EX-99.2 4 a19-17004_1ex99d2.htm EX-99.2

Exhibit 99.2

 

In-O-Vate Dryer Products

Balance Sheet

End of Mar 2019

 

 

 

Jan 2019

 

Feb 2019

 

Mar 2019

 

Financial Row

 

Amount

 

Amount

 

Amount

 

ASSETS

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

Bank

 

 

 

 

 

 

 

Total Bank

 

$

1,808

 

$

2,192

 

$

2,194

 

Accounts Receivable

 

 

 

 

 

 

 

Total Accounts Receivable

 

$

1,365

 

$

1,440

 

$

1,408

 

Other Current Asset

 

 

 

 

 

 

 

11030 - NSF Checks

 

$

0

 

$

0

 

$

0

 

11040 - Undeposited Funds

 

$

19

 

$

27

 

$

51

 

11300 - Allowance for Doubtful Accounts

 

$

(9

)

$

(9

)

$

(9

)

12000 - Inventory

 

 

 

 

 

 

 

Total - 12000 - Inventory

 

$

412

 

$

338

 

$

385

 

12020 - Inventory In Transit

 

$

0

 

6

 

$

1

 

12610 - Prepaid Marketing Expenses

 

$

115

 

$

121

 

$

128

 

Purchases Returned Not Credited

 

$

9

 

$

9

 

$

9

 

Total Other Current Asset

 

$

546

 

$

492

 

$

565

 

Total Current Assets

 

$

3,719

 

$

4,124

 

$

4,168

 

Fixed Assets

 

 

 

 

 

 

 

13800 - Furniture & Fixtures

 

$

18

 

$

18

 

$

18

 

13850 - Vehicles

 

$

(0

)

$

(0

)

$

(0

)

13900 - Computer-Printer-Other

 

$

159

 

$

159

 

$

163

 

Total - 14000 - Accumulated Depreciation

 

$

(566

)

$

(566

)

$

(566

)

14050 - Tooling

 

$

480

 

$

508

 

$

548

 

Total Fixed Assets

 

$

91

 

$

119

 

$

162

 

Total Other Assets

 

$

0

 

$

0

 

$

0

 

Total ASSETS

 

$

3,810

 

$

4,243

 

$

4,330

 

LIABILITIES & EQUITY

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

Total Accounts Payable

 

$

529

 

$

689

 

$

631

 

Total Credit Card

 

$

17

 

$

45

 

$

43

 

Total Other Current Liability

 

$

196

 

$

215

 

$

149

 

Total Current Liabilities

 

$

743

 

$

948

 

$

822

 

Total Equity

 

$

3,067

 

$

3,294

 

$

3,508

 

Total LIABILITIES & EQUITY

 

$

3,810

 

$

4,243

 

$

4,330

 

 

 

In-O-Vate Dryer Products

Income Statement

Jan 2019, Q1 2019, Feb 2019, Mar 2019

 

 

 

Jan 2019

 

Feb 2019

 

Mar 2019

 

Total

 

Financial Row

 

Amount

 

Amount

 

Amount

 

Amount

 

Ordinary Income/Expense

 

 

 

 

 

 

 

 

 

Income

 

 

 

 

 

 

 

 

 

40000 - Sales

 

 

 

 

 

 

 

 

 

Total - 40000 - Sales

 

$

1,298

 

$

1,263

 

$

1,314

 

$

3,875

 

40100 - Shipping and Handling

 

$

27

 

$

38

 

$

36

 

$

101

 

Total - Income

 

$

1,325

 

$

1,301

 

$

1,350

 

$

3,976

 

Cost Of Sales

 

 

 

 

 

 

 

 

 

50000 - Cost of Goods Sold

 

 

 

 

 

 

 

 

 

Total - Cost Of Sales

 

$

829

 

$

840

 

$

854

 

$

2,522

 

Gross Profit

 

$

497

 

$

461

 

$

496

 

$

1,454

 

Expense

 

 

 

 

 

 

 

 

 

Total - Expense

 

$

214

 

$

226

 

$

220

 

$

660

 

Net Ordinary Income

 

$

283

 

$

235

 

$

276

 

$

794

 

Other Income and Expenses

 

 

 

 

 

 

 

 

 

Total - Other Income

 

$

0

 

$

0

 

$

1

 

$

1

 

Net Other Income

 

$

0

 

$

0

 

$

1

 

$

1

 

Net Income

 

$

283

 

$

235

 

$

277

 

$

795

 

 

 

Unaudited Pro Forma Condensed Combined Balance Sheet

As of March 30, 2019

(In thousands)

 

 

 

CMC

 

Inovate

 

Pro forma

 

 

 

Pro forma

 

 

 

Historical

 

Historical

 

adjustments

 

Note

 

Combined

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

35,421

 

2,194

 

(13,049

)

(b)

 

24,566

 

Receivables, net

 

15,053

 

1,399

 

—

 

 

 

16,452

 

Receivable for insured losses

 

875

 

—

 

—

 

 

 

875

 

Inventories

 

13,433

 

386

 

—

 

 

 

13,819

 

Prepaid expenses

 

2,066

 

128

 

—

 

 

 

2,194

 

Other current assets

 

4,549

 

60

 

—

 

 

 

4,609

 

Total current assets

 

71,397

 

4,167

 

(13,049

)

 

 

62,515

 

 

 

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment

 

9,972

 

163

 

(38

)

(a)

 

10,097

 

 

 

 

 

 

 

 

 

 

 

 

 

Right-of use assets

 

5,114

 

—

 

389

 

(f)

 

5,503

 

Goodwill

 

1,000

 

—

 

1,280

 

(c)

 

2,280

 

Amortizable intangible assets, net

 

—

 

—

 

8,839

 

(c)

 

8,839

 

Deferred income taxes

 

2,353

 

—

 

—

 

 

 

2,353

 

Other long-term assets

 

773

 

—

 

—

 

 

 

773

 

 

 

90,609

 

4,330

 

(2,579

)

 

 

92,360

 

 

 

 

 

 

 

 

 

 

 

 

 

Revolving bank loan payable

 

800

 

—

 

—

 

 

 

800

 

Accounts payable and accrued expenses

 

11,617

 

822

 

—

 

 

 

12,439

 

Short-term lease liabilities

 

933

 

—

 

94

 

(f)

 

1,027

 

Liability for unpaid claims covered by insurance

 

875

 

—

 

—

 

 

 

875

 

Income taxes payable

 

3,373

 

—

 

—

 

 

 

3,373

 

Total current liabilities

 

17,598

 

822

 

94

 

 

 

18,514

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term lease liabilities

 

4,240

 

—

 

295

 

(f)

 

4,535

 

Other long-term liabilities

 

6,301

 

—

 

540

 

(d)

 

6,841

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

643

 

—

 

—

 

 

 

643

 

Capital in excess of par value

 

2,013

 

5

 

(5

)

(a)

 

2,013

 

Retained earnings

 

74,453

 

3,503

 

(3,503

)

(a)

 

74,453

 

Treasury shares

 

(14,639

)

—

 

—

 

 

 

(14,639

)

 

 

62,470

 

3,508

 

(3,508

)

 

 

62,470

 

 

 

90,609

 

4,330

 

(2,579

)

 

 

92,360

 

 

See accompanying notes to the Unaudited Pro Forma Condensed Combined Financial Statements

 

 

Unaudited Pro Forma Condensed Combined Statement of Operations

Three months ended March 30, 2019

(In thousands, except per share information)

 

 

 

CMC

 

Inovate

 

Pro forma

 

 

 

Pro forma

 

 

 

Historical

 

Historical

 

adjustments

 

Note

 

Combined

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

22,528

 

$

3,976

 

$

—

 

 

 

$

26,504

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

Cost of sales (exclusive of depreciation, depletion and amortization)

 

17,847

 

2,522

 

 

 

 

 

20,369

 

Depreciation, depletion and amortization

 

519

 

—

 

99

 

(c)

 

618

 

Selling and administrative

 

6,792

 

660

 

 

 

 

 

7,452

 

Gain on legal settlement

 

(15,000

)

—

 

—

 

 

 

(15,000

)

Gain on disposition of property and equipment

 

(5

)

—

 

—

 

 

 

(5

)

Operating income (loss)

 

12,375

 

794

 

(99

)

 

 

13,070

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

149

 

1

 

(69

)

(e)

 

81

 

Interest expense

 

(71

)

—

 

—

 

 

 

(71

)

Other income, net

 

13

 

—

 

—

 

 

 

13

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations before income taxes

 

12,465

 

795

 

(193

)

 

 

13,092

 

Provision (benefit) for income taxes

 

3,366

 

215

 

(45

)

(g)

 

3,535

 

Income (loss) from continuing operations

 

$

9,099

 

$

580

 

$

(123

)

 

 

$

9,556

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted earnings per share

 

$

5.32

 

 

 

 

 

 

 

$

5.59

 

Weighted-average shares

 

1,709

 

 

 

 

 

 

 

1,709

 

 

See accompanying notes to the Unaudited Pro Forma Condensed Combined Financial Statements

 

 

 

Unaudited Pro Forma Condensed Combined Statement of Operations

Fiscal year ended December 29, 2018

(In thousands, except per share information)

 

 

 

CMC

 

Inovate

 

Pro forma

 

 

 

Pro forma

 

 

 

Historical

 

Historical

 

adjustments

 

Note

 

Combined

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

101,029

 

$

13,648

 

$

—

 

 

 

$

114,677

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

Cost of sales (exclusive of depreciation, depletion and amortization)

 

82,205

 

8,701

 

 

 

 

 

90,906

 

Depreciation, depletion and amortization

 

1,581

 

—

 

396

 

(c)

 

1,977

 

Selling and administrative

 

22,870

 

2,668

 

 

 

 

 

25,538

 

Charges related to write-off of deferred development

 

6,840

 

—

 

—

 

 

 

6,840

 

Charges related to write-off of overpayment of prepaid royalties

 

627

 

—

 

—

 

 

 

627

 

Gain on disposition of property and equipment

 

(824

)

—

 

—

 

 

 

(824

)

Operating (loss) income

 

(12,270

)

2,279

 

(396

)

 

 

(10,388

)

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

76

 

4

 

(4

)

(e)

 

76

 

Interest expense

 

(539

)

—

 

—

 

 

 

(539

)

Other income, net

 

25

 

(192

)

192

 

(a)

 

25

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss from continuing operations before income taxes

 

(12,708

)

2,091

 

(208

)

 

 

(10,826

)

Benefit (provision) for income taxes

 

3,457

 

(565

)

56

 

(g)

 

2,949

 

Net loss from continuing operations

 

$

(9,251

)

$

1,526

 

$

(152

)

 

 

$

(7,877

)

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted earnings per share

 

$

(5.45

)

 

 

 

 

 

 

$

(4.64

)

Weighted-average shares

 

1,697

 

 

 

 

 

 

 

1,697

 

 

See accompanying notes to the Unaudited Pro Forma Condensed Combined Financial Statements

 

 

Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements
(in thousands, except per share information)

 

1. Basis of Presentation

 

Inovate Acquisition Company (“Buyer”), a Delaware corporation and wholly owned subsidiary of Continental Materials Corporation (the “Company”), entered into an Asset Purchase Agreement (the “Purchase Agreement”) by and among Buyer, an individual representative of Buyer, In-O-Vate Technologies, Inc., a Florida corporation (“Seller”) and Seller’s stockholders to acquire substantially all of the assets of Seller’s commercial and residential dryer and HVAC venting systems and components business. Buyer paid approximately $11.0 million cash at closing plus additional consideration for a total purchase price of approximately $11.4 million, subject to customary purchase price adjustments.

 

The accompanying unaudited consolidated pro forma financial statements present the consolidated financial statements of the Company, assuming the acquisition occurred as of March 30, 2019 for purposes of the pro forma consolidated balance sheet as of March 30, 2019, and assuming such transactions occurred as of December 31, 2017 for purposes of the pro forma consolidated statements of operations for the year ended December 29, 2018 and three months ended March 30, 2019.

 

The unaudited consolidated pro forma financial statements are presented for illustrative purposes only and do not purport to represent what the Company’s financial position or results of operations would have been if the acquisition had occurred as presented, or to project the Company’s financial position or results of operations for any future periods. The pro forma adjustments are based on available information and certain assumptions that management believes are reasonable. The pro forma adjustments are directly attributable to the acquisition and are expected to have a continuing impact on the Company’s results of operations. In the opinion of management, all adjustments necessary to present fairly the unaudited consolidated pro forma financial statements have been made.

 

2. Preliminary Purchase Accounting

 

The acquisition closed on June 17, 2019 for an aggregate purchase price of $11.4 million payable in cash at close and an earnout over 12 months based on business performance of up to $1.25 million, subject to customary purchase price adjustments. The acquisition will be accounted for using the purchase method of accounting. Accordingly, the assets acquired and liabilities assumed are presented based on their estimated acquisition date fair values. The purchase price allocation below is preliminary and based on management’s best estimates as of the date of this Current Report on Form 8-K. The preliminary purchase price allocation is subject to change based on numerous factors, including the final adjusted purchase price and the final estimated fair value of the assets acquired and liabilities assumed. Any such adjustments to the

 

 

preliminary estimates of fair value could be material.

 

The following table summarizes the estimated acquisition date fair values of the net assets acquired in the Acquisition (in thousands):

 

Purchase price

 

$

11,395

 

 

 

 

 

Accounts receivable, net

 

1,448

 

Other tangible assets

 

864

 

Intangible assets

 

8,839

 

Accounts payable and accrued expenses

 

(1,063

)

Total identifiable net assets

 

10,088

 

Goodwill and intangibles

 

$

1,307

 

 

The preliminary purchase price adjustment has been used to prepare the pro forma adjustments in the pro forma balance sheet and income statement. The final purchase price allocation will be determined when the Company has completed the detailed valuations. The final allocation may include (1) changes to fair value of receivables, (2) changes in allocations to intangibles such as trade names, intellectual property and customer related intangibles as well as goodwill and (3) other changes to assets and liabilities.

 

3. Pro Forma Adjustments

 

The pro forma adjustments are based on preliminary estimates and assumptions that are subject to change. The following adjustments have been reflected in the unaudited pro forma condensed consolidated financial information:

 

(a)         To eliminate assets and equity not included in the transaction.

 

(b)         Represents cash payment of $11.0 million to effect the transaction and elimination of $2.2 million cash not included in transaction.

 

(c)          As part of the preliminary valuation analysis, the Company identified intangible assets including technology, trade names and customer relationships. The fair value of identifiable intangible assets was determined by using the “income approach”, forecasting all future expected cash flows attributable to each intangible asset. These assets are amortized over their estimated useful lives, calculated based on the corresponding intangible life, and set out in the table below.

 

 

The following table summarizes the estimated fair values of Inovate’s identifiable intangible assets and their estimated useful lives (in thousands):

 

 

 

Estimated
Fair Value
(000s)

 

Estimated
Useful
Life in
Years

 

Year ended
December 29, 2019
Amortization
Expense

 

3 months ended
March 30, 2019
Amortization
Expense

 

Technology

 

935

 

12.5

 

75

 

19

 

Trade name

 

1,740

 

15.0

 

116

 

29

 

Customer related

 

6,163

 

30.0

 

205

 

51

 

Total

 

$

8,839

 

 

 

$

396

 

$

99

 

 

These preliminary estimates of fair value and estimated useful lives may differ from final amounts after all valuation analysis is completed. The difference could have a material impact on the accompanying unaudited pro forma condensed combined financial statements. A 10% change in the valuation of intangible assets would cause a corresponding increase or decrease in the balance of goodwill of $884.

 

(d)         To record contingent consideration associated with the transaction. The contingent consideration was valued using a Monte Carol simulation of potential scenarios and discounting the results back using the implied cost of capital for the transaction.

 

(e)          To adjust for interest income not earned due to purchase transaction.

 

(f)           To record right of use lease assets and lease liabilities acquired as part of the transaction.

 

(g)          To record the income tax effect of pro forma adjustments based on an estimated blended federal and state rate of 27%.