1.BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. The consolidated financial statements include the accounts of Crawford United Corporation and its wholly-owned subsidiaries (the “Company”). Significant intercompany transactions and balances have been eliminated in the financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended June 30, 2017March 31, 2021 are not necessarily indicative of the results that may be expected for the fiscal year ended September 30, 2017.December 31, 2021. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2016.December 31, 2020. 

During the nine-monththree-month period ended June 30, 2017,March 31, 2021, there have been no changes to our significant accounting policies as determined in our Annual Report on Form 10-K for the fiscal year ended September 30, 2016.policies.

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company’s Summary of Significant Accounting Policies is provided with the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2016. The Company completed the acquisition of certain assets of Air Enterprises Acquisition, LLC in Akron, Ohio on June 1, 2017. The acquired business, which will continue to operate under the name Air Enterprises, is an industry leader in designing, manufacturing and installing large-scale commercial, institutional, and industrial custom air handling solutions. The significant accounting policies as a result of the acquisition of this business are disclosed below.December 31, 2020.

Revenue Recognition:New Accounting Standards Not Yet Adopted

Revenue from contractsIn June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses. The standard requires a financial asset (including trade receivables) measured at amortized cost basis to be presented at the net amount expected to be collected. Thus, the income statement will reflect the measurement of credit losses for newly-recognized financial assets as well as the expected increases or decreases of expected credit losses that have taken place during the period. This standard will be effective for smaller reporting companies beginning after December 15, 2022. 

Fair Value of Financial Instruments
Accounting for "Financial Instruments" requires the Company to disclose estimated fair values of financial instruments. Financial instruments held by the Company include, among others, accounts receivable, accounts payable, and notes payable. The carrying amounts reported in the consolidated balance sheet for assets and liabilities qualifying as financial instruments is recognizeda reasonable estimate of fair value.

Fair Value Measurements

As defined in FASB ASC 820, "Fair Value Measurements", fair value is 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. In determining fair value, the Company utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable firm inputs. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on the percentage-of-completion method measured byexamination of the percentage of costs incurred to date to total estimated costs for each contract. Contract costs include all direct costs and allocations of indirect costs. Provisions for estimated losses on uncompleted contracts are madeinputs used in the period in which itvaluation techniques, the Company is determined a lossrequired to provide the following information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial assets and liabilities carried at fair value will be incurred. As long-term contracts extend overclassified and disclosed in one or more years, revisions in costs and profits estimated duringof the work are reflected in the accounting period in which the facts requiring the changes become known.following three categories:

Because* Level 1: Quoted market prices in active markets for identical assets or liabilities.

* Level 2: Inputs to the valuation methodology include: * Quoted prices for similar assets or liabilities in active markets;

* Quoted prices for identical assets or similar assets or liabilities in inactive markets;

* Inputs other than quoted prices that are observable for the asset or liability;

* Inputs that are derived principally from or corroborated by observable market data by correlation or other means.

* Level 3: Unobservable inputs that are not corroborated by market data.

A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

Following is a description of the inherent uncertainties in estimating costs, it isvaluation methodologies used for instruments measured at least reasonably possiblefair value, including the estimatesgeneral classification of costs and revenue will change insuch instruments pursuant to the next year. Revenue earned on contracts in progress in excess of billings are classified as an asset. Amounts billed in excess of revenue earned are classified as a liability. The length of the contracts varies, but is typically three to six months.valuation hierarchy.

Revenue relating to replacement parts is recognized upon the shipment of goods or rendering of services to customers.

Deferred Commissions:

Commissions are earned based on the percentage-of-completion of the contract. Commissions are paid upon receipt of payment for units shipped.

Product Warranties:

Stock: The Company provides a warranty for its customer air handling business covering parts for 12 months from startup or 18 months from shipment, whichever comes first. The warranty reserve is maintained at a level which, in management’s judgment, is adequate to absorb potential warranties incurred. The amount of the reservestock market value is based on management’s knowledgevaluation of the contractsmarket quotes from independent active market sources, and historical trends. Because of the uncertainties involved in the contracts, it is reasonably possible that management’s estimates may change in the near term. However, the amount of change that is reasonably possible cannot be precisely estimated at this time.considered a level 1 investment.

4.INVENTORY

4.  INVENTORY

Inventory is valued at the lower of cost (first-in, first-out) or marketnet realizable value and consistconsists of:

The reserve for inventory obsolescence was $561,087 and $235,592 at June 30, 2017 and September 30, 2016, respectively.

5. GOODWILL AND OTHER INTANGIBLEINTANGIBLE ASSETS, NET

For the identified reporting units, a Step 1 impairment test was performed as of December 31, 2020 using an income approach based on management’s determination of the prospective financial information, with consideration given to the existing uncertainty in the global economy and aerospace and defense industry, particularly the commercial sector. The results of this test indicated the fair value exceeded carrying value for all reporting units tested. As a result of the impairment testing performed as of December 31, 2020, no indefinite-lived intangible assets or goodwill was determined to be impaired. Management updated their assessment during the first quarter of fiscal 2021 and validated the assumptions used in the analyses performed as of December 31, 2020 and determined that the resulting conclusions remained appropriate as of March 31, 2021.

Intangible assets relate to the purchase of businesses on June 1, 2017 and July 1, 2016.businesses. Goodwill represents the excess of cost over the fair value of identifiable assets acquired. Goodwill is not amortized but will beis reviewed on an annual basis for impairment. Amortization of other intangibles is being amortized on a straight-line basis over period ranging from one year to 15 years. Intangible assets are as follows:

6.PROPERTY, PLANT AND EQUPMENT,EQUIPMENT, NET

Property, plant and equipment are recorded at cost and depreciated over their useful lives. Maintenance and repair costs are expenses as incurred. Property, plant and equipment are as follows:

Depreciation expense was:was $508,937 and $434,684 for the three months ended March 31, 2021 and 2020, respectively.

7.INVESTMENTS IN EQUITY SECURITIES

7.  8.BANK DEBT 

The Company entered into a Credit Agreement on June 1, 2017 with JPMorgan Chase Bank, N.A. as lender, (thewhich was amended in connection with funding the acquisition of CAD Enterprises, Inc. (“CAD”) on July 5, 2018 and further amended on September 30, 2019, December 30, 2019 and March 2, 2021 (as amended, the “Credit Agreement”). The March 2, 2021 amendment increased the maximum borrowing amount under the revolving credit facility from $20,000,000 to $30,000,000. As amended, the Credit Agreement is comprised of a revolving facility in the amount of $8,000,000, subject to a borrowing base (determined based on 80% of Eligible Accounts, plus 50% of Eligible Progress Billing Accounts, plus 50% of Eligible Inventory, minus Reserves as defined in the Credit Agreement)$30,000,000 and a term A loan in the amount of $2,000,000,$6,000,000. Outstanding borrowings on the term A loan are payable in consecutive monthly installments, of $41,667 commencing on July 1, 2017. which currently amount to $111,111 per month.

The revolving facility under the Credit Agreement includes a $3 million sublimit for the issuance of letters of credit.credit thereunder. Interest for borrowings under the revolving facility accrues at a per annum rate equal to Prime Rate or LIBOR plus applicable margins of (i) 0.00%(0.25%) for Prime Rate loans and (ii) 2.00%1.75% for LIBOR loans. The maturity date of the revolving facility is June 1, 2020.2024. Interest for borrowings under the term A loan accrues ata per annum rate equal to Prime Rate or LIBOR plus applicable margins of (i) 0.25% for Prime Rate loans and (ii) 2.25% for LIBOR loans. The maturity date of the term A loan is JuneDecember 1, 2021.2022. The Credit Agreement includes a commitment fee on the unused portion of the revolving facility of 0.25% per annum payable quarterly. The obligations of the Company and other borrowers under the Credit Agreement are secured by a blanket lien on all the assets of the Company and its subsidiaries. The Credit Agreement also includes customary representations and warranties and applicable reporting requirements and covenants. The financial covenants includingunder the Credit Agreement include a minimum fixed charge coverage ratio, anda maximum senior funded indebtednessdebt to EBITDA ratio financial covenants.

In connection with entering into the Credit Agreement, the Company madeand a onetime prepayment of a portion of the outstanding principal under outstanding promissory notes held by First Francis Company Inc. (“First Francis”), in the amount of $500,000.  The Company will not be requiredmaximum total funded debt to make any of the scheduled quarterly payments due under these notes for the remainder of calendar 2017. First Francis is owned by Edward Crawford and Matthew Crawford, who serve on the Board of Directors of the Company.  EBITDA ratio.

Bank debt balances consist of the following:

9.NOTES PAYABLE

Convertible Notes Payable– Related Party

On December 30, 2011, management entered into a Convertible Loan Agreement (“Convertible Loan”) with Roundball, LLC (“Roundball”). The Convertible Loan provides approximately $467,000 of liquidity to meet on- going working capital requirements of the Company and allows $250,000 of borrowing on the agreement at the Company's discretion at an interest rate of 0.25%. Roundball, a major shareholder of the Company, is an affiliate of Steven Rosen and Matthew Crawford, Directors of the Company.

There have been several amendments to the original agreement over the years for the purpose of extending the existing terms of the Convertible Loan. On December 20, 2016, management entered into Amendment No. 5 of the Convertible Loan Agreement with Roundball. The amended Convertible Loan:

The Company had two separate outstanding balance on the Convertible Loan as of June 30, 2017, and September 30, 2016 was $200,000.

As part of the Convertible Loan Agreement between the Company and Roundball, the parties entered into a Warrant Agreement, dated December 30, 2012, whereby the Company issued a warrant to Roundball to purchase, at its option, up to 100,000 shares of Class A Common Stock of the Company at an exercise price of $2.50 per share, subject to certain anti-dilution and other adjustments. The warrant agreement, as amended, expires December 30, 2017.

Short-Term Financing
On June 3, 2016, management entered into an unsecured revolving credit agreementpromissory notes with First Francis Company Inc. (“First Francis”), which were originally issued in July 2016 in connection with the acquisition of Federal Hose Manufacturing (“Federal Hose”) and which were amended in July 2018 in connection with acquisition of CAD. The first promissory note was issued with original principal in the amount of $2,000,000, and the second was issued with original principal in the amount of $2,768,662. The promissory notes each had an interest rate of 6.25% per annum, which was increased from 4.0% per annum as part of the July 2018 amendments to the Credit Agreement.

In connection with the Komtek Forge acquisition, on January 15, 2021, the Company refinanced the outstanding First Francis promissory notes in the aggregate amount of $2,077,384, including accrued interest payable through the refinance date and combined this amount with an existing First Francis promissory note carried by Komtek Forge in the amount of $1,702,400 into one note for a combined $3,779,784 loan due to First Francis Company, Inc. became a major shareholderpayable in quarterly installments beginning April 15, 2021. The interest rate on the refinanced loan remained at 6.25% per annum. First Francis is owned by Matthew Crawford, who serves on the Board of Directors of the Company, and Edward Crawford, who served on the Board of Directors of the Company until June 17, 2019 and who has been nominated for election to the Board of Directors in 2021.  

Notes Payable – Seller Note

Effective July 1, 2016 when2018, the Company completed the acquisition of Federal Hose Manufacturing, LLC.all of the issued and outstanding shares of capital stock of CAD.  Upon the closing of the transaction, the CAD shares were transferred and assigned to the Company in consideration of the payment by the Company of an aggregate purchase price of $21 million, $12 million of which was payable in cash at closing, with the remainder paid in the form of a subordinated promissory note issued by the Company in favor of a Seller (the “Seller Note”), which is subject to certain post-closing adjustments based on working capital, indebtedness and selling expenses, as specified in the Share Purchase Agreement entered into in connection with the acquisition (the “Share Purchase Agreement”).   The agreement provides for a revolving credit facility of $250,000 withSeller Note bears interest at 4.0%a rate of four percent (4%) per annum and is unsecured. Each loan madepayable in full no later than June 30, 2023 (the “Maturity Date”).  The Maturity Date, with respect to any then-outstanding portion of the original principal amount which is subject to an indemnification claim by the Company (asserted in accordance with the terms of the Share Purchase Agreement) pending as of the date thereof, will be automatically extended until such time as any claim relating to such disputed amount is no longer pending, pursuant to the terms of the Seller Note and subject to additional conditions set forth therein and in the Share Purchase Agreement. The Company is not permitted to prepay any amounts due and owing under the credit arrangement will beSeller Note.  Payment of the Seller Note is secured by a second-priority security interest in the assets of CAD.   Interest accrued on the original principal amount is due and payable in fullarrears on the expiration datefirst day of each calendar quarter up to and including June 30, 2023.  The Company is required to make quarterly principal payments, the amount of which is calculated based on a four (4) year amortization schedule, on the last day of each calendar quarter up to and including the Maturity Date. The holders of the revolver note. In addition,Seller Note and the agreement generally allows for borrowing basedCompany agreed to defer the quarterly principal payment due June 30, 2020 until June 30, 2023; quarterly interest was paid on an amount equal to eighty percent of eligible accounts receivables or $250,000. The revolving line of credit expired on May 31, 2017.

the Seller Note.

Paycheck Protection Program Notes

The Company had $250,000 outstanding borrowingsapplied for and was approved for a loan in the amount of $3,679,383 (the “PPP Loan”) on April 10, 2020 pursuant to the credit facility at September 30, 2016. AtPaycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). On May 5, 2020, the Company instructed JPMorgan to repay in full the Promissory Note pursuant to the Paycheck Protection Program under the CARES Act. On June 30, 2017,4, 2020, Federal Hose and CAD each entered into unsecured loans with First Federal Savings and Loan Association of Lakewood, pursuant to the outstanding balance was $0.
Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), in the amounts of $253,071 and $1,200,766, respectively (the “PPP Loans”). The Company received notice of forgiveness from First Federal Savings and Loan Association of Lakewood of 100% of the CAD and Federal Hose PPP loans on January 2, 2021 and January 29, 2021 respectively.

Notes Payable – Related Party

Notes payable - related parties is a result of the acquisition of a business on July 1, 2016 and consists of the following:

10. LEASES

On January 1, 2019, the Company adopted ASU 2016-02 “Leases (Topic 842),” a new standard related to leases to increase transparency and comparability among organizations by requiring the recognition of lease assets and lease liabilities on the balance sheet. Most prominent among the amendments is the recognition of assets and liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP.

The Company has operating and finance leases for facilities, vehicles and equipment. These leases have remaining terms of 2 years to 15 years, some of which include options to extended the leases for up to 10 years.

Supplemental balance sheet information related to leases:

9.11. EARNINGS PER COMMON SHARE

The following table sets forth the computation of basic and diluted earnings per share.

10.12. ACQUISITIONS

Effective January 15, 2021, the Company completed the acquisition of all of the issued and outstanding membership interests of KT Acquisition LLC (dba Komtek Forge, “Komtek”), a Massachusetts limited liability company and supplier of highly engineered forgings for the aerospace, industrial gas turbine, medical prosthetics. alternative energy, petrochemical, and defense industries, pursuant to a Membership Interest Purchase Agreement entered into as of January 15, 2021. The Company acquired Komtek in consideration of the payment by the Company of an aggregate purchase price of $3.6 million, subject to certain post-closing adjustments based on working capital, indebtedness and selling expenses, as specified in the Membership Interest Purchase Agreement, which was comprised of cash, the issuance of 60,000 Class A common shares of the Company and the assumption of approximately $1,702,000 of specified liabilities of the seller.

Effective March 1, 2021, MTA Acquisition Company, LLC, a Delaware limited liability company (“MTA”) and indirect wholly-owned subsidiary of Crawford United Corporation, completed the acquisition of all of the membership interests of Global-Tek-Manufacturing LLC, a Puerto Rico limited liability company and specialist in machining parts from wrought, rounds, castings or extrusions and providing in house anodizing and other finishing and assembly operations and substantially all of the assets of Machining Technology L.L.C., a Colorado limited liability company with CNC machining capability, pursuant to a Membership Interest and Asset Purchase Agreement entered into March 2, 2021 and effective as of March 1, 2021. The stock and assets were transferred and assigned to MTA in exchange for approximately $4.9 million in cash and the repayment of remaining outstanding indebtedness and transaction costs totaling approximately $1.6 million, subject to customary post-closing adjustments. The Purchase Agreement also includes a post-closing “earnout” that provides for up to an aggregate of $1.5 million in additional consideration to the certain sellers (up to $750,000 per year) if specified performance targets are met in the two years following closing. If earned, the additional consideration is payable in cash or, at the election of each such seller, in Company common shares up to a maximum aggregate amount of 61,475 shares.

13. SEGMENT AND RELATED INFORMATION

As of January 1, 2021, the Company elected to report operations for two business segments: (1) Commercial Air Handling Equipment, (2) Industrial and Transportation Products. The decision to change from three to two reportable business segments was the result of a board-level discussion and was deemed appropriate given the size of the Company. The Company's management evaluates segment performance based primarily on operating income. Certain corporate costs are allocated to the segments and interest expense directly related to financing the acquisition of a business is allocated to that segment, respectively.  Intangible assets are allocated to each segment and the related amortization of these assets are recorded in selling, general and administrative expenses.

Commercial Air Handling:
The Commercial Air Handling segment was added June 1, 2017, when the Company purchased certain assets and assumed certain liabilities of Air Enterprises Acquisition LLC on June 1, 2017 for $10,250,000.in Akron, Ohio. The acquired business, will continue to operatewhich operates under the name Air Enterprises, (“AE”). AE manufacturesis an industry leader in designing, manufacturing and installing large-scale commercial, institutional, and industrial custom air handling units under fixed price contracts.solutions. Its customers are typically in the health care, university, research,education, pharmaceutical and industrial manufacturing market segments, and span all acrossmarkets in the United States and worldwide. AE has one operating location in Northeastern Ohio. The purchase price was assigned to the book value of the net assets acquired with the excess over the book value assigned to intangible assets and goodwill and has been allocated to the following accounts: