CRAWFORD UNITED Corp - Quarter Report: 2012 June (Form 10-Q)

Item 1.  Financial Statements.

See Notes to Consolidated Financial Statements
 

Note:  Amounts derived from audited financial statements previously filed with the Securities and Exchange Commission.

See Notes to Consolidated Financial Statements

1. Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ended September 30, 2012. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended September 30, 2011.

2. Inventories

Inventories are valued at the lower of cost or market and consist of the following:
 
   

The above amounts are net of reserve for obsolete inventory in the amount of $845,415, $714,000 and $524,476 for the periods ended June 30, 2012, September 30, 2011 and June 30, 2011 respectively.

3. Notes Receivable

The Company has notes receivable with a current and former employee at an interest rate of three percent per annum. The Company does not anticipate repayment within the next twelve months.

4. Convertible Notes Payable

On December 30, 2011, Hickok Incorporated entered into a Convertible Loan Agreement with Roundball, LLC and the Aplin Family Trust. Under the Convertible Loan Agreement, the Company issued a convertible note to Roundball in the amount of $466,879.87 and a convertible note to the Aplin Family Trust in the amount of $208,591.20. In addition, Roundball, LLC shall have the right to cause the Company to borrow up to an additional $466,879.88 from Roundball, LLC. The notes are unsecured, bear interest at a rate of 0.20% per annum and will mature on December 30, 2012.

The notes may be converted by the Investors at any time into Class A Common Shares of the Company, at a conversion price of $1.85 per share, although up to no more than 504,735 Conversion Shares for Roundball and no more than 112,752 Conversion Shares for the Aplin Family Trust. The Company has the option to convert the notes at the expiration date, if the investors have not during the course of the agreement. On December 30, 2011, Roundball converted $233,438.55 into Class A Common Shares of the Company.

In addition, the Company sold 20,000 Class B Common Shares currently held in treasury to Roundball at a price of $1.85 per share per a subscription agreement between the Company and Roundball dated December 30, 2011.

5. Long-term Financing

The Company has a credit agreement of $250,000 with one of its major shareholders who is also an employee of the Company. The agreement was to expire in April 2012 but was modified on January 9, 2012 to extend the maturity date to April 2013. Effective October 30, 2012 for the remainder of the agreement, the lender may terminate the agreement with 45 days written notice, but it is at the discretion of the Company to deny the termination notice until April 2013 if it will have a negative effect on the solvency of the Company.

The agreement provides for a revolving credit facility of $250,000 with interest generally equal to three percent per annum plus prime and is unsecured. In addition, the agreement generally allows for borrowing based on an amount equal to eighty percent of eligible accounts receivables or $250,000.

The Company repaid the outstanding balance of $250,000 on the Revolving Credit Agreement with Robert L. Bauman on February 1, 2012. The Company had no outstanding borrowings under this loan facility at June 30, 2012.

Under the Employee Plans there are no options currently available for grant and there are no options outstanding at June 30, 2012.

Under the Company's Key Employees Stock Option Plans (collectively the "Employee Plans"), incentive stock options, in general, are exercisable for up to ten years, at an exercise price of not less than the market price on the date the option is granted. Non-qualified stock options may be granted at such exercise price and such other terms and conditions as the Compensation Committee of the Board of Directors may determine. No options may be granted at a price less than $2.925. Options for 26,850 Class A shares were outstanding at September 30, 2011 and 41,500 shares at June 30, 2011 at prices ranging from $3.125 to $5.00 per share. Options for 26,850 shares at $3.55 per share expired during the three month period ended March 31, 2012. Options for 800 shares at a price of $3.55 per share were canceled during the three month period ended June 30, 2011. Options for 13,850 shares at prices ranging from $3.125 to $3.55 per share expired during the three month period ended December 31, 2010. No other options were granted, exercised, canceled or expired during the three or nine month periods presented under the Employee Plans.

The Company's Outside Directors Stock Option Plans (collectively the "Directors Plans"), provide for the automatic grant of options to purchase up to 38,000 shares of Class A Common Stock to members of the Board of Directors who are not employees of the Company, at the fair market value on the date of grant. Options for 42,000 Class A shares were outstanding at June 30, 2012 (38,000 shares at September 30, 2011 and 38,000 shares at June 30, 2011) at prices ranging from $2.925 to $11.00 per share. Options for 8,000 shares at prices ranging from $2.925 to $11.00 were canceled during the three month period ended June 30, 2011. Options for 7,000 and 5,000 shares were granted under the Directors Plans during each of the three month periods ended March 31, 2012 and March 31, 2011, at a price of $2.925 per share. In addition, options for 3,000 shares expired during the three month periods ended March 31, 2012 and March 31, 2011, at $3.55 and $4.25 per share respectively. All outstanding options under the Directors Plans become fully exercisable on March 8, 2015.

The following is a summary of the range of exercise prices for stock options outstanding and exercisable under the Employee Plans and the Directors Plans at June 30, 2012:

The Company accounts for Share-Based Payments under the modified prospective method for its stock options for both employees and non-employee Directors. Compensation cost for fixed based awards are measured at the grant date, and the Company uses the Black-Scholes option pricing model to determine the fair value estimates for recognizing the cost of employee and director services received in exchange for an award of equity instruments. The Black-Scholes option pricing model requires the use of subjective assumptions which can materially affect the fair value estimates. Employee stock options are immediately exercisable while Director's stock options are exercisable over a three year period. The fair value of stock option grants to Directors is amortized over the three year vesting period. During the three and the nine month periods ended June 30, 2012 and June 30, 2011 respectively $2,841 and $8,547 ; $2,865 and $9,750 was expensed as share-based compensation. The following weighted-average assumptions were used in the option pricing model for the three and nine month periods ended June 30, 2012 and 2011 respectively: a risk free interest rate of 5.5% and 5.5%; an expected life of 10 and 10 years; an expected dividend yield of 0.0% and 0.0%; and a volatility factor of .87 and .75.

7. Recently Issued Accounting Pronouncements

Options to purchase 42,000 shares of common stock during the third quarter and the first nine months of fiscal 2012 at prices ranging from $2.925 to $11.00 per share were outstanding but were not included in the computation of diluted earnings per share because the option's effect was antidilutive or the exercise price was greater than the average market price of the common share.

In addition, conversion rights to purchase 491,304 shares of common stock at a price of $1.85 per share were not included in the computation of diluted earnings per share because the conversion rights of the Convertible Promissory Notes effect was antidilutive.

During the third quarter and the first nine month period of fiscal 2011, options to purchase 64,850 shares of common stock, at prices ranging from $2.925 to $11.00 per share were outstanding but were not included in the computation of diluted earnings per share because the option's effect was antidilutive or the exercise price was greater than the average market price of the common shares.

The Company's three business units have a common management team and infrastructure that offer different products and services. The business units have been aggregated into two reportable segments: 1.) indicators and gauges and 2.) automotive related diagnostic tools and equipment.

Indicators and Gauges
This segment consists of products manufactured and sold primarily to companies in the aircraft and locomotive industry. Within the aircraft market, the primary customers are those companies that manufacture or service business, military and pleasure aircraft. Within the locomotive market, indicators and gauges are sold to both original equipment manufacturers and to operators of railroad equipment.

Automotive Diagnostic Tools and Equipment
This segment consists primarily of products designed and manufactured to support the testing or servicing of automotive systems using electronic means to measure vehicle parameters. These products are sold to OEM's and to the aftermarket using several brand names and a variety of distribution methods. Included in this segment are products used for state required testing of vehicle emissions.   

Information by industry segment is set forth below:
       

All export sales to Australia, Canada, England, Mexico, Taiwan and other foreign countries are made in United States of America Dollars.

10. Commitments and Contingencies

Legal Matters

The Company is the plaintiff in a suit pursuing patent infringement against a competitor in the emissions market. Management believes that it is not currently possible to estimate the impact, if any, that the ultimate resolution of this matter will have on the company's results of operations, financial position or cash flows.

The Company is a named defendant along with numerous other companies in a suit in the State of New York regarding asbestos harm to the plaintiff. The Company has been informed by the plaintiff's attorney that we will be dismissed from the suit.

The Company is a named defendant along with numerous other companies in a suit in the State of Michigan regarding asbestos harm to the plaintiff. The Company has engaged a Michigan attorney to provide representation. The Company believes the suit is without merit and expects it will be able to obtain a dismissal for similar reasons a dismissal is imminent in the New York action.

The Company has evaluated subsequent events through August 3, 2012 which is the date the financial statements were available to be issued, and has determined there were no subsequent events to recognize or disclose in these financial statements.

The Company has determined that it has two reportable segments: 1) indicators and gauges and 2) automotive related diagnostic tools and equipment. The indicators and gauges segment consists of products manufactured and sold primarily to companies in the aircraft and locomotive industry. Within the aircraft market, the primary customers are those companies that manufacture or service business, military and pleasure aircraft. Within the locomotive market, indicators and gauges are sold to original equipment manufacturers, servicers of locomotives and operators of railroad equipment. Revenue in this segment was $537,903 and $372,606 for the third quarter of fiscal 2012 and fiscal 2011, respectively, and $1,268,278 and $907,378 for the first nine months of fiscal 2012 and fiscal 2011, respectively. The increased sales volume in the current year was primarily due to increased orders for military programs.

The automotive diagnostic tools and equipment segment consists primarily of products designed and manufactured to support the testing or servicing of automotive systems using electronic means to measure vehicle parameters. These products are sold to OEM's and to the aftermarket using several brand names and a variety of distribution methods. Included in this segment are products used for state required testing of vehicle emissions. Revenue in this segment was $733,900 and $903,938 for the third quarter of fiscal 2012 and fiscal 2011, respectively, and $2,363,564 and $2,794,705 for the first nine months of fiscal 2012 and fiscal 2011, respectively. The reduced sales volume was due primarily to reduced orders for automotive diagnostic testing equipment for the aftermarket and emissions related products.

Product sales for the quarter ended June 30, 2012 were $1,187,294 versus $1,186,989 for the quarter ended June 30, 2011. Sales of indicator products increased during the current quarter by approximately $176,000 and was volume related and was offset by decreased sales of automotive diagnostic products of approximately $176,000. Within automotive diagnostic products sales of emission products increased by $21,000 and diagnostic products to OEM's and the aftermarket decreased by approximately $131,000 and $66,000 respectively and were volume related. Management continues to be concerned about the current economic conditions in the markets the Company serves. Although the current economic uncertainties make forecasting difficult, product sales are expected to increase slightly during the fourth quarter of the fiscal year. 

Service sales for the quarter ended June 30, 2012 were $84,509 versus $89,555 for the quarter ended June 30, 2011. The decrease was volume related and due primarily to a lower sales volume for chargeable repairs. The current level of service sales related to product repair sales is expected to continue in the fourth quarter of the fiscal year.

Cost of product sold in the third quarter of fiscal 2012 was $739,091 (62.3% of product sales) as compared to $732,777 (61.7% of product sales) in the third quarter of 2011. The dollar and percentage increase in the cost of product sold was due primarily to a change in product mix. Management's strategy of developing lower priced higher volume aftermarket products was developed in 2010 in response to a recognition that this was likely to occur due to economic and market conditions. The current cost of product sold percentage is expected to decrease slightly during the fourth quarter of the fiscal year due to an anticipated change in product mix.

Cost of service sold for the quarter ended June 30, 2012 was $53,523 (63.3% of service sales) as compared to $59,868 (66.9% of service sales) in the quarter ended June 30, 2011. The dollar decrease was due primarily to the lower sales volume in the current quarter. The current cost of services sold percentage is anticipated to continue in the fourth quarter of the fiscal year. 

Marketing and administrative expenses were $419,022 (32.9% of total sales) in the third quarter of fiscal 2012 versus $381,611 (29.9% of total sales) for the same period a year ago. The dollar increase in expenses for the current fiscal quarter was due to the addition of a marketing resource, additional promotion and a small wage increase for existing employees effective in February and March 2012. Marketing expenses were approximately $183,000 in the third quarter of fiscal 2012 versus $165,000 for the same period a year ago. Within marketing expenses, labor costs, outside consulting, commissions, royalties, promotion and travel expenses increased by approximately $18,000, $3,000, $2,000, $2,000, $2,000 and $1,000 respectively. These increases were offset in part by a decrease in advertising expense and credit and collection expense of approximately $8,000 and $1,000 respectively. Administrative expenses were approximately $236,000 in the third quarter of fiscal 2012 versus $216,000 for the same period a year ago. Within administrative expenses, professional fees and labor costs increased approximately $11,000 and $3,000 respectively. The current level of marketing and administrative expenses is expected to continue during the fourth quarter.

Interest expense was $223 in the third quarter of fiscal 2012 which compares with $1,039 in the third quarter of fiscal 2010. Interest expense for the current quarter was due to interest on the convertible promissory notes payable. Interest expense for the prior year third quarter was due primarily to borrowings on the Company's available credit facility and interest paid on vendor accounts. The current level of interest expense is expected to continue for the fourth quarter of the fiscal year.

Other income was $2,571 in the third quarter of fiscal 2012 which compares with $6,007 in the third quarter of fiscal 2011. Other income consists primarily of the proceeds from the sale of scrap metal shavings, purchase discounts and interest income on cash and cash equivalents invested. The decrease is due primarily to a lower level of scrap metal sales during the current quarter of approximately $3,100.

Income taxes in the third quarter of fiscal 2012 and 2011 was $-0-. In the third quarter of fiscal 2012 and 2011 a recovery of income taxes was calculated at an effective tax rate of 37% offset by an increase in the valuation allowance netting to $0.

The net loss in the third quarter of fiscal 2012 was $170,975 which compares with a net loss of $125,949 in fiscal 2011. The net loss increase for the current quarter was the result of a lower sales volume, product mix and increased marketing and administrative expenses.

Unshipped customer orders as of June 30, 2012 were $574,000 versus $600,000 at June 30, 2011. The decrease was due primarily to decreased orders in automotive diagnostic products of $69,000, specifically, $158,000 for emissions products, $49,000 for aftermarket products offset in part by an increase of $138,000 for OEM products. In addition, indicators and gauges increased by approximately $43,000. The Company estimates that approximately 84% of the current backlog will be shipped in the last quarter of fiscal 2012.  

Product sales for the nine months ended June 30, 2012 were $3,367,985 versus $3,393,998 for the same period in fiscal 2011. The decrease in product sales during the first nine months of the current fiscal year of approximately $26,000 was volume related due to decreased sales of automotive diagnostic products. Sales of indicator products increased during the first nine months of the current fiscal year by approximately $380,000 and was volume related and was offset by decreased sales of automotive diagnostic products of approximately $406,000. Within automotive diagnostic products sales of emission products decreased by $199,000 and diagnostic products to OEM's and the aftermarket decreased by approximately $110,000 and $97,000 respectively and were volume related. Management anticipates product sales for the fourth quarter of the fiscal year to increase slightly. 

Service sales for the nine months ended June 30, 2012 were $263,857 compared with $308,085 for the same period in fiscal 2011. The decrease was volume related and due primarily to a lower sales volume for chargeable repairs. The current level of service sales related to product repair sales is expected to continue in the last three months of the fiscal year.

Cost of product sold was $2,179,037 (64.7% of product sales) compared with $2,029,511 (59.8% of product sales) for the nine months ended June 30, 2011. The percentage increase in the cost of product sold was due primarily to a lower sales volume, lower plant utilization and a change in product mix. Management's strategy of developing lower priced higher volume aftermarket products was developed in 2010 in response to a recognition that this was likely to occur due to economic and market conditions. The current cost of product sold percentage is expected to decrease slightly during the fourth quarter of the fiscal year due to an anticipated change in product mix.

Cost of service sold was $178,223 (67.5% of service sales) compared with $213,330 (69.2% of service sales) for the nine months ended June 30, 2011. The dollar and percentage increase was due primarily to the lower sales volume. The cost of services sold percentage is expected to continue in the fourth quarter of the fiscal year.

Product development expenses were $706,720 (21.0% of product sales) compared to $755,207 (22.3% of product sales) for the nine months ended June 30, 2011. The percentage and dollar decrease was due primarily to lower engineering expenses during the first nine months of the fiscal year. During the current nine month period labor costs and research and experimental material expenses declined by approximately $41,000 and $9,000 respectively. The current level of product development expenditures is expected to increase slightly for the fourth quarter of the fiscal year due to a plan to add a temporary resource and the small wage increases for existing employees effective February 2012. Management believes the existing and planned resources will be sufficient to continue to develop identified new products for both OEM and Aftermarket customers.

Marketing and administrative expenses were $1,154,298 for the nine months ended June 30, 2012 (31.8% of total sales) versus $1,370,617 (37.0% of total sales) for the nine months ended June 30, 2011. The percentage and dollar decrease during the first nine months of the current fiscal year was due primarily to the cost reductions implemented in fiscal 2011. Marketing expenses were approximately $465,000 during the first nine months of the current fiscal year versus $581,000 for the same period a year ago. Within marketing expenses, decreases were primarily in labor costs, travel expenses, advertising expense, royalties, credit and collection expense, commissions and industry association dues of approximately $41,000, $26,000, $16,000, $12,000, $9,000, $3,000 and $3,000 respectively. These decreases were offset in part by an increase in outside consulting expense of approximately $3,000. Administrative expenses were approximately $689,000 during the first nine months of the current fiscal year versus $789,000 for the same period a year ago. The dollar decrease during the first nine months of the current fiscal year was due primarily to decreases in labor costs, directors fees and professional fees of approximately $74,000, $20,000 and $5,000 respectively. The current level of marketing and administrative expenses are expected to increase slightly for the remainder of the fiscal year due to the addition of a marketing resource, additional promotion and the small wage increase for existing employees. These increases became effective in February and March of the current fiscal year.

Interest expense was $5,784 for the nine months ended June 30, 2012, and $1,039 for the same period in 2011. The increase during the current nine months was due primarily to borrowings on the Company's available credit facility. Effective April 2011 the Company obtained a limited unsecured line of credit. Interest expense is expected to continue at the third quarter level during the fourth quarter of the fiscal year due to no anticipated borrowing requirements.

Other income of $13,324 compares with other income of $10,009 in the same period last year. Other income consists primarily of the proceeds from the sale of scrap metal shavings, purchase discounts and interest income on cash and cash equivalents invested. The increase is due primarily to the gain on the sale of a company vehicle of approximately $3,500 during the current period. The current level of other income is expected to decrease for the remainder of fiscal 2012.

Income taxes during the first nine months of fiscal 2012 were $0 which compares with income taxes of $0 in the first nine months of fiscal 2011. In fiscal 2012 and 2011 a recovery of income taxes was calculated at an effective tax rate of 37% offset by an increase in the valuation allowance netting to $0. 

Total current assets were $2,853,421, $3,016,871 and $2,958,909 at June 30, 2012, September 30, 2011 and June 30, 2011, respectively. The decrease of approximately $105,000 from June to June is due primarily to a decrease in accounts receivable, inventory and prepaid expenses of approximately $196,000, $369,000 and $23,000 respectively, offset in part by an increase in cash and cash equivalents of approximately $480,000. The increase in cash and cash equivalents was due primarily to the issuance of convertible promissory notes in December 2011. Accounts receivable decreased due primarily to a lower sales volume during the current quarter. The decrease in inventory was due primarily to a higher obsolescence reserve level during the period. The decrease from September 2011 to June 2012 of approximately $163,000 is due primarily to the decrease in accounts receivable, inventory and prepaid expenses of $257,000, $209,000 and $14,000 respectively, offset in part by an increase in cash and cash equivalents of approximately $317,000. Accounts receivable decreased due primarily to a lower sales volume during the current quarter. The increase in cash and cash equivalents was due primarily to the issuance of convertible promissory notes in December 2011.

Working capital as of June 30, 2012 amounted to $1,923,219. This compares to $2,179,908 a year earlier. Current assets were 3.1 times current liabilities compared to 3.8 a year ago. The quick ratio was 1.1 compared to 1.0 a year ago. 

Internally generated funds during the nine months ended June 30, 2012 were a negative $92,247. The primary reason for the negative cash flow from operations was the net loss during the period. The Company anticipates capital expenditures of approximately $50,000 during fiscal 2012 primarily for equipment and tools required to fulfill an anticipated large order for an OEM. The Company believes that cash and cash equivalents together with available short-term financing will provide adequate funding of the Company's working capital needs through the end of fiscal 2012.

Shareholders' equity during the nine months ended June 30, 2012 decreased by $334,146 which was the net loss during the period of $578,896, the issue cost of Convertible Promissory Notes of $34,235, the sale of Class A Conversion shares of $233,438, the sale of Class B Common Shares of $37,000 and $8,547 of share-based compensation expense. 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Market Risk

Item 4. Controls and Procedures.

Item 1. Legal Proceedings.

The Company is the plaintiff in a suit pursuing patent infringement against a competitor in the emissions market. There has been no material developments in this legal proceeding since the filing of Form 10-K for fiscal 2011. Management believes that it is not currently possible to estimate the impact, if any, that the ultimate resolution of the patent infringement matter will have on the Company's results of operations, financial position or cash flows.

The Company is a named defendant along with numerous other companies in a suit in the State of New York regarding asbestos harm to the plaintiff. The Company has been informed by the plaintiff's attorney that we will be dismissed from the suit.

The Company is a named defendant along with numerous other companies in a suit in the State of Michigan regarding asbestos harm to the plaintiff. We have engaged a Michigan attorney to provide representation for us. The Company believes the suit is without merit and expects it will be able to obtain a dismissal for similar reasons a dismissal is imminent in the New York action.

Item 6. Exhibits.

** XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.