Quarterly Report (10-q)

Date : 05/17/2019 @ 9:38PM
Source : Edgar (US Regulatory)
Stock : Arc Grp. Worldwide, Inc. (ARCW)
Quote : 0.25  0.0 (0.00%) @ 1:00AM

Quarterly Report (10-q)

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10 - Q

 

QUARTERLY REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2019

 

OR

 

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

 

For the transition period from _______ to _______

 

PICTURE 1

 

ARC Group Worldwide, Inc.

(Exact name of registrant as specified in its charter)

 

Utah

(State or other jurisdiction of incorporation or organization)

 

 

 

 

001-33400

    

87-0454148

(Commission File Number)

 

(I.R.S. Employer Identification Number)

 

810 Flightline Blvd.

Deland, FL 32724

(Address of principal executive offices including zip code)

 

(303) 467-5236

(Registrant’s telephone number, including area code)

 

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

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).  Yes ☒ No ☐

 

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

 

 

 

 

Large accelerated filer ☐

 

Accelerated filer ☐

 

 

 

Non-accelerated filer ☒ 

 

Smaller reporting company ☒

 

Emerging growth company ☐

 

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

 

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

 

 

 

 

 

Title of each class:

    

Trading Symbol

    

Name of each exchange on which registered:

Common Stock, par value $0.0005

 

ARCW

 

The NASDAQ Global Market

 

As of May 17, 2019, the Registrant had 23,377,256 shares outstanding of its $0.0005 par value common stock.

 

 

 


 

 

ARC Group Worldwide, Inc.

 

Table of Contents

 

 

 

 

 

PART I. FINANCIAL INFORMATION  

 

 

 

 

    

 

Item 1.  

Financial Statements

 

3

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended March 31, 2019 and April 1, 2018

 

3

 

 

 

 

 

Unaudited Condensed Consolidated Balance Sheets as of March 31, 2019 and June 30, 2018

 

4

 

 

 

 

 

Unaudited Condensed Consolidated Statement of Stockholders’ Equity for the Nine Months Ended March 31, 2019 and April 1, 2018

 

5

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2019 and April 1, 2018

 

7

 

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

8

 

 

 

 

Item 2.  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

23

 

 

 

 

Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

 

30

 

 

 

 

Item 4.  

Controls and Procedures

 

30

 

 

 

 

PART II. OTHER INFORMATION  

 

 

 

 

 

 

Item 1A.  

Risk Factors

 

31

 

 

 

 

Item 6.  

Exhibits

 

33

 

 

 

 

SIGNATURES  

 

33

 

 

 


 

PART I — FINANCIAL INFORMATIO N

 

ITEM 1.  FINANCIAL STATEMENT S

 

ARC Group Worldwide, Inc.

Unaudited Condensed Consolidated Statements of Operation s

(in thousands, except for share and per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

For the nine months ended

 

 

March 31,

 

April 1,

 

March 31,

 

April 1,

 

    

2019

    

2018

    

2019

    

2018

Sales

 

$

19,856

 

$

21,046

 

$

61,328

 

$

57,559

Cost of sales

 

 

20,086

 

 

19,365

 

 

56,958

 

 

54,984

Gross profit (deficit)

 

 

(230)

 

 

1,681

 

 

4,370

 

 

2,575

Selling, general and administrative

 

 

2,909

 

 

3,062

 

 

9,388

 

 

9,734

Loss from operations

 

 

(3,139)

 

 

(1,381)

 

 

(5,018)

 

 

(7,159)

Other income (expense), net

 

 

103

 

 

(104)

 

 

193

 

 

24

Interest expense, net

 

 

(936)

 

 

(857)

 

 

(2,765)

 

 

(2,744)

Loss before income taxes

 

 

(3,972)

 

 

(2,342)

 

 

(7,590)

 

 

(9,879)

Income tax benefit

 

 

796

 

 

13

 

 

728

 

 

207

Net loss from continuing operations

 

 

(3,176)

 

 

(2,329)

 

 

(6,862)

 

 

(9,672)

Loss on sale of subsidiaries and loss from discontinued operations, net of tax

 

 

(3,005)

 

 

(787)

 

 

(4,559)

 

 

(1,321)

Net loss

 

$

(6,181)

 

$

(3,116)

 

$

(11,421)

 

$

(10,993)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per common share, basic and diluted:

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(0.14)

 

$

(0.12)

 

$

(0.29)

 

$

(0.51)

Discontinued operations

 

$

(0.12)

 

$

(0.04)

 

$

(0.20)

 

$

(0.07)

ARC Group Worldwide, Inc.

 

$

(0.26)

 

$

(0.16)

 

$

(0.49)

 

$

(0.58)

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

 

23,366,267

 

 

20,051,710

 

 

23,355,074

 

 

18,832,365

 

See accompanying notes to the unaudited condensed consolidated financial statements.

3


 

ARC Group Worldwide, Inc.

Unaudited Condensed Consolidated Balance Sheet s

(in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

March 31, 2019

    

June 30, 2018

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash

 

$

222

 

$

365

 

Accounts receivable, net

 

 

11,243

 

 

11,103

 

Inventories, net

 

 

14,664

 

 

12,102

 

Prepaid expenses and other current assets

 

 

1,578

 

 

2,781

 

Current assets of discontinued operations

 

 

 —

 

 

547

 

Total current assets

 

 

27,707

 

 

26,898

 

Property and equipment, net

 

 

35,069

 

 

36,879

 

Goodwill

 

 

6,412

 

 

6,412

 

Intangible assets, net

 

 

13,738

 

 

16,270

 

Other

 

 

264

 

 

347

 

Long-term assets of discontinued operations

 

 

 —

 

 

3,127

 

Total assets

 

$

83,190

 

$

89,933

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

13,770

 

$

11,345

 

Accrued expenses and other current liabilities

 

 

2,486

 

 

2,000

 

Deferred revenue

 

 

262

 

 

825

 

Bank borrowings, current portion of long-term debt and unamortized financing costs

 

 

1,604

 

 

1,721

 

Capital lease obligations, current portion

 

 

1,176

 

 

456

 

Accrued escrow obligations, current portion

 

 

595

 

 

943

 

Current liabilities of discontinued operations

 

 

 —

 

 

1,422

 

Total current liabilities

 

 

19,893

 

 

18,712

 

Long-term debt, net of current portion and unamortized financing costs

 

 

41,015

 

 

37,013

 

Capital lease obligations, net of current portion

 

 

1,363

 

 

617

 

Other long-term liabilities

 

 

27

 

 

965

 

Long-term liabilities of discontinued operations

 

 

 —

 

 

462

 

Total liabilities

 

 

62,298

 

 

57,769

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 11)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' Equity:

 

 

 

 

 

 

 

Preferred stock, $0.001 par value, 2,000,000 shares authorized, no shares issued and outstanding

 

 

 —

 

 

 —

 

Common stock, $0.0005 par value, 250,000,000 shares authorized; 23,385,657 shares issued and 23,377,256 shares issued and outstanding at March 31, 2019, and 23,324,316 shares issued and 23,315,915 shares issued and outstanding at June 30, 2018

 

 

12

 

 

12

 

Treasury stock, at cost; 8,401 shares at March 31, 2019 and June 30, 2018

 

 

(94)

 

 

(94)

 

Additional paid-in capital

 

 

42,087

 

 

41,829

 

Accumulated deficit

 

 

(21,047)

 

 

(9,627)

 

Accumulated other comprehensive income

 

 

(66)

 

 

44

 

Total stockholders' equity

 

 

20,892

 

 

32,164

 

Total liabilities and stockholders' equity

 

$

83,190

 

$

89,933

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

4


 

ARC Group Worldwide, Inc.

Unaudited Condensed Consolidated Statement of Stockholders’ Equity

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

Treasury Stock

 

 

 

 

Retained

 

Accumulated

 

 

 

 

 

 

 

 

Amount

 

 

 

 

 

 

Additional

 

earnings

 

other

 

 

 

 

 

 

 

(Par value

 

 

 

Amount

 

paid-in

 

(accumulated

 

comprehensive

 

Total

 

 

    

Shares

    

$0.0005)

    

Shares

    

(at cost)

    

capital

    

deficit)

    

income (loss)

    

equity

 

Balance, June 30, 2018

 

23,324

 

12

 

(8)

 

(94)

 

41,829

 

(9,627)

 

44

 

32,164

 

Net loss

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(1,697)

 

 

 —

 

 

(1,697)

 

Share issuance for exercise of options

 

34

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Share-based compensation expense

 

 —

 

 

 —

 

 —

 

 

 —

 

 

61

 

 

 —

 

 

 —

 

 

61

 

Currency translation adjustment

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(47)

 

 

(47)

 

Balance, September 30, 2018

 

23,358

 

$

12

 

(8)

 

$

(94)

 

$

41,890

 

$

(11,324)

 

$

(3)

 

$

30,481

 

Net loss

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(3,542)

 

 

 —

 

 

(3,542)

 

Share-based compensation expense

 

 —

 

 

 —

 

 —

 

 

 —

 

 

137

 

 

 —

 

 

 —

 

 

137

 

Currency translation adjustment

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 9

 

 

 9

 

Balance, December 30, 2018

 

23,358

 

$

12

 

(8)

 

$

(94)

 

$

42,027

 

$

(14,866)

 

$

6

 

$

27,085

 

Net loss

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(6,181)

 

 

 —

 

 

(6,181)

 

Share-based compensation expense

 

 —

 

 

 —

 

 —

 

 

 —

 

 

31

 

 

 —

 

 

 —

 

 

31

 

Shares issued under employee stock purchase plan

 

28

 

 

 —

 

 —

 

 

 —

 

 

29

 

 

 —

 

 

 —

 

 

29

 

Currency translation adjustment

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(72)

 

 

(72)

 

Balance, March 31, 2019

 

23,386

 

$

12

 

(8)

 

$

(94)

 

$

42,087

 

$

(21,047)

 

$

(66)

 

$

20,892

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements

5


 

ARC Group Worldwide, Inc.

Unaudited Condensed Consolidated Statement of Stockholders’ Equity (continued)

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

Treasury Stock

 

 

 

 

Retained

 

Accumulated

 

 

 

 

 

 

 

Amount

 

 

 

 

 

 

Additional

 

earnings

 

other

 

 

 

 

 

 

(Par value

 

 

 

Amount

 

paid-in

 

(accumulated

 

comprehensive

 

Total

 

    

Shares

    

$0.0005)

    

Shares

    

(at cost)

    

capital

    

deficit)

    

income (loss)

    

equity

Balance, June 30, 2017

 

18,180

 

$

10

 

(8)

 

$

(94)

 

$

31,109

 

$

3,569

 

$

73

 

$

34,667

Net loss

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(3,555)

 

 

 —

 

 

(3,555)

Share issuance for exercise of options

 

22

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Share-based compensation expense

 

 —

 

 

 —

 

 —

 

 

 —

 

 

287

 

 

 —

 

 

 —

 

 

287

Shares issued under employee stock purchase plan

 

38

 

 

 —

 

 —

 

 

 —

 

 

92

 

 

 —

 

 

 —

 

 

92

Currency translation adjustment

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

62

 

 

62

Other

 

 —

 

 

 —

 

 —

 

 

 —

 

 

15

 

 

(14)

 

 

 —

 

 

 1

Balance, October 1, 2017

 

18,240

 

$

10

 

(8)

 

$

(94)

 

$

31,503

 

$

0

 

$

135

 

$

31,554

Net loss

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(4,322)

 

 

 —

 

 

(4,322)

Share issuance for exercise of options

 

43

 

 

 —

 

 —

 

 

 —

 

 

63

 

 

 —

 

 

 —

 

 

63

Share-based compensation expense

 

 —

 

 

 —

 

 —

 

 

 —

 

 

109

 

 

 —

 

 

 —

 

 

109

Currency translation adjustment

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

65

 

 

65

Other

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 1

 

 

 —

 

 

 1

Balance, December 31, 2017

 

18,283

 

$

10

 

(8)

 

$

(94)

 

$

31,675

 

$

(4,321)

 

$

200

 

$

27,470

Net loss

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(3,116)

 

 

 —

 

 

(3,116)

Proceeds from rights offering, net

 

5,000

 

 

 2

 

 —

 

 

 —

 

 

9,781

 

 

 —

 

 

 —

 

 

9,783

Share-based compensation expense

 

 —

 

 

 —

 

 —

 

 

 —

 

 

87

 

 

 —

 

 

 —

 

 

87

Shares issued under employee stock purchase plan

 

31

 

 

 —

 

 —

 

 

 —

 

 

55

 

 

 —

 

 

 —

 

 

55

Currency translation adjustment

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

62

 

 

62

Other

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(1)

 

 

 —

 

 

(1)

Balance, April 1, 2018

 

23,314

 

$

12

 

(8)

 

$

(94)

 

$

41,598

 

$

(7,438)

 

$

262

 

$

34,340

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements

6


 

ARC Group Worldwide, Inc.

Unaudited Condensed Consolidated Statements of Cash Flow s

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended

 

 

    

March 31, 2019

    

April 1, 2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net loss

 

$

(11,421)

 

$

(10,993)

 

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

7,707

 

 

7,630

 

Share-based compensation expense

 

 

229

 

 

484

 

Loss on sale of asset

 

 

62

 

 

170

 

Loss on sale of subsidiaries

 

 

2,126

 

 

109

 

Bad debt expense and other

 

 

75

 

 

12

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

(172)

 

 

(469)

 

Inventory

 

 

(2,560)

 

 

1,247

 

Prepaid expenses and other assets

 

 

1,677

 

 

124

 

Accounts payable

 

 

2,857

 

 

3,148

 

Accrued expenses and other liabilities

 

 

(766)

 

 

(1,758)

 

Deferred revenue

 

 

(563)

 

 

(35)

 

Net cash used in operating activities

 

 

(749)

 

 

(331)

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(1,174)

 

 

(4,432)

 

Proceeds from sale of subsidiary

 

 

 —

 

 

3,000

 

Net cash used in investing activities

 

 

(1,174)

 

 

(1,432)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from debt issuance

 

 

56,276

 

 

74,956

 

Repayments of long-term debt and capital lease obligations

 

 

(54,308)

 

 

(83,772)

 

Proceeds from rights offering, net

 

 

 —

 

 

9,783

 

Issuance of common stock under employee stock purchase plan and exercise of stock options

 

 

29

 

 

210

 

Net cash provided by financing activities

 

 

1,997

 

 

1,177

 

Effect of exchange rates on cash

 

 

(217)

 

 

461

 

Net decrease in cash

 

 

(143)

 

 

(125)

 

Cash, beginning of period

 

 

365

 

 

593

 

Cash, end of period

 

$

222

 

$

468

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

Cash paid for interest

 

$

1,874

 

$

2,079

 

Cash paid for income taxes, net of refunds

 

$

24

 

$

52

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

7


 

ARC Group Worldwide, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

NOTE 1 – Nature of Operations and Basis of Presentation

 

Nature of Operations

 

ARC Group Worldwide, Inc. (the “Company” or “ARC”) is a global advanced manufacturer offering a full suite of products and services to our customers, with specific expertise in metal injection molding (“MIM”).  To further advance and support our core capabilities, the Company also offers complementary services including: (i) precision metal stamping; (ii) traditional and clean room plastic injection molding; and (iii) advanced rapid and conformal tooling.  Through its diverse product offerings, the Company provides its customers with a holistic prototyping and full-run production solution for both precision metal and plastic fabrication.  The Company further differentiates itself from its competitors by providing innovative, custom capabilities that improve high-precision manufacturing efficiency and speed-to-market for its customers.

 

Basis of Presentation

 

The Company’s fiscal year begins July 1 and ends June 30, and the quarters for interim reporting consist of thirteen weeks; therefore, the quarter end will not always coincide with the date of the calendar month-end.

 

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial reporting and pursuant to the applicable rules and regulations of the U.S. Securities and Exchange Commission (“SEC”).  Pursuant to these rules and regulations, certain information and note disclosures, normally included in financial statements prepared in accordance with GAAP, have been condensed or omitted.  In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments consisting of normal recurring adjustments necessary for a fair presentation of its financial position and results of operations.  Interim results of operations are not necessarily indicative of the results that may be achieved for the full year.  The consolidated balance sheet as of June 30, 2018, was derived from the audited financial statements as of that date, but does not include all disclosures, including notes required by GAAP.  As such, this quarterly report should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2018.  The Company follows the same accounting policies for preparing quarterly and annual reports.  

 

Principles of Consolidation

 

The unaudited condensed consolidated financial statements include the accounts of ARC and its wholly-owned subsidiaries.  All material intercompany transactions have been eliminated in consolidation.

 

Correction of Immaterial Errors

 

In the first quarter of fiscal year 2019, the Company's management determined that there was an error with respect to the recording of the full cost absorption adjustment for inventory.  The Company assessed the materiality of the misstatement both quantitatively and qualitatively and determined that the error was immaterial to all prior consolidated financial statements taken as a whole. Accordingly, prior period amounts have not been adjusted to reflect the correction of the error.  The correction resulted in an increase in gross profit for the nine months ended March 31, 2019 of $1.0 million which related to the reporting period for the three months ended September 30, 2018. 

 

NOTE 2 – Significant Accounting Policies

 

Use of Estimates

 

The preparation of financial statements in conformity with 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 financial statements, and reported amounts of revenue and expenses during the reporting period.  Due to the inherent uncertainties in making estimates, actual results could differ from those estimates and such differences may be material to the consolidated financial statements.  The Company’s significant estimates include allowance for

8


 

doubtful accounts, reserve for inventory obsolescence, valuation of share-based compensation, useful lives of long-lived assets, valuation of long-lived assets, and income taxes. 

 

Comprehensive Income (Loss)

 

For each of the quarters ended March 31, 2019 and April 1, 2018, there were no material differences between net loss and comprehensive loss.

 

Accounting Pronouncements Adopted in the Current Period    

 

In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09,   Revenue from Contracts with Customers : Topic 606 (“ASU 2014-09”), to supersede nearly all existing revenue recognition guidance under GAAP.  The core principle of ASU 2014-09 is to recognize revenues 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.  ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing GAAP including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation.  ASU 2014-09 is effective in the Company’s first quarter of fiscal 2019 and the Company may transition to the standard using either the full retrospective approach or retrospectively with a cumulative effect of initially applying the amendments recognized at the date of initial application.  The Company has adopted ASU 2014-09 as of July 1, 2018 and no cumulative effect of the adoption was required.  We obtained an understanding of the new standard and determined that the Company will retain much of the same accounting treatment used to recognize revenue as compared to the then existing standards. See below for the Company’s updated revenue recognition policy.

 

Revenue Recognition

 

On January 1, 2018, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers and all the related amendments (the “new revenue standard”) with respect to all contracts using the modified retrospective method. As a majority of the Company’s sales revenue continues to be recognized when products are shipped from its manufacturing facility, and there was no material change in the recognition model historically applied to contracts with customers under the new revenue standard, and there was no adjustment to the opening balance of retained earnings.  The impact to the Company’s results of operations is not expected to be material, on an on-going basis, because the analysis of the Company’s contracts under the new revenue standard supports a recognition model consistent with the Company’s current revenue recognition model.

The Company has historically recognized revenue from two streams, product revenue and tooling revenue.  Product revenues are primarily generated from the sale of MIM and related products. Revenue from product sales is recognized as products are shipped, as the Company transfers control to the customer and is entitled to payment upon shipment. 

 

Tooling revenue is earned from manufacturing multiple tools, molds, and assembly equipment as part of a tooling program for that customer.  Each tooling program consists of a significant service of production, with highly customized products being produced for each customer.  As such, each tooling agreement consists of a single performance obligation.  Based on the arrangement with the customer, the Company recognizes revenue at the time products are shipped, as the Company transfers control of the tooling product to the customer and is entitled payment upon shipment.

 

The Company has elected to exclude from measurement of the transaction price all taxes (e.g., sales, use, value added and certain excise taxes) that are assessed by a governmental authority in connection with a specific revenue-producing transaction and collected by the Company from the customer.  Accordingly, the Company recognizes revenue net of sales taxes.  The revenue and cost for freight and shipping is recorded when control over the sale of goods passes to the Company’s customers.

The Company offers assurance-type warranties for its products and does not have any material separate performance obligations related to these warranties.  The Company’s historical rates of return are insignificant as a percentage of sales and, as a result, the Company does not record a reserve for returns at the time the Company recognizes revenue. 

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Applying the practical expedient in ASC 340-40-25-4, the Company recognizes the incremental costs of obtaining contracts as an expense when incurred since the amortization period of the assets that the Company otherwise would have recognized is one year or less. 

The Company has elected the practical expedient detailed at ASC 606-10-50-13, whereas revenue for unsatisfied performance obligations that will be billed in future periods has not been disclosed.

Deferred revenue consists of customer deposits for the development of the tooling revenue component for the purpose of manufacturing the assembly part.  However, as this does not trigger any income as no products have changed hands and this is done more as a collectability measure with the Customer, no other actions other than recording the deposit occur at the time of the transaction.  The Company recognizes revenue and the related expenses when the customer approves and accepts delivery of the tooling part component, which is the time when the performance obligation of providing product to the customer occurs.  Costs incurred related to tooling components in the process of being developed are deferred and are included as a current assets on the balance sheet.

The Company does not have material amounts of contract assets since revenue is recognized as control of goods is transferred.  Contract liabilities consist of customer deposits and deferred revenue.  For the nine months ended March 31, 2019, the Company recognized revenue of $0.6 million related to the deferred revenue at June 30, 2018.

In regards to the assembly parts, revenue is recognized when the assembly parts are shipped at the Company’s loading dock, which is when the customer takes control of the goods and the performance obligation is satisfied.  

The Company does not examine the effects of a financing component as the timing difference between performance and payment is less than 12 months.  The Company applies this practical expedient to all contracts entered into for all products.

We did not record any adjustments to our financial statements as part of the adoption of ASU 2014-09.

 

The Company reported segment disclosures at Note 12, which presents disaggregated revenue information for financial reporting purposes.

 

Recent Accounting Pronouncements

 

In February 2016, the FASB issued ASU No. 2016-02, Leases : Topic 842 (“ASU 2016-02”), to supersede nearly all existing lease guidance under GAAP.  ASU 2016-02 requires the recognition of lease assets and lease liabilities on the balance sheet by lessees for those leases currently classified as operating leases.  ASU 2016-02 also requires qualitative disclosures along with specific quantitative disclosures and is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.  Early application is permitted.  Entities are required to apply the amendments at the beginning of the earliest period presented using a modified retrospective approach.  We are evaluating additional changes to our processes and internal controls to ensure we meet the standard’s reporting and disclosure requirements. While we continue to evaluate the effect of the standard on our consolidated financial statements, the adoption of the ASU will result in the recognition of a right of use asset and related liability with an estimated immaterial effect to our retained earnings.  The Company is evaluating the requirements of this guidance and has not yet determined the impact of the adoption on its consolidated financial position, results of operations and cash flows; however, the Company’s operating lease commitments are disclosed in Note 12, Commitments and Contingencies, of the Company’s Form 10-K for the fiscal year ended June 30, 2018.    

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses : Topic 326 (“ASU 2016-13”), which requires entities to use a new forward-looking “expected loss” model that generally will result in the earlier recognition of allowances for losses.  ASU 2016-13 is effective for annual periods beginning after December 15, 2019, including interim periods within that year.  Early adoption is permitted.  The adoption of ASU 2016-03 is not expected to have a material effect on the Company’s consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other : Topic 350 (“ASU 2017-04”), which eliminates Step 2 from the goodwill impairment test.  The annual, or interim, goodwill impairment test is performed by comparing fair value of a reporting unit with its carrying amount.  An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value.  ASU 2017-04 also eliminates the

10


 

requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative step, to perform Step 2 of the goodwill impairment test.  An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary.  ASU 2017-04 is effective for all public businesses that are SEC filers for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019.  The Company is currently evaluating the impact of ASU 2017-04 on the financial statements.  There was no impairment noted during nine months ended March 31, 2019, but the Company expects that this standard will impact the financial statements if an impairment is indicated.  

 

 

NOTE 3 – Divestitures

 

General Flange & Forge LLC (“GF&F”)

 

On September 15, 2017, the Company sold substantially all of the assets of GF&F to GFFC Holdings, LLC (“GFFC”) for $3.0 million in cash.  GFFC was owned, in part, by Quadrant Management Inc., which is an affiliate of the Company.  The sale of GF&F was therefore a related party transaction.  The GF&F sale was made pursuant to an industry-wide auction undertaken on behalf of the Company by a registered investment banking organization that managed the sale process with prospective bidders.  GFFC entered into the bidding for the GF&F assets only after the first rounds of the auction indicated uncertainty both in respect to the timing for closing any prospective sale and achieving the Company’s valuation objectives.  Mr. Alan Quasha, CEO of Quadrant Management Inc. and Chairman of the Company’s Board of Directors, recused himself from any deliberations or voting by the Board of Directors in respect of the sale of the GF&F assets to GFFC.  The Board of Directors appointed a special committee consisting solely of independent directors to oversee and negotiate the sale process.  The special committee engaged its own independent legal counsel to advise the special committee in respect of the drafting of the asset sale agreement and ancillary transaction documents in accordance with customary terms and conditions for transactions of this type.  In this manner, the special committee was able to conclude that the sale price and the terms and conditions for the transaction were superior to any other offers, as well as fair and reasonable to the Company and its shareholders.

 

Below is a summary of the loss on sale of discontinued operations (in thousands):

 

 

 

 

 

Gross proceeds

 

$

3,000

 

 

 

 

Less:

 

 

 

Property and equipment, net

 

 

181

Accounts receivable

 

 

561

Inventory

 

 

882

Other current assets

 

 

42

Accounts payable and accrued expenses

 

 

(269)

Total net assets disposed

 

 

1,397

 

 

 

 

Goodwill

 

 

1,712

Transaction costs

 

 

394

Loss on sale of discontinued operations, before income taxes

 

$

(503)

 

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The condensed consolidated statement of operations for the three and nine months ended April 1, 2018, includes the results of operations of GF&F through the sale date of September 15, 2017 and the loss on the sale of GF&F.  Financial information for discontinued operations for the three and nine months ended March 31, 2019 and April 1, 2018 is as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

For the nine months ended

 

 

March 31, 2019

 

April 1, 2018

 

March 31, 2019

 

April 1, 2018

Sales

 

$

 —

 

$

 —

 

$

 —

 

$

726

Cost of sales

 

 

 —

 

 

 —

 

 

 —

 

 

(615)

Gross profit

 

 

 —

 

 

 —

 

 

 —

 

 

111

Selling, general and administrative

 

 

 —

 

 

 —

 

 

 —

 

 

(108)

Income from discontinued operations, before income taxes

 

 

 —

 

 

 —

 

 

 —

 

 

 3

Loss on sale of discontinued operations

 

 

 —

 

 

 —

 

 

 —

 

 

(503)

Total loss from discontinued operations, before income taxes

 

 

 —

 

 

 —

 

 

 —

 

 

(500)

Income tax benefit on discontinued operations

 

 

 —

 

 

 —

 

 

 —

 

 

224

Loss from discontinued operations, net of tax

 

$

 —

 

$

 —

 

$

 —

 

$

(276)

 

Cash flows from GF&F for the nine months ended April 1, 2018 are combined with the cash flows from operations within each of the categories presented on the condensed consolidated statements of cash flows. 

 

3D Material Technologies (“3DMT”)

 

On July 18, 2018, the Company’s Board of Directors approved a plan to explore hiring a third party to help market and sell 3DMT.  On July 25, 2018, the Board of Directors entered into an agreement with a third party to transact the activities of marketing and selling 3DMT.  On March 29, 2019, the Company finalized an agreement with Aerojet Rocketdyne, Inc. (“Aerojet”) for the purchase of substantially all of the assets of 3DMT.  As part of the sale, Aerojet assumed all assets and liabilities of 3DMT, including future operating lease obligations in lieu of cash proceeds.    

 

The condensed consolidated statements of operations for the three and nine months ended March 31, 2019 and April 1, 2018, respectively, include the results of operations of 3DMT disclosed as discontinued operations.  Financial information for discontinued operations for the three and nine months ended March 31, 2019 and April 1, 2018 are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

For the nine months ended

 

 

March 31, 2019

 

April 1, 2018

 

March 31, 2019

 

April 1, 2018

Sales

 

$

204

 

$

415

 

$

872

 

$

2,205

Cost of sales

 

 

(742)

 

 

(989)

 

 

(2,134)

 

 

(2,621)

Gross profit

 

 

(538)

 

 

(574)

 

 

(1,262)

 

 

(416)

Selling, general and administrative

 

 

(223)

 

 

(199)

 

 

(626)

 

 

(566)

Loss from discontinued operations, before income taxes

 

 

(761)

 

 

(773)

 

 

(1,888)

 

 

(982)

Interest expense

 

 

(7)

 

 

(14)

 

 

(37)

 

 

(65)

Other expense, net

 

 

(2,237)

 

 

 —

 

 

(2,634)

 

 

 2

Total loss from discontinued operations, before income taxes

 

 

(3,005)

 

 

(787)

 

 

(4,559)

 

 

(1,045)

Income tax benefit on discontinued operations

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Loss from discontinued operations, net of tax

 

$

(3,005)

 

$

(787)

 

$

(4,559)

 

$

(1,045)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12


 

The condensed consolidated balance sheets for March 31, 2019 and June 30, 2018 include assets related to discontinued operations as follows (in thousands):

 

 

 

 

 

 

 

 

March 31, 2019

 

June 30, 2018

Current assets:

 

 

 

 

 

Accounts receivable, net

$

 —

 

$

148

Inventories, net

 

 —