2. EARNINGS PER COMMON SHARE
Earnings per Common Share (EPS) are presented on both a basic and diluted basis in accordance with the provisions of Accounting Standards Codification Topic 260 - Earnings per Share. Basic EPS is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted EPS reflects the maximum dilution that would result after giving effect to dilutive convertible debentures. The following table presents the computation of basic and diluted EPS:
|
Three Months Ended
|
Six Months Ended
|
|
December 31, 2015
|
December 31, 2014
|
December 31, 2015
|
December 31, 2014
|
Net income
(
loss)
|
$
(13,720 )
|
$
(34,020 )
|
$
27,798
|
$
(18,977)
|
Weighted -average common shares used in the calculation of EPS
|
Basic and diluted
|
1,431,503
|
1,431,503
|
1,431,503
|
1,431,503
|
Basic and diluted net income (loss) per share
|
$
(0.01)
|
$
(0.02)
|
$
0.02
|
$
(0.01)
|
3. COMPREHENSIVE INCOME
The Company has no significant components of other comprehensive income and accordingly, comprehensive income is the same as net income for all periods.
4. INVENTORIES
The table below summarizes information about reported components of inventory for as of December 31, 2015 and as of June 30, 2015:
|
December 31, 2015
|
|
June 30, 2015
|
Raw Material
|
$
1,141,168
|
|
$
984,376
|
Work in Process
|
724,797
|
|
1,398,258
|
Finished Goods
|
-
|
|
-
|
Inventory
|
$
1,865,965
|
|
$
2,382,634
|
5. DEBT
Lines of Credit — Bank
The Company had a line of credit agreement with the Signature Bank allowing borrowings up to $
1,000,000
, subject to certain borrowing base limitations, with interest at
2
% over the reference rate with a floor of
7
% (
7
% at June 30, 2015), matured in Aug, 2015. The reference rate was the rate announced by U.S. Bank National Association referred to as the “U.S. Bancorp Prime Lending Rate”. As of December 31, 2015 and June 30, 2015, the outstanding borrowings under this line of credit were $-and $-respectively. The proceeds could only be used to finance inventory destined for export outside the United States and to support performance bonds associated with related contract down payments. The note was secured by the foreign accounts receivable and export inventory of the Company’s wholly-owned subsidiary, Stinar HG, Inc., continuing commercial guarantees from the Company, the Chief Executive Officer and VP of Marketing and Sales and the assignment of a life insurance policy on the Chief Executive Officer.
Long-term debt consisted of the following:
|
December 31, 2015
|
June 30, 2015
|
Note payable — bank, payable in monthly installments of $
6,672
including interest at
6.0
% with a balloon payment in January 2023. The note is secured by the first mortgage on property owned by the Company, continuing commercial guarantees from both the Company and the chief executive officer/key stockholder and by the assignment of a life insurance policy on the chief executive officer/key stockholder.
|
$
852,648
|
$
859,542
|
Note payable — SBA, payable in monthly installments of $
20,503
including interest at the prime rate (as published by the Wall Street Journal) plus
1
% adjusted every calendar quarter (4.25% at December 31, 2015), maturing in May 2018. The note is secured by the assets of the Company and the unconditional guarantee of the chief executive officer/key stockholder.
|
564,794
|
674,376
|
Note payable — SBA, payable in monthly installments of $
5,107
, including interest and SBA fees for an interest rate of
5.2
%, maturing March 2033. The note is secured by a second mortgage on property owned by the Company and an unconditional guarantee from both the Company and the chief executive officer/key stockholder.
|
675,968
|
691,903
|
Note payable — bank, payable in monthly installments of $
6,091
with interest at
2.75
% over the U.S Bancorp Prime Lending Rate through February 2016. Effective June 2015, the interest rate is
7.25
% due to payment default in accordance with the terms of the note. This note was paid off during fiscal year 2016. The note was secured by the assets of the Company, the unconditional guarantee of the chief executive officer/key stockholder, and by the assignment of a life insurance policy on the chief executive officer/key stockholder.
|
-
|
47,497
|
Total Debt
|
2,093,411
|
2,273,318
|
Less current maturities
|
277,468
|
317,990
|
Long term Debt
|
$
1,815,942
|
$
1,955,328
|
The Company’s credit agreements with its bank contain certain annual covenants, which were not met at June 2015 and were not waived by the bank. However, due to the passage of time the notes have not been reclassified as due on demand as of June 30, 2015. The covenants for June 2016 were not met and were not waived by the bank. The next covenant calculation date will be June 30, 2017.
6. RECENTLY ISSUED ACCOUNTING GUIDANCE
(a) Revenue Recognition
In August 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-14, "Revenue Recognition - Revenue from Contracts with Customers," which extended the effective date of a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition guidance under U.S. GAAP. The new standard will now be effective for interim and annual periods beginning after December 15, 2017, and either full retrospective adoption or modified retrospective adoption is permitted. The Company is evaluating the impact of this standard.
(b) Going Concern
In August 2014, the FASB issued ASU 2014-15 "Presentation of Financial Statements—Going Concern (Subtopic 205-40) (Topic 718): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern". This ASU requires an entity to evaluate whether conditions or events, in the aggregate, raise substantial doubt about the entity's ability to continue as a going concern for one year from the date the financial statements are issued or are available to be issued. The new guidance is effective for annual periods and interim periods within those annual periods beginning after December 15, 2016. The adoption of this ASU is not expected to have an impact on the Company's consolidated financial position, results of operations or cash flows.
(c) Disclosure of Discontinued Operations
In April 2014, the FASB issued ASU 2014-08 “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”. The amendments in this Update improve the definition of discontinued operations by limiting discontinued operations reporting to disposals of components of an entity that represent strategic shifts that have (or will have) a major effect on an entity’s operations and financial results. The adoption of this ASU is not expected to have an impact on the Company’s consolidated financial position, results of operations or cash flows.
(d) Leases
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842 ” (“ASU 2016-02”), which requires lessees to put most leases on their balance sheets but recognize the expenses on their income statements in a manner similar to current practice. The standard states that a lessee would recognize a lease liability for the obligation to make lease payments and a right-to-use asset for the right to use the underlying asset for the lease term. The standard is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2018. Early adoption is permitted. We are currently evaluating the timing of our adoption and the impact that the updated standard will have on our consolidated financial statements.
(e) Statement of Cash Flow
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The amendments should be applied using a retrospective transition method to each period presented. If retrospective application is impractical for some of the issues addressed by the update, the amendments for those issues would be applied prospectively as of the earliest date practicable. Early adoption is permitted, including adoption in an interim period. The Company does not expect the adoption of ASU 2016-15 to have a material impact on its consolidated financial statements.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is management’s discussion and analysis of certain significant factors which have affected the Company's financial position and operating results during the periods included in the accompanying condensed consolidated financial statements.
Management's discussion and analysis of financial condition and results of operations, as well as other portions of this document, include certain forward-looking statements about the Company’s business and products, revenues, expenditures and operating and capital requirements. From time to time, information provided by the Company or statements made by its directors, officers or employees may contain “forward-looking” information subject to numerous risks and uncertainties. Any statements made herein that are not statements of historical fact are forward-looking statements including, but not limited to, statements concerning the characteristics and growth of the Company’s markets and customers, the Company’s objectives and plans for its future operations and products and the Company’s expected liquidity and capital resources. Such forward-looking statements are based on a number of assumptions and involve a number of risks and uncertainties, and, accordingly, actual results could differ materially for those discussed. Among the factors that could cause actual results to differ materially from those projected in any forward-looking statement are as follows: the effect of business and economic conditions; conditions in the industries in which the Company operates, particularly the airline industry; the Company’s ability to win government contracts; the impact of competitive products and continued pressure on prices realized by the Company for its products; constraints on supplies of raw material used in manufacturing certain of the Company’s products or services provided; capacity constraints limiting the production of certain products; changes in anticipated operating results, credit availability, equity market conditions or the Company’s debt levels may further enhance or inhibit the Company’s ability to maintain or raise appropriate levels of cash; requirements for unseen maintenance, repairs or capital asset acquisitions; difficulties or delays in the development, production, testing and marketing of products; market acceptance issues, including the failure of products to generate anticipated sales levels; difficulties in manufacturing process and in realizing related cost savings and other benefits; the effects of changes in trade, monetary and fiscal policies, and laws and regulations; foreign exchange rates and fluctuations in those rates; the cost and effects of legal and administrative proceedings, including environmental proceedings; and the risk factors reported from time to time in the Company’s SEC reports. The Company undertakes no obligation to update any forward-looking statement as a result of future events or developments.
FINANCIAL CONDITION AND LIQUIDITY
The Company’s liquidity needs arise from its debt service, working capital and capital expenditures. The Company has historically funded its liquidity needs with proceeds from equity contributions, bank borrowing, short term notes from officers, cash flows from operations and the offering of its subordinated debentures.
During the six month period ended December 31, 2015, the Company recorded a net income of $27,798 compared to a net loss of $18,977 during the six month period ended December 31, 2014.
For the first six months of fiscal year 2016, the Company had a decrease in cash and cash equivalents of $32,647, compared to an increase in cash and cash equivalents of $194,124 for the same period in fiscal year 2015. As of December 31, 2015, the Company held cash and cash equivalents of $22,395, compared to $518,415 for cash and cash equivalents as of December 31, 2014. The Company’s net cash provided by operating activities for the six month period ended December 31, 2015 was primarily due to the reduction of inventory of $516,669. The Company used this net cash for the six month period ended December 31, 2015 to reduce accounts payable and due to financing company by $243,476 and deferred revenue by $140,586.
Cash flow used in investing activities was $7,959 during the first six months of fiscal year 2016 and was primarily used for the payment of buying new equipment, compared to a negative cash flow of $7,223 used in the first six months of fiscal year 2015. Net cash used for financing activities was $179,908 during the first six months of fiscal year 2016, and was used to pay down the notes payable, compared to a $214,309 from financing activity in the first six months of fiscal year 2015. The remaining increases and decreases in the components of the Company’s financial position reflect normal operating activity.
The Company had positive working capital of $660,810 at December 31, 2015, a decrease of $73,832 since June 30, 2015 due primarily to reductions in inventory. At December 31, 2015, current assets amounted to $2,755,400 and current liabilities were $2,094,590, resulting in current ratio of 1.32 to 1.0, compared to 1.32 to 1.0 at June 30, 2015. Long-term debt was $1,815,942 at December 31, 2015 compared to $1,955,328 at June 30, 2015. Stockholders’ equity was a positive $101,034 at December 31, 2015 compared to a positive balance of $73,236 at June 30, 2015. The Company’s present working capital must continue to improve in order for it to meet current operating needs.
Capital expenditures for continuing operation for the first six months of fiscal year 2016 were $7,959, compared with capital expenditures of $7,212 during the same period in fiscal year 2015. The Company anticipates that it will spend approximately $20,000 on capital expenditures during the final six months of fiscal year 2016 for equipment and building improvements for aviation ground support operations. The Company plans to finance these capital expenditures primarily through operating cash flows as net income continues to improve in the aviation segment.
The Company has no lines of credit facilities as of December 31, 2015. The company needs to have a line of credit.
As indicated above, the Company believes that its financial position and debt capacity should enable it to meet its current and future cash requirements despite the need for improved working capital to meet current operating needs.
INFLATION
Because of the relatively low levels of inflation experienced this past fiscal year, and as of December 31, 2015, inflation did not have a significant effect on the Company’s results in the first six months of fiscal year 2016.
RESULTS OF OPERATIONS
SECOND QUARTER OF FISCAL YEAR 2016 COMPARED
WITH SECOND QUARTER OF FISCAL YEAR 2015
Revenue decreased $246,614 to $1,189,461 or 17.2%, in the second quarter of fiscal year 2016 in comparison to the prior year’s comparable period. The decrease was primarily due to lack of government sales.
Gross profit margin increased 84% in the second quarter of fiscal year 2016, compared to the corresponding period in fiscal year 2015. This increase was primarily due to no U.S. Government contracts and international sales and a decrease in overhead needed due to less sales and no shipping costs or agent commission due to no international sales.
Selling expenses as a percentage of sales decreased 0.37% of net revenues for the comparable period. The decrease of $11,432 in the second quarter of fiscal year 2016, compared to the corresponding period in fiscal year 2015, was primarily due to lower travel expense.
General and administrative expenses in the second quarter of fiscal year 2016 increased $37,643, or 39.1%, in comparison to the second quarter of fiscal year 2015. The increase was primarily to higher credit fees and all other accounts being increased by management a small percentage.
Interest expense in the second quarter of fiscal year 2016 was $34,860, a decrease of $11,354, or 24.6%, in comparison to the second quarter of fiscal year 2015. The decrease was due to lower debt balances and purchase of fewer chassis.
Interest income in the second quarter of fiscal year 2016 is immaterial.
FIRST SIX MONTHS OF FISCAL YEAR 2016 COMPARED
WITH FIRST SIX MONTHS OF FISCAL YEAR 2015
Revenue decreased $209,652 to $2,596,198 or 7.5%, in the first six months of fiscal year 2016 in comparison to the prior year’s comparable period. The decrease was primarily due to lack of government sales.
Gross profit margin increased 49% in the first six months of fiscal year 2016, compared to the corresponding period in fiscal year 2015. This increase was primarily due to no U.S. Government contracts and international sales and a decrease in overhead needed due to less sales and no shipping costs or agent commission due to no international sales.
Selling expenses as a percentage of sales decreased 16.9% of net revenues for the comparable period. The decrease of $11,102 in the first six months of fiscal year 2016, compared to the corresponding period in fiscal year 2015, was primarily due to lower travel expense.
General and administrative expenses in the first six months of fiscal year 2016 increased $58,044, or 27.4%, in comparison to the first six months of fiscal year 2015. The increase was primarily to higher credit fees and all other accounts being increased by management a small percentage.
Interest expense in the first six months of fiscal year 2016 was $71,109, a decrease of $19,758, or 21.7%, in comparison to the first six months of fiscal year 2015. The decrease was due to lower debt balances and purchase of fewer chassis.
Interest income in the first six months of fiscal year 2016 is immaterial.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has no off-balance sheet arrangements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was carried out under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this quarterly report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
(a) CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
During the six months ended December 31, 2015, we continued to implement our remediation efforts related to the following material weaknesses reported in the Form 10-K for the year ended June 30, 2015. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis.
Due to the limited number of Company personnel, a lack of segregation of duties exists. An essential part of internal control is for certain procedures to be properly segregated and the results of their performance to be adequately reviewed.
Due to weaknesses in the Company’s financial reporting controls specifically relating to inventory, management believes there is more than a remote likelihood that a material misstatement of annual or interim financial statements would not be prevented or detected, as happened with our 2009 — 2012 annual financial statements.
Due to the lack of expertise and personnel for financial reporting, the Company was not able to file required financial reports on time.
The Company did not have effective controls to provide reasonable assurance as to timely account reconciliations. Management believes that there is a more than remote likelihood that a material misstatement of annual or interim financial statements would not be prevented or detected in a timely manner. Management plans to update management plans in an effort to reduce the risk and material misstatement of the financial statements.
As a result of the remediation efforts noted below, there were improvements in internal control over financial reporting during the six months ended December 31, 2015 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. There were no other changes in internal control over financial reporting (as defined by Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
(b) REMEDIATION ACTIONS
In response to these material weaknesses, we developed remediation plans to address the control deficiencies identified in fiscal year 2015. We continued to implement the following remediation actions during the six months ended December 31, 2015:
Segregation of duties
• Engaged a third party specialist for advice and consultation
• Provided training and education to different accounting functions
• Established review controls
Financial reporting control
• Provided training for calculating the cost of raw material, work in progress, and finished goods.
• Completed review of the Company's critical accounting and internal control policies with third party advisors that are knowledgeable regarding GAAP and internal controls
• Provided training and education relating to accounting for modifications and extinguishments
• Hired third party advisors to assist in preparing consolidated financial statements
In addition to the above steps, management intends to continue its remediation efforts by:
• Provide ongoing training and education relating to GAAP around complex and non-routine transactions specifically identified through regular review of emerging issues and Company business activities
• Completing our review with the assistance of a third party advisor of the Company’s financial reporting controls and implementing recommended control procedures to strengthen the Company’s control procedures in areas which involve significant judgements and estimates, which involve application of complex accounting methods under GAAP, or which could have a material impact on the accuracy of our financial statements.
We are committed to a strong internal control environment, and believe that, when fully implemented, the remediation actions described above will represent significant improvements in the Company’s accounting and financial reporting functions. The Company anticipates that it will complete its testing of the additional internal control processes designed to remediate these material weaknesses during the balance of 2016. We will continue to assess the effectiveness of our remediation efforts in connection with management’s future evaluations of internal control over financial reporting.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is from time to time involved in the ordinary course of litigation incidental to the conduct of its businesses. The Company believes that none of its pending litigation will have a material adverse effect on the Company’s businesses, financial condition or results of operations.
ITEM 1A. RISK FACTORS
Not applicable.