AGSS 10-Q
Ameriguard Security Services, Inc. (AGSS)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM
For
the nine months ended
or
For the transition period from _________ to _________
Commission
file number:
(Exact name of registrant as specified in its charter)
| (State
or other jurisdiction of incorporation or organization) |
(IRS
Employer Identification No.) |
(Address of Principal Executive Offices) (Zip Code)
Registrant’s
telephone number, including the area code:
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No ☒
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 report(s)), and
(2) has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
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 definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |
| ☒ | Smaller reporting company | |||
| Emerging growth company | ||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold on September 30, 2023, or the average bid and ask price of such common equity, as of the last business day of the registrant’s most recently completed third fiscal quarter is $3,954,977.
The number of outstanding shares of the registrant’s common stock on November 1, 2023, was .
Documents Incorporated by Reference: None.
FORM 10-Q QUARTERLY REPORT
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2023
TABLE OF CONTENTS
i
FORWARD-LOOKING STATEMENTS
The statements contained in this report with respect to our financial condition, results of operations and business that are not historical facts are “forward-looking statements”. Forward-looking statements can be identified by the use of forward-looking terminology, such as “anticipate”, “believe”, “expect”, “plan”, “intend”, “seek”, “estimate”, “project”, “could”, “may” or the negative thereof or other variations thereon, or by discussions of strategy that involve risks and uncertainties. Management wishes to caution the reader of the forward-looking statements that any such statements that are contained in this report reflect our current beliefs with respect to future events and involve known and unknown risks, uncertainties and other factors, including, but not limited to, economic, competitive, regulatory, technological, key employees, and general business factors affecting our operations, markets, growth, services, products, licenses and other factors, some of which are described in this report including in “Risk Factors” in Item 1A and some of which are discussed in our other filings with the SEC. These forward-looking statements are only estimates or predictions. No assurances can be given regarding the achievement of future results, as actual results may differ materially as a result of risks facing our company, and actual events may differ from the assumptions underlying the statements that have been made regarding anticipated events.
These risk factors should be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue. All written and oral forward-looking statements made in connection with this report that are attributable to our company or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Given these uncertainties, we caution investors not to unduly rely on our forward-looking statements. We do not undertake any obligation to review or confirm analysts’ expectations or estimates or to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events, except as required by applicable law or regulation.
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
AmeriGuard Security Services, Inc.
CONSOLIDATED BALANCE SHEETS
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net (note 1) | ||||||||
| Prepaid expenses and deposits | ||||||||
| Related Party Receivable (note 3) | ||||||||
| Total Current Assets | ||||||||
| Other Non-Current Assets | ||||||||
| Fixed assets, net depreciation (note 4) | ||||||||
| Operating Lease | ||||||||
| Total Non-Current Assets | ||||||||
| Total Assets | $ | $ | ||||||
| Liabilities | ||||||||
| Current Liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued Interest Due (note 6) | ||||||||
| Accrued Payroll | ||||||||
| Payroll liability - Pension (note 5) | ||||||||
| Current portion of notes payable (note 6) | ||||||||
| Total Current Liabilities | ||||||||
| Long Term Liabilities | ||||||||
| Long term portion of notes payable (note 6) | ||||||||
| Operating Lease | ||||||||
| Total Liabilities | ||||||||
| Stockholders’ equity | ||||||||
| Common stock, $ par value, shares issued and outstanding at June 30, 2023 and 2022 | ||||||||
| Retained (deficit) | ( | ) | ( | ) | ||||
| Total Stockholders’ Deficit | ( | ) | ( | ) | ||||
| Total Liabilities and Stockholders’ Equity | $ | $ | ||||||
See accompanying notes to financial statements
1
AmeriGuard Security Services, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Nine Months Ended September 30, 2023 and 2022
| 2023 | 2022 | |||||||
| Revenue | ||||||||
| Security Services | $ | $ | ||||||
| Other related income | ||||||||
| Total Revenue | ||||||||
| Cost of Services | ||||||||
| Salaries and related taxes | ||||||||
| Employee benefits | ||||||||
| Sub-Contractor payments | ||||||||
| Guard training | ||||||||
| Vehicles and equipment expenses | ||||||||
| Total Cost of Services | ||||||||
| Gross Margin | ||||||||
| Operating Expenses | ||||||||
| Salaries, payroll taxes and benefits | ||||||||
| Vehicle expense | ||||||||
| Professional services | ||||||||
| Cellular services | ||||||||
| General liability insurance | ||||||||
| Advertising and marketing | ||||||||
| General and administrative expenses | ||||||||
| Loan interest | ||||||||
| Depreciation expense | ||||||||
| Total Operating Expenses | ||||||||
| Net Income/(Loss) from Operations | ( | ) | ||||||
| Other Income (Expenses) | ||||||||
| Other Income | ||||||||
| Other (Expense) | ( | ) | ( | ) | ||||
| Total Other Income (Expense) | ( | ) | ||||||
| Net Income/(loss) before Income Taxes | ||||||||
| Income tax expense | ||||||||
| Net Income/(loss) | $ | $ | ||||||
| Net Income/(loss) per Common Share - Basic and Diluted | $ | $ | ||||||
| Weighted Average Number of Common Shares Outstanding - Basic and Diluted | ||||||||
See accompanying notes to financial statements
2
AmeriGuard Security Services, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
For the Nine Months Ended September 30, 2023
| Common Stock | Preferred Stock | Additional Paid-In | Stockholders’ | Total Stockholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Equity | Equity | ||||||||||||||||||||||
| Balance, December 31, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
| Net Income for the period | ||||||||||||||||||||||||||||
| Balance, June 30, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
See accompanying notes to financial statements
3
AmeriGuard Security Services, Inc.
STATEMENTS OF CASH FLOWS
| For the Nine Months Ended | ||||||||
| September 30, | September 30, | |||||||
| 2023 | 2022 | |||||||
| Cash Flows from Operating Activities | ||||||||
| Net Income/(Loss) | $ | $ | ||||||
| Adjustment to reconcile net loss from operations: | ||||||||
| Changes in Operating Assets and Liabilities | ||||||||
| Accounts receivable, net | ||||||||
| Prepaid insurance | ( | ) | ( | ) | ||||
| Deposits | ( | ) | ||||||
| Depreciation | ||||||||
| Accounts payable | ( | ) | ||||||
| Accrued Interest | ||||||||
| Accrued Payroll | ( | ) | ||||||
| Payroll liability - Pension | ( | ) | ( | ) | ||||
| Net Cash (Used)/provided in Operating Activities | ||||||||
| Cash Flows Used/(Provided) from Investing Activities | ||||||||
| Building improvements | ( | ) | ( | ) | ||||
| Equipment | ( | ) | ( | ) | ||||
| Sales of Vehicle | ||||||||
| Net Cash Used by Investing Activities | ( | ) | ( | ) | ||||
| Cash Provided/(Used) from Financing Activities | ||||||||
| Loan principle payments | ( | ) | ( | ) | ||||
| Payment for shareholder buyout | ( | ) | ||||||
| Net adjustments, Equity | ( | ) | ||||||
| Net Cash Provided by Financing Activities | ( | ) | ( | ) | ||||
| Net Increase (Decrease) in Cash | ( | ) | ||||||
| Cash at Beginning of Period | ||||||||
| Cash at End of Period | $ | $ | ||||||
| Supplemental Cash Flow Information: | ||||||||
| Income Taxes Paid | $ | $ | ||||||
| Interest Paid | $ | $ | ||||||
| Supplemental disclosure of non-cash financing activities: | ||||||||
| Operating leases - right of use asset | $ | $ | ||||||
| Operating leases - lease liability | $ | $ | ||||||
See accompanying notes to financial statements
4
AmeriGuard
Security Services, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
AmeriGuard Security Services, Inc. (the Company), was incorporated on November 14, 2002, with an S-Corp tax election. The corporation was incorporated with the issuance of shares of no-par value stock held by Lawrence Garcia, President and CEO with shares and Lillian Flores, VP of Operations with shares. The Company provides armed guard services as a federal contractor with licenses in 5 states and provides commercial guard services in California.
On July 7, 2021, the Company, entered into an agreement to gain 100% control of Health Revenue Assurance Holdings, Inc (HRAA) a public corporation, incorporated in Nevada, by the purchase of shares of Preferred A-1 Stock from the seller, Custodian Ventures LLC. The purchase of HRAA allowed the Company to begin plans to consummate a reverse merger with HRAA becoming a wholly owned subsidiary of a public company. In March of 2022, a Certificate of Amendment was filed with the Nevada Secretary of State, changing the name of HRAA, to Ameriguard Security Services, Inc. (AGSS). Shortly thereafter, a stock name and ticker change report were filed with the SEC and the stock ticker of HRAA was changed to AGSS.
On December 9, 2022, the Company executed the reverse merger agreement and became the subsidiary of AGSS. From that point forward, the financial statement filings will be the consolidation of Ameriguard Security Services, Inc, a Nevada company with Ameriguard Security Services, Inc. a California company.
The Company’s accounting year end is December 31.
Basis of Presentation
These financial statements are presented in United States dollars and have been prepared in accordance with United States generally accepted accounting principles.
Risks and Uncertainties
The risks and uncertainties described below may not be the only ones we are or may face in the future. If any of the following do occur, our business, financial condition or results of operations could be materially adversely affected.
The
company receives over
The process required to acquire a government contract takes several months to complete starting with the preparation of the proposal, delivery of the proposal to the agency and awaiting notice from the agency of the contract award. Due to the time span required, and winning the contract is not guaranteed, the company maintains a department of individuals who monitor and write proposals for all government contracts that become open for bid on a continuing basis. It is important to the company that new contracts are acquired consistently to maintain and grow annual revenue.
Other risks to operations consist of State and Federal regulations, staffing shortages, accelerating inflation, and overall business environment issues we cannot foresee.
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NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reported period. Actual results could differ from those estimates. Significant estimates include estimated useful lives and potential impairment of property and equipment, along with the collectability of some receivables from customers.
Cash and Cash Equivalents
The
Company considers all highly liquid temporary cash investments with an original maturity of three months or less to be cash equivalents.
On September 30, 2023, and December 31, 2022, the Company had cash and cash equivalents totaling $
Accounts Receivable
We record accounts receivable at net realizable value. This value includes an appropriate allowance for estimated uncollectible accounts to reflect any loss anticipated on the accounts receivable balances and is charged to other bad debt expense. We calculate this allowance based on our history of write-offs, the level of past-due accounts based on the contractual terms of the receivables, and our relationships with, and the economic status of, our customers. With over 86% percent of accounts receivable balance from Federal contracts that require payment, and the uncollectable amount historically has been less than 1%. As of September 30, 2023, and December 31, 2022, an allowance for estimated uncollectible accounts was determined to be unnecessary.
Property and Equipment
Property
and equipment are recorded at cost. Expenditures for major additions and improvements are capitalized and minor replacements, maintenance,
and repairs are charged to expense as incurred. When property and equipment is retired or otherwise disposed of, the cost and accumulated
depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations for the respective
period. Depreciation is provided over the estimated useful lives of the related assets using the straight-line method for financial statement
purposes. The Company uses other depreciation methods (generally accelerated) for tax purposes where appropriate. The estimated useful
life for Machinery and Equipment, and Vehicles is
Operating Leases
In February 2016, FASB ASU No. 2016-02 established ASC Topic 842, Leases, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. Effective December 31, 2022, we have implemented ASU No. 2016-02 and booked the operating lease asset and the related liability.
Net income/(loss) per common share is computed by dividing net income or loss by the weighted average common shares outstanding during the period as defined by Financial Accounting Standards, ASC Topic 260, “Earnings per Share”. Basic earnings/(loss) per common share (“EPS”) calculations are determined by dividing net income/(loss) by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per common share calculations are determined by dividing net income by the weighted average number of common shares and dilutive common share equivalents outstanding.
6
Revenue Recognition
We
recognize revenue when the Invoice for contracted services is issued as stipulated by the contract. Other services provided are recognized
at the time the service is provided. Ninety eight percent of revenues are billed monthly and recognized in the month the services were
provided. Refunds and returns, which are minimal, are recorded as a reduction of revenue. The Company has not recorded a reserve for
returns on September 30, 2023, or 2022 since it does
Fair Value of Financial Instruments
The Company applies the accounting guidance under Financial Accounting Standards Board (“FASB”) ASC 820-10, “Fair Value Measurements”, as well as certain related FASB staff positions. This guidance defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact business and considers assumptions that marketplace participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of non-performance.
The guidance also establishes a fair value hierarchy for measurements of fair value as follows:
| ● | Level 1 - quoted market prices in active markets for identical assets or liabilities. | |
| ● | Level 2 - inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. | |
| ● | Level 3 - unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
The carrying amount of the Company’s financial instruments approximates their fair value as of September 30, 2023, and December 31, 2022, due to the short-term nature of these instruments.
NOTE 3 – RELATED PARTY RECEIVABLE
On July 7, 2021, the company entered into an agreement to purchase 100% of the Preferred A-1 Stock of Health Revenue Assurance Holdings, Inc. a SEC registered company for $. In March 2022, Health Revenue Assurance Holdings, Inc. name was changed to Ameriguard Security Services Inc. (AGSS). On December 9, 2022, we signed the definitive merger agreement initiating a reverse merger with AGSS, resulting in the Company becoming a 100% owned subsidiary of AGSS. Prior to the merger, the Company funded the operational expenses of AGSS and treated these expenses as related party expenses. These expenses we eliminated when the two companies were consolidated for the financial statement presentation.
The receivable balances on September 30, 2023, and December 31, 2022, were $. Related party receivables are eliminated upon consolidation.
7
NOTE 4 – FIXED ASSETS
Fixed assets consist of the following on September 30, 2023, and December 31, 2022:
| 2023 | 2022 | |||||||
| Leasehold Improvements | ||||||||
| Machinery and Equipment | ||||||||
| Vehicles | ||||||||
| Total Fixed Assets | ||||||||
| Accumulated Depreciation | ( | ) | ( | ) | ||||
| Fixed Assets, Net | $ | $ | ||||||
NOTE 5 – PAYROLL LIABILITY – PENSION
The
company offers various pension plans to employee groups based on location of employment. Corporate office employees and guards have an
option to participate in a 401K sponsored by the company with a matching program up to 5% of employee salary. Federal contracts have
union agreements that define the pension calculation and due dates. It is the responsibility of the company to calculate the pension
benefit amount each month and contribute the amount due to the plan designated. The pension balances due on September 30, 2023, and December
31, 2022, for all plans were $
NOTE 6 – NOTES PAYABLE
In
June 2020, AmeriGuard Security Services, Inc. received an SBA Loan through Fresno First Bank in the amount of $
On
July 7, 2022, the Company entered into a buyout agreement with a shareholder Lillian Flores. The total buyout amount was $
The following schedule details the loans active as of September 30, 2023, and December 31, 2022:
| 2023 | 2022 | |||||||
| Current Portion: | ||||||||
| Notes and loans payable | $ | $ | ||||||
| Total Current Portion | ||||||||
| Long term Portion: | ||||||||
| Notes and loans payable | ||||||||
| Total Long-term Portion | ||||||||
| $ | $ | |||||||
8
NOTE 7 – STOCKHOLDERS’ EQUITY
From
December 31, 2022, to September 30,2023 the only impact to equity was the Net Income for the period of $
NOTE 8 – COMMITMENTS AND CONTINGENCIES
The company has a multiple vehicle lease agreement with Enterprise Leasing. As of September 30, 2023, the company had 19 vehicles under lease. The lease agreement includes maintenance services. The terms of the lease agreement varies based on the date vehicle were leased and the respective terms for each vehicle. The master lease is updated annually and requires annual internal financial reports and company tax return.
NOTE 9 – CONCENTRATION OF SALES
The
company generated approximately $
| ● | Social Security Administration, NSC | - | September 2022 through September 2027 Nine-month
revenue - $ | |
| ● | Social security Administration, SSC | - | June 2022 through June 2027 Nine-month
revenue - $ | |
| ● | Social Security Administration, WBDOC | - | June 2021 through July 2026 Nine-month
revenue - $ | |
| ● | National Institute of Health- EPA | - | May 2020 through May 2023 Nine-month
revenue - $ |
NOTE 10 – OTHER INCOME (EXPENSE)
The company received an Employee Retention Tax
Credit of (ERTC) payment of $3,288,000 from the tax year 2021. The company also experienced a related expense of approximately $
NOTE 11 – LITIGATION AND CLAIMS
As of September 30,
2023, there is one employment lawsuit pending. The issue involves an employee who resigned and is claiming various wage and hour
discrepancies. There have been no negotiations or settlement efforts to date, the only activity has been providing the
employee’s counsel with requested employment documents. There are 4 other employees who have also requested similar employment
records and it is not clear how, or if, they intend to move forward. The company will defend its position and intends to prevail in
the lawsuit. As of December 31, 2022, there was one
employment issue pending. The issue involves a terminated employee alleging discrimination and wrongful termination. A lawsuit has
not been filed, only a demand letter has been presented. Management has been working with the attorneys to find a reasonable
settlement to this dispute without going to trial. After several months of discussion and negotiation it appears that the complaint
will be settled for $23,000. As of March 31, 2023, the final agreement was signed which pays out the $
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Item 2 contains forward-looking statements. Forward-looking statements in this Quarterly Report on Form 10-Q are subject to a number of risks and uncertainties, some of which are beyond our control. Our actual results, performance, prospects or opportunities could differ materially from those expressed in or implied by the forward-looking statements. Additional risks of which we are not currently aware or which we currently deem immaterial could also cause our actual results to differ, including those discussed in the sections entitled “Forward-Looking Statements” and “Risk Factors” included elsewhere in this Quarterly Report.
Management’s Discussion and Analysis should be read in conjunction with the financial statements included in this Quarterly Report on Form 10-Q (the “Financial Statements”). The financial statements have been prepared in accordance with generally accepted accounting policies in the United States (“GAAP”). Except as otherwise disclosed, all dollar figures included therein and in the following management discussion and analysis are quoted in United States dollars.
The following discussion of the Company’s financial condition and the results of operations should be read in conjunction with the Financial Statements and footnotes thereto appearing elsewhere in this Report.
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the Company notes that in addition to the description of historical facts contained herein, this report contains certain forward-looking statements that involve risks and uncertainties as detailed herein and from time to time in the Company’s other filings with the Securities and Exchange Commission and elsewhere. Such statements are based on management’s current expectations and are subject to a number of factors and uncertainties, which could cause actual results to differ materially from those described in the forward-looking statements. These factors include, among others: (a) the Company’s fluctuations in sales and operating results; (b) regulatory, competitive and contractual risks; (c) development risks; (d) the ability to achieve strategic initiatives, including but not limited to the ability to achieve sales growth, and (e) unknown litigation.
Corporate Structure
As previously mentioned, on December 9, 2022, AGSS executed a reverse merger with AmeriGuard resulting in AGSS becoming the sole owner of AmeriGuard. This merger establishes AGSS as a company operating a viable guard company with annual sales of approximately $20,000,000. It also is in the position to access the capital market to generate the capital needed to begin its growth strategy of mergers and acquisitions within the security industry.
Prior to and after the merger AGSS has been working on developing the leadership team needed. We have in place a CEO with 20 years of experience in our industry and who has been very successful in the government contracting market. Our CFO has over 35 years of business finance experience, the last 15 of which he has been focusing on organizational development consulting across multiple industries, and an Operations team on the east coast managing IT and our federal contracts. We have a Board of Directors with Wall Street and government security experience, making us well positioned to aggressively grow the business.
Results of Operations for the nine months ending September 30, 2023
Revenues and Cost of Goods Sold
For the first nine months of 2023 AGSS experienced a 16.4% decrease of approximately $3,088,900 in overall revenue over the previous year. The was due to a decline in federal contract revenue, in the amount of approximately $2,900,000, along with a decrease in commercial services in the amount of approximately $189,000. The contract services revenue decrease was the result of the National Institute of Health- EPA contract ending mid-May and the Social Security Administration, WBDOC contract reducing total hours in 2023 over 2022. For the Commercial operations the decrease was due to staffing shortages reducing our ability to acquire new customers. However, we are experiencing a continued demand for our services and expect growth in the commercial service revenues moving forward. Towards the end of September and early October we were able to hire several new guards allowing us to immediately regain some hours lost and confidently acquire new business.
10
Like other professional service industries most of the expense is direct labor and the expenses associated with that labor. We are not an exception. Our direct expenses average around 90% of revenues. However, during the first nine months of 2023 we saw that cost increase to 93% of revenue. This increase is due to labor shortages resulting in an increase in overtime paid to contract guards. Total labor cost of services increased approximately $1,580,000 in 2023 over 2022. We have increased recruitment activities and are working with the staff to address the overtime expenses, and we are beginning to see an improvement as we are continuing to hire and retain guards.
Other Related Income
Other income decreased in 2023 slightly compared to 2022, by approximately $8,200.
Operating Expenses
Operation expenses, overhead expenses, increased in 2023 over 2022 by approximately $720,000. Slightly more than half of that increase was in administrative salaries and related payroll expenses, of approximately $362,000. As part of the reverse merger preparations, we added to our administrative team a full-time CFO, an HR Management team and an Operations Management team along with the necessary support positions in payroll and accounting. We also experienced an increase in professional fees of approximately $65,000. These increases relate to the preparations for the merger and the following corporate expansion. During the third quarter we have taken steps to reduce administrative labor by eliminating two positions with an annual labor cost of approximately $200,000. We have established an administrative team with the capacity available to take the company to annual sales of $200 million and beyond.
The remaining increase in operations expenses fall into a few general categories. One such category is expenses related to public company operations incurred in 2023 and not in 2022. The total of these expenses is approximately $130,000. Another category of expenses is that of loan fees which increased by approximately $120,000 over 2022. The majority of this increase is from the shareholder buyout loan of $110,000 of accrued interest. The final category of general operational expenses such as rent, general liability insurance, marketing, guard training, increased approximately $145,000.
At this time, our operating structure and current level of expense can handle several times more in revenue with minor increases to our operating overhead expenses. This allows the entire gross profit of any new contract or company acquisition to go straight to the bottom line, providing a consistent return on investment. However, due to a delay in our initial capital raise, management will continue taking steps to reduce costs over the next 6 months.
Other Income (Expense)
Other income increased in 2023 significantly compared to 2022, by approximately $3,278,000. This increase was attributable to the receipt of an Employee Retention Tax Credit (ERTC) payment of $3,288,033 and related interest in the amount of $129,800, from tax year 2021. This is a one-time credit. Funds have been set aside to cover related income taxes and debt coverage for the 2023 year. The remaining cash will be utilized for operations. Other expenses increased approximately $450,000 compared to 2022. The primary cause of this increase is due to expenses related to our efforts preparing to enter the capital market. We do not expect to incur these expenses beyond the first quarter of 2024.
Net Income
Net income for the nine months ending September 30, 2023 was $787,034. An increase over net income in 2022 of $189,864. The net income increase was the direct result of the ERTC reviewed in the above section Other Income (Expense). Operationally Net Income declined during this period due to expenses incurred in 2023 relating to the management of the public company not incurred in 2022. As previously mentioned, our operational structure that drives these costs has excess capacity in anticipation of significant growth via new contracts or more specifically, company acquisitions. This allows additional revenue to go directly to our bottom line (see moving forward comments).
11
Liquidity and Capital Resources
The Company’s principal sources of liquidity include cash from operations and proceeds from long-term debt financing. During the nine months ending September 30, 2023, operations generated net increase in cash of approximately $330,000 resulting from the ERTC money received in June. While cash provided by general operations was approximately $398,000. While cash used for investing and financing activities total approximately $55,000.
On September 30, 2023, the Company had cash on hand of $1,557,724, with total current assets of $3,500,863.
Moving Forward
During the past twenty-seven months we have been working to get to where we are today. It has been challenging and expensive to get to this point of being a public company with a corporate structure, systems and team that can expand our business with increasing profitability. These costs have had a negative impact on our bottom line, but we are now in a position to execute our plans. Our current overhead expense structure has the capacity to manage ten times the revenues from one of two strategic sources. We are confident that our future will be profitable.
Our first source is to continue down our historical path of seeking out contracts that meet our criteria and bidding with the hope of winning additional contracts.
Our second source of growth will be mergers and acquisitions. Now that we have the capital market available to us and our industry is positioned for long-term growth, now is the time. Current projections have us completing our initial equity raise by mid-November of this year. The security industry continues to grow in opportunity, and the industry is prime for consolidation. As a top-tier company in the industry, we want to position ourselves to acquire others and quickly grow our revenues significantly with one or two key acquisitions. With our current structure in place, the acquired company’s gross profits can directly impact our bottom line as we will be able to cut certain operational costs of these companies. The returns could be significant.
There are also acquisition opportunities in several other industries that fit our business model. Those include transportation, cyber security, private security, and surveillance to mention a few. We are actively looking for companies that meet our investment criteria of profitability and positive cash flow.
Management is very positive about achieving profitable operations in the next twelve months based on the following:
| ● | AGSS operates in a growing industry. |
| ● | The security industry is favourably positioned, even in a recession. | |
| ● | We will complete our initial equity raise providing the funds necessary to acquire key companies. |
| ● | There are over 8,000 security companies operating in our market, with 50% available for acquisition. |
| ● | Our management team, Board of Directors and supporting equity professionals can get the job done. |
| ● | We have been and will continue to be a company that is very conservative with our resources and will use every possible dollar to provide strength and good return to our investors. |
| ● | We are in it for the long haul. |
| ● | We make profits the old fashion way, hard work. |
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are a smaller reporting company and are not required to provide the information required by this item.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, or the “Exchange Act”) that are designed to ensure that information that would be required to be disclosed in the Exchange Act reports is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including to our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
As required by Rule 13a-15 under the Exchange Act, our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2023. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of September 30, 2023, our disclosure controls and procedures were not effective to satisfy the objectives for which they are intended due to a weakness in our internal control over financial reporting discussed below.
The framework our management uses to evaluate the effectiveness of our internal control over financial reporting is based on the guidance provided by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission in its 1992 report: INTERNAL CONTROL - INTEGRATED FRAMEWORK. Based on our evaluation under the framework described above, our management has concluded that our internal control over financial reporting was effective as of September 30, 2023, due to the same weaknesses that rendered our disclosure controls and procedures ineffective. The Company’s internal control over financial reporting is not effective due to a lack of sufficient resources to hire the necessary support staff to separate duties between different individuals. The Company plans to address these weaknesses as resources become available by hiring additional professional staff, as funding becomes available, outsourcing certain aspects of the recording and reporting functions, and separating responsibilities. We have identified the following material weakness.
As of September 30, 2023, we did not maintain effective controls over the control environment. The Board of Directors has not established an audit committee as defined in Item 407(d)(5)(ii) of Regulation S-K. Since these entity level programs have a pervasive effect across the organization, management has determined that these circumstances constitute a material weakness.
Because of these weaknesses, management has concluded that the Company did not maintain effective internal control over financial reporting as of June 30, 2023, based on the criteria established in “INTERNAL CONTROL-INTEGRATED FRAMEWORK” issued by the COSO. Management believes that the weaknesses set forth above did not have an effect on our financial results because the activity during this period was nominal and properly overseen by the CFO and CEO. However, management believes that the lack of a functioning audit committee results in ineffective oversight in the establishment and monitoring of required internal controls and procedures, which could result in a material misstatement in our financial statements in future periods. Management will further recruit qualified individuals, establish an audit committee, and ensure that board members have current and pertinent financial experience.
Changes in Internal Controls over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II Other Information
ITEM 1. LEGAL PROCEEDINGS
Involvement in Certain Legal Proceedings
To our knowledge, during the past ten years, none of our directors, executive officers, promoters, control persons, or nominees has:
| ● | been convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other minor offenses) | |
| ● | had any bankruptcy petition filed by or against the business or property of the person, or of any partnership, corporation or business association of which he was a general partner or executive officer, either at the time of the bankruptcy filing or within two years prior to that time; | |
| ● | been found by a court of competent jurisdiction in a civil action or by the Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated; | |
| ● | been the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated (not including any settlement of a civil proceeding among private litigants), relating to an alleged violation of any federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or |
| ● | been the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member. |
In the second quarter of 2022 the Company did receive a demand letter from a terminated employee’s lawyer. The demand letter claimed the employee experienced discrimination and wrongful termination. This issue was handled by the Company’s labor attorney and after review and negotiation it was settled out of court in March of 2023 in the amount of $23,000. No other legal issues or court filings are active at this time. During the third quarter 2023, the Company received demand letters from 5 employees requesting employment records and timecards. One employee has filed a lawsuit. The Company intends to litigate its position and expects to settle the issue quickly. It is estimated that if the lawsuit remains the one person, the settlement would be in the range of $7,500 to $50,000, if it becomes a class action for the 40 employees in California the results could be between $8,000 and $120,000. It is the Company’s position that the case has no merit and anticipates winning the lawsuit with no payment to the employees.
ITEM 1A. RISK FACTORS
AS A SMALLER REPORTING COMPANY, WE ARE NOT REQUIRED TO PROVIDE A STATEMENT OF RISK FACTORS.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| AMERIGUARD SECURITY SERVICES, INC. | |||
| Date: November 13, 2023 | By: | /s/ Lawrence Garcia | |
| Name: | Lawrence Garcia | ||
| Title: | Chief Executive Officer | ||
| (principal executive officer) | |||
| Date: November 13, 2023 | By: | /s/ Michael Goossen | |
| Name: | Michael Goosen | ||
| Title: | Chief Financial Officer | ||
| (principal
financial officer and principal accounting officer) | |||
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AMERIGUARD SECURITY SERVICES, INC.
Exhibit Index to Quarterly Report on Form 10-Q
For the Nine Months Ended September 30, 2023
| * | Exhibits filed herewith. |
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