intt20170807_8ka.htm

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM 8-K/A

CURRENT REPORT

 

Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934

 

          May 24, 2017       
Date of Report (Date of earliest event reported)

 

inTEST Corporation
(Exact Name of Registrant as Specified in its Charter)

 

 

 Delaware
(State or Other Jurisdiction of Incorporation)

1-36117
(Commission File Number)

22-2370659
(I.R.S. Employer Identification No.)

 

804 East Gate Drive, Suite 200, Mt. Laurel, New Jersey 08054
(Address of Principal Executive Offices, including zip code)

 

        (856) 505-8800        
(Registrant's Telephone Number, including area code)

 

       N/A       
(Former name or former address, if changed since last report)

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

 

[  ]

Written Communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

[  ]

Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

[  ]

Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

[  ]

Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (17CFR 230.405) or Rule 12b-2 of the Securities Exchange Act of 1934 (17 CFR 240.12b-2)

 

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.   [  ]

 

 
 

 

 

On May 24, 2017, inTEST Corporation (the “Company”) filed a Current Report on Form 8-K (the “Original Form 8-K”) reporting its acquisition of Ambrell Corporation (“Ambrell”). This Current Report on Form 8-K/A amends and supplements the Original Form 8-K to include financial statements and pro forma financial information required by Item 9.01(a) and (b) of Form 8-K.

Item 9.01.    Financials Statements and Exhibits

 

(a)

Financial Statements of Businesses Acquired.

The audited consolidated financial statements of Ambrell for the years ended December 31, 2016 and 2015 and the related report of its independent auditor are attached hereto as Exhibit 99.1 and incorporated herein by reference.

The unaudited consolidated financial statements of Ambrell as of March 31, 2017 and for the three months ended March 31, 2017 and 2016 and the related report of its independent auditor are attached hereto as Exhibit 99.2 and incorporated herein by reference.

   

(b)

Pro Forma Financial Information.

The unaudited pro forma condensed combined balance sheet of inTEST as of March 31, 2017 and unaudited pro forma condensed combined statements of operations for the year ended December 31, 2016 and for the three months ended March 31, 2017 and the notes to such unaudited pro forma condensed combined financial statements are attached hereto as Exhibit 99.3 and incorporated herein by reference.

   

(d)

Exhibits.

A list of the Exhibits which are required by Item 601 of Regulation S-K and furnished with this Report is set forth in the Exhibit Index immediately following the signature page, which Exhibit Index is incorporated herein by reference.

   

 



 

______________________________________________

 

 

 

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.

 


inTEST CORPORATION






By:  /s/ Hugh T. Regan, Jr.
        Hugh T. Regan, Jr.
  
      Secretary, Treasurer and Chief Financial Officer

 

Date:   August 10, 2017

 

 

 

 
 

 

 

Exhibit Index

 

 

 

 

23.1

Consent of Bonadio & Co., LLP, independent auditors of Ambrell.

99.1

The audited financial statements of Ambrell for the years ended December 31, 2016 and 2015.

99.2

The unaudited financial statements of Ambrell as of March 31, 2017 and for the three months ended March 31, 2017 and 2016.

99.3

Unaudited pro forma condensed combined balance sheet of inTEST as of March 31, 2017, and unaudited pro forma condensed combined statement of operations of inTEST for the year ended December 31, 2016 and for the three months ended March 31, 2017 and the notes to such unaudited pro forma condensed combined financial statements.

 

 

 

ex23-1.htm

Exhibit 23.1

 

 

 

 

 

 

 

 

 

Consent of Independent Auditor

 

 

 

We consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-145176 and No. 333-197858) of inTEST Corporation of our reports dated August 1, 2017, with respect to Ambrell Corporation and Subsidiaries consolidated financial statements as of and for the years ended December 31, 2016 and 2015 and the Ambrell Corporation and Subsidiaries consolidated financial statements as of March 31, 2017 and for the three-month periods ended March 31, 2017 and 2016, which appear in this Current Report on Form 8-K/A of inTEST Corporation.

 

/s/ Bonadio & Co., LLP

 

Rochester, New York

August 10, 2017

ex99-1.htm

Exhibit 99.1

 

 

 

 

AMBRELL CORPORATION AND SUBSIDIARIES

 

 

Consolidated Financial Statements as of

December 31, 2016 and 2015

Together with

Independent Auditor’s Report

 

 

 

 

 

 

 

 
 

 

 

INDEPENDENT AUDITOR’S REPORT

171 Sully's Trail, Suite 201

Pittsford, New York 14534

p (585) 381-1000

f (585) 381-3131

 

www.bonadio.com

 

August 1, 2017

 

To the Board of Directors and

Stockholders of Ambrell Corporation:

 

We have audited the accompanying consolidated financial statements of Ambrell Corporation (a New York corporation) and Subsidiaries, which comprise the consolidated balance sheets as of December 31, 2016 and 2015 and the related consolidated statements of operations, comprehensive loss, 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 Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of the consolidated 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 consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the 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 consolidated financial statements.

 

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

 

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Ambrell Corporation and Subsidiaries as of December 31, 2016 and 2015, 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.

 

 

 

 

  

 
ALBANY  ●  BATAVIA  ●  BUFFALO  ●  EAST AURORA  ●  GENEVA  ●  NYC  ●  ROCHESTER  ●  RUTLAND, VT  ●  SYRACUSE  ●  UTICA

 

 

AMBRELL CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2016 AND 2015

 

   

2016

   

2015

 
                 

ASSETS

               
                 

CURRENT ASSETS:

               

Cash

  $ 1,572,589     $ 2,846,229  

Accounts receivable, net

    3,652,601       2,154,412  

Inventory, net

    1,780,863       2,027,955  

Prepaid expenses and other current assets

    184,442       157,269  

Forward contract receivable

    -       885  

Deferred tax asset

    374,097       275,519  
                 

Total current assets

    7,564,592       7,462,269  
                 

PROPERTY AND EQUIPMENT, net

    718,099       765,587  

GOODWILL, net

    2,749,661       3,128,925  

INTANGIBLE ASSETS, net

    7,196,350       8,188,950  
                 
    $ 18,228,702     $ 19,545,731  
                 

LIABILITIES AND STOCKHOLDERS' EQUITY

               
                 

CURRENT LIABILITIES:

               

Current portion of long-term debt

  $ 464,286     $ 464,286  

Accounts payable

    1,095,013       744,512  

Accrued expenses and other current liabilities

    1,347,779       1,074,556  

Merger transaction payable

    62,517       62,517  

Customer advances

    534,727       1,000,973  

Forward contract payable

    573       -  
                 

Total current liabilities

    3,504,895       3,346,844  
                 

DEFERRED TAX LIABILITY

    2,410,494       2,577,410  

LONG-TERM DEBT, net of current portion

    1,586,309       2,050,595  
                 

Total liabilities

    7,501,698       7,974,849  
                 

STOCKHOLDERS' EQUITY:

               

Common stock

    14,291,010       14,291,010  

Accumulated other comprehensive income (loss)

    17,462       (161,906 )

Accumulated deficit

    (3,581,468 )     (2,558,222 )
                 

Total stockholders' equity

    10,727,004       11,570,882  
                 
    $ 18,228,702     $ 19,545,731  

 

 

The accompanying notes are an integral part of these statements.

 

 
1

 

 

AMBRELL CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015

 

   

2016

   

2015

 
                 

SALES

  $ 20,183,243     $ 18,552,852  
                 

COST OF GOODS SOLD

    11,386,862       9,617,691  
                 

Gross profit

    8,796,381       8,935,161  
                 

OPERATING EXPENSES:

               

Marketing and selling

    4,257,705       5,548,317  

Research and development

    704,924       1,062,736  

General and administrative

    3,312,857       2,727,497  

Amortization expense

    1,371,864       1,399,049  
                 

Total operating expenses

    9,647,350       10,737,599  
                 

Loss from operations

    (850,969 )     (1,802,438 )
                 

OTHER INCOME (EXPENSE):

               

Interest expense

    (99,865 )     (83,919 )

Interest income

    29,117       7,726  

Foreign currency loss

    (285,865 )     (45,352 )

Loss on disposal of property and equipment

    (1,988 )     (4,262 )
                 

Total other expense, net

    (358,601 )     (125,807 )
                 

LOSS BEFORE BENEFIT FROM INCOME TAXES

    (1,209,570 )     (1,928,245 )
                 

BENEFIT FROM INCOME TAXES

    186,324       308,118  
                 

NET LOSS

  $ (1,023,246 )   $ (1,620,127 )

 

 

The accompanying notes are an integral part of these statements.

 

 
2

 

 

AMBRELL CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015

 

   

2016

   

2015

 
                 

NET LOSS

  $ (1,023,246 )   $ (1,620,127 )
                 

OTHER COMPREHENSIVE INCOME (LOSS):

               

Unrealized gain (loss) on forward contract

    (791 )     (22,207 )

Foreign currency translation gain (loss)

    180,159       (204,539 )
                 

Total other comprehensive income (loss)

    179,368       (226,746 )
                 

TOTAL COMPREHENSIVE LOSS

  $ (843,878 )   $ (1,846,873 )

 

 

The accompanying notes are an integral part of these statements.

 

 
3

 

 

AMBRELL CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015

 

                   

Other

                 
   

Common Stock

   

Comprehesive

   

Accumulated

         
   

Shares

   

Amount

   

Income (Loss)

   

Deficit

   

Total

 
                                         

Balance, December 31, 2014

    100     $ 14,291,010     $ 64,840     $ (938,095 )   $ 13,417,755  
                                         

Forward contract loss (net of tax benefit of approximately $9,700)

    -       -       (22,207 )     -       (22,207 )
                                         

Foreign currency translation loss

    -       -       (204,539 )     -       (204,539 )
                                         

Net loss

    -       -       -       (1,620,127 )     (1,620,127 )
                                         

Balance, December 31, 2015

    100     $ 14,291,010     $ (161,906 )   $ (2,558,222 )   $ 11,570,882  
                              -       -  

Forward contract loss (net of tax benefit of approximately $600)

    -       -       (791 )     -       (791 )
                                         

Foreign currency translation loss

    -       -       180,159       -       180,159  
                                         

Net loss

    -       -       -       (1,023,246 )     (1,023,246 )
                                         

Balance, December 31, 2016

    100     $ 14,291,010     $ 17,462     $ (3,581,468 )   $ 10,727,004  

 

 

The accompanying notes are an integral part of these statements.

 

 
4

 

 

AMBRELL CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015

 

   

2016

   

2015

 

CASH FLOW FROM OPERATING ACTIVITIES:

               

Net loss

  $ (1,023,246 )   $ (1,620,127 )

Adjustments to reconcile net loss to net cash flow from operating activities:

               

Depreciation and amortization of property and equipment

    295,814       281,261  

Amortization of intangibles

    992,600       992,600  

Amortization of goodwill

    379,264       406,449  

Obsolescence reserve

    2,876       79,030  

Loss on disposal of fixed assets

    1,988       4,262  

Gain on sale of demonstration equipment

    (154,372 )     (101,337 )

Deferred tax benefit

    (137,192 )     (426,651 )

Bad debt expense (recovery)

    (155,116 )     248,867  

Changes in:

               

Accounts receivable

    (1,435,752 )     512,469  

Inventory

    313,740       234,943  

Prepaid expenses and other current assets

    (158,061 )     652,587  

Accounts payable

    373,095       111,508  

Accrued expenses and other current liabilities

    303,953       (6,832 )

Merger transaction payable

    -       (906,000 )

Customer advances

    (442,353 )     599,357  
                 

Net cash flow from operating activities

    (842,762 )     1,062,386  
                 

CASH FLOW FROM INVESTING ACTIVITIES:

               

Purchases of property and equipment

    (315,911 )     (261,153 )

Proceeds from sale of demonstration equipment

    205,372       121,390  
                 

Net cash flow from investing activities

    (110,539 )     (139,763 )
                 

CASH FLOW FROM FINANCING ACTIVITIES:

               

Repayments of long-term debt

    (464,286 )     (464,286 )
                 

Net cash flow from financing activities

    (464,286 )     (464,286 )
                 

EFFECT OF EXCHANGE RATE CHANGE ON CASH

    143,947       (495,707 )
                 

CHANGE IN CASH

    (1,273,640 )     (37,370 )
                 

CASH - beginning of period

    2,846,229       2,883,599  
                 

CASH - end of period

  $ 1,572,589     $ 2,846,229  

 

 

The accompanying notes are an integral part of these statements.

 

 
5

 

 

AMBRELL CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2016 AND 2015 

 

 

1.

The Company

 

Ambrell Corporation and Subsidiaries (collectively, “the Company”) is engaged in worldwide marketing, manufacturing and research and development activities related to induction heating equipment.

 

Ambrell Corporation

Ambrell Corporation (Ambrell Corp) is a wholly-owned subsidiary of Ambrell Holdings, LLC located in Scottsville, NY. Ambrell Corp is engaged in worldwide marketing, manufacturing and research and development activities related to induction heating equipment.

 

Ambrell BV

Ambrell B.V. (BV) is a wholly-owned subsidiary of Ambrell Corp and is located in the Netherlands.

 

Ambrell Limited

Ambrell Limited (LTD) is a wholly-owned subsidiary of Ambrell Corp and is located in England.

 

Ambrell SARL

Ambrell SARL (SARL) is a wholly-owned subsidiary of Ambrell Corp and is located in France.

 

On May 24, 2017, the Company was acquired by inTEST Corporation pursuant to a Stock Purchase Agreement. The purchase price for the Company was $22 million in cash paid at closing, subject to a customary post-closing working capital adjustment. Additional consideration in the form of earnouts, which in aggregate are capped at $18 million, may be paid based upon a multiple of adjusted EBITDA for 2017 and 2018.

 

 

2.

Summary of Significant Accounting Policies

 

Basis of Accounting

The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America.

 

Principles of Consolidation

The consolidated financial statements include the accounts of Ambrell Corp and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

 
6

 

 

2.

Summary of Significant Accounting Policies (Continued)

 

Foreign Currency Translation

The functional currencies of the Company's foreign operations are the local currencies. The financial statements of the Company's foreign subsidiaries have been translated into U.S. dollars. All balance sheet accounts have been translated using the exchange rates in effect at the balance sheet date. Income statement amounts have been translated using the average exchange rate for each period. Accumulated net translation adjustments have been reported separately in other comprehensive income (loss) in the consolidated financial statements.   Foreign currency transaction gains and losses are included in operations as realized.

 

Cash

Cash consists of bank demand deposit accounts that, at times, may exceed federally insured limits and the Company’s deposits in foreign countries are not federally insured. The Company has not experienced any losses in these accounts and believes it is not exposed to any significant credit risk with respect to cash.

 

Accounts Receivable

The Company provides credit in the normal course of business to the majority of its customers. The Company performs periodic credit evaluations of its customers’ financial condition and generally does not require collateral. The Company maintains allowances for doubtful customer accounts for estimated losses resulting from the inability of its customers to make required payments. Allowances are estimated based upon historical experience, known or suspected financial condition of customers and current economic conditions. The allowance for doubtful accounts totaled approximately $222,102 and $384,234 at December 31, 2016 and 2015, respectively.

 

Inventory

Inventory is comprised of raw materials, work-in-process, finished goods, and short-term rental and demo equipment recorded at the lower of cost, determined on a first-in first-out basis, or market.

 

Property and Equipment

Property and equipment is recorded at cost. Depreciation and amortization is provided using the straight-line method over the shorter of the lease term or estimated useful life for leasehold improvements and over the estimated useful lives of the remaining assets, which range from three to seven years.

 

At the time property and equipment is replaced, retired, or otherwise disposed of, the cost and related accumulated depreciation are removed from their respective accounts and any gain or loss is included in income. Expenditures for repairs and maintenance are charged to operations as incurred.

 

Long-Lived Assets

The Company assesses its long-lived assets for impairment when events or circumstances indicate their carrying amounts may not be recoverable by comparing the expected undiscounted future cash flows of the assets with the respective carrying amount as of the date of assessment. Should aggregate future cash flows be less than the carrying value, a write-down would be required, measured as the difference between the carrying value and the fair value of the asset. If the expected undiscounted future cash flows exceed the respective carrying amount as of the date of assessment, no impairment is recognized. No impairment of long-lived assets was recognized during the years ended December 31, 2016 and 2015.

 

 
7

 

 

2.

Summary of Significant Accounting Policies (Continued)

 

Goodwill

Goodwill represents the excess of the acquisition price over fair value of net assets acquired through business combinations. The Company amortizes goodwill on a straight-line basis over a 10 year period. When events or circumstances indicate that goodwill may be impaired, goodwill is tested for impairment at the entity level. Impairment, if any, will be recognized for the difference between the fair value of the Company and its carrying amount and will be limited to the carrying amount of goodwill.

 

Intangible Assets

Intangible assets consist of customer relationships, trade names, technology, and In-Process Research and Development (IPR&D). The intangible assets are amortized using the straight-line method over their estimated useful lives. Intangible assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable based on undiscounted cash flows and, if impaired, written down to fair value.

 

Product Warranties

The Company sells the majority of its products to customers along with repair or replacement warranties. The Company determines its estimated liability for warranty claims based on its historical experience. It is reasonably possible that the Company's estimate of the accrued product warranty claims will change in the near term. Estimated costs for product warranties are recognized at the date the revenue is recognized.

 

Customer Advances

Customer advances primarily represent advance payments received on products. Revenue from service contracts is recognized using the straight-line method over the term of the related contract.

 

Derivative Instruments

The Company, as a result of its operating and financing activities, is exposed to changes in foreign currency exchange rates, which may adversely affect its results of operations and financial position. In seeking to minimize the risks and/or costs associated with changes in foreign currency exchange rates, the Company may enter into derivative contracts.

 

The Company manages its foreign currency related risk primarily through the use of foreign currency forward contracts. The contracts held by the Company are denominated in Euros and British Pounds. The Company has entered into foreign currency forward contracts that are designated as cash flow hedges of exchange rate risk related to forecasted foreign currency-denominated intercompany sales.

 

The Company recorded the fair value of the forward contracts on the consolidated balance sheets. The Company recorded an unrealized loss of $791, net of the effect of income taxes of $600, as a cumulative effect adjustment of accumulated other comprehensive income at December 31, 2016. At December 31, 2016, the Company had a cash flow hedge for 1,932 British Pounds with a maturity date in January 2017.

 

 
8

 

 

2.

Summary of Significant Accounting Policies (Continued)

 

Derivative Instruments (Continued)

The following table presents the amounts reclassified out of each component of accumulated other comprehensive loss for the year ended December 31, 2016.

 

   

Amount

Reclassified

 

Affected Line Item in

Consolidated Statements

of Operations

           

Realized gain on foreign currency forward contracts

  $ 4,320  

Foreign currency loss

 

The Company recorded an unrealized loss of $22,207, net of the effect of income taxes of $9,700, as a cumulative effect adjustment of accumulated other comprehensive income at December 31, 2015. At December 31, 2015, the Company had cash flow hedges for the Euro with maturity dates ranging from February 2016 to May 2016 for 349,903 Euros. At December 31, 2015, the Company had cash flow hedges for 79,373 British Pounds with maturity dates ranging from January 2016 to July 2016.

 

The following table presents the amounts reclassified out of each component of accumulated other comprehensive loss for the year ended December 31, 2015.

 

   

Amount

Reclassified

   

Affected Line Item in

Consolidated Statements

of Operations

 
                 

Realized gain on foreign currency forward contracts

  $ 38,284    

Foreign currency loss

 

 

Revenue Recognition

The Company recognizes revenue upon transfer of title of product, which is generally upon shipment to the customer, and performance of services.

 

Sales Taxes

The Company collects and remits sales taxes during the normal course of business. These taxes are reported net in the accompanying consolidated statements of operations and therefore do not impact reported revenues or expenses.

 

Shipping and Handling

Shipping and handling costs are included as a component of cost of goods sold.

 

Advertising

Advertising and marketing costs are expensed as incurred and amounted to approximately $208,000 and $204,000 for the years ended December 31, 2016 and 2015, respectively.

 

Income Taxes

Income taxes are provided for the tax effects of transactions reported in the consolidated financial statements and consist of taxes currently due and deferred taxes related primarily to differences between the basis of property and certain accrued expenses for financial and income tax reporting purposes. Deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled.

 

 
9

 

 

2.

Summary of Significant Accounting Policies (Continued)

 

Fair Value of Financial Instruments

ASC 820, Fair Value Measurements, provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair market value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements).

 

The three levels of the fair value hierarchy under ASC 820 are described below:

 

●     Level 1     Inputs to the valuation methodology are unadjusted quoted prices for identical assets and liabilities in active markets that the Company has the ability to access.

 

●     Level 2     Inputs to the valuation methodology include:

 

 

Quoted prices for similar assets or liabilities in active markets;

 

Quoted prices for identical or similar assets or liabilities in inactive markets;

 

Inputs other than quoted prices that are observable for the asset or liability;

 

Inputs that are derived principally from or corroborated by observable market data by correlation or other means.

 

●     Level 3     Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

 

The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.

 

At both December 31, 2016 and 2015, the fair values for the Company’s foreign currency forward contracts are determined using significant other observable inputs (Level 2) and are based on the expected future cash flows of the contracts.

 

Estimates

The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

 

Reclassifications

Certain reclassifications have been made to the prior year information to conform to the current year presentation. 

 

 
10

 

 

3.

inventory

 

Inventory consisted of the following at December 31:

 

   

2016

   

2015

 
                 

Raw materials

  $ 980,114     $ 999,718  

Work-in-process

    252,541       200,736  

Finished goods

    715,842       765,208  

Short-term rental and demo equipment

    94,541       321,592  
                 
      2,043,038       2,287,254  
                 

Less: Reserve for obsolescence

    (262,175 )     (259,299 )
                 
    $ 1,780,863     $ 2,027,955  

 

 

4.

property and equipment

 

Property and equipment consisted of the following at December 31:

 

   

2016

   

2015

 
                 

Leasehold improvements

  $ 324,621     $ 326,531  

Test equipment

    38,065       38,065  

Machinery and equipment

    923,538       751,049  

Computer equipment

    103,180       105,585  

Furniture and fixings

    73,445       88,110  

Demo equipment

    97,309       68,798  

Lab equipment

    73,088       116,100  
                 
      1,633,246       1,494,238  
                 

Less: Accumulated depreciation and amortization

    (915,147 )     (728,651 )
                 
    $ 718,099     $ 765,587  

 

Depreciation and amortization expense totaled $295,814 and $281,261 for the years ended December 31, 2016 and 2015, respectively.

 

 

5.

FAIR VALUE MEASUREMENTS

 

The fair value of liabilities measured at fair value at December 31, 2016 was as follows:

 

   

Level 1

   

Level 2

   

Level 3

   

Total

 
                                 

Description

                               

Forward contract payable

  $ -     $ 573     $ -     $ 573  

 

 
11

 

 

5.

FAIR VALUE MEASUREMENTS (Continued)

 

The fair value of assets measured at fair value at December 31, 2015 was as follows:

 

   

Level 1

   

Level 2

   

Level 3

   

Total

 
                                 

Description

                               

Forward contract receivable

  $ -     $ 885     $ -     $ 885  

 

 

6.

GOODWILL

 

Goodwill subject to amortization consisted of the following at December 31, 2016:

 

   

Weighted

Average

Remaining

Useful Life

   

Gross Asset

   

Accumulated Amortization

   

Net

 
                                 

Goodwill

    7.3     $ 3,792,648     $ (1,042,987 )   $ 2,749,661  

 

Goodwill subject to amortization consisted of the following at December 31, 2015:

 

   

Weighted

Average

Remaining

Useful Life

   

Gross Asset

   

Accumulated Amortization

   

Net

 
                                 

Goodwill

    8.3     $ 3,792,648     $ (663,723 )   $ 3,128,925  

 

Amortization expense related to goodwill was $379,264 and $406,449 for the years ended December 31, 2016 and 2015, respectively.

 

Estimated aggregate amortization of goodwill is as follows for the years ending December 31:

 

2017

  $ 379,264  

2018

    379,264  

2019

    379,264  

2020

    379,264  

2021

    379,264  

Thereafter

    853,341  
         
    $ 2,749,661  

 

 

 
12

 

 

7.

INTANGIBLE ASSETS

 

Intangible assets subject to amortization consisted of the following at December 31, 2016:

 

   

Weighted

Average

Remaining

Useful Life

   

Gross Assets

   

Accumulated

Amortization

   

Net

 
                                 

Customer relationships

    7.3     $ 6,484,000     $ (1,783,100 )   $ 4,700,900  

Technology

    7.3       2,341,000       (643,775 )     1,697,225  

IPR&D

    7.3       408,000       (112,200 )     295,800  

Trade names

    7.3       693,000       (190,575 )     502,425  
                                 
            $ 9,926,000     $ (2,729,650 )   $ 7,196,350  

 

Intangible assets subject to amortization consisted of the following at December 31, 2015:

 

   

Weighted

Average

Remaining

Useful Life

   

Gross Assets

   

Accumulated

Amortization

   

Net

 
                                 

Customer relationships

    8.3     $ 6,484,000     $ (1,134,700 )   $ 5,349,300  

Technology

    8.3       2,341,000       (409,675 )     1,931,325  

IPR&D

    8.3       408,000       (71,400 )     336,600  

Trade names

    8.3       693,000       (121,275 )     571,725  
                                 
            $ 9,926,000     $ (1,737,050 )   $ 8,188,950  

 

Amortization expense related to intangible assets was $992,600 for each of the years ended December 31, 2016 and 2015.

 

Estimated aggregate amortization of acquired intangible assets is as follows for the years ending December 31:

 

2017

  $ 992,600  

2018

    992,600  

2019

    992,600  

2020

    992,600  

2021

    992,600  

Thereafter

    2,233,350  
         
    $ 7,196,350  

 

The Company considered the period of expected cash flows used to measure the fair value of the acquired customer relationships in determining the useful life of the acquired customer relationships for amortization purposes. The Company’s future cash flows are not materially impacted by its ability to extend or renew its acquired customer relationships.

 

 
13

 

 

8.

FINANCING ARRANGEMENTS

 

Line-of-Credit

The Company had a $1,000,000 revolving line-of-credit with a bank through July 2016 with amounts borrowed collateralized by all assets of the Company. Interest only payments were due monthly at variable interest rates based on the bank’s prime rate (3.50% at December 31, 2015). There was no amount outstanding under the terms of this arrangement at December 31, 2015. The Company did not renew the line-of-credit upon maturity in July 2016.

 

Long-Term Debt

Long-term debt consisted of the following at December 31:

 

   

2016

   

2015

 
                 

Term note payable to a financial institution in monthly installments of $38,690, plus interest, through April 2021, at which time all outstanding principal and interest becomes due. The note bears interest at the one month LIBOR plus 250 basis points (3.12% at December 31, 2016). The note is collateralized by substantially all of the assets of Ambrell Corp.

  $ 2,050,595     $ 2,514,881  
                 

Less: Current portion

    (464,286 )     (464,286 )
                 
    $ 1,586,309     $ 2,050,595  

 

Future minimum principal payments required under the terms of the long-term debt arrangements are as follows for the years ending December 31:

 

2017

  $ 464,286  

2018

    464,286  

2019

    464,286  

2020

    464,286  

2021

    193,451  
         
    $ 2,050,595  

 

Financial Covenants

The Company’s financing arrangement contains financial covenants, including, but not limited to, earnings before interest, taxes, depreciation and amortization (EBITDA) to fixed charges ratio and total funded debt to EBITDA. The Company was in compliance with these covenants at December 31, 2016. The Company was not in compliance with these covenants at December 31, 2015. Subsequent to December 31, 2015, the Company received a waiver effecting compliance.

 

Cash Paid for Interest

During the years ended December 31, 2016 and 2015, the Company made interest payments totaling approximately $72,000 and $76,000, respectively.

 

 

9.

EQUITY

 

At December 31, 2016 and 2015, there were 20,000,000 shares of common stock, $0.01 par value, authorized and 100 shares issued and outstanding.

 

 
14

 

 

10.

INCOME TAXES

 

The benefit from income taxes consisted of the following for the years ended December 31, 2016 and 2015:

 

   

2016

   

2015

 
                 

Current tax (expense):

               

Federal

  $ (18,255 )   $ (805 )

State

    8,717       (2,557 )

Foreign

    (68,965 )     (116,996 )
                 
      (78,503 )     (120,358 )
                 

Deferred tax benefit

    264,827       428,476  
                 
    $ 186,324     $ 308,118  

 

The income tax benefit differs from the amount of income tax benefit determined by applying the applicable U.S. statutory income tax rate of 34% to the pre-tax net loss as follows for the year ended December 31, 2016 and 2015:

 

   

2016

   

2015

 
                 

Computed “expected” tax benefit

  $ 411,300     $ 655,600  

State tax benefit, net of federal benefit

    5,800       1,700  

Foreign tax rate differential

    (96,500 )     (166,900 )

Permanent differences

    (95,550 )     (233,668 )

Other

    (38,726 )     51,386  
                 
    $ 186,324     $ 308,118  

 

The Company’s deferred tax assets (liabilities) related to the following items at December 31:

 

   

2016

   

2015

 
                 

Current deferred taxes:

               

Accounts receivable

  $ 63,734     $ 113,253  

Inventory

    69,684       52,463  

Accrued expenses

    240,480       110,271  

Other

    199       (468 )
                 

Total current deferred tax asset

  $ 374,097     $ 275,519  
                 

Net long-term deferred taxes:

               

Intangible assets

  $ (2,390,514 )   $ (2,785,653 )

Fixed assets

    (140,650 )     (105,610 )

Business credits

    120,670       189,239  

Net operating loss carryforward

    -       69,310  

Other

    -       55,304  
                 

Total non-current deferred liability

  $ (2,410,494 )   $ (2,577,410 )

 

 

 
15

 

 

11.

EMPLOYEE BENEFIT PLAN

 

The Company has a retirement savings plan under Section 401(k) of the Internal Revenue Code. Employees are immediately eligible to participate in the Plan upon employment and are eligible for employer matching contributions after completing one year of service, as defined in the Plan. The Plan allows eligible employees to make voluntary contributions up to 100% of compensation, up to the federal government contribution limits. The Company will make a matching contribution of 25% of each employee’s contributions up to a maximum of 2% of such employee’s compensation. For the years ended December 31, 2016 and 2015, the Company made matching contributions of $52,798 and $68,328, respectively.

 

 

12.

LEASES

 

The Company leases its facilities as well as equipment under the terms of operating lease agreements requiring total current monthly payments ranging between approximately $6,500-$34,000 and expiring at varying times through 2029. Lease expense under the terms of these lease agreements during the years ended December 31, 2016 and 2015 totaled approximately $395,000 and $378,000, respectively. Future minimum payments required under the terms of these lease agreements are as follows for the years ending December 31:

 

2017

  $ 406,477  

2018

    119,309  

2019

    82,974  

2020

    80,585  

2021

    77,804  

Thereafter

    505,856  
         
    $ 1,273,005  

 

 

13.

WARRANTY OBLIGATIONS

 

The Company has warranty obligations in connection with the sale of its equipment. The original warranty period for equipment products is generally one year. The costs to provide for these warranty obligations are estimated and recorded as an accrued liability at the time of sale. The Company estimates its warranty cost at the point of sale for a given product based on historical failure rates and costs to repair. The change in the Company’s accrued warranty obligations balance, which is included in accrued expenses, was as follows:

 

Accrued warranty obligations – January 1, 2015

  $ 75,000  

Actual warranty experience during 2015

    (55,569 )

Warranty provisions during 2015

    55,569  

Accrued warranty obligations - December 31, 2015

    75,000  

Actual warranty experience during 2016

    (34,921 )

Warranty provisions during 2016

    34,921  

Accrued warranty obligations - December 31, 2016

  $ 75,000  

 

 

14.     Employment Contracts

 

The Company has employment contracts with key personnel. These agreements expire during 2017 and provide for minimum salary requirements, insurance benefits, and other fringe benefits. The minimum payments required under the terms of these employment contracts is $175,000 for the year ending December 31, 2017.

 

 
16

 

 

15.     RELATED PARTY TRANSACTIONS

 

Management Fees

The Company entered into a Management Agreement in 2014 with an entity affiliated through common ownership with the majority stockholders (the Affiliated Entity). Under the terms of the Management Agreement, the Affiliated Entity provides management services for the Company for annual consideration of the greater of 1) $200,000 or 2) 6.0% of the Company’s earnings before interest, taxes, depreciation, and amortization for the year prior. Amounts are payable in quarterly installments of $50,000. During 2016 and 2015, the Company paid the Affiliated Entity $150,000 and $200,000, respectively, which is included in general and administrative expenses on the consolidated statement of operations. At December 31, 2016, there were accrued management fees of $50,000.

 

 

16.     MERGER TRANSACTION PAYABLE

 

Merger transaction payable consists of amounts due to former shareholders as a result of the acquisition of the Company on March 31, 2014, and totaled $62,517 at both December 31, 2016 and 2015.

 

 

17.     SUBSEQUENT EVENTS

 

Subsequent events have been evaluated through August 1, 2017, which is the date the financial statements were available to be issued.

 

 

17

ex99-2.htm

Exhibit 99.2

 

 

 

 

AMBRELL CORPORATION AND SUBSIDIARIES

 

 

Consolidated Financial Statements as of

March 31, 2017 and 2016

Together with

Independent Auditor’s Review Report

 

 

 

 

 

 
 

 

 

 

INDEPENDENT AUDITOR’S REVIEW REPORT

171 Sully's Trail, Suite 201

Pittsford, New York 14534

p (585) 381-1000

f (585) 381-3131

www.bonadio.com  

 

 

August 1, 2017

 

To the Board of Directors and

Stockholders of Ambrell Corporation:

 

We have reviewed the accompanying consolidated financial statements of Ambrell Corporation (a Delaware corporation) and Subsidiaries, which comprise the consolidated balance sheets as of March 31, 2017 and the related consolidated statements of operations, comprehensive loss, changes in stockholders’ equity and cash flows for the three-month periods ended March 31, 2017 and 2016.

 

Management’s Responsibility

The Company’s management is responsible for the preparation and fair presentation of the interim financial information in accordance with accounting principles generally accepted in the United States of America; this responsibility includes the design, implementation and maintenance of internal control sufficient to provide a reasonable basis for the preparation and fair presentation of interim financial information in accordance with accounting principles generally accepted in the United States of America.

 

Auditor’s Responsibility

Our responsibility is to conduct the review in accordance with auditing standards generally accepted in the United States of America applicable to reviews of interim financial information. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial information. Accordingly, we do not express such an opinion.

 

Conclusion

Based on our reviews, we are not aware of any material modifications that should be made to the financial information referred to above for it to be in accordance with accounting principles generally accepted in the United States of America.

 

Report on Balance Sheet as of December 31, 2016

We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet as of December 31, 2016, and the related consolidated statements of operations, comprehensive loss, changes in stockholders’ equity and cash flows for the year then ended (not presented herein); and we expressed an unmodified audit opinion on those audited consolidated financial statements in our report dated August 1, 2017. In our opinion, the accompanying consolidated balance sheet of Ambrell Corporation and Subsidiaries as of December 31, 2016, is consistent, in all material respects, with the audited consolidated financial statements from which it has been derived.

 

 

 

 

 
 

 

 

AMBRELL CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

 

 

   

March 31,

   

December 31,

 
   

2017

   

2016

 
   

(Unaudited)

   

(Audited)

 

ASSETS

               
                 

CURRENT ASSETS:

               

Cash

  $ 1,804,459     $ 1,572,589  

Accounts receivable, net

    3,101,697       3,652,601  

Inventory, net

    1,924,005       1,780,863  

Prepaid expenses and other current assets

    233,108       184,442  

Deferred tax asset

    374,097       374,097  
                 

Total current assets

    7,437,366       7,564,592  
                 

PROPERTY AND EQUIPMENT, net

    649,363       718,099  

GOODWILL, net

    2,654,845       2,749,661  

INTANGIBLE ASSETS, net

    6,948,200       7,196,350  
                 
    $ 17,689,774     $ 18,228,702  
                 

LIABILITIES AND STOCKHOLDERS' EQUITY

               
                 

CURRENT LIABILITIES:

               

Current portion of long-term debt

  $ 464,286     $ 464,286  

Accounts payable

    1,102,855       1,095,013  

Accrued expenses and other current liabilities

    1,177,147       1,347,779  

Merger transaction payable

    62,517       62,517  

Customer advances

    537,881       534,727  

Forward contract payable

    478       573  
                 

Total current liabilities

    3,345,164       3,504,895  
                 

DEFERRED TAX LIABILITY

    2,354,490       2,410,494  

LONG-TERM DEBT, net of current portion

    1,470,238       1,586,309  
                 

Total liabilities

    7,169,892       7,501,698  
                 

STOCKHOLDERS' EQUITY:

               

Common stock

    14,291,010       14,291,010  

Accumulated other comprehensive income (loss)

    17,747       17,462  

Accumulated deficit

    (3,788,875 )     (3,581,468 )
                 

Total stockholders' equity

    10,519,882       10,727,004  
                 
    $ 17,689,774     $ 18,228,702  

 

 

The accompanying notes are an integral part of these statements.

 

 
1

 

 

AMBRELL CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

   

Three-Months

   

Three-Months

 
   

Ended

   

Ended

 
   

March 31,

   

March 31,

 
   

2017

   

2016

 
                 

SALES

  $ 4,611,555     $ 4,383,019  
                 

COST OF GOODS SOLD

    2,680,104       2,401,016  
                 

Gross profit

    1,931,451       1,982,003  
                 

OPERATING EXPENSES:

               

Marketing and selling

    965,801       977,891  

Research and development

    194,286       164,815  

General and administrative

    664,403       759,362  

Amortization expense

    342,966       342,966  
                 

Total operating expenses

    2,167,456       2,245,034  
                 

Loss from operations

    (236,005 )     (263,031 )
                 

OTHER INCOME (EXPENSE):

               

Interest expense

    (24,673 )     (21,208 )

Interest income

    8,075       3,370  

Foreign currency loss

    10,186       6,961  

Loss on disposal of property and equipment

    (4,105 )     -  
                 

Total other expense, net

    (10,517 )     (10,877 )
                 

LOSS BEFORE BENEFIT FROM INCOME TAXES

    (246,522 )     (273,908 )
                 

BENEFIT FROM INCOME TAXES

    39,115       43,024  
                 

NET LOSS

  $ (207,407 )   $ (230,884 )

 

 

The accompanying notes are an integral part of these statements.

 

 
2

 

 

AMBRELL CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

 

   

Three-Months

   

Three-Months

 
   

Ended

   

Ended

 
   

March 31,

   

March 31,

 
   

2017

   

2016

 
                 

NET LOSS

  $ (207,407 )   $ (230,884 )
                 

OTHER COMPREHENSIVE INCOME (LOSS):

               

Unrealized gain (loss) on forward contract

    16,316       (10,395 )

Foreign currency translation gain (loss)

    (16,031 )     16,644  
                 

Total other comprehensive income (loss)

    285       6,249  
                 

TOTAL COMPREHENSIVE LOSS

  $ (207,122 )   $ (224,635 )

 

 

The accompanying notes are an integral part of these statements. 

 

 
3

 

 

AMBRELL CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(Unaudited)

 

                   

Other

                 
   

Common Stock

   

Comprehesive

   

Accumulated

         
   

Shares

   

Amount

   

Income (Loss)

   

Deficit

   

Total

 
                                         

Balance, January 1, 2017

    100     $ 14,291,010     $ 17,462     $ (3,581,468 )   $ 10,727,004  
                                         

Forward contract gain (net of tax benefit of approximately $700)

    -       -       16,316       -       16,316  
                                         

Foreign currency translation loss

    -       -       (16,031 )     -       (16,031 )
                                         

Net loss

    -       -       -       (207,407 )     (207,407 )
                                         

Balance, March 31, 2017 (Unaudited)

    100     $ 14,291,010     $ 17,747     $ (3,788,875 )   $ 10,519,882  

 

 

The accompanying notes are an integral part of these statements.

 

 
4

 

 

AMBRELL CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   

Three-Months

   

Three-Months

 
   

Ended

   

Ended

 
   

March 31,

   

March 31,

 
   

2017

   

2016

 

CASH FLOW FROM OPERATING ACTIVITIES:

               

Net loss

  $ (207,407 )   $ (230,884 )

Adjustments to reconcile net loss to net cash flow from operating activities:

               

Depreciation and amortization of property and equipment

    79,570       74,275  

Amortization of intangibles

    248,150       248,150  

Amortization of goodwill

    94,816       94,816  

Obsolescence reserve

    (10,323 )     (33,532 )

Loss on disposal of fixed assets

    4,105       -  

Gain on sale of demonstration equipment

    -       (78,322 )

Deferred tax benefit

    (56,004 )     (69,462 )

Bad debt expense (recovery)

    (1,745 )     3,223  

Changes in:

               

Accounts receivable

    566,672       (765,342 )

Inventory

    (122,750 )     (108,281 )

Prepaid expenses and other current assets

    (49,599 )     (77,321 )

Accounts payable

    (17,607 )     (144,359 )

Accrued expenses and other current liabilities

    (163,979 )     (252,189 )

Customer advances

    80       123,754  
                 

Net cash flow from operating activities

    363,979       (1,215,474 )
                 

CASH FLOW FROM INVESTING ACTIVITIES:

               

Purchases of property and equipment

    (13,076 )     (43,471 )

Proceeds from sale of demonstration equipment

    -       87,962  
                 

Net cash flow from investing activities

    (13,076 )     44,491  
                 

CASH FLOW FROM FINANCING ACTIVITIES:

               

Repayments of long-term debt

    (116,071 )     (116,071 )
                 

Net cash flow from financing activities

    (116,071 )     (116,071 )
                 

EFFECT OF EXCHANGE RATE CHANGE ON CASH

    (2,962 )     156,242  
                 

CHANGE IN CASH

    231,870       (1,130,812 )
                 

CASH - beginning of period

    1,572,589       2,846,229  
                 

CASH - end of period

  $ 1,804,459     $ 1,715,417  

 

 

The accompanying notes are an integral part of these statements.

 

 
5

 

 

AMBRELL CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.

The Company

 

Ambrell Corporation and Subsidiaries (collectively, “the Company”) is engaged in worldwide marketing, manufacturing and research and development activities related to induction heating equipment.

 

Ambrell Corporation

Ambrell Corporation (Ambrell Corp) is a wholly-owned subsidiary of Ambrell Holdings, LLC located in Scottsville, NY. Ambrell Corp is engaged in worldwide marketing, manufacturing and research and development activities related to induction heating equipment.

 

Ambrell BV

Ambrell B.V. (BV) is a wholly-owned subsidiary of Ambrell Corp and is located in the Netherlands.

 

Ambrell Limited

Ambrell Limited (LTD) is a wholly-owned subsidiary of Ambrell Corp and is located in England.

 

Ambrell SARL

Ambrell SARL (SARL) is a wholly-owned subsidiary of Ambrell Corp and is located in France.

 

On May 24, 2017, the Company was acquired by inTEST Corporation pursuant to a Stock Purchase Agreement. The purchase price for the Company was $22 million in cash paid at closing, subject to customary post-closing working capital adjustment. Additional consideration in the form of earnouts, which in aggregate are capped at $18 million, may be paid based upon a multiple of adjusted EBITDA for 2017 and 2018.

 

 

2.

Summary of Significant Accounting Policies

 

Basis of Accounting and Presentation

The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America.

 

In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial position, results of operations, and changes in cash flows for the interim periods presented. Certain footnote information has been condensed or omitted from these consolidated financial statements. Therefore, these consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying footnotes included in the audited consolidated financial statements of the Company for the year ended December 31, 2016.

 

Principles of Consolidation

The consolidated financial statements include the accounts of Ambrell Corp and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

 
6

 

 

2.

Summary of Significant Accounting Policies (Continued)

 

Foreign Currency Translation

The functional currencies of the Company's foreign operations are the local currencies. The financial statements of the Company's foreign subsidiaries have been translated into U.S. dollars. All balance sheet accounts have been translated using the exchange rates in effect at the balance sheet date. Income statement amounts have been translated using the average exchange rate for each period. Accumulated net translation adjustments have been reported separately in other comprehensive income (loss) in the consolidated financial statements.   Foreign currency transaction gains and losses are included in operations as realized.

 

Cash

Cash consists of bank demand deposit accounts that, at times, may exceed federally insured limits and the Company’s deposits in foreign countries are not federally insured. The Company has not experienced any losses in these accounts and believes it is not exposed to any significant credit risk with respect to cash.

 

Accounts Receivable

The Company provides credit in the normal course of business to the majority of its customers. The Company performs periodic credit evaluations of its customers’ financial condition and generally does not require collateral. The Company maintains allowances for doubtful customer accounts for estimated losses resulting from the inability of its customers to make required payments. Allowances are estimated based upon historical experience, known or suspected financial condition of customers and current economic conditions. The allowance for doubtful accounts totaled approximately $220,882 and $222,102 at March 31, 2017 and December 31, 2016, respectively.

 

Inventory

Inventory is comprised of raw materials, work-in-process, finished goods, and short-term rental and demo equipment recorded at the lower of cost, determined on a first-in first-out basis, or market.

 

Property and Equipment

Property and equipment is recorded at cost. Depreciation and amortization is provided using the straight-line method over the shorter of the lease term or estimated useful life for leasehold improvements and over the estimated useful lives of the remaining assets, which range from three to seven years.

 

At the time property and equipment is replaced, retired, or otherwise disposed of, the cost and related accumulated depreciation are removed from their respective accounts and any gain or loss is included in income. Expenditures for repairs and maintenance are charged to operations as incurred.

 

Long-Lived Assets

The Company assesses its long-lived assets for impairment when events or circumstances indicate their carrying amounts may not be recoverable by comparing the expected undiscounted future cash flows of the assets with the respective carrying amount as of the date of assessment. Should aggregate future cash flows be less than the carrying value, a write-down would be required, measured as the difference between the carrying value and the fair value of the asset. If the expected undiscounted future cash flows exceed the respective carrying amount as of the date of assessment, no impairment is recognized. No impairment of long-lived assets was recognized during the three-month periods ended March 31, 2017 and 2016.

 

 
7

 

 

2.

Summary of Significant Accounting Policies (Continued)

 

Goodwill

Goodwill represents the excess of the acquisition price over fair value of net assets acquired through business combinations. The Company amortizes goodwill on a straight-line basis over a 10 year period. When events or circumstances indicate that goodwill may be impaired, goodwill is tested for impairment at the entity level. Impairment, if any, will be recognized for the difference between the fair value of the Company and its carrying amount and will be limited to the carrying amount of goodwill.

 

Intangible Assets

Intangible assets consist of customer relationships, trade names, technology, and In-Process Research and Development (IPR&D). The intangible assets are amortized using the straight-line method over their estimated useful lives. Intangible assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable based on undiscounted cash flows and, if impaired, written down to fair value.

 

Product Warranties

The Company sells the majority of its products to customers along with repair or replacement warranties. The Company determines its estimated liability for warranty claims based on its historical experience. It is reasonably possible that the Company's estimate of the accrued product warranty claims will change in the near term. Estimated costs for product warranties are recognized at the date the revenue is recognized.

 

Customer Advances

Customer advances primarily represent advance payments received on products. Revenue from service contracts is recognized using the straight-line method over the term of the related contract.

 

Revenue Recognition

The Company recognizes revenue upon transfer of title of product, which is generally upon shipment to the customer, and performance of services.

 

Sales Taxes

The Company collects and remits sales taxes during the normal course of business. These taxes are reported net in the accompanying consolidated statements of operations and therefore do not impact reported revenues or expenses.

 

Shipping and Handling

Shipping and handling costs are included as a component of cost of goods sold.

 

Advertising

Advertising and marketing costs are expensed as incurred and amounted to approximately $46,100 and $58,376 for the three-month period ended March 31, 2017 and 2016, respectively.

 

Income Taxes

Income taxes are provided for the tax effects of transactions reported in the consolidated financial statements and consist of taxes currently due and deferred taxes related primarily to differences between the basis of property and certain accrued expenses for financial and income tax reporting purposes. Deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. The provision for income taxes in interim periods is computed by applying the estimated annual effective tax rate against earnings before income tax expense for the period.

 

 

 
8

 

 

2.

Summary of Significant Accounting Policies (Continued)

 

Estimates

The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

 

 

3.

inventory

 

Inventory consisted of the following at:

 

   

March 31,

2017

   

December 31,

2016

 
                 

Raw materials

  $ 978,583     $ 980,114  

Work-in-process

    356,958       252,541  

Finished goods

    777,438       715,842  

Short-term rental and demo equipment

    68,553       94,541  
                 
      2,181,532       2,043,038  
                 

Less: Reserve for obsolescence

    (257,527 )     (262,175 )
                 
    $ 1,924,005     $ 1,780,863  

 

 

4.

property and equipment

 

Property and equipment consisted of the following at:

 

   

March 31,

2017

   

December 31,

2016

 
                 

Leasehold improvements

  $ 325,458     $ 324,621  

Test equipment

    38,065       38,065  

Machinery and equipment

    931,457       923,538  

Computer equipment

    104,443       103,180  

Furniture and fixings

    74,344       73,445  

Demo equipment

    97,309       97,309  

Lab equipment

    73,088       73,088  
                 
      1,644,164       1,633,246  
                 

Less: Accumulated depreciation and amortization

    (994,801 )     (915,147 )
                 
    $ 649,363     $ 718,099  

 

Depreciation and amortization expense totaled $79,570 and $74,275 for the three-month periods ended March 31, 2017 and 2016, respectively.

 

 
9

 

 

5.

GOODWILL

 

Goodwill subject to amortization consisted of the following at March 31, 2017:

 

   

Weighted

Average

Remaining

Useful Life

   

Gross Asset

   

Accumulated Amortization

   

Net

 
                                 

Goodwill

    7.0     $ 3,792,648     $ (1,137,803 )   $ 2,654,845  

 

 

Goodwill subject to amortization consisted of the following at December 31, 2016:

 

   

Weighted

Average

Remaining

Useful Life

   

Gross Asset

   

Accumulated Amortization

   

Net

 
                                 

Goodwill

    7.3     $ 3,792,648     $ (1,042,987 )   $ 2,749,661  

 

Amortization expense related to goodwill was $94,816 for each of the three-month periods ended March 31, 2017 and 2016.

 

Estimated aggregate amortization of goodwill is as follows for the years ending December 31:

 

2017 (remainder)

  $ 284,448  

2018

    379,264  

2019

    379,264  

2020

    379,264  

2021

    379,264  

Thereafter

    853,341  
         
    $ 2,654,845  

 

 

6.

INTANGIBLE ASSETS

 

Intangible assets subject to amortization consisted of the following at March 31, 2017:

 

   

Weighted

Average

Remaining

Useful Life

   

Gross Assets

   

Accumulated

Amortization

   

Net

 
                                 

Customer relationships

    7.0     $ 6,484,000     $ (1,945,200 )   $ 4,538,800  

Technology

    7.0       2,341,000       (702,300 )     1,638,700  

IPR&D

    7.0       408,000       (122,400 )     285,600  

Trade names

    7.0       693,000       (207,900 )     485,100  
                                 
            $ 9,926,000     $ (2,977,800 )   $ 6,948,200