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, 2018

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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

 

 

  

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 29, 2018, the registrant had 9,835,512 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 Operations

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

20

Item 4.

Controls and Procedures

21

 

PART II.

 

OTHER INFORMATION

 

Item 1.

Legal Proceedings

21

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

22

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,

 

 

 

2018

 

 

2017

 

 

 

Unaudited

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

 

 

Cash

 

$

5

 

 

$

3

 

Trade receivables, net

 

 

17,625

 

 

 

18,276

 

Receivables from affiliates

 

 

25

 

 

 

76

 

Inventory, net

 

 

33,441

 

 

 

26,691

 

Prepaid income tax

 

 

818

 

 

 

896

 

Prepaid expenses and other

 

 

585

 

 

 

591

 

Total current assets

 

 

52,499

 

 

 

46,533

 

 

 

 

 

 

 

 

 

 

NON-CURRENT ASSETS

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

13,039

 

 

 

13,797

 

Intangible assets, net

 

 

21,367

 

 

 

23,277

 

Goodwill

 

 

30,579

 

 

 

30,579

 

Other long-term assets

 

 

255

 

 

 

311

 

Deferred tax asset

 

 

771

 

 

 

624

 

Total assets

 

$

118,510

 

 

$

115,121

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Notes payable - current portion

 

$

2,012

 

 

$

2,000

 

Trade accounts payable

 

 

16,922

 

 

 

15,174

 

Payables to affiliates

 

 

737

 

 

 

1,063

 

Accrued compensation and benefits

 

 

1,096

 

 

 

1,483

 

Accrued warranties

 

 

1,600

 

 

 

1,869

 

Accrued product liability- short term

 

 

82

 

 

 

778

 

Accrued other

 

 

1,280

 

 

 

1,039

 

Total current liabilities

 

 

23,729

 

 

 

23,406

 

 

 

 

 

 

 

 

 

 

NON-CURRENT LIABILITIES

 

 

 

 

 

 

 

 

Revolving loan facility

 

 

15,740

 

 

 

12,511

 

Notes payable - long term, net

 

 

11,625

 

 

 

12,664

 

Other long-term liabilities

 

 

720

 

 

 

739

 

Total liabilities

 

 

51,814

 

 

 

49,320

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value, 5,000 authorized, none outstanding at September 30, 2018 and December 31, 2017, respectively

 

 

 

 

 

 

Common stock, $0.001 par value, 50,000 authorized, 9,834 and 9,806 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively

 

 

10

 

 

 

10

 

Additional paid-in capital

 

 

65,719

 

 

 

65,434

 

Retained earnings

 

 

967

 

 

 

357

 

Total Stockholders' Equity

 

 

66,696

 

 

 

65,801

 

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 

$

118,510

 

 

$

115,121

 

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

1


ASV Holdings, Inc.

Condensed Statements of Operations

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

 

 

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

Unaudited

 

 

Unaudited

 

 

Unaudited

 

 

Unaudited

 

Net sales

 

$

32,776

 

 

$

30,635

 

 

$

94,506

 

 

$

92,885

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

28,576

 

 

 

25,798

 

 

 

82,107

 

 

 

78,389

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

4,200

 

 

 

4,837

 

 

 

12,399

 

 

 

14,496

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development costs

 

 

485

 

 

 

503

 

 

 

1,407

 

 

 

1,561

 

Selling, general and administrative expense

 

 

2,662

 

 

 

2,857

 

 

 

9,004

 

 

 

8,340

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

1,053

 

 

 

1,477

 

 

 

1,988

 

 

 

4,595

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(491

)

 

 

(698

)

 

 

(1,413

)

 

 

(2,463

)

Other income (expense)

 

 

2

 

 

 

 

 

 

8

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other expense

 

 

(489

)

 

 

(698

)

 

 

(1,405

)

 

 

(2,462

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before taxes

 

 

564

 

 

 

779

 

 

 

583

 

 

 

2,133

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense (benefit)

 

 

(35

)

 

 

257

 

 

 

(28

)

 

 

(372

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

599

 

 

$

522

 

 

$

611

 

 

$

2,505

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net income per share

 

 

0.06

 

 

$

0.05

 

 

$

0.06

 

 

$

0.28

 

Diluted net income per share

 

 

0.06

 

 

$

0.05

 

 

$

0.06

 

 

$

0.28

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average common shares outstanding

 

 

9,834

 

 

 

9,800

 

 

 

9,824

 

 

 

8,897

 

Diluted weighted average common shares outstanding

 

 

9,834

 

 

 

9,800

 

 

 

9,824

 

 

 

8,897

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pro forma (C corporation basis):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pro forma tax expense

 

N/A

 

 

N/A

 

 

N/A

 

 

$

768

 

Pro forma net income

 

N/A

 

 

N/A

 

 

N/A

 

 

$

1,365

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pro forma earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net income per share

 

N/A

 

 

N/A

 

 

N/A

 

 

$

0.15

 

Diluted net income per share

 

N/A

 

 

N/A

 

 

N/A

 

 

$

0.15

 

 

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,

 

 

 

2018

 

 

2017

 

 

 

Unaudited

 

 

Unaudited

 

OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net income

 

$

611

 

 

$

2,505

 

Adjustments to reconcile to net income to net cash

 

 

 

 

 

 

 

 

provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

1,717

 

 

 

1,716

 

Amortization

 

 

1,910

 

 

 

1,910

 

Share-based compensation

 

 

374

 

 

 

231

 

Deferred income tax (benefit)

 

 

(147

)

 

 

(947

)

Loss on sale of fixed assets

 

 

6

 

 

 

46

 

Amortization of deferred finance cost

 

 

107

 

 

 

163

 

Loss on debt extinguishment

 

 

 

 

 

83

 

Bad debt expense

 

 

29

 

 

 

17

 

Changes in operating assets and liabilities

 

 

 

 

 

 

 

 

Trade receivables

 

 

622

 

 

 

(3,509

)

Net trade receivables/payables from affiliates

 

 

(275

)

 

 

194

 

Inventory

 

 

(6,887

)

 

 

5,635

 

Prepaid income tax

 

 

 

 

 

 

Prepaid expenses

 

 

78

 

 

 

(144

)

Trade accounts payable

 

 

1,749

 

 

 

2,233

 

Accrued expenses

 

 

(1,111

)

 

 

(1,444

)

Tax payable

 

 

 

 

 

31

 

Other long-term liabilities

 

 

(35

)

 

 

39

 

 

 

 

 

 

 

 

 

 

Net cash (used in) provided by operating activities

 

 

(1,252

)

 

 

8,759

 

 

 

 

 

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Decrease in restricted cash

 

 

 

 

 

535

 

Purchase of property and equipment

 

 

(828

)

 

 

(474

)

 

 

 

 

 

 

 

 

 

Net cash (used in) provided by investing activities

 

 

(828

)

 

 

61

 

 

 

 

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Principal payments on long-term debt

 

 

(1,497

)

 

 

(1,826

)

Proceeds from long-term note

 

 

425

 

 

 

 

Debt issuance costs incurred

 

 

 

 

 

(9

)

Proceeds from issuance of common stock, net of offering costs

 

 

 

 

 

10,405

 

Net payments on debt

 

 

 

 

 

(10,405

)

Shares repurchased for income tax withholding on share-based compensation

 

 

(76

)

 

 

 

Net borrowings (payments) on revolving credit facilities

 

 

3,230

 

 

 

(7,549

)

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) financing activities

 

 

2,082

 

 

 

(9,384

)

 

 

 

 

 

 

 

 

 

NET CHANGE IN CASH

 

 

2

 

 

 

(564

)

 

 

 

 

 

 

 

 

 

Cash at beginning of period

 

 

3

 

 

 

572

 

 

 

 

 

 

 

 

 

 

Cash at end of period

 

$

5

 

 

$

8

 

 

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 Company’s audited financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017.  

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, 2018 and the results of operations for the three and nine months ended September 30, 2018 and 2017. Results of operations for the three and nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the year ended December 31, 2018.

 

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. We describe our significant accounting policies in Note 2, “Summary of

4


Significant Accounting Policies,of the audited financial statements for the year ended December 31, 2017 included in the Annual Report on Form 10-K.

 

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 $111 and $82 at September 30, 2018 and December 31, 2017, respectively.

Revenue Recognition

The Company’s revenues result from the sale of goods or services and reflect the consideration to which the Company expects to be entitled. The Company records revenue based on a five-step model in accordance with Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers ("ASC 606"). For its customer contracts, the Company identifies the performance obligations (goods or services), determines the transaction price, allocates the contract transaction price to the performance obligations, and recognizes the revenue when (or as) the performance obligation is satisfied. A good or service is transferred when the customer obtains control of that good or service.  The Company principally generates revenue from the sale of equipment and parts to dealers, distributors and OEM customers and recognizes revenue at a point in time when control transfers. Transfer of control is generally determined based on the shipping terms of the contract. The Company recognizes revenue for delivered goods or services when the delivered good or service is distinct, control of the good or service has transferred to the customer, and only customary refund or return rights related to the goods or services exist.  Generally, there is no-post shipment obligation on product sold other than standard warranty obligations in the normal and ordinary course of business.

Provisions for sales program incentives (such as wholesale subsidies, retail subsidies and customer cash), product returns, and discounts and allowances are variable consideration and are accounted for as a reduction of revenue and establishment of a liability (or contra asset receivable as appropriate) using the expected value method.  The Company considers historical data in determining its best estimates of variable consideration. These estimates are reviewed regularly for appropriateness, considering also whether the estimates should be constrained in order to avoid a significant reversal of revenue recognition in a future period. If updated information or actual amounts are different from previous estimates of variable consideration, the revisions are included in the results for the period in which they become known through a cumulative effect adjustment to revenue. In addition, the Company’s contracts with customers generally do not include significant financing components or noncash consideration. The Company expenses incremental costs of obtaining a contract (primarily sales commissions) as selling, general and administrative expense in the Condensed Statements of Operations, because the amortization period would be less than one year.

The Company disaggregates revenue from contracts with customers by geographic location and major customer (see Concentrations of Business and Credit Risk) as we believe this best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors.

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.

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.

5


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, 2018 is $760, of which, $64 and $696 is reflected in “Accrued Other” and “Other Long-Term Liabilities,” respectively, on the balance sheet.  The balance at December 31, 2017 was $803, of which, $64 and $739 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 three months ended September 30, 2018, the Company recorded an income tax benefit of $(35), which consists of federal and state taxes of $108 on pre-tax income of $564 offset by a discrete income tax benefit of $(143) related to the finalization of the Company’s 2017 tax returns. The Company’s effective tax rate is affected by recurring items such as state and local taxes, a reduced federal tax rate for foreign derived intangible income, and federal research and development credits.

 

For the three months ended September 30, 2017, the Company recorded an income tax expense of $257 on pre-tax income of $779.

 

For the nine months ended September 30, 2018, the Company recorded an income tax benefit of $(28), which consists of federal and state income tax on it pre-tax income of $583 offset by a discrete income tax benefit of $(147) related primarily to the finalization of the Company’s 2017 tax returns.

 

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 status with the conversion from a Minnesota limited liability company to a Delaware corporation on May 11, 2017.

 

At September 30, 2018, 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 34% and 37% of the Company’s Net Sales for the three months ended September 30, 2018 and 2017 respectively, as well as 64% of the Company’s Accounts Receivable at September 30, 2018. Caterpillar Inc. and CEG Distributions PTY Ltd accounted for 29% and 32% of the Company’s Net Sales for the nine months ended September 30, 2018 and 2017 respectively, as well as 63% of the Company’s Accounts Receivable at December 31, 2017.

6


Sales by major customer consisted of the following for the three and nine months ended September 30, 2018 and 2017:

 

 

 

For the Three Months Ended September 30,

 

 

For the Three Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

 

Percent

 

 

 

 

 

 

Percent

 

 

 

 

 

 

 

of Total

 

 

Amount

 

 

of Total

 

 

Amount

 

Caterpillar

 

16%

 

 

$

5,145

 

 

19%

 

 

$

5,884

 

CEG Distributions PTY Ltd.

 

18%

 

 

 

5,890

 

 

18%

 

 

 

5,515

 

Other

 

66%

 

 

 

21,741

 

 

63%

 

 

 

19,236

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

100%

 

 

$

32,776

 

 

100%

 

 

$

30,635

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

 

Percent

 

 

 

 

 

 

Percent

 

 

 

 

 

 

 

of Total

 

 

Amount

 

 

of Total

 

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Caterpillar

 

15%

 

 

$

13,952

 

 

19%

 

 

$

17,420

 

CEG Distributions PTY Ltd.

 

14%

 

 

 

12,876

 

 

13%

 

 

 

12,225

 

Other

 

71%

 

 

 

67,678

 

 

68%

 

 

 

63,240

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

100%

 

 

$

94,506

 

 

100%

 

 

$

92,885

 

 

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, 2018 and 2017:

 

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

Percent

 

 

 

 

 

 

Percent

 

 

 

 

 

 

Percent

 

 

 

 

 

 

Percent

 

 

 

 

 

 

 

of Total

 

 

Amount

 

 

of Total

 

 

Amount

 

 

of Total

 

 

Amount

 

 

of Total

 

 

Amount

 

United States

 

71%

 

 

$

23,058

 

 

66%

 

 

$

20,112

 

 

72%

 

 

$

68,449

 

 

70%

 

 

$

65,171

 

Australia

 

20%

 

 

 

6,612

 

 

26%

 

 

 

7,875

 

 

16%

 

 

 

15,035

 

 

20%

 

 

 

18,452

 

Other

 

9%

 

 

 

3,106

 

 

9%

 

 

 

2,648

 

 

12%

 

 

 

11,022

 

 

10%

 

 

 

9,262

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

100%

 

 

$

32,776

 

 

100%

 

 

$

30,635

 

 

100%

 

 

$

94,506

 

 

100%

 

 

$

92,885

 

 

 

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, 2018 and December 31, 2017:

 

7


 

 

September 30, 2018

 

 

December 31, 2017

 

Raw materials and supplies

 

$

18,128

 

 

$

16,749

 

Work in process

 

 

81

 

 

 

98

 

Finished equipment and replacement parts

 

 

15,232

 

 

 

9,844

 

 

 

 

 

 

 

 

 

 

 

 

$

33,441

 

 

$

26,691

 

 

 

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, 2018:

 

 

 

Weighted

 

 

Gross

 

 

 

 

 

 

Net

 

 

 

Average Life

 

 

Carrying

 

 

Accumulated

 

 

Carrying

 

 

 

(In Years)

 

 

Amount

 

 

Amortization

 

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Patents and unpatented technology

 

 

10

 

 

$

8,000

 

 

$

(3,027

)

 

$

4,973

 

Tradename and trademarks

 

 

25

 

 

 

7,000

 

 

 

(1,058

)

 

 

5,942

 

Customer relationships

 

 

11

 

 

 

16,000

 

 

 

(5,548

)

 

 

10,452

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12

 

 

$

31,000

 

 

$

(9,633

)

 

$

21,367

 

 

Intangible assets, net comprised the following as of December 31, 2017:

 

 

 

Weighted

 

 

Gross

 

 

 

 

 

 

Net

 

 

 

Average Life

 

 

Carrying

 

 

Accumulated

 

 

Carrying

 

.

 

(In Years)

 

 

Amount

 

 

Amortization

 

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Patents and unpatented technology

 

 

10

 

 

$

8,000

 

 

$

(2,427

)

 

$

5,573

 

Tradename and trademarks

 

 

25

 

 

 

7,000

 

 

 

(848

)

 

 

6,152

 

Customer relationships

 

 

11

 

 

 

16,000

 

 

 

(4,448

)

 

 

11,552

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12

 

 

$

31,000

 

 

$

(7,723

)

 

$

23,277

 

 

8


Amortization of other intangible assets for the nine months ended September 30, 2018 and 2017 was $1,910 and $1,910, respectively.

Goodwill

Goodwill, representing the difference between the total purchase price and the fair value of assets (tangible and intangible) and liabilities at the date of acquisition, is reviewed for impairment annually, and more frequently as circumstances warrant, and written down only in the period in which the recorded value of such assets exceed their fair value. Annual impairment tests are performed by the Company in the fourth quarter of each year using information available as of fiscal September month end.

 

 

Note 5. Related Party Transactions

Effective December 19, 2014, the Company entered into a Distribution and Cross Marketing Agreement with Terex and Manitex (the “Terex Cross Marketing Agreement”) that set forth the terms under which the Company would manufacture and sell ASV products, certain services Terex would provide in assisting in the sales and marketing of ASV products and the costs to be paid by the Company in exchange for such services. The Terex Cross Marketing Agreement defines dealers and customers to which, and territories for which, Terex would have the exclusive right on behalf of the Company to market and sell Terex-branded ASV products. The Terex Cross Marketing Agreement defines the compensation to Terex for its machine sales selling expense, part sales selling expense and general and administrative costs associated with such sales. In addition, for the provision of marketing services by Terex, the Company would pay an annual fee of $250, subject to annual escalation of 3% plus 0.2% of net incremental sales. Unless terminated, the term of the Terex Cross Marketing Agreement is five years, and the parties may agree to renew for additional one-year terms. The Company expensed $0 and $296 for services for the three months and $320 and $888 for the nine months ended September 30, 2018 and 2017, respectively, under the Terex Cross Marketing Agreement.

Effective December 19, 2014, the Company entered into a Services Agreement with Terex (the “Terex Services Agreement”) that set forth the terms under which Terex would provide certain services to the Company and the Company will retain access to certain services provided by Terex and the compensation related thereto. The scope of the Terex Services Agreement covers amongst other items, temporary transition services arising from the transfer of majority ownership to Manitex, third party logistics services for parts fulfillment, warranty and field service and information technology (“IT”) services for both transitional and ongoing services. Unless terminated, the term of the Terex Services Agreement is specific to each service provided, and the parties may agree to renew for additional one-year terms. The Company expensed $0 and $320 for services provided for the three months and $175 and $1,010 for the nine months ended September 30, 2018 and 2017, respectively.  

 

Effective March 27, 2017, the Company entered into a Winddown and Termination of Distribution and Cross Marketing Agreement and Services Agreement with Terex and Manitex (the “Winddown Agreement”). Pursuant to the Winddown Agreement, Terex will continue to provide certain services to the Company following the completion of the IPO under the Terex Cross Marketing Agreement and the Terex Services Agreement, including parts sales, shipment and purchases and parts planning, customer parts phone support, and administrative services, including IT support and accounting input information for parts cost and pricing. Pursuant to the Winddown Agreement, these services will continue on a transitional basis. Terex no longer markets ASV machines under the Terex Cross Marketing Agreement and the Company is responsible for marketing all ASV machines to all distribution channels, but Terex will continue to market ASV parts under the Terex Cross Marketing Agreement during transition period. Pursuant to the Winddown Agreement, the Company will be permitted to produce and sell Terex-branded ASV products to existing Terex dealers and continue to use applicable Terex trademarks during the transition period and for one year after termination of the Winddown Agreement. The Company has the right to terminate any service related to parts sales and distribution upon six months’ notice to Terex, and the Company also has the right to terminate all services upon six months’ notice to Terex. After one year from the date of the Winddown Agreement, Terex will also have the right to terminate services upon six months’ notice.  In no event will the services continue beyond December 19, 2019.  The Winddown Agreement does not immediately terminate the Terex Cross Marketing Agreement or the Terex Services Agreement, each of which will remain in effect until terminated in accordance with the Winddown Agreement. By notice dated October 5, 2017, the Company provided notice to Terex and Manitex of the termination, effective as of April 5, 2018, of all services provided by Terex thereunder.  Such notice also indicated that, also effective as of April 5, 2018, the Terex Cross Marketing Agreement and Terex Services Agreement shall also be deemed terminated.  

 

Included in the Company’s Condensed Statements of Operations are sales to Terex of $39 and $50 for the three months and $98 and $229 for the nine months ended September 30, 2018 and 2017, respectively.  Also included are sales to Manitex of $1 and $1 for the three months ended September 30, 2018 and 2017, respectively and sales of $1 and $24 for the nine months ended September 30, 2018 and 2017, respectively. The Company recorded purchases from Terex of $1,453 and $1,127 for the three months and $5,437 and $4,832 for the nine months ended September 30, 2018 and 2017, respectively.  The Company also recorded charges for insurance and employee benefit costs from Manitex of $567 for the three months ended September 30, 2017 and $2,153 for the nine months ended September 30, 2017.