UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended September 30, ~~2017~~2018

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

For the transition period from to

Commission File Number 1 - 5332

P&F INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)

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

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx No¨

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Website, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files). Yesx No¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting ~~company, or an emerging growth~~ company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting ~~company”, and “emerging growth~~ company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer¨	Accelerated filer¨	Non-accelerated filer¨x	Smaller reporting company x
		~~(Do not check if a smaller reporting~~ ~~company)~~
			Emerging growth company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for the complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes¨ Nox

As of November ~~7, 2017~~6, 2018 there were ~~3,603,872~~3,673,982 shares of the registrant’s Class A Common Stock outstanding.

P&F INDUSTRIES, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, ~~2017~~2018

TABLE OF CONTENTS

		PAGE

PART I — FINANCIAL INFORMATION		13

Item 1.	Financial Statements	13

	Consolidated Balance Sheets as of September 30, ~~2017~~2018 (unaudited) and December 31, ~~2016~~2017	13-4

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

	Consolidated Statement of Shareholders’ Equity for the nine months ended September 30, ~~2017~~2018 (unaudited)	46

	Consolidated Statements of Cash Flows for the nine months ended September 30, ~~2017~~2018 and ~~2016~~2017 (unaudited)	57-8

	Notes to Consolidated Financial Statements (unaudited)	79

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2023

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3236

Item 4.	Controls and Procedures	3236

PART II — OTHER INFORMATION		3337

Item 1.	Legal Proceedings	3337

Item 1A.	Risk Factors	3337

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3337

Item 3.	Defaults Upon Senior Securities	3337

Item 4.	Mine Safety Disclosures	3337

Item 5.	Other Information	3337

Item 6.	Exhibits	3337

Signature		3438

Exhibit Index		3539

PART I - FINANCIAL INFORMATION

Item 1.

Financial Statements

P&F INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	September 30, 2017		December 31, 2016		September 30, 2018		December 31, 2017
	(unaudited)		(See Note 1)		(unaudited)		(See Note 1)
ASSETS
CURRENT ASSETS

Cash	$	1,205,000	$	3,699,000	$	1,729,000	$	1,241,000
Accounts receivable — net		10,994,000		7,906,000		11,701,000		10,047,000
Inventories		20,090,000		19,901,000		20,240,000		19,657,000
Prepaid expenses and other current assets		925,000		3,030,000		1,286,000		1,224,000
TOTAL CURRENT ASSETS		33,214,000		34,536,000		34,956,000		32,169,000

PROPERTY AND EQUIPMENT
Land		1,281,000		1,150,000		1,281,000		1,281,000
Buildings and improvements		6,136,000		5,209,000		6,155,000		6,138,000
Machinery and equipment		20,160,000		19,401,000		22,208,000		20,579,000
		27,577,000		25,760,000		29,644,000		27,998,000
Less accumulated depreciation and amortization		18,770,000		18,671,000		20,019,000		19,091,000
NET PROPERTY AND EQUIPMENT		8,807,000		7,089,000		9,625,000		8,907,000

GOODWILL		4,445,000		3,897,000		4,440,000		4,447,000

OTHER INTANGIBLE ASSETS — net		8,709,000		6,606,000		7,984,000		8,533,000

DEFERRED INCOME TAXES — net		1,643,000		1,793,000		583,000		872,000

OTHER ASSETS — net		120,000		130,000		755,000		110,000

TOTAL ASSETS	$	56,938,000	$	54,051,000	$	58,343,000	$	55,038,000

See accompanying notes to consolidated financial statements (unaudited).

P&F INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	September 30, 2017			December 31, 2016			September 30, 2018			December 31, 2017
	(unaudited)			(See Note 1)			(unaudited)			(See Note 1)
LIABILITIES AND SHAREHOLDERS’ EQUITY

CURRENT LIABILITIES

Short-term borrowings	$	2,334,000		$	—		$	3,607,000		$	1,928,000
Accounts payable		3,247,000			2,398,000			3,018,000			2,443,000
Accrued compensation and benefits		1,694,000			1,733,000			2,016,000			1,944,000
Accrued other liabilities		1,449,000			2,019,000			1,483,000			1,576,000
Current maturities of long-term debt		—			13,000			471,000			—
Other current liabilities								936,000			—
TOTAL CURRENT LIABILITIES		8,724,000			6,163,000			11,531,000			7,891,000

Long - term debt, less current maturities		92,000			88,000
Long–term debt, less current maturities								—			94,000
Other liabilities		901,000			210,000			174,000			1,040,000

TOTAL LIABILITIES		9,717,000			6,461,000			11,705,000			9,025,000


SHAREHOLDERS’ EQUITY
Preferred stock - $10 par; authorized - 2,000,000 shares; no shares issued		—			—			—			—
Common stock
Class A - $1 par; authorized - 7,000,000 shares; issued – 4,203,000 at September 30, 2017 and 4,181,000 at December 31, 2016		4,203,000			4,181,000
Class A - $1 par; authorized - 7,000,000 shares; issued – 4,394,000 at September 30, 2018 and 4,203,000 at December 31, 2017								4,394,000			4,203,000
Class B - $1 par; authorized - 2,000,000 shares; no shares issued		—			—			—			—
Additional paid-in capital		12,996,000			12,906,000			13,811,000			13,064,000
Retained earnings		35,481,000			36,061,000			34,822,000			34,455,000
Treasury stock, at cost – 596,000 shares at September 30, 2017 and 584,000 at December 31, 2016		(4,910,000	)		(4,821,000	)
Treasury stock, at cost – 702,000 shares at September 30, 2018 and 631,000 shares at December 31, 2017								(5,768,000	)		(5,179,000	)
Accumulated other comprehensive loss		(549,000	)		(737,000	)		(621,000	)		(530,000	)

TOTAL SHAREHOLDERS’ EQUITY		47,221,000			47,590,000			46,638,000			46,013,000

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	56,938,000		$	54,051,000		$	58,343,000		$	55,038,000

See accompanying notes to consolidated financial statements (unaudited).

P&F INDUSTRIES, INC. AND SUBSIDIARIES

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

~~(Unaudited)~~

Three months Nine months
ended September 30, ended September 30,
2017 2016 2017 2016

Net revenue $ 15,782,000 $ 14,633,000 $ 44,357,000 $ 44,769,000
Cost of sales 10,198,000 10,128,000 28,377,000 29,743,000
Gross profit 5,584,000 4,505,000 15,980,000 15,026,000
Selling, general and administrative expenses 5,352,000 4,915,000 15,765,000 15,088,000
Impairment of goodwill and other intangible assets — — — 8,311,000
Operating income (loss) 232,000 (410,000 ) 215,000 (8,373,000 )
Other expense (income), net 11,000 (43,000 ) (13,000 ) (75,000 )
Interest expense 50,000 26,000 124,000 164,000
Income (loss) from continuing operations before income taxes 171,000 (393,000 ) 104,000 (8,462,000 )
Income tax expense (benefit) 166,000 (107,000 ) 142,000 (2,872,000 )
Income (loss) from continuing operations 5,000 (286,000 ) (38,000 ) (5,590,000 )

Discontinued operations (Note 2)

Income from discontinued operations, net of tax of $-0- and $38,000 for the three and nine-month periods ended September 30, 2016, respectively. — — — 72,000
Gain on sale of discontinued operations, net of tax benefit of $187,000 and $328,000 for the three and nine-month periods ended September 30, 2016, respectively. — 187,000 — 12,358,000
Income from discontinued operations, net of tax — 187,000 — 12,430,000

Net income (loss) $ 5,000 $ (99,000 ) $ (38,000 ) $ 6,840,000

Basic (loss) earnings per share
Continuing operations $ — $ (0.08 ) $ (0.01 ) $ (1.55 )
Discontinued operations — 0.05 — 3.45
Net (loss) income $ — $ (0.03 ) $ (0.01 ) $ 1.90

Diluted (loss) earnings per share
Continuing operations $ — $ (0.08 ) $ (0.01 ) $ (1.55 )
Discontinued operations — 0.05 — 3.45
Net (loss) income $ — $ (0.03 ) $ (0.01 ) $ 1.90

Weighted average common shares outstanding:

Basic 3,617,000 3,598,000 3,609,000 3,598,000
Diluted 3,777,000 3,598,000 3,609,000 3,598,000

Net income (loss) $ 5,000 $ (99,000 ) $ (38,000 ) $ 6,840,000
Other comprehensive income (loss) - foreign currency translation adjustment 71,000 (63,000 ) 188,000 (299,000 )
Total comprehensive income (loss) $ 76,000 $ (162,000 ) $ 150,000 $ 6,541,000
~~See accompanying notes to consolidated financial statements (unaudited).~~
3
~~P&F INDUSTRIES, INC. AND SUBSIDIARIES~~
~~CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY~~ (unaudited)

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

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

Net loss (38,000 ) — — — (38,000 ) — — —

Restricted common stock compensation 30,000 5,000 5,000 25,000 — — — —

Stock - based compensation 20,000 — — 20,000 — — — —

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

Dividends (542,000 ) — — — (542,000 ) — — —

Purchase of Treasury stock (89,000 ) — — — — (12,000 ) (89,000 ) —

Foreign currency translation adjustment 188,000 — — — — — — 188,000
��
Balance, September 30, 2017 $ 47,221,000 4,203,000 $ 4,203,000 $ 12,996,000 $ 35,481,000 (596,000 ) $ (4,910,000 ) $ (549,000 )
~~See accompanying notes to consolidated financial statements (unaudited).~~
4
~~P&F INDUSTRIES, INC. AND SUBSIDIARIES~~
~~CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)~~
Nine months
ended September 30,
2017 2016
Cash Flows from Operating Activities:
Net loss from continuing operations $ (38,000 ) $ (5,590,000 )
Net income from discontinued operations — 12,430,000

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

Non-cash charges:
Depreciation and amortization 975,000 1,227,000
Amortization of other intangible assets 620,000 803,000
Amortization of debt issue costs 42,000 118,000
Recovery for losses on accounts receivable - net (12,000 ) —
Stock-based compensation 20,000 13,000
Restricted stock-based compensation 30,000 39,000
(Gain) loss on sale of fixed assets (8,000 ) 3,000
Deferred income taxes 142,000 (3,163,000 )
Fair value change in contingent consideration 14,000 —
Impairment of goodwill and other intangible assets — 8,311,000
Changes in operating assets and liabilities:
Accounts receivable (2,252,000 ) (2,166,000 )
Inventories 1,468,000 (681,000 )
Prepaid expenses and other current assets 2,154,000 (1,947,000 )
Other assets 45,000 60,000
Accounts payable 842,000 1,304,000
Accrued compensation and benefits (129,000 ) (209,000 )
Accrued other liabilities (623,000 ) 287,000
Other liabilities (14,000 ) (14,000 )
Total adjustments 3,314,000 3,985,000
Net cash provided by (used in) operating activities – continuing operations 3,276,000 (1,605,000 )
Net cash used in operating activities – discontinued operations — (653,000 )

Net cash provided by (used in) operating activities $ 3,276,000 $ (2,258,000 )
Three months Nine months
ended September 30, ended September 30,
2018 2017 2018 2017

Net revenue $ 17,662,000 $ 15,782,000 $ 49,592,000 $ 44,357,000
Cost of sales 11,064,000 10,198,000 31,695,000 28,377,000
Gross profit 6,598,000 5,584,000 17,897,000 15,980,000
Selling, general and administrative expenses 5,737,000 5,352,000 16,366,000 15,765,000
Operating income 861,000 232,000 1,531,000 215,000
Other expense (income), net 28,000 11,000 85,000 (13,000 )
Interest expense 66,000 50,000 158,000 124,000
Income before income taxes 767,000 171,000 1,288,000 104,000
Income tax expense 226,000 166,000 377,000 142,000
Net income (loss) $ 541,000 $ 5,000 $ 911,000 $ (38,000 )

Basic earnings (loss) per share $ 0.15 $ — $ 0.25 $ (0.01 )
Diluted earnings (loss) per share $ 0.14 $ — $ 0.24 $ (0.01 )

Weighted average common shares outstanding:

Basic 3,701,000 3,617,000 3,626,000 3,609,000
Diluted 3,784,000 3,777,000 3,738,000 3,609,000

Net income (loss) $ 541,000 $ 5,000 $ 911,000 $ (38,000 )
Other comprehensive (loss) income -foreign currency translation adjustment (32,000 ) 71,000 (91,000 ) 188,000
Total comprehensive income $ 509,000 $ 76,000 $ 820,000 $ 150,000

See accompanying notes to consolidated financial statements (unaudited).

5

P&F INDUSTRIES, INC. AND SUBSIDIARIES

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

Nine months
ended September 30,
2017 2016
Cash Flows from Investing Activities:
Capital expenditures $ (444,000 ) $ (894,000 )
Purchase of net assets of Jiffy Air Tool, Inc. (6,845,000 ) —
Purchase of patents (200,000 ) —
Proceeds from disposal of assets 8,000 30,000
Net cash used in investing activities – continuing operations (7,481,000 ) (864,000 )
Net cash provided by investing activities – discontinued operations — 20,149,000
Net cash (used in) provided by investing activities (7,481,000 ) 19,285,000

Cash Flows from Financing Activities:
Dividend payments (542,000 ) (2,156,000 )
Proceeds from exercise of stock options 62,000 23,000
Purchase of Class A Common Stock (89,000 ) (255,000 )
Net proceeds from short-term borrowings 2,334,000 10,536,000
Repayments of term loans — (6,343,000 )
Repayments of notes payable (14,000 ) (27,000 )
Payments of debt issue costs (74,000 ) (30,000 )
Net cash provided by financing activities – continuing operations 1,677,000 1,748,000
Net cash used in financing activities – discontinued operations — (18,716,000 )
Net cash provided by (used in) financing activities 1,677,000 (16,968,000 )

Effect of exchange rate changes on cash 34,000 (45,000 )
Net (decrease) increase in cash (2,494,000 ) 14,000
Cash at beginning of period 3,699,000 927,000
Cash at end of period $ 1,205,000 $ 941,000

Supplemental disclosures of cash flow information:

Cash paid for:
Interest $ 74,000 $ 123,000
Income taxes $ 342,000 $ 88,000

Supplemental disclosure of non-cash investing and financing activities:
Contingent consideration on acquisition $ 692,000 $ —
Class A common
stock, $1 par Additional
paid-in Retained Treasury stock Accumulated
other
comprehensive
Total Shares Amount capital earnings Shares Amount loss

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

Net income 911,000 — — — 911,000 — — —

Exercise of stock options 737,000 184,000 184,000 553,000 — — — —

Restricted common stock compensation 32,000 7,000 7,000 25,000 — — — —

Purchase of Class A common stock (589,000 ) — — — — (71,000 ) (589,000 ) —

Stock-based compensation 169,000 — — 169,000 — — — —

Dividends (544,000 ) — — — (544,000 ) — — —

Foreign currency translation adjustment (91,000 ) — — — — — — (91,000 )

Balance, September 30, 2018 $ 46,638,000 4,394,000 $ 4,394,000 $ 13,811,000 $ 34,822,000 (702,000 ) $ (5,768,000 ) $ (621,000 )

See accompanying notes to consolidated financial statements (unaudited).

6
P&F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Nine months
ended September 30,
2018 2017
Cash Flows from Operating Activities:
Net income (loss) $ 911,000 $ (38,000 )

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

Non-cash charges:
Depreciation and amortization 1,020,000 975,000
Amortization of other intangible assets 531,000 620,000
Amortization of debt issue costs 71,000 42,000
Amortization of costs for contribution to customer 42,000 —
Provision for (recovery of) losses on accounts receivable - net 242,000 (12,000 )
Stock-based compensation 169,000 20,000
Restricted stock-based compensation 32,000 30,000
Gain on sale of fixed assets (6,000 ) (8,000 )
Deferred income taxes 292,000 142,000
Fair value increase in contingent consideration 86,000 14,000
Changes in operating assets and liabilities:
Accounts receivable (2,914,000 ) (2,252,000 )
Inventories (618,000 ) 1,468,000
Prepaid expenses and other current assets 185,000 2,154,000
Other assets — 45,000
Accounts payable 582,000 842,000
Accrued compensation and benefits 73,000 (129,000 )
Accrued other liabilities (89,000 ) (623,000 )
Other liabilities (15,000 ) (14,000 )
Total adjustments (317,000 ) 3,314,000
Net cash provided by operating activities 594,000 3,276,000
See accompanying notes to consolidated financial statements (unaudited).
7
P&F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Nine months
ended September 30,
2018 2017
Cash Flows from Investing Activities:
Capital expenditures $ (1,757,000 ) $ (444,000 )
Purchase of net assets of Jiffy Air Tool, Inc. — (6,845,000 )
Purchase of patents — (200,000 )
Proceeds from disposal of assets 25,000 8,000
Net cash used in investing activities (1,732,000 ) (7,481,000 )

Cash Flows from Financing Activities:
Dividend payments (544,000 ) (542,000 )
Proceeds from exercise of stock options 737,000 62,000
Purchase of Class A common stock (589,000 ) (89,000 )
Net proceeds from short-term borrowings 1,679,000 2,334,000
Proceeds from long-term debt 400,000 —
Repayments of long-term debt (27,000 ) (14,000 )
Payment of debt issue costs (3,000 ) (74,000 )
Net cash provided by financing activities 1,653,000 1,677,000

Effect of exchange rate changes on cash (27,000 ) 34,000
Net increase (decrease) in cash 488,000 (2,494,000 )
Cash at beginning of period 1,241,000 3,699,000
Cash at end of period $ 1,729,000 $ 1,205,000

Supplemental disclosures of cash flow information:

Cash paid for:
Interest $ 83,000 $ 74,000
Income taxes $ 77,000 $ 342,000

Supplemental disclosures of non-cash investing and financing activities:
Contingent consideration on acquisition $ — $ 692,000
See accompanying notes to consolidated financial statements (unaudited).
8
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

NOTE 1 – BUSINESS AND SUMMARY OF ACCOUNTING POLICIES

Basis of Financial Statement Presentation

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

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

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

Principles of Consolidation

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

~~Reclassification~~Customer concentration
~~Certain amounts in the consolidated financial statements~~At September 30, 2018 and December 31, 2017, accounts receivable from The Home Depot was 42.3% and 31.0%, respectively, of ~~the Company have been reclassified to conform to classifications used in the current year. The reclassifications had no effect on previously reported results of operations or retained earnings.~~
~~Customer Concentration~~
~~The Company has one retail customer that during~~our total accounts receivable. Additionally, for the three and nine-month periods ended September 30, 2018, The Home Depot accounted for 35.1% and 28.1%, respectively of the Company’s revenue. During the same three and nine-month periods in 2017, The Home Depot accounted for 23.6% and 27.6%, respectively of the Company’s revenue. Whereas for the same three and nine-month periods in 2016, the Company had two retail customers that accounted for 45.3% and 43.4%, respectively, of the Company’s revenue. Additionally, the Company has two retail customers that, in the aggregate, at September 30, 2017 and December 31, 2016, accounted for 39.6% and 53.5%, respectively, of the Company’s accounts receivable.

~~Out - of - period Adjustment~~
During the preparation of the Company’s tax provision for the three and nine-month periods ended September 30, 2017, it determined that the effect of forfeitures, expiration and exercise of certain of its common stock options should have been reflected in its second quarter and six-month period ended June 30, 2017’s income tax provision. The Company has concluded that this error was immaterial based upon a qualitative and quantitative analysis. As such, the Company reflected such effect in its three and nine-month period ended September 30, 2017.
~~The Company~~
P&F is a Delaware corporation incorporated on April 19, 1963. Prior to February 11, 2016 (the “Nationwide Closing Date”), the effective date of the sale of its Nationwide Industries, Inc. (“Nationwide”) subsidiary, P&F operated in two primary lines of business or segments: (i) tools and other products (“Tools”) and (ii) hardware and accessories (“Hardware”). As a result of the sale of Nationwide, which had been reported in the Hardware segment, the Company currently only operates in the Tools business. See Note 2 to consolidated financial statements for further discussion.
79
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

~~Tools~~The Company

P&F is a Delaware corporation incorporated on April 19, 1963. The Company conducts its ~~Tools~~ business through a wholly-owned subsidiary, Continental Tool Group, Inc. (“Continental”), which in turn operates through its wholly-owned subsidiaries, Florida Pneumatic Manufacturing Corporation (“Florida Pneumatic”) and Hy-Tech Machine, Inc. (“Hy-Tech”). Exhaust Technologies Inc. (“ETI”) and Universal Air Tool Company Limited (“UAT”) are wholly-owned subsidiaries of Florida Pneumatic. Effective April 5, 2017, ~~Florida Pneumatic, through a wholly-owned subsidiary,~~the Company purchased substantially all of the operating assets, less certain payables of Jiffy Air Tool, Inc., through a wholly-owned subsidiary of Florida Pneumatic. See Note 32 to our consolidated financial statements for further discussion. ~~The~~Lastly, the business of Air Tool Service Company (“ATSCO”) operates through a wholly-owned subsidiary of Hy-Tech.

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

Hy-Tech designs, manufactures and ~~sells~~distributes industrial pneumatic tools, industrial gears, hydrostatic test plugs and a wide ~~range~~variety of ~~industrial products~~parts under the brands ATP, ATSCO, ~~Ozat,~~OZAT, Numatx, Thaxton and Quality Gear. These products, including heavy duty air tools, industrial grinders, impact sockets, hydro-pneumatic riveters, hydrostatic test plugs, air motors and custom gears, are all sold direct to major end users as well as through a broad network of Industrial and Fluid Power Distributors. Industries served include power generation, petrochemical, construction, railroad, mining, ship building and fabricated metals. Hy-Tech also manufactures components, assemblies, ~~and~~ finished product and systems for various Original Equipment Manufacturers under their own brand names.
~~Hardware~~
Prior to the Nationwide Closing Date, the Company conducted its Hardware business through its wholly-owned subsidiary, Countrywide Hardware, Inc. (“Countrywide”). Countrywide conducted its business operations through its wholly-owned subsidiary, Nationwide. Nationwide was an importer and manufacturer of door, window and fencing hardware and accessories, including rollers, hinges, window operators, sash locks, custom zinc castings and door closers. Effective as of the Nationwide Closing Date, Countrywide sold Nationwide to an unrelated third party for approximately $22,200,000. See Note 2 to consolidated financial statements for further discussion.

Management Estimates

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

810
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 1 – BUSINESS AND SUMMARY OF ACCOUNTING POLICIES – (Continued)
Significant Accounting Policies – Revenue Recognition
The Company’s significant accounting policies are described in "Note 1: Summary of Significant Accounting Policies" of its 2017 Form 10-K for the year ended December 31, 2017. The Company’s significant accounting policy relating to revenue recognition reflects the impact of the adoption of ASC 606, defined below, effective January 1, 2018. The Company records revenue based on a five-step model in accordance with Accounting Standards Codification ("ASC") 606,Revenue from Contracts with Customers ("ASC 606"). The Company sells its goods on terms which transfer title and risk of loss at a specified location, which may be our warehouse, destination designated by our customer, port of loading or port of discharge, depending on the final destination of the goods. Other than standard product warranty provisions, our sales arrangements provide for no other post-shipment obligations. The Company offers rebates and other sales incentives, promotional allowances or discounts for certain customers, typically related to customer purchase volume, and are classified as a reduction of revenue and recorded at the time of sale, using the most likely amount approach. The Company periodically evaluates whether an allowance for sales returns is necessary. Historically, we have experienced minimal sales returns. If the Company believes there are material potential sales returns, it would provide the necessary provision against sales.

The Company's performance obligations underlying its core revenue sources remain substantially unchanged. Its revenue is generated through the sale of finished products, and is generally recognized at the point in time when merchandise is transferred to the customer with a fixed payment due generally within 30 to 90 days, and in an amount that considers the impacts of estimated allowances. Further, the Company has made a policy election to account for shipping and handling activities that occur after the customer has obtained control of the products as fulfillment costs rather than as an additional promised service. This election is consistent with the Company’s prior policy, and therefore the adoption of ASC 606 relating to shipping and handling activities did not have any impact on its financial results. Additionally, as the result of the adoption of ASC 606, the Company accounts for certain expenses that in prior periods were accounted for as a selling expense, which are now treated as an adjustment to gross revenue. Accordingly, during the three and nine-month period ended September 30, 2018, the Company reduced its net revenue, gross margin and selling expenses by approximately $321,000 and $779,000 respectively. Additionally, the Company at September 30, 2018 has included in its allowance for doubtful accounts approximately $180,000 that would have been accounted for in its current liabilities prior to the adoption of ASC 606. There are no remaining performance obligations as of September 30, 2018.
11
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 1 – BUSINESS AND SUMMARY OF ACCOUNTING POLICIES – (Continued)
The Company analyzes its revenue as follows:
Revenue generated at Florida Pneumatic.
Three months ended September 30,
2018 2017
Revenue Percent of
revenue Revenue Percent of
revenue
Retail $ 6,343,000 45.2 % $ 5,212,000 42.4 %
Automotive 2,930,000 20.9 3,021,000 24.6
Industrial/catalog 1,592,000 11.3 1,228,000 10.0
Aerospace 3,015,000 21.5 2,564,000 20.8
Other 155,000 1.1 270,000 2.2
Total $ 14,035,000 100.0 % $ 12,295,000 100.0 %
Nine months ended September 30,
2018 2017
Revenue Percent of
revenue Revenue Percent of
revenue
Retail $ 14,649,000 37.8 % $ 15,976,000 45.7 %
Automotive 10,640,000 27.4 10,024,000 28.7
Industrial/catalog 4,718,000 12.2 3,812,000 10.9
Aerospace 8,229,000 21.2 4,426,000 12.7
Other 534,000 1.4 698,000 2.0
Total $ 38,770,000 100.0 % $ 34,936,000 100.0 %
Revenue generated at Hy-Tech.
Three months ended September 30,
2018 2017
Revenue Percent of
revenue Revenue Percent of
revenue
ATP brands $ 3,318,000 91.5 % $ 3,092,000 88.7 %
Other brands 309,000 8.5 395,000 11.3
Total $ 3,627,000 100.0 % $ 3,487,000 100.0 %
Nine months ended September 30,
2018 2017
Revenue Percent of
revenue Revenue Percent of
revenue
ATP brands $ 9,777,000 90.3 % $ 8,386,000 89.0 %
Other brands 1,045,000 9.7 1,035,000 11.0
Total $ 10,822,000 100.0 % $ 9,421,000 100.0 %
12
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

New Accounting Pronouncements

Recently Adopted

In ~~March 2016,~~January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting ~~Standard~~Standards Update (“ASU”) No. ~~2016-09,~~2017-04,~~Improvements~~Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which simplified the testing of goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measured a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. ASU 2017-04 is effective for public companies for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted. The Company concluded that ASU 2017-04 is preferable to ~~Employee Share-Based Payment Accounting~~the current guidance due to efficiency, since ASU 2017-04 eliminates the requirement to determine the fair value of individual assets and liabilities of a reporting unit to measure goodwill impairment. The Company adopted ASU 2017-04 in 2017, in conjunction with its annual impairment test of goodwill for all reporting units. The adoption of ASU 2017-04 did not have a material impact on the Company’s financial results.
In August 2016, the FASB issued ASU 2016-15,Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments. The ~~standard reduces complexity~~amendments in ~~several aspects of~~ASU 2016-15 are intended to add or clarify guidance on the ~~accounting for employee share-based compensation, including the income tax consequences,~~ classification of ~~awards as either equity or liabilities,~~certain cash receipts and ~~classification on~~payments in the statement of cash ~~flows. The~~flows, with the intent of reducing diversity in practice for the eight types of cash flows identified. ASU 2016-15 is effective for public companies' fiscal years, including interim periods within those fiscal years, beginning after December 15, 2017. The ~~impact~~adoption of ASU 2016-15 as of January 1, 2018 had no material effect on the Company’s financial position, results of operations or cash flows.
The Company adopted ASC 606 on the first day of fiscal 2018. Its underlying principle is to use a five-step analysis of transactions to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. The Company has elected to use the modified retrospective approach. As the Company did not have any sales contracts that were not completed as of January 1, 2018, there is no adjustment required to its retained earnings. The adoption of ASC 606 will not have an effect on the Company’s cash flows. Other than as discussed earlier in this Note 1, the adoption ~~was~~of ASC 606 did not have a material toeffect on the Company’s consolidated financial statements.

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

In February 2016, the FASB issued ASU ~~No.~~ 2016-02,Leases. This ASU is a comprehensive new leases standard that amends various aspects of existing guidance for leases and requires additional disclosures about leasing arrangements. It will require companies to recognize lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. ~~Accounting Standards Codification (“ASC”)~~ASC Topic 842 retains a distinction between finance leases and operating leases. The classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the previous leases guidance. The ASU is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years; earlier adoption is permitted. ~~In the financial statements~~The ASU offers two transition methods: (1) a modified retrospective approach, in which ~~the ASU is first applied,~~ leases shall be measured and recognized at the beginning of the earliest comparative period presented with an adjustment to ~~equity.~~equity in the financial statements in which the ASU is first applied or (2) a prospective approach, in which the Company is allowed to initially apply the new lease standard at the adoption date. The Company intends to use the prospective approach. Practical expedients are available for election. The Company iscurrently in the process of completing its assessment of all leases and is ~~currently evaluating~~assessing the impact of the adoption of this ~~guidance~~standard will have on its consolidated financial statements and related disclosures. Thus far the Company believes the adoption of this standard will not have a material effect on its consolidated financial statements. However, the Company will continue its evaluation of the standard update through the date of adoption.

913
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

~~New Accounting Pronouncements~~
~~Not Yet Adopted~~
In ~~May 2014,~~February 2018, the FASB issued No. ASU ~~No. 2014-09,~~2018-02,~~Revenue~~Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from ~~Contracts with Customers~~, as a new Topic, ASC Topic 606, which supersedes existing accounting standards for revenue recognition and creates a single framework. Additional updates to Topic 606 issued by the FASB in 2015 and 2016 include the following:
· ~~ASU No. 2015-14,~~~~Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date~~~~, which defers the effective date of the new guidance such that the new provisions will now be required for fiscal years, and interim periods within those years, beginning after December 15, 2017;~~
· ~~ASU No. 2016-08,~~~~Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations~~~~, which clarifies the implementation guidance on principal versus agent considerations (reporting revenue gross versus net);~~
· ~~ASU No. 2016-10,~~~~Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing~~~~, which clarifies the implementation guidance on identifying performance obligations and classifying licensing arrangements;~~
· ~~ASU No. 2016-12,~~~~Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients~~~~, which clarifies the implementation guidance in a number of other areas.~~
The underlying principle is to use a five-step analysis of transactions to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. The standard permits the use of either a retrospective or modified retrospective application. The Company is in the final assessment phaseof what impact, if any, the new revenue standard and related updates will have on its consolidated financial statements and related disclosures, and based on its preliminary assessment, other than additional disclosures in its Notes to its consolidated financial statements, there will be no material impact to its consolidated financial statements.~~The standard update, as amended, will be effective for annual periods beginning after December 15, 2017.~~
~~In January 2017, the FASB issued ASU No. 2017-04,~~~~Intangibles – Goodwill and~~Accumulated Other ~~(Topic 350): Simplifying the Test for Goodwill Impairment~~Comprehensive Income (“ASU ~~2017-04”~~2018-02”),~~which simplified~~. Under ASU 2018-02, an entity may elect to reclassify the ~~testing~~income tax effects of ~~goodwill for impairment by eliminating Step 2 from~~ the ~~goodwill impairment test. Step 2 measured a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill.~~Tax Reform Act on items within accumulated other comprehensive income to retained earnings. ASU ~~2017-04~~2018-02 is effective for ~~public companies for its annual or any interim goodwill impairment tests in~~ fiscal years beginning after December 15, ~~2019.~~2018, and interim periods within those fiscal years. Early adoption is permitted in any interim period. The Company is ~~currently~~ evaluating ~~the effects that the~~what impact, if any, adoption of ASU ~~2017-04 will~~2018-02 may have on its consolidated financial statements.
The SEC has recently issued a final rule (“Rule”) that amends certain of their disclosure requirements that have become redundant, duplicative, overlapping, outdated, or superseded, in light of other SEC disclosure requirements, or changes in the information environment. A financial reporting implication of the Rule addresses interim disclosure changes in stockholders’ equity and non-controlling interests.
Under the requirements in SEC Regulation S-X, Rules 8-03(a)(5) and 10-01(a)(7), as amended by the Rule, registrants must now analyze changes in stockholders’ equity, in the form of a reconciliation, for the current and comparative year-to-date interim periods, with subtotals for each interim period.
                The Rule is effective for all filings submitted on or after November 5, 2018. However, the SEC issued guidance that provides some relief to registrants that file Form 10-Q shortly after the Rule’s effective date. It clarifies that the SEC Staff would not object if a filer’s first presentation of changes in shareholders’ equity is included in its Form 10-Q for the quarter that begins after the final rule’s November 5, 2018, effective date given that date’s close proximity to the filing date for most filers’ quarterly reports.
Other Accounting Pronouncement
The Tax Cuts and Jobs Act (the “Act”) was enacted on December 22, 2017. The Act reduces the U.S. federal corporate income tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries previously deferred from tax, generally eliminates U.S federal income taxes on dividends from foreign subsidiaries and creates a new provision designed to tax global intangible low-taxed income (“GILTI”). Also, on December 22, 2017, the Staff of the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides for a measurement period of up to one year from the enactment for companies to complete their accounting for the Act. The Company is applying the guidance in SAB 118 when accounting for the enactment-date effects of the Act.
At September 30, 2018 the Company has not completed its accounting for the tax effects of the Act, but has made reasonable estimates of the effects on the re-measurement of its deferred tax assets and liabilities as well as its transition tax liability. During the three and nine-month period ended September 30, 2018, the Company made no adjustments to the provisional amounts recorded at December 31, 2017.
The Act also subjects a U.S. shareholder to tax on GILTI earned by certain foreign subsidiaries. Under GAAP, the Company is permitted to make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only. Given the complexity of the GILTI provisions, the Company is still evaluating the effects of the GILTI provisions and has not yet made an accounting policy election. As of September 30, 2018, because the Company is still evaluating the GILTI provisions, the Company has included tax expense related to GILTI for the current year in the estimated annual effective tax rate and have not provided additional GILTI on deferred items.

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

10
~~P&F INDUSTRIES, INC. AND SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)~~
NOTE 2 ~~– DISCONTINUED OPERATIONS~~
~~Sale of Nationwide Industries, Inc.~~
The Company, as part of its strategic plan to focus on expanding its position in the power-tool and accessories market, sold Nationwide in February 2016. On the Nationwide Closing Date, P&F, Countrywide, Nationwide and Argosy NWI Holdings, LLC, a Delaware limited liability company (“Buyer”), entered into a Stock Purchase and Redemption Agreement (the “Stock Purchase Agreement”), pursuant to which, among other things, after giving effect to certain contributions and redemptions of Nationwide’s common shares (“Nationwide Shares”), the Buyer acquired all of the outstanding Nationwide Shares from Countrywide (the “Acquisition”). The purchase price for the Nationwide Shares acquired in the Acquisition was approximately $22,200,000, before giving effect to an estimated working capital adjustment, as defined in the Stock Purchase Agreement, of approximately $802,000 in favor of the Buyer. Further, in accordance with the Stock Purchase Agreement, the Company placed into escrow $1,955,000 (“escrow funds”), of which $250,000 related to the final working capital adjustment. Pursuant to the terms of the Stock Purchase Agreement, the final working capital adjustment amount was determined to be approximately $75,000 in the Company’s favor. As a result, during the three-month period ended June 30, 2016, the $250,000 portion of the escrow funds was released to the Company, and the final working capital adjustment amount of $75,000 was paid to the Company by the Buyer. In connection with the Acquisition, Countrywide agreed that, should it sell the real property it owned in Tampa, Florida (the “Premises”), it will contribute an additional $400,000 into the escrow funds. In November 2016, the Premises were sold, and as a result Countrywide contributed the additional $400,000 into the aforementioned escrow funds which, at that time, aggregated to approximately $2,105,000. In accordance with the Stock Purchase Agreement, in August 2017, as no claims were made against the Escrow funds, the Company received the full amount of the escrow plus interest.
~~At the closing of the Acquisition, after paying closing costs, the net cash received from the Buyer was approximately $18,700,000.~~
As Nationwide was a substantial and unique business unit of the Company, its sale was a strategic shift. Accordingly, in accordance with ASC Topic 360, the Company, in 2016, classified Nationwide as a discontinued operation.
~~The net income from discontinued operations, net of taxes in 2016 presented in the accompanying Consolidated Statements of Operations and Comprehensive Income (Loss), is comprised of the following:~~
January 1, 2016
through February
11, 2016

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

Net income $ 72,000
  The Company recognized a gain of $12,185,000, on the sale of Nationwide during the three-month period ended March 31, 2016, which represents the difference between the adjusted net purchase price and the carrying book value of Nationwide. During the three-month period ended June 30, 2016, the Company incurred an additional $14,000 in expenses related to the sale. For income tax purposes, the Company’s tax basis in Nationwide was greater than the net proceeds, thus resulting in a tax loss. This tax loss may only be applied against future capital gain transactions. During the three-month period ended March 31, 2016; the Company recorded a tax benefit of $141,000, net of a valuation allowance against the gain on sale. In November 2016, Countrywide completed the sale of the real property located in Tampa Florida, which was treated as a capital gain transaction for tax purposes. As a result, during the three-month period ended September 30, 2016, the Company removed the valuation allowance initially recorded against the tax loss, resulting in an additional $187,000 tax benefit recorded against the gain on sale.
11
~~P&F INDUSTRIES, INC. AND SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)~~
~~NOTE 3~~ – ACQUISITION

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

Additionally, ~~the~~ Jiffy Seller may be entitled to up to $1,000,000 in additional consideration, which is contingent upon Jiffy achieving certain revenue thresholds and other criteria as set forth in the Asset Purchase Agreement within two defined measurement periods occurring within approximately the first two years following the Jiffy Closing Date.  As of September 30, 2018, the Company has estimated the fair value of this contingent consideration to be $936,000.

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

14
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 2 – ACQUISITIONS – (Continued)
The initial total consideration ($5,950,000 plus $1,050,000) ~~was~~ paid ~~by Jiffy~~ to ~~the~~ Jiffy Seller was from funds available under the Revolver, as defined in Note ~~10, pursuant to the Second Amended and Restated Loan Agreement (defined below),~~9, less certain amounts escrowed pursuant to ~~among others,~~ the terms of the Agreements.

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

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

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

12
~~P&F INDUSTRIES, INC. AND SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)~~
~~NOTE 3 – ACQUISITION – (Continued)~~
The excess of the total purchase price over the fair value of the net assets acquired, including the value of the identifiable intangible assets, has been allocated to goodwill. Goodwill will be amortized over 15 years for tax purposes, but not deductible for financial reporting purposes. The intangible assets subject to amortization will be amortized over 15 years for tax purposes. For financial reporting purposes, useful lives have been assigned as follows:

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

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

Three months ended Nine months ended
September 30, September 30,
2016 2017 2016
Revenue $ 16,400,000 $ 45,835,000 $ 50,092,000
Net (loss) income from continuing operations $ (23,000 ) $ 68,000 $ (5,002,000 )
(Loss) earnings per share – basic $ (0.01 ) $ 0.02 $ (1.39 )
(Loss) earnings per share – diluted $ (0.01 ) $ 0.02 $ (1.39 )
Nine months ended
September 30, 2017
Revenue $ 45,835,000
Net Income $ 68,000
Earnings per share – Basic $ 0.02
Earnings per share – Diluted $ 0.02

1315
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

NOTE 43 – EARNINGS (LOSS) PER SHARE

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

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

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

Three months ended Nine months ended Three months ended Nine months ended
September 30, September 30, September 30, September 30,
2017 2016 2017 2016 2018 2017 2018 2017
Numerator for basic and diluted earnings (loss) per common share:

Net income (loss) from continuing operations $ 5,000 $ (286,000 ) $ (38,000 ) $ (5,590,000 )
Net income from discontinued operations — 187,000 — 12,430,000
Net income (loss) $ 5,000 $ (99,000 ) $ (38,000 ) $ 6,840,000 $ 541,000 $ 5,000 $ 911,000 $ (38,000 )

Denominator:
For basic earnings (loss) per share - weighted average common shares outstanding 3,617,000 3,598,000 3,609,000 3,598,000
Denominator for basic earnings (loss) per share - weighted average common shares outstanding 3,701,000 3,617,000 3,626,000 3,609,000
Dilutive securities⁽¹⁾ 160,000 — — — 83,000 160,000 112,000 —
For diluted earnings (loss) per share - weighted average common shares outstanding 3,777,000 3,598,000 3,609,000 3,598,000
Denominator for diluted earnings (loss) per share - weighted average common shares outstanding 3,784,000 3,777,000 3,738,000 3,609,000

⁽¹⁾ Dilutive securities consist of “in the money” stock options.

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

Three months ended Nine months ended
September 30, September 30,
2017 2016 2017 2016
Weighted average antidilutive stock options outstanding 138,000 73,000 86,000 78,000

Three months ended Nine months ended
September 30, September 30,
2018 2017 2018 2017
Weighted average antidilutive stock options outstanding — 138,000 16,000 86,000
16
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

NOTE 54 – EQUITY
There were no options granted or issued during the three and nine-month periods ended September 30, 2018.
The following is a summary of the changes in outstanding options during the nine-month period ended September 30, 2018:
Option Shares Weighted
Average
Exercise
Price Weighted Average
Remaining
Contractual Life
(Years) Aggregate
Intrinsic
Value
Outstanding, January 1, 2018 418,233 $ 5.17 3.8 $ 1,343,442
Granted — —
Exercised (184,480 ) $ 3.99
Forfeited — —
Expired — —
Outstanding, September 30, 2018 233,753 $ 6.10 5.6 $ 503,155
Vested, September 30, 2018 174,420 $ 5.76 4.5 $ 434,328
Option Shares Weighted
Average Grant-
Date Fair Value
Non-vested options, January 1, 2018 89,000 $ 4.41
Granted — —
Vested (29,667 ) 4.41
Forfeited — —
Non-vested options, September 30, 2018 59,333 $ 4.41
The number of shares of Common Stock available for issuance under the P&F Industries, Inc. 2012 Stock Incentive Plan (the “2012 Plan”) as of September 30, 2018 was 79,437. At September 30, 2018, there were 184,253 options outstanding issued under the 2012 Plan and 49,500 options outstanding issued under the 2002 Stock Incentive Plan.
Restricted Stock
The Company, in May 2018, granted 1,250 restricted shares of its Common Stock to each non-employee member of its Board of Directors, totaling 6,250 restricted shares. The Company determined that the fair value of these shares was $8.43 per share, which was the closing price of the Company’s Common Stock on the date of the grant. These shares cannot be traded earlier than the first anniversary of the grant date. The Company will ratably amortize the total non-cash compensation expense of approximately $53,000, which is included in its selling, general and administrative expenses through May 2019.
The Company, in May 2017, granted 1,000 restricted shares of its common stock to each non-employee member of its Board of Directors, totaling 5,000 restricted shares. The Company determined that the fair value of these shares was $6.17 per share, which was the closing price of the Company’s Common Stock on the date of the grant. These shares could not have been traded earlier than the first anniversary of the grant date. The Company ratably amortized the total non-cash compensation expense of approximately $30,000 which was included in its selling, general and administrative expenses.
17
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 4 – EQUITY – ~~COMMON STOCK REPURCHASE PLAN~~(Continued)

Treasury Stock
On August 9, 2017, the Company’s Board of Directors authorized the Company to repurchase up to 100,000 shares of its common stock over a period of up to twelve months (the ~~“Repurchase~~“2017 Repurchase Program”).
On August 24, 2017, the Company announced that, pursuant to the 2017 Repurchase Program, it had adopted a written trading plan in accordance with the guidelines specified under Rule 10b5-1 under the Securities Exchange Act of 1934. A plan under Rule 10b5-1 allows the Company to repurchase shares at times when it might otherwise be prevented from doing so by securities laws or because of self-imposed trading blackout periods. Repurchases made under the plan are subject to the SEC’s regulations, as well as certain price, market, volume, and timing constraints specified in the plan. Under the 2017 Repurchase Program, the Company repurchased 94,600 shares of its common stock at an aggregate cost of approximately $753,000.
Additionally, in June 2018, the Company purchased 18,140 shares of its common stock in a privately negotiated transaction outside of the Repurchase Program pursuant to an additional authorization of the Company’s Board of Directors at a total cost of $150,000. The purchase price per share was equal to five percent below the average of the closing price of its common stock for the three days prior to the transaction.
On September 12, 2018, the Company’s Board of Directors authorized the Company to repurchase up to 100,000 additional shares of the Company’s common stock (the “2018 Repurchase Program”) from time to time over the next twelve months through a 10b5-1 trading plan, and potentially through open market purchases, privately-negotiated transactions, or otherwise in compliance with Rule 10b-18 under the Securities ~~and~~ Exchange ~~Commission's~~Act of 1934. On September 14, 2018, the Company announced that, pursuant to the 2018 Repurchase Program, it had adopted a written trading plan in accordance with the guidelines specified under Rule 10b5-1 under the Securities Exchange Act of 1934. Repurchases made under the plan, that commenced on September 17, 2018, are subject to the SEC’s regulations, as well as certain price, market, volume, and timing constraints specified in the plan. Since repurchases under the plan are subject to certain constraints, there is no guarantee as to the exact number of shares that will be repurchased under the plan.
As The actual timing, number and value of shares repurchased under the program will depend on a number of factors, including the constraints specified in the 10b5-1 trading plan, price, general business and market conditions, and alternative investment opportunities. Since the inception of the 2018 Repurchase Program through September 30, ~~2017,~~2018, the Company repurchased ~~12,365~~5,265 shares of its ~~Common Stock pursuant to the Repurchase Program.~~
14
~~P&F INDUSTRIES, INC. AND SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)~~
~~NOTE 5 – EQUITY – COMMON STOCK REPURCHASE PLAN – (Continued)~~
~~Stock option compensation~~
~~The Company accounts for stock-based compensation, including options and non-vested shares, according to the provisions of FASB ASC 718,~~~~Share Based Payment~~.
On September 5, 2017 (“Grant Date”), the compensation committee of Company’s Board of Directors authorized the issuance of 89,000 options to purchase shares of the Company’s Class A Common Stock under the Company’s 2012 Stock Incentive Plan.  The options expire ten years from the Grant Date. The Company grantedcommon stock at an aggregate of 55,000 of these options to its Chief Executive Officer and its Chief Financial Officer, with the balance to non-executive employees of the Company.   All options granted on the Grant Date vest one-third on each of the first three anniversaries of the Grant Date. Further, all options granted on the Grant Date have an exercise price of $7.09, which was the closing price of the Company’s common stock on the Grant Date.
Stock option compensation expense is attributable to the granting of, and the remaining requisite service periods of, stock options. Compensation expense attributable to stock-options was approximately $20,000 and $0 during the three-month periods ended September 30, 2017 and 2016, respectively. Compensation expense attributable to stock-options was approximately $20,000 and $13,000 during the nine-month periods ended September 30, 2017 and 2016, respectively.  The compensation expense is recognized in selling, general and administrative expenses on the Company’s Statements of Operations and Comprehensive Income (Loss) on a straight-line basis over the vesting periods.  The exercisability of the respective non-vested options, which are at pre-determined dates on a calendar year, does not necessarily correspond to the period(s) in which straight-line amortization of compensation cost is recorded. As of September 30, 2017, the Company had approximately $373,000 of total unrecognized compensation cost related to non-vested awards granted under its stock-based plans, which it expects to recognize over a weighted average period of 1.9 years. The expected term of stock options is based on historical exercises and terminations. The volatility is determined using historical volatilities based on historical stock prices.
~~The Company estimated the fair value of these options using the following assumption:~~

Risk-free interest rate 2.07 %
Expected term (in years) 10 years
Volatility 87.16 %
Dividend yield 2.82 %
Weighted average fair value of options granted $ 4.41
~~The following is a summary of the changes in outstanding options during the nine-month period ended September 30, 2017:~~
Option Shares Weighted
Average
Exercise
Price Weighted Average
Remaining
Contractual Life
(Years) Aggregate
Intrinsic
Value
Outstanding and vested, January 1, 2017 423,817 $ 5.68 2.9 $ 1,271,704
Granted 89,000 7.09
Exercised (16,722 ) 3.65
Forfeited (6,793 ) 7.86
Expired (71,069 ) 10.72
Outstanding, September 30, 2017 418,233 $ 5.17 4.1 $ 907,347

Vested, September 30, 2017 329,233 $ 4.65 2.5 $ 891,327
15
~~P&F INDUSTRIES, INC. AND SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)~~
~~NOTE 5 – EQUITY – COMMON STOCK REPURCHASE PLAN – (Continued)~~
Option Shares Weighted Average Grant-
Date Fair Value
Non-vested options, January 1, 2017 — $ —
Granted 89,000 4.41
Vested — —
Forfeited — —
Non-vested options, September 30, 2017 89,000 $ 4.41
The number of shares of Common Stock available for issuance under the P&F Industries, Inc. 2012 Stock Incentive Plan (the “2012 Plan”) as of September 30, 2017 was 88,812. At September 30, 2017, there were 192,233 options outstanding issued under the 2012 Plan and 226,000 options outstanding issued under the 2002 Stock Incentive Plan.
~~Restricted Stock~~
The Company, in May 2017, granted 1,000 restricted shares of its Common Stock to each non-employee member of its Board of Directors, totaling 5,000 restricted shares. The Company determined that the fair value of these shares was $6.17 per share, which was the closing price of the Company’s Common Stock on the date of the grant. These shares cannot be traded earlier than the first anniversary of the grant date. As such, the Company is ratably amortizing the total non-cash compensation expense of approximately ~~$30,000 in its selling, general and administrative expenses through May 2018.~~$44,000.
The Company, in May 2016, granted 1,000 restricted shares of its Common Stock to each non-employee member of its Board of Directors, totaling 5,000 restricted shares. The Company determined that the fair value of these shares was $8.72 per share, which was the closing price of the Company’s Common Stock on the date of the grant. These shares could not have been traded earlier than the first anniversary of the grant date. As such, the Company ratably amortized the total non-cash compensation expense of approximately $44,000 in its selling, general and administrative expenses through May 2017.

NOTE 65 – FAIR VALUE MEASUREMENTS

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

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

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

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

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

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

The fair value of the prepaid expenses and other current assets at December 31, 2016 consisted primarily of escrowed funds from the sale of Nationwide, which was estimated to be the same as its carrying value, based on Level 3 inputs. In August 2017, the Company received the entire $2,105,000, in accordance with the terms and conditions set forth in the Stock Purchase Agreement.
The fair value of the contingent consideration payable to the Jiffy Seller, of ~~$706,000,~~$936,000, included in other current liabilities as of September 30, 2018 was determined applying Level 3 inputs. The fair value of this contingent consideration is being adjusted quarterly.
16
~~P&F INDUSTRIES, INC. AND SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)~~
~~NOTE 6 – FAIR VALUE MEASUREMENTS – (Continued)~~

Assets and liabilities measured at fair value on a non-recurring basis include goodwill and intangible assets. Such assets are reviewed quarterly for impairment indicators. If a triggering event has occurred, the assets are re-measured when the estimated fair value of the corresponding asset group is less than the carrying value. The fair value measurements, in such instances, are based on significant unobservable inputs (Level 3).
18
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

NOTE 76 – ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

Accounts receivable - net consists of:

September 30, 2017 December 31, 2016 September 30, 2018 December 31, 2017
Accounts receivable $ 11,067,000 $ 7,991,000 $ 12,095,000 $ 10,199,000
Allowance for doubtful accounts (73,000 ) (85,000 )
Allowance for doubtful accounts, sales discounts and chargebacks (394,000 ) (152,000 )
$ 10,994,000 $ 7,906,000 $ 11,701,000 $ 10,047,000
Florida Pneumatic agreed to contribute $1,000,000 to The Home Depot (“THD”). This contribution is consideration payable to a customer. This contribution will be in the form of deductions taken by THD from its remittances to the Company. We anticipate that these deductions will occur during the fourth quarter of 2018. Accordingly, accounts receivable is reduced to reflect the $1 million contribution to THD. As this contribution will benefit future periods, a portion is accounted for as Prepaid expenses and other current assets, with the balance in Other assets. This contribution is being amortized over a four year period, which approximates historical time-frames for similar contributions beginning August 2018, the period in which the Company shipped a new line of products to THD.

NOTE 87 – INVENTORIES

Inventories consist of:

September 30, 2017 December 31, 2016 September 30, 2018 December 31, 2017
Raw material $ 1,681,000 $ 1,918,000 $ 2,066,000 $ 1,871,000
Work in process 1,642,000 658,000 2,106,000 1,556,000
Finished goods 16,767,000 17,325,000 16,068,000 16,230,000
$ 20,090,000 $ 19,901,000 $ 20,240,000 $ 19,657,000

NOTE 98 – GOODWILL AND OTHER INTANGIBLE ASSETS

Changes in the carrying amount of goodwill are as follows:

Balance, January 1, 2017 $ 3,897,000
Acquisition of Jiffy Air Tool, Inc. 534,000
Currency translation adjustment 14,000
Balance, September 30, 2017 $ 4,445,000
Balance, January 1, 2018 $ 4,447,000
Currency translation adjustment (7,000 )
Balance, September 30, 2018 $ 4,440,000

Other intangible assets were as follows:

September 30, 2017 December 31, 2016 September 30, 2018 December 31, 2017
Cost Accumulated
amortization Net book
value Cost Accumulated
amortization Net book
value Cost Accumulated
amortization Net book
value Cost Accumulated
amortization Net book
value
Other intangible assets:
Customer relationships (1) $ 6,834,000 $ 1,427,000 $ 5,407,000 $ 5,143,000 $ 1,022,000 $ 4,121,000 $ 6,827,000 $ 1,994,000 $ 4,833,000 $ 6,836,000 $ 1,570,000 $ 5,266,000
Trademarks and trade names (1) 2,326,000 — 2,326,000 1,507,000 — 1,507,000 2,316,000 — 2,316,000 2,329,000 — 2,329,000
Trademarks and trade names ~~(2)~~ 200,000 15,000 185,000 200,000 5,000 195,000 200,000 29,000 171,000 200,000 19,000 181,000
Engineering drawings 330,000 168,000 162,000 330,000 148,000 182,000 330,000 195,000 135,000 330,000 175,000 155,000
Non-compete agreements (1) 238,000 201,000 37,000 212,000 150,000 62,000 235,000 224,000 11,000 239,000 210,000 29,000
Patents ~~(3)~~ 1,405,000 813,000 592,000 1,205,000 666,000 539,000 1,405,000 887,000 518,000 1,405,000 832,000 573,000
Totals $ 11,333,000 $ 2,624,000 $ 8,709,000 $ 8,597,000 $ 1,991,000 $ 6,606,000 $ 11,313,000 $ 3,329,000 $ 7,984,000 $ 11,339,000 $ 2,806,000 $ 8,533,000

(1) A portion of these intangibles are maintained in a foreign currency, and are therefore subject to foreign exchange rate fluctuations.
~~(2)~~ These were previously considered an indefinite-lived intangible asset of Hy-Tech.  However, as the result of a prior impairment, the Company began amortizing these intangible assets over a 15 year useful life.
~~(3)~~ ~~The $200,000 increase represents a patent acquired during the third quarter of 2017.~~

Amortization expense of intangible assets subject to amortization was as follows:
Three months ended September 30, Nine months ended September 30,
2018 2017 2018 2017
$ 172,000 $ 181,000 $ 531,000 $ 620,000
1719
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

NOTE 98 – GOODWILL AND OTHER INTANGIBLE ASSETS – (Continued)

~~Amortization expense of intangible assets from continuing operations subject to amortization was as follows:~~
Three months ended September 30, Nine months ended September 30,
2017 2016 2017 2016
$ 181,000 $ 217,000 $ 620,000 $ 803,000
The weighted average amortization period for intangible assets was as follows:

September 30, 2017 December 31, 2016 September 30, 2018 December 31, 2017
Customer relationships 10.4 9.3 9.5 10.1
Trademarks and trade names (see note 2 to the table above) 13.8 14.5
Trademarks and trade names 12.8 13.5
Engineering drawings 8.3 8.8 7.8 8.1
Non-compete agreements 1.9 1.2 2.5 1.8
Patents 9.0 6.1 8.2 8.8

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

2018 $ 709,000
2019 686,000 $ 686,000
2020 653,000 652,000
2021 638,000 637,000
2022 635,000 635,000
2023 635,000
Thereafter 3,062,000 2,423,000
$ 6,383,000 $ 5,668,000
20
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

NOTE 109 – DEBT

In October 2010, the Company entered into a Loan and Security Agreement ~~(as amended from time to time, “Credit~~(“Credit Agreement”) with an affiliate of Capital One, National Association (“Capital One”, or the “Bank”). The Credit Agreement, as amended from time to time, among other things, provides ~~for~~the ability to borrow funds under a Revolver ~~Loan (“Revolver”),~~arrangement. Revolver borrowings ~~under which~~ are secured by the Company’s accounts receivable, ~~mortgages on its~~inventory, equipment and real ~~property~~property. Additionally, there is a $1,600,000 line available for capital expenditures (“~~Real Property”~~Capex line”)~~, inventory~~. The Credit Agreement includes a $100,000 Term Loan, as defined in the Credit Agreement. This Term Loan remains in place to enable the Company and ~~equipment.~~Capital One to facilitate future term loan borrowings more efficiently and in a less costly manner. P&F and certain of its subsidiaries are borrowers under the Credit Agreement, and their obligations are cross-guaranteed by certain other subsidiaries. The Credit Agreement expires in February 2019, unless extended by the parties.
At the Company’s option, Revolver borrowings ~~will~~ bear interest at either LIBOR (“London InterBank Offered ~~Rate (“LIBOR”~~Rate”) or the Base Rate, as the term is defined in the Credit Agreement, plus ~~the~~an Applicable Margin, as defined in the Credit Agreement. ~~Further, the interest rate, either LIBOR or Base Rate, which is added~~We are subject to ~~the Applicable Margin, is at the option of the Company. The Company is limited as to~~limitations on the number of LIBOR borrowings.

Contemporaneously with the acquisition of the Jiffy ~~Acquisition,~~business discussed in Note 2 to the consolidated financial statements, the Company entered into a Second Amended and Restated Loan and Security Agreement, ~~effective as of the Jiffy Closing Date~~ (the ~~“Second Amended and Restated Loan~~“2017 Agreement”), with Capital One. The ~~Second Amended and Restated Loan Agreement amended and restated the Credit Agreement.~~
~~The Second Amended and Restated Loan~~2017 Agreement, among other things, amended the Credit Agreement by: (1) increasing the maximum amount ~~the Company~~it can borrow under the Revolver Commitment (as ~~defined in the Second Amended and Restated Loan Agreement)~~defined) to $16,000,000, subject to certain borrowing base criteria, and (2) modifying certain borrowing base criteria as well as financial and other covenants. The Company incurred $84,000 of debt issue costs in connection with this 2017 Agreement.

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

18
~~P&F INDUSTRIES, INC. AND SUBSIDIARIES~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)~~
~~NOTE 10 – DEBT – (Continued)~~
SHORT–TERM BORROWINGS
In connection with the Company’s common stock repurchase plan discussed in Note 5, the Company and the Bank amended the Second Amended and Restated Loan Agreement to permit the Company to implement the plan. Among other things, the amendment also reduced the Fixed Charge Coverage Ratio, as defined in the Credit Agreement.
~~Short-term Borrowings~~
The Company had no revolver borrowings at December 31, 2016, whereas at September 30, 2017, its Revolver borrowings were $2,334,000. During the nine-month period ended September 30, 2017, the primary item impacting the Company’s Revolver borrowings was the acquisition discussed in Note 3. The Applicable Margin added to LIBOR borrowings at September 30, 2017 was 1.75%, compared to 1.50% at December 31, 2016. The Applicable Margin added to the Base Rate (Prime rate) borrowings at September 30, 2017 was 0.75% and 0.50% at December 31, 2016.
~~The Company owns vehicles for use by its UAT salesforce. The current portion of the balance due relating to these vehicles is $0 at September 30, 2017 and $13,000 at December 31, 2016.~~
~~Long-term Borrowings~~

~~The Credit Agreement, as amended, provides for a Term Loan A, which is secured by mortgages on the Company’s Real Property, accounts receivable, inventory and equipment. Term Loan A~~Short-term borrowings can be at either LIBOR or at the Base Rate, or a combination of the two, plus the Applicable Margins. At September 30, 2018 and December 31, 2017, the Company’s short-term borrowings were $3,607,000 and $1,928,000, respectively. The Applicable LIBOR Margin ~~added to~~at September 30, 2018 and December 31, 2017 was 1.50%, and the Applicable Base Rate Margin was 0.50% at both dates.
21
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 9 – DEBT – (Continued)
TERM LOAN BORROWINGS
The Term Loan borrowings can be at either LIBOR or at the Base Rate, or a combination of the two, plus the Applicable Margins. LIBOR borrowings at September 30, ~~2017 was 1.75%~~2018 and ~~1.50% at~~ December 31, ~~2016.~~2017 were 1.50%. The Applicable Margin for borrowings at the Base Rate ~~(Prime rate)~~ for the same timeframes was ~~0.75%~~0.50%. At September 30 2018, the Company had a $100,000 Term Loan, which is included in Current maturities of long-term debt on the consolidated balance sheet. At December 31, 2017, this obligation was included in Long-term debt, less current maturities on the consolidated balance sheet. At both September 30, 2018 and December 31, 2017 this Term Loan was at LIBOR plus the Applicable Margin.
In April 2018, the Company borrowed $400,000 against the Capex line. This borrowing is to be repaid in equal principle installments of approximately $6,700, payable monthly, with the balance due in February 2019, unless the Credit Agreement is renewed or extended by the parties. $300,000 of this borrowing is at LIBOR plus Applicable Margin, with the balance of $100,000 at the Base Rate, or prime rate plus Applicable Margin. The Applicable Margin added to the all Base Rate, and LIBOR borrowings were 1.50% and 0.50%, respectively. ~~A portion of~~At September 30, 2018, the ~~net proceeds from~~balance due on the ~~sale of Nationwide repaid all but $100,000 of Term Loan A. This balance is being borrowed~~Capex loan was $373,000. While the Company intends to renew or extend the Credit Agreement currently in place, this obligation at ~~the LIBOR Rate, and~~September 30, 2018, is included in Current maturities of long-term debt ~~less debt issue costs~~ on ~~the Company’s Consolidated Balance Sheets at September 30, 2017 and December 31, 2016.~~its consolidated balance sheet.

~~In accordance with ASU No. 2015-03, the Company reduced its long-term debt by $8,000 and $12,000, respectively, relating to debt issue costs as of September 30, 2017 and December 31, 2016.~~The Company’s Term loan borrowings are:
September 30, 2018 December 31, 2017
Term Loan $ 100,000 $ 100,000
Capex borrowing 373,000 —
Debt issue costs (2,000 ) (6,000 )
471,000 94,000
Less current maturities 471,000 —
$ — $ 94,000

NOTE 1110 – DIVIDEND PAYMENTS

On August ~~10, 2017,~~9, 2018, the Company’s Board of Directors, in accordance with ~~their~~its dividend policy, declared a quarterly cash dividend of $0.05 per common share, which was paid on August ~~25, 2017,~~24, 2018, to shareholders of record at the close of business on August ~~21, 2017.~~20, 2018. The total amount of this dividend payment was approximately ~~$180,000.~~$185,000. During the nine-month period ended September 30, ~~2017,~~2018, the Company ~~has~~ paid approximately ~~$542,000~~$544,000 in ~~dividends. The Company currently intends to continue its quarterly~~ dividend ~~payment; however, it will review its policy on a quarterly basis.~~ payments.

1922

P&F INDUSTRIES, INC. AND SUBSIDIARIES

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

Forward Looking Statement

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

· Exposure to fluctuations in energy prices;
· Debt and debt service requirements;
· Borrowing and compliance with covenants under our credit facility;
· Disruption in the global capital and credit markets;
· The strength of the retail economy in the United States and abroad;
· ~~Supply chain disruptions;~~Risks associated with sourcing from overseas, including tariffs;
· Customer concentration;
· Adverse changes in currency exchange rates;
· Impairment of long-lived assets and goodwill;
· Unforeseen inventory adjustments or changes in purchasing patterns;
· Market acceptance of products;
· Competition;
· Price reductions;
· Interest rates;
· Litigation and insurance;
· Retention of key personnel;
· Acquisition of businesses;
· Regulatory environment;
· The threat of terrorism and related political instability and economic uncertainty; and
· Information technology system failures and attacks,

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

2023
Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

~~P&F INDUSTRIES, INC. AND SUBSIDIARIES~~
~~Item 2.~~ ~~Management’s Discussion and Analysis of Financial Condition and Results of Operations~~
~~Business~~OUR BUSINESS

P&F and each of its subsidiaries are herein referred to collectively as the “Company.” In addition, the words “we”, “our” and “us” refer to the Company. Prior to February 11, 2016, (the “Nationwide Closing Date”) the effective date of the sale of its Nationwide Industries, Inc. (“Nationwide”) subsidiary, P&F operated in two primary lines of business or segments: (i) tools and other products (“Tools”) and (ii) hardware and accessories (“Hardware”). As a result of the sale of Nationwide, the Company currently only operates in the Tools segment. See Note 2 to the consolidated financial statements for further discussion.
~~Tools~~
~~The Company conducts its Tools~~We conduct our business through a wholly-owned subsidiary, Continental Tool Group, Inc. (“Continental”), which in turn operates through its wholly-owned subsidiaries, Florida Pneumatic Manufacturing Corporation (“Florida Pneumatic”, or “FP”) and Hy-Tech Machine, Inc. (“Hy-Tech”). Exhaust Technologies Inc. (“ETI”) and Universal Air Tool Company Limited (“UAT”) are wholly-owned subsidiaries of Florida Pneumatic. Effective April 5, 2017, we purchased substantially all of the operating assets, ~~less~~and assumed certain ~~payables~~liabilities of Jiffy Air Tool, Inc., (“Jiffy”) through a wholly-owned subsidiary ~~(“Jiffy”).~~of Florida Pneumatic. See Note 32 to our consolidated financial statements for further discussion. The business of Air Tool Service Company (“ATSCO”) operates through a wholly-owned subsidiary of Hy-Tech.

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

Hy-Tech designs, manufactures and distributes ~~its own line of~~ industrial pneumatic ~~tools.~~tools, industrial gears, hydrostatic test plugs and a wide variety of parts under the brands ATP, ATSCO, OZAT, Numatx, Thaxton and Quality Gear. Industries served include power generation, petrochemical, construction, railroad, mining, ship building and fabricated metals. Hy-Tech also ~~produces~~manufactures components, assemblies, finished product and markets impact wrenches, grinders, drills, and motors. Further, it also manufactures tools to customer specifications. Its customers include refineries, chemical plants, power generation facilities, heavy construction enterprises, oil and gas and mining companies. In addition, Hy-Tech manufactures an extensive line of pneumatic tool replacement partssystems for ~~its~~various Original Equipment Manufacturers under their own tools as well as several other widely-used brands of pneumatic tools. It also manufactures and distributes high pressure stoppers for hydrostatic testing fabricated pipe, gears, sprockets, splines and racks. Additionally, the Company develops highly engineered product solutions to specific customer requirements in the pneumatic tool market.
~~Hardware~~
Prior to the Nationwide Closing Date, we conducted our Hardware business through our wholly-owned subsidiary, Countrywide Hardware, Inc. (“Countrywide”). Countrywide conducted its business operations through its wholly-owned subsidiary, Nationwide. Nationwide was an importer and manufacturer of door, window and fencing hardware and accessories, including rollers, hinges, window operators, sash locks, custom zinc castings and door closers. On the Nationwide Closing Date, Countrywide sold Nationwide to an unrelated third party for approximately $22,200,000. See Note 2 to consolidated financial statements for further discussion.brand names.

KEY INDICATORS

Economic Measures

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

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

As the result of recently imposed tariffs, specifically those imposed on products imported from China, we now must consider tariffs as a key economic measure. The Office of the US Trade Representative (“USTR”) released a list of China-manufactured products that are subject to tariffs of 25%, effective July 6, 2018. A portion of products imported by Florida Pneumatic for its Retail customers is now subject to this tariff.
On September 18, 2018, the USTR announced a second list of Chinese imports that will be subject to additional tariffs. In accordance with the direction of President Trump, the additional tariffs on this group of products will initially be 10 percent commencing September 24, 2018. This announcement further stated that effective January 1, 2019; the level of the additional tariffs could increase to 25 percent. A significant portion of products imported by Florida Pneumatic for our Retail customers are subject to these tariffs.
The cost and availability of a quality labor pool in the countries where products and components are manufactured, both overseas as well as in the United States, could materially affect our overall results.
2124
Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

KEY INDICATORS- (Continued)
Operating Measures

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

Financial Measures

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

25
Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
OVERVIEW

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

● ~~Decline in Florida Pneumatic’s Automotive and Retail~~Consolidated net revenue increased 11.9%, compared to third quarter 2017;

● ~~Improvement in Hy-Tech’s~~Consolidated gross margin improved 2.0 percentage points, with Hy-Tech improving 5.6 percentage points;

● ~~Addition of Jiffy’s operations~~Florida Pneumatic ships the new Home Depot line causing Retail revenue to increase 21.7% despite no Sears’ revenue;

● Third quarter 2018 Income before income taxes improves to $767,000, from $171,000 in the third quarter 2017.

RESULTS OF OPERATIONS

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

We ~~elected not to renew our supply agreement with Sears, which expired on September 30, 2017. This decision was~~determined that, based on a number of factors including Sears’ continuing financial difficulties, the sale of the Craftsman brand by Sears to Stanley Black & Decker and our level of working capital exposure in relation to our return on that investment pertaining to ~~Sears. There is no Sear’s inventory exposure at~~Sears, it was in our best interest not to renew a supply agreement between us and Sears, effective September 30, 2017. ~~Further, we believe that all accounts receivable~~As a result, the comparative results discussed below reflect sales attributable to shipments to Sears ~~which approximates $1,100,000 at~~during the three and nine-month periods ended September 30, 2017, ~~should be collected by December 31, 2017. However, at the present time,~~whereas there ~~can be~~were no ~~assurance that we will fully recover this.~~shipments to Sears in 2018.

In December of 2017, Florida Pneumatic and The Home Depot (“THD”) agreed to launch an improved line of pneumatic tools to replace the offering at that time. Gross margin for the new product line is projected to be approximately 2% less than recent historic levels. In an effort to assist THD and help promote the roll out of the new products, Florida Pneumatic has agreed to contribute $1,000,000 to THD. We believe this will be contributed some time during the remainder of 2018. This contribution is being ratably amortized over a four year period commencing August 2018, and will be tested for impairment during said period.
We adopted ASC 606 effective January 1, 2018. The most significant impact of this adoption to our results of operations was that beginning January 1, 2018 we now classify certain expenses as deductions against gross revenue, that prior to the adoption, were accounted for as a selling expense. The adoption of ASC 606 reduced our revenue, gross profit and selling expenses approximately $321,000 and $779,000, respectively, for the three and nine-month periods ended September 30, 2018.
We believe that over time several newer technologies and features will ~~begin to~~ have ana greater impact on the market for the Company’s traditional pneumatic tool offerings. This evolution has been felt initially by the advent of some cordless operated hand tools in the automotive aftermarket. We are currently evaluating the development of more advanced technologies in our tool platforms.

There was a 25 percent tariff imposed on certain Chinese-made products that we sell to our Retail customers effective July 6, 2018. We were able to pass through most of the additional costs of this tariff. Further, the Office of the United States Trade Representative (“USTR”) announced that effective September 24, 2018, a new group of Chinese–made products are subject to an additional 10% tariff. The USTR stated that starting January 1, 2019, the level of the additional tariffs on this second group of products will increase to 25 percent. Both tariffs increase the costs of many of the products we sell to our Retail customers.
We are currently in discussion with our Retail customers to determine how to resolve the additional costs incurred resulting from the September 24, 2018 tariff. There is no guarantee that we will be able to pass through these newer tariffs. Should we be unable to pass through such additional costs, our gross margin on these products will be severely impacted, or cause us to terminate certain customer relationships.
2226

Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
RESULTS OF OPERATIONS
~~Continuing operations~~ - (Continued)

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

During the first quarter of 2016, we sold Nationwide to an unrelated third party for approximately $22,200,000. As a result of this transaction, Nationwide’s 2016 results are reported under discontinued operations. Please see Note 2 - Discontinued Operations, to our consolidated financial statements for additional information.
~~REVENUE~~
The tables below provide an analysis of our net revenue ~~from continuing operations~~ for the three and nine-month periods ended September 30, ~~2017~~2018 and ~~2016:~~2017.

Three months ended September 30, Three months ended September 30,
Increase Increase
2017 2016 $ % 2018 2017 $ %
Florida Pneumatic $ 12,295,000 $ 11,702,000 $ 593,000 5.1 % $ 14,035,000 $ 12,295,000 $ 1,740,000 14.2 %
Hy-Tech 3,487,000 2,931,000 556,000 19.0 3,627,000 3,487,000 140,000 4.0

Consolidated $ 15,782,000 $ 14,633,000 $ 1,149,000 7.9 % $ 17,662,000 $ 15,782,000 $ 1,880,000 11.9 %

Nine months ended September 30, Nine months ended September 30,
Decrease Increase
2017 2016 $ % 2018 2017 $ %

Florida Pneumatic $ 34,936,000 $ 35,270,000 $ (334,000 ) (0.9 )% $ 38,770,000 $ 34,936,000 $ 3,834,000 11.0 %
Hy-Tech 9,421,000 9,499,000 (78,000 ) (0.8 ) 10,822,000 9,421,000 1,401,000 14.9

Consolidated $ 44,357,000 $ 44,769,000 $ (412,000 ) (0.9 )% $ 49,592,000 $ 44,357,000 $ 5,235,000 11.8 %

Florida Pneumatic

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

Three months ended September 30, Three months ended September 30,
2017 2016 Increase (decrease) 2018 2017 Increase (decrease)
Revenue Percent of
revenue Revenue Percent of
revenue $ % Revenue Percent of
revenue Revenue Percent of
revenue $ %
Retail customers $ 5,212,000 42.4 % $ 6,631,000 56.7 % $ (1,419,000 ) (21.4 )% $ 6,343,000 45.2 % $ 5,212,000 42.4 % $ 1,131,000 21.7 %
Automotive 3,021,000 24.6 3,723,000 31.8 (702,000 ) (18.9 ) 2,930,000 20.9 3,021,000 24.6 (91,000 ) (3.0 )
Industrial/catalog 1,228,000 10.0 1,026,000 8.7 202,000 19.7 1,592,000 11.3 1,228,000 10.0 364,000 29.6
Aerospace 2,564,000 20.8 89,000 0.8 2,475,000 2,780.9 3,015,000 21.5 2,564,000 20.8 451,000 17.6
Other 270,000 2.2 233,000 2.0 37,000 15.9 155,000 1.1 270,000 2.2 (115,000 ) (42.6 )
Total $ 12,295,000 100.0 % $ 11,702,000 100.0 % $ 593,000 5.1 % $ 14,035,000 100.0 % $ 12,295,000 100.0 % $ 1,740,000 14.2 %

2327
Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

RESULTS OF OPERATIONS- (Continued)

~~Continuing operations - (Continued)~~Florida Pneumatic

Nine months ended September 30, Nine months ended September 30,
2017 2016 Increase (decrease) 2018 2017 Increase (decrease)
Percent of Percent of Percent of Percent of
Revenue revenue Revenue revenue $ % Revenue revenue Revenue revenue $ %
Retail customers $ 15,976,000 45.7 % $ 19,411,000 55.1 % $ (3,435,000 ) (17.7 )% $ 14,649,000 37.8 % $ 15,976,000 45.7 % $ (1,327,000 ) (8.3 )%
Automotive 10,024,000 28.7 11,336,000 32.1 (1,312,000 ) (11.6 ) 10,640,000 27.4 10,024,000 28.7 616,000 6.1
Industrial/catalog 3,812,000 10.9 3,523,000 10.0 289,000 8.2 4,718,000 12.2 3,812,000 10.9 906,000 23.8
Aerospace 4,426,000 12.7 320,000 0.9 4,106,000 1,283.1 8,229,000 21.2 4,426,000 12.7 3,803,000 85.9
Other 698,000 2.0 680,000 1.9 18,000 2.6 534,000 1.4 698,000 2.0 (164,000 ) (23.5 )
Total $ 34,936,000 100.0 % $ 35,270,000 100.0 % $ (334,000 ) (0.9 )% $ 38,770,000 100.0 % $ 34,936,000 100.0 % $ 3,834,000 11.0 %

~~The majority of the decline in Florida Pneumatic’s~~FP’s third quarter ~~2017~~2018 Retail revenue ~~was due to the reduction in shipments to Sears this quarter, compared to~~increased 21.7% over the same period in ~~2016. As discussed above, we elected not to renew an agreement with Sears,~~2017 despite the loss of Sears’ revenue, which expired on September 30, 2017. Also impacting our Retail revenue this quarter was a decline in shipments to The Home Depot, which was due primarily to their decision to reduce the number of items offered for sale at certain locations. Additionally, we believe that the recent hurricanes, which impacted the southern portion of the United States, was a contributing factor to the decline in our Retail revenue this quarter, compared toduring the third quarter of ~~2016. A major factor contributing~~2017 was approximately $1.2 million. This improvement was due to FP shipping the ~~net~~roll-out of THD new, refreshed line of pneumatic tools and accessories. However, as is common with the roll-out of new lines, we believe it is likely that our fourth quarter of 2018 may be slightly less than the fourth quarter of 2017, as both THD stores and their distribution centers will be well stocked and may not require as much replenishment. The slight decline in ~~our~~ Automotive revenue this quarter, compared to the same three-month period in ~~2016, were two~~2017 was due primarily to a decrease in consumer product demand for our AIRCAT tools sold through a major ~~automotive parts distributors continuing~~on-line distributor, and to ~~adjust their inventory levels of pneumatic hand tools. Partially offsetting this~~a lesser degree, a decline ~~was an increase~~ in revenue from our UAT division headquartered in the United Kingdom. ~~Our~~The significant improvement in FP’s Industrial/catalog revenue ~~increased slightly compared to the same period a year ago. We believe that activity~~was driven primarily by greater demand of product in ~~this sector has begun to improve; however, no assurance can be given that this trend will continue. Lastly, the~~all sectors. The Jiffy acquisition in April ~~of this year~~2017~~has~~ enabled us to approach the aerospace sector with a much stronger ~~brand.~~brand and breadth of products. As ~~a result, aerospace sales contributed nearly $2.5 million~~the Jiffy management team continues to ~~Florida Pneumatic’s total third~~improve manufacturing, output revenue this quarter ~~2017 revenue.~~increased 19.3% greater than the same period one year ago. As FP continues to focus on its main product lines, its Other products revenue has declined. It is likely this trend will continue.

~~With respect~~FP’s nine-month comparisons reflect similar results to ~~our year to date results, seventy-five percent~~those of the ~~decline in our~~third quarter. Specifically, its Retail revenue ~~was~~for the nine-month period ended September 30, 2018 is down only $1.3 million, even with the loss of Sears’ revenue of approximately $3.4 million. For the first nine months of 2018 our Automotive revenue increased over the same period in 2017 by 6.1%, due primarily to ~~the reduction in shipments to Sears, compared to the same nine-month period in 2016. During 2016, The Home Depot rolled-out several new tools, which did not occur in 2017, accounting~~consumer demand for ~~much of the decline in The Home Depot’s~~our AIRCAT tools. On a year-to-date revenue. Additionally, year to date revenue was negatively affected by The Home Depot’s decision to reduce the number of items being offered at certain locations. We believe two major automotive distributors have been adjusting their inventory levels. As such, their decision is a primary cause of the year to date decline in our Automotive revenue. It should be noted that we have encountered increased sales to other major Automotive customers and distributors. Additionally, UAT’s 2017 year to datebasis FP’s Industrial/catalog revenue has ~~declined approximately 11%, when compared to~~increased 23.8% of the same period a year ago. ~~Our Industrial/catalog~~This improvement is due to expanded market penetration and greater product acceptance throughout all sectors. Lastly, for the nine-month period ended September 30, 2018 Jiffy’s monthly average revenue while sluggish during the first three months of 2017, has begun to see slight improvement during the second and third quarters of 2017. Lastly, aerospace revenue, driven by the Jiffy acquisition, added more than $4.1 million to Florida Pneumatic’s year to date 2017 revenue,is approximately $876,000, compared to $680,000, which was Jiffy’s monthly average revenue for the ~~same~~six-month period ~~a year ago.~~of April 5, 2017 (the acquisition date) through September 30, 2017. This improved performance is due primarily to enhanced manufacturing processes and overall improved production efficiencies.

Hy-Tech

Hy-Tech designs, manufactures and sells a wide range of industrial products under the brands ~~ATP,~~(ATP, ATSCO, OZAT and ~~Ozat which are categorized~~NUMATX), as ~~“ATP” for reporting purposes and~~well as private label brands (OEM). These products include heavy duty air tools and air motors, industrial grinders, impact sockets, hydro-pneumatic riveters and ~~impact sockets.~~other air powered systems. All of these products are categorized as ATP for reporting purposes. Hy-Tech’s other product lines, ~~Numatx,~~ Thaxton and Quality Gear, are reported with its general machining business as “Other” ~~and include the hydro-pneumatic riveters, hydrostatic test plugs, air motors and custom gears.~~below.

Three months ended September 30, Three months ended September 30,
2017 2016 Increase (decrease) 2018 2017 Increase (decrease)
Revenue Percent of
revenue Revenue Percent of
revenue $ % Revenue Percent of
revenue Revenue Percent of
revenue $ %
ATP $ 3,092,000 88.7 % $ 2,515,000 85.8 % $ 577,000 22.9 % $ 3,318,000 91.5 % $ 3,092,000 88.7 % $ 226,000 7.3 %
Other 395,000 11.3 416,000 14.2 (21,000 ) (5.0 ) 309,000 8.5 395,000 11.3 (86,000 ) (21.8 )
Total $ 3,487,000 100.0 % $ 2,931,000 100.0 % $ 556,000 19.0 % $ 3,627,000 100.0 % $ 3,487,000 100.0 % $ 140,000 4.0 %

2428
Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

RESULTS OF OPERATIONS- (Continued)
Hy-Tech

~~Continuing operations - (Continued)~~
Nine months ended September 30, Nine months ended September 30,
2017 2016 Decrease 2018 2017 Increase
Percent of Percent of Percent of Percent of
Revenue revenue Revenue revenue $ % Revenue revenue Revenue revenue $ %
ATP $ 8,386,000 89.0 % $ 8,411,000 88.5 % $ (25,000 ) (0.3 )% $ 9,777,000 90.3 % $ 8,386,000 89.0 % $ 1,391,000 16.6 %
Other 1,035,000 11.0 1,088,000 11.5 (53,000 ) (4.9 ) 1,045,000 9.7 1,035,000 11.0 10,000 1.0
Total $ 9,421,000 100.0 % $ 9,499,000 100.0 % $ (78,000 ) (0.8 )% $ 10,822,000 100.0 % $ 9,421,000 100.0 % $ 1,401,000 14.9 %

~~Significant components contributing to the~~The 7.3% increase in ~~Hy-Tech’s third quarter 2017~~ ATP revenue this quarter compared to the same period in ~~2016, include the resurgence~~2017 is due primarily to growth in activity from a large customer acquired in the ATSCO acquisition that had reduced its orders until the second quarter of 2017, and continues to place orders during the third quarter of 2017. Additionally, in 2016 we began to pursueour “Engineered Solutions” initiative. This program pursues alternate markets where we believed we could exploit our engineering and manufacturing expertise, and develop different applications for our tools, motors and accessories. We believe the development of this new marketing strategy provides an opportunity to generate new sources of revenue from new markets in 2017 and beyond. While third quarter 2017 revenue from this new initiative was $156,000, at September 30, 2017 Hy-Tech had future orders just shy of $750,000. Although Hy-Tech’s third quarter 2017 revenue has increased compared to both the first and second quarters of 2017, we believe that there continues to be an excess inventory of tools and spare parts in the distribution channels. Additionally, we believe that the turn-around activities in the oil and gas sector continue to lag, compared to historic levels, further negatively impacting Hy-Tech’s revenue. Recent hurricanes and other major storms have also impacted Hy-Tech’s revenue. Further, we believe lower-priced imported tools and spare parts are adversely impacting Hy-Tech’s position in the marketplace.
The fluctuation in Hy-Tech’s year to date revenue for the nine-month period ended September 30, 2017, compared to the same period in 2016 was primarily due to a number of factors. A decline in ATP revenue from a large customer that was acquired in the ATSCO acquisition that had greatly reduced its purchases in the first quarter of 2017, compared to its purchases during the first quarter of 2016. By mid-2016 this customer ceased placing orders. However, as discussed above, this customer began placing orders during the second quarter of 2017 and continued into the third quarter of this year. A major component of Hy-Tech’s revenue is derived from the oil and gas sector. Currently, we estimate that the oil and gas sector revenue accounts for approximately 30% to 35% of Hy-Tech’s total revenue. This revenue stream is driven by a number of factors, such as, the number of off-shore rigs located in the Gulf of Mexico, “turn-arounds” or plant maintenance activities and, to a lesser extent, land rigs. We believe the lag in turn-around activities, the hurricanes that severely damaged the Gulf of Mexico and many of the oil refineries in the Gulf States, along with the growing presence of lower-priced imported tools and spare parts are impacting the markets in which Hy-Tech operates. However, as discussed earlier, Hy-Tech continues to pursue alternate markets where it believes it can exploit its engineering and manufacturing expertise, and develop different applications for its tools, motors and accessories. Revenue from ~~these~~this offering improved 163% over the same period in 2017. Further, new ~~sources during~~orders continue to increase. Open orders for the ~~first nine months of~~Engineered Solutions program at September 30, 2018 were $1.8 million, nearly doubling the level at June 30, 2018, and more than $1 million greater than the level at September 30, 2017. During the three-month period ended September 30, 2018, revenue from a large ATSCO customer declined, yet revenue on a year to date basis, compared to the nine-month period ended September 30, 2017, is more than $700,000 greater. This quarterly decline was partially offset by an increase in revenue from the higher gross margin NUMATX product offering. However, as Hy-Tech’s Engineered Solutions and NUMATX lines continue to expand, Hy-Tech’s Other, lower gross margin revenue declined this quarter, compared to the third quarter 2017. We believe it is likely that Hy-Tech’s Other revenue will continue to decline, as it focuses on the more profitable product offerings.
The primary component contributing to the improvement in Hy-Tech’s nine-month 2018 revenue, compared to the same period in 2017, was ~~approximately $657,000, and~~increased shipments to a large ATSCO customer, with shipments to this customer increasing 39%. Additionally, nine-month revenue from Hy-Tech’s Engineered Solutions has improved 67%, when compared to the same period in 2017. Its NUMATX product offering is ~~included in~~beginning to gain momentum as well. As a result of the above, ATP ~~grouping. Lastly, Hy-Tech has recently begun a new marketing strategy that is intended to re-energize its gear and hydraulic stopper business.~~
25
~~RESULTS OF OPERATIONS~~
~~Continuing operations - (Continued)~~grew by 16.6%.

Gross profit / margin

Three months ended September 30, Increase Three months ended September 30, Increase
2017 2016 Amount % 2018 2017 Amount %
Florida Pneumatic $ 4,579,000 $ 4,219,000 $ 360,000 8.5 % $ 5,351,000 $ 4,579,000 $ 772,000 16.9 %
As percent of respective revenue 37.2 % 36.1 % 1.1 % pts 38.1 % 37.2 % 0.9 % pts
Hy-Tech $ 1,005,000 $ 286,000 $ 719,000 251.4 $ 1,247,000 $ 1,005,000 $ 242,000 24.1
As percent of respective revenue 28.8 % 9.8 % 19.0 % pts 34.4 % 28.8 % 5.6 % pts
Total $ 5,584,000 $ 4,505,000 $ 1,079,000 24.0 % $ 6,598,000 $ 5,584,000 $ 1,014,000 18.2 %
As percent of respective revenue 35.4 % 30.8 % 4.6 % pts 37.4 % 35.4 % 2.0 % pts

Nine months ended September 30, Increase Nine months ended September 30, Increase (decrease)
2017 2016 Amount % 2018 2017 Amount %
Florida Pneumatic $ 13,116,000 $ 13,070,000 $ 46,000 0.4 % $ 14,066,000 $ 13,116,000 $ 950,000 7.2 %
As percent of respective revenue 37.5 % 37.1 % 0.4 % pts 36.3 % 37.5 % (1.2 )% pts
Hy-Tech $ 2,864,000 $ 1,956,000 $ 908,000 46.4 $ 3,831,000 $ 2,864,000 $ 967,000 33.8
As percent of respective revenue 30.4 % 20.6 % 9.8 % pts 35.4 % 30.4 % 5.0 % pts
Total $ 15,980,000 $ 15,026,000 $ 954,000 6.3 % $ 17,897,000 $ 15,980,000 $ 1,917,000 12.0 %
As percent of respective revenue 36.0 % 33.6 % 2.4 % pts 36.1 % 36.0 % 0.1 % pts
29
Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

~~Customer~~RESULTS OF OPERATIONS- (Continued)
As discussed earlier in this Management’s Discussion and ~~product mix were~~Analysis, we adopted ASC 606. This adoption reduced net revenue this quarter by $321,000, thus resulting in a similar reduction to gross profit, thus lowering FP’s quarterly gross margin by 2.3 percentage points. Despite this reduction, FP’s gross margin for the ~~primary factors that contributed~~three-month period ended September 30, 2018, increased 0.9 percentage points, compared to the ~~increase~~same period in ~~Florida Pneumatic’s~~2017. Several factors drove the improvement in FP’s third quarter ~~2017~~2018 gross margin, compared to the same period in 2017. Some of which were product mix, improved overhead absorption, and favorable foreign exchange rates.
When comparing the third quarter of 2018 to the same period in the prior year, Hy-Tech improved its overall gross margin by 5.6 percentage points, due primarily to: (a) greater absorption of its manufacturing overhead costs, driven by greater through-put at its facility; (b) product mix, (c) price increases on certain product lines, and (d) Hy-Tech has also been able to reduce its obsolete and slow moving inventory charges, compared to the same period a year ago. Of note, Jiffy’s gross margin approximates that of Florida Pneumatic’s non-retail product lines. As such, the gross profit associated with the Aerospace revenue this quarter exceeded the gross profits lost as the result of the decline in Retail revenue. There were no significant changes to our cost structure or selling price during this quarter.

~~Florida Pneumatic’s overall~~FP’s gross margin for the nine-month period ended September 30, ~~2017 is essentially~~2018, was impacted by several factors, the ~~same as~~most significant of which was the adoption of ASC 606 that negatively affected its gross profit by $779,000, effectively lowering year to date gross margin ~~for~~by 2.0 percentage points. Promotional discounts offered on its AIRCAT line earlier this year also negatively affected FP’s year to date gross margin. Improved absorption, product mix, and, to a lesser degree, foreign exchange helped to reduce the ~~same period in 2016.~~negative factors.

Hy-Tech’s ~~2017 third quarter~~improved gross margin increased 19.0 percentage points, a more than 250% improvement over the same period a year ago. Factors contributing to the positive change include, among other things: (a) in the third quarter of 2016, we increased Hy-Tech’s allowance for obsolete / slow moving inventory (“OSMI”). This adjustment in 2016 was compounded by lower overhead absorption, due to reduced manufacturing, in turn due to weakness in the oil and gas and power generation sectors and (b) during 2016, we were shipping a line of very low gross margin tools to a major customer. However, during the second and third quarters of 2017, shipments of these low gross margin tools declined compared to the prior year. Additional factors contributing to the improvement in Hy-Tech’s gross margin include: (a) improved overhead absorption as manufacturing activity has increased; (b) improved inventory turns, which directly impacts fluctuations in Hy-Tech’s OSMI, and (c) the sale of the low margin tools has been lower this year compared to the prior year.
~~Hy-Tech’s gross margin~~reported for the nine-month period ended September 30, ~~2017, improved 9.8 percentage points, when~~2018, compared to the same period ~~a year ago. Offsetting~~in 2017, continues to be driven by greater absorption of its manufacturing overhead costs, better product mix, and price increases. Further, when comparing the ~~primary factors~~nine–month periods, ended September 30, 2018 and 2017, Hy-Tech has been able to ~~this improvement discussed above, gross margin on the products being sold under~~better manage and control quantity levels thus reducing its new marketing initiative are below Hy-Tech’s historical range. In addition to margins on these products increasing as the result of manufacturing experience, we also expect average margins in this category to improve as we develop additional product offerings.obsolete and slow-moving inventory charges.

Selling, ~~and~~ general and administrative expenses

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

26
~~RESULTS OF OPERATIONS~~
~~Continuing operations - (Continued)~~
During the third quarter of ~~2017,~~2018, our SG&A was ~~$5,352,000,~~$5,737,000, compared to ~~$4,915,000~~$5,352,000 for the same three-month period in ~~2016. The net increase was due in large part~~2017. As the result of the adoption of the new revenue recognition standard ASC 606, discussed above, we now classify certain expenses totaling $321,000 incurred during the three-month period ended September 30, 2018, as reductions against gross revenue that, prior to the ~~acquisition of the Jiffy business in April 2017, with~~adoption, were accounted for as SG~~&A of approximately $575,000 for~~&A. These same expenses during the third quarter of ~~2017.~~2017 aggregated to $224,000. Other significant components ofto the net change include: (i) ~~a $17,000 reduction~~an increase in ~~non-Jiffy~~ compensation expenses of $315,000, which is comprised of base salaries and wages, accrued performance-based bonus incentives, associated payroll taxes and employee benefits; (ii) ~~a decrease~~an increase in variable expenses, such as commissions, freight out, travel, advertising and promotion expenses of ~~$78,000, due primarily to lower Retail revenue;~~$384,000; and (iii) a decrease in professional fees and services of ~~$56,000~~$68,000.
30
Management’s Discussion and ~~(iv) a reduction in amortization~~Analysis of Financial Condition and ~~depreciation~~Results of Operations - Continued
RESULTS OF OPERATIONS- (Continued)
Selling, general and administrative expenses ~~of $60,000. These reductions were partially offset by an increase in corporate related expenses of $24,000.~~–(Continued)

Our SG&A for the nine-month period ended September 30, ~~2017~~2018 was ~~$15,765,000,~~$16,366,000, compared to ~~$15,088,000~~$15,765,000 for the same period in ~~2016. As noted above, the~~2017. The most significant ~~component~~item contributing to the net increase ~~was~~of $601,000 is additional operating expenses incurred at Jiffy during the ~~addition~~first quarter of 2018 of $581,000, whereas there were no Jiffy ~~with year to date 2017~~ SG&A expenses during the first quarter of 2017. As a result of the adoption of the new revenue recognition standards, we now are required to classify as adjustments to net revenue, certain expenses, which aggregated approximately ~~$1,025,000.~~$779,000 during the nine-month period ended September 30, 2018 that prior to the adoption were accounted for as SG&A during the same period in 2017. These same expenses during the nine-months ended September 30, 2017 aggregated to $645,000. Other significant non-Jiffy components ~~include reductions in:~~include: (i) ~~non-Jiffy~~an increase in compensation expenses of ~~$74,000;~~$459,000, which is comprised of base salaries and wages, accrued performance-based bonus incentives, associated payroll taxes and employee benefits; (ii) increases in variable expenses of ~~$300,000,~~$525,000 due primarily to lower Retail revenue; (iii) ~~depreciation and amortization of $236,000, due mostly to the reduction in Hy-Tech’s intangible assets, which were written down in 2016; and (iv) corporate related expenses of $80,000. The~~ reductions ~~were partially offset by an increase~~ in professional fees of ~~$381,000,~~$439,000, which ~~include fees and expenses~~ related to the Jiffy ~~Acquisition~~Acquisition; (iv) increases in our stock-based compensation of $147,000, and ~~recruitment fees for executive positions at Hy-Tech.~~
~~Impairment~~(v) lower depreciation and amortization expenses of ~~goodwill and other intangible assets - 2016~~
During the second quarter of 2016, we determined that an interim impairment analysis of the goodwill recorded in connection with Hy-Tech and ATSCO was necessary. As a result of the aforementioned, it was determined that Hy-Tech's short and long-term projections at that time had indicated an inability to generate sufficient discounted future cash flows to support the recorded amounts of goodwill, other intangible assets and other long-lived assets necessitating the impairment charge. Accordingly, adhering to current accounting literature, we recorded an impairment charge of $8,311,000 relating to goodwill and other intangible assets during the second quarter of 2016.$101,000.

Other expense (income)~~, net~~

Other expense (income) of $28,000 and $85,000, respectively, for the three and nine-month periods ended September 30, 2018, represents the adjustment of the fair value of the contingent consideration obligation to the Jiffy Seller as discussed in Note 2 to our consolidated financial statements. The three-month period ended September 30, 2017 ~~included~~amount of $11,000 ~~consisting primarily of~~was an adjustment to the fair value of the contingent consideration obligation to the Jiffy Seller. ~~During the same period in 2016, the most significant factor contributing to the net~~ Other income ~~was rental income~~ of ~~real property that was sold in November of 2016. There is no income of a similar nature~~$13,000 for ~~2017.~~
~~For~~ the nine-month ~~period~~periods ended September 30, 2017 ~~our Other expense (income), net,~~ is ~~primarily the fair value adjustment discussed above partially offsetting~~due to the receipt of the balance of ~~an escrow~~escrowed funds related to the sale in November 2016 of the real property ~~that was~~ located in Tampa, Florida ~~and used~~offset by ~~Nationwide Industries Inc. See Note 2 to our consolidated financial statements for further discussion. The amount for~~ the ~~same period in 2016 was the net rental income on the real property that was sold in November of 2016.~~fair value adjustment.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations – Continued
RESULTS OF OPERATIONS
~~Continuing operations~~ - (Continued)

Interest

Three months ended
September 30, Increase Three months ended
September 30, Increase
2017 2016 Amount % 2018 2017 Amount %
Interest expense attributable to:
Short-term borrowings $ 32,000 $ 15,000 $ 17,000 113.3 % $ 40,000 $ 32,000 $ (8,000 ) (25.0 )%
Term loans, including Capital Expenditure Term Loans 1,000 1,000 - -
Term loans, including Capex Term Loans 5,000 1,000 (4,000 ) (400.0 )
Amortization expense of debt issue costs 17,000 10,000 7,000 70.0 21,000 17,000 (4,000 ) (23.5 )

Total $ 50,000 $ 26,000 $ 24,000 92.3 % $ 66,000 $ 50,000 $ (16,000 ) (32.0 )%

Nine months ended
September 30, Increase (decrease) Nine months ended
September 30, (Increase) decrease
2017 2016 Amount % 2018 2017 Amount %
Interest expense attributable to:
Short-term borrowings $ 80,000 $ 41,000 $ 39,000 95.1 % $ 77,000 $ 80,000 $ 3,000 3.8 %
Term loans, including Capital Expenditure Term Loans 2,000 5,000 (3,000 ) (60.0 )
Term loans, including Capex Term Loans 10,000 2,000 (8,000 ) (400.0 )
Amortization expense of debt issue costs 42,000 118,000 (76,000 ) (64.4 ) 71,000 42,000 (29,000 ) (69.0 )

Total $ 124,000 $ 164,000 $ (40,000 ) (24.4 )% $ 158,000 $ 124,000 $ (34,000 ) (27.4 )%

~~Primarily~~The interest expense on our short-term borrowing increased this quarter compared to the same period in the prior year due to slightly higher average interest rates and higher average borrowing. At September 30, 2017, our short term borrowing payable to the ~~result of~~Bank was $2,334,000, whereas at September 30, 2018 the sale of Nationwide and the real property located in Tampa, Florida, occurring in February and November 2016, respectively, our total bank borrowings have been minimal. However, as discussed in Note 3 - Acquisition, to our consolidated financial statements,short term borrowing balance is $3,607,000. Interest on April 5, 2017, we purchased the net assets of the Jiffy business and real property located in Carson City, Nevada. The funding for this transaction was from our Revolver Loan, which is our short-term borrowing.
In accordance with accounting guidance we have reported our short-term and term loan interest expense incurred during the period January 1, 2016 through February 11, 2016, which was the effective date of sale of Nationwide, in Discontinued operations. Further,Term loans increased as the result of the ~~Company and~~creation of a new Capital ~~One, National Association (“Capital One”, or the “Bank”) agreeing to significantly modify the Credit Agreement, as defined below~~expenditure loan. The increase in ~~our Liquidity and Capital Resources, we were required to write down and recognize as interest expense the~~amortization of debt issue costs ~~associated~~is due to the expenses incurred with the ~~then existing Credit Agreement. These costs are identified in the table above as “Amortization expense of debt issue costs”. See Note 2~~amendment to our ~~consolidated financial statements for further discussion on~~Loan and Security Agreement (“Credit Agreement”) in April 2017 that related to the ~~sale of Nationwide. See Liquidity and Capital Resources elsewhere in this Management’s Discussion and Analysis section for further information regarding our bank loans.~~Jiffy acquisition.

Our average balance of short-term borrowings during the three and nine-month periods ended September 30, ~~2017~~2018 was $4,060,000 and $2,834,000, respectively, compared to $3,635,000 and $3,263,000, respectively, ~~compared to $2,585,000 and $3,593,000, respectively,~~ during the same three and nine-month periods in ~~2016.~~2017.

Income taxes

At the end of each interim reporting period, we estimate anour effective tax rate expected to be applied for the full year. This estimate is used to determine the income tax provision or benefit ~~applicable to continuing operations,~~ on a year-to-date basis, and may change in subsequent interim periods. Additionally, in the year to date computation we included the impact of options that expired, were exercised, or were forfeited. The aggregate net effect of these options reduced our deferred tax asset and increased the tax provision by approximately $116,000. As a result of the aforementioned,Accordingly, our effective tax rate ~~applicable to continuing operations~~ for the three and nine-month periods ended September 30, ~~2017~~2018 was 29.5% and 29.3%, respectively, compared to 97.1% and 136.5%, ~~respectively. For~~respectively, for the same three and nine-month periods in ~~2016 our effective tax rate applicable to continuing operations was 27.2% and 33.9%, respectively.~~2017. The ~~Company’s~~ effective tax rates for both periods were ~~also~~ affected primarily by state taxes, non-deductible expenses and foreign tax rate differentials.

In addition to those items mentioned above that affected our effective tax rates was the Tax Cuts and Jobs Act (the “Act”) which was enacted on December 22, 2017. The Act reduces the U.S. federal corporate income tax rate from 35% to 21%, required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries previously deferred from tax, generally eliminates U.S federal income taxes on dividends from foreign subsidiaries and creates a new provision designed to tax global intangible low-taxed income (“GILTI”). Also on December 22, 2017, the Staff of the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”) which provides for a measurement period of up to one year from the enactment for companies to complete their accounting for the Act. We are applying the guidance in SAB 118 when accounting for the enactment-date effects of the Act.
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~~RESULTS OF OPERATIONS~~
~~Discontinued operations - 2016~~
~~Nationwide’s results~~Management’s Discussion and Analysis of ~~operations in our consolidated financial statements~~Financial Condition and ~~Note 2, presents their revenue and cost~~Results of goods sold for the period January 1, 2016 through February 11, 2016. The SG&A incurred during the same period includes that of Nationwide plus $19,000 of expenses incurred at the corporate level that is specifically attributable to Nationwide. In accordance with current accounting guidance, we included, as part of discontinued operations, all interest expense incurred attributable to our Bank borrowings during the period January 1, 2016 through February 11, 2016. Additionally, we initially recognized an after tax gain of $12,171,000, on the sale of Nationwide. For income tax purposes, the Company’s tax basis in Nationwide was greater than the net proceeds, thus resulting in a tax loss. This gain represents the difference between the adjusted net purchase price and the carrying value of Nationwide. Further, in 2016, Countrywide completed the sale of the Tampa, Florida real property, which was treated as a capital gain transaction for tax purposes. During the three-month period ended September 30, 2016, the Company removed a valuation allowance initially recorded against the tax loss, resulting in an additional gain on sale $187,000. Operations – Continued

LIQUIDITY AND CAPITAL RESOURCES

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

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

September 30, 2017 December 31, 2016 September 30, 2018 December 31, 2017
Working Capital $ 24,490,000 $ 28,373,000 $ 23,425,000 $ 24,278,000
Current Ratio 3.81 to 1 5.60 to 1 3.03 to 1 4.08 to 1
Shareholders’ Equity $ 47,221,000 $ 47,590,000 $ 46,638,000 $ 46,013,000

Credit facility

In October 2010, we entered into a Loan and Security Agreement ~~(as amended from time to time, “Credit~~(“Credit Agreement”) with an affiliate of Capital ~~One.~~One, National Association (“Capital One” or the “Bank”). The Credit Agreement, as amended, among other things, provides ~~for~~the ability to borrow funds under a Revolver arrangement. Revolver borrowings ~~which~~ are secured by the Company’s accounts receivable, ~~mortgages on its~~inventory, equipment and real ~~property~~property. Additionally, there is a $1,600,000 line available for capital expenditures (“~~Real Property”~~Capex line”)~~, inventory~~. The Credit Agreement also includes a Term Loan, (the “Term Loan”) as defined in the Credit Agreement. This Term Loan remains in place to enable the Company and ~~equipment.~~Capital One to facilitate future term loan borrowings more efficiently and less costly, should a need arise. P&F and certain of its subsidiaries are borrowers under the Credit Agreement, and their obligations are cross-guaranteed by certain other subsidiaries. The Credit Agreement expires in February 2019. We believe that we will enter into a new credit agreement with Capital One or another financial institution prior to such expiration date.

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

Contemporaneously with the acquisition of the Jiffy business discussed in Note 32 to the consolidated financial statements, we entered into a Second Amended and Restated Loan and Security Agreement, ~~effective as of the April 5, 2017 closing date of the Jiffy Acquisition~~ (the ~~“Second Amended and Restated Loan~~“2017 Agreement”), with Capital ~~One which amended and restated the previous amendment to the Credit Agreement.~~
One. The ~~Second Amended and Restated Loan~~2017 Agreement, among other things, amended the Credit Agreement by: (1) increasing the maximum amount we can borrow under the Revolver Commitment (as defined) ~~from $10,000,000~~ to $16,000,000, subject to certain borrowing base criteria, and (2) modifying certain borrowing base criteria as well as financial and other covenants. We incurred approximately $84,000 of debt issue costs in connection with the 2017 Agreement.

29
~~LIQUIDITY AND CAPITAL RESOURCES – (Continued)~~
~~The net funds of approximately $18,700,000 provided by the sale of Nationwide in 2016 were used to pay down the Revolver, Capex loans and the~~ Term Loan ~~A; however, we~~ and the Bank agreed to have $100,000 remain outstanding under the Term Loan A, rather than pay it off in full, thus providing the Company and Capital One the ability to potentially increase future term loan borrowings more efficiently and at lower costs.
We funded the $7,000,000 Jiffy acquisition from Revolver borrowings. Cash flows from operations thereafter and receipt in August of the $2,100,000 escrow from the sale of Nationwide have reduced our Revolver balance to $2,334,000 at September 30, 2017. RevolverCapex borrowings can be at either LIBOR or at the Base Rate, ~~as defined~~or a combination of the two, plus the Applicable Margins. Applicable Margins for LIBOR borrowings at September 30, 2018, and December 31, 2017 were 1.50%. The Applicable Margin added to the Base Rate borrowings for the same timeframes was 0.50%. At September 30 2018, we had a $100,000 Term Loan borrowing which is included in Current maturities of long-term debt on the consolidated balance sheet. At both September 30, 2018 and December 31, 2017 this Term Loan was at LIBOR plus the Applicable Margin.
In April 2018, we borrowed $400,000 against the Capex line. This borrowing is to be repaid in equal principle installments of approximately $6,700 payable monthly, with the balance due in February 2019, unless the Credit Agreement is extended by the parties. $300,000 of this borrowing is at LIBOR plus Applicable Margin, with ~~Capital One.~~the balance of $100,000 at the Base Rate, or prime rate plus Applicable Margin. The Applicable Margin added to the all Base Rate, and LIBOR ~~Margins~~borrowings were 1.50% and 0.50%, respectively. At September 30, 2018, the balance due on the Capex loan was $373,000. While we intend to renew the Credit Agreement currently in ~~effect~~place, this obligation at September 30, ~~2017 was 1.75%, compared~~2018, is included in Current maturities of long-term debt on our consolidated balance sheet.
33
Management’s Discussion and Analysis of Financial Condition and Results of Operations – Continued
LIQUIDITY AND CAPITAL RESOURCES -Continued
We provide Capital One with monthly financial statements, borrowing base certificates and certificates of compliance with various financial covenants. Should an event of default occur the interest rate on all borrowings would increase by two percent per annum during the period of default, in addition to ~~1.50% at December 31, 2016. The Applicable Base Rate Margins~~other remedies provided to Capital One.
We believe that should a need arise for us to borrow funds in ~~effect as~~excess of ~~September 30, 2017~~the Revolver and ~~December 31, 2016 were 0.75% and 0.50%, respectively.~~Term loans currently available to us under the terms of the Credit Agreement, we believe we would be able to secure additional funds based on the value of our real property or other assets from our Bank or other sources.

Cash flows

During the nine-month period ended September 30, ~~2017,~~2018, our net cash ~~decreased~~increased to ~~$1,205,000~~$1,729,000 from ~~$3,699,000~~$1,241,000 at December 31, ~~2016.~~2017. Our total bank debt at September 30, ~~2017, primarily driven by the Jiffy acquisition, which~~2018 was ~~discussed in Note 3 to the accompanying consolidated financial statements, was $2,434,000, compared to $100,000~~$4,080,000 and $2,028,000 at December 31, ~~2016.~~2017. The total debt to total book capitalization (total debt divided by total debt plus equity); at September 30, ~~2017~~2018 was ~~4.9%, compared to 0.2%~~8.0% and at December 31, ~~2016.~~2017 was 4.2%.

In March 2016, our Board of Directors approved the initiation of a dividend policy under which the Company intends to declare quarterly cash dividends to its stockholders in the amount of $0.05 per quarter. During the nine-month period ended September 30, ~~2017,~~2018, we received approximately $737,000 from the exercise of stock options.
In February, May and August 2018, our Board of Directors ~~voted to approve the payment~~declared quarterly cash dividends of ~~three quarterly dividends. As such, in February 2017, May 2017, and August 2017, we paid a~~ $0.05 per share ~~dividend to~~of our common stock, which were paid in March, May and August 2018, respectively. The total dividends paid during the ~~shareholders of record. The aggregate of such dividend payments was approximately $542,000. Our Board of Directors expects~~nine-month period ended September 30, 2018 were $544,000. We intend to maintain ~~this~~the dividend policy; however, the ~~future~~ declaration of dividends under this policy going forward is dependent upon ~~several factors, which includes such things as~~ our ~~overall~~ financial condition, results of operations, capital requirements and other factors deemed relevant by our ~~board may deemed relevant.~~Board of Directors.

~~We believe~~On August 9, 2017, our Board of Directors authorized us to repurchase up to 100,000 shares of our common stock over a period of up to twelve months. (See Note 4 to our consolidated financial statements.) During the three and nine month periods ended September 30, 2018, we ~~will be able~~repurchased approximately 14,000 and 48,000 shares, respectively, at a cost of approximately $115,000 and $395,000, respectively.
In June 2018, unrelated to ~~fund~~ the ~~repurchase~~2017 Repurchase Program, we purchased 18,140 shares of our common stock at a total cost of $150,000 in a privately negotiated transaction. The purchase price per share was equal to five percent below the average of the ~~remaining~~closing price of its common stock for the three days prior to the transaction.
In September 2018, the Company’s Board of Directors authorized us to repurchase up to 100,000 shares ~~in accordance with~~of our common stock (the “2018 Repurchase Program”). Since inception of the 2018 Repurchase Program, ~~as discussed in~~we repurchased approximately 5,265 shares of our common stock, the cost of which was approximately $44,000. See Note ~~5 – Equity – Common Stock Repurchase Plan.~~4 to our consolidated financial statements for further information.

During the nine-month period ended September 30, ~~2017,~~2018, we used ~~$444,000~~$1,757,000 for capital expenditures, compared to ~~$894,000~~$444,000 during the same period in the prior year.  Capital expenditures for the balance of ~~2017~~2018 are expected to be approximately ~~$500,000,~~$360,000, some of which may be financed through our credit facilities with Capital One, or financed through independent third party financial institutions. The remaining ~~2017~~2018 capital expenditures will likely be for machinery and equipment, tooling and computer hardware and software.

We believe that net cash flows from operations and available borrowings under our Credit Facility should provide sufficient cash to fund our consolidated cost structure for at least the next 12 months from the date of this filing.
3034

Management’s Discussion and Analysis of Financial Condition and Results of Operations – Continued
LIQUIDITY AND CAPITAL RESOURCES ~~– (Continued)~~-Continued

Customer concentration

~~Florida Pneumatic has two customers, Sears~~At September 30, 2018 and December 31, 2017, accounts receivable from The Home Depot ~~that, in the aggregate, at September 30, 2017,~~was 42.3% and ~~December 31, 2016, accounted for 39.6% and 53.5%~~31.0%, respectively, of our total accounts receivable. ~~To date, these customers remain at or close to complying with their payment terms.~~ Additionally, ~~these two customers in the aggregate, accounted for 31.3% and 35.4%, respectively, of our~~ revenue ~~for~~from The Home Depot during the three and nine-month periods ended September 30, ~~2017, compared to 45.3%~~2018 was 35.1% and ~~43.4% for~~28.1%. For the same three and nine-month periods in ~~2016.~~2017 The Home Depot revenue accounted for 23.6% and 27.6%, respectively. We believe the loss of The Home Depot would negatively impact our financial condition, but would not affect our ability to remain a going concern.

As previously mentioned, we elected not to renew an agreement with Sears, which ~~terminated on~~expired September 30, 2017. ~~We believe the loss of Sears’s revenue will have a negative impact on our financial condition, but will not affect our ability to remain a going concern.~~

NEW ACCOUNTING PRONOUNCEMENTS

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

We are currently evaluating the impact of the adoption of ASU ~~No.~~ 2016-02,Leases, on our consolidated financial condition, results of operations and cash flows.
In addition, in February 2018, the ~~financial statements in which~~FASB issued No. ASU 2018-02,Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“ASU 2018-02”). Under ASU 2018-02, an entity may elect to reclassify the ~~ASU is first applied, leases shall be measured and recognized at the beginning~~income tax effects of the ~~earliest comparative period presented with an adjustment~~Tax Reform Act on items within accumulated other comprehensive income to ~~equity.~~
~~The Company~~retained earnings. ASU 2018-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted in ~~the final assessment phase~~ofany interim period. We are currently evaluating what impact, if any, ~~the new revenue standard,~~adoption of ASU ~~No. 2014-09,~~~~Revenue from Contracts with Customers~~~~, and related updates will~~2018-02 may have on ~~its~~our consolidated financial ~~statements~~statements.
The SEC has recently issued a final rule (“Rule”) that amends certain of their disclosure requirements that have become redundant, duplicative, overlapping, outdated, or superseded, in light of other SEC disclosure requirements, or changes in the information environment. A financial reporting implication of the Rule addresses interim disclosure changes in stockholders’ equity and ~~related disclosures,~~non-controlling interests.
Under the requirements in SEC Regulation S-X, Rules 8-03(a)(5) and ~~based~~10-01(a)(7), as amended by the Rule, registrants must now analyze changes in stockholders’ equity, in the form of a reconciliation, for the current and comparative year-to-date interim periods, with subtotals for each interim period.
                The Rule is effective for all filings submitted on ~~its preliminary assessment, other than additional disclosures~~or after November 5, 2018. However, after issued guidance that provides some relief to registrants that file Form 10-Q shortly after the Rule’s effective date. It clarifies that the SEC Staff would not object if a filer’s first presentation of changes in shareholders’ equity is included in its ~~Notes~~Form 10-Q for the quarter that begins after the final rule’s November 5, 2018, effective date given that date’s close proximity to ~~its consolidated financial statements, there will be no material impact to its consolidated financial statements.~~the filing date for most filers’ quarterly reports.

Other than the aforementioned, we do not believe that any other recently issued, but not yet effective accounting standard, if adopted, will have a material effect on our consolidated financial statements.
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Item 3. Quantitative And Qualitative Disclosures About Market Risk

Not required.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

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

Changes in Internal Control over Financial Reporting

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

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

There ~~have been~~were no material changes to the risk factors previously disclosed in our ~~2016~~2017 Form ~~10-K and subsequent Quarterly reports on Form 10-Q.~~10-K.

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

~~The following table presents our repurchase activity of our Class A Common stock during the three-month period ended September 30, 2017.~~
Maximum
Number
Total Number of of shares
Shares Purchased as that May Yet
Part of Publicly Be Purchased
Total Number of Average Price Announced Plan Under the Plan
Period Shares Purchased Paid per Share or Program or Program (1)

July 1, 2017 - July 31, 2017 - - - -
Aug., 1, 2017 – Aug., 31, 2017 1,505 $ 6.32 1,505 98,495
Sept. 1, 2017 – Sept 30, 2017 10,860 $ 7.26 10,860 87,635
Maximum
Total Number Number
of Shares of shares
Purchased as that May Yet
Part of Publicly Be Purchased
Total Number of Average Price Announced Plans Under the Plans
Period Shares Purchased Paid per Share or Programs or Programs

July 1, 2018 – July 31, 2018 (1) 8,876 $ 8.52 8,876 10,096
August 1, 2018 – August 31, 2018 (1) 4,696 $ 8.42 4,696 5,400
September 1, 2018 – September 30, 2018 (2) 5,265 $ 8.35 5,265 94,735

(1) On August 24, 2017, the Company announced that it had adopted a written trading plan for the purpose of repurchasing up to 100,000 shares of its common stock. This trading plan ~~expires on August 23, 2018, and~~ was adopted pursuant to an authorization of a stock repurchase program by the Company’s Board which was publicly announced on August 10, 2017. This trading plan expired on August 23, 2018.
(2) On September 14, 2018, the Company publicly announced that the Company’s Board authorized a new stock repurchase program and the Company adopted a new written trading plan thereunder for the purchase of up to 100,000 shares. This stock repurchase program and trading plan are set to expire on September 16, 2019.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

Item 6. Exhibits

See “Exhibit Index” immediately following the signature page.

3337
SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

P&F INDUSTRIES, INC.
(Registrant)

/s/ JOSEPH A. MOLINO,~~JR.~~ Jr.
Joseph A. Molino, Jr.
Chief Financial Officer
Dated: November ~~13, 2017~~9, 2018 (Principal Financial and Chief Accounting Officer)

3438

EXHIBIT INDEX

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

Exhibit
Number Description of Exhibit
~~10.1~~ Amendment No. 1 to Second Amended and Restated Loan and Security Agreement dated as of August 9, 2017, (executed on September 20, 2017) by and among the Company, Florida Pneumatic Manufacturing Corporation and Hy-Tech Machine, Inc. as Borrowers, ATSCO Holdings Corp. Jiffy Air Tool, Inc., Bonanza Properties Corp., Continental Tool Group, Inc., Countrywide Hardware, Inc. Embassy Industries, Inc., Green Manufacturing, Inc., Exhaust Technologies, Inc., Pacific Stair Products, Inc., WILP Holdings, Inc. and Woodmark International, L.P. as Guarantors and Capital One, National Association as Agent and Lender (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated September 20, 2017).

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

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

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

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

101 *  Interactive Data

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

A copy of any of the foregoing exhibits to this Quarterly Report on Form 10-Q may be obtained, upon payment of the Registrant’s reasonable expenses in furnishing such exhibit, by writing to P&F Industries, Inc., 445 Broadhollow Road, Suite 100, Melville New York 11747, Attention: Corporate Secretary.
3539

	Three months					Nine months
	ended September 30,					ended September 30,
	2017		2016			2017			2016

Net revenue	$	15,782,000	$	14,633,000		$	44,357,000		$	44,769,000
Cost of sales		10,198,000		10,128,000			28,377,000			29,743,000
Gross profit		5,584,000		4,505,000			15,980,000			15,026,000
Selling, general and administrative expenses		5,352,000		4,915,000			15,765,000			15,088,000
Impairment of goodwill and other intangible assets		—		—			—			8,311,000
Operating income (loss)		232,000		(410,000	)		215,000			(8,373,000	)
Other expense (income), net		11,000		(43,000	)		(13,000	)		(75,000	)
Interest expense		50,000		26,000			124,000			164,000
Income (loss) from continuing operations before income taxes		171,000		(393,000	)		104,000			(8,462,000	)
Income tax expense (benefit)		166,000		(107,000	)		142,000			(2,872,000	)
Income (loss) from continuing operations		5,000		(286,000	)		(38,000	)		(5,590,000	)

Discontinued operations (Note 2)

Income from discontinued operations, net of tax of $-0- and $38,000 for the three and nine-month periods ended September 30, 2016, respectively.		—		—			—			72,000
Gain on sale of discontinued operations, net of tax benefit of $187,000 and $328,000 for the three and nine-month periods ended September 30, 2016, respectively.		—		187,000			—			12,358,000
Income from discontinued operations, net of tax		—		187,000			—			12,430,000

Net income (loss)	$	5,000	$	(99,000	)	$	(38,000	)	$	6,840,000

Basic (loss) earnings per share
Continuing operations	$	—	$	(0.08	)	$	(0.01	)	$	(1.55	)
Discontinued operations		—		0.05			—			3.45
Net (loss) income	$	—	$	(0.03	)	$	(0.01	)	$	1.90

Diluted (loss) earnings per share
Continuing operations	$	—	$	(0.08	)	$	(0.01	)	$	(1.55	)
Discontinued operations		—		0.05			—			3.45
Net (loss) income	$	—	$	(0.03	)	$	(0.01	)	$	1.90

Weighted average common shares outstanding:

Basic		3,617,000		3,598,000			3,609,000			3,598,000
Diluted		3,777,000		3,598,000			3,609,000			3,598,000

Net income (loss)	$	5,000	$	(99,000	)	$	(38,000	)	$	6,840,000
Other comprehensive income (loss) - foreign currency translation adjustment		71,000		(63,000	)		188,000			(299,000	)
Total comprehensive income (loss)	$	76,000	$	(162,000	)	$	150,000		$	6,541,000

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

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

Net loss		(38,000	)		—			—		—		(38,000	)		—			—			—

Restricted common stock compensation		30,000			5,000			5,000		25,000		—			—			—			—

Stock - based compensation		20,000			—			—		20,000		—			—			—			—

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

Dividends		(542,000	)		—			—		—		(542,000	)		—			—			—

Purchase of Treasury stock		(89,000	)		—			—		—		—			(12,000	)		(89,000	)		—

Foreign currency translation adjustment		188,000			—			—		—		—			—			—			188,000
						��
Balance, September 30, 2017	$	47,221,000			4,203,000		$	4,203,000	$	12,996,000	$	35,481,000			(596,000	)	$	(4,910,000	)	$	(549,000	)

	Nine months
	ended September 30,
	2018			2017
Cash Flows from Operating Activities:
Net income (loss)	$	911,000		$	(38,000	)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

Non-cash charges:
Depreciation and amortization		1,020,000			975,000
Amortization of other intangible assets		531,000			620,000
Amortization of debt issue costs		71,000			42,000
Amortization of costs for contribution to customer		42,000			—
Provision for (recovery of) losses on accounts receivable - net		242,000			(12,000	)
Stock-based compensation		169,000			20,000
Restricted stock-based compensation		32,000			30,000
Gain on sale of fixed assets		(6,000	)		(8,000	)
Deferred income taxes		292,000			142,000
Fair value increase in contingent consideration		86,000			14,000
Changes in operating assets and liabilities:
Accounts receivable		(2,914,000	)		(2,252,000	)
Inventories		(618,000	)		1,468,000
Prepaid expenses and other current assets		185,000			2,154,000
Other assets		—			45,000
Accounts payable		582,000			842,000
Accrued compensation and benefits		73,000			(129,000	)
Accrued other liabilities		(89,000	)		(623,000	)
Other liabilities		(15,000	)		(14,000	)
Total adjustments		(317,000	)		3,314,000
Net cash provided by operating activities		594,000			3,276,000

	Three months ended September 30,
	2018					2017
	Revenue		Percent of revenue			Revenue		Percent of revenue
Retail	$	6,343,000		45.2	%	$	5,212,000		42.4	%
Automotive		2,930,000		20.9			3,021,000		24.6
Industrial/catalog		1,592,000		11.3			1,228,000		10.0
Aerospace		3,015,000		21.5			2,564,000		20.8
Other		155,000		1.1			270,000		2.2
Total	$	14,035,000		100.0	%	$	12,295,000		100.0	%

	Nine months ended September 30,
	2018					2017
	Revenue		Percent of revenue			Revenue		Percent of revenue
Retail	$	14,649,000		37.8	%	$	15,976,000		45.7	%
Automotive		10,640,000		27.4			10,024,000		28.7
Industrial/catalog		4,718,000		12.2			3,812,000		10.9
Aerospace		8,229,000		21.2			4,426,000		12.7
Other		534,000		1.4			698,000		2.0
Total	$	38,770,000		100.0	%	$	34,936,000		100.0	%

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

	January 1, 2016 through February 11, 2016

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

Net income	$	72,000

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

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

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

	Three months ended			Nine months ended
	September 30,			September 30,
	2016			2017		2016
Revenue	$	16,400,000		$	45,835,000	$	50,092,000
Net (loss) income from continuing operations	$	(23,000	)	$	68,000	$	(5,002,000	)
(Loss) earnings per share – basic	$	(0.01	)	$	0.02	$	(1.39	)
(Loss) earnings per share – diluted	$	(0.01	)	$	0.02	$	(1.39	)

	Option Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)		Aggregate Intrinsic Value
Outstanding, January 1, 2018		418,233		$	5.17		3.8	$	1,343,442
Granted		—			—
Exercised		(184,480	)	$	3.99
Forfeited		—			—
Expired		—			—
Outstanding, September 30, 2018		233,753		$	6.10		5.6	$	503,155
Vested, September 30, 2018		174,420		$	5.76		4.5	$	434,328

	Option Shares			Weighted Average Grant- Date Fair Value
Non-vested options, January 1, 2018		89,000		$	4.41
Granted		—			—
Vested		(29,667	)		4.41
Forfeited		—			—
Non-vested options, September 30, 2018		59,333		$	4.41


Risk-free interest rate		2.07	%
Expected term (in years)		10	years
Volatility		87.16	%
Dividend yield		2.82	%
Weighted average fair value of options granted	$	4.41

	Option Shares		Weighted Average Grant- Date Fair Value
Non-vested options, January 1, 2017		—	$	—
Granted		89,000		4.41
Vested		—		—
Forfeited		—		—
Non-vested options, September 30, 2017		89,000	$	4.41

Balance, January 1, 2017	$	3,897,000
Acquisition of Jiffy Air Tool, Inc.		534,000
Currency translation adjustment		14,000
Balance, September 30, 2017	$	4,445,000

Balance, January 1, 2018	$	4,447,000
Currency translation adjustment		(7,000	)
Balance, September 30, 2018	$	4,440,000

	(1)	A portion of these intangibles are maintained in a foreign currency, and are therefore subject to foreign exchange rate fluctuations.
	~~(2)~~	These were previously considered an indefinite-lived intangible asset of Hy-Tech. However, as the result of a prior impairment, the Company began amortizing these intangible assets over a 15 year useful life.
	~~(3)~~	~~The $200,000 increase represents a patent acquired during the third quarter of 2017.~~

2018	$	709,000
2019		686,000	$	686,000
2020		653,000		652,000
2021		638,000		637,000
2022		635,000		635,000
2023				635,000
Thereafter		3,062,000		2,423,000
	$	6,383,000	$	5,668,000

	September 30, 2018			December 31, 2017
Term Loan	$	100,000		$	100,000
Capex borrowing		373,000			—
Debt issue costs		(2,000	)		(6,000	)
		471,000			94,000
Less current maturities		471,000			—
	$	—		$	94,000

	·	Exposure to fluctuations in energy prices;
	·	Debt and debt service requirements;
	·	Borrowing and compliance with covenants under our credit facility;
	·	Disruption in the global capital and credit markets;
	·	The strength of the retail economy in the United States and abroad;
	·	~~Supply chain disruptions;~~Risks associated with sourcing from overseas, including tariffs;
	·	Customer concentration;
	·	Adverse changes in currency exchange rates;
	·	Impairment of long-lived assets and goodwill;
	·	Unforeseen inventory adjustments or changes in purchasing patterns;
	·	Market acceptance of products;
	·	Competition;
	·	Price reductions;
	·	Interest rates;
	·	Litigation and insurance;
	·	Retention of key personnel;
	·	Acquisition of businesses;
	·	Regulatory environment;
	·	The threat of terrorism and related political instability and economic uncertainty; and
	·	Information technology system failures and attacks,

	Three months ended September 30,									Three months ended September 30,
					Increase									Increase
	2017		2016		$		%			2018		2017		$		%
Florida Pneumatic	$	12,295,000	$	11,702,000	$	593,000		5.1	%	$	14,035,000	$	12,295,000	$	1,740,000		14.2	%
Hy-Tech		3,487,000		2,931,000		556,000		19.0			3,627,000		3,487,000		140,000		4.0

Consolidated	$	15,782,000	$	14,633,000	$	1,149,000		7.9	%	$	17,662,000	$	15,782,000	$	1,880,000		11.9	%

	Nine months ended September 30,										Nine months ended September 30,
					Decrease										Increase
	2017		2016		$			%			2018		2017		$		%

Florida Pneumatic	$	34,936,000	$	35,270,000	$	(334,000	)		(0.9	)%	$	38,770,000	$	34,936,000	$	3,834,000		11.0	%
Hy-Tech		9,421,000		9,499,000		(78,000	)		(0.8	)		10,822,000		9,421,000		1,401,000		14.9

Consolidated	$	44,357,000	$	44,769,000	$	(412,000	)		(0.9	)%	$	49,592,000	$	44,357,000	$	5,235,000		11.8	%

	Three months ended September 30,				Increase					Three months ended September 30,				Increase
	2017		2016		Amount		%			2018		2017		Amount			%
Interest expense attributable to:
Short-term borrowings	$	32,000	$	15,000	$	17,000		113.3	%	$	40,000	$	32,000	$	(8,000	)		(25.0	)%
Term loans, including Capital Expenditure Term Loans		1,000		1,000		-		-
Term loans, including Capex Term Loans											5,000		1,000		(4,000	)		(400.0	)
Amortization expense of debt issue costs		17,000		10,000		7,000		70.0			21,000		17,000		(4,000	)		(23.5	)

Total	$	50,000	$	26,000	$	24,000		92.3	%	$	66,000	$	50,000	$	(16,000	)		(32.0	)%

	Nine months ended September 30,				Increase (decrease)						Nine months ended September 30,				(Increase) decrease
	2017		2016		Amount			%			2018		2017		Amount			%
Interest expense attributable to:
Short-term borrowings	$	80,000	$	41,000	$	39,000			95.1	%	$	77,000	$	80,000	$	3,000			3.8	%
Term loans, including Capital Expenditure Term Loans		2,000		5,000		(3,000	)		(60.0	)
Term loans, including Capex Term Loans												10,000		2,000		(8,000	)		(400.0	)
Amortization expense of debt issue costs		42,000		118,000		(76,000	)		(64.4	)		71,000		42,000		(29,000	)		(69.0	)

Total	$	124,000	$	164,000	$	(40,000	)		(24.4	)%	$	158,000	$	124,000	$	(34,000	)		(27.4	)%

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

July 1, 2017 - July 31, 2017		-		-		-		-
Aug., 1, 2017 – Aug., 31, 2017		1,505	$	6.32		1,505		98,495
Sept. 1, 2017 – Sept 30, 2017		10,860	$	7.26		10,860		87,635

							Maximum
					Total Number		Number
					of Shares		of shares
					Purchased as		that May Yet
					Part of Publicly		Be Purchased
	Total Number of		Average Price		Announced Plans		Under the Plans
Period	Shares Purchased		Paid per Share		or Programs		or Programs

July 1, 2018 – July 31, 2018 (1)		8,876	$	8.52		8,876		10,096
August 1, 2018 – August 31, 2018 (1)		4,696	$	8.42		4,696		5,400
September 1, 2018 – September 30, 2018 (2)		5,265	$	8.35		5,265		94,735

	(1)	On August 24, 2017, the Company announced that it had adopted a written trading plan for the purpose of repurchasing up to 100,000 shares of its common stock. This trading plan ~~expires on August 23, 2018, and~~ was adopted pursuant to an authorization of a stock repurchase program by the Company’s Board which was publicly announced on August 10, 2017. This trading plan expired on August 23, 2018.
(2)	On September 14, 2018, the Company publicly announced that the Company’s Board authorized a new stock repurchase program and the Company adopted a new written trading plan thereunder for the purchase of up to 100,000 shares. This stock repurchase program and trading plan are set to expire on September 16, 2019.

	P&F INDUSTRIES, INC.
	(Registrant)

	/s/ JOSEPH A. MOLINO,~~JR.~~ Jr.
	Joseph A. Molino, Jr.
	Chief Financial Officer
Dated: November ~~13, 2017~~9, 2018	(Principal Financial and Chief Accounting Officer)

Exhibit Number		Description of Exhibit
~~10.1~~		Amendment No. 1 to Second Amended and Restated Loan and Security Agreement dated as of August 9, 2017, (executed on September 20, 2017) by and among the Company, Florida Pneumatic Manufacturing Corporation and Hy-Tech Machine, Inc. as Borrowers, ATSCO Holdings Corp. Jiffy Air Tool, Inc., Bonanza Properties Corp., Continental Tool Group, Inc., Countrywide Hardware, Inc. Embassy Industries, Inc., Green Manufacturing, Inc., Exhaust Technologies, Inc., Pacific Stair Products, Inc., WILP Holdings, Inc. and Woodmark International, L.P. as Guarantors and Capital One, National Association as Agent and Lender (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated September 20, 2017).

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

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

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

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

101		* Interactive Data