Exhibit 99.1
NEEO AG
Consolidated Financial Statements
Year Ended December 31, 2018
NEEO AG
Contents
Independent Auditors’ Report | 3-4 |
| |
Consolidated Financial Statements | |
| |
Consolidated Balance Sheet | 6 |
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Consolidated Statement of Operations | 7 |
| |
Consolidated Statement of Changes in Stockholders’ Deficit | 8 |
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Consolidated Statement of Cash Flows | 9 |
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Notes to Consolidated Financial Statements | 10 - 22 |
2
Independent Auditors’ Report
NEEO AG
Bern, Switzerland
We have audited the accompanying consolidated financial statements of NEEO AG, which comprise the consolidated balance sheet as of December 31, 2018, and the related consolidated statements of operations, changes in stockholders’ deficit, and cash flows for the year then ended, and the related notes to the consolidated financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of the accounting policies used and reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of NEEO AG as of December 31, 2018, and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.
3
Substantial Doubt about the Company’s Ability to Continue as a Going Concern
The accompanying consolidated financial statements have been prepared assuming that NEEO AG will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, NEEO AG has incurred significant losses with substantial debt outstanding at year end which raise substantial doubt about its ability to continue as a going concern. Management’s evaluation of the events and conditions and management’s plans regarding those matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect to that matter.
/s/ WSRP, LLC | |
| |
Salt Lake City, Utah | |
April 12, 2019 | |
4
Consolidated Financial Statements
NEEO AG
Consolidated Balance Sheet
December 31, | | 2018 | |
| | | | | |
Assets | | | | | |
| | | | | |
Current assets | | | | | |
Cash and cash equivalents | | CHF | | 238,983 | |
Accounts receivable, net | | | | 25,380 | |
Inventory | | | | 557,891 | |
Consigned inventory | | | | 279,586 | |
Prepaid expenses and other current assets | | | | 496,836 | |
Related party receivable | | | | 52,218 | |
| | | | | |
Total current assets | | | | 1,650,894 | |
| | | | | |
Property and equipment, net | | | | 57,540 | |
| | | | | |
Total assets | | CHF | | 1,708,434 | |
| | | | | |
Liabilities and Stockholder’s Deficit | | | | | |
| | | | | |
Current liabilities | | | | | |
Accounts payable | | CHF | | 891,523 | |
Accrued expenses and other current liabilities | | | | 989,420 | |
Consigned inventory liability | | | | 279,586 | |
Related party payable | | | | 96,278 | |
Current maturities of notes payable | | | | 3,533,920 | |
| | | | | |
Total current liabilities | | | | 5,790,727 | |
| | | | | |
Notes payable, net of current portion | | | | 1,796,570 | |
Pension liability | | | | 485,506 | |
| | | | | |
Total liabilities | | | | 8,072,803 | |
| | | | | |
Commitments and contingencies | | | | — | |
| | | | | |
Stockholders’ deficit | | | | | |
Common stock - CHF.06 par value; 3,325,207 shares authorized, issued and outstanding. CHF .01 par value; 29,454,917 shares authorized, issued and outstanding | | | | 494,062 | |
Additional paid-in capital | | | | 6,215,522 | |
Accumulated deficit | | | | (12,660,691 | ) |
Accumulated other comprehensive loss | | | | (413,262 | ) |
| | | | | |
Total stockholders’ deficit | | | | (6,364,369 | ) |
| | | | | |
Total liabilities and stockholders’ deficit | | CHF | | 1,708,434 | |
See accompanying notes to consolidated financial statements.
6
NEEO AG
Consolidated Statement of Operations
Year Ended December 31, | | 2018 | |
| | | | | |
Revenues | | CHF | | 905,097 | |
Cost of revenues | | | | 1,126,426 | |
| | | | | |
Gross loss | | | | (221,329 | ) |
| | | | | |
Operating expenses | | | | | |
Research and development | | | | 420,308 | |
Selling, general and administrative | | | | 3,266,075 | |
| | | | | |
Total operating expenses | | | | 3,686,383 | |
| | | | | |
Loss from operations | | | | (3,907,712 | ) |
| | | | | |
Other expense | | | | | |
Interest expense | | | | 373,509 | |
Other components of defined benefit plans, net | | | | 27,572 | |
Foreign exchange loss | | | | 77,423 | |
| | | | | |
Total other expense | | | | 478,504 | |
| | | | | |
Loss before income taxes | | | | (4,386,216 | ) |
| | | | | |
Income tax expense | | | | 3,739 | |
| | | | | |
Net loss | | CHF | | (4,389,955 | ) |
Other comprehensive income (loss) | | | | | |
Pension plan actuarial loss | | | | (177,220 | ) |
Pension plan amortization of prior service cost | | | | 28,534 | |
| | | | | |
Total comprehensive loss | | CHF | | (4,538,641 | ) |
See accompanying notes to consolidated financial statements.
7
NEEO AG
Consolidated Statement of Changes in Stockholders’ Deficit
| | Shares
PAR 0.06 | | Shares
PAR 0.01 | | Amount | | Additional
Paid-In
Capital | | Accumulated
Deficit | | Accumulated
Other
Comprehensive
Loss | | Total | |
Balance, December 31, 2017 | | 3,325,207 | | 29,454,917 | | CHF | 494,062 | | CHF | 6,102,546 | | CHF | (8,270,736 | ) | CHF | (264,576 | ) | CHF | (1,938,704 | ) |
| | | | | | | | | | | | | | | |
Non-cash contributions | | — | | — | | — | | 112,976 | | — | | — | | 112,976 | |
Other comprehensive loss | | — | | — | | — | | — | | — | | (148,686 | ) | (148,686 | ) |
Net loss | | — | | — | | — | | — | | (4,389,955 | ) | — | | (4,389,955 | ) |
| | | | | | | | | | | | | | | |
Balance, December 31, 2018 | | 3,325,207 | | 29,454,917 | | CHF | 494,062 | | CHF | 6,215,522 | | CHF | (12,660,691 | ) | CHF | (413,262 | ) | CHF | (6,364,369 | ) |
See accompanying notes to consolidated financial statements.
8
NEEO AG
Consolidated Statement of Cash Flows
Years Ended December 31, | | 2018 | |
| | | | | |
Cash flows from operating activities | | | | | |
Net loss | | CHF | | (4,389,955 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | | |
Depreciation and amortization | | | | 191,801 | |
Pension cost | | | | 139,801 | |
Non-cash interest expense | | | | 112,976 | |
Foreign currency transactions | | | | 22,024 | |
Changes in operating assets and liabilities: | | | | | |
Accounts receivable | | | | (25,380 | ) |
Inventory | | | | (201,511 | ) |
Prepaid expenses and other current assets | | | | 39,383 | |
Related party receivable | | | | 9,323 | |
Accounts payable | | | | 87,795 | |
Accrued expenses and other current liabilities | | | | 725,854 | |
Related party payable | | | | (302,193 | ) |
| | | | | |
Net cash used in operating activities | | | | (3,590,082 | ) |
| | | | | |
Cash flows from investing activities | | | | | |
Purchases of property and equipment | | | | (13,681 | ) |
| | | | | |
Net cash used in investing activities | | | | (13,681 | ) |
| | | | | |
Cash flows from financing activities | | | | | |
Proceeds from issuance of notes payable | | | | 4,044,948 | |
Repayment of notes payable | | | | (285,000 | ) |
| | | | | |
Net cash provided by financing activities | | | | 3,759,948 | |
| | | | | |
Net increase in cash and cash equivalents | | | | 156,185 | |
| | | | | |
Cash and cash equivalents, beginning of year | | | | 82,798 | |
| | | | | |
Cash and cash equivalents, end of year | | CHF | | 238,983 | |
| | | | | |
Supplemental disclosures for cash flow information | | | | | |
Cash paid for interest | | CHF | | 17,100 | |
See accompanying notes to consolidated financial statements.
9
NEEO AG
Notes to Consolidated Financial Statements
1. Description of Business
NEEO AG (the “Company”), which was formed on April 15, 2014, is registered in the Canton of Solothurn, Switzerland. The Company operates in the field of development, manufacturing and selling of products in the home automation industry.
2. Summary of Significant Accounting Policies and Estimates
Basis of Presentation and Consolidation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). The consolidated financial statements include the accounts of NEEO AG and its wholly owned subsidiary NEEO Inc. Intercompany transactions and balances have been eliminated in consolidation.
Going Concern
In connection with the preparation of the consolidated financial statements for the year ended December 31, 2018, the Company conducted an evaluation as to whether there were conditions and events, considered in the aggregate, which raised substantial doubt as to the entity’s ability to continue as a going concern within one year after the date of the issuance, or the date of availability, of the consolidated financial statements to be issued, noting that there did not appear to be evidence of substantial doubt of the entity’s ability to continue as a going concern as the company was acquired by Control4 Corporation on February 1, 2019.
Concentrations of Risk
The Company relies on one contract manufacturer for the production of its products. A significant disruption in the operations of this contract manufacturer would impact the production of the Company’s products for a substantial period of time, which could have a material adverse effect on the Company’s business, financial condition and results of operations.
The Company maintains its cash and cash equivalents with large financial institutions. Management believes that these financial institutions are financially sound and accordingly are subject to minimal credit risk.
Use of Accounting Estimates
In preparing financial statements in conformity with U.S. GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid securities purchased with original maturities of 90 days or less to be cash equivalents.
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Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded at the invoiced amount and do not generally bear interest. The Company determines whether an allowance for doubtful accounts is required based on historical write-off experience and customer economic data which represents the Company’s best estimate of the amount of probable credit losses in its existing accounts receivable. Account balances are charged off against the allowance when the Company believes it is probable the receivable will not be recovered.
Inventory
Inventory consisting of hardware is stated at the lower of cost (first in, first out method) or net realizable value. The Company periodically assesses the recoverability of its inventory and reduces the carrying value of the inventory when items are determined to be obsolete, defective or in excess of forecasted sales requirements.
Consigned Inventory and Consigned Inventory Liability
The Company utilizes a contract manufacturer for manufacturing and assembly of its products. The contract manufacturer is required to procure and stock raw materials sufficient to meet the Company’s production forecast, that, once processed, the Company is obligated to repurchase as finished goods; therefore, the Company records these materials as consigned inventory and consigned inventory liability.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the following estimated useful lives:
Computer equipment and software | | 2 - 3 years |
Manufacturing tooling and test equipment | | 3 years |
Furniture and fixtures | | 4 years |
Expenditures for all maintenance and repairs are charged as operating expenses. Additions, major renewals and replacements that increase the useful lives of assets are capitalized. Amortization of leasehold improvements is computed using the straight-line method over the shorter of the lease term or the estimated useful life of the leasehold improvements.
Impairment of Long-Lived Assets
When events or circumstances indicate the carrying value of a long-lived asset may be impaired, the Company estimates the future undiscounted cash flows to be derived from the asset to assess whether or not a potential impairment exists, in accordance with Accounting Standards Codification (“ASC”) Topic 360, Property, Plant, and Equipment. If the carrying value exceeds the estimate of future undiscounted cash flows, the impairment is calculated as the excess of the carrying value of the asset over the estimate of its fair value. No long-lived asset impairment was recognized during the year ended December 31, 2018.
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Warranty Obligation
The Company provides warranties on all product sales for two years. The Company accrues for the estimated warranty costs at the time of sale based on historical warranty experience plus any known or expected changes in warranty exposure. As of December 31, 2018, the accrued warranty liability included in “accrued expenses and other current liabilities” in the consolidated balance sheet was CHF 65,000.
Foreign Currency
In general, the functional currency of a foreign operation is the local currency. Assets and liabilities recorded in foreign currencies are translated at the exchange rate on the balance sheet date. Revenue and expenses are translated at average rates of exchange prevailing during the year. The effects of foreign currency translation adjustments, if any, are included in stockholders’ deficit as a component of accumulated other comprehensive income/loss.
Revenue Recognition
The Company’s revenues primarily result from the sale of manufactured products and reflect the consideration to which the Company expects to be entitled. The Company records revenue based on a five-step model in accordance with ASC Topic 606, Revenue from Contracts with Customers. For its customer contracts, the Company identifies the performance obligations, determines the transaction price, allocates the contract transaction price to the performance obligation, and recognizes the revenue when control of goods or services is transferred to the customer.
For product sales, each purchase order, along with any existing governing customer agreements when applicable, represents a contract with a customer and each product sold to a customer typically represents a distinct performance obligation. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The majority of the Company’s product sales are subject to ExWorks (as defined in Incoterms 2010) delivery terms and revenue is recorded at the point in time when products are picked up from the warehouse, as the Company has determined that this is the point in time that control transfers to the customer.
Revenue is recognized net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental authorities.
Collaborative Arrangements
The Company determines the proper accounting treatment for each collaborative arrangement based on the guidance in ASC 808. During 2018 the Company was party to a collaborative arrangement with a related party (shareholder) to jointly develop a new product. Under the terms of the arrangement the Company will be reimbursed by the shareholder for research and development expenses. The Company determined that the shareholder did not meet the definition of a customer as both parties to the arrangement share in the risks and benefits of the activities. The reimbursements received from the shareholder are recorded as an offset to research and development expense.
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Cost of Revenue
Cost of revenue primarily consists of the cost of inventory sold during the period and shipping and handling expenses.
Research and Development Expense
Research and development expenses consist primarily of personnel costs, depreciation associated with research and development equipment, contract labor and consulting services. Research and development costs are expensed as incurred.
Fair Value of Financial Instruments
The Company records certain financial instruments at fair value in accordance with ASC Topic 820, Fair Value Measurements and Disclosures. ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The Company’s financial instruments consist principally of cash and cash equivalents, accounts receivable, accounts payable, and notes payable. The fair values of cash and cash equivalents, accounts receivable, accounts payable and short-term note payable approximate their respective carrying values because of the short maturity of those instruments. The fair value of the long-term notes payable approximates its current carrying value due to the market terms.
Fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
We assess the inputs used to measure fair value using a three-tier hierarchy based on the extent to which inputs used in measuring fair value are observable in the market:
Level 1 — inputs include quoted prices for identical instruments and are the most observable. |
|
Level 2 — inputs include quoted prices for similar assets and observable inputs such as interest rates, currency exchange rates and yield curves. |
|
Level 3 — inputs are not observable in the market and include management’s judgments about the assumptions market participants would use in pricing the asset or liability. |
Income Taxes
Deferred tax assets and liabilities are recognized for differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the tax bases of assets and liabilities that will result in future taxable or deductible amounts. The deferred tax assets and liabilities are measured using the enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company presents deferred tax positions on a net position, when resulting from the same tax jurisdiction.
13
Advertising
The Company expenses advertising costs as incurred. Advertising expense was CHF 453,842 for the year ended December 31, 2018.
Recent Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases, which provides guidance for accounting for leases. ASU 2016-02 requires lessees to classify leases as either finance or operating leases and to record a right-of-use asset and a lease liability for all leases with a term greater than 12 months regardless of the lease classification. The lease classification will determine whether the lease expense is recognized based on an effective interest rate method or on a straight line basis over the term of the lease. Accounting for lessors remains largely unchanged from current GAAP. ASU 2016-02 will be effective for the Company’s fiscal year ending December 31, 2019. The Company is currently evaluating the impact the adoption of ASU 2016-02 will have on the Company’s financial statements.
In March 2017, the FASB issued ASU 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The standard amends the income statement presentation of the components of net periodic benefit cost for defined benefit pension and other postretirement plans. The standard requires entities to (1) disaggregate the current-service-cost component from the other components of net benefit cost (the “other components”) and present it with other current compensation costs for related employees in the income statement and (2) present the other components elsewhere in the income statement and outside of income from operations if such a subtotal is presented. This standard is effective for fiscal years beginning after December 15, 2018 with early adoption permitted. The Company has early adopted this standard for the year ended December 31, 2018.
In August 2018, the FASB issued ASU No. 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General. This ASU modifies the disclosure requirements for defined benefit and other postretirement plans. This ASU eliminates certain disclosures associated with accumulated other comprehensive income, plan assets, related parties, and the effects of interest rate basis point changes on assumed health care costs; while other disclosures have been added to address significant gains and losses related to changes in benefit obligations. This ASU also clarifies disclosure requirements for projected benefit and accumulated benefit obligations. The amendments in this ASU are effective for fiscal years ending after December 15, 2021 and for interim periods therein with early adoption permitted. Adoption on a retrospective basis for all periods presented is required. The Company is currently evaluating the impact of adoption on its financial statement disclosures.
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3. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets are comprised of the following at December 31, 2018:
VAT receivables | | CHF | 261,655 | |
Prepaid expenses | | 119,921 | |
Other | | 115,260 | |
| | | |
Prepaid expenses and other current assets | | CHF | 496,836 | |
4. Property and Equipment, Net
The following is a summary of property and equipment, net at December 31, 2018:
Computer equipment and software | | CHF | 28,285 | |
Manufacturing tooling and test equipment | | 471,335 | |
Furniture and fixtures | | 15,583 | |
| | 515,203 | |
Accumulated depreciation and amortization | | (457,663 | ) |
| | | |
Property and equipment, net | | CHF | 57,540 | |
Depreciation and amortization expense related to property and equipment was CHF 168,901 for the year ended December 31, 2018.
5. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities are comprised of the following at December 31, 2018:
Employee compensation and benefits | | CHF | 342,386 | |
VAT payables | | 124,656 | |
Deferred revenue | | 64,169 | |
Interest payable | | 106,083 | |
Other | | 352,126 | |
| | | |
Accrued expenses and other current liabilities | | CHF | 989,420 | |
15
NEEO AG
Notes to Consolidated Financial Statements
6. Notes Payable
Notes payable consists of the following at December 31, 2018:
Note payable to related party (shareholder), secured by all tooling, hardware and consigned inventory. Due in monthly payments of principle and interest at 2.5% per annum through September 30, 2019. The note was fully repaid in January 2019. | | CHF | | 159,676 | |
Note payable to related party (shareholder), secured by shares of NEEO AG held by the Company’s founder. Due in monthly payments of principle and interest at 6.0% per annum through February 1, 2019. The note was fully repaid in January 2019. | | | | 128,527 | |
Note payable to related party (shareholder), secured by shares of NEEO AG held by the Company’s founder. Principle and interest at 6.0% per annum due December 31, 2018. The note was fully repaid in January 2019. | | | | 1,150,000 | |
Unsecured note payable to related party (shareholder). Principle and interest at 6.0% per annum due June 30, 2018. The note was fully repaid in January 2019. | | | | 100,000 | |
Unsecured note payable to third party. Principle and interest at 6.0% per annum due June 30, 2018. The note was fully repaid in January 2019. | | | | 360,000 | |
Unsecured note payable to third party. Principle and interest at 6.0% per annum due December 30, 2018. The note was fully repaid in January 2019. | | | | 500,000 | |
Subordinated unsecured note payable to related party (shareholder). The note does not bear interest and is due January 1, 2022. | | | | 200,000 | |
Unsecured note payable to a private foundation. Principle and interest at 10.0% per annum due June 30, 2017. The note was fully repaid in January 2019. | | | | 10,000 | |
Note payable to a commercial bank, guaranteed by an export insurance organization. Principle due April 30, 2018. Interest at LIBOR plus 1.5% due monthly. The note was fully repaid in January 2019. | | | | 1,095,717 | |
Subordinated note payable to Control4 Corporation. The purpose of the note was to pay off operational debts until the signing of the share purchase agreement, whereby Control4 Corporation. intends to purchase 100% of the shares of the Company. Principle and interest at 3.0% per annum due the earlier of January 21, 2021 or the conversion date. The note shall automatically convert into shares of the Company upon a qualified financing round based on the price of shares issued to new investors or, at the option of Control4 Corporation, upon a change of control whereby the note may be converted into shares of the Company at the price of the last financing round. These redemption features were assessed as embedded put options under ASC 815 and determined to be clearly and closely related to the debt host and therefore not bifurcated. | | | | 1,626,570 | |
| | | | 5,330,490 | |
Less current portion | | | | (3,533,920 | ) |
| | | | | |
Long-term debt, net of current portion | | CHF | | 1,796,570 | |
16
NEEO AG
Notes to Consolidated Financial Statements
Future scheduled maturities of long-term debt are as follows:
Years Ending December 31, | | Amount | |
| | | | |
2019 | | CHF | 3,533,920 | |
2020 | | | 60,000 | |
2021 | | | 1,706,570 | |
2022 | | | 30,000 | |
| | | | |
| | CHF | 5,330,490 | |
7. Income Taxes
The components of loss before income taxes are as follows:
Year Ended December 31, | | 2018 | |
| | | | |
Switzerland | | CHF | 4,178,294 | |
Foreign | | | 207,922 | |
| | | | |
Loss before income taxes | | CHF | 4,386,216 | |
Income taxes related the Company are as follows:
Year Ended December 31, | | 2018 | |
| | | | |
Switzerland | | CHF | 1,224 | |
Foreign | | | 2,515 | |
| | | | |
Income tax expense | | CHF | 3,739 | |
Income tax at the Swiss statutory rate compared to the Company’s income tax expense as reported are as follows:
Year Ended December 31, | | 2018 | |
| | | | |
Loss before income taxes | | CHF | 4,386,216 | |
Tax rate | | | 21 | % |
Expected income tax benefit | | | (921,105 | ) |
Income tax expense | | | 3,739 | |
Change in valuation allowance | | | 929,337 | |
Permanent difference | | | (8,231 | ) |
| | | | |
Income tax expense | | CHF | 3,739 | |
17
NEEO AG
Notes to Consolidated Financial Statements
The Company assesses the recoverability of its deferred tax assets and, to the extent recoverability does not satisfy the “more likely than not” recognition criterion under ASC 740, records a valuation allowance against its deferred tax assets. The Company considered its recent operating results and anticipated future taxable income in assessing the need for its valuation allowance.
The Company’s deferred tax assets and liabilities consist of the following:
December 31, | | 2018 | |
Deferred tax assets | | | | |
Warranty accrual | | CHF | 13,617 | |
Intangible assets | | | 2,203 | |
Note payable to related party | | | 60,375 | |
Consigned inventory liability | | | 58,569 | |
Intercompany balances | | | 33 | |
Pension liability | | | 101,707 | |
Net operating loss | | | 2,583,332 | |
Total deferred tax assets | | | 2,819,836 | |
| | | | |
Deferred tax liabilities | | | | |
Inventory | | | (98,633 | ) |
Prepaid expenses | | | (695 | ) |
Related party payable | | | (21,069 | ) |
Total deferred tax liabilities | | | (120,397 | ) |
| | | | |
Net deferred tax assets | | | 2,699,439 | |
| | | | |
Valuation allowance | | | (2,699,439 | ) |
| | | | |
Total deferred income taxes | | CHF | — | |
At December 31, 2018, the Company has accumulated loss carry-forwards of CHF 12,331,753, which expire in the following years:
Years Ending December 31, | | Amount | |
| | | | |
2022 | | CHF | 1,619,318 | |
2023 | | | 2,801,861 | |
2024 | | | 3,543,026 | |
2025 | | | 4,367,548 | |
| | | | |
| | CHF | 12,331,753 | |
The 2017 and 2018 tax years remain subject to examination.
18
NEEO AG
Notes to Consolidated Financial Statements
8. Pension Plan
The Company maintains a passive pension plan covering all employees in Switzerland; it is considered a defined benefit plan and accounted for in accordance with ASC 715 Compensation - Retirement Benefits. This model allocates pension costs over the service period of employees in the plan. The underlying principle is that employees render services ratably over this period, and therefore, the statement of comprehensive loss effects of pensions should follow a similar pattern. ASC 715 requires recognition of the funded status, or difference between the fair value of plan assets and the projected benefit obligations of the pension plan on the balance sheet, by recording a corresponding expense in net loss. If the projected benefit obligation exceeds the fair value of plan assets, then that difference or unfunded status represents the pension liability.
The Company records a net periodic pension cost in the statement of comprehensive loss. The liabilities and annual income or expense of the pension plan is determined using methodologies that involve several actuarial assumptions, the most significant of which are the discount rate and the long-term rate of asset return (based on the market-related value of assets). Future benefits, to the extent that they are based on compensation, include salary increases consistent with past experiences and estimates of future increases in the Swiss labor market. The fair values of plan assets are determined based on prevailing market prices.
The following table reflects changes in the pension benefit obligation and plan assets for the year ended December 31, 2018:
| | 2018 | |
Change in benefit obligation: | | | | |
Benefit obligation at beginning of year | | CHF | 629,641 | |
Service cost | | | 112,229 | |
Interest cost | | | 4,855 | |
Employee contributions | | | 67,557 | |
Premiums paid | | | (35,353 | ) |
Net transfer in | | | 34,283 | |
Actuarial loss | | | 73,570 | |
Projected benefit obligation at end of year | | | 886,782 | |
Changes in plan assets: | | | | |
Fair value of plan assets at beginning of year | | | 365,065 | |
Actual return on plan assets | | | (97,833 | ) |
Company contributions | | | 67,557 | |
Employee contributions | | | 67,557 | |
Premiums paid | | | (35,353 | ) |
Net transfer in | | | 34,283 | |
Fair value of plan assets at end of year | | | 401,276 | |
Funded status at end of year | | CHF | (485,506 | ) |
Net long-term pension liability of CHF 485,506 is recognized in the consolidated balance sheet as of December 31, 2018. The accumulated benefit obligation at December 31, 2018 was CHF 729,896.
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NEEO AG
Notes to Consolidated Financial Statements
Accumulated other comprehensive loss consists of the following:
| | 2018 | |
| | | | |
Net prior service cost | | CHF | 264,576 | |
Net loss | | | 177,220 | |
Amortization of prior service cost | | | (28,534 | ) |
Accumulated other comprehensive loss | | CHF | 413,262 | |
The components of net periodic pension cost and other amounts recognized in other comprehensive loss before taxes are as follows:
| | 2018 | |
Components of net periodic pension cost: | | | | |
Service cost | | CHF | 112,229 | |
Interest cost | | | 4,855 | |
Expected return on plan assets | | | (5,817 | ) |
Amortization of prior service cost | | | 28,534 | |
Net periodic pension cost | | CHF | 139,801 | |
Other amounts recognized in other comprehensive loss: | | | | |
Loss on value of plan assets | | CHF | 103,650 | |
Actuarial loss on benefit obligation | | | 73,570 | |
Amortization of prior service cost | | | (28,534 | ) |
Total loss recognized in other comprehensive loss | | CHF | 148,686 | |
Total loss recognized in net periodic pension cost and other comprehensive loss | | CHF | 288,487 | |
The components of net periodic benefit cost other than the service cost component are included in the line item “other components of defined benefit plans, net” in the income statement.
Assumptions used to determine the benefit obligation and net periodic pension cost are as follows:
| | 2018 | |
Weighted-average assumptions used: | | | | |
Discount rate | | | 0.80 | % |
Rate of compensation increase | | | 3.00 | % |
Expected long-term return on plan assets | | | 1.50 | % |
Under Swiss law, pension funds are legally independent from the employer and all the contributions are invested with regulated entities. The Company has a contract with PAX Collective Foundation (the “Foundation”) to manage its Swiss pension fund. Multiple employers contract with the Foundation to manage the employers’ respective pension plans. The Foundation manages the pension plans of its contracted employers as a collective entity. The investment strategy is determined by the Foundation and applies to all members of the collective Foundation. There are no separate financial statements for each employer contract. The pension plan assets of all the
20
NEEO AG
Notes to Consolidated Financial Statements
employers that contract with the Foundation are comingled. They are considered multiple-employer plans under ASC 715 and therefore accounted for as single-employer plans.
As there are no separate financial statements for each employer contract, there are no individual investments that can be directly attributed to the Company’s pension plan assets. However, the funds contributed by an employer are specifically earmarked for its employees and the total assets of the plan allocable to the Company’s employees are separately tracked by the Foundation. The lack of visibility into the specific investments of the plan assets and how they are valued is a significant unobservable input, therefore, the Company considers the plan assets collectively to be Level 3 assets under the fair value hierarchy.
The table below sets forth the fair value of plan assets at December 31, 2018, and the related activity:
| | Insurance
Contracts
(Level 3) | |
Beginning balance at January 1, 2018 | | 365,065 | |
Actual return on plan assets | | (97,833 | ) |
Purchases, sales and settlement | | 134,044 | |
Fair value of plan assets at end of year | | 401,276 | |
The Company expects to contribute approximately CHF 78,300 to the pension plan in 2019.
No pension benefit payments are expected to be paid over the next five years.
9. Related Parties
During the year ended December 31, 2018, the Company entered into the following related party transactions with shareholders of the Company:
· Borrowed CHF 1,535,000 from shareholders, of which CHF 285,000 was repaid during 2018. Refer to Note 6. for details of notes payable outstanding to related parties as of December 31, 2018.
· Recorded a reduction to research and development expense in the amount of CHF 448,667 under a collaborative arrangement. The offset was recorded against related party payable to reduce the amount payable to the shareholder.
10. Commitments and Contingencies
Legal Proceedings
The Company is from time to time involved in ordinary routine litigation incidental to the conduct of its business. The Company regularly reviews all pending litigation matters in which it is involved and establishes reserves deemed appropriate for such litigation matters. Management believes that no presently pending litigation matters are likely to have a material adverse effect on the Company’s consolidated financial statements or results of operations.
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NEEO AG
Notes to Consolidated Financial Statements
11. Subsequent Events
On February 1, 2019, Control4 Corporation acquired all of the outstanding shares of common stock of NEEO AG.
Refer to Note 6. for notes payable repaid subsequent to year end.
The Company has evaluated subsequent events through the date on which the consolidated financial statements were available to be issued.
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