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EX-32.1 - EXHIBIT 32.1 - AG&E HOLDINGS INC.ex_121511.htm
EX-31.2 - EXHIBIT 31.2 - AG&E HOLDINGS INC.ex_121510.htm
EX-31.1 - EXHIBIT 31.1 - AG&E HOLDINGS INC.ex_121509.htm
 

 

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

[X]

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the quarterly period ended June 30, 2018

or

 

[   ]

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the transition period from ____________ to ____________

 

Commission File Number 1-8250

 

AG&E Holdings Inc.

(Exact name of registrant as specified in its charter)

 

Illinois

36-1944630

(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification No.)

 

223 Pratt Street, Hammonton, New Jersey

08037

(Address of principal executive offices)

(Zip Code)

 

(609) 704-3000

(Registrant's telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

YES

 

NO

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

 

YES

 

NO

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of "large accelerated filer", "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

Emerging growth company

     

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

YES

 

NO

 

As of June 30, 2018, approximately 16,953,000 shares of the Common Stock, $1.00 par value of the registrant were outstanding.

 

 

 

AG&E HOLDINGS INC.

 

FORM 10-Q TABLE OF CONTENTS

 

For The Three and Six Months Ended June 30, 2018

 

PART I – FINANCIAL INFORMATION
   
Item 1.  
Financial Statements: 3
   
 

Condensed Consolidated Statements of Operations (unaudited)

 
 

-

Three and Six Months Ended June 30, 2018 & 2017

3
       
 

Condensed Consolidated Balance Sheets (unaudited)

 
 

-

June 30, 2018 & December 31, 2017

4
       
 

Condensed Consolidated Statements of Cash Flows (unaudited)

 
 

-

Six Months Ended June 30, 2018 & 2017

5
       
 

Notes to the Unaudited Condensed Consolidated Financial Statements

6
     
Item 2.  
Management's Discussion & Analysis of Financial Condition & Results of Operations 10
   
Item 4.  
Controls & Procedures 13
   
PART II - OTHER INFORMATION
   
Item 1A.  
Risk Factors 14
   
Item 6.  
Exhibits 14
   
SIGNATURES 15

 

 

 

PART I – FINANCIAL INFORMATION

 

 

Item 1. Financial Statements

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

(in $000’s except for share & per share data)

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2018

   

2017

   

2018

   

2017

 

Net sales

  $ 2,350     $ 3,261     $ 5,172     $ 6,449  

Cost of sales

    1,611       2,243       3,662       4,461  

Gross margin

    739       1,018       1,510       1,988  

Selling & administrative expenses

    1,131       1,241       2,765       2,530  

Transaction related costs

    -       -       -       50  

Intangible amortization

    54       54       108       108  

Operating loss

    (446 )     (277 )     (1,363 )     (700 )

Interest expense

    36       12       66       24  

Loss before income tax

    (482 )     (289 )     (1,429 )     (724 )

Income Tax expense

    3       1       3       1  

Net loss

  $ (485 )   $ (290 )   $ (1,432 )   $ (725 )
                                 

Basic Diluted net loss per common share

  $ (0.03 )   $ (0.02 )   $ (0.08 )   $ (0.04 )
                                 

Basic common weighted shares outstanding

    16,953,176       16,953,176       16,953,176       16,953,176  

Diluted common weighted shares outstanding

    16,953,176       16,953,176       16,953,176       16,953,176  

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 

 

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

(in $000’s except for share information)

 

   

June 30,

   

December 31,

 
   

2018

   

2017

 

Assets:

               

Current assets

               

Cash

  $ 97     $ 47  

Accounts receivable, net

    1,132       2,117  

Inventory

    262       400  

Prepaid expenses & other assets

    498       486  

Total current assets

    1,989       3,050  
                 

Leasehold improvements

    3       3  

Machinery, equipment & software

    2,258       2,224  

less: Accumulated depreciation & amortization

    (2,212 )     (2,204 )

Plant & equipment, net

    49       23  
                 

Other assets:

               

Intangible Assets, net

    1,289       1,397  

Goodwill

    1,152       1,152  

Total other assets

    2,441       2,549  

Total assets

  $ 4,479     $ 5,622  
                 

Liabilities:

               

Current liabilities

               

Accounts payable

  $ 1,205     $ 1,225  

Note payable – related party

    811       327  

Note payable – line of credit

    508       514  

Severance payable

    180       -  

Accrued expenses

    365       252  

Total current liabilities

    3,069       2,318  
                 

Long-term liabilities:

               

Note payable – related party

    980       1,517  

Severance payable

    75       -  

Total long term liabilities

    1,055       1,517  
                 

Total liabilities

    4,124       3,835  
                 

Shareholders' Equity:

               

Common stock : authorized 25,000,000 shares $1.00 par value; shares issued and outstanding:

16,953,176 shares as of June 30, 2018

16,953,176 shares as of December 31, 2017

    16,953       16,953  

Additional paid-in capital

    688       688  

Accumulated deficit

    (17,286 )     (15,854 )

Total shareholders' equity

    355       1,787  

Total liabilities & shareholders' equity

  $ 4,479     $ 5,622  

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (unaudited)

(in $000’s)

 

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2018

   

2017

 

Cash flows from operating activities:

               

Net loss

  $ (1,432 )   $ (725 )

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

               

Depreciation and amortization

    116       134  

Bad debt (recovery) expense

    (10 )     1  

Changes in current assets & liabilities

               

Accounts receivable

    995       (1,289 )

Inventory

    138       72  

Prepaid expenses & other

    (11 )     (235 )

Accounts payable

    (20 )     1,077  

Severance payable

    254       -  

Accrued expenses

    113       84  

Net cash provided by (used in) operating activities

    143       (881 )

Cash provided by investing activities:

               

Additions to plant & equipment, net

    (34 )     (7 )

Net cash used in investing activities

    (34 )     (7 )

Cash used in financing activities:

               

Repayment - Note payable

    (53 )     (104 )

Net repayment - Line of credit

    (6 )        

Net cash used in financing activities

    (59 )     (104 )
                 

Net increase/(decrease) in cash

    50       (992 )

Cash at beginning of period

    47       1,292  

Cash at end of period

  $ 97     $ 300  

Supplemental cash flow disclosure:

               

Interest paid

  $ 36     $ 24  

Taxes paid

  $ 3     $ -  

 

See accompanying notes to the unaudited condensed consolidated financial statements

 

 

AG&E HOLDINGS INC.

 

Notes to the Unaudited Condensed Consolidated Financial Statements 

 

 
1. Description of the Business

 

AG&E Holdings Inc. (the “Company”) through its wholly owned subsidiary American Gaming & Electronics, Inc. (“AG&E”) distributes parts, and repairs and services gaming equipment to casinos throughout the United States with offices in Hammonton, New Jersey, Las Vegas, Nevada and West Palm Beach, Florida.

 

 
2. Summary of Significant Accounting Policies

 

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting of normal recurring adjustments, which are necessary for a fair presentation of the financial position and results of operations for the periods presented. These condensed consolidated financial statements were prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all information or footnotes necessary for a complete presentation in conformity with accounting principles generally accepted in the United States. These condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017. The results of operations for the three and six months ended June 30, 2018 are not necessarily indicative of the operating results for the full year.

 

Basic earnings per share are based on the weighted average number of shares outstanding whereas diluted earnings per share include the dilutive effect of unexercised common stock equivalents. Potentially dilutive securities are excluded from diluted earnings per share calculations for periods with a net loss.

 

The fair value of the Company’s financial instruments does not materially vary from the carrying value of such instruments.

 

Certain amounts in previously issued financial statements have been reclassified to conform to the current year’s presentation.

 

 
3. Going Concern

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the liquidation of liabilities in the normal course of business. As of June 30, 2018 and December 31, 2017, the Company had an accumulated deficit of $17.3 million and $15.9 million, respectively. In addition, the $3.5 million revolving credit facility (the “Credit Facility”) with North Mill Capital LLC (“North Mill”), will terminate on November 22, 2018 unless extended in writing by North Mill (See Note 4).  There is no assurance that North Mill will extend the Credit Facility beyond the termination date. In order to meet its current working capital needs, the Company sought additional funding for its operations without success through a working capital loan and/or equity funding arrangements. There can be no assurance that the Company will be successful in further efforts to obtain additional equity or debt financing. The Company’s ability to raise funds in the equity market may be impacted by the absence of a liquid trading market in its common stock. In the past the Company has relied heavily on one customer for revenue generation and on one vendor that supplied the Company with a necessary component for certain of its products (“Significant Vendor”). In the first quarter of 2018, total cost of goods sold for parts sales were comprised of approximately 52% of the purchases from the Significant Vendor. However, in April 2018, the Company was placed on credit hold by the Significant Vendor and subsequent to the end of the second quarter, the Significant Vendor terminated its relationship with the Company. As a result, the Company experienced decreased sales in the second quarter, and its financial results were adversely affected. The Company expects parts and service sales to decrease further in the third quarter. The Company has begun exploring available restructuring options, including cost reductions and sales improvements. The aforementioned factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

If the company's revenue and stock price continues to decline, it is likely the company will recognize a goodwill impairment in the third quarter as carrying value will exceed fair value.

 

 

 
4. Debt

 

Note payable – related party

On November 30, 2016, the Company issued a promissory note (the “Earn-Out Note”) to Anthony Tomasello, our President and Chief Executive Officer, as part of the merger transaction with Advanced Gaming Associates LLC. The note had a principal amount of $1.0 million and an interest rate of 5% per annum. The note matures on November 30, 2019 and is payable in thirty-six equal payments of $29,971 on the first of each month. Pursuant to the terms of the Earn-Out Note, an additional Earn-Out Note was issued to Mr. Tomasello as of November 30, 2017 because the Company achieved in excess of $5 million in service revenue in the first earn-out period of December 1, 2016 through November 30, 2017. This additional Earn-Out Note has similar terms to the original note with the exception of a maturity date of November 30, 2020. The principal amount outstanding under the Earn-Out Notes was $1.8 million as of June 30, 2018. Pursuant to the terms of the original Earn-Out Note, an additional Earn-Out Note in the principal of $1.0 million could be issued to Mr. Tomasello as of November 30, 2018 upon the achievement of $7.0 million of service revenue for the 12-month period ending November 30, 2018. At June 30, 2018, it was not probable that service revenue would achieve $7.0 million for the 12-month period ending November 30, 2018. Therefore, no accrual was made for this contingency. Payments of principal and interest on the Earn-Out Note are deferred while balances remain payable on the North Mill Capital, LLC revolving credit facility described below.

 

Note payable – line of credit

On November 22, 2017, AG&E entered into a $3.5 million revolving credit facility with North Mill pursuant to a Loan and Security Agreement (the “Loan Agreement”). AG&E’s obligations under the Loan Agreement are guaranteed by the Company. The Credit Facility has a term of one year and is collateralized by a first-priority security interest in all of the assets of AG&E. Borrowings under the Credit Facility accrue interest at a fluctuating rate of interest equal to the prime rate plus 0.75%, subject to a floor of 4.75%. Subject to certain exceptions, the Loan Agreement provides for advances under the Credit Facility of up to 85% of eligible accounts receivable. As of June 30, 2018, outstanding borrowings under the Credit Facility were $508,000, the interest rate thereunder was 5.25%, and AG&E had additional borrowing availability of $261,000 under the Credit Facility based on eligible collateralized assets. The Loan Agreement will terminate on November 22, 2018 unless extended in writing by North Mill for an additional year.  There is no assurance that North Mill will extend the Loan Agreement beyond the termination date.

 

 
5. Severance Payable

 

In March 2018, the Company agreed to a separation agreement with a contracted employee for severance pay and insurance reimbursements totaling $299,000 payable in monthly installments of approximately $15,000 from April 2018 through November 2019. At June 30, 2018, the remaining balance of these installments was $255,000 of which $180,000 is included in current liabilities.

 

 
6. Stock Plans

 

The Company maintains a Stock Award Plan under which officers and key employees may acquire up to a maximum of 2,155,028 restricted shares of common stock of the Company. As of June 30, 2018 and December 31, 2017, there were no restricted shares outstanding and no unrecognized compensation cost related to unvested stock awards.

 

 

 
7. Inventory

 

Our inventory consists entirely of finished goods as of June 30, 2018 and December 31. 2017. At June 30, 2018 and December 31. 2017, the reserve for inventory valuation was $555,000 and $531,000, respectively.

 

 

8.

Long Lived Assets

 

Customer lists are reviewed for impairment whenever events or circumstances indicate the carrying amount may not be recoverable. Events or circumstances that would result in an impairment review primarily include the loss of one or more customers or a significant decline in revenues from related customers. The asset would be considered impaired when the future net undiscounted cash flows generated by the asset are less than its carrying value. An impairment loss would be recognized based on the amount by which the carrying value of the asset exceeds its fair value. As of June 30, 2018 and December 31, 2017 there was no impairment. 

 

 
9. Income Taxes

 

An income tax valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company has net deferred tax assets of approximately $4.9 million at June 30, 2018, which are completely offset by a valuation allowance. As of June 30, 2018, the Company has net operating loss carry forwards for Federal income tax purposes of approximately $13.3 million, which are available to offset future Federal taxable income, if any. The Federal net operating loss carry forwards begin to expire in 2021. The Company also has a net operating loss carry forward for Illinois state income tax purposes of approximately $16.0 million as of June 30, 2018. The Company also has alternative minimum tax credit carry forwards of approximately $148,000, which are available to reduce future Federal regular income taxes, if any, over an indefinite period. No unrecognized tax benefits are set to expire in the next twelve months that may have an impact upon the Company’s effective tax rate.

 

The Company files tax returns in the U.S. federal jurisdiction and various state jurisdictions. The tax years 2014, 2015, 2016 and 2017 remain open to examinations. Our policy is to recognize interest and penalties related to uncertain tax positions in income tax expense. During the three and six months ended June 30, 2018, the Company did not recognize expense for interest or penalties related to income tax, and does not have any amounts accrued at June 30, 2018, as the Company does not believe it has taken any uncertain income tax positions.

 

 
10. Revenue Recognition

 

In May 2014, August 2015 and May 2016, the FASB issued ASU 2014-09 Revenue from Contracts with Customers, ASU 2015-14 Revenue from Contracts with Customers, Deferral of the Effective Date, and ASU 2016-12 Revenue from Contracts with Customers, Narrow-Scope Improvements and Practical Expedients, respectively, which implement ASC Topic 606. ASC Topic 606 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance under U.S. GAAP, including industry-specific guidance. It also requires entities to disclose both quantitative and qualitative information that enable financial statements users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The amendments in these ASUs are effective for annual periods beginning after December 15, 2017, and interim periods therein. These ASUs may be applied retrospectively with a cumulative adjustment to retained earnings in the year of adoption. As of January 1, 2018, the Company adopted this guidance and it did not have a material impact on our financial statements except for providing additional footnote disclosures related to revenue.

 

The Company records revenue under ASC Topic 606 at a single point in time, when control of the promised products or services is transferred to the customer, which is consistent with past practice. The Company’s revenue results from two sources, Parts and Service. All revenues for these two revenue streams are recorded for Parts when sold and Service when performed. Revenue is recognized at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those products or services. The Company does not have any agreements or contracts that have special provisions which would affect revenue recognition.

 

 

When consideration is received, or such consideration is unconditionally due, from a customer prior to transferring goods or services to the customer under the terms of a sales contract, we record unearned revenue, which represents a contract liability.  Unearned revenue was $15,000 as of June 30, 2018 and $2,000 as of December 31, 2017 and is included in accrued expenses on the Company’s balance sheet. Unearned revenue was recorded as a result of customer deposits and not as a requirement of the newly implemented revenue recognition standard.

  

We recognize unearned revenue as net sales after we have transferred control of the goods or services to the customer and all revenue recognition criteria are met. The adoption of the new standard would have had no effect on the revenues, earnings and cash flows reported for the year ended December 31, 2017, had it been adopted prior to January 1, 2018.

 

For the second quarter of 2018, Parts and Service revenues were $1,069,000 and $1,282,000, respectively. For the six months ended June 30, 2018, Parts and Service revenues were $2,357,000 and $2,815,000, respectively.

  

 
11. Recent Accounting Pronouncements

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (ASU No. 2016-02), which will replace the existing guidance in ASC 840, Leases. The updated standard aims to increase transparency and comparability among organizations by requiring lessees to recognize lease assets and lease liabilities on the balance sheet and requiring disclosure of key information about leasing arrangements. This amendment is effective for the Company in the fiscal year beginning after December 15, 2019, but early adoption is permissible. When the standard becomes effective, we expect that our property, plant and equipment will increase due to the addition of assets under lease.  Lease liabilities will have a corresponding increase.  There is not expected to be a significant impact on the statement of operations or on the Company’s cash flows. 

 

 
12. Related Party

 

The Company leases the Hammonton facility from a company which is owned by the Company’s President and Chief Executive Officer. The Hammonton facility lease is currently a month-to-month lease. For the six months ended June 30, 2018 and 2017, total rent paid to this company was approximately $51,000 and $59,000, respectively. The amount due to this company included in accounts payable was $0 as of June 30, 2018 and December 31, 2017.

 

 

 

Cautionary Note Regarding Forward Looking Statements

 

This report contains forward-looking statements – that is, statements related to future, not past, events. In this context, forward-looking statements often address our expected future business and financial performance and financial condition, and often contain words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “see,” or “will.” These forward-looking statements are not guarantees and are subject to known and unknown risks, uncertainties and assumptions about us that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. For us, particular uncertainties that could cause our actual results to be materially different than those expressed in our forward-looking statements include: our ability to obtain required financing; changes in business conditions; changes in the marketplace; continued services of our executive management team; regulatory developments; acquisition matters; and statements of assumption underlying any of the foregoing, as well as other factors set forth under the caption “Risk Factors” in this report and our Annual Report on Form 10-K for the year ended December 31, 2017 filed with the Securities and Exchange Commission. All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the foregoing. We assume no duty to update or revise our forward-looking statements.

 

Item 2. Management's Discussion & Analysis of Financial Condition & Results of Operations

 

Three Months Ended June 30, 2018 & 2017

 

For the quarter ended June 30, 2018, net sales decreased $910,000 or 28%, to $2.4 million compared to $3.3 million in the same quarter of 2017. This decrease was attributable to reduced parts sales due to the credit hold placed by the Significant Vendor and service sales.

 

Gross margin for the quarter ended June 30, 2018 decreased $279,000, or 27%, to $739,000, or 31% of sales compared to $1.0 million, or 31% of sales in the same quarter of 2017. Gross margin decreased due to reduced parts and service sales

 

Operating expenses decreased $110,000 to $1.1 million in the quarter ended June 30, 2018 compared to $1.2 million in the same quarter of 2017.

 

Operating loss was $(446,000) in the quarter ended June 30, 2018 compared to $(277,000) in the same quarter of 2017, resulting in a $(169,000) operating loss increase. The increased loss was primarily due to reduced sales and increased severance costs in 2018.

 

Interest expense was $36,000 in the quarter ended June 30, 2018 compared to $12,000 in the same quarter of 2017 due to interest on the promissory notes issued to Anthony Tomasello and on the Credit Facility, which did not exist in the same quarter of 2017.

 

Income tax expense for the quarter ended June 30, 2018 was $3,000 compared to $1,000 in the same quarter of 2017.

 

Net loss was $(485,000) for the quarter ended June 30, 2018 compared to $(290,000) for the same quarter of 2017. For the second quarter of 2018, basic and diluted loss per share were $(0.03) compared to $(0.02) basic and diluted earnings per share in the second quarter of 2017.

 

 

Six Months Ended June 30, 2018 & 2017

 

For the six months ended June 30, 2018, net sales decreased $1.3 million or 20%, to $5.2 million compared to $6.5 million in the six months ended June 30, 2017. This decrease was primarily attributable to reduced parts sales due to the credit hold placed by the Significant Vendor and service sales.

 

Gross margin for the six months ended June 30, 2018 decreased $478,000, or 24%, to $1.5 million or 29% of sales compared to $2.0 million, or 31% of sales in the same period of 2017. Gross margin decreased due to reduced parts sales. Year-to-year gross margin percentages were reduced due to increased service revenue at lower gross margin rates.

 

Operating expenses increased $235,000 to $2.8 million in the six months ended of 2018 compared to $2.5 million in the same period of 2017. The increase was primarily due to the accrual of severance pay of $0.3 million under a separation agreement with a contracted employee who terminated employment in the quarter ended March 31, 2018.

 

Operating loss was $(1.4) million in the six months ended June 30, 2018 compared to $(700,000) in the same period of 2017, resulting in a $(663,000) operating loss increase. The increased loss was primarily due to reduced sales and severance costs in 2018.

 

Interest expense was $66,000 in the six months ended of 2018 compared to $24,000 in the same period of 2017 due to interest on the promissory notes issued to Anthony Tomasello and on the Credit Facility, which did not exist in the first six months of 2017.

 

Income tax expense for the six months ended June 30, 2018 was $3,000 compared to $1,000 for the same period of 2017.

 

Net loss was $(1.4) million for the six months ended June 30, 2018 compared to $(725,000) for the same period of 2017. For the six months ended June 30, 2018, basic and diluted loss per share were $(0.08) compared to $(0.04) basic and diluted earnings per share in the same period of 2017.

 

Liquidity & Capital Resources

 

Six Months Ended June 30, 2018

 

Accounts receivable decreased $1.0 million to $1.1 million at June 30, 2018 as a result of reduced 2018 sales.  Inventory decreased $138,000 to $262,000 at June 30, 2018. The decrease was primarily due to an increase in the reserve for slow moving stock. Prepaid expenses increased $11,000 to $498,000 at June 30, 2018. Accounts payable decreased $20,000 to $1.2 million at June 30, 2018 compared to $1.2 million at December 31, 2017. Severance payable increased $254,000 at June 30, 2018 due to a severance agreement entered into in March 2018, of which $180,000 is included in current liabilities. Accrued expenses increased $113,000 to $365,000 at June 30, 2018. At June 30, 2018, the Company had a working capital deficit of $1.1 million compared to a working capital surplus of $732,000 at December 31, 2017.

 

The net of our net loss, depreciation and amortization, and other non-cash adjustments to earnings for the six months ended June 30, 2018 resulted in a $143,000 cash provided by operations. The net of our net loss and non-cash adjustments plus working capital changes resulted in $881,000 of cash being used by operations for the same period of 2017.

 

 

Net cash used in investing activities in the six months ended June 30, 2018 was $34,000. Net cash used in financing activities in the six months ended June 30, 2018 was $59,000.

 

Cash at June 30, 2018 of was $97,000 compared to $47,000 at December 31, 2017.

 

Shareholders’ equity was $ 355,000 at June 30, 2018 compared to $1.8 million at December 31, 2017.

 

On November 22, 2017, the Company obtained a $3.5 million revolving credit facility with North Mill. Borrowings under the Credit Facility accrue interest at a fluctuating rate of interest equal to the prime rate plus 0.75%, subject to a floor of 4.75%. Subject to certain exceptions, the Credit Facility provides for advances of up to 85% of eligible accounts receivable. As of June 30, 2018, outstanding borrowings under the Credit Facility were $508,000, the interest rate thereunder was 5.25%, and the Company had additional borrowing availability of $261,000 under the Credit Facility based on eligible collateralized assets. The Loan Agreement will terminate on November 22, 2018 unless extended in writing by North Mill for an additional year.  There is no assurance that North Mill will extend the Loan Agreement beyond the termination date.

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the liquidation of liabilities in the normal course of business. As of June 30, 2018 and December 31, 2017, the Company had an accumulated deficit of $17.3 million and $15.9 million, respectively. In addition, the $3.5 million revolving credit facility (the “Credit Facility”) with North Mill Capital LLC (“North Mill”), will terminate on November 22, 2018 unless extended in writing by North Mill (See Note 4).  There is no assurance that North Mill will extend the Credit Facility beyond the termination date. In order to meet its current working capital needs, the Company sought additional funding for its operations without success through a working capital loan and/or equity funding arrangements. There can be no assurance that the Company will be successful in further efforts to obtain additional equity or debt financing. The Company’s ability to raise funds in the equity market may be impacted by the absence of a liquid trading market in its common stock. In the past the Company has relied heavily on one customer for revenue generation and on one vendor that supplied the Company with a necessary component for certain of its products (“Significant Vendor”). In the first quarter of 2018, total cost of goods sold for parts sales were comprised of approximately 52% of the purchases from the Significant Vendor. However, in April 2018, the Company was placed on credit hold by the Significant Vendor and subsequent to the end of the second quarter, the Significant Vendor terminated its relationship with the Company. As a result, the Company experienced decreased sales in the second quarter, and its financial results were adversely affected. The Company expects parts and service sales to decrease further in the third quarter. The Company has begun exploring available restructuring options, including cost reductions and sales improvements. The aforementioned factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

If the company's revenue and stock price continues to decline, it is likely the company will recognize a goodwill impairment in the third quarter as carrying value will exceed fair value.

 

Critical Accounting Policies and Estimates

 

Revenue Recognition – Adoption of New Accounting Standard

 

In May 2014, August 2015 and May 2016, the FASB issued ASU 2014-09 Revenue from Contracts with Customers, ASU 2015-14 Revenue from Contracts with Customers, Deferral of the Effective Date, and ASU 2016-12 Revenue from Contracts with Customers, Narrow-Scope Improvements and Practical Expedients, respectively, which implement ASC Topic 606. ASC Topic 606 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance under U.S. GAAP, including industry-specific guidance. It also requires entities to disclose both quantitative and qualitative information that enable financial statements users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The amendments in these ASUs are effective for annual periods beginning after December 15, 2017, and interim periods therein. These ASUs may be applied retrospectively with a cumulative adjustment to retained earnings in the year of adoption. As of January 1, 2018, the Company adopted this guidance and it did not have a material impact on our financial statements except for providing additional footnote disclosures related to revenue (See Note 10).

 

Off Balance Sheet Arrangements

 

As of June 30, 2018, we did not have any relationships with unconsolidated entities or financial partners, such as entities often referred to as structured finance or special purpose entities, which had been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

 

 

Item 4. Controls & Procedures

 

Evaluation of Disclosure Controls and Procedures.

 

The Company maintains internal controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) designed to provide reasonable assurance that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. These include controls and procedures designed to ensure that this information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

Our Disclosure Committee, which is comprised of the Company’s Chief Executive Officer, Chief Financial Officer and other management staff meets on a quarterly basis and has overview responsibility for these controls and procedures. The Disclosure Committee conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures as of June 30, 2018.

 

Based on the evaluation, the Disclosure Committee concluded that as of June 30, 2018, the Company’s disclosure controls were effective. The Company corrected a material weakness described in the “Management’s Annual Report on Internal Control over Financial Reporting” section of the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, by using a third party database administrator to make accounting system access changes when necessary.

 

Changes in Internal Control Over Financial Reporting

 

There have been no other changes in the Company’s internal controls and procedures during our most recent fiscal quarter that has materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

PART II - OTHER INFORMATION

 

Item 1A. Risk Factors

 

Except as set forth above under Liquidity and Capital Resources, there have been no material changes to the description of the risk factors associated with the Company's business previously disclosed in Part I, Item 1 "Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2017. In addition to the other information set forth in this report, you should carefully consider the risk factors discussed in the Company's Annual Report on Form 10-K as they could materially affect our business, financial condition and future results. The risks described in the Company's Annual Report on Form 10-K and this report are not the only risks facing the Company. Additional risks and uncertainties not currently known, or that are currently deemed to be immaterial, also may materially and adversely affect the Company's business, financial condition or operating results.

 

 

Item 6. Exhibits

     

(a).

Exhibits:

   
       
 

Exhibit 31.1

-

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

       
 

Exhibit 31.2

-

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

       
 

Exhibit 32.1

-

Statement of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

       
 

Exhibit 101.INS

-

XBRL Instance Document

       
 

Exhibit 101.SCH

-

XBRL Taxonomy Extension Schema

       
 

Exhibit 101.CAL

-

XBRL Taxonomy Extension Calculation

       
 

Exhibit 101.DEF

-

XBRL Taxonomy Extension Definition

       
 

Exhibit 101.LAB

-

XBRL Taxonomy Extension Labels

       
 

Exhibit 101.PRE

 

XBRL Taxonomy Extension Presentation

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) 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.

 

 

AG&E HOLDINGS INC.

 

 

By:

/s/ ANTHONY TOMASELLO

 

President

 

 

 

Anthony Tomasello

 

& Chief Executive Officer

 

August 14, 2018

      (Principal Executive Officer)    

 

 

 

 

 

 

 

/s/ Francis X. McCarthy

 

Chief Financial Officer,

 

 

 

Francis X. McCarthy

 

Secretary & Treasurer

 

August 14, 2018

 

 

 

(Principal Financial and Accounting Officer)

 

 

 

 

Exhibit Index

 

Item 6. Exhibits

       
 

Exhibit 31.1

-

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

       
 

Exhibit 31.2

-

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

       
 

Exhibit 32.1

-

Statement of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

       
 

Exhibit 101.INS

-

XBRL Instance Document

       
 

Exhibit 101.SCH

-

XBRL Taxonomy Extension Schema

       
 

Exhibit 101.CAL

-

XBRL Taxonomy Extension Calculation

       
 

Exhibit 101.DEF

-

XBRL Taxonomy Extension Definition

       
 

Exhibit 101.LAB

-

XBRL Taxonomy Extension Labels

       
 

Exhibit 101.PRE

 

XBRL Taxonomy Extension Presentation

 

 

16