QUARTERLY REPORT FOR CYCLE COUNTRY ACCESSORIES CORP.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2009
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number: 001-31715
Cycle Country Accessories Corp.
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(Exact name of registrant as specified in its charter)
Nevada 42-1523809
--------------------------------- -------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1701 38th Ave W, Spencer, Iowa 51301
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(Address of principal executive offices)
(712) 262-4191
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(Registrant's telephone number)
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(Former name, former address and formal fiscal year, if changed since
last report)
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 [ ]
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 [X] No [ ]
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 accelerated filer" and
"accelerated filer" and "smaller reporting company" in Rule 12b-2 of
the Exchange Act.
(Check one):
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] 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 [ ] No [X]
The number of shares of the registrant's common stock, par value
$0.0001 per share, outstanding as of March 31, 2009 was 5,327,143 and
there were 309 stockholders of record.
Cycle Country Accessories Corp.
Index to Form 10-Q
Part I Financial Information Page
----
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheet - March 31, 2009 2
Condensed Consolidated Statements of Income - Three Months
Ended March 31, 2009 and 2008 3
Condensed Consolidated Statements of Income - Six Months
Ended March 31, 2009 and 2008 4
Condensed Consolidated Statements of Cash Flows - Six Months
Ended March 31, 2009 and 2008 5
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................13
Item 3. Quantitative and Qualitative Disclosures About Market
Risk.....25
Item 4T. Controls and Procedures....................................25
Part II Other Information
Item 1. Legal Proceedings..........................................26
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds............................................26
Item 3. Defaults Upon Senior Securities............................26
Item 4. Submission of Matters to a Vote of Security Holders........26
Item 5. Other Information..........................................26
Item 6. Exhibits ..................................................26
Signatures..........................................................27
Part I Financial Information
Item 1. Financial Statements
Cycle Country Accessories Corp. and Subsidiaries
Condensed Consolidated Balance Sheet
March 31, 2009
(Unaudited)
Assets
Current Assets:
Cash and cash equivalents $ 477,571
Accounts receivable, net 362,393
Inventories 4,609,729
Income taxes receivable 204,490
Deferred income taxes 548,933
Prepaid expenses and other 168,288
--------------
Total current assets 6,371,404
--------------
Property, plant, and equipment, net 11,132,214
Intangible assets, net 184,491
Goodwill 4,890,146
Other assets 44,375
--------------
Total assets $ 22,622,630
==============
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 194,695
Accrued interest payable 5,220
Accrued expenses 510,608
Current portion of bank notes payable 848,095
Current portion of deferred gain 166,524
--------------
Total current liabilities 1,725,142
--------------
Long-Term Liabilities:
Bank notes payable, less current portion 3,535,246
Deferred gain, less current portion 111,016
Deferred income taxes 2,558,002
--------------
Total liabilities 7,929,406
--------------
Stockholders' Equity:
Preferred stock, $.0001 par value; 20,000,000 shares
authorized; no shares issued or outstanding -
Common stock, $.0001 par value; 100,000,000 shares
authorized; 5,327,143 shares issued and
5,327,143 outstanding 748
Additional paid-in capital 14,789,832
Retained earnings 3,054,280
--------------
17,844,860
Treasury stock, at cost, 2,157,980 shares (3,151,636)
--------------
Total stockholders' equity 14,693,224
--------------
Total liabilities and stockholders' equity $ 22,622,630
==============
See accompanying notes to the condensed consolidated financial
statements.
Page 2
Cycle Country Accessories Corp. and Subsidiaries
Condensed Consolidated Statements of Income
Three Months Ended March 31,
2009 2008
-------------- --------------
(Unaudited) (Unaudited)
Revenues:
Net sales $ 1,583,236 $ 3,891,738
Freight income 28,016 19,946
-------------- --------------
Total revenues 1,611,252 3,911,684
-------------- --------------
Cost of goods sold (1,692,352) (2,374,966)
-------------- --------------
Gross profit (81,100) 1,536,718
-------------- --------------
Selling, general, and administrative
expenses (936,936) (1,162,675)
-------------- --------------
Income (Loss) from operations (1,018,036) 374,043
-------------- --------------
Other Income (Expense):
Interest expense (101,634) (80,111)
Interest income 829 7,686
Gain on sale of assets 41,498 42,157
Miscellaneous 3,092 34,189
-------------- --------------
Total other income (expense) (56,216) 3,921
-------------- --------------
Income (Loss) before provision (benefit)
for income taxes (1,074,252) 377,964
-------------- --------------
Provision (benefit) for income taxes 324,692 (146,064)
-------------- --------------
Net income (loss) (749,560) 231,900
============== ==============
Weighted average shares of common
stock outstanding:
Basic 5,327,143 6,006,415
============== ==============
Diluted 5,327,143 6,006,415
============== ==============
Earnings per common share:
Basic $ (0.14) $ 0.04
============== ==============
Diluted $ (0.14) $ 0.04
============== ==============
Cycle Country Accessories Corp. and Subsidiaries
Condensed Consolidated Statements of Income
Six Months Ended March 31,
2009 2008
(Unaudited) (Unaudited)
-------------- --------------
Revenues:
Net sales $ 5,892,289 $ 8,869,932
Freight income 52,578 43,310
-------------- --------------
Total revenues 5,944,867 8,913,242
-------------- --------------
Cost of goods sold (4,609,930) (5,361,194)
-------------- --------------
Gross profit 1,334,937 3,552,048
-------------- --------------
Selling, general, and administrative
expenses (1,820,919) (2,187,927)
-------------- --------------
Income (loss) from operations (485,982) 1,364,121
-------------- --------------
Other Income (Expense):
Interest expense (187,194) (169,395)
Interest income 1,512 17,318
Gain on sale of assets 79,714 280,589
Miscellaneous 3,067 35,981
-------------- --------------
Total other income (expense) (102,901) 164,493
-------------- --------------
Income (loss) before provision (benefit)
for income taxes (588,883) 1,528,614
-------------- --------------
Provision (benefit) for income taxes 221,428 (562,157)
-------------- --------------
Net income (loss) (367,455) 966,457
============== ==============
Weighted average shares of common
stock outstanding:
Basic 5,510,255 6,328,471
============== ==============
Diluted 5,510,255 6,328,471
============== ==============
Earnings per common share:
Basic $ (0.07) $ 0.15
============== ==============
Diluted $ (0.07) $ 0.15
============== ==============
See accompanying notes to the condensed consolidated financial statements.
Page 3
Cycle Country Accessories Corp. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
Six Months Ended March 31,
2009 2008
-------------- --------------
(Unaudited) (Unaudited)
Cash Flows from Operating Activities:
Net income $ (367,455) $ 966,457
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation 415,930 385,649
Amortization 2,951 2,906
Inventory reserve 9,000 18,000
Share-based Compensation 32,000 24,999
Share-based Consulting 22,500 91,495
Share-based Director Fees 6,000 11,000
(Gain) on sale of equipment (79,714) (280,046)
(Increase) decrease in assets:
Accounts receivable, net 2,573,255 1,070,412
Inventories 491,770 (1,482,548)
Taxes receivable (189,710) -
Prepaid expenses and other 45,317 (228,640)
Increase (decrease) in liabilities:
Accounts payable (382,583) 472,538
Deferred income taxes (5,823) -
Accrued expenses (210,603) (80,312)
Income taxes payable - 365,435
Accrued interest payable 1,349 (971)
-------------- -------------
Net cash provided by
operating activities 2,364,184 1,336,373
-------------- -------------
Cash Flows from Investing Activities:
Purchase of equipment (109,814) (250,642)
Purchase of intangible assets (9,630) -
Proceeds from sale of equipment 7,491 9,120
-------------- -------------
Net cash used in investing activities (111,953) (241,522)
-------------- -------------
Cash Flows from Financing Activities:
Payments on bank notes payable (399,237) (306,621)
Bank Line of Credit (1,000,000) -
Purchases of Treasury Stock (570,000) -
-------------- -------------
Net cash used in
financing activities (1,969,237) (306,621)
-------------- -------------
Net increase in cash and
cash equivalents 282,994 788,230
Cash and cash equivalents, beginning of
period 194,577 454,848
-------------- ------------
Cash and cash equivalents, end of
period $ 477,571 $ 1,243,078
============== ============
See accompanying notes to the condensed consolidated financial statements.
Page 4
Cycle Country Accessories Corp. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
Six Months Ended March 31,
2009 2008
-------------- --------------
(Unaudited) (Unaudited)
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 158,099 $ 170,366
============== ==============
Income taxes $ - $ 196,722
============== ==============
Supplemental schedule of non-cash investing
and financing activities:
Fixed assets in accounts payable $ - $ 759,491
============== ==============
Acquisition of common stock
from sale of property,
plant, and equipment $ - $ 2,581,636
============== ==============
Issuance of common stock for
payment of CEO bonus $ - $ 25,000
============== ==============
Issuance of stock and Options
for payment of CEO $ 32,000 $ -
============== ==============
Issuance of common stock for
payment of consultant fees $ 22,500 $ 91,500
============== ==============
Issuance of common stock for
payment of director fees $ 6,000 $ 11,000
============== ==============
See accompanying notes to the condensed consolidated financial statements.
Page 5
Cycle Country Accessories Corp. and Subsidiaries Notes to Condensed
Consolidated Financial Statements Three Months Ended March 31, 2009
and 2008 (Unaudited)
1. Basis of Presentation:
The accompanying unaudited condensed consolidated financial statements
for the three months and six months ended March 31, 2009 and 2008 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. Except as otherwise noted in Item 4T.,
Controls and Procedures, (see below), 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's financial position, results of operations, and cash
flows for the periods presented.
The results of operations for the interim periods ended March 31, 2009
and 2008 are not necessarily indicative of the results to be expected
for the full year. These interim consolidated financial statements
should be read in conjunction with the September 30, 2008 consolidated
financial statements and related notes included in the Company's
Annual Report on Form 10-KSB for the year ended September 30, 2008.
2. Inventories:
Inventories are valued at the lower of cost or market. Cost is
determined using the weighted average method. The major components of
inventories, net of the Inventory Reserve, as of March 31, 2009 are
summarized as follows:
Raw materials $ 1,730,642
Work in progress 149,449
Finished goods 2,729,638
--------------
Total inventories $ 4,609,729
==============
3. Goodwill:
Goodwill represents the excess of the purchase price over the fair
value of assets acquired. Goodwill arising from the Company's April
29, 2005 acquisition is not being amortized, in accordance with
Statement of Financial Accounting Standards No. 142 (SFAS No. 142),
Goodwill and Other Intangible Assets.
SFAS No. 142 requires the use of a non-amortization approach to
account for purchased goodwill and certain intangibles. Under a non-
amortization approach, goodwill and certain intangibles would not be
amortized into results of operations, but instead would be reviewed
for impairment at least annually and written down and charged to
results of operations in the periods in which the recorded value of
goodwill and certain intangibles are determined to be greater than
their fair value.
4. Accrued Expenses:
The major components of accrued expenses at March 31, 2009 are
summarized as follows:
Accrued salaries and related benefits $ 333,890
Accrued warranty expense 50,000
Accrued real estate tax 112,539
Royalties payable 3,892
Accrued director fees 1,500
Other 8,787
--------------
Total accrued expenses $ 510,608
==============
5. Stock Redemption With Sale Of Property, Plant, and Equipment:
On November 14, 2007, the Company closed a transaction with its
founder and his wife in which they purchased the Company's
manufacturing plant located in Milford, Iowa. In return, the Company
received all of the common equity owned by the founder and his wife,
1,410,730 shares. The acquired shares are being held as treasury
stock. The value of the property was determined based upon an
appraisal and discussions with two independent commercial realtors and
the stock was valued using the stock's closing price on November 13,
2007.
Additionally, on November 14, 2007, the Company also entered into a
lease agreement with its founder and his wife providing that the
Company will lease a majority of the Milford facility. The term of the
lease is three years and the Company has the option to renew the lease
on the same terms and conditions for two additional terms of one year
each.
6. Sale-Leaseback Transaction - Operating Lease:
On November 14, 2007, the Company entered into a sale-leaseback
arrangement. Under the arrangement, the Company sold its Milford
facility land and buildings, along with certain other pieces of
equipment, to its founder and his wife for 1,410,730 shares of the
Company's common stock. The leaseback has been accounted for as an
operating lease with a three year term. $485,695 of the total gain of
$724,795 was initially deferred. As of March 31, 2009, $277,540 of the
gain is left to be amortized to income in proportion to lease expense
over the term of the lease. The required minimum lease payments are
$185,104 per year for three years from the inception of the lease.
7. Stock Buyback Transaction: The Company acquired 747,250 shares of
its own stock at an average cost of $0.72 per share price for a total
cost of $570,000, including brokerage fees, in cash during the quarter
ending December 31, 2008. During the quarter ending March 31, 2009,
the Company acquired no additional shares of its own stock.
8. Earnings Per Share:
Basic earnings per share ("EPS") is calculated by dividing net income
by the weighted-average number of common 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 warrants to issue common stock were exercised. The following
is a reconciliation of the numerators and denominators of the basic
and diluted EPS computations for the three months and six months ended
March 31, 2009 and 2008:
For the three months
ended March 31, 2009
-----------------------------
Income (Loss) Shares Per-share
(numerator) (denominator) amount
-------------------------------
Basic EPS
Income (loss) available to common
stockholders $ (749,561) 5,327,143 $ (0.14)
Effect of Dilutive Securities
Warrants - -
Diluted EPS
Income (loss) available to common
stockholders $ (749,561) 5,327,143 $ (0.14)
========= ========= ========
For the six months
ended March 31, 2009
-----------------------------
Income(Loss) Shares Per-share
(numerator) (denominator) amount
-------------------------------
Basic EPS
Income (loss) available to common
stockholders $ (367,455) 5,510,255 $ (0.07)
Effect of Dilutive Securities
Warrants - -
Diluted EPS
Income (loss) available to common
stockholders $ (367,455) 5,510,255 $ (0.07)
========= ========= ========
9. Segment Information:
Segment information has been presented on a basis consistent with how
business activities are reported internally to management. Management
solely evaluates operating profit by segment by direct costs of
manufacturing its products without an allocation of indirect costs. In
determining the total revenues by segment, freight income and sales
discounts are not allocated to each of the segments for internal
reporting purposes.
The Company has four operating segments that assemble, manufacture,
and sell a variety of products: ATV Accessories, Plastic Wheel Covers,
Weekend Warrior, and Contract Manufacturing.
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-KSB for the year
ended September 30, 2008.
The following is a summary of certain financial information related to
the four segments during the three months March 31, 2009 and 2008:
ATV ACCESSORIES - Three Months Ended March 31, 2009 and 2008
Three Months Three Months Increase Increase
Ended Mar 31, Ended Mar 31, (Decrease) (Decrease)
2009 2008 $ %
--------------------------------------------------------
Revenue $ 1,175,325 $ 3,050,823 $(1,875,498) (61.48%)
Cost of goods sold $ 905,881 $ 1,231,108 $ ( 325,227) (26.42%)
Gross profit $ 269,444 $ 1,819,715 $(1,550,271) (85.19%)
Gross profit % 22.9% 59.6%
PLASTIC WHEEL COVERS - Three Months Ended March 31, 2009 and 2008
Three Months Three Months Increase Increase
Ended Mar 31, Ended Mar 31, (Decrease) (Decrease)
2009 2008 $ %
--------------------------------------------------------
Revenue $ 180,042 $ 400,770 $ (220,728) (55.08%)
Cost of goods sold $ 75,386 $ 200,479 $ (125,093) (62.40%)
Gross profit $ 104,656 $ 200,291 $ (95,635) (47.74%)
Gross profit % 58.1% 49.9%
WEEKEND WARRIOR - Three Months Ended March 31, 2009 and 2008
Three Months Three Months Increase Increase
Ended Mar 31, Ended Mar 31, (Decrease) (Decrease)
2009 2008 $ %
--------------------------------------------------------
Revenue $ 25,134 $ 37,139 $ (12,005) (32.33%)
Cost of goods sold $ 21,991 $ 9,689 $ 12,302 126.97%
Gross profit $ 3,143 $ 27,450 $ (24,305) (88.55%)
Gross profit % 12.5% 73.9%
CONTRACT MANUFACTURING - Three Months Ended March 31, 2009 and 2008
Three Months Three Months Increase Increase
Ended Mar 31, Ended Mar 31, (Decrease) (Decrease)
2009 2008 $ %
--------------------------------------------------------
Revenue $ 276,415 $ 657,919 $(381,504) (57.99%)
Cost of goods sold $ 190,016 $ 401,215 $(211,199) (52.64%)
Gross profit $ 86,399 $ 256,704 $(170,305) (66.34%)
Gross profit % 31.2% 39.0%
ATV ACCESSORIES - Six Months Ended March 31, 2009 and 2008
Six Months Six Months Increase Increase
Ended Mar 31, Ended Mar 31, (Decrease) (Decrease)
2009 2008 $ %
--------------------------------------------------------
Revenue $ 5,269,787 $ 7,275,502 $ (2,005,715) (27.57%)
Cost of goods sold $ 2,831,067 $ 2,982,983 $ (151,916) (5.10%)
Gross profit $ 2,438,720 $ 4,292,519 $ (1,853,799) (43.19%)
Gross profit % 46.2% 58.9%
PLASTIC WHEEL COVERS - Six Months Ended March 31, 2009 and 2008
Six Months Six Months Increase Increase
Ended Mar 31, Ended Mar 31, (Decrease) (Decrease)
2009 2008 $ %
--------------------------------------------------------
Revenue $ 289,159 $ 821,458 $ (532,299) (64.80%)
Cost of goods sold $ 115,035 $ 369,672 $ (254,635) (68.88%)
Gross profit $ 174,124 $ 451,786 $ (277,662) (61.46%)
Gross profit % 60.2% 54.9%
WEEKEND WARRIOR - Six Months Ended March 31, 2009 and 2008
Six Months Six Months Increase Increase
Ended Mar 31, Ended Mar 31, (Decrease) (Decrease)
2009 2008 $ %
--------------------------------------------------------
Revenue $ 98,963 $ 117,207 $ (18,244) (15.57%)
Cost of goods sold $ 82,379 $ 51,487 $ 30,892 60.00%
Gross profit $ 16,584 $ 65,720 $ (49,136) (74.76%)
Gross profit % 16.7% 56.0%
CONTRACT MANUFACTURING - Six Months Ended March 31, 2009 and 2008
Six Months Six Months Increase Increase
Ended Mar 31, Ended Mar 31, (Decrease) (Decrease)
2009 2008 $ %
--------------------------------------------------------
Revenue $ 573,014 $ 1,113,812 $(540,798) (48.55%)
Cost of goods sold $ 382,629 $ 594,195 $(211,566) (35.60%)
Gross profit $ 190,385 $ 519,617 $(329,232) (63.36%)
Gross profit % 33.2% 46.6%
GEOGRAPHIC REVENUE
The following is a summary of the Company's revenue in different
geographic areas during the three months and six months ended March
31, 2009 and 2008:
GEOGRAPHIC REVENUE - Three Months Ended March 31, 2009 and 2008
Three Months Three Months Increase Increase
Ended Mar 31, Ended Mar 31, (Decrease) (Decrease)
Country 2009 2008 $ %
--------------------------------------------------------
United States $ 1,537,668 $ 3,622,688 $(2,085,020) (57.5%)
All Other Countries $ 73,584 $ 288,996 $ (215,412) (74.5%)
The following is a summary of the Company's revenue in different
geographic areas during the six months ended March 31, 2009 and
2008:
GEOGRAPHIC REVENUE - Six Months Ended March 31, 2009 and 2008
Six Months Six Months Increase Increase
Ended Mar 31, Ended Mar 31, (Decrease) (Decrease)
Country 2009 2008 $ %
--------------------------------------------------------
United States $ 5,425,273 $ 7,412,972 $(1,987,699) (26.8%)
All Other Countries $ 519,594 $ 1,164,872 $ (645,278) (55.3%)
As of March 31, 2009, all of the Company's long-lived assets are
located in the United States of America.
ATV Accessories sales to major customers which exceeded 10% of net
revenues, accounted for approximately 15% of net revenue for three
months ending March 31, 2009 and approximately 17% and 13% of revenue
for three months ending March 31, 2008.
Plastic Wheel Covers, Weekend Warrior, and Contract Manufacturing did
not have sales to any individual customer greater than 10% of net
revenues during the three months ended March 31, 2009 or 2008
10. Stock Based Compensation:
During the quarter ended December 31, 2008, the Company adopted
Statement on Financial Accounting Standards ("SFAS") No. 123(R),
Share-Based Payment, 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. SFAS
No. 123(R) allows companies to choose one of two transition methods:
the modified prospective transition method or the modified
retrospective transition method.
The Company adopted SFAS No. 123(R) using the modified prospective
method of transition which requires compensation expense related to
share based payments to be recognized beginning on the adoption date
over the requisite service period, generally the vesting period, and
over the remaining service period for the unvested portion of awards
granted prior.
The June 2008 President's Executive Employment Agreement provides for
the grant of 50,000 shares of stock in the Company, vesting over a
three year period. At the end of the first and second full year of
employment, the President shall become vested in and receive 16,666
shares of stock each year. At the completion of the President's third
full year of employment, he shall become vested in and receive the
final 16,668 shares of stock. Total compensation expense recognized
during the three month period ended March 31, 2009 was $4,400 net of
income tax benefit in the amount of $2,200. As of March 31, 2009,
there were $55,000 of total unrecognized compensation cost related to
the non-vested share-based compensation arrangement under the plan.
The cost is expected to be recognized over a three year period.
The President is further offered stock options to acquire an
additional 500,000 shares of stock in the Corporation at the closing
price on the date employment commenced at $1.68 per share, which
option shall run for a period of 3 years. This option may be exercised
by the President paying to the Corporation the exercise price
multiplied by the number of shares he wishes to exercise at that time.
At any time during the first 3 years of employment, this option may be
exercised in full or in part. Any portion of this option which has not
been exercised on the third anniversary of the commencement date of
the Executive Employment Agreement will lapse and no longer be an
obligation of the Corporation. Stock shall be restricted and contain
the appropriate legend noting its restriction.
Under the provisions of SFAS No. 123(R), stock-based compensation cost
is estimated at the grant date based on the fair value of the award
and compensation cost is recognized as an expense over the requisite
service period of the award. The fair value of non-vested stock awards
was determined by reference to the fair market value of the Company's
common stock on the date of the grant. Consistent with the valuation
method the Company used for disclosure-only purposes under the
provisions of SFAS No. 123(R), Accounting for Stock-Based
Compensation, the Company uses the lattice valuation model to estimate
the fair value of option awards. Determining the appropriate fair
value model and related assumptions requires judgment, including
estimating stock price volatility, forfeiture rates and expected
terms.
The following assumptions were utilized to estimate the fair value of
the Company's stock option awards during the three-month periods ended
March 31, 2009 and 2008:
Three months ended March 31,
2009 2008
--------------- --------------
Expected stock price volatility 40% -
Risk-free interest rate 3% -
Expected life of options 3 yrs -
Expected annual dividends 0% -
The expected volatility rate was based on the historical volatility,
for the last 3 years, of the Company's common stock. The expected life
represents the average time options that vest are expected to be
outstanding based on the vesting provisions and the Company's
historical exercise, cancellation and expiration patterns.
The risk-free rate was based on U.S. Treasury zero-coupon issues with
a maturity approximating the expected life as of the week of the grant
date. There was no annual dividend rate assumed as a cash dividend is
not expected to be declared and paid in the foreseeable future. The
Company updates these assumptions at least on an annual basis and on
an interim basis if significant changes to the assumptions are
warranted.
With the adoption of SFAS No. 123(R), the Company recorded stock-based
employee compensation expense related to stock options of
approximately $6,200, net of a tax benefit in the amount of $2,900,
and net of estimated forfeitures, for the three-month period ended
March 31, 2009. The Company recognized the full amount of the stock-
based employee compensation expense of its equity incentive plans in
the consolidated statements of operations for the three-month period
ended March 31, 2009 and did not capitalize any such costs in the
condensed consolidated balance sheets other than in the general
overhead pool for inventory costs. The weighted-average grant-date
fair value per share of options granted during the three-month period
ended March 31, 2009 was $.219 per share. No options were granted for
the three month period ended March 31, 2008.
The following table lists stock option activity for the three-month
period ended March 31, 2009:
Outstanding at December 31, 2008 - $ - $ -
Granted 500,000 $ 1.68 $ 840,000 $ -
Exercised $ - $ - -
Canceled - $ - $ - -
Outstanding at March 31, 2009
500,000 $ 1.68 $ 840,000 $ -
Options vested
and exercisable at March 31, 2009
500,000 $ 1.68 $ 840,000 $ -
As of March 31, 2009, there was $38,000 of total unrecognized
compensation cost related to this stock option arrangement granted
under the plan. The cost is expected to be recognized over the next
two year period.
Prior to the adoption of SFAS No. 123(R), the Company maintained an
employment agreement with their former CEO which provides for $100,000
in restricted Company common stock with 25% issued upon the first day
of employment and 25% issued each anniversary date for the next three
years as an employment bonus. The value of the entire restricted stock
award was determined by the closing price, $2 per share, on the
Presidents first day of employment. As of March 31, 2009, there were
no remaining compensation costs to be recognized under the plan due to
his leaving the Company. There are however 12,500 shares to be issued
on September 18, 2009.
Stock-based compensation expense related to stock options and
restricted shares recorded in the Company's condensed consolidated
statements of operations was allocated as follows:
Three months ended March 31,
2009 2008
----------------------------
Cost of Sales $ - $ -
Selling, General and
Administrative Expense $ 16,000 $ -
Research and Development
Expense $ - $ -
- ----------- ----------- ---------- ------
Stock-Based Compensation
Expense before Income Tax $ 16,000 $ -
Less: Income Tax Benefit $ 5,760 $ -
----------- ------------
Net Stock-Based
Compensation Expense
after Income Tax $ 10,240 $ -
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
This discussion relates to Cycle Country Accessories Corp. and its
consolidated subsidiaries (the "Company") and should be read in
conjunction with our consolidated financial statements as of September
30, 2008, and the year then ended, and Management's Discussion and
Analysis of Financial Condition and Results of Operations, both
contained in our Annual Report on Form 10-KSB for the year ended
September 30, 2008.
We intend for this discussion to provide the reader with information
that will assist in understanding our financial statements, the
changes in certain key items in those financial statements from period
to period, and the primary factors that accounted for those changes,
as well as how certain accounting principles affect our 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. See "Special Note
Regarding Forward-Looking Statements" included elsewhere in this
filing.
Critical Accounting Policies and Estimates
The Company's discussion and analysis of its financial condition and
results of operations are based upon its Consolidated Financial
Statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. The
preparation of these financial statements requires the Company to make
estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, the Company
evaluates the estimates including those related to bad debts and
inventories. 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.
The Company believes the following critical accounting policies affect
the more significant judgments and estimates used in the preparation
of the Consolidated Financial Statements:
Accounts Receivable - Trade credit is 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 30 days
past due. Trade accounts receivable are carried on the books at their
estimated collectible value. 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.
Allowance for Doubtful Accounts - The Company maintains an allowance
for doubtful accounts for estimated losses resulting from the
inability of its customers to make required payments. If the
financial condition of the Company's customers were to deteriorate,
resulting in an impairment of their ability to make payments,
additional allowance may be required.
Inventories - The Company values its inventory at the lower of cost or
market. Cost is determined using the weighted average cost method.
Reserve for Inventory - The Company records valuation reserves on its
inventory for estimated excess and obsolete inventory equal to the
difference between the cost of inventory and the estimated market
value based upon assumptions about future product demand and market
conditions. If future product demand or market conditions are less
favorable than those projected by management, additional inventory
reserves may be required.
Depreciation of Long-Lived Assets - The Company assigns useful lives
for long-lived assets based on periodic studies of actual asset lives
and the intended use for those assets. Any change in those assets
lives would be reported in the statement of operations as soon as any
change in estimate is determined.
Goodwill and Other Intangibles - Goodwill represents the excess of the
purchase price over the fair value of the assets acquired. The
Company accounts for goodwill in accordance with Statement of
Financial Accounting Standard (SFAS) no. 142, "Goodwill and Other
Intangible Assets". SFAS No. 142 requires the use of a non-
amortization approach to account for purchased goodwill and certain
intangibles. Under the non-amortization approach, goodwill and
certain intangibles are not amortized into results of operations, but
instead are reviewed for impairment at least annually and written down
and charged to results of operations in the periods in which the
recorded value is determined to be greater than the fair value. The
Company has reviewed the goodwill recorded at March 31, 2009 and found
no impairment.
Accrued Warranty Costs - The Company records a liability for the
expected cost of warranty-related claims as its products are sold. The
Company provides a one-year warranty on all of its products except the
snowplow blade, which has a limited lifetime warranty. The amount of
the warranty liability accrued reflects the Company's estimate of the
expected future costs of honoring its obligations under the warranty
plan. The estimate is based on historical experiences and known
current events. If future estimates of expected costs were to be less
favorable, an increase in the amount of the warranty liability accrued
may be required.
Accounting for Income Taxes - The Company is required to estimate
income taxes in each of the jurisdictions in which it operates. This
process involves estimating actual current tax exposure for the
Company together with assessing temporary differences resulting from
differing treatment of items, such as property, plant and equipment
depreciation, for tax and accounting purposes. Actual income taxes
could vary from these estimates due to future changes in income tax
law or results from final tax exam reviews. At March 31, 2009, the
Company assessed the need for a valuation allowance on its deferred
tax assets. A valuation allowance is provided when it is more likely
than not that some portion or all of the deferred tax assets will not
be realized. Based upon the historical operating profits and the near
certainty regarding sufficient near term taxable income, management
believes that there is no need to establish a valuation allowance.
Should the Company determine that it would not be able to realize all
or part of its net deferred tax assets in the future, a valuation
allowance may be required.
In July 2006, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 48 (FIN 48), "Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement No. 109." FIN 48
prescribes a comprehensive model for how companies should recognize,
measure, present and disclose in their financial statements uncertain
tax positions taken or expected to be taken on a tax return. Under FIN
48, tax positions are recognized in the Company's financial statements
as the largest amount of tax benefit that has a greater than 50%
likelihood of being realized upon ultimate settlement with tax
authorities assuming full knowledge of the position and all relevant
facts. These amounts are subsequently reevaluated and changes are
recognized as adjustments to current period tax expense. FIN 48 also
revised disclosure requirements to include an annual tabular roll
forward of unrecognized tax benefits.
The Company adopted the provisions of FIN 48 on October 1, 2007. At
March 31, 2009, no uncertain positions were identified. To the extent
interest and penalties would be assessed by taxing authorities on any
underpayment of income taxes, such amounts would be accrued and
classified as a component of income tax expense on the condensed
consolidated statement of income.
OVERALL RESULTS OF OPERATIONS
Three Months Ended March 31, 2009 and 2008
Three Months Three Months Increase Increase
Ended Mar. 31, Ended Mar. 31, (Decrease) (Decrease)
2009 2008 $ %
--------------------------------------------------------
Revenue $ 1,611,252 $ 3,911,684 $(2,300,432) (58.81%)
Cost of goods sold $ 1,692,352 $ 2,374,966 $ (682,614) (28.74%)
Gross profit $ (81,100) $ 1,536,718 $(1,617,818) (105.28%)
Gross profit % (.05%) 39.3%
OVERALL RESULTS OF OPERATIONS
Six Months Ended March 31, 2009 and 2008
Six Months Six Months Increase Increase
Ended Mar 31, Ended Mar 31, (Decrease) (Decrease)
2009 2008 $ %
--------------------------------------------------------
Revenue $ 5,944,867 $ 8,913,242 $(2,968,375) (33.30%)
Cost of goods sold $ 4,609,930 $ 5,361,194 $ (751,264) (14.01%)
Gross profit $ 1,334,937 $ 3,552,048 $(2,217,111) (62.41%)
Gross profit % 22.5% 39.9%
The decrease in revenues for the six months ended March 31, 2009 was
attributable to a broad decline in revenue from all of our segments
and most all of our customers. The decline was most significant in the
second quarter, with the sales decline in the first quarter of 13.4%
and the second quarter of 58.81%. The general economic climate left a
significant impact on our revenues. While the economy in general
strongly contributed to the decline, the second quarter ending March
31, 2009 is also typically the tail-end of our seasonal sales cycle,
exaggerating the decline. With the decline in the general economy, our
distributors and dealers reduced their level of inventory during this
seasonally slow sales period, pushing the carrying of that late-season
inventory on to us. The decrease in overall gross profit as a
percentage of revenue was attributable to high purchased material
costs that carried over in our inventory from the spike last year in
our raw material costs, as discussed in the September 30, 2008
Consolidated Financial Statements and related notes included in the
Company's Annual Report on Form 10-KSB for the year ended September
30, 2008. Further, we took a substantial inventory adjustment
identified in the physical inventory count at January 31, 2009. This
was charged to cost of goods sold in the quarter ending March 31,
2009, resulting in an additional deterioration of our Gross Profit.
Three Months Three Months Increase Increase
Ended Mar. 31, Ended Mar. 31, (Decrease) (Decrease)
2009 2008 $ %
--------------------------------------------------------
Selling, general
and administrative
expenses $ 936,936 $ 1,162,675 $ (225,739) (19.4%)
Though the selling, general and administrative expenses decreased
19.4% overall compared to the prior year, as a percentage of revenue,
these expenses were 58% for the three months ended March 31, 2009
compared to 30% for the three months ended March 31, 2008. The
significant changes in operating expenses for the second quarter of
fiscal 2009 as compared to the second quarter of fiscal 2008 were:
Increase Increase
(Decrease) (Decrease)
$ %
Salaries $ (28,709) (9.3%)
Advertising $ (105,845) (81.2%)
Commissions $ (29,278) (68.2%)
Warranty $ 6,079 31.5%
Other professional fees $ 25,501 37.5%
Salaries decreased for the three months ended March 31, 2009, as
compared to the three months ended March 31, 2008. Advertising was
cut substantially, dropping 81.2% for the quarter. The decrease in
commission expense was a result of the decrease in revenues during the
second quarter of fiscal 2009. Warranty expense increased for the
three months ended March 31, 2009, as compared to the three months
ended March 31, 2008. Other professional fees increased for the three
months ended March 31, 2009, as compared to the three months ended
March 31, 2008.
Three Months Three Months Increase Increase
Ended Mar 31, Ended Mar 31, (Decrease) (Decrease)
2009 2008 $ %
--------------------------------------------------------
Interest and
miscellaneous
income $ 3,920 $ 41,874 $ (37,954) (90.06%)
Gain on sale of assets $ 41,498 $ 42,157 $ (659) (1.56%)
Interest expense $ 101,634 $ 80,111 $ 21,523 (26.87%)
The decrease in interest and miscellaneous income was due to a
decrease in interest income of approximately $7,000 and a decrease in
other income of approximately $31,000. The interest expense increase
of approximately $21,523 for the three months ended March 31, 2009 as
compared to the three months ended March 31, 2008 was due to the
Company receiving a loan for new manufacturing equipment.
Six Months Six Months Increase Increase
Ended Mar 31, Ended Mar 31, (Decrease) (Decrease)
2009 2008 $ %
--------------------------------------------------------
Selling, general
and administrative
expenses $ 1,820,919 $ 2,187,927 $ (367,008) (16.8%)
Though the selling, general and administrative expenses decreased
16.8% overall compared to the prior year, as a percentage of revenue,
these expenses were 31% for the six months ended March 31, 2009
compared to 25% for the three months ended March 31, 2008. The
significant changes in operating expenses for the first two quarters
of fiscal 2009 as compared to the same period of fiscal 2008 were:
Increase Increase
(Decrease) (Decrease)
$ %
Salaries $ (39,974) (6.7%)
Advertising $ (190,325) (82.5%)
Commissions $ (56,527) (67.2%)
Warranty $ 2,204 5.4%
Other professional fees $ (49.099) (27.7%)
Lease expense $ 21,239 30.6%
Salaries decreased for the six months ended March 31, 2009, as
compared to the six months ended March 31, 2008. Advertising was cut
substantially, dropping 82.5% for the six month period. The decrease
in commission expense was a result of the decrease in revenues during
the first two quarters of fiscal 2009 in the ATV Accessories business
segment. Warranty expense increased for the six months ended March 31,
2009, as compared to the six months ended March 31, 2008. Other
professional fees decreased for the six months ended March 31, 2009,
as compared to the six months ended March 31, 2008, due to the removal
of consulting work related to the Company's Sarbanes-Oxley Act
compliance initiatives. The increase in lease expense was due to the
sale and subsequent leasing back of the Company's Milford facility, as
described elsewhere in this filing.
Six Months Six Months Increase Increase
Ended Mar 31, Ended Mar 31, (Decrease) (Decrease)
2009 2008 $ %
--------------------------------------------------------
Interest and
miscellaneous
income $ 4,579 $ 53,299 $ (48,720) (91.41%)
Gain on sale of assets $ 79,714 $ 280,589 $ (200,875) (71.59%)
Interest expense $ 187,194 $ 169,395 $ 17,799 10.51%
The decrease in interest and miscellaneous income was primarily due to
a decrease in interest income of approximately $15,000 and a decrease
in other income of approximately $31,000. The gain on sale of assets
decrease of approximately $200,000 for the six months ended March 31,
2009 as compared to the six months ended March 31, 2008 was due to the
Company having sold its Milford facility and certain other assets in
the prior year. Interest expense increased as the Company received a
loan for new manufacturing equipment.
Interest expense on our long-term debt will decrease in the third
quarter of fiscal 2009 as the principal balances continue to decrease
under fixed rate notes going forward. However, management anticipates
the seasonal use of our line of credit will increase our interest
expense on a quarter-to-quarter basis, but not on a year-over-year
basis.
Looking ahead to the third and fourth quarters of fiscal 2009,
management is cautiously projecting a 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 20% to 25% of
revenue. Management has, and will, continue to seek out and implement
production efficiencies and cost reduction initiatives wherever
possible and will pass as much of the net input costs increases on to
its customers as possible. Remaining competitive in the markets we are
in and maintaining our strong market shares within those markets may
hinder management's ability to pass on the full amount of our net
input costs increases. We project selling, general and administrative
expenses during the remainder of fiscal 2009 to be 25-30% of total
revenue as we continue our focus on cost reduction initiatives,
launching new products and maximizing internal efficiencies, all while
maintaining a consistent level of administrative support.
BUSINESS SEGMENTS
As more fully described in Note 9 to the Condensed Consolidated
Financial Statements included elsewhere in this filing, the Company
operates four reportable business segments: ATV Accessories, Plastic
Wheel Covers, Weekend Warrior, and Contract Manufacturing. ATV
accessories is vertically integrated and utilizes a two-step
distribution method, we are vertically integrated in our Plastic Wheel
Cover segment and utilize both direct and two-step distribution
methods, Weekend Warrior utilizes a single-step distribution method,
and our Contract Manufacturing segment deals directly with other OE
manufacturers and businesses in various industries.
ATV ACCESSORIES
ATV ACCESSORIES - Three Months Ended March 31, 2009 and 2008
Three Months Three Months Increase Increase
Ended Mar 31, Ended Mar 31, (Decrease) (Decrease)
2009 2008 $ %
--------------------------------------------------------
Revenue $ 1,175,325 $ 3,050,823 $ (1,875,498) (61.48%)
Cost of goods sold $ 905,881 $ 1,231,108 $ (325,227) (26.42%)
Gross profit $ 269,444 $ 1,819,715 $ (1,550,271) (85.19%)
Gross profit % 22.9% 59.6%
ATV ACCESSORIES - Six Months Ended March 31, 2009 and 2008
Six Months Six Months Increase Increase
Ended Mar 31, Ended Mar 31, (Decrease) (Decrease)
2009 2008 $ %
--------------------------------------------------------
Revenue $ 5,269,787 $ 7,275,502 $ (2,005,715) (27.57%)
Cost of goods sold $ 2,831,067 $ 2,982,983 $ (151,916) 5.10%
Gross profit $ 2,438,720 $ 4,292,519 $ (1,853,799) (43.19%)
Gross profit % 46.2% 58.9%
The decrease in ATV Accessories revenue for the second quarter of
fiscal 2009 reflects the general decline in sales of our industry
compared to the prior year, as has been previously discussed. The
decrease in gross profit as a percentage of revenue, which was mainly
attributable to an increase in raw material costs as has been
previously discussed. Remaining competitive in the ATV Accessory
market and maintaining our strong market share within this market may
hinder management's ability to pass on the full amount of our net
input costs increases. Year-to-date, our ATV Accessories revenue for
the combined two quarters of fiscal 2009 showed less of a decline than
the second quarter alone, as discussed above. We averaged a 27.57%
decline in revenues for both quarters.
PLASTIC WHEEL COVERS
PLASTIC WHEEL COVERS - Three Months Ended March 31, 2009 and 2008
Three Months Three Months Increase Increase
Ended Mar 31, Ended Mar 31, (Decrease) (Decrease)
2009 2008 $ %
--------------------------------------------------------
Revenue $ 180,042 $ 400,770 $ (220,728) (55.08%)
Cost of goods sold $ 75,386 $ 200,479 $ (125,093) (62.40%)
Gross profit $ 104,656 $ 200,291 $ (95,635) (47.74%)
Gross profit % 58.1% 49.9%
PLASTIC WHEEL COVERS - Six Months Ended March 31, 2009 and 2008
Six Months Six Months Increase Increase
Ended Mar 31, Ended Mar 31, (Decrease) (Decrease)
2009 2008 $ %
--------------------------------------------------------
Revenue $ 289,159 $ 821,458 $ (532,299) (64.80%)
Cost of goods sold $ 115,035 $ 369,672 $ (254,637) (68.88%)
Gross profit $ 174,124 $ 451,786 $ (277,662) (61.46%)
Gross profit % 60.2% 54.9%
The decrease in Wheel Cover revenues can be attributed to a decrease
in sales to OEMs. Just as the ATV Accessory market is down across the
industry, so too is the golf and the lawn & garden accessory sector.
Management is also pursuing and evaluating new markets that our
plastics division can produce parts for to further broaden and grow
this business segments revenue.
WEEKEND WARRIOR
WEEKEND WARRIOR - Three Months Ended March 31, 2009 and 2008
Three Months Three Months Increase Increase
Ended Mar 31, Ended Mar 31, (Decrease) (Decrease)
2009 2008 $ %
--------------------------------------------------------
Revenue $ 25,134 $ 37,139 $ (12,005) (32.33%)
Cost of goods sold $ 21,991 $ 9,689 $ 12,302 126.97%
Gross profit $ 3,143 $ 27,450 $ (24,305) (88.55%)
Gross profit % 12.5% 73.9%
WEEKEND WARRIOR - Six Months Ended March 31, 2009 and 2008
Six Months Six Months Increase Increase
Ended Mar 31, Ended Mar 31, (Decrease) (Decrease)
2009 2008 $ %
--------------------------------------------------------
Revenue $ 98,963 $ 117,207 $ (18,244) (15.57%)
Cost of goods sold $ 82,379 $ 51,487 $ 30,892 60.00%
Gross profit $ 16,584 $ 65,720 $ (49,136) (74.76%)
Gross profit % 16.7% 56.0%
The decrease in revenues was attributable to a decrease in sales to
national retail customers. The decrease in gross profit is due to
higher input costs and inventory adjustments.
CONTRACT MANUFACTURING
CONTRACT MANUFACTURING - Three Months Ended March 31, 2009 and 2008
Three Months Three Months Increase Increase
Ended Mar 31, Ended Mar 31, (Decrease) (Decrease)
2009 2008 $ %
--------------------------------------------------------
Revenue $ 276,415 $ 657,919 $(381,504) (57.99%)
Cost of goods sold $ 190,016 $ 401,215 $(211,199) (52.64%)
Gross profit $ 86,399 $ 256,704 $(170,305) (66.34%)
Gross profit % 31.2% 39.0%
CONTRACT MANUFACTURING - Six Months Ended March 31, 2009 and 2008
Six Months Six Months Increase Increase
Ended Mar 31, Ended Mar 31, (Decrease) (Decrease)
2009 2008 $ %
--------------------------------------------------------
Revenue $ 573,014 $ 1,113,812 $(540,798) (48.55%)
Cost of goods sold $ 382,629 $ 594,195 $(211,566) (35.60%)
Gross profit $ 190,385 $ 519,617 $(329,232) (63.36%)
Gross profit % 33.2% 46.6%
The decrease in revenue was due to a decrease in business with current
customers. With the economy tightening overall, many of our contract
manufacturing customers' demand dropped off substantially. In
particular, our largest contract manufacturing customer overbought a
significant quantity of product in the previous fiscal year, in
anticipation of cancelling their relationship with us, due to a
deterioration in the relationship with the previous management of
Cycle Country. The current management and sales team were able to
resurrect the relationship, but the customer will still need most of,
if not all of, our fiscal year to work off the excess inventory before
needing more. This customer in now developing additional products for
us to manufacture, in addition to the already approved products. With
ample production capacity and unique fabrication and painting
capabilities, management believes that increasing the fabrication of
parts and the manufacture of products to other OE manufacturers and
businesses will provide the Company with a significant source of
revenue in quarters traditionally slow for our main ATV Accessories
business segment. Gross margin decreased as a percentage of revenue as
significant increases in the costs of raw steel impacted the cost of
materials for the quarter ended March 31, 2009.
GEOGRAPHIC REVENUE
GEOGRAPHIC REVENUE - Three Months Ended March 31, 2009 and 2008
Three Months Three Months Increase Increase
Ended Mar 31, Ended Mar 31, (Decrease) (Decrease)
Country 2009 2008 $ %
--------------------------------------------------------
United States $ 1,537,668 $ 3,622,688 $(2,085,020) (57.5%)
All Other Countries $ 73,584 $ 288,996 $ (215,412) (74.5%)
GEOGRAPHIC REVENUE - Six Months Ended March 31, 2009 and 2008
Six Months Six Months Increase Increase
Ended Mar 31, Ended Mar 31, (Decrease) (Decrease)
Country 2009 2008 $ %
--------------------------------------------------------
United States $ 5,425,273 $ 7,412,972 $(1,987,699) (26.8%)
All Other Countries $ 519,594 $ 1,164,872 $ (645,278) (55.3%)
For the six months ended March 31, 2009, the Company experienced
decreased revenue in both the U.S. markets, as well as
internationally. The decrease in revenue in the U.S. was discussed
above, and the decrease in other countries was primarily due to a
decrease of sales in Europe, which is experiencing the same general
economic climate as is the United States.
Liquidity and Capital Resources
Overview
Cash flows provided by operating activities of continuing operations,
built-up cash balances, and borrowings under our bank line of credit
provided us with a significant source of liquidity during the first
six months of Fiscal 2009.
Cash and cash equivalents were $477,571 as of March 31, 2009, compared
to $194,577 as of September 30, 2008. 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.
In the six months ended March 31, 2009, we made approximately $110,000
in capital expenditures, received approximately $7,000 from the sale
of capital equipment, and paid approximately $399,237 of long-term
debt principal. By the end of fiscal 2009, management expects total
capital expenditures to approximate $200,000.
Working Capital
Net working capital was $4,646,262 at March 31, 2009, compared to
$5,531,103 at September 30, 2008. The decrease in working capital was
primarily due to the net change in sales and gross margins.
Liquidity and Capital Resources
Balance Balance Increase/ Percent
Mar 31, 2009 Sep 30, 2008 (Decrease) Change
- -----------------------------------------------------------------------------
Cash and cash
equivalents $ 477,571 $ 194,576 $ 282,995 145.4%
Accounts
receivable $ 362,393 $ 2,935,647 $(2,573,254) (87.7%)
Inventories $ 4,609,729 $ 5,110,499 $ (500,770) ( 9.7%)
Prepaid expenses $ 168,288 $ 209,617 $ (41,329) (19.7%)
Deferred income tax $ 548,933 $ 345,920 $ 203,013 58.6%
Accounts payable $ 194,695 $ 577,278 $ (382,583) (66.2%)
Accrued expenses $ 510,608 $ 721,210 $ (210,602) (29.2%)
Bank line of credit $ - $ 1,000,000 $(1,000,000) (100.0%)
Current portion of
Bank notes payable $ 848,095 $ 811,053 $ 37,042 4.5%
Current portion of
deferred gain $ 166,524 $ 166,524 $ - 0.0%
Long-Term Debt
On May 13, 2008, the Company and its commercial lender modified
the original secured credit agreement dated August 21, 2001. Under
the terms of the modification agreement to the secured credit
agreement, Note One and Note Two were modified to change their fixed
interest rates from 7.375% per annum to 6.125% per annum. Under the
terms of the new amendment to the secured credit agreement, Note One
and Note Two were amended. The Notes, going forward, are payable in
monthly installments from August 2008 until April 2017, for Note One
and until April 2011, for Note Two, which include principal and
interest (6.125% as of March 31, 2009) for Note One and principal and
interest (6.125% as of March 31, 2009) for Note Two, with a final
payment upon maturity on April 25, 2017, for Note One and April 25,
2011 for Note Two. The interest rate is fixed for Note Two and is
fixed for Note One until April 2011, after which the interest rate
will be reset to prime + 0.50% every 60 months. However, the interest
rate for Note One can never exceed 10.5% or be lower than 5.5%. The
monthly payment is $33,449 and $42,049 for Note One and Note Two,
respectively. At March 31, 2009 and 2008, $2,775,950 and $2,998,806,
respectively, were outstanding for Note One and $979,601 and
$1,412,030 respectively, were outstanding for Note Two. Additionally,
any proceeds from the sale of stock received from the exercise of
warrants are to be applied to any outstanding balance on the Notes or
the Line of Credit described below. As of March 31, 2009, the Company
failed to meet one of its debt covenants with its lender. The Company
fell below the covenant for term debt coverage. The Company has
received a waiver of default from the lender.
On May 13, 2008, the Company and its commercial lender entered
into a note payable agreement. Under the terms of the Note, the Note
is payable in monthly installments from May 2008 until April 2013,
which includes principal and interest (6.125% as of March 31, 2009),
with a final payment upon maturity on April 25, 2013. The interest
rate is fixed for the term of the Note. The monthly payment is
$14,567. At March 31, 2009, $627,789 was outstanding. The Note is
collateralized by specific equipment acquired at that time.
Line of Credit
On April 28, 2006, the Company and its commercial lender
amended the original secured credit agreement dated August 21, 2001.
Under the terms of the amended secured credit agreement, the Company
has a Line of Credit for the lesser of $1,000,000 or 80% of eligible
accounts receivable and 35% of eligible inventory. The Line of Credit
bears interest at prime plus 0.50% (5.5% at March 31, 2009) and is
collateralized by all of the Company's assets. The variable interest
rate can never exceed 10.5% or be lower than 5.5%. At March 31, 2009,
there was no outstanding amount due on the Line of Credit and there
was $750,000 outstanding on the Line of Credit as of December 31,
2008. The Line of Credit matured on December 31, 2008, but was
extended until June 1, 2009. A new, permanent loan renewal is under
negotiation and is anticipated to be in place prior to June 30, 2009.
The secured credit agreement contains 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. In addition, the Company is required
to maintain a minimum working capital and shall not declare or pay any
dividends or any other distributions.
Warrants
The Company has 40,000 previously issued warrants outstanding
to purchase one share of the Company's common stock per warrant at
$4.00 per share which do not expire until June 9, 2010. For the three
months ended March 31, 2009, none of the 40,000 warrants were
exercised. The proceeds, if exercised, are to be applied to the
outstanding balance on the Notes.
Capital Resources
Consistent with normal practice, management believes that the
Company's operations are not expected to require significant capital
expenditures during fiscal year 2009. Management believes that
existing cash balances, cash flow to be generated from operating
activities and available borrowing capacity under its line of credit
agreement will be sufficient to fund normal operations and capital
expenditure requirements, non-inclusive of any major capital
investment that may be considered, for at least the next six months.
At this time management is not aware of any factors that would have a
materially adverse impact on cash flow during this period.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As a "Smaller Reporting Company" as defined by Item 10 of Regulation
S-K, the Company is not required to provide information by this Item.
Item 4T. Controls and Procedures
The Company maintains disclosure controls and procedures that
are designed to ensure that information required to be disclosed in
the Company's Securities Exchange Act reports is recorded, processed,
summarized and reported within the time periods specified in the SEC's
rules and forms, and that such information is accumulated and
communicated to the Company's management, including its Chief
Executive Officer and Chief Financial Officer, as appropriate, to
allow timely decisions regarding required disclosure. In designing
and evaluating the disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management necessarily
was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
Evaluation of Disclosure Controls and Procedures
The Company's President and Interim Chief Financial Officer
have evaluated the effectiveness of the Company's disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act) for the quarter ending March 31, 2009. Based upon such
evaluation, the President and Interim Chief Financial Officer have
concluded that, at March 31, 2009, the Company's disclosure controls
and procedures were ineffective. This conclusion by the Company's
President and Interim Chief Financial Officer relates to the year ended
September 30, 2008 and the reporting periods thereafter is mainly due to
the Chief Financial Officer leaving the Company two weeks prior to the
September 30, 2008 year end, and not having hired a replacement as of
March 31, 2009.
Management's Report on Internal Control Over Financial Reporting
Under the supervision and with the participation of our
management, including our President, we conducted an evaluation of the
effectiveness of our internal control over financial reporting as of
September 30, 2008.
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term is
defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Our
internal control system was designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation
of financial statements for external purposes, in accordance with
generally accepted accounting principles. Because of inherent
limitations, a system of internal control over financial reporting may
not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate due to change in conditions, or
that the degree of compliance with the policies or procedures may
deteriorate.
Based on its evaluation as of September 30, 2008, and again at
March 31, 2009, our management concluded that our internal controls
over financial reporting were ineffective as of March 31, 2009 and
that there is a material weakness in our internal control over
financial reporting as of March 31, 2009. A material weakness is a
deficiency, or a combination of control deficiencies, in internal
control over financial reporting such that there is a reasonable
possibility that a material misstatement of the Company's annual or
interim financial statements will not be prevented or detected on a
timely basis.
The material weakness relates to the loss of the Chief
Financial Officer, which left insufficient personnel with
the appropriate level of knowledge, experience and training in the
application of accounting operations of our Company. This potential
weakness could cause us to not fully identify and resolve accounting
and disclosure issues that could lead to a failure to perform timely
internal control reviews and corrections. In order to remedy the
potential weaknesses identified in this assessment, we have hired a
consultant as an interim Chief Financial Officer to work through our
accounting and financial procedures and controls. Further, we are
actively negotiating with this highly qualified individual for the
position of the full-time Chief Financial Officer and anticipate that
this will be completed by May 31, 2009.
This quarterly report does not include an attestation report of
the Company's registered public accounting firm regarding internal
control over financial reporting. Management's report was not subject
to attestation by our registered public accounting firm pursuant to
temporary rules of the SEC that permit us to provide only management's
report in this Quarterly Report on Form 10-Q.
Changes in Internal Control Over Financial Reporting
No change in the Company's internal control except as set forth
above over financial reporting occurred during the quarter ended March
31, 2009, that materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial
reporting.
Special Note Regarding Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 (the "Reform
Act") provides a safe harbor for forward-looking statements made by or
on behalf of the Company. The Company and its representatives may,
from time to time, make written or verbal forward-looking statements,
including statements contained in the Company's filings with the
Securities and Exchange Commission and in its reports to stockholders.
Generally, the inclusion of the words "believe", "expect", "intend",
"estimate", "anticipate", "will", and similar expressions identify
statements that constitute "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934 and that are intended to come
within the safe harbor protection provided by those sections.
All statements addressing operating performance, events, or
developments that the Company expects or anticipates will occur in the
future, including statements relating to sales growth, earnings or
earnings per share growth, and market share, as well as statements
expressing optimism or pessimism about future operating results (in
particular, statements under Part I, Item 2, Management's Discussion
and Analysis of Financial Condition and Results of Operations),
contain forward-looking statements within the meaning of the Reform
Act. The forward-looking statements are and will be based upon
management's then-current views and assumptions regarding future
events and operating performance, and are applicable only as of the
dates of such statements but there can be no assurance that the
statement of expectation or belief will result or be achieved or
accomplished. In addition, the Company undertakes no obligation to
update or revise any forward-looking statements, whether as a result
of new information, future events, or otherwise.
By their nature, all forward-looking statements involve risk and
uncertainties. Actual results may differ materially from those
contemplated by the forward-looking statements for a number of
reasons, including but not limited: competitive prices pressures at
both the wholesale and retail levels, changes in market demand,
changing interest rates, adverse weather conditions that reduce sales
at distributors, the risk of assembly and manufacturing plant
shutdowns due to storms or other factors, the impact of marketing and
cost-management programs, and general economic, financial and business
conditions.
Part II - Other Information
Item 1. Legal Proceedings
None.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits
(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 Chief 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.
(32.2) Certification of Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
Page 26
Signatures
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 May 15, 2009.
CYCLE COUNTRY ACCESSORIES CORP.
By: /s/ Jeffrey M. Tetzlaff
---------------------------------
Jeffrey M. Tetzlaff
Principal Executive Officer,
President, and Director
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 on May 15, 2009.
By: /s/ Jeffrey M Tetzlaff Principal Executive Officer, President
----------------------------
Jeffrey M. Tetzlaff and Director
By: /s/ Robert Davis Interim Chief Financial Officer and
----------------------------
Robert Davis Interim Accounting Officer
Page 27