Acacia Research Corp 8-K/A, filed Jan 2, 2025
Acacia Research Corp (ACTG)
About this 8-K/A
Acacia Research Corp filed this 8-K/A on January 2, 2025, reporting on events of October 18, 2024.
Items reported
- Item 9.01: Financial statements and exhibits
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Amendment No. 1)
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
EXPLANATORY NOTE
As previously disclosed in the Current Report on Form 8-K filed by Acacia Research Corporation (the “Company”) on October 21, 2024 with the U.S. Securities and Exchange Commission (the “Original Form 8-K”), on October 18, 2024 (the “Closing Date”), Deflecto Holdco LLC (“Purchaser”), a wholly-owned subsidiary of the Company, acquired Deflecto Acquisition, Inc. (“Deflecto”), pursuant to that certain Stock Purchase Agreement (the “Stock Purchase Agreement”) entered into on the same day with Deflecto Holdings, LLC and Evriholder Finance LLC (collectively, the “Sellers”), Deflecto and the Sellers’ Representative named therein. Pursuant to the Stock Purchase Agreement, Purchaser purchased all of the issued and outstanding equity interests of Deflecto, upon the terms and subject to the conditions of the Stock Purchase Agreement (such purchase and sale, together with the other transactions contemplated by the Stock Purchase Agreement, the “Transaction”). The Transaction closed simultaneously with the execution of the Stock Purchase Agreement on October 18, 2024.
The Company is filing this Amendment to amend and supplement the Original Form 8-K to provide the financial statements and pro forma financial information relating to the Transaction required under Item 9.01 of Form 8-K as set forth below, which are incorporated herein by reference, and which were excluded from the Original Form 8-K in reliance on the instructions to such item. This Amendment reports no other updates or amendments to the Original Form 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 results of operations that the Company would have achieved had the Transaction been completed prior to the periods presented in the pro forma financial information and is not intended to project the future results of operations that the Company may achieve after completion of the Transaction.
| Item 9.01. |
Financial Statements and Exhibits.
|
| (a) | Financial statements of businesses acquired. |
The Audited Consolidated Financial Statements of Deflecto Acquisition, Inc. and Subsidiaries as of and for the year ended December 31, 2023, and the notes related thereto, are filed as Exhibit 99.1 and incorporated herein by reference.
The Unaudited Consolidated Financial Statements of Deflecto Acquisition, Inc. and Subsidiaries as of and for the six months ended June 30, 2024, and the notes related thereto, are filed as Exhibit 99.2 and incorporated herein by reference.
| (b) | Pro forma financial information. |
The Unaudited Pro Forma Condensed Combined Financial Statements of the Company as of and for the six months ended June 30, 2024 and the year ended December 31, 2023, and the notes related thereto, are filed as Exhibit 99.3 and incorporated herein by reference. The Unaudited Pro Forma Condensed Combined Financial Statements give effect to the Transaction on the basis, and subject to the assumptions, set forth in accordance with Article 11 of Regulation S-X.
| (d) | Exhibits |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| Dated: January 2, 2025 | ||
| ACACIA RESEARCH CORPORATION | ||
| By: | /s/ Jason Soncini | |
| Name: | Jason Soncini | |
| Title: | General Counsel | |
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-249984) and Forms S-8 (No. 333-189135, No. 333-217878, No. 333-279975 and No. 333-279976) of Acacia Research Corporation of our report dated December 27, 2024, relating to the consolidated financial statements of Deflecto Acquisition, Inc. and Subsidiaries, appearing in Acacia Research Corporation’s Current Report on Form 8-K/A filed January 2, 2025.
/s/ Baker Tilly US, LLP
Madison, Wisconsin
December 31, 2024
Exhibit 99.1
Deflecto Acquisition, Inc. and
Subsidiaries
Consolidated Financial Statements
December 31, 2023
Deflecto Acquisition, Inc. and Subsidiaries
Table of Contents
December 31, 2023
| Page | |
| Independent Auditors' Report | 1 |
| Consolidated Financial Statements | |
| Consolidated Balance Sheet | 3 |
| Consolidated Statement of Operations and Comprehensive Income | 4 |
| Consolidated Statement of Stockholders' Equity | 5 |
| Consolidated Statement of Cash Flows | 6 |
| Notes to Consolidated Financial Statements | 8 |
Independent Auditors' Report
To the Stockholders and Board of Directors of
Deflecto Acquisition, Inc. and Subsidiaries
Opinion
We have audited the accompanying consolidated financial statements of Deflecto Acquisition, Inc. and Subsidiaries (the Company), which comprise the consolidated balance sheet as of December 31, 2023 and the related consolidated statements of operations and comprehensive income, stockholders' equity and cash flows for the year then ended and the related notes to the consolidated financial statements.
In our opinion, the accompanying consolidated 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 (GAAP).
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 Auditors’ Responsibilities for the Audit of the Consolidated 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 audit. 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 Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with GAAP, and for the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the consolidated 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.
Auditors' Responsibilities for the Audit of the Consolidated Financial Statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors' 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 consolidated financial statements.
1
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 consolidated 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 consolidated 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 consolidated 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.
Madison, Wisconsin
December 27, 2024
2
Deflecto Acquisition, Inc. and Subsidiaries
Consolidated Balance Sheet
December 31, 2023
(In Thousands)
| Assets | ||||
| Current Assets | ||||
| Cash and cash equivalents | $ | 11,863 | ||
| Accounts receivable, net | 14,348 | |||
| Inventories, net | 17,068 | |||
| Prepaid expenses and other current assets | 2,802 | |||
| Income tax receivable | 191 | |||
| Total current assets | 46,272 | |||
| Property, Plant and Equipment, Net | 14,348 | |||
| Other Assets | ||||
| Goodwill, net | 3,535 | |||
| Customer relationships, net | 20,062 | |||
| Intangible assets, net | 6,214 | |||
| Right-of-use asset | 10,361 | |||
| Total other assets | 40,172 | |||
| Total assets | $ | 100,792 | ||
| Liabilities and Stockholders' Equity | ||||
| Current Liabilities | ||||
| Accounts payable | $ | 7,823 | ||
| Accrued expenses | 7,280 | |||
| Current maturities of long-term debt | 751 | |||
| Current maturities of operating lease liabilities | 3,079 | |||
| Income tax payable | 291 | |||
| Total current liabilities | 19,224 | |||
| Long-Term Liabilities | ||||
| Long-term debt, net | 23,144 | |||
| Long-term operating lease liabilities, net | 7,419 | |||
| Deferred income taxes | 2,146 | |||
| Total liabilities | 51,933 | |||
| Stockholders' Equity | ||||
| Common stock | - | |||
| Accumulated other comprehensive loss | (2,184 | ) | ||
| Additional paid-in capital | 126,736 | |||
| Accumulated deficit | (75,693 | ) | ||
| Total stockholders' equity | 48,859 | |||
| Total liabilities and stockholders' equity | $ | 100,792 | ||
See notes to consolidated financial statements
3
Deflecto Acquisition, Inc. and Subsidiaries
Consolidated Statement of Operations and Comprehensive Income
Year Ended December 31, 2023
(In Thousands)
| Net Sales | $ | 131,754 | ||
| Costs and Expenses | ||||
| Cost of sales, excluding depreciation and amortization | 93,020 | |||
| Selling, general and administrative expenses | 21,898 | |||
| Depreciation | 3,676 | |||
| Amortization | 2,973 | |||
| Advisory fees | 642 | |||
| Total costs and expenses | 122,209 | |||
| Operating income (loss) | 9,545 | |||
| Other Income (Expense) | ||||
| Interest expense | (2,307 | ) | ||
| Interest income | 40 | |||
| Other income (expense) | (407 | ) | ||
| Transaction expenses | (1,618 | ) | ||
| Net other expense | (4,292 | ) | ||
| Income (loss) before taxes | 5,253 | |||
| Provision for Income Taxes | 932 | |||
| Net income | 4,321 | |||
| Other Comprehensive Income | ||||
| Foreign currency translation adjustment | 119 | |||
| Comprehensive income | $ | 4,440 |
See notes to consolidated financial statements
4
Deflecto Acquisition, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity
Year Ended December 31, 2023
(In Thousands, Except for Shares Data)
| Accumulated | Retained | |||||||||||||||||||
| Other | Earnings | Total | ||||||||||||||||||
| Additional | Comprehensive | (Accumulated | Stockholders' | |||||||||||||||||
| Common Stock | Paid-in Capital | Income (Loss) | Deficit) | Equity | ||||||||||||||||
| Balances, December 31, 2022 | $ | - | $ | 126,736 | $ | (2,303 | ) | $ | (80,014 | ) | $ | 44,419 | ||||||||
| Foreign currency translation adjustment | - | - | 119 | - | 119 | |||||||||||||||
| Net income | - | - | - | 4,321 | 4,321 | |||||||||||||||
| Balances, December 31, 2023 | $ | - | $ | 126,736 | $ | (2,184 | ) | $ | (75,693 | ) | $ | 48,859 | ||||||||
Common Stock - Class A: $.01 Par Value, 1,600 shares authorized, 800 shares issued and outstanding at at December 31, 2023.
Common Stock - Class B: $.01 Par Value, 400 shares authorized, 200 shares issued and 55 shares outstanding at December 31, 2023.
Common Stock - Class C: $.01 Par Value, 800 shares authorized, 496 shares issued and outstanding at December 31, 2023.
Common Stock - Class D: $.01 Par Value, 600 shares authorized, 443.5 shares issued and outstanding at December 31, 2023.
See notes to consolidated financial statements
5
Deflecto Acquisition, Inc. and Subsidiaries
Consolidated Statement of Cash Flows
Year Ended December 31, 2023
(In Thousands)
| 2023 | ||||
| Cash Flows From Operating Activities | ||||
| Net income | $ | 4,321 | ||
| Adjustments to reconcile net income to net cash flows from operating activities: | ||||
| Depreciation and amortization | 6,649 | |||
| Amortization of debt issuance costs | 355 | |||
| Change in allowance for doubtful accounts and rebates | (1,674 | ) | ||
| Change in inventory reserve | (1,302 | ) | ||
| (Gain)/loss on sale of property and equipment | (53 | ) | ||
| Deferred taxes | (1,042 | ) | ||
| Lease expense | 3,155 | |||
| Changes in assets and liabilities: | ||||
| Accounts receivable | 6,697 | |||
| Inventories | 3,414 | |||
| Prepaid expenses and other current assets | (13 | ) | ||
| Accounts payable | (324 | ) | ||
| Accrued expenses | (678 | ) | ||
| Lease liability | (3,134 | ) | ||
| Income tax payable | (656 | ) | ||
| Net cash flows from operating activities | 15,715 | |||
| Cash Flows From Investing Activities | ||||
| Capital expenditures | (1,575 | ) | ||
| Proceeds from sale of property and equipment | 71 | |||
| Acquisition of business, net of cash | (14,031 | ) | ||
| Net cash flows from investing activities | (15,535 | ) | ||
| Cash Flows From Financing Activities | ||||
| Net payments on revolving credit agreements | (7,065 | ) | ||
| Principal payments on long-term debt | (2,752 | ) | ||
| Proceeds from long-term debt | 16,015 | |||
| Cash paid for debt issuance costs | (166 | ) | ||
| Net cash flows from financing activities | 6,032 | |||
| Effect of exchange rate changes | 274 | |||
| Net change in cash and cash equivalents | 6,486 | |||
| Cash and Cash Equivalents, Beginning | 5,377 | |||
| Cash and Cash Equivalents, Ending | $ | 11,863 | ||
See notes to consolidated financial statements
6
Deflecto Acquisition, Inc. and Subsidiaries
Consolidated Statement of Cash Flows
Year Ended December 31, 2023
(In Thousands)
| 2023 | ||||
| Supplemental Cash Flow Disclosures | ||||
| Cash paid for interest | $ | 1,671 | ||
| Cash paid for income taxes | $ | 2,483 | ||
| Noncash Investing and Financing Activities | ||||
| Right of use asset | $ | 570 | ||
| Debt incurred with acquisition (See Note 2) | $ | 2,000 | ||
| Debt paid in conjunction with debt refinance | $ | 735 | ||
See notes to consolidated financial statements
7
Deflecto Acquisition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2023
(In Thousands)
| 1. | Summary of Significant Accounting Policies |
| Nature of Operations |
Deflecto Acquisition, Inc. and Subsidiaries (DAI or the Company) is the sole shareholder of Deflecto, LLC and Subsidiaries (DLLC). The Company is headquartered in Indianapolis, Indiana and operates domestically and internationally through the following wholly owned subsidiaries, collectively referred herein as the Subsidiaries and individually as a Subsidiary:
Beemak Plastics, LLC (United States)
Sate-Lite (Foshan) Plastics (People's Republic of China)
Deflecto Asia Ltd. (Hong Kong)
Yearntree Ltd. (United Kingdom)
Instachange Displays Limited (Canada)
Deflecto Canada, Ltd. (Canada)
Sate-Lite Technologies Private Ltd. (India)
Transportation Safety Holdings, LLC (United States)
The Subsidiaries serve a broad range of wholesale and retail markets within the highly-fragmented specialty plastics industry. The group primarily designs, manufactures and sells (1) "take-one" point of purchase brochure, folder and applications display holders, (2) plastic injection-molded office supply and arts, crafts and education products, (3) plastic and aluminum air venting and air control products, (4) extruded vinyl chair mats, (5) safety reflectors for bicycles and (6) mud flaps and splash guards for the heavy duty truck market.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and the Subsidiaries. All significant intercompany accounts and transactions have been eliminated.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an initial maturity of three months or less to be cash and cash equivalents. The Company maintains cash in bank accounts which, at times, exceed federally insured limits. The Company has cash balances of $8,525 held in foreign bank accounts at December 31, 2023. The Company has not experienced any losses in such accounts and management believes it is not exposed to significant credit risks.
Accounts Receivable
Effective January 1, 2023, the Company adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2016-13, Financial Instruments—Credit Losses (Topic 326). The ASU introduces a new credit loss methodology, Current Expected Credit Losses (CECL), which requires earlier recognition of credit losses, while also providing additional transparency about credit risk. The CECL methodology utilizes a lifetime expected credit loss measurement objective for the recognition of credit losses at the time the receivable is originated or acquired. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. There was no adjustment to retained earnings upon adoption.
8
Deflecto Acquisition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2023
(In Thousands)
The Company recognizes an allowance for credit losses for trade and other receivables to present the net amount expected to be collected as of the balance sheet date. Such allowance is based on the credit losses expected to arise over the life of the asset which includes consideration of past events and historical loss experience, current events and also future events based on our expectation as of the balance sheet date. A receivable is considered past due if payments have not been received within agreed upon invoice terms. The Company's typical terms on accounts receivable are net 30-120 days. The Company does not accrue interest on past due accounts. Receivables are written off when the Company determined that such receivables are deemed uncollectible. The Company pools its receivables based on similar risk characteristics in estimating its expected credit losses. In situations where a receivable does not share the same risk characteristics with other receivables, the Company measures those receivables individually. The Company also continuously evaluates such pooling decisions and adjusts as needed from period to period as risk characteristics change.
The Company utilizes the loss rate method in determining its lifetime expected credit losses on its receivables. This method is used for calculating an estimate of losses based primarily on the Company's historical loss experience. In determining its loss rates, the Company evaluates information related to its historical losses, adjusted for current conditions and further adjusted for the period of time that can be reasonably forecasted. Qualitative and quantitative adjustments related to current conditions and the reasonable and supportable forecast period consider the following: past due receivables and the customer creditworthiness on the level of estimated credit losses in the existing receivables.
Accounts receivable are shown net of allowance for expected credit losses and discounts of $731 and customer rebates of $5,961 as of December 31, 2023.
Inventories
Inventories are stated at lower of cost (determined on an average or first-in, first-out basis) or net realizable value.
The Company reviews inventory and calculates a reserve based on the inventory items that either have not been used or are not expected to be used in the future. The inventory balances are recorded net of an inventory obsolescence reserve.
Property, Plant and Equipment
Property, plant and equipment obtained through a business acquisition are recorded at fair value at the date of acquisition of the Company. Otherwise, additions are stated at cost. Property, plant and equipment are presented less accumulated depreciation. Depreciation is provided for using primarily the straight-line method over the estimated useful lives of the respective assets. Major expenditures that extend the useful life of the asset are capitalized. Maintenance, repairs and minor renewals are expensed as incurred. When assets are retired or otherwise disposed of, their costs and related accumulated depreciation are removed for the accounts, with any resulting gains or losses included in operations. Amortization of leasehold improvements is included in the depreciation expense.
The useful lives of property, plant and equipment for the purpose of computing book depreciation are as follows:
| Years | ||
| Machinery and equipment | 3-10 | |
| Buildings and improvements | 5-35 |
The Company evaluates property, plant and equipment for impairment whenever events occur, or circumstances change, that indicate that the fair value of the assets may be below carrying value.
9
Deflecto Acquisition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2023
(In Thousands)
Leases
The Company follows FASB ASU No. 2016-02, Leases (Topic 842), and all related amendments. The Company recognizes assets and liabilities that arise from leases on the balance sheet. A lessee is to recognize, within the balance sheet, a liability to make lease payments (lease obligation) and a right-of-use asset representing the right to use the underlying asset for the lease term. At lease inception, leases are classified as either finance leases or operating leases with the associated right-of-use asset capitalized at the estimated present value of future lease payments. Operating lease right-of-use assets are expensed on a straight-line basis as lease expense over the estimated useful life of the asset.
The Company has elected certain accounting policies related to leases:
| • | The Company elected not to apply the recognition requirements to all leases with an original term of 12 months or less, for which the Company is not likely to exercise a renewal option or purchase the asset at the end of the lease; rather, short term leases will continue to be recorded on a straight-line basis over the lease term. |
| • | The Company has elected the policy not to separate lease and nonlease components for all leases. |
See Note 7 for further information.
Debt Issuance Costs
The Company presents long- term debt issuance costs as a direct reduction of long-term debt. The Company amortizes deferred financing costs using the straight-line method, which closely approximates the effective interest method, over the terms of the related debt. During 2023, the Company refinanced its debt with the same lender. This resulted in the Company amortizing the remaining deferred financing costs of $344 under the prior debt agreement and capitalizing new deferred financing cost of $166 during 2023. Amortization expense attributed to debt issuance costs was $365 for the year ended December 31, 2023, and is included in interest expense in the accompanying consolidated statement of operations and comprehensive income (loss). As of December 31, 2023, the net book value of the Company's deferred financing fees was $155.
Goodwill
Goodwill represents the amount by which the purchase price of net assets acquired in a business combination or acquisition exceeded their fair market value. The Company tests goodwill for impairment at the reporting level at least annually or when a triggering event has occurred. A triggering event may indicate the fair value of the entity is below its carrying value. The goodwill fair value is a level 3 fair value measurement. There were no impairment losses recorded for the year ended December 31, 2023.
Intangible Assets
Intangible assets consist of customer relationships, tradenames and patents related to unique manufacturing technology and product design. The Company amortizes intangible assets using the straight-line method over their estimated useful lives which range from 10 to 15 years.
10
Deflecto Acquisition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2023
(In Thousands)
Impairment of Long-Lived Assets
The Company evaluates the recoverability of the carrying amount of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. The Company evaluates the recoverability of property and equipment and intangibles annually or more frequently if events or circumstances indicate that an asset might be impaired. If an asset is considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the asset exceeds its fair value. Assets to be disposed are reported at the lower of the carrying amount or fair value less cost to sell. Management determines fair value using an undiscounted future cash flow analysis or other accepted valuation techniques. To date, management believes there has not been any impairment of the Company's long-lived assets.
Revenue Recognition
The Company's revenues are substantially comprised of product sales. Revenue is recognized when the Company satisfies its performance obligation(s) under the contract by transferring the promised product to its customer. A performance obligation is a promise in a contract to transfer a distinct product or service to a customer.
Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products or providing services. The nature of the Company's contracts gives rise to several types of variable consideration including incentives, discounts or rebates. As such, revenue is recorded net of estimated discounts, allowances and rebates. These estimates are based on historical experience, anticipated performance and the Company's best judgment at the time. Because of the Company's certainty in estimating these amounts, they are included in the transaction price of its contracts and the Company's estimates of variable consideration are generally not constrained.
The transaction price is allocated to each distinct performance obligation within the contract. Substantially all of the Company’s contracts have a single performance obligation.
Substantially all of the Company's revenue is from products transferred to customers at a point in time. The Company recognizes revenue at the point in time in which the customer obtains control of the product, which is generally when product title passes to the customer upon shipment.
The Company has elected to expense all incremental costs of obtaining a contract as incurred.
Sales, value add and other taxes collected from customers and remitted to governmental authorities are accounted for on a net (excluded from revenues) basis.
Neither the type of product sold or the location of sale significantly impacts nature, amount, timing or uncertainty of revenue and cash flows.
Shipping and Handling Costs
Shipping and handling fees charged to customers are included in net sales with the corresponding costs included in cost of sales in the consolidated statements of operations and comprehensive income (loss).
Research and Development Costs
Research and development costs are charged to expense as incurred.
11
Deflecto Acquisition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2023
(In Thousands)
Income Taxes
The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. The Company follows ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes. ASU No. 2015-17 requires deferred tax assets and liabilities to be classified as noncurrent in a classified balance sheet. When applicable, interest and penalties incurred on uncertain tax positions are calculated based on guidance from the relevant tax authority and included in income tax expense.
The tax effects from an uncertain tax position can be recognized in the consolidated financial statements if the position is more likely than not to be sustained on audit based on the technical merits of the position. The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the consolidated financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. See Note 11 for additional detail on tax benefits related to uncertain tax positions.
Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to a concentration of credit risk consist principally of cash and cash equivalents and accounts receivable. The Company deposits cash and cash equivalents with high quality financial institutions. The Company believes that its allowance for expected credit losses is adequate to cover potential credit risk.
Foreign Currency Translation
The Company has subsidiaries and operations located in Canada, India, People's Republic of China and the United Kingdom. Net assets within Canada, India, People’s Republic of China and the United Kingdom as a percentage of Company totals were 43% as of December 31, 2023. The functional currencies of the Company's foreign operations are the local currencies. Accordingly, assets and liabilities of the Company's foreign operations are translated from foreign currencies into U.S. dollars at the exchange rates in effect at the balance sheet date, while income and expenses are translated at the weighted-average exchange rates for the year. Gains and losses for all transactions denominated in a currency other than the functional currency are recognized in the period incurred and included in other income and expense on the accompanying consolidated statements of operations. The Company recognized approximately $28 of foreign currency transaction gain for the year ended December 31, 2023. Adjustments resulting from the translation of foreign currency financial statements are classified as a separate component of stockholders' equity. The accumulated balance in other comprehensive loss pertaining to foreign currency translation was $(2,184) as of December 31, 2023.
12
Deflecto Acquisition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2023
(In Thousands)
| 2. | Business Combinations |
On May 1, 2023, Deflecto Acquisition Inc., through its wholly-owned subsidiary Transportation Safety Holdings, LLC, acquired substantially all assets owned or used in the operation of James King & Co. Inc. The transaction constituted a business combination. The transaction was funded using proceeds from debt and cash from operations. The total purchase price was as follows:
| Cash consideration paid, net of cash acquired of $250 | $ | 14,159 | ||
| Deferred payment to seller | 2,000 | |||
| Net working capital adjustment | (128 | ) | ||
| Total purchase price | $ | 16,031 |
The deferred payment to the seller is due no later than May 1, 2026. The total purchase price was allocated to the acquired net tangible and intangible assets based on their estimated fair values as of the acquisition date, as set forth below, with the excess amount recorded as goodwill. The Company incurred $1,618 of transaction expenses in connection with the transaction, as reflected on the consolidated statement of operations. The purchase price allocation is final.
| Accounts receivable | $ | 2,279 | ||
| Inventories | 1,801 | |||
| Right-of-use asset | 570 | |||
| Property and equipment | 2,795 | |||
| Prepaid expenses and other current assets | 40 | |||
| Tradenames | 1,440 | |||
| Customer Relationships | 4,500 | |||
| Goodwill | 3,535 | |||
| Liabilities assumed | (359 | ) | ||
| Right-of-use asset liability | (570 | ) | ||
| Total purchase price | $ | 16,031 |
The Company's acquisitions are accounted for pursuant to ASC 805, Business Combinations. A significant amount of the recorded balance of goodwill is expected to be tax deductible. Goodwill recognized in the acquisitions is attributable to intangible assets that do not qualify for separate recognition such as assembled workforce and expected synergies.
The assets acquired and liabilities assumed in connection with these acquisitions were required to be recorded at fair value. A summary of the valuation methodologies used by the Company pertaining to assets acquired and liabilities assumed in connection with these acquisitions are as follows:
| · | The carrying amounts of accounts receivable, prepaid expenses and liabilities assumed approximate fair value principally because of their short-term nature. |
| · | Inventories were valued at current replacement cost which approximated fair value as of the acquisition date. |
| · | Property and equipment was valued under the "in-use" premise using the cost approach. |
| · | Intangible assets were valued under the relief from royalty method and other valuation techniques. |
13
Deflecto Acquisition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2023
(In Thousands)
| 3. | Inventories |
The major categories of inventories, net of reserves, are summarized as follows at December 31:
| 2023 | ||||
| Raw materials | $ | 6,529 | ||
| Work-in-process | 481 | |||
| Finished goods | 10,058 | |||
| Inventories, net | $ | 17,068 | ||
Inventories are shown net of inventory reserve of $3,617 at December 31, 2023.
| 4. | Property, Plant and Equipment |
The major categories of property, plant and equipment are summarized as follows at December 31:
| 2023 | ||||
| Land | $ | 206 | ||
| Machinery and equipment | 23,628 | |||
| Buildings and improvements | 9,603 | |||
| Construction in progress | 3 | |||
| Total property, plant and equipment | 33,440 | |||
| Less accumulated depreciation | (19,092 | ) | ||
| Property, plant and equipment, net | $ | 14,348 | ||
| 5. | Goodwill |
The changes in the carrying amount of goodwill were as follows:
| Balance at January 1, 2023 | $ | - | ||
| Additions | 3,535 | |||
| Balance at December 31, 2023 | $ | 3,535 |
14
Deflecto Acquisition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2023
(In Thousands)
| 6. | Intangible Assets |
The Company's intangible assets consist of tradenames, patents and customer relationships, held by various subsidiaries, which are all being amortized ratably over their useful lives ranging from 10 to 15 years.
The Company's intangible assets consist of the following at December 31:
| 2023 | ||||
| Tradenames | $ | 9,045 | ||
| Patents | 1,000 | |||
| Customer Relationships | 33,101 | |||
| 43,146 | ||||
| Less accumulated amortization | (16,870 | ) | ||
| Intangible assets, net | $ | 26,276 | ||
The Company recognized amortization expense of $2,973 for the year ended December 31, 2023. The intangible assets were decreased by $57 for the year ended December 31, 2023, due to changes in foreign exchange rates.
Estimated annual amortization expense of intangible assets for years ending after December 31, 2023 is as follows:
| Years ending December 31: | ||||
| 2024 | $ | 3,151 | ||
| 2025 | 3,151 | |||
| 2026 | 3,151 | |||
| 2027 | 3,126 | |||
| 2028 | 3,051 | |||
| Thereafter | 10,645 | |||
| Total | $ | 26,275 | ||
| 7. | Leases |
Right-of-use assets represent the Company's right to use an underlying asset for the lease term, while lease liabilities represent the Company's obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the commencement date of a lease based on the present value of lease payments over the lease term.
The Company leases various land, buildings, offices and equipment. Certain of these leases contain various options to renew and expire at varying dates through December 2031. Leases are executed in the United States, Canada and China. The exercise of lease renewal options is at the Company's sole discretion. The Company regularly evaluates the renewal options and when they are reasonably certain of exercise, the Company includes the renewal period in the lease term.
15
Deflecto Acquisition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2023
(In Thousands)
In determining the discount rate used to measure the right-of-use assets and lease liabilities, the Company uses the rate implicit in the lease, or if not readily available, the Company uses the Company's incremental borrowing rate. The Company estimates the incremental borrowing rate based on an estimated secured rate comprised of a risk-free rate plus a credit spread as secured by the Company's assets
Right-of-use assets are assessed for impairment in accordance with the Company's long-lived asset policy. The Company reassesses lease classification and remeasures right of use assets and lease liabilities when a lease is modified and that modification is not accounted for as a separate new lease or upon certain other events that require reassessment in accordance with Topic 842.
The Company made significant assumptions and judgments in applying the requirements of Topic 842. In particular, the Company:
| · | Evaluated whether a contract contains a lease, by considering factors such as whether the Company obtained substantially all rights to control an identifiable underlying asset and whether the lessor has substantive substitution rights. |
The following table summarizes the operating lease right of use assets and operating lease obligations as of December 31:
| 2023 | ||||
| Operating lease right-of-use assets, net | $ | 10,361 | ||
| Operating lease liabilities: | ||||
| Current | $ | 3,079 | ||
| Long-term | 7,419 | |||
| Total operating lease liabilities | $ | 10,498 | ||
Below is a summary of expenses incurred pertaining to leases during the year ended December 31:
| 2023 | ||||
| Operating lease expense | $ | 3,915 | ||
| Total lease expense | $ | 3,915 | ||
As of December 31, 2023, the right-of-use assets and lease obligations were calculated using a weighted average incremental borrowing rate of 6.44 and weighted average lease term of 4.61 years.
The table below summarized the Company's scheduled future minimum lease payments for years ending after December 31, 2023:
| Years ending December 31: | ||||
| 2024 | $ | 3,667 | ||
| 2025 | 2,560 | |||
| 2026 | 2,458 | |||
| 2027 | 1,077 | |||
| 2028 | 598 | |||
| Thereafter | 1,768 | |||
| Total | 12,128 |
16
Deflecto Acquisition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2023
(In Thousands)
| Less present value discount | (1,630 | ) | ||
| Lease liabilities | $ | 10,498 |
The following table includes supplemental cash flow and noncash information related to the leases for the year ended December 31, 2023:
| 2023 | ||||
| Right-of-use assets obtained in exchange for lease liabilities: | ||||
| Operating leases | $ | 570 |
| 8. | Accrued Expenses |
Accrued liabilities consist of the following at December 31, 2023:
| 2023 | ||||
| Accrued medical and workers' compensation | $ | 261 | ||
| Accrued payroll and related costs | 3,788 | |||
| Accrued professional fees | 223 | |||
| Accrued freight | 675 | |||
| Accrued other expenses | 2,333 | |||
| Total | $ | 7,280 | ||
| 9. | Long-Term Debt |
Prior to May 2023, the Company had entered into a credit agreement with its primary lender. The credit agreement consisted of a revolving loan commitment of up to $30,000 with availability based on a borrowing base of eligible accounts receivable and inventory (availability of $6,714 as of December 31, 2022), a term loan of $5,000, a machinery and equipment term loan of $1,030 and a mortgage loan for the Company's subsidiary in the United Kingdom of $3,468 (£2,524), as described in the table below. The agreement also allowed for letters of credit.
During April 2023, the Company entered into a mortgage loan agreement with a lender for its Canadian facility for $6,000.
As part of the business acquisition of James King & Co., Inc. in May 2023 (Note 2), the Company amended and restated their credit agreement. The amended credit agreement consists of a revolving loan commitment of up to $22,500, a term loan of $10,750, and a mortgage loan for the Company's subsidiary in the United Kingdom of $3,468 (£2,524). The Company also entered into a seller note of $2,000 to fund a portion of the acquisition. The seller note is unsecured and subordinated to all senior debt.
The Company is also required to pay a commitment fee, equal to 0.50% per annum on the unused portion of the revolving loan. The note is secured by substantially all the assets of the Company.
Long-term debt consists of the following revolving loan commitments and fixed notes payable at December 31, 2023:
17
Deflecto Acquisition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2023
(In Thousands)
| 2023 | ||||
| Revolving loan commitment, due May 1, 2028 (as amended), with allowed borrowings up to $22,500, interest payable monthly at the SOFR (8.03% at December 31, 2023). This note is secured by substantially all the assets of the Company. | $ | 2,914 | ||
| Term loan (UK mortgage), due April 16, 2026, with principal of £14 and interest payable monthly at the adjusted SONIA rate plus 1.86% (7.05% at December 31, 2023). This note is secured by substantially all the assets of the Company. | 2,654 | |||
| Subordinated seller note payable, due May 1, 2026, with annual interest payments due and a final balloon payment of all outstanding principal and interest at maturity. The note accrues interest at a rate of 5%. | 2,000 | |||
| Term loan B due May 1, 2028, with principal payments of $134 due quarterly through April 2025, then increasing to $202 through April 2026, then increasing to $269 through maturity and interest payable monthly at the SOFR (7.94% at December 31, 2023). The note is secured by substantially all the assets of the Company. | 10,482 | |||
| Term loan (Canadian Mortgage), due May 1, 2043, with principal payments beginning on June 1, 2028. Interest is paid monthly for the initial five years of $44 per month. Interest is accrued at a rate of 8.75%. The note is secured by the mortgage on the facility. | 6,000 | |||
| Total | 24,050 | |||
| Less debt issuance costs, net | (155) | |||
| Less current portion | (751) | |||
| Long-term debt, net | $ | 23,144 | ||
18
Deflecto Acquisition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2023
(In Thousands)
The Company's new credit facility includes financial covenants that require the Company to maintain a minimum fixed charge coverage ratio of at least 1.15, and a total leverage ratio to be greater than 3.00. The Company was in compliance with both covenants during the year ended December 31, 2023.
Aggregate maturities of long-term debt under the agreements in place at December 31, 2023 are as follows:
| Years ending December 31: | ||||
| 2024 | $ | 751 | ||
| 2025 | 912 | |||
| 2026 | 3,181 | |||
| 2027 | 1,315 | |||
| 2028 | 10,418 | |||
| Thereafter | 7,473 | |||
| Total | $ | 24,050 | ||
| 10. | Stockholders' Equity |
The Company has four classes of common stock.
Common Stock - Class C
During 2021, the Company issued 496 shares of Class C common stock. The aggregate purchase price was $21,550. Class C shares accrue accumulated dividends at a rate of 8% of the Class C Original Issue Price of $43 per share plus any unpaid cumulative dividends. As no dividends have been declared, none have been accrued in the accompanying consolidated financial statements. As of December 31, 2023, the amount of dividends in arrears, not yet declared or accrued, was approximately $5,160. Class C dividends are in preference to any declaration or payment of any dividend on the Class A, Class B and Class D shares. In the event of any liquidation, dissolution or winding up of the Company, Class C shares shall be entitled to receive their original issue price and any accrued but unpaid dividends in preference to Class A, Class B and Class D shares.
Common Stock - Class A
Prior to November 2018, the Class A original issue price was $64. During November 2018, the Company amended the Class A original issue price to $43 per share. Class A shares have equal voting rights. Class A shares accrue accumulated dividends at a rate of 8% of the Class A Original Issue Price of $43 per share plus any unpaid cumulative dividends. As no dividends have been declared, none have been accrued in the accompanying consolidated financial statements. As of December 31, 2023, the amount of dividends in arrears, not yet declared or accrued, was approximately $17,762. Class A dividends are in preference to any declaration or payment of any dividend on the Class B or Class D shares. In the event of any liquidation, dissolution or winding up of the Company, Class A shares shall be entitled to receive their original issue price and any accrued but unpaid dividends in preference to Class D and Class B shares.
19
Deflecto Acquisition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2023
(In Thousands)
Common Stock - Class D
During 2021, the Company issued 443.5 shares of Class D common stock to Evriholder Finance, LLC, which is a company with common ownership. The aggregate purchase price was $19,268. Class D shares have equal voting rights. Class D shares accrue accumulated dividends at a rate of 9% of the Class D Original Issue Price of $43 per share plus any unpaid cumulative dividends. As no dividends have been declared, none have been accrued in the accompanying consolidated financial statements. As of December 31, 2023, the amount of dividends in arrears, not yet declared or accrued, was approximately $5,256. Class D dividends are in preference to any declaration or payment of any dividend on the Class B shares. In the event of any liquidation, dissolution or winding up of the Company, Class D shares shall be entitled to receive their original issue price and any accrued but unpaid dividends in preference to Class B shares.
Common Stock - Class B
During 2018, the Company authorized 200 Class B shares to be issued as part of an equity incentive plan. Class B shares have no voting rights. Class B shares require no initial capital contribution and are subject to vesting requirements based on continuous service with the Company and performance measures. In the event of any liquidation, dissolution or winding up of the Company, Class B shareholders are entitled to a pro-rata amount after the payment of the Class A preference.
The following table summarizes the activity of Class B shares as of and for the year ended December 31, 2023:
| Shares | ||||
| Outstanding at January 1, 2023 | 55 | |||
| Issued | - | |||
| Forfeited | - | |||
| Outstanding at December 31, 2023 | 55 | |||
| 11. | Income Taxes |
Income (loss) before taxes for the year ended December 31, 2023 is as follows:
| 2023 | ||||
| Domestic | $ | (70 | ) | |
| Foreign | 5,323 | |||
| Total income (loss) before income taxes | $ | 5,253 | ||
20
Deflecto Acquisition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2023
(In Thousands)
The provision (benefit) for income taxes for the year ended December 31, 2023 and are as follows:
| 2023 | ||||
| Current: | ||||
| Federal | $ | - | ||
| Foreign | 1,912 | |||
| State and local | 62 | |||
| 1,974 | ||||
| Deferred: | ||||
| Federal | - | |||
| Foreign | (1,042 | ) | ||
| State and local | - | |||
| (1,042 | ) | |||
| Total income tax provision | $ | 932 | ||
The Company's effective tax rate varies from the statutory rate primarily as a result of permanent items, state income taxes, foreign rate differential, the change in China's tax rates and the valuation allowance.
The components of the deferred tax assets and liabilities as of December 31, 2023 consist of the following:
| 2023 | ||||
| Deferred income tax assets: | ||||
| Receivable allowances | $ | 37 | ||
| Inventories | 615 | |||
| Intangible assets | 1,514 | |||
| ASC 842 leases | 1,300 | |||
| Accrued expenses | 648 | |||
| Business interest | 4,071 | |||
| Foreign deferred tax assets | 1,436 | |||
| Federal and state net operating loss carryforwards | 3,577 | |||
| Total deferred income tax assets | 13,198 | |||
| Valuation allowance | (9,714 | ) | ||
| Net deferred income tax assets | 3,484 | |||
| Deferred income tax liabilities: | ||||
| Foreign deferred tax liabilities | (3,324 | ) | ||
| Property and equipment | (1,022 | ) | ||
| ASC 842 leases | (1,284 | ) | ||
| Total deferred income tax liabilities | (5,630 | ) | ||
| Net deferred income taxes | $ | (2,146 | ) | |
21
Deflecto Acquisition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2023
(In Thousands)
At December 31, 2023, the Company has $11,980 of Federal and $15,911 of state net operating loss carryforwards, respectively. The Federal net operating loss carryforwards have indefinite carryforward, while the state net operating loss carryforwards expiring 2027 through 2042. The net operating loss carryforwards from the foreign jurisdictions are as follows: UK of $1,362 which carryforward indefinitely for the December 31, 2023 tax year.
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The Company currently has a valuation allowance against its net deferred tax assets in the US and UK as they are not expected to be fully utilized prior to expiration. The allowance is subject to change based upon the Company's operating performance.
As of December 31, 2023, the Company had $30 of unrecognized tax benefits, of which would affect the effective tax rate if recognized. The Company expects a $30 decrease in its uncertain tax positions during the next 12 months that will have a significant impact on the Company's financial position or results of operations. The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense in the consolidated financial statements. There were no interest and penalties accrued as of December 31, 2023. Tax years 2020 through 2023 for Federal tax and 2019 through 2023 for state and foreign tax remain open to statute.
The Company has provided for U.S. federal or foreign withholding taxes on the Canadian and China subsidiaries undistributed earnings as of December 31, 2023, as such earnings not considered to be permanently reinvested. The Company has not provided for U.S. federal or foreign withholding taxes on the UK, Hong Kong and Indian subsidiaries as of December 31, 2023 as such earnings are considered to be permanently reinvested.
| 12. | Retirement Plans |
The Company's U.S. Subsidiaries participated in the Deflecto, LLC 401(k), a defined contribution plan for salaried and hourly employees. In order to participate in the Plan, employees must be at least 21 years old. The Company made contributions to the 401(k) totaling approximately $196 for the year ended December 31, 2023.
In addition, the Company contributes to a state sponsored retirement plan for its resident employees of China. Contributions are based on approximately 13% of participant base salaries for the years ended December 31, 2023.
| 13. | Commitments and Contingencies |
Litigation
The Company is not aware of any pending legal claims which require disclosure. The Company is party to various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's financial position, results of operations or liquidity.
22
Deflecto Acquisition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2023
(In Thousands)
Parent Company Units
The Company's owner, Deflecto Holdings, LLC, has authorized the issuance of Class B Common Member units (or Profits Interests) constituting a profits interest in the Company to certain members of Company's management. There were 7,836 units issued and outstanding as of December 31, 2023. The Company determined any compensation expense would be immaterial and, therefore, no equity-based compensation has been recorded or deemed necessary for the year ended December 31, 2023.
| 14. | Customer Concentrations |
For the year ended December 31, 2023, no customers accounted for more than 10% of total sales.
| 15. | Related-Party Transactions |
The Company entered into a management services agreement with Edgewater Capital Growth Management IV, L.P. (Edgewater) and another related party. The annual fees are payable quarterly in advance from the Company and its Subsidiaries in an amount not to exceed $1,500 and seven percent (7%) of the Adjusted EBITDA of the Company and its Subsidiaries for the preceding calendar year. The Company incurred $642 of expense for the year ended December 31, 2023, related to this agreement, which is included in advisory fees on the accompanying consolidated statements of operations and comprehensive loss. The Company also incurred $0 of directors fees to Edgewater and another related party for the year ended December 31, 2023. In addition, the management services agreement provides for additional fees relating to assistance with transactions, liquidity or financing events. During 2023 as part of the acquisition in Note 2, the Company incurred $814 related to the management services agreement, which is included in transaction expenses. At December 31, 2023, the Company has $193, included in accounts payable and accrued liabilities.
As disclosed in Note 10, the Company issued class D common stock to Evriholder, which was a sister company through common ownership.
| 16. | Subsequent Events |
The Company has evaluated subsequent events occurring through April 30, 2024, which is the date that the Company's consolidated financial statements were approved to be issued, for events requiring recording or disclosure in the Company's consolidated financial statements.
On October 18, 2024, the Company was acquired by Acacia Research Company in a stock sale. The sale is being accounted for under ASC 805, Business Combinations.
23
Exhibit 99.2
Deflecto Acquisition, Inc. and
Subsidiaries
Consolidated Financial Statements
June 30, 2024
Deflecto Acquisition, Inc. and Subsidiaries
Table of Contents
June 30, 2024
| Page | |
| Consolidated Financial Statements | |
| Consolidated Balance Sheet | 1 |
| Consolidated Statement of Operations and Comprehensive Income | 2 |
| Consolidated Statement of Cash Flows | 3 |
| Notes to Consolidated Financial Statements | 5 |
Deflecto Acquisition, Inc. and Subsidiaries
Consolidated Balance Sheet
June 30, 2024
(In Thousands)
| Assets | ||||
| Current Assets | ||||
| Cash and cash equivalents | $ | 11,270 | ||
| Accounts receivable, net | 16,286 | |||
| Inventories, net | 18,642 | |||
| Prepaid expenses and other current assets | 2,635 | |||
| Income tax receivable | 82 | |||
| Total current assets | 48,915 | |||
| Property, Plant and Equipment, Net | 13,187 | |||
| Other Assets | 3,535 | |||
| Goodwill, net | ||||
| Customer relationships, net | 18,767 | |||
| Intangible assets, net | 5,847 | |||
| Right-of-use asset | 9,890 | |||
| Total other assets | 38,039 | |||
| Total assets | $ | 100,141 | ||
| Liabilities and Stockholders' Equity | ||||
| Current Liabilities | $ | 9,011 | ||
| Accounts payable | ||||
| Accrued expenses | 5,453 | |||
| Current maturities of long-term debt | 751 | |||
| Current maturities of operating lease liabilities | 2,878 | |||
| Income tax payable | 69 | |||
| Total current liabilities | 18,162 | |||
| Long-Term Liabilities | ||||
| Long-term debt, net | 20,648 | |||
| Long-term operating lease liabilities, net | 7,124 | |||
| Deferred income taxes | 2,072 | |||
| Total liabilities | 48,006 | |||
| Stockholders' Equity | ||||
| Common stock | - | |||
| Accumulated other comprehensive loss | (2,384 | ) | ||
| Additional paid-in capital | 126,736 | |||
| Accumulated deficit | (72,217 | ) | ||
| Total stockholders' equity | 52,135 | |||
| Total liabilities and stockholders' equity | $ | 100,141 | ||
See notes to consolidated financial statements
1
Deflecto Acquisition, Inc. and Subsidiaries
Consolidated Statement of Operations and Comprehensive Income and Accumulated Deficit
Period Ended June 30, 2024
(In Thousands)
| Net Sales | $ | 65,688 | ||
| Costs and Expenses | ||||
| Cost of sales, excluding depreciation and amortization | 44,872 | |||
| Selling, general and administrative expenses | 11,833 | |||
| Depreciation | 1,728 | |||
| Amortization | 1,563 | |||
| Advisory fees | 758 | |||
| Total costs and expenses | 60,754 | |||
| Operating income | 4,934 | |||
| Other Income (Expense) | ||||
| Interest expense | (999 | ) | ||
| Interest income | 17 | |||
| Other income (expense) | 29 | |||
| Net other expense | (953 | ) | ||
| Income before taxes | 3,981 | |||
| Provision for Income Taxes | 505 | |||
| NET INCOME | 3,476 | |||
| ACCUMULATED DEFICIT - Beginning of Year | (75,693 | ) | ||
| ACCUMULATED DEFICIT - END OF YEAR | $ | (72,217 | ) | |
| Other Comprehensive Income | ||||
| Foreign currency translation adjustment | (200 | ) | ||
| Comprehensive income | $ | 3,276 |
See notes to consolidated financial statements
2
Deflecto Acquisition, Inc. and Subsidiaries
Consolidated Statement of Cash Flows
Period Ended June 30, 2024
(In Thousands)
| Cash Flows From Operating Activities | ||||
| Net income | $ | 3,476 | ||
| Adjustments to reconcile net income to net cash flows from operating activities: | ||||
| Depreciation and amortization | 3,287 | |||
| Amortization of debt issuance costs | 17 | |||
| Change in allowance for doubtful accounts and rebates | 40 | |||
| Change in inventory reserve | (413 | ) | ||
| Deferred taxes | (74 | ) | ||
| Lease expense | 1,638 | |||
| Changes in assets and liabilities: | ||||
| Accounts receivable | (1,978 | ) | ||
| Inventories | (1,161 | ) | ||
| Prepaid expenses and other current assets | 167 | |||
| Accounts payable | 1,188 | |||
| Accrued expenses | (1,827 | ) | ||
| Lease liability | (1,661 | ) | ||
| Income tax payable | (112 | ) | ||
| Net cash flows from operating activities | 2,587 | |||
| Cash Flows From Investing Activities | ||||
| Capital expenditures | (581 | ) | ||
| Net cash flows from investing activities | (581 | ) | ||
| Cash Flows From Financing Activities | ||||
| Net payments on revolving credit agreements | (1,650 | ) | ||
| Principal payments on long-term debt | (682 | ) | ||
| Net cash flows from financing activities | (2,332 | ) | ||
| Effect of exchange rate changes | (267 | ) | ||
| Net change in cash and cash equivalents | (593 | ) | ||
| Cash and Cash Equivalents, Beginning | 11,863 | |||
| Cash and Cash Equivalents, Ending | $ | 11,270 | ||
See notes to consolidated financial statements
3
Deflecto Acquisition, Inc. and Subsidiaries
Consolidated Statement of Cash Flows
Period Ended June 30, 2024
(In Thousands)
| Supplemental Cash Flow Disclosures | ||||
| Cash paid for interest | $ | 1,006 | ||
| Cash paid for income taxes | $ | 638 | ||
| Noncash Investing and Financing Activities | ||||
| Right of use asset | $ | 1,242 | ||
See notes to consolidated financial statements
4
Deflecto Acquisition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2024
(In Thousands)
| 1. | Summary of Significant Accounting Policies |
Nature of Operations
Deflecto Acquisition, Inc. and Subsidiaries (DAI or the Company) is the sole shareholder of Deflecto, LLC and Subsidiaries (DLLC). The Company is headquartered in Indianapolis, Indiana and operates domestically and internationally through the following wholly owned subsidiaries, collectively referred herein as the Subsidiaries and individually as a Subsidiary:
Beemak Plastics, LLC (United States)
Sate-Lite (Foshan) Plastics (People's Republic of China)
Deflecto Asia Ltd. (Hong Kong)
Yearntree Ltd. (United Kingdom)
Instachange Displays Limited (Canada)
Deflecto Canada, Ltd. (Canada)
Sate-Lite Technologies Private Ltd. (India)
Transportation Safety Holdings, LLC (United States)
The Subsidiaries serve a broad range of wholesale and retail markets within the highly-fragmented specialty plastics industry. The group primarily designs, manufactures and sells (1) "take-one" point of purchase brochure, folder and applications display holders, (2) plastic injection-molded office supply and arts, crafts and education products, (3) plastic and aluminum air venting and air control products, (4) extruded vinyl chair mats, (5) safety reflectors for bicycles and (6) mud flaps and splash guards for the heavy duty truck market.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and the Subsidiaries. All significant intercompany accounts and transactions have been eliminated.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an initial maturity of three months or less to be cash and cash equivalents. The Company maintains cash in bank accounts which, at times, exceed federally insured limits. The Company has cash balances of $6,078 held in foreign bank accounts at June 30, 2024. The Company has not experienced any losses in such accounts and management believes it is not exposed to significant credit risks.
Accounts Receivable
The Company adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2016-13, Financial Instruments—Credit Losses (Topic 326). The ASU introduces a new credit loss methodology, Current Expected Credit Losses (CECL), which requires earlier recognition of credit losses, while also providing additional transparency about credit risk. The CECL methodology utilizes a lifetime expected credit loss measurement objective for the recognition of credit losses at the time the receivable is originated or acquired. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. There was no adjustment to retained earnings upon adoption.
5
Deflecto Acquisition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2024
(In Thousands)
The Company recognizes an allowance for credit losses for trade and other receivables to present the net amount expected to be collected as of the balance sheet date. Such allowance is based on the credit losses expected to arise over the life of the asset which includes consideration of past events and historical loss experience, current events and also future events based on our expectation as of the balance sheet date. A receivable is considered past due if payments have not been received within agreed upon invoice terms. The Company's typical terms on accounts receivable are net 30-120 days. The Company does not accrue interest on past due accounts. Receivables are written off when the Company determined that such receivables are deemed uncollectible. The Company pools its receivables based on similar risk characteristics in estimating its expected credit losses. In situations where a receivable does not share the same risk characteristics with other receivables, the Company measures those receivables individually. The Company also continuously evaluates such pooling decisions and adjusts as needed from period to period as risk characteristics change.
The Company utilizes the loss rate method in determining its lifetime expected credit losses on its receivables. This method is used for calculating an estimate of losses based primarily on the Company's historical loss experience. In determining its loss rates, the Company evaluates information related to its historical losses, adjusted for current conditions and further adjusted for the period of time that can be reasonably forecasted. Qualitative and quantitative adjustments related to current conditions and the reasonable and supportable forecast period consider the following: past due receivables and the customer creditworthiness on the level of estimated credit losses in the existing receivables.
Accounts receivable are shown net of allowance for expected credit losses and discounts of $694 and customer rebates of $6,038 as of June 30, 2024.
Inventories
Inventories are stated at lower of cost (determined on an average or first-in, first-out basis) or net realizable value.
The Company reviews inventory and calculates a reserve based on the inventory items that either have not been used or are not expected to be used in the future. The inventory balances are recorded net of an inventory obsolescence reserve.
Property, Plant and Equipment
Property, plant and equipment obtained through a business acquisition are recorded at fair value at the date of acquisition of the Company. Otherwise, additions are stated at cost. Property, plant and equipment are presented less accumulated depreciation. Depreciation is provided for using primarily the straight-line method over the estimated useful lives of the respective assets. Major expenditures that extend the useful life of the asset are capitalized. Maintenance, repairs and minor renewals are expensed as incurred. When assets are retired or otherwise disposed of, their costs and related accumulated depreciation are removed for the accounts, with any resulting gains or losses included in operations. Amortization of leasehold improvements is included in the depreciation expense.
The useful lives of property, plant and equipment for the purpose of computing book depreciation are as follows:
| Years | ||||
| Machinery and equipment | 3-10 | |||
| Buildings and improvements | 5-35 |
The Company evaluates property, plant and equipment for impairment whenever events occur, or circumstances change, that indicate that the fair value of the assets may be below carrying value.
6
Deflecto Acquisition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2024
(In Thousands)
Leases
The Company follows FASB ASU No. 2016-02, Leases (Topic 842), and all related amendments. The Company recognizes assets and liabilities that arise from leases on the balance sheet. A lessee is to recognize, within the balance sheet, a liability to make lease payments (lease obligation) and a right-of-use asset representing the right to use the underlying asset for the lease term. At lease inception, leases are classified as either finance leases or operating leases with the associated right-of-use asset capitalized at the estimated present value of future lease payments. Operating lease right-of-use assets are expensed on a straight-line basis as lease expense over the estimated useful life of the asset.
The Company has elected certain accounting policies related to leases:
| · | The Company elected not to apply the recognition requirements to all leases with an original term of 12 months or less, for which the Company is not likely to exercise a renewal option or purchase the asset at the end of the lease; rather, short term leases will continue to be recorded on a straight-line basis over the lease term. |
| · | The Company has elected the policy not to separate lease and nonlease components for all leases. |
See Note 6 for further information.
Debt Issuance Costs
The Company presents long- term debt issuance costs as a direct reduction of long-term debt. The Company amortizes deferred financing costs using the straight-line method, which closely approximates the effective interest method, over the terms of the related debt. During 2023, the Company refinanced its debt, capitalizing new deferred financing cost of $166 during 2023. Amortization expense attributed to debt issuance costs was $17 for the period ended June 30, 2024, and is included in interest expense in the accompanying consolidated statement of operations and comprehensive loss. As of June 30, 2024, the net book value of the Company's deferred financing fees was $127.
Goodwill
Goodwill represents the amount by which the purchase price of net assets acquired in a business combination or acquisition exceeded their fair market value. The Company tests goodwill for impairment at the reporting level at least annually or when a triggering event has occurred. A triggering event may indicate the fair value of the entity is below its carrying value. The goodwill fair value is a level 3 fair value measurement. There were no impairment losses recorded for the period ended June 30, 2024.
Intangible Assets
Intangible assets consist of customer relationships, tradenames and patents related to unique manufacturing technology and product design. The Company amortizes intangible assets using the straight-line method over their estimated useful lives which range from 10 to 15 years.
7
Deflecto Acquisition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2024
(In Thousands)
Impairment of Long-Lived Assets
The Company evaluates the recoverability of the carrying amount of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. The Company evaluates the recoverability of property and equipment and intangibles annually or more frequently if events or circumstances indicate that an asset might be impaired. If an asset is considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the asset exceeds its fair value. Assets to be disposed are reported at the lower of the carrying amount or fair value less cost to sell. Management determines fair value using an undiscounted future cash flow analysis or other accepted valuation techniques. To date, management believes there has not been any impairment of the Company's long-lived assets.
Revenue Recognition
The Company's revenues are substantially comprised of product sales. Revenue is recognized when the Company satisfies its performance obligation(s) under the contract by transferring the promised product to its customer. A performance obligation is a promise in a contract to transfer a distinct product or service to a customer.
Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products or providing services. The nature of the Company's contracts gives rise to several types of variable consideration including incentives, discounts or rebates. As such, revenue is recorded net of estimated discounts, allowances and rebates. These estimates are based on historical experience, anticipated performance and the Company's best judgment at the time. Because of the Company's certainty in estimating these amounts, they are included in the transaction price of its contracts and the Company's estimates of variable consideration are generally not constrained.
The transaction price is allocated to each distinct performance obligation within the contract. Substantially all of the Company’s contracts have a single performance obligation.
Substantially all of the Company's revenue is from products transferred to customers at a point in time. The Company recognizes revenue at the point in time in which the customer obtains control of the product, which is generally when product title passes to the customer upon shipment.
The Company has elected to expense all incremental costs of obtaining a contract as incurred.
Sales, value add and other taxes collected from customers and remitted to governmental authorities are accounted for on a net (excluded from revenues) basis.
Neither the type of product sold or the location of sale significantly impacts nature, amount, timing or uncertainty of revenue and cash flows.
Shipping and Handling Costs
Shipping and handling fees charged to customers are included in net sales with the corresponding costs included in cost of sales in the consolidated statements of operations and comprehensive income (loss).
Research and Development Costs
Research and development costs are charged to expense as incurred.
8
Deflecto Acquisition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2024
(In Thousands)
Income Taxes
The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. The Company follows ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes. ASU No. 2015-17 requires deferred tax assets and liabilities to be classified as noncurrent in a classified balance sheet. When applicable, interest and penalties incurred on uncertain tax positions are calculated based on guidance from the relevant tax authority and included in income tax expense.
The provision for income taxes for interim periods is determined using an estimate of Deflecto's annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter, Deflecto updates the estimate of the annual effective tax rate, and if the estimated tax rate changes, a cumulative adjustment is recorded.
The tax effects from an uncertain tax position can be recognized in the consolidated financial statements if the position is more likely than not to be sustained on audit based on the technical merits of the position. The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the consolidated financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. See Note 10 for additional detail on tax benefits related to uncertain tax positions.
Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to a concentration of credit risk consist principally of cash and cash equivalents and accounts receivable. The Company deposits cash and cash equivalents with high quality financial institutions. The Company believes that its allowance for expected credit losses is adequate to cover potential credit risk.
9
Deflecto Acquisition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2024
(In Thousands)
Foreign Currency Translation
The Company has subsidiaries and operations located in Canada, India, People's Republic of China and the United Kingdom. Net assets within Canada, India, People’s Republic of China and the United Kingdom as a percentage of Company totals were 40% as of June 30, 2024. The functional currencies of the Company's foreign operations are the local currencies. Accordingly, assets and liabilities of the Company's foreign operations are translated from foreign currencies into U.S. dollars at the exchange rates in effect at the balance sheet date, while income and expenses are translated at the weighted-average exchange rates for the year. Gains and losses for all transactions denominated in a currency other than the functional currency are recognized in the period incurred and included in other income and expense on the accompanying consolidated statements of operations. The Company recognized approximately $5 of foreign currency transaction expense for the period ended June 30, 2024. Adjustments resulting from the translation of foreign currency financial statements are classified as a separate component of stockholders' equity. The accumulated balance in other comprehensive loss pertaining to foreign currency translation was $(2,384) as of June 30, 2024.
| 2. | Inventories |
The major categories of inventories, net of reserves, are summarized as follows at December 31:
| 2024 | ||||
| Raw materials | $ | 6,203 | ||
| Work-in-process | 513 | |||
| Finished goods | 11,926 | |||
| Inventories, net | $ | 18,642 | ||
Inventories are shown net of inventory reserve of $3,204 at June 30, 2024.
| 3. | Property, Plant and Equipment |
The major categories of property, plant and equipment are summarized as follows at December 31:
| 2024 | ||||
| Land | $ | 199 | ||
| Machinery and equipment | 23,742 | |||
| Buildings and improvements | 9,666 | |||
| Construction in progress | 125 | |||
| Total property, plant and equipment | 33,732 | |||
| Less accumulated depreciation | (20,545 | ) | ||
| Property, plant and equipment, net | $ | 13,187 | ||
10
Deflecto Acquisition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2024
(In Thousands)
| 4. | Goodwill |
The changes in the carrying amount of goodwill were as follows:
| Balance at January 1, 2024 | $ | 3,535 | ||
| Additions | - | |||
| Balance at June 30, 2024 | $ | 3,535 |
| 5. | Intangible Assets |
The Company's intangible assets consist of tradenames, patents and customer relationships, held by various subsidiaries, which are all being amortized ratably over their useful lives ranging from 10 to 15 years.
The Company's intangible assets consist of the following at December 31:
| 2024 | ||||
| Tradenames | $ | 9,004 | ||
| Patents | 1,000 | |||
| Customer Relationships | 32,972 | |||
| 42,976 | ||||
| Less accumulated amortization | (18,362 | ) | ||
| Intangible assets, net | $ | 24,614 | ||
The Company recognized amortization expense of $1,559 for the period ended June 30, 2024. The intangible assets were decreased by $102 for the period ended June 30, 2024, due to changes in foreign exchange rates.
Estimated annual amortization expense of intangible assets for years ending after June 30, 2024 is as follows:
| Years ending December 31: | ||||
| 2024 (6 months remaining) | $ | 1,569 | ||
| 2025 | 3,141 | |||
| 2026 | 3,141 | |||
| 2027 | 3,116 | |||
| 2028 | 3,041 | |||
| Thereafter | 10,606 | |||
| Total | $ | 24,614 | ||
11
Deflecto Acquisition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2024
(In Thousands)
| 6. | Leases |
Right-of-use assets represent the Company's right to use an underlying asset for the lease term, while lease liabilities represent the Company's obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the commencement date of a lease based on the present value of lease payments over the lease term.
The Company leases various land, buildings, offices and equipment. Certain of these leases contain various options to renew and expire at varying dates through December 2031. Leases are executed in the United States, Canada and China. The exercise of lease renewal options is at the Company's sole discretion. The Company regularly evaluates the renewal options and when they are reasonably certain of exercise, the Company includes the renewal period in the lease term.
In determining the discount rate used to measure the right-of-use assets and lease liabilities, the Company uses the rate implicit in the lease, or if not readily available, the Company uses the Company's incremental borrowing rate. The Company estimates the incremental borrowing rate based on an estimated secured rate comprised of a risk-free rate plus a credit spread as secured by the Company's assets
Right-of-use assets are assessed for impairment in accordance with the Company's long-lived asset policy. The Company reassesses lease classification and remeasures right of use assets and lease liabilities when a lease is modified and that modification is not accounted for as a separate new lease or upon certain other events that require reassessment in accordance with Topic 842.
The Company made significant assumptions and judgments in applying the requirements of Topic 842. In particular, the Company:
| · | Evaluated whether a contract contains a lease, by considering factors such as whether the Company obtained substantially all rights to control an identifiable underlying asset and whether the lessor has substantive substitution rights. |
The following table summarizes the operating lease right of use assets and operating lease obligations as of June 30:
| 2024 | ||||
| Operating lease right-of-use assets, net | $ | 9,890 | ||
| Operating lease liabilities | ||||
| Current | $ | 2,878 | ||
| Long-term | 7,124 | |||
| Total operating lease liabilities | $ | 10,002 | ||
Below is a summary of expenses incurred pertaining to leases during the period ended June 30:
| 2024 | ||||
| Operating lease expense | $ | 1,954 | ||
| Total lease expense | $ | 1,954 | ||
As of June 30, 2024, the right-of-use assets and lease obligations were calculated using a weighted average incremental borrowing rate of 6.62 and weighted average lease term of 4.39 years.
12
Deflecto Acquisition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2024
(In Thousands)
The table below summarized the Company's scheduled future minimum lease payments for years ending after June 30, 2024:
| Years ending December 31: | ||||
| 2024 (6 months remaining) | $ | 1,876 | ||
| 2025 | 2,949 | |||
| 2026 | 2,815 | |||
| 2027 | 1,461 | |||
| 2028 | 632 | |||
| Thereafter | 1,794 | |||
| Total | 11,527 | |||
| Less present value discount | (1,525 | ) | ||
| Lease liabilities | $ | 10,002 | ||
The following table includes supplemental cash flow and noncash information related to the leases for the period ended June 30, 2024:
| 2024 | ||||
| Right-of-use assets obtained in exchange for lease liabilities: | ||||
| Operating leases | $ | 1,242 | ||
| 7. | Accrued Expenses |
Accrued liabilities consist of the following at December 31, 2023:
| 2024 | ||||
| Accrued medical and workers' compensation | $ | 265 | ||
| Accrued payroll and related costs | 2,341 | |||
| Accrued professional fees | 306 | |||
| Accrued freight | 338 | |||
| Accrued other expenses | 2,203 | |||
| Total | $ | 5,453 | ||
| 8. | Long-Term Debt |
In May 2023, the Company amended and restated their credit agreement. The amended credit agreement consists of a revolving loan commitment of up to $22,500, a term loan of $10,750, and a mortgage loan for the Company's subsidiary in the United Kingdom of $3,468 (£2,524). The Company also entered into a seller note of $2,000 to fund a portion of the acquisition of James King. The seller note is unsecured and subordinated to all senior debt.
The Company is also required to pay a commitment fee, equal to 0.50% per annum on the unused portion of the revolving loan. The note is secured by substantially all the assets of the Company.
13
Deflecto Acquisition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2024
(In Thousands)
Long-term debt consists of the following revolving loan commitments and fixed notes payable at June 30, 2024:
| 2024 | ||||
| Revolving loan commitment, due May 1, 2028 (as amended), with allowed borrowings up to $22,500, interest payable monthly at the SOFR (7.91% at June 30, 2024). This note is secured by substantially all the assets of the Company. | $ | 1,264 | ||
| Term loan (UK mortgage), due April 16, 2026, with principal of £14 and interest payable monthly at the adjusted SONIA rate plus 1.86% (7.06% at June 30, 2024). This note is secured by substantially all the assets of the Company. | 2,226 | |||
| Subordinated seller note payable, due May 1, 2026, with annual interest payments due and a final balloon payment of all outstanding principal and interest at maturity. The note accrues interest at a rate of 5%. | 2,000 | |||
| Term loan B due May 1, 2028, with principal payments of $134 due quarterly through April 2025, then increasing to $202 through April 2026, then increasing to $269 through maturity and interest payable monthly at the SOFR (7.76% at June 30, 2024). The note is secured by substantially all the assets of the Company. | 10,212 | |||
| Term loan (Canadian Mortgage), due May 1, 2043, with principal payments beginning on June 1, 2028. Interest is paid monthly for the initial five years of $44 per month. Interest is accrued at a rate of 8.75%. The note is secured by the mortgage on the facility. | 5,824 | |||
| Total | 21,526 | |||
| Less debt issuance costs, net | (127 | ) | ||
| Less current portion | (751 | ) | ||
| Long-term debt, net | $ | 20,648 |
The Company's new credit facility includes financial covenants that require the Company to maintain a minimum fixed charge coverage ratio of at least 1.15, and a total leverage ratio to be greater than 3.00. The Company was in compliance with both covenants during the period ended June 30, 2024.
Aggregate maturities of long-term debt under the agreements in place at June 30, 2024 are as follows:
| Years ending December 31: | ||||
| 2024 (remaining six months) | $ | 375 | ||
| 2025 | 880 | |||
| 2026 | 3,148 | |||
| 2027 | 1,283 | |||
| 2028 | 8,903 | |||
| Thereafter | 6,810 | |||
| Total | $ | 21,399 | ||
14
Deflecto Acquisition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2024
(In Thousands)
| 9. | Stockholders' Equity |
The Company has four classes of common stock.
Common Stock - Class C
During 2021, the Company issued 496 shares of Class C common stock. The aggregate purchase price was $21,550. Class C shares accrue accumulated dividends at a rate of 8% of the Class C Original Issue Price of $43 per share plus any unpaid cumulative dividends. As no dividends have been declared, none have been accrued in the accompanying consolidated financial statements. As of June 30, 2024, the amount of dividends in arrears, not yet declared or accrued, was approximately $5,160. Class C dividends are in preference to any declaration or payment of any dividend on the Class A, Class B and Class D shares. In the event of any liquidation, dissolution or winding up of the Company, Class C shares shall be entitled to receive their original issue price and any accrued but unpaid dividends in preference to Class A, Class B and Class D shares.
Common Stock - Class A
Prior to November 2018, the Class A original issue price was $64. During November 2018, the Company amended the Class A original issue price to $43 per share. Class A shares have equal voting rights. Class A shares accrue accumulated dividends at a rate of 8% of the Class A Original Issue Price of $43 per share plus any unpaid cumulative dividends. As no dividends have been declared, none have been accrued in the accompanying consolidated financial statements. As of June 30, 2024, the amount of dividends in arrears, not yet declared or accrued, was approximately $17,762. Class A dividends are in preference to any declaration or payment of any dividend on the Class B or Class D shares. In the event of any liquidation, dissolution or winding up of the Company, Class A shares shall be entitled to receive their original issue price and any accrued but unpaid dividends in preference to Class D and Class B shares.
Common Stock - Class D
During 2021, the Company issued 443.5 shares of Class D common stock to Evriholder Finance, LLC, which is a company with common ownership. The aggregate purchase price was $19,268. Class D shares have equal voting rights. Class D shares accrue accumulated dividends at a rate of 9% of the Class D Original Issue Price of $43 per share plus any unpaid cumulative dividends. As no dividends have been declared, none have been accrued in the accompanying consolidated financial statements. As of June 30, 2024, the amount of dividends in arrears, not yet declared or accrued, was approximately $5,256. Class D dividends are in preference to any declaration or payment of any dividend on the Class B shares. In the event of any liquidation, dissolution or winding up of the Company, Class D shares shall be entitled to receive their original issue price and any accrued but unpaid dividends in preference to Class B shares.
15
Deflecto Acquisition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2024
(In Thousands)
Common Stock - Class B
During 2018, the Company authorized 200 Class B shares to be issued as part of an equity incentive plan. Class B shares have no voting rights. Class B shares require no initial capital contribution and are subject to vesting requirements based on continuous service with the Company and performance measures. In the event of any liquidation, dissolution or winding up of the Company, Class B shareholders are entitled to a pro-rata amount after the payment of the Class A preference.
The following table summarizes the activity of Class B shares as of and for the period ended June 30, 2024:
| Shares | ||||
| Outstanding at January 1, 2024 | 55 | |||
| Issued | - | |||
| Forfeited | - | |||
| Outstanding at June 30, 2024 | 55 | |||
| 10. | Income Taxes |
Income tax expense for the six months ended June 30, 2024 is primarily attributable to foreign taxes and withholding taxes incurred year to date.
The Company's effective tax rate was 5.75% for the six months ended June 30, 2024. The 2024 effective tax rate for the period was lower than the U.S. federal statutory rate primarily due to dividends received deduction, foreign taxes, and a full valuation allowance in the US and UK. The effective tax rate may be subject to fluctuations during the year as new information is obtained which may affect the assumptions used to estimate the effective tax rate, including factors such as expected utilization of net operating loss carryforwards, changes in or the interpretation of tax laws in jurisdictions where the Company conducts business, the Company’s expansion into new states or foreign countries, and the amount of valuation allowances against deferred tax assets. The Company has recorded a full valuation allowance against our net deferred tax assets in the US and UK as of June 30, 2024. These assets primarily consist of intangibles, interest expense carryforward, and net operating loss carryforwards, interest expense carryforward.
At June 30, 2024, the Company had no unrecognized tax benefits. At June 30, 2024, no unrecognized tax benefits were recorded in other long-term liabilities. No interest and penalties have been recorded for the unrecognized tax benefits for the period presented. At June 30, 2024, if recognized, no tax benefits would impact the Company’s effective tax rate subject to valuation allowance. The Company does not expect that the liability for unrecognized benefits will change significantly within the next 12 months. Deflecto recognizes interest and penalties with respect to unrecognized tax benefits in income tax expense (benefit). Deflecto has identified no uncertain tax position for which it is reasonably possible that the total amount of unrecognized tax benefits will significantly increase or decrease within 12 months.
16
Deflecto Acquisition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2024
(In Thousands)
| 11. | Retirement Plans |
The Company's U.S. Subsidiaries participated in the Deflecto, LLC 401(k), a defined contribution plan for salaried and hourly employees. In order to participate in the Plan, employees must be at least 21 years old. The Company made contributions to the 401(k) totaling approximately $120 for the period ended June 30, 2024.
In addition, the Company contributes to a state sponsored retirement plan for its resident employees of China. Contributions are based on approximately 15% of participant base salaries for the period ended June 30, 2024.
| 12. | Commitments and Contingencies |
Litigation
The Company is not aware of any pending legal claims which require disclosure. The Company is party to various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's financial position, results of operations or liquidity.
Parent Company Units
The Company's owner, Deflecto Holdings, LLC, has authorized the issuance of Class B Common Member units (or Profits Interests) constituting a profits interest in the Company to certain members of Company's management. There were 7,836 units issued and outstanding as of June 30, 2024. The Company determined any compensation expense would be immaterial and, therefore, no equity-based compensation has been recorded or deemed necessary for the period ended June 30, 2024.
| 13. | Customer Concentrations |
For the period ended June 30, 2024, no customers accounted for more than 10% of total sales.
| 14. | Related-Party Transactions |
The Company entered into a management services agreement with Edgewater Capital Growth Management IV, L.P. (Edgewater) and another related party. The annual fees are payable quarterly in advance from the Company and its Subsidiaries in an amount not to exceed $1,500 and seven percent (7%) of the Adjusted EBITDA of the Company and its Subsidiaries for the preceding calendar year. The Company incurred $758 of expense for the period ended June 30, 2024, related to this agreement, which is included in advisory fees on the accompanying consolidated statements of operations and comprehensive loss. The Company also incurred $0 of directors fees to Edgewater and another related party for the period ended June 30, 2024. In addition, the management services agreement provides for additional fees relating to assistance with transactions, liquidity or financing events. At June 30, 2024, the Company has no amount due to related parties.
As disclosed in Note 9, the Company issued class D common stock to Evriholder, which was a sister company through common ownership.
17
Deflecto Acquisition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2024
(In Thousands)
| 15. | Subsequent Events |
The Company has evaluated subsequent events occurring through April 30, 2024, which is the date that the Company's consolidated financial statements were approved to be issued, for events requiring recording or disclosure in the Company's consolidated financial statements.
On October 18, 2024, the Company was acquired by Acacia Research Company in a stock sale. The sale is being accounted for under ASC 805, Business Combinations.
18
Exhibit 99.3
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
On October 18, 2024 (the “Closing Date’), Deflecto Holdco LLC, a wholly-owned subsidiary of Acacia Research Corporation (the “Company” or “Acacia”), acquired Deflecto Acquisition, Inc. (“Deflecto”), pursuant to that certain Stock Purchase Agreement (the “Stock Purchase Agreement”) entered into on the same day with Deflecto Holdings, LLC and Evriholder Finance LLC (collectively, the “Sellers”), Deflecto and the Sellers’ Representative named therein. Pursuant to the Stock Purchase Agreement, Acacia purchased all of the issued and outstanding equity interests of Deflecto, upon the terms and subject to the conditions of the Stock Purchase Agreement (such purchase and sale, together with the other transactions contemplated by the Stock Purchase Agreement, the “Transaction”). The Transaction had a purchase price of $103.7 million (the “Purchase Price”), subject to customary post-closing adjustment. The Transaction was funded by a combination of Acacia’s cash and borrowings under the term loan. Headquartered in Indianapolis, Indiana, Deflecto is a leading specialty manufacturer of essential products serving the commercial transportation, HVAC, and office markets. The Transaction closed simultaneously with the execution of the Stock Purchase Agreement on October 18, 2024.
As previously reported in the Company’s Form 8-K/A dated July 3, 2024, on April 17, 2024, Benchmark Energy II, LLC (together with its subsidiaries, “Benchmark”), a majority-owned subsidiary of the Acacia Research Corporation consummated the previously announced transactions contemplated in the Purchase and Sale Agreement, dated February 16, 2024, by and among Benchmark and Revolution Resources II, LLC, Revolution II NPI Holding Company, LLC, Jones Energy, LLC, Nosley Assets, LLC, Nosley Acquisition, LLC, and Nosley Midstream, LLC (collectively, “Revolution”). The impact of the acquisition of the assets and liabilities of Revolution have been reflected in the pro forma condensed Statement of Operations for the periods ended December 31, 2023 and June 30, 2024 as the results are already reflected in the consolidated Balance Sheet as of June 30, 2024. The Revolution acquisition was accounted for as an asset acquisition under Accounting Standards Codification 805, Business Combinations. The acquisition of Deflecto and Revolution are collectively referred to as the “Transactions”.
The following unaudited pro forma condensed combined financial information are derived from the historical consolidated financial statements of Acacia and Deflecto, respectively, and reflects (i) the Transactions, which includes the impacts of (a) acquisition of Deflecto by Acacia, (b) the draw down on the term loan to fund the portion of the Purchase Price, and (c) the impact of the previously acquired assets of Revolution, as discussed above. Amounts presented in the “Transaction Adjustments” column reflect the accounting for acquisition of Deflecto by Acacia. Amounts presented in the “Financing Adjustments” column represent additional transactions to issue new debt.
The acquisition of Deflecto is being accounted for as a business combination under Accounting Standards Codification 805, Business Combinations. The unaudited pro forma condensed combined balance sheet as of June 30, 2024 gives effect to the Transactions as if they had occurred as of June 30, 2024. The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2023 and six months ended June 30, 2024 give effect to the Transactions as if they had occurred on January 1, 2023.
The unaudited pro forma combined financial information has been prepared using the acquisition of assets method of accounting for assets previously acquired from Revolution and the business combination method of accounting for the acquisition of Deflecto both under U.S. generally accepted accounting principles (US GAAP). The accounting for asset acquisitions is accounted for by using a cost accumulation model, where the cost of the acquisition is allocated to the assets acquired on the basis of relative fair values. The accounting for business combinations is accounted for by using a fair value model, where the assets and liabilities acquired are recorded on the basis of their assumed fair values. The process of valuing the net assets of Deflecto, as well as evaluating accounting policies for conformity, is preliminary in nature and subject to change.
The unaudited pro forma condensed combined balance sheet and the unaudited pro forma condensed combined statements of operations have been derived from and should be read in conjunction with the following financial statements:
| · | The historical audited consolidated financial statements of Acacia as of and for the year ended December 31, 2023; |
| · | The historical unaudited consolidated financial statements of Acacia as of and for the six months ended June 30, 2024; |
1
| · | The historical audited consolidated financial statements of Deflecto as of and for the year ended December 31, 2023; |
| · | The historical unaudited consolidated financial statements of Deflecto as of and for the six months ended June 30, 2024; and |
| · | The historical audited consolidated financial statements of Revolution II WI Holding Company LLC as of and for the year ended December 31, 2023. |
The unaudited pro forma condensed combined financial information was prepared in accordance with Article 11 of Regulation S-X.
The pro forma adjustments are based on available information and upon assumptions that management believes are reasonable in order to reflect, on a pro forma basis, the effect of the Transactions on the historical financial information of Acacia. The adjustments are described in the notes to the unaudited pro forma condensed combined balance sheet and the unaudited pro forma condensed combined statements of operations.
The unaudited pro forma condensed combined financial information is included for informational purposes only. The unaudited pro forma condensed combined financial information should not be relied upon as being indicative of our results of operations or financial condition had the Transactions occurred on the dates assumed. The unaudited pro forma condensed combined financial information also does not project our results of operations or financial position for any future period or date, including, but not limited to, the anticipated realization of ongoing savings from potential operating efficiencies, cost savings, or economies of scale that the combined company may achieve with respect to the combined operations. Specifically, the unaudited pro forma condensed combined statements of operations does not include projected synergies expected to be achieved as a result of the Transactions and any associated costs that may be required to be incurred to achieve the identified synergies. The unaudited pro forma condensed combined statements of operations also exclude the effects of costs of integration activities that may result from the acquisition.
2
Unaudited Pro Forma Condensed Combined Balance Sheet
As of June 30, 2024
(in thousands, except shares and per share data)
Balance Sheet Pro Forma Adjustments
As of June 30, 2024
| Acacia Historical | Deflecto Historical | Transaction Adjustments | Financing Adjustments | Reclassification | Combined Pro Formas | ||||||||||||||||||||
| Current assets: | |||||||||||||||||||||||||
| Cash and cash equivalents | 386,988 | 11,270 | (59,898 | )(D) | 47,418 | (C) | 355,017 | ||||||||||||||||||
| - | - | (21,391 | )(D) | - | |||||||||||||||||||||
| 46 | (B) | ||||||||||||||||||||||||
| (9,416 | )(D) | ||||||||||||||||||||||||
| Equity Securities | 18,174 | - | - | - | 18,174 | ||||||||||||||||||||
| Equity securities without readily determinable fair value | 5,816 | - | - | - | 5,816 | ||||||||||||||||||||
| Equity Method Investment | 30,934 | - | - | - | 30,934 | ||||||||||||||||||||
| Accounts receivable, net | 18,772 | 16,286 | (581 | )(B) | - | 34,477 | |||||||||||||||||||
| Inventories | 12,289 | 18,642 | 762 | (B) | - | 31,693 | |||||||||||||||||||
| Prepaid expenses and other current assets | 20,961 | 2,635 | 1,803 | (B) | - | - | 25,399 | ||||||||||||||||||
| Income tax receivable | - | 82 | (82 | )(B) | - | - | - | ||||||||||||||||||
| Total current assets | 493,934 | 48,915 | (88,757 | ) | 47,418 | - | 501,510 | ||||||||||||||||||
| Property, plant and equipment, net | 2,315 | 13,187 | 9,130 | (B) | - | 24,632 | |||||||||||||||||||
| Oil and natural gas properties, net | 192,587 | - | - | - | 192,587 | ||||||||||||||||||||
| Goodwill | 8,990 | 3,535 | 13,277 | (B) | - | 26,392 | |||||||||||||||||||
| 592 | (F) | ||||||||||||||||||||||||
| Other intangible assets, net | 36,017 | 24,614 | 6,490 | (B) | - | - | 67,121 | ||||||||||||||||||
| Operating lease, right-of-use assets | 1,639 | 9,890 | (1,049 | )(B) | - | 10,480 | |||||||||||||||||||
| Deferred income tax assets, net | 13,854 | - | 4,850 | (B) | - | 18,370 | |||||||||||||||||||
| (335 | )(F) | ||||||||||||||||||||||||
| Other non-current assets | 4,257 | - | 7,000 | (H) | - | 11,257 | |||||||||||||||||||
| Total assets | 753,593 | 100,141 | (48,803 | ) | 47,418 | - | 852,349 | ||||||||||||||||||
| Current liabilities: | |||||||||||||||||||||||||
| Accounts Payable | 3,191 | 9,011 | (175 | )(B) | - | 12,027 | |||||||||||||||||||
| Accrued expenses and other current liabilities | 15,207 | 5,453 | 9,452 | (B) | - | 647 | (A) | 34,121 | |||||||||||||||||
| 3,363 | (G) | ||||||||||||||||||||||||
| Phantom equity liability | 15,290 | (I) | 15,290 | ||||||||||||||||||||||
| Current maturities of long-term debt | - | 751 | (751 | )(B) | - | - | |||||||||||||||||||
| Current maturities of capital lease obligations | - | 2,878 | (264 | )(B) | - | 2,614 | |||||||||||||||||||
| Accrued compensation | 3,983 | - | - | - | 3,983 | ||||||||||||||||||||
| Royalties and contingent legal fees payable | 4,869 | - | - | - | 4,869 | ||||||||||||||||||||
| Deferred revenue | 911 | - | - | - | 911 | ||||||||||||||||||||
| Asset retirement obligation | 1,543 | - | - | - | 1,543 | ||||||||||||||||||||
| Accrued loss contingency | 14,500 | - | - | - | 14,500 | ||||||||||||||||||||
| Income tax payable | - | 69 | 578 | (B) | - | (647 | )(A) | - | |||||||||||||||||
| - | |||||||||||||||||||||||||
| Total current liabilities | 44,204 | 18,162 | 27,492 | - | - | 89,858 | |||||||||||||||||||
| Long-term debt, net | - | 20,648 | (20,648 | )(D) | 47,418 | (C) | 47,418 | ||||||||||||||||||
| Asset retirement obligation | 27,718 | - | - | - | 27,718 | ||||||||||||||||||||
| Long-term lease liabilities | 1,447 | 7,124 | (771 | )(B) | - | 7,800 | |||||||||||||||||||
| Revolving credit facility | 82,000 | - | - | - | 82,000 | ||||||||||||||||||||
| Deferred income taxes | - | 2,072 | 365 | (B) | - | 2,516 | |||||||||||||||||||
| 79 | (F) | ||||||||||||||||||||||||
| Other long-term liabilities | 1,479 | - | 178 | (F) | - | 1,657 | |||||||||||||||||||
| Total liabilities | 156,848 | 48,006 | 6,695 | 47,418 | - | 258,967 | |||||||||||||||||||
| Commitments and contingencies | - | - | - | - | - | ||||||||||||||||||||
| Series A redeemable convertible preferred stock | - | - | - | - | - | ||||||||||||||||||||
| Stockholder's equity | |||||||||||||||||||||||||
| Preferred stock, par value $0.001 per share; 10,000,000 shares authorized; no shares issued or outstanding | - | - | - | - | - | ||||||||||||||||||||
| Common stock, par value $0.001 per share; 300,000,000 shares authorized; 100,375,459 shares issued and outstanding as of June 30, 2024 | 100 | - | - | - | 100 | ||||||||||||||||||||
| Treasury stock, at cost, 16,183,703 shares as of June 30, 2024 | (98,258 | ) | - | - | - | (98,258 | ) | ||||||||||||||||||
| Additional paid-in capital | 907,215 | 126,736 | (126,736 | )(E) | - | 907,215 | |||||||||||||||||||
| Accumulated deficit | (248,361 | ) | (72,217 | ) | 72,217 | (E) | - | (251,724 | ) | ||||||||||||||||
| (3,363 | )(G) | ||||||||||||||||||||||||
| Accumulated other comprehensive income | - | (2,384 | ) | 2,384 | (E) | - | - | ||||||||||||||||||
| Total Acacia Research Corporation stockholders' equity | 560,696 | 52,135 | (55,498 | ) | - | 557,333 | |||||||||||||||||||
| Noncontrolling interests | 36,049 | - | - | - | 36,049 | ||||||||||||||||||||
| Total stockholders' equity | 596,745 | 52,135 | (55,498 | ) | - | 593,382 | |||||||||||||||||||
| Total liabilities and stockholders' equity | 753,593 | 100,141 | (48,803 | ) | 47,418 | - | 852,349 | ||||||||||||||||||
3
Unaudited Pro Forma Condensed Combined Statement of Operations
For the Year Ended December 31, 2023
(in thousands, except shares and per share data)
Income Statement Pro Forma Adjustments
Twelve Months Ended December 31, 2023
| Acacia Historical | Revolution Acquisition | Acacia, as adjusted | Deflecto Historical | Transaction Adjustments | Financing Adjustments | Reclassifications | Combined Pro Formas |
||||||||||||||||
| (GG) | |||||||||||||||||||||||
| Revenues | |||||||||||||||||||||||
| Intellectual property operations | 89,156 | - | 89,156 | - | 89,156 | ||||||||||||||||||
| Industrial operations | 35,098 | - | 35,098 | - | 131,754 | (AA) | 166,852 | ||||||||||||||||
| Energy operations | 848 | 56,983 | 57,831 | - | 57,831 | ||||||||||||||||||
| Net Sales | - | - | - | 131,754 | (131,754 | )(AA) | - | ||||||||||||||||
| Total revenues | 125,102 | 56,983 | 182,085 | 131,754 | 313,839 | ||||||||||||||||||
| Costs and expenses | |||||||||||||||||||||||
| Cost of revenues- intellectual property operations | 34,164 | - | 34,164 | - | 34,164 | ||||||||||||||||||
| Cost of revenues- industrial operations | 18,009 | - | 18,009 | - | 4,365 | (FF) | 93,020 | (AA) | 115,394 | ||||||||||||||
| Cost of revenues- energy operations | 656 | 46,871 | 47,527 | - | 47,527 | ||||||||||||||||||
| Costs of sales, excluding depreciation and amortization | - | - | - | 93,020 | (93,020 | )(AA) | - | ||||||||||||||||
| Engineering and development expenses- industrial operations | 735 | - | 735 | - | 730 | (AA) | 1,465 | ||||||||||||||||
| Sales and marketing expenses- industrial operations | 6,908 | - | 6,908 | - | 7,140 | (AA) | 14,048 | ||||||||||||||||
| Selling, general and administrative expenses | - | - | - | 21,898 | (21,898 | )(AA) | - | ||||||||||||||||
| Depreciation | - | - | - | 3,676 | (3,676 | )(FF) | - | - | |||||||||||||||
| Amortization | - | - | - | 2,973 | (2,973 | )(FF) | - | - | |||||||||||||||
| Advisory fees | - | - | - | 642 | (642 | )(AA) | - | ||||||||||||||||
| General and administrative expenses | 43,694 | 365 | 44,059 | - | 3,363 | (EE) | 642 | (AA) | 62,092 | ||||||||||||||
| 14,028 | (AA) | ||||||||||||||||||||||
| Other | - | 47 | 47 | - | 47 | ||||||||||||||||||
| Total costs and expenses | 104,166 | 47,283 | 151,449 | 122,209 | 274,737 | ||||||||||||||||||
| Operating income (loss) | 20,936 | 9,700 | 30,636 | 9,545 | 39,102 | ||||||||||||||||||
| Other income (expense) | |||||||||||||||||||||||
| Equity securities investments: | |||||||||||||||||||||||
| Change in fair value of equity securities | 31,423 | - | 31,423 | - | 31,423 | ||||||||||||||||||
| (Loss) gain on sale of equity securities | (10,930 | ) | - | (10,930 | ) | - | (10,930 | ) | |||||||||||||||
| Earnings on equity investment in joint venture | 4,167 | - | 4,167 | - | 4,167 | ||||||||||||||||||
| Net realized and unrealized gain (loss) | 24,660 | - | 24,660 | - | 24,660 | ||||||||||||||||||
| Change in fair value of the Series A and B warrants and embedded derivatives | 8,241 | - | 8,241 | - | 8,241 | ||||||||||||||||||
| Gain (loss) on foreign currency exchange | 53 | - | 53 | - | 53 | ||||||||||||||||||
| Interest expense | (1,930 | ) | (7,542 | ) | (9,472 | ) | (2,307 | ) | (3,791 | )(BB) | (13,263 | ) | |||||||||||
| 2,307 | (DD) | ||||||||||||||||||||||
| Interest income and other, net | 15,466 | 133 | 15,599 | - | 15,599 | ||||||||||||||||||
| Interest income | - | - | - | 40 | 40 | ||||||||||||||||||
| Other income (expense) | - | - | - | (407 | ) | (407 | ) | ||||||||||||||||
| Transaction expenses | - | - | - | (1,618 | ) | (1,618 | ) | ||||||||||||||||
| Total other income (expense) | 46,490 | (7,409 | ) | 39,081 | (4,292 | ) | 33,305 | ||||||||||||||||
| - | - | - | - | ||||||||||||||||||||
| Income (loss) before income taxes | 67,426 | 2,291 | 69,717 | 5,253 | (1,079 | ) | (1,484 | ) | 72,407 | ||||||||||||||
| Income tax benefit (provision) | 1,504 | (400 | ) | 1,104 | - | (45 | )(CC) | (2,503 | )(AA) | (1,444 | ) | ||||||||||||
| Provision for income taxes | - | - | - | (932 | ) | (1,571 | )(HH) | 2,503 | (AA) | - | |||||||||||||
| Net income (loss) including noncontrolling interests in subsidiaries | 68,930 | 1,891 | 70,821 | 4,321 | 70,963 | ||||||||||||||||||
| Net income (loss) attributable to noncontrolling interests in subsidiaries | (1,870 | ) | (278 | ) | (2,148 | ) | - | (2,148 | ) | ||||||||||||||
| Net income attributable to Acacia Research Corporation | 67,060 | 1,613 | 68,673 | 4,321 | 68,815 | ||||||||||||||||||
| Income (loss) per share | |||||||||||||||||||||||
| Net income attributable to common stockholders - Basic | 55,140 | ||||||||||||||||||||||
| Weighted average number of shares outstanding - Basic | 75,296,025 | ||||||||||||||||||||||
| Basic net income per common share | 0.73 | ||||||||||||||||||||||
| Net income attributable to common stockholders - Diluted | 53,208 | ||||||||||||||||||||||
| Weighted average number of shares outstanding - Diluted | 92,411,818 | ||||||||||||||||||||||
| Diluted net income per common share | 0.58 |
4
Unaudited Pro Forma Condensed Combined Statement of Operations
For the Six Months Ended June 30, 2024
(in thousands, except shares and per share data)
Income Statement Pro Forma Adjustments
Six Months Ended June 30, 2024
| Acacia Historical | Revolution Acquisition | Acacia, as adjusted | Deflecto Historical | Transaction Adjustments | Financing Adjustments | Reclassifications | Combined Pro Formas |
||||||||||||||||
| (EEE) | |||||||||||||||||||||||
| Revenues | |||||||||||||||||||||||
| Intellectual property operations | 18,956 | - | 18,956 | - | 18,956 | ||||||||||||||||||
| Industrial operations | 15,176 | - | 15,176 | - | 65,688 | (AAA) | 80,864 | ||||||||||||||||
| Energy operations | 16,026 | 18,507 | 34,533 | - | - | 34,533 | |||||||||||||||||
| Net Sales | - | - | - | 65,688 | (65,688 | )(AAA) | - | ||||||||||||||||
| Total revenues | 50,158 | 18,507 | 68,665 | 65,688 | - | 134,353 | |||||||||||||||||
| - | - | - | - | ||||||||||||||||||||
| Costs and expenses | - | - | - | - | |||||||||||||||||||
| Cost of revenues- intellectual property operations | 12,766 | - | 12,766 | - | 12,766 | ||||||||||||||||||
| Cost of revenues- industrial operations | 7,326 | - | 7,326 | - | 2,325 | (FFF) | 44,872 | (AAA) | 54,523 | ||||||||||||||
| Cost of revenues- energy operations | 11,353 | 13,865 | 25,218 | - | 25,218 | ||||||||||||||||||
| Costs of sales, excluding depreciation and amortization | - | - | - | 44,872 | (44,872 | )(AAA) | - | ||||||||||||||||
| Engineering and development expenses- industrial operations | 312 | - | 312 | - | 430 | (AAA) | 742 | ||||||||||||||||
| Sales and marketing expenses- industrial operations | 2,942 | - | 2,942 | - | 3,818 | (AAA) | 6,760 | ||||||||||||||||
| Selling, general and administrative expenses | - | - | - | 11,833 | (11,833 | )(AAA) | - | ||||||||||||||||
| Depreciation | - | - | - | 1,728 | (1,728 | )(FFF) | - | ||||||||||||||||
| Amortization | - | - | - | 1,563 | (1,563 | )(FFF) | - | ||||||||||||||||
| Advisory fees | - | - | - | 758 | (758 | )(AAA) | - | ||||||||||||||||
| General and administrative expenses | 22,304 | 439 | 22,743 | - | 758 | (AAA) | 31,086 | ||||||||||||||||
| 7,585 | (AAA) | ||||||||||||||||||||||
| Other | - | - | - | - | - | ||||||||||||||||||
| Total costs and expenses | 57,003 | 14,304 | 71,307 | 60,754 | 131,095 | ||||||||||||||||||
| - | - | - | - | ||||||||||||||||||||
| Operating income (loss) | (6,845 | ) | 4,203 | (2,642 | ) | 4,934 | 3,258 | ||||||||||||||||
| - | - | - | - | ||||||||||||||||||||
| Other income (expense) | - | - | - | - | |||||||||||||||||||
| Equity securities investments: | - | - | - | - | |||||||||||||||||||
| Change in fair value of equity securities | (31,445 | ) | - | (31,445 | ) | - | (31,445 | ) | |||||||||||||||
| (Loss) gain on sale of equity securities | 28,861 | - | 28,861 | - | 28,861 | ||||||||||||||||||
| Net realized and unrealized gain (loss) | (2,584 | ) | - | (2,584 | ) | - | (2,584 | ) | |||||||||||||||
| Legal liability fee | (12,856 | ) | - | - | - | - | |||||||||||||||||
| Change in fair value of the Series A and B warrants and embedded derivatives | - | - | - | - | - | ||||||||||||||||||
| Gain (loss) on foreign currency exchange | (88 | ) | - | (88 | ) | - | (88 | ) | |||||||||||||||
| Interest expense | - | (2,232 | ) | (2,232 | ) | (999 | ) | (1,896 | )(BBB) | (4,128 | ) | ||||||||||||
| 999 | (DDD) | ||||||||||||||||||||||
| Interest income and other, net | 5,185 | - | 5,185 | - | 5,185 | ||||||||||||||||||
| Interest income | - | - | - | 17 | 17 | ||||||||||||||||||
| Other income (expense) | - | - | - | 29 | 29 | ||||||||||||||||||
| Transaction expenses | - | - | - | - | - | ||||||||||||||||||
| Total other income (expense) | (10,343 | ) | (2,232 | ) | 281 | (953 | ) | (1,569 | ) | ||||||||||||||
| - | - | - | - | ||||||||||||||||||||
| Income (loss) before income taxes | (17,188 | ) | 1,971 | (15,217 | ) | 3,981 | 966 | (897 | ) | (11,167 | ) | ||||||||||||
| Income tax benefit (provision) | 8,170 | (414 | ) | 7,756 | - | (368 | )(CCC) | 505 | (AAA) | 7,893 | |||||||||||||
| Provision for income taxes | - | - | - | (505 | ) | 505 | (AAA) | - | |||||||||||||||
| Net income (loss) including noncontrolling interests in subsidiaries | (9,018 | ) | 1,557 | (7,461 | ) | 3,476 | (3,274 | ) | |||||||||||||||
| Net income (loss) attributable to noncontrolling interests in subsidiaries | 386 | (522 | ) | (136 | ) | - | (136 | ) | |||||||||||||||
| Net (loss) income attributable to Acacia Research Corporation | (8,632 | ) | 1,035 | (7,597 | ) | 3,476 | (3,410 | ) | |||||||||||||||
| Income (loss) per share | |||||||||||||||||||||||
| Net income (loss) attributable to common stockholders - Basic | (8,632 | ) | |||||||||||||||||||||
| Weighted average number of shares outstanding - Basic | 99,912,854 | ||||||||||||||||||||||
| Basic net income (loss) per common share | (0.09 | ) | |||||||||||||||||||||
| Net income (loss) attributable to common stockholders - Diluted | (8,632 | ) | |||||||||||||||||||||
| Weighted average number of shares outstanding - Diluted | 99,912,854 | ||||||||||||||||||||||
| Diluted net income (loss) per common share | (0.09 | ) |
5
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
1. Basis of Presentation
The unaudited pro forma condensed combined financial information was prepared in accordance with Article 11 of Regulation S-X, and presents the pro forma financial condition and results of operations of Acacia based upon the historical financial information of Acacia, Revolution, and Deflecto after giving effect to the Transactions and related adjustments set forth in the notes to the unaudited pro forma condensed combined financial information.
The unaudited pro forma condensed combined balance sheet as of June 30, 2024, gives effect to the Transactions as if they had occurred on June 30, 2024. The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2023 and six months ended June 30, 2024, give effect to the Transactions as if they had occurred on January 1, 2023.
The unaudited pro forma condensed combined financial information has been prepared assuming both the acquisition of assets method of accounting (Revolution) and the business combination method of accounting (Deflecto) in accordance with GAAP. The accounting for asset acquisitions is accounted for by using a cost accumulation model, where the cost of the acquisition is allocated to the assets acquired on the basis of relative fair values. The accounting for business combinations is accounted for by using a fair value model, where the assets and liabilities acquired are recorded on the basis of their assumed fair values. The pro forma financial information is based on preliminary accounting conclusions and are subject to potential revisions with further analysis.
The pro forma adjustments represent management’s estimates based on information available as of the date of this filing and are subject to change as additional information becomes available and additional analyses are performed. Acacia management considers this basis of presentation to be reasonable under the circumstances.
2. Notes to Unaudited Pro Forma Condensed Combined Balance Sheet
The following adjustments were made related to the unaudited pro forma condensed combined balance sheet as of June 30, 2024:
| A. | The following reclassifications were made to conform Deflecto’s financial statement presentation to Acacia’s financial statement presentation: |
| · | The reclassification of $0.6 million of Deflecto’s Income Tax Payable to Accrued Expenses and Other Current Liabilities. |
| B. | Reflects the preliminary purchase price allocation adjustments to record Deflecto’s assets and liabilities at their fair value based on the cash consideration conveyed. The table below summarizes the fair values of the assets and liabilities assumed. |
| Cash and cash equivalents | $ | 11,316 | ||
| Accounts receivable, net | $ | 15,705 | ||
| Inventories, net (inclusive of Fair Value step up) | $ | 19,404 | ||
| Prepaid expenses and other current assets | $ | 4,438 | ||
| Deferred income tax assets, net | $ | 4,850 | ||
| Real & personal property | $ | 22,317 | ||
| Right of use assets | $ | 8,841 | ||
| Other intangible assets, net | $ | 31,104 | ||
| Goodwill | $ | 16,811 | ||
| Total Assets | $ | 134,786 | ||
| Current lease liability | $ | 2,614 | ||
| Long-term lease liability | $ | 6,353 | ||
| Accounts payable | $ | 8,836 | ||
| Accrued expenses | $ | 14,905 | ||
| Income tax payable | $ | 647 | ||
| Deferred income taxes | $ | 2,437 | ||
| Total Liabilities | $ | 35,792 |
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| C. | Reflects the drawdown of $48.0 million on the amended term loan, net of the debt issuance costs of $0.6 million which will be deferred and amortized over the term of the loan, which is set to mature in October 2029. |
| D. | Reflects the cash paid by Acacia to acquire Deflecto, inclusive of $59.9 million in cash paid to Deflecto’s former owners, $9.4 million in cash to fund escrow accounts, $21.4 million in existing debt payoff (inclusive of the Sellers Note) which was required to be paid off as a result of the acquisition under the terms of the debt agreements. |
| E. | Reflects the elimination of the Additional paid-in capital, Accumulated deficit, and Accumulated other comprehensive income not recognized as a part of the acquisition of Deflecto. |
| F. | Reflects the related income tax impact recognized as a result of the acquisition of Deflecto. |
| G. | Represents the $3.4 million of direct and incremental transaction costs expected to be incurred by Acacia related to the acquisition of Deflecto. These costs are non-recurring. |
| H. | Represents the $7.0 million indemnification asset recognized related to Canadian sales tax liabilities. |
| I. | Represents the $15.3 million in phantom equity payments due to certain executives owners of the Deflecto and required to be paid as a result of the acquisition under the terms of the phantom equity agreements. |
3. Notes to Unaudited Pro Forma Condensed Combined Statement of Operations
The following adjustments were made related to the unaudited pro forma condensed combined statements of operations for the year ended December 31, 2023:
| AA. | The following reclassifications were made to conform Deflecto’s financial statement presentation to Acacia’s financial statement presentation: |
| · | The reclassification of $131.8 million of Deflecto’s Net Sales to Industrial Operations. |
| · | The reclassification of $93.0 million of Deflecto’s Cost of Sales, excluding Depreciation and Amortization to Cost of Revenues – Industrial Operations. |
| · | The reclassification of $7.1 million, $0.7 million, and $14.0 of Deflecto’s Selling, General, and Administrative Expenses to Sales and Marketing Expenses – Industrial Operations, Engineering and Development Expenses – Industrial Operations, and General and Administrative Expenses, respectively. |
| · | The reclassification of $0.6 million of Deflecto’s Advisory Fees to General and Administrative Expenses. |
| · | The reclassification of $2.5 million of Deflecto’s Provision for Income Taxes to Income Tax Benefit (Provision). |
| BB. | Reflects incremental interest expense related to the drawdown on the term loan, as presented at adjustment (C), calculated based on an estimated interest rate of 7.7%. An increase or decrease in the interest rate of 50 basis points would result in an increase or decrease in interest expense of $0.2 million for the year ended December 31, 2023. This adjustment also includes the amortization of debt issuance costs of $0.6 million over the estimated five-year period of the credit facility. |
| CC. | Reflects the $0.05 million tax impact of associated with the Transaction and Financing Adjustments based on the statutory tax rate on a jurisdiction-by-jurisdiction basis (21% in the United States, 25% in Canada, 21 % in the United Kingdom, 15% in China, and 25% in India). No tax benefit was recognized for transaction costs as they are non-deductible. |
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| DD. | Reflects the $2.3 million of interest expense which will no longer be recognized as the associated debt was paid off in connection with the Transaction. |
| EE. | Represents the $3.4 million of direct and incremental transaction costs incurred by Acacia related to the acquisition of Deflecto. These costs are non-recurring. |
| FF. | Represents the elimination of the historical depreciation and amortization expense incurred by Deflecto of $3.7 million and $3.0 million, respectively, and recognition of depreciation and amortization expenses of $4.4 million expected to be incurred by Acacia as a result of the acquired fair value of the tangible and intangible assets acquired. |
| GG. | Reflects the pro forma adjustments made in connection with the acquisition of the Revolution assets and liabilities on April 17, 2024, as previously disclosed in the Company’s Form 8-K/A dated July 3, 2024. |
| HH. | Reflects the elimination of certain income tax valuation allowances that were recognized due to the cumulative income of the combined entities. |
4. Notes to Unaudited Pro Forma Condensed Combined Statement of Operations
The following adjustments were made related to the unaudited pro forma condensed combined statements of operations for the six months ended June 30, 2024:
| AAA. | The following reclassifications were made to conform Deflecto’s financial statement presentation to Acacia’s financial statement presentation: |
| · | The reclassification of $65.7 million of Deflecto’s Net Sales to Industrial Operations. |
| · | The reclassification of $44.9 million of Deflecto’s Cost of Sales, excluding Depreciation and Amortization to Cost of Revenues – Industrial Operations. |
| · | The reclassification of $3.8 million, $0.4 million, and $7.6 of Deflecto’s Selling, General, and Administrative Expenses to Sales and Marketing Expenses – Industrial Operations, Engineering and Development Expenses – Industrial Operations, and General and Administrative Expenses, respectively. |
| · | The reclassification of $0.8 million of Deflecto’s Advisory Fees to General and Administrative Expenses. |
| · | The reclassification of $0.5 million of Deflecto’s Provision for Income Taxes to Income Tax Benefit. |
| BBB. | Reflects incremental interest expense related to the drawdown on the revolving credit facility, as presented at adjustment (C), calculated based on an estimated interest rate of 7.7%. An increase or decrease in the interest rate of 50 basis points would result in an increase or decrease in interest expense of $0.1 million for the six months ended June 30, 2024. This adjustment also includes the amortization of debt issuance costs of $0.6 million over the estimated five-year period of the credit facility. |
| CCC. | Reflects the $0.4 million tax impact of associated with the Transaction and Financing Adjustments based on the statutory tax rate on a jurisdiction-by-jurisdiction basis (21% in the United States, 25% in Canada, 21 % in the United Kingdom, 15% in China, and 25% in India). No tax benefit was recognized for transaction costs as they are non-deductible. |
| DDD. | Reflects the $1.0 million of interest expense which will no longer be recognized as the associated debt was paid off in connection with the Transaction. |
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| EEE. | See Note 6 for discussion of the impact of the previous acquisition of the Revolution assets and liabilities on April 17, 2024, as previously disclosed in the Company’s Form 8-K/A dated July 3, 2024. |
| FFF. | Represents the elimination of the historical depreciation and amortization expense incurred by Deflecto of $1.7 million and $1.6 million, respectively, and recognition of depreciation and amortization expenses of $2.3 million expected to be incurred by Acacia as a result of the acquired fair value of the tangible and intangible assets acquired. |
5. Unaudited Pro Forma Net Income Per Share
Acacia computes unaudited pro forma basic net income per share attributable to common stockholders using the two-class method required for capital structures that include participating securities. Under the two-class method, securities that participate in non-forfeitable dividends, such as the Acacia’s outstanding unvested restricted stock and Series A Redeemable Convertible Preferred Stock, are considered participating securities and are allocated a portion of the Acacia’s earnings.
Unaudited basic net income per share of common stock is computed by dividing unaudited pro forma net income attributable to common stockholders by the weighted average number of shares of common stock outstanding for the period. Unaudited pro forma diluted net income per share of common stock is computed by dividing unaudited pro forma net income attributable to common stockholders by the weighted average number of common and dilutive common equivalent shares outstanding for the period using the treasury stock method or the as-converted method, or the two-class method for participating securities, whichever is more dilutive.
| For the Twelve Months Ended | ||||
| (In thousands, except share and per share data) | December 31, 2023 | |||
| Numerator | ||||
| Pro forma net profit (loss) - basic and diluted | 68,815 | |||
| Less: | ||||
| Dividend on Series A redeemable convertible preferred stock | (1,400 | ) | ||
| Accretion of Series A redeemable convertible preferred stock | (3,230 | ) | ||
| Return on Settlement of Series A redeemable convertible preferred stock | (3,377 | ) | ||
| Undistributed earnings allocated to participating securities | (4,029 | ) | ||
| Net earnings (loss) allocated to common shares | 56,779 | |||
| Denominator | ||||
| Pro forma weighted average shares of common stock outstanding - basic | 75,296,025 | |||
| Pro forma basic earnings (loss) per share | 0.75 | |||
| Add: | ||||
| Interest expense associated with Starboard Notes | 1,518 | |||
| Undistributed earnings allocated to participating securities | 4,029 | |||
| Less: | ||||
| Change in fair value and gain on exercise of dilutive Series B warrants | (4,287 | ) | ||
| Reallocation of undistributed earnings to participating securities | (3,172 | ) | ||
| Net earnings (loss) allocated to common shares - diluted | 54,867 | |||
| Denominator | ||||
| Pro forma weighted average shares of common stock outstanding - basic | 92,411,818 | |||
| Pro forma basic earnings (loss) per share - diluted | 0.59 | |||
| For the Six Months Ended | ||||
| (In thousands, except share and per share data) | June 30, 2024 | |||
| Numerator | ||||
| Pro forma net profit (loss) - basic and diluted | (3,410 | ) | ||
| Less: | ||||
| Dividend on Series A redeemable convertible preferred stock | - | |||
| Accretion of Series A redeemable convertible preferred stock | - | |||
| Net earnings (loss) allocated to common shares | (3,410 | ) | ||
| Net earnings (loss) allocated to common shares - diluted | (3,410 | ) | ||
| Denominator | ||||
| Pro forma weighted average shares of common stock outstanding - basic | 99,912,854 | |||
| Pro forma basic earnings (loss) per share | (0.03 | ) | ||
| Denominator | ||||
| Pro forma weighted average shares of common stock outstanding - basic | 99,912,854 | |||
| Pro forma basic earnings (loss) per share - diluted | (0.03 | ) | ||
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6. Pro Forma Adjustments for Revolution Acquisition
The results of operations of Revolution are recorded in Acacia’s financial statements effective April 18, 2024 (the day post-closing) and therefore we have reflected adjustments to the unaudited pro forma condensed combined statements of operations for the period ended June 30, 2024 to reflect the pre-acquisition period.
| Financial Statement Line Item | January 1, 2024 through March 31, 2024 | April 1, 2024 through April 17, 2024 | Adjustments | January 1, 2024 through April 17, 2024 | ||||||||||||
| Energy operations | $ | 15,501 | $ | 3,006 | $ | - | $ | 18,507 | ||||||||
| Cost of revenues -energy operations | $ | 9,931 | $ | 1,412 | $ | 2,522 | (1) | $ | 13,865 | |||||||
| General and administrative expense | $ | 439 | $ | - | $ | - | $ | 439 | ||||||||
| Other | $ | 235 | $ | - | $ | (235 | )(2) | $ | - | |||||||
| Interest expense | $ | (1,374 | ) | $ | - | $ | (858 | )(3) | $ | (2,232 | ) | |||||
| Interest income and other, net | $ | (715 | ) | $ | - | $ | 715 | (4) | $ | - | ||||||
| Income tax expense | $ | (414 | )(5) | |||||||||||||
| Net income attributable to noncontrolling interests in subsidiaries | $ | (522 | )(6) | |||||||||||||
| (1) | Represents the increase in depletion and amortization of the acquired oil and gas properties acquired as a result of an increase in the allocation fair value as previously disclosed in the Company’s Form 8-K/A dated July 3, 2024. |
| (2) | The loss on the divestiture of the oil and gas properties which took place prior to the acquisition of the Revolution assets is not attributable to the oil and gas properties acquired and therefore not recognized. |
| (3) | Represents the net increase in interest expense as a result of the payoff of the previous loan and drawdown on the new debt as previously disclosed in the Company’s Form 8-K/A dated July 3, 2024. |
| (4) | The loss on derivatives is not attributable to the oil and gas properties which were acquired and therefore not recognized. |
| (5) | Represents the income tax expense recognized at the Corporate Statutory tax rate of 21%. |
| (6) | Represents the net income attributable to noncontrolling interest. As previously disclosed in the Company’s Form 8-K/A dated July 3, 2024, Acacia has a 73.5% interest in Benchmark, the majority-owned subsidiary of Acacia which was the acquiror of the Revolution assets. |
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