CRAWFORD UNITED Corp - Quarter Report: 2013 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, 2013 are not necessarily indicative of the results that may be expected for the year ended September 30, 2013. 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, 2012.

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 $919,676, $851,000 and $845,415 for the periods ended June 30, 2013, September 30, 2012 and June 30, 2012 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

5. Short-term Financing

The Company had a credit agreement of $250,000 with Robert L. Bauman, one of its major shareholders who is also an employee of the Company. The agreement was to expire in April 2013 but was modified on December 31, 2012 to extend the maturity date to December 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 December 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 at 0.24% per annum and is unsecured and includes a three year warrant for 100,000 shares of Class A common stock at a price of $2.50 per share. In addition, the agreement generally allows for borrowing based on an amount equal to eighty percent of eligible accounts receivables or $250,000. During the three month period ended March 31, 2013 the Company borrowed $250,000 against this loan facility and the Company repaid the outstanding balance of $250,000 on the Revolving Credit Agreement with Robert L. Bauman on February 21, 2013. The Company had no outstanding borrowings under this loan facility at June 30, 2013.

In partial consideration for the extension of the revolving credit facility the Company and Bauman entered into a Warrant Agreement, dated December 30, 2012 whereby the Company issued a warrant to Bauman to purchase, at his option, up to 100,000 shares of Class A Common Stock of the Company at an exercise price of $2.50 per share, subject to certain anti-dilution and other adjustments. If not exercised, this warrant will expire on December 30, 2015.

On February 27, 2013, the Company's 2013 Omnibus Equity Plan was approved and adopted by an affirmative vote of a majority of the Company's Class A and Class B Shareholders.

The 2013 Omnibus Plan will provide the Company with the flexibility to grant a variety of share-based awards for covered employees, consultants and Directors. The 2013 Omnibus Plan provides for the grant of the following types of incentive awards: stock options, stock appreciation rights, restricted shares, restricted share units, performance shares and Class A Common Shares. Those who will be eligible for awards under the 2013 Omnibus Plan include employees who provide services to the Company and its affiliates, executive officers, non-employee Directors and consultants designated by the Compensation Committee. The Plan has 150,000 Class A Common Shares reserved for issuance. The Class A Common Shares may be either authorized, but unissued, common shares or treasury shares. No share-based awards have been granted under the 2013 Omnibus Equity Plan as of June 30, 2013.

Under the Company's expired Key Employees Stock Option Plans (collectively the "Employee Plans"), incentive stock options, in general, were 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. Under the expired Employee Plans there are no options currently available for grant and there are no options outstanding at June 30, 2013. Options for 26,850 shares at $3.55 per share expired during the three month period ended March 31, 2012.

The following is a summary of the range of exercise prices for stock options outstanding and exercisable under the expired Directors Plans at June 30, 2013:

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, 2013 and 2012 respectively $1,208 and $5,257; $2,841 and $8,547 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, 2013 and 2012 respectively: a risk free interest rate of 5.0% 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.

On October 11, 2012, the Company's Amended Articles of Incorporation and the Amended Code of Regulations were adopted by an affirmative vote of more than two-thirds of the Company's Class A and Class B Shareholders.

The Amended Articles amend and restate the Current Articles in a number of significant ways and are primarily as follows: increased the number of Class A Shares and Class B Shares from 3,750,000 and 1,000,000 to 10,000,000 and 2,500,000 respectively, and added a class of 1,000,000 Serial Preferred Shares; eliminated par value for for Class A Shares and Class B Shares; updated certain provisions relating to the payment of dividends; removed restrictions on the issuance of additional Class A Shares; clarified the method by which the Company may repurchase its shares; reduced the percentage of shareholder vote required to authorize corporate actions from two-thirds of the voting power to a majority of the voting power; and made other technical or conforming changes.

The Amended Regulations amend and restate the Current Regulations in a number of significant ways and are primarily as follows: updated certain provisions relating to the Company's meetings of shareholders in order to provide more consistency in the regulations regarding the Company's practices in this area; further clarifying the roles of the Company's officers and directors in conducting the Company's business; updated the Company's policy regarding the indemnification of its directors, officers, employees, and others; revised provisions allowing for the Board of Directors to adopt amendments to the Amended Regulations to the extent permitted by Ohio law; and made other technical or conforming changes.

Unissued shares of Class A common stock (958,233 shares) are reserved for the share-for-share conversion rights of the Class B common stock, stock options under the Directors Plans, conversion rights of the Convertible Promissory Note and available warrants.

7. Recently Issued Accounting Pronouncements

Options and warrants to purchase 31,000 and 200,000 shares of common stock respectively during the third quarter and the first nine months of fiscal 2013 at prices ranging from $2.50 to $11.00 per share were outstanding but were not included in the computation of diluted earnings per share because the option's and warrant's effect was antidilutive or the exercise price was greater than the average market price of the common share.

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.

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 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 is pursuing dismissal of the case.

The Company has evaluated subsequent events through August 2, 2013 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 $432,912 and $537,903 for the third quarter of fiscal 2013 and fiscal 2012, respectively, and $1,260,745 and $1,268,278 for the first nine months of fiscal 2013 and fiscal 2012, respectively.

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 $907,019 and $733,900 for the third quarter of fiscal 2013 and fiscal 2012, respectively, and $3,782,427 and $2,363,564 for the first nine months of fiscal 2013 and fiscal 2012, respectively. The increased sales volume was primarily due to the large order from a Tier 1 OEM supplier.

Product sales for the quarter ended June 30, 2013 were $1,270,405 versus $1,187,294 for the quarter ended June 30, 2012. Sales of automotive diagnostic products increased during the current quarter by approximately $189,000 and was volume related and was offset by decreased sales of indicator products of approximately $106,000. Within automotive diagnostic products sales of emission products increased by approximately $198,000, offset in part by a decrease in aftermarket sales of approximately $40,000. Sales of automotive diagnostic products to OEM's increased by approximately $31,000. Management continues to be concerned about the current economic conditions in the markets the Company serves. Product sales are expected to increase slightly during the fourth quarter of the fiscal year. 

Service sales for the quarter ended June 30, 2013 were $69,526 versus $84,509 for the quarter ended June 30, 2012. 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 2013 was $731,058 (57.5% of product sales) as compared to $739,091 (62.3% of product sales) in the third quarter of 2012. The dollar and percentage decrease in the cost of product sold was due primarily to a change in product mix. 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, 2013 was $36,681 (52.8% of service sales) as compared to $53,523 (63.3% of service sales) in the quarter ended June 30, 2012. 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 $453,621 (33.9% of total sales) in the third quarter of fiscal 2013 versus $419,022 (32.9% of total sales) for the same period a year ago. Marketing expenses were approximately $196,000 in the third quarter of fiscal 2013 versus $183,000 for the same period a year ago. Within marketing expenses, advertising expense, commissions, royalties and travel expenses increased by approximately $12,000, $3,000, $2,000 and $2,000 respectively. These increases were offset in part by a decrease in promotion expense and outside consulting of approximately $7,000 and $2,000 respectively. Administrative expenses were approximately $258,000 in the third quarter of fiscal 2013 versus $236,000 for the same period a year ago. Within administrative expenses, professional fees increased approximately $45,000 offset in part by a decrease in repairs and maintenance computer equipment, rent machinery and equipment, travel expense and telephone expense of approximately $11,000, $7,000, $1,800 and $1,700 respectively. The current level of marketing and administrative expenses is expected to continue during the fourth quarter.

Interest expense was $22,750 in the third quarter of fiscal 2013 which compares with $223 in the third quarter of fiscal 2012. Interest expense for the current quarter was due to recording as non-cash interest expense a portion of the present value of the warrants issued in December 2012. Interest expense for the prior year third quarter was due to interest on the convertible promissory notes payable. The current level of interest expense is expected to continue for the fourth quarter of the fiscal year.

Other income was $5,215 in the third quarter of fiscal 2013 which compares with $2,571 in the third quarter of fiscal 2012. 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 a higher level of scrap metal sales during the current quarter of approximately $2,600.

Income taxes in the third quarter of fiscal 2013 and 2012 was $-0-. In the third quarter of fiscal 2013 and 2012 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 2013 was $133,777 which compares with a net loss of $170,975 in fiscal 2012. The net loss decrease for the current quarter was the result of a higher sales volume offset by increased marketing and administrative expenses.

Unshipped customer orders as of June 30, 2013 were $652,000 versus $574,000 at June 30, 2012. The increase was due primarily to increased orders in indicators and gauges of approximately $55,000. In addition, automotive diagnostic products increased by approximately $23,000, specifically, $82,000 for emissions products offset in part by a decrease of $59,000 for OEM products. The Company estimates that approximately 83% of the current backlog will be shipped in the last quarter of fiscal 2013.  

Service sales for the nine months ended June 30, 2013 were $234,080 compared with $263,857 for the same period in fiscal 2012. 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 $2,687,961 (55.9% of product sales) compared with $2,179,037 (64.7% of product sales) for the nine months ended June 30, 2012. The percentage decrease in the cost of product sold was due primarily to a higher sales volume, higher plant utilization and a change in product mix. The change in product mix was largely increased sales of automotive diagnostic testing products to OEM's. The dollar increase is due to the volume increase of product sales during the current nine month period. 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.

Product development expenses were $712,058 (14.8% of product sales) compared to $706,720 (21.0% of product sales) for the nine months ended June 30, 2012. The percentage decrease was due primarily to higher product sales during the current nine months of fiscal 2013. The current level of product development expenditures is expected to continue for the fourth quarter of the fiscal year. 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 $1,339,619 for the nine months ended June 30, 2013 (26.5% of total sales) versus $1,154,298 (31.8% of total sales) for the nine months ended June 30, 2012. The percentage decrease during the first nine months of the current fiscal year was due primarily to the higher level of sales. Marketing expenses were approximately $558,000 during the first nine months of the current fiscal year versus $465,000 for the same period a year ago. Within marketing expenses, increases were primarily in royalty expense, labor costs, advertising expense, commissions and travel expense of approximately $50,000, $28,000, $15,000, $10,000 and $1,000 respectively. These increases were offset in part by decreases in promotion expense, credit and collection expense and outside consulting of approximately $7,000, $3,000 and $1,000 respectively. Administrative expenses were approximately $782,000 during the first nine months of the current fiscal year versus $689,000 for the same period a year ago. The dollar increase during the first nine months of the current fiscal year was due primarily to increases in professional fees and labor costs of approximately $124,000 and $2,000 respectively. These increases were offset in part by decreases in repairs and maintenance computer equipment, rent machinery and equipment, travel expense and depreciation expense of approximately $20,000, $7,000, $2,000 and $1,000 respectively. The current level of marketing and administrative expenses are expected to continue for the remainder of the fiscal year.

Interest expense was $68,428 for the nine months ended June 30, 2013, and $5,784 for the same period in 2012. The increase in interest charges in the current nine month period compared to a year ago was due primarily to recording as non-cash interest expense a portion of the present value of the warrants issued in December 2012. Interest on the line of credit and convertible notes payable declined by approximately $5,264 and $343 respectively. The current level of interest expense is expected to continue for the fourth quarter of the year due to the remaining present value to be recorded as interest expense on the warrants issued in December 2012.

Other income of $8,693 compares with other income of $13,324 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 decrease was due primarily to the gain on the sale of a company vehicle and an increase in the sale of scrap metal shavings of approximately $3,500 and $1,500 respectively during the prior year nine month period. The current level of other income is expected to continue for the fourth quarter of fiscal 2013.

Income taxes during the first nine months of fiscal 2013 was $0 which compares with income taxes of $0 in the first nine months of fiscal 2012. In the first nine months of fiscal 2013 income taxes were recorded at an effective tax rate of 37% offset by deferred taxes, specifically net operating loss carryforwards. In the first nine months of fiscal 2012 recovery of income taxes was calculated at an effective tax rate of 37% offset by a increase in the valuation allowance netting to $0.

Total current assets were $3,126,016, $2,823,971 and $2,853,421 at June 30, 2013, September 30, 2012 and June 30, 2012, respectively. The increase of approximately $272,000 from June to June is due primarily to the increase in cash and cash equivalents, accounts receivable and prepaid expenses of approximately $194,000, $239,000 and $10,000 respectively, offset in part by a decrease in inventory of approximately $171,000. The increase in cash and cash equivalents and accounts receivable combined with the decrease in inventory was due primarily to the increase in the sales volume during the period. The decrease in inventory was due partially to a higher obsolescence reserve level, and in addition management's actions to reduce inventory levels during the period. The increase in current assets from September to June of approximately $302,000 was due primarily to the increase in cash and cash equivalents of approximately $527,000, offset in part by a decrease in inventory and prepaid expenses of approximately $151,000 and $74,000 respectively. The increase in cash and cash equivalents was due primarily to the higher level of sales and the subsequent collection of accounts receivable during the period. The decrease in inventory was due partially to a higher obsolescence reserve level and management's actions to reduce inventory levels during the period.

Working capital as of June 30, 2013 amounted to $2,396,782 as compared with $1,923,219 a year earlier. Current assets were 4.3 times current liabilities compared to 3.1 a year ago. The quick ratio was 2.0 compared to 1.1 a year ago. 

Internally generated funds during the nine months ended June 30, 2013 were $561,552. Capital expenditures during the period were $15,326. The primary reason for the positive cash flow from operations was the net income generated from the large order from a Tier 1 Supplier to an OEM and the decrease in inventory during the period. The Company does not anticipate any material capital expenditures during fiscal 2013. In addition, the Company believes that cash and cash equivalents, together with funds anticipated to be generated by operations in addition to available short-term financing will provide adequate funding of the Company's working capital needs through the end of fiscal 2013.

Shareholders' equity during the nine months ended June 30, 2013 increased by $396,631 which was the net income during the period of $129,458, sale of Class A Conversion shares of $208,591, issuance of Class A Common shares for consulting services of $7,000, share-based compensation expense of $5,257, non-cash interest expense on warrants issued of $68,250 and filing fees for the additional authorized common shares of $21,925.

On October 11, 2012, the Company's Amended Articles of Incorporation and the Amended Code of Regulations were adopted by an affirmative vote of more than two-thirds of the Company's Class A and Class B Shareholders.

The Amended Articles amend and restate the Current Articles in a number of significant ways and are primarily as follows: increased the number of Class A Shares and Class B Shares from 3,750,000 and 1,000,000 to 10,000,000 and 2,500,000 respectively, and added a class of 1,000,000 Serial Preferred Shares; eliminated par value for for Class A Shares and Class B Shares; updated certain provisions relating to the payment of dividends; removed restrictions on the issuance of additional Class A Shares; clarified the method by which the Company may repurchase its shares; reduced the percentage of shareholder vote required to authorize corporate actions from two-thirds of the voting power to a majority of the voting power; and made other technical or conforming changes.

The Amended Regulations amend and restate the Current Regulations in a number of significant ways and are primarily as follows: updated certain provisions relating to the Company's meetings of shareholders in order to provide more consistency in the regulations regarding the Company's practices in this area; further clarifying the roles of the Company's officers and directors in conducting the Company's business; updated the Company's policy regarding the indemnification of its directors, officers, employees, and others; revised provisions allowing for the Board of Directors to adopt amendments to the Amended Regulations to the extent permitted by Ohio law; and made other technical or conforming changes.  

Detailed information related to the two changes approved by shareholders may be found in the 2012 Proxy Statement for the Special Meeting held October 11, 2012 which was filed with the Securities and Exchange Commission on September 14, 2012. 

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. Since the filing of Form 10-K for fiscal 2012 Claims Construction has been completed and the Company believes the rulings were favorable. The Court has scheduled a mediation conference with the defendant in late August 2013. 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 Michigan regarding asbestos harm to the plaintiff. The Company has engaged a Michigan attorney to provide representation. There has been no material developments in this legal proceeding since the filing of Form 10-K for fiscal 2012. The Company believes the suit is without merit and is pursuing dismissal of the case.

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.