saddles inc presentation copy

Exploring the Future of…

ACES Consulting, LLPNovember 6, 2015

ACES Consulting, LLP“Our Experts, Your Success”

Tue Tran, CPA

DirectorFederal, State and

Local Tax, Tax Credits/Incentives

Anisa Din, CPA

Sr. Manager

Andrea Alvarez,

CMCSr. Manager

Corporate Audit, Financial

Management

IT Consulting, Information and

Knowledge Management

Kevin Nguyen

Engagement Consultant

Mergers and Acquisitions,

Corporate Infrastructure

Jordan Anwer

Business Analyst

Strategy and Organization,

Financial Management

Recommendations

Saddles Inc. Overview

Financing

Tax Counsel

Operating Improvements

ERP Restoration

Physical Expansion

Plan and Timeline

Audit Counsel

Recommendations

Recommendations

• Replace system with SAP MEVI-RUS

• Expand production in Sullivan, TN

• Hire and train additional workers

• Finance projects with long-term bonds

Cost

Costs

• ERP: $850,000 over 8 months, plus maintenance and consulting fees

• Expansion: $1.5 million plus rent

• 15% payroll increase

• Up to six months of production shock

• Up to $300,000 annual interest

Cost

Benefits

• 20% increase in output

• Permanent increase in efficiency, productivity, and internal controls

• Technological superiority

• Minimum tax savings of $1 million



Financing

Tax Counsel


ERP Restoration

Physical Expansion

Plan and Timeline

Audit Counsel

Recommendations

S.W.O.T Analysis Strengths• High quality • Brand loyalty• Product

Differentiation

Weaknesses• Production

capacity• Weak

supporting departments

• Outdated ERP

Opportunities• Growing

demand• Potential

expansion• Room for

growth

Threats• High sales concentration • Active poaching

In Comparison to Industry LeadersBrands that we will use as a benchmark:

• Danier

• Tandy Leather Factory

• Fossil

• American Saddlery Inc.

- Fossil

- American Saddlery Inc.

Audit Counsel


Financing

Tax Counsel


ERP Restoration

Physical Expansion

Plan and Timeline

Audit Counsel

Recommendations

AR = IR x CR x DRHIGH RISK1. Biggest

asset2. Easiest

asset to manipulate

3. Incentive to manipulate

HIGH RISK1. Old system of

control with the ERP system

2. Periodic vs. perpetual inventory method

3. Segregation of duties

4. Managements oversight of internal controls

Risk of Material Misstatement

5% LOW RISKAuditors would have to do more testing in order to achieve a low audit risk

Critical Assertions – Inventory

• Do the assets exist?Existence

• Is the account valued correctly?• Is the account recorded accurately?

Valuation or Accuracy

• Does the company really own the assets that are being reported?

Rights and Obligations

Procedures Performed for Each Assertion

Existence

• Vouching documents

• Observe and recount

• Investigate significant difference

Valuation or Accuracy

• Evaluate estimates

• Check consistency of costing method

• Compare cost or market data

Rights and Obligation

• Confirmations• Review

inventory on consignment

POSSIBLE PROBLEMS DURING AUDIT: VALUATION DIFFICULTIES

Tax Counsel


Financing

Tax Counsel


ERP Restoration

Physical Expansion

Plan and Timeline

Audit Counsel

Recommendations

Tax Services

ACES

• Filing jurisdictions• Inventory reservesCompliance

• Maximize savings for capital projects

Strategic planning

Tax JurisdictionsU.S. federal income tax

International taxes where applicable

State taxes where there is substantial nexus• Essentially physical presence

• No sales or use tax

Income Tax

Franchise Tax

Excise Tax

Property Tax

Texas New Mexico Tennessee

Apportionment FactorCalculated based on• Property value

• Payroll expense

• Sales to customers

Everywhere

In-state

Significant State TaxesNM Income Tax TX Franchise Tax TN Franchise Tax TN Excise Tax

Rate 7.3% 0.95% 0.25% 6.5%

Levied on Income Income Net worth/property Income

Apportion Medium High Low Low

Net tax due Medium Medium Low Low

Accounting for Inventory ReservesAnticipate

loss• COGS• Create reserves

Actual loss

identified

• Empty Reserves• Inventory

Income Statement

• Realize costs before goods sold• Tax due per books

Tax Treatment

Reg. §1.471-2(f)

Basic principle: Cannot deduct

estimates

Cannot deduct inventory reserve

Cost

Net Tax Effect • Reduce COGS for inventory reserve recorded

• Deduct business loss when inventory sold/disposedGAAP Tax

Potential Tax Savings

Deductible expenses

State & local tax

R&D tax credit

State & local tax

NM Income Tax TX Franchise Tax TN Franchise Tax TN Excise Tax

Rate 7.3% 0.95% 0.25% 6.5%

Levied on Income Income Net worth/property Income

Apportion Medium High Low Low

Net tax due Medium Medium Low Low

Why Tennessee?

State & local tax

Low property tax in Sullivan county 50% property tax

Full costs

$225,000

$200,000

FastTrack grants

Jobs tax credit

Machinery tax credit



Financing

Tax Counsel


ERP Restoration

Physical Expansion

Plan and Timeline

Audit Counsel

Recommendations

CostOperating and

Technology Issues

• Difficulties in bookkeeping

• Unable to meet demands• Outdated ERP

Inefficiencies

Risk if no action is taken

• Productivity• Missing out on growth

opportunities

Strengths• High quality • Brand loyalty• Product

Differentiation

Weaknesses• Production

capacity• Weak

supporting departments

• Outdated ERP

Opportunities• Growing

demand• Potential

expansion• Room for

growth

Threats• High sales concentration • Active poaching

Solutions to Issues• Implement new ERP

system (SAP MEVI-RUS)• Expand• Improve infrastructure

& internal controls• Retrain employees

Cost

Current Plan

Option 1:

• Outdated

• Not cost-effective

Option 2:

• Too slow

• High risk

Why ACES for ERP Implementation?

SAP MEVI-RUS designed for industry

Comparable price, higher value

Systems integration - the whole thing

Project management

Product functional specialists

Trainers

ERP Restoration


Financing

Tax Counsel


ERP Restoration

Physical Expansion

Plan and Timeline

Audit Counsel

Recommendations

Enterprise Resource PlanningPurpose:

integrate all functions that will serve all company objectives• Improve information sharing• Enhance business

performance• Promote service efficiency

Efficiency & Effectiveness

Timely Decision-Making

Quick ROI

Infrastructure20%

ERP Software20%

Implementation60%

Chart TitleERP Solution Components

Major Reasons for Adopting ERPUpdated ERP

Target Clients > 20 users

Partner Profile IT Consultants

Success Factors Project Management

Offer Tailor Made Solution

Deployment Local/On-Site

Growth StrategyCustom Development YES

Annual Growth Numerous More Clients

Transaction Engine

ERP Functionality

Finance

Human Resources

eBusiness

Customer RelationshipSupply Chain

Management

Data Analysis

Implementation: $850,000

8 Month Process

ERP Cost/Benefit Analysis

Hardware ($228,000)

Infrastructure ($165,000)

Space Planning ($24,000) Training ($175,000)

Utilities and Software ($182,000)

Organization/Staff ($76,000)

Investment in a New ERP

Total Cost: $850,000

Cost

SAP MEVI-RUS for ERP

• Technological edge vs. competitors

• Efficiency & accuracy

• Out-of-box, customization-free

• Cloud-based storage (no server rooms)

• Higher benefits than costs

Physical Expansion


Financing

Tax Counsel


ERP Restoration

Physical Expansion

Plan and Timeline

Audit Counsel

Recommendations

Expansion Option 1

Mergers and Acquisitions

Expansion Option 2: Rent & Furnish Facility

Warehouse56,000 square foot space

24 foot ceiling heightLocated on I-26

$2.4/square foot per year($11,200/month, $136,000/year)

Expansion Option 2: Rent & Furnish FacilityPros:

• More control• New equipment• ERP convenience

Cons:• No potential gain from

intangibles

Plan and Timeline


Financing

Tax Counsel


ERP Restoration

Physical Expansion

Plan and Timeline

Audit Counsel

Recommendations

Initiation Planning Analysis & Design Realization Transition Operation

Major Phases of ERP Implementation

ERP Key Implementation DatesProject Kickoff

February 1, 2016

Functional Process ApprovalMay 29, 2016

CRP Pilot Complete-Go/No GoJune 26,

2016

End-User Training Begins

July 1, 2016

Data Conversion

BeginsSeptember 4,

2016

Go Live!

October 10, 2016

Saddles’ Internal Responsibilities

Full-Time Staff

Phased Implementation

Approach

CommunicationJob-Specific

End User Training

Project Board

Project ManagerOverall User Coordinator

Business Integration Lead

Procurement User Lead

Procurement Functional Team

IT Technical Stream Lead: Implementation/Development

Procurement Stream Lead

HR/Payroll User Lead

HR/Payroll Stream Lead

Finance User Lead

Finance Stream Lead

HR/Payroll Functional Team

Finance Functional Team

Implementation Team Structure

Financing


Financing

Tax Counsel


ERP Restoration

Physical Expansion

Plan and Timeline

Audit Counsel

Recommendations

Long-term bonds• Limited access to outside equity

• No public offerings at this time

• Interest expense is tax-deductible

A Brighter Future, Together

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