 | | | $ | 2.54 | |
Granted | | | – | | | | – | |
Exercised | | | – | | | | – | |
Expired | | | – | | | | – | |
Forfeited | | | – | | | | – | |
Outstanding at December 31, 2017 | | | 700,000 | | | $ | 2.54 | |
| | | | | | | | |
Exercisable at December 31, 2017 | | | 526,667 | | | $ | 2.78 | |
| | | | | | | | | | | |
| Shares | | Fair Value |
Non-vested at June 30, 2023 | 897,490 | | | $ | 1,311 | |
Granted | 40,000 | | | 25 | |
Vested | (143,335) | | | (353) | |
Forfeited | (131,667) | | | (193) | |
Non-vested at September 30, 2023 | 662,488 | | | $ | 790 | |
No nonqualified stock options were granted forDuring the three month period ended September 30, 2023 and 2022, expenses related to share-based arrangements including restricted stock, were $0.1 million and $0.1 million, respectively.
During the nine months ended December 31, 2017. September 30, 2023 and 2022, compensation expenses related to share-based arrangements including restricted stock, were $0.7 million and $0.5 million respectively.
The Company estimatesdid not recognize a tax benefit for compensation expense recognized during the fair value of the options granted using the Black-Scholes option valuation model. The Company estimates the expected term of options granted based on the historical grantsthree and exercises of the Company’s options. The Company estimates the volatility of its common stock at the date of the grant based on both the historical volatility as well as the implied volatility on its common stock. The Company bases the risk-free rate that is used in the Black-Scholes option valuation model on the implied yield in effect at the time of the option grant on U.S. Treasury zero-coupon issues with equivalent expected term. The Company has never paid cash dividends on its common stocknine months ended September 30, 2023 and does not anticipate paying cash dividends in the foreseeable future. Consequently, the Company uses an expected dividend yield of zero in the Black-Scholes option valuation model. The Company amortizes the resulting fair value of the options ratably over the vesting period of the awards. The Company uses historical data to estimate the pre-vesting option forfeitures and records share-based expense only for those awards that are expected to vest.2022.
CompensationAt September 30, 2023, unrecognized compensation expense related to unvested stock options recorded for the three months ended December 31, 2017 is as follows:
| | Three Months Ended | |
| | December 31, 2017 | |
Fiscal year 2016 grant | | $ | 1,789 | |
Fiscal year 2017 grant | | $ | 10,539 | |
The Company recordsnon-vested stock-based compensation expense over the vesting term of the related options. At December 31, 2017, compensation costs related to these unvested stock optionsawards not yet recognized in the consolidated condensed statements of operations was $62,657.$0.4 million. That cost is expected to be recognized over a period of 3.0 years.
Restricted Stock
Note 12 – Leases
The Company granted restricted stockhas a right-of-use for a building in March 2017 to its BoardJessup, Maryland which was no longer being used in operations. The Maryland property was subleased as of Directors and a Company officer totaling 58,009 shares, which were valued at market value on the date of grant. The shares are being held by the Company for 12 monthsSeptember 30, 2023 and will be deliveredend in November, 2023. Rental payments received related to the directors atsublease was recorded as a reduction of rent expense in our consolidated statements of operations for the end of the 12 month holding period. The fair value of these shares at issuance totaled $105,000, which is being amortized over the 12 month holding period as compensation expense. The unamortized portion of the restricted stock is included in prepaid expenses on the Company’s consolidated condensed balance sheets.three and nine months ended September 30, 2023 and 2022.
Note 813 – Segment Reporting
The Company is reporting its financial performance based on its external reporting segments: Cable TelevisionWireless 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.
Cable Television (“Cable TV”)
The Company’s Cable TV segment sells new, surplus and re-manufactured cable television equipment throughout North America, Central America, South America and, to a substantially lesser extent, other international regions that utilize the same technology. In addition, this segment repairs cable television equipment for various cable companies.
Telecommunications (“Telco”)
The Company’s Telco segment sells new and usedrefurbished 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. In addition, thisThis segment also offers its customers decommissioningrepair and testing services for surplus and obsolete equipment, which it in turn processes through its recycling program.
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.
| | Three Months Ended | |
| | December 31, 2017 | | | December 31, 2016 | |
Sales | | | | | | |
Cable TV | | $ | 5,826,405 | | | $ | 6,574,824 | |
Telco | | | 6,458,540 | | | | 5,539,977 | |
Intersegment | | | (180 | ) | | | (18,975 | ) |
Total sales | | $ | 12,284,765 | | | $ | 12,095,826 | |
| | | | | | | | |
Gross profit | | | | | | | | |
Cable TV | | $ | 1,201,127 | | | $ | 2,400,342 | |
Telco | | | 2,180,028 | | | | 1,623,287 | |
Total gross profit | | $ | 3,381,155 | | | $ | 4,023,629 | |
| | | | | | | | |
Operating income (loss) | | | | | | | | |
Cable TV | | $ | (188,500 | ) | | $ | 908,982 | |
Telco | | | (77,168 | ) | | | (482,177 | ) |
Total operating income (loss) | | $ | (265,668 | ) | | $ | 426,805 | |
| | | | | | | | |
The Company allocates its corporate general and administrative expenses to the reportable segments.
12 | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | Three Months Ended September 30, | | Nine Months Ended September 30, | | |
| 2023 | | 2022 | | 2023 | | 2022 | | | | |
Sales | | | | | | | | | | | |
Wireless | $ | 3,669 | | | $ | 7,898 | | | $ | 16,570 | | | $ | 22,908 | | | | | |
Telco | 6,672 | | | 18,028 | | | 20,578 | | | 54,566 | | | | | |
Total sales | $ | 10,341 | | | $ | 25,926 | | | $ | 37,148 | | | $ | 77,474 | | | | | |
Gross profit | | | | | | | | | | | |
Wireless | $ | 948 | | | $ | 2,839 | | | $ | 4,079 | | | $ | 6,350 | | | | | |
Telco | 1,891 | | | 5,704 | | | 5,449 | | | 16,098 | | | | | |
Total gross profit | $ | 2,839 | | | $ | 8,543 | | | $ | 9,528 | | | $ | 22,448 | | | | | |
Income (loss) from operations | | | | | | | | | | | |
Wireless | $ | (1,853) | | | $ | (202) | | | $ | (5,617) | | | $ | (3,859) | | | | | |
Telco | (376) | | | 1,994 | | | (1,465) | | | 5,632 | | | | | |
Total income (loss) from operations | $ | (2,229) | | | $ | 1,792 | | | $ | (7,082) | | | $ | 1,773 | | | | | |
| | | | | | | | | | | |
(in thousands) | September 30, 2023 | | December 31, 2022 |
Segment assets | | | |
Wireless | $ | 5,379 | | | $ | 9,790 | |
Telco | 10,526 | | | 13,217 | |
Non-allocated | 2,630 | | | 4,211 | |
Total assets | $ | 18,535 | | | $ | 27,218 | |
| | December 31, 2017 | | | September 30, 2017 | |
Segment assets | | | | | | |
Cable TV | | $ | 23,806,802 | | | $ | 24,116,395 | |
Telco | | | 23,635,818 | | | | 24,135,091 | |
Non-allocated | | | 2,850,799 | | | | 6,596,119 | |
Total assets | | $ | 50,293,419 | | | $ | 54,847,605 | |
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.
Waiver of Minimum Market Capitalization Requirement by Mast Hill
In connection with the April Notes, the Company is required to maintain a minimum market capitalization of $5 million. In October 2023, the Company's market capitalization fell below the minimum threshold. On October 27, 2023, Mast Hill and the Company amended the April Notes and removed the minimum threshold. The Company issued Mast Hill 142,220 shares of Common Stock in exchange for the amendment.
Accounts Receivable Agreements with Vast Bank, N.A.
In October 2023, Vast Bank, N.A. notified the Company of their intent to not renew the accounts receivable purchase facilities for Nave, Triton, and Fulton when the agreements mature on December 17, 2023.
Reverse Stock Split
On November 9, 2023, the Company announced that its Chief Executive Officer approved a one-for-ten reverse stock split of shares of the Company's common stock, $0.01 par value per share, where every ten issued and outstanding shares of common stock will be converted into one share of common stock. The reverse stock split is expected to take effect as of 12:01 a.m., Eastern Time, on November 16, 2023. The financial statements have not been adjusted because the reverse stock split was not effective as of the filing date of this quarterly report. The reverse stock split will be applied retrospectively once it is effective.
13
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,” "expects,' “projects,” "anticipates," “believes,” “plans,” “intends,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. These statements are subject to a number of risks, uncertainties and developments beyond our control or foresight, including changes in the trends of the cable television industry, changes in the trends of thewireless telecommunications industry, changes in ourcustomer and supplier agreements,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 achievementachievements expressed or implied in the forward-looking statements. We do not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.
Overview
The following MD&A is intended to help the reader understand the results of operations, financial condition, and cash flows of the Company. MD&A is provided as a supplement to, and should be read in conjunction with the information presented elsewhere in this quarterly report on Form 10-Q and with the information presented in our annual report on Form 10-K for the year ended September 30, 2017,December 31, 2022, which includes our audited consolidated financial statements and the accompanying notes to the consolidated financial statements.
The Company is reportingreports its financial performance based on itstwo external reporting segments: Cable TelevisionWireless and Telecommunications. These reportable segments are described below.
Cable TelevisionWireless Infrastructure Services (“Cable TV”Wireless”)
The Company’s Cable TVWireless segment sellsprovides 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 surplus and re-manufactured cable television equipment throughout North America, Central America and South America. In addition, this segment also repairs cable television equipmentsmall cells for various cable companies.
5G.
Telecommunications (“Telco”)
The Company’s Telco segment sells new and usedrefurbished telecommunications networking equipment, including both central office and customer premise equipment, to its customer base of telecommunications providers, enterprise customers and resellers located primarily in North America. This segment also offers its customers repair and testing services for telecommunications networking equipment. In addition, this segment offers its customers decommissioning services for surplus and obsolete equipment, which it in turn processes through its recycling program.equipment.
Results of Operations
Comparison of Results of Operations for the Three Months Ended December 31, 2017three months ended September 30, 2023 and December 31, 2016
September 30, 2022
Consolidated
Consolidated sales increased $0.2decreased $15.6 million, before the impact of intercompany sales, or 2%60%, to $12.3$10.3 million for three months ended September 30, 2023 from $25.9 million for the three months ended December 31, 2017 from $12.1September 30, 2022. The decrease in sales was due to decreased sales in the Telco segment of $11.4 million and a decrease in Wireless segment sales of $4.2 million.
Consolidated gross profit was $2.8 million, or 27% gross margin for the three months ended September 30, 2023, compared to gross profit of $8.5 million, or 33% gross margin for the three months ended September 30, 2022, a decrease of $5.7 million. The decrease in gross profit was primarily due to a decrease in the Telco segment of $3.8 million and a decrease in Wireless of $1.9 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 $1.7 million, compared to $2.3 million in the same period last year, a decrease of $0.6 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 $1.4 million, or 31%, to $3.1 million for the three months ended December 31, 2016. The increase in sales was in the Telco segment of $1.0 million, partially offset by a decrease in the Cable TV segment of $0.8 million. Consolidated gross profit decreased $0.6 million, or 16%, to $3.4 million for the three months ended
December 31, 2017September 30, 2023 from $4.0$4.5 million for the same period last year. The decrease in gross profit was inSG&A relates primarily to decreased selling and commissions expenses related to lower revenues.
Segment Results
Wireless
Revenues for the Cable TVWireless segment of $1.1decreased $4.2 million partially offset by an increase in the Telco segment of $0.5 million.
Consolidated operating, selling, general and administrative expenses include all personnel costs, which include fringe benefits, insurance and business taxes, as well as occupancy, communication and professional services, among other less significant cost categories. Operating, selling, general and administrative expenses remained flat at $3.6to $3.7 million for the three months ended December 31, 2017 compared toSeptember 30, 2023 from $7.9 million for the same period of last year. ThisThe 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 and continuing into the third quarter of 2023, causing a reduction in sites we could build.
Gross profit was $0.9 million, or 26% for the three months ended September 30, 2023 compared to $2.8 million, or 36%, for the three months ended September 30, 2022. The decrease in gross profit dollars was the result of lower revenues quarter-over-quarter. The decrease in gross profit percent is due to an increase ofa different revenue mix this year compared to last year and change orders that impacted both quarters.
Loss from operations was $1.9 million and $0.2 million in the Telco segment, offset by a decrease in the Cable TV segment of $0.1 million.
Interest expense remained flat at $0.1 million for the three months ended December 31, 2017September 30, 2023 and 2016.2022, respectively. The increase is mainly attributable to the decline in revenues and gross profit.
Telco
The provisionSales for income taxes was $0.3the Telco segment decreased $11.4 million to $6.7 million for the three months ended December 31, 2017September 30, 2023 from a provision for income taxes of $0.1 million for the three months ended December 31, 2016. The increase in the tax provision was due primarily to the Tax Cuts and Jobs Act enacted on December 22, 2017. One of the provisions of this legislation was to reduce the corporate income tax rates effective beginning January 1, 2018. As a result of the reduced corporate income tax rate, the Company remeasured its deferred tax balances at the reduced corporate income tax rate, which resulted in income tax expense of $0.4 million. The Company estimates that its effective income tax rate for the remaining quarters of fiscal year 2018 will be approximately 27% as a result of the legislation.
Segment Results
Cable TV
Sales for the Cable TV segment decreased $0.8 million to $5.8 million for the three months ended December 31, 2017 from $6.6$18.0 million for the same period last year. The decrease in revenues in the three months ended September 30, 2023 was related to lower sales was due to a decrease inof used and refurbished equipment salesas wireless and repair service revenueoptical carrier customers absorbed quantities of $0.5inventory purchased during calendar year 2022.
Gross profit was $1.9 million each, partially offset by an increase in new equipment revenue of $0.2 million. The decrease in the refurbished equipment sales was due primarily to an overall decrease in demandand $5.7 million for the three months ended December 31, 2017 as compared to last year.September 30, 2023 and 2022, respectively. The decrease in repair service revenuedecreased gross profit was due primarily to the loss of a significant repair customerdecline in the quarter. As a result of this loss, the Company has closed two of its repair facilities and laid off personnel at its remaining repair facilities.revenues.
Gross marginLoss from operations was 21%$0.4 million for the three months ended December 31, 2017September 30, 2023 compared to 37%income of $2.0 million for the same period last year, primarily due to the reasons discussed above.
Comparison of Results of Operations for the nine months ended September 30, 2023 and September 30, 2022
Consolidated
Consolidated sales decreased $40.3 million, or 52%, to $37.1 million for nine months ended September 30, 2023 from $77.4 million for the nine months ended September 30, 2022. The decrease in sales was due to decreased sales in the Telco segment of $34.0 million and a decrease in Wireless segment sales of $6.3 million.
Consolidated gross profit was $9.5 million, or 26% gross margin for the nine months ended September 30, 2023, compared to gross profit of $22.4 million, or 29% gross margin for the nine months ended September 30, 2022, a decrease of $12.9 million. The decrease in gross profit was primarily due to decreases in the Telco segment of $10.6 million and $2.3 million in the Wireless segment.
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 $5.7 million, compared to $7.6 million in the same period last year, a decrease of $1.9 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 $2.5 million, or 20%, to $10.0 million for the nine months ended September 30, 2023 from $12.5 million for the same period last year. The decrease in gross margin was dueSG&A relates primarily to a significant increase in volumedecreased selling and commissions expenses related to lower revenues.
Segment Results
Wireless
Revenues for a new equipment sales customer with low margins.
Operating, selling, general and administrative expensesthe Wireless segment decreased $0.1$6.3 million to $1.4$16.6 million for the threenine months ended December 31, 2017September 30, 2023 from $1.5$22.9 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 $4.1 million, or 25% for the nine months ended September 30, 2023 compared to $6.4 million, or 28%, for the nine months ended September 30, 2022. The decrease in gross profit dollars was the result of the decline in revenues.
Loss from operations was $5.6 million and $3.9 million for the nine months ended September 30, 2023 and 2022, respectively. The increase is mainly attributable to the decline in revenues.
Telco
Sales for the Telco segment increased $1.0decreased $34.0 million to $6.5$20.6 million for the threenine months ended December 31, 2017September 30, 2023 from $5.5$54.6 million for the same period last year. The increasedecrease in revenues in the first nine 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 $5.4 million and $16.1 million for the Telco segment was due to an increase in equipment salesnine months ended September 30, 2023 and recycling revenue of $0.7 million and $0.3 million,2022, respectively. The increase in Telco equipment sales was primarily due to Triton Datacom, which offset the continued lower equipment sales from Nave Communications. The Company is continuing to address the lower equipment sales at Nave Communications by restructuring and expanding its sales force, targeting a broader end-user customer base, increasing its sales to the reseller market and expanding the capacity of its recycling program.
Gross margin was 34% for the three months ended December 31, 2017 and 29% for the three months ended December 31, 2016. The increase indecreased gross marginprofit was due primarily to higher gross marginsthe decline in revenues.
Loss from equipment sales to end-user customers and our recycling program.
Operating, selling, general and administrative expenses increased $0.1 million to $2.2operations was $1.5 million for the threenine months ended December 31, 2017 from $2.1September 30, 2023 compared to $5.6 million for the same period last year. This increase wasyear, primarily due primarily to earn-out expenses related to the Triton Miami, Inc. acquisition of $0.1 million.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 and income from equity method investment.income. Adjusted EBITDA is presented below because this metric is used by the financial community as a method of measuring our financial performance and of evaluating the market value of companies considered to be in similar businesses. Since Adjusted EBITDA is not a measure of performance calculated in accordance with GAAP, it should not be considered in isolation of, or as a substitute for, net earnings as an indicator of operating performance. Adjusted EBITDA, as calculated below, may
not be comparable to similarly titled measures employed by other companies. In addition, Adjusted EBITDA is not necessarily a measure of our ability to fund our cash needs.
AThe following table provides a reconciliation by segment of operating income (loss) from operations to Adjusted EBITDA, follows:in thousands: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2023 | | Three Months Ended September 30, 2022 |
| Wireless | | Telco | | Total | | Wireless | | Telco | | Total |
Income (loss) from operations | $ | (1,853) | | | $ | (376) | | | $ | (2,229) | | | $ | (202) | | | $ | 1,994 | | | $ | 1,792 | |
Depreciation and amortization expense | 188 | | | 120 | | | 308 | | | 174 | | | 121 | | | 295 | |
Stock compensation expense | (7) | | | 72 | | | 65 | | | 78 | | | 72 | | | 150 | |
Adjusted EBITDA | $ | (1,672) | | | $ | (184) | | | $ | (1,856) | | | $ | 50 | | | $ | 2,187 | | | $ | 2,237 | |
| | | | | | | | | | | |
| Nine Months Ended September 30, 2023 | | Nine Months Ended September 30, 2022 |
| Wireless | | Telco | | Total | | Wireless | | Telco | | Total |
Income (loss) from operations | $ | (5,617) | | | $ | (1,465) | | | $ | (7,082) | | | $ | (3,859) | | | $ | 5,632 | | | $ | 1,773 | |
Depreciation and amortization expense | 582 | | | 360 | | | 942 | | | 561 | | | 364 | | | 925 | |
Stock compensation expense | 283 | | | 380 | | | 663 | | | 234 | | | 266 | | | 500 | |
Adjusted EBITDA | $ | (4,752) | | | $ | (725) | | | $ | (5,477) | | | $ | (3,064) | | | $ | 6,262 | | | $ | 3,198 | |
| | Three Months Ended December 31, 2017 | | | Three Months Ended December 31, 2016 | |
| | Cable TV | | | Telco | | | Total | | | Cable TV | | | Telco | | | Total | |
Income (loss) from operations | | $ | (188,500 | ) | | $ | (77,168 | ) | | $ | (265,668 | ) | | $ | 908,982 | | | $ | (482,177 | ) | | $ | 426,805 | |
Depreciation | | | 66,948 | | | | 31,195 | | | | 98,143 | | | | 73,245 | | | | 30,542 | | | | 103,787 | |
Amortization | | | − | | | | 313,311 | | | | 313,311 | | | | − | | | | 311,986 | | | | 311,986 | |
Adjusted EBITDA (a) | | $ | (121,552 | ) | | $ | 267,338 | | | $ | 145,786 | | | $ | 982,227 | | | $ | (139,649 | ) | | $ | 842,578 | |
(a) | The Telco segment includes earn-out expenses of $0.1 million for the three months ended December 31, 2017 and acquisition-related costs of $0.2 million for the three months ended December 31, 2016 related to the acquisition of Triton Miami, Inc. |
Critical Accounting Policies
Note 1 toOur unaudited consolidated financial statements are impacted by the Consolidated Financial Statements in Form 10-K for fiscal 2017 includes aaccounting policies used and the estimates and assumptions made by management during their preparation. A complete summary of theour significant accounting policies or methods usedis included in the preparationNote 1- Summary of Significant Accounting Policies in our Consolidated Financial Statements. Some of those significant accounting policies or methods require us to make estimates and assumptions that affect the amounts reported by us. We believe the following items require the most significant judgments and often involve complex estimates.
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, under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.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
OurFor 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 high overallhigher gross profit margins on our sales. We market our products primarily to MSOs, telecommunication providers, telecommunication resellers, and other users of cable television and 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.risk for our Telco segment.
Our inventories are all carried in the Telco segment and consist of new and used electronic components for the telecommunications industry. Inventory is stated at the lower of cost or net realizable value, with cost determined using the weighted-average method. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. At September 30, 2023, we had total inventory, before the reserve for excess and obsolete inventories, of $11.9 million, consisting of $1.8 million in new products and $10.1 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.
Our inventories consist of new and used electronic components for the cable television and telecommunications industries. Inventory is stated at the lower of cost or net realizable value, with cost determined using the weighted-average method. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. At December 31, 2017, we had total inventory, before the reserve for excess and obsolete inventories, of $25.5 million, consisting of $14.8 million in new products and $10.7 million in used or refurbished products.
For the Cable TV segment, our reserve at December 31, 2017 for excess and obsolete inventory was $2.5 million, which reflects an increase of $0.2 million to reflect deterioration in the market demand of that inventory. If actual market conditions are less favorable than those projected by management, and our estimates prove to be inaccurate, we could be required to increase our inventory reserve and our gross margins could be materially adversely affected.
For the Telco segment, any obsolete and excess telecommunications inventory is generally processed through its recycling program when it is identified. However, the Telco segmentWe 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 sold, and had not yet been processed through its recycling program.recycling. Therefore, we have aan obsolete and excess inventory reserve of $0.7$4.1 million at December 31, 2017. In the three months ended December 31, 2017, we increased the reserve, by $11 thousand. We also reviewed the cost of inventories against estimated market value and recorded a lower of cost or net realizable value write-off of $12 thousand for inventories that have a cost in excess of estimated net realizable value.September 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 material.
Accounts Receivable Valuation
Management judgments and estimates are made in connection with establishing the allowance for doubtful accounts. Specifically, we analyze the aging of accounts receivable balances, historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in our customer payment terms. Significant changes in customer concentration or payment terms, deterioration of customer credit-worthiness, or weakening in economic trends could have a significant impact on the collectability of receivables and our operating results. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, an additional provision to the allowance for doubtful accounts may be required. The reserve for bad debts was $0.2 million at December 31, 2017 and September 30, 2017. At December 31, 2017, accounts receivable, net of allowance for doubtful accounts, was $5.3 million.
Goodwill
Goodwill represents the excess of purchase price of acquisitions over the acquisition date fair value of the net assets of businesses acquired. Goodwill is not amortized and is tested at least annually for impairment. We perform our annual analysis during the fourth quarter of each fiscal year and in any other period in which indicators of impairment warrant additional analysis. Goodwill is evaluated for impairment by first comparing our estimate of the fair value of each reporting unit, or operating segment, with the reporting unit’s carrying value, including goodwill. Our reporting units for purposes of the goodwill impairment calculation are the Cable TV operating segment and the Telco operating segment.
Management utilizes a discounted cash flow analysis to determine the estimated fair value of each reporting unit. Significant judgments and assumptions including the discount rate, anticipated revenue growth rate, gross margins
and operating expenses are inherent in these fair value estimates. As a result, actual results may differ from the estimates utilized in our discounted cash flow analysis. The use of alternate judgments and/or assumptions could result in the recognition of different levels of impairment charges in the financial statements. If the carrying value of one of the reporting units exceeds its fair value, a computation of the implied fair value of goodwill would then be compared to its related carrying value. If the carrying value of the reporting unit’s goodwill exceeds the implied fair value of goodwill, an impairment loss would be recognized in the amount of the excess. If an impairment charge is incurred, it would negatively impact our results of operations and financial position.
We performed our annual impairment test for both reporting units in the fourth quarter of 2017 and determined that the fair value of our reporting units exceeded their carrying values. Therefore, no impairment existed as of September 30, 2017.
We did not record a goodwill impairment for either of our two reporting units in the three year period ended September 30, 2017. However, we are implementing strategic plans to help prevent impairment charges in the future, which include the restructuring and expansion of the sales organization in the Telco segment to increase the volume of sales activity, and reducing inventory levels in both the Cable TV and Telco segments. Although we do not anticipate a future impairment charge, certain events could occur that might adversely affect the reported value of goodwill. Such events could include, but are not limited to, economic or competitive conditions, a significant change in technology, the economic condition of the customers and industries we serve, a significant decline in the real estate markets we operate in, a material negative change in the relationships with one or morecomponent of our significant customers or equipment suppliers, failure to successfully implement our plan to restructure and expand the Telco sales organization, and failure to reduce inventory levels within the Cable TV or Telco segments. If our judgments and assumptions change as a resultcost of the occurrence of any of these events or other events that we do not currently anticipate, our expectations as to future results and our estimate of the implied fair value of each reporting unit also may change.
sales.
Intangibles
Intangible assets that have finite useful lives are amortized on a straight-line basis over their estimated useful lives ranging from 3 years toof 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 (Used in) Provided by Operating Activities
We finance our operations primarily through cash flows provided by operations, and we have a bank line of credit of up to $7.0 million. During the threenine months ended December 31, 2017, we generated $0.2 million ofSeptember 30, 2023, cash flows from operations. The cashused in operations was $3.0 million. Cash flows from operations was favorably impacted by $0.3 million from a net decrease in accounts receivable. The cash flows operations waswere negatively impacted by $0.2 million from a net increase in inventoryloss of $8.3 million, offset by net cash provided by working capital of $3.2 million and $0.2 million from a net decrease in accrued expenses, which primarily resulted from the first annual paymentnon-cash adjustments of the earn-out related to the acquisition of Triton Miami, Inc.
$2.1 million.
Cash Flows Used forin Investing Activities
During the threenine months ended December 31, 2017,September 30, 2023, cash used in investing activities was $0.7 million, which primarily related to guaranteed payments related to the acquisition$27 thousand, consisting of Triton Miami, Inc.purchases of $0.7 million.
property and equipment.
Cash Flows Used forProvided by (Used in) Financing Activities
During the threenine months ended September 30, 2023, cash provided by financing activities was $1.7 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 September 30, 2023 we had $2.4 million in cash and equivalents and restricted cash.
The Company has an overall capacity to factor its accounts receivable of $14.0 million for working capital needs. At September 30, 2023, the Company had $4.0 million utilized under the receivables purchase facilities.
Subsequent Event: Accounts Receivable Agreements with Vast Bank, N.A.
In October 2023, Vast Bank, N.A. notified the Company of their intent to not renew the accounts receivable purchase facilities for Nave, Triton, and Fulton when the agreements mature on December 31, 2017, we made principal payments17, 2023. These facilities represent a critical source of $3.1 millionfunding for the Company. We are actively engaged in the process of finding a replacement for the facilities prior to the maturation of these facilities.
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 our term loans under our Creditthe 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 Term Loan Agreementits 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 our primary lender. Onthe 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 6, 2017, as part4, 2023, to regain compliance with the Minimum Bid Price Requirement. During the compliance period, the Company’s shares of our overall plancommon stock will continue to become compliant with our financial covenants with our primary financial lender, we extinguished onebe listed and traded on The Nasdaq Capital Market. To regain compliance, the closing bid price of our term loans by paying the outstanding balanceCompany’s common stock must meet or exceed $1.00 per share for a minimum of $2.7 million plus a prepayment penalty of $25,000. As a result, we wereten consecutive business days during the 180-calendar day grace period.
In the event the Company is not in compliance with our financial covenantsthe 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 approved, at December 31, 2017.the annual stockholders meeting held on September 22, 2023, an amendment to its Certificate of Incorporation to effect a reverse stock split of its common stock.
Increase in Authorized Shares of Common Stock
The Company received shareholder approval, at the annual stockholders meeting 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
18The Company received shareholder approval, at the annual stockholders meeting 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 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.
Our first remaining term loan requires monthly paymentsOn November 9, 2023, the Company announced that its Chief Executive Officer approved a one-for-ten reverse stock split of $15,334 plus accrued interest throughshares of the Company's common stock, $0.01 par value per share, where every ten issued and outstanding shares of common stock will be converted into one share of common stock. The reverse stock split is expected to take effect as of 12:01 a.m., Eastern Time, on November 2021. Our second remaining term loan is a three year term loan with monthly principal and interest payments of $118,809 through October 2019.16, 2023. The interest rate is a fixed rate of 4.40%.
At December 31, 2017, therefinancial statements have not been adjusted because the reverse stock split was not a balance outstanding under our line of credit. The lesser of $7.0 million or the total of 80%effective as of the qualified accounts receivable plus 50%filing date of qualified inventorythis quarterly report. The reverse stock split will be applied retrospectively once it is available to us under the revolving credit facility ($7.0 million at September 30, 2017). Any future borrowings under the revolving credit facility are due at maturity on March 30, 2018, for which the Company expects to renew the revolving credit facility for at least one year.effective.
We believe that our cash
Item 3. Quantitative and cash equivalents of $0.4 million at December 31, 2017, cash flow from operations and our existing line of credit provide sufficient liquidity and capital resources to meet our working capital and debt payment needs.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 December 31, 2017,September 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.
19
PART IIII. 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.
Table of Contents Item 6. Exhibits. | | | | | | Exhibit No. | Description | Exhibit No. | Description | 31.1 | | 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. |
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ADDVANTAGE TECHNOLOGIES GROUP, INC.
(Registrant)
Date: February 13, 2018 /s/ David L. Humphrey
David L. Humphrey,
President and Chief Executive Officer
(Principal Executive Officer)
Date: February 13, 2018 /s/ Scott A. Francis
Scott A. Francis,
Chief Financial Officer
(Principal Financial Officer)
Exhibit Index
The following documents are included as exhibits to this Form 10-Q:
Exhibit No. | Description | | | | | | ADDVANTAGE TECHNOLOGIES GROUP, INC. (Registrant) | 31.1Date: November 14, 2023 | Certification of | | /s/ Joseph E. Hart | | Joseph E. Hart | | President and Chief Executive Officer under Section 302 of the Sarbanes Oxley Act of 2002. | | (Principal Executive Officer) | 31.2 | Certification of | Date: November 14, 2023 | | | /s/ Michael A. Rutledge | | Michael A. Rutledge | | Chief Financial Officer under Section 302 of the Sarbanes Oxley Act of 2002. | | | 32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | | | 32.2 | Certification of Chief(Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | | | 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.Officer) |
|