Attached files
Richardson Electronics, Ltd. 8-K/A
EXHIBIT 99.1
International
Medical Equipment &
Services, Inc.
Financial Statements
Years Ended December 31, 2014 and 2013
International Medical Equipment & Services, Inc.
Financial Statements
Years Ended December 31, 2014 and 2013
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International Medical Equipment & Services, Inc.
Contents
| Independent Auditor’s Report | 3-4 | |
| Financial Statements | ||
| Balance Sheets | 5 | |
| Statements of Operations | 6 | |
| Statements of Changes in Stockholders’ Equity | 7 | |
| Statements of Cash Flows | 8 | |
| Notes to Financial Statements | 9-16 | |
| 2 |
Independent Auditor’s Report
Board of Directors
International Medical Equipment & Services, Inc.
Fort Mill, South Carolina
We have audited the accompanying financial statements of International Medical Equipment & Services, Inc. (the “Company”), which comprise the balance sheets as of December 31, 2014 and 2013, and the related statements of operations, 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.
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Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the International Medical Equipment & Services, Inc. as of December 31, 2014 and 2013, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
Other Matter
On June 15, 2015, certain of the Company’s assets were sold to Richardson Electronics, Ltd. Our opinion has not been modified with respect to this matter.
December 18, 2015
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Financial Statements
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International Medical Equipment & Services, Inc.
| December 31, | 2014 | 2013 | ||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash | $ | 647,938 | $ | 184,153 | ||||
| Accounts receivable, net (Note 2) | 628,492 | 426,377 | ||||||
| Inventories, net (Note 3) | 1,518,347 | 2,046,477 | ||||||
| Prepaid expenses and other current assets | 189,955 | 113,931 | ||||||
| Total current assets | 2,984,732 | 2,770,938 | ||||||
| Property and equipment, net (Note 4) | 401,548 | 499,944 | ||||||
| Total assets | $ | 3,386,280 | $ | 3,270,882 | ||||
| Liabilities and Stockholders' Equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 147,514 | $ | 457,727 | ||||
| Current portion of notes payable (Note 5) | 145,521 | 140,124 | ||||||
| Customer deposits | 872,190 | 291,076 | ||||||
| Accrued liabilities | 255,771 | 182,503 | ||||||
| Total current liabilities | 1,420,996 | 1,071,430 | ||||||
| Revolving line of credit (Note 5) | — | 400,000 | ||||||
| Long term notes payable, less current portion (Note 5) | 366,418 | 478,126 | ||||||
| Total liabilities | 1,787,414 | 1,949,556 | ||||||
| Commitments (Note 6) | ||||||||
| Stockholders' Equity: | ||||||||
| Common stock, voting, no par, 100,000 shares authorized; 1,000 shares issued and outstanding at December 31, 2014 and 2013 | 400 | 400 | ||||||
| Retained earnings | 1,598,466 | 1,320,926 | ||||||
| Total stockholders' equity | 1,598,866 | 1,321,326 | ||||||
| Total liabilities and stockholders' equity | $ | 3,386,280 | $ | 3,270,882 | ||||
See accompanying notes to financial statements.
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International Medical Equipment & Services, Inc.
| Years Ended December 31, | 2014 | 2013 | ||||||
| Net revenues | $ | 8,405,615 | $ | 6,333,219 | ||||
| Cost of goods sold | 4,704,322 | 3,911,855 | ||||||
| Gross profit | 3,701,293 | 2,421,364 | ||||||
| Operating expenses: | ||||||||
| Selling, general and administrative expenses | 2,426,724 | 1,840,543 | ||||||
| Depreciation expense | 147,723 | 116,294 | ||||||
| Total operating expenses | 2,574,447 | 1,956,837 | ||||||
| Operating income | 1,126,846 | 464,527 | ||||||
| Interest expense, net | (43,299 | ) | (54,931 | ) | ||||
| Other income (expense), net | 33,993 | (4,817 | ) | |||||
| Net income | $ | 1,117,540 | $ | 404,779 | ||||
See accompanying notes to financial statements.
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International Medical Equipment & Services, Inc.
Statements of Changes in Stockholders’ Equity
| Common Stock | Retained | |||||||||||||||
| Shares | Value | Earnings | Total | |||||||||||||
| Balance, December 31, 2012 | 1,000 | $ | 400 | $ | 1,198,713 | $ | 1,199,113 | |||||||||
| Net income | — | — | 404,779 | 404,779 | ||||||||||||
| Stockholders' distributions | — | — | (282,566 | ) | (282,566 | ) | ||||||||||
| Balance, December 31, 2013 | 1,000 | 400 | 1,320,926 | 1,321,326 | ||||||||||||
| Net income | — | — | 1,117,540 | 1,117,540 | ||||||||||||
| Stockholders' distributions | — | — | (840,000 | ) | (840,000 | ) | ||||||||||
| Balance, December 31, 2014 | 1,000 | $ | 400 | $ | 1,598,466 | $ | 1,598,866 | |||||||||
See accompanying notes to financial statements.
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International Medical Equipment & Services, Inc.
| Years Ended December 31, | 2014 | 2013 | ||||||
| Operating activities: | ||||||||
| Net income | $ | 1,117,540 | $ | 404,779 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 147,723 | 116,294 | ||||||
| Bad debt expense | 100,307 | 34,697 | ||||||
| Changes in: | ||||||||
| Accounts receivable | (302,422 | ) | (68,398 | ) | ||||
| Inventories | 528,130 | (340,807 | ) | |||||
| Prepaid expenses and other assets | (76,023 | ) | 25,400 | |||||
| Accounts payable | (310,214 | ) | 458,600 | |||||
| Customer deposits | 581,114 | 291,076 | ||||||
| Accrued expenses and other current liabilities | 73,268 | 71,427 | ||||||
| Net cash provided by operating activities | 1,859,423 | 993,068 | ||||||
| Investing activities: | ||||||||
| Purchase of property, plant and equipment | (3,310 | ) | (217,888 | ) | ||||
| Net cash used in investing activities | (3,310 | ) | (217,888 | ) | ||||
| Financing activities: | ||||||||
| Stockholder distributions | (840,000 | ) | (282,566 | ) | ||||
| Proceeds from line of credit | — | 400,000 | ||||||
| Repayment of line of credit | (400,000 | ) | — | |||||
| Proceeds from issuance of long-term debt | — | 550,000 | ||||||
| Repayment of long-term debt | (152,328 | ) | (1,478,544 | ) | ||||
| Net cash used in financing activities | (1,392,328 | ) | (811,110 | ) | ||||
| Net increase (decrease) in cash | 463,785 | (35,930 | ) | |||||
| Cash, beginning of year | 184,153 | 220,083 | ||||||
| Cash, end of year | $ | 647,938 | $ | 184,153 | ||||
| Supplemental cash flow information: | ||||||||
| Cash paid for interest | $ | 43,299 | $ | 54,931 | ||||
| Fixed assets acquired through debt financing | $ | 46,016 | $ | 102,892 | ||||
| Inventory acquired through debt financing | $ | — | $ | 130,500 | ||||
See accompanying notes to financial statements.
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International Medical Equipment & Services, Inc.
| 1. | Summary of Significant Accounting Policies |
Organization and Nature of Operations
International Medical Equipment & Services, Inc. (the “Company”), is an international distributor of medical imaging equipment and parts, headquartered in Fort Mill, South Carolina. The Company also provides training on the operation of medical imaging equipment.
Basis of Accounting
The Company prepares its financial statements on the accrual basis of accounting. Under this method, income is recognized as it is earned, and expenses are recognized as they are incurred.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates made by management in the preparation of the accompanying financial statements relate primarily to the collectability of accounts receivable, depreciable lives of property and equipment, and recoverability of the carrying value of inventory. Actual results could differ from those estimates.
Cash
The Company maintains cash balances at certain banks which at times may exceed the Federal Deposit Insurance Corporation limits. The Company has not historically experienced losses related to these balances.
Accounts Receivable and Concentration of Credit Risk
Accounts receivable are unsecured customer obligations due under normal trade terms generally requiring payment within 30 days from the invoice date. Accounts receivable are stated at the amount billed to the customer, less any allowed deductions and other allowances. Customer account balances are considered delinquent when payment is not received within the trade terms granted. The Company estimates the allowance for doubtful accounts based on historical experience, the credit worthiness of its customers, and management’s assessment of general economic conditions, affecting its customer base. Consequently, an adverse change in those factors could affect the Company’s estimate of its bad debts. After exhausting collection efforts, any uncollectible accounts receivable are written off against the reserve. The Company does not charge interest on past due accounts receivable. The Company’s allowance for doubtful accounts totaled approximately $95,000 and $0 at December 31, 2014 and 2013, respectively.
At December 31, 2014 and 2013, two customers comprised approximately 33 percent and 25 percent of accounts receivable, respectively.
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International Medical Equipment & Services, Inc.
Notes to Financial Statements
Inventories
Inventories are valued at the lower of the cost or net realizable value. The costs of inventories are determined using the first-in, first-out (“FIFO”) method. An allowance to reduce inventories to their net realizable value is determined by management based on age, analysis of usage, industry trends and expected demand.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation and amortization. Depreciation and amortization of property and equipment is computed using the straight-line method over the estimated useful lives of the assets or the term of the lease, if shorter. Maintenance and repairs are charged to expense as incurred. Significant renewals or betterments that extend the useful lives of property and equipment are capitalized. When items of property and equipment are disposed of, the cost and accumulated depreciation and amortization is removed from the accounts, and any resulting gain or loss is recorded in the statements of operations. No gain or loss on disposal of property and equipment was recognized in 2014 or 2013.
The estimated useful lives of property and equipment are as follows:
| Machinery and equipment | 5-10 years |
| Furniture and fixtures | 7-10 years |
| Computers and equipment | 1-3 years |
| Leasehold improvements | Lesser of useful life or lease term |
Impairment of Long-Lived Assets
Long-lived assets and finite intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs to dispose. No impairment charges were recognized in 2014 or 2013.
Revenue Recognition
The Company recognizes revenue from equipment and parts sales when the product is delivered or shipped to the customer, title and risk of ownership passes to the customer, collectability is reasonably assured, provided that persuasive evidence of an arrangement exists, and the price is fixed or determinable. Deposits received in advance are recorded as customer deposits and are included in current liabilities until revenue is recognized. The Company recognizes revenue from training and consulting services at the time of the services are rendered. Revenue is recorded net of an allowance for estimated returns and discounts.
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International Medical Equipment & Services, Inc.
Notes to Financial Statements
Sales and Use Tax
Sales are presented net of sales and use taxes in the accompanying statements of operations. Sales and use tax amounts are included as a component of cost of sales in the accompanying statements of operations.
Shipping and Handling Costs
Costs to ship products to customers are expensed as incurred. Shipping costs of approximately $187,000 and $76,000 for the years ended December 31, 2014 and 2013, respectively, are recorded as a component of selling, general and administrative expenses in the accompanying statements of operations.
Advertising and Marketing Costs
Advertising and marketing costs are expensed as incurred. Advertising and marketing costs totaled approximately $76,000 and $62,000 for the years ended December 31, 2014 and 2013, respectively, and are included as a component of selling, general and administrative expenses in the accompanying statements of operations.
Income Taxes
The shareholders of the Company have elected under the provisions of Subchapter S of the Internal Revenue Code to include the Company’s income in their personal income for federal and state income tax purposes. Accordingly, the Company is not subject to federal or state income taxes for its United States sourced income.
ASC 740, Income Taxes (“ASC 740”) was adopted by the Company as of January 1, 2009. This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. Under ASC 740, the impact of an uncertain income tax position on the income tax returns must be recognized at the largest amount that is more-likely-than-not to be required to be recognized upon audit by the relevant taxing authority. ASC 740 also provides guidance on de-recognition, measurement, classification, interest and penalties, accounting for interim periods, disclosure and transition issues with respect to tax positions. The Company believes it has no uncertain tax positions as of December 31, 2014 and 2013.
The Company includes interest and penalties accrued in accordance with ASC 740 in the financial statements as a component of interest expense. No amounts were required to be recorded as of December 31, 2014 and 2013.
Fair Value Measurements
ASC 820, Fair Value Measurements and Disclosures, defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
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International Medical Equipment & Services, Inc.
Notes to Financial Statements
ASC 820 describes three levels of inputs that may be used to measure fair value:
Level 1: Inputs based on quoted market prices for identical assets or liabilities in active markets at the measurement date.
Level 2: Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the instruments valuation.
As of December 31, 2014 and 2013 and for the years then ended, the carrying values reflected in the accompanying balance sheets for cash, accounts receivable, accounts payable and accrued expenses approximate fair value due to their relative short term maturities.
The carrying values of debt approximate fair market value since these financial instruments bear interest at variable rates which approximate current market rates for bonds with similar maturities and credit quality.
At December 31, 2014 and 2013, the Company did not have any assets or liabilities that were required to be measured at fair value on a recurring basis.
Recently Issued Accounting and Reporting Guidance
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in amounts that reflect the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, may require more judgment and estimates within the revenue recognition process than are required under existing U.S. GAAP. For private companies, the standard is effective for annual periods beginning after December 15, 2017, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). The Company is currently evaluating the impact of the adoption of ASU 2014-09 on its financial statements.
In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements – Going Concern. ASU 2014-15 requires an entity’s management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern and if those conditions exist, the required disclosures. The standard is effective for annual periods ending after December 15, 2016, and interim periods therein. The Company does not expect adoption of this standard will have a significant impact on the Company’s financial statements.
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International Medical Equipment & Services, Inc.
Notes to Financial Statements
Subsequent Events
Under ASC 855, companies are required to disclose events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. The statement requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date. The statement sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. See Note 8.
| 2. | Accounts Receivable |
Accounts receivable consist of the following:
| December 31, | 2014 | 2013 | ||||||
| Accounts receivable | $ | 721,049 | $ | 426,377 | ||||
| Less: allowance for doubtful accounts and returns | (92,557 | ) | — | |||||
| Accounts receivable, net | $ | 628,492 | $ | 426,377 | ||||
| 3. | Inventories |
Inventories consist of the following:
| December 31, | 2014 | 2013 | ||||||
| Equipment | $ | 541,393 | $ | 871,037 | ||||
| Parts | 1,062,556 | 1,338,105 | ||||||
| Less: allowance for slow moving and obselete inventory | (85,602 | ) | (162,665 | ) | ||||
| Inventories, net | $ | 1,518,347 | $ | 2,046,477 | ||||
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International Medical Equipment & Services, Inc.
Notes to Financial Statements
| 4. | Property and Equipment |
Property and equipment consist of the following:
| December 31, | 2014 | 2013 | ||||||
| Machinery and equipment | $ | 410,555 | $ | 407,244 | ||||
| Furniture and fixtures | 17,679 | 17,679 | ||||||
| Computers and equipment | 2,885 | 2,885 | ||||||
| Vehicles | 302,866 | 256,850 | ||||||
| Leasehold improvements | 111,507 | 111,507 | ||||||
| Total property and equipment | 845,492 | 796,165 | ||||||
| Less: accumulated depreciation and amortization | (443,944 | ) | (296,221 | ) | ||||
| Property and equipment, net | $ | 401,548 | $ | 499,944 | ||||
Depreciation and amortization expense for the years ended December 31, 2014 and 2013 was approximately $148,000 and $116,000, respectively.
| 5. | Borrowings |
Long-term debt consists of the following:
| December 31, | 2014 | 2013 | ||||||
| Revolving line of credit | $ | — | $ | 400,000 | ||||
| Term loan | 378,610 | 482,656 | ||||||
| Automobile financing | 133,329 | 135,594 | ||||||
| Total long-term debt and capital leases | 511,939 | 1,018,250 | ||||||
| Less: current maturities | (145,521 | ) | (140,124 | ) | ||||
| Long-term debt and capital leases, net | $ | 366,418 | $ | 878,126 | ||||
On April 24, 2013, the Company entered into a credit agreement (the “Credit Agreement”) with a financial institution. The Credit Agreement consists of a $550,000 term loan (the “Term Loan”) and a $1,000,000 revolving credit facility (the “Revolver”). Borrowings under the Credit Agreement are collateralized by accounts receivable, inventory, and fixed assets of the Company. The Term Loan is payable in monthly installments of principal and interest totaling $10,144 through the maturity date of April 24, 2018. The Credit Agreement was amended on February 10, 2014 and March 31, 2015 to increase the availability under the Revolver to $1,500,000 and extend its maturity date to April 24, 2016.
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International Medical Equipment & Services, Inc.
Notes to Financial Statements
Interest accrues on borrowings under the Revolver at LIBOR plus 3.25% (3.43% at December 31, 2013). The interest rate on the Company’s Term Loan was 4.0% at both December 31, 2014 and 2013.
The Company enters into loan agreements in connection with the purchase of its automobiles. At December 31, 2014 and 2013, the Company had four and three automobile financing arrangements in place, respectively. Amounts outstanding under these financing arrangements are collateralized by the related automobiles. These financing arrangements require monthly payments of principal and interest ranging from $555 to $923 each, accrue interest at annual rates ranging from 2.99% to 5.9% and mature in periods beginning in February 2017 through January 2019.
The Company also enters into loan agreements from time to time in connection with the purchase of medical imaging equipment for resale. At December 31, 2012, the Company had seven equipment financing arrangements in place, having a total outstanding loan obligation of approximately $1,225,000. These loans were collateralized by the equipment acquired, accrued interest at annual rates ranging from 4.5% to 5.5%, and had original maturity dates ranging from April 15, 2013 to October 19, 2016. All of the equipment loans were repaid during 2013.
The Credit Agreement contains certain covenants, including covenants restricting additional indebtedness and the payment of dividends. In addition, the Company must maintain certain annual financial covenants, including, among other things, a maximum debt to net worth ratio and a minimum fixed charge coverage ratio., The Company is also required to submit its compiled financial statements to the lender within 120 days of its year-end. The Company was in compliance with its debt covenants at both December 31, 2014 and 2013.
Future maturities of the Company’s outstanding borrowings as of December 31, 2014, are as follows:
| Years Ending March 31, | ||||||
| 2015 | $ | 145,521 | ||||
| 2016 | 151,642 | |||||
| 2017 | 151,812 | |||||
| 2018 | 59,989 | |||||
| 2019 | 2,975 | |||||
| Total notes payable | $ | 511,939 | ||||
| 6. | Commitments |
The Company is from time-to-time involved in litigation incidental to the conduct of its business, and such matters can involve current and former employees and other matters. These actions are routine and are expected to continue to be resolved without a material effect on the Company’s financial position or future results of operation.
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International Medical Equipment & Services, Inc.
Notes to Financial Statements
| 7. | Related Party Transactions |
The Company leases its office and warehouse facility from a related party under a month-to-month arrangement. Amounts paid to the related party for the use of the facility approximated $99,000 in each of 2014 and 2013.
During 2014, the Company recognized revenue of approximately $64,000 related to the sales of parts to Richardson Electronics, Ltd., who acquired the Company in June 2015.
| 8. | Subsequent Events |
The Company has evaluated subsequent events from the date of the balance sheet through December 18, 2015, the date the financial statements were available for issuance. On March 31, 2015, the Company extended the maturity date of the Revolver to April 24, 2016. On June 15, 2015, certain of the Company’s assets were acquired by Richardson Electronics, Ltd. for cash proceeds approximating $12.2 million. Proceeds generated from the sale were used to repay the Company’s outstanding debt obligations. No other material recognizable subsequent events were identified.
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International Medical Equipment &
Services, Inc.
Unaudited Financial Statements
Three Months Ended March 31, 2015 and 2014
International Medical Equipment & Services, Inc.
Unaudited Financial Statements
Three Months Ended March 31, 2015 and 2014
International Medical Equipment & Services, Inc.
CONTENTs
| Unaudited Financial Statements | ||
| Balance Sheets | 3 | |
| Statements of Operations | 4 | |
| Statements of Changes in Stockholders’ Equity | 5 | |
| Statements of Cash Flows | 6 | |
| Notes to Unaudited Financial Statements | 7-14 | |
International Medical Equipment & Services, Inc.
| March 31, | 2015 | 2014 | ||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash | $ | 330,959 | $ | 92,381 | ||||
| Accounts receivable, net (Note 2) | 805,858 | 779,200 | ||||||
| Inventories, net (Note 3) | 1,923,076 | 2,794,191 | ||||||
| Prepaid expenses and other current assets | 37,112 | 24,443 | ||||||
| Total current assets | 3,097,005 | 3,690,215 | ||||||
| Property and equipment, net (Note 4) | 436,667 | 519,030 | ||||||
| Total assets | $ | 3,533,672 | $ | 4,209,245 | ||||
| Liabilities and Stockholders' Equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 322,800 | $ | 609,642 | ||||
| Current portion of notes payable (Note 5) | 167,324 | 145,153 | ||||||
| Customer deposits | 125,000 | 686,586 | ||||||
| Accrued expenses | 121,511 | 70,296 | ||||||
| Total current liabilities | 736,635 | 1,511,677 | ||||||
| Revolving line of credit (Note 5) | — | 400,000 | ||||||
| Long term notes payable, less current portion (Note 5) | 369,250 | 485,350 | ||||||
| Total liabilities | 1,105,885 | 2,397,027 | ||||||
| Stockholders' Equity: | ||||||||
| Common stock, voting, no par, 100,000 shares authorized; 1,000 shares issued and outstanding at March 31, 2015 and 2014 | 400 | 400 | ||||||
| Retained earnings | 2,427,387 | 1,811,818 | ||||||
| Total stockholders' equity | 2,427,787 | 1,812,218 | ||||||
| Total liabilities and stockholders' equity | $ | 3,533,672 | $ | 4,209,245 | ||||
See accompanying notes to unaudited financial statements.
| 3 |
International Medical Equipment & Services, Inc.
Unaudited Statements of Operations
| Three Months Ended March 31, | 2015 | 2014 | ||||||
| Net revenue | $ | 2,841,067 | $ | 2,073,166 | ||||
| Cost of goods sold | 1,352,214 | 914,932 | ||||||
| Gross profit | 1,488,853 | 1,158,234 | ||||||
| Operating expenses: | ||||||||
| Selling, general and administrative expenses | 462,298 | 429,442 | ||||||
| Depreciation expense | 36,913 | 36,931 | ||||||
| Operating income | 989,642 | 691,861 | ||||||
| Interest expense, net | (5,362 | ) | (11,602 | ) | ||||
| Other income (expense), net | 4,641 | (21,867 | ) | |||||
| Net income | $ | 988,921 | $ | 658,392 | ||||
See accompanying notes to unaudited financial statements.
| 4 |
International Medical Equipment & Services, Inc.
Unaudited Statements of Changes in Stockholders’ Equity
| Stockholders' | Retained | |||||||||||
| Equity | Earnings | Total | ||||||||||
| Balance, December 31, 2013 | $ | 400 | $ | 1,320,926 | $ | 1,321,326 | ||||||
| Net income | — | 658,392 | 658,392 | |||||||||
| Stockholder distributions | — | (167,500 | ) | (167,500 | ) | |||||||
| Balance, March 31, 2014 | $ | 400 | $ | 1,811,818 | $ | 1,812,218 | ||||||
| Balance, December 31, 2014 | $ | 400 | $ | 1,598,466 | $ | 1,598,866 | ||||||
| Net income | — | 988,921 | 988,921 | |||||||||
| Stockholder distributions | — | (160,000 | ) | (160,000 | ) | |||||||
| Balance, March 31, 2015 | $ | 400 | $ | 2,427,387 | $ | 2,427,787 | ||||||
See accompanying notes to unaudited financial statements.
| 5 |
International Medical Equipment & Services, Inc.
Unaudited Statements of Cash Flows
| Three Months Ended March 31, | 2015 | 2014 | ||||||
| Operating activities: | ||||||||
| Net income | $ | 988,921 | $ | 658,392 | ||||
| Adjustments to reconcile net income to net cash (used in) provided by operating activities: | ||||||||
| Depreciation and amortization | 36,913 | 36,931 | ||||||
| Changes in: | ||||||||
| Accounts receivable | (177,366 | ) | (352,823 | ) | ||||
| Inventories | (404,729 | ) | (747,714 | ) | ||||
| Prepaid expenses and other assets | 152,843 | 89,488 | ||||||
| Accounts payable | 175,286 | 151,915 | ||||||
| Customer deposits | (747,190 | ) | 395,510 | |||||
| Accrued expenses and other current liabilities | (134,260 | ) | (112,207 | ) | ||||
| Net cash (used in) provided by operating activities | (109,582 | ) | 119,492 | |||||
| Investing activities: | ||||||||
| Purchase of property and equipment | (12,532 | ) | (10,001 | ) | ||||
| Net cash used in investing activities | (12,532 | ) | (10,001 | ) | ||||
| Financing activities: | ||||||||
| Stockholder distributions | (160,000 | ) | (167,500 | ) | ||||
| Repayment of long-term debt | (34,865 | ) | (33,763 | ) | ||||
| Net cash used in financing activities | (194,865 | ) | (201,263 | ) | ||||
| Net decrease in cash | (316,979 | ) | (91,772 | ) | ||||
| Cash, beginning of period | 647,938 | 184,153 | ||||||
| Cash, end of period | $ | 330,959 | $ | 92,381 | ||||
| Supplemental cash flow information: | ||||||||
| Cash paid for interest | $ | 5,362 | $ | 11,603 | ||||
| Fixed assets acquired through debt financing | 59,500 | 46,016 | ||||||
See accompanying notes to unaudited financial statements.
| 6 |
International Medical Equipment & Services, Inc.
Notes to Unaudited Financial Statements
| 1. | Summary of Significant Accounting Policies |
Organization and Nature of Operations
International Medical Equipment & Services, Inc. (the “Company”), is an international distributor of medical imaging equipment and parts, headquartered in Fort Mill, South Carolina. The Company also provides training on the operation of medical imaging equipment.
Basis of Accounting
The unaudited quarterly financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”). In the opinion of management, these unaudited quarterly financial statements contain all adjustments, consisting of adjustments of a normal recurring nature, necessary to present fairly the financial position, results of operations and cash flows for the periods presented. The results of operations for the three months ended March 31, 2015 and 2014 are not necessarily indicative of the results to be expected for the full years.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates made by management in the preparation of the accompanying financial statements relate primarily to the collectability of accounts receivable, depreciable lives of property and equipment, and recoverability of the carrying value of inventory. Actual results could differ from those estimates.
Cash
The Company maintains cash balances at certain banks which at times may exceed the Federal Deposit Insurance Corporation limits. The Company has not historically experienced losses related to these balances.
Accounts Receivable and Concentration of Credit Risk
Accounts receivable are unsecured customer obligations due under normal trade terms generally requiring payment within 30 days from the invoice date. Accounts receivable are stated at the amount billed to the customer, less any allowed deductions and other allowances. Customer account balances are considered delinquent when payment is not received within the trade terms granted. The Company estimates the allowance for doubtful accounts based on historical experience, the credit worthiness of its customers, and management’s assessment of general economic conditions, affecting its customer base. Consequently, an adverse change in those factors could affect the Company’s estimate of its bad debts. After exhausting collection efforts, any uncollectible accounts receivable are written off against the reserve. The Company does not charge interest on past due accounts receivable. The Company’s allowance for doubtful accounts totaled approximately $93,000 and $0 at March 31, 2015 and 2014, respectively.
| 7 |
International Medical Equipment & Services, Inc.
Notes to Unaudited Financial Statements
At March 31, 2015, four customers comprised approximately 49 percent of accounts receivable. At March 31, 2014, two customers comprised approximately 48 percent of accounts receivable.
Inventories
Inventories are valued at the lower of the cost or net realizable value. The costs of inventories are determined using the first-in, first-out (“FIFO”) method. An allowance to reduce inventories to their net realizable value is determined by management based on age, analysis of usage, industry trends and expected demand.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation and amortization. Depreciation and amortization of property and equipment is computed using the straight-line method over the estimated useful lives of the assets or the term of the lease, if shorter. Maintenance and repairs are charged to expense as incurred. Significant renewals or betterments that extend the useful lives of property and equipment are capitalized. When items of property and equipment are disposed of, the cost and accumulated depreciation and amortization is removed from the accounts, and any resulting gain or loss is recorded in the statements of operations.
The estimated useful lives of property and equipment are as follows:
| Machinery and equipment | 5-10 years |
| Furniture and fixtures | 7-10 years |
| Computers and equipment | 1-3 years |
| Leasehold improvements | Lesser of useful life or lease term |
Impairment of Long-Lived Assets
Long-lived assets and finite intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs to dispose. No impairment charges were recognized in the three-month periods ended March 31, 2015 and 2014.
Revenue Recognition
The Company recognizes revenue from equipment and parts sales when the product is delivered o shipped to the customer, title and risk of ownership passes to the customer, collectability is reasonably assured, provided that persuasive evidence of an arrangement exists, and the price is fixed or determinable. Deposits received in advance are recorded as customer deposits and are included in current liabilities until revenue is recognized. The Company recognizes revenue from training and consulting services at the time of the services are rendered. Revenue is recorded net of an allowance for estimated returns and discounts.
| 8 |
International Medical Equipment & Services, Inc.
Notes to Unaudited Financial Statements
Sales and Use Tax
Sales are presented net of sales and use taxes in the accompanying statements of operations. Sales and use tax amounts are included as a component of cost of sales in the accompanying statements of operations.
Shipping and Handling Costs
Costs to ship products to customers are expensed as incurred. Shipping costs of approximately $81,500 and $90,000 for the three months ended March 31, 2015 and 2014, respectively, are recorded as a component of selling, general and administrative expenses in the accompanying statements of operations.
Advertising and Marketing Costs
Advertising and marketing costs are expensed as incurred. Advertising and marketing costs totaled approximately $17,600 and $5,000 for the three months ended March 31, 2015 and 2014, respectively, and are included as a component of selling, general and administrative expenses in the accompanying statements of operations.
Income Taxes
The shareholders of the Company have elected under the provisions of Subchapter S of the Internal Revenue Code to include the Company’s income in their personal income for federal and state income tax purposes. Accordingly, the Company is not subject to federal or state income taxes for its United States sourced income.
ASC 740, Income Taxes (“ASC 740”) was adopted by the Company as of January 1, 2009. This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. Under ASC 740, the impact of an uncertain income tax position on the income tax returns must be recognized at the largest amount that is more-likely-than-not to be required to be recognized upon audit by the relevant taxing authority. ASC 740 also provides guidance on de-recognition, measurement, classification, interest and penalties, accounting for interim periods, disclosure and transition issues with respect to tax positions. The Company believes it has no uncertain tax positions as of March 31, 2015 and 2014.
The Company includes interest and penalties accrued in accordance with ASC 740 in the consolidated financial statements as a component of interest expense. No amounts were required to be recorded as of and for the three month periods ended March 31, 2015 and 2014.
Fair Value Measurements
ASC 820, Fair Value Measurements and Disclosures, defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
| 9 |
International Medical Equipment & Services, Inc.
Notes to Unaudited Financial Statements
ASC 820 describes three levels of inputs that may be used to measure fair value:
Level 1: Inputs based on quoted market prices for identical assets or liabilities in active markets at the measurement date.
Level 2: Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the instruments valuation.
As of March 31, 2015 and 2014 and for the three-month periods then ended, the carrying values reflected in the accompanying balance sheets for cash, accounts receivable, accounts payable and accrued expenses approximate fair value due to the relative short term maturities of these financial instruments.
The carrying values of debt approximates fair value since these financial instruments bear interest at variable rates which approximate current market rates for bonds with similar maturities and credit quality.
At March 31, 2015 and 2014, the Company did not have any assets or liabilities that were required to be measured at fair value on a recurring basis.
Recently Issued Accounting and Reporting Guidance
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenue when promised goods or services are transferred to customers in amounts that reflect the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, may require more judgment and estimates within the revenue recognition process than are required under existing U.S. GAAP. For private companies, the standard is effective for annual periods beginning after December 15, 2017, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). The Company is currently evaluating the impact of the adoption of ASU 2014-09 on its financial statements.
In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements – Going Concern. ASU 2014-15 requires an entity’s management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern and if those conditions exist, the required disclosures. The standard is effective for annual periods ending after December 15, 2016, and interim periods therein. The Company does not expect adoption of this standard will have a significant impact on the Company’s financial statements.
| 10 |
International Medical Equipment & Services, Inc.
Notes to Unaudited Financial Statements
Subsequent Events
Under ASC 855, companies are required to disclose events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. The statement requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date. The statement sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. See Note 8.
| 2. | Accounts Receivable |
Accounts receivable consist of the following:
| March 31, | 2015 | 2014 | ||||||
| Accounts receivable | $ | 898,414 | $ | 779,200 | ||||
| Less: allowance for doubtful accounts | (92,556 | ) | — | |||||
| Accounts receivable, net | $ | 805,858 | $ | 779,200 | ||||
| 3. | Inventories |
Inventories consist of the following:
| March 31, | 2015 | 2014 | ||||||
| Equipment | $ | 649,677 | $ | 1,368,277 | ||||
| Parts | 1,312,590 | 1,568,341 | ||||||
| Less: allowance for slow moving and obselete inventory | (39,191 | ) | (142,427 | ) | ||||
| Inventories, net | $ | 1,923,076 | $ | 2,794,191 | ||||
| 11 |
International Medical Equipment & Services, Inc.
Notes to Unaudited Financial Statements
| 4. | Property and Equipment |
Property and equipment consist of the following:
| March 31, | 2015 | 2014 | ||||||
| Machinery and equipment | $ | 412,084 | $ | 407,245 | ||||
| Furniture and fixtures | 17,679 | 17,679 | ||||||
| Computers and equipment | 2,885 | 2,885 | ||||||
| Vehicles | 320,426 | 312,866 | ||||||
| Leasehold improvements | 111,507 | 111,507 | ||||||
| Total property and equipment | 864,581 | 852,182 | ||||||
| Less: accumulated depreciation and amortization | (427,914 | ) | (333,152 | ) | ||||
| Property and equipment, net | $ | 436,667 | $ | 519,030 | ||||
Depreciation and amortization expense for the three months ended March 31, 2015 and 2014 was $36,913 and $36,931, respectively, and is included as a component of selling, general and administrative expense in the accompanying statements of operations.
| 5. | Borrowings |
Long-term debt consists of the following:
| March 31, | 2015 | 2014 | ||||||
| Revolving line of credit | $ | — | $ | 400,000 | ||||
| Term loan | 351,732 | 457,053 | ||||||
| Automobile financing | 184,842 | 173,450 | ||||||
| Total long-term debt and capital leases | 536,574 | 1,030,503 | ||||||
| Less: current maturities | (167,324 | ) | (145,153 | ) | ||||
| Long-term debt and capital leases, net | $ | 369,250 | $ | 885,350 | ||||
On April 24, 2013, the Company entered into a credit agreement (the “Credit Agreement”) with a financial institution. The Credit Agreement consists of a $550,000 term loan (the “Term Loan”) and a $1,000,000 revolving credit facility (the “Revolver”). Borrowings under the Credit Agreement are collateralized by accounts receivable, inventory, and fixed assets of the Company. The Term Loan is payable in monthly installments of principal and interest totaling $10,144 through the maturity date of April 24, 2018. The Credit Agreement was amended on February 10, 2014 and March 31, 2015 to increase the availability under the Revolver to $1,500,000 and extend its maturity date to April 24, 2016.
| 12 |
International Medical Equipment & Services, Inc.
Notes to Unaudited Financial Statements
Interest accrues on borrowings under the Revolver at LIBOR plus 3.25%. The interest rate on the Company’s Term Loan was 4.0% at both March 31, 2015 and 2014.
The Company enters into loan agreements in connection with the purchase of its automobiles. At March 31, 2015 and 2014, the Company had five automobile financing arrangements in place, respectively. Amounts outstanding under these financing arrangements are collateralized by the related automobiles. These financing arrangements require monthly payments of principal and interest ranging from $555 to $923 each, accrue interest at annual rates ranging from 2.99% to 5.9% and mature in periods beginning in February 2017 through February 2021.
The Credit Agreement contains certain covenants, including covenants restricting additional indebtedness and the payment of dividends. In addition, the Company must maintain certain annual financial covenants, including, among other things, a maximum debt to net worth ratio and a minimum fixed charge coverage ratio. The Company is also required to submit its compiled financial statements to the lender within 120 days of its year end.
Future maturities of the Company’s outstanding borrowings as of March 31, 2015 are as follows:
| Years Ending March 31, | ||||||
| 2015 | $ | 167,324 | ||||
| 2016 | 155,781 | |||||
| 2017 | 152,638 | |||||
| 2018 | 56,565 | |||||
| 2019 | 4,266 | |||||
| Total notes payable | $ | 536,574 | ||||
| 6. | Commitments |
The Company is from time-to-time involved in litigation incidental to the conduct of its business, and such matters can involve current and former employees and other matters. These actions are routine and are expected to continue to be resolved without a material effect on the Company’s financial position or future results of operation.
| 7. | Related Party Transactions |
The Company leases its office and warehouse facility from a related party under a month-to-month arrangement. Amounts paid to the related party for the use of the facility approximated $27,000 for the three months ended March 31, 2015 and 2014. These amounts are included as a component of selling, general and administrative expenses in the accompanying statements of operations.
| 13 |
International Medical Equipment & Services, Inc.
Notes to Unaudited Financial Statements
| 8. | Subsequent Events |
The Company has evaluated subsequent events from the date of the balance sheet through December 18, 2015, the date the financial statements were available for issuance. On June 15, 2015, certain of the Company’s assets were acquired by Richardson Electronics, Ltd. for cash proceeds approximating $12.2 million. Proceeds generated from the sale were used to repay the Company’s outstanding debt obligations. No other material recognizable subsequent events were identified.
| 14 |