UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): July 29, 2015
AMAG PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation)
001-10865 |
|
04-2742593 |
(Commission File |
|
(IRS Employer Identification |
1100 Winter St. |
|
|
Waltham, Massachusetts |
|
02451 |
(Address of principal executive |
|
(Zip Code) |
(617) 498-3300
(Registrants telephone number, including area code)
(Former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Explanatory Note
As previously disclosed in its Current Report on Form 8-K filed with the Securities and Exchange Commission on June 29, 2015 (the Prior 8-K), AMAG Pharmaceuticals, Inc., a Delaware corporation (the Company), entered into a Stock Purchase Agreement (the Stock Purchase Agreement) with CBR Holdco, LLC, a Delaware limited liability company (the Seller), and CBR Acquisition Holdings Corp., a Delaware corporation (CBR), on June 29, 2015. The Stock Purchase Agreement provides that, upon the terms and subject to the conditions set forth in the Stock Purchase Agreement, the Seller agrees to sell, and the Company agrees to purchase, all of the outstanding equity securities of CBR (the Acquisition). CBRs wholly owned subsidiary, Cbr Systems, Inc. (Cbr Systems and, together with CBR, the Acquired Business), which operates as Cord Blood Registry, is a privately held provider of services for the collection, processing and long-term cryopreservation of umbilical cord blood and cord tissue stem cells for family use. Subject to the terms and conditions of the Stock Purchase Agreement, the Company has agreed to pay the Seller an aggregate of $700.0 million in cash consideration, subject to working capital, net debt and transaction expense adjustments as set forth in the Stock Purchase Agreement. The Stock Purchase Agreement contains customary representations, warranties and covenants of the parties and contains customary conditions to closing. The above description of the Stock Purchase Agreement does not purport to be complete and is subject to, and qualified in its entirety by, the full text of the Stock Purchase Agreement, a copy of which is filed as Exhibit 2.1 to the Prior 8-K.
Item 8.01 Other Events.
The Company is filing this Current Report on Form 8-K to disclose (i) the audited financial statements of Cbr Systems (predecessor of the Acquired Business) for the period from January 1, 2012 to September 18, 2012, (ii) the audited consolidated financial statements of the Acquired Business for the period from July 13, 2012 to December 31, 2012, (iii) the audited consolidated financial statements of the Acquired Business for the years ended December 31, 2014 and December 31, 2013, (iv) the unaudited consolidated financial statements of the Acquired Business for the six months ended June 30, 2015 and June 30, 2014, (v) the unaudited condensed combined pro forma financial information of the Company as of June 30, 2015 and for the periods ended December 31, 2014 and June 30, 2015, giving effect to the Acquisition and the related financings as if they had occurred on June 30, 2015, in the case of the pro forma balance sheet as of June 30, 2015, and as of January 1, 2014, in the case of the pro forma statements of operations for the year ended December 31, 2014 and the six months ended June 30, 2015, and (vi) the Acquired Businesss Management Discussion and Analysis of Financial Conditions and Results of Operations for the years ended December 31, 2014 and December 31, 2013 and for the six months ended June 30, 2015 and June 30, 2014.
As previously disclosed, on July 20, 2015, the Federal Trade Commission (the FTC) notified the Company that it is conducting an investigation into whether Lumara Health or its predecessor has engaged in unfair methods of competition with respect to Makena or any hydroxyprogesterone caproate product. Subsequently, the Company has gained additional insight and guidance into what information would be helpful to the FTCs investigation. The Company will fully cooperate with and will expeditiously provide a thorough response to the FTC.
The FTC noted in its letter that the existence of the investigation does not indicate that the FTC has concluded that Lumara Health or its predecessor has violated the law and the Company believes that its contracts and practices comply with relevant law and policy, including the federal Drug Quality and Security Act (the DQSA), which was enacted in November 2013, and public statements from and enforcement actions by the U.S. Food and Drug Administration (the FDA) regarding its implementation of the DQSA. The Company intends to provide the FTC a brief overview of the DQSA for context, which the Company believes will be helpful, including (i) how the statute outlined that large-scale compounding of products that are copies or near-copies of FDA-approved drugs (like Makena) is not in the interests of public safety, (ii) the Companys belief that the DQSA has had a significant impact on the compounding of hydroxyprogesterone caproate, and (iii) how the Companys contracts with former compounders do allow those compounders to continue to serve physicians and patients with respect to supplying medically necessary alternative/altered forms of hydroxyprogesterone caproate. Given the early stages of this inquiry, the Company cannot at this time assess potential outcome of this investigation.
For additional information on the DQSA, please refer to the Companys Annual Report on Form 10-K under the heading Government Regulation - Drug Quality and Security Act in Part I, Item 1 - Business.
The information contained in this Current Report on Form 8-K, including the information contained in Exhibits 99.1, 99.2, 99.3, 99.4, 99.5 and 99.6 does not constitute an offer to sell, or the solicitation of an offer to buy, any securities and shall not constitute an offer, solicitation or sale in any jurisdiction in which such offer, solicitation or sale would be unlawful.
Forward-Looking Statements
This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the PSLRA) and other federal securities laws. Any statements contained herein which do not describe historical facts, including but not limited to, statements regarding the proposed Acquisition, including the consideration to be paid and the terms and conditions thereof, and the other transactions contemplated by the Stock Purchase Agreement, expectations and beliefs regarding the FTCs investigation and the compliance with laws and policy are forward-looking statements which involve risks and uncertainties that could cause actual results to differ materially from those discussed in
such forward-looking statements. Statements about the Companys or CBRs past financial results do not, and are not meant to, predict future results. The Company can provide no assurance that such results and performance will continue. For the avoidance of doubt, any statements in this report that relate to the Acquisition are forward-looking statements within the meaning of the PSLRA and other federal securities laws.
Such risks and uncertainties include, among others, (1) the possibility that the closing conditions set forth in the Stock Purchase Agreement will not be met and that the parties will be unable to consummate the proposed Acquisition, (2) the possibility that, despite having a financing commitment in place, the Company will be unable to secure financing, or financing on satisfactory or anticipated terms, in amounts sufficient to consummate the Acquisition, (3) the possibility that, if the Acquisition is consummated, the Company may not realize the expected benefits, synergies and opportunities anticipated in connection with the Acquisition, including that the Acquisition will further diversify the Companys revenue base, be accretive to adjusted EBITDA, and result in expected annual synergies, (4) the challenges of integrating CBR into the Companys organization, including CBRs commercial team, as well as the Companys ability to retain key CBR talent and the resulting disruptions to the Companys and CBRs operations if it fails to do so, (5) the Companys ability to successfully continue the CBR business, including as a result of CBRs service based business model, the market for stem cell research and the need for strategic pricing skills to optimize the forward looking business, (6) the potential for stem cell science and its recognition, adoption and utility among the medical community, (7) the ethical, legal and social implications of stem cell research, and the possibility that negative public opinion about stem cell therapy may damage public perception of the Companys overall business and (8) such other risks identified in the Companys Securities and Exchange Commission filings, including the Companys Annual Report on Form 10-K for the year ended December 31, 2014, its Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2015, and subsequent filings with the SEC. The Company cautions you not to place undue reliance on any forward-looking statements, which speak only as of the date they are made.
Item 9.01 Financial Statements and Exhibits.
(d) Exhibits.
Exhibit |
|
Description |
|
|
|
23.1 |
|
Consent of Independent Accountants (PricewaterhouseCoopers LLP). |
99.1 |
|
Audited financial statements of Cbr Systems, Inc. (Predecessor Company) as of September 18, 2012 and for the period from January 1, 2012 to September 18, 2012. |
99.2 |
|
Audited consolidated financial statements of CBR Holdco, LLC (Successor Company) as of December 31, 2012 and for the period from July 13, 2012 to December 31, 2012. |
99.3 |
|
Audited consolidated financial statements of CBR Holdco, LLC (Successor Company) as of December 31, 2014 and 2013 and for the years ended December 31, 2014 and 2013. |
99.4 |
|
Unaudited consolidated financial statements of CBR Holdco, LLC (Successor Company) as of June 30, 2015 and 2014 and for the six months ended June 30, 2015 and 2014. |
99.5 |
|
CBR Holdco, LLC (Successor Company)s Management Discussion and Analysis of Financial Condition and Results of Operations for the years ended December 31, 2014 and 2013 and for the six months ended June 30, 2015 and 2014. |
99.6 |
|
Unaudited pro forma condensed combined financial information of AMAG Pharmaceuticals, Inc. as of June 30, 2015 and for the year ended December 31, 2014 and for the six months ended June 30, 2015. |
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.
|
AMAG PHARMACEUTICALS, INC. | |
|
By: |
/s/ William K. Heiden |
|
|
William K. Heiden Chief Executive Officer |
|
| |
|
Date: July 29, 2015 |
EXHIBIT INDEX
Exhibit |
|
Description |
|
|
|
23.1 |
|
Consent of Independent Accountants (PricewaterhouseCoopers LLP). |
99.1 |
|
Audited financial statements of Cbr Systems, Inc. (Predecessor Company) as of September 18, 2012 and for the period from January 1, 2012 to September 18, 2012. |
99.2 |
|
Audited consolidated financial statements of CBR Holdco, LLC (Successor Company) as of December 31, 2012 and for the period from July 13, 2012 to December 31, 2012. |
99.3 |
|
Audited consolidated financial statements of CBR Holdco, LLC (Successor Company) as of December 31, 2014 and 2013 and for the years ended December 31, 2014 and 2013. |
99.4 |
|
Unaudited consolidated financial statements of CBR Holdco, LLC (Successor Company) as of June 30, 2015 and 2014 and for the six months ended June 30, 2015 and 2014. |
99.5 |
|
CBR Holdco, LLC (Successor Company)s Management Discussion and Analysis of Financial Condition and Results of Operations for the years ended December 31, 2014 and 2013 and for the six months ended June 30, 2015 and 2014. |
99.6 |
|
Unaudited pro forma condensed combined financial information of AMAG Pharmaceuticals, Inc. as of June 30, 2015 and for the year ended December 31, 2014 and for the six months ended June 30, 2015. |
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (File Nos. 333-192132, 333-202009 and 333-202252) and Form S-8 (File Nos. 333-82292, 333-131656, 333-148682, 333-159938, 333-168786, 333-182821, 333-190435, 333-197873 and 333-203924) of AMAG Pharmaceuticals, Inc. of our report dated July 28, 2015 relating to the financial statements of Cbr Systems, Inc. and of our report dated April 14, 2015 relating to the consolidated financial statements of CBR Holdco, LLC, which appear in this Current Report on Form 8-K of AMAG Pharmaceuticals, Inc.
/s/ PricewaterhouseCoopers LLP
San Jose, California
July 28, 2015
Exhibit 99.1
Audited Financial Statements of
Cbr Systems, Inc. (Predecessor Company) as of September 18, 2012
and for the Period from January 1, 2012 to September 18, 2012
Report of Independent Auditors
To the Board of Directors
of Cbr Systems, Inc.
We have audited the accompanying balance sheet of Cbr Systems, Inc. as of September 18, 2012, and the related statements of operations, of redeemable convertible preferred stock and convertible preferred stock and stockholders deficit and of cash flows for the period from January 1, 2012 to September 18, 2012. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Cbr Systems, Inc. as of September 18, 2012, and the results of its operations and its cash flows for the period from January 1, 2012 to September 18, 2012 in conformity with accounting principles generally accepted in the United States of America.
As described in Note 2 to the financial statements, the Company has restated its 2011 financial statements as of and for the year ended December 31, 2011 from the amounts previously reported on by other auditors. We also have audited the restatement of the 2011 financial statements to correct such errors, as described in Note 2. In our opinion, such adjustments are appropriate and have been properly applied. As the prior period financial statements have not been presented herein, the restatement has been effected as an adjustment to the January 1, 2012 accumulated deficit.
/s/ PricewaterhouseCoopers LLP
San Jose, California
July 28, 2015
Cbr Systems, Inc.
Balance Sheet
September 18, 2012
Assets |
|
|
| |
|
|
|
| |
Current assets |
|
|
| |
Cash and cash equivalents |
|
$ |
16,911,422 |
|
Short-term investments |
|
2,435,742 |
| |
Accounts receivable, net of allowance for doubtful accounts of $2,062,455 |
|
10,116,318 |
| |
Inventories |
|
6,972,422 |
| |
Deferred tax assets |
|
1,426,840 |
| |
Prepaid and other current assets |
|
25,384,870 |
| |
Total current assets |
|
63,247,614 |
| |
|
|
|
| |
Property and equipment, net |
|
26,339,543 |
| |
Restricted cash |
|
100,000 |
| |
Deferred tax assets |
|
25,131,189 |
| |
Other long-term assets |
|
153,899 |
| |
Total assets |
|
$ |
114,972,245 |
|
|
|
|
| |
Liabilities, Redeemable Convertible Preferred Stock and Convertible Preferred Stock and Stockholders Deficit |
|
|
| |
|
|
|
| |
Current liabilities |
|
|
| |
Accounts payable |
|
$ |
2,221,579 |
|
Accrued liabilities |
|
9,395,141 |
| |
Deferred revenue |
|
27,547,771 |
| |
Total current liabilities |
|
39,164,491 |
| |
|
|
|
| |
Non-current liabilities |
|
|
| |
Deferred revenue, net of current portion |
|
60,079,574 |
| |
Other long-term liabilities |
|
7,008,139 |
| |
Total liabilities |
|
106,252,204 |
| |
|
|
|
| |
Commitments and Contingencies (note 11) |
|
|
| |
|
|
|
| |
Redeemable Convertible Preferred Stock for Series C and D and Convertible Preferred Stock for Series A |
|
24,606,589 |
| |
|
|
|
| |
Stockholders deficit |
|
|
| |
Common stock |
|
14,375 |
| |
Additional paid-in capital |
|
|
| |
Accumulated deficit |
|
(15,900,923 |
) | |
Total stockholders deficit |
|
(15,886,548 |
) | |
|
|
|
| |
Total liabilities and stockholders deficit |
|
90,365,656 |
| |
|
|
|
| |
Total liabilities, redeemable convertible preferred stock and convertible preferred stock and stockholders deficit |
|
$ |
114,972,245 |
|
The accompanying notes are an integral part of these financial statements.
Cbr Systems, Inc.
Statement of Operations
For the period from January 1, 2012 to September 18, 2012
Revenues |
|
|
| |
Net revenues |
|
$ |
86,145,623 |
|
Other revenue |
|
120,726 |
| |
Total revenues |
|
86,266,349 |
| |
Operating costs and expenses |
|
|
| |
Cost of services |
|
18,711,187 |
| |
Selling, general, and administrative |
|
62,807,431 |
| |
Total operating costs and expenses |
|
81,518,618 |
| |
Income from operations |
|
4,747,731 |
| |
Interest income |
|
38,305 |
| |
Income before provision for income taxes |
|
4,786,036 |
| |
Provision for income taxes |
|
(2,246,486 |
) | |
Net Income |
|
2,539,550 |
| |
Increase in redemption value of redeemable convertible preferred stock |
|
(688,000 |
) | |
Net income applicable to common stockholders |
|
$ |
1,851,550 |
|
The accompanying notes are an integral part of these financial statements.
Cbr Systems, Inc.
Statement of Redeemable Convertible Preferred Stock and Convertible Preferred Stock and Stockholders Deficit
Period from January 1, 2012 to September 18, 2012
|
|
Redeemable Convertible Preferred Stock |
|
Convertible Series A |
|
Total |
|
|
|
|
|
|
Additional |
|
|
|
Total |
| ||||||||||||||||
|
|
Series D |
|
Series C |
|
Preferred Stock |
|
Convertible |
|
|
Common Stock |
|
Paid-in |
|
Accumulated |
|
Stockholders |
| ||||||||||||||||
|
|
Shares |
|
Amount |
|
Shares |
|
Amount |
|
Shares |
|
Amount |
|
Preferred Stock |
|
|
Shares |
|
Amount |
|
Capital |
|
Deficit |
|
Deficit |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Balances as of December 31, 2011 |
|
1,338,688 |
|
$ |
6,960,000 |
|
2,677,376 |
|
$ |
14,826,666 |
|
1,399,875 |
|
$ |
2,131,923 |
|
$ |
23,918,589 |
|
|
12,463,084 |
|
$ |
12,463 |
|
$ |
8,177,766 |
|
$ |
(14,329,461 |
) |
$ |
(6,139,232 |
) |
Restatement (see Note 2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
209,110 |
|
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Balances as of January 1, 2012 |
|
1,338,688 |
|
$ |
6,960,000 |
|
2,677,376 |
|
$ |
14,826,666 |
|
1,399,875 |
|
$ |
2,131,923 |
|
$ |
23,918,589 |
|
|
12,463,084 |
|
$ |
12,463 |
|
$ |
8,177,766 |
|
$ |
(14,120,351 |
) |
$ |
(5,930,122 |
) |
Exercise of stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,912,170 |
|
1,912 |
|
9,028,740 |
|
|
|
9,030,652 |
| ||||||||
Increase in redemption value of Series C preferred stock |
|
|
|
|
|
|
|
458,666 |
|
|
|
|
|
458,666 |
|
|
|
|
|
|
(458,666 |
) |
|
|
(458,666 |
) | ||||||||
Increase in redemption value of Series D preferred stock |
|
|
|
229,334 |
|
|
|
|
|
|
|
|
|
229,334 |
|
|
|
|
|
|
(229,334 |
) |
|
|
(229,334 |
) | ||||||||
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,759,503 |
|
|
|
5,759,503 |
| ||||||||
Excess tax benefit from stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,401,869 |
|
|
|
18,401,869 |
| ||||||||
Cash dividends paid |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(40,679,878 |
) |
(4,320,122 |
) |
(45,000,000 |
) | ||||||||
Net Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,539,550 |
|
2,539,550 |
| ||||||||
Balances as of September 18, 2012 |
|
1,338,688 |
|
$ |
7,189,334 |
|
2,677,376 |
|
$ |
15,285,332 |
|
1,399,875 |
|
$ |
2,131,923 |
|
$ |
24,606,589 |
|
|
14,375,254 |
|
$ |
14,375 |
|
$ |
|
|
$ |
(15,900,923 |
) |
$ |
(15,886,548 |
) |
The accompanying notes are an integral part of these financial statements.
Cbr Systems, Inc.
Statement of Cash Flows
Period from January 1, 2012 to September 18, 2012
Cash flows from operating activities: |
|
|
| |
Net lncome |
|
$ |
2,539,550 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
| |
Stock-based compensation |
|
5,759,503 |
| |
Depreciation |
|
4,249,449 |
| |
Deferred income taxes |
|
3,863,677 |
| |
Loss on investments |
|
253,940 |
| |
Changes in assets and liabilities: |
|
|
| |
Accounts receivable |
|
(155,723 |
) | |
Inventories |
|
(1,296,908 |
) | |
Prepaid expenses and other current assets |
|
(4,665,429 |
) | |
Accounts payable |
|
(2,408,410 |
) | |
Deferred revenue |
|
4,041,829 |
| |
Accrued liabilities |
|
2,816,741 |
| |
Other liabilities |
|
(91,576 |
) | |
Net cash provided by operating activities |
|
14,906,643 |
| |
|
|
|
| |
Cash flows from investing activities: |
|
|
| |
Restricted cash |
|
400,000 |
| |
Purchase of investments |
|
(9,700,673 |
) | |
Sales & maturities of investments |
|
33,108,374 |
| |
Purchase of property, plant and equipment |
|
(5,616,303 |
) | |
Net cash provided by investing activities |
|
18,191,398 |
| |
|
|
|
| |
Cash flows from financing activities: |
|
|
| |
Exercise of stock option |
|
9,030,652 |
| |
Cash dividends paid |
|
(45,000,000 |
) | |
Net cash used in financing activities |
|
(35,969,348 |
) | |
Net decrease in cash and cash equivalents |
|
(2,871,307 |
) | |
|
|
|
| |
Cash and cash equivalents at beginning of period |
|
19,782,729 |
| |
Cash and cash equivalents at end of period |
|
$ |
16,911,422 |
|
|
|
|
| |
Supplemental disclosures of cash flow information: |
|
|
| |
Cash paid for interest |
|
$ |
|
|
Cash paid for income taxes |
|
|
| |
|
|
|
| |
Supplemental disclosures of non-cash investing and financing activities: |
|
|
| |
Fixed assets purchases in accrued liabilities/accounts payable |
|
$ |
161,857 |
|
The accompanying notes are an integral part of these financial statements.
Cbr Systems, Inc.
Notes to the Financial Statements As of September 18, 2012 and
For the Period from January 1, 2012 to September 18, 2012
(1) Organization and Nature of Operations
Cbr Systems, Inc. (the Company) was founded in 1994 as a California corporation. In November 2011, the Company reincorporated as a Delaware corporation. The Company provides services for: 1) the collection and processing of newborn stem cells from umbilical cord blood and the cryogenic storage of the cells; and 2) the collection of umbilical cord tissue and the cryogenic storage of the tissue. Umbilical cord blood and tissue are rich and diverse sources of stem cells that can be collected without ethical concerns in a ten-minute window immediately after birth. The Company believes that stem cells, which are precursors of the specialized cells that comprise the bodys immune and blood systems, are beneficial in the treatment of various cancers, immune system disorders, and genetic defects. Additionally, this population of stem cells is an increasingly sought after source for clinical research in regenerative medicine because these cells have demonstrated embryonic-like capabilities to proliferate and develop into all of the major cell types in the body, without tumor or immune response issues.
The Company is headquartered in San Bruno, California with business operations in Tucson, Arizona.
(2) Summary of Significant Accounting Policies
(a) Restatement of the 2011 financial statements
The financial statements as of and for the year ended December 31, 2011, not presented herein, were audited by other independent auditors, whose report dated May 17, 2012 expressed an unqualified opinion on those financial statements. The Company has restated the December 31, 2011 financial statements to reflect the correction of two errors related to overstatement of taxes payable of $641,679 and an understatement of liabilities for unclaimed property of $432,569. As a result of these corrections, the following adjustments have been made to the previously reported on December 31, 2011 balances: reduction of income taxes payable of $641,679, an increase of accrued liabilities of $432,569 and reduction of accumulated deficit of $209,110. As the prior period financial statements have not been presented herein, the restatement has been effected as an adjustment to the opening accumulated deficit balance. These adjustments were audited in connection with the audit of the September 18, 2012 financial statements.
(b) Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the useful lives of fixed assets, allowances for doubtful accounts, deferred tax assets, inventory valuation, and share-based compensation.
(c) Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents consist of cash in bank
Cbr Systems, Inc.
Notes to the Financial Statements As of September 18, 2012 and
For the Period from January 1, 2012 to September 18, 2012
checking and money market accounts.
(d) Fair Value of Financial Instruments
The Company follows the provisions of ASC Topic 820, Fair Value Measurements and Disclosures, for fair value measurements of financial assets and financial liabilities. ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 also includes a framework for measuring fair value and expands disclosures about fair value measurements. ASC Topic 820 establishes 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 the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:
· Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
· Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
· Level 3 inputs are unobservable inputs for the asset or liability.
The level in the fair value hierarchy within which a fair value measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its entirety.
Short-Term Investments
Short-term and long-term investments at September 18, 2012 consist of U.S. government or government-sponsored entity bonds. Short-term investments mature within one year of the respective balance sheet dates, and long-term investments mature beyond one year. The Company classifies its debt securities as held-to-maturity because it has the ability and intent to hold the securities until maturity. Held-to-maturity debt securities are recorded at amortized cost, adjusted for the amortization, or accretion of premiums or discounts.
The fair value of these securities as of September 18, 2012 is $2,435,742, based on Level 1 inputs.
(e) Accounts Receivable
Accounts receivable are recorded at the invoiced amounts and do not bear interest. The Company maintains an allowance for doubtful accounts for estimated losses inherent in its accounts receivable portfolio. In establishing the required allowance, management considers historical losses adjusted to take into account current market conditions and customers financial conditions, the amount of receivables in dispute, and the current receivables aging and current payment patterns. The Company reviews its allowance for uncollectible accounts monthly. Past-due balances over 90 days and over a specified amount are reviewed individually for collectability. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.
Cbr Systems, Inc.
Notes to the Financial Statements As of September 18, 2012 and
For the Period from January 1, 2012 to September 18, 2012
(f) Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, restricted cash, and accounts receivable. The Company extends credit to its customers based on an evaluation of the customers financial condition, generally without requiring a deposit or collateral. Exposure to losses on receivables is principally dependent on each customers financial condition. The Company monitors its exposure for credit losses and maintains allowances for anticipated losses, as needed. Although the Company deposits its cash and cash equivalents and restricted cash with major financial institutions, its deposits, at times, may exceed federally insured limits.
(g) Inventories
Inventories consist of cord blood collection kits and processing bags. The Company values inventories at lower of cost or market using the specific-identification method. The Company analyzes inventory levels monthly, and expired inventory is disposed of and the related costs are written off.
(h) Property and Equipment
Property and equipment consists of land, building and improvements, computer equipment and software, laboratory equipment, office furniture and equipment, leasehold improvements, and construction in progress. Property and equipment are recorded at cost and are depreciated using the straight-line method based upon estimated useful lives of 1 to 40 years. Leasehold improvements are amortized on a straight-line basis over the shorter of the asset useful life or remaining lease term.
(i) Internally Developed Software
The Company capitalizes the cost of software developed for internal use in accordance with ASC Topic 350, Intangibles Goodwill and Other. Capitalization of the costs of software developed or obtained for internal use begins at the application development phase of the project and totaled $708,842 during January 1, 2012 to September 18, 2012. Amortization of the costs of software developed for internal use begins when the assets are placed in productive use. Software currently in development is included in construction in progress.
(j) Restricted Cash
Restricted cash at September 18, 2012 consists of cash in money market accounts related to $100,000 collateral for a letter of credit in conjunction with the G.E. Capital CareCredit client payment plan program.
(k) Other Intangible Assets
The intangible assets include assets with finite useful lives and are amortized over their estimated useful lives based on their pattern of consumption. Intangible assets subject to amortization are reviewed for impairment in accordance with accounting standards related to impairment or disposal of long-lived assets. An impairment loss is recognized if the carrying amount of an intangible asset is not recoverable and its carrying amount exceeds its fair value.
Cbr Systems, Inc.
Notes to the Financial Statements As of September 18, 2012 and
For the Period from January 1, 2012 to September 18, 2012
(l) Revenue Recognition
Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collection is reasonably assured. For multi-element arrangements, the Company allocates revenue to all deliverables based on their relative selling prices.
In October 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards Updates (ASU) 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements, which requires the Company to establish a hierarchy to determine the selling price to be used for allocating revenue to deliverables as follows: (i) vendor specific objective evidence (VSOE), (ii) third-party evidence of selling price (TPE), and (iii) best estimate of the selling price (ESP). VSOE generally exists only when the Company sells the deliverable separately and it is the price actually charged by the Company for that deliverable. ASU 2009-13 also requires that any discounts given to the customer be allocated by applying the relative selling price method.
The Company has identified two deliverables generally contained in the arrangements involving the sale of its umbilical cord blood and/or cord tissue products. The first deliverable is associated with enrollment, including the provision of a collection kit and processing. Revenue for this deliverable is recognized after the collection and successful processing of a cord blood/cord tissue unit. The second deliverable is either the annual storage of a specimen or the 18 year, 25 year, or 30 year storage (prepaid storage) of a specimen. Revenue for this deliverable is recognized ratably over the length of the payment service period. The Company has allocated revenue between these deliverables using the relative selling price method. The selling price for the enrollment, collection kit and processing deliverable and the prepaid storage option are determined based on ESP because the Company doesnt have VSOE or TPE. The selling price for the annual storage option is determined based on VSOE as the Company has standalone renewals to support the selling price.
Deferred revenue includes: (1) amounts collected in advance of unit processing and (2) amounts associated with unearned storage fees collected at the beginning of the storage contract term, net of allocated discounts. Amounts not expected to be recognized within the next year are classified as long-term deferred revenue.
(m) Shipping and Handling Fees and Costs
The Company bills its customers a fee for the shipping of the collection kits. During January 1, 2012 to September 18, 2012, these revenues were $4,686,900 and are recorded in net revenues. The costs associated with the shipping of the collection kit are recorded in cost of services. During January 1, 2012 to September 18, 2012, these costs were $3,532,554.
(n) Rental Revenue and Expenses
The Company owns a building in Tucson, Arizona and leases 10,000 square feet to one tenant. Rental revenue is recognized on a straight-line basis over the life of the lease agreement which expires on March 31, 2013. Rental revenue for the period from January 1, 2012 to September 18, 2012 was $120,726. Rental revenue is recorded in other revenue. Future minimum lease payments to be received are as follows:
2013 |
|
$ |
42,114 |
|
Total |
|
$ |
42,114 |
|
Cbr Systems, Inc.
Notes to the Financial Statements As of September 18, 2012 and
For the Period from January 1, 2012 to September 18, 2012
Operating expenses related to the building consist of utilities, maintenance, depreciation, and building management fees. During January 1, 2012 to September 18, 2012, these costs were $232,730 and are recorded in selling, general, and administrative expenses.
(o) Research and Development
Research and development costs are expensed as incurred and consist primarily of contracted services and other direct expenses.
(p) Advertising Costs
The Company capitalizes costs associated with print media advertising space. The capitalized costs are amortized over their expected periods of use.
Advertising expense was $6,374,630 between January 1, 2012 to September 18, 2012 and is included in selling, general, and administrative expenses in the Statement of Operations.
(q) Impairment of Long-Lived Assets
Long-lived assets, such as property, plant, and equipment, and purchased intangibles subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset group to estimated undiscounted future cash flows expected to be generated by the asset group. If the carrying amount of an asset group exceeds its estimated undiscounted future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset group exceeds the fair value of the asset group.
(r) Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
In accordance with Accounting for Uncertainty in Income Taxes, included in ASC Subtopic 740-10, Income Taxes Overall, the Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Change recognition or measurement is reflected in the period in which the change in judgment occurs.
(s) Stock Based Compensation
The Company accounts for stock-based compensation in accordance with ASC Topic 718, Compensation Stock Compensation. ASC Topic 718 requires that all stock-based compensation be recognized as an expense in the financial statements and that such cost be measured at the fair value of the award.
Cbr Systems, Inc.
Notes to the Financial Statements As of September 18, 2012 and
For the Period from January 1, 2012 to September 18, 2012
(t) Comprehensive Loss
The Company has no components of other comprehensive loss other than its net income, and accordingly, the comprehensive income is equivalent to the net income.
(u) Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update (ASU) No. 2014-09. ASU 2014-09 provided guidance related to revenue from contracts with customers. Under this guidance, revenue is recognized when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. The updated standard will replace most existing revenue recognition guidance under GAAP when it becomes effective and permits the use of either the retrospective or cumulative effect transition method. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2018 and all interim reporting periods within annual reporting periods beginning after December 15, 2019. The Company has not yet selected a transition method and is currently evaluating the effect that the updated standard will have on its financial statements and related disclosures.
In August 2014, the FASB issued new guidance related to the disclosures around going concern. The new standard provides guidance around managements responsibility to evaluate whether there is substantial doubt about an entitys ability to continue as a going concern and to provide related footnote disclosures. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Companys financial statements.
Other amendments to GAAP have been issued by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Companys financial statements upon adoption.
(3) Prepaid and Other Current Assets
Prepaid and other current assets consist of the following as of September 18, 2012:
Interest receivables |
|
$ |
11,815 |
|
Prepaid tax deposits |
|
23,995,776 |
| |
Prepaid expenses |
|
1,377,279 |
| |
Prepaid and other current assets |
|
$ |
25,384,870 |
|
(4) Property and Equipment
Property and equipment, net, consists of the following as of September 18, 2012:
Cbr Systems, Inc.
Notes to the Financial Statements As of September 18, 2012 and
For the Period from January 1, 2012 to September 18, 2012
|
|
As of 9/18/2012 |
|
Useful Life |
| |
|
|
|
|
|
| |
Land |
|
$ |
500,000 |
|
N/A |
|
Building and improvements |
|
6,999,433 |
|
33 - 40 years |
| |
Computer equipment and software |
|
27,238,494 |
|
3-7 years |
| |
Laboratory equipment |
|
7,461,243 |
|
3-7 years |
| |
Office furniture and equipment |
|
1,564,894 |
|
3-5 years |
| |
Leasehold improvements |
|
2,423,205 |
|
Lesser of Lease or Asset Life |
| |
Construction in progress |
|
3,824,074 |
|
N/A |
| |
|
|
50,011,343 |
|
|
| |
Less accumulated depreciation |
|
(23,671,800 |
) |
|
| |
|
|
$ |
26,339,543 |
|
|
|
Depreciation expense totaled $4,249,449 during January 1, 2012 to September 18, 2012.
(5) Intangible Assets
As of September 18, 2012, company had trademark related intangible asset with a net balance of $26,862, and has recorded amortization in the amount of $69,230 for the period beginning January 1, 2012 to September 18, 2012.
(6) Accrued Liabilities
Accrued liabilities consist of the following as of September 18, 2012:
Professional fees |
|
$ |
313,427 |
|
Accrued Expenses |
|
6,847,965 |
| |
Bonus |
|
1,026,348 |
| |
Wages |
|
1,114,688 |
| |
Other |
|
92,713 |
| |
Accrued liabilities |
|
$ |
9,395,141 |
|
(7) Income Taxes
The Company accounts for income taxes in accordance with ASC Topic 740, Income Taxes. This standard requires, among other things, recognition of future tax benefits and liabilities, measured by enacted tax rates, attributable to deductible temporary differences between financial statement and income tax bases of assets and liabilities and to tax net operating loss and tax credit carryforwards, to the extent that realization of such benefits is more likely than not.
The following table summarizes the components of the Companys deferred tax assets as of September 18, 2012:
Cbr Systems, Inc.
Notes to the Financial Statements As of September 18, 2012 and
For the Period from January 1, 2012 to September 18, 2012
|
|
Current |
|
Noncurrent |
| ||
|
|
|
|
|
| ||
Deferred tax assets |
|
|
|
|
| ||
Deferred revenue |
|
$ |
|
|
$ |
24,406,969 |
|
Accruals and reserves |
|
1,426,227 |
|
|
| ||
State taxes |
|
613 |
|
|
| ||
NOL and credit carryforwards |
|
|
|
724,220 |
| ||
|
|
|
|
|
| ||
Total deferred tax assets |
|
1,426,840 |
|
25,131,189 |
| ||
|
|
|
|
|
| ||
Deferred tax liabilities |
|
|
|
|
| ||
Basis difference in depreciable assets |
|
|
|
(5,279,737 |
) | ||
|
|
|
|
|
| ||
Total deferred tax liabilities |
|
|
|
(5,279,737 |
) | ||
Deferred taxes, net |
|
$ |
1,426,840 |
|
$ |
19,851,452 |
|
The components of income tax provision are as follows:
Current: |
|
|
| |
Federal |
|
$ |
(649,835 |
) |
State |
|
1,750 |
| |
|
|
(648,085 |
) | |
Deferred: |
|
|
| |
Federal |
|
3,136,522 |
| |
State |
|
(241,951 |
) | |
|
|
2,894,571 |
| |
Total |
|
$ |
2,246,486 |
|
The total income tax expense differs from what the income tax expense would be using the federal statutory rate primarily due to state taxes and nondeductible expenses.
At September 18, 2012, the Company had state net operating loss carry forwards of approximately $54.4 million. The state net operating loss carry forwards expire in 2021.
Pursuant to ASC 718, the additional tax benefit associated with the windfall is not recognized until the deduction reduces taxes payable. The tax effect of windfalls included in net operating loss carryforwards but not reflected in deferred tax assets for 2012 are $18.4 million and will be recorded to additional paid-in capital when recognized.
At September 18, 2012, the Company had Arizona state credits of $0.4 million. The credit carry forward will expire in 2016.
Cbr Systems, Inc.
Notes to the Financial Statements As of September 18, 2012 and
For the Period from January 1, 2012 to September 18, 2012
(8) Redeemable Convertible Preferred Stock and Convertible Preferred Stock
In November 2011, the Company amended and restated its articles of incorporation, under which the Company has authorized 50,000,000 shares of common stock, with a par value of $0.001 per share, and 10,567,746 shares of preferred stock, with a par value of $0.001 per share. The series of preferred stock outstanding as of September 18, 2012 are summarized as follows:
|
|
|
|
Shares Issued and |
|
Liquidation |
| |
|
|
Shares Authorized |
|
Outstanding |
|
Preference |
| |
Series A |
|
1,866,273 |
|
1,399,875 |
|
$ |
2,225,801 |
|
Series C |
|
2,677,376 |
|
2,677,376 |
|
$ |
15,285,332 |
|
Series D |
|
6,024,097 |
|
1,338,688 |
|
$ |
7,189,334 |
|
Series AThe Company issued 1,399,875 shares of Series A preferred stock for cash and conversion of notes payable as of September 18, 2012, at a price of $1.59 per share, convertible to common stock at $1.59 per share.
Series CThe Company issued 2,677,376 shares of Series C preferred stock for cash as of September 18, 2012, at a price of $2.988 per share, convertible to common stock at $2.988 per share.
Series DThe Company issued 1,338,688 shares of Series D preferred stock for cash as of September 18, 2012 at a price of $2.988 per share, convertible to common stock at $2.988 per share.
The convertible preferred stock has the following rights, preferences, and privileges:
DividendsThe holders of Series A, C, and D preferred stock are entitled to receive dividends at the rate of $0.16, $0.30, and $0.24 per share, respectively (as adjusted for any stock dividends, combinations, or splits with respect to such shares), per year, payable only when and if declared by the board of directors. Dividends on Series A and C preferred stock are noncumulative. Dividends on the Series D preferred stock are cumulative.
On August 4, 2012, the Companys Board of Directors approved a Qualified Dividend, defined as one or more cash dividends aggregating up to and including $45 million where holders of the Series D preferred stock, Series C preferred stock, Series A preferred stock and common stock all receive the same per share dividend. On August 31, 2012 the Company declared a Qualified Dividend payable to the stockholders on record as of August 29, 2012. As of September 18, 2012, a total of $45,000,000 in such dividends was paid.
Cbr Systems, Inc.
Notes to the Financial Statements As of September 18, 2012 and
For the Period from January 1, 2012 to September 18, 2012
Liquidation PreferenceIn the event of a liquidation, dissolution, or winding up, either voluntary or involuntary, of the Companys corporate existence, which includes a merger, reorganization, or consolidation in which the Companys shareholders do not own a majority of the outstanding shares of the surviving corporation, or a sale of all or substantially all of the Companys assets, the distribution would be as follows:
· First, the holders of the Series D preferred stock would be entitled to receive, prior and in preference to the holders of common stock, Series A preferred stock, Series C preferred stock, or any other junior equity security, an amount per share equal to the greater of (i) the sum of (a) $2.988 for each outstanding share of Series D preferred stock (as adjusted for any stock dividends, combinations, or splits with respect to such shares, the Original Series D Issue Price) and (b) an amount equal to 8% of the Original Series D Issue Price per annum per share of Series D preferred stock, or (ii) the amount the holders of Series D preferred stock would have received had such holders converted their shares of Series D preferred stock into common stock prior to the liquidation, dissolution, or winding up of the Company.
· Second, the holders of the Series C preferred stock would be entitled to receive, prior and in preference to the holders of common stock, Series A preferred stock, or any other junior equity security, an amount per share equal to the sum of (i) the greater of (x) $2.988 for each outstanding share of Series C preferred stock (as adjusted for any stock dividends, combinations, or splits with respect to such shares, the Original Series C Issuance Price), plus any amounts payable to the Series C preferred stock, after the distribution of Corporate assets to the Series A preferred stock described below, equal to 8% of the Original Series C Issue Price per annum per share of Series C preferred stock, which amount shall be computed from April 30, 2001, or (y) the amount per share that a holder of Series C preferred stock would receive if all of the outstanding preferred stock were converted into common stock (as adjusted for any stock dividends combinations or splits with respect to such shares), and (ii) an amount equal to all declared but unpaid dividends on each such share.
· Third, the holders of the Series A preferred stock would be entitled to receive, prior and in preference to any distribution of the holders of common stock or any other junior equity security, an amount equal to the sum of (i) the greater of (A)$1.59 for each outstanding share of Series A preferred stock (as adjusted for any stock dividends, combinations, or splits with respect to such shares, the Original Series A Issuance Price) or (B) the amount per share which a holder of Series A preferred stock would receive if all of the outstanding preferred stock were converted into common stock (as adjusted for any stock dividends, combinations or splits with respect to such shares) and (ii) an amount equal to all declared but unpaid dividends on each such share.
· Fourth, the assets would then be distributed to the holders of Series C preferred stock until the holders of Series C preferred stock receive an additional liquidation distribution equal to 8% of the Original Series C Issue Price per share per annum, computed from April 30, 2001.
· Thereafter, the remaining assets of the Company would be distributed to the holders of common stock.
Cbr Systems, Inc.
Notes to the Financial Statements As of September 18, 2012 and
For the Period from January 1, 2012 to September 18, 2012
· Notwithstanding the foregoing, the above liquidation preferences shall not apply to payments made as a Qualified Dividend.
ConversionThe holders of preferred stock have the following conversion rights:
· Each share of preferred stock is convertible at the option of the holder at any time after the date of issuance into shares of fully paid and nonassessable shares of common stock, determined by dividing the original issue price of the series of preferred stock by the conversion price in effect at the time for such shares.
· Each share of preferred stock will convert into shares of common stock immediately upon the sale of common stock in a bona fide underwriting that meets certain minimum conditions.
· The conversion price may be adjusted pursuant to a weighted average anti-dilution formula under certain dilutive circumstances.
Voting RightsThe holders of the preferred stock have the right to one vote for each share of common stock into which the preferred stock could be converted. The preferred stockholders have full voting rights and powers equal to the voting rights and powers of the holders of common stock.
RedemptionRedemption provisions apply to the Series D preferred stock provided that if requested in writing by the majority holder of the issued and outstanding shares of Series D preferred stock at any time after September 18, 2007 (Series D Redemption Notice), the Company shall redeem, from any source of funds legally available, therefore, all or a portion of the shares of Series D preferred stock. Upon receipt by the Company of the Series D Redemption Notice, the Company shall promptly give notice of such receipt to the holders of Series C preferred stock. Thereafter, the holders of a majority of the shares of Series C preferred stock may request the Company to redeem, from any source of funds legally available, all of the shares of Series C preferred stock. The Company shall effect such redemptions on the applicable preferred redemption dates by paying in cash in exchange for the shares of (i) Series C preferred stock to be redeemed for a sum equal to $2.988 per share of Series C preferred stock plus an amount equal to 8% of the Original Series C Issue Price per annum, and (ii) Series D preferred stock to be redeemed for a sum equal to $2.988 per share of Series D preferred stock plus an amount equal to 8% of the Original Series D Issue Price per annum.
The Company records accretion related to this redemption provision as an increase to the liquidation value of the redeemable preferred stock and a decrease to additional paid-in capital based on the rights of each redeemable preferred stock over the period of time up to the redemption date as follows: (i) Series C preferred stock to be redeemed for a sum equal to $2.988 per share of Series C preferred stock plus an amount equal to 8% of the Original Series C Issue Price per annum; and (ii) Series D preferred stock to be redeemed for a sum equal to $2.988 per share of Series D preferred stock plus an amount equal to 8% of the Original Series D Issue Price per annum. As of September 18, 2012, no redemption of preferred stock occurred.
OtherThe Series A, C, and D preferred stock have the following additional rights, preferences, and privileges:
Cbr Systems, Inc.
Notes to the Financial Statements As of September 18, 2012 and
For the Period from January 1, 2012 to September 18, 2012
· As a group, voting as a single class, holders of the Series A preferred stock and common stock have the right to elect three members of the board of directors. As a group, voting as a separate class, holders of the Series C preferred stock have the right to elect one member of the board of directors. As a group, voting as a single class, the holders of common stock and preferred stock have the right to elect one member of the board of directors of the Company.
· Holders of Series C preferred stock have co-sale rights to sell their stock in the event that a founder enters into an agreement to sell any stock.
· The consent of a majority of the Series A, C, and D preferred stockholders, voting as a single class, is required prior to certain actions, including: (i) the redemption, repurchase, or other acquisition of common stock of the Company; (ii) the authorizing, issuing, or obligating the Company to issue any other equity securities; (iii) the consummating of a sale or merger of the Company or sale of substantially all of the assets of the Company, under certain circumstances; (iv) the declaring or paying of any dividend; (v) the increasing of the authorized number of directors of the Company above seven; (vi) actions that adversely affect the rights, preferences, or privileges of the Series A, C, and D preferred stock; or (vii) the authorizing or creating an option plan (other than the 1997 Stock Option Plan).
(9) Equity Incentive Plan
The Company established the 1995, 1996, 1997, 2005, and 2009 Stock Option Plans (the Plans) covering key employees and consultants of the Company. Under the terms of the Plans, incentive and nonqualified stock options and stock purchase rights may be granted for up to 19,330,729 shares (including 3,500,000 shares under the 2009 Stock Option Plan approved in March 2009) of the Companys authorized but unissued common stock. Through September 18, 2012, 11,135,322 options have been exercised for common stock and 2,289,899 options have expired. Options issued under the Plans have a maximum term of 10 years and vest over schedules determined by the board of directors.
The Company generally prices its common stock options based on stock transaction prices or third-party stock valuations. Nonqualified stock options may be granted to employees and consultants at no less than 85% of the fair market value of the stock at the date of grant. Incentive stock options may be granted only to employees at or above the fair market value of the stock on the date of the grant.
On August 7, 2012, the Company amended the 2009 Stock Option Plan to allow for the granting of nonstatutory stock options at an exercise price less than fair market value on the date of grant. Under these amended terms, the Company granted options for a total of 370,000 shares of common stock to two individuals, one of which was established with fully vested terms, with exercise prices approximating 30% of the fair market value on the date of grant. In the period from January 1, 2012 to September 18, 2012, the total stock-based compensation recorded by the Company relating to these two option grants was $4,865,543.
Cbr Systems, Inc.
Notes to the Financial Statements As of September 18, 2012 and
For the Period from January 1, 2012 to September 18, 2012
Activity in the Plans for the period from January 1, 2012 to September 18, 2012 is as follows:
|
|
|
|
|
|
|
|
Weighted |
| ||
|
|
Options |
|
|
|
Weighted |
|
average |
| ||
|
|
available for |
|
|
|
average |
|
fair value of |
| ||
|
|
future |
|
Outstanding |
|
exercise |
|
options |
| ||
|
|
issuance |
|
options |
|
price |
|
granted |
| ||
Balance, January 1, 2012 |
|
2,123,619 |
|
5,694,059 |
|
|
|
|
| ||
Granted |
|
(370,000 |
) |
370,000 |
|
$ |
5.61 |
|
$ |
13.15 |
|
Exercised |
|
|
|
(1,912,170 |
) |
4.72 |
|
|
| ||
Canceled |
|
196,730 |
|
(196,730 |
) |
5.56 |
|
|
| ||
Balance, September 18, 2012 |
|
1,950,349 |
|
3,955,159 |
|
|
|
|
| ||
As of September 18, 2012, the options outstanding consisted of the following:
|
|
Number of |
|
Remaining |
|
Average |
|
Number of |
|
Average |
| ||
Range of |
|
options |
|
contractual |
|
exercise |
|
options |
|
exercise |
| ||
exercise prices |
|
outstanding |
|
life (years) |
|
price |
|
exercisable |
|
price |
| ||
|
|
|
|
|
|
|
|
|
|
|
| ||
2.86 to 5.00 |
|
102,500 |
|
1.61 |
|
$ |
3.16 |
|
102,500 |
|
$ |
3.16 |
|
5.01 to 5.61 |
|
2,665,554 |
|
6.17 |
|
5.61 |
|
2,028,855 |
|
5.61 |
| ||
5.62 to 6.60 |
|
1,187,105 |
|
4.45 |
|
6.14 |
|
1,149,606 |
|
6.12 |
| ||
|
|
|
|
|
|
|
|
|
|
|
| ||
|
|
3,955,159 |
|
|
|
|
|
3,280,961 |
|
|
| ||
The intrinsic value of share options exercised during the period from January 1, 2012 to September 18, 2012 was $26,611,584.
Stock-based compensation cost that has been included in operating costs and expenses amounted to $5,759,503 in the period from January 1, 2012 to September 18, 2012. Stock-based compensation is classified in the statements of income in the same expense line items as cash compensation.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for grants made in 2012: risk-free interest rate of 1.4%; expected life of 6 months; expected volatility of 65%; and expected dividend yield of 0%.
(10) 401(k) Plan
The Company has a 401(k) profit sharing plan for all eligible employees and their beneficiaries. Contributions by the Company are determined by the Companys Board of Directors and are discretionary. As of September 18, 2012, company made matching benefit contribution of $466,591.
(11) Commitments and Contingencies
(a) Rental Commitments
The Company leases office space under a non-cancelable operating lease. The office space
Cbr Systems, Inc.
Notes to the Financial Statements As of September 18, 2012 and
For the Period from January 1, 2012 to September 18, 2012
lease expires in September 2017. The office space lease provides for an annual 3% increase in rent. Rent expense under the lease totaled $878,841 during January 1, 2012 to September 18, 2012. Future minimum lease commitments are as follows:
2012 remaining |
|
$ |
|
|
2013 |
|
947,921 |
| |
2014 |
|
999,068 |
| |
2015 |
|
1,029,040 |
| |
2016 |
|
1,059,911 |
| |
2017 |
|
812,686 |
| |
Total |
|
$ |
4,848,626 |
|
(b) Legal Matters
From time to time, in the ordinary course of business, various claims may be made against the Company. The Company is not aware of any claims that could materially affect the financial statements as of September 18, 2012.
(c) Lawsuit
In January 2012, a class action lawsuit was commenced, naming the Company as the defendant. The plaintiffs allege that the Company breached the California Confidentiality of Medical Information Act as a result of medical records being stolen from an employees vehicle. As of September 18, 2012, there was no change in the status of this claim. Refer to Note 13, Subsequent Events, for an update on this matter.
(d) Purchase Commitment
The Company has a purchase commitment with the manufacturer of the processing bags. As of September 18, 2012, the Company only has committed to purchase $5,049,000 worth of processing bags through December 31, 2013.
(12) Subsequent Events
(a) Acquisition of the Company
On August 10, 2012, the Company signed a merger agreement with CBR Holdco, LLC (Holdco) and CBR Acquisitions Holdings Corp (Holdings), completed on September 19, 2012, in which Holdco through its wholly owned subsidiary, Holdings, acquired 100% of the outstanding capital stock of the Company. In conjunction with the merger, the Companys successor retained the name of Cbr Systems, Inc. (CBR). CBR, Holdings and Holdco are collectively referred to herein as the Successor Company.
(b) Term Loans and Notes Payable
CBR and Holdings entered into a credit agreement on September 19, 2012 with lending institutions in the form of term loans totaling $150,000,000 (Term Loans) and an unsecured notes payable in the amount of $64,000,000 (Notes Payable) to fund the merger and acquisition of CBR and the related expenses incurred. In addition, the credit agreement gives
Cbr Systems, Inc.
Notes to the Financial Statements As of September 18, 2012 and
For the Period from January 1, 2012 to September 18, 2012
CBR access to a revolving line of credit in the principal amount of $15,000,000, letters of credit and swing line loans to be used for working capital and other general corporate financing purposes.
On May 31, 2013 the Successor Company executed a first amendment to its credit agreement.
On August 5, 2014, the Successor Company entered into a new credit agreement with its lending institutions. The initial term loan was modified and a new term loan of $200,000,000 resulted. The notes payable was modified by increasing the balance by $19,000,000 for a total notes payable amount of $83,000,000. In addition, the new credit agreement gives CBR access to a revolving line of credit in the principal amount of $15,000,000, letters of credit and swing line loans to be used for working capital and other general corporate financing purposes.
(c) Legal Matters
From time to time, in the ordinary course of business, various claims may be made against CBR. The Successor Company is not aware of any claims that could materially affect the financial statements. On August 8, 2014, the Successor Company entered into a Confidential Settlement Agreement and Release. In this agreement, the Successor Company was paid a sum of $815,000 in exchange for the mutual release of the defendants in the case and dismissal of all litigation.
(d) Lawsuit
In January 2012, a class action lawsuit was commenced, naming the Company as the defendant. The plaintiffs allege that the Company breached the California Confidentiality of Medical Information Act as a result of medical records being stolen from an employees vehicle. In February 2013, Holdco presented their preliminary settlement to the court, which includes two years of credit monitoring and identity theft insurance for each class member. In February 2013, class members were also notified of the terms of the settlement. Class members were required to enroll online for credit monitoring and identity theft insurance by May 2013 and November 2013, respectively. As a result of these terms, Holdco also entered into a contract with a credit monitoring company to cover a minimum of $600,000 in credit monitoring services. Holdco believes the retained amount established at the close of acquisition of the Company will be sufficient to cover any losses that may result from this matter and thus will not have a material impact on the Companys operations.
(e) Purchase Commitments
CBR has purchase commitments with the manufacturer of the processing bags and the collection bags. As of December 31, 2014, CBR has committed to purchase $4,866,048 worth of processing bags and collection bags through 2016. CBR has 1 year remaining on a contract with two professional services groups that are providing guidance on marketing and a registry website, content, and tracking. CBR has committed to paying them $976,394 in 2015. CBR has contracts with four large practice groups which provide education services to their doctors and patients. CBR has committed to paying them $92,568 per year from 2015 through 2019.
(f) Distribution to Successor Company Members
On August 5, 2014, the Successor Companys Board of Directors declared and paid a distribution of $4.15 per common unit to all common unit holders as of August 4, 2014. The distribution paid totaled $98,000,000.
Cbr Systems, Inc.
Notes to the Financial Statements As of September 18, 2012 and
For the Period from January 1, 2012 to September 18, 2012
(g) Acquisition of Successor Company
On June 29, 2015, the Successor Company entered into a definitive agreement to be acquired by a specialty pharmaceutical company.
(h) The Company has evaluated subsequent events from the balance sheet date through July 28, 2015, the date at which the financial statements were available to be issued.
Exhibit 99.2
Audited Consolidated Financial Statements of
CBR Holdco, LLC (Successor Company) as of December 31, 2012
and for the Period from July 13, 2012 (date of inception) to December 31, 2012
Independent Auditors Report
To the Board of Directors and Management
of CBR Holdco, LLC
We have audited the accompanying consolidated financial statements of CBR Holdco, LLC and its subsidiaries, which comprise the consolidated balance sheets as of December 31, 2014, 2013 and 2012 and the related consolidated statements of operations, of members equity and of cash flows for the years ended December 31, 2014 and 2013 and the period from July 13, 2012 to December 31, 2012.
Managements Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of the consolidated 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 consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors Responsibility
Our responsibility is to express an opinion on the consolidated 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 consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Companys preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CBR Holdco, LLC and its subsidiaries at December 31, 2014, 2013 and 2012, and the results of their operations and their cash flows for the years ended December 31, 2014 and 2013 and the period from July 13, 2012 through December 31, 2012, in accordance with accounting principles generally accepted in the United States of America.
/s/ PricewaterhouseCoopers LLP
San Jose, California
April 14, 2015
CBR Holdco, LLC
Consolidated Balance Sheet
December 31, 2012
Assets |
|
|
| |
Current assets |
|
|
| |
Cash and cash equivalents |
|
$ |
20,086,006 |
|
Accounts receivable, net of allowance for doubtful accounts of $2,047,328 |
|
10,622,431 |
| |
Inventories |
|
7,420,432 |
| |
Deferred tax assets |
|
1,772,390 |
| |
Restricted cash |
|
2,343,396 |
| |
Prepaid and other current assets |
|
25,362,162 |
| |
Total current assets |
|
67,606,817 |
| |
Property and equipment, net |
|
31,643,403 |
| |
Restricted cash |
|
14,596,420 |
| |
Goodwill |
|
287,502,236 |
| |
Other intangibles |
|
162,540,145 |
| |
Deferred tax assets |
|
3,958,383 |
| |
Other long-term assets |
|
2,876,786 |
| |
Total assets |
|
$ |
570,724,190 |
|
|
|
|
| |
Liabilities and Members Equity |
|
|
| |
Current liabilities |
|
|
| |
Accounts payable |
|
$ |
4,211,761 |
|
Accrued liabilities |
|
10,628,186 |
| |
Deferred revenue |
|
12,552,212 |
| |
Term loan |
|
4,073,842 |
| |
Other current liabilities |
|
683,488 |
| |
Total current liabilities |
|
32,149,489 |
| |
|
|
|
| |
Non-current liabilities |
|
|
| |
Deferred revenue, net of current portion |
|
4,232,581 |
| |
Term loan, net of current |
|
142,082,801 |
| |
Notes payable |
|
62,109,284 |
| |
Other long term liabilities |
|
106,667,285 |
| |
Deferred rent |
|
242,431 |
| |
Total liabilities |
|
347,483,871 |
| |
|
|
|
| |
Commitments and Contingencies (note 14) |
|
|
| |
|
|
|
| |
Members Equity |
|
|
| |
Common units; 45,025,336 units authorized; 24,001,090 issued and outstanding |
|
238,010,903 |
| |
Additional paid-in capital |
|
2,201,394 |
| |
Accumulated deficit |
|
(16,971,978 |
) | |
Total members equity |
|
223,240,319 |
| |
Total liabilities and members equity |
|
$ |
570,724,190 |
|
The accompanying notes are an integral part of these consolidated financial statements.
CBR Holdco, LLC
Consolidated Statement of Operations
Period from July 13, 2012 (date of inception) to December 31, 2012
Revenues |
|
|
| |
Net revenues |
|
$ |
23,868,523 |
|
Other revenue |
|
47,729 |
| |
Total revenues |
|
23,916,252 |
| |
Operating costs and expenses |
|
|
| |
Cost of services |
|
8,409,002 |
| |
Selling, general, and administrative |
|
28,906,509 |
| |
Research and development |
|
11,641 |
| |
Transaction costs |
|
4,767,609 |
| |
Total operating expenses |
|
42,094,761 |
| |
Loss from operations |
|
(18,178,509 |
) | |
Interest expense, net |
|
5,584,957 |
| |
Interest income |
|
4,105 |
| |
|
|
|
| |
Loss before provision for income taxes |
|
(23,759,361 |
) | |
Provision for income taxes |
|
(9,525,210 |
) | |
Net loss |
|
$ |
(14,234,151 |
) |
The accompanying notes are an integral part of these consolidated financial statements.
CBR Holdco, LLC
Consolidated Statement of Members Equity
Period from July 13, 2012 (date of inception) to December 31, 2012
|
|
|
|
|
|
Additional |
|
|
|
Total |
| ||||
|
|
Common units |
|
paid-in |
|
Accumulated |
|
members' |
| ||||||
|
|
Units |
|
Amount |
|
capital |
|
deficit |
|
equity |
| ||||
|
|
|
|
$ |
|
|
$ |
|
|
$ |
(2,737,827 |
) |
$ |
(2,737,827 |
) |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Common units issued to investors for cash |
|
21,260,340 |
|
212,603,396 |
|
|
|
|
|
212,603,396 |
| ||||
Common units issued to employees in connection with the acquisition |
|
2,533,251 |
|
25,332,507 |
|
|
|
|
|
25,332,507 |
| ||||
Common units issued in lieu of cash compensation |
|
7,500 |
|
75,000 |
|
|
|
|
|
75,000 |
| ||||
Incentive units issued to employee |
|
200,000 |
|
|
|
|
|
|
|
|
| ||||
Stock-based compensation |
|
|
|
|
|
1,726,881 |
|
|
|
1,726,881 |
| ||||
Tax benefit from CBR stock options |
|
|
|
|
|
474,513 |
|
|
|
474,513 |
| ||||
Net loss |
|
|
|
|
|
|
|
(14,234,151 |
) |
(14,234,151 |
) | ||||
Balances as of December 31, 2012 |
|
24,001,091 |
|
$ |
238,010,903 |
|
$ |
2,201,394 |
|
$ |
(16,971,978 |
) |
$ |
223,240,319 |
|
The accompanying notes are an integral part of these consolidated financial statements.
CBR Holdco, LLC
Consolidated Statement of Cash Flows
Period from July 13, 2012 (date of inception) to December 31, 2012
Cash flows from operating activities: |
|
|
| |
Net loss |
|
$ |
(14,234,151 |
) |
Adjustments to reconcile net loss to net cash used in operating activities |
|
|
| |
Stock-based compensation expense of incentive units |
|
1,726,881 |
| |
Non-cash bonus award |
|
75,000 |
| |
Non-cash transaction costs |
|
2,729,330 |
| |
Tax benefit from CBR stock options |
|
474,513 |
| |
Depreciation |
|
2,325,106 |
| |
Amortization of intangibles |
|
5,549,855 |
| |
Deferred Income Taxes |
|
(5,420,011 |
) | |
Allowance for doubtful accounts |
|
180,000 |
| |
Amortization of debt discounts and issuance costs |
|
362,267 |
| |
Changes in assets and liabilities: |
|
|
| |
Accounts receivable |
|
(682,386 |
) | |
Inventories |
|
(891,051 |
) | |
Prepaid expenses and other current assets |
|
(373,107 |
) | |
Accounts payable |
|
1,990,182 |
| |
Deferred revenue |
|
11,782,775 |
| |
Accrued expenses |
|
(11,852,326 |
) | |
Other long-term liabilities |
|
4,424,342 |
| |
Net cash used in operating activities |
|
(1,832,781 |
) | |
|
|
|
| |
Cash flows from investing activities: |
|
|
| |
Restricted cash |
|
(16,839,816 |
) | |
Purchase of property, plant, and equipment |
|
(1,029,305 |
) | |
Purchase of business, net of cash acquired |
|
(374,576,924 |
) | |
Net cash used in investing activities |
|
(392,446,045 |
) | |
|
|
|
| |
Cash flows from financing activities: |
|
|
| |
Proceeds from sale of membership units |
|
207,756,008 |
| |
Net borrowings under line of credit agreement |
|
209,181,567 |
| |
Debt issuance costs |
|
(1,635,243 |
) | |
Repayments of bank borrowings |
|
(937,500 |
) | |
Net cash provided by financing activities |
|
414,364,832 |
| |
|
|
|
| |
Net increase in cash and cash equivalents |
|
$ |
20,086,006 |
|
|
|
|
| |
Cash and cash equivalents at beginning of period |
|
|
| |
Cash and cash equivalents at end of period |
|
$ |
20,086,006 |
|
|
|
|
| |
Supplemental disclosures of cash flow information: |
|
|
| |
Cash paid for interest |
|
$ |
(5,200,607 |
) |
|
|
|
| |
Supplemental disclosures of non-cash investing and financing activities: |
|
|
| |
Non-cash consideration in connection with purchase of business |
|
|
| |
Common units issued |
|
$ |
25,332,507 |
|
Contingent consideration |
|
6,386,502 |
| |
Retained amount |
|
25,865,394 |
|
The accompanying notes are an integral part of these consolidated financial statements.
CBR Holdco, LLC
Notes to the Consolidated Financial Statements
For the period from July 13, 2012 (date of inception) to December 31, 2012
(1) Organization and Nature of Operations
CBR Holdco, LLC (Holdco) was formed on July 13, 2012. Holdco, a Delaware limited liability company, is the parent of CBR Acquisition Holdings Corp (Holdings), a Delaware corporation and a wholly owned subsidiary and the parent of Cbr Systems, Inc. (CBR), a Delaware corporation and a wholly owned subsidiary (collectively, the Company).
The consolidated financial statements for period from July 13, 2012 (date of inception) to December 31, 2012 reflects the financial results of the Company. The financial results of CBR are included for the period from September 19, 2012, the closing date of the acquisition (see Note 2), to December 31, 2012.
CBR was founded in 1994 as a California corporation. In November 2011, CBR reincorporated as a Delaware corporation. CBR provides services for: 1) the collection and processing of newborn stem cells from umbilical cord blood and the cryogenic storage of the cells; and 2) the collection of umbilical cord tissue and the cryogenic storage of the tissue. Umbilical cord blood and tissue are rich and diverse sources of stem cells that can be collected without ethical concerns in a ten-minute window immediately after birth. CBR believes that stem cells, which are precursors of the specialized cells that comprise the bodys immune and blood systems, are beneficial in the treatment of various cancers, immune system disorders, and genetic defects. Additionally, this population of stem cells is an increasingly sought after source for clinical research in regenerative medicine because these cells have demonstrated embryonic-like capabilities to proliferate and develop into all of the major cell types in the body, without tumor or immune response issues.
CBR is headquartered in San Bruno, California with business operations in Tucson, Arizona.
(2) Acquisition
On August 10, 2012, Holdco, Holdings and CBR signed a merger agreement which was completed on September 19, 2012, in which Holdco through its wholly owned subsidiary, Holdings, acquired 100% of the outstanding capital stock of CBR. The transaction was accounted for as a business combination using the acquisition method of accounting in accordance with Accounting Standards Codification (ASC) 805, Business Combinations.
The total purchase price of $451,506,000 consisted of $419,786,991 of cash consideration, $25,332,507 of common units and $6,386,502 of contingent consideration at fair value.
Common units with a value of $25,332,507 were issued to CBR management in exchange for a portion of their CBR common stock held immediately prior to the merger.
Pursuant to the merger agreement, certain employees of CBR are eligible for additional compensation of up to $9.9 million if they continue to work for CBR. The Employment related amount ("ERA") is scheduled to be paid evenly on an annual basis over a three-year period, each on the anniversary date of the merger. The ERA payment is service-based and contingent on future employment with CBR. In the event an individual is no longer employed with the Company on the applicable anniversary date, the designated amount for such employee will be forfeited by the employee and added to the retained amount that ultimately may be paid to the selling shareholders. Amounts paid to employees under this compensation arrangement are expensed and accrued over the service period.
CBR Holdco, LLC
Notes to the Consolidated Financial Statements
For the period from July 13, 2012 (date of inception) to December 31, 2012
The $6.4 million contingent consideration at fair value is comprised of the following two items: i) payments of up to $9.9 million if certain individuals are not retained as employees on an annual basis over a three-year period, on each of the anniversary dates of the merger and ii) up to $4.2 million related to the utilization of carry forward net operating losses for state tax purposes. The Company has recorded, as of the acquisition date, the estimated fair value of the contingent payments of $6.4 million as a component of the consideration transferred as part of the acquisition.
The recognized amounts of the assets acquired on September 19, 2012 were based on estimates of their respective fair values at that date. The following summarizes the assets acquired:
Assets |
|
|
| |
Cash |
|
$ |
19,347,164 |
|
Accounts receivable, net |
|
10,120,044 |
| |
Prepaid expenses |
|
1,846,679 |
| |
Inventories |
|
6,529,381 |
| |
Real property |
|
8,630,000 |
| |
Personal property |
|
24,309,204 |
| |
Restricted cash |
|
100,000 |
| |
Deferred tax asset |
|
4,379,936 |
| |
Other assets |
|
22,606,268 |
| |
Trade names |
|
30,090,000 |
| |
Patents/proprietary technology |
|
23,090,000 |
| |
Customer relationships |
|
114,910,000 |
| |
Goodwill |
|
287,502,236 |
| |
Total assets |
|
553,460,912 |
| |
|
|
|
| |
Liabilities |
|
|
| |
Accounts payable |
|
(2,221,579 |
) | |
Accrued liabilities |
|
(10,316,644 |
) | |
Deferred revenue |
|
(5,002,017 |
) | |
Deferred tax liability |
|
(74,984,564 |
) | |
Other liabilities |
|
(9,430,108 |
) | |
|
|
|
| |
Net assets acquired |
|
$ |
451,506,000 |
|
A portion of the overall purchase price was allocated to acquired intangible assets. Amortization expense associated with acquired intangible assets is not deductible for tax purposes. Therefore, $67.1 million was established as a deferred tax liability for the future amortization of these intangibles and is included in other long term liabilities (see note 9).
The fair value of cash, accounts receivable, inventory, prepaid expenses, restricted cash, other assets, accounts payable, accrued liabilities and other liabilities were recorded at fair value, which in most cases approximates the historical carrying values given the short-term nature of these assets and liabilities.
The fair values for acquired property, plant and equipment, intangible assets and deferred revenue were determined with the input from a third party valuation specialist using estimates of replacement cost or estimates of discounted cashflows.
CBR Holdco, LLC
Notes to the Consolidated Financial Statements
For the period from July 13, 2012 (date of inception) to December 31, 2012
The fair values of certain other assets and certain other long term liabilities were determined internally by management using estimates of discounted cashflows and a weighted average cost of capital.
The fair value of the acquired identifiable intangibles was determined by using Level 3 inputs, which are estimated using significant unobservable inputs. Goodwill was recognized for the amount of consideration in excess of the identifiable assets and liabilities assumed as of the merger date.
While the Company used its best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date as well as contingent consideration, where applicable, the Company's estimates are inherently uncertain and subject to refinement. As a result, for those estimates where the Company continues to gather and analyze information that existed or was available or obtainable as of the acquisition date, the Company will record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill as part of the one year measurement period adjustment. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the consolidated statements of operations.
Acquisition costs directly related to the acquisition are expensed as incurred in accordance with authoritative accounting guidance. The accumulated deficit of $2,737,827, net of taxes, represents the transaction costs incurred on behalf of Holdings prior to July 13, 2012 (date of inception). Transactions costs incurred after inception either by or on behalf of Holdings, are reflected in the consolidated statement of operations.
(3) Summary of Significant Accounting Policies
(a) Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the useful lives of fixed assets, valuation of goodwill and purchased intangible assets, allowances for doubtful accounts, deferred tax assets, inventory valuation, and share-based compensation.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of Holdco, Holdings, and CBR. All significant intercompany balances and transactions have been eliminated.
(c) Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents consist of cash in bank checking and money market accounts.
CBR Holdco, LLC
Notes to the Consolidated Financial Statements
For the period from July 13, 2012 (date of inception) to December 31, 2012
(d) Fair Value of Financial Instruments
The Company follows the provisions of ASC Topic 820, Fair Value Measurements and Disclosures, for fair value measurements of financial assets and financial liabilities. ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 also includes a framework for measuring fair value and expands disclosures about fair value measurements. ASC Topic 820 establishes 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 the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:
· Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
· Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
· Level 3 inputs are unobservable inputs for the asset or liability.
The level in the fair value hierarchy within which a fair value measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its entirety. See note 12.
(e) Accounts Receivable
Accounts receivable are recorded at the invoiced amounts and do not bear interest. The Company maintains an allowance for doubtful accounts for estimated losses inherent in its accounts receivable portfolio. In establishing the required allowance, management considers historical losses adjusted to take into account current market conditions and customers financial conditions, the amount of receivables in dispute, and the current receivables aging and current payment patterns. The Company reviews its allowance for uncollectible accounts monthly. Past-due balances over 90 days and over a specified amount are reviewed individually for collectability. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.
(f) Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, restricted cash, and accounts receivable. The Company extends credit to its customers based on an evaluation of the customers financial condition, generally without requiring a deposit or collateral. Exposure to losses on receivables is principally dependent on each customers financial condition. The Company monitors its exposure for credit losses and maintains allowances for anticipated losses, as needed. Although the Company deposits its cash and cash equivalents and restricted cash with major financial institutions, its deposits, at times, may exceed federally insured limits.
(g) Inventories
Inventories consist of cord blood collection kits and processing bags. The Company values inventories at lower of cost or market using the specific-identification method. The Company
CBR Holdco, LLC
Notes to the Consolidated Financial Statements
For the period from July 13, 2012 (date of inception) to December 31, 2012
analyzes inventory levels monthly, and expired inventory is disposed of and the related costs are written off.
(h) Property and Equipment
Property and equipment consists of land, building and improvements, computer equipment and software, laboratory equipment, office furniture and equipment, leasehold improvements, and construction in progress. Property and equipment are recorded at cost and are depreciated using the straight-line method based upon estimated useful lives of 1 to 40 years. Leasehold improvements are amortized on a straight-line basis over the shorter of the asset useful life or remaining lease term.
(i) Internally Developed Software
The Company capitalizes the cost of software developed for internal use in accordance with ASC Topic 350 (Statement of Position (SOP) 98-1), Intangibles Goodwill and Other. Capitalization of the costs of software developed or obtained for internal use begins at the application development phase of the project and totaled $184,782 during July 13, 2012 to December 31, 2012. Amortization of the costs of software developed for internal use begins when the assets are placed in productive use. Software currently in development is included in construction in progress.
(j) Restricted Cash
Restricted cash at December 31, 2012 consists of cash in money market accounts related to providing certain employees of CBR additional compensation for continuing to work for CBR, funding a portion of the retained amount and $100,000 collateral for a letter of credit in conjunction with the G.E. Capital CareCredit client payment plan program.
(k) Goodwill and Other Intangible Assets
Goodwill has an indefinite useful life and is not amortized. Goodwill is tested annually for impairment and whenever events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. The Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The qualitative factors include, but are not limited to, a deterioration in general economic condition, changes in market environment including increased competition, cost increases, changes in management and key personnel and overall financial performance of the Company. If events and circumstances, evaluated on the basis of the weight evidence, indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, a two-step impairment test is used to identify potential goodwill impairment. In the first step, we compare the fair value of the reporting unit to its carrying value. The second step, if necessary, measures the amount of impairment by applying fair-value-based tests to the individual assets and liabilities within the reporting unit.
The Other intangible assets include assets with finite useful lives and are amortized over their estimated useful lives based on their pattern of consumption. Intangible assets subject to amortization are reviewed for impairment in accordance with accounting standards related to impairment or disposal of long-lived assets. An impairment loss is recognized if the carrying amount of an intangible asset is not recoverable and its carrying amount exceeds its fair value.
There has been no impairment loss related to goodwill or other intangible assets recorded as of December 31, 2012.
CBR Holdco, LLC
Notes to the Consolidated Financial Statements
For the period from July 13, 2012 (date of inception) to December 31, 2012
(l) Contingent Consideration
The fair value of the contingent consideration is remeasured at the estimated fair value at each year end with the change in fair value recognized as income or expense in the Companys consolidated statements of operations. Therefore, any changes in the fair value will impact the Companys results in such reporting period thereby resulting in potential variability in the Companys results until contingencies are resolved
(m) Revenue Recognition
Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collection is reasonably assured. For multi-element arrangements, the Company allocates revenue to all deliverables based on their relative selling prices.
In October 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards Updates (ASU) 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements, which requires the Company to establish a hierarchy to determine the selling price to be used for allocating revenue to deliverables as follows: (i) vendor specific objective evidence (VSOE), (ii) third-party evidence of selling price (TPE), and (iii) best estimate of the selling price (ESP). VSOE generally exists only when the Company sells the deliverable separately and it is the price actually charged by the Company for that deliverable. ASU 2009-13 also requires that any discounts given to the customer be allocated by applying the relative selling price method.
The Company has identified two deliverables generally contained in the arrangements involving the sale of its umbilical cord blood and/or cord tissue products. The first deliverable is associated with enrollment, including the provision of a collection kit and processing. Revenue for this deliverable is recognized after the collection and successful processing of a cord blood/cord tissue unit. The second deliverable is either the annual storage of a specimen or the 18 year, 25 year, or 30 year storage (prepaid storage) of a specimen. Revenue for this deliverable is recognized ratably over the length of the payment service period. The Company has allocated revenue between these deliverables using the relative selling price method. The selling price for the enrollment, collection kit and processing deliverable and the prepaid storage option are determined based on ESP because the Company doesnt have VSOE or TPE. The selling price for the annual storage option is determined based on VSOE as the Company has standalone renewals to support the selling price.
Deferred revenue includes: (1) amounts collected in advance of unit processing and (2) amounts associated with unearned storage fees collected at the beginning of the storage contract term, net of allocated discounts. Amounts not expected to be recognized within the next year are classified as long-term deferred revenue.
(n) Shipping and Handling Fees and Costs
The Company bills its customers a fee for the shipping of the collection kits. During July 13, 2012 to December 31, 2012, these revenues were $1,618,200 and are recorded in net revenues. The costs associated with the shipping of the collection kit are recorded in cost of services. During July 13, 2012 to December 31, 2012, these costs were $1,371,905.
CBR Holdco, LLC
Notes to the Consolidated Financial Statements
For the period from July 13, 2012 (date of inception) to December 31, 2012
(o) Rental Revenue and Expenses
The Company owns a building in Tucson, Arizona and leases 10,000 square feet to one tenant. Rental revenue is recognized on a straight-line basis over the life of the lease agreement which expired on March 31, 2013. Rental revenue is recorded in other revenue. Future minimum lease payments to be received are as follows:
2013 |
|
$ |
42,114 |
|
Total |
|
$ |
42,114 |
|
Operating expenses related to the building consist of utilities, maintenance, depreciation, and building management fees. During July 13, 2012 to December 31, 2012, these costs were $90,862 and are recorded in selling, general, and administrative expenses.
(p) Research and Development
Research and development costs are expensed as incurred and consist primarily of contracted services and other direct expenses.
(q) Advertising Costs
The Company capitalizes costs associated with print media advertising space. The capitalized costs are amortized over their expected periods of use.
At December 31, 2012, $101,460 of advertising was reported as assets and included in prepaid and other in the accompanying balance sheet. Advertising expense was $3,304,102 between July 13, 2012 to December 31, 2012 and is included in selling, general, and administrative expenses in the accompanying consolidated statement of operations.
(r) Impairment of Long-Lived Assets
Long-lived assets, such as property, plant, and equipment, and purchased intangibles subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset group to estimated undiscounted future cash flows expected to be generated by the asset group. If the carrying amount of an asset group exceeds its estimated undiscounted future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset group exceeds the fair value of the asset group.
(s) Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
CBR Holdco, LLC
Notes to the Consolidated Financial Statements
For the period from July 13, 2012 (date of inception) to December 31, 2012
In accordance with FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), included in ASC Subtopic 740-10, Income Taxes Overall, the Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Change recognition or measurement is reflected in the period in which the change in judgment occurs.
(t) Management Incentive Units
The Company accounts for stock-based compensation in accordance with ASC Topic 718 (SFAS No. 123R), Compensation Stock Compensation. ASC Topic 718 requires that all stock-based compensation be recognized as an expense in the financial statements and that such cost be measured at the fair value of the award.
(u) Comprehensive Loss
The Company has no components of other comprehensive loss other than its net loss, and accordingly, the comprehensive loss is equivalent to the net loss.
(v) Recent Accounting Pronouncements
In December 2011, the FASB amended ASC Topic 210, Balance Sheet. This amendment enhances disclosure requirements about the nature of an entitys right to offset and related arrangements associated with its financial instruments and derivative instruments. The amendment requires disclosure of the gross amounts subject to rights of set-off, the amounts offset in accordance with the accounting standards followed, and the related net exposure. The amendment will be effective for the Company for the period beginning January 1, 2013. The adoption of this amendment concerns disclosure only and the Company does not expect it to have an impact on the Companys consolidated financial position, results of operations or cash flows.
In July 2012, the FASB amended ASC Topic 350, Intangibles Goodwill and Other. This amendment is intended to simplify how an entity tests goodwill for impairment and will allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. An entity no longer will be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that the reporting units fair value is less than its carrying amount. This amendment will be effective for the Company beginning on January 1, 2013. The adoption of this amendment is not expected to have a material impact on the Companys consolidated financial position, results of operations and cash flows.
(4) Prepaid and Other Current Assets
Prepaid and other current assets consist of the following as of December 31, 2012:
Tax receivable |
|
$ |
22,391,828 |
|
Prepaid expenses |
|
2,307,190 |
| |
Debt issuance costs, short term |
|
663,144 |
| |
Prepaid and other current assets |
|
$ |
25,362,162 |
|
CBR Holdco, LLC
Notes to the Consolidated Financial Statements
For the period from July 13, 2012 (date of inception) to December 31, 2012
(5) Property and Equipment
Property and equipment, net, consists of the following as of December 31, 2012:
|
|
2012 |
|
Useful Life |
| |
Land |
|
$ |
700,000 |
|
N/A |
|
Building and improvements |
|
7,930,000 |
|
40 years |
| |
Computer equipment and software |
|
15,904,740 |
|
3-7 years |
| |
Laboratory equipment |
|
4,771,893 |
|
3-7 years |
| |
Office furniture and equipment |
|
840,950 |
|
3-5 years |
| |
Leasehold improvements |
|
618,626 |
|
4-5 years |
| |
Construction in progress |
|
3,202,300 |
|
N/A |
| |
|
|
33,968,509 |
|
|
| |
Less accumulated depreciation |
|
(2,325,106 |
) |
|
| |
Property and equipment, net |
|
$ |
31,643,403 |
|
|
|
Depreciation expense totaled $2,325,106 during July 13, 2012 to December 31, 2012.
(6) Goodwill and Other Intangible Assets
The business combination described in Note 2 resulted in the recognition of intangible assets in the amount of $455,592,236, including $287,502,236 for goodwill and $168,090,000 for other intangible assets.
The identifiable intangible assets classes subject to amortization, their gross carrying amount, and accumulated amortization as of December 31, 2012 are as follows:
|
|
Gross Carrying |
|
Accumulated |
|
Weighted Amortization Period |
| ||
Intangible Asset |
|
Amount |
|
Amortization |
|
During Acquisition Period |
| ||
Trade names |
|
$ |
30,090,000 |
|
$ |
753,305 |
|
20 years |
|
Patents and proprietary technology |
|
23,090,000 |
|
878,486 |
|
10 years |
| ||
Customer relationships |
|
114,910,000 |
|
3,918,064 |
|
25 years |
| ||
|
|
$ |
168,090,000 |
|
$ |
5,549,855 |
|
22 years |
|
The total weighted-average amortization period of the intangible assets with the finite useful lives was 22 years during the acquisition period. The Company recorded amortization expense of $5,549,855 for the period during July 13, 2012 (date of inception) to December 31, 2012.
CBR Holdco, LLC
Notes to the Consolidated Financial Statements
For the period from July 13, 2012 (date of inception) to December 31, 2012
Estimated aggregate amortization expense for future years is:
2013 |
|
$ |
18,179,512 |
|
2014 |
|
16,796,281 |
| |
2015 |
|
15,529,059 |
| |
2016 |
|
14,397,366 |
| |
2017 |
|
13,013,864 |
| |
2018 and thereafter |
|
84,624,063 |
| |
Total |
|
$ |
162,540,145 |
|
(7) Term Loans and Notes Payable
CBR and Holdings entered into a credit agreement on September 19, 2012 with lending institutions in the form of term loans totaling $150,000,000 (Term Loans) and an unsecured notes payable in the amount of $64,000,000 (Notes Payable) to fund the merger and acquisition of CBR and the related expenses incurred. In addition, the credit agreement gives CBR access to a revolving line of credit in the principal amount of $15,000,000, letters of credit and swing line loans to be used for working capital and other general corporate financing purposes.
The Terms Loans may be structured as alternate base rate loans or adjusted LIBOR rate loans. CBR can convert from one type to the other following the specific conditions and events as described in the credit agreement. Upon the closing date of the credit agreement, the term loans were structured as alternate base rate loans and bore an interest rate of 7.5%. In December 2012, CBR converted the term loans to adjusted LIBOR rate loans with an interest rate of 5.56%. CBR paid $156,200 in December 2012 to convert the interest rate which is included in the unamortized debt discount.
The Term Loans were recorded at an initial carrying value of $147,112,500, net of $2,887,500 in debt discount. The debt discount will be accreted to the carrying value of the Term Loans as a non-cash interest expense utilizing the effective interest rate method over the period ending in September 2017, which is the scheduled maturity date of the Term Loans. Debt discount amortized during July 13, 2012 (date of inception) to December 31, 2012, was $137,843. At December 31, 2012, the carrying value of the Term Loans was $146,156,643, net of $2,905,857 of unamortized debt discount.
Interest expense on the Term Loans for the period from July 13, 2012 (date of inception) to December 31, 2012 was $3,078,525. Principal payments and the accrued interest are due and payable on a quarterly basis, starting on December 31, 2012. The quarterly payments range from $937,500 to $2,812,500 with a balloon payment of $111,562,500 at the maturity date. The Term Loans mature in September 2017 and are secured by a perfected security interest in, and mortgages on, substantially all the tangible and intangible assets of CBR and each guarantor. The Term Loans are unconditionally guaranteed by Holdings and each wholly-owned domestic subsidiary of Holdings as specified in the agreement. CBR may prepay the Term Loans, revolving line of credit loans and swing line loans without premium or penalties. The agreement requires mandatory prepayment of the term loans upon a certain excess of cash flow as defined in the terms of the agreement. The Term Loans require CBR to maintain certain financial and non-financial covenants.
The Notes Payable are subordinated to the Term Loans and revolving line of credit (senior obligations), accrues interest at 11.75% annually and is due and payable on a quarterly basis. Interest expense on the Notes Payable for the period from July 13, 2012 (date of inception) to December 31, 2012 was $2,122,082.
CBR Holdco, LLC
Notes to the Consolidated Financial Statements
For the period from July 13, 2012 (date of inception) to December 31, 2012
The Notes Payable were recorded at an initial carrying value of $62,069,067, net of $1,930,933 in debt discount. The debt discount will be accreted to the carrying value of the Notes Payable as a non-cash interest expense utilizing the effective interest rate method over the period ending in September 2020, which is the scheduled maturity date of the Notes Payable. Debt discount amortized during July 13, 2012 (date of inception) to December 31, 2012, was $40,217. At December 31, 2012, the carrying value of the Notes Payable was $62,109,284, net of $1,890,716 of unamortized debt discount.
The Notes Payable require CBR to maintain certain financial and non-financial covenants. The Notes Payable are subject to a mandatory prepayment following (i) the change of control prior to the third anniversary of the closing date of the agreement at a prepayment premium, and (ii) the prepayment of senior loan obligations in connection with casualty event-repayment event as defined in the agreement. CBR is also required to make quarterly payments on the outstanding principle of the note starting September 2017 equal to the specific formula as defined in the agreement. The note matures in September 2020 and is unconditionally guaranteed by Holdings and each wholly-owned domestic subsidiary of Holdings as specified in the agreement.
CBR incurred issuance costs of $3,597,101, consisting primarily of investment banking, legal and other professional fees. These issuance costs were allocated to the Term Loans ($2,846,819) and Notes Payable ($750,282). The total issuance costs were capitalized and are being amortized as non-cash interest expense utilizing the effective interest rate method over the period ending on the scheduled maturity dates of the Term Loans and Notes Payable. Issuance costs amortized during July 13, 2012 (date of inception) to December 31, 2012, was $184,207.
As of December 31, 2012 there were no borrowings on the revolving line of credit, swing line loans or letters of credit. CBR is charged fees of 0.5% annually on the unutilized revolving line of credit borrowing base. The fee is due and payable on a quarterly basis, starting on December 31, 2012. Fees related to the unutilized line of credit during July 13, 2012 (date of inception) to December 31, 2012, were $22,083 and is included in interest expense. The revolving line of credit matures in September 2020. The swing line loans are due on the earlier of (i) five business days after such loan is made and (ii) the maturity date of the revolving line of credit.
As of December 31, 2012, the Company was in compliance with all debt covenants.
CBR Holdco, LLC
Notes to the Consolidated Financial Statements
For the period from July 13, 2012 (date of inception) to December 31, 2012
Future minimum payments at December 31, 2012 are:
Years ending December 31, |
|
|
| |
2013 |
|
$ |
20,530,704 |
|
2014 |
|
22,999,179 |
| |
2015 |
|
23,513,888 |
| |
2016 |
|
25,811,406 |
| |
2017 |
|
129,339,530 |
| |
2018 and thereafter |
|
84,458,521 |
| |
Total |
|
306,653,228 |
| |
Less: amounts representing interest |
|
(93,590,728 |
) | |
|
|
213,062,500 |
| |
Less: unamortized discount |
|
(4,796,573 |
) | |
|
|
208,265,927 |
| |
Less: current portion |
|
(4,073,842 |
) | |
Long term portion |
|
$ |
204,192,085 |
|
(8) Accrued Liabilities
Accrued liabilities consist of the following as of December 31, 2012:
Professional fees |
|
$ |
282,653 |
|
Interest |
|
19,167 |
| |
Tax payable |
|
4,064,874 |
| |
Bonus |
|
1,157,504 |
| |
Other |
|
5,103,988 |
| |
Accrued liabilities |
|
$ |
10,628,186 |
|
(9) Other Long Term Liabilities
Other long term liabilities consist of the following as of December 31, 2012:
Deferred tax liability |
|
$ |
70,915,389 |
|
Contingent consideration |
|
5,911,989 |
| |
Retained amount |
|
29,839,907 |
| |
Other long term liabilities |
|
$ |
106,667,285 |
|
Pursuant to the merger agreement, a retained amount was established to cover expenses and potential settlements related to certain pre-acquisition contingencies and breach of general representations and warranties. The retained amount was a component of the purchase price (see Note 2). On the 36th month anniversary of the closing, the Company will pay to the selling shareholders the remaining balance of the retained amount if no claims for indemnification against any security holder remain pending and no amounts are otherwise outstanding under a settlement agreement as of such date. Any amounts added to
CBR Holdco, LLC
Notes to the Consolidated Financial Statements
For the period from July 13, 2012 (date of inception) to December 31, 2012
the retained amount after the 36-month anniversary of the closing, but before the 72-month anniversary, will be paid out by the Company to the selling shareholders. At December 31, 2012, the retained amount was $29,839,907.
Cash of $6,913,023 has been restricted to fund the retained amount. Additionally, proceeds from the tax receivable of $22,391,828 will be used to fund the remaining retained amount.
(10) Income Taxes
The Company accounts for income taxes in accordance with ASC Topic 740 (SFAS No. 109), Income Taxes. This standard requires, among other things, recognition of future tax benefits and liabilities, measured by enacted tax rates, attributable to deductible temporary differences between financial statement and income tax bases of assets and liabilities and to tax net operating loss and tax credit carryforwards, to the extent that realization of such benefits is more likely than not.
The following table summarizes the components of the Companys deferred tax liability as of December 31, 2012:
|
|
2012 |
| |
Deferred revenue |
|
$ |
1,515,208 |
|
Accruals, reserves, and other |
|
2,032,391 |
| |
Transaction costs |
|
2,183,109 |
| |
Depreciation and amortization |
|
(70,915,412 |
) | |
Net deferred tax liability |
|
$ |
(65,184,704 |
) |
In 2012, the Company recorded income tax payables totaling approximately $4,064,874, in accrued liabilities, in the accompanying balance sheet.
The components of income tax provision are as follows:
|
|
07/13/12 (date of inception) |
| |
|
|
to 12/31/12 |
| |
|
|
|
| |
Current: |
|
|
| |
Federal |
|
$ |
4,064,874 |
|
State |
|
65,290 |
| |
|
|
4,130,164 |
| |
Deferred: |
|
|
| |
Federal |
|
(11,138,356 |
) | |
State |
|
(2,517,018 |
) | |
|
|
(13,655,374 |
) | |
Total |
|
$ |
(9,525,210 |
) |
The total income tax expense differs from what the income tax expense would be using the federal statutory rate primarily due to state taxes and nondeductible expenses.
CBR Holdco, LLC
Notes to the Consolidated Financial Statements
For the period from July 13, 2012 (date of inception) to December 31, 2012
Pursuant to ASC 718, the benefit of stock options will only be recorded to equity when they reduce cash taxes payable. As of December 31, 2012, the portion of the federal and state net operating loss related to stock options is approximately $3.8 million. The Company is tracking the tax benefit of stock options in a separate memo account and therefore is excluded from the schedule of deferred tax assets.
At December 31, 2012, the Company had state net operating loss carry forwards of approximately $44.6 million. The net operating loss carry forwards expire in 2032.
The Company adopted ASC 740-10 on July 13, 2012 (date of inception). Interest and penalty costs related to unrecognized tax benefits, if any, are classified as a component of other income (expense), net in the accompanying Statements of Comprehensive Loss. We did not recognize any interest and penalty expense related to unrecognized tax benefits for the year ended December 31, 2012.
The State of California implemented a mandatory single sales factor apportionment methodology in November of 2012 for tax years beginning on or after January 1, 2013. As such all of the ending deferred tax assets and deferred tax liabilities are revalued using the revised state rate. The rate results in a lower apportionment which is a significant driver in the deferred state tax benefit noted above.
(11) Members Equity
Under the CBR Holdco Limited Liability Company Agreement (LLC Agreement) dated September 19, 2012, the Company is authorized as the Board determines from time to time, to issue common units, which includes incentive units under the Companys Incentive Unit Plan.
Incentive Unit Plan
CBRs parent, Holdco has agreements with certain employees and board members whereby those employees and board members have been granted management incentive units. The incentive units granted are subject to a participation threshold at the grant date, based on the $10 stated value of the common units of Holdco, which increase by 8% per annum. The granted awards contain service criteria, performance criteria, or a combination thereof for vesting. Incentive units with a service condition generally vests over 5 years with 20% vesting each year. Incentive units with a performance condition, vests when the internal rate of return exceeds 25%, and when cash outflows to investors exceeds cash inflows from investors by a multiple of 3 times.
A total of 1,878,179 incentive units were granted on September 19, 2012 (of which 200,000 units vested immediately) and an additional 489,786 were granted on December 26, 2012 (of which 70,241 units included a vesting performance criteria). At December 31, 2012, 2,097,724 additional units are available for grant.
Stock-based compensation expense for the period from July 13, 2012 (date of inception) to December 31, 2012 was $1,726,881.
The fair value of the 70,241 incentive units granted with vesting performance criteria totaled $287,286. At December 31, 2012, the Company did not believe the vesting performance criteria were probable and therefore no stock-based compensation has been recorded. Once vesting performance criteria becomes probable, the amortization of the fair value will commence and be recorded as stock-based compensation.
CBR Holdco, LLC
Notes to the Consolidated Financial Statements
For the period from July 13, 2012 (date of inception) to December 31, 2012
The following table summarizes the incentive unit activity for the period from July 13, 2012 (date of inception) through December 31, 2012:
|
|
Incentive Units |
|
Weighted Average Grant |
| |
|
|
Outstanding |
|
Date Fair Value |
| |
Balance |
|
|
|
$ |
|
|
Units granted |
|
2,367,965 |
|
|
10,452,485 |
|
Units forfeited |
|
|
|
|
| |
Balance |
|
2,367,965 |
|
$ |
10,452,485 |
|
The grant date fair value of all the incentive units was $10,452,485. The fair value of the incentive units was estimated using the Option-Pricing Method (OPM). To apply the OPM, the Company calculated the various equity values, at which the sharing percentages would change among the Companys securities.
The Company estimated volatility based on the historical volatility of similar public companies stock price over a preceding period commensurate with the expected term of the incentive units. The Company estimated the expected term of the incentive units considering the timing and probabilities of a liquidity event. The risk-free interest rate for the expected term of the incentive units is based on the U.S. Treasury yield curve in effect at the time of grant.
Total future compensation cost of incentive units is $8,438,318, which is expected to be recognized over a weighted average period of 5 years.
Distributions
The Board may in its discretion make distributions from time to time pursuant to the distribution priorities as set in the LLC Agreement. No incentive unit shall receive distributions until each common unit that is not an incentive unit has received an amount equal to a hypothetical yield on the aggregate unreturned capital contributions of 8% per annum, compounded quarterly. No portion of any distribution shall be made with respect to any unit that has not been issued or unvested incentive units.
Holdco shall use its reasonable best efforts to distribute to the unitholders within 15 days after the end of fiscal quarter an aggregate amount of cash to approximate the unitholders U.S federal, state and local estimated tax liability for the fiscal quarter. Holdco is required to distribute to unitholders net cash proceeds received from a public offering or a sale of the company within terms as described in the agreement.
Allocations
Net profit or net losses for any calendar year shall be allocated among the unitholders in such a manner that, as of the end of such calendar year, the sum of each unitholders capital account, share of minimum gain and partner nonrecourse debt minimum gain shall be equal to the respective net amounts, which would be distributed to them as if Holdco were to liquidate the assets of Holdco for an amount equal to their book value and distribute the proceeds of the liquidation. Special allocations to the unitholders capital accounts are made in the manner required by Treasury Regulation Section 1.704-2.
CBR Holdco, LLC
Notes to the Consolidated Financial Statements
For the period from July 13, 2012 (date of inception) to December 31, 2012
Repurchases
In the event of an employee separation, the co-invest units and the vested incentive units will be subject to repurchase at the Companys option. The purchase price for each co-invest unit and vested incentive unit will be the fair market value of such unit provided, however, if such separation results from employees resignation without good reason or from the Companys termination of employment with cause (as defined in the employment agreement), the purchase price for each co-invest unit will be the lesser of the employees original cost for such unit and fair market value of such unit, and the purchase price for each vested incentive unit will be $0.00.
The Company may elect to purchase all or any portion of the co-invest units and vested incentive units by delivering written notice (the Repurchase Notice) to the holder of such securities within twelve months after the separation.
Transfer by Unitholders
No unitholder is allowed to transfer, offer or agree to transfer all or any parts of any interest in such units without the prior written consent of the Board. All Board approved unit transfers are subject to compliance with the terms of the Agreement. The transferee becomes a substitute unitholder on the date of such transfer. Consent to units transfer is not required for purchasers and investors as specified in the agreement. No transfer of any unit or economic interest is permitted if such a transfer would cause Holdco to have more than 100 partners and would create a risk that Holdco would be treated as a publicly traded partnership within the meaning of Section 7704 of the Internal Revenue Code. An additional person may be admitted as a unitholder based on Boards discretion.
Dissolution and Liquidation
Holdco shall dissolve upon the earlier of: (i) approval of the Board or the holders of the required interest or (ii) judicial dissolution or administrative dissolution of Holdco. On dissolution of Holdco, the Board shall act as liquidator or may appoint one or more representative or unitholders as liquidator. The liquidator shall sell any portion of Holdcos assets and make final distributions.
(12) Fair Value of Financial Instruments
The following methods and assumptions are used to estimate the fair values of the Companys financial instruments:
(a) Term Loans and Notes Payable
Term loans and notes payable are carried at the outstanding principal balances, net of issue discounts. The following table presents the carrying value and estimated fair value of the Companys term loans and notes payable as of December 31, 2012:
|
|
December 31, 2012 |
| ||||
|
|
|
|
Estimated |
| ||
|
|
Carrying Value |
|
Fair Value |
| ||
|
|
|
|
|
| ||
Term Loan |
|
$ |
146,156,643 |
|
$ |
129,081,934 |
|
Notes Payable |
|
62,109,284 |
|
70,990,262 |
| ||
Totals |
|
$ |
208,265,927 |
|
$ |
200,072,196 |
|
CBR Holdco, LLC
Notes to the Consolidated Financial Statements
For the period from July 13, 2012 (date of inception) to December 31, 2012
The estimated fair values of the term loans and notes payable were based on the then-current rates available to the Company for debt of similar terms and remaining maturities and also took into consideration default and credit risk. The Company determined the estimated fair value amount by using available market information and commonly accepted valuation methodologies. The fair value of the long-term debt was categorized as Level 3 in the fair value hierarchy.
(b) Assets/Liabilities Measured at Fair Value on a Recurring Basis
In the tables below, the Company has segregated all assets and liabilities that are measured at fair value on a recurring basis into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date.
|
|
December 31, 2012 |
| |||||||
|
|
Quoted prices in |
|
|
|
|
| |||
|
|
Active Markets for |
|
Significant Other |
|
Significant |
| |||
|
|
Identical |
|
Observable Inputs |
|
Unobservable |
| |||
Liabilities |
|
Items (Level 1) |
|
(Level 2) |
|
Inputs (Level 3) |
| |||
Contingent consideration |
|
$ |
|
|
$ |
|
|
$ |
5,911,989 |
|
The Company measures the fair value of its Level 3 contingent consideration liabilities based on the income approach by using expected payouts, factoring in estimated staff retention for the ERA portion and based on the income approach by using expected future utilization of carry forward net operation losses for the state tax portion. The estimated discount rate used ranged from 4.5% to 10.5%.
The following table presents the reconciliation for all assets and liabilities measured and recorded at fair value on a recurring basis using significant unobservable inputs (Level 3):
|
|
Contingent |
| |
Fair Value Using Level 3 Inputs |
|
Consideration |
| |
Balance at July 13, 2012 |
|
$ |
|
|
Additions |
|
6,386,502 |
| |
Transferred to Retained amount liability |
|
(474,513 |
) | |
Change in fair value |
|
|
| |
Balance at December 31, 2012 |
|
$ |
5,911,989 |
|
(c) Fair Value of Other Financial Instrument
The fair values of certain of the Companys financial instruments that are not measured at fair value, including bank deposits, accounts receivable, accounts payable, approximate their carrying amounts due to their short maturities.
(13) 401(k) Plan
The Company has a 401(k) profit sharing plan for all eligible employees and their beneficiaries. Contributions by the Company are determined by the Companys Board of Directors and are discretionary.
CBR Holdco, LLC
Notes to the Consolidated Financial Statements
For the period from July 13, 2012 (date of inception) to December 31, 2012
(14) Commitments and Contingencies
(a) Rental Commitments
The Company leases office space under a non-cancelable operating lease. The office space lease expires in September 2017. The office space lease provides for an annual 3% increase in rent. Rent expense under the lease totaled $50,875 during July 13, 2012 to December 31, 2012. Future minimum lease commitments are as follows:
2013 |
|
$ |
947,921 |
|
2014 |
|
999,068 |
| |
2015 |
|
1,029,040 |
| |
2016 |
|
1,059,911 |
| |
2017 |
|
812,686 |
| |
Total |
|
$ |
4,848,626 |
|
(b) Legal Matters
From time to time, in the ordinary course of business, various claims may be made against the Company. The Company is not aware of any claims that could materially affect the financial statements.
(c) Class Action
In January 2012, a class action lawsuit was commenced, naming CBR as the defendant. The plaintiffs allege that CBR breached the California Confidentiality of Medical Information Act as a result of medical records being stolen from an employees vehicle. In February 2013, Holdco presented their preliminary settlement to the court, which includes two years of credit monitoring and identity theft insurance for each class member. In February 2013, class members were also notified of the terms of the settlement. Class members are required to enroll online for credit monitoring and identity theft insurance by May 2013 and November 2013, respectively. As a result of these terms, Holdco also entered into a contract with a credit monitoring company to cover a minimum of $600,000 in credit monitoring services. Holdco believes the retained amount established at the close of acquisition of CBR will be sufficient to cover any losses that may result from this matter and thus will not have a material impact on its operations.
(d) Purchase Commitment
The Company has a purchase commitment with the manufacturer of the processing bags. For 2013, the Company has committed to purchase $5,049,000 worth of processing bags.
(15) Related Party Transactions
The Company entered into an advisory services agreement with the Companys primary equity sponsor, GTCR, effective September 19, 2012. GTCR provides the Company financial and management consulting services in the areas of corporate strategy, budgeting of future corporate investments, acquisition and divestiture strategies and debt and equity financings.
The advisory services agreement provides that the Company pay placement fees to GTCR of 1% of the gross amount of any debt or equity financing. During the period from July 13, 2012 (date of inceptions) to
CBR Holdco, LLC
Notes to the Consolidated Financial Statements
For the period from July 13, 2012 (date of inception) to December 31, 2012
December 31, 2012, the Company incurred placement fees of $4,646,672. Of this amount $2,528,614 was recorded as transaction costs and expensed in the period from July 13, 2012 (date of inception) to December 31, 2012 and $2,118,058 was deferred as debt issuance costs and will be amortized as non-cash interest expense utilizing the effective interest rate method over the period ending on the scheduled maturity dates of the Term Loans and Notes Payable (see Note 7).
The advisory services agreement provides that the Company pay a $125,000 quarterly management fee to GTCR. During the period from July 13, 2012 (date of inceptions) to December 31, 2012 the Company paid management fees of $250,000.
The Company also reimburses GTCR for out-of-pocket expenses incurred while providing the above professional services. During the period from July 13, 2012 (date of inceptions) to December 31, 2012 the Company reimbursed out-of-pocket expenses to GTCR of $200,716.
The Company has an agreement with a firm that provides legal services. Two employees of that firm are equity investors in the Company. During the period from July 13, 2012 (date of inception) to December 31, 2012 the Company paid $225,687 in fees to this firm.
(16) Subsequent Events
On May 31, 2013 the Company executed a first amendment to the credit agreement. Pursuant to the amendment, required delivery to the lending institutions of the Companys financial statements for the period from July 13, 2012 (date of inception) to December 31, 2012 was extended to June 14, 2013.
The Company has evaluated subsequent events from the balance sheet date through April 14, 2015, the date at which the financial statements were available to be issued.
Exhibit 99.3
Audited Consolidated Financial Statements of
CBR Holdco, LLC (Successor Company) as of December 31, 2014 and 2013
and for the Years Ended December 31, 2014 and 2013
Independent Auditors Report
To the Board of Directors and Management
of CBR Holdco, LLC
We have audited the accompanying consolidated financial statements of CBR Holdco, LLC and its subsidiaries, which comprise the consolidated balance sheets as of December 31, 2014, 2013 and 2012 and the related consolidated statements of operations, of members equity and of cash flows for the years ended December 31, 2014 and 2013 and the period from July 13, 2012 to December 31, 2012.
Managements Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of the consolidated 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 consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors Responsibility
Our responsibility is to express an opinion on the consolidated 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 consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Companys preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CBR Holdco, LLC and its subsidiaries at December 31, 2014, 2013 and 2012, and the results of their operations and their cash flows for the years ended December 31, 2014 and 2013 and the period from July 13, 2012 through December 31, 2012, in accordance with accounting principles generally accepted in the United States of America.
/s/ PricewaterhouseCoopers LLP
San Jose, California
April 14, 2015
CBR Holdco, LLC
Consolidated Balance Sheets
December 31, 2014 and 2013
|
|
2014 |
|
2013 |
| ||
Assets |
|
|
|
|
| ||
Current assets |
|
|
|
|
| ||
Cash and cash equivalents |
|
$ |
11,134,325 |
|
$ |
21,029,580 |
|
Accounts receivable, net of allowance for doubtful accounts of $2,115,475 and $2,232,175, respectively |
|
11,161,527 |
|
11,589,790 |
| ||
Inventories |
|
5,156,379 |
|
7,466,197 |
| ||
Deferred tax assets |
|
2,197,882 |
|
2,271,426 |
| ||
Restricted cash |
|
30,918,827 |
|
2,240,000 |
| ||
Prepaid and other current assets |
|
8,747,940 |
|
10,879,817 |
| ||
Total current assets |
|
69,316,880 |
|
55,476,810 |
| ||
Property and equipment, net |
|
26,310,683 |
|
26,140,435 |
| ||
Restricted cash |
|
|
|
34,626,975 |
| ||
Goodwill |
|
288,006,094 |
|
286,236,057 |
| ||
Other intangibles |
|
127,564,343 |
|
144,360,633 |
| ||
Other long-term assets |
|
4,659,657 |
|
3,963,335 |
| ||
Total assets |
|
$ |
515,857,657 |
|
$ |
550,804,245 |
|
Liabilities and Members Equity |
|
|
|
|
| ||
Current liabilities |
|
|
|
|
| ||
Accounts payable |
|
$ |
2,650,568 |
|
$ |
1,613,693 |
|
Accrued liabilities |
|
9,999,430 |
|
11,759,194 |
| ||
Deferred revenue |
|
30,960,319 |
|
27,276,833 |
| ||
Term loan |
|
1,740,700 |
|
6,900,140 |
| ||
Other current liabilities |
|
36,551,890 |
|
628,445 |
| ||
Total current liabilities |
|
81,902,907 |
|
48,178,305 |
| ||
|
|
|
|
|
| ||
Non-current liabilities |
|
|
|
|
| ||
Deferred revenue, net of current portion |
|
22,035,345 |
|
11,209,989 |
| ||
Term loan, net of current |
|
195,625,828 |
|
135,148,645 |
| ||
Notes payable |
|
81,002,723 |
|
62,221,353 |
| ||
Other long term liabilities |
|
45,837,335 |
|
94,156,478 |
| ||
Deferred rent |
|
234,893 |
|
264,236 |
| ||
Total liabilities |
|
426,639,031 |
|
351,179,006 |
| ||
|
|
|
|
|
| ||
Commitments and Contingencies (note 13) |
|
|
|
|
| ||
|
|
|
|
|
| ||
Members equity |
|
|
|
|
| ||
Common units; 45,025,336 units authorized; 23,812,488 and 23,776,091, issued and outstanding, at December 31, 2014 and 2013, respectively |
|
138,160,906 |
|
235,760,903 |
| ||
Additional paid-in capital |
|
6,538,922 |
|
4,209,761 |
| ||
Accumulated deficit |
|
(55,481,202 |
) |
(40,345,425 |
) | ||
Total members equity |
|
89,218,626 |
|
199,625,239 |
| ||
Total liabilities and members equity |
|
$ |
515,857,657 |
|
$ |
550,804,245 |
|
The accompanying notes are an integral part of these consolidated financial statements.
CBR Holdco, LLC
Consolidated Statements of Operations
Years Ended December 31, 2014 and December 31, 2013
|
|
2014 |
|
2013 |
| ||
Revenues |
|
|
|
|
| ||
Net revenues |
|
$ |
121,790,170 |
|
$ |
108,104,486 |
|
Other revenue |
|
145,843 |
|
163,242 |
| ||
Total revenues |
|
121,936,013 |
|
108,267,728 |
| ||
Operating costs and expenses |
|
|
|
|
| ||
Cost of services |
|
27,358,681 |
|
29,376,414 |
| ||
Selling, general, and administrative |
|
95,926,556 |
|
96,087,955 |
| ||
Research and development |
|
252,160 |
|
166,045 |
| ||
Total operating costs and expenses |
|
123,537,397 |
|
125,630,414 |
| ||
Loss from operations |
|
(1,601,384 |
) |
(17,362,686 |
) | ||
Interest expense |
|
22,447,428 |
|
17,443,942 |
| ||
Interest income |
|
(35,995 |
) |
(11,063 |
) | ||
Other expense |
|
48,882 |
|
|
| ||
Change in fair value of contingent consideration |
|
(264,306 |
) |
651,726 |
| ||
Loss before provision for income taxes |
|
(23,797,393 |
) |
(35,447,291 |
) | ||
Benefit from income taxes |
|
(8,661,616 |
) |
(12,073,844 |
) | ||
Net loss |
|
$ |
(15,135,777 |
) |
$ |
(23,373,447 |
) |
The accompanying notes are an integral part of these consolidated financial statements.
CBR Holdco, LLC
Consolidated Statements of Members Equity
Years Ended December 31, 2014 and December 31, 2013
|
|
|
|
|
|
Additional |
|
|
|
Total |
| ||||
|
|
Common units |
|
paid-in |
|
Accumulated |
|
members |
| ||||||
|
|
Units |
|
Amount |
|
capital |
|
deficit |
|
equity |
| ||||
Balances as of December 31, 2012 |
|
24,001,091 |
|
$ |
238,010,903 |
|
$ |
2,201,394 |
|
$ |
(16,971,978 |
) |
$ |
223,240,319 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Common units issued to investors for cash |
|
57,500 |
|
575,000 |
|
|
|
|
|
575,000 |
| ||||
Common units repurchased from investors with cash |
|
(282,500 |
) |
(2,825,000 |
) |
|
|
|
|
(2,825,000 |
) | ||||
Stock-based compensation |
|
|
|
|
|
2,008,367 |
|
|
|
2,008,367 |
| ||||
Net loss |
|
|
|
|
|
|
|
(23,373,447 |
) |
(23,373,447 |
) | ||||
Balances as of December 31, 2013 |
|
23,776,091 |
|
235,760,903 |
|
4,209,761 |
|
(40,345,425 |
) |
199,625,239 |
| ||||
Common units issued to investors for cash |
|
36,397 |
|
400,003 |
|
|
|
|
|
400,003 |
| ||||
Distribution to members |
|
|
|
(98,000,000 |
) |
|
|
|
|
(98,000,000 |
) | ||||
Stock-based compensation |
|
|
|
|
|
2,329,385 |
|
|
|
2,329,385 |
| ||||
Repurchase of Incentive Units |
|
|
|
|
|
(224 |
) |
|
|
(224 |
) | ||||
Net loss |
|
|
|
|
|
|
|
(15,135,777 |
) |
(15,135,777 |
) | ||||
Balances as of December 31, 2014 |
|
23,812,488 |
|
$ |
138,160,906 |
|
$ |
6,538,922 |
|
$ |
(55,481,202 |
) |
$ |
89,218,626 |
|
The accompanying notes are an integral part of these consolidated financial statements.
CBR Holdco, LLC
Consolidated Statements of Cash Flows
Years Ended December 31, 2014 and December 31, 2013
|
|
2014 |
|
2013 |
| ||
Cash flows from operating activities: |
|
|
|
|
| ||
Net loss |
|
$ |
(15,135,777 |
) |
$ |
(23,373,447 |
) |
Adjustments to reconcile net loss to net cash provided by operating activities: |
|
|
|
|
| ||
Stock-based compensation |
|
2,329,385 |
|
2,008,367 |
| ||
Depreciation |
|
8,785,472 |
|
8,967,580 |
| ||
Change in fair value of contingent consideration |
|
(264,306 |
) |
651,726 |
| ||
Gain on settlement with selling shareholders of CBR |
|
(1,227,632 |
) |
|
| ||
Amortization of intangibles |
|
16,796,290 |
|
18,179,512 |
| ||
Loss on disposal of property and equipment |
|
436,975 |
|
|
| ||
Deferred income taxes |
|
(10,382,489 |
) |
(8,958,875 |
) | ||
Provision for/(recovery of) doubtful accounts |
|
(116,700 |
) |
184,847 |
| ||
Non-cash interest expense on term loans and notes payable |
|
2,014,081 |
|
1,354,484 |
| ||
Changes in assets and liabilities: |
|
|
|
|
| ||
Accounts receivable |
|
544,963 |
|
(1,152,206 |
) | ||
Inventories |
|
2,309,818 |
|
(45,765 |
) | ||
Prepaid expenses and other current assets |
|
293,450 |
|
(8,997,163 |
) | ||
Accounts payable |
|
1,036,875 |
|
(2,598,068 |
) | ||
Deferred revenue |
|
14,508,842 |
|
21,702,029 |
| ||
Accrued liabilities |
|
(2,189,921 |
) |
1,069,862 |
| ||
Other liabilities |
|
(2,247,106 |
) |
(777,549 |
) | ||
Net cash provided by operating activities |
|
17,492,220 |
|
8,215,334 |
| ||
|
|
|
|
|
| ||
Cash flows from investing activities: |
|
|
|
|
| ||
Restricted cash |
|
6,468,839 |
|
3,069,206 |
| ||
Purchase of property, plant, and equipment |
|
(8,962,538 |
) |
(3,403,466 |
) | ||
Net cash used in investing activities |
|
(2,493,699 |
) |
(334,260 |
) | ||
|
|
|
|
|
| ||
Cash flows from financing activities: |
|
|
|
|
| ||
Proceeds from sale of membership units |
|
400,003 |
|
575,000 |
| ||
Cash used from repurchase of membership units or incentive units |
|
(224 |
) |
(2,825,000 |
) | ||
Borrowings term loans and notes payable |
|
81,121,670 |
|
|
| ||
Distribution to members |
|
(98,000,000 |
) |
|
| ||
Debt issuance costs |
|
(3,665,225 |
) |
|
| ||
Repayments of term loans |
|
(4,750,000 |
) |
(4,687,500 |
) | ||
Net cash used in financing activities |
|
(24,893,776 |
) |
(6,937,500 |
) | ||
Net (decrease) increase in cash and cash equivalents |
|
(9,895,255 |
) |
943,574 |
| ||
|
|
|
|
|
| ||
Cash and cash equivalents at beginning of year |
|
21,029,580 |
|
20,086,006 |
| ||
Cash and cash equivalents at end of year |
|
$ |
11,134,325 |
|
$ |
21,029,580 |
|
|
|
|
|
|
| ||
Supplemental disclosures of cash flow information: |
|
|
|
|
| ||
Cash paid for interest |
|
$ |
17,731,895 |
|
$ |
16,122,246 |
|
Cash paid for income taxes |
|
527,049 |
|
8,010,100 |
| ||
|
|
|
|
|
| ||
Supplemental disclosures of non-cash investing and financing activities: |
|
|
|
|
| ||
Fixed assets purchases in accrued liabilities/accounts payable |
|
$ |
430,157 |
|
$ |
61,146 |
|
(Payment)/Refund of taxes in restricted cash |
|
(520,691 |
) |
22,996,365 |
| ||
Change in goodwill |
|
(1,770,037 |
) |
1,266,179 |
|
The accompanying notes are an integral part of these consolidated financial statements.
CBR Holdco, LLC
Notes to the Consolidated Financial Statements
December 31, 2014 and 2013
1. The Company and Basis of Presentation
CBR Holdco, LLC (Holdco) was formed in July, 2012. Holdco, a Delaware limited liability company, is the parent of CBR Acquisition Holdings Corp (Holdings), a Delaware corporation and a wholly owned subsidiary and the parent of Cbr Systems, Inc. (CBR), a Delaware corporation and a wholly owned subsidiary (collectively, the Company). In September 2012, Holdco, through its wholly owned subsidiary, Holdings, acquired all outstanding capital stock of CBR. The financial results of CBR are included starting from September 19, 2012, the closing date of the acquisition.
The consolidated financial statements for years ended December 31, 2014 and 2013 reflects the financial results of the Company.
CBR provides services for: 1) the collection and processing of newborn stem cells from umbilical cord blood and the cryogenic storage of the cells; and 2) the collection of umbilical cord tissue and the cryogenic storage of the tissue. Umbilical cord blood and tissue are rich and diverse sources of stem cells that can be collected without ethical concerns in a ten-minute window immediately after birth. CBR believes that stem cells, which are precursors of the specialized cells that comprise the bodys immune and blood systems, are beneficial in the treatment of various cancers, immune system disorders, and genetic defects. Additionally, this population of stem cells is an increasingly sought after source for clinical research in regenerative medicine because these cells have demonstrated embryonic-like capabilities to proliferate and develop into all of the major cell types in the body, without tumor or immune response issues.
The Company is headquartered in San Bruno, California with business operations in Tucson, Arizona.
2. Summary of Significant Accounting Policies
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the useful lives of fixed assets, valuation of goodwill and purchased intangible assets, allowances for doubtful accounts, deferred tax assets, inventory valuation, and stock-based compensation.
Principles of Consolidation
The consolidated financial statements include the accounts of Holdco, Holdings, and CBR. All material intercompany balances and transactions have been eliminated.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original purchase maturity of three months or less to be cash equivalents. Cash and cash equivalents consist of cash in bank checking accounts.
Fair Value of Financial Instruments
The carrying amount of certain financial instruments, including accounts receivable, accounts payable and accrued liabilities, approximate fair value due to their relatively short maturities. The Company discloses and recognizes the fair value of its assets and liabilities using a hierarchy that prioritizes the inputs to valuations
CBR Holdco, LLC
Notes to the Consolidated Financial Statements
December 31, 2014 and 2013
techniques used to measure fair value. The hierarchy gives the highest priority to valuations based upon unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to valuations based upon unobservable inputs that are significant to the valuation (Level 3 measurements). The guidance establishes three levels of the fair value hierarchy as follows:
Level 1 Inputs that reflect unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date;
Level 2 Inputs other than quoted prices that are observable for the assets or liability either directly or indirectly, including inputs in markets that are not considered to be active;
Level 3 Inputs that are unobservable.
Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Companys assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability. See Note 12 for more information.
Accounts Receivable
Accounts receivable are recorded at the invoiced amounts and do not bear interest. The Company maintains an allowance for doubtful accounts for estimated losses inherent in its accounts receivable portfolio. In establishing the required allowance, management considers historical losses adjusted to take into account current market conditions and customers financial conditions, the amount of receivables in dispute, and the current receivables aging and current payment patterns. The Company reviews its allowance for uncollectible accounts monthly. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, restricted cash, and accounts receivable. The Company extends credit to its customers based on an evaluation of the customers financial condition, generally without requiring a deposit or collateral. Exposure to losses on receivables is principally dependent on each customers financial condition. The Company monitors its exposure for credit losses and maintains allowances for anticipated losses, as needed. Although the Company deposits its cash and cash equivalents and restricted cash with major financial institutions, its deposits, at times, may exceed federally insured limits.
Inventories
Inventories consist of cord blood collection kits and processing bags. The Company values inventories at lower of cost or market using the specific-identification method. The Company analyzes inventory levels monthly and expired inventory is disposed of and the related costs are written off. Inventory consisted of the following at December 31:
|
|
2014 |
|
2013 |
| ||
|
|
|
|
|
| ||
Raw materials |
|
$ |
4,397,743 |
|
$ |
6,345,674 |
|
Finished goods |
|
758,636 |
|
1,120,523 |
| ||
Total |
|
$ |
5,156,379 |
|
$ |
7,466,197 |
|
CBR Holdco, LLC
Notes to the Consolidated Financial Statements
December 31, 2014 and 2013
Property and Equipment
Property and equipment consists of land, building and improvements, computer equipment and software, laboratory equipment, office furniture and equipment, leasehold improvements, and construction in progress. Property and equipment are recorded at cost and are depreciated using the straight-line method based upon estimated useful lives of the assets, which are as follows:
|
|
Useful Life |
Building and improvements |
|
33 - 40 Years |
Comuter equipment and software |
|
3 - 5 Years |
Laboratory equipment |
|
3 - 7 Years |
Office furniture and equipment |
|
3 - 5 Years |
Leasehold improvements |
|
Lesser of Lease or Asset Life |
Upon sale or retirement of assets, the cost and related accumulated depreciation and amortization are removed from the balance sheet and the resulting gain or loss is recognized in the statement of operations. Maintenance and repairs are charged to operations as incurred.
Internally Developed Software
The Company capitalizes the cost of software developed for internal use in accordance with ASC Topic 350 (Statement of Position (SOP) 98-1), Intangibles Goodwill and Other. Capitalization of the costs of software developed or obtained for internal use begins at the application development phase of the project and totaled $2,443,106 and $379,395 for the years ended December 31, 2014 and 2013, respectively. Amortization of the costs of software developed for internal use begins when the assets are placed in productive use. Software currently in development is included in construction in progress.
Restricted Cash
Restricted cash at December 31, 2014 and 2013 consists of cash in money market accounts related to providing certain employees of CBR additional compensation for continuing to work for CBR, and funding a portion of the retained amount. The balance in restricted cash at December 31, 2014 totaled $30,918,827, comprising $28,459,036 related to the Retained Account, and $2,459,791 relating to the Employee Retention Account (Note 8).
Goodwill
Goodwill has an indefinite useful life and is not amortized. For the purpose of testing goodwill for impairment, the Company has determined that it has one reporting unit. The Company evaluates goodwill for impairment at least annually or whenever an event occurs or circumstances changes that would more likely than not reduce the fair value of a reporting unit below its carrying amount. If the Company determines that a quantitative analysis is necessary, the impairment test for goodwill is a two-step process. Step one consists of a comparison of the fair value of a reporting unit against its carrying amount, including the goodwill allocated to each reporting unit. The Company determines the fair value of its reporting unit based on a combination of income and market approaches. The income approach is based on the present value of estimated future cash flows of the reporting units and the market approach is based on a market multiple calculated for each business unit based on market data of other companies engaged in similar business. If the carrying amount of the reporting unit is in excess of its fair value, step two requires the comparison of the implied fair value of the reporting units goodwill against the carrying amount of the reporting units goodwill. Any excess of the carrying value of the reporting units goodwill over the implied
CBR Holdco, LLC
Notes to the Consolidated Financial Statements
December 31, 2014 and 2013
fair value of the reporting units goodwill is recorded as an impairment loss. There was no impairment of goodwill identified through December 31, 2014.
Impairment of Long-Lived Assets
Long-lived assets, such as property, plant, and equipment, and purchased intangibles subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset group to estimated undiscounted future cash flows expected to be generated by the asset group. If the carrying amount of an asset group exceeds its estimated undiscounted future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset group exceeds the fair value of the asset group. There have not been any impairments of long-lived assets through December 31, 2014.
Contingent Consideration
Contingent consideration is re-measured to its estimated fair value for each year and with the change in fair value recognized as income or expense in the Companys consolidated statements of operations. Therefore, any changes in the fair value will impact the Companys results of operations in such reporting period thereby resulting in potential variability in the Companys results until contingencies are resolved. The change in fair value for the year ended December 31, 2014 and 2013 was ($264,306) and $651,726, respectively.
Revenue Recognition
Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collection is reasonably assured. For multiple-element arrangements, the Company allocates revenue to all deliverables based on their relative selling prices.
The Company determines the selling price to be used for allocating revenue to deliverables as follows: (i) vendor specific objective evidence (VSOE), (ii) third-party evidence of selling price (TPE), and (iii) best estimate of the selling price (ESP). VSOE generally exists only when the Company sells the deliverable separately and it is the price actually charged by the Company for that deliverable. Any discounts given to the customer are allocated by applying the relative selling price method.
The Company has identified two deliverables generally contained in the arrangements involving the sale of its umbilical cord blood and/or cord tissue products. The first deliverable is associated with enrollment, including the provision of a collection kit and processing. Revenue for this deliverable is recognized after the collection and successful processing of a cord blood/cord tissue unit. The second deliverable is either the annual storage of a specimen for 18 year or lifetime storage (prepaid storage) of a specimen. The time period for the lifetime prepaid storage is assessed annually by the Company based on the average duration of life per actuarial tables for males and females. Revenue for this deliverable is recognized ratably over the length of the payment service period. The Company has allocated revenue between these deliverables using the relative selling price method. The selling price for the enrollment, collection kit and processing deliverable and the prepaid storage option are determined based on ESP because the Company does not have VSOE or TPE for these elements. The selling price for the annual storage option is determined based on VSOE as the Company has standalone renewals to support the selling price.
CBR Holdco, LLC
Notes to the Consolidated Financial Statements
December 31, 2014 and 2013
Deferred revenue includes: (1) amounts collected in advance of unit processing and (2) amounts associated with unearned storage fees collected at the beginning of the storage contract term, net of allocated discounts. Amounts not expected to be recognized within the next year are classified as long-term deferred revenue.
Shipping and Handling
The Company bills its customers a fee for the shipping of the collection kits. For the years ended December 31, 2014 and 2013, these revenues were $6,267,050 and $5,955,710, respectively, and are recorded in net revenues. The costs associated with the shipping of the collection kit are recorded in cost of services. For the years ended December 31, 2014 and 2013, these costs were $4,584,508 and $4,714,247, respectively.
Rental Revenue and Expenses
The Company owns a building in Tucson, Arizona and leases 10,000 square feet to one tenant. Rental revenue is recognized on a straight-line basis over the life of the lease agreement which was renewed in 2013 and expires December 31, 2015. Rental revenue is recorded in other revenue. Future minimum lease payments to be received total $172,124 for the year ending December 31, 2015.
Operating expenses related to the building consist of utilities, maintenance, depreciation, and building management fees. For the years ended December 31, 2014 and 2013, these costs were $282,195 and $286,845, respectively, and are recorded in selling, general, and administrative expenses in the Consolidated Statements of Operations.
Research and Development
Research and development costs are expensed as incurred and consist primarily of contracted services and other direct expenses.
Advertising Costs
The Company capitalizes costs associated with print media advertising space. The capitalized costs are amortized over their expected periods of use.
At December 31, 2014 and 2013, $248,127 and $174,334 of advertising was included in prepaid and other current assets in the accompanying balance sheets. Advertising expense was $2,170,614 and $3,017,445, respectively, for the years ending December 31, 2014 and 2013 and is included in selling, general, and administrative expenses in the Consolidated Statements of Operations.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The Company follows generally accepted accounting principles for uncertainty in income taxes. These accounting principles prescribe a comprehensive model for the recognition, measurement, presentation and
CBR Holdco, LLC
Notes to the Consolidated Financial Statements
December 31, 2014 and 2013
disclosure in the consolidated financial statements of any uncertain tax positions that have been taken or expected to be taken on a tax return. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Change recognition or measurement is reflected in the period in which the change in judgment occurs. No liabilities related to uncertain tax positions are recorded in the consolidated financial statements. It is the Companys policy to include penalties and interest expense related to income taxes as a component of income tax expense. No penalties or interest have been recorded in the consolidated financial statements.
Management Incentive Units
The Company accounts for stock-based compensation in accordance with ASC Topic 718 (SFAS No. 123R), Compensation Stock Compensation. ASC Topic 718 requires that all stock-based compensation be recognized as an expense in the financial statements and that such cost be measured at the fair value of the award.
Comprehensive Loss
The Company has no components of other comprehensive loss other than its net loss, and accordingly, the comprehensive loss is equivalent to the net loss for the years ended December 31, 2014 and 2013.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update (ASU) No. 2014-09. ASU 2014-09 provided guidance related to revenue from contracts with customers. Under this guidance, revenue is recognized when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. The updated standard will replace most existing revenue recognition guidance under GAAP when it becomes effective and permits the use of either the retrospective or cumulative effect transition method. Early adoption is not permitted. The Company has not yet selected a transition method and is currently evaluating the effect that the updated standard will have on its consolidated financial statements and related disclosures.
In August 2014, the FASB issued new guidance related to the disclosures around going concern. The new standard provides guidance around managements responsibility to evaluate whether there is substantial doubt about an entitys ability to continue as a going concern and to provide related footnote disclosures. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Companys financial statements.
Other amendments to GAAP have been issued by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Companys consolidated financial statements upon adoption.
Correction of errors
The Company recorded out of period adjustments relating to errors in the 2012 and 2013 financial statements, the effect of which was to record an increase in goodwill of $1,770,037, an increase in deferred taxes of $2,203,799, an increase in other receivables of $1,097,955, an increase in sales, general and administrative expenses of $38,310, and a corresponding increase in Retained Liability of $5,110,101. In the opinion of management, the impact of these errors is not material to the current and prior periods.
CBR Holdco, LLC
Notes to the Consolidated Financial Statements
December 31, 2014 and 2013
3. Prepaid and Other Current Assets
Prepaid and other current assets consist of the following as of December 31:
|
|
2014 |
|
2013 |
| ||
|
|
|
|
|
| ||
Income tax receivable |
|
$ |
3,463,386 |
|
$ |
3,702,692 |
|
Other receivables |
|
883,347 |
|
408,236 |
| ||
Prepaid tax deposits |
|
2,553,053 |
|
3,950,632 |
| ||
Prepaid expenses |
|
1,848,154 |
|
2,818,257 |
| ||
Prepaid and other current assets |
|
$ |
8,747,940 |
|
$ |
10,879,817 |
|
4. Property and Equipment
Property and equipment, net, consists of the following as of December 31:
|
|
2014 |
|
2013 |
| ||
|
|
|
|
|
| ||
Land |
|
$ |
700,000 |
|
$ |
700,000 |
|
Building and improvements |
|
9,549,193 |
|
7,930,000 |
| ||
Computer equipment and software |
|
21,902,699 |
|
19,380,932 |
| ||
Laboratory equipment |
|
6,092,655 |
|
5,315,297 |
| ||
Office furniture and equipment |
|
1,431,843 |
|
1,098,983 |
| ||
Leasehold improvements |
|
1,197,476 |
|
1,202,814 |
| ||
Construction in progress |
|
5,342,507 |
|
1,805,095 |
| ||
|
|
46,216,373 |
|
37,433,121 |
| ||
Less accumulated depreciation |
|
(19,905,690 |
) |
(11,292,686 |
) | ||
Property and equipment |
|
$ |
26,310,683 |
|
$ |
26,140,435 |
|
Depreciation expense totaled $8,785,472 and $8,967,580 for the years ended December 31, 2014 and 2013, respectively. The loss on disposal of assets was $436,975, which is comprised of a reduction of fixed assets of $609,443 and a reduction of accumulated depreciation of $172,468.
5. Goodwill and Other Intangible Assets
Goodwill was remeasured in 2014, as a result of the out of period adjustments described in Note 2. This had the effect of increasing the Goodwill balance from $286,236,057 in December 31, 2013 to $288,006,095 at December 31, 2014.
The Companys identifiable intangible asset classes subject to amortization, their gross carrying amount, and accumulated amortization as follows as of December 31:
CBR Holdco, LLC
Notes to the Consolidated Financial Statements
December 31, 2014 and 2013
Intangible Asset |
|
Weighted Amortization Period |
|
2014 |
|
2013 |
| ||
Trade names |
|
20 years |
|
$ |
30,090,000 |
|
$ |
30,090,000 |
|
Patents and proprietary technology |
|
10 years |
|
23,090,000 |
|
23,090,000 |
| ||
Customer relationships |
|
25 years |
|
114,910,000 |
|
114,910,000 |
| ||
Less: Accumulated amortization |
|
|
|
(40,525,657 |
) |
(23,729,367 |
) | ||
Net carrying amount |
|
|
|
$ |
127,564,343 |
|
$ |
144,360,633 |
|
The total weighted-average amortization period of the intangible assets with the finite useful lives was 22 years. The Company recorded amortization expense of $16,796,290 and $18,179,512 for the years ended December 31, 2014 and 2013, respectively.
Estimated aggregate amortization expense for future years is:
2015 |
|
$ |
15,529,059 |
|
2016 |
|
14,397,366 |
| |
2017 |
|
13,013,864 |
| |
2018 |
|
11,716,444 |
| |
2019 |
|
10,616,065 |
| |
2020 and thereafter |
|
62,291,545 |
| |
Total |
|
$ |
127,564,343 |
|
6. Term Loans and Notes Payable
In September 2012, CBR and Holdings entered into a credit agreement with lending institutions in the form of term loans totaling $150,000,000 (Term Loans) and a notes payable in the amount of $64,000,000 (Notes Payable) to fund the acquisition of CBR. The credit agreement gave CBR access to a revolving line of credit in the principal amount of $15,000,000, letters of credit and swing line loans to be used for working capital and other general corporate financing purposes.
On August 5, 2014, the Company entered into a new credit agreement with its lending institutions. The initial term loan was modified and a new term loan of $200,000,000 resulted. The notes payable was modified by increasing the balance by $19,000,000 for a total notes payable amount of $83,000,000. In addition, the new credit agreement gives CBR access to a revolving line of credit in the principal amount of $15,000,000, letters of credit and swing line loans to be used for working capital and other general corporate financing purposes.
The Term Loans were recorded at an initial carrying value of $147,112,500, net of $2,887,500 in debt discount. The debt discount is being accreted to the carrying value of the Term Loans as a non-cash interest expense utilizing the effective interest rate method over the period ending on September 2017, which was the scheduled maturity date of the Term Loans. Debt discount accreted during December 31, 2013, was $579,641. At December 31, 2013, the carrying value of the Term Loans was $142,048,785, net of $2,326,216 of unamortized debt discount.
CBR Holdco, LLC
Notes to the Consolidated Financial Statements
December 31, 2014 and 2013
The Term Loans were recorded at an initial carrying value of $198,288,821, net of $1,711,179 in debt discount. The debt discount is being accreted to the carrying value of the Term Loans as a non-cash interest expense utilizing the effective interest rate method over the period ending on August 4, 2019, which is the scheduled maturity date of the Term Loans. Debt discount accreted during December 31, 2014, was $1,229,978. At December 31, 2014, the carrying value of the Term Loans was $197,369,974, net of $1,630,026 of unamortized debt discount.
Interest expense on the Term Loans for the year ended December 31, 2013 was $8,182,138. Principal payments and the accrued interest were due and payable on a quarterly basis, starting on December 31, 2012. The quarterly payments were to range from $937,500 to $2,812,500 with a balloon payment of $111,562,500 at the maturity date. The Term Loans were to mature in September 2017 and are collateralized by a perfected security interest in, and mortgages on, substantially all the tangible and intangible assets of CBR and each guarantor. The Term Loans are unconditionally guaranteed by Holdings and each wholly-owned domestic subsidiary of Holdings as specified in the agreement. CBR may prepay the Term Loans, revolving line of credit loans and swing line loans without premium or penalties. The agreement requires mandatory prepayment of the term loans upon a certain excess of cash flow as defined in the terms of the agreement. The Term Loans require CBR to maintain certain financial and non-financial covenants. The agreement contains a material adverse change clause, as defined in the agreement, which would result in an event of default if the lender deems a material adverse change to have occurred to the Companys business and the bank may declare all obligations immediately due and payable as well as restricts payments of dividends.
Interest expense on the Term Loans for the year ended December 31, 2014 was $9,300,245. Principal payments and the accrued interest are due and payable on a quarterly basis, starting on September 30, 2014. The quarterly payments are $500,000 with a balloon payment of $190,000,000 at the maturity date. The Term Loans mature on August 4, 2019 and are collateralized by a perfected security interest in, and mortgages on, substantially all the tangible and intangible assets of CBR and each guarantor. The Term Loans are unconditionally guaranteed by Holdings and each wholly-owned domestic subsidiary of Holdings as specified in the agreement. CBR may prepay the Term Loans, revolving line of credit loans and swing line loans without premium or penalties. The agreement requires mandatory prepayment of the term loans upon a certain excess of cash flow as defined in the terms of the agreement. The Term Loans require CBR to maintain certain financial and non-financial covenants. The agreement contains a material adverse change clause, as defined in the agreement, which would result in an event of default if the lender deems a material adverse change to have occurred to the Companys business and the bank may declare all obligations immediately due and payable as well as restricts payments of dividends.
The Notes Payable are subordinated to the Term Loans and revolving line of credit (senior obligations), accrues interest at 11.75% annually and is due and payable on a quarterly basis. Interest expense on the Notes Payable for the years ended December 31, 2014 and 2013 was $8,431,349 and $7,520,000, respectively.
The Notes Payable were recorded at an initial carrying value of $80,925,738, net of $2,074,262 in debt discount. The debt discount is being accreted to the carrying value of the Notes Payable as a non-cash interest expense utilizing the effective interest rate method over the period ending in September 2020, which is the scheduled maturity date of the Notes Payable. Debt discount amortized for the years ended December 31, 2014 and 2013, was $162,690 and $112,069, respectively. At December 31, 2014 and 2013, the carrying value of the Notes Payable was $81,002,723 and $62,221,353, net of $1,997,277 and $1,778,647 of unamortized debt discount, respectively.
CBR Holdco, LLC
Notes to the Consolidated Financial Statements
December 31, 2014 and 2013
The Notes Payable require CBR to maintain certain financial and non-financial covenants. The Notes Payable are subject to a mandatory prepayment following (i) the change of control prior to the third anniversary of the closing date of the agreement at a prepayment premium, and (ii) the prepayment of senior loan obligations in connection with casualty event-repayment event as defined in the agreement. CBR is also required to make quarterly payments on the outstanding principal of the note starting September 2017 equal to the specific formula as defined in the agreement. The Note Payable matures in September 2020 and is unconditionally guaranteed by Holdings and each wholly-owned domestic subsidiary of Holdings as specified in the agreement. The agreement contains a material adverse change clause, as defined in the agreement, which would result in an event of default if the lender deems a material adverse change to have occurred to the Companys business and the bank may declare all obligations immediately due and payable as well as restricts payments of dividends.
CBR incurred issuance costs of $3,665,225, consisting primarily of investment banking, legal and other professional fees. The total issuance costs were capitalized and are being amortized as non-cash interest expense utilizing the effective interest rate method over the period ending on the scheduled maturity dates of the Term Loans and Notes Payable. Issuance costs amortized for the years ended December 31, 2014 and 2013, was $621,413 and $662,774, respectively.
As of December 31, 2014 and 2013 there were minimal short-term borrowings on the revolving line of credit, swing line loans or letters of credit. CBR is charged fees of 0.5% annually on the unutilized revolving line of credit borrowing base. The fee is due and payable on a quarterly basis, starting on December 31, 2012. Fees related to the unutilized line of credit for the years ending December 31, 2014 and 2013, were $73,125 and $76,042, respectively, and is included in interest expense in the Consolidated Statement of Operations. The revolving line of credit matures in September 2020.
As of December 31, 2014, the Company was in compliance with all debt covenants.
Future minimum payments at December 31, 2014 are:
Years ending December 31, |
|
Term Loans |
|
Notes Payable |
|
Total |
| |||
2015 |
|
$ |
13,054,924 |
|
$ |
9,752,500 |
|
$ |
22,807,424 |
|
2016 |
|
12,973,493 |
|
9,752,500 |
|
22,725,993 |
| |||
2017 |
|
12,831,868 |
|
9,752,500 |
|
22,584,368 |
| |||
2018 |
|
12,720,340 |
|
9,752,500 |
|
22,472,840 |
| |||
2019 |
|
197,290,701 |
|
9,752,500 |
|
207,043,201 |
| |||
2020 and thereafter |
|
|
|
90,027,144 |
|
90,027,144 |
| |||
Total |
|
248,871,326 |
|
138,789,644 |
|
387,660,970 |
| |||
Less: amounts representing interest |
|
(49,874,772 |
) |
(55,789,644 |
) |
(105,664,416 |
) | |||
Less: unamortized discount |
|
(1,630,026 |
) |
(1,997,277 |
) |
(3,627,303 |
) | |||
Less: current portion |
|
(1,740,700 |
) |
|
|
(1,740,700 |
) | |||
Long term portion |
|
$ |
195,625,828 |
|
$ |
81,002,723 |
|
$ |
276,628,551 |
|
CBR Holdco, LLC
Notes to the Consolidated Financial Statements
December 31, 2014 and 2013
7. Accrued Liabilities
Accrued liabilities consist of the following as of December 31:
|
|
2014 |
|
2013 |
| ||
|
|
|
|
|
| ||
Professional fees |
|
$ |
315,366 |
|
$ |
273,784 |
|
Interest |
|
30,556 |
|
197,918 |
| ||
Taxes payable |
|
23,831 |
|
502,000 |
| ||
Bonus |
|
1,682,827 |
|
1,449,859 |
| ||
Wages |
|
1,327,847 |
|
500,490 |
| ||
Other |
|
6,619,003 |
|
8,835,143 |
| ||
Accrued liabilities |
|
$ |
9,999,430 |
|
$ |
11,759,194 |
|
8. Other Current Liabilities
Other current liabilities consist of the following as of December 31:
|
|
2014 |
|
2013 |
| ||
|
|
|
|
|
| ||
Contingent consideration |
|
$ |
286,181 |
|
$ |
|
|
Retained amount |
|
35,673,120 |
|
|
| ||
Employee retention amount |
|
592,589 |
|
628,445 |
| ||
Other current liabilities |
|
$ |
36,551,890 |
|
$ |
628,445 |
|
9. Other Long Term Liabilities
Other long term liabilities consist of the following as of December 31:
|
|
2014 |
|
2013 |
| ||
|
|
|
|
|
| ||
Deferred tax liability |
|
$ |
45,837,335 |
|
$ |
58,497,167 |
|
Contingent consideration |
|
|
|
6,563,715 |
| ||
Retained amount |
|
|
|
29,095,596 |
| ||
Other long term liabilities |
|
$ |
45,837,335 |
|
$ |
94,156,478 |
|
Pursuant to the acquisition, a retained amount was established to cover expenses and potential settlements related to certain pre-acquisition contingencies and breach of general representations and warranties. The retained amount was a component of the purchase price.
The Company entered into an agreement with the selling shareholders dated December 30, 2014. The agreement addressed the following: i) finalized the amounts the Company was to remit to CBR 1.0 related to the transaction costs, NOL carry forwards, and all tax refunds, ii) accelerated the timing of these payments
CBR Holdco, LLC
Notes to the Consolidated Financial Statements
December 31, 2014 and 2013
from September 2017 to September 2015. The Company recorded a gain of $1,227,632 upon execution of this agreement.
At December 31, 2013, cash of $23,301,560 has been restricted to fund the retained amount. At December 31, 2014, cash of $28,459,036 has been restricted to fund the retained amount. The remaining cash of $7,214,084 will be transferred from the operating account in September 2015 to fund the remaining portion of the retained amounts.
10. Income Taxes
The following table summarizes the components of the Companys deferred taxes as of December 31:
|
|
2014 |
|
2013 |
| ||||||||
|
|
Current |
|
Noncurrent |
|
Current |
|
Noncurrent |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Deferred tax assets |
|
|
|
|
|
|
|
|
| ||||
Deferred Revenue |
|
$ |
277,942 |
|
$ |
4,121,282 |
|
$ |
167,796 |
|
$ |
1,500,472 |
|
Accrued liabilities |
|
1,098,142 |
|
|
|
1,218,355 |
|
|
| ||||
Allowance for doubtful accounts |
|
827,431 |
|
|
|
872,913 |
|
|
| ||||
State taxes |
|
|
|
|
|
1,061 |
|
|
| ||||
NOLs and Credits |
|
|
|
2,628,026 |
|
11,301 |
|
551,942 |
| ||||
Transaction Costs |
|
|
|
934,917 |
|
|
|
1,269,411 |
| ||||
Total deferred tax assets |
|
2,203,515 |
|
7,684,225 |
|
2,271,426 |
|
3,321,825 |
| ||||
Deferred tax liabilities |
|
|
|
|
|
|
|
|
| ||||
Accrued liabilities |
|
|
|
(227,628 |
) |
|
|
|
| ||||
State taxes |
|
(5,633 |
) |
|
|
|
|
|
| ||||
Depreciation and amortization |
|
|
|
(53,293,932 |
) |
|
|
(61,818,992 |
) | ||||
Total deferred tax liabilities |
|
(5,633 |
) |
(53,521,560 |
) |
|
|
(61,818,992 |
) | ||||
Deferred taxes, net |
|
$ |
2,197,882 |
|
$ |
(45,837,335 |
) |
$ |
2,271,426 |
|
$ |
(58,497,167 |
) |
At December 31, 2014 and 2013, the Company recorded income tax payables totaling approximately $23,831 and $502,000, respectively, in accrued liabilities, in the accompanying consolidated balance sheets.
The components of benefit from income taxes are as follows for the years ending December 31:
|
|
2014 |
|
2013 |
| ||
Current: |
|
|
|
|
| ||
Federal |
|
$ |
1,736,835 |
|
$ |
(3,118,000 |
) |
State |
|
(15,962 |
) |
3,031 |
| ||
|
|
1,720,873 |
|
(3,114,969 |
) | ||
Deferred: |
|
|
|
|
| ||
Federal |
|
(9,419,921 |
) |
(8,001,018 |
) | ||
State |
|
(962,568 |
) |
(957,857 |
) | ||
|
|
(10,382,489 |
) |
(8,958,875 |
) | ||
Total |
|
$ |
(8,661,616 |
) |
$ |
(12,073,844 |
) |
CBR Holdco, LLC
Notes to the Consolidated Financial Statements
December 31, 2014 and 2013
The total income tax expense differs from what the income tax expense would be using the federal statutory rate primarily due to state taxes and nondeductible expenses.
At December 31, 2014 and 2013, the Company had state net operating loss carry forwards of approximately $50.0 million and $50.1 million, respectively. The state net operating loss carry forwards expire in 2032.
At both December 31, 2014 and 2013, the Company had Arizona state credits of $0.4 million. The credit carry forward will expire in 2018.
The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. All tax years are open and may be subject to potential examination in one or more jurisdictions.
11. Members Equity
Under the CBR Holdco Limited Liability Company Agreement (LLC Agreement) dated September 19, 2012, the Company is authorized as the Board determines from time to time, to issue common units, which includes incentive units under the Companys Incentive Unit Plan.
Incentive Unit Plan
CBRs parent, Holdco has agreements with certain employees and board members whereby those employees and board members have been granted management incentive units. The incentive units granted are subject to a participation threshold at the grant date, based on the $10 stated value of the common units of Holdco, which increase by 8% per annum. The granted awards contain service criteria, performance criteria, or a combination thereof for vesting. Incentive units with a service condition generally vests over 5 years with 20% vesting each year. Incentive units with a performance condition vest when the annual internal rate of return exceeds 25%, and when cash outflows to investors exceeds cash inflows from investors by a multiple of 3 times.
During the years ended December 31, 2014 and 2013, a total of 423,319 (of which 323,319 included a vesting performance criteria) and 1,229,750 (including 282,000 vested immediately and 947,750 included a vesting performance criteria) incentive units were granted, respectively. At December 31, 2014 and 2013, 842,896 and 973,174 additional units are available for grant, respectively.
Stock-based compensation expense for the years ended December 31, 2014 and 2013 was $2,329,385 and $2,008,367, respectively.
The fair value of the 392,241 incentive units granted with vesting performance criteria totaled $1,583,866. At December 31, 2014 and 2013, the Company did not believe the vesting performance criteria were probable and therefore no stock-based compensation has been recorded. Once vesting performance criteria becomes probable, the amortization of the fair value will commence and be recorded as stock-based compensation.
CBR Holdco, LLC
Notes to the Consolidated Financial Statements
December 31, 2014 and 2013
The following table summarizes the incentive unit activity for the year ended December 31, 2014:
|
|
Incentive Units |
|
Weighted Average Grant |
| |
|
|
Outstanding |
|
Date Fair Value |
| |
Balance |
|
3,492,515 |
|
$ |
14,478,374 |
|
Units granted |
|
423,319 |
|
1,480,282 |
| |
Units forfeited |
|
(282,200 |
) |
(957,476 |
) | |
Units repurchased |
|
(2,800 |
) |
(10,024 |
) | |
Balance |
|
3,630,834 |
|
$ |
14,991,156 |
|
The following table summarizes the incentive unit activity for December 31, 2013:
|
|
Incentive Units |
|
Weighted Average Grant |
| |
|
|
Outstanding |
|
Date Fair Value |
| |
Balance |
|
2,367,965 |
|
$ |
10,452,485 |
|
Units granted |
|
1,229,750 |
|
4,402,505 |
| |
Units forfeited |
|
(105,200 |
) |
(376,616 |
) | |
Balance |
|
3,492,515 |
|
$ |
14,478,374 |
|
The grant date fair value of all the incentive units was $14,991,156. The fair value of the incentive units was estimated using the Option-Pricing Method (OPM). To apply the OPM, the Company calculated the various equity values, at which the sharing percentages would change among the Companys securities.
The Company estimated volatility based on the historical volatility of similar public companies stock price over a preceding period commensurate with the expected term of the incentive units. The Company estimated the expected term of the incentive units considering the timing and probabilities of a liquidity event. The risk-free interest rate for the expected term of the incentive units is based on the U.S. Treasury yield curve in effect at the time of grant.
Total future compensation cost of incentive units (without vesting performance criteria) is $7,279,590, which is expected to be recognized over a weighted average period of 5 years.
Distributions
The Board may in its discretion make distributions from time to time pursuant to the distribution priorities as set in the LLC Agreement. No incentive unit shall receive distributions until each common unit that is not an incentive unit has received an amount equal to a hypothetical yield on the aggregate unreturned capital contributions of 8% per annum, compounded quarterly. No portion of any distribution shall be made with respect to any unit that has not been issued or unvested incentive units.
Holdco shall use its reasonable best efforts to distribute to the unitholders within 15 days after the end of fiscal quarter an aggregate amount of cash to approximate the unitholders U.S federal, state and local estimated tax liability for the fiscal quarter. Holdco is required to distribute to unitholders net cash proceeds received from a public offering or a sale of the company within terms as described in the agreement.
CBR Holdco, LLC
Notes to the Consolidated Financial Statements
December 31, 2014 and 2013
Allocations
Net profit or net losses for any calendar year shall be allocated among the unitholders in such a manner that, as of the end of such calendar year, the sum of each unitholders capital account, share of minimum gain and partner nonrecourse debt minimum gain shall be equal to the respective net amounts, which would be distributed to them as if Holdco were to liquidate the assets of Holdco for an amount equal to their book value and distribute the proceeds of the liquidation. Special allocations to the unitholders capital accounts are made in the manner required by Treasury Regulation Section 1.704-2.
Repurchases
In the event of an employee separation, the co-invest units and the vested incentive units will be subject to repurchase at the Companys option. The purchase price for each co-invest unit and vested incentive unit will be the fair market value of such unit provided, however, if such separation results from employees resignation without good reason or from the Companys termination of employment with cause (as defined in the employment agreement), the purchase price for each co-invest unit will be the lesser of the employees original cost for such unit and fair market value of such unit, and the purchase price for each vested incentive unit will be $0.00.
The Company may elect to purchase all or any portion of the co-invest units and vested incentive units by delivering written notice (the Repurchase Notice) to the holder of such securities within twelve months after the separation. For the year ended December 31, 2014, 1,400 vested incentive units were repurchased for $224.
Transfer by Unitholders
No unitholder is allowed to transfer, offer or agree to transfer all or any parts of any interest in such units without the prior written consent of the Board. All Board approved unit transfers are subject to compliance with the terms of the Agreement. The transferee becomes a substitute unitholder on the date of such transfer. Consent to units transfer is not required for purchasers and investors as specified in the agreement. No transfer of any unit or economic interest is permitted if such a transfer would cause Holdco to have more than 100 partners and would create a risk that Holdco would be treated as a publicly traded partnership within the meaning of Section 7704 of the Internal Revenue Code. An additional person may be admitted as a unitholder based on Boards discretion.
Dissolution and Liquidation
Holdco shall dissolve upon the earlier of: (i) approval of the Board or the holders of the required interest or (ii) judicial dissolution or administrative dissolution of Holdco. On dissolution of Holdco, the Board shall act as liquidator or may appoint one or more representative or unitholders as liquidator. The liquidator shall sell any portion of Holdcos assets and make final distributions.
12. Fair Value of Financial Instruments
The following methods and assumptions are used to estimate the fair values of the Companys financial instruments:
CBR Holdco, LLC
Notes to the Consolidated Financial Statements
December 31, 2014 and 2013
a. Term Loans and Notes Payable
Term loans and notes payable are carried at the outstanding principal balances, net of issue discounts. The following table presents the carrying value and estimated fair value of the Companys term loans and notes payable as of December 31, 2014 and 2013:
|
|
2014 |
|
2013 |
| ||||||||
|
|
|
|
Estimated |
|
|
|
Estimated |
| ||||
|
|
Carrying Value |
|
Fair Value |
|
Carrying Value |
|
Fair Value |
| ||||
Term Loans |
|
$ |
197,366,528 |
|
$ |
165,964,273 |
|
$ |
142,048,785 |
|
$ |
130,010,574 |
|
Notes Payable |
|
81,002,723 |
|
88,116,129 |
|
62,221,353 |
|
71,985,551 |
| ||||
Totals |
|
$ |
278,369,251 |
|
$ |
254,080,402 |
|
$ |
204,270,138 |
|
$ |
201,996,125 |
|
The estimated fair values of the term loans and notes payable were based on the then-current rates available to the Company for debt of similar terms and remaining maturities and also took into consideration default and credit risk. The Company determined the estimated fair value amount by using available market information and commonly accepted valuation methodologies. The fair value of the long-term debt was categorized as Level 3 in the fair value hierarchy.
b. Assets/Liabilities Measured at Fair Value on a Recurring Basis
In the tables below, the Company has segregated all assets and liabilities that are measured at fair value on a recurring basis into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date.
|
|
December 31, 2014 |
| |||||||
|
|
Quoted prices in |
|
|
|
|
| |||
|
|
Active Markets for |
|
Significant Other |
|
Significant |
| |||
|
|
Identical |
|
Observable Inputs |
|
Unobservable |
| |||
Liabilities |
|
Items (Level 1) |
|
(Level 2) |
|
Inputs (Level 3) |
| |||
Contingent consideration |
|
$ |
|
|
$ |
|
|
$ |
286,181 |
|
|
|
December 31, 2013 |
| |||||||
|
|
Quoted prices in |
|
|
|
|
| |||
|
|
Active Markets for |
|
Significant Other |
|
Significant |
| |||
|
|
Identical |
|
Observable Inputs |
|
Unobservable |
| |||
Liabilities |
|
Items (Level 1) |
|
(Level 2) |
|
Inputs (Level 3) |
| |||
Contingent consideration |
|
$ |
|
|
$ |
|
|
$ |
6,563,715 |
|
The Company measures the fair value of its Level 3 contingent consideration liabilities based on the income approach by using expected payouts, factoring in estimated staff retention for the ERA portion. The estimated discount rate used ranged from 4.5% to 10.5%.
The following table presents the reconciliation for all assets and liabilities measured and recorded at fair value on a recurring basis using significant unobservable inputs (Level 3):
CBR Holdco, LLC
Notes to the Consolidated Financial Statements
December 31, 2014 and 2013
|
|
Contingent |
| |
Fair Value Using Level 3 Inputs |
|
Consideration |
| |
Balance at December 31, 2012 |
|
$ |
5,911,989 |
|
Change in fair value |
|
651,726 |
| |
Balance at December 31, 2013 |
|
6,563,715 |
| |
Change in fair value |
|
(264,306 |
) | |
Transfer out to retained liability |
|
(6,013,228 |
) | |
Balance at December 31, 2014 |
|
$ |
286,181 |
|
13. 401(k) Plan
The Company has a 401(k) profit sharing plan for all eligible employees and their beneficiaries. Contributions by the Company are determined by the Companys Board of Directors and are discretionary. The Company contributed $1,002,002 and $680,626 to the 401(k) profit sharing plan during 2014 and 2013, respectively.
14. Commitments and Contingencies
a. Rental Commitments
The Company leases office space under a non-cancelable operating lease. The office space lease expires in September 2017. The office space lease provides for an annual 3% increase in rent. Rent expense under the lease totaled $1,176,750 and $1,136,157 during December 31, 2014 and 2013, respectively. Future minimum lease commitments are as follows:
2015 |
|
$ |
1,029,040 |
|
2016 |
|
1,059,911 |
| |
2017 |
|
812,686 |
| |
Total |
|
$ |
2,901,637 |
|
b. Legal Matters
From time to time, in the ordinary course of business, various claims may be made against the Company. The Company is not aware of any claims that could materially affect the consolidated financial statements.
On August 8, 2014, the Company entered into a Confidential Settlement Agreement and Release. In this agreement, the Company was paid a sum of $815,000 in exchange for the mutual release of the defendants in the case and dismissal of all litigation.
CBR Holdco, LLC
Notes to the Consolidated Financial Statements
December 31, 2014 and 2013
c. Class Action
In January 2012, a class action lawsuit was commenced, naming CBR as the defendant. The plaintiffs allege that CBR breached the California Confidentiality of Medical Information Act as a result of medical records being stolen from an employees vehicle. In February 2013, Holdco presented their preliminary settlement to the court, which includes two years of credit monitoring and identity theft insurance for each class member. In February 2013, class members were also notified of the terms of the settlement. Class members were required to enroll online for credit monitoring and identity theft insurance by May 2013 and November 2013, respectively. As a result of these terms, Holdco also entered into a contract with a credit monitoring company to cover a minimum of $600,000 in credit monitoring services. Holdco believes the retained amount established at the close of acquisition of CBR will be sufficient to cover any losses that may result from this matter and thus will not have a material impact on its business or the consolidated financial statements.
d. Purchase Commitments
The Company has purchase commitments with the manufacturer of the processing bags and the collection bags. As of December 31, 2014, the Company has committed to purchase $4,866,048 worth of processing bags and collection bags through 2016.
The Company has 1 year remaining on a contract with two professional services groups that are providing guidance on marketing and a registry website, content, and tracking. The Company has committed to paying them $976,394 in 2015.
The Company has contracts with four large practice groups which provide education services to their doctors and patients. The Company has committed to paying them $92,568 per year from 2015 through 2019.
15. Related Party Transactions
The Company entered into an advisory services agreement with the Companys primary equity sponsor, GTCR, effective September 19, 2012. GTCR provides the Company financial and management consulting services in the areas of corporate strategy, budgeting for future corporate investments, acquisition and divestiture strategies and debt and equity financings.
The advisory services agreement provides that the Company pay placement fees to GTCR of 1% of the gross amount of any debt or equity financing. For the year ended December 31, 2014, the Company incurred placement fees of $783,750 which was deferred as debt issuance costs and will be amortized as non-cash interest expense utilizing the effective interest rate method over the period ending on the scheduled maturity dates of the Term Loans and Notes Payable (see Note 6). No such amounts were incurred during the year ended December 31, 2013.
The advisory services agreement provides that the Company pay a $125,000 quarterly management fee to GTCR. During each of the years ended December 31, 2014 and 2013, the Company incurred management fees of $500,000.
CBR Holdco, LLC
Notes to the Consolidated Financial Statements
December 31, 2014 and 2013
The Company also reimburses GTCR for out-of-pocket expenses incurred while providing the above professional services. During the years ended December 31, 2014 and 2013 the Company reimbursed out-of-pocket expenses to GTCR of $28,504 and $157,641, respectively.
The Company has an agreement with a firm that provides legal services. Two employees of that firm are equity investors in the Company. During the years ended December 31, 2014 and 2013 the Company paid $561,150 and $2,242,725, respectively, in fees to this firm.
On February 18, 2013, the Company entered into a Promissory Note and Pledge Agreement with an employee of the Company totaling $1,000,000. This is a term loan with a maturity date of February 18, 2020. The interest rate is 1% per annum due on the 1st day of each calendar quarter after the Date of Issuance. The loan is secured with 50,000 Co-Invest Units and 200,000 Special Incentive Units. The agreement contains a mandatory prepayments clause within 30 days of Separation with Cause, upon payment of any proceeds paid or payable to Borrower in connection with any sale, pledge or transfer of, or cash distribution with respect to, any equity of the Company or its subsidiaries, or upon any Sale of the Company or Public Offering. Borrower may prepay all or any portion of the outstanding principal at any time before the maturity date.
16. Distribution to members
On August 5, 2014, the Board of Directors declared and paid a distribution of $4.15 per common unit to all common unit holders as of August 4, 2014. The distribution paid totaled $98,000,000.
17. Subsequent Events
The Company has evaluated subsequent events from the balance sheet date through April 14, 2015, the date at which the consolidated financial statements were available to be issued.
Exhibit 99.4
Unaudited Consolidated Financial Statements of
CBR Holdco, LLC (Successor Company) as of June 30, 2015 and 2014
and for the Six Months Ended June 30, 2015 and 2014
CBR Holdco, LLC
Consolidated Balance Sheets
June 30, 2015 and 2014
(Unaudited)
|
|
2015 |
|
2014 |
| ||
Assets |
|
|
|
|
| ||
Current assets |
|
|
|
|
| ||
Cash and cash equivalents |
|
$ |
16,319,010 |
|
$ |
27,995,420 |
|
Accounts receivable, net of allowance for doubtful accounts of $2,005,469 and $2,175,981 respectively |
|
9,278,935 |
|
10,583,149 |
| ||
Inventories |
|
4,572,363 |
|
6,133,178 |
| ||
Deferred tax assets |
|
2,197,882 |
|
2,271,426 |
| ||
Restricted cash |
|
30,750,657 |
|
2,240,000 |
| ||
Prepaid and other current assets |
|
8,485,082 |
|
10,458,389 |
| ||
Total current assets |
|
71,603,929 |
|
59,681,562 |
| ||
Property and equipment, net |
|
28,205,104 |
|
24,522,665 |
| ||
Restricted cash |
|
|
|
30,771,918 |
| ||
Goodwill |
|
288,006,094 |
|
286,236,057 |
| ||
Other intangibles, net |
|
119,799,815 |
|
135,962,489 |
| ||
Other long-term assets |
|
4,311,905 |
|
3,636,044 |
| ||
Total assets |
|
$ |
511,926,847 |
|
$ |
540,810,735 |
|
Liabilities and Members Equity |
|
|
|
|
| ||
Current liabilities |
|
|
|
|
| ||
Accounts payable |
|
$ |
1,537,139 |
|
$ |
2,743,830 |
|
Accrued liabilities |
|
10,088,154 |
|
9,997,150 |
| ||
Deferred revenue |
|
31,845,116 |
|
28,465,372 |
| ||
Term loan |
|
1,706,829 |
|
6,897,536 |
| ||
Other current liabilities |
|
37,588,154 |
|
1,562,015 |
| ||
Total current liabilities |
|
82,765,392 |
|
49,665,903 |
| ||
|
|
|
|
|
| ||
Non-current liabilities |
|
|
|
|
| ||
Deferred revenue, net of current portion |
|
28,352,043 |
|
16,510,882 |
| ||
Term loan, net of current |
|
194,792,158 |
|
131,698,405 |
| ||
Notes payable |
|
81,123,013 |
|
62,292,689 |
| ||
Other long term liabilities |
|
45,458,166 |
|
86,768,839 |
| ||
Deferred rent |
|
209,066 |
|
253,283 |
| ||
Total liabilities |
|
432,699,838 |
|
347,190,001 |
| ||
|
|
|
|
|
| ||
Commitments and Contingencies (note 14) |
|
|
|
|
| ||
|
|
|
|
|
| ||
Members equity |
|
|
|
|
| ||
Common units; 45,025,336 units authorized; 23,812,488 issued and outstanding, at June 30, 2015 and 2014 |
|
138,160,906 |
|
236,160,906 |
| ||
Additional paid-in capital |
|
7,735,501 |
|
5,344,863 |
| ||
Accumulated deficit |
|
(66,669,398 |
) |
(47,885,035 |
) | ||
Total members equity |
|
79,227,009 |
|
193,620,734 |
| ||
Total liabilities and members equity |
|
$ |
511,926,847 |
|
$ |
540,810,735 |
|
The accompanying notes are an integral part of these consolidated financial statements.
CBR Holdco, LLC
Consolidated Statements of Operations
Six Months Ended June 30, 2015 and 2014
(Unaudited)
|
|
2015 |
|
2014 |
| ||
Revenues |
|
|
|
|
| ||
Net revenues |
|
$ |
58,409,362 |
|
$ |
59,674,356 |
|
Other revenue |
|
81,608 |
|
66,133 |
| ||
Total revenues |
|
58,490,970 |
|
59,740,489 |
| ||
Operating costs and expenses |
|
|
|
|
| ||
Cost of services |
|
13,494,714 |
|
13,433,930 |
| ||
Selling, general, and administrative |
|
45,183,937 |
|
49,437,510 |
| ||
Total operating costs and expenses |
|
58,678,651 |
|
62,871,440 |
| ||
Loss from operations |
|
(187,681 |
) |
(3,130,951 |
) | ||
Interest expense |
|
11,130,631 |
|
8,598,350 |
| ||
Interest income |
|
(5,118 |
) |
(24,870 |
) | ||
Other Income |
|
(29,886 |
) |
(10,844 |
) | ||
Change in fair value of contingent consideration |
|
284,057 |
|
|
| ||
Loss before benefit from income taxes |
|
(11,567,365 |
) |
(11,693,587 |
) | ||
Benefit from income taxes |
|
(379,169 |
) |
(4,153,977 |
) | ||
Net loss |
|
$ |
(11,188,196 |
) |
$ |
(7,539,610 |
) |
The accompanying notes are an integral part of these consolidated financial statements.
CBR Holdco, LLC
Consolidated Statements of Members Equity
Six Months Ended June 30, 2015 and 2014
(Unaudited)
|
|
|
|
|
|
Additional |
|
|
|
Total |
| ||||
|
|
Common units |
|
paid-in |
|
Accumulated |
|
members |
| ||||||
|
|
Units |
|
Amount |
|
capital |
|
deficit |
|
equity |
| ||||
Balances as of December 31, 2013 |
|
23,776,091 |
|
$ |
235,760,903 |
|
$ |
4,209,761 |
|
$ |
(40,345,425 |
) |
$ |
199,625,239 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Common units issued to investors for cash |
|
36,397 |
|
400,003 |
|
|
|
|
|
400,003 |
| ||||
Stock-based compensation |
|
|
|
|
|
1,135,215 |
|
|
|
1,135,215 |
| ||||
Repurchase of Incentive Units |
|
|
|
|
|
(113 |
) |
|
|
(113 |
) | ||||
Net loss |
|
|
|
|
|
|
|
(7,539,610 |
) |
(7,539,610 |
) | ||||
Balances as of June 30, 2014 |
|
23,812,488 |
|
236,160,906 |
|
5,344,863 |
|
(47,885,035 |
) |
193,620,734 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Distribution to members |
|
|
|
(98,000,000 |
) |
|
|
|
|
(98,000,000 |
) | ||||
Stock-based compensation |
|
|
|
|
|
1,194,170 |
|
|
|
1,194,170 |
| ||||
Repurchase of Incentive Units |
|
|
|
|
|
(111 |
) |
|
|
(111 |
) | ||||
Net loss |
|
|
|
|
|
|
|
(7,596,167 |
) |
(7,596,167 |
) | ||||
Balances as of December 31, 2014 |
|
23,812,488 |
|
138,160,906 |
|
6,538,922 |
|
(55,481,202 |
) |
89,218,626 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Stock-based compensation |
|
|
|
|
|
1,202,234 |
|
|
|
1,202,234 |
| ||||
Repurchase of Incentive Units |
|
|
|
|
|
(5,655 |
) |
|
|
(5,655 |
) | ||||
Net loss |
|
|
|
|
|
|
|
(11,188,196 |
) |
(11,188,196 |
) | ||||
Balances as of June 30, 2015 |
|
23,812,488 |
|
$ |
138,160,906 |
|
$ |
7,735,501 |
|
$ |
(66,669,398 |
) |
$ |
79,227,009 |
|
The accompanying notes are an integral part of these consolidated financial statements.
CBR Holdco, LLC
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2015 and 2014
(Unaudited)
|
|
2015 |
|
2014 |
| ||
Cash flows from operating activities: |
|
|
|
|
| ||
Net loss |
|
$ |
(11,188,196 |
) |
$ |
(7,539,610 |
) |
Adjustments to reconcile net loss to net cash provided by operating activities: |
|
|
|
|
| ||
Stock-based compensation |
|
1,202,234 |
|
1,135,215 |
| ||
Depreciation |
|
2,655,526 |
|
4,866,993 |
| ||
Change in fair value of contingent consideration |
|
284,057 |
|
|
| ||
Amortization of intangibles |
|
7,764,528 |
|
8,398,144 |
| ||
Loss on disposal of property and equipment |
|
878,070 |
|
8,872 |
| ||
Deferred income taxes |
|
(379,621 |
) |
(4,127,433 |
) | ||
Provision for/(recovery of) doubtful accounts |
|
110,002 |
|
(56,194 |
) | ||
Non-cash interest expense on term loans and notes payable |
|
623,332 |
|
697,154 |
| ||
Changes in assets and liabilities: |
|
|
|
|
| ||
Accounts receivable |
|
1,772,590 |
|
1,062,835 |
| ||
Inventories |
|
584,016 |
|
1,333,019 |
| ||
Prepaid expenses and other current assets |
|
240,479 |
|
(100,660 |
) | ||
Accounts payable |
|
(1,213,848 |
) |
1,092,222 |
| ||
Deferred revenue |
|
7,201,495 |
|
6,489,432 |
| ||
Accrued liabilities |
|
41,855 |
|
(1,762,044 |
) | ||
Other liabilities |
|
726,380 |
|
(2,337,563 |
) | ||
Net cash provided by operating activities |
|
11,302,899 |
|
9,160,382 |
| ||
|
|
|
|
|
| ||
Cash flows from investing activities: |
|
|
|
|
| ||
Restricted cash |
|
168,170 |
|
4,375,748 |
| ||
Purchase of property, plant, and equipment |
|
(5,280,729 |
) |
(3,220,180 |
) | ||
Net cash (used in) provided by investing activities |
|
(5,112,559 |
) |
1,155,568 |
| ||
|
|
|
|
|
| ||
Cash flows from financing activities: |
|
|
|
|
| ||
Proceeds from sale of membership units |
|
|
|
400,003 |
| ||
Cash used from repurchase of membership units or incentive units |
|
(5,655 |
) |
(113 |
) | ||
Repayments of term loans |
|
(1,000,000 |
) |
(3,750,000 |
) | ||
Net cash used in financing activities |
|
(1,005,655 |
) |
(3,350,110 |
) | ||
Net increase in cash and cash equivalents |
|
5,184,685 |
|
6,965,840 |
| ||
|
|
|
|
|
| ||
Cash and cash equivalents at beginning of period |
|
11,134,325 |
|
21,029,580 |
| ||
Cash and cash equivalents at end of period |
|
$ |
16,319,010 |
|
$ |
27,995,420 |
|
|
|
|
|
|
| ||
Supplemental disclosures of cash flow information: |
|
|
|
|
| ||
Cash paid for interest |
|
$ |
9,684,503 |
|
$ |
7,688,223 |
|
Cash paid for income taxes |
|
64,610 |
|
|
| ||
|
|
|
|
|
| ||
Supplemental disclosures of non-cash investing and financing activities: |
|
|
|
|
| ||
Fixed assets purchases in accrued liabilities/accounts payable |
|
$ |
577,444 |
|
$ |
99,062 |
|
Payments of taxes in restricted cash |
|
1,268,417 |
|
520,691 |
|
The accompanying notes are an integral part of these consolidated financial statements.
CBR Holdco, LLC
Notes to the Unaudited Consolidated Financial Statements
June 30, 2015 and 2014
1. The Company and Basis of Presentation
CBR Holdco, LLC (Holdco) was formed in July 2012. Holdco, a Delaware limited liability company, is the parent of CBR Acquisition Holdings Corp (Holdings), a Delaware corporation and a wholly owned subsidiary and the parent of Cbr Systems, Inc. (CBR), a Delaware corporation and a wholly owned subsidiary (collectively, the Company). In September 2012, Holdco, through its wholly owned subsidiary, Holdings, acquired all the outstanding capital stock of CBR.
CBR provides services for: 1) the collection and processing of newborn stem cells from umbilical cord blood and the cryogenic storage of the cells; and 2) the collection of umbilical cord tissue and the cryogenic storage of the tissue. Umbilical cord blood and tissue are rich and diverse sources of stem cells that can be collected without ethical concerns in a ten-minute window immediately after birth. CBR believes that stem cells, which are precursors of the specialized cells that comprise the bodys immune and blood systems, are beneficial in the treatment of various cancers, immune system disorders, and genetic defects. Additionally, this population of stem cells is an increasingly sought after source for clinical research in regenerative medicine because these cells have demonstrated embryonic-like capabilities to proliferate and develop into all of the major cell types in the body, without tumor or immune response issues.
The Company is headquartered in San Bruno, California with business operations in Tucson, Arizona.
2. Summary of Significant Accounting Policies
The unaudited consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States, or GAAP, for interim financial information. This financial information reflects all adjustments which are, in the opinion of our management, of a normal recurring nature and necessary for a fair statement of the results for the periods presented. The operating results for the six months ended June 30, 2015 are not necessarily indicative of the results that may be expected for the year ended December 31, 2015, or for any other future period.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the useful lives of fixed assets, valuation of goodwill and purchased intangible assets, allowances for doubtful accounts, deferred tax assets, inventory valuation, and stock-based compensation.
Principles of Consolidation
The consolidated financial statements include the accounts of Holdco, Holdings, and CBR. All material intercompany balances and transactions have been eliminated.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original purchase maturity of three months or less to be cash equivalents. Cash and cash equivalents consist of cash in bank checking accounts.
CBR Holdco, LLC
Notes to the Unaudited Consolidated Financial Statements
June 30, 2015 and 2014
Fair Value of Financial Instruments
The carrying amount of certain financial instruments, including accounts receivable, accounts payable and accrued liabilities, approximate fair value due to their relatively short maturities. The Company discloses and recognizes the fair value of its assets and liabilities using a hierarchy that prioritizes the inputs to valuations techniques used to measure fair value. The hierarchy gives the highest priority to valuations based upon unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to valuations based upon unobservable inputs that are significant to the valuation (Level 3 measurements). The guidance establishes three levels of the fair value hierarchy as follows:
Level 1 Inputs that reflect unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date;
Level 2 Inputs other than quoted prices that are observable for the assets or liability either directly or indirectly, including inputs in markets that are not considered to be active;
Level 3 Inputs that are unobservable.
Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Companys assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability. See Note 12 for more information.
Accounts Receivable
Accounts receivable are recorded at the invoiced amounts and do not bear interest. The Company maintains an allowance for doubtful accounts for estimated losses inherent in its accounts receivable portfolio. In establishing the required allowance, management considers historical losses adjusted to take into account current market conditions and customers financial conditions, the amount of receivables in dispute, and the current receivables aging and current payment patterns. The Company reviews its allowance for uncollectible accounts monthly. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, restricted cash, and accounts receivable. The Company extends credit to its customers based on an evaluation of the customers financial condition, generally without requiring a deposit or collateral. Exposure to losses on receivables is principally dependent on each customers financial condition. The Company monitors its exposure for credit losses and maintains allowances for anticipated losses, as needed. Although the Company deposits its cash and cash equivalents and restricted cash with major financial institutions, its deposits, at times, may exceed federally insured limits.
Inventories
Inventories consist of cord blood collection kits and processing bags. The Company values inventories at lower of cost or market using the specific-identification method. The Company analyzes inventory levels monthly and expired inventory is disposed of and the related costs are written off. Inventory consisted of the following at June 30:
CBR Holdco, LLC
Notes to the Unaudited Consolidated Financial Statements
June 30, 2015 and 2014
|
|
2015 |
|
2014 |
| ||
|
|
|
|
|
| ||
Raw materials |
|
$ |
3,841,625 |
|
$ |
5,634,402 |
|
Finished goods |
|
730,738 |
|
498,776 |
| ||
Total |
|
$ |
4,572,363 |
|
$ |
6,133,178 |
|
Property and Equipment
Property and equipment consists of land, building and improvements, computer equipment and software, laboratory equipment, office furniture and equipment, leasehold improvements, and construction in progress. Property and equipment are recorded at cost and are depreciated using the straight-line method based upon estimated useful lives of the assets, which are as follows:
|
|
Useful Life |
|
Building and improvements |
|
33 - 40 Years |
|
Computer equipment and software |
|
3 -5 Years |
|
Laboratory equipment |
|
3 -7 Years |
|
Office furniture and equipment |
|
3 - 5 Years |
|
Leasehold improvements |
|
Lesser of Lease or Asset Life |
|
Upon sale or retirement of assets, the cost and related accumulated depreciation and amortization are removed from the balance sheet and the resulting gain or loss is recognized in the statement of operations. Maintenance and repairs are charged to operations as incurred.
Internally Developed Software
The Company capitalizes the cost of software developed for internal use in accordance with ASC Topic 350, Intangibles Goodwill and Other. Capitalization of the costs of software developed or obtained for internal use begins at the application development phase of the project and totaled $369,472 and $277,195 for the six month ended June 30, 2015 and 2014, respectively. Amortization of the costs of software developed for internal use begins when the assets are placed in productive use. Software currently in development is included in construction in progress.
Restricted Cash
Restricted cash at June 30, 2015 and 2014 consists of cash in money market accounts related to providing certain employees of CBR additional compensation for continuing to work for CBR, and funding a portion of the retained amount. The restricted cash balance at June 30, 2015 totaled $30,750,657, comprising $28,464,330 related to the Retained Account, and $2,286,327 relating to the Employee Retention Account. The restricted cash balance at June 30, 2014 totaled $33,011,918, comprising $25,886,207 related to the Retained Account, and $7,125,711 relating to the Employee Retention Account (Notes 8 and 9).
Goodwill
Goodwill has an indefinite useful life and is not amortized. For the purpose of testing goodwill for impairment, the Company has determined that it has one reporting unit. The Company evaluates goodwill for impairment at least annually or whenever an event occurs or circumstances changes that would more likely than not reduce the fair value of a reporting unit below its carrying amount. If the Company
CBR Holdco, LLC
Notes to the Unaudited Consolidated Financial Statements
June 30, 2015 and 2014
determines that a quantitative analysis is necessary, the impairment test for goodwill is a two-step process. Step one consists of a comparison of the fair value of a reporting unit against its carrying amount, including the goodwill allocated to each reporting unit. The Company determines the fair value of its reporting unit based on a combination of income and market approaches. The income approach is based on the present value of estimated future cash flows of the reporting units and the market approach is based on a market multiple calculated for each business unit based on market data of other companies engaged in similar business. If the carrying amount of the reporting unit is in excess of its fair value, step two requires the comparison of the implied fair value of the reporting units goodwill against the carrying amount of the reporting units goodwill. Any excess of the carrying value of the reporting units goodwill over the implied fair value of the reporting units goodwill is recorded as an impairment loss. There was no impairment of goodwill identified through June 30, 2015.
Impairment of Long-Lived Assets
Long-lived assets, such as property, plant, and equipment, and purchased intangibles subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset group to estimated undiscounted future cash flows expected to be generated by the asset group. If the carrying amount of an asset group exceeds its estimated undiscounted future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset group exceeds the fair value of the asset group. There have not been any impairments of long-lived assets through June 30, 2015.
Contingent Consideration
Contingent consideration is re-measured to its estimated fair value for each year and with the change in fair value recognized as income or expense in the Companys consolidated statements of operations. Therefore, any changes in the fair value will impact the Companys results of operations in such reporting period thereby resulting in potential variability in the Companys results until contingencies are resolved. The changes in fair value for the six months ended June 30, 2015 and 2014 were $284,057 and $0, respectively.
Revenue Recognition
Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collection is reasonably assured. For multiple-element arrangements, the Company allocates revenue to all deliverables based on their relative selling prices.
The Company determines the selling price to be used for allocating revenue to deliverables as follows: (i) vendor specific objective evidence (VSOE), (ii) third-party evidence of selling price (TPE), and (iii) best estimate of the selling price (ESP). VSOE generally exists only when the Company sells the deliverable separately and it is the price actually charged by the Company for that deliverable. Any discounts given to the customer are allocated by applying the relative selling price method.
The Company has identified two deliverables generally contained in the arrangements involving the sale of its umbilical cord blood and/or cord tissue products. The first deliverable is associated with enrollment, including the provision of a collection kit and processing. Revenue for this deliverable is recognized after the collection and successful processing of a cord blood/cord tissue unit. The second deliverable is either the annual storage of a specimen for 18 year or lifetime storage (prepaid storage) of a specimen. The time period for the lifetime prepaid storage is assessed annually by the Company based on the average duration of life per actuarial tables for males and females. Revenue for this deliverable is recognized ratably over the
CBR Holdco, LLC
Notes to the Unaudited Consolidated Financial Statements
June 30, 2015 and 2014
length of the payment service period. The Company has allocated revenue between these deliverables using the relative selling price method. The selling price for the enrollment, collection kit and processing deliverable and the prepaid storage option are determined based on ESP because the Company does not have VSOE or TPE for these elements. The selling price for the annual storage option is determined based on VSOE as the Company has standalone renewals to support the selling price.
Deferred revenue includes: (1) amounts collected in advance of unit processing and (2) amounts associated with unearned storage fees collected at the beginning of the storage contract term, net of allocated discounts. Amounts not expected to be recognized within the next year are classified as long-term deferred revenue.
Shipping and Handling
The Company bills its customers a fee for the shipping of the collection kits. For the six months ended June 30, 2015 and 2014, these revenues were $2,971,260 and $3,027,530, respectively, and are recorded in net revenues. The costs associated with the shipping of the collection kit are recorded in cost of services. For the six months ended June 30, 2015 and 2014, these costs were $2,201,734 and $2,442,721, respectively.
Rental Revenue and Expenses
The Company owns a building in Tucson, Arizona and leases 10,000 square feet to one tenant. Rental revenue is recognized on a straight-line basis over the life of the lease agreement which was renewed in 2013 and expires on December 31, 2015. Rental revenue is recorded in other revenue. As of June 30, 2015, the future minimum lease payments to be received totaled $87,500 for the remaining six months ending December 31, 2015.
Operating expenses related to the building consist of utilities, maintenance, depreciation, and building management fees. For the six months ended June 30, 2015 and 2014, the operating expenses were $241,305 and $112,864, respectively, and are recorded in selling, general, and administrative expenses in the Consolidated Statements of Operations.
Research and Development
Research and development costs are expensed as incurred and consist primarily of contracted services and other direct expenses.
Advertising Costs
The Company capitalizes costs associated with print media advertising space. The capitalized costs are amortized over their expected periods of use.
As of June 30, 2015 and 2014, $141,940 and $57,305, respectively, of capitalized advertising costs were included in prepaid and other current assets on the Consolidated Balance Sheets. Advertising expenses were $649,049 and $1,273,790 for the six months ending June 30, 2015 and 2014, respectively, and are included in selling, general, and administrative expenses in the Consolidated Statements of Operations.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to
CBR Holdco, LLC
Notes to the Unaudited Consolidated Financial Statements
June 30, 2015 and 2014
apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The Company follows generally accepted accounting principles for uncertainty in income taxes. These accounting principles prescribe a comprehensive model for the recognition, measurement, presentation and disclosure in the consolidated financial statements of any uncertain tax positions that have been taken or expected to be taken on a tax return. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Change recognition or measurement is reflected in the period in which the change in judgment occurs. No liabilities related to uncertain tax positions are recorded in the consolidated financial statements. It is the Companys policy to include penalties and interest expense related to income taxes as a component of income tax expense. No penalties or interest have been recorded in the consolidated financial statements.
Management Incentive Units
The Company accounts for stock-based compensation in accordance with ASC Topic 718, Compensation Stock Compensation. ASC Topic 718 requires that all stock-based compensation be recognized as an expense in the financial statements and that such cost be measured at the fair value of the award.
Comprehensive Loss
The Company has no components of other comprehensive loss other than its net loss, and accordingly, the comprehensive loss is equivalent to the net loss for the six months ended June 30, 2015 and 2014.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update (ASU) No. 2014-09. ASU 2014-09 provided guidance related to revenue from contracts with customers. Under this guidance, revenue is recognized when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. The updated standard will replace most existing revenue recognition guidance under GAAP when it becomes effective and permits the use of either the retrospective or cumulative effect transition method. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2018 and all interim reporting periods within annual reporting periods beginning after December 15, 2019. The Company has not yet selected a transition method and is currently evaluating the effect that the updated standard will have on its consolidated financial statements and related disclosures.
In August 2014, the FASB issued new guidance related to the disclosures around going concern. The new standard provides guidance around managements responsibility to evaluate whether there is substantial doubt about an entitys ability to continue as a going concern and to provide related footnote disclosures. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Companys consolidated financial statements.
Other amendments to GAAP have been issued by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Companys consolidated financial statements upon adoption.
CBR Holdco, LLC
Notes to the Unaudited Consolidated Financial Statements
June 30, 2015 and 2014
3. Prepaid and Other Current Assets
Prepaid and other current assets consist of the following as of June 30:
|
|
2015 |
|
2014 |
| ||
|
|
|
|
|
| ||
Other receivables |
|
$ |
1,121,736 |
|
$ |
1,509,904 |
|
Prepaid tax deposits |
|
5,597,808 |
|
6,990,022 |
| ||
Prepaid expenses |
|
1,765,538 |
|
1,958,463 |
| ||
Prepaid and other current assets |
|
$ |
8,485,082 |
|
$ |
10,458,389 |
|
4. Property and Equipment, net
Property and equipment, net, consists of the following as of June 30:
|
|
2015 |
|
2014 |
| ||
|
|
|
|
|
| ||
Land |
|
$ |
700,000 |
|
$ |
700,000 |
|
Building and improvements |
|
9,611,570 |
|
7,930,000 |
| ||
Computer equipment and software |
|
19,997,011 |
|
21,015,720 |
| ||
Laboratory equipment |
|
5,558,376 |
|
5,567,752 |
| ||
Office furniture and equipment |
|
1,488,935 |
|
1,113,074 |
| ||
Leasehold improvements |
|
1,151,876 |
|
1,243,215 |
| ||
Construction in progress |
|
8,751,462 |
|
3,112,584 |
| ||
|
|
47,259,230 |
|
40,682,345 |
| ||
Less accumulated depreciation |
|
(19,054,126 |
) |
(16,159,680 |
) | ||
Property and equipment |
|
$ |
28,205,104 |
|
$ |
24,522,665 |
|
Depreciation expense totaled $2,655,526 and $4,866,993 for the six months ended June 30, 2015 and 2014, respectively. During the six months ended June 30, 2015, the loss on disposal of assets was $878,070, which is comprised of a reduction of fixed assets of $4,385,160 and a reduction of accumulated depreciation of $3,507,090. During the six months ended June 30, 2014, the loss on disposal of assets was $8,872, which is comprised of a reduction of fixed assets of $8,872 and a reduction of accumulated depreciation of $0.
5. Goodwill and Other Intangible Assets, net
The Company has intangible assets of $407,805,909 and $422,198,546 as of June 30, 2015 and 2014, respectively, including $288,006,094 and $286,236,057 of goodwill and $119,799,815 and $135,962,489 of intangible assets, respectively.
The Companys identifiable intangible asset classes subject to amortization, their gross carrying amount, and accumulated amortization as follows as of June 30:
CBR Holdco, LLC
Notes to the Unaudited Consolidated Financial Statements
June 30, 2015 and 2014
Intangible Asset |
|
Weighted Amortization Period |
|
2015 |
|
2014 |
| ||
Trade names |
|
20 years |
|
$ |
30,090,000 |
|
$ |
30,090,000 |
|
Patents and proprietary technology |
|
10 years |
|
23,090,000 |
|
23,090,000 |
| ||
Customer relationships |
|
25 years |
|
114,910,000 |
|
114,910,000 |
| ||
Less: Accumulated amortization |
|
|
|
(48,290,185 |
) |
(32,127,511 |
) | ||
Net carrying amount |
|
|
|
$ |
119,799,815 |
|
$ |
135,962,489 |
|
The total weighted-average amortization period of the intangible assets with the finite useful lives was 22 years. The Company recorded amortization expenses of $7,764,528 and $8,398,144 for the six months ended June 30, 2015 and 2014, respectively.
Estimated aggregate amortization expense for future years is:
2015, remaining six months |
|
$ |
7,764,531 |
|
2016 |
|
14,397,366 |
| |
2017 |
|
13,013,864 |
| |
2018 |
|
11,716,444 |
| |
2019 |
|
10,616,065 |
| |
2020 and thereafter |
|
62,291,545 |
| |
Total |
|
$ |
119,799,815 |
|
6. Term Loans and Notes Payable
In September 2012, CBR and Holdings entered into a credit agreement with lending institutions in the form of term loans totaling $150,000,000 (Term Loans) and a notes payable in the amount of $64,000,000 (Notes Payable) to fund the acquisition of CBR. The credit agreement gave CBR access to a revolving line of credit in the principal amount of $15,000,000, letters of credit and swing line loans to be used for working capital and other general corporate financing purposes.
The Term Loans were recorded at an initial carrying value of $147,112,500, net of $2,887,500 in debt discount. The debt discount is being accreted to the carrying value of the Term Loans as a non-cash interest expense utilizing the effective interest rate method over the period ending on September 2017, which was the scheduled maturity date of the Term Loans. Debt discount accreted during the six month ended June 30, 2014 was $297,156. At June 30, 2014, the carrying value of the Term Loans was $138,595,941, net of $2,029,059 of unamortized debt discount.
Interest expense on the Term Loans for the six months ended June 30, 2014 was $4,538,511. Principal payments and the accrued interest were due and payable on a quarterly basis, starting on December 31, 2012. The quarterly payments were to range from $937,500 to $2,812,500 with a balloon payment of $111,562,500 at the maturity date. The Term Loans were to mature in September 2017 and are collateralized by a perfected security interest in, and mortgages on, substantially all the tangible and intangible assets of CBR and each guarantor. The Term Loans are unconditionally guaranteed by Holdings and each wholly-owned domestic subsidiary of Holdings as specified in the agreement. CBR may prepay the Term Loans, revolving line of credit loans and swing line loans without premium or penalties. The agreement requires mandatory
CBR Holdco, LLC
Notes to the Unaudited Consolidated Financial Statements
June 30, 2015 and 2014
prepayment of the term loans upon a certain excess of cash flow as defined in the terms of the agreement. The Term Loans require CBR to maintain certain financial and non-financial covenants. The agreement contains a material adverse change clause, as defined in the agreement, which would result in an event of default if the lender deems a material adverse change to have occurred to the Companys business and the bank may declare all obligations immediately due and payable as well as restricts payments of dividends.
On August 5, 2014, the Company entered into a new credit agreement with its lending institutions. The initial term loan was modified and a new term loan of $200,000,000 resulted (New Term Loans). The notes payable was modified by increasing the balance by $19,000,000 for a total notes payable amount of $83,000,000. In addition, the new credit agreement gives CBR access to a revolving line of credit in the principal amount of $15,000,000, letters of credit and swing line loans to be used for working capital and other general corporate financing purposes.
The New Term Loans were recorded at an initial carrying value of $198,288,821, net of $1,711,179 in debt discount. The debt discount is being accreted to the carrying value of the New Term Loans as a non-cash interest expense utilizing the effective interest rate method over the period ending on August 4, 2019, which is the scheduled maturity date of the New Term Loans. Debt discount accreted during the six months ended June 30, 2015 was $132,458. At June 30, 2015, the carrying value of the New Term Loans was $196,498,987, net of $1,501,013 of unamortized debt discount.
Interest expense on the New Term Loans for the six months ended June 30, 2015 was $5,495,799. Principal payments and the accrued interest are due and payable on a quarterly basis, starting on September 30, 2014. The quarterly payments are $500,000 with a balloon payment of $190,000,000 at the maturity date. The New Term Loans mature on August 4, 2019 and are collateralized by a perfected security interest in, and mortgages on, substantially all the tangible and intangible assets of CBR and each guarantor. The New Term Loans are unconditionally guaranteed by Holdings and each wholly-owned domestic subsidiary of Holdings as specified in the agreement. CBR may prepay the New Term Loans, revolving line of credit loans and swing line loans without premium or penalties. The agreement requires mandatory prepayment of the term loans upon a certain excess of cash flow as defined in the terms of the agreement. The New Term Loans require CBR to maintain certain financial and non-financial covenants. The agreement contains a material adverse change clause, as defined in the agreement, which would result in an event of default if the lender deems a material adverse change to have occurred to the Companys business and the bank may declare all obligations immediately due and payable as well as restricts payments of dividends.
The Notes Payable are subordinated to the New Term Loans and revolving line of credit (senior obligations), accrues interest at 11.75% annually and is due and payable on a quarterly basis. Interest expense on the Notes Payable for the six months ended June 30, 2015 and 2014 was $4,836,171 and $3,846,906, respectively.
The Notes Payable were recorded at an initial carrying value of $80,925,738, net of $2,074,262 in debt discount. The debt discount is being accreted to the carrying value of the Notes Payable as a non-cash interest expense utilizing the effective interest rate method over the period ending in September 2020, which is the scheduled maturity date of the Notes Payable. Debt discount amortized during the six months ended June 30, 2015 and 2014, were $120,290 and $71,336, respectively. At June 30, 2015 and 2014, the carrying value of the Notes Payable were $81,123,013 and $62,292,689, net of $1,876,987 and $1,707,311, respectively, of unamortized debt discount.
CBR Holdco, LLC
Notes to the Unaudited Consolidated Financial Statements
June 30, 2015 and 2014
The Notes Payable require CBR to maintain certain financial and non-financial covenants. The Notes Payable are subject to a mandatory prepayment following (i) the change of control prior to the third anniversary of the closing date of the agreement at a prepayment premium, and (ii) the prepayment of senior loan obligations in connection with casualty event-repayment event as defined in the agreement. CBR is also required to make quarterly payments on the outstanding principal of the note starting September 2017 equal to the specific formula as defined in the agreement. The Note Payable matures in September 2020 and is unconditionally guaranteed by Holdings and each wholly-owned domestic subsidiary of Holdings as specified in the agreement. The agreement contains a material adverse change clause, as defined in the agreement, which would result in an event of default if the lender deems a material adverse change to have occurred to the Companys business and the bank may declare all obligations immediately due and payable as well as restricts payments of dividends.
CBR incurred issuance costs of $3,665,225, consisting primarily of investment banking, legal and other professional fees. The total issuance costs were capitalized and are being amortized as non-cash interest expense utilizing the effective interest rate method over the period ending on the scheduled maturity dates of the Term Loans and Notes Payable. Issuance costs amortized during the six months ended June 30, 2015 and 2014 were $348,204 and $328,663, respectively.
As of June 30, 2015 and 2014, there were minimal short-term borrowings on the revolving line of credit, swing line loans or letters of credit. CBR is charged fees of 0.5% annually on the unutilized revolving line of credit borrowing base. The fee is due and payable on a quarterly basis, starting on December 31, 2012. Fees related to the unutilized line of credit for the six months ended June 30, 2015 and 2014 were $37,708, and is included in interest expense in the Consolidated Statement of Operations. The revolving line of credit matures in September 2020.
As of June 30, 2015, the Company was in compliance with all debt covenants.
Future minimum payments at June 30, 2015 are:
Years ending December 31, |
|
Term Loans |
|
Notes Payable |
|
Total |
| |||
2015, remaining six months |
|
$ |
6,558,973 |
|
$ |
4,916,328 |
|
$ |
11,475,301 |
|
2016 |
|
12,973,493 |
|
9,752,500 |
|
22,725,993 |
| |||
2017 |
|
12,831,868 |
|
9,752,500 |
|
22,584,368 |
| |||
2018 |
|
12,720,340 |
|
9,752,500 |
|
22,472,840 |
| |||
2019 |
|
197,290,701 |
|
9,752,500 |
|
207,043,201 |
| |||
2020 and thereafter |
|
|
|
90,027,144 |
|
90,027,144 |
| |||
Total |
|
242,375,375 |
|
133,953,472 |
|
376,328,847 |
| |||
Less: amounts representing interest |
|
(44,375,375 |
) |
(50,953,472 |
) |
(95,328,847 |
) | |||
Less: unamortized discount |
|
(1,501,013 |
) |
(1,876,987 |
) |
(3,378,000 |
) | |||
Less: current portion |
|
(1,706,829 |
) |
|
|
(1,706,829 |
) | |||
Long term portion |
|
$ |
194,792,158 |
|
$ |
81,123,013 |
|
$ |
275,915,171 |
|
CBR Holdco, LLC
Notes to the Unaudited Consolidated Financial Statements
June 30, 2015 and 2014
7. Accrued Liabilities
Accrued liabilities consist of the following as of June 30:
|
|
2015 |
|
2014 |
| ||
|
|
|
|
|
| ||
Professional fees |
|
$ |
289,554 |
|
$ |
215,840 |
|
Interest |
|
49,361 |
|
2,228,824 |
| ||
Taxes payable |
|
160,813 |
|
136,081 |
| ||
Bonus |
|
609,601 |
|
995,871 |
| ||
Wages |
|
1,237,194 |
|
1,070,694 |
| ||
Accrued expenses |
|
7,741,631 |
|
5,349,840 |
| ||
Accrued liabilities |
|
$ |
10,088,154 |
|
$ |
9,997,150 |
|
8. Other Current Liabilities
Other current liabilities consist of the following as of June 30:
|
|
2015 |
|
2014 |
| ||
|
|
|
|
|
| ||
Contingent consideration |
|
$ |
570,238 |
|
$ |
|
|
Retained amount |
|
35,678,413 |
|
|
| ||
Employee retention amount |
|
1,339,503 |
|
1,562,015 |
| ||
Other current liabilities |
|
$ |
37,588,154 |
|
$ |
1,562,015 |
|
9. Other Long Term Liabilities
Other long term liabilities consist of the following as of June 30:
|
|
2015 |
|
2014 |
| ||
|
|
|
|
|
| ||
Deferred tax liability |
|
$ |
45,458,166 |
|
$ |
54,369,708 |
|
Contingent consideration |
|
|
|
6,563,715 |
| ||
Retained amount |
|
|
|
25,835,416 |
| ||
Other long term liabilities |
|
$ |
45,458,166 |
|
$ |
86,768,839 |
|
Pursuant to the acquisition, a retained amount was established to cover expenses and potential settlements related to certain pre-acquisition contingencies and breach of general representations and warranties. The retained amount was a component of the purchase price.
At June 30, 2014, cash of $25,886,207 has been restricted to fund the retained amount. At June 30, 2015, cash of $28,464,330 has been restricted to fund the retained amount. An additional $7,214,083 will be transferred from the operating account in September 2015 to fund the remaining portion of the retained amounts.
CBR Holdco, LLC
Notes to the Unaudited Consolidated Financial Statements
June 30, 2015 and 2014
10. Income Taxes
At June 30, 2015 and 2014, the Company recorded income tax payables totaling approximately $160,813 and $136,081, respectively, in accrued liabilities, on the Consolidated Balance Sheets.
The total income tax expense differs from what the income tax expense would be using the federal statutory rate primarily due to state taxes and nondeductible expenses.
At June 30, 2015 and 2014, the Company had state net operating loss carry forwards of approximately $44.8 million and $49.7 million, respectively. The state net operating loss carry forwards expire in 2021.
At June 30, 2015 and 2014, the Company had Arizona state credits of $0.4 million. The credit carry forward will expire in 2016.
The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. All tax years are open and may be subject to potential examination in one or more jurisdictions.
11. Members Equity
Under the CBR Holdco Limited Liability Company Agreement (LLC Agreement) dated September 19, 2012, the Company is authorized as the Board determines from time to time, to issue common units, which includes incentive units under the Companys Incentive Unit Plan.
Incentive Unit Plan
CBRs parent, Holdco has agreements with certain employees and board members whereby those employees and board members have been granted management incentive units. The incentive units granted are subject to a participation threshold at the grant date, based on the $10 stated value of the common units of Holdco, which increase by 8% per annum. The granted awards contain service criteria, performance criteria, or a combination thereof for vesting. Incentive units with a service condition generally vests over 5 years with 20% vesting each year. Incentive units with a performance condition vest when the annual internal rate of return exceeds 25%, and when cash outflows to investors exceeds cash inflows from investors by a multiple of 3 times.
Stock-based compensation expenses for the six months ended June 30, 2015 and 2014 were $1,202,234 and $1,135,215, respectively.
The fair value of the 392,241 incentive units granted with vesting performance criteria totaled $1,583,866. At June 30, 2015 and 2014, the Company did not believe the vesting performance criteria were probable and therefore no stock-based compensation has been recorded. Once vesting performance criteria becomes probable, the amortization of the fair value will commence and be recorded as stock-based compensation.
Distributions
The Board may in its discretion make distributions from time to time pursuant to the distribution priorities as set in the LLC Agreement. No incentive unit shall receive distributions until each common unit that is not an incentive unit has received an amount equal to a hypothetical yield on the aggregate unreturned capital
CBR Holdco, LLC
Notes to the Unaudited Consolidated Financial Statements
June 30, 2015 and 2014
contributions of 8% per annum, compounded quarterly. No portion of any distribution shall be made with respect to any unit that has not been issued or unvested incentive units.
Holdco shall use its reasonable best efforts to distribute to the unitholders within 15 days after the end of fiscal quarter an aggregate amount of cash to approximate the unitholders U.S federal, state and local estimated tax liability for the fiscal quarter. Holdco is required to distribute to unitholders net cash proceeds received from a public offering or a sale of the company within terms as described in the agreement.
Allocations
Net profit or net losses for any calendar year shall be allocated among the unitholders in such a manner that, as of the end of such calendar year, the sum of each unitholders capital account, share of minimum gain and partner nonrecourse debt minimum gain shall be equal to the respective net amounts, which would be distributed to them as if Holdco were to liquidate the assets of Holdco for an amount equal to their book value and distribute the proceeds of the liquidation. Special allocations to the unitholders capital accounts are made in the manner required by Treasury Regulation Section 1.704-2.
Repurchases
In the event of an employee separation, the co-invest units and the vested incentive units will be subject to repurchase at the Companys option. The purchase price for each co-invest unit and vested incentive unit will be the fair market value of such unit provided, however, if such separation results from employees resignation without good reason or from the Companys termination of employment with cause (as defined in the employment agreement), the purchase price for each co-invest unit will be the lesser of the employees original cost for such unit and fair market value of such unit, and the purchase price for each vested incentive unit will be $0.
The Company may elect to purchase all or any portion of the co-invest units and vested incentive units by delivering written notice (the Repurchase Notice) to the holder of such securities within twelve months after the separation. For the six months ended June 30, 2015, 5,460 vested incentive units were repurchased for $5,655.
Transfer by Unitholders
No unitholder is allowed to transfer, offer or agree to transfer all or any parts of any interest in such units without the prior written consent of the Board. All Board approved unit transfers are subject to compliance with the terms of the Agreement. The transferee becomes a substitute unitholder on the date of such transfer. Consent to units transfer is not required for purchasers and investors as specified in the agreement. No transfer of any unit or economic interest is permitted if such a transfer would cause Holdco to have more than 100 partners and would create a risk that Holdco would be treated as a publicly traded partnership within the meaning of Section 7704 of the Internal Revenue Code. An additional person may be admitted as a unitholder based on Boards discretion.
Dissolution and Liquidation
Holdco shall dissolve upon the earlier of: (i) approval of the Board or the holders of the required interest or (ii) judicial dissolution or administrative dissolution of Holdco. On dissolution of Holdco, the Board shall
CBR Holdco, LLC
Notes to the Unaudited Consolidated Financial Statements
June 30, 2015 and 2014
act as liquidator or may appoint one or more representative or unitholders as liquidator. The liquidator shall sell any portion of Holdcos assets and make final distributions.
12. Fair Value of Financial Instruments
The following methods and assumptions are used to estimate the fair values of the Companys financial instruments:
a. Term Loans and Notes Payable
Term loans and notes payable are carried at the outstanding principal balances, net of issue discounts. The following table presents the carrying value and estimated fair value of the Companys term loans and notes payable as of June 30, 2015 and 2014:
|
|
2015 |
|
2014 |
| ||||||||
|
|
|
|
Estimated |
|
|
|
Estimated |
| ||||
|
|
Carrying Value |
|
Fair Value |
|
Carrying Value |
|
Fair Value |
| ||||
Term Loans |
|
$ |
196,498,987 |
|
$ |
168,429,024 |
|
$ |
138,595,941 |
|
$ |
128,539,097 |
|
Notes Payable |
|
81,123,013 |
|
87,979,991 |
|
62,292,689 |
|
68,140,994 |
| ||||
Totals |
|
$ |
277,622,000 |
|
$ |
256,409,015 |
|
$ |
200,888,630 |
|
$ |
196,680,091 |
|
The estimated fair values of the term loans and notes payable were based on the then-current rates available to the Company for debt of similar terms and remaining maturities and also took into consideration default and credit risk. The Company determined the estimated fair value amount by using available market information and commonly accepted valuation methodologies. The fair value of the long-term debt was categorized as Level 3 in the fair value hierarchy.
b. Assets/Liabilities Measured at Fair Value on a Recurring Basis
In the tables below, the Company has segregated all assets and liabilities that are measured at fair value on a recurring basis into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date.
CBR Holdco, LLC
Notes to the Unaudited Consolidated Financial Statements
June 30, 2015 and 2014
|
|
June 30, 2015 |
| |||||||
|
|
Quoted prices in |
|
|
|
|
| |||
|
|
Active Markets for |
|
Significant Other |
|
Significant |
| |||
|
|
Identical |
|
Observable Inputs |
|
Unobservable |
| |||
Liabilities |
|
Items (Level 1) |
|
(Level 2) |
|
Inputs (Level 3) |
| |||
Contingent consideration |
|
$ |
|
|
$ |
|
|
$ |
570,238 |
|
|
|
June 30, 2014 |
| |||||||
|
|
Quoted prices in |
|
|
|
|
| |||
|
|
Active Markets for |
|
Significant Other |
|
Significant |
| |||
|
|
Identical |
|
Observable Inputs |
|
Unobservable |
| |||
Liabilities |
|
Items (Level 1) |
|
(Level 2) |
|
Inputs (Level 3) |
| |||
Contingent consideration |
|
$ |
|
|
$ |
|
|
$ |
6,563,715 |
|
The Company measures the fair value of its Level 3 contingent consideration liabilities based on the income approach by using expected payouts, factoring in estimated staff retention for the ERA portion. The estimated discount rate used ranged from 4.5% to 10.5%.
The following table presents the reconciliation for all assets and liabilities measured and recorded at fair value on a recurring basis using significant unobservable inputs (Level 3):
|
|
Contingent |
| |
Fair Value Using Level 3 Inputs |
|
Consideration |
| |
Balance at December 31, 2013 |
|
$ |
6,563,715 |
|
Change in fair value |
|
|
| |
Balance at June 30, 2014 |
|
6,563,715 |
| |
Change in fair value |
|
(264,306 |
) | |
Transfer out to retained liability |
|
(6,013,228 |
) | |
Balance at December 31, 2014 |
|
286,181 |
| |
Change in fair value |
|
284,057 |
| |
Balance at June 30, 2015 |
|
$ |
570,238 |
|
13. 401(k) Plan
The Company has a 401(k) profit sharing plan for all eligible employees and their beneficiaries. Contributions by the Company are determined by the Companys Board of Directors and are discretionary. The Company contributed $430,479 and $409,359 to the 401(k) profit sharing plan during the six months ended June 30, 2015 and 2014, respectively.
CBR Holdco, LLC
Notes to the Unaudited Consolidated Financial Statements
June 30, 2015 and 2014
14. Commitments and Contingencies
a. Rental Commitments
The Company leases office space under a non-cancelable operating lease. The office space lease expires in September 2017. The office space lease provides for an annual 3% increase in rent. Rent expense under the lease totaled $484,863 and $575,668 during the six months ended June 30, 2015 and 2014, respectively. Future minimum lease commitments are as follows:
2015, remaining six months |
|
$ |
518,350 |
|
2016 |
|
1,059,911 |
| |
2017 |
|
812,686 |
| |
Total |
|
$ |
2,390,947 |
|
b. Legal Matters
From time to time, in the ordinary course of business, various claims may be made against the Company. The Company is not aware of any claims that could materially affect the consolidated financial statements.
On August 8, 2014, the Company entered into a Confidential Settlement Agreement and Release. In this agreement, the Company was paid a sum of $815,000 in exchange for the mutual release of the defendants in the case and dismissal of all litigation.
c. Class Action
In January 2012, a class action lawsuit was commenced, naming CBR as the defendant. The plaintiffs allege that CBR breached the California Confidentiality of Medical Information Act as a result of medical records being stolen from an employees vehicle. In February 2013, Holdco presented their preliminary settlement to the court, which includes two years of credit monitoring and identity theft insurance for each class member. In February 2013, class members were also notified of the terms of the settlement. Class members were required to enroll online for credit monitoring and identity theft insurance by May 2013 and November 2013, respectively. As a result of these terms, Holdco also entered into a contract with a credit monitoring company to cover a minimum of $600,000 in credit monitoring services. Holdco believes the retained amount established at the close of acquisition of CBR will be sufficient to cover any losses that may result from this matter and thus will not have a material impact on its business or the consolidated financial statements.
d. Purchase Commitments
The Company has purchase commitments with the manufacturer of the processing bags and the collection bags. As of June 30, 2015, the Company has committed to purchase $3,649,536 worth of processing bags and collection bags through 2016.
The Company has one year remaining on a contract with two professional services groups that are providing guidance on marketing and a registry website, content, and tracking. As of June 30, 2015, the
CBR Holdco, LLC
Notes to the Unaudited Consolidated Financial Statements
June 30, 2015 and 2014
Company has committed to paying $420,000 during the remaining six months ended December 31, 2015.
The Company has contracts with four large practice groups which provide education services to their doctors and patients. The Company has committed to paying them $92,568 per year from 2015 through 2019.
15. Related Party Transactions
The Company entered into an advisory services agreement with the Companys primary equity sponsor, GTCR, effective September 19, 2012. GTCR provides the Company financial and management consulting services in the areas of corporate strategy, budgeting for future corporate investments, acquisition and divestiture strategies and debt and equity financings.
The advisory services agreement provides that the Company pay placement fees to GTCR of 1% of the gross amount of any debt or equity financing. For the six months ended June 30, 2015 and 2004, the Company incurred placement fees of $783,750 and $0 which was deferred as debt issuance costs and will be amortized as non-cash interest expense utilizing the effective interest rate method over the period ending on the scheduled maturity dates of the Term Loans and Notes Payable (Note 6).
The advisory services agreement provides that the Company pay a $125,000 quarterly management fee to GTCR. During the six months ended June 30, 2015 and 2014, the Company incurred management fees of $250,000.
The Company also reimburses GTCR for out-of-pocket expenses incurred while providing the above professional services. During the six months ended June 30, 2015 and 2014 the Company reimbursed out-of-pocket expenses to GTCR of $17,135 and $23,984, respectively.
The Company has an agreement with a firm that provides legal services. Two employees of that firm are equity investors in the Company. During the six months ended June 30, 2015 and 2014 the Company paid $35,132 and $343,121, respectively, in fees to this firm.
On February 18, 2013, the Company entered into a Promissory Note and Pledge Agreement with an employee of the Company totaling $1,000,000. This is a term loan with a maturity date of February 18, 2020. The interest rate is 1% per annum due on the 1st day of each calendar quarter after the Date of Issuance. The loan is secured with 50,000 Co-Invest Units and 200,000 Special Incentive Units. The agreement contains a mandatory prepayments clause within 30 days of Separation with Cause, upon payment of any proceeds paid or payable to Borrower in connection with any sale, pledge or transfer of, or cash distribution with respect to, any equity of the Company or its subsidiaries, or upon any Sale of the Company or Public Offering. Borrower may prepay all or any portion of the outstanding principal at any time before the maturity date.
16. Subsequent Events
On June 29, 2015, the Company entered into a definitive agreement to be acquired by a specialty pharmaceutical company.
CBR Holdco, LLC
Notes to the Unaudited Consolidated Financial Statements
June 30, 2015 and 2014
In July 2015, the Company paid down $12.0 million on the term loan balance.
The Company has evaluated subsequent events from the balance sheet date through July 28, 2015, the date at which the consolidated financial statements were available to be issued.
Exhibit 99.5
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF CBR
The following information should be read in conjunction with the consolidated financial statements and related notes thereto included in this Current Report on Form 8-K. Among other things, those historical financial statements include more detailed information regarding the basis of presentation for the financial data than included in the following discussion. This discussion contains forward-looking statements about CBRs business, operations and industry that involve risks and uncertainties, such as statements regarding CBRs plans, objectives, expectations and intentions. CBRs future results and financial condition may differ materially from those currently anticipated by CBR as a result of the factors described or incorporated by reference in the sections entitled Risk Factors set forth in AMAGs most recent Quarterly Report on Form 10-Q.
Overview
CBR is the largest private umbilical cord blood stem cell bank in the world. It offers pregnant women and their families the ability to collect, process and cryogenically preserve newborn umbilical cord blood and tissue stem cell units. CBR also partners with leading academic institutions that conduct clinical trials focused on evaluating the use of stem cells for regenerative medicine applications in diseases and conditions that have no cure today.
CBRs cord blood banking services include collection, processing and storage of both cord blood and cord tissue (the CBR Services). CBR processes the collected blood and/or tissue and long-term cryopreserves the stem cells contained in cord blood and tissue. CBR is partnered with institutions on seven FDA-regulated clinical trials, four of which are active and recruiting participants. Currently, CBR provides cord blood stem cells for FDA-regulated clinical trials on treatments for cerebral palsy, autism, acquired hearing loss and pediatric stroke.
CBR directly markets to pregnant women and their families through social media and electronic marketing, and believes that it reaches approximately two million pregnant women each year. CBR also utilizes its consumer sales team to develop customer referrals from its existing base of over 350,000 families. CBR has a team of inside tele-sales representatives who are dedicated to a direct-to-consumer approach based off of CBRs electronic marketing lead generation and qualification expertise. CBR additionally employs approximately 50 field sales representatives focused on calling on approximately 8,000 obstetricians in the United States.
CBR is headquartered in San Bruno, California with business operations in Tucson, Arizona.
Critical Accounting Policies
CBR defines critical accounting policies as those that are important to the portrayal of its financial condition and results of operations and require estimates and assumptions based on CBRs judgment of changing market conditions and the performance of its assets and liabilities at any given time. In determining which accounting policies meet this definition, CBR considered its policies with respect to the valuation of its assets and liabilities and estimates and assumptions used in determining those valuations. CBR 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:
· Revenue recognition
· Accounts Receivable
· Inventories
· Property and Equipment
· Goodwill
Revenue Recognition
Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collection is reasonably assured. For multiple-element arrangements, CBR allocates revenue to all deliverables based on their relative selling prices.
CBR determines the selling price to be used for allocating revenue to deliverables as follows: (i) vendor specific objective evidence (VSOE), (ii) third-party evidence of selling price (TPE), and (iii) best estimate of the selling price (ESP). VSOE generally exists only when CBR sells the deliverable separately and it is the price actually charged for that deliverable. Any discounts given to the customer are allocated by applying the relative selling price method.
CBR has identified two deliverables generally contained in the arrangements involving the sale of its umbilical cord blood and/or cord tissue products. The first deliverable is associated with enrollment, including the provision of a collection kit and processing. Revenue for this deliverable is recognized after the collection and successful processing of a cord blood/cord tissue unit. The second deliverable is either the annual storage of a specimen for 18 year or lifetime storage (prepaid storage) of a specimen. The time period for the lifetime prepaid storage is assessed annually based on the life expectancy actuarial tables for males and females derived from the United States Social Security Administration. Revenue for this deliverable is recognized ratably over the length of the payment service period. CBR has allocated revenue between these deliverables using the relative selling price method. The selling price for the enrollment, collection kit and processing deliverable and the prepaid storage option are determined based on ESP because CBR does not have VSOE or TPE for these elements. The selling price for the annual storage option is determined based on VSOE as CBR has standalone renewals to support the selling price.
Deferred revenue includes: (i) amounts collected in advance of unit processing and (ii) amounts associated with unearned storage fees collected at the beginning of the storage contract term, net of allocated discounts. Amounts not expected to be recognized within the next year are classified as long-term deferred revenue.
Accounts Receivable
Accounts receivable are recorded at the invoiced amounts and do not bear interest. CBR maintains an allowance for doubtful accounts for estimated losses inherent in its accounts receivable portfolio. In establishing the required allowance, management considers historical losses adjusted to take into account current market conditions and customers financial conditions, the amount of receivables in dispute, and the current receivables aging and current payment patterns. CBR reviews its allowance for uncollectible accounts monthly. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.
Inventories
Inventories consist of cord blood collection kits and processing bags. CBR values inventories at lower of cost or market using the specific-identification method. CBR analyzes inventory levels monthly and expired inventory is disposed of and the related costs are written off. Inventory consisted of the following at December 31:
|
|
2014 |
|
2013 |
| ||
|
|
|
|
|
| ||
Raw materials |
|
$ |
4,397,743 |
|
$ |
6,345,674 |
|
Finished goods |
|
758,636 |
|
1,120,523 |
| ||
|
|
|
|
|
| ||
Total |
|
$ |
5,156,379 |
|
$ |
7,466,197 |
|
Property and Equipment
Property and equipment consists of land, building and improvements, computer equipment and software, laboratory equipment, office furniture and equipment, leasehold improvements, and construction in progress. Property and equipment are recorded at cost and are depreciated using the straight-line method based upon estimated useful lives of the assets, which are as follows:
|
|
Useful Life |
Building and improvements |
|
33 - 40 Years |
Computer equipment and software |
|
3 - 5 Years |
Laboratory equipment |
|
3 - 7 Years |
Office furniture and equipment |
|
3 - 5 Years |
Leasehold improvements |
|
Lesser of Lease or Asset Life |
Upon sale or retirement of assets, the cost and related accumulated depreciation and amortization are removed from the balance sheet and the resulting gain or loss is recognized in the statement of operations. Maintenance and repairs are charged to operations as incurred.
Goodwill
Goodwill has an indefinite useful life and is not amortized. For the purpose of testing goodwill for impairment, CBR has determined that it has one reporting unit. CBR evaluates goodwill for impairment at least annually or whenever an event occurs or circumstances changes that would more likely than not reduce the fair value of a reporting unit below its carrying amount. If CBR determines that a quantitative analysis is necessary, the impairment test for goodwill is a two-step process. Step one consists of a comparison of the fair value of a reporting unit against its carrying amount, including the goodwill allocated to each reporting unit. CBR determines the fair value of its reporting unit based on a combination of income and market approaches. The income approach is based on the present value of estimated future cash flows of the reporting units and the market approach is based on a market multiple calculated for each business unit based on market data of other companies engaged in similar business. If the carrying amount of the reporting unit is in excess of its fair value, step two requires the comparison of the implied fair value of the reporting units goodwill against the carrying amount of the reporting units goodwill. Any excess of the carrying value of the reporting units goodwill over the implied fair value of the reporting units goodwill is recorded as an impairment loss. There was no impairment of goodwill identified through June 30, 2015.
Results of Operations
Six Months Ended June 30, 2015 Compared To the Six Months Ended June 30, 2014
Revenue. For the six months ended June 30, 2015, revenues decreased $1.2 million, or 2.0%, to $58.5 million from $59.7 million for the six months ended June 30, 2014. Revenues are generated primarily from (i) processing fees for cord blood and cord tissue and (ii) storage fees from cord blood and cord tissue. The decrease in revenue was primarily attributable to a change in the mix of total units processed and reduced average processing prices during the six months ended June 30, 2015 compared to the corresponding period in 2014, partially offset by increased storage fees. The reduction in average cord blood processing price was attributable to a measured reduction of upfront fees for the collection and processing of cord blood in order to make CBRs services affordable for more pregnant couples. The increase in storage fees was attributable to the additional cord blood and cord tissue units placed in storage over the preceding twelve months and increased storage pricing.
Cost of Services. Cost of services increased by $0.1 million or 0.7%, to $13.5 million for the six months ended June 30, 2015 from $13.4 million for the six months ended June 30, 2014. Cost of services includes transportation of the umbilical cord blood and cord tissue from the hospital, direct material plus labor costs for processing and cryogenic storage and collection kit materials. The increase in cost of services was primarily attributable to inflationary increases in collection kit and labor costs.
Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased $4.2 million, or 8.5%, to $45.2 million for the six months ended June 30, 2015 from $49.4 million for the six months ended June 30, 2014. Selling, general and administrative expenses primarily relate to marketing and advertising, professional services, clinical consulting services and associated programs, facility related expenses, including utilities, and wages for personnel. The decrease in selling, general and administrative expenses was primarily
attributable to lower depreciation, amortization and selling expenses, partially offset by increased advisory board expenses.
Interest Expense. Interest expense increased $2.5 million, or 29.1%, during the six months ended June 30, 2015 compared to the corresponding period in 2014. The increase in interest expense was primarily attributable to the increased borrowings associated with CBRs entry into a new credit agreement in August 2014.
Year Ended December 31, 2014 Compared To the Year Ended December 31, 2013
Revenue. For the year ended December 31, 2014, revenues increased $13.7 million, or 13.6%, to $121.9 million from $108.3 million for the year ended December 31, 2013. Increased storage fee revenue was partially offset by a decrease in processing fee revenue. The increase in storage fee revenue was primarily attributable to the additional cord blood and cord tissue units placed in storage over the preceding twelve months and an increase in per unit storage pricing as well as fully recognizing the installed storage base deferred revenue from the fair value deferred revenue adjustment recorded at CBRs acquisition date in September 2012. The deferred revenue adjustment is attributable to the purchase accounting fair value adjustment required at the September 19, 2012 acquisition date. The decrease in processing fee revenue was primarily attributable to a decrease in cord blood prices partially offset by increased cord tissue prices and an increase in the number of cord blood and cord tissue units processed during the year ended December 31, 2014 compared to the year ended December 31, 2013.
Cost of Services. Cost of services decreased by $2.0 million, or 6.8%, to $27.4 million for the year ended December 31, 2014 from $29.4 million for the year ended December 31, 2013. The decrease in cost of services was primarily attributable to decreased collection kit and shipping costs associated with the move of kit distribution from CBRs California headquarters to its Arizona processing facility.
Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased $0.2 million, or 0.2%, to $95.9 million for the year ended December 31, 2014 from $96.1 million for the year ended December 31, 2013. The decrease in selling, general and administrative expenses was primarily attributable to reimbursement of expenses paid by CBR on behalf of the previous owners, expense reduction on the final payment owed to the previous owners, and a reduction in legal fees related to a favorable lawsuit settlement, partially offset by increased sales and marketing expenses.
Interest Expense. Interest expense increased $5.1 million, or 29.3%, for the year ended December 31, 2014 compared to the year ended December 31, 2013. The increase in interest expense was primarily attributable to CBRs entry into a new credit agreement in August 2014.
Liquidity and Capital Resources
CBRs principal liquidity requirements are to finance its operations, service its debt and fund capital expenditures. As of June 30, 2015, CBR had $16.3 million in cash and cash equivalents, an increase of $5.2 million compared to cash and cash equivalents as of December 31, 2014. CBRs principal source of liquidity is from cash generated from operations and borrowings under its credit facilities discussed below.
On August 5, 2014, CBR paid a distribution totaling $98.0 million to holders of its common units as of August 4, 2014.
CBR entered into a credit agreement with certain lending institutions. The credit agreement provides for a term loan of $200.0 million and notes payable of $83.0 million. As of June 30, 2015, the outstanding principal balance of the term loan was $198.0 million and the outstanding balance of the notes payable was $83.0 million. On July 6, 2015, CBR paid down $12.0 million on the term loan balance. These credit facilities will be repaid in full upon the closing of AMAGs acquisition of CBR.
As of June 30, 2015, CBR had a revolving line of credit available with a commercial bank that provided for advances of up to $15.0 million. As of June 30, 2015, CBR had no outstanding balance on this credit facility and
CBR was in compliance with all the debt covenants. This line of credit will be terminated upon the closing of AMAGs acquisition of CBR.
Cash Flows
|
|
Year Ended |
|
Six Months Ended June 30 |
| ||||||||
|
|
2014 |
|
2013 |
|
2015 |
|
2014 |
| ||||
Net cash provided by operating activities |
|
$ |
17.5 |
|
$ |
8.2 |
|
$ |
11.3 |
|
$ |
9.2 |
|
Net cash (used in) provided by investing activities |
|
$ |
(2.5 |
) |
$ |
(0.3 |
) |
$ |
(5.1 |
) |
$ |
1.2 |
|
Net cash used in financing activities |
|
$ |
(24.9 |
) |
$ |
(6.9 |
) |
$ |
(1.0 |
) |
$ |
(3.4 |
) |
Operating Activities. Cash provided by operating activities is primarily influenced by the amount of cash CBR invests in personnel and infrastructure to support the anticipated growth of its business and the increase in its revenues. Cash provided by operating activities has historically been impacted by changes in CBRs operating assets and liabilities, particularly accounts receivable, inventories, prepaid expenses, other current assets, accounts payable, deferred revenue, accrued liabilities and other liabilities, adjusted for non-cash expense items such as depreciation, amortization, stock-based compensation, change in fair value of contingent consideration and gain on lawsuit settlement with a third party and deferred income taxes.
The net cash provided by operating activities of $11.3 million during the six months ended June 30, 2015, reflected CBRs net loss of $11.2 million, offset by net non-cash expenses of $13.1 million and cash provided by net changes in assets and liabilities of $9.4 million, compared to net cash provided by operating activities of $9.2 million for the year six months ended June 30, 2014, reflecting CBRs net loss of $7.5 million, offset by net non-cash expenses of $10.9 million and cash provided by net changes in assets and liabilities of $5.8 million.
During the year ended December 31, 2014, net cash provided by operating activities was $17.5 million, reflecting CBRs net loss of $15.1 million, offset by net non-cash expenses of $18.3 million and cash provided by net changes in assets and liabilities of $14.3 million,, compared to net cash provided by operating activities of $8.2 million for the year ended December 31, 2013, reflecting CBRs net loss of $23.4 million, offset by net non-cash expenses of $22.4 million and cash provided by net changes in assets and liabilities of $9.2 million.
Investing Activities. During the six months ended June 30, 2015, net cash used in investing activities was $5.1 million, reflecting a change in restricted cash balance of $0.2 million, offset by $5.3 million in purchases of property and equipment. Purchases of property and equipment include investments at CBRs Arizona processing facility and in IT infrastructure and software. During the six months ended June 30, 2014, net cash provided by investing activities was $1.2 million, reflecting a change in restricted cash balance of $4.4 million, offset by $3.2 million in purchases of property and equipment.
During the year ended December 31, 2014, net cash used in investing activities was $2.5 million, reflecting a change in restricted cash balance of $6.5 million, offset by $9.0 million in purchases of property and equipment. During the year ended December 31, 2013, net cash used in investing activities was $0.3 million, reflecting a change in restricted cash balance of $3.1 million, offset by $3.4 million in purchases of property and equipment.
Financing Activities. CBRs financing activities have consisted primarily of proceeds from the issuance of membership units and borrowings under debt obligations, offset by distributions to members, repurchase of membership units and incentive units, repayment of debt obligations and debt issuance costs.
During the six months ended June 30, 2015, net cash used in financing activities reflects $1.0 million in repayments of debt obligations. During the six months ended June 30, 2014, net cash used in financing activities reflects $0.4 million in proceeds from the issuance of membership units and incentive units, offset by $3.8 million in repayments of debt obligations.
During the year ended December 31, 2014, net cash used in financing activities reflects $81.1 million in proceeds from debt borrowings, offset by $3.6 million in debt issuance costs, a $98.0 million distribution to members and $4.8 million in repayments of debt obligations. During the year ended December 31, 2013, net cash used in financing activities reflects $2.8 million in repurchases of CBRs membership units and incentive units and $4.7 million in repayments of debt obligations, offset by $0.6 million in proceeds from sale of membership units.
Contractual Obligations and Commitments
The following table summarizes CBRs debt and other contractual obligations as of June 30, 2015.
|
|
Payments Due by Period |
| |||||||||||||
|
|
|
|
Less than 1 |
|
|
|
|
|
More than 5 |
| |||||
|
|
Total |
|
year |
|
1-3 years |
|
3-5 years |
|
years |
| |||||
Debt obligations |
|
$ |
376,328,847 |
|
$ |
22,795,648 |
|
$ |
45,156,220 |
|
$ |
223,212,726 |
|
$ |
85,164,253 |
|
Operating lease obligations |
|
2,390,947 |
|
1,044,360 |
|
1,346,587 |
|
|
|
|
| |||||
Purchase obligations |
|
4,439,808 |
|
2,945,592 |
|
1,401,648 |
|
92,568 |
|
|
| |||||
Total |
|
$ |
383,159,602 |
|
$ |
26,785,600 |
|
$ |
47,904,455 |
|
$ |
223,305,294 |
|
$ |
85,164,253 |
|
(1) These debt obligations will be repaid in full upon the closing of AMAGs acquisition of CBR.
Off-Balance Sheet Arrangements
CBR does not have any off-balance sheet arrangements.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update (ASU) No. 2014-09. ASU 2014-09 provided guidance related to revenue from contracts with customers. Under this guidance, revenue is recognized when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. The updated standard will replace most existing revenue recognition guidance under GAAP when it becomes effective and permits the use of either the retrospective or cumulative effect transition method. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2018 and all interim reporting periods within annual reporting periods beginning after December 15, 2019. CBR has not yet selected a transition method and is currently evaluating the effect that the updated standard will have on its consolidated financial statements and related disclosures.
In August 2014, the FASB issued new guidance related to the disclosures around going concern. The new standard provides guidance around managements responsibility to evaluate whether there is substantial doubt about an entitys ability to continue as a going concern and to provide related footnote disclosures. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on CBRs consolidated financial statements.
Other amendments to GAAP have been issued by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on CBRs consolidated financial statements upon adoption.
Exhibit 99.6
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined statements of operations for the year ended December 31, 2014 and the six months ended June 30, 2015 reflect pro forma adjustments to the results of operations of AMAG Pharmaceuticals, Inc. (the Company or AMAG) to give effect to the following transactions as if each had occurred on January 1, 2014:
· the completed merger (the Lumara Merger) with Lumara Health Inc. (Lumara) on November 12, 2014;
· the incurrence of an aggregate of $340.0 million of indebtedness under a term loan facility to fund the Lumara Merger (the 2014 Term Loan Facility);
· the probable acquisition (the CBR Acquisition) of CBR Acquisition Holdings Corp. (CBR Acquisition Holdings), which is a wholly owned and the sole subsidiary of CBR Holdco, LLC (CBR);
· the proposed incurrence of an aggregate of $350.0 million of indebtedness under a new senior secured term loan facility (the New Term Loan Facility) and an aggregate of $450.0 million of senior unsecured bridge loans or other senior unsecured notes, or any combination thereof (the Unsecured Debt Financing and, together with the New Term Loan Facility, the Debt Financing);
· the proposed issuance of AMAG common stock generating gross proceeds of approximately $200.0 million (the Equity Offering); and
· the use of the proceeds from the Debt Financing and the Equity Offering to fund the CBR Acquisition, including all transaction fees and expenses, and the repayment of outstanding borrowings and the payment of accrued interest and a 2.0% prepayment premium required for early repayment of all amounts outstanding under the 2014 Term Loan Facility (collectively with the Lumara Merger, the 2014 Term Loan Facility, the CBR Acquisition, the Debt Financing and the Equity Offering, the Transactions).
In addition, the following unaudited pro forma condensed combined balance sheet as of June 30, 2015 reflects pro forma adjustments to the financial position of AMAG to give effect to the following transactions as if each had occurred on June 30, 2015:
· the CBR Acquisition;
· the Debt Financing and the Equity Offering; and
· the use of the proceeds from the Debt Financing and the Equity Offering to fund the CBR Acquisition, including all transaction fees and expenses, and the repayment of outstanding borrowings and the payment of accrued interest and a 2.0% prepayment premium required for early repayment of all amounts outstanding under the 2014 Term Loan Facility.
The Lumara Merger has already been reflected in the Companys historical unaudited condensed consolidated balance sheet as of June 30, 2015 and historical unaudited condensed consolidated statement of operations for the six months ended June 30, 2015; therefore, no pro forma adjustments related to the Lumara Merger are necessary for the unaudited pro forma condensed combined balance sheet as of June 30, 2015 or for the unaudited pro forma condensed combined statement of operations for the six months ended June 30, 2015.
The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2014 is based on and should be read in conjunction with (1) the historical audited consolidated financial statements of AMAG for the year ended December 31, 2014 (which include the results of operations of Lumara beginning from the date of acquisition (November 12, 2014) and are available in AMAGs Annual Report on Form 10-K for the year ended December 31, 2014); (2) the historical audited consolidated financial statements of CBR for the year ended December 31, 2014 (included elsewhere in this Current Report on Form 8-K); and (3) the historical unaudited consolidated statement of operations of Lumara for the period from January 1, 2014 through November 11, 2014 (not included herein). The unaudited pro forma condensed combined financial information as of and for the six months ended June 30, 2015 is based on and should be read in conjunction with the historical unaudited condensed consolidated financial statements of AMAG as of and for the six months ended June 30, 2015 (which are available in AMAGs Quarterly Report in Form 10-Q for the quarter ended June 30, 2015) and the historical unaudited consolidated financial statements of CBR as of and for the six months ended June 30, 2015 (included elsewhere in this Current Report on Form 8-K).
The unaudited pro forma condensed combined financial information has been prepared by management in accordance with SEC Regulation S-X Article 11 for illustrative purposes only and is not necessarily indicative of the consolidated financial position or results of operations that would have been realized had the Transactions occurred as of the dates indicated, nor is it meant to be indicative of any future consolidated financial position or future results of operations that the combined company will experience. The historical consolidated financial information has been adjusted in the accompanying unaudited pro forma condensed combined financial statements to give pro forma effect to events that are (1) directly attributable to the Transactions, (2) factually supportable and (3) with respect to the unaudited pro forma condensed combined statements of operations, expected to have a continuing impact on the combined results. The pro forma adjustments included in the accompanying unaudited pro forma condensed combined financial statements are based on currently available data and assumptions that AMAG believes are reasonable. However, the unaudited pro forma condensed combined statements of operations do not include any expected cost savings or restructuring actions which may be achievable or which may occur subsequent to the CBR Acquisition or the impact of any non-recurring activity and one-time transaction related costs.
In the accompanying unaudited pro forma condensed combined financial information, the Lumara Merger and the CBR Acquisition have been accounted for as business combinations using the acquisition method of accounting under the provisions of Accounting Standard Codification No. 805, Business Combinations, (ASC 805) and applying the pro forma assumptions and adjustments described in the accompanying notes. Under ASC 805, the Company values assets acquired and liabilities assumed in a business combination at their fair values as of the acquisition date. Fair value measurements can be highly subjective and the reasonable application of measurement principles may result in a range of alternative estimates using the same facts and circumstances. Under ASC 805, transaction costs are not included as a component of consideration transferred and are expensed as incurred. The excess of the purchase price (consideration transferred) over the estimated fair value of identifiable assets and liabilities as of the acquisition date is allocated to goodwill in accordance with ASC 805. The final valuations are expected to be completed as soon as practicable but no later than one year after the consummation of the Lumara Merger and the CBR Acquisition, respectively. The purchase price allocations reflected in the unaudited pro forma condensed combined financial statements are preliminary and will be adjusted upon completion of the Companys final valuations of the fair value of the assets and liabilities of Lumara and CBR as of the effective dates of the Lumara Merger and the CBR Acquisition, respectively, which requires extensive use of accounting estimates and management judgment. Although the Company believes the fair values assigned to the assets to be acquired and liabilities to be assumed reflected in the unaudited pro forma condensed combined financial information are based on reasonable estimates and assumptions using currently available data, the results of the final allocation could be materially different from the preliminary allocations, including, but not limited to, the allocations related to components of working capital, identifiable intangible assets, goodwill, property and equipment, inventory, deferred revenues and deferred income taxes, and any resulting impacts to amortization and income taxes.
AMAG PHARMACEUTICALS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF JUNE 30, 2015
(In thousands)
|
|
|
|
|
|
CBR |
|
|
|
Equity Offering |
|
|
|
Debt Financing |
|
|
|
|
| ||||||
|
|
Historical |
|
Historical |
|
Pro Forma |
|
|
|
Pro Forma |
|
|
|
Pro Forma |
|
|
|
Pro Forma |
| ||||||
|
|
AMAG |
|
CBR |
|
Adjustments |
|
Notes |
|
Adjustments |
|
Notes |
|
Adjustments |
|
Notes |
|
Combined |
| ||||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Cash and cash equivalents |
|
$ |
89,884 |
|
$ |
16,319 |
|
$ |
(645,877 |
) |
(a) |
|
$ |
189,237 |
|
(l) |
|
$ |
440,321 |
|
(m) |
|
$ |
89,884 |
|
Investments |
|
308,524 |
|
|
|
(65,325 |
) |
(b) |
|
|
|
|
|
|
|
|
|
243,199 |
| ||||||
Accounts receivable, net |
|
57,954 |
|
9,279 |
|
|
|
|
|
|
|
|
|
|
|
|
|
67,233 |
| ||||||
Inventories |
|
34,363 |
|
4,572 |
|
|
|
|
|
|
|
|
|
|
|
|
|
38,935 |
| ||||||
Receivable from collaboration |
|
5,615 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,615 |
| ||||||
Deferred tax assets |
|
53,135 |
|
2,198 |
|
(16,906 |
) |
(i) |
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
2,036 |
|
(k) |
|
|
|
|
|
7,090 |
|
(o) |
|
47,553 |
| ||||||
Prepaid and other current assets |
|
6,004 |
|
8,485 |
|
|
|
|
|
|
|
|
|
|
|
|
|
14,489 |
| ||||||
Restricted cash |
|
|
|
30,751 |
|
|
|
|
|
|
|
|
|
|
|
|
|
30,751 |
| ||||||
Total current assets |
|
555,479 |
|
71,604 |
|
(726,072 |
) |
|
|
189,237 |
|
|
|
447,411 |
|
|
|
537,659 |
| ||||||
Property and equipment, net |
|
1,917 |
|
28,205 |
|
|
|
|
|
|
|
|
|
|
|
|
|
30,122 |
| ||||||
Goodwill |
|
204,414 |
|
288,006 |
|
171,741 |
|
(d) |
|
|
|
|
|
|
|
|
|
664,161 |
| ||||||
Intangible assets, net |
|
863,020 |
|
119,800 |
|
229,200 |
|
(c) |
|
|
|
|
|
|
|
|
|
1,212,020 |
| ||||||
Restricted cash |
|
2,397 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,397 |
| ||||||
Other long-term assets |
|
12,056 |
|
4,312 |
|
(3,094 |
) |
(e) |
|
|
|
|
|
2,600 |
|
(n) |
|
15,874 |
| ||||||
Total assets |
|
$ |
1,639,283 |
|
$ |
511,927 |
|
$ |
(328,225 |
) |
|
|
$ |
189,237 |
|
|
|
$ |
450,011 |
|
|
|
$ |
2,462,233 |
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Accounts payable |
|
$ |
6,147 |
|
$ |
1,537 |
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
7,684 |
|
Accrued expenses |
|
89,617 |
|
10,088 |
|
(2,653 |
) |
(g) |
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
(49 |
) |
(h) |
|
|
|
|
|
(1,919 |
) |
(m) |
|
95,084 |
| ||||||
Current portion of long-term debt |
|
132,680 |
|
1,707 |
|
(1,707 |
) |
(h) |
|
|
|
|
|
(115,180 |
) |
(m) |
|
17,500 |
| ||||||
Current portion of acquisition-related contingent consideration |
|
95,526 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95,526 |
| ||||||
Deferred revenues |
|
|
|
31,845 |
|
(29,604 |
) |
(f) |
|
|
|
|
|
|
|
|
|
2,241 |
| ||||||
Other current liabilities |
|
|
|
37,588 |
|
|
|
|
|
|
|
|
|
|
|
|
|
37,588 |
| ||||||
Total current liabilities |
|
323,970 |
|
82,765 |
|
(34,013 |
) |
|
|
|
|
|
|
(117,099 |
) |
|
|
255,623 |
| ||||||
Long-term liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Long-term debt, net |
|
179,706 |
|
|
|
|
|
|
|
|
|
|
|
578,294 |
|
(m) |
|
758,000 |
| ||||||
Convertible 2.5% senior notes, net |
|
170,817 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
170,817 |
| ||||||
Term loan |
|
|
|
194,792 |
|
(194,792 |
) |
(h) |
|
|
|
|
|
|
|
|
|
|
| ||||||
Notes payable |
|
|
|
81,123 |
|
(81,123 |
) |
(h) |
|
|
|
|
|
|
|
|
|
|
| ||||||
Acquisition-related contingent consideration |
|
124,666 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
124,666 |
| ||||||
Deferred income tax liability |
|
122,303 |
|
45,458 |
|
93,044 |
|
(i) |
|
|
|
|
|
|
|
|
|
260,805 |
| ||||||
Deferred revenues |
|
|
|
28,352 |
|
(24,593 |
) |
(f) |
|
|
|
|
|
|
|
|
|
3,759 |
| ||||||
Other long-term liabilities |
|
4,840 |
|
210 |
|
(210 |
) |
(j) |
|
|
|
|
|
|
|
|
|
4,840 |
| ||||||
Total liabilities |
|
926,302 |
|
432,700 |
|
(241,687 |
) |
|
|
|
|
|
|
461,195 |
|
|
|
1,578,510 |
| ||||||
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Stockholders equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Common stock, par value $0.01 per share |
|
309 |
|
|
|
|
|
|
|
30 |
|
(l) |
|
|
|
|
|
339 |
| ||||||
Common units |
|
|
|
138,161 |
|
(138,161 |
) |
(k) |
|
|
|
|
|
|
|
|
|
|
| ||||||
Additional paid-in capital |
|
1,000,901 |
|
7,735 |
|
(7,735 |
) |
(k) |
|
189,207 |
|
(l) |
|
|
|
|
|
1,190,108 |
| ||||||
Accumulated other comprehensive loss |
|
(3,948 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,948 |
) | ||||||
Accumulated deficit |
|
(284,281 |
) |
(66,669 |
) |
59,358 |
|
(k) |
|
|
|
|
|
(11,184 |
) |
(o) |
|
(302,776 |
) | ||||||
Total stockholders equity |
|
712,981 |
|
79,227 |
|
(86,538 |
) |
|
|
189,237 |
|
|
|
(11,184 |
) |
|
|
883,723 |
| ||||||
Total liabilities and stockholders equity |
|
$ |
1,639,283 |
|
$ |
511,927 |
|
$ |
(328,225 |
) |
|
|
$ |
189,237 |
|
|
|
$ |
450,011 |
|
|
|
$ |
2,462,233 |
|
The accompanying notes are an integral part of these unaudited pro forma condensed combined financial statements.
AMAG PHARMACEUTICALS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2015
(In thousands, except per share data)
|
|
|
|
|
|
CBR |
|
|
|
Equity Offering |
|
|
|
Debt Financing |
|
|
|
|
|
|
| ||||||
|
|
Historical |
|
Historical |
|
Pro Forma |
|
|
|
Pro Forma |
|
|
|
Pro Forma |
|
|
|
Pro Forma |
|
|
| ||||||
|
|
AMAG |
|
CBR |
|
Adjustments |
|
Notes |
|
Adjustments |
|
Notes |
|
Adjustments |
|
Notes |
|
Combined |
|
Notes |
| ||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
U.S. product sales, net |
|
$ |
162,067 |
|
$ |
|
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
162,067 |
|
|
|
Service revenues |
|
|
|
58,409 |
|
|
|
|
|
|
|
|
|
|
|
|
|
58,409 |
|
|
| ||||||
License fee and other collaboration revenues |
|
51,322 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51,322 |
|
|
| ||||||
Other product sales and royalties |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Other revenue |
|
|
|
82 |
|
|
|
|
|
|
|
|
|
|
|
|
|
82 |
|
|
| ||||||
Total revenues |
|
213,389 |
|
58,491 |
|
|
|
|
|
|
|
|
|
|
|
|
|
271,880 |
|
|
| ||||||
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Cost of product sales |
|
40,705 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,705 |
|
|
| ||||||
Cost of services |
|
|
|
9,923 |
|
|
|
|
|
|
|
|
|
|
|
|
|
9,923 |
|
|
| ||||||
Research and development expenses |
|
15,172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,172 |
|
|
| ||||||
Selling, general and administrative expenses |
|
63,913 |
|
49,040 |
|
(82 |
) |
(a) |
|
|
|
|
|
|
|
|
|
112,871 |
|
|
| ||||||
Acquisition-related costs |
|
2,653 |
|
|
|
(2,653 |
) |
(b) |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Restructuring expenses |
|
1,014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,014 |
|
|
| ||||||
Total costs and expenses |
|
123,457 |
|
58,963 |
|
(2,735 |
) |
|
|
|
|
|
|
|
|
|
|
179,685 |
|
|
| ||||||
Operating income (loss) |
|
89,932 |
|
(472 |
) |
2,735 |
|
|
|
|
|
|
|
|
|
|
|
92,195 |
|
|
| ||||||
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Interest expense |
|
(20,572 |
) |
(11,130 |
) |
11,130 |
|
(c) |
|
|
|
|
|
(15,299 |
) |
(f) |
|
(35,871 |
) |
|
| ||||||
Interest and dividend income, net |
|
443 |
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
448 |
|
|
| ||||||
Gains (losses) on sale of assets, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Gains (losses) on investments, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Other, net |
|
2 |
|
30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
32 |
|
|
| ||||||
Total other income (expense) |
|
(20,127 |
) |
(11,095 |
) |
11,130 |
|
|
|
|
|
|
|
(15,299 |
) |
|
|
(35,391 |
) |
|
| ||||||
Net income (loss) before income taxes |
|
69,805 |
|
(11,567 |
) |
13,865 |
|
|
|
|
|
|
|
(15,299 |
) |
|
|
56,804 |
|
|
| ||||||
Income tax benefit (provision) |
|
(23,643 |
) |
379 |
|
(1,271 |
) |
(d) |
|
|
|
|
|
5,936 |
|
(g) |
|
(18,599 |
) |
|
| ||||||
Net income (loss) |
|
$ |
46,162 |
|
$ |
(11,188 |
) |
$ |
12,594 |
|
|
|
$ |
|
|
|
|
$ |
(9,363 |
) |
|
|
$ |
38,205 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Basic |
|
$ |
1.60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1.20 |
|
(h) |
| ||||
Diluted |
|
$ |
1.23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.96 |
|
(h) |
| ||||
Weighted average shares outstanding used to compute net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Basic |
|
28,934 |
|
|
|
|
|
|
|
3,020 |
|
(e) |
|
|
|
|
|
31,954 |
|
(h) |
| ||||||
Diluted |
|
40,791 |
|
|
|
|
|
|
|
3,020 |
|
(e) |
|
|
|
|
|
43,811 |
|
(h) |
|
The accompanying notes are an integral part of these unaudited pro forma condensed combined financial statements.
AMAG PHARMACEUTICALS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2014
(In thousands, except per share data)
|
|
|
|
Historical |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
|
|
|
|
Lumara |
|
Lumara Pro Forma Adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
|
|
|
|
January 1, 2014 |
|
Womens |
|
|
|
|
|
|
|
CBR |
|
|
|
Equity Offering |
|
|
|
Debt Financing |
|
|
|
|
|
|
| |||||||||
|
|
Historical |
|
through |
|
Health |
|
Acquisition |
|
|
|
Historical |
|
Pro Forma |
|
|
|
Pro Forma |
|
|
|
Pro Forma |
|
|
|
Pro Forma |
|
|
| |||||||||
|
|
AMAG |
|
November 11, 2014 |
|
Division (a) |
|
Adjustments |
|
Notes |
|
CBR |
|
Adjustments |
|
Notes |
|
Adjustments |
|
Notes |
|
Adjustments |
|
Notes |
|
Combined |
|
Notes |
| |||||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
U.S. product sales, net |
|
$ |
108,795 |
|
$ |
156,578 |
|
$ |
(13,257 |
) |
$ |
|
|
|
|
$ |
|
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
252,116 |
|
|
|
Service revenues |
|
|
|
|
|
|
|
|
|
|
|
121,790 |
|
|
|
|
|
|
|
|
|
|
|
|
|
121,790 |
|
|
| |||||||||
License fee and other collaboration revenues |
|
10,886 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,886 |
|
|
| |||||||||
Other product sales and royalties |
|
4,703 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,703 |
|
|
| |||||||||
Other revenue |
|
|
|
|
|
|
|
|
|
|
|
146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
146 |
|
|
| |||||||||
Total revenues |
|
124,384 |
|
156,578 |
|
(13,257 |
) |
|
|
|
|
121,936 |
|
|
|
|
|
|
|
|
|
|
|
|
|
389,641 |
|
|
| |||||||||
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Cost of product sales |
|
20,306 |
|
77,653 |
|
(14,577 |
) |
(4,845 |
) |
(b) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
|
|
|
|
|
|
|
|
9,742 |
|
(c) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88,279 |
|
|
| |||||||||
Cost of services |
|
|
|
|
|
|
|
|
|
|
|
19,913 |
|
|
|
|
|
|
|
|
|
|
|
|
|
19,913 |
|
|
| |||||||||
Research and development expenses |
|
24,160 |
|
11,304 |
|
(458 |
) |
|
|
|
|
252 |
|
|
|
|
|
|
|
|
|
|
|
|
|
35,258 |
|
|
| |||||||||
Selling, general and administrative expenses |
|
72,254 |
|
90,487 |
|
(4,260 |
) |
(26,500 |
) |
(d) |
|
103,108 |
|
(2,230 |
) |
(h) |
|
|
|
|
|
|
|
|
|
232,859 |
|
|
| |||||||||
Acquisition-related costs |
|
9,478 |
|
|
|
|
|
(9,478 |
) |
(d) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Restructuring expenses |
|
2,023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,023 |
|
|
| |||||||||
Impairment of long-lived assets |
|
|
|
26,222 |
|
(26,222 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Total costs and expenses |
|
128,221 |
|
205,666 |
|
(45,517 |
) |
(31,081 |
) |
|
|
123,273 |
|
(2,230 |
) |
|
|
|
|
|
|
|
|
|
|
378,332 |
|
|
| |||||||||
Operating income (loss) |
|
(3,837 |
) |
(49,088 |
) |
32,260 |
|
31,081 |
|
|
|
(1,337 |
) |
2,230 |
|
|
|
|
|
|
|
|
|
|
|
11,309 |
|
|
| |||||||||
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Interest expense |
|
(14,697 |
) |
(8,224 |
) |
|
|
(15,356 |
) |
(e) |
|
(22,447 |
) |
22,447 |
|
(i) |
|
|
|
|
|
(28,433 |
) |
(k) |
|
(66,710 |
) |
|
| |||||||||
Interest and dividend income, net |
|
975 |
|
|
|
|
|
|
|
|
|
36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
1,011 |
|
|
| |||||||||
Gains (losses) on sale of assets, net |
|
103 |
|
(1,011 |
) |
1,036 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
128 |
|
|
| |||||||||
Gains (losses) on investments, net |
|
114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
114 |
|
|
| |||||||||
Other, net |
|
|
|
5,879 |
|
|
|
|
|
|
|
(49 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
5,830 |
|
|
| |||||||||
Total other income (expense) |
|
(13,505 |
) |
(3,356 |
) |
1,036 |
|
(15,356 |
) |
|
|
(22,460 |
) |
22,447 |
|
|
|
|
|
|
|
(28,433 |
) |
|
|
(59,627 |
) |
|
| |||||||||
Net income (loss) before reorganizaion items and income taxes |
|
(17,342 |
) |
(52,444 |
) |
33,296 |
|
15,725 |
|
|
|
(23,797 |
) |
24,677 |
|
|
|
|
|
|
|
(28,433 |
) |
|
|
(48,318 |
) |
|
| |||||||||
Reorganization items, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Professional fees |
|
|
|
(817 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(817 |
) |
|
| |||||||||
Net income (loss) before income taxes |
|
(17,342 |
) |
(53,261 |
) |
33,296 |
|
15,725 |
|
|
|
(23,797 |
) |
24,677 |
|
|
|
|
|
|
|
(28,433 |
) |
|
|
(49,135 |
) |
|
| |||||||||
Income tax benefit (provision) |
|
153,159 |
|
(774 |
) |
|
|
(152,385 |
) |
(f) |
|
8,661 |
|
(8,661 |
) |
(j) |
|
|
|
|
|
|
|
(l) |
|
|
|
|
| |||||||||
Net income (loss) |
|
$ |
135,817 |
|
$ |
(54,035 |
) |
$ |
33,296 |
|
$ |
(136,660 |
) |
|
|
$ |
(15,136 |
) |
$ |
16,016 |
|
|
|
$ |
|
|
|
|
$ |
(28,433 |
) |
|
|
$ |
(49,135 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Basic |
|
$ |
6.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(1.74 |
) |
|
| |||||||
Diluted |
|
$ |
5.45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(1.74 |
) |
|
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Weighted average shares outstanding used to compute net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Basic |
|
22,416 |
|
|
|
|
|
2,770 |
|
(g) |
|
|
|
|
|
|
|
3,020 |
|
(g) |
|
|
|
|
|
28,206 |
|
(g) |
| |||||||||
Diluted |
|
25,225 |
|
|
|
|
|
(39 |
) |
(g) |
|
|
|
|
|
|
|
3,020 |
|
(g) |
|
|
|
|
|
28,206 |
|
(g) |
|
The accompanying notes are an integral part of these unaudited pro forma condensed combined financial statements.
AMAG PHARMACEUTICALS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
1. Description of the Business Combinations
Lumara Merger
On November 12, 2014, AMAG completed its acquisition of 100% of the equity ownership of Lumara, excluding the assets and liabilities of the Womens Health Division and certain other assets and liabilities. AMAG paid approximately $600.0 million in cash (subject to finalization of certain adjustments related to Lumara Healths financial position at the time of closing, including adjustments related to net working capital, net debt and transaction expenses) and issued approximately 3.2 million shares of its common stock, having a value of approximately $112.0 million at the time of the closing, to the holders of Lumara common stock, stock options and restricted stock units. In addition, AMAG agreed to pay additional merger consideration, up to a maximum of $350.0 million, based on the achievement of certain sales milestones for the period from December 1, 2014 through December 19, 2019. The fair value of the contingent merger consideration was determined to be $205.0 million as of the closing date. In June 2015, AMAG settled the net working capital, net debt and transaction expenses with the Lumara stockholders, as a result of which the final purchase price for the Lumara Merger was $912.0 million, net of $5.2 million of cash acquired. Lumaras operations have been included in AMAGs historical consolidated financial statements beginning on the date of acquisition (November 12, 2014). For additional information, please see AMAGs Annual Report on Form 10-K for the year ended December 31, 2014 and Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2015.
CBR Acquisition
On June 29, 2015, AMAG entered into a stock purchase agreement (the CBR stock purchase agreement) to purchase all of the outstanding equity securities of CBR Acquisition Holdings for an aggregate of $700.0 million in cash consideration, subject to net working capital, net debt, transaction expense and other adjustments as defined in the stock purchase agreement. The following table summarizes the components of the estimated total purchase price included in the unaudited pro forma condensed combined financial statements as if the CBR Acquisition had been completed on June 30, 2015 (in thousands):
Base consideration |
|
$ |
700,000 |
|
Adjustments for assumed indebtedness |
|
(17,117 |
) | |
Estimated purchase price |
|
$ |
682,883 |
|
The adjustments for assumed indebtedness include post-closing payments of a portion of CBRs retained amount and employee retention amount, and post-closing tax obligations as defined in the stock purchase agreement, which specifies that the cash consideration will be reduced by the aggregate amount of indebtedness assumed.
Under the CBR stock purchase agreement, certain assets and liabilities of CBR will not transfer to AMAG at closing, including cash and certain indebtedness. Accordingly, pro forma adjustments have been reflected in the unaudited pro forma condensed combined balance sheet to exclude these assets and liabilities, as follows (in thousands):
Cash and cash equivalents |
|
$ |
16,319 |
|
Accrued interest payable |
|
(49 |
) | |
Current portion of long-term debt |
|
(1,707 |
) | |
Term loan |
|
(194,792 |
) | |
Notes payable |
|
(81,123 |
) | |
Net liabilities not assumed |
|
$ |
(261,352 |
) |
AMAG PHARMACEUTICALS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION (CONTINUED)
The following summarizes the preliminary purchase price allocation of the CBR Acquisition under ASC 805 as if the CBR Acquisition had been completed on June 30, 2015 (in thousands):
Accounts receivable, net |
|
$ |
9,279 |
|
Inventories |
|
4,572 |
| |
Prepaid and other current assets |
|
8,485 |
| |
Restricted cash |
|
30,751 |
| |
Property and equipment, net |
|
28,205 |
| |
Goodwill |
|
459,747 |
| |
Intangible assets, net |
|
349,000 |
| |
Other long-term assets |
|
1,218 |
| |
Accounts payable |
|
(1,537 |
) | |
Accrued expenses |
|
(10,039 |
) | |
Deferred revenues short-term |
|
(2,241 |
) | |
Deferred income tax liability short-term |
|
(14,708 |
) | |
Other current liabilities |
|
(37,588 |
) | |
Deferred revenues long-term |
|
(3,759 |
) | |
Deferred income tax liability long-term |
|
(138,502 |
) | |
Estimated purchase price |
|
$ |
682,883 |
|
2. Accounting Policies
During the preparation of the accompanying unaudited pro forma condensed combined financial statements, AMAG was not aware of any material differences between accounting policies of AMAG and Lumara or of AMAG and CBR, except for certain reclassifications necessary to conform to AMAGs financial presentation as discussed in Note 3 below. Accordingly, the accompanying unaudited pro forma condensed combined financial statements do not assume any material differences in accounting policies between the companies.
Following the closing of the CBR Acquisition, AMAG will finalize its review of CBRs accounting policies in an effort to determine if differences in accounting policies require adjustment or reclassification of CBRs results of operations or assets or liabilities to conform to AMAGs accounting policies and classifications. As a result of this review, AMAG may identify differences between the accounting policies of the two companies that, when conformed, could be materially different from the amounts set forth in the accompanying unaudited pro forma condensed combined financial statements.
AMAG PHARMACEUTICALS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION (CONTINUED)
3. Reclassifications
Lumara
Financial information presented in the Historical Lumara January 1, 2014 through November 11, 2014 column in the unaudited pro forma condensed combined statement of operations for the year ended December 31, 2014 has been reclassified to conform to the presentation in AMAGs historical consolidated financial statements, as follows (in thousands):
Year Ended December 31, 2014 |
|
Before |
|
Reclassification |
|
After |
| |||
Cost of product sales |
|
$ |
15,138 |
|
$ |
62,515 |
|
$ |
77,653 |
|
Selling, general and administrative expenses |
|
153,002 |
|
(62,515 |
) |
90,487 |
| |||
Loss on sale of property and equipment |
|
(97 |
) |
97 |
|
|
| |||
Loss on assets held for sale |
|
(914 |
) |
914 |
|
|
| |||
Interest and other income, net |
|
5,879 |
|
(5,879 |
) |
|
| |||
Gains (losses) on sale of assets, net |
|
|
|
(1,011 |
) |
(1,011 |
) | |||
Other, net |
|
|
|
5,879 |
|
5,879 |
| |||
Amortization of intangible assets relating to product rights is classified as selling, general and administrative expense in Lumaras historical financial statements, while AMAG classifies such amortization expense as cost of product sales. Accordingly, AMAG has reclassified Lumaras amortization of intangible assets relating to product rights to cost of product sales in the unaudited pro forma condensed combined financial statements to conform to the presentation in AMAGs historical consolidated financial statements.
CBR
Financial information presented in the Historical CBR column in the unaudited pro forma condensed combined financial statements has been reclassified to conform to the presentation in AMAGs historical consolidated financial statements, as follows (in thousands):
Six Months Ended June 30, 2015 |
|
Before |
|
Reclassification |
|
After |
| |||
Net revenues |
|
$ |
58,409 |
|
$ |
(58,409 |
) |
$ |
|
|
Service revenues |
|
|
|
58,409 |
|
58,409 |
| |||
Cost of services |
|
13,495 |
|
(3,572 |
) |
9,923 |
| |||
Selling, general and administrative expenses |
|
45,184 |
|
3,856 |
|
49,040 |
| |||
Other income |
|
(30 |
) |
30 |
|
|
| |||
Change in fair value of contingent consideration |
|
284 |
|
(284 |
) |
|
| |||
Other, net |
|
|
|
(30 |
) |
(30 |
) | |||
As of June 30, 2015 |
|
Before |
|
Reclassification |
|
After |
| |||
Other long-term liabilities |
|
$ |
45,458 |
|
$ |
(45,248 |
) |
$ |
210 |
|
Deferred rent |
|
210 |
|
(210 |
) |
|
| |||
Deferred income tax liability |
|
|
|
45,458 |
|
45,458 |
| |||
AMAG PHARMACEUTICALS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION (CONTINUED)
Year Ended December 31, 2014 |
|
Before |
|
Reclassification |
|
After |
| |||
Net revenues |
|
$ |
121,790 |
|
$ |
(121,790 |
) |
$ |
|
|
Service revenues |
|
|
|
121,790 |
|
121,790 |
| |||
Cost of services |
|
27,359 |
|
(7,446 |
) |
19,913 |
| |||
Selling, general and administrative expenses |
|
95,926 |
|
7,182 |
|
103,108 |
| |||
Other expense |
|
49 |
|
(49 |
) |
|
| |||
Change in fair value of contingent consideration |
|
(264 |
) |
264 |
|
|
| |||
Other, net |
|
|
|
49 |
|
49 |
| |||
CBRs net revenues have been reclassified to service revenues in the unaudited pro forma condensed combined financial statements to present such revenues based on the nature of the revenue. CBR classifies shipping and handling costs and amortization of patents as cost of services and presents changes in the fair value of the contingent consideration on a separate line in its consolidated statements of operations. Accordingly, AMAG has reclassified CBRs shipping and handling costs, amortization of patents and changes in the fair value of the contingent consideration for the six months ended June 30, 2015 and the year ended December 31, 2014 to selling, general and administrative expense in the unaudited pro forma condensed combined financial statements to conform to the presentation in AMAGs historical consolidated financial statements.
CBRs deferred rent and long-term deferred income tax liability have been reclassified in the unaudited pro forma condensed combined balance sheet at June 30, 2015 to conform to the presentation in AMAGs historical consolidated financial statements.
4. Adjustments to Unaudited Pro Forma Condensed Combined Balance Sheet as of June 30, 2015
(a) Represents the use of cash to pay the purchase price for CBR Acquisition Holdings and related transaction fees and expenses, as follows (in thousands):
Sales of marketable securities (see Note 4(b)) |
|
$ |
65,325 |
|
Cash paid for CBR Acquisition Holdings |
|
(682,883 |
) | |
CBR cash and cash equivalents retained by former shareholders |
|
(16,319 |
) | |
Estimated transaction fees and expenses (not paid as of June 30, 2015) |
|
(12,000 |
) | |
Net adjustment |
|
$ |
(645,877 |
) |
(b) Represents the sale of marketable securities to fund a portion of the purchase price for the CBR Acquisition.
(c) Represents adjustments to record identified intangible assets of CBR at fair value on the acquisition date. The fair value estimate for identifiable intangible assets is preliminary and is determined based on assumptions that market participants would use in pricing an asset, based on the most advantageous market for the asset (i.e., its highest and best use). The final fair value determination for identified intangible assets may differ from this preliminary determination, and such differences could be material. The preliminary fair value of identifiable intangible assets was primarily determined using the income approach, which is a valuation technique that provides an estimate of the fair value of an asset based on market participant expectations of the cash flows an asset would generate over its remaining useful life. Some of the more significant assumptions used in the income approach from the perspective of a market participant include the estimated net cash flows for each year for each identifiable intangible asset (including service revenues, cost of services, research and development costs, selling, general and
AMAG PHARMACEUTICALS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION (CONTINUED)
administrative costs and working capital/contributory asset charges), the discount rate that measures the risk inherent in each future cash flow stream, the assessment of each assets life cycle, competitive trends impacting the asset and each cash flow stream as well as other factors. No assurances can be given that the underlying assumptions used to prepare the discounted cash flow analysis will not change. For this and other reasons, actual results may vary significantly from estimated results.
A summary of the identifiable intangible assets estimated to be recorded in connection with the CBR Acquisition is as follows (in thousands):
Customer relationships |
|
$ |
280,000 |
|
Trademarks and tradenames |
|
69,000 |
| |
|
|
349,000 |
| |
Eliminate CBRs existing intangible assets |
|
(119,800 |
) | |
Net adjustment |
|
$ |
229,200 |
|
The customer relationships intangible asset is expected to be amortized over a period of 20 years (see Note 5(a)). The trademarks and tradenames intangible asset is deemed to be an indefinite-lived asset, which is not amortizable but is subject to periodic assessments of impairment.
(d) Represents an adjustment to record goodwill resulting from the CBR Acquisition, as follows (in thousands):
Goodwill recorded in CBR Acquisition |
|
$ |
459,747 |
|
Eliminate CBRs existing goodwill |
|
(288,006 |
) | |
Net adjustment |
|
$ |
171,741 |
|
AMAG has preliminarily allocated the purchase price to the net tangible and identifiable intangible assets based on their estimated acquisition-date fair values. The excess of the purchase price over the estimated fair values of the net tangible and identifiable intangible assets acquired has been recorded as goodwill. The goodwill is not expected to be deductible for income tax purposes.
(e) Represents an adjustment to eliminate the deferred financing costs associated with the portion of CBRs indebtedness that will not be assumed by AMAG in the CBR Acquisition.
(f) Represents an adjustment to record CBRs deferred revenue at fair value on the acquisition date. The fair value estimate for deferred revenue is preliminary, and the final fair value determination for deferred revenue may differ from this preliminary determination. The fair value of deferred revenue was estimated as the direct and indirect costs of fulfilling the legal performance obligations, plus a reasonable profit margin for the level of effort or assumption of risk by AMAG after the acquisition date. No assurances can be given that the underlying assumptions used to prepare the related discounted cash flow analysis will not change. For this and other reasons, actual results may vary significantly from estimated results.
A summary of the deferred revenue estimated to be recorded in connection with the CBR Acquisition and the resulting net adjustments to deferred revenues is as follows (in thousands):
Deferred revenue short-term |
|
$ |
2,241 |
|
Eliminate CBRs existing deferred revenue short-term |
|
(31,845 |
) | |
Net adjustment |
|
$ |
(29,604 |
) |
|
|
|
| |
Deferred revenue long-term |
|
$ |
3,759 |
|
Eliminate CBRs existing deferred revenue long-term |
|
(28,352 |
) | |
Net adjustment |
|
$ |
(24,593 |
) |
(g) Represents an adjustment to eliminate AMAGs transaction costs related to the CBR Acquisition accrued at June 30, 2015. The full amount of such transaction costs are assumed to be paid in Note 4(a) above.
AMAG PHARMACEUTICALS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION (CONTINUED)
(h) Represents an adjustment to eliminate CBRs liabilities not assumed by AMAG, consisting of outstanding debt and the related accrued interest (see Note 1).
(i) The CBR Acquisition is expected to result in carryover basis for all tax attributes. Based on the preliminary purchase accounting for the CBR Acquisition, including the preliminary fair value adjustments for identifiable intangible assets acquired and deferred revenue obligations assumed, AMAG recorded a reduction to current deferred income tax assets of $16.9 million and an increase to long-term deferred income tax liabilities of $93.0 million, determined using a combined federal statutory rate and state statutory rate (net of federal benefit).
These estimates are preliminary and subject to change based on, among other things, managements final determination of the fair values of the tangible and identifiable intangible assets acquired and liabilities assumed by jurisdiction and managements assessment of the combined companys ability to utilize the future benefits from acquired and legacy deferred tax assets.
(j) Represents an adjustment to eliminate the deferred rent recorded in CBRs historical unaudited consolidated financial statements at June 30, 2015.
(k) Represents adjustments to stockholders equity to (i) reflect recognition of the $12.0 million of transaction costs estimated to be incurred by AMAG related to the CBR Acquisition, less the $2.7 million of costs incurred as of June 30, 2015; (ii) reflect the $2.0 million tax benefit on the portion of the $9.3 million of additional transaction costs estimated to be deductible for tax purposes and (iii) eliminate CBRs remaining historical stockholders equity, as follows (in thousands):
|
|
Common |
|
Additional |
|
Accumulated |
|
Total |
| ||||
Record estimated additional transaction costs not yet incurred as of June 30, 2015 |
|
$ |
|
|
$ |
|
|
$ |
(9,347 |
) |
$ |
(9,347 |
) |
Tax benefit of estimated additional transaction costs |
|
|
|
|
|
2,036 |
|
2,036 |
| ||||
Elimination of CBRs historical equity |
|
(138,161 |
) |
(7,735 |
) |
66,669 |
|
(79,227 |
) | ||||
Net adjustments |
|
$ |
(138,161 |
) |
$ |
(7,735 |
) |
$ |
59,358 |
|
$ |
(86,538 |
) |
Based on a preliminary assessment of the total $12.0 million of estimated transaction costs, AMAG estimates that approximately $6.3 million will be deductible for income tax purposes, resulting in an estimated income tax benefit of $2.4 million. The evaluation of the deductibility of the transaction costs, and the ability to utilize such benefits, is preliminary and subject to change.
(l) Represents an adjustment to reflect the estimated net proceeds from the issuance of AMAG common stock pursuant to the Equity Offering, assuming the sale of 3,019,780 shares at an assumed public offering price of $66.23 per share, which was the last reported sale price of AMAGs common stock on The NASDAQ Global Select Market on July 28, 2015. The estimated proceeds of $189.2 million from the Equity Offering is presented net of estimated underwriting discounts and commissions and estimated offering expenses payable by AMAG, aggregating $10.8 million.
(m) Represents new borrowings under the Debt Financing as well as the repayment of outstanding borrowings and the payment of accrued interest and a 2.0% prepayment premium under the 2014 Term Loan Facility. Of the total $800.0 million borrowed under the Debt Financing, approximately $17.5 million is payable within 12 months of the balance sheet date and therefore is reflected as a current liability. The pro forma combined long-term debt balance at June 30, 2015 is stated net of $24.5 million of estimated original issue discount (OID) costs, which will be amortized and recorded as interest expense based on the effective interest method over the term of the debt.
A summary of the impact of the borrowings under the Debt Financing as well as the repayment of outstanding borrowings and the payment of accrued interest and a 2.0% prepayment premium under the 2014 Term Loan Facility as of June 30, 2015 is as follows (in thousands):
AMAG PHARMACEUTICALS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION (CONTINUED)
Proceeds from the Debt Financing: |
|
|
| |
New Term Loan Facility |
|
$ |
350,000 |
|
Unsecured Debt Financing |
|
450,000 |
| |
Total proceeds |
|
800,000 |
| |
Less: OID and deferred financing costs |
|
(28,300 |
) | |
Less: Repayment of principal under the 2014 Term Loan Facility |
|
(323,000 |
) | |
Less: Repayment of the accrued interest on the 2014 Term Loan Facility |
|
(1,919 |
) | |
Less: Payment of prepayment premium upon repayment of principal under the 2014 Term Loan Facility |
|
(6,460 |
) | |
Net adjustment cash and cash equivalents |
|
$ |
440,321 |
|
|
|
|
| |
Long-term debt: |
|
|
| |
New Term Loan Facility |
|
$ |
350,000 |
|
Unsecured Debt Financing |
|
450,000 |
| |
Less: OID on the Debt Financing |
|
(24,500 |
) | |
Total proceeds from the Debt Financing, net of OID |
|
775,500 |
| |
Less: Current portion of New Term Loan Facility |
|
(17,500 |
) | |
New long-term debt, net |
|
758,000 |
| |
Less: Repayment of 2014 Term Loan Facility long-term debt |
|
(190,320 |
) | |
Plus: Write-off of OID on 2014 Term Loan Facility |
|
10,614 |
| |
Net adjustment long-term debt |
|
$ |
578,294 |
|
|
|
|
| |
Current portion of New Term Loan Facility |
|
$ |
17,500 |
|
Less: Repayment of current portion of 2014 Term Loan Facility |
|
(132,680 |
) | |
Net adjustment current portion of long-term debt |
|
$ |
(115,180 |
) |
(n) Represents an adjustment to record the new deferred financing costs incurred in connection with the Debt Financing, less the elimination of the remaining deferred financing costs associated with the 2014 Term Loan Facility at June 30, 2015. The new deferred financing costs consist principally of underwriting and legal fees and expenses, which will be amortized and recorded as interest expense based on the effective interest method over the term of the debt.
A summary of the net impact to the deferred financing costs as of June 30, 2015 is as follows (in thousands):
Deferred financing costs: |
|
|
| |
New Term Loan Facility |
|
$ |
1,800 |
|
Unsecured Debt Financing |
|
2,000 |
| |
|
|
3,800 |
| |
Less: Deferred financing costs on 2014 Term Loan Facility |
|
(1,200 |
) | |
Net adjustment |
|
$ |
2,600 |
|
(o) Represents an adjustment to record the $11.2 million net impact to accumulated deficit of the write-off of historical unamortized OID ($10.6 million) and remaining deferred financing costs ($1.2 million) and the payment of a 2.0% prepayment premium ($6.5 million) in connection with the repayment of principal under the 2014 Term Loan Facility, net of the related income tax benefit of $7.1 million. The $7.1 million income tax benefit is also reflected as an increase to deferred tax assets.
AMAG PHARMACEUTICALS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION (CONTINUED)
5. Adjustments to Unaudited Pro Forma Condensed Combined Statements of Operations for the Six Months Ended June 30, 2015
(a) Represents incremental amortization expense relating to the fair value purchase accounting adjustments for the CBR Acquisition, as follows (dollars in thousands):
|
|
Estimated |
|
Estimated |
|
Six Months Ended |
| ||
CBR customer relationships |
|
20 |
|
$ |
280,000 |
|
$ |
7,683 |
|
Trademarks and tradenames |
|
N/A |
|
69,000 |
|
|
| ||
Pro forma amortization expense |
|
|
|
|
|
7,683 |
| ||
Less: Amortization expense included in CBRs historical financial statements |
|
|
|
|
|
(7,765 |
) | ||
Net adjustment |
|
|
|
|
|
$ |
(82 |
) | |
Amortization of the customer relationships intangible asset will be recognized using an economic consumption model over 20 years, which represents the period over which AMAG expects the related cash flows to be realized. Amortization expense attributable to the CBR customer relationships for the six months ended June 30, 2015 represents amortization expense estimated to be recorded in the first six months of the second year following the assumed closing of the CBR Acquisition on January 1, 2014.
(b) Represents elimination of the non-recurring transaction fees and expenses recorded as expense in AMAGs historical unaudited condensed consolidated statement of operations for the six months ended June 30, 2015.
(c) Represents elimination of interest expense related to the portion of CBRs indebtedness that will not be assumed by AMAG in the CBR Acquisition.
(d) Represents an aggregate adjustment of $1.3 million to record (i) an income tax provision for the net pro forma adjustments related to the CBR Acquisition and (ii) an income tax benefit for CBRs historical net loss before income taxes prior to those pro forma adjustments, both determined using a combined federal statutory rate and state statutory rate (net of federal benefit).
(e) Represents an adjustment to give effect to the shares of AMAG common stock issued in the Equity Offering, assuming the sale of 3,019,780 shares at an assumed public offering price of $66.23 per share, which was the last reported sale price of AMAGs common stock on The NASDAQ Global Select Market on July 28, 2015. The pro forma combined weighted average number of common shares outstanding for the six months ended June 30, 2015 has been calculated as if the common stock had been issued on January 1, 2014.
AMAG PHARMACEUTICALS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION (CONTINUED)
(f) Represents incremental interest expense related to AMAGs indebtedness after giving effect to the Transactions, composed of borrowings under the Debt Financing less the repayment of outstanding borrowings and the payment of accrued interest and a 2.0% prepayment premium under the 2014 Term Loan Facility, as follows (in thousands):
|
|
Six Months Ended |
| |
|
|
June 30, 2015 |
| |
Interest on outstanding borrowings under the Debt Financing: |
|
|
| |
New Term Loan Facility at an interest rate of 5.25% per annum |
|
$ |
9,188 |
|
Unsecured Debt Financing at an assumed interest rate of 7.375% per annum |
|
16,594 |
| |
Amortization of OID and deferred financing costs |
|
1,988 |
| |
Pro forma interest expense |
|
27,770 |
| |
Interest on outstanding borrowings under the 2014 Term Loan |
|
|
| |
Facility at an interest rate of 7.25% per annum |
|
(10,923 |
) | |
Amortization of OID and deferred financing costs on the 2014 Term Loan Facility |
|
(1,548 |
) | |
Net adjustment |
|
$ |
15,299 |
|
The New Term Loan Facility will bear interest at a floating rate based on the U.S. prime rate or the London Interbank Offered Rate (LIBOR) depending on the type of loan requested by AMAG at the time of borrowing. The Unsecured Debt Financing is estimated to bear interest at a rate of 7.375%. A 1/8th percent change in the interest rate would increase or decrease the pro forma cash interest expense on the $800.0 million of expected borrowings under the Debt Financing by $1.0 million per year.
(g) Represents an adjustment of $5.9 million to record an income tax benefit on the pro forma adjustments for the Debt Financing, determined using a combined federal statutory rate and state statutory rate (net of federal benefit).
(h) Pro forma combined basic and diluted net income per share for the six months ended June 30, 2015 was calculated as follows (in thousands, except per share data):
|
|
Six Months Ended |
| |
Pro forma combined net income, basic |
|
$ |
38,205 |
|
Effect of dilutive securities: |
|
|
| |
Interest expense on convertible 2.5% senior notes, net of income tax benefit |
|
3,890 |
| |
Pro forma combined net income, diluted |
|
$ |
42,095 |
|
|
|
|
| |
Pro forma combined weighted average common shares outstanding |
|
31,954 |
| |
Effect of dilutive securities: |
|
|
| |
Stock options and restricted stock units |
|
1,639 |
| |
Convertible 2.5% senior notes |
|
7,382 |
| |
Warrants |
|
2,836 |
| |
Shares used in calculating pro forma combined diluted net income per share |
|
43,811 |
| |
|
|
|
| |
Pro forma combined net income per share: |
|
|
| |
Basic |
|
$ |
1.20 |
|
Diluted |
|
$ |
0.96 |
|
The denominator used in computing pro forma combined basic and diluted net income per share includes all of the 3,019,780 shares of common stock assumed to be issued in the Equity Offering as the net
AMAG PHARMACEUTICALS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION (CONTINUED)
proceeds therefrom will be used in entirety to fund the CBR Acquisition as well as the repayment of outstanding borrowings and the payment of accrued interest and a 2.0% prepayment premium under the 2014 Term Loan Facility.
6. Adjustments to Unaudited Pro Forma Condensed Combined Statements of Operations for the Year Ended December 31, 2014
Lumara Merger
(a) Represents elimination of the operating results of the Womens Health Division of Lumara, which was not acquired in the Lumara Merger.
(b) Represents incremental amortization expense relating to the fair value purchase accounting adjustments for the Lumara Merger, as follows (dollars in thousands):
|
|
Estimated |
|
Estimated Fair |
|
Year Ended |
| ||
Makena IPR&D |
|
N/A |
|
$ |
79,100 |
|
$ |
|
|
Makena-marketed product |
|
20 |
|
797,100 |
|
51,377 |
| ||
Pro forma amortization expense |
|
|
|
|
|
51,377 |
| ||
Less: Makena amortization included in Lumaras historical financial statements |
|
|
|
|
|
(51,388 |
) | ||
Less: Makena amortization included in AMAGs historical financial statements |
|
|
|
|
|
(4,834 |
) | ||
Net adjustment |
|
|
|
|
|
$ |
(4,845 |
) | |
Amortization of the product rights on the Makena-marketed product intangible asset will be recognized using an economic consumption model over 20 years, which represents managements best estimate of the period over which AMAG expects 90% or more of the related cash flows to be realized. Amortization expense during the next five years is estimated as follows: $51.4 million in fiscal 2015, $64.2 million in fiscal 2016, $75.4 million in fiscal 2017, $82.7 million in fiscal 2018 and $53.7 million in fiscal 2019. Amortization expense for the year ended December 31, 2014 represents the amortization expense that was estimated to be recorded in the first 12 months following the assumed closing of the Lumara Merger on January 1, 2014.
(c) AMAG will reflect the fair value of Lumaras inventories in its statement of operations as the acquired inventory is sold. The entire finished goods inventory of Lumara was estimated to turnover within the first 12 months after acquisition. Conversion of the raw materials into finished goods and sale of those finished goods was estimated to occur over several years. As there is a continuing impact of the step-up in the inventory on AMAGs results of operations, the increased value has been included in the unaudited pro forma condensed combined statement of operations. The pro forma adjustment represents the additional cost of product sales associated with inventories estimated to be sold within the first 12 months following the assumed closing of the Lumara Merger on January 1, 2014, as follows (in thousands):
AMAG PHARMACEUTICALS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION (CONTINUED)
|
|
Year Ended |
| |
|
|
December 31, 2014 |
| |
Pro forma amortization of the inventory step-up associated with inventories estimated to be sold within the first 12 months following the Lumara Merger |
|
$ |
11,055 |
|
Less: Amortization of the inventory step-up recorded in AMAGs historical financial statements |
|
(1,313 |
) | |
Net adjustment |
|
$ |
9,742 |
|
Amortization of the fair value adjustment to inventories during the next five years is estimated as follows: $11.1 million in fiscal 2015, $3.5 million in fiscal 2016, $4.0 million in fiscal 2017, $3.5 million in fiscal 2018 and $2.7 million in fiscal 2019.
(d) Represents elimination of the $9.5 million of non-recurring transaction fees and expenses recorded as expense by AMAG for the Lumara Merger for the year ended December 31, 2014. In addition, $26.5 million of transaction costs recorded by Lumara during the period from January 1, 2014 through November 11, 2014 were not assumed by AMAG in the Lumara Merger and, accordingly, have been eliminated in the unaudited pro forma condensed combined statement of operations for the year ended December 31, 2014.
(e) Represents incremental interest expense related to AMAGs indebtedness after giving effect to the Lumara Merger, composed of borrowings under the 2014 Term Loan Facility, as follows (in thousands):
|
|
Year Ended |
| |
Interest on outstanding borrowings under the 2014 Term Loan Facility at an interest rate of 7.25% per annum |
|
$ |
23,857 |
|
Amortization of OID and deferred financing costs |
|
3,250 |
| |
Pro forma interest expense at an effective interest rate of 8.55% per annum |
|
27,107 |
| |
Less: Historical Lumara interest expense on debt not assumed |
|
(7,955 |
) | |
Less: 2014 Term Loan Facility interest expense and amortization recorded in AMAGs historical financial statements |
|
(3,796 |
) | |
Net adjustment |
|
$ |
15,356 |
|
Interest on outstanding borrowings under the 2014 Term Loan Facility may be based on the U.S. prime rate or the LIBOR depending on the type of loan requested by AMAG at the time of borrowing. The 7.25% per annum rate used in the above calculation represents the current interest rate AMAG is paying on the $340.0 million of outstanding borrowings. A 1/8th percent change in the interest rate would increase or decrease the pro forma cash interest expense on the $340.0 million of outstanding borrowings under the 2014 Term Loan Facility by approximately $0.4 million per year.
(f) The acquisition of Lumara resulted in carryover basis for all tax attributes. Both AMAG and Lumara had deferred tax assets for which full valuation allowances were provided in the companies historical consolidated financial statements. However, AMAG considered certain of Lumaras deferred tax liabilities recorded in acquisition accounting as sources of income to support realization of Lumaras deferred tax assets at the date of acquisition. AMAG also considered certain of Lumaras deferred tax liabilities recorded in acquisition accounting to be a source of income to support the realization of certain legacy U.S. deferred tax assets of AMAG.
AMAG PHARMACEUTICALS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION (CONTINUED)
As a result of the acquisition, AMAG recorded an income tax benefit of $153.2 million in its historical consolidated statement of operations for the year ended December 31, 2014 for the release of a portion of the legacy AMAG domestic valuation allowance as of December 31, 2014 as a result the acquisition of Lumara. As this release of a portion of the valuation allowance was considered directly attributable to the transaction and non-recurring, the unaudited pro forma condensed combined statement of operations for the year ended December 31, 2014 excludes the impact of the tax benefit of the valuation release. As of December 31, 2014, AMAG continued to maintain a valuation allowance against its remaining legacy U.S. deferred tax assets and the remaining U.S. deferred tax assets acquired from Lumara.
In addition, AMAG has considered the impact of the CBR Acquisition as of an assumed January 1, 2014 acquisition date and determined that the CBR Acquisition would not have impacted AMAGs determination to maintain a full valuation allowance on a pro forma combined basis for the year ended December 31, 2014.
These tax estimates are preliminary and subject to change based on, among other things, managements final determination of the fair values of the assets acquired and liabilities assumed by jurisdiction, the deductibility of AMAGs acquisition-related costs and other costs deducted by Lumara or CBR prior to the closing of the Lumara Merger and CBR Acquisition, and managements assessment of AMAGs ability to utilize the future benefits from acquired and legacy deferred tax assets.
(g) Represents the pro forma combined total number of shares outstanding, giving effect to (i) the 3,209,971 shares of AMAG common stock issued as consideration in the Lumara Merger and (ii) the shares of AMAG common stock issued in the Equity Offering, assuming the sale of 3,019,780 million shares at an assumed public offering price of $66.23 per share, which was the last reported sale price of AMAGs common stock on the NASDAQ Global Select Market on July 28, 2015. The pro forma combined weighted average number of common shares outstanding for the year ended December 31, 2014 has been calculated as if the common stock had been issued on January 1, 2014. Approximately 18,300,000 potential shares of common stock were excluded from the computation of pro forma combined diluted net loss per share for the year ended December 31, 2014 as their effect would be anti-dilutive. The following table sets forth the computation of pro forma combined basic and diluted weighted average common shares outstanding (in thousands of shares):
|
|
Year Ended |
|
|
|
December 31, 2014 |
|
Basic weighted average shares outstanding historical |
|
22,416 |
|
Add: Common shares issued in the Lumara Merger |
|
2,770 |
|
Add: Common shares issued in the Equity Offering |
|
3,020 |
|
Basic weighted average shares outstanding pro forma combined |
|
28,206 |
|
|
|
|
|
Diluted weighted average shares outstanding historical |
|
25,225 |
|
Add: Common shares issued in the Lumara Merger |
|
2,770 |
|
Add: Common shares issued in the Equity Offering |
|
3,020 |
|
Less: Dilutive shares assumed in the historical calculation |
|
(2,809 |
) |
Diluted weighted average shares outstanding pro forma combined |
|
28,206 |
|
AMAG PHARMACEUTICALS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION (CONTINUED)
CBR Acquisition
(h) Represents a reduction to amortization expense relating to the fair value purchase accounting adjustments for the CBR Acquisition, as follows (dollars in thousands):
|
|
Estimated |
|
Estimated |
|
Year Ended |
| ||
CBR customer relationships |
|
20 |
|
$ |
280,000 |
|
$ |
14,566 |
|
Trademarks and tradenames |
|
N/A |
|
|
69,000 |
|
|
|
|
Pro forma amortization expense |
|
|
|
|
|
14,566 |
| ||
Less: Amortization expense included in CBRs historical financial statements |
|
|
|
|
|
(16,796 |
) | ||
Net adjustment |
|
|
|
|
|
$ |
(2,230 |
) |
Amortization of CBRs customer relationships intangible asset will be recognized using an economic consumption model over 20 years, which represents the period over which AMAG expects the related cash flows to be realized. Amortization expense attributable to the CBR customer relationships for the year ended December 31, 2014 represents the amortization expense estimated to be recorded in the first 12 months following the assumed closing of the CBR Acquisition on January 1, 2014. Amortization expense attributable to the CBR customer relationships during the five years following the January 1, 2014 acquisition date assumed for pro forma purposes is estimated as follows: $14.6 million in 2014, $15.4 million in 2015, $15.2 million in 2016, $15.1 million in 2017 and $14.9 million in 2018.
(i) Represents elimination of interest expense related to the portion of CBRs indebtedness that will not be assumed by AMAG in the CBR Acquisition.
(j) Represents an adjustment to eliminate the income tax benefit recorded by CBR in its historical consolidated statement of operations as AMAG would have continued to maintain a full valuation allowance on pro forma combined basis during the year ended December 31, 2014 (see Note 6(f)).
(k) Represents the incremental interest expense related to AMAGs indebtedness after giving effect to the Transactions, composed of borrowings under the Debt Financing less the repayment of outstanding borrowings and the payment of accrued interest and a 2.0% prepayment premium under the 2014 Term Loan Facility, as follows (in thousands):
|
|
Year Ended |
| |
|
|
December 31, 2014 |
| |
Interest on outstanding borrowings under the Debt Financing: |
|
|
| |
New Term Loan Facility at an interest rate of 5.25% per annum |
|
$ |
18,375 |
|
Unsecured Debt Financing at an assumed interest rate of 7.375% per annum |
|
33,188 |
| |
Amortization of OID and deferred financing costs |
|
3,977 |
| |
Pro forma interest expense |
|
55,540 |
| |
Interest on outstanding borrowings under the 2014 Term Loan Facility at an interest rate of 7.25% per annum |
|
(23,857 |
) | |
Amortization of OID and deferred financing costs on the 2014 Term Loan Facility |
|
(3,250 |
) | |
Net adjustment |
|
$ |
28,433 |
|
The New Term Loan Facility will bear interest at a floating rate based on the U.S. prime rate or the LIBOR depending on the type of loan requested by AMAG at the time of borrowing. The Unsecured Debt Financing is estimated to bear interest at a rate of 7.375%. A 1/8th percent change in the interest rate would increase or decrease the pro forma cash interest expense on the $800.0 million of expected borrowings under the Debt Financing by $1.0 million per year.
(l) No income tax benefit has been recorded for the pro forma adjustments for the Debt Financing as AMAG would have continued to maintain a full valuation allowance on a pro forma combined basis during the year ended December 31, 2014 (see Note 6(f)).
AMAG PHARMACEUTICALS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION (CONTINUED)
7. Items Not Included in Pro Forma Condensed Combined Statements of Operations
The unaudited pro forma condensed combined statements of operations do not include any further cost savings or restructuring actions which may be achievable in connection with the Lumara Merger, or any expected cost savings or restructuring actions which may be achievable subsequent to the CBR Acquisition, or the impact of any non-recurring activity and one-time transaction related costs, including costs related to the CBR Acquisition that were or will be paid subsequent to June 30, 2015.