Amplitech Group, Inc. — Q2 2016 Form 10-Q
Business and period: The company designs and assembles custom radio-frequency and microwave amplifiers and related components for aerospace, government, defense, satellite, and commercial customers. This unaudited quarterly report covers the three and six months ended June 30, 2016, with comparisons to 2015; balance-sheet comparisons are to December 31, 2015.
Financial results
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Sales | $504,565 | $378,788 | $651,045 | $727,240 |
| Gross profit | $354,440 | $185,897 | $392,924 | $393,077 |
| Gross margin | 70.3% | 49.1% | 60.4% | 54.1% |
| Operating income | $159,585 | $18,932 | $22,004 | $59,636 |
| Net income | $154,761 | $9,453 | $13,542 | $40,263 |
| Interest expense | $4,824 | $9,479 | $8,462 | $19,373 |
Margins are calculated from reported sales and gross profit. Basic and diluted EPS were each reported as $0.00, reflecting rounding. The filing reports no income-tax provision for these periods.
- Cash flow, six months: Operating activities provided $120,285, investing activities used $14,335 (equipment purchases), and financing activities used $1,395. Cash increased $104,555 to $153,590.
- Liquidity at June 30: Current assets were $480,074 and current liabilities $421,881, for working capital of $58,193. Total assets were $576,546; stockholders’ equity was $154,665.
- Debt and obligations: Current liabilities included a $91,854 line-of-credit balance, $26,958 in notes payable, and $47,403 due to the CEO. The company’s $250,000 line of credit matures April 20, 2019 and initially carried a variable 5.25% rate, subject to stated adjustments and a 5%–25% range. The unsecured demand note bears 8% interest and had a stated 2012 maturity; the CEO loan is also payable on demand and bears 8% interest.
- Other balance-sheet movements: Inventory rose to $311,305 from $145,815, including a $76,000 obsolescence reserve. Accounts receivable fell to $9,790 from $175,869. Customer deposits increased to $132,251 from $77,630.
Changes and management commentary
- Second-quarter sales rose 33% year over year and gross profit increased to $354,440 from $185,897. Management attributed the improvement to more efficient outsourced assembly for a large foreign sales order, which increased production capacity and carried a higher gross margin.
- First-half sales declined approximately 11%, while gross profit was nearly unchanged. Management attributed lower sales to a manufacturing shutdown during the February move to a larger facility, equipment damage, and repair delays.
- First-half general and administrative expense was $370,920 in the statements (versus $333,441 in 2015); management cited relocation costs and increased marketing. Q2 expense was $194,855, up from $166,965, reflecting trade-show advertising and equipment lease and repair costs.
- First-half interest expense declined approximately 56%; management attributed this primarily to refinancing factoring financing with the lower-rate line of credit.
- Management said cash on hand, operating cash flow, and available borrowing were expected to provide sufficient working capital for the next 12 months. The filing provides no quantified revenue or earnings guidance. Management also noted plans to finance internal growth through cash, operations, line-of-credit borrowings, debt or equity offerings, or a combination.
Risks, contingencies, and other disclosures
- Results remain exposed to production disruption and repair delays, as well as reliance on individual customer orders; the filing highlights a large foreign order as a significant driver of quarterly performance.
- Liquidity is limited relative to current obligations, and the company relies in part on credit availability and financing from its majority-shareholder CEO. The demand obligations and overdue-maturity note warrant attention.
- Inventory recoverability and obsolescence are identified as management estimates; the reported reserve was $76,000. Cash was held primarily at one financial institution.
- The company reported no off-balance-sheet transactions, no pending legal proceedings to its knowledge, and no material subsequent events. It reported effective disclosure controls and no material change in internal control over financial reporting.
- The company was a smaller reporting company and an emerging growth company. Management cautioned that forward-looking statements are uncertain and undertook no general obligation to update them.
Key facts for investors to verify
- Whether the Q2 margin and earnings improvement is repeatable or depends on the large foreign order and outsourced assembly arrangement.
- Production recovery after the facility move, equipment damage, and repair delays, and the effect on future order fulfillment.
- Availability and terms of the $250,000 credit facility, and repayment or refinancing plans for the demand note and CEO loan.
- Inventory composition, realizability, and adequacy of the $76,000 obsolescence reserve, particularly after the substantial inventory increase.
- Potential dilution: the statements show diluted weighted-average shares of about 85.8 million versus 46.1 million basic shares, while the notes cite 39.7 million potential dilutive shares; reconcile this with the reported rounded EPS and disclosure elsewhere that no dilutive instruments were outstanding.
- The MD&A cites first-half 2016 G&A expense of $370,923 in one passage, while the financial statements report $370,920.