Amplitech Group, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. The unaudited statements compare results with Q1 2018. Amplitech designs and assembles custom microwave amplifiers and related components for aerospace, government, defense, satellite and commercial customers.
Financial performance and position
| Metric | Q1 2019 / March 31, 2019 | Comparable / prior date |
|---|---|---|
| Revenue | $678,318 | $428,541 in Q1 2018 |
| Gross profit; gross margin | $324,118; 47.78% | $254,888; 59.48% in Q1 2018 |
| Operating income | $82,647 | $44,218 in Q1 2018 |
| Net income | $78,802 | $42,770 in Q1 2018 |
| Interest expense | $3,845 | $1,448 in Q1 2018 |
| Cash from operations | $95,987 provided | $83,970 used in Q1 2018 |
| Cash and cash equivalents | $783,645 | $442,098 at December 31, 2018 |
| Working capital | $1,153,516 surplus | $836,786 at December 31, 2018 |
| Total assets; liabilities; equity | $1,693,403; $699,296; $994,107 | $1,407,840; $492,535; $915,305 at December 31, 2018 |
Q1 basic and diluted EPS were each reported as $0.00, rounded to the nearest cent. Weighted-average shares were 48,336,326 basic and 88,200,852 diluted. No income tax provision was recorded.
Material changes and cash flows
- Revenue rose $249,777, or about 58.3%. Management attributed the increase to shipment of the final installment of a large 2018 order and stronger telecommunications product demand.
- International sales were $395,968, versus none reported in Q1 2018; domestic sales were $282,350, down from $428,541.
- Cost of goods sold rose about 104%, faster than sales. Management said a large order had a lower margin and that significant-quantity orders were outsourced; gross margin declined from 59.48% to 47.78%.
- General and administrative expense increased 14.6% to $241,471, which management attributed to sales commissions, promotion consulting and software upgrades. Operating income increased to $82,647.
- Operating cash flow was $95,987, while financing activities provided $245,560, primarily from loan proceeds, partly offset by repayment of the line of credit and lease financing. Cash increased by $341,547; investing activities used no cash.
Debt, liquidity and other notable items
- On March 18, 2019, the company obtained a five-year, $350,000 loan at 13.99% annual interest, less a $24,465 original issuance discount. Its March 31 carrying value was $325,739, split between $55,821 current and $269,918 long-term. Disclosed remaining payments total $454,395.
- The existing $250,000 commercial line of credit had an $86 balance at March 31; the company repaid $72,811 during the quarter. It renewed the facility on April 11, 2019, extending maturity to April 12, 2022; the stated initial rate is 5.25%, subject to adjustment.
- Finance lease liabilities totaled $135,949 and operating lease liabilities totaled $101,423 at March 31. The company adopted the lease accounting standard in Q1 2019; prior periods were not restated.
- Management stated that cash on hand and operating cash flow should fund operations for the next 12 months. This is management’s expectation, not a guarantee.
Outlook, risks and contingencies
- No specific revenue or earnings guidance was provided. Forward-looking statements include plans for growth and financing and are subject to risks and uncertainties; the company disclaimed an obligation to update them except as required by law.
- On May 9, 2019, the company signed a conditional agreement to acquire Specialty Microwave Corp.’s business assets for $2.05 million plus inventory value. The transaction also depends on purchasing the seller’s premises, satisfactory due diligence and definitive agreements. Consideration is expected to be funded with cash and promissory notes at 6%; the filing does not state that the acquisition had closed.
- On April 25, 2019, an independent director joined the board under an arrangement providing $5,000 monthly for one year and a warrant for 3 million shares at $0.03 per share.
- Management concluded disclosure controls and procedures were not effective as of March 31, 2019. No material change in internal control over financial reporting was reported during the quarter. The company reported no pending legal proceedings known to it and no off-balance-sheet transactions.
Key facts for investors to verify
- Whether the lower gross margin on large orders and the use of outsourcing persist as sales grow.
- The terms, repayment burden and use of proceeds of the 13.99% loan, and the company’s ability to maintain liquidity while meeting lease and debt payments.
- The status, financing and eventual cost of the conditional Specialty Microwave acquisition, including the property purchase and inventory valuation.
- How and when management plans to address ineffective disclosure controls.
- The potential dilution from the 3-million-share warrant, Series A conversion rights and other dilutive securities; diluted weighted-average shares materially exceed basic shares.