UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K / A
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): June 22, 2017
REPLIGEN CORPORATION
(Exact name of registrant as specified in charter)
Delaware | 0-14656 | 04-2729386 | ||
(State or Other Jurisdiction of Incorporation) |
(Commission File Number) |
(IRS Employer Identification No.) |
41 Seyon Street, Bldg. 1, Suite 100, Waltham, MA 02453
(Address of Principal Executive Offices) (Zip Code)
(781) 250-0111
(Registrants telephone number, including area code)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
☐ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
☐ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
☐ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
☐ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
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). Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Explanatory Note
As previously disclosed in its Current Report on Form 8-K filed with the Securities and Exchange Commission on June 23, 2017 (the Original 8-K), Repligen Corporation, a Delaware corporation (the Company), entered into an Agreement and Plan of Merger and Reorganization (the Merger Agreement) with Top Hat, Inc., a California corporation and a wholly owned subsidiary of the Company (First Merger Sub), Swing Time, LLC, a Delaware limited liability company and a wholly owned subsidiary of the Company (Second Merger Sub), Spectrum, Inc., a California corporation (Spectrum), and Roy T. Eddleman as representative of Spectrums securityholders on June 22, 2017. Pursuant to the Merger Agreement, (i) First Merger Sub will merge with and into Spectrum, with Spectrum as the surviving entity and a direct subsidiary of the Company, and (ii) thereafter as part of the same overall transaction, Spectrum will merge with and into Second Merger Sub, with Second Merger Sub as the surviving entity and a direct subsidiary of the Company (together, the Merger). The aggregate consideration payable in exchange for all of the outstanding equity securities of Spectrum consists of approximately $120 million in cash and 6,154,000 shares of the Companys common stock (together, the Merger Consideration). The Merger Consideration is subject to adjustment based on (i) cash and working capital adjustment provisions, (ii) the amount of Spectrums transaction expenses and indebtedness that remain unpaid as of the closing of the Merger (the Closing) and (iii) indemnification obligations of holders of equity securities of Spectrum receiving Merger Consideration. Approximately $27 million of the Merger Consideration will be placed into a third party escrow account against which the Company may make claims for indemnification and purchase price adjustments until the fifteen month anniversary of the Closing. The Merger Agreement contains customary representations, warranties and covenants of the parties and contains customary conditions to closing. The above description of the Merger Agreement does not purport to be complete and is subject to, and qualified in its entirety by, the full text of the Merger Agreement, a copy of which is filed as Exhibit 2.1 to the Original 8-K.
Item 8.01 Other Events.
The Company is filing this Amendment to the Original 8-K to disclose (i) (A) the audited combined financial statements of Spectrum and subsidiaries and combined entities, which comprise the combined balance sheets as of December 31, 2016 and January 2, 2016, and the related combined statements of comprehensive income, stockholders equity, and cash flows for the years then ended, (B) the unaudited combined financial statements of Spectrum and subsidiaries and combined entities, which comprise the combined balance sheets for the thirteen weeks ended April 1, 2017 and April 2, 2016 and the related combined statements of comprehensive income, stockholders equity, and cash flows for the periods then ended and (C) the related notes to the combined financial statements, and (ii) (A) the unaudited pro forma condensed combined statement of operations of Repligen for the year ended December 31, 2016 and for the three months ended March 31, 2017, (B) the unaudited pro forma condensed combined balance sheet of Repligen as of March 31, 2017 and (C) the related notes to unaudited pro forma condensed combined financial statements, and (iii) the Management Discussion and Analysis of Financial Conditions and Results of Operations of Spectrum for the years ended December 31, 2016 and January 2, 2016 and for the thirteen weeks ended April 1, 2017 and April 2, 2016.
This Amendment to the Original 8-K amends the Original 8-K to provide the historical financial statements of Spectrum under Item 9.01(a) and the pro forma financial information required under Item 9.01(b).
Forward-Looking Statements
This Current Report on Form 8-K, as amended, contains forward-looking statements, which are made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding the timing of the consummation of the Merger. These statements are neither promises nor guarantees, and are subject to a variety of risks and uncertainties, many of which are beyond the control of the Company, which could cause actual results to differ materially from those contemplated in these forward-looking statements. In particular, the risks and uncertainties include, among other things, the risk that the Merger does not close. For additional disclosure regarding these and other risks faced by the Company, see the disclosures contained in the Companys Annual Report on Form 10-K on file with the Securities and Exchange Commission and the other reports that the Company periodically files with the Securities and Exchange Commission. Actual results may differ materially from those contemplated by these forward-looking statements. These forward looking statements reflect managements current views and the Company does not undertake to update any of these forward-looking statements to reflect a change in its views or events or circumstances that occur after the date hereof except as required by law.
Item 9.01 | Financial Statements and Exhibits. |
(d) Exhibits.
Exhibit |
Description | |
2.1 | Agreement and Plan of Merger and Reorganization, dated June 22, 2017, by and among Repligen Corporation, Top Hat, Inc., Swing Time, LLC, Spectrum, Inc., and Roy T. Eddleman (incorporated herein by reference to Exhibit 2.1 to Repligen Corporations Form 8-K filed on June 23, 2017). | |
10.1 | Stockholder Agreement, dated June 22, 2017, by and between Repligen Corporation and Roy T. Eddleman (incorporated herein by reference to Exhibit 10.1 to Repligen Corporations Form 8-K filed on June 23, 2017). | |
23.1 | Consent of Independent Accountants (Wright Ford Young & Co.). | |
99.1 | Press Release by Repligen Corporation, dated June 23, 2017 (incorporated herein by reference to Exhibit 99.1 to Repligen Corporations Form 8-K filed on June 23, 2017). | |
99.2 | Audited combined financial statements of Spectrum and subsidiaries and combined entities, which comprise the combined balance sheets as of December 31, 2016 and January 2, 2016, and the related combined statements of comprehensive income, stockholders equity, and cash flows for the years then ended, the unaudited combined financial statements of Spectrum and subsidiaries and combined entities, which comprise the combined balance sheets for the quarter ended April 1, 2017 and April 2, 2016 and the related combined statements of comprehensive income, stockholders equity, and cash flows for the quarters then ended, and the related notes to the combined financial statements. | |
99.3 | (A) Unaudited Pro Forma Condensed Combined Statement of Operations of Repligen for the year ended December 31, 2016 and for the three months ended March 31, 2017, (B) Unaudited Pro Forma Condensed Combined Balance Sheet of Repligen as of March 31, 2017 and (C) the related Notes to Unaudited Pro Forma Condensed Combined Financial Statements. | |
99.4 | Spectrums Management Discussion and Analysis of Financial Conditions and Results of Operations for the years ended December 31, 2016 and January 2, 2016 and for the thirteen weeks ended April 1, 2017 and April 2, 2016. |
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.
REPLIGEN CORPORATION | ||
By: | /s/ Tony J. Hunt | |
Tony J. Hunt President and Chief Executive Officer | ||
Date: | June 26, 2017 |
EXHIBIT INDEX
Exhibit Number |
Description | |
2.1 | Agreement and Plan of Merger and Reorganization, dated June 22, 2017, by and among Repligen Corporation, Top Hat, Inc., Swing Time, LLC, Spectrum, Inc., and Roy T. Eddleman (incorporated herein by reference to Exhibit 2.1 to Repligen Corporations Form 8-K filed on June 23, 2017). | |
10.1 | Stockholder Agreement, dated June 22, 2017, by and between Repligen Corporation and Roy T. Eddleman (incorporated herein by reference to Exhibit 10.1 to Repligen Corporations Form 8-K filed on June 23, 2017). | |
23.1 | Consent of Independent Accountants (Wright Ford Young & Co.). | |
99.1 | Press Release by Repligen Corporation, dated June 23, 2017(incorporated herein by reference to Exhibit 99.1 to Repligen Corporations Form 8-K filed on June 23, 2017). | |
99.2 | Audited combined financial statements of Spectrum and subsidiaries and combined entities, which comprise the combined balance sheets as of December 31, 2016 and January 2, 2016, and the related combined statements of comprehensive income, stockholders equity, and cash flows for the years then ended, the unaudited combined financial statements of Spectrum and subsidiaries and combined entities, which comprise the combined balance sheets for the quarter ended April 1, 2017 and April 2, 2016 and the related combined statements of comprehensive income, stockholders equity, and cash flows for the quarters then ended, and the related notes to the combined financial statements. | |
99.3 | (A) Unaudited Pro Forma Condensed Combined Statement of Operations of Repligen for the year ended December 31, 2016 and for the three months ended March 31, 2017, (B) Unaudited Pro Forma Condensed Combined Balance Sheet of Repligen as of March 31, 2017 and (C) the related Notes to Unaudited Pro Forma Condensed Combined Financial Statements. | |
99.4 | Spectrums Management Discussion and Analysis of Financial Conditions and Results of Operations for the years ended December 31, 2016 and January 2, 2016 and for the thirteen weeks ended April 1, 2017 and April 2, 2016. |
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration Statement of Repligen Corporation on Forms S-3 (File Nos. 333-211436, 333-106109, 333-36280, 333-35056, 333-31728, 333-95641, 333-79611, 333-76005, 333-57951, 333-30383 and 333-211436) and Forms S-8 (File Nos. 333-196456, 333-184284, 333-181670, 333-157168 and 333-89140) of our report dated June 14, 2017, with respect to our audit of the combined financial statements of Spectrum, Inc. and subsidiaries and combined entities, which comprise the combined balance sheet as of December 31, 2016 and January 2, 2016, and the related combined statements of comprehensive income, stockholders equity, and cash flows for the years then ended, and the related notes to the combined financial statements, which report is included in this Form 8-K/A of Repligen Corporation.
/s/ Wright Ford Young & Co.
Wright Ford Young & Co.
Irvine, California
June 26, 2017
Exhibit 99.2
Spectrum, Inc.
Table of Contents
Page(s) | ||||
Report of Independent Auditors |
2 | |||
Combined Balance Sheets as of April 1, 2017 (unaudited), December 31, 2016 and January 2, 2016 (restated) |
3 | |||
Combined Statements of Comprehensive Income for the Quarters Ended April 1, 2017 and April 2, 2016 (unaudited), the Year Ended December 31, 2016 and for the Year Ended January 2, 2016 (restated) |
4 | |||
Combined Statements of Stockholders Equity for the Quarter Ended April 1, 2017 (unaudited), the Year Ended December 31, 2016 and for the Year Ended January 2, 2016 (restated) |
5 | |||
Combined Statements of Cash Flows for the Quarters Ended April 1, 2017 and April 2, 2016 (unaudited), the Year Ended December 31, 2016 and for the Year Ended January 2, 2016 (restated) |
6 | |||
Notes to Combined Financial Statements |
7 - 19 |
1
To the Board of Directors and Stockholders of
Spectrum, Inc. and its subsidiaries:
We have audited the accompanying combined financial statements of Spectrum, Inc. and subsidiaries and combined entities (collectively, the Company), which comprise the combined balance sheets as of December 31, 2016 and January 2, 2016, and the related combined statements of comprehensive income, stockholders equity, and cash flows for the years then ended, and the related notes to the combined financial statements.
Managements Responsibility for the Combined Financial Statements
Management is responsible for the preparation and fair presentation of these combined financial statements in accordance with accounting principles generally accepted in the United States of America. This includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of the combined financial statements that are free from material misstatement, whether due to fraud or error.
Auditors Responsibility
Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free of material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the combined financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the combined financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entitys preparation and fair presentation of the combined financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entitys internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the combined financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2016 and January 2, 2016, 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 of America.
Restatement
As discussed in Note 3 to the financial statements, the Company has restated its financial statements as of and for the year ended January 2, 2016, related to the reassessment of two leases as capital leases that had previously been reported as operating leases. Our opinion is not modified with respect to this matter.
/s/ WRIGHT FORD YOUNG & CO.
Irvine, California
June 14, 2017
2
Combined Balance Sheets
April 1, 2017 |
December 31, 2016 |
January 2, 2016 |
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(Unaudited) | Restated | |||||||||||
ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
$ | 7,071,000 | $ | 6,941,000 | $ | 5,544,000 | ||||||
Accounts receivable, less allowances for bad debts & sales returns of $199,000, $197,000 and $226,000, respectively |
6,245,000 | 6,415,000 | 5,437,000 | |||||||||
Investment in marketable securities |
990,000 | 996,000 | 356,000 | |||||||||
Inventories, net of reserves |
8,847,000 | 8,189,000 | 7,973,000 | |||||||||
Prepaid expenses |
649,000 | 648,000 | 277,000 | |||||||||
Income taxes receivable |
242,000 | 172,000 | | |||||||||
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Total current assets |
24,044,000 | 23,361,000 | 19,587,000 | |||||||||
Due from related party |
3,029,000 | 3,025,000 | 3,010,000 | |||||||||
Property and equipment, net |
16,736,000 | 16,815,000 | 16,640,000 | |||||||||
Deferred income taxes |
1,056,000 | 1,165,000 | 982,000 | |||||||||
Goodwill, net |
1,122,000 | 1,122,000 | 1,122,000 | |||||||||
Other assets - including artwork of $911,000 in all periods |
988,000 | 1,021,000 | 989,000 | |||||||||
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Total assets |
$ | 46,975,000 | $ | 46,509,000 | $ | 42,330,000 | ||||||
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LIABILITIES AND STOCKHOLDERS EQUITY |
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CURRENT LIABILITIES: |
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Line of credit |
$ | 1,400,000 | $ | 1,400,000 | $ | | ||||||
Current maturities of long-term debt |
509,000 | 506,000 | 491,000 | |||||||||
Current maturities of capital leases |
5,941,000 | 25,000 | 3,000 | |||||||||
Current portion of accrued interest on capital leases |
89,000 | 88,000 | 105,000 | |||||||||
Accounts payable |
1,287,000 | 1,266,000 | 563,000 | |||||||||
Accrued expenses: |
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Compensation |
1,640,000 | 1,839,000 | 1,806,000 | |||||||||
Other |
608,000 | 1,110,000 | 159,000 | |||||||||
Accrued Dividends |
471,000 | 242,000 | | |||||||||
Income taxes payable |
| | 76,000 | |||||||||
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Total current liabilities |
11,945,000 | 6,476,000 | 3,203,000 | |||||||||
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LONG-TERM LIABILITIES: |
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Line of credit |
| | 1,400,000 | |||||||||
Deferred rent |
44,000 | 3,000 | 24,000 | |||||||||
Long-term debt, net of current maturities |
1,490,000 | 1,584,000 | 2,059,000 | |||||||||
Capital leases, net of current maturities |
5,914,000 | 11,836,000 | 11,861,000 | |||||||||
Accrued interest on capital leases, net of current portion |
47,000 | 69,000 | 157,000 | |||||||||
Unrecognized tax benefit |
576,000 | 534,000 | 355,000 | |||||||||
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Total long-term liabilities |
8,071,000 | 14,026,000 | 15,856,000 | |||||||||
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Total liabilities |
20,016,000 | 20,502,000 | 19,059,000 | |||||||||
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STOCKHOLDERS EQUITY |
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Spectrum, Inc. stockholders equity: |
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Common stock |
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Class A - no par stock, 2,000,000 shares authorized |
| | | |||||||||
Class B - no par stock, 18,000,000 shares authorized |
| | | |||||||||
Additional paid-in capital |
9,785,000 | 9,785,000 | 9,785,000 | |||||||||
Accumulated other comprehensive income |
23,000 | 26,000 | 3,000 | |||||||||
Retained earnings |
17,151,000 | 16,196,000 | 13,483,000 | |||||||||
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Total equity |
26,959,000 | 26,007,000 | 23,271,000 | |||||||||
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Total liabilities and stockholders equity |
$ | 46,975,000 | $ | 46,509,000 | $ | 42,330,000 | ||||||
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See independent auditors report and notes to these combined financial statements.
3
Combined Statements of Comprehensive Income
Quarter ended April 1, 2017 |
Quarter ended April 2, 2016 |
Fiscal Year 2016 |
Fiscal Year 2015 |
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(Unaudited) | (Unaudited) | Restated | ||||||||||||||
NET SALES |
$ | 9,735,000 | $ | 9,092,000 | $ | 40,200,000 | $ | 34,482,000 | ||||||||
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COSTS AND EXPENSES: |
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Cost of sales |
4,179,000 | 4,440,000 | 18,902,000 | 15,125,000 | ||||||||||||
Selling, general and administrative |
3,258,000 | 2,490,000 | 11,835,000 | 10,384,000 | ||||||||||||
Research and development |
567,000 | 476,000 | 1,995,000 | 1,769,000 | ||||||||||||
Building expenses |
16,000 | 15,000 | 57,000 | 72,000 | ||||||||||||
(Gain) loss on remeasurement of foreign currencies |
(90,000 | ) | (201,000 | ) | 264,000 | 323,000 | ||||||||||
Interest (income) expense, net |
162,000 | 157,000 | 654,000 | 627,000 | ||||||||||||
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Total costs and expenses |
8,092,000 | 7,377,000 | 33,707,000 | 28,300,000 | ||||||||||||
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Income before provision for income taxes |
1,643,000 | 1,715,000 | 6,493,000 | 6,182,000 | ||||||||||||
Provision for income taxes |
606,000 | 627,000 | 2,131,000 | 1,800,000 | ||||||||||||
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Net income |
1,037,000 | 1,088,000 | 4,362,000 | 4,382,000 | ||||||||||||
Other comprehensive income (loss), net of income tax: |
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Unrealized gain (loss) on marketable securities, see Note 2. |
(3,000 | ) | 12,000 | 23,000 | (34,000 | ) | ||||||||||
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Comprehensive income |
$ | 1,034,000 | $ | 1,100,000 | $ | 4,385,000 | $ | 4,348,000 | ||||||||
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See independent auditors report and notes to these combined financial statements.
4
Combined Statements of Stockholders Equity
Accumulated | ||||||||||||||||||||||||
Common Stock | Additional | Other | ||||||||||||||||||||||
Class A Shares |
Class B Shares |
Paid-in Capital |
Comprehensive Income (Loss) |
Retained Earnings |
Total Equity | |||||||||||||||||||
Balance, December 27, 2014 (as previously reported) |
1,440,684 | 8,849,916 | $ | 9,785,000 | $ | 37,000 | $ | 9,512,000 | $ | 19,334,000 | ||||||||||||||
Restatement (Note 3) |
| | | | 37,000 | 37,000 | ||||||||||||||||||
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Balance, December 27, 2014 (restated) |
1,440,684 | 8,849,916 | $ | 9,785,000 | $ | 37,000 | $ | 9,549,000 | $ | 19,371,000 | ||||||||||||||
Net income (restated) |
| | | | 4,382,000 | 4,382,000 | ||||||||||||||||||
Dividends accrued |
| | | | (448,000 | ) | (448,000 | ) | ||||||||||||||||
Other comprehensive loss net of income tax |
| | | (34,000 | ) | | (34,000 | ) | ||||||||||||||||
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Balance, January 2, 2016 (restated) |
1,440,684 | 8,849,916 | $ | 9,785,000 | $ | 3,000 | $ | 13,483,000 | $ | 23,271,000 | ||||||||||||||
Net income |
| | | 4,362,000 | 4,362,000 | |||||||||||||||||||
Dividends accrued |
| | | | (1,649,000 | ) | (1,649,000 | ) | ||||||||||||||||
Other comprehensive income net of income tax |
| | | 23,000 | | 23,000 | ||||||||||||||||||
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Balance, December 31, 2016 |
1,440,684 | 8,849,916 | $ | 9,785,000 | $ | 26,000 | $ | 16,196,000 | $ | 26,007,000 | ||||||||||||||
Net income |
| | | 1,037,000 | 1,037,000 | |||||||||||||||||||
Dividends accrued |
| | | | (82,000 | ) | (82,000 | ) | ||||||||||||||||
Other comprehensive loss net of income tax |
| | | (3,000 | ) | | (3,000 | ) | ||||||||||||||||
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Balance, April 1, 2017 |
1,440,684 | 8,849,916 | $ | 9,785,000 | $ | 23,000 | $ | 17,151,000 | $ | 26,959,000 | ||||||||||||||
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See independent auditors report and notes to these combined financial statements.
5
Combined Statements of Cash Flows
Quarter ended April 1, 2017 |
Quarter ended April 2, 2016 |
Fiscal Year 2016 |
Fiscal Year 2015 |
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(Unaudited) | (Unaudited) | Restated | ||||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
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Comprehensive income |
$ | 1,034,000 | $ | 1,100,000 | $ | 4,385,000 | $ | 4,348,000 | ||||||||
Adjustments to reconcile comprehensive income to net cash provided by operating activities: |
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Depreciation and amortization |
267,000 | 241,000 | 1,033,000 | 937,000 | ||||||||||||
Deferred income taxes |
112,000 | 35,000 | (200,000 | ) | (115,000 | ) | ||||||||||
Unrealized (gain) loss on marketable securities, net |
3,000 | (13,000 | ) | (23,000 | ) | 34,000 | ||||||||||
Change in working capital components: |
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Decrease (increase) in accounts receivable |
170,000 | (491,000 | ) | (978,000 | ) | (1,220,000 | ) | |||||||||
Increase in inventories |
(658,000 | ) | (239,000 | ) | (216,000 | ) | (1,381,000 | ) | ||||||||
Decrease (increase) in prepaid expenses and other assets |
33,000 | (159,000 | ) | (403,000 | ) | (75,000 | ) | |||||||||
(Increase) decrease in income taxes receivable/payable |
(70,000 | ) | (219,000 | ) | (248,000 | ) | 416,000 | |||||||||
Increase in accounts payable |
21,000 | 259,000 | 703,000 | 62,000 | ||||||||||||
Increase (decrease) in accrued expenses |
26,000 | (369,000 | ) | 257,000 | 216,000 | |||||||||||
Increase (decrease) in deferred rent |
41,000 | (7,000 | ) | (21,000 | ) | (11,000 | ) | |||||||||
Increase (decrease) in accrued interest on capital leases |
(21,000 | ) | (27,000 | ) | (105,000 | ) | 19,000 | |||||||||
Increase in unrecognized tax benefit |
42,000 | 51,000 | 179,000 | 104,000 | ||||||||||||
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Net cash provided by operating activities |
1,000,000 | 162,000 | 4,363,000 | 3,334,000 | ||||||||||||
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Investment in marketable securities |
| | (600,000 | ) | | |||||||||||
Increase in due from related party |
(4,000 | ) | (4,000 | ) | (15,000 | ) | (140,000 | ) | ||||||||
Acquisition of property and equipment |
(188,000 | ) | (266,000 | ) | (1,208,000 | ) | (543,000 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net cash used in investing activities |
(192,000 | ) | (270,000 | ) | (1,823,000 | ) | (683,000 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||||||||||
Loan proceeds |
| | 42,000 | | ||||||||||||
Payments on long-term debt |
(91,000 | ) | (97,000 | ) | (502,000 | ) | (384,000 | ) | ||||||||
Payments on capital leases |
(6,000 | ) | | (3,000 | ) | | ||||||||||
Dividends paid |
(581,000 | ) | (446,000 | ) | (680,000 | ) | (448,000 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net cash used in financing activities |
(678,000 | ) | (543,000 | ) | (1,143,000 | ) | (832,000 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net change in cash and cash equivalents |
130,000 | (651,000 | ) | 1,397,000 | 1,819,000 | |||||||||||
Cash and cash equivalents |
||||||||||||||||
Beginning of year |
6,941,000 | 5,544,000 | 5,544,000 | 3,725,000 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
End of year |
$ | 7,071,000 | $ | 4,893,000 | $ | 6,941,000 | $ | 5,544,000 | ||||||||
|
|
|
|
|
|
|
|
See independent auditors report and notes to these combined financial statements.
6
Spectrum Technology Corporation
Notes to Financial Statements
NOTE 1 NATURE OF BUSINESS
The accompanying combined financial statements include the accounts of Spectrum, Inc. formerly known as Spectrum Laboratories, Inc. (Spectrum) and its subsidiaries, Laboratory Safety Inc. (Laboratory Safety) and Spectrum Chromatography (Chromatography); and Spectrum Europe B.V. (Spectrum B.V.) and its subsidiary Spectrum Labs India Pvt. Ltd (Spectrum India), Spectrum Labs Shanghai Co., Ltd (Spectrum China), and Spectrum Overseas, Inc. (Overseas), which are under common control (collectively, the Company).
The Company develops and sells proprietary tubular membranes and membrane devices for existing and emerging life science applications used primarily by research laboratories. The Company is also engaged in the manufacture and sale of medical laboratory equipment and supplies and disposable products. Certain products are regulated by the United States Food and Drug Administration, California Department of Toxic Substances Control and the California Food and Drug Branch. All products are for sale primarily to the pharmaceutical, biotechnology and medical industries throughout the world.
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Quarter and Fiscal Year The quarters ended on April 1, 2017 (Q1 2017) and April 2, 2016 (Q1 2016), which consist of 13 weeks. The Companys fiscal year ends on the Saturday closest to December 31st. The years ended on December 31, 2016 (fiscal year 2016) and January 2, 2016 (fiscal year 2015) consisted of 52 weeks and 53 weeks, respectively.
Principles of Combination The accompanying combined financial statements include the accounts of Spectrum, and its two wholly owned subsidiaries, Laboratory Safety and Chromatography; and four entities under common control consisting of Spectrum B.V. and its wholly owned subsidiary Spectrum India, Spectrum China, and Overseas. All intercompany balances and transactions have been eliminated in combination.
Use of Estimates
The preparation of the combined financial statements require management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosure of contingent assets and liabilities at the date of the combined financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
The Companys operations are affected by numerous factors including market acceptance, changes in technologies and new laws and government regulations and policies. The Company cannot predict what impact, if any, the occurrence of these or other events might have on the Companys operations.
Significant estimates and assumptions made by management are used for, but not limited to, the allowance for doubtful accounts and sales returns, the reserve for slow moving or obsolete inventories, the fair value of long-lived and intangible assets, and the realizability of deferred tax assets and unrecognized tax benefits. Actual results could differ from these estimates.
Cash and Cash Equivalents
The Company classifies all highly liquid investments with original maturities of 90 days or less at the time of purchase as cash and cash equivalents. The Company, periodically throughout the year, has amounts on deposit that exceed insured limits.
7
Accounts Receivable
The Company performs ongoing credit evaluations of its customers and generally does not require collateral. Accounts receivable are carried at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis. Management determines the allowance for doubtful accounts by identifying troubled accounts and by using historical experience applied to an aging of accounts. Accounts receivable are written off when deemed uncollectible. Recoveries of accounts receivable previously written off are recorded when received. No interest is charged on past due accounts.
Inventory
Inventories are stated at the lower of cost (using the first-in first-out method) or net realizable value and are net of slow moving and obsolescence reserves.
Investment in Marketable Securities Classified as Available-For-Sale Securities
Management determines the appropriate classification of the securities at the time they are acquired and evaluates the appropriateness of such classifications at each balance sheet date. Available-for-sale securities are stated at fair value and unrealized holding gains and losses, net of the related deferred tax effect, are reported as other comprehensive income or loss. Realized gains and losses, including losses from declines in value of specific securities determined by management to be other than temporary, are included in earnings. Realized gains and losses are determined on the basis of the specific identification of the securities sold.
As of April 1, 2017, December 31, 2016 and January 2, 2016, $390,000, $396,000 and $356,000, respectively, in available-for-sale securities included equity securities of two unrelated companies within the same industry that the Company operates. The cost of these investments approximates $352,000, with no purchases in the quarter ended April 1, 2017 or in fiscal years 2016 or 2015. The following table sets forth a summary of other comprehensive gain (loss) recognized on these investments during the quarters ended April 1, 2017 and April 2, 2016 and fiscal years 2016 and 2015.
Quarter ended April 1, 2017 |
Quarter ended April 2, 2016 |
Fiscal Year 2016 |
Fiscal Year 2015 |
|||||||||||||
Unrecognized gain (loss) |
$ | (6,000 | ) | $ | 20,000 | $ | 39,000 | $ | (57,000 | ) | ||||||
Tax benefit (expense) |
3,000 | (8,000 | ) | (16,000 | ) | 23,000 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Other comprehensive gain (loss) |
$ | (3,000 | ) | $ | 12,000 | $ | 23,000 | $ | (34,000 | ) | ||||||
|
|
|
|
|
|
|
|
In 2016, the Company made an investment in a venture capital limited partnership. The cost of this investment is $600,000, with additional committed capital of $400,000 due in 2017. There was no gain or loss associated with this investment in the quarter ended April 1, 2017 or fiscal year 2016.
Long-Lived Assets
Property and equipment are recorded at cost, net of accumulated depreciation and amortization. Depreciation of property and equipment is provided using the straight-line method over the estimated useful lives (ranging from 3 to 30 years) of the respective assets. Leasehold improvements are amortized on a straight-line basis over the lesser of the lease term or the estimated useful life of the asset. Amortization of leasehold improvements is included with depreciation expense. No depreciation is being provided for the Company owned artwork, which is carried at its historical cost.
The Company periodically reviews its long-lived assets to determine potential impairment by comparing the carrying value of the long-lived assets with the estimated future net undiscounted cash flows expected to result from the use of the assets, including cash flows from disposition. Long-lived assets evaluated for impairment are grouped with other assets to the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. Should the sum of the expected future net cash flows be less than the carrying value, the Company would recognize an impairment loss at that date. An impairment loss would be measured by comparing the amount by which the carrying value exceeds the fair value (estimated discounted future cash flows) of the long-lived assets.
Changes in circumstances, such as the passage of new laws or changes in regulations, technological advances or changes to the Companys business strategy, could result in the actual useful lives of long-lived assets differing from initial estimates. Factors such as changes in the planned use of equipment, customer attrition, contractual amendments or mandated regulatory requirements could result in shortened useful lives. In those cases where the Company determines that the useful life of a long-lived asset should be revised, the Company will amortize or depreciate the net book value in excess of the estimated residual value over its revised remaining useful life.
Goodwill
The Company accounts for goodwill in accordance with guidance issued by the Financial Accounting Standards Board (the FASB). Based upon the provisions of this guidance, the Company first assesses certain qualitative factors to determine whether it is more
8
likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. If, after assessing the qualitative events and circumstances, the Company determines that it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary and no impairment of goodwill exists. However, if the Company concludes otherwise, then it is required to perform the first step of the two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit. If the reporting units estimated fair value exceeds the reporting units carrying value, no impairment of goodwill exists. If the fair value of the reporting unit does not exceed the units carrying value, then the Company is required to perform the second step of the goodwill impairment test to measure the amount of the impairment loss, if any.
Income Taxes
Deferred income taxes are provided on a liability method whereby deferred income tax assets are recognized for deductible temporary differences and tax credit carryforwards and deferred income tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred income 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. Deferred income tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Undistributed earnings of non-U.S. entities amounted to approximately $7,962,000 and $7,684,000 at April 1, 2017 and December 31, 2016, respectively. Those earnings are considered to be indefinitely reinvested and, accordingly, no U.S. federal or state deferred taxes have been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to U.S. income taxes, which could potentially be offset by foreign tax credits. Determination of the amount of unrecognized deferred U.S. income tax liability is not practicable because of the complexities associated with its hypothetical calculation.
Overseas is set up as an Interest Charge Domestic International Sales Corporation (IC-DISC) for tax savings on sales to customers located outside the United States of America. Overseas stockholders are required to pay only a nominal interest charge to the federal government with respect to taxes that are deferred on Overseas income. The stockholders then recognize the dividend income received from the IC-DISC on their tax returns as qualified dividend income.
Accounting for Uncertainty in Income Taxes
The Company accounts for uncertainty in income taxes under the required provisions of accounting guidance issued by the FASB. This guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The guidance requires that the Company determine whether the benefits of tax positions are more likely than not of being sustained upon audit based on the technical merits of the tax position. For tax positions that are more likely than not of being sustained upon audit, the Company recognizes the largest amount of the benefit that is more likely than not of being sustained in the financial statements. For tax positions that are not more likely than not of being sustained upon audit, the Company does not recognize any portion of the benefit in the financial statements. Additionally, the interpretation provides guidance on de-recognition, classification, interest and penalties, disclosure and transition. At April 1, 2017, December 31, 2016 and January 2, 2016, the Company had an accrual of $576,000, $534,000 and $355,000, respectively, for potential losses related to uncertain tax positions. The Company is subject to routine audits by taxing jurisdictions. Management believes it is no longer subject to income tax examinations for the years prior to fiscal 2013 for federal and 2012 for California.
In April 2017, the Internal Revenue Service (IRS) notified the Company that it would begin an examination of the Companys federal income tax returns for 2014. The Company has responded to the requests for information from the IRS, however, the examining agent has not yet indicated whether there would be a proposed assessment or no change proposed. No provision has been made in the accompanying combined financial statements since any ultimate liability cannot be reasonably estimated.
Revenue Recognition
The Company records revenue at the time the related products are shipped.
Product Returns and Warranties
The Company records a provision for estimated product returns and warranties at the time the related revenue is recognized, which is included in sales returns and allowances.
Research and Development
The Company expenses research and development costs as incurred.
Advertising Costs
Costs associated with advertising and promoting products are expensed as incurred. Advertising and promotion expense was $133,000 and $97,000, during quarters ended April 1, 2017 and April 2, 2016 and $537,000 and $599,000 during fiscal years 2016 and 2015, respectively, inclusive of trade shows.
9
Remeasurement of Foreign Currencies
Monetary assets and liabilities of Spectrum B.V., Spectrum China and the Spectrum Japan distribution office are remeasured into U.S. dollars at year-end exchange rates and nonmonetary assets and stockholders equity are remeasured using historical rates of exchange. Income and expenses are remeasured at average rates during the respective years. The functional currency of these entities and this division is the U.S. dollar; therefore, remeasurement gains or losses are included in income. Remeasurement (gains) losses included in the combined statements of comprehensive income were ($90,000) and ($201,000) in the quarters ended April 1, 2017 and April 2, 2016, $264,000 in fiscal year 2016 and $323,000 in fiscal year 2015.
Fair Value Measurements
The FASB provides the framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy under this framework are described as follows:
Level 1 | Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access. | |||
Level 2 | Inputs to the valuation methodology include: | |||
| quoted prices for similar assets or liabilities in active markets; | |||
| quoted prices for identical or similar assets or liabilities in inactive markets; | |||
| inputs other than quoted prices that are observable for the asset or liability; | |||
| inputs that are derived principally from or corroborated by observable market data by correlation or other means. | |||
If the asset or liability has a specified (contractual) term, the level 2 input must be observable for substantially the full term of the asset or liability. | ||||
Level 3 | Inputs to the valuation methodology are unobservable and significant to the fair value measurement. |
The asset or liabilitys fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.
Accordingly, the Company believes the carrying value of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses to be representative of their fair values based on their short term nature. For investments in marketable securities, the carrying amount is fair market value based on quoted market prices. For long term debt and the line of credit, the carrying value is considered to approximate the fair value of such debt for all periods presented based upon the interest rates that the Company believes it can currently obtain for similar debt.
Additional disclosures regarding assets and liabilities measured at fair value on a recurring basis are as follows:
Description |
Total | Level 1 | Level 2 | Level 3 | ||||||||||||
April 01, 2017 |
||||||||||||||||
ASSETS: |
||||||||||||||||
Investment in marketable securities |
$ | 990,000 | $ | 390,000 | $ | | $ | 600,000 | ||||||||
LIABILITIES: |
||||||||||||||||
Line of credit |
1,400,000 | | 1,400,000 | | ||||||||||||
Long-term debt |
1,999,000 | | 1,999,000 | | ||||||||||||
Capital leases |
11,855,000 | | 11,855,000 | | ||||||||||||
December 31, 2016 |
||||||||||||||||
ASSETS: |
||||||||||||||||
Investment in marketable securities |
$ | 996,000 | $ | 396,000 | $ | | $ | 600,000 | ||||||||
LIABILITIES: |
||||||||||||||||
Line of credit |
1,400,000 | | 1,400,000 | | ||||||||||||
Long-term debt |
2,090,000 | | 2,090,000 | | ||||||||||||
Capital leases |
11,861,000 | | 11,861,000 | | ||||||||||||
January 02, 2016 |
||||||||||||||||
ASSETS: |
||||||||||||||||
Investment in marketable securities |
$ | 356,000 | $ | 356,000 | $ | | $ | | ||||||||
LIABILITIES: |
||||||||||||||||
Line of credit |
1,400,000 | | 1,400,000 | | ||||||||||||
Long-term debt |
2,550,000 | | 2,550,000 | | ||||||||||||
Capital leases |
11,864,000 | | 11,864,000 | |
There were no transfers between levels 1, 2 and 3 during the fiscal years 2016 and 2015.
The following table sets forth a summary of changes in the fair value of the Companys level 3 assets for the quarter ended April 1, 2017 and fiscal year 2016.
Limited Partnership |
||||
Balance, January 2, 2016 |
$ | | ||
Purchases |
600,000 | |||
|
|
|||
Balance, December 31, 2016 |
$ | 600,000 | ||
Purchases |
| |||
|
|
|||
Balance, April 1, 2017 |
$ | 600,000 | ||
|
|
Accounting for Stock-based Compensation
The Company accounts for share-based compensation under the required provisions of accounting guidance issued by the FASB. This guidance requires all share-based payments to employees, including grants of employee stock options, to be measured at fair value and expensed in the combined statements of comprehensive income over the requisite service period (generally the vesting period). The Company elected the modified prospective method as prescribed by the guidance, whereby compensation cost is only recognized in the combined statements of comprehensive income beginning with the first period that the guidance is effective and thereafter.
There were no options that vested in the quarter ended April 1, 2017, or in fiscal year 2016 or 2015.
New Accounting Pronouncements
In January 2014, the FASB amended guidance that gives private companies the option to amortize goodwill on a straight-line basis over a period of ten years or over a shorter period if the company demonstrates that another useful life is more appropriate. Goodwill would be subject to impairment testing only upon the occurrence of a triggering event. The amendment was effective for the Company in 2015. The alternative is applied on a prospective basis, with amortization of existing goodwill commencing at the beginning of the period of adoption. The Company has not adopted this pronouncement.
In May 2014, the FASB issued guidance to change the recognition of revenue from contracts with customers. The core principle of the new guidance is that an entity should recognize revenue to reflect the transfer of goods and services to customers in an amount
10
equal to the consideration the entity receives or expects to receive. The guidance will be effective for the Company in 2019. The Company has not completed its assessment but does not expect this amendment to have a material effect on its combined financial statements.
In November 2015, the FASB issued guidance to simplify the presentation of deferred income taxes. This guidance requires that deferred tax assets and liabilities be classified as non-current in a statement of financial position. The Company elected to early adopt the provisions of this pronouncement. The Company has reclassified all deferred taxes as of January 2, 2016 as non-current to give retroactive effect to this change.
Intra Entity transfer of Assets - In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfer of Assets Other than Inventory ASU 2016-16, which requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The standard is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. The Company does not believe such an adoption will have a material impact.
In February 2016, the FASB issued guidance intended to improve financial reporting for leasing transactions. This guidance will require companies to recognize on the balance sheet, the assets and liabilities for the rights and obligations, respectively, created by leases with lease terms greater than 12 months. The guidance will also require disclosures to help financial statement users better understand the amount, timing and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements. This guidance will be effective for the Company in 2020. The Company is currently evaluating the impact the pronouncement will have on its combined financial statements and related disclosures.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Companys financial position, results of operations or cash flows.
NOTE 3 RESTATEMENT OF THE COMBINED FINANCIAL STATEMENTS
The Company has restated its previously issued combined financial statements as of and for the years ended on January 2, 2016 (fiscal year 2015) and December 27, 2014 (fiscal year 2014) which consisted of 53 weeks and 52 weeks, respectively, to correct an error in the accounting for two leases. During 2014, the Company entered a lease with the majority stockholder for a property in Palm Desert, California and renegotiated a lease for property in Las Vegas, Nevada with the same lessor. As a result of lessor put options included within the leases, the leases have been determined to be capital leases from the effective dates of lease execution/amendment. The restatements are reflected in these combined financial statements. See Note 7 for information related to the capital leases.
Certain disclosures, including Notes 5, 6, 7, 9, 14 and 15 have been restated consistent with the combined financial statements.
As a result of this error, the following adjustments have been made to previously issued combined financial statements:
COMBINED BALANCE SHEET |
January 2, 2016 | |||||||||||
As previously reported | Adjustment | As Restated | ||||||||||
Property and equipment, net |
$ | 5,221,000 | $ | 11,419,000 | $ | 16,640,000 | ||||||
Deferred income taxes |
904,000 | 78,000 | 982,000 | |||||||||
Total assets |
30,833,000 | 11,497,000 | 42,330,000 | |||||||||
Deferred rent |
537,000 | (513,000 | ) | 24,000 | ||||||||
Capital leases |
| 11,864,000 | 11,864,000 | |||||||||
Accrued interest on capital leases |
| 262,000 | 262,000 | |||||||||
Total liabilities |
7,446,000 | 11,613,000 | 19,059,000 | |||||||||
Retained earnings |
13,599,000 | (116,000 | ) | 13,483,000 | ||||||||
Total equity |
23,387,000 | (116,000 | ) | 23,271,000 | ||||||||
Total liabilities and stockholders equity |
30,833,000 | 11,497,000 | 42,330,000 | |||||||||
COMBINED BALANCE SHEET |
December 27, 2014 | |||||||||||
As previously reported | Adjustment | As Restated | ||||||||||
Property and equipment, net |
$ | 5,377,000 | $ | 11,656,000 | $ | 17,033,000 | ||||||
Deferred income taxes |
869,000 | (25,000 | ) | 844,000 | ||||||||
Total assets |
26,717,000 | 11,631,000 | 38,348,000 | |||||||||
Deferred rent |
548,000 | (513,000 | ) | 35,000 | ||||||||
Capital leases |
| 11,864,000 | 11,864,000 | |||||||||
Accrued interest on capital leases |
| 243,000 | 243,000 | |||||||||
Total liabilities |
7,383,000 | 11,594,000 | 18,977,000 | |||||||||
Retained earnings |
9,512,000 | 37,000 | 9,549,000 | |||||||||
Total equity |
19,334,000 | 37,000 | 19,371,000 | |||||||||
Total liabilities and stockholders equity |
26,717,000 | 11,631,000 | 38,348,000 | |||||||||
COMBINED STATEMENT OF COMPREHENSIVE INCOME |
Fiscal Year 2015 | |||||||||||
As previously reported | Adjustment | As Restated | ||||||||||
Cost of sales |
$ | 15,330,000 | $ | (205,000 | ) | $ | 15,125,000 | |||||
Selling, general and administrative |
10,552,000 | (168,000 | ) | 10,384,000 | ||||||||
Interest (income) expense, net |
(1,000 | ) | 628,000 | 627,000 | ||||||||
Total costs and expenses |
28,045,000 | 255,000 | 28,300,000 | |||||||||
Income before provision for income taxes |
6,437,000 | (255,000 | ) | 6,182,000 | ||||||||
Provision for income taxes |
1,798,000 | (102,000 | ) | 1,696,000 | ||||||||
Net income |
4,535,000 | (153,000 | ) | 4,382,000 | ||||||||
Comprehensive income |
4,501,000 | (153,000 | ) | 4,348,000 | ||||||||
COMBINED STATEMENT OF COMPREHENSIVE INCOME |
Fiscal Year 2014 | |||||||||||
As previously reported | Adjustment | As Restated | ||||||||||
Cost of sales |
$ | 13,570,000 | $ | (379,000 | ) | $ | 13,191,000 | |||||
Selling, general and administrative |
10,165,000 | (168,000 | ) | 9,997,000 | ||||||||
Interest (income) expense, net |
35,000 | 485,000 | 520,000 | |||||||||
Total costs and expenses |
25,910,000 | (62,000 | ) | 25,848,000 | ||||||||
Income before provision for income taxes |
3,737,000 | 62,000 | 3,799,000 | |||||||||
Provision for income taxes |
586,000 | 25,000 | 611,000 | |||||||||
Net income |
2,900,000 | 37,000 | 2,937,000 | |||||||||
Comprehensive income |
2,865,000 | 37,000 | 2,902,000 | |||||||||
COMBINED STATEMENT OF CASH FLOWS |
Fiscal Year 2015 | |||||||||||
As previously reported | Adjustment | As Restated | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||||||
Comprehensive income |
$ | 4,501,000 | $ | (153,000 | ) | $ | 4,348,000 | |||||
Depreciation and amortization |
700,000 | 237,000 | 937,000 | |||||||||
Deferred income taxes |
(12,000 | ) | (103,000 | ) | (115,000 | ) | ||||||
Accrued interest on capital leases |
| 19,000 | 19,000 | |||||||||
Increase (decrease) in deferred rent |
(11,000 | ) | | (11,000 | ) | |||||||
COMBINED STATEMENT OF CASH FLOWS |
Fiscal Year 2014 | |||||||||||
As previously reported | Adjustment | As Restated | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||||||
Comprehensive income |
$ | 2,865,000 | $ | 37,000 | $ | 2,902,000 | ||||||
Depreciation and amortization |
713,000 | 208,000 | 921,000 | |||||||||
Deferred income taxes |
(535,000 | ) | 25,000 | (510,000 | ) | |||||||
Accrued interest on capital leases |
| 243,000 | 243,000 | |||||||||
Increase (decrease) in deferred rent |
308,000 | (513,000 | ) | (205,000 | ) | |||||||
COMBINED STATEMENT OF STOCKHOLDERS EQUITY |
Fiscal Year 2015 | |||||||||||
As previously reported | Adjustment | As Restated | ||||||||||
Net income |
$ | 4,535,000 | $ | (153,000 | ) | $ | 4,382,000 | |||||
Retained earnings |
13,599,000 | (116,000 | ) | $ | 13,483,000 | |||||||
Total Equity |
23,387,000 | (116,000 | ) | 23,271,000 | ||||||||
COMBINED STATEMENT OF STOCKHOLDERS EQUITY |
Fiscal Year 2014 | |||||||||||
As previously reported | Adjustment | As Restated | ||||||||||
Net income |
$ | 2,900,000 | $ | 37,000 | $ | 2,937,000 | ||||||
Retained earnings |
9,512,000 | 37,000 | $ | 9,549,000 | ||||||||
Total Equity |
19,334,000 | 37,000 | 19,371,000 |
NOTE 4 INVENTORY, NET
Inventories, net consist of the following:
April 1, 2017 |
December 31, 2016 |
January 2, 2016 |
||||||||||
(Unaudited) | Restated | |||||||||||
Raw materials |
$ | 6,846,000 | $ | 6,599,000 | $ | 5,783,000 | ||||||
Work in process |
547,000 | 129,000 | 512,000 | |||||||||
Finished goods |
2,609,000 | 2,554,000 | 2,527,000 | |||||||||
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|
|
|
|||||||
10,002,000 | 9,282,000 | 8,822,000 | ||||||||||
Less reserve for slow moving and obsolete items |
(1,155,000 | ) | (1,093,000 | ) | (849,000 | ) | ||||||
|
|
|
|
|
|
|||||||
$ | 8,847,000 | $ | 8,189,000 | $ | 7,973,000 | |||||||
|
|
|
|
|
|
NOTE 5 PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following:
April 1, 2017 |
December 31, 2016 |
January 2, 2016 |
||||||||||
(Unaudited) | Restated | |||||||||||
Land |
$ | 4,746,000 | $ | 4,746,000 | $ | 4,746,000 | ||||||
Buildings |
9,691,000 | 9,691,000 | 9,691,000 | |||||||||
Machinery, equipment and tooling |
11,205,000 | 11,431,000 | 10,632,000 | |||||||||
Office furniture and equipment |
1,987,000 | 1,658,000 | 1,369,000 | |||||||||
Leasehold improvements |
1,947,000 | 1,861,000 | 1,741,000 | |||||||||
|
|
|
|
|
|
|||||||
29,575,000 | 29,387,000 | 28,179,000 | ||||||||||
Less accumulated depreciation and amortization |
(12,840,000 | ) | (12,572,000 | ) | (11,539,000 | ) | ||||||
|
|
|
|
|
|
|||||||
$ | 16,736,000 | $ | 16,815,000 | $ | 16,640,000 | |||||||
|
|
|
|
|
|
11
Depreciation expense was $267,000 and $241,000 for the quarters ended April 1, 2017 and April 2, 2016, respectively. Depreciation expense for the years ended December 31, 2016 and January 2, 2016 was $1,033,000 and $937,000, respectively.
NOTE 6 INCOME TAXES
Pre-tax income subject to foreign and U.S. income taxes for the quarters ended April 1, 2017 and April 2, 2016 and fiscal years 2016 and 2015 were as follows:
Quarter ended April 1, 2017 |
Quarter ended April 2, 2016 |
Fiscal Year 2016 |
Fiscal Year 2015 |
|||||||||||||
(Unaudited) | (Unaudited) | Restated | ||||||||||||||
U.S. pre tax income |
$ | 1,088,000 | $ | 566,000 | $ | 3,974,000 | $ | 4,557,000 | ||||||||
Foreign pre tax income |
555,000 | 1,149,000 | 2,519,000 | 1,625,000 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 1,643,000 | $ | 1,715,000 | $ | 6,493,000 | $ | 6,182,000 | |||||||||
|
|
|
|
|
|
|
|
Income tax data for the quarters ended April 1, 2017 and April 2, 2016 (unaudited) and for the years ended December 31, 2016 and January 2, 2016 is as follows:
Quarter ended April 1, 2017 |
Quarter ended April 2, 2016 |
Fiscal Year 2016 |
Fiscal Year 2015 |
|||||||||||||
(Unaudited) | (Unaudited) | Restated | ||||||||||||||
Current: |
||||||||||||||||
Federal |
$ | 326,000 | $ | 266,000 | $ | 1,522,000 | $ | 402,000 | ||||||||
State |
6,000 | 14,000 | 77,000 | 996,000 | ||||||||||||
Foreign |
138,000 | 288,000 | 732,000 | 517,000 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
470,000 | 568,000 | 2,331,000 | 1,915,000 | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Deferred: |
||||||||||||||||
Federal |
63,000 | 21,000 | (99,000 | ) | (75,000 | ) | ||||||||||
State |
73,000 | 38,000 | (101,000 | ) | (40,000 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
136,000 | 59,000 | (200,000 | ) | (115,000 | ) | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 606,000 | $ | 627,000 | $ | 2,131,000 | $ | 1,800,000 | |||||||||
|
|
|
|
|
|
|
|
The reported provision for income taxes differs from the amount computed by applying the income tax rate of 34% to the combined income before provision for income taxes as follows:
Quarter ended April 1, 2017 |
Quarter ended April 2, 2016 |
Fiscal Year 2016 |
Fiscal Year 2015 |
|||||||||||||
(Unaudited) | (Unaudited) | Restated | ||||||||||||||
Statutory federal tax rate |
$ | 558,000 | $ | 583,000 | $ | 2,208,000 | $ | 2,102,000 | ||||||||
State taxes, net of federal benefit |
99,000 | 103,000 | 389,000 | 371,000 | ||||||||||||
Foreign taxes and change in foreign rate differential |
(83,000 | ) | (172,000 | ) | (378,000 | ) | (281,000 | ) | ||||||||
Nondeductible expenses |
13,000 | 10,000 | 25,000 | 17,000 | ||||||||||||
Tax credits |
(67,000 | ) | (72,000 | ) | (291,000 | ) | (317,000 | ) | ||||||||
Other |
86,000 | 175,000 | 178,000 | (92,000 | ) | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income tax provision |
$ | 606,000 | $ | 627,000 | $ | 2,131,000 | $ | 1,800,000 | ||||||||
|
|
|
|
|
|
|
|
The components of the Companys net deferred income tax assets are as follows:
April 1, 2017 | December 31, 2016 | January 2, 2016 | ||||||||||
(Unaudited) | Restated | |||||||||||
Reserves not currently deductible |
$ | 802,000 | $ | 733,000 | $ | 859,000 | ||||||
Equipment and leasehold improvements |
(416,000 | ) | (454,000 | ) | (422,000 | ) | ||||||
Capital lease timing difference |
| 178,000 | 78,000 | |||||||||
Tax credits |
428,000 | 465,000 | 381,000 | |||||||||
Other |
242,000 | 243,000 | 86,000 | |||||||||
|
|
|
|
|
|
|||||||
$ | 1,056,000 | $ | 1,165,000 | $ | 982,000 | |||||||
|
|
|
|
|
|
As of April 1, 2017, and December 31, 2016 the Company had reserves of $2,005,000 and 1,832,500, respectively that the Company expects to utilize against its taxable income in future years.
The Company has evaluated the positive and negative evidence bearing on its ability to realize the deferred tax assets. The Companys history of cumulative profitability, management has concluded that it is more likely than not that the Company will be able to fully realize the benefits of its deferred tax assets. Accordingly, a valuation allowance has not been established against any of the Companys identified deferred tax assets. Management reevaluates the positive and negative evidence at each reporting period and will continue to monitor this matter going forward.
The Company evaluates the uncertainty of a tax position on whether a tax position is more likely than not to be sustained upon examination, including resolution of any appeals or litigation process, and based on the technical merits of the tax position in question. For tax positions meeting the more likely than not threshold, the tax amount recognized in the financial statements is reduced by the largest benefit that has a greater than 50% likelihood of being realized upon the ultimate settlement with the relevant tax authority.
12
For the quarters ended April 1, 2017 and April 2, 2016 and fiscal years 2016 and 2015, the Company had uncertain tax position of $575,000, $406,000, $534,000, and $355,000, respectively, related to certain identified potential losses. A roll-forward of the Companys identified uncertain tax positions is as follows:
Quarter ended | Quarter ended | Fiscal Year | Fiscal Year | |||||||||||||
April 1, 2017 | April 2, 2016 | 2016 | 2015 | |||||||||||||
(Unaudited) | (Unaudited) | Restated | ||||||||||||||
Beginning Balance |
$ | 534,000 | $ | 355,000 | $ | 355,000 | $ | 251,000 | ||||||||
Additions: |
||||||||||||||||
$ | 42,000 | $ | 51,000 | $ | 203,000 | $ | 144,000 | |||||||||
Tax Positions for current year |
||||||||||||||||
Reductions: |
||||||||||||||||
Statute Reductions |
| | (24,000 | ) | (40,000 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 576,000 | $ | 406,000 | $ | 534,000 | $ | 355,000 | |||||||||
|
|
|
|
|
|
|
|
The Company files tax returns in the United States, China, India and various other state and foreign jurisdictions. All of the Companys tax years remain open to examination of major taxing authority from 2012 to the present. To the extent a carryforward attribute such as identified tax credits were generated in years past, they may still be adjusted upon examination by the Internal Revenue Service or state and foreign tax authorities if they will have or will be used in the future periods. The Company has received notice from the Internal Revenue Service of a pending examination however, at this time, time the Company has not identified any quantifiable taxes that might otherwise be due.
The resolution of tax matters, when and if identified, is not expected to have a material effect on the Companys, the financial statements. The Companys policy is to record interest and penalties related to income taxes as part of the tax provision. The Company reported no material interest and penalties pertaining to uncertain tax positions in 2016 or 2017.
13
NOTE 7 LONG TERM DEBT AND CAPITAL LEASES
The Company has a $5 million Revolving Credit Commitment with a bank that provides Spectrum with additional liquidity. The line of credit agreement bears interest at the banks prime rate (4.0% as of April 1, 2017 and 3.75% as of December 31, 2016) and matures August 2017. The line of credit balance outstanding as of April 1, 2017 and December 31, 2016 was $1,400,000.
The Company entered a $4 million Multiple Disbursement Note in May 2014. This note bears interest at the banks prime rate. Payment for outstanding balances commenced July 2015 and principal is to be paid off in 48 equal installments. The balance outstanding as of April 1, 2017 was $900,000 with $300,000 due for the remainder of 2017, $400,000 due in 2018, and $200,000 due in 2019. The balance outstanding as of December 31, 2016 was $1,000,000 with $400,000 due annually from 2017 through 2018, and $200,000 due in 2019.
The Revolving Credit Commitment and the Multiple Disbursement Note are secured by substantially all the Spectrum assets and are personally guaranteed by the majority stockholder. The agreement also requires the maintenance of certain financial and non-financial loan covenants.
During September 2009, Spectrum B.V. entered a 1.0 million Mortgage Agreement with a European Bank, in order to purchase a building with a total cost of 1.250 million. The loan originally carried a fixed interest rate of 4.9% for the first two years with principal payments of 4,165 monthly beginning November 1, 2010 for 20 years. As of April 1, 2017, and December 31, 2016 the variable interest rates were 2.8% and 3.0%, respectively. The Company also elected to exercise its right to prepay 50,000 in December of 2010 and January of 2011. The outstanding balance is 529,000 and 538,000 as of April 1, 2017 and December
31, 2016, respectively. Based on the April 1, 2017 Euro/US dollar conversion rate of 1.069 the outstanding balance at April 1, 2017 is $566,000, with approximately $53,000 due annually through 2029. Based on the December 31, 2016 Euro/US dollar conversion rate of 1.053 the outstanding balance at December 31, 2016 is $566,000, with approximately $53,000 due annually through 2029. The Mortgage Agreement is secured by all the assets of Spectrum B.V. and guaranteed up to 30% by Spectrum.
During April 2013, Spectrum Japan entered a ¥74,000,000 Mortgage Agreement with a Japanese Bank, to purchase a building with a cost of ¥70,000,000 and other related transaction fees. The loan carries a fixed interest rate of 4.25% for the first 10 years with principal payments of ¥411,000 monthly beginning May 31, 2013 for 15 years. The outstanding balance is ¥54,683,000 and ¥56,327,000 as of April 1, 2017 and December 31, 2016, respectively. Based on the April 1, 2017 Yen/US Dollar conversion rate of 111, the outstanding balance at April 1, 2017 is $492,000, with approximately $44,000 due annually through 2028. Based on the December 31, 2016 Yen/US Dollar conversion rate of 117, the outstanding balance at December 31, 2016 is $481,000 with approximately $42,000 due annually through 2028. The Mortgage Agreement is secured by all the assets of Spectrum Japan.
During September 2016, Spectrum India entered a INR 3,007,539 auto financing agreement with an Indian financing company to purchase an auto for the Director of Spectrum India. The loan carries a fixed interest rate of 9.0% with principal payments of INR 63,450 monthly beginning November 2016. Based on the April 1, 2017 INR/US dollar conversion rate of .015414 the outstanding balance at April 1, 2017 is $41,000, with approximately $12,000 due annually through 2020. The outstanding balance is INR 2,880,639 as of December 31, 2016. Based on the December 31, 2016 INR/US dollar conversion rate of .014748 the outstanding balance at December 31, 2016 is $42,000, with approximately $11,000 due annually through 2020.
Capital Leases
The Company is the lessee to two lease agreements with a related party that include put options where the lessor may require the Company to acquire the leased facilities. See Note 9 for information relating to these leases. The Company views these arrangements as capital leases resulting from the put options being considered as guarantees of a minimum residual value for each of the facilities.
14
As of April 1, 2017, December 31, 2016 and January 2, 2016, assuming the put options are exercised at December 31, 2018 for Palm Desert and January 1, 2018 for Las Vegas, the minimum lease payments under capital leases were as follows:
April 1, 2017 |
December 31, 2016 |
January 2, 2016 |
||||||||||
(Unaudited) | ||||||||||||
2016 |
$ | | $ | | $ | 733,000 | ||||||
2017 (9 months for April 1, 2017) |
550,000 | 733,000 | 733,000 | |||||||||
2018 |
12,238,000 | 12,238,000 | 12,238,000 | |||||||||
|
|
|
|
|
|
|||||||
Total minimum payments required |
12,788,000 | 12,971,000 | 13,704,000 | |||||||||
Less: Amounts representing interest |
(933,000 | ) | (1,110,000 | ) | (1,840,000 | ) | ||||||
|
|
|
|
|
|
|||||||
Present value of net minimum lease payments |
$ | 11,855,000 | $ | 11,861,000 | $ | 11,864,000 | ||||||
|
|
|
|
|
|
NOTE 8 STOCK OPTION PLANS AND SUBSEQUENT EVENT
In February of 2007, the Companys Board of Directors approved the 2007 Equity Incentive Plan (the EIP) reserving 1,341,400 shares of Common Stock for issuance upon the exercise of stock options under the EIP. Exercise prices for the stock options will not be less than 100% of the fair market value of the stock on the date of grant. Options under the EIP expire not more than ten years from date of grant. Options issued under the EIP will become exercisable over a specified period upon issuance of the option determined at that time by the Administrator of the EIP. There were no stock options issued under the EIP in 2017 or 2016.
A summary of the status of the EIP and changes during fiscal years 2017 and 2016 are as follows:
Number of shares |
Weighted Average Exercise Price |
|||||||
OUTSTANDING, December 27, 2014 |
600,000 | $ | 1.065 | |||||
Granted |
| $ | | |||||
Exercised |
| $ | | |||||
Forfeited |
| $ | | |||||
|
|
|||||||
OUTSTANDING, January 2, 2016 |
600,000 | $ | 1.065 | |||||
Granted |
| $ | | |||||
Exercised |
| $ | | |||||
Forfeited |
| $ | | |||||
|
|
|||||||
OUTSTANDING, December 31, 2016 |
600,000 | $ | 1.065 | |||||
Granted |
| $ | | |||||
Exercised |
| $ | | |||||
Forfeited |
| $ | | |||||
|
|
|||||||
OUTSTANDING, April 1, 2017 |
600,000 | $ | 1.065 | |||||
|
|
Shares available for future grants under the EIP were 741,400 shares at April 1, 2017, December 31, 2016 and January 2, 2016. The number of options exercisable was 600,000 at April 1, 2017, December 31, 2016 and January 2, 2016.
A further summary of options outstanding at December 31, 2016 is as follows:
Options Outstanding | Options Exercisable | |||||||||||||||||||||
Exercise Prices |
Number of options |
Weighted average exercise price |
Weighted average remaining contractual life in years |
Number of options |
Weighted average exercise price |
|||||||||||||||||
$ | 1.065 | 600,000 | $ | 1.065 | 0.32 | 600,000 | $ | 1.065 |
The fair value of each option award is estimated using the Black-Scholes option valuation model that requires the Company to develop estimates for assumptions used in the model. The Black-Scholes option valuation model uses the assumptions related to expected volatility, expected life of options, risk-free interest rate and dividend yield.
In April 2017, all outstanding stock options were exercised.
15
NOTE 9 RELATED-PARTY TRANSACTIONS
Royalty Agreement The Company is committed under a royalty agreement to pay the majority stockholder royalties of 7% of the net sales of certain products, as defined, through the life of the defined products. During the quarters ended April 1, 2017 and April 2, 2016 the Company incurred royalty expenses of $81,000 and $82,000, respectively, under this agreement. During fiscal years 2016 and 2015, the Company incurred royalty expenses of $338,000 and $335,000, respectively, under this agreement.
Rental Agreements The Company is committed under a lease agreement for its California headquarters facility through July 15, 2020 with its majority stockholder. The original lease, beginning July 15, 2005, was entered into with a third party leaseholder. The majority stockholder acquired the California facility from the third party as of November 30, 2005 and assumed the original lease. The original lease agreement was for five years through July 14, 2010. The Company exercised its option to extend the lease for an additional five years at a fair market rental rate which expired July 14, 2015. A new lease was signed with an end date of July 15, 2020. The current rent is approximately $41,000 per month through the remainder of the lease. Total rent expense incurred under this agreement during the quarters ended April 1, 2017 and April 2, 2016 was $122,000 and $122,000, respectively, and in fiscal years 2016 and 2015 was $488,000 and $501,000, respectively.
The Company is committed under two additional lease agreements with the majority stockholder for its Texas facilities. Both lease agreements are for five years, and expired in October and November of 2011, respectively, and each have one five year option to renew. The Company exercised its option to extend both leases in 2011. The current rent is approximately $12,600 and $9,500 per month for these facilities, respectively, and the Company subleases a portion of both these buildings to third parties. Future monthly rents for these leases range from $9,500 to $13,400 through the remainder of these leases. Total rent expense, net of sublease income, incurred under these agreements during the quarters ended April 1, 2017 and April 2, 2016 and fiscal years 2016 and 2015 was $50,000, $46,000, $186,000 and $182,000, respectively, while the total rent payments to the majority stockholder were $70,000, $66,000, $268,000 and $255,000, respectively.
The Company committed to a 10 year lease agreement in 2013 with the majority stockholder for its Las Vegas facility. The current rent is approximately $30,000 per month through the remainder of the lease and the Company subleases a portion of the building to a third party. As a result of a lessor put option included within the lease amendment in 2014, the lease has been determined to be a capital lease from the date of amendment signing in March 2014 (see Note 7). Total payments made under this agreement during the quarters ended April 1, 2017 and April 2, 2016 and fiscal years 2016 and 2015 to the majority stockholder were $90,000, $90,000, $360,000 and $360,000, respectively.
The Company committed to a 5 year lease agreement in 2014 with the majority stockholder for its Palm Desert facility. The current rent is approximately $31,100 per month through the remainder of the lease. As a result of a lessor put option included within the lease, the lease has been determined to be a capital lease from the date of signing (see Note 7). Total payments made under this agreement during the quarters ended April 1, 2017 and April 2, 2016 and fiscal years 2016 and 2015 to the majority stockholder were $93,000, $93,000, $373,400 and $249,000, respectively.
Future payments due under the two capital leases if the put options are not exercised the years ending on the last Saturday of the calendar year are as follows:
April 1, 2017 | December 31, 2016 | |||||||
2017 (9 months for April 1, 2017) |
549,982 | $ | 733,308 | |||||
2018 |
733,308 | 733,308 | ||||||
2019 |
359,940 | 359,940 | ||||||
2020 |
359,940 | 359,940 | ||||||
2021 |
359,940 | 359,940 | ||||||
Thereafter |
359,940 | 359,940 | ||||||
|
|
|
|
|||||
Total |
2,723,050 | $ | 2,906,376 | |||||
|
|
|
|
Due From Related Party The Company had outstanding advances of $3,029,000, $3,025,000 and $3,010,000, including principal and interest, to its majority stockholder as of April, 1, 2017, December 31, 2016 and January 2, 2016, respectively. These advances mature over a 3 year period and are not expected to be repaid within the next twelve months. The interest rates on the advances outstanding at the end of fiscal years 2016 and 2015 ranged from 0.38% and 0.75%.
16
NOTE 10 COMMITMENTS AND CONTINGENCIES
Lease Commitments and Rent Expense The Company is obligated under the terms of a third party operating lease agreement for its facility in China. The original agreement entered into in December 2011 was renewed in December 2014. The office moved to a new location and a new building lease was entered into starting October 2015 and expires in October 2018. The current monthly rent expense is approximately $3,700 per month. Total rent expense incurred under this agreement during the quarters ended April 1, 2017 and April 2, 2016 and fiscal years 2016 and 2015 was $11,000, $13,000, $49,000 and $37,000 respectively.
The Company is obligated under the terms of a third party operating lease for its facility in India. The agreement was entered into starting March 2016 and expires February 2019. The monthly rent is approximately $1,500 through the remainder of the lease. Total rent expense incurred under this agreement during the quarters ended April 1, 2017 and April 2, 2016 and fiscal year 2016 was $5,000, $1,500 and $15,000, respectively.
The Company is obligated under the terms of a third party operating lease agreement for its facility in Massachusetts. The original agreement entered in October 2014 expired in September 2015. Current rent is $1,500 per month on a month-to-month basis. Total rent expense incurred under this agreement during the quarters ended April 1, 2017 and April 2, 2016 and fiscal years 2016 and 2015 was $4,500, $5,000, $18,300 and $15,000, respectively.
A portion of the building in Europe, which is owned by the Company, is subleased to a third party. The agreement is for five years, expiring in June 2016. The lease was renewed for one year and expires June 2017. Total rental income under this agreement during the quarters ended April 1, 2017 and April 2, 2016 and fiscal years 2016 and 2015 was $11,000, $12,000, $48,000 and $53,000, respectively.
A portion of the building in Japan, which is owned by the Company, is subleased to a third party. The agreement is for 3 years, expiring in October 2019. Total rental income under this agreement during the quarters ended April 1, 2017 and April 2, 2016 and fiscal years 2016 and 2015 was $3,000, $4,000, $18,000 and $15,000, respectively. Another portion of the building is subleased to a third party. The agreement is for 3 years, expiring July 2018. Total rental income under this agreement during the quarters ended April 1, 2017 and April 2, 2016 and fiscal years 2016 and 2015 was $4,000, $6,000, $22,000 and $7,000, respectively. Another portion of the building is subleased to a third party. The agreement is for 3 years, expiring February 2019. The total rental income during the quarters ended April 1, 2017 and April 2, 2016 and fiscal year 2016 was $3,000, $4,000 and $18,000, respectively.
The Company currently leases three automobiles. Monthly rents range from $500 to $1,400, through 2019. Total lease expense approximated $8,000 and $9,000 in the quarters ended April 1, 2017 and April 2, 2016, respectively, $35,000 in 2016 and $38,000 in 2015.
Total rent expense for all related party and third party leases, net of sublease rental income, and auto leases was $187,000 and $181,000 in the quarters ended April 1, 2017 and April 2, 2016, respectively, $737,000 in fiscal year 2016 and $698,000 in fiscal year 2015. Minimum future rental payments, net of sublease rental receipts, under all operating lease agreements for the years ending on the last Saturday of the calendar year are as follows:
April 1, 2017 | December 31, 2016 | |||||||
2017 (9 months for April 1, 2017) |
$ | 536,000 | $ | 708,000 | ||||
2018 |
735,000 | 736,000 | ||||||
2019 |
768,000 | 769,000 | ||||||
2020 |
571,000 | 571,000 | ||||||
2021 |
316,000 | 316,000 | ||||||
Thereafter |
1,706,000 | 1,706,000 | ||||||
|
|
|
|
|||||
Total |
$ | 4,632,000 | $ | 4,806,000 | ||||
|
|
|
|
17
NOTE 11 GEOGRAPHIC INFORMATION
Net sales by country for quarters ended April 1, 2017 and April 2, 2017 and fiscal years 2016 and 2015 are as follows:
Quarter ended | Quarter ended | Fiscal Year | Fiscal Year | |||||||||||||
April 1, 2017 | April 1, 2017 | 2016 | 2015 | |||||||||||||
(Unaudited) | (Unaudited) | Restated | ||||||||||||||
United States |
$ | 3,332,000 | $ | 3,345,000 | $ | 23,927,000 | $ | 20,511,000 | ||||||||
Japan |
733,000 | 596,000 | 1,595,000 | 2,049,000 | ||||||||||||
Netherlands |
1,451,000 | 1,549,000 | 972,000 | 787,000 | ||||||||||||
China |
743,000 | 532,000 | 2,222,000 | 1,474,000 | ||||||||||||
Belgium |
423,000 | 293,000 | 1,900,000 | 1,903,000 | ||||||||||||
United Kingdom |
341,000 | 683,000 | 2,222,000 | 1,031,000 | ||||||||||||
Canada |
806,000 | 187,000 | 717,000 | 822,000 | ||||||||||||
Other countries, each of which represent less than 5% of total net sales |
1,906,000 | 1,907,000 | 6,645,000 | 5,905,000 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 9,735,000 | $ | 9,092,000 | $ | 40,200,000 | $ | 34,482,000 | |||||||||
|
|
|
|
|
|
|
|
Sales to Japan, the Netherlands, China and other countries are denominated in U.S. dollars and there are no material differences in gross margin in sales to different countries. Assets located outside of the United States of America totaled $10,127,000, $9,925,000 and $9,054,000 as of April 1, 2017, December 31, 2016 and January 2, 2016, respectively.
NOTE 12 MAJOR CUSTOMERS
During the quarters ended April 1, 2017 and April 2, 2016, the Company had a concentration in net sales to one customer. During fiscal year 2016, the Company had a concentration in net sales to one customer. As of January 2, 2016, the Company had a concentration in receivables due from another customer. Each customers concentration is as follows:
Q1 2017 | Q1 2016 | 2016 | 2015 | |||||||||||||||||||||||||||||
Net Sales | Trade Accounts Receivable |
Net Sales | Trade Accounts Receivable |
Net Sales | Trade Accounts Receivable |
Net Sales | Trade Accounts Receivable |
|||||||||||||||||||||||||
Customer A |
$ | 450,000 | $ | 294,000 | $ | 739,000 | $ | 348,000 | $ | 4,296,000 | $ | 531,000 | $ | 2,798,000 | $ | 192,000 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Customer B |
$ | 484,000 | $ | 448,000 | $ | 463,000 | $ | 460,000 | $ | 1,996,000 | $ | 306,000 | $ | 1,941,000 | $ | 654,000 |
NOTE 13 PRODUCT GROUP INFORMATION
The Companys product groups are based on specific product characteristics and are grouped into bioprocessing, laboratory products and operating room disposable products. Bioprocessing and laboratory products consist primarily of (1) hollow fiber membrane devices that allow components retained by a membrane to be concentrated, including filters utilized for micro and ultra-filtration separations that are sold to biotech and pharmaceutical companies (2) membranes used to concentrate, separate and purify dissolved or suspended molecules that are sold primarily to laboratories. Operating room disposable products consist of sterile plastic surgical drapes and cloth bandages that are used primarily by hospitals.
Revenue by product group for the quarters ended April 1, 2017 and April 2, 2016 (unaudited) and for the fiscal years ended 2016 and 2015 is as follows:
Quarter ended | Quarter ended | Fiscal Year | Fiscal Year | |||||||||||||
April 1, 2017 | April 2, 2016 | 2016 | 2015 | |||||||||||||
(Unaudited) | (Unaudited) | Restated | ||||||||||||||
Bioprocessing products |
$ | 7,167,000 | $ | 6,749,000 | $ | 30,108,000 | $ | 25,118,000 | ||||||||
Laboratory products |
$ | 1,992,000 | $ | 1,803,000 | $ | 7,657,000 | $ | 7,275,000 | ||||||||
Operating room disposable products |
$ | 576,000 | $ | 540,000 | $ | 2,435,000 | $ | 2,089,000 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 9,735,000 | $ | 9,092,000 | $ | 40,200,000 | $ | 34,482,000 | |||||||||
|
|
|
|
|
|
|
|
NOTE 14 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Quarter ended April 1, 2017 |
Quarter ended April 2, 2016 |
Fiscal Year 2016 |
Fiscal Year 2015 |
|||||||||||||
(Unaudited) | (Unaudited) | Restated | ||||||||||||||
Cash paid for: |
||||||||||||||||
Income taxes |
$ | 503,000 | $ | 430,000 | $ | 2,411,000 | $ | 1,431,000 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Interest (restated for 2015) |
$ | 209,000 | $ | 205,000 | $ | 862,000 | $ | 763,000 | ||||||||
|
|
|
|
|
|
|
|
18
NOTE 15 VALUATION AND QUALIFYING ACCOUNTS
Fiscal period |
Balance at beginning of period |
Provision charged to expense |
Net recoveries (charge-offs) |
Balance at end of period |
||||||||||||||
Doubtful accounts: |
Q1 2017 | 138,000 | $ | 18,000 | $ | (16,000 | ) | $ | 140,000 | |||||||||
|
|
|
|
|
|
|
|
|||||||||||
2016 | $ | 167,000 | $ | 39,000 | $ | (68,000 | ) | $ | 138,000 | |||||||||
|
|
|
|
|
|
|
|
|||||||||||
2015 | $ | 49,000 | $ | 118,000 | $ | | $ | 167,000 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Sales returns & allowances: |
Q1 2017 | 59,000 | $ | 59,000 | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
2016 | $ | 59,000 | $ | | $ | | $ | 59,000 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||||
2015 | $ | 135,000 | $ | (76,000 | ) | $ | | $ | 59,000 | |||||||||
|
|
|
|
|
|
|
|
|||||||||||
Slow moving and obsolete inventory: |
Q1 2017 | $ | 1,093,000 | $ | 62,000 | $ | | $ | 1,155,000 | |||||||||
|
|
|
|
|
|
|
|
|||||||||||
2016 | $ | 849,000 | $ | 363,000 | $ | (119,000 | ) | $ | 1,093,000 | |||||||||
|
|
|
|
|
|
|
|
|||||||||||
2015 | $ | 830,000 | $ | 140,000 | $ | (121,000 | ) | $ | 849,000 | |||||||||
|
|
|
|
|
|
|
|
|||||||||||
Net deferred tax assets (restated for 2015): |
Q1 2017 | 1,165,000 | $ | (109,000 | ) | $ | | $ | 1,056,000 | |||||||||
|
|
|
|
|
|
|
|
|||||||||||
2016 | $ | 982,000 | $ | 183,000 | $ | | $ | 1,165,000 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||||
2015 | $ | 844,000 | $ | 138,000 | $ | | $ | 982,000 | ||||||||||
|
|
|
|
|
|
|
|
NOTE 16 SUBSEQUENT EVENTS
The Company evaluated subsequent events through June 14, 2017 which is the date the combined financial statements were available to be issued. Based upon this evaluation, other than subsequent events previously disclosed in the footnotes, no events required disclosure in or adjustment to the combined financial statements, other than the following:
In May 2017, the Company gifted a collection of artwork, with a value of approximately $211,000, to a non-for-profit entity. In June 2017, the remaining artwork was sold to the majority stockholder at its fair value of approximately $704,000.
In June 2017, the Company sold its marketable securities to the majority stockholder at cost, which approximates its market value, except for an investment valued at $12,000. The majority stockholder has assumed the obligation to fund additional capital investment related to one of the investments, in the amount of $400,000.
The Company received a demand letter in May 2017 on behalf of a former employee of the Company. The Company has tendered the demand to its insurance carrier and believes it is insured for this type of claim, subject to a $50,000 deductible. No recognition of this issue has been recorded as any liability is not reasonably estimateable and would likely not be material.
The Company is in the process of forming a new subsidiary that will operate in South Korea.
19
Exhibit 99.3
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS:
Introduction
Unaudited Pro Forma Condensed Combined Balance Sheet as of March 31, 2017
Unaudited Pro Forma Condensed Combined Statement of Operations for the year ended December 31, 2016
Unaudited Pro Forma Condensed Combined Statement of Operations for the three months ended March 31, 2017
Notes to Unaudited Pro Forma Condensed Combined Financial Statements
1
INTRODUCTION
On June 22, 2017, Repligen Corporation (Repligen) agreed to acquire Spectrum, Inc (Spectrum), pursuant to the terms of the Agreement and Plan of Merger and Reorganization (the Agreement), by and among Repligen and Spectrum (such acquisition, the Spectrum Acquisition).
Spectrums business consists of three product groups (i) bioprocessing, (ii) original equipment manufacturing, or OEM, and (iii) operating room disposables. The bioprocessing unit sells membranes, membrane devices and other products used by customers at pharmaceutical, diagnostic and biotechnology companies, universities, government institutions and non-profit organizations. These products are originally used for life science research and high technology applications with some applications growing into good manufacturing practices, or GMP, for diagnostics and pharmaceuticals. The OEM unit supplies separations devices to companies developing proprietary products for cell therapy, cell expansion, implants and molecular/ micro filtration for in vivo and ex-vivo applications. The disposable operating room unit sells orthopedic and arthroscopic drapes, sterile microscope covers, tissue carriers and other disposables to hospital and clinic operating rooms.
The Spectrum Acquisition will be accounted for as a purchase of a business under ASC 805, Business Combinations. The purchase price of the Spectrum Acquisition will consist of $118 million in cash, and 6,154,000 common shares totaling $239 million for a total purchase price of $357 million.
The accompanying unaudited pro forma condensed combined financial statements for the year ended December 31, 2016 combine the historical consolidated financial statements of Repligen, and those of TangenX Technology Corporation (TangenX), which Repligen acquired on December 14, 2016 (the TangenX Acquisition) with the historical financial information of Spectrum after giving effect to (i) the TangenX Acquisition and (ii) the Spectrum Acquisition. The unaudited pro forma condensed combined statements of operations combine Repligens operating results for the quarter and year ended, March 31, 2017 and December 31, 2016, respectively, with the operating results of TangenX for the period from January 1, 2016 to December 14, 2016 and Spectrum for the quarter and year ended, April 1, 2017 and December 31, 2016, respectively. The unaudited pro forma condensed combined balance sheet combines the balances of Repligen as of March 31, 2017 with the balances of Spectrum as of April 1, 2017. The unaudited pro forma condensed combined statements of operations give effect to the TangenX Acquisition and the Spectrum Acquisition as if such acquisitions had occurred on January 1, 2016, and the unaudited pro forma condensed combined balance sheet gives effect to the acquisition as if it had occurred on March 31, 2017. The unaudited pro forma condensed combined financial information includes all material pro forma adjustments necessary for this purpose that are directly attributable to the TangenX Acquisition and the Spectrum Acquisition and are factually supportable. The unaudited pro forma condensed combined financial information herein should be read in conjunction with the historical financial statements and the related notes thereto of Repligen Corporation which are presented in the Annual Report on Form 10-K for the year ended December 31, 2016, filed on February 23, 2017 (File No. 000-14656), Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2017, filed on May 4, 2017 (File No. 000-14656), the historical unaudited interim financial statements of TangenX for the period ended September 30, 2016, filed on March 1, 2017 (File No. 000-14656) and the financial statements of Spectrum that are presented as exhibits to this Form 8-K.
The unaudited pro forma condensed combined financial statements are presented for illustrative purposes only and are not necessarily indicative of the operating results or financial position that would have been achieved if the acquisition had been consummated as of the beginning of the periods presented, nor are they necessarily indicative of the future operating results or financial position of the combined company. No effect has been given in these pro forma financial statements for synergistic benefits that may be realized through the combination or costs that may be incurred in integrating operations.
2
Repligen Corporation
Pro Forma Condensed Combined Consolidated Balance Sheet
March 31, 2017
(Unaudited)
(in thousands, except share and share data) | Historical Repligen |
Historical Spectrum |
Pro Forma Adjustments | Notes |
Pro Forma Combined |
|||||||||||||
Assets |
||||||||||||||||||
Current assets |
||||||||||||||||||
Cash and cash equivalents |
129,663 | 7,071 | (118,338 | ) | (a) | 18,396 | ||||||||||||
Investment in marketable securities |
12,180 | 990 | | 13,170 | ||||||||||||||
Accounts receivable, net |
17,710 | 6,245 | (295 | ) | (g) | 23,660 | ||||||||||||
Other receivables |
669 | 242 | (179 | ) | (v) |
732 | ||||||||||||
Inventories, net of reserves |
23,957 | 8,847 | 2,502 | (b) | 35,306 | |||||||||||||
Prepaid expenses and other current assets |
1,620 | 649 | | 2,269 | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Total current assets |
185,799 | 24,044 | (116,310 | ) | 93,533 | |||||||||||||
Property and equipment, net |
15,373 | 16,736 | (11,123 | ) | (n) | 20,986 | ||||||||||||
Due from related party |
3,029 | | 3,029 | |||||||||||||||
Intangible assets, net |
29,222 | | 114,070 | (c) | 143,292 | |||||||||||||
Goodwill |
59,784 | 1,122 | 252,816 | (d) | 313,722 | |||||||||||||
Restricted cash |
450 | | | 450 | ||||||||||||||
Deferred income taxes |
| 1,056 | (1,056 | ) | (ab) | | ||||||||||||
Other assets |
| 988 | | 988 | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Total assets |
290,628 | 46,975 | 238,397 | 576,000 | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Liabilities and Stockholders Equity |
||||||||||||||||||
Current liabilities |
||||||||||||||||||
Accounts payable |
4,635 | 1,287 | (200 | ) | (g) | 5,722 | ||||||||||||
Accrued liabilities |
9,116 | 2,719 | 5,663 | (g), (q), (s), (y), (aa) | 17,498 | |||||||||||||
Line of credit |
| 1,400 | (1,400 | ) | (p) | | ||||||||||||
Current maturities of long-term debt |
| 509 | (509 | ) | (p) | | ||||||||||||
Current maturities of capital leases |
| 5,941 | (5,941 | ) | (n) | | ||||||||||||
Current portion of accrued interest on capital leases |
| 89 | (89 | ) | (n) | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Total current liabilities |
13,751 | 11,945 | (2,476 | ) | 23,220 | |||||||||||||
Convertible senior notes |
96,242 | | | 96,242 | ||||||||||||||
Long-term debt, net of current maturities |
| 1,490 | (1,490 | ) | (p) | | ||||||||||||
Capital leases, net of current maturities |
| 5,914 | (5,914 | ) | (n) | | ||||||||||||
Accrued interest on capital leases, net of current portion |
| 47 | (47 | ) | (n) | | ||||||||||||
Deferred tax liabilities |
2,188 | 576 | 26,857 | (e), (i), (w), (x), (aa) | 29,621 | |||||||||||||
Other long-term liabilities |
1,656 | 44 | | 1,700 | ||||||||||||||
Commitments and contingencies |
| | | | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Total liabilities |
113,837 | 20,016 | 16,930 | 150,783 | ||||||||||||||
Stockholders equity: |
||||||||||||||||||
Preferred stock |
| | | | ||||||||||||||
Common stock |
341 | | 62 | (f) | 403 | |||||||||||||
Additional paid-in capital |
245,961 | 9,785 | 228,744 | (f) | 484,490 | |||||||||||||
Accumulated other comprehensive (loss) income |
(12,718 | ) | 23 | (23 | ) | (f) | (12,718 | ) | ||||||||||
Accumulated (deficit) earnings |
(56,793 | ) | 17,151 | (7,316 | ) | (f), (g), (i), (q), (r) , (t), (v), (w), (x), (y) | (46,958 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Total stockholders equity |
176,791 | 26,959 | 221,467 | 425,217 | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Total liabilities and stockholders equity |
$ | 290,628 | $ | 46,975 | 238,397 | 576,000 | ||||||||||||
|
|
|
|
|
|
|
|
See accompanying notes to unaudited pro forma condensed combined financial statements which are an integral part of these financial statements. The Company is planning to raise $100 million in a common stock offering. In connection with the common stock offering, the Company executed a commitment letter with the lead underwriter for a $30 million one year term loan. If the Company consummates the common stock offering, it is not expected that the commitment will be drawn upon. The equity offering and the commitment loan are not reflected in the pro forma balance sheet because such funding is not necessary to complete the transaction.
3
Repligen Corporation
Pro Forma Condensed Combined Consolidated Statements of Income
For the Year Ended December 31, 2016
(Unaudited)
(in thousands, except share and per share data) |
Historical Repligen Year Ended December 31, 2016 |
Historical TangenX 2016 to December 14, |
Historical Spectrum Year Ended December 31, 2016 |
TangenX Pro Forma |
Notes | Spectrum Pro Forma |
Notes | Pro Forma Combined |
||||||||||||||||||||
Revenue |
104,541 | 5,687 | 40,200 | | (4,290 | ) | (j) | 146,138 | ||||||||||||||||||||
Cost of revenue |
47,117 | 3,270 | 18,902 | (868 | ) | (l), (o) | (4,561 | ) | (j), (m), (n) | 63,859 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Gross profit |
57,424 | 2,417 | 21,298 | 868 | 271 | 82,278 | ||||||||||||||||||||||
R&D |
7,355 | 1 | 1,995 | (202 | ) | (o) | | 9,148 | ||||||||||||||||||||
SG&A |
30,853 | 3,781 | 11,892 | (1,016 | ) | (c), (o), (r) | 7,925 | (c), (m), (n), (t) | 53,434 | |||||||||||||||||||
Contingent consideration |
3,242 | | | | | 3,242 | ||||||||||||||||||||||
Change in fair value of put option liability |
| | | 1,143 | | 1,143 | ||||||||||||||||||||||
Loss on remeasurement of foreign currencies |
| | 264 | | | 264 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total operating expenses |
41,450 | 3,782 | 14,151 | (76 | ) | 7,925 | 67,232 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Operating income (loss) |
15,974 | (1,365 | ) | 7,147 | 944 | (7,653 | ) | 15,047 | ||||||||||||||||||||
Other expense, net |
(4,282 | ) | | (654 | ) | (174 | ) | (h) | (96 | ) | (h), (n) | (5,206 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Income (loss) before income taxes |
11,692 | (1,365 | ) | 6,493 | 770 | (7,750 | ) | 9,840 | ||||||||||||||||||||
Income tax expense |
11 | 544 | 2,131 | 2,882 | (u), (y) | (2,693 | ) | (y), (z) | 2,875 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Net income (loss) |
11,681 | (1,909 | ) | 4,362 | (2,112 | ) | (5,057 | ) | 6,965 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Net income per share: |
||||||||||||||||||||||||||||
Basic |
0.35 | 0.18 | ||||||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||||||
Diluted |
0.34 | 0.17 | ||||||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||||||
Weighted average common shares outstanding: |
||||||||||||||||||||||||||||
Basic |
33,572,883 | 6,154,000 | (k) | 39,726,883 | ||||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||||||
Diluted |
34,098,898 | 6,154,000 | (k) | 40,252,898 | ||||||||||||||||||||||||
|
|
|
|
4
Repligen Corporation
Pro Forma Condensed Combined Consolidated Statements of Income
For the Three Months Ended March 31, 2017
(Unaudited)
(in thousands, except share and per share data) | Repligen Three Months Ended March 31, 2017 |
Spectrum Thirteen Weeks Ended April 1, 2017 |
Pro Forma Adjustments |
Notes | Pro Forma Combined |
|||||||||||||
Revenue |
30,590 | 9,735 | (450 | ) | (j) | 39,875 | ||||||||||||
Cost of revenue |
13,990 | 4,179 | (742 | ) | (j), (m), (n), (l) | 17,427 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Gross profit |
16,600 | 5,556 | 292 | 22,448 | ||||||||||||||
R&D |
1,742 | 567 | 2,309 | |||||||||||||||
SG&A |
9,182 | 3,274 | 1,579 | (c), (m), (n), (q), (t) | 14,035 | |||||||||||||
Loss on remeasurement of foreign currencies |
| (90 | ) | | (90 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Total operating expenses |
10,924 | 3,751 | 1,579 | 16,254 | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Operating income (loss) |
5,676 | 1,805 | (1,288 | ) | 6,193 | |||||||||||||
Other expense, net |
(1,609 | ) | (162 | ) | (24 | ) | (h), (n) | (1,795 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||||
Income (loss) before income taxes |
4,067 | 1,643 | (1,311 | ) | 4,399 | |||||||||||||
Income tax expense (benefit) |
999 | 606 | (472 | ) | (y) | 1,133 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Net income |
3,068 | 1,037 | (839 | ) | 3,266 | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Net income per share: |
||||||||||||||||||
Basic |
0.09 | 0.08 | ||||||||||||||||
|
|
|
|
|||||||||||||||
Diluted |
0.09 | 0.08 | ||||||||||||||||
|
|
|
|
|||||||||||||||
Weighted average common shares outstanding: |
||||||||||||||||||
Basic |
33,891,702 | 6,154,000 | (k) | 40,045,702 | ||||||||||||||
|
|
|
|
|||||||||||||||
Diluted |
34,382,322 | 6,154,000 | (k) | 40,536,322 | ||||||||||||||
|
|
|
|
5
Repligen Corporation
Notes to Pro Forma Condensed Combined Consolidated Financial Statements
As of March 31, 2017 and for the Three Months Ended March 31, 2017 and Quarter Ended April 1, 2017
and the Year Ended December 31, 2016
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
1. Description of the Transaction
On June 22, 2017, Repligen Corporation (Repligen) agreed to acquire Spectrum, Inc (Spectrum), pursuant to the terms of the Agreement and Plan of Merger and Reorganization (the Agreement), by and among Repligen and Spectrum (such acquisition, the Spectrum Acquisition).
The Spectrum Acquisition will be accounted for as a purchase of a business under ASC 805, Business Combinations. The purchase price of the Spectrum Acquisition will consist of $118 million in cash, and 6,154,000 common shares totaling $239 million for a total purchase price of $357 million.
2. Basis of Presentation
The accompanying unaudited pro forma condensed combined financial statements combine the historical consolidated financial statements of Repligen Corporation and those of TangenX Technology Corporation (TangenX), which we acquired on December 14, 2016 (the TangenX Acquisition) the historical financial information of Spectrum after giving effect to (i) the TangenX acquisition and (ii) the Spectrum Acquisition, in each case using the acquisition method of accounting in accordance with Accounting Standards Codification (ASC) 805, Business Combinations, and applying the assumptions and adjustments described in the accompanying notes.
The unaudited pro forma condensed combined statements of operations combine Repligens operating results for the quarter and year ended, March 31, 2017 and December 31, 2016, respectively, with the operating results of TangenX for the period from January 1, 2016 through December 14, 2016, and with the operating results of Spectrum for the quarter and year ended, April 1, 2017 and December 31, 2016, respectively. The unaudited pro forma condensed combined balance sheet combines the balances of Repligen as of March 31, 2017 with the balances of Spectrum as of April 1, 2017. The unaudited pro forma condensed combined statements of operations give effect to the TangenX Acquisition and the Spectrum Acquisition as if such acquisitions had occurred on January 1, 2016, and the unaudited pro forma condensed combined balance sheet gives effect to the Spectrum Acquisition as if it had occurred on March 31, 2017.
The historical consolidated financial statements have been adjusted in the pro forma condensed combined financial statements to give effect to pro forma events that are (1) directly attributable to the business combinations, (2) factually supportable and (3) with respect to the pro forma condensed combined statements of operations, expected to have a continuing impact on the combined results following the business combinations. The unaudited pro forma condensed combined financial information herein should be read in conjunction with the historical financial statements and the related notes thereto of Repligen Corporation which are presented in the Annual Report on Form 10-K for the year ended December 31, 2016, filed on February 23, 2017 (File No. 000-14656), Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2017, filed on May 4, 2017 (File No. 000-14656), the historical unaudited interim financial statements of TangenX for the period ended September 30, 2016, filed on March 1, 2017 (File No. 000-14656) and the financial statements of Spectrum that are presented as exhibits to this Form 8-K. The unaudited pro forma condensed combined financial statements are presented for illustrative purposes only and are not necessarily indicative of the operating results or financial position that would have been achieved if the acquisition had been consummated as of the beginning of the periods presented, nor are they necessarily indicative of the future operating results or financial position of the combined Company. No effect has been given in these pro forma financial statements for synergistic benefits that may be realized through the combination or costs that may be incurred in integrating operations.
3. Estimated consideration and preliminary purchase price allocation
Repligen accounted for the Spectrum Acquisition as the purchase of a business under U.S. GAAP. Under the acquisition method of accounting, the assets of the Spectrum were recorded as of the acquisition date, at their respective fair values, and consolidated with those of Repligen. The fair value of the net assets acquired was approximately $357 million. The estimated consideration and preliminary purchase price information has been prepared using a preliminary valuation. The final purchase price allocation will be completed upon closing of the transaction. The preparation of the valuation required the use of significant assumptions and estimates. Critical estimates included, but were not limited to, future expected cash flows, including projected revenues and expenses, and the applicable discount rates. These estimates were based on assumptions that Repligen believes to be reasonable. However, actual results may differ from these estimates.
6
The total consideration transferred follows (in thousands):
Cash consideration |
$ | 118,787 | ||
Equity consideration |
$ | 238,591 | ||
Less: working capital adjustment |
$ | (449 | ) | |
|
|
|||
Net assets acquired |
$ | 356,929 | ||
|
|
Acquisition related costs are not included as a component of consideration transferred, but are expensed in the periods in which the costs are incurred.
Fair Value of Net Assets Acquired
Repligen has performed a preliminary valuation analysis of the fair market value of Spectrums assets to be acquired and liabilities to be assumed. Using the total consideration for the Spectrum Acquisition, Repligen has estimated the allocations to such assets and liabilities. The following table summarizes the allocation of the preliminary purchase price as of March 31, 2017 (in thousands):
Cash and cash equivalents |
$ | 7,071 | ||
Marketable securities |
$ | 990 | ||
Accounts receivable |
$ | 6,245 | ||
Other receivables |
$ | 3,271 | ||
Inventory |
$ | 11,349 | ||
Prepaid expenses and other current assets |
$ | 891 | ||
Fixed assets |
$ | 16,736 | ||
Customer relationships |
$ | 73,530 | ||
Developed technology |
$ | 37,630 | ||
Trademark and tradename |
$ | 2,140 | ||
Non-competition agreements |
$ | 770 | ||
Deferred income tax |
$ | 1,056 | ||
Other assets |
$ | 988 | ||
Goodwill |
$ | 222,091 | ||
Accounts payable |
$ | (1,287 | ) | |
Accrued liabilities |
$ | (2,248 | ) | |
Short term debt |
$ | (1,909 | ) | |
Long term debt |
$ | (1,534 | ) | |
Capital leases |
$ | (11,855 | ) | |
Accrued interest on capital leases |
$ | (136 | ) | |
Unrecognized tax benefit |
$ | (576 | ) | |
Estimated closing indebtedness |
$ | (7,004 | ) | |
Estimated transaction costs |
$ | (1,280 | ) | |
|
|
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Fair value of net assets acquired |
356,929 | |||
|
|
This preliminary purchase price allocation has been used to prepare pro forma adjustments in the pro forma balance sheet and income statement and is subject to adjustment as purchase accounting is finalized. The final purchase price allocation will be determined when Repligen has completed the detailed valuations and necessary calculations. The final allocation could differ materially from the preliminary allocation used in the pro forma adjustments. The final allocation may include, but not be limited to: (1) changes in fair values of property, plant and equipment, (2) changes in allocations to intangible assets such as trade names, technology and customer relationships as well as goodwill and (3) other changes to assets and liabilities.
7
4. Pro Forma Adjustments
This note should be read in conjunction with Notes 1, 2 and 3. Adjustments included in the pro forma columns include the following:
(a) | To record an adjustment to cash of $118.3 million for the estimated cash portion of the transaction price. |
(b) | This adjustment represents the estimated step-up of Spectrums inventory by $2.5 million from the carrying value. The fair value calculation is preliminary and subject to change. After the acquisition, the step-up in inventory fair value of $2.5 million will increase cost of sales as the inventory is sold. This increase is not reflected in the pro forma condensed combined statements of operations because it does not have a continuing impact. |
(c) | Reflects the adjustment of intangible assets acquired by Repligen to their estimated fair values of $114.1 million, with a continuing annual amortization impact of $7.8 million. As part of the preliminary valuation analysis, Repligen identified intangible assets, including developed technology, customer relationships, and trade names. The fair value of identifiable intangible assets is determined primarily using the income approach, which requires a forecast of all the expected future cash flows. These preliminary estimates of fair value and estimated useful lives will likely differ from final amounts Repligen will calculate after completing a detailed valuation analysis, and the difference could have a material effect on the accompanying unaudited pro forma condensed combined financial statements. Additionally, this represents an adjustment to add $746 thousand of intangible asset amortization related to the TangenX Acquisition for the period from January 1, 2016 to December 14, 2016. |
(d) | Reflects adjustment to remove Spectrums historical goodwill of $1.1 million and record goodwill associated with the Spectrum acquisition. |
(e) | To reflect the deferred tax liabilities resulting from the acquisition. The estimated increase in deferred tax liabilities of $43.7 million stems primarily from the fair value adjustments for non-deductible intangible assets based on an estimated tax rate of 36%. This estimate of deferred income tax balances is preliminary and subject to change based on managements final determination of the fair value of assets acquired and liabilities assumed by jurisdiction. |
(f) | Represents the elimination of the historical equity of Spectrum, and the increase to common stock and additional paid in capital resulting from the issuance of 6,154,000 shares of common stock at a price of $38.77 for the equity portion of the transaction price. The par value of common stock is $0.01 and results in a $62 thousand increase to common stock. The value in excess of par, or $238.6 million is recognized in additional paid-in capital. Potential variability in stock price could impact the final purchase price for accounting purposes. |
(g) | Represents elimination of pre-existing accounts receivable and accounts payable between Spectrum and Repligen. The adjustment results in a decrease to accounts receivable of $295 thousand for Spectrum receivables from Repligen, and a $200 thousand and $28 thousand decrease to accounts payable and accrued expenses, respectively, for amounts Repligen owed to Spectrum. The resulting difference of $67 thousand is an increase to accumulated deficit. |
(h) | To adjust investment income to reflect foregone investment earnings on cash used to fund the acquisition. This results in reductions to other income by $174 thousand related to TangenX for the period from January 1, 2016 to December 31 2016, $722 thousand related to Spectrum for the year ended December 31, 2016 and $180 thousand related to Spectrum for the three months ended March 31, 2017. Foregone returns were calculated by applying the US Treasury Bill rate to the cash portion of the purchase price for each acquisition. |
(i) | This adjustment reflects the elimination of Repligens deferred tax asset valuation allowance. The acquisition of Spectrum results in the recognition of deferred tax liabilities of approximately $43.7 million related primarily to amortizable intangible assets. Because Spectrum will be included in Repligens consolidated tax return following the acquisition, Repligen has determined that the deferred tax liabilities related to the acquisition provide sufficient taxable income to realize the full amount of Repligens deferred tax assets of $21.3 million. However, the income tax benefit of $10.1 million related to the reduction in Repligens valuation allowance is not reflected in the pro forma statement of operations because it will not have a continuing impact. |
(j) | To adjust for intercompany revenue and cost of goods sold related to the sale of Spectrum products to Repligen, totaling $4.3 million for the year ended December 31, 2016 and $450 thousand for the three months ended March 31, 2017. |
(k) | Represents the increase to common stock from the issuance of 6,154,000 shares of common stock at a price of $38.77 for the equity portion of the transaction price. |
(l) | To adjust cost of goods sold by $59 thousand and $224 thousand for the portion of the TangenX inventory step-up recognized in Repligens historical income statement for the post-acquisition period from December 15, 2016 to December 31, 2016 and the three months ended March 31, 2017, respectively, as it will not have a continuing impact. |
(m) | To reflect ongoing lease expense due to re-negotiation of leases tied to the transaction closing, assuming the transaction occurred on January 1, 2016. Savings are estimated at $739 thousand and $185 thousand for the year ended December 31, 2016 and three months ended March 31, 2017, respectively, and have been allocated to cost of revenue and SG&A at a 60/40 split. |
(n) | To remove capital leases on the historical Spectrum balance sheet as of March 31, 2017, assuming the transaction occurred on January 1, 2016, due to changes in the underlying lease terms, resulting in operating lease classification going forward. This adjustment results in net balance sheet reductions of $11.1 million, $11.9 million, and $136 thousand to the PP&E, short and long term capital lease liability, and short and long term accrued interest liability, respectively, as of March 31, 2017. The corresponding income statement impact for the year ended December 31, 2016 results in adjustments to reduce depreciation and interest expense by $237 thousand and $626 thousand, respectively, and to increase rent expense by $610 thousand. These adjustments reduced cost of revenue by $167 thousand, SG&A by $205 thousand and other expense by $626 thousand for the year ended December 31, 2016. The corresponding income statement impact for the three months ended March 31, 2017 results in adjustments to reduce depreciation and interest expense by $59 thousand and $157 thousand, respectively, and to increase rent expense by $153 thousand. These adjustments reduced cost of revenue by $42 thousand, SG&A by $51 thousand and other expense by $157 thousand for the three months ended March 31, 2017. |
8
(o) | To adjust for $1.8 million of bonus expense paid upon the closing of the TangenX acquisition as it will not have a continuing impact. This amount was allocated 12% to R&D, 45% to SG&A and 44% to cost of revenue based on functional department allocations. |
(p) | Reflects the elimination of historical Spectrum debt arrangements in connection with a cash-free, debt-free acquisition. |
(q) | To adjust for estimated transaction costs of $6.0 million in connection with the Spectrum acquisition. The transaction cost amount has been recorded as an adjustment to retained earnings, and has not been reflected in the pro forma condensed consolidated income statement as these costs will not have a continuing impact. |
(r) | To adjust for $935k and $402k of transaction costs related to the TangenX acquisition recognized in the historical Repligen income statements for the 12 months ended December 31, 2016 and 3 months ended March 31, 2017, respectively, as these costs will not have a continuing impact. |
(s) | To adjust for bonuses totaling $470 thousand with four key executives tied to integration activities related to the transaction. The adjustment is reflected as an increase to accrued expenses and accumulated deficit. The pro forma statement of operations does not reflect the adjustment as it will not have a continuing impact on operations. |
(t) | This pro forma adjustment represents stock based compensation expense increases of $736 thousand and $184 thousand for the year ended December 31, 2016 and three months ended March 31, 2017, respectively, related to service and performance based restricted stock units issued to four key executives as part of the Agreement. The fair value of the awards assumes a stock price of $40, and will be recognized over post-combination service periods ranging from two to three years assuming the service and performance conditions are achieved. |
(u) | As explained in Note i, the acquisition of Spectrum will result in the reversal of the Companys valuation allowance. This adjustment is to add back the 2016 partial valuation allowance reversal recorded by Repligen in the amount of $2.0 million since the combined group will not require a valuation allowance on the deferred tax assets. |
(v) | Represents an adjustment for the settlement of pre-existing receivables between Repligen and Spectrum. The adjustment results in a decrease to other receivables of $179 thousand for Repligen receivables from Spectrum, and a corresponding increase to accumulated deficit. |
(w) | Represents the adjustment to deferred tax assets and retained earnings of $5.3 million as a result of implementing the provisions of ASU 2016-09. This adjustment is required due to the reversal of the valuation allowance on Repligens deferred tax assets. |
(x) | To record the adjustment to deferred tax assets and retained earnings of $757 thousand related to transaction costs incurred by Repligen. |
(y) | Adjustment of $(2.8) million and $0.9 million for Spectrum Pro Forma Adjustments and TangenX Pro Forma adjustments, respectively, for the year ended December 31, 2016, represents the tax effect of pro forma adjustments. Adjustment of $(0.5) million for the quarter ended March 31, 2017 represents the tax effect of pro forma adjustments. |
(z) | To record the $97 thousand combined tax effect of R&D credits generated by the combined group and eliminate deductions for domestic production activities no longer taken due to the application of net operating loss carryforwards for the year ended December 31, 2016 resulting from the acquisition of Spectrum by Repligen. |
(aa) | To record the adjustment to accrued liabilities and deferred tax liabilities of $307 thousand related to impact of using Repligen net operating losses against Spectrum tax liability and impact of recalculating Spectrum AMT liabilities. |
(ab) | Reflects pro forma adjustments to reclassify long term deferred tax assets to long term deferred tax liabilities as after netting, the combined group will be in a net deferred tax liability position. |
9
Exhibit 99.4
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION OF SPECTRUM
The information contained in this section is based on Spectrums historical financial condition and results of operations and does not give effect to the Merger. The Merger will have a material impact on the results of operations of the Spectrum business going forward. You should read the following in conjunction with Spectrums audited and unaudited financial statements and the related notes thereto included elsewhere in this Current Report on Form 8-K.
Overview
Spectrums business consists of three product groups (i) bioprocessing, (ii) original equipment manufacturing, or OEM, and (iii) operating room disposables. The bioprocessing unit sells membranes, membrane devices and other products used by customers at pharmaceutical, diagnostic and biotechnology companies, universities, government institutions and non-profit organizations. These products are originally used for life science research and high technology applications with some applications growing into good manufacturing practices, or GMP, for diagnostics and pharmaceuticals. Spectrum developed disposable hollow fiber filtration modules, systems and dialysis membranes. Today, Spectrum offers a differentiated portfolio of hollow fiber cartridges, disposable flow path solutions for single-use manufacturing and a market leading family of fully integrated filtration systems that span production volumes from laboratory to commercial scale. Spectrums products are used for the filtration, isolation, purification and concentration of monoclonal antibodies, vaccines, recombinant proteins, diagnostic products and cell therapies with the substantial majority of its 2016 revenue coming from these markets. The remaining 2016 revenue was derived from sales of its OEM products and hospital operating room disposables.
Spectrum is headquartered in Rancho Dominguez, California and has a distribution center in the Netherlands and a direct sales presence in North America, Europe and Asia.
Critical Accounting Policies
Spectrum defines critical accounting policies as the ones which are necessary to understand Spectrums financial results. Spectrum believes the most critical accounting issues that require the most complex and difficult judgments and that are particularly susceptible to significant change to its financial condition and results of operations include the following:
| Basis of Presentation |
| Use of Estimates |
| Cash and Cash Equivalents |
| Accounts Receivable |
| Inventory |
| Investment in Marketable Securities Classified as Available-For-Sale Securities |
| Long-Lived Assets |
| Goodwill |
| Income Taxes |
| Accounting for Uncertainty in Income Taxes |
| Revenue Recognition |
| Product Returns and Warranties |
| Research and Development |
| Advertising Costs |
| Remeasurement of Foreign Currencies |
| Fair Value Measurements |
| Accounting for Stock-based Compensation |
1
For more information about Spectrums critical accounting policies, see note 2 to Spectrums annual audited financial statements and unaudited quarterly financial statements incorporated by reference in this prospectus supplement.
Results of Operations
Quarter ended April 1, 2017 compared to Quarter ended April 2, 2016
Quarters Ended | ||||||||||||||||
April 1, 2017 | April 2, 2016 | Variance $ | Variance % | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Net sales |
$ | 9,735 | $ | 9,092 | $ | 643 | 7 | % | ||||||||
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Costs and expenses: |
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Cost of sales |
4,179 | 4,440 | (261 | ) | (6 | %) | ||||||||||
Selling, general and administrative |
3,258 | 2,490 | 768 | 31 | % | |||||||||||
Research and development |
567 | 476 | 91 | 19 | % | |||||||||||
Loss on remeasurement of foreign currencies |
(90 | ) | (201 | ) | (111 | ) | (55 | %) | ||||||||
Building expenses |
16 | 15 | 1 | 7 | % | |||||||||||
Interest (income) expense, net |
162 | 157 | 5 | 3 | % | |||||||||||
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Total costs and expenses |
$ | 8,092 | $ | 7,377 | $ | 717 | 10 | % | ||||||||
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Income before provision for income taxes |
$ | 1,643 | $ | 1,715 | (53 | ) | (3 | %) | ||||||||
Provision for income taxes |
(606 | ) | (627 | ) | 21 | (3 | %) | |||||||||
Unrecognized tax benefit |
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Net income |
1,037 | 1,088 | (51 | ) | (5 | %) |
Net sales
Product sales for the quarters ended April 1, 2017 and April 2, 2016 were $9,735,000 and $9,092,000, respectively, representing an increase of $643,000, or 7%. This increase was primarily due to growth in sales in California, China and Japan. Spectrum introduced a new product KR2i TFF system to the market during the first quarter of 2017 and there was an increase in the quantity of sales of one high value product and the sale of a new high value customized product.
Costs and expenses
Cost of sales was approximately $4,179,000 and $4,440,000 for the quarters ended April 1, 2017 and April 2, 2016, respectively, a decrease of $261,000 or 6%. This decrease is primarily due to increased margins due to a price increase and favorable product mix in the first quarter of 2017 as compared to the first quarter of 2016.
Selling, general and administrative expenses were approximately $3,258,000 and $2,490,000 for the quarters ended April 1, 2017 and April 2, 2016, respectively, an increase of $768,000, or 31%. This increase is primarily due to increased headcount in the U.S. and Europe, a companywide salary and wage increase and new expenses from new operations in India. In addition, there was an increase in consulting expense relating to the implementation of a new ERP system as well as a rent expense increase.
Research and development expenses were approximately $567,000 and $476,000 for the quarters ended April 1, 2017 and April 2, 2016, respectively, an increase of $91,000 or 19%. This increase is primarily due to an increase in compensation to senior employees deployed in research and development.
Interest expense was approximately $162,000 and $157,000 for the quarters ended April 1, 2017 and April 2, 2016, respectively, an increase of $5,000 or 3%.
2
Fiscal Year Ended December 31, 2016 Compared to the Fiscal Year Ended January 1, 2016
Fiscal Years | Year-over-Year Variance $ |
Year-over-Year Variance % |
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2016 | 2015 | 2016 to 2015 | 2016 to 2015 | |||||||||||||
Net sales |
$ | 40,200 | $ | 34,482 | $ | 5,718 | 17 | % | ||||||||
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Costs and expenses: |
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Cost of sales |
18,902 | 15,125 | 3,777 | 25 | % | |||||||||||
Selling, general and administrative |
11,835 | 10,384 | 1,451 | 14 | % | |||||||||||
Research and development |
1,995 | 1,769 | 226 | 13 | % | |||||||||||
Building expenses |
57 | 72 | (15,000 | ) | (21 | %) | ||||||||||
Loss on remeasurement of foreign currencies |
264 | 323 | (59 | ) | (18 | %) | ||||||||||
Interest (income) expense, net |
654 | 627 | 27 | 4 | % | |||||||||||
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Total costs and expenses |
$ | 33,707 | $ | 28,300 | $ | 5,407 | 19 | % | ||||||||
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Income before provision for income taxes |
$ | 6,493 | $ | 6,182 | $ | 311 | 5 | % | ||||||||
Provision for income taxes |
2,131 | 1,800 | 331 | 18 | % | |||||||||||
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Net income |
$ | 4,362 | $ | 4,382 | (20 | ) | (1 | %) | ||||||||
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Net sales
Sales of products for the fiscal years 2016 and 2015 were $40,200,000 and $34,482,000, respectively, representing an increase of $5,718,000 or 17%, primarily as a result of increased sales to its top customer and an expansion of its direct sales presence internationally year over year and resulting increases of sales in Europe of $1,800,000 and of sales in China of $662,000.
Cost and expenses
Cost of sales was approximately $18,902,000 and $15,125,000 for the fiscal years 2016 and 2015, respectively, representing an increase of $3,777,000 or 25%. This increase was primarily due to growth of revenues in fiscal year 2016.
Selling, general and administrative expenses were approximately $11,835,000 and $10,384,000 for the fiscal years 2016 and 2015, respectively, an increase of $1,451,000 or 14%. This increase was primarily driven by additional staff and increased salaries as well as a new business office in India.
Research and development expenses were approximately $1,995,000 and $1,769,000 for the fiscal years 2016 and 2015, respectively, an increase of $226,000 or 13%. Research and development salaries increased by approximately $217,000 primarily due to salary adjustments.
Net interest income and expenses were approximately $654,000 and $627,000 for the fiscal years 2016 and 2015, respectively, an increase of $27,000 or 4%. The increase was primarily due to interest due in 2016 from the line of credit which was not due in 2015.
Liquidity and Capital Resources
Spectrum has financed operations primarily through revenues derived from product sales and through borrowing.
At April 1, 2017, Spectrum had cash and cash equivalents of $7,071,000 compared to $6,941,000 at December 31, 2016.
The following table summarizes Spectrums sources and uses of cash for each of the periods presented:
Quarters Ended, | Fiscal Years | |||||||||||||||
April 2, 2017 | April 2, 2016 | 2016 | 2015 | |||||||||||||
(in thousands) | ||||||||||||||||
Net cash (used in) provided by operating activities |
$ | 1,000 | $ | 162 | $ | 4,363 | $ | 3,334 | ||||||||
Net cash (used in) provided by investing activities |
$ | (192 | ) | $ | (270 | ) | $ | (1,823 | ) | $ | (683 | ) | ||||
Net cash (used in) provided by financing activities |
$ | (678 | ) | $ | (543 | ) | $ | (1,143 | ) | $ | (832 | ) |
3
Operating Activities
For the quarter ended April 1, 2017, operating activities provided cash of $1,000,000 reflecting comprehensive income of $1,034,000 and non-cash charges totaling $382,000 primarily related to depreciation and amortization and deferred income taxes. An increase in inventories consumed $658,000 of cash. Payments of accrued liabilities consumed $67,000 of cash, including accrued interest on capital leases, and were mainly due to payment of dividends and accrued compensation. The remaining cash flow used in operations resulted from net unfavorable changes in various other working capital accounts.
For the quarter ended April 2, 2016 operating activities provided cash of $162,000 reflecting comprehensive income of $1,110,000 and non-cash charges totaling $263,000 related to depreciation and amortization and deferred income taxes. An increase in accounts receivable consumed $491,000 of cash and was primarily due to the timing of sales within the quarter and cash receipts from customers. An increase in inventories consumed $239,000 of cash. An increase in accounts payable decreased available cash by $259,000 due to unfavorable timing of payments on accounts payable. Increase in taxes receivable used $219,000 of cash as payments were made for estimated first quarter 2016 taxes. The remaining cash flow used in operations resulted from net unfavorable changes in various other working capital accounts.
For fiscal year 2016, operating activities provided cash of $4,363,000 reflecting comprehensive income of $4,385,000 and non-cash charges totaling $810,000 primarily related to depreciation, amortization and deferred income taxes. An increase in accounts receivable consumed $978,000, primarily due to the 17% year over year increase in net sales. An increase in accounts payable provided $703,000 of cash, which was due to an increase in cost of goods and the timing of purchases and payments to vendors. The remaining cash flow used in operations resulted from net unfavorable changes in various other working capital accounts.
For fiscal year 2015, operating activities provided cash of $3,334,000 reflecting comprehensive income of $4,348,000 and non-cash charges totaling $856,000 primarily related to depreciation, amortization and deferred income taxes. An increase in accounts receivable consumed $1,220,000, primarily due to a 16% year over year increase in net sales. An increase in inventories consumed $1,381,000. A decrease in income taxes payable provided $416,000 in cash. The remaining cash flow provided by operations resulted from net favorable changes in various other working capital accounts.
Investing Activities
Investing activities consumed $192,000 and $270,000 in the quarters ended April 1, 2017 and April 2, 2016, respectively, primarily in relation to new property and equipment purchased within the United States related to the development of new production machinery to increase capacity and yields.
Investing activities were $1,823,000 in fiscal year 2016, primarily due to investments in property and equipment of $1,208,000 and investment in a venture capital limited partnership. Investing activities were $683,000 in fiscal year 2015, primarily to fund the acquisition of property and equipment.
Financing Activities
For the quarter ended April 1, 2017 financing activities used $678,000 of cash, primarily in paying dividends of $581,000. For the quarter ended April 2, 2016 financing activities used $543,000 of cash, primarily in paying dividends of $446,000.
For fiscal year 2016 the company used $1,143,000 of cash in financing activities, primarily in the payment of dividends of $680,000 and payments on long-term debt of $502,000. For fiscal year 2015 the company used $832,000 of cash for financing activities, primarily in payments on long-term debt of $384,000 and dividend payments of $448,000.
Off-Balance Sheet Arrangements
Spectrum does not have any off-balance sheet arrangements, as defined in the rules and regulations of the Securities and Exchange Commission.
4
Commitments and Contingencies
The following table summarizes Spectrums contractual obligations as of April 1, 2017 for the years ending on the last Saturday of the calendar year specified:
2017 (9 months for April 1, 2017) |
$ | 536,000 | ||
2018 |
735,000 | |||
2019 |
768,000 | |||
2020 |
571,000 | |||
2021 |
316,000 | |||
Thereafter |
1,706,000 | |||
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Total |
$ | 4,632,000 |
5