UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September30, 20182019
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from Not Applicable to Not Applicable
Commission file number: 0-147
Crawford United Corporation
(Exact Name of Registrant as Specified in Charter)
HICKOK INCORPORATED
(Exact name of registrant as specified in its charter)
Ohio | 0-147 | 34-0288470 |
(State or of | ( File Number) | (IRS Employer Identification No.) |
10514 Dupont Avenue Cleveland, Ohio | 44108 |
(Address of | (Zip Code) |
Registrant's
(216) 541-8060
(Registrant’s telephone number, (216) 541-8060including area code)
Securities registered pursuant to Section 12(b) of the Act: None.
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 every Interactive Data File required to be submitted 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 such files). Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] | Accelerated filer [ ] |
Non-accelerated filer [ ] | Smaller reporting company [X] |
| Emerging growth company [ ] |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of October 31, 2018, 2,123,8062019, 2,162,806 shares of Class A Common Stock and 596,848696,848 shares of Class B Common Stock were outstanding.
PART I
ITEM 1. FINANCIAL STATEMENTS
HICKOK INCORPORATEDCRAWFORD UNITED CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited) | (Unaudited) | |||||||||||||||
September 30, 2018 | December 31, 2017 | September 30, 2019 | December 31, 2018 | |||||||||||||
ASSETS | ||||||||||||||||
CURRENT ASSETS: | ||||||||||||||||
Cash and Cash Equivalents | $ | 3,891,692 | $ | 2,444,110 | ||||||||||||
Cash and cash equivalents | $ | 3,250,087 | $ | 5,057,626 | ||||||||||||
Accounts receivable less allowance for doubtful accounts | 13,151,816 | 9,011,677 | 13,151,459 | 9,835,262 | ||||||||||||
Costs and estimated earnings in excess of billing | 1,825,715 | 1,605,991 | 2,609,373 | 2,083,349 | ||||||||||||
Inventories-less allowance for obsolete inventory | 5,142,522 | 3,903,481 | ||||||||||||||
Prepaid Expenses and other current assets | 498,444 | 265,456 | ||||||||||||||
Inventories less allowance for obsolete inventory | 7,099,673 | 5,497,982 | ||||||||||||||
Prepaid expenses and other current assets | 631,967 | 818,609 | ||||||||||||||
Total Current Assets | 24,510,189 | 17,230,715 | 26,742,559 | 23,292,828 | ||||||||||||
PROPERTY, PLANT AND EQUIPMENT: | ||||||||||||||||
Land and Improvements | 257,205 | 235,179 | ||||||||||||||
Buildings and Leasehold Improvements | 1,525,194 | 2,239,763 | ||||||||||||||
Machinery and Equipment | 13,488,275 | 5,091,360 | ||||||||||||||
Total Property, Plant and Equipment | 15,270,674 | 7,566,302 | ||||||||||||||
Land and improvements | 228,872 | 257,205 | ||||||||||||||
Buildings and leasehold improvements | 1,837,721 | 1,709,165 | ||||||||||||||
Machinery and equipment | 13,834,588 | 13,343,878 | ||||||||||||||
Total property, plant and equipment | 15,901,181 | 15,310,248 | ||||||||||||||
Less accumulated depreciation | 1,612,569 | 4,242,913 | 3,189,009 | 2,006,133 | ||||||||||||
Property, Plant and Equipment, Net | 13,658,105 | 3,323,389 | 12,712,172 | 13,304,115 | ||||||||||||
Operating right of use assets, net | 9,448,909 | - | ||||||||||||||
OTHER ASSETS: | ||||||||||||||||
Goodwill | 7,026,045 | 2,255,912 | 9,792,670 | 9,582,202 | ||||||||||||
Intangibles, net of accumulated amortization | 4,425,793 | 1,896,399 | 4,051,428 | 4,332,202 | ||||||||||||
Deferred income taxes-less valuation allowance | 1,687,277 | 2,173,892 | ||||||||||||||
Other non-current assets | 95,263 | 3,250 | 88,046 | 95,263 | ||||||||||||
Total Non-Current Other Assets | 13,234,378 | 6,329,453 | 13,932,144 | 14,009,667 | ||||||||||||
Total Assets | $ | 51,402,672 | $ | 26,883,557 | $ | 62,835,784 | $ | 50,606,610 |
See accompanying notes to consolidated financial statements
HICKOK INCORPORATEDCRAWFORD UNITED CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited) | (Unaudited) | |||||||||||||||
September 30, 2018 | December 31, 2017 | September 30, 2019 | December 31, 2018 | |||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
CURRENT LIABILITIES: | ||||||||||||||||
Convertible notes payable - related party | $ | 200,000 | $ | 200,000 | ||||||||||||
Notes payable - related party | 432,910 | 352,727 | ||||||||||||||
Bank Debt – Current | 1,333,333 | 500,000 | ||||||||||||||
Convertible notes payable | $ | 200,000 | $ | 200,000 | ||||||||||||
Notes payable | 2,742,760 | 1,555,663 | ||||||||||||||
Bank debt | 1,333,333 | 1,333,333 | ||||||||||||||
Leases payable | 15,973 | 55,735 | 959,808 | 13,800 | ||||||||||||
Accounts payable | 4,989,595 | 2,112,695 | 6,612,817 | 5,169,819 | ||||||||||||
Unearned revenue | 6,384,479 | 2,601,355 | 1,884,218 | 5,257,797 | ||||||||||||
Accrued payroll and related expenses | 1,214,631 | 723,053 | 1,077,546 | 1,358,669 | ||||||||||||
Accrued expenses | 1,718,906 | 1,340,465 | 2,519,444 | 1,606,429 | ||||||||||||
Accrued income taxes | 711,457 | 108,576 | 662,327 | 360,239 | ||||||||||||
Total Current Liabilities | 17,001,284 | 7,994,606 | 17,992,253 | 16,855,749 | ||||||||||||
LONG-TERM LIABILITIES: | ||||||||||||||||
Notes payable - related party | 3,312,711 | 3,651,765 | ||||||||||||||
Seller Note | 9,000,000 | - | ||||||||||||||
Bank Debt | 10,798,973 | 4,732,550 | ||||||||||||||
Notes payable | 8,366,237 | 11,086,402 | ||||||||||||||
Bank debt | 7,241,356 | 8,194,679 | ||||||||||||||
Deferred income taxes | 1,701,651 | 1,701,653 | ||||||||||||||
Leases payable | 5,239 | 106,855 | 8,617,781 | 2,642 | ||||||||||||
Total Long-Term Liabilities | 23,116,923 | 8,491,170 | 25,927,025 | 20,985,376 | ||||||||||||
STOCKHOLDERS' EQUITY | ||||||||||||||||
Preferred shares, no par value - 1,000,000 shares authorized, no shares issued and outstanding | - | - | ||||||||||||||
Common shares, no par value | ||||||||||||||||
Class A common shares - 10,000,000 shares authorized, 2,123,806 shares issued and outstanding at September 30, 2018 and 2,130,681 shares issued and outstanding at December 31, 2017 | 2,508,534 | 2,246,367 | ||||||||||||||
Class B common shares - 2,500,000 shares authorized, 596,848 shares issued and outstanding at September 30, 2018 and 779,283 shares at December 31, 2017, respectively | 710,272 | 710,272 | ||||||||||||||
Class A common shares - 10,000,000 shares authorized, 2,162,806 and 2,161,014 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively | 2,945,642 | 2,641,300 | ||||||||||||||
Class B common shares - 2,500,000 shares authorized, 696,848 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively | 1,358,272 | 710,272 | ||||||||||||||
Contributed capital | 1,741,901 | 1,741,901 | 1,741,901 | 1,741,901 | ||||||||||||
Treasury shares | (1,905,780 | ) | (264,841 | ) | (1,905,780 | ) | (1,905,780 | ) | ||||||||
Class A common shares - 37,208 shares held at September 30, 2018 and 15,795 shares held at December 31, 2017, respectively | ||||||||||||||||
Class B common shares – 182,435 shares held at September 30, 2018 and 5,667 shares held at December 31, 2017, respectively | ||||||||||||||||
Class A common shares - 37,208 shares held at September 30, 2019 and December 31, 2018 | ||||||||||||||||
Class B common shares – 182,435 shares held at September 30, 2019 and December 31, 2018 | ||||||||||||||||
Retained earnings | 8,229,538 | 5,964,082 | 14,776,471 | 9,577,792 | ||||||||||||
Total Stockholders' Equity | 11,284,465 | 10,397,781 | 18,916,506 | 12,765,485 | ||||||||||||
Total Liabilities and Stockholders' Equity | $ | 51,402,672 | $ | 26,883,557 | $ | 62,835,784 | $ | 50,606,610 |
See accompanying notes to consolidated financial statements
HICKOK INCORPORATEDCRAWFORD UNITED CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||
Total Sales | $ | 19,771,137 | $ | 10,892,868 | $ | 45,243,029 | $ | 21,459,809 | $ | 22,244,681 | $ | 19,771,137 | $ | 68,595,404 | $ | 45,243,029 | ||||||||||||||||
Cost of Sales | 15,320,915 | 7,858,489 | 34,287,788 | 14,018,770 | 17,257,118 | 15,320,915 | 53,551,020 | 34,287,788 | ||||||||||||||||||||||||
Gross Profit | 4,450,222 | 3,034,379 | 10,955,241 | 7,441,039 | 4,987,563 | 4,450,222 | 15,044,384 | 10,955,241 | ||||||||||||||||||||||||
Operating Expenses: | ||||||||||||||||||||||||||||||||
Product development costs | - | 159,791 | 220,418 | 556,947 | - | - | - | 220,418 | ||||||||||||||||||||||||
Selling, general and administrative expenses | 1,978,943 | 1,460,126 | 5,803,514 | 3,894,809 | 2,428,784 | 1,978,943 | 7,122,981 | 5,803,514 | ||||||||||||||||||||||||
Operating Income | 2,471,279 | 1,414,462 | 4,931,309 | 2,989,283 | 2,558,779 | 2,471,279 | 7,921,403 | 4,931,309 | ||||||||||||||||||||||||
Other (Income) and Expenses: | ||||||||||||||||||||||||||||||||
Interest charges | 286,684 | 116,992 | 453,372 | 231,879 | 321,994 | 286,684 | 872,646 | 453,372 | ||||||||||||||||||||||||
Loss on sale of business | - | - | 1,160,574 | - | - | - | - | 1,160,574 | ||||||||||||||||||||||||
Other (income) expense, net | 97,412 | 3,167 | 205,678 | 262,938 | 3 | 97,412 | 1,664 | 205,678 | ||||||||||||||||||||||||
Total Other (Income) and Expenses | 384,096 | 120,159 | 1,819,624 | 494,817 | 321,997 | 384,096 | 874,310 | 1,819,624 | ||||||||||||||||||||||||
Income before Provision for Income Taxes | 2,087,183 | 1,294,303 | 3,111,685 | 2,494,466 | 2,236,782 | 2,087,183 | 7,047,093 | 3,111,685 | ||||||||||||||||||||||||
Provision for Income Taxes | 590,104 | 726,864 | 846,229 | 772,364 | 541,914 | 590,104 | 1,775,288 | 846,229 | ||||||||||||||||||||||||
Net Income | $ | 1,497,079 | $ | 567,439 | $ | 2,265,456 | $ | 1,722,102 | $ | 1,694,868 | $ | 1,497,079 | $ | 5,271,805 | $ | 2,265,456 | ||||||||||||||||
Net Income Per Common Share - Basic | $ | 0.55 | $ | 0.20 | $ | 0.80 | $ | 0.60 | $ | 0.59 | $ | 0.55 | $ | 1.89 | $ | 0.80 | ||||||||||||||||
Net Income Per Common Share - Diluted | $ | 0.48 | $ | 0.18 | $ | 0.71 | $ | 0.56 | $ | 0.52 | $ | 0.48 | $ | 1.64 | $ | 0.71 | ||||||||||||||||
Weighted Average Shares of Common Stock Outstanding | ||||||||||||||||||||||||||||||||
Basic | 2,720,654 | 2,888,502 | 2,826,347 | 2,882,278 | 2,850,958 | 2,720,654 | 2,787,845 | 2,826,347 | ||||||||||||||||||||||||
Diluted | 3,092,520 | 3,161,975 | 3,186,946 | 3,101,016 | 3,249,233 | 3,092,520 | 3,223,004 | 3,186,946 |
See accompanying notes to consolidated financial statements
HICKOK INCORPORATEDCRAWFORD UNITED CORPORATION
CONSOLIDATED STATEMENTSTATEMENTS OF CASH FLOW STOCKHOLDERS' EQUITY
(Unaudited)
Nine Months Ended September 30, | ||||||||
2018 | 2017 | |||||||
Cash Flows from Operating Activities | ||||||||
Net Income | $ | 2,265,456 | $ | 1,722,102 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 1,122,061 | 649,835 | ||||||
Loss (gain) on sale of operations | 1,160,574 | - | ||||||
Non-cash professional service expense | - | 7,884 | ||||||
Loss (gain) on disposal of assets | 10,750 | 13,386 | ||||||
Deferred income taxes | - | 693,398 | ||||||
Non-cash share-based compensation expense | 262,167 | 129,832 | ||||||
Changes in assets and liabilities: | ||||||||
Decrease (Increase) in accounts receivable | (2,555,058 | ) | (2,728,471 | ) | ||||
Decrease (Increase) in inventories | (1,325,790 | ) | (43,467 | ) | ||||
Decrease (Increase) in costs and estimated earnings in excess of billings | (219,723 | ) | 2,341,305 | |||||
Decrease (Increase) in prepaid expenses & other assets | (387,039 | ) | (210,473 | ) | ||||
Increase (Decrease) in accounts payable | 1,400,608 | (858,488 | ) | |||||
Increase (Decrease) in accrued payroll and related expenses | 391,161 | 182,826 | ||||||
Increase (Decrease) in accrued expenses | (253,853 | ) | 317,368 | |||||
Increase (Decrease) in accrued income taxes | 602,881 | 61,933 | ||||||
Increase (Decrease) in unearned revenue | 3,783,124 | (611,598 | ) | |||||
Total adjustments | 3,991,863 | (54,730 | ) | |||||
Net Cash Provided by Operating Activities | $ | 6,257,319 | $ | 1,667,372 | ||||
Cash Flows from Investing Activities | ||||||||
Capital expenditures | $ | (274,556 | ) | $ | (177,941 | ) | ||
Cash paid for acquisition, net | (20,209,583 | ) | (10,250,000 | ) | ||||
Net Cash (Used in) Investing Activities | (20,484,139 | ) | (10,427,941 | ) | ||||
Cash Flows from Financing Activities | ||||||||
Payments on related party notes | (258,870 | ) | (682,459 | ) | ||||
Payments on bank debt | (6,863,889 | ) | (1,775,000 | ) | ||||
Borrowings on seller note | 9,000,000 | - | ||||||
Borrowings on bank debt | 13,824,690 | 8,694,486 | ||||||
Payments on capital lease | (27,529 | ) | (53,350 | ) | ||||
Net Cash Provided by Financing Activities | 15,674,402 | 6,183,677 | ||||||
Net Increase (decrease) in cash and cash equivalents | 1,447,582 | (2,576,892 | ) | |||||
Cash and cash equivalents at beginning of year | 2,444,110 | 3,607,452 | ||||||
Cash and cash equivalents at end of year | $ | 3,891,692 | $ | 1,030,560 | ||||
Supplemental disclosures of cash flow information | ||||||||
Interest Paid | $ | 493,527 | $ | 67,045 | ||||
Income Taxes Paid | $ | 130,745 | $ | 31,000 | ||||
Non-cash proceeds received for Class A and Class B Common Shares in exchange for the sale of certain assets | $ | 1,640,939 | $ | - |
COMMON SHARES - NO PAR VALUE | ||||||||||||||||||||||||
CLASS A | CLASS B | CONTRIBUTED CAPITAL | TREASURY SHARES | RETAINED EARNINGS | TOTAL | |||||||||||||||||||
Balance at June 30, 2018 | $ | 2,495,534 | $ | 710,272 | $ | 1,741,901 | $ | (1,905,780 | ) | $ | 6,732,459 | $ | 9,774,386 | |||||||||||
Share-based compensation expense | 13,000 | - | - | - | - | 13,000 | ||||||||||||||||||
Net Income | - | - | - | - | 1,497,079 | 1,497,079 | ||||||||||||||||||
Balance at September 30, 2018 | $ | 2,508,534 | $ | 710,272 | $ | 1,741,901 | $ | (1,905,780 | ) | $ | 8,229,538 | $ | 11,284,465 |
COMMON SHARES - NO PAR VALUE | ||||||||||||||||||||||||
CLASS A | CLASS B | CONTRIBUTED CAPITAL | TREASURY SHARES | RETAINED EARNINGS | TOTAL | |||||||||||||||||||
Balance at June 30, 2019 | $ | 2,907,342 | $ | 710,272 | $ | 1,741,901 | $ | (1,905,780 | ) | $ | 13,081,603 | $ | 16,535,338 | |||||||||||
Share-based compensation expense | 38,300 | - | - | - | - | 38,300 | ||||||||||||||||||
Note conversion | - | 648,000 | - | - | - | 648,000 | ||||||||||||||||||
Net Income | - | - | - | - | 1,694,868 | 1,694,868 | ||||||||||||||||||
Balance at September 30, 2019 | $ | 2,945,642 | $ | 1,358,272 | $ | 1,741,901 | $ | (1,905,780 | ) | $ | 14,776,471 | $ | 18,916,506 |
See accompanying notes to consolidated financial statements
CRAWFORD UNITED CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
COMMON SHARES - NO PAR VALUE | ||||||||||||||||||||||||
CLASS A | CLASS B | CONTRIBUTED CAPITAL | TREASURY SHARES | RETAINED EARNINGS | TOTAL | |||||||||||||||||||
Balance at December 31, 2017 | $ | 2,246,367 | $ | 710,272 | $ | 1,741,901 | $ | (264,841 | ) | $ | 5,964,082 | $ | 10,397,781 | |||||||||||
Share-based compensation expense | 262,167 | - | - | - | - | 262,167 | ||||||||||||||||||
Proceeds from sale of business | - | - | - | (1,640,939 | ) | - | (1,640,939 | ) | ||||||||||||||||
Net Income | - | - | - | - | 2,265,456 | 2,265,456 | ||||||||||||||||||
Balance at September 30, 2018 | $ | 2,508,534 | $ | 710,272 | $ | 1,741,901 | $ | (1,905,780 | ) | $ | 8,229,538 | $ | 11,284,465 |
COMMON SHARES - NO PAR VALUE | ||||||||||||||||||||||||
CLASS A | CLASS B | CONTRIBUTED CAPITAL | TREASURY SHARES | RETAINED EARNINGS | TOTAL | |||||||||||||||||||
Balance at December 31, 2018 | $ | 2,641,300 | $ | 710,272 | $ | 1,741,901 | $ | (1,905,780 | ) | $ | 9,577,792 | $ | 12,765,485 | |||||||||||
Share-based compensation expense | 304,342 | - | - | - | - | 304,342 | ||||||||||||||||||
Note conversion | - | 648,000 | - | - | - | 648,000 | ||||||||||||||||||
Cumulative effect of accounting change | - | - | - | - | (73,126 | ) | (73,126 | ) | ||||||||||||||||
Net Income | - | - | - | - | 5,271,805 | 5,271,805 | ||||||||||||||||||
Balance at September 30, 2019 | $ | 2,945,642 | $ | 1,358,272 | $ | 1,741,901 | $ | (1,905,780 | ) | $ | 14,776,471 | $ | 18,916,506 |
See accompanying notes to consolidated financial statements
CRAWFORD UNITED CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOW (Unaudited)
Nine Months Ended September 30, | ||||||||
2019 | 2018 | |||||||
Cash Flows from Operating Activities | ||||||||
Net Income | $ | 5,271,805 | $ | 2,265,456 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 1,482,784 | 1,122,061 | ||||||
Loss (gain) on sale of operations | - | 1,160,574 | ||||||
Loss (gain) on disposal of assets | 4,294 | 10,750 | ||||||
Non-cash share-based compensation expense | 304,342 | 262,167 | ||||||
Changes in assets and liabilities: | ||||||||
Decrease (Increase) in accounts receivable | (3,314,197 | ) | (2,555,058 | ) | ||||
Decrease (Increase) in inventories | (1,601,691 | ) | (1,325,790 | ) | ||||
Decrease (Increase) in costs and estimated earnings in excess of billings | (526,024 | ) | (219,723 | ) | ||||
Decrease (Increase) in prepaid expenses & other assets | 196,359 | (387,039 | ) | |||||
Increase (Decrease) in accounts payable | 1,288,002 | 1,400,608 | ||||||
Increase (Decrease) in accrued payroll and related expenses | (281,123 | ) | 391,161 | |||||
Increase (Decrease) in accrued expenses | 987,717 | (253,853 | ) | |||||
Increase (Decrease) in accrued income taxes | 302,088 | 602,881 | ||||||
Increase (Decrease) in unearned revenue | (3,383,550 | ) | 3,783,124 | |||||
Total adjustments | (4,540,999 | ) | 3,991,863 | |||||
Net Cash Provided by Operating Activities | 730,806 | 6,257,319 | ||||||
Cash Flows from Investing Activities | ||||||||
Capital expenditures | (595,227 | ) | (274,556 | ) | ||||
Cash paid for acquisition | (50,001 | ) | (20,209,583 | ) | ||||
Net Cash Used in Investing Activities | (645,228 | ) | (20,484,139 | ) | ||||
Cash Flows from Financing Activities | ||||||||
Payments on notes | (909,457 | ) | (258,870 | ) | ||||
Payments on bank debt | (2,870,999 | ) | (6,863,889 | ) | ||||
Borrowings on seller note | - | 9,000,000 | ||||||
Borrowings on bank debt | 1,898,542 | 13,824,690 | ||||||
Payments on capital lease | (11,203 | ) | (27,529 | ) | ||||
Net Cash Provided by (Used in) Financing Activities | (1,893,117 | ) | 15,674,402 | |||||
Net Increase (decrease) in cash and cash equivalents | (1,807,539 | ) | 1,447,582 | |||||
Cash and cash equivalents at beginning of year | 5,057,626 | 2,444,110 | ||||||
Cash and cash equivalents at end of period | $ | 3,250,087 | $ | 3,891,692 | ||||
Supplemental disclosures of cash flow information | ||||||||
Interest paid | $ | 884,103 | $ | 493,527 | ||||
Income taxes paid | $ | 1,507,700 | $ | 130,745 | ||||
Non-cash proceeds received for Class A and Class B Common Shares in exchange for the sale of certain assets | $ | - | $ | 1,640,939 | ||||
Note conversion | $ | 648,000 | $ | - |
See accompanying notes to consolidated financial statements
CRAWFORD UNITED CORPORATION
HICKOK INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)SEPTEMBERSeptember 30, 20182019
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. The consolidated financial statements include the accounts of Hickok IncorporatedCrawford 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-nine months ended September 30, 20182019 are not necessarily indicative of the results that may be expected for the year ended December 31, 2018.2019. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s TransitionAnnual Report on Form 10-KT10-K for the year ended December 31, 2017.2018.
During the nine-month periodthree and nine months ended September 30, 2018,2019, there have beenwere no changes to our significant accounting policies other than the adoption of the new standard for recognition of revenue from contracts with customers,leases, as discussed in Note 2 below.
Reclassifications
Certain prior year amounts were reclassified to conform to the current year presentation, including transaction costs related to acquisitions that were reclassified from selling, general and administrative to other (income) expenses as these costs are not considered as operating costs.presentation. These reclassifications have no effect on the financial position or results of operations reported as of and for the periods presented.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company’s Summary of Significant Accounting Policies is provided with the consolidated financial statements and footnotes thereto included in the Company’s TransitionAnnual Report on Form 10-KT10-K for the three-month transition periodyear ended December 31, 2017.2018.
Recently Adopted Accounting Standards
The Company did not incur any material impact to its financial condition or results of operations due to the adoption of any new accounting standards during the periods reported. The adoption of the new standard for leases did have a material impact on consolidated balance sheets as disclosed below and in Note 9.
In May 2017,February 2016, the Financial Accounting Standards Board (FASB), issued ASU 2017-09, "Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting." ASU 2017-09 provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The amendments in this update should be applied prospectively to an award modified on or after the adoption date. The Company adopted this guidance January 1, 2018. The adoption of this guidance did not have a material effect on our consolidated financial statements.
In August 2016, FASB issued ASU 2016-15, "Statement2016-02 “Leases (Topic 842),” a new standard related to leases to increase transparency and comparability among organizations by requiring the recognition of Cash Flows (Topic 230), Classificationlease assets and lease liabilities on the balance sheet. Most prominent among the amendments is the recognition of Certain Cash Receiptsassets and Cash Payments."liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP. Under the new standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The amendments in this update provide guidance on eight specific cash flow issues, thereby reducingnew standard requires a modified retrospective transition for capital or operating leases existing at or entered into after the diversity in practice in how certain transaction are classifiedbeginning of the earliest comparative period presented in the consolidatedfinancial statements, but it does not require transition accounting for leases that expire prior to the date of cash flows. Thisinitial application. The new standard is effective for annual periodsfiscal years and interim periods forwithin those annual periodsyears, beginning on or after December 15, 2017. Early2018, with early adoption is permitted. The Company adopted this guidance January 1, 2018. The adoption of this guidance did not have a material impact on our consolidated financial statements.
In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU 2016-09) a new standard that changes the accounting for certain aspects of share-based payments to employees. The new guidance requires excess tax benefits and tax deficiencies to be recorded in the income statement when the awards vest or are settled. In addition, cash flows related to excess tax benefits will no longer be separately classified as a financing activity apart from the other income tax cash flows. The standard also allows the Company to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting, clarifies that all cash payments made on an employee’s behalf for withheld shares should be presented as a financing activity on our cash flow statements, and provides an accounting policy election to account for forfeitures as they occur. The Company adopted this standard effective October 1, 2017. The adoption of this new standard did not have a material impact on our consolidated financial statements.
In May 2014, the FASB issued its final standard on the recognitionJanuary 1, 2019 resulted in assets of revenue from contracts with customers. The standard, issued$9.7 million recorded as Accounting Standards Update (ASU) 2014-09, outlines a single comprehensive model for entities to use in the accounting for revenue arising from contracts with customersOperating Right of Use Assets, net, and supersedes most current revenue recognition guidance, including industry specific guidance. The core principleadditional lease liabilities of this model is that “an entity recognizes revenue to depict the transfer of promised goods or services to a customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services.”$9.8 million. The Company adopted this new standard effective January 1, 2018. The adoptionalso recorded an adjustment to retained earnings resulting from the cumulative effect of this standard did not have a material impact on our consolidated financial statements. the change in accounting of ($0.1) million. See Note 9 for further information.
Recently Issued Accounting Standards
In January 2017, FASB issued ASU 2017-04, "Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment." ASU 2017-04 eliminates the second step in the goodwill impairment test which requires an entity to determine the implied fair value of the reporting unit’s goodwill. Instead, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying value and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The standard, which should be applied prospectively, is effective for fiscal years and interim periods within those years beginning on or after December 15, 2019. Early adoption is permitted. We are evaluating the impact the adoption of this standard could have on our consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses. The standard requires a financial asset (including trade receivables) measured at amortized cost basis to be presented at the net amount expected to be collected. Thus, the income statement will reflect the measurement of credit losses for newly-recognized financial assets as well as the expected increases or decreases of expected credit losses that have taken place during the period. This standard is effective for fiscal years and interim periods within those fiscal years beginning on or after December 15, 2019 with early adoption permitted. We are evaluating the impact the adoption of this standard could have on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02 “Leases (Topic 842),” a new standard related to leases to increase transparency and comparability among organizations by requiring the recognition of lease assets and lease liabilities on the balance sheet. Most prominent among the amendments is the recognition of assets and liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP. Under the new standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The new standard requires a modified retrospective transition for capital or operating leases existing at or entered into after the beginning of the earliest comparative period presented in the financial statements, but it does not require transition accounting for leases that expire prior to the date of initial application. The new standard is effective for fiscal years and interim periods within those years, beginning on or after January 1, 2019, with early adoption permitted. We are evaluating the impact the adoption of this standard will have to our consolidated financial statements.
3. ACCOUNTS RECEIVABLE
The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information. The reserve for doubtful accounts was $8,852$17,625 and $10,175$35,000 at September 30, 20182019 and December 31, 2017,2018, respectively.
4. INVENTORY
Inventory is valued at the lower of cost (first-in, first-out) or marketnet realizable value and consists of:
September 30, 2018 | December 31, 2017 | |||||||
Raw materials and component parts | $ | 2,064,573 | $ | 2,637,138 | ||||
Work-in-process | 1,419,666 | 523,644 | ||||||
Finished products | 1,861,375 | 1,200,204 | ||||||
Total Inventory | $ | 5,345,614 | 4,360,986 | |||||
Less: inventory reserves | 203,092 | 457,505 | ||||||
Net Inventory | $ | 5,142,522 | $ | 3,903,481 |
September 30, 2019 | December 31, 2018 | |||||||
Raw materials and component parts | $ | 3,082,312 | $ | 2,313,664 | ||||
Work-in-process | 2,180,458 | 1,209,117 | ||||||
Finished products | 2,158,350 | 2,201,693 | ||||||
Total inventory | 7,421,120 | 5,724,474 | ||||||
Less: inventory reserves | 321,447 | 226,492 | ||||||
Net inventory | $ | 7,099,673 | $ | 5,497,982 |
5. GOODWILL AND OTHER INTANGIBLE ASSETS, NET
Intangible assets relate to the purchase of businesses. Goodwill represents the excess of cost over the fair value of identifiable assets acquired. Goodwill is not amortized but is reviewed on an annual basis for impairment. Amortization of intangiblesintangible assets is being amortized on a straight-line basis over period ranging from one1 year to 15 years. Intangible assets are as follows:
September 30, 2018 | December 31, 2017 | |||||||
Customer List: Backlog | $ | 4,970,000 | $ | 1,970,000 | ||||
Non-Compete Agreements | 200,000 | 200,000 | ||||||
Trademarks | 340,000 | 340,000 | ||||||
Other Intangibles | 5,510,000 | 2,510,000 | ||||||
Less: Accumulated Amortization | 1,084,207 | 613,601 | ||||||
Other Intangibles, Net | $ | 4,425,793 | $ | 1,896,399 |
September 30, 2019 | December 31, 2018 | |||||||
Customer list intangibles | $ | 4,970,000 | $ | 4,970,000 | ||||
Non-compete agreements | 200,000 | 200,000 | ||||||
Trademarks | 340,000 | 340,000 | ||||||
Total intangible assets | 5,510,000 | 5,510,000 | ||||||
Less: accumulated amortization | 1,458,572 | 1,177,798 | ||||||
Intangible assets, net | $ | 4,051,428 | $ | 4,332,202 |
Amortization of intangibles assets was:was $93,592 and $93,591 for the three months ended September 30, 2019 and 2018, respectively, and $280,774 and $470,606 and $338,162 for the nine months ended September 30, 20182019 and 2017,2018, respectively.
6. PROPERTY, PLANT AND 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:
September 30, 2018 | December 31, 2017 | |||||||
Land | $ | 257,205 | $ | 235,179 | ||||
Buildings and Improvements | 1,525,194 | 2,239,763 | ||||||
Machinery & Equipment | 13,488,275 | 5,091,360 | ||||||
Total Property, Plant & Equipment | 15,270,674 | 7,566,302 | ||||||
Less: Accumulated Depreciation | 1,612,569 | 4,242,913 | ||||||
Property Plant & Equipment, Net | $ | 13,658,105 | $ | 3,323,389 |
September 30, 2019 | December 31, 2018 | |||||||
Land | $ | 228,872 | $ | 257,205 | ||||
Buildings and improvements | 1,837,721 | 1,709,165 | ||||||
Machinery & equipment | 13,834,588 | 13,343,878 | ||||||
Total property, plant & equipment | 15,901,181 | 15,310,248 | ||||||
Less: accumulated depreciation | 3,189,009 | 2,006,133 | ||||||
Property plant & equipment, net | $ | 12,712,172 | $ | 13,304,115 |
Depreciation expense was $651,455$378,111 and $308,732$379,495 for the three months ended September 30, 2019 and 2018, respectively, and was $1,182,876 and $651,455 for the nine months ended September 30, 20182019 and 2017,2018, respectively.
7. BANK DEBT
The Company entered into a Credit Agreement on June 1, 2017 with JPMorgan Chase Bank, N.A. as lender, which was subsequently amended in connection with funding the acquisition of CAD Enterprises, Inc. (“CAD”) on July 5, 2018 (as amended, the “Credit Agreement”). As amended, the Credit Agreement is comprised of a revolving facility in the amount of $12,000,000, subject to a borrowing base (determined based on 80% of Eligible Accounts, plus 50% of Eligible Progress Billing Accounts, plus 50% of Eligible Inventory, minus Reserves, each as defined in the Credit Agreement) and a term A loan in the amount of $6,000,000. Outstanding borrowings on the term A loan are payable in consecutive monthly installments, which currently amount to $111,111 per month. The Credit Agreement was amended on September 30, 2019 to expand the revolving loan amount from $12,000,000 to $20,000,000, subject to a borrowing base, and to extend the maturity of revolving facility was extended from June 1, 2021 to June 1, 2024.
The revolving facility under the Credit Agreement includes a $3 million sublimit for the issuance of letters of credit thereunder. The Credit Agreement also provides for a separate credit line for borrowings of up to an aggregate of $1,000,000 for capital expenditures until July 5, 2019, at which time any outstanding capital expenditure borrowings will be converted into a term loan maturing at the earlier of five years after such conversion or the termination of the revolving credit facility. Interest for borrowings under the revolving facility accrues at a per annum rate equal to Prime Rate or LIBOR plus applicable margins of (i) 0.00%(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 at a 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 December 1, 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 under the amended Credit Agreement include a minimum fixed charge coverage ratio, a revised maximum senior funded debt to EBITDA ratio and a new maximum total funded debt to EBITDA ratio.
In connection with entering into the Credit Agreement in 2017, the Company made a one-time prepayment of a portion of the outstanding principal under promissory notes held by First Francis Company Inc. (“First Francis”), in the amount of $500,000. First Francis is owned by Edward Crawford and Matthew Crawford, who serve on the Board of Directors of the Company.
Bank debt balances consist of the following:
September 30, 2018 | December 31, 2017 | |||||||
Term Debt | $ | 5,777,778 | $ | 1,750,000 | ||||
Revolving Debt | 6,457,258 | 3,524,235 | ||||||
Total Bank Debt | 12,235,036 | 5,274,235 | ||||||
Less: Current Portion | 1,333,333 | 500,000 | ||||||
Non-Current Bank Debt | 10,901,703 | 4,774,235 | ||||||
Less: Unamortized Debt Costs | 102,730 | 41,685 | ||||||
Net Non-Current Bank Debt | $ | 10,798,973 | $ | 4,732,550 |
September 30, 2019 | December 31, 2018 | |||||||
Term debt | $ | 4,444,444 | $ | 5,444,444 | ||||
Revolving debt | 4,211,703 | 4,184,158 | ||||||
Total Bank debt | 8,656,147 | 9,628,602 | ||||||
Less: current portion | 1,333,333 | 1,333,333 | ||||||
Non-current bank debt | 7,322,814 | 8,295,269 | ||||||
Less: unamortized debt costs | 81,458 | 100,590 | ||||||
Net non-current bank debt | $ | 7,241,356 | $ | 8,194,679 |
8. NOTES PAYABLE
Convertible Notes Payable - Related Party
On December 30, 2011, management entered intoThe Company is party to a Convertible Loan Agreement (“Convertible(as amended, “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%0.34%. Borrowings under the Convertible Loan mature on December 30, 2019. Roundball, a major shareholder of the Company, is an affiliate of Steven Rosen and Matthew Crawford, who serve on the Board of Directors of the Company.
There have been several amendmentsThe Convertible Loan provides Roundball with the option to the original agreement over the years for the purpose of extending the existing terms of the Convertible Loan. On December 29, 2017, management entered into Amendment No. 6 ofelect to convert amounts outstanding under the Convertible Loan Agreementinto Class A Common Shares at a conversion price of $1.43 per Class A Common Share. In December 2018, the Convertible Loan was amended to provide Roundball with Roundball.the option to elect to convert, subject to shareholder approval which was obtained on May 10, 2019, a portion of the indebtedness into Class B Common Shares at a conversion price of $1.43 per Class B Common Share, up to a maximum amount of 75,000 Class B Common Shares. The amended Convertible Loan:
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The outstanding principal balance on the Convertible Loan as of September 30, 2018,2019 and December 31, 20172018, respectively, was $200,000.
As part ofIn connection with the Convertible Loan, the parties entered into a Warrant Agreement, dated December 30, 2012 (as amended to date, the “Warrant Agreement”), whereby the Company issued a warrant to Roundball to purchase, at itsRoundball’s 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,warrant expires on December 30, 2018.2019.
Notes Payable – Related Party
On July 1, 2016, theThe Company entered intohas two separate outstanding promissory notes with First Francis Company Inc. (“First Francis”), which were originally issued in July 2016 in connection with the acquisition of Federal Hose Manufacturing. InManufacturing (“Federal Hose”) and which were amended in July 2018 in connection with acquisition of CAD effective July 1, 2018 and the amendment to the Credit Agreement on July 5, 2018, the Company and First Francis entered into an amendment to the Promissory Note dated July 1, 2016CAD. The first promissory note was issued with original principal in the amount of $2,000,000, and an amendment to the Promissory Note dated July 1, 2016second was issued with original principal in the amount of $2,768,662 (as amended, the “Promissory Notes”),$2,768,662. The promissory notes each issued by the Company to First Francis. The Promissory Notes each were amended to increase thehave an interest rate of 6.25% per annum, which was increased from 4.0% per annum as part of the July 2018 amendments to 6.25% per annum.the Credit Agreement. In addition, the Promissory Notepromissory note with original principal amount of $2,768,662 was amended in July 2018 to provide for a conversion option commencing July 5, 2019 which allows First Francis to convert the Promissory Note,promissory note, in whole in part with respect to a maximum amount of $648,000, into shares of the Company’s Class B common stock at the price of $6.48 per share (subject to adjustment), subject to shareholder approval.approval which was obtained on May 10, 2019. On July 9, 2019, First Francis exercised its option to convert $648,000 of existing indebtedness into 100,000 Class B Common Shares of the Company. First Francis is owned by Edward Crawford and Matthew Crawford, who serveserves on the Board of Directors of the Company.
Notes payable – related party consistsCompany, and Edward Crawford, who served on the Board of Directors of the following:
September 30, 2018 | December 31, 2017 | |||||||
In connection with the acquisition, the Company entered into a promissory note on July 1, 2016 for a $2,000,000 loan due to First Francis Company, payable in quarterly installments. The remaining balance of the note shall be payable in full on July 1, 2022. | $ | 1,528,892 | $ | 1,639,206 | ||||
In connection with the acquisition, the Company entered into a promissory note on July 1, 2016 for a $2,768,662 loan due to First Francis Company, payable in quarterly installments. The remaining balance of the note shall be payable in full on July 1, 2022. | 2,216,729 | 2,365,286 | ||||||
Total notes payable – related party | 3,745,621 | 4,004,492 | ||||||
Less current portion | 432,910 | 352,727 | ||||||
Notes payable – related party non-current portion | $ | 3,312,711 | $ | 3,651,765 |
Company until June 17, 2019.
Notes Payable – Seller Note
Effective July 1, 2018, the Company completed the acquisition of 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 offor 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 Sellerseller (the “Seller Note)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 Seller Note bears interest at a rate of four percent (4%) per annum and is payable 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 Seller Note. Payment of the Seller Note is secured by a second-priority security interest in the assets of the Company. Interest accrued on the original principal amount becomesbecame due and payable in arrears beginning September 30, 2018, and subsequent interest is due on the first day of each calendar quarter thereafter up to and including Junethe quarter ending September 30, 2019. The Company is required to make quarterly principal payments, the amount of which will beis calculated based on a four (4) year amortization schedule, beginning on September 30, 2019 and continuing on the last day of each calendar quarter thereafter up to and including the Maturity Date.
Notes payable consists of the following:
September 30, 2019 | December 31, 2018 | |||||||
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. The remaining balance of the note shall be payable in full on July 1, 2022. | $ | 1,349,413 | $ | 1,485,061 | ||||
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. The remaining balance of the note shall be payable in full on July 1, 2022. | 1,322,084 | 2,157,004 | ||||||
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 Loudermilk’s, payable in quarterly installments. The first principal payment was made in the current quarter. | 8,437,500 | 9,000,000 | ||||||
Total notes payable | 11,108,997 | 12,642,065 | ||||||
Less current portion | 2,742,760 | 1,555,663 | ||||||
Notes payable – non-current portion | $ | 8,366,237 | $ | 11,086,402 |
9. 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:
September 30, 2019 | December 31, 2018 | |||||||
Operating leases: | ||||||||
Operating lease right-of-use assets | $ | 9,448,909 | $ | - | ||||
Other current liabilities | 959,808 | - | ||||||
Operating lease liabilities | 8,617,781 | - | ||||||
Total operating lease liabilities | $ | 9,577,589 | $ | - | ||||
Weighted Average Remaining Lease Term | ||||||||
Operating Leases (in years) | 11.2 | - | ||||||
Weighted Average Discount Rate | ||||||||
Operating Leases | 5.0 | % | - |
9.10. EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings per share.
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||
Earnings Per Share - Basic | ||||||||||||||||||||||||||||||||
Net Income | $ | 1,497,079 | $ | 567,439 | $ | 2,265,456 | $ | 1,722,102 | $ | 1,694,868 | $ | 1,497,079 | $ | 5,271,805 | $ | 2,265,456 | ||||||||||||||||
Weighted average shares of common stock outstanding - Basic | 2,720,654 | 2,888,502 | 2,826,347 | 2,882,278 | 2,850,958 | 2,720,654 | 2,787,845 | 2,826,347 | ||||||||||||||||||||||||
Earnings Per Share - Basic | $ | 0.55 | $ | 0.20 | $ | 0.80 | $ | 0.60 | $ | 0.59 | $ | 0.55 | $ | 1.89 | $ | 0.80 | ||||||||||||||||
Earnings Per Share - Diluted | ||||||||||||||||||||||||||||||||
Weighted average shares of common stock outstanding - Basic | 2,720,654 | 2,888,502 | 2,826,347 | 2,882,278 | 2,850,958 | 2,720,654 | 2,787,845 | 2,826,347 | ||||||||||||||||||||||||
Warrants, Options and Convertible Notes | 371,866 | 273,473 | 360,599 | 218,738 | 398,275 | 371,866 | 435,159 | 360,599 | ||||||||||||||||||||||||
Weighted average shares of common stock -Diluted | 3,092,520 | 3,161,975 | 3,186,946 | 3,101,016 | 3,249,233 | 3,092,520 | 3,223,004 | 3,186,946 | ||||||||||||||||||||||||
Earnings Per Share - Diluted | $ | 0.48 | $ | 0.18 | $ | 0.71 | $ | 0.56 | $ | 0.52 | $ | 0.48 | $ | 1.64 | $ | 0.71 |
10.11. ACQUISITIONS
Effective July 1, 2018, the Company completed the acquisition of all of the issued and outstanding shares of capital stock of CAD, pursuant to the Share Purchase Agreement. Upon the closing of the transaction, the CAD shares were transferred and assigned to the Company in consideration of the payment by the Company of an aggregate purchase price of $21 million, $12 million of which was payable in cash at closing, with the remainder paid in the form of the Seller Note, which is subject to certain post-closing adjustments based on working capital, indebtedness and selling expenses, as specified in the Share Purchase Agreement.
CAD manufactures high end components for the aerospace industry and has one operating location in Phoenix, Arizona. The purchase price was assigned to the book value of the net assets acquired with the excess over the book value assigned to intangible assets and goodwill and has been allocated to the following accounts:
Cash | $ | 790,417 | $ | 790,417 | ||||
Accounts Receivable | 2,221,635 | 2,221,635 | ||||||
Inventory | 2,098,732 | 2,098,732 | ||||||
Fixed Assets | 11,030,000 | 10,867,500 | ||||||
Prepaid and Other Assets | 70,467 | 35,264 | ||||||
Intangibles Assets | 3,000,000 | 3,000,000 | ||||||
Goodwill | 4,770,133 | 7,326,289 | ||||||
Total Assets Acquired | $ | 23,981,384 | $ | 26,339,837 | ||||
Accounts Payable | $ | 1,843,882 | $ | 1,846,247 | ||||
Accrued Payroll and related expenses | 132,071 | 224,139 | ||||||
Accrued Expense | 518,816 | 518,816 | ||||||
Deferred Income Taxes | 486,615 | 2,750,635 | ||||||
Total Liabilities Assumed | $ | 2,981,384 | $ | 5,339,837 | ||||
Net Assets Acquired | $ | 21,000,000 | $ | 21,000,000 |
TheOn April 19, 2019, the Company, purchased certaincompleted the acquisition of substantially all of the assets of Data Genomix, Inc., an Ohio corporation (“DG”), pursuant to the terms of an Asset Purchase Agreement (the “Asset Purchase Agreement”) entered into by and assumed certain liabilitiesbetween Hickok Operating LLC, an Ohio limited liability company and wholly-owned subsidiary of Air Enterprises Acquisition, LLCthe Company (“Hickok Operating”), and DG on June 1, 2017 for $10,250,000. The acquired business will continue to operate under the name Air Enterprises (“AE”). AE manufactures custom commercial air handling units under fixed price contracts. Its customers are typicallydate thereof. DG is in the health care, university, research, pharmaceuticalbusiness of developing and industrial manufacturing market segments,commercializing marketing and span all across the United Statesdata analytic technology applications, which applications include, but are not limited to topplr, anglrjobs, anglrlegal 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:anglrads.
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 |
11.12. DISPOSITIONS
Effective June 1, 2018, the Company completed the sale (the “Sale”) of certain assets comprising its Test and Measurement business segment (the “Test and Measurement Segment”) to Hickok Waekon, LLC, an Ohio limited liability company (“Buyer”), pursuant to an Asset Purchase Agreement (the “Purchase Agreement”) by and among Buyer, the Company, Supreme Electronics Corp., a Mississippi corporation and wholly-owned subsidiary of the Company (“Supreme”), Waekon Corporation, an Ohio corporation and wholly-owned subsidiary of the Company (“Waekon Corporation”), and Robert L. Bauman, who was a director of the Company. Prior to the effectiveness of the Sale, Supreme and Waekon Corporation owned certain of the assets used in the operation of the Test and Measurement Segment and were primarily responsible for the operation thereof.
Upon the closing of the Sale, all of the issued and outstanding shares of capital stock of the Company then-owned, directly or indirectly, by Mr. Bauman or his affiliate, equaling approximately 21,413 shares of Class A Common Stock of the Company and 176,768 shares of Class B Common Stock of the Company, were transferred and assigned to the Company. The shares constituted the consideration received by the Company in the Sale. Based upon the share price at closing, the value of the proceeds received was approximately $1.6 million. The net assets sold were approximately $2.7 million. The Company recorded a loss on sale of approximately $1.2 million.million in the second quarter of 2018.
12.13. SEGMENT AND RELATED INFORMATION
The Company operates the followingthree reportable business segments: 1)(1) Aerospace Components, (2) Commercial Air Handling, 2)(3) and Industrial Hose. The Company operated the Test and Measurement 3) Industrial Hose, and 4) Aerospace.business segment through June 1, 2018, at which time it was sold to Hickok Waekon, LLC. 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.
Aerospace Components:
The Aerospace Components segment was added July 1, 2018, when the Company purchased all of the issued and outstanding shares of capital stock of CAD Enterprises, Inc. (“CAD”) in Phoenix, Arizona. This segment manufactures precision components primarily for customers in the aerospace industry. This segment 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. Our 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.
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 in Akron, Ohio. The acquired business, which operates under the name Air Enterprises, is an industry leader in designing, manufacturing and installing large-scale commercial, institutional, and industrial custom air handling solutions. Its customers are typically in the health care, education, pharmaceutical and industrial manufacturing markets in the United States. This segment manufacturesalso sells to select international markets. The custom air handling units under fixed price contracts to customersare constructed of non-corrosive aluminum, resulting in thesustainable, 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 university, research, pharmaceuticalnetworks, building contractors and engineering firms. The custom air handling equipment is designed, manufactured and installed under the 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 Hose:
The Industrial Hose segment was added July 1, 2016, when the Company purchased the assets of the Federal Hose Manufacturing, LLC in 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 manufacturing market segments, and across the United Statespetrochemical markets. Silicone hoses are distributed to a number of industries in North America, including agriculture and worldwide.general industrial markets.
Test and Measurement:
The Test and Measurement segment is the legacy business that was started in 1910 when the Company was founded, and was sold June 1, 2018. This business segment consists of diagnostic toolsincluded electronic testing products designed and equipment sold tomanufactured for the automotive industry and trucking industries and includes indicators and gauges sold primarily to companies infor the locomotive and aircraft and locomotive industries. TheseThe automotive diagnostic products are sold to original equipment manufacturers and to the aftermarket usingunder several brand names and through a variety of distribution methods. The Company completedIn the saleaircraft industry, primary customers are manufacturers of certain assets comprising its Testcommercial, military and Measurement segment on June 1, 2018. See Note 11, Dispositions, for additional details regardingpersonal airplanes. In the dispositionlocomotive industry, indicators and gauges are sold to manufacturers and servicers of this segment. The Company is currently reporting operationalrailroad equipment and locomotives.
Corporate and Other:
Corporate costs not allocated to the three primary business segments are aggregated with the results for this segment as a result of a single customer relationship retained by the Company following the disposition.DG, acquired in April 2019.
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.
Aerospace Components:This segment manufactures components primarily for customers in the aerospace industry.
Information by industry segment is set forth below:
Three Months Ended | Nine Months Ended | Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||
September 30 | September 30 | September 30, | September 30, | |||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||
Sales | ||||||||||||||||||||||||||||||||
Commercial Air Handling | $ | 9,876,700 | $ | 7,846,896 | $ | 29,876,961 | $ | 11,190,841 | $ | 12,878,988 | $ | 9,876,700 | $ | 39,504,053 | $ | 29,876,961 | ||||||||||||||||
Test and Measurement | 790,297 | 1,560,696 | 2,786,742 | 5,783,621 | 29,893 | 790,297 | 532,076 | 2,786,742 | ||||||||||||||||||||||||
Industrial Hose | 1,718,138 | 1,485,276 | 5,193,324 | 4,485,347 | 1,823,950 | 1,718,138 | 5,554,766 | 5,193,324 | ||||||||||||||||||||||||
Aerospace Components | 7,386,002 | - | 7,386,002 | - | 7,386,930 | 7,386,002 | 22,864,710 | 7,386,002 | ||||||||||||||||||||||||
Corporate and Other | 124,920 | - | 139,799 | - | ||||||||||||||||||||||||||||
Total Sales | $ | 19,771,137 | $ | 10,892,868 | $ | 45,243,029 | $ | 21,459,809 | $ | 22,244,681 | $ | 19,771,137 | $ | 68,595,404 | $ | 45,243,029 | ||||||||||||||||
Gross Profit | ||||||||||||||||||||||||||||||||
Commercial Air Handling | $ | 2,743,833 | $ | 1,946,546 | $ | 7,861,725 | $ | 2,900,293 | $ | 2,915,767 | $ | 2,743,833 | $ | 9,466,810 | $ | 7,861,725 | ||||||||||||||||
Test and Measurement | 130,293 | 533,879 | 722,062 | 3,233,133 | 4,933 | 130,293 | 87,792 | 722,062 | ||||||||||||||||||||||||
Industrial Hose | 356,000 | 553,954 | 1,151,358 | 1,307,613 | 403,158 | 356,000 | 1,521,137 | 1,151,358 | ||||||||||||||||||||||||
Aerospace Components | 1,220,096 | - | 1,220,096 | - | 1,611,655 | 1,220,096 | 3,907,056 | 1,220,096 | ||||||||||||||||||||||||
Corporate and Other | 52,050 | - | 61,589 | - | ||||||||||||||||||||||||||||
Total Gross Profit | $ | 4,450,222 | $ | 3,034,379 | $ | 10,955,241 | $ | 7,441,039 | $ | 4,987,563 | $ | 4,450,222 | $ | 15,044,384 | $ | 10,955,241 | ||||||||||||||||
Operating Income | ||||||||||||||||||||||||||||||||
Commercial Air Handling | $ | 1,696,934 | $ | 1,083,140 | $ | 4,357,970 | $ | 1,425,524 | $ | 1,509,077 | $ | 1,696,934 | $ | 5,536,745 | $ | 4,357,970 | ||||||||||||||||
Test and Measurement | 130,293 | 41,816 | (239,151 | ) | 707,126 | 4,933 | 130,293 | 87,792 | (239,151 | ) | ||||||||||||||||||||||
Industrial Hose | 111,419 | 289,506 | 413,573 | 856,633 | 137,640 | 111,419 | 681,628 | 413,573 | ||||||||||||||||||||||||
Aerospace Components | 706,424 | - | 706,424 | - | 1,073,388 | 706,424 | 2,247,461 | 706,424 | ||||||||||||||||||||||||
Unallocated Corporate General | (173,791 | ) | - | (307,507 | ) | |||||||||||||||||||||||||||
Corporate and Other | (166,259 | ) | (173,791 | ) | (632,223 | ) | (307,507 | ) | ||||||||||||||||||||||||
Total Operating Income | $ | 2,471,279 | $ | 1,414,462 | $ | 4,931,309 | $ | 2,989,283 | $ | 2,558,779 | $ | 2,471,279 | $ | 7,921,403 | $ | 4,931,309 | ||||||||||||||||
Income Before Provision for Income Taxes | ||||||||||||||||||||||||||||||||
Commercial Air Handling | 1,686,296 | 816,669 | 4,316,875 | 1,424,878 | 1,508,944 | 1,686,296 | 5,536,122 | 4,316,875 | ||||||||||||||||||||||||
Test and Measurement | 130,293 | 188,128 | (94,828 | ) | 628,275 | 4,933 | 130,293 | 87,792 | (94,828 | ) | ||||||||||||||||||||||
Industrial Hose | 48,454 | 289,506 | 272,608 | 441,313 | 69,697 | 48,454 | 476,710 | 272,608 | ||||||||||||||||||||||||
Aerospace Components | 620,023 | - | 620,023 | - | 830,865 | 620,023 | 1,625,116 | 620,023 | ||||||||||||||||||||||||
Loss on sale of business | - | - | (1,160,574 | ) | - | - | - | - | (1,160,574 | ) | ||||||||||||||||||||||
Unallocated Corporate General & Other | (397,883 | ) | - | (842,419 | ) | - | ||||||||||||||||||||||||||
Income Before Provision for Income Taxes | $ | 2,087,183 | $ | 1,294,303 | $ | 3,111,685 | $ | 2,494,466 | ||||||||||||||||||||||||
Corporate and Other | (177,657 | ) | (397,883 | ) | (678,647 | ) | (842,419 | ) | ||||||||||||||||||||||||
Income before provision for income taxes | $ | 2,236,782 | $ | 2,087,183 | $ | 7,047,093 | $ | 3,111,685 |
13.14. SUBSEQUENT EVENTS
None.
RESULTS OF OPERATIONS.
The following discussion is intended to assist in the understanding of the Company's financial position at September 30, 20182019 and December 31, 2017,2018, results of operations for the three and nine months ended September 30, 20182019 and 20172018, and cash flows for the nine months ended September 30, 20182019 and 2017,2018, and should be read in conjunction with the consolidated financial statements and related notes included elsewhere this Quarterly Report on Form 10-Q and with the Company’s TransitionAnnual Report on Form 10-KT10-K for the three-month transition periodyear ended December 31, 2017.2018.
SummaryItems Affecting the Comparability of our Financial Results
Effective June 1, 2018, Hickok Incorporatedthe Company completed the sale of certain assets comprising its Test and Measurement business segment to Hickok Waekon, LLC, (Buyer), pursuant to an Asset Purchase Agreement by and among Buyer, the Company, Supreme Electronics Corp., a Mississippi corporation and wholly-owned subsidiary of the Company, Waekon Corporation, and Robert L. Bauman, a director of the Company. Ohio limited liability company (“Buyer”).
Effective July 1, 2018, the Company completed the acquisition of all of the issued and outstanding shares of capital stock of CAD Enterprises, Inc., (“CAD”), pursuant to a Share Purchase Agreement (the “Share Purchase Agreement”) entered into as of July 5, 2018 by and among the Company, the sellers named therein and the Sellers’ representative named therein.. The results of this acquisition are reported under the Aerospace Components segment.
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 results of this acquisition are reported under the Corporate and Other segment.
Accordingly, in light of the timing of these transactions, the Company’s results for the quarter ended on September 30, 2019 include operations in the Aerospace Components segment and operations of DG in the Corporate and Other segment, but not in the Test and Measurement segment. Conversely, our results for the quarter ended September 30, 2018 include operations in the Test and Measurement segment, but not in the operations of DG in the Corporate and Other segment.
Results of Operations – Three Months Ended September 30, 20182019 and 20172018
Sales for the quarter ended September 30, 20182019 (“current quarter”) increased to $19.8$22.2 million, an increase of approximately $9.0$2.5 million or 82%13% from sales of $10.9$19.7 million during the same quarter of the prior year. This increase in sales was primarily attributable to resultsorganic growth, mainly from the acquisition of CAD on July 1, 2018, as well as strong sales in the Commercial Air Handling segment.
Cost of sales for the current quarter was $15.3$17.3 million compared to $7.9$15.3 million an increase of $7.4 million or 95% fromin the same quarter of the prior year.year, an increase of $2.0 million or 13%. Gross profit was $4.5$5.0 million in the current quarter compared to $3.0$4.5 million an increase of $1.5 million fromin the same quarter of the prior year.year, an increase of $0.5 million. The increase in cost of sales and gross profit was attributable to the addition of CAD and strongstronger sales performance in the Commercial Air Handling segment.
There were no product development expenditures during the current quarter as those expenditures historically were related to the Test and Measurement segment which was divested in June 2018. The company also had no product and development expenditures in the same quarter of the prior year.
Selling, general and administrative expenses (SG&A) in the current quarter were $2.4 million, or 11% of sales, compared to $2.0 million, compared to $1.5 million, an increaseor 10% of $0.5 million fromsales, in the same quarter of the prior year. The increase inSG&A expenses increased due to higher selling generalexpenses to support sales growth. SG&A costs are comprised of sales and administrative expenses was primarily related acquisitionsalaries, commissions, professional services, intangible asset amortization, and other costs not directly associated with manufacturing of CAD on July 1, 2018, including intangible amortization expense.products.
Interest charges in the current quarter were approximately $0.3 million compared to $0.1$0.3 million in the same quarter of the prior year. The increase inInterest charges increased due to higher weighted average interest expense is primarily related to the increase in outstanding debt for the quarter resulting from the acquisition of CAD.
Other expense, net was $0.1 millionrates in the current quarter as compared to the same quarter of the prior year and is primarilyinterest charges resulting form the adoption of the lease accounting standard on January 1, 2019. These increases in interest were offset by decreases in interest resulting from lower weighted average debt outstanding in the current quarter compared to the same period of the prior year.
Other (income) expense, net was comprised of transactionalrental income, gains and losses on the disposal of assets, legal settlements, transaction costs for acquisitions.and other miscellaneous charges. The current quarter has lower other expense compared to the same quarter last year as a result of lower merger and acquisition (M&A) activity.
Income tax expense in the current quarter was $0.6$0.5 million compared to $0.7$0.6 million in the same quarter of the prior year. Tax expense in the current period is recorded at the Company’s expected effective tax rate. The Company anticipates that it will be able to utilize the remaining net operating loss and a significant portionrate of the research and development credit carryforwards in the current fiscal year recorded on the balance sheet as a deferred tax asset.25%.
Net income in the current quarter was $1.5$1.7 million or $0.48$0.52 per diluted share as compared to the net income of $0.6$1.5 million or $0.18$0.48 per diluted share for the same quarter of the prior year.
ResultsResults of Operations – Nine Months Ended September 30, 20182019 and 20172018
Sales for the nine months ended September 30, 20182019 (“current year”) increased to $45.2$68.6 million, an increase of approximately $23.8$23.4 million and 111%or 52% from sales of $21.5$45.2 million induring the same period of the prior year. This increase in sales was primarily attributable to results from the acquisition of CADAerospace Components segment acquired on July 1, 2018, and salesas well organic growth, primarily from the Commercial Air Handling segment. The Commercial Air Handling segment has reported results for nine months during the current year compared to five months of results in the same period a year ago.
Cost of sales for the nine months ended September 30, 2018 were $34.3current year was $53.5 million compared to $14.0 million, an increase of $20.3 million or 143% in the same period of the prior year. Gross profit was $11.0 million compared to $7.4 million, an increase of $3.6$34.3 million in the same period of the prior year. Thisyear, an increase in grossof $19.2 million or 56%. Gross profit was primarily attributable to results from the acquisition of CAD on July 1, 2018, as well as results from the Commercial Air Handling segment for nine months during$15.0 million in the current year compared to five months of results$11.0 million in the same period a year ago.
Product development expenditures were $0.2 million for the nine months ended September 30, 2018, a decrease of $0.4 million from $0.6 million in same period of the prior year. Productyear, an increase of $4 million or 37%. The increase in cost of sales and gross profit was attributable to the addition of the Aerospace Components segment and stronger performance in the Commercial Air Handling segment.
There were no product development expenditures during the current year as those expenditures historically were related to the Test and Measurement segment which was divested in June 2018.
Selling, general The company had $0.2 million of product and administrative expenses for the nine months ended September 30, 2018 were $5.8 million compared to $3.9 million, an increase of $1.9 million or 49%development expenditures in the same period of the2018, which were made prior year. The increase in selling, general and administrative was attributable to results from the acquisition of CAD on July 1, 2018 and higher sales expenses to support higher sales from the Commercial Air Handling segment, offset by a decrease in expenses from the divestiture of the Test and Measurement business.segment.
SG&A expenses for the current year were $7.1 million, or 10% of sales, compared to $5.8 million, or 13% of sales in the same period of last year. SG&A expenses increased due to higher selling expenses to support sales growth, and decreased as a percentage of sales due to the sale of the Test and Measurement segment. SG&A expenses are comprised of sales and administrative salaries, commissions, professional services, intangible asset amortization, and other costs not directly associated with manufacturing of products.
Interest chargesexpenses for the nine months ended September 30, 2018current year were approximately $0.5$0.9 million compared to $0.2$0.5 million in the same period of the prior year. The increase in interest expense iswas primarily related to the increase in weighted outstanding debt for the quartercurrent year resulting from the acquisition of CAD, and increasesthe Aerospace Components segment on July 1, 2018, in addition to higher weighted average interest rate in the interest rates on the floating rate bank debt.current year.
LossThere was no loss on the sale of business wasin the current year, as compared to $1.2 million forin the nine months ended September 30, 2018 andsame period of the prior year. The loss on the sale of business is directly related to the sale of certain assets of the Company comprising its Test and Measurement segment on June 1, 2018.
Other (income) expense, net was $0.2 million forcomprised of rental income, gains and losses on the nine months ended September 30, 2018disposal of assets, legal settlements, transaction costs and other miscellaneous charges. This is primarily related to fewer M&A activities compared to other expense, net of $0.3 million in the same period ofin the prior year. Other expense, net is primarily comprised of transactional costs for acquisitions.
Income tax expense forin the nine months ended September 30, 2018current year was $0.8$1.8 million compared to $0.8 million recognized in the same period of the prior year. Tax expense in the current period is recorded at the Company’s expected effective tax rate of 25%. The Company anticipates it will be able to utilize the remaining net operating loss and a significant portion of the research and development credit carryforwards in the current fiscal year recorded on the balance sheet as a deferred tax asset.
Net income forin the nine months ended September 30, 2018current year was $2.3$5.3 million or $0.71$1.64 per diluted share as compared to the net income of $1.7$2.3 million or $0.56$0.71 per diluted share infor the same period of the prior year.
Liquidity and Capital Resources
As described further in Note 1011 to our consolidated financial statements, effective July 1, 2018, we completed the CAD acquisition for an aggregate purchase price of $21 million, $12 million of which was payable in cash at closing, with the remainder paid in the form of a subordinated promissory note issued by the Company in favor of a Seller,seller, which is subject to certain post-closing adjustments based on working capital, indebtedness and selling expenses, as specified in the Share Purchase Agreement.expenses. In connection with that transaction, we also amended our credit agreement to, among other things, increase the maximum availability under our revolving credit facility to $12 million, and to increase the amount of our term loan to $8$6 million. In connection with the acquisition, weWe also amended our promissory notes payable to First Francis to increase the interest rate payable from 4.0% to 6.2%6.25%, and to provide First Francis with the right to convert up to $648,000 principal amount of one note into shares of Class B Common Stockshares at a conversion price of $6.48 per share, subject to shareholder approval.approval which was obtained on May 10, 2019. Subsequently, we also amended our outstanding convertible loan with Roundball to provide Roundball with the option to convert, subject to shareholder approval which was obtained on May 10, 2019, a portion of the indebtedness into Class B Common Shares at a conversion price of $1.43 per Class B Common Share, up to a maximum amount of 75,000 Class B Common Shares.
On July 9, 2019, First Francis exercised its option to convert $648,000 of existing indebtedness into 100,000 Class B Common Shares of the Company.
On September 30, 2019, we amended our credit agreement to, among other things, increase the maximum availability under our revolving credit facility from $12 million to $20 million, and to extend the maturity of the revolving loan from June 1, 2021 to June 1, 2024. Management believes the increase of the revolving credit facility and other modifications to the loan agreement provided additional flexibility to fund acquisitions, working capital and other strategic initiatives.
Total current assets at September 30, 20182019 increased to $24.5$26.7 million from $17.2$23.3 million at December 31, 2017,2018, an increase of $7.3$3.4 million. The increase in current assets is primarily related to the acquisition of CAD on July 1, 2018, and is comprised of the following: an increase in cash of $1.5 million; an increase in accounts receivable of $4.1 million; and$3.3 million, an increase in inventories of $1.2 million. Of the $4.1$1.6 million and an increase in accounts receivable, $2.5costs in excess of billings of $0.5 million is directly related to the Commercial Air Handing division asoffset by a resultdecrease in cash of increased billings.$1.8 million. Fluctuations in accounts receivable and costs and estimated earnings in excess of billing related to the Commercial Air Handling division are dependent upon progress billing milestones for contracts.
Total current liabilities at September 30, 20182019 increased to $17.0$18.0 million from $8.0$16.9 million at December 31, 2017,2018, an increase of $9.0$1.1 million. The increase in current liabilities is primarily due to:comprised of the following: an increase of short term notes payable of $1.1 million, an increase in current leases payable of $0.9 million, an increase in accounts payable of $1.4 million, and an increase in accrued expenses of $0.9 million, offset by a decrease in billings in excess of costs and earnings (included in unearned revenue on the balance sheet) of $4.2 million; and increases$3.4 million. The increase in accountsleases payable of $2.9 million primarilyis related to the acquisitionadoption of the new lease accounting standard adopted January 1, 2019 as discussed in Note 1 and Note 9 of the notes to the consolidated financial statements. The increase in notes payable reflects required principal payments due in the next twelve months related to the CAD on July 1, 2018.seller note. Fluctuations in billings in excess of costs and earnings related to the Commercial Air Handling division are dependent upon progress billing milestones for contracts.
Cash provided by operating activities in the current year was approximately $0.7 million, compared to cash provided by operating activities of $6.3 million in the same period a year ago. Cash provided by operating activities for the nine months ended September 30, 2018 was approximately $6.3 million resulting fromcurrent year is comprised of the following: net income of $2.3$5.3 million and adjustments for non-cash items of $2.6$1.8 million, and favorableoffset by cash used for working capital adjustments of $1.4$6.3 million. Cash from operating activities was adequateThe primary uses of working capital were the increase in accounts receivable of $3.3 million, the increase in inventory of $1.6 million, and the decrease in billings in excess of costs and earnings (included in unearned revenue) of $3.4 million, offset by the increase in accounts payable of $1.3 million. Fluctuations in accounts receivable and costs and estimated earnings in excess of billing related to fund the Company's operations.Commercial Air Handling division are dependent upon the timing of achievement of progress billing milestones for contracts.
Cash flowused in investing activities for the current year of $0.6 million, compared to cash used in investing activities of $20.5 million in the same period a year ago. Cash used in investing activities in the current year was primarily related to $20.2 millionfor the purchase of DG in April 2019 and capital expenditures in the normal course of business. Cash used to acquirein investing activities in the prior year was for the purchase CAD ($21.0 million paid less cash acquired)in July 2018 and $0.3 for capital expenditures in the normal course of business.
Cash used in financing activities was approximately $1.9 million for the current year, compared to cash provided by financing activities of approximately $15.7 million in the same period a year ago. Cash used by financing activities for the current year was primarily related to: $0.9 million for payments against notes and $1.0 million for net payments against bank debt. Cash provided by financing activities for the prior year was primarily related to: $9.0 million seller note entered into in connection with the acquisition of CAD and $13.8 million borrowed against bank debt ($12.0 million directly related to the acquisition of CAD). The increases in borrowings were offset by the $6.9 million repayment against the bank debt and the $0.3 million repayments for the related party notes.
The Company expects positive cash flow from operations to be sufficient to fund working capital needs and service principal and interest payments due related to the bank debt and notes payable. In addition, the Company has $5.4had $9.2 million available to borrow on the revolving credit facility at September 30, 2018.2019. See Note 7 of the notes to the consolidated financial statements. Management believes the Company has adequate liquidity for debt service, working capital, capital expenditures and other strategic initiatives.
Off-Balance Sheet Arrangements
TheFrom time to time, the Company has a securedenters into performance and payment bondbonds in the amountordinary course of $1.6 million asbusiness. These bonds are secured by certain assets of the Company by the surety onuntil the Company's completion of the requirements of athe commercial air handling contract. At September 30, 2019, the Company did not have any active surety bonds for which performance and payment 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 Policies
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-KT10-K for the three-month transition periodyear ended December 31, 2017.2018.
Forward-Looking Statements
The foregoing discussion includes forward-looking statements relating to the business of the Company. These forward-looking statements, or other statements made by the Company, are made based on management's expectations and beliefs concerning future events impacting the Company and are subject to uncertainties and factors (including, but not limited to, those specified below) which are difficult to predict and, in many instances, are beyond the control of the Company. As a result, actual results of the Company could differ materially from those expressed in or implied by any such forward-looking statements. These uncertainties and factors include (a)include: the Company's ability to effectively integrate acquisitions including the acquisition of CAD, and manage the larger operations of the combined businesses, (b) the impact on the Company’s Industrial Hose and Commercial Air Handling segments and the Company’s 2018 financial results of the previously announced divestiture of the Test and Measurement segment, (c) the Company's dependence upon a limited number of customers and the aerospace industry, (d) the highly competitive industryindustries in which the Company operates, which includes several competitors with greater financial resources and larger sales organizations, (e) the ability of the Company to further establish distribution and a customer base in the automotive aftermarket, (f) the Company's ability to capitalize on market opportunities in certain sectors, (f) the Company's ability to obtain cost effective financing and (h) the Company's ability to satisfy obligations under its financing arrangements.arrangements, as well as the risks described from time to time in the Company’s reports as filed with the Securities and Exchange Commission. Except to the extent required by law, the Company does not undertake and specifically declines any obligation to review or update any forward-looking statements or to publicly announce the results of any revisions to any of such statements to reflect future events or developments or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to certain market risks from transactions that it enters during the normal course of business. The Company has not entered into derivative financial instruments for trading purposes. The Company's primary market risk is exposure related to interest rate 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 $6.5 million and an outstanding balance on the term A loan of $5.8 million. Interest for borrowings under the Credit Agreement accrue at prime rate or a LIBOR plus an applicable margin. In addition to floating rate debt under the Credit Agreement, the Company has fixed rate debt with various parties. At September 30, 2018, the Company had $12.9 million of outstanding fixed rate debt; $9.0 million related to seller notes, $3.7 million related to promissory notes with a related party, and $0.2 million convertible debt. The Company believes that the mix of fixed and floating rate debt is appropriate. Management believes the Company has adequate liquidity for debt service, including increases in interest due to rising rates.Not required.
ITEM 4. CONTROLS AND PROCEDURES
As of September 30, 2018,2019, 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 of September 30, 20182019 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 control over financial reporting during the quarter ended September 30, 20182019 that have materially affected or are reasonably likely to materially affect the Company's internal control over financial reporting.
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
HickokCrawford AE LLC (dba Air Enterprises), a wholly owned subsidiary of Hickok Incorporated,Crawford United Corporation, was named as a defendant in a lawsuit filed in Superior Court in Quebec, Canada by Carmichael Engineering Ltd. of Quebec (“Carmichael”). Carmichael’s lawsuit seeks payment of invoices for materials and services it allegedly provided to Air Enterprises prior to the Company’s acquisition of Air Enterprises and relating to a third-party cooling system. A trial date has been set for April 2020. The Company believes the claims have been improperly brought against Hickok.the Company. The Company denies the allegations and will vigorously defend the claims asserted against it. The Company cannot predict the outcome of the above matters or estimate the possible loss or range of loss, if any. Management believes that the allegations are without merit and that the ultimate resolution of these matters will not have a material adverse effect on the consolidated financial condition, results of operations or cash flow of the Company.
ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable.As previously disclosed in Item 3.02 of the current report, a Form 8-K filed by the Company on July 12, 2019, the Company issued 100,000 Class B common shares on July 9, 2019 to First Francis, a related party, in exchange for the conversion of $648,000 of outstanding notes payable.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS
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31.1 | Rule 13a-14(a)/15d-14(a) Certification by the Chief Executive Officer. |
31.2 | Rule 13a-14(a)/15d-14(a) Certification by the Chief Financial Officer. |
32.1 | |
32.2 | |
101.INS* | XBRL Instance |
101.SCH* | XBRL Taxonomy Extension Schema |
101.CAL* | XBRL Taxonomy Extension Calculation |
101.DEF* | XBRL Extension Definition |
101.LAB* | XBRL Taxonomy Extension Labels |
101.PRE* | XBRL Taxonomy Extension Presentation |
*XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned as of the 1413th day of November 2018,2019, thereunto duly authorized.
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SIGNATURE: | TITLE |
/s/ Brian E. Powers | Chairman, President and Chief |
Brian E. Powers | Executive Officer |
| (Principal Executive Officer) |
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/s/ Kelly J. Marek | Vice President and Chief Financial |
Kelly J. Marek | Officer (Principal Accounting and Financial Officer) |
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