Amplitech Group, Inc. — Q2 2019 Form 10-Q
Period: Quarter and six months ended June 30, 2019. Financial statements are unaudited. The company designs and assembles custom microwave and RF amplifiers and related subsystems for domestic and international customers.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $631,208 | $618,787 | $1,309,526 | $1,047,328 |
| Gross profit | $360,766 | $364,610 | $684,884 | $619,498 |
| Gross margin | 57.15% | 58.92% | 52.30% | 59.15% |
| Operating income | $59,085 | $74,000 | $141,733 | $118,218 |
| Net income | $48,416 | $71,455 | $127,219 | $114,225 |
| Interest expense | $10,669 | $2,545 | $14,514 | $3,993 |
Basic and diluted EPS were reported as $0.00 in each period, rounded to cents. Six-month operating cash flow was $43,144, versus cash used of $23,473 in 2018. Investing cash flow was zero; financing provided $224,825, primarily from loan proceeds, partly offset by repayment of the line of credit and lease financing. Cash increased by $267,969 to $710,067.
Financial position and liquidity
- At June 30, cash was $710,067, accounts receivable $366,853, inventory $369,539, and current assets $1,556,268. Working capital was $1,228,521, compared with $836,786 at December 31, 2018.
- Total liabilities were $717,475 and stockholders’ equity was $1,092,294. The company reported no line-of-credit balance, down from $72,897 at year-end.
- A five-year loan obtained in March had a stated principal of $350,000, a 13.99% interest rate, and a $24,465 original issue discount. Its carrying value was $313,564 at June 30.
- Finance lease liabilities totaled $128,698; operating lease liabilities totaled $88,850. The company adopted the lease accounting standard in 2019, recognizing operating right-of-use assets and liabilities.
- Cash was held primarily at one financial institution. The company reported no material allowance for doubtful accounts.
Changes versus comparable periods
- Six-month revenue rose 25.03%; management attributed growth to increased telecommunications product sales and marketing, particularly international sales. International sales were $531,651, versus $58,918 in the prior-year half, while domestic sales declined to $777,875 from $988,410.
- Six-month cost of goods sold increased 46.00%, faster than revenue, and gross margin fell to 52.30% from 59.15%. Management cited product mix and outsourcing of larger-quantity orders, which carried lower margins.
- Six-month operating income increased 19.89%, but Q2 operating income declined to $59,085 from $74,000; Q2 net income declined to $48,416 from $71,455.
- General and administrative expense increased 8.35% for the first half. Management cited director, investor-relations/public-relations and warrant-related stock compensation costs. First-half interest expense also rose, reflecting the loan and equipment financing.
Outlook, risks and unusual items
- Management stated it expects cash on hand and operating cash flow to fund operations for the next 12 months; it also cited potential borrowing or debt/equity offerings as sources for internal growth. No specific revenue or earnings guidance was provided.
- The company signed a conditional agreement to acquire Specialty Microwave Corp.’s business assets, including inventory, customer orders, intellectual property and eight employees, together with a required purchase of its premises. Total consideration was $2.025 million, expected to be funded with cash and 6% promissory notes. Completion remained subject to due diligence and definitive agreements.
- After quarter-end, the company engaged ipCapital Group for IP strategy consulting for $30,000, partly payable in 200,000 restricted shares. It also engaged Bentley Securities as financial advisor; compensation includes a 6.5% success fee and warrants to purchase 3.5% of securities outstanding at transaction close.
- A director appointed in April was granted a warrant for 3 million common shares, with a stated exercise price of $0.03, six-month vesting and a ten-year term. The warrant table reports a weighted-average exercise price of $0.046; verify this discrepancy. Unrecognized warrant compensation was $88,230 at quarter-end.
- Management concluded disclosure controls and procedures were not effective as of June 30, 2019. It reported no changes to internal control over financial reporting during the period. The filing reports no pending legal proceedings and no off-balance-sheet transactions.
- The filing cautions that forward-looking statements are uncertain; actual results may differ. Management’s liquidity expectation and the proposed acquisition are subject to financing, execution and other uncertainties.
Investor verification points
- Confirm the warrant exercise-price discrepancy ($0.03 stated in the grant terms versus $0.046 in the warrant table), and assess potential dilution: diluted weighted-average shares were 89.37 million versus 48.34 million basic shares.
- Review the proposed $2.025 million acquisition’s conditions, financing mix and expected effect on cash, debt and operations; it was not presented as completed.
- Assess the 13.99% loan cost, lease obligations and ability to fund operations and growth while maintaining liquidity.
- Track whether international sales growth is sustained and whether outsourcing and product mix continue to pressure gross margins.
- Consider the disclosed ineffective disclosure controls and procedures, and monitor any remediation.