ADDvantage Technologies Group, Inc.

Greetings and welcome to the Advantage Technologies Group fiscal 2023 second quarter financial results. At this time, all participants are in listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star and then zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Brian Siegel. Thank you, and you may proceed, sir.

Thank you, Claudia. Joining me today is Joe Hart, President and CEO, and Mike 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 certain forward-looking statements which are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, among other things, statements regarding future events such as the ability to maintain strategic relationships and agreements with certain original equipment manufacturers and multiple system operators, as well as the future financial performance. 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 the most recent reports on Forms 10-K, 10-Q, and 8-K on file with the SEC. Financial information presented on this conference call should be considered in conjunction with the consolidated financial statements and notes, including the company's press release issued earlier today and included its most recent reports on Forms 10-K and 10-Q. The guidance regarding anticipated future results on this call is based on limited information currently available to management, which is subject to change. Although any such guidance and factors influencing it may change, the company will not necessarily update the information, as it will only provide guidance at certain points during the year. Such information is valid only as 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 in these measures. In our press release and in the financial tables issued earlier today, which are located on our website at advantagetechnologies.com, you'll 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 and 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, Brian, and thank you to everyone joining us on the call today. We continue to navigate a challenging environment for both our telco and our wireless segments while laying the groundwork for better days in the future. Both segments of our business were impacted by macro headwinds during the quarter. The results we are reporting today are not what we envisioned, especially for our wireless business. As has been widely reported, several carriers have paused CapEx investments, slowing the deployment of 5G upgrades. We are responding by carefully managing expenses and broadening our offerings to address a wider range of projects. Our wireless segment was hit late in the second quarter by a sudden downturn in 5G-related build activity by a couple of large wireless customers and an overall slowdown in the industry by the national wireless carriers. Construction is expected to pick back up later this year and in 2024, as wireless data consumption and network demand continues to climb at an increasing rate. The wireless industry faces significant change. Several large construction services providers in the industry, companies that have served large carriers in many areas of the country, have failed over the last 12 months. Others are struggling. This has created greenfield opportunities for reliable partners, and we believe we are well-positioned to capture a meaningful share of the near-term CapEx spend in key geographies. Our efforts to expand our addressable market in the wireless segment are accelerating, and under the leadership of Brian Davidson, our new Chief Revenue Officer, We are optimistic that we can secure additional projects from wireless carriers over the next few quarters. Our recently announced strategic partnership with Walker Technical Solutions is making encouraging progress on a significant multi-year program in the wireless space. The program will aid in a carrier significantly increasing its diversity spend and create a new source of revenue to Fulton Technologies for many years to come. We have added key personnel with deep industry experience to lead this important initiative. We're also very encouraged by the federal government's funding of the Rural Broadband Program, BEAD, and the Rural Digital Opportunity Fund, known as RDOF. Both programs will provide funding of a few hundred billion in fiber and fixed wireless network investment over the next several years. we are aggressively pursuing opportunities to design and build fiber networks across multiple regions. Compounding the challenging conditions in our wireless segment is continued depressed demand for refurbished solutions through our telco segment. As we discussed last quarter, the rapid normalization of the supply chain over the last few months has significantly slowed demand for our telco business. Companies no longer need to build inventory to account for supply chain challenges and chip shortages. And many customers have significant inventory in-house that they want to work off before resuming purchases. Orders for used and refurbished equipment in our telco segment have been drastically reduced due to the overstocking done in 2022 by our customers. and we have been forced to wait for the burn off of that access inventory by the optical network providers sometime later this year. Simultaneously, we have been methodically reducing our telco inventory levels in light of lower demand. We again lowered our SG&A expenses and we believe that as conditions improve, we can return to profitability as revenues normalize in the wireless division later this year and 2024 construction returns to normal. 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 15.7 million, or 57%, to 12.1 million for the second quarter, from 27.8 million for the three months ended June 30, 2022. The decrease is primarily due to a decrease of 14.8 million or 72% in telco revenue and a decrease of 0.9 million or 13% in wireless revenue. Gross profit was 3.3 million or a 27% gross margin compared to gross profit of 8.1 million or a 29% gross margin for the same period last year. Operating expenses decreased half a million dollars or 23% to $2.0 million, reflecting the previously announced cost reduction initiatives taking place in 2022. Consolidated Selling General and Administrative, or SG&A, expenses include overhead, which consists of personnel, insurance, professional services, communication, and other cost categories, decreased $0.8 million, or 21%, to $3.3 million for the three months ended June 30, 2023 from 4.1 million for the same period last year. Net loss for the quarter was 2.8 million or a 20 cent per basic and diluted share loss compared to net income of 0.9 million or 7 cents per basic share, basic and diluted share for the same quarter last year. Turning to our balance sheet, cash and cash equivalents was 2.8 million at June 30, compared to 2.6 million at December 31, 2022. In April, we entered into a securities purchase agreement issuing 13% senior secured promissory notes in the aggregate principal amount of up to $3 million 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 up to 648,000 shares of common stock of the company. raising net proceeds of $2.8 million. As of June 30, 2023, the company had net inventories of $8.1 million, down from $8.5 million at March 31 and $9.6 million at December 31, 2022. Reducing our inventory exposure in our telco business has been an area of focus for us. Our outstanding debt at June 30 was $3.8 million. 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. We will now be conducting a question and answer session. If you would like to ask a question, please press star and then 1 on your telephone keypad. A confirmation tone will indicate your question is in the question queue. You may press star and then 2 if you would like to remove your question from the queue. Just a reminder, please limit your questions to one question and one follow-up question. We will pause momentarily to poll for questions. Ladies and gentlemen, just another reminder, if you'd like to ask a question, please press star and then once. If you'd like to ask a question, please press star and then one. We will pause for questions. The first question comes from George Gasco, who is a private investor. Please proceed with your question, George.

Okay, thank you. Good afternoon. questions about the wireless area. Can you identify the crews that you're operating with in-house crews and outside crews that you're using now and at the beginning of the third quarter that you're in now versus what you're had in the second quarter. Can you identify that?

I can address it in a fairly broad fashion, George. The wireless group was doing fine this year until the month of June. So the last 60 days have dropped quite a bit as DISH is one of our big customers, and they finished the phase two of their build-out and launched that phase two network in June. So they've taken a pause, and for them, before they start their next or third bigger phase, it'll probably be three, four months before they get back in action and get the real estate permissions required for phase three. So they've slowed down. And really, AT&T, it's been widely announced that AT&T has been going through a slowdown. They're in a similar situation, but for a different reason. So our in-house crews remain the same as they have been. We haven't reduced the in-house crews because we have enough work for them. We have reduced our number of subcontracted crews in the central region, and that's why we use a lot of subcontractors, so that we can manage through the highs and lows during the construction year. So I would say we're probably currently running in total at about 40 to 50 percent of a crew count that we had in the first four months, five months of the year and through most of last year in the peak. So it's down right now. Now, there's more work coming that we can see, but we don't have it in hand at the moment. So, you know, I think we're going to go through the two months we've already experienced. and maybe a couple more before the work picks back up going into fourth quarter. Verizon and T-Mobile still continue to build not at a great pace, but, you know, at a steady pace. So every indication is that, you know, DISH will pick back up as they go into phase three of their build and they get their CapEx funding, the merger with Echos, they get that done, and then AT&T will pick back up as they go into the next capital year of 2024. So I think next year is going to be a very strong year, and we have a number of initiatives in place that we're working on. So I think this is a temporary slowdown, and that's what all the analysts that are looking at both the carrier and OEM earnings reports are saying, so that's what I'm going to stick with. Okay.

And then could you identify a little bit more about if there's any changes in what you're installing on towers? Are you getting yourself in a position where you can do more work on a tower? as opposed to what you've been doing in the past? Or is it still a steady trend of what you have been doing up to now?

Well, I mean, we do, I mean, we currently perform all nature of work and activity that customers are asking for on towers. The only thing we don't do much much of is actually erecting new towers. We're not really in the steel stacking business. We do the technology upgrades, both at the base of a tower as well as on top of a tower. And we do integration of those radio networks. So we do most everything that anyone could ask for on a tower. already, and been doing it for a few decades. So I don't see any change there. What we are excited about is our push into project and construction management of fiber optic cable networks. And as I talked about in my remarks, the federal funding has come through recently and in very large amounts of money up into $60 to $80 to $100 billion. And there are matching funds that go along with that of 30 to 50% in terms of matching funds that take that in above, you know, closer to $150 billion available for the next five years or so. So, you know, we're really excited about that. We have a good team It's very similar to our wireless work in the sense of its program management, construction management, working with subcontractors, and, you know, working and we're going to focus on similar geographies so that we don't get stranded, you know, 10 states away from our home base. Okay. And could I ask an additional question, please? If it's a quick one, George, yeah, I don't want to.

Okay.

In case anybody else wants a question.

Okay. I'd like to know about your future financing requirement going forward relative to what you released as far as your financial capacity now. Do you have some indications that you're going to have to do something near-term here to broaden your flexibility so that you can start turning around the amount of volume that you're going to do and have the finances available to you to handle that?

Well, I think we view the next four to six months as kind of a bridge period to 2024. So we're looking at multiple alternatives to make sure that we stay healthy, can, you know, continue to pay our bills and, you know, get to 2024. And Michael Rutledge, our CFO, Michael, you might have some more comments in that regard.

Yeah, sorry, I was coming off on mute. We certainly are evaluating our needs on a daily, if not weekly basis. So as we see an opportunity to bolster our balance sheet, we will address it.

Okay. So at least you feel you've got the flexibility now to handle your activity level going forward.

I'd say given where we're at, and that we expect what we're starting to see the wireless work start to pick up. Um, so that we're, you know, we sort of bottomed out on wireless in June, July, and it's picking back up. I think we're going to be, we're going to be fine, uh, in that regard on the telco side, you know, the orders, uh, order activity continues to remain flat at the reduced level. So, um, You know, NAVA has always been a profitable contributor. So I think we're going to be fine. We've just got to get through this bridge period to get us into the new capital year. Okay. Thank you.

Thank you very much. There are no further questions at this time. I'd now like to turn the floor over to Mr. Joe Hart for closing remarks. Thank you, sir.

Yes, I'd like to say that we appreciate those who are invested in the company today and have been with us for quite a few years. We had a big growth year last year in 2022, grew the business in all aspects by 40, 50% across all the entities. This year, the drop in telco product demand was both a surprise, both that it happened so quickly, as well as to the level it did. We feel that once the fiber optic providers burn off that excess inventory that I described earlier, that it will return to a new normal. It most likely won't get back to 2022 levels, but we think it's going to be fine. The company has a strong management team. We have a strong board of directors that is supportive of the company. And most importantly, we feel that investors that have been with us for a number of years, sometimes a decade or more, So we feel that we're going to get through this and, uh, you know, it's always, uh, an uncertain path that you go because it's dependent upon customers. So, um, and we have some good partnerships in place. Uh, we think that, uh, Walker technical solutions is going to be a very good, strong partnership and help lead us to, uh, you know, a very good future. So, um, We've got our heads down trying to keep costs low, reduce inventories, and get this business turned around. And thank you for attending the call, and thank you for your support.

Thank you very much, sir. Ladies and gentlemen, that does conclude today's conference. Thank you very much for joining us. You may now disconnect your lines.