UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
AMENDMENT NO. 1
TO
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) May 2, 2018
Superior Group of Companies, Inc.
(Exact name of registrant as specified in its charter)
Florida |
001-05869 |
11-1385670 |
(State or other jurisdiction |
(Commission |
(IRS Employer |
10055 Seminole Blvd., Seminole, Florida (Address of principal executive offices) |
33772 (Zip Code) |
Registrant's telephone number including area code: (727) 397-9611
Not Applicable
(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 or Rule 12b-2 of the Securities Exchange Act of 1934.
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Explanatory Note
As previously reported, on May 2, 2018, Superior Group of Companies, Inc., known at the time as Superior Uniform Group, Inc. (the “Company”) entered into a Stock Purchase Agreement (the “Purchase Agreement”) with CID Resources, Inc., a Delaware corporation (“CID”), CID Resources Holdings LLC, a Delaware limited liability company (the “Seller”), and certain of the equityholders of the Seller (such signatories, the “Equityholders”). Pursuant to the Purchase Agreement, the Company acquired all of the issued and outstanding common stock and Series A preferred stock of CID effective as of May 2, 2018. CID, headquartered in Coppell, Texas, manufactures medical uniforms, lab coats, and layers, and sells its products to specialty uniform retailers, ecommerce medical uniform retailers, and other retailers. This Amendment No. 1 to Current Report on Form 8-K (the “Form 8-K/A”) amends and supplements the Current Report on 8-K filed by the Company with the Securities and Exchange Commission on May 3, 2018 (the “Original Report”) to include the financial statements of CID Resources, Inc. and the pro forma financial information required by Items 9.01(a) and 9.01(b) of Form 8-K, respectively, and to include the exhibits under Item 9.01(d) of Form 8-K.
Item 9.01 Financial Statements and Exhibits.
(a) |
Financial Statements of Business Acquired. |
The audited financial statements of CID Resources, Inc.as of and for the years ended December 31, 2017 and December 31, 2016, and the related notes thereto, are filed as Exhibit 99.4 to this Form 8-K/A and are incorporated in their entirety into this item by reference.
The balance sheets as of March 31, 2018 (unaudited) and December 31, 2017, and the unaudited statements of income and cash flows for the three-month periods ended March 31, 2018 and March 31, 2017, and unaudited statement of stockholders’ equity for the three-month period ended March 31, 2018, and the related notes thereto, are filed as Exhibit 99.5 to this Form 8-K/A and are incorporated in their entirety into this item by reference.
(b) |
Pro Forma Financial Information. |
The unaudited pro forma combined financial statements, which includes the unaudited pro forma combined balance sheet as of March 31, 2018 and the unaudited pro forma combined statements of comprehensive income for the three-month period ended March 31, 2018 and for the year ended December 31, 2017, and the related notes thereto, are filed as Exhibit 99.6 to this Form 8-K/A and are incorporated in their entirety into this item by reference.
(c) |
Not Applicable. |
(d) |
Exhibits. |
Exhibit Number |
Description of Exhibit |
99.3 |
99.4 |
99.5 |
99.6 |
Signature
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.
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SUPERIOR GROUP OF COMPANIES, INC. |
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Date: July 12, 2018 |
By: |
/s/ Andrew D. Demott, Jr. |
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Andrew D. Demott, Jr. |
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Chief Operating Officer, Chief Financial Officer and Treasurer |
3
Exhibit 99.3
Consent of Independent Auditor
We hereby consent to the incorporation by reference in the registration statements on Form S-8 (File No. 333-105906 and File No. 333-188944) of Superior Group of Companies, Inc. of our report dated April 23, 2018, relating to the financial statements of CID Resources, Inc. which appears in this Form 8-K/A.
/s/ BDO USA, LLP
July 12, 2018
Exhibit 99.4
CID Resources, Inc.
Financial Statements December 31, 2017 and 2016 |
CID Resources, Inc.
Contents
Independent Auditor’s Report | 3 |
Financial Statements | |
Balance Sheets | 4 |
Statements of Income | 5 |
Statements of Stockholders’ Equity |
6 |
Statements of Cash Flows | 7 |
Notes to Financial Statements | 8 |
Independent Auditor’s Report
To the Board of Directors
CID Resources, Inc.
Dallas, Texas
We have audited the accompanying financial statements of CID Resources, Inc., which comprise the balance sheets as of December 31, 2017 and 2016, and the related statements of income, changes in stockholders’ equity, 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 or 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 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 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 financial statements referred to above present fairly, in all material respects, the financial position of CID Resources, Inc. as of December 31, 2017 and 2016, 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/ BDO USA, LLP
April 23, 2018
Dallas, Texas
CID Resources, Inc.
Balance Sheets
December 31, |
2017 |
2016 |
||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 186,640 | $ | 368,484 | ||||
Accounts receivable, net of allowance for doubtful accounts of $45,903 and $54,145 for 2017 and 2016, respectively |
10,064,522 | 8,697,609 | ||||||
Inventories, net of allowance for inventory obsolescence of $220,567 and $220,567 for 2017 and 2016, respectively |
32,976,555 | 26,458,988 | ||||||
Prepaid expenses and other current assets |
1,023,086 | 1,082,533 | ||||||
Total current assets |
44,250,803 | 36,607,614 | ||||||
Property and equipment, net |
754,852 | 1,613,593 | ||||||
Deferred income taxes |
166,028 | - | ||||||
Other assets, net |
393,130 | 310,452 | ||||||
Total assets |
$ | 45,564,813 | $ | 38,531,659 | ||||
Liabilities and Stockholders’ Equity |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 3,336,994 | $ | 1,724,282 | ||||
Accrued expenses |
1,289,315 | 1,197,260 | ||||||
Income tax payable |
- | 740,318 | ||||||
Current portion of term loan |
800,000 | 800,000 | ||||||
Total current liabilities |
5,426,309 | 4,461,860 | ||||||
Long-term portion of term loan, net of current portion and deferred financing cost |
13,303,115 | 13,983,667 | ||||||
Revolving loan |
18,071,464 | 13,122,204 | ||||||
Deferred tax liability |
- | 10,529 | ||||||
Total liabilities |
36,800,888 | 31,578,260 | ||||||
Commitments and contingencies |
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Stockholders’ equity: |
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Common stock - $.0001 par value, 100,000 shares authorized, 3,529 shares issued and outstanding |
- | - | ||||||
Series A Preferred stock - $.0001 par value, non-voting, cumulative, 100,000 shares authorized, 8,465 shares issued and outstanding (liquidation value of $14,997,984 as of December 31, 2017) |
- | - | ||||||
Additional paid-in capital |
8,468,246 | 8,468,246 | ||||||
Retained earnings (accumulated deficit) |
295,679 | (1,514,847 | ) | |||||
Total stockholders’ equity |
8,763,925 | 6,953,399 | ||||||
Total liabilities and stockholders’ equity |
$ | 45,564,813 | $ | 38,531,659 |
See accompanying notes to financial statements. |
CID Resources, Inc.
Statements of Income
For the years ended December 31, |
2017 |
2016 |
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Net sales |
$ | 65,265,803 | $ | 61,196,506 | ||||
Cost of goods sold |
41,257,034 | 38,723,116 | ||||||
Gross profit |
24,008,769 | 22,473,390 | ||||||
Selling, general and administrative expenses |
17,650,588 | 15,523,257 | ||||||
Impairment of software development costs |
737,775 | - | ||||||
Other expense - LEK Marketing |
397,486 | - | ||||||
Operating income |
5,222,920 | 6,950,133 | ||||||
Interest expense |
(2,230,021 | ) | (1,640,323 | ) | ||||
Income before tax |
2,992,899 | 5,309,810 | ||||||
Provision for income tax |
1,182,373 | 1,866,201 | ||||||
Net income |
$ | 1,810,526 | $ | 3,443,609 |
See accompanying notes to financial statements. |
CID Resources, Inc.
Statements of Stockholders’ Equity
Common Stock |
Series A Preferred Stock |
Additional |
Retained Earnings (Accumulated |
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Shares |
Amount |
Shares |
Amount |
Capital |
Deficit) |
Total |
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Balance, January 1, 2016 |
3,529 | $ | - | 8,464 | $ | - | $ | 8,468,246 | $ | 41,544 | $ | 8,509,790 | ||||||||||||||||
Dividend declared |
- | - | - | - | - | (5,000,000 | ) | (5,000,000 | ) | |||||||||||||||||||
Net income |
- | - | - | - | - | 3,443,609 | 3,443,609 | |||||||||||||||||||||
Balance, December 31, 2016 |
3,529 | - | 8,464 | - | 8,468,246 | (1,514,847 | ) | 6,953,399 | ||||||||||||||||||||
Net income |
- | - | - | - | - | 1,810,526 | 1,810,526 | |||||||||||||||||||||
Balance, December 31, 2017 |
3,529 | $ | - | 8,464 | $ | - | $ | 8,468,246 | $ | 295,679 | $ | 8,763,925 |
See accompanying notes to financial statements. |
CID Resources, Inc.
Statements of Cash Flows
For the years ended December 31, |
2017 |
2016 |
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Cash flows from operating activities: |
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Net income |
$ | 1,810,526 | $ | 3,443,609 | ||||
Adjustments to reconcile net income to net cash used in operating activities: |
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Depreciation and amortization expense |
422,925 | 414,404 | ||||||
Impairment of software development costs |
737,775 | - | ||||||
Amortization of deferred financing cost |
197,679 | 151,923 | ||||||
Deferred income tax |
(176,557 | ) | 116,589 | |||||
Changes in operating assets and liabilities: |
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Accounts receivable |
(1,366,913 | ) | (1,291,138 | ) | ||||
Inventories |
(6,517,567 | ) | (894,395 | ) | ||||
Prepaid expenses and other current assets |
59,447 | 3,258 | ||||||
Accounts payable |
- | (3,117,340 | ) | |||||
Accrued expenses |
1,704,767 | (208,572 | ) | |||||
Income tax payable |
(740,318 | ) | 403,227 | |||||
Net cash used in operating activities |
(3,868,236 | ) | (978,435 | ) | ||||
Cash flows from investing activities: |
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Purchase of trademarks |
(103,093 | ) | (94,381 | ) | ||||
Purchase of property and equipment |
(301,959 | ) | (894,625 | ) | ||||
Net cash used in investing activities |
(405,052 | ) | (989,006 | ) | ||||
Cash flows from financing activities: |
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Proceeds from revolving loan |
68,539,750 | 61,979,666 | ||||||
Payments of revolving loan |
(63,590,490 | ) | (58,872,245 | ) | ||||
Payments of term loan |
(800,000 | ) | (612,500 | ) | ||||
Proceeds from issuance of term loan |
- | 5,000,000 | ||||||
Cash dividends paid to Series A preferred stockholders |
- | (5,000,000 | ) | |||||
Deferred financing costs |
(57,816 | ) | (179,038 | ) | ||||
Net cash provided by financing activities |
4,091,444 | 2,315,883 | ||||||
Net (decrease) increase in cash and cash equivalents |
(181,844 | ) | 348,442 | |||||
Cash and cash equivalents, beginning of year |
368,484 | 20,042 | ||||||
Cash and cash equivalents, end of year |
$ | 186,640 | $ | 368,484 | ||||
Supplemental cash flow information: |
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Cash paid for interest |
$ | 2,507,044 | $ | 1,466,536 | ||||
Income tax paid |
2,109,552 | 1,278,939 |
See accompanying notes to financial statements. |
CID Resources, Inc.
Notes to Financial Statements
1. |
Organization and Nature of Operations |
Organization and Nature of Operations
CID Resources, Inc. (“the Company” or “CID”), a Delaware corporation, was incorporated on May 21, 2010. The Company issued 1,800 shares of Common Stock on June 14, 2010 for $1,800 representing 51% ownership in the Company to Public Safety CID, LLC (“PSCID”), a subsidiary of Public Safety Supply Resources Holdings, LLC (“PSSRH”) and 1,729 shares of Common Stock on June 11, 2010 for $1,729 to Mayberry 9, LLC (“Mayberry”) representing 49% ownership in the Company. Additionally, on June 13, 2010, Series A Preferred Stock totaling 8,465 units were issued to PSSRH. On September 19, 2015, the Company became wholly owned by CID Resources Holdings LLC (the “Parent”). The 1,800 shares of Common Stock issued to PSCID and 1,729 shares of Common Stock issued to Mayberry by the Company, and the 8,465 units of Series A Preferred Stock were transferred to the Parent. The Company is in the business of wholesale distribution of high-quality medical uniforms (“medical scrubs”) throughout the United States, Canada, Latin America, and certain locations in other countries. The Company has its own brands, the WonderWink and Zoe + Chloe, and has license agreements with Carhartt, Inc. and Vera Bradley Designs, Inc., which gives the Company the right to use their logos on the tags and labels of medical scrubs and related marketing materials.
2. |
Summary of Significant Accounting Policies |
Basis of Presentation
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less at the time of purchase to be cash and cash equivalents.
Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally insured limits. The Company has never experienced any losses related to these balances.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable is carried at estimated collectible amounts. The Company estimates an allowance for doubtful accounts based on various factors including credit worthiness of its customers as well as general economic conditions. Consequently, an adverse change in these factors could affect the Company’s estimate of its bad debts. After exhausting collection efforts, any uncollectible accounts receivable is written off against the reserve or directly to bad debt expense. One customer accounted for 12% and another customer accounted for 10% of the outstanding balances of accounts receivable as of December 31, 2017. No single customer accounted for 10% or more of the outstanding balance of accounts receivable as of December 31, 2016.
CID Resources, Inc.
Notes to Financial Statements
Fair Value of Financial Instruments
The fair value of the Company’s financial instruments including cash and cash equivalents, accounts receivable, and accounts payable and accrued expenses, approximate their carrying values due to their relatively short maturities. Financial instruments that are not carried at fair value in the balance sheets include long-term debt including current installments. Management believes that the carrying amount of these debts approximates fair value as semi-variable rates of the revolving debt and the term-loan are within the range of current rates offered by third parties on debt with similar terms and preferences.
Inventories
Inventories are stated at the lower of the cost or net realizable value. Cost is determined using an average cost basis. A reserve to reduce inventories to their net realizable value is determined by management based on age, analysis of usage, industry trends and expected demand. The three largest vendors represented approximately 31%, 15% and 15% of total inventory purchases in 2017. The four largest vendors represented approximately 24%, 24%, 15% and 10% of total inventory purchases in 2016. The three largest vendors represented approximately 26%, 16% and 10% of total accounts payable as of December 31, 2017 and the three largest vendors represented approximately 51%, 18% and 14% of total accounts payable as of December 31, 2016.
Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization of property and equipment is provided over the estimated useful lives using the straight-line method.
Property and equipment has the following estimated useful lives:
Machinery and equipment | 3-5 years |
Furniture and fixtures | 3-7 years |
Computer equipment and software | 3-5 years |
Leasehold improvements | Lesser of useful life or lease term |
Expenditures for repairs and maintenance are charged to expense as incurred. Expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized.
Long-Lived Assets
Long-lived assets are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable (a ‘‘triggering event’’). Recoverability of assets to be held and used is measured by a comparison of the carrying amount of such assets to estimated undiscounted future cash flows expected to be generated by the assets. Expected future cash flows and carrying values are aggregated at their lowest identifiable level, which is at the asset group level. If the carrying amount of such assets exceeds their estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of such assets exceeds the fair value of the assets. As of December 31, 2017, the Company determined the investment in related to the automation of its fulfillment system is impaired. The total amount of $737,775 incurred through December 31, 2017 that was previously recorded as construction in-progress (see Note 3) was written off and recorded as a charge to income in the accompanying statements of income.
CID Resources, Inc.
Notes to Financial Statements
Deferred Financing Costs
The Company defers certain costs related to obtaining financing and amortizes these costs to interest expense using the straight-line method, which approximates the effective interest method over the life of the related financing agreements. Net deferred financing costs associated with term loan amounting to $346,885 and $466,333 as of December 31, 2017 and 2016, respectively, was presented in the balance sheets as a direct deduction from the carrying amount of the debt liability. Net deferred financing costs associated with the revolver loan amounting to $92,028 and $112,443 as of December 31, 2017 and 2016, respectively, were presented in the balance sheets under Other Assets, net.
Trademarks
Trademarks, which the Company assessed to have infinite useful lives, are recorded at fair market value at date of acquisition. The Company tests trademarks qualitatively for impairment on an annual basis. No impairment existed as of December 31, 2017 and 2016.
Use of Estimates
The preparation of financial statements in conformity with GAAP 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. Actual results could differ from those estimates.
Revenue Recognition
The Company recognizes revenue when a persuasive evidence of an arrangement with the buyer exists, the price is fixed or determinable, inventory is shipped and risk of ownership is transferred to the customer and all activities required to be performed by the Company are complete, and collectibility is reasonably assured.
Income Taxes
Deferred income taxes are provided for temporary differences between the book and tax bases of assets and liabilities using the tax rates, under existing legislation, expected to be in effect at the date the temporary differences are expected to reverse. The effect of changes in tax laws or rates is recognized in deferred tax balances when enacted. The Company evaluates the recoverability of deferred tax assets and provides for a valuation allowance if, based upon available evidence, it is more likely than not that some portion of the deferred tax assets will not be recognized. The Company also uses judgment and makes estimates and assumptions on the potential liability related to an assessment of whether an income tax position will “more likely than not” be sustained in an income tax audit by regulators. As of December 31, 2017 and 2016, the Company has not recognized any liability for any uncertain income tax positions.
Advertising and Marketing Cost
Advertising and marketing costs are expensed as incurred. Total advertising and marketing costs for 2017 and 2016 were $ 1,634,760 and $1,455,967, respectively.
CID Resources, Inc.
Notes to Financial Statements
Shipping and Handling
The Company recorded $1,411,017 and $1,431,232 for the years ended December 31, 2017 and 2016, respectively, in revenue for amounts billed to customers for products sold. Shipping and handling costs are included in the cost of goods sold which totaled $1,264,877 and $975,007 for the years ended December 31, 2017 and 2016, respectively.
Comprehensive Income
There is no difference between comprehensive income and income on the statements of income for the periods presented.
Recently Issued Accounting Standards
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). Subsequently, the FASB has issued the following standards related to ASU 2014-09: ASU No. 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations”; ASU No. 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing”; ASU No. 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients”; and ASU No. 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers”. The Company must adopt ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20 with ASU 2014-09 (collectively, the “new revenue standards”). The new revenue standards require an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The new revenue standards will replace most existing revenue recognition guidance under U.S. generally accepted accounting principles when they become effective and permit the use of either a full retrospective or retrospective with cumulative effect transition method. The Company is in the process of evaluating the impact of the provisions of the new revenue standards and the impact it will have on its financial statements. This update will be effective for annual reporting periods beginning after December 15, 2018, and interim periods beginning after December 15, 2019.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”). The new standard is intended to provide enhanced transparency and comparability by requiring lessees to record right-of-use assets and corresponding lease liabilities on the balance sheet, with the exception of leases with a term of 12 months or less, which permits a lessee to make an accounting policy election by class of underlying asset not to recognize lease assets and liabilities. At inception, lessees must classify leases as either finance or operating based on five criteria. Balance sheet recognition of finance and operating leases is similar, but the pattern of expense recognition in the income statement, as well as the effect on the statement of cash flows, differs depending on the lease classification. Also, certain qualitative and quantitative disclosures are required to enable users of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2019 for nonpublic entities and early adoption is permitted. The new standard requires the recognition and measurement of leases at the beginning of the earliest period presented using a modified retrospective approach, which includes a number of optional practical expedients that entities may elect to apply. The Company is currently evaluating the impact of the pending adoption of the new standard on the financial statements.
CID Resources, Inc.
Notes to Financial Statements
3. |
Property and Equipment |
Property and equipment consisted of the following:
As of December 31, |
2017 |
2016 |
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Machinery and equipment |
$ | 666,481 | $ | 592,611 | ||||
Furniture and fixtures |
265,454 | 175,856 | ||||||
Computers and equipment |
856,254 | 764,278 | ||||||
Leasehold improvements |
869,272 | 866,025 | ||||||
2,657,461 | 2,398,770 | |||||||
Less: accumulated depreciation and amortization |
1,902,609 | 1,479,684 | ||||||
754,852 | 919,086 | |||||||
Construction in-progress |
- | 694,507 | ||||||
Property and equipment, net |
$ | 754,852 | $ | 1,613,593 |
Depreciation and amortization expense for 2017 and 2016 was $422,925 and $414,404, respectively.
4. |
Other Assets |
Other assets consisted of the following:
As of December 31, |
2017 |
2016 |
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Deferred financing costs |
$ | 305,137 | $ | 287,636 | ||||
Less: accumulated amortization |
213,109 | 175,193 | ||||||
92,028 | 112,443 | |||||||
Trademarks - indefinite lived |
301,102 | 198,009 | ||||||
Other assets, net |
$ | 393,130 | $ | 310,452 |
Amortization expense of the deferred financing costs related to the revolver and the term loan (see Notes 2 and 6), which are included in the interest expense in the accompanying statement of income, amounted to $197,679 and $151,923 for 2017 and 2016, respectively.
CID Resources, Inc.
Notes to Financial Statements
5. |
Accrued Expenses |
Accrued expenses consisted of the following:
As of December 31, |
2017 |
2016 |
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Compensation |
$ | 355,688 | $ | 414,555 | ||||
Rebates and coop advertising |
211,872 | 231,772 | ||||||
Royalties |
311,225 | 169,681 | ||||||
Interest |
79,344 | 45,800 | ||||||
Others |
331,186 | 335,452 | ||||||
$ | 1,289,315 | $ | 1,197,260 |
6. |
Notes Payable |
Revolving Facility and Term Loan with PNC Bank
The Company has a Revolving and Term Loan Agreement with PNC Bank. As of December 31, 2017, the maximum limit of the revolving line of credit was $20,000,000 with an inventory sublimit of $16,000,000 and is due on September 23, 2020. The amounts that can be drawn under the revolving advances are subject to predefined limits based on factors defined in the agreement. These factors include amounts of undrawn letters of credit and certain percentages of eligible inventory and accounts receivable on hand. The Revolving Credit and Term Loan Agreement also provides for the issuance of standby/trade letters of credit by the bank of up to $2,000,000 for Company’s inventory purchases. The issuance of letters of credit is also subject to predefined limits depending on amounts outstanding under the revolving advances and other factors similar to limitations on the Company’s revolving advances.
The revolving rate loans are subject to interest rates at (a) the sum of the Alternate Base Rate (Prime) plus 2.0% with respect to Domestic Rate Loans and (b) the sum of the Eurodollar Rate (LIBOR) plus 3.00% with respect to Eurodollar Rate Loans. At December 31, 2017, the interest rate on the revolving rate loans was 4.36%.
The Company is subject to financial covenants which include fixed charge coverage ratio, minimum average undrawn availability amounts of $250,000, minimum TTM EBITDA levels, Total Debt to TTM EBITDA ratio, and maximum annual unfunded capital expenses as defined in the Revolving Credit and Term Loan Agreement. In addition, the Company is also prohibited, among others, to enter into mergers and acquisitions, incur additional indebtedness, liens and guaranties or incur capital expenditures or investments outside limits defined in the Revolving Credit and Term Loan Agreement. On April 27, 2017, PNC Bank granted the Company a waiver on the adjusted 12-month EBITDA covenant requirement that was not met as of December 31, 2016. PNC Bank also replaced the adjusted 12-month EBITDA covenant requirements to lower amounts required on a quarterly basis through December 31, 2017. The EBITDA covenant requirements subsequent to December 31, 2017 remained the same. Furthermore, PNC Bank replaced the Total Debt (defined as the amount owed to PNC Bank and Monroe Capital less Qualified Cash) to EBITDA ratio to a higher rate from March 2017 through December 31, 2017 quarterly computational periods.
CID Resources, Inc.
Notes to Financial Statements
On October 11, 2017, the Revolving Credit and Term Loan Agreement was amended to waive existing defaults and to amend certain covenants. The Company was in compliance with its debt covenant requirements as of December 31, 2017.
The revolving line of credit is secured by substantially all the assets of the Company. There were no letters of credit outstanding as of December 31, 2017 and 2016. As of December 31, 2017 and 2016, the outstanding balance on the revolving line of credit was $18,071,464 and $13,122,204, respectively. As of December 31, 2017, amounts available to be drawn under the revolving line of credit amounted to $1,928,536 after considering amounts outstanding and sublimits as defined in the agreement.
Term Loan with Monroe Capital
On September 25, 2015, the Company entered into a Term Loan and Security Agreement with Monroe Capital to borrow $11,000,000 with uncommitted Delayed Draw Term Loans at the sole discretion of Monroe Capital not to exceed $5,000,000.
The Monroe Capital Term Loan is for five years ending on September 23, 2020. The Company is obligated to pay $137,500 on the outstanding principal balance at the end of each quarter, beginning with the quarter ended December 31, 2015, with the balance due at the termination date. Interest is due on a monthly basis at the current one-month LIBOR rate plus 8% times the outstanding principal balance. If the ratio of the Company’s Total Debt (defined as the total of the balance owed to PNC Bank and Monroe Capital) to the TTM EBITDA drops below 3.50 to 1.00, the interest rate on the outstanding balance to Monroe Capital falls to current one-month LIBOR rate plus 7.5% times the outstanding principal balance. At December 31, 2017, the loan was subject to interest of 10.35%.
In September 2016, Monroe Capital agreed to commit the Delayed Draw Term Loan of $5,000,000 to the existing Term Loan. The Company had paid $550,000 of principal payments on the $11,000,000. Therefore, the loan agreement reflected the addition of the $5,000,000 to the balance of $10,450,000 for a new term loan of $15,450,000. The term loan carried the same interest of one-month LIBOR rate plus 8% times the outstanding principal balance. The quarterly principal payments increased from $137,500 to $200,000, commencing on December 31, 2016. The loan balance after the $200,000 principal payment on December 31, 2016 was $15,250,000.
In November 2016, the Company entered into a First Amendment to Term Loan and Security Agreement (“November 2016 Amendment”) with Monroe Capital. The amendments include, among others: (a) an increase in term loan commitment from $11,000,000 to $15,450,000, and (b) increase in minimum EBITDA requirement and in the Total Debt to EBITDA ratio.
Covenants are similar with the covenants under the revolving line of credit with PNC Bank (as described above), and the Company was in compliance with all of its covenants on the Term Loan and Security Agreement as of December 31, 2016 with the exception of the TTM EBITDA as described under the November 2016 Amendment. On April 14, 2017, through Second Amendment to Term Loan and Security Agreement (“April 2017 Amendment”), Monroe Capital granted the Company a waiver on the TTM adjusted EBITDA covenant requirement as of December 31, 2016. Monroe Capital also amended the TTM adjusted EBITDA covenant requirement to lower amounts required and the Total Debt to EBITDA ratio to a higher rate on a quarterly basis from March 31, 2017 to December 31, 2017. The EBITDA covenant requirements subsequent to December 31, 2017 remained the same. Covenant requirements subsequent to December 31, 2017 did not change based on the terms of the November 2016 Amendment and April 2017 Amendment. On October 11, 2017, the Monroe Capital Term Loan Agreement was amended to waive existing defaults and to amend certain covenants. The Company was in compliance with all of its covenant requirements as of December 31, 2017.
CID Resources, Inc.
Notes to Financial Statements
As of December 31, 2017 and 2016, the outstanding balance on the Monroe Capital Term Loan was $14,450,000 and $15,250,000, respectively.
The Revolving and Term Loan Agreement with PNC Bank has a first and exclusive priority lien on the Company’s cash and cash equivalents, accounts receivable and inventory. The Monroe Capital Term Loan has a first and exclusive lien on all other tangible and intangible assets of the Company including without limitation, insurance policies, fixtures, contract rights, real estate, leases and leaseholds. The Monroe Capital Term Loan is also secured by a pledge of the Company’s capital stock. In addition, the Monroe Capital Term Loan has a second lien on all assets secured under the Revolving and Term Loan Agreement with PNC Bank.
The following is a schedule of future maturities of the Company’s debt:
Year ending December 31, |
||||
2018 |
$ | 800,000 | ||
2019 |
800,000 | |||
2020 |
30,921,464 | |||
32,521,464 | ||||
Less: |
||||
Current portion |
800,000 | |||
Deferred financing cost, net of accumulated amortization of $295,308 |
346,885 | |||
Total |
$ | 31,374,579 |
7. |
Related Party Transactions |
The Company has an ongoing business relationship with Chief Supply Corp., an entity owned by the Company’s ultimate parent company, as a customer. Total sales made by the Company to this related party amounted to $1,670,554 and $1,374,041 in 2017 and 2016, respectively. Outstanding accounts receivable amounted to $720,036 and $788,026 as of December 31, 2017 and 2016, respectively.
On August 25, 2016, the Company entered into a Service Agreement with CID Vina Co., Ltd (“CID Vina”), a company located in Vietnam. CID Vina provides quality control, merchandising and other logistical services and is managed by an employee of the Company. Total fees incurred related to services provided by CID Vina were $519,729 and $172,500 for the years ended December 31, 2017 and 2016, respectively, which were recorded as part of selling, general and administrative expenses in the accompanying statements of income. As of December 31, 2017, $38,667 was due to CID Vina and as of December 31, 2016, $122,000 was recorded as advances to CID Vina.
CID Resources, Inc.
Notes to Financial Statements
8. |
Series A Preferred Stock |
Series A preferred stock are non-voting but have distribution and liquidation preference over common stock and earn cumulative dividends at a rate of 14% per annum. Dividends are distributed when declared. In the event of liquidation or change of control, these shares are redeemable at original issuance price plus any undeclared dividends. During 2016, the Company declared and paid $5,000,000 distributions to Series A preferred stockholders. As of December 31, 2017 and 2016, total dividends in arrears from Series A preferred stock amounted to $6,533,268 and $4,584,484, respectively. Total liquidation value of the Series A Preferred stock amounted to $14,997,984 and $13,049,200 as of December 31, 2017 and 2016, respectively.
9. |
Commitment and Contingencies |
Leases
The Company leases its facilities under an operating lease from August 15, 2013, through November 14, 2018. The total rent expense for 2017 and 2016 was $586,680 and $555,175, respectively. Total rent expense for the year ending December 31, 2018 is estimated to be $562,235. The Company has the option to renew for another five year period based on adjusted rental rates currently quoted to prospective tenants. The Company intends to renew the lease when it expires.
Litigation
The Company may be involved in certain claims and legal actions arising in the ordinary course of business. The Company is not currently subject to claims or litigation.
10. |
Income Taxes |
The income tax expense (benefit) for the years ended December 31, 2017 and 2016 includes the following:
For the years ended December 31, |
2017 |
2016 |
||||||
Current |
$ | 1,358,930 | $ | 1,749,612 | ||||
Deferred tax expense (benefit) |
(176,557 | ) | 116,589 | |||||
$ | 1,182,373 | $ | 1,866,201 |
CID Resources, Inc.
Notes to Financial Statements
The provision for income taxes differs from the amount computed by applying the U.S. federal statutory income tax rate of 34% as follows:
For the years ended December 31, |
2017 |
2016 |
||||||
Federal income tax expense at statutory rate |
$ | 1,017,586 | $ | 1,805,335 | ||||
State tax expense net of federal benefit |
59,060 | 54,495 | ||||||
Federal rate change |
102,778 | - | ||||||
Other permanent differences |
2,949 | 6,371 | ||||||
Income tax expense |
$ | 1,182,373 | $ | 1,866,201 |
The tax effects of significant items comprising the Company’s net deferred income taxes assets (liabilities) are as follows:
December 31, |
2017 |
2016 |
||||||
Deferred tax assets and liabilities: |
||||||||
Inventory reserve |
$ | 130,805 | $ | 216,231 | ||||
Allowance for doubtful accounts |
9,640 | 18,409 | ||||||
Property and equipment |
(98,815 |
) |
(221,843 |
) |
||||
Impairment of construction in-progress |
154,933 | - | ||||||
Prepaid insurance |
(30,535 |
) |
(23,326 |
) |
||||
Total net deferred tax asset (liability ) |
$ | 166,028 | $ | (10,529 |
) |
The Company records net deferred tax assets to the extent it believes these assets will more likely than not be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations.
The Company measures deferred tax assets and liabilities using enacted tax rates that will apply in the years in which the temporary differences are expected to be recovered or paid. In December 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “2017 Tax Act”), which significantly changed U.S. tax law. The 2017 Tax Act most notably reduced the U.S. corporate income tax rate from 35% to 21% for tax years beginning after December 31, 2017. The corporate income tax rate change did not have a material impact on the Company’s deferred tax assets and liabilities.
The years ended December 31, 2017, 2016, 2015 remain subject to examination by the Internal Revenue Service (IRS). The years ended December 31, 2017, 2016, 2015, 2014, and 2013 remain subject to examination by the state of Texas tax jurisdiction.
CID Resources, Inc.
Notes to Financial Statements
11. |
Subsequent Events |
The Company has evaluated subsequent events from the date of the balance sheet through April 23, 2018, the date the financial statement was available to be issued.
18
Exhibit 99.5
CID Resources, Inc.
Financial Statements As of March 31, 2018 and December 31, 2017 and for the Three Months Ended March 31, 2018 and 2017 |
The report accompanying these financial statements was issued by BDO USA, LLP, a Delaware limited liability partnership and the U.S. member of BDO International Limited, a UK company limited by guarantee. |
CID Resources, Inc.
Contents
Financial Statements | |
Balance Sheets as of March 31, 2018 (Unaudited) and December 31, 2017 | 3 |
Unaudited Statements of Income for the Three Months Ended March 31, 2018 and 2017 | 4 |
Unaudited Statement of Stockholders’ Equity for the Three Months Ended March 31, 2018 | 5 |
Unaudited Statements of Cash Flows for the Three Months Ended March 31, 2018 and 2017 | 6 |
Notes to Unaudited Financial Statements | 7 |
CID Resources, Inc.
Balance Sheets
March 31, 2018 (Unaudited) |
December 31, 2017 |
|||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 84,964 | $ | 186,640 | ||||
Accounts receivable, net of allowance for doubtful accounts of $67,024 and $45,903 for 2018 and 2017, respectively |
10,671,978 | 10,064,522 | ||||||
Inventories, net of allowance for inventory obsolescence of $220,567 and $220,567 for 2018 and 2017, respectively |
35,984,950 | 32,976,555 | ||||||
Prepaid expenses and other current assets |
1,846,694 | 1,023,086 | ||||||
Total current assets |
48,588,586 | 44,250,803 | ||||||
Property and equipment, net |
888,285 | 754,852 | ||||||
Deferred income taxes |
166,028 | 166,028 | ||||||
Other assets, net |
398,310 | 393,130 | ||||||
Total assets |
$ | 50,041,209 | $ | 45,564,813 | ||||
Liabilities and Stockholders’ Equity |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 5,814,808 | $ | 3,336,994 | ||||
Accrued expenses |
1,299,667 | 1,289,315 | ||||||
Income tax payable |
365,498 | - | ||||||
Term Loan, net of deferred financing cost |
13,936,879 | 800,000 | ||||||
Revolving loan |
18,485,461 | - | ||||||
Total current liabilities |
39,902,313 | 5,426,309 | ||||||
Long-term portion of term loan, net of current portion and deferred financing cost |
- | 13,303,115 | ||||||
Revolving loan |
- | 18,071,464 | ||||||
Total liabilities |
39,902,313 | 36,800,888 | ||||||
Commitments and contingencies |
||||||||
Stockholders’ equity: |
||||||||
Common stock - $.0001 par value, 100,000 shares authorized, 3,529 shares issued and outstanding |
- | - | ||||||
Series A Preferred stock - $.0001 par value, non-voting, cumulative, 100,000 shares authorized, 8,465 shares issued and outstanding (liquidation value of $15,521,697 as of March 31, 2018) |
- | - | ||||||
Additional paid-in capital |
8,468,246 | 8,468,246 | ||||||
Retained earnings |
1,670,650 | 295,679 | ||||||
Total stockholders’ equity |
10,138,896 | 8,763,925 | ||||||
Total liabilities and stockholders’ equity |
$ | 50,041,209 | $ | 45,564,813 |
See accompanying notes to financial statements. |
CID Resources, Inc.
Unaudited Statements of Income
For the three months ended March 31, |
2018 |
2017 |
||||||
Net sales |
$ | 17,213,548 | $ | 17,171,403 | ||||
Cost of goods sold |
10,590,454 | 11,121,384 | ||||||
Gross profit |
6,623,094 | 6,050,019 | ||||||
Selling, general and administrative expenses |
4,291,733 | 4,062,734 | ||||||
Operating income |
2,331,361 | 1,987,285 | ||||||
Interest expense |
(590,893 | ) | (459,912 | ) | ||||
Income before tax |
1,740,468 | 1,527,373 | ||||||
Provision for income tax |
365,498 | 519,307 | ||||||
Net income |
$ | 1,374,970 | $ | 1,008,066 |
See accompanying notes to financial statements. |
CID Resources, Inc.
Unaudited Statement of Stockholders’ Equity
Common Stock |
Series A Preferred Stock |
Additional |
Retained |
|||||||||||||||||||||||||
Shares |
Amount |
Shares |
Amount |
Capital |
Earnings |
Total |
||||||||||||||||||||||
Balance, December 31, 2017 |
3,529 | $ | - | 8,464 | $ | - | $ | 8,468,246 | $ | 295,680 | $ | 8,763,926 | ||||||||||||||||
Net income |
- | - | - | - | - | 1,374,970 | 1,374,970 | |||||||||||||||||||||
Balance, March 31, 2018 (Unaudited) |
3,529 | $ | - | 8,464 | $ | - | $ | 8,468,246 | $ | 1,670,650 | $ | 10,138,896 |
See accompanying notes to financial statements. |
CID Resources, Inc.
Unaudited Statements of Cash Flows
For the three months ended March 31, |
2018 |
2017 |
||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 1,374,970 | $ | 1,008,066 | ||||
Adjustments to reconcile net income to net cash used in operating activities: |
||||||||
Depreciation and amortization expense |
135,063 | 105,752 | ||||||
Amortization of deferred financing cost |
39,901 | 47,631 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
(607,456 | ) | (2,106,047 | ) | ||||
Inventories |
(3,008,395 | ) | 1,148,156 | |||||
Prepaid expenses and other current assets |
(801,192 | ) | 33,435 | |||||
Accounts payable |
2,477,814 | (554,137 | ) | |||||
Accrued expenses |
(822 | ) | (214,205 | ) | ||||
Income tax payable |
354,258 | 519,307 | ||||||
Net cash used in operating activities |
(35,859 | ) | (12,041 | ) | ||||
Cash flows from investing activities: |
||||||||
Purchase of trademarks |
(11,318 | ) | (76,931 | ) | ||||
Purchase of property and equipment |
(268,496 | ) | (34,585 | ) | ||||
Net cash used in investing activities |
(279,814 | ) | (111,517 | ) | ||||
Cash flows from financing activities: |
||||||||
Proceeds from revolving loan |
16,889,940 | 15,137,489 | ||||||
Payments of revolving loan |
(16,475,943 | ) | (15,003,567 | ) | ||||
Payments of term loan |
(200,000 | ) | (200,000 | ) | ||||
Net cash provided by financing activities |
213,997 | (66,079 | ) | |||||
Net decrease in cash and cash equivalents |
(101,676 | ) | (189,637 | ) | ||||
Cash and cash equivalents, beginning of period |
186,640 | 368,484 | ||||||
Cash and cash equivalents, end of period |
$ | 84,964 | $ | 178,847 | ||||
Supplemental cash flow information: |
||||||||
Cash paid for interest |
$ | 591,831 | $ | 466,294 | ||||
See accompanying notes to financial statements. |
CID Resources, Inc.
Notes to Financial Statements
1. |
Organization and Nature of Operations |
CID Resources, Inc. (“the Company” or “CID”), a Delaware corporation, was incorporated on May 21, 2010. The Company issued 1,800 shares of Common Stock on June 14, 2010 for $1,800 representing 51% ownership in the Company to Public Safety CID, LLC (“PSCID”), a subsidiary of Public Safety Supply Resources Holdings, LLC (“PSSRH”) and 1,729 shares of Common Stock on June 11, 2010 for $1,729 to Mayberry 9, LLC (“Mayberry”) representing 49% ownership in the Company. Additionally, on June 13, 2010, Series A Preferred Stock totaling 8,465 units were issued to PSSRH. On September 19, 2015, the Company became wholly owned by CID Resources Holdings LLC (the “Parent”). The 1,800 shares of Common Stock issued to PSCID and 1,729 shares of Common Stock issued to Mayberry by the Company, and the 8,465 units of Series A Preferred Stock were transferred to the Parent. The Company is in the business of wholesale distribution of high-quality medical uniforms (“medical scrubs”) throughout the United States, Canada, Latin America, and certain locations in other countries. The Company has its own brands, the WonderWink and Zoe + Chloe, and has license agreements with Carhartt, Inc. and Vera Bradley Designs, Inc., which gives the Company the right to use their logos on the tags and labels of medical scrubs and related marketing materials.
2. |
Summary of Significant Accounting Policies |
Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and applicable rules. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been or omitted pursuant to such rules and regulations. The unaudited financial statements should be read in conjunction with the financial statements and notes included in the audited annual financial statements at December 31, 2017. The balance sheet as of December 31, 2017 included in these financial statements has been derived from the audited financial statements. There have been no changes in the significant accounting policies from those that were disclosed in the audited financial statements for the fiscal year ended December 31, 2017.
In the opinion of management, the unaudited interim consolidated financial statements include all the normal recurring adjustments necessary to present fairly the consolidated financial statements. The results of operations for the three months ended March 31, 2018 and 2017 were not necessarily indicative of the operating results for the full fiscal year or any future periods.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less at the time of purchase to be cash and cash equivalents.
Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally insured limits. The Company has never experienced any losses related to these balances.
CID Resources, Inc.
Notes to Financial Statements
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable is carried at estimated collectible amounts. The Company estimates an allowance for doubtful accounts based on various factors including credit worthiness of its customers as well as general economic conditions. Consequently, an adverse change in these factors could affect the Company’s estimate of its bad debts. After exhausting collection efforts, any uncollectible accounts receivable is written off against the reserve or directly to bad debt expense. One customer accounted for 10% of the outstanding balances of accounts receivable as of March 31, 2018. One customer accounted for 10% and another customer accounted for 9% of the outstanding balances of accounts receivable as of December 31, 2017.
Fair Value of Financial Instruments
The fair value of the Company’s financial instruments including cash and cash equivalents, accounts receivable, and accounts payable and accrued expenses, approximate their carrying values due to their relatively short maturities. Financial instruments that are not carried at fair value in the balance sheets include long-term debt including current installments. Management believes that the carrying amount of these debts approximates fair value as semi-variable rates of the revolving debt and the term-loan are within the range of current rates offered by third parties on debt with similar terms and preferences.
Inventories
Inventories are stated at the lower of the cost or net realizable value. Cost is determined using an average cost basis. A reserve to reduce inventories to their net realizable value is determined by management based on age, analysis of usage, industry trends and expected demand. The three largest vendors represented approximately 22%, 14% and 11% of total inventory purchases for the three months ended March 31, 2018. The three largest vendors represented approximately 31%, 15% and 15% of total inventory purchases for the three months ended March 31, 2017. The three largest vendors represented approximately 18%, 17% and 15% of total accounts payable as of March 31, 2018 and the three largest vendors represented approximately 26%, 16% and 10% of total accounts payable as of December 31, 2017.
Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization of property and equipment is provided over the estimated useful lives using the straight-line method.
Property and equipment has the following estimated useful lives:
Machinery and equipment | 3-5 years |
Furniture and fixtures | 3-5 years |
Computer equipment and software | 3-7 years |
Leasehold improvements | Lesser of useful life or lease term |
Expenditures for repairs and maintenance are charged to expense as incurred. Expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized.
CID Resources, Inc.
Notes to Financial Statements
Long-Lived Assets
Long-lived assets are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable (a ‘‘triggering event’’). Recoverability of assets to be held and used is measured by a comparison of the carrying amount of such assets to estimated undiscounted future cash flows expected to be generated by the assets. Expected future cash flows and carrying values are aggregated at their lowest identifiable level, which is at the asset group level. If the carrying amount of such assets exceeds their estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of such assets exceeds the fair value of the assets. At December 31, 2017, the Company determined the investment related to the automation of its fulfillment system is impaired. The total amount of $737,775 incurred through December 31, 2017 that was previously recorded as construction in-progress (see Note 3) was written off and recorded as a charge as impairment expense during December 2017. There is no impact reflected in the statements of income for the periods presented.
Deferred Financing Costs
The Company defers certain costs related to obtaining financing and amortizes these costs to interest expense using the straight-line method, which approximates the effective interest method over the life of the related financing agreements. Net deferred financing costs associated with term loan amounting to $313,121 and $346,885 as of March 31, 2018 and December 31, 2017, respectively, was presented in the balance sheets as a direct deduction from the carrying amount of the debt liability. Net deferred financing costs associated with the revolver loan amounting to $85,890 and $92,028 as of March 31, 2018 and December 31, 2017, respectively, were presented in the balance sheets under Other Assets, net.
Trademarks
Trademarks, which the Company assessed to have infinite useful lives, are recorded at fair market value at date of acquisition. The Company tests trademarks for impairment qualitatively on an annual basis. No impairment existed as of March 31, 2018 and December 31, 2017.
Use of Estimates
The preparation of financial statements in conformity with GAAP 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. Actual results could differ from those estimates.
Revenue Recognition
The Company recognizes revenue when a persuasive evidence of an arrangement with the buyer exists, the price is fixed or determinable, inventory is shipped and risk of ownership is transferred to the customer and all activities required to be performed by the Company are complete, and collectability is reasonably assured.
CID Resources, Inc.
Notes to Financial Statements
Income Taxes
Deferred income taxes are provided for temporary differences between the book and tax bases of assets and liabilities using the tax rates, under existing legislation, expected to be in effect at the date the temporary differences are expected to reverse. The effect of changes in tax laws or rates is recognized in deferred tax balances when enacted. The Company evaluates the recoverability of deferred tax assets and provides for a valuation allowance if, based upon available evidence, it is more likely than not that some portion of the deferred tax assets will not be recognized. The Company also uses judgment and makes estimates and assumptions on the potential liability related to an assessment of whether an income tax position will “more likely than not” be sustained in an income tax audit by regulators. As of March 31, 2018 and December 31, 2017, the Company has not recognized any liability for any uncertain income tax positions.
Advertising and Marketing Cost
Advertising and marketing costs are expensed as incurred. Total advertising and marketing costs for the three months ended March 31, 2018 and 2017 were $317,453 and $324,816, respectively.
Shipping and Handling
The Company recorded $395,930 and $389,912 for the three months ended March 31, 2018 and 2017, respectively, in revenue for amounts billed to customers for products sold. Shipping and handling costs are included in the cost of goods sold which totaled $345,611 and $302,092 for the three months ended March 31, 2018 and 2017, respectively.
Comprehensive Income
There is no difference between comprehensive income and income on the statements of income for the periods presented.
Recently Issued Accounting Standards
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). Subsequently, the FASB has issued the following standards related to ASU 2014-09: ASU No. 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations”; ASU No. 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing”; ASU No. 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients”; and ASU No. 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers”. The Company must adopt ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20 with ASU 2014-09 (collectively, the “new revenue standards”). The new revenue standards require an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The new revenue standards will replace most existing revenue recognition guidance under U.S. generally accepted accounting principles when they become effective and permit the use of either a full retrospective or retrospective with cumulative effect transition method. The Company is in the process of evaluating the impact of the provisions of the new revenue standards and the impact it will have on its financial statements. This update will be effective for annual reporting periods beginning after December 15, 2018, and interim periods beginning after December 15, 2019.
CID Resources, Inc.
Notes to Financial Statements
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”). The new standard is intended to provide enhanced transparency and comparability by requiring lessees to record right-of-use assets and corresponding lease liabilities on the balance sheet, with the exception of leases with a term of 12 months or less, which permits a lessee to make an accounting policy election by class of underlying asset not to recognize lease assets and liabilities. At inception, lessees must classify leases as either finance or operating based on five criteria. Balance sheet recognition of finance and operating leases is similar, but the pattern of expense recognition in the income statement, as well as the effect on the statement of cash flows, differs depending on the lease classification. Also, certain qualitative and quantitative disclosures are required to enable users of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2019 for nonpublic entities and early adoption is permitted. The new standard requires the recognition and measurement of leases at the beginning of the earliest period presented using a modified retrospective approach, which includes a number of optional practical expedients that entities may elect to apply. The Company is currently evaluating the impact of the pending adoption of the new standard on the financial statements.
3. |
Property and Equipment |
Property and equipment consisted of the following:
March 31, 2018 |
December 31, 2017 |
|||||||
Machinery and equipment |
$ | 834,040 | $ | 666,481 | ||||
Furniture and fixtures |
269,473 | 265,454 | ||||||
Computers and equipment |
856,254 | 856,254 | ||||||
Leasehold improvements |
966,190 | 869,272 | ||||||
2,925,957 | 2,657,461 | |||||||
Less: accumulated depreciation |
2,037,672 | 1,902,609 | ||||||
Property and equipment, net |
$ | 888,285 | $ | 754,852 |
Depreciation expenses for the three months ended March 31, 2018 and 2017 was $135,063 and $105,752, respectively.
4. |
Other Assets |
Other assets consisted of the following:
March 31, 2018 |
December 31, 2017 |
|||||||
Deferred financing costs |
$ | 305,136 | $ | 305,137 | ||||
Less: accumulated amortization |
219,246 | 213,109 | ||||||
85,890 | 92,028 | |||||||
Trademarks - indefinite lived |
312,420 | 301,102 | ||||||
Other assets, net |
$ | 398,310 | $ | 393,130 |
CID Resources, Inc.
Notes to Financial Statements
Amortization expense of the deferred financing costs related to the revolver and the term loan (see Notes 2 and 6), which are included in the interest expense in the accompanying statement of income, amounted to $39,901 and $47,631 for the three months ended March 31, 2018 and 2017, respectively.
5. |
Accrued Expenses |
Accrued expenses consisted of the following:\
March 31, 2018 |
December 31, 2017 |
|||||||
Compensation |
$ | 278,214 | $ | 355,688 | ||||
Rebates and coop advertising |
208,719 | 211,872 | ||||||
Royalties |
346,522 | 311,225 | ||||||
Interest |
78,407 | 79,344 | ||||||
Others |
387,805 | 331,186 | ||||||
$ | 1,299,667 | $ | 1,289,315 |
6. |
Notes Payable |
Revolving Facility and Term Loan with PNC Bank
The Company has a Revolving and Term Loan Agreement with PNC Bank. As of March 31, 2018, the maximum limit of the revolving line of credit was $20,000,000 with an inventory sublimit of $16,000,000 and is due on September 23, 2020. The amounts that can be drawn under the revolving advances are subject to predefined limits based on factors defined in the agreement. These factors include amounts of undrawn letters of credit and certain percentages of eligible inventory and accounts receivable on hand. The Revolving Credit and Term Loan Agreement also provides for the issuance of standby/trade letters of credit by the bank of up to $2,000,000 for Company’s inventory purchases. The issuance of letters of credit is also subject to predefined limits depending on amounts outstanding under the revolving advances and other factors similar to limitations on the Company’s revolving advances.
The revolving rate loans are subject to interest rates at (a) the sum of the Alternate Base Rate (Prime) plus 2.0% with respect to Domestic Rate Loans and (b) the sum of the Eurodollar Rate (LIBOR) plus 3.00% with respect to Eurodollar Rate Loans. At March 31, 2018, the interest rate on the revolving rate loans was 4.36%.
The Company is subject to financial covenants which include fixed charge coverage ratio, minimum average undrawn availability amounts of $250,000, minimum TTM EBITDA levels, Total Debt to TTM EBITDA ratio, and maximum annual unfunded capital expenses as defined in the Revolving Credit and Term Loan Agreement. In addition, the Company is also prohibited, among others, to enter into mergers and acquisitions, incur additional indebtedness, liens and guaranties or incur capital expenditures or investments outside limits defined in the Revolving Credit and Term Loan Agreement. On April 27, 2017, PNC Bank granted the Company a waiver on the adjusted 12-month EBITDA covenant requirement that was not met as of December 31, 2016. PNC Bank also replaced the adjusted 12-month EBITDA covenant requirements to lower amounts required on a quarterly basis through December 31, 2017. The EBITDA covenant requirements subsequent to March 31, 2018 remained the same. Furthermore, PNC Bank replaced the Total Debt (defined as the amount owed to PNC Bank and Monroe Capital less Qualified Cash) to EBITDA ratio to a higher rate from March 2017 through December 31, 2017 quarterly computational periods.
CID Resources, Inc.
Notes to Financial Statements
The revolving line of credit is secured by substantially all the assets of the Company. There were no letters of credit outstanding as of March 31, 2018 and December 31, 2017. As of March 31, 2018, and December 31, 2017, the outstanding balance on the revolving line of credit was $18,485,461 and $18,071,464, respectively. As of March 31, 2018, amounts available to be drawn under the revolving line of credit amounted to $1,514,539 after considering amounts outstanding and sublimit as defined in the agreement.
Term Loan with Monroe Capital
On September 25, 2015, the Company entered into a Term Loan and Security Agreement with Monroe Capital to borrow $11,000,000 with uncommitted Delayed Draw Term Loans at the sole discretion of Monroe Capital not to exceed $5,000,000.
The Monroe Capital Term Loan is for five years ending on September 23, 2020. The Company is obligated to pay $137,500 on the outstanding principal balance at the end of each quarter, beginning with the quarter ended December 31, 2015, with the balance due at the termination date. Interest is due on a monthly basis at the current one-month LIBOR rate plus 8% times the outstanding principal balance. If the ratio of the Company’s Total Debt (defined as the total of the balance owed to PNC Bank and Monroe Capital) to the TTM EBITDA drops below 3.50 to 1.00, the interest rate on the outstanding balance to Monroe Capital falls to current one-month LIBOR rate plus 7.5% times the outstanding principal balance. At March 31, 2018, the loan was subject to interest of 10.65%.
In September 2016, Monroe Capital agreed to commit the Delayed Draw Term Loan of $5,000,000 to the existing Term Loan. The Company had paid $550,000 of principal payments on the $11,000,000. Therefore, the loan agreement reflected the addition of the $5,000,000 to the balance of $10,450,000 for a new term loan of $15,450,000. The term loan carried the same interest of one-month LIBOR rate plus 8% times the outstanding principal balance. The quarterly principal payments increased from $137,500 to $200,000, commencing on December 31, 2016.
In November 2016, the Company entered into a First Amendment to Term Loan and Security Agreement (“November 2016 Amendment”) with Monroe Capital. The amendments include, among others: (a) an increase in term loan commitment from $11,000,000 to $15,450,000, and (b) increase in minimum EBITDA requirement and in the Total Debt to EBITDA ratio.
Covenants are similar with the covenants under the revolving line of credit with PNC Bank (as described above), and the Company was in compliance with all of its covenants on the Term Loan and Security Agreement as of December 31, 2016 with the exception of the TTM EBITDA as described under the November 2016 Amendment. On April 14, 2017, through Second Amendment to Term Loan and Security Agreement (“April 2017 Amendment”), Monroe Capital granted the Company a waiver on the TTM adjusted EBITDA covenant requirement as of December 31, 2016. Monroe Capital also amended the TTM adjusted EBITDA covenant requirement to lower amounts required and the Total Debt to EBITDA ratio to a higher rate on a quarterly basis from March 31, 2017 to December 31, 2017. The EBITDA covenant requirements subsequent to December 31, 2017 remained the same. Covenant requirements subsequent to December 31, 2017 did not change based on the terms of the November 2016 Amendment and April 2017 Amendment. On October 11, 2017, the Monroe Capital Term Loan Agreement was amended to waive existing defaults and to amend certain covenants.
CID Resources, Inc.
Notes to Financial Statements
As of March 31, 2018, and December 31, 2017, the outstanding balance on the Monroe Capital Term Loan was $14,250,000 and $14,450,000, respectively.
The Revolving and Term Loan Agreement with PNC Bank has a first and exclusive priority lien on the Company’s cash and cash equivalents, accounts receivable and inventory. The Monroe Capital Term Loan has a first and exclusive lien on all other tangible and intangible assets of the Company including without limitation, insurance policies, fixtures, contract rights, real estate, leases and leaseholds. The Monroe Capital Term Loan is also secured by a pledge of the Company’s capital stock. In addition, the Monroe Capital Term Loan has a second lien on all assets secured under the Revolving and Term Loan Agreement with PNC Bank.
The Company was in compliance with its debt covenants as of December 31, 2017. As of March 31, 2018, the Company has failed to meet certain financial covenants and waivers were not obtained prior to the settlement of both the revolving facility and the term loans as part of the acquisition (see Note 11). Accordingly, the debts were classified as current as of March 31, 2018.
7. |
Related Party Transactions |
The Company has an ongoing business relationship with Chief Supply Corp., an entity owned by the Company’s ultimate parent company, as a customer. Total sales made by the Company to this related party amounted to $249,553 and $458,004 for the three months ended March 31, 2018 and 2017, respectively. Outstanding accounts receivable amounted to $968,159 and $720,036 as of March 31, 2018 and December 31, 2017, respectively.
On August 25, 2016, the Company entered into a Service Agreement with CID Vina Co., Ltd (“CID Vina”), a company located in Vietnam. CID Vina provides quality control, merchandising and other logistical services and is managed by an employee of the Company. Total fees incurred related to services provided by CID Vina were $133,909 and $154,361 for the three months ended March 31, 2018 and 2017, respectively, which were recorded as part of selling, general and administrative expenses in the accompanying statements of income. As of March 31, 2018, $46,452 was due to CID Vina and as of December 31, 2017, $38,667 was recorded as advances to CID Vina.
8. |
Series A Preferred Stock |
Series A preferred stock are non-voting but have distribution and liquidation preference over common stock and earn cumulative dividends at a rate of 14% per annum. Dividends are distributed when declared. In the event of liquidation or change of control, these shares are redeemable at original issuance price plus any undeclared dividends. As of March 31, 2018, and December 31, 2017, total dividends in arrears from Series A preferred stock amounted to $7,056,980 and $6,533,268, respectively. Total liquidation value of the Series A Preferred stock amounted to $15,521,697 and $14,997,984 as of March 31, 2018 and December 31, 2017, respectively.
CID Resources, Inc.
Notes to Financial Statements
As discussed in Note 11, the Company was acquired and the liquidation value of the Series A preferred stock were settled with the holders as part of the acquisition.
9. |
Commitment and Contingencies |
Leases
The Company leases its facilities under an operating lease from August 15, 2013, through November 14, 2018. The total rent expense for the three months ended March 31, 2018 and 2017 was $151,886 and $146,670, respectively. Total remaining rent expense from April 1, 2018 to November 15, 2018 is estimated to be $379,716. The Company has the option to renew for another five-year period based on adjusted rental rates currently quoted to prospective tenants. The Company intends to renew the lease when it expires.
Litigation
The Company may be involved in certain claims and legal actions arising in the ordinary course of business. The Company is not currently subject to claims or litigation.
10. |
Income Taxes |
For the three months ended March 31, 2018 and 2017, the Company’s effective tax rate was 22.4% and 34%, respectively, was determined based on the estimated annual effective income tax rate.
The effective tax rate for the three months ended March 31, 2018 and 2017 resulted in tax expense due to income from operations. Items increasing the effective tax rate are state taxes and permanent items.
In December 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “2017 Tax Act”), which significantly changed U.S. tax law. The 2017 Tax Act most notably reduced the U.S. corporate income tax rate from 35% to 21% for tax years beginning after December 31, 2017. On December 22, 2017, the SEC staff issued Staff Accounting Bulletin 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), which provides guidance on accounting for the impact of the 2017 Tax Act. Pursuant to the disclosure provisions of SAB 118, as of March 31, 2018, the Company has not completed its accounting for the tax effects of the 2017 Tax Act. The Company recorded a reasonable estimate of the impact from the 2017 Tax Act but is still analyzing the impact and refining calculations. Additionally, future guidance from the Internal Revenue Service, SEC, or the FASB could result in changes to our accounting for the tax effects of the 2017 Tax Act. The 2017 Tax Act is not anticipated to have a material impact on the Company’s financial statements.
11. |
Subsequent Events |
The Company was acquired by Superior Uniform Group, Inc. on May 2, 2018. As part of the acquisition, all outstanding debt was settled and Series A preferred stock was liquidated. The Company has evaluated subsequent events through July 12, 2018, which is the date the financial statements were available to be issued.
Exhibit 99.6
INTRODUCTION TO
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
On May 2, 2018, the Superior Group of Companies, Inc., known at the time as Superior Uniform Group, Inc., (“the Company”) entered into a Stock Purchase Agreement (the “Purchase Agreement”) with CID Resources, Inc., a Delaware corporation (“CID”), CID Resources Holdings LLC, a Delaware limited liability company (the “Seller”), and certain of the equityholders of the Seller (such signatories, the “Equityholders”). Pursuant to the Purchase Agreement, the Company acquired all of the issued and outstanding common stock and Series A preferred stock of CID effective as of May 2, 2018. CID, headquartered in Coppell, Texas, manufactures medical uniforms, lab coats, and layers, and sells its products to specialty uniform retailers, ecommerce medical uniform retailers, and other retailers.
The purchase price in the acquisition consists of the following, subject to adjustment in accordance with the terms of the Purchase Agreement: (a) approximately $84.4 million in cash, subject to adjustment for cash on hand, indebtedness, unpaid Seller expenses and working capital (excluding cash), in each case as of the closing date, and (b) the issuance of 150,094 shares of the Company’s common stock to an Equityholder. Any working capital adjustment will be based on the difference between working capital as of the closing date and a target amount of approximately $39.5 million.
The following unaudited pro forma combined balance sheet as of March 31, 2018 combines the historical balance sheet of the Company as of March 31, 2018, as filed with the Securities and Exchange Commission (“SEC”) in its corresponding report on Form 10-Q, with the historical balance sheet of CID as of March 31, 2018, giving effect to the acquisition as if it had occurred on March 31, 2018. The unaudited pro forma combined statements of comprehensive income for the three-month period ended March 31, 2018 and for the year ended December 31, 2017 combine the historical consolidated statements of comprehensive income of the Company for the three-month period ended March 31, 2018 and for the year ended December 31, 2017, as filed with the SEC in its corresponding quarterly report on Form 10-Q and annual report on Form 10-K, respectively, with the historical statements of income of CID for the three-month period ended March 31, 2018 and for the year ended December 31, 2017, giving effect to the acquisition as though it had occurred on January 1, 2017, using the purchase method of accounting and applying the assumptions and adjustments described in the accompanying notes to the unaudited pro forma combined financial statements.
The acquisition has been accounted for under the purchase method of accounting in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805, Business Combinations. Under the purchase method of accounting, the total purchase price is allocated to the net tangible and intangible assets of CID acquired in connection with the acquisition, based on their estimated fair values. Management has made a preliminary allocation of the purchase price to the tangible and intangible assets acquired and liabilities assumed based on various preliminary estimates. The allocation of the purchase price is preliminary pending finalization of various estimates and valuation analyses. A final determination of fair values may differ materially from the preliminary estimates and will include management’s final valuation of the fair values of assets acquired and liabilities assumed. This final valuation will be based on the actual acquired net tangible assets of CID that existed as of the completion date of the acquisition. The final valuation may change the allocation of purchase price, which could affect the fair value assigned to the assets and liabilities and could result in a change to the unaudited pro forma combined financial statements.
The unaudited pro forma combined financial statements have been prepared by management for illustrative purposes only and are not necessarily indicative of the financial position or results of operations in future periods or the results that actually would have been realized had the Company and CID been a consolidated company during the specified periods. The pro forma adjustments are based on the preliminary information available at the time of the preparation of this document. The unaudited pro forma combined financial statements, including the notes thereto, are qualified in their entirety by reference to, and should be read in conjunction with, the historical financial statements of the Company included in its Annual Report on Form 10-K for the year ended December 31, 2017 and Quarterly Report on Form 10-Q for the period ended March 31, 2018. In addition, the unaudited pro forma combined financial statements, including the notes thereto, are based on the historical financial statements of CID for the three-month period ended March 31, 2018 and year ended December 31, 2017, which are included in Exhibits 99.4 and 99.5 to this Form 8-K/A.
Pro forma adjustments are necessary to reflect the purchase price and purchase accounting adjustments based on preliminary estimates of the fair values of the CID net assets acquired. The unaudited pro forma combined financial statements do not reflect any operating efficiencies and cost savings that may be realized with respect to the consolidated companies, although there can be no assurances that efficiencies and savings will be realized.
Superior Group of Companies, Inc. and Subsidiaries |
UNAUDITED PRO FORMA COMBINED STATEMENT OF COMPREHENSIVE INCOME |
Three months ended March 31, 2018 |
(In thousands, except shares and per share data) |
Superior |
Pro |
Pro |
||||||||||||||||||
Group of |
CID |
Forma |
Note |
Forma |
||||||||||||||||
Companies, Inc. |
Resources, Inc. |
Adjustments |
3 |
Combined |
||||||||||||||||
Net sales |
$ | 73,087 | $ | 17,214 | $ | 2,027 | M | $ | 92,328 | |||||||||||
Costs and expenses: |
||||||||||||||||||||
Cost of goods sold |
48,212 | 10,591 | (20 | ) |
N |
59,887 | ||||||||||||||
1,104 | M | |||||||||||||||||||
Selling and administrative expenses |
21,182 | 4,292 | 57 |
N |
25,576 | |||||||||||||||
(409 | ) |
O |
||||||||||||||||||
454 |
P |
|||||||||||||||||||
Other periodic pension costs |
96 | - | - | 96 | ||||||||||||||||
Interest expense |
277 | 591 | (591 | ) |
Q |
913 | ||||||||||||||
636 |
R |
|||||||||||||||||||
69,767 | 15,474 | 1,231 | 86,472 | |||||||||||||||||
Income before taxes on income |
3,320 | 1,740 | 796 | 5,856 | ||||||||||||||||
Income tax expense |
870 | 365 | 199 |
S |
1,434 | |||||||||||||||
Net income |
$ | 2,450 | $ | 1,375 | $ | 597 | $ | 4,422 | ||||||||||||
Weighted average number of shares outstanding during the period |
||||||||||||||||||||
(Basic) |
14,821,659 | 150,094 |
T |
14,971,753 | ||||||||||||||||
(Diluted) |
15,457,629 | 150,094 |
T |
15,607,723 | ||||||||||||||||
Per Share Data: |
||||||||||||||||||||
Basic |
||||||||||||||||||||
Net income |
$ | 0.17 | $ | 0.30 | ||||||||||||||||
Diluted |
||||||||||||||||||||
Net income |
$ | 0.16 | $ | 0.28 | ||||||||||||||||
Other comprehensive income, net of tax: |
||||||||||||||||||||
Defined benefit pension plans: |
||||||||||||||||||||
Recognition of net losses included in net periodic pension costs |
216 | - | - | 216 | ||||||||||||||||
Gain on cash flow hedging activities |
140 | - | - | 140 | ||||||||||||||||
Foreign currency translation adjustment |
52 | - | - | 52 | ||||||||||||||||
Other comprehensive income |
$ | 408 | $ | - | $ | - | $ | 408 | ||||||||||||
Comprehensive income |
$ | 2,858 | $ | 1,375 | $ | 597 | $ | 4,830 | ||||||||||||
Cash dividends per common share |
$ | 0.0950 | $ | - | $ | - | $ | 0.0950 |
See accompanying notes to Unaudited Proforma Combined Interim Financial Statements.
Superior Group of Companies, Inc. and Subsidiaries |
UNAUDITED PRO FORMA COMBINED STATEMENT OF COMPREHENSIVE INCOME |
Year Ended December 31, 2017 |
(In thousands, except shares and per share data) |
Superior |
Pro |
Pro |
||||||||||||||||||
Group of |
CID |
Forma |
Note |
Forma |
||||||||||||||||
Companies, Inc. |
Resources, Inc. |
Adjustments |
3 |
Combined |
||||||||||||||||
Net sales |
$ | 266,814 | $ | 65,266 | $ | - | $ | 332,080 | ||||||||||||
Costs and expenses: |
||||||||||||||||||||
Cost of goods sold |
170,462 | 41,257 | 579 |
N |
212,298 | |||||||||||||||
Selling and administrative expenses |
71,816 | 18,786 | 102 |
N |
92,009 | |||||||||||||||
(509 | ) |
O |
||||||||||||||||||
1,814 |
P |
|||||||||||||||||||
Interest expense |
802 | 2,230 | (2,230 | ) |
Q |
3,346 | ||||||||||||||
2,544 |
R |
|||||||||||||||||||
243,080 | 62,273 | 2,300 | 307,653 | |||||||||||||||||
Gain on sale of property, plant and equipment |
1,048 | - | - | 1,048 | ||||||||||||||||
Income before taxes on income |
24,782 | 2,993 | (2,300 | ) | 25,475 | |||||||||||||||
Taxes on income |
9,760 | 1,182 | (909 | ) |
S |
10,034 | ||||||||||||||
Net income |
$ | 15,022 | $ | 1,811 | $ | (1,392 | ) | $ | 15,442 | |||||||||||
Weighted average number of shares outstanding during the period |
||||||||||||||||||||
(Basic) |
14,510,156 | 150,094 |
T |
14,660,250 | ||||||||||||||||
(Diluted) |
15,118,768 | 150,094 |
T |
15,268,862 | ||||||||||||||||
Per Share Data: |
||||||||||||||||||||
Basic |
||||||||||||||||||||
Net earnings |
$ | 1.04 | $ | 1.05 | ||||||||||||||||
Diluted |
||||||||||||||||||||
Net earnings |
$ | 0.99 | $ | 1.01 | ||||||||||||||||
Other comprehensive income (loss), net of tax: |
||||||||||||||||||||
Defined benefit pension plans: |
||||||||||||||||||||
Recognition of net losses included in net periodic pension costs |
652 | - | - | 652 | ||||||||||||||||
Recognition of settlement loss included in net periodic pension costs |
272 | - | - | 272 | ||||||||||||||||
Current period loss |
(1,948 | ) | - | - | (1,948 | ) | ||||||||||||||
Loss on cash flow hedging activities |
(111 | ) | - | - | (111 | ) | ||||||||||||||
Foreign currency translation adjustments |
20 | - | - | 20 | ||||||||||||||||
Other comprehensive loss |
(1,115 | ) | - | - | (1,115 | ) | ||||||||||||||
Comprehensive income |
$ | 13,907 | $ | 1,811 | $ | (1,392 | ) | $ | 14,327 | |||||||||||
Dividends per common share |
$ | 0.365 | $ | - | $ | - | $ | 0.365 |
See accompanying notes to Unaudited Proforma Combined Interim Financial Statements. |
Superior Group of Companies, Inc. and Subsidiaries |
UNAUDITED PRO FORMA COMBINED BALANCE SHEETS |
March 31, 2018 |
(In thousands, except share and par value data) |
Superior |
Pro |
Pro |
||||||||||||||||
Group of |
CID |
Forma |
Note |
Forma |
||||||||||||||
Companies, Inc. |
Resources, Inc. |
Adjustments |
3 |
Combined |
||||||||||||||
ASSETS |
||||||||||||||||||
CURRENT ASSETS: |
||||||||||||||||||
Cash and cash equivalents |
$ | 10,442 | $ | 85 | $ | - | $ | 10,527 | ||||||||||
Accounts receivable - trade, net |
48,275 | 10,672 | - | 58,947 | ||||||||||||||
Accounts receivable - other |
2,107 | - | - | 2,107 | ||||||||||||||
Inventories, net |
36,380 | 35,985 | (2,738 | ) |
A |
68,523 | ||||||||||||
(1,104 | ) |
B |
||||||||||||||||
Contract Assets |
47,098 | - | 2,027 |
B |
49,125 | |||||||||||||
Prepaid expenses and other current assets |
10,005 | 1,847 | - | 11,852 | ||||||||||||||
TOTAL CURRENT ASSETS |
154,307 | 48,589 | (1,815 | ) | 201,081 | |||||||||||||
PROPERTY, PLANT AND EQUIPMENT, NET |
27,033 | 888 | 152 |
C |
28,073 | |||||||||||||
INTANGIBLE ASSETS, NET |
28,302 | - | 39,087 |
D |
67,389 | |||||||||||||
GOODWILL |
16,042 | - | 20,425 |
E |
36,467 | |||||||||||||
DEFERRED INCOME TAXES |
215 | 166 | (381 | ) |
K |
- | ||||||||||||
OTHER ASSETS |
9,180 | 398 | (398 | ) |
F |
9,180 | ||||||||||||
$ | 235,079 | $ | 50,041 | $ | 57,070 | $ | 342,190 | |||||||||||
LIABILITIES AND SHAREHOLDERS' EQUITY |
||||||||||||||||||
CURRENT LIABILITIES: |
||||||||||||||||||
Accounts payable |
19,263 | 5,815 | 1,615 |
L |
26,693 | |||||||||||||
Other current liabilities |
9,375 | 1,300 | - | 10,675 | ||||||||||||||
Income tax payable |
- | 365 | - | 365 | ||||||||||||||
Current portion of long-term debt |
6,000 | 32,422 | (32,422 | ) |
G |
6,000 | ||||||||||||
Currrent portion of acquisition-related contingent liabilities |
1,080 | - | - | 1,080 | ||||||||||||||
TOTAL CURRENT LIABILITIES |
35,718 | 39,902 | (30,807 | ) | 44,813 | |||||||||||||
LONG-TERM DEBT |
39,949 | - | 87,093 |
H |
127,042 | |||||||||||||
LONG-TERM PENSION LIABILITY |
8,133 | - | - | 8,133 | ||||||||||||||
ACQUISITION-RELATED CONTINGENT LIABILITIES |
7,469 | - | - | 7,469 | ||||||||||||||
OTHER LONG-TERM LIABILITIES |
4,744 | - | - | 4,744 | ||||||||||||||
DEFERRED INCOME TAXES |
- | - | 8,554 |
K |
8,775 | |||||||||||||
221 |
B |
|||||||||||||||||
COMMITMENTS AND CONTINGENCIES |
||||||||||||||||||
SHAREHOLDERS' EQUITY: |
||||||||||||||||||
Preferred stock, $.001 par value - authorized 300,000 shares (none issued) |
- | - | - | |||||||||||||||
Common stock, $.001 par value - authorized 50,000,000 shares, issued and outstanding - 15,143,328 and 15,081,947 shares, respectively. |
15 | - | - | 15 | ||||||||||||||
Additional paid-in capital |
50,626 | 8,468 | (8,468 | ) |
J |
54,389 | ||||||||||||
3,763 |
I |
|||||||||||||||||
Retained earnings |
95,296 | 1,671 | (1,671 | ) |
J |
93,681 | ||||||||||||
(1,615 | ) |
L |
||||||||||||||||
Accumulated other comprehensive loss, net of tax: |
||||||||||||||||||
Pensions |
(7,066 | ) | - | - | (7,066 | ) | ||||||||||||
Cash Flow Hedges |
50 | - | - | 50 | ||||||||||||||
Foreign currency translation adjustment |
145 | - | - | 145 | ||||||||||||||
TOTAL SHAREHOLDERS' EQUITY |
139,066 | 10,139 | (7,991 | ) | 141,214 | |||||||||||||
$ | 235,079 | $ | 50,041 | $ | 57,070 | $ | 342,190 |
See accompanying notes to Unaudited Proforma Combined Interim Financial Statements. |
SUPERIOR GROUP OF COMPANIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
NOTE 1 – Basis of Presentation:
The unaudited pro forma combined balance sheet gives effect to the acquisition, which was accounted for under the purchase method of accounting, as if it had been consummated on March 31, 2018.
The unaudited pro forma combined statement of comprehensive income for the three-month period ended March 31, 2018 has been prepared to reflect the acquisition as if it occurred on January 1, 2017.
The unaudited pro forma combined statement of comprehensive income for the year ended December 31, 2017 has been prepared to reflect the acquisition as if it occurred on January 1, 2017.
NOTE 2 –Acquisition and Purchase Price Allocation:
On May 2, 2018, the Company entered into a Stock Purchase Agreement (the “Purchase Agreement”) with CID. The purchase price in the acquisition consists of the following, subject to adjustment in accordance with the terms of the Purchase Agreement: (a) approximately $84.4 million in cash, subject to adjustment for cash on hand, indebtedness, unpaid Seller expenses and working capital (excluding cash), in each case as of the closing date, and (b) the issuance of 150,094 shares of the Company’s common stock to an Equityholder. Any working capital adjustment will be based on the difference between working capital as of the closing date and a target amount of approximately $39.5 million.
The following table reconciles the estimated fair value of the acquired assets and assumed liabilities to the total purchase price as if the acquisition occurred on March 31, 2018.
Cash |
$ | 85 | ||
Accounts receivable |
10,672 | |||
Inventories |
32,143 | |||
Contract assets |
2,027 | |||
Prepaid expenses and other current assets |
1,847 | |||
Property, plant and equipment |
1,040 | |||
Identifiable intangible assets |
39,087 | |||
Goodwill |
20,425 | |||
Total assets |
$ | 107,326 | ||
Accounts payable |
5,815 | |||
Other current liabilities |
1,499 | |||
Deferred tax liabilities |
9,156 | |||
Total liabilities |
$ | 16,470 | ||
Purchase price |
$ | 90,856 |
The excess of the purchase price over the net assets has been preliminarily allocated to goodwill and intangible assets pending final valuation by an independent appraisal. Intangible assets consist of $13.5 million of brand name which will not be amortized, $0.8 million of non-compete agreements which will be amortized over five years, and $24.7 million of customer relationships which will be amortized over 15 years.
A final determination of fair values may differ materially from the preliminary estimates and will include management’s final valuation of the fair values of assets acquired and liabilities assumed. This final valuation will be based on the actual acquired net tangible assets of CID that existed as of the completion date of the acquisition. The final valuation may change the allocation of purchase price, which could affect the fair value assigned to the assets and liabilities and could result in a change to the unaudited pro forma combined financial statements.
NOTE 3 –Pro Forma Adjustments:
The following is a summary of pro forma adjustments reflected in the unaudited pro forma combined financial statements based on preliminary estimates, which may change as additional information is obtained.
Pro Forma Combined Balance Sheet Adjustments
A. |
To conform accounting for capitalized inventory costs for CID with the Company and adjust inventory to fair value at the date of acquisition. |
B. |
To record adoption of ASC 606 for CID. |
C. |
To adjust property, plant and equipment to fair value at the date of acquisition. |
D. |
To record the estimated fair value of acquired identifiable intangible assets. |
E. |
To record the estimated fair value of acquired goodwill. |
F. |
To eliminate historical value of intangible assets and capitalized loan costs. |
G. |
To eliminate CID debt paid at closing. |
H. |
To record loans from BB&T to the Company to fund the acquisition. |
I. |
To record fair value of stock issued as part of consideration for acquisition. |
J. |
To eliminate CID’s historical equity balances. |
K. |
To record deferred taxes on the fair value of intangible assets acquired and inventory fair value adjustment. |
L. |
To record acquisition costs incurred which are not reflected in historical financial statements. |
Pro Forma Combined Statement of Comprehensive Income Adjustments
M. |
To record adoption of ASC 606 for CID. |
N. |
To conform accounting for capitalized inventory costs for CID with the Company. |
O. |
To remove transaction fees recognized. These do not include amounts which are not reflected in the historical statements of comprehensive income. See Note L. |
P. |
To record amortization expense on intangible assets acquired. |
Q. |
To eliminate interest on outstanding debt of CID paid at closing. |
R. |
To record interest on Company debt used to finance the transaction. This amount is calculated utilizing the weighted average interest rate of the new term loans that were in effect on the date of closing of 2.92%. |
S. |
To record tax effect of the pro forma income and adjustments to the statement of comprehensive income. |
T. |
To reflect increase in outstanding shares for stock issued. |
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