UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
x QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
or
o 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 x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes x No o
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 | x |
(Do not check if a smaller reporting company) | Emerging Growth Company | ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for 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 o No x
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
Number of shares outstanding of the registrant’s common stock, as of November 9, 2018: 297,386
| Page | ||||
PART I FINANCIAL INFORMATION | |||||
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| 3 | ||||
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| 4 | ||||
| 5 | ||||
| 6 | ||||
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
| 24 | |||
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| 26 | ||||
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| 26 | ||||
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| 27 | ||||
| 28 |
2 |
Table of Contents |
AMERINAC HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
|
| September 30, |
|
| December 31, |
| ||
|
| 2018 |
|
| 2017 |
| ||
|
|
|
|
|
|
| ||
ASSETS | ||||||||
Current assets: |
|
|
|
|
|
| ||
Cash |
| $ | 312,959 |
|
| $ | 348,398 |
|
Accounts receivable (net of allowance for doubtful accounts of $78,753 as of September 30, 2018 and December 31, 2017.) |
|
| 4,786,383 |
|
|
| 2,825,846 |
|
Inventories (net of reserve for obsolesence of $208,000 and $338,260 as of September 30, 2018 and December 31, 2017, respectively) |
|
| 5,028,783 |
|
|
| 3,483,809 |
|
Escrow receivable |
|
| 500,000 |
|
|
| 1,000,000 |
|
Other current assets |
|
| 75,064 |
|
|
| 336,509 |
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
| 10,703,189 |
|
|
| 7,994,562 |
|
|
|
|
|
|
|
|
|
|
Property, land and equipment - net |
|
| 6,150,548 |
|
|
| 6,241,706 |
|
|
|
|
|
|
|
|
|
|
Other assets: |
|
|
|
|
|
|
|
|
Customer lists - net of amortization |
|
| 1,757,833 |
|
|
| 1,907,083 |
|
Goodwill |
|
| 54,993 |
|
|
| 54,993 |
|
Other |
|
| 51,917 |
|
|
| 51,917 |
|
Total other assets |
|
| 1,864,743 |
|
|
| 2,013,993 |
|
|
|
|
|
|
|
|
|
|
Total |
| $ | 18,718,480 |
|
| $ | 16,250,261 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Line of credit |
| $ | 1,375,302 |
|
| $ | - |
|
Accounts payable and accrued expenses |
|
| 4,614,667 |
|
|
| 2,624,937 |
|
Notes payable - short term - related party |
|
| - |
|
|
| 515,627 |
|
Notes payable - short term, net |
|
| 600,000 |
|
|
|
|
|
Capital leases payable - short term |
|
| 42,902 |
|
|
| - |
|
Income taxes payable |
|
| 102,205 |
|
|
| - |
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
| 6,735,076 |
|
|
| 3,140,564 |
|
|
|
|
|
|
|
|
|
|
Long-term liabilities: |
|
|
|
|
|
|
|
|
Notes payable - related party |
|
| - |
|
|
| 7,026,130 |
|
Notes payable, net |
|
| 4,205,472 |
|
|
| - |
|
Capital leases payable |
|
| 124,408 |
|
|
| - |
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities |
|
| 4,329,880 |
|
|
| 7,026,130 |
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
| 11,064,956 |
|
|
| 10,166,694 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable non-controlling interest |
|
| 720,758 |
|
|
| 453,377 |
|
|
|
|
|
|
|
|
|
|
Stockholders' equity: |
|
|
|
|
|
|
|
|
Common stock, $.001 par value; 1,500,000 shares authorized, 297,386 issued and outstanding at September 30, 2018 and December 31, 2017 |
|
| 297 |
|
|
| 297 |
|
Additional paid-in capital |
|
| 15,733,615 |
|
|
| 15,733,615 |
|
Accumulated deficit |
|
| (8,801,146 | ) |
|
| (10,103,722 | ) |
|
|
|
|
|
|
|
|
|
Total stockholders' equity |
|
| 6,932,766 |
|
|
| 5,630,190 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity |
| $ | 18,718,480 |
|
| $ | 16,250,261 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
3 |
Table of Contents |
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017 |
|
| FOR THE NINE |
|
| FOR THE THREE |
| ||||||||||
|
| MONTHS |
|
| MONTHS |
| ||||||||||
|
| ENDED SEPTEMBER 30, |
|
| ENDED SEPTEMBER 30, |
| ||||||||||
|
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net revenue |
| $ | 32,986,071 |
|
| $ | 9,942,032 |
|
| $ | 10,972,390 |
|
| $ | 5,808,727 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold |
|
| 26,743,807 |
|
|
| 7,889,345 |
|
|
| 8,852,352 |
|
|
| 4,593,641 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
| 6,242,264 |
|
|
| 2,052,687 |
|
|
| 2,120,038 |
|
|
| 1,215,086 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses |
|
| 3,136,605 |
|
|
| 1,529,390 |
|
|
| 1,077,456 |
|
|
| 560,851 |
|
Professional and consulting fees |
|
| 294,065 |
|
|
| 535,467 |
|
|
| 79,123 |
|
|
| 331,356 |
|
Total operating expenses |
|
| 3,430,670 |
|
|
| 2,064,857 |
|
|
| 1,156,579 |
|
|
| 892,207 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before other income (expense) |
|
| 2,811,594 |
|
|
| (12,170 | ) |
|
| 963,459 |
|
|
| 322,879 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
| (1,036,934 | ) |
|
| (466,530 | ) |
|
| (308,009 | ) |
|
| (203,158 | ) |
Change in fair value of put option |
|
| - |
|
|
| (213,000 | ) |
|
| - |
|
|
| - |
|
Gain on sale |
|
| - |
|
|
| 3,409,184 |
|
|
| - |
|
|
| - |
|
Other income |
|
| 84,882 |
|
|
| 53 |
|
|
| (203,714 | ) |
|
| 3,818 |
|
Total other income (expense) |
|
| (952,052 | ) |
|
| 2,729,707 |
|
|
| (511,723 | ) |
|
| (199,340 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before provision for income taxes |
|
| 1,859,542 |
|
|
| 2,717,537 |
|
|
| 451,736 |
|
|
| 123,539 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
| (103,751 | ) |
|
| (731 | ) |
|
| 27,806 |
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before discontinued operations |
|
| 1,755,791 |
|
|
| 2,716,806 |
|
|
| 479,542 |
|
|
| 123,539 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, net |
|
| - |
|
|
| 976,287 |
|
|
| - |
|
|
| (16,566 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
| 1,755,791 |
|
|
| 3,693,093 |
|
|
| 479,542 |
|
|
| 106,973 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-controlling interest share of net income from continuing operations |
|
| 453,215 |
|
|
| 34,833 |
|
|
| 88,922 |
|
|
| 34,833 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Amerinac Holding Corp. shareholders |
| $ | 1,302,576 |
|
| $ | 3,658,260 |
|
| $ | 390,620 |
|
| $ | 72,140 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings per share applicable to common stockholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
| 4.38 |
|
|
| 9.88 |
|
|
| 1.31 |
|
|
| 0.31 |
|
Discontinued operations |
|
| - |
|
|
| 3.59 |
|
|
| - |
|
|
| (0.06 | ) |
Earnings per share |
|
| 4.38 |
|
|
| 13.47 |
|
|
| 1.31 |
|
|
| 0.25 |
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
| 297,386 |
|
|
| 271,572 |
|
|
| 297,386 |
|
|
| 283,442 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
4 |
Table of Contents |
AMERINAC HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017
CASH FLOWS FROM OPERATING ACTIVITIES |
| 2018 |
|
| 2017 |
| ||
Net income |
| $ | 1,755,791 |
|
| $ | 3,693,093 |
|
Adjustments to reconcile net income to net cash |
|
|
|
|
|
|
|
|
provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 564,136 |
|
|
| 93,475 |
|
Amortization of deferred financing fees |
|
| 103,405 |
|
|
| 246,345 |
|
Gain on sale |
|
| - |
|
|
| (3,409,184 | ) |
Stock compensation |
|
| - |
|
|
| 28,467 |
|
Loss from discontinued operations |
|
| - |
|
|
| 976,287 |
|
Change in fair value put option |
|
| - |
|
|
| 213,000 |
|
Net loss on debt extinguishment |
|
| 69,722 |
|
|
| - |
|
Inventory writedown and reserve |
|
| (130,260 | ) |
|
| 60,639 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Increase in accounts receivable |
|
| (1,960,537 | ) |
|
| (2,513,692 | ) |
Increase in inventory |
|
| (1,414,714 | ) |
|
| (1,219,642 | ) |
Decrease (increase) in other current assets |
|
| 261,445 |
|
|
| (340,849 | ) |
Increase in other assets |
|
| - |
|
|
| (3,001 | ) |
Increase in income taxes payable |
|
| 102,205 |
|
|
| 731 |
|
Decrease in shareholder put option |
|
| - |
|
|
| (687,000 | ) |
Increase in accounts payable and accrued expenses |
|
| 1,989,730 |
|
|
| 1,021,535 |
|
Net cash provided by (used in) operating activities of continuing operations |
|
| 1,340,923 |
|
|
| (1,839,796 | ) |
Net cash provided by operating activities of discontinued operations |
|
| - |
|
|
| 968,480 |
|
Net cash provided by (used in) operating activities |
|
| 1,340,923 |
|
|
| (871,316 | ) |
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Proceeds from sale, net of escrow |
|
| - |
|
|
| 9,500,000 |
|
Acquisition of business |
|
| - |
|
|
| (9,600,000 | ) |
Proceeds from escrow receivable from sale |
|
| 500,000 |
|
|
| - |
|
Purchase of property and equipment |
|
| (145,135 | ) |
|
| (64,285 | ) |
Net cash provided by (used in) investing activities of continuing operations |
|
| 354,865 |
|
|
| (164,285 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Net proceeds (payments) on line of credit |
|
| 1,375,302 |
|
|
| (5,339,199 | ) |
Net proceeds (payments) on notes payable |
|
| 4,790,955 |
|
|
| (4,000,000 | ) |
Payments on capital leases |
|
| (11,283 | ) |
|
| - |
|
Net (payments) proceeds on notes payable - related party |
|
| (7,886,201 | ) |
|
| 8,000,000 |
|
Proceeds from issuance of stock, net |
|
| - |
|
|
| 3,650,097 |
|
Purchase of treasury stock |
|
| - |
|
|
| (900,000 | ) |
Net cash (used in) provided by financing activities of continuing operations |
|
| (1,731,227 | ) |
|
| 1,410,898 |
|
|
|
|
|
|
|
|
|
|
(DECREASE) INCREASE IN CASH |
|
| (35,439 | ) |
|
| 375,297 |
|
|
|
|
|
|
|
|
|
|
CASH - BEGINNING OF PERIOD |
|
| 348,398 |
|
|
| 83,391 |
|
|
|
|
|
|
|
|
|
|
CASH - END OF PERIOD |
| $ | 312,959 |
|
| $ | 458,688 |
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
Interest |
| $ | 1,030,076 |
|
| $ | 466,530 |
|
Income taxes |
| $ | 1,546 |
|
| $ | - |
|
|
|
|
|
|
|
|
|
|
Non-cash financing activities: |
|
|
|
|
|
|
|
|
Stock issued for payment of debt |
| $ | - |
|
| $ | 85,600 |
|
Acquisition of equipment through capital lease |
| $ | 178,593 |
|
| $ | - |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
5 |
Table of Contents |
AMERINAC HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018
(UNAUDITED)
1. SUMMARY OF BUSINESS
Amerinac Holding Corp. and Subsidiaries (the “Company”) distributes high-quality, predominantly domestically-manufactured, technically complex, nut and bolt products and a proprietary locking washer product that are for industrial and commercial applications that require a high level of certified and assured quality. Additionally, the Company manufactures specialty stainless steel, and related products for steel mills, steel forging operations, and various metal fabrication facilities.
The Company’s operations are carried out through its wholly-owned distribution subsidiary Creative Assembly Systems, Inc (“Creative Assembly”) and its majority-owned subsidiary, Prime Metals Acquisition LLC, a Delaware limited liability company (“PMAL”). Until April 28, 2017, the Company’s operations were also carried out through its wholly-owned distribution subsidiary, Aero-Missile Components, Inc. (“Aero-Missile”). Creative Assembly is a value added distributor of proprietary and specialty fasteners primarily serving the heavy truck, automotive, transportation, and infrastructure industries. Aero-Missile had stocking distributor relationships with a number of United States fastener manufacturers. Aero-Missile predominantly sold to all levels of the aviation industry original equipment manufacturers, maintenance and repair organizations, and other distributors, as well as to the United States Department of Defense (“Department of Defense”).
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.
On April 28, 2017, the Company and Aero-Missile entered into an Asset Purchase Agreement (the “Aero-Missile Asset Purchase Agreement”) with Apollo Aerospace LLC (“Apollo”) pursuant to which Aero-Missile sold substantially all of its assets to Apollo and Apollo assumed certain liabilities of Aero-Missile (the “Asset Sale”) for an aggregate purchase price of $10.5 million paid by Apollo to Aero-Missile. The purchase price was subject to a working capital adjustment and $1.0 million being held in escrow (of which $500,000 was received in April 2018 and $500,000 was received on November 2, 2018) to secure the indemnification obligations of the Company and Aero-Missile. During the third quarter of 2017, it was determined that $22,500 was owed by the Company to Apollo, under the terms of the working capital adjustment. Pursuant to the Aero-Missile Asset Purchase Agreement, the Company and Aero-Missile were required to change their corporate names. On May 1, 2017, Aero-Missile changed its name to “PolyAero Inc.” and on June 28, 2017, the Company changed its name to “Amerinac Holding Corp.”
Simultaneous with the sale of Asset Sale, the Company repaid all amounts owing to C3 Capital Partners III, L.P. (“C3”). The total amount repaid was $4 million plus accrued interest of $42,389. In addition, the Company purchased the 96,697 shares of common stock of the Company owned by C3 for an aggregate purchase price of $900,000 that was mutually agreed to by the Company and C3.
On April 28, 2017, the balance of the proceeds of the Asset Sale, totaling $4,557,611, were used to partially pay down the principal balance of the WBCC Revolving Loan. Although the WBCC Revolving Loan was senior to the amounts owed to C3, WBCC consented to the early repayment of these loans in full.
All financial results of Aero-Missile are classified as discontinued operations for the purposes of this quarterly report.
6 |
Table of Contents |
On July 12, 2017, the Company entered into an Asset Purchase Agreement (the “Prime Asset Purchase Agreement”) with Prime Metals & Alloys, Inc., a Delaware corporation, (“Prime Metals”) pursuant to which PMAL would purchase all of the assets of Prime Metals for an aggregate purchase price of $9.6 million pursuant to an order of the Bankruptcy Court approving the sale under Section 363 of the Bankruptcy Code. Pursuant to an order of the Bankruptcy Court, the Company paid a deposit of $0.5 million to be held in escrow. The deposit was credited to the purchase price at Closing. On March 2, 2017, Prime Metals filed a voluntary petition for relief under chapter 11 of title of the United States Code (as amended, the “Bankruptcy Code”) in the United States Bankruptcy Court for the Western District of Pennsylvania (the “Bankruptcy Court”) at case no. 17-70164-JAD.
On August, 17, 2017, PMAL purchased substantially all of the assets of Prime Metals for $9.6 million in cash pursuant to the Prime Asset Purchase Agreement. To finance the purchase of the assets, on August 17, 2017, PMAL entered into a Credit Agreement (the “Credit Agreement”) with SummitBridge National Investments V LLC (“Summit”) pursuant to which Summit 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 making the Summit Loans, PMAL issued to SBN V PMA LLC, an affiliate of Summit (“SBN”), membership interests in PMAL equal to 25% of the equity ownership of PMAL (the “SBN Membership Interests”).
The Company guaranteed payment of the Summit Loans pursuant to a Guaranty Agreement made by the Company as of the Effective Date.
The Credit Agreement also contained customary covenants, representations and warranties of the parties, including, among others (1) the grant by PMAL to Summit of a security interest on all of the assets of PMAL, (2) a pledge with respect to the equity interests in PMAL owned by the Company, and (3) an unconditional and irrevocable guaranty by the Company of the performance by PMAL of the obligations under the Credit Agreement. In addition, until all amounts under the Summit Loans were paid in full, PMAL agreed to comply with certain financial covenants that require PMAL to meet pre-established financial ratios. Covenant calculations commenced with the period ending December 31, 2017.
On July 17, 2017, the Company completed the closing of a private placement (the “Private Placement”) with approximately 17 accredited investors (the “Investors”), pursuant to which the Company sold to the Investors a total of 75,500 shares of restricted common stock (the “Shares”) of the Company at a purchase price of $40.00 per share, and total consideration of $3.02 million.
On September 28, 2017, the Company sold an additional 15,750 Shares at a purchase price of $40.00 per share, and total consideration of $630,000 to 5 Investors.
On August 31, 2018 (the “Refinancing Date”), PMAL entered into a Loan and Security Agreement (the “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 $3,435,000 on September 30, 2018 of which the Company had drawn $1,375,302.
On August 31, 2018, pursuant to the Loan and Security Agreement, PMAL used an amount of $7,678,814 under the Loan and Security Agreement to fully repay the Summit Loans. 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.
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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 nine months ended September 30, 2018 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, 2017 included in the Company’s Annual Report on Form 10-K filed on March 28, 2018.
Principles of Consolidation and Basis of Presentation
The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly and majority owned subsidiaries. All inter-company accounts have been eliminated. All financial results of Aero-Missile are classified as discontinued operations for the purposes of this quarterly report.
Earnings (Loss) Per Share
Basic earnings (loss) 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 (loss) 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 September 30, 2018 and 2017.
Use of Estimates
The preparation of the unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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 significant estimates are the useful lives of tangible assets, reserves for inventory and accounts receivable, estimate of the valuation allowance against deferred tax assets and the valuation of put option and redeemable non-controlling interest.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded net of reserves for sales returns and allowances and 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 carries an allowance for doubtful accounts of $78,753 as of September 30, 2018 and December 31, 2017, respectively. 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.
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Inventory
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 knowledge of future demand of inventory on hand as well as other market conditions and events. As of September 30, 2018 and December 31, 2017, the inventory reserve was $140,000 and $194,555, respectively.
For the Company’s distribution subsidiary, 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 September 30, 2018, the Company’s distribution subsidiary 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.
For the Company’s manufacturing subsidiary, 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 September 30, 2018, the Company’s manufacturing subsidiary had more than 500 unique metal chemistries it produced, but keeps minimal finished inventory on hand. Management will evaluate the need to change inventory on hand levels.
For the Company’s manufacturing subsidiary, 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 as other market conditions and events. As of September 30, 2018 and December 31, 2017, the inventory reserve was $68,000 and $143,705, respectively.
The Company’s inventory consists of the following:
|
| September 30, 2018 |
|
| December 31, 2017 |
| ||
|
|
|
|
|
|
| ||
Raw Materials |
| $ | 2,068,500 |
|
| $ | 1,548,531 |
|
Finished Goods |
|
| 3,168,283 |
|
|
| 2,273,538 |
|
Reserves |
|
| (208,000 | ) |
|
| (338,260 | ) |
|
|
|
|
|
|
|
|
|
Total |
| $ | 5,028,783 |
|
| $ | 3,483,809 |
|
Property, Land and Equipment
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.
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The carrying amount of all long-lived assets is evaluated periodically 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.
Concentration of Credit Risk
At September 30, 2018, Ametek, Remelt Sources, Inc., and PACCAR receivables were 25.1%, 14.6% and 12.4% of total receivables, respectively. At December 31, 2017, Universal Stainless & Alloy Products, Remelt Sources, Inc., PACCAR, Ametek and Eastham Forge receivables were 17.0%, 15.2%, 13.5%, 10.3% and 10.2% of total receivables, respectively.
For the nine-month period ending September 30, 2018, Remelt Sources, Inc., Ametek, AMG-Vanadium, PACCAR and Universal Stainless & Alloy Products accounted for 18.2%, 16.1%, 15.6%, 14.0% and 12.5% of sales, respectively. For the three-month period ending September 30, 2018, Ametek, Remelt Sources, Inc., PACCAR, AMG-Vanadium and Universal Stainless & Alloy Products accounted for 18.3%, 15.6%, 14.6%, 14.1% and 11.0% of sales, respectively. For the three-month and nine-month period ending September 30, 2017, PACCAR accounted for 16.6% and 31.2% of sales. AMG-Vanadium accounted for 11% of sales for the three months and nine months ended September 30, 2017.
Concentration of Suppliers
For the three month and nine-month periods ending September 30, 2018, no supplier represented more than 10% of purchases. For the three and nine-month period ending September 30, 2017, AVK represented approximately 12.5% and 21.8% of purchases. On September 30, 2018, AVK represented approximately 12.2% of accounts payable. On December 31, 2017, AVK represented approximately 17% of accounts payable.
Fair Value of Financial Assets and Liabilities
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.
Income Taxes
The Company provides for income taxes under 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 and deferred compensation.
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.
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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 September 30, 2018, 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 Tax Cuts and Jobs Act (the “Tax Act”), enacted on December 22, 2017, among other things, permanently lowered the statutory federal corporate tax rate from 35% to 21%, effective for tax years including or beginning January 1, 2018. Under the guidance of ASC 740, “Income Taxes” (“ASC 740”), the Company revalued its net deferred tax assets on the date of enactment based on the reduction in the overall future tax benefit expected to be realized at the lower tax rate implemented by the new legislation. Although in the normal course of business the Company is required to make estimates and assumptions for certain tax items which cannot be fully determined at period end, the Company did not identify items for which the income tax effects of the Tax Act have not been completed as of September 30, 2018 and December 31, 2017 and, therefore, considers its accounting for the tax effects of the Tax Act on its deferred tax assets and liabilities to be complete as of September 30, 2018 and December 31, 2017.
Revenue Recognition
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”). This update outlines a new comprehensive revenue recognition model that supersedes most current revenue recognition guidance and requires companies to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The FASB has issued several updates to ASU 2014-09, which collectively with ASU 2014-09, represent the FASB Accounting Standards Codification Topic 606 (“ASC 606”). On January 1, 2018, we adopted ASC 606 for all contracts using the modified retrospective method, which means the historical periods are presented under the previous revenue standards with the cumulative net income effect being adjusted through retained earnings. The adoption of ASC 606 did not have a material effect on our unaudited condensed consolidated financial statements.
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 obligation 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 and master alloys and tolling services. 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 serve is transferred and payment is received within one year.
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Product Returns
We estimate product returns based on historical experience and record them on a gross basis. Substantially all of Creative Assembly Systems customer returns relate to products that are returned under warranty obligations underwritten by manufacturers. Substantially all of Prime Metals Acquisition LLC 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 did not record any deferred revenue as of September 30, 2018 or December 31, 2017.
Redeemable Non-controlling Interest
Non-controlling interests that are not subject to redemption rights are classified in permanent equity. Redeemable non-controlling interests are classified outside of permanent equity on the unaudited condensed consolidated balance sheets.
On August, 17, 2017, PMAL purchased substantially all of the assets of Prime Metals for $9.6 million in cash pursuant to the Prime Asset Purchase Agreement. To finance the purchase of the assets, PMAL entered into the Credit Agreement with Summit pursuant to which Summit made the Summit Loans to PMAL: (1) Summit Term Loan A and (2) Summit Term Loan B. In addition, in consideration for Summit making the Loans, PMAL issued to the SBN the SBN Membership Interests. The SBN Membership Interests represented 25% ownership of PMAL. 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.
PMAL has 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 has 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 is reflected before stockholders’ equity as Redeemable Non-Controlling interest. The redeemable non-controlling interest was reduced for the reduction in membership interests during the quarter. In connection with the refinancing on August 31, 2018 (see note 8) and the respective reduction from 25% to 20% noted above, the Company recognized a loss on the extinguishment of approximately $255,556 related to the unamortized debt discount with the Summit Loans, which was offset by approximately $185,834 of a gain associated with the reduction from the adjustment to the redeemable non-controlling interest, resulting in a net $69,722 loss on debt extinguishment recorded in other income on the accompanying unaudited condensed consolidated statements of income. SBN’s pro-rata net income allocation was made at a rate of 25% through August 31, 2018 and 20% commencing September 30, 2018 in accordance with the reduction in membership interests.
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3. ACQUISITION AND BUSINESS COMBINATION
On July 12, 2017, the Company and PMAL entered into an Asset Purchase Agreement with Prime Metals. On August 17, 2017, PMAL purchased substantially all of the assets of Prime Metals for a purchase price of $9.6 million. The assets and liabilities of PMAL were recorded at their respective fair values as of the closing date of the acquisition, and the following table summarizes these values based on the balance sheet at August 17, 2017 and the Purchase Price Allocation performed as of December 31, 2017.
The following summarizes the purchase price allocation:
Purchase Price |
|
| 9,600,000 |
|
|
|
|
|
|
Accounts Receivable |
|
| 681,251 |
|
Inventory |
|
| 693,603 |
|
Other current assets |
|
| 23,053 |
|
Machinery & Equipment |
|
| 2,747,100 |
|
Intangibles – customer list |
|
| 1,990,000 |
|
Real Estate – Building and Land |
|
| 3,410,000 |
|
Total |
|
| 9,545,007 |
|
Goodwill |
|
| 54,993 |
|
Acquisition costs were approximately $170,000, which are included in general and administrative expenses in 2017.
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, 2017, 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 nine months ended September 30, 2017 as if the acquisition had occurred on January 1, 2017.
|
| Nine Months Ended |
|
| Three Months Ended |
| ||
Pro Forma |
| September 30, 2017 |
|
| September 30, 2017 |
| ||
Net Sales |
|
| 24,720,668 |
|
|
| 8,800,469 |
|
Operating expenses |
|
| 3,185,437 |
|
|
| 963,040 |
|
Income before taxes |
|
| (233,091 | ) |
|
| 3,951,573 |
|
Net income |
|
| (233,091 | ) |
|
| 3,950,842 |
|
The Company’s unaudited condensed consolidated financial statements for the nine months ending September 30, 2018 include the actual results of PMAL since the date of the acquisition, August 17, 2017. The nine months ended September 30, 2017, pro forma results above include nine months of pro forma results for PMAL. For the three and nine months ended September 30, 2018, the PMAL operations had a net income before taxes and interest of $642,455 and $2,828,552, respectively, that was included in the Company’s unaudited Condensed Consolidated Statements of income, which consisted of $7,859,348 and $24,673,494 in revenues, respectively. $170,000 included in the operating expenses relates to the interest on the Summit Loans which were used to finance the acquisition of PMAL on August 17, 2017. Operating expenses also include $24,875 of amortization of intangibles relating to the amortization of the customer list purchased on August 17, 2017 pursuant to the purchase of the Prime Metals' assets.
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4. DISCONTINUED OPERATIONS
The financial results of our Aero-Missile business, sold on April 28, 2017, for the nine and three months ended September 30, 2017 are presented as discontinued operations, net of income taxes on our condensed consolidated statement of income. The following table presents financial results of the Aero-Missile business:
|
| Nine Months Ended September 30, 2017 |
|
| Three Months Ended September 30, 2017 |
| ||
Net Revenue |
| $ | 5,839,989 |
|
| $ | - |
|
|
|
|
|
|
|
|
|
|
Cost of goods sold |
|
| 4,048,651 |
|
|
| - |
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
| 1,791,338 |
|
|
| - |
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
General and administrative expenses |
|
| 443,771 |
|
|
| - |
|
Professional and consulting fees |
|
| 56,796 |
|
|
| - |
|
Depreciation and amortization |
|
| 9,132 |
|
|
| - |
|
Total operating expenses |
|
| 509,699 |
|
|
| - |
|
|
|
|
|
|
|
|
|
|
Income before other income (expense) |
|
| 1,281,639 |
|
|
| - |
|
|
|
|
|
|
|
|
|
|
Other expense |
|
|
|
|
|
|
|
|
Interest expense - net |
|
| (299,427 | ) |
|
| (16,566 | ) |
Other expense |
|
| (5,925 | ) |
|
| - |
|
Total other expense |
|
| (305,352 | ) |
|
| - |
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for income taxes |
|
| 976,287 |
|
|
| (16,566 | ) |
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
| - |
|
|
| - |
|
|
|
|
|
|
|
|
|
|
Net income (loss) from discontinued operations |
|
| 976,287 |
|
|
| (16,566 | ) |
5. PROPERTY, LAND AND EQUIPMENT
The Company’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. The useful life of the building is estimated to be 30 years. The useful life of the machinery and equipment is estimated to range from 3 to 10 years. Depreciation expense was $414,886 and $93,475 for the nine months ended September 30, 2018 and 2017 and $208,724 and $85,937 for the three months ended September 30, 2018 and 2017.
|
| September 30, 2018 |
|
| December 31, 2017 |
| ||
|
|
|
|
|
|
| ||
Land, buildings and improvements |
| $ | 3,419,779 |
|
| $ | 3,410,000 |
|
Equipment |
|
| 3,344,584 |
|
|
| 3,030,635 |
|
Total |
|
| 6,764,363 |
|
|
| 6,440,635 |
|
Less accumulated depreciation |
|
| (613,815 | ) |
|
| (198,929 | ) |
Net property, land and equipment |
| $ | 6,150,548 |
|
| $ | 6,241,706 |
|
As described in Note 1, the Company has $6,180,774 in notes secured against the property, land and equipment.
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6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consists of the following as of September 30, 2018 and December 31, 2017:
|
| September 30, 2018 |
|
| December 31, 2017 |
| ||
Accounts payable |
| $ | 3,430,483 |
|
| $ | 1,763,213 |
|
Interest |
|
| 33,415 |
|
|
| 115,445 |
|
Salaries and Bonus |
|
| 986,077 |
|
|
| 673,088 |
|
Utilities |
|
| 53,427 |
|
|
| 15,000 |
|
Professional fees |
|
| 21,000 |
|
|
| 46,000 |
|
Closing costs |
|
| 80,000 |
|
|
| - |
|
Rent |
|
| 10,265 |
|
|
| 12,191 |
|
|
| $ | 4,614,667 |
|
| $ | 2,624,937 |
|
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 September 30, 2018, the value, net of amortization, of the customer list was $1,757,833.
Amortization expense for the years ended December 31, 2018 through 2022 will be $199,000 per year. The Company will continue to expense $199,000 annually until 2027. For the three and nine months ended September 30, 2018, $49,750 and $149,250 was amortized.
8. LONG-TERM DEBT AND LINE OF CREDIT
Summit Bridge Loans
On August, 17, 2017 (the “Effective Date”), PMAL purchased substantially all of the assets of Prime Metals for $9.6 million in cash pursuant to the Prime Asset Purchase Agreement. To finance the purchase of the assets, on August 17, 2017, PMAL entered into the Credit Agreement with Summit pursuant to which made the Summit Loans to PMAL: (1) Summit Term Loan A and (2) Summit Term Loan B. In addition, in consideration for Summit making the Loans, PMAL issued to SBN, the SBN Membership Interests.
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. SummitTerm Loan B was secured against all of the assets of PMAL.
The Company guaranteed payment of the Summit Loans pursuant to a Guaranty Agreement made by the Company as of the Effective Date.
PMAL has 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 has 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 is reflected before stockholders’ equity as Redeemable Non-Controlling interest. Due to the SBN Membership Interests, Summit is considered a related party of the Company for the purposes of these unaudited condensed consolidated financial statements.
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The Credit Agreement also contained customary covenants, representations and warranties of the parties, including, among others (1) the grant by PMAL to Summit of a security interest on all of the assets of PMAL, (2) a pledge with respect to the equity interests in PMAL owned by the Company, and (3) an unconditional and irrevocable guaranty by the Company of the performance by PMAL of the obligations under the Credit Agreement. In addition, until all amounts under the Summit Loans were paid in full, PMAL agreed to comply with certain financial covenants that require PMAL to meet pre-established financial ratios. Covenant calculations commenced with the period ending December 31, 2017.
On August 31, 2018 (the “Refinancing Date”), PMAL entered into a Loan and Security Agreement (the “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 $3,435,000 on September 30, 2018 of which the Company had drawn $1,375,302.
On August 31, 2018, pursuant to the Loan and Security Agreement, PMAL used an amount of $7,678,814 under the Loan and Security Agreement to fully repay the Summit Loans. 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. In connection with the refinancing on August 31, 2018 and the respective reduction from 25% to 20% noted above, the Company recognized a loss on the extinguishment of approximately $255,556 related to the unamortized debt discount with the Summit Loans, which was offset by approximately $185,834 of a gain associated with the reduction from the adjustment to the redeemable non-controlling interest, resulting in a net $69,722 loss on debt extinguishment recorded in other income on the accompanying unaudited condensed consolidated statements of income. SBN’s pro-rata net income allocation was made at a rate of 25% through August 31, 2018 and 20% commencing September 30, 2018 in accordance with the reduction in membership interests.
The following table shows the value of the non-controlling interests (“NCI”):
Value of NCI at January 1, 2018 |
| $ | 453,377 |
|
PMAL Income from January 1, 2018 to September 30, 2018 attributable to NCI |
|
| 453,215 |
|
Reduction in NCI on September 30, 2018 |
|
| (185,834 | ) |
Value of NCI at September 30, 2018 |
|
| 720,758 |
|
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 5.33% at September 30, 2018. Berkshire Term Loan A and Berkshire Term Loan B bear interest at ICE LIBOR rate plus 4.25%, which was 6.33% at September 30, 2018.
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 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.
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The 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, commencing with the fiscal quarter ending September 30, 2018, PMAL shall maintain a quarterly cash flow coverage ratio of not less than 1.20 to 1.00. Under the tangible net worth covenant, commencing with the fiscal quarter ending December 31, 2018, PMAL shall maintain a tangible net worth of no less than $3.1 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 September 30, 2018, PMAL was in compliance with the covenants contained within the Loan and Security Agreement.
The obligations of PMAL under the Loan and Security Agreement are secured by liens and security interests on all assets of PMAL. Amerinac is a secured guarantor of the Loan and Security Agreement, and has pledged its equity in PMAL.
9. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company has two leased facilities, which are office, manufacturing and warehouse space. Our Texas facility is leased under an operating lease that is less than three years in duration. Our Ohio facility is leased under an operating lease that is more than three years in duration. In some cases the Company is responsible for real estate taxes, utilities, and repairs under the terms of certain of the operating leases. Our Texas facility lease calls for payments until expiration in February 2019 totaling $49,467. The annual payments for 2018 and 2019 are $42,400 and $7,067. Our Ohio facility calls for lease payments until expiration totaling $365,750. The annual payments are $77,000 for each of the years 2018, 2019, 2020 and 2021 and $57,750 for 2022.
Capital Leases
The below chart shows our obligations under current capital leases:
|
| September 30, 2018 |
| |
Obligations under capital leases |
| $ | 167,310 |
|
Less: current portion |
|
| 42,902 |
|
Long-term portion |
| $ | 124,408 |
|
Future minimum repayments
The table below presents the future minimum repayments of capital lease obligations for the Company as of September 30, 2018
Years ending December 31, |
| Capital lease obligations |
| |
2018 (remaining three months) |
| $ | 10,518 |
|
2019 |
|
| 43,434 |
|
2020 |
|
| 45,634 |
|
2021 |
|
| 46,618 |
|
2022 |
|
| 21,106 |
|
Total |
| $ | 167,310 |
|
17 |
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The table below represents the future minimum repayments of the Berkshire Terms Loan A and Berkshire Term Loan B as of September 30, 2018.
Years ending December 31, |
| Term Loans Minimum Amortization |
| |
2018 (remaining three months) |
| $ | 150,000 |
|
2019 |
|
| 600,000 |
|
2020 |
|
| 600,000 |
|
2021 |
|
| 3,650,000 |
|
Total |
| $ | 5,000,000 |
|
Litigation
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 consolidated financial position or results of operations.
Employment Agreements
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 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”). 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.
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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 2018 and 2019, the threshold amounts will be $1,250,000 and $1,750,000, respectively.
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. All awards will be subject to threshold performance and high-water marks.
The Company will issue 7,500 shares pursuant to the Executive Bonus Plan to Mr. Wachter in 2018. The Company will issue 7,500 shares pursuant to the Executive Bonus Plan to Mr. Golden in 2018, valued at $600,000, which has been accrued for as of September 30, 2018. In addition, the Company anticipates issuing 625 shares to both Mr. Lamb and Mr. Garruto at the conclusion of their first year of service on the Board of Directors in November 2018 pursuant to their independent director agreements.
10. SEGMENT RESULTS
The Company manages its operations in two business segments which are defined as follows:
| · | The Company’s Creative Assembly (“CAS”) 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 (“PMAL”), which includes all our manufacturing of specialty ingot, electrode products, shot products, and master alloys in addition to toll conversion melting services. |
Segment information for the nine months ended September 30, 2018 is as follows:
|
| CAS |
|
| PMAL |
| ||
Net Revenue |
| $ | 8,312,577 |
|
| $ | 24,673,494 |
|
|
|
|
|
|
|
|
|
|
Cost of goods sold |
|
| 6,547,851 |
|
|
| 20,195,956 |
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
| 1,764,726 |
|
|
| 4,477,538 |
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
General and administrative expenses |
|
| 1,271,145 |
|
|
| 1,577,183 |
|
Professional and consulting fees |
|
| 54,427 |
|
|
| 154,251 |
|
Total operating expenses |
|
| 1,325,572 |
|
|
| 1,731,434 |
|
|
|
|
|
|
|
|
|
|
Income before other income (expense) |
|
| 439,154 |
|
|
| 2,746,104 |
|
Below is the Segment reconciliation to total net income
Income from segments above |
|
| 3,185,258 |
|
|
|
|
|
|
Non-allocated expenses |
|
|
|
|
|
|
|
|
|
Interest expense - net |
|
| (1,036,934 | ) |
General and administrative expenses |
|
| (373,664 | ) |
|
|
|
|
|
Other income |
|
| 84,882 |
|
Total |
|
| (1,325,716 | ) |
|
|
|
|
|
Income from continuing operations before provision for income taxes |
| $ | 1,859,542 |
|
19 |
Table of Contents |
Segment information for the three months ended September 30, 2018 is as follows:
|
| CAS |
|
| PMAL |
| ||
Net Revenue |
| $ | 3,113,042 |
|
| $ | 7,859,348 |
|
|
|
|
|
|
|
|
|
|
Cost of goods sold |
|
| 2,447,111 |
|
|
| 6,405,241 |
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
| 665,931 |
|
|
| 1,454,107 |
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
General and administrative expenses |
|
| 420,522 |
|
|
| 558,271 |
|
Professional and consulting fees |
|
| 13,750 |
|
|
| 49,667 |
|
Total operating expenses |
|
| 434,272 |
|
|
| 607,938 |
|
|
|
|
|
|
|
|
|
|
Income before other income (expense) |
|
| 231,659 |
|
|
| 846,169 |
|
Below is the Segment reconciliation to total net income
Income from segments above |
|
| 1,077,828 |
|
|
|
|
|
|
Non-allocated expenses |
|
|
|
|
|
|
|
|
|
Interest expense - net |
|
| (308,009 | ) |
General and administrative expenses |
|
| (114,369 | ) |
|
|
|
|
|
Other income |
|
| (203,714 | ) |
Total |
|
| (626,092 | ) |
|
|
|
|
|
Income from continuing operations before provision for income taxes |
| $ | 451,736 |
|
Segment information for the nine months ended September 30, 2017 is as follows:
|
| CAS |
|
| PMAL |
| ||
Net Revenue |
| $ | 6,548,474 |
|
| $ | 3,393,558 |
|
|
|
|
|
|
|
|
|
|
Cost of goods sold |
|
| 5,172,578 |
|
|
| 2,716,767 |
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
| 1,375,896 |
|
|
| 676,791 |
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
General and administrative expenses |
|
| 1,427,231 |
|
|
| 102,159 |
|
Professional and consulting fees |
|
| 266,352 |
|
|
| 269,115 |
|
Total operating expenses |
|
| 1,693,583 |
|
|
| 371,274 |
|
|
|
|
|
|
|
|
|
|
Income before other income (expense) |
|
| (317,687 | ) |
|
| 305,517 |
|
20 |
Table of Contents |
Below is the Segment reconciliation to total net income
(Loss) income from segments above |
|
| (12,170 | ) |
|
|
|
|
|
Non-allocated expenses |
|
|
|
|
Interest expense - net |
|
| (466,530 | ) |
Change in fair value put option |
|
| (213,000 | ) |
Gain on sale |
|
| 3,409,184 |
|
Other income (expense) |
|
| 53 |
|
Total other income (expense) |
|
| 2,729,707 |
|
|
|
|
|
|
Income from continuing operations before |
|
| 2,717,537 |
|
provision for income taxes |
|
|
|
|
Segment information for the three months ended September 30, 2017 is as follows:
|
| CAS |
|
| PMAL |
| ||
Net Revenue |
| $ | 2,415,169 |
|
| $ | 3,393,558 |
|
|
|
|
|
|
|
|
|
|
Cost of goods sold |
|
| 1,880,153 |
|
|
| 2,716,767 |
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
| 535,016 |
|
|
| 676,791 |
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
General and administrative expenses |
|
| 455,413 |
|
|
| 102,159 |
|
Professional and consulting fees |
|
| 62,241 |
|
|
| 269,115 |
|
Total operating expenses |
|
| 517,654 |
|
|
| 371,274 |
|
|
|
|
|
|
|
|
|
|
Income before other income (expense) |
|
| 17,362 |
|
|
| 305,517 |
|
21 |
Table of Contents |
Below is the Segment reconciliation to total net income
Income from segments above |
|
| 322,879 |
|
|
|
|
|
|
Non-allocated expenses |
|
|
|
|
|
|
|
|
|
Interest expense - net |
|
| (203,158 | ) |
General and administrative expenses |
|
| - |
|
|
|
|
|
|
Other income |
|
| 3,818 |
|
Total |
|
| (199,340 | ) |
|
|
|
|
|
Income from continuing operations before provision for income taxes |
| $ | 123,539 |
|
Segment asset information for the Company is as follows:
| September 30, 2018 |
| December 31, 2017 |
| ||||
PMAL assets |
| 13,963,174 |
| 12,356,392 |
| |||
CAS assets |
| 4,013,350 |
| 2,698,882 |
| |||
Corporate Assets |
| 741,956 |
| 1,194,987 |
| |||
Total assets |
| 18,718,480 |
| 16,250,261 |
22 |
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11. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, as well as net operating loss carryforwards. Deferred tax assets and liabilities are classified as a net amount in the non-current portion of the unaudited condensed consolidated balance sheet. Valuation allowances are established against deferred tax assets if it is more likely than not that the assets will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates or laws is recognized in operations in the period that includes the enactment date.
The 2017 Tax Cuts and Jobs Act (“Tax Reform”) was enacted on December 22, 2017. The Tax Reform includes a number of changes in existing tax law impacting businesses including a permanent reduction in the U.S. federal statutory rate from 34% to 21%, effective on January 1, 2018. Under U.S. GAAP, changes in tax rates and tax law are accounted for in the period of enactment and deferred tax assets and liabilities are measured at the enacted tax rate.
The Company files income tax returns in the U.S. federal and state jurisdictions. Tax years 2014 to 2017 remain open to examination for both the U.S. federal and state jurisdictions.
At December 31, 2017, the Company recorded provisional amounts for the impact of re-measurement on its deferred taxes related to Tax Reform as set forth under SAB No. 118 guidance. Through September 30, 2018, no adjustments were made to the provisional amounts. Management will continue to analyze these provisional amounts, which are still subject to change during the allowable measurement period.
The Company utilized previously reserved for federal deferred tax assets, resulting in nil to no federal tax expense for the respective periods. There were no liabilities for uncertain tax positions at September 30, 2018 and December 31, 2017.
Tax information for the three-months ended September 30, 2018 and 2017 is as follows:
|
| For the three months ended September 30, |
| |||||
|
| 2018 |
|
| 2017 |
| ||
|
|
|
|
|
|
| ||
Current income tax |
|
|
|
|
|
| ||
Federal |
| $ | - |
|
| $ | - |
|
State |
|
| (27,806 | ) |
|
| - |
|
City |
|
| - |
|
|
| - |
|
Total Current income tax |
|
| (27,806 | ) |
|
| - |
|
|
|
|
|
|
|
|
|
|
Deferred income tax |
|
|
|
|
|
|
|
|
Federal |
|
| - |
|
|
| - |
|
State |
|
| - |
|
|
| - |
|
City |
|
| - |
|
|
| - |
|
Total deferred income tax |
|
| - |
|
|
| - |
|
|
|
|
|
|
|
|
|
|
Total income tax |
| $ | (27,806 | ) |
| $ | - |
|
Tax information for the nine-months ended September 30, 2018 and 2017 is as follows:
|
| For the nine months ended September 30, |
| |||||
|
| 2018 |
|
| 2017 |
| ||
Current income tax |
|
|
|
|
|
| ||
Federal |
| $ | - |
|
| $ | - |
|
State |
|
| 103,751 |
|
|
| 731 | |
City |
|
| - |
|
|
| - |
|
Total Current income tax |
|
| 103,751 |
|
|
| 731 | |
|
|
|
|
|
|
|
|
|
Deferred income tax |
|
|
|
|
|
|
|
|
Federal |
|
| - |
|
|
| - |
|
State |
|
| - |
|
|
| - |
|
City |
|
| - |
|
|
| - |
|
Total deferred income tax |
|
| - |
|
|
| - |
|
|
|
|
|
|
|
|
|
|
Total income tax |
| $ | 103,751 |
|
| $ | 731 |
23 |
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
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, 2017 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 nine months ended September 30, 2018 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.
Plan of Operation and Discussion of Operations
Through its 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 Company 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 Company competes with numerous distributors who serve as authorized stocking distributors for the fastener manufacturers in the Company’s supplier base.
The Company is a one-stop source for standard, self-locking, semi-special and special nuts, bolts and washers manufactured to several industrial specifications. The Company maintains an inventory of approximately 4,000 SKUs comprised of approximately 19 million parts of premium quality, brand name fastener products.
The Company sells its products pursuant to written purchase orders from its customers. All products are shipped from the Company’s warehouses via common carrier.
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Through its 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.
At September 30, 2018, Ametek, Remelt Sources, Inc., and PACCAR receivables were 25.1%, 14.6% and 12.4% of total receivables, respectively. At December 31, 2017, Universal Stainless & Alloy Products, Remelt Sources, Inc., PACCAR, Ametek and Eastham Forge receivables were 17.0%, 15.2%, 13.5%, 10.3% and 10.2% of total receivables, respectively.
For the nine-month period ending September 30, 2018, Remelt Sources, Inc., Ametek, AMG-Vanadium, PACCAR and Universal Stainless & Alloy Products accounted for 18.2%, 16.1%, 15.6%, 14.0% and 12.5% of sales, respectively. For the three-month period ending September 30, 2018, Ametek, Remelt Sources, Inc., PACCAR, AMG-Vanadium and Universal Stainless & Alloy Products accounted for 18.3%, 15.6%, 14.6%, 14.1% and 11.0% of sales, respectively. For the three-month and nine-month period ending September 30, 2017, PACCAR accounted for 16.6% and 31.2% of sales. AMG-Vanadium accounted for 11% of sales for the three months and nine months ended September 30, 2017.
For the three month and nine-month periods ending September 30, 2018, no supplier represented more than 10% of purchases. For the three-month and nine-month period ending September 30, 2017, AVK represented approximately 12.5% and 21.8% of purchases. On September 30, 2018, AVK represented approximately 12.2% of accounts payable. On December 31, 2017, AVK represented approximately 17% of accounts payable.
Results from Operations for nine months ending September 30, 2018 vs September 30, 2017
The Company’s revenues increased approximately 232% or $23,044,039 for nine months ended September 30, 2018 to $32,986,071 from $9,942,032 in the comparable period last year. The primary driver of the increase in sales was the acquisition of the assets of PMAL. PMAL is our sole manufacturing subsidiary and had $24,673,494 in revenue for the nine months ended September 30, 2018. For the nine months ended September 30, 2018, sales increased by 26.9% for the Company’s distribution subsidiary. Our distribution subsidiary was up approximately $1,764,103 in revenue year to date, versus 2017 year to date due to the pick-up in customer activity.
The Company’s gross profit increased approximately 204% or $4,189,577 for the nine months ended September 30, 2018 to $6,242,264 from $2,052,687 in the comparable period last year primarily due to the acquisition of PMAL. From time to time the Company will experience margin mix that will lead to temporarily higher or lower gross profit. In addition, a decrease in volumes does not necessarily mean our warehouse staffing levels can adjust in a linear fashion to offset the decrease in volumes. For the nine months ended September 30, 2018, gross profit at our distribution subsidiary increased by $388,830 or approximately 28.3% versus 2017 year to date. At our manufacturing subsidiary, our gross profit contribution accounted for approximately 71.7% of the Company’s total gross profit and has a margin of approximately 18.1%.
The Company’s total operating expenses increased 66.1% or $1,365,813 for the nine months September 30, 2018 to $3,430,670 from $2,064,857 in the comparable period last year. This is a result of the acquisition of PMAL.
In the quarter ending June 30, 2017, the Company recorded on a gain of $3,409,184 for the sale of the assets of Aero-Missile.
The Company’s accounts receivable have increased by $1,960,537 to $4,786,383 at September 30, 2018 from $2,825,846 at December 31, 2017; this difference is due to mainly to an increase in sales and extending terms to larger customers. The Company’s inventory increased by $1,544,974 from December 31, 2017 to September 30, 2018. The Company expects to see a continued trend of increasing inventory levels to support the Company’s growth plans in both subsidiaries.
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Results from Operations for three months ending September 30, 2018 vs September 30, 2017
The Company’s revenues increased approximately 88.9% or $5,163,663 for three months ended September 30, 2018 to $10,972,390 from $5,808,727 in the comparable period last year. The primary driver of the increase in sales was the acquisition of the assets of PMAL. PMAL had $7,859,348 in revenue for the three months ended September 30, 2018. For the three months ended September 30, 2018, sales increased by 28.9% for the Company’s distribution subsidiary versus the three months ended September 30, 2017 from $2,415,169 to $3,113,042.
The Company’s total operating expenses increased 29.6% or $264,372 for the three months September 30, 2018 to $1,156,579 from $892,207 in the comparable period last year. This is a result of the acquisition of PMAL.
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 is presently seeking to expand its capital availability which will enable the Company to fully take advantage of sales opportunities presented to it which require the Company to make additional investments in inventory.
The Company believes it can expand its business with its present staff numbers.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This item is not required for smaller reporting companies, and, if it were required, is not applicable to the Company’s present operations.
ITEM 4. CONTROLS AND PROCEDURES
(A) Disclosure Controls and Procedures
We carried out an evaluation with the participation of our chief executive officer who serves as 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 chief executive officer concluded that our disclosure controls and procedures were not effective at September 30, 2018 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 chief executive officer, to allow timely decisions regarding required disclosures due to the existence of material weaknesses.
The material weaknesses are as follows:
· | 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. | |
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· | 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. | |
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· | 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 may add additional personnel and procedures, which we believe will remedy these weaknesses in disclosure controls and procedures in future periods. 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.
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OTHER INFORMATION
The following exhibits are included herein:
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101 |
| XBRL Interactive Data Files |
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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.
| AMERINAC HOLDING CORP. | ||
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Dated: November 14, 2018 | By: | /s/ John Wachter | |
| John Wachter | ||
| Chief Executive Officer |
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EXHIBIT INDEX
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101 |
| XBRL Interactive Data Files |
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