Exhibit 99.2

 

 

 

 

 

 

CUSTOM BIOGENIC SYSTEMS, INC.

 

REVIEWED FINANCIAL STATEMENTS

 

For the nine months ended September 30, 2019 and 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CUSTOM BIOGENIC SYSTEMS, INC.

 

 

 

TABLE OF CONTENTS

 

 

 

	Page
Unaudited Financial Statements
Balance Sheets	2
Statements of Stockholder’s Equity	3
Statements of Operations	4
Statements of Cash Flows	5
Notes to Financial Statements	6

 

CUSTOM BIOGENIC SYSTEMS, INC.

UNAUDITED BALANCE SHEETS

 

 

		September 30,				September 30,
		2019				2018
ASSETS
CURRENT ASSETS
Cash		$	1,438			$	7,760
Accounts receivable			1,502,854				1,437,718
Inventory, net			2,793,588				2,038,441
Prepaid expenses			41,403				32,069
Total current assets			4,339,283				3,515,988
PROPERTY AND EQUIPMENT, net			3,238,708				3,607,545
TOTAL ASSETS		$	7,577,991			$	7,123,533
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Current portion of long-term debt		$	398,314			$	526,609
Bank overdraft			297,486				213,461
Line of credit			1,149,883				1,145,804
Accounts payable			2,050,215				1,727,845
Accrued expenses			247,583				201,703
Deposits			282,461				331,210
Notes payable - related parties			871,287				451,985
Total current liabilities			5,297,229				4,598,617
LONG-TERM LIABILITIES, net of current portion			1,334,187				1,747,311
TOTAL LIABILITIES			6,631,416				6,345,928
STOCKHOLDER'S EQUITY			946,575				777,605
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY		$	7,577,991			$	7,123,533

 

CUSTOM BIOGENIC SYSTEMS, INC.

UNAUDITED STATEMENTS OF STOCKHOLDER'S EQUITY

Nine months ended September 30, 2019 and 2018

 

 

		Common				Retained
		Stock				Earnings				Total
Balance, January 1, 2018		$	100			$	1,434,934			$	1,435,034
Dividend distributions			-				(30,000	)			(30,000	)
Net loss			-				(627,429	)			(627,429	)
Balance, September 30, 2018		$	100			$	777,505			$	777,605
		Common				Retained
		Stock				Earnings				Total
Balance, January 1, 2019		$	100			$	820,182			$	820,282
Dividend distributions			-				(30,000	)			(30,000	)
Net income			-				156,293				156,293
Balance, September 30, 2019		$	100			$	946,475			$	946,575

 

CUSTOM BIOGENIC SYSTEMS, INC.

UNAUDITED STATEMENTS OF OPERATIONS

 

 

		Nine months ended September 30,
		2019								2018
						Percent of								Percent of
		Amount				Net Sales				Amount				Net Sales
Net sales		$	9,423,425				100.0	%		$	8,723,490				100.0	%
Cost of goods sold			6,444,614				68.4				6,077,519				69.7
Gross profit			2,978,811				31.6				2,645,971				30.3
Operating expenses
Research and development			518,442				5.5				840,052				9.6
General and administrative			1,690,620				17.9				1,752,005				20.1
Sales and marketing			477,337				5.1				569,527				6.5
Total operating expenses			2,686,399				28.5				3,161,584				36.2
Operating income (loss)			292,412				3.1				(515,613	)			(5.9	)
Other income (expense)
Other income			126				-				-				-
Interest expense			(136,245	)			(1.4	)			(111,816	)			(1.3	)
Total other income (expense)			(136,119	)			(1.4	)			(111,816	)			(1.3	)
Net income (loss)		$	156,293				1.7	%		$	(627,429	)			(7.2	)%

 

CUSTOM BIOGENIC SYSTEMS, INC.

UNAUDITED STATEMENTS OF CASH FLOWS

 

 

		Nine months
		ended September 30,
		2019				2018
OPERATING ACTIVITIES
Net income (loss)		$	156,293			$	(627,429	)
Adjustments to reconcile net income (loss) to net cash flows from operating activities:
Depreciation and amortization			372,554				330,061
Loss on sale of fixed assets			7,967				7,937
Bad debt expense			6,459				-
Changes in:
Accounts receivable			(297,118	)			180,198
Inventory			118,852				151,011
Prepaid expenses			(28,908	)			(19,426	)
Deposits			23,556				64,065
Accounts payable and accrued expenses			(226,755	)			577,575
Net cash provided by operating activities			132,900				663,992
INVESTING ACTIVITIES
Proceeds from sale of fixed assets			25,000				253,665
Expenditures for property and equipment			(115,619	)			(400,891	)
Expenditures for construction in process			(23,380	)			(12,473	)
Net cash used in investing activities			(113,999	)			(159,699	)
FINANCING ACTIVITIES
Net activity under bank overdraft			54,366				(8,401	)
Borrowings under line of credit			4,146,976				4,274,656
Payments on line of credit			(4,248,951	)			(4,286,830	)
Payments on notes payable			(400,579	)			(370,262	)
Payments on capital lease			-				(37,506	)
Borrowings on notes payable - related parties			541,500				46,286
Payments on notes payable - related parties			(82,079	)			(84,879	)
Dividend distributions			(30,000	)			(30,000	)
Net cash (used in) provided by financing activities			(18,767	)			(496,936	)
NET CHANGE IN CASH			134				7,357
CASH, Beginning of year			1,304				403
CASH, End of year		$	1,438			$	7,760

 

CUSTOM BIOGENIC SYSTEMS, INC.

NOTES TO UNAUDITED FINANCIAL STATEMENTS

September 30, 2019 and 2018

 

 

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The following is a summary of certain accounting policies followed in the preparation of these financial statements. The policies conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the financial statements.

 

Company Operations

 

Custom Biogenic Systems, Inc. (the “Company”) is engaged in the manufacture and sale of cryogenic freezing and long-term storage products mostly within the healthcare and biomedical industries to customers around the world, with majority of sales shipped to North America and Europe.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Concentration of Credit Risk

 

The Company, from time to time during the periods covered by these financial statements, may have bank balances in excess of its insured limits. Management has deemed this as a normal business risk.

 

Accounts Receivable

 

The Company carries its accounts receivable at their invoiced amounts. On a periodic basis, the Company evaluates its accounts receivable and establishes an allowance for doubtful accounts, when deemed necessary, based on the history of past write-offs and collections and current credit conditions. The Company will place customer accounts on hold if payments violate terms of agreement. At September 30, 2019 and 2018, management determined no allowance was deemed necessary. Generally, the Company does not require collateral for its accounts receivable. The Company does not charge interest on past due accounts receivable.

 

CUSTOM BIOGENIC SYSTEMS, INC.

NOTES TO UNAUDITED FINANCIAL STATEMENTS

September 30, 2019 and 2018

 

 

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Inventory Valuation

 

Inventories are valued at lower of cost or net realizable value, with cost being determined on a first-in, first-out basis. Net realizable value is the estimated selling price in the ordinary course of business less reasonably predictable costs of completion, disposal, and transportation. General and administrative expenses are not inventoried, but are charged to expense when purchased. Provisions are recorded to reduce inventory for obsolete or slow-moving inventory based on assumptions about future demand and marketability of products, inventory levels and turns and product spoilage. As of September 31, 2019 and 2018, the Company had an inventory reserve in the amount of $210,000 and $140,000, respectively.

 

Property and Equipment

 

Management capitalizes expenditures for property and equipment. Expenditures for maintenance and repairs are charged to operating expenses. Property and equipment are carried at cost. Adjustments of the asset and the related accumulated depreciation and amortization accounts are made for property and equipment retirements and disposals, with the resulting gain or loss included in the statements of operations.

 

Depreciation and Amortization

 

Depreciation and amortization of property and equipment are computed using the straight-line method over the estimated useful lives of assets at acquisition. Leasehold improvements are amortized over the shorter of the assets’ useful lives or the term of the lease.

 

Depreciation and amortization for the nine months ended September 31, 2019 and 2018 was $372,554 and $330,061, respectively.

 

Revenue Recognition

 

Sales are recorded when the products are shipped to customers. Provision for discounts and rebates to customers and other adjustments are provided for in the same period as the related sales.

 

Shipping and Handling Costs

 

The Company records the amount of shipping and handling costs billed of customers as revenue. The cost incurred for shipping and handling is included in cost of sales.

 

CUSTOM BIOGENIC SYSTEMS, INC.

NOTES TO UNAUDITED FINANCIAL STATEMENTS

September 30, 2019 and 2018

 

 

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Advertising and Promotion

 

Advertising and promotion costs are expensed as incurred. Advertising and promotion expense for the nine months ended September 30, 2019 and 2018 was $106,126 and $187,852, respectively.

 

Sales and Use Taxes

 

The Company records sales net of sales and use taxes.

 

Product Warranty

 

The Company accrues an estimate of its exposure to warranty claims based on both current and historical product sales data and warranty costs incurred. The majority of the Company’s products carry a warranty ranging from ninety days to five years. The Company assesses the adequacy of its recorded warranty liability annually and adjusts the amount as necessary.  The warranty liability is included in accrued expenses in the accompanying balance sheet.  Warranty expenses are recorded in cost of sales.  See Note 13 for additional disclosure.

 

Income Taxes

 

Custom Biogenic Systems, Inc. has elected to be treated as a Subchapter S Corporation under the Internal Revenue Code. Under these provisions, the Company generally does not pay federal corporate income taxes on its taxable income. Instead, the stockholder is liable for individual federal and state income taxes the Company’s taxable income. Accordingly, no provision for federal or state corporate income taxes has been reflected in the financial statements.

 

Variable Interest Entities

 

Under alternatives available to private companies, the Company has elected not to evaluate any related parties under common control to determine if any such entities are variable interest entities that might be required to be consolidated in the financial statements of the Company.

 

CUSTOM BIOGENIC SYSTEMS, INC.

NOTES TO UNAUDITED FINANCIAL STATEMENTS

September 30, 2019 and 2018

 

 

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Subsequent Events

 

The Company has performed a review of events subsequent to the balance sheet date through January 24, 2020, the date the financial statements were available to be issued.

 

 

NOTE 2 – RELATED PARTY TRANSACTIONS

 

Notes Payable

 

At September 30, 2019 and 2018, the Company was indebted to its sole shareholder in the amount of $694,402 and $328,692, respectively. The note is unsecured, non-interest bearing, is classified as short-term on the balance, and is due on demand. See Note 7 for a schedule of minimum long-term debt payments.

At September 30, 2019 and 2018, the Company was indebted to a related party through common ownership in the amount of $176,885 and $109,174, respectively. The note is unsecured, non-interest bearing, is classified as short-term on the balance sheets, and is due on demand. See Note 7 for a schedule of minimum long-term debt payments.

 

At September 30, 2018, the Company was indebted to related parties in the amount of $14,119. The note was unsecured and was classified as short-term on the balance sheet. During the period ended September 30, 2019 the note was paid in full.

 

Lease Agreement

 

The Company leases its operating facilities from a related party on a month-to-month basis. The lease calls for monthly payments of $10,000 and total rental expense related to the lease during the periods ended September 30, 2019 and 2018 was $95,645 and $89,900 respectively.

 

Guarantee

 

The Company guarantees the debt of a related party through common ownership, which is secured by real estate owned by a related party. In the event of a default by the related party, the Company could be obligated to repay the full amount outstanding. At September 30, 2019 and 2018, the outstanding balance is $827,686 and $872,056, respectively. Management anticipates the related party will be able to meet their debt obligation, therefore; no accrual has been made on the financial statements at September 30, 2019 and 2018.

 

CUSTOM BIOGENIC SYSTEMS, INC.

NOTES TO UNAUDITED FINANCIAL STATEMENTS

September 30, 2019 and 2018

 

 

NOTE 3 – INVENTORY

 

Inventory consisted of the following at September 30:

 

		2019				2018
Raw materials		$	792,898			$	621,433
Work in process			483,064				143,628
Finished goods			1,727,626				1,413,380
Inventory Reserve			(210,000	)			(140,000	)
		$	2,793,588			$	2,038,441

 

 

NOTE 4 – PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following at September 30:

 

		2019				2018
Equipment		$	4,617,910			$	4,570,023
Computers & equipment			384,029				389,679
Furniture & fixtures			38,709				36,909
Autos & trucks			77,319				97,462
Building improvements			717,456				684,703
			5,835,423				5,778,776
Less: Accumulated depreciation and amortization			2,639,417				2,190,554
			3,196,006				3,588,222
Construction in process			42,702				19,323
		$	3,238,708			$	3,607,545

 

 

NOTE 5 – LINE OF CREDIT

 

At September 30, 2019 and 2018, the Company had drawn $1,149,883 and $1,145,804, respectively, under a line-of-credit agreement with a financial institution. Under the agreement, the Company may borrow up to $1,500,000 on a revolving basis through November 2019. The line of credit bears interest at LIBOR plus 2.5% (LIBOR was 2.05% at September 30, 2019) and is secured by the Company’s general assets. The agreement is subject to a financial covenant related to a fixed charge coverage ratio. At covenant measurement date, December 31, 2018, the Company was not in compliance with the financial covenant. Subsequent to December 31, 2018, the financial institution issued a waiver for the covenant violation.

 

CUSTOM BIOGENIC SYSTEMS, INC.

NOTES TO UNAUDITED FINANCIAL STATEMENTS

September 30, 2019 and 2018

 

 

NOTE 6 – ACCRUED EXPENSES

 

Accrued expenses consisted of the following at September 30:

 

		2019				2018
Accrued payroll		$	75,235			$	83,907
Interest payable			13,116				15,829
Sales tax payable			11,522				23,967
Property taxes			3,710				-
Accrued warranty expense			144,000				78,000
		$	247,583			$	201,703

 

 

NOTE 7 – LONG-TERM DEBT

 

		September 30,
		2019				2018
The Company has a note payable to a financial institution. The note is payable in monthly installments of $15,974, including interest at 3.59%, and matures in November 2019. The note is secured by the Company’s general assets and is cross-collateralized and cross-defaulted with other notes and a line of credit from the same financial institution. The agreement is subject to a financial covenant related to a fixed charge coverage ratio. At December 31, 2018, the Company was not in compliance with the financial covenant. Subsequent to December 31, 2018, the financial institution issued a waiver for the covenant violation.		$	31,825			$	218,644
The Company has a note payable to a financial institution. The note is payable in monthly installments of $6,548, plus interest at LIBOR plus 2.75%, and matures in June 2023. The note is secured by the Company’s general assets and is cross-collateralized and cross-defaulted with other notes and a line of credit from the same financial institution. The agreement is subject to a financial covenant related to a fixed charge coverage ratio. At December 31, 2018, the Company was not in compliance with the financial covenant. Subsequent to December 31, 2018, the financial institution issued a waiver for the covenant violation.			294,643				373,214
Subtotal		$	326,468			$	591,858

 

CUSTOM BIOGENIC SYSTEMS, INC.

NOTES TO UNAUDITED FINANCIAL STATEMENTS

September 30, 2019 and 2018

 

 

NOTE 7 – LONG-TERM DEBT (Continued)

 

		September 30,
		2019				2018
Subtotal from previous page		$	326,468			$	591,858
The Company has a note payable to a financial institution. The note is payable in monthly installments of $3,571, plus interest at LIBOR plus 2.75%, and matures in December 2023. The note is secured by the Company’s general assets and is cross-collateralized and cross-defaulted with other notes and a line of credit from the same financial institution. The agreement is subject to a financial covenant related to a fixed charge coverage ratio. At December 31, 2018, the Company was not in compliance with the financial covenant. Subsequent to December 31, 2018, the financial institution issued a waiver for the covenant violation.			178,571				221,429
The Company has a note payable to a financial institution. The note is payable in monthly installments of $812, including interest at 4.9%, secured by the vehicle purchased under the note, and matures in May 2020. During the nine months ended September 30, 2019, the Company paid the remaining balance of the loan.			-				14,810
The Company has a note payable to a financial institution in the original amount of $600,000. The note is payable in monthly installments of $9,807, plus interest at LIBOR plus 2.75%, and matures in November 2022. The note is secured by the Company’s general assets and is cross-collateralized and cross-defaulted with other notes and the line of credit from the same financial institution. The agreement is subject to a financial covenant related to a fixed charge coverage ratio. At December 31, 2018, the Company was not in compliance with the financial covenant. Subsequent to December 31, 2018, the financial institution issued a waiver for the covenant violation.			382,460				500,520
Subtotal		$	887,499			$	1,328,617

 

CUSTOM BIOGENIC SYSTEMS, INC.

NOTES TO UNAUDITED FINANCIAL STATEMENTS

September 30, 2019 and 2018

 

 

NOTE 7 – LONG-TERM DEBT (Continued)

 

		September 30,
		2019				2018
Subtotal from previous page		$	887,499			$	1,328,617
During the nine months ended September 30, 2018, the Company entered into a note payable to a financial institution in the amount of $959,733. The note is payable in monthly installments of $12,953, including interest 7.31% and matures June 2025 with a final payment $192,244. The loan is secured by financed assets.			845,002				945,303
Notes payable to related parties from Note 2			871,287				451,985
Subtotal			2,603,788				2,725,905
Less: related party debt			871,287				451,985
Less: current portion of long-term debt			398,314				526,609
		$	1,334,187			$	1,747,311

 

Minimum future payments for the notes described above and in Note 2 for the next five years and in the aggregate are as follows:

 

Years ended September 30,		Amount
2020		$	1,269,601
2021			341,919
2022			351,134
2023			253,056
2024			148,969
Subsequent to 2024			239,109
		$	2,603,788

 

 

NOTE 8 – CAPITAL LEASE

 

At December 31, 2017, the Company had a capital lease payable to a financial institution in the amount of $183,221. The asset and liability under the lease were recorded at the lower of the present value of the minimum lease payments or the fair value of the asset. During the nine months ended September 30, 2018, the capital lease was refinanced into a new note payable as described in Note 7.

 

Interest expense included in the capital lease payments for the nine months ended September 30, 2018 was $7,353. Depreciation expense for the asset under the capital lease for the nine months ended September 30, 2018 was $25,450.

 

CUSTOM BIOGENIC SYSTEMS, INC.

NOTES TO UNAUDITED FINANCIAL STATEMENTS

September 30, 2019 and 2018

 

 

NOTE 9 – OPERATING LEASE

 

The Company leases certain office equipment under an operating lease agreement ending February 2021. The lease agreement calls for monthly payments of $296 including taxes. This lease agreement replaces another lease agreement which expired in February, 2018. Total lease expense under these agreements for the periods ended September 30, 2019 and 2018 was $2,666 and $2,676, respectively.

 

The following is a schedule of minimum future lease payments under the non-cancelable operating lease above for the next two years:

 

Years ended September 30,		Amount
2020		$	3,554
2021			1,481
Total minimum future lease payments		$	5,035

 

 

NOTE 10 – COMMON STOCK

 

Custom Biogenic Systems, Inc. had authorized 10,000 shares of $1 par value common stock. At both September 30, 2019 and 2018, the Company had 100 shares issued and outstanding.

 

 

NOTE 11 – ECONOMIC DEPENDENCY

 

The Company sold a substantial portion of its services to one customer during the nine months ended September 30, 2019 and 2018. For the nine months ended September 30, 2019 and 2018, sales to this customer approximated 15% and 16% of net sales, respectively. Accounts receivable to this customer amounted to $204,757 and $306,107 at September 30, 2019 and 2018, respectively.

 

The Company purchased a substantial portion of their supplies and services from two and three of their suppliers during the nine months ended September 30, 2019 and 2018, respectively. For the nine months ended September 30, 2019 and 2018, purchases from these suppliers approximated 45% and 49% of total purchases, respectively. Accounts payable to these customers amounted to $996,072 and $800,002 at September 30, 2019 and 2018, respectively.

 

CUSTOM BIOGENIC SYSTEMS, INC.

NOTES TO UNAUDITED FINANCIAL STATEMENTS

September 30, 2019 and 2018

 

 

NOTE 12 – 401(K) RETIREMENT PLAN

 

The Company sponsors a traditional 401(k) plan covering substantially all employees at least 19 years old with one full year of service. Eligible employees may contribute up to the IRS limit. Under the plan, the Company can make contributions at the discretion of management. During the nine months ended September 30, 2019 and 2018, the Company did not make a matching contribution. The Company has funded or accrued all calculated contributions as of the balance sheet dates.

 

 

NOTE 13 – PRODUCT WARRANTIES

 

The following summarizes the changes in the Company’s aggregate liability under product warranties for the periods ended September 30:

 

		2019				2018
Warranty accrual, beginning of year		$	93,000			$	75,000
Charged to costs and expenses			251,005				84,187
Actual warranty expenditures			(200,005	)			(81,187	)
Warranty accrual, end of year		$	144,000			$	78,000

 

NOTE 14 – CASH FLOWS

 

The following is a schedule of interest paid for the periods ended September 30:

 

		2019				2018
Interest paid		$	136,245			$	111,816

 

Non-cash transactions:

 

During the period ended September 30, 2018 the Company refinanced a capital lease into a new note payable in the amount of $814,018. See long term debt disclosure at Note 7.

 

During the period ended September 30, 2018, the Company refinanced outstanding balance on a capital lease identified in Note 8 into a new note payable disclosed in Note 7 in the amount of $145,715.

 

CUSTOM BIOGENIC SYSTEMS, INC.

NOTES TO UNAUDITED FINANCIAL STATEMENTS

September 30, 2019 and 2018

 

 

NOTE 15 − LITIGATION

 

The Company is subject to outstanding claims that arise in the ordinary course of business and to other legal proceedings. Management anticipates that any potential liability of the Company, which may arise with respect to these matters, will not materially affect the Company’s financial statements.

 

 

NOTE 16 – SUBSEQUENT EVENTS

 

Subsequent to the balance sheet date, the Company sold substantially all of its assets to an unrelated third party. A portion of the proceeds from the sale were used to pay off all outstanding notes payable and the line of credit identified in Note 2, 5 and 7.

 

 

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