CRAWA 10-Q Quarter ended June 30, 2017

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 June 30 , 201 7

OR

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

For the transition period from Not Applicable to Not Applicable

Commission file number: 0-147

HICKOK INCORPORATED

(Exact name of registrant as specified in its charter)

Registrant's telephone number (216) 541-8060

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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

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

As of July 31, 2017, 2,114,886 shares of Class A Common Stock and 773,616 shares of Class B Common Stock were outstanding.

HICKOK INCORPORATED AND SUBSIDIARIES

See accompanying notes to consolidated financial statements

HICKOK INCORPORATED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

See accompanying notes to consolidated financial statements

HICKOK INCORPORATED AND SUBSIDIARIES

See accompanying notes to consolidated financial statements

HICKOK INCORPORATED AND SUBSIDIARIES

See accompanying notes to consolidated financial statements

HICKOK INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOW (Unaudited)

See accompanying notes to consolidated financial statements

HICKOK INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2017

1. BASIS OF PRESENTATION

During the nine-month period ended June 30, 2017, there have been no changes to our significant accounting policies as determined in our Annual Report on Form 10-K for the fiscal year ended September 30, 2016.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company’s Summary of Significant Accounting Policies is provided with the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2016. The Company completed the acquisition of certain assets of Air Enterprises Acquisition, LLC in Akron, Ohio on June 1, 2017. The acquired business, which will continue to operate under the name Air Enterprises, is an industry leader in designing, manufacturing and installing large-scale commercial, institutional, and industrial custom air handling solutions. The significant accounting policies as a result of the acquisition of this business are disclosed below.

Revenue Recognition:

Revenue from contracts is recognized on the percentage-of-completion method measured by the percentage of costs incurred to date to total estimated costs for each contract. Contract costs include all direct costs and allocations of indirect costs. Provisions for estimated losses on uncompleted contracts are made in the period in which it is determined a loss will be incurred. As long-term contracts extend over one or more years, revisions in costs and profits estimated during the work are reflected in the accounting period in which the facts requiring the changes become known.

Because of the inherent uncertainties in estimating costs, it is at least reasonably possible the estimates of costs and revenue will change in the next year. Revenue earned on contracts in progress in excess of billings are classified as an asset. Amounts billed in excess of revenue earned are classified as a liability. The length of the contracts varies, but is typically three to six months.

Revenue relating to replacement parts is recognized upon the shipment of goods or rendering of services to customers.

Deferred Commissions:

Commissions are earned based on the percentage-of-completion of the contract. Commissions are paid upon receipt of payment for units shipped.

Product Warranties:

3 .  ACCOUNTS RECEIVABLE

The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information. The reserve for doubtful accounts was $117,750 and $10,000 at June 30, 2017 and September 30, 2016.

4.  INVENTORY

The reserve for inventory obsolescence was $561,087 and $235,592 at June 30, 2017 and September 30, 2016, respectively.

5. GOODWILL AND OTHER INTA NGIBLE ASSETS, NET

Intangible assets relate to the purchase of businesses on June 1, 2017 and July 1, 2016. Goodwill is not amortized, but will be reviewed on an annual basis for impairment. Amortization of other intangibles is being amortized on a straight-line basis over period ranging from one year to 15 years. Intangible assets are as follows:

Amortization of other intangibles was:

6.  PROPERTY, PLANT AND EQUPMENT, NET

Property, plant and equipment are recorded at cost and depreciated over their useful lives. Maintenance and repair costs are expenses as incurred. Depreciation expense was:

The Company entered into a Credit Agreement on June 1, 2017 with JPMorgan Chase Bank, N.A. as lender (the “Credit Agreement”). The Credit Agreement is comprised of a revolving facility in the amount of $8,000,000, subject to a borrowing base (determined based on 80% of Eligible Accounts, plus 50% of Eligible Progress Billing Accounts, plus 50% of Eligible Inventory, minus Reserves as defined in the Credit Agreement) and a term A loan in the amount of $2,000,000, payable in consecutive monthly installments of $41,667 commencing on July 1, 2017.

The revolving facility includes a $3 million sublimit for the issuance of letters of credit.  Interest for borrowings under the revolving facility accrues at a per annum rate equal to Prime Rate or LIBOR plus applicable margins of (i) 0.00% for Prime Rate loans and (ii) 2.00% for LIBOR loans. The maturity date of the revolving facility is June 1, 2020. Interest for borrowings under the term A loan accrues at a per annum rate equal to Prime Rate or LIBOR plus applicable margins of (i) 0.25% for Prime Rate loans and (ii) 2.25% for LIBOR loans. The maturity date of the term A loan is June 1, 2021. The Credit Agreement includes a commitment fee on the unused portion of the revolving facility of 0.25% per annum payable quarterly. The obligations of the Company and other borrowers under the Credit Agreement are secured by a blanket lien on all the assets of the Company and its subsidiaries. The Credit Agreement also includes customary representations and warranties and applicable reporting requirements and covenants, including fixed charge coverage ratio and senior funded indebtedness to EBITDA ratio financial covenants.

In connection with entering into the Credit Agreement, the Company made a onetime prepayment of a portion of the outstanding principal under outstanding promissory notes held by First Francis Company Inc. (“First Francis”), in the amount of $500,000.  The Company will not be required to make any of the scheduled quarterly payments due under these notes for the remainder of calendar 2017. First Francis is owned by Edward Crawford and Matthew Crawford, who serve on the Board of Directors of the Company.

Bank debt balances consist of the following:

8. NOTES PAYABLE

Convertible Notes Payable

On December 30, 2011, management entered into a Convertible Loan Agreement (“Convertible Loan”) with Roundball, LLC (“Roundball”). The Convertible Loan provides approximately $467,000 of liquidity to meet on- going working capital requirements of the Company and allows $250,000 of borrowing on the agreement at the Company's discretion at an interest rate of 0.25%. Roundball, a major shareholder of the Company, is an affiliate of Steven Rosen and Matthew Crawford, Directors of the Company.

There have been several amendments to the original agreement over the years for the purpose of extending the existing terms of the Convertible Loan. On December 20, 2016, management entered into Amendment No. 5 of the Convertible Loan Agreement with Roundball. The amended Convertible Loan:

The outstanding balance on the Convertible Loan as of June 30, 2017, and September 30, 2016 was $200,000.

As part of the Convertible Loan Agreement between the Company and Roundball, the parties entered into a Warrant Agreement, dated December 30, 2012, whereby the Company issued a warrant to 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. The warrant agreement, as amended, expires December 30, 2017.

Short-Term Financing
On June 3, 2016, management entered into an unsecured revolving credit agreement with First Francis Company Inc. First Francis Company Inc. became a major shareholder of the Company on July 1, 2016 when the Company completed the acquisition of Federal Hose Manufacturing, LLC. The agreement provides for a revolving credit facility of $250,000 with interest at 4.0% per annum and is unsecured. Each loan made under the credit arrangement will be due and payable in full on the expiration date of the revolver note. In addition, the agreement generally allows for borrowing based on an amount equal to eighty percent of eligible accounts receivables or $250,000. The revolving line of credit expired on May 31, 2017.

The Company had $250,000 outstanding borrowings on the credit facility at September 30, 2016. At June 30, 2017, the outstanding balance was $0.

Notes Payable – Related Party

Notes payable - related parties is a result of the acquisition of a business on July 1, 2016 and consists of the following:

9. EARNINGS PER COMMON SHARE

The following table sets forth the computation of basic and diluted earnings per share.

10 . ACQUISITIONS

Acquisition related costs were approximately $0.3 million for the three and nine months ended June 30, 2017.

11. SEGMENT AND RELATED INFORMATION

Test and Measurement :
This segment consists of diagnostic tools and equipment sold to the automotive industry and indicators and gauges sold primarily to companies in the aircraft and locomotive industries. These products are sold to original equipment manufacturers and to the aftermarket using a variety of distribution methods.

Industrial Hose:
This segment consists primarily of flexible metal and silicone hose products designed and manufactured or distributed primarily to the trucking industry and other industrial end-users. These products are sold to original equipment manufacturers and to the aftermarket using a variety of distribution methods.

Information by industry segment is set forth below:

12 . RECENTLY ISSUED ACCOUNTING STANDARDS

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.

RESULTS OF OPERATIONS .

The following discussion is intended to assist in the understanding of Hickok’s financial position at June 30, 2017 and September 30, 2016, results of operations for the three and nine months ended June 30, 2017 and 2016, and cash flows for the nine months ended June 30, 2017 and 2016, and should be read in conjunction with the consolidated financial statements and related notes included elsewhere this Quarterly Report on Form 10-Q and with the Company’s Annual Report on Form 10-K for the year ended September 30, 2016.

Product development expenditures were $0.2 million in the fiscal quarter ended June 30, 2017, which was a modest decrease from $0.3 million in same fiscal quarter of the prior year. Product development expenditures relate to the Test and Measurement division. The current level of product development expenses is expected to continue for the balance of the fiscal year. Management believes current resources will be sufficient to maintain current product development commitments and to continue to develop a reasonable flow of new products for both the OEM and aftermarket customers.

Selling, general and administrative expenses in the fiscal quarter ended June 30, 2017 were $1.8 million or 25% of sales compared to $0.5 million or 33% of sales, respectively, in the same fiscal quarter of the prior year. The increase in selling, general and administrative expenses was primarily related to costs related to the addition of the Commercial Air Handling division and the Industrial Hose division. In addition, the Company incurred higher sales expenses in support of higher sales and higher depreciation expenses related to fixed assets acquired with and intangibles allocated due to the purchase of the Commercial Air Handling division.

Interest charges in the fiscal quarter ended June 30, 2017 were approximately $67 thousand compared to $5 thousand in the same fiscal quarter of the prior year. The current year interest expense is primarily due to the recording of interest expense on bank debt related to the acquisitions on June 1, 2017 and notes related to the acquisition of a business on July 1, 2016.

Other income was $5 thousand in the fiscal quarter ended June 30, 2017 compared with $2 thousand in the same fiscal quarter of the prior year. Other income consists primarily of interest income on cash and cash equivalents and proceeds from the sale of scrap metal shavings.

Income tax expense is expected to be minimal as the Company believes it will be able to utilize the majority of the net operating loss and research and development credit carryforwards before they expire; however, there are certain limitations to the use of these tax credits that are expected to result in a small amount of alternative minimum tax. In addition, the Company expects to pay state and local income tax.

Net income in the fiscal quarter ended June 30, 2017 was $0.9 million or $0.31 per diluted share as compared to the net loss of $8 thousand or $0.00 per diluted share in the same fiscal quarter of the prior year.

Results of Operations – Nine Months Ended June 30, 2017 and 2016

Cost of products sold in the nine months ended June 30, 2017 was $7.9 million or 61% of sales compared to $2.2 million or 56% of sales in the same period a year ago. The increase in costs was associated with higher sales for the quarter in all three divisions. Gross margin (sales less costs of products sold) was approximately 39% for the nine months ended June 30, 2017 compared to 44% for the same period in 2016.

Product development expenditures in the nine months ended June 30, 2017 were $0.6 million or 5% of sales compared to $0.8 million or 20%, respectively, in the same period a year ago. The current level of product development expenses is expected to continue for the balance of the fiscal year. Management believes current resources will be sufficient to maintain current product development commitments and to continue to develop a reasonable flow of new products for both the OEM and aftermarket customers.

Selling, general and administrative expenses in the nine months ended June 30, 2017 were $3.4 million or 26% of sales compared to $1.5 million or 38%, respectively, in the same period a year ago. The increase in selling, general and administrative expenses was primarily related to costs related to the addition of the Commercial Air Handling division and the Industrial Hose division. In addition, the Company incurred higher sales expenses in support of higher sales and higher depreciation expenses related to fixed assets acquired with and intangibles allocated due to the purchase of the Commercial Air Handling division.

Interest charges in the nine-month period ended June 30, 2017 were $166 thousand compared to $8 thousand in the same period a year ago. The current year interest expense is primarily due to the recording of interest expense on bank debt related to the acquisitions on June 1, 2017 and notes related to the acquisition of a business on July 1, 2016.

Other income was $11 thousand in the nine-month period ended June 30, 2017 compared with $6 thousand in the same period a year ago. Other income consists primarily of interest income on cash and cash equivalents and proceeds from the sale of scrap metal shavings.

Income tax expense is expected to be minimal as the Company believes it will be able to utilize the majority of the net operating loss and research and development credit carryforwards before they expire; however, there are certain limitations to the use of these tax credits that are expected to result in a small amount of alternative minimum tax. In addition, the Company expects to pay state and local income tax.

Net income in the nine-month period ended June 30, 2017 was $0.8 million or $0.28 per diluted share as compared to the net loss of $0.5 million or ($0.32) per diluted share in the same period a year ago.

Liquidity and Capital Resource s

Total current assets at June 30, 2017 increased to approximately $17.5 million from $7.8 million at September 30, 2016, an increase of $9.7 million. The increase in current assets is due to an increase in accounts receivable of $7.3 million, costs in excess of billings of $3.9 million, inventories of $0.6 million, and prepaid expenses and other assets of approximately $0.7 million, respectively. The increase in these assets is primarily a result of the acquisition of the Commercial Air Handling division on June 1, 2017. The increases in current assets were offset by a decrease in cash of approximately $2.0 million. The decrease in cash and cash equivalents was due cash used towards the purchase of the Commercial Air Handling division.

Cash provided by operating activities for the nine months ended June 30, 2017 was approximately $1.4 million and was adequate to fund the Company's operations as well as capital expenditures of approximately $0.3 million.

Capital expenditures were needed for building improvements as well as for tooling, machinery and equipment for product manufacturing. Cash flow used in investing activities of $10.6 million was primarily used for the purchase of the Commercial Air Handling division for $10.3 million.

Cash provided by financing activities of approximately $7.1 million was primarily related to the $8.5 million borrowing on the bank debt in connection with the purchase of the Commercial Air Handling division, offset by payment of the short-term financing of $0.3 million, payment of approximately $0.8 million for the related party notes, and $0.3 million repayment against the revolving credit facility with JPMorgan Chase Bank, N.A.

The Company entered into a Credit Agreement on June 1, 2017 with JPMorgan Chase Bank, N.A. as lender (the “Credit Agreement”). The Credit Agreement is comprised of a revolving facility in the amount of $8.0 million, subject to a borrowing base and a term A loan in the amount of $2.0 million, payable in consecutive monthly installments of $41,667 commencing on July 1, 2017. The Credit Agreement includes customary representations and warranties and applicable reporting requirements and covenants, including fixed charge coverage ratio and senior funded indebtedness to EBITDA ratio financial covenants. Management believes the Company is in compliance with debt covenants.

In addition to the Credit Agreement, the Company has several borrowing arrangements as discussed in Note 8 of this Quarter Report on Form 10-Q, including Convertible Notes Payable and outstanding notes related to the Company’s acquisition of its Industrial Hose division in 2016. The Convertible Notes provide liquidity to the Company for working capital. In December 2016, the Company entered into Amendment No. 5 of the Convertible Loan Agreement. The Convertible Loan Agreement, as amended, is between the Company and a major shareholder who is also affiliated with two Directors, as discussed in Note 4 of the Company’s Annual Report on Form 10-K for the year ended September 30, 2016. The amended Convertible Loan:

The outstanding balance on the Convertible Loan as of June 30, 2017 and September 30, 2016 is $200,000.

The Company expects positive cash flow from operations to be sufficient to fund working capital needs and service principal and interest payments due related to the bank debt and notes payable. In addition, the Company has $1.8 million available to borrow on the revolving credit facility at June 30, 2017. Management believes the Company has adequate liquidity for working capital, capital expenditures and other strategic initiatives.

Off-Balance Sheet Arrangements

Hickok has no off-balance sheet arrangements (as defined in Regulation S-K Item 303 paragraph (a)(4)(ii)) that have or are reasonably likely to have a material current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Critical Accounting Pronouncements

The Company’s critical accounting policies are as presented in Notes to Consolidated Financial Statements and Management’s Discuss and Analysis of Financial Condition and Results of Operations in our Form 10-K for the year ended September 30, 2016.

Forward-Looking Statements

None.

None.

Not applicable.

Not applicable.

Not applicable.

*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 as of the 14 ^th day of August 2017, thereunto duly authorized.

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