☒ QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
or
☐ TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT OF 1934
For the transition period from ___________ to ______________
Commission File No. 000-30185
AMERINAC HOLDING CORP.
(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware
20-4763096
(State or Other Jurisdiction of
Incorporation or Organization)
(IRS Employer
Identification No.)
5936 State Route 159
Chillicothe, OH 45601
(Address of Principal Executive Offices)
(614) 836-1050
(Issuer’s Telephone Number, including Area Code)
_________________________________________________
(Former Name or Former Address, if Changed Since Last Report)
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulations 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 ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
☐
Accelerated Filer
☐
Non-Accelerated Filer
☒
Smaller Reporting Company
☒
Emerging Growth Company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. N/A
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
None
Number of shares outstanding of the registrant’s common stock, as of May 14, 2020: 311,636
Accounts receivable (net of allowance for doubtful accounts of $78,753 as of March 31, 2020 and December 31, 2019.)
4,959,424
3,804,699
Unbilled receivables
287,538
418,629
Inventories (net of reserve for obsolesence of $169,060 as of March 31, 2020 and December 31, 2019.)
10,846,401
7,056,547
Other current assets
422,061
155,037
Total current assets
17,337,105
11,492,331
Property, land and equipment - net
13,004,488
6,004,844
Other assets:
Customer lists - net of amortization
1,459,333
1,509,083
Right-of-use asset
1,032,140
1,092,253
Deferred tax asset
-
356,453
Goodwill
54,993
54,993
Other
65,593
65,593
Total other assets
2,612,059
3,078,375
Total
$
32,953,652
$
20,575,550
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Lines of credit
$
2,431,739
$
3,280,654
Accounts payable and accrued expenses
6,584,425
3,283,856
Notes payable, net - short term
650,441
600,000
Finance leases payable - short term
57,137
49,662
Deferred revenue
59,990
-
Operating leases payable - short term
259,595
255,533
Income taxes payable
187,361
164,554
Total current liabilities
10,230,688
7,634,259
Long-term liabilities:
Notes payable, net of current portion
9,677,444
3,539,671
Finance leases payable - net of current portion
69,472
79,214
Deferred tax liability
653,888
-
Operating leases payable - net of current portion
811,211
877,899
Total long-term liabilities
11,212,015
4,496,784
Total liabilities
21,442,703
12,131,043
Commitments and contingencies
Stockholders' equity:
Common stock, $.001 par value; 1,500,000 shares authorized, 311,636 and 313,636 issued and outstanding at March 31, 2020 and December 31, 2019, respectively.
311
313
Additional paid-in capital
14,706,468
14,836,466
Accumulated deficit
(3,195,830
)
(6,392,272
)
Total stockholders' equity
11,510,949
8,444,507
Total liabilities and stockholders' equity
$
32,953,652
$
20,575,550
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
(UNAUDITED)
1. SUMMARY OF BUSINESS
Amerinac Holding Corp. and Subsidiaries (the “Company”) distributes high-quality, predominantly domestically-manufactured, technically complex, nut and bolt products that are for industrial and commercial applications that require a high level of certified and assured quality. The Company manufactures specialty stainless steel, and related products for steel mills, steel forging operations, and various metal fabrication facilities. The Company is also engaged in the manufacture of precision aluminum castings.
The Company’s operations are carried out through its wholly-owned distribution subsidiary Creative Assembly Systems, Inc (“Creative Assembly”), its wholly-owned manufacturing subsidiary, Prime Metals Acquisition LLC, a Delaware limited liability company (“PMAL”), its wholly-owned manufacturing subsidiary, USAC Ross LLC (“USAC Ross”) and its wholly-owned manufacturing subsidiary, USAC WA LLC (“USAC WA”). USAC Ross and USAC WA were formed as wholly-owned single member limited liability companies by the Company on March 3, 2020 and had no operations prior to the March 20, 2020 acquisition discussed in Note 4.
Creative Assembly is a value-added distributor of proprietary and specialty fasteners primarily serving the heavy truck, automotive, transportation, and infrastructure industries.
PMAL manufactures specialty ingot and electrode products which are supplied for investment castings, forging, ring rolling, and plate production. PMAL also manufactures shot products and master alloys which are sold to other melt shops, and provides manufacturing support services. The flexible manufacturing operations at PMAL enable the Company to offer a wide range of product grades in customer specific order quantities. The primary grade types include stainless steels, tool steels, nickel-based grades, cobalt based grades and some nonferrous alloys. The Company also offers toll conversion melting services.
USAC Ross and USAC WA (collectively, “USAC”) are precision aluminum castings manufacturers. USAC offers multiple casting processes as well as in-house heat treating, machining, powder coating and non-destructive testing. The products are used in defense, aerospace, heavy truck, marine and commercial applications.
COVID-19
In March 2020, President Donald Trump declared the coronavirus disease 2019 (“COVID-19”) pandemic as a national public health emergency. COVID-19 is the disease caused by a novel strain of a coronavirus that originated from Wuhan, China in November 2019. Several of the Company’s customers have reduced or shutdown production in response to COVID-19. This has temporarily affected the Company’s sales. As of the date of this report, the Company has not experienced any long-term disruptions with suppliers. As noted below, the Company applied for and received loans under the Cares Act to aid with the financial impact of COVID-19.
To augment an expected decline in operating cash flows caused by the reduced sales caused by the COVID-19 pandemic, the Company instituted the following measures:
·
terminated several employees with the anticipation of rehiring these employees after the public health emergency has passed;
·
reduced the number hours and overtime worked by hourly employees to compensate for declining sales;
·
reduced current inventory purchases to compensate for the short-term reduction in sales;
·
stopped paying salaries to Messrs. Wachter and Golden while accruing for payment of these salaries after the public health emergency has passed.
On or about April 23, 2020, the Company’s operating subsidiaries received approval and funding of approximately $3 million under the Paycheck Protection Program of the CARES Act. These funds have enabled the Company to continue to employ a large percentage of its workforce.
As of the release of this report, the Company does not know the extent and duration of the impact of COVID-19 on its businesses due to the uncertainty about the spread of the virus and when the Company’s customers will restart full production.
The Company considers the COVID-19 pandemic as a triggering event in the assessment of recoverability of the goodwill, intangibles and long-lived tangible assets for its operating entities. The Company evaluated and assessed that while the COVID-19 pandemic will affect short and medium term sales numbers, it is not expected to affect the value of its intangibles and long-lived tangible assets. The Company will continue to evaluate the situation on an ongoing basis.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Consolidated Financial Statements
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and in conformity with the instructions to Form 10-Q and Article 8 of Regulation S-X and the related rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. However, we believe that the disclosures included in these unaudited condensed consolidated financial statements are adequate to make the information presented not misleading. The unaudited condensed consolidated financial statements included in this document have been prepared on the same basis as the annual consolidated financial statements, and in the Company’s opinion reflect all adjustments, which include normal recurring adjustments necessary for a fair presentation in accordance with GAAP and SEC regulations for interim financial statements. The results for the three months ended March 31, 2020 are not necessarily indicative of the results that the Company will have for any subsequent period. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto for the year ended December 31, 2019 included in the Company’s Annual Report on Form 10-K filed on March 30, 2020.
Principles of Consolidation and Basis of Presentation
The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All inter-company accounts have been eliminated.
Use of Estimates
The preparation of the unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. The most significant estimates relate to the useful lives and impairment considerations of long-lived and intangible assets, reserves for inventory and accounts receivable, going concern considerations, discount rates in connection with right-of-use assets and estimates related to the purchase price allocation contained in Note 4.
Cash and Cash Equivalents
For purposes of the unaudited condensed consolidated statements of cash flows, the Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. From time to time, cash balances may exceed the federal deposit insurance limits.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded net of provisions for doubtful accounts. The Company records an allowance for doubtful accounts to allow for any amounts that may not be recoverable. The amount of the allowance is based on an analysis of the Company’s prior collection experience, customer credit worthiness, and current economic trends. Based on management’s review of accounts receivable, the Company carried an allowance for doubtful accounts of $78,753 as of March 31, 2020 and December 31, 2019. The Company determines receivables to be past due based on the payment terms of original invoices. Interest is not typically charged on past due receivables. Accounts are written off against the allowance when deemed uncollectable.
Unbilled Services
The Company recognizes revenue on its tolling services as those services are performed. Unbilled services represent the revenue recognized but not yet invoiced.
For the Company’s distribution subsidiary, Creative Assembly, inventories consist only of finished goods and are carried at the lower of cost on an average cost basis, or net realizable value. When necessary, management records an inventory reserve for estimated obsolescence or unmarketable inventory based upon the age of the respective part and the knowledge of future demand of inventory on hand as well as other market conditions and events. Management believes that the longer a part sits on the shelf the higher the likelihood that it will not sell in the future. This belief is not unique to the fastener industry. While management constantly assesses viability of a part within the customer base, it also believes that a reserve should be carried to reflect product that is aging out, as opposed to product that management identified based on a specific event. As of March 31, 2020, the Company had more than 4,000 unique part numbers on hand that had carrying value. Management believes that the two methods, specific identification and reserve based on age, to analyzing inventory will reflect the appropriate balance sheet value. As of March 31, 2020 and December 31, 2019, the inventory reserve for Creative Assembly was $86,211.
For the Company’s manufacturing subsidiary, PMAL, management believes volatility in the broader metal markets will have an impact on all aspects of raw material, work in process, and finished goods inventory. Management actively seeks to minimize inventory working capital, and increase inventory turns to eliminate any impacts from market fluctuations. As of March 31, 2020, the Company’s manufacturing subsidiary had more than 500 unique metal chemistries it produced, but keeps minimal finished inventory on hand.
For PMAL, inventories are carried at the lower of cost on an average cost basis, or net realizable value. When necessary, management records an inventory reserve for estimated obsolescence or unmarketable inventory based upon knowledge of future demand of inventory on hand as well other market conditions and events. As of March 31, 2020 and December 31, 2019, the inventory reserve for PMAL was $82,849.
For USAC, management believes volatility in the aluminum markets will have an impact on all aspects of raw material, work in process, and finished goods inventory. Management actively seeks to minimize inventory working capital, and increase inventory turns to eliminate any impacts from market fluctuations.
For USAC, inventories are carried at the lower of cost on an average cost basis, or net realizable value. When necessary, management records an inventory reserve for estimated obsolescence or unmarketable inventory based upon knowledge of future demand of inventory on hand as well other market conditions and events. As of March 31, 2020, the combined inventory reserve for USAC Ross and USAC WA was $0 as the inventory was acquired at fair value as part of the March 20, 2020 acquisition discussed in Note 4.
The Company’s inventory consists of the following:
Property, land and equipment are stated at cost less accumulated depreciation and amortization. The Company computes depreciation and amortization using the straight-line method over the estimated useful lives of the assets acquired as follows:
Leasehold improvements
5 years **
Furniture and fixtures
7 years
Equipment and other
3-10 years
Building
30 years
____________
** Shorter of life or lease term.
The carrying amount of all long-lived assets is evaluated when an indicator of impairment exists to determine whether adjustment to the useful life or to the unamortized balance is warranted. Such evaluation is based principally on the expected utilization of the long-lived assets.
Income Taxes
The Company provides for income taxes under Accounting Standards Codification (“ASC”) Topic 740-10. ASC Topic 740-10 requires the use of an asset and liability approach in accounting for income taxes. Deferred tax assets and liabilities are recorded based on the differences between the financial statement and tax bases of assets and liabilities and the tax rates in effect when these differences are expected to reverse. Temporary differences relate primarily to different accounting methods used for depreciation and amortization of property and equipment.
ASC Topic 740-10 requires the reduction of deferred tax assets by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
ASC Topic 740-10 clarifies the accounting for uncertainty in income tax positions, as defined. It requires, among other matters, that the Company recognize in our unaudited condensed consolidated financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The Company analyzes the filing positions in all of the federal and state jurisdictions where the Company is required to file income tax returns, as well as all open tax years in these jurisdictions. As of March 31, 2020, the Company did not record any unrecognized tax benefits. The Company’s policy, if it had unrecognized benefits, is to recognize accrued interest and penalties related to unrecognized tax benefits as interest expense and other expense, respectively.
The Company accounts for revenue recognition in accordance with ASC Topic 606 (“ASC 606”). The core principle of ASC 606 is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASC 606 defines a five-step process to achieve this core principle, which includes; (1) Identifying contracts with customers, (2) Identifying performance obligations within those contracts, (3) Determining the transaction price, (4) Allocating the transaction price to the performance obligations in the contract, which may include an estimate of variable consideration, and (5) Recognizing revenue when or as each performance obligation is satisfied.
Revenue primarily consists of sales of fasteners, specialty ingot products, master alloys products, metal processing and tolling services, and specialty aluminum cast parts. We generate our revenue primarily from the sale of finished products and tolling services to customers, therefore, the significant majority of our contracts are short-term in nature and have a single performance obligation to deliver products or services, in which our performance obligation is satisfied when control of the product is transferred to the customer or the service is performed. Some contracts contain a combination of product sales and services which are distinct and accounted for as separate performance obligations. Our performance obligations for services are satisfied when the services are rendered within the arranged service period. Tolling revenue is recognized when the tolling service is completed.
Revenue is recognized when control transfers to our customers via shipment of products or delivery of services. Shipping and handling costs are considered fulfillment activities and as such are not accounted for as separate performance obligations. We measure revenue as the amount of consideration we expect to be entitled to receive in exchange for those goods or services, net of any variable considerations (e.g., rights to return product, sales incentives, others) and any taxes collected from customers and subsequently remitted to governmental authorities. The Company applied the practical expedient available under ASC 606 to disregard determining significant financing components if the good or service is transferred and payment is received within one year.
We estimate product returns based on historical experience and record them on a gross basis. Substantially all of Creative Assembly customer returns relate to products that are returned under warranty obligations underwritten by manufacturers. Substantially all of PMAL and USAC customer returns relate to products which do not meet customer requirements and are replaced by the Company.
We occasionally receive advance payments to secure product to be delivered in future periods. These advance payments are recorded as deferred revenue, and revenue is recognized as our performance obligations are satisfied throughout the term of the applicable contract. We may also purchase metal on our customer’s behalf, sell the unprocessed metal to our customer, and then process and ship the material, charging a processing fee at the time of shipment. For these specific non-tolling arrangements in which we purchase metal for a customer, a single performance obligation exists, and as a result, amounts invoiced to our customers for the metal purchased on their behalf is recorded as deferred revenue until the metal is processed and shipped. The Company recorded deferred revenue of $59,990 and $0 as of March 31, 2020 and December 31, 2019, respectively.
In accordance with the authoritative guidance for fair value measurements and the fair value election for financial assets and financial liabilities, a fair value measurement is determined based on the assumptions that a market participant would use in pricing an asset or liability. A three-tiered hierarchy was established that draws a distinction between market participant assumptions based on the following:
i)
observable inputs such as quoted prices in active markets (Level 1)
ii)
inputs other than quoted prices in active markets that are observable either directly or indirectly (Level 2)
iii)
unobservable inputs that require the Company to use present value and other valuation techniques in the determination of fair value (Level 3).
Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurements requires judgment, and may affect the valuation of the assets and liabilities being measured and their placement within the fair value hierarchy.
Fair Value of Financial Instruments
The carrying amounts reported in the unaudited condensed consolidated balance sheets for cash, accounts receivable, accounts payable, accrued liabilities, unbilled receivables and deferred revenue approximate fair value because of the immediate or short-term maturity of the financial instruments.
The Company believes that its indebtedness approximates fair value based on current yields for debt instruments with similar terms.
Stock Based Compensation
The Company accounts for stock-based awards to recipients in accordance with applicable accounting principles, which requires compensation expense related to share-based transactions, to be measured and recognized in the unaudited condensed consolidated financial statements based on a grant date fair value over the requisite service period.
Long-Lived Assets Impairment
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. When it becomes apparent that indicators such as a significant decrease in the market value of the long-lived asset group or if material differences between operating results and the Company’s forecasted expectations occur, then an impairment analysis is performed.
If indicators arise, an initial determination of recoverability is performed based on an estimate of the undiscounted future cash flows resulting from the use of the asset and its eventual disposition compared with the carrying value. If the carrying value of the asset group exceeds the undiscounted cash flows, a measurement of an impairment loss for long-lived assets is performed. The impairment charge is the excess of the carrying value of the asset group over the fair value, as determined utilizing appropriate valuation techniques. The Company considers the COVID-19 pandemic as a triggering event in the assessment of recoverability of the goodwill, intangibles, long-lived intangibles and long-lived tangible assets for its operating entities. As of March 31, 2020, the Company concluded that there was no impairment on the long-lived assets for its operating entities.
We make estimates, assumptions, and judgments when valuing goodwill and other intangible assets such as customer lists in connection with the initial purchase price allocation of any acquired operations, as well as when evaluating the recoverability of our goodwill and other intangible assets on an ongoing basis. These estimates are based upon a number of factors, including historical experience, market conditions, and information obtained from the management of any acquired operations. Critical estimates in valuing certain intangible assets include, but are not limited to, historical and projected attrition rates, discount rates, anticipated growth in revenue from the acquired customers and acquired technology, and the expected use of the acquired assets. These factors are also considered in determining the useful life of acquired intangible assets. The amounts and useful lives assigned to identified intangible assets impact the amount and timing of future amortization expense. As of March 31, 2020, the Company concluded that there was no impairment on the goodwill and intangibles for its operating entities.
Earnings Per Share
Basic earnings per share is calculated by dividing net profit attributable to common stockholders by the weighted average number of outstanding common shares during the year. Basic earnings per share excludes any dilutive effects of options, warrants and other stock-based compensation, which are included in diluted earnings per share. When a company is in a loss situation, all outstanding dilutive shares are excluded from the calculation of diluted earnings because their inclusion would be antidilutive; and the basic and fully diluted common shares outstanding are stated to be the same. There were no dilutive shares as of March 31, 2020 and 2019.
Recently Adopted Authoritative Pronouncements
In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350), which includes provisions intended to simplify the test for goodwill impairment. The standard was adopted on January 1, 2020 and did not have a material impact on the Company’s financial position and results of operations.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which adds a new Topic 326 to the Codification and removes the thresholds that companies apply to measure credit losses on financial instruments measured at amortized cost, such as loans, receivables, and held-to-maturity debt securities. In May 2019, the FASB issued ASU 2019-05, which is an update to ASU 2016-13, which introduced the expected credit losses methodology for the measurement of credit losses on financial assets measured at amortized cost basis, replacing the previous incurred loss methodology. The amendments in Update 2016-13 added Topic 326, Financial Instruments—Credit Losses, and made several consequential amendments to the Codification. Update 2016-13 also modified the accounting for available-for-sale debt securities, which must be individually assessed for credit losses when fair value is less than the amortized cost basis, in accordance with Subtopic 326-30, Financial Instruments— Credit Losses—Available-for-Sale Debt Securities. The amendments in this Update address those stakeholders’ concerns by providing an option to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost basis. For those entities, the targeted transition relief will increase comparability of financial statement information by providing an option to align measurement methodologies for similar financial assets. Furthermore, the targeted transition relief also may reduce the costs for some entities to comply with the amendments in Update 2016-13 while still providing financial statement users with decision useful information. The guidance in ASU 2016-13 is effective for “public business entities,” as defined, that are SEC filers for fiscal years and for interim periods within those fiscal years beginning after December 15, 2022. The Company is currently evaluating the impact of this new standard on its consolidated financial statements and related disclosures.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU simplifies accounting for income taxes by removing the following exceptions: (1) exception to the incremental approach for intraperiod tax allocation, (2) exceptions to accounting for basis differences when there are ownership changes in foreign investments, and (3) exception in interim period income tax accounting for year-to-date losses that exceed anticipated losses. The ASU also improves financial statement preparers’ application of income tax related guidance for franchise taxes that are partially based on income; transactions with a government that result in a step up in the tax basis of goodwill; separate financial statements of legal entities that are not subject to tax; and enacted changes in tax laws in interim periods. The ASU is effective for public business entities for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted for public business entities for periods for which financial statements have not been issued. An entity that elects early adoption in an interim period should reflect any adjustments as of the beginning of the annual period that includes that interim period. Additionally, an entity that elects early adoption should adopt all the amendments in the same period. The Company is still evaluating the impact of this ASU on the Company’s consolidated financial statements.
3. CONCENTRATIONS
Concentration of Credit Risk
At March 31, 2020, Remelt Sources, Inc., AMG-Vanadium and Drive Automotive receivables were 20.8%, 10.3%, and 10.0% of total receivables, respectively. At December 31, 2019, Remelt Sources, Inc., Universal Stainless & Alloy Products, AMG-Vanadium, PACCAR, and Eastham Forge receivables were 19.8%, 16.2%, 14.9%, 13.3% and 11.7% of total receivables, respectively.
For the three-month period ending March 31, 2020, Remelt Sources, Inc., AMG-Vanadium, and PACCAR accounted for 28.0%, 18.0%, and 12.3% of sales, respectively. For the three-month period ending March 31, 2019, Remelt Sources, Inc., AMG-Vanadium, PACCAR and Universal Stainless & Alloy Products accounted for 19.0%, 18.1%, 15.5% and 13.1% of sales, respectively.
For the three-month period ending March 31, 2020, no supplier represented more than 10% of purchases. For the three-month period ending March 31, 2019, no supplier represented more than 10% of purchases. At March 31, 2020, no supplier represented more than 10% of accounts payable. At December 31, 2019, AVK represented approximately 11.9% of accounts payable.
4. ACQUISITION AND BUSINESS COMBINATION
On March 20, 2020, the Company, USAC Ross and USAC WA entered into a Purchase and Sale Agreement (the “Purchase and Sale Agreement”) by and among SummitBridge National Investments VI LLC (“SummitBridge VI”) and ABTV, in its capacity as court-appointed receiver ordered by the Court of Common Pleas of Chester County, Pennsylvania on March 6, 2020 in the Matter of SummitBridge National Investments VI LLC v. Advanced Metals Group, LLC et al., Case No. 2020-02461-MJ. USAC Ross and USAC WA were formed as wholly-owned single member limited liability companies by the Company on March 3, 2020 and had no operations prior to this transaction. Pursuant to the Purchase and Sale Agreement, USAC Ross purchased all the personal property of Advanced Metals Group, LLC, Advanced Aluminum Castings, LLC, Advanced Iron Castings, LLC, Ross Aluminum Castings, LLC, US Castings, LLC, PFRE Properties, LLC, BFRE Properties, LLC, Oberdorfer, LLC, Mabry Acquisition Company Ltd., MFRE Properties Ltd., USCRE Properties, LLC and RCRE, LLC (collectively, the “Debtors”) located in the State of Ohio, in addition to real property owned by RCRE, LLC in the State of Ohio. Pursuant to the Purchase and Sale Agreement, USAC WA purchased all of the personal property of the Debtors located in the State of Washington, in addition to real property owned by USCRE, Properties, LLC in the State Washington. The purchase price paid by USAC Ross and USAC WA was $6,167,000.
The acquisition was accounted for as a business combination. The assets and liabilities of USAC Ross and USAC WA (collectively, the “USAC Assets”) were recorded at their estimated respective fair values as of the closing date of the acquisition, and the following table summarizes these values based on the balance sheet at March 20, 2020. Upon completion of an independent purchase price allocation and valuation, the allocation will be adjusted accordingly.
The following summarizes the preliminary purchase price allocation:
Debt issuance costs were approximately $61,000, which was recorded as debt discount and will amortized over the life of the loan.
The following unaudited pro forma information does not purport to present what the Company’s actual results would have been had the acquisition occurred on January 1, 2019, nor is the financial information indicative of the results of future operations. The following table represents the unaudited consolidated pro forma results of operations for the three months ended March 31, 2020 and March 31, 2019 as if the acquisition had occurred on January 1, 2019.
Three Months Ended
Three Months
Ended
Pro Forma
March 31, 2020
March 31,
2019
Net sales
14,657,251
17,455,895
Operating expenses
1,672,288
1,940,746
Income before taxes
3,935,887
1,140,221
Net income
2,833,297
877,755
The Company’s unaudited condensed consolidated financial statements for the three months ending March 31, 2020 include the actual results of USAC Ross and USAC WA since the date of the acquisition, March 20, 2020. The three months ended March 31, 2020, pro forma results above include three months of pro forma results for USAC Ross and USAC WA. For the period between March 20, 2020 and March 31, 2020, the USAC Ross and USAC WA operations had a net income before taxes of $60,289 that was included in the Company’s unaudited condensed consolidated statements of income, which consisted of approximately $560,462 in revenues, $440,122 in cost of goods sold and $60,051 in expenses.
5. PROPERTY, LAND AND EQUIPMENT
PMAL’s 220,000 square foot facility is located at 101 Innovation Drive, Homer City, PA. The facility is located on approximately 38 acres and was purchased in 2007. The facility houses the manufacturing operations of PMAL. Depreciation expense was $159,293 and $152,099 for the three months ended March 31, 2020 and 2019.
USAC Ross’ 175,000 square foot facility is located at 815 Oak Avenue, Sidney, OH. The facility is located on approximately 7 acres and was purchased in 2020. The facility houses the manufacturing operations of USAC Ross. Depreciation expense was $15,662 for the period from March 20, 2020 to March 31, 2020.
USAC WA’s 88,000 square foot facility is located at 14531 Shamel Street, Entiat, WA. The facility is located on approximately 5 acres and was purchased in 2020. The facility houses the manufacturing operations of USAC WA. Depreciation expense was $16,624 for the period from March 20, 2020 to March 31, 2020.
March 31,
2020
December 31,
2019
Land, buildings and improvements
$
8,282,199
$
3,419,779
Equipment
6,313,048
3,974,047
Total
14,595,247
7,393,826
Less accumulated depreciation
(1,590,759
)
(1,388,982
)
Net property, land and equipment
$
13,004,488
$
6,004,844
As described in Note 10, the Company has $12,951,205 in debt secured against the property, land and equipment.
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consists of the following as of March 31, 2020 and December 31, 2019:
March 31,
2020
December 31,
2019
Accounts payable
$
5,463,063
$
2,839,425
Interest
99,008
40,455
Salaries and bonus
898,620
357,976
Other
123,734
46,000
$
6,584,425
$
3,283,856
7. GOODWILL AND INTANGIBLE ASSETS
Information regarding our acquired intangible assets was as follows:
Customer lists
$
1,990,000
Goodwill
$
54,993
The customer lists are estimated to have a useful life of 10 years. As of March 31, 2020 and December 31, 2019, the value, net of amortization, of the customer list was $1,459,333 and $1,509,083, respectively.
Amortization expense for the years ended December 31, 2020 through 2027 will be $199,000 per year. Amortization expense was $49,750 for each of the three months ended March 31, 2020 and 2019.
The Company determines if a contract contains a lease at inception. GAAP requires that the Company’s leases be evaluated and classified as operating or finance leases for financial reporting purposes. The classification evaluation begins at the commencement date and the lease term used in the evaluation includes the non-cancellable period for which the Company has the right to use the underlying asset, together with renewal option periods when the exercise of the renewal option is reasonably certain and failure to exercise such option will result in an economic penalty. All of the Company’s real estate leases are classified as operating leases.
Most real estate leases include one or more options to renew, with renewal terms that generally can extend the lease term for an additional four to five years. The exercise of lease renewal options is at the Company’s discretion. The Company evaluates renewal options at lease inception, and includes renewal options that it is reasonably certain to exercise in its expected lease terms when classifying leases and measuring lease liabilities. Lease agreements generally do not require material variable lease payments, residual value guarantees or restrictive covenants.
Leases recorded on the unaudited condensed consolidated balance sheet consist of the following:
Leases
Classification on the Balance Sheet
March 31,
2020
December 31,
2019
Assets
Operating lease ROU assets
Right-of-use asset
$
1,032,140
$
1,092,253
Finance lease ROU assets
Property, land and equipment, net
$
157,991
$
153,307
Liabilities
Current
Operating
Operating leases payable – short term
$
259,595
$
255,533
Finance
Finance leases payable – short term
$
57,137
$
49,662
Noncurrent
Operating
Operating leases payable – net of current portion
$
811,211
$
877,899
Finance
Finance leases payable – net of current portion
$
69,472
$
79,214
The Company’s leases generally do not provide an implicit rate, and therefore the Company uses its incremental borrowing rate as the discount rate when measuring operating lease liabilities. The incremental borrowing rate represents an estimate of the interest rate the Company would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease within a particular currency environment. The Company used incremental borrowing rates as of January 1, 2019 for operating leases that commenced prior to that date.
The Company’s weighted average remaining lease term and weighted average discount rate for operating leases as of March 31, 2020 are:
The components of lease expense, included in general and administrative expenses and interest expense on the unaudited condensed consolidated statements of income, are as follows:
Three Months
Ended
March 31,
2020
Three Months
ended
March 31,
2019
Operating lease cost:
Operating lease cost
$
75,765
$
18,608
Finance lease cost:
Amortization of ROU assets
7,556
6,682
Interest expense
1,769
1,891
Total lease cost
$
85,090
$
27,181
Supplemental disclosures of cash flow information related to leases for the three months ended March 31, 2020 and 2019 were as follows:
Cash paid for operating lease obligations was $78,279 and $19,250 for the three months ended March 31, 2020 and 2019, respectively. Operating lease asset obtained for operating lease obligation was $251,735 during the three months ended March 31, 2019.
The table below reconciles the undiscounted future minimum lease payments (displayed by year and in the aggregate) under noncancelable operating leases with terms of more than one year to the total operating lease liabilities recognized on the unaudited condensed consolidated balance sheets as of March 31, 2020:
April 1, 2020 through December 31, 2020
$
234,836
2021
313,115
2022
287,448
2023
236,115
2024
118,058
Total undiscounted future minimum lease payments
1,189,572
Less: Imputed interest
118,766
Present value of operating lease obligations
$
1,070,806
The Company has two leased facilities, which are office, manufacturing and warehouse space. In some cases the Company is responsible for real estate taxes, utilities, and repairs under the terms of certain of the operating leases. Under the elected package of practical expedients, the Company does not separate non-lease components from the lease component. Therefore, all lease and non-lease components are combined and accounted for as single lease component.
On November 10, 2017, John Wachter was appointed Chief Executive Officer of the Company. In connection with his appointment, the Company and Mr. Wachter entered into a written employment agreement (the “Wachter Employment Agreement”) for an initial three-year term, which provides for the following compensation terms for Mr. Wachter. Pursuant to the Wachter Employment Agreement, Mr. Wachter will receive a base salary of $100,000 per year, subject to increase, but not decrease, at the discretion of the Board. Mr. Wachter is eligible for a cash and stock bonus equal to ten to twenty percent of the Company’s pre-tax profits over established pre-tax targets, at the end of each respective annual period.
In addition, the Wachter Employment Agreement also provides for certain payments and benefits in the event of a termination of his employment under specific circumstances. If, during the term of the Wachter Employment Agreement, his employment is terminated by the Company other than for “cause,” by Mr. Wachter for “good reason” (each as defined in the Wachter Employment Agreement) or by failure by either party to renew the Wachter Employment Agreement after expiration of the employment term, he would be entitled to (1) a lump sum payment equal to two times his base salary at the rate in effect immediately prior to the termination date, and (2) any unpaid portion of any cash bonus for the annual period preceding the annual period in which such termination occurs that was earned but not paid.
On November 10, 2017, William J. Golden was appointed Chief Financial Officer of the Company. Mr. Golden remains the Company’s General Counsel. In connection with his appointment, the Company and Mr. Golden entered into a written employment agreement (the “Golden Employment Agreement”) for an initial three-year term, which provides for the following compensation terms for Mr. Golden. Pursuant to the Golden Employment Agreement, Mr. Golden will receive a base salary of $100,000 per year, subject to increase, but not decrease, at the discretion of the Board. Mr. Golden is eligible for a cash and stock bonus equal to ten to twenty percent of the Company’s pre-tax profits over established pre-tax targets, at the end of each respective annual period.
In addition, the Golden Employment Agreement also provides for certain payments and benefits in the event of a termination of his employment under specific circumstances. If, during the term of the Golden Employment Agreement, his employment is terminated by the Company other than for “cause,” by Mr. Golden for “good reason” (each as defined in the Golden Employment Agreement) or by failure by either party to renew the Golden Employment Agreement after expiration of the employment term, he would be entitled to (1) a lump sum payment equal to two times his base salary at the rate in effect immediately prior to the termination date, and (2) any unpaid portion of any cash bonus for the annual period preceding the annual period in which such termination occurs that was earned but not paid.
The Company is subject to the possibility of claims and lawsuits arising in the normal course of business. In the opinion of management, the Company liability, if any, under existing claims, asserted or unasserted, would not have a material adverse effect on the Company’s unaudited condensed consolidated financial position or results of operations.
10. LONG-TERM DEBT AND LINES OF CREDIT
Summit Bridge PMAL Loans
On August, 17, 2017, PMAL purchased substantially all of the assets of Prime Metals & Alloys, Inc., a Delaware corporation, (“Prime Metals”) for $9.6 million in cash. To finance the purchase of the assets, PMAL entered into a credit agreement with SummitBridge National Investments V LLC (“Summit V”) pursuant to which Summit V made loans to PMAL: (1) a Term Loan in the amount of $4.5 million (“Summit Term Loan A”) and (2) a Term Loan in the amount of $3.5 million (“Summit Term Loan B”) (collectively, the “Summit Loans”). In addition, in consideration for Summit V making the loans, PMAL issued membership interests representing 25% ownership of PMAL to an affiliate of Summit V, SBN V PMA LLC (“SBN”) (the “SBN Membership Interests”). Pursuant to the terms of the Summit Loans and because PMAL repaid the Summit Loans within thirty-six (36) months of the origination of the Summit Loans, the SBN Membership Interests were reduced from 25% to 20% of PMAL as of September 1, 2018.
Summit Term Loan A accrued each month at either 17.5% interest per annum (with 12.5% payable monthly and 5.0% accruing to the outstanding balance of Term Loan A, payable at maturity) or 17.0% interest per annum, payable monthly. Summit Term Loan A had a Maturity date of August 17, 2020. Summit Term Loan A was secured against all of the assets of PMAL.
Summit Term Loan B accrued each month at either 17.5% interest per annum (with 14.0% payable monthly and 3.5% accruing to the outstanding balance of Term Loan B, payable at maturity) or 17.0% interest per annum, payable monthly. Term Loan B had a Maturity date of August 17, 2020. Summit Term Loan B was secured against all of the assets of PMAL.
PMAL granted SBN a put right under the operating agreement for PMAL for the SBN Membership Interests. On August 31, 2018, the operating agreement for PMAL was amended to provide that on the earlier of November 30, 2021 or the date of a change in control of PMAL, SBN has the right but not the obligation to require PMAL to repurchase all of the SBN Membership Interests at market equity value (“Market Equity Value”). Market Equity Value shall be equal to the higher of (i) value of PMAL implied by a sale, (ii) 4.5 x EBITDA for the trailing twelve months plus cash, less all outstanding funded indebtedness or (iii) fair market value as determined by mutual agreement between PMAL and SBN, or failing that by an independent firm mutually agreed to. SBN has granted PMAL a call right under the operating agreement for PMAL for the SBN Membership Interests. On August 17, 2021, PMAL has the right but not the obligation to require SBN to sell all of the SBN Membership Interests at Market Equity Value.
The Company accounted for this in accordance with ASC 480-10-55-59, as a redeemable non-controlling interest. At acquisition $400,000 was recorded as SBN’s PMAL equity ownership. This amount, plus SBN’s pro rata net income allocation was reflected before stockholders’ equity as Redeemable Non-Controlling interest. Due to the SBN Membership Interests, Summit was considered a related party of the Company for the purposes of these unaudited condensed consolidated financial statements. Pursuant to the terms of the Summit Loans and because PMAL repaid the Summit Loans within thirty-six (36) months of the origination of the Summit Loans, the SBN Membership Interests were reduced from 25% to 20% of PMAL as of September 1, 2018. SBN’s pro-rata net income allocation was made at a rate of 25% through August 31, 2018 and 20% commencing September 1, 2018 in accordance with the reduction in membership interests.
Effective July 1, 2019, the Company and SBN entered into a Membership Interest Redemption Agreement pursuant to which the Company purchased the remaining SBN Membership Interests with a carrying value of $757,778 from SBN for a purchase price of $3,000,000 cash. SBN also waived its share of income for all of 2019. The Company adjusted additional paid-in capital downward by $1,547,133, net of deferred taxes of $695,089, to reflect the difference between the purchase price and the balance sheet value of the non-controlling interests.
The Membership Interest Redemption Agreement contains a look-back provision that entitles SBN to receive additional compensation in the event the Company sells PMAL or its assets in a subsequent transaction within three hundred and sixty-five (365) days following the repurchase. Such additional compensation would be equal to the difference between what SBN received in the repurchase and what the SBN Membership Interests would be worth at the subsequent transaction date.
The following table shows the value of the non-controlling interests (“NCI”) for the three months ended March 31, 2019:
Value of NCI at January 1, 2019
$
757,778
PMAL income from January 1, 2019 to March 31, 2019 attributable to NCI
169,293
Value of NCI at March 31, 2019
927,071
Transfer of PMAL income allocated to SBN to Amerinac Holding Corp.
(169,293
)
Adjusted value of NCI at March 31, 2019
$
757,778
PMAL Berkshire Loans
On August 31, 2018, PMAL entered into a Loan and Security Agreement (the “PMAL Loan and Security Agreement”) with Berkshire Bank (“Berkshire Bank”) establishing: 1) a new revolving credit facility in an aggregate principal amount of up to $6.0 million (the “Berkshire Revolving Loan”), 2) a term loan in the amount of $3.5 million (“Berkshire Term Loan A”) and 3) a term loan in the amount of $1.5 million (“Berkshire Term Loan B”). Borrowings under the Berkshire Revolving Loan may be used to finance working capital and other general corporate purposes. The Berkshire Revolving Loan had a borrowing base of approximately $3.1 million on March 31, 2020 of which the Company had drawn $708,700.
On August 31, 2018, pursuant to the PMAL Loan and Security Agreement, PMAL used an amount of $7,678,814 under the Loan and Security Agreement to fully repay the Summit Loans. On August 16, 2019, the PMAL Loan and Security Agreement was amended to permit a one-time cash distribution of $1.5 million which was used to partially fund the Company’s repurchase of the SBN Membership Interests.
Borrowings under the Berkshire Revolving Loan bear interest at a rate equal to the Intercontinental Exchange Benchmark Administration Ltd. London Interbank Offered Rate (“ICE LIBOR”) rate plus 3.25%, which was 4.85% at March 31, 2020. Berkshire Term Loan A and Berkshire Term Loan B bear interest at ICE LIBOR rate plus 4.25%, which was 5.85% at March 31, 2020.
The outstanding principal amount of any borrowings under the Berkshire Revolving Loan will be due and payable on August 21, 2021, subject to an earlier maturity date upon an event of default (the “Revolving Credit Maturity Date”). Berkshire Term Loan A has a maturity date the earlier of (i) August 31, 2023 or (ii) the Revolving Credit Maturity Date. Berkshire Term Loan B has a maturity date the earlier of (i) August 31, 2023 or (ii) the Revolving Credit Maturity Date. The principal balance of Berkshire Term Loan A shall be paid in equal monthly installments of $41,667 commencing on October 1, 2018. Any unpaid principal and interest shall be due on the maturity date. The principal balance of Berkshire Term Loan B shall be paid in equal monthly installments of $8,334 commencing on October 1, 2018. Any unpaid principal and interest shall be due on the maturity date.
The PMAL Loan and Security Agreement contains usual and customary covenants for financings of this type, including, among other things: (i) requirements to deliver financial statements, other reports and notices; (ii) restrictions on indebtedness; (iii) restrictions on dividends, distributions and redemptions of equity and repayment of subordinated indebtedness; (iv) restrictions on liens; (v) restrictions on making certain payments; (vi) restrictions on investments; (vii) restrictions on asset dispositions and other fundamental changes; and (viii) restrictions on transactions with affiliates.
The PMAL Loan and Security Agreement contains certain financial covenants, including a cash flow coverage ratio and a tangible net worth requirement. Under the cash flow coverage covenant, PMAL shall maintain a quarterly cash flow coverage ratio of not less than 1.20 to 1.00. Under the tangible net worth covenant, PMAL shall maintain a tangible net worth of no less than $4.1 million. The tangible net worth amount required shall increase annually on each June 30 by 50% of PMAL’s prior year’s undistributed net income. As of March 31, 2020, PMAL was in compliance with the covenants contained within the PMAL Loan and Security Agreement.
The obligations of PMAL under the PMAL Loan and Security Agreement are secured by liens and security interests on all assets of PMAL. Amerinac is a secured guarantor of the PMAL Loan and Security Agreement, and has pledged its equity in PMAL.
The table below represents the future minimum repayments of Berkshire Term Loan A and Berkshire Term Loan B as of March 31, 2020.
Years ending December 31,
Term Loans Minimum Amortization
2020 (remaining nine months)
$
450,000
2021
3,650,000
Total
4,100,000
Unamortized debt and financing cost
(92,909
)
Total (net of unamortized debt and financing cost)
$
4,007,091
As of March 31, 2020, the principal balance of Term Loan A was $2,750,000 and the principal balance of Term Loan B was $1,350,000. As of December 31, 2019, the principal balance of Term Loan A was $2,875,000 and the principal balance of Term Loan B was $1,375,000. The total amount of unamortized debt financing cost was $92,909 and $110,329 at March 31, 2020 and December 31, 2019, respectively. For the three months ended March 31, 2020, the Company amortized $17,420 in debt financing cost.
CAS Berkshire Loan
On July 15, 2019, CAS entered into a Loan and Security Agreement (the “CAS Loan and Security Agreement”) with Berkshire Bank establishing a new revolving credit facility in an aggregate principal amount of up to $6.0 million (the “CAS Revolving Loan”). Borrowings under the CAS Revolving Loan may be used to finance working capital and other general corporate purposes. The Berkshire Revolving Loan had a borrowing base of approximately $3 million on March 31, 2020 of which the Company had drawn $1,760,386. This amount is reflected net of an unamortized discount of $37,344 on the Company’s unaudited condensed consolidated balance sheet. For the three months ended March 31, 2020, the Company amortized $2,154 in debt financing cost.
On August 16, 2019, the CAS Loan and Security Agreement was amended to permit a one-time cash distribution of $1.5 million which was used to partially fund the Company’s repurchase of the SBN Membership Interests.
Borrowings under the CAS Revolving Loan bear interest at a rate equal to the ICE LIBOR rate plus 3.00%, which was 4.6% at March 31, 2020.
The outstanding principal amount of any borrowings under the CAS Revolving Loan will be due and payable on July 15, 2022, subject to an earlier maturity date upon an event of default. Any unpaid principal and interest shall be due on the maturity date.
The CAS Loan and Security Agreement contains usual and customary covenants for financings of this type, including, among other things: (i) requirements to deliver financial statements, other reports and notices; (ii) restrictions on indebtedness; (iii) restrictions on dividends, distributions and redemptions of equity and repayment of subordinated indebtedness; (iv) restrictions on liens; (v) restrictions on making certain payments; (vi) restrictions on investments; (vii) restrictions on asset dispositions and other fundamental changes; and (viii) restrictions on transactions with affiliates.
The CAS Loan and Security Agreement contains certain financial covenants, including a cash flow coverage ratio and a tangible net worth requirement covenant. Under the cash flow coverage covenant, CAS shall maintain a quarterly cash flow coverage ratio of not less than 1.20 to 1.00. Under the tangible net worth covenant, CAS shall maintain a tangible net worth of no less than $1.0 million, as amended on August 16, 2019. The tangible net worth amount required shall increase annually on each June 30 by 50% of CAS’s prior years undistributed net income. As of March 31, 2020, the Company was in compliance will all covenants under the CAS Loan and Security Agreement.
The obligations of CAS under the CAS Loan and Security Agreement are secured by liens and security interests on all assets of CAS. The Company is a secured guarantor of the CAS Loan and Security Agreement, and has pledged its equity in CAS.
SummitBridge USAC Loans
To finance the purchase of the USAC Assets, on March 20, 2020, USAC Ross and USAC WA entered into a Loan and Security Agreement (the “USAC Loan and Security Agreement”) with SummitBridge VI pursuant to which SummitBridge VI made a two year term loan in the amount of $6,167,000 to USAC Ross and USAC WA (the “USAC Term Loan”).
The USAC Term Loan has a maturity date of March 20, 2022. The USAC Term Loan will begin amortizing on the thirteenth (13) month following March 20, 2020 (the “Effective Date”) pursuant to a seven (7) year amortization schedule with the balance due on the maturity date. The USAC Term Loan is secured against all of the assets of USAC Ross and USAC WA. The USAC Term Loan may be prepaid in whole or in part at any time without any fee, charge or penalty.
The USAC Term Loan bears an interest rate of 9% interest per annum, payable monthly, beginning the first (1) month after the Effective Date. On the 16-month anniversary of the Effective Date, the interest rate on the USAC Term Loan will increase to 15% interest per annum, payable monthly. If the USAC Term Loan is prepaid in full on or before the nine (9) month anniversary of the Effective Date, the principal amount will be reduced by $500,000. If the USAC Term Loan is prepaid in full on or before the ten (10) month anniversary of the Effective Date, the principal amount will be reduced by $400,000. If the USAC Term Loan is prepaid in full on or before the eleven (11) month anniversary of the Effective Date, the principal amount will be reduced by $300,000. If the USAC Term Loan is prepaid in full before the twelve (12) month anniversary of the Effective Date, the principal amount will be reduced by $200,000. If the USAC Term Loan is prepaid in full on or before the sixteen (16) month anniversary of the Effective Date, the principal amount will be reduced by $100,000.
The Company has guaranteed payment of the USAC Term Loan pursuant to a guaranty agreement made by the Company as of the Effective Date.
The USAC Loan and Security Agreement also contains customary covenants, representations and warranties of the parties, including, among others (1) the grant by USAC Ross and USAC WA to SummitBridge VI of a security interest on all of the assets of USAC Ross and USAC WA, and (2) an unconditional and irrevocable guaranty by the Company of the performance by USAC Ross and USAC WA of the obligations under the USAC Loan and Security Agreement. In addition, until all amounts under the USAC Term Loan are paid in full, USAC Ross and USAC WA have agreed to comply with certain financial covenants commencing with the fiscal quarter ending June 30, 2020 that require USAC Ross and USAC WA to meet pre-established financial ratios. Debt issuance costs were approximately $61,000, which was recorded as debt discount and will amortized over the life of the loan.
Debt Assumed Pursuant to Acquisition
Pursuant to the March 20, 2020 transaction, USAC Ross and USAC WA assumed certain secured equipment loans in the aggregate amount of $230,007.
LIBOR Rate
To the extent that the PMAL Loan and Security Agreement and the CAS Loan and Security Agreement extend beyond 2021, the interest rates for these obligations might be subject to change based on recent regulatory changes.
LIBOR, the London Interbank Offered Rate, is the basic rate of interest used in lending transactions between banks on the London interbank market and is widely used as a reference for setting the interest rate on loans globally. The interest rates for borrowings under the PMAL Loan and Security Agreement and the CAS Loan and Security Agreement are based on the ICE LIBOR rate.
On July 27, 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced that it intends to phase out LIBOR by the end of 2021. It is unclear at that time whether LIBOR will cease to exist or if new methods of calculating LIBOR will be established such that it continues to exist after 2021. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, is considering replacing U.S. dollar LIBOR with a new index calculated by short term repurchase agreements, backed by Treasury securities. The future of LIBOR at this time is uncertain. If LIBOR ceases to exist, we may need to renegotiate any agreements extending beyond 2021 that utilize LIBOR as a factor in determining the interest rate to replace LIBOR with the new standard that is established, which may have an adverse effect on the Company.
11. SEGMENT RESULTS
The Company manages its operations in three business segments which are defined as follows:
·
The Company’s Creative Assembly subsidiary, which includes all distribution of proprietary and specialty fasteners primarily serving the heavy truck, automotive, transportation, and infrastructure industries.
·
The Company’s PMAL subsidiary, which includes all our manufacturing of specialty ingot, electrode products, shot products, and master alloys in addition to toll conversion melting services.
·
The Company’s USAC Ross and USAC WA subsidiaries, which include all our manufacturing of precision aluminum castings, as well as in-house heat treating, machining, powder coating and non-destructive testing.
Below is the Segment reconciliation to total net income
Income from segments above
$
1,291,842
Non-allocated expenses
Interest expense - net
(121,795
)
General and administrative expenses
(135,481
)
Other income
(7,998
)
Total
(265,274
)
Income before provision for income taxes
$
1,026,568
Segment asset information for the Company is as follows:
March 31,
2020
December 31,
2019
PMAL assets
$
13,674,719
$
14,615,627
CAS assets
6,076,392
5,498,560
USAC assets
13,082,867
-
Corporate assets
119,674
461,363
Total assets
$
32,953,652
$
20,575,550
12. INCOME TAXES
Income taxes are provided for the tax effects of transactions reported in the unaudited condensed consolidated financial statements and consist of taxes currently due.
Tax information for the three-months ended March 30, 2020 and 2019 is as follows:
The Company’s deferred tax assets and liability relates mainly to a temporary timing difference in long-term assets and net operating loss carryforwards. There were no significant uncertain tax positions taken, or expected to be taken, in a tax return that would be determined to be an unrecognized tax benefit that should have been recorded in the Company’s unaudited condensed consolidated financial statements for the three months ended March 31, 2020 or 2019. Additionally, there were no interest or penalties outstanding as of or for each of the three months ended March 31, 2020 and 2019.
The federal and state tax returns for the years ending December 31, 2016, 2017 and 2018 have been filed, but are still open to examination. Federal and state tax returns for the year ending December 31, 2019 have not been filed.
13. RELATED PARTIES
Board and Executive Compensation
The Compensation Committee adopted a 2017-2019 Amerinac Holding Corp. Executive Bonus Plan (the “Executive Bonus Plan”), which is subject to and governed by the terms of the 2017 Amerinac Holding Corp. 2017 Equity Incentive Plan (the “2017 Equity Plan”). The 2017 Equity Plan provides for an aggregate of 100,000 shares of common stock to be available for awards. Certain key employees will participate in the Executive Bonus Plan. The Executive Bonus Plan is designed to (i) offer variable compensation primarily in equity of the Company if executives achieve annual target growth amounts and (ii) align the incentives of executives and shareholders. The Board is currently evaluating extending the Executive Bonus Plan to cover 2020 and 2021.
The Company will fund the annual corporate bonus pool with no more than 20% of the excess, if any, of the Company’s yearly earnings before taxes minus a threshold amount. For 2019, the threshold amount was $1,750,000. The Board is currently evaluating the threshold amounts for 2020 and 2021.
Pursuant to the Executive Bonus Plan, awards are paid out in a mix of cash and equity, with no less than 60% of corporate bonus pool to be in the form of newly issued restricted common stock, subject to the discretion of the Compensation Committee of the Board. All awards will be subject to threshold performance and high-water marks.
As of March 31, 2020 and December 31, 2019, the Company had accrued at total of $283,000 in bonus for Mssrs. Wachter and Golden, of which $193,000 was for bonuses earned in 2019.
In return for their service during the 2019 term, Messrs. Lamb and Garruto are each set to receive $25,000 in stock during 2020, which has been accrued for as of March 31, 2020. On December 27, 2019, Mssrs. Lamb and Garruto were re-elected to the Board for an additional 1-year term under the same terms.
On April 23, 2020, CAS entered into a promissory note with Berkshire Bank, which provides for a loan in the amount of $227,800 (the “CAS PPP Loan”) pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The CAS PPP Loan has a two-year term and bears interest at a rate of 1.0% per annum. Monthly principal and interest payments are deferred for six months after the date of disbursement. The CAS PPP Loan may be prepaid at any time prior to maturity with no prepayment penalties. The promissory note contains events of default and other provisions customary for a loan of this type. The Paycheck Protection Program provides that the CAS PPP Loan may be partially or wholly forgiven if the funds are used for certain qualifying expenses as described in the CARES Act. CAS intends to use the entire CAS PPP Loan amount for qualifying expenses and to apply for forgiveness of the loan in accordance with the terms of the CARES Act. The Company can provide no assurance that the loan will be forgiven despite the best efforts of the Company.
On April 21, 2020, PMAL entered into a Promissory Note with Berkshire Bank, which provides for a loan in the amount of $1,074,700 (the “PMAL PPP Loan”) pursuant to the CARES Act. The PMAL PPP Loan has a two-year term and bears interest at a rate of 1.0% per annum. Monthly principal and interest payments are deferred for six months after the date of disbursement. The PMAL PPP Loan may be prepaid at any time prior to maturity with no prepayment penalties. The promissory note contains events of default and other provisions customary for a loan of this type. The Paycheck Protection Program provides that the PMAL PPP Loan may be partially or wholly forgiven if the funds are used for certain qualifying expenses as described in the CARES Act. PMAL intends to use the entire PMAL PPP Loan amount for qualifying expenses and to apply for forgiveness of the loan in accordance with the terms of the CARES Act. The Company can provide no assurance that the loan will be forgiven despite the best efforts of the Company.
On April 23, 2020, USAC Ross entered into a promissory note with Berkshire Bank, which provides for a loan in the amount of $984,100 (the “USAC Ross PPP Loan”) pursuant to the CARES Act. The USAC Ross PPP Loan has a two-year term and bears interest at a rate of 1.0% per annum. Monthly principal and interest payments are deferred for six months after the date of disbursement. The USAC Ross PPP Loan may be prepaid at any time prior to maturity with no prepayment penalties. The promissory note contains events of default and other provisions customary for a loan of this type. The Paycheck Protection Program provides that the USAC Ross PPP Loan may be partially or wholly forgiven if the funds are used for certain qualifying expenses as described in the CARES Act. USAC Ross intends to use the entire USAC Ross PPP Loan amount for qualifying expenses and to apply for forgiveness of the loan in accordance with the terms of the CARES Act. The Company can provide no assurance that the loan will be forgiven despite the best efforts of the Company.
On April 22, 2020, USAC WA entered into a promissory note with Berkshire Bank, which provides for a loan in the amount of $796,400 (the “USAC WA PPP Loan”) pursuant to the CARES Act. The USAC WA PPP Loan has a two-year term and bears interest at a rate of 1.0% per annum. Monthly principal and interest payments are deferred for six months after the date of disbursement. The USAC WA PPP Loan may be prepaid at any time prior to maturity with no prepayment penalties. The promissory note contains events of default and other provisions customary for a loan of this type. The Paycheck Protection Program provides that the USAC WA PPP Loan may be partially or wholly forgiven if the funds are used for certain qualifying expenses as described in the CARES Act. USAC WA intends to use the entire USAC WA PPP Loan amount for qualifying expenses and to apply for forgiveness of the loan in accordance with the terms of the CARES Act. The Company can provide no assurance that the loan will be forgiven despite the best efforts of the Company.
This Form 10-Q contains “forward-looking statements” relating to Amerinac Holding Corp. (the “Company”) which represent the Company’s current expectations or beliefs including, but not limited to, statements concerning the Company’s operations, performance, financial condition and growth. For this purpose, any statements contained in this Form 10-Q that are not statements of historical fact are forward-looking statements. Without limiting the generality of the foregoing, words such as “may”, “anticipate”, “intend”, “could”, “estimate” or “continue” or the negative or other comparable terminology are intended to identify forward-looking statements. These statements by their nature involve substantial risks and uncertainties, such as credit losses, dependence on management and key personnel, variability of quarterly results, and the ability of the Company to continue its growth strategy and the Company’s competition, certain of which are beyond the Company’s control. Should one or more of these risks or uncertainties materialize or should the underlying assumptions prove incorrect, or any of the other risks set out under the caption “Risk Factors” in the Company’s 10-K report for the year ended December 31, 2019 occur, actual outcomes and results could differ materially from those indicated in the forward-looking statements.
Any forward-looking statement speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time and it is not possible for management to predict all of such factors, nor can it assess the impact of each such factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
General
The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements, and the notes thereto, included herein. The information contained below includes statements of the Company’s or management’s beliefs, expectations, hopes, goals and plans that, if not historical, are forward-looking statements subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. For a discussion of forward-looking statements, see the information set forth in the Introductory Note to this Quarterly Report under the caption “Forward Looking Statements” which information is incorporated herein by reference.
The unaudited condensed consolidated interim financial statements included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. The unaudited condensed consolidated financial statements and notes are presented as permitted on Form 10-Q and do not contain information included in the Company’s annual consolidated statements and notes. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. The results for the three months ended March 31, 2020 may not be indicative of the results for the entire year.
These statements reflect all adjustments, consisting of normal recurring adjustments, which in the opinion of management, are necessary for fair presentation of the information contained herein.
Through its Creative Assembly Systems, Inc. (“Creative Assembly”) segment, the Company distributes high-quality, predominantly domestically-manufactured, technically complex, nut and bolt products and a proprietary locking washer product that are used primarily for industrial/commercial applications that require a high level of certified and assured quality.
Creative Assembly is a value-added distributor of proprietary and specialty fasteners for production, primarily serving the heavy truck, automotive, appliance, and material handling industries.
The Creative Assembly is a niche player in the North American fastener industry. The fastener distribution industry is highly fragmented with no single company holding a dominant position. The Creative Assembly competes with numerous distributors who serve as authorized stocking distributors for the fastener manufacturers in Creative Assembly’s supplier base.
Creative Assembly is a one-stop source for standard, self-locking, semi-special and special nuts, bolts and washers manufactured to several industrial specifications. Creative Assembly maintains an inventory of approximately 4,000 SKUs comprised of approximately 19 million parts of premium quality, brand name fastener products.
Creative Assembly sells its products pursuant to written purchase orders from its customers. All products are shipped from Creative Assembly’s warehouses via common carrier.
Through its Prime Metals Acquisition LLC (“PMAL”) segment, the Company is a manufacturer of specialty ingot and electrode products which are supplied for investment castings, forging, ring rolling, and plate production. The Company also manufactures shot products and master alloys which are sold to other melt shops, and provides manufacturing support services. The flexible manufacturing operations at PMAL enable the Company to offer a wide range of product grades in customer specific order quantities. The primary grade types include stainless steels, tool steels, nickel-based grades, cobalt based grades and some nonferrous alloys. The Company also offers toll conversion melting services.
The Company’s products are manufactured, by others, to exacting specifications and are made from materials that provide the strength and reliability required for their industrial applications.
Through its USAC Ross LLC and USAC WA LLC (collectively, “USAC”) segments, the Company manufactures precision aluminum castings. USAC offers multiple casting processes as well as in-house heat treating, machining, powder coating and non-destructive testing. The products are used in defense, aerospace, heavy truck, marine and commercial applications. USAC Ross and USAC WA were formed as wholly-owned single member limited liability companies by the Company on March 3, 2020 and had no operations prior to the March 20, 2020 acquisition discussed in Note 4 to the unaudited condensed consolidated financial statements.
At March 31, 2020, Remelt Sources, Inc., AMG-Vanadium and Drive Automotive receivables were 20.8%, 10.3%, and 10.0% of total receivables, respectively. At December 31, 2019, Remelt Sources, Inc., Universal Stainless & Alloy Products, AMG-Vanadium, PACCAR, and Eastham Forge receivables were 19.8%, 16.2%, 14.9%, 13.3% and 11.7% of total receivables, respectively.
For the three-month period ending March 31, 2020, Remelt Sources, Inc., AMG-Vanadium, and PACCAR accounted for 28.0%, 18.0%, and 12.3% of sales, respectively. For the three-month period ending March 31, 2019, Remelt Sources, Inc., AMG-Vanadium, PACCAR and Universal Stainless & Alloy Products accounted for 19.0%, 18.1%, 15.5% and 13.1% of sales, respectively.
For the three-month period ending March 31, 2020, no supplier represented more than 10% of purchases. For the three-month period ending March 31, 2019, no supplier represented more than 10% of purchases. At March 31, 2020, no supplier represented more than 10% of accounts payable. At December 31, 2019, AVK represented approximately 11.9% of accounts payable.
Results from Operations for three months ending March 31, 2020 vs March 31, 2019
The Company’s revenues decreased 9.6% or $1,198,526 for the three months ended March 31, 2020 to $11,306,442 from $12,504,968 in the comparable period last year. PMAL had $7,838,167 in revenue for the three months ended March 31, 2020. PMAL revenue was down $348,972 or 4.3% for the three months ended March 31, 2020 versus March 31, 2019, primarily due to a slowdown in March 2020 caused by the COVID-19 pandemic. Creative Assembly was down $1,410,016 or 32.7% in revenue for the three months ended March 31, 2020 versus March 31, 2019 due to a shutdown by the largest customers in March 2020 in response to the COVID-19 pandemic. USAC had revenue of $560,462 for the period between March 20, 2020 and March 31, 2020.
The Company’s gross profit decreased approximately 22.8% or $591,164 for the three months ended March 31, 2020 to $1,997,427 from $2,588,591 in the comparable period last year. For the three months ended March 31, 2020, gross profit at Creative Assembly decreased by $342,228 or approximately 42.6% versus the comparable period last year due to decreased sales caused by the COVID-19 pandemic. For the three months ended March 31, 2020, gross profit at PMAL decreased by $369,276 or approximately 20.7% versus the comparable period last year due to a decrease in sales caused by the COVID-19 pandemic.
The Company’s total operating expenses decreased 4.2% or $60,433 for the three months ending March 31, 2020 to $1,379,795 from $1,440,228.
Liquidity
The Company believes that it can meet its financial obligations for a period of 12 months from the date of this report at its presently contemplated operating levels.
The Company believes it can expand its business with its present staff numbers. The Company’s PMAL subsidiary has the ability to borrow under its respective revolving credit facility with Berkshire Bank. In addition, the Company’s Creative Assembly subsidiary can utilize borrowings under its revolving credit facility with Berkshire Bank entered into on July 15, 2019 in an aggregate principal amount of up to $6.0 million to finance an increase in working capital in order to increase the size of the business. As of March 31, 2020, the Company currently had approximately $3.6 million in total availability on its credit facilities with Berkshire Bank. In addition, the Company’s subsidiaries have received loans under the CARES Act in the aggregate amount of $3,083,000.
We carried out an evaluation with the participation of our principal executive officer and principal financial officer, required by Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934 (the “Exchange Act”) of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on this evaluation our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective at March 31, 2020 as to ensure that the information relating to our company required to be disclosed in our SEC reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) is accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosures due to the existence of material weaknesses.
The material weaknesses are as follows:
·
We did not perform an effective risk assessment or monitor internal controls over financial reporting.
·
A lack of sufficient resources and an insufficient level of monitoring and oversight, which restricted the Company’s ability to gather, analyze and report information relative to the financial statement assertions in a timely manner, including insufficient documentation and review of selection of generally accepted accounting principles.
·
The limited size of the accounting department makes it impractical to achieve an appropriate level of segregation of duties. Specifically, due to lack of personnel, effective controls were not designed and implemented to ensure accounting functions were properly segregated.
·
Due to a lack of adequate staffing within the finance department and adequate staffing within operational departments that provide information to the finance department, we did not establish and maintain effective controls over certain of our period-end financial close and reporting processes. Specifically, effective controls were not designed and implemented to ensure that journal entries were properly prepared with sufficient support or documentation or were reviewed and approved to ensure the accuracy and completeness of the journal entries recorded.
The Company expects improvements to be made in 2020 as the Company grows in size given recent acquisitions and the Company is able to dedicate more resources to the financial and accounting function. The Company plans to further remdiate the material weaknesses identified above as its resources permit. However, there are no assurances we will be able to devote the necessary capital to hire the additional personnel and institute the additional systems, policies and procedures to the level necessary. In that event, there are no assurances that the material weaknesses described above will be timely remediated or not result in errors in our consolidated financial statements in future periods.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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