Ufp Technologies Inc 8-K/A, filed Mar 10, 2022
Ufp Technologies Inc (UFPT)
About this 8-K/A
Ufp Technologies Inc filed this 8-K/A on March 10, 2022, reporting on events of December 22, 2021.
Items reported
- Item 9.01: Financial statements and exhibits
UNITED STATES
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WASHINGTON, D.C. 20549
FORM
Current Report Pursuant to
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| The |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
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Explanatory Note.
This amendment to the Original Report is being filed to provide the financial statements and pro forma financial information required by Items 9.01(a) and 9.01(b), respectively, of Form 8-K.
Item 9.01 Financial Statements and Exhibits.
| (a) | Financial Statements of Business Acquired. |
The audited consolidated financial statements of DAS Medical as of and for the year ended December 31, 2020, the accompanying notes thereto, and the related Independent Auditors report, are filed as Exhibit 99.1.
The unaudited consolidated financial statements of DAS Medical as of and for the three and nine months ended September 30, 2021 and 2020, and the accompanying notes thereto, are filed as Exhibit 99.2.
| (b) | Pro Forma Financial Information. |
The following unaudited pro forma condensed combined financial information giving effect to the Acquisition are filed as Exhibit 99.3:
- Unaudited pro forma condensed combined balance sheet as of September 30, 2021
- Unaudited pro forma condensed combined statement of income for the nine-months ended September 30, 2021
- Unaudited pro forma condensed combined statement of income for the year ended December 31, 2020; and
- Notes to unaudited pro forma condensed combined financial information.
| (d) | Exhibits |
| Exhibit Number |
Description | |
| 23.1 | Consent of Windham Brannon, LLC | |
| 99.1 | Audited condensed consolidated financial statements of DAS Medical for the years ended December 31, 2020 | |
| 99.2 | Unaudited condensed consolidated financial statements of DAS Medical as of and for the three and nine months ended September 30, 2021 and 2020 | |
| 99.3 | Unaudited pro forma condensed combined financial information of UFP | |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
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.
| Dated: March 10, 2022 | UFP TECHNOLOGIES, INC. |
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| By: /s/ Ronald J. Lataille | |
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Ronald J. Lataille, Chief Financial Officer and Senior Vice President |
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the following Registration Statements:
Forms S-8 (File No. 333-174907, File No. 333-151883, File No. 333-143673, File No. 333-116436, File No. 333-56741, File No. 333-91408, File No. 333-106390, File No. 333-39946, and File No. 033-76640) of our report dated March 4, 2022, with respect to the consolidated financial statements of DAS Medical Holdings, LLC and Subsidiaries, as of December 31, 2020 and for the year then ended, included in this Current Report on Form 8-K/A of UFP Technologies, Inc.
/s/ WINDHAM BRANNON, LLC
Atlanta, Georgia
March 10, 2022
Exhibit 99.1
DAS Medical Holdings, LLC
and Subsidiaries
Consolidated Financial Statements
December 31, 2020
DAS Medical Holdings, LLC and Subsidiaries
Table of Contents
December 31, 2020
| Independent Auditor’s Report | 1 |
| Consolidated Financial Statements | |
| Consolidated Balance Sheet | 3 |
| Consolidated Statement of Income | 4 |
| Consolidated Statement of Changes in Members’ Equity | 5 |
| Consolidated Statement of Cash Flows | 6 |
| Notes to Consolidated Financial Statements | 7 |
INDEPENDENT AUDITOR’S REPORT
To the Board of Directors of
DAS Medical Holdings, LLC and Subsidiaries
We have audited the accompanying consolidated financial statements of DAS Medical Holdings, LLC and Subsidiaries (the Company), which comprise the consolidated balance sheet as of December 31, 2020, and the related consolidated statements of income, changes in members’ equity, and cash flows for the year then ended, and the related notes to the consolidated financial statements.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States. This includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Company’s preparation and fair presentation of the consolidated 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 Company’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 consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of DAS Medical Holdings, LLC and Subsidiaries as of
December 31, 2020, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles
generally accepted in the United States.
| 3630 Peachtree Road NE, Suite 600 | Atlanta, GA 30326 | 404.898.2000 | www.windhambrannon.com | |||
| 1 |
Emphasis of Matter
As discussed in Note 3, the consolidated financial statements include inventories of $10,810,440 (38% of total assets) as of December 31, 2020, that are stated at the lower of cost or net realizable value. We were engaged as the Company’s independent auditors on August 24, 2021. We were unable to observe inventories at December 31, 2020 and 2019. Management provided us with all records and all adjustments to inventory to facilitate a complete and accurate recreation of the inventory balances, by category of inventory. Our opinion was not modified with respect to this matter.
/s/ WINDHAM BRANNON, LLC | ||
| March 4, 2022 | Certified Public Accountants |
| 2 |
DAS Medical Holdings, LLC and Subsidiaries
Consolidated Balance Sheet
December 31, 2020
| Assets | ||||
| Current assets | ||||
| Cash | $ | 7,372,875 | ||
| Accounts receivable | 2,234,212 | |||
| Inventories | 10,810,440 | |||
| Short-term investments | 1,015,726 | |||
| Other current assets | 195,569 | |||
| Total current assets | 21,628,822 | |||
| Property and equipment, net | 2,957,670 | |||
| Long-term investments | 3,332,138 | |||
| Alternative investment | 455,000 | |||
| Goodwill and other intangible assets, net | 77,222 | |||
| Total assets | $ | 28,450,852 | ||
| Liabilities and members’ equity | ||||
| Current liabilities | ||||
| Accounts payable | $ | 2,570,627 | ||
| Accrued expenses | 150,983 | |||
| Other current liabilities | 11,899 | |||
| Total current liabilities | 2,733,509 | |||
| Paycheck Protection Program loan | 203,400 | |||
| Total liabilities | 2,936,909 | |||
| Members’ equity attributable to controlling interest | 22,209,741 | |||
| Noncontrolling interests | 3,304,202 | |||
| Total members’ equity | 25,513,943 | |||
| Total liabilities and members’ equity | $ | 28,450,852 | ||
The accompanying notes are an integral part of these financial statements.
| 3 |
DAS Medical Holdings, LLC and Subsidiaries
Consolidated Statement of Income
For the Year Ended December 31, 2020
| Revenues, net | $ | 39,244,589 | ||
| Cost of sales | 28,271,541 | |||
| Gross profit | 10,973,048 | |||
| Selling, general, and administrative expenses | 2,540,020 | |||
| Operating income | 8,433,028 | |||
| Other income (expense) | ||||
| Gain and income on investments, net | 194,464 | |||
| Interest expense | (18,665 | ) | ||
| Other expense, net | (21,250 | ) | ||
| Other income, net | 154,549 | |||
| Income before taxes | 8,587,577 | |||
| Income tax expense | 653,553 | |||
| Net income | 7,934,024 | |||
| Net income attributable to noncontrolling interests | (825,689 | ) | ||
| Net income attributable to controlling interest | $ | 7,108,335 |
The accompanying notes are an integral part of these financial statements.
| 4 |
DAS Medical Holdings, LLC and Subsidiaries
Consolidated Statement of Members’ Equity
For the Year Ended December 31, 2020
| Attributable to | Total | |||||||||||
| Controlling | Noncontrolling | Members’ | ||||||||||
| Interest | Interests | Equity | ||||||||||
| Balance, December 31, 2019 | $ | 17,501,406 | $ | 2,729,474 | $ | 20,230,880 | ||||||
| Distributions | (2,400,000 | ) | (250,961 | ) | (2,650,961 | ) | ||||||
| Net income | 7,108,335 | 825,689 | 7,934,024 | |||||||||
| Balance, December 31, 2020 | $ | 22,209,741 | $ | 3,304,202 | $ | 25,513,943 | ||||||
The accompanying notes are an integral part of these financial statements.
| 5 |
DAS Medical Holdings, LLC and Subsidiaries
Consolidated Statement of Cash Flows
For the Year Ended December 31, 2020
| Cash flows from operating activities | ||||
| Net income | $ | 7,934,024 | ||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||
| Depreciation and amortization | 362,060 | |||
| Gain and income on investments, net | (194,464 | ) | ||
| Changes in operating assets and liabilities: | ||||
| Accounts receivable | 6,178,885 | |||
| Inventories | (2,507,264 | ) | ||
| Other current assets | 108,767 | |||
| Accounts payable | (3,008,818 | ) | ||
| Accrued expenses | 15,899 | |||
| Other current liabilities | 11,899 | |||
| Net cash provided by operating activities | 8,900,988 | |||
| Cash flows from investing activities | ||||
| Purchases of property and equipment | (342,942 | ) | ||
| Purchases of investments | (5,361,511 | ) | ||
| Proceeds from sale of investments | 3,024,999 | |||
| Purchases of alternative investment | (200,000 | ) | ||
| Net cash used in investing activities | (2,879,454 | ) | ||
| Cash flows from financing activities | ||||
| Proceeds from PPP loan | 203,400 | |||
| Distributions paid | (4,329,825 | ) | ||
| Net cash used in financing activities | (4,126,425 | ) | ||
| Net change in cash | 1,895,109 | |||
| Cash, beginning of year | 5,477,766 | |||
| Cash, end of year | $ | 7,372,875 | ||
| Supplemental disclosure of cash flow information | ||||
| Cash paid for interest | $ | 18,665 | ||
| Cash paid for taxes | $ | 804,935 | ||
| Non-cash transaction - decrease in accrued distributions | $ | 1,678,864 | ||
The accompanying notes are an integral part of these financial statements.
| 6 |
DAS Medical Holdings, LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
| 1. | Organization and Business |
DAS Medical Holdings, LLC (DAS) was organized under the laws of the state of Georgia in 2015. DAS is a world-class and innovative solutions provider to medical device manufacturers. As a contract manufacturer, DAS specializes in the design development and manufacturing of single use surgical equipment covers, robotic draping systems, and fluid control pouches.
| 2. | Summary of Significant Accounting Policies |
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of DAS, DAS Medical Corporation (DAS Corp), DAS Medical International, S.R.L. (DAS International), Inmobiliaria Abidor, S.R.L. (Abidor), One Degree Medical Holdings, LLC (One Degree), and Sterimed, LLC (Sterimed). The six entities are collectively referred to herein as the “Company”. Significant intercompany accounts and transactions have been eliminated in consolidation.
DAS Corp is 100% owned by DAS and was incorporated to hold the Company’s interest in DAS International.
DAS International provides contract manufacturing services in the Dominican Republic. DAS Corp owns 87% of DAS International. The outside investor’s 13% interest is included in the Company’s consolidated financial statements as noncontrolling interests.
Abidor owns certain real estate in the Dominican Republic. DAS International owns 99% of Abidor. The remaining 1% of ownership interest is held by a member of DAS. The Company considers any noncontrolling interest to be insignificant and has fully consolidated Abidor in the Company’s consolidated financial statements.
One Degree manufactures intraoperative patient warming solutions. DAS owns 95% of One Degree. The outside investor’s 5% interest is included in the Company’s consolidated financial statements as noncontrolling interests.
Sterimed manufactures sterile disposable equipment covers. Sterimed was acquired by DAS in 2015 from a third party in exchange for ownership in DAS, and is wholly owned.
On September 29, 2021, the members of DAS formed Parallax Investments, LLC (Parallax), a Georgia limited liability company. On October 14, 2021, all issued and outstanding equity interests in the Company were contributed to Parallax in exchange for all of the issued and outstanding membership interests of Parallax. On December 22, 2021 (Closing Date), Parallax sold all of the interests in the Company to UFP Technologies, Inc., a Delaware corporation, excluding the equity interests in Abidor, for a purchase price of $75,000,000. The purchase price is subject to certain purchase price adjustments and includes potential earnout payments. Simultaneous with this transaction, certain members of Parallax, who are also management of the Company, agreed to sell their personal goodwill related to the Company, as well as enter into a non-compete agreement with UFP Technologies, Inc.
| 7 |
DAS Medical Holdings, LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
During 2021 and prior to the Closing Date, DAS International and One Degree redeemed each outside investors’ noncontrolling interest for $6,000,000 and $30,000, respectively. DAS International’s outside investor received an additional $600,000 as part of a non-compete agreement.
Significant Accounting Standards Not Yet Adopted
Leases—In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2016-02 (ASU 2016-02), Leases (Topic 842). ASU 2016-02 amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. The new standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. The guidance is expected to be effective for nonpublic business entities for fiscal years beginning after December 15, 2021. Early adoption is permitted. Subsequent to the issuance of ASU 2016-02, the FASB issued additional Accounting Standards Updates clarifying aspects of the new lease accounting standard, which will be effective upon adoption of ASU 2016-02. The Company plans to adopt ASU 2016-02 for the year ending December 31, 2022. The Company is still evaluating the effect that the updated standard will have on its consolidated financial statements and related disclosures.
Basis of Presentation
The accompanying consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (GAAP).
Use of Estimates
The preparation of consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ significantly from those estimates.
Revenue Recognition
The Company’s revenues primarily consist of revenue from the sale of drapes, machine covers, and other sterile medical devices. Under ASC Topic 606 - Revenue from Contracts with Customers (ASC 606), the amount of revenue recognized for any goods or services reflects the consideration that the Company expects to be entitled to receive in exchange for these goods or services. To achieve this core principle, the Company applies the following five-step approach: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to performance obligations in the contract; and (5) recognize revenue when or as a performance obligation is satisfied. The Company determines the accounting treatment for each contract at inception in accordance with ASC 606. Incidental items that are immaterial in the context of the contract are recognized as expense. The Company does not have any significant financing components. The incremental costs of obtaining a contract, which consist primarily of sales commissions, are reviewed and those costs where the amortization period is less than a year are expensed as they occur. As of December 31, 2020, the Company had no deferred expense related to incremental contract costs.
| 8 |
DAS Medical Holdings, LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
Performance Obligations—A performance obligation is a promise in a contract to transfer a distinct good or service to a customer and is the unit of account in ASC 606. This good or service must be distinct within the context of the contract. The transaction price of a contract is allocated to each distinct performance obligation and is recognized as revenue when, or as, the performance obligation is satisfied. To the extent a contract is deemed to have multiple performance obligations, management allocates the transaction price of the contract to each performance obligation using their best estimate of the standalone selling price of each distinct good or service in the contract.
Performance Obligations Satisfied at a Point in Time—Performance obligations that do not meet the criteria to be recognized over time are required to be recognized at a point in time, whereby revenues and gross profit are recognized only when a performance obligation is complete, and a customer has obtained control of a promised good or service. In determining when a performance obligation is complete for revenues recognized at a point in time, management measures transfer of control considering physical possession of the good or service, and the Company’s rights to payment.
The Company has determined that revenue from the sale of the Company’s products is generally recognized at the point in time when the products are shipped, and the customer takes ownership and assumes the risk of loss.
Cash
The Company’s cash accounts may exceed federally insured limits. The Company believes it mitigates any risks by depositing cash with major financial institutions.
Accounts Receivable
In the normal course of business, the Company extends unsecured credit to its customers. Accounts receivable are stated at estimated net realizable value. The Company performs on-going credit evaluations of its customers. The carrying amount of accounts receivable is reduced, if necessary, by a valuation allowance that reflects management’s best estimate of the amounts that will not be collected. Management individually reviews all past due balances, and based on that assessment of payment history, provides an allowance for the portion, if any, of the balance that will not be collected. All accounts or portions thereof considered uncollectible or to require excessive collection costs are written off. As of December 31, 2020, management determined that an allowance was not necessary as all amounts are fully collectible.
| 9 |
DAS Medical Holdings, LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
Inventories
Inventories consists of raw materials, work in progress, and finished goods and is stated at the lower of cost (average cost method) or net realizable value. An allowance for damaged or obsolete products is established, if necessary, based on management’s assessment of inventory on hand. As of December 31, 2020, management has determined that no such allowance is necessary.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed on a straight-line basis, over the estimated useful lives of the assets. Maintenance and repairs are expensed as incurred, while significant improvements are capitalized.
Investments
The Company’s investments are marketable securities recorded at fair value. Unrealized gains and losses on equity securities available for sale are reflected in other income (expense) on the consolidated statement of income. The estimate of fair value is based on publicly available market information or other estimates determined by management. Realized gains and losses from the sale of available for sale securities, if any, are determined on a specific identification method.
Alternative Investment
The Company’s alternative investment consists of contributions to a secured lending fund (the Fund). The Company has determined that it should report this investment under the cost method of accounting. Therefore, the Company recognizes dividend income to the extent such dividends represent the Company’s proportionate share of earnings. Dividends received in excess of the Company’s proportionate share of earnings are treated as a reduction in the investment. The Company evaluates its investment for other than temporary impairments at least annually, or more frequently if impairment indicators arise. No such impairments were recognized during 2020. On October 28, 2021, the Fund underwent an initial public offering and is now traded on the New York Stock Exchange. The Fund's advisor has designed a staged liquidity schedule over a period of eight months following the initial public offering. Subsequent to the initial public offering, the Company began classifying the Fund with other investments.
Impairment
Long-lived assets such as property and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When indicators of impairment are present, the Company evaluates the carrying amount of such assets in relation to the operating performance and future estimated undiscounted net cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. The assessment of the recoverability of assets will be impacted if estimated future operating cash flows are not achieved. Management did not identify any conditions that would suggest an impairment of long-lived assets exists during 2020.
| 10 |
DAS Medical Holdings, LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
Goodwill and Other Intangible Assets
The acquisition of Sterimed resulted in the recording of goodwill and certain other intangible assets. Goodwill represents the excess cost over fair value of net assets acquired through acquisition. The other intangible assets acquired included customer lists and customer contracts. The Company amortizes all intangible assets related to the Sterimed acquisition on a straight-line basis over 15 years. Amortization expense for the year ended December 31, 2020 was $7,413. Future amortization expense is expected to be approximately $7,413 each year until the assets are fully amortized during the year ended December 31, 2031.
The Company evaluates the carrying value of goodwill on an annual basis and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of goodwill below its carrying amount. When assessing whether goodwill is impaired, management considers first a qualitative approach to evaluate whether it is more likely than not the fair value of goodwill is below its carrying amount; if so, management considers a quantitative approach by analyzing changes in performance and market-based metrics as compared to those used at the time of the initial acquisition. No impairment loss was recognized for goodwill during the year ended December 31, 2020.
Foreign Currency Activities
The Company’s functional currency for all operations worldwide is the U.S. dollar. The Company conducts certain transactions in foreign currencies. Foreign currency transactions are remeasured into U.S. dollars at prevailing or current rates, respectively. Exchange gains and losses resulting from foreign currency transactions are recognized in current operations. Such foreign currency transactions, gains, and losses were inconsequential for the year ended December 31, 2020.
Income Taxes
DAS, One Degree, and Sterimed are limited liability companies treated as partnerships for income tax reporting purposes and, as such, are not subject to income tax. Instead, the members report their proportionate share of taxable income or loss on their own income tax return.
DAS Corp accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income tax expense represents the change during the period in the deferred tax assets and liabilities. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. During 2020, there were no deferred tax assets or liabilities to recognize.
| 11 |
DAS Medical Holdings, LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
DAS International and Abidor are included with the DAS Corp federal income tax return. DAS International and Abidor are also subject to certain taxes imposed by the Dominican Republic federal government.
During 2020, federal and foreign income taxes totaled $556,718 and $96,835, respectively.
Management of the Company considers the likelihood of changes by taxing authorities in its income tax returns and would disclose potential significant changes that management believes are more likely than not to occur upon examination by tax authorities. Management has not identified any uncertain tax positions that require recognition or disclosure in the accompanying financial statements. The Company’s income tax returns for the past three years are subject to examination by tax authorities and may change upon examination.
Sales Tax
Sales taxes are imposed on all of the Company’s nonexempt sales at rates based on the destination of the product. The Company collects the sales tax from customers and remits the amount to the proper jurisdictions. The Company’s accounting policy is to exclude the tax collected from revenues and cost of sales.
Shipping and Handling
Shipping and handling fees charged to customers are included in revenue and shipping and handling costs incurred are included in cost of sales in the accompanying consolidated statement of income.
Subsequent Events
Management evaluates events occurring subsequent to the date of the financial statements in determining the accounting for and disclosure of transactions and events that affect the financial statements. Subsequent events have been evaluated through March 4, 2022, which is the date the financial statements were available to be issued.
| 12 |
DAS Medical Holdings, LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
| 3. | Inventories |
Inventories consisted of the following at December 31, 2020:
| Raw materials | $ | 7,370,899 | ||
| Work in process | 431,003 | |||
| Finished goods | 3,008,538 | |||
| Total | $ | 10,810,440 |
| 4. | Property and Equipment |
Property and equipment consisted of the following at December 31, 2020:
| Useful Lives | 2020 | |||||
| Machinery and equipment | 3-5 years | $ | 2,486,630 | |||
| Building | 20 years | 872,165 | ||||
| Leasehold improvements | 3-10 years | 600,122 | ||||
| Furniture and fixtures | 3-10 years | 18,434 | ||||
| 3,977,351 | ||||||
| Accumulated depreciation | (1,019,681 | ) | ||||
| Property and equipment, net | $ | 2,957,670 |
Depreciation expense for the year ended December 31, 2020 amounted to $354,647.
| 5. | Fair Value Measurements |
The fair value measurement guidance defines fair value, establishes a framework for measuring fair value, and expands disclosure requirements about fair value measurements. Under the guidance, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
The guidance also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability, developed based on market data obtained from independent sources. Unobservable inputs are inputs that reflect management’s assumptions about the factors market participants would use in valuing the asset or liability, developed based upon the best information available in the circumstances. The input levels are not necessarily an indication of the risk or liquidity associated with financial instruments at that level.
| 13 |
DAS Medical Holdings, LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
The fair value hierarchy prescribed by the guidance is broken down into three levels as follows:
Level 1 – unadjusted quoted prices for identical assets or liabilities at the measurement date in an active market that the entity has the ability to access.
Level 2 – other observable inputs available at the measurement date, other than quoted prices included in Level 1, either directly or indirectly, including:
| · | quoted prices for similar assets or liabilities in active markets; |
| · | quoted prices for identical or similar assets in nonactive markets; |
| · | inputs other than quoted prices that are observable for the asset or liability; |
| · | inputs that are derived principally from or corroborated by other observable market data |
Level 3 – unobservable inputs that reflect the use of significant management judgment. These values are generally determined using pricing models for which assumptions utilize management’s estimate of market participant assumptions.
The following table provides information by level for the Company’s investments in marketable securities that are measured at fair value on a recurring basis:
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Marketable securities: | ||||||||||||||||
| Mutual funds | $ | 1,015,726 | $ | - | $ | - | $ | 1,015,726 | ||||||||
| Corporate bonds | - | 3,332,138 | - | 3,332,138 | ||||||||||||
| Total | $ | 1,015,726 | $ | 3,332,138 | $ | - | $ | 4,347,864 | ||||||||
| 6. | Paycheck Protection Program Loan |
On April 30, 2020, DAS and Sterimed each applied for and were approved for a Small Business Administration (SBA) loan in conjunction with the Paycheck Protection Program (PPP). DAS and Sterimed received loan proceeds of $156,400 and $47,000, respectively, under unsecured promissory notes from the Company’s existing commercial bank (collectively, the PPP loan). The PPP was established by Congress and the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The PPP loan has a two-year term and bears interest at a rate of 1.0% per annum. Monthly principal and interest payments are deferred until the earlier of SBA loan forgiveness or October 2021. The PPP loan is included in non-current liabilities on the accompanying consolidated balance sheet as the Company expects full forgiveness of both loans without the usage of current assets.
| 14 |
DAS Medical Holdings, LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
Under the terms of the CARES Act, PPP loan recipients can be granted forgiveness for all or a portion of loans granted under the PPP. Such forgiveness will be determined by the SBA, subject to limitations, based on the use of loan proceeds for payment of payroll costs, mortgage interest, rent, and utilities. The Company believes the loan proceeds were used in accordance with PPP loan forgiveness requirements.
In connection with applying for the PPP loan, the Company was required to certify, among other things, that the economic uncertainty, at the time, made the PPP loan necessary to support the Company’s operations. Management made this certification in good faith after analyzing the effects of the COVID-19 pandemic on the Company. Management believes the Company satisfied all eligibility criteria for the PPP loan, and that the receipt of the PPP loan was consistent with the broad objectives of the CARES Act.
DAS was granted full forgiveness by the SBA on February 24, 2021. Sterimed was granted full forgiveness by the SBA on June 9, 2021.
| 7. | Revolving Line of Credit |
DAS International maintains a revolving credit agreement with a financial institution for borrowings up to $2,000,000, limited by the available borrowing base, as defined in the agreement. Borrowings under the agreement bear interest at one month LIBOR plus 2.25%, or approximately 2.40% on December 31, 2020. The Company is required to maintain certain covenants as a part of the revolving credit agreement and was in compliance with all covenants as of December 31, 2020. There were no outstanding borrowings under the agreement during or as of the year end December 31, 2020. The Company terminated the revolving credit agreement effective December 17, 2021.
| 8. | Employee Benefit Plan |
On June 1, 2020, the Company established the DAS Medical Holdings Company Retirement Plan (the Plan). The Plan covers substantially all of the Company’s U.S. employees. Employer contributions under the Plan are at the Company’s discretion. The Company contributed $17,975 to the Plan for the year ended December 31, 2020.
| 15 |
DAS Medical Holdings, LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
| 9. | Commitments, Concentrations, and Contingencies |
Operating Leases
The Company leases various office and warehouse space from third-party sources
under
non-cancelable operating leases with payments due through August 2025. Minimum future lease payments due under the non-cancelable operating
leases are as follows:
| Year ending December 31, | Amount | ||||
| 2021 | $ | 462,950 | |||
| 2022 | 401,009 | ||||
| 2023 | 264,008 | ||||
| 2024 | 270,244 | ||||
| 2025 | 182,934 | ||||
| Total | $ | 1,581,145 | |||
Rent expense from third-party sources for the year ended December 31, 2020 amounted to $275,307.
Concentration Risk
During 2020, one customer accounted for approximately 93% of the Company’s sales. Approximately 80% of the Company’s accounts receivable was due from the same customer at December 31, 2020. During 2020, two vendors accounted for approximately 49% of the Company’s purchases. At December 31, 2020, approximately 62% of accounts payable was related to the same two vendors.
Foreign Operations
Approximately 95% of the Company’s products are manufactured by DAS International in the Dominican Republic. Property and Equipment of approximately $2,950,000 and inventory of approximately $10,600,000 related to the manufacturing facility in the Dominican Republic are included in the Company’s consolidated balance sheet at December 31, 2020. Operations outside the United States are subject to risks inherent in operating under different legal systems and various political and economic environments. Among the risks are changes in existing tax laws, possible limitations on foreign investment and income repatriation, government price or foreign exchange controls, and restrictions on currency exchange. The Company does not engage in hedging activities to mitigate its exposure to fluctuations in foreign currency exchange rates.
| 16 |
DAS Medical Holdings, LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
Litigation
The Company may be subject to routine litigation, claims, or assessments in the normal course of business. The Company has no threatened or pending legal proceedings that warrant recognition or disclosure in the consolidated financial statements.
| 10. | Related Party Transactions |
The Company leases an office building owned by a member of DAS, who was also the former owner of Sterimed, with payments due through July 2025. Minimum future lease payments due under the related party lease is as follows:
| Year ending December 31, | Amount | ||||
| 2021 | $ | 45,720 | |||
| 2022 | 45,720 | ||||
| 2023 | 45,720 | ||||
| 2024 | 45,720 | ||||
| 2025 | 26,670 | ||||
| Total | $ | 209,550 | |||
Rent expense paid to a related party for the year ended December 31, 2020 amounted to $45,948.
During 2020, One Degree made guaranteed payments to its outside investor totaling $84,936 related to the individual’s continued role in One Degree’s business operations.
17
Exhibit 99.2
DAS Medical Holdings, LLC
and Subsidiaries
Consolidated Financial Statements (unaudited)
As of September 30, 2021 and 2020 and for each of the three and nine months ended September 30, 2021 and 2020
Unaudited Consolidated Financial Statements
| Condensed Consolidated Balance Sheets | 3 | |||
| Condensed Consolidated Statements of Income | 4 | |||
| Condensed Consolidated Statement of Changes in Members’ Equity | 5 | |||
| Condensed Consolidated Statement of Cash Flows | 6 | |||
| Notes to Condensed Consolidated Financial Statements | 7 |
2
DAS Medical Holdings, LLC and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
September 30, 2021 | September 30, 2020 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash | $ | 16,759,400 | $ | 7,438,832 | ||||
| Accounts receivable | 2,566,396 | 3,392,406 | ||||||
| Inventories | 8,928,723 | 9,877,010 | ||||||
| Short-term investments | 1,699,309 | 654,421 | ||||||
| Other current assets | 57,709 | 51,270 | ||||||
| Total current assets | 30,011,537 | 21,413,939 | ||||||
| Property, plant and equipment | 4,083,523 | 3,748,232 | ||||||
| Less accumulated depreciation and amortization | (1,333,055 | ) | (929,696 | ) | ||||
| Net property, plant and equipment | 2,750,468 | 2,818,536 | ||||||
| Long-term investments | 1,590,459 | 4,046,152 | ||||||
| Alternative Investment | 505,000 | 375,000 | ||||||
| Goodwill and other intangible assets, net | 69,808 | 77,222 | ||||||
| Total assets | $ | 34,927,272 | $ | 28,730,849 | ||||
| Liabilities and Members’ Equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 3,402,846 | $ | 3,580,297 | ||||
| Accrued expenses | 137,828 | 151,907 | ||||||
| Other current liabilities | - | 11,000 | ||||||
| Total current liabilities | 3,540,674 | 3,743,204 | ||||||
| Paycheck Protection Loan | - | 203,400 | ||||||
| Total liabilities | 3,540,674 | 3,946,604 | ||||||
| Members'equity attributable to controlling interest | 27,276,844 | 21,727,652 | ||||||
| Noncontrolling interests | 4,109,754 | 3,056,593 | ||||||
| Total members’ equity | 31,386,598 | 24,784,245 | ||||||
| Total liabilities and members' equity | $ | 34,927,272 | $ | 28,730,849 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
DAS Medical Holdings, LLC and Subsidiaries
Condensed Consolidated Statements of Income
(Unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Revenues, net | $ | 13,228,673 | $ | 12,652,481 | $ | 37,648,133 | $ | 30,323,131 | ||||||||
| Cost of sales | 9,792,668 | 8,991,057 | 27,394,959 | 21,772,895 | ||||||||||||
| Gross profit | 3,436,005 | 3,661,424 | 10,253,174 | 8,550,236 | ||||||||||||
| Selling, general & administrative expenses | 639,556 | 555,170 | 2,183,519 | 2,005,028 | ||||||||||||
| Operating income | 2,796,449 | 3,106,254 | 8,069,655 | 6,545,208 | ||||||||||||
| Interest income and net gain on investments | (18,779 | ) | (33,337 | ) | (83,550 | ) | (93,131 | ) | ||||||||
| Interest expense | - | - | - | 13,368 | ||||||||||||
| Other expense, net | (60,844 | ) | - | (239,857 | ) | - | ||||||||||
| Income before income tax expense | 2,876,072 | 3,139,591 | 8,393,062 | 6,624,971 | ||||||||||||
| Income tax expense | 143,260 | 283,495 | 497,760 | 588,033 | ||||||||||||
| Net income | 2,732,812 | 2,856,096 | 7,895,302 | 6,036,938 | ||||||||||||
| Net income attributable to noncontrolling interests | $ | (246,255 | ) | $ | (311,974 | ) | $ | (805,551 | ) | $ | (669,233 | ) | ||||
| Net income attributable to controlling interests | $ | 2,486,557 | $ | 2,544,122 | $ | 7,089,751 | $ | 5,367,705 | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
DAS Medical Holdings, LLC and Subsidiaries
Condensed Consolidated Statements of changes in Members’ Equity
(Unaudited)
| Three and Nine Month Periods Ended September 30, 2021 | ||||||||||||
| Attributable | Total | |||||||||||
| to Controlling | Noncontrolling | Members' | ||||||||||
| Interest | Interests | Equity | ||||||||||
| Balance at December 31, 2020 | $ | 22,209,741 | $ | 3,304,202 | $ | 25,513,943 | ||||||
| Distributions | (250,000 | ) | 50 | (249,950 | ) | |||||||
| Net income | 1,902,635 | 257,263 | 2,159,898 | |||||||||
| Balance at March 31, 2021 | $ | 23,862,376 | $ | 3,561,515 | $ | 27,423,891 | ||||||
| Distributions | (700,000 | ) | - | (700,000 | ) | |||||||
| Net income | 2,700,558 | 302,034 | 3,002,592 | |||||||||
| Balance at June 30, 2021 | $ | 25,862,934 | $ | 3,863,549 | $ | 29,726,483 | ||||||
| Distributions | (1,072,697 | ) | - | (1,072,697 | ) | |||||||
| Net income | 2,486,607 | 246,205 | 2,732,812 | |||||||||
| Balance at September 30, 2021 | $ | 27,276,845 | $ | 4,109,754 | $ | 31,386,598 | ||||||
| Three and Nine Month Periods Ended September 30, 2020 | ||||||||||||
| Attributable | Total | |||||||||||
| to Controlling | Noncontrolling | Members' | ||||||||||
| Interest | Interests | Equity | ||||||||||
| Balance at December 31, 2019 | $ | 17,501,406 | $ | 2,729,474 | $ | 20,230,880 | ||||||
| Distributions | - | (152,327 | ) | (152,327 | ) | |||||||
| Net income | 1,044,916 | 231,926 | 1,276,842 | |||||||||
| Balance at March 31, 2020 | $ | 18,546,322 | $ | 2,809,073 | $ | 21,355,395 | ||||||
| Distributions | - | (139,737 | ) | (139,737 | ) | |||||||
| Net income | 1,778,667 | 125,334 | 1,904,001 | |||||||||
| Balance at June 30, 2020 | $ | 20,324,989 | $ | 2,794,669 | $ | 23,119,658 | ||||||
| Distributions | (1,141,459 | ) | (50,050 | ) | (1,191,509 | ) | ||||||
| Net income | 2,544,122 | 311,973 | 2,856,096 | |||||||||
| Balance at September 30, 2020 | $ | 21,727,652 | $ | 3,056,593 | $ | 24,784,245 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
5
DAS Medical Holdings, LLC and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2021 | 2020 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | 7,895,302 | $ | 6,036,938 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 320,788 | 272,074 | ||||||
| Gain and income on investments, net | (78,596 | ) | (1,105 | ) | ||||
| Changes in operating assets and liabilities: | ||||||||
| Receivables, net | (332,184 | ) | 4,468,446 | |||||
| Inventories | 1,881,717 | (1,578,548 | ) | |||||
| Other current assets | 137,860 | (45,703 | ) | |||||
| Accounts payable | 832,219 | (3,038,100 | ) | |||||
| Accrued expenses | (13,155 | ) | 12,981 | |||||
| Other current liabilities | (11,899 | ) | 11,000 | |||||
| Net cash provided by operating activities | 10,632,052 | 6,137,983 | ||||||
| Cash flows from investing activities: | ||||||||
| Additions to property, plant, and equipment | (106,172 | ) | (952,861 | ) | ||||
| Purchases of investments | (602,142 | ) | (3,092,350 | ) | ||||
| Proceeds from sale of investments | 1,738,834 | 1,262,804 | ||||||
| Purchases of alternative investment | (50,000 | ) | (120,000 | ) | ||||
| Net cash provided by (used in) investing activities | 980,520 | (2,902,407 | ) | |||||
| Cash flows from financing activities: | ||||||||
| Payments of / Proceeds from PPP loan | (203,400 | ) | 203,400 | |||||
| Distrubutions paid | (2,022,647 | ) | (1,483,573 | ) | ||||
| Net cash used in financing activities | (2,226,047 | ) | (1,280,173 | ) | ||||
| Net increase in cash and cash equivalents | 9,386,525 | 1,955,403 | ||||||
| Cash and cash equivalents at beginning of period | 7,372,875 | 5,483,429 | ||||||
| Cash and cash equivalents at end of period | $ | 16,759,400 | $ | 7,438,832 | ||||
| Supplemental disclosure of cash flow information | ||||||||
| Cash paid for interest | $ | - | $ | 13,368 | ||||
| Cash paid for taxes | $ | 442,985 | $ | 259,495 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
DAS Medical Holdings, LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements
| 1. | Organization and Business |
DAS Medical Holdings, LLC (DAS) was organized under the laws of the state of Georgia in 2015. DAS is a world-class and innovative solutions provider to medical device manufacturers. As a contract manufacturer, DAS specializes in the design development and manufacturing of single use surgical equipment covers, robotic draping systems, and fluid control pouches.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of DAS, DAS Medical Corporation (DAS Corp), DAS Medical International, S.R.L. (DAS International), Inmobiliaria Abidor, S.R.L. (Abidor), One Degree Medical Holdings, LLC (One Degree), and Sterimed, LLC (Sterimed). The six entities are collectively referred to herein as the “Company”. Significant intercompany accounts and transactions have been eliminated in consolidation.
DAS Corp is 100% owned by DAS and was incorporated to hold the Company’s interest in DAS International.
DAS International provides contract manufacturing services in the Dominican Republic. DAS Corp owns 87% of DAS International. The outside investor’s 13% interest is included in the Company’s consolidated financial statements as noncontrolling interests.
Abidor owns certain real estate in the Dominican Republic. DAS International owns 99% of Abidor. The remaining 1% of ownership interest is held by a member of DAS. The Company considers any noncontrolling interest to be insignificant and has fully consolidated Abidor in the Company’s consolidated financial statements.
One Degree manufactures intraoperative patient warming solutions. DAS owns 95% of One Degree. The outside investor’s 5% interest is included in the Company’s consolidated financial statements as noncontrolling interests.
Sterimed manufactures sterile disposable equipment covers. Sterimed was acquired by DAS in 2015 from a third party in exchange for ownership in DAS, and is wholly owned.
On September 29, 2021, the members of DAS formed Parallax Investments, LLC (Parallax), a Georgia limited liability company. On October 14, 2021, all issued and outstanding equity interests in the Company were contributed to Parallax in exchange for all of the issued and outstanding membership interests of Parallax. .
Significant Accounting Standards Not Yet Adopted
Leases—In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2016-02 (ASU 2016-02), Leases (Topic 842). ASU 2016-02 amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. The new standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. The guidance is expected to be effective for nonpublic business entities for fiscal years beginning after December 15, 2021. Early adoption is permitted. Subsequent to the issuance of ASU 2016-02, the FASB issued additional Accounting Standards Updates clarifying aspects of the new lease accounting standard, which will be effective upon adoption of ASU 2016-02. The Company plans to adopt ASU 2016-02 for the year ending December 31, 2022. The Company is still evaluating the effect that the updated standard will have on its consolidated financial statements and related disclosures.
7
Basis of Presentation
The accompanying consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (GAAP).
Use of Estimates
The preparation of consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ significantly from those estimates.
Revenue Recognition
The Company’s revenues primarily consist of revenue from the sale of drapes, machine covers, and other sterile medical devices. Under ASC Topic 606 - Revenue from Contracts with Customers (ASC 606), the amount of revenue recognized for any goods or services reflects the consideration that the Company expects to be entitled to receive in exchange for these goods or services. To achieve this core principle, the Company applies the following five-step approach: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to performance obligations in the contract; and (5) recognize revenue when or as a performance obligation is satisfied. The Company determines the accounting treatment for each contract at inception in accordance with ASC 606. Incidental items that are immaterial in the context of the contract are recognized as expense. The Company does not have any significant financing components. The incremental costs of obtaining a contract, which consist primarily of sales commissions, are reviewed and those costs where the amortization period is less than a year are expensed as they occur. As of December 31, 2020, the Company had no deferred expense related to incremental contract costs.
Performance Obligations—A performance obligation is a promise in a contract to transfer a distinct good or service to a customer and is the unit of account in ASC 606. This good or service must be distinct within the context of the contract. The transaction price of a contract is allocated to each distinct performance obligation and is recognized as revenue when, or as, the performance obligation is satisfied. To the extent a contract is deemed to have multiple performance obligations, management allocates the transaction price of the contract to each performance obligation using their best estimate of the standalone selling price of each distinct good or service in the contract.
Performance Obligations Satisfied at a Point in Time—Performance obligations that do not meet the criteria to be recognized over time are required to be recognized at a point in time, whereby revenues and gross profit are recognized only when a performance obligation is complete, and a customer has obtained control of a promised good or service. In determining when a performance obligation is complete for revenues recognized at a point in time, management measures transfer of control considering physical possession of the good or service, and the Company’s rights to payment.
The Company has determined that revenue from the sale of the Company’s products is generally recognized at the point in time when the products are shipped, and the customer takes ownership and assumes the risk of loss.
8
Cash
The Company’s cash accounts may exceed federally insured limits. The Company believes it mitigates any risks by depositing cash with major financial institutions.
Accounts Receivable
In the normal course of business, the Company extends unsecured credit to its customers. Accounts receivable are stated at estimated net realizable value. The Company performs on-going credit evaluations of its customers. The carrying amount of accounts receivable is reduced, if necessary, by a valuation allowance that reflects management’s best estimate of the amounts that will not be collected. Management individually reviews all past due balances, and based on that assessment of payment history, provides an allowance for the portion, if any, of the balance that will not be collected. All accounts or portions thereof considered uncollectible or to require excessive collection costs are written off. As of September 30, 2021, management determined that an allowance was not necessary as all amounts are fully collectible.
Inventories
Inventories consists of raw materials, work in progress, and finished goods and is stated at the lower of cost (average cost method) or net realizable value. An allowance for damaged or obsolete products is established, if necessary, based on management’s assessment of inventory on hand. As of September 30, 2021, management has determined that no such allowance is necessary.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed on a straight-line basis, over the estimated useful lives of the assets. Maintenance and repairs are expensed as incurred, while significant improvements are capitalized.
Investments
The Company’s investments are marketable securities recorded at fair value. Unrealized gains and losses on equity securities available for sale are reflected in other income (expense) on the consolidated statement of income. The estimate of fair value is based on publicly available market information or other estimates determined by management. Realized gains and losses from the sale of available for sale securities, if any, are determined on a specific identification method.
Alternative Investment
The Company’s alternative investment consists of contributions to a secured lending fund (the Fund). The Company has determined that it should report this investment under the cost method of accounting. Therefore, the Company recognizes dividend income to the extent such dividends represent the Company’s proportionate share of earnings. Dividends received in excess of the Company’s proportionate share of earnings are treated as a reduction in the investment. The Company evaluates its investment for other than temporary impairments at least annually, or more frequently if impairment indicators arise. No such impairments were recognized during the periods ended September 30, 2021 and 2020. On October 28, 2021, the Fund underwent an initial public offering and is now traded on the New York Stock Exchange. The Fund's advisor has designed a staged liquidity schedule over a period of eight months following the initial public offering. Subsequent to the initial public offering, the Company began classifying the Fund with other investments.
Impairment
Long-lived assets such as property and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When indicators of impairment are present, the Company evaluates the carrying amount of such assets in relation to the operating performance and future estimated undiscounted net cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. The assessment of the recoverability of assets will be impacted if estimated future operating cash flows are not achieved. Management did not identify any conditions that would suggest an impairment of long-lived assets exists during the periods ended September 30, 2021 and 2020.
9
Goodwill and Other Intangible Assets
The acquisition of Sterimed resulted in the recording of goodwill and certain other intangible assets. Goodwill represents the excess cost over fair value of net assets acquired through acquisition. The other intangible assets acquired included customer lists and customer contracts. The Company amortizes all intangible assets related to the Sterimed acquisition on a straight-line basis over 15 years. Amortization expense for the nine months ended September 30, 2021 and 2020 was $7,413 and $7,413, respectively. Future amortization expense is expected to be approximately $7,413 each year until the assets are fully amortized during the year ended December 31, 2031.
The Company evaluates the carrying value of goodwill on an annual basis and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of goodwill below its carrying amount. When assessing whether goodwill is impaired, management considers first a qualitative approach to evaluate whether it is more likely than not the fair value of goodwill is below its carrying amount; if so, management considers a quantitative approach by analyzing changes in performance and market-based metrics as compared to those used at the time of the initial acquisition. No impairment loss was recognized for goodwill during the periods ended September 30, 2021 and 2020.
Foreign Currency Activities
The Company’s functional currency for all operations worldwide is the U.S. dollar. The Company conducts certain transactions in foreign currencies. Foreign currency transactions are remeasured into U.S. dollars at prevailing or current rates, respectively. Exchange gains and losses resulting from foreign currency transactions are recognized in current operations. Such foreign currency transactions, gains, and losses were inconsequential for the periods ended September 30, 2021 and 2020.
Income Taxes
DAS, One Degree, and Sterimed are limited liability companies treated as partnerships for income tax reporting purposes and, as such, are not subject to income tax. Instead, the members report their proportionate share of taxable income or loss on their own income tax return.
DAS Corp accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income tax expense represents the change during the period in the deferred tax assets and liabilities. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. During the periods ended September 30, 2021 and 2020, there were no deferred tax assets or liabilities to recognize.
DAS International and Abidor are included with the DAS Corp federal income tax return. DAS International and Abidor are also subject to certain taxes imposed by the Dominican Republic federal government.
10
For the periods ended September 30, 2021 and 2020 the components of income tax are as follows:
| 2021 | 2020 | |||||||
| Federal | $ | 447,735 | $ | 554,538 | ||||
| Foreign | 50,025 | 33,495 | ||||||
| Total | $ | 497,760 | $ | 588,033 | ||||
Management of the Company considers the likelihood of changes by taxing authorities in its income tax returns and would disclose potential significant changes that management believes are more likely than not to occur upon examination by tax authorities. Management has not identified any uncertain tax positions that require recognition or disclosure in the accompanying financial statements. The Company’s income tax returns for the past three years are subject to examination by tax authorities and may change upon examination.
Sales Tax
Sales taxes are imposed on all of the Company’s nonexempt sales at rates based on the destination of the product. The Company collects the sales tax from customers and remits the amount to the proper jurisdictions. The Company’s accounting policy is to exclude the tax collected from revenues and cost of sales.
Shipping and Handling
Shipping and handling fees charged to customers are included in revenue and shipping and handling costs incurred are included in cost of sales in the accompanying consolidated statement of income.
11
3. Inventories
Inventories consisted of the following at September 30, 2021 and 2020:
| September 30, 2021 | September 30, 2020 | |||||||
| Raw Materials | $ | 6,695,697 | $ | 6,003,363 | ||||
| Work in process | 188,257 | 543,608 | ||||||
| Finished goods | 2,044,769 | 3,330,039 | ||||||
| Total | $ | 8,928,723 | $ | 9,877,010 | ||||
4. Property and Equipment
Property and equipment consisted of the following for the nine months ended September 30, 2021 and 2020:
| For the nine-months ended, | ||||||||||
| Useful Lives | September 30, 2021 | September 30, 2020 | ||||||||
| Machinery and equipment | 3-5 years | $ | 2,529,226 | $ | 2,408,073 | |||||
| Building | 20 years | 872,165 | 872,165 | |||||||
| Leasehold improvements | 3-10 years | 652,945 | 442,016 | |||||||
| Furniture and fixtures | 3-10 years | 29,187 | 25,978 | |||||||
| Property and equipment, gross | 4,083,523 | 3,748,232 | ||||||||
| Accumulated depreciation | (1,333,055 | ) | (929,696 | ) | ||||||
| Property and equipment, net | $ | 2,750,468 | $ | 2,818,536 | ||||||
Depreciation expense for the periods ended September 30, 2021 and 2020 amounted to approximately $313,374 and 264,661, respectively.
5. Fair Value Measurements
The fair value measurement guidance defines fair value, establishes a framework for measuring fair value, and expands disclosure requirements about fair value measurements. Under the guidance, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
The guidance also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability, developed based on market data obtained from independent sources. Unobservable inputs are inputs that reflect management’s assumptions about the factors market participants would use in valuing the asset or liability, developed based upon the best information available in the circumstances. The input levels are not necessarily an indication of the risk or liquidity associated with financial instruments at that level.
12
The fair value hierarchy prescribed by the guidance is broken down into three levels as follows:
| Level 1 – | unadjusted quoted prices for identical assets or liabilities at the measurement date in an active market that the entity has the ability to access. | |
| Level 2 – | other observable inputs available at the measurement date, other than quoted prices included in Level 1, either directly or indirectly, including: |
| · | quoted prices for similar assets or liabilities in active markets; |
| · | quoted prices for identical or similar assets in nonactive markets; |
| · | inputs other than quoted prices that are observable for the asset or liability; |
| · | inputs that are derived principally from or corroborated by other observable market data |
| Level 3 – | unobservable inputs that reflect the use of significant management judgment. These values are generally determined using pricing models for which assumptions utilize management’s estimate of market participant assumptions. |
The following table provides information by level for the Company’s investments in marketable securities that are measured at fair value on a recurring basis at September 30, 2021:
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Marketable securities: | ||||||||||||||||
| Mutual funds | $ | 1,699,309 | $ | 1,699,309 | ||||||||||||
| Corporate bonds | 1,590,459 | 1,590,459 | ||||||||||||||
| Total | $ | 1,699,309 | $ | 1,590,459 | $ | - | $ | 3,289,768 | ||||||||
6. Paycheck Protection Program Loan
On April 30, 2020, DAS and Sterimed each applied for and were approved for a Small Business Administration (SBA) loan in conjunction with the Paycheck Protection Program (PPP). DAS and Sterimed received loan proceeds of $156,400 and $47,000, respectively, under unsecured promissory notes from the Company’s existing commercial bank (collectively, the PPP loan). The PPP was established by Congress and the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The PPP loans had a two-year term and bears interest at a rate of 1.0% per annum. Monthly principal and interest payments are deferred until the earlier of SBA loan forgiveness or October 2021. The PPP loans are included in non-current liabilities on the accompanying consolidated balance sheet. Under the terms of the CARES Act, PPP loan recipients can be granted forgiveness for all or a portion of loans granted under the PPP. Such forgiveness will be determined by the SBA, subject to limitations, based on the use of loan proceeds for payment of payroll costs, mortgage interest, rent, and utilities. The Company believes the loan proceeds were used in accordance with PPP loan forgiveness requirements.
In connection with applying for the PPP loan, the Company was required to certify, among other things, that the economic uncertainty, at the time, made the PPP loan necessary to support the Company’s operations. Management made this certification in good faith after analyzing the effects of the COVID-19 pandemic on the Company. Management believes the Company satisfied all eligibility criteria for the PPP loan, and that the receipt of the PPP loan was consistent with the broad objectives of the CARES Act.
DAS was granted full forgiveness by the SBA on February 24, 2021. Sterimed was granted full forgiveness by the SBA on June 9, 2021.
13
7. Revolving Line of Credit
DAS International maintains a revolving credit agreement with a financial institution for borrowings up to $2,000,000, limited by the available borrowing base, as defined in the agreement. Borrowings under the agreement bear interest at one month LIBOR plus 2.25%, or approximately 2.33% on September 30, 2021. The Company is required to maintain certain covenants as a part of the revolving credit agreement and was in compliance with all covenants as of September 30, 2021. There were no outstanding borrowings under the agreement during or as of September 30 ,2021. The Company terminated the revolving credit agreement effective December 17, 2021.
8. Employee Benefit Plan
On June 1, 2020, the Company established the DAS Medical Holdings Company Retirement Plan (the Plan). The Plan covers substantially all of the Company’s U.S. employees. Employer contributions under the Plan are at the Company’s discretion. The Company contributed $28,619 and $9,910 to the Plan for the periods ended September 30, 2021 and 2020.
9. Commitments, Concentrations, and Contingencies
Operating Leases
The Company leases various office and warehouse space from third-party
sources under
non-cancelable operating leases with payments due through August 2025. As of September 30, 2021, minimum future lease payments due under
the non-cancelable operating leases are as follows:
| Amount | ||||
| 2021 | $ | 115,738 | ||
| 2022 | 401,009 | |||
| 2023 | 264,008 | |||
| 2024 | 270,244 | |||
| 2025 | 182,934 | |||
| Total | $ | 1,233,933 | ||
Rent expense from third-party sources for the period ended September 30, 2021 amounted to $255,463.
Concentration Risk
For the nine-month periods ended September 30, 2021 and 2020, one customer accounted for approximately 93% and 93%, respectively of the Company’s sales. Approximately 73% and 75% of the Company’s accounts receivable was due from the same customer at September 20, 2021 and 2020, respectively. For the nine-month periods ended September 30, 2021 and 2020, two vendors accounted for approximately 40% and 39% of the Company’s purchases, and at September 30, 2021 and 2020, approximately 32% and 49% of accounts payable was related to the same two vendors.
Foreign Operations
Approximately 95% of the Company’s products are manufactured by DAS International in the Dominican Republic. Property and Equipment of approximately $2,750,000 and inventory of approximately $8,670,000 related to the manufacturing facility in the Dominican Republic are included in the Company’s consolidated balance sheet at September 30, 2021. Operations outside the United States are subject to risks inherent in operating under different legal systems and various political and economic environments. Among the risks are changes in existing tax laws, possible limitations on foreign investment and income repatriation, government price or foreign exchange controls, and restrictions on currency exchange. The Company does not engage in hedging activities to mitigate its exposure to fluctuations in foreign currency exchange rates.
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Litigation
The Company may be subject to routine litigation, claims, or assessments in the normal course of business. The Company has no threatened or pending legal proceedings that warrant recognition or disclosure in the consolidated financial statements.
10. Related Party Transactions
The Company leases an office building owned by a member of DAS, who was also the former owner of Sterimed, with payments due through July 2025. As of September 30, 2021, minimum future lease payments due under the related party lease is as follows:
| Amount | ||||
| 2021 | $ | 11,430 | ||
| 2022 | 45,720 | |||
| 2023 | 45,720 | |||
| 2024 | 45,720 | |||
| 2025 | 26,670 | |||
| Total | $ | 175,260 | ||
Rent expense paid to a related party for the period ended September 30, 2021 amounted to $34,290.
During the period ended September 30, 2021, One Degree made guaranteed payments to its outside investor totaling $75,000 related to the individual’s continued role in One Degree’s business operations.
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Exhibit 99.3
UFP Technologies, Inc.
Unaudited Pro Forma Condensed Combined Financial Statements
The following unaudited pro forma condensed combined financial statements are provided for informational purposes only and do not purport to represent what the actual combined results of operations or the combined financial position of the combined company would be had the acquisition occurred on the dates assumed, nor are they necessarily indicative of future combined results of operations or combined financial position.
The historical consolidated financial information of the Company and DAS Medical Holdings, LLC (“DAS Medical”) has been adjusted in the unaudited pro forma condensed combined financial statements to give effect to pro forma events that are (1) directly attributable to the acquisition, (2) factually supportable, and (3) expected to have a continuing impact on the combined results. The unaudited pro forma condensed combined financial statements presented are based on the assumptions and adjustments described in the accompanying notes. The unaudited pro forma condensed combined financial statements are presented for illustrative purposes and do not purport to represent what the results of operations would actually have been had the acquisition occurred as of the date indicated or what such results of operations will be for any future periods. The actual results of operations reported by the combined company in periods following the acquisition may differ significantly from those reflected in these unaudited pro forma condensed combined financial statements for a number of reasons, including but not limited to the impact and benefits of the acquisition, cost savings from operating efficiencies, synergies and the incremental costs incurred in successfully integrating and operating the DAS Medical business. The unaudited pro forma condensed combined financial statements are based upon the respective historical consolidated financial information of the Company and DAS Medical for the periods presented, and should be read in conjunction with:
| · | The notes to the unaudited pro forma condensed combined financial information; |
| · | The Company’s Current Report on Form 8-K filed December 23, 2021, including the exhibits thereto; |
| · | The audited consolidated financial statements of the Company as of December 31, 2020 and December 31, 2019 and for each of the three years in the period ended December 31, 2020, which are included in the Company’s Annual Report on Form 10-K, as filed with the SEC; and |
| · | The audited consolidated financial statements of DAS Medical as of and for the year ended December 31, 2020, filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K, filed on the date hereof. |
The Unaudited Pro Forma Condensed Combined Balance Sheet as of September 30, 2021 gives effect to the acquisition as if it had been consummated on that date.
For the nine-months ended September 30, 2021, the Unaudited Pro Forma Condensed Combined Statement of Income gives effect to the acquisition as if it had been consummated at January 1, 2021.
For the year ended December 31, 2020, the Unaudited Pro Forma Condensed Combined Statement of Income gives effect to the acquisition as if it had been consummated at January 1, 2020.
Unaudited Pro Forma Condensed Combined Balance Sheet
As of September 30, 2021
(In thousands)
| UFP Historical | DAS Medical Historical | Pro Forma Adjustments | Pro Forma | |||||||||||||||
| Assets | ||||||||||||||||||
| Current assets: | ||||||||||||||||||
| Cash and cash equivalents | $ | 33,094 | $ | 18,335 | $ | (31,854 | ) | (a)(b)(c)(d) | $ | 19,575 | ||||||||
| Receivables, net | 32,456 | 2,414 | - | 34,870 | ||||||||||||||
| Short-term investments | - | - | - | |||||||||||||||
| Inventories | 21,674 | 8,896 | 14 | (e) | 30,584 | |||||||||||||
| Prepaid expenses and other current assets | 3,909 | 243 | 161 | (b) | 4,313 | |||||||||||||
| Refundable income taxes | - | - | - | - | ||||||||||||||
| Total current assets | 91,133 | 29,888 | (31,679 | ) | 89,342 | |||||||||||||
| Property, plant and equipment, net | 52,982 | 1,943 | 1,371 | (f) | 56,296 | |||||||||||||
| Goodwill | 51,838 | 11 | 46,303 | (g) | 98,152 | |||||||||||||
| Intangible assets, net | 18,776 | 81 | 43,726 | (h) | 62,583 | |||||||||||||
| Other assets | 5,957 | 1,892 | (671 | ) | (c)(i) | 7,178 | ||||||||||||
| Total assets | $ | 220,686 | $ | 33,815 | $ | 59,050 | $ | 313,551 | ||||||||||
| Liabilities and Stockholders’ Equity | ||||||||||||||||||
| Current liabilities: | ||||||||||||||||||
| Accounts payable | $ | 7,556 | $ | 1,937 | $ | - | $ | 9,493 | ||||||||||
| Short-term Debt | - | - | 4,000 | (j) | 4,000 | |||||||||||||
| Accrued expenses | 8,361 | 657 | 221 | (k) | 9,239 | |||||||||||||
| Othe rcurrent liabilities | 2,843 | - | - | 2,843 | ||||||||||||||
| Total current liabilities | 18,760 | 2,594 | 4,221 | 25,575 | ||||||||||||||
| Deferred income taxes | 5,539 | - | - | 5,539 | ||||||||||||||
| Long-term Debt | - | - | 71,000 | (j) | 71,000 | |||||||||||||
| Other liabilities | 5,634 | 7 | 15,264 | (i)(l) | 20,905 | |||||||||||||
| Total liabilities | 29,933 | 2,601 | 90,485 | 123,019 | ||||||||||||||
| Stockholders’ equity: | ||||||||||||||||||
| Members equity - controlling interest | - | 31,377 | (31,377 | ) | (m) | - | ||||||||||||
| Members equity - noncontrolling interest | - | (163 | ) | 163 | (m) | - | ||||||||||||
| Common stock | 75 | - | - | 75 | ||||||||||||||
| Additional paid-in capital | 33,677 | - | - | 33,677 | ||||||||||||||
| Retained earnings | 157,588 | - | (221 | ) | (k) | 157,367 | ||||||||||||
| Treasury stock | (587 | ) | - | - | (587 | ) | ||||||||||||
| Total stockholders' equity | 190,753 | 31,214 | (31,435 | ) | 190,532 | |||||||||||||
| Total liabilities and stockholders' equity | $ | 220,686 | $ | 33,815 | $ | 59,050 | $ | 313,551 | ||||||||||
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Information.
Unaudited Pro Forma Condensed Combined Statement of Income
For the Nine-Months Ended September 30, 2021
(In thousands, except per share data)
| UFP Historical | DAS Medical Historical | Pro Forma Adjustments | Pro forma | ||||||||||||||
| Net sales | $ | 149,977 | $ | 37,648 | $ | - | $ | 187,625 | |||||||||
| Cost of sales | 111,938 | 27,959 | 87 | (n)(o) | 139,984 | ||||||||||||
| Gross profit | 38,039 | 9,689 | (87 | ) | 47,641 | ||||||||||||
| Selling, general and administrative expenses | 21,343 | 1,619 | 2,154 | (n)(p)(q) | 25,116 | ||||||||||||
| Other operating (income) expenses, net | 112 | - | - | 112 | |||||||||||||
| Operating income | 16,584 | 8,070 | (2,241 | ) | 22,413 | ||||||||||||
| Interest income, net | 9 | (327 | ) | 1,293 | (r) | 975 | |||||||||||
| Income before income tax provision | 16,575 | 8,397 | (3,534 | ) | 21,438 | ||||||||||||
| Income tax expense | 3,908 | 501 | (866 | ) | (s) | 3,543 | |||||||||||
| Net income from consolidated operations | $ | 12,667 | $ | 7,896 | $ | (2,668 | ) | $ | 17,895 | ||||||||
| Net income per common share outstanding: | |||||||||||||||||
| Basic | $ | 1.68 | $ | 2.38 | |||||||||||||
| Diluted | $ | 1.67 | $ | 2.36 | |||||||||||||
| Weighted average common shares outstanding: | |||||||||||||||||
| Basic | 7,522 | 7,522 | |||||||||||||||
| Diluted | 7,585 | 7,585 | |||||||||||||||
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Information.
Unaudited Pro Forma Condensed Combined Statement of Income
For the Year Ended December 31, 2020
(In thousands, except per share data)
| UFP Historical | DAS Medical Historical | Pro Forma Adjustments | Pro forma | ||||||||||||||
| Net sales | $ | 179,373 | $ | 39,245 | $ | - | $ | 218,618 | |||||||||
| Cost of sales | 134,689 | 28,272 | 111 | (t)(u) | 163,072 | ||||||||||||
| Gross profit | 44,684 | 10,973 | (111 | ) | 55,546 | ||||||||||||
| Selling, general and administrative expenses | 27,493 | 2,540 | 2,774 | (t)(v)(w) | 32,807 | ||||||||||||
| Other operating (income) expenses, net | 459 | - | - | 459 | |||||||||||||
| Operating income | 16,732 | 8,433 | (2,885 | ) | 22,280 | ||||||||||||
| Interest income, net | 449 | (155 | ) | 1,594 | (x) | 1,888 | |||||||||||
| Income before income tax provision | 16,283 | 8,588 | (4,479 | ) | 20,392 | ||||||||||||
| Income tax expense | 2,914 | 654 | (1,097 | ) | (y) | 2,471 | |||||||||||
| Net income from consolidated operations | $ | 13,369 | $ | 7,934 | $ | (3,382 | ) | $ | 17,921 | ||||||||
| Net income per common share outstanding: | |||||||||||||||||
| Basic | $ | 1.79 | $ | 2.39 | |||||||||||||
| Diluted | $ | 1.77 | $ | 2.37 | |||||||||||||
| Weighted average common shares outstanding: | |||||||||||||||||
| Basic | 7,484 | 7,484 | |||||||||||||||
| Diluted | 7,568 | 7,568 | |||||||||||||||
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Information.
UFP Technologies, Inc.
Notes to Unaudited Pro Forma Condensed Combined Financial Information
(In thousands, except per share data)
Basis of Presentation
The historical consolidated financial statements have been adjusted in the unaudited pro forma consolidated financial statements to give effect to pro forma events that are (1) directly attributable to the acquisition of DAS Medical, (2) factually supportable and (3) with respect to the unaudited pro forma consolidated statements of operations, expected to have a continuing impact on the combined results following the aforementioned transaction. The business combination was accounted for under the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations. As the acquirer for accounting purposes, the Company has estimated the fair value of DAS Medical’ assets acquired, and liabilities assumed and conformed the accounting policies of DAS Medical to its own accounting policies. The unaudited pro forma consolidated financial statements do not necessarily reflect what the combined company’s financial condition or results of operations would have been had the acquisition occurred on the dates indicated. They also may not be useful in predicting the future financial condition and results of operations of the combined company. The actual financial position and results of operations may differ significantly from the pro forma amounts reflected herein due to a variety of factors. The unaudited pro forma financial information does not reflect the realization of any expected cost savings or other synergies from the acquisition of DAS Medical as a result of restructuring activities and other planned cost savings initiatives following the completion of the business combination.
Description of Transaction
On December 22, 2021, pursuant to the terms of a Securities Purchase Agreement, dated as of December 22, 2021 (the “Purchase Agreement”), by and among Parallax Investments, LLC, a Georgia limited liability company and its purchase price beneficiaries (collectively the “Sellers”), DAS Medical and the Company, the Company purchased from the Sellers all of the issued and outstanding membership interests of DAS Medical for an aggregate purchase price of $75 million in cash. The purchase price is subject to adjustment based upon DAS Medical’s working capital at closing, and the purchase price may be increased by up to $20.0 million in earn-out payments based upon the performance of the business during the four-year period following the closing.
$10.0 million of the purchase price is being held in escrow to indemnify the Company against certain claims, losses and liabilities, as well as to provide for liquidated damages in the event that the Sellers’ representative fails to deliver to the Company certain audited financial statements of DAS Medical for pre-closing periods. The Purchase Agreement contains customary representations, warranties and covenants customary for transactions of this type.
In connection with the acquisition of DAS Medical, the Company has also entered into Non-Competition Agreements with Danny R. Lee, Carol Lee, Daniel E. Lee, Houston Lee, Armond Groves, Thomas Bonner, and Bruce Grady. The Company has agreed to pay additional consideration to the parties to the Non-Competition Agreements, including an aggregate of $10.0 million in payments over the ten years following the closing of the DAS Medical acquisition for the 10-year noncompetition covenants of Mr. Daniel E. Lee and Mr. Houston Lee.
Goodwill Agreement
On December 21, 2021, in connection with its entry into the Purchase Agreement, the Company also entered into an Agreement for the Purchase and Sale of Personal Goodwill (the “Goodwill Agreement”) with Danny R. Lee, Daniel Lee, Houston Lee, Armond Groves, Thomas Bonner and Bruce Grady (“Beneficiaries”), the purchase price beneficiaries. Pursuant to the terms of the Goodwill Agreement, on December 21, 2021, the Company purchased from the Beneficiaries their personal goodwill, including business relationships, trade secrets and knowledge in connection with DAS Medical’s business, for a purchase price of $20 million in cash. Pursuant to the terms of the Goodwill Agreement, the Beneficiaries (other than Daniel E. Lee and Houston Lee) agreed to certain non-competition and confidential information restrictions for a period of five years.
Amended and Restated Credit Agreement
On December 22, 2021, the Company, as the borrower, entered into a secured $130 million Amended and Restated Credit Agreement (the “Amended and Restated Credit Agreement”) with certain of the Company’s subsidiaries (the “Subsidiary Guarantors”) and Bank of America, N.A., in its capacity as the initial lender, Administrative Agent, Swingline Lender and L/C Issuer, and certain other lenders from time-to-time party thereto. The Amended and Restated Credit Agreement amends and restates the Company’s prior credit agreement, originally dated as of February 1, 2018.
The credit facilities under the Amended and Restated Credit Agreement consist of a $40 million secured term loan to UFP and a secured revolving credit facility, under which the Company may borrow up to $90 million. The Amended and Restated Credit Facilities mature on December 21, 2026. The proceeds of the Amended and Restated Credit Agreement may be used for general corporate purposes, including funding the acquisition of DAS Medical, as well as certain other permitted acquisitions. Included in the Amended and Restated Credit Facilities is approximately $0.7 million in standby letters of credit drawable as a financial guarantee on worker’s compensation insurance policies.
The Company’s obligations under the Amended and Restated Credit Agreement are guaranteed by the Subsidiary Guarantors.
The Amended and Restated Credit Facilities call for interest of BSBY plus a margin that ranges from 1.25% to 2.0% or, at the discretion of the Company, the bank’s prime rate less a margin that ranges from .25% to zero. In both cases the applicable margin is dependent upon Company performance. Under the Amended and Restated Credit Agreement, the Company is subject to a minimum fixed-charge coverage financial covenant as well as a maximum total funded debt to EBITDA financial covenant. The Amended and Restated Credit Agreement contains other covenants customary for transactions of this type, including restrictions on certain payments, permitted indebtedness and permitted investments. As of the date of this report, the Company had approximately $75 million in borrowings outstanding under the Amended and Restated Credit Facilities, which were used as partial consideration for the Dielectrics acquisition.
Preliminary Purchase Price Allocation
On December 22, 2021, the Company acquired DAS Medical for total net cash consideration of approximately $86.7 million. The Company financed the acquisition through borrowings on its credit facilities and through the utilization of cash on hand. The unaudited pro forma condensed combined financial information includes various assumptions, including those related to the preliminary purchase price allocation of the assets acquired and liabilities assumed of DAS Medical based on management’s best estimates of fair value. The final purchase price allocation may vary based on final appraisals, valuations and analyses of the fair value of the acquired assets and assumed liabilities. Accordingly, differences between these preliminary estimates and the final purchase accounting may occur and these differences could have a material impact on the accompanying unaudited pro forma financial information and the combined company’s future results of operations and financial position.
The following table shows the preliminary allocation of the purchase price for DAS Medical to the acquired identifiable assets, assumed liabilities and pro forma goodwill (in thousands) as of the acquisition date:
| Fair value of consideration transferred: | ||||
| Cash paid at closing | $ | 95,000 | ||
| Contingent liability (Earn-out) | 5,188 | |||
| Non-Compete agreements | 8,855 | |||
| Cash from DAS | (8,316 | ) | ||
| Total consideration | $ | 100,727 | ||
| Purchase Price Allocation: | ||||
| Accounts receivable | $ | 2,351 | ||
| Inventory | 7,978 | |||
| Other current assets | 68 | |||
| Property, plant and equipment | 3,314 | |||
| Customer Contracts & Relationships | 36,730 | |||
| Intellectual Property | 2,380 | |||
| Non-Compete agreement | 4,697 | |||
| Lease right of use assets | 1,221 | |||
| Goodwill | 51,789 | |||
| Total identifiable assets | $ | 110,528 | ||
| Accounts payable | (5,238 | ) | ||
| Accrued expenses | (3,336 | ) | ||
| Deferred revenue | (6 | ) | ||
| Lease liabilities | (1,221 | ) | ||
| Net assets acquired | $ | 100,727 | ||
Pro Forma Adjustments
The pro forma adjustments are based on our preliminary estimates and assumption that are subject to change. The following adjustments have been reflected in the unaudited pro forma condensed combined financial information (in thousands):
Adjustments to the pro forma condensed combined balance sheet
| (a) | Reflects the use of $20,000 in cash towards the total consideration paid for the acquisition. |
| (b) | Reflects the payment of debt issuance costs associated with the financing of $161. |
| (c) | Reflects the elimination of cash/investment accounts not part of the acquisition. |
| (d) | Reflects the adjustment to cash for working capital in excess of the $10.1 million target. |
| (e) | Reflects the required step-up in value of finished goods inventory. |
| (f) | Reflects the preliminary fair value adjustment of $1,371 to the acquired property, plant and equipment. To estimate the required step-up adjustment, the Company utilized fixed asset records as of October 31, 2021 and estimated the fair value of property, plant and equipment using a combination of the cost and market approaches. Estimated useful lives for acquired property, plant and equipment are 8 years for machinery and equipment, 5 years for leasehold improvements and 5 years for furniture and fixtures. |
| (g) | Reflects the preliminary estimate of goodwill, which represents the excess of the purchase price over the fair value of DAS Medical identifiable assets acquired and liabilities assumed as if the acquisition occurred on September 30, 2021, and the elimination of historical Goodwill. |
| (h) | Reflects the preliminary fair value adjustment of $43,807 for identifiable intangible assets as follows: |
| Estimated Fair Value | Estimated Useful Life | |||||
| Customer contracts & relationships | $ | 36,730 | 20 years | |||
| Noncompetition agreements | 4,697 | 10 years | ||||
| Intellectual property | 2,380 | 12 years | ||||
| $ | 43,807 | |||||
The preliminary fair value of the intangible assets has been estimated using various methods under the income approach as follows:
| · | The non-competition agreement is valued using the with and without method. Cash flows without competition are compared to cash flows with competition. The difference in net present values is the effect of competition. This amount is weighted by probability, taking into account the seller's motivations to compete, the resources required to compete (capital and facilities), and the effectiveness of competition. |
| · | The intellectual property is valued using the relief from royalty method. The value of the intellectual property is the after-tax present value of royalties that would be paid to license the manufacturing process and know-how. |
| · | The customer contracts and relationships are valued using the multi-period excess earnings method (MPEEM). The MPEEM values an asset as the residual present value of cash flows after a fair return has been allocated to other assets. The returns to other assets are represented by contributory asset charges. The MPEEM is appropriate for valuing the primary asset. |
| (i) | Reflects the recording of Right of Use Lease Assets and Lease Liabilities. |
| (j) | Reflects borrowings from the Company’s credit facilities to finance the acquisition. |
| (k) | Reflects the payment/accrual of acquisition costs, net of tax in the amount of $221. |
| (l) | Reflects the recording of contingent liabilities / consideration as follows: |
| Value of earn-out payments based on the performance of the business | $ | 5,188 | ||
| Present value of non-competition payments | 8,855 | |||
| $ | 14,043 |
Contingent liabilities are re-measured each reporting period and changes in fair value are recorded through a separate line item within the consolidated statements of operations.
| (m) | Reflects the elimination of DAS Medical equity. |
Adjustments to the pro forma condensed combined statements of income
For the nine-months ended September 30, 2021:
| (n) | Reflects estimated depreciation expense of $73 (cost of sales) and depreciation adjustment $(18) (SG&A) related to the step-up of acquired property, plant and equipment as discussed in Note (f). |
| (o) | Reflects the flow through the inventory step-up of $14 discussed in note (e). |
| (p) | Reflects estimated amortization expense of $1,879 related to the identified intangible assets as discussed in Note (h). |
| (q) | Reflects the accrued acquisition costs of $293 discussed in note (k). |
| (r) | Reflects the additional interest expense related to the Company’s borrowings on its credit facilities of $1,050 and the elimination of investment income on investments not part of the acquisition. |
| (s) | Reflects the income tax effect of pro forma adjustments and the recording of income taxes on DAS Medical income based on the estimated effective rate of 24.5%. |
For the year ended December 30, 2020:
| (t) | Reflects estimated depreciation expense of $97 (cost of sales) and depreciation adjustment $(24) (SG&A) related to the step-up of acquired property, plant and equipment as discussed in Note (f). |
| (u) | Reflects the flow through the inventory step-up of $14 discussed in note (e). |
| (v) | Reflects estimated amortization expense of $2,505 related to the identified intangible assets as discussed in Note (h). |
| (w) | Reflects the accrued acquisition costs of $293 discussed in note (k). |
| (x) | Reflects the additional interest expense related to the Company’s borrowings on its credit facilities of $1,400 and the elimination of investment income on investments not part of the acquisition. |
| (y) | Reflects the income tax effect of pro forma adjustments and the recording of income taxes on DAS Medical income based on the estimated effective rate of 24.5%. |