ADDvantage Technologies Group, Inc.

Greetings, ladies and gentlemen, and welcome to Advantage Technology Group's fiscal 2023 first quarter financial results. At this time, all participants are in the tsunami mode. The question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star then zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Rich Moss of Hayden IR. Please go ahead, sir.

Thank you, Operator. We're joined today by Joe Hart, President and CEO, as well as Michael Rutledge, the company's Chief Financial Officer. Before we begin today's call, I'd like to remind you that this conference call may contain forward-looking statements, which are subject to the safe harbor provisions of the Private Securities and 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 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 they materially differ from the actual future events and results due to a variety of factors, such as those contained in advantage technologies. Most recent report on Form 10-K on the file of the Security and Exchange Commission. Actual information presented on this conference call should be considered in conjunction with the consolidated financial statements and notes included in the company's first release issued earlier today and including Advantage Technologies' most recent report on Form 10-K. The guidance regarding anticipated future results on this call is based on limited information currently available on Advantage Technologies. We have started to change. Although any such guidance and factors may change, Advantage Technologies will not necessarily update this information as the company will only provide guidance at certain points during the year. Such information speaks only of the date of this call. During the 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 advancedtechnologies.com, you will find a reconciliation of these non-GAAP financial measures with the closest GAAP financials and a discussion about why we believe the non-GAAP financial measures are relevant. These financial measures are included for the benefit of investors and should be considered in addition to and not instead of GAAP measures. I'd like to now turn the call to Joe Hart, President and CEO of Advantage Technologies. Joe, please go ahead.

Thank you, Brett, and thank you to everyone joining us on the call today. This was a challenging quarter. The March quarter is always a challenge for our wireless segment, due largely to winter weather in the Midwest. It is typically our slowest quarter. But compounding that was the sudden and precipitous decline in demand for our telco segment. For the last two years, our telco segment has been delivering robust growth, benefiting from several pandemic-related trends, such as the disrupted supply chain, the global chip shortage, and the remote workforce. Simply put, enterprises needed more telco equipment, from office phones to optical switches, to better support a workforce that was more distributed than ever. But the chip shortage, supply chain constraints, and high cost to borrow made it difficult, and in some cases impossible, to buy new equipment. Last year, this led to a large demand curve for used and refurbished network components. The result was overbuying in 2022 from network operators concerned that they wouldn't be able to get critical parts or spares for their network. Now that the OEMs have improved delivery intervals for new equipment, the operators have focused on burning off the excess inventory that they have built up of spares, which has had a significant impact on our business. We expect that inventory buildup will burn off at some point in the next few months. and that our equipment business will normalize back to more historic levels during the second half of this year. In the meantime, our wireless segment continues to perform at normal levels with a slight decline in January due to winter weather. As the weather improves, we are highly confident that our wireless revenue will accelerate significantly this year. We think we've only scratched the surface of the wireless opportunity. We continue to add experienced talent to our team, broadening our opportunities and improving our competitive position. Moreover, the wireless industry is facing unprecedented upheaval. Some of the largest service integrators who have served large carriers in many areas of the country are struggling. Some have had service issues and one has failed. This has created greenfield opportunities for reliable partners, and we believe we will capture a meaningful share of the near-term CapEx spend. The overall opportunity is massive, and the new additions to our team bring established relationships and significant experience. The continuing 5G opportunity represents a multi-year growth opportunity for tower work, as the carriers are less than halfway complete with their initial 5G deployments. Although some of the carriers are announcing a brief pause or slowdown in their expansion plans, they continue to invest billions of dollars in their networks as they must deliver the capacity and coverage required by the ever demanding wireless subscriber population. On the bright side, we benefited from the cost reduction initiatives we put in place last year. We again lowered our SG&A expenses and we are poised for solid profitability as revenues normalize in the telco segment and increase in the wireless division in the second half of this year. While consolidated revenues decreased 38% from the same quarter a year ago, gross margins remained essentially flat, and our operating expenses decreased by $0.8 million. With that, I'll now turn the call over to Michael Rutledge, our CFO, to provide a more detailed review of our financial results. Michael, please go ahead.

Thank you, Joe. Consolidated sales decreased 9.1 million, or 38%, to 14.7 million for the first quarter from 23.8 million for the three months ended March 31, 2022. The decrease was primarily due to a decrease of $7.9 million or 49% in telco revenue and a decrease of $1.2 million or 15% in wireless revenue. Gross profit was $3.4 million with a 23% gross margin compared to a gross profit of $5.1 million or a 24% gross margin for the same period last year. Operating expenses decreased approximately $800,000 or 29%, to $2.0 million, reflecting the previously announced cost reduction initiatives. Consolidated selling, general and administrative, or SG&A expenses, include overhead, which consists of personnel, insurance, professional services, communication, and other cost categories, decreased approximately 200,000, or 6%, to 3.6 million for the three months ended March 31, 2023 from 3.9 million for the same period last year. Net loss for the quarter was 2.7 million or 21 cents per basic and diluted share compared to a net loss of 1.4 million or 11 cents per basic and diluted share for the same quarter last year. Turning to our balance sheet, cash and cash equivalents were 2.6 million at March 31, essentially unchanged from December 31, 2022. In April, we entered into a securities purchase agreement issuing 13% secured promissory notes in the aggregate principal amount of $3.0 million convertible into shares of the common stock of the company, raising net proceeds of $2.9 million. As of March 31, 2023, the company had net inventories of $8.5 million, Outstanding debt as of March 31 was $1.7 million, consisting of vehicle financing leases. This concludes the financial overview segment of our remarks. I will now turn the call over to the operator to facilitate any questions.

Thank you very much, Jeff.

Ladies and gentlemen, we will now be conducting the question and answer session. If you would like to ask a question, please press star then 1. On your telephone keypad, a confirmation turn will indicate that your line is in the question queue. You may press star 2 to leave the question queue. We ask that you please limit your questions to 1. For participants making use of speaking equipment, it may be necessary to pick up your handset before pressing the star keys.

The first question comes from George Gaspar, the property investor. Can you hear me?

Yes, we can hear you, George.

Okay, all right. Well, needless to say, it's a disappointing quarter, much more so than what you addressed in your last call. But I'd like to know on the wireless area, Are you going to be able to expand what you're operating besides getting on the tellers? And is there anything going on in terms of teller development now? You implied that there's a lot of potential changes that have to be made in the past on tellers to update to the 5G that's coming into the market on a regular basis. Are there things that you envision going on on towers that are going to give you even more work? And can you expand your base of operations in terms of this wireless area in general?

Thanks, George. This is Joe. Thank you for your question. Yes, there's a lot of new aspects to the services that we perform on towers that we think will improve the future for us. One of those is fixed wireless access where businesses and homes can directly get internet over fixed wireless which is going into the cellular network. That gives us an opportunity. Small cell, which is poles, light poles, street lights, billboards, basically street side architecture that allows you to put smaller cell sites right in residential and commercial areas and are less obtrusive rather than the big two 300-foot cell towers that exist. Both of those are, you know, a coming growth opportunity for us. Some of the carriers are starting to announce their fixed wireless access programs. The one in your geography, US Cellular, is a big advocate of fixed wireless, so we see a bright future in that. As you increase the speed and the bandwidth from 3G to 4G to 5G, the cell sites need a tremendous amount of bandwidth. And as people doing video streaming and data streaming, it requires a lot more bandwidth. So the height of those antennas is slowly coming down from probably an average of about 220 to 240 feet. down more to the 150 feet, 180 foot level. But what that does, it shrinks the diameter of the cell and then creates holes in the network. So what happens there? You see companies like Verizon, you know, announcing a big program to increase the number of new sites that they have out there. So, you know, we'll be doing a lot of new site construction for a number of the carriers. And then recently, AT&T announced that as soon as the dual-band radios are available, they'll be relaunching and rejuvenating their whole C-band program for the new spectrum that they bought in the FCC auctions last year. So we see, you know, quite a bit of opportunity developing beyond just the plain old climb the tower and upgrade the radios and antennas. So there's a lot of opportunity out there. And then maybe further down the road, we're looking at potentially expanding the fiber optic cable network services in some fashion. But that's a little bit further down the road for us. I hope that answers your question.

Okay, could I just expand that question? Can you talk a little bit about the geographical coverage that you're involved now relative to, say, a few months ago and what you're looking at going forward state to state? Where are you really concentrating and where would you like to go from here?

So we serve basically the central region from north to south. So we serve Illinois, Wisconsin, Michigan, Indiana, a little bit of Minnesota sometimes, but it comes straight down through Arkansas, Oklahoma, Missouri, Kansas, all the way down to the southern border of Texas. And last year, We branched out into Louisiana, Mississippi, and a little bit in Alabama. We expect that our geography of growth might be the Minnesota northern plains states, you know, including Iowa, Nebraska, and then also the southeastern states, you know, the Gulf all the way over to Florida, Georgia, and potentially up into the Carolinas. We won't go there without a customer that is, you know, giving, awarding us business that takes us and, you know, really provides the opportunity for deployment. We're not just going to go set up a storefront and wait for business.

Okay. And then, Joe, can you identify the number of crews that you have working now as opposed to the end of the year?

uh this past year and uh where do you think you're going by say middle of the year well i know we had a big rainstorm here this afternoon george so i might be off by a couple but uh you know we're we're currently at about 30 crews um north to south um towards the end of the year we were you know with the christmas holidays and the winter weather that hit in the Chicago area and that Great Lakes area, you know, we were probably down around 25, 24 for a few weeks there. But we think this summer will probably hit a level of 50 to 55 crews. We expect our revenues to pick up here in the second half of the year, and that'll drive crew count.

Okay, all right. And as far as the crew capability, are you finding crews accessible for your service or is it getting crews?

No, there are a lot of crews available as some of the carrier programs hit either a completion point or a pause in their programs or a change in geography, whatever might cause that. But there are a lot of subcontractor crews available. And the trickier part about internal crews is just making sure that you're adding really good internal crews, that you're just not picking up warm bodies.

Okay. If I could ask one additional question. Can you just identify a little more specifically the number of shares that are out at this point in time in terms of the most recent financing that you've accomplished in the conversion of that? Where's the share count going to go? Can you just give us a general idea?

Yeah, I'm going to ask Michael Broutledge to answer that just so that I don't misspeak.

Yeah, thanks. Thanks, Joe. George, on the 10Q, we disclosed that we have 14.9 million shares outstanding as of May 9th. As far as the conversion, potential conversion of the financing that we did in April, It's not our intent necessarily that any of those shares would convert. It will be tied to pricing that at the time that if MassTIL decided to convert that it would determine how many shares they would get. Given the current share price, I'm not anticipating that they would want to convert and nor do we intend necessarily for them to convert. Determining that a number of shares at this point, we don't have that number.

You don't have the number beyond the $14.9 million. Is that it?

That's correct. Like I said, we intend to pay the loan down, so we don't have an intent to have the shares convert.

I see. I got you. I got you. Okay. Well, that's positive also. Hopefully this all comes together.

Thank you.

Ladies and gentlemen, we seem to have reached the end of the question and answer session. I will now turn the call back over to Joe Hart for closing remarks.

Thank you, operator. I just want to continuously remember to thank those folks that have invested in Advantage Technologies. We had a couple of really great quarters late last year, and we're hitting a rough patch right now as the telephone equipment market for used product sort of readjusts itself and gets to a new normal. You know, we'll get through this. We have a good year ahead of us. Wireless growth looks... Apologies, sir.

Can I interrupt you there for a moment? I do apologize. We do have another question in the queue.

Okay.

Thank you.

The next question comes from Richard McGlynn with a private investor. Hello. Yeah, hi.

Hello. Yeah, George just touched on this convertible promissory note with the $3 million here. I have some additional concerns about it, and it basically is tied to the current share price of AEY. And there are situations that, as stated in the agreement, that if the market price is is below $1 share, which is the floor price for it, that first off, that the shareholders would get an opportunity to vote on it. Is that going to happen? If not, why not?

Yeah, thank you for the question, Richard. We have an obligation to, once the As you pointed out, once the shares have been trading for below $1 for five consecutive days, which they have now, we have an obligation to request that the shareholders approve a potential sale of over 20% of the company should that be converted to shares. So we have a legal obligation to do that, and we'll be doing that in the future.

When can we expect that? Also, the aspect of the share price, too, is that if the stock is in danger or gets – NASDAQ notifies you that they're going to delist it from the national market because the price is below $1 for 30 consecutive days, you guys will get a notification from that, and that is considered a – A DEFAULT ON THIS NOTE WHICH COULD SET A LOT OF ITEMS IN THE PLAY AS FAR AS WHAT MASTHILL CAN DO TO CONVERT THE SHARE OF CONVERT THE NOTE, THE PRINCIPLE. WHAT DOES THE MANAGEMENT HAVE PLANS FOR CONCERNING THAT POSSIBILITY?

We have plans in the works to grow the business, and we'll see where the share price goes from there. And if the share price stays below $1 and we get notified by NASDAQ, we'll have to deal with that as it comes.

We're halfway through already. It's 15 days that it's been underneath the dollar. It's 30 days usually by NASDAQ, and they will notify you that the company is no longer in. What's the word? Compliance. And I guess you will get, if I remember correctly, I think you possibly have 180 days to remedy the situation if the stock price doesn't get back up over a dollar again. But as I say, you can see the stock's not heading in the right direction. for sure, and we're looking at a share price that we haven't seen with AEY in over 20 years. And I'm just kind of curious, even from the beginning, when I first saw this note, what led to the necessity of coming up with a convertible like this at such generous terms, in my opinion. Of course, now that I see what the earnings were for the first quarter there, it makes a little more sense So my concern is the liquidity situation for the company to continue operating as it has been and being able to have enough liquid cash around to keep business going at a rate as planned. But as I say, I'm very concerned, like George was, about the possible – dilution to the current shareholders is saying because this loan could possibly issue, I mean, Mass Hill could end up with close to 3 million shares, and I don't know if that includes the warrants in addition to that, and end up with 20% or more of the company outstanding shares at that point. Sue?

Yeah, this is Richard. Richard, this is John.

This is rather unusual considering what we heard at the end of the last earnings call. So it's kind of broad-sighted, but I'm just curious about this floor price issue and how it would trigger a default, which could possibly, I guess, make the conversion of shares available by mass toll possible at the floor price of a dollar a share? Is that correct?

It is possible, but as I stated to George, it is not our intent to get to a point where the shares would be converted.

Well, it never is, but it does.

I mean, mass toll. MassTill would only want to convert if they thought we weren't going to be able to pay. I don't think there's an advantage to them to take 20% or greater of the shares when we're making regular payments on the loan. The other thing is because the share price has declined, it now It now could be a calculation that equals greater than the 20%, which meant that we must go to the shareholders to approve such a potential event. It's not something that we want to happen for sure, but by rule, we have to. As far as the NASDAQ, once we're ultimately notified that we've exceeded the 30-day sub-$1 category, we get 45 days to submit a corrective action plan to cure on the stock price, and then we have a total of 180 days from date of notification to cure. And then if you're making progress, there's the potential for an additional 180 days after that. We don't envision that being a necessity. We feel that we're going to have a much improved year compared to this recent quarter, but you know, I will show you nothing. We didn't change anything from when we were really having a couple of great quarters in a row. And our equipment business was, you know, growing like crazy, and highly profitable, nicely profitable. Nothing changed on our side. It was just the total shutdown of ordering mostly by the optical fiber network providers who had built up a stockpile of spares and standby equipment because they couldn't order new equipment from the OEMs. Once the OEMs finally resolved the chip shortages, supply chain issues, et cetera, and the OEMs got a supply of new equipment back online, then the fiber network providers decided to burn off that stockpile of spares that they had accumulated and just put a hold on any additional orders to companies like us until such time as they burned off that stockpile. We feel like that sometime in the next couple of months, there's no way to know for sure. We are talking to the same people that, you know, helped us grow this business and ordered this equipment over the last two years. I mean, our equipment business tripled in revenue over the last 24 months. Those same customer contacts are saying, look, I need this, I need that, I need 10 of this, 6 of that, 12 of this, 20 of that. I'm not allowed to order anything. until the inventory level comes down to an acceptable level. And then as soon as they take that hold off, I'll be back ordering again. The only thing is we just have no control over when that gate's going to open again. Our wireless division has been going along steadily earning revenue month after month. Margins have been good. We get into our summer months here, and people like George, it sounds like you too, Richard, have been here quite a while as an investor. Our summer months are really big months for us on the wireless side. So we think this is going to normalize on the equipment side over the next few months, and we still believe we're going to have a strong year on the wireless side. That will change things.

Was this note or this financing something that you guys were hit with, happened to do suddenly because of the sudden drop off in the revenues from Telco? You kind of had to get some liquidity?

That's exactly correct. The rapid decline from the Telco business put us in a situation where working capital declined from 1231, and this was a way to bolster our working capital.

Okay, so the first amortization payment on this note is what, not until October?

Yeah, six months out, yeah.

Okay, and then each month it says, I think I saw it in the filing, I guess you had five payments, and then I guess the last one was supposed to finish it, whatever the balance was with interest left on that. Okay, so liquidity, I mean, I don't know if you can tell me, tell us how liquidity is currently going on this, but you don't anticipate, feel like you're going to have a struggle with making those loan payments?

No, we intend to start paying those payments early. So it is not our intent to get to a point where we're at the latter part of the the agreement in making $500,000 payments a month.

Right. Okay. Well, as I said, being with the company, you know, and invested in this company for, it seems like forever, maybe back to the last millennium. But, yeah, you know, 20 years. And as I say, when it was shortly, I guess, after the earnings report came out that the stock went from $140,000, down to dollar and teens and that. And then when this convertible note was filed and saw that it was diluted, then I thought, people ain't going to like this. And the market, like I said, we've had a drop since, I guess, mid-March or so, 40% and 20% of that's been since this note was, you know, filed. The Dow's on it. because of what looks like a huge dilution possibility for the current shareholders, me included. And I got a pretty decent size holding in this company. And big hopes for it, as all of us do. So, as I say, I just was mainly wanting to know how those issues, you know, the defaults that could be triggered by the share price, creating an issue with the listing. And the warrants, the 720,000 warrants, 720,000 warrant shares and that, those go on no matter what, right? The things successfully paid off, those are still, MassTeal still has the chance to redeem those or buy those for five years?

Approximately. Approximately half of them, they'll keep. The other half, if we pay off successfully, they return the warrants to us.

Now, which ones are that, the 250s or the 140s? Or does it matter? A little bit of each.

No, it's the ones that are 140 that return to us. Return to us.

Okay. Well, then it's up to the market. business, hopefully getting back to firmer ground. All right. Well, those are my concerns mainly. I don't want to spook too much, but it's something that I just felt like I wanted to give more clarification on it, and maybe other shareholders would like to know too. And I didn't want George to be the only one that called in.

Well, we appreciate the questions and we'll continue to monitor and evaluate, you know, what we do on a daily basis to do what's best for the shareholders.

That's what I depend on. All right.

Thank you. Thanks so much.

Thank you very much, sir. Ladies and gentlemen, we have now reached the end of the question and answer session. I will now turn the call back over to Joe Hart for closing remarks. Thank you, sir.

Thanks, operator. Yeah, as I started to say earlier, you know, we thank you for your interest and your investment in Advantage Technologies. We feel that we have a bright future. You know, we're feeling that we're in a rough patch at the moment, but This too shall pass. We know the cause of it, and we know the cure for it. So we feel that we're going to be headed in the right direction here over these next few months, and we'll hit full stride here as we hit June, July, and move into the summer months. It's always our biggest time of the year, and it's also our most profitable. So And then we'll go into next year on a different growth trajectory. So thank you for joining the call today. And that concludes our remarks.

Thank you, sir. Ladies and gentlemen, that concludes today's event. Thank you for attending. Anyone else connect the line.