Amplitech Group, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. The unaudited statements are for a company designing and assembling custom RF/microwave amplifiers and related components and services.
Financial performance
| Metric | Three months ended Sept. 30 | Nine months ended Sept. 30 |
|---|---|---|
| Sales | $301,155; up 122% from $135,522 | $759,246; up 6% from $716,259 |
| Gross profit | $210,630 per financial statements, versus $37,401 | $440,483 versus $376,475 |
| Gross margin | About 70%, versus 28% | About 58%, versus 53% |
| Operating income (loss) | $62,552 versus $(98,298) | $(35,240) versus $(5,336) |
| Net income (loss) | $35,135 versus $(117,172) | $(97,236) versus $(60,099) |
| Interest expense | $27,417 versus $18,874 | $61,996 versus $54,763 |
Management attributed higher sales and gross margins primarily to increased production capacity and more efficient outsourced assembly. Nine-month general and administrative expense rose 25% to $475,723, including higher legal, accounting, and professional costs. Interest expense increased with greater factor and sales-order financing.
Cash, liquidity, and obligations
- Cash was $14,035 at September 30, down from $27,716 at December 31, 2012. Operating cash flow was $(82,834) for the nine months, compared with $42,329 provided in the prior-year period; financing provided $69,153.
- Current assets were $303,006 and current liabilities $807,123, yielding a $504,117 working-capital deficit. Total liabilities were $887,244; total assets were $478,255, and stockholders’ deficit was $408,989.
- Current obligations included $158,000 of convertible notes, $69,697 of notes payable, $101,923 of factor financing, $67,172 of current capital leases, and $45,502 of current loans. Long-term capital leases were $37,934 and loans payable were $42,187.
- Accounts receivable increased to $112,391 from $45,784, and inventory rose to $169,013 from $112,817.
Material developments, outlook, and risks
- The company reported substantial doubt about its ability to continue as a going concern, citing its working-capital deficit, accumulated deficit of $769,712, and nine-month net loss. It plans to seek additional debt or equity financing and pursue customers and acquisition prospects, but gives no assurance of success. Management said cash on hand and operating cash flow would not be sufficient to fund the next 12 months.
- In February, holders converted $200,000 of notes and accrued interest into 2,000,000 common shares and 119,863 additional shares for interest. The company also issued 150,000 restricted shares to a consultant for services.
- The company designated 140,000 Series A preferred shares, each convertible into 100 common shares and carrying 100 votes. It stated an intention to issue all of them to its CEO, Fawad Maqbool; the filing does not report that issuance as completed.
- Three Asher Enterprises notes totaling $133,000 were issued under agreements dated August 21, September 26, and October 22, 2013; thus, the aggregate includes post-quarter financing. The notes bear 8% interest and, after 180 days, are convertible at 61% of a formula based on recent low bid prices. They include prepayment premiums, default interest of 22%, and significant default-payment provisions. The filing says the company intended to repay the notes before conversion rights began.
- Management concluded disclosure controls and procedures were not effective as of September 30, 2013. No material changes to internal control over financial reporting were reported during the quarter. The company reported no material pending legal proceedings.
Important facts for investors to verify
- The quarterly gross-profit figure conflicts within the filing: the statements report $210,630, while MD&A reports $201,630. The $210,630 figure reconciles to stated sales less cost of goods sold.
- Confirm the amount and timing of Asher financing outstanding at quarter-end versus the $133,000 total that includes an October note, and assess conversion dilution and repayment terms.
- Monitor access to new capital, operating cash burn, working-capital needs, and progress against the going-concern plans.
- Confirm whether the planned Series A issuance to the CEO occurred and assess its potential voting control and common-share dilution.
- Common shares outstanding were 20,144,863 at September 30 and 20,443,863 as of November 18, 2013; verify the intervening share changes.