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EX-99.4 - EX-99.4 - ConvergeOne Holdings, Inc.d519248dex994.htm
EX-99.2 - EX-99.2 - ConvergeOne Holdings, Inc.d519248dex992.htm
EX-99.1 - EX-99.1 - ConvergeOne Holdings, Inc.d519248dex991.htm
EX-21.1 - EX-21.1 - ConvergeOne Holdings, Inc.d519248dex211.htm
EX-16.1 - EX-16.1 - ConvergeOne Holdings, Inc.d519248dex161.htm
EX-10.21 - EX-10.21 - ConvergeOne Holdings, Inc.d519248dex1021.htm
EX-10.8 - EX-10.8 - ConvergeOne Holdings, Inc.d519248dex108.htm
EX-10.5 - EX-10.5 - ConvergeOne Holdings, Inc.d519248dex105.htm
EX-10.4 - EX-10.4 - ConvergeOne Holdings, Inc.d519248dex104.htm
EX-4.2 - EX-4.2 - ConvergeOne Holdings, Inc.d519248dex42.htm
EX-3.2 - EX-3.2 - ConvergeOne Holdings, Inc.d519248dex32.htm
EX-3.1 - EX-3.1 - ConvergeOne Holdings, Inc.d519248dex31.htm
8-K - FORM 8-K - ConvergeOne Holdings, Inc.d519248d8k.htm

Exhibit 99.3

AOS, Inc. and Subsidiaries

Condensed Consolidated

Financial Statements

October 1, 2017

 

LOGO


AOS, Inc. and Subsidiaries

October 1, 2017

Contents

 

Condensed Consolidated Financial Statements

  

Balance Sheets

     1  

Statements of Operations

     3  

Statements of Stockholders’ Equity

     4  

Statements of Cash Flows

     5  

Notes to Financial Statements

     6  


AOS, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

Assets

 

     As of
December 25, 2016
     As of
October 1, 2017
 
     (Restated)      (Unaudited)  

Current Assets

     

Cash and cash equivalents

   $ 9,953,783      $ 12,310,704  

Accounts receivable, trade, net of allowance; 2016 - $375,532, 2017 - $304,135

     26,365,786        22,568,609  

Receivable for sale of AOScloud, LLC

     300,000        —    

Returned goods receivable

     800,274        894,615  

Inventories

     1,788,622        1,001,074  

Prepaid expenses

     573,852        528,393  
  

 

 

    

 

 

 

Current assets—continuing operations

     39,782,317        37,303,395  

Current assets—discontinued operations

     135,587        —    
  

 

 

    

 

 

 

Total current assets

     39,917,904        37,303,395  
  

 

 

    

 

 

 

Property, Equipment and Software, Net

     2,177,476        1,565,736  
  

 

 

    

 

 

 

Other Assets

     

Goodwill, net

     2,665,422        2,665,422  

Intangible assets, net

     545,700        460,635  

Other

     71,817        150,799  
  

 

 

    

 

 

 

Total other assets

     3,282,939        3,276,856  
  

 

 

    

 

 

 

Non-current assets—continuing operations

     5,460,415        4,842,592  

Non-current assets—discontinued operations

     18,240        20,199  
  

 

 

    

 

 

 

Total non-current assets

     5,478,655        4,862,791  
  

 

 

    

 

 

 

Total assets

   $ 45,396,559      $ 42,166,186  
  

 

 

    

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

1


AOS, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

Liabilities and Stockholders’ Equity

 

     As of
December 25, 2016
     As of
October 1, 2017
 
     (Restated)      (Unaudited)  

Current Liabilities

     

Accounts payable

   $ 22,273,061      $ 17,111,893  

Accrued compensation

     4,616,881        4,245,604  

Accrued expenses

     2,303,779        958,046  

Deferred lease incentives

     163,618        163,618  

Deferred revenue

     2,246,464        1,817,786  
  

 

 

    

 

 

 

Current liabilities—continuing operations

     31,603,803        24,296,947  

Current liabilities—discontinued operations

     90,170        4,971  
  

 

 

    

 

 

 

Total current liabilities

     31,693,973        24,301,918  
  

 

 

    

 

 

 

Deferred Lease Incentives

     1,108,458        948,913  
  

 

 

    

 

 

 

Total non-current liabilities

     1,108,458        948,913  
  

 

 

    

 

 

 

Total liabilities

     32,802,431        25,250,831  
  

 

 

    

 

 

 

Stockholders’ Equity

     

Common stock, $1 par value; 100,000 shares authorized, 1,197 shares issued and outstanding

     1,197        1,197  

Additional paid-in capital

     9,905,404        9,905,404  

Retained earnings

     2,687,527        7,008,754  
  

 

 

    

 

 

 

Total stockholders’ equity

     12,594,128        16,915,355  
  

 

 

    

 

 

 

Total liabilities and stockholders’ equity

   $ 45,396,559      $ 42,166,186  
  

 

 

    

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

2


AOS, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

 

     Year Ended
December 25, 2016
    39
Weeks Ended
September 25, 2016
    40
Weeks Ended
October 1, 2017
 
     (Restated)     (Unaudited)     (Unaudited)  

Revenue

      

Hardware sales

   $ 143,708,752     $ 105,218,135     $ 109,941,870  

Engineering services

     26,362,400       19,507,232       17,894,561  

Third-party warranty

     6,454,899       4,584,037       5,027,553  

Other revenue

     820,788       681,986       349,613  
  

 

 

   

 

 

   

 

 

 

Total revenue

     177,346,839       129,991,390       133,213,597  
  

 

 

   

 

 

   

 

 

 

Cost of Sales

      

Hardware cost of sales

     115,345,597       84,088,937       88,525,515  

Engineering services cost of sales

     16,961,909       12,637,852       10,765,420  

Other cost of sales

     232,268       191,661       158,596  
  

 

 

   

 

 

   

 

 

 

Total cost of sales

     132,539,774       96,918,450       99,449,531  
  

 

 

   

 

 

   

 

 

 

Gross Profit

     44,807,065       33,072,940       33,764,066  

Operating Expenses

     41,074,901       31,138,076       28,004,991  
  

 

 

   

 

 

   

 

 

 

Operating Income

     3,732,164       1,934,864       5,759,075  

Other Expense

      

Interest expense

     1,357       1,357       433  
  

 

 

   

 

 

   

 

 

 

Income from Continuing Operations

     3,730,807       1,933,507       5,758,642  

Discontinued Operations (Note 10 )

      

Loss from discontinued operations

     (3,235,264     (3,235,264     (244
  

 

 

   

 

 

   

 

 

 

Net Income (Loss)

   $ 495,543     $ (1,301,757   $ 5,758,398  
  

 

 

   

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

3


AOS, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity

 

     Common
Stock
     Additional
Paid-in
Capital
     Retained
Earnings
    Total
Stockholders’
Equity
 

Balance, December 25, 2016 (Restated)

   $ 1,197      $ 9,905,404      $ 2,687,527     $ 12,594,128  

Distributions

     —          —          (1,437,171     (1,437,171

Net income

     —          —          5,758,398       5,758,398  
  

 

 

    

 

 

    

 

 

   

 

 

 

Balance, October 1, 2017 (Unaudited)

   $ 1,197      $ 9,905,404      $ 7,008,754     $ 16,915,355  
  

 

 

    

 

 

    

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

4


AOS, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

 

     Year Ended
December 25,
2016
    39
Weeks Ended
September 25,
2016
    40
Weeks Ended
October 1,
2017
 
     (Restated)     (Unaudited)     (Unaudited)  

Operating Activities

      

Net income (loss)

   $ 495,543     $ (1,301,757   $ 5,758,398  

Items not requiring (providing) cash

      

Depreciation and amortization

     2,479,884       2,226,987       736,208  

Loss on sale of property and equipment

     361,839       361,839       15,084  

Loss on sale of AOScloud, LLC

     434,295       434,295       —    

Deferred lease incentives

     (193,894     (154,529     (159,545

Changes in

      

Accounts receivable, trade

     4,640,196       4,695,093       3,985,860  

Returned goods receivable

     245,063       325,785       (94,341

Inventories

     699,507       464,803       787,548  

Prepaid expenses

     365,341       139,035       45,459  

Other assets

     22,784       8,755       (73,222

Accounts payable, trade

     (2,723,394     (5,169,486     (5,161,168

Accrued compensation

     642,088       1,781,769       (371,277

Accrued expenses

     (947,326     (1,664,912     (1,318,932

Deferred revenue

     (826,653     (919,607     (428,678
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     5,695,273       1,228,070       3,721,394  
  

 

 

   

 

 

   

 

 

 

Investing Activities

      

Purchase of property and equipment

     (477,116     (450,197     (55,703

Proceeds from the sale of AOScloud, LLC

     1,700,000       1,700,000       300,000  

Proceeds from the sale of property and equipment

     2,300       2,300       1,180  
  

 

 

   

 

 

   

 

 

 

Net cash provided by investing activities

     1,225,184       1,252,103       245,477  
  

 

 

   

 

 

   

 

 

 

Financing Activities

      

Repayment of capital lease obligations

     (1,392,793     (1,392,793     —    

Dividends paid

     (4,458,808     (3,636,510     (1,609,950
  

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

     (5,851,601     (5,029,303     (1,609,950
  

 

 

   

 

 

   

 

 

 

Increase (Decrease) in Cash and Cash Equivalents

     1,068,856       (2,549,130     2,356,921  

Cash and Cash Equivalents, Beginning of Year

     8,884,927       8,884,927       9,953,783  
  

 

 

   

 

 

   

 

 

 

Cash and Cash Equivalents, End of Year

   $ 9,953,783     $ 6,335,797     $ 12,310,704  
  

 

 

   

 

 

   

 

 

 

Supplemental Cash Flows Information

      

Interest paid

   $ 64,115     $ 64,439     $ 433  

Capital lease obligation incurred for equipment

     123,228       123,228       —    

Leasehold improvements provided by landlord

     160,763       160,763       —    

Receivable for sale of AOScloud, LLC

     300,000       300,000       —    

Distributions declared

     107,948       —         —    

See Notes to Condensed Consolidated Financial Statements

 

5


AOS, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

October 1, 2017

 

Note 1: Nature of Operations and Summary of Significant Accounting Policies

Nature of Operations

AOS, Inc. was incorporated in Nevada on January 1, 2006. Its wholly-owned subsidiaries include: Alexander Open Systems, Inc. that was incorporated in Kansas on September 1, 1992; AOS, LLC that was organized in Missouri on January 31, 2005; AOSNC, LLC that was organized in Nebraska on August 26, 2005; eTek Global, Inc., a Kansas Corporation, that was acquired on June 3, 2011; and AOScloud, LLC, that was organized in Kansas on July 3, 2012.

Alexander Open Systems, Inc., AOS, LLC and AOSNC, LLC design, sell, install and service computer network systems. eTek Global, Inc. designs intranet portals using the SharePoint system. AOScloud, LLC provides data center-based hosting solutions. The Company’s primary customers are state and local governments, medical, legal, school districts and universities as well as large corporate accounts located throughout the Midwest.

As discussed in Note 10, in 2015 the Company ceased the operations of its Texas division and has reported the activity for 2015 and 2016 as discontinued operations in the consolidated statements of operations. In 2016 the Company sold virtually all of the assets of AOScloud, LLC and has reported the activity for 2015 and 2016 as discontinued operations in the consolidated statements of operations. The Company applied the provisions of ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, for the discontinued operations disclosures.

Basis of Presentation

The condensed consolidated financial statements of AOS, Inc. and Subsidiaries (collectively, the “Company”) have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for the fair presentation have been included. Operating results for the nine months ended October 1, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. The condensed consolidated balance sheet of the Company as of December 25, 2016 has been derived from the audited balance sheet of the Company as of that date. Certain information and note disclosures normally included in the Company’s annual financial statements prepared in accordance with GAAP have been condensed or eliminated. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s annual financial statements.

Principles of Consolidation

The condensed consolidated financial statements include the accounts of the Company. All significant intercompany balances have been eliminated.

 

6


AOS, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

October 1, 2017

 

Fiscal Year

The Company operates on a fiscal year based on 52- or 53-week periods ending on the last Sunday in December. Fiscal year ended December 25, 2016 (“FY 2016”) was 52 weeks. Third quarter ended September 25, 2016 (“Q3YTD 2016”) and October 1, 2017 (“Q3YTD 2017”) were 39 and 40 weeks, respectively.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Revenue Recognition

The Company recognizes revenue, net of sales taxes, when all of the following are present: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, fee to the customer is fixed or determinable and collectability is reasonably assured.

The Company entered into short-term contracts to install computer systems, whereby the contract is generally completed within the same year that the contract began. Services primarily relate to design and installment of hardware. These services are charged to customers based upon time and material or a predetermined agreed upon fixed fee. Revenue related to services is recognized based on hours spent. For contracts with anticipated services less than 40 hours, revenue is recognized as time is accrued on the services performed. For contracts with anticipated services greater than 40 hours, which generally require a Project Manager to oversee, revenue is recognized on a proportional performance basis. Management determines billing amounts the last week of each fiscal month based on the fixed contract amount and the proportion of the project completed. The proportion is based on hours worked on the project to date versus the total hours budgeted for the project.

Revenue associated with hardware sales is recognized based on the sales terms. Sales terms usually are stated as F.O.B. destination, and delivery is not deemed to have occurred until the point in time when the product is received by the customer.

Revenue is recognized from software sales when the customers acquire the right to use or copy software under license, provided that all revenue recognition criteria have been met.

The sale of hardware and software products may also include the provision of services, and the associated contracts may contain multiple elements. If services are performed in conjunction with a hardware or software sale, revenue is recognized for each portion of the arrangement that is attributable to the items as they are delivered or the services are performed. The selling price is determined in a manner that is consistent with that used to determine the price to sell the deliverable on a standalone basis.

The Company sells certain third-party service contracts for which the sale is evaluated whether it should be recorded as a gross sale or a net sale. If the Company acts as a principal in the transaction and assume the risks and rewards of ownership, the sale is recorded gross, and the entire selling price is recorded in sales and the cost to the third-party provider is recorded in cost of goods sold. If the Company is acting as an agent or broker, the sale is recorded net, and the cost to the third-party provider is recorded as a reduction of sales and there are no cost of goods sold. Net sales are presented within Third-Party Warranty and Engineering Services in the condensed consolidated statements of operations.

 

7


AOS, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

October 1, 2017

 

Shipping and Handling Costs

Freight billed to customers is considered sales revenue and the related freight costs as cost of sales.

Advertising

Advertising costs are expensed when incurred. Advertising costs were $573,197, $743,877 and $899,736 for FY 2016, Q3YTD 2016 and Q3YTD 2017, respectively. Advertising costs are offset by cooperative rebates received from vendors, which were $219,259, $461,951 and $219,259 for FY 2016, Q3YTD 2016 and Q3YTD 2017, respectively.

Cash and Cash Equivalents

The Company considers all liquid investments with original maturities of three months or less to be cash equivalents. At December 25, 2016 and October 1, 2017, cash equivalents consisted primarily of money market accounts with brokers and certificates of deposit.

Accounts Receivable

Accounts receivable are stated at the amount billed to customers. The Company provides an allowance for doubtful accounts, which is based upon a review of outstanding receivables, historical collection information and existing economic conditions. Accounts receivable are ordinarily due 30 days after the issuance of the invoice. Accounts past due more than 120 days are considered delinquent. Delinquent receivables are written off based on individual credit evaluation and specific circumstances of the customer.

Returned Goods Receivable

Returned goods receivable are stated at the amount due from vendors for customer returns of product. Customer returns and reorders are processed and executed by the Company while credit from the vendors is in process.

Inventories

Inventories consist primarily of hardware in transit and prepaid inventory. Inventories are stated at lower of cost or market. Cost of inventory has been determined using the first-in, first-out (FIFO) method.

Property, Equipment and Software

Property, equipment and software acquisitions are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are charged to expense using straight-line or accelerated methods over the estimated useful life of each asset. Assets under capital lease obligations and leasehold improvements are amortized over the shorter of the lease term or their respective estimated useful lives.

 

8


AOS, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

October 1, 2017

 

The estimated useful lives for each major depreciable classification of property and equipment and software are as follows:

 

Software    3 years
Computer equipment    3-5 years
Furniture and fixtures    7-10 years
Leasehold improvements    Lease life
Automobiles    5 years

Long-lived Asset Impairment

The Company evaluates the recoverability of the carrying value of long-lived assets whenever events or circumstances indicate the carrying amount may not be recoverable. If a long-lived asset is tested for recoverability and the undiscounted estimated future cash flows expected to result from the use and eventual disposition of the asset is less than the carrying amount of the asset, the asset cost is adjusted to fair value and an impairment loss is recognized as the amount by which the carrying amount of a long-lived asset exceeds its fair value.

No asset impairments on long-lived tangible assets were recognized during the periods presented.

Goodwill

Goodwill is evaluated annually for impairment or more frequently if impairment indicators are present. A qualitative assessment is performed to determine whether the existence of events or circumstances leads to a determination that it is more likely than not the fair value is less than the carrying amount, including goodwill. If, based on the evaluation, it is determined to be more likely than not that the fair value is less than the carrying value, then goodwill is tested further for impairment. If the implied fair value of goodwill is lower than its carrying amount, a goodwill impairment is indicated and goodwill is written down to its implied fair value. No goodwill impairment losses were recognized during the periods presented.

Intangible Assets

Intangible assets include domain name, contracted customers and customer relationships. These assets are amortized using the straight-line method. The domain name is amortized over one and a half years; the contracted customer intangibles are amortized over the life of the contracts (three years) and the customer relationships are amortized over nine years. Such assets are periodically evaluated as to the recoverability of their carrying values. No impairment losses were recognized during the periods presented.

Incentive Payments

The Company receives third-party manufacturer incentives that result in a price reduction on equipment sold to the Company’s customers. The Company records these incentives as a reduction of cost of sales. For FY 2016, Q3YTD 2016 and Q3YTD 2017, the Company recorded $3,912,832, $4,117,303 and $5,313,223, respectively, in incentive payments.

 

9


AOS, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

October 1, 2017

 

Deferred Revenue

The Company sells certain services under arrangements that permit customers to prepay for services to be provided. These prepayments are deferred and recognized over the periods in which the services are performed.

Income Taxes

The stockholders of AOS, Inc. and all of its subsidiaries are either limited liability companies or corporations where the respective stockholders have elected to be taxed as an “S” Corporation under provisions of the Internal Revenue Code or similar section of the state income tax law for the year ended December 25, 2016. Therefore, taxable income or loss is reported to the individual stockholders and members for inclusion in their respective tax returns and no provision for federal and state income taxes is included in these statements.

The Company recognizes interest and penalties on income taxes as a component of income tax expense.

Self-Insurance

The Company has elected to self-insure certain costs related to employee health benefit programs. Costs resulting from noninsured losses are charged to income when incurred. The Company purchased insurance that limits their exposure for individual claims and that limits their aggregate exposure.

Taxes Collected from Customers and Remitted to Governmental Authorities

Taxes collected from customers and remitted to governmental authorities are presented in the accompanying consolidated statements of operations on a net basis.

Reclassifications

Certain reclassifications have been made to the 2016 financial statements to conform to the 2017 financial statement presentation. These reclassifications had no effect on net earnings.

Note 2: Restatement

The Company did not quantify and record an impairment loss on the property, equipment and software related to its AOScloud, LLC subsidiary at December 27, 2015. The impairment loss was recorded in 2016 when certain assets of the subsidiary were sold to a third party. Fiscal years 2015 and 2016 have been restated for the error. In addition to the restatement for the error above, on December 15, 2017, the Company was acquired and required to report goodwill as a non-amortizable asset, whereas in prior years, goodwill was valued under the provisions of ASU 2014-02—Intangibles—Goodwill and Other (Topic 350): Accounting for Goodwill (a consensus of the Private Company Council), which allowed goodwill to be amortized over a 10 year useful life. The new method of accounting was required as the Company meets the definition of a public business entity as of December 15, 2017 and comparative financial statements of prior years have been adjusted to apply the new method retrospectively. This restatement increased previously reported income for the year ended December 25, 2016 by $4,201,355 and reduced previously reported income for the year ended December 27, 2015 by $4,105,226. The following financial statement line items for fiscal year 2016 were affected by the change in accounting principle.

 

10


AOS, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

October 1, 2017

 

     As Restated      2016
As
Previously
Reported
     Effect of
Change
 

Consolidated Statement of Operations

        

Loss from Discontinued Operations

   $ 3,235,264      $ 7,170,076      $ (3,934,812

Operating Expenses

     41,074,901        41,341,444        (266,543

Consolidated Balance Sheet

        

Retained Earnings

     2,687,527        1,621,358        1,066,169  

Goodwill, net

     2,665,422        1,599,253        1,066,169  

Consolidated Statement of Cash Flows

        

Net Income (Loss)

     495,543        (3,705,812      4,201,355  

Depreciation and Amortization

     2,479,884        2,746,427        (266,543

Loss on sale of AOScloud, LLC

     434,295        4,369,107        (3,934,812

Note 3: Related Party Transactions

The Company leased office space under operating leases with Optober Investments I, LLC and Optober Investments III, LLC (“collectively, Optober”). Both entities are related parties that are 100 percent owned by a minority shareholder. For FY 2016 and Q3YTD 2016, the Company paid $845,302 and $845,302, respectively, to the related parties included in rent expense. In 2016, the operating leases with Optober were discontinued.

Note 4: Property, Equipment and Software

Property, equipment and software consist of the following at December 25, 2016 and October 1, 2017:

 

     As of
December 25,
2016
     As of
October 1,
2017
 
            (Unaudited)  

Software

   $ 1,112,146      $ 1,078,985  

Computer equipment

     2,326,856        2,394,193  

Furniture and fixtures

     1,811,766        1,685,246  

Leasehold improvements

     2,020,429        1,944,137  

Automobiles

     49,545        49,545  
  

 

 

    

 

 

 

Total cost

     7,320,742        7,152,106  

Accumulated depreciation and amortization

     (5,130,786      (5,566,171
  

 

 

    

 

 

 
     2,189,956        1,585,935  

Less: Property, equipment and software—discontinued operations

     12,480        20,199  
  

 

 

    

 

 

 

Property, equipment and software—continuing operations

   $ 2,177,476      $ 1,565,736  
  

 

 

    

 

 

 

Depreciation and amortization expense on the above property, equipment and software for FY 2016, Q3YTD 2016 and Q3YTD 2017 was $651,145, $2,141,922 and $651,143, respectively.

 

11


AOS, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

October 1, 2017

 

Note 5: Acquired Intangible Assets and Goodwill

The carrying basis and accumulated amortization of recognized intangible assets at December 25, 2016 and October 1, 2017 were:

 

     2016
(Restated)
     2017
(Unaudited)
 
     Gross
Carrying
Amount
     Accumulated
Amortization
     Accumulated
Impairment
Loss
     Gross
Carrying
Amount
     Accumulated
Amortization
     Accumulated
Impairment
Loss
 

Amortized intangible assets

                 

Customer relationships

   $ 1,020,780      $ 475,080      $ —        $ 1,020,780      $ 560,145      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total amortized intangible assets

     1,020,780        475,080        —          1,020,780        560,145        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Goodwill

     2,665,422        —          —          2,665,422        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Amortized and intangible assets and goodwill—continuing operations

   $ 3,686,202      $ 475,080      $ —        $ 3,686,202      $ 560,145      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Amortization expense recorded for FY 2016, Q3YTD 2016 and Q3YTD 2017 was $113,420, $85,065 and $85,065, respectively. Estimated amortization expense for each of the next five years is:

 

2017

   $ 28,354  

2018

     113,420  

2019

     113,420  

2020

     113,420  

2021

     92,021  

Note 6: Operating Leases

Noncancellable operating leases for branch sales offices and certain office furniture and equipment expire in various years through 2023. These leases generally contain renewal options for various periods and require the Company to pay all executory costs (property taxes, maintenance and insurance). Lease incentives received by the Company such as free rent periods, escalating rent provisions and leasehold improvement allowances are deferred and amortized on a straight-line basis over the term of the respective lease agreements, and are recorded as a reduction of rent expense. At December 25, 2016 and October 1, 2017, the Company accrued $1,112,530 and $1,272,076, respectively, for the deferral of the benefit received for free rent periods, future escalating rent payments and leasehold improvement allowances. These amounts are included in deferred lease incentives on the accompanying condensed consolidated balance sheets.

 

12


AOS, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

October 1, 2017

 

Future minimum lease payments at October 1, 2017 were:

 

2017

   $ 439,464  

2018

     1,552,923  

2019

     1,470,897  

2020

     1,416,016  

2021

     1,301,739  

2022

     1,200,192  

Thereafter

     78,339  
  

 

 

 

Total

   $ 7,459,570  
  

 

 

 

Total rent expense under operating leases for FY 2016, Q3YTD 2016 and Q3YTD 2017 were $1,255,094, $2,393,756 and $2,833,221, respectively.

Note 7: Lines of Credit

At December 25, 2016 and October 1, 2017, the Company has a $45,000,000 line of credit from Castle Pines Capital, LLC. At both December 25, 2016 and October 1, 2017, there was $0 borrowed against this line. The balance is payable on demand and has two components. The first component is a floor plan financing arrangement whereby the Company’s inventory purchases can be financed with 30, 45 or 60 day interest-free periods. The Company classifies amounts outstanding under the floor plan financing as accounts payable. The second component of the line of credit consists of an extended pay line, whereby all inventory purchases that are beyond the interest-free term roll into the interest-bearing portion of the line. Interest on this portion of the line is to be paid weekly at the prime rate, plus 1.5 percent (5.25 percent as of December 25, 2016 and 5.75 percent as of October 1, 2017). There were no outstanding balances owed on the extended pay portion of the line of credit as of December 25, 2016 and October 1, 2017. The Company also classify amounts outstanding under the extended pay line as accounts payable.

This line of credit is collateralized by the Company’s accounts receivable, all other assets and guarantees by all of its shareholders. All payments received by the Company on their accounts receivable are directly deposited into a lock-box account so that the Company can apply payment against the obligation. A power of attorney has been granted to Castle Pines Capital, LLC by the Company with respect to collections, security interests and related aspects of this agreement.

At December 25, 2016 and October 1, 2017, the credit agreement was subject to the following covenants:

The Company will at all times maintain on a consolidated basis:

 

  (A) A ratio of current assets to current liability of at least 1.00.

 

  (B) Tangible net worth equal to at least $7,000,000.

 

  (C) A maximum funded debt to tangible net worth ratio of no more than 2.50 to 1.00.

 

  (D) A minimum cumulative fixed coverage charge ratio of 1.25 to 1.00. This ratio will be measured on a trailing 12 month basis at the end of each fiscal month.

Inventory financed through the floor plan is included in operating activities in the condensed consolidated statements of cash flows.

 

13


AOS, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

October 1, 2017

 

Note 8: Profit Sharing Plan

The Company has established a defined contribution 401(k) profit sharing plan providing benefits for substantially all of their employees. The Company’s matching contributions for FY 2016, Q3YTD 2016 and Q3YTD 2017 totaled $204,328, $228,840 and $292,270, respectively.

Note 9: Significant Estimates and Concentrations

Accounting principles generally accepted in the United States of America require disclosure of certain significant estimates and current vulnerabilities due to certain concentrations. Those matters include the following:

Major Suppliers

For FY 2016, two vendors represented 71 percent of total company purchases, and for Q3YTD 2017 three vendors represented approximately 82 percent of total company purchases.

Note 10: Discontinued Operations

As of December 27, 2015, the Company elected to discontinue the operations of its Texas division, effective in January 2016, due to poor profitability. The closure of this entity resulted in the discontinuation of any marketing and sales effort in the state of Texas for all product and service offerings, which includes hardware sales and engineering services. The remaining assets were analyzed for impairment with no impairment loss assessed by management. The operations of the discontinued division have been reclassified to include all revenues and expenses of the division in discontinued operations. After the closure of the entity, the remaining assets and liabilities were transferred to Alexander Open Systems, Inc. See below for a reconciliation of the major classes of line items from the condensed consolidated statements of operations and condensed consolidated balance sheets for FY 2016 and Q3YTD 2017.

Reconciliation of the Major Classes of Line Items Constituting Loss of Discontinued

Operations that are Disclosed in the Notes to Condensed Consolidated Financial Statements to the Loss

of Discontinued Operations that are Presented

in the Condensed Consolidated Statements of Operations

 

     December 25, 2016      September 25, 2016  
     (Restated)      (Unaudited)  

Major classes of line items constituting loss of discontinued operations

     

Total revenues

   $ 243,702      $ 243,702  

Total cost of sales

     (152,710      (152,710

Operating expenses

     (382,784      (382,784

Other expense—interest expense

     (9,543      (9,543
  

 

 

    

 

 

 

Total loss on discontinued operations that is presented in the condensed consolidated statements of operations

   $ (301,335    $ (301,335
  

 

 

    

 

 

 

 

14


AOS, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

October 1, 2017

 

Reconciliation of the Carrying Amounts of Major Classes of Assets and Liabilities

of the Discontinued Operation that are Disclosed in the Notes to Condensed Consolidated Financial Statements

to Total Assets and Liabilities of the Disposal Group

that are Presented Separately in the Condensed Consolidated Balance Sheets

 

     December 25, 2016      October 1, 2017  
     (Restated)         

Carrying amounts of major classes of assets included as part of discontinued operations:

     

Inventories

   $ 332      $ —    

Property, equipment and software, net

     12,480        20,199  

Other noncurrent assets

     5,760        —    
  

 

 

    

 

 

 

Total major classes of assets of the discontinued operations

   $ 18,572      $ 20,199  
  

 

 

    

 

 

 

Carrying amounts of major classes of liabilities included as part of discontinued operations:

     

Accounts payable

   $ 9,889      $ —    

Accrued expenses

     671        —    
  

 

 

    

 

 

 

Total major classes of liabilities of the discontinued operations

   $ 10,560      $ —    
  

 

 

    

 

 

 

There were no significant statement of cash flows activities for the year ended December 25, 2016 nor the periods ended October 1, 2017 and September 25, 2016.

As of July 27, 2016, the Company elected to sell the AOScloud, LLC component, effective on that date, due to continuing operating losses. As part of the discontinuation, all data hosting operations and related services were eliminated. The remaining assets were analyzed for impairment and it was determined there were no material impairment losses. All existing property, equipment and software were included in the asset purchase agreement for a sale price of $2,000,000. The sales agreement also includes a contingent purchase price where the Company may earn up to $800,000 each year for two years if certain revenue targets are achieved. See below for a reconciliation of the major classes of line items from the condensed consolidated statements of operations and condensed consolidated balance sheet for the year ended December 25, 2016.

 

15


AOS, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

October 1, 2017

 

Reconciliation of the Major Classes of Line Items Constituting Loss of Discontinued

Operations that are Disclosed in the Notes to Condensed Consolidated Financial Statements to the Loss

of Discontinued Operations that are Presented

in the Condensed Consolidated Statements of Operations

 

     December 25, 2016      September 25, 2016  
     (Restated)      (Unaudited)  

Major classes of line items constituting loss of discontinued operations

     

Total revenues

   $ 4,566,659      $ 4,566,659  

Total cost of sales

     (3,967,845      (3,967,845

Operating expenses

     (3,479,204      (3,479,204

Other expense - interest expense

     (53,539      (53,539
  

 

 

    

 

 

 

Total loss on discontinued operations that is presented in the condensed consolidated statements of operations

   $ (2,933,929    $ (2,933,929
  

 

 

    

 

 

 

Reconciliation of the Carrying Amounts of Major Classes of Assets and Liabilities

of the Discontinued Operation that are Disclosed in the Notes to Condensed Consolidated Financial Statements

to Total Assets and Liabilities of the Disposal Group

that are Presented Separately in the Condensed Consolidated Balance Sheets

 

     December 25, 2016  
     (Restated)  

Carrying amounts of major classes of assets included as part of discontinued operations:

  

Accounts receivable, trade, net of allowance

   $ 135,255  
  

 

 

 

Total major classes of assets of the discontinued operations

   $ 135,255  
  

 

 

 

Carrying amounts of major classes of liabilities included as part of discontinued operations:

  

Accrued compensation expense

   $ 35,704  

Accrued expenses

     43,906  
  

 

 

 

Total major classes of liabilities of the discontinued operations

   $ 79,610  
  

 

 

 

The impact on significant statement of cash flow activities is presented below for the year ended December 25, 2016 and the period ended September 25, 2016. There were no significant cash flow activities for the period ended October 1, 2017.

 

     December 25, 2016      September 25, 2016  
     (Restated)      (Unaudited)  

Significant operating items not involving cash

     

Depreciation and amortization

   $ 241,761      $ 241,761  

Loss on sale of property and equipment

     434,295        434,295  

Significant investing activities

     

Purchase of property and equipment

   $ 211,330      $ 211,330  

Note 11: Subsequent Events

Subsequent events have been evaluated through February 9, 2018, which is the date the condensed consolidated financial statements were available to be issued.

On December 15, 2017, the Company entered into a stock purchase agreement with ConvergeOne, Inc. to sell all the outstanding shares of common stock of the Company for a base purchase price of $64,500,000 subject to certain purchase price adjustments.

 

16