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 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 December 31, 2017 and 2016.
Stock
Based Compensation
FASB
ASC 718, Stock Compensation, requires all share-based payments to employees, including grants of stock options and restricted
stock units (“RSUs”) 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 $235,576
and $11,443 for stock based compensation have been recorded for the nine months ended December 31, 2017 and 2016, respectively.
During
the three months ended September 30, 2017, the Company issued 285,000 shares of RSUs to its board of directors, executive officers
and certain other employees pursuant to the Company’s Amended and Restated 2009 Omnibus Equity Incentive Plan (“Plan”).
These RSUs were valued based on the fair value at $3.24 per share, the closing price of the Company’s common stock on July
21, 2017. The RSUs vest ratably over 36 months or earlier in certain circumstances as described in the Plan. The valuation of
restricted stock units with only a service condition or a service and performance condition requires no significant assumptions
as the fair value for these types of equity awards is based solely on the fair value of the Company’s stock price on the
date of grant.
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 18 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 $5.5 million, or 12.9%, to $48.2 million for the three months ended December 31, 2017, from $42.7 million
in the corresponding period of the prior year. The increase in revenues was due mainly to the commencement of work under new contracts
with a large on-line retailer and its web services division in June and July 2017. These increases were partly offset by reductions
in revenues from a major transportation company of approximately $5.9 million following the Company’s decision to terminate
its relationship with this customer effective August 31, 2017.
Our
revenues increased by $20.3 million, or 16.7%, to $141.7 million for the nine months ended December 31, 2017 from $121.4 million
in the corresponding period of the prior year. The increase in revenues for the nine months ended December 31, 2017 was due mainly
to the commencement of work under new contracts with a large on-line retailer and its web services division in June and July 2017,
and the commencement of work under the contracts with the USPS in June 2016. These increases were partly offset by reductions
in revenues from a major transportation company of approximately $6.7 million following the Company’s decision to terminate
its relationship with this customer effective August 31, 2017.
Gross
Profit
Our
gross profit increased by $0.8 million, or 17.7%, to $5.5 million (11.5% of revenues) for the three months ended December 31,
2017, from $4.7 million (11.0% of revenues) in the corresponding period of the prior year. The increase in gross profit was due
mainly to the above-mentioned changes in revenue, a reduction in overhead costs associated with the above mentioned terminated
contract, a decrease in workers compensation and general liability insurance expense. The increase was partly offset by higher
labor costs including training, overtime and subcontractor costs related to the commencement of the above-mentioned new contracts.
Our
gross profit increased by $1.6 million, or 11.4%, to $16.1 million (11.3% of revenues) for the nine months ended December 31,
2017, from $14.4 million (11.9% of revenues) in the corresponding period of the prior year. The increase in gross profit was due
mainly to the commencement of work under new contracts with a large on-line retailer as discussed above, a reduction in overhead
costs associated with the above mentioned terminated contract and a decrease in workers’ compensation insurance expense.
These increases were partly offset by increased labor costs including training, overtime and subcontractor costs related to the
commencement of the above-mentioned new contracts and a decrease in profits from a large international airline following a reduction
in scope of services with this customer as well as increased labor costs and overall price reductions driven by competitive pressures.
Cost of sales for the nine months ended December 31, 2017 includes approximately $90,000 of startup costs incurred in connection
with and prior to the commencement of work under the above-mentioned new contracts.
General
and Administrative Expenses
Our
general and administrative expenses decreased by $0.5 million, or 9.5%, to $4.5 million (9.4% of revenues) for the three months
ended December 31, 2017, from $5.0 million (11.7% of revenues) in the corresponding period of the prior year. The decrease in
general and administrative expenses was driven primarily by decreased legal, labor settlement and information technology costs,
partly offset by an increase in start-up costs incurred in connection with the previously announced contract to provide security
services in Honduras for the United States Department of State and an increase in consulting fees.
Our
general and administrative expenses increased by $0.6 million, or 4.7%, to $14.1 million (9.9% of revenues) for the nine months
ended December 31, 2017, from $13.5 million (11.1% of revenues) in the corresponding period of the prior year. The increase in
general and administrative expenses for the nine months ended December 31, 2017 was driven primarily by increased non-cash stock
compensation costs of approximately $224,000, severance costs, increased general and administrative salaries and wages directly
associated with the above-mentioned new business, partly offset by lower legal, labor settlement, and amortization costs. In addition,
general and administrative costs for the nine months ended December 31, 2017, includes approximately $0.4 million of startup costs
incurred in connection with and prior to the commencement of work on the above-mentioned new contracts.
Provision
for Doubtful Accounts
The
provision for doubtful accounts for the three months ended December 31, 2017, net of recoveries, decreased by $92,743 to net recoveries
of $14,284 as compared with net expense of $78,459 in the corresponding period of the prior year. The decrease in the net provision
for doubtful accounts was primarily due to recoveries of specific accounts previously deemed uncollectible.
The
provision for doubtful accounts for the nine months ended December 31, 2017, net of recoveries, decreased by $102,448 to net recoveries
of $131,902 as compared with net recoveries of $29,454 in the corresponding period of the prior year. The decrease in the net
provision for doubtful accounts for the nine months ended December 31, 2017 was driven primarily by recoveries of specific accounts
previously deemed uncollectible.
We
periodically evaluate the requirement to provide 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 $69,557, or 89.1%, to $147,617 for the three months ended December 31, 2017, from $78,060 in the corresponding
period of the prior year. The increase in interest expense for the three months ended December 31, 2017 was due mainly to higher
average outstanding borrowings in support of increased revenues and higher average interest rates under our credit agreement
with Wells Fargo, described below.
Interest
expense increased by $151,194, or 69.1%, to $370,025 for the nine months ended December 31, 2017, from $218,831 in the corresponding
period of the prior year. The increase in interest expense for the nine months ended December 31, 2017 was due primarily 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 December 31, 2017 was $68,500 as compared
with net income of $73,000 in the corresponding period of the prior year.
The
Company’s proportionate share of the net loss of OPSA for the nine months ended December 31, 2017 was $123,400 as compared
with net loss of $57,000 in the corresponding period of the prior year. The increase in the company’s proportionate share
of net loss of OPSA was due primarily to a decline in total missions and corresponding revenues.
Provision
for income taxes
The
provision for income taxes increased by $1.77 million to $1.61 million for the three months ended December 31, 2017, compared
with a benefit of $0.15 million in the corresponding period of the prior year. The Company’s effective tax rate increased
by 152% to 194% for the three months ended December 31, 2017 compared with 42.3% in the corresponding period of the prior year.
The difference between the Company’s effective tax rate of 194% for the three months ended December 31, 2017 and the Company’s
statutory tax rate of approximately 38% is primarily attributable to a $1.35 million non-cash charge to adjust for the decline
in the value of deferred tax assets resulting from the reduction in the federal corporate income tax rate, permanent tax differences
related to the exercise of stock options and the Company’s proportionate share of the net loss of OPSA.
The
provision for income taxes increased by $1.66 million to $1.97 million for the nine months ended December 31, 2017 compared to
$0.3 million in the corresponding period of the prior year. The Company’s effective tax rate increased by 78.5% to 123%
for the nine months ended December 31, 2017 compared with 44.5% in the corresponding period of the prior year. The difference
between the Company’s effective tax rate of 123% for the nine months ended December 31, 2017 and the Company’s statutory
tax rate of approximately 38% is primarily attributable to a $1.35 million non-cash charge to adjust for the decline in the value
of deferred tax assets resulting from the reduction in the federal corporate income tax rate, permanent tax differences related
to the exercise of stock options and the Company’s proportionate share of the net loss of OPSA.
Liquidity
and Capital Resources
We
pay approximately 85% 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 floating 90 day LIBOR
rate plus 1.75%. For LIBOR loans, interest will be calculated on the outstanding principal balance of the LIBOR loans at the floating
30 day LIBOR rate 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 December 31, 2017, the interest rate was 3.125% for LIBOR loans and 3.5% for revolving loans. At December
31, 2017, we had approximately $0.7 million of cash on hand. We also had $12.5 million in LIBOR loans outstanding, $9.0 million
of revolving loans outstanding and $0.3 million outstanding under our letters of credit sub-line under the Credit Agreement, representing
85% 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. As of the close of business January 31, 2018, we had total short term borrowings, net
of cash, of approximately $17 million, representing approximately 79% 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 $2.1 million, or 22.5%, to $11.4 million as of December 31, 2017, from $9.3 million as of March 31,
2017.
We
had checks drawn in advance of future deposits of $1.0 million at December 31, 2017 and $0.6 million at March 31, 2017. 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. In addition, the Company announced on October
2, 2017 the award of a five year contract with the Department of State to provide armed security at the U.S. Embassy in Honduras
which will open another line of security services. 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:
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Improved
performance through better systems, procedures and training;
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Profitable
top line revenue growth through identification of larger bid and proposal opportunities including new federal and/or international
opportunities and potential acquisitions;
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Dedicated
marketing and sales efforts in specific industry sectors that complement our core capabilities, geography and operational
expertise; and,
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Attention
to details and discipline that will drive operating efficiencies, and enhance enterprise value.
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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 nine months ended December 31, 2017 was 11.3%. During the three months ended September 30, 2017,
our gross profit margin was under pressure from the combination of startup costs related to new business and the decision by the
company to terminate its relationship with a major transportation company. We expect our gross profit margin 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 $97.0 million or 68.5% of our total revenues in the nine months ended December
31, 2017. Our aviation services division generated approximately $44.7 million or 31.5% of our total revenues in the nine months
ended December 31, 2017.
In
the nine months ended December 31, 2017, the Company had six customers who, in the aggregate, represented approximately 60% of
the Company’s revenues, with two of those customers representing 23% and 14% 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. The contract with one of these customers was terminated effective August 31, 2017. The remaining
five customers, in the aggregate, represent approximately 54% of the Company’s revenues.
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 January 31, 2018, we had total short term borrowings, net
of cash, of approximately $17 million, representing approximately 79% 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, 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.
