Amplitech Group, Inc. quarterly report, Q1 FY2020

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Amplitech Group, Inc. — Q1 2020 Form 10-Q

Reporting period: Three months ended March 31, 2020. The unaudited consolidated results include Specialty Microwave Corporation (SMW), acquired September 12, 2019. AmpliTech designs and assembles microwave components and amplifiers; SMW manufactures passive microwave components and related subsystems.

Financial results and liquidity

  • Revenue: $755,948, up 11.4% from $678,318 in Q1 2019. SMW contributed $211,668; AmpliTech’s sales were down approximately $134,000 year over year, according to management.
  • Gross profit and margin: $239,314, down 26.2% from $324,118. Gross margin fell to 31.7% from 47.8%.
  • Operating result: Operating loss of $299,247 versus operating income of $82,647. SG&A rose 123.0% to $538,561.
  • Net result: Net loss of $322,961, or $0.01 per basic and diluted share, compared with net income of $78,802 in Q1 2019. Interest expense was $23,714, versus $3,845.
  • Cash flow: Operating cash outflow was $76,195, compared with inflow of $95,987. Investing cash outflow was $8,088; financing cash outflow was $44,182. Cash declined $128,465 during the quarter to $446,247.
  • Liquidity: Working capital was $951,573 at March 31, versus $1,354,758 at December 31, 2019. Current assets were $1,549,269 and current liabilities $597,696.
  • Debt and leases: Notes payable totaled approximately $1.457 million, including the SMW acquisition note and a secured term loan. The $500,000 line of credit had no balance outstanding. Operating lease liabilities were $437,337 and finance lease obligations were $106,299.
  • Equity: Stockholders’ equity was $782,559, down from $1,093,673 at year-end. Common shares outstanding were 49,086,326 at March 31 and May 7, 2020.

Material changes versus Q1 2019

  • Reported revenue increased following the SMW acquisition, while legacy AmpliTech sales declined. Management attributed the decline partly to COVID-19 disruption.
  • Higher cost of goods sold—up 45.9%—and lower gross margin reflected outsourcing of larger orders, additional engineering and assembly staffing, and more customer-specific product costs.
  • SG&A increased by $297,090, with management citing parent-company professional and investor-relations costs, director and stock-compensation expense, sales and marketing hiring, and SMW-related payroll, insurance, rent, and other expenses.
  • Interest expense increased primarily because of acquisition-related financing. Operating cash flow turned negative, and cash fell from $574,712 at December 31, 2019.

Outlook, risks, and unusual items

  • Management said cash on hand and cash provided by operations should fund operations for the next 12 months, while also stating it may use borrowings or debt or equity offerings. This is an estimate, not a guarantee.
  • COVID-19 reduced workforce availability and affected some customers, vendors, and suppliers. Restricted access to customer facilities could impair demand fulfillment and results. Management reported strong RFQ activity and no cancellations of open orders at the time of filing, but warned that orders could be delayed into the third or fourth quarter.
  • After quarter-end, on April 20, 2020, the company received a $232,200 PPP loan at 1% annual interest, subject to permitted-use requirements. The filing says it helped offset pandemic effects and support reduced-capacity operations.
  • SMW acquisition consideration was $1,143,633: $668,633 cash and a $475,000 note bearing 6% interest. The acquisition included a five-year facility lease with an option to purchase during the first two years for $1.2 million.
  • Management concluded disclosure controls and procedures were not effective as of March 31, 2020. It reported no material change in internal control over financial reporting during the quarter.
  • The filing reports no pending legal proceedings to the company’s knowledge, no off-balance-sheet transactions, and no defaults upon senior securities.

Most important facts for investors to verify

  • Whether COVID-19-related workforce and customer-site restrictions delayed orders, affected fulfillment, or changed the reported strong RFQ activity.
  • Whether the lower gross margin and sharply higher SG&A persist, and how much of reported revenue and operating performance is attributable to SMW.
  • Cash burn, working-capital trends, debt-service requirements, and whether management’s stated 12-month funding expectation remains supportable.
  • The PPP loan’s permitted use and any subsequent determination of forgiveness or repayment obligations; the filing does not report a forgiveness outcome.
  • Remediation plans and progress addressing the ineffective disclosure controls and procedures.
  • Potential dilution: the filing identifies 43.1 million potentially dilutive shares, excluded from diluted EPS in Q1 2020 because their effect was anti-dilutive.