lgaa10qsb2ndqtr_242008.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-QSB

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

For the quarterly period ended:   December 31, 2007

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

For the transition period from  ______ to  ______


LGA HOLDINGS, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)
 
 
 Utah
0-18113
87-0405405 
 (State or other jurisdiction
 (Commission
 I.R.S. Employer
 of incorporation or organization)
 File No.) 
  Identification Number
       
        3380 North El Paso Street, Suite G, Colorado Springs, Colorado 80907
(Address of Principal Executive Offices) (Zip Code)

Registrant’s telephone number including area code:  (719) 630-3800
 
NO CHANGE
(Former name, former address and former fiscal year, if changed since last report)
 
Check whether the Issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the last 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 [ ]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and "large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):     Large accelerated filer []      Accelerated filer  []       Non-accelerated filer [X].
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes [  ]    No [ X ]
 
State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 9,108,330 shares of common stock outstanding as of December 2007.

Transitional Small Business Disclosure Format:  Yes [ X ]    No [ X ]
 
 
 
 
LGA HOLDINGS, INC.
Index to Financial Statements
(Unaudited)
 
   
Page
     
     
Condensed Balance Sheet at December 31, 2007
3
     
Condensed Statements of Operations, for the six months ended
  
 
December 31, 2007 and 2006 and for the three months ended
  
 
December 31, 2007 and 2006
4
     
Condensed Statement of Changes in Shareholders' Equity for
  
 
the period from July 1, 2007 through December 31, 2007
8
     
Condensed Statements of Cash Flows, for the six months ended
  
 
December 31, 2007 and 2006
8
     
Notes to Condensed Financial Statements
7
 
 
- 2 -
 
 
LGA HOLDINGS, INC.
Condensed Balance Sheet
December 31, 2007
(Unaudited)
 
 
 
Current assets:
      
Cash   $  5,119  
Account and notes receivable
     24,340  
Inventory, at lower of cost or market  (Note 3)
     268,887  
Prepaid expenses
     6,264  
         
Total current assets
     304,610  
         
Property and equipment
     293,398  
Accumulated depreciation
     (149,565 )
Intangible Assets
     120,648  
Accumulated amortization
     (21,340 )
Other assets
     2,605  
         
Total assets
   $ 550,356  
         
Liabilities and Shareholders’ Equity
  
         
Current liabilities:
        
Accounts payable
   $ 111,985  
Accrued payroll
     128,963  
Accrued other liabilities
     12,860  
Notes payable, related party (Note 2)
     124,056  
         
Total current liabilities
     377,864  
         
Long term note payable, related party (Note 2)
     60,000  
         
Total liabilities
     437,864  
         
         
Shareholders’ equity:
        
Common stock
     9,109  
Additional paid-in capital
     2,357,931  
Accumulated deficit
     (2,254,547 )
         
Total shareholders' equity
     112,493  
         
Total liabilities and shareholders' equity
   $ 550,356  

See accompanying notes to condensed financial statements

- 3 -


LGA HOLDINGS, INC.
Condensed Statements of Operations
(Unaudited)

   
Six months ended
    
Three months ended
  
   
December 31,
    
December 31,
  
   
2007
    
2006
    
2007
    
2006
  
                         
Sales and revenue
   $ 222,093     $ 167,428     $ 95,118     $ 50,413  
                                 
                                 
Costs of sales and revenue
     169,152       85,993       69,802       31,326  
Research and development
     22,201       70,314       9,840       59,370  
Selling, general and administrative
     667,243       258,025       550,432       140,011  
                                 
Total operating expenses
     858,596       414,332       630,074       230,707  
                                 
Operating loss
     (636,503 )     (246,904 )     (534,956 )     (180,294 )
                                 
Other income (expense):
                                
Other income
     —       193       —       78  
Interest expense
     (6,835 )     (2,466 )     (3,974 )     (1,762 )
Embezzlement expense, net of recoveries
     —       (44,764 )     —       (30,279 )
                                 
Loss before income taxes
     (643,338 )     (293,941 )     (538,930 )     (212,257 )
                                 
Income tax provision
     —       —       —       —  
                                 
Net loss
   $ (643,338 )   $ (293,941 )   $ (538,930 )   $ (212,257 )
                                 
Basic and diluted loss per share
   $ (0.07 )   $ (0.03 )   $ (0.06 )   $ (0.02 )
                                 
Number of weighted average common shares
                                
outstanding
     9,089,793       8,603,198       9,108,310       8,628,793  
 
See accompanying notes to condensed financial statements

- 4 -

 
LGA HOLDINGS, INC.
Condensed Statement of Changes in Shareholders' Equity
(Unaudited)
 
                               
               
Additional
              
   
Common Stock
    
paid-in
    
Accumulated
        
   
Shares
    
Amount
    
capital
    
deficit
    
Total
  
                               
Balance at July 1, 2007
     8,972,960     $ 8,974     $ 1,754,066     $ (1,611,209 )   $ 151,831  
                                         
Sale of common stock at $1.25 per share
     100,000       100       124,900       —       125,000  
Common stock options
                                        
exercised at $0.70 per share
     35,350       35       25,065       —       25,100  
Stock options issued (Note 4)
     —       —       453,900       —       453,900  
Net loss
     —       —       —       (643,338 )     (643,338 )
                                         
Balance at December 31, 2007
     9,108,310     $ 9,109     $ 2,357,931     $ (2,254,547 )   $ 112,493  
 
See accompanying notes to condensed financial statements

- 5 -

 
LGA HOLDINGS, INC.
Condensed Statements of Cash Flows
(Unaudited)

   
Six months ended
  
   
December 31,
  
   
2007
    
2006
  
             
Net cash used in operating activities
   $ (249,837 )   $ (73,848 )
                 
Cash flows from investing activities:
                
Purchase of equipment and other assets
     (19,200 )     (35,825 )
                 
Net cash used in investing activities
     (19,200 )     (35,825 )
                 
Cash flows from financing activities:
                
Proceeds from notes payable, related party
     124,056       60,000  
Proceeds from exercise of stock options
     25,100       —  
Proceeds from sale of common stock
     125,000       150,000  
                 
Net cash provided by financing activities
     274,156       210,000  
                 
Net change in cash
     5,119       100,327  
                 
                 
Cash, beginning of period
     —       —  
                 
Cash, end of period
   $ 5,119     $ 100,327  
                 
Supplemental disclosure of cash flow information:
                
Cash paid during the year for:
                
Income taxes
   $ —     $ —  
Interest
   $  —     $  —  

See accompanying notes to condensed financial statements

- 6 -

LGA HOLDINGS, INC.
Notes to Condensed Financial Statements
(Unaudited)

 
Note 1:  Basis of presentation

The condensed financial statements presented herein have been prepared by our Company in accordance with the accounting policies in its Form 10-KSB with financial statements dated June 30, 2007, and should be read in conjunction with the notes thereto.

In our opinion, all adjustments (consisting only of normal recurring adjustments) which are necessary to provide a fair presentation of operating results for the interim period presented have been made. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the year.
 
Interim financial data presented herein are unaudited. The unaudited interim financial information presented herein has been prepared by the Company in accordance with the policies in its audited financial statements for the period ended June 30, 2007 and should be read in conjunction with the notes thereto.
 
The accompanying statements of operations and cash flows reflect the six-month and three-month period ended December 31, 2007. The comparative figures for the three-month and six-month periods ended December 31, 2006 have been included in the accompanying statements of operations and cash flows for comparison on an unaudited basis.

Recent Accounting Pronouncements

In September 2006, FASB issued Statement 157, Fair Value Measurements (“SFAS 157”). This statement defines fair value and establishes a framework for measuring fair value in generally accepted accounting principles (GAAP). More precisely, this statement sets forth a standard definition of fair value as it applies to assets or liabilities, the principal market (or most advantageous market) for determining fair value (price), the market participants, inputs and the application of the derived fair value to those assets and liabilities. The effective date of this pronouncement is for all full fiscal and interim periods beginning after November 15, 2007. The Company is currently evaluating the impact of adopting SFAS 157 on its financial statements and related disclosures.
 
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”) which permit entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact of adopting SFAS 159 on its financial position, cash flows, and results of operations.

 
In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109 , or FIN No. 48. FIN No. 48 provides guidance on the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 requires that we recognize in the financial statements the benefit of a tax position if that position will more likely than not be sustained on audit, based on the technical merits of the position. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition provisions. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. Effective January 1, 2007, the Company has adopted FIN No. 48.  This interpretation did not have a significant impact on the financial statements due to the Company’s significant net operating loss carryforward.

- 7 -

LGA HOLDINGS, INC.
Notes to Condensed Financial Statements
(Unaudited)

Reclassification

Certain prior period amounts have been reclassified to conform to the current period’s presentation. The reclassification did not have an effect on total revenues, total costs and expenses, loss from operations, net loss and net loss per share.

Note 2:  Related Party

During September, 2007, an affiliate loaned the Company $88,056 in the form of an unsecured note carrying 8% annual interest which matured on December 15, 2007.  It was agreed that if the note is not paid on the due date, the entire principal and accrued interest shall continue to draw interest at the rate of 8%.  In January 2008, the principal and accrued interests were paid in full.

During July, 2007, a director loaned the Company $36,000 in the form of an unsecured demand note carrying 8% annual interest.  In January 2008, the principal and accrued interests were paid in full.

Note 3:  Inventory

Inventory consists of raw materials and finished inventory, which have been accounted for at lower of cost or market.
 
Raw materials
   $ 84,100  
Finished goods
     184,787  
    $ 268,887  
 
Note 4:  Shareholders’ Equity

Stock Options

On November 26, 2007, the Company granted officers and employees options to purchase an aggregate of 730,000 shares of the Company’s common stock at an exercise price of $1.50 per share under the 2005 Equity Incentive Plan.  The options vested on the date of grant and expire on November 26, 2012.  The quoted market price of the stock was $0.51 per share on the date of grant.  The Company valued the options at $0.51 per share, or $372,300, in accordance with SFAS 123(R).  Stock-based compensation of $372,300 was recorded in the accompanying financial statements for the six months ended December 31, 2007.

The fair value of the options was estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions:
 
- 8 -

LGA HOLDINGS, INC.
Notes to Condensed Financial Statements
(Unaudited)




Risk-free interest rate
        
3.23%
Dividend yield
        
0.00%
Volatility factor
        
287.00%
Weighted average expected life
      
 5 years


On November 26, 2007, the Company granted an officer and two vendors options to purchase an aggregate of 160,000 shares of the Company’s common stock at an exercise price of $1.50 per share.  The options vested on the date of grant and expire on November 26, 2017.  The quoted market price of the stock was $0.51 per share on the date of grant.  The Company valued the options at $0.51 per share, or $81,600 in accordance with SFAS 123(R).  Stock-based compensation of $81,600 was recorded in the accompanying financial statements for the six month ended December 31, 2007.

The fair value of the options was estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions:

Risk-free interest rate
        
3.83%
Dividend yield
        
0.00%
Volatility factor
        
287.00%
Weighted average expected life
      
 10 years
 
 Capital Stock

During July 2007, two unaffiliated investors purchased a total of 100,000 shares of our common stock in a private placement offering for total cash proceeds of $125,000 or $1.25 per share.  No commissions were paid in connection with this transaction.

In September 2007, a former employee exercised options to purchase 35,350 shares of our common stock for proceeds of $25,100 or $0.70 per share.

Note 5:  Income taxes

We record income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes”.  We have incurred net operating losses during all periods presented resulting in a deferred tax asset, which was fully allowed for; therefore, the net benefit and expense resulted in $-0- income taxes.

Note 6:  Subsequent Events

In January 2008, an unaffiliated existing investor exercised options at $.70 to acquire 43,148 common shares of the Company.  Cash proceeds to the Company were $30,204.
 
 
- 9 -

 
LGA HOLDINGS, INC.
Notes to Condensed Financial Statements
(Unaudited)


In January 2008, the Company signed a license agreement with Cequent Towing Products, a division of Trimas Corporation (Cequent).  This license gives Cequent exclusive manufacturing and sales rights to the Company’s entire line of hitch-mounted cargo carriers, Silent Hitch Pin, and “Pixie” bicycle carrier, for a two-year period.  Following the two-year exclusive period, Cequent retains non-exclusive rights for the life of the patents contained in these products.  The agreement also contains a right of first refusal for Cequent on any license agreement that the Company may consider with other parties for the Company’s GearWagon 125 and Little Giant trailer products.  The agreement provides for a $400,000 upfront fee and continuing royalties paid by Cequent to the Company for the life of the patents.  The Company anticipates that these payments will substantially alter the Company’s business model going forward from the December 31, 2007 quarter.  The Company’s revenue mix will shift proportionally away from direct sales to distributors, dealers, and end users, toward proportionally increasing royalty and fee income into the foreseeable future.  The Company plans to recognize the upfront fee on a straight-line basis over the two year exclusive license period.
 
- 10 -
 
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
Certain statements made herein are forward-looking statements under the Private Securities Litigation Reform Act of 1995. They include statements regarding the timing and expected benefits of the acquisition of LGA by Tenet. These statements are based on management's current expectations and estimates; actual results may differ materially due to certain risks and uncertainties. For example, the ability of LGA to achieve expected results may be affected by external factors such as competitive price pressures, conditions in the economy and industry growth, and internal factors, such as future financing of the acquired operations and the ability to control expenses.
 
Results of Operations
 
Results of Operations
  
Three months ended December 31,
  
   
2008
    
2007
  
Revenue
     95,118       50,413  
Cost of Revenue
     69,802       31,326  
Gross Margin
     25,316       19,087  
Research and Development
     9,840       59,370  
SG&A (less Stock-Based Compensation)
     (96,532 )     (140,011 )
Stock-Based Compensation
     (453,900 )     (0 )
Net (Loss)
     (538,930 )     (212,257 )
 
Second Quarter 2008 Compared with Second Quarter 2007
 
During the second quarter of Fiscal 2008, the Company had revenues of $95,118, which represented an increase of $44,705 or 88% over the comparable quarter's revenue of $50,413.  During the second quarter of Fiscal 2008, the Company had a substantially broader product line compared to 2007’s second quarter.  In particular, the company’s Little Giant trailer, a product not in existence during fiscal 2007, was the company’s largest selling product by dollar volume in the most recent quarter.
 
Cost of revenue increased $38,476 or 123% from $31,326 in 2007 to $69,802 in 2008.  This increase in product costs was primarily due to higher unit sales volumes, increased shipping costs, and to costs associated with mitigation of product quality shortfalls in the company’s initial inventory of Little Giant trailers.
 
Gross margin on product sales decreased in the first quarter of 2008 versus the first quarter of 2007, both absolutely and as a percentage of sales, primarily due to increased shipping costs and to substantial sales out of the initial inventory of the Company’s Little Giant trailer in the 2008 second fiscal quarter, versus no such sales in the 2007 second fiscal quarter.  This inventory carried added costs, and hence narrower gross margins, to mitigate product quality shortfalls.
 
Research and development expenses decreased materially due to substantial completion of development work throughout the Company’s current product line during the time between the second fiscal quarters of 2007 and 2008.
 
SG&A expenses (aside from stock-based compensation) decreased significantly year-to-year, despite increased business activity and employee head count, primarily due to the absence in the 2008 quarter of the substantial embezzlement-associated expenses incurred in the 2007 quarter.
 

- 11 -

Stock-Based Compensation expense was $453,900 in 2008 versus $0 in 2007.  The 2008 expense resulted entirely from the ISO and NSO awards described in Note 4 of the Financial Statements.
 
Net (loss) for the current quarter was ($538,930) or ($0.06) per share as compared to ($212,257) or ($0.02) per share for the Quarter ended Sept. 30, 2006.  The substantial increase in the net (loss) was due primarily to stock-based compensation.
 
Liquidity and Capital Resources
 
The Company's cash position decreased from $100,321 at December 31, 2006 to $5,119 at December 31, 2007.  Due to the subsequent events described in Note 6 to the Financial Statements, cash balance substantially increased in January, 2008.  During the first half of Fiscal 2008, the Company used ($249,837) of cash to fund its operating activities.  Negative operating cash flow was substantially less than the operating loss in the first half of fiscal 2008 primarily due to stock-based compensation, a non-cash expense.
 
LGA Capital Requirements
 
 
The Company reported shareholder equity of $112,493 as of December 31, 2007, as compared with $119,497 as of December 31, 2006.
 
The Company does not anticipate any need for additional capital infusions.  We anticipate that licensing and product sales revenues will be sufficient to fund all of our operating activities and present growth plans.  In the event the Company decides to respond to expanding growth opportunities in the future, additional capital may be required.  The Company cannot give any assurance that such additional capital would be available on terms acceptable to shareholders.
 
The Company is working on several product licensing opportunities that, if completed, have the potential to generate significant revenues beyond those figuring into our current plans.  In the event that revenues substantially exceed our operating requirements, consideration would be given to cash dividends, and/or stock repurchases.  However, no assurance can be given as to whether these discussions will result in a completed transaction, nor can the Company give any assurances as to the timing or financial magnitude of these transactions.
 
The Company anticipates improvement in operating margins due to higher selling prices, reduced per-unit inventory acquisition costs, the proportional shift of our revenue mix toward royalties and fees described in Note 6 to the Financial Statements, and a possible reduction in SG&A.  In the event that these anticipations prove mistaken, the Company can provide shareholders with no assurance that any required additional capital will be available on terms acceptable to shareholders.
 
While a portion of the current liabilities, approximately $124,000, is owed to present officers and/or directors, there can be no assurance that these officers/directors will not seek payment in the near term.  The Company does anticipate paying off a substantial portion of these liabilities during the third quarter of Fiscal 2008.
 
Inflation has not had a significant impact on the Company's operations.
 
- 12 -
 
 
PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

    None.
 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

    None

 
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

    None
 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
 
    None

 
ITEM 5. OTHER INFORMATION.

    None.

 
- 13 -
 
 
ITEM 6. EXHIBITS.

(a)  
Exhibits
 
31.1
 
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
31.2
 
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
32.1
 
Certification of Chief Executive Officer Pursuant to Section 18 U.S.C. Section 1350
     
 32.2
   Certification of Chief Financial Officer Pursuant to Section 18 U.S.C. Section 1350
 
 
 
SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
     
 
LGA Holdings, Inc.
     (Registrant)
 
 		  
 		  
 
Date: February 6, 2008 By:   /s/ Marty Williams
 
Marty Williams
Chief Executive Officer, President
   
 
 
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