Attached files
file | filename |
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EX-99.4 - EX-99.4 - First Eagle Alternative Capital BDC, Inc. | d905476dex994.htm |
EX-99.3 - EX-99.3 - First Eagle Alternative Capital BDC, Inc. | d905476dex993.htm |
EX-99.1 - EX-99.1 - First Eagle Alternative Capital BDC, Inc. | d905476dex991.htm |
EX-32.2 - EX-32.2 - First Eagle Alternative Capital BDC, Inc. | d905476dex322.htm |
EX-32.1 - EX-32.1 - First Eagle Alternative Capital BDC, Inc. | d905476dex321.htm |
EX-31.2 - EX-31.2 - First Eagle Alternative Capital BDC, Inc. | d905476dex312.htm |
EX-31.1 - EX-31.1 - First Eagle Alternative Capital BDC, Inc. | d905476dex311.htm |
10-K/A - 10-K/A - First Eagle Alternative Capital BDC, Inc. | d905476d10ka.htm |
Exhibit 99.2
OEM Group, LLC and
Subsidiaries
Consolidated Financial Report (Unaudited)
December 31, 2017
Contents
Financial statements |
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Consolidated balance sheets |
1 | |||
Consolidated statements of operations and comprehensive loss |
2 | |||
Consolidated statements of members equity |
3 | |||
Consolidated statements of cash flows |
4 | |||
Notes to consolidated financial statements |
5-16 |
OEM Group, LLC and Subsidiaries
Consolidated Balance Sheets
December 31, 2017 and 2016
2017 | 2016 | |||||||
Assets |
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Current assets: |
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Cash |
$ | 1,177,589 | $ | 2,043,415 | ||||
Accounts receivable, net |
5,268,280 | 5,556,792 | ||||||
Inventories, net |
8,110,331 | 8,778,522 | ||||||
Cost and estimated earnings in excess of billings on contracts in process |
1,020,127 | 1,589,206 | ||||||
Prepaid expenses and other current assets |
1,873,256 | 1,851,161 | ||||||
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Total current assets |
17,449,583 | 19,819,096 | ||||||
Property, plant and equipment, net |
2,736,739 | 2,767,044 | ||||||
Intangible assets, net |
8,134,217 | 8,966,840 | ||||||
Goodwill, net |
10,530,481 | 11,813,382 | ||||||
Other noncurrent assets |
361,429 | 172,766 | ||||||
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$ | 39,212,449 | $ | 43,539,128 | |||||
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Liabilities and Members Equity |
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Current liabilities: |
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Current portion of long-term debt |
$ | 300,070 | $ | 1,321,378 | ||||
Accounts payable |
6,317,706 | 5,617,515 | ||||||
Customer deposits |
556,297 | 2,240,849 | ||||||
Billings in excess of costs and estimated earnings on contracts in process |
297,131 | 2,277,303 | ||||||
Other current liabilities and accrued expenses |
2,243,655 | 1,307,119 | ||||||
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Total current liabilities |
9,714,859 | 12,764,164 | ||||||
Long-term debt, less current portion |
28,221,226 | 24,718,367 | ||||||
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Total liabilities |
37,936,085 | 37,482,531 | ||||||
Members equity |
1,276,364 | 6,056,597 | ||||||
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$ | 39,212,449 | $ | 43,539,128 | |||||
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See notes to consolidated financial statements.
1
OEM Group, LLC and Subsidiaries
Consolidated Statements of Operations and Comprehensive Loss
Year Ended December 31, 2017, and Period From March 16, 2016,
Through December 31, 2016
2017 | 2016 | |||||||
Revenues |
$ | 41,849,483 | $ | 36,462,822 | ||||
Cost of revenues |
28,373,503 | 24,546,110 | ||||||
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Gross profit |
13,475,980 | 11,916,712 | ||||||
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Operating expenses: |
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General and administrative |
11,494,883 | 9,709,825 | ||||||
Amortization |
2,115,524 | 1,674,790 | ||||||
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13,610,407 | 11,384,615 | |||||||
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(Loss) income from operations |
(134,427 | ) | 532,097 | |||||
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Other (expense) income: |
||||||||
Interest expense |
(4,552,407 | ) | (3,671,606 | ) | ||||
Other, net |
16,539 | (154,790 | ) | |||||
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(4,535,868 | ) | (3,826,396 | ) | |||||
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Loss before income tax expense |
(4,670,295 | ) | (3,294,299 | ) | ||||
Income tax expense |
226,107 | 263,817 | ||||||
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Net loss |
(4,896,402 | ) | (3,558,116 | ) | ||||
Other comprehensive income (loss): |
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Foreign currency translation adjustment |
116,169 | (54,285 | ) | |||||
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Comprehensive loss |
$ | (4,780,233 | ) | $ | (3,612,401 | ) | ||
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See notes to consolidated financial statements.
2
OEM Group, LLC and Subsidiaries
Consolidated Statements of Members Equity
Year Ended December 31, 2017, and Period From March 16, 2016,
Through December 31, 2016
Accumulated | ||||||||||||||||||||
Other | Total | |||||||||||||||||||
Membership Interests | Accumulated | Comprehensive | Members | |||||||||||||||||
Class A | Class B | Deficit | (Loss) Income | Equity | ||||||||||||||||
Balance, March 16, 2016 |
$ | 6,648,000 | $ | 3,312,000 | $ | | $ | | $ | 9,960,000 | ||||||||||
Distributiontransaction costs |
| | (291,002 | ) | | (291,002 | ) | |||||||||||||
Net loss |
| | (3,558,116 | ) | | (3,558,116 | ) | |||||||||||||
Foreign currency translation adjustment |
| | | (54,285 | ) | (54,285 | ) | |||||||||||||
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Balance, December 31, 2016 |
6,648,000 | 3,312,000 | (3,849,118 | ) | (54,285 | ) | 6,056,597 | |||||||||||||
Net loss |
| | (4,896,402 | ) | | (4,896,402 | ) | |||||||||||||
Foreign currency translation adjustment |
| | | 116,169 | 116,169 | |||||||||||||||
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Balance, December 31, 2017 |
$ | 6,648,000 | $ | 3,312,000 | $ | (8,745,520 | ) | $ | 61,884 | $ | 1,276,364 | |||||||||
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See notes to consolidated financial statements. |
3
OEM Group, LLC and Subsidiaries
Consolidated Statements of Cash Flows
Year Ended December 31, 2017, and Period From March 16, 2016,
Through December 31, 2016
2017 | 2016 | |||||||
Cash flows from operating activities: |
||||||||
Net loss |
$ | (4,896,402 | ) | $ | (3,558,116 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
Depreciation |
106,980 | 235,358 | ||||||
Amortization of intangibles and goodwill |
2,115,524 | 1,674,790 | ||||||
Amortization of debt discount |
1,340,043 | 1,379,137 | ||||||
Amortization of debt issuance cost |
131,388 | 89,609 | ||||||
Elimination of note payable pursuant to summary judgment ruling |
(467,000 | ) | | |||||
Bad debt expense |
8,878 | 56,833 | ||||||
Provision for inventory reserves |
197,448 | 435,898 | ||||||
Decrease (increase) in assets: |
||||||||
Accounts receivable |
342,610 | (2,381,841 | ) | |||||
Inventories |
470,743 | (204,703 | ) | |||||
Cost and estimated earnings in excess of billings on contracts in process |
569,079 | 593,880 | ||||||
Prepaid expenses and other assets |
(210,758 | ) | (808,831 | ) | ||||
Increase (decrease) in liabilities: |
||||||||
Accounts payable and other current liabilities |
1,636,727 | (2,961,088 | ) | |||||
Billings in excess of costs and estimated earnings on contracts in process |
(1,980,172 | ) | 1,805,683 | |||||
Customer deposits |
(1,684,552 | ) | (1,981,332 | ) | ||||
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Net cash used in operating activities |
(2,319,464 | ) | (5,624,723 | ) | ||||
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Cash flows from investing activities: |
||||||||
Purchases of property and equipment |
(76,675 | ) | (356,979 | ) | ||||
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Net cash used in investing activities |
(76,675 | ) | (356,979 | ) | ||||
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Cash flows from financing activities: |
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Borrowings on revolving credit note payable |
2,900,000 | 6,509,848 | ||||||
Payments on revolving credit note payable |
(850,000 | ) | (500,000 | ) | ||||
Borrowings on long-term debt |
48,730 | 1,613,605 | ||||||
Payments on long-term debt |
(621,610 | ) | (1,141,317 | ) | ||||
Distribution |
| (291,002 | ) | |||||
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Net cash provided by financing activities |
1,477,120 | 6,191,134 | ||||||
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Effect of exchange rates on cash |
53,193 | 36,120 | ||||||
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Net (decrease) increase in cash |
(865,826 | ) | 245,552 | |||||
Cash: |
||||||||
Beginning of period |
2,043,415 | 1,797,863 | ||||||
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End of period |
$ | 1,177,589 | $ | 2,043,415 | ||||
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Supplemental disclosures of cash flow information: |
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Cash paid for interest |
$ | 2,844,000 | $ | 2,143,000 | ||||
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Cash paid for income taxes |
$ | 213,000 | $ | 227,000 | ||||
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See notes to consolidated financial statements.
4
OEM Group, LLC and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Operations and Significant Accounting Policies
Nature of operations: OEM Group, LLC (OEMG) and Subsidiaries (collectively, the Company) are suppliers of semiconductor capital equipment solutions to the global market of manufacturers of computer chips, and adjacent markets such as LED lighting and sensors. The Company designs, manufacturers, sells, installs and services its products worldwide. In addition to supplying the capital equipment, the Company also supplies spare parts, field service, upgrades and software to support the equipment in its customers global manufacturing sites.
Principles of consolidation: The accompanying consolidated financial statements include the accounts of OEMG and its wholly owned subsidiaries, OEM Group Japan, G.K. (OEMJ), OEM Technologies, LLC (OEMT), OEM-TEG, LLC (OEM-TEG), OEM Spares, LLC (OEMS), OEM Group, Inc. Taiwan Branch (OET), OEM Group East, LLC (OEE), OEM Group Austria GmbH (OEA), OEM Group Singapore Pte. Limited (OES) and OEM Group IC-DISC, Inc. All significant intercompany transactions and balances have been eliminated upon consolidation.
Use of estimates: The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.
Foreign operations: Assets located outside of the United States approximated $4,141,000 and $5,588,000 at December 31, 2017 and 2016, respectively (of which approximately $611,000 and $489,000 were deposited in bank accounts outside of the United States). Revenues earned outside of the United States approximated $12,088,000 and $10,052,000, respectively, for year ended December 31, 2017, and the period from March 16, 2016, through December 31, 2016.
Foreign currency translation: The functional currency of OEMT, OEM-TEG, OEMS, OET, OEE, OEA and OES is the United States dollar. The functional currency of OEMJ is the Japanese yen. Assets and liabilities measured in Japanese yen have been translated into U.S. dollars using exchange rates in effect at balance sheet dates. Revenues and expenses measured in Japanese yen have been translated using average exchange rates prevailing during the year ended December 31, 2017, and the period from March 16, 2016, through December 31, 2016. Capital accounts have been translated using exchange rates in effect when the capital was originally contributed. Translation adjustments have been accounted for as other comprehensive income (loss) in the consolidated statements of members equity.
Transactions in foreign currencies are translated at the current exchange rates as of the date on which they are recognized. Such losses, net of any gains, of approximately $176,000 and $38,000, respectively, during 2017 and 2016, are included within operating expenses in the accompanying consolidated statements of operations and comprehensive loss.
Accumulated other comprehensive loss and comprehensive loss: The Companys accumulated other comprehensive loss is comprised of foreign currency translation adjustments.
Cash: The Company maintains its U.S. cash in bank deposit accounts which, at times, may exceed federally insured limits. The Company does not believe it is exposed to a significant credit risk.
5
OEM Group, LLC and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Operations and Significant Accounting Policies (Continued)
Accounts receivable: Accounts receivable are stated at the amount management expects to collect from outstanding balances. The Company generally does not charge interest on past-due balances, and the Company does not require collateral for accounts receivable. Management provides for probable uncollectable amounts through a charge to earnings and a credit to a valuation allowance based on its assessment of the current status of individual accounts. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable. The allowance for doubtful accounts approximated $34,000 and $42,000, respectively, at December 31, 2017 and 2016.
Inventories: Inventories are stated at the lower of cost or net realizable value, with cost determined on the first-in, first-out basis. Provisions are made to reduce excess and obsolete inventories to their estimated net realizable value. The process for evaluating the value of excess and obsolete inventories requires the Company to make judgments and estimates concerning product changes, future demand and market conditions.
Property, plant and equipment: Property, plant and equipment in service as of the date of the Restructuring Agreement (see Note 2) are stated at their estimated fair values. Purchases of property and equipment subsequent to such date are stated at cost. Maintenance and repairs are charged to operations as incurred. Expenditures that significantly extend the useful lives of assets are capitalized.
Depreciation is computed over the estimated useful lives of depreciable assets using the straight-line method. Useful lives are as follows:
Computer and office equipment |
3-7 years | |||
Machinery equipment |
7 years | |||
Building |
39 years | |||
Leasehold improvements |
Lesser of life of asset or lease |
Debt issuance costs: Debt issuance costs are carried at cost less accumulated amortization as a direct deduction from the carrying amount of the related debt. The costs are amortized over the terms of the related loans using the effective interest method. Amortization expense is classified as interest expense in the accompanying consolidated statements of operations and comprehensive loss.
Discount on notes payable: Debt discounts are reflected as a reduction of debt and are amortized into interest expense over the terms of the related loans using the effective interest method.
Impairment of long-lived assets: The Company evaluates impairment of long-lived assets in accordance with U.S. GAAP. The Company assesses the impairment of long-lived assets, including property and equipment, and purchased intangibles subject to amortization, when events or changes in circumstances indicate that the carrying amount of an asset held may not be recoverable. In such instances, the Company assesses long-lived assets for impairment by determining their estimated fair value based on the forecasted, undiscounted cash flows that the assets are expected to generate, plus the net proceeds expected to be realized from the sale of the assets. An impairment loss is recognized when the estimated fair value of an asset is less than its net book value. The amount of loss, in such instances, is equal to the difference between the assets net book value and its estimated fair value.
6
OEM Group, LLC and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Operations and Significant Accounting Policies (Continued)
Forecasts of future cash flows are judgments based on the Companys experience and knowledge of its business and the industries in which it operates. These forecasts could be significantly affected by future changes in market conditions, the economic environment and capital spending decisions of the Companys customers, and inflation. The Company believes that the future cash flows to be received from its long-lived assets exceed the carrying value of the assets and, accordingly, the Company did not recognize an impairment loss during the year ended December 31, 2017, or the period from March 16, 2016, through December 31, 2016.
Intangible assets: Intangible assets with finite lives are amortized on a straight-line basis over the estimated lives, as follows:
Trade names/trademarks |
15 years | |||
Proprietary technology |
9-11 years |
Goodwill: Goodwill originated from the March 16, 2016, change of control and represents the excess of the fair value of debt exchanged plus the fair value of the noncontrolling interest over the fair value of the identifiable net assets at such date (see Note 2). The Company evaluates goodwill and other identifiable intangible assets for impairment in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 350, Goodwill and Other Intangible Assets. In January 2014, the FASB issued Accounting Standards Update (ASU) 2014-02, IntangiblesGoodwill and Other (Topic 350): Accounting for Goodwill, which allows private companies an accounting alternative for the subsequent measurement of goodwill. The pronouncement permits a private company to elect to amortize goodwill on a straight-line basis over a period of 10 years, or less than 10 years if the Company demonstrates that another useful life is more appropriate. It also permits a private company to apply a simplified impairment model to goodwill.
Under the aforementioned accounting alternative, goodwill is tested for impairment when a triggering event occurs indicating that the fair value of a company (or a reporting unit) may be below its carrying amount. The amount of goodwill impairment, if any, is equal to the excess of the companys carrying amount over its fair value. The Company elected to adopt this guidance and to test goodwill for impairment at the entity level. Management determined that there was no impairment charge required during 2017. As a result of the Companys adoption of the accounting alternative, the Company recognized amortization expense of approximately $1,283,000 and $1,016,000, respectively, for the year ended December 31, 2017, and the period from March 16, 2016, through December 31, 2016. Management anticipates that the Company will recognize future amortization expense, resulting from this election, of approximately $1,283,000 during each year through March 2026.
Customer deposits: Customer deposits represent payments received in advance from customers on sales contracts.
Revenue and cost recognitionsystems: The Company recognizes revenue from sales of systems on either the percentage-of-completion method or the completed-contract method. Each contract is evaluated on an individual basis to determine which method is appropriate.
Percentage-of-completion method: The percentage-of-completion method recognizes income as work on a contract progresses. Progress is measured by the percentage of total costs incurred to date to managements estimated total costs to be incurred for each contract. This method is used because management considers expended costs to be the best available measure of progress on the contracts. Because of the inherent uncertainties in estimating costs, it is reasonably possible that the estimates used will change within the near term.
7
OEM Group, LLC and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Operations and Significant Accounting Policies (Continued)
Contract costs include all direct material and labor costs and those indirect costs related to contract performance. Selling, general and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions and estimated profitability, including those arising from contract penalty provisions, and final contract settlements may result in revisions to costs and income, and are recognized in the period in which the revisions are determined.
The asset costs and estimated earnings in excess of billings on contracts in process represents revenues recognized in excess of amounts billed. The liability billings in excess of costs and estimated earnings on contracts in process represents billings in excess of revenues recognized.
Completed-contract method: Under the completed-contract method, income is recognized only when a contract is completed or substantially completed. Accordingly, during the period of performance, billings and costs are accumulated as work-in-process inventory on the consolidated balance sheets, but no profit or income is recorded before completion or substantial completion of the work. Circumstances considered in determining substantial completion primarily include customer acceptance and compliance with performance specifications.
Revenue and cost recognitionservices, parts and upgrades: Service revenues are recognized when the services are performed. Parts and upgrades revenues are recognized upon shipment and when title and risk of loss have passed to the customer.
Shipping and handling costs: Direct costs associated with the shipment of products are included as a component of cost of sales.
Warranties: The Company accounts for warranties based on estimates of future costs associated with fulfilling its warranty obligation. The estimates are derived from historical cost experience. Because of the inherent uncertainties in estimating costs, it is at least reasonably possible that the estimates used will change within the near term. The consolidated financial statements include a product warranty reserve, which is included as a component of other current liabilities and accrued expenses. As of December 31, 2017 and 2016, and for the year ended December 31, 2017, and the period from March 16, 2016, through December 31, 2016, the warranties are as follows:
2017 | 2016 | |||||||
Accrued warranties, beginning of period |
$ | 599,306 | $ | 747,147 | ||||
Claims paid |
(131,267 | ) | (149,486 | ) | ||||
Change in liability for warranties issued during the year and adjustments to pre-existing warranties |
33,106 | 1,645 | ||||||
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Accrued warranties, end of period |
$ | 501,145 | $ | 599,306 | ||||
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Income taxes: The Company and its U.S. subsidiaries are organized as limited liability companies and are treated as pass-through entities for income tax purposes. Each member is allocated and is responsible for their proportionate share of the Companys taxable income or loss. Accordingly, no provision for U.S. federal income taxes has been recorded in the accompanying consolidated financial statements.
8
OEM Group, LLC and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Operations and Significant Accounting Policies (Continued)
The Company reflects foreign income taxes relating to foreign income earned. Foreign subsidiaries are taxed as corporations in their respective jurisdictions. When applicable, deferred income taxes are provided on an asset and liability method whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases.
The authoritative guidance relating to the accounting for uncertainty in income taxes requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Companys tax returns to determine whether the tax positions are more likely than not of being sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold are recorded as a tax benefit or expense in the current year. In addition, guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition is also provided. There are no tax positions that the Companys management has determined to be uncertain.
Recent accounting pronouncements: In May 2014, the FASB issued ASU 2014-09, Revenue From Contracts With Customers (Topic 606), which requires companies to recognize the amount of revenue that it expects to be entitled to for the transfer of promised goods or services to customers. The updated standard will replace most existing revenue recognition guidance in U.S. GAAP and permits the use of either a full retrospective or retrospective with cumulative effect transition method. The updated standard will be effective for annual reporting periods beginning after December 15, 2018. Early adoption is not permitted. The Company has not yet selected a transition method and is currently evaluating the effect that the updated standard will have on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The guidance in this ASU supersedes the leasing guidance in Topic 840, Leases. Under the new guidance, lessees are required to recognize lease assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2019. The Company is currently evaluating the impact of the pending adoption of the new standard on its consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 provides guidance on how certain cash receipts and cash payments should be presented and classified in the statement of cash flows with the objective of reducing existing diversity in practice with respect to these items. ASU 2016-15 will be effective for the Company on January 1, 2019. ASU 2016-15 requires a retrospective transition method. However, if it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. The Company is currently evaluating the impact the adoption of this guidance will have on its consolidated statements of cash flows.
Subsequent events: The Company has evaluated subsequent events for potential recognition and/or disclosure through June 8, 2018, the date the consolidated financial statements were available to be issued.
9
OEM Group, LLC and Subsidiaries
Notes to Consolidated Financial Statements
Note 2. Restructuring Transaction
On March 16, 2016, OEMG, its owners and THL (note holder) executed a Restructuring Agreement pursuant to which the note holders contributed warrants (deemed to have no value) and outstanding notes, including accrued interest, in the amount of approximately $15,549,000, in exchange for 10,000 Class A Membership Interests of OEMG with a fair value of $6,648,000, which effectuated a change in control. Concurrent with such transaction, the parties executed a Second Amended and Restated Note Purchase Agreement (Agreement) that provided for various borrowing facilities (see Note 7). In addition, the former owners of OEMG converted their equity interests into 10,000 new Class B membership interests in OEMG with a fair value of $3,312,000. Such fair value was based on fair value of the Class A Membership Interests, without applying a minority discount, due to preferential Class B member liquidation rights and managements considerations regarding control and marketability among the classes of interests.
Due to the note holders election to apply push-down accounting, the transaction was accounted for in accordance with FASB ASC 805, Business Combinations. In connection with the transaction, the Company paid $291,000 of transaction costs on behalf of the members, which were recorded as distributions during the period from March 16, 2016, through December 31, 2016. In addition, the Company incurred approximately $330,000 in debt issuance costs, which have been reflected as a debt discount.
The estimated fair values of the assets and liabilities as of the date of the Restructuring Transaction are as follows:
Cash |
$ | 1,797,000 | ||
Accounts receivable |
3,230,000 | |||
Inventories |
9,009,000 | |||
Costs and estimated earnings in excess of billing on contracts in process |
2,183,000 | |||
Prepaid expenses and other current assets |
1,219,000 | |||
Property, plant and equipment |
2,656,000 | |||
Intangible assets |
9,626,000 | |||
Goodwill |
12,829,000 | |||
Accounts payable |
(8,214,000 | ) | ||
Customer deposits |
(4,218,000 | ) | ||
Billings in excess of costs and estimated earnings on contracts in process |
(472,000 | ) | ||
Other current liabilities and accrued expenses |
(1,596,000 | ) | ||
Related-party notes payable |
(17,430,000 | ) | ||
Notes payable |
(659,000 | ) | ||
|
|
|||
Total consideration |
$ | 9,960,000 | ||
|
|
The consolidated statement of operations and comprehensive loss for the period from March 16, 2016, through December 31, 2016, includes the results of operations of the business since the date of the Restructuring Transaction. The assets and liabilities at such date were recorded at their estimated fair values, as determined by the Companys management with the assistance of external valuation experts, based on information currently available and on current assumptions as to future operations. The excess of the fair value of the debt exchanged for Class A Membership Interests plus the fair value of the noncontrolling interest over the fair value of the net assets at such date have been recognized as goodwill. Management believes that goodwill relates primarily to the value of customer-related intangibles and an assembled workforce, which were subsumed into goodwill in accordance with ASU 2014-18. Goodwill is not expected to be deductible for income tax purposes.
10
OEM Group, LLC and Subsidiaries
Notes to Consolidated Financial Statements
Note 2. Restructuring Transaction (Continued)
The weighted-average amortization period for intangible assets acquired in the above acquisition are as follows:
Weighted- | ||||||||
Average | ||||||||
Amounts | Amortization | |||||||
Allocated | Period (Years) | |||||||
Proprietary technology |
$ | 7,615,000 | 10.9 | |||||
Trade names/trademarks |
2,011,000 | 15.0 | ||||||
|
|
|||||||
$ | 9,626,000 | |||||||
|
|
The fair values of proprietary technology and trade names/trademarks were based on a discounted cash flow model using the relief-from-royalty method.
Note 3. Inventories
Inventories consisted of the following at December 31:
2017 | 2016 | |||||||
Raw materials and spare parts |
$ | 7,191,307 | 6,111,680 | |||||
Work in process |
1,552,370 | 3,102,740 | ||||||
|
|
|
|
|||||
Total inventories |
8,743,677 | 9,214,420 | ||||||
Less allowance for obsolete and slow-moving items |
(633,346 | ) | (435,898 | ) | ||||
|
|
|
|
|||||
Total inventories, net |
$ | 8,110,331 | $ | 8,778,522 | ||||
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|
|
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Note 4. Contracts in Process
Contracts in process consisted of the following at December 31:
2017 | 2016 | |||||||
Costs incurred on contracts in process |
$ | 5,249,665 | $ | 5,910,351 | ||||
Estimated earnings |
3,288,966 | 5,059,658 | ||||||
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|
|
|
|||||
Total costs and estimated earnings |
8,538,631 | 10,970,009 | ||||||
Less billings to date |
(7,815,635 | ) | (11,658,106 | ) | ||||
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|
|
|||||
Net amount |
$ | 722,996 | $ | (688,097 | ) | |||
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11
OEM Group, LLC and Subsidiaries
Notes to Consolidated Financial Statements
Note 4. Contracts in Process (Continued)
Such amounts are included in the accompanying consolidated balance sheets at December 31 under the following captions:
2017 | 2016 | |||||||
Cost and estimated earnings in excess of billings on contracts in process |
$ | 1,020,127 | $ | 1,589,206 | ||||
Billings in excess of costs and estimated earnings on contracts in process |
(297,131 | ) | (2,277,303 | ) | ||||
|
|
|
|
|||||
$ | 722,996 | $ | (688,097 | ) | ||||
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|
|
Note 5. Property, Plant and Equipment
Property, plant and equipment at December 31 consisted of the following:
2017 | 2016 | |||||||
Land and building |
$ | 2,025,145 | $ | 2,017,265 | ||||
Machinery and equipment |
592,019 | 574,680 | ||||||
Leasehold improvements |
123,990 | 123,990 | ||||||
Computer and office equipment |
331,565 | 277,330 | ||||||
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|
|
|||||
3,072,719 | 2,993,265 | |||||||
Less accumulated depreciation |
(335,980 | ) | (226,221 | ) | ||||
|
|
|
|
|||||
Property, plant and equipment, net |
$ | 2,736,739 | $ | 2,767,044 | ||||
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|
|
|
Depreciation expense approximated $107,000 and $235,000 for the year ended December 31, 2017, and the period from March 16, 2016, through December 31, 2016, respectively.
Note 6. Intangible Assets
Intangible assets as of December 31 consisted of the following:
2017 | 2016 | |||||||||||||||||||||||
Gross | Gross | |||||||||||||||||||||||
Carrying | Accumulated | Net Carrying | Carrying | Accumulated | Net Carrying | |||||||||||||||||||
Amount | Amortization | Amount | Amount | Amortization | Amount | |||||||||||||||||||
Proprietary technology |
$ | 7,615,000 | $ | (1,251,580 | ) | $ | 6,363,420 | $ | 7,615,000 | $ | (553,024 | ) | $ | 7,061,976 | ||||||||||
Trade names/trademarks |
2,011,000 | (240,203 | ) | 1,770,797 | 2,011,000 | (106,136 | ) | 1,904,864 | ||||||||||||||||
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|
|
|
|
|
|
|||||||||||||
Total intangible assets |
9,626,000 | (1,491,783 | ) | 8,134,217 | 9,626,000 | (659,160 | ) | 8,966,840 | ||||||||||||||||
Goodwill |
12,829,012 | (2,298,531 | ) | 10,530,481 | 12,829,012 | (1,015,630 | ) | 11,813,382 | ||||||||||||||||
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|
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|
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|
|
|
|
|
|||||||||||||
Total intangible assets and goodwill |
$ | 22,455,012 | $ | (3,790,314 | ) | $ | 18,664,698 | $ | 22,455,012 | $ | (1,674,790 | ) | $ | 20,780,222 | ||||||||||
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12
OEM Group, LLC and Subsidiaries
Notes to Consolidated Financial Statements
Note 6. Intangible Assets (Continued)
Future amortization expense related to these intangible assets is expected to be as follows:
Years ending December 31: |
||||
2018 |
$ | 2,115,524 | ||
2019 |
2,115,524 | |||
2020 |
2,115,524 | |||
2021 |
2,115,524 | |||
2022 |
2,115,524 | |||
Thereafter |
8,087,078 | |||
|
|
|||
$ | 18,664,698 | |||
|
|
Note 7. Debt
As of December 31, debt consisted of the following:
2017 | 2016 | |||||||
Amended and restated notes payable to senior lender/member: |
||||||||
Term note payable (bearing interest, payable monthly at LIBOR plus 9.5% (10.83% and 10.24% at December 31, 2017 and 2016, respectively; principal due on February 15, 2019) |
$ | 20,000,000 | $ | 20,000,000 | ||||
Bridge note payable (due in monthly principal installments of $45,694; noninterest-bearing; repaid on April 30, 2018) |
91,389 | 639,722 | ||||||
Revolving credit note payable (see below) |
8,059,848 | 6,009,848 | ||||||
Promissory note payable, related party (secured by certain real estate; bearing interest, payable monthly at 9.5%; due on March 31, 2019) |
1,450,000 | 1,450,000 | ||||||
Other |
323,218 | 791,136 | ||||||
|
|
|
|
|||||
29,924,455 | 28,890,706 | |||||||
Less: Current portion |
(300,070 | ) | (1,321,378 | ) | ||||
Less: Discount on notes payable |
(1,258,366 | ) | (2,574,780 | ) | ||||
Less: Debt issuance costs |
(144,793 | ) | (276,181 | ) | ||||
|
|
|
|
|||||
Total long-term debt, less current portion |
$ | 28,221,226 | $ | 24,718,367 | ||||
|
|
|
|
The aforementioned term, bridge and revolving credit notes payable were made pursuant to an Agreement, which was executed on March 16, 2016 (and most recently amended on May 2, 2018), concurrent with the Restructuring Transaction (see Note 2). The Agreement provides for a security interest in substantially all of the Companys assets and contains certain restrictive covenants, and a financial covenant. The Company was in violation of a nonfinancial covenant, for which a waiver was obtained.
The revolving credit note provided for maximum available borrowings of $7,000,000, matured on June 30, 2017, and bears interest, payable monthly at LIBOR plus 9.5 percent (10.83 percent and 10.24 percent at December 31, 2017 and 2016, respectively). During 2017, amendments to the agreement were executed on June 21, 2017, and August 14, 2017, which extended the maturity date of this facility to February 19, 2019, and increased the maximum available borrowings to $9,000,000. Subsequent to year-end, additional amendments to the Agreement were executed on April 16, 2018, and May 2, 2018, which increased the maximum available borrowings to $9,750,000.
13
OEM Group, LLC and Subsidiaries
Notes to Consolidated Financial Statements
Note 7. Debt (Continued)
In connection with the adoption of ASC 805, effective March 16, 2016, the notes payable made pursuant to the Agreement were recorded at fair value, which provided for a debt discount of approximately $3,955,000. Such fair value was determined using an option pricing model with the following assumptions: expected life of two years, volatility of 60.2 percent and a risk-free interest rate of 0.9 percent. During the year ended December 31, 2017, and the period from March 16, 2016, through December 31, 2016, the Company recorded approximately $1,340,000 and $1,380,000, respectively, in debt discount amortization, which was recorded using the effective interest method.
Related-party interest expense approximated $4,305,000 and $3,600,000 for the year ended December 31, 2017, and the period from March 16, 2016, through December 31, 2016, respectively. Related party accrued interest payable approximated $311,000 and $112,000, respectively, at December 31, 2017 and 2016, and is included on the accompanying consolidated balance sheets in other current liabilities and accrued expenses.
Aggregate maturities of long-term debt as of December 31, 2017, are as follows:
Years ending December 31: |
||||
2018 |
$ | 300,070 | ||
2019 |
29,558,386 | |||
2020 |
44,662 | |||
2021 |
21,337 | |||
|
|
|||
$ | 29,924,455 | |||
|
|
Note 8. Employee Benefit Plan
The Company maintains a 401(k) plan covering substantially all employees. The plan, which was restated on January 1, 2017, provides for employer safe harbor, matching and profit sharing contributions based primarily on employee participation. Employer contributions approximated $209,000 and $189,000 for the year ended December 31, 2017, and the period from March 16, 2016, through December 31, 2016, respectively.
Note 9. Members Equity
As provided in the Limited Liability Company Agreement, the Class A Membership Interests are owned by an entity affiliated with the lender and the Class B Membership Interests are owned by an entity controlled by the former owners of OEMG. On any action required or permitted to be voted on by the Members, the Class A Members and Class B Members shall vote as a single class, with the Class A Members collectively entitled to 75 percent of the aggregate vote and the Class B Members collectively entitled to 25 percent of the aggregate vote. Profits and losses of the Company are allocated to members capital accounts in the amount that would be distributed pursuant to a hypothetical distribution for book value (as defined), adjusted for applicable provisions of the Internal Revenue Code (75 percent to Class A and 25 percent to Class B, adjusted for a Qualifying Sale (as defined) that provides for Class B Members to receive a proportionately larger distribution upon a sale of the Company at a specified amount).
The Company may make distributions to unit holders as determined by its Manager for payment of federal and state income taxes.
14
OEM Group, LLC and Subsidiaries
Notes to Consolidated Financial Statements
Note 10. Taxes
For the year ended December 31, 2017, and the period from March 16, 2016, through December 31, 2016, income (loss) before income taxes attributable to domestic and foreign sources approximated the following:
2017 | 2016 | |||||||
U.S. source loss |
$ | (5,351,000 | ) | $ | (4,881,000 | ) | ||
Foreign source income |
681,000 | 1,587,000 |
The provision for income taxes that relate to foreign source income and U.S. state income taxes consists of the following for the year ended December 31, 2017, and the period from March 16, 2016, through December 31, 2016:
2017 | 2016 | |||||||
Current: |
||||||||
U.S. |
$ | 15,623 | $ | 2,322 | ||||
Foreign |
210,484 | 79,248 | ||||||
Deferred: |
||||||||
U.S. |
| | ||||||
Foreign |
| 182,247 | ||||||
|
|
|
|
|||||
$ | 226,107 | $ | 263,817 | |||||
|
|
|
|
The differences between statutory and effective tax rates relate primarily to the limited liability company not being subject to federal income taxes.
Note 11. Major Customers
Customers are considered major when revenue for the customer exceeds 10 percent of total revenue for the period or outstanding receivable balances exceed 10 percent of current assets. Revenues from one major customer for the period from March 16, 2016, through December 31, 2016, approximated $6,286,000. For the year ended December 31, 2017, there were no customers that exceeded 10 percent of total revenue or outstanding accounts receivable in excess of 10 percent of current assets.
Note 12. Operating Leases
The Company leases space for its corporate headquarters, clean-room and warehouse facilities in Gilbert, Arizona as well as limited warehouse and office space in Arizona, Pennsylvania, Japan, Taiwan and Singapore under operating lease agreements, which expire through November 2020.
Future minimum payments under noncancelable operating leases with initial or remaining terms of one year or more are as follows:
Years ending December 31: |
||||
2018 |
$ | 393,000 | ||
2019 |
309,000 | |||
2020 |
275,000 | |||
|
|
|||
$ | 977,000 | |||
|
|
15
OEM Group, LLC and Subsidiaries
Notes to Consolidated Financial Statements
Note 12. Operating Leases (Continued)
Rent expense (including common area maintenance and rental taxes) under the leases described above totaled approximately $912,000 and $732,000 for the year ended December 31, 2017, and the period from March 16, 2016, through December 31, 2016, respectively.
Note 13. Litigation
In the ordinary course of conducting business, the Company becomes involved in various lawsuits and administrative proceedings. Some of these proceedings may result in fines, penalties or judgments being assessed against the Company which, from time to time, may have an impact on earnings. Management does not currently believe that any potential liability resulting from proceedings, individually or in the aggregate, would have a material adverse effect on its consolidated financial position or results of operations.
16