Company Quick10K Filing
Quick10K
Amerinac Holding
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
8-K 2019-07-15 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-08-31 Enter Agreement, Off-BS Arrangement, Exhibits
MDXL Medixall Group 197
RCAR RenovaCare 137
RSSV Resort Savers 115
EMMA Emmaus Life Sciences 104
PGTK Pacific Green Technologies 88
FUSZ nFusz 13
EGLT Egalet 4
PTCO Petrogas 0
NEST Nestbuilder.com 0
CNL Clecoorate Holdings 0
PAOS 2019-06-30
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II
Item 6. Exhibits
EX-31.1 paos_ex311.htm
EX-31.2 paos_ex312.htm
EX-32.1 paos_ex321.htm
EX-32.2 paos_ex322.htm

Amerinac Holding Earnings 2019-06-30

PAOS 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 paos_10q.htm FORM 10-Q paos_10q.htm

 

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 June 30, 2019

 

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 x No ¨

 

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 ¨

 

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

x

Smaller Reporting Company

x

 

Emerging Growth Company

¨

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

 

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 August 9, 2019: 313,636

 

 
 
 
 

 

TABLE OF CONTENTS

 

 

Page

PART I

FINANCIAL INFORMATION

 

Item 1.

Financial Statements – (Unaudited)

3

Condensed Consolidated Balance Sheets

3

Condensed Consolidated Statements of Income

4

 

Condensed Consolidated Statements of Stockholders’ Equity

5

 

Condensed Consolidated Statements of Cash Flows

6

Notes to Condensed Consolidated Financial Statements

7

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

27

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

30

 

Item 4.

Controls and Procedures

30

PART II

OTHER INFORMATION

 

Item 6.

Exhibits

31

Signatures

32

 

 
 
 
 
 

Item 1. Financial Statements

 

AMERINAC HOLDING CORP. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

 

 

 

 

 

June 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash

 

$265,264

 

 

$360,283

 

Accounts receivable (net of allowance for doubtful accounts of  $78,753 as of June 30, 2019 and December 31, 2018.)

 

 

5,721,417

 

 

 

3,801,166

 

Inventories (net of reserve for obsolesence of $158,009 and $151,009 as of June 30, 2019 and December 31, 2018.)

 

 

5,836,154

 

 

 

5,580,942

 

Other current assets

 

 

283,321

 

 

 

230,985

 

 

 

 

 

 

 

 

 

 

Total current assets

 

 

12,106,156

 

 

 

9,973,376

 

 

 

 

 

 

 

 

 

 

Property, land and equipment - net

 

 

6,051,989

 

 

 

6,125,183

 

 

 

 

 

 

 

 

 

 

Other assets:

 

 

 

 

 

 

 

 

Customer lists - net of amortization

 

 

1,608,583

 

 

 

1,708,084

 

Right-of-use asset

 

 

1,208,613

 

 

 

-

 

Deferred tax asset

 

 

-

 

 

 

358,686

 

Goodwill

 

 

54,993

 

 

 

54,993

 

Other

 

 

71,593

 

 

 

51,917

 

Total other assets

 

 

2,943,782

 

 

 

2,173,680

 

 

 

 

 

 

 

 

 

 

Total

 

$21,101,927

 

 

$18,272,239

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Line of credit

 

$745,431

 

 

$1,092,058

 

Accounts payable and accrued expenses

 

 

4,026,018

 

 

 

3,275,011

 

Notes payable, net- short term

 

 

600,000

 

 

 

600,000

 

Finance leases payable - short term

 

 

45,688

 

 

 

43,435

 

Operating leases payable - short term

 

 

254,845

 

 

 

-

 

Deferred revenue

 

 

23,247

 

 

 

-

 

Income taxes payable

 

 

110,144

 

 

 

14,351

 

 

 

 

 

 

 

 

 

 

Total current liabilities

 

 

5,805,373

 

 

 

5,024,855

 

 

 

 

 

 

 

 

 

 

Long-term liabilities:

 

 

 

 

 

 

 

 

Notes payable, net of current portion

 

 

3,804,830

 

 

 

4,069,990

 

Finance leases payable - net of current portion

 

 

89,656

 

 

 

113,358

 

Operating leases payable - net of current portion

 

 

1,000,193

 

 

 

-

 

Deferred tax liability

 

 

7,041

 

 

 

-

 

Total long-term liabilities

 

 

4,901,720

 

 

 

4,183,348

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

10,707,093

 

 

 

9,208,203

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable non-controlling interest

 

 

1,071,729

 

 

 

757,778

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Common stock, $.001 par value; 1,500,000 shares authorized, 313,636 issued and outstanding at June 30, 2019 and December 31, 2018, respectively.

 

 

313

 

 

 

313

 

Additional paid-in capital

 

 

16,383,599

 

 

 

16,383,599

 

Accumulated deficit

 

 

(7,060,807)

 

 

(8,077,654)

 

 

 

 

 

 

 

 

 

Total stockholders' equity

 

 

9,323,105

 

 

 

8,306,258

 

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders' equity

 

$21,101,927

 

 

$18,272,239

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 
3
 
Table of Contents

 

AMERINAC HOLDING CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

FOR THE SIX MONTHS

 

 

FOR THE THREE MONTHS

 

 

 

ENDED JUNE 30,

 

 

ENDED JUNE 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenue

 

$24,062,327

 

 

$22,013,681

 

 

$11,557,359

 

 

$11,310,897

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

19,169,449

 

 

 

17,891,455

 

 

 

9,253,072

 

 

 

9,475,915

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

4,892,878

 

 

 

4,122,226

 

 

 

2,304,287

 

 

 

1,834,982

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative expenses

 

 

2,669,426

 

 

 

2,059,149

 

 

 

1,338,765

 

 

 

1,061,479

 

Professional and consulting fees

 

 

190,704

 

 

 

214,942

 

 

 

81,137

 

 

 

36,835

 

Total operating expenses

 

 

2,860,130

 

 

 

2,274,091

 

 

 

1,419,902

 

 

 

1,098,314

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before other (expense) income

 

 

2,032,748

 

 

 

1,848,135

 

 

 

884,385

 

 

 

736,668

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other (expense) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest

 

 

(240,430)

 

 

(728,925)

 

 

(118,635)

 

 

(363,774)

Other income

 

 

-

 

 

 

288,596

 

 

 

-

 

 

 

278,244

 

Total other (expense) income

 

 

(240,430)

 

 

(440,329)

 

 

(118,635)

 

 

(85,530)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before provision for income taxes

 

 

1,792,318

 

 

 

1,407,806

 

 

 

765,750

 

 

 

651,138

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

 

(461,520)

 

 

(131,557)

 

 

(199,054)

 

 

(131,557)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

1,330,798

 

 

 

1,276,249

 

 

 

566,696

 

 

 

519,581

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-controlling interest share of net income

 

 

313,951

 

 

 

364,293

 

 

 

144,658

 

 

 

166,556

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Amerinac Holding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corp. shareholders

 

$1,016,847

 

 

$911,956

 

 

$422,038

 

 

$353,025

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted earnings per share applicable to common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share

 

$3.24

 

 

$3.07

 

 

$1.35

 

 

$1.19

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

 

313,636

 

 

 

297,386

 

 

 

313,636

 

 

 

297,386

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 
4
 
Table of Contents
 

AMERINAC HOLDING CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)

SIX MONTHS ENDED JUNE 30, 2019 AND 2018

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Additional

 

 

Accumulated

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Paid-in Capital

 

 

(Deficit)

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2018

 

 

297,386

 

 

$297

 

 

$15,733,615

 

 

$(10,103,722)

 

$5,630,190

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Amerinac

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Holding Corp. shareholders

 

 

-

 

 

 

-

 

 

 

-

 

 

 

911,956

 

 

 

911,956

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, June 30, 2018

 

 

297,386

 

 

$297

 

 

$15,733,615

 

 

$(9,191,766)

 

$6,542,146

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2019

 

 

313,636

 

 

$313

 

 

$16,383,599

 

 

$(8,077,654)

 

$8,306,258

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Amerinac

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Holding Corp. shareholders

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,016,847

 

 

 

1,016,847

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, June 30, 2019

 

 

313,636

 

 

$313

 

 

$16,383,599

 

 

$(7,060,807)

 

$9,323,105

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

THREE MONTHS ENDED JUNE 30, 2019 AND 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Additional

 

 

 

Accumulated

 

 

 

 

Shares

 

 

Amount

 

 

Paid-in Capital

 

 

(Deficit)

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, April 1, 2018

 

 

297,386

 

 

$297

 

 

$15,733,615

 

 

$(9,544,791)

 

$6,189,121

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Amerinac

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Holding Corp. shareholders

 

 

-

 

 

 

-

 

 

 

-

 

 

 

353,025

 

 

 

353,025

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, June 30, 2018

 

 

297,386

 

 

$297

 

 

$15,733,615

 

 

$(9,191,766)

 

$6,542,146

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, April 1, 2019

 

 

313,636

 

 

$313

 

 

$16,383,599

 

 

$(7,482,845)

 

$8,901,067

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Amerinac

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Holding Corp. shareholders

 

 

-

 

 

 

-

 

 

 

-

 

 

 

422,038

 

 

 

422,038

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, June 30, 2019

 

 

313,636

 

 

$313

 

 

$16,383,599

 

 

$(7,060,807)

 

$9,323,105

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 
5
 
Table of Contents

 

AMERINAC HOLDING CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

SIX MONTHS ENDED JUNE 30, 2019 AND 2018

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

2019

 

 

2018

 

Net income

 

$1,330,798

 

 

$1,276,249

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

407,055

 

 

 

372,328

 

Amortization of deferred financing fees

 

 

34,840

 

 

 

66,666

 

Non-cash lease expense

 

 

78,152

 

 

 

-

 

Deferred income taxes

 

 

365,727

 

 

 

-

 

Inventory reserve

 

 

7,000

 

 

 

-

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Increase in accounts receivable

 

 

(1,920,251)

 

 

(1,355,635)

Increase in inventory

 

 

(262,212)

 

 

(71,663)

Decrease in operating leases payable

 

 

(31,727)

 

 

-

 

(Increase) decrease in other current assets

 

 

(52,336)

 

 

244,535

 

Increase in other assets

 

 

(19,676)

 

 

-

 

Increase in deferred revenue

 

 

23,247

 

 

 

-

 

Increase in income taxes payable

 

 

95,793

 

 

 

131,557

 

Increase in accounts payable and accrued expenses

 

 

751,007

 

 

 

125,372

 

Net cash provided by operating activities

 

 

807,417

 

 

 

789,409

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Proceeds from escrow receivable from sale

 

 

-

 

 

 

500,000

 

Purchase of property and equipment

 

 

(234,360)

 

 

(97,536)

Net cash (used) provided in investing activities

 

 

(234,360)

 

 

402,464

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Net payments on line of credit

 

 

(346,627)

 

 

-

 

Payments on notes payable

 

 

(300,000)

 

 

-

 

Payments on finance leases

 

 

(21,449)

 

 

(873)

Payments on notes payable - related party

 

 

-

 

 

 

(242,526)

Net cash used in financing activities

 

 

(668,076)

 

 

(243,399)

 

 

 

 

 

 

 

 

 

(DECREASE) INCREASE IN CASH

 

 

(95,019)

 

 

948,474

 

 

 

 

 

 

 

 

 

 

CASH - BEGINNING OF PERIOD

 

 

360,283

 

 

 

348,398

 

 

 

 

 

 

 

 

 

 

CASH - END OF PERIOD

 

$265,264

 

 

$1,296,872

 

 

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Interest

 

$241,305

 

 

$669,232

 

 

 

 

 

 

 

 

 

 

Non-cash financing activities:

 

 

 

 

 

 

 

 

Operating lease asset obtained in exchange for operating lease obligation

 

$1,277,143

 

 

$-

 

Acquisition of equipment through finance lease

 

$-

 

 

$162,903

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 
6
 
Table of Contents

 

AMERINAC HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2019

(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”). 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.

 

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 six months ended June 30, 2019 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, 2018 included in the Company’s Annual Report on Form 10-K filed on March 26, 2019.

 

 
7
 
Table of Contents
 

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.

 

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 June 30, 2019 and 2018.

 

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 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 the valuation of 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 June 30, 2019 and December 31, 2018. The Company determines receivables to be past due based on the payment terms of original invoices. Accounts are written off against the allowance when deemed uncollectable. Interest is not typically charged on past due receivables.

 

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 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 June 30, 2019, 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 June 30, 2019 and December 31, 2018, the inventory reserve for Creative Assembly was $75,160 and $68,160, respectively.

 

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 June 30, 2019, the Company’s manufacturing subsidiary had more than 500 unique metal chemistries it produced, but keeps minimal finished inventory on hand.

 

 
8
 
Table of Contents

 

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 June 30, 2019 and December 31, 2018, the inventory reserve for PMAL was $82,849.

 

The Company’s inventory consists of the following:

 

 

 

June 30,

2019

 

 

December 31,

2018

 

 

 

 

 

 

 

 

Raw Materials

 

$2,168,422

 

 

$2,133,311

 

Finished Goods

 

 

3,825,741

 

 

 

3,598,640

 

Reserves

 

 

(158,009)

 

 

(151,009)

 

 

 

 

 

 

 

 

 

Total

 

$5,836,154

 

 

$5,580,942

 

 

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.

 

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.

 

Concentration of Credit Risk

 

At June 30, 2019, Remelt Sources, Inc., Universal Stainless & Alloy Products, PACCAR, Eastham Forge and Drive Automotive receivables were 17.8%, 13.4%, 11.9%, 11.2% and 10.2% of total receivables, respectively. At December 31, 2018, Remelt Sources, Inc., AMG-Vanadium, PACCAR, and Universal Stainless & Alloy Products receivables were 20.9%, 15.0%, 14.0%, and 13.0% of total receivables, respectively.

 

For the six-month period ending June 30, 2019, Remelt Sources, Inc., AMG-Vanadium, PACCAR and Universal Stainless & Alloy Products accounted for 20.3%, 17.0%, 15.6%, and 12.0% of sales, respectively. For the three-month period ending June 30, 2019, Remelt Sources, Inc., AMG-Vanadium, PACCAR and Universal Stainless & Alloy Products accounted for 21.8%, 15.7%, 16.2%, and 10.8% of sales, respectively. For the six-month period ending June 30, 2018, Remelt Sources, Inc., AMG-Vanadium, Ametek, PACCAR and Universal Stainless & Alloy Products accounted for 19.5%, 16.4%, 15.1%, 13.7% and 12.5% of sales, respectively. For the three-month period ending June 30, 2018, Remelt Sources, Inc., Ametek, AMG-Vanadium, PACCAR and Universal Stainless & Alloy Products accounted for 21.1%, 18.7%, 14.2%, 14.1% and 11.4% of sales, respectively.

 

Concentration of Suppliers

 

For the six-month period ending June 30, 2019, no supplier represented more than 10% of purchases. For the three-month period ending June 30, 2019, no supplier represented more than 10% of purchases. For the six-month period ending June 30, 2018, no supplier represented more than 10% of purchases. For the three-month period ending June 30, 2018, no supplier represented more than 10% of purchases. At June 30, 2019, AVK represented approximately 16.9% of accounts payable. At December 31, 2018, AVK represented approximately 11.8% of accounts payable.

 

 
9
 
Table of Contents
 

Fair Value Measurements

 

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 and accrued liabilities 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.

 

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 June 30, 2019, 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”, 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 June 30, 2019 and December 31, 2018 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 June 30, 2019 and December 31, 2018.

 

 
10
 
Table of Contents
 

Revenue Recognition

 

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 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 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 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 $23,247 as of June 30, 2019. The Company did not record any deferred revenue as of December 31, 2018.

 

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.

 

 
11
 
Table of Contents

 

On August, 17, 2017, PMAL purchased substantially all of the assets of Prime Metals for $9.6 million in cash. To finance the purchase of the assets, 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 loans, PMAL issued membership interests representing 25% ownership of PMAL to an affiliate of Summit, 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.

 

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 from 25% to 20% in 2018, as noted above. 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.

 

Recently Adopted Authoritative Pronouncements

 

In February 2016, the Financial Accounting Standards Board (“FASB”) established Topic 842, Leases, by issuing Accounting Standards Update (“ASU”) No. 2016-02, which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. The new standard establishes a right-of-use model (“ROU”) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. The new standard is effective on January 1, 2019. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. If an entity chooses the second option, the transition requirements for existing leases also apply to leases entered into between the date of initial application and the effective date. The entity must also recast its comparative period financial statements and provide the disclosures required by the new standard for the comparative periods. The Company adopted the new standard on January 1, 2019 and used the effective date as the date of initial application. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019. The new standard provides a number of optional practical expedients in transition. The Company elects the ‘package of practical expedients’, which permits the Company not to reassess under the new standard prior conclusions about lease identification, lease classification and initial direct costs. Under this 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 a single lease component. On adoption, the Company recognized additional operating lease liabilities of approximately $251,000 with corresponding ROU assets of the same amount based on the present value of the remaining minimum rental payments under current leasing standards for existing operating leases.

 

 
12
 
Table of Contents

 

In June 2018, the FASB, issued ASU No. 2018-07 to simplify the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees, with certain exceptions. The new guidance expands the scope of ASC 718 to include share-based payments granted to nonemployees in exchange for goods or services used or consumed in an entity’s own operations and supersedes the guidance in ASC 505-50. The guidance is effective for public business entities in annual periods beginning after December 15, 2018, and interim periods within those annual periods. Early adoption is permitted, including in an interim period for which financial statements have not been issued, but not before an entity adopts ASC 606. This was adopted on January 1, 2019 and did not have a material impact on the Company’s financial position and results of operations.

 

Recent Accounting 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 is effective for annual periods beginning after December 15, 2019, with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect the adoption of this standard to have a significant impact on its financial position and results of operations.

 

No other recently issued accounting pronouncements had or are expected to have a material impact on the Company’s unaudited condensed consolidated financial statements.

 

3. 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. Depreciation expense was $307,554 and $206,162 for the six months ended June 30, 2019 and 2018. Depreciation expense was $155,455 and $70,696 for the three months ended June 30, 2019 and 2018.

 

 

 

June 30,

2019

 

 

December 31,

2018

 

 

 

 

 

 

 

 

Land, buildings and improvements

 

$3,419,779

 

 

$3,419,779

 

Equipment

 

 

3,698,189

 

 

 

3,463,829

 

Total

 

 

7,117,968

 

 

 

6,883,608

 

Less accumulated depreciation

 

 

(1,065,979)

 

 

(758,425)

Net property, land and equipment

 

$6,051,989

 

 

$6,125,183

 

 

As described in Note 7, the Company has $5,295,431 in notes secured against the property, land and equipment.

 

 
13
 
Table of Contents

 

4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

Accounts payable and accrued expenses consists of the following as of June 30, 2019 and December 31, 2018:

 

 

 

June 30,

2019

 

 

December 31,

2018

 

Accounts payable

 

$3,478,306

 

 

$3,060,269

 

Interest

 

 

33,192

 

 

 

35,805

 

Salaries and bonus

 

 

495,000

 

 

 

116,930

 

Other

 

 

19,520

 

 

 

62,007

 

 

 

$4,026,018

 

 

$3,275,011

 

 

5. 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 June 30, 2019, the value, net of amortization, of the customer list was $1,608,583.

 

Amortization expense for the years ended December 31, 2019 through 2023 will be $199,000 per year. The Company will continue to expense $199,000 annually until 2027. Amortization expense was $99,501 for each of the six months ended June 30, 2019 and 2018 and $49,751 for each of the three months ended June 30, 2019 and 2018.

 

6. LEASES

 

Operating Leases

 

The Company determines if a contract contains a lease at inception. US 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 which result in an economic penalty. All of the Company’s real estate leases are classified as operating leases.

 

 
14
 
Table of Contents

 

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 on an ongoing basis, 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 balance sheet consist of the following:

 

 

Leases

 

Classification on the Balance Sheet

 

June 30,

2019

 

Assets

 

Operating lease ROU assets

 

Right-of-use asset

 

$

1,208,613

 

Finance lease ROU assets

 

Property, land and equipment, net

 

$

150,966

 

Liabilities

 

Current

 

Operating

 

Operating leases payable – short term

 

$

254,845

 

Finance

 

Finance leases payable – short term

 

$

45,688

 

Noncurrent

 

Operating

 

Operating leases payable – net of current portion

 

$

1,000,193

 

Finance

 

Finance leases payable – net of current portion

 

$

89,656

 

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 June 30, 2019 are:

 

 

 

June 30,

2019

 

Weighted average remaining lease term

 

55.3 months

 

Weighted average discount rate

 

 

5.63%

 

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 June 30, 2019

 

 

Six Months Ended June 30, 2019

 

 

 

 

 

 

 

 

Operating lease cost:

 

 

 

 

 

 

Operating lease cost

 

$51,927

 

 

$89,432

 

Finance lease cost:

 

 

 

 

 

 

 

 

Amortization of ROU assets

 

 

8,227

 

 

 

21,449

 

Interest expense

 

 

1,759

 

 

 

3,650

 

Total lease cost

 

$61,913

 

 

$114,531

 

 

Supplemental disclosures of cash flow information related to leases for the six months ended June 30, 2019 were as follows:

 

Cash paid for operating lease obligations was $52,633. Operating lease asset obtained for operating lease obligation was $1,277,143.

 

 
15
 
Table of Contents

 

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 June 30, 2019:

 

July 1, 2019 through December 31, 2019

 

$156,558

 

2020

 

 

313,115

 

2021

 

 

313,115

 

2022

 

 

287,448

 

2023

 

 

236,115

 

2024

 

 

118,058

 

Total undiscounted future minimum lease payments

 

 

1,424,408

 

Less: Imputed interest

 

 

169,370

 

Present value of operating lease obligations

 

$1,255,038

 

 

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. The lease on our facility in Texas expired in February 2019. In May 2019, we entered into a new lease for a new Texas facility that commenced on May 1, 2019 and recorded a right of use asset and corresponding lease liability in the second quarter of 2019. This Texas facility lease calls for payments until expiration in 2024 totaling $576,180. The annual payments are $57,618 for the year 2019, $236,115 for each of the years 2020, 2021, 2022 and 2023 and $57,618 for the year 2024. Our Ohio facility calls for lease payments until expiration totaling $243,833. The annual payments are $77,000 for each of the years 2019, 2020 and 2021 and $57,750 for 2022. Lease expense was $54,883 for the six months ended June 30, 2018. Lease expense was $29,208 for the three months ended June 30, 2018. Lease expense for the six months ended June 30, 2019 includes $14,133 related to month to month lease expense in the Texas facility prior to commencement of the new agreement on May 1, 2019 as noted above.

 

Finance and Capital Leases

 

The below chart shows our obligations under finance and capital leases:

 

 

 

Finance Leases

June 30,

2019

 

 

Capital Leases

December 31,

2018

 

Obligations under finance and capital leases

 

$135,344

 

 

$156,793

 

Less: current portion

 

 

45,688

 

 

 

43,435

 

Long-term portion

 

$89,656

 

 

$113,358

 

 

 
16
 
Table of Contents

 

Future minimum repayments

 

The table below presents the future minimum repayments of finance lease obligations for the Company as of June 30, 2019:

 

Years ending December 31,

 

Finance lease obligations

as of

June 30,

2019

 

2019 (remaining six months)

 

$25,098

 

2020

 

 

50,200

 

2021

 

 

48,880

 

2022

 

 

21,397

 

Total future minimum repayments inclusive of interest

 

 

145,575

 

Interest

 

 

10,231

 

Total principal repayments

 

$135,344

 

 

The Company entered into a finance lease for a forklift effective July 1, 2019. The lease runs for 49 months with an interest rate of 5.5% and a monthly payment of $399. Total payments will equal $19,534.

 

The table below presents the future minimum repayments of capital lease obligations for the Company as of December 31, 2018:

 

Years ending December 31,

 

Capital lease

obligations as of

December 31,

2018

 

2019

 

$50,199

 

2020

 

 

50,199

 

2021

 

 

48,878

 

2022

 

 

21,396

 

Total future minimum repayments inclusive of interest

 

 

170,672

 

Interest

 

 

13,879

 

Total principal repayments

 

$156,793

 

 

The Company’s weighted average remaining lease term and weighted average discount rate for finance leases as of June 30, 2019 are:

 

 

 

June 30,

2019

 

Weighted average remaining lease term

 

35 months

 

Weighted average discount rate

 

 

4.93%

 

 
17
 
Table of Contents
 

7. LONG-TERM DEBT AND LINE OF CREDIT

 

Summit Bridge Loans

 

On August, 17, 2017, PMAL purchased substantially all of the assets of Prime Metals for $9.6 million in cash. 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 Summit Loans, PMAL issued to SBN, the SBN Membership Interests. On August 31, 2018, PMAL fully repaid the Summit Loans.

 

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.

 

The Company guaranteed payment of the Summit Loans pursuant to a Guaranty Agreement made by the Company as of August 17, 2017.

 

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 required PMAL to meet pre-established financial ratios.

 

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. 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.

 

 
18
 
Table of Contents

 

The following table shows the value of the non-controlling interests (“NCI”) for the six-month period ending June 30, 2019:

 

Value of NCI at December 31, 2018

 

$757,778

 

PMAL Income from January 1, 2019 to June 30, 2019 attributable to NCI

 

 

313,951

 

Value of NCI at June 30, 2019

 

$1,071,729

 

 

The following table shows the value of the non-controlling interests (“NCI”) for the three-month period ending June 30, 2019:

 

Value of NCI at March 31, 2019

 

$927,071

 

PMAL Income from April 1, 2019 to June 30, 2019 attributable to NCI

 

 

144,658

 

Value of NCI at June 30, 2019

 

$1,071,729

 

 

The following table shows the change in the value of the NCI for the six-month period ending of June 30, 2018:

 

Value of NCI at December 31, 2017

 

$453,377

 

PMAL Income from January 1, 2018 to June 30, 2018 attributable to NCI

 

 

364,293

 

Value of NCI at June 30, 2018

 

$817,670

 

 

The following table shows the value of the non-controlling interests (“NCI”) for the three-month period ending June 30, 2018:

 

Value of NCI at March 31, 2018

 

$651,114

 

PMAL Income from April 1, 2018 to June 30, 2018 attributable to NCI

 

 

166,556

 

Value of NCI at June 30, 2018

 

$817,670

 

 

 
19
 
Table of Contents

 

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 $3.3 million on June 30, 2019 of which the Company had drawn $745,431.

 

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.

 

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 5.69% at June 30, 2019. Berkshire Term Loan A and Berkshire Term Loan B bear interest at ICE LIBOR rate plus 4.25%, which was 6.69% at June 30, 2019.

 

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.

 

 
20
 
Table of Contents

 

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 $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 June 30, 2019, 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 June 30, 2019.

 

Years ending December 31,

 

Term Loans Minimum Amortization

 

2019 (remaining six months)

 

300,000

 

2020

 

 

600,000

 

2021

 

 

3,650,000

 

Total

 

 

4,550,000

 

Unamortized debt and financing cost

 

 

145,170

 

Total (net of unamortized debt and financing cost)

 

$4,404,830

 

 

As of June 30, 2019, the principal balance of Term Loan A was $3,125,000 and the principal balance of Term Loan B was $1,425,000. As of December 31, 2018, the principal balance of Term Loan A was $3,375,000 and the principal balance of Term Loan B was $1,475,000. The total amount of unamortized debt financing cost was $145,170 and $180,010 at June 30, 2019 and December 31, 2018, respectively.

 

8. COMMITMENTS AND CONTINGENCIES

 

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.

 

 
21
 
Table of Contents

 

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. 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 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 will be $1,750,000.

 

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 December, 31, 2018, the Company had accrued $103,000 in bonus for Mssrs. Wachter and Golden. On March 25, 2019, the Board authorized the payment of these bonuses to be in cash and the bonuses were paid on April 12, 2019.

 

For the six months ended June 30, 2019, the Company accrued an additional $177,000 for bonuses. At June 30, 2019, the Company had accrued $177,000 for bonuses to executives.

 

In addition, the Company issued 625 shares to both Mr. Lamb and Mr. Garruto at the conclusion of their first year of service on the Board of Directors on December 31, 2018 pursuant to their independent director agreements, valued at $25,000 each. On December 21, 2018, Mssrs. Lamb and Garruto were re-elected to the Board for an additional 1-year term. At the end of the 2019 term, they will each receive $25,000 in stock.

 

9. SEGMENT RESULTS

 

The Company manages its operations in two 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.

 

Segment information for the six months ended June 30, 2019 is as follows:

 

 

 

CAS

 

 

PMAL

 

Net revenue

 

$8,494,047

 

 

$15,568,280

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

6,985,022

 

 

 

12,184,427

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

1,509,025

 

 

 

3,383,853

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

General and administrative expenses

 

 

958,673

 

 

 

1,443,026

 

Professional and consulting fees

 

 

38,926

 

 

 

130,986

 

Total operating expenses

 

 

997,599

 

 

 

1,574,012

 

 

 

 

 

 

 

 

 

 

Income before other income (expense)

 

$511,426

 

 

$1,809,841

 

 

 
22
 
Table of Contents
 

Below is the Segment reconciliation to total net income

 

Income from segments above

 

$2,321,267

 

 

 

 

 

 

Non-allocated expenses

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(240,430)

General and administrative expenses

 

 

(267,727)

Professional and consulting fees

 

 

(20,792)

Total non-allocated expenses

 

 

(528,949)

 

 

 

 

 

Income before provision for income taxes

 

$1,792,318

 

 

Segment information for the three months ended June 30, 2019 is as follows:

 

 

 

CAS

 

 

PMAL

 

Net revenue

 

$4,176,218

 

 

$7,381,141

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

3,469,766

 

 

 

5,783,306

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

706,452

 

 

 

1,597,835

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

General and administrative expenses

 

 

492,228

 

 

 

714,291

 

Professional and consulting fees

 

 

26,559

 

 

 

41,784

 

Total operating expenses

 

 

518,787

 

 

 

756,075

 

 

 

 

 

 

 

 

 

 

Income before other income (expense)

 

$187,665

 

 

$841,760

 

 

Below is the Segment reconciliation to total net income

 

Income from segments above

 

$1,029,425

 

 

 

 

 

 

Non-allocated expenses

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(118,635)

General and administrative expenses

 

 

(132,246)

Professional and consulting fees

 

 

(12,794)

Total non-allocated expenses

 

 

(263,675)

 

 

 

 

 

Income before provision for income taxes

 

$765,750

 

 

Segment information for the six months ended June 30, 2018 is as follows:

 

 

 

CAS

 

 

PMAL

 

Net Revenue

 

$5,199,535

 

 

$16,814,146

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

4,100,740

 

 

 

13,790,715

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

1,098,795

 

 

 

3,023,431

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

General and administrative expenses

 

 

850,623

 

 

 

1,018,912

 

Professional and consulting fees

 

 

40,677

 

 

 

104,584

 

Total operating expenses

 

 

891,300

 

 

 

1,123,496

 

 

 

 

 

 

 

 

 

 

Income before other income (expense)

 

$207,495

 

 

$1,899,935

 

 

 
23
 
Table of Contents
 

Below is the Segment reconciliation to total net income

 

Income from segments above

 

$2,107,430

 

 

 

 

 

 

Non-allocated expenses

 

 

 

 

Interest expense

 

 

(728,925)

General and administrative expenses

 

 

(259,295)

Other income (expense)

 

 

288,596

 

Total non-allocated expenses

 

 

(699,624)

 

 

 

 

 

Income before

 

$1,407,806

 

provision for income taxes

 

 

 

 

 

Segment information for the three months ended June 30, 2018 is as follows:

 

 

 

 

 

 

 

 

 

 

CAS

 

 

PMAL

 

Net Revenue

 

$2,719,570

 

 

$8,591,327

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

2,131,684

 

 

 

7,344,231

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

587,886

 

 

 

1,247,096

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

General and administrative expenses

 

 

466,970

 

 

 

508,256

 

Professional and consulting fees

 

 

16,697

 

 

 

(16,314)

Total operating expenses

 

 

483,667

 

 

 

491,942

 

 

 

 

 

 

 

 

 

 

Income before other income (expense)

 

$

104,219

 

 

$

755,154

 

 

Below is the Segment reconciliation to total net income

 

Income from segments above

 

$859,373

 

 

 

 

 

 

Non-allocated expenses

 

 

 

 

 

 

 

 

 

Interest expense - net

 

 

(363,774)

General and administrative expenses

 

 

(86,253)

Professional and consulting fees

 

 

(36,452)

Other income

 

 

278,244

 

Total

 

 

(171,783)

 

 

 

 

 

Income before provision for income taxes

 

$651,138

 

 

Segment asset information for the Company is as follows:

 

 

 

June 30,

2019

 

 

December 31,

2018

 

PMAL assets

 

$14,221,255

 

 

$12,982,588

 

CAS assets

 

 

6,789,307

 

 

 

4,526,530

 

Corporate assets

 

 

91,365

 

 

 

763,121

 

Total assets

 

$21,101,927

 

 

$18,272,239

 

 

 
24
 
Table of Contents
 

10. 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. For 2018, our current effective tax rate is lower than the Federal and state effect rate primarily to the release of a portion of the valuation allowance.

 

Tax information for the six-months ended June 30, 2019 and 2018 is as follows:

 

 

 

For the six months

ended June 30,

 

 

 

2019

 

 

2018

 

 

 

 

 

 

 

 

Current income tax

 

 

 

 

 

 

Federal

 

$-

 

 

$-

 

State

 

 

95,793

 

 

 

131,557

 

City

 

 

-

 

 

 

-

 

Total current income tax

 

$95,793

 

 

$131,557

 

 

 

 

 

 

 

 

 

 

Deferred income tax

 

 

 

 

 

 

 

 

Federal

 

$329,154

 

 

$-

 

State

 

 

36,573

 

 

 

-

 

City

 

 

-

 

 

 

-

 

Total deferred income tax

 

$365,727

 

 

$-

 

 

 

 

 

 

 

 

 

 

Total income tax expense

 

$461,520

 

 

$131,557

 

 

The Company’s deferred tax assets and liability relates mainly to a temporary timing difference in long-term assets. 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 taken or expected to be taken in a tax return that should have been recorded in the Company’s unaudited condensed consolidated financial statements for the six months ended June 30, 2019 or 2018. Additionally, there were no interest or penalties outstanding as of or for each of the six months ended June 30, 2019 and 2018.

 

The federal and state tax returns for the years ending December 31, 2015, 2016, and 2017 have been filed, but are still open to examination. Federal and state tax returns for the year ending December 31, 2018 have not been filed.

 

 
25
 
Table of Contents

  

11. SUBSEQUENT EVENTS

 

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.

 

Borrowings under the CAS Revolving Loan bear interest at a rate equal to the ICE LIBOR rate plus 3.00%.

 

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, commencing with the fiscal quarter ending September 30, 2019, CAS 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, 2019, CAS shall maintain a tangible net worth of no less than $1.5 million. The tangible net worth amount required shall increase annually on each June 30 by 50% of CAS’s prior years undistributed net income.

 

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.

 

Effective July 1, 2019, the Company and SBN entered into a Membership Interest Redemption Agreement (the “Redemption Agreement”) pursuant to which the Company will purchase the remaining SBN Membership Interests from SBN for a purchase price of $3,000,000.

 

 
26
 
Table of Contents

 

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, 2018 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 six months ended June 30, 2019 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.

 

 
27
 
Table of Contents
 

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.

 

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 June 30, 2019, Remelt Sources, Inc., Universal Stainless & Alloy Products, PACCAR, Eastham Forge and Drive Automotive receivables were 17.8%, 13.4%, 11.9%, 11.2% and 10.2% of total receivables, respectively. At December 31, 2018, Remelt Sources, Inc., AMG-Vanadium, PACCAR, and Universal Stainless & Alloy Products receivables were 20.9%, 15.0%, 14.0%, and 13.0% of total receivables, respectively.

 

For the six-month period ending June 30, 2019, Remelt Sources, Inc., AMG-Vanadium, PACCAR and Universal Stainless & Alloy Products accounted for 20.3%, 17.0%, 15.6%, and 12.0% of sales, respectively. For the three-month period ending June 30, 2019, Remelt Sources, Inc., AMG-Vanadium, PACCAR and Universal Stainless & Alloy Products accounted for 21.8%, 15.7%, 16.2%, and 10.8% of sales, respectively. For the six-month period ending June 30, 2018, Remelt Sources, Inc., AMG-Vanadium, Ametek, PACCAR and Universal Stainless & Alloy Products accounted for 19.5%, 16.4%, 15.1%, 13.7% and 12.5% of sales, respectively. For the three-month period ending June 30, 2018, Remelt Sources, Inc., Ametek, AMG-Vanadium, PACCAR and Universal Stainless & Alloy Products accounted for 21.1%, 18.7%, 14.2%, 14.1% and 11.4% of sales, respectively.

 

For the six-month period ending June 30, 2019, no supplier represented more than 10% of purchases. For the three-month period ending June 30, 2019, no supplier represented more than 10% of purchases. For the six-month period ending June 30, 2018, no supplier represented more than 10% of purchases. For the three-month period ending June 30, 2018, no supplier represented more than 10% of purchases. At June 30, 2019, AVK represented approximately 16.9% of accounts payable. At December 31, 2018, AVK represented approximately 11.8% of accounts payable.

 

 
28
 
Table of Contents

 

Results from Operations for six months ending June 30, 2019 vs June 30, 2018

 

The Company’s revenues increased 9.3% or $2,048,646 for the six months ended June 30, 2019 to $24,062,327 from $22,013,681 in the comparable period last year. The primary driver of the increase in sales was increased revenue at our distribution subsidiary. PMAL is our sole manufacturing subsidiary and had $15,568,280 in revenue for the six months ended June 30, 2019. PMAL revenue was down $1,245,866 or 7.4% for the six months ended June 30, 2019 versus June 30, 2018 as we eliminated low margin business. Our distribution subsidiary was up $3,294,512 or 63.4% in revenue for the six months ended June 30, 2019 versus June 30, 2018 due to the pick-up in existing customer activity and the addition of new customers.

 

The Company’s gross profit increased approximately 18.7% or $770,652 for the six months ended June 30, 2019 to $4,892,878 from $4,122,226 in the comparable period last year. From time to time the Company will experience margin mix that will lead to temporarily higher or lower gross profit. For the six months ended June 30, 2019, gross profit at our distribution subsidiary increased by $410,230 or approximately 37.3% versus 2018 year to date. At our manufacturing subsidiary, our gross profit contribution accounted for approximately 69.2% of the Company’s total gross profit and has a margin of approximately 21.7%.

 

The Company’s total operating expenses increased 25.8% or $586,039 for the six months ended June 30, 2019 to $2,860,130 from $2,274,091 in the comparable period last year primarily due to increasing sales at the Company.

 

The Company’s accounts receivable have increased by $1,920,251 to $5,721,417 at June 30, 2019 from $3,801,166 at December 31, 2018; this difference is due to mainly to an increase in sales. The Company’s inventory increased by $255,212 from December 31, 2018 to June 30, 2019 due to normal variations in delivery schedules and to support increased sales. The Company expects to see relatively stable inventory levels in both subsidiaries in the short to medium term.

 

Results from Operations for three months ending June 30, 2019 vs June 30, 2018

 

The Company’s revenues increased 2.2% or $246,462 for the three months ended June 30, 2019 to $11,557,359 from $11,310,897 in the comparable period last year. PMAL, our sole manufacturing subsidiary, had $7,381,141 in revenue for the three months ended June 30, 2019. PMAL revenue was down $1,210,186 or 14.1% for the three months ended June 30, 2019 versus June 30, 2018. Our distribution subsidiary was up approximately $1,456,648 or 53.6% in revenue for the three months ended June 30, 2019 versus June 30, 2018 due to the pick-up in existing customer activity and the addition of new customers.

 

The Company’s gross profit increased approximately 25.6% or $469,305 for the three months ended June 30, 2019 to $2,304,287 from $1,834,982 in the comparable period last year. For the three months ended June 30, 2019, gross profit at our distribution subsidiary increased by $118,566 or approximately 20.2% versus the comparable period last year. For the three months ended June 30, 2019, gross profit at our manufacturing subsidiary increased by $350,739 or approximately 28.1% versus the comparable period last year due to better margin mix with our customer base.

 

The Company’s total operating expenses increased 29.3% or $321,588 for the three months June 30, 2019 to $1,419,902 from $1,098,314 from in the comparable period last year primarily due to increasing sales at the Company and in anticipation of increased sales.

  

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. The Company’s PMAL subsidiary has the ability to borrow under its revolving credit facility with Berkshire Bank. In addition, the Company’s CAS subsidiary can utilize borrowings under its new 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.

  

 
29
 
Table of Contents

 

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 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 June 30, 2019 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:

 

·

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 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.

  

 
30
 
Table of Contents

 

PART II

OTHER INFORMATION

 

ITEM 6. EXHIBITS

 

The following exhibits are included herein:

 

Exhibit No.

 

Exhibit

 

31.1

Certification of Chief Executive Officer of the Company required by Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended

 

31.2

 

Certification of Chief Financial Officer of the Company required by Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended

 

32.1

 

Certification of Chief Executive Officer and of the Company required by Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended

 

32.2

Certification of Chief Financial Officer of the Company required by Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended

 

101

 

XBRL Interactive Data Files

 

 
31
 
Table of Contents

 

SIGNATURES

 

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.

 

 

Dated: August 14, 2019

/s/ John Wachter

 

John Wachter

 

Chief Executive Officer

 

 
32
 
Table of Contents

 

EXHIBIT INDEX

 

Exhibit

Number

 

Description

 

31.1

 

Certification of Chief Executive Officer of the Company required by Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended

 

31.2

 

Certification of Chief Financial Officer of the Company required by Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended

 

32.1

 

Certification of Chief Executive Officer of the Company required by Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended

 

32.2

 

Certification of Chief Financial Officer of the Company required by Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended

 

101

 

XBRL Interactive Data Files

 

33