ITEM 1. BUSINESS
Overview of Business
Amerinac Holding Corp. (“Amerinac” or the “Company”) was incorporated in Delaware on December 28, 2005. 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. 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” or “CAS”) and its wholly-owned manufacturing subsidiary, Prime Metals Acquisition LLC (“PMAL”). Creative Assembly is a value added distributor of proprietary and specialty fasteners primarily serving the heavy truck, automotive, transportation, and infrastructure industries.
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.
Industry Overview and Competition
The fastener distribution industry is highly fragmented. No one company holds a dominant position. This is primarily caused by the varied uses of fasteners and the size of the industry. Amerinac competes with the numerous fastener distributors which serve as authorized stocking distributors for one or more of the manufacturers in the Company’s supplier base. Amerinac believes that the depth of its inventory represents a competitive advantage. As a stocking distributor, the Company has employed a business model of maintaining levels of inventory on hand or on order with its suppliers that can satisfy its customers’ projected needs. The demanding quality, inspection, tracking and re-inspection requirements, part certifications and customer qualifications imposed on distributors of industrial fasteners by major consumers create a barrier to entry.
In addition to competing against other distributors, the company believes it faces competition from end users creating their own supply chain management.
The company believes its competitive attributes are as follows:
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The Company’s quality system is certified to Rev. C, AS9100D, ISO 9001:2015 and PED quality measures. Since quality is an important measure of industrial suppliers, the Company strives to maintain its quality system to the highest standards in the industry.
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As an authorized stocking distributor for the premier domestic manufacturers, the Company is able to maintain relationships with customers not generally available to the industry. Many manufacturers in the past several years have consolidated their network of authorized distributors.
The steel foundry industry is a diverse industry. This is primarily caused by the varied sizes and shapes of metal produced, as well as, the numerous grades and quality of steel required for the end use applications. PMAL competes with the numerous mills in the United States and internationally. PMAL’s customers sell products into automotive, aerospace, medical device, as well as other industries. PMAL believes that its nimble and flexible production capabilities, and consistent high level of quality, provide competitive advantages. PMAL believes that the fixed costs needed for new entrants to the steel foundry market create very significant barriers to entry.
Suppliers
No supplier represented more than 10% of product distributed for the year ending December 31, 2019. No supplier represented more than 10% of product distributed for the year ending December 31, 2018. Amounts owing to AVK outstanding at December 31, 2019 and 2018 represented 11.9% and 11.8% of accounts payable, respectively. 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.
Customers
At December 31, 2019, Remelt Sources, Inc., Universal Stainless & Alloys Products, AMG-Vanadium, PACCAR and Eastham Forge were 19.8%, 16.2%, 14.9%, 13.3% and 11.7% of total receivables, respectively. At December 31, 2018, Remelt Sources, Inc., AMG-Vanadium, PACCAR and Universal Stainless & Alloys Products receivables were 20.9%, 15%, 14% and 13% of total receivables, respectively.
For the year ending December 31, 2019, Remelt Sources, Inc., AMG-Vanadium, PACCAR and Universal Stainless & Alloys Products accounted for 20.3%, 17%, 16.7% and 11.1% of sales, respectively. For the year ending December 31, 2018, Remelt Sources, Inc., AMG-Vanadium, PACCAR, Ametek and Universal Stainless & Alloys Products accounted for 17.6%, 16.2%, 14%, 13.8% and 12.4% of sales, respectively.
Employees
As of December 31, 2019, the Company had 84 employees, of whom 4 were part-time. We believe our employee relations are very good.
ITEM 1A.
ITEM 1A. RISK FACTORS
An investment in our securities involves a high degree of risk. We are subject to various risks that may materially harm our business, financial condition and results of operations. An investor should carefully consider the risks and uncertainties described below and the other information in this filing before deciding to purchase our securities. If any of these risks or uncertainties actually occurs, our business, financial condition or operating results could be materially harmed. In that case, the trading price of our common stock could decline. You should only purchase our securities if you can afford to suffer the loss of your entire investment.
RISKS RELATED TO OUR BUSINESS
Fluctuations in our operating results and announcements and developments concerning our business affect our stock price.
Our quarterly operating results, the number of stockholders desiring to sell their shares, changes in general economic conditions and the financial markets, the execution of new contracts and the completion of existing agreements and other developments affecting us, could cause the market price of our common stock to fluctuate substantially.
We may not be able to obtain necessary additional capital which could adversely impact our operations.
Unless the Company can increase its investment in inventory and meet operational expenses with the existing sources of funds we have available, we may need access to additional financing to grow our sales. Such additional financing, whether from external sources or related parties, may not be available if needed or on favorable terms. Our inability to obtain adequate financing will adversely affect the Company’s pace of business operations or could create liquidity and cash flow problems. This could be materially harmful to our business and may result in a lower stock price.
We could fail to attract or retain key personnel, which could be detrimental to our operations.
Our success largely depends on the efforts and abilities of key executives, employees and consultants. The loss of the services of a key executive, employee or consultant could materially harm our business because of the cost and time necessary to replace and train a replacement. Such a loss would also divert management attention away from operational issues. To the extent that we are smaller than our competitors and have fewer resources, we may not be able to attract the sufficient number and quality of staff.
If we make any acquisitions, they may disrupt or have a negative impact on our business.
If we make acquisitions, we could have difficulty integrating the acquired companies’ personnel and operations with our own. In addition, the key personnel of the acquired business may not be willing to work for us. We cannot predict the affect expansion may have on our core business. Regardless of whether we are successful in making an acquisition, the negotiations could disrupt our ongoing business, distract our management and employees and increase our expenses. In addition to the risks described above, acquisitions are accompanied by a number of inherent risks, including, without limitation, the following:
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the difficulty of integrating acquired products, services or operations;
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the potential disruption of the ongoing businesses and distraction of our management and the management of acquired companies;
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the difficulty of incorporating acquired rights or products into our existing business;
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difficulties in disposing of the excess or idle facilities of an acquired company or business and expenses in maintaining such facilities;
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difficulties in maintaining uniform standards, controls, procedures and policies;
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the potential impairment of relationships with employees and customers as a result of any integration of new management personnel;
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the potential inability or failure to achieve additional sales and enhance our customer base through cross-marketing of the products to new and existing customers;
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the effect of any government regulations which relate to the business acquired; and
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potential unknown liabilities associated with acquired businesses or product lines, or the need to spend significant amounts to retool, reposition or modify the marketing or sales of acquired products or the defense of any litigation, whether or not successful, resulting from actions of the acquired company prior to our acquisition.
Our business could be severely impaired if and to the extent that we are unable to succeed in addressing any of these risks or other problems encountered in connection with these acquisitions, many of which cannot be presently identified. These risks and problems could disrupt our ongoing business, distract our management and employees, increase our expenses and adversely affect our results of operations.
We are dependent on a few major industries.
We are dependent on the stainless steel fabrication and trucking industries for a majority of our revenue and, as a result, our business will be negatively impacted by any decline in those industries.
Our business or operations could be adversely affected by events outside of our control, such as natural disasters, wars or health epidemics.
The Company’s operations may be affected by the recent and ongoing outbreak of the coronavirus disease 2019 (COVID-19) which in March 2020, was been declared a pandemic by the World Health Organization. The ultimate disruption which may be caused by the outbreak is uncertain; however, it may result in a material adverse impact on the Company’s financial position, operations and cash flows. Possible areas that may be affected include, but are not limited to, disruption to the Company’s customers and revenue, labor workforce, unavailability of products and supplies used in operations, and the decline in value of assets held by the Company, including, inventories, property and equipment, and accounts receivable and unbilled receivables.
RISKS RELATING TO OUR COMMON STOCK
If we fail to remain current on our reporting requirements, we could be removed from the OTC Bulletin Board or OTC:Pink listing which would limit the ability of broker-dealers to sell our securities and the ability of stockholders to sell their securities in the secondary market.
Companies trading on the OTC Bulletin Board or OTC:Pink, such as us, must be reporting issuers under Section 12 of the Securities Exchange Act of 1934, as amended, and must be current in their reports under Section 13, in order to maintain price quotation privileges on the OTC Bulletin Board or OTC:Pink. If we fail to remain current on our reporting requirements, we could be removed from the OTC Bulletin Board or OTC:Pink. As a result, the market liquidity for our securities could be severely adversely affected by limiting the ability of broker-dealers to sell our securities and the ability of stockholders to sell their securities in the secondary market.
If the number of record holders of our common stock stays below 300, we may choose to terminate registration of our common stock and suspend our SEC reporting obligations limiting the ability of stockholders to sell their securities in the secondary market.
As of December 31, 2019, we have only 54 record holders of our common stock. We may choose to file a Form 15 with the SEC, which would suspend our SEC reporting obligations until the number of record holders of our common stock exceeded 300. Suspending our reporting obligations could adversely affect the liquidity and price of our common stock.
Our common stock may be affected by limited trading volume and the price of our shares may fluctuate significantly, which cumulatively may affect shareholders’ ability to sell shares of our common stock
There has been a limited public market for our common stock. A more active trading market for our common stock may not develop. An absence of an active trading market could adversely affect our shareholders’ ability to sell our common stock in short time periods, or possibly at all. Our common stock has experienced, and is likely to experience in the future, significant price and volume fluctuations, which could adversely affect the market price of our common stock without regard to our operating performance. In addition, we believe that factors such as quarterly fluctuations in our financial results and changes in the overall economy or the condition of the financial markets could cause the price of our common stock to fluctuate substantially. These factors may negatively impact shareholders’ ability to sell shares of the Company’s common stock.
Because we are currently subject to the “penny stock” rules, our investors may have difficulty in selling their shares of our common stock.
“Penny Stock” is shares of stock:
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With a price of less than $5.00 per share;
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That are not traded on a “recognized” national exchange;
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Whose prices are not quoted on the NASDAQ automated quotation system (NASDAQ listed stock must still have a price of not less than $5.00 per share); or
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Of issuers with net tangible assets less than $2.0 million (if the issuer has been in continuous operation for at least three years) or $10.0 million (if in continuous operation for less than three years), or with average revenues of less than $6.0 million for the last three years.
Our Common Stock is presently deemed to be Penny Stock.
Our stock is currently subject to the SEC’s penny stock rules, (Rule 3a51-1 promulgated under the Securities Exchange Act of 1934) which impose additional sales practice requirements and restrictions on broker-dealers that sell our stock to persons other than established customers and institutional accredited investors. These requirements may reduce the potential market for our common stock by reducing the number of potential investors. This may make it more difficult for investors in our common stock to sell shares to third parties or to otherwise dispose of them. This could cause our stock price to decline.
Broker-dealers dealing in penny stocks are required to provide potential investors with a document disclosing the risks of penny stocks. Because of the speculative nature of penny stocks, Congress prohibited broker-dealers from effecting transactions in penny stocks unless they comply with the requirements of Section 15(h) of the Exchange Act and the rules thereunder. These SEC rules provide, among other things, that a broker-dealer must (1) approve the customer for the specific penny stock transaction and receive from the customer a written agreement to the transaction; (2) furnish the customer a disclosure document describing the risks of investing in penny stocks; (3) disclose to the customer the current market quotation, if any, for the penny stock; and (4) disclose to the customer the amount of compensation the firm and its broker will receive for the trade.
According to the SEC, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include:
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Control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer;
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Manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases;
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“Boiler room” practices involving high pressure sales tactics and unrealistic price projections by inexperienced sales persons;
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Excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and
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The wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the inevitable collapse of those prices with consequent investor losses.
This may make it more difficult for investors to sell their shares due to suitability requirements.
The protection provided by the federal securities laws relating to forward looking statements does not presently apply to issuers of Penny Stock Shares. Our shares are Penny Stock shares.
Although the federal securities law provides a safe harbor for forward-looking statements made by a public company that files reports under the federal securities laws, this safe harbor is not available to issuers of penny stocks. As a result, as long as our shares continue to be a Penny Stock, we will not have the benefit of this safe harbor protection in the event of any proceeding based upon a claim that the material provided by us contained a material misstatement of fact or was misleading in any material respect because of our failure to include any statements necessary to make the statements not misleading.
Failure to achieve and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and operating results and stockholders could lose confidence in our financial reporting.
Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness of our internal control over financial reporting as of the end of each year, and to include a management report assessing the effectiveness of our internal control over financial reporting in each Annual Report on Form 10-K.
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. Over time, controls may become inadequate because changes in conditions or deterioration in the degree of compliance with policies or procedures may occur. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
As a result, we cannot assure you that significant deficiencies or material weaknesses in our internal control over financial reporting will not be identified in the future or that we can effectively remediate our reported weaknesses. Any failure to maintain or implement required new or improved controls, or any difficulties we encounter in their implementation, could result in significant deficiencies or material weaknesses, cause us to fail to timely meet our periodic reporting obligations, or result in material misstatements in our financial statements. Any such failure could also adversely affect the results of periodic management evaluations regarding disclosure controls and the effectiveness of our internal control over financial reporting required under Section 404 of the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder. The existence of a material weakness could result in errors in our financial statements that could result in a restatement of financial statements, cause us to fail to timely meet our reporting obligations and cause investors to lose confidence in our reported financial information.
In 2020, the Company anticipates engaging an outside consultant to properly test the Company’s internal controls and provide a report to help the Company outlining the steps necessary for the Company to have effective internal controls. Over the past few years, the Company has proactively taken steps to improve internal controls and governance, including but not limited to separation of certain financial reporting duties.
ITEM 2.
ITEM 2. PROPERTIES
Our principal executive office and distribution center for Creative Assembly is located at 5936 State Route 159 Chillicothe, Ohio. The space is leased by the Company for approximately $6,417 per month until September 2022. The principal manufacturing center for PMAL is located at 101 Innovation Drive, Homer City, Pennsylvania. The Homer City facility is owned by PMAL. Our Texas facility is leased by the Company for $19,676 per month until June 2024. In total, the Company occupies three (3) locations ranging in size throughout the United States for use as warehouse space. All of the space we currently occupy is sufficient for our present and anticipated needs. Management expects no material change in lease expenses through 2020.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR AMERINAC HOLDING CORP.’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company’s common stock currently trades on the OTC: BB or OTC: Pink under the trading symbol “PAOS”. As of December 31, 2019, the Company was authorized to issue 1,500,000 shares of common stock with a $0.001 par value. As of December 31, 2019, there were 54 holders of record of the Company’s common stock and 313,636 shares issued and outstanding.
Dividends
Amerinac has not declared or paid cash dividends on its common stock since its inception and does not anticipate paying such dividends in the foreseeable future. The payment of dividends may be made at the discretion of the Board and will depend upon, among other factors, the Company’s operations, its capital requirements, and its overall financial condition.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The following discussion and analysis should be read in conjunction with the consolidated financial statements, and the notes thereto included herein. The information contained below includes statements of the Company’s or management’s beliefs, expectations, goals and plans. These forward-looking statements are 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 Annual Report under the caption “Forward Looking Statements” which information is incorporated herein by reference.
A description of the Company’s operations and marketplace is contained in Section 1 of this report.
Liquidity and Capital Resources
In 2019, the Company had $1,650,264 of operating cash flow, versus $1,451,253 of operating cash flow in 2018 due to increased profitability after noncash adjustments. Cash flows from investing activities was ($3,492,766) in 2019 versus 735,620 in 2018, primarily because of the repurchase of the non-controlling interests in PMAL. Purchases of property and equipment increased from $264,380 in 2018 to $492,766 in 2019 as the Company made several investments in upgraded equipment. The Company’s net cash flow provided by (used in) financing activity was $1,539,638 in 2019 versus ($2,174,988) in 2018, which is primarily the result of the draw on the CAS revolving loan and PMAL revolving loan to repurchase the non-controlling interests of SBN V PMA LLC, and the payment on notes in the prior year. The working capital of the Company was $3,858,072 for 2019 and $4,948,521 for 2018 due to an increase in our lines of credit to repurchase the non-controlling interests in PMAL, which was offset by an increase in inventory.
Management believes that the company has appropriate liquidity to continue operations for at least twelve months from the date of this report.
PMAL Berkshire Loans
On August 31, 2018, PMAL entered into a Loan and Security Agreement (the “PMAL Loan and Security Agreement”) with Berkshire Bank (“Berkshire Bank”) establishing: 1) a new revolving credit facility in an aggregate principal amount of up to $6.0 million (the “PMAL Revolving Loan”), 2) a term loan in the amount of $3.5 million (“Berkshire Term Loan A”) and 3) a term loan in the amount of $1.5 million (“Berkshire Term Loan B”). Borrowings under the PMAL Revolving Loan may be used to finance working capital and other general corporate purposes. On August 16, 2019, the PMAL Loan and Security Agreement was amended to permit a one-time cash distribution of $1.5 million, which was used to partially fund the Company’s repurchase of the SBN Membership Interests.
Borrowings under the PMAL Revolving Loan bear interest at a rate equal to the Intercontinental Exchange Benchmark Administration Ltd. London Interbank Offered Rate (“ICE LIBOR”) rate plus 3.25%, which was 4.95% at December 31, 2019. Berkshire Term Loan A and Berkshire Term Loan B bear interest at ICE LIBOR rate plus 4.25%, which was 5.95% at December 31, 2019. The Company paid a total of $98,353 and $33,618 in interest on the PMAL Revolving Loan during the years ended December 31, 2019 and 2018, respectively.
The outstanding principal amount of any borrowings under the PMAL Revolving Loan will be due and payable on August 21, 2021, subject to an earlier maturity date upon an event of default (the “PMAL Revolving Credit Maturity Date”). Berkshire Term Loan A has a maturity date the earlier of (i) August 31, 2023 or (ii) the PMAL Revolving Credit Maturity Date. Berkshire Term Loan B has a maturity date the earlier of (i) August 31, 2023 or (ii) the PMAL Revolving Credit Maturity Date. The principal balance of Berkshire Term Loan A shall be paid in equal monthly installments of $41,667 commencing on October 1, 2018. Any unpaid principal and interest shall be due on the maturity date. The principal balance of Berkshire Term Loan B shall be paid in equal monthly installments of $8,334 commencing on October 1, 2018. Any unpaid principal and interest shall be due on the maturity date.
The PMAL Loan and Security Agreement contains 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 PMAL Loan and Security Agreement contains certain financial covenants, including a cash flow coverage ratio and a tangible net worth require covenant. Under the cash flow coverage covenant, PMAL shall maintain a quarterly cash flow coverage ratio of not less than 1.20 to 1.00. Under the tangible net worth covenant, PMAL shall maintain a tangible net worth of no less than $4.1 million. The tangible net worth amount required shall increase annually on each June 30 by 50% of PMAL’s prior year’s undistributed net income. As of December 31, 2019, PMAL was in compliance with both of these covenants.
The obligations of PMAL under the PMAL Loan and Security Agreement are secured by liens and security interests on all assets of PMAL. Amerinac is a secured guarantor of the PMAL Loan and Security Agreement, and has pledged its equity in PMAL.
CAS Berkshire Loan
On July 15, 2019, CAS entered into a Loan and Security Agreement (the “CAS Loan and Security Agreement”) with Berkshire Bank establishing a new revolving credit facility in an aggregate principal amount of up to $6.0 million (the “CAS Revolving Loan”). Borrowings under the CAS Revolving Loan may be used to finance working capital and other general corporate purposes.
On August 16, 2019, the CAS Loan and Security Agreement was amended to permit a one-time cash distribution of $1.5 million which was used to partially fund the Company’s repurchase of the SBN Membership Interests.
Borrowings under the CAS Revolving Loan bear interest at a rate equal to the ICE LIBOR rate plus 3.00%, which was 4.70% at December 31, 2019.
The outstanding principal amount of any borrowings under the CAS Revolving Loan will be due and payable on July 15, 2022, subject to an earlier maturity date upon an event of default. Any unpaid principal and interest shall be due on the maturity date.
The CAS Loan and Security Agreement contains 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 CAS Loan and Security Agreement contains certain financial covenants, including a cash flow coverage ratio and a tangible net worth requirement covenant. Under the cash flow coverage covenant, CAS shall maintain a quarterly cash flow coverage ratio of not less than 1.20 to 1.00. Under the tangible net worth covenant, CAS shall maintain a tangible net worth of no less than $1.0 million. The tangible net worth amount required shall increase annually on each June 30 by 50% of CAS’s prior years undistributed net income. As of December 31, 2019, the Company was in compliance will all covenants under the CAS Loan and Security Agreement.
The obligations of CAS under the CAS Loan and Security Agreement are secured by liens and security interests on all assets of CAS. The Company is a secured guarantor of the CAS Loan and Security Agreement, and has pledged its equity in CAS.
Results of Operations
The Company’s aggregate sales increased by 3% in 2019 over 2018. During 2019, the CAS sales compared to 2018 sales were up approximately 37.2%. The main driver of sales has been related to the growth in our heavy truck market and the addition of new customers.
PMAL sales were $28,330,608 and $31,452,408 for 2019 and 2018, respectively as PMAL had a larger mix of tolling revenue in 2019. Tolling revenue is less per each equivalent heat because PMAL does not purchase the metal, which remains the property of the customer.
In 2019, the Company experienced normal lead times for product deliveries. While the Company believes that its supply chain will continue to operate without major interruption, the Company’s management periodically assesses each supplier.
Gross profit margins, were 17.4% and 17.9% for 2019 and 2018, respectively. Operating expenses in 2019 increased by 4.6% compared to 2018 due to normal variation in cost. In 2019, PMAL operating expenses were $2,354,664 and Creative Assembly operating expenses were $1,817,444. In 2018, PMAL operating expenses were $2,376,301 and Creative Assembly operating expenses were $1,688,634.
Interest cost was down 56% in 2019 compared to 2018 because the Company refinanced Summit Term Loan A and Summit Term Loan B with lower interest financing midway through 2018. Interest expense in 2019 and 2018 was $516,352 and $1,176,469, respectively.
Off-Balance Sheet Arrangements
None.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonably based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements, as well as the reported amounts of revenue and expenses during the periods presented. To the extent there are material differences between these estimates, judgments and assumptions and actual results, our consolidated financial statements will be affected.
In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application. There are also areas in which management’s judgment in selecting among available alternatives would not produce a materially different result. Our senior management has reviewed these critical accounting policies and related disclosures. See notes to consolidated financial statements, which contain additional information regarding our accounting policies and other disclosures required by GAAP.
The following are the Company’s critical accounting policies:
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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 the age of the respective part and the knowledge of future demand of inventory on hand as well as other market conditions and events. 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.
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Accounts Receivable Allowance - Accounts receivable are recorded net of provisions for doubtful accounts. The Company records an allowance for doubtful accounts to allow for any amounts that may not be recoverable. The amount of the allowance is based on an analysis of the Company’s prior collection experience, customer credit worthiness, and current economic trends. The Company determines receivables to be past due based on the payment terms of original invoices. Interest is not typically charged on past due receivables. Accounts are written off against the allowance when deemed uncollectable.
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Unbilled Services - The Company recognizes revenue on its tolling services as those services are performed. Unbilled services represent the revenue recognized but not yet invoiced.
• Revenue Recognition - Revenue is recognized when control transfers to our customers via shipment of products or delivery of services. Shipping and handling costs are considered fulfillment activities and as such are not accounted for as separate performance obligations. We measure revenue as the amount of consideration we expect to be entitled to receive in exchange for those goods or services, net of any variable considerations (e.g., rights to return product, sales incentives, others) and any taxes collected from customers and subsequently remitted to governmental authorities. The Company applied the practical expedient available under ASC 606 to disregard determining significant financing components if the good or serve is transferred and payment is received within one year. We estimate product returns based on historical experience and record them on a gross basis. Substantially all of Creative Assembly customer returns relate to products that are returned under warranty obligations underwritten by manufacturers. Substantially all of PMAL customer returns relate to products which do not meet customer requirements and are replaced by the Company. We occasionally receive advance payments to secure product to be delivered in future periods. These advance payments are recorded as deferred revenue, and revenue is recognized as our performance obligations are satisfied throughout the term of the applicable contract. We may also purchase metal on our customer’s behalf, sell the unprocessed metal to our customer, and then process and ship the material, charging a processing fee at the time of shipment. For these specific non-tolling arrangements in which we purchase metal for a customer, a single performance obligation exists, and as a result, amounts invoiced to our customers for the metal purchased on their behalf is recorded as deferred revenue until the metal is processed and shipped.
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Income Taxes - In the preparation of consolidated financial statements, the Company estimates anticipated income taxes. Deferred income tax assets and liabilities represent tax benefits or obligations that arise from temporary differences due to differing treatment of certain items for accounting and income tax purposes. The Company evaluates deferred tax assets each period to ensure that estimated future taxable income will be sufficient in character, amount and timing to result in their recovery. A valuation allowance is established when management determines that it is more likely than not that a deferred tax asset will not be realized to reduce the assets to their realizable value. Considerable judgments are required in establishing deferred tax valuation allowances and in assessing probable exposures related to tax matters. The Company’s tax returns are subject to audit by Federal, state and local taxing authorities that could challenge the company’s tax positions. The Company believes it records and/or discloses such potential tax liabilities as appropriate and has reasonably estimated its income tax liabilities and recoverable tax assets.
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Goodwill and Intangible Assets - We make estimates, assumptions, and judgments when valuing goodwill and other intangible assets such as customer lists in connection with the initial purchase price allocation of any acquired operations, as well as when evaluating the recoverability of our goodwill and other intangible assets on an ongoing basis. These estimates are based upon a number of factors, including historical experience, market conditions, and information obtained from the management of any acquired operations. Critical estimates in valuing certain intangible assets include, but are not limited to, historical and projected attrition rates, discount rates, anticipated growth in revenue from the acquired customers and acquired technology, and the expected use of the acquired assets. These factors are also considered in determining the useful life of acquired intangible assets. The amounts and useful lives assigned to identified intangible assets impact the amount and timing of future amortization expense.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Amerinac Holding Corp.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Amerinac Holding Corp. and Subsidiaries (the “Company”) as of December 31, 2019 and 2018, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2019, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Friedman LLP
FRIEDMAN LLP
We have served as the Company’s auditor since 2009.
Marlton, New Jersey
March 30, 2020
AMERINAC HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these consolidated financial statements.
AMERINAC HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
The accompanying notes are an integral part of these consolidated financial statements.
AMERINAC HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2019 AND 2018
The accompanying notes are an integral part of these consolidated financial statements.
AMERINAC HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2019 AND 2018
The accompanying notes are an integral part of these consolidated financial statements.
AMERINAC HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
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 used primarily for industrial/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” or “CAS”) and its wholly-owned manufacturing subsidiary, Prime Metals Acquisition LLC, a Delaware limited liability company (“PMAL”). Creative Assembly is a value-added distributor of proprietary and specialty fasteners primarily serving the heavy truck, automotive, transportation, and infrastructure industries.
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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All inter-company accounts have been eliminated.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. The most significant estimates relate to the useful lives and impairment considerations of long-lived and intangible assets, reserves for inventory and accounts receivable, going concern considerations, discount rates in connection with right-of-use assets and the valuation of redeemable non-controlling interest.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. From time to time, cash balances may exceed the federal deposit insurance limits.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded net of provisions for doubtful accounts. The Company records an allowance for doubtful accounts to allow for any amounts that may not be recoverable. The amount of the allowance is based on an analysis of the Company’s prior collection experience, customer credit worthiness, and current economic trends. Based on management’s review of accounts receivable, the Company carries an allowance for doubtful accounts of $78,753 as of December 31, 2019 and 2018. The Company determines receivables to be past due based on the payment terms of original invoices. Interest is not typically charged on past due receivables. Accounts are written off against the allowance when deemed uncollectable.
Unbilled Services
The Company recognizes revenue on its tolling services as those services are performed. Unbilled services represent the revenue recognized but not yet invoiced.
Inventory
For the Company’s distribution subsidiary, Creative Assembly, inventories consist only of finished goods and 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 the age of the respective part and the knowledge of future demand of inventory on hand as well as other market conditions and events. 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. At the end of 2019, the Company 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. As of December 31, 2019 and December 31, 2018, the inventory reserve for Creative Assembly was $86,211 and $68,160, respectively.
For the Company’s manufacturing subsidiary, PMAL, 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 December 31, 2019, the Company’s manufacturing subsidiary had more than 500 unique metal chemistries it produced, but keeps minimal finished inventory on hand.
For 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 other market conditions and events. As of December 31, 2019 and December 31, 2018, the inventory reserve for PMAL was $82,849.
The Company’s inventory consists of the following:
Property, Land and Equipment
Property, land and equipment are stated at cost less accumulated depreciation and amortization. The Company computes depreciation and amortization using the straight-line method over the estimated useful lives of the assets acquired as follows:
_____________
** Shorter of life or lease term.
The carrying amount of all long-lived assets is evaluated periodically to determine whether adjustment to the useful life or to the unamortized balance is warranted. Such evaluation is based principally on the expected utilization of the long-lived assets.
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 goodwill.
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.
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 consolidated 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 December 31, 2019, 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
The Company accounts for revenue recognition in accordance with ASC Topic 606 (“ASC 606”). The core principle of ASC 606 is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASC 606 defines a five-step process to achieve this core principle, which includes; (1) Identifying contracts with customers, (2) Identifying performance obligations within those contracts, (3) Determining the transaction price, (4) Allocating the transaction price to the performance obligation in the contract, which may include an estimate of variable consideration, and (5) Recognizing revenue when or as each performance obligation is satisfied.
Revenue primarily consists of sales of fasteners, specialty ingot products and master alloys and tolling services. We generate our revenue primarily from the sale of finished products and tolling services to customers, therefore, the significant majority of our contracts are short-term in nature and have a single performance obligation to deliver products or services, in which our performance obligation is satisfied when control of the product is transferred to the customer or the service is performed. Some contracts contain a combination of product sales and services which are distinct and accounted for as separate performance obligations. Our performance obligations for services are satisfied when the services are rendered within the arranged service period. Tolling revenue is recognized when the tolling service is completed.
Revenue is recognized when control transfers to our customers via shipment of products or delivery of services. Shipping and handling costs are considered fulfillment activities and as such are not accounted for as separate performance obligations. We measure revenue as the amount of consideration we expect to be entitled to receive in exchange for those goods or services, net of any variable considerations (e.g., rights to return product, sales incentives, others) and any taxes collected from customers and subsequently remitted to governmental authorities. The Company applied the practical expedient available under ASC 606 to disregard determining significant financing components if the good or serve is transferred and payment is received within one year.
We estimate product returns based on historical experience and record them on a gross basis. Substantially all of Creative Assembly customer returns relate to products that are returned under warranty obligations underwritten by manufacturers. Substantially all of PMAL customer returns relate to products which do not meet customer requirements and are replaced by the Company.
We occasionally receive advance payments to secure product to be delivered in future periods. These advance payments are recorded as deferred revenue, and revenue is recognized as our performance obligations are satisfied throughout the term of the applicable contract. We may also purchase metal on our customer’s behalf, sell the unprocessed metal to our customer, and then process and ship the material, charging a processing fee at the time of shipment. For these specific non-tolling arrangements in which we purchase metal for a customer, a single performance obligation exists, and as a result, amounts invoiced to our customers for the metal purchased on their behalf is recorded as deferred revenue until the metal is processed and shipped. The Company did not record any deferred revenue as of December 31, 2019 or December 31, 2018.
Fair Value Measurements
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.
Fair Value of Financial Instruments
The carrying amounts reported in the consolidated balance sheets for cash, accounts receivable, unbilled receivables, accounts payable and accrued liabilities approximate fair value because of the immediate or short-term maturity of the financial instruments.
The Company believes that its indebtedness approximates fair value based on current yields for debt instruments with similar terms.
Stock Based Compensation
The Company accounts for stock-based awards to recipients in accordance with applicable accounting principles, which requires compensation expense related to share-based transactions, to be measured and recognized in the consolidated financial statements based on a grant date fair value over the requisite service period.
Long-Lived Assets Impairment
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. When it becomes apparent that indicators such as a significant decrease in the market value of the long-lived asset group or if material differences between operating results and the Company’s forecasted expectations occur, then an impairment analysis is performed.
If indicators arise, an initial determination of recoverability is performed based on an estimate of the undiscounted future cash flows resulting from the use of the asset and its eventual disposition compared with the carrying value. If the carrying value of the asset group exceeds the undiscounted cash flows, a measurement of an impairment loss for long-lived assets is performed. The impairment charge is the excess of the carrying value of the asset group over the fair value, as determined utilizing appropriate valuation techniques.
Goodwill and Intangible Assets
We make estimates, assumptions, and judgments when valuing goodwill and other intangible assets such as customer lists in connection with the initial purchase price allocation of any acquired operations, as well as when evaluating the recoverability of our goodwill and other intangible assets on an ongoing basis. These estimates are based upon a number of factors, including historical experience, market conditions, and information obtained from the management of any acquired operations. Critical estimates in valuing certain intangible assets include, but are not limited to, historical and projected attrition rates, discount rates, anticipated growth in revenue from the acquired customers and acquired technology, and the expected use of the acquired assets. These factors are also considered in determining the useful life of acquired intangible assets. The amounts and useful lives assigned to identified intangible assets impact the amount and timing of future amortization expense.
Earnings per Common Share
Basic earnings 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 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 December 31, 2019 and 2018.
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 consolidated balance sheets.
Reclassification of Prior Year Presentation
Certain prior year amounts have been reclassified for consistency with the current period presentation. These include the presentation of the Company’s unbilled receivables. None of these reclassifications has had a material impact on the consolidated financial statements of the Company.
Recently Adopted Authoritative Pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) established Topic 842, Leases, by issuing Accounting Standards Update (“ASU”) No. 2016-02, which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. The new standard establishes a right-of-use model (“ROU”) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. The new standard is effective on January 1, 2019. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. If an entity chooses the second option, the transition requirements for existing leases also apply to leases entered into between the date of initial application and the effective date. The entity must also recast its comparative period financial statements and provide the disclosures required by the new standard for the comparative periods. The Company adopted the new standard on January 1, 2019 and used the effective date as the date of initial application. Consequently, financial information was not updated and the disclosures required under the new standard were not provided for dates and periods before January 1, 2019. The new standard provides a number of optional practical expedients in transition. The Company elects the ‘package of practical expedients’, which permits the Company not to reassess under the new standard prior conclusions about lease identification, lease classification and initial direct costs. Under this elected package of practical expedients, the Company does not separate non-lease components from the lease component. Therefore, all lease and non-lease components are combined and accounted for as a single lease component. On adoption, the Company recognized additional operating lease liabilities of approximately $251,000 with ROU assets of approximately $242,000, net of a reclassification adjustment of deferred rent, based on the present value of the remaining minimum rental payments under current leasing standards for existing operating leases.
In June 2018, the FASB, issued ASU No. 2018-07 to simplify the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees, with certain exceptions. The new guidance expands the scope of ASC 718 to include share-based payments granted to nonemployees in exchange for goods or services used or consumed in an entity’s own operations and supersedes the guidance in ASC 505-50. The guidance is effective for public business entities in annual periods beginning after December 15, 2018, and interim periods within those annual periods. Early adoption is permitted, including in an interim period for which financial statements have not been issued, but not before an entity adopts ASC 606. This was adopted on January 1, 2019 and did not have a material impact on the Company’s financial position and results of operations.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which adds a new Topic 326 to the Codification and removes the thresholds that companies apply to measure credit losses on financial instruments measured at amortized cost, such as loans, receivables, and held-to-maturity debt securities. The guidance in ASU 2016-13 is effective for “public business entities,” as defined, that are SEC filers for fiscal years and for interim periods within those fiscal years beginning after December 15, 2022. The Company is currently evaluating the impact of this new standard on its consolidated financial statements and related disclosures.
In May 2019, the FASB issued ASU 2019-05, which is an update to ASU Update No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which introduced the expected credit losses methodology for the measurement of credit losses on financial assets measured at amortized cost basis, replacing the previous incurred loss methodology. The amendments in Update 2016-13 added Topic 326, Financial Instruments-Credit Losses, and made several consequential amendments to the Codification. Update 2016-13 also modified the accounting for available-for-sale debt securities, which must be individually assessed for credit losses when fair value is less than the amortized cost basis, in accordance with Subtopic 326-30, Financial Instruments- Credit Losses-Available-for-Sale Debt Securities. The amendments in this Update address those stakeholders’ concerns by providing an option to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost basis. For those entities, the targeted transition relief will increase comparability of financial statement information by providing an option to align measurement methodologies for similar financial assets. Furthermore, the targeted transition relief also may reduce the costs for some entities to comply with the amendments in Update 2016-13 while still providing financial statement users with decision-useful information. ASU 2019-05 is effective for the Company for annual and interim reporting periods beginning December 15, 2022. The Company is currently evaluating the impact of this new standard on its consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350), which includes provisions intended to simplify the test for goodwill impairment. The standard is effective for annual periods beginning after December 15, 2019, with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect the adoption of this standard to have a significant impact on its financial position and results of operations.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU simplifies accounting for income taxes by removing the following exceptions: (1) exception to the incremental approach for intraperiod tax allocation, (2) exceptions to accounting for basis differences when there are ownership changes in foreign investments, and (3) exception in interim period income tax accounting for year-to-date losses that exceed anticipated losses. The ASU also improves financial statement preparers’ application of income tax related guidance for franchise taxes that are partially based on income; transactions with a government that result in a step up in the tax basis of goodwill; separate financial statements of legal entities that are not subject to tax; and enacted changes in tax laws in interim periods. The ASU is effective for public business entities for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted for public business entities for periods for which financial statements have not been issued. An entity that elects early adoption in an interim period should reflect any adjustments as of the beginning of the annual period that includes that interim period. Additionally, an entity that elects early adoption should adopt all the amendments in the same period. The Company is still evaluating the impact of this ASU on the Company’s consolidated financial statements.
There have been no other accounting pronouncements that have been issued but not yet implemented that the Company believes will materially impact the consolidated financial statements.
3. CONCENTRATIONS
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to concentration of credit risk, consist principally of cash and trade receivables. Concentration of credit risk with respect to trade receivables is generally diversified due to the large number of entities comprising the Company’s customer base and their dispersion across geographic areas principally within the United States. The Company routinely addresses the financial strength of its customers and, as a consequence, believes that its receivable credit risk exposure is limited. The Company does not require its customers to post collateral.
At December 31, 2019, Remelt Sources, Inc., Universal Stainless & Alloys Products, AMG-Vanadium, PACCAR and Eastham Forge were 19.8%, 16.2%, 14.9%, 13.3% and 11.7% of total receivables, respectively. At December 31, 2018, Remelt Sources, Inc., AMG-Vanadium, PACCAR and Universal Stainless & Alloys Products receivables were 20.9%, 15%, 14% and 13% of total receivables, respectively.
For the year ending December 31, 2019, Remelt Sources, Inc., AMG-Vanadium, PACCAR and Universal Stainless & Alloys Products accounted for 20.3%, 17%, 16.7% and 11.1% of sales, respectively. For the year ending December 31, 2018, Remelt Sources, Inc., AMG-Vanadium, PACCAR, Ametek and Universal Stainless & Alloys Products accounted for 17.6%, 16.2%, 14%, 13.8% and 12.4% of sales, respectively.
No other customers represented more than 10% of total sales in 2019 or 2018, or outstanding accounts receivable as of December 31, 2019 and 2018.
Concentration of Suppliers
No supplier represented more than 10% of product distributed for the year ending December 31, 2019. No supplier represented more than 10% of product distributed for the year ending December 31, 2018. Amounts owing to AVK outstanding at December 31, 2019 and 2018 represented 11.9% and 11.8% of accounts payable, respectively. 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.
4. 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 purchased in 2007. The facility houses the manufacturing operations of PMAL. The useful life of the building is estimated to be 30 years. The useful life of the machinery and equipment is estimated to range from 3 to 10 years. Depreciation was $630,556 and $559,496 for the years ending December 31, 2019 and 2018, respectively.
As described in Note 9, the Company has $7,570,152 in notes secured against the property, plant and equipment.
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consists of the following as of December 31, 2019 and December 31, 2018:
6. GOODWILL AND INTANGIBLE ASSETS
Information regarding our acquired intangible assets was as follows:
The customer lists are estimated to have a useful life of 10 years. As of December 31, 2019, the value, net of amortization, of the customer list was $1,509,083.
Amortization expense for the years ended December 31, 2019 through 2027 is $199,000 per year. For the years ended December 31, 2019 and 2018, $199,000 was amortized each year.
7. LEASES
Operating Leases
The Company determines if a contract contains a lease at inception. US GAAP requires that the Company’s leases be evaluated and classified as operating or finance leases for financial reporting purposes. The classification evaluation begins at the commencement date and the lease term used in the evaluation includes the non-cancellable period for which the Company has the right to use the underlying asset, together with renewal option periods when the exercise of the renewal option is reasonably certain and failure to exercise such option will result in an economic penalty. All of the Company’s real estate leases are classified as operating leases.
Most real estate leases include one or more options to renew, with renewal terms that generally can extend the lease term for an additional four to five years. The exercise of lease renewal options is at the Company’s discretion. The Company evaluates renewal options at lease inception, and includes renewal options that it is reasonably certain to exercise in its expected lease terms when classifying leases and measuring lease liabilities. Lease agreements generally do not require material variable lease payments, residual value guarantees or restrictive covenants.
Leases recorded on the consolidated balance sheet consist of the following:
The Company’s leases generally do not provide an implicit rate, and therefore the Company uses its incremental borrowing rate as the discount rate when measuring operating lease liabilities. The incremental borrowing rate represents an estimate of the interest rate the Company would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease within a particular currency environment. The Company used incremental borrowing rates as of January 1, 2019 for operating leases that commenced prior to that date.
The Company’s weighted average remaining lease term and weighted average discount rate for operating leases as of December 31, 2019 are:
The components of lease expense, included in general and administrative expenses and interest expense on the consolidated statements of income, are as follows:
Supplemental disclosures of cash flow information related to leases for the year ended December 31, 2019 were as follows:
Cash paid for operating lease obligations was $209,058. Operating lease asset obtained for operating lease obligation was $1,277,143, net of a reclassification adjustment of deferred rent of $9,625.
The table below reconciles the undiscounted future minimum lease payments (displayed by year and in the aggregate) under noncancelable operating leases with terms of more than one year to the total operating lease liabilities recognized on the consolidated balance sheets as of December 31, 2019:
The Company has two leased facilities, which are office, manufacturing and warehouse space. In some cases the Company is responsible for real estate taxes, utilities, and repairs under the terms of certain of the operating leases. Under the elected package of practical expedients, the Company does not separate non-lease components from the lease component. Therefore, all lease and non-lease components are combined and accounted for as single lease component. The lease on our facility in Texas expired in February 2019. In May 2019, we entered into a new lease for a new Texas facility that commenced on May 1, 2019 and recorded a right of use asset and corresponding lease liability in the second quarter of 2019.
Disclosures under ASC 840
Operating lease expense was $113,300 for the year ending December 31, 2018.
The table below presents the future minimum repayments of operating lease obligations for the Company as of December 31, 2018.
Finance and Capital Leases
The below chart shows our obligations under finance and capital leases:
Future minimum repayments
The table below presents the future minimum repayments of finance lease obligations for the Company as of December 31, 2019:
The table below presents the future minimum repayments of capital lease obligations for the Company as of December 31, 2018:
The Company’s weighted average remaining lease term and weighted average discount rate for finance leases as of December 31, 2019 are:
8. COMMITMENTS AND CONTINGENCIES
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” or by Mr. Wachter for “good reason” (each as defined in the Wachter Employment Agreement), 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” or by Mr. Golden for “good reason” (each as defined in the Golden Employment Agreement), 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.
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.
9. LONG-TERM DEBT AND LINES OF CREDIT
SummitBridge Loans
On August, 17, 2017, PMAL purchased substantially all of the assets of Prime Metals for $9.6 million in cash. To finance the purchase of the assets, PMAL entered into a 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 $4.5 million (“Summit Term Loan A”) and (2) a Term Loan in the amount of $3.5 million (“Summit Term Loan B”) (collectively, the “Summit Loans”). In addition, in consideration for Summit making the loans, PMAL issued membership interests representing 25% ownership of PMAL to an affiliate of Summit, SBN V PMA LLC (“SBN”) (the “SBN Membership Interests”). Pursuant to the terms of the Summit Loans and because PMAL repaid the Summit Loans within thirty-six (36) months of the origination of the Summit Loans, the SBN Membership Interests were reduced from 25% to 20% of PMAL as of September 1, 2018.
Summit Term Loan A accrued 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. Summit Term Loan A had a Maturity date of August 17, 2020. Summit Term Loan A was secured against all of the assets of PMAL.
Summit Term Loan B accrued 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 B, payable at maturity) or 17.0% interest per annum, payable monthly. Term Loan B had a Maturity date of August 17, 2020. Summit Term Loan B was secured against all of the assets of PMAL.
PMAL granted SBN a put right under the operating agreement for PMAL for the SBN Membership Interests. On August 31, 2018, the operating agreement for PMAL was amended to provide that on the earlier of November 30, 2021 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 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 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 was reflected before stockholders’ equity as Redeemable Non-Controlling interest. Due to the SBN Membership Interests, Summit was considered a related party of the Company for the purposes of these consolidated financial statements. Pursuant to the terms of the Summit Loans and because PMAL repaid the Summit Loans within thirty-six (36) months of the origination of the Summit Loans, the SBN Membership Interests were reduced from 25% to 20% of PMAL as of September 1, 2018. SBN’s pro-rata net income allocation was made at a rate of 25% through August 31, 2018 and 20% commencing September 1, 2018 in accordance with the reduction in membership interests.
Effective July 1, 2019, the Company and SBN entered into a Membership Interest Redemption Agreement pursuant to which the Company purchased the remaining SBN Membership Interests from SBN for a purchase price of $3,000,000 cash. SBN also waived its share of income for all of 2019. The Company adjusted additional paid-in capital downward by $1,547,133, net of deferred taxes of $695,089, to reflect the difference between the purchase price and the balance sheet value of the non-controlling interests.
The Membership Interest Redemption Agreement contains a look-back provision that entitles SBN to receive additional compensation in the event the Company sells PMAL or its assets in a subsequent transaction within three hundred and sixty-five (365) days following the repurchase. Such additional compensation would be equal to the difference between what SBN received in the repurchase and what the SBN Membership Interests would be worth at the subsequent transaction date.
The following table shows the value of the non-controlling interests (“NCI”) for the year ended December 31, 2019:
The following table shows the value of the NCI for the year ended December 31, 2018:
PMAL Berkshire Loans
On August 31, 2018, PMAL entered into a Loan and Security Agreement (the “PMAL Loan and Security Agreement”) with Berkshire Bank (“Berkshire Bank”) establishing: 1) a new revolving credit facility in an aggregate principal amount of up to $6.0 million (the “Berkshire Revolving Loan”), 2) a term loan in the amount of $3.5 million (“Berkshire Term Loan A”) and 3) a term loan in the amount of $1.5 million (“Berkshire Term Loan B”). Borrowings under the Berkshire Revolving Loan may be used to finance working capital and other general corporate purposes. The Berkshire Revolving Loan had a borrowing base of approximately $3.4 million on December 31, 2019 of which the Company had drawn $2,293,972.
On August 31, 2018, pursuant to the PMAL Loan and Security Agreement, PMAL used an amount of $7,678,814 under the Loan and Security Agreement to fully repay the Summit Loans. On August 16, 2019, the PMAL Loan and Security Agreement was amended to permit a one-time cash distribution of $1.5 million which was used to partially fund the Company’s repurchase of the SBN Membership Interests.
Borrowings under the Berkshire Revolving Loan bear interest at a rate equal to the Intercontinental Exchange Benchmark Administration Ltd. London Interbank Offered Rate (“ICE LIBOR”) rate plus 3.25%, which was 4.95% at December 31, 2019. Berkshire Term Loan A and Berkshire Term Loan B bear interest at ICE LIBOR rate plus 4.25%, which was 5.95% at December 31, 2019.
The outstanding principal amount of any borrowings under the Berkshire Revolving Loan will be due and payable on August 21, 2021, subject to an earlier maturity date upon an event of default (the “Revolving Credit Maturity Date”). Berkshire Term Loan A has a maturity date the earlier of (i) August 31, 2023 or (ii) the Revolving Credit Maturity Date. Berkshire Term Loan B has a maturity date the earlier of (i) August 31, 2023 or (ii) the Revolving Credit Maturity Date. The principal balance of Berkshire Term Loan A shall be paid in equal monthly installments of $41,667 commencing on October 1, 2018. Any unpaid principal and interest shall be due on the maturity date. The principal balance of Berkshire Term Loan B shall be paid in equal monthly installments of $8,334 commencing on October 1, 2018. Any unpaid principal and interest shall be due on the maturity date.
The PMAL Loan and Security Agreement contains 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 PMAL Loan and Security Agreement contains certain financial covenants, including a cash flow coverage ratio and a tangible net worth requirement. Under the cash flow coverage covenant, PMAL shall maintain a quarterly cash flow coverage ratio of not less than 1.20 to 1.00. Under the tangible net worth covenant, PMAL shall maintain a tangible net worth of no less than $4.1 million. The tangible net worth amount required shall increase annually on each June 30 by 50% of PMAL’s prior year’s undistributed net income. As of December 31, 2019, PMAL was in compliance with the covenants contained within the PMAL Loan and Security Agreement.
The obligations of PMAL under the PMAL Loan and Security Agreement are secured by liens and security interests on all assets of PMAL. Amerinac is a secured guarantor of the PMAL Loan and Security Agreement, and has pledged its equity in PMAL.
The table below represents the future minimum repayments of the Berkshire Terms Loan A and Berkshire Term Loan B as of December 31, 2019.
As of December 31, 2019, the principal balance of Term Loan A was $2,875,000 and the principal balance of Term Loan B was $1,375,000. As of December 31, 2018, the principal balance of Term Loan A was $3,375,000 and the principal balance of Term Loan B was $1,475,000. The total amount of unamortized debt financing cost was $110,329 and $180,010 at December 31, 2019 and December 31, 2018, respectively. For the years ended December 31, 2019 and 2018, the Company amortized $69,681 and $29,035 in debt financing cost, respectively.
CAS Berkshire Loan
On July 15, 2019, CAS entered into a Loan and Security Agreement (the “CAS Loan and Security Agreement”) with Berkshire Bank establishing a new revolving credit facility in an aggregate principal amount of up to $6.0 million (the “CAS Revolving Loan”). Borrowings under the CAS Revolving Loan may be used to finance working capital and other general corporate purposes. The CAS Revolving Loan had a borrowing base of approximately $2.7 million on December 31, 2019 of which the Company had drawn $1,026,180. This amount is reflected net of an unamortized discount of $39,498 on the Company’s consolidated balance sheet. For the year ended December 31, 2019, the Company amortized $3,592 in debt financing cost.
On August 16, 2019, the CAS Loan and Security Agreement was amended to permit a one-time cash distribution of $1.5 million which was used to partially fund the Company’s repurchase of the SBN Membership Interests.
Borrowings under the CAS Revolving Loan bear interest at a rate equal to the ICE LIBOR rate plus 3.00%, which was 4.70% at December 31, 2019.
The outstanding principal amount of any borrowings under the CAS Revolving Loan will be due and payable on July 15, 2022, subject to an earlier maturity date upon an event of default. Any unpaid principal and interest shall be due on the maturity date.
The CAS Loan and Security Agreement contains 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 CAS Loan and Security Agreement contains certain financial covenants, including a cash flow coverage ratio and a tangible net worth requirement covenant. Under the cash flow coverage covenant, CAS shall maintain a quarterly cash flow coverage ratio of not less than 1.20 to 1.00. Under the tangible net worth covenant, CAS shall maintain a tangible net worth of no less than $1.0 million, as amended on August 16, 2019. The tangible net worth amount required shall increase annually on each June 30 by 50% of CAS’s prior years undistributed net income. As of December 31, 2019, the Company was in compliance will all covenants under the CAS Loan and Security Agreement.
The obligations of CAS under the CAS Loan and Security Agreement are secured by liens and security interests on all assets of CAS. The Company is a secured guarantor of the CAS Loan and Security Agreement, and has pledged its equity in CAS.
LIBOR Rate
To the extent that the PMAL Loan and Security Agreement and the CAS Loan and Security Agreement extend beyond 2021, the interest rates for these obligations might be subject to change based on recent regulatory changes.
LIBOR, the London Interbank Offered Rate, is the basic rate of interest used in lending transactions between banks on the London interbank market and is widely used as a reference for setting the interest rate on loans globally. The interest rates for borrowings under the PMAL Loan and Security Agreement and the CAS Loan and Security Agreement are based on the ICE LIBOR rate.
On July 27, 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced that it intends to phase out LIBOR by the end of 2021. It is unclear at that time whether LIBOR will cease to exist or if new methods of calculating LIBOR will be established such that it continues to exist after 2021. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, is considering replacing U.S. dollar LIBOR with a new index calculated by short term repurchase agreements, backed by Treasury securities. The future of LIBOR at this time is uncertain. If LIBOR ceases to exist, we may need to renegotiate any agreements extending beyond 2021 that utilize LIBOR as a factor in determining the interest rate to replace LIBOR with the new standard that is established, which may have an adverse effect on the Company.
10. SEGMENT RESULTS
The Company manages its operations in two business segments which are defined as follows:
•
The Company’s Creative Assembly subsidiary, which includes all distribution 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 year ended December 31, 2019 is as follows:
Below is the Segment reconciliation to total net income:
Segment information for the year ended December 31, 2018 is as follows:
Below is the Segment reconciliation to total net income:
Segment asset information as of December 31, 2019 and 2018 is listed below:
11. INCOME TAXES
Income taxes are provided for the tax effects of transactions reported in the consolidated financial statements and consist of taxes currently due.
Significant components of the income tax provision are as follows:
The Company has an accumulated deficit of approximately $6.4 million and there are approximately $2.5 million and $0.2 million of net operating losses available to be used against Federal and state taxable income, respectively, which are subject to certain Section 382 limitations as a result of the change in control in January 2015.
A reconciliation of the statutory tax rate to the effective tax rate is as follows:
The Company’s deferred tax assets and liability relates to a temporary timing difference in long-term assets, with the deferred tax asset for December 31, 2019 and 2018 consisting of:
The components of the net deferred income tax assets as of December 31, 2019 and 2018 are as follows:
There were no significant uncertain tax positions taken, or expected to be taken, in a tax return that would be determined to be an unrecognized tax benefit taken or expected to be taken in a tax return that should have been recorded in the Company’s consolidated financial statements for the year ended December 31, 2019. Additionally, there were no interest or penalties outstanding as of or for each of the years ended December 31, 2019 and 2018.
The federal and state tax returns for the years ending December 31, 2016, 2017, and 2018 have been filed, but are still open to examination.
12. RELATED PARTIES
Board and Executive Compensation
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”). The 2017 Equity Plan provides for an aggregate of 100,000 shares of common stock to be available for awards. 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 2018 and 2019, the threshold amounts were $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, subject to the discretion of the Compensation Committee of the Board. All awards will be subject to threshold performance and high-water marks.
The Company issued 7,500 shares pursuant to the Executive Bonus Plan to Mr. Wachter on December 31, 2018, valued at $300,000 for bonus accrued in 2017. The Company issued 7,500 shares pursuant to the Executive Bonus Plan to Mr. Golden on December 31, 2018, valued at $300,000 for bonus accrued in 2017.
As of December, 31, 2018, the Company had accrued $103,000 in bonus for Mssrs. Wachter and Golden. On March 25, 2019, the Board authorized the payment of these bonuses to be in cash and the bonuses were paid on April 12, 2019.
As of December, 31, 2019, the Company had accrued $193,000 in bonus for Mssrs. Wachter and Golden.
In addition, the Company issued 625 shares to both Mr. Lamb and Mr. Garruto at the conclusion of their first year of service on the Board of Directors on December 31, 2018 pursuant to their independent director agreements, valued at $25,000 each. In return for their service during the 2019 term, they are each set to receive $25,000 in stock during 2020, which has been accrued for as of December 31, 2019. On December 27, 2019, Mssrs. Lamb and Garruto were re-elected to the Board for an additional 1-year term under the same terms.
13. REVISION OF PRIOR PERIOD IMMATERIAL MISSTATEMENT
During the three and nine months ended September 30, 2019 (third quarter of 2019), the Company incorrectly recorded the deferred tax benefit resulting from the repurchase of the NCI discussed in Note 9, as well as the related current income tax provision. As such the Company has revised these amounts to accurately reflect the transactions.
The tables below present the impact of the revision in the Company’s unaudited condensed consolidated financial statements:
14. SUBSEQUENT EVENTS
SummitBridge National Investments VI LLC Purchase and Sale Agreement and Business Combination
On March 20, 2020 (the “Effective Date”), USAC Ross LLC (“USAC Ross”) and USAC WA LLC (“USAC WA”), both wholly owned Delaware limited liability company subsidiaries of the Company entered into a Purchase and Sale Agreement (the “Purchase and Sale Agreement”) by and among SummitBridge National Investments VI LLC (“SummitBridge VI”) and ABTV, in its capacity as court-appointed receiver ordered by the Court of Common Pleas of Chester County, Pennsylvania on March 6, 2020 in the Matter of SummitBridge National Investments VI LLC v. Advanced Metals Group, LLC et al., Case No. 2020-02461-MJ. USAC Ross and USAC WA were formed as wholly-owned single member limited liability companies by the Company on March 3, 2020 and had no operations prior to this transaction.
Pursuant to the Purchase and Sale Agreement, USAC Ross purchased all the personal property of Advanced Metals Group, LLC, Advanced Aluminum Castings, LLC, Advanced Iron Castings, LLC, Ross Aluminum Castings, LLC, US Castings, LLC, PFRE Properties, LLC, BFRE Properties, LLC, Oberdorfer, LLC, Mabry Acquisition Company Ltd., MFRE Properties Ltd., USCRE Properties, LLC and RCRE, LLC (collectively, the “Debtors”) located in the State of Ohio, in addition to real property owned by RCRE, LLC in the State of Ohio. Pursuant to the Purchase and Sale Agreement, USAC WA purchased all of the personal property of the Debtors located in the State of Washington, in addition to real property owned by USCRE, Properties, LLC in the State Washington. The purchase price paid by USAC Ross and USAC WA was $6,167,000. The acquisition will be accounted for as a business combination. As of the date of the issuance of the Company’s consolidated financial statements, the Company has not completed the purchase price allocation.
Prior to the transaction, the Debtors were precision aluminum castings manufacturers located in Ohio and Washington. The Debtors offered multiple casting processes as well as in-house heat treating, machining, powder coating and non-destructive testing. The Debtor’s products are used in defense, aerospace, heavy truck, marine and commercial applications. The Debtors were ITAR, AS9100, NADCAP and ISO 9001 certified.
To finance the purchase of the assets, on the Effective Date, USAC Ross and USAC WA entered into a Loan and Security Agreement (the “Loan and Security Agreement”) with SummitBridge VI pursuant to which SummitBridge VI made a two year term loan in the amount of $6,167,000 to USAC Ross and USAC WA (the “USAC Term Loan”).
The USAC Term Loan has a maturity date of March 20, 2022. The USAC Term Loan will begin amortizing on the thirteenth (13) month following the Effective Date pursuant to a seven (7) year amortization schedule with the balance due on the maturity date. The USAC Term Loan is secured against all of the assets of USAC Ross and USAC WA. The USAC Term Loan may be prepaid in whole or in part at any time without any fee, charge or penalty.
The USAC Term Loan bears an interest rate of 9% interest per annum, payable monthly, beginning the first (1) month after the Effective Date. On the 16-month anniversary of the Effective Date, the interest rate on the USAC Term Loan will increase to 15% interest per annum, payable monthly. If the USAC Term Loan is prepaid in full on or before the nine (9) month anniversary of the Effective Date, the principal amount will be reduced by $500,000. If the USAC Term Loan is prepaid in full on or before the ten (10) month anniversary of the Effective Date, the principal amount will be reduced by $400,000. If the USAC Term Loan is prepaid in full on or before the eleven (11) month anniversary of the Effective Date, the principal amount will be reduced by $300,000. If the USAC Term Loan is prepaid in full before the twelve (12) month anniversary of the Effective Date, the principal amount will be reduced by $200,000. If the USAC Term Loan is prepaid in full on or before the sixteen (16) month anniversary of the Effective Date, the principal amount will be reduced by $100,000.
The Company has guaranteed payment of the USAC Term Loan pursuant to a guaranty agreement made by the Company as of the Effective Date.
The Loan and Security Agreement also contains customary covenants, representations and warranties of the parties, including, among others (1) the grant by USAC Ross and USAC WA to SummitBridge VI of a security interest on all of the assets of USAC Ross and USAC WA, and (2) an unconditional and irrevocable guaranty by the Company of the performance by USAC Ross and USAC WA of the obligations under the Loan and Security Agreement. In addition, until all amounts under the USAC Term Loan are paid in full, USAC Ross and USAC WA have agreed to comply with certain financial covenants that require USAC Ross and USAC WA to meet pre-established financial ratios.
The foregoing summary of the Purchase and Sale Agreement, Loan and Security Agreement and the transactions contemplated thereby does not purport to be complete and is subject to, and qualified in their entirety by, the full text of such agreements.
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, 2019, 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 year ended December 31, 2019 as if the acquisition had occurred on January 1, 2019.
The following table represents the unaudited consolidated pro forma balance sheet information for the year ended December 31, 2019 as if the acquisition had occurred on January 1, 2019.
COVID-19
The Company’s operations may be affected by the recent and ongoing outbreak of the coronavirus disease 2019 (COVID-19) which in March 2020, was declared a pandemic by the World Health Organization. The ultimate disruption which may be caused by the outbreak is uncertain; however, it may result in a material adverse impact on the Company’s financial position, operations and cash flows. Possible areas that may be affected include, but are not limited to, disruption to the Company’s customers and revenue, labor workforce, unavailability of products and supplies used in operations, and the decline in value of assets held by the Company, including, inventories, property and equipment, accounts receivable and unbilled receivables.
Stock Repurchase
In the first quarter of 2020, the Company purchased 2,000 shares of common stock of the Company from a shareholder for the price of $65.00 per share of common stock. The shares were subsequently cancelled.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation as of December 31, 2019 of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective as of December 31, 2019.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Under the supervision and with the participation of management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the 2013 framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO Framework”). Based on this evaluation under the COSO Framework, management concluded that our internal control over financial reporting was not effective as of December 31, 2019.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of the inherent limitations of internal control, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
As of December 31, 2019, management has not completed an effective assessment of the Company’s internal control over financial reporting based on the 2013 Committee of Sponsoring Organizations (COSO) framework. Management has concluded that as of December 31, 2019, our internal control over financial reporting was not effective to detect the inappropriate application of U.S. GAAP. Management identified the following material weaknesses set forth below in our internal control over financial reporting.
1. We did not perform an effective risk assessment or monitor internal controls over financial reporting.
2. A lack of sufficient resources including a solely 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.
3. 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.
4. 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 expects improvements to be made in 2020 as the Company grows in size given recent acquisitions and the Company is able to dedicate more resources to the financial and accounting function. The Company plans to further remediate the material weaknesses identified above as its resources permit.
This Report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to the rules of the SEC that permit the Company to provide only the management’s report in this Report.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the fourth quarter of 2019 that would have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Set forth below is certain information concerning each of the directors and executive officers of the Company:
The Company’s directors are elected at the annual meeting of stockholders and hold office until their successors are elected. The Company’s officers are appointed by the Board of Directors and are subject to employment agreements, if any, approved and ratified by the Board. On December 27, 2019, William J. Golden, John Wachter, Saverio Garruto and William Lamb were reelected to the Board.
John Wachter
Mr. Wachter is one of the founders of Polymathes Capital LLC (“Polymathes Capital”). Polymathes Capital is located in Princeton, New Jersey. Previously, Mr. Wachter was an equity analyst for a hedge fund. Mr. Wachter also serves as Chairman of Epolin Chemicals LLC, a specialty chemical manufacturer located in Newark, New Jersey. Mr. Wachter is a graduate of Princeton University.
Mr. Wachter is CEO, Chairman of the Board of Directors and a member of the Company’s Audit Committee.
William J. Golden
Mr. Golden is one of the founders of Polymathes Capital. Mr. Golden is an attorney admitted to practice law in the States of New York and New Jersey, and the Commonwealth of Pennsylvania. From 2006 to 2008, he was an attorney in the financial restructuring department of Cadwalader, Wickersham & Taft, an international law firm based in New York, New York. Mr. Golden is a graduate of Princeton University, the London School of Economics and Political Science and the Fordham University School of Law.
Mr. Golden serves as CFO, Secretary of the Board and a member of the Company’s Audit and Compensation Committee.
Saverio Garruto
Mr. Garruto is a certified public accountant, possessing over forty years of experience in accounting and consulting. He is a retired audit partner with CohnReznick, which he joined in 1998. He is experienced with the Sarbanes-Oxley Act for public companies. Mr. Garruto currently serves on the Board of Trustees of the Kessler Foundation. He graduated from Fairleigh Dickinson University in 1970 and did his post-graduate work at Rutgers University.
Mr. Garruto serves as the Chairman of the Company’s Audit Committee and a member of the Company’s Compensation Committee.
William Lamb
Mr. Lamb is the owner and operator of The ABC Insert Company, a custom manufacturer of pharmaceutical packaging components that he purchased in 2010. In 1999, he was a founding shareholder of The Philadelphia Trust Company, a depositary trust company and private bank based in Philadelphia. Mr. Lamb graduated from Saint Joseph’s University in 1983.
Mr. Lamb serves as the Chairman of the Company’s Compensation Committee.
Code of Ethics and Committee Charters
The Audit Committee Charter is available on the Company’s website.
Code of Ethics
The Code of Ethics applies to the Company’s directors, officers and employees. It is available on the Company’s website.
Audit Committee
The Audit Committee makes such examinations as are necessary to monitor the corporate financial reporting and the external audits of the Company, to provide to the Board of Directors (the “Board”) the results of its examinations and recommendations derived there from, to outline to the Board improvements made, or to be made, in internal control, to nominate independent auditors and to provide to the Board such additional information and materials as it may deem necessary to make the Board aware of significant financial matters that require Board attention. Saverio Garruto is the current chair.
Compensation Committee
The compensation committee is authorized to review and make recommendations to the Board regarding all forms of compensation to be provided to the executive officers and directors of the Company, including stock compensation and bonus compensation to all employees. Officers of the Company serving on the Compensation committee do not participate in discussions regarding their own compensation.
Nominating Committee
The Company does not have a Nominating Committee and the full Board acts in such capacity.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires that the Company’s directors and executive officers and persons who beneficially own more than ten percent (10%) of a registered class of its equity securities, file with the SEC reports of ownership and changes in ownership of its common stock and other equity securities. Executive officers, directors, and greater than ten percent (10%) beneficial owners are required by SEC regulation to furnish the Company with copies of all Section 16(a) reports that they file. Based solely upon a review of the copies of such reports furnished to us or written representations that no other reports were required, the Company believes that all filing requirements applicable to its executive officers, directors and greater than ten percent (10%) beneficial owners were met for events in 2018 and 2019.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information concerning all cash and non-cash compensation awarded to, earned by or paid to the Company’s principal executive officer and all of the other executive officers with annual compensation exceeding $100,000, who served during the years 2018 and 2019, for services in all capacities to the Company:
SUMMARY COMPENSATION TABLE
_________
(1)
Mr. Wachter and Mr. Golden served as directors of the Company, but without compensation for their director services.
Compensation of Directors
Messrs. Wachter and Golden do not receive compensation for their role as Directors of the Company. Messrs. Garruto and Lamb received 625 shares of common stock of the Company upon the completion of their first-year term in 2018. In return for their service during the 2019 term, they are each set to receive $25,000 in stock during 2020.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
(a) The following table sets forth certain information with respect to the beneficial ownership of the Common Stock of the Company, for each person who is known by the Company to beneficially own more than 5 percent of the Company’s Common Stock (its only voting securities) as of March 25, 2020:
_____________
(2)
The “Wynnefield Reporting Persons” are Wynnefield Small Cap Value, L.P., Wynnefield Partners Small Cap Value, L.P. I, Wynnefield Small Cap Value Offshore Fund, Ltd., Wynnefield Capital, Inc., Wynnefield Capital Management, LLC, Wynnefield Capital, Inc., Nelson Obus and Joshua H. Landes.
(b) The following table sets forth certain information with respect to the beneficial ownership of the Common Stock of the Company by (i) each of the Company’s Directors, (ii) each of the Company’s Named Executive Officers, and (iii) all directors and executive officers as a group, as of December 31, 2019.
_____________
(1)
Except where otherwise indicated, the address of the beneficial owner is deemed to be the same address as the Company
As of March 25, 2020, the date used to calculate the tables above, the Company had 311,636 shares of Common Stock outstanding.
Securities Authorized for Issuance Under Equity Compensation Plans
The Amerinac Holding Corp. 2017 Equity Incentive Plan (the “Equity Plan”) was approved by a majority of Shareholders of the Company on November 10, 2017 and the Board on October 30, 2017. The 2017 Equity Plan provides for an aggregate of 100,000 shares of common to be available for awards, of which 85,000 shares are still available for issue.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
As of December 31, 2019, Mr. Wachter serves as Chief Executive Officer of the Company. Mr. Golden serves as Chief Financial Officer and General Counsel.
As of November 10, 2017, Messrs. Garruto and Lamb serve as the Company’s independent directors.
For the year 2018, management bonus compensation was $103,000 which was paid in cash on April 12, 2019. For the year 2019, the Company accrued $193,000 in bonus at December 31, 2019.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees
The aggregate fees billed or to be billed for professional services rendered by our independent registered public accounting firms for the audit of our annual consolidated financial statements, review of the unaudited condensed consolidated financial statements included in our quarterly reports and other fees that are normally provided by the accounting firms in connection with statutory and regulatory filings or engagements for the years ended December 31, 2018 and 2019 were approximately $94,000 for 2018 and approximately $104,000 for 2019.
Audit Related Fees
There were no aggregate fees billed or to be billed for audit related services by the Company’s independent registered public accounting firms that are reasonably related to the performance of the audit or review of our consolidated financial statements, other than those previously reported in this Item 14, and includes $0 during 2018 and $0 during 2019.
Tax Fees
The aggregate fees billed for tax compliance, tax advice and tax planning for the years ended December 31, 2018 and 2019 were $25,000 and $0.
All Other Fees
No fees were billed for products and services provided the Company’s independent registered public accounting firms for the years ended December 31, 2018 and 2019.
Audit Committee
Our Audit Committee implemented pre-approval policies and procedures for our engagement of the independent auditors for both audit and permissible non-audit services. Under these policies and procedures, all services provided by the independent auditors must be approved by the Audit Committee or Board of Directors prior to the commencement of the services, subject to certain de-minimis non-audit service (as described in Rule 2-01(c)(7)(C) of Regulation S-X) that do not have to be pre-approved as long as management promptly notifies the Audit Committee of such service and the Audit Committee or Board of Directors approves it prior to the service being completed. All of the services provided by our independent auditors have been approved in accordance with our pre-approval policies and procedures.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Listed in the Exhibit Index following the signature page hereof.
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.
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ John Wachter
Chairman of the Board of Directors
March 30, 2020
John Wachter
and Chief Executive Officer
/s/ William J. Golden
Chief Financial Officer and Director
March 30, 2020
William J. Golden
/s/ Saverio Garruto
Director
March 30, 2020
Saverio Garruto
/s/ William Lamb
Director
March 30, 2020
William Lamb
Exhibits: