ADDVANTAGE TECHNOLOGIES GROUP, INC.
Special Note on Forward-Looking Statements
Certain statements in Management's Discussion and Analysis ("MD&A"), other than
purely historical information, including estimates, projections, statements
relating to our business plans, objectives and expected operating results, and
the assumptions upon which those statements are based, are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). These
forward-looking statements generally are identified by the words "estimates,"
"projects," "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 wireless
infrastructure services industry, changes in the trends of the
telecommunications industry, changes in our supplier agreements, technological
developments, changes in the general economic environment, the potential impact
of the novel strain of coronavirus ("COVID-19") pandemic, the growth or
formation of competitors, changes in governmental regulation or taxation, the
potential forgiveness of any portion of the PPP Loan, changes in our personnel
and other such factors. Our actual results, performance or achievements may
differ significantly from the results, performance or achievements expressed or
implied in the forward-looking statements. We do not undertake any obligation to
publicly release any revisions to these forward-looking statements to reflect
events or circumstances after the date of this report or to reflect the
occurrence of unanticipated events.
Overview
The following MD&A is intended to help the reader understand the results of
operations, financial condition, and cash flows of the Company. MD&A is provided
as a supplement to, and should be read in conjunction with the information
presented elsewhere in this quarterly report on Form 10-Q and with the
information presented in our annual report on Form 10-K for the year ended
September 30, 2020 , which includes our audited consolidated financial statements
and the accompanying notes to the consolidated financial statements.
The Company reports its financial performance based on two external reporting
segments: Wireless and Telecommunications. These reportable segments are
described below.
Wireless Infrastructure Services ("Wireless")
The Company's Wireless segment provides turn-key wireless infrastructure
services for the four major U.S. wireless carriers, communication tower
companies, national integrators, and original equipment manufacturers that
support these wireless carriers. These services primarily consist of the
installation and upgrade of technology on cell sites and the construction of new
small cells for 5G.
Telecommunications ("Telco")
The Company's Telco segment sells new and refurbished telecommunications
networking equipment, including both central office and customer premise
equipment, to its customer base of telecommunications providers, enterprise
customers and resellers located primarily in North America . This segment also
offers its customers repair and testing services for telecommunications
networking equipment. In addition, this segment offers its customers
decommissioning services for surplus and obsolete equipment, which it in turn
processes through its recycling program.
Recent Business Developments
COVID-19
On March 11, 2020 , the World Health Organization declared the current outbreak
of COVID-19 to be a global pandemic, and on March 13, 2020 , the United States
declared a national emergency. In response to these declarations and the rapid
spread of COVID-19, federal, state and local governments have imposed varying
degrees of restrictions on business and social activities to contain COVID-19,
including quarantine and "stay-at-home" or "shelter-in-place" orders in markets
where we operate. Despite these "stay-at-home" or "shelter-in-place"
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orders, we are classified as an essential business due to the services and
products we provide to the telecommunications industry. Therefore, we continue
to operate in the markets we serve, but most of our back-office and
administrative personnel were working from home through March 31, 2021 while
these orders were in place. Although we can continue to operate our businesses,
our revenues have slowed, especially in our Wireless segment, due to the
carriers slowing down various wireless tower projects. We have not experienced a
material disruption in our supply chain to date.
With the partial reopening of the economy the economic effects of the pandemic
and resulting societal changes remain unpredictable. There are a number of
uncertainties that could impact our future results of operations, including the
efficacy and widespread distribution of a vaccine, the return of major outdoor
events during the summer and fall months, and the impact of COVID-19 on the
operating results and capital budgets of our customers.
Results of Operations
Comparison of Results of Operations for the Three Months Ended March 31, 2021
and March 31, 2020
Consolidated
Consolidated sales increased $0.7 million , or 6%, to $12.7 million for three
months ended March 31, 2021 from $12.0 million for the three months ended
March 31, 2020 . The increase in sales was due to increased sales in the Telco
segment of $1.0 million partially offset by a decrease in Wireless segment sales
of $0.3 million .
Consolidated gross profit increased $3.6 million for three months ended March
31, 2021 to $3.2 million compared to a deficit of $0.4 million for the same
period last year. The increases in gross profit were due to an increase in the
Telco segment of $2.3 million , and a Wireless segment increase of $1.3 million .
Consolidated operating expenses include indirect costs associated with operating
our business such as indirect personnel, facilities, vehicles, insurance,
communication, and business taxes. Operating expenses remained consistent at
approximately $2.2 million for the three months ended March 31, 2021 and $2.1
million the same period last year.
Consolidated selling, general and administrative ("SG&A") expenses include
overhead, which consist of personnel, insurance, professional services,
communication, and other cost categories. SG&A expense increased $0.9 million ,
or 30%, to $3.8 million for the three months ended March 31, 2021 from $2.9
million for the same period last year. The increase in SG&A relates to increased
personnel costs such as non-cash stock compensation of $0.1 million , executive
severance of $0.2 million , as well as computing and communications costs of
approximately $0.2 million , and $0.4 million of increased selling costs compared
to the same period last year.
Depreciation and amortization expenses decreased $0.2 million , or 40%, to $0.3
million for the three months ended March 31, 2021 , from $0.5 million for the
same period last year. The decrease was due primarily to a decrease in
amortization expenses to the Telco segment of $0.2 million , as a result of
intangible impairments taken in fiscal 2020.
Interest income primarily consists of interest earned on the promissory note
receivable. Interest income has decreased to $33 thousand for the three months
ended March 31, 2021 compared to $0.1 million for the same period last year, as
the note receivable principal has decreased.
Interest expense for the three months ended March 31, 2021 was $42 thousand as
compared to $59 thousand for the same period last year. The expense was related
to interest expense on the revolving bank line of credit and the loan with our
primary financial lender.
Income tax expense was zero during the three months ended March 31, 2021 and the
same period in 2020. Our effective tax rates during the three months ended March
31, 2021 and 2020 were approximately 0%, respectively because increases in our
valuation allowance against our deferred tax assets.
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Segment Results
Wireless
Revenues for the Wireless segment decreased $0.3 million to $4.3 million for the
three months ended March 31, 2021 from $4.7 million for the same period of last
year. Revenues continued to be negatively impacted due to delays in
infrastructure spending from the major U.S. carriers related to the COVID-19
pandemic. However, we believe that the 5G rollout will gain momentum in the
calendar year and that there is substantial constrained demand for 5G-related
work on existing towers, new raw-land builds, and small cell networks. In
addition, we have made and are continuing to make the necessary operational
changes in order to be well positioned to secure an increased share of the 5G
construction services work.
Gross profit was $1.5 million , or 35% for the three months ended March 31, 2021
compared to $0.2 million , or 4%, for the three months ended March 31, 2020 . The
improvement in the gross profit percentage was driven by organizational changes
put into place to strengthen margins during the latter half of fiscal 2020.
Operating expenses were $1.4 million for each of the three months periods ended
March 31, 2021 and 2020.
Selling, general and administrative expenses increased $0.2 million to $0.6
million for the three months ended March 31, 2021 from $0.4 million for the
three months ended March 31, 2020 . This increase was due to increased
sales-related personnel costs. The corporate overhead allocation increased $0.3
million mainly as a result of the employee stock-based compensation plan and
interest expense.
Depreciation and amortization expense was $0.2 million for the three months
ended March 31, 2021 and 2020.
Telco
Sales for the Telco segment increased $1.0 million to $8.3 million for the three
months ended March 31, 2021 from $7.3 million for the same period last year. The
increase in revenues were related to increased sales of used and refurbished
equipment, coupled with decreased charges for returns during the quarter
compared to the prior year quarter.
Gross profit was $1.7 million for the three months ended March 31, 2021 and a
deficit of $0.6 million for the three months ended March 31, 2020 . The increase
was mainly related to a $2.1 million obsolescence expense recorded in the prior
year quarter.
Operating expenses increased $0.1 million to $0.8 million for the three months
ended March 31, 2021 compared to $0.7 million the three months ended March 31,
2020 . The increased operating expense was due to fees related to the utilization
of a third-party logistics provider.
Selling, general and administrative expenses increased $0.2 million to $1.1
million for the three months ended March 31, 2021 from $0.9 million for the same
period last year. This increase was due primarily to increased sales
commissions. In addition, the corporate allocation increased $0.1 million , which
related to the employee stock-compensation plan and executive severance costs.
Depreciation and amortization expense decreased $0.2 million to $0.1 million for
the three months ended March 31, 2021 from $0.3 million for the same period last
year. This was due to decreased amortization expense resulting from the
impairment of intangibles taken in the three months ended March 31, 2020 .
Comparison of Results of Operations for the Six Months Ended March 31, 2021 and
March 31, 2020
Consolidated
Consolidated sales decreased $0.5 million , or 2%, to $25.4 million for the six
months ended March 31, 2021 from $25.9 million for the six months ended March
31, 2020 . The decrease in sales was primarily in the Wireless segment, which
decreased $1.9 million , partially offset by an increase in sales from the Telco
segment of $1.4 million .
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Consolidated gross profit increased $3.7 million , or 116%, to $6.8 million for
the six months ended March 31, 2021 from $3.2 million for the same period last
year. The increase in gross profit was due to an increase in the Telco segment
of $2.6 million , as well as an increase in the Wireless segment of $1.1 million .
Consolidated operating expenses include indirect costs associated with operating
our business such as indirect personnel costs, facilities, vehicles, insurance,
communication, and business taxes, among other costs. Operating expenses
decreased $0.1 million , or 1%, to $4.2 million for the six months ended March
31, 2021 from $4.3 million for the same period last year.
Consolidated selling, general and administrative expenses include overhead
costs, which primarily consist of personnel, insurance, professional services,
and communication, among other costs. Selling, general and administrative
expenses increased $1.3 million , or 23%, to $7.0 million for the six months
ended March 31, 2021 from $5.7 million for the same period last year. General
and administrative costs accounted for $0.7 million of the increase, while
selling costs accounted for $0.6 million of the increase. Non-cash share-based
compensation accounted for $0.4 million of the increased G&A.
Depreciation and amortization expenses decreased $0.4 million , or 39%, to $0.6
million for the six months ended March 31, 2021 from $1.0 million for the same
period last year. The decrease was due primarily to decreased amortization
expense resulting from the impairment of intangible assets in the three months
ended March 31, 2020 .
Interest income primarily consists of interest earned on the promissory note
from the sale of the cable business in June 2019 . Interest income was $0.1
million for six months ended March 31, 2021 and $0.2 million for the six months
ended March 31, 2020 .
Other expense for the six months ended March 31, 2021 was $27.4 thousand as
compared to $0.1 million for the same period last year. The expense for the both
the six months ended March 31, 2021 and March 31, 2020 is primarily related to
our factoring arrangements with our Wireless segment.
Interest expense for the six months ended March 31, 2021 was $0.1 million as
compared to $0.2 million for the same period last year. Interest expense for the
six months ended March 31, 2021 was related to the revolving bank line of
credit, the loan with our primary financial lender.
The provision for income taxes was zero for the six months ended March 31, 2021
compared to a benefit of $15 thousand for the six months ended March 31, 2020 .
Our effective tax rates during the six months ended March 31, 2021 and 2020 were
approximately 0% because of increases in our valuation allowance against our
deferred tax assets.
Segment Results
Wireless
Revenues for the Wireless segment were $9.6 million for the six months ended
March 31, 2021 and $11.5 million for the same period last year. The decrease in
revenue was due to a full six months of COVID-19 related slow-down in activity
included in the current year results.
Gross profit was $3.1 million , or 33% for the six months ended March 31, 2021
and $2.0 million , or 18%, for six months ended March 31, 2020 . This increase is
due primarily to the impact of structural operational changes and more effective
customer sales change order processes in place during the current fiscal six
month period.
Operating expenses decreased $0.3 million to $2.6 million for the six months
ended March 31, 2021 from $2.9 million for the same period last year, mainly as
a result of lower vehicle and equipment costs as a result of decreased revenues.
Selling, general and administrative expenses increased
Depreciation and amortization expense was consistent at
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Telco
Sales for the Telco segment increased $1.4 million to $15.8 million for the six
months ended March 31, 2021 from $14.5 million for the same period last year.
The increase was mainly related to sales of used and refurbished equipment.
Gross profit was $3.7 million for the six months ended March 31, 2021 compared
to $1.1 million for six months ended March 31, 2020 . Gross profit for the six
months ended March 31, 2021 rebounded after taking a charge of $2.1 million for
inventory obsolescence expense in the same period last year.
Operating expenses increased $0.2 million to $1.6 million for the six months
ended March 31, 2021 from $1.4 million for the same period last year. This
increase was due primarily to increased costs from our third-party logistics
provider as revenue increases, and severance costs for certain employees
resulting from cost reduction activities.
Selling, general and administrative expenses increased
Depreciation and amortization expense decreased$0.4 million to$0.2 million from$0.6 million for the six months endedMarch 31, 2021 and 2020, respectively, resulting from significant impairments of intangible assets in the second quarter of 2020. Non-GAAP Financial Measure Adjusted EBITDA is a supplemental, non-GAAP financial measure. EBITDA is defined as earnings before interest expense, income taxes, depreciation and amortization. Adjusted EBITDA as presented also excludes impairment charges for operating lease right-of-use assets and intangible assets including goodwill, stock compensation expense, other income, other expense, interest income and income from equity method investment. Adjusted EBITDA is presented below because this metric is used by the financial community as a method of measuring our financial performance and of evaluating the market value of companies considered to be in similar businesses. Since Adjusted EBITDA is not a measure of performance calculated in accordance with GAAP, it should not be considered in isolation of, or as a substitute for, net earnings as an indicator of operating performance. Adjusted EBITDA, as calculated below, may not be comparable to similarly titled measures employed by other companies. In addition, Adjusted EBITDA is not necessarily a measure of our ability to fund our cash needs. The following table provides a reconciliation by segment of loss from operations to Adjusted EBITDA for the three and six month periods endedMarch 31, 2021 andMarch 31, 2020 , in thousands: Three Months Ended March 31, 2021 Three Months Ended March 31, 2020 Wireless Telco Total Wireless Telco Total Loss from operations$ (1,537) $ (1,510) $ (3,047) $ (2,453) $ (12,226) $ (14,679) Impairment of intangibles including goodwill - - - - 8,714 8,714 Depreciation and amortization expense 176 128 304 169 339 508 Stock compensation expense 107 139 246 23 65 88 Adjusted EBITDA$ (1,254) $ (1,243) $ (2,497) $ (2,261) $ (3,108) $ (5,369) Six Months Ended March 31, 2021 Six Months Ended March 31, 2020 Wireless Telco Total Wireless Telco Total Loss from operations$ (2,642) $ (2,319) $ (4,961) $ (3,235) $ (13,207) $ (16,442) Impairment of intangibles including goodwill - - - - 8,714 8,714 Depreciation and amortization expense 328 257 585 315 640 955 Stock compensation expense 247 314 561 32 74 106 Adjusted EBITDA$ (2,067) $ (1,748) $ (3,815) $ (2,888) $ (3,779) $ (6,667)
Due to rounding, numbers presented may not foot to the totals provided.
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Critical Accounting Policies Our unaudited consolidated financial statements are impacted by the accounting policies used and the estimates and assumptions made by management during their preparation. A complete summary of our significant accounting policies is included in Note 1- Basis of Presentation and Accounting Policies in our Form 10-K. General The preparation of financial statements in conformity withUnited States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We base our estimates and judgments on historical experience, current market conditions, and various other factors we believe to be reasonable, which form the basis for making judgments about the carrying values of certain assets. Actual results could differ from these estimates under different assumptions or conditions. The most significant estimates and assumptions are discussed below. Inventory Valuation For our Telco segment, our position in the telecommunications industry requires us to carry large inventory quantities relative to annual sales, but it also allows us to realize high gross profit margins on our sales. We market our products primarily to telecommunication providers, resellers, and other users of telecommunication equipmentwho are seeking products for which manufacturers have discontinued production or cannot ship new equipment on a same-day basis, as well as providing used products as an alternative to new products from the manufacturer. Carrying these large inventory quantities represents our largest risk for our Telco segment. 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. AtMarch 31, 2021 , we had total inventory, before the reserve for excess and obsolete inventories, of$8.9 million , consisting of$1.3 million in new products and$7.6 million in used or refurbished products. 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. In order to address the risks associated with our investment in inventory, we review inventory quantities on hand and reduce the carrying value for obsolete and excess inventories, when our analysis indicates that cost will not be recovered when an item is sold. We identified certain inventory that more than likely will not be sold or that the cost will not be recovered when it is processed through our recycling program. Therefore, we have an obsolete and excess inventory reserve of$3.2 million atMarch 31, 2021 . 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. Intangibles Intangible assets that have finite useful lives are amortized on a straight-line basis over their estimated useful lives ranging from 3 years to 10 years. Intangible assets are also tested for impairment when events and circumstances indicate that the carrying value may not be recoverable. As ofMarch 31, 2021 , there were no indicators of impairment present. 20 -------------------------------------------------------------------------------- Table of Content s Liquidity and Capital Resources Cash Flows Used in Operating Activities During the six months endedMarch 31, 2021 , cash used in operations was$4.1 million . Cash flows from operations were negatively impacted by a net loss of$5.0 million and net cash used by working capital of$0.2 million , which was partially offset by non-cash adjustments of$1.1 million . Cash Flows Provided by Investing Activities During the six months endedMarch 31, 2021 , cash provided by investing activities was$1.4 million which consisted of$1.5 million of payments received under the promissory note receivable. Cash Flows Used in Financing Activities During the six months endedMarch 31, 2021 , cash used in financing activities was$0.5 million , of which$1.2 million related to repayment of our promissory note payable, partially offset by net proceeds from the sale of our common stock utilizing our shelf registration of$0.9 million . InMarch 2020 , we entered into a loan agreement with our primary financial lender for$3.5 million , bearing interest at 6% per annum. The principal and interest payments correlate to our promissory note receivable with Leveling 8. We monetized$3.5 million of the$5.8 million remaining balance of the promissory note receivable. In connection with the$1.4 million in payments received in the first quarter of 2021, we paid down the remaining outstanding principal under this loan. The Company has a$4.0 million revolving line of credit agreement with its primary financial lender, which matures onDecember 17, 2021 . The line of credit requires quarterly interest payments based on the prevailingWall Street Journal Prime Rate, floating (3.25% atMarch 31, 2021 ), with the addition of a 4% floor rate and a fixed charge coverage ratio of 1.25 to be tested quarterly beginningJune 30, 2021 . AtMarch 31, 2021 , there was$2.8 million outstanding under the line of credit. Future borrowings under the line of credit are limited to the lesser of$4.0 million or the sum of 80% of eligible accounts receivable and 60% of eligible Telco segment inventory. Under these limitations, the Company's total line of credit borrowing capacity was$4.0 million atMarch 31, 2021 . OnApril 14, 2020 , the Company entered into an unsecured loan in the amount of$2.9 million ("PPP Loan") with our primary lender. The PPP Loan matures onApril 14, 2022 , bears interest at 1% per annum, with monthly payments of principal and interest in the amount of$164,045 commencing on the date on which the amount of loan forgiveness is determined. OnAugust 28, 2020 , we submitted our application to our lender, requesting PPP Loan forgiveness of$2.9 million . Our lender reviewed our application and forwarded to the SBA for approval onSeptember 27, 2020 . As of the filing of this Report, we have not received an approval or denial of our application for forgiveness from the SBA; per the Flexibility Act, the date for commencement of loan payments has not yet occurred, and we have made no loan payments. The Company deferred$0.8 million of loan payments during the six months endedMarch 31, 2021 . We continue to take actions to preserve and improve our liquidity. We believe that our cash and cash equivalents and restricted cash of$5.2 million atMarch 31, 2021 and our existing revolving bank line of credit will provide sufficient liquidity and capital resources to cover our operating losses and our additional working capital and debt payment needs. However, we will likely need to seek a waiver for our probable covenant violation under our loan agreements with our primary financial lender. Further, as discussed above, we received the PPP Loan inApril 2020 , which provided funding necessary to offset the immediate and anticipated impacts of COVID-19, and there is some uncertainty whether we will be granted forgiveness from the SBA. In addition, there is still uncertainty surrounding the timing of the overall recovery of the economy and the timing of wireless infrastructure service opportunities for the upgrade to 5G. Therefore, depending on the timing of these factors and our primary financial lender granting us a waiver of the probable covenant violation, there is still risk that we may not have sufficient cash and cash equivalents available for us to sustain our operations at our current level. If that were to occur, we would need to seek additional funding and further utilize our shelf registration that we have available to us in order to enhance our cash position and assist in our working capital needs. In the six months endedMarch 31, 2021 , we utilized our recently filed shelf registration statement to raise additional cash by selling common shares utilizing an at the market offering under our equity distribution agreement with 21 -------------------------------------------------------------------------------- Table of Content sNorthland Securities, Inc. ("Northland"). Under this program, we sold 245,973 shares for net proceeds of$0.9 million . 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 theSecurities and Exchange Commission . Based on their evaluation as ofMarch 31, 2021 , our Chief Executive Officer and Controller 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 Controller as appropriate to allow timely decisions regarding required disclosure. 22
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