Amplitech Group, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Unaudited interim financial statements. The company designs and assembles custom microwave/RF amplifiers and related components for aerospace, government, defense, satellite and commercial customers.
Financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $284,151 | $721,482 | $1,044,055 | $1,372,527 |
| Gross profit | $142,163 | $411,720 | $575,986 | $796,973 |
| Gross margin | 50.0% | 57.1% | 55.2% | 58.1% |
| Operating income (loss) | ($53,244) | $243,634 | ($74,399) | $249,925 |
| Net income (loss) | ($54,433) | $239,206 | ($79,992) | $237,035 |
Revenue fell 60.6% year over year in Q3 and 23.9% over the first nine months. Management attributed the quarterly decline largely to the prior-year fulfillment of a large, higher-margin foreign order and a shift in product demand. It said current new-order backlog required engineering and R&D work, with products aimed at larger commercial markets. Nine-month G&A rose 18.9% to $650,385, which management linked to marketing, trade shows and R&D. Interest expense declined to $5,593 for the nine months, primarily due to a lower line-of-credit balance.
Cash, liquidity and debt
- At September 30, cash was $235,879, down from $283,660 at year-end 2016. Working capital was $452,636, versus $515,368; total liabilities were $172,258 and stockholders’ equity was $517,419.
- Nine-month operating cash use was $14,751; investing cash use was $2,771; financing cash use was $30,259, principally net line-of-credit repayments. Cash declined $47,781 overall.
- Current debt included a $24,648 line-of-credit balance and a $15,000 demand note bearing 8% interest. The credit facility has a stated $250,000 limit and maturity in April 2019. The demand note had $10,787 of accrued interest at quarter-end.
- Inventory, net of a $65,000 obsolescence reserve, increased to $329,024 from $266,938 at year-end. Accounts receivable declined to $56,516 from $146,235.
Outlook, risks and other notable items
- Management said cash on hand and expected operating cash would be sufficient to fund operations for the next 12 months. It also cited borrowing and debt or equity offerings as potential sources for growth financing; this is management’s outlook, not a guarantee.
- The filing identifies forward-looking-statement uncertainty and dependence on future demand, financing and execution of growth plans. Management’s expected revenue benefit from new products is not quantified. The filing does not provide specific revenue or earnings guidance.
- The company expected adoption of ASC 606 to accelerate revenue recognition for certain qualifying customer-specific production arrangements; the financial impact was still under assessment.
- The 2016 financial statements were revised for a tax-provision error: reported 2016 net income increased by $41,092, from $415,196 to $456,288, and liabilities were reduced by the same amount. Management deemed the correction immaterial to previously issued annual statements.
- The company reported no material subsequent events, no pending legal proceedings to its knowledge, and no off-balance-sheet transactions. It has a five-year office lease that began in February 2016; nine-month 2017 rent expense was $38,750. Management concluded disclosure controls were effective and reported no material changes in internal control over financial reporting.
Investor verification points
- Check order backlog conversion, customer demand and timing of the planned larger-market products against subsequent results.
- Assess whether lower sales and gross margins, higher G&A and operating cash use persist, and whether cash remains adequate for the stated 12-month horizon.
- Review inventory composition and recoverability, including the $65,000 obsolescence reserve, and monitor collection of receivables and customer deposits.
- Confirm debt repayment terms and treatment of the demand note’s accrued interest; evaluate potential need for external financing and dilution.
- Review the effect of ASC 606 adoption and the disclosed 2016 financial-statement revision. The filing’s MD&A gives nine-month 2017 sales as $1,044,056, while the financial statements report $1,044,055.