Note 1 - Basis of Presentation and Accounting Policies
Basis of presentation
The consolidated financial statements include the accounts of ADDvantage Technologies Group, Inc. and its subsidiaries, all of which are wholly owned (collectively, the “Company”). Intercompany balances and transactions have been eliminated in consolidation. The Company’s reportable segments are Wireless Infrastructure Services (“Wireless”) and Telecommunications (“Telco”).
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial statements and do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. However, the information furnished reflects all adjustments, which are, in the opinion of management, necessary in order to make the unaudited consolidated financial statements not misleading.
The Company’s business is subject to seasonal variations due to weather in the geographic areas where services are performed, as well as calendar events and national holidays. Therefore, the results of operations for the three months ended March 31, 2023 and 2022, are not necessarily indicative of the results to be expected for the full fiscal year. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
Change in year end
In September 2022, the Company's Board of Directors approved a change in the Company's fiscal year end from September 30 to December 31. The Company's current fiscal year runs from January 1 through December 31. As a result of the change in year end, the Company filed a Transition Report on Form 10-Q for the period from October 1, 2021 through December 31, 2021.
Recently Adopted Accounting Standards
Financial Instruments – Credit Losses. The Financial Accounting Standards Board ("FASB") issued five Accounting Standards Updates (ASUs) related to financial instruments – credit losses. The ASUs issued were: (1) in June 2016, ASU 2016-13, “Financial Instruments – Credit Losses (“ASC 326”): Measurement of Credit Losses on Financial Instruments,” (2) in November 2018, ASU 2018-19, “Codification Improvements to Topic 326, Financial Instruments—Credit Losses,” (3) in April 2019, ASU 2019-04, “Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments,” (4) in May 2019, ASU 2019-05, “Financial Instruments – Credit Losses (Topic 326): Targeted Transition Relief” and (5) in November 2019, ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments—Credit Losses.” Additionally, in February and March 2020, the FASB issued ASU 2020-02, “Financial Instruments—Credit Losses (Topic 326) and Leases (ASC 842): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (ASC 842)” and ASU 2020-03, “Codification Improvements to Financial Instruments,” respectively, which include amendments to ASC 326.
ASU 2016-13 is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. ASU 2018-19 clarifies that receivables arising from operating leases are not within the scope of the credit losses standard, but rather, should be accounted for in accordance with the leasing standard. ASU 2019-04 clarifies and improves areas of guidance related to the recently issued standards on financial instruments – credit losses, derivatives and hedging, and financial instruments. ASU 2019-05 provides entities that have certain instruments within the scope of ASC Subtopic 326-20, Financial Instruments—Credit Losses—Measured at Amortized Cost, with an option to irrevocably elect the fair value option in Subtopic 825-10, Financial Instruments—Overall. ASU 2019-11 clarifies guidance around how to report expected recoveries and reinforces existing guidance that prohibits organizations from recording negative allowances for available-for-sale debt securities, among other narrow scope and technical improvements. ASU 2020-02 adds a Securities and Exchange Commission (SEC) paragraph pursuant to the
issuance of SEC Staff Accounting Bulletin No. 119 on loan losses to FASB Codification ASC 326 and also updates the SEC section of the Codification for the change in the effective date of ASC 842. ASU 2020-03 makes narrow-scope improvements to various aspects of the financial instrument guidance as part of the FASB’s ongoing Codification improvement project aimed at clarifying specific areas of accounting guidance to help avoid unintended application.
The Company adopted the applicable guidance in ASU 2016-13, ASU 2018-19, ASU 2019-04, ASU 2019-05, ASU 2019-11, ASU 2020-02 and ASU 2020-03 on January 1, 2023, and the adoption did not have a material impact on its consolidated financial statements and related disclosures.
Note 2 – Revenue Recognition
The Company’s principal sales are from Wireless services and sales of Telco equipment, primarily in the United States. Sales to international customers totaled approximately $1.6 million and $1.5 million for the three months ended March 31, 2023 and 2022, respectively.
The Company’s customers include wireless carriers, wireless equipment providers, multiple system operators, resellers and direct sales to end-user customers. Sales, which individually amounted to 10% or greater of the Company's revenue, to one customer totaled 19%, and to two customers totaled 39% of consolidated revenues for the three months ended March 31, 2023 and 2022, respectively.
Our sales by type were as follows, in thousands:
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| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
Wireless services sales | $ | 6,572 | | | $ | 7,767 | | | | | |
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Telco equipment | 8,147 | | | 15,986 | | | | | |
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Telco repair | 1 | | | 6 | | | | | |
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Total sales | $ | 14,720 | | | $ | 23,759 | | | | | |
Contract assets and contract liabilities are included in unbilled revenue and deferred revenue, respectively, in the consolidated balance sheets. At March 31, 2023 and December 31, 2022, contract assets were $3.1 million and $5.0 million, respectively, and contract liabilities were $0.2 million and $0.1 million, respectively. The Company recognized $0.1 million of contract revenue during the three months ended March 31, 2023 related to contract liabilities recorded in deferred revenue at December 31, 2022.
Note 3 – Accounts Receivable Agreements
The Company maintains accounts receivable purchase facilities for its Nave and Triton subsidiaries with its primary financial lender with capacities of $10.0 million for Nave and $3.0 million for Triton. The lender charges a fee of 1.75% of sold receivables. The Company also maintains accounts receivable purchase facilities for its Fulton subsidiary, providing a credit capacity excluding a major customer of $3.0 million, with a fee of 2.0% of sold receivables, and credit capacity secured by receivables of a major customer of $3.0 million, with a fee of 1.6% of sold receivables.
All four facilities are secured by the subsidiary's receivables, and the lender advances 90% of sold receivables and establishes a reserve of 10% of the sold receivables at initial sale, which increases to 100% over time after 120 days, until the Company collects the sold receivables. All four facilities mature on December 17, 2023.
The Company has a total capacity under all four facilities of $19.0 million. As of March 31, 2023, the lender has a reserve against the sold receivables of $1.5 million, which is reflected as restricted cash on the consolidated balance sheets. The facilities agreements address events and conditions which may obligate the Company to immediately repay the institution the outstanding purchase price of the receivables sold. The total amount of receivables uncollected by the institution was $7.0 million at March 31, 2023. Although the sale of receivables is with recourse, the Company did not record a recourse obligation at March 31, 2023 as the Company concluded that the sold receivables are collectible.
For the three months ended March 31, 2023, the Company received proceeds from the sold receivables under all of their various agreements of $12.9 million and included the proceeds in net cash provided by operating activities in the consolidated statements of cash flows. The Company recorded related costs of $0.2 million for the three months ended March 31, 2023, in other expense in the consolidated statements of operations.
Note 4 – Inventories
Inventories, which are all within the Telco segment, at March 31, 2023 and December 31, 2022 are as follows, in thousands: | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
New equipment | $ | 2,144 | | | $ | 2,286 | |
Refurbished and used equipment | 10,443 | | | 11,148 | |
Allowance for excess and obsolete inventory | (4,118) | | | (3,871) | |
| | | |
Total inventories, net | $ | 8,469 | | | $ | 9,563 | |
New equipment includes products purchased from manufacturers plus “surplus-new”, which are unused products purchased from other distributors or multiple system operators. Refurbished and used equipment includes factory refurbished, Company refurbished and used products. Generally, the Company does not refurbish its used inventory until there is a sale of that product or to keep a certain quantity on hand.
Note 5 – Intangible Assets
Intangible assets with their associated accumulated amortization and impairment at March 31, 2023 and December 31, 2022 are as follows, in thousands:
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| March 31, 2023 |
Intangible assets: | Gross | | Accumulated Amortization | | | | Net |
Customer relationships – 10 years | $ | 3,155 | | | $ | (2,940) | | | | | $ | 215 | |
Trade name – 10 years | 2,122 | | | (1,708) | | | | | 414 | |
Total intangible assets | $ | 5,277 | | | $ | (4,648) | | | | | $ | 629 | |
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| December 31, 2022 |
Intangible assets: | Gross | | Accumulated Amortization | | | | Net |
Customer relationships – 10 years | $ | 3,155 | | | $ | (2,913) | | | | | $ | 242 | |
Trade name – 10 years | 2,122 | | | (1,655) | | | | | 467 | |
Total intangible assets | $ | 5,277 | | | $ | (4,568) | | | | | $ | 709 | |
Note 6 – Debt
Credit Agreement
On March 17, 2022, the Company closed its $3.0 million credit facility for its Nave and Triton subsidiaries with its primary financial lender. See Note 3 - Accounts Receivable Agreements for more information about the Company's receivables purchase facilities.
Note 7 – Equity Distribution Agreement and Sale of Common Stock
On April 24, 2020, the Company entered into an Equity Distribution Agreement (the “Sales Agreement”) with Northland Securities, Inc., as agent (“Northland”), pursuant to which the Company may offer and sell, from time to time, through Northland, shares of the Company’s common stock, par value $0.01 per share, having an aggregate offering price of up to $13.9 million ("Shares").
The offer and sale of the Shares were made pursuant to a shelf registration statement on Form S-3 and the related prospectus filed by the Company with the Securities and Exchange Commission (the "SEC") on March 3, 2020, as amended on March 23, 2020, and declared effective by the SEC on April 1, 2020.
Pursuant to the Sales Agreement, Northland sold the Shares by any method permitted by law deemed to be an “at the market offering” as defined in Rule 415 of the Securities Act of 1933 (the “Securities Act”), including sales made by means of ordinary brokers’ transactions, including on The Nasdaq Capital Market, at market prices or as otherwise agreed with Northland. Northland used commercially reasonable efforts consistent with its normal trading and sales practices to sell the Shares from time to time, based upon instructions from the Company, including any price or size limits or other customary parameters or conditions the Company may have imposed.
The Company paid Northland a commission rate equal to an aggregate of 3.0% of the aggregate gross proceeds from each sale of Shares and agreed to provide Northland with customary indemnification and contribution rights. The Company also reimbursed Northland for certain specified expenses in connection with entering into the Sales Agreement. The Sales Agreement contained customary representations and warranties and conditions to the placements of the Shares pursuant thereto.
During the three months ended March 31, 2022, 143,985 Shares were sold by Northland on behalf of the Company with gross proceeds of $0.2 million, and net proceeds after commissions and fees of $0.2 million. On November 28, 2022, the Company terminated the Sales Agreement with Northland. There were no penalties associated with the termination of the Sales Agreement. As a result of the termination, no shares were sold during the three months ended March 31, 2023.
Note 8 – Earnings Per Share
Basic and diluted earnings per share for the three months ended March 31, 2023 and 2022, in thousands:
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| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
| | | | | | | |
| | | | | | | |
Net loss attributable to common shareholders | $ | (2,748) | | | $ | (1,394) | | | | | |
| | | | | | | |
Basic and diluted weighted average shares | 13,273 | | | 13,071 | | | | | |
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| | | | | | | |
| | | | | | | |
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Basic and diluted loss per common share | $ | (0.21) | | | $ | (0.11) | | | | | |
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The table below includes information related to stock options and restricted stock awards that were outstanding at the end of each respective three-month period ended March 31, but have been excluded from the computation of weighted average shares for dilutive securities because their effect would be anti-dilutive.
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
Stock options excluded | — | | | 50,000 | | | | | |
Weighted average exercise price of stock options | | | $ | 1.28 | | | | | |
Average market price of common stock | | | $ | 1.32 | | | | | |
| | | | | | | |
Unvested restricted stock awards | 912,883 | | | — | | | | | |
Note 9 – Supplemental Cash Flow Information
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(in thousands) | Three Months Ended March 31, |
| 2023 | | 2022 |
| | | |
Supplemental cash flow information: | | | |
Cash paid for interest | $ | 46 | | | $ | 62 | |
| | | |
| | | |
Supplemental noncash investing and financing activities: | | | |
Assets acquired under financing leases | $ | — | | | $ | 203 | |
| | | |
Note 10 – Stock-Based Compensation
Plan Information
The 2015 Incentive Stock Plan (the “Plan”) provides for awards of stock options and restricted stock to officers, directors, key employees and consultants. At March 31, 2023, 3,100,415 shares of common stock were reserved for stock award grants under the Plan. Of these reserved shares, 415,480 shares were available for future grants.
Stock Options
As of December 31, 2022, there were no outstanding stock options under the Plan. There were no stock options granted during the three months ended March 31, 2023.
Restricted stock awards
A summary of the Company's non-vested restricted share awards at March 31, 2023 and changes during the three months ended March 31, 2023 is presented in the following table (in thousands, except shares):
| | | | | | | | | | | |
| Shares | | Fair Value |
Non-vested at December 31, 2022 | 531,725 | | | $ | 1,016 | |
Granted | 692,824 | | | 804 | |
Vested | (275,666) | | | (368) | |
Forfeited | (36,000) | | | (49) | |
Non-vested at March 31, 2023 | 912,883 | | | $ | 1,403 | |
During the three month period ended March 31, 2023 and 2022, expenses related to share-based arrangements including restricted stock and stock option awards, were $0.4 million and $0.2 million, respectively.
The Company did not recognize a tax benefit for compensation expense recognized during the three months ended March 31, 2023 and 2022.
At March 31, 2023, unrecognized compensation expense related to non-vested stock-based compensation awards not yet recognized in the consolidated statements of operations was $0.8 million. That cost is expected to be recognized over a period of 3.0 years.
Note 11 – Leases
The Company has a right-of-use for a building in Jessup, Maryland which was no longer being used in operations. The Maryland property was subleased as of March 31, 2023 and will end in November, 2023. Rental payments received related to the sublease was recorded as a reduction of rent expense in our consolidated statements of operations for the periods ending March 31, 2023 and 2022.
Note 12 – Segment Reporting
The Company is reporting its financial performance based on its external reporting segments: Wireless 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.
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.
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. The Company allocates its corporate general and administrative expenses to the reportable segments.
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(in thousands) | Three Months Ended | | |
| March 31, 2023 | | March 31, 2022 | | | | |
Sales | | | | | | | |
Wireless | $ | 6,572 | | | $ | 7,766 | | | | | |
Telco | 8,148 | | | 15,993 | | | | | |
Total sales | $ | 14,720 | | | $ | 23,759 | | | | | |
Gross profit | | | | | | | |
Wireless | $ | 1,344 | | | $ | 1,537 | | | | | |
Telco | 2,073 | | | 4,221 | | | | | |
Total gross profit | $ | 3,417 | | | $ | 5,758 | | | | | |
Income (loss) from operations | | | | | | | |
Wireless | $ | (2,097) | | | $ | (2,203) | | | | | |
Telco | (456) | | | 1,038 | | | | | |
Total income (loss) from operations | $ | (2,553) | | | $ | (1,165) | | | | | |
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(in thousands) | March 31, 2023 | | December 31, 2022 |
Segment assets | | | |
Wireless | $ | 8,223 | | | $ | 9,790 | |
Telco | 12,224 | | | 13,217 | |
Non-allocated | 3,562 | | | 4,211 | |
Total assets | $ | 24,009 | | | $ | 27,218 | |
Note 13 – Subsequent Events
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.
Mast Hill Fund Investments
On April 7 and April 12, 2023, the Company entered into securities purchase agreements (the “Securities Purchase Agreements”) with Mast Hill Fund, L.P. (the "Purchaser") for the issuance of 13% senior secured promissory notes in the aggregate principal amount of $3.0 million (collectively the “Notes”) convertible into shares of common stock of the Company, as well as the issuance of up to 72,000 shares of common stock as a commitment fee and
warrants for the purchase of 648,000 shares of common stock of the Company. The Company and its subsidiaries entered into certain Security Agreements, creating a security interest in certain property of the Company and its subsidiaries to secure the prompt payment, performance and discharge in full of all of the Company’s obligations under the Notes. The Purchaser transactions closed on April 7 and April 12, 2023 (each, a “Closing Date”).
On April 7, 2023, the Purchaser acquired the Notes with principal amount of $2.4 million and paid the purchase price of $2.3 million after an original issue discount of $0.1 million. On the same Closing Date, the Company issued (i) a warrant to purchase 290,526 shares of common stock with an exercise price of $2.50 exercisable until the five-year anniversary of the Closing Date, (ii) a warrant to purchase 232,421 shares of common stock with an exercise price of $1.40 exercisable until the five-year anniversary of the Closing Date, which warrant shall be cancelled and extinguished against payment of the Notes, and (iii) 58,105 shares of common stock to the Purchaser as additional consideration for the purchase of the Note. On the Closing Date, the Company delivered such duly executed Notes, warrants and common stock to the Purchaser against delivery of such purchase price.
On April 12, 2023, the Purchaser acquired the Notes with principal amount of $0.6 million and paid the purchase price of $0.6 million after an original issue discount of $29 thousand. On the same Closing Date, the Company issued (i) a warrant to purchase 69,474 shares of common stock with an exercise price of $2.50 exercisable until the five-year anniversary of the Closing Date, (ii) a warrant to purchase 55,579 shares of common stock with an exercise price of $1.40 exercisable until the five-year anniversary of the Closing Date, which warrant shall be cancelled and extinguished against payment of the Notes, and (iii) 13,895 shares of common stock to the Purchaser as additional consideration for the purchase of the Note. On the Closing Date, the Company delivered such duly executed Notes, warrants and common stock to the Purchaser against delivery of such purchase price.