ADDvantage Technologies Group, Inc.

Good day, and welcome to the Advantage Technologies Fiscal 2021 Second Quarter Financial Results Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Brett Moss, Hayden IR. Please go ahead, sir.

Thank you, Operator. We're joined today by Joe Hart, President and CEO, as well as Donna Guy, the company's Comptroller. Before we begin today's call, I'd like to remind you this conference call may contain forward-looking statements, which are subject to safe harbor provisions of the Private Securities Allegation Reform Act of 1995. These forward-looking statements include, among other things, statements regarding future events, such as the ability of Advantage Technologies and its subsidiaries to maintain strategic relationships and agreements with certain original equipment manufacturers and multiple system operators, as well as future financial performance of Advantage Technologies. These statements involve a number of risks and uncertainties. Participants are cautioned that these forward-looking statements are only predictions and may materially differ from actual future events or results due to a variety of factors, such as those contained in Advantage Technologies' most recent report on Form 10-K on file with the Securities and Exchange Commission. Financial information presented on this conference call should be considered in conjunction with the consolidated financial statements and notes included in the company's press release issued earlier today and included in Advantage Technologies' most recent report on Form 10-K. The guidance regarding anticipated future results on this call are based on limited information, certainly currently available on Advantage Technologies, which is subject to change. Although any such guidance and factors influencing it may change, Advantage Technologies will not necessarily update the information, as the company will only provide guidance at certain points during the year. Such information speaks as only of the date of this call. During this call, we may also present certain non-GAAP financial measures, such as non-GAAP net income and certain ratios that are used with these measures. In our press release and in the financial tables issued earlier today, which are located on our website at advantagetechnologies.com, you will find a reconciliation of these non-GAAP financial measures with the closest GAAP financials and a discussion about why we believe these non-GAAP financial measures are relevant. These financial measures are included for the benefit of investors and should be considered in addition to, not instead of, GAAP measures. I would now like to turn the call over to Joe Hart, President and Chief Executive Officer of Advantage Technologies. Joe, please go ahead.

Thank you, Brett. And thank you to everyone joining us on the call today. We are finally seeing the long awaited acceleration in 4G and 5G tower work by all of the wireless carriers. Over the last few weeks, we have received a significant increase in site awards and initial purchase orders. In the aggregate, the awards received today indicate that wireless revenue in the second half of calendar 2021 The period encompassing our fourth fiscal quarter of this year and first fiscal quarter of next year will be double the levels we will report in the first half of calendar 2021. There are additional sites still to be awarded. In fact, the initial awards are just a small part of the overall scope of work. So we have quite a bit of upside in our future. The initial awards are from multiple carriers in several markets. We expect additional markets to be awarded over the next few months. Some of these markets are new regions for us and others are markets where we have an established presence, but all are in the greater Midwest and Southwest regions. Some of the awards involve decommissioning and removing older technologies on a tower or rooftop to make room for new 5G installations to follow later. Other awards are for either installing additional 4G frequencies at the site or installing new 5G radios and antennas. The work is from multiple carriers, sometimes direct and sometimes through large integrators or OEMs. In summary, this is what we have been waiting for. The pandemic impacted the timing of this rollout, but the budgets have finally loosened, and the 5G rollout will soon be underway. We are strategically positioned to benefit with established relationships and experienced crews in key markets across the center of the United States. We already have multi-year service agreements in place with all of the major wireless carriers, the integrators, and the OEMs, needed to pursue this 5G-driven wave of work over the coming years. To be clear, this notable uptick in activity is not reflected in the results we are reporting today for Q2. We expect to see the commencement of new site activity late in our current third quarter and anticipate a substantial increase in wireless revenue in the fourth quarter. the period ending September 30th. This activity will also give us momentum carrying into our fiscal 2022, which starts in October. I am encouraged by what this all suggests for our second half of the calendar year. Jimmy Taylor and his wireless team are benefiting from improved operational efficiency and with a higher volume of work driven by all four carriers building out their networks at the same time to compete in 5G, we are well positioned for success from Q4 forward into 2022 and beyond. In the telco side of our business, led by Reggie Jaramillo and his team, revenue is up $1 million year over year, reflecting the progress new leadership has made and the new customers and partners our NAVE and Triton DataCom businesses have added. These new customers expand our addressable market and add a much higher level of consignment-based inventory to offer our customers. This is translating to better use of cash, lower operating costs, and reduced inventory. Our Triton business, however, continues to be impacted by the nationwide shutdown of most offices and the move to remote work. Despite COVID closing many clients' offices this past year, our team has added new offerings and new clients to offset a great deal of that impact felt throughout the second half of last year. We remain hopeful that increased vaccinations will lead to a return to the office for most US workers and have a positive impact on the sale of our enterprise network products. With that, I will now turn the call over to Donna Guy, our controller, to provide a more detailed review of our financial results. Donna, please go ahead.

Thank you, Joe. Sales for the second quarter of fiscal 2021 were up 8.4% to $12.7 million compared to $12 million in the second quarter of fiscal 2020. The increase of $700,000 was driven by a 1 million year-over-year increase in the telco segment, partially offset by a 300,000 decrease in the wireless segment. Gross profit increased by 3.6 million to 3.2 million, compared with a negative margin of 439,000 for the same quarter last fiscal year. This was due to an increase of 2.3 million in our telco segment related to the prior year year quarters charge for obsolete inventory of $2.1 million and an increase of $1.3 million in our wireless segment due to increased operational efficiency. Gross profit margin was 25% compared to negative 4% for the prior year quarter. Operating expenses were relatively flat at $2.2 million for the quarter compared with $2.1 million for the same quarter last year. Selling general and administrative expenses for the quarter increased by $900,000 to $3.8 million, compared with $2.9 million for the same quarter last year. The increase relates to increased personnel costs, such as non-cash stock compensation of $100,000, executive severance of $215,000, as well as increased computing and communications costs of $200,000, and increased selling costs of $400,000 compared to the same period last year. Net loss for the quarter was 3.1 million, or a loss of 25 cents per diluted share based on 12.4 million shares, compared with a loss of 14.7 million, or a loss of $1.41 per diluted share based on 10.4 million shares for the same quarter last year. Net loss for the prior year fiscal quarter included an 8.7 million impairment charge related to intangible assets including goodwill and an inventory obsolescence charge of 2.1 million. Adjusted EBITDA was a loss of 2.3 million for the second quarter of fiscal 2021 compared with an adjusted EBITDA loss of 5.4 million for the same quarter last fiscal year. Adjusted EBITDA loss for the second fiscal quarter of 2020 included the inventory obsolescence charge of 2.1 million. Turning to our balance sheet. Cash and cash equivalents were 5.2 million as of March 31st, 2021, compared with 8.4 million as of September 30th, 2020. Cash was used primarily to fund operations. As of March 31st, 2021, the company had net inventories of 5.7 million, up slightly from 5.6 million at September 30, 2020. Outstanding debt went down by 1 million to 7 million at March 31, 2021. Debt was comprised of 2.8 million under our revolving line of credit, a 2.9 million PPP loan for which we have applied for forgiveness, and 1.2 million of finance lease obligations. Debt as of September 30, 2020 was 8 million, which was comprised of 2.8 million under our revolving line of credit, 4.1 million of notes payable, including the PPP loan, and 1.1 million of finance lease obligations. We continue to believe we are sufficiently capitalized with appropriate backstops to support near-term business needs as more normalized business conditions fully return. This concludes the financial overview portion of our remarks. I will now turn the call over to the operator to facilitate any questions. Thank you.

Well, thank you. If you would like to signal with questions, please press star 1 on your touchtone telephone. If you're joining us today using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that is star 1 if you would like to signal with questions, star 1. Our first question will come from George Gaspar, a private investor.

Yes, thank you. Good afternoon to everyone. Very positive to hear the commentary, Joe, that you presented on the near term and what we could see by the end of this current fiscal year. I would like to... could you relate the number of crews that you have in line working or preparing to work on the 5G install and anything else that you're doing on the tower side? And if you could describe maybe some of the work processing that goes into all of this and how is that number of crews going to change going forward. What's your thought on that?

Sure. Hi, George. Good to hear you back. Yes. I think we're probably in that transition right now where we're growing from about 20 or so standing crews. It varies a little bit week in to week out, but let's say about a level of 20, and we will be growing to a little over 60 crews here in the next, well, I'll say during the next 60 to 90 days. And the balance of that...

Yes. OK.

The balance, you know, we try to keep a good balance between subcontractor crews and in-house crews so that we don't overinvest with in-house crews. So, yeah, we're very encouraged. Obviously, morale is really peaking and we're in a good place. And when I gave you the crew count, that's a balance of both civil crews as well as tower crews, right? The mix of work changes a little between customers and type of work. So probably not a lot of value in giving you more detail because until the actual, you know, orders come in month by month, we won't know the precise mix of work. But overall... This is the first time we've had visibility into a backlog that takes us through the end of the calendar year. So we are very encouraged. And it's been a long time coming. I've been making these promises quarter after quarter. It looks like it's finally here. And work has started. So it's going to be a bit of a slow ramp here in this current third quarter. May isn't very strong, but June is going to pick up quite a bit. And then July, August, and September are going to be just sort of gangbuster construction months. So it truly has kicked in, and we do have actual backlog.

I see. Okay. And, Joe, if you could explain a little bit more about the elaboration or elaborate on – What work that you end up accomplishing away from the tower work itself? I assume you're going to be actually doing work on streets along the way and buildings, installing. Is that right or not?

Well, right now the workload that we have in hand for the balance of the calendar year is principally made up of macro cell sites. So as I said in my remarks, it's a combination of different kinds of work. Some customers are asking us to decommission equipment and make room for the coming 5G radios. Some customers were expanding additional frequencies in 4G, and then other customers were actually installing new 5G radios and antennas for them. You know, and I should point out that doing more 4G work is a good thing because, you know, the balance of voice and I'll say text messaging is conducted over the existing 4G frequencies. And the 5G frequencies are going to be used primarily for video streaming and large data file transfers and things like that. So the new network will be comprised of a heavy balance of both 4G and 5G frequencies. So it's all in the nature of good. And, you know, even making room on existing towers or rooftops for the coming 5G is really advanced prep work. So it's kind of a combination of scopes of work.

Okay. All right. Well, that sounds like it could end up being a very big job. And I think you made one comment about the potential of the ongoing business on a year-to-year basis. Do you see some of this work that's coming at you maybe further down the line than current where you could actually sign contracts that would put you out into multiple years of activity?

Well, all of our service agreements with the carriers and OEMs and integrators, they are all multi-year contracts. typically they are three-year service agreements. And the actual work, so the sort of problem we've been in the last 12 months or so is that, you know, we've been getting enough backlog two, three, maybe four weeks out in front of our nose. But now we actually have as much as six months of scheduled assigned site work. So You know, the quality, quantity, and the length of the backlog are really extending nicely. So we're very encouraged by that. That allows us to plan for crews and, you know, trucks and, you know, tools, just everything, right? Warehouse space, you name it, it flows downhill. So we're feeling very encouraged by that. All right.

Okay, and in terms of the geographical, you mentioned that Midwest-Southwest is the primary area. Are you trying to – will you be pushing it into any larger areas, let's say into the southeast from the central south part of maybe where you're working or will be working? And could you end up going – northwest in the western part of the United States. What's your strategy on that?

So our, you know, the strategy document that we actually have on our website says that after the greater Midwest and Southwest, which are our, you know, top two targets in our sort of home base, that our next targets are southeast and mid-Atlantic. We don't have the working capital or really the resource base to be chasing things in the northeast and the west coast right now. So I don't envision that anytime soon. So I think would we follow any of the major carriers or OEMs through the southeast and the mid-Atlantic region? Most certainly, right? Those are high-growth areas, Georgia, Florida, the Carolinas, et cetera. But for now, we have no plans to go northeast or west coast.

Okay. And then a question regarding your financing that's going to be required to get this really rolling forward. Do you feel comfortable with the loan agreements that you have in place now, or are you going to have to – surge forward and try to build debt refill agreements that are expanded.

We don't, for the growth that we envision for 2022, we feel that we have adequate capital. We're doing, I think, a very good job being very diligent about managing our cash. We do have the standing S3 that has been out there for over a year. Should the share price make a nice recovery here over the next few months, we may sell some shares via the S3 as we did last year. But we don't see substantially needing to increase our debt. As a matter of fact, should the PPP loan be forgiven, we actually see our debt level decreasing by that $2.9 million at some point here. We continue to talk to our banks about keeping our line of credit in good standing and maybe periodically having to draw from it. But so far, we feel pretty confident about our cash position.

Okay. Well, that's encouraging. And the beauty, one of the real positive things, Joe, for what you've got going at AEY is the modest number of shares outstanding at this point in time. And when you look at the overview of the huge operational improvement going forward within another three-month, six-month period really creates an opportunity to develop some real leveraged earnings going forward, hopefully. That's an outsider looking in. I got one question on the telco operation and the whole telephonic area. You've done a lot of work in terms of regenerating that business and it would seem that going forward there should be some pretty decent opportunity for you to build that business. What's your thinking on that?

Well, Reggie and his team have done a lot of work, including Reggie's predecessor. So operationally, we think we have both NAVE and Triton in really as optimal position as possible from an operations perspective. The NAVE team has done a nice job this year. Sales have increased. Margins have held nicely. And so we're very encouraged on the NAVE side. The Triton team is a great team and works well. I mean, they just are in a network space of enterprise products that was hit hard by the remote work and COVID-19. So they've restored... revenue to somewhat of a normal level after a couple really bad months last year. But, you know, I think they're doing as well as can be expected given the uncertainty around the whole when will large offices return to work. So, you know, it's a bit of an unknown on that network, but the NAVE team Both teams work really hard and do really well. And so we feel pretty blessed, actually, that we've had the kind of year we've had for both our telco teams.

All right. Okay, good. And one last thing about management. As you're looking forward now in this expansive opportunity in the 5G development area, Do you feel that you're going to need to add to your base management? I know you're going to do it on the crew side, and that might require having some additional personnel on board to coordinate that kind of activity if you're going to go from the 20 crew to 60 crews or whatever. Can you give us just a little thought process on that?

Well, we have added, Jimmy Taylor has added recently, we added Dan Delaria as the vice president for the northern region up in Chicago, native Chicagoan, longtime wireless industry construction and program management executive, most recently worked for Moss Tech, probably the largest integrator in the United States. I've known Dan and we've known Dan for a long time as both a competitor and a customer in the last few years. So Dan has joined us in Chicago. He just finished his first month. And then we added a fellow, Sean Rickman, here to be the VPGM of the Southern region. Sean was a long time AT&T Wireless, management representative in the Texas and Southwest region, and more recently with some of the other integrators. So we have added two longstanding operations VPs to the team. So we've been bolstering up the team as we've gone along. So we feel we're in a good place. And... We're ready to spring forward with the work.

Great. Well, thanks very much for your summations to my questions, and I'll turn it over to you guys.

Okay. Thanks. Thanks, George.

Thank you. Once again, if you would like to signal with questions, please press star 1 on your touchtone telephone. Again, that is star 1. 1 if you would like to signal with questions. We'll pause for just a moment. Once again, please press star 1 if you would like to ask questions. And there are no further questions at this time. I'll now turn the conference back over to you for any additional or closing remarks.

Okay, this is Joe Hart again. I want to thank everybody for joining us on the call. It's one of those mixed bag kind of sessions where results are not good and where we want them to be for Q2. We're about halfway through Q3. We are just starting to pick up in the volume of wireless work. Here towards the second half of May and it should be a pretty good June, but Q3 will not be anything of exception. It will be somewhat in the pattern of Q2, but we have the backlog now and we have the trajectory to really ramp up into a very strong finish to the fiscal year. and we think we'll be at a plateau to take us into a new level going into 2022. So we appreciate your interest. We appreciate your participation in the call, and thank you for being investors in Advantage Technologies.

Well, thank you. And that does conclude today's conference. We do thank you for your participation. Have an excellent day.