Item
1. Financial Statements
COMMAND
SECURITY CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
|
|
Three Months Ended
|
|
|
|
June 30, 2017
|
|
|
June 30, 2016
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
43,802,721
|
|
|
$
|
36,336,208
|
|
Cost of revenues
|
|
|
(38,749,550
|
)
|
|
|
(31,787,201
|
)
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
5,053,171
|
|
|
|
4,549,007
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
(4,778,205
|
)
|
|
|
(4,094,912
|
)
|
Provision for doubtful accounts, net
|
|
|
(2,488
|
)
|
|
|
74,861
|
|
|
|
|
(4,780,693
|
)
|
|
|
(4,020,051
|
)
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
272,478
|
|
|
|
528,956
|
|
|
|
|
|
|
|
|
|
|
Other expenses
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(91,927
|
)
|
|
|
(53,985
|
)
|
|
|
|
|
|
|
|
|
|
Income before income taxes and equity loss in minority investment of unconsolidated affiliate
|
|
|
180,551
|
|
|
|
474,971
|
|
|
|
|
|
|
|
|
|
|
Equity loss in minority investment of unconsolidated affiliate
|
|
|
(25,200
|
)
|
|
|
(100,000
|
)
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
155,351
|
|
|
|
374,971
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
(84,000
|
)
|
|
|
(214,000
|
)
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
71,351
|
|
|
$
|
160,971
|
|
|
|
|
|
|
|
|
|
|
Income per share of common stock
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.01
|
|
|
$
|
0.02
|
|
Diluted
|
|
$
|
0.01
|
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
|
|
|
|
|
|
Basic
|
|
|
9,848,186
|
|
|
|
9,792,618
|
|
Diluted
|
|
|
10,264,096
|
|
|
|
10,156,337
|
|
See
accompanying notes to condensed consolidated financial statements
COMMAND
SECURITY CORPORATION
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
June 30, 2017
|
|
|
March 31, 2017
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
941,052
|
|
|
$
|
1,042,291
|
|
Accounts receivable, net of allowance for doubtful accounts of $544,977 and
$542,489, respectively
|
|
|
30,587,577
|
|
|
|
29,189,233
|
|
Prepaid expenses
|
|
|
1,834,466
|
|
|
|
1,784,990
|
|
Other assets
|
|
|
1,770,045
|
|
|
|
2,821,172
|
|
Total current assets
|
|
|
35,133,140
|
|
|
|
34,837,686
|
|
|
|
|
|
|
|
|
|
|
Furniture and equipment at cost, net
|
|
|
115,329
|
|
|
|
146,345
|
|
|
|
|
|
|
|
|
|
|
Other assets:
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
|
984,187
|
|
|
|
1,028,582
|
|
Minority investment in unconsolidated affiliate
|
|
|
488,091
|
|
|
|
513,291
|
|
Other assets
|
|
|
4,839,933
|
|
|
|
5,253,946
|
|
Total other assets
|
|
|
6,312,211
|
|
|
|
6,795,819
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
41,560,680
|
|
|
$
|
41,779,850
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Checks issued in advance of deposits
|
|
$
|
1,536,726
|
|
|
$
|
583,201
|
|
Short-term borrowings
|
|
|
11,960,526
|
|
|
|
12,228,679
|
|
Accounts payable
|
|
|
1,718,832
|
|
|
|
1,215,591
|
|
Accrued expenses and other liabilities
|
|
|
9,910,817
|
|
|
|
11,503,474
|
|
Total current liabilities
|
|
|
25,126,901
|
|
|
|
25,530,945
|
|
|
|
|
|
|
|
|
|
|
Insurance reserves
|
|
|
461,621
|
|
|
|
366,323
|
|
Total liabilities
|
|
|
25,588,522
|
|
|
|
25,897,268
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
Preferred stock, convertible Series A, $.0001 par value
|
|
|
-
|
|
|
|
-
|
|
Common stock, $.0001 par value per share
|
|
|
1,160
|
|
|
|
1,160
|
|
Treasury stock, at cost, 1,752,200 shares
|
|
|
(2,885,579
|
)
|
|
|
(2,885,579
|
)
|
Additional paid-in capital
|
|
|
18,553,276
|
|
|
|
18,535,051
|
|
Accumulated earnings
|
|
|
303,301
|
|
|
|
231,950
|
|
Total stockholders’ equity
|
|
|
15,972,158
|
|
|
|
15,882,582
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
41,560,680
|
|
|
$
|
41,779,850
|
|
See
accompanying notes to condensed consolidated financial statements
COMMAND
SECURITY CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Treasury Stock
|
|
|
Additional Paid In Capital
|
|
|
Accumulated Earnings
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2016
|
|
|
-
|
|
|
|
1,155
|
|
|
|
(2,885,579
|
)
|
|
|
18,410,595
|
|
|
|
2,556,539
|
|
|
|
18,082,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,053
|
|
|
|
|
|
|
|
4,053
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
160,971
|
|
|
|
160,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2016
|
|
|
-
|
|
|
|
1,155
|
|
|
|
(2,885,579
|
)
|
|
|
18,414,648
|
|
|
|
2,717,510
|
|
|
|
18,247,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercised, net
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
95,964
|
|
|
|
|
|
|
|
95,969
|
|
Stock based compensation tax benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,577
|
|
|
|
|
|
|
|
10,577
|
|
Stock compensation cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,862
|
|
|
|
|
|
|
|
13,862
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,485,560
|
)
|
|
|
(2,485,560
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2017
|
|
|
-
|
|
|
|
1,160
|
|
|
|
(2,885,579
|
)
|
|
|
18,535,051
|
|
|
|
231,950
|
|
|
|
15,882,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,225
|
|
|
|
|
|
|
|
18,225
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71,351
|
|
|
|
71,351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2017
|
|
$
|
-
|
|
|
$
|
1,160
|
|
|
$
|
(2,885,579
|
)
|
|
$
|
18,553,276
|
|
|
$
|
303,301
|
|
|
$
|
15,972,158
|
|
See
accompanying notes to condensed consolidated financial statements
COMMAND
SECURITY CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Three Months Ended
June 30,
|
|
|
|
|
2017
|
|
|
|
2016
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
71,351
|
|
|
$
|
160,971
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
70,493
|
|
|
|
132,848
|
|
Provision for doubtful accounts, net
|
|
|
2,488
|
|
|
|
(74,861
|
)
|
Equity loss in minority investment of unconsolidated affiliate
|
|
|
25,200
|
|
|
|
100,000
|
|
Rent expense
|
|
|
(39,064
|
)
|
|
|
(3,963
|
)
|
Stock based compensation costs
|
|
|
18,225
|
|
|
|
4,053
|
|
Insurance reserves
|
|
|
95,298
|
|
|
|
(37,507
|
)
|
Deferred income taxes
|
|
|
396,178
|
|
|
|
555,788
|
|
Change in receivables, prepaid expenses and other current assets
|
|
|
(381,346
|
)
|
|
|
(4,091,256
|
)
|
Change in accounts payable and other liabilities
|
|
|
(1,050,352
|
)
|
|
|
318,337
|
|
Net cash used in operating activities
|
|
|
(791,529
|
)
|
|
|
(2,935,590
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of equipment
|
|
|
-
|
|
|
|
(14,620
|
)
|
Proceeds from equipment dispositions
|
|
|
4,918
|
|
|
|
-
|
|
Net cash provided by (used in) investing activities
|
|
|
4,918
|
|
|
|
(14,620
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Net advances (repayments) on short-term borrowings
|
|
|
(268,153
|
)
|
|
|
1,804,675
|
|
Change in checks issued in advance of deposits
|
|
|
953,525
|
|
|
|
166,301
|
|
Net cash provided by financing activities
|
|
|
685,372
|
|
|
|
1,970,976
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
(101,239
|
)
|
|
|
(979,234
|
)
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of period
|
|
|
1,042,291
|
|
|
|
1,486,854
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
941,052
|
|
|
$
|
507,620
|
|
Supplemental
Disclosures of Cash Flow Information
Cash
paid during the three months ended June 30 for:
|
|
2017
|
|
|
2016
|
|
Interest
|
|
$
|
98,695
|
|
|
$
|
50,640
|
|
Income
taxes
|
|
|
-
|
|
|
|
6,390
|
|
See
accompanying notes to condensed consolidated financial statements
COMMAND
SECURITY CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The
accompanying condensed consolidated financial statements presented herein have not been audited, and have been prepared in accordance
with the instructions to Form 10-Q which do not include all of the information and note disclosures required by generally accepted
accounting principles in the United States. These financial statements should be read in conjunction with our consolidated financial
statements and notes thereto as of and for the fiscal year ended March 31, 2017. In this discussion, the words “Company,”
“we,” “our,” “us” and terms of similar import should be deemed to refer to Command Security
Corporation and its consolidated subsidiary.
The
condensed consolidated financial statements for the interim period shown in this report are not necessarily indicative of our
results to be expected for any period after the date hereof, including for the fiscal year ending March 31, 2018, or for any other
subsequent period. The condensed consolidated financial statements include the consolidated accounts of the Company with all intercompany
transactions eliminated. In the opinion of our management, the accompanying condensed consolidated financial statements reflect
all adjustments, consisting of only normal recurring adjustments, considered necessary for a fair presentation of the financial
statements included in this quarterly report. All such adjustments are of a normal recurring nature.
1.
|
Recently
Issued Accounting Standards
|
In
May 2014, the FASB and the International Accounting Standards Board (IASB) issued, ASU 2014-09
(Topic 606) Revenue from Contracts
with Customers
. The guidance substantially converges final standards on revenue recognition between the FASB and IASB providing
a framework on addressing revenue recognition issues and, upon its effective date, replaces almost all existing revenue recognition
guidance, including industry-specific guidance, in current U.S. generally accepted accounting principles. In July 2015, the FASB
issued ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date”, which
deferred the effective date of ASU No. 2014-09 by one year, making it effective for the Company’s fiscal year ending March
31, 2019. Subsequently, the FASB also issued a series of amendments to the new revenue standards. The new revenue standards may
be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date
of adoption. The new revenue standards are not expected to have a material impact on the amount and timing of revenue recognized
in the Company’s consolidated financial statements.
In
November 2015, the FASB issued ASU 2015-17, “
Balance Sheet Classification of Deferred Taxes
”. ASU 2015-17 simplifies
the presentation of deferred taxes by requiring deferred tax assets and liabilities to be classified as non-current on the balance
sheet. The Company adopted this standard during the quarter ended June 30, 2017, and applied the new standard retrospectively.
Other than the reclassification of the current deferred tax asset to long term assets, the adoption of this guidance did not have
a material impact on the Company’s financial position, results of operations, or cash flows.
In
February 2016, the FASB issued ASU No. 2016-02, “
Leases (Topic 842)
”, which requires lessees to recognize a
lease liability and a right-to-use asset on the balance sheet for all leases, except certain short-term leases. ASU 2016-02 is
effective beginning with the Company’s fiscal year ending March 31, 2020, with early adoption permitted, and must be implemented
using a modified retrospective approach for all leases existing at, or entered into after the beginning of the earliest comparative
period that is presented in the financial statements. The Company is currently evaluating the impact of ASU 2016-02 on its consolidated
financial statements. The adoption of this guidance is expected to result in a significant increase in assets and liabilities
on the Company’s balance sheet, with no material impact on the statements of operations. However, the ultimate impact of
adopting ASU 2016-02 will depend on the Company’s lease portfolio as of the adoption date.
In
March 2016, the FASB issued ASU No. 2016-09, “
Improvements to Employee Share-Based Payment Accounting
”, which
simplifies accounting and presentation of share-based payments, primarily relating to the recognition and classification of excess
tax benefits, accounting for forfeitures and tax withholding requirements. ASU 2016-09 is effective for the Company’s fiscal
year ending March 31, 2018. Previously, excess tax benefits or deficiencies from the Company’s equity awards were recorded
as additional paid-in capital in its balance sheets. Upon adoption, the Company has begun recording any excess tax benefits or
deficiencies from its equity awards in its statements of operations in the reporting periods in which the benefit or deficiency
is realized. As a result, the Company’s income tax expense and associated effective tax rate are impacted by fluctuations
in stock price between the grant dates and exercise dates of equity awards. The impact during the quarter was not material. The
amendments also allow for a one-time accounting policy election to either account for forfeitures as they occur or to estimate
forfeitures as required by current guidance. The Company elected to account for forfeitures as they occur. The adoption of this
accounting policy did not have a material impact on the Company’s financial position, results of operations or cash flows.
In
August 2016, the FASB issued new guidance on cash flow statement presentation ASU 2016-15,
Statement of Cash Flows (Topic 230);
Classification of Certain Cash Receipts and Cash Payments
. This ASU addresses diversity in how certain cash receipts and cash
payments are presented and classified in the statement of cash flows. The new guidance is effective beginning with the Company’s
fiscal year ending March 31, 2019, with early adoption permitted. The adoption of ASU 2016-15 is not expected to have a material
impact on the Company’s consolidated financial statements.
In
January 2017, the FASB issued ASU 2017-04 “
Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for
Goodwill Impairment
”, which eliminates Step 2 from the goodwill impairment test. Instead, an entity should perform its
annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize
an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed
the total amount of goodwill allocated to the reporting unit. ASU 2017-04 is effective for annual or any interim goodwill tests
in fiscal years beginning after December 15, 2019. The adoption is not expected to have a material impact on the consolidated
financial statements.
COMMAND
SECURITY CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2.
|
Short-Term
Borrowings:
|
On
February 12, 2009, we entered into a $20.0 million credit facility (the “Credit Agreement”) with Wells Fargo Bank,
National Association (“Wells Fargo”). This credit facility, which was most recently amended in March 2017 (see below)
and matures March 31, 2020, contains customary affirmative and negative covenants, including, among other things, covenants requiring
us to maintain certain financial ratios and is collateralized by customer accounts receivable and certain other assets of the
Company as defined in the Credit Agreement.
The
Credit Agreement provides for a letter of credit sub-line in an aggregate amount of up to $1.5 million. The Credit Agreement also
provides for interest to be calculated on the outstanding principal balance of the revolving loans at the prime rate (as defined
in the Credit Agreement) plus 1.50%. For LIBOR loans, interest will be calculated on the outstanding principal balance of the
LIBOR loans at the LIBOR rate (as defined in the Credit Agreement) plus 1.75%.
On
March 30, 2017, we entered into an eighth amendment (the “Eighth Amendment”) to our Credit Agreement. The Eighth Amendment
extended the Credit Agreement from March 31, 2017 to March 31, 2020, increased the revolving line of credit from $20.0 million
to $27.5 million, amended the terms of the “Minimum Excess Availability” covenant and redefined the term “Borrowing
Base”.
Under
the Credit Agreement, as of June 30, 2017, the interest rate was 2.875% for LIBOR loans and 3.125% for revolving loans. At June
30, 2017, we had approximately $0.9 million of cash on hand. We also had $7.0 million in LIBOR loans outstanding, $5.0 million
of revolving loans outstanding and $0.5 million outstanding under our letters of credit sub-line under the Credit Agreement, representing
62% of the maximum borrowing capacity under the Credit Agreement based on our “eligible accounts receivable” (as defined
in the Credit Agreement) as of such date.
|
|
June 30, 2017
|
|
|
March 31, 2017
|
|
|
|
|
|
|
|
|
Workers’ compensation insurance
|
|
$1,615,176
|
|
|
$2,804,341
|
|
Deferred tax asset
|
|
|
4,719,597
|
|
|
|
5,115,775
|
|
Security deposits
|
|
|
120,336
|
|
|
|
138,171
|
|
Other receivables
|
|
|
154,869
|
|
|
|
16,831
|
|
|
|
|
6,609,978
|
|
|
|
8,075,118
|
|
|
|
|
|
|
|
|
|
|
Current portion
|
|
|
(1,770,045
|
)
|
|
|
(2,821,172
|
)
|
|
|
|
|
|
|
|
|
|
Total non-current portion
|
|
$
|
4,839,933
|
|
|
$
|
5,253,946
|
|
The
other asset workers’ compensation insurance represents the net amount of the payments made to cover the workers’ compensation
insurance premium against the actual premium due as well as the difference in the amount deposited to the loss fund less the estimated
workers’ compensation claims and reserves related to the historical loss claims as well as the estimates related to claims
incurred but not reported. There is no offsetting claim liability reported as the Company has determined that there is a sufficient
amount deposited into the loss funds to cover the estimated claims reserve as well as the estimate related to claims incurred
but not reported.
COMMAND
SECURITY CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4.
|
Minority
Investment in Unconsolidated Affiliate
|
In
2014, the Company made a 20% minority investment in Ocean Protection Services LLC, a Delaware limited liability company (“OPS
LLC”), which holds a 30% interest in an entity that specializes in maritime security, risk management and risk analysis.
The Company purchased 2,000 Class A Common Units of OPS LLC for a purchase price of $2.125 million. The excess of the carrying
value of the Company’s investment in OPS LLC and the Company’s proportionate share of the net assets of OPS Acquisitions
Ltd. (“OPSA”) and OPS LLC is largely attributable to goodwill. Since the Company’s initial investment, there
have been no additional capital contributions made or distributions received.
In
September 2016, the majority owner of OPS LLC consented to a restructuring transaction pursuant to which the majority owner of
OPS LLC transferred its 80% interest in OPS LLC to the Company for no consideration resulting in OPS LLC becoming a wholly-owned
subsidiary of the Company.
During
the quarter and year ended March 31, 2017, the Company performed an impairment analysis of its investment in OPSA and concluded
the investment to be impaired and, accordingly, recorded a $2.1 million impairment charge in the year ended March 31, 2017.
The
following summarizes the condensed consolidated statements of operations of OPSA Ltd. for the three months ended:
|
|
June 30, 2017
|
|
|
June 30, 2016
|
|
|
|
|
|
|
|
|
Net operating revenues
|
|
$
|
1,006,149
|
|
|
$
|
2,288,195
|
|
Gross profit
|
|
$
|
241,263
|
|
|
$
|
792,520
|
|
Operating income (loss)
|
|
$
|
(160,301
|
)
|
|
$
|
(361,003
|
)
|
Net income (loss) from continuing operations
|
|
$
|
(83,830
|
)
|
|
$
|
(557,322
|
)
|
5.
|
Accrued
Expenses and Other Liabilities:
|
|
|
June 30, 2017
|
|
|
March 31, 2017
|
|
|
|
|
|
|
|
|
Payroll and related expenses
|
|
$
|
7,214,815
|
|
|
$
|
8,076,807
|
|
Taxes and fees payable
|
|
|
444,583
|
|
|
|
325,763
|
|
Accrued interest payable
|
|
|
6,740
|
|
|
|
13,508
|
|
Other
|
|
|
2,244,679
|
|
|
|
3,087,396
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,910,817
|
|
|
$
|
11,503,474
|
|
We
have insurance policies covering workers’ compensation claims in states where we perform services. Estimated accrued
liabilities are based on our historical loss experience and the ratio of claims paid to our historical payout profiles. Charges
for estimated workers’ compensation related losses incurred and included in cost of sales were $726,418 and $971,114 for
the three months ended June 30, 2017 and 2016, respectively.
The
nature of our business also subjects us to claims or litigation alleging that we are liable for damages as a result of the conduct
of our employees or others. We insure against such claims and suits through general liability policies with third-party insurance
companies.
Our
insurance coverage limits are currently $1.0 million per occurrence for non-aviation related business (with additional first and
second layer excess liability policies of $5.0 million and $10.0 million, respectively) and $30.0 million per occurrence for aviation
related business. We retain the risk for the first $25,000 of general liability non-aviation related operations. The aviation
related deductible is $5,000 per occurrence, with the exception of $50,000 for airport wheelchair and electric cart operations,
$25,000 for damage to aircraft and $100,000 for skycap operations. Estimated accrued liabilities are based on specific reserves
in connection with existing claims as determined by third party risk management consultants and actuarial factors and the timing
of reported claims. These are all factored into estimated losses incurred but not yet reported to us.
Cumulative
amounts estimated to be payable by us with respect to pending and potential claims for all years in which we are liable under
our general liability retention and workers’ compensation policies have been accrued as liabilities. Such accrued liabilities
are necessarily based on estimates; accordingly, our ultimate liability may exceed or be less than the amounts accrued. The methods
of making such estimates and establishing the resultant accrued liability are reviewed continually and any adjustments resulting
therefrom are reflected in our current results of operations.
Workers’
compensation annual costs are comprised of premiums as well as incurred losses as determined at the end of the coverage period,
subject to minimum and maximum amounts. Workers’ compensation insurance claims and reserves include accruals of estimated
settlements for known claims, as well as accruals of estimates for claims incurred but not yet reported as provided by a third
party. In estimating these accruals, we consider historical loss experience and make judgments about the expected levels of costs
per claim. We believe our estimates of future liability are reasonable based upon our methodology; however, changes in health
care costs, accident frequency and severity and other factors could materially affect these estimates. The Company continually
monitors changes in claim type and incident and evaluates the workers’ compensation insurance accrual, making necessary
adjustments based on the evaluation of these qualitative data points.
COMMAND
SECURITY CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Under
the requirements of FASB ASC 260-10,
Earnings Per Share
, the dilutive effect of our common shares that have not been issued,
but that may be issued upon the exercise or conversion, as the case may be, of rights or options to acquire such common shares,
is excluded from the calculation for basic earnings per share. Diluted earnings per share reflects the additional dilution that
would result from the issuance of our common shares if such rights or options were exercised or converted, as the case may be,
and is presented for the three months ended June 30, 2017 and 2016.
The
nature of our business is such that there is a significant volume of routine claims and lawsuits that are made against us, the
vast majority of which never lead to the award of substantial damages. We maintain general liability and workers’ compensation
insurance coverage that we believe is appropriate to the relevant level of risk and potential liability that we face, relating
to these matters. Some of the claims brought against us could result in significant payments; however, the exposure to us under
general liability non-aviation related operations is limited to the first $25,000 per occurrence. The aviation related deductible
is $5,000 per occurrence, with the exception of $50,000 for airport wheelchair and electric cart operations, $25,000 for damage
to aircraft and $100,000 for skycap operations. Any punitive damage award would not be covered by the general liability insurance
policy. The only other potential impact would be on future premiums, which may be adversely affected by an unfavorable claims
history.
We
have been named as a defendant in several uninsured employment related claims that are pending before various courts, the Equal
Employment Opportunities Commission or various state and local agencies. We have instituted policies to minimize these occurrences
and monitor those that do occur. At this time, we are unable to determine the impact on the financial position and results of
operations that these claims may have, should the investigations conclude that they are valid.
We
have employment agreements with certain of our officers and key employees with varying terms. The agreements generally provide
for annual salaries and for salary continuation for a specified number of months under certain circumstances, including a change
in control of the Company.
Approximately
62% of our workforce is not subject to a labor union. The remaining 38% of our workforce, including in particular, a number of
employees based in our New York City security services office and at our airport offices at John F. Kennedy International and
LaGuardia airports are subject to collective bargaining agreements. Four of the
agreements, covering approximately 19% of our employees, expired on October 31, 2016, February 28, 2017, March 31, 2017 and June
28, 2017. We are currently involved in negotiations to renew the expired agreements. The remaining seven agreements are set to
expire in September 2018 and thereafter.
Item
2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The
following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction
with our condensed consolidated financial statements and the related notes contained in this quarterly report.
Forward
Looking Statements
Certain
of our statements contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operations
section of this quarterly report and, in particular, those under the heading “Outlook,” contain forward-looking statements.
The words “may,” “will,” “should,” “expect,” “anticipate,” “believe,”
“plans,” “intend” and “continue,” or the negative of these words or other variations on these
words or comparable terminology typically identify such statements. These statements are based on our management’s current
expectations, estimates, forecasts and projections about the industry in which we operate generally, and other beliefs of and
assumptions made by our management, some or many of which may be incorrect. In addition, other written or verbal statements that
constitute forward-looking statements may be made by us or on our behalf. While our management believes these statements are accurate,
our business is dependent upon general economic conditions and various conditions specific to the industries in which we operate.
Moreover, we believe that the current business environment is more challenging and difficult than it has been in the past several
years, if not longer. If the business of any substantial customer or group of customers fails or is materially and adversely affected
by the current economic environment or otherwise, they may seek to substantially reduce their expenditures for our services. Any
loss of business from our substantial customers could cause our actual results to differ materially from the forward-looking statements
that we have made in this quarterly report. Further, other factors, including, but not limited to, those relating to the shortage
of qualified labor, competitive conditions and adverse changes in economic conditions of the various markets in which we operate,
could adversely impact our business, operations and financial condition and cause our actual results to fail to meet our expectations,
as expressed in the forward-looking statements that we have made in this quarterly report. These forward-looking statements are
not guarantees of future performance, and involve certain risks, uncertainties and assumptions that we may not be able to accurately
predict. We undertake no obligation to update publicly any of these forward-looking statements, whether as a result of new information,
future events or otherwise.
As
provided for under the Private Securities Litigation Reform Act of 1995, we wish to caution shareholders and investors that the
important factors under the heading “Risk Factors” in our Annual Report on Form 10-K filed with the Securities and
Exchange Commission with respect to our fiscal year ended March 31, 2017, could cause our actual financial condition and results
from operations to differ materially from our anticipated results or other expectations expressed in our forward-looking statements
in this quarterly report.
Critical
Accounting Policies and Estimates
Critical
accounting policies are defined as those most important to the portrayal of a company’s financial condition and results
and that require the most difficult, subjective or complex judgments. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities at the date of the financial statements, the disclosure of contingent assets and
liabilities, and the reported amounts of revenues and expenses during the reporting period. The estimates that we make include
allowances for doubtful accounts, depreciation and amortization, income tax assets and insurance reserves. Estimates are based
on historical experience, where applicable or other assumptions that management believes are reasonable under the circumstances.
We have identified the policies described below as our critical accounting policies. Due to the inherent uncertainty involved
in making estimates, actual results may differ from those estimates under different assumptions or conditions.
Revenue
Recognition
We
record revenues as services are provided to our customers. Revenues consist primarily of aviation and security services, which
are typically billed at hourly rates. These rates may vary depending on base, overtime and holiday time worked. Revenue is reported
net of applicable taxes.
Accounts
Receivable
We
periodically evaluate the requirement for providing for billing adjustments and/or reflect the extent to which we will be able
to collect our accounts receivable. We provide for billing adjustments where management determines that there is a likelihood
of a significant adjustment for disputed billings. Criteria used by management to evaluate the adequacy of the allowance for doubtful
accounts include, among others, the creditworthiness of the customer, current trends, prior payment performance, the age of the
receivables and our overall historical loss experience. Individual accounts are charged off against the allowance as management
deems them to be uncollectible.
Minority
Investment in Unconsolidated Affiliate
The
Company uses the equity method to account for its investment in OPSA. Equity method investments are recorded at original cost
and adjusted periodically to recognize: (i) our proportionate share of investees’ net income or losses after the date of
the investment; (ii) additional contributions made or distributions received; and (iii) impairment losses resulting from adjustments
to net realizable value. The Company reviews its investment accounted for under the equity method of accounting for impairment
whenever events or changes in circumstances indicate a loss in the value of the investment may be other than temporary.
Intangible
Assets
Intangible
assets are stated at cost and consist primarily of customer lists that are being amortized on a straight-line basis over a period
of ten years, and goodwill, which is reviewed annually for impairment. The life assigned to customer lists acquired is based on
management’s estimate of our expected customer attrition rate. The attrition rate is estimated based on historical contract
longevity and management’s operating experience. We test for impairment annually or when events and circumstances warrant
such a review, if earlier. Any potential impairment is evaluated based on anticipated undiscounted future cash flows and actual
customer attrition in accordance with FASB ASC 360,
Property, Plant and Equipment
.
Insurance
Reserves
General
liability estimated accrued liabilities are calculated on an undiscounted basis based on actual claim data and estimates of incurred
but not reported claims developed utilizing historical claim trends. Projected settlements and incurred but not reported claims
are estimated based on pending claims, historical trends and related data.
Workers’
compensation annual costs are comprised of premiums as well as incurred losses as determined at the end of the coverage period,
subject to minimum and maximum amounts. Workers’ compensation insurance claims and reserves include accruals of estimated
settlements for known claims, as well as accruals of estimates for claims incurred but not yet reported as provided by a third
party. In estimating these accruals, we consider historical loss experience and make judgments about the expected levels of costs
per claim. We believe our estimates of future liability are reasonable based upon our methodology; however, changes in health
care costs, accident frequency and severity and other factors could materially affect the estimate for these liabilities. The
Company continually monitors changes in claim type and incident and evaluates the workers’ compensation insurance accrual,
making necessary adjustments based on the evaluation of these qualitative data points.
Income
Taxes
Income
taxes are based on income (loss) for financial reporting purposes and reflect a current tax liability (asset) for the estimated
taxes payable (recoverable) in the current year tax return and changes in deferred taxes. Deferred tax assets or liabilities are
determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using enacted
tax laws and rates. A valuation allowance is provided on deferred tax assets if it is determined that it is more likely than not
that the asset will not be realized.
We
recognize the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income
tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or
measurement are reflected in the period in which the change in judgment occurs. In the event that interest and/or penalties are
assessed in connection with our tax filings, interest will be recorded as interest expense and penalties as selling, general and
administrative expense. We did not have any unrecognized tax benefits as of June 30, 2017 and 2016.
Stock
Based Compensation
FASB
ASC 718, Stock Compensation, requires all share-based payments to employees, including grants of employee stock options, to be
recognized in the financial statements based on their fair values at grant date and the recognition of the related expense over
the period in which the share-based compensation vests. We use the modified-prospective transition method. Under the modified-prospective
transition method, we recognize compensation expense in our financial statements issued subsequent to the date of adoption for
all share-based payments granted, modified or settled. Non-cash charges of $18,225 and $4,052 for stock based compensation have
been recorded for the three months ended June 30, 2017 and 2016, respectively.
Reclassifications
Certain
amounts previously reported for prior periods have been reclassified to conform to the current year presentation in the accompanying
condensed financial statements. Such reclassifications had no effect on the results of operations or shareholders’ equity
as previously recorded.
Overview
We
principally provide uniformed security officers and aviation services to commercial, residential, financial, industrial, aviation
and governmental customers through approximately 23 offices throughout the United States. In conjunction with providing these
services, we assume responsibility for a variety of functions, including recruiting, hiring, training and supervising all operating
personnel as well as paying such personnel and providing them with uniforms, fringe benefits and workers’ compensation insurance.
Our
customer-focused mission is to provide the best personalized supervision and management attention necessary to deliver timely
and efficient security solutions so that our customers can operate in safe environments without disruption or loss. Technology
underpins our efficiency, accuracy and dependability. We use a sophisticated software system that integrates scheduling, payroll
and billing functions, giving customers the benefit of customized programs using the personnel best suited to the job.
Renewing
and extending existing contracts and obtaining new contracts are crucial to our ability to generate revenues, earnings and cash
flow. In addition, our growth strategy involves the acquisition and integration of complementary businesses in order to increase
our scale within certain geographical areas, increase our market share in the markets in which we operate, gain market share in
the markets in which we do not currently operate and improve our profitability. We intend to pursue suitable acquisition opportunities
for contract security officer businesses. We frequently evaluate acquisition opportunities and, at any given time, may be in various
stages of due diligence or preliminary discussions with respect to a number of potential acquisitions. However, we cannot assure
you that we will identify any suitable acquisition candidates or, if identified, that we will be able to complete the acquisition
of such candidates on favorable terms or at all.
The
global security industry has grown largely due to an increasing fear of crime and terrorism. In the United States, the demand
for security-related products and central station monitoring services also has grown steadily. We believe that there is continued
heightened attention to and demand for security due to worldwide events, and the ensuing threat, or perceived threat, of criminal
and terrorist activities. For these reasons, we expect that security will continue to be a key area of focus both domestically
in the United States and abroad.
Demand
for security officer services is dependent upon a number of factors, including, among other things, demographic trends, general
economic variables such as growth in the gross domestic product, unemployment rates, consumer spending levels, perceived and actual
crime rates, government legislation, terrorism sensitivity, war/external conflicts and technology.
Results
of Operations
Revenues
Our
revenues increased by $7.5 million, or 20.5%, to $43.8 million for the three months ended June 30, 2017 from $36.3 million in
the corresponding period of the prior year. The increase in revenues was due mainly to the commencement of work under the contracts
with the USPS in June 2016 and the commencement of work under new contracts with a large on-line retailer in June 2017. In addition,
revenues from a major transportation company increased by approximately $0.6 million. These increases were partly offset by reductions
in revenues of approximately $0.5 million from various residential and retail customers.
Gross
Profit
Our
gross profit increased by $0.5 million, or 11.1%, to $5.1 million (11.5% of revenues) for the three months ended June 30, 2017,
from $4.5 million (12.5% of revenues) in the corresponding period of the prior year. The increase in gross profit was due mainly
to the commencement of work under the contracts with the USPS and the large on-line retailer as discussed above, partly offset
by a decline in security services for a variety of residential and retail customers. Startup costs included in cost of sales in
connection with the commencement of work under the contracts with the large online retailer were approximately $90,000 in the
three months ended June 30, 2017.
General
and Administrative Expenses
Our
general and administrative expenses increased by $0.7 million, or 16.7%, to $4.8 million (10.9% of revenues) for the three months
ended June 30, 2017, from $4.1 million (11.3% of revenues) in the corresponding period of the prior year. The increase in general
and administrative expenses consisted primarily of higher employee compensation, benefits, and information technology costs incurred
in support of increasing revenues, partly offset by lower legal and labor settlement costs. Startup costs included in general
and administrative expenses in connection with the commencement of work with the large online retailer were approximately $260,000
in the three months ended June 30, 2017. Excluding these start-up costs, general and administrative costs in the quarter ended
June 30, 2017 increased by 10.3% to 10.3% of revenues.
Provision
for Doubtful Accounts
The
provision for doubtful accounts for the three months ended June 30, 2017, net of recoveries, increased by $77,349 to net expense
of $2,488 as compared with net recoveries of $74,861 in the corresponding period of the prior year. The increase in the net provision
for doubtful accounts was primarily due to the absence of recoveries of specific accounts previously deemed uncollectible.
We
periodically evaluate the requirement for providing for billing adjustments and/or credit losses on our accounts receivable. We
provide for billing adjustments in cases where our management determines that there is a likelihood of a significant adjustment
for disputed billings. Criteria used by management to evaluate the adequacy of the allowance for doubtful accounts include, among
others, the creditworthiness of the customer, current trends, prior payment performance, the age of the receivables and our overall
historical loss experience. Individual accounts are charged off against the allowance for doubtful accounts as our management
deems them to be uncollectible. We do not know if bad debts will increase in future periods.
Interest
Expense
Interest
expense increased by $37,942, or 70%, to $91,927 for the three months ended June 30, 2017, from $53,985 in the corresponding period
of the prior year. The increase in interest expense for the three months ended June 30, 2017 was due mainly to higher average
outstanding borrowings in support of increased revenues and higher interest rates under our credit agreement with Wells Fargo,
described below.
Equity
Earnings (Loss) in Minority Investment of Unconsolidated Affiliate
The
Company uses the equity method to account for its investment in OPS Acquisitions Ltd. (“OPSA”). Equity method investments
are recorded at original cost and adjusted periodically to recognize: (i) our proportionate share of investees’ net income
or losses after the date of the investment; (ii) additional contributions made or distributions received; and (iii) impairment
losses resulting from adjustments to net realizable value. The Company reviews its investment accounted for under the equity method
of accounting for impairment whenever events or changes in circumstances indicate a loss in the value of the investment may be
other than temporary.
The
Company’s proportionate share of the net loss of OPSA for the three months ended June 30, 2017 was $25,200 as compared with
net loss of $100,000 in the corresponding period of the prior year. The decrease in the Company’s proportionate share of
net loss of OPSA was due to a reduction in legal and consulting expenses incurred in connection with certain strategic initiatives
and changes in the Company’s ownership partly offset by lower gross profits following the decline in revenues.
Provision
for (benefit from) income taxes
The
provision for income taxes decreased by $130,000 to $84,000 for the three months ended June 30, 2017 compared with $214,000 in
the corresponding period of the prior year. The Company’s effective tax rate decreased by 3.0% to 54.1% for the three months
ended June 30, 2017 compared with 57.1% in the corresponding period of the prior year. The difference between the Company’s
effective tax rate of 54.1% for the three months ended June 30, 2017 and the Company’s statutory tax rate of approximately
41% is primarily attributable to the Company’s proportionate share of the net loss of OPSA and certain expenses that are
not deductible for income tax purposes.
Liquidity
and Capital Resources
We
pay approximately 81% of our employees on a bi-weekly basis with the remaining employees being paid on a weekly basis, while customers
pay for services generally within 60 days from the invoice date. We maintain a commercial revolving loan arrangement, currently
with Wells Fargo Bank, National Association (“Wells Fargo”). We fund our payroll and operations primarily through
borrowings under our $27.5 million credit facility with Wells Fargo (as amended, the “Credit Agreement”), described
below under “Short Term Borrowings.”
We
principally use short-term borrowings under our Credit Agreement to fund our accounts receivable. Our short-term borrowings have
supported the accounts receivable associated with our organic growth. We intend to continue to use short-term borrowings to support
our working capital requirements.
We
believe that our existing funds, cash generated from operations, and existing sources of and access to financing are adequate
to satisfy our working capital, capital expenditure and debt service requirements for the foreseeable future. However, we cannot
assure you that this will continue to be the case. We may be required to obtain alternative or additional financing to maintain
and expand our existing operations through the sale of our securities, an increase in the amount of available borrowings under
our Credit Agreement, obtaining additional financing from other financial institutions, or otherwise. The failure by us to obtain
such financing, if needed, would have a material adverse effect upon our business, financial condition and results of operations.
Short-Term
Borrowings:
On
February 12, 2009, we entered into a $20.0 million credit facility (the “Credit Agreement”) with Wells Fargo Bank,
National Association (“Wells Fargo”). This credit facility, which was most recently amended in March 2017 (see below)
and matures March 31, 2020, contains customary affirmative and negative covenants, including, among other things, covenants requiring
us to maintain certain financial ratios and is collateralized by customer accounts receivable and certain other assets of the
Company as defined in the Credit Agreement.
The
Credit Agreement provides for a letter of credit sub-line in an aggregate amount of up to $1.5 million. The Credit Agreement also
provides for interest to be calculated on the outstanding principal balance of the revolving loans at the prime rate (as defined
in the Credit Agreement) plus 1.50%. For LIBOR loans, interest will be calculated on the outstanding principal balance of the
LIBOR loans at the LIBOR rate (as defined in the Credit Agreement) plus 1.75%.
On
March 30, 2017, we entered into an eighth amendment (the “Eighth Amendment”) to our Credit Agreement. The Eighth Amendment
extended the Credit Agreement from March 31, 2017 to March 31, 2020, increased the revolving line of credit from $20.0 million
to $27.5 million, amended the terms of the “Minimum Excess Availability” covenant and redefined the term “Borrowing
Base”.
Under
the Credit Agreement, as of June 30, 2017, the interest rate was 2.875% for LIBOR loans and 3.125% for revolving loans. At June
30, 2017, we had approximately $0.9 million of cash on hand. We also had $7.0 million in LIBOR loans outstanding, $5.0 million
of revolving loans outstanding and $0.5 million outstanding under our letters of credit sub-line under the Credit Agreement, representing
62% of the maximum borrowing capacity under the Credit Agreement based on our “eligible accounts receivable” (as defined
in the Credit Agreement) as of such date.
Investments
and Capital Expenditures
We
have no material commitments for capital expenditures at this time.
Working
Capital
Our
working capital increased by $0.7 million, or 7.5%, to $10.0 million as of June 30, 2017, from $9.3 million as of March 31, 2017.
We
had checks drawn in advance of future deposits of $1.5 million and $0.6 million at June 30, 2017, and March 31, 2017, respectively.
Cash balances, book overdrafts and payroll and related expenses can fluctuate materially from day to day depending on such factors
as collections and timing of payroll payments.
Outlook
Operating
Initiatives
During
the last few years the Company has pursued several initiatives to improve our competitive and strategic position. Significant
progress has been made in rebuilding and strengthening our management team and improving the efficiency and functional effectiveness
of our organization, systems and processes. The Company re-entered the U.S. federal government market with the commencement of
work on the U.S. Postal Service (USPS) contract in June 2016. Also consistent with the Company’s initiative to compete for
larger contract opportunities, the Company commenced work on a new multi-state security services contract with a large on-line
retailer in April 2016 in the Southeast region and in June 2017 we commenced work with this customer in the Northeast/Mid-west
region of the country. The Company also recently announced a new contract to provide physical security for data centers for the
web services segment of the major on-line retailer which commenced in July 2017. We expect to continue to pursue similar large
contract opportunities in multiple end markets.
With
a stronger foundation and a more effective organization, the Company remains engaged in a corporate-wide campaign with four basic
focus areas:
|
●
|
Improved
performance through better systems, procedures and training;
|
|
|
|
|
●
|
Profitable
top line revenue growth through identification of larger bid and proposal opportunities including new Federal and/or international
opportunities and potential acquisitions;
|
|
|
|
|
●
|
Dedicated
marketing and sales efforts in specific industry sectors that complement our core capabilities, geography and operational
expertise; and,
|
|
|
|
|
●
|
Attention
to details and discipline that will drive operating efficiencies, and enhance enterprise value.
|
These
strategic initiatives may result in future costs related to new business development expenses, severance and other employee-related
matters, litigation risks and expenses, and other costs. At this time we are unable to determine the scope of these potential
costs.
Financial
Results
Our
future revenues will largely depend on our ability to gain additional business from new and existing customers in our security
officer and aviation services divisions at acceptable margins, while minimizing terminations of contracts with existing customers.
In addition, our growth strategy involves the acquisition and integration of complementary businesses to increase our scale within
certain geographical areas, capture market share in the markets in which we operate, enter new markets and improve our profitability.
We intend to pursue acquisition opportunities for contract security officer businesses. Our ability to complete future acquisitions
will depend on our ability to identify suitable acquisition candidates, negotiate acceptable terms for their acquisition and,
if necessary, finance those acquisitions. Our security services division continues to experience organic growth over recent quarters
as demand for our security services has steadily increased. Our current focus is on increasing our revenues, as our sales and
marketing team and branch managers’ work to develop new business and retain profitable contracts. During recent years, the
Department of Homeland Security and the Transportation Security Administration have implemented numerous security measures that
affect airline operations, including expanded cargo and baggage screening, and are likely to implement additional measures in
the future. Additional measures taken to enhance either passenger or cargo security procedures in the future may increase the
airline industry’s demand for third party services provided by us. Additionally, our aviation services division is continually
subject to such government regulation, which has adversely affected us in the past with the federalization of the pre-board screening
services and the document verification process at several of our domestic airport locations.
Our
gross profit margin during the three months ended June 30, 2017 was 11.5%. We expect gross profit to remain under pressure due
primarily to continued price competition, including competition from companies that have substantially greater financial and other
resources than we have. However, we expect these effects will be moderated by continued operational efficiencies resulting from
better management and leveraging of our cost structures, workflow process efficiencies associated with our integrated financial
software system and higher contributions from our continuing new business development.
Our
security services division generated approximately $28.9 million or 66% of our total revenues in the three months ended June 30,
2017. Our aviation services division generated approximately $14.9 million or 34% of our total revenues in the three months ended
June 30, 2017.
In
the three months ended June 30, 2017, the Company had six customers who, in the aggregate, represented approximately 56% of the
Company’s revenues, with two of those customers representing 15% and 12% of total revenues, respectively. These customers
include three major transportation & logistics customers, one domestic and one international airline and a northeast U.S.
based healthcare facility. Any loss of business with these customers could have a material adverse effect on our business, financial
condition and results of operation.
As
noted earlier, on February 12, 2009, we entered into a $20.0 million Credit Agreement with Wells Fargo, which was most recently
amended in March 2017, as described above. As of the close of business on July 25, 2017, our total outstanding borrowings
under the Credit Agreement were approximately $12.0 million and our total availability was approximately $6.7 million,
which we believe is sufficient to meet our needs for the foreseeable future barring any increase in reserves imposed by Wells
Fargo. We believe that existing funds, cash generated from operations, and existing sources of and access to financing are adequate
to satisfy our working capital, planned capital expenditures and debt service requirements for the foreseeable future, barring
any increase in reserves imposed by Wells Fargo. However, we cannot assure you that this will be the case, and we may be required
to obtain alternative or additional financing to maintain and expand our existing operations through the sale of our securities,
an increase in the amount of available borrowings under our Credit Agreement, obtaining additional financing from other financial
institutions or otherwise. The financial markets generally, and the credit markets in particular, continue to be volatile, both
in the United States and in other markets worldwide. The current market situation has resulted generally in substantial reductions
in available loans to a broad spectrum of businesses, increased scrutiny by lenders of the credit-worthiness of borrowers, more
restrictive covenants imposed by lenders upon borrowers under credit and similar agreements and, in some cases, increased interest
rates under commercial and other loans. If we require alternative or additional financing at this or any other time, we cannot
assure you that such financing will be available upon commercially acceptable terms or at all. If we fail to obtain additional
financing when and if required by us, our business, financial condition and results of operations would be materially adversely
affected.