MASS 8-K/A
908 Devices Inc. (MASS)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name
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| The |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 ( §230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
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has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant
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| Explanatory Note |
On April 30, 2024, 908 Devices Inc. (the “Company”) filed a Current Report on Form 8-K with the Securities and Exchange Commission (the “Original 8-K”) reporting the Company’s completion of the acquisition of all of the issued and outstanding equity interests of CAM2 Technologies, LLC (d/b/a RedWave Technology) (“RedWave”) pursuant to an Equity Purchase Agreement (the “Purchase Agreement”) with RedWave, CAM3 HoldCo, LLC (“Seller Entity”), each of the holders of outstanding equity interests of Seller Entity (the “Beneficial Sellers”), and Jon Frattaroli, in his capacity as a guarantor for a Beneficial Seller (the “Indirect Beneficial Seller”). The transaction closed on April 29, 2024, at which time RedWave became a wholly-owned subsidiary of the Company (the “Transaction”).
The Company is filing this amendment to the Original 8-K (this “Amendment”) to amend and supplement the Original 8-K to include historical financial statements of RedWave required by Item 9.01(a) and pro forma financial information required by Item 9.01(b), each of which were excluded from the Original 8-K in reliance on the instructions to such Items of Form 8-K. Except as noted in this paragraph, no other information contained in the Original 8-K is amended or supplemented. This Amendment should be read together with the Original 8-K.
The pro forma financial information included in this Amendment has been presented for informational purposes only, as required by Form 8-K. It does not purport to represent the actual financial position or results of operations that the Company and RedWave would have achieved had the companies been combined as of the date or during the periods presented in the pro forma financial information and is not intended to project the future financial position or results of operations that the combined company may achieve after the implementation of the Transaction.
| Item 9.01. | Financial Statements and Exhibits. |
(a) Financial Statements of Businesses Acquired.
The audited financial statements of RedWave, which comprise the balance sheet as of December 31, 2023 and the related statements of income, changes in members’ equity, and cash flows for the year then ended, the related notes to the financial statements, and the related report of BDO USA, P.C., RedWave’s independent auditors, are filed as Exhibit 99.2 hereto.
The unaudited condensed financial statements of RedWave, which comprise the unadited condensed balance sheet as of March 31, 2024 and the related unaudited condensed statements of income, changes in members’ equity, and cash flows for the three months then ended, and the related notes to the financial statements, are filed as Exhibit 99.3 hereto.
(b) Pro Forma Financial Information.
The (A) Unaudited Pro Forma Condensed Combined Consolidated Balance Sheet of the Company as of March 31, 2024, (B) Unaudited Pro Forma Condensed Combined Consolidated Statements of Comprehensive Income of the Company for the three months ended March 31, 2024, (C) Unaudited Pro Forma Condensed Combined Consolidated Statements of Comprehensive Income of the Company for the year ended December 31, 2023, and (D) the related Notes to Unaudited Pro Forma Condensed Combined Consolidated Financial Statements, are filed as Exhibit 99.4 hereto and are incorporated herein by reference.
(d) Exhibits.
| * | Schedules, exhibits, and similar supporting attachments or agreements to the Purchase Agreement are omitted pursuant to Item 601(b)(2) of Regulation S-K. 908 Devices Inc. agrees to furnish a supplemental copy of any omitted schedule or similar attachment to the Securities and Exchange Commission upon request. |
| + | Previously filed. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| 908 DEVICES INC. | ||
| Date: July 9, 2024 | By: | /s/ Michael S. Turner |
| Name: Michael S. Turner | ||
| Title: Chief Legal and Administrative Officer | ||
Exhibit 23.1
Consent of Independent Auditor
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-264828) and Form S-8 (No. 333-251755, 333-263485, 333-270574 and 333-277800) of 908 Devices Inc. of our report dated June 3, 2024, relating to the financial statements of CAM2 Technologies, LLC which appears in this Form 8-K.
/s/ BDO USA, P.C.
Boston, Massachusetts
July 9, 2024
Exhibit 99.2
Cam2 Technologies, LLC
Financial Statements
As of December 31, 2023
Cam2 Technologies, LLC
Contents
| Independent Auditor’s Report | 3-4 |
| Financial Statements | |
| Balance Sheet | 6 |
| Statement of Income | 7 |
| Statement of Changes in Members’ Equity | 8 |
| Statement of Cash Flows | 9 |
| Notes to Financial Statements | 10-23 |
2
Independent Auditor’s Report
Board of Directors
CAM2 Technologies, LLC
Danbury, CT
Opinion
We have audited the financial statements of CAM2 Technologies, LLC (the Company), which comprise the balance sheet as of December 31, 2023, and the related statements of income, changes in members’ equity, and cash flows for the year then ended, and the related notes to the financial statements.
In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023, and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.
Basis for Opinion
We conducted our audit in accordance with auditing standards generally accepted in the United States of America (GAAS). Our responsibilities under those standards are further described in the
Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are required to be independent of the Company and to meet our other ethical responsibilities, in accordance with the relevant ethical requirements relating to our audits. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Responsibilities of Management for the Financial Statements
Management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America, and for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are available to be issued.
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Auditor’s Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with GAAS will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements.
In performing an audit in accordance with GAAS, we:
| · | Exercise professional judgment and maintain professional skepticism throughout the audit. | |
| · | Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. | |
| · | Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, no such opinion is expressed. | |
| · | Evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluate the overall presentation of the financial statements. | |
| · | Conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for a reasonable period of time. |
We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control-related matters that we identified during the audit.
/s/ BDO USA, P.C.
Boston, Massachusetts
June 3, 2024
4
Financial Statements
Cam2 Technologies, LLC
Balance Sheet
| December 31, 2023 | ||||
| Assets | ||||
| Current Assets: | ||||
| Cash and cash equivalents | $ | 1,638,948 | ||
| Marketable securities | 1,021,991 | |||
| Accounts receivable, net | 2,989,597 | |||
| Inventory, net | 1,423,003 | |||
| Other current assets | 1,000 | |||
| Total Current Assets | 7,074,539 | |||
| Operating lease right-of-use assets | 39,685 | |||
| Property and equipment, net | 262,414 | |||
| Total Assets | $ | 7,376,638 | ||
| Liabilities and Members’ Equity | ||||
| Current Liabilities: | ||||
| Accounts payable | $ | 432,023 | ||
| Accrued expenses | 747,716 | |||
| Deferred revenue | 1,391,976 | |||
| Operating lease liabilities | 39,685 | |||
| Total Current Liabilities | 2,611,400 | |||
| PPP Loan payable | 150,000 | |||
| Deferred revenue, net of current portion | 2,513,956 | |||
| Operating lease liabilities, net of current portion | - | |||
| Total Liabilities | 5,275,356 | |||
| Commitments and Contingencies (Note 13) | ||||
| Members’ Equity: | ||||
| Members' equity (1,188,750 units issued and outstanding) | 2,101,282 | |||
| Total Stockholders’ Equity | ||||
| Total Liabilities and Members’ Equity | $ | 7,376,638 | ||
The accompanying notes are an integral part of these financial statements.
6
Cam2 Technologies, LLC
Statement of Income
| Year ended December 31, 2023 | ||||
| Revenue: | ||||
| Product revenue | $ | 12,076,061 | ||
| Service revenue | 1,678,910 | |||
| Total Revenue | 13,754,971 | |||
| Cost of Revenue | ||||
| Product revenue | 5,914,123 | |||
| Service revenue | 576,530 | |||
| Total Cost of Revenue | 6,490,653 | |||
| Gross Profit | 7,264,318 | |||
| Operating Expenses: | ||||
| Sales and marketing | 2,040,763 | |||
| General and administrative | 536,055 | |||
| Research and development | 2,608,130 | |||
| Total Operating Expenses | 5,184,948 | |||
| Income From Operations | 2,079,370 | |||
| Other Income (Expense): | ||||
| Gain on investments | 69,101 | |||
| Interest expense | (10,022 | ) | ||
| Total Other Income | 59,079 | |||
| Net Income | $ | 2,138,449 | ||
The accompanying notes are an integral part of these financial statements.
7
Cam2 Technologies, LLC
Statement of Changes in Members’ Equity
| Class A Units | Class B Units | Total Members’ | ||||||||||||||||||
| Units | Amount | Units | Amount | Equity | ||||||||||||||||
| Balance - December 31, 2022 | 1,099,750 | $ | 1,815,844 | 89,000 | $ | - | $ | 1,815,844 | ||||||||||||
| Distributions | - | (1,853,011 | ) | - | - | (1,853,011 | ) | |||||||||||||
| Net income | - | 2,138,449 | - | - | 2,138,449 | |||||||||||||||
| Balance - December 31, 2023 | 1,099,750 | $ | 2,101,282 | 89,000 | $ | - | $ | 2,101,282 | ||||||||||||
The accompanying notes are an integral part of these financial statements.
8
Cam2 Technologies, LLC
Statement of Cash Flows
| Year ended December 31, 2023 | ||||
| Cash Flows From Operating Activities: | ||||
| Net loss | $ | 2,138,449 | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||
| Depreciation expense | 224,305 | |||
| Reduction in carrying amount of right-of-use assets | 40,111 | |||
| Gain on investment in marketable securities | (32,657 | ) | ||
| Changes in operating assets and liabilities: | ||||
| Accounts receivable | (2,007,394 | ) | ||
| Inventory | 689,303 | |||
| Other current assets | (1,000 | ) | ||
| Accounts payable | (153,140 | ) | ||
| Accrued expenses | (42,696 | ) | ||
| Deferred revenue | 3,293,477 | |||
| Operating lease liabilities | (40,111 | ) | ||
| Net Cash Provided by Operating Activities | 4,108,647 | |||
| Cash Flows from Investing Activities | ||||
| Purchases of marketable securities | (2,012,334 | ) | ||
| Proceeds from maturities of marketable securities | 1,023,000 | |||
| Purchases of property and equipment | (206,506 | ) | ||
| Net Cash Used in Investing Activities | (1,195,840 | ) | ||
| Cash Flows from Financing Activities | ||||
| Member distributions | (1,853,011 | ) | ||
| Net change in Cash and Cash Equivalents | 1,059,796 | |||
| Cash and Cash Equivalents: | ||||
| Beginning of year | 579,152 | |||
| End of year | $ | 1,638,948 | ||
| Supplemental Cash Flow Information: | ||||
| Cash paid for interest | $ | 10,022 | ||
| Supplemental Disclosure of Noncash Investing Information: | ||||
| Inventory purchases included in accounts payable | $ | 272,295 | ||
The accompanying notes are an integral part of these financial statements.
9
Cam2 Technologies, LLC
Notes to Financial Statements
1. Nature of Operations and Basis of Presentation
Business
CAM2 Technologies, LLC (the “Company”) was founded in 2013 to develop and commercialize portable Fourier-transform infrared spectroscopy (“FTIR”) spectroscopic analyzers used for chemical threat detection and identification. The Company generates revenues from the sale of portable FTIR analyzers under “Redwave Technology” brands (“Redwave devices”) and other products based on the FTIR technology, as well as related services.
Risks and Uncertainties
The Company is subject to risks and uncertainties common to technology companies in the technology industry and of similar size, including, but not limited to, development by competitors of new technological innovations, dependence on key personnel, protection of proprietary technology, compliance with government regulations, and uncertainty of market acceptance of products. Potential risks and uncertainties also include, without limitation, uncertainties regarding rising inflation and higher interest rates. Products currently under development will require additional research and development efforts prior to commercialization and will require additional capital and adequate personnel and infrastructure. The Company’s research and development may not be successfully completed, adequate protection for the Company’s technology may not be obtained, and products may not prove commercially viable. The Company operates in an environment of rapid change in technology and competition.
Certain of the components included in the Company’s products are obtained from a sole source, a single source or a limited group of suppliers. Although the Company seeks to reduce dependence on those limited sources of suppliers and manufacturers, the partial or complete loss of certain of these sources, or the requirement to establish a new supplier for the components, could have a material adverse effect on the Company’s operating results, financial condition and cash flows and damage its customer relationships.
Basis of Presentation
The accompanying financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
2. Significant Accounting Policies
The following is a summary of significant accounting policies adopted by the Company in preparation of its financial statements.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting periods. Significant estimates relate to the timing and amounts of revenue recognized, inventory reserves, allowance for credit losses, and unit-based compensation. The Company bases its estimates on historical experience, known trends and other market-specific or other relevant factors that it believes to be reasonable under the circumstances.
10
Cam2 Technologies, LLC
Notes to Financial Statements
These estimates may change, as new events occur and additional information is obtained. On an ongoing basis, management evaluates its estimates as there are changes in circumstances, facts and experience. Changes in estimates are recorded in the period in which they become known. Actual results may differ from those estimates or assumptions.
Concentrations
Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. The Company maintains the majority of its cash and cash equivalents with financial institutions that management believes to be of high credit quality. The Company has not experienced any losses with respect to its cash and cash equivalents and does not believe that it is subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships.
Significant customers are those that account for 10% or more of the Company’s total revenue or accounts receivable. For the year ended December 31, 2023, two customers represented approximately 39% of total revenue. As of December 31, 2023, two customers accounted for approximately 85% of outstanding accounts receivable.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of 90 days or less at the date of purchase to be cash equivalents. Cash equivalents, consisting of short-term treasury bills are carried at fair value which approximates cost.
Investments in Marketable Securities
The Company accounts for its investments in debt securities in accordance with Accounting Standards Codification (“ASC”) 320, Investments — Debt Securities (“ASC 320”). Debt securities, which are comprised of investments in U.S. Treasury Securities, are measured at fair value, based on quoted market prices. As the Company has classified its investments in debt securities as available-for-sale, the Company recognizes all unrealized gains and losses in other comprehensive income, net of tax, and recognizes all realized gains and losses in net income/loss within the Company’s statement of income. The unrealized gains and losses were immaterial at December 31, 2023. Net realized gains on marketable securities totaled $32,657 for the year ended December 31, 2023.
When the fair value is below the amortized cost basis of a marketable security, an estimate of expected credit losses is made. The credit-related impairment amount is recognized in the statements of income. Credit losses are recognized through the use of an allowance for credit losses account in the balance sheet and subsequent improvements in expected credit losses are recognized as a reversal of an amount in the allowance account. If the Company has the intent to sell the security or it is more likely than not that the Company will be required to sell the security prior to recovery of its amortized cost basis, then the allowance for the credit loss is written-off and the excess of the amortized cost basis of the asset over its fair value is recorded in the consolidated statements of operations. There were no credit losses recorded through December 31, 2023.
11
Cam2 Technologies, LLC
Notes to Financial Statements
Accounts Receivable
Accounts receivable are presented net of an allowance for credit losses, which is an estimate of amounts that may not be collectible. The Company performs ongoing credit evaluations of its customers and monitors economic conditions to identify facts and circumstances that may indicate its receivables are at risk of collection. The Company provides reserves against accounts receivable for estimated credit losses, if any, that may result from a customer’s inability to pay based on the composition of its accounts receivable, current economic conditions and historical credit loss activity. Amounts deemed uncollectible are charged or written-off against the reserve. As of December 31, 2023, the Company had zero reserve related to the potential likelihood of not collecting its receivables.
Fair value measurements
Certain assets and liabilities are carried at fair value under GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable:
| · | Level 1 - Quoted prices in active markets for identical assets or liabilities. |
| · | Level 2 - Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data. |
| · | Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques. |
The Company's financial instruments consist primarily of cash equivalents, marketable securities, accounts receivable, accounts payable and accrued expenses. The Company’s cash equivalents, consisting of U.S. Treasury bills (a Level 2 measurement), are carried at fair value, determined according to the fair value hierarchy described above (see Note 3). The Company’s marketable securities include U.S. Treasury securities which were valued by the Company using quoted prices in active markets for similar securities, which represent a Level 2 measurement within the fair value hierarchy.
The carrying values of the Company’s accounts receivable, other current assets, accounts payable and accrued expenses approximate their fair values due to the short-term nature of these assets and liabilities.
12
Cam2 Technologies, LLC
Notes to Financial Statements
Inventories
Inventories consist of finished goods, work-in-process materials and raw materials which are stated at the lower of cost or net realizable value using the weighted-average cost method. As the Company manufactures the finished goods and work-in-process materials, overhead costs are included in inventory. The Company evaluates the carrying cost of finished goods, work-in-process, and raw materials items. To the extent that such costs exceed future demand estimates and/or exhibit historical turnover at rates less than current inventory levels, the Company reduces the carrying value of the applicable inventories. As of December 31, 2023, the reserve for inventory obsolescence was approximately $57,000. As of December 31, 2023, substantially all of the Company’s inventory consists of raw materials.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation. Repairs and maintenance charges that do not increase the useful life of the assets are charged to operations as incurred.
Depreciation on property and equipment is calculated using the straight-line method over the estimated useful lives as follows:
| Classification | Estimated Useful Life (in years) | |||
| Computer hardware and software | 3 - 5 | |||
| Machinery and equipment | 5 | |||
| Furniture and fixtures | 5 | |||
| Loaner and demonstration equipment | 2 – 3 | |||
| Leasehold improvements | Shorter of useful life or lease term | |||
Impairment of Long-Lived Assets
The Company assesses, on an annual basis, the recoverability of the carrying amount of long-lived assets used in continuing operations. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future net cash flow expected to be generated by the asset. A loss is recognized when expected future cash flows (undiscounted and without interest) are less than the carrying amount of the asset. The impairment loss is determined as the difference by which the carrying amount of the asset exceeds its fair value. No impairments were recognized for the year ended December 31, 2023.
Leases
The Company accounts for leases in accordance with ASC Topic 842, Leases (“ASC 842”). Under ASC 842, the Company assesses its contracts at inception to determine whether the contract contains a lease, including evaluation of whether the contract conveys the right to control an explicitly or implicitly identified asset for a period of time. As a lessee, the Company records a right-of-use asset and a lease liability in its consolidated balance sheets for all leases with terms longer than 12 months. Leases are classified as either finance or operating, with classification affecting the pattern of expense recognition in the statement of income.
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Cam2 Technologies, LLC
Notes to Financial Statements
The Company recognizes operating lease right-of-use (“ROU”) assets and operating lease liabilities in its balance sheet. ROU assets represent the Company’s right to use an underlying asset during the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at commencement date based on the net present value of fixed lease payments over the lease term. The Company’s lease term includes options to extend or terminate the lease when it is reasonably certain that it will exercise that option. ROU assets also include any advance lease payments made and are net of any lease incentives. As the Company’s operating lease does not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date of the lease in determining the present value of lease payments. The incremental borrowing rate is the rate of interest that the Company would expect to pay to borrow over a similar term, and on a collateralized basis, an amount equal to the lease payments in a similar economic environment.
The Company entered into a lease agreement for the use of office space, classified as an operating lease. Operating leases are included in Operating lease right-of-use assets and Operating lease liabilities in the balance sheet.
Revenue Recognition
The Company recognizes revenue from sales to customers under ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”), by applying the following five steps: (1) identification of the contract, or contracts, with a customer, (2) identification of the performance obligations in the contract, (3) determination of the transaction price, (4) allocation of the transaction price to the performance obligations in the contract and (5) recognition of revenue when, or as, performance obligations are satisfied.
For a contract with multiple performance obligations, the Company allocates the contract’s transaction price to each performance obligation on a relative standalone selling price basis using the Company’s best estimate of the standalone selling price of each distinct product or service in the contract. The primary method used to estimate standalone selling price is the price observed in standalone sales to customers; however, when prices in standalone sales are not available the Company may use third party pricing for similar products or services or estimate the standalone selling price, which is set by management. Allocation of the transaction price is determined at the contract’s inception and is not updated to reflect changes between contract inception and when the performance obligations are satisfied.
The Company earns revenue primarily from the sale of Redwave devices and other FTIR technology-based products such as OEM FTIR components and Laboratory FTIR accessories, as well as related consumables and technical support services. The Company also provides extended service warranties for its Redwave devices. Revenue is recognized when control of the promised products, consumables or services is transferred to the Company’s customers, in an a mount that reflects the consideration the Company expects to be entitled to in exchange for those products, consumables or services (the transaction price). A performance obligation is a promise in a contract to transfer a distinct product or service to a customer and is the unit of accounting under ASC 606.
Products and Consumables
For products and consumables sold by the Company, control transfers to the customer at a point in time. To indicate the transfer of control, the Company must have a present right to payment, legal title must have passed to the customer, the customer must have the significant risks and rewards of ownership, and where acceptance is other than perfunctory, the customer must have accepted the product or service. The Compa ny’s principal terms of sale are freight on board (“FOB”) shipping point, or equivalent, and, as such, the Company primarily transfers control and records revenue for product sales upon shipment. Sales arrangements with delivery terms that are not FOB shipping point are not recognized upon shipment and the transfer of control for revenue recognition is evaluated based on the associated shipping terms and customer obligations. If a performance obligation to the customer with respect to a sales transaction remains to be fulfilled following shipment (typically installation or acceptance by the customer), revenue recognition for that performance obligation is deferred until such commitments have been fulfilled. Sales tax and value added taxes collected from the customers relating to product sales and remitted to governmental authorities are excluded from revenues.
14
Cam2 Technologies, LLC
Notes to Financial Statements
Services
The sales of extended service warranties are recognized as separate service performance obligations. For extended warranty and technical support services, control transfers to the customer over the term of the arrangement, and revenue is recognized based upon the period of time elapsed under the arrangement as this period represents the transfer of benefits or services under the agreement. For those service arrangements that are bundled with a product sale, a portion of the revenue from the sale is allocated to the support service and extended warranty components and recognized as deferred revenue on the balance sheet.
The Company evaluates contingent payments to estimate the amount which is not probable of a material reversal to include in the transaction price using the most likely amount method. Future payments that are not within the control of the Company, are not considered probable of being achieved until the contingencies are resolved. The Company does not enter into significant financing agreements or other forms of variable consideration.
Contract assets arise from unbilled amounts in customer arrangements when revenue recognized exceeds the amount billed to the customer and the Company’s right to payment is not only subject to the passage of time. The Company had no contract assets related to product or service revenue as of December 31, 2023.
Contract liabilities represent the Company’s obligation to transfer goods or services to a customer for which it has received consideration (or the amount is due) from the customer. The Company has determined that its only contract liability related to its revenue is deferred revenue related to the services, which consists of amounts that have been invoiced but that have not been recognized as revenue. Amounts expected to be recognized as revenue within 12 months of the balance sheet date are classified as current deferred revenue and amounts expected to be recognized as revenue beyond 12 months of the balance sheet date are classified as noncurrent deferred revenue.
The Company capitalizes commissions earned by sales employees and consultants as these costs are incremental and recoverable costs of obtaining a contract with a customer. These costs are amortized over the contract term, as additional contract acquisition costs are incurred for contract renewals. Amortization is included in sales and marketing expense in the statement of income. The deferred sales commissions were immaterial for the year ended December 31, 2023.
The following is a summary of the activity related to the Company’s deferred revenue:
| December 31, 2023 | ||||
| Beginning balance | $ | 612,455 | ||
| Revenue recognized | (266,431 | ) | ||
| Revenue deferred | 3,559,908 | |||
| Ending Balance | $ | 3,905,932 | ||
15
Cam2 Technologies, LLC
Notes to Financial Statements
The amount of deferred revenue equals the transaction price allocated to unfulfilled performance obligations for the period presented. Such deferred revenue amounts are expected to be recognized in the future as follows:
| December 31, 2023 | ||||
| Deferred Revenue Expected to be Recognized in: | ||||
| One year or less | $ | 1,391,976 | ||
| One to two years | 1,228,765 | |||
| Three years and beyond | 1,285,192 | |||
| $ | 3,905,932 | |||
Distribution Channels
A majority of the Company’s revenue is generated from the sales to its distribution partners, and, in the United States, from the sales to end customers where a government contract is required, or a customer has a pre-existing relationship. When the Company transacts with a distribution partner, its contractual arrangement is with the partner and not with the end-use customer. Whether the Company transacts business with and receives the order from a distribution partner or directly from an end-use customer, its revenue recognition policy and resulting pattern of revenue recognition for the order are the same.
The following table presents the Company’s product and service revenue by device type:
| December 31, 2023 | ||||
| Redwave Devices: | ||||
| Device sales revenue | $ | 10,149,416 | ||
| Service revenue | 1,678,910 | |||
| Total Redwave Devices Revenue | 11,828,326 | |||
| OEM FTIR Components: | ||||
| Device sales revenue | 1,116,848 | |||
| Laboratory FTIR Accessories: | ||||
| Device sales revenue | 809,797 | |||
| Total Revenue | $ | 13,754,971 | ||
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16
Cam2 Technologies, LLC
Notes to Financial Statements
Revenue based on the end-user entity type for the Company’s product and service revenue are presented below:
| December 31, 2023 | ||||
| Government | $ | 11,828,326 | ||
| Pharmaceutical/Biotechnology | 1,116,848 | |||
| Academia and other | 809,797 | |||
| Total Revenue | $ | 13,754,971 | ||
The following table disaggregates the Company’s revenue from contracts with customers by geography, which are determined based on the customer location:
| December 31, 2023 | ||||
| United States | $ | 6,568,164 | ||
| International | 7,186,807 | |||
| $ | 13,754,971 | |||
International sales are comprised primarily of device sales revenue. The international sales are primarily in Japan and Poland, which represent approximately 44% and 31%, respectively of the international revenues, respectively. Service revenue is primarily sourced in the United States.
Product Warranty
The Company provides a one-year warranty on the sales of its Redwave devices and other FTIR technology-based products (the “Product Warranty”). The Product Warranty is an assurance-type warranty accounted for under Topic ASC 460 Guarantees (“ASC 460”) as a liability. The estimate of returns and repairs related to product warranties are established using historical information on the nature, frequency and average cost of claims of each type of device and assumptions about future activity and events.
Research and Development Expenses
Costs incurred in the research and development of new products, and the enhancement of existing products, are expensed as incurred. The Company’s research and development expenses include, but are not limited to, salaries, payroll taxes, and employee benefits for those individuals involved in research and development efforts, as well as consulting expenses and laboratory supplies and materials.
Software Development Costs
The Company incurs costs to develop computer software that is embedded in the hardware components of the Company’s products. Research and development costs related to this software are expensed as incurred, except for costs of internally developed or externally purchased software that qualify for capitalization. Software development costs incurred subsequent to the establishment of technological feasibility, but prior to the general release of the product, are capitalized and, upon general release, are amortized based upon the pattern in which economic benefits related to such assets are realized. Due to the short time period between achieving technological feasibility and product release and the insignificant amount of costs incurred during such periods, the Company did not capitalize any software development costs during the year ended December 31, 2023.
17
Cam2 Technologies, LLC
Notes to Financial Statements
Income Taxes
The Company is a limited liability company whereby the members report the respective entities’ income or loss on their individual returns. Accordingly, no provision for federal or state taxes on income is recorded in the accompanying financial statements.
It is management’s intention to make distributions to the shareholders and members, which, at a minimum, are sufficient to fund required tax payments on earnings.
The Company follows the provisions of Topic ASC 740-10, “Accounting for Uncertainty in Income Taxes” (“ASC 740-10”) which specifies how tax benefits for uncertain tax positions are to be recognized, measured, and recorded in financial statements; requires certain disclosures of uncertain tax matters; specifies how reserves for uncertain tax positions should be classified on the combined balance sheet; and provides transition and interim period guidance, among other provisions. As of December 31, 2023, the Company has not recorded any amounts for uncertain tax positions.
The Company’s policy is to recognize interest and penalties accrued on any uncertain tax positions as a component of income tax expense, if any, in its statements of income. As of December 31, 2023, the Company had no reserves for uncertain tax positions. For the year ended December 31, 2023 no estimated interest or penalties were recognized on uncertain tax positions. The Company’s federal and state income tax returns are generally open for examination for the past 3 years.
Recently Adopted Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326). The new standard adjusts the accounting for assets held at amortized costs basis, including trade receivables. The standard eliminates the probable initial recognition threshold and requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For public entities except smaller reporting companies, the guidance is effective for annual reporting periods beginning after December 15, 2019 and for interim periods within those fiscal years. For non-public entities and smaller reporting companies, the guidance was effective for annual reporting periods beginning after December 15, 2021. In November 2019, the FASB issued ASU No. 2019 -10, which deferred the effective date for non-public entities to annual reporting periods beginning after December 15, 2022, including interim periods within those fiscal years. Early application is allowed. The Company adopted this standard effective January 1, 2023 which had no material impact on its financial statements.
Recently Issued Accounting Standards
The Company has evaluated recent accounting pronouncements issued but not yet effective and has determined that upon adoption, none of these standards will have a material impact on the Company’s financial statements.
18
Cam2 Technologies, LLC
Notes to Financial Statements
3. Property and Equipment
| December 31, 2023 | ||||
| Computer hardware and software | $ | 79,102 | ||
| Lab equipment | 50,041 | |||
| Machinery and equipment | 11,209 | |||
| Furniture and fixtures | 41,892 | |||
| Loaner and demonstration equipment | 474,667 | |||
| Leasehold improvements | 35,033 | |||
| 691,944 | ||||
| Less: Accumulated Depreciation | (429,530 | ) | ||
| Property and Equipment, net | $ | 262,414 | ||
Depreciation expense was $224,305 for the year ended December 31, 2023.
4. Accrued Expenses
Accrued expenses consisted of the following:
| December 31, 2023 | ||||
| Accrued compensation | $ | 511,621 | ||
| Accrued warranty liabilities | 30,788 | |||
| Other accrued expenses | 205,307 | |||
| Total Accrued Expenses | $ | 747,716 |
Changes in the Company’s Product Warranty obligations were as follows:
| Year Ended December 31, 2023 | ||||
| Accrual balance at beginning of period | $ | 20,601 | ||
| Provision for new warranties | 30,788 | |||
| Settlements and adjustments made during the period | (20,601 | ) | ||
| Accrual Balance at End of Period | $ | 30,788 |
5. PPP Loan Payable
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act, (the “CARES Act”) was signed into law. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations, increased limitations on qualified charitable contributions, and technical corrections to tax depreciation methods for qualified improvement property.
19
Cam2 Technologies, LLC
Notes to Financial Statements
It also appropriated funds for the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loans that are forgivable in certain situations to promote continued employment, as well as Economic Injury Disaster Loans to provide liquidity to small businesses harmed by COVID-19.
On May 15, 2020 the Company received a loan from a bank with an aggregate amount of $150,000, pursuant to the PPP (“the PPP Loan”). The PPP Loan is effective for thirty years, with a maturity date of May 15, 2050, and bears interest at 3.75%. Under the terms of the PPP Loan, certain amounts of the loan and accrued interest may be forgiven if they are used for qualifying expenses as described in the CARES Act. The Company intends to repay the PPP Loan. The balance of the PPP Loan was $150,000 at December 31, 2023, included in PPP Loan payable on the accompanying balance sheet.
6. Leases
The Company is obligated under a noncancelable lease for its office space in Danbury, CT which expires in November 2024 (the “41 Eagle Rd Lease”). In addition to the base rent, the Company is required to pay a proportionate share of real estate taxes, insurance and other operating costs. The 41 Eagle Rd Lease is classified as an operating lease. The lease liability represents the net present value of future lease payments for the lease utilizing the Company’s incremental borrowing rate of 8%.
The operating lease expense under the 41 Eagle Rd Lease was $45,044 for the year ended December 31, 2023. During the year ended December 31, 2023, the Company made cash payments of $45,044, for amounts included in the measurement of lease liabilities for the 41 Eagle Rd Lease. As of December 31, 2023, the remaining lease term was approximately 0.9 years.
The following table reconciles the undiscounted lease liabilities to the total lease liabilities recognized on the consolidated balance sheet as of December 31, 2023:
| 2024 | $ | 41,291 | ||
| Total future minimum lease payments | 41,291 | |||
| Less: amount representing interest | (1,606 | ) | ||
| Present value of future minimum lease payments | 39,685 | |||
| Current portion of operating lease liability | 39,685 | |||
| Operating Lease Liability, noncurrent | $ | - |
In September 2023, the Company amended its 41 Eagle Rd Lease to relocate to a larger office space (the “New Office Lease”). The commencement date (the “Commencement Date”) is determined based on the completion of the landlord’s alterations and improvements. As of December 31, 2023, the work has not been completed and the commencement certificate has not yet been delivered to the Company. As a result, the amendment had no impact on the right-of-use assets, lease liabilities, or lease expense. The Company expects the New Office Lease to commence during the year ended December 31, 2024.
In addition to the monthly base rent (summarized below), the Company is required to pay a proportionate share of real estate taxes, insurance and other operating costs under the New Office Lease. The lease term is ten years from the Commencement Date.
20
Cam2 Technologies, LLC
Notes to Financial Statements
| Years (begins at Commencement Date) | Monthly Base Rent | |||
| Years 1 - 3 | $ | 19,571 | ||
| Year 4 | 26,880 | |||
| Year 5 - 10 | 27,687 – 32,085 | |||
7. Commitments and Contingencies
The Company may be involved in legal actions in the ordinary course of business. In the opinion of management, there are no legal proceedings pending against or involving the Company whose outcome is likely to have a material adverse effect on the Company’s financial position or results of operations.
401(k) Savings Plan
The Company has a defined-contribution savings plan under Section 401(k) of the Internal Revenue Code (the “401k Savings Plan”). This plan covers substantially all employees who meet minimum age and service requirements and allows participants to defer a portion of their annual compensation on a pre-tax basis. The Company’s contributions to the plan may be made at the discretion of the members. During the year ended December 31, 2023 the Company recorded $425,895 in compensation expenses related to the Company’s contributions to the 401k Savings Plan, included in accrued expenses as of December 31, 2023.
8. Members’ Equity
Pursuant to the Amended and Restated Operating Agreement as of January 3, 2016 (the “LLC Agreement”) the Company, a Connecticut registered LLC, shall survive in perpetuity and shall not be dissolved except upon the approval by the Board of Managers, a sale of substantially all the operating assets of the Company or upon a judicial decree of dissolution (a “Dissolution”).
Under the terms of the LLC agreement, the Company has two classes of equity: Class A units and, Class B units (“Incentive Units” or together with the Class A Units, “Units”).
As of December 31, 2023, there were 1,099,750 and 89,000 Class A and Class B units issued and outstanding, respectively.
The holders of the Class A Units have the right to vote together as a single class and each member is entitled to one vote for each Class A unit held on all matters and in connection with the election of directors of the Company. The Class A unit holders contributed a total of $1,100,000 to the Company in 2016. All profits and losses, except as discussed below, are allocated to the Class A unit holders pro rata based on Class A units held. The distributions are made at the Board of Directors’ discretion. There were $1,853,011 in distributions made to the members for the year ended December 31, 2023.
During 2016 and 2019, the Company granted a total of 89,000 fully vested Class B Units to three employees for services. The Class B unitholders have no right to participate in the management of the Company, or otherwise vote for the appointment of directors or on any matters to be voted on by the members. Under the terms of the Company’s LLC agreement, the holders of Class B Units will receive distributions only upon a capital event as defined in the LLC Agreement. Capital Distributions will first be allocated to pay off contributed capital. Once contributed capital has been paid, distributions will be allocated to all participating unit holders, Class A and Class B unit holders, pro rata based on the number of Units held by each member. The holders of the Class B Units have no transfer rights. Upon termination for any reason or no reason of a Class B Unit member, the Class B Units will be automatically forfeited.
21
Cam2 Technologies, LLC
Notes to Financial Statements
During the year ended December 31, 2022, the Company issued options to purchase 80,000 Class B Units with the exercise price of $15.82 to employees subject to certain performance-based vesting conditions over a three-year period. During the year ended December 31, 2023, the Company issued options to purchase 130,000 Class B Units with the exercise price of $20.92 to employees subject to service vesting conditions over a three-year period. All options will become fully vested upon a change of control event through an asset sale or liquidation of the Company. There were no options exercised or forfeited during the year ended December 31, 2023.
The awards of Class B Units and the options to purchase the Class B Units granted through December 31, 2023 are accounted under Topic ASC 710 “Compensation” (“ASC 710”) guidance as the terms and conditions of the awards are more akin to a profit-sharing arrangement. Under the ASC 710 accounting guidance related to deferred compensation, the Company will not recognize a liability for these awards until the occurrence of a Capital Event, as defined in the LLC agreement.
9. Subsequent Events
The Company has evaluated subsequent events through June 3, 2024, the date these financial statements were available to be issued. Other than what is disclosed below, or elsewhere in these notes to the financial statements, there are no material subsequent events requiring additional disclosure.
On April 12, 2024, in conjunction with the Transaction (defined below), the Company’s equity holders contributed 100% of the equity securities of the Company to CAM3 HoldCo, LLC, a Connecticut limited liability company incorporated in March 2024 (“CAM3”), in exchange for 100% of the equity securities of CAM3 (the “Restructuring”). As a result of the Restructuring, the Company became a wholly owned subsidiary of CAM3.
On April 29, 2024, the Company and CAM3 (the “Sellers”) entered into an Equity Purchase Agreement (the “Purchase Agreement”) with 908 Devices Inc. (the “908 Devices”). Pursuant to the Purchase Agreement, 908 Devices purchased all of CAM3’s right, title and interest in and to all of the issued and outstanding equity interests of the Company (the “Transaction”), in exchange for an initial payment of $45.0 million in cash (the “Cash Consideration”), and 1,497,171 unregistered shares of common stock, par value $0.001, of 908 Devices (the “908 Devices Common Stock”) (the “Closing Shares” and together with the Cash Consideration, the “Closing Consideration”). The Purchase Agreement also provides that approximately $4.5 million of the Cash Consideration will be placed into an indemnification escrow account for a 12-month period following the Closing Date (as defined below) to settle certain claims for indemnification for breaches or inaccuracies in the Company’s representations and warranties, covenants, and agreements.
22
Cam2 Technologies, LLC
Notes to Financial Statements
Pursuant to the Purchase Agreement, 908 Devices may also be obligated to issue up to an additional 4,000,000 unregistered shares of 908 Devices Common Stock (the “Earnout Shares” and, together with the Closing Shares, the “Shares”) as contingent consideration based on the amount of revenue 908 Devices generates from the sale of certain Company products and services (“Earnout Revenue”) during the 2-year period from May 1, 2024 through April 30, 2026 (the “Earnout Period”) as provided in the Purchase Agreement (the “Earnout Milestone”). If the Earnout Revenue achieved during the Earnout Period is at least $37 million, 908 Devices will be obligated to issue at least 1,000,000 Earnout Shares, which number of Earnout Shares will be increased based on the amount of Earnout Revenue achieved during the Earnout Period as provided in the Purchase Agreement, up to a maximum of 4,000,000 Earnout Shares for Earnout Revenue equal to or greater than $45 million. The Earnout Revenue also may include certain qualified bookings credit for certain Redwave products in the event that Earnout Revenue is otherwise above $37 million. No Earnout Shares will be issued if the Earnout Revenue achieved during the Earnout Period is less than $37 million.
The Transaction closed on April 29, 2024 (the “Closing Date”).
In connection with the closing of the Transaction, and pursuant to that certain Confidential Settlement Agreement and Mutual Releases, dated April 8, 2024, the Company settled a dispute with a current employee that included the employee receiving an upfront payment of $700,000 and an issuance of 75,000 Class B Units of CAM3. The Class B Units of CAM3 have the same terms as the Company’s Class B Units. Upon the closing of the Transaction, the employee received approximately $2,800,000 as a settlement for its equity holdings in Class B Units of CAM3. The employee is also entitled to 5% of the Earnout Shares earned by the Sellers in accordance with the terms described above.
In connection with the closing of the Transaction, and pursuant to certain transaction bonus agreements executed on April 25, 2024 between the Company and certain employees of the Company (the “Transaction Bonus Agreements”), the Company paid an aggregate cash bonus of approximately $1.2 million to certain employees of the Company, subject to the closing of the Transaction.
At the Closing Date, the Company’s option holders received approximately $1.9 million in cash and 224,776 of the Closing Shares in settlement of the outstanding options to purchase Class B Units. The holders are also entitled to approximately 14.3% of the Earnout Shares earned by the Sellers.
23
Exhibit 99.3
Cam2 Technologies, LLC
Unaudited Condensed Financial Statements
As of and for the three months ended March 31, 2024
Table of Contents
| Unaudited Condensed Financial Statements: | |
| Unaudited Condensed Balance Sheet as of March 31, 2024 | 3 |
| Unaudited Condensed Statement of Income for the three months ended March 31, 2024 | 4 |
| Unaudited Condensed Statement of Changes in Members’ Equity for the three months ended March 31, 2024 | 5 |
| Unaudited Condensed Statement of Cash Flows for the three months ended March 31, 2024 | 6 |
| Notes to Unaudited Condensed Financial Statements | 7-15 |
CAM2 TECHNOLOGIES, LLC
UNAUDITED CONDENSED BALANCE SHEET
| March 31, | ||||
| 2024 | ||||
| Assets | ||||
| Current assets: | ||||
| Cash | $ | 2,109,830 | ||
| Marketable securities | 1,035,422 | |||
| Accounts receivable | 2,109,783 | |||
| Inventory | 1,259,433 | |||
| Other current assets | 38,756 | |||
| Total current assets | 6,553,224 | |||
| Operating lease right-of-use assets | 29,148 | |||
| Property and equipment, net | 342,132 | |||
| Total assets | $ | 6,924,504 | ||
| Liabilities and Members' Equity | ||||
| Current liabilities: | ||||
| Accounts payable | $ | 481,739 | ||
| Accrued expenses | 392,802 | |||
| Deferred revenue | 1,583,620 | |||
| Operating lease liabilities | 29,148 | |||
| Total current liabilities | 2,487,309 | |||
| Deferred revenue, net of current portion | 2,489,032 | |||
| Total liabilities | 4,976,341 | |||
| Commitments and contingencies (Note 7) | ||||
| Members' equity | ||||
| Members' equity (1,188,750 units issued and outstanding) | 1,948,163 | |||
| Total liabilities and members' equity | $ | 6,924,504 | ||
The accompanying notes are an integral part of these unaudited condensed financial statements.
3
CAM2 TECHNOLOGIES, LLC
UNAUDITED CONDENSED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2024
| Revenue: | ||||
| Product revenue | $ | 3,655,273 | ||
| Service revenue | 613,049 | |||
| Total revenue | 4,268,322 | |||
| Cost of revenue: | ||||
| Product cost of revenue | 1,565,428 | |||
| Service cost of revenue | 130,674 | |||
| Total cost of revenue | 1,696,102 | |||
| Gross profit | 2,572,220 | |||
| Operating expenses: | ||||
| Sales and marketing | 594,208 | |||
| General and administrative | 291,708 | |||
| Research and development | 728,755 | |||
| Total operating expenses | 1,614,671 | |||
| Income from operations | 957,549 | |||
| Other income (expense): | ||||
| Gain on investments | 13,431 | |||
| Interest expense | (11,899 | ) | ||
| Total other income, net | 1,532 | |||
| Net income | $ | 959,081 | ||
The accompanying notes are an integral part of these unaudited condensed financial statements.
4
CAM2 TECHNOLOGIES, LLC
UNAUDITED CONDENSED STATEMENT OF CHANGES IN MEMBERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2024
| Class A Units | Class B Units | Total | ||||||||||||||||
| Units | Amount | Units | Amount | Members' Equity | ||||||||||||||
| Balance - December 31, 2023 | 1,099,750 | $ | 2,101,282 | 89,000 | $ | - | $ | 2,101,282 | ||||||||||
| Distributions | - | (1,112,200 | ) | - | - | (1,112,200 | ) | |||||||||||
| Net income | - | 959,081 | - | - | 959,081 | |||||||||||||
| Balance - March 31, 2024 | 1,099,750 | $ | 1,948,163 | 89,000 | $ | - | $ | 1,948,163 | ||||||||||
The accompanying notes are an integral part of these unaudited condensed financial statements.
5
CAM2 TECHNOLOGIES, LLC
UNAUDITED CONDENSED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2024
| Cash flows from operating activities: | ||||
| Net income | $ | 959,081 | ||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||
| Depreciation expense | 56,217 | |||
| Reduction in carrying amount of right-of-use assets | 10,537 | |||
| Gain on investment in marketable securities | (13,431 | ) | ||
| Changes in operating assets and liabilities: | ||||
| Accounts receivable | 879,814 | |||
| Inventory | 163,570 | |||
| Other current assets | (37,756 | ) | ||
| Accounts payable | 49,716 | |||
| Accrued expenses | (354,914 | ) | ||
| Deferred revenue | 166,720 | |||
| Operating lease liabilities | (10,537 | ) | ||
| Net cash provided by operating activities | 1,869,017 | |||
| Cash Flows from Investing Activities: | ||||
| Purchases of property and equipment | (135,935 | ) | ||
| Net cash used in investing activities | (135,935 | ) | ||
| Cash flows from financing activities | ||||
| Repayment of PPP Loan | (150,000 | ) | ||
| Member distributions | (1,112,200 | ) | ||
| Net cash used in financing activities | (1,262,200 | ) | ||
| Net change in cash and cash equivalents | 470,882 | |||
| Cash - beginning of period | 1,638,948 | |||
| Cash - end of period | $ | 2,109,830 | ||
| Supplemental cash flow information: | ||||
| Cash paid for interest | $ | 11,899 | ||
The accompanying notes are an integral part of these unaudited condensed financial statements.
6
CAM2 Technologies, LLC
Notes to Unaudited Condensed Financial Statements
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Business
Cam2 Technologies, LLC (the “Company”) was founded in 2013 to develop and commercialize portable Fourier-transform infrared spectroscopy (“FTIR”) spectroscopic analyzers used for chemical threat detection and identification. The Company generates revenues from the sale of portable FTIR analyzers under “Redwave Technology” brands (“Redwave devices”) and other products based on the FTIR technology, as well as related services.
Risks and uncertainties
The Company is subject to risks and uncertainties common to technology companies in the technology industry and of similar size, including, but not limited to, development by competitors of new technological innovations, dependence on key personnel, protection of proprietary technology, compliance with government regulations, and uncertainty of market acceptance of products. Potential risks and uncertainties also include, without limitation, uncertainties regarding rising inflation and higher interest rates. Products currently under development will require additional research and development efforts prior to commercialization and will require additional capital and adequate personnel and infrastructure. The Company’s research and development may not be successfully completed, adequate protection for the Company’s technology may not be obtained, and products may not prove commercially viable. The Company operates in an environment of rapid change in technology and competition.
Certain of the components included in the Company’s products are obtained from a sole source, a single source or a limited group of suppliers. Although the Company seeks to reduce dependence on those limited sources of suppliers and manufacturers, the partial or complete loss of certain of these sources, or the requirement to establish a new supplier for the components, could have a material adverse effect on the Company’s operating results, financial condition and cash flows and damage its customer relationships.
Basis of presentation
The accompanying unaudited condensed financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and on a basis consistent with the audited financial statements of the Company as of and for the year ended December 31, 2023. These unaudited condensed financial statements should be read in conjunction with such audited financial statements.
These unaudited condensed financial statements include all adjustments that management considers necessary for a fair statement of the Company’s statement of income, balance sheet, statement of cash flows, and statement of changes in members’ equity for the interim period presented. Interim results are not necessarily indicative of the results to be expected for the periods ending December 31, 2024, or for any other future annual or interim period.
2. SIGNIFICANT ACCOUNTING POLICIES
There have been no changes to our significant accounting policies described within the Notes to the Company’s financial statements as of and for the year ended December 31, 2023.
Concentrations
Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. The Company maintains the majority of its cash and cash equivalents with financial institutions that management believes to be of high credit quality. The Company has not experienced any losses with respect to its cash and cash equivalents and does not believe that it is subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships.
Significant customers are those that account for 10% or more of the Company’s total revenue or accounts receivable. For the three months ended March 31, 2024, two customers represented approximately 24% of total revenue. As of March 31, 2024, three customers accounted for approximately 65% of outstanding accounts receivable.
7
Cam2 Technologies, LLC
Notes to Unaudited Condensed Financial Statements
Investments in marketable securities
The Company accounts for its investments in debt securities in accordance with Accounting Standards Codification (“ASC”) 320, Investments — Debt Securities (“ASC 320”). Debt securities, which are comprised of investments in U.S. Treasury Securities, are measured at fair value, based on quoted market prices. As the Company has classified its investments in debt securities as available-for-sale, the Company recognizes all unrealized gains and losses in other comprehensive income, net of tax, and recognizes all realized gains and losses in net income/loss within the Company’s unaudited condensed statement of income. The unrealized gains and losses were immaterial at March 31, 2024. As a result, for the three months ended March 31, 2024, the Company’s net income was equal to the Company’s other comprehensive income. The Company realized gains on marketable securities totaling $13,431 for the three months ended March 31, 2024.
When the fair value is below the amortized cost basis of a marketable security, an estimate of expected credit losses is made. The credit-related impairment amount is recognized in the statements of income. Credit losses are recognized through the use of an allowance for credit losses account in the balance sheet and subsequent improvements in expected credit losses are recognized as a reversal of an amount in the allowance account. If the Company has the intent to sell the security or it is more likely than not that the Company will be required to sell the security prior to recovery of its amortized cost basis, then the allowance for the credit loss is written-off and the excess of the amortized cost basis of the asset over its fair value is recorded in the consolidated statements of operations. There were no credit losses recorded through March 31, 2024.
Fair value measurements
Certain assets and liabilities are carried at fair value under GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable:
| ● | Level 1 — Quoted prices in active markets for identical assets or liabilities. |
| ● | Level 2 — Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data. |
| ● | Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques. |
The Company's financial instruments consist primarily of cash equivalents, marketable securities, accounts receivable, accounts payable and accrued expenses. The Company’s marketable securities include U.S. Treasury securities which were valued by the Company using quoted prices in active markets for similar securities, which represent a Level 2 measurement within the fair value hierarchy.
The carrying values of the Company’s accounts receivable, other current assets, accounts payable and accrued expenses approximate their fair values due to the short-term nature of these assets and liabilities.
8
Cam2 Technologies, LLC
Notes to Unaudited Condensed Financial Statements
The following table presents information about the Company’s assets that are measured at fair value on a recurring basis at March 31, 2024 and indicates the fair value hierarchy of the valuation inputs the Company utilized to determine such fair value:
| Fair Value Measurements at March 31, 2024 Using: | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Assets: | ||||||||||||||||
| Marketable securities | — | 1,035,422 | — | 1,035,422 | ||||||||||||
| Total assets measured at fair value | $ | — | $ | 1,035,422 | $ | — | $ | 1,035,422 | ||||||||
Revenue recognition
The Company recognizes revenue from sales to customers under ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”), by applying the following five steps: (1) identification of the contract, or contracts, with a customer, (2) identification of the performance obligations in the contract, (3) determination of the transaction price, (4) allocation of the transaction price to the performance obligations in the contract and (5) recognition of revenue when, or as, performance obligations are satisfied.
For a contract with multiple performance obligations, the Company allocates the contract’s transaction price to each performance obligation on a relative standalone selling price basis using the Company’s best estimate of the standalone selling price of each distinct product or service in the contract. The primary method used to estimate standalone selling price is the price observed in standalone sales to customers; however, when prices in standalone sales are not available the Company may use third party pricing for similar products or services or estimate the standalone selling price, which is set by management. Allocation of the transaction price is determined at the contract’s inception and is not updated to reflect changes between contract inception and when the performance obligations are satisfied.
The Company earns revenue primarily from the sale of Redwave devices and other FTIR technology-based products such as OEM FTIR components and Laboratory FTIR accessories, as well as related consumables and technical support services. The Company also provides extended service warranties for its Redwave devices. Revenue is recognized when control of the promised products, consumables or services is transferred to the Company’s customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those products, consumables or services (the transaction price). A performance obligation is a promise in a contract to transfer a distinct product or service to a customer and is the unit of accounting under ASC 606.
Products and Consumables
For products and consumables sold by the Company, control transfers to the customer at a point in time. To indicate the transfer of control, the Company must have a present right to payment, legal title must have passed to the customer, the customer must have the significant risks and rewards of ownership, and where acceptance is other than perfunctory, the customer must have accepted the product or service. The Company’s principal terms of sale are freight on board (“FOB”) shipping point, or equivalent, and, as such, the Company primarily transfers control and records revenue for product sales upon shipment. Sales arrangements with delivery terms that are not FOB shipping point are not recognized upon shipment and the transfer of control for revenue recognition is evaluated based on the associated shipping terms and customer obligations. If a performance obligation to the customer with respect to a sales transaction remains to be fulfilled following shipment (typically installation or acceptance by the customer), revenue recognition for that performance obligation is deferred until such commitments have been fulfilled. Sales tax and value added taxes collected from the customers relating to product sales and remitted to governmental authorities are excluded from revenues.
9
Cam2 Technologies, LLC
Notes to Unaudited Condensed Financial Statements
Services
The sales of extended service warranties are recognized as separate service performance obligations. For extended warranty and technical support services, control transfers to the customer over the term of the arrangement, and revenue is recognized based upon the period of time elapsed under the arrangement as this period represents the transfer of benefits or services under the agreement. For those service arrangements that are bundled with a product sale, a portion of the revenue from the sale is allocated to the support service and extended warranty components and recognized as deferred revenue on the unaudited condensed balance sheet.
The Company evaluates contingent payments to estimate the amount which is not probable of a material reversal to include in the transaction price using the most likely amount method. Future payments that are not within the control of the Company, are not considered probable of being achieved until the contingencies are resolved. The Company does not enter into significant financing agreements or other forms of variable consideration.
Contract assets arise from unbilled amounts in customer arrangements when revenue recognized exceeds the amount billed to the customer and the Company’s right to payment is not only subject to the passage of time. The Company had no contract assets related to product or service revenue as of March 31, 2024.
Contract liabilities represent the Company’s obligation to transfer goods or services to a customer for which it has received consideration (or the amount is due) from the customer. The Company has determined that its only contract liability related to its revenue is deferred revenue related to the services, which consists of amounts that have been invoiced but that have not been recognized as revenue. Amounts expected to be recognized as revenue within 12 months of the balance sheet date are classified as current deferred revenue and amounts expected to be recognized as revenue beyond 12 months of the balance sheet date are classified as noncurrent deferred revenue.
The Company capitalizes commissions earned by sales employees and consultants as these costs are incremental and recoverable costs of obtaining a contract with a customer. These costs are amortized over the contract term, as additional contract acquisition costs are incurred for contract renewals. Amortization is included in sales and marketing expense in the unaudited condensed statement of income. The deferred sales commissions were immaterial for the three months ended March 31, 2024.
The amount of deferred revenue equals the transaction price allocated to unfulfilled performance obligations for the period presented. The following is a summary of the activity related to the Company’s deferred revenue for the three months ended March 31, 2024:
| Beginning balance | $ | 3,905,932 | ||
| Revenue recognized | (359,343 | ) | ||
| Revenue deferred | 526,063 | |||
| Ending balance | $ | 4,072,652 |
The deferred revenue amounts are expected to be recognized in the future as follows:
| March 31, | ||||
| 2024 | ||||
| Deferred revenue expected to be recognized in: | ||||
| One year or less | $ | 1,583,620 | ||
| One to two years | 1,326,219 | |||
| Three years and beyond | 1,162,813 | |||
| $ | 4,072,652 | |||
Distribution Channels
A majority of the Company’s revenue is generated from the sales to its distribution partners, and, in the United States, from the sales to end customers where a government contract is required, or a customer has a pre-existing relationship. When the Company transacts with a distribution partner, its contractual arrangement is with the partner and not with the end-use customer. Whether the Company transacts business with and receives the order from a distribution partner or directly from an end-use customer, its revenue recognition policy and resulting pattern of revenue recognition for the order are the same.
10
Cam2 Technologies, LLC
Notes to Unaudited Condensed Financial Statements
The following table presents the Company’s product and service revenue by device type:
| March 31, | ||||
| 2024 | ||||
| Redwave devices: | ||||
| Device sales revenue | $ | 3,208,054 | ||
| Service revenue | 613,050 | |||
| Total Redwave devices revenue | 3,821,104 | |||
| OEM FTIR components: | ||||
| Device sales revenue | 318,643 | |||
| Laboratory FTIR accessories: | ||||
| Device sales revenue | 128,575 | |||
| Total revenue | $ | 4,268,322 | ||
Revenue based on the end-user entity type for the Company’s product and service revenue are presented below:
| March 31, | ||||
| 2024 | ||||
| Government | $ | 3,821,104 | ||
| Pharmaceutical/Biotechnology | 318,643 | |||
| Academia and other | 128,575 | |||
| Total revenue | $ | 4,268,322 | ||
The following table disaggregates the Company’s revenue from contracts with customers by geography, which are determined based on the customer location:
| March 31, | ||||
| 2024 | ||||
| United States | $ | 3,407,970 | ||
| International | 860,352 | |||
| $ | 4,268,322 | |||
International sales are comprised primarily of device sales revenue. The International sales during the three months ended March 31, 2024 are primarily to Japan, Canada, and South Korea, which represent approximately 44%, 15% and 15% of the International revenues, respectively. Service revenue is primarily sourced in the United States.
Recently issued accounting standards
The Company has evaluated recent accounting pronouncements issued but not yet effective and has determined that upon adoption, none of these standards will have a material impact on the Company’s unaudited condensed financial statements.
11
Cam2 Technologies, LLC
Notes to Unaudited Condensed Financial Statements
3. Property and Equipment
| March 31, | ||||
| 2024 | ||||
| Computer hardware and software | $ | 79,102 | ||
| Lab equipment | 50,041 | |||
| Machinery and equipment | 11,209 | |||
| Furniture and fixtures | 41,892 | |||
| Loaner and demonstration equipment | 610,602 | |||
| Leasehold improvements | 35,033 | |||
| 827,879 | ||||
| Less: Accumulated Depreciation | (485,747 | ) | ||
| Property and equipment, net | $ | 342,132 | ||
Depreciation expense was $56,217 for the three months ended March 31, 2024.
4. INVENTORY
Inventory consisted of the following as of March 31, 2024:
| March 31, | ||||
| 2024 | ||||
| Raw materials | $ | 100,181 | ||
| Work-in-progress | 174,397 | |||
| Finished goods | 984,855 | |||
| $ | 1,259,433 | |||
During the three months ended March 31, 2024, the Company made non-cash transfers of loaner and demonstration equipment from inventory to property and equipment of $135,935.
5. Accrued Expenses
Accrued expenses consisted of the following:
| March 31, | ||||
| 2024 | ||||
| Accrued compensation | $ | 230,397 | ||
| Accrued warranty liabilities | 30,675 | |||
| Other accrued expenses | 131,730 | |||
| Total accrued expenses | $ | 392,802 | ||
6. PPP LOAN PAYABLE
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act, (the “CARES Act”) was signed into law. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations, increased limitations on qualified charitable contributions, and technical corrections to tax depreciation methods for qualified improvement property. It also appropriated funds for the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loans that are forgivable in certain situations to promote continued employment, as well as Economic Injury Disaster Loans to provide liquidity to small businesses harmed by COVID-19.
12
Cam2 Technologies, LLC
Notes to Unaudited Condensed Financial Statements
On May 15, 2020 the Company received a loan from a bank with an aggregate amount of $150,000, pursuant to the PPP (“the PPP Loan”). The PPP Loan was effective for thirty years, with a maturity date of May 15, 2050, and bears interest at 3.75%. Under the terms of the PPP Loan, certain amounts of the loan and accrued interest may be forgiven if they are used for qualifying expenses as described in the CARES Act. The Company repaid the PPP Loan in full during the three months ended March 31, 2024. The Company incurred $11,899 in interest expenses in relation to the PPP Loan for the three months ended March 31, 2024.
7. Commitments and contingencies
The Company may be involved in legal actions in the ordinary course of business. In the opinion of management, there are no legal proceedings pending against or involving the Company whose outcome is likely to have a material adverse effect on the Company’s financial position or results of operations.
401(k) Savings Plan
The Company has a defined-contribution savings plan under Section 401(k) of the Internal Revenue Code (the “401k Savings Plan”). This plan covers substantially all employees who meet minimum age and service requirements and allows participants to defer a portion of their annual compensation on a pre-tax basis. The Company’s contributions to the plan may be made at the discretion of the members. During the three months ended March 31, 2024 the Company recorded no compensation expenses related to the Company’s contributions to the 401k Savings Plan.
8. MEMBERS’ EQUITY
Pursuant to the Amended and Restated Operating Agreement as of January 3, 2016 (the “LLC Agreement”) the Company, a Connecticut registered LLC, shall survive in perpetuity and shall not be dissolved except upon the approval by the Board of Managers, a sale of substantially all the operating assets of the Company or upon a judicial decree of dissolution (a “Dissolution”).
Under the terms of the LLC agreement, the Company has two classes of equity: Class A units and, Class B units (“Incentive Units” or together with the Class A Units, “Units”).
As of March 31, 2024, there were 1,099,750 and 89,000 Class A and Class B units issued and outstanding, respectively.
The holders of the Class A Units have the right to vote together as a single class and each member is entitled to one vote for each Class A unit held on all matters and in connection with the election of directors of the Company. The Class A unit holders contributed a total of $1,100,000 to the Company in 2016. All profits and losses, except as discussed below, are allocated to the Class A unit holders pro rata based on Class A units held. The distributions are made at the Board of Directors’ discretion. There were $1,112,200 in distributions made to the members for the three months ended March 31, 2024.
During 2016 and 2019, the Company granted a total of 89,000 fully vested Class B Units to three employees for services. The Class B unitholders have no right to participate in the management of the Company, or otherwise vote for the appointment of directors or on any matters to be voted on by the members. Under the terms of the Company’s LLC agreement, the holders of Class B Units will receive distributions only upon a capital event as defined in the LLC Agreement. Capital Distributions will first be allocated to pay off contributed capital. Once contributed capital has been paid, distributions will be allocated to all participating unit holders, Class A and Class B unit holders, pro rata based on the number of Units held by each member. The holders of the Class B Units have no transfer rights. Upon termination for any reason or no reason of a Class B Unit member, the Class B Units will be automatically forfeited.
During the year ended December 31, 2022, the Company issued options to purchase 80,000 Class B Units with the exercise price of $15.82 to certain employees subject to performance-based vesting conditions over a three-year period. During the year ended December 31, 2023, the Company issued options to purchase 130,000 Class B Units with the exercise price of $20.92 to employees subject to service vesting conditions over a three-year period. All options will become fully vested upon a change of control event through an asset sale or liquidation of the Company. There were no options exercised or forfeited during the three months ended March 31, 2024.
13
Cam2 Technologies, LLC
Notes to Unaudited Condensed Financial Statements
The awards of Class B Units and the options to purchase the Class B Units granted through March 31, 2024 are accounted under Topic ASC 710 “Compensation” (“ASC 710”) guidance as the terms and conditions of the awards are more akin to a profit-sharing arrangement. Under the ASC 710 accounting guidance related to deferred compensation, the Company would not recognize a liability for these awards until the occurrence of a Capital Event, as defined in the LLC agreement. The Company settled its liability for all the outstanding options to purchase Class B Units in connection with the Transaction (see Note 9).
9. SUBSEQUENT EVENTS
The Company has evaluated subsequent events through July 3, 2024, the date these financial statements were available to be issued. Other than what is disclosed below, or elsewhere in these notes to the unaudited condensed financial statements, there are no material subsequent events requiring additional disclosure.
Entity Restructuring
On April 12, 2024, in conjunction with the Transaction (defined below), the Company’s equity holders contributed 100% of the equity securities of the Company to CAM3 HoldCo, LLC, a Connecticut limited liability company incorporated in March 2024 (“CAM3”), in exchange for 100% of the equity securities of CAM3 (the “Restructuring”). As a result of the Restructuring, the Company became a wholly owned subsidiary of CAM3.
Equity Purchase Agreement
On April 29, 2024, the Company and CAM3 (the “Sellers”) entered into an Equity Purchase Agreement (the “Purchase Agreement”) with 908 Devices Inc. (the “908 Devices”). Pursuant to the Purchase Agreement, 908 Devices purchased all of CAM3’s right, title and interest in and to all of the issued and outstanding equity interests of the Company (the “Transaction”), in exchange for an initial payment of $45.0 million in cash (the “Cash Consideration”), and 1,497,171 unregistered shares of common stock, par value $0.001, of 908 Devices (the “908 Devices Common Stock”) (the “Closing Shares” and together with the Cash Consideration, the “Closing Consideration”). The Purchase Agreement also provides that approximately $4.5 million of the Cash Consideration will be placed into an indemnification escrow account for a 12-month period following the Closing Date (as defined below) to settle certain claims for indemnification for breaches or inaccuracies in Redwave’s representations and warranties, covenants, and agreements.
Pursuant to the Purchase Agreement, 908 Devices may also be obligated to issue up to an additional 4,000,000 unregistered shares of 908 Devices Common Stock (the “Earnout Shares” and, together with the Closing Shares, the “Shares”) as contingent consideration based on the amount of revenue 908 Devices generates from the sale of certain Redwave products and services (“Earnout Revenue”) during the 2-year period from May 1, 2024 through April 30, 2026 (the “Earnout Period”) as provided in the Purchase Agreement (the “Earnout Milestone”). If the Earnout Revenue achieved during the Earnout Period is at least $37 million, 908 Devices will be obligated to issue at least 1,000,000 Earnout Shares, which number of Earnout Shares will be increased based on the amount of Earnout Revenue achieved during the Earnout Period as provided in the Purchase Agreement, up to a maximum of 4,000,000 Earnout Shares for Earnout Revenue equal to or greater than $45 million. The Earnout Revenue also may include certain qualified bookings credit for certain Redwave products in the event that Earnout Revenue is otherwise above $37 million. No Earnout Shares will be issued if the Earnout Revenue achieved during the Earnout Period is less than $37 million.
14
Cam2 Technologies, LLC
Notes to Unaudited Condensed Financial Statements
The Transaction closed on April 29, 2024 (the “Closing Date”).
Transactions at Closing
In connection with the closing of the Transaction, and pursuant to that certain Confidential Settlement Agreement and Mutual Releases, dated April 8, 2024, the Company settled a dispute with a current employee that included the employee receiving an upfront payment of $700,000 and an issuance of 75,000 Class B Units of CAM3. The Class B Units of CAM3 have the same terms as the Company’s Class B Units. Upon the closing of the Transaction, the employee received approximately $2,800,000 as a settlement for its equity holdings in Class B Units of CAM3. The employee is also entitled to 5% of the Earnout Shares earned by the Sellers in accordance with the terms described above.
In connection with the closing of the Transaction, and pursuant to certain transaction bonus agreements executed on April 25, 2024 between the Company and certain employees of the Company (the “Transaction Bonus Agreements”), the Company paid an aggregate cash bonus of approximately $1.2 million to certain employees of the Company.
At the Closing Date, the Company’s option holders received approximately $1.9 million in cash and 224,776 of the Closing Shares in settlement of all the outstanding options to purchase Class B Units. The option holders are also entitled to approximately 14.3% of the Earnout Shares earned by the Sellers.
15
Exhibit 99.4
UNAUDITED PRO FOMA CONDENSED COMBINED FINANCIAL INFORMATION
INDEX TO FINANCIAL STATEMENTS
| UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS: | |
| Introduction | 2 |
| Pro Forma Condensed Combined Consolidated Balance Sheet as of March 31, 2024 (Unaudited) | 3 |
| Pro Forma Condensed Combined Consolidated Statement of Comprehensive Income for the three months Ended March 31, 2024 (Unaudited) | 4 |
| Pro Forma Condensed Combined Consolidated Statement of Comprehensive Income for the year Ended December 31, 2023 (Unaudited) | 5 |
| Notes to Pro Forma Condensed Combined Consolidated Financial Statements (Unaudited) | 6 |
1
INTRODUCTION
On April 29, 2024, 908 Devices Inc. (the “Company”), entered into an Equity Purchase Agreement (the “Purchase Agreement”) and purchased all of the issued and outstanding equity interests of CAM2 Technologies, LLC, a Connecticut limited liability company (d/b/a RedWave Technology) (“RedWave”). The transaction closed on April 29, 2024, at which time RedWave became a wholly-owned subsidiary of the Company (the “Acquisition”).
RedWave is a leading provider of portable FTIR (Fourier Transform Infrared) spectroscopic analyzers for rapid chemical identification of bulk materials. FTIR, an optical spectroscopy technology, is highly regarded for its specific substance identification abilities across a broad range of bulk materials. This acquisition provides the Company with an expanded portfolio of handheld chemical analysis devices for forensic workflows that quickly detect and identify unknown solids, liquids, vapors, and aerosols at the point of need. In addition, RedWave bolsters the Company’s desktop portfolio with a line of accessories for pharma Process Analytical Technology (PAT) and industrial QC applications.
The Company will account for the acquisition of RedWave as a business combination under U.S. GAAP. Under the acquisition method of accounting, the assets and liabilities of RedWave will be recorded as of the acquisition date, at their respective fair values, and consolidated with those of the Company. The Company paid $45.0 million in cash (the “Cash Consideration”), and 1,497,171 unregistered shares of the Company’s common stock, which reflects closing adjustments relating to working capital, cash and debt as set forth in the Purchase Agreement. The Cash Consideration is subject to additional working capital, cash, debt, and transaction expense adjustments as set forth in the Purchase Agreement.
The Company may also be obligated to issue up to an additional 4,000,000 unregistered shares of the Company’s common stock as contingent consideration based on the amount of revenue the Company generates from the sale of certain RedWave products and services during the two-year period from May 1, 2024 through April 30, 2026. If the earnout revenue achieved during the period is at least $37.0 million, the Company will be obligated to issue at least 1,000,000 contingent shares, which number of contingent shares will be increased based on the amount of earnout revenue achieved during the period, up to a maximum of 4,000,000 contingent shares for earnout revenue equal to or greater than $45.0 million. The earnout revenue also may include certain qualified bookings credit, as defined in the Purchase Agreement, for certain RedWave products in the event that earnout revenue is otherwise above $37 million. No contingent shares will be issued if the earnout revenue achieved during the period is less than $37 million. If any change in control event occurs, such contingent shares earned are payable in cash at an amount equal to the fair market value of the underlying shares, unless the acquiror is a publicly traded company or an affiliate of a publicly traded company and the acquiror or its affiliated publicly traded company expressly assumes the contingent consideration obligations, subject to the terms set forth in the Purchase Agreement.
The accompanying unaudited pro forma condensed combined balance sheet as of March 31, 2024 that combines the historical consolidated balance sheets of the Company and RedWave gives effect to the Acquisition as if it had occurred on March 31, 2024. The unaudited pro forma condensed combined statements of comprehensive income for the three months ended March 31, 2024 and the year ended December 31, 2023, which combine the historical consolidated statements of operations of the Company and the historical consolidated statements of income of RedWave assume the Acquisition occurred on January 1, 2023.
The unaudited pro forma condensed combined financial information herein should be read in conjunction with the historical financial statements and the related notes thereto of the Company which are presented in the Annual Report on Form 10-K for the year ended December 31, 2023, filed on March 8, 2024 (File No. 001-39815), the Company’s historical unaudited condensed consolidated financial statements included in its Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2024, filed on May 4, 2024 (File No. 001-39815), and the historical financial statements of RedWave which are presented as exhibits to this Form 8-K/A.
The allocation of the purchase price as reflected in the unaudited pro forma condensed combined financial information was based on a preliminary valuation of the assets acquired and liabilities assumed, and the valuation and accounting are subject to revision as more detailed analyses are completed and additional information about the fair value of assets acquired and liabilities assumed becomes available.
The following unaudited pro forma condensed combined financial statements are provided for illustrative purposes only and are based on available information and assumptions that the acquirer believes are reasonable. They do not purport to represent what the actual combined results of operations or the combined financial position would have been had the Acquisition occurred on the dates indicated, or on any other date, nor are they necessarily indicative of the Company’s future combined results of operations or the combined financial position after the Acquisition.
2
908 Devices Inc.
Unaudited Pro Forma Condensed Combined Balance Sheet
As of March 31, 2024
(in thousands)
| Historical | Historical | Pro Forma | Pro Forma | |||||||||||||||||
| 908 Devices Inc. | CAM2 (Note 3) | Adjustments | Notes | Combined | ||||||||||||||||
| Assets | ||||||||||||||||||||
| Current assets: | ||||||||||||||||||||
| Cash and cash equivalents | $ | 104,599 | $ | 2,110 | $ | (45,000 | ) | 5C | $ | 61,709 | ||||||||||
| Marketable securities | 29,596 | 1,035 | — | 30,631 | ||||||||||||||||
| Accounts receivable, net | 7,486 | 2,110 | — | 9,596 | ||||||||||||||||
| Inventory | 16,356 | 1,259 | 61 | 5B | 17,676 | |||||||||||||||
| Prepaid expenses and other current assets | 3,831 | 39 | — | 3,870 | ||||||||||||||||
| Total current assets | 161,868 | 6,553 | (44,939 | ) | 123,482 | |||||||||||||||
| Operating lease, right-of-use assets | 5,754 | 29 | — | 5,783 | ||||||||||||||||
| Property and equipment, net | 3,215 | 342 | — | 3,557 | ||||||||||||||||
| Goodwill | 10,139 | — | 26,535 | 5A, 5B, 5C | 36,674 | |||||||||||||||
| Intangible assets, net | 7,468 | — | 40,580 | 5A | 48,048 | |||||||||||||||
| Other long-term assets | 1,347 | — | — | 1,347 | ||||||||||||||||
| Total assets | $ | 189,791 | $ | 6,924 | $ | 22,176 | $ | 218,891 | ||||||||||||
| Liabilities and Stockholders' Equity | ||||||||||||||||||||
| Current liabilities: | ||||||||||||||||||||
| Accounts payable | $ | 1,472 | $ | 482 | $ | — | $ | 1,954 | ||||||||||||
| Accrued expenses | 5,299 | 392 | 2,100 | 5D | 7,791 | |||||||||||||||
| Deferred revenue | 10,483 | 1,584 | — | 12,067 | ||||||||||||||||
| Operating lease liabilities | 2,076 | 29 | — | 2,105 | ||||||||||||||||
| Total current liabilities | 19,330 | 2,487 | 2,100 | 23,917 | ||||||||||||||||
| Operating lease liabilities, net of current portion | 3,380 | — | — | 3,380 | ||||||||||||||||
| Deferred revenue, net of current portion | 7,871 | 2,489 | — | 10,360 | ||||||||||||||||
| Deferred income taxes | 2,317 | — | — | 2,317 | ||||||||||||||||
| Other long-term liabilities | — | — | 15,500 | 5C | 15,500 | |||||||||||||||
| Total liabilities | 32,898 | 4,976 | 17,600 | 55,474 | ||||||||||||||||
| Commitments and contingencies | ||||||||||||||||||||
| Stockholders' equity: | ||||||||||||||||||||
| Preferred stock | ||||||||||||||||||||
| Common stock | 33 | — | 1 | 5C | 34 | |||||||||||||||
| Additional paid-in capital | 337,396 | — | 8,623 | 5C | 346,019 | |||||||||||||||
| Accumulated other comprehensive income | 980 | — | — | 980 | ||||||||||||||||
| Accumulated (deficit) earnings | (181,516 | ) | 1,948 | (4,048 | ) | 5D, 5E | (183,616 | ) | ||||||||||||
| Total stockholders' equity | 156,893 | 1,948 | 4,576 | 163,417 | ||||||||||||||||
| Total liabilities and stockholders' equity | $ | 189,791 | $ | 6,924 | $ | 22,176 | $ | 218,891 | ||||||||||||
See accompanying notes to unaudited pro forma condensed combined financial information.
3
908 Devices Inc.
Unaudited Pro Forma Condensed Combined Statement of Comprehensive Income
For the three months Ended March 31, 2024
(in thousands, except share and per share data)
| Historical | Historical | Pro Forma | Pro Forma | |||||||||||||||||
| 908 Devices Inc. | CAM2 (Note 3) | Adjustments | Notes | Combined | ||||||||||||||||
| Revenue: | ||||||||||||||||||||
| Product revenue | $ | 7,233 | $ | 3,655 | $ | — | $ | 10,888 | ||||||||||||
| Service revenue | 2,758 | 613 | — | 3,371 | ||||||||||||||||
| Contract revenue | — | — | — | — | ||||||||||||||||
| Total revenue | 9,991 | 4,268 | — | 14,259 | ||||||||||||||||
| Cost of revenue: | ||||||||||||||||||||
| Product cost of revenue | 3,210 | 1,565 | 650 | 5b, 5f | 5,425 | |||||||||||||||
| Service cost of revenue | 1,778 | 131 | — | 1,909 | ||||||||||||||||
| Contract cost of revenue | — | — | — | — | ||||||||||||||||
| Total cost of revenue | 4,988 | 1,696 | 650 | 7,334 | ||||||||||||||||
| Gross profit | 5,003 | 2,572 | (650 | ) | 6,925 | |||||||||||||||
| Operating expenses: | ||||||||||||||||||||
| Research and development | 5,790 | 729 | 23 | 5f | 6,542 | |||||||||||||||
| Selling, general and administrative | 11,901 | 886 | 142 | 5b, 5f | 12,929 | |||||||||||||||
| Total operating expenses | 17,691 | 1,615 | 165 | 19,471 | ||||||||||||||||
| Loss from operations | (12,688 | ) | 957 | (815 | ) | (12,546 | ) | |||||||||||||
| Other income, net | ||||||||||||||||||||
| Interest income | 1,729 | 14 | (600 | ) | 5d | 1,143 | ||||||||||||||
| Interest expense | — | (12 | ) | — | (12 | ) | ||||||||||||||
| Other expense, net | (28 | ) | — | — | (28 | ) | ||||||||||||||
| Total other income, net | 1,701 | 2 | (600 | ) | 1,103 | |||||||||||||||
| (Loss) income from operations before income taxes | (10,987 | ) | 959 | (1,415 | ) | (11,443 | ) | |||||||||||||
| Provision for (benefit from) income taxes | 70 | — | — | 5g | 70 | |||||||||||||||
| Net (loss) income | $ | (10,917 | ) | $ | 959 | $ | (1,415 | ) | $ | (11,373 | ) | |||||||||
| Net loss per share | ||||||||||||||||||||
| Basic and diluted | $ | (0.33 | ) | $ | (0.00 | ) | 5c | $ | (0.33 | ) | ||||||||||
| Weighted average common shares outstanding | ||||||||||||||||||||
| Basic and diluted | 32,710,894 | 1,497,171 | 5e | 34,208,065 | ||||||||||||||||
See accompanying notes to unaudited pro forma condensed combined financial information.
4
908 Devices Inc.
Unaudited Pro Forma Condensed Combined Statement of Comprehensive Income
For the year Ended December 31, 2023
(in thousands, except share and per share data)
| Historical | Historical | Pro Forma | Pro Forma | |||||||||||||||||
| 908 Devices Inc. | CAM2 (Note 3) | Adjustments | Notes | Combined | ||||||||||||||||
| Revenue: | ||||||||||||||||||||
| Product revenue | $ | 40,214 | $ | 12,076 | $ | — | $ | 52,290 | ||||||||||||
| Service revenue | 9,645 | 1,679 | — | 11,324 | ||||||||||||||||
| Contract revenue | 370 | — | — | 370 | ||||||||||||||||
| Total revenue | $ | 50,229 | $ | 13,755 | $ | — | $ | 63,984 | ||||||||||||
| Cost of revenue: | ||||||||||||||||||||
| Product cost of revenue | 18,428 | 5,914 | 2,601 | 5b, 5f | 26,943 | |||||||||||||||
| Service cost of revenue | 6,380 | 577 | — | 6,957 | ||||||||||||||||
| Contract cost of revenue | 99 | — | — | 99 | ||||||||||||||||
| Total cost of revenue | 24,907 | 6,491 | 2,601 | 33,999 | ||||||||||||||||
| Gross profit | 25,322 | 7,264 | (2,601 | ) | 29,985 | |||||||||||||||
| Operating expenses: | ||||||||||||||||||||
| Research and development | 21,904 | 2,608 | 95 | 5f | 24,607 | |||||||||||||||
| Selling, general and administrative | 46,176 | 2,577 | 2,635 | 5a, 5b, 5f | 51,388 | |||||||||||||||
| Total operating expenses | 68,080 | 5,185 | 2,730 | 75,995 | ||||||||||||||||
| Loss from operations | (42,758 | ) | 2,079 | (5,331 | ) | (46,010 | ) | |||||||||||||
| Other income, net | ||||||||||||||||||||
| Interest income | 6,480 | 69 | (1,916 | ) | 5d | 4,633 | ||||||||||||||
| Interest expense | (201 | ) | (10 | ) | — | (211 | ) | |||||||||||||
| Other expense, net | (131 | ) | — | (131 | ) | |||||||||||||||
| Total other income, net | 6,148 | 59 | (1,916 | ) | 4,291 | |||||||||||||||
| (Loss) income from operations before income taxes | (36,610 | ) | 2,138 | (7,247 | ) | (41,719 | ) | |||||||||||||
| Provision for (benefit from) income taxes | 211 | — | — | 5g | 211 | |||||||||||||||
| Net (loss) income | $ | (36,399 | ) | $ | 2,138 | $ | (7,247 | ) | $ | (41,508 | ) | |||||||||
| Net loss per share | ||||||||||||||||||||
| Basic and diluted | $ | (1.13 | ) | $ | (0.10 | ) | 5c | $ | (1.23 | ) | ||||||||||
| Weighted average common shares outstanding | ||||||||||||||||||||
| Basic and diluted | 32,239,394 | 1,497,171 | 5e | 33,736,565 | ||||||||||||||||
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908 Devices Inc.
Notes to Unaudited Pro Forma Condensed Combined Consolidated Financial Statements
1. Description of the Transaction
On April 29, 2024, 908 Devices Inc. (the “Company”), entered into an Equity Purchase Agreement (the “Purchase Agreement”) and purchased all of the issued and outstanding equity interests of CAM2 Technologies, LLC, a Connecticut limited liability company (d/b/a RedWave Technology) (“RedWave”). The transaction closed on April 29, 2024, at which time RedWave became a wholly-owned subsidiary of the Company (the “Acquisition”).
The Company has accounted for the acquisition of RedWave as a business combination under U.S. GAAP. The Company paid $45.0 million in cash, and 1,497,171 unregistered shares of the Company’s common stock, which reflects closing adjustments relating to working capital, cash and debt as set forth in the Purchase Agreement. The Company may also be obligated to issue up to an additional 4,000,000 unregistered shares of the Company’s common stock as contingent consideration based on the amount of revenue the Company generates from the sale of certain RedWave products and services during the two-year period from May 1, 2024 through April 30, 2026. If the earnout revenue achieved during the period is at least $37.0 million, the Company will be obligated to issue at least 1,000,000 contingent shares, which number of contingent shares will be increased based on the amount of earnout revenue achieved during the period, up to a maximum of 4,000,000 contingent shares for earnout revenue equal to or greater than $45.0 million. The earnout revenue also may include certain qualified bookings credit, as defined in the Purchase Agreement, for certain RedWave products in the event that earnout revenue is otherwise above $37 million. No contingent shares will be issued if the earnout revenue achieved during the period is less than $37 million. If any change in control event occurs, such contingent shares earned are payable in cash in an amount equal to the fair value of the underlying shares, unless the acquiror is a publicly traded company or an affiliate of a publicly traded company and the acquiror or its affiliated publicly traded company expressly assumes the contingent consideration obligations, subject to the terms set forth in the Purchase Agreement.
2. Basis of Presentation
The following unaudited pro forma condensed combined financial information has been prepared in accordance with Article 11 of Regulation S-X, Pro Forma Financial Information, as amended by the final rule, Release No. 33-10786 “Amendments to Financial Disclosures about Acquired and Disposed Businesses” (“Article 11”), and are being provided pursuant to Rule 3-05 of Regulation S-X as the Acquisition constitutes a significant acquisition.
Article 11 requires the depiction of the accounting for the Acquisition (“Transaction Accounting Adjustments”) and the option to present the reasonable synergies and dis-synergies (“Management’s Adjustments”) in the explanatory notes to the unaudited pro forma condensed combined financial information. The Company has elected not to present Management’s Adjustments in the following unaudited pro forma condensed combined financial statements.
The accompanying unaudited pro forma condensed combined financial statements combine the historical consolidated financial statements of the Company and those of RedWave after giving effect to the Acquisition, using the acquisition method of accounting in accordance with Accounting Standards Codification (ASC) 805, “Business Combinations”, and applying the assumptions and adjustments described in the accompanying notes.
The accompanying unaudited pro forma condensed combined balance sheet as of March 31, 2024 that combines the historical consolidated balance sheets of the Company and RedWave gives effect to the Acquisition as if it had occurred on March 31, 2024. The unaudited pro forma condensed combined statements of comprehensive income for the three months ended March 31, 2024 and the year ended December 31, 2023, which combine the historical consolidated statements of operations of the Company and the historical consolidated statements of income of RedWave assume the Acquisition occurred on January 1, 2023.
The historical consolidated financial statements have been adjusted to give effect to pro forma events based on information available to management during the preparation of the pro forma financial information and assumptions that management believes are reasonable and supportable. These unaudited pro forma condensed combined financial statements should be read in conjunction with the accompanying notes thereto of the Company which are presented in the Annual Report on Form 10-K for the year ended December 31, 2023, filed on March 8, 2023 (File No. 001-39815), the Company’s historical unaudited condensed consolidated financial statements included in its Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2024, filed on May 4, 2024 (File No. 001-39815), and the historical financial statements of RedWave which are presented as exhibit 99.2 and 99.3 to this Form 8-K/A. The following unaudited pro forma condensed combined financial statements are provided for illustrative purposes only and are based on available information and assumptions that the acquirer believes are reasonable. They do not purport to represent what the actual combined results of operations or the combined financial position would have been had the Acquisition occurred on the dates indicated, or on any other date, nor are they necessarily indicative of the Company’s future combined results of operations or the combined financial position after the Acquisition. No effect has been given in these pro forma financial statements for synergistic benefits that may be realized through the combination or costs that may be incurred in integrating operations.
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3. Conforming accounting policies and presentation
The unaudited pro forma combined financial statements have been adjusted to reflect reclassifications of certain RedWave historical financial statement line items to conform to the financial statement line items presented in the Company’s historical financial statements. These reclassification adjustments include the following:
Unaudited pro forma condensed combined balance sheet as of March 31, 2024
| Amount | Presentation in | |||||
| Presentation in RedWave Financial Statements | (in thousands) | Unaudited Pro Forma Condensed Combined Balance Sheet | ||||
| Accounts receivable | $ | 2,110 | Accounts receivable, net | |||
Unaudited pro forma condensed combined statement of comprehensive loss for the three months ended March 31, 2024
| Amount | Presentation in | |||||
| Presentation in RedWave Financial Statements | (in thousands) | Unaudited Pro Forma Condensed Combined Balance Sheet | ||||
| Cost of Revenue - Product revenue | $ | 1,565 | Product cost of revenue | |||
| Cost of Revenue - Service revenue | 131 | Service cost of revenue | ||||
| Sales and marketing | 594 | Selling, general and administrative | ||||
| General and administrative | 292 | Selling, general and administrative | ||||
| Gain on investments | 14 | Interest income | ||||
Unaudited pro forma condensed combined statement of comprehensive loss for the year ended December 31, 2023
| Amount | Presentation in | |||||
| Presentation in RedWave Financial Statements | (in thousands) | Unaudited Pro Forma Condensed Combined Balance Sheet | ||||
| Cost of Revenue - Product revenue | $ | 5,914 | Product cost of revenue | |||
| Cost of Revenue - Service revenue | 577 | Service cost of revenue | ||||
| Sales and marketing | 2,041 | Selling, general and administrative | ||||
| General and administrative | 536 | Selling, general and administrative | ||||
| Gain on investments | 69 | Interest income | ||||
The Company performed an initial review of the accounting policies of RedWave to determine if differences in accounting policies require reclassification or adjustment. Except for differences in naming conventions of various financials statement line items that are presented within this footnote, as a result of that preliminary review, the Company did not identify any material difference in accounting policies.
When the Company completes its final review of the accounting policies of RedWave, differences may be identified that, when conformed, could have a material impact on the unaudited pro forma condensed combined financial information.
4. Estimated consideration and preliminary purchase price allocation
The Company accounted for the Acquisition as the purchase of a business under U.S. GAAP. Under the acquisition method of accounting, the assets and liabilities of RedWave will be recorded as of the acquisition date, at their respective fair values, and consolidated with those of the Company. The estimated consideration and preliminary purchase price information has been prepared using a preliminary valuation. The preparation of the valuation required the use of significant assumptions and estimates. Critical estimates included, but were not limited to, future expected cash flows, including projected revenues and expenses, and the applicable discount rates. These estimates were based on assumptions that the Company believes to be reasonable. However, actual results may differ from these estimates.
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The total consideration transferred follows (amounts in thousands):
| Cash consideration | $ | 45,000 | ||
| Equity consideration | 8,624 | |||
| Contingent consideration | 15,500 | |||
| Total consideration transferred | $ | 69,124 |
Acquisition related costs are not included as a component of consideration transferred, but are expensed in the periods in which the costs are incurred. In connection with the Acquisition, the Company incurred $2.4 million in cash related to legal fees, banking fees and other direct costs incurred with the Acquisition.
Fair Value of Net Assets Acquired
The following table presents the preliminary allocation of the purchase consideration for the Acquisition including the contingent consideration and the preliminary allocation of the purchase consideration as of March 31, 2024 (amounts in thousands):
| Consideration Transferred: | ||||
| Cash paid | $ | 45,000 | ||
| Fair value of common stock shares issued (1) | 8,624 | |||
| Contingent consideration - earnout | 15,500 | |||
| Total consideration transferred | $ | 69,124 | ||
| Assets acquired and liabilities assumed: | ||||
| Cash and cash equivalents | $ | 3,145 | ||
| Accounts receivable | 2,110 | |||
| Inventory | 1,320 | |||
| Prepaid expenses and other current assets | 39 | |||
| Property and equipment | 342 | |||
| Identifiable Intangible assets | ||||
| Customer Relationships | 2,500 | |||
| Developed Technology | 38,080 | |||
| Goodwill | 26,535 | |||
| Operating lease right-of-use assets | 29 | |||
| Accounts payable, accrued expenses and other current liabilities | (874 | ) | ||
| Deferred revenue | (4,073 | ) | ||
| Other liabilities | (29 | ) | ||
| Total | $ | 69,124 | ||
| (1) | The share consideration component of the estimated purchase price consideration is computed on the basis of 1,497,171 shares issued and the Company’s common share closing price of $5.76 on April 29, 2024. |
This preliminary purchase price allocation has been used to prepare pro forma adjustments in the pro forma balance sheet and statement of comprehensive income and is subject to adjustment as purchase accounting is finalized. The final purchase price allocation will be determined when the Company has completed the detailed valuations and necessary calculations. The final allocation could differ materially from the preliminary allocation used in the pro forma adjustments. The final allocation may include, but not be limited to: (1) changes in fair values of property, plant and equipment, (2) changes in allocations to intangible assets such as trade names, technology and customer relationships as well as goodwill and (3) other changes to assets and liabilities.
5. Pro Forma Adjustments
This note should be read in conjunction with Notes 1 and 2. Adjustments included in the pro forma adjustments column of the pro forma condensed combined statement of comprehensive income and the pro forma condensed combined consolidated balance sheet include the following, as indicated in the “Notes” column thereto:
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Adjustments to Unaudited Pro Forma Condensed Combined Balance Sheet
| A. | Reflects the adjustments to the assets acquired and liabilities assumed in accordance with the preliminary estimated purchase price described in Note 3, including (1) goodwill of $26.5 million, and (2) identifiable intangible assets of $2.5 million and $38.1 million for customer relationships and developed technology related assets, respectively. The adjustment to record the step-up of intangible assets per description below: |
| Estimated | Estimated | Balance Sheet | |||||||||
| Description | Useful Life | Fair value | Classification | ||||||||
| Developed technology | 15 years | $ | 38,080 | Intangible assets, net | |||||||
| Customer relationships | 8 years | 2,500 | Intangible assets, net | ||||||||
| Total identifiable intangible assets | $ | 40,580 | |||||||||
The fair value of RedWave’s technology-based intangible assets were determined using the multi-period excess earnings method which measures economic benefit indirectly by calculating the income attributable to an asset after appropriate returns are paid to complementary assets used in conjunction with the subject asset to produce the earnings associated with the subject assets, commonly referred to as contributory asset charges. Under this method, the value of an asset is a function of several components, including the forecasted revenue, earnings generated by the asset, expected economic life of the asset, contributory asset charges and a discount rate.
The fair value of the customer relationships was calculated using a distributor method, a form of the income approach, which incorporates a variation of the multi-period excess earnings method that uses market-based inputs to value an asset. Under this method, the value of the asset is a function of several components, including revenue associated with the existing customers, distributor profit margin, charges for use of other assts and discount rate.
The fair value estimate for all identified intangible assets is preliminary and is based on assumptions that market participants would use in pricing an asset, based on the most advantageous market for the asset (i.e., its highest and best use). The final fair value determination for identifiable intangibles may differ materially from this preliminary determination.
| B. | Reflects an adjustment to step up finished goods inventory to fair value. The fair value was determined based on the estimated selling price of the inventory, less the remaining manufacturing and selling costs and a normal profit margin on those manufacturing and selling efforts. |
| C. | Reflects the consideration paid for the acquisition, which was $45.0 million in cash, $8.6 million related to the fair value of the 1,497,171 issued shares and $15.5 million related to the acquisition date fair value of the contingent consideration. |
The fair value of the contingent consideration of $15.5 million was determined using a Monte-Carlo simulation which took utilized assumptions to forecast the revenue achievement and the price of the Company’s common stock at the end of the earn-out period. The number of shares of the Company’s common stock to be paid is contingent upon on the amount of revenue the Company generates from the sale of certain RedWave products and services (“Earnout Revenue”) during the two-year period from May 1, 2024 through April 30, 2026 (the “Earnout Period”). The valuation calculated the average present value of all outcomes to determine the fair value. The contingent consideration is being accounted for as a liability and will be subsequently remeasured at fair value at the balance sheet date with changes in fair value being recorded as a component of income or loss in the statement of comprehensive income. Factors that will affect the fair value of the contingent consideration liability include management’s estimates of the future revenues generated by certain Red Wave products, estimated discount rates and the price of the Company’s common stock.
| D. | To adjust for $2.1 million of transaction costs incurred subsequent to March 31, 2024 that are related to the Acquisition. The adjustment has been recorded as an adjustment to accrued liabilities and accumulated deficit. These costs will not affect the Company’s statement of comprehensive income beyond 12 months after the acquisition date. |
| E. | Reflects the elimination of historical equity balances. |
Adjustments to Unaudited Pro Forma Condensed Combined Statement of comprehensive income
| a. | To adjust for $2.1 million of transaction costs incurred subsequent to March 31, 2024, that are related to the Acquisition. These costs will not affect the Company’s statement of comprehensive income beyond 12 months after the acquisition date. |
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| b. | Reflects the pro forma adjustment to record the amortization of the acquired identifiable intangible assets related to the developed technology and customer relationships of RedWave. The following table summarizes the estimated fair values of amortizable intangible assets, their estimated useful lives and the pro forma annual amortization expense using a straight-line method of amortization (dollar amounts in thousands): |
| Three months ended | ||||||||
| Annual 2023 | March 31, 2024 | |||||||
| Intangible assets | Amortization expense | Amortization expense | ||||||
| Developed technology | $ | 2,539 | $ | 635 | ||||
| Customer relationships | 313 | 78 | ||||||
The amortization of developed technology intangibles is calculated by using the straight-line method over the estimated useful life of 15 years and classified under cost of revenue. The amortization of customer relationships is calculated by using the straight-line method over the estimated useful life of 8 years and classified under selling, general and administrative. These preliminary estimated useful lives could differ from final amounts the Company will calculate after completing a detailed valuation analysis, and the difference could have a material effect on the accompanying unaudited pro forma condensed combined financial statements.
| c. | Basic and diluted pro forma net loss per share is based on the weighted average number of shares of the Company’s common shares outstanding for the period presented. The Company’s potential dilutive securities have been excluded from the computation of diluted net loss per share as the effect would be antidilutive. Therefore, the weighted average number of common shares outstanding used to calculate both basic and diluted net loss per share attributable to common stockholders is the same. The Company excluded the following potential common shares, presented based on amounts outstanding at each pro forma period end, from the computation of pro forma diluted net loss per share attributable to common stockholders for the periods indicated because including them would have had an anti-dilutive effect: |
| March 31, | December 31, | |||||
| 2024 | 2023 | |||||
| Warrants to purchase common stock | 92,703 | 92,703 | ||||
| Options to purchase common stock | 2,781,364 | 2,427,417 | ||||
| Performance stock units | 105,878 | 105,878 | ||||
| Restricted stock units | 2,632,957 | 1,976,117 | ||||
| 5,612,902 | 4,602,115 |
| d. | Reflects the removal of $0.6 million and $1.9 million of the interest income recognized from $45.0 million of cash under the money market funds for the three months ended March 31, 2024 and the year ended December 31, 2023, respectively. |
| e. | As the Acquisition is being reflected in the unaudited pro forma condensed combined statement of comprehensive income as if it occurred at the beginning of the period presented. The calculation of basic and diluted earnings per share includes 1,497,171 unregistered shares of the Company’s common stock which were issued on the transaction date. |
| f. | This adjustment reflects $0.1 million and $0.4 million stock based compensation expense incurred from performance-based stock units (PSUs) issued under new compensation arrangements with employees in connection with the business combination and restricted share units (RSUs) issued to continuing employees as part of the acquisition for the three months ended March 31, 2024 and for the year ended December 31, 2023, respectively. The vesting of the PSUs are subject to the achievement of a certain level of bookings over two years. The RSUs are recognized ratably over three years. |
The following table summarizes the stock based compensation expense within the expense categories in the unaudited pro forma condensed combined statements of comprehensive income (dollar amounts in thousands):
| Three months ended | ||||||||
| Annual 2023 | March 31, 2024 | |||||||
| expense | expense | |||||||
| Product cost of revenue | $ | 62 | $ | 15 | ||||
| Research and development | 95 | 23 | ||||||
| Selling, general and administrative | 222 | 64 | ||||||
| $ | 379 | $ | 102 | |||||
| g. | No income tax adjustment is reflected for the three months ended March 31, 2024 and the year ended December 31 2023 based on the Company having a full valuation allowance on its net deferred tax asset and an effective income tax rate of 0%. |
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