UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended September 30, 2017

OR

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

 

For the transition period from ________________ to ________________

 

Commission File Number: 001-38089

 

ASV HOLDINGS, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

82-1501649

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

840 Lily Lane

Grand Rapids, MN

55744

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (218) 327-3434

 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes      No  

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

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

  

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  

As of October 30, 2017, the registrant had 9,800,000 shares of common stock, $0.001 par value per share, outstanding.

 

 

 

i


Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

 

Item 1.

 

Financial Statements (Unaudited)

1

 

Condensed Balance Sheets

1

 

Condensed Statements of Income

2

 

Condensed Statements of Cash Flows

3

 

Notes to Unaudited Condensed Financial Statements

4

Item 2.  

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

14

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

21

Item 4.

Controls and Procedures

22

 

PART II.

 

OTHER INFORMATION

 

Item 1.

Legal Proceedings

22

Item 1A.

Risk Factors

22

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

22

Item 3.

Defaults upon Senior Securities

22

Item 4.

Mine Safety Procedures

22

Item 5.

Other Information

22

Item 6.

Exhibits

23

Signatures

 

24

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

i


EXPLANATORY NOTE: REFERENCES TO ASV

 

 

In this Quarterly Report on Form 10-Q, unless otherwise stated or the context otherwise requires:

 

 

References to the “Company,” “ASV,” “we,” “us” and “our” following the date of Corporate Conversion (May 11, 2017) refer to ASV Holdings, Inc. and its consolidated subsidiaries;

 

 

References to the “Company,” “ASV,” “we,” “us” and “our” prior to the date of Corporate Conversion refer to A.S.V., LLC and its consolidated subsidiaries; and

 

 

References to the “Corporate Conversion” or “corporate conversion” refer to all of the transactions related to the conversion of A.S.V., LLC, a Minnesota limited liability company, into ASV Holdings, Inc., a Delaware corporation, including the conversion of all of the outstanding membership units of A.S.V., LLC into shares of common stock of ASV Holdings, Inc., effected on May 11, 2017.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ii


PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

ASV Holdings, Inc.

Condensed Balance Sheets

(In thousands, except par value)

 

 

September 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

 

 

Unaudited

 

 

Unaudited

 

ASSETS

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

 

 

Cash

 

$

8

 

 

$

572

 

Cash - restricted

 

 

 

 

 

535

 

Trade receivables, net

 

 

17,096

 

 

 

13,603

 

Receivables from affiliates

 

 

44

 

 

 

1,413

 

Inventory

 

 

25,123

 

 

 

30,896

 

Prepaid expenses and other

 

 

681

 

 

 

537

 

Total current assets

 

 

42,952

 

 

 

47,556

 

 

 

 

 

 

 

 

 

 

NON-CURRENT ASSETS

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

14,252

 

 

 

15,402

 

Intangible assets, net

 

 

23,914

 

 

 

25,824

 

Goodwill

 

 

30,579

 

 

 

30,579

 

Deferred financing costs - revolving loan facility

 

 

317

 

 

 

371

 

Deferred tax asset

 

 

947

 

 

 

 

Total assets

 

$

112,961

 

 

$

119,732

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Note payable - current portion

 

$

2,150

 

 

$

3,000

 

Trade accounts payable

 

 

14,209

 

 

 

11,976

 

Payables to affiliates

 

 

1,123

 

 

 

2,298

 

Accrued compensation and benefits

 

 

1,049

 

 

 

1,073

 

Accrued warranties

 

 

1,879

 

 

 

1,870

 

Accrued product liability- short term

 

 

915

 

 

 

2,125

 

Accrued other

 

 

1,139

 

 

 

1,312

 

Income taxes payable

 

 

31

 

 

 

 

Total current liabilities

 

 

22,495

 

 

 

23,654

 

 

 

 

 

 

 

 

 

 

NON-CURRENT LIABILITIES

 

 

 

 

 

 

 

 

Revolving loan facility

 

 

7,439

 

 

 

15,605

 

Note payable - long term, net

 

 

15,685

 

 

 

26,265

 

Accrued product liability- long term

 

 

82

 

 

 

 

Other long-term liabilities

 

 

731

 

 

 

773

 

Total liabilities

 

 

46,432

 

 

 

66,297

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value, 5,000 authorized, none outstanding at September 30, 2017 and December 31, 2016, respectively

 

 

 

 

 

 

Common stock, $0.001 par value, 50,000 authorized, 9,800 and 8,000 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively

 

 

10

 

 

 

 

Additional paid-in capital

 

 

65,367

 

 

 

54,787

 

Retained earnings (accumulated deficit)

 

 

1,152

 

 

 

(1,352

)

Total Stockholders' Equity

 

 

66,529

 

 

 

53,435

 

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 

$

112,961

 

 

$

119,732

 

The accompanying notes are an integral part of these condensed financial statements.

1


ASV Holdings, Inc.

Condensed Statements of Income

(In thousands, except par value and per share data)

 

 

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

Unaudited

 

 

Unaudited

 

 

Unaudited

 

 

Unaudited

 

Net sales

 

$

30,635

 

 

$

23,011

 

 

$

92,885

 

 

$

78,752

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

25,798

 

 

 

19,339

 

 

 

78,389

 

 

 

66,241

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

4,837

 

 

 

3,672

 

 

 

14,496

 

 

 

12,511

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development costs

 

 

503

 

 

 

464

 

 

 

1,561

 

 

 

1,510

 

Selling, general and administrative expense

 

 

2,857

 

 

 

1,509

 

 

 

8,340

 

 

 

6,218

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

1,477

 

 

 

1,699

 

 

 

4,595

 

 

 

4,783

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(698

)

 

 

(1,259

)

 

 

(2,463

)

 

 

(3,816

)

Other income (expense)

 

 

 

 

 

(2

)

 

 

1

 

 

 

(18

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other expense

 

 

(698

)

 

 

(1,261

)

 

 

(2,462

)

 

 

(3,834

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before taxes

 

 

779

 

 

 

438

 

 

 

2,133

 

 

 

949

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense (benefit)

 

 

257

 

 

 

 

 

 

(372

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

522

 

 

$

438

 

 

$

2,505

 

 

$

949

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net income per share

 

$

0.05

 

 

$

0.05

 

 

$

0.28

 

 

$

0.12

 

Diluted net income per share

 

$

0.05

 

 

$

0.05

 

 

$

0.28

 

 

$

0.12

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average common shares outstanding

 

 

9,800

 

 

 

8,000

 

 

 

8,897

 

 

 

8,000

 

Diluted weighted average common shares outstanding

 

 

9,800

 

 

 

8,000

 

 

 

8,897

 

 

 

8,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pro forma (C corporation basis):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pro forma tax expense

 

N/A

 

 

$

158

 

 

$

768

 

 

$

342

 

Pro forma net income

 

N/A

 

 

$

280

 

 

$

1,365

 

 

$

607

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pro forma earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net income per share

 

N/A

 

 

$

0.04

 

 

$

0.15

 

 

$

0.08

 

Diluted net income per share

 

N/A

 

 

$

0.04

 

 

$

0.15

 

 

$

0.08

 

 

The accompanying notes are an integral part of these condensed financial statements.

 

 

2


ASV Holdings, Inc.

Condensed Statements of Cash Flows

(In thousands)

 

 

 

 

For the Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

 

Unaudited

 

 

Unaudited

 

OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net income

 

$

2,505

 

 

$

949

 

Adjustments to reconcile to net income to net cash

 

 

 

 

 

 

 

 

provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

1,716

 

 

 

1,537

 

Amortization

 

 

1,910

 

 

 

1,910

 

Share-based compensation

 

 

231

 

 

 

 

Deferred income tax (benefit)

 

 

(947

)

 

 

 

Loss on sale of fixed assets

 

 

46

 

 

 

20

 

Amortization of deferred finance cost

 

 

163

 

 

 

438

 

Loss on debt extinguishment

 

 

83

 

 

 

 

Bad debt expense

 

 

17

 

 

 

44

 

Inventory reserves

 

 

377

 

 

 

96

 

Changes in operating assets and liabilities

 

 

 

 

 

 

 

 

Trade receivables

 

 

(3,509

)

 

 

(157

)

Net trade receivables/payables from affiliates

 

 

194

 

 

 

(721

)

Inventory

 

 

5,258

 

 

 

(3,950

)

Prepaid expenses

 

 

(144

)

 

 

(43

)

Trade accounts payable

 

 

2,233

 

 

 

(985

)

Accrued expenses

 

 

(1,444

)

 

 

(1,186

)

Tax payable

 

 

31

 

 

 

 

Other long-term liabilities

 

 

39

 

 

 

(41

)

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

 

 

8,759

 

 

 

(2,089

)

 

 

 

 

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Decrease in restricted cash

 

 

535

 

 

 

 

Purchase of property and equipment

 

 

(474

)

 

 

(279

)

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) investing activities

 

 

61

 

 

 

(279

)

 

 

 

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Principal payments on term debt

 

 

(1,826

)

 

 

(5,500

)

Debt issuance costs incurred

 

 

(9

)

 

 

(108

)

Members equity contribution

 

 

 

 

 

5,000

 

Proceeds from issuance of common stock, net of offering costs

 

 

10,405

 

 

 

 

Net payments on debt

 

 

(10,405

)

 

 

 

Net payments on revolving credit facilities

 

 

(7,549

)

 

 

2,978

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) financing activities

 

 

(9,384

)

 

 

2,370

 

 

 

 

 

 

 

 

 

 

NET CHANGE IN CASH

 

 

(564

)

 

 

2

 

 

 

 

 

 

 

 

 

 

Cash at beginning of period

 

 

572

 

 

 

3

 

 

 

 

 

 

 

 

 

 

Cash at end of period

 

$

8

 

 

$

5

 

 

The accompanying notes are an integral part of these condensed financial statements.

 

 

 

3


ASV Holdings, Inc.

Notes to Unaudited Condensed Financial Statements

(In thousands, except par value and per share data)

 

Note 1. Basis of Presentation

Nature of Operations

ASV Holdings, Inc. (the “Company” or “ASV”) primarily designs, manufactures and markets compact track loaders and skid steer loaders as well as related parts for use primarily in the construction, landscaping, and agricultural industries. The Company’s headquarters and manufacturing facility is located in Grand Rapids, Minnesota. Products are marketed and sold in North America, Australia, New Zealand and Latin America.

Corporate Conversion and  Initial Public Offering

On May 11, 2017, pursuant to a Plan of Conversion adopted by the Members and Board of Managers of A.S.V., LLC as of April 25, 2017, the Company converted from a Minnesota limited liability company into a Delaware corporation and changed its name from A.S.V., LLC to ASV Holdings, Inc.  In conjunction with this corporate conversion, the Company filed a certificate of incorporation  (the “Certificate of Incorporation”) with the Secretary of State of the State of Delaware and the bylaws of the Company (the “Bylaws”) became effective. Both the Certificate of Incorporation and the Bylaws were approved by the Board of Managers and Members of A.S.V., LLC prior to corporate conversion. Pursuant to the Company’s Certificate of Incorporation, the Company is authorized to issue up to 50,000 shares of common stock $0.001 par value per share and 5,000 shares of preferred stock $0.001 par value per share.  All references in the unaudited interim condensed financial statements to the number of shares and per-share amounts of common stock have been retroactively restated to reflect the corporate conversion.

On May 17, 2017, the Company completed its underwritten initial public offering (“IPO”) of 3,800 shares of the Company’s common stock, including 1,800 shares sold by the Company and 2,000 shares sold by Manitex International, Inc. (“Manitex”), at a price to the public of $7.00 per share.  After underwriting discounts and commissions and offering expenses payable by the Company, the Company received net proceeds of $10,405 from the offering. The Company did not receive any proceeds from the sale of shares by Manitex.

On May 23, 2017, the underwriters exercised their over-allotment option in full by purchasing an additional 570 shares of the Company’s common stock from A.S.V. Holding, LLC, a selling stockholder in the IPO and subsidiary of Terex Corporation (“Terex”), at the IPO price of $7.00 per share, less underwriting discounts and commissions. The Company did not receive any proceeds from the sale of the shares by A.S.V. Holding, LLC.

 

Note 2. Summary of Significant Accounting Policies

Basis of Presentation

The unaudited financial statements, included herein, have been prepared by the Company pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). Pursuant to these rules and regulations, the financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements and have been consistently applied. These unaudited financial statements should be read in conjunction with the financial statements and related notes included in our prospectus dated May 12, 2017 (the “Prospectus”), as filed with the SEC on May 15, 2017 pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended (the “Securities Act”).

The unaudited financial statements include all adjustments of a normal, recurring nature considered necessary for a fair presentation of our financial position as of September 30, 2017 and the results of operations for the three and nine months ended September 30, 2017 and 2016. Results of operations for the three and nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the year ended December 31, 2017.

 

Critical Accounting Policies and Estimates 

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States, which require the Company to make estimates, judgments and assumptions that affect the reported amounts of certain assets, liabilities, revenues, expenses and related disclosures and contingencies. The Company evaluates estimates used in preparation of the accompanying financial statements on a continual basis. There have been no significant changes to the critical accounting policies

4


described in Note 2, “Summary of Significant Accounting Policies,” to the audited financial statements for the year ended December 31, 2016 included in the Prospectus dated May 12, 2017.

 

Recent Accounting Pronouncements

Recent accounting pronouncements are described in Note 6, “Recent Accounting Pronouncements.” 

 

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in its existing accounts receivable. The Company determines the allowance based on individual customer review and current economic conditions. The Company reviews its allowance for doubtful accounts at least quarterly. Individual balances exceeding a threshold amount that are over 90 days past due are reviewed individually for collectability. All other balances are reviewed on a pooled basis by type of receivable. Account balances are charged off against the allowance when the Company determines it is probable the receivable will not be recovered.

The balance of the allowance for doubtful accounts was $85 and $63 at September 30, 2017 and December 31, 2016, respectively.

Revenue Recognition

Revenue and related costs are recorded when title and risk of loss passes to dealers and OEM customers. The Company’s typical terms are FOB shipping point and Ex-Works, which results in revenue being recognized and invoicing of dealers and OEM customers upon shipment from the Company’s facilities and when the Company’s products are picked up from the Company’s facilities, respectively.

The Company’s policy requires in all instances certain minimum criteria be met in order to recognize revenue, specifically:

 

Persuasive evidence that an arrangement exists;

 

 

The price to the buyer is fixed or determinable;

 

 

Collectability is reasonably assured; and

 

 

No significant obligations remain for future performance.

In addition, the Company’s policies regarding discounts, returns, post shipment obligations, customer acceptance, credits, rebates and protection or similar privileges are as follows:

 

Revenue is recognized consistently across all customers.

 

 

Sales discounts are deducted from the revenue immediately as part of the final sales invoice to dealers and OEM customers. Occasional discounts for prompt cash payment are provided to dealers and OEM customers, which are deducted from the cash payment. A reserve is established for future cash discounts based upon historical experience with dealers and OEM customers.

 

 

Sales are final and there is no return period allowed.

 

 

The Company has no post shipment obligations outside of warranty assurance, which is included in the sales price.

 

 

Customer acceptance occurs by confirmation of the sales quote provided, which describes the terms and conditions of the sale.

 

 

Any credits are determined based on investigation of specific customer concerns. Credits that may be issued are recognized in the period in which they are approved.

Accrued Warranties

The Company records accruals for potential warranty claims based on its claim experience. The Company’s products are typically sold with a standard warranty covering defects that arise during a fixed period.

5


A liability for estimated warranty claims is accrued at the time of sale. The liability is established using historical warranty claim experience for each product sold. Historical claim experience may be adjusted for known design improvements or for the impact of unusual product quality issues. Warranty reserves are reviewed quarterly to ensure critical assumptions are updated for known events that may affect the potential warranty liability.

Litigation Claims

In determining whether liabilities should be recorded for pending litigation claims, the Company must assess the allegations and the likelihood that it will successfully defend itself. When the Company believes it is probable that it will not prevail in a particular matter, it will then record an estimate of the amount of liability based, in part, on advice of outside legal counsel.

Defined Benefit Plan

The Company sponsors a nonqualified Supplemental Executive Retirement Plan (“SERP”) for a former senior executive. The SERP is unfunded. The Company accounts for this plan pursuant to the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) 710, “Compensation – General.” This guidance requires balance sheet recognition of the overfunded or underfunded status of the defined benefit plan. Actuarial gains and losses, prior service costs or credits, and any remaining transition assets or obligations that have not been recognized under previous accounting guidance must be recognized in the Statement of Operations. The defined benefit obligation for this plan as of September 30, 2017 is $795, of which, $64 and $731 is reflected in “Accrued Other” and “Other Long-Term Liabilities,” respectively, on the balance sheet.  The balance at December 31, 2016 was $837, of which, $64 and $773 was reflected in the “Accrued Other” and “Other Long-Term Liabilities,” respectively.  The Company expects to make annual benefit payments of $64 per year over the next five years.

Research and Development Costs

Research and development costs are expensed as incurred. Such costs are incurred in the development of new products or significant improvements to existing products.

Income Taxes

The Company’s provision for income taxes consists of federal and state taxes, as applicable, in amounts necessary to align the Company’s year-to-date tax provision with the effective rate that it expects to achieve for the full year. Each quarter the Company updates its estimate of the annual effective tax rate and records cumulative adjustments as necessary.  For the nine months ended September 30, 2017, the Company recorded an income tax benefit of $(372), which consists of a federal and state income tax provision of $575 offset by a discrete income tax benefit of $(947) related primarily to the recognition of a deferred tax asset related to a change in tax status with the conversion from a Minnesota limited liability company to a Delaware corporation on May 11, 2017. For the three months ended September 30, 2017, the Company recorded an income tax provision of $257, which consists of a federal and state income tax provision.

 

Prior to May 11, 2017, the Company was taxed as partnership.  As such, the Company was not a tax paying entity and not subject to federal and state income tax purposes.  The income or loss of the Company was passed through to its members and their share was reported on their respective tax returns.

 

At September 30, 2017, the Company did not have any uncertain tax positions.  The Company records interest and penalties related to uncertain tax positions in the provision for income taxes in the accompanying Statement of Income.

 

Concentrations of Business and Credit Risk

Caterpillar Inc., an OEM customer, and CEG Distributions PTY Ltd., the Company’s Australian master distributor, accounted for 37% and 43% of the Company’s Net Sales for the three months ended September 30, 2017 and 2016, respectively, as well as 63% of the Company’s Accounts Receivable at September 30, 2017. Caterpillar Inc. and CEG Distributions PTY Ltd. accounted for 32% and 34% of the Company’s Net Sales for the nine months ended September 30, 2017 and 2016, respectively, as well as 64% of the Company’s Accounts Receivable at December 31, 2016.  

6


Sales by major customer consisted of the following for the three and nine months ended September 30, 2017 and 2016:

 

 

 

Three months ended September 30,

 

 

Three months ended September 30,

 

 

 

2017

 

 

2016

 

 

 

Percent

 

 

 

 

 

 

Percent

 

 

 

 

 

 

 

of Total

 

 

Amount

 

 

of Total

 

 

Amount

 

Caterpillar

 

 

19%

 

 

$

5,884

 

 

 

26%

 

 

$

6,057

 

CEG Distributions PTY Ltd.

 

 

18%

 

 

 

5,515

 

 

 

17%

 

 

 

4,001

 

Other

 

 

63%

 

 

 

19,236

 

 

 

57%

 

 

 

12,953

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

100%

 

 

$

30,635

 

 

 

100%

 

 

$

23,011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30,

 

 

Nine months ended September 30,

 

 

 

2017

 

 

2016

 

 

 

Percent

 

 

 

 

 

 

Percent

 

 

 

 

 

 

 

of Total

 

 

Amount

 

 

of Total

 

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Caterpillar

 

 

19%

 

 

$

17,420

 

 

 

23%

 

 

$

18,031

 

CEG Distributions PTY Ltd.

 

 

13%

 

 

 

12,225

 

 

 

11%

 

 

 

8,822

 

Other

 

 

68%

 

 

 

63,240

 

 

 

66%

 

 

 

51,899

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

100%

 

 

$

92,885

 

 

 

100%

 

 

$

78,752

 

 

Any disruptions to these two customer relationships could have adverse effects on the Company’s financial results. The Company manages dealer and OEM concentration risk by evaluating in advance the financial condition and creditworthiness of its dealers and OEM customers. The Company establishes an allowance for doubtful accounts receivable, if needed, based upon expected collectability.  Any reserves established for doubtful accounts is determined on a case-by-case basis when it is believed the payment of specific amounts owed to us is unlikely to occur. Although the Company has encountered isolated credit concerns related to its dealer base, management is not aware of any significant credit risks related to the Company’s dealer base and generally does not require collateral or other security to support account receivables, other than UCC related sales. The Company has secured a credit insurance policy for certain accounts with a policy limit of liability of not more than $8,600.

Revenue by geographic area consisted of the following for the three and nine months ended September 30, 2017 and 2016:

 

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

Percent

 

 

 

 

 

 

Percent

 

 

 

 

 

 

Percent

 

 

 

 

 

 

Percent

 

 

 

 

 

 

 

of Total

 

 

Amount

 

 

of Total

 

 

Amount

 

 

of Total

 

 

Amount

 

 

of Total

 

 

Amount

 

United States

 

 

66%

 

 

$

20,112

 

 

 

73%

 

 

$

16,836

 

 

 

70%

 

 

$

65,171

 

 

 

79%

 

 

$

62,116

 

Australia

 

 

25%

 

 

 

7,875

 

 

 

18%

 

 

 

4,079

 

 

 

20%

 

 

 

18,452

 

 

 

12%

 

 

 

9,483

 

Other

 

 

9%

 

 

 

2,648

 

 

 

9%

 

 

 

2,096

 

 

 

10%

 

 

 

9,262

 

 

 

9%

 

 

 

7,153

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

100%

 

 

$

30,635

 

 

 

100%

 

 

$

23,011

 

 

 

100%

 

 

$

92,885

 

 

 

100%

 

 

$

78,752

 

 

 

Note 3. Inventory

Inventory is stated at the lower of cost (first-in, first-out) or net realizable value. The company records excess and obsolete inventory reserves.  The estimated reserve is based on specific identification of excess or obsolete inventories.

Inventory consisted of the following as of September 30, 2017 and December 31, 2016:

 

7


 

 

September 30, 2017

 

 

December 31, 2016

 

Raw materials and supplies

 

$

14,242

 

 

$

18,920

 

Work in process

 

 

37

 

 

 

165

 

Finished equipment and replacement parts

 

 

11,302

 

 

 

12,105

 

 

 

 

 

 

 

 

 

 

 

 

 

25,581

 

 

 

31,190

 

Less: Reserves for excess and obsolete

 

 

(458

)

 

 

(294

)

 

 

 

 

 

 

 

 

 

 

 

$

25,123

 

 

$

30,896

 

 

 

Note 4. Goodwill and Other Intangible Assets

Intangible Assets

Intangible assets include patented and unpatented technology, trade names, customer relationships and other specifically identifiable assets and are amortized on a straight-line basis over their respective estimated useful lives, which range from ten to twenty-five years.  Intangible assets are reviewed for impairment when facts and circumstances indicate a potential impairment has occurred.

There are three fundamental methods applied to value intangible assets outlined in FASB ASC 820, “Fair Value Measurement.” These methods include the Cost Approach, the Market Approach, and the Income Approach. Each of these valuation approaches were considered in the Company’s estimation of value.

Trade names and trademarks, patented and unpatented technology:  Valued using the Relief from Royalty method, a form of both the Market Approach and the Income Approach. Because the Company has established trade names and trademarks and has developed patented and unpatented technology, the Company estimated that the benefit of ownership as the relief from the royalty expense that would need to be incurred in absence of ownership.

Customer relationships: Because there is a specific earnings stream that can be associated with customer relationships, the Company determined the fair value of these relationships based on the excess earnings method, a form of the Income Approach.

Technology: The Company holds a number of U.S. patents covering its undercarriage technology. The key patent related to the Company’s Posi-Track undercarriage and suspension expires in 2023. The average estimated useful life for the Company’s patents is ten years, but useful life is determined in part by any legal, regulatory or contractual provisions that limit useful life. The Company has and will continue to dedicate technical resources toward the further development of our products and processes in order to maintain its competitive position.

Intangible assets, net comprised the following as of September 30, 2017:

 

 

 

Weighted

 

 

Gross

 

 

 

 

 

 

Net

 

 

 

Average Life

 

 

Carrying

 

 

Accumulated

 

 

Carrying

 

 

 

(In Years)

 

 

Amount

 

 

Amortization

 

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Patents and unpatented technology

 

 

10

 

 

$

8,000

 

 

$

(2,226

)

 

$

5,774

 

Tradename and trademarks

 

 

25

 

 

 

7,000

 

 

 

(779

)

 

 

6,221

 

Customer relationships

 

 

11

 

 

 

16,000

 

 

 

(4,081

)

 

 

11,919

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12

 

 

$

31,000

 

 

$

(7,086

)

 

$

23,914

 

 

8


Intangible assets, net comprised the following as of December 31, 2016:

 

 

 

Weighted

 

 

Gross

 

 

 

 

 

 

Net

 

 

 

Average Life

 

 

Carrying

 

 

Accumulated

 

 

Carrying

 

.

 

(In Years)

 

 

Amount

 

 

Amortization

 

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Patents and unpatented technology

 

 

10