ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity, and certain other factors that may affect our future results. The following discussion and analysis should be read in conjunction with our audited consolidated financial statements and the accompanying notes thereto included in “Item 8. Financial Statements and Supplementary Data.”

Forward-Looking Statements

In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. See “Forward-Looking Statements.” Our results and the timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors.

Business Overview

We design, engineer and assemble micro-wave component based amplifiers that meet individual customer specifications. Our products consists of RF amplifiers and related subsystems, operating at multiple frequencies from 50kHz to 44GHz, including Low Noise Amplifiers, Medium Power Amplifiers, oscillators, filters, and custom assembly designs. We also offer non-recurring engineering services on a project-by-project basis, for a predetermined fixed contractual amount, or on a time plus material basis.

Our plans for the next year include new product development, expansion of existing product line and targeting mergers and acquisitions.

Results of Operations

As of December 31, 2017, the Company had a working capital of $439,811 and an Accumulated Deficit of $1,177,751. Additionally, there was a net loss of $97,049 and net income $456,288 for the year ended December 31, 2017 and December 31, 2016, respectively.

For Years Ended December 31, 2017 and December 31, 2016

Revenues

Sales decreased from $2,036,443 for the year ended December 31, 2016 to $1,380,743 for the year ended December 31, 2017, a decrease of $655,700 or approximately 32.2%. These results were impacted by the shift in new product demand. The company’s backlog of new orders required new engineering design and additional research and development. These new products are geared towards larger commercial markets to yield much higher revenue in the future.

Cost of Goods Sold and Gross Profit

Cost of Goods Sold decreased from $827,600 in 2016 to $652,444 in 2017, a decrease of $175,156 or approximately 21.2%. This decrease was the direct result of the decrease in sales for the year as well as a decrease in our outsourcing costs. As a result, the gross profit was $728,299 for 2017 compared to $1,208,843 for 2016, a decrease of $480,544 or 39.8%

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General and Administrative Expenses

General and administrative expenses increased to $818,395 in 2017 from $736,927 in 2016, an increase of $81,468, or approximately 11.1%. This increase primarily was due to the increase in marketing expenditures, attending additional trade shows, hiring additional sales personnel and the increase in research and development.

Other Income (Expenses)

Interest expense decreased $8,675, or 55.51%, when comparing the year ended December 31, 2017 to the year ended December 31, 2016. The decrease was primarily due to the low balance on the Company’s line of credit.

Net Income

As a result of the decrease in sales and gross profit, the Company had a net loss of $97,049 in 2017 but net income of $456,288 in 2016.

Liquidity and Capital Resources

Operating Activities

The net cash used in operating activities for the year ended December 31, 2017 was $166,827 resulting primarily from the decrease in net income, an increase in inventory and prepaid expenses.

The net cash provided by operating activities for the year ended December 31, 2016 was $346,663 resulting primarily from the increase in net income, a decrease in accounts receivable, an increase in inventory and a decrease in prepaid expenses.

Investing Activities

The net cash used in investing activities for the year ended December 31, 2017 and 2016 was $5,371 and $14,335, respectively, which was for the purchase of equipment.

Financing Activities

The net cash provided by financing activities for the year ended December 31, 2017 was $6,528 a result of borrowing against the line of credit to repay the note payable.

The net cash used in financing activities for the year ended December 31, 2016 was $97,703 which was used to repay the note payable, line of credit and amounts due to officer.

We have historically financed our operations through, debt from third party lenders, notes issued to various private individuals and personal funds advanced from time to time by the majority shareholder, who is also the President and Chief Executive Officer of the Company.

As of December 31, 2017, we had cash and cash equivalents of $117,990 a working capital of $439,811 and an accumulated deficit of $1,177,751.

On November 16, 2015, we terminated our factoring agreement and the balance of the loan was paid in full with the Company’s newly acquired commercial line of credit for $150,000. This credit line agreement will be paid over a three year term with monthly payments equal to 2.780% of the outstanding balance plus accrued interest. The initial variable interest rate on this agreement is 5.25% per annum. This interest rate may change every year on the anniversary date or change date to reflect the new prime rate in effect as per the Wall Street Journal plus 2%. The interest rate will never be greater than 25% or less than 5%. On April 20, 2016 the existing line of credit was increased from $150,000 to $250,000 with an extended maturity date of April 20, 2019. As of December 31, 2017 and 2016 the outstanding balance was $76,435 and $54,907, respectively. Interest expense relating to this line of credit for 2017 and 2016 was $2,721 and $4,029, respectively.

We intend to finance our internal growth with cash on hand, cash provided from operations, borrowings, debt or equity offerings, or some combination thereof. We believe that our cash provided from operations and cash on hand will provide sufficient working capital to fund our operations for the next twelve months.

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Critical Accounting Policies, Estimates and Assumptions

The SEC defines critical accounting policies as those that are, in management’s view, most important to the portrayal of our financial condition and results of operations and those that require significant judgments and estimates.

The discussion and analysis of our financial condition and results of operations is based upon our financial statements that have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities. On an on-going basis, we evaluate our estimates including the allowance for doubtful accounts, the salability and recoverability of inventory, income taxes and contingencies. We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the circumstances, the results of which form our basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We cannot predict what future laws and regulations might be passed that could have a material effect on our results of operations. We assess the impact of significant changes in laws and regulations on a regular basis and update the assumptions and estimates used to prepare our financial statements when we deem it necessary.

Allowance for Doubtful Accounts

The Company provides an allowance for doubtful accounts equal to the estimated uncollectible amounts. The Company’s estimate is based on historical collection experience and a review of the current status of Accounts Receivable. It is reasonably possible that the Company’s estimate of the allowance for doubtful accounts will change in the future.

Depreciation and Amortization

Property and equipment are recorded at cost. Depreciation is provided over the estimated useful lives of the related assets using the straight-line method for financial statement purposes. The Company uses other depreciation methods (generally, accelerated depreciation methods) for tax purposes where appropriate. Amortization of leasehold improvements is computed using the straight-line method over the shorter of the remaining lease term or the estimated useful lives of the improvements.

Income Taxes

The Company accounts for income taxes under the provisions of Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) 740 “Income Tax”. ASC 740 requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement carrying amounts and tax bases of certain assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. The deferred tax assets and liabilities are classified according to the financial statement classification of the assets and liabilities generating the differences. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The Company has adopted the provisions of FASB ASC 740-10-05 “Accounting for Uncertainty in Income Taxes”. The ASC clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. The ASC prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The ASC provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

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Inventory Obsolescence

Inventory quantities and related values are analyzed at the end of each fiscal quarter to determine those items that are slow moving or obsolete. An inventory reserve is recorded for those items determined to be slow moving with a corresponding charge to cost of goods sold. Inventory items that are determined obsolete are written off currently with a corresponding charge to cost of goods sold.

Revenue Recognition

Revenues and costs of revenues are recognized during the period in which the products are shipped. The Company applies the provisions of FASB Accounting Standards Codification (“ASC”) 605-10, Revenue Recognition in Financial Statements ASC 605-10, which provides guidance on the recognition, presentation, and disclosure of revenue in financial statements filed with the SEC. ASC 605-10 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosure related to revenue recognition policies. In general, the Company recognizes revenue for sale of products when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the fee is fixed or determinable, and (iv) the collectability is reasonably assured.

The Company’s sources of revenue are from the sale of various component amplifiers. Revenue is recognized upon shipment of such products. The Company offers a 100% satisfaction guarantee against defects for 90 days after the sale of their product except for a few circumstances. There are no maintenance or service contracts related to any product sale.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the periods presented. Actual results could differ from those estimates.

Off Balance Sheet Transactions

As of December 31, 2017, we did not have any off-balance sheet arrangements.

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AMPG - Amplitech Group, Inc.