Amplitech Group, Inc. — Q1 2014 Form 10-Q
Business and period: The filing reports unaudited results for the three months ended March 31, 2014, compared with Q1 2013. AmpliTech designs and assembles microwave/RF amplifiers, related subsystems, and custom products and engineering services. Product sales were primarily low-noise amplifiers.
Financial performance and liquidity
| Metric | Q1 2014 / March 31, 2014 | Comparable period / December 31, 2013 |
|---|---|---|
| Sales | $323,876 | $309,183 |
| Gross profit (margin) | $154,079 (about 47%) | $187,542 (about 61%) |
| Operating income (loss) | $(34,347) | $31,272 |
| Interest expense | $53,343 | $15,913 |
| Net income (loss) | $(82,110) | $15,359 |
| Net cash from (used in) operating activities | $43,705 | $(92,842) |
| Cash and cash equivalents | $10,715 | $10,623 at December 31, 2013 |
| Working capital deficit | $310,040 | $323,897 at December 31, 2013 |
| Total liabilities | $679,745 | $753,977 at December 31, 2013 |
| Stockholders’ deficit | $189,653 | $220,243 at December 31, 2013 |
Financing activities used $43,613 in Q1 2014, primarily for repayments of factor financing, notes and loans, and capital leases; cash increased by $92 for the quarter. Current liabilities were $648,704, against current assets of $338,664. The filing reports basic loss per share rounded to $(0.00); weighted-average basic shares were 22,380,909.
Changes and notable transactions
- Revenue increased about 5% year over year, but gross margin fell from about 61% to 47%. Management attributed the decline mainly to $40,932 of additional outsourced assembly costs on a large, lower-margin customer order.
- General and administrative expense rose 21% to $188,426, primarily due to increased payroll and related costs.
- Interest expense increased by $37,430, including a noncash $25,380 beneficial-conversion discount on a convertible note. A $5,580 gain was recorded on debt exchanged for shares.
- A $58,000 convertible note plus $2,320 accrued interest was converted into 1,069,436 common shares during the quarter. Other debt and accrued commissions were also exchanged for 450,000 shares. Common shares outstanding at March 31 were 23,673,340.
Outlook, risks, and contingencies
- Going concern: Management states that the working-capital and stockholders’ deficits and recent losses raise substantial doubt about the company’s ability to continue as a going concern. It estimates an additional $100,000 is needed for the next 12 months. Plans include converting debt to equity, raising additional debt or equity, pursuing customers, developing products, and expanding distribution; success is not assured. The statements include no adjustments for a potential inability to continue as a going concern.
- Subsequent financing and dilution: In April, a noteholder converted $15,000 of debt into 717,703 shares. The company also received a further $40,000 advance under a note convertible at the holder’s discretion after 180 days at the lesser of $0.15 or 60% of the lowest trading price over the specified 25-trading-day period.
- Voting control: On May 8, the company issued its CEO and sole director 140,000 Series A shares. They carry 51% of total voting power and are convertible at the holder’s option into 100 common shares each.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. The company reported no material pending legal proceedings and no defaults upon senior securities.
- The filing cautions that forward-looking statements are uncertain and undertakes no general obligation to update them. It provides no specific sales or earnings guidance.
Investor verification points
- Assess near-term liquidity and the feasibility of raising the stated $100,000; verify debt maturities, payment terms, and access to financing.
- Review the terms and potential dilution from convertible notes, including the April advance’s market-price conversion formula, and confirm subsequent conversions.
- Verify the Series A voting and conversion provisions, their effect on control, and the fully diluted share count.
- Evaluate whether the lower-margin customer order and outsourced assembly costs persist, and whether gross margin and operating performance recover.
- Note that cash from operations was positive despite the net loss; assess the effects of working-capital movements and noncash interest adjustments on cash generation.