Washington, D.C. 20549
Securities registered pursuant to Section 12(b) of the Act: Common Stock, Par Value $0.001 Per Share; Common stock traded on the NASDAQ Stock Market
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
☐
Yes
☒
No
Indicated by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.
☐
Yes
☒
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
☒
Yes
☐
No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
☒
Yes
☐
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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.
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
☐
Yes
☒
No
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, as of the last business day of the registrant’s most recently completed second fiscal quarter was $8,002,053. This calculation is based upon the closing price of $3.54 of the stock on June 29, 2018. Without asserting that any director or executive officer of the registrant, or the beneficial owner of more than five percent of the registrant’s common stock, is an affiliate, the shares of which they are the beneficial owners have been deemed to be owned by affiliates solely for this calculation.
As of April 16, 2019, there were 8,268,531 shares of the registrant’s common stock outstanding.
Certain statements in this annual report on Form 10-K constitute “forward-looking statements.” These forward-looking statements involve known or unknown risks, uncertainties and other factors that may or may not be outside our control and that may cause our actual results, performance, or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Specifically, the actions of competitors, suppliers, customers and the NASDAQ Stock Market are generally outside of our control. Our ability to execute our business plans and to increase revenues and operating income are each dependent upon our ability to continue to expand our current businesses and to enter new business areas, as well as upon general economic conditions and other factors, including some of the factors identified as “Risk Factors” in this annual report and from time to time in our other SEC filings. You can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continues,” or the negative of these terms, or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, achievements or continued market listing. We do not intend to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events, unless required by law.
In this annual report on Form 10-K, “Cool Holdings,” “the Company,” “we,” “us” and “our” refer to Cool Holdings, Inc. and our wholly owned subsidiaries on a consolidated basis, unless the context otherwise provides.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and
Stockholders of Cooltech Holding Corp.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of Cooltech Holding Corp. (the Company) as of December 31, 2017, and the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash
flows for the year ended December 31, 2017, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements
present fairly, in all material respects, the financial position of the Company as of December 31, 2017, and the results of its operations and its cash flows for year ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
The Company’s Ability to Continue as a Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the consolidated financial statements, the Company’s recurring losses and negative cash flows from operations as well as working capital deficiency and accumulated deficit raise substantial doubt about its ability to continue as a going concern. Management’s plans concerning these matters are also discussed in Note 3 to the consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ MNP LLP
We
have served as
the
Company's
auditor
since 2016.
Toronto, Ontario, Canada
May 21, 2018 (Except for Notes 2 and 16 pertaining to certain reclassifications, as to which the date is April 16, 2019)
F-3
COOL HOLDINGS, INC.
Consolidated Balance Sheets
(Amounts in thousands, except per share data)
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,281
|
|
|
$
|
346
|
|
Restricted cash
|
|
|
2,012
|
|
|
|
1,008
|
|
Trade accounts receivable, net of allowance for doubtful accounts of $73 and $9
as of December 31, 2018 and 2017, respectively
|
|
|
2,287
|
|
|
|
8,495
|
|
Other accounts receivable
|
|
|
1,262
|
|
|
|
3,361
|
|
Inventory
|
|
|
3,623
|
|
|
|
1,631
|
|
Prepaid assets
|
|
|
314
|
|
|
|
11
|
|
Current assets of discontinued operations
|
|
|
788
|
|
|
|
—
|
|
Total current assets
|
|
|
11,567
|
|
|
|
14,852
|
|
Property and equipment, net
|
|
|
1,009
|
|
|
|
391
|
|
Intangibles
|
|
|
883
|
|
|
|
1,135
|
|
Goodwill
|
|
|
—
|
|
|
|
5,936
|
|
Other assets
|
|
|
232
|
|
|
|
138
|
|
Total assets
|
|
$
|
13,691
|
|
|
$
|
22,452
|
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
5,013
|
|
|
$
|
10,841
|
|
Accrued expenses
|
|
|
1,555
|
|
|
|
1,276
|
|
Notes payable to related parties
|
|
|
—
|
|
|
|
441
|
|
Notes payable
|
|
|
4,464
|
|
|
|
3,374
|
|
Current liabilities of discontinued operations
|
|
|
2,543
|
|
|
|
—
|
|
Total current liabilities
|
|
|
13,575
|
|
|
|
15,932
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
Notes payable to related parties
|
|
|
—
|
|
|
|
3,315
|
|
Notes payable
|
|
|
2,873
|
|
|
|
5,540
|
|
Total long-term current liabilities
|
|
|
2,873
|
|
|
|
8,855
|
|
Total liabilities
|
|
|
16,448
|
|
|
|
24,787
|
|
Commitments and Contingencies (Note 12)
|
|
|
|
|
|
|
|
|
Stockholders’ deficit:
|
|
|
|
|
|
|
|
|
Series A convertible preferred stock, $0.0001 par value, 250,000 shares authorized: 4,408 shares issued and outstanding as of December 31, 2017
|
|
|
—
|
|
|
|
—
|
|
Preferred stock, $0.001 par value, 10,000 shares authorized: 322 shares issued and
outstanding as of December 31, 2018
|
|
|
—
|
|
|
|
—
|
|
Common stock, $0.0001 par value, 50,000 shares authorized: 5,781 shares issued and outstanding as of December 31, 2017
|
|
|
—
|
|
|
|
1
|
|
Common stock, $0.001 par value, 150,000 shares authorized: 7,793 shares issued and outstanding as of December 31, 2018
|
|
|
8
|
|
|
|
—
|
|
Additional paid-in capital
|
|
|
35,303
|
|
|
|
7,578
|
|
Accumulated other comprehensive loss
|
|
|
(1,011
|
)
|
|
|
(128
|
)
|
Accumulated deficit
|
|
|
(37,057
|
)
|
|
|
(9,786
|
)
|
Total stockholders’ deficit
|
|
|
(2,757
|
)
|
|
|
(2,335
|
)
|
Total liabilities and stockholders’ deficit
|
|
$
|
13,691
|
|
|
$
|
22,452
|
|
Accompanying notes are an integral part of these financial statements.
F-4
COOL HOLDINGS, INC.
Consolidated Statements of Operations and Comprehensive Loss
(Amounts in thousands, except per share data)
|
|
For the Year Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Net sales
|
|
$
|
24,177
|
|
|
$
|
13,615
|
|
Cost of sales
|
|
|
19,128
|
|
|
|
12,235
|
|
Gross profit
|
|
|
5,049
|
|
|
|
1,380
|
|
Selling, general and administrative expenses
|
|
|
14,700
|
|
|
|
8,094
|
|
Goodwill and intangible impairments
|
|
|
10,396
|
|
|
|
—
|
|
Operating loss
|
|
|
(20,047
|
)
|
|
|
(6,714
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(1,579
|
)
|
|
|
(1,013
|
)
|
Foreign exchange losses
|
|
|
(479
|
)
|
|
|
—
|
|
Loss on early extinguishment of debt
|
|
|
(1,227
|
)
|
|
|
—
|
|
Other income, net
|
|
|
1,435
|
|
|
|
187
|
|
Loss from continuing operations before provision for income taxes
|
|
|
(21,897
|
)
|
|
|
(7,540
|
)
|
Provision for income taxes
|
|
|
(221
|
)
|
|
|
—
|
|
Loss from continuing operations
|
|
|
(22,118
|
)
|
|
|
(7,540
|
)
|
Loss from discontinued operations
|
|
|
(5,153
|
)
|
|
|
—
|
|
Net loss
|
|
$
|
(27,271
|
)
|
|
$
|
(7,540
|
)
|
|
|
|
|
|
|
|
|
|
Loss per share (basic and diluted):
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(5.36
|
)
|
|
$
|
(1.73
|
)
|
Discontinued operations
|
|
|
(1.25
|
)
|
|
|
—
|
|
Total
|
|
$
|
(6.61
|
)
|
|
$
|
(1.73
|
)
|
Basic and diluted weighted-average number of common shares outstanding
|
|
|
4,128
|
|
|
|
4,358
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(27,271
|
)
|
|
$
|
(7,540
|
)
|
Foreign currency translation adjustments
|
|
|
(883
|
)
|
|
|
(128
|
)
|
Comprehensive loss
|
|
$
|
(28,154
|
)
|
|
$
|
(7,668
|
)
|
Accompanying notes are an integral part of these financial statements.
F-5
COOL HOLDINGS, INC.
Consolidated Statements of Stockholders’ Deficit
(Amounts in thousands)
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Additional
Paid-In
|
|
|
Accumulated
Other
Comprehensive
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Loss
|
|
|
Deficit
|
|
|
Total
|
|
Balance, December 31, 2016
|
|
|
4,408
|
|
|
$
|
1
|
|
|
|
2,331
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(2,246
|
)
|
|
$
|
(2,245
|
)
|
Sale of common stock
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
2,275
|
|
|
|
1
|
|
|
|
4,641
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,641
|
|
Issuance of common stock to founders
|
|
|
—
|
|
|
|
—
|
|
|
|
1,175
|
|
|
|
—
|
|
|
|
2,937
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,937
|
|
Foreign currency translation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(128
|
)
|
|
|
—
|
|
|
|
(128
|
)
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(7,540
|
)
|
|
|
(7,540
|
)
|
Balance, December 31, 2017
|
|
|
4,408
|
|
|
|
—
|
|
|
|
5,781
|
|
|
|
1
|
|
|
|
7,578
|
|
|
|
(128
|
)
|
|
|
(9,786
|
)
|
|
|
(2,335
|
)
|
Exchange of shares in connection with reverse merger
|
|
|
(3,645
|
)
|
|
|
1
|
|
|
|
(3,994
|
)
|
|
|
1
|
|
|
|
6,181
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,183
|
|
Sale of common and preferred stock
|
|
|
298
|
|
|
|
—
|
|
|
|
1,060
|
|
|
|
1
|
|
|
|
5,334
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,335
|
|
Conversions of preferred to common stock
|
|
|
(739
|
)
|
|
|
(1
|
)
|
|
|
739
|
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Debt exchange
|
|
|
—
|
|
|
|
—
|
|
|
|
3,400
|
|
|
|
3
|
|
|
|
13,691
|
|
|
|
—
|
|
|
|
—
|
|
|
|
13,694
|
|
Cashless warrant exercises
|
|
|
—
|
|
|
|
—
|
|
|
|
81
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercise of Unitron option
|
|
|
—
|
|
|
|
—
|
|
|
|
625
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Issuance of warrants and beneficial conversion feature with convertible debt
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,060
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,060
|
|
Stock-based compensation expense
|
|
|
—
|
|
|
|
—
|
|
|
|
101
|
|
|
|
—
|
|
|
|
460
|
|
|
|
—
|
|
|
|
—
|
|
|
|
460
|
|
Foreign currency translation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(883
|
)
|
|
|
—
|
|
|
|
(883
|
)
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(27,271
|
)
|
|
|
(27,271
|
)
|
Balance, December 31, 2018
|
|
|
322
|
|
|
$
|
—
|
|
|
|
7,793
|
|
|
$
|
8
|
|
|
$
|
35,303
|
|
|
$
|
(1,011
|
)
|
|
$
|
(37,057
|
)
|
|
$
|
(2,757
|
)
|
Accompanying notes are an integral part of these financial statements.
F-6
COOL HOLDINGS, INC.
Consolidated Statements of Cash Flows
(Amounts in thousands)
|
|
For the Year Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(27,271
|
)
|
|
$
|
(7,540
|
)
|
Less: loss on discontinued operations
|
|
|
(5,153
|
)
|
|
|
—
|
|
Loss from continuing operations
|
|
|
(22,118
|
)
|
|
|
(7,540
|
)
|
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
541
|
|
|
|
75
|
|
Accretion of debt discount
|
|
|
800
|
|
|
|
368
|
|
Loss on debt conversion
|
|
|
1,227
|
|
|
|
—
|
|
Impairment of goodwill and intangibles
|
|
|
10,396
|
|
|
|
—
|
|
Loss on disposal of fixed assets
|
|
|
24
|
|
|
|
4
|
|
Provision for (recovery of) bad debts
|
|
|
64
|
|
|
|
(9
|
)
|
Provision for obsolete inventory
|
|
|
315
|
|
|
|
—
|
|
Stock-based compensation
|
|
|
430
|
|
|
|
2,938
|
|
Loss on sale of investment securities
|
|
|
121
|
|
|
|
—
|
|
(Increase) decrease in:
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
|
5,610
|
|
|
|
(842
|
)
|
Other accounts receivable
|
|
|
182
|
|
|
|
(3,361
|
)
|
Accounts receivable related parties
|
|
|
—
|
|
|
|
(514
|
)
|
Inventory
|
|
|
(1,063
|
)
|
|
|
619
|
|
Prepaids
|
|
|
(34
|
)
|
|
|
35
|
|
Other assets
|
|
|
—
|
|
|
|
299
|
|
Increase (decrease) in:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
(6,826
|
)
|
|
|
2,460
|
|
Accrued expenses
|
|
|
705
|
|
|
|
1,276
|
|
Net cash used in continuing operating activities
|
|
|
(9,626
|
)
|
|
|
(4,192
|
)
|
Net cash provided by discontinued operating activities
|
|
|
2,205
|
|
|
|
—
|
|
Net cash used in operating activities
|
|
|
(7,421
|
)
|
|
|
(4,192
|
)
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Recovery of (purchase of) property and equipment
|
|
|
(620
|
)
|
|
|
151
|
|
Purchase of intangibles
|
|
|
—
|
|
|
|
(2
|
)
|
Purchase of investment securities
|
|
|
(355
|
)
|
|
|
—
|
|
Sale of investment securities
|
|
|
210
|
|
|
|
|
|
Cash acquired in reverse merger with Cooltech (Note 17)
|
|
|
1,264
|
|
|
|
—
|
|
Cash acquired in acquisition of Cooltech Canada (Note 18)
|
|
|
21
|
|
|
|
—
|
|
Acquisition of Unitron assets, net of cash acquired (Note 19)
|
|
|
(1,432
|
)
|
|
|
—
|
|
Acquisition of OneClick International, net of cash acquired
|
|
|
—
|
|
|
|
1,072
|
|
Acquisition of OneClick License, net of cash acquired
|
|
|
—
|
|
|
|
(751
|
)
|
Net cash provided by (used in) investing activities
|
|
|
(912
|
)
|
|
|
470
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Repayments on line of credit
|
|
|
—
|
|
|
|
(500
|
)
|
Borrowings from notes payable
|
|
|
7,490
|
|
|
|
1,502
|
|
Payment of notes payable
|
|
|
(1,763
|
)
|
|
|
(1,179
|
)
|
Non-controlling interest in subsidiary
|
|
|
—
|
|
|
|
4
|
|
Sale of common and preferred stock
|
|
|
5,335
|
|
|
|
4,641
|
|
Net cash provided by financing activities
|
|
|
11,062
|
|
|
|
4,468
|
|
Effect of exchange rate changes on cash
|
|
|
(790
|
)
|
|
|
(128
|
)
|
Net increase in cash and cash equivalents
|
|
|
1,939
|
|
|
|
618
|
|
Cash, cash equivalents and restricted cash, beginning of year
|
|
|
1,354
|
|
|
|
736
|
|
Cash, cash equivalents and restricted cash, end of year
|
|
$
|
3,293
|
|
|
$
|
1,354
|
|
Cash paid for interest
|
|
$
|
462
|
|
|
$
|
172
|
|
Cash paid for income taxes
|
|
$
|
2
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Conversion of account payable and accrued interest to note payable
|
|
$
|
1,439
|
|
|
$
|
—
|
|
Conversion of notes payable and accrued interest to equity
|
|
$
|
11,445
|
|
|
$
|
—
|
|
Conversion of accounts payable to equity
|
|
$
|
1,023
|
|
|
$
|
—
|
|
Offset of accounts receivable against notes payable
|
|
$
|
561
|
|
|
$
|
—
|
|
Application of other accounts receivable to Unitron Asset acquisition consideration
|
|
$
|
2,250
|
|
|
$
|
—
|
|
The accompanying notes are an integral part of these financial statements.
F-7
NOTE 1—ORGANIZATION
AND LINE OF BUSINESS
Cool Holdings, Inc. (“Cool Holdings,” “we,” “us,” “our,” or the “Company”) was incorporated in February 1994 in the state of California under the name InfoSonics Corporation (“InfoSonics”) and reincorporated in September 2003 in the state of Maryland. InfoSonics was in the business of sourcing and selling Android-based cell phones and tablets under its
verykool
®
proprietary brand name to big-box retailers and distributors throughout Latin America. In March 2018, InfoSonics merged with Cooltech Holding Corp. (“Cooltech”) (the “Merger” or “Cooltech Merger”).
As discussed in Note 17, because of the change of control that resulted from the Merger, it was treated as a reverse merger with Cooltech deemed to be acquiring InfoSonics for accounting purposes. Therefore, the Company’s historical financial statements prior to the Merger reflect those of Cooltech.
In June 2018, InfoSonics changed its name to Cool Holdings. Subsequent to the Merger, the Company adopted the strategy of Cooltech and worked to wind down the legacy
verykool
business, which it discontinued by December 31, 2018. The operating results of the verykool business have been classified as a discontinued operation in the 2018 financial statements. Cool Holdings is now focused on its primary business as an Apple
®
Partner.
Currently, our business is comprised of two reportable segments: (1) OneClick
®
, our chain of 16 retail consumer electronics stores authorized under the Apple
®
Premier Partner, APR (Apple
®
Premium Reseller) and AAR MB (Apple
®
Authorized Reseller Mono-Brand) programs, and (2) Cooltech Distribution, an authorized distributor to the OneClick
®
stores and other resellers of Apple
®
products and other consumer electronic brands. Geographically, our 16 OneClick stores are located as follows: 7 in the Dominican Republic, 6 in Argentina, and 3 in Florida in the U.S.
NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES; PRIOR PERIOD RECLASSIFICATION
Principles of Consolidation
The Consolidated Financial Statements include the accounts of Cool Holdings and our wholly owned subsidiaries. All material intercompany accounts and transactions are eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, 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. In preparing these financial statements, we have made our best estimates and judgments of certain amounts included in the financial statements. Changes in the estimates and assumptions used by us could have a significant impact on our financial results. Actual results could differ from those estimates.
Revenue Recognition and Allowance for Returns
We adopted Accounting Standards Update (“ASU”) 2014-09,
Revenue from Contracts with Customers (ASC Topic 606)
on January 1, 2018 using the modified retrospective method to all noncompleted contracts as of the date of adoption. No adjustment of opening retained earnings for the cumulative effect of initially applying the new revenue standard was required. See the Recently Adopted Accounting Standards section for additional information pertaining to the adoption of ASU 2014-09. The comparative information has not been restated and continues to be reported under the accounting standards in effect for 2017. The following accounting policies became effective upon the adoption of ASU 2014-09.
Under ASU 2014-09, we apply a five-step approach in determining the amount and timing of revenue to be recognized which includes the following: (1) identifying the contract with a customer, (2) identifying the performance obligations in the contract, (3) determining the transaction price, (4) allocating the transaction price to the performance obligations in the contract and (5) recognizing revenue when the performance obligation is satisfied.
In our OneClick retail stores, revenue is recognized at a point in time, which typically is at the time of sale, net of discounts and estimated returns, when collection is reasonably assured and the customer takes possession of the merchandise. Revenues do not include sales taxes or other taxes collected from customers. Products sold in our stores typically come with a manufacturer’s warranty, which is an obligation of the manufacturer. However, our stores also sell AppleCare+ plans to customers that provide extended warranty coverage on their device purchases. Because the service to be provided to the consumer under the AppleCare+ Plan comes directly from Apple, OneClick does not “obtain substantive control” of the service. Consequently, OneClick acts as the “agent” in the sales transaction rather than the “principal,” and records the transaction on a “net” basis with the cost being netted against the sale and only the margin being recorded as revenue.
For sales by our Cooltech Distribution unit and our discontinued verykool unit, revenue is recognized when control passes, which generally occurs upon delivery of the product to the customer. Revenue is recorded net of discounts and estimated returns.
F-8
At our discontinued verykool unit, s
ales
were
recorded net of discounts, rebates, cooperative marketing arrangements, returns and allowances. On select sales,
we
agree
d
to cooperative arrangements wherein
we
fund
ed
future marketing programs related to the products purchased by the customer. Such arrangements
were
usually agreed to in advance. The amount of the co-op allowance
was
recorded as a reduction of the sale and added to accrued expenses as a current liabilit
y. Subsequent expenditures made pursuant to the arrangements reduce
d
this liability. To the extent
we
incur
red
costs in excess of the established cooperative fund,
we
recognize
d
the amount as a selling or marketing expense. As part of the sales process,
ve
rykool
may
have
perform
ed
certain value-added services such as programming, software loading and quality assurance testing. These value-added services
were
considered an ancillary component of the sales process and amounts attributable to these processes
w
ere
included in the unit cost to the customer. Furthermore, these value-added services
were provided
prior to the shipment of the products, and no value-added services
were
provided after delivery of the products.
We
recognize
d
as a reserve against the rel
ated receivables estimates for product returns based on historical experience and other judgmental factors, evaluate
d
these estimates on an ongoing basis and adjust
ed
our
estimates each period based on actual product return activity.
We
recognize
d
freight
costs billed to customers in net sales and actual freight costs incurred as a component of cost of sales.
Verykool provided a 1-year limited warranty on its products, for which it is responsible. However, the customer did not have the option to purchase the warranty separately, and the warranty provided only an “assurance” to the customer that the product would function as expected and in accordance with its specifications. It was intended to safeguard the customer against existing defects and did not provide any incremental service to the customer. Consequently, the warranty was not a “separate performance obligation.” Costs incurred to either repair or replace the product were additional costs of providing the initial products. Consequently, for this reason, and because the customer did not have the option to purchase the warranty separately, the warranty was accounted for in accordance with ASC 460. We recorded a cost accrual for our warranty obligations based upon the units still under warranty, expected failure rates and our historical cost to repair.
Foreign Currency Transactions
Certain of the Company’s foreign subsidiaries (in Argentina and the Dominican Republic) have a functional currency that is not the U.S. Dollar. Assets and liabilities of such subsidiaries are translated to U.S. Dollars using exchange rates in effect at the balance sheet dates. Revenues and expenses are translated at average exchange rates in effect during the period. Translation adjustments are included in stockholders’ deficit in the accompanying consolidated balance sheets as a component of accumulated other comprehensive loss.
The International Practices Task Force (“IPTF”) of the Center for Audit Quality discussed the inflationary status of Argentina at its meeting on May 16, 2018 and categorized Argentina as a country with a projected three-year cumulative inflation rate greater than 100%. Therefore, the Company has transitioned its Argentine operations to highly inflationary status as of July 1, 2018.
For operations in highly inflationary economies, we use the U.S. dollar as the functional currency. Accordingly, monetary asset and liabilities are remeasured at exchange rates in effect at the balance sheet date, and non-monetary assets and liabilities are remeasured at historical exchange rates. Nonmonetary assets and liabilities existing on July 1, 2018 (the date that the Company adopted highly inflation accounting) were translated using the Argentine Peso to United States Dollar exchange rate in effect on June 30, 2018, which was 28.880. Foreign currency transaction adjustments are reflected in loss on foreign currency translation on the accompanying statement of operations. During the year ended December 31, 2018, the Company recorded a $470,000 loss on foreign currency transactions.
Comprehensive Income (Loss)
Comprehensive income (loss) as defined by U.S. generally accepted accounting principles (GAAP) includes all changes in equity (net assets) during a period from non-owner sources. The Company’s comprehensive loss includes foreign currency translation adjustments, which are excluded from net income (loss) and are reported as a separate component of stockholders’ deficit as accumulated other comprehensive loss.
Cash, Cash Equivalents and Restricted Cash
For consolidated financial statement purposes, cash equivalents are defined as investments which have an original maturity of ninety days or less from the original date of purchase. Cash and cash equivalents consist of cash on hand and in banks. The Company maintains its cash, cash equivalents and restricted cash balances in banks that from time to time exceed amounts insured by the Federal Deposit Insurance Corporation. As of December 31, 2018 and 2017, the Company maintained deposits totaling $2,375,000 and $924,000, respectively, with certain financial institutions in excess of federally insured amounts. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash.
Amounts included in restricted cash are pledged as collateral to a bank and restricted to use in support of a letter of credit issued to a vendor or vendors for inventory purchases.
F-9
Trade Accounts Receivable
Trade accounts receivable are comprised primarily of amounts due from the Company’s distribution customers, of certain corporate customers of the Company’s OneClick stores and from financial institutions for the settlement of credit card transactions. The Company provides for the possible inability to collect accounts receivable by recording an allowance for doubtful accounts. The Company writes off an account when it is considered to be uncollectible. The Company evaluates the collectability of its accounts receivable on an ongoing basis. In circumstances where the Company is aware of a specific customer’s inability to meet its financial obligations, the Company records a specific allowance against amounts due to reduce the net recognized receivable to the amount the Company reasonably believes will be collected. For all other customers, the Company recognizes allowances for doubtful accounts based on the length of time the receivables are past due, the current business environment and the Company’s historical experience. The allowance for doubtful accounts was $73,000 and $9,000 at December 31, 2018 and 2017, respectively.
During the year ended December 31, 2017, the Company entered into factoring agreements with various financial institutions to sell accounts receivable under non-recourse agreements. These transactions were treated as sales and accounted for as a reduction in accounts receivable because the agreements transferred effective control over the receivables, and risk related thereto, to the buyers. Thus, cash proceeds from these arrangements were reflected as operating activities, including the change of accounts receivable in the consolidated statement of cash flows for the year. The Company did not service any factored accounts after the factoring occurred and did not have any servicing assets or liabilities. During the year ended December 31, 2017, the aggregate gross amount factored under these facilities was $2,557,000, and the cost of factoring such accounts receivable was $85,000, which amount is reflected as interest expense in the accompanying consolidated statement of operations and comprehensive loss.
Inventory
Inventory is stated at the lower of cost (first-in, first-out) or net realizable value and consists primarily of consumer electronics and accessories. The Company writes down its inventory to net realizable value when it is estimated to be slow-moving or obsolete. As of December 31, 2018 and 2017, the inventory was net of write-downs of $351,000 and $36,000, respectively.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. The Company provides for depreciation using the straight-line method over estimated useful lives of three to five years. Expenditures for maintenance and repairs are charged to operations as incurred while renewals and betterments are capitalized. Gains or losses on the sale of property and equipment are reflected in the statements of operations.
Fair Value of Financial Instruments
The Company measures its financial instruments in its financial statements at fair value or amounts that approximate fair value. The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when developing fair value measurements. When available, the Company uses quoted market prices to measure fair value. If market prices are not available, fair value measurement is based upon models that use primarily market-based or independently-sourced market parameters. If market observable inputs for model-based valuation techniques are not available, the Company makes judgments about assumptions market participants would use in estimating the fair value of the financial instrument. Carrying values of cash, cash equivalents, restricted cash, trade and other accounts receivable, prepaid expenses, accounts payable, accrued expenses, short-term notes payable and short-term notes payable to related parties approximate their fair values due to the short-term nature and liquidity of these financial instruments. The Company estimates that the fair value of its long-term debt and long-term debt to related parties approximates its carrying value based on significant level 2 observable inputs.
Business Combinations
We account for business combinations under the acquisition method of accounting. This method requires the recording of acquired assets and assumed liabilities at their acquisition date fair values. The excess of the purchase price over the fair value of assets acquired and liabilities assumed is recorded as goodwill. Results of operations related to business combinations are included prospectively beginning with the date of acquisition and transaction costs related to business combinations are recorded within selling, general and administrative ("SG&A") expenses.
F-10
Goodwill and Intangible
Assets
Goodwill represents the excess purchase price over tangible net assets and identifiable intangible assets acquired. Intangible assets are recorded apart from goodwill if they arise from a contractual right and are capable of being separated from the entity and sold, transferred, licensed, rented or exchanged individually. We are required to evaluate goodwill and other intangible assets not subject to amortization for impairment at least annually or when circumstances indicate the carrying value of the goodwill or other intangible assets might be impaired. Goodwill has been assigned to reporting units for the purpose of impairment testing. Excluding our verykool unit that was discontinued in the fourth quarter of 2018, we have two operating segments: our OneClick retail stores and our Cooltech distribution unit. Within the OneClick retail segment, we define our reporting units by their three geographic country locations: United States, Argentina and the Dominican Republic. The annual impairment tests for the United States and Argentina were performed as of October 1, 2018, while the annual impairment test for the Dominican Republic was performed as of December 31, 2018.
In order to test goodwill for impairment, we compare a reporting unit's carrying amount to its estimated fair value. If the reporting unit’s carrying value exceeds its estimated fair value, then an impairment charge is recorded in the amount of the excess, limited to the amount of the goodwill in the reporting unit. The estimated fair value of a reporting unit is determined based on a combination of enterprise market valuation methods including (1) income approach using discounted cash flow analysis based on our long-term financial forecasts, (2) market approach using data for comparable market transactions, and (3) asset approach valuing the individual assets of the reporting unit. The discounted cash flows analysis requires significant assumptions including, among others, a discount rate and a terminal value. The Company elected to early adopt ASU 2017-04,
Intangibles-Goodwill and Other (ASC Topic 350)
on January 1, 2018, which eliminates step 2 from the impairment test. Goodwill impairment charges of $13.7 million were recognized in 2018, including $3.3 million included in discontinued operations. See Note 6, "Goodwill and Intangible Assets" for additional information. No goodwill impairment charges were recognized in 2017.
Our definite-lived intangible assets consist primarily of trade names and covenants not to compete recorded as a result of business acquisitions. The estimated useful life and amortization methodology of intangible assets are determined based on the period in which they are expected to contribute directly to cash flows. Intangible assets that are determined to have a definite life are amortized over that period.
Stock-Based Compensation
The Company’s share-based compensation plans are described in Note 9. The Company measures compensation cost for all employee stock-based awards at fair value on the date of grant and recognizes compensation expense, net of estimated forfeitures, over the requisite service period, usually the vesting period. The fair value of stock options is determined using the Black-Scholes valuation model.
Effective January 1, 2018, the Company adopted ASU No. 2018-07,
Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting
, which expands the scope of Topic 718 to include share-based payment awards to nonemployees. As a result, stock-based awards granted to consultants and non-employees are accounted for in the same manner as awards granted to employees and directors as described above.
Advertising Expense
The Company expenses all advertising costs, including direct response advertising, as they are incurred. Advertising expense for the years ended December 31, 2018 and 2017 was $ 334,000 and $193,000, respectively.
Income Taxes
The Company recognizes deferred tax assets and liabilities for the future consequences of events that have been recognized in the Company’s financial statements or tax returns. The measurement of the deferred items is based on enacted tax laws. In the event the future consequences of differences between financial reporting bases and the tax bases of the Company’s assets and liabilities result in a deferred tax asset, the Company performs an evaluation of the probability of being able to realize the future benefits indicated by such asset. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion or the entire deferred tax asset will not be realized.
In addition, the Company recognizes the financial statement impact of a tax position when it is more likely than not that the position will be sustained upon examination. The amount recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. The Company recognizes interest and penalties related to tax uncertainties as operating expenses.
F-11
Based on our evaluation, the Company has concluded that there are no
significant uncertain tax positions requiring recognition in its financial statements.
Earnings (Loss) Per Share
The Company computes basic earnings (loss) per share by dividing income (loss) available to common stockholders by the weighted-average number of common shares outstanding. Diluted earnings (loss) per share is computed similarly to basic earnings (loss) per share except that the denominator is increased to include the number of additional common shares that would be issued as a result of potentially dilutive securities outstanding during the period. Potentially dilutive securities include preferred stock, stock options and warrants. In periods when a net loss is incurred, no additional shares are included in the computation of diluted loss per share because the effect of inclusion would be anti-dilutive.
Common shares from exercise of certain options and warrants are excluded from the computation of diluted earnings per share when their exercise prices are greater than the Company’s weighted-average stock price for the period. For the years ended December 31, 2018 and 2017, the number of such shares excluded was 161,000 and 34,000 respectively. In addition, for the year ended December 31, 2018, because their inclusion would have been anti-dilutive to the loss calculation, common shares from exercise of 5,192,000 in-the-money warrants and 322,000 preferred shares were excluded from the computation of net loss per share. No such shares were excluded for the year ended December 31, 2017.
All share and per share numbers in this report have been retroactively restated for the Company’s two one-for-five reverse stock splits effected in October 2017 and March 2018.
Geographic Reporting
The Company allocates revenues to geographic areas based on the location where our retail stores are located or, in the case of Cooltech Distribution, the countries to which the product is shipped.
Major Suppliers
The Company purchases its Apple products either directly from Apple or from major distributors, depending on availability of product and credit lines at the time of purchase. Ultimately, Apple is the sole source of supply of Apple products, and the Company’s business is highly dependent on Apple for its supply of current and future products. Approximately 77% of the Company’s 2018 sales are comprised of sales of Apple products. In addition, the growth of our business is highly dependent upon our relationship with Apple in providing us with the licenses and approvals necessary to expand our footprint into various countries and regions around the world. Apple has very strict performance standards and guidelines that we must achieve and adhere to in order to be successful and continue to receive their support. Consequently, our performance deterioration or failure to adhere to their guidelines could jeopardize our strategy and adversely affect our financial performance.
During the year ended December 31, 2018, the Company’s three largest suppliers accounted for 36%, 24% and 10%, respectively, of total cost of sales. During the year ended December 31, 2017, the Company’s three largest suppliers accounted for 44%, 12% and 11%, respectively, of total cost of sales.
Concentrations of Credit Risk, Customers
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. We maintain our cash and cash equivalents with various high-credit-quality financial institutions located primarily in the United States. Currently, the Company’s cash balances are kept primarily in demand accounts at these banks, but the Company may periodically invest excess cash in certificates of deposit or money market accounts in order to maintain safety and liquidity. The Company’s investment strategy generally results in lower yields on investments but reduces the risk to principal in the short term prior to these funds being used in its business. The Company has not experienced any material losses on financial instruments held at financial institutions.
The Company’s retail stores sell primarily to end consumers, with periodic sales to corporate customers. The Company’s Cooltech Distribution segment sells primarily to resellers. The Company selectively provides credit to corporate and reseller customers in the normal course of business and generally requires no collateral. The Company performs ongoing credit evaluations of its customers and maintains reserves for potential credit losses based upon the Company’s historical experience related to credit losses and any unusual circumstances that may affect the ability of its customers to meet their obligations. The Company’s bad debt expenses have not been significant relative to its total revenues.
F-12
In
2018, no customer represented 10% or more of the
Company’s total net sales. However, one customer represented approximately 30% of accounts receivable at December 31, 2018.
In addition, one customer of the Company’s discontinued verykool business segment represented approximately
49
% of
the current as
sets of discontinued operations at December 31, 2018. In 2017, no customer represented 10% or more of the Company’s total sales. However, one customer represented 84% of accounts receivable at December 31, 2017.
Recently Adopted Accounting Pronouncements:
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” which supersedes the revenue recognition requirements in “Revenue Recognition (Topic 605),” and requires entities to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additionally, this guidance requires that entities disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. In March 2016, the FASB issued ASU 2016-08, “Revenue from Contracts with Customers - Principal versus Agent Considerations (Reporting revenue gross versus net),” which clarifies gross versus net revenue reporting when another party is involved in the transaction. In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers - Identifying Performance Obligations and Licensing,” which amends the revenue guidance on identifying performance obligations and accounting for licenses of intellectual property. In May 2016, the FASB issued ASU 2016-12, “Revenue from Contracts with Customers - Narrow-Scope Improvements and Practical Expedients,” which provides narrow-scope improvements to the guidance on collectability, non-cash consideration, and completed contracts at transition. In December 2016, the FASB issued ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers,” which amended the guidance on performance obligation disclosures and makes technical corrections and improvements to the new revenue standard. The Company adopted this guidance effective January 1, 2018, which adoption did not have a material impact on the Company’s consolidated financial statements.
In November 2015, the FASB issued ASU No. 2015-17, "Balance Sheet Classification of Deferred Taxes," which requires that deferred tax liabilities and assets be classified on our Consolidated Combined Balance Sheets as noncurrent based on an analysis of each taxpaying component within a jurisdiction. ASU No. 2015-17 was effective for fiscal years commencing after December 15, 2016. The Company adopted this guidance effective January 1, 2017, which adoption did not have a material impact on the Company’s consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01, “Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-01 requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income, requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset, and eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. For the Company, ASU 2016-01 was effective for annual reporting periods, including interim reporting periods within those periods, beginning after December 15, 2017, and early adoption is permitted. The Company adopted this guidance effective January 1, 2018, which adoption did not have an impact on the Company’s consolidated financial statements.
In May 2017, the FASB issued ASU No.
2017-09
, “Compensation—Stock Compensation (Topic 718), Scope of Modification Accounting.” ASU
2017-09
clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions or the classification of the award changes as a result of the change in terms or conditions. The guidance was effective prospectively for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, and early adoption is permitted.
The Company adopted this guidance effective January 1, 2018, which adoption did not have an impact on the Company’s consolidated financial statements
.
In November 2016, the FASB issued ASU No. 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash
(“ASU 2016-18”). ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 became effective, on a retrospective basis, for the Company on January 1, 2018. All prior periods have been adjusted to conform to the current period presentation, which resulted in a decrease in cash used in investing activities of $1,008,000 for the year ended December 31, 2017 on the Consolidated Statement of Cash Flows.
F-13
Accounting Pronouncements
I
ssued (Not adopted yet):
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).”
The guidance in ASU 2016-02 and subsequently issued amendments requires lessees to capitalize virtually all leases with terms of more than twelve months on the balance sheet as a right-of-use asset and recognize an associated lease liability. The right-of-use asset represents the lessee’s right to use, or control the use of, a specified asset for the specified lease term. The lease liability represents the lessee’s obligation to make lease payments arising from the lease, measured on a discounted basis. Based on certain characteristics, leases are classified as financing or operating leases and their classification impacts the recognition of expense in the income statement. Entities are allowed to apply the modified retrospective approach (1) retrospectively to each comparative period presented (comparative method) or (2) retrospectively at the beginning of the period of adoption through a cumulative-effect adjustment (effective date method). ASU 2016‑02 is effective for public companies for interim and annual reporting periods beginning after December 15, 2018. The Company adopted the new standard on January 1, 2019 using the effective date method. Therefore, upon adoption, the Company will recognize and measure leases without revising comparative period information or disclosures. The Company implemented the transition package of three practical expedients permitted within the standard, which among other things, allows for the carryforward of historical lease classifications. The Company will make an accounting policy election to keep leases with terms of twelve months or less off the balance sheet and result in recognizing those lease payments on a straight-line basis over the lease term. As a result of adopting the new standard, the Company estimates it will record initial right-of-use assets of approximately $4,642,000 with a corresponding initial lease liability, which will also be adjusted by reclassifications of existing assets and liabilities primarily related to deferred rent. The adoption of this new standard is not expected to have a material impact on the Company’s consolidated results of operations or cash flows.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flow - Classification of Certain Cash Receipts and Cash Payments (Topic 230)” ("ASU 2016-15"), which addresses a few specific cash flow issues with the objective of reducing the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. For the Company, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. If the Company early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The Company is currently evaluating the potential impact this standard may have on its consolidated statement of cash flows and the timing of adoption.
Other Accounting Standards Updates not effective until after December 31, 2018 are not expected to have a material effect on the Company’s financial position or results of operations.
Prior Period Reclassification:
During the preparation of these consolidated financial statements, it was noted that a journal entry for the year ended December 31, 2017 to eliminate pre-acquisition results of the Company’s OneClick Argentino business unit was misclassified as a reduction of cost of goods sold rather than selling, general and administrative expenses. The consolidated statement of operations for the year ended December 31, 2017 has been adjusted to correct this error, the impact of which is as follows:
|
|
As Originally Reported
|
|
|
As Adjusted
|
|
|
Effect of Change
|
|
Net sales
|
|
$
|
13,615
|
|
|
$
|
13,615
|
|
|
$
|
—
|
|
Cost of sales
|
|
|
11,331
|
|
|
|
12,235
|
|
|
|
904
|
|
Gross profit
|
|
|
2,284
|
|
|
|
1,380
|
|
|
|
904
|
|
Selling, general and administrative expenses
|
|
|
8,998
|
|
|
|
8,094
|
|
|
|
(904
|
)
|
Operating loss
|
|
$
|
(6,714
|
)
|
|
$
|
(6,714
|
)
|
|
$
|
—
|
|
F-14
NOTE 3—GOING
CONCERN CONSIDERATIONS
In accordance with the
guidance issued by the FASB under ASU No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern, the Company is required to evaluate each reporting period whether there is substantial doubt about its ability to continue as a going concern. In evaluating the Company’s ability to continue as a going concern, management considered the conditions and events that could raise substantial doubt about the Company’s ability to continue as a going concern for 12 months following the date the Company’s financial statements are issued. Management considered the Company’s current financial condition and liquidity sources, including current funds and available working capital, forecasted future cash flows and the Company’s conditional and unconditional obligations due within one year from the date of issuance of the financial statements. Because the Company has sustained significant losses over the past two years and its total liabilities exceed its total assets, management has substantial doubt that the Company could remain independent and continue as a going concern for the required period of time if it were not able to refinance or restructure its existing debt and raise additional capital to fund its working capital needs.
These consolidated financial statements do not include any adjustment that might be necessary if the Company is unable to continue as a going concern.
NOTE 4—DISCONTINUED OPERATIONS
During the fourth quarter of 2018, the Company completed the closure of the verykool business segment that had been the legacy business of InfoSonics prior to the Merger. By December 31, 2018, the verykool product inventory was substantially liquidated, the trade name was sold, remaining assets consisted primarily of accounts receivable, and remaining liabilities consisted primarily of estimated warranty obligations and a $250,000 note payable to a vendor that was repaid in March 2019. The historical results of the verykool segment, including the impairment of goodwill assigned to the segment at the time of the Merger, are reported as discontinued operations in our consolidated financial statements for all periods from the merger through December 31, 2018. The results of discontinued operations for 2018 are as follows (in thousands):
|
|
2018
|
|
Net sales
|
|
$
|
6,486
|
|
Cost of sales
|
|
|
6,876
|
|
Gross profit (loss)
|
|
|
(390
|
)
|
Selling, general and administrative expenses
|
|
|
1,457
|
|
Goodwill impairment
|
|
|
3,343
|
|
Operating loss
|
|
|
(5,190
|
)
|
Other income, net
|
|
|
39
|
|
Loss from discontinued operations before income taxes
|
|
|
(5,151
|
)
|
Provision for income taxes
|
|
|
(2
|
)
|
Net loss from discontinued operations
|
|
$
|
(5,153
|
)
|
NOTE 5—PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of the dates presented (in thousands):
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Vehicles
|
|
$
|
48
|
|
|
$
|
—
|
|
Machinery and equipment
|
|
|
146
|
|
|
|
51
|
|
Furniture and fixtures
|
|
|
122
|
|
|
|
220
|
|
Leasehold improvements
|
|
|
1,100
|
|
|
|
376
|
|
|
|
|
1,416
|
|
|
|
647
|
|
Less accumulated depreciation and amortization
|
|
|
407
|
|
|
|
256
|
|
Total
|
|
$
|
1,009
|
|
|
$
|
391
|
|
F-15
Depreciation
and amortization
expense
of property and equipment
was $
274
,000 and $
21
,000 for the years ended December 31, 201
8
and 201
7
, respectively.
NOTE 6—GOODWILL AND INTANGIBLE ASSETS
Goodwill
The changes in the carrying amount of goodwill related to our various reporting units for the years ended December 31, 2018 and 2017 were as follows (in thousands):
|
|
OneClick
Argentina
|
|
|
OneClick
USA
|
|
|
Verykool Products (Discontinued Operation)
|
|
|
OneClick
Dominican
Republic
|
|
|
Total
|
|
Balance at December 31, 2016
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
2017 acquisitions
|
|
|
4,511
|
|
|
|
1,425
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,936
|
|
Balance at December 31, 2017
|
|
|
4,511
|
|
|
|
1,425
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,936
|
|
2018 acquisitions
|
|
|
—
|
|
|
|
—
|
|
|
|
3,343
|
|
|
|
4,399
|
|
|
|
7,742
|
|
Impairment charge
|
|
|
(4,511
|
)
|
|
|
(1,425
|
)
|
|
|
(3,343
|
)
|
|
|
(4,399
|
)
|
|
|
(13,678
|
)
|
Balance at December 31, 2018
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
The Company performs an impairment test of goodwill on an annual basis during the fourth quarter, or when circumstances indicate that the carrying value of goodwill might be impaired. As a result of our annual impairment test in the fourth quarter of fiscal 2018, the Company recognized goodwill impairment charges totaling $13,678,000, of which $3,343,000 was related to our verykool segment which was classified as a discontinued operation.
Definite-lived Intangible Assets
The Company’s definite-lived intangible assets arose from the OneClick and Unitron acquisitions. These assets and related accumulated amortization consisted of the following as of December 31, 2018 and 2017 (in thousands):
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Tradenames
|
|
$
|
938
|
|
|
$
|
938
|
|
Covenants Not To Compete
|
|
|
258
|
|
|
|
258
|
|
Domain Name
|
|
|
2
|
|
|
|
2
|
|
Subtotal
|
|
|
1,198
|
|
|
|
1,198
|
|
Less accumulated amortization
|
|
|
(315
|
)
|
|
|
(63
|
)
|
Total
|
|
$
|
883
|
|
|
$
|
1,135
|
|
During 2018, the Company evaluated the intangibles in connection with its annual goodwill impairment analysis and recognized an impairment charge of $62,000 related to the write-off of the tradename and covenant not to compete from the Unitron acquisition. The tradename and covenants not to compete related to OneClick were determined not to be impaired. Amortization expense for the years ended December 31, 2018 and 2017 amount to $266,000 and $54,000, respectively. The OneClick trade name and the covenant are being amortized over 60 months and 48 months, respectively. Amortization expense for the years ending December 31, 2019 through 2022 will be $252,000, $252,000, $236,000 and $143,000, respectively.
NOTE 7—LINE OF CREDIT
In April 2016, the Company obtained a revolving credit facility of $500,000 to finance accounts receivable. The outstanding balances under the credit facility bore interest at the floating WSJ prime rate plus 1%, with a floor of 4.5%, payable monthly in arrears. In addition to other restrictive covenants, a first priority security interest lien on all assets of Cooltech Distribution, a subsidiary of the Company, was pledged to the lender, an international financial institution. This liability was guaranteed personally by two executive officers of the Company. On October 31, 2017, the line was fully repaid and terminated and the lender
released its security interest in the Company’s assets. Interest expense related to the revolving credit facility in the year ended December 31, 2017 was $23,000.
F-16
NOTE
8
—ACCRUED EXPENSES
As of December 31, 2018 and 2017, accrued expenses consisted of the following (in thousands):
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Accrued compensation (wages, benefits, severance, vacation)
|
|
$
|
697
|
|
|
$
|
497
|
|
Customer deposits and overpayments
|
|
|
31
|
|
|
|
13
|
|
Accrued interest
|
|
|
170
|
|
|
|
247
|
|
Accrued taxes
|
|
|
406
|
|
|
|
—
|
|
Other accruals
|
|
|
251
|
|
|
|
519
|
|
Total
|
|
$
|
1,555
|
|
|
$
|
1,276
|
|
NOTE 9—NOTES PAYABLE TO RELATED PARTIES
Notes payable to related parties consisted of the following at December 31, 2018 and 2017 (in thousands):
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Class B promissory notes
|
|
$
|
—
|
|
|
$
|
200
|
|
Class C promissory notes
|
|
|
—
|
|
|
|
667
|
|
0% promissory note due 3/31/19
|
|
|
—
|
|
|
|
44
|
|
8% secured promissory notes due 3/31/19
|
|
|
—
|
|
|
|
1,050
|
|
8% promissory notes due 3/31/19
|
|
|
—
|
|
|
|
2,031
|
|
Total face amount
|
|
|
—
|
|
|
|
3,992
|
|
Less unamortized discount
|
|
|
—
|
|
|
|
(236
|
)
|
Total carrying value
|
|
|
—
|
|
|
|
3,756
|
|
Amount classified as current
|
|
|
—
|
|
|
|
441
|
|
Amount classified as long-term
|
|
$
|
—
|
|
|
$
|
3,315
|
|
The Class B and C promissory notes were issued by the Company in December 2016 in connection with the acquisition of Cooltech Distribution prior to the Merger. The notes were non-interest bearing and were due upon the closing of an initial public offering by the Company. The Class B notes were paid in June 2018, and the Class C notes were retired on August 15, 2018 as part of the debt exchange described in Note 13. The 0% promissory note was issued in connection with the acquisition of OneClick License, and was retired in June 2018. The 8% secured promissory notes were assumed in the October 2017 acquisition of OneClick International, of which $494,000 was retired in the August 15, 2018 debt exchange, and $556,000 was refinanced in September 2018 as part of a note consolidation. The 8% promissory notes were also issued in October 2017 in connection with the OneClick acquisitions, with $1,768,000 retired in the August 15, 2018 debt exchange, and $263,000 offset in August 2018 against receivables owed to the Company by the lenders. Interest expense related to these notes during the years ended December 31, 2018 and 2017 was $480,000 and $148,000, respectively, including accretion of the $236,000 unamortized discount.
F-17
NOTE 10—NOTES PAYABLE
Notes payable consisted of the following at December 31, 2018 and 2017 (in thousands):
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Class B promissory notes
|
|
$
|
—
|
|
|
$
|
100
|
|
Class C promissory notes
|
|
|
—
|
|
|
|
333
|
|
10% promissory note due on demand
|
|
|
—
|
|
|
|
500
|
|
8% convertible promissory note due March 2019
|
|
|
—
|
|
|
|
250
|
|
8% secured promissory notes due July/August 2018
|
|
|
250
|
|
|
|
1,350
|
|
8% promissory notes due March 2019
|
|
|
—
|
|
|
|
715
|
|
0% promissory notes due May 2018
|
|
|
—
|
|
|
|
261
|
|
8% promissory note due March 2019
|
|
|
—
|
|
|
|
200
|
|
8% promissory notes due March 2019
|
|
|
—
|
|
|
|
1,776
|
|
8% secured promissory notes due March 2019
|
|
|
—
|
|
|
|
3,455
|
|
0% convertible notes due January 2021
|
|
|
275
|
|
|
|
—
|
|
4% promissory note due April 2021
|
|
|
847
|
|
|
|
—
|
|
0% promissory note due April 2019
|
|
|
418
|
|
|
|
—
|
|
8% promissory note due March 2021
|
|
|
2,107
|
|
|
|
—
|
|
12% convertible notes due October 2019
|
|
|
4,000
|
|
|
|
—
|
|
12% convertible notes due November 2019
|
|
|
1,220
|
|
|
|
—
|
|
Total face amount
|
|
|
9,117
|
|
|
|
8,940
|
|
Unamortized discount
|
|
|
(1,780
|
)
|
|
|
(26
|
)
|
Total carrying value
|
|
|
7,337
|
|
|
|
8,914
|
|
Amount classified as current
|
|
|
4,464
|
|
|
|
3,374
|
|
Amount classified as long-term
|
|
$
|
2,873
|
|
|
$
|
5,540
|
|
The Class B and C promissory notes were issued by the Company in December 2016 in connection with the acquisition of Cooltech Distribution prior to the Merger. The notes were non-interest bearing and were due upon the closing of an initial public offering by the Company. The Class B notes were paid in June 2018, and the Class C notes were retired on August 15, 2018 as part of the debt exchange described in Note 13.
In May 2015, the Company issued a promissory note for $500,000, with interest payable on the first of each month at a rate of 10% per annum, and a maturity date of April 30, 2016. This loan was amended on May 1, 2016 to be due on demand. It was retired in the August 15, 2018 debt exchange.
In July and August 2017, the Company issued secured promissory notes with 1-year terms bearing interest at 8% in the aggregate amount of $1,350,000. Of that amount, $350,000 was paid in August 2018 and $750,000 was retired in the August 15, 2018 debt exchange. The remaining $250,000 note payable was not paid upon maturity, and went into default. Upon agreement with the holder, the note was paid in full, including additional default interest on February 14, 2019.
In January and March 2017, the Company issued an aggregate of $715,000 0% promissory notes with 1-year terms that were later modified to 8% notes and with maturities extended to March 2019. All of these notes were retired in the August 15, 2018 debt exchange.
The $261,000 of 0% promissory notes payable in May 2018 were ultimately paid in November 2018.
The $200,000 8% promissory note payable in March 2019 was refinanced in September 2018 as part of a note consolidation.
The $1,776,000 of 8% promissory notes payable in March 2019 were all retired in the August 15, 2018 debt exchange.
Of the $3,455,000 of 8% secured promissory notes payable in March 2019, $2,780,000 were retired in the August 15, 2018 debt exchange and the remaining $675,000 was refinanced in September 2018 as part of a note consolidation.
F-18
In January 2018, the Company issued an aggregate of $1,000,000 of 3-year 0% convertible notes and warrants.
The notes are convertible into an aggregate of 570,287 shares of common stock of the Company and the warrants are exercisable for 570,287 shar
es of common stock of the Company at an exercise price of $9.15 per share. The Company valued the debt and the warrants in accordance with ASC 470-20-25-2 using a binomial option pricing model for the warrants, and the conversion feature, which was determ
ined to be a Beneficial Conversion Feature, was recorded at fair value based on the difference between the closing market price of the Company’s stock on the date of the transaction and the implied conversion price in the fair value of the debt. The valua
tion assumed a 105% volatility rate of the Company’s common stock, a risk-free interest rate of 2.20% and a credit spread of 7.70%. The warrants were assigned a value of $127,000 and the conversion feature was assigned a value of $144,000. The remaining
value of $729,000 was assigned to the debt. The aggregate discount of $271,000 is being amortized to interest expense over the 3-year life of the notes on a straight-line basis. In connection with the debt exchange on August 15, 2018
(see Note 13)
, holde
rs of an aggregate principal amount of $725,000 of the notes converted their notes to common stock, leaving a principal balance of $275,000 outstanding. The unamortized discount related to the converted notes amounted to $163,000, which amount was recorde
d as accretion expense in the period. Excluding this amount, accretion of the discount for the year ended December 31, 2018 amounted to $45,000.
In April 2018, the Company issued a $1,000,000 installment note bearing interest at 4.02% per annum due April 30, 2021. The note specifies varying monthly payments of principal and interest through 2021.
In August 2018, in connection with the Unitron acquisition described in Note 20, the Company assumed the remaining balance of the $868,000, 0% promissory notes with $450,000 paid in October 2018 and $418,000 due in April 2019.
In September 2018, the Company entered into a Note Consolidation Agreement with a lender in which 12 promissory notes and associated accrued interest were consolidated into a single unsecured 8% promissory note in the principal amount of $2,107,000. The note is due in a lump sum on March 31, 2021. Interest compounds annually. Because the present value of the cash flows under the terms of the new debt instrument was less than 10% different from the present value of the aggregate remaining cash flows under the terms of the original instruments, the debt instruments were not considered to be substantially different and the transaction was not considered a debt extinguishment.
In October 2018, the Company issued an aggregate of $4,000,000 of 1-year 12% convertible notes and warrants. The notes are convertible at the option of the holder after six months from the date of issuance into an aggregate of 941,181 shares of common stock of the Company and the warrants are exercisable for 470,592 shares of common stock of the Company at an exercise price of $4.25 per share. The Company valued the debt and the warrants in accordance with ASC 470-20-25-2 using a binomial option pricing model for the warrants, and the conversion feature, which was determined to be a Beneficial Conversion Feature, was recorded at fair value based on the difference between the closing market price of the Company’s stock on the date of the transaction and the implied conversion price in the fair value of the debt. The valuation assumed a 90% volatility rate of the Company’s common stock, a 25% discount on the value of the underlying stock due to trading restrictions, and a risk-free interest rate of 2.47%. The warrants were assigned a value of $769,000 and the conversion feature was assigned a value of $1,173,000. The remaining value of $2,058,000 was assigned to the debt. The aggregate discount of $1,942,000 is being amortized to interest expense over the 1-year life of the notes on a straight-line basis, which approximates the effective interest method. Accretion of the discount for the year ended December 31, 2018 amounted to $324,000.
In November 2018, the Company issued an aggregate of $1,220,000 of 1-year 12% convertible notes and warrants. The notes are convertible at the option of the holder after six months from the date of issuance into an aggregate of 277,274 shares of common stock of the Company and the warrants are exercisable for 138,638 shares of common stock of the Company at an exercise price of $4.40 per share. The Company valued the debt and the warrants in accordance with ASC 470-20-25-2 using a binomial option pricing model for the warrants. The conversion feature was not assigned any value as the implied conversion price in the fair value of the debt was higher than the closing market price of the Company’s stock on the date of the transaction. The valuation assumed a 90% volatility rate of the Company’s common stock, a 25% discount on the value of the underlying stock due to trading restrictions, and a risk-free interest rate of 2.52%. The warrants were assigned a value of $118,000 and the remaining value of $1,102,000 was assigned to the debt. The discount of $118,000 is being amortized to interest expense over the 1‑year life of the notes on a straight-line basis. Accretion of the discount for the year ended December 31, 2018 amounted to $10,000.
Maturities of long-term debt are as follows (in thousands):
|
|
Principal
|
|
Fiscal 2019
|
|
$
|
6,190
|
|
Fiscal 2020
|
|
|
359
|
|
Fiscal 2021
|
|
|
2,568
|
|
Interest expense for notes payable for the years ended December 31, 2018 and 2017 amounted to $557,000 and $279,000, respectively.
F-19
NOTE 11—INCOME TAXES
The Company is subject to U.S. federal income tax, as well as income tax in multiple states and foreign jurisdictions. For all major taxing jurisdictions, the tax years 2014 through 2018 remain open to examination by the taxing authorities due to the carryforward of unutilized net operating losses. As of December 31, 2018, the Company does not expect any material changes to unrecognized tax positions within the next twelve months.
Components of the income tax provision are as follows for the years ended December 31 (in thousands):
|
|
2018
|
|
|
2017
|
|
Current tax provision:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
—
|
|
State
|
|
|
(1
|
)
|
|
|
—
|
|
Foreign
|
|
|
(220
|
)
|
|
|
—
|
|
Total
|
|
|
(221
|
)
|
|
|
—
|
|
Deferred tax provision:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
—
|
|
|
|
—
|
|
State
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
|
—
|
|
|
|
—
|
|
Change in valuation allowance
|
|
|
—
|
|
|
|
—
|
|
Total provision for income taxes
|
|
$
|
(221
|
)
|
|
$
|
—
|
|
A reconciliation of income taxes computed by applying the federal statutory income tax rate of 21.0% to loss from continuing operations before income taxes to the recognized income tax provision reported in the accompanying consolidated statements of operations is as follows for the years ended December 31 (in thousands):
|
|
2018
|
|
|
2017
|
|
Income tax at U.S. federal statutory rate
|
|
$
|
(4,598
|
)
|
|
$
|
(2,458
|
)
|
State taxes, net of federal benefit
|
|
|
(640
|
)
|
|
|
(336
|
)
|
Non-deductible expenses
|
|
|
1,190
|
|
|
|
121
|
|
Foreign income tax rate differential
|
|
|
279
|
|
|
|
35
|
|
Valuation allowance
|
|
|
4,011
|
|
|
|
2,186
|
|
Tax Reform
|
|
|
—
|
|
|
|
959
|
|
Other
|
|
|
(21
|
)
|
|
|
(507
|
)
|
Total provision for income taxes
|
|
$
|
221
|
|
|
$
|
—
|
|
F-20
Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company has recorded a full valuation allowance
against its deferred tax assets, as realization of such assets is uncertain based on the Company’s history of operating losses. Significant components of deferred tax assets and liabilities are shown below (in thousands):
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Non-current deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss
|
|
$
|
4,209
|
|
|
$
|
1,461
|
|
Allowance for bad debts
|
|
|
5
|
|
|
|
—
|
|
Accrued compensation
|
|
|
538
|
|
|
|
287
|
|
Foreign currency translation
|
|
|
554
|
|
|
|
—
|
|
Related party accruals
|
|
|
—
|
|
|
|
152
|
|
Interest expense
|
|
|
211
|
|
|
|
|
|
Intangible assets
|
|
|
2,308
|
|
|
|
584
|
|
Other accruals
|
|
|
63
|
|
|
|
21
|
|
Depreciation
|
|
|
122
|
|
|
|
—
|
|
Total
|
|
|
8,010
|
|
|
|
2,505
|
|
Valuation allowance
|
|
|
(7,929
|
)
|
|
|
(2,505
|
)
|
Net deferred tax assets
|
|
|
81
|
|
|
|
—
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Debt discount
|
|
|
(74
|
)
|
|
|
—
|
|
Capitalized costs
|
|
|
(7
|
)
|
|
|
—
|
|
Net deferred tax liabilities
|
|
|
(81
|
)
|
|
|
—
|
|
Net deferred tax accounts
|
|
$
|
—
|
|
|
$
|
—
|
|
At December 31, 2018, the Company had U.S. federal and state net operating loss carryforwards of approximately $15,538,000 and $17,927,000, respectively. The loss carryforwards begin to expire in 2027. In addition, at December 31, 2018, the Company has foreign net operating loss carryforwards of approximately $130,000, which begin to expire in 2020.
Utilization of the net operating loss carryforwards may be subject to a substantial annual limitation due to ownership change limitations that may have occurred, or that occur in the future, as required by Section 382 of the Internal Revenue Code of 1986, as amended, as well as similar state provisions. These ownership changes may limit the amount of the net operating loss carryover that can be utilized annually to offset future taxable income. In general, an “ownership change” as defined by Section 382 results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50 percentage points of the outstanding stock of a company by certain stockholders. The Company believes that ownership changes occurred in March 2018 and August 2018. As a result, the deferred tax asset associated with the Company’s federal and state net operating loss carryforward has been reduced based on the estimated amount of the Section 382 limitation. The Company estimates that approximately $18.9 million of its federal and state net operating loss carryforwards cannot be used in future years.
Following the Company’s adoption on January 1, 2007 of ASC 740-10 regarding accounting for uncertainty in income taxes, the Company made a comprehensive review of its portfolio of uncertain tax positions in accordance with the guidance. In this regard, an uncertain tax position represents the Company’s expected treatment of a tax position taken in a filed tax return, or planned to be taken in a future tax return, that has not been reflected in measuring income tax expense for financial reporting purposes. As a result of that review, the Company concluded there were no uncertain tax positions and no cumulative effect on retained earnings at the time of adoption. Subsequent to that date of adoption through December 31, 2018, the Company has continued to evaluate its tax positions and concluded that it has not had any material uncertain tax positions.
F-21
NOTE
12
—COMMITMENTS AND CONTINGENCIES
Leases
The Company leases its retail stores, distribution center and corporate and administrative office facilities under operating lease agreements which expire through June 2027. Rent expense was $2,033,000, and $1,300,000 for the years ended December 31, 2018 and 2017, respectively. The following is a schedule of aggregate future minimum payments required by the above obligations (in thousands):
|
|
|
|
|
|
Payments due by period
|
|
Contractual Obligations
|
|
Total
|
|
|
Less than
1 year
|
|
|
1-3 years
|
|
|
4-5 years
|
|
|
More than
5 years
|
|
Operating Lease Obligations
|
|
$
|
7,322
|
|
|
$
|
1,611
|
|
|
$
|
2,453
|
|
|
|
1,664
|
|
|
|
1,594
|
|
Litigation
The Company has historically and may become involved in certain legal proceedings and claims which arise in the normal course of business. As of the filing date of this report, the Company did not have any significant litigation outstanding.
Employee Agreements and Compensation
The Company provides a 401(k) retirement savings plan for certain full-time employees in the U.S. Those employees are eligible to participate after 90 days of service with the Company. The Company does not currently provide matching contributions. The Company has entered into employment agreements with its officers which could subject the Company to the payment of severance compensation in the event the employees are terminated without cause.
NOTE 13—STOCKHOLDERS’ DEFICIT
Preferred Stock
The Company has authorized the issuance of 10,000,000 shares of 0% Series A Convertible Preferred Stock. As of December 31, 2018, a total of 322,000 shares were outstanding. The preferred shares rank senior to the common stock with respect to the preferences as to dividends, distributions and payments upon the liquidation, dissolution and winding-up of the Company, and are entitled to vote on all shareholder matters. The preferred shares are essentially convertible into common stock of the Company on a one-for-one basis at the election of the holder.
On March 12, 2018, in connection with the Cooltech Merger, the Company issued 763,000 preferred shares. On June 1, 2018, in connection with a sale of stock and warrants described further below, the Company issued an additional 298,000 preferred shares. During the remainder of 2018, holders of 739,000 preferred shares elected to convert their preferred shares to common shares.
As of December 31, 2017, Cooltech had 4,408,000 Series A Convertible Preferred Stock outstanding, all of which was exchanged into shares of the Company’s stock upon the Merger.
Common Stock and Warrants
The Company has authorized the issuance of 150,000,000 shares of common stock. This represents a 110,000,000 increase from 40,000,000 shares authorized at December 31, 2017, which increase was approved by shareholders in connection with the Cooltech Merger. As of December 31, 2018, a total of 7,792,918 shares were outstanding.
On August 3, 2017, the Company entered into a stock purchase agreement for the private placement of 175,000 shares of common stock at a purchase price of $10.00 per share and warrants to purchase 175,000 shares of common stock at $12.10 per share with investors related to Cooltech. The aggregate purchase price of $1,750,000 was placed into escrow and the closing of the offering, including the issuance of the shares and warrants, was contingent upon approval of the transaction by the Company’s stockholders and the closing of the Merger.
On October 10, 2017, the Company effected a 1-for-5 reverse stock split in order to regain compliance with the minimum bid price requirement of the NASDAQ Stock Market. On October 25, 2017, after 10 consecutive days of trading, the Company received notification from NASDAQ that it had regained compliance. On March 9, 2018, the Company effected a second 1-for-5 reverse stock split in order to achieve the $4.00 minimum bid price required by NASDAQ for a new issuer listing that was triggered by the change of control that resulted from the Merger. All references to shares and per share amounts have been restated to give effect to both reverse splits.
F-22
On March 12, 2018, in connection with the closing of the Merger and as further discussed in Note
18
, the Company completed the August 3, 2017 private placement noted above, received
the escrow proceeds and issued the common shares, and issued 1,111,000 shares to Cooltech shareholders in exchange for their stock.
On June 1, 2018, the Company sold 885,346 shares of its common stock and 297,770 shares of its preferred stock in a public offering at $3.14 per unit, which price included the concurrent private placement of warrants to purchase 1,183,116 shares of common stock at an exercise price of $3.02 per share. Net proceeds from the offering after expenses amounted to $3,585,000. The warrants, which have a cashless exercise feature, have a 3-year life and may not be exercised until 6 months from the date of issuance.
On August 15, 2018, the Company entered into debt exchange agreements with twenty-one holders of certain then outstanding promissory notes in the principal amount of $11,019,000 and related accrued interest of $426,000. The aggregate amount owed of $11,445,000 was exchanged into 3,110,000 units at a price of $3.68 per unit (the “Exchange”). Each unit was comprised of one share of Company common stock and a warrant to purchase one common share at an exercise price of $3.56 per share. The warrants, which have a cashless exercise feature, are exercisable beginning February 15, 2019 and expire August 15, 2021. The Exchange was made in reliance on the exemption from the registration requirements of the Securities Act of 1933 (the “Act”), as amended, provided by Section 3(a)(9) of the Act. All of the common stock issued in the transaction were “restricted securities,” as defined in Rule 144(a)(3), promulgated under the Act. The fair value of the restricted stock on the date of issuance was estimated to be $8,280,000 using a 25% discount for trading restrictions computed using a risk-free interest rate of 2.23% for the 6-month hold period and an expected volatility of 90% based on the Company’s historical stock price fluctuation. The fair value of the warrants was estimated at $4,292,000 using the Black-Scholes pricing model and assuming, a 25% discount on the value of the underlying stock due to trading restrictions, a risk-free interest rate of 2.68% based on the U.S. Treasury rate then in effect, a 3-year life and an expected volatility of 90% based on the Company’s historical stock price fluctuations for a 3-year period. The combined value of the stock and warrants was $12,572,000, and the Company recorded a loss on early extinguishment of debt of $1,227,000.
On August 17, 2018, as discussed in Note 20, the Company exercised an option to acquire the assets of a chain of
seven retail electronics stores in the Dominican Republic referred to as the “Unitron Assets.” The Option Agreement, as amended, was issued on January 5, 2018 as part of the Company’s
Merger with Cooltech. The Option Agreement provided that upon exercise of the Option by the Company, the Cooltech shareholders at the date of the merger would receive 625,000 shares of the Company’s common stock that was originally carved out of the Merger consideration when the Unitron acquisition had to be unwound as a result of the inability to produce pre-acquisition audited financial statements.
On September 13, 2018, the Company entered into release agreements pursuant to which the Company exchanged outstanding obligations to three parties in the aggregate amount of $1,023,000 into 290,000 units at a price of $3.53 per unit (the “Exchange”). Each unit was comprised of one share of Company common stock and a warrant to purchase one common share at an exercise price of $3.41 per share. The warrants, which have a cashless exercise feature, are exercisable beginning March 13, 2019 and expire September 13, 2021. The Exchange was made in reliance on the exemption from the registration requirements of the Securities Act of 1933 (the “Act”), as amended, provided by Section 4(a)(2) of the Act. All of the common stock issued in the transaction were “restricted securities,” as defined in Rule 144(a)(3), promulgated under the Act. The fair value of the restricted stock on the date of issuance was estimated to be $739,000 using a 25% discount for lack of marketability computed using a risk-free interest rate of 2.23% for the 6-month hold period and an expected volatility of 90% based on the Company’s historical stock price fluctuation. The fair value of the warrants was estimated on the date of issuance at $384,000 using the Black-Scholes pricing model and assuming a risk-free interest rate of 2.68% based on the U.S. Treasury rate then in effect, a 3-year life and an expected volatility of 90% based on the Company’s historical stock price fluctuations for a 3-year period. The combined value of the stock and warrants was $1,123,000, and the Company recorded a loss on early extinguishment of debt of $100,000.
During the year ended December 31, 2018, holders of 233,000 warrants exercised their warrants at a weighted average price of $11.38 per share in cashless exercise transactions in which the Company issued 81,000 common shares. At December 31, 2018, warrants on a total of 5,348,601 shares were outstanding at an average exercise price of $3.73 per share, of which 156,543 shares were exercisable at an average exercise price of $11.02.
Stock Options and Stock-based Compensation
The Company has two stock-based compensation plans: the 2006 Equity Incentive Plan (“2006 Plan”) and the 2015 Equity Incentive Plan (“2015 Plan”), both of which were approved by our stockholders. As of December 31, 2018, options to purchase 2,000 shares were outstanding under each of the 2006 Plan and the 2015 Plan, respectively, and a total of 779,000 shares were available for grant under the 2015 Plan. No options or other equity awards are available for grant under the 2006 Plan.
F-23
The 2015 Plan was approved by stockholders in June 2015, with
4
8
,
23
0 shares of the Company’s common stock authorized for issuance thereunder.
In December 2018, stockholders approved an amendment to the 2015 Plan to increase the number of shares authorized for issuance thereunder by 775,000 shares.
Shares subject to o
utstanding options under the 2006 Plan that cease to be subject to such options, such as by expiration or forfeiture, also become available for issuance under the 2015 Plan, up to an aggregate maximum of
38
,
347
shares. The 2015 Plan is intended to provide incentives to key employees, officers, directors and consultants who provide significant services to the Company. The exercise price is determined by the Compensation Committee, but must be at least equal to th
e fair market value of the common stock on the date of grant of such option. The Compensation Committee also establishes the vesting schedule for each option granted and the term of each option, which cannot exceed 10 years from the date of grant. In the e
vent of termination, vested options generally must be exercised within three months. In a change of control, if outstanding awards under the 2015 Plan are assumed or substituted by a successor company, such awards do not automatically fully vest but may be
come fully vested in the event of a qualifying termination following such change of control. Outstanding options granted under the 2006 Plan provide 100% vesting upon a change of control of the Company.
The Company’s stock options vest on an annual or a monthly basis. The Company recognizes stock-based compensation expense on a straight-line basis over the requisite service period of the award, which is generally the option vesting term. Options granted generally vest over a two-year or three-year period. Income tax effects of share-based payments are recognized in the financial statements for those awards which will normally result in tax deductions under existing tax law. Under current U.S. federal tax law, we would receive a compensation expense deduction related to non-qualified stock options only when those options are exercised and vested shares are received. Accordingly, the financial statement recognition of compensation expense for non-qualified stock options creates a deductible temporary difference which results in a deferred tax asset and a corresponding deferred tax benefit in the income statement.
No stock options were granted by the Company during the years ended December 31, 2017 or 2018.
A summary of stock option activity for the year ended December 31, 2018 is as follows (shares and aggregate intrinsic value in thousands):
|
|
Shares
|
|
|
Wtd. Avg.
Exercise Price
|
|
|
Wtd. Avg.
Remaining
Contractual
Life
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at December 31, 2017
|
|
|
34
|
|
|
$
|
27.20
|
|
|
|
|
|
|
|
Granted
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
Expired
|
|
|
(30
|
)
|
|
$
|
26.52
|
|
|
|
|
|
|
|
Forfeited
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
Outstanding at December 31, 2018
|
|
|
4
|
|
|
$
|
31.89
|
|
|
1.69 years
|
|
$
|
—
|
|
Vested and expected to vest
|
|
|
4
|
|
|
$
|
31.89
|
|
|
1.69 years
|
|
$
|
—
|
|
Exercisable at December 31, 2018
|
|
|
4
|
|
|
$
|
31.89
|
|
|
1.69 years
|
|
$
|
—
|
|
There was no aggregate intrinsic value in the outstanding stock options at December 31, 2018 because the closing price of our stock at that date was $1.94 per share, which price was below the exercise price of all outstanding options. All options outstanding at December 31, 2018 and 2017 were fully vested at December 31, 2017.
During the quarter ended June 30, 2018, the Company granted a restricted stock award on 42,000 shares with 17,000 shares vesting on the date of grant and the remaining 25,000 shares vesting in four equal installments on the last day of each calendar quarter beginning June 30, 2018. The total value of the award was $200,000. During the quarter ended September 30, 2018, the Company granted a fully vested stock award of 59,000 shares of its common stock valued at $260,000. Total stock-based compensation expense recorded in the year ended December 31, 2018 amounted to $430,000. At December 31, 2018, a total of $30,000 remains in prepaid assets related to the first grant.
During the year ended December 31, 2017, prior to the Cooltech Merger, Cooltech issued common stock to the founding shareholders of Cooltech Distribution with a value of $2,938,000, which was recorded as stock-based compensation expense.
F-24
NOTE 1
4
—SEGMENTS
The tables below (in thousands) reflect the operating results of the Company’s segments for the reported periods, consistent with the management and measurement system utilized within the Company. The two segments include (1) the Company’s OneClick retail stores, and (2) its Cooltech Distribution business. Performance measurement of each segment is based on sales, gross profit and operating income (loss). The segments represent components of the Company for which separate financial information is available that is utilized on a regular basis by the Chief Operating Decision Maker (“CODM”) in determining how to allocate Company resources and evaluate performance. The CODM is a group of Company executives who comprise the management committee, consisting of the Company’s Chief Executive Officer, Chief Sales and Marketing Officer, Chief Operating Office and Chief Financial Officer.
|
OneClick
Retail Stores
|
|
|
Cooltech
Distribution
|
|
|
Total
Segments
|
|
Year ended December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
16,064
|
|
|
$
|
8,113
|
|
|
$
|
24,177
|
|
Gross profit
|
$
|
4,464
|
|
|
$
|
585
|
|
|
$
|
5,049
|
|
Operating loss
|
$
|
(13,405
|
)
|
|
$
|
(1,353
|
)
|
|
$
|
(14,758
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
2,860
|
|
|
$
|
10,755
|
|
|
$
|
13,615
|
|
Gross profit
|
$
|
769
|
|
|
$
|
611
|
|
|
$
|
1,380
|
|
Operating loss
|
$
|
(561
|
)
|
|
$
|
(1,190
|
)
|
|
$
|
(1,751
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of Operating Loss to Cool Holdings as Reported:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
Operating loss:
|
|
|
|
|
|
|
|
|
|
|
|
Total reportable segments
|
$
|
(14,758
|
)
|
|
$
|
(1,751
|
)
|
|
|
|
|
Unallocated corporate expenses
|
|
(5,289
|
)
|
|
|
(4,963
|
)
|
|
|
|
|
Total consolidated operating loss
|
$
|
(20,047
|
)
|
|
$
|
(6,714
|
)
|
|
|
|
|
Additional segment information for the years ended December 31, 2018 and 2017 is as follows (in thousands):
|
OneClick
Retail Stores
|
|
|
Cooltech
Distribution
|
|
|
Total
Segments
|
|
|
Corporate
|
|
|
Consolidated
|
|
As of and for the year ended December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
$
|
454
|
|
|
$
|
7
|
|
|
$
|
461
|
|
|
$
|
80
|
|
|
$
|
541
|
|
Goodwill and intangible impairments
|
|
10,396
|
|
|
|
—
|
|
|
|
10,396
|
|
|
|
—
|
|
|
|
10,396
|
|
Capital expenditures
|
|
620
|
|
|
|
—
|
|
|
|
620
|
|
|
|
—
|
|
|
|
620
|
|
Property and equipment, net
|
|
896
|
|
|
|
8
|
|
|
|
904
|
|
|
|
105
|
|
|
|
1,009
|
|
Total assets
|
|
7,647
|
|
|
|
3,696
|
|
|
|
11,343
|
|
|
|
2,348
|
|
|
|
13,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the year ended December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
11
|
|
|
|
6
|
|
|
$
|
17
|
|
|
|
58
|
|
|
$
|
75
|
|
Goodwill and intangible impairments
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Capital expenditures (recoveries)
|
|
(151
|
)
|
|
|
—
|
|
|
|
(151
|
)
|
|
|
—
|
|
|
|
(151
|
)
|
Property and equipment, net
|
|
252
|
|
|
|
15
|
|
|
|
267
|
|
|
|
124
|
|
|
|
391
|
|
Total assets
|
|
9,013
|
|
|
|
7,601
|
|
|
|
16,614
|
|
|
|
5,838
|
|
|
|
22,452
|
|
F-25
NOTE 1
5
—GEOGRAPHIC INFORMATION
The Company’s net sales by geographic area for the years ended December 31, 2018 and 2017 were as follows (in thousands):
|
|
2018
|
|
|
2017
|
|
Central America
|
|
$
|
784
|
|
|
$
|
828
|
|
South America
|
|
|
9,571
|
|
|
|
4,462
|
|
Caribbean
|
|
|
3,940
|
|
|
|
1,291
|
|
Mexico
|
|
|
—
|
|
|
|
17
|
|
Canada
|
|
|
—
|
|
|
|
14
|
|
United States
|
|
|
9,874
|
|
|
|
6,707
|
|
EMEA
|
|
|
8
|
|
|
|
296
|
|
Total
|
|
$
|
24,177
|
|
|
$
|
13,615
|
|
Assets held by the Company at December 31, 2018 in foreign countries consisted of $4,269,000 in Argentina and $1,734,000 in the Dominican Republic, respectively. Assets held by the Company at December 31, 2017 in foreign countries consisted solely of $2,441,000 in Argentina.
NOTE 16—ACQUISITION OF ONECLICK
Effective October 1, 2017, Cooltech acquired all of the outstanding membership interests of OneClick International, LLC and OneClick License, LLC
(collectively, “OneClick”) (the “OneClick Acquisitions”). OneClick is a consumer electronics retailer, specializing in commercializing Apple products and compatible brand accessories and providing professional technical support to Apple retail customers. Pursuant to non-exclusive authorized reseller, distributor and service provider agreements with Apple, Inc., OneClick is authorized to resell and service Apple products to/for end-users and other Apple-authorized resellers. OneClick International, LLC is authorized to purchase products directly from Apple, but may only sell such products to the Company’s international subsidiaries.
In the acquisition of OneClick International, the Company issued promissory notes in the aggregate face amount of $2,996,000 ($2,812,000 net of debt discount) and assumed liabilities of $11,963,000. The purchase price was allocated to the net assets acquired in the transaction as follows (in thousands):
Cash
|
|
$
|
1,072
|
|
Accounts receivable and due from related parties
|
|
|
6,358
|
|
Inventory
|
|
|
1,648
|
|
Fixed assets
|
|
|
321
|
|
Intangibles
|
|
|
866
|
|
Goodwill
|
|
|
4,511
|
|
Accounts payable and due to related parties
|
|
|
(6,531
|
)
|
Notes payable
|
|
|
(5,433
|
)
|
Total
|
|
$
|
2,812
|
|
F-26
In the acquisition of OneClick License, the Company issued promissory notes in the aggregate face amount
of $562,000 ($526,000 net of debt discount) and cancelled liabilities of the members to the Company in the aggregate amount of $796,000.
The purchase price was allocated to the net assets acquired in the transaction as follows
(in thousands):
Cash
|
|
$
|
45
|
|
Accounts receivable
|
|
|
277
|
|
Inventory
|
|
|
275
|
|
Fixed assets
|
|
|
44
|
|
Intangibles
|
|
|
330
|
|
Goodwill
|
|
|
1,425
|
|
Other assets
|
|
|
483
|
|
Accounts payable
|
|
|
(756
|
)
|
Notes payable
|
|
|
(798
|
)
|
Other liabilities
|
|
|
(3
|
)
|
Total
|
|
$
|
1,322
|
|
The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2017 below presents the results of the Company as if the OneClick Acquisitions occurred on January 1, 2017 (in thousands). The first column contains the historical results of the Company for 2017, which includes the results of the OneClick entities from October 1, 2017, the date of the Acquisitions, through December 31, 2017. The next three columns contain the pre-acquisition results for the OneClick entities from January 1, 2017 through September 30, 2017.
|
|
Year Ended 12/31/17
|
|
|
9 Months Ended 9/30/17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Reported
|
|
|
OneClick License
|
|
|
OneClick International
|
|
|
OneClick Argentino (B)
|
|
|
Pro Forma Adjustments
|
|
|
Notes
|
|
Pro Forma Combined
|
|
Net sales
|
|
$
|
13,615
|
|
|
$
|
6,115
|
|
|
$
|
3,394
|
|
|
$
|
3,957
|
|
|
$
|
(4,900
|
)
|
|
A
|
|
$
|
22,181
|
|
Cost of sales
|
|
|
12,235
|
|
|
|
5,265
|
|
|
|
3,259
|
|
|
|
2,591
|
|
|
|
(4,900
|
)
|
|
A
|
|
|
18,450
|
|
Gross profit
|
|
|
1,380
|
|
|
|
850
|
|
|
|
135
|
|
|
|
1,366
|
|
|
|
|
|
|
|
|
|
3,731
|
|
Operating expenses
|
|
|
8,094
|
|
|
|
1,488
|
|
|
|
326
|
|
|
|
1,697
|
|
|
|
|
|
|
|
|
|
11,605
|
|
Operating loss
|
|
|
(6,714
|
)
|
|
|
(638
|
)
|
|
|
(191
|
)
|
|
|
(331
|
)
|
|
|
|
|
|
|
|
|
(7,874
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(1,013
|
)
|
|
|
(8
|
)
|
|
|
(225
|
)
|
|
|
(50
|
)
|
|
|
|
|
|
|
|
|
(1,296
|
)
|
Other income
|
|
|
187
|
|
|
|
—
|
|
|
|
—
|
|
|
|
219
|
|
|
|
|
|
|
|
|
|
406
|
|
Loss before income taxes
|
|
|
(7,540
|
)
|
|
|
(646
|
)
|
|
|
(416
|
)
|
|
|
(162
|
)
|
|
|
|
|
|
|
|
|
(8,764
|
)
|
Provision for income taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
—
|
|
Net loss
|
|
$
|
(7,540
|
)
|
|
$
|
(646
|
)
|
|
$
|
(416
|
)
|
|
$
|
(162
|
)
|
|
|
|
|
|
|
|
$
|
(8,764
|
)
|
Note A: This adjustment represents the elimination of intercompany sales.
Note B: These numbers reflect a $904,000 reclassification out of cost of sales and into operating expenses as discussed further in Note 2 under “
Prior Period Reclassification
.”
A pro forma balance sheet is not presented because the accounts of the acquired entities are already included in the consolidated results at December 31, 2017.
F-27
NOTE 1
7
—MERGER WITH COOLTECH
On July 25, 2017, the Company entered into an Agreement and Plan of Merger (as amended “Merger Agreement”) by and among the Company, Cooltech Holding Corp., and the Company’s wholly-owned subsidiary, InfoSonics Acquisition Sub, Inc. (“Merger Sub”), pursuant to which Cooltech would merge with and into the Merger Sub, with Cooltech surviving as a wholly-owned subsidiary of the Company. After approval by the Company’s stockholders at a Special Meeting held on March 7, 2018, the Merger closed on March 12, 2018. The Merger involved a series of transactions and events as described below.
On August 2, 2017, the Company sold 100,000 shares of common stock at $10.00 per share in a public offering and the concurrent private placement of warrants to purchase 100,000 shares of common stock at $12.10 per share to investors related to Cooltech. Proceeds from these offerings were used by the Company to pay expenses of the Merger.
On August 3, 2017, the Company entered into a stock purchase agreement for the private placement of 175,000 shares of common stock at a purchase price of $10.00 per share and warrants to purchase 175,000 shares of common stock at $12.10 per share (the “Private Placement”) to investors related to Cooltech. The aggregate purchase price of $1,750,000 was placed into escrow and closing of the offering was contingent upon approval of such transaction by the Company’s stockholders.
On October 10, 2017, the Company effected a one-for-five reverse stock split of its common stock in order to regain compliance with the minimum bid price rule of Nasdaq. On October 25, 2017, Nasdaq notified the Company that it had regained compliance.
The original Merger Agreement contemplated that the Merger consideration would be 2,500,000 shares of the Company’s common stock. However, in late December 2017 it was determined that Cooltech would be unable to obtain the audited financial statements required by the SEC for an entity that it had acquired in October 2017. The entity, Unitron del Caribe S.A. (“Unitron”), is a company operating OneClick stores in the Dominican Republic. Consequently, it was determined that the acquisition would be unwound and the Merger Agreement was amended to reduce the merger consideration by 25%, or 625,000 shares, to 1,875,000 shares. On January 5, 2018, Cooltech and the seller of Unitron entered into a settlement agreement to unwind the transaction pursuant to which Cooltech agreed to return to the seller the assets of Unitron on an as-is where-is basis (the “Unitron Assets”), and the seller agreed to return an aggregate sum of $4,568,000. Concurrently, Cooltech entered into an option agreement (the “Option Agreement”) pursuant to which it was granted the sole, exclusive and irrevocable right and option to acquire the Unitron Assets (the “Option”). The Option was exercisable during the period of time beginning March 12, 2018, the effective date of the Merger, and ending on January 5, 2019 (the “Option Period”), unless sooner terminated or extended in accordance with the terms of the Agreement. Upon exercise of the Option, and in consideration for receipt of the Unitron Assets, Cooltech agreed to pay an aggregate sum of $4,568,000, subject to adjustment as set forth therein, in the form of cancellation of certain indebtedness owed to Cooltech by the grantor of the Option and assumption of certain liabilities of Unitron. Also, shareholders of Cooltech would receive an aggregate of 625,000 shares of InfoSonics common stock (including securities convertible into common stock), provided all necessary approvals as set forth in the Merger Agreement were obtained.
On January 19, 2018, the Company sold $1 million of three-year 0% convertible notes and warrants to investors related to Cooltech. The notes are convertible into an aggregate of 114,285 shares of common stock and the warrants are exercisable for 114,285 shares of common stock at an exercise price of $9.15 per share. The warrants are exercisable commencing July 19, 2018 and have a term of exercise equal to three years. Proceeds from these sales were used by the Company to pay expenses of the Merger and for general corporate purposes.
On March 9, 2018, the Company effected a second one-for-five reverse stock split of its common stock in order to achieve the $4.00 Nasdaq minimum bid price required for an initial listing necessitated by the change of control caused by the Merger.
On March 12, 2018, both the Private Placement and the Merger closed. The Company issued 175,000 common shares and warrants contemplated by the Private Placement and an aggregate of 1,875,000 shares of its common and preferred stock for all of the outstanding capital stock of Cooltech. Although InfoSonics was the legal acquiror of Cooltech in the Merger, for accounting purposes, Cooltech was considered to be acquiring InfoSonics. Cooltech was determined to be the “accounting acquirer” because after the Merger and above described related transactions: (i) stockholders related to Cooltech own 2,150,000 shares of InfoSonics common stock plus warrants on approximately 389,000 additional shares, which together gives them approximately 82% of the common shares of the Company on a fully-diluted basis, (ii) Cooltech directors now hold a majority of board seats in the combined organization and (iii) Cooltech management hold all key executive management positions in the Company. Consequently, in accordance with the provisions of Accounting Standards Codification Topic 805, “Business Combinations” (“ASC 805”), the Merger has been accounted for as a reverse acquisition using the acquisition method of accounting. Accordingly, Cooltech’s historical financial information replaces InfoSonics’ historical financial information for all periods prior to the Merger.
F-28
Because the Merger involves only the exchange of equity and Cooltech is a
private company whose value was difficult to measure, the fair value of the equity of InfoSonics immediately before the Merger is used to measure consideration transferred because it has a quoted market price. The closing market price per share of the Comp
any’s stock on March 12, 2018, the date of the Merger closing, was $8.15. Using this price, the total fair value of the Merger consideration amounts to approximately $
6.15
million. This amount is comprised of
two
elements: (1) $5.5 million representing th
e value of the 675,656 outstanding shares of InfoSonics common stock at $8.15/share
, and
(2)
$676,000 representing the value of outstanding stock warrants and options. The purchase price was allocated to the net assets acquired in the transaction as follo
ws (in thousands)
:
Cash
|
|
$
|
1,264
|
|
Accounts receivable
|
|
|
2,692
|
|
Inventory
|
|
|
3,190
|
|
Prepaid assets
|
|
|
1,454
|
|
Property and equipment
|
|
|
58
|
|
Goodwill
|
|
|
3,343
|
|
Other assets
|
|
|
28
|
|
Accounts payable
|
|
|
(2,744
|
)
|
Accrued expenses
|
|
|
(2,396
|
)
|
Long-term convertible debt
|
|
|
(735
|
)
|
Total
|
|
$
|
6,154
|
|
On an unaudited pro forma basis, had the Merger occurred on January 1, 2017, the net sales of the Company for the years ended December 31, 2018 and 2017 would have been $27,088,000 and $37,001,000, respectively, and the net loss of the Company would have been $32,064,000 and $12,210,000, respectively.
NOTE 18—ACQUISITION OF COOLTECH CORP.
On June 1, 2018,
the Company exercised an option to acquire all of the outstanding stock of a Canadian shell company called Cooltech Corp. for $1.00. At the time of the acquisition, Cooltech Corp. had $21,000 in cash and $21,000 of accounts payable, plus entitlement to a pending claim in an intellectual property lawsuit. Subsequent to the acquisition, the company recognized a $1,277,000 gain on the pending claim.
NOTE 19—ACQUISITION OF UNITRON
On August 17, 2018,
the Company exercised the option to acquire the assets of a chain of
seven retail electronics stores in the Dominican Republic referred to as the “Unitron Assets.” The Option Agreement, as amended, was issued on January 5, 2018 as part of the Company’s
Merger with Cooltech. As required in the Option Agreement, upon exercise by the Company, the Cooltech shareholders at the date of the merger received 625,000 restricted shares of the Company’s common stock, which was recorded directly to stockholders’ equity. Consideration for the Unitron acquisition was comprised of $3,700,000 of previously advanced funds and the assumption of $868,000 of debt. The purchase price was allocated to the net assets acquired in the transaction as follows (in thousands):
Cash
|
|
$
|
18
|
|
Accounts receivable
|
|
|
27
|
|
Inventory
|
|
|
1,243
|
|
Other current assets
|
|
|
601
|
|
Property and equipment
|
|
|
332
|
|
Intangibles
|
|
|
76
|
|
Goodwill
|
|
|
4,399
|
|
Other assets
|
|
|
41
|
|
Accounts payable
|
|
|
(2,169
|
)
|
Notes payable
|
|
|
(868
|
)
|
Total
|
|
$
|
3,700
|
|
For the period from August 17, 2018, the date of acquisition, through December 31, 2018, net sales and operating loss from the Dominican Republic entity included in the Company’s consolidated statement of operations amount to $1,607,000 and $204,000, respectively. On an unaudited pro forma basis, if the acquisition had occurred on January 1, 2018, the Company’s combined net sales and net loss from continuing operations for the year ended December 31, 2018 would have been $26,503,000 and $22,383,000, respectively.
F-29
NOTE 20—RELATED PARTY TRANSACTIONS
During the years ended December 31, 2018 and 2017, the Company was engaged in non-arm’s length transactions, which were in the normal course of business and were measured at the exchange amount. Transactions included sales of products, purchases of inventory as well as general expenses, reimbursements and sales commissions incurred from related parties. The related parties involved in these transactions included the following:
Nirvana Corp
. - This entity is controlled by a family member of the CEO of the Company and conducts business as a reseller of consumer electronic products.
Smash Technologies, LLC
– This entity is controlled by a family member of the CEO of the Company and conducts business as a reseller of accessories.
Stamax Corp.
– This entity is a predecessor entity of OneClick License and prior to October 1, 2017 was controlled by certain members of management.
OneClick License
– Prior to October 1, 2017, this entity was controlled by certain members of management. It is now a wholly-owned subsidiary of the Company.
OneClick International LLC
– Prior to October 1, 2017, this entity was controlled by certain members of management. It is now a wholly-owned subsidiary of the Company.
There are no long-term arrangements with any of the related parties. Pricing and other material payment terms are determined on a case by case basis. At December 31, 2018, there were no amounts outstanding to or from the above listed related parties.
Products and services sold by the Company to related parties for the years ended December 31, 2018 and 2017 were as follows (in thousands):
|
|
2018
|
|
|
2017
|
|
Nirvana Corp.
|
|
$
|
—
|
|
|
$
|
738
|
|
Smash Technologies LLC
|
|
|
1
|
|
|
|
37
|
|
Stamax Corp.
|
|
|
—
|
|
|
|
9
|
|
OneClick International LLC
|
|
|
—
|
|
|
|
160
|
|
OneClick License LLC
|
|
|
—
|
|
|
|
1,533
|
|
Total
|
|
$
|
1
|
|
|
$
|
2,477
|
|
Purchases from, or operating expenses paid to, related parties by the Company for the years ended December 31, 2018 and 2017 were as follows (in thousands):
|
|
2018
|
|
|
2017
|
|
Stamax Corp.
|
|
$
|
—
|
|
|
$
|
9
|
|
Nirvana Corp.
|
|
|
—
|
|
|
|
6
|
|
Smash Technologies LLC
|
|
|
459
|
|
|
|
149
|
|
OneClick International LLC
|
|
|
—
|
|
|
|
—
|
|
OneClick License LLC
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
459
|
|
|
$
|
164
|
|
NOTE 21—SUBSEQUENT EVENTS
On January 9, 2019, the Company entered into a fee settlement agreement with a vendor to whom it owed $164,000. In the agreement, the parties agreed to satisfy this obligation by the Company issuing to the vendor 93,448 restricted common shares and warrants to purchase 93,448 common shares at $1.64 per share.
During March 2019, holders of warrants on 382,165 shares of the Company’s common stock exercised the warrants at the strike price of $3.02 per share, which resulted in aggregate proceeds to the Company of $1,154,000.
F-30
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