|• QUARTERLY REPORT • CERTIFICATION • CERTIFICATION|
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
þ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2012
o 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: 000-52043
AGR TOOLS, INC.
(Exact name of registrant as specified in its charter)
3500 Fairmount Street, Suite 501, Dallas, Texas 75219
(Address of principal executive offices)
214-613-6400(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 þ No o
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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
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.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Table of Contents
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AGR Tools, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the United States Securities and Exchange Commission. They do not include all information and notes required by generally accepted accounting principles for complete financial statements. However, except as disclosed, there has been no material change in the information disclosed in the notes to the consolidated financial statements included in the Annual Report on Form 10-K of AGR Tools, Inc. for the year ended June 30, 2011. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine-month period ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending June 30, 2012. The consolidated financial statements and notes are representations of the Company’s management who are responsible for their integrity and objectivity. The Company’s accounting policies conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of these consolidated financial statements.
These financial statements have been prepared on a going concern basis, which implies the Company will continue to realize its assets and discharge its liabilities in the normal course of business. The continuation of the Company as a going concern is dependent upon the continued financial support from its shareholders, the ability of management to raise additional equity capital through private and public offerings of its common stock, and the attainment of profitable operations. As of March 31, 2012, the Company has a working capital deficit of $885,127, and has an accumulated deficit of $2,127,695 since inception. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. These financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
(2) CHANGE IN CORPORATE CONTROL
In January 2012, the three largest shareholders sold an aggregate 40,267,390 shares of common stock of the Company to third parties. In connection with the sale of the shares, the then-current Board of Directors (comprised of the controlling shareholders) resigned from their officer and director positions and concurrently appointed Mr. Vern O.C. Wilson to the Board of Directors appointed as Chief Executive Officer, Secretary and Treasurer. Additional information on the sale and changes in the Board of Directors is available on Form 8-K, filed with the SEC on February 14, 2102 and incorporated by reference
(3) LINE OF CREDIT
The Company has a revolving bank credit line with a limit of $24,300.00 that bears interest at 9.75% per annum and is secured by a personal guarantee of the former Vice-President of the Company. The balance in this account at December 31, 2011 was $23,157 (June 30, 2011 - $23,126). In connection with the change in control described in Note 2 above, the former Vice-President of the Company has assumed the line of credit. Therefore, the balance as of March 31, 2012 was $0.
(4) CONVERTIBLE NOTES
During the year ended June 30, 2011, the Company issued two convertible notes for a total principal of $45,000 and $45,000, respectively. These notes carry an 8% annual interest rate. These convertible notes of $45,000 each have stated terms as the following, convertible at the greater of a fixed conversion price of $.00009 or 55% of lowest average 3 trading price over 10 days preceding the day of the note. In addition, there is a cap on the number of shares convertible under the note to prevent a derivative and these subordinated convertible debentures may have conversion prices that at issuance could be lower than the fair market value of the underlying stock.
In addition, the Company recognized and measured the embedded beneficial conversion feature present in the convertible debts by allocating a portion of the proceeds equal to the intrinsic value of the feature to additional paid-in-capital. The intrinsic value of the feature was calculated on the commitment date using the effective conversion price of the convertible debt. This intrinsic value is limited to the portion of the proceeds allocated to the convertible debt. This beneficial conversion feature is amortized as a non-cash interest expense from the issuance date of the debenture through the earlier of the stated redemption date, which is nine months from issuance, or conversion into common stock. The amortization was calculated on a quarterly basis using the effective interest method. The offset was a credit to the discount. The notes were discounted $82,506 at issuance for a carrying value of $7,494. During the year ending June 30, 2011, the notes were accreted $67,366 and have a balance as of June 30, 2011 of $64,860. During the nine months ended March 31, 2012, the remaining $15,140 was accreted.
During the nine months ended March 31, 2012, the convertible notes were refinanced into a single convertible note and additional principal of $40,750 was advanced to the Company. The new note carries an interest rate of 8% and matures on December 21, 2012. The principal balance as of March 31, 2012 is $120,750.
During the year ended June 30, 2011, the company issued non-convertible promissory notes in the amount of $325,000. There were three notes and they were denominated in the amounts of $25,000, $100,000, and $200,000. The note with a face value of $25,000 is due on August 13, 2011 and accrues interest of 12%. The notes with face values of $100,000 and $200,000 are due on December 14, 2011 and accrue interest of 12%. The notes were extended in January 2012 and mature June 30, 2012. As of March 31, 2012, the principal balance owed is $325,000.
The Company did not sell any of its inventory during the quarter ended March 31, 2012. The last sale occurred in November 2011. There is substantial doubt as to the amount, if any, the Company may realize on the sale of the remaining inventory. Consequently, Management has determined that the carrying value of the Company’s inventory should be impaired. For the quarter ended March 31, 2012, the Company recorded an impairment expense related to inventory of $266,387. The carrying value of inventory on the Company’s balance sheet as of March 31, 2012 is $0.
Additionally, the Company recorded an impairment expense of $4,528 related to the remaining book value of the Company’s depreciable equipment. The book value of equipment on the Company’s balance sheet as of March 31, 2012 is $0.
(6) COMMON STOCK
On September 17, 2011, the Company settled debt of $4,000 by issuing 4,000,000 shares of stock at the fair market value of the date of grant, valued at $14,800. This resulted in a loss of $10,800.
(7) RELATED PARTY TRANSACTIONS
One of the shareholders who acquired the stock from former shareholders as described in Note 2 above was the holder of the promissory notes described in Note 4 above.
During the nine months ended March 31, 2012, the Company paid rent of $Nil (2010: $3,000) to the former President of the Company. As of March 31, 2012 the Company owes $12,500 to the former President of the Company.
During the nine months ended March 31, 2012, the Company incurred rent of $Nil (2010: $3,000) to the Secretary and Treasurer of the Company. As of March 31, 2012, the Company owes $2,194 to the former Secretary and Treasurer of the Company.
At March 31, 2012, the Company owes $1,961 to a former director of the Company.
The company is not aware of any material pending or threatened litigation through the date of these financial statements. On January 13, 2012, a mediation involving the Company and a stocking dealer was concluded. The stocking dealer had purchased inventory from the Company, but had subsequently refused delivery and demanded a refund. The mediator held that the Company is required to deliver inventory of equal value to the stocking dealer.
(9) SUBSEQUENT EVENTS
On April 24, 2012, the Board of Directors approved and recommended the shareholders of the Company approve a 500:1 reverse stock split of the Company’s common stock. The reverse split was subsequently approved by a majority of the shareholders. Immediately prior to the stock split there were 91,823,982 shares of common stock issued and outstanding. Immediately after the reverse split, there were 183,661 shares of common stock issued and outstanding.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
You should read the following discussion and analysis in conjunction with our unaudited condensed consolidated financial statements and the related notes thereto contained elsewhere in this report. The information contained in this quarterly report on Form 10-Q is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the Securities and Exchange Commission, or SEC, including our annual report on Form 10-K for the year ended June 30, 2011 and subsequent reports on Form 8-K, which discuss our business in greater detail.
In this report we make, and from time to time we otherwise make, written and oral statements regarding our business and prospects, such as projections of future performance, statements of management’s plans and objectives, forecasts of market trends, and other matters that are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Statements containing the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimates,” “projects,” “believes,” “expects,” “anticipates,” “intends,” “target,” “goal,” “plans,” “objective,” “should” or similar expressions identify forward-looking statements, which may appear in documents, reports, filings with the Securities and Exchange Commission, news releases, written or oral presentations made by officers or other representatives made by us to analysts, stockholders, investors, news organizations and others, and discussions with management and other of our representatives. For such statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
Our future results, including results related to forward-looking statements, involve a number of risks and uncertainties. Such risks and uncertainties include, but are not limited to, changes in local, regional, and national economic and political conditions, the effect of governmental regulation, competitive market conditions, our ability to obtain additional financing, and other risks detailed herein and from time to time in our SEC reports. No assurance can be given that the results reflected in any forward-looking statements will be achieved. Any forward-looking statement speaks only as of the date on which such statement is made.
Overview of Our Business
We were incorporated under the name “Laburnum Ventures Inc.” on March 11, 2004, under the laws of the State of Nevada. Until recently, we were a pre-exploration stage company engaged in the acquisition and exploration of mineral properties. We formerly owned a 100% undivided interest in a mineral property located in the Province of British Columbia, Canada known as the Sum Mineral Claim, but we decided not to pursue this claim.
On July 21, 2009, we entered into a share exchange agreement (the “Original Share Exchange Agreement”) with AGR Stone & Tools USA, Inc., a private Texas company (“AGR USA”). Pursuant to the terms of the Original Share Exchange Agreement, we agreed to acquire all of the outstanding shares of AGR USA from its shareholders in exchange for our shares on a one-for-one basis, which, if completed, would result in AGR USA becoming our wholly owned subsidiary.
On September 15, 2009, in contemplation of the completion of the share exchange with AGR USA, we completed a name change from Laburnum Ventures Inc. to AGR Tools, Inc. in accordance with Nevada law.
On October 29, 2009, pursuant to the terms of the Original Share Exchange Agreement, we agreed to terminate the Original Share Exchange Agreement with AGR USA and enter into a new share exchange agreement (the “New Share Exchange Agreement”). Under the New Share Exchange Agreement, we agreed to carry out the exchange of shares with the shareholders of AGR USA through a statutory process pursuant to Part 5 of the Texas Business Corporation Act in order to effect the transaction in a more efficient manner.
The closing of the transactions contemplated by the New Share Exchange Agreement occurred on May 27, 2010, at which time AGR USA became our wholly-owned operating subsidiary and we adopted the business of AGR USA. In connection with the closing, we issued 46,186,516 shares of our common stock to the shareholders of AGR USA and our former sole officer and director, Thomas Brown, cancelled 25,000,000 shares of our common stock held in his name.
In January 2012, our directors and officers resigned from the Company and sold all of their shares of the Company to third parties, resulting in a change of ownership of approximately 43.85% of the outstanding shares of common stock of the Company. The resignations were voluntary and did not involve a disagreement with the Company on any matters relating to the Company’s operations, policies or practice. A new director was concurrently appointed by the departing board members to fill the resulting vacancies pursuant to NRS § 78.130 and the sole board member subsequently appointed a new officer to fill all vacant positions.
We are a Texas-based company in the business of manufacturing and selling tooling and accessories to the construction, building, maintenance and demolition industries in the United States and Canada. Tooling is the consumable disposal portion of a tool that makes the tool work. It wears out as the tool is operated, and as a result, demand for our products is driven by the need for original and replacement tool parts, not the tools themselves. We currently sell more than 700 products through our stocking dealer network, which consists of dealers in 15 U.S. states and two Canadian provinces. Our products include diamond-based blades, diamond drill bits, diamond cup wheels, resin polyesters, glues, inks, resin-based waterproof grinding stones and diamond polishing pads, all of which are manufactured in a number of different sizes.
Our products are manufactured in China on a contract basis and we subject the manufacturers to strict standards. We field-test the products by using them in construction, building and demolition projects. We also test our products alongside the products of our competitors both in the field and in our testing facility. All of our products are accompanied by a warranty against defects in workmanship.
We currently focus on sales through our stocking dealers. We also sell a number of our products through our website, which are delivered to customers either through our storage centers or our stocking dealers. Our stocking dealers act as face-to-face contacts for our customers and provide support to one another by sharing order fulfillment with our storage centers. We train and provide training manuals to our stocking dealers and require each one to be familiar with at least 200 of our products during their initial training. We currently do not have brokers or commission sales representatives involved in the distribution of our products.
Results of Operations
The following discussion and analysis of our results of operations and financial condition for the three months ended March 31, 2012 should be read in conjunction with our interim financial statements and related notes included in this quarterly report, as well as our most recent annual report on Form 10-K.
Three Months Ended March 31, 2012 Compared to Three Months Ended March 31, 2011
We generated revenue of $0 during the three months ended March 31, 2012, compared to revenue of $59,192 during the three months ended March 31, 2011.
Our cost of goods sold decreased to $0 in the three months ended March 31, 2012 from $32,604 in the prior period. Consequently, we yielded gross profit of $0 during the three months ended March 31, 2012, compared to gross profit of $26,588 during the three months ended March 31, 2011.
During the three months ended March 31, 2012, our total operating expenses were $270,552 compared to $84,240 during the prior period. The increase in operating expenses was primarily driven by impairment expenses related to the write down of inventory.
We incurred a loss from our operations of $270,552 during the three months ended March 31, 2012, compared to a loss from operations of $57,652 during the three months ended March 31, 2011.
Our total other income during the three months ended March 31, 2012 was $20,484 compared to total other expenses of $33,398 during the prior period.
During the three months ended March 31, 2012, we incurred a net loss of $25,068. During the three months ended March 31, 2011, we incurred a net loss of $91,050.
Nine Months Ended March 31, 2012 Compared to Nine Months Ended March 31, 2011
We generated revenue of $67,313 during the nine months ended March 31, 2012, compared to revenue of $375,353 during the nine months ended March 31, 2011. The decrease in revenue was primarily due to a decrease in overall activity in the construction, building and demolition industries in the United States and Canada during the most recent fiscal year.
Our cost of goods sold decreased to $40,953 in the nine months ended March 31, 2012 from $216,381 in the prior period as a result of the decrease in overall activity in the construction, building and demolition industries in the United States and Canada during the most recent fiscal year. Consequently, we yielded gross profit of $23,360 during the nine months ended March 31, 2012, compared to gross profit of $156,972 during the nine months ended March 31, 2012.
During the nine months ended March 31, 2012, our total operating expenses increased to $357,193 from $318,603 during the prior period. The increase in operating expense was primarily due to impairment expense related to the write-down of inventory.
We incurred a loss from our operations of $330,833 during the nine months ended March 31, 2012, compared to a loss from operations of $159,631 during the nine months ended March 31, 2011.
Our total other expenses during the nine months ended March 31, 2012 were $26,143 compared to $50,465 during the prior period.
During the nine months ended March 31, 2012, we incurred a net loss of $356,976. During the nine months ended March 31, 2011, we incurred a net loss of $210,096.
Liquidity and Capital Resources
As of March 31, 2012, we had $289 in cash, $3,289 in total assets, $888,416 in total liabilities and a working capital deficit of $885,127. As of March 31, 2012, we had an accumulated deficit of $2,127,695. During the nine months ended March 31, 2012, operating activities used cash of $49,113, compared to $162,030 during the nine months ended March 31, 2011.
Investing activities used cash of $0 in the nine months ended March 31, 2012 and 2011.
Financing activities in the nine months ended March 31, 2012 provided cash of $40,781, compared to $158,772 in the prior period primarily from loans from related parties.
We are currently reviewing our business and are evaluating whether to remain in the business of manufacturing and selling tools and accessories to the construction, building, maintenance and demolition industries. We may or may not exit this business within the next 6 months. In the event we choose to exit the business, we expect to enter a different business and are in the process of evaluating our options and developing our strategy.
We anticipate raising additional funds required to execute our strategy from the sale of equity securities. There can be no assurance that we will be able to secure the necessary financing from the sale of our securities. If we are unable to raise sufficient funds to finance our operations, our business may fail. An investment in our securities involves significant risk and you could lose your entire investment.
Our financial statements for the period ended March 31, 2012 have been prepared on a going concern basis and Note 2 to the financial statements identifies issues that raise substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Off-Balance Sheet Arrangements
We have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to stockholders.
Critical Accounting Estimates
Our discussion and analysis of our financial condition and results of operations are based upon consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at year-end and the reported amounts of revenues and expenses during the year. We base our estimates on historical experience and various other assumptions that we believe are reasonable; however, actual results may differ.
Certain accounting estimates are considered to be critical if (a) the nature of the estimates and assumptions is material due to the level of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to changes; and (b) the impact of the estimates and assumptions on financial condition or operating performance is material.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As a “smaller reporting company” defined in Item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this item.
ITEM 4T. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as defined in Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management, including our Chief Executive Officer, as appropriate to allow timely decisions regarding required disclosure.
As of the end of the period covered by this report, our management, with the participation of our sole officer serving as the Chief Executive Officer and acting Chief Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures. Based upon this evaluation, our Chief Executive Officer/acting Chief Financial Officer concluded that our disclosure controls and procedures were not effective to ensure that information we are required to disclose in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms due to the following deficiencies:
In light of the existence of these control deficiencies, our management concluded that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis by our internal controls.
Management is currently evaluating remediation plans for the above control deficiencies. Management plans to enhance our risk assessment, internal control design and documentation and implement other procedures in the internal control function.
Changes in Internal Control
Other than as described above, during the three months ended March 31, 2012, there were no changes in our internal control over financial reporting (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act) that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We are not a party to any material pending legal proceedings and are not aware of any legal proceedings that have been threatened against us. None of our directors, officers, affiliates, any owner of record or beneficially of more than 5% of our voting securities, or any associate of any such director, officer, affiliate or security holder are (i) a party adverse to us in any legal proceedings, or (ii) have a material interest adverse to us in any legal proceedings.
On January 13, 2012, a mediation involving the Company and a stocking dealer was concluded. The stocking dealer had purchased inventory from the Company, but had subsequently refused delivery and demanded a refund. The mediator held that the Company is required to deliver inventory of equal value to the stocking dealer.
ITEM 1A. RISK FACTORS.
As a “smaller reporting company” defined in Item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this item.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
ITEM 4. (REMOVED AND RESERVED).
ITEM 5. OTHER INFORMATION.
ITEM 6. EXHIBITS.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.