UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report: August 17, 2007
INCENTRA SOLUTIONS, INC.
(Exact Name of Registrant as Specified in Its Charter)
NEVADA | 7371 | 86-0793960 |
(State or Other Jurisdiction of Incorporation | (Primary Standard Industrial Classification Code Number) | (I.R.S.Employer Identification No.) |
1140 PEARL STREET
BOULDER, COLORADO 80302
(303) 440-7930
(Address of Principal Executive Offices)
(303) 440-7930
(Registrant's telephone number, including area code)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Incentra Solutions, Inc. filed a Current Report on Form 8-K, dated August 17, 2007, as filed on August 23, 2007 announcing that it had completed its acquisition of Helio Solutions, Inc., a California corporation, ("Helio") on August 17, 2007. The purpose of this amendment is to file various financial statements relating to the business of the acquired company.
SECTION 9 - FINANCIAL STATEMENTS AND EXHIBITS
ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS.
Paragraphs (a) and (b) of Item 9, "Financial Statements and Exhibits" are hereby amended to include the following:
(a) Financial Statements of Business Acquired (Helio Solutions, Inc.):
(1) Audited Consolidated Financial Statements | ||||
Report of Independent Registered Public Accounting Firm | F-1 | |||
Balance Sheets as of December 31, 2006 and 2005 | F-2 | |||
Statements of Operations for the years ended December 31, 2006 and 2005 | F-3 | |||
Statements of Changes in Shareholders' Equity for the years ended December 31, 2006 and 2005 | F-4 | |||
Statements of Cash Flows for the years ended December 31, 2006 and 2005 | F-5 | |||
Notes to Financial Statements | F-6 | |||
(2) Unaudited Interim Condensed Consolidated Financial Statements | ||||
Balance Sheets as of June 30, 2007 and 2006 | F-11 | |||
Statements of Operations for the six month periods ended June 30, 2007 and 2006 | F-12 | |||
Statements of Cash Flows for the six month periods ended June 30, 2007 and 2006 | F-13 | |||
Notes to Financial Statements | F-14 |
(b) Pro Forma Condensed Consolidated Financial Information (Unaudited):
Headnote to Pro Forma Financial Information | F-16 | |||
Pro Forma Balance Sheet as of June 30, 2007 | F-17 | |||
Pro Forma Statement of Operations for the year ended December 31, 2006 | F-18 | |||
Pro Forma Statement of Operations for the six months ended June 30, 2007 | F-19 | |||
Notes to Pro Forma Condensed Financial Information | F-20 |
(c) Exhibits. The exhibits required by this item are listed on the Exhibit Index hereto.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
Incentra Solutions, Inc.
We have audited the accompanying consolidated balance sheets of Helio Solutions, Inc. and subsidiary (the "Company") as of December 31, 2006 and 2005, and the related consolidated statements of operations, changes in shareholders' equity, and cash flows for each of the years in the two-year period ended December 31, 2006. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Helio Solutions, Inc. and subsidiary as of December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 8 to the consolidated financial statements, on August 17, 2007, the Company was acquired by an unrelated entity.
As discussed in Note 9 to the consolidated financial statements, the Company restated its consolidated financial statements as of December 31, 2006 and 2005, and for each of the years in the two-year period ended December 31, 2006, to reflect the correction of certain errors in previously issued financial statements.
/s/ GHP Horwath, P.C.
Denver, Colorado
November 8, 2007
F-1
Helio Solutions, Inc. and Subsidiary
Consolidated Balance Sheets
(As Restated, Note 9)
December 31, | |||||||
2006 | 2005 | ||||||
ASSETS | |||||||
Current Assets | |||||||
Cash and cash equivalents | $ | 1,056,485 | $ | 1,995,396 | |||
Accounts receivable, net of allowance for doubtful accounts of $144,131 (2006) and $110,562 (2005) (including related parties of $273,142 (2006) and 0 (2005)) (Note 6) | 14,350,991 | 14,650,024 | |||||
Inventory | 818,974 | 874,105 | |||||
Prepaid expenses and other current assets | 1,709,304 | 2,514,702 | |||||
Total current assets | 17,935,754 | 20,034,227 | |||||
Property and Equipment, net (Note 2) | 2,979,688 | 3,109,413 | |||||
Other Assets | |||||||
Cash surrender value of life insurance contracts | 709,954 | 573,112 | |||||
Deposits and other | 92,540 | 93,699 | |||||
Total other assets | 802,494 | 666,811 | |||||
$ | 21,717,936 | $ | 23,810,451 | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||
Current Liabilities | |||||||
Accounts payable (including related parties of $1,431,000 (2006) and $139,768 (2005)) (Note 6) | $ | 14,175,741 | $ | 14,036,752 | |||
Accrued expenses (Note 3) | 1,793,369 | 2,688,697 | |||||
Current portion of notes payable and other obligations (Note 4) | 67,407 | 306,636 | |||||
Deferred revenue and other | 141,990 | 638,486 | |||||
Deferred income taxes (Note 5) | 238,187 | 533,610 | |||||
Total current liabilities | 16,416,694 | 18,204,181 | |||||
Long-term Liabilities | |||||||
Deferred income taxes (Note 5) | 110,000 | 119,000 | |||||
Deposits | 27,846 | ||||||
Notes payable and other obligations, less current portion (Note 4) | 2,146,502 | 2,163,823 | |||||
Total long-term liabilities | 2,256,502 | 2,310,669 | |||||
Total liabilities | 18,673,196 | 20,514,850 | |||||
Commitments and contingencies (Notes 3, 4 and 7) | |||||||
Non-Controlling Interest (Note 1) | 676,630 | 564,253 | |||||
Shareholders' Equity: | |||||||
Common stock, $0.15 par value; 8,000,000 shares authorized; 3,860,020 shares issued and outstanding at December 31, 2006 and 2005 | 568,628 | 568,628 | |||||
Retained earnings | 1,799,482 | 2,162,720 | |||||
Total shareholders' equity | 2,368,110 | 2,731,348 | |||||
$ | 21,717,936 | $ | 23,810,451 |
See notes to consolidated financial statements.
F-2
Helio Solutions, Inc. and Subsidiary
Consolidated Statements of Operations
(As Restated, Note 9)
Years Ended December 31, | |||||||
2006 | 2005 | ||||||
Revenue | $ | 87,293,579 | $ | 100,283,398 | |||
Cost of revenue | 72,948,966 | 83,013,713 | |||||
Gross margin | 14,344,613 | 17,269,685 | |||||
Expenses: | |||||||
Selling, general and administrative | 14,348,293 | 14,863,097 | |||||
Depreciation and amortization | 176,880 | 182,261 | |||||
14,525,173 | 15,045,358 | ||||||
(Loss) income from operations | (180,560 | ) | 2,224,327 | ||||
Other income (expense): | |||||||
Interest expense, net | (134,787 | ) | (117,477 | ) | |||
Loss on disposal of equipment | (8,450 | ) | (102,227 | ) | |||
Other income | 72,704 | 27,665 | |||||
Total other expense | (70,533 | ) | (192,039 | ) | |||
(Loss) income before non-controlling interest and income taxes | (251,093 | ) | 2,032,288 | ||||
Non-controlling interest (Note 1) | 309,175 | 344,575 | |||||
(Loss) income before income taxes | (560,268 | ) | 1,687,713 | ||||
Income tax (benefit) expense (Note 5) | (197,030 | ) | 757,192 | ||||
Net (loss) income | $ | (363,238 | ) | $ | 930,521 | ||
See notes to consolidated financial statements.
F-3
Helio Solutions, Inc. and Subsidiary
Consolidated Statements of Changes in Shareholders' Equity
Years Ended December 31, 2006 and 2005
Common Stock | |||||||||||||
Shares | Amount | Retained earnings | Total | ||||||||||
Balance, December 31, 2004, as previously stated | 3,860,020 | $ | 568,628 | $ | 597,193 | $ | 1,165,821 | ||||||
Restatement for the correction of errors (Note 9) | 656,237 | 656,237 | |||||||||||
Balance, December 31, 2004, as restated | 3,860,020 | 568,628 | 1,253,430 | 1,822,058 | |||||||||
Dividends declared | (21,231 | ) | (21,231 | ) | |||||||||
Net income | 930,521 | 930,521 | |||||||||||
Balance, December 31, 2005, as restated | 3,860,020 | 568,628 | 2,162,720 | 2,731,348 | |||||||||
Net loss | (363,238 | ) | (363,238 | ) | |||||||||
Balance, December 31, 2006, as restated | 3,860,020 | $ | 568,628 | $ | 1,799,482 | $ | 2,368,110 |
See notes to consolidated financial statements.
F-4
Helio Solutions, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(As Restated, Note 9)
Years Ended December 31, | |||||||
2006 | 2005 | ||||||
Cash Flows from operating activities | |||||||
Net (loss) income | $ | (363,238 | ) | $ | 930,521 | ||
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities | |||||||
Bad debt expense | 142,554 | 41,966 | |||||
Depreciation and amortization | 176,880 | 182,261 | |||||
Change in non-controlling interest | 112,377 | 236,419 | |||||
Loss on disposal of equipment | 8,450 | 102,227 | |||||
Deferred income taxes | (304,423 | ) | 232,619 | ||||
Changes in operating assets and liabilities | |||||||
Accounts receivable | 156,479 | 2,373,959 | |||||
Inventory | 55,131 | 179,127 | |||||
Prepaid expenses and other | 756,294 | (1,588,323 | ) | ||||
Accounts payable | 138,989 | (2,250,349 | ) | ||||
Accrued expenses | (895,329 | ) | 264,371 | ||||
Deferred revenue and other | (503,111 | ) | 617,256 | ||||
Net cash (used in) provided by operating activities | (518,947 | ) | 1,322,054 | ||||
Cash flows from investing activities | |||||||
Capital expenditures | (5,342 | ) | (171,185 | ) | |||
Proceeds from sale of equipment | 41,361 | ||||||
Deposits | 51,664 | ||||||
Increase in cash surrender value of life insurance contracts | (136,842 | ) | (196,672 | ) | |||
Net cash used in investing activities | (142,184 | ) | (274,832 | ) | |||
Cash flows from financing activities | |||||||
Payments on notes payable and other obligations | (256,549 | ) | (260,540 | ) | |||
Dividends paid | (21,231 | ) | |||||
Net cash used in financing activities | (277,780 | ) | (260,540 | ) | |||
(Decrease) increase in cash and cash equivalents | (938,911 | ) | 786,682 | ||||
Cash and cash equivalents at beginning of year | 1,995,396 | 1,208,714 | |||||
Cash and cash equivalents at end of year | $ | 1,056,485 | $ | 1,995,396 | |||
Supplemental disclosures of cash flow information | |||||||
Cash paid during the year for: | |||||||
Interest | $ | 145,098 | $ | 129,601 | |||
Income taxes | $ | 417,156 | $ | 1,010,000 | |||
Non-cash investing and financing activities: | |||||||
Dividend declared and recorded as a liability | $ | 21,231 | |||||
Vehicle acquired under lease obligation | $ | 50,087 | |||||
See notes to consolidated financial statements.
F-5
Helio Solutions, Inc. and Subsidiary
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2006 and 2005
Note 1. Business and Summary of Significant Accounting Policies
Company: Helio Solutions, Inc. (Helio) was incorporated on April 19, 2001 in the state of California. Helio is a San Jose, California based reseller of computer hardware, software and services. Helio also has a sales office in Scottsdale, Arizona. In August 2007, all of Helio’s outstanding stock was acquired by a publicly-traded company (Note 8).
Use of estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Principles of Consolidation: The consolidated financial statements of Helio include the accounts of 3000 Lakeside LLC (“Lakeside”), a variable interest entity formed in 2004, for which Helio is the primary beneficiary. These consolidated entities are collectively referred to as the “Company”. All intercompany balances and transactions have been eliminated in consolidation.
The Company consolidates Lakeside in accordance with Financial Accounting Standards Board (“FASB”) Interpretation No. 46(R) (“FIN 46R”), Consolidation of Variable Interest Entities (“VIEs”), which addresses consolidation by a business enterprise of VIEs that either: (1) do not have sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support, or (2) will hold a significant variable interest in, or have significant involvement with, an existing VIE.
Lakeside owns land and a building which it leases to Helio for approximately $22,600 per month under an 11-year lease agreement expiring in 2017 (Note 2). The land and building are collateralized by mortgage notes which have been guaranteed by Helio (Note 4). All intercompany rental income and expense is eliminated upon consolidation.
Reflected in the December 31, 2006 and 2005, consolidated balance sheets are Lakeside assets of approximately $2.8 million, which primarily represent land and building. Lakeside liabilities consist of mortgage notes on that property which total approximately $2.1 million and $2.2 million at December 31, 2006 and 2005, respectively. Non-controlling interest as of and for the periods ended December 31, 2006 and 2005, represents other investors’ 100% claim to Lakeside’s net assets and net income.
Cash and cash equivalents: For purposes of the balance sheets and the statements of cash flows, the Company considers all highly liquid debt instruments with an original maturity of three months or less to be cash equivalents.
Inventory: Inventory is stated at the lower of cost or market basis, by the first-in, first-out method. Obsolete inventory is either written off or reduced to estimated net realizable values.
Impairment of long-lived assets: Management reviews the carrying value of property and equipment and other long-lived assets to determine whether there are any indications of impairment. Impairment of long-lived assets is assessed by a comparison of the carrying amount of an asset to expected future cash flows to be generated by the asset. If the assets are considered to be impaired, the impairment recognized is measured by the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets. Management has determined that no impairment of long-lived assets exists at December 31, 2006 and 2005.
Property and equipment: Property and equipment is recorded at cost. Costs of maintenance and repairs which do not improve or extend the lives of respective assets are expensed currently. Depreciation for financial reporting purposes is computed on the straight-line method over the estimated useful lives of the assets which range from 3 to 7 years.
Concentration of credit risk: The Company performs continuing credit evaluations of its customers and historically the Company has not experienced significant losses related to receivables from individual customers in any particular geographic area or industry. At December 31, 2006 and 2005, three customers accounted for approximately 42% and 48%, respectively, of accounts receivable. Each accounted for 10% or more of total accounts receivable. The inability to collect amounts due from any of these customers could have an adverse effect on the Company’s operations.
For the year ended December 31, 2006, three customers accounted for 50% of revenue, and each accounted for more than 10% of revenue. For the year ended December 31, 2005, two customers accounted for 34% of revenue and each accounted for more than 10% of revenue. The loss of any one or a group of these customers could have a material adverse effect on the Company’s statement of financial position, results of operations or cash flows.
The Company primarily sells products acquired from one distributor. Purchases from this distributor were in excess of 90% of cost of revenues for 2006 and 2005. This vendor accounted for approximately 81% and 92% of accounts payable at December 31, 2006 and 2005, respectively. The loss of this distributor could have an adverse effect on the Company’s operations.
Revenue recognition: The Company applies the provisions of Emerging Issues Task Force (“EITF) Issue No. 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent.” The Company’s application of EITF 99-19 includes evaluation of the terms of customer contracts relative to a number criteria that management considers in making its determination with respect to gross versus net reporting of revenue for transactions with customers. Management’s criteria for making these judgments place particular emphasis on determining the primary obligor in a transaction and which party bears general inventory risk. The Company purchases and resells hardware, software and third-party maintenance contracts. In these transactions, the Company (i) acts as principal; (ii) take title to the products; and (iii) has the risks and rewards of ownership, including the risk of loss for collection, delivery or returns (which have not been significant). For these transactions, the Company recognizes revenues based on the gross amounts due from customers.
Revenue is recognized when all of the following criteria are met: persuasive evidence of an agreement exists, delivery has occurred or services have been rendered, the sales price is fixed or determinable, and collectibility is reasonably assured.
Financial instruments: The carrying amounts of financial instruments held by us, which include cash and cash equivalents, accounts receivable, and accounts payable approximate fair value due to their short duration. The carrying values of notes payable and other obligations approximate fair values based upon market rates currently available to the Company. The fair values of accounts receivable from related parties and accounts payable to related parties are not practicable to estimate, due to the related party nature of the underlying transactions.
Recently issued accounting pronouncements: In February 2007, FASB issued Statement of Financial Accounting Standard (SFAS) No. 159, The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment to FASB Statement No. 115. This statement permits companies to choose to measure many financial instruments and other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This statement is expected to expand the use of fair value measurement of accounting for financial instruments. This statement applies to all entities, including not for profit. The fair value option established by this statement permits all entities to measure eligible items at fair value at specified election dates. This statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Management does not expect that the adoption of this statement will have a significant immediate impact on the Company’s consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurement. This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This statement applies under other accounting pronouncements that require or permit fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. Management does not expect that the adoption of this statement will have a significant immediate impact on the Company’s consolidated financial statements.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, which changes the requirements for the accounting and reporting of a change in accounting principle and applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions, those provisions should be followed. Accounting Principles Board Opinion No. 20, Accounting Changes previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. SFAS 154 requires retrospective application to prior period financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. The provisions of SFAS 154 were effective for fiscal years beginning after December 15, 2005. The adoption of this statement did not have an impact on the Company’s consolidated financial statements.
F-6
Helio Solutions, Inc. and Subsidiary
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2006 and 2005
Note 2. Property and equipment
Property and equipment consists of the following:
December 31, | |||||||
2006 | 2005 | ||||||
Land (owned by Lakeside) | $ | 1,100,000 | $ | 1,100,000 | |||
Building (owned by Lakeside) | 1,340,755 | 1,340,755 | |||||
Leasehold improvements | 280,844 | 280,844 | |||||
Automobiles | 178,220 | 128,134 | |||||
Furniture and fixtures | 80,561 | 80,561 | |||||
Equipment | 333,511 | 357,913 | |||||
Computer software | 94,689 | 94,689 | |||||
3,408,580 | 3,382,896 | ||||||
Less accumulated depreciation | (428,892 | ) | (273,483 | ) | |||
$ | 2,979,688 | $ | 3,109,413 |
The amounts above include assets under capital leases with a gross carrying value of $155,475 and $105,389 at December 31, 2006 and 2005, and accumulated depreciation of $53,620 and $31,707 at December 31, 2006 and 2005, respectively.
Note 3. Accrued expenses
Accrued expenses consist of the following:
December 31, | |||||||
2006 | 2005 | ||||||
Commissions | $ | 647,356 | $ | 1,037,910 | |||
Payroll taxes | 50,808 | 55,230 | |||||
Salaries and wages | 293,230 | 650,136 | |||||
Sales taxes and other | 632,242 | 700,234 | |||||
Vacation | 169,733 | 245,187 | |||||
$ | 1,793,369 | $ | 2,688,697 |
Note 4. Notes payable and other obligations
Notes payable and other obligations are as follows:
December 31, | |||||||
2006 | 2005 | ||||||
Note payable by Lakeside to a finance company; interest at prime rate less .125% (8.375% and 7.375% at December 31, 2006 and 2005, respectively); due in monthly payments of principal and interest of approximately $10,000; matures in 2019; collateralized by Landmark land and building | $ | 1,527,893 | $ | 1,544,026 | |||
Note payable by Lakeside to a finance company; interest at 5.25%; due in monthly payments of principal and interest of approximately $4,800; matures in 2024; collateralized by Landmark land and building | 580,693 | 600,572 | |||||
Borrowing under $1 million line of credit; variable interest rate (10.5% and 9.5% at December 31, 2006 and 2005 respectively); expired September, 2007 | 250,000 | ||||||
Obligations under capital leases; implicit interest rates ranging from 4.95% to 5.9%; leases maturing through December 2011; collateralized by vehicles | 105,323 | 75,861 | |||||
2,213,909 | 2,470,459 | ||||||
Less current portion | 67,407 | 306,636 | |||||
Non-current | $ | 2,146,502 | $ | 2,163,823 |
Notes payable and other obligations mature over the next five years and thereafter as follows:
2007 | $ | 67,407 | ||
2008 | 71,606 | |||
2009 | 62,348 | |||
2010 | 55,271 | |||
2011 | 78,930 | |||
Thereafter | 1,878,347 | |||
$ | 2,213,909 |
F-7
Helio Solutions, Inc. and Subsidiary
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2006 and 2005
Note 5. Income taxes
The provision for income tax (benefit) expense consists of the following:
2006 | 2005 | ||||||
Current | $ | 107,393 | $ | 524,573 | |||
Deferred | (304,423 | ) | 232,619 | ||||
$ | (197,030 | ) | $ | 757,192 |
The provision for income taxes differs from the amount of income tax determined by applying the applicable US Federal income tax rate to pre-tax income. The differences are primarily due to certain nondeductible expenses including meals and entertainment and officers' life insurance expenses and state taxes.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities are presented below.:
December 31, | |||||||
2006 | 2005 | ||||||
Deferred tax assets, current | |||||||
Accrued liabilities | $ | 124,000 | $ | 315,000 | |||
Inventory | 15,000 | 14,000 | |||||
139,000 | 329,000 | ||||||
Deferred tax liabilities, current | |||||||
Deferred revenue | (377,187 | ) | (862,610 | ) | |||
Net deferred tax liabilities, current | $ | (238,187 | ) | $ | (533,610 | ) | |
Deferred tax liabilities, long term | |||||||
Property and Equipment, principally | |||||||
due to differences in depreciation | $ | (110,000 | ) | $ | (119,000 | ) | |
Total deferred tax liabilities | $ | (348,187 | ) | $ | (652,610 | ) |
F-8
Helio Solutions, Inc. and Subsidiary
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2006 and 2005
Note 6. Related party transactions
A shareholder of the Company holds a substantial owneership interest in an entity that leases vehicles to the Company under operating leases expiring through July 2008. Future annual lease payments for 2007 and 2008 are $70,290 and $10,200, respectively. During the years ended December 31, 2006 and 2005, vehicle lease expense was $154,130 and $133,315, respectively.
The Company also purchases inventory from two other companies in which certain shareholders hold substantial ownership interests. During the years ended December 31, 2006 and December 31, 2005, purchases from these companies totaled $154,046 and $543,530, respectively. At December 31, 2006, the Company had accounts payable to these two companies totaling $1,431,000. At December 31, 2005, the Company had accounts payable to one of these companies totaling $139,768.
During the years ended December 31, 2006 and 2005, the Company had equipment sales of $273,142 and $200,000 respectively to a company in which a shareholder held substantial ownership interests. Accounts receivable from this company was $273,142 at December 31, 2006. At December 31, 2005, the Company had no receivables from this company.
Note 7. Commitments
Leases
The Company leases its San Jose and Scottsdale facilities under non-cancellable operating lease agreements that have more than one year remaining. Certain leases contain options to renew. In addition, the Company is required to pay utilities, insurance, property taxes, and common area maintenance costs. Annual lease payments are as follows as of December 31, 2006:
San Jose | Scottsdale | Total | |||||||||||
2007 | $ | 181,975 | $ | 21,840 | $ | 203,815 | |||||||
2008 | 186,732 | - | 186,732 | ||||||||||
2009 | 192,150 | - | 192,150 | ||||||||||
$ | 560,857 | $ | 21,840 | $ | 582,697 |
Facility rent expense was $178,850 and $200,638 for the years ended December 31, 2006 and 2005, respectively.
401(k) Plan
The Company sponsors a 401(k) Savings Plan (the “Plan”). The Plan is a defined contribution plan for all regular employees. Participants may elect to make contributions ranging from 1% to 100% of their eligible compensation, subject to limitations based on the tax law. The Company matches employee contributions up to the first 4% contributed, and employee contributions are 100% vested when made. Contributions made by the Company vest ratably over two years. The Company’s total contribution expense for the years ended December 31, 2006 and 2005 was approximately $8,800 and $8,400, respectively.
F-9
Helio Solutions, Inc. and Subsidiary
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2006 and 2005
Note 8. Subsequent event
On August 17, 2007, the Company was acquired by Incentra Solutions, Inc., a publicly-traded company. The purchase price was approximately $10.3 million and was paid in cash ($5,000,000), shares of Incentra Solutions, Inc. common stock (6,000,000 shares) and a three-year term note ($770,000). Additionally, the purchase agreement includes an earn-out provision whereby the Company shareholders can earn up to an additional $15 million based on achieving certain levels of operating performance over the next three years.
Note 9. Restatements
The accompanying consolidated financial statements as of December 31, 2006 and 2005 and for the two years ended December 31, 2006 have been restated to reflect adjustments made to the Company’s previously issued 2006 and 2005 financial statements.The following table summarizes the impact of the restatements on balances previously reported:
As of and for the year ended December 31, 2006: |
As reported | Adjustments | As restated | ||||||||
Current assets | $ | 16,988,311 | $ | 947,443 | (a) | $ | 17,935,754 | |||
Property and equipment, net | 370,607 | 2,609,081 | (b) | 2,979,688 | ||||||
Other assets | 1,076,049 | (273,555) | (c) | 802,494 | ||||||
Total assets | $ | 18,434,967 | $ | 3,282,969 | $ | 21,717,936 | ||||
Current liabilities | $ | 15,985,082 | $ | 431,612 | (d) | $ | 16,416,694 | |||
Long-term liabilities | 375,673 | 1,880,829 | (b) | 2,256,502 | ||||||
Non-controlling interest | 676,630 | (b) | 676,630 | |||||||
Shareholders' equity | 2,074,212 | 293,898 | 2,368,110 | |||||||
Total liabilities and shareholders' equity | $ | 18,434,967 | $ | 3,282,969 | $ | 21,717,936 | ||||
Revenue | $ | 90,079,102 | $ | (2,785,523) | (a) | $ | 87,293,579 | |||
Cost of revenue | 74,489,531 | (1,540,565) | (a) | 72,948,966 | ||||||
Gross margin | 15,589,571 | (1,244,958 | ) | 14,344,613 | ||||||
Expenses | 15,033,907 | (508,734 | ) (e) | 14,525,173 | ||||||
Income (loss) from operations | 555,664 | (736,224 | ) | (180,560 | ) | |||||
Other income (expense) | 80,036 | (150,569 | ) (b) | (70,533 | ) | |||||
Income (loss) before non-controlling interest | 635,700 | (886,793 | ) | (251,093 | ) | |||||
Non-controlling interest | 309,175 | (b) | 309,175 | |||||||
Income (loss) before income taxes | 635,700 | (1,195,968 | ) | (560,268 | ) | |||||
Income tax expense (benefit) | 337,393 | (534,423 | ) (d) | (197,030 | ) | |||||
Net income (loss) | $ | 298,307 | $ | (661,545 | ) | $ | (363,238 | ) |
As of and for the year ended December 31, 2005: |
As reported | Adjustments | As restated | |||||||||||
Current assets | $ | 18,153,103 | $ | 1,881,124 | (a | ) | $ | 20,034,227 | |||||
Property and equipment, net | 458,754 | 2,650,659 | (b | ) | 3,109,413 | ||||||||
Other assets | 964,349 | (297,538 | ) | (c | ) | 666,811 | |||||||
Total assets | $ | 19,576,206 | $ | 4,234,245 | $ | 23,810,451 | |||||||
Current liabilities | $ | 17,003,578 | $ | 1,200,603 | (d | ) | $ | 18,204,181 | |||||
Long-term liabilities | 796,723 | 1,513,946 | (b | ) | 2,310,669 | ||||||||
Non-controlling interest | 564,253 | (b | ) | 564,253 | |||||||||
Shareholders' equity | 1,775,905 | 955,443 | 2,731,348 | ||||||||||
Total liabilities and shareholders' equity | $ | 19,576,206 | $ | 4,234,245 | $ | 23,810,451 | |||||||
Revenue | $ | 104,059,298 | $ | (3,775,900 | ) | (a | ) | $ | 100,283,398 | ||||
Cost of revenue | 86,504,294 | (3,490,581 | ) | (a | ) | 83,013,713 | |||||||
Gross margin | 17,555,004 | (285,319 | ) | 17,269,685 | |||||||||
Expenses | 16,508,469 | (1,463,111 | ) | (e | ) | 15,045,358 | |||||||
Income from operations | 1,046,535 | 1,177,792 | 2,224,327 | ||||||||||
Other income (expense) | 41,353 | (233,392 | ) | (b | ) | (192,039 | ) | ||||||
Income before non-controlling interest | 1,087,888 | 944,400 | 2,032,288 | ||||||||||
Non-controlling interest | 344,575 | (b | ) | 344,575 | |||||||||
Income before income taxes | 1,087,888 | 599,825 | 1,687,713 | ||||||||||
Income tax expense | 456,573 | 300,619 | (d | ) | 757,192 | ||||||||
Net income | $ | 631,315 | $ | 299,206 | $ | 930,521 |
(a) | Adjustments primarily resulting from recording rebates received on the accrual basis and reclassifying rebates received from revenue to a reduction of cost of revenue. | ||
(b) | Adjustments primarily resulting from the consolidation of Lakeside in accordance with FIN 46R. | ||
(c) | Adjustments primarily resulting from the write off of intangible assets. | ||
(d) | Adjustments primarily resulting from changes in deferred taxes due to the adjustments recorded. | ||
(e) | Adjustments primarily resulting from reclassifying certain rebates received from a reduction in advertising expense to a reduction of cost of revenue. |
F-10
Helio Solutions, Inc. and Subsidiary
Condensed Consolidated Balance Sheets
(Unaudited)
June 30, | |||||||
2007 | 2006 | ||||||
ASSETS | |||||||
Current Assets | |||||||
Cash and cash equivalents | $ | 537,250 | $ | 1,776,454 | |||
Accounts receivable net of allowance for doubtful accounts of $40,000 (2007) and $108,913 (2006) | 10,448,570 | 14,452,163 | |||||
Inventory | 1,114,986 | 1,442,029 | |||||
Prepaid expenses and other current assets | 1,229,074 | 1,807,032 | |||||
Total current assets | 13,329,880 | 19,477,678 | |||||
Property and Equipment, net (Note 2) | 2,878,356 | 3,020,842 | |||||
Other Assets | |||||||
Cash surrender value of life insurance contracts | 826,731 | 676,694 | |||||
Deposits and other | 74,887 | 93,120 | |||||
Total other assets | 901,618 | 769,814 | |||||
$ | 17,109,854 | $ | 23,268,334 | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||
Current Liabilities | |||||||
Accounts payable (including related parties of $450,000 (2007) and 0 (2006)) | $ | 9,797,252 | $ | 13,268,103 | |||
Accrued expenses (Note 3) | 1,091,666 | 1,932,303 | |||||
Current portion of notes payable and other obligations | 47,117 | 100,317 | |||||
Deferred income taxes | 238,187 | 533,610 | |||||
Deferred revenue and other | 490,798 | 837,429 | |||||
Total current liabilities | 11,665,020 | 16,671,762 | |||||
Long-term Liabilities | |||||||
Deferred income taxes | 110,000 | 119,000 | |||||
Notes payable and other obligations, less current portion | 2,088,820 | 2,090,223 | |||||
Total long-term liabilities | 2,198,820 | 2,209,223 | |||||
Total liabilities | 13,863,840 | 18,880,985 | |||||
Non-Controlling Interest (Note 1) | 725,635 | 686,850 | |||||
Shareholders’ Equity: | |||||||
Common Stock, $0.15 par value; 8,000,000 shares authorized; 3,860,020 shares issued and outstanding at June 30, 2007 and 2006 | 568,628 | 568,628 | |||||
Retained earnings | 1,951,751 | 3,131,871 | |||||
Total shareholders’ equity | 2,520,379 | 3,700,499 | |||||
$ | 17,109,854 | $ | 23,268,334 | ||||
See notes to condensed consolidated financial statements.
F-11
Helio Solutions, Inc. and Subsidiary
Condensed Consolidated Statements of Operations
(Unaudited)
Six Months Ended June 30, | |||||||
2007 | 2006 | ||||||
Revenues | $ | 32,840,300 | $ | 45,888,539 | |||
Cost of revenue | 27,295,097 | 38,708,694 | |||||
Gross margin | 5,545,203 | 7,179,845 | |||||
Expenses: | |||||||
Selling , general and administrative | 5,026,355 | 5,108,672 | |||||
Depreciation and amortization | 88,020 | 89,152 | |||||
5,114,375 | 5,197,824 | ||||||
Income from operations | 430,828 | 1,982,021 | |||||
Other income (expense) | |||||||
Interest expense, net | (69,085 | ) | (69,570 | ) | |||
Loss on disposal of equipment | (22,029 | ) | |||||
Other income | 78,718 | 3,850 | |||||
Total other expense | (12,396 | ) | (65,720 | ) | |||
Income before non - controlling interest and income taxes | 418,432 | 1,916,301 | |||||
Non - controlling interest | 160,352 | 273,674 | |||||
Income before income taxes | 258,080 | 1,642,627 | |||||
Income tax expense | 105,813 | 673,477 | |||||
Net income | $ | 152,267 | $ | 969,150 | |||
See notes to condensed consolidated financial statements.
F-12
Helio Solutions, Inc. and Subidiary
Condensed Consolidated Statements of Cash Flows
( Unaudited)
Six Months Ended June 30, | |||||||
2007 | 2006 | ||||||
Cash Flows from operating activities | |||||||
Net income | $ | 152,267 | $ | 969,150 | |||
Adjustments to reconcile net income to net cash (used in) provided by operating activities | |||||||
Bad debt expense | 40,000 | 3,897 | |||||
Depreciation and amortization | 88,020 | 89,152 | |||||
Change in non-controlling interest | 49,006 | 122,596 | |||||
Loss on disposal of equipment | 22,029 | ||||||
Changes in operating assets and liabilities | |||||||
Accounts receivable | 3,862,421 | 193,964 | |||||
Inventory | (296,012 | ) | (567,924 | ) | |||
Prepaid expenses and other | 480,229 | 707,670 | |||||
Accounts payable | (4,378,489 | ) | (768,649 | ) | |||
Accrued expenses | (701,703 | ) | (756,394 | ) | |||
Deferred revenue | 270,840 | (453,305 | ) | ||||
Other current liabilities | 105,813 | 673,478 | |||||
Net cash (used in) provided by operating activities | (305,579 | ) | 213,635 | ||||
Cash flows from investing activities | |||||||
Capital expenditures | (8,135 | ) | |||||
Deposits | (10,772 | ) | (27,846 | ) | |||
Increase in cash surrender value of life insurance contracts | (116,777 | ) | (103,582 | ) | |||
Net cash used in investing activities | (135,684 | ) | (131,428 | ) | |||
Cash flows from financing activities | |||||||
Payments on notes payable and other obligations | (77,972 | ) | (279,918 | ) | |||
Dividends paid | (21,231 | ) | |||||
Net cash used in financing activities | (77,972 | ) | (301,149 | ) | |||
Decrease in cash and cash equivalents | (519,235 | ) | (218,942 | ) | |||
Cash and cash equivalents at beginning of period | 1,056,485 | 1,995,396 | |||||
Cash and cash equivalents at end of period | $ | 537,250 | $ | 1,776,454 | |||
Supplemental disclosures of cash flow information | |||||||
Cash paid during the period for: | |||||||
Interest | $ | 72,651 | $ | 71,484 | |||
Income taxes | $ | 140,000 | |||||
See notes to condensed consolidated financial statements.
F-13
Helio Solutions, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
For the Six Month Periods Ended June 30, 2007 and 2006
(Unaudited)
Note 1. Summary of Significant Accounting Policies
Company: Helio Solutions, Inc. (Helio) was incorporated on April 19, 2001 in the state of California. Helio is a San Jose, California-based reseller of computer hardware, software and services. Helio also has a sales office in Scottsdale, Arizona. In August 2007, all of Helio’s outstanding stock was acquired by a publicly-traded company.
Principles of consolidation: The consolidated financial statements of Helio include the accounts of 3000 Lakeside LLC (“Lakeside”), a variable interest entity formed in 2004, for which Helio is the primary beneficiary. These consolidated entities are collectively referred to as the “Company”. All intercompany balances and transactions have been eliminated in consolidation.
The Company consolidates Lakeside in accordance with Financial Accounting Standards Board (“FASB”) Interpretation No. 46(R) (“FIN 46R”), Consolidation of Variable Interest Entities (“VIEs”), which addresses consolidation by a business enterprise of variable interest entities that either: (1) do not have sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support, or (2) will hold a significant variable interest in, or have significant involvement with, an existing VIE.
Lakeside owns land and a building which it leases to Helio for approximately $22,600 per month under an 11-year lease agreement expiring in 2017 (Note 2). The land and building are collateralized by mortgage notes which have been guaranteed by Helio. All intercompany rent income and expense is eliminated upon consolidation.
Reflected in the June 30, 2007 and 2006, condensed consolidated balance sheets are Lakeside assets of approximately $2.8 million, which primarily represent land and building. Lakeside liabilities consist of mortgage notes on that property which total approximately $2.1 million at June 30, 2007 and 2006. Non-controlling interest as of and for the periods ended June 30, 2007 and 2006, represents other investors’ 100% claim to Lakeside’s net assets and net income.
Interim Financial Statements: The accompanying balance sheet as of June 30, 2007, and the statements of operations and the statements of cash flows for the six months ended June 30, 2007 and 2006, have been prepared by the Company without audit. In the opinion of management, all adjustments (which included normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows for such periods have been made. The results of operations for the six months ended June 30, 2007, are not necessarily indicative of operating results for the full year. These interim unaudited financial statements should be read in conjunction with the Company’s audited December 31, 2006 and 2005 consolidated financial statements, presented elsewhere within this Form 8-K/A.
Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liablilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Estimates made by us include those related to fair values of acquired goodwill and intangible assets, as well as property and equipment (including assumptions and estimates used in evaluating these assets for impairment), and the establishment of an allowance of uncollectible accounts receivable.
F-14
Helio Solutions, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
For the Six Month Periods Ended June 30, 2007 and 2006
(Unaudited)
Note 2. Property and equipment
Property and equipment consists of the following:
2007 | 2006 | ||||||
Land (owned by Lakeside) | $ | 1,100,000 | $ | 1,100,000 | |||
Building (owned by Lakeside) | 1,340,755 | 1,340,755 | |||||
Leasehold improvements | 280,844 | 280,844 | |||||
Automobiles | 178,220 | 128,134 | |||||
Furniture and fixtures | 38,506 | 80,561 | |||||
Equipment | 341,648 | 357,913 | |||||
Computer software | 94,689 | 94,689 | |||||
3,374,662 | 3,382,896 | ||||||
Less accumulated depreciation | (496,306 | ) | (362,054 | ) | |||
$ | 2,878,356 | $ | 3,020,842 |
Note 3. Accrued expenses
Accrued expenses consist of the following:
2007 | 2006 | ||||||
Commissions | $ | 315,613 | $ | 895,027 | |||
Payroll taxes | 14,518 | 14,645 | |||||
Salaries and wages | 267,714 | 374,625 | |||||
Sales taxes and other | 340,427 | 438,884 | |||||
Vacation | 153,394 | 209,122 | |||||
$ | 1,091,666 | $ | 1,932,303 |
Note 4. Related party transactions
A shareholder of the Company holds a substantial interest in an entity that leases vehicles under operating leases. During the six months ended June 30, 2007 and 2006, rent expense recorded under these operating leases was $76,185 and $166,497, respectively.
The Company also purchases inventory from two other companies in which certain shareholders hold substantial interests. During the six month periods ended June 30, 2007, and June 30, 2006, purchases from these companies totaled $981,000 and $139,768, respectively. At June 30, 2007, the Company had accounts payable to these companies totaling $450,000. At June 30, 2006, the Company had no amounts payable to related parties.
There were no sales to related parties for the six month periods ended June 30, 2007 and June 30, 2006.
Note 5. Subsequent event
On August 17, 2007, the Company was acquired by Incentra Solutions, Inc., a publicly-traded company. The purchase price was approximately $10.3 million and was paid in cash ($5,000,000), shares of Incentra Solutions, Inc. common stock (6,000,000 shares) and a three-year term note ($770,000). Additionally, the purchase agreement includes an earn-out provision whereby the Company shareholders can earn up to an additional $15 million based on achieving certain levels of operating performance over the next three years.
F-15
ITEM 9.01(b) HEADNOTE TO PRO FORMA FINANCIAL INFORMATION
The pro forma financial information presented below reflects the acquisition of Helio Solutions, Inc., a California corporation acquired on August 17, 2007. The initial purchase price for the acquisition was approximately $10.3 million in cash and common stock. The acquisition agreement includes earn-out provisions that provide for up to $15 million in additional consideration that can be earned over the next three years based on the attainment of certain levels of financial performance. The transaction is described in more detail in our filing on Form 8-K dated August 17, 2007.
A preliminary allocation of the purchase price has been made to major categories of assets and liabilities in the accompanying pro forma condensed consolidated financial statements. The actual allocation of the purchase price and the resulting effect on income (loss) from operations is not expected to differ significantly from the pro forma amounts included herein. The pro forma adjustments represent the Company's preliminary determination of purchase accounting adjustments and are based upon available information and certain assumptions that the Company believes to be reasonable. Consequently, the amounts reflected in the unaudited pro forma condensed consolidated financial statements are subject to change; however, the final amounts are not expected to differ substantially.
The historical financial information on which the pro forma statements are based is included in our Annual Report on Form 10-KSB for the fiscal year ended December 31, 2006, which was filed on April 2, 2007, and our Quarterly report on Form 10-Q for the fiscal quarter ended June 30, 2007 filed on August 7, 2007.
The accompanying pro forma condensed consolidated balance sheet as of June 30, 2007 gives effect to the acquisition as if it had been consummated on that date. The accompanying pro forma condensed consolidated statements of operations for the six months ended June 30, 2007, and the year ended December 31, 2006, give effect to the acquisition as if it had been consummated at the beginning of the periods presented.
The pro forma financial information should be read in conjunction with our historical consolidated financial statements used in the presentation of the pro forma financial information. THE PRO FORMA INFORMATION PRESENTED IS NOT NECESSARILY INDICATIVE OF THAT WHICH WOULD HAVE BEEN ATTAINED HAD THE TRANSACTION OCCURRED AT THE DATES INCLUDED IN THE PRO FORMA FINANCIAL INFORMATION.
F-16
Incentra Solutions, Inc. and Subsidiaries
Pro Forma Condensed Consolidated Balance Sheets
(Unaudited)
Historical June 30, 2007 Incentra Solutions, Inc. | Historical June 30, 2007 Helio Solutions, Inc. | Pro Forma Adjustments | Notes | Pro Forma June 30, 2007 | |||||||||||
ASSETS | |||||||||||||||
Current assets: | |||||||||||||||
Cash and cash equivalents | $ | 596,582 | $ | 537,250 | $ | (235,340 | ) | 4 | $ | 898,492 | |||||
Accounts receivable, net of allowance for doubtful accounts of $373,000 | 22,153,750 | 10,448,570 | 32,602,320 | ||||||||||||
Other current assets | 4,517,771 | 2,344,060 | 6,861,831 | ||||||||||||
Total current assets | 27,268,103 | 13,329,880 | (235,340 | ) | 40,362,643 | ||||||||||
Property and equipment, net | 2,866,521 | 2,878,356 | (2,588,292 | ) | 2,4 | 3,156,585 | |||||||||
Capitalized software development costs, net | 966,192 | 966,192 | |||||||||||||
Intangible assets, net | 2,022,989 | 2,022,989 | |||||||||||||
Goodwill | 16,870,862 | 9,366,534 | 2 | 26,237,396 | |||||||||||
Other assets | 338,003 | 901,618 | (414,753 | ) | 2, 4 | 824,868 | |||||||||
TOTAL ASSETS | $ | 50,332,670 | $ | 17,109,854 | $ | 6,128,149 | $ | 73,570,673 | |||||||
LIABILITIES AND SHAREHOLDERS' DEFICIT | |||||||||||||||
Current liabilities: | |||||||||||||||
Current portion of notes payable, capital leases and other long-term obligations | $ | 12,756,992 | $ | 47,117 | $ | 313,564 | 1, 2, 4 | $ | 13,117,673 | ||||||
Accounts payable | 18,205,436 | 9,797,252 | (1,128 | ) | 2, 4 | 28,001,560 | |||||||||
Accrued expenses | 4,680,754 | 1,091,666 | 258,668 | 2, 4 | 6,031,088 | ||||||||||
Deferred income taxes | 238,187 | (238,187 | ) | 2 | |||||||||||
Current portion of deferred revenue | 3,566,831 | 490,798 | 4,057,629 | ||||||||||||
Total current liabilities | 39,210,013 | 11,665,020 | 332,917 | 51,207,950 | |||||||||||
Notes payable, capital leases and other long-term obligations, net of current portion | 392,330 | 2,088,820 | 2,745,468 | 1, 2, 4 | 5,226,618 | ||||||||||
Deferred income taxes | 110,000 | (110,000 | ) | 2 | |||||||||||
Deferred revenue, net of current portion | 102,244 | 102,244 | |||||||||||||
TOTAL LIABILITIES | 39,704,587 | 13,863,840 | 2,829,385 | 56,536,812 | |||||||||||
Series A convertible redeemable preferred stock, $.001 par value, $31,500,000 liquidation preference, 2,500,000 shares authorized, 2,466,971 shares issued and outstanding | 28,544,683 | 28,544,683 | |||||||||||||
Non-controlling Interest | 725,635 | (725,635 | ) | ||||||||||||
Shareholders' deficit: | |||||||||||||||
Preferred stock, nonvoting, $.001 par value, 2,500,000 shares authorized, none issued | |||||||||||||||
Common stock, $.001 par value, 200,000,000 shares authorized | 13,087 | 568,628 | (562,628 | ) | 2 | 19,087 | |||||||||
Additional paid-in capital | 122,515,987 | 6,538,778 | 2 | 129,054,765 | |||||||||||
Accumulated deficit | (140,445,675 | ) | 1,951,751 | (1,951,751 | ) | 2 | (140,445,675 | ) | |||||||
TOTAL SHAREHOLDERS' DEFICIT | (17,916,601 | ) | 2,520,379 | 4,024,399 | (11,371,823 | ) | |||||||||
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT | $ | 50,332,670 | $ | 17,109,854 | $ | 6,128,149 | $ | 73,570,673 | |||||||
See accompanying notes to unaudited pro forma condensed consolidated financial statements.
F-17
Incentra Solutions, Inc. and Subsidiaries
Pro Forma Condensed Consolidated Statements of Operations
(Unaudited)
Historical For Year Ended December 31, 2006 Incentra Solutions, Inc. | Historical For Year Ended December 31, 2006 Helio Solutions, Inc. | Pro Forma Adjustments | Notes | Pro Forma Year Ended December 31, 2006 | |||||||||||
Revenue | $ | 66,632,154 | $ | 87,293,579 | $ | $ | 153,925,733 | ||||||||
Cost of revenue | 52,374,437 | 72,948,966 | 125,323,403 | ||||||||||||
GROSS MARGIN | 14,257,717 | 14,344,613 | 28,602,330 | ||||||||||||
Selling, general and administrative | 26,550,751 | 14,348,293 | 494,031 | 4 | 41,393,075 | ||||||||||
Depreciation and amortization | 767,342 | 176,880 | (42,737 | ) | 4 | 901,485 | |||||||||
27,318,093 | 14,525,173 | 451,294 | 42,294,560 | ||||||||||||
OPERATING LOSS FROM CONTINUING OPERATIONS | (13,060,376 | ) | (180,560 | ) | (451,294 | ) | (13,692,230 | ) | |||||||
Other income (expense) | |||||||||||||||
Interest expense, net | (2,884,977 | ) | (134,787 | ) | (475,034 | ) | 3, 4 | (3,494,798 | ) | ||||||
Loss on disposal of equipment | (8,450 | ) | (8,450 | ) | |||||||||||
Loss on early extinguishment of debt | (2,956,606 | ) | (2,956,606 | ) | |||||||||||
Other income | 42,426 | 72,704 | 115,130 | ||||||||||||
Foreign currency transaction gain | 21,897 | 21,897 | |||||||||||||
(5,777,260 | ) | (70,533 | ) | (475,034 | ) | (6,322,827 | ) | ||||||||
LOSS FROM CONTINUING OPERATIONS | (18,837,636 | ) | (251,093 | ) | (926,328 | ) | (20,015,057 | ) | |||||||
Non-controlling interest | 309,175 | (309,175 | ) | 4 | |||||||||||
Accretion of convertible redeemable preferred stock to redemption amount | (2,617,566 | ) | (2,617,566 | ) | |||||||||||
Income taxes | (197,030 | ) | 197,030 | 5 | |||||||||||
NET LOSS FROM CONTINUING OPERATIONS BEFORE NONRECURRING CHARGES OR CREDITS DIRECTLY ATTRIBUTABLE TO THE TRANSACTION | $ | (21,455,202 | ) | $ | (363,238 | ) | $ | (814,183 | ) | $ | (22,632,623 | ) | |||
Weighted average number of common shares outstanding - basic and diluted | 13,643,447 | 6,000,000 | 6 | 19,643,447 | |||||||||||
Basic and diluted loss from continuing operations per share applicable to common shareholders | $ | (1.57 | ) | $ | (1.15 | ) | |||||||||
See accompanying notes to unaudited pro forma condensed consolidated financial statements.
F-18
Incentra Solutions, Inc. and Subsidiaries
Pro Forma Condensed Consolidated Statements of Operations
(Unaudited)
Historical For the Six Months Ended June 30, 2007 Incentra Solutions, Inc. | Historical For the Six Months Ended June 30, 2007 Helio Solutions, Inc. | Pro Forma Adjustments | Notes | Pro Forma Six Months Ended June 30, 2007 | |||||||||||
Revenue | $ | 55,781,631 | $ | 32,840,300 | $ | $ | 88,621,931 | ||||||||
Cost of revenue | 44,055,560 | 27,295,097 | 71,350,657 | ||||||||||||
GROSS MARGIN | 11,726,071 | 5,545,203 | 17,271,274 | ||||||||||||
Selling, general and administrative | 13,852,416 | 5,026,355 | 252,284 | 4 | 19,131,055 | ||||||||||
Stock-based compensation expense | 822,994 | 822,994 | |||||||||||||
Depreciation and amortization | 604,570 | 88,020 | (21,368 | ) | 4 | 671,222 | |||||||||
15,279,980 | 5,114,375 | 230,916 | 20,625,271 | ||||||||||||
OPERATING (LOSS) INCOME FROM CONTINUING OPERATIONS | (3,553,909 | ) | 430,828 | (230,916 | ) | (3,353,997 | ) | ||||||||
Other income (expense): | |||||||||||||||
Interest expense, net | (1,445,393 | ) | (69,085 | ) | (238,013 | ) | 3, 4 | (1,752,491 | ) | ||||||
Loss on disposal of equipment | (22,029 | ) | (22,029 | ) | |||||||||||
Other income | (36,437 | ) | 78,718 | 42,281 | |||||||||||
Foreign currency transaction gain | 48,957 | 48,957 | |||||||||||||
(1,432,873 | ) | (12,396 | ) | (238,013 | ) | (1,683,282 | ) | ||||||||
(LOSS) INCOME FROM CONTINUING OPERATIONS | (4,986,781 | ) | 418,432 | (468,930 | ) | (5,037,279 | ) | ||||||||
Non-controlling interest | 160,352 | (160,352 | ) | 4 | - | ||||||||||
Accretion of convertible redeemable preferred stock to redemption amount | (1,308,784 | ) | (1,308,784 | ) | |||||||||||
Income taxes | 105,813 | (105,813 | ) | 5 | |||||||||||
NET (LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE NONRECURRING CHARGES OR CREDITS DIRECTLY ATTRIBUTABLE TO THE TRANSACTION | $ | (6,295,565 | ) | $ | 152,267 | $ | (202,765 | ) | $ | (6,346,063 | ) | ||||
Weighted average number of common shares outstanding - basic and diluted | 13,162,751 | 6,000,000 | 6 | 19,162,751 | |||||||||||
Basic and diluted loss from continuing operations per share applicable to common shareholders: | $ | (0.48 | ) | $ | (0.33 | ) | |||||||||
See accompanying notes to unaudited pro forma condensed consolidated financial statements.
F-19
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
BALANCE SHEET AND STATEMENTS OF OPERATIONS
BALANCE SHEET AS OF JUNE 30, 2007, AND STATEMENTS OF
OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2007, AND THE
YEAR ENDED DECEMBER 31, 2006
On August 17, 2007, Incentra Solutions, Inc. (“Incentra”) acquired all of the common stock of Helio Solutions, Inc. (“Helio”). The acquisition was accounted for as a purchase. The total acquisition price was $10.3 million, subject to certain post-closing adjustments, as defined. The purchase price consisted of $5.0 million cash, six million shares of Incentra restricted common shares valued at $4,560,000 (based on an average of the closing prices of Incentra’s common stock during the seven-day periods before and after the acquisition date), and an unsecured, 8% convertible three-year promissory note for $770,000 (the “Convertible Note”). The Convertible Note is convertible into shares of Incentra common stock at $1.00 per share, at the option of the holder.
Of the $5.0 million paid in cash, $750,000 was placed into escrow to secure certain working capital and indemnification obligations of Helio, which funds are to be released one year after the closing data of the transaction.
The cash paid at closing was funded with proceeds from a financing entered into with a third party lender in August 2007 under a new $12 million, prime plus 2.0% interest term note (the “Term Note”). In addition, investment banking fees incurred by Incentra which were directly attributable to the acquisition included cash paid to third parties of $602,500 and a five-year warrant issued to a third party to purchase 600,000 shares of Incentra’s common stock. The warrant was determined to have an estimated fair value of $333,000, which was included in the purchase price.
Note 1: This entry is recorded to reflect the proceeds received under the Term Note, of which $6.95 million was used to acquire Helio. The entry is net of a discount of approximately $1.7 million, which represents the amount allocated to the detachable warrant issued along with the Term Note.
Note 2: This entry is recorded to reflect Incentra’s acquisition of substantially all assets of Helio, and the assumption of certain liabilities. Incentra did not assume Helio’s notes payable and long-term debt, nor did it acquire any assets or assume any liabilities of Lakeside 3000, LLC, (“Lakeside,” a variable interest entity consolidated by Helio). Based on the preliminary allocation of the acquisition price to the assets acquired and liabilities assumed, the Company has recorded goodwill of approximately $9.4 million.
A preliminary allocation of the purchase price was made to major categories of assets and liabilities. The actual allocation of the purchase price and the resulting effect on income (loss) from operations may differ significantly from the pro forma amounts included herein. The pro forma adjustments represent the Company's preliminary determination of the purchase accounting adjustments and are based upon available information and certain assumptions that the Company believes to be reasonable. Consequently, the amounts reflected in the unaudited pro forma condensed consolidated statements of operations are subject to change, and the final amounts may differ substantially.
Note 3: This entry is recorded to reflect interest expense under the Term Note and Convertible Note.
Note 4: This entry is recorded to reflect the elimination of Lakeside.
Note 5: This entry is recorded to reduce income tax expense (benefit) to $0 based on the pretax loss of Incentra, utilized to offset Helio income.
Note 6: This entry is recorded to reflect the pro forma, weighted average number of common shares outstanding, to include six million shares issued upon the acquisition of Helio.
F-20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this Report to be signed on its behalf by the undersigned hereunto duly authorized.
INCENTRA SOLUTIONS, INC. | ||
| | |
Date: November 13, 2007 | By: | /s/ Thomas P. Sweeney III |
Thomas P. Sweeney III | ||
Chief Executive Officer |
F-21
Exhibit Index
Exhibit No. | Description |
23.1 | Consent of Independent Registered Public Accounting Firm |
F-22