8-K/A
Crocs, Inc. (CROX)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
(Amendment No. 1)
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of report (Date of earliest event reported): February 17, 2022
CROCS, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 0-51754 | 20-2164234 | |
|---|---|---|---|
| (State or other jurisdiction | (Commission File Number) | (I.R.S. Employer | |
| of incorporation) | Identification No.) | ||
| 13601 Via Varra | |||
| Broomfield, | Colorado | 80020 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (303) 848-7000
Not Applicable
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
☐ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
☐ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
☐ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
☐ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class: | Trading symbol: | Name of each exchange on which registered: |
|---|---|---|
| Common Stock, par value $0.001 per share | CROX | The Nasdaq Global Select Market |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (17 CFR 230.45) or Rule 12b-2 of the Securities Exchange Act of 1934 (17 CFR 240.12b-2).
Emerging growth company ☐
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
On February 18, 2022, Crocs, Inc. (the “Company”) filed a Current Report on Form 8-K (the “Initial Form 8-K”) to report the completion of its acquisition (the “Acquisition”) of HEYDUDE®, a privately-owned casual footwear brand, pursuant to a Securities Purchase Agreement (the “Agreement”) by and among: (i) the Company; (ii) Full Fortune Wealth Limited, a company with limited liability incorporated under the laws of Hong Kong (“HK Seller”); (iii) Mr. Daniele Guidi (“US Seller” and, together with HK Seller, the “Sellers”); (iv) Full Fortune Intellectual Limited, a company with limited liability incorporated under the laws of Hong Kong (“FF Intellectual”); (v) Full Fortune Worldwide Limited, a company with limited liability incorporated under the laws of Hong Kong (“FF Worldwide”); (vi) Full Fortune Online Limited, a company with limited liability incorporated under the laws of Hong Kong (“FF Online” and collectively with FF Intellectual and FF Worldwide the “HK Acquired Companies”); (vii) Happy One LLC, a limited liability company formed under the laws of the State of Nevada (“Happy One”); (viii) Lucky Top Inc., a corporation incorporated under the laws of the State of Delaware (“Lucky Top” and together with Happy One, the “US Acquired Companies”); (ix) Mr. Alessandro Rosano (“Guarantor”); and (x) HK Seller, in its capacity as representative and agent for the Sellers.
Upon completion of the Acquisition, the Company purchased of all of the issued and outstanding equity securities of each of the HK Acquired Companies and the US Acquired Companies pursuant to the Agreement. Guarantor indirectly owned all of the equity securities of HK Seller, and HK Seller owned all of the equity securities of each of the HK Acquired Companies, which constituted all of the issued and outstanding equity securities of the HK Acquired Companies, and US Seller owned all of the equity securities of the US Acquired Companies.
The Company is filing this Amendment No. 1 to the Initial Form 8-K to include the historical financial statements of the HK Acquired Companies and the US Acquired Companies and pro forma condensed combined financial information required to be filed under Item 9.01 of Form 8-K. The disclosure included in the Initial Form 8-K otherwise remains unchanged.
Item 9.01. Financial Statements and Exhibits.
(a) Financial Statements of Businesses Acquired.
The audited combined financial statements of the HK Acquired Companies as of and for the year ended March 31, 2021 are attached as Exhibit 99.1 to this Current Report on Form 8-K/A and are incorporated by reference herein. The audited combined financial statements of the US Acquired Companies as of and for the year ended December 31, 2021 are attached as Exhibit 99.2 to this Current Report on Form 8-K/A and are incorporated by reference herein. The unaudited interim combined financial statements of the HK Acquired Companies as of and for the nine months ended December 31, 2021 are attached as Exhibit 99.3 to this Current Report on Form 8-K/A and are incorporated by reference herein.
(b) Pro Forma Financial Information.
The unaudited pro forma combined financial statements and related notes as of and for the year ended December 31, 2021, giving effect to the Acquisition, are attached as Exhibit 99.4 to this Current Report Form 8-K/A and are incorporated by reference herein.
(d) Exhibits.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| CROCS, INC. | ||
|---|---|---|
| Date: May 5, 2022 | By: | /s/ Daniel P. Hart |
| Daniel P. Hart | ||
| Executive Vice President, Chief Legal and Risk Officer |
4
Document
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in Registration Statement No. 333-144705, 333-176696, 333-204841, 333-221385 and 333-239089, and in Post-Effective Amendments No. 1 to Registration Statement Nos. 333-176696, 333-204841 and 333-221385 on Form S-8 of Crocs, Inc. of our report dated April 29, 2022, relating to the combined financial statements of Full Fortune Worldwide Limited, Full Fortune Intellectual Limited and Full Fortune Online Limited as of and for the year ended March 31, 2021 appearing in this Current Report on Form 8-K/A of Crocs, Inc.
/s/ Ernst & Young
Hong Kong, the People’s Republic of China
April 29, 2022
Document
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statement Nos. 333-144705, 333-176696, 333-204841, 333-221385 and 333-239089, and in Post-Effective Amendments No. 1 to Registration Statement Nos. 333-176696, 333-204841 and 333-221385 on Form S-8 of Crocs, Inc. of our report dated May 5, 2022, relating to the combined financial statements of Happy One LLC and Lucky Top Inc. appearing in this Current Report on Form 8-K of Crocs, Inc. filed on May 5, 2022.
/s/ Deloitte & Touche LLP
Denver, Colorado
May 5, 2022
Document
Exhibit 99.1
Audited Combined Financial Statements
FULL FORTUNE WORLDWIDE LIMITED
FULL FORTUNE INTELLECTUAL LIMITED
FULL FORTUNE ONLINE LIMITED
Year ended March, 31 2021
FULL FORTUNE WORLDWIDE LIMITED
FULL FORTUNE INTELLECTUAL LIMITED
FULL FORTUNE ONLINE LIMITED
CONTENTS
| Pages | |
|---|---|
| REPORT OF INDEPENDENT AUDITORS | 1 |
| AUDITED COMBINED FINANCIAL STATEMENTS | |
| Combined balance sheet | 2 |
| Combined statement of comprehensive income | 3 |
| Combined statement of changes in stockholders' equity | 4 |
| Combined statement of cash flows | 5 |
| Notes to combined financial statements | 6 - 15 |
Report of Independent Auditors
To the Board of Directors and Shareholders of Full Fortune Worldwide Limited, Full Fortune Intellectual Limited and Full Fortune Online Limited
We have audited the accompanying combined financial statements of Full Fortune Worldwide Limited, Full Fortune Intellectual Limited and Full Fortune Online Limited (the "Group"), which comprise the combined balance sheet as of March 31, 2021, and the related combined statement of comprehensive income, changes in stockholders' equity and cash flows for the year then ended, and the related notes to the combined financial statements.
Management's Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these combined financial statements in conformity with U.S. generally accepted accounting principles; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of combined financial statements that are free of material misstatement, whether due to fraud or error.
Auditor's Responsibility
Our responsibility is to express an opinion on these combined financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free of material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the combined financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the combined financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the combined financial statements 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 entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the combined financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of the Group at March 31, 2021, and the combined results of their operations and their cash flows for the year then ended in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young
Hong Kong, the People’s Republic of China
April 29, 2022
FULL FORTUNE WORLDWIDE LIMITED
FULL FORTUNE INTELLECTUAL LIMITED
FULL FORTUNE ONLINE LIMITED
COMBINED BALANCE SHEET
| Notes | As of March 31, 2021 | |
|---|---|---|
| US$ | ||
| ASSETS | ||
| Current assets: | ||
| Cash and cash equivalents | 37,563,915 | |
| Accounts receivable | 18,230,198 | |
| Prepaid expenses and other assets | 1,693,677 | |
| Total current assets | 57,487,790 | |
| Non-current assets: | ||
| Intangible assets | 3 | 3,026,426 |
| Total non-current assets | 3,026,426 | |
| Total assets | 60,514,216 | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||
| Current liabilities: | ||
| Accounts payable | 1,444,733 | |
| Accrued expenses and other liabilities | 1,509,365 | |
| Amount due to a related party | 4 | 2,057 |
| Income tax payable | 9,399,477 | |
| Total current liabilities | 12,355,632 | |
| Commitments and contingencies | 7 | |
| Non-current liabilities: | ||
| Deferred tax liabilities | 6 | 99,872 |
| Total non-current liabilities | 99,872 | |
| Total liabilities | 12,455,504 | |
| Stockholders’ equity: | ||
| Common stock | 3,840 | |
| Retained earnings | 48,054,872 | |
| Total stockholders’ equity | 48,058,712 | |
| Total liabilities and stockholders’ equity | 60,514,216 |
The accompanying notes are an integral part of these combined financial statements.
FULL FORTUNE WORLDWIDE LIMITED
FULL FORTUNE INTELLECTUAL LIMITED
FULL FORTUNE ONLINE LIMITED
COMBINED STATEMENT OF COMPREHENSIVE INCOME
| Notes | For the year ended March 31, 2021 | |
|---|---|---|
| US$ | ||
| Revenues | 150,322,925 | |
| Cost of sales | (91,311,870) | |
| Gross profit | 59,011,055 | |
| Selling and administrative expenses | (1,932,240) | |
| Other income, net | 5 | 495,406 |
| Income before income taxes | 57,574,221 | |
| Income taxes | 6 | (9,499,349) |
| Net income and total comprehensive income | 48,074,872 |
The accompanying notes are an integral part of these combined financial statements.
FULL FORTUNE WORLDWIDE LIMITED
FULL FORTUNE INTELLECTUAL LIMITED
FULL FORTUNE ONLINE LIMITED
COMBINED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
| Note | Common stock | Retained earnings | Total stockholders’ equity | |
|---|---|---|---|---|
| US$ | US$ | US$ | ||
| Balance as of April 1, 2020 | 2,560 | — | 2,560 | |
| Issuance of ordinary shares | 1,280 | — | 1,280 | |
| Net income | — | 48,074,872 | 48,074,872 | |
| Dividends | 4 | — | (20,000) | (20,000) |
| Balance as of March 31, 2021 | 3,840 | 48,054,872 | 48,058,712 |
The accompanying notes are an integral part of these combined financial statements.
FULL FORTUNE WORLDWIDE LIMITED
FULL FORTUNE INTELLECTUAL LIMITED
FULL FORTUNE ONLINE LIMITED
COMBINED STATEMENT OF CASH FLOWS
| Notes | For the year ended March 31, 2021 | |
|---|---|---|
| US$ | ||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||
| Net income | 48,074,872 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | ||
| Deferred income tax expense | 99,872 | |
| Changes in operating assets and liabilities: | ||
| Accounts receivable | (18,230,198) | |
| Prepaid expenses and other assets | (1,693,677) | |
| Accounts payable | 1,444,733 | |
| Accrued expenses and other liabilities | 3 | 1,009,365 |
| Amount due to a related party | 4 | 2,560 |
| Amount due from a related party | 4 | 2,057 |
| Income tax payable | 9,399,477 | |
| Net cash provided by operating activities | 40,109,061 | |
| CASH FLOW FROM INVESTING ACTIVITIES | ||
| Addition to intangible assets | 3 | (2,526,426) |
| Net cash used in investing activities | (2,526,426) | |
| CASH FLOW FROM FINANCING ACTIVITIES | ||
| Issuance of ordinary shares | 1,280 | |
| Payment of dividends | 4 | (20,000) |
| Net cash used in financing activities | (18,720) | |
| NET INCREASE IN CASH AND CASH EQUIVALENTS | 37,563,915 | |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR | — | |
| CASH AND CASH EQUIVALENTS AT THE END OF YEAR | 37,563,915 |
The accompanying notes are an integral part of these combined financial statements.
FULL FORTUNE WORLDWIDE LIMITED
FULL FORTUNE INTELLECTUAL LIMITED
FULL FORTUNE ONLINE LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS
(Expressed in U.S. dollars (“US$”), except for number of shares)
1. ORGANIZATION AND BASIS OF PREPARATION
Full Fortune Worldwide Limited, Full Fortune Intellectual Limited and Full Fortune Online Limited (collectively known as the “Full Fortune Entities” or the “Group”) were incorporated in Hong Kong on March 10, 2020, March 10, 2020 and March 29, 2021, respectively, and were wholly and directly owned upon their respective incorporation by Full Fortune Wealth Limited (“FF Wealth”), a private company incorporated in Hong Kong. During the current year, the principal activities of the Group were the design and trading of leisure footwear.
On February 17, 2022, the Full Fortune Entities were acquired by Crocs Malta Holdings Ltd, a wholly owned subsidiary of Crocs, Inc., a United States of America (“U.S.”) Securities and Exchange Commission registrant.
The accompanying combined financial statements and related notes are presented in accordance with generally accepted accounting principles in the U.S. (“U.S. GAAP”). The combined financial statements include the accounts of the Full Fortune Entities. During the year ended March 31, 2021, the Full Fortune Entities were under common control of FF Wealth. Significant intercompany transactions and balances have been eliminated on combination. These financial statements are presented in United States dollars (“US$”), which is also the functional currency of the Group.
2.1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of estimates
The preparation of the combined financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the combined financial statements and the reported amounts of revenues and expenses during the year. Significant estimates reflected in the Group's combined financial statements include, but are not limited to, tax provision. Management bases its estimates on historical experience and on various other market-specific and relevant assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Changes in facts and circumstances may result in revised estimates. Actual results could differ from those estimates, and as such, differences may be material to the combined financial statements.
FULL FORTUNE WORLDWIDE LIMITED
FULL FORTUNE INTELLECTUAL LIMITED
FULL FORTUNE ONLINE LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS
(Expressed in U.S. dollars (“US$”), except for number of shares)
2.1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Cash and cash equivalents
Cash and cash equivalents consist of cash on hand which are unrestricted as to withdrawal or use.
Accounts receivable
Accounts receivable are stated at invoiced amount, net of allowance for doubtful accounts. The Group estimates an allowance for doubtful accounts based upon the collectability of the receivables in light of historical trends, reasonable and supportable information of the customers' economic conditions that may affect the customers' ability to pay and prevailing economic conditions. This evaluation is done in order to identify issues that may impact the collectability of receivables and related estimated required allowance. Revisions to the allowance are recorded as an adjustment to bad debt expense. After appropriate collection efforts are exhausted, specific accounts receivable deemed to be uncollectible are charged against the allowance in the period they are deemed uncollectible. Recoveries of accounts receivable previously written-off are recorded as credits to bad debt expense. No allowance for doubtful accounts was recorded as of March 31, 2021.
Indefinite-lived intangible assets
Indefinite-lived intangible assets primarily consist of acquired trademarks. Such indefinite-lived intangible assets are assessed for impairment at least annually. The Group generally performs its annual indefinite-lived intangible assets impairment analyses using a qualitative approach to determine whether it is more likely than not that the fair values of such assets are less than their respective carrying values. If, based on the results of the qualitative assessment, it is concluded that it is not more likely than not that the fair value of the asset exceeds its carrying value, a quantitative test is performed. Under the quantitative test, if the carrying value of the asset exceeds its fair value, an impairment loss is recognised in the amount of the excess.
FULL FORTUNE WORLDWIDE LIMITED
FULL FORTUNE INTELLECTUAL LIMITED
FULL FORTUNE ONLINE LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS
(Expressed in U.S. dollars (“US$”), except for number of shares)
2.1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income tax
The Group accounts for income taxes using the liability approach and recognizes deferred tax assets and liabilities for the expected future consequences of events that have been recognized in the combined financial statements or in the Group's tax returns. Deferred tax assets and liabilities are recognized on the basis of the temporary differences that exist between the tax basis of assets and liabilities and their reported amounts in the combined financial statements using enacted tax rates in effect for the year in which the differences are expected to reverse. Changes in deferred tax assets and liabilities are recorded in earnings. Deferred tax assets are reduced by a valuation allowance through a charge to income tax expense when, in the opinion of management, it is more-likely-than-not that a portion of or all of the deferred tax assets will not be realized. Potential for recovery of deferred tax assets is evaluated by estimating the future taxable profits expected and considering prudent and feasible tax planning strategies. The components of the deferred tax assets and liabilities are classified as non-current.
The Group accounts for uncertainty in income taxes recognized in the combined financial statements by applying a two-step process to determine the amount of the benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon external examination by the taxing authorities. If the tax position is deemed more-likely-than-not to be sustained (defined as a likelihood of more than fifty percent of being sustained upon an audit, based on the technical merits of the tax position), the tax position is then assessed to determine the amount of benefits to recognize in the combined financial statements. The amount of the benefits that may be recognized is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement. Interest and penalties on income taxes will be classified as a component of the provisions for income taxes. The Group did not recognize any income tax due to uncertain tax position or incur any interest and penalties related to potential underpaid income tax expenses for the year ended March 31, 2021.
Revenue recognition
The Group adopted ASC 606, Revenue from Contracts with Customers using the full retrospective method on April 1, 2020. Revenue transactions associated with the sale of footwear is a single performance obligation, which consists of the sale of products to wholesale customers. The Group satisfies the performance obligation and records revenues at a point in time when transfer of control to the customers has occurred, based on the terms of sale. A customer is considered to have control once they are able to direct the use of and obtain substantially all of the benefits of the product. Control is transferred upon shipment.
FULL FORTUNE WORLDWIDE LIMITED
FULL FORTUNE INTELLECTUAL LIMITED
FULL FORTUNE ONLINE LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS
(Expressed in U.S. dollars (“US$”), except for number of shares)
2.1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Cost of sales
Cost of sales consists of purchase costs of footwear from the suppliers, commissions for procurement, design fee and expenses incurred for quality control of footwear.
Advertising expenses
Advertising expenses represents expenses relating to the marketing of the Group's offline sales channels. Advertising expenses are charged to “Selling and administrative expenses” as incurred which amounted to US$228,429 for the year ended March 31, 2021.
Contract liabilities
Contract liabilities represents cash payments received in advance of the Group's transfer of control of products to its customers. Contract liabilities are recognised as revenue when the Group performs under the contract (i.e., transfers control of the related goods or services to the customer). At March 31, 2021, US$911,855 of deferred revenues associated with advance customer deposits were reported in “Accrued expenses and other liabilities” in the combined balance sheet.
Employee benefits
All eligible employees of the Group are entitled to staff welfare benefits including medical care and pension benefits through a mandatory provident fund scheme under the Mandatory Provident Fund Schemes Ordinance in Hong Kong. The Group is required to make contributions to the plan based on a percentage of the employees' basic salaries and are charged to “Selling and administrative expenses” as and when the contributions fall due. The Group recorded employee benefit expenses of US$10,556 for the year ended March 31, 2021.
Leases
Leases where substantially all the rewards and risks of ownership of assets remain with the lessor are accounted for as operating leases. Rental costs applicable to such operating leases are recognized on a straight-line basis over the lease term. Certain of the operating lease agreements contain rent holidays. Rent holidays are considered in determining the straight-line rent expense to be recorded over the lease term.
Foreign currency transaction
The Group's functional and reporting currency is US$. Transactions denominated in foreign currencies are measured at the exchange rates prevailing on the transaction dates. Monetary assets and liabilities denominated in foreign currencies are remeasured at the exchange rates prevailing at the balance sheet date. Non-monetary items that are measured in terms of historical cost in foreign currency are remeasured using the exchange rates at the dates of the initial transactions. Exchange gains and losses are included in "Other income, net" in the combined statement of comprehensive income.
FULL FORTUNE WORLDWIDE LIMITED
FULL FORTUNE INTELLECTUAL LIMITED
FULL FORTUNE ONLINE LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS
(Expressed in U.S. dollars (“US$”), except for number of shares)
2.1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Fair value measurements of financial instruments
The carrying amounts of cash and cash equivalents, accounts receivable, other assets, amount due to a related party, accounts payable, and financial liabilities included in accrued expense and other liabilities approximate to their to fair values due to the short term maturity of these financial instruments.
2.2 CONCENTRATION OF RISKS
Concentration of credit risk
Financial instruments that potentially subject the Group to significant concentration of credit risk consist primarily of cash and cash equivalents and accounts receivable. As of March 31, 2021, all cash and cash equivalents were held by financial institutions located in Hong Kong, which management believes are of high credit quality. Accounts receivable are typically unsecured and derived from revenue earned from customers in the U.S., which are exposed to credit risk. The risk is mitigated by credit evaluations the Group performs on its customers and its ongoing monitoring process of outstanding balances.
During the year ended and as of March 31, 2021, 86.6% of revenue and 97.5% of the total accounts receivable were due from a customer, Lucky Top Inc.
Business and economic risks
The Group believes that changes in the following areas could have a material adverse effect on the Group's future financial position, results of operations or cash flows: changes in the overall demand for the Group's products; competitive pressures due to new entrants; strategic relationships or customer relationships; regulatory considerations; and risks associated with the Group's ability to attract and retain employees necessary to support its growth.
Impact of the outbreak of Coronavirus disease ("COVID-19")
During the year ended March 31, 2021, COVID-19 has not had a material impact to the Group's operations.
There are still uncertainties of COVID-19's future impact, and the extent of the impact will depend on a number of factors, including the duration and severity of COVID-19, the development and progress of distribution of COVID-19 vaccine and other medical treatment, the potential change in user behavior, especially on internet usage due to the prolonged impact of COVID-19, the actions taken by government authorities, particularly to contain the outbreak, stimulate the economy to improve business condition especially for small and medium enterprises, almost all of which are beyond the Group's control.
Management will continuously assess the impact of COVID-19 on the Group's operations and financial position and closely monitor the Group's exposure to the risks and uncertainties in connection with COVID-19.
FULL FORTUNE WORLDWIDE LIMITED
FULL FORTUNE INTELLECTUAL LIMITED
FULL FORTUNE ONLINE LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS
(Expressed in U.S. dollars (“US$”), except for number of shares)
2.3 RECENT ACCOUNTING PRONOUNCEMENTS
(i)Leases
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") No. 2016-02, Leases (Topic 842) ("ASU 2016-02"). ASU 2016-02 modifies existing guidance for off-balance sheet treatment of a lessees' operating leases by requiring lessees to recognise lease assets and lease liabilities. Under ASU 2016-02, lessor accounting is largely unchanged. ASU 2016-02 is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020.
In June 2020, the FASB issued ASU No 2020-05, Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842): Effective Dates for certain entities, and private companies that have not yet issued (or made available for issuance) financial statements are now required to adopt the new leases standard for annual reporting periods beginning after December 15, 2021 and interim reporting periods in annual reporting periods beginning after December 15, 2022. Early adoption is permitted. The Group does not plan to early adopt the standard and it is in the process of evaluating the impact adopting this new standard will have on its combined financial statements.
(ii)Measurement of credit losses on financial instruments
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). ASU 2016-13 changes the impairment model for most financial assets and certain other instruments. The standard will replace "incurred loss" approach with an "expected loss" model for instruments measured at amortised cost. The standard is effective for the private companies for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, with early adoption permitted. The Group does not plan to early adopt the standard and it is in the process of evaluating the impact adopting this new standard will have on its combined financial statements.
(iii)Simplifying the Accounting for Income Taxes
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This update simplifies the accounting for income taxes as part of the FASB's overall initiative to reduce complexity in accounting standards. The amendments include removal of certain exceptions to the general principles of ASC 740, Income taxes, and simplification in several other areas such as accounting for a franchise tax (or similar tax) that is partially based on income. The update will be effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early adoption is permitted. Certain amendments in this update should be applied retrospectively or modified retrospectively, while all other amendments should be applied prospectively. The Group does not plan to early adopt the standard and it is in the process of evaluating the impact adopting this new standard will have on its combined financial statements.
FULL FORTUNE WORLDWIDE LIMITED
FULL FORTUNE INTELLECTUAL LIMITED
FULL FORTUNE ONLINE LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS
(Expressed in U.S. dollars (“US$”), except for number of shares)
3. ASSET ACQUISITION
In April 2020, the Group acquired certain indefinite-lived intangible assets, including trademarks and internet domain names, from Full Fortune Brands Limited for a cash consideration of US$3,000,000 and accounted for this transaction as an asset acquisition.
| As of March 31, 2021 | |
|---|---|
| US$ | |
| Trademarks | 3,026,426 |
No impairment losses were recognized for the year ended March 31, 2021.
As of March 31, 2021, US$500,000 of the total consideration remains outstanding and is recorded in “Accrued expenses and other liabilities” in the combined balance sheet.
4. RELATED PARTY TRANSACTIONS
During the year ended March 31, 2021, Full Fortune Intellectual Limited declared an interim dividend of US$2 per ordinary share, totaling US$20,000, to FF Wealth.
As of March 31, 2020, proceeds amounting to US$2,560 for the issuance of common stock was due from FF Wealth. During the year ended March 31, 2021, FF Wealth paid the proceeds due in full.
During the year ended March 31, 2021, a director settled expenses of US$2,057 on behalf of the Group. As of March 31, 2021, the outstanding balance amounting to US$2,057 is unsecured, interest-free and repayable on demand.
FULL FORTUNE WORLDWIDE LIMITED
FULL FORTUNE INTELLECTUAL LIMITED
FULL FORTUNE ONLINE LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS
(Expressed in U.S. dollars (“US$”), except for number of shares)
5. OTHER INCOME, NET
Other income, net consist of the following:
| For the year ended March 31, 2021 | |
|---|---|
| US$ | |
| Foreign exchange difference, net | 468,507 |
| Other gain | 26,880 |
| Bank interest income | 19 |
| 495,406 |
6. TAXATION
Hong Kong
The Group was incorporated in Hong Kong and is subject to income tax at the rate of 16.5% on the estimated assessable profits arising in Hong Kong.
The current and deferred components of income tax expense appearing in the combined statement of comprehensive income is as follows:
| For the year ended March 31, 2021 | |
|---|---|
| US$ | |
| Current income tax expense | 9,399,477 |
| Deferred income tax expense | 99,872 |
| Total income tax expense | 9,499,349 |
FULL FORTUNE WORLDWIDE LIMITED
FULL FORTUNE INTELLECTUAL LIMITED
FULL FORTUNE ONLINE LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS
(Expressed in U.S. dollars (“US$”), except for number of shares)
6. TAXATION (continued)
The significant components of deferred taxes is as follows:
| As of March 31, 2021 | |
|---|---|
| US$ | |
| Non-current deferred tax liabilities | |
| Intangible assets arising from asset acquisition | 99,872 |
| Net deferred tax liabilities | 99,872 |
The reconciliation of tax computed by applying the Hong Kong statutory tax rate of 16.5% to income tax expenses is as follows:
| For the year ended March 31, 2021 | |
|---|---|
| US$ | |
| Income before income taxes | 57,574,221 |
| Income tax computed at the statutory tax rate of 16.5% | 9,499,746 |
| Non-taxable income | (3) |
| Non-deductible expenses | 17,255 |
| Lower tax rate enacted by local authority | (21,271) |
| Others | 3,622 |
| Income tax expenses | 9,499,349 |
FULL FORTUNE WORLDWIDE LIMITED
FULL FORTUNE INTELLECTUAL LIMITED
FULL FORTUNE ONLINE LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS
(Expressed in U.S. dollars (“US$”), except for number of shares)
7. COMMITMENTS AND CONTINGENCIES
Commitments
The Group leases offices and apartment under operating leases. The leases were negotiated for terms ranging from 1 to 2 years.
At March 31, 2021, the total future minimum lease payments under non-cancellable operating leases are payable as follows:
| US$ | |
|---|---|
| Within 1 year | 240,671 |
| After 1 year but within 2 years | 88,711 |
| 329,382 |
Payments under operating leases are expensed on a straight-line basis over the periods of their respective leases. For the year ended March 31, 2021, total rental expenses for all operating leases amounted to approximately US$130,291.
Contingencies
The Group is currently not involved in any legal or administrative proceedings that may have a material adverse impact on the Group's business, financial position or results of operations.
8. SUBSEQUENT EVENTS
In preparing the audited combined financial statements, the Group has evaluated events and transactions for potential recognition and disclosure through April 29, 2022, the date the combined financial statements were available to be issued.
Subsequent to March 31, 2021, Full Fortune Worldwide Limited declared interim dividends of US$1,000,000, US$5,000,000 and US$93,800,000 to FF Wealth, which were settled in August 2021, December 2021 and February 2022, respectively.
Subsequent to March 31, 2021, Full Fortune Intellectual Limited declared interim dividends of US$1,000,000, US$5,000,000 and US$750,000 to FF Wealth, which were settled in November 2021, December 2021 and February 2022, respectively.
15
Document
Exhibit 99.2
HAPPY ONE LLC LUCKY TOP INC.
FINANCIAL STATEMENTS AND FOOTNOTES
12/31/2021
Table of Contents
INDEX TO THE COMBINED FINANCIAL STATEMENTS
| Financial Statements: | |
|---|---|
| Independent Auditor’s Report | F-2 |
| Combined Statement of Operations for the Twelve Months Ended December 31, 2021 | F-4 |
| Combined Balance Sheet as of December 31, 2021 | F-5 |
| Statement of Combined Equity for the Twelve Months Ended December 31, 2021 | F-6 |
| Combined Statement of Cash Flows for the Twelve Months Ended December 31, 2021 | F-7 |
| Notes to Combined Financial Statements | F-8 |
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INDEPENDENT AUDITOR’S REPORT
To the Board of Directors of Crocs, Inc.
Opinion
We have audited the combined financial statements of Lucky Top Inc. and Happy One LLC (the “Company”), which comprise the combined balance sheet as of December 31, 2021, and the related combined statements of operations, equity, and cash flows for the year then ended, and the related notes to the combined financial statements (collectively referred to as the "financial statements").
In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021, and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.
Basis for Opinion
We conducted our audit in accordance with auditing standards generally accepted in the United States of America (GAAS). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are required to be independent of the Company and to meet our other ethical responsibilities, in accordance with the relevant ethical requirements relating to our 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 Financial Statements
Management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America, and for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for one year after the date that the financial statements are issued.
Auditor’s Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with GAAS will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements.
In performing an audit in accordance with GAAS, we:
•Exercise professional judgment and maintain professional skepticism throughout the audit.
•Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.
•Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, no such opinion is expressed.
•Evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluate the overall presentation of the financial statements.
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•Conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for a reasonable period of time.
We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control-related matters that we identified during the audit.
/s/ Deloitte & Touche LLP
Denver, Colorado
May 5, 2022
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HAPPY ONE LLC LUCKY TOP INC.
COMBINED STATEMENT OF OPERATIONS
(in thousands)
| Twelve Months Ended December 31, | ||
|---|---|---|
| 2021 | ||
| Revenues | $ | 561,895 |
| Cost of sales | 330,990 | |
| Gross profit | 230,905 | |
| Selling, general and administrative expenses | 81,786 | |
| Income from operations | 149,119 | |
| Interest expense | (1,230) | |
| Other income, net | 11 | |
| Income before income taxes | 147,900 | |
| Income tax expense | 35,102 | |
| Net income | $ | 112,798 |
The accompanying notes are an integral part of these combined financial statements.
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HAPPY ONE LLC LUCKY TOP INC.
COMBINED BALANCE SHEET
(in thousands)
| December 31, | ||
|---|---|---|
| 2021 | ||
| ASSETS | ||
| Current assets: | ||
| Cash and cash equivalents | $ | 64,870 |
| Accounts receivable, net of allowances of $85 | 65,414 | |
| Inventories | 97,589 | |
| Other receivables | 172 | |
| Prepaid expenses and other assets | 1,199 | |
| Income taxes receivable | 2,780 | |
| Total current assets | 232,024 | |
| Property and equipment, net | 314 | |
| Deferred tax assets, net | 3,329 | |
| Total assets | $ | 235,667 |
| LIABILITIES AND EQUITY | ||
| Current liabilities: | ||
| Accounts payable | $ | 105,388 |
| Accrued expenses and other liabilities | 33,840 | |
| Total current liabilities | 139,228 | |
| Long-term income taxes payable | 4,922 | |
| Total liabilities | 144,150 | |
| Commitments and contingencies - Note 8 | ||
| Combined equity: | ||
| Retained earnings | 91,517 | |
| Total liabilities and equity | $ | 235,667 |
The accompanying notes are an integral part of these combined financial statements.
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HAPPY ONE LLC LUCKY TOP INC.
STATEMENT OF COMBINED EQUITY
(in thousands, except share amounts)
| Common Stock | Retained Earnings | Total<br>Combined Equity | |||||
|---|---|---|---|---|---|---|---|
| Shares | Amount | ||||||
| Balance at January 1, 2021 | 1,000 | $ | — | $ | (14,281) | $ | (14,281) |
| Dividends declared | — | — | (7,000) | (7,000) | |||
| Net income | — | — | 112,798 | 112,798 | |||
| Balance at December 31, 2021 | 1,000 | $ | — | $ | 91,517 | $ | 91,517 |
The accompanying notes are an integral part of these combined financial statements.
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HAPPY ONE LLC LUCKY TOP INC.
COMBINED STATEMENT OF CASH FLOWS
(in thousands)
| Twelve Months Ended December 31, | ||
|---|---|---|
| 2021 | ||
| Cash flows from operating activities: | ||
| Net income | $ | 112,798 |
| Adjustments to reconcile net income to net cash provided by operating activities: | ||
| Depreciation and amortization | 629 | |
| Deferred taxes | (1,879) | |
| Changes in operating assets and liabilities: | ||
| Accounts receivable, net of allowances | (15,724) | |
| Inventories | (47,790) | |
| Prepaid expenses and other assets | (811) | |
| Accounts payable | 32,944 | |
| Accrued expenses and other liabilities | 21,499 | |
| Income taxes | (2,462) | |
| Cash provided by operating activities | 99,204 | |
| Cash flows from investing activities: | ||
| Purchases of property and equipment | (436) | |
| Cash used in investing activities | (436) | |
| Cash flows from financing activities: | ||
| Proceeds from borrowings | 36,050 | |
| Repayments of borrowings | (52,050) | |
| Dividends paid | (32,893) | |
| Cash used in financing activities | (48,893) | |
| Net change in cash and cash equivalents | 49,875 | |
| Cash and cash equivalents — beginning of year | 14,995 | |
| Cash and cash equivalents — end of year | $ | 64,870 |
| Cash paid for interest | $ | 1,230 |
| Cash paid for income taxes | 39,464 |
The accompanying notes are an integral part of these combined financial statements.
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HAPPY ONE LLC LUCKY TOP INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
- DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
The combined financial statements include the combined financial statements of Happy One LLC (“Happy One”), a limited liability company formed under the laws of the State of Nevada, and Lucky Top Inc. (“Lucky Top”), a corporation incorporated under the laws of the State of Delaware. Unless otherwise noted in this report, any description of the “Company,” “we,” “us,” or “our” includes the combined entity consisting of Happy One and Lucky Top. Both of these entities are under common ownership in the twelve months ended December 31, 2021.
We are engaged in the distribution and sale of modern casual lifestyle footwear for men, women, and children.
The combined financial statements reflect all adjustments which are necessary for a fair statement of results of operations, financial position, and cash flows for the periods presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). All significant intercompany accounts and transactions have been eliminated within the combined financial statements.
Risks and Uncertainties
We are subject to a number of risks similar to those of other companies of similar size in its industry, including, but not limited to, the COVID-19 pandemic, inflation, supply chain disruptions, which have and could continue to interrupt manufacturing and global logistics, risks associated with sourcing raw materials and our reliance on third party manufacturers, and risks associated with our reliance on and changes in information technology.
- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
Our combined financial statements are prepared in accordance with U.S. GAAP. These accounting principles require us to make certain estimates, judgments, and assumptions. We believe that the estimates, judgments, and assumptions used to determine certain amounts that affect the financial statements are reasonable, based on information available at the time they are made. Management believes that the estimates, judgments, and assumptions made when accounting for items and matters such as, but not limited to, sales returns, deferred tax assets, uncertain tax positions, income tax expense, and the assessment of lower of cost or net realizable value on inventory are reasonable based on information available at the time they are made. To the extent there are differences between these estimates and actual results, our combined financial statements may be materially affected.
Transactions with Related Parties
In April 2021, we entered into an agreement with Lever Your Business (“LYB”), a consulting firm owned by the owner of the Company, Daniele Guidi, to provide business strategy and marketing services. In the twelve months ended December 31, 2021, we incurred costs with LYB of $0.7 million, which are reported in ‘Selling, general, and administrative expenses’ in the combined statement of operations. As of December 31, 2021, we owed LYB $16,200, which is reported in ‘Accounts payable’ in the combined balance sheet.
Additionally, during the twelve months ended December 31, 2021, we paid off outstanding borrowings on a prior year loan from LYB, totaling $16.0 million, such that the balance at December 31, 2021 was zero. Total interest paid to LYB related to this loan was $0.3 million. We also entered into seven loans with Mr. Guidi in the three months ended March 31, 2021 for an aggregate $36.1 million. Each of these loans were paid off by December 31, 2021, such that the balance at December 31, 2021 was zero. Total interest paid to Mr. Guidi related to these loans was $1.0 million.
Cash and Cash Equivalents
Cash and cash equivalents represent cash and short-term, highly-liquid investments with maturities of three months or less at the date of purchase. We report receivables from credit card companies, if expected to be received within five days, in cash and cash equivalents.
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Accounts Receivable, Net
Accounts receivable are recorded at invoiced amounts, net of allowances. During 2021, we sold receivables related to selected customers. We account for the transfer of our accounts receivable to a third party under a factoring agreement in accordance with ASC 860-10, which requires that several conditions be met in order to present the transfer of accounts receivable as a sale. We have met these requirements. Our accounts receivable balance at December 31, 2021 primarily consists of receivables from our factoring company.
Inventories
Inventories are comprised of finished goods, are stated at the lower of cost or net realizable value, and recognized using the first-in-first-out method of inventory costing. We estimate the market value of inventory based on an analysis of historical sales trends of our individual product lines, the impact of market trends and economic conditions, and a forecast of future demand, giving consideration to the value of current orders in-house for future sales of inventory. Estimates may differ from actual results due to the quantity, quality, and mix of products in inventory, consumer and retailer preferences, and market conditions. If the estimated market value is less than its carrying value, the carrying value is adjusted to the market value, and the difference is recorded in ‘Cost of sales’ in our combined statements of operations.
Property and Equipment, Net
Property, equipment, furniture, and fixtures are stated at original cost, less accumulated depreciation. Depreciation is provided using the straight-line method over the estimated useful asset lives. The useful lives are reviewed periodically and range from 3 to 5 years for machinery and office equipment. Leasehold improvements are stated at cost and amortized on a straight-line basis over their estimated economic useful lives or the lease term, whichever is shorter. Costs of enhancements or modifications that substantially extend the capacity or useful life of an asset are capitalized and depreciated accordingly. Ordinary repairs and maintenance are expensed as incurred. Depreciation of warehouse- and distribution-related assets is included in ‘Cost of sales’ in our combined statements of operations. Depreciation related to corporate and non-product assets is included in ‘Selling, general and administrative expenses’ in our combined statements of operations. When property is retired or otherwise disposed of, the cost and accumulated depreciation are removed from our combined balance sheets, and the resulting gain or loss, if any, is reflected in ‘Income from operations’ in the combined statement of operations.
Leases
We account for our operating leases under ASC 840 with rent expensed as incurred.
Revenue Recognition
Revenues are recognized at the amount expected to be received in exchange for products when control of the products transfers to customers and excludes various forms of promotions, including contractually-fixed percentage price reductions, sales returns, discounts, rebates, and other incentives that may vary in amount, must be estimated, and are reported as a reduction in revenues. Variable amounts are estimated based on an analysis of historical experience and adjusted as better estimates become available.
The following is a description of our principal revenue-generating activities by distribution channel.
Wholesale Channel
For many of our wholesale customers, control transfers and revenues are recognized when the product is shipped or delivered from a manufacturing facility or distribution center to the wholesale customer. In certain cases, control of the product transfers and revenues are recognized when the product is ready to be picked up at the port of entry.
E-commerce Channel
E-commerce revenues consist of sales generated through our company-operated e-commerce websites and sales through Amazon directly to the consumer. We transfer control and recognize revenues when the product is shipped from the distribution centers to the end consumer. A portion of the transaction price charged to our customers is variable, primarily due to promotional discounts or allowances. When recognizing revenues, the amount of revenues associated with expected sales returns is estimated based on historical experience, and adjustments to our estimates are made when the most likely amount of consideration we expect to receive changes.
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Shipping and Handling Costs and Fees
Shipping and handling costs are expensed as incurred and are included in ‘Cost of sales’ in the combined statements of operations. Shipping and handling fees billed to customers are included in revenues.
Taxes Assessed by Governmental Authorities
Taxes assessed by governmental authorities that are directly imposed on a revenue transaction are recorded on a net basis and are therefore excluded from revenues.
Cost of Sales
Our cost of sales includes costs incurred to procure and ship our footwear. These costs include shipping and handling, including freight and duties costs and other warehouse and distribution overhead and costs, including depreciation.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of labor and outside services, rent expense, and legal costs. Selling, general and administrative expenses also include costs for our marketing and sales organizations, and other functions including finance, legal, and human resources.
Our selling, general and administrative expenses also include media advertising (television, radio, print, social, digital), tactical advertising (signs, banners, point-of-sale materials) and promotional costs. Advertising production costs are expensed when the advertising is first run. Advertising communication costs are expensed in the periods that the communications occur.
Total marketing expenses, inclusive of advertising, production, promotion, and agency expenses, including variable marketing expenses, were $33.4 million for the twelve months ended December 31, 2021.
Other Income, Net
Other income, net primarily includes gains and losses associated with activities not directly related to selling footwear.
Income Taxes
Income taxes are accounted for using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of other assets and liabilities. We provide for income taxes at the current and future enacted tax rates and laws applicable in each taxing jurisdiction. We use a two-step approach for recognizing and measuring tax benefits taken or expected to be taken in a tax return and disclosures regarding uncertainties in income tax positions. We recognize interest and penalties related to income tax matters in income tax expense in the consolidated statements of operations.
- PROPERTY AND EQUIPMENT, NET
‘Property and equipment, net’ consists of the following:
| December 31, | ||
|---|---|---|
| 2021 | ||
| (in thousands) | ||
| Office equipment | $ | 575 |
| Machinery and equipment | 248 | |
| Leasehold improvements | 147 | |
| Vehicles | 9 | |
| Property and equipment | 979 | |
| Less: Accumulated depreciation and amortization | (665) | |
| Property and equipment, net | $ | 314 |
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- ACCRUED EXPENSES AND OTHER LIABILITIES
Amounts reported in ‘Accrued expenses and other liabilities’ in the combined balance sheet were:
| December 31, | ||
|---|---|---|
| 2021 | ||
| (in thousands) | ||
| Fulfillment, freight, and duties | $ | 17,690 |
| Sales and use taxes payable | 7,519 | |
| Accrued commissions | 2,708 | |
| Return liabilities | 2,689 | |
| Deferred revenue | 2,080 | |
| Other | 1,154 | |
| Total accrued expenses and other liabilities | $ | 33,840 |
- EQUITY
In the twelve months ended December 31, 2021, we declared dividends of $7.0 million to Daniele Guidi, the sole owner of the Company.
- REVENUES
Revenues by channel were:
| Twelve Months Ended December 31, 2021 | ||
|---|---|---|
| (in thousands) | ||
| Channel: | ||
| Wholesale | $ | 280,484 |
| E-commerce | 281,411 | |
| Total revenues | $ | 561,895 |
Contract Liabilities
Contract liabilities consist of cash received from e-commerce customers for orders that have not yet shipped. As products are shipped and control transfers, we recognize the deferred revenue in ‘Revenues’ in the combined statement of operations. Contract liabilities also include unredeemed customer loyalty points. As loyalty points are redeemed, we recognize the deferred revenue in ‘Revenues’ in the combined statement of operations. At December 31, 2021, $0.7 million of deferred revenues associated with cash received from e-commerce customers and $1.4 million of deferred revenues associated with loyalty programs were reported in ‘Accrued expenses and other liabilities’ in the combined balance sheet. At December 31, 2020, $0.5 million of deferred revenues associated with cash received from e-commerce customers and $0.1 million of deferred revenues associated with loyalty programs were reported in current liabilities.
Refund Liabilities
Refund liabilities associated with product sales returns are estimated based on an analysis of historical experience, and adjustments to revenues made when the most likely amount of consideration expected changes. At December 31, 2021, $2.7 million of refund liabilities were reported in ‘Accrued expenses and other liabilities’ in the combined balance sheet.
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- INCOME TAXES
The following table sets forth income before taxes and the expense for income taxes:
| Twelve Months Ended December 31, | ||
|---|---|---|
| 2021 | ||
| (in thousands) | ||
| Income before taxes | $ | 147,900 |
| Income tax expense: | ||
| Current income taxes: | ||
| U.S. federal | $ | 31,515 |
| U.S. state | 5,466 | |
| Total current income taxes | 36,981 | |
| Deferred income taxes: | ||
| U.S. federal | (1,098) | |
| U.S. state | (781) | |
| Total deferred income taxes | (1,879) | |
| Total income tax expense | $ | 35,102 |
The following table sets forth income reconciliations of the statutory federal income tax rate to actual rates based on income or loss before income taxes:
| Twelve Months Ended December 31, | ||||
|---|---|---|---|---|
| 2021 | ||||
| (in thousands) | ||||
| Income tax expense and rate attributable to: | ||||
| Federal income tax rate | $ | 31,058 | 21.0 | % |
| State income tax rate | 1,434 | 1.0 | % | |
| Uncertain tax positions | 2,838 | 1.9 | % | |
| Non-deductible / non-taxable items | (229) | (0.2) | % | |
| Effective income tax expense and rate | $ | 35,101 | 23.7 | % |
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Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The following table sets forth deferred income tax assets and liabilities as of the date shown:
| December 31, | ||
|---|---|---|
| 2021 | ||
| (in thousands) | ||
| Non-current deferred tax assets: | ||
| Property and equipment | $ | 34 |
| Accruals, reserves, and other expenses | 2,633 | |
| Uncertain tax benefit deferred tax asset | 889 | |
| Total non-current deferred tax assets | $ | 3,556 |
| Non-current deferred tax liabilities: | ||
| Product returns asset | $ | (227) |
| Total non-current deferred tax liabilities | (227) | |
| Deferred tax assets, net | $ | 3,329 |
The following table sets forth a reconciliation of the beginning and ending amount of unrecognized tax benefits:
| Year Ended December 31, | ||
|---|---|---|
| 2021 | ||
| (in thousands) | ||
| Unrecognized tax benefit as of January 1 | $ | 1,087 |
| Additions in tax positions taken in prior period | — | |
| Reductions in tax positions taken in prior period | — | |
| Additions in tax positions taken in current period | 3,147 | |
| Settlements | — | |
| Lapse of statute of limitations | — | |
| Unrecognized tax benefit as of December 31 | $ | 4,234 |
We recorded a net expense of $4.0 million related to increases in 2021 unrecognized tax benefits. Unrecognized tax benefits as of December 31, 2021 relate to tax years that are currently open under the statute of limitation. The primary impact of uncertain tax benefits on the rate reconciliation includes audit settlements, net increases in position changes, and accrued interest expense.
Any settlements or statute of limitations expirations could result in a significant decrease in our uncertain tax positions. Our assessments are based on estimates and assumptions using the best available information to management. However, our estimates of unrecognized tax benefits and potential tax benefits may not be representative of actual outcomes, and any variation from such estimates could materially affect our financial statements in the period of settlement or when the statutes of limitations expire. Finalizing audits with the relevant taxing authorities can include formal administrative and legal proceedings, and, as a result, it is difficult to estimate the timing and range of possible change related to our uncertain tax positions, and such changes could be significant.
Interest and penalties related to income tax liabilities are included in ‘Income tax benefit’ in the consolidated statements of operations. For the years ended December 31, 2021, we recorded approximately $0.7 million, of penalties and interest. During the year ended December 31, 2021, we did not release interest from settlements, lapses of statutes, and changes in certainty. The accrued balance of penalties and interest was $0.7 million, as of December 31, 2021.
Unrecognized tax benefits of $4.0 million as of December 31, 2021, if recognized, would reduce the annual effective tax rate offset by deferred tax assets recorded for uncertain tax positions.
We are not currently under audit in any material U.S. states. Our tax returns are generally subject to examination for a period of three to five years after filing of the respective return. The state impact of any federal changes remains subject to examination by various state jurisdictions for a period up to two years after formal notification to the states. As such, U.S. federal and state
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income tax returns for us are generally subject to examination for the years 2016 to 2021. Although the timing of income tax audit resolutions and negotiations with taxing authorities is highly uncertain, we do not anticipate a significant change in the total amount of unrecognized tax benefits within the next twelve months.
- COMMITMENTS AND CONTINGENCIES
Leases
We lease office and warehouse space under noncancellable operating lease agreements, which expire from 2022 through 2024. The Company is required to pay property taxes, insurance, and normal maintenance costs for certain of these facilities and will be required to pay any increases over the base year of these expenses on the remainder of the Company’s facilities.
Rent expense for operating leases for the twelve months ended December 31, 2021 was $1.6 million. Future minimum lease payments under noncancellable operating leases as of December 31, 2021 are as follows (in thousands):
| As of December 31, | ||
|---|---|---|
| 2022 | $ | 1,504 |
| 2023 | 1,301 | |
| 2024 | 38 | |
| Total future minimum lease payments | $ | 2,843 |
Other
During our normal course of business, we may make certain indemnities, commitments, and guarantees under which we may be required to make payments in relation to certain matters. We cannot determine a range of estimated future payments and have not recorded any liability for such payments in the accompanying combined balance sheets. We believe that any liability that may arise out of or with respect to these matters will not materially adversely affect our financial position, results of operations, or cash flows.
- SUBSEQUENT EVENTS
We have evaluated subsequent events through the date these financial statements were issued.
Acquisition by Crocs, Inc.
On December 22, 2021, we and other entities associated with the HEYDUDE Brand entered into a definitive agreement to be acquired by Crocs, Inc., pursuant to a Securities Purchase Agreement (the “Securities Purchase Agreement”). The Securities Purchase Agreement provides that we will sell all of the issued and outstanding equity securities of the Company for a purchase price of $787.2 million in cash. Additionally, effective December 22, 2021, we renewed our consulting agreement with LYB for a term of 90 days from the effective date.
The sale of the Company to Crocs, Inc. closed on February 17, 2022, at which point a restrictive covenant agreement, including clauses restricting competition and the use of confidential information, among other things, went into effect for Daniele Guidi, owner of the Company, and for LYB, a related party to the Company, also owned by Mr. Guidi. This agreement is effective from the closing date through February 17, 2025. In conjunction with the sale of the Company to Crocs, Inc, Mr. Guidi resigned, effective February 17, 2022.
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Document
Exhibit 99.3
Unaudited Interim Combined Financial Information
FULL FORTUNE WORLDWIDE LIMITED
FULL FORTUNE INTELLECTUAL LIMITED
FULL FORTUNE ONLINE LIMITED
Nine months ended December 31, 2021 and 2020
FULL FORTUNE WORLDWIDE LIMITED
FULL FORTUNE INTELLECTUAL LIMITED
FULL FORTUNE ONLINE LIMITED
CONTENTS
| Pages | |
|---|---|
| REVIEW REPORT OF INDEPENDENT AUDITORS | 1 |
| UNAUDITED FINANCIAL INFORMATION | |
| Combined balance sheets | 2 |
| Combined statements of comprehensive income | 3 |
| Combined statements of changes in stockholders' equity | 4 |
| Combined statements of cash flows | 5 |
| Notes to combined financial statements | 6 - 11 |
Review Report of Independent Auditors
To the Board of Directors and Shareholders of Full Fortune Worldwide Limited, Full Fortune Intellectual Limited and Full Fortune Online Limited
We have reviewed the combined financial information of Full Fortune Worldwide Limited, Full Fortune Intellectual Limited, and Full Fortune Online Limited (the “Group”), which comprise the combined balance sheets as of December 31, 2021 and 2020, and the related combined statements of comprehensive income, changes in stockholders’ equity and cash flows for the nine-month periods ended December 31, 2021 and 2020.
Management's Responsibility for the Financial Information
Management is responsible for the preparation and fair presentation of the financial information in conformity with U.S. generally accepted accounting principles; this includes the design, implementation and maintenance of internal control sufficient to provide a reasonable basis for the preparation and fair presentation of interim financial information in conformity with U.S. generally accepted accounting principles.
Auditor's Responsibility
Our responsibility is to conduct our review in accordance with auditing standards generally accepted in the United States of America applicable to reviews of interim financial information. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements. Accordingly, we do not express such an opinion.
Conclusion
Based on our review, we are not aware of any material modifications that should be made to the combined financial information referred to above for it to be in conformity with U.S. generally accepted accounting principles.
Report on Balance Sheet as of March 31, 2021
We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the combined balance sheet of the Group as of March 31, 2021, and the related combined statement of comprehensive income, changes in stockholders' equity and cash flows for the year then ended (not presented herein); and we expressed an unmodified audit opinion on those audited combined financial statements in our report dated April 29, 2022. In our opinion, the accompanying combined balance sheet of the Group as of March 31, 2021, is consistent, in all material respects, with the combined balance sheet from which it has been derived.
/s/ Ernst & Young
Hong Kong, the People’s Republic of China
April 29, 2022
FULL FORTUNE WORLDWIDE LIMITED
FULL FORTUNE INTELLECTUAL LIMITED
FULL FORTUNE ONLINE LIMITED
UNAUDITED INTERIM COMBINED BALANCE SHEETS
| As of | ||||
|---|---|---|---|---|
| Notes | December 31, 2021 | March 31, 2021 | December 31, 2020 | |
| US$ | US$ | US$ | ||
| ASSETS | ||||
| Current assets: | ||||
| Cash and cash equivalents | 34,440,229 | 37,563,915 | 1,901,486 | |
| Accounts receivable, net | 97,159,015 | 18,230,198 | 48,568,330 | |
| Inventories | 178,249 | — | — | |
| Amount due from related parties | 4 | 211 | — | — |
| Prepaid expenses and other assets | 4,106,027 | 1,693,677 | 51,052 | |
| Total current assets | 135,883,731 | 57,487,790 | 50,520,868 | |
| Non-current assets: | ||||
| Intangible assets | 3,107,639 | 3,026,426 | 3,011,012 | |
| Total non-current assets | 3,107,639 | 3,026,426 | 3,011,012 | |
| Total assets | 138,991,370 | 60,514,216 | 53,531,880 | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||
| Current liabilities: | ||||
| Accounts payable | 10,247,026 | 1,444,733 | 2,618,368 | |
| Accrued expenses and other liabilities | 4,428,045 | 1,509,365 | 3,938,326 | |
| Amount due to related parties | 4 | 253,892 | 2,057 | 4,142,182 |
| Income tax payable | 22,268,067 | 9,399,477 | 6,996,778 | |
| Total current liabilities | 37,197,030 | 12,355,632 | 17,695,654 | |
| Commitments and contingencies | 7 | |||
| Non-current liabilities: | ||||
| Deferred tax liabilities | 5 | 202,424 | 99,872 | 99,363 |
| Total non-current liabilities | 202,424 | 99,872 | 99,363 | |
| Total liabilities | 37,399,454 | 12,455,504 | 17,795,017 | |
| Stockholders’ equity: | ||||
| Common stock | 3,840 | 3,840 | 2,560 | |
| Retained earnings | 101,588,076 | 48,054,872 | 35,734,303 | |
| Total stockholders’ equity | 101,591,916 | 48,058,712 | 35,736,863 | |
| Total liabilities and stockholders’ equity | 138,991,370 | 60,514,216 | 53,531,880 |
The accompanying notes are an integral part of these unaudited interim combined financial statements.
FULL FORTUNE WORLDWIDE LIMITED
FULL FORTUNE INTELLECTUAL LIMITED
FULL FORTUNE ONLINE LIMITED
UNAUDITED INTERIM COMBINED STATEMENTS OF COMPREHENSIVE INCOME
| Nine months ended | |||
|---|---|---|---|
| Note | December 31, 2021 | December 31, 2020 | |
| US$ | US$ | ||
| Revenues | 235,038,239 | 108,451,122 | |
| Cost of sales | (153,046,783) | (64,573,519) | |
| Gross profit | 81,991,456 | 43,877,603 | |
| Selling and administrative expenses | (4,157,733) | (1,091,328) | |
| Other income, net | 670,623 | 44,169 | |
| Income before income taxes | 78,504,346 | 42,830,444 | |
| Income taxes | 5 | (12,971,142) | (7,096,141) |
| Net income and total comprehensive income | 65,533,204 | 35,734,303 |
The accompanying notes are an integral part of these unaudited interim combined financial statements.
FULL FORTUNE WORLDWIDE LIMITED
FULL FORTUNE INTELLECTUAL LIMITED
FULL FORTUNE ONLINE LIMITED
UNAUDITED INTERIM COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
| Note | Common stock | Retained earnings | Total stockholders’ equity | |
|---|---|---|---|---|
| US$ | US$ | US$ | ||
| Balance as of April 1, 2021 | 3,840 | 48,054,872 | 48,058,712 | |
| Net income | — | 65,533,204 | 65,533,204 | |
| Dividends | 4 | — | (12,000,000) | (12,000,000) |
| Balance at December 31, 2021 | 3,840 | 101,588,076 | 101,591,916 | |
| Balance as of April 1, 2020 | 2,560 | — | 2,560 | |
| Net income | — | 35,734,303 | 35,734,303 | |
| Balance at December 31, 2020 | 2,560 | 35,734,303 | 35,736,863 |
The accompanying notes are an integral part of these unaudited interim combined financial statements.
FULL FORTUNE WORLDWIDE LIMITED
FULL FORTUNE INTELLECTUAL LIMITED
FULL FORTUNE ONLINE LIMITED
UNAUDITED INTERIM COMBINED STATEMENTS OF CASH FLOWS
| Nine months ended | |||
|---|---|---|---|
| Notes | December 31, 2021 | December 31, 2020 | |
| US$ | US$ | ||
| CASH FLOWS FROM OPERATING ACTIVITIES | |||
| Net income | 65,533,204 | 35,734,303 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | |||
| Deferred income tax expense | 102,552 | 99,363 | |
| Changes in operating assets and liabilities: | |||
| Accounts receivable | (78,928,817) | (48,568,330) | |
| Inventories | (178,249) | — | |
| Prepaid expenses and other assets | (2,412,350) | (51,052) | |
| Accounts payable | 8,802,293 | 2,618,368 | |
| Accrued expenses and other liabilities | 6 | 2,918,680 | 1,938,326 |
| Amount due from related parties | 4 | (211) | 2,560 |
| Amount due to related parties | 4 | 251,835 | 4,142,182 |
| Income tax payable | 12,868,590 | 6,996,778 | |
| Net cash provided by operating activities | 8,957,527 | 2,912,498 | |
| CASH FLOW FROM INVESTING ACTIVITIES | |||
| Acquisition of intangible assets | 6 | (81,213) | (1,011,012) |
| Net cash used in investing activities | (81,213) | (1,011,012) | |
| CASH FLOW FROM FINANCING ACTIVITIES | |||
| Payment of dividends | 4 | (12,000,000) | — |
| Net cash used in financing activities | (12,000,000) | — | |
| NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS | (3,123,686) | 1,901,486 | |
| CASH AND CASH EQUIVALENTS AT THE BEGINNING OF PERIOD | 37,563,915 | — | |
| CASH AND CASH EQUIVALENTS AT THE END OF PERIOD | 34,440,229 | 1,901,486 |
The accompanying notes are an integral part of these unaudited interim combined financial statements.
FULL FORTUNE WORLDWIDE LIMITED
FULL FORTUNE INTELLECTUAL LIMITED
FULL FORTUNE ONLINE LIMITED
NOTES TO THE UNAUDITED INTERIM COMBINED FINANCIAL INFORMATION
(Expressed in U.S. dollars (“US$”), except for number of shares)
1. ORGANIZATION AND BASIS OF PREPARATION
Full Fortune Worldwide Limited (“FFWW”), Full Fortune Intellectual Limited (“FFIL”), Full Fortune Online Limited (“FFOL”) were incorporated in Hong Kong on March 10, 2020, March 10, 2020 and March 29, 2021, respectively, and were wholly and directly owned upon their respective incorporation by Full Fortune Wealth Limited (“FF Wealth”), a private company incorporated in Hong Kong. On May 25, 2021, FFOL incorporated a wholly-owned subsidiary, HEYDUDE B.V., in the Netherlands. During the nine months ended December 31, 2021 and 2020, the principal activities of FFWW, FFIL, and FFOL (collectively known as “Full Fortune Entities” or the “Group”) were the design and trading of leisure footwear.
On February 17, 2022, the Full Fortunes Entities were acquired by Crocs Malta Holdings Ltd, a wholly owned subsidiary of Crocs, Inc., a United States of America (“U.S.”) Securities and Exchange Commission registrant.
2.1 BASIS OF PREPARATION
The accompanying unaudited interim combined financial information of the Group are prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) as determined by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”). The unaudited interim combined financial information and accompanying notes include all adjustments necessary for the fair presentation of the Group's combined financial position, results of operations and cash flows for the periods presented.
In the opinion of the Group's management, the accompanying unaudited interim combined financial information contains all normal recurring adjustments necessary to present fairly the combined financial position, operating results and cash flows of the Group for each of the periods presented. The results of operations for the nine months ended December 31, 2021 and 2020 are not necessarily indicative of results to be expected for any other interim periods or for the years ended March 31, 2022 and 2021, respectively. The interim combined balance sheet as of March 31, 2021 was derived from the audited combined financial statements at that date but does not include all of the disclosures required by U.S. GAAP for annual financial statements. These unaudited interim combined financial information should be read in conjunction with the Group's audited combined financial statements for the year ended March 31, 2021.
These unaudited interim combined financial information includes the accounts of the Full Fortune Entities, after elimination of the intercompany transactions and balances. During the nine months ended December 31, 2021 and 2020, the Full Fortune Entities were under common control of FF Wealth. Significant intercompany transactions and balances have been eliminated on combination. These unaudited interim combined financial information is presented in United States dollars (“US$”), which is also the functional currency of the Group.
FULL FORTUNE WORLDWIDE LIMITED
FULL FORTUNE INTELLECTUAL LIMITED
FULL FORTUNE ONLINE LIMITED
NOTES TO THE UNAUDITED INTERIM COMBINED FINANCIAL INFORMATION
(Expressed in U.S. dollars (“US$”), except for number of shares)
2.2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of estimates
The preparation of the unaudited interim combined financial information in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited interim combined financial information and the reported amounts of revenues and expenses during the periods. Significant estimates reflected in the Group's unaudited interim combined financial information includes, but are not limited to, tax provision. Management bases its estimates on historical experience and on various other market-specific and relevant assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Changes in facts and circumstances may result in revised estimates. Actual results could differ from those estimates, and as such, differences may be material to the unaudited interim combined financial information.
Inventories
Inventories are stated at the lower of cost or net realizable value and recognized using the first-in-first-out method of inventory costing.
Contract liabilities
Contract liabilities represents cash payments received in advance of the Group's transfer of control of products to its customers. Contract liabilities are recognised as revenue when the Group performs under the contract (i.e., transfers control of the related goods to the customer). As of December 31, 2021, March 31, 2021, and December 31, 2020, US$3,895,811, US$911,855, US$1,925,247 of deferred revenues associated with advance customer deposits were reported in “Accrued expenses and other liabilities” in the combined balance sheets, respectively.
FULL FORTUNE WORLDWIDE LIMITED
FULL FORTUNE INTELLECTUAL LIMITED
FULL FORTUNE ONLINE LIMITED
NOTES TO THE UNAUDITED INTERIM COMBINED FINANCIAL INFORMATION
(Expressed in U.S. dollars (“US$”), except for number of shares)
3. CONCENTRATION OF RISKS
Concentration of credit risks
Financial instruments that potentially subject the Group to significant concentration of credit risk consist primarily of cash and cash equivalents and accounts receivable. During the periods presented, all cash and cash equivalents were held by financial institutions located in Hong Kong and Canada, which management believes are of high credit quality. Accounts receivable are typically unsecured and derived from revenue earned from customers in the U.S., which are exposed to credit risk. The risk is mitigated by credit evaluations the Group performs on its customers and its ongoing monitoring process of outstanding balances.
During the nine months ended and as of December 31, 2021, 95.1% of revenue and 99.5% of the total accounts receivable were due from a customer, Lucky Top Inc.
During the nine months ended and as of December 31, 2020, 87.5% of revenue and 98.7% of the total accounts receivable were due from the same aforementioned customer.
At March 31, 2021, 97.5% of the total accounts receivable were due from the same aforementioned customer.
Business and economic risks
The Group believes that changes in the following areas could have a material adverse effect on the Group's future financial position, results of operations or cash flows: changes in the overall demand for the Group's products; competitive pressures due to new entrants; strategic relationships or customer relationships; regulatory considerations; and risks associated with the Group's ability to attract and retain employees necessary to support its growth.
Impact of the outbreak of Coronavirus disease ("COVID-19")
During the periods presented, COVID-19 has not had a material impact to the Group's operations.
There are still uncertainties of COVID-19's future impact, and the extent of the impact will depend on a number of factors, including the duration and severity of COVID-19, the development and progress of distribution of COVID-19 vaccine and other medical treatment, the potential change in user behaviour, especially on internet usage due to the prolonged impact of COVID-19, the actions taken by government authorities, particularly to contain the outbreak, stimulate the economy to improve business condition especially for small and medium enterprises, almost all of which are beyond the Group's control.
Management will continuously assess the impact of COVID-19 on the Group's operations and financial position and closely monitor the Group's exposure to the risks and uncertainties in connection with COVID-19.
FULL FORTUNE WORLDWIDE LIMITED
FULL FORTUNE INTELLECTUAL LIMITED
FULL FORTUNE ONLINE LIMITED
NOTES TO THE UNAUDITED INTERIM COMBINED FINANCIAL INFORMATION
(Expressed in U.S. dollars (“US$”), except for number of shares)
4. RELATED PARTY TRANSACTIONS
During the nine months ended December 31, 2021, FFWW declared interim dividends of US$100 per ordinary share, totaling US$1,000,000, and of US$500 per ordinary share, totaling US$5,000,000, to FF Wealth.
During the nine months ended December 31, 2021, FFIL declared interim dividends of US$100 per ordinary share, totaling US$1,000,000, and of US$500 per ordinary share, totaling US$5,000,000, to FF Wealth.
As of March 31, 2020, proceeds amounting to US$2,560 for the issuance of common stock was due from FF Wealth. During the nine months ended December 31, 2020, FF Wealth paid the proceeds due in full.
A summary of the balances with the related parties at the end of the reporting periods are as follows:
| As of | |||
|---|---|---|---|
| December 31, 2021 | March 31, 2021 | December 31, 2020 | |
| (Unaudited) | (Audited) | (Unaudited) | |
| US$ | US$ | US$ | |
| Amount due from a director | 211 | — | — |
| Amount due to a director | 3,892 | 2,057 | 4,064,464 |
| Amount due to FF Wealth | 250,000 | — | 77,718 |
The amounts due to a director and FF Wealth represented operating expenses incurred by the Group and paid by a director and FF Wealth on behalf of the Group during the reporting periods.
The balances with a director and FF Wealth are unsecured, interest-free and repayable on demand.
5. TAXATION
For the nine months ended December 31, 2021 and 2020, the Group recorded an income tax provision of US$12,971,142 and US$7,096,141, which represent an effective income tax rate of 16.5% and 16.5%, respectively, that approximates the Hong Kong statutory tax rate of 16.5%.
The Group did not identify any material unrecognized tax benefits for each of the periods presented.
FULL FORTUNE WORLDWIDE LIMITED
FULL FORTUNE INTELLECTUAL LIMITED
FULL FORTUNE ONLINE LIMITED
NOTES TO THE UNAUDITED INTERIM COMBINED FINANCIAL INFORMATION
(Expressed in U.S. dollars (“US$”), except for number of shares)
6. NOTES TO UNAUDITED INTERIM COMBINED STATEMENTS OF CASH FLOWS
During the nine months ended December 31, 2020, the Group acquired certain indefinite-lived intangible assets, including trademarks and internet domain names, from Full Fortune Brands Limited for a cash consideration of US$3,000,000, of which US$2,000,000 was not yet settled by the Group and recorded in “Accrued expenses and other liabilities” in the combined balance sheet as of December 31, 2020.
7. COMMITMENTS AND CONTINGENCIES
Commitments
The Group leases offices and an apartment under operating leases. The leases were negotiated for terms ranging from 1 to 2 years.
At the end of the reporting period, the total future minimum lease payments under non-cancellable operating leases are payable as follows:
| As of | |
|---|---|
| December 31, 2021 | |
| US$ | |
| Within 1 year | 144,532 |
Payments under operating leases are expensed on a straight-line basis over the periods of their respective leases. For the nine months ended December 31, 2021 and 2020, total rental expenses for all operating leases amounted to approximately US$209,419 and US$77,397, respectively.
Contingencies
The Group is currently not involved in any legal or administrative proceedings that may have a material adverse impact on the Group's business, financial position or results of operations.
FULL FORTUNE WORLDWIDE LIMITED
FULL FORTUNE INTELLECTUAL LIMITED
FULL FORTUNE ONLINE LIMITED
NOTES TO THE UNAUDITED INTERIM COMBINED FINANCIAL INFORMATION
(Expressed in U.S. dollars (“US$”), except for number of shares)
8. SUBSEQUENT EVENTS
In preparing the unaudited interim combined financial information, the Group has evaluated events and transactions for potential recognition and disclosure through April 29, 2022, the date the unaudited interim combined financial information were available to be issued.
Subsequent to December 31, 2021, FFWW declared an interim dividend of US$93,800,000 to FF Wealth, which was settled in February 2022.
Subsequent to December 31, 2021, FFIL declared an interim dividend of US$750,000 to FF Wealth, which was settled in February 2022.
11
Document
Exhibit 99.4
Unaudited Pro Forma Combined Financial Information
The following unaudited pro forma combined financial information has been prepared to illustrate the effect of the acquisition (the “Acquisition”) of HEYDUDE, a privately-owned casual footwear business (“HEYDUDE”). On February 17, 2022 (the “Acquisition Date”), Crocs, Inc. (“Crocs” or the “Company”) completed its acquisition of HEYDUDE, pursuant to the Securities Purchase Agreement (the “Agreement”), dated as of December 22, 2021, by and among (i) the Company; (ii) Full Fortune Wealth Limited, a company with limited liability incorporated under the laws of Hong Kong (“HK Seller”); (iii) Mr. Daniele Guidi (“US Seller” and, together with HK Seller, “Sellers”, and each individually, a “Seller”); (iv) Full Fortune Intellectual Limited, a company with limited liability incorporated under the laws of Hong Kong (“FF Intellectual”); (v) Full Fortune Worldwide Limited, a company with limited liability incorporated under the laws of Hong Kong (“FF Worldwide”); (vi) Full Fortune Online Limited, a company with limited liability incorporated under the laws of Hong Kong (“FF Online” and collectively with FF Intellectual and FF Worldwide the “HK Acquired Companies”); (vii) Happy One LLC, a limited liability company formed under the laws of the State of Nevada (“Happy One”); (viii) Lucky Top Inc., a corporation incorporated under the laws of the State of Delaware (“Lucky Top” and together with Happy One, the “US Acquired Companies”); (ix) Mr. Alessandro Rosano (“Guarantor”); and (x) HK Seller, in its capacity as representative and agent for Sellers. The HK Acquired Companies and the US Acquired Companies together make up HEYDUDE. Crocs acquired all of the issued and outstanding equity securities of each of the HK Acquired Companies and the US Acquired Companies for cash consideration of $2,038.0 million and issued 2,852,280 shares of the Company’s common stock to the HK Seller (“the Equity Consideration Shares”).
The aggregate preliminary purchase price at the closing of the Acquisition was $2,316.8 million. We paid aggregate consideration of $2,050.0 million in cash, subject to adjustment based on, among other things, the cash, indebtedness, transaction expenses, and working capital of the companies comprising HEYDUDE and their respective subsidiaries as of the Acquisition Date, and issued 2,852,280 shares of the Company’s common stock to one of the sellers. The Equity Consideration Shares are subject to a lock-up period beginning on the Acquisition Date and continuing to, and including, the date that is 12 months after the Acquisition Date, provided that (a) on the date that is six months after the Acquisition Date, 50% of the Equity Consideration Shares will be released from the lock-up, and (b) on the date that is twelve months after the Acquisition Date, the remaining 50% of the Equity Consideration Shares will be released from the lock-up. The Cash Consideration was financed via the Company’s entry into a new $2.0 billion term loan B credit facility and $50.0 million of borrowings under the Company’s existing revolving credit facility. The unaudited pro forma combined financial information gives effect to the Acquisition and the additional debt incurred to fund the Acquisition. The preliminary closing price is subject to adjustment due to net working capital settlements.
The unaudited pro forma combined statement of operations and balance sheet were prepared using the acquisition method of accounting in accordance with Financial Accounting Standards Board Accounting Standards Codification (“ASC”) Topic 805, Business Combinations, with Crocs considered as the accounting acquirer and HEYDUDE as the accounting acquiree. Accordingly, consideration paid by Crocs to complete the Acquisition has been allocated to identifiable assets and assumed liabilities of HEYDUDE based on estimated fair values as of the closing date of the Acquisition. Management made a preliminary allocation of the consideration transferred to the assets acquired and liabilities assumed based on the information available. The finalization of the purchase accounting assessment may result in changes to the valuation of assets acquired and liabilities assumed, which could be material. Accordingly, the pro forma adjustments related to the allocation of consideration transferred are preliminary and have been presented solely for the purpose of providing the unaudited pro forma combined statement of operations and balance sheet in the Current Report on Form 8-K/A. Management expects to finalize the accounting for the business combination as soon as practicable within the measurement period in accordance with ASC 805, but in no event later than one year from February 17, 2022.
The unaudited pro forma combined balance sheet gives effect to the Acquisition, related borrowings, and equity issuance as if each had been consummated on December 31, 2021 and includes pro forma adjustments based on Crocs’ management’s preliminary purchase price allocation. The unaudited pro forma combined balance sheet combines Crocs’ audited historical consolidated balance sheet as of December 31, 2021 with the unaudited historical, as adjusted, combined balance sheet of HEYDUDE as of December 31, 2021. The unaudited historical, as adjusted, combined balance sheet of HEYDUDE was prepared based on combining the audited historical combined balance sheet of the US Acquired Companies as of December 31, 2021, with the unaudited combined historical balance sheet of the HK Acquired Companies as of December 31, 2021, adjusted for reclassifications and eliminations.
The unaudited pro forma combined statement of operations for the year ended December 31, 2021 gives effect to the Acquisition, related borrowing, and equity issuance as if each had been consummated on January 1, 2021 and combines Crocs’ audited historical consolidated statement of operations for the year ended December 31, 2021, with HEYDUDE’s unaudited
historical, as adjusted, combined statement of operations for the twelve months ended December 31, 2021. The unaudited historical, as adjusted, combined statement of operations for the twelve months ended December 31, 2021, of HEYDUDE was prepared based on combining the audited historical combined statement of operations of the US Acquired Companies for the twelve months ended December 31, 2021 with the unaudited historical combined statement of operations of the HK Acquired Companies for the twelve months ended December 31, 2021, adjusted for reclassifications and eliminations.
The audited historical combined statement of operations of the HK Acquired Companies was prepared based on its fiscal year end of March 31, 2021. Because the year-end differs from Crocs’ fiscal year end by more than 93 days, the HK Acquired Companies’ financial information is required to be adjusted to a period within 93 days of Crocs’ fiscal year end. For the purposes of preparing the unaudited pro forma combined statement of operations for the twelve months ended December 31, 2021, the HK Acquired Companies’ unaudited combined statement of operations for the twelve months ended December 31, 2021 was derived by adding the historical audited combined statement of comprehensive income for the twelve months ended March 31, 2021 to the unaudited combined statement of comprehensive income for the nine months ended December 31, 2021, and deducting the historical unaudited combined statement of comprehensive income for the nine months ended December 31, 2020.
The unaudited pro forma combined financial statements presented below are derived from and should be read in conjunction with (i) the Company’s historical audited consolidated financial statements, and the related notes thereto, included in its Annual Report on Form 10-K for the year ended December 31, 2021; (ii) the audited combined financial statements of the HK Acquired Companies as of and for the year ended March 31, 2021, which are attached as Exhibit 99.1 to the Current Report on Form 8-K/A; (iii) the audited combined financial statements of the US Acquired Companies as of and for the twelve months ended December 31, 2021, which are attached as Exhibit 99.2 to the Current Report on Form 8-K/A; and (iv) the unaudited interim combined financial statements of the HK Acquired Companies as of and for the nine months ended December 31, 2021, which are attached as Exhibit 99.3 to the Current Report on Form 8-K/A.
The unaudited pro forma combined financial statements have been prepared by management in accordance with Regulation S-X Article 11, “Pro Forma Financial Information,” as amended by the final rule, “Amendments to Financial Disclosures About Acquired and Disposed Businesses,” as adopted by the U.S. Securities and Exchange Commission (the “SEC”) on May 21, 2020 (“Article 11”) and is presented in U.S. dollars. Crocs is providing the unaudited pro forma combined financial statements for illustrative purposes only and such pro forma information does not represent the consolidated results or financial position of Crocs had the Acquisition been completed as of the dates indicated. The companies may have performed differently had they been combined during the periods presented. Specifically, the unaudited pro forma combined financial statements do not reflect any cost savings, operating synergies, revenue enhancements or restructuring costs that the combined company may achieve or incur as a result of the Acquisition. You should not rely on the unaudited pro forma combined financial statements as being indicative of the historical results that would have been achieved had the companies actually been combined during the periods presented. Further, the unaudited pro forma combined financial statements do not purport to project the future financial position or operating results of the combined company. The unaudited pro forma combined financial statements should be read in conjunction with the accompanying notes to the unaudited pro forma combined financial statements.
CROCS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF DECEMBER 31, 2021
(in thousands)
| Historical Crocs | Historical, as adjusted, HEYDUDE<br><br>(Note 1) | Debt Financing Adjustments<br><br>(Note 3) | Transaction Accounting Adjustments<br><br>(Note 3) | Pro Forma Combined | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| ASSETS | ||||||||||||
| Current assets: | ||||||||||||
| Cash and cash equivalents | $ | 213,197 | $ | 99,310 | $ | 2,000,995 | A | $ | (2,131,076) | A,O | $ | 182,426 |
| Restricted cash — current | 65 | — | — | — | 65 | |||||||
| Accounts receivable, net of allowances | 182,629 | 65,888 | — | — | 248,517 | |||||||
| Inventories | 213,520 | 67,424 | — | 103,846 | C | 384,790 | ||||||
| Income taxes receivable | 22,301 | 2,780 | — | — | 25,081 | |||||||
| Other receivables | 12,252 | 172 | — | — | 12,424 | |||||||
| Prepaid expenses and other assets | 22,605 | 5,305 | — | — | 27,910 | |||||||
| Total current assets | 666,569 | 240,879 | 2,000,995 | (2,027,230) | 881,213 | |||||||
| Property and equipment, net | 108,398 | 314 | — | (314) | D | 108,398 | ||||||
| Intangible assets, net | 28,802 | 3,108 | — | 1,866,892 | E | 1,898,802 | ||||||
| Goodwill | 1,600 | — | — | 703,123 | (1) | 704,723 | ||||||
| Deferred tax assets, net | 567,201 | 3,329 | — | — | 570,530 | |||||||
| Restricted cash | 3,663 | — | — | — | 3,663 | |||||||
| Right-of-use assets | 160,768 | 2,844 | — | — | 163,612 | |||||||
| Other assets | 8,067 | — | — | — | 8,067 | |||||||
| Total assets | $ | 1,545,068 | $ | 250,474 | $ | 2,000,995 | $ | 542,471 | $ | 4,339,008 | ||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||
| Current liabilities: | ||||||||||||
| Accounts payable | $ | 162,145 | $ | 18,950 | $ | — | $ | 8,500 | B | $ | 189,595 | |
| Accrued expenses and other liabilities | 166,887 | 38,522 | — | 22,126 | M | 227,535 | ||||||
| Income taxes payable | 16,279 | 22,268 | — | — | 38,547 | |||||||
| Current operating lease liabilities | 42,932 | 1,178 | — | — | 44,110 | |||||||
| Total current liabilities | 388,243 | 80,918 | — | 30,626 | 499,787 | |||||||
| Long-term income taxes payable | 219,744 | 4,922 | — | — | 224,666 | |||||||
| Long-term borrowings | 771,390 | — | 2,000,995 | A | — | 2,772,385 | ||||||
| Long-term operating lease liabilities | 149,237 | 1,666 | — | — | 150,903 | |||||||
| Long-term deferred tax liability | — | 202 | — | 331,018 | F | 331,220 | ||||||
| Other liabilities | 2,372 | — | — | — | 2,372 | |||||||
| Total liabilities | 1,530,986 | 87,708 | 2,000,995 | 361,644 | 3,981,333 | |||||||
| Stockholders’ equity: | ||||||||||||
| Common stock | 106 | 4 | — | (1) | G,H | 109 | ||||||
| Treasury stock | (1,684,262) | — | — | — | (1,684,262) | |||||||
| Additional paid-in capital | 496,036 | — | — | 365,716 | H | 861,752 | ||||||
| Retained earnings | 1,279,040 | 162,762 | — | (184,888) | G,M | 1,256,914 | ||||||
| Accumulated other comprehensive loss | (76,838) | — | — | — | (76,838) | |||||||
| Total stockholders’ equity | 14,082 | 162,766 | — | 180,827 | 357,675 | |||||||
| Total liabilities and stockholders’ equity | $ | 1,545,068 | $ | 250,474 | $ | 2,000,995 | $ | 542,471 | $ | 4,339,008 |
(1) Refer to Notes A through H and O in the accompanying notes to these consolidated financial statements.
CROCS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2021
(in thousands, except per share data)
| Historical Crocs | Historical, as adjusted, HEYDUDE<br><br>(Note 1) | Debt Financing Adjustments (Note 3) | Transaction Accounting Adjustments (Note 3) | Pro Forma Combined | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Revenues | $ | 2,313,416 | $ | 580,678 | $ | — | $ | — | $ | 2,894,094 | ||
| Cost of sales | 893,196 | 268,278 | — | 103,532 | I,J | 1,265,006 | ||||||
| Gross profit | 1,420,220 | 312,400 | — | (103,532) | 1,629,088 | |||||||
| Selling, general and administrative expenses | 737,156 | 86,784 | — | 41,811 | J,M | 865,751 | ||||||
| Income from operations | 683,064 | 225,616 | — | (145,343) | 763,337 | |||||||
| Foreign currency losses, net | (140) | — | — | — | (140) | |||||||
| Interest income | 775 | — | — | — | 775 | |||||||
| Interest expense | (21,647) | (1,230) | (87,941) | K | — | (110,818) | ||||||
| Other income, net | 1,797 | 1,133 | — | — | 2,930 | |||||||
| Income before income taxes | 663,849 | 225,519 | (87,941) | (145,343) | 656,084 | |||||||
| Income tax (benefit) expense | (61,845) | 50,476 | (15,567) | L | (25,729) | L | (52,665) | |||||
| Net income | $ | 725,694 | $ | 175,043 | $ | (72,374) | $ | (119,614) | $ | 708,749 | ||
| Net income per common share: | ||||||||||||
| Basic | $ | 11.62 | $ | 10.85 | ||||||||
| Diluted | $ | 11.39 | $ | 10.65 | ||||||||
| Weighted average common shares outstanding: | ||||||||||||
| Basic | 62,464 | 2,852 | N | 65,316 | ||||||||
| Diluted | 63,718 | 2,852 | N | 66,570 |
Note 1. Basis of Pro Forma Preparation
In order to derive the unaudited historical, as adjusted, combined financial statements of HEYDUDE, Crocs has combined the audited historical combined financial statements of the US Acquired Companies and the unaudited historical combined financial statements of the HK Acquired Companies, as of and for the twelve months ended December 31, 2021, adjusted for reclassifications and eliminations. The reclassifications are necessary to present HEYDUDE’s financial statements consistent with Crocs’ financial statement presentation. Accordingly, $0.3 million of amounts due to related parties was reclassified into accrued expenses and other liabilities related to the HK Acquired Companies, as Crocs does not have a financial statement line item for amounts due to related parties. The eliminations are necessary to remove the effect of transactions between the US Acquired Companies and HK Acquired Companies. The US Acquired Companies and the HK Acquired Companies are being presented separately here, with the combined adjusted total being presented in the unaudited pro forma combined financial statements.
Accounting Policies and Accounting Framework Conversion
The accounting policies used in the preparation of these unaudited pro forma combined financial statements are those set out in Crocs’ Annual Report on Form 10-K for the year ended December 31, 2021. Certain adjustments have been made to the unaudited pro forma combined financial statements to conform HEYDUDE’s historical, as adjusted, financial statement presentation to Crocs’ financial statement presentation. As a result of this process, it was determined that a Right-of-Use (“ROU”) asset and corresponding operating lease liability should be recognized in accordance with ASC 842 – Leases (“ASC 842”) for leases held by HEYDUDE that were not historically recognized in accordance with ASC 842. Accordingly, a $2.8 million dollar ROU asset and corresponding current and long-term operating lease liability for the same amount was recorded to recognize the historical HEYDUDE leases in accordance with ASC 842.
During preparation of the unaudited pro forma combined financial information, Crocs management has performed a preliminary analysis and is not aware of any material differences other than the pro forma reclassifications detailed within this footnote. Accordingly, this unaudited pro forma combined financial information assumes no material differences in accounting policies between the companies, except for those discussed above.
HEYDUDE
Historical, as adjusted, Balance Sheet as of December 31, 2021
(amounts in thousands)
| Historical US Acquired Companies | Historical HK Acquired Companies | Reclassification Adjustments and Policy Alignment<br>(Note 4) | Intercompany Eliminations<br>(Note 4) | Historical, as adjusted, HEYDUDE | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| ASSETS | ||||||||||||
| Current assets: | ||||||||||||
| Cash and cash equivalents | $ | 64,870 | $ | 34,440 | $ | — | $ | — | $ | 99,310 | ||
| Restricted cash — current | — | — | — | — | — | |||||||
| Accounts receivable, net of allowances | 65,414 | 97,159 | — | (96,685) | CC | 65,888 | ||||||
| Inventories | 97,589 | 178 | — | (30,343) | DD | 67,424 | ||||||
| Income taxes receivable | 2,780 | — | — | — | 2,780 | |||||||
| Other receivables | 172 | — | — | — | 172 | |||||||
| Prepaid expenses and other assets | 1,199 | 4,106 | — | — | 5,305 | |||||||
| Total current assets | 232,024 | 135,883 | — | (127,028) | 240,879 | |||||||
| Property and equipment, net | 314 | — | — | — | 314 | |||||||
| Intangible assets, net | — | 3,108 | — | — | 3,108 | |||||||
| Goodwill | — | — | — | — | — | |||||||
| Deferred tax assets, net | 3,329 | — | — | — | 3,329 | |||||||
| Restricted cash | — | — | — | — | — | |||||||
| Right-of-use assets | — | — | 2,844 | AA | — | 2,844 | ||||||
| Other assets | — | — | — | — | — | |||||||
| Total assets | $ | 235,667 | $ | 138,991 | $ | 2,844 | $ | (127,028) | $ | 250,474 | ||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||
| Current liabilities: | ||||||||||||
| Accounts payable | $ | 105,388 | $ | 10,247 | $ | — | $ | (96,685) | CC | $ | 18,950 | |
| Accrued expenses and other liabilities | 33,840 | 4,428 | 254 | BB | — | 38,522 | ||||||
| Income taxes payable | — | 22,268 | — | — | 22,268 | |||||||
| Current operating lease liabilities | — | — | 1,178 | AA | — | 1,178 | ||||||
| Amount due to related parties | — | 254 | (254) | BB | — | — | ||||||
| Total current liabilities | 139,228 | 37,197 | 1,178 | (96,685) | 80,918 | |||||||
| Long-term income taxes payable | 4,922 | — | — | — | 4,922 | |||||||
| Long-term borrowings | — | — | — | — | — | |||||||
| Long-term operating lease liabilities | — | — | 1,666 | AA | — | 1,666 | ||||||
| Long-term deferred tax liability | — | 202 | — | — | 202 | |||||||
| Other liabilities | — | — | — | — | — | |||||||
| Total liabilities | 144,150 | 37,399 | 2,844 | (96,685) | 87,708 | |||||||
| Commitments and contingencies | — | |||||||||||
| Stockholders’ equity: | ||||||||||||
| Common stock | — | 4 | — | — | 4 | |||||||
| Treasury stock | — | — | — | — | — | |||||||
| Additional paid-in capital | — | — | — | — | — | |||||||
| Retained earnings | 91,517 | 101,588 | — | (30,343) | DD | 162,762 | ||||||
| Accumulated other comprehensive loss | — | — | — | — | — | |||||||
| Total stockholders’ equity | 91,517 | 101,592 | — | (30,343) | 162,766 | |||||||
| Total liabilities and stockholders’ equity | $ | 235,667 | $ | 138,991 | $ | 2,844 | $ | (127,028) | $ | 250,474 |
HEYDUDE
Historical, as adjusted, Statement of Operations for the twelve months ended December 31, 2021
(amounts in thousands)
| Historical US Acquired Companies | Historical HK Acquired Companies | Intercompany Eliminations<br>(Note 4) | Historical, as adjusted, HEYDUDE | ||||||
|---|---|---|---|---|---|---|---|---|---|
| Revenues | $ | 561,895 | $ | 276,910 | $ | (258,127) | EE | $ | 580,678 |
| Cost of sales | 330,990 | 179,785 | (242,497) | EE | 268,278 | ||||
| Gross profit | 230,905 | 97,125 | (15,630) | 312,400 | |||||
| Selling, general and administrative expenses | 81,786 | 4,998 | — | 86,784 | |||||
| Income from operations | 149,119 | 92,127 | (15,630) | 225,616 | |||||
| Foreign currency losses, net | — | — | — | — | |||||
| Interest income | — | — | — | — | |||||
| Interest expense | (1,230) | — | — | (1,230) | |||||
| Other income, net | 11 | 1,122 | — | 1,133 | |||||
| Income before income taxes | 147,900 | 93,249 | (15,630) | 225,519 | |||||
| Income tax expense | 35,102 | 15,374 | — | 50,476 | |||||
| Net income | $ | 112,798 | $ | 77,875 | $ | (15,630) | $ | 175,043 |
Note 2. Preliminary Purchase Price Allocation
The Acquisition is being accounted for as a business combination using the acquisition method of accounting, whereby the assets acquired and liabilities assumed are recognized based upon their estimated fair values at the Acquisition Date, under ASC 805.
The fair values of the assets and liabilities in the unaudited pro forma combined financial statements are based upon a preliminary assessment of fair value and may change when the final valuation of assets acquired and liabilities assumed and working capital settlements are made. Crocs expects to finalize the purchase price allocation as soon as practicable, but no later than one year from the Acquisition Date. Assuming the Acquisition was consummated on December 31, 2021. the preliminary closing price for HEYDUDE would be $2,412.2 million, comprising of $2,038.0 million in cash paid to the sellers at the time of close, $8.5 million held back and reserved for working capital adjustments to the purchase price expected to be paid to the sellers, and $365.7 million in Crocs’ equity, based on 2,852,280 shares issued and the closing stock price on December 31, 2021.
Based on December 31, 2021 financial information, Crocs estimated total Acquisition consideration and the preliminary allocation of fair value to the related assets and liabilities as follows (in thousands):
| Amounts | ||
|---|---|---|
| Cash and cash equivalents (see Note 3 TM O) | $ | 6,232 |
| Accounts receivable, net | 66,060 | |
| Inventories | 171,270 | |
| Income taxes receivable | 2,780 | |
| Prepaid expenses and other assets | 5,305 | |
| Deferred tax assets, net | 3,329 | |
| Intangible assets | 1,870,000 | |
| Goodwill | 703,123 | |
| Right-of-use assets | 2,844 | |
| Accounts payable | (18,950) | |
| Accrued expenses and other liabilities | (38,522) | |
| Income taxes payable | (22,268) | |
| Current operating lease liabilities | (1,178) | |
| Long-term deferred tax liability | (331,220) | |
| Long-term income taxes payable | (4,922) | |
| Operating lease liabilities | (1,666) | |
| Net assets acquired | $ | 2,412,217 |
Note 3. Unaudited Pro Forma Adjustments to the Combined Financial Statements
The pro forma adjustments are based on Crocs’ preliminary estimates and assumptions that are subject to change with respect to the final purchase price and allocation thereof. Accordingly, the purchase price allocation is considered preliminary and may materially change before final determination. The changes would affect the values assigned to the assets acquired and liabilities assumed. The following adjustments have been reflected in the unaudited pro forma combined balance sheet as if the Acquisition occurred on December 31, 2021 and in the unaudited pro forma combined statement of operations as if the Acquisition occurred on January 1, 2021.
A. Adjustment to reflect the cash received from borrowings under the Company’s existing revolving credit facility and the Company’s new term loan B credit facility, net of issuance costs and debt discount, offset by the cash paid for the acquisition of HEYDUDE (in thousands).
| Proceeds from revolving credit facility | $ | 50,000 |
|---|---|---|
| Proceeds from term loan B credit facility | 2,000,000 | |
| Issuance costs and debt discount | (49,005) | |
| Increase in cash and cash equivalents due to debt financing | $ | 2,000,995 |
| Cash payment for HEYDUDE | $ | (2,037,998) |
| Decrease in cash and cash equivalents due to transaction accounting adjustments | $ | (2,037,998) |
B. Reflects adjustment of $8.5 million to accounts payable for the amount of purchase price consideration held back from the initial cash payment on the Acquisition Date for any potential downward adjustments to the Purchase Price.
C. Reflect adjustments to inventories for the step up of HEYDUDE’s inventory to fair value. The fair value of inventory was determined using a market approach via a top-down method viewpoint and a cost approach (Replacement Cost Method) via a bottom-up method viewpoint. The top-down and bottom-up methods are reconciled in order to allocate profit and expenses to measure the inventory value created by a seller. The unaudited pro forma combined statement of operations for the twelve months ended December 31, 2021 is also adjusted to increase cost of sales by the same amount as the inventory is expected to be sold within one year of the Acquisition Date.
| Carrying value | Fair value adjustment | Preliminary fair value | ||||
|---|---|---|---|---|---|---|
| (in thousands) | ||||||
| Inventories | $ | 67,424 | $ | 103,846 | $ | 171,270 |
D. Reflects adjustments of $0.3 million to property and equipment, net to remove the historical carrying values of property and equipment, net of HEYDUDE that will not be utilized. Prior to removal, the property and equipment, net had been depreciated straight-line over its useful life.
E. Reflects the net elimination of historical intangible assets, net of HEYDUDE and the recognition of the preliminary amounts assigned to the identifiable intangible assets of $1,886.9 million, as shown below. Trademarks are indefinite-lived and therefore not amortized. Customer relationships are amortized on a straight-line basis over its useful life of 15 years. Note that the historical HEYDUDE intangibles, net balance consisted of trademarks, which are indefinite-lived and therefore not amortized. As such, the historical carrying value of HEYDUDE intangibles, net was reversed and no reversal of amortization was required for this adjustment.
| Historical HEYDUDE Intangibles, net<br>(in thousands) | Preliminary fair value<br>(in thousands) | Net recognition (elimination) of intangible assets<br>(in thousands) | Remaining useful life<br>(in years) | Amortization per year | |||||
|---|---|---|---|---|---|---|---|---|---|
| Trademark | $ | — | $ | 1,570,000 | $ | 1,570,000 | Indefinite | $ | — |
| Customer relationships | — | 300,000 | 300,000 | 15 | 20,000 | ||||
| Intangible assets | 3,108 | — | (3,108) | — | — | ||||
| Total | $ | 3,108 | $ | 1,870,000 | $ | 1,866,892 | — | $ | 20,000 |
F. Reflects adjustments $331.2 million to record a deferred tax liability as a result of the fair value step up of certain tangible and intangible assets.
G. Reflects the elimination of historical equity of HEYDUDE in total amount of $162.8 million. The impact on the Company’s common stock is reflective of a par value of $0.001 per share.
H. Reflects the equity consideration of $365.7 million, calculated as the number of shares issued, 2,852,280, multiplied by the closing price of the Company’s common stock on December 31, 2021 of $128.22, calculated in accordance with the Agreement. The impact on the Company’s common stock is reflective of a par value of $0.001 per share.
I. Reflects adjustments to the cost of goods sold related to the step up in fair value in inventory discussed in C. Note this is a non-recurring item as the inventory turnover is less than 12 months.
J. Reflects amortization expense of $20.0 million for the twelve months ended December 31, 2021 due to the customer relationship intangible asset with a useful life of 15 years pursuant to the Acquisition, as described above in E. Also reflects reversal of $0.6 million of depreciation expense (which consists of $0.3 million in ‘Cost of sales’ and $0.3 million in ‘Selling, general and administrative expenses’ in the unaudited pro forma combined statement of operations) recorded in the historical, as adjusted, HEYDUDE financial statements. There is no historical amortization expense to reverse from HEYDUDE’s financial results.
K. Reflects adjustments to interest expense and amortization of deferred financing costs related to the Company’s new term loan B credit facility and the additional draw on the Company’s existing revolving credit facility to finance the cash consideration. Borrowings under the revolving credit facility bear interest at a variable interest rate based on (A) a Base Rate (defined as the highest of (i) the Overnight Bank Funding Rate (as defined in the credit agreement governing the revolving credit facility (the “Credit Agreement”)), plus 0.25%, (b) the Prime Rate (as defined in the Credit Agreement), and (c) the Daily Simple SOFR (as defined in the Credit Agreement), plus 1.00%), plus an applicable margin ranging from 0.25% to 0.875% based on our leverage ratio or 1.35% to 1.975% for the Daily Simple SOFR based on the leverage ratio, or (B) the Term SOFR Rate (as defined in the Credit Agreement), plus an applicable margin ranging from 1.35% to 1.975% based on our leverage ratio for one-month interest periods and 1.40% to 2.025% based on our leverage ratio for three month interest periods. Borrowings under the revolving credit facility are secured by all of the assets of the Company and its subsidiaries (the “Borrowers”) and guaranteed by certain other subsidiaries of the Borrowers. The Company calculated pro forma interest expense using a rate of 4% for the term loan B and 1.88% on the revolving facility.
A 1/8 of a percentage point increase or decrease in the interest rate related to borrowings under the Company’s new term loan B credit facility would result in a change in interest expense of approximately $0.1 million for the twelve months ended December 31, 2021.
| Amounts | ||
|---|---|---|
| (in thousands) | ||
| Interest related to term loan B credit facility | $ | 80,000 |
| Interest related to draw on revolving facility | 940 | |
| Amortization of deferred financing fees | 7,001 | |
| Total adjustment to interest expense | $ | 87,941 |
L. Reflects income tax effect of pro forma adjustments using the estimated statutory tax rate of 17.7% for the year ended December 31, 2021. The tax rate used for the pro forma financial information is a blended statutory tax rate, which will likely vary from the actual effective tax rate in periods subsequent to the completion of the pro forma events.
M. On the Unaudited Pro Forma Combined Balance Sheet, this reflects an adjustment to accrue for $22.1 million of non-recurring transaction costs related to the Acquisition, which are not reflected in the historical financial statements. On the Unaudited Pro Forma Combined Statement of Operations, this amount has been included as a transaction adjustment in selling, general and administrative expenses.
N. The unaudited pro forma combined basic and diluted earnings per share calculations are based on Crocs’ consolidated basic and diluted weighted average outstanding common shares, including the issuance of the 2,852,280 shares as part of the consideration.
O. The Agreement specified that the Company would acquire a limited amount of cash. As a result of this provision, acquired cash was reduced to $6.2 million with the balance distributed to the Sellers prior to the close of the Acquisition. At December 31, 2021 historical HEYDUDE cash was $99.3 million. Therefore, for purposes of the Unaudited Pro Forma Combined Balance Sheet, there is a transaction adjustment of $93.1 million to present the adjusted cash balance.
Note 4. Adjustments to components of historical HEYDUDE financial statements
Certain adjustments were made to the historical financial statements of the US Acquired Companies and HK Acquired Companies to conform accounting policies and presentation and to eliminate intercompany activity between the two entities.
AA. Reflects a right of use asset and associated operating lease liability to account for leases not historically accounted for by HEYDUDE under ASC 842.
BB. Reflects a reclassification of a related party balance to accrued expenses to conform presentation of the two entities.
CC. Reflects an elimination of intercompany accounts receivable and accounts payable between the US Acquired Companies and the HK Acquired Companies.
DD. Reflects an elimination of a markup on inventory sold between the US Acquired Companies and the HK Acquired Companies.
EE. Reflects an elimination of revenue and cost of sales on intercompany sale transactions between the US Acquired Companies and the HK Acquired Companies.
11