UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-10-QQ
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period endedJune 30September, 201 30, 20187
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period fromNot Applicable toNot Applicable
Commission file number:0-147
HICKOK INCORPORATED
(Exact name of registrant as specified in its charter)
Ohio | 34-0288470 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
10514 Dupont Avenue, Cleveland, Ohio | 44108 | |
(Address of principal executive offices) | (Zip Code) |
Registrant's telephone number(216) 541-8060
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yes [X] No [ ]
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).Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] | Accelerated filer [ ] |
Non-accelerated filer [ ] | Smaller reporting company [X] |
Emerging growth company [ ] |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes [ ] No [X]
As of JulyOctober 31, 2017, 2,114,8862018, 2,123,806 shares of Class A Common Stock and 773,616596,848 shares of Class B Common Stock were outstanding.
PART I
ITEM 1. FINANCIAL STATEMENTS
HICKOK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited) | (Unaudited) | |||||||||||||||
June 30, 2017 | September 30, 2016 | September 30, 2018 | December 31, 2017 | |||||||||||||
ASSETS | ||||||||||||||||
CURRENT ASSETS: | ||||||||||||||||
Cash and Cash Equivalents | $ | 1,030,560 | $ | 3,060,734 | $ | 3,891,692 | $ | 2,444,110 | ||||||||
Accounts receivable-less allowance for doubtful accounts | 8,702,023 | 1,354,199 | ||||||||||||||
Costs in Excess of Billings and estimated costs | 3,106,868 | |||||||||||||||
Accounts receivable less allowance for doubtful accounts | 13,151,816 | 9,011,677 | ||||||||||||||
Costs and estimated earnings in excess of billing | 1,825,715 | 1,605,991 | ||||||||||||||
Inventories-less allowance for obsolete inventory | 3,896,865 | 3,308,799 | 5,142,522 | 3,903,481 | ||||||||||||
Prepaid Expenses and other current assets | 715,740 | 43,085 | 498,444 | 265,456 | ||||||||||||
Total Current Assets | 17,452,056 | 7,766,817 | 24,510,189 | 17,230,715 | ||||||||||||
PROPERTY, PLANT AND EQUIPMENT: | ||||||||||||||||
Land | 233,479 | 233,479 | ||||||||||||||
Land and Improvements | 257,205 | 235,179 | ||||||||||||||
Buildings and Leasehold Improvements | 2,028,914 | 1,448,978 | 1,525,194 | 2,239,763 | ||||||||||||
Machinery and Equipment | 5,236,781 | 3,392,734 | 13,488,275 | 5,091,360 | ||||||||||||
Total Property, Plant and Equipment | 7,499,174 | 5,075,191 | 15,270,674 | 7,566,302 | ||||||||||||
Less accumulated depreciation | 3,974,633 | 3,771,268 | 1,612,569 | 4,242,913 | ||||||||||||
Property, Plant and Equipment, Net | 3,524,541 | 1,303,923 | 13,658,105 | 3,323,389 | ||||||||||||
OTHER ASSETS: | ||||||||||||||||
Goodwill | 2,409,048 | 1,777,656 | 7,026,045 | 2,255,912 | ||||||||||||
Intangibles, net of accumulated amortization | 2,330,914 | 1,250,909 | 4,425,793 | 1,896,399 | ||||||||||||
Deferred income taxes-less valuation allowance of $500,000 | 3,330,600 | 3,330,600 | ||||||||||||||
Deferred income taxes-less valuation allowance | 1,687,277 | 2,173,892 | ||||||||||||||
Other non-current assets | 3,250 | 4,850 | 95,263 | 3,250 | ||||||||||||
Total Non-Current Other Assets | 8,073,812 | 6,364,015 | 13,234,378 | 6,329,453 | ||||||||||||
Total Assets | $ | 29,050,409 | $ | 15,434,755 | $ | 51,402,672 | $ | 26,883,557 | ||||||||
See accompanying notes to consolidated financial statements
HICKOK INCORPORATED
CONSOLIDATED BALANCE SHEET
(Unaudited) | ||||||||
September 30, 2018 | December 31, 2017 | |||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
CURRENT LIABILITIES: | ||||||||
Convertible notes payable - related party | $ | 200,000 | $ | 200,000 | ||||
Notes payable - related party | 432,910 | 352,727 | ||||||
Bank Debt – Current | 1,333,333 | 500,000 | ||||||
Leases payable | 15,973 | 55,735 | ||||||
Accounts payable | 4,989,595 | 2,112,695 | ||||||
Unearned revenue | 6,384,479 | 2,601,355 | ||||||
Accrued payroll and related expenses | 1,214,631 | 723,053 | ||||||
Accrued expenses | 1,718,906 | 1,340,465 | ||||||
Accrued income taxes | 711,457 | 108,576 | ||||||
Total Current Liabilities | 17,001,284 | 7,994,606 | ||||||
LONG-TERM LIABILITIES: | ||||||||
Notes payable - related party | 3,312,711 | 3,651,765 | ||||||
Seller Note | 9,000,000 | - | ||||||
Bank Debt | 10,798,973 | 4,732,550 | ||||||
Leases payable | 5,239 | 106,855 | ||||||
Total Long-Term Liabilities | 23,116,923 | 8,491,170 | ||||||
STOCKHOLDERS' EQUITY | ||||||||
Preferred shares, no par value - 1,000,000 shares authorized, no shares issued and outstanding | ||||||||
Common shares, no par value | ||||||||
Class A common shares - 10,000,000 shares authorized, 2,123,806 shares issued and outstanding at September 30, 2018 and 2,130,681 shares issued and outstanding at December 31, 2017 | 2,508,534 | 2,246,367 | ||||||
Class B common shares - 2,500,000 shares authorized, 596,848 shares issued and outstanding at September 30, 2018 and 779,283 shares at December 31, 2017, respectively | 710,272 | 710,272 | ||||||
Contributed capital | 1,741,901 | 1,741,901 | ||||||
Treasury shares | (1,905,780 | ) | (264,841 | ) | ||||
Class A common shares - 37,208 shares held at September 30, 2018 and 15,795 shares held at December 31, 2017, respectively | ||||||||
Class B common shares – 182,435 shares held at September 30, 2018 and 5,667 shares held at December 31, 2017, respectively | ||||||||
Retained earnings | 8,229,538 | 5,964,082 | ||||||
Total Stockholders' Equity | 11,284,465 | 10,397,781 | ||||||
Total Liabilities and Stockholders' Equity | $ | 51,402,672 | $ | 26,883,557 | ||||
See accompanying notes to consolidated financial statements
HICKOK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETSTATEMENT OF INCOME (Unaudited)
(Unaudited) | ||||||||
June 30, 2017 | September 30, 2016 | |||||||
| LIABILITIES AND STOCKHOLDERS EQUITY | ||||||||
CURRENT LIABILITIES: | ||||||||
Convertible notes payable - related party | $ | 200,000 | $ | - | ||||
Short-term financing - related party | - | 250,000 | ||||||
Notes payable - related party | 142,726 | 379,761 | ||||||
Bank Debt - Current | 500,000 | - | ||||||
Leases payable | 42,896 | 59,369 | ||||||
Accounts payable | 3,324,482 | 733,388 | ||||||
Billings in Excess of Costs & Earnings | 647,276 | |||||||
Accrued payroll and related expenses | 838,458 | 301,054 | ||||||
Accrued expenses | 1,362,390 | 593,378 | ||||||
Accrued income taxes | 77,744 | 31,000 | ||||||
Deferred revenue | 503,646 | - | ||||||
Total Current Liabilities | 7,639,618 | 2,347,950 | ||||||
LONG-TERM LIABILITIES: | ||||||||
Notes payable - related party | 3,861,766 | 4,388,901 | ||||||
Bank Debt | 7,700,000 | - | ||||||
Leases payable | 151,208 | 144,997 | ||||||
Convertible notes payable - related party | - | 200,000 | ||||||
Deferred revenue | 377,735 | - | ||||||
Total Long-Term Liabilities | 12,090,709 | 4,733,898 | ||||||
STOCKHOLDERS' EQUITY | ||||||||
Common shares - no par value | ||||||||
Class A 10,000,000 shares authorized, 2,130,681 and 2,090,394 shares issued | 2,246,369 | 2,108,651 | ||||||
Class B 2,500,000 convertible shares authorized, 779,283 shares issued | 710,272 | 710,272 | ||||||
Preferred 1,000,000 shares authorized, no shares outstanding | - | - | ||||||
Contributed capital | 1,741,901 | 1,741,901 | ||||||
Treasury shares | (264,841 | ) | (253,341 | ) | ||||
Class A - 15,795 shares | ||||||||
Class B - 5,667 and 667 shares | ||||||||
Retained earnings | 4,886,381 | 4,045,424 | ||||||
Total Stockholders' Equity | 9,320,082 | 8,352,907 | ||||||
Total Liabilities and Stockholders' Equity | $ | 29,050,409 | $ | 15,434,755 | ||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Total Sales | $ | 19,771,137 | $ | 10,892,868 | $ | 45,243,029 | $ | 21,459,809 | ||||||||
Cost of Sales | 15,320,915 | 7,858,489 | 34,287,788 | 14,018,770 | ||||||||||||
Gross Profit | 4,450,222 | 3,034,379 | 10,955,241 | 7,441,039 | ||||||||||||
Operating Expenses: | ||||||||||||||||
Product development costs | - | 159,791 | 220,418 | 556,947 | ||||||||||||
Selling, general and administrative expenses | 1,978,943 | 1,460,126 | 5,803,514 | 3,894,809 | ||||||||||||
Operating Income | 2,471,279 | 1,414,462 | 4,931,309 | 2,989,283 | ||||||||||||
Other (Income) and Expenses: | ||||||||||||||||
Interest charges | 286,684 | 116,992 | 453,372 | 231,879 | ||||||||||||
Loss on sale of business | - | - | 1,160,574 | - | ||||||||||||
Other (income) expense, net | 97,412 | 3,167 | 205,678 | 262,938 | ||||||||||||
Total Other (Income) and Expenses | 384,096 | 120,159 | 1,819,624 | 494,817 | ||||||||||||
Income before Provision for Income Taxes | 2,087,183 | 1,294,303 | 3,111,685 | 2,494,466 | ||||||||||||
Provision for Income Taxes | 590,104 | 726,864 | 846,229 | 772,364 | ||||||||||||
Net Income | $ | 1,497,079 | $ | 567,439 | $ | 2,265,456 | $ | 1,722,102 | ||||||||
Net Income Per Common Share - Basic | $ | 0.55 | $ | 0.20 | $ | 0.80 | $ | 0.60 | ||||||||
Net Income Per Common Share - Diluted | $ | 0.48 | $ | 0.18 | $ | 0.71 | $ | 0.56 | ||||||||
Weighted Average Shares of Common Stock Outstanding | ||||||||||||||||
Basic | 2,720,654 | 2,888,502 | 2,826,347 | 2,882,278 | ||||||||||||
Diluted | 3,092,520 | 3,161,975 | 3,186,946 | 3,101,016 | ||||||||||||
See accompanying notes to consolidated financial statements
HICKOK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOMECASH FLOW (Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
TOTAL SALES | $ | 7,220,626 | $ | 1,530,244 | $ | 12,923,867 | $ | 3,953,740 | ||||||||
COSTS AND EXPENSES: | ||||||||||||||||
Cost of Sales | 4,191,480 | 769,430 | 7,933,969 | 2,204,495 | ||||||||||||
Product Development | 179,840 | 258,406 | 636,166 | 777,889 | ||||||||||||
Selling, General and Administrative Expenses | 1,808,920 | 507,326 | 3,354,796 | 1,488,461 | ||||||||||||
Interest Charges | 66,695 | 4,843 | 165,656 | 8,179 | ||||||||||||
Legal matter | - | - | (50,000 | ) | - | |||||||||||
Other income | (5,205 | ) | (1,666 | ) | (11,177 | ) | (5,556 | ) | ||||||||
Total Costs and Expenses | 6,241,730 | 1,538,339 | 12,029,410 | 4,473,468 | ||||||||||||
Income (Loss) before Provision for Income Taxes | 978,896 | (8,095 | ) | 894,457 | (519,728 | ) | ||||||||||
Provision for Income Taxes | 37,373 | - | 53,500 | - | ||||||||||||
Net Income (Loss) | $ | 941,523 | $ | (8,095 | ) | $ | 840,957 | $ | (519,728 | ) | ||||||
Earnings (Loss) Per Common Share - Basic | $ | 0.33 | $ | (0.00 | ) | $ | 0.29 | $ | (0.32 | ) | ||||||
Earnings (Loss) Per Common Share - Diluted | $ | 0.31 | $ | (0.00 | ) | $ | 0.28 | $ | (0.32 | ) | ||||||
Weighted Average Shares of Common Stock Outstanding - Basic | 2,880,719 | 1,638,215 | 2,870,349 | 1,638,215 | ||||||||||||
Weighted Average Shares of Common Stock Outstanding - Diluted | 3,044,440 | 1,638,215 | 2,962,430 | 1,638,215 | ||||||||||||
Nine Months Ended September 30, | ||||||||
2018 | 2017 | |||||||
Cash Flows from Operating Activities | ||||||||
Net Income | $ | 2,265,456 | $ | 1,722,102 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 1,122,061 | 649,835 | ||||||
Loss (gain) on sale of operations | 1,160,574 | - | ||||||
Non-cash professional service expense | - | 7,884 | ||||||
Loss (gain) on disposal of assets | 10,750 | 13,386 | ||||||
Deferred income taxes | - | 693,398 | ||||||
Non-cash share-based compensation expense | 262,167 | 129,832 | ||||||
Changes in assets and liabilities: | ||||||||
Decrease (Increase) in accounts receivable | (2,555,058 | ) | (2,728,471 | ) | ||||
Decrease (Increase) in inventories | (1,325,790 | ) | (43,467 | ) | ||||
Decrease (Increase) in costs and estimated earnings in excess of billings | (219,723 | ) | 2,341,305 | |||||
Decrease (Increase) in prepaid expenses & other assets | (387,039 | ) | (210,473 | ) | ||||
Increase (Decrease) in accounts payable | 1,400,608 | (858,488 | ) | |||||
Increase (Decrease) in accrued payroll and related expenses | 391,161 | 182,826 | ||||||
Increase (Decrease) in accrued expenses | (253,853 | ) | 317,368 | |||||
Increase (Decrease) in accrued income taxes | 602,881 | 61,933 | ||||||
Increase (Decrease) in unearned revenue | 3,783,124 | (611,598 | ) | |||||
Total adjustments | 3,991,863 | (54,730 | ) | |||||
Net Cash Provided by Operating Activities | $ | 6,257,319 | $ | 1,667,372 | ||||
Cash Flows from Investing Activities | ||||||||
Capital expenditures | $ | (274,556 | ) | $ | (177,941 | ) | ||
Cash paid for acquisition, net | (20,209,583 | ) | (10,250,000 | ) | ||||
Net Cash (Used in) Investing Activities | (20,484,139 | ) | (10,427,941 | ) | ||||
Cash Flows from Financing Activities | ||||||||
Payments on related party notes | (258,870 | ) | (682,459 | ) | ||||
Payments on bank debt | (6,863,889 | ) | (1,775,000 | ) | ||||
Borrowings on seller note | 9,000,000 | - | ||||||
Borrowings on bank debt | 13,824,690 | 8,694,486 | ||||||
Payments on capital lease | (27,529 | ) | (53,350 | ) | ||||
Net Cash Provided by Financing Activities | 15,674,402 | 6,183,677 | ||||||
Net Increase (decrease) in cash and cash equivalents | 1,447,582 | (2,576,892 | ) | |||||
Cash and cash equivalents at beginning of year | 2,444,110 | 3,607,452 | ||||||
Cash and cash equivalents at end of year | $ | 3,891,692 | $ | 1,030,560 | ||||
Supplemental disclosures of cash flow information | ||||||||
Interest Paid | $ | 493,527 | $ | 67,045 | ||||
Income Taxes Paid | $ | 130,745 | $ | 31,000 | ||||
Non-cash proceeds received for Class A and Class B Common Shares in exchange for the sale of certain assets | $ | 1,640,939 | $ | - | ||||
See accompanying notes to consolidated financial statements
HICKOK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOW (Unaudited)
| Nine Months Ended | ||||||||
| June 30 | ||||||||
| 2017 | 2016 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Cash received from customers | $ | 15,510,323 | $ | 4,261,359 | ||||
Cash paid to suppliers and employees | (13,874,832 | ) | (4,542,057 | ) | ||||
Interest paid | (176,219 | ) | (7,329 | ) | ||||
Interest received | 4,049 | 632 | ||||||
Income taxes paid | (51,500 | ) | - | |||||
Net Cash Provided by (Used in) Operating Activities | 1,411,821 | (287,395 | ) | |||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Cash used in purchase of business | (10,250,000 | ) | ||||||
Capital Expenditures | (314,530 | ) | (26,435 | ) | ||||
Net Cash Used in Investing Activities | (10,564,530 | ) | (26,435 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Payments on Related Party Notes | (764,170 | ) | - | |||||
Payments on related party short-term financing | (250,000 | ) | ||||||
Borrowing on short-term financing | - | 250,000 | ||||||
Borrowing on bank debt | 8,500,000 | - | ||||||
Payment on bank debt | (300,000 | ) | ||||||
Payments on capital lease | (51,795 | ) | (26,524 | ) | ||||
Purchase of Class B shares | (11,500 | ) | - | |||||
Net Cash Provided by Financing Activities | 7,122,535 | 223,476 | ||||||
Decrease in Cash and Cash Equivalents | (2,030,174 | ) | (90,354 | ) | ||||
Cash and Cash Equivalents at Beginning of Period | 3,060,734 | 346,405 | ||||||
Cash and Cash Equivalents at End of Period | $ | 1,030,560 | $ | 256,051 | ||||
See accompanying notes to consolidated financial statements
HICKOK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOW (Unaudited)
Nine Months Ended | ||||||||
June 30 | ||||||||
2017 | 2016 | |||||||
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH PROVIDED BY OPERATING ACTIVITIES: | ||||||||
Net Income (Loss) | $ | 840,957 | $ | (519,728 | ) | |||
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH PROVIDED BY OPERATING ACTIVITIES: | ||||||||
Depreciation and amortization | 353,693 | 94,500 | ||||||
Loss on disposal of assets | 2,667 | - | ||||||
Non-cash share-based compensation expense | 129,832 | - | ||||||
CHANGES IN ASSETS AND LIABILITIES: | ||||||||
Decrease (Increase) in accounts receivable | (2,586,456 | ) | 307,619 | |||||
Decrease (Increase) in excess of billing | 873,956 | - | ||||||
Decrease (Increase) in inventories | 6,437 | (22,161 | ) | |||||
Decrease (Increase) in prepaid expenses and other assets | (610,393 | ) | 58,856 | |||||
Increase (Decrease) in accounts payable | 864,476 | (107,043 | ) | |||||
Increase (Decrease) in billings in excess of costs and earnings | 52,732 | (35,063 | ) | |||||
Increase (Decrease) in accrued payroll and related expenses | 211,454 | (64,375 | ) | |||||
Increase (Decrease) in accrued expenses | 344,341 | - | ||||||
Increase (Decrease) in accrued income taxes | 46,744 | - | ||||||
Increase (Decrease) in deferred revenue | 881,381 | - | ||||||
Total Adjustments | 570,864 | 232,333 | ||||||
Net Cash Provided by Operating Activities | $ | 1,411,821 | $ | (287,395 | ) | |||
See accompanying notes to consolidated financial statements
HICKOK INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
SEPTEMBER (Unaudited)JUNE 30, 20172018
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. The consolidated financial statements include the accounts of Hickok Incorporated and its wholly-owned subsidiaries (the “Company”). Significant intercompany transactions and balances have been eliminated in the financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and ninenine- months ended JuneSeptember 30, 20172018 are not necessarily indicative of the results that may be expected for the year ended September 30, 2017.December 31, 2018. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s AnnualTransition Report on Form 10-K10-KT for the year ended September 30, 2016.December 31, 2017.
During the nine-month period ended JuneSeptember 30, 2017,2018, there have been no changes to our significant accounting policies other than the adoption of the new standard for recognition of revenue from contracts with customers, as determineddiscussed in our Annual ReportNote 2 below.
Reclassifications
Certain prior year amounts were reclassified to conform to the current year presentation, including transaction costs related to acquisitions that were reclassified from selling, general and administrative to other (income) expenses as these costs are not considered as operating costs. These reclassifications have no effect on Form 10-Kthe financial position or results of operations reported as of and for the fiscal year ended September 30, 2016.periods presented.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company’s Summary of Significant Accounting Policies is provided with the consolidated financial statements and footnotes thereto included in the Company’s AnnualTransition Report on Form 10-K10-KT for the yearthree-month transition period ended September 30, 2016. December 31, 2017.
Recently Adopted Accounting Standards
The Company completeddid not incur any material impact to its financial condition or results of operations due to the acquisitionadoption of any new accounting standards during the periods reported.
In May 2017, the Financial Accounting Standards Board (FASB), issued ASU 2017-09, "Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting." ASU 2017-09 provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The amendments in this update should be applied prospectively to an award modified on or after the adoption date. The Company adopted this guidance January 1, 2018. The adoption of this guidance did not have a material effect on our consolidated financial statements.
In August 2016, FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments." The amendments in this update provide guidance on eight specific cash flow issues, thereby reducing the diversity in practice in how certain assetstransaction are classified in the consolidated statements of Air Enterprises Acquisition, LLCcash flows. This standard is effective for annual periods and interim periods for those annual periods beginning on or after December 15, 2017. Early adoption is permitted. The Company adopted this guidance January 1, 2018. The adoption of this guidance did not have a material impact on our consolidated financial statements.
In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU 2016-09) a new standard that changes the accounting for certain aspects of share-based payments to employees. The new guidance requires excess tax benefits and tax deficiencies to be recorded in Akron, Ohiothe income statement when the awards vest or are settled. In addition, cash flows related to excess tax benefits will no longer be separately classified as a financing activity apart from the other income tax cash flows. The standard also allows the Company to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting, clarifies that all cash payments made on Junean employee’s behalf for withheld shares should be presented as a financing activity on our cash flow statements, and provides an accounting policy election to account for forfeitures as they occur. The Company adopted this standard effective October 1, 2017. The acquired business, which will continue to operate under the name Air Enterprises, is an industry leader in designing, manufacturing and installing large-scale commercial, institutional, and industrial custom air handling solutions. The significant accounting policies as a result of the acquisitionadoption of this business are disclosed below.
Revenue Recognition:
Revenue from contracts is recognizednew standard did not have a material impact on the percentage-of-completion method measured by the percentage of costs incurred to date to total estimated costs for each contract. Contract costs include all direct costs and allocations of indirect costs. Provisions for estimated losses on uncompleted contracts are made in the period in which it is determined a loss will be incurred. As long-term contracts extend over one or more years, revisions in costs and profits estimated during the work are reflected in the accounting period in which the facts requiring the changes become known.
Because of the inherent uncertainties in estimating costs, it is at least reasonably possible the estimates of costs and revenue will change in the next year. Revenue earned on contracts in progress in excess of billings are classified as an asset. Amounts billed in excess of revenue earned are classified as a liability. The length of the contracts varies, but is typically three to six months.
Revenue relating to replacement parts is recognized upon the shipment of goods or rendering of services to customers.
Deferred Commissions:
Commissions are earned based on the percentage-of-completion of the contract. Commissions are paid upon receipt of payment for units shipped.
Product Warranties:
The Company provides a warranty for its customer air handling business covering parts for 12 months from startup or 18 months from shipment, whichever comes first. The warranty reserve is maintained at a level which, in management’s judgment, is adequate to absorb potential warranties incurred. The amount of the reserve is based on management’s knowledge of the contracts and historical trends. Because of the uncertainties involved in the contracts, it is reasonably possible that management’s estimates may change in the near term. However, the amount of change that is reasonably possible cannot be precisely estimated at this time.our consolidated financial statements.
In May 2014, the FASB issued its final standard on the recognition of revenue from contracts with customers. The standard, issued as Accounting Standards Update (ASU) 2014-09, outlines a single comprehensive model for entities to use in the accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry specific guidance. The core principle of this model is that “an entity recognizes revenue to depict the transfer of promised goods or services to a customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services.” The Company adopted this new standard effective January 1, 2018. The adoption of this standard did not have a material impact on our consolidated financial statements.
3Recently Issued Accounting Standards
In January 2017, FASB issued ASU 2017-04, "Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment." ASU 2017-04 eliminates the second step in the goodwill impairment test which requires an entity to determine the implied fair value of the reporting unit’s goodwill. Instead, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying value and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The standard, which should be applied prospectively, is effective for fiscal years and interim periods within those years beginning on or after December 15, 2019. Early adoption is permitted. We are evaluating the impact the adoption of this standard could have on our consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses. The standard requires a financial asset (including trade receivables) measured at amortized cost basis to be presented at the net amount expected to be collected. Thus, the income statement will reflect the measurement of credit losses for newly-recognized financial assets as well as the expected increases or decreases of expected credit losses that have taken place during the period. This standard is effective for fiscal years and interim periods within those fiscal years beginning on or after December 15, 2019 with early adoption permitted. We are evaluating the impact the adoption of this standard could have on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02 “Leases (Topic 842),” a new standard related to leases to increase transparency and comparability among organizations by requiring the recognition of lease assets and lease liabilities on the balance sheet. Most prominent among the amendments is the recognition of assets and liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP. Under the new standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The new standard requires a modified retrospective transition for capital or operating leases existing at or entered into after the beginning of the earliest comparative period presented in the financial statements, but it does not require transition accounting for leases that expire prior to the date of initial application. The new standard is effective for fiscal years and interim periods within those years, beginning on or after January 1, 2019, with early adoption permitted. We are evaluating the impact the adoption of this standard will have to our consolidated financial statements.
.3. ACCOUNTS RECEIVABLE
The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information. The reserve for doubtful accounts was $117,750$8,852 and $10,000$10,175 at June 30, 2017 and September 30, 2016.2018 and December 31, 2017, respectively.
4. INVENTORY
Inventory is valued at the lower of cost (first-in, first-out) or market and consistconsists of:
June 30,2017 | September 30, 2016 | September 30, 2018 | December 31, 2017 | |||||||||||||
Raw materials and component parts | $ | 2,760,341 | $ | 1,730,563 | $ | 2,064,573 | $ | 2,637,138 | ||||||||
Work-in-process | 592,670 | 438,447 | 1,419,666 | 523,644 | ||||||||||||
Finished products | 543,854 | 1,139,789 | 1,861,375 | 1,200,204 | ||||||||||||
Inventories, net of reserve | $ | 3,896,865 | $ | 3,308,799 | ||||||||||||
Total Inventory | $ | 5,345,614 | 4,360,986 | |||||||||||||
Less: inventory reserves | 203,092 | 457,505 | ||||||||||||||
Net Inventory | $ | 5,142,522 | $ | 3,903,481 | ||||||||||||
The reserve for inventory obsolescence was $561,087 and $235,592 at June 30, 2017 and September 30, 2016, respectively.
5. GOODWILL AND OTHER INTANGIBLEINTANGIBLE ASSETS, NET
Intangible assets relate to the purchase of businesses on June 1, 2017 and July 1, 2016.businesses. Goodwill represents the excess of cost over the fair value of identifiable assets acquired. Goodwill is not amortized but will beis reviewed on an annual basis for impairment. Amortization of other intangibles is being amortized on a straight-line basis over period ranging from one year to 15 years. Intangible assets are as follows:
June 30, 2017 | September 30, 2016 | September 30, 2018 | December 31, 2017 | |||||||||||||
Customer List: Backlog | $ | 1,970,000 | $ | 1,280,000 | $ | 4,970,000 | $ | 1,970,000 | ||||||||
Non-Compete Agreements | 200,000 | 0 | 200,000 | 200,000 | ||||||||||||
Trademarks | 340,000 | 0 | 340,000 | 340,000 | ||||||||||||
Other Intangibles | 2,510,000 | 1,280,000 | 5,510,000 | 2,510,000 | ||||||||||||
Accumulated Amortization | (179,086 | ) | (29,091 | ) | ||||||||||||
Less: Accumulated Amortization | 1,084,207 | 613,601 | ||||||||||||||
Other Intangibles, Net | $ | 2,330,914 | $ | 1,250,909 | $ | 4,425,793 | $ | 1,896,399 | ||||||||
Amortization of other intangibles assets was: $470,606 and $338,162 for the nine months ended September 30, 2018 and 2017, respectively.
| Three Months Ended | Nine Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Intangible Amortization | $ | 91,813 | $ | - | $ | 149,995 | $ | - | ||||||||
6. PROPERTY, PLANT AND EQUPMENT,EQUIPMENT, NET
Property, plant and equipment are recorded at cost and depreciated over their useful lives. Maintenance and repair costs are expenses as incurred. Depreciation expense was:Property, plant and equipment are as follows:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Depreciation Expense | $ | 86,293 | $ | 31,500 | $ | 203,698 | $ | 94,500 | ||||||||
September 30, 2018 | December 31, 2017 | |||||||
Land | $ | 257,205 | $ | 235,179 | ||||
Buildings and Improvements | 1,525,194 | 2,239,763 | ||||||
Machinery & Equipment | 13,488,275 | 5,091,360 | ||||||
Total Property, Plant & Equipment | 15,270,674 | 7,566,302 | ||||||
Less: Accumulated Depreciation | 1,612,569 | 4,242,913 | ||||||
Property Plant & Equipment, Net | $ | 13,658,105 | $ | 3,323,389 | ||||
Depreciation expense was $651,455 and $308,732 for the nine months ended September 30, 2018 and 2017, respectively.
7. BANK DEBT
The Company entered into a Credit Agreement on June 1, 2017 with JPMorgan Chase Bank, N.A. as lender, (thewhich was subsequently amended in connection with funding the acquisition of CAD Enterprises, Inc. (“CAD”) on July 5, 2018 (as amended, the “Credit Agreement”). TheAs amended, the Credit Agreement is comprised of a revolving facility in the amount of $8,000,000,$12,000,000, subject to a borrowing base (determined based on 80% of Eligible Accounts, plus 50% of Eligible Progress Billing Accounts, plus 50% of Eligible Inventory, minus Reserves, each as defined in the Credit Agreement) and a term A loan in the amount of $2,000,000,$6,000,000. Outstanding borrowings on the term A loan are payable in consecutive monthly installments, of $41,667 commencing on July 1, 2017.which currently amount to $111,111 per month.
The revolving facility under the Credit Agreement includes a $3 million sublimit for the issuance of letters of credit.credit thereunder. The Credit Agreement also provides for a separate credit line for borrowings of up to an aggregate of $1,000,000 for capital expenditures until July 5, 2019, at which time any outstanding capital expenditure borrowings will be converted into a term loan maturing at the earlier of five years after such conversion or the termination of the revolving credit facility. Interest for borrowings under the revolving facility accrues at a per annum rate equal to Prime Rate or LIBOR plus applicable margins of (i) 0.00% for Prime Rate loans and (ii) 2.00% for LIBOR loans. The maturity date of the revolving facility is June 1, 2020. Interest for borrowings under the term A loan accrues ata per annum rate equal to Prime Rate or LIBOR plus applicable margins of (i) 0.25% for Prime Rate loans and (ii) 2.25% for LIBOR loans. The maturity date of the term A loan is JuneDecember 1, 2021.2022. The Credit Agreement includes a commitment fee on the unused portion of the revolving facility of 0.25% per annum payable quarterly. The obligations of the Company and other borrowers under the Credit Agreement are secured by a blanket lien on all the assets of the Company and its subsidiaries. The Credit Agreement also includes customary representations and warranties and applicable reporting requirements and covenants. The financial covenants includingunder the amended Credit Agreement include a minimum fixed charge coverage ratio, anda revised maximum senior funded indebtednessdebt to EBITDA ratio financial covenants.and a new maximum total funded debt to EBITDA ratio.
In connection with entering into the Credit Agreement in 2017, the Company made a onetimeone-time prepayment of a portion of the outstanding principal under outstanding promissory notes held by First Francis Company Inc. (“First Francis”), in the amount of $500,000. The Company will not be required to make any of the scheduled quarterly payments due under these notes for the remainder of calendar 2017. First Francis is owned by Edward Crawford and Matthew Crawford, who serve on the Board of Directors of the Company.
Bank debt balances consist of the following:
September 30, 2018 | December 31, 2017 | |||||||||||||||||||
| Current June 30, 2017 | Total June 30, 2017 | Total September 30, 2016 | ||||||||||||||||||
Term Debt | $ | 500,000 | $ | 2,000,000 | $ | - | $ | 5,777,778 | $ | 1,750,000 | ||||||||||
Revolving Debt | - | 6,200,000 | - | 6,457,258 | 3,524,235 | |||||||||||||||
Total Bank Debt | 8,200,000 | - | 12,235,036 | 5,274,235 | ||||||||||||||||
Less: Current Portion | 500,000 | 1,333,333 | 500,000 | |||||||||||||||||
Non-Current Bank Debt | 7,700,000 | 10,901,703 | 4,774,235 | |||||||||||||||||
Less: Unamortized Debt Costs | 102,730 | 41,685 | ||||||||||||||||||
Net Non-Current Bank Debt | $ | 10,798,973 | $ | 4,732,550 | ||||||||||||||||
8. NOTES PAYABLE
Convertible Notes Payable
On December 30, 2011, management entered into a Convertible Loan Agreement (“Convertible Loan”) with Roundball, LLC (“Roundball”). The Convertible Loan provides approximately $467,000 of liquidity to meet on- going working capital requirements of the Company and allows $250,000 of borrowing on the agreement at the Company's discretion at an interest rate of 0.25%. Roundball, a major shareholder of the Company, is an affiliate of Steven Rosen and Matthew Crawford, Directors of the Company.
There have been several amendments to the original agreement over the years for the purpose of extending the existing terms of the Convertible Loan. On December 20, 2016,29, 2017, management entered into Amendment No. 56 of the Convertible Loan Agreement with Roundball. The amended Convertible Loan:
● | Continues to provide approximately $467,000 of liquidity to meet on going working capital requirements; |
● | Continues to allow $250,000 of borrowing on the agreement at the Company's discretion at an interest rate of 0.34%; and |
● | Extends the due date of the loan agreement |
The outstanding balance on the Convertible Loan as of June 30, 2017, and September 30, 20162018, and December 31, 2017 was $200,000.
As part of the Convertible Loan, Agreement between the Company and Roundball, the parties entered into a Warrant Agreement, dated December 30, 2012 (as amended to date, the “Warrant Agreement”), whereby the Company issued a warrant to Roundball to purchase, at its option, up to 100,000 shares of Class A Common Stock of the Company at an exercise price of $2.50 per share, subject to certain anti-dilution and other adjustments. The warrant agreement,Warrant Agreement, as amended, expires December 30, 2017.2018.
Short-Term FinancingNotes Payable – Related Party
On June 3,July 1, 2016, managementthe Company entered into an unsecured revolving credit agreementtwo separate promissory notes with First Francis Company Inc. (“First Francis”) in connection with the acquisition of Federal Hose Manufacturing. In connection with acquisition of CAD effective July 1, 2018 and the amendment to the Credit Agreement on July 5, 2018, the Company and First Francis Company Inc. became a major shareholder ofentered into an amendment to the Company onPromissory Note dated July 1, 2016 whenwith original principal in the amount of $2,000,000, and an amendment to the Promissory Note dated July 1, 2016 with original principal in the amount of $2,768,662 (as amended, the “Promissory Notes”), each issued by the Company to First Francis. The Promissory Notes each were amended to increase the interest rate from 4.0% per annum to 6.25% per annum. In addition, the Promissory Note with original principal amount of $2,768,662 was amended to provide a conversion option commencing July 5, 2019 which allows First Francis to convert the Promissory Note, in whole in part with respect to a maximum amount of $648,000, into shares of the Company’s Class B common stock at the price of $6.48 per share (subject to adjustment), subject to shareholder approval. First Francis is owned by Edward Crawford and Matthew Crawford, who serve on the Board of Directors of the Company.
Notes payable – related party consists of the following:
September 30, 2018 | December 31, 2017 | |||||||
In connection with the acquisition, the Company entered into a promissory note on July 1, 2016 for a $2,000,000 loan due to First Francis Company, payable in quarterly installments. The remaining balance of the note shall be payable in full on July 1, 2022. | $ | 1,528,892 | $ | 1,639,206 | ||||
In connection with the acquisition, the Company entered into a promissory note on July 1, 2016 for a $2,768,662 loan due to First Francis Company, payable in quarterly installments. The remaining balance of the note shall be payable in full on July 1, 2022. | 2,216,729 | 2,365,286 | ||||||
Total notes payable – related party | 3,745,621 | 4,004,492 | ||||||
Less current portion | 432,910 | 352,727 | ||||||
Notes payable – related party non-current portion | $ | 3,312,711 | $ | 3,651,765 | ||||
Seller Note
Effective July 1, 2018, the Company completed the acquisition of Federal Hose Manufacturing, LLC.all of the issued and outstanding shares of capital stock of CAD. Upon the closing of the transaction, the CAD shares were transferred and assigned to the Company in consideration of the payment by the Company of an aggregate purchase price of $21 million, $12 million of which was payable in cash at closing, with the remainder paid in the form of a subordinated promissory note issued by the Company in favor of a Seller (the “Seller Note), which is subject to certain post-closing adjustments based on working capital, indebtedness and selling expenses, as specified in the Share Purchase Agreement entered into in connection with the acquisition (the “Share Purchase Agreement”). The agreement provides for a revolving credit facility of $250,000 withSeller Note bears interest at 4.0%a rate of four percent (4%) per annum and is unsecured. Each loan madepayable in full no later than June 30, 2023 (the “Maturity Date”). The Maturity Date, with respect to any then-outstanding portion of the original principal amount which is subject to an indemnification claim by the Company (asserted in accordance with the terms of the Share Purchase Agreement) pending as of the date thereof, will be automatically extended until such time as any claim relating to such disputed amount is no longer pending, pursuant to the terms of the Seller Note and subject to additional conditions set forth therein and in the Share Purchase Agreement. The Company is not permitted to prepay any amounts due and owing under the credit arrangement will beSeller Note. Payment of the Seller Note is secured by a second-priority security interest in the assets of the Company. Interest accrued on the original principal amount becomes due and payable in fullarrears beginning September 30, 2018, and subsequent interest is due on the expiration datefirst day of each calendar quarter thereafter up to and including June 30, 2019. The Company is required to make quarterly principal payments, the revolver note. In addition, the agreement generally allows for borrowingamount of which will be calculated based on an amount equal to eighty percent of eligible accounts receivables or $250,000. The revolving line of credit expireda four (4) year amortization schedule, beginning on May 31, 2017.The Company had $250,000 outstanding borrowingsSeptember 30, 2019 and continuing on the credit facility at September 30, 2016. At June 30, 2017,last day of each calendar quarter thereafter up to and including the outstanding balance was $0.
Notes Payable – Related Party
Notes payable - related parties is a result of the acquisition of a business on July 1, 2016 and consists of the following:Maturity Date.
Current 2017 | Total | Total | ||||||||||
In connection with the acquisition, the Company entered into a promissory note on July 1, 2016 for $2,000,000 loan due to First Francis Company, payable in quarterly installments of $60,911 beginning on October 31, 2016, bearing interest at 4%. The remaining balance of the note shall be payable in full on July 1, 2022. | $ | 81,254 | $ | 1,639,206 | $ | 2,000,000 | ||||||
In connection with the acquisition, the Company entered into a promissory note on July 1, 2016 for $2,768,662 loan due to First Francis Company, payable in quarterly installments of $84,321 beginning on October 31, 2016, bearing interest at 4%. The remaining balance of the note shall be payable in full on July 1, 2022. | 61,472 | 2,365,286 | 2,768,662 | |||||||||
| $ | 142,726 | 4,004,492 | 4,768,662 | |||||||||
Less current portion | 142,726 | 379,761 | ||||||||||
| $ | 3,861,766 | $ | 4,388,901 | |||||||||
9.EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings per share.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Earnings Per Share - Basic | ||||||||||||||||
Net Income | $ | 1,497,079 | $ | 567,439 | $ | 2,265,456 | $ | 1,722,102 | ||||||||
Weighted average shares of common stock outstanding - Basic | 2,720,654 | 2,888,502 | 2,826,347 | 2,882,278 | ||||||||||||
Earnings Per Share - Basic | $ | 0.55 | $ | 0.20 | $ | 0.80 | $ | 0.60 | ||||||||
Earnings Per Share - Diluted | ||||||||||||||||
Weighted average shares of common stock outstanding - Basic | 2,720,654 | 2,888,502 | 2,826,347 | 2,882,278 | ||||||||||||
Warrants, Options and Convertible Notes | 371,866 | 273,473 | 360,599 | 218,738 | ||||||||||||
Weighted average shares of common stock -Diluted | 3,092,520 | 3,161,975 | 3,186,946 | 3,101,016 | ||||||||||||
Earnings Per Share - Diluted | $ | 0.48 | $ | 0.18 | $ | 0.71 | $ | 0.56 | ||||||||
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Earnings (Loss) Per Share - Basic | ||||||||||||||||
Net Income (Loss) | $ | 941,523 | $ | (8,095 | ) | $ | 840,957 | $ | (519,728 | ) | ||||||
Weighted average shares of common stockoutstanding - Basic | 2,880,719 | 1,638,215 | 2,870,349 | 1,638,215 | ||||||||||||
Earnings (Loss) Per Share - Basic | $ | 0.33 | $ | (0.00 | ) | $ | 0.29 | $ | (0.32 | ) | ||||||
Earnings (Loss) Per Share - Diluted | ||||||||||||||||
Weighted average shares of common stockoutstanding - Basic | 2,880,719 | 1,638,215 | 2,870,349 | 1,638,215 | ||||||||||||
Warrants, Options and Convertible Notes | 163,721 | - | 92,081 | - | ||||||||||||
Weighted average shares of common stock -Diluted | 3,044,440 | 1,638,215 | 2,962,430 | 1,638,215 | ||||||||||||
Earnings (Loss) Per Share - Diluted | $ | 0.31 | $ | (0.00 | ) | $ | 0.28 | $ | (0.32 | ) | ||||||
10. ACQUISITIONS
10.ACQUISITIONS
Effective July 1, 2018, the Company completed the acquisition of all of the issued and outstanding shares of capital stock of CAD, pursuant to the Share Purchase Agreement. Upon the closing of the transaction, the CAD shares were transferred and assigned to the Company in consideration of the payment by the Company of an aggregate purchase price of $21 million, $12 million of which was payable in cash at closing, with the remainder paid in the form of the Seller Note, which is subject to certain post-closing adjustments based on working capital, indebtedness and selling expenses, as specified in the Share Purchase Agreement.
CAD manufactures high end components for the aerospace industry and has one operating location in Phoenix, Arizona. The purchase price was assigned to the book value of the net assets acquired with the excess over the book value assigned to intangible assets and goodwill and has been allocated to the following accounts:
Cash | $ | 790,417 | ||
Accounts Receivable | 2,221,635 | |||
Inventory | 2,098,732 | |||
Fixed Assets | 11,030,000 | |||
Prepaid and Other Assets | 70,467 | |||
Intangibles Assets | 3,000,000 | |||
Goodwill | 4,770,133 | |||
Total Assets Acquired | $ | 23,981,384 | ||
Accounts Payable | $ | 1,843,882 | ||
Accrued Payroll and related expenses | 132,071 | |||
Accrued Expense | 518,816 | |||
Deferred Income Taxes | 486,615 | |||
Total Liabilities Assumed | $ | 2,981,384 | ||
Net Assets Acquired | $ | 21,000,000 |
The Company purchased certain assets and assumed certain liabilities of Air Enterprises Acquisition, LLC on June 1, 2017 for $10,250,000. The acquired business will continue to operate under the name Air Enterprises (“AE”). AE manufactures custom commercial air handling units under fixed price contracts. Its customers are typically in the health care, university, research, pharmaceutical and industrial manufacturing market segments, and span all across the United States and worldwide. AE has one operating location in Northeastern Ohio. The purchase price was assigned to the book value of the net assets acquired with the excess over the book value assigned to intangible assets and goodwill and has been allocated to the following accounts:
Accounts Receivable | $ | 4,761,368 | ||
Inventory | 594,503 | |||
Costs in excess of billings and estimated costs | 3,980,824 | |||
Fixed Assets | 2,112,120 | |||
Prepaid and Other Assets | 53,110 | |||
Intangibles Assets | 1,230,000 | |||
Goodwill | 631,392 | |||
Total Assets Acquired | $ | 13,363,317 | ||
Accounts Payable | $ | 1,726,618 | ||
Billings in Excess of costs and earnings | 594,545 | |||
Accrued Payroll and related expenses | 325,950 | |||
Accrued Expense | 424,671 | |||
Lease Payable | 41,533 | |||
Total Liabilities Assumed | $ | 3,113,317 | ||
Net Assets Acquired | $ | 10,250,000 |
Acquisition related costs were approximately $0.3 million for the three and nine months ended June 30, 2017.
11. DISPOSITIONS
Effective June 1, 2018, the Company completed the sale (the “Sale”) of certain assets comprising its Test and Measurement business segment (the “Test and Measurement Segment”) to Hickok Waekon, LLC, an Ohio limited liability company (“Buyer”), pursuant to an Asset Purchase Agreement (the “Purchase Agreement”) by and among Buyer, the Company, Supreme Electronics Corp., a Mississippi corporation and wholly-owned subsidiary of the Company (“Supreme”), Waekon Corporation, an Ohio corporation and wholly-owned subsidiary of the Company (“Waekon Corporation”), and Robert L. Bauman, who was a director of the Company. Prior to the effectiveness of the Sale, Supreme and Waekon Corporation owned certain of the assets used in the operation of the Test and Measurement Segment and were primarily responsible for the operation thereof.
Upon the closing of the Sale, all of the issued and outstanding shares of capital stock of the Company then-owned, directly or indirectly, by Mr. Bauman or his affiliate, equaling approximately 21,413 shares of Class A Common Stock of the Company and 176,768 shares of Class B Common Stock of the Company, were transferred and assigned to the Company. The shares constituted the consideration received by the Company in the Sale. Based upon the share price at closing, the value of the proceeds received was approximately $1.6 million. The net assets sold were approximately $2.7 million. The Company recorded a loss on sale of approximately $1.2 million.
12. SEGMENT AND RELATED INFORMATION
The Company operates threethe following reportable segments: 1) commercial air handling,Commercial Air Handling, 2) testTest and measurementMeasurement, 3) Industrial Hose, and 3) industrial hose.4) Aerospace. The Company's management evaluates segment performance based primarily on operating earnings before taxes.. Depreciationincome. Certain corporate costs are allocated to the segments and interest expense ondirectly related to financing the acquisition of a business is allocated to that segment, respectively. Intangible assets used in manufacturing are considered partallocated to each segment and the related amortization of each segment's operating performance. Depreciation expense on non-manufacturingthese assets is includedare recorded in selling, general and administrative expenses.
Commercial Air HandlingHandling::
This segment manufactures custom air handling units under fixed price contractcontracts to customers in the health care, university, research, pharmaceutical and industrial manufacturing market segments, and across the United States and worldwide.
Test and MeasurementMeasurement::
This segment consists of diagnostic tools and equipment sold to the automotive industry and indicators and gauges sold primarily to companies in the aircraft and locomotive industries. These products are sold to original equipment manufacturers and to the aftermarket using a variety of distribution methods. The Company completed the sale of certain assets comprising its Test and Measurement segment on June 1, 2018. See Note 11, Dispositions, for additional details regarding the disposition of this segment. The Company is currently reporting operational results for this segment as a result of a single customer relationship retained by the Company following the disposition.
Industrial Hose: Hose:
This segment consists primarily of flexible metal and silicone hose products designed and manufactured or distributed primarily to the trucking industry and other industrial end-users. These products are sold to original equipment manufacturers and to the aftermarket using a variety of distribution methods.
Aerospace Components:
This segment manufactures components primarily for customers in the aerospace industry.
Information by industry segment is set forth below:
Three Months Ended | Nine Months Ended | |||||||||||||||
June 30 | June 30 | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Sales | ||||||||||||||||
Commercial Air Handling | $ | 3,343,945 | $ | - | $ | 3,343,945 | $ | - | ||||||||
Test and Measurement | 2,452,854 | 1,530,244 | 5,049,991 | 3,953,740 | ||||||||||||
Industrial Hose | 1,423,827 | - | 4,529,931 | - | ||||||||||||
Total Sales | $ | 7,220,626 | $ | 1,530,244 | $ | 12,923,867 | $ | 3,953,740 | ||||||||
Income (Loss) Before Provision for Income Taxes | ||||||||||||||||
Commercial Air Handling | 607,471 | - | 607,471 | - | ||||||||||||
Test and Measurement (1) | 880,600 | (8,095 | ) | (19,446 | ) | (519,728 | ) | |||||||||
Industrial Hose | (509,175 | ) | - | 306,433 | - | |||||||||||
Income (Loss) Before Provision for Income Taxes | $ | 978,896 | $ | (8,095 | ) | $ | 894,458 | $ | (519,728 | ) | ||||||
|
|
12. RECENTLY ISSUED ACCOUNTING STANDARDS
The Company did not incur any material impact to its financial condition or results of operations due to the adoption of any new accounting standards during the periods reported.
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30 | September 30 | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Sales | ||||||||||||||||
Commercial Air Handling | $ | 9,876,700 | $ | 7,846,896 | $ | 29,876,961 | $ | 11,190,841 | ||||||||
Test and Measurement | 790,297 | 1,560,696 | 2,786,742 | 5,783,621 | ||||||||||||
Industrial Hose | 1,718,138 | 1,485,276 | 5,193,324 | 4,485,347 | ||||||||||||
Aerospace Components | 7,386,002 | - | 7,386,002 | - | ||||||||||||
Total Sales | $ | 19,771,137 | $ | 10,892,868 | $ | 45,243,029 | $ | 21,459,809 | ||||||||
Gross Profit | ||||||||||||||||
Commercial Air Handling | $ | 2,743,833 | $ | 1,946,546 | $ | 7,861,725 | $ | 2,900,293 | ||||||||
Test and Measurement | 130,293 | 533,879 | 722,062 | 3,233,133 | ||||||||||||
Industrial Hose | 356,000 | 553,954 | 1,151,358 | 1,307,613 | ||||||||||||
Aerospace Components | 1,220,096 | - | 1,220,096 | - | ||||||||||||
Total Gross Profit | $ | 4,450,222 | $ | 3,034,379 | $ | 10,955,241 | $ | 7,441,039 | ||||||||
Operating Income | ||||||||||||||||
Commercial Air Handling | $ | 1,696,934 | $ | 1,083,140 | $ | 4,357,970 | $ | 1,425,524 | ||||||||
Test and Measurement | 130,293 | 41,816 | (239,151 | ) | 707,126 | |||||||||||
Industrial Hose | 111,419 | 289,506 | 413,573 | 856,633 | ||||||||||||
Aerospace Components | 706,424 | - | 706,424 | - | ||||||||||||
Unallocated Corporate General | (173,791 | ) | - | (307,507 | ) | |||||||||||
Total Operating Income | $ | 2,471,279 | $ | 1,414,462 | $ | 4,931,309 | $ | 2,989,283 | ||||||||
Income Before Provision for Income Taxes | ||||||||||||||||
Commercial Air Handling | 1,686,296 | 816,669 | 4,316,875 | 1,424,878 | ||||||||||||
Test and Measurement | 130,293 | 188,128 | (94,828 | ) | 628,275 | |||||||||||
Industrial Hose | 48,454 | 289,506 | 272,608 | 441,313 | ||||||||||||
Aerospace Components | 620,023 | - | 620,023 | - | ||||||||||||
Loss on sale of business | - | - | (1,160,574 | ) | - | |||||||||||
| Unallocated Corporate General & Other | (397,883 | ) | - | (842,419 | ) | - | ||||||||||
Income Before Provision for Income Taxes | $ | 2,087,183 | $ | 1,294,303 | $ | 3,111,685 | $ | 2,494,466 | ||||||||
13. SUBSEQUENT EVENTS
None.
RESULTS OF OPERATIONSOPERATIONS..
The following discussion is intended to assist in the understanding of Hickok’sthe Company's financial position at June 30, 2017 and September 30, 2016,2018 and December 31, 2017, results of operations for the three and nine months ended JuneSeptember 30, 20172018 and 2016,2017 and cash flows for the nine months ended JuneSeptember 30, 20172018 and 2016,2017, and should be read in conjunction with the consolidated financial statements and related notes included elsewhere this Quarterly Report on Form 10-Q and with the Company’s AnnualTransition Report on Form 10-K10-KT for the yearthree-month transition period ended September 30, 2016.December 31, 2017.
Summary
The Company has historically operated two divisions: 1) indicators and gauges that sell primarily to companies inEffective June 1, 2018, Hickok Incorporated completed the aircraft and locomotive industries and 2) automotive diagnostic tools and equipment that sell to OEMs and the aftermarket. These divisions are now being reported as thesale of certain assets comprising its Test and Measurement segment. In July 2016,business segment to Hickok Waekon, LLC (Buyer), pursuant to an Asset Purchase Agreement by and among Buyer, the Company, expanded its markets withSupreme Electronics Corp., a Mississippi corporation and wholly-owned subsidiary of the Company, Waekon Corporation, and Robert L. Bauman, a director of the Company.
Effective July 1, 2018, the Company completed the acquisition of all of the issued and outstanding shares of capital stock of CAD Enterprises, Inc., (“CAD”), pursuant to a manufacturerShare Purchase Agreement (the “Share Purchase Agreement”) entered into as of flexible metal hose for use in heavy truck, drilling,July 5, 2018 by and grain handling, as well as silicone hose sold to these same industries.among the Company, the sellers named therein and the Sellers’ representative named therein. The acquisitionresults of this business resulted in a new segment foracquisition are reported under the Company, referred to as the Industrial Hose division. In June 2017, the Company expanded its markets further with the acquisition of a manufacturer of commercial air handling for customers in the health care, university, research, pharmaceutical and industrial manufacturing market segments. The acquisition of this business resulted in a new segment for the Company, referred to as the Commercial Air Handling division.Aerospace Components segment.
Results of Operations – Three Months Ended June 30,September 30, 2018 and 2017 and 2016
Sales for the fiscal quarter ended JuneSeptember 30, 20172018 (“current quarter”) increased to $7.2$19.8 million, an increase of approximately $5.7$9.0 million and 372%or 82% from sales of $1.5$10.9 million induring the same fiscal quarter of the prior year. This increase in sales was primarily attributable to results from the additionacquisition of ourCAD on July 1, 2018, as well as strong sales in the Commercial Air Handling division on June 1, 2017 and the Industrial Hose division acquired July 1, 2016.segment.
Cost of products soldsales for the current quarter was $15.3 million compared to $7.9 million, an increase of $7.4 million or 95% from the same quarter of the prior year. Gross profit was $4.5 million in the fiscalcurrent quarter ended June 30, 2017 was $4.2 million or 58% of sales compared to $ 0.8$3.0 million, or 50%an increase of sales in$1.5 million from the same fiscal quarter of the prior year. The increase in costscost of sales and gross profit was associated with higher sales forattributable to the quarteraddition of CAD and strong performance in all three divisions. Gross margin (sales less costs of products sold) was approximately 42% for the third fiscal quarter of 2017 compared to 50% for the same fiscal quarter of 2016.Commercial Air Handling segment.
ProductThere were no product development expenditures during the current quarter as those expenditures were $0.2 million in the fiscal quarter ended June 30, 2017, which was a modest decrease from $0.3 million in same fiscal quarter of the prior year. Product development expenditures relaterelated to the Test and Measurement division. The current level of product development expenses is expected to continue for the balance of the fiscal year. Management believes current resources will be sufficient to maintain current product development commitments and to continue to develop a reasonable flow of new products for both the OEM and aftermarket customers.segment which was divested in June 2018.
Selling, general and administrative expenses in the fiscalcurrent quarter ended June 30, 2017 were $1.8$2.0 million or 25% of sales compared to $1.5 million, an increase of $0.5 million or 33% of sales, respectively, infrom the same fiscal quarter of the prior year. The increase in selling, general and administrative expenses was primarily related to costs related to the additionacquisition of the Commercial Air Handling division and the Industrial Hose division. In addition, the Company incurred higher sales expenses in support of higher sales and higher depreciation expenses related to fixed assets acquired with and intangibles allocated due to the purchase of the Commercial Air Handling division.CAD on July 1, 2018, including intangible amortization expense.
Interest charges in the fiscalcurrent quarter ended June 30, 2017 were approximately $67 thousand$0.3 million compared to $5 thousand$0.1 million in the same fiscal quarter of the prior year. The current yearincrease in interest expense is primarily due to the recording of interest expense on bank debt related to the acquisitions on June 1, 2017 and notes related toincrease in outstanding debt for the quarter resulting from the acquisition of a business on July 1, 2016.CAD.
Other incomeexpense, net was $5 thousand$0.1 million in the fiscalcurrent quarter ended June 30, 2017 compared with $2 thousandand is primarily comprised of transactional costs for acquisitions.
Income tax expense in the current quarter was $0.6 million compared to $0.7 million in the same fiscal quarter of the prior year. Other income consists primarily of interest income on cash and cash equivalents and proceeds fromTax expense in the sale of scrap metal shavings.
Incomecurrent period is recorded at the Company’s expected effective tax expense is expected to be minimal as therate. The Company believesanticipates that it will be able to utilize the majority of theremaining net operating loss and a significant portion of the research and development credit carryforwards before they expire; however, there are certain limitations toin the use of thesecurrent fiscal year recorded on the balance sheet as a deferred tax credits that are expected to result in a small amount of alternative minimum tax. In addition, the Company expects to pay state and local income tax.asset.
Net income in the fiscalcurrent quarter ended June 30, 2017 was $0.9$1.5 million or $0.31$0.48 per diluted share as compared to the net lossincome of $8 thousand$0.6 million or $0.00$0.18 per diluted share infor the same fiscal quarter of the prior year.
Results of Operations – Nine – Nine Months Ended JuneSeptember 30, 20172018 and 20162017
Sales for the nine months ended JuneSeptember 30, 20172018 increased to $12.9$45.2 million, an increase of approximately $8.9$23.8 million and 227%111% from sales of $4.0$21.5 million in the same period of the prior year. This increase in sales was attributable to results from the acquisition of CAD on July 1, 2018, and sales from the Commercial Air Handling segment. The Commercial Air Handling segment has reported results for nine months during the current year compared to five months of results in the same period a year ago. This increase in sales was attributable to the addition of our Commercial Air Handling division on June 1, 2017 and the Industrial Hose division acquired July 1, 2016. Sales from our Test and Measurement division increased $1.1 million due to strong sales in the third fiscal quarter 2017 from emissions and OEMs.
Cost of products sold in the nine months ended June 30, 2017 was $7.9 million or 61% of sales compared to $2.2 million or 56% of sales in the same period a year ago. The increase in costs was associated with higher sales for the quarter in all three divisions. Gross margin (sales less costs of products sold) was approximately 39% for the nine months ended JuneSeptember 30, 20172018 were $34.3 million compared to 44% for the same period in 2016.
Product development expenditures in the nine months ended June 30, 2017 were $0.6$14.0 million, an increase of $20.3 million or 5% of sales compared to $0.8 million or 20%, respectively,143% in the same period a year ago. The current level of product development expenses is expected to continue for the balance of the fiscalprior year. Management believes current resources will be sufficient to maintain current product development commitments and to continue to develop a reasonable flow of new products for both the OEM and aftermarket customers.
Selling, general and administrative expenses in the nine months ended June 30, 2017 were $3.4Gross profit was $11.0 million or 26% of sales compared to $1.5$7.4 million, or 38%, respectively,an increase of $3.6 million in the same period a year ago. Theof the prior year. This increase in selling, general and administrative expensesgross profit was primarily relatedattributable to costs related toresults from the additionacquisition of CAD on July 1, 2018, as well as results from the Commercial Air Handling division andsegment for nine months during the Industrial Hose division. In addition, the Company incurred higher sales expenses in support of higher sales and higher depreciation expenses related to fixed assets acquired with and intangibles allocated due to the purchase of the Commercial Air Handling division.
Interest charges in the nine-month period ended June 30, 2017 were $166 thousandcurrent year compared to $8 thousand in the same period a year ago. The current year interest expense is primarily due to the recordingfive months of interest expense on bank debt related to the acquisitions on June 1, 2017 and notes related to the acquisition of a business on July 1, 2016.
Other income was $11 thousand in the nine-month period ended June 30, 2017 compared with $6 thousand in the same period a year ago. Other income consists primarily of interest income on cash and cash equivalents and proceeds from the sale of scrap metal shavings.
Income tax expense is expected to be minimal as the Company believes it will be able to utilize the majority of the net operating loss and research and development credit carryforwards before they expire; however, there are certain limitations to the use of these tax credits that are expected to result in a small amount of alternative minimum tax. In addition, the Company expects to pay state and local income tax.
Net income in the nine-month period ended June 30, 2017 was $0.8 million or $0.28 per diluted share as compared to the net loss of $0.5 million or ($0.32) per diluted shareresults in the same period a year ago.
Product development expenditures were $0.2 million for the nine months ended September 30, 2018, a decrease of $0.4 million from $0.6 million in same period of the prior year. Product development expenditures were related to the Test and Measurement segment which was divested in June 2018.
Selling, general and administrative expenses for the nine months ended September 30, 2018 were $5.8 million compared to $3.9 million, an increase of $1.9 million or 49% in the same period of the prior year. The increase in selling, general and administrative was attributable to results from the acquisition of CAD on July 1, 2018 and higher sales expenses to support higher sales from the Commercial Air Handling segment, offset by a decrease in expenses from the divestiture of the Test and Measurement business.
Interest charges for the nine months ended September 30, 2018 were approximately $0.5 million compared to $0.2 million in the same period of the prior year. The increase in interest expense is primarily related to the increase in outstanding debt for the quarter resulting from the acquisition of CAD, and increases in the interest rates on the floating rate bank debt.
Loss on the sale of business was $1.2 million for the nine months ended September 30, 2018 and is directly related to the sale of certain assets of its Test and Measurement segment on June 1, 2018.
Other expense, net was $0.2 million for the nine months ended September 30, 2018 compared to other expense, net of $0.3 million in the same period of the prior year. Other expense, net is primarily comprised of transactional costs for acquisitions.
Income tax expense for the nine months ended September 30, 2018 was $0.8 million compared to $0.8 million recognized in the same period of the prior year. Tax expense in the current period is recorded at the Company’s expected effective tax rate of 25%. The Company anticipates it will be able to utilize the remaining net operating loss and a significant portion of the research and development credit carryforwards in the current fiscal year recorded on the balance sheet as a deferred tax asset.
Net income for the nine months ended September 30, 2018 was $2.3 million or $0.71 per diluted share as compared to the net income of $1.7 million or $0.56 per diluted share in the same period of the prior year.
Liquidity and Capital ResourceResourcess
As described further in Note 10 to our consolidated financial statements, effective July 1, we completed the CAD acquisition for an aggregate purchase price of $21 million, $12 million of which was payable in cash at closing, with the remainder paid in the form of a subordinated promissory note issued by the Company in favor of a Seller, which is subject to certain post-closing adjustments based on working capital, indebtedness and selling expenses, as specified in the Share Purchase Agreement. In connection with that transaction, we also amended our credit agreement to, among other things, increase the maximum availability under our revolving credit facility to $12 million, and to increase the amount of our term loan to $8 million. In connection with the acquisition, we also amended our promissory notes payable to First Francis to increase the interest rate payable from 4.0% to 6.2%, and to provide First Francis with the right to convert up to $648,000 principal amount of one note into shares of Class B Common Stock at a conversion price of $6.48 per share, subject to shareholder approval.
Total current assets at JuneSeptember 30, 20172018 increased to approximately $17.5$24.5 million from $7.8$17.2 million at September 30, 2016,December 31, 2017, an increase of $9.7$7.3 million. The increase in current assets is dueprimarily related to the acquisition of CAD on July 1, 2018, and is comprised of the following: an increase in cash of $1.5 million; an increase in accounts receivable of $7.3$4.1 million; and an increase in inventories of $1.2 million. Of the $4.1 million increase in accounts receivable, $2.5 million is directly related to the Commercial Air Handing division as a result of increased billings. Fluctuations in accounts receivable and costs and estimated earnings in excess of billings of $3.9 million, inventories of $0.6 million, and prepaid expenses and other assets of approximately $0.7 million, respectively. The increase in these assets is primarily a result of the acquisition ofbilling related to the Commercial Air Handling division are dependent upon progress billing milestones for contracts.
Total current liabilities at September 30, 2018 increased to $17.0 million from $8.0 million at December 31, 2017, an increase of $9.0 million. The increase in current liabilities is primarily due to: the increase in billings in excess of costs and earnings (included in unearned revenue on June 1, 2017. Thethe balance sheet) of $4.2 million; and increases in current assets were offset by a decrease in cashaccounts payable of approximately $2.0 million. The decrease in cash and cash equivalents was due cash used towards$2.9 million primarily related to the purchaseacquisition of the Commercial Air Handling division.CAD on July 1, 2018.
Cash provided by operating activities for the nine months ended JuneSeptember 30, 20172018 was approximately $1.4$6.3 million resulting from net income of $2.3 million, adjustments for non-cash items of $2.6 million, and favorable working capital adjustments of $1.4 million. Cash from operating activities was adequate to fund the Company's operations as well as capital expenditures of approximately $0.3 million.operations.
Capital expenditures were needed for building improvements as well as for tooling, machinery and equipment for product manufacturing. Cash flow used in investing activities of $10.6$20.5 million was primarily related to $20.2 million used to acquire CAD ($21.0 million paid less cash acquired) and $0.3 for capital expenditures in the purchasenormal course of the Commercial Air Handling division for $10.3 million.business.
Cash provided by financing activities of approximately $7.1$15.7 million was primarily related to the $8.5to: $9.0 million borrowing on the bank debtseller note entered into in connection with the purchaseacquisition of CAD and $13.8 million borrowed against bank debt ($12.0 million directly related to the Commercial Air Handling division,acquisition of CAD). The increases in borrowings were offset by payment of the short-term financing of$6.9 million repayment against the bank debt and the $0.3 million payment of approximately $0.8 millionrepayments for the related party notes, and $0.3 million repayment against the revolving credit facility with JPMorgan Chase Bank, N.A.
The Company entered into a Credit Agreement on June 1, 2017 with JPMorgan Chase Bank, N.A. as lender (the “Credit Agreement”). The Credit Agreement is comprised of a revolving facility in the amount of $8.0 million, subject to a borrowing base and a term A loan in the amount of $2.0 million, payable in consecutive monthly installments of $41,667 commencing on July 1, 2017. The Credit Agreement includes customary representations and warranties and applicable reporting requirements and covenants, including fixed charge coverage ratio and senior funded indebtedness to EBITDA ratio financial covenants. Management believes the Company is in compliance with debt covenants.
In addition to the Credit Agreement, the Company has several borrowing arrangements as discussed in Note 8 of this Quarter Report on Form 10-Q, including Convertible Notes Payable and outstanding notes related to the Company’s acquisition of its Industrial Hose division in 2016. The Convertible Notes provide liquidity to the Company for working capital. In December 2016, the Company entered into Amendment No. 5 of the Convertible Loan Agreement. The Convertible Loan Agreement, as amended, is between the Company and a major shareholder who is also affiliated withtwo Directors, as discussed in Note 4 of theCompany’s Annual Report on Form 10-K for the year ended September 30, 2016.The amended Convertible Loan:
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The outstanding balance on the Convertible Loan as of June 30, 2017 and September 30, 2016 is $200,000.notes.
The Company expects positive cash flow from operations to be sufficient to fund working capital needs and service principal and interest payments due related to the bank debt and notes payable. In addition, the Company has $1.8$5.4 million available to borrow on the revolving credit facility at JuneSeptember 30, 2017.2018. See Note 7 of notes to consolidated financial statements. Management believes the Company has adequate liquidity for debt service, working capital, capital expenditures and other strategic initiatives.
Off-Balance Sheet Arrangements
HickokThe Company has a secured performance and payment bond in the amount of $1.6 million as surety on completion of the requirements of a commercial air handling contract. The Company has no other off-balance sheet arrangements (as defined in Regulation S-K Item 303 paragraph (a)(4)(ii)) that have or are reasonably likely to have a material current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Critical Accounting PronouncementsPolicies
The Company’s critical accounting policies are as presented in Notes to Consolidated Financial Statements and Management’s Discuss and Analysis of Financial Condition and Results of Operations in our Form 10-K10-KT for the yearthree-month transition period ended September 30, 2016.December 31, 2017.
Forward-Looking Statements
The foregoing discussion includes forward-looking statements relating to the business of the Company. These forward-looking statements, or other statements made by the Company, are made based on management's expectations and beliefs concerning future events impacting the Company and are subject to uncertainties and factors (including, but not limited to, those specified below) which are difficult to predict and, in many instances, are beyond the control of the Company. As a result, actual results of the Company could differ materially from those expressed in or implied by any such forward-looking statements. These uncertainties and factors include (a) the Company's ability to effectively integrate Federal Hose and Air Enterprisesacquisitions, including the acquisition of CAD, and manage the larger operations of the combined businesses, (b) the impact on the Company’s Industrial Hose and Commercial Air Handling segments and the Company’s 2018 financial results of the previously announced divestiture of the Test and Measurement segment, (c) the Company's dependence upon a limited number of customers and the automotiveaerospace industry, (c)(d) the highly competitive industry in which the Company operates, which includes several competitors with greater financial resources and larger sales organizations, (d) the acceptance in the marketplace of new products and/or services developed or under development by the Company including automotive diagnostic products and indicating instrument products, (e) the ability of the Company to further establish distribution and a customer base in the automotive aftermarket, (f) the Company's ability to capitalize on market opportunities including state automotive emissions programs and OEM tool programs, (g)in certain sectors, (f) the Company's ability to obtain cost effective financing and (h) the Company's ability to satisfy obligations under its interest payments.
financing arrangements.
ITEM 3. MARKET RISK
The Company is exposed to certain market risks from transactions that are entered intoit enters during the normal course of business. The Company has not entered into derivative financial instruments for trading purposes. The Company's primary market risks arerisk is exposure related to interest rate risk and equity market fluctuations. The Company's debt subject to interest rate risk relates to funds available under Credit Agreement with JPMorgan Chase Bank (“Chase Bank”). The Company had an outstanding balance on the revolving credit facility with Chase Bank of $6.2$6.5 million and an outstanding balance on the term A loan of $2.0$5.8 million. Interest for borrowings under the Credit Agreement accrue at prime rate or a LIBOR plus an applicable margin. In addition to floating rate debt under the Credit Agreement, the Company has fixed rate debt.debt with various parties. At JuneSeptember 30, 2017,2018, the Company hashad $12.9 million of outstanding amounts of $0.2fixed rate debt; $9.0 million related to convertibleseller notes, that bear interest at 0.34%. The Company also outstanding amounts of $1.6 million and $2.4$3.7 million related to promissory notes with a related party, both of which bears interest at a rate of 4.0% per annum.and $0.2 million convertible debt. The Company believes that the market risk relatingmix of fixed and floating rate debt is appropriate. Management believes the Company has adequate liquidity for debt service, including increases in interest due to interest rate movements is minimal.rising rates.
ITEM 4. CONTROLS AND PROCEDURES
As of JuneSeptember 30, 2017,2018, an evaluation was performed, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer along with the Company's Vice President, Finance and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based upon that evaluation, the Company's management, including the Chief Executive Officer along with the Company's Vice President, Finance and Chief Financial Officer, concluded that the Company's disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended ("Exchange Act") were effective as Juneof September 30, 20172018 to ensure that information required to be disclosed by the Company in reports that it files and submits under the Exchange Act is (1) recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms, and (2) is accumulated and communicated to the Company's management, including its principal executive and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. There were no changes in the Company's internal controlscontrol over financial reporting during the fiscal quarter ended JuneSeptember 30, 20172018 that have materially affected or are reasonably likely to materially affect the Company's internal control over financial reporting.
PART II – OTHER INFORMATION
ITEM1. 1. LEGAL PROCEEDINGS.
None.Hickok AE LLC (dba Air Enterprises), a wholly owned subsidiary of Hickok Incorporated, was named as a defendant in a lawsuit filed in Superior Court in Quebec, Canada by Carmichael Engineering Ltd. of Quebec (“Carmichael”). Carmichael’s lawsuit seeks payment of invoices for materials and services it allegedly provided to Air Enterprises prior to the Company’s acquisition and relating to a third-party cooling system. The Company believes the claims have been improperly brought against Hickok. The Company denies the allegations and will vigorously defend the claims asserted against it. The Company cannot predict the outcome of the above matters or estimate the possible loss or range of loss, if any. Management believes that the allegations are without merit and that the ultimate resolution of these matters will not have a material adverse effect on the consolidated financial condition, results of operations or cash flow of the Company.
ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.Not applicable.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS
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31.1 | Rule 13a-14(a)/15d-14(a) Certification by the Chief Executive Officer. |
31.2 | Rule 13a-14(a)/15d-14(a) Certification by the Chief Financial Officer. |
32.1 | |
32.2 | |
101.INS* | XBRL Instance |
101.SCH* | XBRL Taxonomy Extension Schema |
101.CAL* | XBRL Taxonomy Extension Calculation |
101.DEF* | XBRL Extension Definition |
101.LAB* | XBRL Taxonomy Extension Labels |
101.PRE* | XBRL Taxonomy Extension Presentation |
*XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned as of the 14th day of August 2017,November 2018, thereunto duly authorized.
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SIGNATURE: | TITLE |
/s/ Brian E. Powers | Chairman, President and Chief |
Brian E. Powers | Executive Officer |
(Principal Executive Officer) | |
/s/ Kelly J. Marek | Vice President and Chief Financial |
Kelly J. Marek | Officer (Principal Accounting and Financial Officer) |
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