AMERICAN LOCKER GROUP INC - FORM 10-Q

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EXCEL - IDEA: XBRL DOCUMENT - AMERICAN LOCKER GROUP INC	Financial_Report.xls
EX-31 - EXHIBIT 31.1 - AMERICAN LOCKER GROUP INC	ex31-1.htm
EX-10 - EXHIBIT 10.2 - AMERICAN LOCKER GROUP INC	ex10-2.htm
EX-31 - EXHIBIT 31.2 - AMERICAN LOCKER GROUP INC	ex31-2.htm
EX-3 - EXHIBIT 3.1 - AMERICAN LOCKER GROUP INC	ex3-1.htm
EX-32 - EXHIBIT 32.1 - AMERICAN LOCKER GROUP INC	ex32-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

X	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2014

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from ____________ to ____________

Commission File Number: 0-439

American Locker Group Incorporated

(Exact name of registrant as specified in its charter)

Delaware		16-0338330
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

2701 Regent Blvd., Suite 200 DFW Airport, TX		75261
(Address of principal executive offices)		(Zip code)

(817) 329-1600

(Registrant’s telephone number, including area code)

None

(Former name, former address and former fiscal year, if changed since last report)

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 [ X ] No [ ]

Indicated by a 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 a shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]

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 definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer [ ]	Accelerated filer [ ]	Non-accelerated filer [ ]	Smaller Reporting Company [ X ]
	(Do not check if a 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 [ X ]

Indicate the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 1,687,319 shares of common stock, par value $1.00, issued and outstanding as of August 14, 2014.

TABLE OF CONTENTS

	Page No.

FORWARD-LOOKING INFORMATION	3

PART I — FINANCIAL INFORMATION	3
Item 1. Financial Statements	3
Consolidated Balance Sheets as of June 30, 2014 (Unaudited) and December 31, 2013	4
Consolidated Statements of Operations (Unaudited) for the Six Months Ended June 30, 2014 and 2013	6
Consolidated Statements of Operations (Unaudited) for the Three Months Ended June 30, 2014 and 2013	7
Consolidated Statements of Comprehensive Loss (Unaudited) for the Six and Three Months Ended June 30, 2014 and 2013	8
Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2014 and 2013	9
Notes to Consolidated Financial Statements	10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3. Quantitative and Qualitative Disclosures About Market Risk	20
Item 4. Controls and Procedures	21

PART II — OTHER INFORMATION	21
Item 1. Legal Proceedings	21
Item 1A. Risk Factors	21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	21
Item 3. Defaults Upon Senior Securities	21
Item 4. Mine Safety Disclosure	21
Item 5. Other Information	22
Item 6. Exhibits	23

SIGNATURES	24
EX-3.1
EX-10.1
EX-10.2
EX-31.1
EX-31.2
EX-32.1
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT

FORWARD-LOOKING INFORMATION

This Quarterly Report on Form 10-Q for American Locker Group Incorporated (the “Company”) contains various “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve certain known and unknown risks and uncertainties, including, among others, those contained in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” When used in this Quarterly Report on Form 10-Q, the words “anticipates,” “plans,” “believes,” “estimates,” “intends,” “expects,” “projects,” “will” and similar expressions may identify forward-looking statements, although not all forward-looking statements contain such words. Such statements, including, but not limited to, the Company’s statements regarding business strategy, competition, new product development, liquidity and capital resources are based on management’s beliefs, as well as on assumptions made by, and information currently available to, management, and involve various risks and uncertainties, some of which are beyond the Company’s control. The Company’s actual results could differ materially from those expressed in any forward-looking statement made by or on the Company’s behalf. In light of these risks and uncertainties, there can be no assurance that the forward-looking information will in fact prove to be accurate. The Company has undertaken no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

The interim consolidated financial statements included herein are unaudited but reflect, in management’s opinion, all adjustments, consisting only of normal recurring adjustments necessary for a fair presentation of our financial position and the results of our operations for the interim periods presented.

The interim consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements, and notes thereto, for the year ended December 31, 2013 presented in the Company’s Annual Report on Form 10-K that was filed with the Securities and Exchange Commission (the “SEC”) on April 10, 2014.

Interim results are not necessarily indicative of results for the full fiscal year.

American Locker Group Incorporated and Subsidiaries

Consolidated Balance Sheets

	June 30,			December 31,
	2014 (Unaudited)			2013

Assets
Current assets:
Cash and cash equivalents	$	129,238		$	279,288
Accounts receivable, less allowance for doubtful accounts of approximately $145,000 in 2014 and $199,000 in 2013		2,361,199			2,097,644
Inventories, net		3,353,030			2,738,813
Prepaid expenses		491,225			299,730
Total current assets		6,334,692			5,415,475

Property, plant and equipment:
Buildings and leasehold improvements		456,333			552,561
Machinery and equipment		10,521,425			12,089,799
		10,977,758			12,642,360
Less allowance for depreciation and amortization		(8,452,428	)		(9,226,076	)
		2,525,330			3,416,284
Other noncurrent assets		191,465			123,856

Total assets	$	9,051,487		$	8,955,615

The accompanying notes are an integral part of these consolidated financial statements.

American Locker Group Incorporated and Subsidiaries

Consolidated Balance Sheets (continued)

	June 30,			December 31,
	2014 (Unaudited)			2013
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	2,943,024		$	2,496,331
Customer deposits		280,206			216,107
Commissions, salaries, wages, and taxes thereon		160,684			77,101
Income taxes payable		4,011			5,326
Revolving line of credit		2,164,569			1,580,611
Current portion of long-term debt		240,000			240,000
Note payable to related party		200,000			200,000
Current portion of capital lease obligation		14,287			13,883
Accrued settlement, current portion		-			156,000
Other accrued expenses		982,421			660,771
Total current liabilities		6,989,202			5,646,130

Long-term liabilities:
Long-term debt, net of current portion		680,000			920,000
Capital lease obligation, net of current portion		52,522			59,768
Accrued settlement, net of current portion		-			130,000
Pension and other benefits		1,192,372			1,274,173
		1,924,894			2,383,941

Total liabilities		8,914,096			8,030,071

Commitments and contingencies (Note 9)

Stockholders’ equity:
Series C redeemable, convertible preferred stock, $1.00 par value: Liquidation preference of $5 per share Authorized shares - 100,000 Issued and outstanding shares - 60,000 in 2014 and 60,000 in 2013		300,000			300,000
Common stock, $1.00 par value: Authorized shares – 4,000,000 Issued shares – 1,879,319 in 2014 and 1,879,319 in 2013; Outstanding shares – 1,687,319 in 2014 and 1,687,319 in 2013		1,879,319			1,879,319
Other capital		271,381			271,381
Retained earnings		765,953			1,565,134
Treasury stock at cost, 192,000 shares		(2,112,000	)		(2,112,000	)
Accumulated other comprehensive loss		(967,262	)		(978,290	)
Total stockholders’ equity		137,391			925,544

Total liabilities and stockholders’ equity	$	9,051,487		$	8,955,615

The accompanying notes are an integral part of these consolidated financial statements.

American Locker Group Incorporated and Subsidiaries

Consolidated Statements of Operations

(Unaudited)

	Six months ended June 30,
	2014			2013


Net sales	$	6,172,263		$	7,242,772

Cost of products sold		5,363,515			5,488,321
Gross profit		808,748			1,754,451

Selling, general and administrative expenses		2,132,204			2,518,784
Settlement expense		-			441,583

Total operating loss		(1,323,456	)		(1,205,916	)

Other income (expense):
Gain on sale of property		703,439			-
Interest income		-			18,747
Other expense – net		(18,007	)		(22,254	)
Interest expense		(146,607	)		(54,806	)
Total other income (expense)		538,825			(58,313	)
Loss before income taxes		(784,631	)		(1,264,229	)
Income tax expense		(9,211	)		(12,385	)
Net loss		(793,842	)		(1,276,614	)
Provision for preferred stock dividends		(8,926	)		-
Net loss applicable to common shareholders	$	(802,768	)	$	(1,276,614	)

Weighted average common shares:
Basic		1,687,319			1,687,319

Diluted		1,687,319			1,687,319

Net loss per share applicable to common shareholders:
Basic	$	(0.48	)	$	(0.76	)

Diluted	$	(0.48	)	$	(0.76	)

The accompanying notes are an integral part of these consolidated financial statements.

American Locker Group Incorporated and Subsidiaries

Consolidated Statements of Operations

(Unaudited)

	Three months ended June 30,
	2014			2013


Net sales	$	3,338,054		$	4,088,285

Cost of products sold		2,863,561			2,931,050
Gross profit		474,493			1,157,235

Selling, general and administrative expenses		1,126,978			1,363,289

Total operating loss		(652,485	)		(206,054	)

Other income (expense):
Other income (expense) – net		(9,161	)		(20,402	)
Interest expense		(77,554	)		(28,083	)
Total other income		(86,715	)		(48,485	)
Net loss before income taxes		(739,200	)		(254,539	)
Income tax expense		(4,722	)		(8,445	)
Net loss		(743,922	)		(262,984	)
Provision for preferred stock dividends		(4,488	)		-
Net loss applicable to common shareholders	$	(748,410	)	$	(262,984	)

Weighted average common shares:
Basic		1,687,319			1,687,319

Diluted		1,687,319			1,687,319

Net loss per share applicable to common shareholders:
Basic	$	(0.44	)	$	(0.16	)

Diluted	$	(0.44	)	$	(0.16	)

The accompanying notes are an integral part of these consolidated financial statements.

American Locker Group Incorporated and Subsidiaries

Consolidated Statements of Comprehensive Loss

(Unaudited)

	Six months ended June 30,
	2014			2013

Net loss	$	(793,842	)	$	(1,276,614	)
Other comprehensive income (loss):
Foreign currency translation adjustment		11,896			(45,357	)
Adjustment to minimum pension liability, net of tax effect of $0 in 2014 and $8,970 in 2013		(868	)		22,782
Other comprehensive income (loss)		11,028			(22,575	)
Total comprehensive loss	$	(782,814	)	$	(1,299,189	)

	Three months ended June 30,
	2014			2013

Net loss	$	(743,922	)	$	(262,984	)
Other comprehensive income (loss):
Foreign currency translation adjustment		8,389			(22,262	)
Adjustment to minimum pension liability, net of tax effect of $0 in 2014 and $5,546 in 2013		(13,111	)		13,858
Other comprehensive income (loss):		(4,722	)		(8,404	)
Total comprehensive loss	$	(748,644	)	$	(271,388	)

The accompanying notes are an integral part of these consolidated financial statements.

American Locker Group Incorporated and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

	Six months ended June 30,
	2014			2013

Operating activities:
Net loss	$	(793,842	)	$	(1,276,614	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		319,555			398,955
Gain on sale of property		(703,439	)		-
Provision for uncollectible accounts		51,956			2,145
Changes in assets and liabilities:
Accounts receivable		(314,748	)		106,635
Inventories		(613,826	)		16,631
Prepaid expenses and other assets		(168,944	)		(218,006	)
Accounts payable, customer deposits, accrued legal settlement (current and long-term) and accrued expenses		753,436			652,664
Pension and other benefits		(81,424	)		12,152
Income taxes		(1,315	)		7,184
Net cash used in operating activities		(1,552,591	)		(298,254	)

Investing activities:
Purchase of property, plant and equipment		(68,984	)		(50,604	)
Proceeds from sale of property		1,128,075			-
Net cash provided by (used in) investing activities		1,059,091			(50,604	)

Financing activities:
Long-term debt payments to Bank of America Merrill Lynch		-			(100,000	)
Long-term debt borrowings from Bank of America Merrill Lynch		-			150,000
Long-term debt payments to Triumph Commercial Finance		(240,000	)		-
Borrowings on line of credit with Bank of America Merrill Lynch		-			220,000
Borrowings on line of credit with Triumph Commercial Finance		583,958			-
Payment of capital lease obligation		(6,842	)		-
Payment of preferred stock dividends		(5,339	)		-
Net cash provided by financing activities		331,777			270,000
Effect of exchange rate changes on cash		11,673			(16,214	)
Net decrease in cash and cash equivalents		(150,050	)		(95,072	)
Cash and cash equivalents at beginning of period		279,288			413,353
Cash and cash equivalents at end of period	$	129,238		$	318,281

Supplemental cash flow information:
Cash paid for:
Interest	$	115,248		$	54,766
Income taxes	$	10,241		$	5,606

The accompanying notes are an integral part of these consolidated financial statements.

American Locker Group Incorporated and Subsidiaries

Notes to Consolidated Financial Statements

1. Basis of Presentation

The accompanying unaudited consolidated financial statements of American Locker Group Incorporated (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q. Accordingly, the financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of the Company’s management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation of such consolidated financial statements, have been included. Operating results for the six and three months ended June 30, 2014 are not necessarily indicative of the results that may be expected for the year ended December 31, 2014.

The consolidated balance sheet at December 31, 2013 has been derived from the Company’s audited financial statements at that date, but does not include all of the financial information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the Company’s consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 (the “2013 Annual Report”).

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. As a result of the Company’s recurring losses from operations and working capital deficiency at December 31, 2013, the Report of Independent Registered Public Accounting Firm on the financial statements of the Company as of and for the year ended December 31, 2013 included in the 2013 Annual Report contained an explanatory paragraph expressing substantial doubt about the Company’s ability to continue as a going concern. Management’s plans to address the liquidity and working capital needs of the Company were included in Note 1 of the Notes to Consolidated Financial Statements presented in the 2013 Annual Report. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Additional risks and uncertainties not presently known or that the Company currently deems immaterial may also impair its business operations. Should one or more of these risks or uncertainties materialize, the Company’s business, financial condition or results of operations could be materially adversely affected.

Effect of New Accounting Guidance

In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. Under this guidance, an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward. This update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Adoption of this new guidance did not have a significant impact on the Company’s consolidated financial statements.

In May 2014, as part of its ongoing efforts to assist in the convergence of U.S. GAAP and International Financial Reporting Standards, FASB issued ASU 2014-09, Revenue from Contracts with Customers. The new guidance sets forth a new five-step revenue recognition model which replaces the prior revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue recognition guidance that have historically existed in U.S. GAAP. The underlying principle of the new standard is that a business or other organization will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or services. The standard also requires more detailed disclosures and provides additional guidance for transactions that were not addressed completely in the prior accounting guidance. ASU 2014-09 provides alternative methods of initial adoption and is effective for annual and interim periods beginning after December 15, 2016. We are currently evaluating the impact that this standard will have on our consolidated financial statements.

2. Concession Agreement and Disposition of Assets

In 2010, the Company entered into a five-year agreement with a large theme-park operator to provide approximately 4,300 lockers under a locker concession arrangement. The Company retained ownership of the lockers and received a portion of the revenue generated by the locker operations. Under appropriate accounting guidance, the Company capitalized its costs related to the concession agreement and was depreciating such costs over the five-year term of the agreement. The Company recognized its portion of the revenue as it was collected.

In February 2014, the Company sold the lockers, kiosks and other assets related to that locker concession arrangement to a third party and entered into a subcontract agreement pursuant to which the third party agreed to perform the locker concession and management services previously performed by the Company for the theme-park operator in exchange for the right to receive all of the payments owed to the Company under such arrangement. The Company received $1,218,075 in total consideration for the disposition of these assets. Net of a holdback amount of $90,000, the Company received proceeds of $1,128,075 at closing of which $120,000 was used to make a principal payment on the Company’s outstanding term loan (see Note 8) and the remainder was used for working capital and general corporate purposes. Additionally, in connection with the sale of these assets, the Company and the third party agreed to an amendment to a settlement agreement previously executed between the two parties (see Note 9) whereby payments the Company had been making to the third party pursuant to the settlement agreement were eliminated. Accordingly, the Company wrote-off the outstanding balance of its accrued settlement of $273,000 and recorded a gain, net of selling costs, of $703,439 in February 2014 in connection with the sale of the locker concession assets and amendment to the settlement agreement.

3. Inventories

Inventories are valued at the lower of cost or market value. Cost is determined using the first-in first-out method (FIFO).

Inventories consist of the following:

	June 30, 2014		December 31, 2013
Finished products	$	428,066	$	373,281
Work-in-process		859,839		817,456
Raw materials		2,065,125		1,548,076
Net Inventories	$	3,353,030	$	2,738,813

4. Income Taxes

Provision for income taxes is based upon the estimated annual effective income tax rate. The Company’s effective income tax rate was approximately (1.2)% and (1.0)% for the six months ended June 30, 2014 and 2013, respectively. For the six months ended June 30, 2014, the effective income tax rate differs significantly from the statutory rate primarily due to an increase in the deferred tax asset valuation allowance of approximately $158,000, as well as permanent timing differences between expenses recorded for financial and tax reporting. For the six months ended June 30, 2013, the effective income tax rate differs significantly from the statutory rate primarily due to an increase in the deferred tax asset valuation allowance of approximately $464,000, as well as permanent timing differences between expenses recorded for financial and tax reporting. Although the Company reported a pre-tax loss in the six months ended June 30, 2014 and 2013, it was unable to record a tax benefit in either period due to corresponding changes in the deferred tax asset valuation allowance, causing the effective income tax rate to be negative.

5. Stockholders’ Equity

The Company did not issue any shares of common stock or preferred stock in the first six months of 2014 or in the first six months of 2013.

6. Pension Benefits

The following sets forth the components of net periodic employee benefit cost of the Company’s defined benefit pension plans for the six months and three months ended June 30, 2014 and 2013:

	Six months ended June 30,
	Pension Benefits
	U.S. Plan						Canadian Plan
	2014			2013			2014			2013
Service Cost	$	-		$	-		$	-		$	-
Interest Cost		(76,231	)		116,343			28,319			26,189
Expected return on plan assets		77,850			(125,410	)		(33,700	)		(35,219	)
Net actuarial loss		22,890			-			15,368			18,764
Amortizations		-			79,218			-			-
Net periodic benefit cost	$	24,509		$	70,151		$	9,987		$	9,734

	Three months ended June 30,
	Pension Benefits
	U.S. Plan						Canadian Plan
	2014			2013			2014			2013
Service Cost	$	-		$	-		$	-		$	-
Interest Cost		(38,116	)		53,237			14,233			12,588
Expected return on plan assets		38,925			(57,386	)		(16,938	)		(16,929	)
Net actuarial loss		11,445			-			7,724			9,019
Amortizations		-			36,249			-			-
Net periodic benefit cost	$	12,254		$	32,100		$	5,019		$	4,678

The Company has frozen the accrual of any additional benefits under the U.S. defined benefit pension plan effective July 15, 2005.

Effective January 1, 2009, the Company converted its pension plan for its Canadian employees (the “Canadian Plan”) from a noncontributory defined benefit plan to a defined contribution plan. Until the conversion, benefits for the salaried employees were based on specified percentages of the employees’ monthly compensation. The conversion of the Canadian Plan has the effect of freezing the accrual of future defined benefits under the plan. Under the defined contribution plan, the Company will contribute 3% of employee compensation plus 50% of employee elective contributions up to a maximum contribution of 5% of employee compensation.

The Fair Value Measurements and Disclosure Topic of the FASB Accounting Standards Codification requires the categorization of financial assets and liabilities, based on the inputs to the valuation technique, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to the quoted prices in active markets for identical assets and liabilities and lowest priority to unobservable inputs. The various values of the Fair Value Measurements and Disclosure Topic fair value hierarchy are described as follows:

Level 1 — Financial assets and liabilities whose values are based on unadjusted quoted market prices for identical assets and liabilities in an active market that the Company has the ability to access.

Level 2 — Financial assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable for substantially the full term of the asset or liability.

Level 3 — Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement.

The fair value hierarchy of the plan assets are as follows:

		June 30, 2014
		US Plan		Canadian Plan
Cash and cash equivalents	Level 1	$	68,534	$	22,351
Mutual funds	Level 1		235,903		1,052,498
Corporate/Government Bonds	Level 1		623,364		-
Equities	Level 1		1,105,218		-
Total		$	2,033,019	$	1,074,849

US pension plan assets are invested solely in pooled separate account funds. The net asset values of the pooled separate account funds are based on the value of the underlying assets owned by the fund, minus its liabilities, and then divided by the number of units outstanding. The unit prices of the pooled separate account funds are not quoted on any market; however, the unit price is based on the underlying investments which are traded in an active market and are priced by independent providers. There have been no significant transfers in or out of Level 1 fair value measurements.

For additional information on the defined benefit pension plans, please refer to Note 10 of the consolidated financial statements included in the 2013 Annual Report.

7. Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per common share for the six and three months ended June 30, 2014 and 2013:

	Six months ended June 30,
	2014			2013
Numerator:
Net loss applicable to common shareholders	$	(802,768	)	$	(1,276,614	)
Denominator:
Denominator for earnings per share (basic and diluted) ― weighted average shares		1,687,319			1,687,319
Net loss per share applicable to common shareholders (basic and diluted):	$	(0.48	)	$	(0.76	)

	Three months ended June 30,
	2014			2013
Numerator:
Net loss applicable to common shareholders	$	(748,410	)	$	(262,984	)
Denominator:
Denominator for earnings per share (basic and diluted) ― weighted average shares		1,687,319			1,687,319
Net loss per share applicable to common shareholders (basic and diluted):	$	(0.44	)	$	(0.16	)

The Company had 12,000 stock options outstanding at June 30, 2013 which were not included in the weighted average shares computation for loss per share, as the common stock equivalents were anti-dilutive. The weighted average shares computation for loss per share at June 30, 2014 excludes preferred stock convertible into 150,752 shares of common stock because those common stock equivalents were anti-dilutive.

8. Debt

The Company had previously entered into a credit agreement with Bank of America Merrill Lynch (“BAML”), pursuant to which it obtained a $1 million term loan, a $2.5 million revolving line of credit and a $500,000 draw note. The credit agreement contained certain covenants with which the Company was required to comply, including a debt service coverage ratio and a funded debt-to-EBITDA ratio. For the quarters ended March 31, 2013 and June 30, 2013, the Company was not in compliance with either covenant. On September 13, 2013, the Company entered into a Forbearance Agreement with BAML pursuant to which BAML agreed to waive the Company’s obligation to meet these financial covenants and forbear from enforcing its remedies against the Company with respect to such failure through November 30, 2013. On September 30, 2013, the Company terminated the credit agreement with BAML and repaid in full all of the borrowings under these credit facilities.

On September 30, 2013, the Company and its subsidiaries, Security Manufacturing Corporation and American Locker Security Systems, Inc., entered into a Loan Agreement (the “Loan Agreement”) with Triumph Savings Bank, SSB (d/b/a Triumph Commercial Finance) (the “Lender”). The Loan Agreement provides for a $2.8 million revolving credit facility (the “Revolver”) and a $1.2 million term loan facility (the “Term Loan”). The Company initially borrowed approximately $1.7 million on the Revolver and $1.2 million on the Term Loan. The Company used these proceeds to repay in full the outstanding indebtedness under the Company’s prior credit facilities and equipment leases with BAML and for working capital and general corporate purposes.

The Revolver matures on September 30, 2016 and the Lender may, in its sole discretion, extend the maturity of the Revolver for a period of one year, and may further extend the Revolver for one-year periods thereafter. Available borrowings under the Revolver are limited to a borrowing base of 85% of eligible trade receivables plus 50% of eligible inventory (capped at $1,000,000) less any availability reserves established by the Lender. The interest rate on the Revolver is 3.50% plus the greater of (a) the U.S. prime rate as published in The Wall Street Journal or (b) 3.25%.

The Term Loan is payable in equal monthly installments based on a 60-month amortization schedule. All unpaid principal on the Term Loan is due and payable on September 30, 2016, the maturity date. The interest rate on the Term Loan is 4.00% plus the greater of (a) the U.S. prime rate as published in The Wall Street Journal or (b) 3.25%. In the event of a default under the Loan Agreement, the Revolver and the Term Loan will each bear interest at the applicable rate plus an additional 2.00%.

The Company will pay the Lender an annual facility fee of $30,000 in the first year and, thereafter, an annual facility fee of 0.75% of the Revolver amount. In addition, the Company will pay the Lender a monthly unused line fee equal to 0.50% per annum of the average daily unused portion of the Revolver for the preceding month. In the event the Company desires to terminate the Loan Agreement and prepay in full the amounts outstanding under the Revolver and the Term Loan, it will pay a termination fee equal to $120,000 if terminated before September 30, 2014, $80,000 if terminated after September 30, 2014 but before September 30, 2015, and $40,000 if terminated after September 30, 2015 but before September 30, 2016.

The credit facilities under the Loan Agreement are secured by a security interest in substantially all of the assets of the Company, and its subsidiaries Security Manufacturing Corporation and American Locker Security Systems, Inc., including a pledge of a portion of the stock of Canadian Locker Company Limited, a subsidiary of American Locker Security Systems, Inc., and each is jointly and severally liable for all borrowings under the Loan Agreement. Unless otherwise approved by the Lender, the Company is required to use the net cash proceeds from any asset disposition or the issuance of equity securities (excluding issuances to employees or another borrower) or debt securities to prepay, first, the Term Loan and, if any proceeds remain, to pay down the Revolver. The Company received approval from the Lender to use net proceeds from a preferred stock issuance completed subsequent to June 30, 2014 to pay down the Revolver (see Note 10 for further disclosure of the preferred stock issuance).

The Loan Agreement includes various representations, warranties, affirmative and negative covenants, events of default, remedies and other provisions customary for a transaction of this nature. In addition, the Company is required to comply with certain financial covenants on a monthly basis, including a maximum debt to tangible net worth ratio, a minimum fixed charge ratio and a minimum tangible net worth. For the months ended December 31, 2013, January 31, 2014, February 28, 2014, and March 31, 2014, the Company was not in compliance with these financial covenants. On April 7, 2014, the Lender waived the Company’s failure to meet these financial covenants and the parties amended the Loan Agreement to modify the ratio of debt to tangible net worth covenant, the fixed charge ratio covenant and the tangible net worth covenant. For the months ended April 30, 2014, May 31, 2014 and June 30, 2014, the Company was not in compliance with the amended financial covenants. On June 11, 2014, the Lender issued to the Company a notice of default and reservation of rights letter in which the Lender notified the Company that it reserves any and all of the rights, privileges and remedies available to it under the Loan Agreement. We can give no assurances that we will be able to comply with the financial covenants, as amended, in future periods and cure the event of default that has occurred as a result of noncompliance with these covenants. If we continue to violate these covenants in future periods and the Lender does not waive the violations or amend the Loan Agreement to reflect covenants with which we could comply, the Lender could demand payment of all balances outstanding under the Loan Agreement. Such action by the Lender would have a material adverse effect on the Company’s ability to continue operations.

On December 10, 2013, the Company executed a Promissory Note (the “Note”), effective as of November 13, 2013, in favor of Anthony B. Johnston, the Company’s Chairman and Chief Executive Officer, in the principal amount of $200,000 to evidence a loan by Mr. Johnston to the Company. The principal balance of the Note, together with accrued but unpaid interest, is due and payable on November 30, 2014. The interest rate on the Note is 6.00% and the Company may prepay the Note at any time and from time to time without premium or penalty. The Note is unsecured and contains event of default provisions that are customary for a transaction of this nature. The Company used the proceeds from the Note for working capital and general corporate purposes.

9. Commitments and Contingencies

In July 2001, the Company received a letter from the New York State Department of Environmental Conservation (the “NYSDEC”) advising the Company that it is a potentially responsible party (“PRP”) with respect to environmental contamination at, and alleged migration from, property located in Gowanda, New York which was sold by the Company to Gowanda Electronics Corporation prior to 1980. In March 2001, the NYSDEC issued a Record of Decision with respect to the Gowanda site in which it set forth a remedy including continued operation of an existing extraction well and air stripper, installation of groundwater pumping wells and a collection trench, construction of a treatment system in a separate building on the site, installation of a reactive iron wall covering 250 linear feet, which is intended to intercept any contaminates and implementation of an on-going monitoring system. The NYSDEC has estimated that its selected remediation plan will cost approximately $688,000 for initial construction and a total of $1,997,000 with respect to expected operation and maintenance expenses over a 30-year period after completion of initial construction. The Company has not conceded to the NYSDEC that the Company is liable with respect to this matter and has not agreed with the NYSDEC that the remediation plan selected by NYSDEC is the most appropriate plan. This matter has not been litigated, and at the present time the Company has only been identified as a PRP. The Company also believes that other parties may have been identified by the NYSDEC as PRPs, and the allocation of financial responsibility of such parties has not been litigated. To the Company’s knowledge, the NYSDEC has not commenced implementation of the remediation plan and has not indicated when construction will start, if ever. Based upon currently available information, the Company is unable to estimate timing with respect to the resolution of this matter. The Company’s primary insurance carrier has assumed the cost of the Company’s defense in this matter, subject to a reservation of rights.

Beginning in September 1998 and continuing through the date of filing of this Quarterly Report on Form 10-Q, the Company has been named as an additional defendant in approximately 241 cases pending in state court in Massachusetts and one in the state of Washington. The plaintiffs in each case assert that a division of the Company manufactured and furnished components containing asbestos to a shipyard during the period from 1948 to 1972 and that injury resulted from exposure to such products. The assets of this division were sold by the Company in 1973. During the process of discovery in certain of these actions, documents from sources outside the Company have been produced that indicate the Company appears to have been included in the chain of title for certain wall panels that contained asbestos and were delivered to the Massachusetts shipyards. Defense of these cases has been assumed by the Company’s insurance carrier, subject to a reservation of rights. Settlement agreements have been entered in approximately 40 cases with funds authorized and provided by the Company’s insurance carrier. Further, over 185 cases have been terminated as to the Company without liability to the Company under Massachusetts procedural rules. Therefore, the balance of unresolved cases against the Company as of June 30, 2014, the most recent date for which information is available, is approximately 16 cases. While the Company cannot estimate potential damages or predict what the ultimate resolution of these asbestos cases may be because the discovery proceedings on the cases are not complete, based upon the Company’s experience to date with similar cases, as well as the assumption that insurance coverage will continue to be provided with respect to these cases, at the present time, the Company does not believe that the outcome of these cases will have a significant adverse impact on the Company’s operations or financial condition.

On February 5, 2013, the Company was notified by one of its customers that certain product purchased by that customer had quality issues. On March 11, 2013, the Company and the customer entered into an agreement whereby the Company agreed to reimburse the customer for reasonable costs and expenses incurred on or before December 31, 2013 by the customer in its efforts to resolve the quality issue. In 2012 and 2013, the Company recorded expense of $50,000 and approximately $114,000, respectively, for costs to be reimbursed to the customer pursuant to the terms of the agreement. In June, 2014, the Company recorded expense of approximately $51,000 for additional expenses incurred by the customer prior to December 31, 2013 that were reimbursed by the Company. As of June 30, 2014, all reimbursements of claims by the customer had been paid.

In March 2012, the Company was named as a defendant in a legal action brought by a competitor (which was also a former customer and supplier) who alleged that the Company and certain other third-party defendants profited improperly from the use of intellectual property developed by such competitor. The Company believed the asserted claims were without merit and that its chances of prevailing without material liability were high. However, due largely to the increasing costs of the ongoing litigation, the Company and the plaintiff entered into a settlement agreement effective as of June 12, 2013. Under the settlement agreement, the Company agreed to pay all outstanding invoices due to the plaintiff from the Company as of the date of the settlement, net of existing amounts due to the Company from the plaintiff, and further to pay license, service and other fees to the plaintiff in return for the plaintiff’s providing maintenance services on lockers distributed to certain of the Company’s customers. At March 31, 2013, the Company recorded an expense of approximately $412,000 related to the settlement, with approximately $377,000 recorded as accrued settlement and approximately $35,000 included in other accrued expenses. The Company was to pay amounts due to the plaintiff under the terms of the settlement agreement over a minimum period of 29 months which began June 1, 2013. In connection with an asset purchase agreement the Company entered into with the plaintiff on February 14, 2014 (see Note 2), the settlement agreement was amended such that, effective as of that date, the Company is no longer required to make monthly settlement payments and will pay only maintenance fees to the plaintiff on a monthly basis over the remainder of the 29-month period which began June 1, 2013.

The Company is involved in other claims and litigation from time to time in the normal course of business. The Company does not believe these matters will have a significant adverse impact on the Company’s operations or financial condition.

10. Subsequent Event

On August 11, 2014, the Company filed a Certificate of Designation with the Secretary of State of the State of Delaware to authorize the issuance of up to 100,000 shares of Series D Preferred Stock and to establish the relative rights, preferences, qualifications, limitations and restrictions of such Series D Preferred Stock. The Certificate of Designation became effective upon such filing. On August 12, 2014, the Company issued 40,000 shares of its newly authorized Series D Preferred Stock to certain accredited investors pursuant to a Purchase Agreement executed with those investors for aggregate consideration of $200,000. Net proceeds from the offering will be used by the Company to fund working capital and for general corporate purposes. Paul Luber and Graeme Jack, each a member of the Company’s board of directors, purchased 5,000 shares each of Series D Preferred Stock for aggregate consideration of $50,000. Anthony Johnston, the Company’s Chairman and Chief Executive Officer, purchased 6,000 shares of Series D Preferred Stock for total consideration of $30,000. A description of the rights, preferences and limitations of the Series D Preferred Stock is set forth in “Part II – Item 5 – Other Information – Amendment to Articles of Incorporation; Material Modifications to Rights of Security Holders” in this Quarterly Report on Form 10-Q.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Business Overview

The Company is a leading manufacturer of lockers and lock and key systems with a wide-range of applications for use in numerous industries. The Company is best known for manufacturing and servicing the widely-utilized key and lock system with the iconic plastic orange cap. The Company serves customers in a variety of industries in all 50 states and in Canada, Mexico, Europe, Asia and South America.

The Company’s products can be categorized as lockers, mailboxes or contract manufacturing services. Most of the Company’s lockers systems are key-controlled checking lockers and these locker systems have occasionally been provided under a concession arrangement in which the Company retains ownership of the lockers and receives a portion of the revenue generated by the locker operations.

The Company also manufactures United States Postal Service approved multi-tenant mailboxes used for the delivery of mail, packages and other parcels to multi-tenant facilities. These mailboxes are typically installed in apartment and commercial buildings.

In addition to its mailbox and locker system operations, the Company offers contract manufacturing services for customers. Contract manufacturing includes precision fabricated sheet metal parts and enclosures provided to original equipment manufacturers and other third-party customers.

Comparison of Results of Operations for the Six Months Ended June 30, 2014 and 2013

Overall Results and Outlook

Consolidated net sales for the first six months of 2014 decreased by $1,070,509 to $6,172,263 as compared to the first six months of 2013, representing a 14.8% decrease. This decrease was primarily attributable to decreases in locker and mailbox revenue partially offset by an increase in contract manufacturing revenue. Pre-tax operating results improved to a pre-tax loss of $784,631 for the first six months of 2014 from pre-tax loss of $1,264,229 for the first six months of 2013. After-tax operating results improved to a net loss of $793,842 for the first six months of 2014 from a net loss of $1,276,614 for the first six months of 2013. Net loss per share (basic and diluted) was $0.48 for the first six months of 2014, a $0.28 improvement from a net loss per share (basic and diluted) of $0.76 for the first six months of 2013.

Net Sales

Consolidated net sales for the six months ended June 30, 2014 were $6,172,263, a decrease of $1,070,509, or 14.8%, compared to net sales of $7,242,772 for the same period of 2013. Sales of lockers for the six months ended June 30, 2014 were $3,640,570, a decrease of $543,750, or 13.0%, compared to locker sales of $4,184,320 for the same period of 2013. The decrease is primarily attributable to the Company’s fulfillment of two large sales orders to an international customer in the first six months of 2013. No such large sales were completed in the first six months of 2014. Also contributing to the decrease were lower locker sales in Canada in the first six months of 2014 as compared to the first six months of 2013.

Sales of mailboxes were $875,526 for the six months ended June 30, 2014, a decrease of $716,507, or 45.0%, compared to mailbox sales of $1,592,033 for the same period of 2013. Decreased mailbox sales in the first six months of 2014 were attributable to the Company’s fulfillment of a large Series 2900 order to the U.S. Postal Service in the first six months of 2013 as well as decreased sales of Horizontal and Horizontal 4C units in the first six months of 2014 as compared to the first six months of 2013.

Sales of contract manufacturing services were $1,381,211 for the six months ended June 30, 2014 compared to $810,904 for the same period of 2013, representing an increase of $570,307, or 70.3%. Contract manufacturing includes precision sheet metal fabrication of metal furniture, electrical enclosures and other metal products for third party customers. The Company has focused its recent contract manufacturing efforts on selling electrical enclosures and components to Fortune 1000 customers, allowing it to benefit from the trend of bringing the manufacture of such items, previously manufactured overseas, back to the U.S. The increase in contract manufacturing revenues through the first six months of 2014 is directly attributable to the Company’s efforts to aggressively grow this segment of our business.

Concession revenues for the six months ended June 30, 2014 were $274,956, a decrease of $380,559 or 58.1% from concession revenues of $655,515 for the same period of 2013. In February 2014, the Company sold to a third party the lockers, kiosks and other assets related to a locker concession arrangement with a theme-park operator and entered into a subcontract agreement pursuant to which the third party agreed to perform the locker concession and management services previously performed by the Company for the theme-park operator in exchange for the right to receive all of the payments owed to the Company under such arrangement. The decrease in concession revenue in 2014 is directly attributable to this sale and subcontract agreement.

	Six months ended June 30,				Dollar			Percentage
	2014		2013		Increase/(Decrease)			Increase/(Decrease)
Lockers	$	3,640,570	$	4,184,320	$	(543,750	)		(13.0%	)
Mailboxes		875,526		1,592,033		(716,507	)		(45.0%	)
Contract manufacturing		1,381,211		810,904		570,307			70.3	%
Concession revenues		274,956		655,515		(380,559	)		(58.1%	)
Total	$	6,172,263	$	7,242,772	$	(1,070,509	)		(14.8%	)

Gross Margin

Consolidated gross margin for the six months ended June 30, 2014 was $808,748, or 13.1% of net sales, compared to $1,754,451, or 24.2% of net sales, for the same period of 2013. The decrease in gross margin as a percentage of net sales was primarily due to increased labor and overhead costs related to the Company’s growing contract manufacturing business. Additionally, a certain portion of expenses included in cost of products sold are fixed and do not vary with the fluctuation in sales from period to period. With an overall decrease in net sales of 14.8% in the first six months of 2014 compared to the first six months of 2013, these fixed costs became a larger portion of the cost of sales, contributing to a lower gross margin percentage in the first six months of 2014.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the six months ended June 30, 2014 were $2,132,204 or 34.5% of net sales, compared to $2,518,784 or 34.8% of net sales for the same period of 2013, a decrease of $386,580, or 15.3%. The decrease in 2014 was primarily due to (1) a decrease in legal expenses of approximately $226,000, (2) a decrease in general expenses of approximately $51,000 relating to the reimbursement by the Company of certain costs incurred by a customer to resolve a quality issue, (more fully described in Note 9 to the accompanying consolidated financial statements), (3) a decrease in public company expenses of approximately $66,000 related primarily to decreased SEC filing expenses, and (4) a decrease in pension plan costs of approximately $24,000.

Settlement Expense

In February 2013, a customer brought legal action against the Company alleging the Company defaulted on its obligations and failed to perform pursuant to the terms of a written agreement entered into with the Company in February 2012. In April 2013, the customer and the Company agreed to a settlement of the customer’s claims in which the Company will pay to the customer an aggregate amount of $30,000. At March 31, 2013, the Company recorded expense of $30,000 related to this settlement. In March 2012, the Company was named as a defendant in a legal action brought by a competitor (which was also a former customer and supplier). In May 2013, the Company and the plaintiff agreed to a settlement of the plaintiff’s claims. At June 30, 2013, the Company recorded an expense of approximately $412,000 related to the settlement. These settlements are more fully described in Note 9 to the accompanying consolidated financial statements.

Gain on Sale of Property

In February 2014, the Company sold to a third party the lockers, kiosks and other assets related to a locker concession arrangement with a theme-park operator and entered into a subcontract agreement pursuant to which the third party agreed to perform the locker concession and management services previously performed by the Company for the theme-park operator in exchange for the right to receive all of the payments owed to the Company under such arrangement. The Company received $1,218,075 in total consideration for the disposition of these assets. Additionally, in connection with the sale of these assets, the Company and the third party agreed to an amendment to a settlement agreement previously executed between the two parties whereby payments the Company was making to the third party pursuant to the settlement agreement were eliminated. The Company wrote-off the outstanding balance of its accrued settlement of $273,000 and recorded a gain, net of selling costs, of $703,439 in February 2014 in connection with the sale of the locker concession assets and amendment to the settlement agreement.

Interest Expense

Interest expense for the six months ended June 30, 2014 was $146,607, an increase of $91,801 compared to interest expense of $54,806 for the same period of 2013. This increase in interest expense was the result of higher debt balances and higher interest rates associated with the new Loan Agreement the Company entered into with the Lender on September 30, 2013.

Income Taxes

For the six months ended June 30, 2014, the Company recorded income tax expense of $9,211, compared to income tax expense of $12,385 for the same period of 2013. The Company’s effective income tax rate was approximately (1.2)% and (1.0)% for the six months ended June 30, 2014 and 2013, respectively. In the first six months of 2014, the effective income tax rate differs significantly from the statutory rate primarily due to an increase in the deferred tax asset valuation allowance of approximately $158,000, as well as permanent timing differences between expenses recorded for financial and tax reporting. In the first six months of 2013, the effective income tax rate differs significantly from the statutory rate primarily due to an increase in the deferred tax asset valuation allowance of approximately $464,000, as well as permanent timing differences between expenses recorded for financial and tax reporting. Although the Company reported a pre-tax loss in the six months ended June 30, 2014 and 2013, it was unable to record a tax benefit in either period due to corresponding changes in the deferred tax asset valuation allowance, causing the effective income tax rate to be negative.

Comparison of Results of Operations for the Three Months Ended June 30, 2014 and 2013

Overall Results

Consolidated net sales for the second quarter of 2014 decreased 18.4%, or $750,231, to $3,338,054 when compared to net sales of $4,088,285 for the same period of 2013. Pre-tax operating losses increased to a pre-tax loss of $739,200 for the second quarter of 2014 as compared to a pre-tax loss of $254,539 for the second quarter of 2013. After-tax operating losses, including a provision for preferred stock dividends of $4,488, increased to a net loss applicable to common shareholders of $748,410 for the second quarter of 2014 from a net loss of $262,984 for the second quarter of 2013. Net loss per share (basic and diluted) was $0.44 for the second quarter of 2014, an increase from a net loss per share (basic and diluted) of $0.16 for the second quarter of 2013.

Net Sales

Consolidated net sales for the three months ended June 30, 2014 were $3,338,054, a decrease of $750,231, or 18.4%, compared to net sales of $4,088,285 for the same period of 2013. Sales of lockers for the three months ended June 30, 2014 were $1,960,749, a decrease of $341,660, or 14.8%, compared to sales of $2,302,409 for the same period of 2013. The decrease is primarily attributable to a decrease in sales of parcel packaging locker systems and lower locker sales in Canada in the second quarter of 2014 as compared to the second quarter of 2013.

Sales of mailboxes were $490,954 for the three months ended June 30, 2014, a decrease of $324,343, or 39.8%, compared to sales of $815,297 for the same period of 2013. Decreased mailbox sales were primarily driven by decreased sales of Horizontal and Horizontal 4C units in the second quarter of 2014 as compared to the second quarter of 2013.

Sales of contract manufacturing services were $806,163 for the three months ended June 30, 2014, an increase of $160,324, or 24.8%, from sales of $645,839 for the same period of 2013. The Company has focused its recent contract manufacturing efforts on selling electrical enclosures and components to Fortune 1000 customers, allowing it to benefit from the trend of bringing the manufacture of such items, previously manufactured overseas, back to the U.S. The increase in contract manufacturing revenues in the second quarter of 2014 is directly attributable to the Company’s efforts to grow this segment of our business.

Concession revenue for the three months ended June 30, 2014 was $80,187, a decrease of $244,553 or 75.3% from concession revenue of $324,740 for the same period of 2013. In February 2014, the Company sold to a third party the lockers, kiosks and other assets related to a locker concession arrangement with a theme-park operator and entered into a subcontract agreement pursuant to which the third party agreed to perform the locker concession and management services previously performed by the Company for the theme-park operator in exchange for the right to receive all of the payments owed to the Company under such arrangement. The decrease in concession revenue in the second quarter of 2014 is directly attributable to this sale and subcontract agreement.

	Three months ended June 30,				Dollar			Percentage
	2014		2013		Increase/(Decrease)			Increase/(Decrease)
Lockers	$	1,960,750	$	2,302,409	$	(341,659	)		(14.8%	)
Mailboxes		490,954		815,297		(324,343	)		(39.8%	)
Contract manufacturing		806,163		645,839		160,324			24.8	%
Concession revenues		80,187		324,740		(244,553	)		(75.3%	)
Total	$	3,338,054	$	4,088,285	$	(750,231	)		(18.4%	)

Gross Margin

Consolidated gross margin for the three months ended June 30, 2014 was $474,493, or 14.2% of net sales, compared to $1,157,235, or 28.3% of net sales, for the same period of 2013, a decrease of $682,742, or 59.0%. The decrease in gross margin as a percentage of net sales was primarily due to increased labor and overhead costs related to the Company’s growing contract manufacturing business. Additionally, a certain portion of expenses included in cost of products sold are fixed and do not vary with the fluctuation in sales from period to period. With an overall decrease in net sales of 18.4% in the second quarter of 2014 compared to the second quarter of 2013, these fixed costs became a larger portion of the cost of sales, contributing to a lower gross margin percentage in the second quarter of 2014.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the three months ended June 30, 2014 decreased $236,311, or 17.3%, to $1,126,978 compared to $1,363,289 in the same period of 2013. The decrease in 2014 was primarily due to (1) a decrease in legal expenses of approximately $77,000, (2) a decrease in general expenses of approximately $51,000 relating to the reimbursement by the Company of certain costs incurred by a customer to resolve a quality issue, (more fully described in Note 9 to the accompanying consolidated financial statements), (3) a decrease in public company expenses of approximately $45,000 related primarily to decreased SEC filing expenses, and (4) a decrease in pension plan costs of approximately $25,000.

Settlement Expense

In February 2013, a customer brought legal action against the Company alleging the Company defaulted on its obligations and failed to perform pursuant to the terms of a written agreement entered into with the Company in February 2012. In April 2013, the customer and the Company agreed to a settlement of the customer’s claims in which the Company paid the customer an aggregate amount of $30,000. At March 31, 2013, the Company recorded expense of $30,000 related to this settlement. In March 2012, the Company was named as a defendant in a legal action brought by a competitor (which was also a former customer and supplier). In May 2013, the Company and the plaintiff agreed to a settlement of the plaintiff’s claims. At March 31, 2013, the Company recorded an expense of approximately $412,000 related to the settlement. These settlements are more fully described in Note 9 to the accompanying consolidated financial statements.

Interest Expense

Interest expense for the three months ended June 30, 2014 was $77,554, an increase of $49,471 compared to interest expense of $28,083 for the same period of 2013. This increase in interest expense was the result of higher debt balances and higher interest rates associated with the new Loan Agreement the Company entered into with the Lender on September 30, 2013.

Income Taxes

For the second quarter of 2014, the Company recorded income tax expense of $4,722 compared to income tax expense of $8,445 for the same period of 2013. The Company’s effective income tax rate was approximately (0.6%) and (3.3%) in the second quarter of 2014 and 2013, respectively. In both periods, the difference in the effective income tax rate from the statutory rate is primarily due to an increase in the deferred tax asset valuation allowance and permanent timing differences between expenses recorded for financial and tax reporting. Although the Company reported a pre-tax loss in the second quarters of 2014 and 2013, it was unable to record a tax benefit in either period due to corresponding changes in the deferred tax asset valuation allowance, causing the effective income tax rate to be negative.

Liquidity and Sources of Capital

The Company’s liquidity is reflected by its current ratio, which is the ratio of current assets to current liabilities, and its working capital, which is the excess of current assets over current liabilities. These measures of liquidity were as follows:

As of June 30,

2014

As of December 31,

2013

Current ratio

0.91

0.96

Working capital deficit

(654,510

)

(230,655

)

We have incurred substantial losses in each of the last two fiscal years and in the first six months of 2014 and over this period of time our working capital has decreased substantially. These circumstances raise doubt as to the Company’s ability to continue as a going concern. Further, we are dependent on our ability to obtain short term financing and ultimately to generate sufficient cash flow to meet our obligations on a timely basis, as well as successfully obtain financing on favorable terms to fund our long term plans. The independent auditor’s report on our consolidated financial statements for the years ended December 31, 2013 and 2012 included an explanatory paragraph that describes substantial doubt about our ability to continue as a going concern. Management’s plans in regard to the factors prompting the explanatory paragraph are discussed in Note 1 of the Notes to Consolidated Financial Statements presented in the 2013 Annual Report and below.

On February 14, 2014, we sold to a third party the lockers, kiosks and other assets related to locker concession services we provided under a concession arrangement with a theme-park operator and entered into a subcontract agreement pursuant to which the third party agreed to perform the locker concession and management services relating to such concession arrangement. The purchase price was $1,218,075. Net of a holdback amount of $90,000, we received proceeds of $1,128,075 at closing. While this transaction improved our short-term liquidity and working capital needs, continued cost containment and revenue increases are essential for the Company to achieve sustained profitability and strengthen our liquidity and working capital position in the long-term.

On August 11, 2014, the Company filed a Certificate of Designation with the Secretary of State of the State of Delaware to authorize 100,000 shares of Series D Preferred Stock. The Certificate of Designation became effective upon such filing. On August 12, 2014, the Company issued 40,000 shares of its newly authorized Series D Preferred Stock to certain accredited investors pursuant to a purchase agreement executed with those investors. The purchase price was $5.00 per share for aggregate consideration of $200,000. Net proceeds from the offering will be used by the Company to fund working capital and for general corporate purposes. A description of the rights, preferences and limitations of the Series D Preferred Stock is set forth in “Part II – Item 5 – Other Information – Amendment to Articles of Incorporation; Material Modifications to Rights of Security Holders.”

Management has focused efforts to increase core locker sales in future periods through new product development and to increase contract manufacturing revenues by continuing its efforts to grow this segment of our business. We expect continued growth in our contract manufacturing business during the remainder of 2014 as a result of these efforts. In conjunction with its focus on increasing revenues, management has taken steps to improve overall margins and profits in 2014 through cost containment, including better management of labor costs and discretionary expenditures. While these efforts resulted in minimal improvements in the second quarter of 2014, management believes its efforts will result in more substantial improvements in margins and profits in future periods. Although we expect margins and profits to improve in future periods, our operating losses in recent periods, and the negative impact these losses have had on cash flow and working capital, will likely require us to seek additional financing or other strategic alternatives to support the working capital and capital expenditure needs of our operations during the remainder of 2014. In the second quarter of 2014, our Board of Directors formed a committee to independently assess the strategic alternatives that might be available to the Company and beneficial to our shareholders. While we will consider and pursue, where feasible, such strategic options, there can be no assurance that the actions of the Company or the committee will result in improved operating performance or improve our cash flow and working capital positions or that the Company will be able to continue operations in its current form.

Under terms of our Loan Agreement, the Company is required to comply with certain financial covenants on a monthly basis, including a maximum debt to tangible net worth ratio, a minimum fixed charge ratio and a minimum tangible net worth. For the months ended December 31, 2013, January 31, 2014, February 28, 2014, and March 31, 2014, the Company was not in compliance with these financial covenants. On April 7, 2014, the Lender waived the Company’s failure to meet these financial covenants and the parties amended the Loan Agreement to modify the ratio of debt to tangible net worth covenant, the fixed charge ratio covenant and the tangible net worth covenant. For the months ended April 30, 2014, May 31, 2014 and June 30, 2014, the Company was not in compliance with the amended financial covenants. On June 11, 2014, the Lender issued to the Company a notice of default and reservation of rights letter in which the Lender notified the Company that it reserves any and all of the rights, privileges and remedies available to it under the Loan Agreement. We can give no assurances that we will be able to cure the event of default that has occurred as a result of noncompliance with these covenants or comply with the financial covenants in future periods. If we continue to violate these covenants in future periods and the Lender does not waive the violations or amend the Loan Agreement to reflect covenants with which we could comply, the Lender could demand payment of all balances outstanding under the Loan Agreement. Such action by the Lender would have a material adverse effect on the Company’s ability to continue operations.

The Company’s capital expenditures were approximately $69,000 and $51,000 for the six months ended June 30, 2014 and 2013, respectively.

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company.

Effect of New Accounting Guidance

In July 2013, the FASB issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. Under this guidance, an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward. This update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Adoption of this new guidance did not have a significant impact on the Company’s consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not required of a smaller reporting company.

Item 4. Controls and Procedures

The Company carried out an evaluation, under the supervision and with the participation of its management, including its principal executive officer and principal financial officer, of the effectiveness of its disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of June 30, 2014. These disclosure controls and procedures are designed to provide reasonable assurance to the Company’s management and board of directors that information required to be disclosed by the Company in the reports that it files under the Exchange Act is accumulated and communicated to its management as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation, the principal executive officer and principal financial officer of the Company have concluded that the Company’s disclosure controls and procedures as of June 30, 2014 were effective, at the reasonable assurance level, to ensure that material information relating to the Company (a) is accumulated and made known to the Company’s management, including its principal executive officer and principal financial officer, in a manner that allows timely decisions regarding required disclosure and (b) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. There have been no changes in the Company’s internal control over financial reporting that occurred during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

The information required by this item is incorporated herein by reference to the information set forth under the caption “Commitments and Contingencies” in Note 9 of the Notes to the Consolidated Financial Statements included in “Part I - Item 1 - Financial Statements.”

Item 1A. Risk Factors

Not required of a smaller reporting company.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On August 12, 2014, the Company issued 40,000 shares of its newly authorized Series D Preferred Stock to certain accredited investors pursuant to a Purchase Agreement executed with those investors. The purchase price was $5.00 per share for aggregate consideration of $200,000. Net proceeds from the offering will be used by the Company to fund working capital and for general corporate purposes. A description of the rights, preferences and limitations of the Series D Preferred Stock is set forth in “Part II – Item 5 – Other Information – Amendment to Articles of Incorporation; Material Modifications to Rights of Security Holders.” The Purchase Agreement contains customary representations and warranties made by the Company and by each investor. Under the terms of the Purchase Agreement, the Company has agreed to sell to each investor his pro rata portion of 192,000 shares of common stock held in treasury for a purchase price of $0.01 per share upon the conversion by such investor of his Series D Preferred Stock into shares of common stock. The Company has also granted the holders of the Series D Preferred Stock a demand registration right exercisable at any time after the Series D Preferred Stock is convertible into shares of common stock. This description of the Purchase Agreement is qualified in its entirety by reference to the complete text of the Purchase Agreement, which is attached hereto as Exhibit 10.2.

The issuance and sale of the Series D Preferred Stock was made in reliance on Rule 506 of Regulation D promulgated under the Securities Act of 1933, as amended. The recipients of the Series D Preferred Stock, each of whom is an accredited investor, represented their intentions to acquire the stock for investment only and not with a view to or for sale in connection with any distribution thereof.

Item 3. Defaults Upon Senior Securities

On September 30, 2013, the Company entered into the Loan Agreement with the Lender for a $2.8 million revolving credit facility and a $1.2 million term loan facility. The Company used these proceeds to repay in full the outstanding indebtedness under the Company’s prior credit facilities and equipment leases with BAML and for working capital and general corporate purposes.

Under the terms of the Loan Agreement, the Company is required to comply with certain financial covenants on a monthly basis, including a maximum debt to tangible net worth ratio, a minimum fixed charge ratio and a minimum tangible net worth. For the months ended December 31, 2013, January 31, 2014, February 28, 2014, and March 31, 2014, the Company was not in compliance with these financial covenants. On April 7, 2014, the Lender waived the Company’s failure to meet these financial covenants and the parties amended the Loan Agreement to modify the ratio of debt to tangible net worth covenant, the fixed charge ratio covenant and the tangible net worth covenant. For the months ended April 30, 2014, May 31, 2014 and June 30, 2014, the Company was not in compliance with the amended financial covenants. On June 11, 2014, the Lender issued a notice of default and reservation of rights letter to the Company in which the Lender notified the Company that it reserves any and all of the rights, privileges and remedies available to it under the Loan Agreement. As a result of the defaults, the Lender may accelerate the amounts outstanding under the loan facilities. As of the date of this report, the Lender has not accelerated the repayment of the amounts outstanding under the loan facilities but may do so in the future.

We can give no assurances that we will be able to cure the events of default that have occurred as a result of noncompliance with these covenants or that we will be able to comply with the financial covenants in future periods. If we continue to violate these covenants in future periods and the Lender does not waive the violations or amend the Loan Agreement to reflect covenants with which we could comply, the Lender could demand payment of all balances outstanding under the Loan Agreement. Such action by the Lender would have a material adverse effect on the Company’s ability to continue operations.

Item 4. Mine Safety Disclosure

Not applicable.

Item 5. Other Information

Amendment to Articles of Incorporation; Material Modifications to Rights of Security Holders

On August 11, 2014, the Company filed the Certificate of Designation of Preferences, Rights and Limitations of Series D Preferred Stock (the “Certificate of Designation”) with the Secretary of State of the State of Delaware setting forth the terms of its newly authorized Series D Preferred Stock. The Series D Preferred Stock ranks senior to all of the Company’s other classes and series of capital stock, including its common stock. The rights, preferences and privileges of the Series D Preferred Stock are as follows:

●

Dividends. Holders of Series D Preferred Stock are entitled to receive cash dividends at the annual rate of 6% per share and will be paid in preference to the holders of any other class or series of capital stock. Such dividends will begin accruing on the date of issuance and will be paid only when and if a dividend payment is declared by the Board of Directors. If the dividend has not been paid or set apart in full, the Company cannot purchase or redeem any other class of capital stock unless the persons holding more than 60% of the outstanding shares of Series D Preferred Stock (the “Majority of Holders”) have given their consent.

●

Redemption. The Company may redeem the Series D Preferred Stock at any time, in whole or in part, for $5.00 per share, plus accrued and unpaid dividends.

●

Amendment of Certificate of Designation. Without the consent of a Majority of Holders, the Company may not: amend or change the Certificate of Designation in a manner that affects adversely the rights and preferences of the holders of Series D Preferred Stock; authorize or issue any class of stock ranking senior to, or on a parity with, the Series D Preferred Stock with respect to payment of dividends or distribution of assets; or authorize the merger or consolidation of the Company or the sale of all or substantially all of its assets.

●

Voting Rights. Holders of Series D Preferred Stock have no voting rights, except upon matters for which a class vote is specifically required by law or as provided in the Certificate of Designation.

●

Conversion. Any time after December 8, 2014, a holder of Series D Preferred Stock may convert each share of its Series D Preferred Stock into five shares of the Company’s common stock. Such conversion ratio may be adjusted from time to time as set forth in the Certificate of Designation.

●

Liquidation Preference. In the event of a “liquidation event,” the holders of Series D Preferred Stock are entitled to receive, in cash, a liquidating distribution of $5.00 per share, plus all accrued but unpaid dividends, before any distribution or payment may be made to the holders of shares of any other classes of capital stock. A “liquidation event” means a sale or other disposition of all or substantially all of the assets of the Company, a voluntary or involuntary liquidation or dissolution; the merger or consolidation of the Company in which the Company’s stockholders own less than 50% of the outstanding voting securities of the surviving entity; or any transaction involving the transfer of shares of capital stock of the Company in which the stockholders immediately prior to the transaction own less than 50% of the voting securities.

This description is qualified in its entirety by reference to the copy of the Certificate of Designation, which is attached hereto as Exhibit 3.1.

Entry Into a Material Definitive Agreement; Unregistered Sales of Equity Securities.

The information set forth in “Part II, Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds” is incorporated into this Item 5 by reference.

Triggering Event that Accelerate or Increase a Direct Financial Obligation.

The information set forth in “Part II, Item 3 – Defaults Upon Senior Securities” is incorporated into this Item 5 by reference.

Item 6. Exhibits.

Except as otherwise indicated, the following documents are filed as part of this Quarterly Report on Form 10-Q:

Exhibit

Number

Description

3.1	Certificate of Designation of Preferences, Rights and Limitations of Series D Preferred Stock filed with Delaware Secretary of State on August 11, 2014 (filed herewith)

10.1

Amendment to Loan Agreement dated April 7, 2014 by and among American Locker Group Incorporated, Security Manufacturing Corporation, American Locker Security Systems, Inc. and Triumph Savings Bank, SSB, d/b/a Triumph Commercial Finance (incorporated by reference to the Company’s annual report on Form 10-K, filed with the SEC on April 10, 2014)

10.2	Purchase Agreement dated August 12, 2014 by and among American Locker Group Incorporated and certain accredited investors (filed herewith)

31.1	Certification of Principal Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934.

31.2	Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934.

32.1	Certifications of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS *	XBRL Instance Document

101.SCH *	XBRL Taxonomy Extension Schema Document

101.CAL *	XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB *	XBRL Taxonomy Extension Label Linkbase Document

101.DEF *	XBRL Taxonomy Extension Definition Linkbase Document

101.PRE *	XBRL Taxonomy Extension Presentation Linkbase Document

* In accordance with Rule 406T of Regulation S-T, the information in these exhibits shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	AMERICAN LOCKER GROUP INCORPORATED


August 14, 2014	By:	/s/ ANTHONY B. JOHNSTON
	Anthony B. Johnston
	President and Chief Executive Officer

August 14, 2014	By:	/s/ STEPHEN P. SLAY
	Stephen P. Slay
	Chief Financial Officer

AMERICAN LOCKER GROUP INC - FORM 10-Q - August 14, 2014

Attached files

AMERICAN LOCKER GROUP INC Reports