UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended ~~June 30, 2017~~March 31, 2018

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 1 - 5332

P&F INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)

Delaware		22-1657413
(State or other jurisdiction of		(I.R.S. Employer Identification Number)
incorporation or organization)

445 Broadhollow Road, Suite 100, Melville, New York		11747
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code:(631) 694-9800

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. Yesx No¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yesx 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, or an emerging growth~~ company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company”~~, and “emerging growth company”~~in Rule 12b-2 of the Exchange Act.

Large accelerated filer¨	Accelerated filer¨	Non-accelerated filer¨	Smaller reporting company x
		(Do not check if a 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 the 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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes¨ Nox

As of ~~August 8, 2017~~May 4, 2018 there were ~~3,619,592~~3,579,294 shares of the registrant’s Class A Common Stock outstanding.

P&F INDUSTRIES, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED ~~JUNE 30, 2017~~MARCH 31, 2018

TABLE OF CONTENTS

		PAGE

PART I — FINANCIAL INFORMATION		1

Item 1.	Financial Statements	13

	Consolidated Balance Sheets as of ~~June 30, 2017~~March 31, 2018 (unaudited) and December 31, ~~2016~~2017	13

	Consolidated Statements of Operations and Comprehensive Income (Loss) for the three months ended March 31, 2018 and ~~six-month periods ended June 30,~~ 2017 ~~and 2016~~ (unaudited)	35

	Consolidated Statement of Shareholders’ Equity for the ~~six~~three months ended ~~June 30, 2017~~March 31, 2018 (unaudited)	46

	Consolidated Statements of Cash Flows for the ~~six~~three months ended ~~June 30,~~March 31, 2018 and 2017 ~~and 2016~~ (unaudited)	57

	Notes to Consolidated Financial Statements (unaudited)	79

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2019

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3229

Item 4.	Controls and Procedures	3229

PART II — OTHER INFORMATION		33

Item 1.	Legal Proceedings	3330

Item 1A.	Risk Factors	3330

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3330

Item 3.	Defaults Upon Senior Securities	3330

Item 4.	Mine Safety Disclosures	3330

Item 5.	Other Information	3330

Item 6.	Exhibits	3330

Signature	34	31

Exhibit Index	35	32

PART I - FINANCIAL INFORMATION

~~Item 1.~~

~~Financial Statements~~

Item 1. Financial Statements

P&F INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

June 30, 2017 December 31, 2016
(unaudited) (See Note 1)
ASSETS
CURRENT ASSETS

Cash $ 1,269,000 $ 3,699,000
Accounts receivable — net 9,781,000 7,906,000
Inventories 20,124,000 19,901,000
Prepaid expenses and other current assets 2,880,000 3,030,000
TOTAL CURRENT ASSETS 34,054,000 34,536,000

PROPERTY AND EQUIPMENT
Land 1,281,000 1,150,000
Buildings and improvements 6,136,000 5,209,000
Machinery and equipment 20,941,000 19,401,000
28,358,000 25,760,000
Less accumulated depreciation and amortization 19,314,000 18,671,000
NET PROPERTY AND EQUIPMENT 9,044,000 7,089,000

GOODWILL 4,425,000 3,897,000

OTHER INTANGIBLE ASSETS — net 8,674,000 6,606,000

DEFERRED INCOME TAXES — net 1,812,000 1,793,000

OTHER ASSETS — net 124,000 130,000

TOTAL ASSETS $ 58,133,000 $ 54,051,000

~~See accompanying notes to consolidated financial statements (unaudited).~~

~~P&F INDUSTRIES, INC. AND SUBSIDIARIES~~

~~CONSOLIDATED BALANCE SHEETS~~

June 30, 2017 December 31, 2016
(unaudited) (See Note 1)
LIABILITIES AND SHAREHOLDERS’ EQUITY

CURRENT LIABILITIES

Short-term borrowings $ 4,537,000 $ —
Accounts payable 2,787,000 2,398,000
Accrued compensation and benefits 1,204,000 1,733,000
Accrued other liabilities 1,231,000 2,019,000
Current maturities of long-term debt 4,000 13,000
TOTAL CURRENT LIABILITIES 9,763,000 6,163,000

Long–term debt, less current maturities 91,000 88,000
Other liabilities 892,000 210,000

TOTAL LIABILITIES 10,746,000 6,461,000

SHAREHOLDERS’ EQUITY
Preferred stock - $10 par; authorized - 2,000,000 shares; no shares issued — —
Common stock
Class A - $1 par; authorized - 7,000,000 shares; issued – 4,203,000 at June 30, 2017 and 4,181,000 at December 31, 2016 4,203,000 4,181,000
Class B - $1 par; authorized - 2,000,000 shares; no shares issued — —
Additional paid-in capital 12,968,000 12,906,000
Retained earnings 35,657,000 36,061,000
Treasury stock, at cost – 584,000 shares at June 30, 2017 and December 31, 2016 (4,821,000 ) (4,821,000 )
Accumulated other comprehensive loss (620,000 ) (737,000 )

TOTAL SHAREHOLDERS’ EQUITY 47,387,000 47,590,000

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 58,133,000 $ 54,051,000

~~See accompanying notes to consolidated financial statements (unaudited).~~

~~P&F INDUSTRIES, INC. AND SUBSIDIARIES~~

~~CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)~~

~~(unaudited)~~

Three months Six months
ended June 30, ended June 30,
2017 2016 2017 2016

Net revenue $ 15,359,000 $ 15,637,000 $ 28,575,000 $ 30,136,000
Cost of sales 9,937,000 10,332,000 18,180,000 19,615,000
Gross profit 5,422,000 5,305,000 10,395,000 10,521,000
Selling, general and administrative expenses 5,366,000 5,154,000 10,413,000 10,173,000
Impairment of goodwill and other intangible assets — 8,311,000 — 8,311,000
Operating income (loss) 56,000 (8,160,000 ) (18,000 ) (7,963,000 )
Other income, net (24,000 ) (18,000 ) (24,000 ) (32,000 )
Interest expense 64,000 36,000 74,000 138,000
Income (loss) from continuing operations before income taxes 16,000 (8,178,000 ) (68,000 ) (8,069,000 )
Income tax benefit — (2,808,000 ) (24,000 ) (2,765,000 )
Income (loss) from continuing operations 16,000 (5,370,000 ) (44,000 ) (5,304,000 )

Discontinued operations (Note 2)

Net income from discontinued operations, net of tax of $-0- and $38,000 for the three and six-month periods ended June 30, 2016 — — — 72,000
(Loss) gain on sale of discontinued operations, net of tax benefit of $-0- and $141,000 for the three and six-month periods ended June 30, 2016 — (14,000 ) — 12,171,000
(Loss) income from discontinued operations, net of tax — (14,000 ) — 12,243,000

Net income (loss) $ 16,000 $ (5,384,000 ) $ (44,000 ) $ 6,939,000

Basic earnings (loss) per share
Continuing operations $ — $ (1.49 ) $ (0.01 ) $ (1.47 )
Discontinued operations — — — 3.40
Net income (loss) $ — $ (1.49 ) $ (0.01 ) $ 1.93

Diluted earnings (loss) per share
Continuing operations $ — $ (1.49 ) $ (0.01 ) $ (1.47 )
Discontinued operations — — — 3.40
Net income (loss) $ — $ (1.49 ) $ (0.01 ) $ 1.93

Weighted average common shares outstanding:

Basic 3,611,000 3,595,000 3,605,000 3,598,000
Diluted 3,720,000 3,595,000 3,605,000 3,598,000

Net income (loss) $ 16,000 $ (5,384,000 ) $ (44,000 ) $ 6,939,000
Other comprehensive income (loss) -foreign currency translation adjustment 91,000 (166,000 ) 117,000 (236,000 )
Total comprehensive income (loss) $ 107,000 $ (5,550,000 ) $ 73,000 $ 6,703,000

	March 31, 2018		December 31, 2017
	(unaudited)		(See Note 1)
ASSETS
CURRENT ASSETS

Cash	$	1,704,000	$	1,241,000
Accounts receivable — net		10,667,000		10,047,000
Inventories		18,739,000		19,657,000
Prepaid expenses and other current assets		1,427,000		1,224,000
TOTAL CURRENT ASSETS		32,537,000		32,169,000

PROPERTY AND EQUIPMENT
Land		1,281,000		1,281,000
Buildings and improvements		6,138,000		6,138,000
Machinery and equipment		21,094,000		20,579,000
		28,513,000		27,998,000
Less accumulated depreciation and amortization		19,380,000		19,091,000
NET PROPERTY AND EQUIPMENT		9,133,000		8,907,000

GOODWILL		4,454,000		4,447,000

OTHER INTANGIBLE ASSETS — net		8,376,000		8,533,000

DEFERRED INCOME TAXES — net		847,000		872,000

OTHER ASSETS — net		89,000		110,000

TOTAL ASSETS	$	55,436,000	$	55,038,000

See accompanying notes to consolidated financial statements (unaudited).

P&F INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED ~~STATEMENT OF SHAREHOLDERS’ EQUITY (unaudited)~~BALANCE SHEETS

Class A common
stock, $1 par Additional
paid-in Retained Treasury stock Accumulated
other
comprehensive
Total Shares Amount capital earnings Shares Amount loss

Balance, January 1, 2017 $ 47,590,000 4,181,000 $ 4,181,000 $ 12,906,000 $ 36,061,000 (584,000 ) $ (4,821,000 ) $ (737,000 )

Net loss (44,000 ) — — — (44,000 ) — — —

Restricted common stock compensation 22,000 5,000 5,000 17,000 — — — —

Exercise of stock options 62,000 17,000 17,000 45,000

Dividends (360,000 ) — — — (360,000 ) — — —

Foreign currency translation adjustment 117,000 — — — — — — 117,000

Balance, June 30, 2017 $ 47,387,000 4,203,000 $ 4,203,000 $ 12,968,000 $ 35,657,000 (584,000 ) $ (4,821,000 ) $ (620,000 )

	March 31, 2018			December 31, 2017
	(unaudited)			(See Note 1)
LIABILITIES AND SHAREHOLDERS’ EQUITY

CURRENT LIABILITIES

Short-term borrowings	$	3,241,000		$	1,928,000
Accounts payable		2,735,000			2,443,000
Accrued compensation and benefits		961,000			1,944,000
Accrued other liabilities		1,256,000			1,576,000
Current maturities of long-term debt		95,000			—
TOTAL CURRENT LIABILITIES		8,288,000			7,891,000

Long–term debt, less current maturities		—			94,000
Other liabilities		1,064,000			1,040,000

TOTAL LIABILITIES		9,352,000			9,025,000


SHAREHOLDERS’ EQUITY
Preferred stock - $10 par; authorized - 2,000,000 shares; no shares issued		—			—
Common stock
Class A - $1 par; authorized - 7,000,000 shares; issued – 4,229,000 at March 31, 2018 and 4,203,000 at December 31, 2017		4,229,000			4,203,000
Class B - $1 par; authorized - 2,000,000 shares; no shares issued		—			—
Additional paid-in capital		13,210,000			13,064,000
Retained earnings		34,340,000			34,455,000
Treasury stock, at cost – 641,000 shares at March 31, 2018 and 631,000 shares at December 31, 2017		(5,261,000	)		(5,179,000	)
Accumulated other comprehensive loss		(434,000	)		(530,000	)

TOTAL SHAREHOLDERS’ EQUITY		46,084,000			46,013,000

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	55,436,000		$	55,038,000

See accompanying notes to consolidated financial statements (unaudited).

P&F INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF ~~CASH FLOWS~~ OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(unaudited)

Six months
ended June 30,
2017 2016
Cash Flows from Operating Activities:
Net loss from continuing operations $ (44,000 ) $ (5,304,000 )
Net income from discontinued operations — 12,243,000

Adjustments to reconcile net loss from operations to net cash provided by (used in) operating activities:

Non-cash charges:
Depreciation and amortization 650,000 823,000
Amortization of other intangible assets 439,000 586,000
Amortization of debt issue costs 25,000 108,000
Recovery for losses on accounts receivable - net (5,000 ) (1,000 )
Stock-based compensation — 13,000
Restricted stock-based compensation 22,000 25,000
Gain on sale of fixed assets (1,000 ) (6,000 )
Deferred income taxes (24,000 ) (2,868,000 )
Impairment of goodwill and other intangible assets — 8,311,000
Changes in operating assets and liabilities:
Accounts receivable (1,059,000 ) (1,979,000 )
Inventories 1,399,000 (531,000 )
Prepaid expenses and other current assets 199,000 (186,000 )
Other assets 32,000 (1,619,000 )
Accounts payable 384,000 28,000
Accrued compensation and benefits (618,000 ) (641,000 )
Accrued other liabilities (822,000 ) 241,000
Other liabilities (9,000 ) (9,000 )
Total adjustments 612,000 2,295,000
Net cash provided by (used in) operating activities – continuing operations 568,000 (3,009,000 )
Net cash used in operating activities – discontinued operations — (840,000 )

Net cash provided by (used in) operating activities $ 568,000 $ (3,849,000 )

	Three months
	ended March 31,
	2018		2017

Net revenue	$	15,742,000	$	13,216,000
Cost of sales		10,308,000		8,243,000
Gross profit		5,434,000		4,973,000
Selling, general and administrative expenses		5,280,000		5,047,000
Operating income (loss)		154,000		(74,000	)
Other expenses		29,000		—
Interest expense		37,000		10,000
Income (loss) before income taxes		88,000		(84,000	)
Income tax expense (benefit)		23,000		(24,000	)
Income (loss)		65,000		(60,000	)

Net income (loss)	$	65,000	$	(60,000	)


Basic and diluted earnings (loss) per share	$	0.02	$	(0.02	)


Weighted average common shares outstanding:

Basic		3,583,000		3,598,000
Diluted		3,745,000		3,598,000



Net income (loss)	$	65,000	$	(60,000	)
Other comprehensive income - foreign currency translation adjustment		96,000		26,000
Total comprehensive income (loss)	$	161,000	$	(34,000	)

See accompanying notes to consolidated financial statements (unaudited).

P&F INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED ~~STATEMENTS~~STATEMENT OF ~~CASH FLOWS~~SHAREHOLDERS’ EQUITY (unaudited)

Six months
ended June 30,
2017 2016
Cash Flows from Investing Activities:
Capital expenditures $ (358,000 ) $ (766,000 )
Purchase of net assets of Jiffy Air Tool, Inc. (6,845,000 ) —
Proceeds from disposal of assets 1,000 10,000
Net cash used in investing activities – continuing operations (7,202,000 ) (756,000 )
Net cash provided by investing activities – discontinued operations — 20,149,000
Net cash (used in) provided by investing activities (7,202,000 ) 19,393,000

Cash Flows from Financing Activities:
Dividend payments (360,000 ) (1,976,000 )
Proceeds from exercise of stock options 62,000 23,000
Purchase of Class A common stock — (255,000 )
Net proceeds from short-term borrowings 4,537,000 11,793,000
Repayments of term loans — (6,343,000 )
Repayments of notes payable (10,000 ) (17,000 )
Payments of debt issue costs (50,000 ) (30,000 )
Net cash provided by financing activities – continuing operations 4,179,000 3,195,000
Net cash used in financing activities – discontinued operations — (18,716,000 )
Net cash provided by (used in) financing activities 4,179,000 (15,521,000 )

Effect of exchange rate changes on cash 25,000 (43,000 )
Net decrease in cash (2,430,000 ) (20,000 )
Cash at beginning of period 3,699,000 927,000
Cash at end of period $ 1,269,000 $ 907,000

Supplemental disclosures of cash flow information:

Cash paid for:
Interest $ 36,000 $ 108,000
Income taxes $ 335,000 $ 43,000

Supplemental disclosures of non-cash investing and financing activities:
Contingent consideration on acquisition $ 692,000 $ —

				Class A common stock, $1 par				Additional paid-in		Retained			Treasury stock						Accumulated other comprehensive
	Total			Shares		Amount		capital		earnings			Shares			Amount			loss

Balance, January 1, 2018	$	46,013,000			4,203,000	$	4,203,000	$	13,064,000	$	34,455,000			(631,000	)	$	(5,179,000	)	$	(530,000	)

Net income		65,000			—		—		—		65,000			—			—			—

Exercise of stock options		105,000			26,000		26,000		79,000		—			—			—			—

Restricted common stock compensation		7,000			—		—		7,000		—			—			—			—

Purchase of Class A common stock		(82,000	)		—		—		—		—			(10,000	)		(82,000	)		—

Stock-based compensation		60,000			—		—		60,000		—			—			—			—

Dividends		(180,000	)		—		—		—		(180,000	)		—			—			—

Foreign currency translation adjustment		96,000			—		—		—		—			—			—			96,000

Balance, March 31, 2018	$	46,084,000			4,229,000	$	4,229,000	$	13,210,000	$	34,340,000			(641,000	)	$	(5,261,000	)	$	(434,000	)

See accompanying notes to consolidated financial statements (unaudited).

P&F INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

	Three months
	ended March 31,
	2018			2017
Cash Flows from Operating Activities:
Net income (loss)	$	65,000		$	(60,000	)

Adjustments to reconcile net income (loss) to net cash used in operating activities:

Non-cash charges:
Depreciation and amortization		335,000			319,000
Amortization of other intangible assets		179,000			206,000
Amortization of debt issue costs		23,000			9,000
(Recovery of) provision for losses on accounts receivable - net		(1,000	)		1,000
Stock-based compensation		60,000			—
Loss on sale of fixed assets		1,000			—
Restricted stock-based compensation		7,000			12,000
Deferred income taxes		21,000			(71,000	)
Fair value increase in contingent consideration		29,000			—

Changes in operating assets and liabilities:
Accounts receivable		(603,000	)		(716,000	)
Inventories		961,000			(331,000	)
Prepaid expenses and other current assets		(200,000	)		(166,000	)
Other assets		—			18,000
Accounts payable		287,000			59,000
Accrued compensation and benefits		(985,000	)		(1,080,000	)
Accrued other liabilities		(328,000	)		(69,000	)
Other liabilities		(5,000	)		(5,000	)
Total adjustments		(219,000	)		(1,814,000	)
Net cash used in operating activities		(154,000	)		(1,874,000	)

See accompanying notes to consolidated financial statements (unaudited).

P&F INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

	Three months
	ended March 31,
	2018			2017
Cash Flows from Investing Activities:
Capital expenditures	$	(570,000	)	$	(231,000	)
Proceeds from disposal of assets		10,000			—
Net cash used in investing activities		(560,000	)		(231,000	)

Cash Flows from Financing Activities:
Dividend payments		(180,000	)		(180,000	)
Proceeds from exercise of stock options		105,000			—
Purchase of Class A common stock		(82,000	)		—
Net proceeds from short-term borrowings		1,313,000			—
Repayments of notes payable		—			(5,000	)
Net cash provided by (used in) financing activities		1,156,000			(185,000	)

Effect of exchange rate changes on cash		21,000			4,000
Net increase (decrease) in cash		463,000			(2,286,000	)
Cash at beginning of period		1,241,000			3,699,000
Cash at end of period	$	1,704,000		$	1,413,000

Supplemental disclosures of cash flow information:

Cash paid for:
Interest	$	16,000		$	1,000
Income taxes	$	2,000		$	—

See accompanying notes to consolidated financial statements (unaudited).

P&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

NOTE 1 – BUSINESS AND SUMMARY OF ACCOUNTING POLICIES

Basis of Financial Statement Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information, and with the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, these interim financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of the management of the Company, as defined below, these unaudited consolidated financial statements include all adjustments necessary to present fairly the information set forth therein. ~~All such adjustments, except for those adjustments relating to discontinued operations are of a normal recurring nature.~~ Results for interim periods are not necessarily indicative of results to be expected for a full year.

The consolidated balance sheet information as of December 31, ~~2016~~2017 was derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2016~~2017 (“~~2016~~2017 Form 10-K”). The interim financial statements contained herein should be read in conjunction with the ~~2016~~2017 Form 10-K.

The consolidated financial statements have been reported in U.S. dollars by translating asset and liability amounts of a foreign wholly-owned subsidiary at the closing exchange rate, equity amounts at historical rates and the results of operations and cash flow at the average of the prevailing exchange rates during the periods reported. As a result, the Company is exposed to foreign currency translation gains or losses. These gains or losses are presented in the Company’s consolidated financial statements as “Other comprehensive income ~~(loss)~~ - foreign currency translation adjustment”.

Principles of Consolidation

The unaudited consolidated financial statements contained herein include the accounts of P&F Industries, Inc. and its subsidiaries, (“P&F” or the “Company”). All significant intercompany balances and transactions have been eliminated.

~~Reclassification~~

Certain amounts in the consolidated financial statements of the Company have been reclassified to conform to classifications used in the current year. The reclassifications had no effect on previously reported results of operations or retained earnings.

~~Customer concentration~~

The Company has two retail customers that, during the three and six-month periods ended June 30, 2017 accounted for 35.2% and 37.7%, respectively, of the Company’s revenue. For the same three and six-month periods in 2016 these two customers accounted for 46.2% and 42.4% of the Company’s revenue.

The Company

P&F is a Delaware corporation incorporated on April 19, 1963. Prior to February 11, 2016 (the “Nationwide Closing Date”), the effective date of the sale of its Nationwide Industries, Inc. (“Nationwide”) subsidiary, P&F operated in two primary lines of business or segments: (i) tools and other products (“Tools”) and (ii) hardware and accessories (“Hardware”). As a result of the sale of Nationwide, which had been reported in the Hardware segment, the Company currently only operates in the Tools business. See Note 2 to consolidated financial statements for further discussion.

~~P&F INDUSTRIES, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)~~

~~NOTE 1 – BUSINESS AND SUMMARY OF ACCOUNTING POLICIES – (continued)~~

~~Tools~~

The Company conducts its ~~Tools~~ business through a wholly-owned subsidiary, Continental Tool Group, Inc. (“Continental”), which in turn operates through its wholly-owned subsidiaries, Florida Pneumatic Manufacturing Corporation (“Florida Pneumatic”) and Hy-Tech Machine, Inc. (“Hy-Tech”). Exhaust Technologies Inc. (“ETI”) and Universal Air Tool Company Limited (“UAT”) are wholly-owned subsidiaries of Florida Pneumatic. Effective April 5, 2017, ~~Florida Pneumatic, through a wholly-owned subsidiary~~the Company purchased substantially all of the operating assets, less certain payables of Jiffy Air Tool, Inc., (“Jiffy”). through a wholly-owned subsidiary. See Note 32 to our consolidated financial statements for further discussion. ~~The~~Lastly, the business of Air Tool Service Company (“ATSCO”) operates through a wholly-owned subsidiary of Hy-Tech.

Florida Pneumatic ~~is engaged in the importation~~manufactures, imports and ~~sale of~~sells pneumatic hand tools, most of which are of its own design, primarily ~~for~~to the retail, industrial, automotive and ~~automotive~~aerospace markets. ~~Florida Pneumatic~~It also markets, through its Berkley Tool division (“Berkley”), a product line which includes pipe and bolt dies, pipe taps, wrenches, vises and stands, pipe and tubing cutting equipment, hydrostatic test pumps, and replacement electrical components for a widely-used brand of pipe cutting and threading machines. ~~Lastly as the result of the acquisition of Jiffy, Florida Pneumatic now manufactures pneumatic tools marketed primarily to the aerospace sector.~~

Hy-Tech designs, manufactures and distributes ~~its own line of~~ industrial pneumatic ~~tools.~~tools, industrial gears, hydrostatic test plugs and a wide variety of parts under the brands ATP, ATSCO, OZAT, Numatx, Thaxton and Quality Gear. Industries served include power generation, petrochemical, construction, railroad, mining, ship building and fabricated metals. Hy-Tech also ~~produces~~manufactures components, assemblies, finished product and markets impact wrenches, grinders, drills, and motors. Further, it also manufactures tools to customer specifications. Its customers include refineries, chemical plants, power generation facilities, heavy construction enterprises, oil and gas and mining companies. In addition, Hy-Tech manufactures an extensive line of pneumatic tool replacement parts that are sold to original equipment manufacturers (“OEMs”). It also manufactures and distributes high pressure stopperssystems for ~~hydrostatic testing fabricated pipe, gears, sprockets, splines and racks.~~various Original Equipment Manufacturers under their own brand names.

P&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

~~Hardware~~

Prior to the Nationwide Closing Date, the Company conducted its Hardware business through its wholly-owned subsidiary, Countrywide Hardware, Inc. (“Countrywide”). Countrywide conducted its business operations through its wholly-owned subsidiary, Nationwide. Nationwide was an importer and manufacturer of door, window and fencing hardware and accessories, including rollers, hinges, window operators, sash locks, custom zinc castings and door closers. Effective as of the Nationwide Closing Date, Countrywide sold Nationwide to an unrelated third party for approximately $22,200,000. See Note 2 to consolidated financial statements for further discussion.NOTE 1 – BUSINESS AND SUMMARY OF ACCOUNTING POLICIES – (continued)

Management Estimates

The preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses in those financial statements. Certain significant accounting policies that contain subjective management estimates and assumptions include those related to revenue recognition, inventory, goodwill, intangible assets and other long-lived assets, contingent consideration, income taxes and deferred taxes. Descriptions of these policies are discussed in the Company’s ~~2016~~2017 Form 10-K. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, and makes adjustments when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from those estimates and assumptions. Significant changes, if any, in those estimates resulting from continuing changes in the economic environment will be reflected in the consolidated financial statements in future periods.

Significant Accounting Policies – Revenue Recognition

Our significant accounting policies are described in "Note 1: Summary of Significant Accounting Policies" of our Annual Report on Form 10-K for the year ended December 31, 2017. Our significant accounting policy relating to revenue recognition reflects the impact of the adoption of ASC 606, defined below, in the first quarter of 2018.

The Company records revenue based on a five-step model in accordance with Accounting Standards Codification ("ASC") 606,Revenue from Contracts with Customers ("ASC 606"). The Company sells its goods on terms which transfer title and risk of loss at a specified location, which may be our warehouse, destination designated by our customer, port of loading or port of discharge, depending on the final destination of the goods. Other than standard product warranty provisions, our sales arrangements provide for no other post-shipment obligations. The Company offers rebates and other sales incentives, promotional allowances or discounts for certain customers, typically related to customer purchase volume, and are classified as a reduction of revenue and recorded at the time of sale, using the most likely amount approach. The Company periodically evaluates whether an allowance for sales returns is necessary. Historically, we have experienced minimal sales returns. If the Company believes there are material potential sales returns, it would provide the necessary provision against sales.

The Company's performance obligations underlying its core revenue sources remain substantially unchanged. Its revenue is generated through the sale of finished products, and is generally recognized at the point in time when merchandise is transferred to the customer with a fixed payment due generally within 30 to 90 days, and in an amount that considers the impacts of estimated allowances. Further, the Company has made a policy election to account for shipping and handling activities that occur after the customer has obtained control of the products as fulfillment costs rather than as an additional promised service. This election is consistent with the Company’s prior policy, and therefore the adoption of ASC 606 relating to shipping and handling activities will not have any impact on its financial results. Additionally, as the result of the adoption of ASC 606, the Company will account for certain expenses that in prior periods were accounted for as a selling expense, which will now be treated as an adjustment to gross revenue. Accordingly, during the three-month period ended March 31, 2018 the Company reduced its net revenue, gross margin and selling expense by approximately $214,000. Additionally, the Company at March 31, 2018 has included in its allowance for doubtful accounts approximately $74,000 that was previously accounted for in its current liabilities. There are no remaining performance obligations as of March 31, 2018.

810

P&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

NOTE 1 – BUSINESS AND SUMMARY OF ACCOUNTING POLICIES – (Continued)

The Company analyzes its revenue as follows:

Revenue generated at Florida Pneumatic.

	Three months ended March 31,
	2018					2017
	Revenue		Percent of revenue			Revenue		Percent of revenue
Retail	$	4,090,000		33.4	%	$	5,353,000		50.9	%
Automotive		3,938,000		32.1			3,613,000		34.4
Aerospace		2,670,000		21.8			89,000		0.9
Industrial/catalog		1,364,000		11.1			1,245,000		11.8
Other		202,000		1.6			209,000		2.0
Total	$	12,264,000		100.0	%	$	10,509,000		100.0	%

Revenue generated at Hy-Tech.

	Three months ended March 31,
	2018					2017
	Revenue		Percent of revenue			Revenue		Percent of revenue
ATP brands	$	3,076,000		88.4	%	$	2,406,000		88.9	%
Other brands		402,000		11.6			301,000		11.1
Total	$	3,478,000		100.0	%	$	2,707,000		100.0	%

New Accounting Pronouncements

Recently Adopted

In ~~March 2016,~~January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting ~~Standard~~Standards Update (“ASU”) ~~2016-09,~~No. 2017-04,~~Improvements~~Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which simplified the testing of goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measured a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. ASU 2017-04 is effective for public companies for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The Company concluded that ASU 2017-04 is preferable to ~~Employee Share-Based Payment Accounting~~the current guidance due to efficiency, since ASU 2017-04 eliminates the requirement to determine the fair value of individual assets and liabilities of a reporting unit to measure goodwill impairment. The Company adopted ASU 2017-04 in 2017, in conjunction with its annual impairment test of goodwill for all reporting units. The adoption of ASU 2017-04 did not have a material impact on the Company’s financial results.

In August 2016, the FASB issued ASU 2016-15,Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments. The ~~standard reduces complexity~~amendments in ~~several aspects of~~ASU 2016-15 are intended to add or clarify guidance on the ~~accounting for employee share-based compensation, including the income tax consequences,~~ classification of ~~awards as either equity or liabilities,~~certain cash receipts and ~~classification on~~payments in the statement of cash ~~flows. The~~flows, with the intent of reducing diversity in practice for the eight types of cash flows identified. ASU 2016-15 is effective for public companies' fiscal years, including interim periods within those fiscal years, beginning after December 15, 2017. The ~~impact~~adoption of ASU 2016-15 as of January 1, 2018 had no material effect on the Company’s financial position, results of operations or cash flows.

In May 2014, the FASB issued ASU No. 2014-09,Revenue from Contracts with Customers, as a new Topic, Accounting Standards Codification (“ASC”) ASC 606 (“ASC 606”), which supersedes existing accounting standards for revenue recognition and creates a single framework. Additional updates to ASC 606 were issued by the FASB in 2015 and 2016.

The Company adopted ASC 606 on the first day of fiscal 2018. Its underlying principle is to use a five-step analysis of transactions to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. The Company has elected to use the modified retrospective approach. As the Company does not have any contracts that were not completed as of January 1, 2018, there is no adjustment required to its retained earnings. The adoption ~~was~~of ASC 606 will not have an effect on the Company’s cash flows. Other than discussed earlier in this Note 1, the Adoption of ASC 606 did not have a material toeffect on the Company’s consolidated financial statements.

~~In July 2015, the FASB~~The Company does not believe that any other recently issued ~~ASU No. 2015-11,~~~~Inventory (Topic 330): Simplifying the Measurement of Inventory~~ ~~(“ASU 2015-11”). The~~accounting standard simplifies the subsequent measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value for entities using the first-in-first out method of valuing inventory. ASU 2015-11 eliminates other measures required by current guidance to determine net realizable value. ASU 2015-11 is effective for fiscal 2017. The impact of the adoption was notwould have a material ~~to the Company’s~~effect on its consolidated financial statements.

P&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

NOTE 1 – BUSINESS AND SUMMARY OF ACCOUNTING POLICIES – (Continued)

Not Yet Adopted

In February 2016, the FASB issued ASU 2016-02,Leases. This ASU is a comprehensive new leases standard that amends various aspects of existing guidance for leases and requires additional disclosures about leasing arrangements. It will require companies to recognize lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. ~~Accounting Standards Codification (“ASC”)~~ASC Topic 842 retains a distinction between finance leases and operating leases. The classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the previous leases guidance. The ASU is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years; earlier adoption is permitted. In the financial statements in which the ASU is first applied, leases shall be measured and recognized at the beginning of the earliest comparative period presented with an adjustment to equity. Practical expedients are available for election as a package and if applied consistently to all leases. The Company is currently evaluating the impact of the adoption of this guidance on its consolidated financial ~~statements.~~

~~P&F INDUSTRIES, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)~~

~~NOTE 1 – BUSINESS AND SUMMARY OF ACCOUNTING POLICIES – (Continued)~~

~~New Accounting Pronouncements~~

~~Not Yet Adopted~~condition, results of operations and cash flows.

In ~~May 2014,~~February 2018, the FASB issued No. ASU ~~No. 2014-09,~~2018-02,~~Revenue~~Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from ~~Contracts with Customers, as a new Topic, ASC Topic 606, which supersedes existing accounting standards for revenue recognition and creates a single framework. Additional updates~~Accumulated Other Comprehensive Income (“ASU 2018-02”). Under ASU 2018-02, an entity may elect to ~~Topic 606 issued by~~reclassify the ~~FASB in 2015 and 2016 include the following:~~

·	~~ASU No. 2015-14,~~ ~~Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date~~~~, which defers the effective date of the new guidance such that the new provisions will now be required for fiscal years, and interim periods within those years, beginning after December 15, 2017;~~
·	~~ASU No. 2016-08,~~ ~~Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations~~~~, which clarifies the implementation guidance on principal versus agent considerations (reporting revenue gross versus net);~~
·	~~ASU No. 2016-10,~~ ~~Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing~~~~, which clarifies the implementation guidance on identifying performance obligations and classifying licensing arrangements;~~
·	~~ASU No. 2016-12,~~ ~~Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients~~~~, which clarifies the implementation guidance in a number of other areas.~~

The underlying principle is to use a five-step analysis of transactions to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. The standard permits the use of either a retrospective or modified retrospective application. The Company intends to use the modified retrospective approach. The Company is~~currently in the process of completing its assessment of any significant contract and assessing the impact the adoption~~income tax effects of the ~~new revenue standard and related updates will have~~Tax Reform Act on ~~its consolidated financial statements and related disclosures. T~~hus far the Company does not believe the adoption of this standard and related updates will have a material effect on its consolidated financial statements. However, the Company will continue its evaluation of the standards update through the date of adoption. The standard update, as amended, will be effective for annual periods beginning after December 15, 2017.

~~In January 2017, the FASB issued~~items within accumulated other comprehensive income to retained earnings. ASU ~~No. 2017-04,~~~~“Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”,~~ which simplified the testing of goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measured a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. ASU 2017-042018-02 is effective for ~~public companies for its annual or any interim goodwill impairment tests in~~ fiscal years beginning after December 15, ~~2019.~~2018, and interim periods within those fiscal years. Early adoption is permitted in any interim period. We are currently evaluating what impact, if any, adoption of ASU 2018-02 may have on our consolidated financial statements.

Other Accounting Pronouncement

The Tax Cuts and Jobs Act (the “Act”) was enacted on December 22, 2017. The Act reduces the U.S. federal corporate income tax rate from 35% to 21%, required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries previously deferred from tax, generally eliminates U.S federal income taxes on dividends from foreign subsidiaries and creates a new provision designed to tax global intangible low-taxed income (“GILTI”). Also on December 22, 2017, the U.S. Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides for a measurement period of up to one year from the enactment for companies to complete their accounting for the Act. The Company is ~~currently evaluating~~applying the guidance in SAB 118 when accounting for the enactment-date effects of the Act.

At March 31, 2018, the Company has not completed its accounting for the tax effects of the Act, but has made reasonable estimates of the effects ~~that~~on the ~~adoption~~re-measurement of ~~ASU 2017-04~~its deferred tax assets and liabilities as well as its transition tax liability. During the three month period ended March 31, 2018, the Company made no adjustments to the provisional amounts recorded at December 31, 2017. Additionally, the Company has not yet collected and analyzed all necessary tax and earnings data of its foreign operations and therefore, the Company has also not yet completed its accounting for the income tax effects of the transition tax. The Company will ~~have on~~continue to make and refine its ~~consolidated financial statements.~~ calculations as additional analysis is completed.

Other than the aforementioned, the Company does not believe that any other recently issued, but not yet effective accounting standard, if adopted, will have a material effect on its consolidated financial statements.

~~P&F INDUSTRIES, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)~~

NOTE 2 ~~– DISCONTINUED OPERATIONS~~

~~Sale of Nationwide Industries, Inc.~~

Effective as of the Nationwide Closing Date, the Company, as part of its strategic plan to focus on expanding its position in the power-tool and accessories market, sold Nationwide. On this date, P&F, Countrywide, Nationwide and Argosy NWI Holdings, LLC, a Delaware limited liability company (“Buyer”), entered into a Stock Purchase and Redemption Agreement (the “Stock Purchase Agreement”), pursuant to which, among other things, after giving effect to certain contributions and redemptions of Nationwide’s common shares (“Nationwide Shares”), the Buyer acquired all of the outstanding Nationwide Shares from Countrywide (the “Acquisition”). The purchase price for the Nationwide Shares acquired in the Acquisition was approximately $22,200,000, before giving effect to an estimated working capital adjustment, as defined in the Stock Purchase Agreement, of approximately $802,000 in favor of the Buyer. Further, in accordance with the Stock Purchase Agreement, the Company placed into escrow $1,955,000 (“escrow funds”), of which $250,000 related to the final working capital adjustment. Pursuant to the terms of the Stock Purchase Agreement, the final working capital adjustment amount was determined to be approximately $75,000 in the Company’s favor. As a result, during the three-month period ended June 30, 2016, the $250,000 portion of the escrow funds was released to the Company, and the final working capital adjustment amount of $75,000 was paid to the Company by the Buyer. In connection with the Acquisition, Countrywide agreed that, should it sell the real property it owned in Tampa, Florida, (the “Premises”) it will contribute an additional $400,000 into the escrow funds. In November 2016, the Premises were sold, and as a result Countrywide contributed the additional $400,000 into the aforementioned escrow funds, which currently aggregate to approximately $2,105,000. After paying closing costs, the net cash received from the Buyer was approximately $18,700,000.

The escrow funds, which are classified as Prepaid expenses and other current assets on the Company’s Consolidated Balance Sheet, are to be released in August 2017, less any claims made against these escrow funds, in accordance with the Stock Purchase Agreement. The Company believes that these escrow funds are highly collectible, and that it is more likely than not that with respect to any or all such potential claims made against the Company, these claims will not exceed the minimum dollar threshold amount of $150,000 required under the Stock Purchase Agreement. The Company has therefore included $1,705,000 of the escrow funds in its gain on sale of Nationwide. Should claims made against the Company pursuant to the Stock Purchase Agreement exceed the minimum threshold, then to the extent such claims are resolved in favor of the Buyer under the terms of the Stock Purchase Agreement, the total amount of such claims will be recorded as a loss on sale of Nationwide in future periods.

As Nationwide was a substantial and unique business unit of the Company, its sale was a strategic shift. Accordingly, in accordance with ASC Topic 360, the Company has classified Nationwide as a discontinued operation in 2016.

~~The net income from discontinued operations, net of taxes in 2016 presented in the accompanying Consolidated Statements of Operations and Comprehensive (Loss) Income, is comprised of the following:~~

January 1, 2016
through February
11, 2016

Revenue $ 1,830,000
Cost of goods sold 1,177,000
Gross margin 653,000
Selling and general and administrative expenses 483,000
Interest expense-net 60,000
Income before income taxes 110,000
Income taxes 38,000

Net income $ 72,000

The Company recognized a gain of $12,185,000, on the sale of Nationwide during the three-month period ended March 31, 2016, which represents the difference between the adjusted net purchase price and the carrying book value of Nationwide. During the three-month period ended June 30, 2016 the Company incurred an additional $14,000 in expenses related to the sale. For income tax purposes, the Company’s tax basis in Nationwide was greater than the net proceeds, thus resulting in a tax loss. At the applicable tax rate of 34%, this loss has been recorded as a tax benefit of $141,000. This tax benefit may only be applied against future capital gain transactions.

~~P&F INDUSTRIES, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)~~

~~NOTE 3~~ – ACQUISITION

On April 5, 2017 (the “Jiffy Closing Date”), Bonanza Holdings Corp. (now known as Jiffy Air Tool, Inc.), a Delaware corporation and newly formed ~~wholly owned~~wholly-owned subsidiary (“~~Jiffy Buyer”~~Jiffy”) of Florida Pneumatic, Jiffy Air Tool, Inc. a Nevada corporation (“Jiffy Seller”), The Jack E. Pettit—1996 Trust, the sole shareholder of Jiffy Seller and Jack E. Pettit, entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”), pursuant to which, among other things, ~~the~~ Jiffy ~~Buyer~~ acquired (the “Jiffy Acquisition”) substantially all of the operating assets of Jiffy Seller for $5,950,000, in addition to the assumption of certain payables and contractual obligations as set forth in the Asset Purchase Agreement. Jiffy manufactures and distributes pneumatic tools and components, primarily sold to aerospace manufacturers. The purchase price was $5,950,000, less a post-closing working capital adjustment of $155,000, which was paid by Jiffy Seller to the Company in June 2017.

Additionally, ~~the~~Jiffy Seller may be entitled to up to $1,000,000 in additional consideration, which is contingent upon Jiffy achieving certain revenue thresholds and other criteria as set forth in the Asset Purchase Agreement within two defined measurement periods occurring within approximately the first two years following the Jiffy Closing Date. ~~Jiffy Air Tool, Inc. (“Jiffy”) manufactures and distributes pneumatic tools and components, primarily sold~~As of March 31, 2018, the Company has estimated the fair value of this contingent consideration to ~~aerospace manufacturers.~~be $880,000.

~~Additionally, in~~In connection with the Asset Purchase Agreement, a separate Purchase and Sale Agreement and Joint Escrow Instructions (the “Purchase and Sale Agreement” and together with the Asset Purchase Agreement, the “Agreements”) was entered into between Jiffy Seller and Bonanza Properties Corp. (“Bonanza Properties”), a Delaware corporation and newly formed ~~wholly owned~~wholly-owned subsidiary of Florida Pneumatic, pursuant to which Bonanza Properties purchased certain real property of ~~the~~Jiffy Seller. Pursuant to the Purchase and Sale Agreement, the purchase price for the real property was $1,050,000.

The initial total consideration ($5,950,000 plus $1,050,000) was paid by the Jiffy Buyer to the Seller from funds available under the Revolver, as defined in Note 10, pursuant to the Second Amended and Restated Loan Agreement (defined below), less certain amounts escrowed pursuant to, among others, the terms of the Agreements.

Total
Cash paid at closing $ 7,000,000
Less: Working Capital Adjustment (155,000 )
Fair Value of Contingent Consideration 692,000
Total estimated purchase price $ 7,537,000

As the Jiffy Acquisition has recently been completed, the Company is currently in the process of completing the purchase price allocation. As a result, the Company expects that the purchase price allocation should be finalized during its fiscal third quarter of 2017.

~~The following table presents preliminary purchase price allocation:~~

Accounts receivable $ 789,000
Inventories 1,571,000
Other current assets 45,000

Land 131,000
Building 919,000
Machinery and equipment 1,196,000
Identifiable intangible assets:
Customer relationships 1,670,000
Trademarks and trade names 790,000
Non-compete agreements 17,000
Liabilities assumed (110,000 )
Goodwill 519,000
Total estimated purchase price $ 7,537,000

P&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

NOTE 32 – ACQUISITION – (Continued)

The initial total consideration ($5,950,000 plus $1,050,000) paid to Jiffy Seller was from funds available under the Revolver, as defined in Note 9, less certain amounts escrowed pursuant to the terms of the Agreements.

	Total
Cash paid at closing	$	7,000,000
Less working capital adjustment		(155,000	)
Fair value of contingent consideration		692,000
Total estimated purchase price	$	7,537,000

The following table presents purchase price allocation:

Accounts receivable	$	789,000
Inventories		1,571,000
Other current assets		45,000
Land		131,000
Building		919,000
Machinery and equipment		1,196,000
Identifiable intangible assets:
Customer relationships		1,670,000
Trademarks and trade names		790,000
Non-compete agreements		17,000
Liabilities assumed		(125,000	)
Goodwill		534,000
Total estimated purchase price	$	7,537,000

The excess of the total purchase price over the fair value of the net assets acquired, including the value of the identifiable intangible assets, has been allocated to goodwill. Goodwill will be amortized over 15 years for tax purposes, but not deductible for financial reporting purposes. The intangible assets subject to amortization will be amortized over 15 years for tax purposes. For financial reporting purposes, useful lives have been assigned as follows:

Customer relationships		15 years
Trademarks and trade names		Indefinite
Non-compete agreements		4 years

The following unaudited pro-forma combined financial information gives effect to the Jiffy Acquisition as if the Jiffy Acquisition was consummated January 1, ~~2016.~~2017. This unaudited pro-forma financial information is presented for information purposes only, and is not intended to present actual results that would have been attained had the Jiffy Acquisition been completed as of January 1, ~~2016~~2017 (the beginning of the earliest period presented) or to project potential operating results as of any future date or for any future periods.

	Three months ended			Six months ended					Three months ended
	June 30,			June 30,					March 31,
	2016			2017		2016			2017
Revenue	$	17,517,000		$	30,053,000	$	33,691,000		$	14,694,000
Net (Loss) Income	$	(5,168,000	)	$	64,000	$	(4,964,000	)
Net Income									$	46,000
Earnings per share – Basic	$	(1.44	)	$	0.02	$	(1.38	)	$	0.01
Earnings per share – Diluted	$	(1.44	)	$	0.02	$	(1.38	)	$	0.01

P&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

NOTE 43 – EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per common share is based only on the average number of shares of Common Stock outstanding for the periods. Diluted earnings (loss) per common share reflects the effect of shares of Common Stock issuable upon the exercise of options, unless the effect on earnings is antidilutive.

Diluted earnings (loss) per common share is computed using the treasury stock method. Under this method, the aggregate number of shares of Common Stock outstanding reflects the assumed use of proceeds from the hypothetical exercise of any outstanding options to purchase shares of Common Stock. The average market value for the period is used as the assumed purchase price.

The following table sets forth the elements of basic and diluted earnings (loss) per common share:

	Three months ended					Six months ended						Three months ended
	June 30,					June 30,						March 31,
	2017		2016			2017			2016			2018		2017
Numerator for basic and diluted earnings (loss) per common share:

Net income (loss) from continuing operations	$	16,000	$	(5,370,000	)	$	(44,000	)	$	(5,304,000	)
Net (loss) income from discontinued operations		—		(14,000	)		—			12,243,000
Net income (loss)	$	16,000	$	(5,384,000	)	$	(44,000	)	$	6,939,000		$	65,000	$	(60,000	)

Denominator:
For basic earnings (loss) per share - weighted average common shares outstanding		3,611,000		3,595,000			3,605,000			3,598,000			3,583,000		3,598,000
Dilutive securities ⁽¹⁾		109,000		—			—			—			162,000		—
For diluted earnings (loss) per share - weighted average common shares outstanding		3,720,000		3,595,000			3,605,000			3,598,000			3,745,000		3,598,000

⁽¹⁾

Dilutive securities consist of “in the money” stock options.

At ~~June 30,~~March 31, 2018 and 2017, ~~and 2016,~~ there were outstanding stock options whose exercise prices were higher than the average market values of the underlying Common Stock for the period. ~~For all periods presented, other than~~Options for the three months ended ~~June 30,~~March 31, 2017 ~~options~~ are anti-dilutive and are excluded from the computation of diluted earnings (loss) per share. The weighted average of anti-dilutive stock options outstanding was as follows:

Three months ended Six months ended
June 30, June 30,
2017 2016 2017 2016
Weighted average antidilutive stock options outstanding 49,000 73,000 60,000 81,000

~~P&F INDUSTRIES, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)~~

	Three months ended
	March 31,
	2018		2017
Weighted average antidilutive stock options outstanding		49,000		71,000

NOTE 54 – STOCK-BASED COMPENSATION

There were no options granted or issued during the ~~three and six-month periods~~three-month period ended ~~June 30, 2017.~~March 31, 2018.

The following is a summary of the changes in outstanding options during the ~~six-month~~three-month period ended ~~June 30, 2017:~~March 31, 2018:

	Option Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)		Aggregate Intrinsic Value		Option Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)		Aggregate Intrinsic Value
Outstanding and Vested, January 1, 2017		423,817		$	5.68		2.9	$	1,271,704
Outstanding, January 1, 2018											418,233		$	5.17		3.8	$	1,343,442
Granted		—									—			—
Exercised		(16,722	)		3.65						(26,130	)		3.98
Forfeited		(6,793	)		7.86						—			—
Expired		(71,069	)		10.72						—			—
Outstanding and Vested, June 30, 2017		329,233		$	4.65		2.7	$	541,186
Outstanding, March 31, 2018											392,103		$	5.25		3.8	$	989,441
Vested, March 31, 2018											303,103		$	4.71		2.1	$	929,811

P&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

NOTE 4 – STOCK-BASED COMPENSATION – (Continued)

	Option Shares		Weighted Average Grant- Date Fair Value
Non-vested options, January 1, 2018		89,000	$	4.41
Granted		—		—
Vested		—		—
Forfeited		—		—
Non-vested options, March 31, 2018		89,000	$	4.41

The number of shares of Common Stock available for issuance under the P&F Industries, Inc. 2012 Stock Incentive Plan (the “2012 Plan”) as of ~~June 30, 2017~~March 31, 2018 was ~~177,812.~~88,812. At ~~June 30, 2017,~~March 31, 2018, there were ~~103,233~~192,233 options outstanding issued under the 2012 Plan and ~~226,000~~199,870 options outstanding issued under the 2002 Stock Incentive Plan.

Restricted Stock

The Company, in May 2017, granted 1,000 restricted shares of its ~~Common Stock~~common stock to each non-employee member of its Board of Directors, totaling 5,000 restricted shares. The Company determined that the fair value of these shares was $6.17 per share, which was the closing price of the Company’s Common Stock on the date of the grant. These shares cannot be traded earlier than the first anniversary of the grant date. As such, the Company is ratably amortizing the total non-cash compensation expense of approximately ~~$31,000~~$30,000 in its selling, general and administrative expenses through May 2018.

~~The~~Treasury Stock

On August 9, 2017, the Company’s Board of Directors authorized the Company ~~in May 2016, granted 1,000 restricted~~to repurchase up to 100,000 shares of its ~~Common Stock~~common stock over a period of up to ~~each non-employee member~~twelve months (the “Repurchase Program”). On August 24, 2017, the Company announced that, pursuant to the Repurchase Program, it had adopted a written trading plan in accordance with the guidelines specified under Rule 10b5-1 under the Securities Exchange Act of 1934. A plan under Rule 10b5-1 allows the Company to repurchase shares at times when it might otherwise be prevented from doing so by securities laws or because of self-imposed trading blackout periods. Repurchases made under the plan are subject to the SEC’s regulations, as well as certain price, market, volume, and timing constraints specified in the plan. Since repurchases under the plan are subject to certain constraints, there is no guarantee as to the exact number of shares that will be repurchased under the plan. Since the inception of the Repurchase Program through March 31, 2018, the Company repurchased approximately 57,000 shares of its Board of Directors, totaling 5,000 restricted shares. The Company determined that the fair value of these shares was $8.72 per share, which was the closing price of the Company’s Common Stock on the date of the grant. These shares could not have been traded earlier than the first anniversary of the grant date. As such, the Company ratably amortized the total non-cash compensation expensecommon stock at an aggregate cost of approximately ~~$44,000 in its selling, general and administrative expenses through May 2017.~~$439,000.

~~P&F INDUSTRIES, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)~~

NOTE 65 – FAIR VALUE MEASUREMENTS

Accounting guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Under this guidance, the Company is required to classify certain assets and liabilities based on the following hierarchy:

Level 1: Quoted prices for identical assets or liabilities in active markets that can be assessed at the measurement date.

Level 2: Inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Inputs reflect management's best estimate of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the instruments valuation.

The guidance requires the use of observable market data if such data is available without undue cost and effort.

P&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

NOTE 5 – FAIR VALUE MEASUREMENTS – (Continued)

As of ~~June 30, 2017~~March 31, 2018 and December 31, ~~2016,~~2017, the carrying amounts reflected in the accompanying ~~Consolidated Balance Sheets~~consolidated balance sheets for current assets and current liabilities approximated fair value due to the short-term nature of these accounts.

The fair value of the Prepaid expenses and other current assets consists primarily of escrowed funds from the sale of Nationwide, which was estimated to be the same as its carrying value, based on Level 3 inputs. The Company believes the escrow will be released to the Company in August 2017, in accordance with the terms and conditions set forth in the Stock Purchase Agreement.

The fair value of the contingent consideration payable to the Seller of Jiffy, of $692,000, included in Other liabilities was determined applying Level 3 inputs. The fair value of this contingent consideration will be adjusted quarterly.

Assets and liabilities measured at fair value on a non-recurring basis include goodwill and intangible assets. Such assets are reviewed quarterly for impairment indicators. If a triggering event has occurred, the assets are re-measured when the estimated fair value of the corresponding asset group is less than the carrying value. The fair value measurements, in such instances, are based on significant unobservable inputs ~~(Level~~(level 3).

NOTE 76 – ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

Accounts receivable - net consists of:

	June 30, 2017			December 31, 2016			March 31, 2018			December 31, 2017
Accounts receivable	$	9,861,000		$	7,991,000		$	10,892,000		$	10,199,000
Allowance for doubtful accounts		(80,000	)		(85,000	)
Allowance for doubtful accounts, sales discounts and chargebacks								(225,000	)		(152,000	)
	$	9,781,000		$	7,906,000		$	10,667,000		$	10,047,000

NOTE 87 – INVENTORIES

Inventories consist of:

	June 30, 2017		December 31, 2016		March 31, 2018		December 31, 2017
Raw material	$	1,855,000	$	1,918,000	$	1,912,000	$	1,871,000
Work in process		1,443,000		658,000		1,873,000		1,556,000
Finished goods		16,826,000		17,325,000		14,954,000		16,230,000
	$	20,124,000	$	19,901,000	$	18,739,000	$	19,657,000

P&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

NOTE 98 – GOODWILL AND OTHER INTANGIBLE ASSETS

Changes in the carrying amount of goodwill are as follows:

Balance, January 1, 2017 $ 3,897,000
Acquisition of Jiffy Air Tool, Inc. 519,000
Currency translation adjustment 9,000
Balance, June 30, 2017 $ 4,425,000

Balance, January 1, 2018	$	4,447,000
Currency translation adjustment		7,000
Balance, March 31, 2018	$	4,454,000

Other intangible assets were as follows:

	June 30, 2017						December 31, 2016						March 31, 2018						December 31, 2017
	Cost		Accumulated amortization		Net book value		Cost		Accumulated amortization		Net book value		Cost		Accumulated amortization		Net book value		Cost		Accumulated amortization		Net book value
Other intangible assets:
Customer relationships (1)	$	6,827,000	$	1,279,000	$	5,548,000	$	5,143,000	$	1,022,000	$	4,121,000	$	6,847,000	$	1,715,000	$	5,132,000	$	6,836,000	$	1,570,000	$	5,266,000
Trademarks and trade names (1)		2,315,000		—		2,315,000		1,507,000		—		1,507,000		2,344,000		—		2,344,000		2,329,000		—		2,329,000
Trademarks and trade names (2)		200,000		12,000		188,000		200,000		5,000		195,000		200,000		22,000		178,000		200,000		19,000		181,000
Engineering drawings		330,000		161,000		169,000		330,000		148,000		182,000		330,000		182,000		148,000		330,000		175,000		155,000
Non-compete agreements (1)		235,000		187,000		48,000		212,000		150,000		62,000		243,000		223,000		20,000		239,000		210,000		29,000
Patents		1,205,000		799,000		406,000		1,205,000		666,000		539,000		1,405,000		851,000		554,000		1,405,000		832,000		573,000
Totals	$	11,112,000	$	2,438,000	$	8,674,000	$	8,597,000	$	1,991,000	$	6,606,000	$	11,369,000	$	2,993,000	$	8,376,000	$	11,339,000	$	2,806,000	$	8,533,000

(1)

A portion of these intangibles are maintained in a foreign currency, and are therefore subject to foreign exchange rate fluctuations.

(2)

These were previously considered an ~~indefinite lived~~indefinite-lived intangible asset of ~~Hy-Tech, however~~Hy-Tech. However, as the result of ~~the testing for~~a prior impairment, the Company began amortizing these intangible assets over a 15 year useful life.

Amortization expense of intangible assets ~~from continuing operations~~ subject to amortization was as follows:

Three months ended June 30, Six months ended June 30,
2017 2016 2017 2016
$ 233,000 $ 278,000 $ 439,000 $ 586,000

Three months ended March 31,
2018		2017
$	179,000	$	206,000

The weighted average amortization period for intangible assets was as follows:

	June 30, 2017		December 31, 2016		March 31, 2018		December 31, 2017
Customer relationships		10.6		9.3		9.9		10.1
Trademarks and trade names (see note 2 to the table above)		14.0		14.5
Trademarks and trade names (2)						13.3		13.5
Engineering drawings		8.4		8.8		8.0		8.1
Non-compete agreements		1.9		1.2		2.0		1.8
Patents		7.0		6.1		8.6		8.8

Amortization expense for each of the next five years and thereafter is estimated to be as follows:

2019	$	696,000
2020		677,000
2021		641,000
2022		637,000
2023		637,000
Thereafter		2,744,000
	$	6,032,000

P&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

NOTE 9 ~~– GOODWILL AND OTHER INTANGIBLE ASSETS~~– (~~Continued~~)

~~Amortization expense for each of the next five years and thereafter is estimated to be as follows:~~

2018 $ 704,000
2019 672,000
2020 648,000
2021 623,000
2022 620,000
Thereafter 3,092,000
$ 6,359,000

~~NOTE 10~~ – DEBT

In October 2010, the Company entered into a Loan and Security Agreement (“Credit Agreement”) with an affiliate of Capital One, National Association (“Capital One”, or the “Bank”). The Credit Agreement, as amended from time to time, among other things, provides ~~for~~the ability to borrow funds under a Revolver ~~Loan (“Revolver”),~~arrangement, which is currently set at a maximum of $16,000,000. Revolver borrowings ~~under which~~ are secured by the Company’s accounts receivable, inventory, equipment and mortgages on ~~its~~real property. Additionally, there is a $1,600,000 line available for capital expenditures. Lastly, the Credit Agreement includes a $100,000 Term Loan. This term loan, which is secured by real property, ~~(“Real Property”), inventory~~remains in place such that should the Company and ~~equipment.~~Capital One wish to facilitate future term loan borrowings more efficiently and less costly. P&F and certain of its subsidiaries are borrowers under the Credit Agreement, and their obligations are cross-guaranteed by certain other subsidiaries. Lastly, the Credit Agreement expires in February 2019.

At the Company’s option, Revolver borrowings ~~will~~ bear interest at either LIBOR (“London InterBank Offered Rate”) or the Base Rate, as the term is defined in the Credit Agreement, plus ~~the~~an Applicable Margin, as defined in the Credit Agreement. ~~Further, the interest rate, either LIBOR or Base Rate, which is added~~We are subject to ~~the Applicable Margin, is at the option of the Company. The Company is limited as to~~limitations on the number of LIBOR borrowings.

Contemporaneously with the acquisition of the Jiffy ~~Acquisition,~~business discussed in Note 2 to the consolidated financial statements, the Company entered into a Second Amended and Restated Loan and Security Agreement, effective as of the April 5, 2017, the closing date of the Jiffy ~~Closing Date~~Acquisition (the ~~“Second Amended and Restated Loan~~“2017 Agreement”), with Capital One. The ~~Second Amended and Restated Loan Agreement amended and restated the previous amendment to the Credit Agreement.~~

~~The Second Amended and Restated Loan~~2017 Agreement, among other things, amended the Credit Agreement by: (1) increasing the maximum amount ~~the Company~~it can borrow under the Revolver Commitment (as ~~defined in the Second Amended and Restated Loan Agreement)~~defined) from $10,000,000 to $16,000,000, subject to certain borrowing base criteria, and (2) modifying certain borrowing base criteria as well as financial and other covenants. In addition, the Company incurred $84,000 of debt issue costs in connection with this Amendment.

The Company provides Capital One ~~with, among other things,~~ monthly financial statements, ~~and monthly~~ borrowing base ~~certificates. The Company is required to comply~~certificates and certificates of compliance with ~~certain~~various financial covenants. ~~The Company believes it is~~Should an event of default occur, the interest rate would increase by two percent per annum during the period of default, in ~~compliance with all covenants under the Credit Agreement.~~addition to other remedies provided to Capital One.

SHORT–TERM BORROWINGS

The Company had no revolver borrowings at December 31, 2016; however, primarily as the result of the acquisition discussed in Note 3, of Jiffy on April 5, 2017, the Company’s Revolver balance increased to $4,537,000 at June 30, 2017. The Applicable Margins added to LIBOR borrowings at June 30, 2017 was 1.75%, compared to 1.50% at December 31, 2016. The Applicable Margins added to the Base Rate (Prime rate) borrowings at June 30, 2017 was 0.75% and 0.50% at December 31, 2016.

~~The Company purchases vehicles for use by its UAT salesforce. The current portion of the balance due relating to these vehicles is $4,000 at June 30, 2017 and $13,000 at December 31, 2016.~~

~~P&F INDUSTRIES, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)~~

~~NOTE 10 – DEBT – (Continued)~~

~~LONG –TERM BORROWINGS~~

~~The Credit Agreement, as amended, provides for a Term Loan A, which is secured by mortgages on the Company’s Real Property, accounts receivable, inventory and equipment. Term Loan A~~Short-term borrowings can be at either LIBOR or at the Base Rate, or a combination of the two, plus the Applicable Margins. At March 31, 2018 and December 31, 2017, the Company’s short-term borrowings were $3,241,000 and $1,928,000, respectively. Applicable LIBOR Margin in effect as of March 31, 2018 and December 31, 2017 was 1.50%, and the Applicable Base Rate Margin was 0.50% at both dates.

TERM LOAN BORROWINGS

The Term Loan borrowings can be at either LIBOR or at the Base Rate, or a combination of the two, plus the Applicable ~~Margin added to~~Margins. LIBOR borrowings at ~~June 30, 2017 was 1.75%~~March 31, 2018, and ~~1.50% at~~ December 31, ~~2016.~~2017 were 1.50%. The Applicable Margin for borrowings at the Base Rate ~~(Prime rate)~~ for the same timeframes was ~~0.75%~~0.50%. At both March 31, 2018 and ~~0.50%, respectively. A portion of the net proceeds from the sale of Nationwide repaid all but $100,000 of~~December 31, 2017 this Term Loan ~~A. This balance is being borrowed~~was at the ~~LIBOR Rate, and~~Base Rate. At March 31, 2018, this $100,000 Term Loan is included in Current maturities of long-term debt on the consolidated balance sheet. At December 31, 2017, this obligation was included in Long-term debt, less ~~debt issue costs~~current maturities on the ~~Company’s Consolidated Balance Sheet at June 30, 2017 and December 31, 2016.~~consolidated balance sheet.

In accordance with ASU 2015-03, the Company reduced its long-term debt by ~~$9,000~~$5,000 and ~~$12,000,~~$6,000, respectively, relating to debt issue costs as of ~~June 30, 2017~~March 31, 2018 and December 31, ~~2016.~~2017.

NOTE 1110 – DIVIDEND PAYMENTS

On ~~May 10, 2017,~~February 14, 2018, the Company’s Board of Directors, in accordance with their dividend policy, declared a quarterly cash dividend of $0.05 per common share, which was paid on ~~May 26, 2017,~~March 2, 2018, to shareholders of record at the close of business on ~~May 22, 2017.~~February 26, 2018. The total amount of this dividend payment was approximately $180,000. ~~During the six-month period ended June 30, 2017, the Company has paid approximately $360,000 in dividends.~~

~~NOTE 12 – SUBSEQUENT EVENTS~~

On August 9, 2017, the Company’s Board of Directors authorized the Company’s management to repurchase up to 100,000 shares of the Company’s Class A Common Stock. This repurchase plan is expected to go into effect during the third quarter of 2017 and expires after 12 months.

The repurchases are expected to be made from time to time through a trading plan pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934 (the “Act”), and potentially through open market purchases, privately-negotiated transactions, or otherwise in compliance with Rule 10b-18 under the Act. The actual timing, number and value of shares repurchased under the program will depend on a number of factors, including trading volume, timing and other constraints specified in the Rule 10b5-1 trading plan, price, general business and market conditions, and alternative investment opportunities.

The Company’s Board of Directors also declared a quarterly cash dividend of $0.05 per share of its Class A Common Stock, payable on August 25, 2017 to all stockholders of record as of the close of business on August 21, 2017.

1918

P&F INDUSTRIES, INC. AND SUBSIDIARIES

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statement

The Private Securities Litigation Reform Act of 1995 (the “Reform Act”) provides a safe harbor for forward-looking statements made by or on behalf of P&F Industries, Inc. and subsidiaries (“P&F”, or the “Company”). P&F and its representatives may, from time to time, make written or verbal forward-looking statements, including statements contained in the Company’s filings with the Securities and Exchange Commission and in its reports to shareholders. Generally, the inclusion of the words “believe,” “expect,” “intend,” “estimate,” “anticipate,” “will,” “may,” “would,” ~~“could”~~“could,” “should,” and their opposites and similar expressions identify statements that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and that are intended to come within the safe harbor protection provided by those sections. Any forward-looking statements contained herein, including those related to the Company’s future performance, are based upon the Company’s historical performance and on current plans, estimates and expectations. All forward-looking statements involve risks and uncertainties. These risks and uncertainties could cause the Company’s actual results for all or part the ~~2017~~2018 fiscal year and beyond to differ materially from those expressed in any forward-looking statement made by or on behalf of the Company for a number of reasons including, but not limited to:

Exposure to fluctuations in energy prices;

Debt and debt service requirements;

Borrowing and compliance with covenants under our credit facility;

Disruption in the global capital and credit markets;

The strength of the retail economy in the United States and abroad;

~~Supply chain disruptions;~~Risks associated with sourcing from overseas, including tariffs;

Customer concentration;

Adverse changes in currency exchange rates;

Impairment of long-lived assets and goodwill;

Unforeseen inventory adjustments or changes in purchasing patterns;

Market acceptance of products;

Competition;

Price reductions;

Interest rates;

Litigation and insurance;

Retention of key personnel;

Acquisition of businesses;

Regulatory environment;

The threat of terrorism and related political instability and economic uncertainty; and

Information technology system failures and attacks,

and those other risks and uncertainties described in its Annual Report on Form 10-K for the year ended December 31, ~~2016~~2017 (“~~2016~~2017 Form 10-K”) and its other reports and statements filed by the Company with the Securities and Exchange Commission. Forward-looking statements speak only as of the date on which they are made. The Company undertakes no obligation to update publicly or revise any forward-looking statement, whether as a result of new information, future developments or otherwise. The Company cautions you against relying on any of these forward-looking statements.

2019

~~P&F INDUSTRIES, INC. AND SUBSIDIARIES~~Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

~~Item 2.~~

~~Management’s Discussion and Analysis of Financial Condition and Results of Operations~~

~~Business~~OUR BUSINESS

P&F and each of its subsidiaries are herein referred to collectively as the “Company.” In addition, the words “we”, “our” and “us” refer to the Company. Prior to February 11, 2016, (the “Nationwide Closing Date”) the effective date of the sale of its Nationwide Industries, Inc. (“Nationwide”) subsidiary, P&F operated in two primary lines of business or segments: (i) tools and other products (“Tools”) and (ii) hardware and accessories (“Hardware”). As a result of the sale of Nationwide, the Company currently only operates in the Tools segment. See Note 2 to the consolidated financial statements for further discussion.

~~Tools~~

~~The Company conducts its Tools~~We conduct our business through a wholly-owned subsidiary, Continental Tool Group, Inc. (“Continental”), which in turn operates through its wholly-owned subsidiaries, Florida Pneumatic Manufacturing Corporation (“Florida Pneumatic”) and Hy-Tech Machine, Inc. (“Hy-Tech”). Exhaust Technologies Inc. (“ETI”) and Universal Air Tool Company Limited (“UAT”) are wholly-owned subsidiaries of Florida Pneumatic. Effective April 5, 2017, we purchased substantially all of the operating assets, less certain payables of Jiffy Air Tool, Inc., (“Jiffy”). through a wholly-owned subsidiary. See Note 32 to our consolidated financial statements for further discussion. The business of Air Tool Service Company (“ATSCO”) operates through a wholly-owned subsidiary of Hy-Tech.

Florida Pneumatic ~~is engaged in the importation~~manufactures, imports and ~~sale of~~sells pneumatic hand tools, most of which are of its own design, primarily ~~for~~to the retail, industrial, automotive and ~~automotive~~aerospace markets. ~~Florida Pneumatic~~It also markets, through its Berkley Tool division (“Berkley”), a product line which includes pipe and bolt dies, pipe taps, wrenches, vises and stands, pipe and tubing cutting equipment, hydrostatic test pumps, and replacement electrical components for a widely-used brand of pipe cutting and threading machines. ~~Lastly, as the result of the acquisition of Jiffy, Florida Pneumatic now manufactures pneumatic tools marketed primarily to the aerospace sector.~~

~~Hardware~~

Prior to the Nationwide Closing Date, we conducted our Hardware business through our wholly-owned subsidiary, Countrywide Hardware, Inc. (“Countrywide”). Countrywide conducted its business operations through its wholly-owned subsidiary, Nationwide. Nationwide was an importer and manufacturer of door, window and fencing hardware and accessories, including rollers, hinges, window operators, sash locks, custom zinc castings and door closers. On the Nationwide Closing Date, Countrywide sold Nationwide to an unrelated third party for approximately $22,200,000. See Note 2 to consolidated financial statements for further discussion.various Original Equipment Manufacturers under their own brand names.

KEY INDICATORS

Economic Measures

Much of our business is driven by the ebbs and flows of the general economic conditions in both the United States and, to a lesser extent, abroad. We focus on a wide array of customer types including, but not limited to, large retailers, aerospace manufacturers, large and small resellers of pneumatic tools and parts, and automotive related customers. We tend to track the general economic conditions of the United States, industrial production and general retail sales.

A key economic measure relevant to us is the cost of the raw materials in our products. Key materials include metals, especially various types of steel and aluminum. Also important is the value of the United States Dollar (“USD”) in relation to the Taiwanese dollar (“TWD”), as we purchase a significant portion of our products from Taiwan. Purchases from Chinese sources are made in ~~USD,~~USD; however, if the Chinese currency, the Renminbi (“RMB”), were to be revalued against the USD, there could be a negative impact on the cost of our products. Additionally, we closely monitor the fluctuation in the Great British Pound (“GBP”) to the USD, and the GBP to TWD, both of which ~~has had~~can have an impact on ~~our~~the consolidated ~~results in 2017.~~results. In addition, we monitor the number of operating rotary drilling rigs in the United States, as a means of gauging oil production, which is a key factor in our sales into the oil and gas exploration and extraction sector.

The cost and availability of a quality labor pool in the countries where products and components are manufactured, both overseas as well as in the United States, could materially affect our overall results.

2120

Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

Operating Measures

Key operating measures we use to manage our operations are: orders; shipments; development of new products; customer retention; inventory levels and productivity. These measures are recorded and monitored at various intervals, including daily, weekly and monthly. To the extent these measures are relevant; they are discussed in the detailed sections below.

Financial Measures

Key financial measures we use to evaluate the results of our business include: various revenue metrics; gross margin; selling, general and administrative expenses; earnings before interest and taxes; operating cash flows and capital expenditures; return on sales; return on assets; days sales outstanding and inventory turns. These measures are reviewed at monthly, quarterly and annual intervals and compared to historical periods as well as established objectives. To the extent that these measures are relevant, they are discussed in the detailed sections below for each operating segment.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Descriptions of these policies are discussed in the ~~2016~~2017 Form 10-K. Certain of these accounting policies require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities, revenues and expenses. On an ongoing basis, we evaluate estimates, including, but not limited to those related to bad debts, inventory reserves, goodwill and intangible assets, warranty reserves, ~~and~~ taxes and deferred taxes. We base our estimates on historical data and experience, when available, and on various other assumptions that are believed to be reasonable under the circumstances, the combined results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. As future events and their effects cannot be determined with precision, actual results could differ significantly from those estimates and assumptions. Significant changes, if any, in those estimates resulting from continuing changes in the economic environment will be reflected in the consolidated financial statements in future periods.

OVERVIEW

Key factors or events impacting our ~~second~~first quarter ~~2017~~2018 results of operations were:

●

~~Acquisition~~First quarter of ~~the~~2018 includes three-month results of Jiffy, ~~Air Tool, Inc.’s business~~which was acquired effective April 5, 2017;

●

~~Decline~~The decision in ~~Florida Pneumatic’s Retail~~2017 not to renew a supply agreement with Sears; and ~~Automotive revenue~~

●

~~Improved gross margins at Hy-Tech – (increase~~Adoption of ~~11.2 percentage points~~Accounting Standards Update (“ASU”) No. 2014-09,Revenue from ~~second quarter 2016)~~

●

~~Expenses~~Contracts with Customers, and related ~~to the Jiffy Acquisition~~Updates, as a new Topic, Accounting Standards Codification (“ASC”) ASC 606 (“ASC 606”).

RESULTS OF OPERATIONS

~~Continuing operations~~

Unless otherwise discussed elsewhere in the Management’s Discussion and Analysis, we believe that our relationships with our key customers and suppliers remain satisfactory. The global oil and gas exploration and extraction have been the primary market of Hy-Tech, which until recently has begun to show signs of improving. Further, there remains a persistent weakness in the other markets that Hy-Tech serves, most notably power generation and construction.

We have elected not to renew our supply agreement with Sears, which will expire on September 30, 2017. While Sears remains at or close to complying with its payment terms to Florida Pneumatic, this difficult decision wasdetermined that, based on a number of factors including Sears’ continuing financial difficulties, the sale of the Craftsman brand by Sears to Stanley Black & Decker and our level of working capital exposure in relation to our return on that investment pertaining to ~~Sears. It is anticipated that~~Sears, it was in our best interest not to renew a supply agreement between us and Sears, ~~inventory exposure should be eliminated by~~effective September 30, 2017.

In December of 2017, Florida Pneumatic and ~~that all accounts receivable should~~Home Depot agreed to launch an improved line of pneumatic tools to replace the current offering. We expect to begin shipment of this new product line sometime in the third quarter of 2018. Gross margin for the new product line will be ~~collected~~approximately 2% less than the current product line. In order to promote the roll out of the new products, Florida Pneumatic has agreed to participate in the marketing efforts by ~~December 31, 2017. However, at~~contributing $1,000,000. We believe this will be contributed some time during the ~~present time, there can be no assurance that we will fully recover our working capital exposure.~~remainder of 2018.

We ~~believe in~~adopted ASC 606 effective January 1, 2018. The most significant impact of this adoption to our results of operations was that beginning January 1, 2018 we now classify certain expenses as deductions against revenue, that prior to the ~~near future that some more technically advanced battery operated hand tools will begin to satisfy certain customer applications where pneumatic tools have typically been used.~~adoption, were accounted for as a selling expense.

2221

Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

RESULTS OF OPERATIONS- (Continued)

~~Continuing operations - (Continued)~~We believe that over time several newer technologies and features will have a greater impact on the market for the Company’s traditional pneumatic tool offerings. This evolution has been felt initially by the advent of some cordless operated hand tools in the automotive aftermarket. We are currently evaluating the development of more advanced technologies in our tool platforms.

Following an announcement by the President of the United States in first quarter of 2018 of his intention to impose tariffs on certain goods imported specifically from China, the Office of the US Trade Representative announced a proposed list of China-manufactured categories of products that would be subject to a tariff of up to 25%. Such list is scheduled to undergo further review in a public notice and comment process, including a hearing. It is anticipated that a final determination on the products subject to the tariffs will be announced during the second quarter of 2018. A large portion of products imported by Florida Pneumatic for its Retail customers could be subject to this tariff. Should Florida Pneumatic be unable to pass a major portion of the additional cost created by these new proposed tariffs on to its customers, the profit margin on these products would be severely impacted. We are awaiting further announcements on this matter from the U.S. Government and remain in contact with our Retail customers. Based upon current releases from the Office of the US Trade Representative, products offered to the Company’s non-retail customers thus far are not materially affected, as such other products are imported from other countries, produced domestically or, to the extent imported from China, such imports are immaterial to those product lines.

Other than the aforementioned, or that may be discussed further in this management’s discussion and analysis, there are no major trends or uncertainties that had, or we could reasonably expect could have, a material impact on our revenue, nor was there any unusual or infrequent event, transaction or any significant economic change that materially affected our results of operations.

During the first quarter of 2016, we sold Nationwide to an unrelated third party for approximately $22,200,000. As a result of this transaction, Nationwide’s 2016 results are reported under discontinued operations. Please see Note 2 - Discontinued Operations, to our consolidated financial statements for additional information.

~~REVENUE~~

The tables below provide an analysis of our net revenue from ~~continuing operations~~ for the ~~three and six-month~~three-month periods ended ~~June 30, 2017~~March 31, 2018 and ~~2016:~~2017.

Three months ended June 30,
Increase (decrease)
2017 2016 $ %
Florida Pneumatic $ 12,132,000 $ 12,738,000 $ (606,000 ) (4.8 )%
Hy-Tech 3,227,000 2,899,000 328,000 11.3

Consolidated $ 15,359,000 $ 15,637,000 $ (278,000 ) (1.8 )%

	Six months ended June 30,
					Decrease						Three months ended March 31,
	2017		2016		$			%							Increase
											2018		2017		$		%
Florida Pneumatic	$	22,641,000	$	23,568,000	$	(927,000	)		(3.9	)%	$	12,264,000	$	10,509,000	$	1,755,000		16.7	%
Hy-Tech		5,934,000		6,568,000		(634,000	)		(9.7	)		3,478,000		2,707,000		771,000		28.5

Consolidated	$	28,575,000	$	30,136,000	$	(1,561,000	)		(5.2	)%	$	15,742,000	$	13,216,000	$	2,526,000		19.1	%

Florida Pneumatic

Florida Pneumatic markets its air tool products to four primary sectors within the pneumatic tool market; ~~retail, automotive, industrial/catalog,~~Retail, Automotive, Aerospace and ~~aerospace.~~Industrial/catalog. It also generates revenue from its Berkley products line, as well as a line of air filters and other OEM parts (“Other”).

	Three months ended June 30,																Three months ended March 31,
	2017					2016					Increase (decrease)						2018					2017					Increase (decrease)
	Revenue		Percent of revenue			Revenue		Percent of revenue			$			%			Revenue		Percent of revenue			Revenue		Percent of revenue			$			%
Retail customers	$	5,411,000		44.6	%	$	7,232,000		56.8	%	$	(1,821,000	)		(25.2	)%
Retail																	$	4,090,000		33.4	%	$	5,353,000		50.9	%	$	(1,263,000	)		(23.6	)%
Automotive		3,390,000		27.9			3,892,000		30.5			(502,000	)		(12.9	)		3,938,000		32.1			3,613,000		34.4			325,000			9.0
Aerospace																		2,670,000		21.8			89,000		0.9			2,581,000			2,900.0
Industrial/catalog		1,250,000		10.3			1,241,000		9.8			9,000			0.7			1,364,000		11.1			1,245,000		11.8			119,000			9.6
Aerospace		1,862,000		15.4			130,000		1.0			1,732,000			1,332.3
Other		219,000		1.8			243,000		1.9			(24,000	)		(9.9	)		202,000		1.6			209,000		2.0			(7,000	)		(3.3	)
Total	$	12,132,000		100.0	%	$	12,738,000		100.0	%	$	(606,000	)		(4.8	)%	$	12,264,000		100.0	%	$	10,509,000		100.0	%	$	1,755,000			16.7	%

The decline in Florida Pneumatic’s first quarter 2018 Retail revenue presented in the table above was driven by our decision in 2017 not to renew a supply agreement with Sears, as well as a slight decline in The Home Depot revenue. The increase in Automotive revenue this quarter, compared to the same three-month period in 2017, was due primarily to the increase in consumer product demand for our AIRCAT tools sold through a major on-line distributor, and an increase in revenue from our UAT division headquartered in the United Kingdom. UAT revenue in local currency (GBP), declined 1.62% this quarter compared to the same period in 2017, however when converted to USD its revenue increased 10.5%, resulting in an increase of approximately $72,000. The Jiffy acquisition in April 2017 enabled us to approach the aerospace sector with a much stronger brand and breadth of products. As a result, our Aerospace sales contributed nearly $2.6 million to Florida Pneumatic’s improved revenue this quarter, compared to the first quarter of 2017. Lastly,Industrial/catalog revenue increased 9.6% this quarter, compared to the same period in 2017, which we attribute to overall market sector strengthening for this product line.

Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

RESULTS OF OPERATIONS- (Continued)

Hy-Tech

Hy-Tech designs, manufactures and sells a wide range of industrial products under the brands ATP, ATSCO, OZAT and NUMATX, which are categorized as “ATP” for reporting purposes and include heavy duty air tools and air motors, industrial grinders, impact sockets, hydro-pneumatic riveters and OEM business. Hy-Tech’s other product lines, Thaxton and Quality Gear, are reported with its general machining business as “Other” below.

	Three months ended March 31,
	2018					2017					Increase
	Revenue		Percent of revenue			Revenue		Percent of revenue			$		%
ATP	$	3,076,000		88.4	%	$	2,406,000		88.9	%	$	670,000		27.8	%
Other		402,000		11.6			301,000		11.1			101,000		33.6
Total	$	3,478,000		100.0	%	$	2,707,000		100.0	%	$	771,000		28.5	%

Significant components contributing to the increase in Hy-Tech’s first quarter 2018 ATP revenue, compared to the same period in 2017, include the increase in orders from a large customer acquired in the ATSCO acquisition that had, until recently, reduced its placement of orders with us. Additionally, our “engineered solutions” program, which pursues alternate markets where we can exploit our engineering and manufacturing expertise, and develop different applications for our tools, motors and accessories, continues to expand. This marketing strategy continues to provide us an opportunity to generate new sources of revenue. Revenue this quarter from this new initiative was $395,000, compared to approximately $200,000 in the same period in the prior year, with future orders at March 31, 2018 of approximately $760,000. The improvement in Hy-Tech’s Other revenue was driven primarily by an increase in Thaxton sales.

~~RESULTS OF OPERATIONS~~

~~Continuing operations - (Continued)~~

Six months ended June 30,
2017 2016 Increase (decrease)
Percent of Percent of
Revenue revenue Revenue revenue $ %
Retail customers $ 10,764,000 47.5 % $ 12,780,000 54.2 % $ (2,016,000 ) (15.8 )%
Automotive 7,003,000 30.9 7,613,000 32.3 (610,000 ) (8.0 )
Industrial/catalog 2,439,000 10.8 2,497,000 10.6 (58,000 ) (2.3 )
Aerospace 2,008,000 8.9 231,000 1.0 1,777,000 769.3
Other 427,000 1.9 447,000 1.9 (20,000 ) (4.5 )
Total $ 22,641,000 100.0 % $ 23,568,000 100.0 % $ (927,000 ) (3.9 )%

As discussed in Note 3 - Acquisition, to our consolidated financial statements, effective April 5, 2017 we acquired the Jiffy business. We believe Jiffy’s aerospace based revenue will be a significant componentManagement’s Discussion and Analysis of ~~Florida Pneumatic’s future revenue,~~Financial Condition and ~~as such we will present and discuss “aerospace” revenue independent~~Results of ~~Florida Pneumatic’s other lines of business going forward.~~Operations – Continued

Ninety-six percent of the decline in Florida Pneumatic’s second quarter 2017 Retail revenue was due primarily to the reduction in shipments to Sears this quarter, compared to the same period in 2016. As discussed above, we elected not to renew an agreement with Sears, which is to expire on September 30, 2017. We believe the decline in Automotive revenue this quarter compared to the same three-month period in 2016 was the result of a major automotive parts distributor adjusting their inventory levels. Additionally, contributing to the lower Automotive revenue, was a decline in revenue from our UAT division headquartered in the United Kingdom, where its revenue declined approximately $171,000 when comparing the three-month periods ended June 30, 2017 and June 30, 2016. Lastly, ourIndustrial/catalog revenue increased slightly, compared to the same period a year ago; we believe that activity in this sector has begun to improve, however no assurance can be given that this trend will continue.

With respect to our year to date results, 91% of the decline in our Retail revenue was due primarily to the reduction in shipments to Sears, compared to the same period in 2016. During the first six months of 2016 there was a roll-out of new tools to The Home Depot, which did not occur in 2017, accounting for the decline in year-to-date revenue from The Home Depot. When comparing our Automotive revenue for the six-month periods ended June 30, 2017 and 2016, more than 82% of the decline occurred during the fiscal second quarter and was discussed previously. Our Industrial/catalog revenue, while sluggish during the first three months of 2017, has begun to see slight improvement during the second quarter of 2017. The acquisition of Jiffy has enabled us to approach the aerospace sector with a much stronger brand. As a result, our six-month revenue for this sector, has expanded nearly eight-fold.

~~Hy-Tech~~

Hy-Tech focuses primarily on the industrial sector of the pneumatic tools market. Hy-Tech manufactures and markets its own value-added line of air tools and parts, including the ATSCO product line, as well as distributes a complementary line of sockets, which in the aggregate are referred to as “ATP”. Hy-Tech Machine also manufactures products primarily marketed to the mining, construction and industrial manufacturing sectors. These products along with gears, sprockets, splines, and hydraulic stoppers are aggregated as “Other”.

Three months ended June 30,
2017 2016 Increase (decrease)
Revenue Percent of
revenue Revenue Percent of
revenue $ %
ATP $ 2,888,000 89.5 % $ 2,490,000 85.9 % $ 398,000 16.0 %
Other 339,000 10.5 409,000 14.1 (70,000 ) (17.1 )
Total $ 3,227,000 100.0 % $ 2,899,000 100.0 % $ 328,000 11.3 %

~~RESULTS OF OPERATIONS~~

~~Continuing operations - (Continued)~~

Six months ended June 30,
2017 2016 Decrease
Percent of Percent of
Revenue revenue Revenue revenue $ %
ATP $ 5,294,000 89.2 % $ 5,896,000 89.8 % $ (602,000 ) (10.2 )%
Other 640,000 10.8 672,000 10.2 (32,000 ) (4.8 )
Total $ 5,934,000 100.0 % $ 6,568,000 100.0 % $ (634,000 ) (9.7 )%

Significant components contributing to the increase in second quarter 2017 ATP revenue, compared to the same period in 2016, include growth in Hy-Tech’s ATP parts business and a resurgence in activity from a large customer acquired in the ATSCO acquisition that had placed little to no orders for several quarters. Additionally, in 2016 we began to pursue alternate markets where we believed we could exploit our manufacturing expertise, and develop different applications for our tools, motors and accessories. We believe the development of this new marketing strategy will provide an opportunity to generate revenue from the new markets in 2017 and beyond. Revenue from these new markets during the second quarter of 2017 was approximately $298,000. Although Hy-Tech’s second quarter 2017 revenue has increased compared to the first quarter of 2017, we believe that there continues to be an excess inventory of tools and spare parts in the distribution channels. Additionally, we believe that the turn-around activities in the oil and gas sector continue to lag, compared to historic levels, further negatively impacting Hy-Tech’s revenue. Lastly, we believe lower-priced imported tools and spare parts are also adversely impacting the marketplace. Lastly, Hy-Tech has recently begun to develop a new marketing strategy that is intended to re-energize the gear and hydraulic stopper business.

The fluctuation in Hy-Tech’s revenue for the first six months of 2017 compared to the same period in 2016 was primarily due to the decline in ATP revenue from a large customer that was acquired in the ATSCO acquisition greatly reducing its purchases in the first quarter of 2017, compared to its purchases during the first quarter of 2016. The decision by this customer to cease placing orders began sometime in mid-2016. However, as discussed above this customer began to purchase products during the second quarter of 2017. Further, shipments of the very low gross margin tools declined, contributing to the reduction in ATP revenue. A major component of Hy-Tech’s revenue is derived from the oil and gas sector. Currently, oil and gas sector revenue accounts for approximately 30% to 35% of Hy-Tech’s total revenue. This revenue stream is driven by a number of factors, such as, the number of off-shore rigs located in the Gulf of Mexico, “turn-arounds” or plant maintenance activities and, to a lesser extent, land rigs. We believe the lag in turn-around activities and a growing presence of lower-priced imported tools and spare parts are impacting this marketplace. Further, as discussed earlier, Hy-Tech is currently pursuing alternate markets where it believes it can exploit its manufacturing expertise, and develop different applications for its tools, motors and accessories. Revenue from these new sources during the first six months of 2017 was approximately $501,000, and is included in the ATP grouping. At June 30, 2017, Hy-Tech had more than $590,000 in open orders for products within this new initiative. Lastly, Hy-Tech’s total backlog at June 30, 2017, increased approximately 65%, compared to its backlog at June 30, 2016.

RESULTS OF OPERATIONS

~~Continuing operations~~ - (Continued)

Gross profit / margin

Three months ended June 30, Increase (decrease)
2017 2016 Amount %
Florida Pneumatic $ 4,418,000 $ 4,727,000 $ (309,000 ) (6.5 )
As percent of respective revenue 36.4 % 37.1 % (0.7 )% pts
Hy-Tech $ 1,004,000 $ 578,000 $ 426,000 73.7
As percent of respective revenue 31.1 % 19.9 % 11.2 % pts
Total $ 5,422,000 $ 5,305,000 $ 117,000 2.2
As percent of respective revenue 35.3 % 33.9 % 1.4 % pts

	Six months ended June 30,								Increase (decrease)						Three months ended March 31,								Increase (decrease)
	2017				2016				Amount			%			2018				2017				Amount			%
Florida Pneumatic	$	8,537,000			$	8,851,000			$	(314,000	)		(3.5	)	$	4,183,000			$	4,119,000			$	64,000			1.6	%
As percent of respective revenue			37.7	%			37.6	%		0.1	% pts						34.1	%			39.2	%			(5.1) % pts
Hy-Tech	$	1,858,000			$	1,670,000			$	188,000			11.3		$	1,251,000			$	854,000			$	397,000			46.5
As percent of respective revenue			31.3	%			25.4	%		5.9	% pts						36.0	%			31.5	%			4.5 % pts
Total	$	10,395,000			$	10,521,000			$	(126,000	)		(1.2	)	$	5,434,000			$	4,973,000			$	461,000			9.3	%
As percent of respective revenue			36.4	%			34.9	%		1.5	% pts						34.5	%			37.6	%			(3.1) % pts

Three primary factors impacted Florida Pneumatic’s ~~second quarter of 2017~~ gross margin ~~declined when compared~~during the three-month period ended March 31, 2018. First, as discussed earlier in this management’s discussion and analysis, we adopted ASC 606. This adoption effectively reduced gross profit by reducing net revenue by $214,000, thus resulting in a reduction in gross margin of 1.7 percent. Second, its gross margin was negatively impacted by late arrival of overseas shipments, which are the drivers of Florida Pneumatic’s overhead absorption. As fewer containers were processed through its facility it caused reduced absorption, thus lowering their gross margin. We believe the absorption short-fall incurred this quarter should be reversed during the second and third quarters of 2018. Lastly, during the three-month period ended March 31, 2018, foreign currency, specifically the weakness of the U.S. dollar to the ~~same period in 2016,~~Taiwan dollar adversely affected Florida Pneumatic’s gross margin.

Hy-Tech was able to improve its overall gross margin primarily due to ~~customer and product mix. There were no significant changes in our cost structure or selling price. Jiffy’s gross margin approximates that~~greater absorption of ~~Florida Pneumatic’s other non-retail product lines.~~

~~Florida Pneumatic’s overall gross margin for~~its manufacturing overhead costs, driven by greater through-put through the ~~six-month period ended June 30, 2017 is essentially the same as the gross margin for the same period in 2016.~~

Hy-Tech’s 2017 second quarter gross margin increased 11.2 percentage points, a 56.3% improvement over the same period a year ago. Factors contributing to the positive change include, among other things: (a) in the second quarter of 2016, we reviewed certain components of Hy-Tech’s inventory and determined that it was necessary to lower the carrying value, which resulted in lower gross margin and gross profit, (b) during the second quarter of 2016, Hy-Tech’s overhead absorption was diminished primarily due to reduced manufacturing, negatively impacting that quarter’s results, and (c) lastly, during the first six months of 2016, we were shipping a line of very low gross margin tools to a major customer. During the second quarter of 2017, shipments for the low gross margin tools declined compared to the prior year. Additional factors contributing to the improvement in Hy-Tech’s gross margin include such things as improved overhead absorption as manufacturing activity has increased, inventory turns are healthier, which in turn reduces charges for slow moving inventory, and the sale of the low margin tools has been lower this year compared to the prior year. However, there is a balance of these low margin tools that we believe will be shipped sometime during 2017; however it is difficult to predict exactly when this customer will request the completion of the order.

Hy-Tech’s gross margin for the six-month period ended June 30, 2017, improved 5.9 percentage points, when compared to the same period a year ago. In addition to the primary factors to this improvement discussed above, gross margin on the products being sold under its new marketing initiative are slightly below its historical range. However we believe that as volume of these products increases, manufacturing expertise will improve, thus increasing margin.facility.

Selling, ~~and~~ general and administrative expenses

Selling, general and administrative expenses, (“SG&A” ~~or “operating expenses”~~) include salaries and related costs, commissions, travel, administrative facilities, communications costs and promotional expenses for our direct sales and marketing staff, administrative and executive salaries and related benefits, legal, accounting and other professional fees as well as general corporate overhead and certain engineering expenses.

~~RESULTS OF OPERATIONS~~

~~Continuing operations - (Continued)~~

During the ~~second~~first quarter of ~~2017,~~2018, our SG&A was ~~$5,366,000,~~$5,280,000, compared to ~~$5,154,000~~$5,047,000 for the same three-month period in ~~2016.~~2017, or an increase of $233,000. The most significant item contributing to the net increase was ~~due in large part~~additional operating expenses incurred at Jiffy during the first quarter of 2018 of $581,000, whereas there were no Jiffy SG&A expenses during the first quarter of 2017. Additionally, as the result of the adoption of the new revenue recognition standards, we now are required to ~~acquisition of Jiffy in April 2017,~~classify as adjustments to net revenue certain expenses, which ~~added~~aggregated approximately ~~$450,000~~$214,000 during the three-month period ended March 31, 2018 that prior to ~~our~~the adoption were accounted for as SG&A. Other significant components ofto the change ~~include:~~in SG&A include reductions in: (i) ~~a $33,000 reduction~~variable expenses, which include costs such as: commissions, advertising travel and warranty of $192,000, due primarily to lower Retail revenue; (ii) depreciation and amortization of $48,000; (iii) professional fees of $242,000, which during the first quarter of 2017 included fees and expenses related to the Jiffy Acquisition as well as recruitment fees for executive positions at Hy-Tech. The reductions were partially offset by increases in ~~non-Jiffy~~our stock-based compensation ~~expenses,~~of $59,000, and compensation expense which is comprised of base salaries and wages, accrued performance-based bonus incentives, associated payroll taxes and employee benefits; (ii) a decrease in variable expenses of $208,000, due primarily to lower Retail revenue; (iii) a decrease in corporate related expenses of $40,000; and (iv) a reduction in amortization and depreciation expenses of $69,000, due mostly to the reduction in Hy-Tech’s intangible assets, which were written down in 2016. The reductions were partially offset by an increase in professional fees of $172,000, most of which was incurred as the result of the Jiffy acquisition.

Our SG&A for the six-month period ended June 30, 2017 was $10,413,000, compared to $10,173,000 for the same period in 2016. As noted above the most significant component to the net increase was the addition of Jiffy’s SG&A of $450,000. Other significant components include reductions in: (i) non-Jiffy compensation expenses of $45,000; (ii) variable expenses of $220,000 due primarily to lower Retail revenue; (iii) depreciation and amortization of $176,000, due mostly to the reduction in Hy-Tech’s intangible assets, which were written down in 2016; and (iv) corporate related expenses of $104,000. The reductions were partially offset by an increase in professional fees of $438,000, which include fees and expenses related to the Jiffy acquisition and recruitment fees for executive positions at Hy-Tech.

~~Impairment of goodwill and other intangible assets~~

During the second quarter of 2016, we determined that an interim impairment analysis of the goodwill recorded in connection with Hy-Tech and ATSCO was necessary. As a result of the aforementioned, it was determined that Hy-Tech's short and long-term projections at that time had indicated an inability to generate sufficient discounted future cash flows to support the recorded amounts of goodwill, other intangible assets and other long-lived assets necessitating the impairment charge. Accordingly, adhering to current accounting literature, we recorded an impairment charge of $8,311,000 relating to goodwill and other intangible assets during the second quarter of 2016.benefits, increased $47,000.

Other ~~income – net~~Expense

~~The real property that generated $18,000 and $32,000~~Other Expense represents the adjustment of ~~Other income – net during~~ the ~~three and six-month periods ended June 30, 2016, respectively, was sold in November 2016. As such, there is no income~~fair value of ~~a similar nature for 2017. Other income of $24,000 for~~ the ~~three and six-month periods ended June 30, 2017 is due~~contingent consideration obligation to the ~~receipt of the balance of an escrow related to the sale of the real property that was located~~Jiffy Seller, as discussed in ~~Tampa, Florida and used by Nationwide Industries Inc. See~~ Note 2 to our consolidated financial ~~statements for further discussion.~~statements.

2724

Management’s Discussion and Analysis of Financial Condition and Results of Operations – Continued

RESULTS OF OPERATIONS

~~Continuing operations~~ - (Continued)

Interest

Three months ended
June 30, Increase (decrease)
2017 2016 Amount %
Interest expense attributable to:
Short-term borrowings $ 48,000 $ 23,000 $ 25,000 108.7 %
Term loans, including Capital Expenditure Term Loans 1,000 3,000 (2,000 ) (66.7 )
Amortization expense of debt issue costs 15,000 10,000 5,000 50.0

Total $ 64,000 $ 36,000 $ 28,000 77.8 %

	Six months ended June 30,				Increase (decrease)						Three months ended March 31,				Increase
	2017		2016		Amount			%			2018		2017		Amount
Interest expense attributable to:
Short-term borrowings	$	49,000	$	26,000	$	23,000			88.5	%	$	13,000	$	1,000	$	12,000
Term loans, including Capital Expenditure Term Loans		1,000		4,000		(3,000	)		(75.0	)		1,000		—		1,000
Amortization expense of debt issue costs		24,000		108,000		(84,000	)		(77.8	)		23,000		9,000		14,000

Total	$	74,000	$	138,000	$	(64,000	)		(46.4	)%	$	37,000	$	10,000	$	27,000

~~Primarily the result of the sale of Nationwide and the real property located~~The increase in ~~Tampa, Florida, occurring in February and November 2016, respectively, our total bank~~short-term loan borrowings during the first quarter of 2017, were minimal. However, as discussed in Note 3 - Acquisition, to our consolidated financial statements, on April 5, 2017, we purchased the net assets of Jiffy and real property located in Carson City, Nevada. The funding for this transactioninterest was ~~from~~driven primarily by greater borrowings against our Revolver, ~~Loan, which is our short-term borrowing. As~~described below, in 2018, compared to the ~~result, our short-term~~prior year, and to a lesser extent, higher interest ~~expense incurred during the three-month period ended June 30, 2017 increased over the second quarter of 2016.~~

In accordance with accounting guidance we have reported our short-term and term loan interest expense incurred during the period January 1, 2016 through February 11, 2016, which was the effective date of sale of Nationwide,rates. The increase in Discontinued operations. Further, as the result of the Company and Capital One, National Association (“Capital One”, or the “Bank”) agreeing to significantly modify the Credit Agreement, as defined below, we were required to write down and recognized as interest expense, the debt issue costs associated with the then existing Credit Agreement. As such, $38,000 is included in amortization ~~expense~~ of debt issue costs ~~in our interest expense for~~is due to the ~~three-month period ended March 31, 2016. See Note 2~~expenses incurred with the amendment to our ~~consolidated financial statements for further discussion on~~Loan and Security Agreement (“Credit Agreement”) in April 2017 that related to the ~~sale of Nationwide. See Liquidity and Capital Resources elsewhere in this Management’s Discussion and Analysis section for further information regarding our bank loans.~~Jiffy acquisition.

Our average balance of short-term borrowings during the ~~three and six-month periods~~three-month period ended ~~June 30, 2017~~March 31, 2018 was ~~$6,011,000 and $3,073,000, respectively,~~$1,847,000, compared to ~~$2,978,000 and $4,103,000, respectively,~~$103,000 during the same ~~periods~~three-month period in ~~2016.~~2017.

Income taxes

At the end of each interim reporting period, ~~we estimate an~~the Company estimates its effective tax rate expected to be applied for the full year. This estimate is used to determine the income tax provision or benefit ~~applicable to continuing operations,~~ on a year-to-date basis, and may change in subsequent interim periods. ~~As a result,~~Accordingly, our effective tax rate ~~applicable to continuing operations~~ for the ~~three and six-months~~three-month period ended ~~June 30, 2017~~March 31, 2018 was ~~0% and 35.3%~~26.1%, ~~respectively. For~~compared to the ~~same periods in 2016 our~~ effective tax benefit rate ~~applicable to continuing operations was 34.3%.~~of 28.6% for the three-month period ended March 31, 2017. The Company’s effective tax rates for both periods were affected primarily by state taxes, non-deductible expenses and foreign tax rate differentials.

In addition to those items mentioned above that affected the Company’s effective tax rates was the Tax Cuts and Jobs Act (the “Act”) which was enacted on December 22, 2017. The Act reduces the U.S. federal corporate income tax rate from 35% to 21%, required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries previously deferred from tax, generally eliminates U.S federal income taxes on dividends from foreign subsidiaries and creates a new provision designed to tax global intangible low-taxed income (“GILTI”). Also on December 22, 2017, the U.S. Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 (“SAB 118”) which provides for a measurement period of up to one year from the enactment for companies to complete their accounting for the Act. The Company is applying the guidance in SAB 118 when accounting for the enactment-date effects of the Act.

At March 31, 2018, the Company has not completed its accounting for the tax effects of the Act, but has made reasonable estimates of the effects on the re-measurement of its deferred tax assets and liabilities as well as its transition tax liability. During the three month period ended March 31, 2018, the Company made no adjustments to the provisional amounts recorded at December 31, 2017. Additionally, the Company has not yet collected and analyzed all necessary tax and earnings data of its foreign operations and therefore, the Company has also not yet completed its accounting for the income tax effects of the transition tax. The Company will continue to make and refine its calculations as additional analysis is completed.

The Act also subjects a U.S. shareholder to tax on GILTI earned by certain foreign subsidiaries. Under U.S. GAAP, the Company is permitted to make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only. Given the complexity of the GILTI provisions, the Company is still evaluating the effects of the GILTI provisions and has not yet made its accounting policy election. At March 31, 2018, because the Company is still evaluating the GILTI provisions, the Company has included tax expense related to GILTI for the current year in its estimated annual effective tax rate and has not provided additional GILTI on deferred items.

2825

~~RESULTS OF OPERATIONS~~

~~Discontinued operations - 2016~~

~~Nationwide’s results~~Management’s Discussion and Analysis of ~~operations in our consolidated financial statements~~Financial Condition and ~~Note 2, presents their revenue and cost~~Results of goods sold for the period January 1, 2016 through February 11, 2016. The SG&A incurred during the same period includes that of Nationwide plus $19,000 of expenses incurred at the corporate level that is specifically attributable to Nationwide. In accordance with current accounting guidance, we included, as part of discontinued operations, all interest expense incurred attributable to our Bank borrowings during the period January 1, 2016 through February 11, 2016. We recognized a gain of $12,171,000, on the sale of Nationwide. This gain represents the difference between the adjusted net purchase price and the carrying value of Nationwide. Operations – Continued

LIQUIDITY AND CAPITAL RESOURCES

We monitor such metrics as days’ sales outstanding, inventory requirements, inventory turns, estimated future purchasing requirements and capital expenditures to project liquidity needs, as well as evaluate return on assets. Our primary sources of funds are operating cash flows and our Revolver Loan (“Revolver”) with our Bank.

We gauge our liquidity and financial stability by various measurements, some of which are shown in the following table:

	June 30, 2017		December 31, 2016		March 31, 2018		December 31, 2017
Working Capital	$	24,291,000	$	28,373,000	$	24,249,000	$	24,278,000
Current Ratio		3.49 to 1		5.60 to 1		3.93 to 1		4.08 to 1
Shareholders’ Equity	$	47,387,000	$	47,590,000	$	46,084,000	$	46,013,000

Credit facility

In October 2010, we entered into a ~~Loan and Security~~Credit Agreement ~~(“Credit Agreement”)~~ with an affiliate of Capital One, National Association (“Capital One”, or the “Bank”). The Credit Agreement, as amended from time to time, among other things, provides ~~for~~the ability to borrow funds under a Revolver arrangement, which is currently set at a maximum of $16,000,000. Revolver borrowings ~~which~~ are secured by the Company’s accounts receivable, inventory, equipment and mortgages on ~~its~~real property. Additionally there is a $1,600,000 line available for capital expenditures. Lastly, the Credit Agreement includes a $100,000 term loan. This term loan, which is secured by our real property, ~~(“Real Property”), inventory~~remains in place such that should we and ~~equipment.~~Capital One wish to facilitate future term loan borrowings more efficiently and less costly. P&F and certain of its subsidiaries are borrowers under the Credit Agreement, and their obligations are cross-guaranteed by certain other subsidiaries.

At our option, Revolver borrowings ~~will~~ bear interest at either LIBOR (“London InterBank Offered Rate”) or the Base Rate, as the term is defined in the Credit Agreement, plus ~~the~~an Applicable Margin, as defined in the Credit Agreement. ~~The interest rate, either LIBOR or Base Rate, which is added to the Applicable Margin, is at our option.~~ We are ~~limited in~~subject to limitations on the number of LIBOR borrowings.

At March 31, 2018 and December 31, 2017, our short-term or Revolver borrowings were $3,241,000 and $1,928,000, respectively. Applicable LIBOR Margins in effect as of March 31, 2018 and December 31, 2017 was 1.50%. The Applicable Base Rate Margins in effect as of March 31, 2018 and December 31, 2017 was 0.50%.

Contemporaneously with the acquisition of the Jiffy ~~Air Tool, Inc.~~ business discussed in Note 32 to the consolidated financial statements, we entered into a Second Amended and Restated Loan and Security Agreement, effective as of April 5, 2017, the ~~Closing Date~~closing date of the Jiffy Acquisition (the ~~“Jiffy Amendment”~~“2017 Agreement”), with Capital One. The ~~Jiffy Amendment amended and restated the previous amendment to the Credit Agreement.~~

~~The Jiffy Amendment,~~2017 Agreement, among other things, amended the Credit Agreement by: (1) increasing the maximum amount weit can borrow under the Revolver Commitment (as defined) from $10,000,000 to $16,000,000, subject to certain borrowing base criteria, and (2) modifying certain borrowing base criteria as well as financial and other covenants. In addition, we incurred $84,000 of debt issue costs in connection with this Amendment.

We provide Capital One monthly financial statements, monthly borrowing base certificates and monthly certificates of compliance with various financial covenants. We believe we are in compliance with all financial and non-financial covenants. As part of the 2017 Agreement, if an event of default occurs, the interest rate would increase by two percent per annum during the period of default, in addition to other remedies provided to Capital One.

We believe that should a need arise whereby the current credit facility is insufficient, we can borrow additional amounts against our real property or other assets.

2926

Management’s Discussion and Analysis of Financial Condition and Results of Operations – Continued

LIQUIDITY AND CAPITAL RESOURCES – (Continued)

The net funds of approximately $18,700,000 provided by the sale of Nationwide in 2016 were used to pay down the Revolver, Capex loans and the Term Loan A; however, we and the Bank agreed to have $100,000 remain outstanding under the Term Loan A, rather than pay it off in full, thus providing the Company and Capital One the ability to potentially increase future term loan borrowings more efficiently and at lower costs.

Primarily the result of the Jiffy acquisition, our Revolver borrowing at June 30, 2017 increased to $4,537,000, compared to no short term borrowings at December 31, 2016. Revolver borrowings can be at either LIBOR or at the Base Rate, as defined in the Credit Agreement with Capital One. Applicable LIBOR Margins in effect at June 30, 2017, was 1.75%, compared to 1.50% at December 31, 2016. The Applicable Base Rate Margins in effect as of June 30, 2017 and December 31, 2016 were 0.75% and 0.50%, respectively.

Cash flows

During the ~~six-month~~three-month period ended ~~June 30, 2017,~~March 31, 2018, our net cash ~~decreased~~increased to ~~$1,269,000~~$1,704,000 from ~~$3,699,000~~$1,241,000 at December 31, ~~2016.~~2017. Our total bank debt at ~~June 30, 2017, driven by the Jiffy acquisition, which~~March 31, 2018 was ~~discussed in Note 3 to the accompanying consolidated financial statements, was $4,637,000, compared to $100,000~~$3,341,000 and $2,028,000 at December 31, ~~2016.~~2017. The total debt to total book capitalization (total debt divided by total debt plus equity); at ~~June 30, 2017~~March 31, 2018 was ~~8.9%, compared to 0.2%~~6.8% and at December 31, ~~2016.~~2017 was 4.2%.

In ~~March 2016,~~February 2018, our Board of Directors ~~approved the initiation of~~declared a ~~dividend policy under which the Company intends to declare~~ quarterly cash ~~dividends to its stockholders in the amount~~dividend of $0.05 per ~~quarter. During the six-month period ended June 30, 2017,~~share of our ~~Board of Directors voted to approve the payment of two quarterly dividends. As such,~~common stock, which was paid in ~~February 2017, and May 2017, we paid a $0.05 per share dividend to the shareholders of record as of February 6, 2017, and May 22, 2017.~~March 2018. The ~~aggregate~~total of such dividend ~~payments~~payment was ~~approximately $360,000. Our Board of Directors expects~~$180,000. The Company continues to maintain the dividend ~~policy,~~policy; however, the ~~future~~ declaration of dividends under this policy going forward is dependent upon ~~several factors, which includes such things as~~ our ~~overall~~ financial condition, results of operations, capital requirements and other factors deemed relevant by our ~~board may deemed relevant.~~ Board of Directors.

On August 9, 2017, our Board of Directors authorized us to repurchase up to 100,000 shares of our common stock over a period of up to twelve months (the “Repurchase Program”). On August 24, 2017, we announced that, pursuant to the Repurchase Program, we had adopted a written trading plan in accordance with the guidelines specified under Rule 10b5-1 under the Securities Exchange Act of 1934. Since inception of the Repurchase Program, through March 31, 2018, we repurchased approximately 57,000 shares of our Common Stock, the cost of which was approximately $439,000. During the three-month period ended March 31, 2018, we repurchased 10,356 shares at a cost of approximately $82,000.

During the ~~six-month~~three-month period ended ~~June 30, 2017,~~March 31, 2018, we used ~~$358,000~~$570,000 for capital expenditures, compared to ~~$766,000~~$231,000 during the same period in the prior year. Capital expenditures for the balance of ~~2017~~2018 are expected to be approximately ~~$560,000,~~$1,500,000, some of which may be financed through our credit facilities with Capital One, or financed through independent third party financial institutions. The remaining ~~2017~~2018 capital expenditures will likely be for machinery and equipment, tooling and computer hardware and software.

We believe that net cash flows from operations, available borrowings under our current Credit Facility should provide sufficient cash to fund our consolidated cost structure for at least the next 12 months from the date of this filing. Additionally, we anticipate the receipt in August 2017 of approximately $2.1 million that has been held in escrow in connection with the sale of Nationwide.

~~LIQUIDITY AND CAPITAL RESOURCES – (Continued)~~

Customer concentration

~~Florida Pneumatic has two customers, Sears~~At March 31, 2018 and December 31, 2017, accounts receivable from The Home Depot ~~that, in the aggregate, at June 30, 2017,~~was 32.4% and ~~December 31, 2016, accounted for 48.1% and 53.5%~~31.0%, respectively, of our total accounts receivable. ~~To date, these~~Additionally, revenue from The Home Depot during the three-month periods ended March 31, 2018 and 2017 were 23.5% and 30.8%, respectively. There were no other customers ~~remain at or close to complying with their payment terms. Further, these two customers in the aggregate,~~that accounted for ~~35.2% and 37.7%, respectively,~~more than 10% of our consolidated revenue ~~for~~during the ~~three and six-month period~~three-month periods ended ~~June 30, 2017, compared to 46.2% and 42.4% for the same three and six-month periods in 2016.~~March 31, 2018 or 2017.

As previously mentioned we ~~have~~ elected not to renew an agreement with Sears, which ~~will terminate~~terminated September 30, 2017. ~~We believe the~~The loss of Sears’s revenue ~~will have~~had a negative impact on our financial condition, but ~~will~~does not affect our ability to remain a going concern. Further, we believe the loss of The Home Depot would also negatively impact our working capital, but again, would not affect our ability to remain a going concern.

Management’s Discussion and Analysis of Financial Condition and Results of Operations – Continued

NEW ACCOUNTING PRONOUNCEMENTS

Refer to Note 1 to our consolidated financial statements for a discussion of recent accounting standards and pronouncements.

We are currently evaluating the impact of the adoption of ASU 2016-02,Leases, on our consolidated financial condition, results of operations and cash flows.

In addition, in February 2018, the FASB issued No. ASU 2018-02,Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other ~~than~~Comprehensive Income (“ASU 2018-02”). Under ASU 2018-02, an entity may elect to reclassify the ~~aforementioned, we do not believe that~~income tax effects of the Tax Reform Act on items within accumulated other comprehensive income to retained earnings. ASU 2018-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted in any ~~other recently issued, but not yet effective accounting standard,~~interim period. We are currently evaluating what impact, if ~~adopted, will~~any, adoption of ASU 2018-02 may have ~~a material effect~~ on our consolidated financial statements.

~~We are currently evaluating what if any impact there will be on our consolidated financial condition, results of operations and cash flows upon the adoption of ASU No. 2014-09,~~~~Revenue from Contracts with Customers~~~~, and related updates thereto.~~

Other than the aforementioned, we do not believe that any other recently issued, but not yet effective accounting standard, if adopted, will have a material effect on our consolidated financial statements.

3128

Item 3.

Quantitative And Qualitative Disclosures About Market Risk

Not required.

Item 4.

Controls and Procedures

Disclosure Controls and Procedures

The Company's management, with the participation of the Company's Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), evaluated, as of ~~June 30, 2017,~~March 31, 2018, the effectiveness of the Company's disclosure controls and procedures, which were designed to be effective at the reasonable assurance level. The term "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of the Company's disclosure controls and procedures as of ~~June 30, 2017,~~March 31, 2018, the Company’s management, including its CEO and CFO, concluded that the Company's disclosure controls and procedures were effective at the reasonable assurance level at that date.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting, identified in connection with the evaluation required by Exchange Act Rule 13a-15(d), that occurred during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

3229

PART II - OTHER INFORMATION

Item 1.

Legal Proceedings

There have been no material changes to the legal proceedings disclosure described in our ~~2016~~2017 Form 10-K.

Item 1A.

Risk Factors

~~Set out below is risk factor previously disclosed in our 2016 Form 10-K, which has been amended by adding the last sentence. This risk factor, as amended, should be considered in addition~~There were no material changes to the ~~other~~ riskfactors previously disclosed in our ~~2016~~2017 Form 10-K. ~~Other than this amended risk factor, there were nomaterial changes to such previously disclosed risk factors.~~

~~Market acceptance of products.~~ There can be no assurance that the market continues its acceptance of the products we introduced in recent years or will accept new products (including the introduction of products into new geographic markets) introduced or scheduled for introduction in 2017. There can also be no assurance that the level of sales generated from these new products or geographic markets relative to our expectations will materialize. Furthermore, there can be no assurance that the market acceptance of the Company’s products will not diminish due to technological advances in the Company’s competitors’ products.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

~~None.~~

							Maximum
							Number
					Total Number of		of shares
					Shares Purchased as		that May Yet
					Part of Publicly		Be Purchased
	Total Number of		Average Price		Announced Plan		Under the Plan
Period	Shares Purchased		Paid per Share		or Program		or Program (1)

January 1, 2018 - January 31, 2018		3,122	$	8.38		3,122		50,000
February 1, 2018 – February 28, 2018		—		—		—		50,000
March 1, 2018 – March 31, 2018		7,234	$	7.68		7,234		42,766

(1)

On August 24, 2017, the Company announced that it had adopted a written trading plan for the purpose of repurchasing up to 100,000 shares of its common stock. This trading plan expires on August 23, 2018, and was adopted pursuant to an authorization of a stock repurchase program by the Company’s Board which was publicly announced on August 10, 2017.

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

Mine Safety Disclosures

None.

Item 5.

Other Information

None.

Item 6.

Exhibits

See “Exhibit Index” immediately following the signature page.

3330

��

SIGNATURE

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.

	P&F INDUSTRIES, INC.
	(Registrant)

	/s/ JOSEPH A. MOLINO, Jr.
	Joseph A. Molino, Jr.
	Chief Financial Officer
Dated: ~~August~~May 11, ~~2017~~2018	(Principal Financial and Chief Accounting Officer)

3431

EXHIBIT INDEX

The following exhibits are either included in this report or incorporated herein by reference as indicated below:

Exhibit Number		Description of Exhibit
~~2.1~~		Asset Purchase Agreement, dated as of April 5, 2017, by and among Bonanza Holdings Corp., Jack E. Pettit, Jiffy Air Tool, Inc. and The Jack E. Pettit—1996 Trust (Incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K dated April 5, 2017).

~~2.2~~10.1		Purchase and Sale Agreement and Joint Escrow Instructions, dated as of April 5, 2017, by and among Jiffy Air Tool, Inc. and Bonanza Properties Corp. (Incorporated by reference to Exhibit 2.2 to the Registrant’s Current Report on Form 8-K dated April 5, 2017).

~~10.1~~		~~Second Amended and Restated Loan and Security~~Executive Employment Agreement, dated as of ~~April 5, 2017, by~~January 1, 2018, between the Registrant and among the Company, Florida Pneumatic Manufacturing Corporation and Hy-Tech Machine, Inc. as Borrowers, ATSCO Holdings Corp. Bonanza Holdings Corp., Bonanza Properties Corp., Continental Tool Group, Inc., Countrywide Hardware, Inc. Embassy Industries, Inc., Green Manufacturing, Inc., Exhaust Technologies, Inc., Pacific Stair Products, Inc., WILP Holdings, Inc. and Woodmark International, L.P. as Guarantors and Capital One, National Association as Agent and LenderJoseph A. Molino, Jr. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated ~~April 5, 2017)~~January 30, 2018).

~~10.2~~31.1		Third Amended and Restated Revolver Note dated as of April 5, 2017, by the Company, Florida Pneumatic Manufacturing Corporation and Hy-Tech Machine, Inc. in favor of Capital One, National Association (Incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K dated April 5, 2017).

~~10.3~~		Amended and Restated Tranche A Term Loan Note dated as of April 5, 2017 by the Company, Florida Pneumatic Manufacturing Corporation and Hy-Tech Machine, Inc. in favor of Capital One, National Association (Incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K dated April 5, 2017).

~~10.4~~		Second Amended and Restated Capex Loan Note dated as of April 5, 2017, by the Company, Florida Pneumatic Manufacturing Corporation and Hy-Tech Machine, Inc. in favor of Capital One, National Association (Incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K dated April 5, 2017).

~~31.1~~		Certification of Richard A. Horowitz, Principal Executive Officer of the Registrant, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Joseph A. Molino, Jr., Principal Financial Officer of the Registrant, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Richard A. Horowitz, Principal Executive Officer of the Registrant, Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 .

32.2		Certification of Joseph A. Molino, Jr., Principal Financial Officer of the Registrant, Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101		* Interactive Data

* Attached as Exhibit 101 are the following, each formatted in Extensible Business Reporting Language (“XBRL”): (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Operations and Comprehensive Income (Loss) ~~Income;~~; (iii) Consolidated Statement of Shareholders’ Equity; (iv) Consolidated Statements of Cash Flows; and (v) Notes to Consolidated Financial Statements.

A copy of any of the foregoing exhibits to this Quarterly Report on Form 10-Q may be obtained, upon payment of the Registrant’s reasonable expenses in furnishing such exhibit, by writing to P&F Industries, Inc., 445 Broadhollow Road, Suite 100, Melville New York 11747, Attention: Corporate Secretary.

3532

	Three months						Six months
	ended June 30,						ended June 30,
	2017			2016			2017			2016

Net revenue	$	15,359,000		$	15,637,000		$	28,575,000		$	30,136,000
Cost of sales		9,937,000			10,332,000			18,180,000			19,615,000
Gross profit		5,422,000			5,305,000			10,395,000			10,521,000
Selling, general and administrative expenses		5,366,000			5,154,000			10,413,000			10,173,000
Impairment of goodwill and other intangible assets		—			8,311,000			—			8,311,000
Operating income (loss)		56,000			(8,160,000	)		(18,000	)		(7,963,000	)
Other income, net		(24,000	)		(18,000	)		(24,000	)		(32,000	)
Interest expense		64,000			36,000			74,000			138,000
Income (loss) from continuing operations before income taxes		16,000			(8,178,000	)		(68,000	)		(8,069,000	)
Income tax benefit		—			(2,808,000	)		(24,000	)		(2,765,000	)
Income (loss) from continuing operations		16,000			(5,370,000	)		(44,000	)		(5,304,000	)

Discontinued operations (Note 2)

Net income from discontinued operations, net of tax of $-0- and $38,000 for the three and six-month periods ended June 30, 2016		—			—			—			72,000
(Loss) gain on sale of discontinued operations, net of tax benefit of $-0- and $141,000 for the three and six-month periods ended June 30, 2016		—			(14,000	)		—			12,171,000
(Loss) income from discontinued operations, net of tax		—			(14,000	)		—			12,243,000

Net income (loss)	$	16,000		$	(5,384,000	)	$	(44,000	)	$	6,939,000

Basic earnings (loss) per share
Continuing operations	$	—		$	(1.49	)	$	(0.01	)	$	(1.47	)
Discontinued operations		—			—			—			3.40
Net income (loss)	$	—		$	(1.49	)	$	(0.01	)	$	1.93

Diluted earnings (loss) per share
Continuing operations	$	—		$	(1.49	)	$	(0.01	)	$	(1.47	)
Discontinued operations		—			—			—			3.40
Net income (loss)	$	—		$	(1.49	)	$	(0.01	)	$	1.93

Weighted average common shares outstanding:

Basic		3,611,000			3,595,000			3,605,000			3,598,000
Diluted		3,720,000			3,595,000			3,605,000			3,598,000

Net income (loss)	$	16,000		$	(5,384,000	)	$	(44,000	)	$	6,939,000
Other comprehensive income (loss) -foreign currency translation adjustment		91,000			(166,000	)		117,000			(236,000	)
Total comprehensive income (loss)	$	107,000		$	(5,550,000	)	$	73,000		$	6,703,000

	January 1, 2016 through February 11, 2016

Revenue	$	1,830,000
Cost of goods sold		1,177,000
Gross margin		653,000
Selling and general and administrative expenses		483,000
Interest expense-net		60,000
Income before income taxes		110,000
Income taxes		38,000

Net income	$	72,000

Balance, January 1, 2017	$	3,897,000
Acquisition of Jiffy Air Tool, Inc.		519,000
Currency translation adjustment		9,000
Balance, June 30, 2017	$	4,425,000

2018	$	704,000
2019		672,000
2020		648,000
2021		623,000
2022		620,000
Thereafter		3,092,000
	$	6,359,000

	Three months ended June 30,				Increase (decrease)
	2017		2016		Amount			%
Interest expense attributable to:
Short-term borrowings	$	48,000	$	23,000	$	25,000			108.7	%
Term loans, including Capital Expenditure Term Loans		1,000		3,000		(2,000	)		(66.7	)
Amortization expense of debt issue costs		15,000		10,000		5,000			50.0

Total	$	64,000	$	36,000	$	28,000			77.8	%