PINX:HICKA Hickok, Inc. Class A Quarterly Report 10-Q Filing - 3/31/2012

Item 1. Financial Statements.

See Notes to Consolidated Financial Statements

Note: Amounts derived from audited financial statements previously filed with the Securities and Exchange Commission

See Notes to Consolidated Financial Statements

1. Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month and six month periods ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ended September 30, 2012. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended September 30, 2011.

Inventories are valued at the lower of cost or market and consist of the following:

The above amounts are net of reserve for obsolete inventory in the amount of $810,000, $714,000 and $476,181 for the periods ended March 31, 2012, September 30, 2011 and March 31, 2011 respectively.

3. Notes receivable

The Company has notes receivable with a current and former employee at an interest rate of three percent per annum. The Company does not anticipate repayment within the next twelve months.

4. Convertible Notes Payable

On December 30, 2011, Hickok Incorporated entered into a Convertible Loan Agreement with Roundball, LLC and the Aplin Family Trust. Under the Convertible Loan Agreement, the Company issued a convertible note to Roundball in the amount of $466,879.87 and a convertible note to the Aplin Family Trust in the amount of $208,591.20. In addition, Roundball, LLC shall have the right to cause the Company to borrow up to an additional $466,879.88 from Roundball, LLC. The notes are unsecured, bear interest at a rate of 0.20% per annum and will mature on December 30, 2012.

The notes may be converted by the Investors at any time into Class A Common Shares of the Company, at a conversion price of $1.85 per share, although up to no more than 504,735 Conversion Shares for Roundball and no more than 112,752 Conversion Shares for the Aplin Family Trust. The Company has the option to convert the notes at the expiration date, if the investors have not during the course of the agreement. On December 30, 2011, Roundball converted $233,438.55 into Class A Common Shares of the Company.

In addition, the Company sold 20,000 Class B Common Shares currently held in treasury to Roundball at a price of $1.85 per share per a subscription agreement between the Company and Roundball dated December 30, 2011.

5. Long-term Financing

The Company has a credit agreement of $250,000 with one of its major shareholders who is also an employee of the Company. The agreement was to expire in April 2012 but was modified on January 9, 2012 to extend the maturity date to April 2013. Effective October 30, 2012 for the remainder of the agreement, the lender may terminate the agreement with 45 days written notice, but it is at the discretion of the Company to deny the termination notice until April 2013 if it will have a negative effect on the solvency of the Company.

The agreement provides for a revolving credit facility of $250,000 with interest generally equal to three percent per annum plus prime and is unsecured. In addition, the agreement generally allows for borrowing based on an amount equal to eighty percent of eligible accounts receivables or $250,000.

The Company repaid the outstanding balance of $250,000 on the Revolving Credit Agreement with Robert L. Bauman on February 1, 2012. The Company had no outstanding borrowings under this loan facility at March 31, 2012.

6. Capital Stock, Treasury Stock, Contributed Capital and Stock Options

Under the Company's Key Employees Stock Option Plans (collectively the "Employee Plans"), incentive stock options, in general, are exercisable for up to ten years, at an exercise price of not less than the market price on the date the option is granted. Non-qualified stock options may be granted at such exercise price and such other terms and conditions as the Compensation Committee of the Board of Directors may determine. No options may be granted at a price less than $2.925. Under the Employee Plans there are no options currently available for grant and there are no options outstanding at March 31, 2012. Options for 26,850 Class A shares were outstanding at September 30, 2011 and 27,650 shares at March 31, 2011 at prices ranging from $3.125 to $3.55. Options for 26,850 shares at $3.55 per share expired during the three month period ended March 31, 2012. In addition, options for 13,850 shares at a price of $3.125 per share expired during the three month period ended December 31, 2010. No other options were granted, exercised, canceled or expired during the three or six month periods presented under the Employee Plans.

The following is a summary of the range of exercise prices for stock options outstanding and exercisable under the Employee Plans and the Directors Plans at March 31, 2012:

The Company accounts for Share-Based Payments under the modified prospective method for its stock options for both employees and non-employee Directors. Compensation cost for fixed based awards are measured at the grant date, and the Company uses the Black-Scholes option pricing model to determine the fair value estimates for recognizing the cost of employee and director services received in exchange for an award of equity instruments. The Black-Scholes option pricing model requires the use of subjective assumptions which can materially affect the fair value estimates. Employee stock options are immediately exercisable while Director's stock options are exercisable over a three year period. The fair value of stock option grants to Directors is amortized over the three year vesting period. During the three and the six month periods ended March 31, 2012 and 2011 respectively $3,283 and $2,865; $6,148 and $6,885 was expensed as share-based compensation. The following weighted-average assumptions were used in the option pricing model for the three and six month periods ended March 31, 2012 and 2011 respectively: a risk free interest rate of 5.0% and 5.5%; an expected life of 10 and 10 years; an expected dividend yield of 0.0% and 0.0%; and a volatility factor of .87 and .75.

Unissued shares of Class A common stock (1,008,170 shares) are reserved for the share-for-share conversion rights of the Class B common stock, stock options under the Directors Plans and conversion rights of the Convertible Promissory Notes.

7. Recently Issued Accounting Pronouncements

The Company did not incur any material impact to its financial condition or results of operations due to the adoption of any new accounting standards during the periods reported.

8. Earnings per Common Share

Earnings per common share information is computed on the weighted average number of shares outstanding during each period based on the provisions of FASB Codification ASC Topic 260, "Earnings per Share." The required reconciliations are as follows

Options to purchase 42,000 shares of common stock during the second quarter and the first six months of fiscal 2012 at prices ranging from $2.925 to $11.00 per share were outstanding but were not included in the computation of diluted earnings per share because the option's effect was antidilutive or the exercise price was greater than the average market price of the common share.

In addition, conversion rights to purchase 491,304 shares of common stock at a price of $1.85 per share were not included in the computation of diluted earnings per share because the conversion rights of the Convertible Promissory Notes effect was antidilutive.

During the second quarter and the first six month period of fiscal 2011, options to purchase 73,650 shares of common stock, at prices ranging from $2.925 to $11.00 per share were outstanding but were not included in the computation of diluted earnings per share because the option's effect was antidilutive or the exercise price was greater than the average market price of the common shares.

9. Segment and Related Information

The Company's four business units have a common management team and infrastructure that offer different products and services. The business units have been aggregated into two reportable segments: 1.) indicators and gauges and 2.) automotive related diagnostic tools and equipment.

Indicators and Gauges
This segment consists of products manufactured and sold primarily to companies in the aircraft and locomotive industry. Within the aircraft market, the primary customers are those companies that manufacture or service business, military and pleasure aircraft. Within the locomotive market, indicators and gauges are sold to both original equipment manufacturers and to operators of railroad equipment.

Automotive Diagnostic Tools and Equipment
This segment consists primarily of products designed and manufactured to support the testing or servicing of automotive systems using electronic means to measure vehicle parameters. These products are sold to OEM's and to the aftermarket using several brand names and a variety of distribution methods. Included in this segment are products used for state required testing of vehicle emissions.

Information by industry segment is set forth below:

All export sales to Australia, Canada, Mexico, Taiwan and other foreign countries are made in United States of America Dollars.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The Company has determined that it has two reportable segments: 1) indicators and gauges and 2) automotive related diagnostic tools and equipment. The indicators and gauges segment consists of products manufactured and sold primarily to companies in the aircraft and locomotive industry. Within the aircraft market, the primary customers are those companies that manufacture or service business, military and pleasure aircraft. Within the locomotive market, indicators and gauges are sold to original equipment manufacturers, servicers of locomotives and operators of railroad equipment. Revenue in this segment was $352,372 and $290,966 for the second quarter of fiscal 2012 and fiscal 2011, respectively and $730,375 and $534,772 for the first six months of fiscal 2012 and fiscal 2011, respectively. The increased sales volume was primarily due to the receipt of increased orders for the military.

The automotive diagnostic tools and equipment segment consists primarily of products designed and manufactured to support the testing or servicing of automotive systems using electronic means to measure vehicle parameters. These products are sold to OEM's and to the aftermarket using several brand names and a variety of distribution methods. Included in this segment are products used for state required testing of vehicle emissions. Revenue in this segment was $826,166 and $1,021,930 for the second quarter of fiscal 2012 and fiscal 2011, respectively, and $1,629,664 and $1,890,767 for the first six months of fiscal 2012 and fiscal 2011, respectively. The reduced sales volume was largely due to reduced sales of emissions related products.

Product sales for the six months ended March 31, 2012 were $2,180,691 versus $2,207,009 for the same period in fiscal 2011. The decrease in product sales during the first six months of the current fiscal year of approximately $26,000 was volume related due primarily to decreased sales of automotive diagnostic products, primarily, emission aftermarket products and non-emmision aftermarket testing products of approximately $220,000 and $32,000 respectively. Sales of diagnostic testing products to OEM's increased by approximately $21,000. In addition, sales of indicator products increased by approximately $205,000. Management anticipates product sales for the third and fourth quarter to increase slightly.

Service sales for the six months ended March 31, 2012 were $179,348 compared with $218,530 for the same period in fiscal 2011. The decrease was volume related and due primarily to a lower sales volume for chargeable repairs. The current level of service sales related to product repair sales is expected to continue for the balance of the fiscal year.

Cost of product sold was $1,439,946 or (66.0% of product sales) compared to $1,296,734 (58.8% of product sales) for the six months ended March 31, 2011. The dollar and percentage increase in the cost of product sold was due primarily to a lower sales volume, lower plant utilization and a change in product mix. The change in mix was largely reduced sales of emissions products and certain higher priced aftermarket products. Management's strategy of developing lower priced higher volume aftermarket products was developed in 2010 in response to a recognition that this was likely to occur due to economic and market conditions. The current cost of product sold percentage is expected to decrease moderately for the balance of the fiscal year due to an anticipated change in product mix.

Cost of service sold was $124,700 (69.5% of service sales) compared with $153,462 (70.2% of service sales) for the six months ended March 31, 2011. The dollar and percentage increase was due primarily to a lower sales volume. The cost of services sold percentage is expected to continue for the balance of the fiscal year.

Product development expenses were $473,230 (21.7% of product sales) compared to $522,002 (23.7% of product sales) for the six months ended March 31, 2011. The percentage and dollar decrease was due primarily to lower engineering expenses. During the current six month period labor costs and research and experimental material declined by approximately $49,000 and $3,000 respectively. The current level of product development expenditures is expected to increase slightly for the balance of the fiscal year due to a plan to add a resource and small wage increases for existing employees. Management believes the existing and planned resources will be sufficient to continue to develop identified new products for both OEM and Aftermarket customers.

Marketing and administrative expenses were $735,276 for the six months ended March 31, 2012 (31.2% of total sales) versus $989,006 (40.8% of total sales) for the six months ended March 31, 2011. The dollar and percentage decrease was primarily due to the cost reductions implemented in fiscal 2011. Marketing expenses were approximately $282,000 during the first six months of the current fiscal year as compared to $416,000 for the same period a year ago. Within marketing expenses, decreases were primarily in labor costs, travel expenses, royalties, credit and collection expense, advertising expense, commissions and promotion of approximately $58,000, $26,000, $13,000, $8,000, $7,000, $6,000 and $2,000 respectively. Administrative expenses were approximately $454,000 during the first six months of the current fiscal year as compared to $573,000 for the same period a year ago. The dollar decrease was due primarily to decreases in labor costs, directors fees and professional fees of approximately $77,000, $19,000 and $15,000 respectively. The current level of marketing and administrative expenses are expected to increase slightly for the remainder of the fiscal year due to the planned addition of a marketing resource, additional promotion and the small wage increase for existing employees.

Interest expense was $5,561 for the six months ended March 31, 2012, and $0 for the same period in 2011. The increase in interest charges in the current six month period compared to a year ago was due primarily to borrowings on the revolving loan facility during the current year. During the prior year there was no loan facility. The current level of interest expense is expected to decrease for the third and fourth quarters of the year due to no anticipated borrowing requirements.

Other income of $10,753 for the six months ended March 31, 2012 compares with other income of $4,002 in the same period last year. Other income consists primarily of interest income on cash and cash equivalents invested and the proceeds from the sale of scrap metal shavings. The increase is due primarily to the gain on the sale of a company vehicle and an increase in the sale of scrap metal shavings of approximately $3,500 and $3,000 respectively during the current period. The current level of other income is expected to decrease for the remainder of fiscal 2012.

Income taxes during the first six months of fiscal 2012 was $0 which compares with income taxes of $0 in the first six months of fiscal 2011. In fiscal 2012 and 2011 a recovery of income taxes was calculated at an effective tax rate of 37% offset by an increase in the valuation allowance netting to $0.

The net loss for the six months ended March 31, 2012 was $407,921 compared with a net loss of $561,663 for the six months ended March 31, 2011. The net loss for the first half of fiscal 2012 was primarily the result of lower margins due to product mix, pricing pressure a lower sales volume and that the 2010 management strategic plan has not had sufficient time to be fully effective offset in part by the cost reduction measures.

Management took several steps to reduce direct and non-direct product related expenses throughout the Company in response to the economic downturn and the uncertainty in the markets the Company serves. The steps included a substantial reduction in personnel, wage reductions for all personnel and expenditure restrictions in most aspects of the Company's operations in 2008 and 2009. Management implemented additional expense reductions that were effective March 1, 2011 in the form of a substantial reduction in personnel and a wage reduction for the CEO. In addition, the Board of Directors reduced and then eliminated all Board of Directors fees until Company financial conditions improve. A senior OEM sales executive resigned in mid-March and management decided to eliminate that position from the Marketing department. Management continues to believe its strategy to improve revenue and profitability will aid results during fiscal 2012.

The savings from the above cost cutting measures have been realized, as expected, in equal amounts per month with similar impact on both future earnings and cash flows.

Total current assets were $3,063,976, $3,016,871 and $2,916,634 at March 31, 2012, September 30, 2011 and March 31, 2011, respectively. The increase of approximately $147,000 from March to March was due primarily to the increase in cash and cash equivalents, accounts receivable and notes receivable of approximately $389,000, $56,000 and $2,000 respectively, offset in part by a decrease in inventory and prepaid expenses of approximately $287,000 and $13,000 respectively. The increase in cash and cash equivalents was due primarily to the issuance of convertible promissory notes in December 2011. The decrease in inventory was due primarily to a higher obsolescence reserve level during the period. The increase from September to March of approximately $47,000 was due primarily to the increase in cash and cash equivalents of approximately $380,000, offset in part by a decrease in accounts receivable and inventory of approximately $211,000 and $139,000 respectively. The increase in cash and cash equivalents was due primarily to the issuance of convertible promissory notes in December 2011. The decrease in accounts receivable was due to a decrease in sales during the current quarter.

Working capital as of March 31, 2012 amounted to $2,073,066 as compared with $2,273,599 a year earlier. Current assets were 3.1 times current liabilities compared to 4.5 a year ago. The quick ratio was 1.2 compared to 1.1 a year ago.

Internally generated funds during the six months ended March 31, 2012 were a negative $38,159. Capital expenditures during the period were $21,093. The primary reason for the negative cash flow from operations was the net loss during the period. The Company does not anticipate any material capital expenditures during fiscal 2012. In addition, the Company believes that cash and cash equivalents, together with funds anticipated to be generated by operations in addition to available short-term financing will provide adequate funding of the Company's working capital needs through the end of fiscal 2012.

Shareholders' equity during the six months ended March 31, 2012 decreased by $165,570 which was the net loss during the period of $407,921, the issue cost of Convertible Promissory Notes of $34,235, the sale of Class A Conversion shares of $233,438, the sale of Class B Common shares of $37,000 and $6,148 of share-based compensation expense.

During fiscal 2012 the Company's business may require a short-term increase in inventory and accounts receivables. Whenever there may be a requirement to increase inventory in fiscal 2012 there will be a negative but temporary impact on liquidity. The Company has reduced headcount, product development, and marketing, administrative and sales related expenses in order to appropriately manage its working capital. The Company believes that internally generated funds and available short-term financing will provide sufficient liquidity to meet ongoing working capital requirements.

Our critical accounting policies are as presented in Notes to Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K for the year ended September 30, 2011.

Market Risk

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

The Company is the plaintiff in a suit pursuing patent infringement against a competitor in the emissions market. There has been no material developments in this legal proceeding since the filing of Form 10-K for fiscal 2011. Management believes that it is not currently possible to estimate the impact, if any, that the ultimate resolution of the patent infringement matter will have on the Company's results of operations, financial position or cash flows.

Item 6. Exhibits.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.