Amplitech Group, Inc. — Q3 2019 Form 10-Q
Business context and period: Unaudited results for the quarter and nine months ended September 30, 2019. Amplitech designs and assembles custom microwave amplifiers and related products. On September 12, 2019, it acquired Specialty Microwave Corporation (SMW), adding passive microwave components, customers, intellectual property, assets, and eight employees. SMW contributed $125,633 of revenue from acquisition through quarter-end.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $708,896 | $530,113 | $2,018,422 | $1,577,441 |
| Gross profit | $350,370 | $280,329 | $1,035,254 | $899,827 |
| Gross margin | 49.42% | 52.88% | 51.29% | 57.04% |
| Operating income (loss) | $(127,927) | $11,432 | $13,806 | $129,650 |
| Net income (loss) | $(138,384) | $6,728 | $(11,165) | $120,953 |
| Operating cash flow | Not presented for quarter | Not presented for quarter | $5,123 | $113,352 |
- Costs and margins: Nine-month cost of goods sold rose 45.1%, faster than revenue growth of 28.0%. Management attributed margin compression to product mix and lower-margin outsourced orders, as well as increased engineering support, assembly labor, and custom parts.
- Cash and liquidity: Cash was $982,311 at September 30, 2019, versus $442,098 at December 31, 2018. Working capital was $1,529,779, compared with $836,786. Nine-month investing cash use was $668,633, primarily the cash portion of the SMW acquisition; financing provided $1,203,723, primarily from borrowing.
- Debt and leases: Total liabilities were $2,733,137, including $1,301,024 in loans payable net of discount and $475,000 in acquisition promissory note principal. The company also reported $484,052 in operating lease liabilities and $121,359 in finance lease liabilities. It obtained a $1 million, seven-year term loan at 6.75%; monthly payments began in October 2019. A separate $350,000 loan bearing 13.99% was repaid in October 2019. The $475,000 SMW note bears 6% interest, with payments scheduled to begin November 2019.
- Other metrics: Accounts receivable was $564,931 and inventory, net, was $673,717. The nine-month net loss included $119,148 of stock-based compensation; approximately $77,000 of SMW acquisition costs were expensed.
Material changes and management commentary
- Q3 revenue increased 33.7% year over year; nine-month revenue increased 28.0%. For the nine months, domestic sales declined to $1,283,721 from $1,489,485, while international sales increased to $734,701 from $87,956.
- Despite higher revenue and gross profit, higher G&A costs contributed to an operating loss in Q3 and an 89.4% decline in nine-month operating income. Management cited director, investor-relations and public-relations costs, warrant compensation, acquisition expenses, sales and marketing hiring, research and development, and software and integration costs.
- SMW acquisition consideration was $1,143,633: $668,633 cash and a $475,000 note. The preliminary purchase-price allocation included $806,000 of intangible assets and is subject to valuation work and possible significant revisions. Pro forma results are illustrative, not actual: for the nine months ended September 30, 2019, pro forma revenue was $3,055,259 and pro forma net income was $142,378.
- Management stated that cash on hand and operating cash flow should provide sufficient working capital for the next 12 months; it may also use borrowings or debt or equity offerings. No quantified forward revenue or earnings guidance was provided.
Risks, contingencies, and unusual items
- Management concluded disclosure controls and procedures were not effective as of September 30, 2019. It reported no period changes that materially affected, or were reasonably likely to materially affect, internal control over financial reporting.
- The filing identifies no pending legal proceedings and no off-balance-sheet transactions. Management’s forward-looking statements are subject to risks and uncertainties; the filing provides no specific risk-factor discussion, noting the company’s smaller-reporting-company status.
- The company adopted the lease accounting standard in 2019, recognizing right-of-use assets and lease liabilities. The new Ronkonkoma property lease includes an option to purchase for $1.2 million during the first two years.
- After quarter-end, the company issued 200,000 restricted shares to ipCapital Group as partial payment for consulting services and engaged Maxim Group as a financial adviser, with share compensation tied partly to a potential exchange uplisting.
Important facts for investors to verify
- SMW’s post-acquisition contribution, integration progress, and whether the preliminary $806,000 intangible-asset valuation changes.
- Whether margins recover as the product mix and outsourced production costs evolve, and whether G&A spending moderates.
- Debt repayment capacity and actual cash generation, particularly given low operating cash flow and increased borrowing.
- Management’s stated 12-month liquidity outlook, including cash needs for operations, acquisition integration, and lease and loan payments.
- Remediation plans and progress addressing the ineffective disclosure controls and procedures.
- Potential dilution from outstanding preferred-stock conversion rights, warrants, and post-quarter advisory share issuances.