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CRAWFORD UNITED Corp - Quarter Report: 2014 March (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q


[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2014

or

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 13(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to ______ .

Commission File No. 0-147

HICKOK INCORPORATED
_____________________________________________________________
(Exact name of registrant as specified in its charter)


Ohio

34-0288470

(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification No.)



10514 Dupont Avenue, Cleveland, Ohio

44108

(Address of principal executive offices)

(Zip Code)



(Registrant's telephone number, including area code)

(216) 541-8060

Indicate by check 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 Regulation 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, or a small reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer [ ]
Accelerated filer  [ ]
Non-accelerated filer   [ ]
Small reporting company [X]


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   No_X_

As of May 9, 2014:  1,163,349 Hickok Incorporated Class A Common Shares and 474,866 Class B Common Shares were outstanding.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

HICKOK INCORPORATED
CONSOLIDATED INCOME STATEMENTS
(Unaudited)



Three months ended
March 31,
Six months ended
March 31,


2014
2013
2014
2013
Net Sales



 Product Sales
$1,057,684
$1,891,252
$2,038,079
$3,538,687
 Service Sales
58,783
73,086
128,630
164,554





    Total Net Sales
1,116,467
1,964,338
2,166,709
3,703,241





Costs and Expenses



 Cost of Product Sold
639,984
1,064,770
1,295,284
1,956,903
 Cost of Service Sold
48,452
43,391
82,556
77,660
 Product Development
253,154
246,098
484,210
477,245
 Marketing and Administrative  Expenses
474,545
468,755
928,542
885,998
 Interest Charges
-
22,823
- 45,678
 Other Income
(2,013)
(930)
(5,941)
(3,478)





  Total Costs and Expenses
1,414,122
1,844,907
2,784,651
3,440,006





Income (Loss) before Provision for Income Taxes
(297,655)
119,431
(617,942)
263,235





Provision for (Recovery of) Income Taxes
-
-
-
-





  Net Income (Loss) $(297,655) $119,431 $(617,942) $263,235





Earnings per Common Share:



Net Income (Loss) $(.18) $.08 $(.38) $.17





Earnings per Common Share Assuming Dilution:



Net Income (Loss) $(.18) $.07 $(.38) $.16





Dividends per Common Share
$-0-
$-0-
$-0-
$-0-





See Notes to Consolidated Financial Statements


HICKOK INCORPORATED
CONSOLIDATED BALANCE SHEET



March 31,
2014
(Unaudited)
September 30,
2013
(Note)
March 31,
2013
(Unaudited)
Assets


Current Assets


Cash and Cash Equivalents
$153,048
$938,852
$883,341
Trade Accounts Receivable-Net
453,384
638,316
727,095
Notes Receivable - Current
-
-
3,600
Inventories
2,020,358
1,589,816
1,480,154
Prepaid Expenses
87,258
32,342
84,596




Total Current Assets
2,714,048
3,199,326
3,178,786








Property, Plant and Equipment


Land
233,479
233,479
233,479
Buildings
1,429,718
1,429,718
1,429,718
Machinery and Equipment
2,466,316
2,388,762
2,378,319






4,129,513
4,051,959
4,041,516




Less: Allowance for Depreciation
3,785,212
3,752,452
3,739,735




Total Property - Net
344,301
299,507
301,781








Other Assets


Notes Receivable - Long-term
4,100
4,100
29,500
Deposits
1,750
1,750
1,750




Total Other Assets
5,850
5,850
31,250




Total Assets
$3,064,199
$3,504,683
$3,511,817




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

See Notes to Consolidated Financial Statements







March 31,
2014
(Unaudited)
September 30,
2013
(Note)
March 31,
2013
(Unaudited)
Liabilities and Stockholders' Equity



Current Liabilities



Short-Term Financing

$-
$-
$-
Convertible Notes Payable

-
-
-
Trade Accounts Payable
416,427
174,236
128,389
Accrued Payroll & Related Expenses
165,476
142,519
154,344
Accrued Expenses
332,987
395,426
383,226
Accrued Taxes Other Than Income
17,689
44,691
21,533
Accrued Income Taxes
-
-
-





Total Current Liabilities

932,579
756,872
687,492










Long-Term Financing

-
-
-





Stockholders' Equity



Class A, no par value; authorized
10,000,000 shares; 1,163,349 shares outstanding (1,163,349 shares outstanding at September 30, 2013 and March 31, 2013) excluding 15,795 shares in treasury

1,261,188
1,261,188
1,261,188





Class B, no par value; authorized
2,500,000 shares; 474,866 shares outstanding (474,866 shares outstanding at September 30, 2013 and March 31, 2013) excluding 667 shares in treasury

474,866
474,866
474,866





Preferred, no par value; authorized
1,000,000 shares; no shares outstanding

-
-
-





Contributed Capital
1,486,931
1,485,180
1,437,264





Retained Earnings
(1,091,365)
(473,423)
(348,993)





Total Stockholders' Equity

2,131,620
2,747,811
2,824,325





Total Liabilities and Stockholders' Equity
$3,064,199
$3,504,683
$3,511,817






HICKOK INCORPORATED
 CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31,
(Unaudited)


2014 2013



Cash Flows from Operating Activities:

Cash received from customers $2,351,641 $3,678,992
Cash paid to suppliers and employees (3,060,392) (3,030,303)
Interest paid - -
Interest received 501
279
Income taxes (paid) refunded - -



Net Cash Provided By (Used In) Operating Activities (708,250) 648,968



Cash Flows from Investing Activities:

Capital expenditures (77,554) (4,000)
Payments received on notes receivable
-
1,500



Net Cash Provided By (Used In) Investing Activities (77,554) (2,500)



Cash Flows from Financing Activities:

Short-term borrowing
-
250,000
Payments on short-term borrowings
-
(250,000)
Cost for additional Authorized shares
-
(21,925)



Net Cash Provided By (Used In) Financing Activities - (21,925)



Net increase (decrease) in cash and cash equivalents (785,804) 624,543



Cash and cash equivalents at beginning of year 938,852 258,798



Cash and cash equivalents at end of second quarter $153,048 $883,341




See Notes to Consolidated Financial Statements


2014 2013



Reconciliation of Net Income (Loss) to Net Cash Provided By (Used In) Operating Activities:




Net Income (Loss) $(617,942) $263,235
Adjustments to reconcile Net Income (Loss) to net cash provided by operating activities:

Depreciation 32,760 51,469
Non-cash share-based compensation expense
1,751
4,049
Non-cash professional service expense
-
7,000
Warrants issued for debt offering
-
45,500
Changes in assets and liabilities:

Decrease (Increase) in accounts receivable 184,932 (24,249)
Decrease (Increase) in inventories (430,542) 254,616
Decrease (Increase) in prepaid expenses (54,916) 39,361
Increase (Decrease) in accounts payable 242,191 (50,446)
Increase (Decrease) in accrued payroll and related expenses 22,957 4,708
Increase (Decrease) in accrued expenses and accrued taxes other than income (89,441) 53,725



Total Adjustments (90,308) 385,733



Net Cash Provided By (Used In) Operating Activities $(708,250) $648,968






Supplemental Schedule of Non-Cash Financing Activities:


   Conversion of convertible notes payable
      to Class A shares
$-
$208,591




HICKOK INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2014


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 month and six month periods ended March 31, 2014 are not necessarily indicative of the results that may be expected for the year ended September 30, 2014. 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, 2013.

2. Inventories

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



March 31,
2014
September 30, 2013
March 31,
2013




Components
$941,852
$852,229
$942,802
Work-in-Process
908,124
590,687
341,766
Finished Product
170,382
146,900
195,586





$2,020,358
$1,589,816
$1,480,154




The above amounts are net of reserve for obsolete inventory in the amount of $828,376, $793,000 and $916,903 for the periods ended March 31, 2014, September 30, 2013 and March 31, 2013 respectively.

3. Notes receivable

The Company has a note receivable with a current 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 and a convertible note to the Aplin Family Trust in the amount of $208,591. In addition, Roundball, LLC had the right to cause the Company to borrow up to an additional $466,880 from Roundball, LLC. The notes were unsecured, bore interest at a rate of 0.20% per annum and were set to mature on December 30, 2012.

The notes were convertible 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 had the option to convert the notes at the expiration date, if the investors had not during the course of the agreement. On December 30, 2011, Roundball converted $233,438 into Class A Common Shares of the Company. In addition, on August 20, 2012 Roundball converted the remaining $233,441 under the Convertible Loan Agreement into Class A Common Shares of the Company.

On December 28, 2012, the Aplin Family Trust converted the $208,591 under the Convertible Loan Agreement into Class A Common Shares of the Company.

On December 30, 2012 management entered into an amended Convertible Loan Agreement with Roundball which provided approximately $467,000 of liquidity to meet on going working capital requirements. The amended Convertible Loan Agreement is by and between the Company and a major shareholder who is also a Director modifying the terms and extending the due date of the loan agreement from December 30, 2012 to December 31, 2013 and modifying the terms to allow $250,000 of borrowing on the agreement at the Company's discretion at an interest rate of 0.24%.

In partial consideration for Amendment No. 1, the Company and Roundball entered into a Warrant Agreement, dated  December 30, 2012, whereby the Company issued a warrant to the Roundball to purchase, at its 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. Roundball is an affiliate of Steven Rosen, a Director of the Company.

The Company used the Black-Scholes option pricing model to determine the fair value estimate for recognizing the cost of 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. The warrants are immediately exercisable and expire in December 2015. The fair value of the warrants issued is amortized over the one year amended convertible loan agreement period. During the three and six month periods ended March 31, 2013, $11,375 and $22,750 was expensed as non-cash interest expense. The following weighted-average assumptions were used in the option pricing model for the three and six month periods ended March 31, 2013: a risk free interest rate of 0.42%; an expected life of 3 years; an expected dividend yield of 0.0%; and a volatility factor of .84.

On December 30, 2013 management entered into Amendment No. 2 of the Convertible Loan Agreement with Roundball which may provide approximately $467,000 of liquidity to meet on going working capital requirements. The amended Convertible Loan Agreement is by and between the Company and a major shareholder who is also a Director modifying the terms and extending the due date of the loan agreement from December 30, 2013 to December 30, 2014 and continues to allow $250,000 of borrowing on the agreement at the Company's discretion at an interest rate of 0.25%.

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 would have had a negative effect on the solvency of the Company.

The agreement provided for a revolving credit facility of $250,000 with interest at 0.24% per annum and was unsecured and included 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 allowed for borrowing based on an amount equal to eighty percent of eligible accounts receivables or $250,000. The Company had no outstanding borrowings under this loan facility at December 31, 2013. The revolving line of credit was not extended.

In partial consideration for the original 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.

The Company used the Black-Scholes option pricing model to determine the fair value estimate for recognizing the cost of 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. The warrants are immediately exercisable and expire in December 2015. The fair value of the warrants issued is amortized over the one year credit agreement period. During the three and six month periods ended March 31, 2013, $11,375 and $22,750 was expensed as non-cash interest expense. The following weighted-average assumptions were used in the option pricing model for the three and six month month periods ended March 31, 2013: a risk free interest rate of 0.42%; an expected life of 3 years; an expected dividend yield of 0.0%; and a volatility factor of .84.

6. Capital Stock, Treasury Stock, Contributed Capital and Stock Options

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 (956,233 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.

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 March 31, 2014.

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 March 31, 2014.

The Company's expired Outside Directors Stock Option Plans (collectively the "Directors Plans"), have provided for the automatic grant of options to purchase up to 29,000 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 29,000 Class A shares were outstanding at March 31, 2014 (31,000 shares at September 30, 2013 and 31,000 shares at March 31, 2013) at prices ranging from $2.925 to $11.00 per share. Options for 2,000 shares expired during the three month period ended March 31, 2014 at $7.25 per share. In addition, options for 2,000 shares expired during the three month period ended March 31, 2013 at $3.67 per share. All outstanding options under the expired 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 expired Directors Plans at March 31, 2014:


Directors Plans
Outstanding Stock Options
Weighted Average
 Share Price
Weighted Average Remaining Life
Number of Stock Options  Exercisable
Weighted Average Share Price
Range of exercise prices:       

$2.925 - 5.25
17,000
$3.34
6.2
14,667
$3.40
$6.00 - 7.25
6,000
$6.15
4.3
6,000
$6.15
$10.50 - 11.00
6,000
$10.75
3.5
6,000
$10.75
 

   


 
29,000
$5.45

26,667
$5.67








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 six month periods ended March 31, 2014 and 2013 respectively $543 and $1,208; $1,751 and $4,049 was expensed as share-based compensation. The following weighted-average assumptions were used in the option pricing model for the three and six month periods ended March 31, 2014 and 2013 respectively: a risk free interest rate of 5.0% and 5.0%; 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 .87.

7. Recently Issued Accounting Pronouncements

The Company did not incur any material impact to its financial condition or results of operations due to the adoption of any new accounting standards during the periods reported.

8. Earnings per Common Share

Earnings per common share information is computed on the weighted average number of shares outstanding during each period based on the provisions of FASB Codification ASC Topic 260, "Earnings per Share." The required reconciliations are as follows:



Three Months Ended
March 31,
Six Months Ended
March 31,


2014
2013
2014
2013
Basic Income (Loss) per Share



Income (Loss) available
to common stockholders
$(297,655)
$119,431
$(617,942)
$263,235





Shares denominator
1,638,215
1,638,215
1,638,215
1,582,776





Per share amount
$(.18)
$.08
$(.38)
$.17





Effect of Dilutive Securities



Average shares outstanding

1,638,215
1,638,215

1,638,215
1,582,776
Stock options
-*
30,044
-*
30,044






1,638,215
1,668,259
1,638,215
1,612,820





Diluted Income (Loss) per Share



Income (Loss) available to common stockholders
$(297,655)
$119,431
$(617,942)
$263,235





Per share amount
$(.18)
$.07
$(.38)
$.16





* Net effect of stock options and warrants were antidilutive for the period.

Options and warrants to purchase 29,000 and 200,000 shares of common stock respectively during the second quarter and the first six months of fiscal 2014 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.

In addition, conversion rights to purchase 252,367 shares of common stock during the second quarter and the first six months of fiscal 2014 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 or the exercise price was greater than the average market price of the common share.

Options and warrants to purchase 31,000 and 200,000 shares of common stock respectively during the second quarter and the first six 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.


9. Segment and Related Information

The Company's four 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:



Three Months Ended
March 31,
Six Months Ended
March 31,


2014
2013
2014
2013
Net Sales



Indicators and Gauges
$346,196
$417,607
$750,601
$827,833
Automotive Diagnostic Tools and Equipment
770,271
1,546,731
1,416,108
2,875,408






$1,116,467
$1,964,338
$2,166,709
$3,703,241





Income (Loss) before provision for Income Taxes



Indicators and Gauges
$23,770
$113,216
$89,404
$224,840
Automotive Diagnostic Tools and Equipment
(14,140)
297,435
(101,210)
604,900
General Corporate
Expenses

(307,285)

(291,220)

(606,136)

(566,505)






$(297,655)
$119,431
$(617,942)
$263,235





Asset Information



Indicators and Gauges

$848,878
$807,464
Automotive Diagnostic Tools and Equipment

1,622,450
1,398,266
Corporate

592,871
1,306,087








$3,064,199
$3,511,817





Geographical Information



Included in the consolidated financial statements are the
following amounts related to geographical locations:





Revenue:



United States
$1,094,458
$1,896,250
$2,098,606
$3,596,685
Australia
-
14,231
24,138
14,231
Canada
10,222
22,644
21,714
50,698
Mexico
7,848
3,488 18,312
10,536
Taiwan
-
22,481
-
22,481
Other foreign countries
3,939
5,244
3,939
8,610






$1,116,467
$1,964,338
$2,166,709
$3,703,241







All export sales to Australia, Canada, 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.

11. Subsequent Events

The Company has analyzed its operations subsequent to March 31, 2014 through the date the financial statements were submitted to the Securities and Exchange Commission and has determined that no subsequent events have occurred that would require recognition in the consolidated financial statements or disclosure in the notes to the consolidated financial statements.

12. Business Condition and Management Plan

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has suffered recurring losses from operations during the past several years due primarily to decreasing sales of existing product lines and a general economic downturn in all markets the Company serves.

The ability of the Company to continue as a going concern is dependent on improving the Company's profitability and cash flow and securing additional financing if needed. Management continues to review and revise its strategic plan and believes in the viability of its strategy to increase revenues and profitability through increased sales of existing products and the introduction of new products to the market place. Management believes that the actions presently being taken by the Company will provide the stimulus for it to continue as a going concern, however, because of the inherent uncertainties there can be no assurances to that effect. These consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

On December 30, 2012 management entered into an amended unsecured convertible loan agreement and an additional revolving line of credit which may provide approximately $717,000 of liquidity to meet on going working capital requirements. One agreement was an unsecured revolving line of credit with a major shareholder who is also an employee and the other was an unsecured convertible loan agreement with a major shareholder who is also a Director as discussed in Notes 4 and 5. These facilities were available through December 2013. The revolving line of credit was not extended.

In addition, on December 30, 2013 management entered into Amendment No. 2 of the unsecured convertible loan agreement which may provide approximately $467,000 of liquidity to meet on going working capital requirements. The agreement is with a major shareholder who is also a Director as discussed in Note 4. This facility is available through December 2014.

The above available financing resource together with management’s revised strategic plan to increase revenues and profitability through increased sales of existing products and the introduction of new products to the market place should provide the Company with the needed working capital for the next twelve months. In addition, in January of 2014 the Company received an order for approximately $1,800,000. The order is expected to cause a short-term cash drain and subsequently provide additional cash reserves as the Company is paid.



Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Results of Operations, Second Quarter (January 1, 2014 through March 31, 2014)
Fiscal 2014 Compared to Second Quarter Fiscal 2013
-----------------------------------------------------------------------------------------

Reportable Segment Information

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 $346,196 and $417,607 for the second quarter of fiscal 2014 and fiscal 2013, respectively and $750,601 and $827,833 for the first six months of fiscal 2014 and fiscal 2013, 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 $770,271 and $1,546,731 for the second quarter of fiscal 2014 and fiscal 2013, respectively, and $1,416,108 and $2,875,408 for the first six months of fiscal 2014 and fiscal 2013, respectively. The higher sales volume in the prior year was primarily due to the large order from a Tier 1 OEM supplier.

Results of Operations

Product sales for the quarter ended March 31, 2014 were $1,057,684 versus $1,891,252 for the quarter ended March 31, 2013. The 44% decrease in product sales during the current quarter of approximately $834,000 was volume related due primarily to decreased sales of automotive diagnostic testing products to OEM's of approximately $599,000. Sales of emission products and aftermarket products decreased by approximately $51,000 and $115,000 respectively. In addition, sales of indicator products decreased by approximately $69,000. Product sales for the quarter ended March 31, 2013 benefited from the large order from a Tier 1 Supplier with no similar order in the quarter ended March 31, 2014. Management continues to be concerned about the current economic conditions in the markets the Company serves. Product sales are expected to increase significantly during the remainder of fiscal 2014 due to the large order received in January and to anticipated improvement in other markets the Company serves.

Service sales for the quarter ended March 31, 2014 were $58,783 versus $73,086 for the quarter ended March 31, 2013. 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 for the balance of the fiscal year.

Cost of product sold in the second quarter of fiscal 2014 was $639,984 (60.5% of product sales) as compared to $1,064,770 (56.3% of product sales) in the second quarter of fiscal 2013. The increase in the cost of product sold percentage was due primarily to reduced plant utilization and a change in product mix. The dollar decrease is due to the volume decrease of product sales during the current quarter. The current cost of product sold percentage is expected to decrease significantly for the balance of the fiscal year due to both increased plant utilization and a change in product mix.

Cost of service sold in the second quarter of fiscal 2014 was $48,452 (82.4% of service sales) as compared to $43,391 (59.4% of service sales) in the second quarter of fiscal 2013. The percentage increase was due primarily to a lower service sales volume and product specifics of chargeable repairs in the current quarter. The current cost of services sold percentage is anticipated to decrease slightly for the balance of the fiscal year.

Product development expenses were $253,154 in the second quarter of fiscal 2014 (23.9% of product sales) as compared to $246,098 (13.0% of product sales) in the second quarter of fiscal 2013. The percentage increase was due primarily to lower product sales during the current quarter. The current level of product development expenses is expected to continue for the balance of the fiscal year. The Company believes the existing resources will be sufficient to continue to develop identified new products for both OEM and Aftermarket customers.

Marketing and administrative expenses were $474,545 (42.5% of total sales) in the second quarter of 2014 versus $468,755 (23.9% of total sales) for the same period a year ago. Marketing expenses were approximately $165,000 in the second quarter of fiscal 2014 versus $199,000 for the same period a year ago. The percentage increase was due primarily to a lower sales volume during the current quarter. Within marketing expenses, royalty expense and commissions decreased by approximately $35,000 and $14,000 respectively. These decreases were offset in part by increases in labor costs, promotion expense, travel expense, credit and collection expense and advertising of approximately $4,000, $4,000, $3,000, $3,000 and $1,000 respectively. Administrative expenses were approximately $309,000 in the second quarter of fiscal 2014 versus $269,000 for the same period a year ago. Within administrative expenses professional fees and labor costs increased by approximately $43,000 and $6,000 respectively, offset in part by a decrease in rent machinery and equipment, depreciation and travel expenses of approximately $5,000, $3,000 and $1,000 respectively. The current level of marketing and administrative expenses are expected to continue for the balance of the fiscal year.

Interest expense was $0 in the second quarter of fiscal 2014 which compares to $22,823 in the second quarter of fiscal 2013. The decrease in interest charges in the current quarter compared to a year ago was due primarily to recording as non-cash interest expense the present value of one fourth of the warrants issued in December 2012 during the prior year second quarter. The current level of interest expense is expected to increase slightly for the remainder of the fiscal year due to expected short-term borrowing during the balance of the year.

Other income was $2,013 in the second quarter of fiscal 2014 which compares with $930 in the second quarter of fiscal 2013. Other income consists primarily of interest income on cash and cash equivalents invested and the proceeds from the sale of scrap metal shavings. The increase is due primarily to a higher level of scrap metal sales of approximately $1,100 during the current quarter.

Income taxes in the second quarter of fiscal 2014 were $0 which compares with income taxes of $0 in the second quarter of fiscal 2013. In the second quarter of fiscal 2014 recovery of income taxes was calculated at an effective tax rate of 37% offset by a increase in the valuation allowance netting to $0. In the second quarter of fiscal 2013 income taxes were recorded at an effective tax rate of 37% offset by deferred taxes, specifically net operating loss carryforwards.

The net loss in the second quarter of fiscal 2014 was $297,655 which compares with net income of $119,431 in the second quarter of fiscal 2013. The net loss in fiscal 2014 was primarily the result of a lower sales volume. The prior year first half benefited from a large order from a Tier 1 supplier to an OEM with no similar order during the current fiscal year.

Unshipped customer orders as of March 31, 2014 were $2,427,000 versus $639,000 at March 31, 2013. The increase was due primarily to increased orders for diagnostic products to automotive OEM's of approximately $1,844,000, offset in part by a decrease in orders for indicator products of approximately $18,000 and emissions products of approximately $38,000. The Company anticipates that most of the current backlog will be shipped in the last half of fiscal 2014. The current order backlog increased substantially due to an order for an automotive diagnostic product of approximately $1,800,000 that will ship in fiscal 2014.

Results of Operations, Six Months Ended March 31, 2014
Compared to Six Months Ended March 31, 2013

Product sales for the six months ended March 31, 2014 were $2,038,079 versus $3,538,687 for the same period in fiscal 2013. The decrease in product sales during the first six months of the current fiscal year of approximately $1,501,000 was volume related due primarily to decreased sales of automotive diagnostic testing products, primarily, automotive diagnostic testing products to OEM's of approximately $1,350,000. Sales of emission products and aftermarket products decreased by approximately $53,000 and $35,000 respectively. In addition, sales of indicator products decreased by approximately $63,000. The decrease in product sales to OEM's is due to the prior year benefiting from the large order for a Tier 1 OEM supplier with no similar order during the current period. Management anticipates product sales for the third and fourth quarter will increase significantly due to the large order received in January.

Service sales for the six months ended March 31, 2014 were $128,630 compared with $164,554 for the same period in fiscal 2013. 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 for the balance of the fiscal year.

Cost of product sold was $1,295,284 or (63.6% of product sales) compared to $1,956,903 (55.3% of product sales) for the six months ended March 31, 2013. 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. The change in mix was largely decreased sales of automotive diagnostic testing products to OEM's. The dollar decrease is due to the volume decrease of product sales during the current period. The current cost of product sold percentage is expected to decrease significantly for the balance of the fiscal year due to both increased plant utilization, improved product mix, and delivery of the large OEM order.

Cost of service sold was $82,556 (64.2% of service sales) compared with $77,660 (47.2% of service sales) for the six months ended March 31, 2013. The dollar and percentage increase was due primarily to lower plant utilization and product specifics of chargeable repairs. The cost of services sold percentage is expected to decrease moderately for the balance of the fiscal year.

Product development expenses were $484,210 (23.8% of product sales) compared to $477,245 (13.5% of product sales) for the six months ended March 31, 2013. The percentage increase was due primarily to lower product sales during the current six months of fiscal 2014. The current level of product development expenditures is expected to continue for the balance 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 $928,542 for the six months ended March 31, 2014 (42.9% of total sales) versus $885,998 (23.9% of total sales) for the six months ended March 31, 2013. The percentage increase was due primarily to the lower level of total sales for the current six months of fiscal 2014. Marketing expenses were approximately $317,000 during the first six months of the current fiscal year as compared to $362,000 for the same period a year ago. Within marketing expenses, decreases were primarily in royalties and commissions of approximately $51,000 and $12,000 respectively. These decreases were offset in part by increases in labor costs, credit and collection expense, travel expenses and advertising of approximately $9,000, $4,000, $2,000 and $3,000 respectively. Administrative expenses were approximately $612,000 during the first six months of the current fiscal year as compared to $524,000 for the same period a year ago. The dollar increase was due primarily to increases in professional fees and labor costs of approximately $99,000 and $11,000 respectively, offset in part by a decrease in rent machinery and equipment, data processing costs, depreciation and travel expenses of approximately $9,000, $5,000, $5,000 and $3,000 respectively. The current level of marketing and administrative expenses are expected to continue for the remainder of the fiscal year.

Interest expense was $0 for the six months ended March 31, 2014, and $45,678 for the same period in 2013. The interest charges in the prior six month period were primarily due to recording as non-cash interest expense a portion of the present value of the warrants issued in December 2012. The current level of interest expense is expected to continue for the continue for the year due to the remainder of the fiscal year.

Other income of $5,941 for the six months ended March 31, 2014 compares with other income of $3,478 in the same period last year. Other income consists primarily of interest income on cash and cash equivalents invested and the proceeds from the sale of scrap metal shavings. The increase is due primarily to a higher level of scrap metal sales of approximately $3,300 during the current year six month period. The current level of other income is expected to decrease for the remainder of fiscal 2014.

Income taxes during the first six months of fiscal 2014 were $0 which compares with income taxes of $0 in the first six months of fiscal 2013. In the first six months of fiscal 2014 recovery of income taxes was calculated at an effective tax rate of 37% offset by a increase in the valuation allowance netting to $0. In the first six months of fiscal 2013 income taxes were recorded at an effective tax rate of 37% offset by deferred taxes, specifically net operating loss carryforwards.

The net loss for the six months ended March 31, 2014 was $617,942 compared with net income of $263,235 for the six months ended March 31, 2013. The net loss for the first half of fiscal 2014 was primarily the result of a lower sales volume.


Liquidity and Capital Resources

Total current assets were $2,714,048, $3,199,326 and $3,178,786 at March 31, 2014, September 30, 2013 and March 31, 2013, respectively. The decrease of approximately $465,000 from March to March was due primarily to the decrease in cash and cash equivalents and accounts receivable of approximately $730,000 and $274,000 respectively, offset by an increase in inventory of approximately $540,000. The decrease in cash and cash equivalents and accounts receivable was due primarily to the decrease in the sales volume during the period. The increase in inventory was due to the purchase of inventory for the large OEM order to be shipped in the third and fourth quarter. The decrease from September to March of approximately $485,000 was due primarily to the decrease in cash and cash equivalents and accounts receivable of approximately $786,000 and $185,000 respectively, offset in part by an increase in inventory and prepaid expenses of approximately $431,000 and $55,000 respectively. The decrease in cash and cash equivalents and accounts receivable was due primarily to the lower level of sales during the period and the purchase of inventory for the large order. The increase in inventory was due to the purchase of inventory for the large OEM order to be shipped in the third and fourth quarter.

Working capital as of March 31, 2014 amounted to $1,781,469 as compared with $2,491,294 a year earlier. Current assets were 2.9 times current liabilities compared to 4.6 a year ago. The quick ratio was .7 compared to 2.3 a year ago.

Internally generated funds during the six months ended March 31, 2014 were a negative $708,250 and were not adequate to fund the Company's primary non-operating cash requirements consisting of capital expenditures of $77,554. The primary reason for the negative cash flow from operations was the net loss during the period of $617,942 and the increase in inventory. The Company does anticipate additional capital expenditures during fiscal 2014 of approximately $70,000. 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.

Shareholders' equity during the six months ended March 31, 2014 decreased by $616,191 which was the net loss during the period of $617,942 and share-based compensation expense of $1,751.

During fiscal 2014 the Company received an order for approximately $1,800,000. The order has required a temporary increase in inventory and has caused a short-term cash drain and will subsequently provide additional cash reserves as the Company is paid. The Company believes that internally generated funds and available short-term financing will provide sufficient liquidity to meet ongoing working capital requirements.

Critical Accounting Policies

Our critical accounting policies are as presented in Notes to Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K for the year ended September 30, 2013.

Forward-Looking Statements

The foregoing discussion includes forward-looking statements relating to the business of the Company. These forward-looking statements, or other statements made by the Company, are made based on management's expectations and beliefs concerning future events impacting the Company and are subject to uncertainties and factors (including, but not limited to, those specified below) which are difficult to predict and, in many instances, are beyond the control of the Company. As a result, actual results of the Company could differ materially from those expressed in or implied by any such forward-looking statements. These uncertainties and factors include (a) the Company's dependence upon a limited number of customers, (b) the highly competitive industry in which the company operates, which includes several competitors with greater financial resources and larger sales organizations, (c) the acceptance in the marketplace of new products and/or services developed or under development by the Company including automotive diagnostic products, fastening systems products and indicating instrument products, (d) the ability of the Company to further establish distribution and a customer base in the automotive aftermarket, (e) the Company's ability to capitalize on market opportunities including state automotive emissions programs and OEM tool programs and (f) the Company's ability to obtain cost effective financing.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Market Risk

The Company is exposed to certain market risks from transactions that are entered into during the normal course of business. The Company has not entered into derivative financial instruments for trading purposes. The Company's primary market risks are exposure related to interest rate risk and equity market fluctuations. The Company's only debt subject to interest rate risk during the current quarter was the funds available from the convertible note agreement. The Company currently has available under the convertible note agreement a credit facility subject to a nominal fixed rate of interest. As a result, the Company believes that the market risk related to interest rate movements is minimal. The Company had no outstanding borrowings under this credit facility at March 31, 2014.

Item 4. Controls and Procedures.

As of March 31, 2014, an evaluation was performed, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer along with the Company's Vice President, Finance and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based upon that evaluation, the Company's management, including the Chief Executive Officer along with the Company's Vice President, Finance and Chief Financial Officer, concluded that the Company's disclosure controls and procedures were effective as of March 31, 2014 in ensuring that information required to be disclosed by the Company in the reports it files and submits under the Exchange Act is (1) recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms, and (2) is accumulated and communicated to the Company's management, including its principal executive and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. There were no changes in the Company's internal controls over financial reporting during the second fiscal quarter ended March 31, 2014 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.


PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

The Company is the plaintiff in a suit pursuing patent infringement against a competitor in the emissions market. There have been several legal developments in this legal proceeding since the filing of Form 10-K for fiscal 2013 however it is still difficult to access the status of the proceedings or probable outcomes. 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.

Item 6. Exhibits.

Exhibit No.

Description



11

Statement Regarding Computation of Earnings Per share and Common Share Equivalents



31.1

Rule 13a-14(a)/15d-14(a) Certification by the Chief Executive Officer



31.2

Rule 13a-14(a)/15d-14(a) Certification by the Chief Financial Officer



32.1

Certification by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002



32.2

Certification by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002



101.INS**
XBRL Instance



101.SCH**
XBRL Taxonomy Extension Schema



101.CAL**
XBRL Taxonomy Extension Calculation



101.DEF**
XBRL Extension Definition



101.LAB**
XBRL Extension Labels



101.PRE**
XBRL Taxonomy Extension Presentation

** 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.

SIGNATURES

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.





HICKOK INCORPORATED
(Registrant)



Date: May 14, 2014
/s/ R. L. Bauman

R. L. Bauman, Chief Executive Officer,
President, and Treasurer




Date: May 14, 2014
/s/ G. M. Zoloty

G. M. Zoloty, Chief Financial Officer