UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): January 27, 2020 (November 10, 2019)
BIOLIFE SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware |
|
001-36362 |
|
94-3076866 |
(State or other jurisdiction of |
|
(Commission File Number) |
|
(IRS Employer Identification No.) |
3303 Monte Villa Parkway,
Bothell, WA 98021
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (425) 402-1400
N/A |
(Former name or former address, if changed since last report) |
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
☐ |
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
☐ |
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
☐ |
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
☐ |
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Trading symbol |
Name of exchange on which registered |
BioLife Solutions, Inc. Common Shares |
BLFS |
NASDAQ Capital Market |
EXPLANATORY NOTE
This Amendment No. 1 on Form 8-K/A (this “Form 8-K/A”) to our Current Report on Form 8-K filed with the Securities and Exchange Commission on November 15, 2019 (the “Original Form 8-K”) is being filed to amend Item 9.01 to the Original Form 8-K to include certain financial statements related to the acquisition by BioLife Solutions, Inc. (the “Company”), through its wholly owned subsidiary, Arctic Solutions, Inc., of substantially all of the assets, properties and rights of Custom Biogenic Systems, Inc. (“CBS”) as reported on the Original Form 8-K. Except as set forth herein, no modifications have been made to the information contained in the Original Form 8-K.
Item 9.01 |
Financial Statements and Exhibits. |
(a) |
Financial Statements of Businesses Acquired. |
The audited financial statements of CBS as of and for the fiscal year ended December 31, 2018 and 2017 and the unaudited financial statements of CBS as of September 30, 2019 and for the nine months ended September 30, 2019 and 2018 are filed as Exhibit 99.1 and 99.2, respectively, and are incorporated by reference herein.
(b) |
Pro Forma Financial Information. |
The unaudited pro forma combined statement of operations of the Company relating to the acquisition of the assets, properties and rights of CBS as of and for the fiscal year ended December 31, 2018 and the statement of operations and balance sheet for the nine months ended September 30, 2019, are filed as Exhibit 99.3 and incorporated by reference herein.
(d) |
Exhibits. |
Exhibit No. |
Description |
|
|
99.1 |
|
|
|
99.2 |
|
|
|
99.3 |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
|
Biolife Solutions, Inc. |
|
|
Date: January 27, 2020 |
By: |
/s/ Roderick de Greef |
|
|
|
Name: Roderick de Greef Title: Chief Financial Officer |
|
Exhibit 99.1
CUSTOM BIOGENIC SYSTEMS, INC.
AUDITED FINANCIAL STATEMENTS
Years ended December 31, 2018 and 2017
CUSTOM BIOGENIC SYSTEMS, INC.
TABLE OF CONTENTS
Page | |
Independent Auditor’s Audit Report | 1 |
Financial Statements | |
Balance Sheets | 2 |
Statements of Stockholder’s Equity | 3 |
Statements of Operations | 4 |
Statements of Cash Flows | 5 |
Notes to Financial Statements | 6 |
INDEPENDENT AUDITOR’S REPORT
To the Board of Directors
Custom Biogenic Systems, Inc.
Bruce Township, Michigan
We have audited the accompanying financial statements of Custom Biogenic Systems, Inc., which comprise the balance sheets as of December 31, 2018 and 2017, and the related statements of stockholder’s equity, operations, and cash flows for the years then ended, and the related notes to the financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these 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 financial statements that are free from material misstatement, whether due to fraud of error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these 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 financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluation 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 financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
To the Board of Directors
Custom Biogenic Systems, Inc.
Bruce Township, Michigan
Page 2
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Custom Biogenic Systems, Inc. as of December 31, 2018 and 2017, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
/s/ UHY LLP
Sterling Heights, Michigan
January 24, 2020
CUSTOM BIOGENIC SYSTEMS, INC. |
BALANCE SHEETS |
December 31, |
||||||||
2018 |
2017 |
|||||||
ASSETS |
||||||||
CURRENT ASSETS |
||||||||
Cash |
$ | 1,304 | $ | 403 | ||||
Accounts receivable |
1,212,195 | 1,617,916 | ||||||
Inventory, net |
2,883,315 | 2,189,452 | ||||||
Prepaid expenses |
41,620 | 12,643 | ||||||
Total current assets |
4,138,434 | 3,820,414 | ||||||
PROPERTY AND EQUIPMENT, net |
3,505,230 | 2,924,185 | ||||||
TOTAL ASSETS |
$ | 7,643,664 | $ | 6,744,599 | ||||
LIABILITIES AND STOCKHOLDER'S EQUITY |
||||||||
CURRENT LIABILITIES |
||||||||
Current portion of long-term debt |
$ | 518,269 | $ | 423,602 | ||||
Bank overdraft |
243,120 | 221,862 | ||||||
Line of credit |
1,251,858 | 1,157,979 | ||||||
Accounts payable |
2,328,356 | 1,195,012 | ||||||
Accrued expenses |
196,197 | 156,961 | ||||||
Deposits |
258,905 | 267,145 | ||||||
Loans payable - related parties |
411,866 | 476,459 | ||||||
Total current liabilities |
5,208,571 | 3,899,020 | ||||||
LONG-TERM LIABILITIES, net of current portion |
1,614,811 | 1,410,699 | ||||||
TOTAL LIABILITIES |
6,823,382 | 5,309,719 | ||||||
STOCKHOLDER'S EQUITY |
820,282 | 1,434,880 | ||||||
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY |
$ | 7,643,664 | $ | 6,744,599 |
CUSTOM BIOGENIC SYSTEMS, INC. |
STATEMENTS OF STOCKHOLDER'S EQUITY |
Years ended December 31, 2018 and 2017 |
Common |
Retained |
|||||||||||
Stock |
Earnings |
Total |
||||||||||
Balance, January 1, 2017 |
$ | 100 | $ | 2,347,963 | $ | 2,348,063 | ||||||
Dividend distributions |
- | (219,140 | ) | (219,140 | ) | |||||||
Net loss |
- | (694,043 | ) | (694,043 | ) | |||||||
Balance, December 31, 2017 |
100 | 1,434,780 | 1,434,880 | |||||||||
Dividend distributions |
- | (30,000 | ) | (30,000 | ) | |||||||
Net loss |
- | (584,598 | ) | (584,598 | ) | |||||||
Balance, December 31, 2018 |
$ | 100 | $ | 820,182 | $ | 820,282 |
CUSTOM BIOGENIC SYSTEMS, INC. |
STATEMENTS OF OPERATIONS |
Years ended December 31, |
||||||||||||||||
2018 |
2017 |
|||||||||||||||
Percent of |
Percent of |
|||||||||||||||
Amount |
Net Sales |
Amount |
Net Sales |
|||||||||||||
Net sales |
$ | 11,715,329 | 100.0 |
% |
$ | 9,274,542 | 100.0 |
% |
||||||||
Cost of goods sold |
8,005,725 | 68.4 | 6,222,095 | 67.1 | ||||||||||||
Gross profit |
3,709,604 | 31.6 | 3,052,447 | 32.9 | ||||||||||||
Operating expenses |
||||||||||||||||
Research and development |
935,026 | 8.0 | 847,398 | 9.1 | ||||||||||||
General and administrative |
2,400,104 | 20.5 | 1,866,623 | 20.1 | ||||||||||||
Sales and marketing |
770,878 | 6.6 | 904,876 | 9.8 | ||||||||||||
Total operating expenses |
4,106,008 | 35.1 | 3,618,897 | 39.0 | ||||||||||||
Operating loss |
(396,404 | ) | (3.5 | ) | (566,450 | ) | (6.1 | ) | ||||||||
Other income (expense) |
||||||||||||||||
Other income |
645 | - | 6,109 | - | ||||||||||||
Interest expense |
(188,839 | ) | (1.6 | ) | (133,702 | ) | (1.4 | ) | ||||||||
Total other income (expense) |
(188,194 | ) | (1.6 | ) | (127,593 | ) | (1.4 | ) | ||||||||
Net loss |
$ | (584,598 | ) | (5.1 | )% | $ | (694,043 | ) | (7.5 |
)% |
CUSTOM BIOGENIC SYSTEMS, INC. |
STATEMENTS OF CASH FLOWS |
Years ended December 31, |
||||||||
2018 |
2017 |
|||||||
OPERATING ACTIVITIES |
||||||||
Net loss |
$ | (584,598 | ) | $ | (694,043 | ) | ||
Adjustments to reconcile net loss to net cash flows from operating activities: |
||||||||
Depreciation and amortization |
454,677 | 394,930 | ||||||
Loss on sale of fixed assets |
16,641 | 54,107 | ||||||
Bad debt expense |
- | 25,999 | ||||||
Changes in: |
||||||||
Accounts receivable |
405,721 | 33,209 | ||||||
Inventory |
(693,863 | ) | (299,102 | ) | ||||
Prepaid expenses |
(28,977 | ) | 11,706 | |||||
Deposits |
(8,240 | ) | 267,145 | |||||
Accounts payable and accrued expenses |
1,172,580 | (36,831 | ) | |||||
Net cash provided by (used in) operating activities |
733,941 | (242,880 | ) | |||||
INVESTING ACTIVITIES |
||||||||
Proceeds from sale of fixed assets |
259,165 | 111,283 | ||||||
Expenditures for note receivable |
- | (95,419 | ) | |||||
Payments from note receivable |
- | 128,473 | ||||||
Expenditures for property and equipment |
(531,813 | ) | (554,298 | ) | ||||
Expenditures for construction in process |
(12,473 | ) | (6,850 | ) | ||||
Net cash used in investing activities |
(285,121 | ) | (416,811 | ) | ||||
FINANCING ACTIVITIES |
||||||||
Net activity under bank overdraft |
21,258 | (104,297 | ) | |||||
Borrowings under line of credit |
5,803,145 | 4,956,789 | ||||||
Payments on line of credit |
(5,709,266 | ) | (4,298,532 | ) | ||||
Borrowings on notes payable |
- | 598,586 | ||||||
Payments on notes payable |
(430,957 | ) | (355,301 | ) | ||||
Payments on capital lease |
(37,506 | ) | (72,292 | ) | ||||
Borrowings on notes payable - related parties |
95,286 | 220,181 | ||||||
Payments on notes payable - related parties |
(159,879 | ) | (65,900 | ) | ||||
Dividend distributions |
(30,000 | ) | (219,140 | ) | ||||
Net cash (used in) provided by financing activities |
(447,919 | ) | 660,094 | |||||
NET CHANGE IN CASH |
901 | 403 | ||||||
CASH, Beginning of year |
403 | - | ||||||
CASH, End of year |
$ | 1,304 | $ | 403 |
CUSTOM BIOGENIC SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2018 and 2017
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of certain accounting policies followed in the preparation of these financial statements. The policies conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the financial statements.
Company Operations
Custom Biogenic Systems, Inc. (the “Company”) is engaged in the manufacture and sale of cryogenic freezing and long-term storage products mostly within the healthcare and biomedical industries to customers around the world, with majority of sales shipped to North America and Europe.
Use of Estimates
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.
Concentration of Credit Risk
The Company, from time to time during the years covered by these financial statements, may have bank balances in excess of its insured limits. Management has deemed this as a normal business risk.
Accounts Receivable
The Company carries its accounts receivable at their invoiced amounts. On a periodic basis, the Company evaluates its accounts receivable and establishes an allowance for doubtful accounts, when deemed necessary, based on the history of past write-offs and collections and current credit conditions. The Company will place customer accounts on hold if payments violate terms of agreement. At December 31, 2018 and 2017 management determined that no allowance was deemed necessary. Generally, the Company does not require collateral for its accounts receivable. The Company does not charge interest on past due accounts receivable.
CUSTOM BIOGENIC SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2018 and 2017
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Inventory Valuation
Inventories are valued at lower of cost or net realizable value, with cost being determined on a first-in, first-out basis. Net realizable value is the estimated selling price in the ordinary course of business less reasonably predictable costs of completion, disposal, and transportation. General and administrative expenses are not inventoried, but are charged to expense when purchased. Provisions are recorded to reduce inventory for obsolete or slow-moving inventory based on assumptions about future demand and marketability of products, inventory levels and turns and product spoilage. As of December 31, 2018 and 2017, the Company had an inventory reserve in the amount of $170,000 and $160,000, respectively.
Property and Equipment
Management capitalizes expenditures for property and equipment. Expenditures for maintenance and repairs are charged to operating expenses. Property and equipment are carried at cost. Adjustments of the asset and the related accumulated depreciation and amortization accounts are made for property and equipment retirements and disposals, with the resulting gain or loss included in the statements of operations.
Depreciation and Amortization
Depreciation and amortization of property and equipment are computed using the straight-line method over the estimated useful lives of assets at acquisition. Leasehold improvements are amortized over the shorter of the assets’ useful lives or the term of the lease.
Depreciation and amortization for the years ended December 31, 2018 and December 31, 2017 was $454,677 and $394,930, respectively.
Revenue Recognition
Sales are recorded when the products are shipped to customers. Provision for discounts and rebates to customers and other adjustments are provided for in the same period as the related sales.
Shipping and Handling Costs
The Company records the amount of shipping and handling costs billed of customers as revenue. The cost incurred for shipping and handling is included in cost of sales.
Advertising and Promotion
Advertising and promotion costs are expensed as incurred. Advertising and promotion expense for the years ended December 31, 2018 and 2017 was $236,047 and $396,334, respectively.
CUSTOM BIOGENIC SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2018 and 2017
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Product Warranty
The Company accrues an estimate of its exposure to warranty claims based on both current and historical product sales data and warranty costs incurred. The majority of the Company’s products carry a warranty ranging from ninety days to five years. The Company assesses the adequacy of its recorded warranty liability annually and adjusts the amount as necessary. The warranty liability is included in accrued expenses in the accompanying balance sheet. Warranty expenses are recorded in cost of sales. See Note 13 for additional disclosure.
Sales and Use Taxes
The Company records sales net of sales and use taxes.
Income Taxes
Custom Biogenic Systems, Inc. has elected to be treated as a Subchapter S Corporation under the Internal Revenue Code. Under these provisions, the Company generally does not pay federal corporate income taxes on its taxable income. Instead, the stockholder is liable for individual federal and state income taxes on the Company’s taxable income. Accordingly, no provision for federal or state corporate income taxes has been reflected in the financial statements.
Variable Interest Entities
Under alternatives available to private companies, the Company has elected not to evaluate any related parties under common control to determine if any such entities are variable interest entities that might be required to be consolidated in the financial statements of the Company.
Subsequent Events
The Company has performed a review of events subsequent to the balance sheet date through January 24, 2020, the date the financial statements were available to be issued.
CUSTOM BIOGENIC SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2018 and 2017
NOTE 2 – RELATED PARTY TRANSACTIONS
Notes Payable
At December 31, 2018 and 2017, the Company was indebted to its sole shareholder in the amount of $272,692 and $363,066, respectively. The note is unsecured, non-interest bearing, is classified as short-term on the balance sheet, and is due on demand. See Note 7 for a schedule of minimum long-term debt payments.
At December 31, 2017, the Company was indebted to related parties in the amount of $14,119. The note was unsecured and was classified as short-term on the balance sheet. During the year ended December 31, 2018, the note was paid in full.
At December 31, 2018 and 2017, the Company was indebted to a related party through common ownership in the amount of $139,174 and $99,274, respectively. The note is unsecured, non-interest bearing, is classified as short-term on the balance, and is due on demand. See Note 7 for a schedule of minimum long-term debt payments.
Lease Agreement
The Company leases its operating facilities from a related party on a month-to-month basis. The lease calls for monthly payments of $10,000 and total rental expense related to the lease during the years ended December 31, 2018 and 2017 was $107,910 and $54,000, respectively.
Guarantee
The Company guarantees the debt of a related party through common ownership, which is secured by real estate owned by a related party. In the event of default by the related party, the Company could be obligated to repay the full amount outstanding. At December 31, 2018 and 2017, the outstanding balance is $863,136 and $901,530, respectively. Management anticipates the related party will be able to meet their debt obligation; therefore, no accrual has been made on the financial statements at December 31, 2018 and 2017.
CUSTOM BIOGENIC SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2018 and 2017
NOTE 3 – INVENTORY
Inventory consisted of the following at December 31:
2018 |
2017 |
|||||||
Raw materials |
$ | 677,646 | $ | 955,761 | ||||
Work in process |
492,223 | 472,736 | ||||||
Finished goods |
1,883,446 | 920,955 | ||||||
Inventory reserve |
(170,000 | ) | (160,000 | ) | ||||
$ | 2,883,315 | $ | 2,189,452 |
NOTE 4 – PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31:
2018 |
2017 |
|||||||
Equipment |
$ | 4,664,089 | $ | 3,824,043 | ||||
Computers & equipment |
312,557 | 352,289 | ||||||
Furniture & fixtures |
38,709 | 36,761 | ||||||
Autos & trucks |
77,319 | 97,462 | ||||||
Building improvements |
673,129 | 639,195 | ||||||
5,765,803 | 4,949,750 | |||||||
Less: Accumulated depreciation and amortization |
2,279,896 | 2,032,415 | ||||||
3,485,907 | 2,917,335 | |||||||
Construction in process |
19,323 | 6,850 | ||||||
$ | 3,505,230 | $ | 2,924,185 |
NOTE 5 – LINE OF CREDIT
At December 31, 2018 and 2017, the Company had drawn $1,251,858 and $1,157,979, respectively, under a line-of-credit agreement with a financial institution. Under the agreement, the Company may borrow up to $1,500,000 on a revolving basis through November 2019. The line of credit bears interest at LIBOR plus 2.5% (LIBOR was 2.38% at December 31, 2018) and is secured by the Company’s general assets. The agreement is subject to a financial covenant related to a fixed charge coverage ratio. At December 31, 2018, the Company was not in compliance with the financial covenant. Subsequent to December 31, 2018, the financial institution issued a waiver for the covenant violation.
CUSTOM BIOGENIC SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2018 and 2017
NOTE 6 – ACCRUED EXPENSES
Accrued expenses consisted of the following at December 31:
2018 |
2017 |
|||||||
Accrued payroll |
$ | 66,329 | $ | 47,536 | ||||
Interest payable |
13,116 | 6,002 | ||||||
Sales tax payable |
23,752 | 28,423 | ||||||
Accrued warranty expense |
93,000 | 75,000 | ||||||
$ | 196,197 | $ | 156,961 |
NOTE 7 – LONG-TERM DEBT
December 31, |
||||||||
2018 |
2017 |
|||||||
The Company has a note payable to a financial institution. The note is payable in monthly installments of $15,974, including interest at 3.59%, and matures in November 2019. The note is secured by the Company’s general assets and is cross-collateralized and cross-defaulted with other notes and a line of credit from the same financial institution. The agreement is subject to a financial covenant related to a fixed charge coverage ratio. At December 31, 2018, the Company was not in compliance with the financial covenant. Subsequent to December 31, 2018, the financial institution issued a waiver for the covenant violation. |
$ | 172,572 | $ | 354,432 | ||||
The Company has a note payable to a financial institution. The note is payable in monthly installments of $6,548, plus interest at LIBOR plus 2.75%, and matures in June 2023. The note is secured by the Company’s general assets and is cross-collateralized and cross-defaulted with other notes and a line of credit from the same financial institution. The agreement is subject to a financial covenant related to a fixed charge coverage ratio. At December 31, 2018, the Company was not in compliance with the financial covenant. Subsequent to December 31, 2018, the financial institution issued a waiver for the covenant violation. |
353,571 | 432,143 | ||||||
Subtotal |
$ | 526,143 | $ | 786,575 |
CUSTOM BIOGENIC SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2018 and 2017
NOTE 7 – LONG-TERM DEBT (Continued)
December 31, |
||||||||
2018 |
2017 |
|||||||
Subtotal from previous page |
$ | 526,143 | $ | 786,575 | ||||
The Company has a note payable to a financial institution. The note is payable in monthly installments of $3,571, plus interest at LIBOR plus 2.75%, and matures in December 2023. The note is secured by the Company’s general assets and is cross-collateralized and cross-defaulted with other notes and a line of credit from the same financial institution. The agreement is subject to a financial covenant related to a fixed charge coverage ratio. At December 31, 2018, the Company was not in compliance with the financial covenant. Subsequent to December 31, 2018, the financial institution issued a waiver for the covenant violation. |
210,714 | 253,571 | ||||||
The Company has a note payable to a financial institution. The note is payable in monthly installments of $812, including interest at 4.9%, secured by the vehicle purchased under the note, and matures in May 2020. |
12,547 | 22,155 | ||||||
The Company has a note payable to a financial institution in the original amount of $600,000. The note is payable in monthly installments of $9,807, plus interest at LIBOR plus 2.75%, and matures in November 2022. The note is secured by the Company’s general assets and is cross-collateralized and cross-defaulted with other notes and the line of credit from the same financial institution. The agreement is subject to a financial covenant related to a fixed charge coverage ratio. At December 31, 2018, the Company was not in compliance with the financial covenant. Subsequent to December 31, 2018, the financial institution issued a waiver for the covenant violation. |
470,720 | 588,779 | ||||||
Subtotal |
$ | 1,220,124 | $ | 1,651,080 |
CUSTOM BIOGENIC SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2018 and 2017
NOTE 7 – LONG-TERM DEBT (Continued)
December 31, |
||||||||
2018 |
2017 |
|||||||
Subtotal from previous page |
$ | 1,220,124 | $ | 1,651,080 | ||||
During the year ended December 31, 2018, the Company entered into a note payable to a financial institution in the amount of $959,733. The note is payable in monthly installments of $12,953, including interest 7.31% and matures June 2025 with a final payment $192,244. The loan is secured by financed assets. |
912,956 | - | ||||||
Notes payable to related parties from Note 2 |
411,866 | 476,459 | ||||||
2,544,946 | 2,127,539 | |||||||
Less: related party debt |
411,866 | 476,459 | ||||||
Less: current portion of long-term debt |
518,269 | 423,602 | ||||||
$ | 1,614,811 | $ | 1,227,478 |
Minimum future payments for the notes described above and in Note 2 for the next five years and in the aggregate are as follows:
Years ended December 31, |
Amount |
|||
2019 |
$ | 930,135 | ||
2020 |
341,394 | |||
2021 |
345,013 | |||
2022 |
343,226 | |||
2023 |
194,606 | |||
Subsequent to 2023 |
390,572 | |||
$ | 2,544,946 |
CUSTOM BIOGENIC SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2018 and 2017
NOTE 8 – CAPITAL LEASE
At December 31, 2017, the Company had a capital lease payable to a financial institution in the amount of $183,221. The asset and liability under the lease were recorded at the lower of the present value of the minimum lease payments or the fair value of the asset. During the year ended December 31, 2018, the capital lease was refinanced into a new note payable as described in Note 7.
Interest expense included in the capital lease payments for the years ended December 31, 2018 and 2017 was $7,353 and $11,009 respectively. Depreciation expense for the asset under the capital lease for the years ended December 31, 2018 and 2017 was $25,450 and $50,900, respectively.
NOTE 9 – OPERATING LEASE
The Company leases certain office equipment under an operating lease agreement ending February 2021. The lease agreement calls for monthly payments of $296, including taxes. This lease agreement replaces another lease agreement which ended in February 2018. Total lease expense under these agreements for the years ended December 31, 2018 and 2017 was $3,565 and $3,617, respectively.
The following is a schedule of minimum future lease payments under the non-cancelable operating lease above for the next three years:
Year ended December 31, |
Amount |
|||
2019 |
$ | 3,554 | ||
2020 |
3,554 | |||
2021 |
592 | |||
Total minimum future lease payments |
$ | 7,700 |
NOTE 10 – COMMON STOCK
Custom Biogenic Systems, Inc. had authorized 10,000 shares of $1 par value common stock. At both December 31, 2018 and 2017, the Company had 100 shares issued and outstanding.
CUSTOM BIOGENIC SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2018 and 2017
NOTE 11 – ECONOMIC DEPENDENCY
During the years ended December 31, 2018 and 2017, the Company had a substantial amount of sales to one and two customers, respectively. Sales to these customers approximated 16% and 25% of net sales for the years ended December 31, 2018 and 2017, respectively. At December 31, 2018 and 2017, the amount due from these customers totaled $363,498 and $501,988, respectively.
During the years ended December 31, 2018 and 2017, the Company purchased a substantial amount of its materials from three and two vendors, respectively. Purchases from these vendors approximated 50% and 38%, of total purchases for the years ended December 31, 2018 and 2017, respectively. At December 31, 2018 and 2017, the amount due to these vendors totaled $1,111,383 and $348,914, respectively.
NOTE 12 – 401(K) RETIREMENT PLAN
The Company sponsors a traditional 401(k) plan covering substantially all employees at least 19 years old who have completed one full year of service. Eligible employees may contribute up to the IRS limit. Under the Plan, the Company can make contributions at the discretion of management. During the years ended December 31, 2018 and 2017, the Company did not make matching contributions. The Company has funded or accrued all calculated contributions as of the balance sheet date.
NOTE 13 – PRODUCT WARRANTIES
The following summarizes the changes in the Company’s aggregate liability under product warranties for the years ended December 31:
2018 |
2017 |
|||||||
Warranty accrual, beginning of year |
$ | 75,000 | $ | 73,000 | ||||
Charged to costs and expenses |
107,027 | 79,973 | ||||||
Actual warranty expenditures |
(89,027 | ) | (77,973 | ) | ||||
Warranty accrual, end of year |
$ | 93,000 | $ | 75,000 |
CUSTOM BIOGENIC SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2018 and 2017
NOTE 14 – CASH FLOWS
The following is a schedule of interest paid for the years ended December 31:
December 31, |
||||||||
2018 |
2017 |
|||||||
Interest paid |
$ | 181,725 | $ | 130,769 |
Non-cash transaction:
During the year ended December 31, 2018, the Company financed the capital expenditures in the amount of $814,018. See long term debt disclosure at Note 7.
During the year ended December 31, 2018, the Company refinanced outstanding balance on a capital lease identified in Note 8 into a new note payable disclosed in Note 7 in the amount of $145,715.
NOTE 15 − LITIGATION
The Company is subject to outstanding claims that arise in the ordinary course of business and to other legal proceedings. Management anticipates that any potential liability of the Company, which may arise with respect to these matters, will not materially affect the Company’s financial statements.
NOTE 16 – SUBSEQUENT EVENTS
Subsequent to the balance sheet date, the Company sold substantially all of its assets to an unrelated third party. A portion of the proceeds from the sale were used to pay off all outstanding notes payable and the line of credit identified in Note 2, 5 and 7.
Page 16
Exhibit 99.2
CUSTOM BIOGENIC SYSTEMS, INC.
REVIEWED FINANCIAL STATEMENTS
For the nine months ended September 30, 2019 and 2018
CUSTOM BIOGENIC SYSTEMS, INC.
TABLE OF CONTENTS
Page | |
Unaudited Financial Statements | |
Balance Sheets | 2 |
Statements of Stockholder’s Equity | 3 |
Statements of Operations | 4 |
Statements of Cash Flows | 5 |
Notes to Financial Statements | 6 |
CUSTOM BIOGENIC SYSTEMS, INC. |
UNAUDITED BALANCE SHEETS |
September 30, | December 31, | |||||||
2019 |
2018 |
|||||||
ASSETS |
||||||||
CURRENT ASSETS |
||||||||
Cash |
$ | 1,438 | $ | 7,760 | ||||
Accounts receivable |
1,502,854 | 1,437,718 | ||||||
Inventory, net |
2,793,588 | 2,038,441 | ||||||
Prepaid expenses |
41,403 | 32,069 | ||||||
Total current assets |
4,339,283 | 3,515,988 | ||||||
PROPERTY AND EQUIPMENT, net |
3,238,708 | 3,607,545 | ||||||
TOTAL ASSETS |
$ | 7,577,991 | $ | 7,123,533 | ||||
LIABILITIES AND STOCKHOLDER'S EQUITY |
||||||||
CURRENT LIABILITIES |
||||||||
Current portion of long-term debt |
$ | 398,314 | $ | 526,609 | ||||
Bank overdraft |
297,486 | 213,461 | ||||||
Line of credit |
1,149,883 | 1,145,804 | ||||||
Accounts payable |
2,050,215 | 1,727,845 | ||||||
Accrued expenses |
247,583 | 201,703 | ||||||
Deposits |
282,461 | 331,210 | ||||||
Notes payable - related parties |
871,287 | 451,985 | ||||||
Total current liabilities |
5,297,229 | 4,598,617 | ||||||
LONG-TERM LIABILITIES, net of current portion |
1,334,187 | 1,747,311 | ||||||
TOTAL LIABILITIES |
6,631,416 | 6,345,928 | ||||||
STOCKHOLDER'S EQUITY |
946,575 | 777,605 | ||||||
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY |
$ | 7,577,991 | $ | 7,123,533 |
CUSTOM BIOGENIC SYSTEMS, INC. |
UNAUDITED STATEMENTS OF STOCKHOLDER'S EQUITY |
Nine months ended September 30, 2019 and 2018 |
Common |
Retained |
|||||||||||
Stock |
Earnings |
Total |
||||||||||
Balance, January 1, 2018 |
$ | 100 | $ | 1,434,934 | $ | 1,435,034 | ||||||
Dividend distributions |
- | (30,000 | ) | (30,000 | ) | |||||||
Net loss |
- | (627,429 | ) | (627,429 | ) | |||||||
Balance, September 30, 2018 |
$ | 100 | $ | 777,505 | $ | 777,605 | ||||||
Common |
Retained |
|||||||||||
Stock |
Earnings |
Total |
||||||||||
Balance, January 1, 2019 |
$ | 100 | $ | 820,182 | $ | 820,282 | ||||||
Dividend distributions |
- | (30,000 | ) | (30,000 | ) | |||||||
Net income |
- | 156,293 | 156,293 | |||||||||
Balance, September 30, 2019 |
$ | 100 | $ | 946,475 | $ | 946,575 |
CUSTOM BIOGENIC SYSTEMS, INC. |
UNAUDITED STATEMENTS OF OPERATIONS |
Nine months ended September 30, |
||||||||||||||||
2019 |
2018 |
|||||||||||||||
Percent of |
Percent of |
|||||||||||||||
Amount |
Net Sales |
Amount |
Net Sales |
|||||||||||||
Net sales |
$ | 9,423,425 | 100.0 |
% |
$ | 8,723,490 | 100.0 |
% |
||||||||
Cost of goods sold |
6,444,614 | 68.4 | 6,077,519 | 69.7 | ||||||||||||
Gross profit |
2,978,811 | 31.6 | 2,645,971 | 30.3 | ||||||||||||
Operating expenses |
||||||||||||||||
Research and development |
518,442 | 5.5 | 840,052 | 9.6 | ||||||||||||
General and administrative |
1,690,620 | 17.9 | 1,752,005 | 20.1 | ||||||||||||
Sales and marketing |
477,337 | 5.1 | 569,527 | 6.5 | ||||||||||||
Total operating expenses |
2,686,399 | 28.5 | 3,161,584 | 36.2 | ||||||||||||
Operating income (loss) |
292,412 | 3.1 | (515,613 | ) | (5.9 | ) | ||||||||||
Other income (expense) |
||||||||||||||||
Other income |
126 | - | - | - | ||||||||||||
Interest expense |
(136,245 | ) | (1.4 | ) | (111,816 | ) | (1.3 | ) | ||||||||
Total other income (expense) |
(136,119 | ) | (1.4 | ) | (111,816 | ) | (1.3 | ) | ||||||||
Net income (loss) |
$ | 156,293 | 1.7 |
% |
$ | (627,429 | ) | (7.2 |
)% |
CUSTOM BIOGENIC SYSTEMS, INC. |
UNAUDITED STATEMENTS OF CASH FLOWS |
Nine months |
||||||||
ended September 30, |
||||||||
2019 |
2018 |
|||||||
OPERATING ACTIVITIES |
||||||||
Net income (loss) |
$ | 156,293 | $ | (627,429 | ) | |||
Adjustments to reconcile net income (loss) to net cash flows from operating activities: |
||||||||
Depreciation and amortization |
372,554 | 330,061 | ||||||
Loss on sale of fixed assets |
7,967 | 7,937 | ||||||
Bad debt expense |
6,459 | - | ||||||
Changes in: |
||||||||
Accounts receivable |
(297,118 | ) | 180,198 | |||||
Inventory |
118,852 | 151,011 | ||||||
Prepaid expenses |
(28,908 | ) | (19,426 | ) | ||||
Deposits |
23,556 | 64,065 | ||||||
Accounts payable and accrued expenses |
(226,755 | ) | 577,575 | |||||
Net cash provided by operating activities |
132,900 | 663,992 | ||||||
INVESTING ACTIVITIES |
||||||||
Proceeds from sale of fixed assets |
25,000 | 253,665 | ||||||
Expenditures for property and equipment |
(115,619 | ) | (400,891 | ) | ||||
Expenditures for construction in process |
(23,380 | ) | (12,473 | ) | ||||
Net cash used in investing activities |
(113,999 | ) | (159,699 | ) | ||||
FINANCING ACTIVITIES |
||||||||
Net activity under bank overdraft |
54,366 | (8,401 | ) | |||||
Borrowings under line of credit |
4,146,976 | 4,274,656 | ||||||
Payments on line of credit |
(4,248,951 | ) | (4,286,830 | ) | ||||
Payments on notes payable |
(400,579 | ) | (370,262 | ) | ||||
Payments on capital lease |
- | (37,506 | ) | |||||
Borrowings on notes payable - related parties |
541,500 | 46,286 | ||||||
Payments on notes payable - related parties |
(82,079 | ) | (84,879 | ) | ||||
Dividend distributions |
(30,000 | ) | (30,000 | ) | ||||
Net cash (used in) provided by financing activities |
(18,767 | ) | (496,936 | ) | ||||
NET CHANGE IN CASH |
134 | 7,357 | ||||||
CASH, Beginning of year |
1,304 | 403 | ||||||
CASH, End of year |
$ | 1,438 | $ | 7,760 |
CUSTOM BIOGENIC SYSTEMS, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
September 30, 2019 and 2018
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of certain accounting policies followed in the preparation of these financial statements. The policies conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the financial statements.
Company Operations
Custom Biogenic Systems, Inc. (the “Company”) is engaged in the manufacture and sale of cryogenic freezing and long-term storage products mostly within the healthcare and biomedical industries to customers around the world, with majority of sales shipped to North America and Europe.
Use of Estimates
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.
Concentration of Credit Risk
The Company, from time to time during the periods covered by these financial statements, may have bank balances in excess of its insured limits. Management has deemed this as a normal business risk.
Accounts Receivable
The Company carries its accounts receivable at their invoiced amounts. On a periodic basis, the Company evaluates its accounts receivable and establishes an allowance for doubtful accounts, when deemed necessary, based on the history of past write-offs and collections and current credit conditions. The Company will place customer accounts on hold if payments violate terms of agreement. At September 30, 2019 and 2018, management determined no allowance was deemed necessary. Generally, the Company does not require collateral for its accounts receivable. The Company does not charge interest on past due accounts receivable.
CUSTOM BIOGENIC SYSTEMS, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
September 30, 2019 and 2018
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Inventory Valuation
Inventories are valued at lower of cost or net realizable value, with cost being determined on a first-in, first-out basis. Net realizable value is the estimated selling price in the ordinary course of business less reasonably predictable costs of completion, disposal, and transportation. General and administrative expenses are not inventoried, but are charged to expense when purchased. Provisions are recorded to reduce inventory for obsolete or slow-moving inventory based on assumptions about future demand and marketability of products, inventory levels and turns and product spoilage. As of September 31, 2019 and 2018, the Company had an inventory reserve in the amount of $210,000 and $140,000, respectively.
Property and Equipment
Management capitalizes expenditures for property and equipment. Expenditures for maintenance and repairs are charged to operating expenses. Property and equipment are carried at cost. Adjustments of the asset and the related accumulated depreciation and amortization accounts are made for property and equipment retirements and disposals, with the resulting gain or loss included in the statements of operations.
Depreciation and Amortization
Depreciation and amortization of property and equipment are computed using the straight-line method over the estimated useful lives of assets at acquisition. Leasehold improvements are amortized over the shorter of the assets’ useful lives or the term of the lease.
Depreciation and amortization for the nine months ended September 31, 2019 and 2018 was $372,554 and $330,061, respectively.
Revenue Recognition
Sales are recorded when the products are shipped to customers. Provision for discounts and rebates to customers and other adjustments are provided for in the same period as the related sales.
Shipping and Handling Costs
The Company records the amount of shipping and handling costs billed of customers as revenue. The cost incurred for shipping and handling is included in cost of sales.
CUSTOM BIOGENIC SYSTEMS, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
September 30, 2019 and 2018
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Advertising and Promotion
Advertising and promotion costs are expensed as incurred. Advertising and promotion expense for the nine months ended September 30, 2019 and 2018 was $106,126 and $187,852, respectively.
Sales and Use Taxes
The Company records sales net of sales and use taxes.
Product Warranty
The Company accrues an estimate of its exposure to warranty claims based on both current and historical product sales data and warranty costs incurred. The majority of the Company’s products carry a warranty ranging from ninety days to five years. The Company assesses the adequacy of its recorded warranty liability annually and adjusts the amount as necessary. The warranty liability is included in accrued expenses in the accompanying balance sheet. Warranty expenses are recorded in cost of sales. See Note 13 for additional disclosure.
Income Taxes
Custom Biogenic Systems, Inc. has elected to be treated as a Subchapter S Corporation under the Internal Revenue Code. Under these provisions, the Company generally does not pay federal corporate income taxes on its taxable income. Instead, the stockholder is liable for individual federal and state income taxes the Company’s taxable income. Accordingly, no provision for federal or state corporate income taxes has been reflected in the financial statements.
Variable Interest Entities
Under alternatives available to private companies, the Company has elected not to evaluate any related parties under common control to determine if any such entities are variable interest entities that might be required to be consolidated in the financial statements of the Company.
CUSTOM BIOGENIC SYSTEMS, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
September 30, 2019 and 2018
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Subsequent Events
The Company has performed a review of events subsequent to the balance sheet date through January 24, 2020, the date the financial statements were available to be issued.
NOTE 2 – RELATED PARTY TRANSACTIONS
Notes Payable
At September 30, 2019 and 2018, the Company was indebted to its sole shareholder in the amount of $694,402 and $328,692, respectively. The note is unsecured, non-interest bearing, is classified as short-term on the balance, and is due on demand. See Note 7 for a schedule of minimum long-term debt payments.
At September 30, 2019 and 2018, the Company was indebted to a related party through common ownership in the amount of $176,885 and $109,174, respectively. The note is unsecured, non-interest bearing, is classified as short-term on the balance sheets, and is due on demand. See Note 7 for a schedule of minimum long-term debt payments.
At September 30, 2018, the Company was indebted to related parties in the amount of $14,119. The note was unsecured and was classified as short-term on the balance sheet. During the period ended September 30, 2019 the note was paid in full.
Lease Agreement
The Company leases its operating facilities from a related party on a month-to-month basis. The lease calls for monthly payments of $10,000 and total rental expense related to the lease during the periods ended September 30, 2019 and 2018 was $95,645 and $89,900 respectively.
Guarantee
The Company guarantees the debt of a related party through common ownership, which is secured by real estate owned by a related party. In the event of a default by the related party, the Company could be obligated to repay the full amount outstanding. At September 30, 2019 and 2018, the outstanding balance is $827,686 and $872,056, respectively. Management anticipates the related party will be able to meet their debt obligation, therefore; no accrual has been made on the financial statements at September 30, 2019 and 2018.
CUSTOM BIOGENIC SYSTEMS, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
September 30, 2019 and 2018
NOTE 3 – INVENTORY
Inventory consisted of the following at September 30:
2019 |
2018 |
|||||||
Raw materials |
$ | 792,898 | $ | 621,433 | ||||
Work in process |
483,064 | 143,628 | ||||||
Finished goods |
1,727,626 | 1,413,380 | ||||||
Inventory Reserve |
(210,000 | ) | (140,000 | ) | ||||
$ | 2,793,588 | $ | 2,038,441 |
NOTE 4 – PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at September 30:
2019 |
2018 |
|||||||
Equipment |
$ | 4,617,910 | $ | 4,570,023 | ||||
Computers & equipment |
384,029 | 389,679 | ||||||
Furniture & fixtures |
38,709 | 36,909 | ||||||
Autos & trucks |
77,319 | 97,462 | ||||||
Building improvements |
717,456 | 684,703 | ||||||
5,835,423 | 5,778,776 | |||||||
Less: Accumulated depreciation and amortization |
2,639,417 | 2,190,554 | ||||||
3,196,006 | 3,588,222 | |||||||
Construction in process |
42,702 | 19,323 | ||||||
$ | 3,238,708 | $ | 3,607,545 |
NOTE 5 – LINE OF CREDIT
At September 30, 2019 and 2018, the Company had drawn $1,149,883 and $1,145,804, respectively, under a line-of-credit agreement with a financial institution. Under the agreement, the Company may borrow up to $1,500,000 on a revolving basis through November 2019. The line of credit bears interest at LIBOR plus 2.5% (LIBOR was 2.05% at September 30, 2019) and is secured by the Company’s general assets. The agreement is subject to a financial covenant related to a fixed charge coverage ratio. At covenant measurement date, December 31, 2018, the Company was not in compliance with the financial covenant. Subsequent to December 31, 2018, the financial institution issued a waiver for the covenant violation.
CUSTOM BIOGENIC SYSTEMS, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
September 30, 2019 and 2018
NOTE 6 – ACCRUED EXPENSES
Accrued expenses consisted of the following at September 30:
2019 |
2018 |
|||||||
Accrued payroll |
$ | 75,235 | $ | 83,907 | ||||
Interest payable |
13,116 | 15,829 | ||||||
Sales tax payable |
11,522 | 23,967 | ||||||
Property taxes |
3,710 | - | ||||||
Accrued warranty expense |
144,000 | 78,000 | ||||||
$ | 247,583 | $ | 201,703 |
NOTE 7 – LONG-TERM DEBT
September 30, |
||||||||
2019 |
2018 |
|||||||
The Company has a note payable to a financial institution. The note is payable in monthly installments of $15,974, including interest at 3.59%, and matures in November 2019. The note is secured by the Company’s general assets and is cross-collateralized and cross-defaulted with other notes and a line of credit from the same financial institution. The agreement is subject to a financial covenant related to a fixed charge coverage ratio. At December 31, 2018, the Company was not in compliance with the financial covenant. Subsequent to December 31, 2018, the financial institution issued a waiver for the covenant violation. |
$ | 31,825 | $ | 218,644 | ||||
The Company has a note payable to a financial institution. The note is payable in monthly installments of $6,548, plus interest at LIBOR plus 2.75%, and matures in June 2023. The note is secured by the Company’s general assets and is cross-collateralized and cross-defaulted with other notes and a line of credit from the same financial institution. The agreement is subject to a financial covenant related to a fixed charge coverage ratio. At December 31, 2018, the Company was not in compliance with the financial covenant. Subsequent to December 31, 2018, the financial institution issued a waiver for the covenant violation. |
294,643 | 373,214 | ||||||
Subtotal |
$ | 326,468 | $ | 591,858 |
CUSTOM BIOGENIC SYSTEMS, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
September 30, 2019 and 2018
NOTE 7 – LONG-TERM DEBT (Continued)
September 30, |
||||||||
2019 |
2018 |
|||||||
Subtotal from previous page |
$ | 326,468 | $ | 591,858 | ||||
The Company has a note payable to a financial institution. The note is payable in monthly installments of $3,571, plus interest at LIBOR plus 2.75%, and matures in December 2023. The note is secured by the Company’s general assets and is cross-collateralized and cross-defaulted with other notes and a line of credit from the same financial institution. The agreement is subject to a financial covenant related to a fixed charge coverage ratio. At December 31, 2018, the Company was not in compliance with the financial covenant. Subsequent to December 31, 2018, the financial institution issued a waiver for the covenant violation. |
178,571 | 221,429 | ||||||
The Company has a note payable to a financial institution. The note is payable in monthly installments of $812, including interest at 4.9%, secured by the vehicle purchased under the note, and matures in May 2020. During the nine months ended September 30, 2019, the Company paid the remaining balance of the loan. |
- | 14,810 | ||||||
The Company has a note payable to a financial institution in the original amount of $600,000. The note is payable in monthly installments of $9,807, plus interest at LIBOR plus 2.75%, and matures in November 2022. The note is secured by the Company’s general assets and is cross-collateralized and cross-defaulted with other notes and the line of credit from the same financial institution. The agreement is subject to a financial covenant related to a fixed charge coverage ratio. At December 31, 2018, the Company was not in compliance with the financial covenant. Subsequent to December 31, 2018, the financial institution issued a waiver for the covenant violation. |
382,460 | 500,520 | ||||||
Subtotal |
$ | 887,499 | $ | 1,328,617 |
CUSTOM BIOGENIC SYSTEMS, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
September 30, 2019 and 2018
NOTE 7 – LONG-TERM DEBT (Continued)
September 30, |
||||||||
2019 |
2018 |
|||||||
Subtotal from previous page |
$ | 887,499 | $ | 1,328,617 | ||||
During the nine months ended September 30, 2018, the Company entered into a note payable to a financial institution in the amount of $959,733. The note is payable in monthly installments of $12,953, including interest 7.31% and matures June 2025 with a final payment $192,244. The loan is secured by financed assets. |
845,002 | 945,303 | ||||||
Notes payable to related parties from Note 2 |
871,287 | 451,985 | ||||||
Subtotal |
2,603,788 | 2,725,905 | ||||||
Less: related party debt |
871,287 | 451,985 | ||||||
Less: current portion of long-term debt |
398,314 | 526,609 | ||||||
$ | 1,334,187 | $ | 1,747,311 |
Minimum future payments for the notes described above and in Note 2 for the next five years and in the aggregate are as follows:
Years ended September 30, |
Amount |
|||
2020 |
$ | 1,269,601 | ||
2021 |
341,919 | |||
2022 |
351,134 | |||
2023 |
253,056 | |||
2024 |
148,969 | |||
Subsequent to 2024 |
239,109 | |||
$ | 2,603,788 |
NOTE 8 – CAPITAL LEASE
At December 31, 2017, the Company had a capital lease payable to a financial institution in the amount of $183,221. The asset and liability under the lease were recorded at the lower of the present value of the minimum lease payments or the fair value of the asset. During the nine months ended September 30, 2018, the capital lease was refinanced into a new note payable as described in Note 7.
Interest expense included in the capital lease payments for the nine months ended September 30, 2018 was $7,353. Depreciation expense for the asset under the capital lease for the nine months ended September 30, 2018 was $25,450.
CUSTOM BIOGENIC SYSTEMS, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
September 30, 2019 and 2018
NOTE 9 – OPERATING LEASE
The Company leases certain office equipment under an operating lease agreement ending February 2021. The lease agreement calls for monthly payments of $296 including taxes. This lease agreement replaces another lease agreement which expired in February, 2018. Total lease expense under these agreements for the periods ended September 30, 2019 and 2018 was $2,666 and $2,676, respectively.
The following is a schedule of minimum future lease payments under the non-cancelable operating lease above for the next two years:
Years ended September 30, |
Amount |
|||
2020 |
$ | 3,554 | ||
2021 |
1,481 | |||
Total minimum future lease payments |
$ | 5,035 |
NOTE 10 – COMMON STOCK
Custom Biogenic Systems, Inc. had authorized 10,000 shares of $1 par value common stock. At both September 30, 2019 and 2018, the Company had 100 shares issued and outstanding.
NOTE 11 – ECONOMIC DEPENDENCY
The Company sold a substantial portion of its services to one customer during the nine months ended September 30, 2019 and 2018. For the nine months ended September 30, 2019 and 2018, sales to this customer approximated 15% and 16% of net sales, respectively. Accounts receivable to this customer amounted to $204,757 and $306,107 at September 30, 2019 and 2018, respectively.
The Company purchased a substantial portion of their supplies and services from two and three of their suppliers during the nine months ended September 30, 2019 and 2018, respectively. For the nine months ended September 30, 2019 and 2018, purchases from these suppliers approximated 45% and 49% of total purchases, respectively. Accounts payable to these customers amounted to $996,072 and $800,002 at September 30, 2019 and 2018, respectively.
CUSTOM BIOGENIC SYSTEMS, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
September 30, 2019 and 2018
NOTE 12 – 401(K) RETIREMENT PLAN
The Company sponsors a traditional 401(k) plan covering substantially all employees at least 19 years old with one full year of service. Eligible employees may contribute up to the IRS limit. Under the plan, the Company can make contributions at the discretion of management. During the nine months ended September 30, 2019 and 2018, the Company did not make a matching contribution. The Company has funded or accrued all calculated contributions as of the balance sheet dates.
NOTE 13 – PRODUCT WARRANTIES
The following summarizes the changes in the Company’s aggregate liability under product warranties for the periods ended September 30:
2019 |
2018 |
|||||||
Warranty accrual, beginning of year |
$ | 93,000 | $ | 75,000 | ||||
Charged to costs and expenses |
251,005 | 84,187 | ||||||
Actual warranty expenditures |
(200,005 | ) | (81,187 | ) | ||||
Warranty accrual, end of year |
$ | 144,000 | $ | 78,000 |
NOTE 14 – CASH FLOWS
The following is a schedule of interest paid for the periods ended September 30:
2019 |
2018 |
|||||||
Interest paid |
$ | 136,245 | $ | 111,816 |
Non-cash transactions:
During the period ended September 30, 2018 the Company refinanced a capital lease into a new note payable in the amount of $814,018. See long term debt disclosure at Note 7.
During the period ended September 30, 2018, the Company refinanced outstanding balance on a capital lease identified in Note 8 into a new note payable disclosed in Note 7 in the amount of $145,715.
CUSTOM BIOGENIC SYSTEMS, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
September 30, 2019 and 2018
NOTE 15 − LITIGATION
The Company is subject to outstanding claims that arise in the ordinary course of business and to other legal proceedings. Management anticipates that any potential liability of the Company, which may arise with respect to these matters, will not materially affect the Company’s financial statements.
NOTE 16 – SUBSEQUENT EVENTS
Subsequent to the balance sheet date, the Company sold substantially all of its assets to an unrelated third party. A portion of the proceeds from the sale were used to pay off all outstanding notes payable and the line of credit identified in Note 2, 5 and 7.
Page 16
Exhibit 99.3
BioLife Solutions, Inc.
Unaudited Pro Forma Condensed Combined Balance Sheets
September 30, 2019
(In thousands)
Historical BioLife |
Historical CBS |
Pro Forma Adjustments |
Notes (1) |
Pro Forma Combined |
|||||||||||||
Assets |
|||||||||||||||||
Current Assets |
|||||||||||||||||
Cash and cash equivalents |
$ | 21,205 | $ | 1 | $ | (11,001 |
) |
(a) |
$ | 10,205 | |||||||
Accounts receivable, net |
4,313 | 1,503 | — | 5,816 | |||||||||||||
Inventories |
5,694 | 2,794 | 135 |
(b) |
8,623 | ||||||||||||
Prepaid expenses and other current assets |
855 | 41 | — | 896 | |||||||||||||
Total current assets |
32,067 | 4,339 | (10,866 |
) |
25,540 | ||||||||||||
Property and equipment, net |
2,136 | 3,239 | 371 |
(c) |
5,746 | ||||||||||||
Operating lease right-of-use assets |
1,177 | — | — | 1,177 | |||||||||||||
Assets held for lease |
2,976 | — | — | 2,976 | |||||||||||||
Intangible assets, net |
16,485 | — | 6,790 |
(d) |
23,275 | ||||||||||||
Goodwill |
28,351 | — | 3,597 |
(e) |
31,948 | ||||||||||||
Investments |
1,000 | — | — | 1,000 | |||||||||||||
Other assets |
36 | — | — | 36 | |||||||||||||
Total assets |
$ | 84,228 | $ | 7,578 | $ | (108 | ) | $ | 91,698 | ||||||||
Liabilities and Stockholders Equity |
|||||||||||||||||
Current liabilities |
|||||||||||||||||
Accounts payable |
$ | 1,570 | $ | 2,050 | $ | — | $ | 3,620 | |||||||||
Accrued expenses and other current liabilities |
230 | 530 | — | 760 | |||||||||||||
Accrued compensation |
1,576 | — | — | 1,576 | |||||||||||||
Current portion of long-term debt |
— | 398 | (398 |
) |
(f) |
— | |||||||||||
Bank overdraft and line of credit |
— | 1,448 | (1,448 |
) |
(f) |
— | |||||||||||
Due to related parties |
— | 871 | (871 |
) |
(f) |
— | |||||||||||
Contingent consideration |
371 | — | 21 |
(g) |
392 | ||||||||||||
Lease liability - operating, current portion |
771 | — | — | 771 | |||||||||||||
Other liabilities |
426 | — | — | 426 | |||||||||||||
Total current liabilities |
4,944 | 5,297 | (2,696 |
) |
7,545 | ||||||||||||
Long-term lease liability - operating |
753 | — | — | 753 | |||||||||||||
Contingent consideration |
1,560 | — | 869 |
(g) |
2,429 | ||||||||||||
Other long-term liabilities |
9 | 1,335 | (1,335 |
) |
(f) |
9 | |||||||||||
Total liabilities |
7,266 | 6,632 | (3,162 |
) |
10,736 | ||||||||||||
Shareholder’s equity |
|||||||||||||||||
Common stock |
20 | — | — |
(h) |
20 | ||||||||||||
Additional paid-in capital |
137,392 | — | 4,000 |
(h) |
141,392 | ||||||||||||
Accumulated deficit |
(60,450 |
) |
946 | (946 |
) |
(i) |
(60,450 |
) |
|||||||||
Total shareholder’s equity |
76,962 | 946 | 3,054 | 80,962 | |||||||||||||
Total liabilities and shareholder’s equity |
$ | 84,228 | $ | 7,578 | $ | (108 | ) | $ | 91,698 |
(1) See Note 4 to the accompanying notes to unaudited pro forma condensed combined financial statements
BioLife Solutions, Inc.
Unaudited Pro Forma Condensed Combined Statements of Operations
For the Nine Months Ended September 30, 2019
(In thousands, except share and per share data)
Pro Forma Consolidated Adjusted Nine Months Ended September 30, 2019 |
Historical CBS |
Pro Forma Adjustments |
Notes (1) |
Pro Forma Combined |
|||||||||||||
Product sales |
$ | 19,726 | $ | 9,423 | $ | — | $ | 29,149 | |||||||||
Cost of product sales |
6,500 | 6,445 | — | 12,945 | |||||||||||||
Gross profit |
13,226 | 2,978 | — | 16,204 | |||||||||||||
Operating expenses |
|||||||||||||||||
Research and development |
4,170 | 518 | 546 |
(d),(j) |
5,234 | ||||||||||||
Sales and marketing |
3,637 | 1,691 | 170 |
(d) |
5,498 | ||||||||||||
General and administrative |
7,058 | 477 | — | 7,535 | |||||||||||||
Acquisition Costs |
291 | — | (291 |
) |
(k) |
— | |||||||||||
Total operating expenses |
15,156 | 2,686 | 425 | 18,267 | |||||||||||||
Operating income (loss) |
(1,930 |
) |
292 | (425 |
) |
(2,063 |
) |
||||||||||
Other (expenses) income, net |
412 | (136 |
) |
136 |
(f) |
412 | |||||||||||
Net income (loss) |
$ | (1,518 |
) |
$ | 156 | (289 |
) |
$ | (1,651 |
) |
|||||||
Net loss per share: |
|||||||||||||||||
Basic |
$ | (0.08 |
) |
$ | (0.08 |
) |
|||||||||||
Diluted(2) |
$ | (0.08 |
) |
$ | (0.08 |
) |
|||||||||||
Weighted average common shares outstanding: |
|||||||||||||||||
Basic |
19,950,110 | 234,219 | 20,184,329 | ||||||||||||||
Diluted |
25,583,812 | 234,219 | 25,818,031 |
(1) |
See Note 4 to the accompanying notes to unaudited pro forma condensed combined financial statements |
(2) |
Common stock equivalents are excluded since the effect is anti-dilutive due to the Company’s pro forma net losses |
BioLife Solutions, Inc.
Unaudited Pro Forma Condensed Combined Statements of Operations
For the Twelve Months Ended December 31, 2018
(In thousands, except share and per share data)
Pro Forma Consolidated Adjusted Twelve Months Ended December 31, 2018 |
Historical CBS |
Pro Forma Adjustments |
Notes (1) |
Pro Forma Combined |
|||||||||||||
Product sales |
$ | 20,638 | $ | 11,715 | $ | — | $ | 32,353 | |||||||||
Cost of product sales |
7,067 | 8,006 | — | 15,073 | |||||||||||||
Gross profit |
13,571 | 3,709 | — | 17,280 | |||||||||||||
Operating expenses |
|||||||||||||||||
Research and development |
4,483 | 935 | 727 |
(d),(j) |
6,145 | ||||||||||||
Sales and marketing |
3,819 | 2,400 | 227 |
(d) |
6,446 | ||||||||||||
General and administrative |
7,315 | 771 | 8,086 | ||||||||||||||
Acquisition Costs |
— | — | — | — | |||||||||||||
Total operating expenses |
15,617 | 4,106 | 954 | 20,677 | |||||||||||||
Operating income (loss) |
(2,046 |
) |
(397 |
) |
(954 |
) |
(3,397 |
) |
|||||||||
Other (expenses) income, net |
271 | (188 |
) |
188 |
(f) |
271 | |||||||||||
Net income (loss) |
(1,775 |
) |
(585 |
) |
(766 |
) |
(3,126 |
) |
|||||||||
Less: Preferred stock dividends and impact of redemption |
(339 |
) |
— | — | (339 |
) |
|||||||||||
Net income (loss) attributable to common stockholders |
$ | (2,114 |
) |
$ | (585 |
) |
(766 |
) |
$ | (3,465 |
) |
||||||
Net loss per share: |
|||||||||||||||||
Basic |
$ | (0.12 |
) |
$ | (0.20 |
) |
|||||||||||
Diluted(2) |
$ | (0.12 |
) |
$ | (0.20 |
) |
|||||||||||
Weighted average common shares outstanding: |
|||||||||||||||||
Basic |
17,356,465 | 234,219 | 17,590,684 | ||||||||||||||
Diluted |
22,727,278 | 234,219 | 22,961,497 |
(1) |
See Note 4 to the accompanying notes to unaudited pro forma condensed combined financial statements |
(2) |
Common stock equivalents are excluded since the effect is anti-dilutive due to the Company’s pro forma net losses |
BioLife Solutions, Inc.
Notes to Unaudited Pro Forma Condensed Combined Financial Statements
1. |
Description of the Transaction |
As previously disclosed, on November 12, 2019, BioLife Solutions, Inc. (the “Company”) acquired (the “Acquisition”) substantially all of the assets of Custom Biogenic Systems, Inc. (“CBS”). CBS, a privately held company with operations located near Detroit, is a global leader in the design and manufacture of state-of-the-art liquid nitrogen laboratory freezers and cryogenic equipment. CBS also offers a related cloud-based monitoring system that continuously assesses biologic sample storage conditions and alerts equipment owners if a fault condition occurs.
CBS founder, sole shareholder and CEO John Brothers received $11 million in cash and $4 million of BioLife common stock in consideration for the asset sale. Brothers, now Vice President, Advanced Freezer Technologies at BioLife, may earn up to an additional $15 million in cash or stock over the next five years, based on exceeding certain annual new product revenue goals.
2. |
Basis of Presentation |
The accompanying unaudited pro forma condensed combined financial statements combine the historical consolidated financial statements of Biolife and those of CBS after giving effect to the Acquisition, using the acquisition method of accounting in accordance with Accounting Standards Codification (ASC) 805, “Business Combinations”, and applying the assumptions and adjustments described in the accompanying notes. The accompanying unaudited pro forma condensed combined financial information was prepared in accordance with Article 11 of SEC Regulation S-X.
The unaudited pro forma condensed combined statements of operations for the nine months ended September 30, 2019 combine BioLife’s operating results for the nine months ended September 30, 2019, after giving effect to the unaudited pro forma operating results of our April 1, 2019 Astero acquisition for the three months ended March 31, 2019 and the unaudited pro forma operating results of our August 7, 2019 SAVSU acquisition prior to our acquisition date (see our Form 8-K/A filed October 23, 2019), with the operating results of CBS for the nine months ended September 30, 2019. The unaudited pro forma condensed combined statements of operations for the 12 months ended December 31, 2018 combine BioLife’s operating results for the twelve months ended December 31, 2018, which include and the unaudited pro forma to operating results of Astero and SAVSU for the twelve months ended December 31, 2018, with the operating results of CBS and for the twelve months ended December 31, 2018. The unaudited pro forma condensed balance sheets combine BioLife’s balance sheet as of September 30, 2019 with the balance sheet of CBS as of September 30, 2019.
The unaudited pro forma condensed combined statements of operations and balance sheets give effect to the Acquisition as if such acquisition had occurred at the beginning of the year. The historical consolidated financial statements have been adjusted in the pro forma condensed combined financial statements to give effect to pro forma events that are (1) directly attributable to the business combination, (2) factually supportable and (3) with respect to the pro forma condensed combined statements of operations, expected to have a continuing impact on the combined results following the business combination. The unaudited pro forma condensed combined financial information herein should be read in conjunction with the historical financial statements and the related notes thereto of BioLife which are presented in the Annual Report on Form 10-K for the year ended December 31, 2018. The unaudited pro forma condensed combined financial statements are presented for illustrative purposes only and are not necessarily indicative of the operating results that would have been achieved if the Acquisition had been consummated as of the beginning of the period presented, nor are they necessarily indicative of the future operating results of the combined company. No effect has been given in these pro forma financial statements for synergistic benefits that may be realized through the combination or costs that may be incurred in integrating operations.
3. |
Estimated consideration and preliminary purchase price allocation |
BioLife accounted for the Acquisition as the purchase of a business under U.S. GAAP. Under the acquisition method of accounting, the assets of CBS will be recorded as of the acquisition date, at their fair values, and consolidated with BioLife. The preliminary fair value of the net tangible assets acquired is $5.5 million, the preliminary fair value of the identifiable intangibles is $10.4 million, and the preliminary residual goodwill is $3.6 million. The fair value estimates required critical estimates, including, but not limited to, future expected cash flows, revenue and expense projections, discount rates, revenue volatility, and royalty rates. BioLife believes these estimates to be reasonable. Actual results may differ from these estimates.
Total consideration transferred (in thousands):
Cash consideration |
$ | 11,000 | ||
Stock consideration |
4,000 | |||
Contingent consideration |
890 | |||
Total consideration transferred |
$ | 15,890 |
Transaction costs related to the acquisition are expensed as incurred and are not included in the calculation of consideration transferred.
The table below represents the estimated preliminary purchase price allocation to the net assets acquired based on their estimated fair values, as well as the associated estimated useful lives of the acquired intangible assets (amounts in thousands). Such amounts were estimated using the most recent financial statements from CBS as of September 30, 2019.
Accounts receivable, net |
1,503 | |||
Inventory |
2,929 | |||
Prepaid expenses and other current assets |
41 | |||
Property, plant and equipment, net |
3,610 | |||
Customer relationships |
560 | |||
Tradenames |
800 | |||
Developed technology |
5,430 | |||
Goodwill |
3,597 | |||
Accounts Payable |
(2,050 |
) |
||
Other liabilities |
(530 |
) |
||
Fair value of net assets acquired |
$ | 15,890 |
The fair value of CBS’s identifiable intangible assets and weighted average useful lives have been preliminary estimated as follows (amounts in thousands):
Estimated Fair Value |
Estimated Useful Life (Years) |
|||||||
Customer relationships |
$ | 560 | 6 | |||||
Tradenames |
800 | 6 | ||||||
Acquired technologies |
5,430 | 9 | ||||||
Total identifiable intangible assets |
$ | 6,790 |
Fair value measurement methodologies used to calculate the value of any asset can be broadly classified into one of three approaches, referred to as the cost, market and income approaches. In any fair value measurement analysis, all three approaches must be considered, and the approach or approaches deemed most relevant will then be selected for use in the fair value measurement of that asset. The fair value of identifiable intangible assets was determined primarily using variations of the “income approach,” which is based on the present value of the future after-tax cash flows attributable to each identifiable intangible asset. The fair value of inventories was determined using both the “cost approach” and the “market approach” and the fair value of property, plant and equipment was determined using the “market approach”.
Some of the more significant assumptions inherent in the development of intangible asset fair values, from the perspective of a market participant, include, but are not limited to (i) the amount and timing of projected future cash flows (including revenue and expenses), (ii) the discount rate selected to measure the risks inherent in the future cash flows, (iii) the assessment of the asset’s life cycle, and (iv) the competitive trends impacting the asset.
These preliminary estimates of fair value and estimated useful lives may be different from the amounts included in the final acquisition accounting, and the difference could have a material impact on the accompanying unaudited pro forma condensed combined financial statements.
4. |
Pro Forma Adjustments |
This note should be read in conjunction with Notes 1 and 2. Adjustments included in the pro forma adjustments column of the pro forma condensed combined statement of operations and the pro forma condensed combined balance sheet include the following, as indicated in the “Notes” column thereto:
(a) |
An adjustment to cash of $11.0 million for the estimated non-contingent cash portion of the transaction price, include $450,000 in escrow less the cash not purchased per the asset purchase agreement |
(b) |
The adjustment represents the estimated step-up of CBS inventory by $500,000 from carrying value less an inventory reserve of $365,000. The fair value calculation is preliminary and subject to change. The step-up in inventory will increase cost of sales as inventory is sold. The increase is not reflected in the pro forma condensed combined statements of operation because it does not have a continuing impact. |
(c) |
The adjustment represents the estimated fair market value of CBS fixed assets by $371,000 from historical cost basis. The fair value calculation is preliminary and subject to change and will be depreciated over the remaining useful life of the assets. |
(d) |
Reflects the preliminary fair value estimate of identifiable intangible assets to be acquired by BioLife of $6.8 million, with a continuing annual amortization impact of $830,000. The fair value calculation is preliminary and subject to change. The identifiable intangible assets include developed technology, customer relationships, and trade names. The fair value of the identifiable intangible assets is determined primarily using the “income approach,” which requires a forecast of all the expected future cash flows. |
(e) |
Reflects the adjustments to record goodwill related to the transaction. |
(f) |
No debt or bank payables was assumed under the asset purchase agreement. The associated interest expense was eliminated in the pro forma adjustments due to the debt no longer being outstanding. |
(g) |
Represents fair value of contingent consideration. We assessed the payoff structure of our contingent consideration and determined the payoff was nonlinear and since it is related to revenue, carried non-diversifiable risk. In addition, due to the cap, the earnout payoff structure is path dependent and therefore a Monte Carlo simulation was appropriate. The Monte Carlo model requires assumptions including volatility, credit risk, and time value discount rates. The fair value calculation is preliminary and subject to change. |
(h) |
Represents the fair value of stock of the transaction price. |
(i) |
Represents the elimination of historical equity of CBS. |
(j) |
Represents salary increase of $124,000 for the twelve months ended December 31, 2018 and salary increase of $93,000 for the nine months ended September 30, 2019 related to one key executive retained from CBS. |
(k) |
Represents the elimination of acquisition costs as these expenses will not have a continuing impact. |