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Table of Contents

 

 

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, 2015

OR

 

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

For the transition period from                      to                     

Commission File Number 1-9511

 

 

THE COAST DISTRIBUTION SYSTEM, INC.

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware   94-2490990

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification Number)

350 Woodview Avenue, Morgan Hill, California   95037
(Address of principal executive offices)   (Zip Code)

(408) 782-6686

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed, since last year)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, 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 for 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 definitions of “accelerated filer”, “large 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

 

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

5,197,182 shares of Common Stock as of May 1, 2015

 

 

 


Table of Contents

THE COAST DISTRIBUTION SYSTEM, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2015

TABLE OF CONTENTS

 

 

     Exhibit No.  
Part I. Financial Information   

Item 1.

  

Financial Statements

     1   

Item 2.

  

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

     10   

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

     17   

Item 4T.

  

Controls and Procedures

     17   
Part II. Other Information   

Item 1A.

  

Risk Factors

     18   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     18   

Item 4.

  

Mine Safety Disclosures

     18   

Item 6.

  

Exhibits

     18   
SIGNATURES      S-1   
INDEX TO EXHIBITS      E-1   

 

(i)


Table of Contents

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

THE COAST DISTRIBUTION SYSTEM, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

 

 

     March 31,
2015
    December 31,
2014
 
     (unaudited)        
ASSETS     

Current Assets

    

Cash

   $ 337      $ 447   

Accounts receivable – net of allowances of $250 and $225 as of March 31, 2015 and December 31, 2014, respectively

     17,717        10,849   

Inventories

     37,608        32,151   

Other current assets

     1,942        2,148   
  

 

 

   

 

 

 

Total current assets

  57,604      45,595   

Property and Equipment, net

  1,067      1,126   

Other Assets

  3,279      3,046   
  

 

 

   

 

 

 

Total Assets

$ 61,950    $ 49,767   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY

Current Liabilities

Accounts payable

$ 11,979    $ 6,795   

Accrued liabilities

  3,624      4,146   
  

 

 

   

 

 

 

Total current liabilities

  15,603      10,941   

Long-Term Obligations

  20,141      11,681   
  

 

 

   

 

 

 

Total Liabilities

  35,744      22,622   
  

 

 

   

 

 

 

Stockholders’ Equity

Preferred stock, $.001 par value: 2,000,000 shares authorized; none issued or outstanding:

  —       —    

Common stock, $.001 par value: 10,000,000 shares authorized; 5,197,182 and 5,207,180 shares issued and outstanding at March 31, 2015 and December 31, 2014, respectively

  18,558      18,444   

Accumulated other comprehensive (loss) income

  (120   458   

Retained earnings

  7,768      8,243   
  

 

 

   

 

 

 

Total Stockholders’ Equity

  26,206      27,145   
  

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

$ 61,950    $ 49,767   
  

 

 

   

 

 

 

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

 

1


Table of Contents

THE COAST DISTRIBUTION SYSTEM, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share data)

Three Months Ended March 31,

(Unaudited)

 

     2015     2014  

Net sales

   $ 28,492      $ 24,855   

Cost of sales, including distribution costs

     23,626        20,640   
  

 

 

   

 

 

 

Gross profit

  4,866      4,215   

Selling, general and administrative expenses

  5,409      5,171   
  

 

 

   

 

 

 

Operating loss

  (543   (956

Other expense

Interest

  175      141   

Other

  23      29   
  

 

 

   

 

 

 

Total other expense, net

  198      170   
  

 

 

   

 

 

 

Loss before income tax benefit

  (741   (1,126

Income tax benefit

  266      388   
  

 

 

   

 

 

 

Net loss

$ (475 $ (738
  

 

 

   

 

 

 

Basic and diluted loss per share

$ (0.10 $ (0.15
  

 

 

   

 

 

 

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

 

2


Table of Contents

THE COAST DISTRIBUTION SYSTEM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Dollars in thousands, except per share data)

Three Months Ended March 31,

(Unaudited)

 

 

     2015     2014  
     (In thousands)  

Net loss

   $ (475   $ (738

Other comprehensive loss:

    

Foreign currency translation adjustment

     (578     (345
  

 

 

   

 

 

 

Total comprehensive loss

$ (1,053 $ (1,083
  

 

 

   

 

 

 

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

 

3


Table of Contents

THE COAST DISTRIBUTION SYSTEM, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

Three months ended March 31,

(Unaudited)

 

     2015     2014  

Cash flows from operating activities:

    

Net loss

   $ (475   $ (738

Adjustments to reconcile net loss to net cash used in operating activities:

    

Depreciation and amortization

     170        164   

Stock-based compensation

     143        157   

Loss on sale of property and equipment

     3       1   

Deferred income taxes

     (159 )     —    

Changes in assets and liabilities:

    

Accounts receivable

     (6,868     (7,493

Inventories

     (5,457     (5,176

Other current assets

     121        (332

Accounts payable

     5,184        4,119   

Accrued liabilities

     (522     (223
  

 

 

   

 

 

 

Net cash used in operating activities

  (7,860   (9,521
  

 

 

   

 

 

 

Cash flows from investing activities:

Capital expenditures

  (49   (47

Increase in other assets

  (77   (8
  

 

 

   

 

 

 

Net cash used in investing activities

  (126   (55
  

 

 

   

 

 

 

Cash flows from financing activities:

Borrowings under line of credit agreement

  33,861      29,919   

Repayments under line of credit agreement

  (25,264   (21,205

Issuance of common stock under employee equity incentive plans

  —        158   

Excess tax benefit from stock-based payments

  6      11   

Common stock cancelled in payment of payroll taxes due on vesting of restricted shares under employee stock incentive plans

  (35   (129
  

 

 

   

 

 

 

Net cash provided by financing activities

  8,568      8,754   
  

 

 

   

 

 

 

Effect of exchange rate changes on cash

  (692   (333
  

 

 

   

 

 

 

NET DECREASE IN CASH

  (110   (1,155

Cash beginning of period

  447      2,140   
  

 

 

   

 

 

 

Cash end of period

$ 337    $ 985   
  

 

 

   

 

 

 

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

 

4


Table of Contents

THE COAST DISTRIBUTION SYSTEM, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1. Significant Accounting Policies. The accompanying (a) condensed consolidated balance sheet as of December 31, 2014, which has been derived from our audited financial statements, and (b) the unaudited condensed consolidated financial statements, have been prepared in accordance with accounting principles and SEC rules applicable to interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, the unaudited condensed consolidated financial statements included in this report contain all adjustments (consisting only of normal recurring adjustments and accruals) necessary for a fair presentation of the Company’s consolidated financial position as of March 31, 2015 and the consolidated results of its operations and cash flows for the three months ended March 31, 2015 and 2014. The accounting policies followed by the Company are set forth in Note A to the Company’s financial statements in its Annual Report on Form 10-K for its fiscal year ended December 31, 2014 filed with the SEC on March 31, 2015 (the “2014 10-K”). The unaudited interim consolidated financial statements included in this report, and the notes that follow, should be read in conjunction with the consolidated financial statements and related notes included in our 2014 10-K.

The preparation of consolidated financial statements requires us to make estimates and assumptions that affect the amounts reported and disclosed in the financial statements and the accompanying notes. On an ongoing basis, we evaluate our estimates, including those related to the accounts receivable and sales allowances, and useful lives of property and equipment, fair values of stock-based awards, income taxes, warranty liability and other contingent liabilities, among others. We base our estimates on historical experience and on various assumptions that are believed to be reasonable, the results of which form the basis for making judgments and estimates about the carrying values of assets and liabilities. However, such estimates and the assumptions on which they were based may later prove to have been incorrect due to unforeseen changes in market or economic conditions or the occurrence of unexpected events. As a result, the carrying values of our assets and our results of operations could differ in the future from the carrying values and results of operations that were based on our earlier estimates and assumptions. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” in Item 2 of Part I of this report.

 

2. Seasonality. The Company’s business is seasonal and its results of operations for the three months ended March 31, 2015 are not necessarily indicative of the results to be expected in any other interim period during, or for the full year ending, December 31, 2015. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Seasonality and Inflation” in Item 2 of Part I of this report.

 

3. Earnings Per Share. Basic earnings (loss) per share for each period are computed using the weighted average number of common shares outstanding during the period. Nonvested restricted shares are excluded from outstanding shares for purposes of this calculation. Diluted earnings per share are computed using the weighted average number of common and potentially dilutive securities outstanding during the period. Potentially dilutive securities consist of the incremental common shares issuable upon the exercise of stock options and unvested restricted shares (using the treasury stock method). Potentially dilutive securities are excluded from the computation of diluted earnings per share if their exercise prices are greater than the average market price of the Company’s common stock or if the inclusion, in the calculation of common stock equivalents under the treasury method, of the unvested compensation expense attributable to the option shares or restricted shares would have been anti-dilutive. All of the Company’s common shares issuable on exercise of outstanding stock options and all unvested restricted shares were excluded from the computation of diluted loss per share in the quarters ended March 31, 2015 and 2014, because the Company incurred losses in those periods and, as a result, the inclusion of those securities would have been anti-dilutive.

The table which follows sets forth the manner in which diluted loss per common share for the three months ended March 31, 2015 and 2014 was calculated.

 

     Three Months Ended
March 31,
 
     2015      2014  
     (In thousands)  

Numerator:

     

Net loss

   $ (475    $ (738
  

 

 

    

 

 

 

Denominator:

Weighted average shares outstanding

  4,949      4,815   

Dilutive effect of stock options and unvested restricted shares

  —       —    
  

 

 

    

 

 

 

Denominator for diluted net loss per share

  4,949      4,815   
  

 

 

    

 

 

 

 

5


Table of Contents

THE COAST DISTRIBUTION SYSTEM, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

4. Commitments. The Company leases its corporate offices, warehouse facilities and data processing equipment. Those leases are classified as operating leases as they do not meet the required capitalization criteria. The office and warehouse leases expire over the next ten years. Minimum future rental commitments under non-cancelable operating leases (in thousands of dollars) are as follows:

 

     Year Ending
December 31,
 

2015 (remaining nine months)

   $ 2,711   

2016

     3,079   

2017

     723   

2018

     475   

2019

     425   

Thereafter

     562   
  

 

 

 
$ 7,975   
  

 

 

 

 

5. Operating Segment. The Company has one operating segment, the distribution of replacement parts, accessories and supplies for recreational vehicles. The following table sets forth the net sales (in thousands), by region, for the periods presented below:

 

     Three Months Ended
March 31,
 
     2015      2014  

USA

   $ 23,265       $ 19,005   

Canada

     5,227         5,850   
  

 

 

    

 

 

 
$ 28,492    $ 24,855   
  

 

 

    

 

 

 

 

6. Stock-Based Compensation. In August 2012, our stockholders approved the 2012 Equity Incentive Plan (the “2012 Plan”), which provides for the grant of equity incentives, consisting of stock options, stock appreciation rights, restricted stock and restricted stock units to officers, other key employees, directors and consultants. The 2012 Plan initially set aside, for the grant of equity incentives, 300,000 shares of the Company’s common stock, plus an additional 17,666 shares which was equal to the total number of shares that were then available for the grant of new options or other equity incentives under our existing stockholder approved stock incentive plans (the “Previously Approved Plans”). At the same time, those 17,666 shares ceased to be issuable under the Previously Approved Plans.

The Previously Approved Plans had provided that, if any options outstanding under any of those Plans were to expire or otherwise terminate, rather than being exercised, or if any unvested restricted shares were to be cancelled, the shares that had been subject to those options and such cancelled restricted shares would have become available for the grant of new options or other equity incentives under those Plans. However, the 2012 Plan provides, instead, that if any of those options expire or terminate for any reason or any of those unvested restricted shares are cancelled, then, the number of shares that will become available for grants or awards of equity incentives under the 2012 Plan will be increased by an equivalent number of shares, instead of becoming available for new equity incentive grants under the Previously Approved Plans. Therefore, if any equity incentives that are outstanding under the Previously Approved Plans expire, terminate or, subject to certain limitations, are reacquired by the Company, then a number of shares equal to the number of shares that had been subject to those equity incentives would become available for future grants under the 2012 Plan and those shares would cease to be available for future grants under the Previously Approved Plans. As of March 31, 2015, 308,821 shares from the Previous Plans have become available for grant under the 2012 Plan due to the expiration or termination of equity incentives that had been outstanding under the Previously Approved Plans.

At March 31, 2015, options to purchase a total of 64,000 shares of our common stock and a total of 165,491 of unvested restricted shares were outstanding under the 2012 and Previously Approved Plans. As of that same date, 419,330 shares remained available for future equity incentive grants under the 2012 Plan.

 

6


Table of Contents

THE COAST DISTRIBUTION SYSTEM, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

We recognized non-cash stock-based compensation expense of $143,000 and $157,000 in the three months ended March 31, 2015 and 2014, respectively, as a component of selling, general and administrative expenses in our condensed consolidated statements of operations.

Information Regarding Stock Options. The fair value of each outstanding option is estimated as of the date of grant using a binomial model. This model incorporates certain assumptions including a risk-free market interest rate, expected dividend yield of the underlying common stock, expected option life and expected volatility in the market value of the underlying common stock.

Expected volatilities are based on the historical volatility of the Company’s common stock. The risk free interest rate is based upon market yields for United States Treasury debt securities. The expected dividend yield is based upon the Company’s dividend policy and the fair market value of the Company’s shares at the time of grant. Expected lives are based on several factors including the average holding period of outstanding options, their remaining terms and the cycle of our long range business plan.

We did not grant any stock options in the three months ended March 31, 2015 or 2014. As a result, no estimates of the fair market values of options were made during either of those periods.

The following tables summarize stock option activity during the three month period ended March 31, 2015:

 

     Number
of Shares
     Weighted
Average
Exercise
Price
     Weighted
Average
Remaining
Contractual
Term
   Aggregate
Intrinsic
Value
 

Outstanding at January 1, 2015

     101,000       $ 5.31         

Granted

     —          —          

Exercised

     —          —          

Forfeited

     (37,000      7.29         
  

 

 

          

Outstanding and exercisable at March 31, 2015

  64,000    $ 4.17    4.8 years $ 21,500   
  

 

 

          

Exercisable at March 31, 2015

  64,000    $ 4.17    4.8 years $ 21,000   
  

 

 

          

Options vested and expected (as of March 31, 2015) to vest in the future

  64,000    $ 4.17    4.8 years $ 21,500   
  

 

 

          

The aggregate intrinsic values set forth in the above table represent the total pre-tax intrinsic values (the aggregate differences between the closing stock price of the Company’s common stock on March 31, 2015 and the exercise prices of the then outstanding in-the-money options) that would have been received by the option holders if all of the in-the-money options had been exercised on March 31, 2015. There were no options exercised during the first quarter of 2015.

There was no unrecognized compensation cost related to unvested options at March 31, 2015.

Restricted Shares. We began granting “service-contingent” restricted shares of common stock to some of our officers and other key management employees in 2010. The terms of those grants provided for those restricted shares to vest in equal annual installments over a three or four year service period following the respective dates of those awards, subject to the continued service with the Company of the recipients of such shares. In accordance with Accounting Standards Codification (“ASC”) 718, compensation expense for such awards is based on the fair market value of the awards on their respective dates of grant and is recognized over those service periods. At March 31, 2015, no service-contingent restricted shares remained outstanding.

 

7


Table of Contents

THE COAST DISTRIBUTION SYSTEM, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

In 2013 and 2014, the Compensation Committee granted “performance-contingent” restricted shares to our officers and other key management employees. These performance-contingent shares vest in three annual installments, subject to the achievement by the Company of different financial performance goals applicable to those years. Stock-based compensation expense with respect to each one-third of those performance-contingent shares is recognized only if, and when, we are able to determine that the Company’s achievement of the performance goal for the particular year has become probable. However, if any compensation expense were to be recognized based on such a determination, but the performance goal was not ultimately achieved, then that previously recognized stock-based compensation expense would be reversed. At March 31, 2015, a total of 165,491 unvested performance-contingent restricted shares were outstanding.

A summary of the status of the Company’s restricted share activity follows:

 

     Shares      Weighted Average
Grant Date
Fair Values
 

Unvested restricted shares outstanding at January 1, 2015

     268,985       $ 3.43   

Granted

     —          —    

Vested(1)

     (103,494      3.44   

Forfeited

     —          —    
  

 

 

    

Unvested restricted shares at March 31, 2015

  165,491    $ 3.42   
  

 

 

    

 

(1) Service-based restricted shares.

The intrinsic value of the 103,494 restricted shares that vested during the three months ended March 31, 2015 was approximately $370,000. A total of 9,998 of those restricted shares were cancelled in satisfaction of a total of $35,000 of tax withholding obligations of holders of those restricted shares that arose as a result of the vesting of those shares.

Unrecognized stock-based compensation expense related to the outstanding unvested restricted shares totaled approximately $475,200 at March 31, 2015. Those costs are expected to be recognized generally over weighted average period of 1.4 years measured, from March 31, 2015. All 165,491 unvested shares of restricted stock outstanding as of March 31, 2015 are expected to vest. The aggregate intrinsic value of these shares was $571,000 as of March 31, 2015.

 

7. Warranty Reserve. We generally do not independently provide warranties on the products that we sell. Instead, in almost all cases, the manufacturers of the products that we sell warrant the products and allow us to return defective products, including those that have been returned to us by our customers. However, we sell a line of portable generators under a product supply arrangement which obligates us to provide warranty services for these products and to share the costs of providing those services with the manufacturer. We maintain a reserve for warranty claims against which the warranty costs we incur are charged. We replenish or make additions to the reserve from time to time, based primarily on our warranty claims experience and the volume of generators that we sell, by a provision we make for warranty claims, recorded as a component of costs of products sold, in the condensed consolidated statements of operations.

The following table sets forth, in thousands, the accrued warranty expense that is included in accrued liabilities on the condensed consolidated balance sheets as of March 31, 2015 and 2014:

 

         2015              2014      

Accrued warranty balance – January 1,

   $ 762       $ 737   

Warranty costs incurred

     (245      (253

Provision for warranty

     237         225   
  

 

 

    

 

 

 

Accrued warranty balance – March 31,

$ 754    $ 709   
  

 

 

    

 

 

 

 

8. Fair Value Measurement of Financial Assets and Liabilities. We apply fair value accounting for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. We define fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities that are required to be recorded at fair value, we consider the principal or most advantageous market in which we would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as inherent risk, transfer restrictions and credit risk.

 

8


Table of Contents

THE COAST DISTRIBUTION SYSTEM, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

GAAP establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring the fair values of financial and non-financial assets and liabilities. These tiers consist of:

Level 1: Quoted market prices in active markets for identical assets or liabilities

Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data

Level 3: Unobservable inputs that are not corroborated by market data

At March 31, 2015, we had no financial assets or liabilities that were required to be recognized at fair value.

 

9. Recent Accounting Pronouncements. With the exception of the item discussed below, there have been no recent accounting pronouncements or changes in accounting pronouncements that we believe are of significance, or potential significance, to the Company based on our current operations.

In June 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-12, which clarifies the accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. ASU 2014-12 is effective for annual and interim periods beginning after December 15, 2015 with early adoption permitted. The adoption of this guidance did not have a material impact on our consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts With Customers, a new standard on revenue recognition. The new standard will supersede existing revenue recognition guidance and apply to all entities that enter into contracts to provide goods or services to customers. The guidance also addresses the measurement and recognition of gains and losses on the sale of certain non-financial assets, such as real estate, and property and equipment. The new standard will become effective for us beginning in the first quarter of 2017 and can be adopted either retrospectively to each reporting period presented or as a cumulative effect adjustment as of the date of adoption. We are currently evaluating the impact of adopting this new guidance on our consolidated financial statements.

In April 2014, the FASB issued a new standard relating to the reporting and disclosure of discontinued operations, which changes the criteria and requires additional disclosures for reporting discontinued operations. This new standard will be effective for all disposals of components of an entity that occur within annual periods beginning on or after December 15, 2015. We do not expect this new standard to have a material impact on our consolidated financial statements or disclosures in our financial statements.

 

10. Subsequent Events. The Company finances a substantial portion of its working capital requirements with borrowings under a long-term revolving bank line of credit, which is governed by that certain Third Amended and Restated Loan and Security Agreement, as amended (the “Credit Line Agreement”) entered into by the Company with Bank of America N. A., as lender (the “Bank”).

On May 4, 2015, the Company and the Bank entered into the 20th Amendment to the Credit Line Agreement (the “20th Amendment”), which (i) extends the maturity date of the line of credit by one year, from July 10, 2017 to July 10, 2018; (ii) increases the maximum amount of borrowings that may be outstanding at any one time under the credit line to $30 million, and (iii) reduces the interest rate on credit line borrowings by 25 basis points. The Company obtained the increase in the maximum amount of borrowings permitted under the credit line primarily for the purpose of financing increases in inventories and accounts receivable in anticipation of a continuing increase in its product sales during the remainder of 2015 as compared to 2014.

The foregoing summary of the 20th Amendment is not intended to be complete and is qualified in its entirety by reference to that Amendment, a copy of which is attached as Exhibit 99.1 to the Company’s Current Report on Form 8-K filed with the SEC on May 6, 2015.

 

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Table of Contents
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Information

Statements contained in this Report that are not historical facts or that discuss our expectations, beliefs or views regarding our future financial performance or future financial condition, or financial or other trends in our business or in the markets in which we operate, constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. Often, they include words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “project,” “forecast” or words of similar meaning, or future or conditional verbs such as “will,” “would,” “should,” “could” or “may.” Such forward-looking statements are based on current information that is available to us, and on assumptions and judgments that we make about future events over which we do not have control. In addition, our business and the markets in which we operate are subject to a number of risks and uncertainties. Such risks and uncertainties, and unexpected future events, could cause our financial condition or actual operating results in the future to differ significantly from our expected financial condition and operating results that are set forth in the forward-looking statements contained in this report and could, therefore, also affect the price performance of our shares.

The principal risks and uncertainties to which our business is subject are discussed in (i) Item 1A in our Annual Report on Form 10-K for our fiscal year ended December 31, 2014 (our “2014 10-K”) that we filed with the Securities and Exchange Commission (the “SEC”) on March 31, 2015, and (ii) in the subsection below in this Item 2 captioned “Management Overview – Factors Generally Affecting Sales of RV”. Therefore, you are urged to read not only the information contained below in this Item 2, but also the risks and uncertainties discussed in Item 1A of our 2014 10-K, which qualify the forward-looking statements contained in this report.

Due to these risks and uncertainties, you are cautioned not to place undue reliance on the forward-looking statements contained in this report and not to make predictions about our future financial performance based solely on our historical financial performance. We also disclaim any obligation to update forward-looking statements contained in this Report or in our 2014 10-K, except as may otherwise be required by law or the rules of the NYSE MKT.

Management Overview

We believe that we are one of the largest wholesale suppliers of after-market replacement parts, accessories and supplies for recreational vehicles (“RVs”) in North America. We supply more than 14,000 products and serve more than 10,000 customers throughout the United States and Canada, from 13 regional distribution centers in the United States and 4 regional distribution centers in Canada. Our sales are made primarily to retail parts and supplies stores, service and repair establishments and new and used RV dealers (“After-Market Customers”). Our sales to our Aftermarket Customers are affected primarily by (i) the usage of RVs by consumers, because such usage affects their need for and their purchases of replacement parts, repair services and supplies from our Aftermarket Customers, and (ii) sales of new RVs, because consumers often “accessorize” their RVs at the time of purchase.

Factors Generally Affecting Sales of RV Products

Our sales and operating results are directly affected by the extent to which consumers purchase and use RVs. Such purchases and usage, in turn, depend, in large measure, upon the extent of discretionary income available to consumers, their confidence about future economic conditions and the availability of credit that consumers often use to finance the purchase of RVs, each of which can affect the willingness and ability of consumers to use and purchase RVs. As a result, recessionary conditions or a tightening in the availability or increases in the costs of credit often lead consumers to reduce their purchases and, to a lesser extent, their usage of RVs and, therefore, their purchases of the products that we sell. Additionally, increases in the prices and shortages in the supply of gasoline can lead to declines in the usage and purchases of RVs, because these conditions increase the costs of, and create difficulties for consumers in, using RVs.

Weather conditions also can affect our operating results. Purchases and the usage of RVs decline in the winter months. As a result, our sales and operating results in the first and fourth calendar quarters generally are lower than in the spring and summer months in the second and third calendar quarters of the year. See “Seasonality and Inflation” below. Moreover, our sales and operating results can be adversely affected if unusually severe or winter weather conditions occur during the spring or summer months, because conditions of this nature will cause consumers to reduce their usage of RVs and, therefore, their purchases of the products we sell during periods when such purchases and usage ordinarily increase.

 

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These same conditions, in turn, affect the willingness and ability of Aftermarket Customers to purchase the products that we sell. Generally, Aftermarket Customers will reduce their purchases of products from us if consumer demand for those products declines, or Aftermarket Customers lose confidence about future economic conditions or encounter difficulties in obtaining or affording bank financing they need to fund their working capital requirements. Moreover, during the winter, as well as any other periods of the year that may encounter unusually adverse weather conditions, Aftermarket Customers also reduce their purchases of the products we sell due to declines in the usage and purchases of RVs by consumers during such periods. By contrast, when the economy is strong and financing is readily available, and weather conditions are good, Aftermarket Customers are more willing to increase their product purchases in order to be able to meet expected increases in consumer demand.

As a result, our sales and operating results can be, and in the past have been, affected by economic conditions, the availability and the costs of consumer and business financing, the supply and prices of gasoline and weather conditions.

Overview of Operating Results for the Quarter Ended March 31, 2015

The following table provides information comparing our operating results for the quarters ended March 31, 2015 and 2014:

 

     Three Months Ended March 31,  
         2015              2014          Increase/(Decrease)
2015 vs. 2014
 

Dollars in thousands, except per share data

   Amounts        Amount         Percent    

Net sales

   $ 28,492       $ 24,855       $ 3,637        14.6

Cost of sales (including distribution costs)

     23,626         20,640         2,986        14.5

Gross profit

     4,866         4,215         651        15.4

Selling, general and administrative expenses

     5,409         5,171         238        4.6

Operating loss

     (543      (956      (413     (43.2 )% 

Interest expense

     175         141         34        24.1

Loss before income tax benefit

     (741      (1,126      385        (34.2 )% 

Income tax benefit

     266         388         (122     (31.4 )% 

Net loss

   $ (475    $ (738    $ (263     (35.6 )% 

Net loss per common share – basic and diluted

   $ (0.10    $ (0.15    $ (0.05     (33.3 )% 

As the table above indicates, net sales increased by $3.6 million, or 14.6%, to $28.5 million in this year’s first quarter, as compared to $24.9 million in the same quarter of 2014. This increase was achieved despite poor weather conditions in much of the United States and in Canada and a rapid decline in the value of the Canadian dollar in relation to the U.S. dollar, which adversely affected our sales in Canada. The increase in our net sales enabled us to reduce our operating loss by $413,000, or 43%, to $543,000 and our net loss by $263,000, or 35.6%, to $475,000, or $0.10 per diluted share, from $956,000 and $738,000, or $0.15 per diluted share, respectively, in the same quarter of last year. The increase in our net sales was a attributable to a number of factors, including a recent consolidation of competitors in the RV channel, which has enabled us to gain market share, a positive response by customers to our newly introduced towing and outdoor power equipment products, and an improvement in RV industry trends due primarily to a strengthening of the economy and increases in consumer confidence. See “Results of Operations” below.

Critical Accounting Policies and Estimates

General

In accordance with accounting principles generally accepted in the United States of America (“GAAP”), we record most of our assets at the lower of cost or fair value. In the case of some of our assets, principally accounts receivable, inventories and deferred income taxes, we make adjustments to their cost or fair values to arrive at what we expect to be able to collect on outstanding accounts receivables, the amounts for which we expect to be able to sell our inventories and the amount of available tax loss and credit carryforwards and deductions that we will be able to use to reduce our future income tax liability. Those adjustments are made on the basis of estimates which require us to make assumptions and judgments regarding economic and market conditions and trends and their impact on our financial performance. However, those assumptions and judgments are necessarily based on current information available to us. If those conditions or trends were to change in ways that we did not expect, or other unexpected events were to occur, then, pursuant to GAAP, we may be required to further adjust the carrying values at which we had recorded these assets for financial reporting purposes. Any resulting downward adjustments are commonly referred to as “write-downs” of the assets affected by the changed conditions.

It is our practice to establish reserves or allowances against which we charge any such downward adjustments or “write-downs” to our assets. Examples include an allowance established for uncollectible accounts receivable (sometimes referred to as “bad debt reserves”), an allowance for inventory obsolescence, a reserve for product warranty claims and a valuation allowance against our deferred tax asset to the extent necessary to reduce its carrying value to the amount of that

 

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asset which we believe we are likely to be able to use to reduce our income taxes in future periods. The amounts at which those allowances or reserves are established and maintained involve estimates that are based on historical experience and our assumptions and judgments about economic or market conditions or trends and any other factors that we believe could affect the values at which we had recorded such assets. We periodically increase or replenish the allowances or reserves following write-downs of uncollectible accounts or to take account of increased risks due to changes in economic or market conditions or trends. Increases in the allowances or reserves are effectuated by charges to income or increases in expense in the periods when those allowances or reserves are increased. As a result, our judgments or assumptions about market and economic conditions or trends and about their effects on our financial performance can and will affect not only the amounts at which we record these assets on our balance sheet, but also our results of operations.

The decisions as to the timing of (i) adjustments or write-downs of this nature and (ii) the increases we make to our allowances or reserves, also require subjective evaluations or assessments about the effects and duration of changes in economic or market conditions or trends. For example, it is difficult to predict whether events or changes in economic or market conditions, such as increasing gasoline prices or interest rates or economic downturns, will be of short or long-term duration, and it is not uncommon for it to take some time after the onset of such changes for their full effects on our business to be recognized. Therefore, we make our estimates based upon the information available to us at that time and reevaluate and, if necessary, adjust the reserves and allowances for potential write-downs on a quarterly basis.

Under GAAP, most businesses also must make estimates or judgments regarding the periods during which sales are recorded and also the amounts at which they are recorded. Those estimates and judgments will depend on such factors as the steps or actions that a business must take to complete a sale of products to or to perform services for a customer and the circumstances under which a customer would be entitled to return the products or reject or adjust the payment for the services rendered to it. Additionally, in the case of a business that grants its customers contractual rights to return products sold to them, GAAP requires that a reserve or allowance be established for product returns by means of a reduction in the amount at which its sales are recorded, based primarily on the nature, extensiveness and duration of those rights and historical return experience.

In making our estimates and assumptions we follow GAAP and accounting practices applicable to our business that we believe will enable us to make fair and consistent estimates of the carrying value of those assets and to establish adequate reserves or allowances for downward adjustments in those values that we may have to make in future periods.

Our Critical Accounting Policies

Set forth below is a summary of the accounting policies that we believe are material to an understanding of our financial condition and results of operations that are discussed below.

Revenue Recognition and the Allowance for Product Returns. We recognize revenue from the sale of a product upon its shipment to the customer. Shipping and handling costs that are billed to our customers are included in revenue and our shipping and handling costs are included in costs of sales. We provide our customers with limited rights to return products that we sell to them. We establish an allowance for potential returns that reduces the amounts of our reported sales. We estimate the allowance based on historical experience with returns of like products and current economic and market conditions and trends, which can affect the level at which customers submit products for return.

Accounts Receivable and the Allowance for Doubtful Accounts. In the normal course of our business we extend 30 day payment terms to our customers and, due to the seasonality of our business, during late fall and winter we sometimes grant payment terms of longer duration to those of our customers that have good credit records. We regularly review our customers’ accounts and estimate the amount of, and establish an allowance for, uncollectible accounts receivable in each reporting period. The amount of the allowance is based on several factors, including the age of unpaid amounts, a review of significant past due accounts and current economic and market trends that can affect the ability of customers to keep their accounts current. Estimates of uncollectible amounts are reviewed periodically to determine if the allowance should be increased, and any increases are recorded in the accounting period in which the events or circumstances that require such increases become known. For example, if the financial condition of some of our customers or economic or market conditions were to deteriorate, adversely affecting the ability of customers to make payments to us on a timely basis, it could become necessary for us to increase the allowance for uncollectible accounts. Since the allowance is increased or replenished by recording a charge which is included in, and has the effect of increasing, selling, general and administrative expenses, an increase in the allowance will reduce income in the period when the increase is recorded.

Inventory and Reserve for Excess, Slow-Moving and Obsolete Inventory. We are a wholesale supplier and not a manufacturer of products and, therefore, all of our inventory consists of finished goods. Inventories are valued at the lower of cost (first-in, first-out) or net realizable value and that value is reduced by an allowance for excess and slowing-moving or obsolete inventories. The amount of the allowance is determined on the basis of historical experience with different product

 

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lines and estimates or assumptions concerning future economic and market conditions and trends. If there is an economic downturn or a decline in sales, causing inventories of some product lines to accumulate, it may become necessary for us to increase the allowance. Other factors that can require increases in the allowance or inventory write downs are reductions in pricing or introduction of new or competitive products by manufacturers; however, due to the relative maturity of the markets in which we operate, usually these are not significant factors. Increases in this allowance also will cause a decline in operating results as such increases are effectuated by charges against income. Our reserve for excess and obsolete inventory was $1,424,000, or approximately 3.8% of gross inventory, at March 31, 2015 and $1,395,000, or approximately 4.3% of gross inventory, at December 31, 2014.

Deferred Tax Asset and Valuation Allowance. We record as a “deferred tax asset” on our balance sheet an amount equal to the tax credit and tax loss carryforwards and tax deductions (“tax benefits”) that we believe will be available to us to offset or reduce the amounts of our income taxes in future periods. Under applicable federal and state income tax laws and regulations, such tax benefits will expire if not used within specified periods of time. Accordingly, the ability to fully use our deferred tax asset depends on the amount of taxable income that we generate during those time periods. At least once each year, we make estimates of future taxable income that we believe we are likely to generate during those future periods. If we conclude, on the basis of those estimates and the aggregate amount of the tax benefits available to us, that it is more likely, than not, that we will be able to fully utilize those tax benefits prior to their expiration, we recognize the deferred tax asset in full on our balance sheet. On the other hand, if we conclude that it has become more likely, than not, that we will be unable to utilize those tax benefits in their entirety prior to their expiration, then we would establish (or increase any existing) valuation allowance to reduce the deferred tax asset on our balance sheet to the amount that we believe we will be able to utilize. Any reduction of this nature would be implemented by recognizing a non-cash charge that would have the effect of increasing the provision, or reducing any credit, for income taxes that would otherwise have been recorded in our statement of operations. The aggregate amount of our net deferred tax asset was approximately $3.4 million at March 31, 2015 and $3.2 million at December 31, 2014.

Warranty Costs and Reserves. We generally do not independently warrant the products that we sell. Instead, in almost all cases, the manufacturers warrant the products and allow us to return defective products, including those that have been returned to us by our customers. However, we sell a line of portable generators under a product supply arrangement which obligates us to provide warranty services for these products and to share the costs of providing those services with the manufacturer. The duration of the warranty period for these products is 24 months, commencing on the respective dates on which such products are sold to retail customers. We maintain warranty reserves for these products, which totaled $754,000 and $709,000 at March 31, 2015 and 2014, respectively. Those amounts were determined on the basis of a number of factors, including our sales of the products that we warrant and our historical and expected future warranty claims experience. In the event changes occur in the conditions or circumstances upon which our assumptions and estimates were made, it could become necessary for us to increase the reserve by means of a charge to our income.

Long-Lived Assets. Long-lived assets are reviewed for possible impairment at least annually or if and when events or changes in circumstances indicate the carrying amount of any of those assets may not be recoverable in full, by comparing the fair value of the long-lived asset to its carrying amount.

Foreign Currency Translation. The financial position and results of operations of our Canadian and other foreign subsidiaries are measured using local currency as the functional currency. Assets and liabilities of each foreign subsidiary are translated into U.S. dollars at the rate of exchange in effect at the end of each reporting period. Revenues and expenses are translated into U.S. dollars at the average exchange rate for the reporting period. Foreign currency translation gains and losses not impacting cash flows are credited to or charged against other comprehensive earnings. Foreign currency translation gains and losses arising from cash transactions are credited to or charged against current earnings.

 

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Stock-Based Compensation. We account for stock-based compensation in accordance with ASC 718, Stock Compensation, which requires of us to recognize the fair value of compensation paid in stock or other equity instruments as an expense in the calculation of net earnings (loss). We recognize stock-based compensation expense in the period in which the employee is required to provide service, which is generally over the vesting period of the individual equity instruments, except in the case of restricted shares with respect to which vesting is contingent on the achievement by the Company of one or more financial or other performance goals. Stock-based compensation expense with respect to such performance contingent shares is recognized only if, and when, a determination is made that the Company’s achievement of a performance goal, either in whole or in part, has become probable. However, if any compensation expense were to be recognized based on such a determination, but the performance goal was not ultimately achieved, then, that previously recognized stock-based compensation expense would be reversed. Stock options and restricted shares issued in lieu of cash to non-employees for services performed are recorded at their respective fair values at the time they are issued and are expensed as service is provided. Stock-based compensation expense in the three months ended March 31, 2015 and 2014 totaled $143,000 and $157,000, respectively.

Results of Operations

The following table sets forth certain financial data, expressed as percentage of net sales, derived from our statements of operations for the respective periods indicated below:

 

     Three Months
Ended
 
     2015     2014  

Net sales

     100.0     100.0

Cost of sales, including distribution costs

     82.9     83.0

Gross profit

     17.1     17.0

Selling, general and administrative expenses

     19.0     20.8

Operating loss

     (1.9 )%      (3.9 )% 

Interest

     0.6     0.6

Loss before income taxes

     (2.6 %)      (4.5 )% 

Income tax benefit

     0.9     1.6

Net loss

     (1.9 )%      (3.0 )% 

Net Sales

Net sales consist of revenues from the sales of the products we supply or distribute, net of an allowance for product returns. The following table sets forth and compares our net sales (in thousands of dollars) for the three months ended March 31, 2015 and 2014:

 

Three Months Ended March 31,

Amounts

  

% Change

2015 vs. 2014

     2015     

  

    2014    

  

$28,492

   $24,855    14.6%

We believe that the $3,637,000, or 14.6%, increase in net sales in the first three months of 2015, as compared to the same three months of 2014, was primarily the result of increased sales in all of the channels we serve, including high volume and internet retailers, as well as our core business in the RV dealer channel. The growth was driven primarily by: (i) the consolidation of competitors in our core RV market which enabled us to gain market share, (ii) the introduction of new proprietary towing and outdoor power equipment products, (iii) an expansion of our line of distributed products, and (iv) improving industry trends.

Gross Profit

Gross profit is calculated by subtracting the cost of products sold from net sales. Cost of products sold consists primarily of the amounts paid to manufacturers and suppliers for the products that we purchase for resale, and warehouse and distribution costs, including warehouse labor costs and freight charges. Gross margin is gross profits stated as a percentage of net sales.

The following table compares our gross profits (in thousands of dollars) and gross margin in the quarters ended March 31, 2015 and 2014.

 

     Three Months Ended March 31,  
     2015     2014  

Gross profit

   $ 4,866      $ 4,215   

Gross margin

     17.1     17.0

Our gross margin was relatively flat at 17.1% of net sales in the first quarter of 2015, as compared to 17.0% for the same period of 2014. The increase in our gross profits in 2015 was the result of the increase in sales we achieved during the first quarter of 2015.

 

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Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses include marketing and advertising costs and expenses, compensation paid (including non-cash stock-based compensation) to general and administrative personnel, depreciation expense and other administrative and miscellaneous expenses. Set forth below is information regarding our SG&A expenses in the three months ended March 31, 2015 and March 31, 2014, respectively (in thousands of dollars):

 

     Three Months Ended March 31,  
     2015     2014  

Selling, general and administrative expenses

   $ 5,409      $ 5,171   

As a percentage of net sales

     19.0     20.8

The $238,000, or 4.6%, increase in SG&A expenses in the quarter ended March 31, 2015 was primarily attributable to increased variable expenses relating to the increase in sales and increased professional fees.

Other Expense

The largest component of other expense is the interest expense that we incur on borrowings under our long-term revolving line of credit. To a lesser extent, other expense also includes foreign currency gains or losses and gains or losses on disposal of assets.

 

     Three Months Ended March 31,  
     2015     2014  

Other expense, net

    

Interest expense

   $ 175      $ 141   

Other

     23        29   
  

 

 

   

 

 

 

Total

$ 198    $ 170   
  

 

 

   

 

 

 

As a percentage of net sales

  0.7   0.7

The increase in interest expense was due to an increase in average borrowings outstanding under our revolving credit line during this year’s first quarter as compared to the same quarter of 2014. The increased borrowings were used primarily to fund an increase in our inventory in anticipation of higher sales.

Income Taxes

 

     Three Months Ended March 31,  
     2015     2014  

Income tax benefit

   $ 266      $ 388   

Effective tax rate

     35.9     34.5

Our effective tax rate is affected primarily by the amount of our expenses that are not deductible for income tax purposes and by varying tax rates on income generated by our foreign subsidiaries.

Financial Condition, Liquidity and Capital Resources

We finance our working capital requirements for our operations primarily with borrowings under a long-term revolving bank line of credit, and internally generated funds.

Our revolving bank line of credit agreement, or the Credit Line Agreement, permits us to borrow up to the lesser of (i) $30,000,000, or (ii) an amount equal to 85% of the value of our eligible accounts receivable and up to 55% of the value of our eligible inventory (the “borrowing base”). Our borrowing base under the Credit Line Agreement was $23.1 million at March 31, 2015, as compared to $21.8 million at March 31, 2014. Our outstanding revolving credit line borrowings totaled approximately $20.1 million at March 31, 2015 and $20.9 million at April 30, 2015. Effective May 4, 2014, we obtained an amendment to our Credit Line Agreement which extended the maturity date of the credit line by one year to July 10, 2018 and reduced the interest rate on credit line borrowings by 25 basis points. As a result, interest on our credit line borrowings is now payable at the bank’s prime rate (3.25% at March 31, 2015) plus 1.50% or, at the Company’s option but subject to certain limitations, at the bank’s LIBOR rate (0.25% at March 31, 2015) plus 3.00%. Our bank borrowings are secured by substantially all of our assets, and rank senior in priority to other indebtedness of the Company. The maturity date of the revolving bank line of credit is July 10, 2018. As of March 31, 2015, we were in compliance with all of our financial and other covenants under our bank line of credit agreement.

Our bank borrowings are collateralized by substantially all of our consolidated assets and rank senior in priority to any other indebtedness that we may be permitted to incur by the bank.

 

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Cash Used in Operations. We generally use cash for, rather than generate cash from, operations in the first half of the year, because we build inventories, and accounts receivables increase, as our customers begin increasing their product purchases prior to and in anticipation of the spring and summer selling seasons. See “Seasonality and Inflation” below.

During the three months ended March 31, 2015, we used $7.9 million of cash for our operations, as compared to $9.5 million for the same three months of 2014. At March 31, 2015, inventories totaled $37.6 million and accounts receivable totaled $17.7 million, respectively, as compared to $32.7 million and $17.6 million, respectively, at March 31, 2014.

Net Cash Used in Investing Activities. In the three months ended March 31, 2015, we used net cash of $126,000 in investing activities, consisting primarily of capital expenditures of $49,000, primarily for purchases of computer and office equipment and an increase in other assets of $77,000. By comparison, we used $55,000 in investing activities in the first three months of 2014, primarily consisting of capital expenditures of $47,000 and an increase in other assets of $8,000.

Net Cash Provided by Financing Activities. Financing activities provided cash of $8.6 million in three months ended March 31, 2015, which was the amount by which our borrowings exceeded repayments under our revolving bank line of credit during that three month period. By comparison, financing activities provided cash of $8.8 million in three months ended March 31, 2014, which also was the amount by which our borrowings exceeded repayments under our revolving bank line of credit during that three month period.

Generally, during the winter months, and particularly in the first quarter of the year, when sales are lower than in other periods of the year, we rely more heavily on credit line borrowings to finance increases in accounts receivable and inventory in preparation for the spring and summer selling season when sales increase due to the increased use and purchases by consumers of RVs. By comparison, during the spring and summer months those increases in sales ordinarily generate increases in cash from operations which enable us to reduce our reliance on borrowings to fund our operations. See “Seasonality and Inflation” below.

We lease the majority of our facilities and certain of our equipment under non-cancelable operating leases. Our future lease commitments are described in Note 4 of Notes to our Condensed Consolidated Financial Statements included elsewhere in this report. The following table sets forth, by maturity dates, the total of our contractual obligations, in thousands, at March 31, 2015:

 

Contractual Obligations as March 31, 2015    Total      Less than
One Year
     More than One
and less than
Four Years
     Four to
Five Years
     More than
Five Years
 

Long-term debt obligations

   $ 20,141       $ —        $ 20,141       $ —        $ —    

Operating lease obligations

     7,975         2,711         4,277         425         562   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 28,116    $ 2,711    $ 24,418    $ 425    $ 562   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Our long-term debt obligations consist primarily of borrowings under our long-term revolving bank credit line. It is not possible to calculate future estimated interest payments on those borrowings predictably, because the amounts of such borrowings fluctuate throughout the year depending on our liquidity needs, which can vary widely primarily due to the seasonality of our business and the effects of prevailing economic conditions on the demand for and the purchases of our products by customers. Also, the interest rate on those borrowings is determined by reference to the bank’s prime rate or LIBOR, which also can and often do fluctuate during the year. Additionally, the formulas for determining the specific interest rate that will apply to such borrowings can change from year to year. Set forth above, under the caption “Financial Condition, Liquidity and Capital Resources” are the formulas for determining the interest rates that will apply to those borrowings during the remainder of 2015.

Expected Uses and Sources of Funds. We expect our principal uses for cash in the year ending December 31, 2015 will be to fund operations and capital expenditures. It is our expectation that we will be able to fund those cash requirements in 2015 with borrowings under our revolving credit facility and internally generated funds.

 

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We will continue to explore opportunities to increase our sales and our market shares and to improve our profit margins. We plan to establish new product supply relationships, including relationships that enable us to increase the products that we source from lower cost, but high quality, overseas suppliers, including product suppliers in China and other countries in the Far East, and in Canada, Europe and the United States, and to invest in tooling needed for such products. As a result, we may have occasion in the future to use internally generated funds or bank borrowings for these purposes as well.

Seasonality and Inflation

Seasonality. Sales of recreational vehicle and boating parts, supplies and accessories are seasonal. We generate significantly higher sales during the six-month period from March through August, when usage of RVs and boats are at their peak, than we do during the remainder of the year when weather conditions are not optimal for outdoor activities. Because a substantial portion of our expenses are fixed, operating income declines and we may incur losses and must rely more heavily on borrowings to fund operating requirements during the period from September through February when our sales are lower.

Inflation. Generally, we have been able to pass inflationary price increases on to our customers. However, inflation also may cause or may be accompanied by increases in gasoline prices and interest rates. Such increases, or even the prospect of increases in the price or shortages in the supply of gasoline, can adversely affect the purchase and usage of RVs and boats, which can result in a decline in the demand for our products.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to market risk with respect to financial instruments is primarily related to changes in interest rates with respect to borrowing activities, which may adversely affect our financial position, results of operations and cash flows. In seeking to minimize the risks from interest rate fluctuations, we manage exposures through our regular operating and financing activities. The fair value of borrowings under our revolving credit facility approximates the carrying value of such obligations. As of March 31, 2015, outstanding borrowings under our bank revolving line of credit totaled approximately $20.1 million.

We have substantial sales operations in Canada and as a result, our earnings, cash flows and financial position can be affected by movements in the Canadian dollar exchange rate. Consequently, we are exposed to market risk from foreign currency fluctuations associated with our Canadian operations and our Canadian currency denominated debt. Therefore, we sometimes hedge the net investment of our foreign operations in Canada by purchasing foreign exchange derivatives, such as purchased put option contracts, to mitigate the risk of changes in the value of our net investment in our Canadian subsidiary that can occur as a result of changes in currency exchange rates. As of March 31, 2015 we held no foreign currency derivatives. We do not use financial instruments for trading or other speculative purposes.

 

ITEM 4T. CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) 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 management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognized that any system of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

In accordance with SEC rules, an evaluation was performed under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer of the effectiveness, as of March 31 2015, of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2015, the Company’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in our reports that we file under the Exchange Act 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 management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

There was no change in our internal control over financial reporting that occurred during the quarter ended March 31, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II—OTHER INFORMATION

 

ITEM 1A. RISK FACTORS

There have been no material changes in the risk factors that were disclosed in Item 1A, under the caption “Risk Factors” in Part I of our 2014 10-K.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchase of Equity Securities

The following table provides information as of and for the three months ended March 31, 2015 with respect to shares of common stock repurchased by us during that period:

 

     (a)      (b)      (c)      (d)  

Period

   Total
Number of
Shares
Purchased(1)
     Average Price
Paid
per Share
     Total Number of
Shares Purchased
as Part of Publicly
Announced
Plans or
Programs
     Maximum Dollar
Value of Shares
that may yet
be Purchased
under the Plans
or Programs
 

January 1, 2015 to January 31, 2015

     —        $ —          —        $ —    

February 1, 2015 to February 28, 2015

     —        $ —          —        $ —    

March 1, 2015 to March 31, 2015

     9,998       $ 3.52         —        $ —    
  

 

 

          

Total

  9,998    $ 3.52      —     $ —    
  

 

 

          

 

(1) We cancelled these 9,998 shares in satisfaction of tax withholding obligations of holders of restricted shares which arose as a result of the vesting of those shares.

 

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable.

 

ITEM 6. EXHIBITS

(a) Exhibits.

 

Exhibit No.

  

Description of Exhibit

31.1    Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002
31.2    Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002
32.1*    Certification of Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002
32.2*    Certification of Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002
101    XBRL (eXtensive Business Reporting Language). The following financial materials from the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2015, formatted in XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Loss, (iv) Condensed Consolidated Statements of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements.

 

* The certifications attached as Exhibits 32.1 and 32.2 accompanying this Quarterly Report on Form 10-Q are not deemed filed with the SEC, and are not to be incorporated by reference into any filing of The Coast Distribution System, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in any such filing.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

THE COAST DISTRIBUTION SYSTEM, INC.
Dated: May 15, 2015 By: /S/ SANDRA A. KNELL
Sandra A. Knell

Executive Vice President and

Chief Financial Officer

 

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INDEX TO EXHIBITS

 

Exhibit No.

  

Description of Exhibit

31.1    Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002
31.2    Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002
32.1*    Certification of Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002
32.2*    Certification of Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002
101    XBRL (eXtensive Business Reporting Language). The following financial materials from the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2015, formatted in XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Loss, (iv) Condensed Consolidated Statements of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements.

 

* The certifications attached as Exhibits 32.1 and 32.2 accompanying this Quarterly Report on Form 10-Q are not deemed filed with the SEC, and are not to be incorporated by reference into any filing of The Coast Distribution System, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in any such filing.

 

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