On October 3, 2016, the Company completed the acquisition of Vertex from DXP Enterprises. The acquisition has been accounted for in accordance with ASC Topic 805, “Business Combinations.” Accordingly, the total purchase price has been allocated to the assets acquired and liabilities assumed based on their fair values as of the acquisition date. Vertex is a master distributor of industrial fasteners, specializing in corrosion resistant and specialty alloy inch and metric threaded fasteners, rivets, and hose clamps, to the industrial market. Under the terms of the acquisition agreement, the purchase price was $32.3 million, subject to an adjustment based on the net working capital of Vertex as of the date of closing. On May 2, 2017, the Company and DXP Enterprises finalized the working capital adjustment resulting in a final purchase price of $32.2 million. The Company treated the acquisition as a stock purchase for tax purposes. The amount of goodwill deductible for tax purposes is $1.0 million. The acquisition was funded by borrowing under the Company’s loan agreement. This acquisition expands the Company’s product offerings to the industrial marketplace that purchases its wire and cable products.

During the quarter, the Company finalized its analysis of assets acquired and liabilities assumed, including accounts receivable, inventories and leases. The following table summarizes the final fair value of the acquired assets and assumed liabilities recorded as of the date of acquisition:

The fair values of the assets acquired and liabilities assumed were determined using the market, income and cost approaches. The market approach used by the Company included prices at which comparable assets were purchased under similar circumstances. The income approach indicated value for the subject net assets based on the present value of cash flows projected to be generated by the net assets over their useful life. Projected cash flows were discounted at a market rate of return that reflected the relative risk associated with the asset and the time value of money. The cost approach estimated value by determining the current cost of replacing the asset with another of equivalent economic utility. The cost to replace a given asset reflected the estimated reproduction or replacement cost for the asset, less an allowance for loss in value due to depreciation.

Intangible assets acquired consist of customer relationships - $7.0 million and trade names - $2.1 million. Trade names are not being amortized, while customer relationships are being amortized over a 9 year useful life. Amortization expense to be recognized on the acquired intangible assets is expected to be $0.8 million per year in 2017 through 2024 and $0.6 million in 2025. Amortization expense was $0.2 million during the three months ended September 30, 2017, and accumulated amortization on the acquired intangible assets was $0.8 million as of September 30, 2017.

The long-term obligation represents the unfavorable lease terms relative to market, and is being amortized over the remaining 81 months of the lease.

The results of operations of Vertex are included in the consolidated statements of operations prospectively from October 3, 2016. The unaudited pro forma combined historical results of the Company, giving effect to the acquisition assuming the transaction was consummated on January 1, 2016, are as follows:

The unaudited pro forma combined historical results do not reflect any cost savings or other synergies that might result from the transaction. They are provided for informational purposes only and are not necessarily indicative of the results of operations for future periods or the results that actually would have been realized had the acquisition occurred as of January 1, 2016.

On October 3, 2016, in connection with the acquisition of Vertex, HWC Wire & Cable Company, the Company, Vertex, and Bank of America, N.A., as agent and lender, entered into a First Amendment (“the Loan Agreement Amendment”) amendingare parties to the Fourth Amended and Restated Loan and Security Agreement (“the 2015 Loan(the “Loan Agreement”)., as amended as of October 3, 2016. The Loan Agreement Amendment adds Vertex as a borrower (and lien grantor) and provides the terms for inclusion of Vertex’s eligible accounts receivable and eligible inventory in the borrowing base for the 2015 Loan Agreement. The 2015 Loan Agreement was expanded to include incremental availability on eligible accounts receivable and inventory up to $5 million, which is being amortized quarterly, starting April 1, 2017, over two and a half years. The 2015 Loan Agreement provides a $100 million revolving credit facility and expires on September 30, 2020. Under certain circumstances the Company may request an increase in the commitment by an additional $50 million.

Portions of the loan may be converted to LIBOR loans in minimum amounts of $1.0 million and integral multiples of $0.1 million. LIBOR loans bear interest at the British Bankers Association LIBOR Rate plus 100 to 150 basis points based on availability, and loans not converted to LIBOR loans bear interest at a fluctuating rate equal to the greatest of the agent’s prime rate, the federal funds rate plus 50 basis points, or 30-day LIBOR plus 150 basis points. The unused commitment fee is 25 basis points.

Availability under the 2015 Loan Agreement is limited to a borrowing base equal to 85% of the value of eligible accounts receivable, plus the lesser of 70% of the value of eligible inventory or 90% of the net orderly liquidation value percentage of the value of eligible inventory, in each case less certain reserves. The 2015 Loan Agreement is secured by substantially all of the property of the Company, other than real estate.

The 2015 Loan Agreement includes, among other things, covenants that require the Company to maintain a specified minimum fixed charge coverage ratio, unless certain availability levels exist. Additionally, the 2015 Loan Agreement allows for the unlimited payment of dividends and repurchases of stock, subject to the absence of events of default and maintenance of a fixed charge coverage ratio and minimum level of availability. The 2015 Loan Agreement contains certain provisions that may cause the debt to be classified as a current liability, in accordance with GAAP, if availability falls below certain thresholds, even though the ultimate maturity date under the loan agreement remains as September 30, 2020. At SeptemberJune 30, 2017,2018, the Company was in compliance with the availability-based covenants governing its indebtedness.

The carrying amount of long term debt approximates fair value as it bears interest at variable rates. The fair value is a Level 2 measurement as defined in ASC Topic 820, “Fair Value Measurement.”

On December 22, 2017 the Tax Cuts and Jobs Act was signed into law, making significant changes to the U.S. Internal Revenue Code. The major provisions include a corporate tax rate decrease from 35% to 21%, effective for years beginning after December 31, 2017, and changes in business-related exclusions and deductions.

The Company calculates its provision for income taxes during interim reporting periods by applying the estimated annual effective tax rate for the full fiscal year to pre-tax income or loss, excluding discrete items, for the reporting period. The Company’s effective tax rate increased in the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016, primarily due to changes in the estimated annual earnings for 2017 and a valuation allowance on deferred tax assets not expected to be realized. In the nine months ended September 30, 2017, the effect of discrete period tax items was $2.1 million which were primarily related to the valuation allowance on deferred tax assets not expected to be realized.

A valuation allowance for deferred tax assets is recognized when it is more likely than not that some or all of the benefit from the deferred tax assets will not be realized. To assess that likelihood, the Company uses its current financial position, results of operations, both actual and forecasted, the reversal of deferred tax liabilities, and tax planning strategies, as well as the current and forecasted business economics, to determine whether a valuation allowance is required.

The Company has assessed both positive and negative evidence to estimate whether sufficient future taxable income will be generated and concludeddetermined that it is more likely than not that the deferred tax assets will not be realized and, as such, has recorded a $1.0 million valuation allowance of $2.4 million as of Septemberwas required at December 31, 2017 and June 30, 2017. Going forward, management will continue to assess the available evidence to determine whether it is more likely than not that sufficient future taxable income will be generated to realize the deferred tax assets.2018. 

No dividend was declared during the first, second or third quarter of 2017. Dividends paid were $2.5 million during the nine months ended September 30, 2016.

Stock Option Awards

There were no stock option awards granted during the first ninesix months of 20172018 or 2016.2017.

Restricted Stock Awards and Restricted Stock Units

FollowingThe 2017 Stock Plan (the “2017 Plan”) was approved by the stockholders at the 2018 Annual Meeting of Stockholders on May 8, 2018. As a result, all awards outstanding under the 2017 Plan (including those cash/liability awards granted prior to the approval of the 2017 Plan) will entitle the recipient to receive shares of the Company’s common stock.

All awards outstanding prior to the approval of the 2017 Plan were reclassified to restricted stock units (equity) effective May 8, 2018. The total liability reclassified to additional paid-in-capital was $0.4 million. This modification resulted in an increase in total fair value of $0.1 million, recognized over the term of the grants, which range from 1 to 5 2017,years.

On June 1, 2018, the Company approved theawarded restricted stock units with a grant date value of $55,000, for a total of 6,667 restricted stock units, to its newly-appointed non-employee director. This award of restricted stock units with a value of $60,000 to each non-employee director who was elected or re-elected, for an aggregate of 37,500 restricted stock units. Issuance of the restricted stock unit awards was subject to adoption of a new stock plan, as the Company’s 2006 Stock Plan expired on May 1, 2017. On August 4, 2017, the Company adopted the 2017 Stock Plan. Each award of restricted stock units will vestvests at the date of the 20182019 Annual Meeting of Stockholders. In addition, on August 4, 2017, the Company approved the award of 7,653 restricted stock units with a value of $45,000 to a newly elected director. Until the new stock plan has been approved by the Company’s stockholders, each restricted stock unit will entitleThe grant entitles the non-employee director to receive a number of shares of the Company's common stock equal to the number of vested restricted stock units, together with dividend equivalents from the date of grant, at such time as the director’s service on the board terminates for any reason,reason.

Following the Annual Meeting of Stockholders on May 8, 2018, the Company approved the award of restricted stock units with a cash payment equal to the marketgrant date value of one share$60,000 to each non-employee director who was re-elected, for an aggregate of the Company’s common31,372 restricted stock together with dividend equivalents fromunits. Each award of restricted stock units vests at the date of grant, at the time2019 Annual Meeting of payment. Following stockholder approval of the new stock plan, instead of such cash payment eachStockholders. Each non-employee director will beis entitled to receive a number of shares of the Company’s common stock equal to the number of vested restricted stock units, together with dividend equivalents from the date of grant, at such time as the director’s service on the board terminates for any reason. The Company intends to submit the 2017 Stock Plan for approval by stockholders at the 2018 Annual Meeting. Assuming such approval, at the time the awards vest, they will represent the right to receive shares of common stock.

In addition,Also on August 4, 2017,May 8, 2018, the Company approved an award of $50,000granted 28,144 voting shares of restricted stock units to a new membermembers of seniorthe management basedteam. Of the 28,144 shares granted, 26,144 shares vest in one third increments on the closing price onfirst, second and third anniversaries of the date of grant. These unitsgrant and the remaining 2,000 shares vest in one third increments on the third, fourth and fifth anniversaries of the date of grant, in each case as long as the recipient is still employed by the Company. Assuming the stockholders approve the 2017 Stock Plan at the 2018 Annual Meeting, upon vesting each restricted stock unit will entitle the recipient to receive one share of the Company’s common stock, together with dividend equivalents from the date of grant.

The three awards discussed above are liability awards and are required to be fair valued every quarter and any difference accounted for in the statement of operation. The Company believes that the impact of any fair value adjustment to be immaterial.

On January 30, 2017, the Company granted to the Company’s President and CEO 60,000 shares of restricted stock and performance stock units with respect to an additional 40,000 shares of common stock under the 2006 Stock Plan. The equity award of 60,000 shares of restricted stock vest in one-third increments on January 30, 2018, December 19, 2018 and December 19, 2019, in each case as long as Mr. Pokluda is then employed by the Company. The performance stock units vest on December 31, 2019 based on and subject to the Company’s achievement of cumulative EBITDA and stock price performance goals over a three-year period, as long as Mr. Pokluda is then employed by the Company, and upon vesting will be settled in shares of our common stock. Any dividends declared will be accrued and paid to Mr. Pokluda if and when the related shares vest.

Total stock-based compensation cost was $0.3 million$0.4 and $0.2 million for the three months ended SeptemberJune 30, 20172018 and 2016,2017, respectively, and $0.8$0.7 million and $0.6$0.5 million for the ninesix months ended SeptemberJune 30, 20172018 and 2016,2017, respectively, and is included in salaries and commissions.commissions for employees, and in other operating expenses for non-director employees. 

As a result of unfavorable lease terms relative to market for one of the leases acquired as part of the Vertex acquisition in 2016, there is a remaining additional liability of Southwest Wire Rope and Southern Wire made in 2010,$0.2 million that is being amortized over the Company assumed the liability for the post-remediation monitoringremaining term of the water qualitylease, which was 60 months at one of the acquired facilities in Louisiana. The expected liability of $0.1 million at SeptemberJune 30, 2017 relates to the cost of the monitoring, which the Company estimates will be incurred in the next year, and also the cost to plug the wells. Remediation work was completed prior to the acquisition in accordance with the requirements of the Louisiana Department of Environmental Quality.

The Company had outstanding under the 2015 Loan Agreement, letters of credit totaling $1.1 million to certain vendors as of September 30, 2017.2018.

The Company, along with many other defendants, has been named in a number of lawsuits in the state courts of Minnesota, North Dakota, and South Dakota alleging that certain wire and cable which may have contained asbestos caused injury to the plaintiffs who were exposed to this wire and cable. These lawsuits are individual personal injury suits that seek unspecified amounts of money damages as the sole remedy. It is not clear whether the alleged injuries occurred as a result of the wire and cable in question or whether the Company, in fact, distributed the wire and cable alleged to have caused any injuries. The Company maintains general liability insurance that, to date, has covered the defense of and all costs associated with these claims. In addition, the Company did not manufacture any of the wire and cable at issue, and the Company would rely on any warranties from the manufacturers of such cable if it were determined that any of the wire or cable that the Company distributed contained asbestos which caused injury to any of these plaintiffs. In connection with ALLTEL’s sale of the Company in 1997, ALLTEL provided indemnities with respect to costs and damages associated with these claims that the Company believes it could enforce if its insurance coverage proves inadequate.

There are no legal proceedings pending against or involving the Company that, in management’s opinion, based on the current known facts and circumstances, are expected to have a material adverse effect on the Company’s consolidated financial position, cash flows, or results of operations.

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

The following Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand the Company’s financial position and results of operations. MD&A is provided as a supplement to the Company’s Consolidated Financial Statements (unaudited) and the accompanying Notes to Consolidated Financial Statements (unaudited) and should be read in conjunction with the MD&A included in the Company’s Form 10-K for the year ended December 31, 2016.2017.

Overview

We are a provider of industrial products including electrical and mechanical wire and cable, industrial fasteners, hardware and related services to the U.S. market. We provide our customers with a single-source solution by offering a large selection of in-stock items, exceptional customer service and high levels of product expertise.

Critical Accounting Policies

The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, revenue and expenses. On an on-going basis, we make and evaluate estimates and judgments, including those related to the inventory obsolescence reserve, the reserve for returns and allowances, vendor rebates, the realization of deferred tax assets and asset impairments.liabilities and the valuation of goodwill and indefinite-lived assets. We base our estimates on historical experience and various other assumptions that we believe are reasonable under the circumstances; the results of which form the basis for making judgments about amounts and timing of revenue and expenses, the carrying values of assets and the recorded amounts of liabilities that are not readily apparent from other sources. Actual results may differ from these estimates and such estimates may change if the underlying conditions or assumptions change. We have discussed the development and selection of critical accounting policies and estimates with the Audit Committee of our Board of Directors, and the Audit Committee has reviewed our related disclosures. The critical accounting policies related to the estimates and judgments are discussed in our Annual Report on Form 10-K for the year ended December 31, 20162017 under Management’s Discussion and Analysis of Financial Condition and Results of Operations. There have been no changes to our critical accounting policies and estimates during the ninethree and six months ended SeptemberJune 30, 2017.2018. 

Cautionary Statement for Purposes of the “Safe Harbor”

Forward-looking statements in this report are made in reliance upon the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.  Such forward-looking statements may relate to, but are not limited to, information or assumptions about our sales and marketing strategy, sales (including pricing), income, operating income or gross margin improvements, working capital, cash flow, interest rates, impact of changes in accounting standards, future economic performance, management’s plans, goals and objectives for future operations, performance and growth or the assumptions relating to any of the forward-looking statements.  These statements can be identified by the fact that they do not relate strictly to historical or current facts.  They use words such as “aim”, “anticipate”, “believe”, “could”, “estimate”, “expect”, “intend”, “may”, “plan”, “project”, “should”, “will be”, “will continue”, “will likely result”, “would” and other words and terms of similar meaning in conjunction with a discussion of future operating or financial performance.  The Company cautions that forward-looking statements are not guarantees because there are inherent difficulties in predicting future results.  Actual results could differ materially from those expressed or implied in the forward-looking statements.  The factors listed under “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016,2017, as well as any cautionary language in this report, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements.

Results of Operations

The following table shows, for the periods indicated, information derived from our consolidated statements of operations, expressed as a percentage of net sales for the periods presented.

Note: Due to rounding, percentages may not add up to total operating expenses, operating income (loss), income (loss) before income taxes or net loss.income (loss).

Comparison of the Three Months Ended SeptemberJune 30, 20172018 and 20162017

Sales

Our sales for the thirdsecond quarter increased 24.5%24.1% to $81.2$93.9 million in 20172018 from $65.2$75.6 million in 2016.2017. The primary reasons for the increase were $7.8 million in sales from Vertex and a 12.6% or $8.2 million increase in sales of wireis due to improved industrial activity, increased commodity prices and cable products.disciplined pricing. We estimate that higher metals prices in 2017 represented approximately 5% of the increase in wire and cable sales. We estimate wire and cable sales for our project business, which targets end markets, forencompassing Environmental Compliance, Engineering & Construction, Industrials, Utility Power Generation, and Mechanical Wire Rope, decreased 5%increased 26%, while Maintenance, Repair, and Operations (MRO) wire and cable sales increased 20%23%, as compared to 2016, including the impactsecond quarter of higher metals prices.2017.

Gross Profit

Gross profit increased 54.2%36.9% to $18.6$22.3 million in 20172018 from $12.0$16.3 million in 2016.2017. The increase in gross profit was primarily attributable to the increased sales in the thirdsecond quarter of 2017, including the acquisition of Vertex, and to higher gross margins.2018. Gross margin (gross profit as a percentage of sales) increased to 22.9%23.8% in 20172018 from 18.5%21.6% in 20162017 primarily due to increasedimproved pricing discipline and product margins and the higher margins earned by Vertex.mix.

Operating Expenses

Note:  Due to rounding, numbers may not add up to total operating expenses.

Salaries and commissions increased $1.8$1.1 million between the periods primarily due to the additional personnel at Vertex and increased commissions due toresulting from higher sales and gross profit.

Other operating expenses increased $1.1$0.7 million primarily due to $1.0 millionhigher distribution expenses as a result of additional other operating expenses at Vertex.increased volume and higher administrative expenses.

Depreciation and amortization decreased $0.2$0.3 million primarily due to a decreasecertain intangibles which became fully amortized in the amortization of intangibles.2017.

Operating expenses as a percentage of sales decreased to 20.3%19.1% in 2018 from 21.8% in 2017, from 21.2% in 2016, as sales growth exceededoperating expenses increased at a lower rate than the increase in operating expenses.sales, due to improved leverage. 

Interest Expense

Interest expense increased to $0.8 million in 2018 from $0.5 million in 2017 from $0.1 million in 2016 due to higher debt as a result of the Vertex acquisition and to an increase in the average effective interest rate. Average debt was $71.2$82.5 million in 20172018 compared to $28.5$72.6 million in 2016.2017. The average effective interest rate was 3.0%3.7% in 20172018 compared to 1.7%2.7% in 2016.2017.

Income Taxes

The income tax expense of $3.2$1.0 million fluctuated from a $0.5increased compared to the $0.6 million income tax benefit in the prior year period. The effective income tax rate for the quarter increaseddecreased to 213.8%28.0% in 20172018 from 25.6%91.8% in 2016,2017, primarily due to a change in thehigher estimated annual earnings for 2018 offset by the benefit in 2017 which also reflected the cumulative effectimpact of which, is reflected in the current quarter and a full valuation allowance on the net deferred tax assets not expectedas of June 30, 2017. The 2018 tax rate is also lower due to be realized. The 2016 incomethe lower corporate tax benefit was netrate as a result of the non-deductible portion of the goodwill impairment charge of $0.5 million.2017 Tax Cuts and Jobs Act.

Net LossIncome

We incurred aachieved net lossincome of $1.7$2.6 million in 20172018 compared to a net loss of $1.4$0.1 million in 2016.2017.

Comparison of the NineSix Months Ended SeptemberJune 30, 20172018 and 20162017

Our sales for the ninesix month period increased 22.4%15.9% to $235.6$178.9 million in 20172018 from $192.4$154.4 million in 2016.2017. The primary reasons for the increase were $23.6 million in sales from Vertexare improved industrial activity, increased commodity prices and a 10.2% or $19.5 million increase in sales of wire and cable products. We estimate that higher metals prices in 2017 represented approximately 3% of the increase in wire and cable sales. We estimate wire and cable sales for ourdisciplined pricing. Our project business, which targets end markets forincludes our key growth initiatives encompassing Environmental Compliance, Engineering & Construction, Industrials, Utility Power Generation, and Mechanical Wire Rope, decreased 6%is estimated to have increased 30%, while Maintenance, Repair, and Operations (MRO) wire and cable salesfrom 2017. MRO increased 17%12%, as compared to 2016, including the impact of higher metals prices.from 2017.

Gross Profit

Gross profit increased 36.8%28.8% to $51.8$42.8 million in 20172018 from $37.9$33.2 million in 2016.2017. The increase in gross profit was primarily attributable to increasedthe higher sales including the acquisition of Vertex and to higher product gross margin. Gross margin increased to 22.0%23.9% in 20172018 from 19.7%21.5% in 2016,2017, primarily due to increasedimproved pricing discipline and product margins and the higher gross margins generated by Vertex.mix.

Operating Expenses

Note:  Due to rounding, numbers may not add up to total operating expenses.

Salaries and commissions increased $5.8$1.4 million between the periods due to the additional personnel, from the Vertex acquisition, as well as increased commissions and higher distribution salaries, both resulting from increased sales and gross profit.

Other operating expenses increased $4.0$0.7 million, primarilyas distribution expenses increased due to the additional other operating expenses at Vertex, as well ashigher sales and increased distribution expenses due to increased sales.administrative expenses.

Depreciation and amortization remained consistent with the prior year period.

The impairment chargedecreased primarily due to certain intangibles which became fully amortized in 2016 relates to the write-off of goodwill at the HWC reporting unit and the write-down of trade names at the Southern Wire reporting unit.2017.

Operating expenses as a percentage of sales decreased to 21.3%19.7% in 2017 from 22.2%21.8% in 2016,2017, as sales growth exceededoperating expenses increased at a lower rate than the increase in operating expenses.sales, due to improved leverage. 

Interest Expense

Interest expense increased 49.3% to $1.5$1.4 million in 20172018 from $0.5$0.9 million in 20162017 due to higher average debt levels from the Vertex acquisitiondue to increased inventory investment and higher interest rates. Average debt was $70.6$79.7 million in 20172018 compared to $32.4$70.3 million in 2016.2017. The average effective interest rate was 2.8%rose to 3.5% in 2017 up2018 from 1.7%2.6% in the prior year period.

Income Taxes

The income tax expense of $2.4$1.7 million fluctuatedincreased from the $1.2 million incomea tax benefit of $0.9 million in 2016.2017. The effective income tax rate increaseddecreased to 1,651.0%27.1% in 20172018 from 22.0%62.7% in 2016,2017, primarily due to a change in thehigher estimated annual earnings for 2018 offset by the benefit in 2017 andwhich also reflected the impact of a full valuation allowance on the net deferred tax assets not expected to be realized.as of June 30, 2017. The effective income2018 tax rate in 2017 is also greater thanlower due to the statutorylower corporate tax rate primarily becauseas a result of the valuation allowance on deferred tax assets not expected to be realized. The 2016 income tax benefit was net of the non-deductible portion of the goodwill impairment charge of $0.5 million.2017 Tax Cuts and Jobs Act.

Net LossIncome

TheWe achieved net income of $4.6 million in 2018 compared to a net loss of $2.2$0.5 million in 2017 was lower than the loss of $4.2 million in 2016. The 2016 loss included an impairment charge of $2.4 million.2017.

Impact of Inflation and Commodity Prices

Our results of operations are affected by changes in the inflation rate and commodity prices. Moreover, because copper, steel, aluminum, nickel and petrochemical products are components of the industrial products we sell, fluctuations in the costs of these and other commodities have historically affected our operating results. To the extent commodity prices decline, the net realizable value of our existing inventory could also decline, and our gross profit could be adversely affected because of either reduced selling prices or lower of cost or market adjustments in the carrying value of our inventory. If weWe turn our inventory approximately three times a year, therefore, the impact of changes in commodity prices in any particular quarter would primarily affect the results of the succeeding two calendar quarters. If we are unable to pass on to our customers future cost increases due to inflation or rising commodity prices, our operating results could be adversely affected. 

Liquidity and Capital Resources

Our primary capital needs are for working capital obligations, capital expenditures and other general corporate purposes, including acquisitions. Our primary sources of working capital are cash from operations supplemented by bank borrowings.

 Liquidity is defined as the ability to generate adequate amounts of cash to meet the current need for cash. We assess our liquidity in terms of our ability to generate cash to fund our operating activities. Significant factors which could affect liquidity include the following:

Comparison of the NineSix Months Ended SeptemberJune 30, 20172018 and 20162017

Our net cash used in operating activities was $10.9$5.7 million for the ninesix months ended SeptemberJune 30, 20172018 compared to net cash provided by operating activities of $16.0$8.4 million in 2016.2017. We had net income of $4.6 million in 2018 compared to a net loss of $2.2$0.5 million in 2017 compared to net loss of $4.2 million in 2016.2017.

Changes in our operating assets and liabilities resulted in cash used in operating activities of $15.1$12.3 million in 2017.2018. An increase in accounts receivable of $12.6$5.4 million due to the increase in sales, an increasea decrease in accrued and other liabilities of $2.1$4.5 million in inventories,and a decrease in book overdraft of $1.3 million, a decrease in accounts payable of $1.8 million, an increase in income taxes receivable of $0.7 million, offset by an increase in accrued and other liabilities of $4.0$1.7 million were the main uses of cash.

Net cash used in investing activities was $0.7 million in 2018 compared to $1.1 million in 2017 compared to $1.0 million in 2016.2017.

Net cash provided by financing activities was $12.0$6.4 million in 20172018 compared to net cash used of $15.0$9.5 million in 2016.2017. Net borrowings on the revolver of $12.1$6.6 million were the primary source for financing activities in 2017.2018.

Indebtedness

Our principal source of liquidity at SeptemberJune 30, 20172018 was working capital of $116.7$131.5 million compared to $102.1$119.6 million at December 31, 2016.2017. We also had additional available borrowing capacity of $24.0approximately $19.9 million at SeptemberJune 30, 20172018 and $25.6$23.0 million at December 31, 20162017 under our loan agreement. The availability at September 30, 2017 is net of outstanding letters of credit of $1.1 million.

We believe that we will have adequate availability of capital to fund our present operations, meet our commitments on our existing debt, and fund anticipated growth over the next twelve months, including expansion in existing and targeted market areas. We continually seek potential acquisitions and from time to time hold discussions with acquisition candidates. If suitable acquisition opportunities or working capital needs arise that would require additional financing, we believe that our financial position and earnings history provide a solid base for obtaining additional financing resources at competitive rates and terms. Additionally, based on market conditions, and approval of our 2017 Stock Plan, we may decide to issue additional shares of common or preferred stock to raise funds.

Contractual Obligations

The following table summarizes our loan commitment at SeptemberJune 30, 2017.2018.

There were no material changes in operating lease obligations or non-cancellable purchase obligations since December 31, 2016.2017.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

There were no material changes to our market risk as set forth in Items 7A and 7 of our Annual Report on Form 10-K for the year ended December 31, 2016.2017.

Item 4. Controls and Procedures

As of SeptemberJune 30, 2017,2018, an evaluation was performed by the Company’s management, under the supervision and with the participation of the Company’s chief executive officer and chief financial officer, of the effectiveness of the Company’s disclosure controls and procedures.  InBased on that evaluation, our Chief Executive Officerthe chief executive officer and Chief Financial Officer notedthe chief financial officer concluded that we had failed to file an amendment to our October 5, 2016 Form 8-K to provide audited financial statements for Vertex for 2015 and related pro forma information, and as a result ourthe Company’s disclosure controls and procedures were not effective as of September 30, 2017. The deficiency identified in our disclosure controls and procedures was related to our inability to obtain in a timely manner audited financial statements of Vertex for a period pre-dating our acquisition and did not impact our current financial reporting or the Company’s current or historical financial statements. The Form 8-K amendment was filed on October 20, 2017 and, as a result, the deficiency has been addressed.effective. There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended SeptemberJune 30, 20172018 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. The Company implemented internal controls to ensure it adequately evaluated its controls and properly assessed the impact of the new accounting standard related to revenue recognition on its financial statements to facilitate the adoption on January 1, 2018. There were no significant changes to the Company’s internal control over financial reporting due to the adoption of the new standard.

Part II. Other Information

Item 1 – Not applicable and has been omitted.

Item 1A.  Risk Factors

There were no material changes in the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016.2017.

Item 2 – Not applicable and has been omitted.

Item 3 – Not applicable and has been omitted.

Item 4 – Not applicable and has been omitted.

Item 5 – Not applicable and has been omitted.

Item 6.  Exhibits

(a) Exhibits required by Item 601 of Regulation S-K.

EXHIBIT INDEX

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.