QUARTERLY REPORT FOR CYCLE COUNTRY ACCESSORIES CORP.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Amendment No. 1)10-Q
(Mark one)
(Mark one) | | |
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
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For the quarterly period ended December 31, 20102011 |
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OR |
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| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE EXCHANGE ACT OF 1934. |
For the transition period from __________toto
Commission file number: 001-31715
Cycle Country Accessories Corp.
(Exact name of registrant as specified in its charter)
Nevada
(State or other jurisdiction of incorporation or organization)
42-1523809
(IRS Employer Identification No.)
1701 38th Ave W, Spencer, Iowa 51301
5929 Baker Road, Suite 400, Minnetonka, MN 55345
(Address of principal executive offices)
P: (712) 262-4191
(952) 215-3100
F: (712) 262-0248(952) 215-3129
www.cyclecountry.com
www.atcvg.com
(Registrant'sRegistrant’s telephone number, facsimile number, and corporate website)
Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the past 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 x No o
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 (Section 232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files). Yes xo No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of "large“large accelerated filer"filer” and "accelerated filer"“accelerated filer” and "smaller“smaller reporting company"company” in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer o | | Accelerated filer o |
| | |
Non-accelerated filer o | | Smaller reporting company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The number of shares of the registrant'sregistrant’s common stock, par value $0.0001 per share, outstanding as of February 14, 2011 is 6,990,662May 15, 2012: 7,090,662
Table of Contents
2
EXPLANATORY NOTE
We are filing this Amended Quarterly Report on Form 10-Q/A (the "Amended Filing") to our Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2010 (the "Original Filing"), to correct errors relating to the number of shares outstanding, the valuation and timing of the expense recognition of employee equity awards, and the amount, timing and income statement classification of sales discounts, allowances and expenses related to a customer incentive program that was put into place by former management. In addition, our correction of the error regarding the number of shares outstanding related to equity compensation awards with multiple vesting dates that covered multi-year service periods. These errors, in total, caused us to overstate total revenue and selling expenses related to our customer incentive program, while understating our stock-based compensation expense. Additionally, the error regarding the number of shares that were to have been issued and outstanding had the effect of further misstating the basic and fully-diluted earnings per share for the three months ended December 31, 2010. The effects of these restatements are disclosed in Note 10- Restatement of Consolidated Financial Statements.
No other changes are being made other than the updating of: (i) the Exhibits to include updated Certifications of the Chief Executive and Chief Financial Officers, and (ii) the Exhibit Index to disclose that certain exhibits that were filed with the Original Filing are incorporated by reference into this Amended Filing. The sections of the Original Filing that are not being amended are unchanged and continue in full force and effect as originally filed. This Amended Filing speaks as of the date of the Original Filing and has not been updated to reflect events occurring subsequent to the date of the Original Filing.
Part I Financial Information
Item 1. Financial Statements
Cycle Country Accessories Corp. and Subsidiaries
Condensed Consolidated Balance Sheet
| | | | | | |
| | December 31, 2010 (Restated)(1) | | September 30, 2010 (Restated)(1) | | |
| | (Unaudited) | | | | |
Assets | | | | | | | | |
Current Assets | | | | | | | | |
Cash and cash equivalents | | $ | 133,821 | | $ | 28,939 | | |
Accounts receivable, net | | | 1,854,305 | | | 1,963,548 | | |
Inventories, net | | | 2,947,827 | | | 3,208,749 | | |
Income taxes receivable | | | 638,164 | | | 640,733 | | |
Deferred income taxes | | | 338,000 | | | 366,000 | | |
Prepaid expenses and other | | | 100,844 | | | 320,475 | |
Total current assets | | | 6,012,961 | | | 6,528,444 | | |
| | | | | | | | |
Property, plant and equipment, net | | | 9,826,636 | | | 10,028,623 | | |
Intangible assets, net | | | 160,387 | | | 161,957 | | |
Other assets | | | 5,419 | | | 7,413 | | |
| | | | | | | | |
Total assets | | $ | 16,005,403 | | $ | 16,726,437 | | |
| | | | | | | | |
Liabilities and Stockholders' Equity | | | | | | | | |
Current Liabilities | | | | | | | | |
Disbursements in excess of bank balances | | $ | 121,639 | | $ | 387,141 | | |
Accounts payable | | | 1,502,063 | | | 695,241 | | |
Accrued expenses | | | 1,116,407 | | | 1,055,583 | | |
Bank line of credit | | | 2,193,998 | | | 2,700,000 | | |
Current portion of notes payable | | | 583,697 | | | 699,681 | | |
Current portion of deferred gain | | | - | | | 27,754 | | |
Total current liabilities | | | 5,517,804 | | | 5,565,400 | | |
| | | | | | | | |
Long-Term Liabilities | | | | | | | | |
Notes payable, less current portion | | | 2,371,120 | | | 2,478,279 | | |
Deferred income taxes | | | 1,409,000 | | | 1,587,000 | | |
Total long term liabilities | | | 3,780,120 | | | 4,065,279 | | |
Total liabilities | | | 9,297,924 | | | 9,630,679 | | |
| | | | | | | | |
Stockholders' Equity | | | | | | | | |
Common stock, $.0001 par value; 100,000,000 shares authorized; 6,990,662 and 8,046,471 shares issued and outstanding, respectively | | | 699 | | | 805 | | |
Additional paid-in capital | | | 12,416,823 | | | 12,495,917 | | |
Accumulated deficit | | | (5,710,043 | ) | | (5,400,964 | ) | |
Total stockholders' equity | | | 6,707,479 | | | 7,095,758 | | |
| | | | | | | | |
Total liabilities and stockholders' equity | | $ | 16,005,403 | | $ | 16,726,437 | | |
| | | | | | | | | | | | | |
(1)See Note 10- Restatement of Consolidated Financial Statements- of Notes to Condensed Consolidated Financial Statements | | December 31, | | | September 30, | |
| | 2011 (Unaudited) | | | 2011 | |
Assets | | | | | | |
| | | | | | |
Current Assets | | | | | | |
Cash and cash equivalents | | $ | 84,845 | | | $ | 25,185 | |
Accounts receivable, net | | | 2,482,676 | | | | 850,087 | |
Inventories | | | 517,625 | | | | 799,205 | |
Income taxes receivable | | | - | | | | 2,120 | |
Deferred income taxes | | | 552,000 | | | | 625,000 | |
Prepaid expenses and other | | | 101,637 | | | | 424,726 | |
Assets held for sale | | | 58,910 | | | | 930,338 | |
Total current assets | | | 3,797,693 | | | | 3,656,661 | |
| | | | | | | | |
Property, plant and equipment, net | | | 8,830,021 | | | | 8,971,158 | |
Other assets | | | 736 | | | | 1,479 | |
| | | | | | | | |
Total assets | | $ | 12,628,450 | | | $ | 12,629,298 | |
| | | | | | | | |
| | | | | | | | |
Liabilities and Stockholders' Equity | | | | | | | | |
Current Liabilities: | | | | | | | | |
Disbursements in excess of bank balances | | $ | 56,548 | | | $ | 108,757 | |
Accounts payable | | | 2,093,558 | | | | 1,818,906 | |
Accrued expenses | | | 1,666,831 | | | | 1,251,966 | |
Bank line of credit | | | 647,040 | | | | 3,643,600 | |
Current portion of notes payable | | | 283,012 | | | | 441,718 | |
Total current liabilities | | | 4,746,989 | | | | 7,264,947 | |
| | | | | | | | |
Long-Term Liabilities: | | | | | | | | |
Notes payable, less current portion | | | 1,860,112 | | | | 2,033,545 | |
Deferred income taxes | | | 1,034,000 | | | | 124,000 | |
| | | | | | | | |
Total long term liabilities | | | 2,894,112 | | | | 2,157,545 | |
Total liabilities | | | 7,641,101 | | | | 9,422,492 | |
| | | | | | | | |
Stockholders' Equity: | | | | | | | | |
| | | | | | | | |
Common stock, $.0001 par value; 100,000,000 shares authorized; 7,090,662 shares issued and outstanding, respectively | | | 709 | | | | 709 | |
Additional paid-in capital | | | 12,636,252 | | | | 12,518,814 | |
Accumulated deficit | | | (7,649,612 | ) | | | (9,312,717 | ) |
| | | | | | | | |
Total stockholders' equity | | | 4,987,349 | | | | 3,206,806 | |
| | | | | | | | |
Total liabilities and stockholders' equity | | $ | 12,628,450 | | | $ | 12,629,298 | |
See accompanying notes to the unaudited condensed consolidated financial statements.
3
Condensed Consolidated Statements of Operations | | | |
| | Three Months ended December 31, | |
| | 2010 (Restated)(1) | | 2009 | |
| | (Unaudited) | | (Unaudited) | |
Revenue | | | | | | | |
| | | | | | | |
Net sales | | $ | 4,214,851 | | $ | 4,128,681 | |
Freight income | | | 22,455 | | | 24,567 | |
| | | | | | | |
Total revenues | | | 4,237,306 | | | 4,153,248 | |
| | | | | | | |
Cost of goods sold | | | 3,470,728 | | | 2,895,712 | |
| | | | | | | |
Gross profit | | | 766,578 | | | 1,257,536 | |
| | | | | | | |
Selling, general, and administrative expenses | | | 1,149,984 | | | 857,584 | |
| | | | | | | |
Income (loss) from operations | | | (383,406 | ) | | 399,952 | |
| | | | | | | |
Other income (expense) | | | | | | | |
| | | | | | | |
Interest expense | | | (98,749 | ) | | (82,388 | ) |
Interest income | | | - | | | 2 | |
Miscellaneous | | | 27,075 | | | 34,488 | |
| | | | | | | |
Total other expense, net | | | (71,674 | ) | | (47,898 | ) |
| | | | | | | |
Income (loss) before income tax provision (benefit) | | | (455,080 | ) | | 352,054 | |
| | | | | | | |
Provision for (benefit) from income taxes | | | (146,001 | ) | | 124,777 | |
| | | | | | | |
Net income (loss) | | $ | (309,079 | ) | $ | 227,277 | |
| | | | | | | |
Weighted average shares of common stock | | | | | | | |
Basic | | | 8,030,474 | | | 6,072,307 | |
| | | | | | | |
Diluted | | | 8,030,474 | | | 6,097,307 | |
| | | | | | | |
Income (loss) per common share: | | | | | | | |
Basic | | $ | (0.04 | ) | $ | 0.04 | |
| | | | | | | |
Diluted | | $ | (0.04 | ) | $ | 0.04 | |
(1)See Note 10- Restatement of Consolidated Financial Statements- of Notes to Condensed Consolidated Financial Statements | | | | | | |
| | For the three months ended December 31, | |
| | 2011 (Unaudited) | | | 2010 (Unaudited) | |
| | | | | | |
Revenue | | $ | 571,803 | | | $ | 693,049 | |
Cost of goods sold | | | 492,991 | | | | 657,664 | |
| | | | | | | | |
Gross profit | | | 78,812 | | | | 35,385 | |
| | | | | | | | |
Selling, general, and administrative expenses | | | 113,133 | | | | 183,792 | |
| | | | | | | | |
Loss from operations | | | (34,321 | ) | | | (148,407 | ) |
| | | | | | | | |
Other income (expense) | | | | | | | | |
| | | | | | | | |
Interest expense, net | | | (10,960 | ) | | | (14,812 | ) |
| | | | | | | | |
Total other expense, net | | | (10,960 | ) | | | (14,812 | ) |
| | | | | | | | |
Loss from continuing operations before income tax benefit | | | (45,281 | ) | | | (163,219 | ) |
| | | | | | | | |
Income tax benefit | | | - | | | | 21,899 | |
| | | | | | | | |
Net loss from continuing operations | | | (45,281 | ) | | | (141,320 | ) |
| | | | | | | | |
Income (loss) from discontinued operations, net of tax | | | 1,708,386 | | | | (167,760 | ) |
| | | | | | | | |
Net income (loss) | | $ | 1,663,105 | | | $ | (309,080 | ) |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Weighted average shares of common stock | | | | | | | | |
Basic | | | 7,090,662 | | | | 8,030,474 | |
| | | | | | | | |
Diluted | | | 7,090,662 | | | | 8,030,474 | |
| | | | | | | | |
Loss per basic and diluted share: | | | | | | | | |
Continuing Operations | | | (0.01 | ) | | | (0.01 | ) |
| | | | | | | | |
Discontinued Operations | | | 0.24 | | | | (0.02 | ) |
| | | | | | | | |
| | $ | 0.23 | | | $ | (0.03 | ) |
See accompanying notes to the unaudited condensed consolidated financial statements.
4
Condensed Consolidated Statements of Cash Flows
| | | |
| | Three Months ended December 31, | |
| | 2010 (Restated)(1) | | 2009 | |
| | (Unaudited) | | (Unaudited) | |
Cash Flows from Operating Activities: | | | | | | | |
Net income (loss) | | $ | (309,079 | ) | $ | 227,277 | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | | |
Depreciation | | | 177,471 | | | 203,099 | |
Amortization | | | 1,571 | | | 1,475 | |
Reserve for bad debts | | | 60,000 | | | - | |
Stock-based compensation | | | 49,542 | | | 6,874 | |
(Gain) loss on sale of property, plant and equipment | | | 23,141 | | | (34,411 | ) |
Deferred income taxes | | | (150,000 | ) | | 250,000 | |
Change in: | | | | | | | |
Accounts receivable | | | 49,243 | | | 8,399 | |
Inventories | | | 260,922 | | | 227,695 | |
Income tax receivable | | | 2,569 | | | (45,446 | ) |
Prepaid expenses and other, net | | | 219,631 | | | 46,799 | |
Other assets | | | 1,994 | | | 1,994 | |
Accounts payable, net | | | 806,822 | | | (198,341 | ) |
Accrued expenses | | | (67,922 | ) | | (160,143 | ) |
| | | | | | | |
Net cash provided by operating activities | | | 1,125,905 | | | 535,271 | |
| | | | | | | |
Cash Flows from Investing Activities: | | | | | | | |
Purchase of property, plant and equipment | | | (28,744 | ) | | (51,725 | ) |
Purchase of intangible assets, net | | | - | | | (1,426 | ) |
Proceeds from sale of property, plant and equipment | | | 2,368 | | | 500 | |
| | | | | | | |
Net cash used for investing activities | | | (26,376 | ) | | (52,651 | ) |
| | | | | | | |
Cash Flows from Financing Activities: | | | | | | | |
Disbursements in excess of bank balances | | | (265,502 | ) | | (266,673 | ) |
Payments on bank notes payable | | | (223,143 | ) | | (207,756 | ) |
Bank line of credit, net | | | (506,002 | ) | | 5,078 | |
| | | | | | | |
Net cash used for financing activities | | | (994,647 | ) | | (469,351 | ) |
| | | | | | | |
Net increase in cash and cash equivalents | | | 104,882 | | | 13,269 | |
| | | | | | | |
Cash and cash equivalents, beginning of period | | | 28,939 | | | 27,490 | |
| | | | | | | |
Cash and cash equivalents, end of period | | $ | 133,821 | | $ | 40,759 | |
(1)See Note 10- Restatement of Consolidated Financial Statements- of Notes to Condensed Consolidated Financial Statements | | For the three months ended December 31, | |
| | 2011 (Unaudited) | | | 2010 (Unaudited) | |
Cash Flows from Operating Activities from Continuing Operations: | |
Net loss from continuing operations | | $ | (45,281 | ) | | $ | (141,320 | ) |
Adjustments to reconcile net loss from continuing operations to net cash provided by operating activities: | |
Depreciation | | | 16,116 | | | | 31,550 | |
Bad debt reserve | | | - | | | | 9,800 | |
Share-based compensation | | | 10,569 | | | | 7,431 | |
Deferred income taxes | | | - | | | | (21,899 | ) |
Change in: | | | | | | | | |
Accounts receivable, net | | | (46,326 | ) | | | 49,243 | |
Inventories | | | 281,580 | | | | 220,662 | |
Income tax receivable | | | (300 | ) | | | 2,569 | |
Prepaid expenses and other | | | - | | | | 219,631 | |
Other assets | | | 744 | | | | 1,994 | |
Accounts payable | | | 274,651 | | | | 806,822 | |
Accrued expenses | | | 365,283 | | | | (67,922 | ) |
| | | | | | | | |
Net cash provided by operating activities from continuing operations | | | 857,036 | | | | 1,118,561 | |
| | | | | | | | |
Cash Flows from Investing Activities: | | | | | | | | |
Purchase of property, plant and equipment | | | - | | | | (28,744 | ) |
| | | | | | | | |
Net cash used for investing activities in continuing operations | | | - | | | | (28,744 | ) |
| | | | | | | | |
Cash Flows from Financing Activities: | | | | | | | | |
Change in disbursements in excess of bank balances | | | (52,209 | ) | | | (265,502 | ) |
Payments on bank notes payable | | | (332,139 | ) | | | (223,143 | ) |
Bank line of credit, net | | | 21,146 | | | | (506,002 | ) |
| | | | | | | | |
Net cash used for financing activities from continuing operations | | | (363,202 | ) | | | (994,647 | ) |
| | | | | | | | |
Cash flows from Discontinued Operations: | | | | | | | | |
Cash provided by (used) for operating activities | | | (552,076 | ) | | | 7,344 | |
Cash provided by for investing activities | | | 117,902 | | | | 2,368 | |
Net cash (used for) provided by discontinued operations | | | (434,174 | ) | | | 9,712 | |
| | | | | | | | |
Net increase in cash and cash equivalents | | | 59,660 | | | | 104,882 | |
| | | | | | | | |
Cash and cash equivalents, beginning of period | | | 25,185 | | | | 28,939 | |
| | | | | | | | |
Cash and cash equivalents, end of period | | $ | 84,845 | | | $ | 133,821 | |
See accompanying notes to the unaudited condensed consolidated financial statements.
5
Cycle Country Accessories Corp. and Subsidiaries
Condensed Consolidated Statements of Cash Flow
| | | |
| | Three Months ended December 31, | |
| | 2010 Restated(1) | | 2009 | |
| | (Unaudited) | | (Unaudited) | |
Supplemental disclosures of cash flow information: | | | | | | | |
| | | | | | | |
Cash paid during the period for: | | | | | | | |
| | | | | | | |
Interest | | $ | 93,922 | | $ | 82,351 | |
| | | | | | | |
Supplemental schedule of non-cash investing and financing: | | | | | | | |
| | | | | | | |
Treasury stock purchased included in accrued expense | | $ | 128,744 | | $ | - | |
| | | | | | | |
Disposal of fixed assets | | $ | 53,264 | | $ | - | |
(1)See Note 10- Restatement of Consolidated Financial Statements- of Notes to Condensed Consolidated Financial Statements | | Three months ending December 31, | |
| | 2011 (Unaudited) | | | 2010 (Unaudited) | |
Supplemental disclosures of cash flow information: | | | | |
Cash paid during the period for: | | | | | | |
Interest | | $ | 121,534 | | | $ | 93,922 | |
Income tax refunds (payments), net | | $ | (300 | ) | | $ | 1,430 | |
| | | | | | | | |
Supplemental schedule of non-cash investing and financing: | | | | | |
Treasury stock purchased included in accrued expense | | $ | - | | | $ | 128,744 | |
Non cash sale of ATV Accessories Segment as all proceeds applied directly to outstanding debt | | $ | 3,017,707 | | | $ | - | |
| | | | | | | | |
| | | | | | | | |
| | $ | - | | | $ | - | |
See accompanying notes to the unaudited condensed consolidated financial statements.
6
Notes to Condensed Consolidated Financial Statements
(Unaudited) (Unaudited)
Note 1. Summary of Significant Accounting Policies:
Basis of Presentation - The accompanying unaudited condensed consolidated financial statements for the three months ended December 31, 20102011 and 20092010 have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission for Form 10-Q. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. It is the opinion of management that the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting only of normal recurring accruals, considered necessary for a fair presentation of the Company'sCompany’s financial position, results of operations, and cash flows for the periods presented.
The results of operations for the interim periods ended December 31, 20102011 and 20092010 are not necessarily indicative of the results to be expected for the full year. These interim condensed consolidated financial statements should be read in conjunction with the September 30, 20102011 consolidated financial statements and related notes included in the Company'sCompany’s Annual Report on Form 10-K/A10-K for the fiscal year ended September 30, 2010.2011.
Reporting Entity and Principles of Consolidation -— Cycle Country Accessories Corp. ("(“Cycle Country"Country”) a Nevada corporation, has a wholly-owned subsidiary, Cycle Country Accessories Corp. ("Corporation. (“Cycle Country - Iowa"— Iowa”), an Iowa corporation.
The entities are collectively referred to as the "Company"“Company” for these condensed consolidated financial statements. All significant intercompany balances and transactions have been eliminated in consolidation.
Nature of the Business -– The Company has fourone distinct segments engaged in the design, manufacture, sale and distribution of products. Three of the segments have branded, proprietary products, and the other is a contract manufacturing division. The largestoperating segment, Cycle Country ATV Accessories, designs, manufactures and sells a popular selection of branded accessories for vehicles in the powersports industryImdyne, which are sold to various wholesale distributors and retail dealers throughout the United States of America, Canada, Mexico, South America, Europe, and Asia. Plazco manufactures, sells, and distributes injection-molded plastic products for vehicles such as golf cars, lawn mowers, and low-speed vehicles (LSVs). Perf-Form manufactures, sells, and distributes oil filters for the powersports industry, including ATVs, UTVs and Motorcycles. Additionally, Imdyne is engaged in the design, manufacture and assembly of an array of parts for original equipment manufacturers (OEMs) and other customers. The Company has offices in Minnetonka, MN and Spencer, IA, and has approximately 260,000160,000 square feet of modern manufacturing facilities in its owned building in Spencer, IA.
The Company records assets, liabilities, revenues and leased spaceexpenses associated with three other segments as discontinued operations for all periods presented. On August 26, 2011, the Company entered into an Asset Purchase Agreement (the “Purchase Agreement”) for the sale (the “Asset Sale”) of the Company’s assets related to its business in Milford, IA.aftermarket accessories for all-terrain vehicles and utility vehicles sold under the “Cycle Country” brand name (the “Product Line”) to Kolpin Outdoors, Inc. (“Kolpin”). Details of the Purchase Agreement are more fully disclosed in the Company’s 8-K filing dated September 11, 2011. As of December 31, 2011, the brand “Cycle Country” and the ATV Accessories division, as well as Perf-Form segment, were sold. See Note 10 for additional information on these sales. Following these sales, the Company redefined its business strategies and changed its name to “ATC Venture Group Inc.”
Under the trade name, Plazco, the company manufactures, sells, and distributes injection-molded plastic products for vehicles such as golf cars, and low-speed vehicles (LSVs). The Company’s Perf-Form segment manufactured, sold, and distributed oil filters for the Powersports industry, including ATVs, UTVs, and Motorcycles. As more fully disclosed in Note 8, in the previous fiscal year the Company concluded that these segments are not in the long-term strategic plans of the Company.
Upon the sale of the ATC Accessories division and Perf-Form and the discontinued operation of Plazco, the Company only has one remaining segment.
Revenue Recognition - The Company primarily ships products to its customers by third party carriers. The Company recognizes revenues from product sales when title and risk of loss to the products is passed to the customer, which occurs at the point of shipping.
Certain costs associated with the shipping and handling of products to customers are billed to the customer and included as freight income in the accompanying condensed consolidated statements of operations. The actual freight costs incurred are included in cost of goods sold. Sales wereare recorded net of sales discounts, returns and allowances. Sales discounts, returns and allowances for continuing operations were approximately $308,000 (restated)$14,000 and $377,000$8,000 for the three months ended December 31, 2011 and 2010, respectively. Sales discounts, returns and 2009,allowances for discontinued operations were approximately $390,000 and $300,000 for the three months ended December 31, 2011 and 2010, respectively.
Cost of Goods Sold - The components of cost of goods sold in the accompanying condensed consolidated statements of operations include overhead allocation, all direct materials and direct labor associated with the assembly and/or manufacturing of the Company's products.
Cash and Cash Equivalents - The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. The Company maintains its accounts primarily at one financial institution. At times throughout the year, the Company'sCompany’s cash and cash equivalent balances may exceed amounts insured by the Federal Deposit Insurance Company.
7
Cycle Country Accessories Corp
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Accounts Receivable - Credit terms are generally extended to customers on a short-term basis. These receivables do not bear interest, although a finance charge may be applied to balances more than thirty days past due. Trade accounts receivable are carried on the books at their net realizable value. The Company performs ongoing credit evaluations of its customers to reduce credit risk.
Individual trade accounts receivable are periodically evaluated for collectability based on past credit history and their current financial condition. Trade accounts receivable are charged against the allowance for doubtful accounts when such receivables are deemed to be uncollectible. While the Company has a large customer base that is geographically dispersed, a slowdown in markets in which the Company operates may result in higher than expected uncollectible accounts, and therefore, the need to revise estimates for bad debts. To the extent historical experience is not indicative of future performance or other assumptions used by management do not prevail, the provision for uncollectible accounts could differ significantly, resulting in either higher or lower future provisions for uncollectible accounts. The allowance for doubtful accounts was $75,000 and $15,000 at December 31, 2010 and September 30, 2010, respectively. It is at least reasonably possible that the Company's estimate will change in the future.
Inventories - Inventory is stated at the lower of cost or market. Inventory consists of raw material, work in process, and finished goods. Cost is determined using the weighted average method.
Property, Plant, and Equipment - Property, plant and equipment is stated at cost. Depreciation is provided over the estimated useful lives of the assets by using the straight-line and accelerated methods. Long-lived assets, such as property, plant, and equipment, are reviewed for possible impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company determined that indicators of potential impairment existed because the Company experienced a decrease in the Company's market capitalization for a sustained period of time. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows (undiscounted and without interest charges) expected to be generated by the asset. If these projected cash flows are less than the carrying amount, impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques, including discounted cash flow models, quoted market values and third party appraisals, as considered necessary. In accordance with ASC 360, the Company evaluated its long-lived assets using an undiscounted cash flow analysis. This analysis supported the carrying value of the long-lived assets and, therefore, no impairment was recorded. The Company's analysis uses significant estimates in its evaluation. It is reasonably possible that its estimates and assumptions could change in the near future, which could lead to further impairment of long-lived assets. The estimated useful lives are as follows:
| | | |
Asset Description | | Years | |
Land Improvements | | | 15-20 | |
Building | | | 15-40 | |
Plant Equipment | | | 7-10 | |
Tooling and Dies | | | 3-7 | |
Vehicles | | | 3-7 | |
Office Equipment | | | 3-10 | |
Maintenance and repairs are expensed as incurred; major improvements and betterments are capitalized.
Intangible Assets - Intangible assets with estimable useful lives are amortized over their respective estimated useful lives.
Warranty Costs - Estimated future costs related to product warranties are accrued as products are sold based on prior experience and known current events and are included in accrued expenses in the accompanying condensed consolidated balance sheets. Accrued warranty costs have historically been sufficient to cover actual costs incurred.
Income Taxes - Income taxes are provided for the tax effects of transactions reported in the condensed consolidated financial statements and consist of taxes currently receivable and deferred taxes related primarily to differences between the basis for financial and income tax reporting. Deferred taxes also are recognized for operating losses that are available to offset future taxable income and tax credits that are available to offset future income taxes payable.
8
Cycle Country Accessories Corp
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The Company follows a two-step approach to recognizing and measuring tax benefits and liabilities when realization of the tax position is uncertain. The first step is to determine whether the tax positions meet the more-likely-than-not condition for recognition and the second step is to determine the amount to be recognized based on the cumulative probability that exceeds 50%.
The Company recognizes in its condensed consolidated financial statements only those tax positions that are "more-likely-than-not"“more-likely-than-not” of being sustained upon examination by taxing authorities, based on the technical merits of the position.
The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. With a few exceptions, the Company is no longer subject to U.S. federal, state, or local income tax examinations by tax authorities for years before 2007. The Company'sCompany’s policy is to recognize interest and penalties related to uncertain tax benefits in income tax expense. The Company has no significant accrued interest or penalties related to uncertain tax positions as of October 1, 2009September 30, 2011 or December 31, 20102011 and such uncertain tax positions as of each reporting date are insignificant.
Stock-Based Compensation - The Company accounts for stock-based compensation on a fair value basis. The estimated grant date fair value of each stock-based award is recognized in expense overdoes not anticipate that the requisite service period (generally the vesting period).total unrecognized tax benefits will significantly change prior to December 31, 2012.
Earnings (Loss) Per Share - Basic earnings (loss) per share ("EPS"(“EPS”) is calculated by dividing net income (loss) by the weighted-average number of shares outstanding during the period. Diluted EPS is computed in a manner consistent with that of basic EPS while giving effect to the potential dilution that could occur if stock options or other share-based awards were exercised, by dividing net income (loss) by the weighted average number of shares and share equivalents during the period. See Note 6 for details regarding basic and diluted earnings per share.
Legal - The Company is subject to legal proceedings and claims which arise in the ordinary course of its business. While the ultimate outcome of these matters is not presently determinable, it is in the opinion of management that the resolution of outstanding claims will not have a material adverse effect on the financial position or results of operations of the Company. Due to the uncertainties in the settlement process, it is at least reasonably possible that management'smanagement’s view of outcomes will change in the near term.
Advertising - Advertising consists primarily of trade magazine advertisements, product brochures and catalogs, and trade shows. Advertising expense totaled approximately $35,000 and $33,000 in the three month period ended December 31, 2010 and 2009, respectively, and is included in selling, general, and administrative expenses in the accompanying condensed consolidated statements of operations.
Research and Development Costs - Research and development costs are expensed as incurred. Research and development costs totaled approximately $73,000 (restated) and $86,000 in the three month period ended December 31, 2010 and 2009, respectively, and are included in selling, general and administrative expenses and cost of goods sold in the accompanying condensed consolidated statements of operations.
Shipping and Handling Costs - Shipping and handling costs represent costs associated with shipping products to customers and handling finished goods. Shipping and handling costs totaled approximately $64,000 and $68,000 in the three month period ended December 31, 2010 and 2009, respectively, and are included in cost of goods sold in the accompanying condensed consolidated statements of operations..
Use of Estimates -The—The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and operating results, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses. Significant items subject to such estimates include the useful lives and assumptions used in the impairment analysis of property, plant, and equipment; valuation of intangible assets; valuation of deferred tax assets; allowance for doubtful accounts; and allowance for inventory reserves. Actual results could differ significantly from those estimates.
Fair Value of Financial Instruments -– The Company utilizes FASB ASC 820 "Fair Value Measurements" which definesCompany’s accounting for fair value outlines a framework for measuringmeasurements of assets and liabilities that are recognized or disclosed at fair value (although it does not expandin the required use of fair value) and detailsfinancial statements on a recurring or nonrecurring basis adhere to the required disclosures aboutFinancial Accounting Standards Board (FASB) fair value measurements. At December 31, 2010,hierarchy that prioritized the Company does not have any financial or nonfinancialinputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities that would require(Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value recognition or disclosures under ASC 820.hierarchy are as follows:
9
· | Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date |
· | Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset of liability |
Cycle Country Accessories Corp· | Level 3 inputs are unobservable inputs for the asset or liability |
Notes
The level in the fair value hierarchy within which a fair measurement in its entirety falls is based on the lowest level input that is significant to Condensed Consolidated Financial Statementsthe fair value measurement in its entirety.
(Unaudited)
The carrying value of cash, and cash equivalents, accounts receivable, prepaid expenses,and accounts payable, accrued liabilitiesshort and long-term debt, approximates fair value. The Company estimates that theand other working capital items approximate fair value of all financial instruments at December 31 2010 approximates their carrying values inand September 30, 2011 due to the accompanying balance sheet. The estimated fair value amounts have been determined by the Company using appropriate valuation methodologies.short maturity nature of these instruments.
Note 2. Misappropriation of Funds:Inventories:
The Company previously reported the misappropriation of funds by its then-Chairman of the Board of Directors and its Audit Committee, Mr. L. G. Hancher Jr. in the fiscal year ended September 30, 2009. This misappropriation of funds was related to a plan for the Company to purchase shares of its own stock which was to be completed by Mr. Hancher on the Company's behalf (the "Stock Buyback") in fiscal 2009.
The Company continues to work to recover all of the amounts misappropriated. During the year ended September 30, 2010, the Company recovered and cancelled 195,416 shares of Company stock with a market value of $120,000, which reduced common equity and was recorded against fraud expense, net in the consolidated statement of operations. The Company believes the value represents the amount the Company provided for the purchase of shares to the third party that returned these shares to the Company. The price per share is consistent with the trading in the market at the time the Company believed that the shares were being purchased on its behalf.
In June 2010, the Company commenced a lawsuit against Mr. Hancher. On August 2, 2010, Mr. Hancher filed a Chapter 7 petition in the Bankruptcy Court for the Southern District of Indiana. Proceedings in the Bankruptcy Court are pending. There has been no recovery to date on this action and the amount of a potential recovery, if any, cannot be reasonably estimated at this time.
On January 13, 2011, the Securities and Exchange Commission filed a complaint in U.S. District Court, Northern District of Iowa, against Mr. Hancher and various affiliates of his, charging them with six counts of securities violations involving multiple issuers, including the Company. On the same day, Mr. Hancher entered into a consent agreement with the SEC in which, among other things, Mr. Hancher agreed to pay back an aggregate of approximately $2.4 million in disgorgement, plus approximately $600,000 in pre-judgment interest, and a fine of $130,000. At this time, it is not believed that this will result in restitution to the Company in the foreseeable future, based on the previous filings in Mr. Hancher's pending bankruptcy case.
Additional recoveries, if any, will impact subsequent periods and will be reported for the periods in which such recoveries occur. The possibility of any future recoveries and the amount of any such recovery remain uncertain, and the Company can have no assurance that any such recoveries can be achieved or that they can be achieved without significant cost to the Company.
Note 3. Inventories:
Inventories are stated at the lower of cost or market using the weighted average cost method. Cost includes materials, labor, and manufacturing overhead related to the purchase and production of inventories. Management regularly reviews inventory quantities on hand, future product demand and the estimated utility of inventory. If the review indicates a reduction in utility below carrying value, management would reduce the Company'sCompany’s inventory to a new cost basis through a chargelower of cost or market adjustment. Details on historical adjustments to cost of goods sold.inventory can be found in the Company’s most recent 10-K filing.
10
Cycle Country Accessories Corp
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The major components of inventories are as follows:
| | | | | |
| | December 31, 2010 | | September 30, 2010 | |
| | (Unaudited) | | | |
| | | | | | | |
Raw Material | | $ | 1,398,420 | | $ | 1,386,948 | |
Work in Process | | | 151,437 | | | 69,481 | |
Finished Goods | | | 1,547,970 | | | 1,902,320 | |
Inventory Reserve | | | (150,000 | ) | | (150,000 | ) |
Total Inventories | | $ | 2,947,827 | | $ | 3,208,749 | |
Inventories are stated at the lower of cost or market determined using the weighted average cost method. | | December 31, 2011 (Unaudited) | | | September 30, 2011 | |
| | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Inventory consists of raw material,materials, work in process, and finished goods. Management has evaluated the Company'sCompany’s inventory reserve based on historical experience and current economic conditions and determined that an inventory reserve of approximately $150,000 at December 31, 20102011 and September 30, 20102011 was appropriate. It is reasonably possible the inventory reserve will change in the near future.
Note 4.3. Line of Credit:
The Company has a line of credit ("Line of Credit One") for the lesser of $1,000,000 or 80% of eligible accounts receivable and 35% of eligible inventory. Line of Credit One bears interest at prime (3.25% at December 31, 2010 and September 30, 2010) plus 0.50% with a ceiling of 10.5% and a floor of 6.5%. At December 31, 2010 and September 30, 2010, the rate was 6.5%. At December 31, 2010 and September 30, 2010 there was $1,000,000 due on Line of Credit One.
On September 30, 2009, the Company and its commercial lender entered into an additional secured credit agreement, ("Line of Credit Two"), dated September 30, 2009, as a temporary expansion of its credit facility Under the terms of Line of Credit Two, the Company added an additional line of credit for the lesser of $500,000 or 80% of eligible accounts receivable and 35% of eligible inventory. The line was subsequently increased to $600,000. The interest rate on Line of Credit Two was at 6.5%. There was no amount due on Line of Credit Two at December 31, 2010 or September 30, 2010.
On July 16, 2010,22, 2011, the Company entered into an agreement with its commercial lender to replace a Secured Credit Agreement (“Line of Credit TwoFour”) with a new, larger facility, ("the Lender. This line increases the revolving credit commitment under the Credit Agreement to $4,100,000 until the closing of the Company’s previously disclosed sale of its branded ATV Accessories product line to Kolpin Outdoors Inc. (the “Kolpin Sale”). Line of Credit Three"). UnderFour required the termsCompany to repay a portion of the amount outstanding under the Credit Agreement upon the closing of the Kolpin Sale. After the closing of the Kolpin Sale, the revolving credit commitment under the Credit Agreement automatically reduced to $1,000,000. As of December 31 and September 30, 2011, the balance due under Line of Credit Three, the Company has added an additional line of credit for the lesser of $1,700,000 or 80% of eligible accounts receivableFour agreement was $647,040 and 35% of inventory and bears interest at 6.75%. $3,643,600, respectively.
The note is collateralized by all of the Company's assets. The balance of Line of Credit Three was $1,193,998 and $1,700,000 as of December 31, 2010 and September 30, 2010, respectively.
Lines of Credit One, Two and Three containcontains conditions and covenants that prevent or restrict the Company from engaging in certain transactions without the consent of the commercial lenderLender and require the Company to maintain certain financial ratios, including term debt coverage and maximum leverage. In addition, the Company is required to maintain a minimum working capital ratio and shall not declare or pay any dividends or any other distributionsdistributors without the consent of the lender.Lender. As more fully described in Note 5, as of and for the three months endingended December 31 2010,and September 30, 2011, the Company was not in compliance with allsome of its covenants with the lender.
AsLender. On March 20, 2012, for all notes and lines of January 17, 2011,credit, the Company and its lender entered into the Seventh Amendment to the Secured Credit Agreement and Waiver ("Amendment 7"). Amendment 7 replaces Line of Credit One, Line of Credit Two and Line of Credit Three with a Revolving Credit Agreement in an amount not to exceed $2,700,000, maturing on March 31, 2011.
As part of Amendment 7, the Company has agreed to engage an advisor to assist in obtaining replacement financing to refinance Line of Credit One and Line of Credit Three with one or more replacement lenders; and further, to receive a commitment from such replacement lenders to fully take out and refinance Line of Credit One and Line of Credit Three.waive the covenant noncompliance by the Company.
11
Cycle Country Accessories Corp
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 5.4. Long-Term Debt:
Long term
Long-term debt consists of the following:
| | | | | |
| | December 31, 2010 | | September 30, 2010 | |
| | (Unaudited) | | | |
| | | | | | | |
Note 1 to commercial lender payable in equal monthly installments of $42,049 including interest at 6.125%. The note matures April 2011 and is secured by all Company assets. | | $ | 161,853 | | $ | 284,263 | |
| | | | | | | |
Note 2 to commercial lender payable in equal monthly installments of $33,449 including interest fixed at 6.125% until April 2011. Beginning April 2011, the interest is reset every 60 months to 0.50% over prime not to exceed 10.5% or be less than 5.5%. The note matures April 2018 and is secured by all Company assets. | | | 2,355,276 | | | 2,418,530 | |
| | | | | | | |
Note 3 to commercial lender payable in equal monthly installments of $14,567 including interest at 6.125% until maturity of April 2013 secured by the specific equipment acquired. | | | 377,688 | | | 415,167 | |
| | | | | | | |
Note - Spencer Area Jobs Trust due in full March 2014 interest free and forgivable in full if the Company maintains required job levels. | | | 60,000 | | | 60,000 | |
| | | | | | | |
Total | | | 2,954,817 | | | 3,177,960 | |
Less current maturities | | | (583,697 | ) | | (699,681 | ) |
Net | | $ | 2,371,120 | | $ | 2,478,279 | |
| | December 31, | | | September 30, | |
| | 2011 (Unaudited) | | | 2011 | |
Note 2 to commercial lender payable in equal monthly installments of $33,449 including interest fixed at 6.125% until April 2011. Beginning April 2011, the interest is reset every 60 months to 0.50% over prime not to exceed 10.5% or be less than 5.5%. The note matures April 2018 and is secured by all Company assets. | | | | | | | | |
| | | | | | | | |
Note 3 to commercial lender payable in equal monthly installments of $14,567 including interest at 6.125% until maturity of April 2013; secured by the specific equipment acquired. Note was paid in full during the three months ended December 31, 2011. | | | | | | | | |
| | | | | | | | |
Note - Spencer Area Jobs Trust due in full March 2014, forgivable in full if the Company maintans required job levels. | | | | | | | | |
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These secured credit agreements contain conditions and covenants that prevent or restrict the Company from engaging in certain transactions without the consent of the commercial lender and require the Company to maintain certain financial ratios, including term debt coverage and maximum leverage. As of and for the three months ended December 31, 2010,2011, the Company was not in compliance with the term debt coverage requirement or the working capital requirement of the agreement.
As
On March 20, 2012, for all notes and lines of January 17, 2011, the Company and its lender entered into Amendment 7. Under the terms of Amendment 7,credit, the lender agreed to waive the covenant noncompliance by the Company with the required ratio of current assetsretroactively to current liabilities as of September 30, 2010,2011 and including the periods ending December 31, 2010 and the Company's anticipated noncompliance with the required ratio of current assets to current liabilities through October 1, 2011 and further, waive the Company's noncompliance with the Term Debt Coverage Ratio as of September 30, 2010, DecemberMarch 31, 2010, and the Company's anticipated noncompliance with the Term Debt Coverage Ratio through October 1, 2011.2012.
On April 29, 2010,2011, the Company entered into an agreement with the Spencer Area Jobs Trust (the "Trust"“Trust”). Under the terms of this agreement, the Trust advanced $60,000 to the Company under a loan which is forgivable if the Company maintainsemploys no less than seventy full time employment positions throughemployees as of February 2014. If the Company does not maintainemploy seventy employment positions,full-time employees at that time, the amount of the loan forgiven will equal $850 for each employment position retained.filled. The Company will extinguish this debt amount, if any, upon notice from the Trust.
12
Cycle Country Accessories Corp
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 6.5. Earnings (Loss) Per Share:
Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of shares outstanding during the period. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of shares and share equivalents outstanding during the period.
The Company incurred a net lossincome of $309,079 (restated)$1,663,105 for the three months ended December 31, 2010. A2011 and a net loss causes all outstanding common stock equivalents, such as certain stock options and warrants, to be antidilutive. As a result, the basic and dilutive losses per common share are the sameof $309,080 for the three months ended December 31, 2010. There were no common stock equivalents for the three months ended December 31, 20102011 or 2009.2010.
The following is a reconciliation of the numerators and denominators of the basic and diluted EPS computations:
| | | | | |
| | For the three months ended December 31, 2010 | | For the three months ended December 31, 2009 | |
| | (Unaudited) | | (Unaudited) | |
| | Restated Loss (numerator) | | Restated Weighted Average Shares (denominator) | | Restated Per share amount | | Earnings (numerator) | | Weighted Average Shares (denominator) | | Per share amount | |
Basic EPS | | | | | | | | | | | | | | | | | | | |
Earnings (loss) available to common stockholders | | $ | (309,079 | ) | | 8,030,474 | | $ | (0.04 | ) | $ | 227,277 | | | 6,072,307 | | $ | 0.04 | |
| | | | | | | | | | | | | | | | | | | |
Diluted EPS | | | | | | | | | | | | | | | | | | | |
Earnings (loss) available to common stockholders | | $ | (309,079 | ) | | 8,030,474 | | $ | (0.04 | ) | $ | 227,277 | | | 6,097,307 | | $ | 0.04 | |
| | For the three months ended | | | For the three months ended | |
| | December 31, 2011 (Unaudited) | | | December 31, 2010 | |
| | | | | | | | | | | | | | | | | | |
| | | | | Weighted | | | | | | | | | Weighted | | | | |
| | Loss | | | Average Shares | | | Per share | | | Loss | | | Average Shares | | | Per share | |
| | (numerator) | | | (denominator) | | | amount | | | (numerator) | | | (denominator) | | | amount | |
| | | | | | | | | | | | | | | | | | |
Loss from continuing operations | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net income/loss from discontinued operations | | | | | | | | | | | | | | | | | | | | | | | | |
Note 7. Segment Information:
Segment information has been presented on a basis consistent with how business activities are reported internally to management. Management evaluates the operating profit of each segment by using the direct costs of manufacturing its products after an allocation of indirect costs. In determining the total revenues by segment, freight income and sales discounts are allocated to each of the segments for internal reporting purposes. This represents a change in the way the Company reports segment results. Management believes segments are more accurately analyzed if costs are allocated to each segment. Prior periods have been re-stated using segment allocations. This resulted in no change to net income.
The Company has four operating segments that assemble, manufacture, or sell a variety of products. Each operating segment is separately managed and has separate financial information evaluated regularly by the Company's executive officers in determining resource allocation and assessing performance.
"Cycle Country ATV Accessories" is engaged in the design, manufacture, and sale of accessories for all terrain vehicles (ATVs) and utility vehicles (UTVs) such as snowplow blades, lawnmowers, spreaders, sprayers, tillage equipment, winch mounts, and utility boxes.
"Plazco", the Company's plastic products division, designs, manufactures, markets, and distributes injection-molded plastic products for vehicles such as golf cars, lawn mowers, and low-speed vehicles (LSVs).
"Perf-Form", the Company's oil filter division, is engaged in the design, manufacture, sale, and distribution of oil filters for the powersports industry including ATVs, UTVs, LSVs and Motorcycles.
13
Cycle Country Accessories Corp
Notes to Condensed Consolidated Financial Statements
(Unaudited)
"Imdyne", the Company's contract manufacturing division, is engaged in the design, manufacture and assembly of a wide array of parts, components, and other precuts for non-competing OEM and other businesses.
The significant accounting policies of the operating segments are the same as those described in Note 1 to the consolidated financial statements of the Company's Annual Report on Form 10-K/A for the fiscal year ended September 30, 2010.
The following is a summary of certain financial information related to the four segments:
| | | |
| | For the Three Months Ended December 31, 2010 (Restated) | |
| | (Unaudited) | |
| | Cycle Country ATV Accessories | | Plazco | | Perf-Form | | Imdyne | | Total | |
| | | | | | | | | | | | | | | | |
Net sales | | $ | 3,423,350 | | $ | 73,455 | | $ | 28,670 | | $ | 689,376 | | $ | 4,214,851 | |
Freight income | | | 18,188 | | | 449 | | | 225 | | | 3,593 | | | 22,455 | |
Total Revenue | | | 3,441,538 | | | 73,904 | | | 28,895 | | | 692,969 | | | 4,237,306 | |
| | | | | | | | | | | | | | | | |
Cost of goods sold | | | 2,706,925 | | | 78,509 | | | 34,792 | | | 650,502 | | | 3,470,728 | |
| | | | | | | | | | | | | | | | |
Gross profit (loss) | | $ | 734,613 | | $ | (4,606 | ) | $ | (5,896 | ) | $ | 42,467 | | | 766,578 | |
| | | | | | | | | | | | | | | | |
Sales, general & admin | | | | | | | | | | | | | | | (1,149,984 | ) |
Interest expense, net | | | | | | | | | | | | | | | (98,749 | ) |
Other income /expense, net | | | | | | | | | | | | | | | 27,075 | |
Income tax benefit | | | | | | | | | | | | | | | 146,001 | |
Net loss | | | | | | | | | | | | | | $ | (309,079 | ) |
| | For the Three Months Ended December 31, 2009 | |
| | (Unaudited) | |
| | Cycle Country ATV Accessories | | Plazco | | Perf-Form | | Imdyne | | Total | |
Net sales | | $ | 3,256,158 | | $ | 75,886 | | $ | 21,880 | | $ | 774,757 | | $ | 4,128,681 | |
Freight income | | | 17,197 | | | 983 | | | 491 | | | 5,896 | | | 24,567 | |
Total Revenue | | | 3,273,355 | | | 76,869 | | | 22,371 | | | 780,653 | | | 4,153,248 | |
| | | | | | | | | | | | | | | | |
Cost of goods sold | | | 2,054,654 | | | 95,716 | | | 37,251 | | | 708,091 | | | 2,895,712 | |
| | | | | | | | | | | | | | | | |
Gross profit (loss) | | $ | 1,218,701 | | $ | (18,847 | ) | $ | (14,880 | ) | $ | 72,562 | | | 1,257,536 | |
| | | | | | | | | | | | | | | | |
Sales, general & admin | | | | | | | | | | | | | | | (857,584 | ) |
Interest expense, net | | | | | | | | | | | | | | | (82,386 | ) |
Other income /expense, net | | | | | | | | | | | | | | | 34,488 | |
Income tax expense | | | | | | | | | | | | | | | (124,777 | ) |
Net income | | | | | | | | | | | | | | $ | 227,277 | |
14
Cycle Country Accessories Corp
Notes to Condensed Consolidated Financial Statements
(Unaudited)
GEOGRAPHIC REVENUE
The following is a summary of the Company's revenue in different geographic areas:
| | | | | | | |
| | For the three months ended December 31, | |
| | (Unaudited) | |
| | 2010 Restated | | 2009 | |
United States | | $ | 3,833,632 | | $ | 3,908,481 | |
Other Countries | | | 403,674 | | | 244,767 | |
Total Revenue | | $ | 4,237,306 | | $ | 4,153,248 | |
As of December 31, 2010, all of the Company's long-lived assets are located in the United States of America.
The Company had sales to two major customers that were approximately 20.30% and 18.97% of total sales respectively for the three months ended December 31, 2010. During the three months ended December 31, 2009, sales to the same customers were approximately 27.82% and 14.70% of total sales, respectively.
Note 8.6. Stock Based Compensation:
The Company accounts for share-based payments using the related accounting guidance, which requires share-based payment transactions to be accounted for using a fair value based method and the recognition of the related expense in the results of operations.
The Company's employment agreement dated June 24, 2008 with its former chief executive officer, Jeffrey M. Tetzlaff, provided for
Executive Stock Based Compensation
On July 1, 2011, 201,162 of Mr. Davis’ remaining 603,485 restricted shares were released from restriction and forfeiture, based upon the grant of 50,000 shares of stock in the Company, vesting over a three-year period. At the endschedule of the first and second full year of employment, Mr. Tetzlaff became vested in and received 16,666 shares of stock each year. During the year ended September 30, 2010, the Board accelerated the vesting of the final installment of 16,668 shares of stock which otherwise would have vested April 7, 2011. agreement.
For the three months ended December 31, 2009, $6,875 was2011 and 2010, $77,645 and $48,292, respectively, were recognized as total executive stock based compensation expense. As ofThis expense was allocated $6,988 continuing operations and $70,657 to discontinued operations for the three months ended December 31, 2009, there2011 and $7,244 to continuing operations and $41,048 to discontinued operations for the year ended December 31, 2010. Remaining unrecognized executive stock based compensation expense expected to be recognized within three years was $48,125approximately $-0- and $175,000 at December 31, 2011 and 2010, respectively.
In the three months ended December 31, 2011, and concurrent with the execution and completion of totalthe Asset Purchase Agreement more fully disclosed in the Company’s 8-K filing dated September 1, 2011, the remaining 402,323 restricted shares of Mr. Davis’ shares were released from restriction and forfeiture. All previously unrecognized compensation cost related to the unvested shares. Theexecutive stock based compensation expense was fully recognized in fiscal year 2010.
Under the 2008 employment agreement, Mr. Tetzlaff also received an option to purchase up to an additional 500,000 shares of the Company's common stock. Effective July 1, 2010, the option to purchase these shares was terminated. There were no outstanding options as of December 31, 2010 or December 31, 2009.
Effective July 1, 2010, the Company entered into new employment agreements with Mr. Tetzlaff and Robert Davis, as the Chief Operating Officer and Chief Financial Officer. Under the terms of these agreements, the Company granted, subject to shareholder approval, to each such shares of common stock equal to 12.5% on a fully-diluted basis of the common stock, but not less than 1,005,809 shares, which vest in four installments during the respective terms of the agreements with the first installment of 40% vesting October 1, 2010 and which vesting is subject to acceleration on the occurrence of certain events, including a change of control. These awards were approved by the Company's stockholders at the 2010 annual meeting. During the vesting period, Mr. Tetzlaff and Mr. Davis have full voting and participating rights of the common shares.
Both Mr. Tetzlaff and Mr. Davis elected Section 83(b) of the Internal Revenue Code for their shares, which allows them to pay income tax on the initial grant instead of paying the tax as the stock vests. As such, the Company originally used the Section 83(b) assigned value of $.05 per share ($100,581 in total), and recognized the entire associated expense during the year ended September 30, 2010. It was subsequently determined that this was not the appropriate fair value for these shares for book purpose, and that the stock award included multiple vesting dates that covered multi-year service periods. As part of the restatement further described in Note 10, the shares were revalued as of September 30, 2010 at the grant date fair value price of $.37, or $744,299 in total.
Effective December 31, 2010, Mr. Tetzlaff resigned and the Company and Mr. Tetzlaff entered into a Separation Agreement and Release of Claims. In accordance with the terms of that agreement, Mr. Tetzlaff settled the 402,234 shares that vested October 1, 2010, and forfeited his unvested shares. Cumulative compensation expense of $48,493 (restated) related to Mr. Tetzlaff's unvested shares was reversed during the three months ended December 31, 2010. 2011.
Director Stock Based Compensation
For the three months ended December 31, 2011 and 2010, $48,293 (restated) was$39,793 and $1,249, respectively, were recognized as officer restrictedtotal director stock based compensation expense. This expense was allocated $3,581 to continuing operations and $36,212 to discontinued operations for the three months ended December 31, 2011 and $187 to continuing operations and $1,062 to discontinued operations for the three months ended December 31, 2010. Unrecognized executive stock based compensation expense remaining was approximately $-0- and $17,000 at December 31, 2011 and 2010, respectively.
During
Subsequent to the fourth quarteryear-end, and concurrent with the execution and completion of the fiscal year endedAsset Purchase Agreement more fully disclosed in the Company’s 8-K filing dated September 30, 2010, each of two members of1, 2011, the board of directors were granted 50,000 restricted shares of Mr. DeShaw, Mr. Morgan and Mr. Bohn were released from restriction and forfeiture. All previously unrecognized director stock for services provided to the Company under the approved Director Equity Compensation Agreement. The shares vest over a period of three years based on years of service.
Effective December 31, 2010, Daniel Thralow resigned as a member of the Company's Board of Directors. Accordingly, Mr. Thralow forfeited his 50,000 unvested shares. Cumulative compensation expense of $1,857 (restated) related to these unvested shares was reversedexpensed during the three months ended December 31, 2010. For the three months ended December 31, 2010, $1,249 (restated) was recognized as director restricted stock compensation expense.2011.
As of December 31, 2010 $191,440 (restated) of total unrecognized compensation cost related to the remaining unvested shares. These remaining shares will become vested over the next 3 years.
Note 9.7. Going Concern:
The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern. During the three months ended December 31, 2010,2011, the Company incurred agenerated approximately
$1,663,000 of net loss of approximately
Cycle Country Accessories Corp
Notes to Condensed Consolidated Financial Statements
(Unaudited)
$309,000 (restated).income. As of December 31, 2010,2011, the Company had an accumulated deficit of approximately $5,710,000 (restated).$7,650,000. As discussed in Note 5, as of December 31, 2010,2011, the Company was in violation of covenants with its lender, a waiver for which was received. If the Company is unable to generate profits and unable to continue to obtain financing or renew existing financing for its working capital requirements, it may have to curtail its business sharply or cease business altogether. These unaudited condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets or the amounts and classification of liabilities that might be necessary in the event the Company does not continue as a going concern.
The Company expects the existing cash balances, cash flow generated from operating activities, and the available borrowing capacity under the revolving line of credit agreement to be sufficient to fund operations. Short term cash can be generated through the aggressive collection of accounts receivable and by reducing inventory balances. The Company will file for income tax refunds due of approximately $600,000, the timing of which cannot be estimated. The Company is in the process of securing replacement financing through an asset-based lender for its Revolving Credit Agreement which matures MarchAgreement.
Note 8 – Sale of Segment
On December 31, 2011.
Note 10. Restatement2011, the brand “Cycle Country” and the ATV Accessories division were sold to Kolpin Outdoors, Inc. (“Kolpin”) for a sale price of Consolidated Financial Statements:
These financial statements were restated$8,000,000, subject to correct errors relating tocertain adjustments. $3,017,707 paid at closing with remaining funds contingent on future production and other terms. Revenue will be recognized on this sale in the number of shares outstanding,period the valuation and timingtransaction was complete or at the time revenue was earned for portions requiring continued products or services. Details of the expense recognition of employee equity awards, andPurchase Agreement are more fully disclosed in the amount, timing and incomeCompany’s 8-K filing dated September 1, 2011. This agreement was fully executed on December 31, 2011, as fully disclosed in the Company’s 8-K filing dated January 6, 2012. Financial statement classification of sales discounts and allowances and selling expenses related to a customer incentive program that was put in place by former management. In addition,impacts for the Company, corrected error regarding the number of shares outstanding related to equity compensation awards with multiple vesting dates that covered multi-year service periods. These errors, in total, caused the Company to overstate total revenue and selling expenses related to our customer incentive program, while understating our stock-based compensation expense. Additionally, the error regarding the number of shares thatsale were to have been issued and outstanding had the effect of further misstating the basic and fully-diluted earnings per shareas follows for the three months ended December 31, 2010.2011:
15
| | | |
Property, plant, equipment, net | | $ | 143,913 | |
| | | 702,905 | |
| | | 34,416 | |
| | | 881,234 | |
| | | | |
Proceeds from sale applied directly to outstanding debt | | | 3,017,707 | |
| | | | |
| | $ | 2,136,473 | |
The following tables show
There has been a recent dispute relating to the specific effectspayment of a portion of the restatement ondeferred and contingent purchase price due to the Company under the asset purchase agreement. No portion of these contingent and deferred payments were recorded as revenue as of December 31, 2011.
Following this sale, the Company redefined its business strategies and changed its name from “Cycle Country Accessories Corp.” to “ATC Venture Group, Inc.” It also changed the name of its subsidiary from “Cycle Country Accessories Corporation” to “Simonsen Iron Works Inc.”
On November 3, 2011, the Perf-Form segment was sold for $25,000. Financial statement impacts of this sale were as follows for the three month period ending December 31, 2011:
Note 9 – Discontinued Operations
In the year ended September 30, 2011, the Company concluded that the Perf-Form and Plazco segments no longer fit with the long term strategic plans of the Company. Both of these segments are outside of the Company’s core product lines and/or our core customer relationships. Both of these segments have seen substantial decline in the past five years in sales and profitability as they lacked adequate sales, marketing, and operational leadership. Further, the Company has no internal expertise in engineering in either of these product segments. As a result, with the changes in the senior management of the Company, the determination was made that these segments no longer fit the Company’s strategic plan, and therefore, these segments are expected to cease operations within one year and are reported as discontinued operations in the condensed consolidated financial statementsstatements.
On August 26, 2011, the Company entered into an Asset Purchase Agreement (the “Purchase Agreement”) for the sale (the “Asset Sale”) of the Company’s assets related to its business in aftermarket accessories for all-terrain vehicles and utility vehicles sold under the “Cycle Country” brand name (the “Product Line”) to Kolpin Outdoors, Inc. (“Kolpin”). Details of the Purchase Agreement are more fully disclosed in the Company’s 8-K filing dated September 1, 2011. Since this Product Line was sold subsequent to September 30, 2011, it has been included in discontinued operations for all years presented.
See Note 8 for information on sales of the Perf-Form and Cycle Country ATV Accessories segments.
Gains (Losses) from discontinued operations, net of income taxes for all periods presented, include the operating results of Cycle Country ATV Accessories, Perf-Form and Plazco and are as follows:
| | For the three months ended December 31, 2011 (Unaudited) | |
| | | | | | | | | | | | |
| | ATV | | | Plazco | | | Perf-Form | | | Total | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Discounts, returns & allowances | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Selling, general, and administrative expenses | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Gain on sale of segments and other assets | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Net income from discontinued operations | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | For the three months ended December 31, 2010 (Unaudited) | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Discounts, returns & allowances | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Selling, general, and administrative expenses | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Net loss from discontinued operations | | | | | | | | | | | | | |
Note 10 - INCOME TAXES
The income tax expense (benefit) for the three months ending December 31, 2011 and 2010 consists of the following:
| | December 31, | | | December 31, | |
| | 2011 | | | 2010 | |
Change in tax allowance | | | 57,000 | | | | - | |
Deferred tax expense (benefit) | | | 984,000 | | | | (146,000 | ) |
Total tax expense (benefit) | | $ | 1,035,000 | | | $ | (146,000 | ) |
| | | | | | | | |
Deferred tax assets and liabilities as of December 31, 2011 and September 30, 2011 are comprised of the following:
| | December 31, | | | September 30, | |
| | 2011 | | | 2011 | |
Deferred Tax Assets: | | | | | | |
Capitalized fees | | $ | 33,000 | | | $ | 33,000 | |
Accrued expenses | | | 205,000 | | | | 227,000 | |
Allowance for uncollectible accounts | | | 26,000 | | | | 26,000 | |
Charitable contributions | | | - | | | | 15,000 | |
NOL carryforward | | | 1,227,000 | | | | 2,137,000 | |
State NOL carryforward | | | 31,000 | | | | 68,000 | |
Business credit carryforward | | | 239,000 | | | | 187,000 | |
Total Deferred Assets | | | 1,761,000 | | | | 2,693,000 | |
| | | | | | | | |
Deferred Tax Liability: | | | | | | | | |
Property and equipment | | | (1,992,000 | ) | | | (1,992,000 | ) |
Less valuation allowance allowance | | | (251,000 | ) | | | (200,000 | ) |
Net Deferred Tax Asset (Liability) | | $ | (482,000 | ) | | $ | 501,000 | |
| | | | | | | | |
| | December 31, | | | September 30, | |
| | 2011 | | | 2010 | |
Current Assets | | $ | 552,000 | | | $ | 625,000 | |
Long-Term Liabilities | | | (1,034,000 | ) | | | (124,000 | ) |
Net Deferred Tax Asset (Liability) | | $ | (482,000 | ) | | $ | 501,000 | |
| | | | | | | | |
The tax provision of $1,035,000 for the three months ended December 31, 2010:
Cycle Country Accessories Corp. and Subsidiaries
Condensed Consolidated Balance Sheet
| | | | | | | | |
| | December 31, 2010 | | | | | December 31, 2010 | |
(Unaudited) | | ORIGINAL | | ADJUSTMENTS | | RESTATED | |
Assets | | | | | | | | | | |
Current Assets: | | | | | | | | | | |
Cash and cash equivalents | | $ | 133,821 | | $ | - | | $ | 133,821 | |
Accounts receivable, net | | | 1,854,305 | | | - | | | 1,854,305 | |
Inventories, net | | | 2,947,827 | | | - | | | 2,947,827 | |
Income taxes receivable | | | 638,164 | | | - | | | 638,164 | |
Deferred income taxes | | | 259,000 | | | 79,000 | | | 338,000 | |
Prepaid expenses and other | | | 100,844 | | | - | | | 100,844 | |
Total current assets | | | 5,933,961 | | | 79,000 | | | 6,012,961 | |
| | | | | | | | | | |
Property, plant, and equipment, net | | | 9,826,636 | | | - | | | 9,826,636 | |
Intangible assets, net | | | 160,387 | | | - | | | 160,387 | |
Other assets | | | 5,419 | | | - | | | 5,419 | |
Total assets | | $ | 15,926,403 | | $ | 79,000 | | $ | 16,005,403 | |
| | | | | | | | | | |
Liabilities and Stockholders' Equity | | | | | | | | | | |
Current Liabilities: | | | | | | | | | | |
Disbursements in excess of bank balances | | $ | 121,639 | | $ | - | | $ | 121,639 | |
Accounts payable | | | 1,502,063 | | | - | | | 1,502,063 | |
Accrued expenses | | | 919,920 | | | 196,487 | | | 1,116,407 | |
Bank line of credit | | | 2,193,998 | | | - | | | 2,193,998 | |
Current portion of notes payable | | | 583,697 | | | - | | | 583,697 | |
Total current liabilities | | | 5,321,317 | | | 196,487 | | | 5,517,804 | |
Long-Term Liabilities: | | | | | | | | | | |
Notes payable, less current portion | | | 2,371,120 | | | - | | | 2,371,120 | |
Deferred income taxes | | | 1,382,000 | | | 27,000 | | | 1,409,000 | |
Total long term liabilities | | | 3,753,120 | | | 27,000 | | | 3,780,120 | |
| | | | | | | | | | |
Total liabilities | | | 9,074,437 | | | 223,487 | | | 9,297,924 | |
Stockholders' Equity: | | | | | | | | | | |
Common stock, $.0001 par value; 100,000,000 shares authorized; 6,990,662 shares issued and outstanding | | | 633 | | | 66 | | | 699 | |
Additional paid-in capital | | | 12,217,178 | | | 199,645 | | | 12,416,823 | |
Accumulated deficit | | | (5,365,845 | ) | | (344,198 | ) | | (5,710,043 | ) |
Total stockholders' equity | | | 6,851,966 | | | (144,487 | ) | | 6,707,479 | |
| | | | | | | | | | |
Total liabilities and stockholders' equity | | $ | 15,926,403 | | $ | 79,000 | | $ | 16,005,403 | |
Cycle Country Accessories Corp. and Subsidiaries
Condensed Consolidated Statement of Operations
2011 is included in discontinued operations. For the Three Months Endedthree months ended December 31, 2010, $124,101 of the tax benefit was included in discontinued operations. The remaining $21,899 was a benefit for continuing operations.
| | | | | | | |
(Unaudited) | | ORIGINAL | | ADJUSTMENTS | | RESTATED | |
Revenues: | | | | | | | | | | |
Net sales | | $ | 4,336,737 | | $ | (121,886 | ) | $ | 4,214,851 | |
Freight income | | | 22,455 | | | - | | | 22,455 | |
| | | | | | | | | | |
Total revenues | | | 4,359,192 | | | (121,886 | ) | | 4,237,306 | |
| | | | | | | | | | |
Cost of goods sold | | | 3,470,728 | | | - | | | 3,470,728 | |
| | | | | | | | | | |
Gross profit | | | 888,464 | | | (121,886 | ) | | 766,578 | |
| | | | | | | | | | |
Selling, general, and administrative expenses | | | 1,264,652 | | | (114,668 | ) | | 1,149,984 | |
| | | | | | | | | | |
Loss from operations | | | (376,188 | ) | | (7,218 | ) | | (383,406 | ) |
| | | | | | | | | | |
Other income (expense): | | | | | | | | | | |
Interest expense | | | (98,749 | ) | | - | | | (98,749 | ) |
Miscellaneous | | | 27,075 | | | - | | | 27,075 | |
| | | | | | | | | | |
Total other expense, net | | | (71,674 | ) | | - | | | (71,674 | ) |
| | | | | | | | | | |
Loss before income tax benefit | | | (447,862 | ) | | (7,218 | ) | | (455,080 | ) |
| | | | | | | | | | |
Income tax benefit | | | 161,001 | | | (15,000 | ) | | 146,001 | |
| | | | | | | | | | |
Net loss | | $ | (286,861 | ) | $ | (22,218 | ) | $ | (309,079 | ) |
| | | | | | | | | | |
Weighted average shares of common stock outstanding: | | | | | | | | | | |
| | | | | | | | | | |
Basic | | | 6,337,177 | | | 1,693,297 | | | 8,030,474 | |
| | | | | | | | | | |
Diluted | | | 6,337,177 | | | 1,693,297 | | | 8,030,474 | |
| | | | | | | | | | |
Loss per common share: | | | | | | | | | | |
Basic | | $ | (0.05 | ) | $ | 0.01 | | $ | (0.04 | ) |
| | | | | | | | | | |
Diluted | | $ | (0.05 | ) | $ | 0.01 | | $ | (0.04 | ) |
Cycle Country Accessories Corp. and Subsidiaries
Condensed Consolidated Statement of Cash Flows
For the Three Months Ended December 31, 2010
| | | | | | | |
(Unaudited) | | ORIGINAL | | ADJUSTMENTS | | RESTATED | |
Cash Flows from Operating Activities: | | | | | | | | | | |
Net loss | | $ | (286,861 | ) | $ | (22,218 | ) | $ | (309,079 | ) |
| | | | | | | | | | |
Adjustments to reconcile net loss to net cash used by operating activities: | | | | | | | | | | |
Depreciation | | | 177,471 | | | - | | | 177,471 | |
Amortization | | | 1,571 | | | - | | | 1,571 | |
Reserve for bad debts | | | 60,000 | | | - | | | 60,000 | |
Stock-based compensation | | | - | | | 49,542 | | | 49,542 | |
Loss on sale of property, plant and equipment | | | 23,141 | | | - | | | 23,141 | |
Deferred income taxes | | | (165,000 | ) | | 15,000 | | | (150,000 | ) |
Change in: | | | | | | | | | | |
Accounts receivable | | | 49,243 | | | - | | | 49,243 | |
Inventories | | | 260,922 | | | - | | | 260,922 | |
Income tax receivable | | | 2,569 | | | - | | | 2,569 | |
Prepaid expenses and other, net | | | 219,631 | | | - | | | 219,631 | |
Other assets | | | 1,994 | | | - | | | 1,994 | |
Accounts payable, net | | | 806,822 | | | - | | | 806,822 | |
Accrued expenses | | | (25,598 | ) | | (42,324 | ) | | (67,922 | ) |
| | | | | | | | | | |
Net cash used for operating activities | | | 1,125,905 | | | - | | | 1,125,905 | |
| | | | | | | | | | |
Cash Flows from Investing Activities: | | | | | | | | | | |
Purchase of property, plant and equipment | | | (28,744 | ) | | - | | | (28,744 | ) |
Proceeds from sale of property, plant and equipment | | | 2,368 | | | - | | | 2,368 | |
| | | | | | | | | | |
Net cash used for investing activities | | | (26,376 | ) | | - | | | (26,376 | ) |
| | | | | | | | | | |
Cash Flows from Financing Activities: | | | | | | | | | | |
Disbursements in excess of bank balances | | | (265,502 | ) | | - | | | (265,502 | ) |
Payments on bank notes payable | | | (223,143 | ) | | - | | | (223,143 | ) |
Bank line of credit, net | | | (506,002 | ) | | - | | | (506,002 | ) |
| | | | | | | | | | |
Net cash provided by financing activities | | | (994,647 | ) | | - | | | (994,647 | ) |
| | | | | | | | | | |
Net increase in cash and cash equivalents | | | 104,882 | | | - | | | 104,882 | |
| | | | | | | | | | |
Cash and cash equivalents, beginning of period | | | 28,939 | | | - | | | 28,939 | |
| | | | | | | | | | |
Cash and cash equivalents, end of period | | $ | 133,821 | | | - | | $ | 133,821 | |
Cycle Country Accessories Corp. and Subsidiaries
Condensed Consolidated Statement of Cash Flows
For the Three Months Ended December 31, 2010
| | | | | | | | | | |
(Unaudited) | | ORIGINAL | | ADJUSTMENTS | | RESTATED | |
Supplemental disclosures of cash flow information: | | | | | | | | | | |
| | | | | | | | | | |
Cash paid during the period for: | | | | | | | | | | |
| | | | | | | | | | |
Interest | | $ | 93,922 | | | - | | $ | 93,922 | |
| | | | | | | | | | |
Supplemental schedule of non-cash investing and financing | | | | | | | | | | |
| | | | | | | | | | |
Treasury stock purchased included in accrued expense | | $ | - | | | 128,744 | | $ | 128,744 | |
| | | | | | | | | | |
Issuance of common stock and options for payment of compensation | | $ | 20,116 | | | (20,116 | ) | $ | - | |
| | | | | | | | | | |
Disposal of fixed assets | | $ | 53,264 | | | - | | $ | 53,264 | |
16
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Note about Forward Looking Statements.
Certain matters discussed in this Form 10-Q/A10-Q are "forward-looking statements," and the“forward-looking statements.” The Company intends these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and is including this statement for purposes of those safe harbor provisions.1995. These forward-looking statements can generally be identified as such because they include phrases such as the Company "expects," "believes," "anticipates"“expects,” “believes,” “anticipates” or other words of similar meaning. Similarly, statements that describe the Company'sCompany’s future plans, objectives or goals are also forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties which could cause actual results or outcomes to differ materially from those currently anticipated. Factors that could affect actual results or outcomes include the matters described under the caption "Risk Factors"“Risk Factors” in Item 1A of Form 10-K/A10-K for the year ended September 30, 2010.2011. Shareholders, potential investors and other readers are urged to consider these factors in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included herein are only made as of the date of this filing. The Company assumes no obligation and disclaims any obligation, to update such forward-looking statements to reflect subsequent events or circumstances.
Executive-Level Overview
This discussion relates to Cycle Country Accessories Corp. and its consolidated subsidiary (the "Company"“Company”) and should be read in conjunction with our consolidated financial statements as of September 30, 2010,2011, and the fiscal year then ended, and Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations, both contained in our Annual Report on Form 10-K/A10-K for the fiscal year ended September 30, 2010.2011.
We intend for this discussion to provide the reader with information that will assist in understanding our condensed consolidated financial statements, the changes in certain key items in those condensed consolidated financial statements from period to period, and the primary factors that accounted for those changes, as well as how certain accounting principles affect our condensed consolidated financial statements. The discussion also provides information about the financial results of the various segments of our business to provide a better understanding of how those segments and their results affect the financial condition and results of operations of the Company as a whole. To the extent that our analysis contains statements that are not of a historical nature, these statements are forward-looking statements, which involve risks and uncertainties.
The economic environment is showing signs of improvement but continues to be a challenge.and one turnaround plan has shown strong signs as well. The Company has remained focused on strategy and working hard to execute its business plans. The response to those challenges has taken time to show its effect. The Company is positioned to weather the current economic environment and to take advantage of any improvements. Our new product initiatives are providing us with new products that we anticipate will enhance our competitive position as the dominant player in the powersports accessories market. The internal reorganization and initiatives started by the new management team are expected to eliminatein early 2011 have eliminated unprofitable and or unnecessary aspects of the business, allowingwhich allowed us to focus our efforts on our core customers receiving core products from our core people.
Looking ahead to the balance of fiscal 2011,2012, management is cautiously projecting a slight rebound in revenues and margins as new products and effective marketing initiatives continue to be the focus of management and the entire Company. The Company anticipates gross profit margins will be within the range of at least 25% of revenue.revenue by the end of the fiscal year.
Management has, and will continue to seek out and implement production efficiencies and cost reduction initiatives wherever possible. We project selling, general and administrative expenses duringby the remainderend of fiscal 20112012 to be approximately 25% of revenuecontinue decline as we continue our focus on cost reduction initiatives and focusing on internal efficiencies, all while maintaining a responsive and courteous customer service standard. Our goals for showing greater improvement are likely to not be achieved until the end of the fiscal year due to efficiencies lost during the transition between old product lines and expansion of our contract manufacturing.
17
Overview for the Three Months Ended December 31, 2011 and 2010 and 2009 (Unaudited)(Unaudited)
The following is a summary of the results of operations for the three months ended December 31, 2010 (Restated)2011 and December 31, 20092010 (Unaudited):
| | | |
| | Three Months Ended December 31, | |
| | 2010 (Restated) | | 2009 | |
| | (Unaudited) | | (Unaudited) | |
Total revenue | | $ | 4,237,306 | | | 100.00 | % | $ | 4,153,248 | | | 100.00 | % |
| | | | | | | | | | | | | |
Cost of goods sold | | | 3,470,728 | | | 81.91 | % | | 2,895,712 | | | 69.72 | % |
| | | | | | | | | | | | | |
Gross profit | | | 766,578 | | | 18.09 | % | | 1,257,536 | | | 30.28 | % |
| | | | | | | | | | | | | |
Selling, general, and administrative expenses | | | (1,149,984 | ) | | (27.14 | )% | | (857,584 | ) | | (20.65 | )% |
| | | | | | | | | | | | | |
Profit (loss) from operations | | | (383,406 | ) | | (9.05 | )% | | 399,952 | | | 9.63 | % |
| | | | | | | | | | | | | |
Other expense | | | (71,674 | ) | | (1.69 | )% | | (47,898 | ) | | (1.15 | )% |
| | | | | | | | | | | | | |
Profit (loss) before benefit from income taxes | | | (455,080 | ) | | (10.74 | )% | | 352,054 | | | 8.48 | % |
| | | | | | | | | | | | | |
Income tax (expense) benefit | | | 146,001 | | | 3.45 | % | | (124,777 | ) | | (3.00 | )% |
| | | | | | | | | | | | | |
Net profit (loss) | | $ | (309,079 | ) | | (7.29 | )% | $ | 227,277 | | | 5.48 | % |
| | For the three months ended December 31, 2011 (Unaudited) | | | For the three months ended December 31, 2010 (Unaudited) | |
| | Continuing Operations | | | Discontinued Operations | | | Total | | | Continuing Operations | | | Discontinued Operations | | | Total | |
STATEMENT OF OPERATIONS | | | | | | | | | | | | | | | | |
Sales | | $ | 571,803 | | | $ | 5,546,597 | | | $ | 6,118,400 | | | $ | 693,049 | | | $ | 3,544,257 | | | $ | 4,237,306 | |
Cost of goods sold | | | 492,991 | | | | 3,641,533 | | | | 4,134,524 | | | | 657,664 | | | | 2,813,064 | | | | 3,470,728 | |
Gross profit | | | 78,812 | | | | 1,905,064 | | | | 1,983,876 | | | | 35,385 | | | | 731,193 | | | | 766,578 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Sales, general & admin | | | 113,133 | | | | 1,277,209 | | | | 1,390,342 | | | | 183,792 | | | | 943,050 | | | | 1,126,842 | |
Income (Loss) from operations | | | (34,321 | ) | | | 627,855 | | | | 593,534 | | | | (148,407 | ) | | | (211,857 | ) | | | (360,264 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Other income (expense) | | | (10,960 | ) | | | 2,115,531 | | | | 2,104,571 | | | | (14,812 | ) | | | (80,004 | ) | | | (94,816 | ) |
Net income (loss) pre tax | | | (45,281 | ) | | | 2,743,386 | | | | 2,698,105 | | | | (163,219 | ) | | | (291,861 | ) | | | (455,080 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | (45,281 | ) | | $ | 1,708,386 | | | $ | 1,663,105 | | | $ | (102,419 | ) | | $ | (167,760 | ) | | $ | (309,080 | ) |
For the three months ended December 31, 2010,2011, the Company reported a net lossprofit of $309,079 (restated),$1,663,105, or 7.29%27.18% of total revenue (restated).revenue. This compares to the three months ending December 31, 20092010 during which the Company recorded net incomeloss of $227,277$309,080 or 5.48%(7.3%) of total revenue. RevenuesTotal revenues for the period increased approximately 2.02% (restated)30.74% over the same period in fiscal year 2010. Revenue increasedContinuing operating sales decreased for the Cycle Country ATV Accessories segment and the Perf-Form segment by approximately 5.13% (restated) and 31.04% respectively. Sales in the Plazco segment decreased during the three monthsmonth period ended December 31, 2010 approximately 3.20% (restated)2011 to $571,803 as compared to the three monthsmonth period ended December 31, 2009. For2010 with continuing operating sales of $693,049. This decrease was due to the same period,gap between transition out of discontinued activities and the transition in of new activities. Other income increased due to the $2,136,473 gain on sale of the ATV Accessories segment. Continuing operating sales were down due to segment declining projects below profit goals. Furthermore, profitability of operating segment was down due to efficiencies temporarily lost in the Imdyne segment decreased approximately 11.02%.transition between discontinued operations and expansion of operating division.
18
BUSINESS SEGMENTS
The following is a summary of the results of operations by segment for the three months ended December 31, 20102011 and December 31, 20092010 (Unaudited):
| | | | | | | |
| | (Unaudited) For the three months ended December 31, | | | | | |
| | 2010 (Restated) | | 2009 | | Increase (Decrease) $ | | Increase (Decrease) % | |
Net revenue by segment | | | | | | | | | | | | | |
CCAC ATV | | $ | 3,423,350 | | $ | 3,256,158 | | $ | 167,192 | | | 5.13 | % |
Plazco | | | 73,455 | | | 75,886 | | | (2,431 | ) | | (3.20 | )% |
Perf-Form | | | 28,670 | | | 21,880 | | | 6,790 | | | 31.04 | % |
Imdyne | | | 689,376 | | | 774,757 | | | (85,381 | ) | | (11.02 | )% |
| | | | | | | | | | | | | |
Net revenue by segment | | | 4,214,851 | | | 4,128,681 | | | 86,170 | | | 2.09 | % |
| | | | | | | | | | | | | |
Freight income | | | 22,455 | | | 24,567 | | | (2,112 | ) | | (8.60 | )% |
| | | | | | | | | | | | | |
Total combined revenue | | | 4,237,306 | | | 4,153,248 | | | 84,058 | | | 2.02 | % |
| | | | | | | | | | | | | |
Gross profit (loss) by segment | | | | | | | | | | | | | |
CCAC ATV | | | 734,613 | | | 1,218,701 | | | (484,088 | ) | | (39.72 | )% |
Plazco | | | (4,606 | ) | | (18,847 | ) | | 14,241 | | | 75.56 | % |
Perf-Form | | | (5,896 | ) | | (14,880 | ) | | 8,984 | | | 60.38 | % |
Imdyne | | | 42,467 | | | 72,562 | | | (30,095 | ) | | (41.47 | )% |
| | | | | | | | | | | | | |
Total gross profit | | | 766,578 | | | 1,257,536 | | | (490,958 | ) | | (39.04 | )% |
| | | | | | | | | | | | | |
Sales, general and administrative | | | (1,149,984 | ) | | (857,584 | ) | | (292,400 | ) | | (34.10 | )% |
Interest income and expense | | | (98,749 | ) | | (82,386 | ) | | (16,363 | ) | | (19.86 | )% |
Other income and expense | | | 27,075 | | | 34,488 | | | (7,413 | ) | | (21.49 | )% |
Income tax (expense) benefit | | | 146,001 | | | (124,777 | ) | | 270,778 | | | 217.01 | % |
| | | | | | | | | | | | | |
Net income (loss) | | $ | (309,079 | ) | $ | 227,277 | | $ | (536,356 | ) | | (235.99 | )% |
| | For the three months ended December 31, 2011 (Unaudited) | | | For the three months ended December 31, 2010 (Unaudited) | |
| | Continuing Operations | | | Discontinued Operations | | | Total | | | Continuing Operations | | | Discontinued Operations | | | Total | |
| | | | | | | | | | | | | | | | | | |
Total revenue by segment | | | | | | | | | | | | | | | | | | |
CCAC ATV | | $ | - | | | $ | 5,486,257 | | | $ | 5,486,257 | | | $ | - | | | $ | 3,441,588 | | | $ | 3,441,588 | |
Plazco | | | - | | | | 60,280 | | | | 60,280 | | | | - | | | | 73,846 | | | | 73,846 | |
Perf-Form | | | - | | | | 60 | | | | 60 | | | | - | | | | 28,823 | | | | 28,823 | |
Imdyne | | | 571,803 | | | | - | | | | 571,803 | | | | 693,049 | | | | - | | | | 693,049 | |
Total revenue by segment | | $ | 571,803 | | | $ | 5,546,597 | | | $ | 6,118,400 | | | $ | 693,049 | | | $ | 3,544,257 | | | $ | 4,237,306 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Gross profit (loss) by segment | | | | | | | | | | | | | | | | | | | | | |
CCAC ATV | | $ | - | | | $ | 1,879,955 | | | $ | 1,879,955 | | | $ | - | | | $ | 728,485 | | | $ | 728,485 | |
Plazco | | | - | | | | 24,893 | | | | 24,893 | | | | - | | | | 10,430 | | | | 10,430 | |
Perf-Form | | | - | | | | 216 | | | | 216 | | | | - | | | | (7,722 | ) | | | (7,722 | ) |
Imdyne | | | 78,812 | | | | - | | | | 78,812 | | | | 35,385 | | | | - | | | | 35,385 | |
Gross profit | | | 78,812 | | | | 1,905,064 | | | | 1,983,876 | | | | 35,385 | | | | 731,193 | | | | 766,578 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Sales, general & admin | | | 113,133 | | | | 1,277,209 | | | | 1,390,342 | | | | 183,792 | | | | 943,050 | | | | 1,126,842 | |
Interest expense, net | | | 10,960 | | | | 106,320 | | | | 117,280 | | | | 14,812 | | | | 83,937 | | | | 98,749 | |
(Gain) loss on sale of assets | | | - | | | | (2,221,851 | ) | | | (2,221,851 | ) | | | - | | | | 23,142 | | | | 23,142 | |
Other (inc)/exp, net | | | - | | | | - | | | | - | | | | - | | | | (27,075 | ) | | | (27,075 | ) |
Income tax expense (benefit) | | | - | | | | 1,035,000 | | | | 1,035,000 | | | | (21,899 | ) | | | (124,101 | ) | | | (146,000 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | (45,281 | ) | | $ | 1,708,386 | | | $ | 1,663,105 | | | $ | (141,320 | ) | | $ | (167,760 | ) | | $ | (309,080 | ) |
As more fully described above in Note 7 to the condensed consolidated financial statements included elsewhere in this filing,of December 31, 2011, the Company operates fourone reportable business segments.segment, as compared to four segments at December 31, 2010. Two segments were sold in the three month period ending December 31, 2011 and one is classified as discontinued operations.
Cycle Country ATV Accessories is vertically integrated and utilizes a two-step distribution method. We are vertically integrated in our Plazco segment and utilize both direct and two-step distribution methods. Perf-Form utilizes both direct and two-step distribution methods, and our contract manufacturing segment, Imdyne, deals directly with other original equipment manufacturers (OEMs) and businesses in various industries.
Revenue
Revenue increased approximately 5.13%44.39% or $167,000 (restated)$,1881,904 for the three months ended December 31, 20102011 as compared to the three months ended December 31, 20092010 in the Cycle Country ATV Accessories segment. SalesThis increase was due to one customer also increased approximately $130,000 during the same period. This segment benefited from increased snow fall throughout North America this winter.successful in sale and production prior to the close of the sale on the segment.
Net revenue for the Plazco segment decreased slightly by approximately 3.20%18.37% or $2,000 (restated)$13,566 for the three months ended December 31, 20102011 as compared to the three months ended December 31, 2009. No single customer or product line contributed2010. This decrease was due to this change.the continual reduction of effort in a discontinuing operation.
Revenue for the Perf-Form segment increased todecreased approximately $29,000 (restated)$28,763 for the three months ended December 31, 20102011 from approximately $22,000the three months ended December 31, 2010. This decrease was due to the sale of the segment. See note 8 for additional information on sale.
Other income increased to $2,221,851 for the three months ended December 31, 2009.2011 compared to a loss of $23,142 for the three months ended December 31, 2010. This increase is due, in part,can be attributed to sales to one customer which increased approximately $7,000 due to an improvement in on-time deliveries.the gain on sale of the assets of these discontinued segments on December 31, 2011, of $2,143,979.
19
The Imdyne segment reported sales of approximately $689,000$571,803 and $775,000$693,049 for the three months ended December 31, 20102011 and December 31, 2009,2010, respectively. Management made a decisionThis decrease was due to discontinue processing orders for customers that were not profitable for the Company which resulted in a decrease in salesstrategic reduction of low profit customers. Profitability results from those customersthis change are expected by fourth quarter of approximately $200,000. However, sales increased for other, more profitable, existing customers, and new customer lines were added to replace those lost, resulting in a net decrease for the period of approximately $86,000.fiscal 2012.
Cost of Goods Sold
The following table details components of direct costs of goods sold by segment as a percentage of sales:
| | | | | |
| | For the Three Months Ended December 31, 2010 (Restated) (Unaudited) | | For the Three Months Ended December 31, 2009 (Unaudited) | |
| | CCAC | | Plazco | | Perf-Form | | Imdyne | | CCAC | | Plazco | | Perf-Form | | Imdyne | |
| | % of Net Sales | | % of Net Sales | |
Materials | | | 51.52 | % | | 27.11 | % | | 36.99 | % | | 55.25 | % | | 43.13 | % | | 22.01 | % | | 34.14 | % | | 57.10 | % |
Direct labor | | | 4.69 | % | | 6.74 | % | | 18.68 | % | | 6.63 | % | | 3.37 | % | | 8.73 | % | | 14.64 | % | | 6.45 | % |
Mfg variance | | | 0.44 | % | | 7.57 | % | | 3.05 | % | | 4.02 | % | | 0.45 | % | | 5.76 | % | | 1.75 | % | | 1.23 | % |
Subcontract | | | 0.99 | % | | 11.63 | % | | 7.15 | % | | 1.18 | % | | 0.71 | % | | 10.50 | % | | 7.39 | % | | 0.84 | % |
Royalty | | | 0.11 | % | | 1.69 | % | | 0.00 | % | | 0.00 | % | | 0.20 | % | | 0.42 | % | | 0.00 | % | | 0.00 | % |
Burden | | | 14.19 | % | | 25.73 | % | | 51.32 | % | | 19.65 | % | | 10.21 | % | | 23.74 | % | | 40.08 | % | | 17.81 | % |
Mfg overhead | | | 7.13 | % | | 26.41 | % | | 4.16 | % | | 7.63 | % | | 5.03 | % | | 54.97 | % | | 72.26 | % | | 7.97 | % |
| | | 79.07 | % | | 106.88 | % | | 121.35 | % | | 94.36 | % | | 63.10 | % | | 126.13 | % | | 170.26 | % | | 91.40 | % |
| | For the three months ended December 31, | |
| | 2011 | | | 2010 | |
| | Imdyne | | | Imdyne | |
Materials | | | 58.11 | % | | | 50.86 | % |
Direct labor | | | 7.20 | % | | | 6.59 | % |
Applied overhead | | | 17.79 | % | | | 19.55 | % |
Subcontract | | | 0.42 | % | | | 1.17 | % |
Mfg variance | | | 5.09 | % | | | 3.99 | % |
Unapplied overhead | | | -3.84 | % | | | 8.21 | % |
Other | | | 1.46 | % | | | 4.52 | % |
Total costs of goods sold | | | 86.22 | % | | | 94.89 | % |
| | For the three months ended December 31, 2011 | |
| | ATV | | | Plazco | | | Perf-Form | | | Total Disc Ops | |
Materials | | | 50.88 | % | | | 12.43 | % | | | 4933.33 | % | | | 50.52 | % |
Direct labor | | | 4.50 | % | | | 4.88 | % | | | 520.00 | % | | | 4.51 | % |
Applied overhead | | | 12.47 | % | | | 24.30 | % | | | 1480.00 | % | | | 12.61 | % |
Subcontract | | | 0.25 | % | | | 9.84 | % | | | 175.00 | % | | | 0.35 | % |
Mfg variance | | | 0.31 | % | | | 8.00 | % | | | 0.00 | % | | | 0.40 | % |
Unapplied overhead | | | -3.14 | % | | | -2.37 | % | | | -326.67 | % | | | -3.13 | % |
Other | | | 0.45 | % | | | 1.62 | % | | | -7041.67 | % | | | 0.39 | % |
Total costs of goods sold | | | 65.73 | % | | | 58.70 | % | | | -260.00 | % | | | 65.65 | % |
| | For the three months ended December 31, 2010 | |
| | ATV | | | Plazco | | | Perf-Form | | | Total Disc Ops | |
Materials | | | 49.73 | % | | | 25.68 | % | | | 35.14 | % | | | 49.11 | % |
Direct labor | | | 4.66 | % | | | 6.70 | % | | | 18.59 | % | | | 4.82 | % |
Applied overhead | | | 14.12 | % | | | 25.59 | % | | | 51.06 | % | | | 14.66 | % |
Subcontract | | | 0.99 | % | | | 11.57 | % | | | 7.11 | % | | | 1.26 | % |
Mfg variance | | | 0.43 | % | | | 7.53 | % | | | 3.03 | % | | | 0.60 | % |
Unapplied overhead | | | 7.30 | % | | | 7.31 | % | | | 11.75 | % | | | 7.34 | % |
Other | | | 1.60 | % | | | 1.49 | % | | | 0.11 | % | | | 1.59 | % |
Total costs of goods sold | | | 78.83 | % | | | 85.88 | % | | | 126.79 | % | | | 79.37 | % |
The cost of materials as a percentage of revenue increased for each segment excepttotal discontinued operations and decreased for Imdyne. The cost of material for the Cycle Country ATV Accessories segment increased from approximately 43.13%49.7% for the three months ended December 31, 20092010 to approximately 51.52% (restated)50.9% for the three months ended December 31, 2010. Steel prices can be very volatile. Average steel prices increased approximately 19.12% for the three months ended September 30, 2010 as compared to the three months ended September 30, 2009 which would be the time we would purchase raw materials for production during the three months ended December 31, 2010 and December 30, 2009, respectively.2011. The Plazco segment also saw increasesdecreased in material costs to 27.11%12.4% of net revenue for the three months ended December 31, 20102011 from 22.01%25.7% for the three months ended December 31, 2009. This is due, in part,2010.
Materials as a percentage of sales for Imdyne also increased 7.2% for the three months ended December 31, 2011, compared to increased costs for plastics in general.the three months ended December 31, 2010.
Direct labor as a percentage of sales increased for allImdyne and Perf-Form segments. These increases are attributed to lost efficiencies during the transitional period. The other two segments except Plazco. Effective October 1, 2010, the Company evaluated and adjusted its labor allocation rates for every segment. Direct labor increased approximately $46,000 for all segments combined which iswere not as impacted due in part, to additional labor expenses allocated.
Burden expense for all segments combined increased approximately $158,000. Effective October 1, 2010, the Company evaluated and adjusted its burden calculation rates. As a result, manufacturing overhead applied to burden fortheir sale in the three months ended December 31, 2010 was approximately $886,000 compared to approximately $778,000 applied for the three months ended December 31, 2009.2011.
Manufacturing overhead as a percentage of sales increased for the CCACPerf-Form segment but decreased for the other segments. Total manufacturing overhead increasedapplied decreased as a percentage of sales by 2.36% approximately $34,000 after burden allocation for the three months ended December 31, 20102011 as compared to the three months ended December 31, 2009.2010.
Expenses
Our selling, general and administrative expenses were approximately $1,150,000 (restated)$1,390,000 and $857,000$1,130,000 for the three months ended December 31, 20102011 and December 30, 2009,2010, respectively.
The significant changes in expenses for the three months ended December 31, 20102011 as compared to the three months ended December 31, 20092010 were:
· | | |
| ■ | WagesSeverance expense increased approximately $120,000 (restated)$150,000 due to increasesterminations and related costs incurred in wages for officers, engineering and sales professionals. Effective July 1, 2010, the Company entered into an employment agreement with Robert Davis, its Chief Financial Officer and Chief Operating Officer. Priorthree months ended December 31 2011, compared to that time, Mr. Davis had been the Interim Chief Financial Officer and was compensated as a consultant. Additionally, officer restricted stock based compensation expense was approximately $48,293 (restated) for the three months ended December 31, 2010. |
20
· | Stock compensation expense increased, as all previously unrecognized stock comp became recognizable at December 31, 2011 upon the sale of the ATV Accessories segment, as this was a vesting triggering event in the stock compensation agreements. |
| | |
| | Promotion expense decreased approximately $19,000 (restated) on costs associated with the timing of awards paid to distributors for increasing distribution channels. |
| | |
| · | Commission expense increased approximately $21,000$190,000 due to the change in the management compensation structure focusing on increased sales.variable pay based on performance goals for the three months ended December 31, 2011 compared to the three months ended December 31, 2010. |
| | |
| · | Professional fees increased approximately $105,000$60,000 due, in part, to fees associated with SEC filing requirements, and legal and audit expenses involved with the departure of the former Chief Executive Officer. |
| | |
| | The lossrestatements filed in April 2012 that were worked on disposal of assets increased approximately $44,000 due to the disposal of assets no longer utilizedextensively in the Company.three months ended December 31, 2011. |
Liquidity and Capital Resources
Overview
Cash and cash equivalents were $133,821$84,845 as of December 31, 20102011 compared to $28,939$25,185 as of September 30, 2010.2011. Until required for operations, our policy is to invest any excess cash reserves in bank deposits, money market funds, and certificates of deposit after first repaying any built up balance on our bank line of credit.
Working Capital
Net working capital deficit was $495,157 (restated)$861,295 as of December 31, 20102011 compared to $985,596$3,608,286 as of September 30, 2010.2011. The working capital ratio was 1.09 (restated).86 and 1.18.53 as of December 31, 20102011 and September 30, 2010,2011, respectively.
The following table summarizes the Company'sCompany’s sources and uses of cash and cash equivalents for the periods indicated:three months ended December 31:
| | | |
| | Three Months Ended December 31, | |
| | 2010 | | 2009 | |
| | (Unaudited) | | (Unaudited) | |
Net cash provided by operating activities | | $ | 1,125,905 | | $ | 535,271 | |
Net cash used for investing activities | | | (26,376 | ) | | (52,651 | ) |
Net cash used for financing activities | | | (994,647 | ) | | (469,351 | ) |
| | $ | 104,882 | | $ | 13,269 | |
| | 2011 (Unaudited) | | | 2010 (Unaudited) | |
| | | | | | |
Net cash provided by operating activities of continuing operations | | $ | 857,036 | | | $ | 1,118,561 | |
Net cash used for investing activities of continuing operations | | | - | | | | (28,744 | ) |
Net cash used for financing activities of continuing operations | | | (363,202 | ) | | | (994,647 | ) |
Net cash provided by (used for) discontinued operations | | | (434,174 | ) | | | 9,712 | |
| | $ | 59,660 | | | $ | 104,882 | |
The Company'sCompany’s principal uses of cash are to pay operating expenses, acquire necessary equipment and to make debt service payments. During the three months ended December 31, 2010,2011, the Company used cash to make principal payments of approximately $223,000$330,000 against long-term debt and paid down approximately $506,000$2,995,000 on its lines of credit.
Capital Resources
Management believes that existing cash balances, cash flow to be generated from operating activities, and income tax refunds receivable and available borrowing capacity under its line of credit agreement will be sufficient to fund normal operations and capital expenditure requirements for the next twelve months. The Company is not considering any major capital investment for at least the next three months.
As of December 31, 20102011 and as of September 30, 2010,2011, the Company was in violation of its current ratio and term debt coverage ratio covenants in its loan agreements with its lender. As of January 17, 2011,March 20, 2012, the Company and its lender entered into the Seventh Amendment to thea Secured Credit Agreement and Waiver ("Amendment 7").Waiver. Under the terms of Amendment 7,this Agreement, the lender agreed to waive the noncompliance by the Company with the required ratio of current assets to current liabilities as of September 30, 2010, December 31, 20102011 and the Company'sCompany’s anticipated noncompliance with the required ratio of current assets to current liabilities through October 1, 20112012 and further, to waive the Company'sCompany’s noncompliance with the Term Debt Coverage Ratio as of September 30, 2010,2011, December 31, 2010,2011, and the Company'sCompany’s anticipated noncompliance with the Term Debt Coverage Ratio through October 1, 2011.2012.
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As part of Amendment 7, the Company has agreed to engage an advisor to assist in obtaining replacement financing to refinance Line of Credit One and Line of Credit Three with one or more replacement lenders. Further, the Company has agreed to obtain a commitment or commitments from one or more replacement lenders to fully take out and refinance all Lines of Credit by March 31, 2011.
Management expects to be able to comply with the requirements of Amendment 7the Secured Credit Agreement and has begun the process to secure a commitment for funding from an asset-based lender. Management believes this is an appropriate financing vehicle for its operations and expects to have a positive impact on the Company'sCompany’s working capital through fiscal year 2011.2012. Further, this funding will help to continue the stabilization and turnaround of the Company while facilitating continued growth. The failure to obtain a replacement lender by March 31, 2011June 30, 2012 could result in the lender foreclosing on its security interest resulting in a significant disruption to the Company'sCompany’s operations.
Our continued existence is dependent upon or ability to generate cash and to market and sell our products successfully. However, there are no assurances whatsoever that we will be able to borrow further funds from our lender or that we will increase our revenues and/or control our expenses to a level sufficient to provide positive cash flow.
Critical Accounting Policies and Estimates
The Company's discussion and analysispreparation of its financial condition and results of operations are based upon its condensed consolidatedour financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statementsAmerica, requires the Companyus to make judgments and estimates that may have a significant impact upon the portrayal of our financial condition and results of operations. We believe that of our significant accounting policies, the following require estimates and assumptions that require complex, subjective judgments by management that affectcan materially impact the reported amountsportrayal of assets, liabilities, revenuesour financial condition and expenses,results of operations: useful lives of fixed assets; impairment of long-lived assets; valuation of and related disclosure of contingentdeferral tax assets, and liabilities. On an on-going basis, the Company evaluates the estimates including those related to bad debts, inventory valuationsinventory; and the recoverability of fraud expense. The Company bases its estimates on historical experiences and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
Allowance for Doubtful Accounts
The Company recognizes revenue when title and risk of ownership have passed to the buyer. Allowancesallowance for doubtful accountsaccounts. These significant accounting principles are estimated basedmore fully described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” in our Annual Report on estimates of losses related to customer accounts receivable balances. Estimates are developed by using standard quantitative measures based on historical losses, adjusting for current economic conditions and, in some cases, evaluating specific customer accounts for risk of loss. The establishment of reserves requires the use of judgment and assumptions regarding the potential for losses on receivable balances. Though the Company considers these balances adequate and proper, changes in economic conditions in specific markets in which the Company operates and any specific customer collection issues the Company identifies could have a favorable or unfavorable effect on required reserve balances.
Inventories
Inventories are stated at the lower of cost or market using the weighted average method. Cost includes materials, labor, and manufacturing overhead related to the purchase and production of inventories. Management regularly reviews inventory quantities on hand, future product demand and the estimated utility of inventory. If the review indicates a reduction in utility below carrying value, management would reduce the Company's inventory to a new cost basis through a charge to cost of goods sold.
Deferred Taxes
The Company records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. While the Company has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the needForm 10-K for the valuation allowance, in the event the Company were to determine that it would not be able to realize all or part of its net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to income in the period such determination was made. Likewise, should the Company determine that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax assets would increase income in the period such determination was made.year ended September 30, 2011.
Stock-Based Compensation
The Company accounts for stock-based compensation on a fair value basis. The estimated grant date fair value of each stock-based award is recognized in expense over the requisite service period (generally the vesting period). Non-vested stock awards are recorded as compensation expense over the requisite service periods based on the market value on the date of grant.
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ITEM 3. Quantitative and Qualitative Disclosure About Market Risk
As a smaller reporting company, the Company is not required to provide this information.
ITEM 4. Controls and Procedures
Disclosure Controls and Procedures
Based on management'smanagement’s evaluation (with the participation of our former Chief Executive Officer and Chief Financial Officer) as of the end of the period covered by this report, our former Chief Executive Officer and Chief Financial Officer have concluded that the Company'sCompany’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the ExchangedExchange Act), are ineffective, due to the material weakness in our internal control over financial reporting as discussed below, to provide reasonable assurance that the information to be disclosed by the Company in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and is accumulated and communicated to management, including our principal executive officer and principal financial officer as appropriate to allow timely decisions regarding required disclosures.
Subsequent to the evaluation made in connection with the Original Filing, and in connection with the restatement and filing of priorour recent 2010 Form 10-K/A and 2011 Form 10-Q/A’s for the first three quarters, our management, including our current Chief Executive Officer and Chief Financial Officer, re-evaluatedevaluated the effectiveness of the design and operation of our disclosure controls and procedures and concluded that, because of the material weakness in our internal control over financial reporting of the Company'sCompany’s stock-based compensation plans and customer incentive programs, our disclosure controls and procedures continued to be ineffective as of December 31, 2010. Notwithstanding the material weaknesses discussed below, our management, including our current Chief Executive Officer and Chief Financial Officer, has concluded that the consolidated financial statements included in the prior 10-K/A present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States.2011.
Changes in Internal Control over Financial Reporting
Our management, including our principal executive officer and principal financial officer, have reviewed and evaluated any changes in our internal control over financial reporting that occurred as of December 31, 2010.2011. Our management is in the process of addressing the above material weakness as updated above, and is utilizinghas utilized the services of an outside accounting firm to assist with this process. Additionally, on April 1, 2012, we hired a VP of Finance and Administration. We believe this will help remediate the material weakness by focusing additional attention and resources in our internal accounting functions. However, the material weakness will not be considered remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
Part II - Other Information
ITEM 1. Legal Proceedings
Please refer to the disclosure set forth in Note 21 to our Condensed Consolidated Financial Statements included in this report.
Please refer to the discussion of risk factors included in the Company'sCompany’s annual report on Form 10-K/A10-K for the fiscal year ended September 30, 2010.2011.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Mine Safety Disclosures
None.
ITEM 5. Other Information
None.
(31.1) Certification of Principal Executive Officer pursuant to Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
(31.2) Certification of Principal Financial Officer pursuant to Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
(32.1) Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on April 16,May 15, 2012
| | |
| CYCLE COUNTRY ACCESSORIES CORP. | |
| | | | |
| | By: | /s/ Robert Davis | |
| | | Robert Davis | |
| | | Chief Executive Officer | |
In accordance with the requirements of the Exchange Act, this report has been signed by the following persons on behalf of the registrant and in the capacities indicated.
Name and Signature | | Title | | Date |
| | | | |
/s/ Robert Davis | | Chief Financial Officer, Chief Operating Officer, Chief Executive Officer, Treasurer, Secretary and Director | | May 15, 2012 |
Robert Davis | | (principal executive, financial and accounting officer) | | |
| | | | |