Business context and reporting period
AmpliTech Group, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2012. The company designs and assembles custom microwave amplifiers and related components; product sales were primarily Low Noise Amplifiers. On August 13, 2012, it completed a share exchange that made AmpliTech, Inc. its wholly owned subsidiary, with AmpliTech treated as the accounting acquirer in a reverse acquisition. The filing says it was late because Hurricane Sandy disrupted power, facilities, communications, staffing, and the completion of financial review; it relied on an SEC exemptive order.
Financial results and position
| Metric | Q3 2012 / September 30, 2012 | Comparable period / prior balance date |
|---|---|---|
| Sales | $135,522 for Q3; $716,259 for nine months | $126,525 for Q3 2011; $594,504 for nine months 2011 |
| Gross profit | $37,401 for Q3; $376,475 for nine months | $37,165 for Q3 2011; $335,663 for nine months 2011 |
| Gross margin | 27.6% Q3; 52.6% nine months | 29.4% Q3 2011; 56.5% nine months 2011 |
| Operating income (loss) | $(72,913) Q3; $61,574 nine months | $(99,246) Q3 2011; $(34,130) nine months 2011 |
| Net income (loss) | $(117,172) Q3; $(60,099) nine months | $(110,523) Q3 2011; $(67,046) nine months 2011 |
| Cash and cash equivalents | $19,434 | $54,038 at December 31, 2011 |
| Current assets / current liabilities | $288,911 / $718,683 | $423,844 / $714,805 at December 31, 2011 |
| Total assets / total liabilities | $525,396 / $931,239 | $536,003 / $887,347 at December 31, 2011 |
| Stockholders’ deficit | $(405,843) | $(351,344) at December 31, 2011 |
For the first nine months, operating cash flow was $42,329, investing cash flow was $(164,366), and financing cash flow was $87,433; cash declined by $34,604. Capital spending included $164,366 of property and equipment. The company reported $212,500 of convertible notes payable at September 30 and total current liabilities substantially exceeding current assets. The filing gives a working-capital deficit of $429,772.
Material changes and management commentary
- Nine-month sales rose about 21% year over year, attributed to improved production efficiency in the first half and use of factoring to fund receivables and material purchases. Gross profit increased about 12%, but gross margin declined as cost of goods sold rose from about 44% to 48% of sales.
- Q3 sales increased about 7% year over year, while gross profit was nearly flat and gross margin declined. Management attributed weaker quarterly production to staff absences and outsourcing some assembly. Q3 operating and net losses remained significant.
- Nine-month general and administrative expense fell from $369,793 to $314,901, primarily due to lower administrative salaries and related costs. Interest expense increased, mainly due to factoring costs. Other expenses included $62,637 of professional fees for prior-year audits and the S-1 filing.
- The company entered into a 36-month capital lease for lab equipment, with a reported principal balance of $159,366. It also raised $170,000 and converted $42,500 of other debt into six-month convertible notes bearing 8% interest. A subsequent $30,000 note issued November 14 bears 12% interest; MD&A also reports a $20,000 note issued October 19.
- Management said cash on hand and operating cash flow should fund operations for the next 12 months, while also disclosing substantial doubt about the company’s ability to continue as a going concern. Its plans include raising debt or equity, pursuing customers, and considering acquisition prospects; success is not assured.
Risks, contingencies, and unusual items
The going-concern disclosure cites the working-capital deficit, accumulated deficit of $539,580, and recurring losses; the financial statements include no adjustments that might be required if the company cannot continue. Factoring is with recourse and can result in invoice chargebacks. Convertible notes may dilute shareholders. The filing reports no legal proceedings, defaults upon senior securities, or off-balance-sheet transactions. Management stated disclosure controls were effective at September 30, 2012 and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Reconcile conflicting figures in the filing: Q3 G&A is $110,314 in the statements but $101,314 in MD&A; the going-concern note states a nine-month loss of $60,009 while the statements show $60,099; and MD&A’s stated year-over-year loss improvement does not match the amounts in the statements.
- Confirm share counts and dilution. The balance-sheet share-count description appears inconsistent with the statement of stockholders’ equity and the reported 17,875,000 shares outstanding at November 14. Clarify the conversion terms of the convertible notes, which are described differently in the notes and MD&A.
- Assess near-term liquidity, debt maturities, factoring availability and recourse, and the company’s ability to meet obligations despite management’s 12-month funding expectation and the going-concern warning.
- Evaluate the impact of the reverse acquisition and Hurricane Sandy-related operating disruption, including whether subsequent results and production recovery support management’s plans.