10-Q 1 asv-10q_20190630.htm 10-Q asv-10q_20190630.htm

 

 

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 June 30, 2019

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 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  

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.     Yes      No  

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $0.001 per share

 

ASV

 

NASDAQ Capital Market

 

As of July 29, 2019, the registrant had 9,909,858 shares of common stock, $0.001 par value per share, outstanding.

 

 

 

 


 

Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

 

Item 1.

 

Financial Statements (Unaudited)

3

 

Condensed Balance Sheets

3

 

Condensed Statements of Operations

4

 

Statements of Stockholders’ Equity

5

 

Condensed Statements of Cash Flows

6

 

Notes to Unaudited Condensed Financial Statements

7

Item 2.  

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

17

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

24

Item 4.

Controls and Procedures

25

 

PART II.

 

OTHER INFORMATION

 

Item 1.

Legal Proceedings

25

Item 1A.

Risk Factors

26

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

27

Item 3.

Defaults upon Senior Securities

27

Item 4.

Mine Safety Procedures

27

Item 5.

Other Information

27

Item 6.

Exhibits

28

Signatures

 

29

 

 

 

 

 

2

 


 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

ASV Holdings, Inc.

Condensed Balance Sheets

(In thousands, except par value)

 

 

June 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

 

Unaudited

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

 

 

Cash

 

$

8

 

 

$

2

 

Accounts receivable, net

 

 

15,594

 

 

 

18,462

 

Receivables from affiliates

 

 

26

 

 

 

7

 

Income tax receivable

 

 

 

 

 

840

 

Inventory, net

 

 

33,241

 

 

 

34,055

 

Prepaid income tax

 

 

65

 

 

 

43

 

Prepaid expenses and other

 

 

745

 

 

 

593

 

Total current assets

 

 

49,679

 

 

 

54,002

 

Property, plant and equipment, net

 

 

11,862

 

 

 

12,662

 

Operating lease assets, net

 

 

1,054

 

 

 

 

Intangible assets, net

 

 

19,457

 

 

 

20,730

 

Other long-term assets

 

 

313

 

 

 

237

 

Total assets

 

$

82,365

 

 

$

87,631

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

 

Notes payable - current portion

 

$

2,012

 

 

$

2,991

 

Trade accounts payable

 

 

13,352

 

 

 

18,834

 

Payables to affiliates

 

 

 

 

 

480

 

Accrued compensation and benefits

 

 

1,296

 

 

 

1,394

 

Accrued warranties

 

 

1,405

 

 

 

1,584

 

Operating lease liability- current portion

 

 

287

 

 

 

 

Accrued other current liabilities

 

 

1,710

 

 

 

1,405

 

Total current liabilities

 

 

20,062

 

 

 

26,688

 

Revolving loan facility

 

 

18,315

 

 

 

16,026

 

Notes payable - long term, net

 

 

9,139

 

 

 

10,159

 

Operating lease liability- long term

 

 

827

 

 

 

 

Other long-term liabilities

 

 

651

 

 

 

727

 

Total liabilities

 

 

48,994

 

 

 

53,600

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value, 5,000 authorized, none outstanding at June 30, 2019 and December 31, 2018, respectively

 

 

 

 

 

 

Common stock, $0.001 par value, 50,000 authorized, 9,910 and 9,851 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively

 

 

10

 

 

 

10

 

Additional paid-in capital

 

 

66,094

 

 

 

65,794

 

Accumulated deficit

 

 

(32,733

)

 

 

(31,773

)

Total Stockholders' Equity

 

 

33,371

 

 

 

34,031

 

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 

$

82,365

 

 

$

87,631

 

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

3

 


 

ASV Holdings, Inc.

Condensed Statements of Operations

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

 

 

 

 

For the Three Months Ended June 30,

 

 

For the Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

Unaudited

 

 

Unaudited

 

 

Unaudited

 

 

Unaudited

 

Net sales

 

$

36,018

 

 

$

31,860

 

 

$

63,356

 

 

$

61,729

 

Cost of goods sold

 

 

31,435

 

 

 

27,603

 

 

 

55,338

 

 

 

53,531

 

Gross profit

 

 

4,583

 

 

 

4,257

 

 

 

8,018

 

 

 

8,198

 

Research and development costs

 

 

523

 

 

 

451

 

 

 

1,015

 

 

 

922

 

Selling, general and administrative expense

 

 

3,713

 

 

 

2,934

 

 

 

6,849

 

 

 

6,341

 

Operating income

 

 

347

 

 

 

872

 

 

 

154

 

 

 

935

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(570

)

 

 

(464

)

 

 

(1,122

)

 

 

(922

)

Other income

 

 

 

 

 

 

 

 

8

 

 

 

7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other expense

 

 

(570

)

 

 

(464

)

 

 

(1,114

)

 

 

(915

)

(Loss) Income before income taxes

 

 

(223

)

 

 

408

 

 

 

(960

)

 

 

20

 

Income tax expense (benefit)

 

 

 

 

 

89

 

 

 

 

 

 

8

 

Net (loss) income

 

$

(223

)

 

$

319

 

 

$

(960

)

 

$

12

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net (loss) income per share of common stock

 

$

(0.02

)

 

$

0.03

 

 

$

(0.10

)

 

$

0.00

 

Diluted net (loss) income per share of common stock

 

$

(0.02

)

 

$

0.03

 

 

$

(0.10

)

 

$

0.00

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average common shares outstanding

 

 

9,901

 

 

 

9,823

 

 

 

9,882

 

 

 

9,820

 

Diluted weighted average common shares outstanding

 

 

9,901

 

 

 

9,823

 

 

 

9,882

 

 

 

9,820

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4

 


 

ASV Holdings, Inc.

Statements of Stockholders’ Equity

(Unaudited)

(In thousands, except per share data)

 

 

 

 

Common Stock

 

 

Additional Paid-in

 

 

 

 

 

 

Total Stockholders'

 

 

 

Shares

 

 

Amounts

 

 

Capital

 

 

Retained Earnings

 

 

Equity

 

Balances, December 31, 2017

 

 

9,806

 

 

 

10

 

 

 

65,434

 

 

 

357

 

 

 

65,801

 

Stock-based compensation expense

 

 

-

 

 

 

-

 

 

 

196

 

 

 

-

 

 

 

196

 

Incentive plan grant

 

 

18

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Repurchase to satisfy withholding and cancelled

 

 

(6

)

 

 

-

 

 

 

(52

)

 

 

-

 

 

 

(52

)

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(307

)

 

 

(307

)

Balances, March 31, 2018

 

 

9,818

 

 

 

10

 

 

 

65,578

 

 

 

50

 

 

 

65,638

 

Stock-based compensation expense

 

 

-

 

 

 

-

 

 

 

71

 

 

 

-

 

 

 

71

 

Incentive plan grant

 

 

16

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Repurchase to satisfy withholding and cancelled

 

 

-

 

 

 

-

 

 

 

(24

)

 

 

-

 

 

 

(24

)

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

319

 

 

 

319

 

Balances, June 30, 2018

 

 

9,834

 

 

 

10

 

 

 

65,625

 

 

 

369

 

 

 

66,004

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Additional Paid-in

 

 

 

 

 

 

Total Stockholders'

 

 

 

Shares

 

 

Amounts

 

 

Capital

 

 

Accumulated Deficit

 

 

Equity

 

Balances, December 31, 2018

 

 

9,851

 

 

 

10

 

 

 

65,794

 

 

 

(31,773

)

 

 

34,031

 

Stock-based compensation expense

 

 

-

 

 

 

-

 

 

 

218

 

 

 

-

 

 

 

218

 

Incentive plan grant

 

 

49

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Repurchase to satisfy withholding and cancelled

 

 

(3

)

 

 

-

 

 

 

(9

)

 

 

-

 

 

 

(9

)

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(737

)

 

 

(737

)

Balances, March 31, 2019

 

 

9,897

 

 

 

10

 

 

 

66,003

 

 

 

(32,510

)

 

 

33,503

 

Stock-based compensation expense

 

 

-

 

 

 

-

 

 

 

91

 

 

 

-

 

 

 

91

 

Incentive plan grant

 

 

13

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Repurchase to satisfy withholding and cancelled

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(223

)

 

 

(223

)

Balances, June 30, 2019

 

 

9,910

 

 

 

10

 

 

 

66,094

 

 

 

(32,733

)

 

 

33,371

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

5

 


 

ASV Holdings, Inc.

Condensed Statements of Cash Flows

(In thousands)

 

 

 

 

For the Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

 

Unaudited

 

 

Unaudited

 

OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(960

)

 

$

12

 

Adjustments to reconcile to net income to net cash

 

 

 

 

 

 

 

 

provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

1,174

 

 

 

1,129

 

Amortization

 

 

1,273

 

 

 

1,273

 

Share-based compensation

 

 

265

 

 

 

251

 

Loss on sale of fixed assets

 

 

36

 

 

 

1

 

Amortization of deferred finance cost

 

 

89

 

 

 

71

 

Bad debt expense

 

 

(5

)

 

 

23

 

Changes in operating assets and liabilities

 

 

 

 

 

 

 

 

Accounts receivable

 

 

2,873

 

 

 

3,177

 

Net accounts receivable/payable from affiliates

 

 

(498

)

 

 

(231

)

Income tax receivable

 

 

840

 

 

 

 

Inventory

 

 

744

 

 

 

(4,089

)

Prepaid income tax

 

 

(22

)

 

 

(17

)

Prepaid expenses

 

 

(153

)

 

 

(69

)

Operating lease asset and liabilities

 

 

60

 

 

 

 

Trade accounts payable

 

 

(5,482

)

 

 

(90

)

Accrued expenses

 

 

72

 

 

 

(967

)

Other long-term liabilities

 

 

(80

)

 

 

(40

)

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

 

226

 

 

 

434

 

 

 

 

 

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(336

)

 

 

(501

)

 

 

 

 

 

 

 

 

 

Net cash used in investing activities

 

 

(336

)

 

 

(501

)

 

 

 

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Principal payments on term debt

 

 

(1,984

)

 

 

(1,001

)

Proceeds from long-term note

 

 

 

 

 

425

 

Debt issuance costs incurred

 

 

(180

)

 

 

 

Shares repurchased for income tax withholding on share-based compensation

 

 

(9

)

 

 

(76

)

Net borrowings on revolving credit facilities

 

 

2,289

 

 

 

720

 

 

 

 

 

 

 

 

 

 

Net cash provided by financing activities

 

 

116

 

 

 

68

 

 

 

 

 

 

 

 

 

 

NET CHANGE IN CASH

 

 

6

 

 

 

1

 

 

 

 

 

 

 

 

 

 

Cash at beginning of period

 

 

2

 

 

 

3

 

 

 

 

 

 

 

 

 

 

Cash at end of period

 

$

8

 

 

$

4

 

 

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

 

 

 

6

 


 

ASV Holdings, Inc.

Notes to Unaudited Condensed Financial Statements

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

 

Note 1. Business Description

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.

Agreement and Plan of Merger

On June 26, 2019, ASV entered into an Agreement and Plan of Merger (the “Merger Agreement”) among Yanmar America Corporation, a Georgia corporation (“Yanmar”), Osaka Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of Yanmar (“Merger Sub”), and Yanmar Co., Ltd., a company organized under the laws of Japan (“Guarantor”).

The Merger Agreement provides that, upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub will merge with and into the Company (the “Merger” and, collectively with the other transactions contemplated by the Merger Agreement, the “Transactions”), with the Company continuing as the surviving corporation and as a wholly owned subsidiary of Yanmar.

At the effective time of the Merger (the “Effective Time”), each share of common stock, par value $0.001 per share, of the Company (the “Common Stock”), issued and outstanding immediately prior to the Effective Time (other than (A) shares of Common Stock held in the treasury of the Company and shares of Common Stock owned by Yanmar or any direct or indirect subsidiary of Yanmar (including Merger Sub) which shall automatically be cancelled without any conversion thereof and no payment or distribution shall be made with respect thereto and (B) shares of Common Stock for which appraisal rights have been validly asserted) shall be converted into the right to receive $7.05 per share in cash, without interest (the “Per Share Merger Consideration”). Guarantor has irrevocably and unconditionally guaranteed to the Company the due and punctual payment and performance of (i) Yanmar’s and Merger Sub’s obligations under the Merger Agreement, and (ii) Yanmar’s and Merger Sub’s liability and obligations (including for breach) under the Merger Agreement.

At the Effective Time, any restricted stock units providing for a right to receive shares of Common Stock outstanding immediately prior to the Effective Time that are unvested or are subject to a repurchase option, risk of forfeiture or other condition shall, as of the Effective Time, whether granted prior to the date of the Merger Agreement or granted after the date of the Merger Agreement as permitted by the Merger Agreement, become fully vested and nonforfeitable and shall be cancelled and converted automatically into the right to receive an amount in cash equal to the product of (i) the Merger Consideration multiplied by (ii) the total number of shares of Common Stock subject to such restricted stock units.

The Board of Directors of the Company (the “Board”) has unanimously (i) determined that the Merger Agreement and the Transactions, including the Merger, are advisable and fair to, and in the best interests of, the Company’s stockholders, (ii) approved and declared advisable the Merger Agreement and the Transactions, including the Merger, (iii) approved the execution, delivery and performance by the Company of the Merger Agreement and the consummation of the Transactions, including the Merger, upon the terms and subject to the conditions set forth in the Merger Agreement, (iv) recommended that the stockholders of the Company vote to approve the Transactions, including the Merger, and adopt the Merger Agreement, and (v) directed that the adoption of the Merger Agreement be submitted to a vote of the Company’s stockholders.

The consummation of the Merger (the “Closing”) is subject to certain conditions, including (i) the affirmative vote of the holders of a majority of the outstanding shares of Common Stock (the “Stockholder Approval”), (ii) the absence of any law or order restraining, enjoining or otherwise prohibiting the Merger and (iii) any waiting period (and any extension thereof) applicable to the consummation of the Merger under applicable foreign, federal or state antitrust, competition or fair-trade laws shall have expired or been terminated. Each of Yanmar’s, Merger Sub’s, and the Company’s obligation to consummate the Merger is also subject to additional customary conditions, including (x) subject to specific standards, the accuracy of the representations and warranties of the other party, (y) performance in all material respects by the other party of its obligations under the Merger Agreement, and (z) with respect to

7

 


 

Yanmar’s and Merger Sub’s obligations to consummate the Merger, the absence of a Company Material Adverse Effect (as defined in the Merger Agreement).

The Company has made customary representations and warranties in the Merger Agreement and has agreed to customary covenants regarding the operation of the business of the Company and its subsidiaries prior to the earlier of the Closing or the date that the Merger Agreement is terminated in accordance with its terms. Each of Yanmar and Merger Sub has agreed to customary covenants related to treatment of employees and their compensation and benefits after Closing.

 

The Company is also subject to customary restrictions on its ability to solicit acquisition proposals from third parties, to provide information to, and enter into discussions or negotiations with, third parties regarding alternative acquisition proposals. However, prior to the Stockholder Approval, these restrictions are subject to customary “fiduciary out” provisions that allow, under certain circumstances, (i) the Company to provide information to, and enter into discussions or negotiations with, third parties with respect to an acquisition proposal if the Board determines in good faith, after consultation with and taking into account the advice of, the Company’s financial advisor and outside legal counsel, that such alternative acquisition proposal could reasonably be expected to constitute or result in a Superior Proposal (as defined in the Merger Agreement) and that failure to take such actions would be inconsistent with its fiduciary duties and (ii) the Board to withdraw or change its recommendation in favor of the Merger if a Company Intervening Event (as defined in the Merger Agreement) occurs and as a result thereof it determines that its failure to take such action would be inconsistent with its fiduciary duties. If the Company receives an unsolicited, written acquisition proposal that the Board determines in good faith (after consultation with its outside advisors) is a Superior Proposal (as defined in the Merger Agreement) and determines in good faith (after consultation with its outside legal counsel) that its failure to withdraw or change its recommendation with respect to the Merger would be inconsistent with its fiduciary duties, the Company may terminate the Merger Agreement to enter into a definitive agreement with respect to such Superior Proposal.

The Merger Agreement also includes customary termination provisions for both the Company and Yanmar and provides that, in connection with the termination of the Merger Agreement, under specified circumstances, the Company will be required to pay Yanmar a termination fee of $2,650, including if (i) the Company enters into an acquisition agreement with respect to a Superior Proposal prior to obtaining the Stockholder Approval or (ii) the Board changes its recommendation or takes similar actions prior to the meeting of the stockholders. The Merger Agreement further provides that, upon termination of the Merger Agreement under specified circumstances, the Company will be required to pay to Yanmar up to $500 for expenses incurred by Yanmar. The Merger Agreement also provides that, upon termination of the Merger Agreement under specified circumstances, Yanmar will be required to pay to the Company up to $500 for expenses incurred by the Company.

Each party to the Merger Agreement is required to use its reasonable best efforts to take all actions to consummate the Merger.

The Merger Agreement includes customary representations, warranties, and covenants of the Company made solely for the benefit of Yanmar and Merger Sub. The assertions embodied in those representations and warranties were made solely for purposes of allocating risk among the Company, Yanmar and Merger Sub rather than establishing matters of fact and may be subject to important qualifications and limitations agreed to by the Company, Yanmar, and Merger Sub in connection with the negotiated terms. Moreover, some of those representations and warranties may not be accurate or complete as of any specified date, may be subject to a contractual standard of materiality different from those generally applicable to the Company’s filings with the U.S. Securities and Exchange Commission (the “SEC”). Investors should not rely on the representations, warranties, and covenants or any description thereof as characterizations of the actual state of facts of the Company or any of its subsidiaries or affiliates.

If the Merger is consummated, the Common Stock will be delisted from the Nasdaq Capital Market and deregistered under the Securities Exchange Act of 1934.

Voting Agreement

Concurrently with the execution of the Merger Agreement, on June 26, 2019, A.S.V. Holding, LLC, which is a wholly owned subsidiary of Terex Corporation, Inc. (the “Key Stockholder”) representing approximately 34% of the outstanding Common Stock of the Company entered into a Voting Agreement (the “Voting Agreement”) with Yanmar, pursuant to which, among other things, and subject to the terms and conditions set forth therein, the Key Stockholder agreed to vote its shares of Common Stock in favor of the adoption of the Merger Agreement and against any alternative proposal. The Voting Agreement automatically terminates upon the earliest to occur of (i) the Effective Time, (ii) a change in the Board’s recommendation to stockholders that results from a Company Intervening Event, (iii) the termination of the Merger Agreement, (iv) the election of the Key Stockholder upon any amendment or modification to the Merger Agreement with respect to any terms of the merger consideration, the conditions to the merger or any change to the Merger Agreement that would have a materially adverse impact on the Key Stockholder or (v) the written agreement of the parties to the Voting Agreement.

8

 


 

This summary of the principal terms of the Merger Agreement and the Voting Agreement is intended to provide information regarding the terms of the Merger Agreement and the Voting Agreement and is not intended to modify or supplement any factual disclosures about the Company in its public reports filed with the SEC. In particular, the Merger Agreement and related summary is not intended to be, and should not be relied upon as, disclosure regarding any facts and circumstances relating to the Company. The foregoing description of the Merger Agreement and the Voting Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Merger Agreement and the Voting Agreement, copies of which were filed as Exhibit 2.1 and Exhibit 10.1, respectively, to the Company’s Current Report on Form 8-K filed on June 27, 2019.

Compensatory Arrangement

On June 26, 2019, in connection with the Merger, the Board adopted retention bonus agreements (the “Retention Agreements”) that apply to the following executive officers of the Company: Melissa How, Chief Financial Officer, Justin Rupar, Vice President of Sales and Marketing, and Thomas Foster, Vice President of Operations and Supply Chain (collectively, the “Participants”). The purpose of the Retention Agreements is to ensure that the expertise of such Participants is preserved for the benefit of the Company through at least the Effective Time.

Pursuant to the Retention Agreements, each Participant will receive a retention bonus in the event that such Participant (i) remains employed by the Company and performs his or her duties and responsibilities in a satisfactory manner through the earlier of (i) the closing date of the Merger or (ii) the Merger Agreement is terminated in accordance with its terms. If a Participant is terminated for Cause (as such term is defined in each Retention Agreement), such Participant shall not be entitled to receive the retention bonus. Pursuant to their respective Retention Agreements, Ms. How will receive $75 and Messrs. Rupar and Foster will each receive $50.

The foregoing description of the Retention Agreements does not purport to be complete and is qualified in its entirety by reference to the full text of the form of Retention Agreements, which is filed as Exhibit 10.2 to our Current Report on Form 8-K filed on June 27, 2019.

 

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 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, 2018.  

The unaudited financial statements include all adjustments of a normal, recurring nature considered necessary for a fair presentation of our financial position as of June 30, 2019 and the results of operations for the three and six months ended June 30, 2019 and 2018. Results of operations for the three and six months ended June 30, 2019 are not necessarily indicative of the results that may be expected for the year ended December 31, 2019.

 

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 Significant Accounting Policies,” of the audited financial statements for the year ended December 31, 2018 included in the Annual Report on Form 10-K.

 

Recent Accounting Pronouncements

Recent accounting pronouncements are described in Note 11, “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

9

 


 

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 $104 and $109 at June 30, 2019 and December 31, 2018, 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 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 Original Equipment Manufacturer (“OEM”) customers and recognizes revenue at a point in time when control transfers. The Company recognizes revenue for each distinct good or service when control of the good or service has transferred to the customer. Transfer of control is generally determined based on the shipping terms of the contract, with most of our sales recognized F.O.B. shipping point, as that is the time we have a present right to payment, the customer takes possession of the goods, and the customer has the risks and reward of ownership. For most of our contracts, the customer takes legal title upon shipment; however, under the terms of our contract with certain international distributors, title does not transfer until we are paid for the goods. We retain title solely to maintain a security interest in the assets and have concluded that such right is protective in nature and that control transfers at the time of shipment based on the other control indicators. Generally, there is no-post shipment obligation on product sold other than standard assurance-type warranty obligations in the normal and ordinary course of business, typically a twelve to eighteen-month warranty period. Payment terms range from 0-60 days for domestic sales and 0-180 days for international sales.

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. Typically, all qualifying machine sales to distributors or dealers provide for program incentives that are accrued at the time of sales. 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.

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.

10

 


 

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.

 

The Company is estimating an annual effective tax rate of 18.9% (excluding discrete items) for the year ending December 31, 2019. Our 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 June 30, 2019, the Company recorded no income tax expense on its pre-tax loss of $(223) pursuant to the authoritative accounting literature prescribed in ASC 740-27-30-30 through 33 as the Company has a year-to-date loss of $(960) through June 30, 2019.

 

For the three months ended June 30, 2018, the Company recorded an income tax expense of $89, which consists of a federal and state income tax benefit on its pre-tax income of $408.

 

At June 30, 2019, 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 15% and 26% of the Company’s Net Sales for the three months ended June 30, 2019 and 2018 respectively, as well as 44% of the Company’s Accounts Receivable at June 30, 2019. Caterpillar Inc. and CEG Distributions PTY Ltd accounted for 19% and 25% of the Company’s Net Sales for the six months ended June 30, 2019 and 2018 respectively, as well as 71% of the Company’s accounts receivable at December 31, 2018.

Sales by major customer consisted of the following for the three and six months ended June 30, 2019 and 2018:

 

 

 

For the Three Months Ended June 30,

 

 

For the Three Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

 

Percent

 

 

 

 

 

 

Percent

 

 

 

 

 

 

 

of Total

 

 

Amount

 

 

of Total

 

 

Amount

 

Caterpillar

 

10%

 

 

$

3,631

 

 

13%

 

 

$

3,986

 

CEG Distributions PTY Ltd.

 

5%

 

 

 

1,778

 

 

13%

 

 

 

4,091

 

Other

 

85%

 

 

 

30,609

 

 

74%

 

 

 

23,783

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

100%

 

 

$

36,018

 

 

100%

 

 

$

31,860

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended June 30,

 

 

For the Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

 

Percent

 

 

 

 

 

 

Percent

 

 

 

 

 

 

 

of Total

 

 

Amount

 

 

of Total

 

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Caterpillar

 

13%

 

 

$

8,296

 

 

14%

 

 

$

8,808

 

CEG Distributions PTY Ltd.

 

6%

 

 

 

3,614

 

 

11%

 

 

 

6,986

 

Other

 

81%

 

 

 

51,446

 

 

75%

 

 

 

45,935

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

100%

 

 

$

63,356

 

 

100%

 

 

$

61,729

 

 

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

11

 


 

collectability.  Any reserves established for doubtful accounts is re-evaluated on a case-by-case basis when it is believed the payment of specific amounts owed to us is unlikely to occur. 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 six months ended June 30, 2019 and 2018:

 

 

 

For the Three Months Ended June 30,

 

 

For the Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

Percent

 

 

 

 

 

 

Percent

 

 

 

 

 

 

Percent

 

 

 

 

 

 

Percent

 

 

 

 

 

 

 

of Total

 

 

Amount

 

 

of Total

 

 

Amount

 

 

of Total

 

 

Amount

 

 

of Total

 

 

Amount

 

United States

 

80%

 

 

$

28,764

 

 

68%

 

 

$

21,764

 

 

82%

 

 

$

51,714

 

 

74%

 

 

$

45,390

 

Australia

 

8%

 

 

 

2,702

 

 

16%

 

 

 

5,063

 

 

8%

 

 

 

5,335

 

 

13%

 

 

 

8,423

 

Other

 

12%

 

 

 

4,552

 

 

16%

 

 

 

5,033

 

 

10%

 

 

 

6,307

 

 

13%

 

 

 

7,916

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

100%

 

 

$

36,018

 

 

100%

 

 

$

31,860

 

 

100%

 

 

$

63,356

 

 

100%

 

 

$

61,729

 

 

 

Note 3. Inventory

Inventory consisted of the following as of June 30, 2019 and December 31, 2018:

 

 

 

June 30, 2019

 

 

December 31, 2018

 

Raw materials and supplies

 

$

21,229

 

 

$

20,897

 

Work in process

 

 

36

 

 

 

36

 

Finished equipment and replacement parts

 

 

11,976

 

 

 

13,122

 

 

 

 

 

 

 

 

 

 

 

 

$

33,241

 

 

$

34,055

 

 

Note 4. Intangible Assets

Intangible assets, net comprised the following as of June 30, 2019:

 

 

 

Weighted

 

 

Gross

 

 

 

 

 

 

Net

 

 

 

Average Life

 

 

Carrying

 

 

Accumulated

 

 

Carrying

 

 

 

(In Years)

 

 

Amount