Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion provides information which management believes is relevant to an assessment and understanding of our results of operations and financial condition. The discussion should be read along with our financial statements and notes thereto contained elsewhere in this Quarterly Report on Form 10-Q. The following discussion and analysis contains forward-looking statements, which involve risks and uncertainties. Our actual results may differ significantly from the results, expectations and plans discussed in these forward-looking statements.
Business Overview
We design, engineer and assemble micro-wave component based amplifiers that meet individual customer’s specifications. Our products consists of Radio Frequency (RF) amplifiers and related subsystems, operating at multiple frequencies from 50kHz to 44GHz, including Low Noise Amplifiers, Medium Power Amplifiers, oscillators, filters, and custom assemblies such as MMIC (Monolithic Microwave Integrated Circuit) and MIC (Microwave Integrated Circuit) 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.
Recent Developments
Convertible Notes
On August 13, 2012, we assumed certain the obligations and rights under a number of convertible notes in an aggregate principal amount of $212,500 that were issued by our wholly owned subsidiary AmpliTech, Inc. pursuant to an assignment and assumption agreement among the noteholders, AmpliTech, Inc. and us, We cancelled the Original Notes and issued new convertible notes to the original note holders (the “Convertible Notes”). The Convertible Notes has a six-month term and compounds annually and accrues at 8% per annum from the issue date through the maturity date. The holders are entitled to convert any portion of the outstanding and unpaid amount into our common stock at conversion price of $0.10 per share. The holders have “piggyback” registration rights with respect the shares issued or issuable upon conversion.
On February 15, 2013, the Company received conversion notices from the holders of the Convertible Notes, whereby the Holders requested the Company to covert, the principal amounts and interests accrued until the notice date, into shares of the Company’s common stock. On February 28, 2013, the Company issued the holders a total of 2,000,000 shares of the Company’s common stock, which are covered on the Registration Statement on Form S-1 (No. 333-183291), representing their principal amounts dividing by the conversion price, and a total of 119,863 shares of the Company’s restricted common stock, to the holders representing their interest accrued through the notice date dividing by the conversion price.
On February 1, 2013, the Company issued a promissory note in a principal amount of $50,000, in exchange for the holder’s cancellation of two notes held by him and issued by the Company in 2012. The terms and conditions of this note are identical to that of the Convertible Notes as described above.
On February 8, 2013, the Company issued a promissory note in a principal amount of $50,000. The terms and conditions of this note are identical to that of the Convertible Notes as described above.
OTC Bulletin Board
On February 20, 2013, the Company received approval by Financial Industry Regulatory Authority (FINRA) for adding the Company’s common stock on the OTC Bulletin Board, effective the next day. The Company’s common stock has become quoted on the OTC Bulletin Board under the symbol “AMPG” on February 22, 2013.
Emerging Growth Company Status
We are an “emerging growth company,” as defined in the JOBS Act. For as long as we are an “emerging growth company,” we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding advisory “say-on-pay” votes on executive compensation and shareholder advisory votes on golden parachute compensation.
Under the JOBS Act, we will remain an “emerging growth company” until the earliest of:
• the last day of the fiscal year during which we have total annual gross revenues of $1 billion or more;
• the last day of the fiscal year following the fifth anniversary of the completion of this offering;
• the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt; and
• the date on which we are deemed to be a “large accelerated filer” under the Securities Exchange Act of 1934, or the Exchange Act. We will qualify as a large accelerated filer as of the first day of the first fiscal year after we have (i) more than $700 million in outstanding common equity held by our non-affiliates and (ii) been public for at least 12 months. The value of our outstanding common equity will be measured each year on the last day of our second fiscal quarter.
The Section 107 of the JOBS Act provides that we may elect to utilize the extended transition period for complying with new or revised accounting standards and such election is irrevocable if made. As such, we have made the election to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(1) of the JOBS Act.
Results of Operations
Our auditor has indicated in their report on our financial statements for the fiscal years ended December 31, 2012 that conditions exist that raise substantial doubt about our ability to continue as a going concern due to our recurring losses from operations, deficit in equity, and the need to raise additional capital to fund operations. A “going concern” opinion could impair our ability to finance our operations through the sale of debt or equity securities.
As of June 30, 2013, the Company had a working capital deficit of $542,594 and an accumulated deficit of $804,847. Additionally, there was a net loss of $132,371 for the six months ended June 30, 2013 and a net loss of $192,995 for the year ended December 31, 2012. These factors raise substantial doubt as to the ability of the Company to continue as a going concern. The Company will require additional funding to finance the growth of its current and expected future operations as well as to achieve its strategic objectives. We plan to improve the Company’s financial condition by raising working capital from the issuance of additional notes with equity convertible features and pursue new customers and acquisition prospects to improve our operational results. However, there is no assurance that the Company will be successful in accomplishing these objectives. If adequate funds are not available, our business would be jeopardized and we may not be able to continue. If we ceased operations, it is likely that all of our investors would lose their investment.
For The Six Months Ended June 30, 2013 and June 30, 2012
Revenues
Sales decreased by $122,647, or approximately 21%, when comparing sales for the six months ended June 30, 2012 of $580,738 to sales for the six months ended June 30, 2013 of $458,091. This decrease was directly related to a slowdown in production during the second quarter of 2013 that resulted from various internal operational and cash flow issues. Specifically, we needed to complete engineering and prototype development related to certain sales orders before commencing production. In addition, we had difficulties in procuring certain parts to complete some sales orders, in respect of availability of the parts, timely delivery by the suppliers, and our ability to make payments for the parts ordered on the terms required by the suppliers.
Cost of Goods Sold and Gross Profit
Cost of goods sold as a percentage of sales increased by approximately 8% when comparing 42% for the six months ended June 30, 2012 to 50% for the six months ended June 30, 2013. This increase was related to less efficient labors as a result of our assembly lines operating at well below its full capacity when our production slowed down during the second quarter of 2013. This also resulted in a corresponding decrease of 8% in gross profit, or $109,223, when comparing the first six months of 2012 gross profit of $339,075, or gross profit margin of 58%, to gross profit of $229,852, or gross profit margin of 50% during the first six months of 2013.
General and Administrative Expenses
General and administrative expenses increased from $243,597 for the first six months of 2012 compared to $327,347 for the first six months of 2013, an increase of $83,750, or approximately 34%. This increase resulted from legal, accounting and professional fees incurred in the first six months of 2013 related to the filing the Company’s registration statement on Form S-1 that became effective on January 18, 2013, the periodic filings under the 1934 Securities Exchange Act, as amended, transfer agent fees, and the cost for the Company’s Depository Trust Corporation (DTC) eligibility application. We did not incur the foregoing costs in the first six months of 2012.
Other Income (Expenses)
Interest expense decreased by $950 when comparing the six months ended June 30, 2012 to the six months ended June 30, 2013. This decrease resulted primarily from a decline in accrued interest when some of our promissory notes converted into our equity in the first quarter of 2013.
Net Income (Loss)
As a result of the above, the Company had a net loss of $132,371 for the six months ended June 30, 2013 compared to a net income of $59,652 for the six months ended June 30, 2012, an overall decrease of $192,023, or approximately 322%.
For The Three Months Ended June 30, 2013 and June 30, 2012
Revenues
Sales decreased by $169,078, or approximately 53%, when comparing sales for the three months ended June 30, 2012 of $317,985 to sales for the three months ended June 30, 2013 of $148,907. This decrease was directly related to a slowdown in production during the second quarter of 2013 that resulted from various internal operational and cash flow issues. Specifically, we needed to complete engineering and prototype development related to certain sales orders before commencing production. In addition, we had difficulties in procuring certain parts to complete some sales orders, in respect of availability of the parts, timely delivery by the suppliers, and our ability to make payments for the parts ordered on the terms required by the suppliers.
Cost of Goods Sold and Gross Profit
Cost of goods sold as a percentage of Sales increased by approximately 34% when comparing 37% for the three months ended June 30, 2012 to 71% for the three months ended June 301, 2013. This increase was related to less efficient labors as a result of our assembly lines operating at well below its full capacity when our production slowed down during the second quarter of 2013. This also resulted in a corresponding 34% decrease in gross profit, or $157,677, when comparing the second quarter of 2012 gross profit of $200,236, or gross profit margin of 63%, to the gross profit of $42,559, or gross profit margin of 29% during the second quarter of 2013.
General and Administrative Expenses
General and administrative expenses increased from $138,803 for the second quarter of 2012 compared to $186,326 for the second quarter of 2013, an increase of $47,523, or approximately 34%. This increase resulted from legal, accounting and professional fees incurred in the second quarter of 2013 related to the costs of being a public company while such costs were not incurred in the second quarter of 2012.
Other Income (Expenses)
Interest expense decreased by $630 when comparing the three months ended June 30, 2012 to the three months ended June 30, 2013. This decrease resulted primarily from a decline in accrued interest when some of our promissory notes converted into our equity in the first quarter of 2013.
Net Income (Loss)
As a result of the above, the Company had a net loss of $162,730 for the three months ended June 30, 2013 compared to a net income of $43,100 for the three months ended June 30, 2012, an overall decrease of $205,830, or approximately 478%.
Liquidity and Capital Resources
We have historically financed our operations through debt from third party lenders, notes from various private individuals and funds advanced from Fawad Maqbool, our majority shareholder, President and Chief Executive Officer of the Company.
As of June 30, 2013, we had $3,468 in cash and cash equivalents compared to $27,716 in cash and cash equivalents as of December 31, 2012. As of December 31, 2012 and June 30, 2013 we had a working capital deficit of $599,787 and $542,594, respectively, and an accumulated deficit of $672,476 and $804,847, respectively.
Net cash used in operating activities was $138,273 for the six months ended June 30, 2013. The net cash provided by financing activities for six months ended June 30, 2013 was $114,025, which resulted primarily from proceeds received from the issuance of a promissory note in February 2013 and advances from the private lender under the Master Factoring Agreement dated September 2011 to finance accounts receivable and certain sales orders.
We will require additional funding to finance the growth of the Company’s current and expected future operations as well as to achieve its strategic objectives. We intend to finance our internal growth with cash on hand, cash provided from operations, borrowings, debt or equity offerings, or some combination thereof. However, there is no assurance that the Company will be successful in accomplishing these objectives. If adequate funds are not available, our business would be jeopardized and we may not be able to continue. If we ceased operations, it is likely that all of our investors would lose their investment.
Financing Activities
On February 1, 2013, the Company issued a promissory note in a principal amount of $50,000, in exchange for the holder’s cancellation of two notes held by him and issued by the Company in 2012. The note has a six-month term and compounds annually and accrues at 8% per annum from the issue date through the maturity date. The holder is entitled to convert any portion of the outstanding and unpaid amount into our common stock at conversion price of $0.10 per share. The holder has “piggyback” registration rights with respect the shares issued or issuable upon conversion.
On February 8, 2013, the Company issued a promissory note in a principal amount of $50,000. The note has a six-month term and compounds annually and accrues at 8% per annum from the issue date through the maturity date. The holder is entitled to convert any portion of the outstanding and unpaid amount into our common stock at conversion price of $0.10 per share. The holder has “piggyback” registration rights with respect the shares issued or issuable upon conversion.
On February 15, 2013, the Company received conversion notices from the holders of the Convertible Notes (as defined above), whereby the holders requested the Company to covert, the principal amounts and interests accrued until the notice date, into shares of the Company’s common stock. On February 28, 2013, the Company issued the holders a total of 2,000,000 shares of the Company’s common stock, which are covered on the Registration Statement on Form S-1 (No. 333-183291), representing their principal amounts dividing by the conversion price, and a total of 119,863 shares of the Company’s restricted common stock, to the holders representing their interest accrued through the notice date dividing by the conversion price.
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 which 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.
Basis of Accounting
The accompanying consolidated financial statements have been prepared using the accrual basis of accounting.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated.
Cash and Cash Equivalents
The Company considers deposits that can be redeemed on demand and investments that have original maturities of less than three months, when purchased, to be cash equivalents. Company’s cash and cash equivalents were deposited primarily in one financial institution.
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.
Income (Loss) Per Common Share
Basic loss per share is computed by dividing the net loss attributable to the common stockholders by the weighted-average number of shares of common stock outstanding during the period. Diluted loss per share is computed similar to basic loss per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if potentially dilutive common shares (such as stock options and convertible securities) had been issued and if the additional common shares were dilutive. There were no dilutive financial instruments issued or outstanding for the periods presented.
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
Revenue is recognized on an accrual basis immediately as a sale based on FOB shipping point. 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
None.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Smaller reporting companies are not required to provide the information required by this item.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management, including our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act as of the end of the period covered by this report. Our management does not expect that our disclosure controls and procedures will prevent all error and all fraud. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
Based on the evaluation as of June 30, 2013, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes that have affected, or are reasonably likely to materially affect, our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act) during the period covered by this report.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings.
To the best of our knowledge, there are no material pending legal proceedings to which we are a party or of which any of our property is the subject.
Item 1A. Risk Factors.
Smaller reporting companies are not required to provide the information required by this item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable
Item 5. Other Information.
None.
Item 6. Exhibits.
(a) Exhibits
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Exhibit No.
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Description
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31.1
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Rule 13a-14(a)/ 15d-14(a) Certification of Principal Executive Officer
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31.2
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Rule 13a-14(a)/ 15d-14(a) Certification of Principal Financial Officer
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32.1+
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Section 1350 Certification of Principal Executive Officer
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32.2+
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Section 1350 Certification of Principal Financial Officer
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101. INS*
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XBRL Instance Document
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101. SCH*
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XBRL Taxonomy Extension Schema Document
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101. CAL*
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XBRL Taxonomy Extension Calculation Linkbase Document
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101. DEF*
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XBRL Taxonomy Extension Definition Linkbase Document
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101. LAB*
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XBRL Taxonomy Extension Label Linkbase Document
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101. PRE*
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XBRL Taxonomy Extension Presentation Linkbase Document
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________________
+ In accordance with SEC Release 33-8238, Exhibits 32.1 and 32.2 are furnished and not filed.
* Furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise not subject to liability under these sections.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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AmpliTech Group, Inc.
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Date: August 19, 2013
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By:
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/s/ Fawad Maqbool
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Fawad Maqbool
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President and Chief Executive Officer
(Duly Authorized Officer and Principal Executive Officer)
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Dated: August 19, 2013
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By:
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/s/ Louisa Sanfratello
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Louisa Sanfratello
Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer)
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