UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

x QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2017

 

or

 

o TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT OF 1934

 

For the transition period from ___________ to ______________

 

Commission File No. 000-30185

 

AMERINAC HOLDING CORP.

(Exact Name of Small Business Issuer as Specified in Its Charter)

 

Delaware		20-4763096
(State or Other Jurisdiction of Incorporation or Organization)		(IRS Employer Identification No.)

 

PO Box 69

Groveport, OH 43125

(Address of Principal Executive Offices)

 

(614) 836-1050

(Issuer’s Telephone Number, including Area Code)

 

Amerinac Holding Corp.

6002 Groveport Road

Groveport, OH 43125 

(614) 836-1050

(Former Name or Former Address, if Changed Since Last Report)

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer	¨	Accelerated Filer	¨
Non-Accelerated Filer	¨	Smaller Reporting Company	x
(Do not check if a smaller reporting company)		Emerging Growth Company	¨

 

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

 

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

 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. N/A

 

Number of shares outstanding of the registrant’s common stock, as of November 14, 2017: 302,386

 

TABLE OF CONTENTS 

 

			Page
PART I FINANCIAL INFORMATION
Item 1.	Financial Statements – (Unaudited)			3
	Condensed Consolidated Balance Sheets			3
	Condensed Consolidated Statements of Income			4
	Condensed Consolidated Statements of Cash Flows			5
	Notes to Condensed Consolidated Financial Statements			6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations			18
Item 3.	Quantitative and Qualitative Disclosures about Market Risk			20
Item 4.	Controls and Procedures			20
PART II OTHER INFORMATION
Item 6.	Exhibits			22
	Signatures			23

 

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Item 1. Financial Statements

 

AMERINAC HOLDING CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

 

		September 30,				December 31,
		2017				2016
ASSETS
Current assets:
Cash		$	458,688			$	83,391
Accounts receivable (net of allowance for doubtful accounts of $43,947 as of September 30, 2017 and December 31, 2016)			3,234,113				720,421
Inventories (net of reserve for obsolesence of $149,719 and $89,080 as of September 30, 2017 and December 31, 2016, respectively)			2,956,064				1,797,061
Escrow receivable			1,000,000				-
Current assets - discontinued operations			-				8,469,472
Other current assets			422,134				81,285
Total current assets			8,070,999				11,151,630
Property, land and equipment - net			6,198,992				142,167
Other assets:
Other			9,799				6,798
Goodwill			2,033,276				-
Long-term assets - discontinued operations			-				44,948
Total other assets			2,043,075				51,746
Total		$	16,313,066			$	11,345,543
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Line of credit		$	-			$	5,292,366
Accounts payable and accrued expenses			2,038,498				1,016,963
Notes payable - short term - related party			487,739				-
Shareholder put option			-				687,000
Income taxes payable			22,831				22,100
Current liabilities - discontinued operations			-				1,646,448
Total current liabilities			2,549,068				8,664,877
Long-term liabilities:
Notes payable			-				3,800,489
Notes payable - related party			7,112,261				-
Total long-term liabilities			7,112,261				3,800,489
Total liabilities			9,661,329				12,465,366
Commitments and contingencies
Redeemable non-controlling interest			434,833				-
Stockholders' equity (deficiency):
Common stock, $.001 par value; 1,500,000 shares authorized, 302,386 issued and outstanding at September 30, 2017 and 298,867 issued and outstanding at December 31, 2016.			302				299
Additional paid-in capital			15,749,460				12,070,996
Accumulated deficit			(9,532,858	)			(13,191,118	)
Total stockholders' equity (deficiency)			6,216,904				(1,119,823	)
Total liabilities and stockholders' equity (deficiency)		$	16,313,066			$	11,345,543

 

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

 

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AMERINAC HOLDING CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

 

		FOR THE NINE MONTHS								FOR THE THREE MONTHS
		ENDED SEPTEMBER 30,								ENDED SEPTEMBER 30,
		2017				2016				2017				2016
Net revenue		$	9,942,032			$	7,262,449			$	5,808,727			$	2,390,474
Cost of goods sold			7,889,345				5,183,911				4,593,641				1,765,998
Gross profit			2,052,687				2,078,538				1,215,086				624,476
Operating expenses:
General and administrative expenses			1,529,390				1,066,289				560,851				384,404
Professional and consulting fees			535,467				82,315				331,356				11,522
Total operating expenses			2,064,857				1,148,604				892,207				395,926
(Loss) income before other income (expense)			(12,170	)			929,934				322,879				228,550
Other income(expense):
Interest			(466,530	)			(285,691	)			(203,158	)			(117,386	)
Change in fair value of put option			(213,000	)			93,342				-				(60,808	)
Gain on sale			3,409,184				-				-				-
Other expense			53				-				3,818				-
Total other income (expense)			2,729,707				(192,349	)			(199,340	)			(178,194	)
Income from continuing operations before
provision for income taxes			2,717,537				737,585				123,539				50,356
Provision for income taxes			(731	)			(3,903	)			-				46,116
Income before before discontinued operations			2,716,806				733,682				123,539				96,472
Income (loss) from discontinued operations, net			976,287				(100,140	)			(16,566	)			45,428
Net income			3,693,093				633,542				106,973				141,900
Non-controlling interest share of net income from continuing operations			34,833				-				34,833				-
Net income attributable to Amerinac Holding
Corp. shareholders		$	3,658,260			$	633,542			$	72,140			$	141,900
Basic earnings per share applicable to common stockholders:
Continuing operations			9.88				5.74				0.31				0.32
Discontinued operations			3.59				(0.78	)			(0.06	)			0.15
Earnings per share			13.47				4.96				0.25				0.47
Diluted earnings per share applicable to common stockholders:
Continuing operations			9.88				5.74				0.31				0.32
Discontinued operations			3.59				(0.78	)			(0.06	)			0.15
Earnings per share			13.47				4.96				0.25				0.47
Weighted average shares outstanding:
Basic			271,572				127,752				283,442				298,926
Diluted			271,572				127,752				283,442				298,926

 

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

 

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AMERINAC HOLDING CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

NINEMONTHS ENDED SEPTEMBER 30, 2017 AND 2016

 

CASH FLOWS FROM OPERATING ACTIVITIES		2017				2016
Net income		$	3,658,260			$	633,542
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization			93,475				1,064
Amortization of deferred financing fees			246,345				66,110
Gain on sale			(3,409,184	)			-
Stock compensation			28,467				6,326
Income (loss) from discontinued operations			976,287				(100,140	)
Change in fair value put option			213,000				(93,342	)
Inventory writedown and reserve			60,639				47,526
Changes in assets and liabilities:
Increase in accounts receivable			(2,513,692	)			(183,646	)
(Increase) decrease in inventory			(1,219,642	)			175,307
Increase in other current assets			(340,849	)			(163,260	)
Increase in other assets			(3,001	)			-
Increase in income taxes payable			731				-
Decrease in shareholder put option			(687,000	)			-
Increase (decrease) in accounts payable and accrued expenses			1,021,535				(209,629	)
Net cash (used in) provided by operating activities of continuing operations			(1,874,629	)			179,858
Net cash provided by operating activities of discontinued operations			1,003,313				352,281
Net cash (used in) provided by operating activities			(871,316	)			532,139
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale, net of escrow			9,500,000				-
Acquisition of business			(9,600,000	)			-
Purchase of property and equipment			(64,285	)			(67,604	)
Net cash used in investing activities of continuing operations			(164,285	)			(67,604	)
Net cash used in investing activities of discontinued operations			-				(83,330	)
Net cash used in investing activities			(164,285	)			(150,934	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net payments on line of credit			(5,339,199	)			(350,375	)
Net payments on notes payable			(4,000,000	)			-
Net proceeds on notes payable - related party			8,000,000				-
Proceeds from issuance of stock, net			3,650,097				68,257
Purchase of treasury stock			(900,000	)			-
Payments on shareholder loan			-				(122,790	)
Net cash provided by (used in) financing activities of continuing operations			1,410,898				(404,908	)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			375,297				(23,703	)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD			83,391				81,941
CASH AND CASH EQUIVALENTS - END OF PERIOD		$	458,688			$	58,238
Cash paid during the period for:
Interest		$	466,530			$	641,951
Income taxes		$	-			$	4,195
Non-cash financing activities:
Stock issued for payment of debt		$	85,600			$	-

 

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

 

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AMERINAC HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2017

(UNAUDITED)

 

1. SUMMARY OF BUSINESS

 

Amerinac Holding Corp. and Subsidiaries (the “Company”) distributes high-quality, predominantly domestically-manufactured, technically complex, nut and bolt products and a proprietary locking washer product that are for industrial and commercial applications that require a high level of certified and assured quality. Additionally, the Company manufactures specialty stainless steel, and related products for steel mills, steel forging operations, and various metal fabrication facilities.

 

The Company’s operations are carried out through its wholly-owned distribution subsidiary Creative Assembly Systems, Inc (“Creative Assembly”) and its majority-owned subsidiary, Prime Metals Acquisition LLC, a Delaware limited liability company (“PMAL”). Until April 28, 2017, the Company’s operations were also carried out through its wholly-owned distribution subsidiary, Aero-Missile Components, Inc. (“Aero-Missile”). Creative Assembly is a value added distributor of proprietary and specialty fasteners primarily serving the heavy truck, automotive, transportation, and infrastructure industries. Aero-Missile had stocking distributor relationships with a number of United States fastener manufacturers. Aero-Missile predominantly sold to all levels of the aviation industry original equipment manufacturers, maintenance and repair organizations, and other distributors, as well as to the United States Department of Defense (“Department of Defense”).

 

PMAL manufactures specialty ingot and electrode products which are supplied for investment castings, forging, ring rolling, and plate production. PMAL also manufactures shot products and master alloys which are sold to other melt shops, and provides manufacturing support services. The flexible manufacturing operations at PMAL enable the Company to offer a wide range of product grades in customer specific order quantities. The primary grade types include stainless steels, tool steels, nickel based grades, cobalt based grades and some nonferrous alloys. The Company also offers toll conversion melting services.

 

On October 18, 2016, the Company completed a 1-for-2500 reverse stock split. No fractional shares were issued. Shareholders received $0.02 in consideration for each “pre-split” share of a fractional share. Amounts for the Company’s historical (pre-reverse stock split) common stock including share and per share amounts have been retroactively adjusted using the respective ratio of 1-for-2500 in these financial statements, unless otherwise disclosed and indicated.

 

On April 28, 2017, the Company and Aero-Missile entered into an Asset Purchase Agreement (the “Aero-Missile Asset Purchase Agreement”) with Apollo Aerospace LLC (“Apollo”) pursuant to which Aero-Missile sold substantially all of its assets to Apollo and Apollo assumed certain liabilities of Aero-Missile (the “Asset Sale”) for an aggregate purchase price of $10.5 million paid by Apollo to Aero-Missile. The purchase price is subject to a working capital adjustment and $1.0 million being held in escrow to secure the indemnification obligations of the Company and Aero-Missile. During the third quarter, it was determined that $22,500 was owed by the Company to Apollo, under the terms of the working capital adjustment. Pursuant to the Aero-Missile Asset Purchase Agreement, the Company and Aero-Missile were required to change their corporate names. On May 1, Aero-Missile changed its name to “PolyAero Inc.” and on June 28, 2017, the Company changed its name to “Amerinac Holding Corp.”

 

Simultaneous with the sale of Asset Sale, the Company repaid all amounts owing to C3 under Note A and Note B. The total amount repaid was $4 million plus accrued interest of $42,389. In addition, the Company purchased the 96,697 shares of common stock of the Company owned by C3 for an aggregate purchase price of $900,000 that was mutually agreed to by the Company and C3.

 

On April 28, 2017, the balance of the proceeds of the Asset Sale discussed in Note 8, totaling $4,557,611, were used to partially pay down the principal balance of the WBCC Revolving Loan. Although the WBCC Revolving Loan was senior to Note A and B, WBCC consented to the early repayment of these loans in full.

 

All financial results of Aero-Missile are classified as discontinued operations for the purposes of this quarterly report.

 

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On July 12, 2017, the Company entered into an Asset Purchase Agreement (the “Prime Asset Purchase Agreement”) with Prime Metals & Alloys, Inc., a Delaware corporation, (“Prime Metals”) pursuant to which PMAL would purchase all of the assets of Prime Metals for an aggregate purchase price of $9.6 million pursuant to an order of the Bankruptcy Court approving the sale under Section 363 of the Bankruptcy Code. Pursuant to an order of the Bankruptcy Court, the Company paid a deposit of $0.5 million to be held in escrow. The deposit was credited to the purchase price at Closing. On March 2, 2017, Prime Metals filed a voluntary petition for relief under chapter 11 of title of the United States Code (as amended, the “Bankruptcy Code”) in the United States Bankruptcy Court for the Western District of Pennsylvania (the “Bankruptcy Court”) at case no. 17-70164-JAD.

 

On August, 17, 2017, PMAL purchased substantially all of the assets of Prime Metals for $9.6 million in cash pursuant to the Prime Asset Purchase Agreement. To finance the purchase of the assets, on August 17, 2017, PMAL entered into a Credit Agreement (the “Credit Agreement”) with SummitBridge National Investments V LLC (“Summit”) pursuant to which Summit made Loans to PMAL: (1) a Term Loan in the amount of $4,500,000 (“Term Loan A”) and (2) a Term Loan in the amount of $3,500,000 (“Term Loan B”). In addition, in consideration for Summit making the Loans, PMAL issued to SBN V PMA LLC, an affiliate of Summit (“SBN”), membership interests in PMAL equal to 25% of the equity ownership of PMAL ( the “SBN Membership Interests”).

 

The Company has guaranteed payment of Term Loan A and Term Loan B pursuant to a Guaranty Agreement made by the Company as of the Effective Date.

 

The Credit Agreement also contains customary covenants, representations and warranties of the parties, including, among others (1) the grant by PMAL to Summit of a security interest on all of the assets of PMAL, (2) a pledge with respect to the equity interests in PMAL owned by the Company, and (3) an unconditional and irrevocable guaranty by the Company of the performance by PMAL of the obligations under the Credit Agreement. In addition, until all amounts under Term Loan A and Term Loan B are paid in full, PMAL has agreed to comply with certain financial covenants that require PMAL to meet pre-established financial ratios. No covenants are calculated in the current quarter. Covenant calculations commence with the period ending December 31, 2017.

 

On July 17, 2017, the Company completed the closing of a private placement (the “Private Placement”) with approximately 17 accredited investors (the “Investors”), pursuant to which the Company sold to the Investors a total of 75,500 shares of restricted common stock (the “Shares”) of the Company at a purchase price of $40.00 per share, and total consideration of $3.02 million. The Shares were offered and sold in reliance upon exemptions from registration under the Securities Act of 1933, as amended (the “Securities Act”) in reliance on Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder, as transactions by an issuer not involving a public offering. The subscription agreements executed in connection with the transactions disclosed above contain representations from the Investors to support our reasonable belief that: (i) the Investors either received or had access to adequate information concerning the Company’s operations and financial condition in order to make an informed investment decision, (ii) the Investors acquired the Shares for their own account for investment purposes only and not with a view to distribution thereof in the absence of an effective registration statement or an applicable exemption from registration, and (iii) the Investors are sophisticated within the meaning of Section 4(2) of the Securities Act and are “accredited investors” (as defined by Rule 501 under the Securities Act).

 

On September 28, 2017, the Company sold an additional 15,750 Shares at a purchase price of $40.00 per share, and total consideration of $630,000 to 5 Investors. The Shares were offered and sold in reliance upon exemptions from registration under the Securities Act in reliance on Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder, as transactions by an issuer not involving a public offering. The subscription agreements executed in connection with the transactions disclosed above contain representations from the Investors to support our reasonable belief that: (i) the Investors either received or had access to adequate information concerning the Company’s operations and financial condition in order to make an informed investment decision, (ii) the Investors acquired the Shares for their own account for investment purposes only and not with a view to distribution thereof in the absence of an effective registration statement or an applicable exemption from registration, and (iii) the Investors are sophisticated within the meaning of Section 4(2) of the Securities Act and are “accredited investors”.

  

The Shares of common stock have not been registered under the Securities Act and may not be transferred or resold unless the transfer or resale is registered or unless exemptions from the registration requirements of the Securities Act and applicable state laws are available.

 

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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Interim Consolidated Financial Statements

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and in conformity with the instructions to Form 10-Q and Article 8 of Regulation S-X and the related rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. However, we believe that the disclosures included in these unaudited condensed consolidated financial statements are adequate to make the information presented not misleading. The unaudited condensed consolidated financial statements included in this document have been prepared on the same basis as the annual consolidated financial statements, and in the Company’s opinion reflect all adjustments, which include normal recurring adjustments necessary for a fair presentation in accordance with GAAP and SEC regulations for interim financial statements. The results for the nine months ended September 30, 2017 are not necessarily indicative of the results that the Company will have for any subsequent period. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto for the year ended December 31, 2016 included in the Company’s Annual Report on Form 10-K filed on March 31, 2017.

 

Earnings (Loss) Per Share

 

Basic earnings (loss) per share is calculated by dividing net profit attributable to common stockholders by the weighted average number of outstanding common shares during the year. Basic earnings (loss) per share excludes any dilutive effects of options, warrants and other stock-based compensation, which are included in diluted earnings per share. When a company is in a loss situation, all outstanding dilutive shares are excluded from the calculation of diluted earnings because their inclusion would be antidilutive; and the basic and fully diluted common shares outstanding are stated to be the same. There were no dilutive shares as of September 30, 2017 and 2016.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. The significant estimates are the useful lives of tangible assets, reserves for inventory and accounts receivable and the valuation of shareholder put option.

 

Inventory

 

For the Company’s distribution subsidiary, Creative Assembly, inventories are carried at the lower of cost on an average cost basis, or net realizable value. When necessary, management records an inventory reserve for estimated obsolescence or unmarketable inventory based upon knowledge of future demand of inventory on hand as well as other market conditions and events. As of September 30, 2017 and December 31, 2016, the inventory reserve was $149,719 and $89,080, respectively.

 

For the Company’s distribution subsidiary, management believes that the longer a part sits on the shelf the higher the likelihood that it will not sell in the future. This belief is not unique to the fastener industry. While management constantly assesses viability of a part within the customer base, it also believes that a reserve should be carried to reflect product that is aging out, as opposed to product that management identified based on a specific event. As of September 30, 2017, the Company’s distribution subsidiary had more than 4,000 unique part numbers on hand that had carrying value. Management believes that the two methods, specific identification and reserve based on age, to analyzing inventory will reflect the appropriate balance sheet value. For the Company’s manufacturing subsidiary, management believes volatility in the broader metal markets will have an impact on all aspects of raw material, work in process, and finished goods inventory. Management actively seeks to minimize inventory working capital, and increase ‘inventory’ turns to eliminate any impacts from market fluctuations. As of September 30, 2017, the Company’s manufacturing subsidiary had more than 500 unique metal chemistries it produced, but keeps minimal finished inventory on hand. Management will evaluate the need to change inventory on hand levels.

 

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For the Company’s manufacturing subsidiary, PMAL, inventories are carried at the lower of cost on an average cost basis, or net realizable value. When necessary, management records an inventory reserve for estimated obsolescence or unmarketable inventory based upon knowledge of future demand of inventory on hand as well as other market conditions and events. As of September 30, 2017, the inventory reserve was $0. The Company’s sole manufacturing subsidiary was acquired in the third quarter of 2017. As part of the acquisition, inventory is recorded net of any reserve.

 

Concentration of Credit Risk

 

For the nine month period ending September 30, 2017, sales to PACCAR accounted for 31.2% of total sales, versus 18.5% of sales for the prior nine month period ending September 30, 2016. For the nine month period ending September 30, 2017, AMG-Vanadium accounted for 11% of sales. For the nine month period ending September 30, 2016, Waterous accounted for 11% of sales.

 

At September 30, 2017, PACCAR receivables were $424,826, which accounted for 13.6% of total receivables. At December 31, 2016, PACCAR receivables were $338,368, which accounted for 47%. At September 30, 2017, Remelt Resources, Universal Stainless, and AMG-Vanadium were 24.6%, 13.6% and 12.7%, respectively. There were no other receivable concentrations above 10%. 

 

Concentration of Suppliers

 

The Company’s largest supplier, AVK Industrial Products, represents approximately 21.8% of product distributed for the nine months ending September 30, 2017, versus 27% for the nine months ending September30, 2016. For nearly all suppliers, the Company looks to have secondary supply outlets. However, manufacturing issues with any supplier could cause temporary disruptions to the Company. AVK represented 29% and 36% of accounts payables at September 30, 2017, and December 31, 2016, respectively.

 

Fair Value of Financial Assets and Liabilities

 

In accordance with the authoritative guidance for fair value measurements and the fair value election for financial assets and financial liabilities, a fair value measurement is determined based on the assumptions that a market participant would use in pricing an asset or liability. A three-tiered hierarchy was established that draws a distinction between market participant assumptions based on the following:

 

	i)	observable inputs such as quoted prices in active markets (Level 1)
	ii)	inputs other than quoted prices in active markets that are observable either directly or indirectly (Level 2)
	iii)	unobservable inputs that require the Company to use present value and other valuation techniques in the determination of fair value (Level 3).

 

Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurements requires judgment, and may affect the valuation of the assets and liabilities being measured and their placement within the fair value hierarchy.

 

Income Taxes

 

The Company provides for income taxes under ASC Topic 740-10. ASC Topic 740-10 requires the use of an asset and liability approach in accounting for income taxes. Deferred tax assets and liabilities are recorded based on the differences between the financial statement and tax bases of assets and liabilities and the tax rates in effect when these differences are expected to reverse. Temporary differences relate primarily to different accounting methods used for depreciation and amortization of property and equipment and recording the inventory reserve.

 

ASC Topic 740-10 requires the reduction of deferred tax assets by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

 

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ASC Topic 740-10 clarifies the accounting for uncertainty in income tax positions, as defined. It requires, among other matters, that the Company recognize in our financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The Company analyzes the filing positions in all of the federal and state jurisdictions where the Company is required to file income tax returns, as well as all open tax years in these jurisdictions. As of September 30, 2017, the Company did not record any unrecognized tax benefits. The Company’s policy, if it had unrecognized benefits, is to recognize accrued interest and penalties related to unrecognized tax benefits as interest expense and other expense, respectively.

 

Revenue Recognition

 

Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the fee is fixed and determinable and collectability is reasonably assured. The Company recognizes revenue when product is shipped or when it is received by the customer, depending on the contractual terms.

 

Redeemable Non-controlling Interest

  

Non-controlling interests that are not subject to redemption rights are classified in permanent equity. Redeemable non-controlling interests are classified outside of permanent equity on the condensed consolidated balance sheets.

  

On August, 17, 2017, PMAL purchased substantially all of the assets of Prime Metals for $9.6 million in cash pursuant to the Prime Asset Purchase Agreement. To finance the purchase of the assets, PMAL entered into the Credit Agreement with Summit pursuant to which Summit made Loans to PMAL: (1) Term Loan A and (2) Term Loan B. In addition, in consideration for Summit making the Loans, PMAL issued to the SBN the SBN Membership Interests. The SBN Membership Interests represent 25% ownership of PMAL.

  

PMAL has granted SBN a put right under the operating agreement for PMAL for the SBN Membership Interests. On the earlier of August 17, 2020 or the date of a change in control of PMAL, SBN has the right but not the obligation to require PMAL to repurchase all of the SBN Membership Interests at market equity value (“Market Equity Value”). Market Equity Value shall be equal to the higher of (i) value of PMAL implied by a sale, (ii) 4.5 x EBITDA for the trailing twelve months plus cash, less all outstanding funded indebtedness or (iii) fair market value as determined by mutual agreement between PMAL and SBN, or failing that by an independent firm mutually agreed to. SBN has granted PMAL a call right under the operating agreement for PMAL for the SBN Membership Interests. On the August 17, 2021, PMAL has the right but not the obligation to require SBN to sell all of the SBN Membership Interests at Market Equity Value.

   

The Company has accounted for this in accordance with ASC 480-10-55-59, as a redeemable non-controlling interest. At acquisition $400,000 was recorded as SBN’s PMAL equity ownership. This amount, plus SBN’s pro rata net income allocation is reflected before stockholder’s equity as Redeemable Non-controlling Interest.

    

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3. ACQUISITION AND BUSINESS COMBINATION

 

On July 12, 2017, the Company and PMAL entered into an Asset Purchase Agreement with Prime Metals. On August 17, 2017, PMAL purchased substantially all of the assets of Prime Metals for a purchase price of $9.6 million. The assets and liabilities of PMAL were recorded at their respective fair values as of the closing date of the acquisition, and the following table summarizes these values based on the estimated balance sheet at August 17, 2017.

   

The goodwill was recorded, based on the estimated fair value. Upon completion of an independent purchase price allocation and valuation, the allocation of goodwill and intangible assets will be adjusted accordingly.

The following summarizes the purchase price allocation:

 

 

Purchase Price			9,600,000
Accounts Receivable			719,000
Inventory			667,571
Other current assets			23,053
Machinery & Equipment			2,747,100
Real Estate			3,410,000
Total			7,566,724
Goodwill			2,033,276

 

Acquisition costs were approximately $220,000, which are included in general and administrative expenses.

     

The following unaudited pro forma information does not purport to present what the Company’s actual results would have been had the acquisition occurred on January 1, 2016, nor is the financial information indicative of the results of future operations. The following table represents the unaudited consolidated pro forma results of operations for the nine months ended September 30, 2017 and 2016 as if the acquisition had occurred on January 1, 2016.

    

		Nine Months Ended				Nine Months Ended
Pro Forma		September 30, 2017				September 30, 2016
Net Sales			24,720,668				25,449,423
Operating expenses			3,185,437				3,112,727
Income before taxes			(233,091	)			2,653,431
Net income			(233,091	)			2,653,431

 

The Company’s condensed consolidated financial statements for the nine months ending September 30, 2017 include the actual results of PMAL since the date of the acquisition, August 17, 2017. The nine months ended September 30, 2017, pro forma results above include nine months of pro forma results for Prime Metals. For the period ended September 30, 2016, pro forma results above include nine months of pro forma results for Prime Metals. For the nine months ended September 30, 2017, the PMAL operations had a net income before taxes of $139,335 that was included in the Company’s Condensed Consolidated Statement of Income, which consisted of approximately $3,393,558 in revenues and $3,254,223 in expenses.

 

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4. DISCONTINUED OPERATIONS

  

The financial results of our Aero-Missile business, sold on April 28, 2017, for the three and nine months ended September 30, 2017 and 2016 are presented as discontinued operations, net of income taxes on our condensed consolidated statement of income. The following table presents financial results of the Aero-Missile business:

 

		Nine Months Ended September 30,								Three Months Ended September 30,
		2017				2016				2017				2016
Net Revenue		$	5,839,989			$	10,746,633				-			$	3,535,997
Cost of goods sold			4,048,651				8,597,807				-				2,884,066
Gross profit			1,791,338				2,148,826				-				651,931
Operating expenses:
General and administrative expenses			443,771				1,719,313				-				428,191
Professional and consulting fees			56,796				111,396				-				21,502
Depreciation and amortization			9,132				9,213				-				2,134
Total operating expenses			509,699				1,839,922				-				451,827
Income before other income (expense)			1,281,639				308,904				-				200,104
Other income (expense)
Interest expense - net			(299,427	)			(409,044	)			(16,566	)			(157,459	)
Other expense			(5,925	)			-				-				(692	)
Total other income (expense)			(305,352	)			(409,044	)			-				(156,767	)
Income before provision for income taxes			976,287				(100,140	)			(16,566	)			43,337
Provision for state income taxes			-				-				-				2,091
Net Income (loss) of discontinued operations			976,287				(100,140	)			(16,566	)			45,428

 

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5. PROPERTY, LAND AND EQUIPMENT

 

The Company’s 220,000 square foot facility is located at 101 Innovation Drive, Homer City, PA. The facility is located on approximately 38 acres and was constructed in 2007. The facility houses the manufacturing operations of Prime Metals. The useful life of the building is estimated to be at least 20 years. The useful life of the machinery and equipment is estimated to range from 10 to 30 years. Depreciation and amortization expense was $93,475 and $1,064 for the nine months ended September 30, 2017 and 2016.

     

		September 30, 2017				December 31, 2016
Land , buildings and improvements			3,410,000				-
Equipment			2,906,320				152,132
Total			6,316,320				152,132
Less accumulated depreciation			(117,328	)			(9,965	)
Net property, land and equipment			6,198,992				142,167

 

As described in Note 1, the Company has $8,000,000 in notes secured against the property, plant and equipment.

 

6. LONG-TERM DEBT AND LINE OF CREDIT

 

Webster Business Credit Corporation

 

On August 25, 2015, the Company established a new revolving credit facility in an aggregate principal amount of up to $7,500,000 (the “WBCC Revolving Loan”) by entering into a Credit Agreement (the “WBCC Credit Agreement”) with Webster Business Credit Corporation, as Lender (“WBCC”). The Company’s wholly owned subsidiaries Aero-Missile Components, Inc., and Creative Assembly Systems served as guarantors of the WBCC Revolving. Borrowings under the WBCC Revolving Loan were used to finance working capital and other general corporate purposes.

 

Borrowings under the WBCC Credit Agreement bore interest, at the Company’s election, at a rate tied to one of the following rates: (i) the prime lending rate plus 1.25% or (ii) the adjusted daily LIBOR rate plus 2.75%. As ofSeptember 30, 2017, the credit facility was terminated.

 

The WBCC Credit Agreement contained usual and customary covenants for financings of this type, including, among other things: (i) requirements to deliver financial statements, other reports and notices; (ii) restrictions on indebtedness; (iii) restrictions on dividends, distributions and redemptions of equity and repayment of subordinated indebtedness; (iv) restrictions on liens; (v) restrictions on making certain payments; (vi) restrictions on investments; (vii) restrictions on asset dispositions and other fundamental changes; and (viii) restrictions on transactions with affiliates.

 

The WBCC Credit Agreement contained certain financial covenants, including a minimum fixed charge coverage ratio.

 

The obligations of the Company and its Subsidiaries under the WBCC Credit Agreement were secured by liens and security interests on all assets of the Company and its Subsidiaries, including a pledge of 100% of the equity of the Subsidiaries.

 

On the April 28, 2017, the Company entered into Amendment No. 2 to and Consent No.1 (the “Amendment and Consent”) under the WBCC Credit Agreement. Under the Amendment and Consent, WBCC amended the WBCC Credit Agreement and consented to the Asset Sale, the repayment of all amounts owing to C3, and the Stock Repurchase. On April 28, 2017, the balance of the proceeds of the Asset Sale totaling $4,557,611, were used to partially pay down the principal balance of the WBCC Revolving Loan.

 

On July 31, 2017, the Company paid the remaining $209,406 due under the WBCC Credit Agreement and the WBCC Credit Agreement was terminated by mutual agreement.

 

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SummitBridge Loans

 

On August, 17, 2017 (the “Effective Date”), PMAL purchased substantially all of the assets of Prime Metals for $9.6 million in cash pursuant to the Prime Asset Purchase Agreement. To finance the purchase of the assets, on August 17, 2017, PMAL entered into the Credit Agreement with Summit pursuant to which made Loans to PMAL: (1) Term Loan A and (2) Term Loan B. In addition, in consideration for Summit making the Loans, PMAL issued to SBN, the SBN Membership Interests.

 

Term Loan A will accrue each month at either 17.5% interest per annum (with 12.5% payable monthly and 5.0% accruing to the outstanding balance of Term Loan A, payable at maturity) or 17.0% interest per annum, payable monthly. Term Loan A has a Maturity date of August 17, 2020. Any prepayments of principal during the period from the Effective Date through the day before the one year anniversary of the Effective Date will be subject to a fee payable to Summit equal to the interest that would have accrued on the principal amount prepaid from the date of such prepayment through the day before the one year anniversary of the Effective Date with the exception that such fee shall not be chargeable to PMAL if the specific prepayment resulted solely from the operating cash flow of PMAL. Term Loan A will begin amortizing on the thirteenth (13) month following the Effective Date. Term Loan A is secured against all of the assets of PMAL.

 

Term Loan B will accrue each month at either 17.5% interest per annum (with 14.0% payable monthly and 3.5% accruing to the outstanding balance of Term Loan A, payable at maturity) or 17.0% interest per annum, payable monthly. Term Loan A has a Maturity date of August 17, 2020. Any prepayments of principal during the period from the Effective Date through the day before the one year anniversary of the Effective Date will be subject to a fee payable to Summit equal to the interest that would have accrued on the principal amount prepaid from the date of such prepayment through the day before the one year anniversary of the Effective Date with the exception that such fee shall not be chargeable to PMAL if the specific prepayment resulted solely from the operating cash flow of PMAL. Term Loan B will begin amortizing on the first month following the Effective Date. Term Loan B is secured against all of the assets of PMAL.

 

The Company has guaranteed payment of Term Loan A and Term Loan B pursuant to a Guaranty Agreement made by the Company as of the Effective Date.

 

PMAL has granted SBN a put right under the operating agreement for PMAL for the SBN Membership Interests. On the earlier of August 17, 2020 or the date of a change in control of PMAL, SBN has the right but not the obligation to require PMAL to repurchase all of the SBN Membership Interests at market equity value (“Market Equity Value”). Market Equity Value shall be equal to the higher of (i) value of PMAL implied by a sale, (ii) 4.5 x EBITDA for the trailing twelve months plus cash, less all outstanding funded indebtedness or (iii) fair market value as determined by mutual agreement between PMAL and SBN, or failing that by an independent firm mutually agreed to. SBN has granted PMAL a call right under the operating agreement for PMAL for the SBN Membership Interests. On the August 17, 2021, PMAL has the right but not the obligation to require SBN to sell all of the SBN Membership Interests at Market Equity Value. The Company has accounted for this in accordance with ASC 480-10-55-59, as a redeemable non-controlling interest. At acquisition $400,000 was recorded as SBN’s PMAL equity ownership. This amount, plus SBN’s pro rata net income allocation is reflected before stockholder’s equity as Redeemable Non-controlling Interest.

 

The Credit Agreement also contains customary covenants, representations and warranties of the parties, including, among others (1) the grant by PMAL to Summit of a security interest on all of the assets of PMAL, (2) a pledge with respect to the equity interests in PMAL owned by the Company, and (3) an unconditional and irrevocable guaranty by the Company of the performance by PMAL of the obligations under the Credit Agreement. In addition, until all amounts under Term Loan A and Term Loan B are paid in full, PMAL has agreed to comply with certain financial covenants that require PMAL to meet pre-established financial ratios. No covenants were calculated in the current quarter. Covenant calculations commence with the period ending December 31, 2017.

 

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7. COMMITMENTS AND CONTINGENCIES

 

Operating Leases

 

The Company has two facilities, which are primarily office and warehouse space. These facilities are all leased under operating leases. One facility is currently under lease for less than one year, while the second facility is currently under lease for more than one year, calling for monthly rental payments of $3,533 through February 28, 2019. In some cases the Company is responsible for real estate taxes, utilities, and repairs under the terms of certain of the operating leases.

 

Litigation

 

The Company is subject to the possibility of claims and lawsuits arising in the normal course of business. In the opinion of management, the Company liability, if any, under existing claims, asserted or unasserted, would not have a material adverse effect on the Company’s consolidated financial position or results of operations.

 

Employment Agreements

   

On November 10, 2017, John Wachter was appointed Chief Executive Officer of the Company. In connection with his appointment, the Company and Mr. Wachter entered into a written employment agreement (the “Wachter Employment Agreement”) for an initial three-year term, which provides for the following compensation terms for Mr. Wachter. Pursuant to the Wachter Employment Agreement, Mr. Wachter will receive a base salary of $100,000 per year, subject to increase, but not decrease, at the discretion of the Board. Mr. Wachter is eligible for a cash and stock bonus equal to ten to twenty percent of the Company’s pre-tax profits over established pre-tax targets, at the end of each respective annual period.

 

In addition, the Wachter Employment Agreement also provides for certain payments and benefits in the event of a termination of his employment under specific circumstances. If, during the term of the Wachter Employment Agreement, his employment is terminated by the Company other than for “cause,”, by Mr. Wachter for “good reason” (each as defined in the Wachter Employment Agreement) or by failure by either party to renew the Wachter Employment Agreement after expiration of the employment term, he would be entitled to (1) a lump sum payment equal to two times his base salary at the rate in effect immediately prior to the termination date, and (2) any unpaid portion of any cash bonus for the annual period preceding the annual period in which such termination occurs that was earned but not paid.

 

On November 10, 2017, William J. Golden was appointed Chief Financial Officer of the Company. Mr. Golden remains the Company’s General Counsel. In connection with his appointment, the Company and Mr. Golden entered into a written employment agreement (the “Golden Employment Agreement”) for an initial three-year term, which provides for the following compensation terms for Mr. Golden. Pursuant to the Golden Employment Agreement, Mr. Golden will receive a base salary of $100,000 per year, subject to increase, but not decrease, at the discretion of the Board. Mr. Golden is eligible for a cash and stock bonus equal to ten to twenty percent of the Company’s pre-tax profits over established pre-tax targets, at the end of each respective annual period.

 

In addition, the Golden Employment Agreement also provides for certain payments and benefits in the event of a termination of his employment under specific circumstances. If, during the term of the Golden Employment Agreement, his employment is terminated by the Company other than for “cause,”, by Mr. Golden for “good reason” (each as defined in the Golden Employment Agreement) or by failure by either party to renew the Golden Employment Agreement after expiration of the employment term, he would be entitled to (1) a lump sum payment equal to two times his base salary at the rate in effect immediately prior to the termination date, and (2) any unpaid portion of any cash bonus for the annual period preceding the annual period in which such termination occurs that was earned but not paid.

 

On November 10, 2017, Mr. Mondo resigned his position as Chief Executive Officer of the Company. Mr. Mondo will remain President of Creative Assembly and continue to focus on expanding and growing the Company’s distribution subsidiary. All other terms of the Mondo Employment Agreement remain the same.

  

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On April 1, 2016, the Company appointed Victor Mondo as President of Aero-Missile. Mr. Mondo became Chief Executive Officer of the Company on July 18, 2016. In connection with his appointment, the Company and Mr. Mondo entered into a written employment agreement (the “Mondo Employment Agreement”) for an initial three-year term, which provides for the following compensation terms for Mr. Mondo. As part of the divesture of Aero-Missile, Mr. Mondo’s compensation structure was altered. Pursuant to the updated Mondo Employment Agreement, Mr. Mondo will receive a base salary of $195,000 per year, subject to increase, but not decrease, at the discretion of the Board. Mr. Mondo is eligible for a cash bonus equal to 4% of Adjusted EBITDA of the Company’s distribution subsidiary over $1,000,000 at the end of each respective annual period. For the period ending March 31, 2017, the Company awarded Mondo a discretionary $60,000 cash bonus. In addition, Mr. Mondo was entitled to an award of shares of the common stock of the Company equal to 3% of the total equity on a fully diluted basis, which were to fully vest on December 31, 2018. Pursuant to the updated Mondo Employment Agreement, Mr. Mondo’s shares vested fully on June 30, 2017, subject to various clawback provisions. As of the date of this report, 8,966 shares have been vested and issued to Mr. Mondo. Furthermore, Mr. Mondo is eligible to receive 3,800 shares of common stock, subject to certain growth metrics for each annual period.

 

In addition, the Mondo Employment Agreement also provides for certain payments and benefits in the event of a termination of his employment under specific circumstances. If, during the term of the Mondo Employment Agreement, his employment is terminated by the Company other than for “cause,” death or disability or by Mr. Mondo for “good reason” (each as defined in the Mondo Employment Agreement), he would be entitled to (1) continuation of his base salary at the rate in effect immediately prior to the termination date for six (6) months following the termination date, and (2) any unpaid portion of any cash bonus for the annual period preceding the annual period in which such termination occurs that was earned but not paid.

 

The Compensation Committee adopted a 2017-2019 Amerinac Holding Corp. Executive Bonus Plan (the “Executive Bonus Plan”), which is subject to and governed by the terms of the 2017 Amerinac Holding Corp. 2017 Equity Incentive Plan (the “2017 Equity Plan”). Certain key employees will participate in the Executive Bonus Plan. The Executive Bonus Plan is designed to (i) offer variable compensation primarily in equity of the Company if executives achieve annual target growth amounts and (ii) align the incentives of executives and shareholders.

 

The Company will fund the annual corporate bonus pool with no more than 20% of the excess, if any, of the Company’s yearly earnings before taxes minus a threshold amount. For 2017, 2018 and 2019, the threshold amounts will be $750,000, $1,250,000 and $1,750,000, respectively.

 

Pursuant to the Executive Bonus Plan, awards are paid out in a mix of cash and equity, with no less than 60% of corporate bonus pool to be in the form of newly issued restricted common stock. All awards will be subject to threshold performance and high-water marks. 

 

8. RELATED PARTY TRANSACTIONS

 

On January 16, 2015, the Company and Polymathes Capital, LLC, an affiliate of Holdings, (“Consultant”), entered into a Management Services Agreement whereby the Company engaged the Consultant to provide financing and management consulting services to the Company and its Subsidiaries on a month-to-month basis. Messrs John Wachter and William Golden are also affiliates of Polymathes Capital and Holdings. The consulting fee is $100,000 per annum, payable in monthly increments. On June 30, 2017, the Company accelerated the payment of management fees due for the second half of 2017. On November 10, 2017, the Company and the Consultant mutually agreed to terminate the Management Services Agreement on December 31, 2017.

 

9. SEGMENT RESULTS

 

The Company manages its operations in two business segments which are defined as follows:

 

	·	The Company’s Creative Assembly subsidiary, which includes alldistribution of proprietary and specialty fasteners primarily serving the heavy truck, automotive, transportation, and infrastructure industries.
	·	The Company’s PMAL subsidiary, which includes all our manufacturing of specialty ingot, electrode products shot products, and master alloys in addition to toll conversion melting services.

 

Segment information for the nine months ended September 30, 2017 is as follows:

 

						Prime
		CAS				Metals
Net Revenue			6,548,474				3,393,558
Cost of goods sold			5,172,578				2,716,767
Gross profit			1,375,896				676,791
Operating expenses:
General and administrative expenses			1,427,231				102,159
Professional and consulting fees			266,352				269,115
Total operating expenses			1,693,583				371,274
Income before other income (expense)			(317,687	)			305,517

 

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Below is the Segment reconciliation to total net income

 

(Loss) income from segments above			(12,170	)
Non-allocated expenses
Other income (expense)
Interest expense - net			(466,530	)
Change in fair value put option			(213,000	)
Gain on sale			3,409,184
Other income (expense)			53
Total other income (expense)			2,729,707
Income from continuing operations before			2,717,537
provision for income taxes
Provision for income taxes			(731	)
Income before before discontinued operations			2,716,806
Income (loss) from discontinued operations, net			976,287
Net Income (loss)			3,693,093

 

9. SUBSEQUENT EVENTS

 

On November 10, 2017, the Saverio Garruto and William A. Lamb were elected to one year terms on the Board. Mr. Garruto will serve as Chairman of the Company’s Audit Committee and a member of the Company’s Compensation Committee. Mr. Lamb will serve as Chairman of the Company’s Compensation Committee. Both Mr. Garruto and Mr. Lamb are independent directors pursuant to the definition of Independent Director as set forth in the NASDAQ Manual.

 

On November 10, 2017, the Company’s Board of Directors adopted the Amerinac Holding Corp. 2017 Equity Plan (the “2017 Equity Plan”), which was approved by our majority of our stockholders. The Compensation Committee, compromised of a majority of independent directors, administers the 2017 Equity Plan and has broad authority to administer, construe and interpret the 2017 Equity Plan.

 

The 2017 Equity Plan is intended to provide incentive compensation and performance compensation to attract and retain talent. The 2017 Equity Plan authorizes the issuance of up to 100,000 shares of the Company’s common stock, subject to adjustment as provided in the 2017 Equity Plan.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

FORWARD-LOOKING STATEMENTS

 

This Form 10-Q contains “forward-looking statements” relating to Amerinac Holding Corp. (the “Company”) which represent the Company’s current expectations or beliefs including, but not limited to, statements concerning the Company’s operations, performance, financial condition and growth. For this purpose, any statements contained in this Form 10-Q that are not statements of historical fact are forward-looking statements. Without limiting the generality of the foregoing, words such as “may”, “anticipate”, “intend”, “could”, “estimate” or “continue” or the negative or other comparable terminology are intended to identify forward-looking statements. These statements by their nature involve substantial risks and uncertainties, such as credit losses, dependence on management and key personnel, variability of quarterly results, and the ability of the Company to continue its growth strategy and the Company’s competition, certain of which are beyond the Company’s control. Should one or more of these risks or uncertainties materialize or should the underlying assumptions prove incorrect, or any of the other risks set out under the caption “Risk Factors” in the Company’s 10-K report for the year ended December 31, 2016 occur, actual outcomes and results could differ materially from those indicated in the forward-looking statements.

 

Any forward-looking statement speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time and it is not possible for management to predict all of such factors, nor can it assess the impact of each such factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

 

General

 

The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements, and the notes thereto, included herein. The information contained below includes statements of the Company’s or management’s beliefs, expectations, hopes, goals and plans that, if not historical, are forward-looking statements subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. For a discussion of forward-looking statements, see the information set forth in the Introductory Note to this Quarterly Report under the caption “Forward Looking Statements” which information is incorporated herein by reference.

 

The condensed consolidated interim financial statements included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. The condensed consolidated financial statements and notes are presented as permitted on Form 10-Q and do not contain information included in the Company’s annual consolidated statements and notes. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. The results for the ninemonths ended September 30, 2017 may not be indicative of the results for the entire year.

 

These statements reflect all adjustments, consisting of normal recurring adjustments, which in the opinion of management, are necessary for fair presentation of the information contained herein.

 

Plan of Operation and Discussion of Operations

 

Through its Creative Assembly segment, the Company distributes high-quality, predominantly domestically-manufactured, technically complex, nut and bolt products and a proprietary locking washer product that are used primarily for industrial/commercial applications that require a high level of certified and assured quality.

 

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Creative Assembly is a value added distributor of proprietary and specialty fasteners for production, primarily serving the heavy truck, automotive, appliance, and material handling industries. Creative Assembly is a niche player in the North American fastener industry. The fastener distribution industry is highly fragmented with no single company holding a dominant position. Creative Assembly competes with numerous distributors who serve as authorized stocking distributors for the fastener manufacturers in the Company’s supplier base. Creative Assembly is a one-stop source for standard, self-locking, semi-special and special nuts, bolts and washers manufactured to several industrial specifications. Creative Assembly maintains an inventory of approximately 4,000 SKUs comprised of approximately 19 million parts of premium quality, brand name fastener products. Creative Assembly sells its products pursuant to written purchase orders from its customers. All products are shipped from the Company’s warehouses via common carrier. Creative Assembly’s products are manufactured, by others, to exacting specifications and are made from materials that provide the strength and reliability required for their industrial applications.

 

Through its PMAL segment, the Company is a manufacturer of specialty ingot and electrode products which are supplied for investment castings, forging, ring rolling, and plate production. PMAL also manufactures shot products and master alloys which are sold to other melt shops, and provides manufacturing support services. The flexible manufacturing operations at PMAL enable the Company to offer a wide range of product grades in customer specific order quantities. The primary grade types include stainless steels, tool steels, nickel based grades, cobalt based grades and some nonferrous alloys. PMAL also offers toll conversion melting services.

 

PACCAR Inc represented approximately 31% of the Company’s total sales for the nine months ended September 30, 2017. AMG-Vanadium represented 11% of the Company’s total sales for the nine months ended September 30, 2017. Waterous Company represented approximately 6.5% of sales for the ninemonths ended September 30, 2017. No other customer accounted for greater than 10% of the Company’s total sales.

 

At September 30, 2017, Remelt Resources, PACCAR, Universal Stainless Steel and AMG-Vanadiumreceivables were $771,000, $424,800, $422,550,and $397,800, respectively, which accounted for 24.6%, 13.5%, 13.6%, and 12.7% of total receivables, respectively.

 

For the nine months period ending September 30, 2016, Waterous accounted for 11% of sales.

 

At December 31, 2016, PACCAR and Waterous receivables were $338,368. At December 31, 2016, PACCAR represented 47% of outstanding receivables.

 

The Company’s largest supplier, AVK Industrial Products, represent approximately 21.8% of product distributed for the nine months ending September 30, 2017, versus 38.4% for the nine months ending September 30, 2016.

 

For the periods ending September 30, 2017 and December 31, 2016, AVK accounted for 29% and 36% of payables respectively.

 

Results from Operations for ninemonths ending September 30, 2017 vs September 30, 2016

 

The Company’s revenues increased approximately 36.9% or $2,679,500 for nine months ended September 30, 2017 to $9,942,000 from $7,262,500 in the comparable period last year.

 

The primary driver of the increase in sales was the acquisition of the assets of Prime Metals. PMAL is our sole manufacturing subsidiary. Slowdowns in the Class 8 truck market were the primary contribution to the decrease in sales in the Company’s distribution subsidiary, as well as the termination of our relationship with Waterous. The nature of our sales relationship, within our distribution subsidiary, does not allow us to increase unit pricings as production volumes drop. Our distribution subsidiary was down approximately $800,000 in revenue year to date, versus 2016 year to date.

 

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The Company’s gross profit decreased approximately 1.24% or $26,000 for the nine months ended September 30, 2017 to $2,053,000 from $2,078,500 in the comparable period last year. From time to time the Company will experience margin mix that will lead to temporarily higher or lower gross profit. Our distribution subsidiary experienced margin compression as several high volume parts required price decreases to maintain the business. In addition, a decrease in volumes does not necessarily mean our warehouse staffing levels can adjust in a linear fashion to offset the decrease in volumes. At our manufacturing subsidiary, our gross profit contribution accounted for approximately one third of the Company’s total gross profit.

 

The Company’s total operating expenses increased 80% or $916,400 for the nine months September 30, 2017 to $2,065,000 from $1,148,600 in the comparable period last year. This is largely a result of additions to staffing related to the Company’s long term growth plan and inclusion of approximately $400,000 from PMAL.

 

The Company’s accounts receivable have increased by approximately $2,514,000 to $3,234,000 at September 30, 2017 from $720,000 at December 31, 2016; this difference is due to mainly to the impact of the acquisition of the assets of Prime Metals. The Company’s inventory has increased approximately $1,159,000 as of September 30, 2017 from December 31, 2016 due to acquisition of Prime Metals. The Company expects to see a continued trend of increasing inventory levels to support the Company’s growth plans in both subsidiaries.

 

Liquidity

 

The Company believes that it can meet its financial obligations for a period of 12 months from the date of this report at its presently contemplated operating levels. The Company is presently seeking to expand its capital availability which will enable the Company to fully take advantage of sales opportunities presented to it which require the Company to make additional investments in inventory.

 

The Company believes it can expand its business with its present staff numbers.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

This item is not required for smaller reporting companies, and, if it were required, is not applicable to the Company’s present operations.

 

ITEM 4. CONTROLS AND PROCEDURES

 

(A) Disclosure Controls and Procedures

 

We carried out an evaluation with the participation of our chief executive officer who serves as our principal executive officer and principal financial officer, required by Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934 (the “Exchange Act”) of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on this evaluation our chief executive officer concluded that our disclosure controls and procedures were not effective at September 30, 2017 as to ensure that the information relating to our company required to be disclosed in our SEC reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) is accumulated and communicated to our management, including our chief executive officer, to allow timely decisions regarding required disclosures due to the existence of material weaknesses.

 

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The material weaknesses are as follows:

 

	·	A lack of sufficient resources including a designated chief financial officer and an insufficient level of monitoring and oversight, which restricted the Company’s ability to gather, analyze and report information relative to the financial statement assertions in a timely manner, including insufficient documentation and review of selection of generally accepted accounting principles.
	·	The limited size of the accounting department makes it impractical to achieve an appropriate level of segregation of duties. Specifically, due to lack of personnel, effective controls were not designed and implemented to ensure accounting functions were properly segregated.
	·	Due to a lack of adequate staffing within the finance department and adequate staffing within operational departments that provide information to the finance department, we did not establish and maintain effective controls over certain of our period-end financial close and reporting processes. Specifically, effective controls were not designed and implemented to ensure that journal entries were properly prepared with sufficient support or documentation or were reviewed and approved to ensure the accuracy and completeness of the journal entries recorded.

 

The Company may add additional personnel and procedures, which we believe will remedy these weaknesses in disclosure controls and procedures in future periods. However, there are no assurances we will be able to devote the necessary capital to hire the additional personnel and institute the additional systems, policies and procedures to the level necessary. In that event, there are no assurances that the material weaknesses described above will be timely remediated or not result in errors in our financial statements in future periods.

 

Changes in Internal Control Over Financial Reporting

 

There was no change in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II

OTHER INFORMATION

 

ITEM 6. EXHIBITS

 

The following exhibits are included herein:

 

Exhibit No.		Exhibit
31.1		Certification of Chief Executive Officer of the Company required by Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended
31.2		Certification of Chief Financial Officer of the Company required by Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended
32.1		Certification of Chief Executive Officer and of the Company required by Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended
32.2		Certification of Chief Financial Officer of the Company required by Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended
101		XBRL Interactive Data Files

 

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SIGNATURES

 

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. 

 

	AMERINAC HOLDING CORP.
Dated: November 17, 2017	By:	/s/ John Wachter
		John Wachter
		Chief Executive Officer

 

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EXHIBIT INDEX

 

Exhibit Number		Description
31.1		Certification of Chief Executive Officer of the Company required by Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended
31.2		Certification of Chief Financial Officer of the Company required by Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended
32.1		Certification of Chief Executive Officer of the Company required by Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended
32.2		Certification of Chief Financial Officer of the Company required by Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended
101		XBRL Interactive Data Files

 

 

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