UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31,20152016
Commission File Number001-8250
AG&E HOLDINGS INC.
(Exact name of registrant as specified in its charter)
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ILLINOIS (State or other jurisdiction of incorporation or organization) |
| 36-1944630 (IRS Employer Identification Number) |
4630 S. Arville223 Pratt Street, Suite EHammonton, New Jersey 08037
Las Vegas, NV 89103
(Address of principal executive offices)
Registrant’s telephone number, including area code: 702-798-5752 (609) 704-3000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
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Common Stock, $1.00 par value |
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Title of each class |
| Name of each exchange on which registered |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant has (1) 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 (ss 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 if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K ☒☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer ☐ | Accelerated filer ☐ | Non-accelerated filer ☐ (Do not check if Smaller Reporting Company) | Smaller Reporting Company ☒ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the registrant’s voting stock held by non-affiliates of the registrant (assuming for the purposes hereof, that directors, executive officers and 10% or greater stockholders of the registrant are affiliates of the registrant), based upon the closing sale price of the registrant’s Common Stock on March 16, 201628, 2017 was approximately $4,543,000.$3,730,000.
The number of shares of the registrant’s Common Stock outstanding as of March 16, 2016,28, 2017, was approximately 11,649,000.16,953,000.
Consent of Plante & Moran PLLC | ||
Certification of Principal Executive and Financial Officer Pursuant to Section 302 | ||
Certification of Principal Executive and Financial Officer Pursuant to Section 302 | ||
Statement of Principal Executive and Financial Officer Pursuant to Section 906 |
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This document 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.” Forward-looking statements by their nature address matters that are, to different degrees, uncertain. For us, particular uncertainties that could cause our actual results to be materially different than those expressed in our forward-looking statements include, but are not limited to: changes in business conditions or the gaming equipment marketplace, continued services of our executive management team, competitive pricing pressures, regulatory changes, and numerous other matters of national, regional and global scale, including those of a political, economic, business and competitive nature. These uncertainties may cause our actual future results to be materially different than those expressed in our forward-looking statements. These uncertainties are described in more detail in Part I, Item 1A. “Risk Factors” of this Annual Report on Form 10-K. 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 do not undertake to update our forward-looking statements.
Item 1. BUSINESS
OVERVIEW
AG&E Holdings Inc., through its wholly owned subsidiary American Gaming & Electronics, Inc. (“AG&E”) distributes parts and repairs and services gaming equipment and provides replacement monitors to casinos throughout the United States with offices in Las Vegas, Nevada, Hialeah, Florida and Hammonton, New Jersey. As used in this Annual Report on Form 10-K, the terms “we,” “us,” “our” and “the Company” mean AG&E Holdings Inc., an Illinois corporation, and its subsidiaries, unless the context indicates a different meaning, and the term “common stock” means our common stock, $1.00 par value per share.
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PARTI
Item 1. BUSINESS
OVERVIEW
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 and provides replacement monitors to casinos throughout the United States with offices in Las Vegas, Nevada, Hialeah, Florida and McCook, Illinois.
Originally founded in 1925 as an Illinois corporation, the Company previously was a global distributor and manufacturer of liquid crystal display (LCD) video monitors and other related parts for a variety of markets including, but not limited to, gaming machine manufacturers, coin-operated video game manufacturers and other display integrators. On September 12, 2014, the Company sold its LCD monitor business operations, and on October 30, 2014, changed its name to AG&E Holdings Inc. On June 15, 2015, the Company’s distribution agreement for video gaming terminals, or VGTs, in Illinois with GTech expired and as a result, the Company wound down this business.
Going forward,On November 30, 2016, the continuing operations portionCompany acquired Advanced Gaming Associates LLC (“AGA”). On the closing date, AGA was merged with and into AG&E. The separate legal existence of our financial statements will reflect only theAGA ceased with AG&E distribution operations plus public companycontinuing as the surviving entity and other corporate expenses. The Company’s prior LCD monitor business operations will be shown as discontinued operations. The Company continues to explore strategic alternatives.
The Company’s common stock is publicly traded onremaining a wholly-owned subsidiary of the NYSE MKT exchange under the symbol “WGA.”Company.
PRODUCTS AND SERVICES
The Company’s primary business is the distribution and service of electronic componentsgaming equipment and supplies, which consist of LCD displays, gaming supplies and components, andto various casinos across the distributioncountry.
MARKETING AND SALES
The Company sells products primarily in the United States with limited distribution in Europe and Asia.States. The Company maintains its own internal sales staff for a majority of its sales for products and for repair and service of its products.
The Company’s business is generally not seasonal, but sales generally are a little higher during the first half of the year and a little lower the second half of the year.
The Company believes it has no unique or unusual practices or policies relating to working capital itemsCompany’s largest customer in the continuing operations accounted for 14% of total revenues in 2016 and believes its practices are consistent with32% of total accounts receivable as of December 31, 2016. No other comparable companiescustomer accounted for more than 10% of sales in its served markets. The Company currently believes that its financial requirements during the foreseeable future can be met with funds on hand and generated from operating activities.
2016. The Company did not have any customers that accounted for more than 10% of sales in 2015. The Company’s largest customer in the continuing operations accounted for 10% and 17% of total revenues in 2014 and 2013, respectively, and 10% and 16% of total accounts receivable as of December 31, 2014 and 2013. No other customer accounted for more than 10% of sales in 2014 or 2013.
The Company’s parts orders normally are shipped within two weeks, so there is minimal backlog in this category.
No material portion of the Company’s business is subject to re-negotiation of profits or termination of contracts or subcontracts at the election of any governmental entity.
The Company’s market for its products and services is highly competitive with low barriers to entry.
Our efforts to comply with federal, state and local laws and regulations applicable to the discharge of materials into the environment, or otherwise relating to the protection of the environment, has had no material effect upon our capital expenditures, earnings and competitive position.
RESEARCH AND DEVELOPMENT
During the past two years, we have not spent any material amount on research and development activities.
EMPLOYEES
As of December 31, 2015,2016, the Company employed a total of approximately 2072 full time employees at all of its locations. The Company believes its relationship with its employees is satisfactory.
Available Information
The Company files reports with the Securities and Exchange Commission (the “SEC”) and files all required reports under the Exchange Act
Item1A.RISK FACTORS
Risks related to our Operations
The loss or interruption of supply from our key parts suppliers could limit our ability to distribute our products.
We purchase certain products from various suppliers, some of which are located outside of the United States. Any loss or interruption of supply from our key parts suppliers may require us to find new suppliers. The number of suppliers for certain electronic components is limited. We could experience delays while we seek new suppliers and could have difficulty finding new suppliers, which would substantially impair our operating results and business.
The loss of the Illinois VGT contract with GTech will reduce our revenues and our profitability and the Company will continue to incur losses.
We had an exclusive contract to distribute VGT’s in Illinois for GTech. This exclusive contract expired on June 15, 2015. Since the contract was not renewed, we are no longer able to sell Spielo VGT’s in Illinois which will significantly reduce our future revenues and profitability. The Company has incurred losses in 2014 and 2015 and expects to continue to incur losses for the foreseeable future.
The Company has lost employees and executives.
On December 8, 2015, the Company’s prior chief financial officer resigned. The Company has not hired a replacement. Other accounting staff has resigned since that date. During the review of strategic alternatives, in September 2015, the Special Committee of the Board of Directors placed the Chief Executive Officer on paid leave. The lack of management personnel may have an adverse impact on the operations and profitability of the Company.
The gaming business is heavily regulated and we depend on our ability to obtain/maintain regulatory approvals.
Nearly all of the jurisdictions in the United States require licenses, permits, documentation of qualification, including evidence of financial stability, and other forms of approval for distributors of gaming equipment and supplies and for their key personnel. The revocation or denial of a license in a particular jurisdiction could adversely affect our ability to obtain or maintain licenses in other jurisdictions. In addition, laws and regulations applicable to our business could be changed or repealed. These changes could affect our business and results of operations.
The Company is pursuing certain strategic transactions that involve significant risks and uncertainties.
The Company expects to continue incurring costs in pursuing, evaluating and negotiating particular strategic transactions, but its efforts might not prove successful. For example, such transactions might not be available on terms acceptable to the Company or at all. Or, if such a transaction is entered into by the Company, the Company might not ever close such transaction or realize the anticipated benefits of such transaction. For example, some transactions may require shareholder approval or regulatory approvals, which may not be received.
Certain strategic transactions that the Company is pursuing might dilute the equity interests of our common shareholders.
Certain strategic transactions that the Company is pursuing might involve, through one or more transactions, the issuance of our capital stock, which will dilute (either economically or in percentage terms, or both) the ownership interests of our existing shareholders.
If the Company is unable to enter into one or more otherstrategictransactions, the Company will have to consider liquidation.
If we are unable to enter into a strategic transaction on terms acceptable to the Company and realize certain benefits from such transaction, the Company might be required to dispose of or liquidate its assets at some future date at values less than what we believe their current values to be and at which they are carried on our financial statements.
The Company might not meet listing requirements during 2016 and therefore might be subject to delisting.
It is a requirement of NYSE MKT that the Company maintain shareholder equity of more than $5 million in order to remain listed. The Company’s equity at year end was $5,358,000. The Company’s equity will likely drop below $5.0 million during the first half of 2016. As a result, the Company could become subject to delisting by the NYSE.
The market price for our shares is susceptible to significant changes in market price.
Historically, the volume of trading of our shares has been relatively low. As a result, larger than average buy or sell orders on a given day, or news about us or the gaming industry, has had and may in the future have a significant impact on the trading price for our shares.
Intense competition in our industry could impair our ability to grow and achieve profitability.
We may not be able to compete effectively with current or future competitors. The market for our products and services is intensely competitive and constantly attracts new competitors even as others leave the industry due to low barriers to entry to our business. Some of our competitors are large companies with greater financial, marketing and product development resources. In addition, new competitors may enter our key markets. This may place us at a disadvantage in responding to our competitors’ pricing strategies, technological advances and other initiatives.
The current economic conditions might cause sales to decline without warning making it difficult to reduce costs fast enough to maintain profitability.
Our customers’ business (and their customers’ business) might decline more than we or our customers are forecasting making it difficult for us to reduce our expenses as fast as our sales decline. Although the Company strives to keep our expenses in line with current sales, weWe could experience periods where the sales decline occurs so rapidly that we are unprofitable for a period of time.time
We are substantially dependent on key personnel.
For the foreseeable future, our success will depend largely on the continued services of our President and Interim Chief Executive Officer, Anthony Tomasello, as well as certain of the other key executives because of their collective industry knowledge, marketing skills and relationships with suppliers and customers. Should any of these individuals leave us, we could have difficulty replacing them with qualified individuals and it could have a material adverse effect on our future results of operations.
Our results of operations could vary as a result of the methods, estimates, and judgments that we use in applying our accounting policies.
The methods, estimates, and judgments that we use in applying our accounting policies have a significant impact on our results of operations (see “Critical Accounting Policies” in Part II, Item 7 of this report). Such methods, estimates, and judgments are, by their nature, subject to substantial risks, uncertainties, and assumptions, and factors may arise over time that lead us to change our methods, estimates, and judgments. Changes in those methods, estimates, and judgments could significantly affect our results of operations.
Risks Related to our Common Stock
The market price for our shares is susceptible to significant changes in market price.
Historically, the volume of trading of our shares has been relatively low. As a result, larger than average buy or sell orders on a given day, or news about us or the gaming industry, has had and may in the future have a significant impact on the trading price for our shares.
Our common stock is considered a “penny stock” and is subject to the penny stock rules.
Our common stock currently trades over-the-counter on the OTCQB. Since our common stock continues to trade below $5.00 per share, our common stock is considered a “penny stock” and is subject to the Securities and Exchange Commission rules and regulations which impose limitations upon the manner in which our shares can be publicly traded. These regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the associated risks. Under these regulations, certain brokers who recommend such securities to persons other than established customers or certain accredited investors must make a special written suitability determination regarding such a purchaser and receive such purchaser’s written agreement to a transaction prior to sale. These regulations may have the effect of limiting the trading activity of our common stock and reducing the liquidity of an investment in our common stock.
We do not anticipate paying dividends in the foreseeable future.
Any payment of cash dividends in the future will depend upon our earnings (if any), financial condition and capital requirements. We do not anticipate paying dividends in the foreseeable future. Accordingly, any potential investor who anticipates the need for current dividends from its investment should not purchase any of our securities.
Item1B. UNRESOLVED STAFF COMMENTS
None.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Because we want to provide you with more meaningful and useful information, this Annual Report on Form 10-K includes forward-looking statements that reflect our current expectations and projections about our future results, performance, prospects and opportunities. You can find many of these statements by looking for words such as “may,” “will,” “expect,” “anticipate,” “believe,” “intend,” “estimate” and similar expressions. These forward-looking statements are based on information currently available to us and are subject to a number of risks, uncertainties and other factors that could cause our actual results, performance, prospects or opportunities in 2015 and beyond to differ materially from those expressed in, or implied by, these forward-looking statements. These risks, uncertainties and other factors include but are not limited to the factors described under the heading “Risk Factors” above. We caution you not to place undue reliance on any forward-looking statements. Except as otherwise required by federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason after the date of this Annual Report on Form 10-K.
Item 2. PROPERTIES
The Company leases its headquarters which are located at 9500 West 55th223 Pratt Street, Suite A, McCook, Illinois 60525.Hammonton, NJ 08037. The Company’s leased McCookHammonton facility has approximately 104,00015,000 square feet of floor space. There is excess, unused space of approximately 23,000 square feet. The Company’s McCook facility lease expires on April 30, 2016. The Company will not renew the lease. It will close the Midwest warehouse and consolidate the inventory in Nevada. The Company’s administrative staff will move to a temporary office in Burr Ridge, Illinois. The Company also has other leased facilities to support its operations in Illinois, Nevada and Florida. Effective April 29, 2016 the Company’s headquarters will move to its leased facility at 4630 S. Arville Street, Suite E, Las Vegas, NV 89103.
Item 3. LEGAL PROCEEDINGS
The Company is or may be subject to various legal proceedings and actions arising in the normal course of our business. In the opinion of management, based upon the information presently known, the ultimate liability, if any, arising from such pending legal proceedings, as well as from asserted legal claims and known potential legal claims which are likely to be asserted, taking into account established accruals for estimated liabilities (if any), are not expected to be material individually and in the aggregate to our consolidated financial position, results of operations or cash flows.
Item 4. MINE SAFTETY DISCLOSURES
Not Applicable.
PARTII
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERSAND ISSUER PURCHASES OF EQUITY SECURITIES,
COMMON SHARE MARKET PRICE
The Company's common shares arestock is traded on the NYSE MKT Stock ExchangeOTCQB Marketplace under the symbol “WGA”“AGNU”. The following table sets forth the range of high and low bid prices per share of our common stock for each of the calendar quarters identified below as reported by the OTCQB Marketplace. These quotations represent inter-dealer prices, without retail mark-up, markdown or commission, and may not represent actual transactions.
2016 Prices | 2015 Prices | |||||||||||||||
High | Low | High | Low | |||||||||||||
| Quarter ended: | ||||||||||||||||
| March 31 | $ | 0.49 | $ | 0.30 | $ | 0.95 | $ | 0.65 | ||||||||
June 30 | $ | 0.45 | $ | 0.24 | $ | 0.95 | $ | 0.70 | ||||||||
September 30 | $ | 0.38 | $ | 0.24 | $ | 1.00 | $ | 0.42 | ||||||||
| December 31 | $ | 0.33 | $ | 0.16 | $ | 0.62 | $ | 0.41 | ||||||||
On December 31, 2015,2016, there were approximately 512460 holders of record of the common shares of the Company. High and low prices for the last two years were:
2015 Prices | 2014 Prices | |||||||||||||||
| High | Low | High | Low | |||||||||||||
| Quarter ended: | ||||||||||||||||
March 31 | $ | 0.95 | $ | 0.65 | $ | 1.99 | $ | 1.64 | ||||||||
| June 30 | $ | 0.95 | $ | 0.70 | $ | 1.99 | $ | 1.21 | ||||||||
| September 30 | $ | 1.00 | $ | 0.42 | $ | 1.49 | $ | 1.11 | ||||||||
| December 31 | $ | 0.62 | $ | 0.41 | $ | 1.34 | $ | 0.63 | ||||||||
On September 15, 2015, the Company paid a $0.45 per share cash distribution to shareholders which as of December 31, 2015, was determined to be a return of capital. The Company paid no other distributions to shareholders during the two most recent fiscal years.years and we do not intend to declare any dividends on its common stock in the foreseeable future.
During the fiscal year covered by this Annual Report on Form 10-K, we have not repurchased any shares of our common stock or sold any unregistered securities.securities, except that in connection with our acquisition of AGA on November 30, 2016, we issued to Anthony Tomasello, our current President and the former Chief Executive Officer of AGA, 5,303,816 shares of our common stock.
Item 6. SELECTED FINANCIAL DATA
Not applicable.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS
Year Ended December 31, 20152016 Compared to Year Ended December 31, 20142015
Net sales from continuing operations decreased $8.0$7.7 million, or 37%55%, to $6.2 million in 2016 compared to $13.9 million in 2015 compared to $21.9 million in 2014.2015. Parts and service sales increaseddecreased approximately 9%18% while VGT sales declined by 58%accounted for a decrease in sales of $6.3 million compared to prior year due to the expiration in 2015 of our distribution agreement with GTech for the Illinois VGT market.
Gross margin for 20152016 decreased $843,000$1.6 million to $1.9 million, or 30.0% of sales, compared to $3.4 million, or 24.6% of sales, compared to $4.3 million or 19.4% of sales in 2014. Gross margins decreased by $843,0002015. The decrease is primarily dueattributable to the lowerdiscontinuation of VGT sales.sales and decreased volume. Although gross margin dollars are down due to reduced volume, thehas decreased, our gross margin percentage has increased to 24.6% of sales in 2015 from 19.4% of sales in 2014 due to the lower VGT margin percentage compared to the much highersince parts and service sales have a higher gross margin percentage.percentage than VGT sales.
Operating expenses decreased $828,000increased $637,000 to $4.6 million in 2016 compared to $4.0 million in 2015 compared to $4.8 million in 2014. These 2015 decreases were2015. The increase is primarily due to lower administrative expenses during this year comparedcosts related to transaction expensesthe merger with AGA in 2016 and costs associated with the exit of the LCD businessfrom our former headquarters in the second half 2014 and the VGT business in the second half 2015. The savings from these lower administrative expenses wereMcCook, Illinois, partially offset by costs associated with the Company pursuing strategic alternatives in 2015. The Company continuesvarious administrative savings. We continue to place emphasis on operating expense control.
Operating loss before goodwill impairment was a loss of $582,000 in 2015 compared to a loss of $567,000 in 2014.
In 2014, the Company reviewed its future projections for the AG&E distribution operations. With lower anticipated future VGT sales and higher operating expense due to absorbing all the public company and other corporate expense previously charged to its discontinued operations, it anticipated lower future cash flows. As a result, the Company determined that one hundred percent of the AG&E goodwill was impaired which resulted in a charge of $1.3 million in 2014.
Operating loss from continuing operations was $0.6$2.8 million in 20152016 compared to an operating loss of $2.4 million$582,000 in 20142015. The decrease is primarily dueattributable to reduced sales as well as transaction costs related to the goodwill impairment.merger with AGA.
Interest expense was $4,000 in 2016 compared to zero in 2015 compared to $29,000 in 2014 due to cancellinginterest from the linepromissory note that was issued to Anthony Tomasello, our President and the former Chief Executive Officer of credit on October 30, 2014.AGA, upon closing of the merger with AGA Other income & expense was a $39,000 credit in 2016 compared to an $3,000 credit in 2015 compared2015. This increase is due to an $18,000 credit in 2014.the sale of fixed assets.
Income tax expensebenefit was $8,000 in 20152016 compared to $539,000an expense of $8,000 in 2014. The large income tax expense increase in 2014 was due to an increase in the deferred tax valuation allowance resulting from the Company determination that its future profit would not support the deferred tax asset of $497,000.2015. The Company has available a net operating loss carry forward of approximately $11.0$9.1 million as of December 31, 2015.2016.
Net loss from continuing operations was $0.6$2.7 million in 20152016 compared to a net loss of $2.4$0.5 million in 2014.2015. For 20152016 basic and diluted loss per share was $0.05$0.23 compared to basic and diluted loss per share of $0.21$0.05 in 2014.2015.
The gain from discontinued operations for 20152016 was zero compared to $0.1 million compared to a loss of $3.1 million in 2014, which included a loss on the sale of the assets of $2.1 million.2015.
Net loss including discontinued operations was $0.5$2.7 million in 20152016 compared to net loss of $5.5 million$499,000 in 2014.2015. For 20152016 basic and diluted loss per share was $0.04$0.23 compared to basic and diluted loss per share of $0.47$0.04 in 2014.2015.
Year Ended December 31, 2014 Compared to Year Ended December 31, 2013
Net sales from continuing operations decreased $6.3 million or 22% to $21.9 million in 2014 compared to $28.2 million in 2013. Parts sales increased slightly while VGT sales declined by 31% compared to prior year due to the slowdown in the Illinois VGT market.
Gross margin for 2014 decreased $575,000 to $4.3 million or 19.4% of sales compared to $4.8 million or 17.1% of sales in 2013. Gross margins decreased by $885,000 primarily due to the lower VGT sales. Although margin dollars are down due to reduced volume, the gross margin percentage increased to 19.4% of sales in 2014 from 17.1% of sales in 2013 due to the lower VGT margin percentage compared to the much higher parts margin percentage.
Operating expenses decreased $740,000 to $4.8 million in 2014 compared to $5.6 million in 2013. These 2014 decreases were primarily due to lower administrative expenses due to the sale of the LCD business including occupancy, IT network and accounting services. As well, bonus expenses were lower by $190,000 compared to prior year. The Company continues to place great emphasis on operating expense control.
Operating loss before goodwill impairment was a loss of $567,000 in 2014 compared to a loss of $732,000 in 2013.
In 2014, the Company reviewed its future projections for the AG&E distribution operations. It appears that the City of Chicago will not approve VGTs for the foreseeable future and that no new states will be added until at least the second half of 2016 or sometime in 2017. AG&E also has higher operating expense, since it will be absorbing all the public company and other corporate expense previously charged to its discontinued operations. As a result, the Company determined that the AG&E goodwill was impaired which resulted in a charge of $1.3 million.
Operating loss from continuing operations was $1.9 million in 2014 compared to an operating loss of $732,000 in 2013 primarily due to the goodwill impairment.
Interest expense was $29,000 in 2014 compared to $77,000 in 2013 due to cancelling the line of credit on October 30, 2014. Other income & expense was an $18,000 credit in 2014 compared to a $10,000 credit in 2013.
Income tax expense was $539,000 in 2014 compared to a benefit of $8,000 in 2013. The large income tax expense increase was due to an increase in the deferred tax valuation allowance resulting from the Company determining its future profit would not support the deferred tax asset of $497,000. The Company has available a net operating loss carry forward of approximately $9.8 million as of December 31, 2014.
Net loss from continuing operations was $2.4 million in 2014 compared to a net loss of $791,000 in 2013. For 2014 basic and diluted loss per share was $0.21 compared to basic and diluted loss per share of $0.06 in 2013.
The loss from discontinued operations for 2014 was $3.1 million which included a loss on the sale of the assets of $2.1 million compared to a profit in 2013 of $1.4 million.
Net loss including discontinued operations was $5.5 million in 2014 compared to net income of $651,000 in 2013. For 2014 basic and diluted loss per share was $0.47 compared to basic and diluted earnings per share of $0.06 in 2013.
Critical Accounting Policies
The preparation of the Company’s consolidated financial statements in accordance with accounting principles generally accepted in the United States of America requires the Company’s management to adopt accounting policies and to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses. Management periodically evaluates its policies, estimates and assumptions related to, among others: revenue recognition, receivables and provision for bad debt, inventory obsolescence and costing methods, provision for warranty, goodwill, income taxes and valuation allowance for deferred taxes, and contingencies. The Company’s management bases its estimates on historical experience and expectations of the future. Actual reported and future amounts could differ from those estimates under different conditions and assumptions.
Revenue Recognition
In general, the Company recognizes revenue when the following criteria are met: evidence of an arrangement between the Company and its customer exists, shipment has occurred or services have been rendered, the sales price is fixed and determinable and collectability is reasonably assured. Revenue from video gaming terminal sales with standard payment terms is recognized upon the passage of title and transfer of the risk of loss. The Company recognizes revenue even if it retains a form of title to products delivered to customers, provided the sole purpose is to enable the Company to recover the products in the event of a customer payment default and the arrangement does not prohibit the customer’s use of the product in the ordinary course of business.
Receivables & Provision for Bad Debt
The Company is exposed to credit risk on certain assets, primarily accounts receivable. The Company provides credit to customers in the ordinary course of business and performs ongoing credit evaluations. Concentrations of credit risk with respect to trade receivables are limited. The Company currently believes its allowance for doubtful accounts is sufficient to cover customer credit risks.
Inventory Obsolescence & Costing Methods
The Company uses an average cost method to value inventory. The Company provides an allowance for estimated obsolete or excess inventory based on assumptions about future demands for its products.
Income Taxes & Valuation Allowance for Deferred Taxes
The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. The amount of deferred tax asset we recognize is based upon our expected income for the next twelve to eighteen months. We record a valuation allowance to reduce deferred tax assets to an amount for which the realization is more likely than not.
Contingencies
When applicable, the Company assesses its exposures to loss contingencies including legal and other matters and provides for an exposure if it is judged to be probable and estimable. If the actual loss from a contingency differs from management’s estimates, operating results could be impacted.
Liquidity & Capital Resources
For continuing operations, accounts receivable decreasedincreased by $1.3$280,000 to $1.0 million in 2016 compared to $0.7 million in 2015 compared to $2.0 million in 2014.2015. Days sales in accounts receivable decreased to 36 days at year end 2016 compared to 39 days at year end 2015 compared to 54 days at year end 2014.2015.
Inventory decreasedincreased by $3.5 million$333,000 to $0.6 million$917,000 in 20152016 compared to $4.1 million$584,000 in 2014.2015. Days cost of sales in inventory decreased to 6261 days at year end 20152016 compared to 17162 days cost of sales at year end 2014.2015.
Accounts payable decreasedincreased to $0.5 million$476,000 in 20152016 compared to $0.8 million$457,000 in 2014, a $0.3 million use of cash to due to no VGT activity the second half of the year.2015. Days payables outstanding decreasedincreased to 39 days at year end 2016 compared to 29 days at year end 2015 compared to 27 days at year end 2014.2015.
Prepaid expenses decreased $0.1millionincreased $45,000 and accrued expenses decreased $1.5 million,increased $220,000, primarily due to settling allcosts related to the transaction expenses associated with the sale of the LCD business operations.merger transaction.
Discontinued operating activities provided zero cash in 2015 compared to $0.4 million of cash in 2014.
The net of our 20152016 loss, depreciation and amortization, and other non cash adjustments to earnings resulted in a $0.4$2.7 million use of cash in operations. The net of earnings and non cash adjustments plus the working capital changes noted above resulted in $2.7$2.6 million of cash being providedused by operations.
Cash provided by the sales of discontinued operations was $0.1 millionzero in 20152016 compared to $7.1 millionand 2015. Cash used in 2014.the acquisition of AGA was $512,000 in 2016. Capital expenditures were minimal in 20152016 and 2014.2015. This resulted in a provisionuse of cash by investing activities of $0.1 million$479,000 in 20152016 and $7.1 milliona provision of cash of $75,000 in 2014.2015.
Cash provided by sales of stock issued under the employee stock grant plan was minimal in 2015 and 2014. The Company paid a cash dividend of $5.3 million in 2015 and zero in 2014. These three items2016. This resulted in $5.3 million of net cash used by financing activities in 2015 and $1.6 million in 2014.2015.
Cash at the beginning of the year was $6.9$4.4 million and at the end of the year was $4.4$1.3 million.
Shareholders’ equity wasdecreased $1.8 million to $3.6 million in 2016 from $5.4 million in 2015 compared to $11.1 million in 2014 or a decrease of $5.7 million.2015. This decrease was attributedis attributable to the Company’s net earningsloss in 2015 and2016 partially offset by the cash returncommon stock issued in connection with the acquisition of capital of $5.25 million during 2015.AGA.
The Company believes it has no unique or unusual practices or policies relating to working capital items and believes its practices are consistent with other comparable companies in its served markets. The Company currently believes that its financial requirements during the foreseeable future can be met with funds on hand and generated from operating activities.
Off Balance Sheet Arrangements and Contractual Obligations
The Company has no off balance sheet arrangements other than the McCook building lease that expires on April 30, 2016 and one copier lease that expires in 2016 and a second copier lease that expires in 2017.
The following table summarizes the Company’s contractual commitments asAs of December 31, 2015. The commitments2016, 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, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are discussednot materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in the indicated notes to the Company’s consolidated financial statements:
Payments Due In Year Ending December 31, | ||||||||||||||||||||||||
(in $000’s) | Total | 2016 | 2017 | 2018 | 2019 | Thereafter | ||||||||||||||||||
Operating Leases (Note 11) | $ | 258 | $ | 232 | $ | 22 | $ | 4 | $ | --- | $ | --- | ||||||||||||
| $ | 258 | $ | 232 | $ | 22 | $ | 4 | $ | --- | $ | --- | |||||||||||||
Inflation
In 2015 and 2014, inflation has not had a material effect on the Company’s results of operations.
such relationships.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The 20152016 annual financial statements together with the notes thereto follow:
Quarterly financial data for the four quarters ended December 31,
To The Board of Directors and Shareholders of AG&E Holdings Inc. McCook, Illinois
We have audited the accompanying consolidated balance sheets of AG&E Holdings Inc.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of
/s/ Plante & Moran, PLLC Chicago, Illinois March
CONSOLIDATED BALANCE SHEETS As of December 31, (in $000’s except for share information)
See accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended December 31, (in $000’s except for share & per share data)
See accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (in $000’s)
See accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, (in $000’s)
See accompanying notes to the consolidated financial statements.
NOTES TO THE FINANCIAL STATEMENTS
Note 1. DESCRIPTION OF THE BUSINESS
AG&E Holdings Inc. (the “Company”) through its wholly owned subsidiary American Gaming and Electronics, Inc. (“AG&E”) distributes parts and repairs and services gaming equipment and provides replacement monitors to casinos throughout the United States with offices in Hammonton, New Jersey, Las Vegas, Nevada and Hialeah,
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation The financial statements of the Company include the accounts of AG&E Holdings Inc. and its wholly-owned subsidiary, American Gaming & Electronics, Inc. All significant intercompany accounts and transactions have been eliminated in consolidation.
Management Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP USA) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses, during the reporting period. Actual results could differ from those estimates.
Revenue Recognition In general, the Company recognizes revenue when the following criteria are met: evidence of an arrangement between the Company and its customer exists, shipment has occurred or services have been rendered, the sales price is fixed and determinable and collectability is reasonably assured. Generally, these terms are met upon shipment.
Revenue from video gaming terminal sales with standard payment terms is recognized upon the passage of title and transfer of the risk of loss. The Company recognizes revenue even if it retains a form of title to products delivered to customers, provided the sole purpose is to enable the Company to recover the products in the event of a customer payment default and the arrangement does not prohibit the customer’s use of the product in the ordinary course of business.
Financial Instruments The fair value of the Company’s financial instruments does not materially vary from the carrying value of such instruments.
Receivables Receivables are carried at original invoice or closing statement amount less estimates made for doubtful receivables. Management determines the allowances for doubtful accounts by reviewing and identifying troubled accounts on a monthly basis and by using historical experience applied to an aging of accounts. A receivable is considered to be past due if any portion of the receivable balance is outstanding past terms which are normally 30 to 60 days. Receivables are written off when deemed uncollectible. Recoveries of receivables previously written off are recorded when received.
Inventory Obsolescence & Costing Methods The Company uses an average cost method to value inventory. The Company provides an allowance for estimated obsolete or excess inventory based on assumptions about future demands for its products.
Property, Plant & Equipment Property, plant and equipment are stated at cost and are depreciated and amortized for financial reporting purposes over the estimated useful lives on a straight-line basis as follows: machinery & equipment - five to fifteen years and leasehold improvements - shorter of lease term or estimated useful life. Capitalized software costs are amortized on a straight-line basis over the expected economic life of the software of three to seven years.
Intangibles The fair value of intangible assets with determinable useful lives is amortized on a straight-line basis over the estimated life. Customer relationships are amortized over a 10 year life, while gaming licenses are amortized over a 2 year life. Goodwill The Company accounted for its goodwill resulting from its purchase of
Income Taxes The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, the Company recognizes deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. The Company records a valuation allowance to reduce deferred tax assets to an amount for which realization is more likely than not.
Earnings Per Share Basic earnings per share is based on the weighted-average number of common shares outstanding whereas diluted earnings per share includes the dilutive effect of unexercised common stock options and warrants. Potentially dilutive securities are excluded from diluted earnings per share calculations for periods with a net loss.
Stock Based Compensation At December 31,
Subsequent Events The Company evaluated subsequent events through the date the financial statements were issued.
Recently Issued Accounting Pronouncements
In May 2014, August 2015 and May 2016, the FASB issued ASU 2014-09Revenue from Contracts with Customers , ASU 2015-14Revenue from Contracts with Customers, Deferral of the Effective Date , and ASU 2016-12Revenue 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. Early adoption is permitted for annual periods beginning after December 15, 2016. These ASUs may be applied retrospectively with a cumulative adjustment to retained earnings in the year of adoption. We have evaluated this guidance and do not expect a material impact on our core business. We are currently evaluating the impact of implementing this guidance as it relates to our recent business combination. Note 3. BUSINESS COMBINATIONS On November 30, 2016, the Company completed the acquisition and merger of Advanced Gaming Associates LLC (“AGA”) with and into American Gaming & Electronics Inc (“AG&E). In connection with this merger, the Company issued to Anthony Tomasello 5,303,816 shares of its common stock. The Company may issue to Mr. Tomasello up to 4.2 million additional shares of common stock in the future depending on the Company’s performance and the achievement of certain revenue thresholds. Upon the closing of the merger, the Company issued to Anthony Tomasello a promissory note in the initial principal amount of $1.0 million (the “Company Note”). The Company Note accrues interest at a rate of 5% per annum and matures on November 30, 2019. In addition, if certain service revenue targets are satisfied during either of two 12-month periods immediately following the Closing, additional Company Notes will be issued for an additional $1.0 million at the end of each 12-month period, up to an aggregate additional amount of $2.0 million. The following table summarizes the fair value of total consideration transferred to AGA’s equity holder at the closing date:
The fair value of the contingent consideration was estimated usinga real options approach, where the company’s revenue and stock price are simulated in the risk-neutral world using Geometric Brownian Motion, a widely accepted model of price behavior that is used in option pricing models such as the Black-Scholes option pricing model. The value of the earnout was derived primarily from the provisions requiring future adjustment to the Company Note. Accordingly, the fair value of the contingent consideration is being reported as a liability. The following table summarizes the allocation of the purchase price at fair value as of the acquisition date:
Note On September 12, 2014, the Company sold its LCD monitor business operations to HT Precision Technologies U.S., Inc a wholly owned subsidiary of HT Precision Technologies, Inc. of Taiwan for approximately $7.2 million in
-19- Table of
The following amounts related to the discontinued operations were derived from historical financial information and have been segregated from continuing operations and reported as discontinued operations in the Condensed Consolidated Statement of Earnings:
Years Ended December 31, (in $000’s )
Note Net inventory, which includes a valuation reserve of $99 and $66
Note On first of each month.
Note The Company maintains
Restricted Shares All shares granted are governed by the Company’s Stock Award Plan, which was approved by shareholders in 2000 and amended in 2009. The employees can earn the restricted shares in exchange for services to be provided to the Company over a three year or five-year vesting period. The fair value of restricted shares is based on the market price on the grant date. In
The following table summarizes information regarding restricted share activity for the twelve months ending December 31,
Note Identifiable intangible assets were comprised of:
Total amortization of intangible assets was $18,000 and $0 in 2016 and 2015, respectively. Estimated amortization expense over the next five years is:
Note9. ACCRUED EXPENSES Accrued expenses consisted of the following items:
Note The Company’s largest customer in the continuing operations accounted for 14% of total revenues in 2016 and 32% of total accounts receivable as of December 31, 2016. No other customer accounted for more than 10% of sales in 2016. The Company did not have any customers that accounted for more than 10% of sales in 2015.
Note The effective income tax rates differed from the expected Federal income tax rate (34%) for the following reasons:
Deferred income taxes reflect the impact of temporary differences between the amounts of assets and liabilities for financial reporting purposes and as measured by income tax regulations. Temporary differences which gave rise to deferred tax assets and deferred tax liabilities consisted of:
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 historically provided a partial valuation allowance on its net deferred tax benefits.
The Company files tax returns in the U.S. federal jurisdiction and various state jurisdictions. The tax years
Note The Company
The Company leases the Hammonton facility from a company which is owned by the Company’s Chief Executive Officer. The Hammonton facility lease is currently a month-to-month lease. Total rent paid to this company was approximately $8,000 in 2016. The amount due to this company included in accounts payable was $0 as of December 31, 2016 and 2015, respectively.
Note The Company leases certain buildings, data processing and other equipment under operating lease agreements expiring through the year
Rent expense related to operating leases was approximately
Note Selected quarterly data for
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Item9A. CONTROLS AND 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 SEC’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 made up of the Company’s Chief Executive 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 December 31,
Based on the evaluation, the Disclosure Committee concluded that as of December 31,
Management’s Annual Report on Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes of accounting principles generally accepted in the United States.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives.
The Company's
Based on such assessment, the Company's Disclosure Committee has concluded that, as of December 31,
Except for our review of controls and remediation alternatives described above, there have been no changes in the Company’s internal controls and procedures during the fiscal quarter ended December 31,
Item 9B. OTHER INFORMATION None
PARTIII
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
Item 11. EXECUTIVE COMPENSATION
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The
Proxy Statement.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The
PARTIV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(1) The following financial statements required by Part II, Item 8 of this annual report and are included hereto:
(3) (c) The following exhibits are incorporated by reference or filed herewith:
* filed herewith
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.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities on the dates indicated.
FINANCIAL SCHEDULE
Schedules not included with this additional financial data have been omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
SCHEDULE II
UNAUDITED VALUATION AND QUALIFYING ACCOUNTS (in $000’s)
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