UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-10-QQ
[X]☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period endedJune 30March 31, 2021, 2017
OR
[ ]☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period fromNot Applicable toNot Applicable
Commission file number:0-147000-000147
HICKOK INCORPORATEDCRAWFORD UNITED CORPORATION
(Exact name of registrant as specified in its charter)
Ohio | 34-0288470 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
10514 Dupont Avenue, Suite 200, Cleveland, Ohio | 44108 | |
(Address of principal executive offices) | (Zip Code) |
Registrant's telephone number(216) 541-8060243-2614
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yes [X]☒ No [ ]
☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yes [X]☒ No [ ]☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | Accelerated filer |
Non-accelerated filer | Smaller reporting company |
Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes [ ]☐ No [X]☒
Securities registered pursuant to Section 12(b) of the Act: None.
As of July 31, 2017, 2,114,886May 3, 2021, 2,637,058 shares of Class A Common Stock and 773,616771,848 shares of Class B Common Stock were outstanding.
PART I
ITEM 1. FINANCIAL STATEMENTS
HICKOK INCORPORATED AND SUBSIDIARIESCRAWFORD UNITED CORPORATION
CONSOLIDATED BALANCE SHEET
(Unaudited) | ||||||||
June 30, 2017 | September 30, 2016 | |||||||
ASSETS | ||||||||
CURRENT ASSETS: | ||||||||
Cash and Cash Equivalents | $ | 1,030,560 | $ | 3,060,734 | ||||
Accounts receivable-less allowance for doubtful accounts | 8,702,023 | 1,354,199 | ||||||
Costs in Excess of Billings and estimated costs | 3,106,868 | |||||||
Inventories-less allowance for obsolete inventory | 3,896,865 | 3,308,799 | ||||||
Prepaid Expenses and other current assets | 715,740 | 43,085 | ||||||
Total Current Assets | 17,452,056 | 7,766,817 | ||||||
PROPERTY, PLANT AND EQUIPMENT: | ||||||||
Land | 233,479 | 233,479 | ||||||
Buildings and Leasehold Improvements | 2,028,914 | 1,448,978 | ||||||
Machinery and Equipment | 5,236,781 | 3,392,734 | ||||||
Total Property, Plant and Equipment | 7,499,174 | 5,075,191 | ||||||
Less accumulated depreciation | 3,974,633 | 3,771,268 | ||||||
Property, Plant and Equipment, Net | 3,524,541 | 1,303,923 | ||||||
OTHER ASSETS: | ||||||||
Goodwill | 2,409,048 | 1,777,656 | ||||||
Intangibles, net of accumulated amortization | 2,330,914 | 1,250,909 | ||||||
Deferred income taxes-less valuation allowance of $500,000 | 3,330,600 | 3,330,600 | ||||||
Other non-current assets | 3,250 | 4,850 | ||||||
Total Non-Current Other Assets | 8,073,812 | 6,364,015 | ||||||
Total Assets | $ | 29,050,409 | $ | 15,434,755 |
(Unaudited) | ||||||||
March 31, 2021 | December 31, 2020 | |||||||
ASSETS | ||||||||
CURRENT ASSETS: | ||||||||
Cash and cash equivalents | $ | 4,841,177 | $ | 6,194,276 | ||||
Accounts receivable less allowance for doubtful accounts | 15,550,526 | 12,021,692 | ||||||
Contract assets | 3,901,253 | 3,735,557 | ||||||
Inventories-less allowance for obsolete inventory | 13,119,476 | 11,030,960 | ||||||
Investments | 1,644,975 | 1,534,400 | ||||||
Prepaid expenses and other current assets | 674,789 | 657,496 | ||||||
Total Current Assets | 39,732,196 | 35,174,381 | ||||||
Property, plant and equipment, net | 15,286,257 | 11,290,783 | ||||||
Operating right of use asset, net | 8,565,973 | 8,856,820 | ||||||
OTHER ASSETS: | ||||||||
Goodwill | 13,978,426 | 11,505,852 | ||||||
Intangibles, net of accumulated amortization | 9,555,385 | 7,558,309 | ||||||
Other non-current assets | 102,129 | 106,638 | ||||||
Total Non-Current Other Assets | 23,635,940 | 19,170,799 | ||||||
Total Assets | $ | 87,220,366 | $ | 74,492,783 |
See accompanying notes to consolidated financial statements
HICKOK INCORPORATED AND SUBSIDIARIESCRAWFORD UNITED CORPORATION
CONSOLIDATED BALANCE SHEET
(Unaudited) | ||||||||
June 30, 2017 | September 30, 2016 | |||||||
LIABILITIES AND STOCKHOLDERS EQUITY | ||||||||
CURRENT LIABILITIES: | ||||||||
Convertible notes payable - related party | $ | 200,000 | $ | - | ||||
Short-term financing - related party | - | 250,000 | ||||||
Notes payable - related party | 142,726 | 379,761 | ||||||
Bank Debt - Current | 500,000 | - | ||||||
Leases payable | 42,896 | 59,369 | ||||||
Accounts payable | 3,324,482 | 733,388 | ||||||
Billings in Excess of Costs & Earnings | 647,276 | |||||||
Accrued payroll and related expenses | 838,458 | 301,054 | ||||||
Accrued expenses | 1,362,390 | 593,378 | ||||||
Accrued income taxes | 77,744 | 31,000 | ||||||
Deferred revenue | 503,646 | - | ||||||
Total Current Liabilities | 7,639,618 | 2,347,950 | ||||||
LONG-TERM LIABILITIES: | ||||||||
Notes payable - related party | 3,861,766 | 4,388,901 | ||||||
Bank Debt | 7,700,000 | - | ||||||
Leases payable | 151,208 | 144,997 | ||||||
Convertible notes payable - related party | - | 200,000 | ||||||
Deferred revenue | 377,735 | - | ||||||
Total Long-Term Liabilities | 12,090,709 | 4,733,898 | ||||||
STOCKHOLDERS' EQUITY | ||||||||
Common shares - no par value | ||||||||
Class A 10,000,000 shares authorized, 2,130,681 and 2,090,394 shares issued | 2,246,369 | 2,108,651 | ||||||
Class B 2,500,000 convertible shares authorized, 779,283 shares issued | 710,272 | 710,272 | ||||||
Preferred 1,000,000 shares authorized, no shares outstanding | - | - | ||||||
Contributed capital | 1,741,901 | 1,741,901 | ||||||
Treasury shares | (264,841 | ) | (253,341 | ) | ||||
Class A - 15,795 shares | ||||||||
Class B - 5,667 and 667 shares | ||||||||
Retained earnings | 4,886,381 | 4,045,424 | ||||||
Total Stockholders' Equity | 9,320,082 | 8,352,907 | ||||||
Total Liabilities and Stockholders' Equity | $ | 29,050,409 | $ | 15,434,755 |
(Unaudited) | ||||||||
March 31, 2021 | December 31, 2020 | |||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
CURRENT LIABILITIES: | ||||||||
Notes payable – current | 2,915,213 | 2,782,479 | ||||||
Bank debt – current | 1,333,333 | 1,333,333 | ||||||
Leases payable – current | 1,158,633 | 1,136,300 | ||||||
Accounts payable | 9,913,661 | 9,230,032 | ||||||
Unearned revenue | 677,741 | 820,002 | ||||||
Contingent liability - current | 750,000 | - | ||||||
Accrued expenses | 3,382,366 | 2,242,924 | ||||||
Total Current Liabilities | 20,130,947 | 17,545,070 | ||||||
LONG-TERM LIABILITIES: | ||||||||
Notes payable – long-term | 6,489,571 | 5,455,717 | ||||||
Bank debt – long-term | 17,757,675 | 12,174,428 | ||||||
PPP loans | - | 1,453,837 | ||||||
Leases payable – long-term | 7,638,786 | 7,901,357 | ||||||
Deferred income taxes | 2,429,828 | 2,429,828 | ||||||
Contingent liability – long-term | 750,000 | - | ||||||
Total Long-Term Liabilities | 35,065,860 | 29,415,167 | ||||||
STOCKHOLDERS' EQUITY | ||||||||
Class A common shares - 10,000,000 shares authorized, 2,678,787 issued at March 31, 2021 and 2,595,087 issued at December 31, 2020 | 5,285,333 | 3,896,705 | ||||||
Class B common shares - 2,500,000 shares authorized, 954,283 shares issued at March 31, 2021 and December 31, 2020 | 1,465,522 | 1,465,522 | ||||||
Contributed capital | 1,741,901 | 1,741,901 | ||||||
Treasury shares | (1,979,085 | ) | (1,938,052 | ) | ||||
Class A common shares – 41,729 shares held at March 31, 2021 and 39,467 shares held at December 31, 2020 | ||||||||
Class B common shares – 182,435 shares held at March 31, 2021 and December 31, 2020 | ||||||||
Retained earnings | 25,509,888 | 22,366,470 | ||||||
Total Stockholders' Equity | 32,023,559 | 27,532,546 | ||||||
Total Liabilities and Stockholders' Equity | $ | 87,220,366 | $ | 74,492,783 |
See accompanying notes to consolidated financial statements
HICKOK INCORPORATED AND SUBSIDIARIESCRAWFORD UNITED CORPORATION
CONSOLIDATED STATEMENT OF INCOME (Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
TOTAL SALES | $ | 7,220,626 | $ | 1,530,244 | $ | 12,923,867 | $ | 3,953,740 | ||||||||
COSTS AND EXPENSES: | ||||||||||||||||
Cost of Sales | 4,191,480 | 769,430 | 7,933,969 | 2,204,495 | ||||||||||||
Product Development | 179,840 | 258,406 | 636,166 | 777,889 | ||||||||||||
Selling, General and Administrative Expenses | 1,808,920 | 507,326 | 3,354,796 | 1,488,461 | ||||||||||||
Interest Charges | 66,695 | 4,843 | 165,656 | 8,179 | ||||||||||||
Legal matter | - | - | (50,000 | ) | - | |||||||||||
Other income | (5,205 | ) | (1,666 | ) | (11,177 | ) | (5,556 | ) | ||||||||
Total Costs and Expenses | 6,241,730 | 1,538,339 | 12,029,410 | 4,473,468 | ||||||||||||
Income (Loss) before Provision for Income Taxes | 978,896 | (8,095 | ) | 894,457 | (519,728 | ) | ||||||||||
Provision for Income Taxes | 37,373 | - | 53,500 | - | ||||||||||||
Net Income (Loss) | $ | 941,523 | $ | (8,095 | ) | $ | 840,957 | $ | (519,728 | ) | ||||||
Earnings (Loss) Per Common Share - Basic | $ | 0.33 | $ | (0.00 | ) | $ | 0.29 | $ | (0.32 | ) | ||||||
Earnings (Loss) Per Common Share - Diluted | $ | 0.31 | $ | (0.00 | ) | $ | 0.28 | $ | (0.32 | ) | ||||||
Weighted Average Shares of Common Stock Outstanding - Basic | 2,880,719 | 1,638,215 | 2,870,349 | 1,638,215 | ||||||||||||
Weighted Average Shares of Common Stock Outstanding - Diluted | 3,044,440 | 1,638,215 | 2,962,430 | 1,638,215 |
Three Months Ended March 31, | ||||||||
2021 | 2020 | |||||||
Total Sales | $ | 23,994,004 | $ | 25,281,574 | ||||
Cost of Sales | 17,991,083 | 19,073,431 | ||||||
Gross Profit | 6,002,921 | 6,208,143 | ||||||
Operating Expenses: | ||||||||
Selling, General and administrative expenses | 3,677,461 | 3,069,994 | ||||||
Operating Income | 2,325,460 | 3,138,149 | ||||||
Other (Income) and Expenses: | ||||||||
Interest charges | 218,618 | 297,421 | ||||||
Realized (gain) on investments | (152,761 | ) | - | |||||
Unrealized (gain) on investments | (233,644 | ) | - | |||||
PPP loan forgiveness | (1,453,837 | ) | - | |||||
Other (income) expense, net | 278,125 | 71,361 | ||||||
Total Other (Income) and Expenses | (1,343,499 | ) | 368,782 | |||||
Income before Provision for Income Taxes | 3,668,959 | 2,769,367 | ||||||
Provision for Income Taxes | 525,542 | 693,797 | ||||||
Net Income | $ | 3,143,417 | $ | 2,075,570 | ||||
Net Income Per Common Share - Basic | $ | 0.93 | $ | 0.63 | ||||
Net Income Per Common Share - Diluted | $ | 0.93 | $ | 0.63 | ||||
Weighted Average Shares of Common Stock Outstanding | ||||||||
Basic | 3,392,839 | 3,311,477 | ||||||
Diluted | 3,393,720 | 3,313,157 |
See accompanying notes to consolidated financial statements
CRAWFORD UNITED CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON SHARES - NO PAR VALUE | ||||||||||||||||||||||||
CLASS A | CLASS B | CONTRIBUTED CAPITAL | TREASURY SHARES | RETAINED EARNINGS | TOTAL | |||||||||||||||||||
Balance at December 31, 2019 | $ | 3,599,806 | $ | 1,465,522 | $ | 1,741,901 | $ | (1,905,780 | ) | $ | 16,527,083 | $ | 21,428,532 | |||||||||||
Share-based compensation expense | 70,849 | - | - | - | - | 70,849 | ||||||||||||||||||
Stock awards | 226,050 | - | - | - | - | 226,050 | ||||||||||||||||||
Repurchase of shares | - | - | - | (32,272 | ) | - | (32,272 | ) | ||||||||||||||||
Net income | - | - | - | - | 5,839,387 | 5,839,387 | ||||||||||||||||||
Balance at December 31, 2020 | $ | 3,896,705 | $ | 1,465,522 | $ | 1,741,901 | $ | (1,938,052 | ) | $ | 22,366,470 | $ | 27,532,546 | |||||||||||
Share-based compensation expense | 15,667 | - | - | - | - | 15,667 | ||||||||||||||||||
Stock awards | 313,961 | - | - | - | - | 313,961 | ||||||||||||||||||
Issuance for acquisition | 1,059,000 | - | - | - | - | 1,059,000 | ||||||||||||||||||
Repurchase of shares | - | - | - | (41,033 | ) | - | (41,033 | ) | ||||||||||||||||
Net income | - | - | - | - | 3,143,417 | 3,143,417 | ||||||||||||||||||
Balance at March 31, 2021 | $ | 5,285,333 | $ | 1,465,522 | $ | 1,741,901 | $ | (1,979,085 | ) | $ | 25,509,887 | $ | 32,023,559 |
COMMON SHARES ISSUED | TREASURY SHARES | COMMON SHARES OUTSTANDING | ||||||||||||||||||||||
CLASS A | CLASS B | CLASS A | CLASS B | CLASS A | CLASS B | |||||||||||||||||||
Balance at December 31, 2019 | 2,576,837 | 954,283 | 37,208 | 182,435 | 2,539,629 | 771,848 | ||||||||||||||||||
Stock awards | 17,250 | - | - | - | 17,250 | - | ||||||||||||||||||
Stock option exercise | 1,000 | - | - | - | 1,000 | - | ||||||||||||||||||
Share repurchase | - | - | 2,259 | - | (2,259 | ) | - | |||||||||||||||||
Balance at December 31, 2020 | 2,595,087 | 954,283 | 39,467 | 182,435 | 2,555,620 | 771,848 | ||||||||||||||||||
Stock Awards | 23,700 | - | - | - | 23,700 | - | ||||||||||||||||||
Acquisition | 60,000 | - | - | - | 60,000 | - | ||||||||||||||||||
Share repurchase | - | - | 2,262 | - | (2,262 | ) | - | |||||||||||||||||
Balance at March 31, 2021 | 2,678,787 | 954,283 | 41,729 | 182,435 | 2,637,058 | 771,848 |
HICKOK INCORPORATED AND SUBSIDIARIESCRAWFORD UNITED CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOW (Unaudited)
Nine Months Ended | ||||||||
June 30 | ||||||||
2017 | 2016 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Cash received from customers | $ | 15,510,323 | $ | 4,261,359 | ||||
Cash paid to suppliers and employees | (13,874,832 | ) | (4,542,057 | ) | ||||
Interest paid | (176,219 | ) | (7,329 | ) | ||||
Interest received | 4,049 | 632 | ||||||
Income taxes paid | (51,500 | ) | - | |||||
Net Cash Provided by (Used in) Operating Activities | 1,411,821 | (287,395 | ) | |||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Cash used in purchase of business | (10,250,000 | ) | ||||||
Capital Expenditures | (314,530 | ) | (26,435 | ) | ||||
Net Cash Used in Investing Activities | (10,564,530 | ) | (26,435 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Payments on Related Party Notes | (764,170 | ) | - | |||||
Payments on related party short-term financing | (250,000 | ) | ||||||
Borrowing on short-term financing | - | 250,000 | ||||||
Borrowing on bank debt | 8,500,000 | - | ||||||
Payment on bank debt | (300,000 | ) | ||||||
Payments on capital lease | (51,795 | ) | (26,524 | ) | ||||
Purchase of Class B shares | (11,500 | ) | - | |||||
Net Cash Provided by Financing Activities | 7,122,535 | 223,476 | ||||||
Decrease in Cash and Cash Equivalents | (2,030,174 | ) | (90,354 | ) | ||||
Cash and Cash Equivalents at Beginning of Period | 3,060,734 | 346,405 | ||||||
Cash and Cash Equivalents at End of Period | $ | 1,030,560 | $ | 256,051 |
Three Months Ended March 31, | ||||||||
2021 | 2020 | |||||||
Cash Flows from Operating Activities | ||||||||
Net Income | $ | 3,143,417 | $ | 2,075,570 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 724,641 | 623,465 | ||||||
Unrealized gain on investments in equity securities | (233,644 | ) | - | |||||
Forgiveness of PPP loan | (1,453,837 | ) | - | |||||
Non-cash share-based compensation expense | 329,628 | 36,466 | ||||||
Changes in assets and liabilities: | ||||||||
Decrease (Increase) in accounts receivable | (967,662 | ) | 2,056,246 | |||||
Decrease (Increase) in inventories | (319,455 | ) | (339,843 | |||||
Decrease (Increase) in contract assets | (165,696 | ) | (1,775,539 | ) | ||||
Decrease (Increase) in prepaid expenses & other assets | 268,510 | (58,099 | ) | |||||
Increase (Decrease) in accounts payable | (633,307 | ) | 2,305,197 | |||||
Increase (Decrease) in accrued expenses | 912,024 | 1,239,831 | ||||||
Increase (Decrease) in unearned revenue | (142,261 | ) | (546,965 | ) | ||||
Total adjustments | (1,681,059 | ) | 3,540,759 | |||||
Net Cash Provided by Operating Activities | $ | 1,462,358 | $ | 5,616,329 | ||||
Cash Flows from Investing Activities | ||||||||
Cash paid for business acquisitions | (7,081,277 | ) | (9,400,000 | ) | ||||
Sale of equity securities | 123,069 | - | ||||||
Capital expenditures | (827,184 | ) | (122,720 | ) | ||||
Net Cash (Used in) Investing Activities | $ | (7,785,392 | ) | $ | (9,522,720 | ) | ||
Cash Flows from Financing Activities | ||||||||
Payments on notes | (562,500 | ) | (684,720 | ) | ||||
Payments on bank debt | (1,352,833 | ) | (3,093,747 | ) | ||||
Borrowings on bank debt | 6,926,301 | 10,870,893 | ||||||
Share repurchase | (41,033 | ) | - | |||||
Net Cash Provided by Financing Activities | $ | 4,969,935 | $ | 7,092,426 | ||||
Net Increase (decrease) in cash and cash equivalents | (1,353,099 | ) | 3,186,035 | |||||
Cash and cash equivalents at beginning of period | 6,194,276 | 2,232,499 | ||||||
Cash and cash equivalents at end of period | $ | 4,841,177 | $ | 5,418,534 | ||||
Supplemental disclosures of cash flow information | ||||||||
Interest Paid | $ | 153,995 | $ | 255,742 | ||||
Supplemental disclosures of noncash financing activity | ||||||||
Forgiveness of PPP loan | $ | 1,453,837 | - | |||||
Supplemental disclosures of noncash investing activity | ||||||||
Issuance of Class A common shares in business acquisition | $ | 1,059,000 | - | |||||
See accompanying notes to consolidated financial statements
HICKOK INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOW (Unaudited)
Nine Months Ended | ||||||||
June 30 | ||||||||
2017 | 2016 | |||||||
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH PROVIDED BY OPERATING ACTIVITIES: | ||||||||
Net Income (Loss) | $ | 840,957 | $ | (519,728 | ) | |||
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH PROVIDED BY OPERATING ACTIVITIES: | ||||||||
Depreciation and amortization | 353,693 | 94,500 | ||||||
Loss on disposal of assets | 2,667 | - | ||||||
Non-cash share-based compensation expense | 129,832 | - | ||||||
CHANGES IN ASSETS AND LIABILITIES: | ||||||||
Decrease (Increase) in accounts receivable | (2,586,456 | ) | 307,619 | |||||
Decrease (Increase) in excess of billing | 873,956 | - | ||||||
Decrease (Increase) in inventories | 6,437 | (22,161 | ) | |||||
Decrease (Increase) in prepaid expenses and other assets | (610,393 | ) | 58,856 | |||||
Increase (Decrease) in accounts payable | 864,476 | (107,043 | ) | |||||
Increase (Decrease) in billings in excess of costs and earnings | 52,732 | (35,063 | ) | |||||
Increase (Decrease) in accrued payroll and related expenses | 211,454 | (64,375 | ) | |||||
Increase (Decrease) in accrued expenses | 344,341 | - | ||||||
Increase (Decrease) in accrued income taxes | 46,744 | - | ||||||
Increase (Decrease) in deferred revenue | 881,381 | - | ||||||
Total Adjustments | 570,864 | 232,333 | ||||||
Net Cash Provided by Operating Activities | $ | 1,411,821 | $ | (287,395 | ) |
See accompanying notes to consolidated financial statements
HICKOK INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2021JUNE 30, 2017
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.
33.. ACCOUNTS RECEIVABLE
The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information. The reserve for doubtful accounts was $117,750$17,009 and $10,000$19,973 at June 30, 2017March 31, 2021 and September 30, 2016.December 31, 2020, respectively.
4.INVENTORY
4. INVENTORY
Inventory is valued at the lower of cost (first-in, first-out) or marketnet realizable value and consistconsists of:
June 30,2017 | September 30, 2016 | March 31, 2021 | December 31, 2020 | |||||||||||||
Raw materials and component parts | $ | 2,760,341 | $ | 1,730,563 | $ | 3,914,652 | $ | 3,897,133 | ||||||||
Work-in-process | 592,670 | 438,447 | 3,963,814 | 3,449,252 | ||||||||||||
Finished products | 543,854 | 1,139,789 | 5,556,355 | 3,999,920 | ||||||||||||
Inventories, net of reserve | $ | 3,896,865 | $ | 3,308,799 | ||||||||||||
Total inventory | $ | 13,434,821 | $ | 11,346,305 | ||||||||||||
Less: inventory reserves | 315,345 | 315,345 | ||||||||||||||
Net inventory | $ | 13,119,476 | $ | 11,030,960 |
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:
June 30, 2017 | September 30, 2016 | |||||||
Customer List: Backlog | $ | 1,970,000 | $ | 1,280,000 | ||||
Non-Compete Agreements | 200,000 | 0 | ||||||
Trademarks | 340,000 | 0 | ||||||
Other Intangibles | 2,510,000 | 1,280,000 | ||||||
Accumulated Amortization | (179,086 | ) | (29,091 | ) | ||||
Other Intangibles, Net | $ | 2,330,914 | $ | 1,250,909 |
March 31, 2021 | December 31, 2020 | |||||||
Customer list intangibles | $ | 8,741,000 | $ | 7,700,000 | ||||
Non-compete agreements | 200,000 | 200,000 | ||||||
Trademarks | 3,092,000 | 1,930,000 | ||||||
Total intangible assets | 12,033,000 | 9,830,000 | ||||||
Less: accumulated amortization | 2,477,615 | 2,271,691 | ||||||
Intangible assets, net | $ | 9,555,385 | $ | 7,558,309 |
Amortization of other intangibles assets was: $205,924 and $179,340 for the three months ended March 31, 2021 and 2020, respectively.
Three Months Ended | Nine Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Intangible Amortization | $ | 91,813 | $ | - | $ | 149,995 | $ | - |
6.PROPERTY, PLANT AND EQUPMENT,EQUIPMENT, NET
Property, plant and equipment are recorded at cost and depreciated over their useful lives. Maintenance and repair costs are expenses as incurred. Property, plant and equipment are as follows:
March 31, 2021 | December 31, 2020 | |||||||
Land | $ | 228,872 | $ | 228,872 | ||||
Buildings and improvements | 2,434,882 | 2,061,887 | ||||||
Machinery & equipment | 20,251,375 | 14,329,462 | ||||||
Total property, plant & equipment | 22,915,129 | 16,620,221 | ||||||
Less: accumulated depreciation | 7,628,872 | 5,329,438 | ||||||
Property plant & equipment, net | $ | 15,286,257 | $ | 11,290,783 |
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
Three Months Ended | Nine Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Depreciation Expense | $ | 86,293 | $ | 31,500 | $ | 203,698 | $ | 94,500 |
Investments in equity securities are summarized in the table below:
March 31, 2021 | December 31, 2020 | |||||||
Fair value of equity securities | $ | 1,644,975 | $ | 1,534,400 | ||||
Cost basis | 826,224 | 949,293 | ||||||
Unrealized gain (loss) on equity securities | $ | 818,751 | $ | 585,107 |
Unrealized gains were $233,644 as of March 31, 2021 compared to $585,107 as of December 31, 2020 and unrealized losses were $0 as of March 31, 2021 compared to $0 as of December 31, 2020. Realized gains were $152,748 as of March 31, 2021 compared to $0 as of December 31, 2020 and Realized losses were $0 as of March 31, 2021 and $0 as of December 31, 2020.
Investments by fair value level in the hierarchy as of March 31, 2021 and December 31, 2020 are as follows:
Quoted Market Prices in Attractive Markets (Level 1) | Models with Significant Observable Market Parameters (Level 2) | Unobservable Inputs that are not Corroborated by Market Data (Level 3) | Total Carrying Value in the Balance Sheet | |||||||||||||
Common stock as of March 31, 2021 | $ | 1,644,975 | $ | - | $ | - | $ | 1,644,975 | ||||||||
Common stock as of December 31, 2020 | $ | 1,534,400 | $ | - | $ | - | $ | 1,534,400 |
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:
Current June 30, 2017 | Total June 30, 2017 | Total September 30, 2016 | ||||||||||
Term Debt | $ | 500,000 | $ | 2,000,000 | $ | - | ||||||
Revolving Debt | - | 6,200,000 | - | |||||||||
Total Bank Debt | 8,200,000 | - | ||||||||||
Less: Current Portion | 500,000 | |||||||||||
Non-Current Bank Debt | 7,700,000 |
March 31, 2021 | December 31, 2020 | |||||||
Term debt | $ | 2,444,445 | $ | 2,777,778 | ||||
Revolving debt | 16,752,098 | 10,825,797 | ||||||
Total Bank debt | 19,196,543 | 13,603,575 | ||||||
Less: current portion | 1,333,333 | 1,333,333 | ||||||
Non-current bank debt | 17,863,210 | 12,270,242 | ||||||
Less: unamortized debt costs | 105,535 | 95,814 | ||||||
Net non-current bank debt | $ | 17,757,675 | $ | 12,174,428 |
8. The Company had $13.2 million and $9.2 million available to borrow on the revolving credit facility at March 31, 2021 and December 31, 2020, respectively.
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:
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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 FinancingOn 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:
Current 2017 | Total | Total | ||||||||||
In connection with the acquisition, the Company entered into a promissory note on July 1, 2016 for $2,000,000 loan due to First Francis Company, payable in quarterly installments of $60,911 beginning on October 31, 2016, bearing interest at 4%. The remaining balance of the note shall be payable in full on July 1, 2022. | $ | 81,254 | $ | 1,639,206 | $ | 2,000,000 | ||||||
In connection with the acquisition, the Company entered into a promissory note on July 1, 2016 for $2,768,662 loan due to First Francis Company, payable in quarterly installments of $84,321 beginning on October 31, 2016, bearing interest at 4%. The remaining balance of the note shall be payable in full on July 1, 2022. | 61,472 | 2,365,286 | 2,768,662 | |||||||||
$ | 142,726 | 4,004,492 | 4,768,662 | |||||||||
Less current portion | 142,726 | 379,761 | ||||||||||
$ | 3,861,766 | $ | 4,388,901 |
March 31, 2021 | December 31, 2020 | |||||||
In connection with the Federal Hose acquisition, the Company entered into a promissory note on July 1, 2016 for a $2,000,000 loan due to First Francis Company, payable in quarterly installments beginning October 31, 2016. Refinanced on January 15, 2021. | $ | - | $ | 1,108,829 | ||||
In connection with the Federal Hose acquisition, the Company entered into a promissory note on July 1, 2016 for a $2,768,662 loan due to First Francis Company, payable in quarterly installments beginning October 31, 2016. Refinanced on January 15, 2021. | - | 941,867 | ||||||
In connection with the Komtek Forge acquisition, the Company refinanced the outstanding First Francis promissory notes, accrued interest payable through the refinance date and the assumed First Francis promissory note into one note on January 15, 2021 for a $3,779,784 loan due to First Francis Company, payable in quarterly installments beginning April 15, 2021. | 3,779,784 | - | ||||||
In connection with the CARES Act, Federal Hose entered into a promissory note on June 4, 2020 for a $253,071 loan due to First Federal Savings and Loan Association of Lakewood, with monthly principal and interest installments scheduled to begin January 4, 2021. This note was fully forgiven on January 29, 2021. | - | 253,071 | ||||||
In connection with the CARES Act, CAD entered into a promissory note on June 4, 2020 for a $1,200,766 loan due to First Federal Savings and Loan Association of Lakewood, with monthly principal and interest installments scheduled to begin January 4, 2021. This note was fully forgiven on January 22, 2021. | - | 1,200,766 | ||||||
In connection with the CAD acquisition, the Company entered into a promissory note on July 1, 2018 for a $9,000,000 loan due to the Loudermilks, payable in quarterly installments beginning September 30, 2018. | 5,625,000 | 6,187,500 | ||||||
Total notes payable | 9,404,784 | 9,692,033 | ||||||
Less current portion | 2,915,213 | 2,782,479 | ||||||
Notes payable – non-current portion | $ | 6,489,571 | $ | 6,909,554 |
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:
March 31, 2021 | December 31, 2020 | |||||||
Operating leases: | ||||||||
Operating lease right-of-use assets, net | $ | 8,565,973 | $ | 8,856,820 | ||||
Other current liabilities | 1,158,633 | 1,136,300 | ||||||
Operating lease liabilities | 7,638,786 | 7,901,357 | ||||||
Total operating lease liabilities | $ | 8,797,419 | $ | 9,037,657 | ||||
Weighted Average Remaining Lease Term | ||||||||
Operating Leases (in years) | 9.0 | 9.0 | ||||||
Weighted Average Discount Rate | ||||||||
Operating Leases | 5.0 | % | 5.0 | % |
9.11. EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings per share.
Three Months Ended March 31, | ||||||||
2021 | 2020 | |||||||
Earnings Per Share - Basic | ||||||||
Net Income | $ | 3,143,417 | $ | 2,075,570 | ||||
Weighted average shares of common stock outstanding - Basic | 3,392,839 | 3,311,477 | ||||||
Earnings Per Share - Basic | $ | 0.93 | $ | 0.63 | ||||
Earnings Per Share - Diluted | ||||||||
Weighted average shares of common stock outstanding - Basic | 3,392,839 | 3,311,477 | ||||||
Warrants, Options and Convertible Notes | 881 | 1,680 | ||||||
Weighted average shares of common stock -Diluted | 3,393,720 | 3,313,157 | ||||||
Earnings Per Share - Diluted | $ | 0.93 | $ | 0.63 |
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Earnings (Loss) Per Share - Basic | ||||||||||||||||
Net Income (Loss) | $ | 941,523 | $ | (8,095 | ) | $ | 840,957 | $ | (519,728 | ) | ||||||
Weighted average shares of common stockoutstanding - Basic | 2,880,719 | 1,638,215 | 2,870,349 | 1,638,215 | ||||||||||||
Earnings (Loss) Per Share - Basic | $ | 0.33 | $ | (0.00 | ) | $ | 0.29 | $ | (0.32 | ) | ||||||
Earnings (Loss) Per Share - Diluted | ||||||||||||||||
Weighted average shares of common stockoutstanding - Basic | 2,880,719 | 1,638,215 | 2,870,349 | 1,638,215 | ||||||||||||
Warrants, Options and Convertible Notes | 163,721 | - | 92,081 | - | ||||||||||||
Weighted average shares of common stock -Diluted | 3,044,440 | 1,638,215 | 2,962,430 | 1,638,215 | ||||||||||||
Earnings (Loss) Per Share - Diluted | $ | 0.31 | $ | (0.00 | ) | $ | 0.28 | $ | (0.32 | ) |
10.12. 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.
Cash | $ | 75,701 | ||
Accounts Receivable | 1,502,713 | |||
Inventory | 1,595,859 | |||
Fixed Assets | 434,197 | |||
Prepaid and Other Assets | 280,258 | |||
Goodwill | 832,306 | |||
Total Assets Acquired | $ | 4,721,034 | ||
Accounts Payable | $ | 843,817 | ||
Accrued Expense | 223,909 | |||
Assumed debt | 1,753,757 | |||
Total Liabilities Assumed | $ | 2,821,483 | ||
Equity Issuance | $ | 1,059,000 | ||
Net Assets Acquired | $ | 840,551 | ||
Acquisition transaction costs incurred were: | $ | 145,900 |
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.
Accounts Receivable | $ | 1,058,459 | ||
Inventory | 173,202 | |||
Fixed Assets | 3,243,031 | |||
Prepaid and Other Assets | 1,036 | |||
Intangibles Assets | 2,203,000 | |||
Goodwill | 1,640,268 | |||
Total Assets Acquired | $ | 8,318,996 | ||
Accounts Payable | $ | 473,119 | ||
Accrued Payroll and Other Expense | 29,450 | |||
Contingent Liability | 1,500,000 | |||
Total Liabilities Assumed | $ | 2,002,569 | ||
Net Assets Acquired | $ | 6,316,427 | ||
Acquisition transaction costs incurred were: | $ | 181,133 |
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:
Accounts Receivable | $ | 4,761,368 | ||
Inventory | 594,503 | |||
Costs in excess of billings and estimated costs | 3,980,824 | |||
Fixed Assets | 2,112,120 | |||
Prepaid and Other Assets | 53,110 | |||
Intangibles Assets | 1,230,000 | |||
Goodwill | 631,392 | |||
Total Assets Acquired | $ | 13,363,317 | ||
Accounts Payable | $ | 1,726,618 | ||
Billings in Excess of costs and earnings | 594,545 | |||
Accrued Payroll and related expenses | 325,950 | |||
Accrued Expense | 424,671 | |||
Lease Payable | 41,533 | |||
Total Liabilities Assumed | $ | 3,113,317 | ||
Net Assets Acquired | $ | 10,250,000 |
Acquisition related costs were approximately $0.3 million for the three and nine months ended June 30, 2017.
11.SEGMENT AND RELATED INFORMATION
The Company operates three reportable segments: 1) commercial air handling, 2) test and measurement and 3) industrial hose. The Company's management evaluates segment performance based primarily on operating earnings before taxes.. Depreciation expense on assets used in manufacturing are considered part of each segment's operating performance. Depreciation expense on non-manufacturing assets is included in selling, general and administrative expenses.
Commercial Air Handling:
States. This segment manufacturesalso sells to select international markets. The custom air handling units are constructed of non-corrosive aluminum, resulting in sustainable, long-lasting, and energy efficient solutions with life expectancies of 50 years or more. These products are distributed through a network of sales representatives, based on relationships with health care networks, building contractors and engineering firms. The custom air handling equipment is designed, manufactured and installed under fixed price contractthe brand names FactoryBilt® and SiteBilt®. FactoryBilt® air handling solutions are designed, fabricated and assembled in a vertically integrated process entirely within the Akron, Ohio facility. SiteBilt® air handling solutions are designed and fabricated in Akron, but are then crated and shipped to the field and assembled on-site.
Industrial and Transportation Products:
The Industrial and Transportation Products segment was added July 1, 2016, when the Company purchased the assets of the Federal Hose Manufacturing, LLC of Painesville, Ohio. This business segment includes the manufacture of flexible interlocking metal hoses and the distribution of silicone and hydraulic hoses. Metal hoses are sold primarily to major heavy-duty truck manufacturers and major aftermarket suppliers in North America. Metal hoses are also sold into the agricultural, industrial and petrochemical markets. Silicone hoses are distributed to a number of industries in North America, including agriculture and general industrial markets. The Company purchased all of the issued and outstanding shares of capital stock of CAD Enterprises, Inc.(“CAD”) in Phoenix, Arizona on July 1, 2018. CAD provides complete end-to-end engineering, machining, grinding, welding, brazing, heat treat and assembly solutions. Utilizing state-of-the-art machining and welding technologies, this segment is an industry leader in providing complex components produced from nickel-based superalloys and stainless steels. CAD’s quality certifications include ISO 9001:2015/AS9100D, as well as Nadcap accreditation for Fluorescent Penetrant Inspection (FPI), Heat Treating/Braze, Non-Conventional Machining EDM, TIG/E-Beam welding. The Company added the distribution of marine hose to this segment through the acquisition of the assets of MPI Products, Inc. (“MPI”) on January 2, 2020. MPI specialized in rubber and plastic marine hose for the recreational boating industry. MPI offers certified products that meet marine industry standards and regulations. Effective April 19, 2019, the Company, completed the acquisition of substantially all of the assets of Data Genomix, Inc., an Ohio corporation (“DG”). DG is in the business of developing and commercializing marketing and data analytic technology applications. The Company purchased all of the issued and outstanding membership interests of KT Acquisition LLC (name later changed to Komtek Forge LLC), in Worcester, Massachusetts on January 15, 2021. Komtek Forge LLC is a supplier of highly engineered forgings for the aerospace, industrial gas turbine, medical prosthetics, alternative energy, petrochemical and defense industries. The Company purchased all of the membership interests of Global-Tek-Manufacturing LLC (“Global-Tek”), in Ceiba, Puerto Rico and substantially all of the assets of Machining Technology L.L.C. (Machining Technologies), in Longmont, Colorado on March 2, 2021. Global-Tek and Machining Technologies specialize in providing customers with highly engineered manufacturing solutions, including CNC machining, anodizing, electro polishing and laser marking for customers in the health care, university, research, pharmaceuticaldefense, aerospace and industrial manufacturing market segments, and across the United States and worldwide.medical device markets.
TestCorporate and MeasurementOther::This segment consists of diagnostic tools and equipment sold
Corporate costs not allocated to the automotive industry and indicators and gauges sold primarily to companies in the aircraft and locomotive industries. These productstwo primary business segments are sold to original equipment manufacturers and to the aftermarket using a variety of distribution methods.
Industrial Hose:This segment consists primarily of flexible metal and silicone hose products designed and manufactured or distributed primarily to the trucking industry and other industrial end-users. These products are sold to original equipment manufacturers and to the aftermarket using a variety of distribution methods.aggregated here.
Information by industry segment is set forth below:
Three Months Ended | Nine Months Ended | |||||||||||||||
June 30 | June 30 | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Sales | ||||||||||||||||
Commercial Air Handling | $ | 3,343,945 | $ | - | $ | 3,343,945 | $ | - | ||||||||
Test and Measurement | 2,452,854 | 1,530,244 | 5,049,991 | 3,953,740 | ||||||||||||
Industrial Hose | 1,423,827 | - | 4,529,931 | - | ||||||||||||
Total Sales | $ | 7,220,626 | $ | 1,530,244 | $ | 12,923,867 | $ | 3,953,740 | ||||||||
Income (Loss) Before Provision for Income Taxes | ||||||||||||||||
Commercial Air Handling | 607,471 | - | 607,471 | - | ||||||||||||
Test and Measurement (1) | 880,600 | (8,095 | ) | (19,446 | ) | (519,728 | ) | |||||||||
Industrial Hose | (509,175 | ) | - | 306,433 | - | |||||||||||
Income (Loss) Before Provision for Income Taxes | $ | 978,896 | $ | (8,095 | ) | $ | 894,458 | $ | (519,728 | ) |
Three Months Ended March 31, 2021 | ||||||||||||||||
Commercial Air Handling | Industrial And Transportation Products | Corporate and Other | Consolidated | |||||||||||||
Sales | $ | 8,765,099 | $ | 15,228,905 | $ | - | $ | 23,994,004 | ||||||||
Gross Profit | 2,230,821 | 3,772,100 | - | 6,002,921 | ||||||||||||
Operating Income | 1,045,631 | 1,751,443 | (471,614 | ) | 2,325,460 | |||||||||||
Pretax Income | 1,045,631 | 3,025,970 | (402,642 | ) | 3,668,959 | |||||||||||
Net Income | 784,224 | 2,660,019 | (300,826 | ) | 3,143,417 |
Three Months Ended March 31, 2020 (1) | ||||||||||||||||
Commercial Air Handling | Industrial And Transportation Products | Corporate and Other | Consolidated | |||||||||||||
Sales | $ | 11,453,774 | $ | 13,827,800 | $ | - | $ | 25,281,574 | ||||||||
Gross Profit | 3,047,801 | 3,160,342 | - | 6,208,143 | ||||||||||||
Operating Income | 1,619,769 | 1,414,604 | 103,776 | 3,138,149 | ||||||||||||
Pretax Income | 1,594,804 | 1,121,227 | 53,336 | 2,769,367 | ||||||||||||
Net Income | 1,196,102 | 839,496 | 39,972 | 2,075,570 |
(1) |
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14. UNCERTAINTIES
12. RECENTLY ISSUED ACCOUNTING STANDARDS
The coronavirus (COVID-19) pandemic had a material adverse effect on the Company’s reported results for the three months ended March 31, 2021. The Company did not incur any materialwill continue to actively monitor the impact of the coronavirus pandemic, which is expected to its financial condition ornegatively impact the Company’s business and results of operations duefor the remainder of fiscal year 2021 and possibly beyond. The extent to which the adoptionCompany’s business and operations will be impacted by the pandemic will depend largely on future developments, which are highly uncertain and cannot be accurately predicted, including new information which may emerge concerning the severity of anythe outbreak; new accounting standards during the periods reported.and growing outbreaks of COVID-19 or new strains of COVID-19; actions by government authorities to contain COVID-19 or treat its impact, such as reimposed public health restrictions; efforts to combat COVID-19, such as vaccine development and distribution, among other things.
15. SUBSEQUENT EVENTS
None
RESULTS OF OPERATIONSOPERATIONS..
The following discussion is intended to assist in the understanding of Hickok’sthe Company's financial position at June 30, 2017March 31, 2021 and September 30, 2016,December 31, 2020, results of operations for the three and nine months ended June 30, 2017March 31, 2021 and 2016,2020, and cash flows for the ninethree months ended June 30, 2017March 31, 2021 and 2016,2020, and should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2016. December 31, 2020. The coronavirus (COVID-19) pandemic had a material adverse effect on the Company’s reported results for the three months ended March 31, 2021. The Company will continue to actively monitor the impact of the coronavirus pandemic, which is expected to negatively impact the Company’s business and results of operations for the remainder of fiscal year 2021 and possibly beyond. Many of our customers are considered “essential” and have remained operational during the pandemic, although in some cases in a limited capacity. This, together with the overall economic downturn that has resulted from the pandemic, slowed demand in the first quarter of 2021. Nearly all of the Company’s facilities have remained operational. While there are some restrictions to the supply of materials and products and those restrictions may continue or expand, our supply chain has remained largely intact. The extent to which the Company’s business and operations will continue to be impacted by the pandemic will depend largely on future developments, which are highly uncertain and cannot be accurately predicted, including new information which may emerge concerning the severity of the pandemic; new and growing outbreaks of COVID-19 or new strains of COVID-19; actions by government authorities to contain COVID-19 or treat its impact, such as reimposed public health restrictions; efforts to combat COVID-19, such as vaccine development and distribution, among other things.
Items Affecting the Comparability of our Financial Results
Summary
The Company has historically operated two divisions: 1) indicatorspurchased all of the issued and gauges that sell primarilyoutstanding membership interests of KT Acquisition LLC (name later changed to companiesKomtek Forge LLC “Komtek”), in Worcester, Massachusetts on January 15, 2021.
The Company purchased all of the membership interests of Global-Tek Manufacturing LLC (“Global-Tek”) in Ceiba, Puerto Rico and substantially all of the assets of Machining Technology L.L.C. (“Machining Technology”), in Longmont, Colorado on March 2, 2021.
Accordingly, in light of the timing of these transactions, the Company’s results for the quarter ended on March 31, 2021 include the added results of operations of Komtek, Global-Tek and Machining Technology in the aircraftIndustrial and locomotive industries and 2) automotive diagnostic tools and equipment that sell to OEMs and the aftermarket. These divisions are now being reported as the Test and MeasurementTransportation Products segment. In July 2016, the Company expanded its markets with the acquisition of a manufacturer of flexible metal hose for use in heavy truck, drilling, and grain handling, as well as silicone hose sold to these same industries. The acquisition of this business resulted in a new segmentConversely, our results for the Company, referred to asquarter ended March 31, 2020 do not include the results of operations of Komtek, Global-Tek and Machining Technology in the Industrial Hose division. In June 2017, the Company expanded its markets further with the acquisition of a manufacturer of commercial air handling for customers in the health care, university, research, pharmaceutical and industrial manufacturing market segments. The acquisition of this business resulted in a new segment for the Company, referred to as the Commercial Air Handling division.Transportation Products segment.
Results of Operations– – Three Months Ended June 30, 2017March 31, 2021 and 20162020
Sales for the fiscal quarter ended June 30, 2017 increasedMarch 31, 2021 (“current quarter”) decreased to $7.2$24.0 million, an increasea decrease of approximately $5.7$1.3 million and 372%or 5.1% from sales of $1.5$25.3 million induring the same fiscal quarter of the prior year. This increasedecrease in sales was primarily attributable to the additionimpact of our Commercial Air Handling division on June 1, 2017the COVID-19 pandemic partially offset by the acquisitions of Komtek, Global-Tek and the Industrial Hose division acquired July 1, 2016.Machining Technology.
Cost of products soldsales for the current quarter was $18.0 million compared to $19.1 million, a decrease of $1.1 million or 5.8% from the same quarter of the prior year. Gross profit was $6.0 million in the fiscalcurrent quarter ended June 30, 2017compared to $6.2 million, a decrease of $0.2 million from the same quarter of the prior year. The decrease in cost of sales and gross profit was $4.2attributable to the impact of the COVID-19 pandemic partially offset by the acquisitions of Komtek, Global-Tek and Machining Technology.
Selling, general and administrative expenses (SG&A) in the current quarter were $3.7 million, or 58%15.3% of sales, compared to $ 0.8$3.1 million, or 50%12.1% of sales in the first quarter of last year. Selling, general and administrative expenses increased as a percentage of sales due primarily to $0.3 million of stock awards that were granted in the current quarter compared to $0.0 million of stock awards during the same fiscalquarter of last year. An additional $0.3 million of Selling, general and administrative expenses in the current quarter were a result of the acquisitions of Komtek, Global-Tek and Machining Technology.
Interest charges in the current quarter were approximately $0.2 million compared to $0.3 million in the same quarter of the prior year. The interest expense decreased due to lower average interest rates on the Company’s floating rate bank debt. Average total debt (including notes) and average interest rates for the current quarter were $25.6 million and 3.0% compared to $27.0 million and 3.9% in the same period of last year.
Other income, net was $1.6 million in the current quarter compared to $0.1 million of other expense, net in the same quarter of the prior year. The increase in costsother income is primarily driven by the forgiveness of the Company’s $1.5 million in outstanding Payroll Protection Loans (“PPP Loans”) in full by the U.S. Small Business Administration in accordance with the terms of the CARES Act. The forgiveness of the PPP Loans is treated as income.
Income tax expense in the current quarter was associated with higher sales for the quarter in all three divisions. Gross margin (sales less costs of products sold) was approximately 42% for the third fiscal quarter of 2017$0.5 million compared to 50% for the same fiscal quarter of 2016.
Product development expenditures were $0.2$0.7 million in the fiscal quarter ended June 30, 2017, which was a modest decrease from $0.3 million in same fiscal quarter of the prior year. Product development expenditures relate toTax expense is lower than the Test and Measurement division. The current levelCompany’s historical expected effective tax rate of product development expenses is expected to continue for25% because the balanceincome as a result of the fiscal year. Management believes current resources will be sufficient to maintain current product development commitmentsPPP Loan forgiveness is not taxable and to continue to develop a reasonable flow of new productsbecause the expected tax rate for both the OEM and aftermarket customers.
Selling, general and administrative expensesGlobal-Tek in the fiscal quarter ended June 30, 2017 were $1.8 million orPuerto Rico is lower than 25% of sales compared to $0.5 million or 33% of sales, respectively, in the same fiscal quarter of the prior year. The increase in selling, general and administrative expenses was primarily related to costs related to the addition of the Commercial Air Handling division and the Industrial Hose division. In addition, the Company incurred higher sales expenses in support of higher sales and higher depreciation expenses related to fixed assets acquired with and intangibles allocated due to the purchase of the Commercial Air Handling division.
Interest charges in the fiscal quarter ended June 30, 2017 were approximately $67 thousand compared to $5 thousand in the same fiscal quarter of the prior year. The current year interest expense is primarily due to the recording of interest expense on bank debt related to the acquisitions on June 1, 2017 and notes related to the acquisition of a business on July 1, 2016.
Other income was $5 thousand in the fiscal quarter ended June 30, 2017 compared with $2 thousand in the same fiscal quarter of the prior year. Other income consists primarily of interest income on cash and cash equivalents and proceeds from the sale of scrap metal shavings.
Income tax expense is expected to be minimal as the Company believes it will be able to utilize the majority of the net operating loss and research and development credit carryforwards before they expire; however, there are certain limitations to the use of these tax credits that are expected to result in a small amount of alternative minimum tax. In addition, the Company expects to pay state and local income tax..
Net income in the fiscalcurrent quarter ended June 30, 2017 was $0.9$3.1 million or $0.31$0.93 per diluted share as compared to the net lossincome of $8 thousand$2.1 million or $0.00$0.63 per diluted share infor the same fiscal quarter of the prior year.
Results of Operations – Nine Months Ended June 30, 2017Liquidity and 2016Capital Resources
Sales for the nine months ended June 30, 2017 increased to $12.9 million, an increase of approximately $8.9 million and 227% from sales of $4.0 millionAs described further in the same period a year ago. This increase in sales was attributableNote 11 to the additionCompany’s consolidated financial statements, effective January 15, 2021, the Company completed the Komtek acquisition for a purchase price of our Commercial Air Handling division$3.6 million, which included the assumption of $1.7 million of debt and the issuance of $1.1 million of common stock.
As described further in Note 11 to the Company’s consolidated financial statements, effective March 1, 2021, the Company completed the Global-Tek and Machining Technology acquisition for a purchase price of $8.0 million, subject to certain post-closing adjustments based on working capital and the achievement of future performance milestones.
The Company’s credit agreement, dated as of June 1, 2017, by and between the Industrial Hose division acquired July 1, 2016. SalesCompany and JPMorgan Chase Bank, N.A. as lender (as amended, the “Credit Agreement”), provides for a revolving credit facility. On March 2, 2021, the Company amended its Credit Agreement to increase availability under the revolving credit facility to $30.0 million from our Test and Measurement division increased $1.1 million due to strong sales in the third fiscal quarter 2017 from emissions and OEMs.
Cost of products sold in the nine months ended June 30, 2017 was $7.9 million or 61% of sales compared to $2.2 million or 56% of sales in the same period a year ago.$20.0 million. The increase in costs was associated with higher sales for the quarter in all three divisions. Gross margin (sales less costs of products sold) was approximately 39% for the nine months ended June 30, 2017 compared to 44% for the same period in 2016.
Product development expenditures in the nine months ended June 30, 2017 were $0.6 million or 5% of sales compared to $0.8 million or 20%, respectively, in the same period a year ago. The current level of product development expenses is expected to continue for the balance of the fiscal year. Management believes current resources will be sufficient to maintain current product development commitments and to continue to develop a reasonable flow of new products for both the OEM and aftermarket customers.
Selling, general and administrative expenses in the nine months ended June 30, 2017 were $3.4 million or 26% of sales compared to $1.5 million or 38%, respectively, in the same period a year ago. The increase in selling, general and administrative expenses was primarily related to costs relatedamendment to the addition of the Commercial Air Handling divisionloan agreement provided additional flexibility to fund acquisitions, working capital and the Industrial Hose division. In addition, the Company incurred higher sales expenses in support of higher sales and higher depreciation expenses related to fixed assets acquired with and intangibles allocated due to the purchase of the Commercial Air Handling division.other strategic initiatives.
Interest charges in the nine-month period ended June 30, 2017 were $166 thousand compared to $8 thousand in the same period a year ago. The current year interest expense is primarily due to the recording of interest expense on bank debt related to the acquisitions on June 1, 2017 and notes related to the acquisition of a business on July 1, 2016.
Other income was $11 thousand in the nine-month period ended June 30, 2017 compared with $6 thousand in the same period a year ago. Other income consists primarily of interest income on cash and cash equivalents and proceeds from the sale of scrap metal shavings.
Income tax expense is expected to be minimal as the Company believes it will be able to utilize the majority of the net operating loss and research and development credit carryforwards before they expire; however, there are certain limitations to the use of these tax credits that are expected to result in a small amount of alternative minimum tax. In addition, the Company expects to pay state and local income tax.
Net income in the nine-month period ended June 30, 2017 was $0.8 million or $0.28 per diluted share as compared to the net loss of $0.5 million or ($0.32) per diluted share in the same period a year ago.
Liquidity and Capital Resources
Total current assets at June 30, 2017March 31, 2021 increased to approximately $17.5$39.7 million from $7.8$35.2 million at September 30, 2016,December 31, 2020, an increase of $9.7$4.5 million. The increase in current assets is due tocomprised of the following: an increase of accounts receivable of $3.5 million; an increase in accounts receivableinventory of $7.3 million, costs$2.1 million; an increase in excess of billings of $3.9 million, inventories of $0.6 million, and prepaid expenses and othercontract assets of approximately $0.7 million, respectively. The$0.2 million; and an increase in these assets is primarily a resultinvestments of the acquisition of the Commercial Air Handling division on June 1, 2017. The increases in current assets were$0.1 million; partially offset by a decrease in cash of approximately $2.0$1.4 million. The decreaseincreases in inventory and accounts receivable are driven primarily by the recent acquisitions of Komtek, Global-Tek and Machining Technology. The Company is carrying lower cash balances due to funding the recent acquisitions of Komtek, Global-Tek and cash equivalents was due cash used towards the purchaseMachining Technology.
Total current liabilities at March 31, 2021 increased to $20.1 million from $17.5 million at December 31, 2020, an increase of $2.6 million. The increase in current liabilities is comprised of the Commercial Air Handling division.following: an increase in accrued expenses of $1.1 million; an increase in accounts payable of $0.7 million; and an increase in accrued income taxes of $0.5 million.
Cash provided by operating activities for the ninethree months ended June 30, 2017March 31, 2021 was approximately $1.4$1.5 million, compared to cash provided by operating activities of $5.6 million in the same period a year ago. Cash provided by operating activities for the current quarter is comprised of the following: net income of $3.1 million; cash used in adjustments for non-cash items of $0.6 million; and cash used in working capital adjustments of $1.1 million. The primary drivers of decreased working capital during the current quarter were the increase in accounts receivable of $1.0 million and was adequate to fund the Company's operations as well as capital expendituresdecrease of approximately $0.3accounts payable of $0.6 million.
Capital expenditures were neededCash used in investing activities for building improvements as well as for tooling, machinery and equipment for product manufacturing. Cash flowthe three months ended March 31, 2021 was $7.8 million, compared to cash used in investing activities of $10.6$9.5 million in the same period a year ago. Cash used in investing activities was primarily used for the purchaseacquisitions of Komtek, Global-Tek and Machining Technology in the Commercial Air Handling division for $10.3 million.Industrial and Transportation Products segment and capital expenditures in the normal course of business.
Cash provided by financing activities was approximately $5.0 million for the three months ended March 31, 2021, compared to cash provided by financing activities of approximately $7.1 million in the same period a year ago. Cash provided by financing activities for the current quarter was primarily related to: $6.9 million borrowings on bank debt related to the $8.5acquisitions of Komtek, Global-Tek and Machining Technology; offset by cash used for $1.4 million borrowingin payments on the bank debt and $0.5 million in connection with the purchase of the Commercial Air Handling division, offset by payment of the short-term financing of $0.3 million, payment of approximately $0.8 million for the related party notes, and $0.3 million repayment against the revolving credit facility with JPMorgan Chase Bank, N.A.payments on notes.
The Company entered into a Credit Agreement on June 1, 2017 with JPMorgan Chase Bank, N.A. as lender (the “Credit Agreement”). The Credit Agreement is comprised of a revolving facility in the amount of $8.0 million, subjectactively managing its business to a borrowing base and a term A loan in the amount of $2.0 million, payable in consecutive monthly installments of $41,667 commencing on July 1, 2017. The Credit Agreement includes customary representations and warranties and applicable reporting requirements and covenants, including fixed charge coverage ratio and senior funded indebtedness to EBITDA ratio financial covenants. Management believes the Company is in compliance with debt covenants.
In addition to the Credit Agreement, the Company has several borrowing arrangements as discussed in Note 8 of this Quarter Report on Form 10-Q, including Convertible Notes Payable and outstanding notes related to the Company’s acquisition of its Industrial Hose division in 2016. The Convertible Notes provide liquidity to the Company for working capital. In December 2016, the Company entered into Amendment No. 5 of the Convertible Loan Agreement. The Convertible Loan Agreement, as amended, is between the Company and a major shareholder who is also affiliated withtwo Directors, as discussed in Note 4 of theCompany’s Annual Report on Form 10-K for the year ended September 30, 2016.The amended Convertible Loan:
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The outstanding balance on the Convertible Loan as of June 30, 2017 and September 30, 2016 is $200,000.
The Company expects positivemaintain cash flow from operationsand liquidity. We believe that cash and availability on our revolving credit facility to be sufficient to fund working capital needs and service principal and interest payments due related to the bank debt and notes payable. In addition, theThe Company has $1.8had $13.2 million available to borrow on the revolving credit facility at June 30, 2017. Management believesMarch 31, 2021. Notwithstanding the Company's expectations, if the Company's operating results decrease as the result of pressures on the business due to, for example, the impact of the COVID-19 pandemic, currency fluctuations, regulatory issues, or the Company's failure to execute its business plans, the Company has adequate liquidity for working capital, capital expendituresmay require additional financing, or may be unable to comply with its obligations under the credit facility, and other strategic initiatives.its lenders could demand repayment of any amounts outstanding under the Company’s credit facility. As the company cannot predict the duration or scope of the COVID-19 pandemic and its impact on the Company’s customers and suppliers, the negative financial impact to the Company’s results cannot be reasonably estimated, but could be material. In addition, see Note 7 of the notes to the consolidated financial statements.
Off-Balance Sheet Arrangements
HickokFrom time to time, the Company enters into performance and payment bonds in the ordinary course of business. These bonds are secured by certain assets of the Company by the surety until the Company’s completion of the requirements of the commercial air handling contract. At March 31, 2021, the Company did not have any active surety bonds for which performance and payment had not been satisfied. The Company has no other off-balance sheet arrangements (as defined in Regulation S-K Item 303 paragraph (a)(4)(ii)) that have or are reasonably likely to have a material current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Critical Accounting PronouncementsPolicies
The Company’s critical accounting policies are as presented in Notes to Consolidated Financial Statements and Management’s Discuss and Analysis of Financial Condition and Results of Operations in our Annual Report Form 10-K for the year ended September 30, 2016.December 31, 2020.
Forward-Looking Statements
The foregoing discussion includes forward-looking statements relating to the business of the Company. Generally, these statements can be identified by the use of words such as “guidance,” “outlook,” “believes,” “estimates,” “anticipates,” “expects,” “forecasts,” “seeks,” “projects,” “intends,” “plans,” “may,” “will,” “should,” “could,” “would” and similar expressions intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These forward-looking statements, or other statements made by the Company, are made based on management's expectations and beliefs concerning future events impacting the Company and are subject to uncertainties and factors (including, but not limited to, those specified below) which are difficult to predict and, in many instances, are beyond the control of the Company. As a result, actual results of the Company could differ materially from those expressed in or implied by any such forward-looking statements. These uncertainties and factors include (a) the Company's ability to effectively integrate Federal Hoseacquisitions, including the acquisitions of Komtek, Global-Tek and Air EnterprisesMachining Technology, and manage the larger operations of the combined businesses
(b) the duration and scope of the COVID-19 pandemic, the resumption of operations by the Company’s customers, loosening of public health restrictions, or an reimposed restrictions or tightening of public health restrictions which could impact the demand for the Company’s products; (c) the Company’s inability to obtain needed products, components or raw materials from its suppliers; (d) actions that governments, businesses and individuals take in response to the pandemic, including mandatory business closures and restrictions on onsite commercial interactions; (e) the impact of the pandemic and actions taken in response to the pandemic on global and regional economies and economic activity; (f) the pace of recovery when the COVID-19 pandemic subsides; (g) the Company's ability to effectively integrate acquisitions, and manage the larger operations of the combined businesses, (h) the Company's dependence upon a limited number of customers and the automotiveaerospace industry, (c)(i) the highly competitive industry in which the Company operates, which includes several competitors with greater financial resources and larger sales organizations, (d) the acceptance in the marketplace of new products and/or services developed or under development by the Company including automotive diagnostic products and indicating instrument products, (e) the ability of the Company to further establish distribution and a customer base in the automotive aftermarket, (f)(j) the Company's ability to capitalize on market opportunities including state automotive emissions programs and OEM tool programs, (g)in certain sectors, (k) the Company's ability to obtain cost effective financing and (h)(l) the Company's ability to satisfy obligations under its interest payments.
financing arrangements, and the other risks described in “Item 1A. Risk Factors” in this Annual Report on Form 10-K and the Company’s subsequent filings with the SEC.
ITEM 3. MARKET RISK
The CompanyThis item is exposednot applicable to certain market risks from transactions that are entered into during the normal course of business. The Company has not entered into derivative financial instruments for trading purposes. The Company's primary market risks are exposure related to interest rate risk and equity market fluctuations. The Company's debt subject to interest rate risk relates to funds available under Credit Agreement with JPMorgan Chase Bank (“Chase Bank”). The Company had an outstanding balance on the revolving credit facility with Chase Bank of $6.2 million and an outstanding balance on the term A loan of $2.0 million. Interest for borrowings under the Credit Agreement accrue at prime rate or a LIBOR plus an applicable margin. In addition to floating rate debt under the Credit Agreement, the Company has fixed rate debt. At June 30, 2017, the Company has outstanding amounts of $0.2 million related to convertible notes that bear interest at 0.34%. The Company also outstanding amounts of $1.6 million and $2.4 million related to promissory notes withas a related party, both of which bears interest at a rate of 4.0% per annum. The Company believes that the market risk relating to interest rate movements is minimal.smaller reporting company.
ITEM 4. CONTROLS AND PROCEDURES
As of June 30, 2017,March 31, 2021, an evaluation was performed, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer along with the Company's Vice President, Finance and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based upon that evaluation, the Company's management, including the Chief Executive Officer along with the Company's Vice President, Finance and Chief Financial Officer, concluded that the Company's disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended ("Exchange Act") were effective as June 30, 2017of March 31, 2021 to ensure that information required to be disclosed by the Company in reports that it files and submits under the Exchange Act is (1) recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms, and (2) is accumulated and communicated to the Company's management, including its principal executive and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. There were no changes in the Company's internal controls over financial reporting during the fiscal quarter ended June 30, 2017March 31, 2021 that have materially affected, or are reasonably likely to materially affect the Company's internal control over financial reporting.
The Company's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principles. The Company's internal control over financial reporting includes policies and procedures that (1) pertain to maintaining records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company assets, (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that the Company's receipts and expenditures are being made only in accordance with authorization of the Company's management and directors, and (3) provide reasonable assurance regarding prevention or the timely detection of unauthorized acquisition, use or disposal of the company's assets that could have a material effect on the financial statements.
Management, including the Company's Chief Executive Officer along with the Company's Vice President, Finance and Chief Financial Officer, does not expect that the Company's internal controls will prevent or detect all errors and all fraud. An internal control system no matter how well designed and operated can provide only reasonable, not absolute, assurance that the objectives of the system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, collusion of two or more people, or by management override of the control. Also, any evaluation of the effectiveness of controls in future periods are subject to the risk that those internal controls may become inadequate because of changes in business conditions, or that the degree of compliance with the policies or procedures may deteriorate.
PART II – OTHER INFORMATION
ITEM1. 1. LEGAL PROCEEDINGS.
None.
ITEM 1A. RISK FACTORS.
There have been no material changes from the risk factors disclosed in Part 1, Item 1A, of our Annual Report on Form 10-K for the year ended December 31, 2020.
ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.None
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
Not applicable.None
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.None
ITEM 6. EXHIBITS
*XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned as of the 14th11th day of August 2017,May 2021, thereunto duly authorized.
SIGNATURE: | TITLE |
/s/ Brian E. Powers | Chairman, President and Chief |
Brian E. Powers | Executive Officer |
(Principal Executive Officer) | |
/s/ | Vice President and Chief Financial Officer |
|
|
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