Business context and reporting period
AmpliTech Group, Inc. designs, engineers and assembles custom microwave and RF amplifiers and related subsystems for domestic and international customers, including aerospace, government, defense and commercial satellite markets. This unaudited Form 10-Q covers the three months ended March 31, 2018; comparisons are with the first quarter of 2017 unless noted.
Financial results and liquidity
| Metric | Q1 2018 | Q1 2017 or prior date |
|---|---|---|
| Revenue | $428,541 | $458,600 |
| Gross profit / margin | $254,888 / 59.5% | $261,489 / 57.0% |
| General and administrative expense | $210,670 | $225,493 |
| Operating income / margin | $44,218 / 10.3% | $35,996 / 7.8% |
| Net income | $42,770 | $33,664 |
| Basic / diluted EPS as reported | $0.00 / $0.00 | $0.01 / $0.00 |
| Operating cash flow | $(83,970) | $(26,559) |
| Cash and cash equivalents | $75,965 at March 31, 2018 | $117,990 at December 31, 2017 |
| Working capital | $503,548 at March 31, 2018 | $439,811 at December 31, 2017 |
| Line of credit | $120,513 at March 31, 2018 | $76,435 at December 31, 2017 |
Net cash used in investing activities was $2,133, principally for equipment. Financing provided $44,078 from the line of credit. Total assets were $853,078 and stockholders’ equity was $559,382 at March 31, 2018. No income-tax provision was reported. The company reported no off-balance-sheet transactions.
Material changes versus the prior comparable period
- Revenue declined $30,059, or approximately 6.6%. Management attributed the comparison to a large order’s final installment shipping in Q1 2017.
- Gross profit fell $6,601, or approximately 2.5%, although gross margin increased to about 59.5% from 57.0%. Management said the prior-year large order had higher gross margins and cited outsourcing of larger-quantity orders.
- G&A expense decreased $14,823, or approximately 6.6%, which management attributed to lower cryogenic-product R&D and investor-relations costs. Operating income rose $8,222; interest expense decreased $884.
- Operating cash use increased year over year, mainly reflecting higher accounts receivable and inventory. Receivables rose to $299,758 from $137,465 at year-end; inventory rose to $398,749 from $335,668.
Outlook, commentary, risks and unusual items
- Management stated that cash on hand and cash from operations should provide sufficient working capital for the next 12 months, while also identifying borrowings and debt or equity offerings as potential financing sources. No revenue or earnings guidance was provided.
- Disclosure controls and procedures were deemed ineffective as of March 31, 2018. Management reported no material change in internal control over financial reporting during the quarter.
- The company adopted ASC 606 on January 1, 2018 using the modified retrospective method and said it did not expect a material effect on reported revenue; prior periods were not restated.
- A two-year advisory agreement for sales and distribution in Asia and the Middle East provides 2.2 million restricted shares. 500,000 shares were issued in February; the remaining 1.7 million were issued April 9, 2018. The filing reports 48,336,326 common shares outstanding as of May 3, versus 46,636,326 at March 31.
- The $250,000 line of credit matures April 20, 2019 and bears variable interest; its March 31 balance was $120,513. The company reported no pending legal proceedings or material subsequent events apart from the advisory-share issuance.
- Cash was deposited primarily at one financial institution. The filing also notes that interim results are not necessarily indicative of full-year results and that forward-looking statements are subject to risks and uncertainties.
Important facts for investors to verify
- Whether the company can convert the substantial increases in receivables and inventory into cash, given Q1 operating cash outflow and declining cash balances.
- The status and collectability of receivables, inventory realization and the adequacy of the $70,000 inventory obsolescence reserve.
- The full dilution and compensation implications of the 2.2 million advisory shares, including the post-quarter issuance and updated shares outstanding.
- The remediation plan and progress for the ineffective disclosure controls, and the company’s ability to fund operations beyond management’s stated 12-month expectation.
- The impact of potentially dilutive securities: the filing reports 39,835,200 potential dilutive shares for Q1 2018 and weighted-average diluted shares of 86,221,526.