FELLS POINT WHOLESALE MEATS, INC.
Consolidated Financial Statements
Table of Contents
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| Independent Auditor's Report | |
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| Consolidated Financial Statements: | |
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Independent Auditor’s Report
To the Board of Directors of
Fells Point Wholesale Meats Inc.
Baltimore, Maryland
We have audited the accompanying financial statements of Fells Point Wholesale Meats Inc., which comprise the consolidated balance sheet as of December 31, 2016 and the related consolidated statement of operations, stockholder’s equity, 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.
Auditor’s 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 auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Fells Point Wholesale Meats Inc. as of December 31, 2016, 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.
Emphasis of Matter
As described in Note 7 to the accompanying financial statements, the Company was sold on August 25, 2017.
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| /s/ BDO USA, LLP | |
| Stamford, CT | |
| November 7, 2017 | |
FELLS POINT WHOLESALE MEATS, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
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| | June 30, 2017
(unaudited) | | December 31, 2016 |
| ASSETS | |
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| Current assets: | |
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| Cash and cash equivalents | $ | 1,298 |
| | $ | 712 |
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| Accounts receivable, net of allowance for doubtful accounts of $147 and $144, respectively | 4,748 |
| | 4,657 |
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| Inventories | 2,262 |
| | 2,198 |
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| Prepaid expenses and other current assets | 132 |
| | 197 |
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| Total current assets | 8,440 |
| | 7,764 |
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| Property, plant and equipment, net | 4,897 |
| | 5,024 |
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| Total assets | $ | 13,337 |
| | $ | 12,788 |
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| LIABILITIES AND EQUITY | |
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| Current liabilities: | |
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| Accounts payable | $ | 1,822 |
| | $ | 1,500 |
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| Accrued liabilities | 90 |
| | 106 |
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| Current portion of long-term debt | 201 |
| | 201 |
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| Total current liabilities | 2,113 |
| | 1,807 |
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| Long-term debt, net of current portion | 1,572 |
| | 1,673 |
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| Deferred taxes, net | 72 |
| | 74 |
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| Total liabilities | 3,757 |
| | 3,554 |
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| Commitments | — |
| | — |
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| Equity: | |
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| Common stock (no par value, 1,000 shares authorized, 200 shares issued and outstanding at June 30, 2017 and December 31, 2016) | 20 |
| | 20 |
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| Retained earnings | 8,874 |
| | 8,575 |
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| Fells Point Wholesale Meats, Inc. shareholders' equity | 8,894 |
| | 8,595 |
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| Non-controlling interests | 686 |
| | 639 |
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| Equity | 9,580 |
| | 9,234 |
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| Total liabilities and equity | $ | 13,337 |
| | $ | 12,788 |
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See accompanying notes to consolidated financial statements.
FELLS POINT WHOLESALE MEATS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands)
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| | Six Months Ended (Unaudited) | | Year Ended |
| | June 30, 2017 | | June 30, 2016 | | December 31, 2016 |
| Net sales | $ | 30,369 |
| | $ | 29,637 |
| | $ | 59,427 |
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| Cost of sales | 24,810 |
| | 23,330 |
| | 46,791 |
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| Gross profit | 5,559 |
| | 6,307 |
| | 12,636 |
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| Operating expenses | 3,226 |
| | 2,980 |
| | 6,230 |
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| Operating income | 2,333 |
| | 3,327 |
| | 6,406 |
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| Interest expense | 27 |
| | 37 |
| | 62 |
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| Loss on asset disposal | — |
| | — |
| | 3 |
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| Income before income taxes | 2,306 |
| | 3,290 |
| | 6,341 |
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| Income tax expense | 92 |
| | 94 |
| | 193 |
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| Net income | 2,214 |
| | 3,196 |
| | 6,148 |
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| Net income attributable to non-controlling interests | 47 |
| | 39 |
| | 90 |
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| Net income attributable to Fells Point Wholesale Meats, Inc. shareholders | $ | 2,167 |
| | $ | 3,157 |
| | $ | 6,058 |
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See accompanying notes to consolidated financial statements.
FELLS POINT WHOLESALE MEATS, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(Amounts in thousands, except share data)
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| | Fells Point Wholesale Meats, Inc. Stock Shares | | Fells Point Wholesale Meats, Inc. Stock Amount | | Retained Earnings | | Non-controlling Interest | | Total Equity |
| Balance, December 31, 2015 | 200 |
| | $ | 20 |
| | $ | 8,058 |
| | $ | 549 |
| | $ | 8,627 |
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| Net income | — |
| | — |
| | 6,058 |
| | 90 |
| | 6,148 |
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| Capital distributions | — |
| | — |
| | (5,541 | ) | | — |
| | (5,541 | ) |
| Balance, December 31, 2016 | 200 |
| | 20 |
| | 8,575 |
| | 639 |
| | 9,234 |
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| Net income (unaudited) | — |
| | — |
| | 2,167 |
| | 47 |
| | 2,214 |
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| Capital distributions (unaudited) | — |
| | — |
| | (1,868 | ) | | — |
| | (1,868 | ) |
| Balance, June 30, 2017 (unaudited) | 200 |
| | $ | 20 |
| | $ | 8,874 |
| | $ | 686 |
| | $ | 9,580 |
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See accompanying notes to consolidated financial statements.
FELLS POINT WHOLESALE MEATS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands) |
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| | Six Months Ended (Unaudited) | | Year Ended |
| | June 30, 2017 | | June 30, 2016 | | December 31, 2016 |
| Cash flows from operating activities: | |
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| Net income | $ | 2,214 |
| | $ | 3,196 |
| | $ | 6,148 |
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| Adjustments to reconcile net income to net cash provided by operating activities: | |
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| Depreciation | 219 |
| | 160 |
| | 389 |
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| Provision for allowance for doubtful accounts | — |
| | 1 |
| | 59 |
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| Deferred taxes | (2 | ) | | 15 |
| | 21 |
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| Loss on sale of assets | — |
| | — |
| | (3 | ) |
| Changes in assets and liabilities: | | | | | |
| Accounts receivable | (92 | ) | | 471 |
| | 235 |
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| Inventories | (63 | ) | | (190 | ) | | (211 | ) |
| Prepaid expenses and other current assets | 65 |
| | (78 | ) | | (42 | ) |
| Accounts payable and accrued liabilities | 306 |
| | 117 |
| | (132 | ) |
| Net cash provided by operating activities | 2,647 |
| | 3,692 |
| | 6,464 |
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| Cash flows from investing activities: | |
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| Capital expenditures | (93 | ) | | (145 | ) | | (492 | ) |
| Net cash used in investing activities | (93 | ) | | (145 | ) | | (492 | ) |
| Cash flows from financing activities: | |
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| Payment of debt | (100 | ) | | (47 | ) | | (174 | ) |
| Capital distributions | (1,868 | ) | | (2,635 | ) | | (5,541 | ) |
| Net cash used in financing activities | (1,968 | ) | | (2,682 | ) | | (5,715 | ) |
| Net increase in cash and cash equivalents | 586 |
| | 865 |
| | 257 |
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| Cash and cash equivalents-beginning of period | 712 |
| | 455 |
| | 455 |
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| Cash and cash equivalents-end of period | $ | 1,298 |
| | $ | 1,320 |
| | $ | 712 |
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| Supplemental cash flow disclosures: | | | | | |
| Cash paid for income taxes | $ | 108 |
| | $ | 206 |
| | $ | 313 |
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| Cash paid for interest | $ | 27 |
| | $ | 31 |
| | $ | 56 |
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See accompanying notes to consolidated financial statements.
FELLS POINT WHOLESALE MEATS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands)
Note 1 Description of Business
Founded in 1993, Fells Point Wholesale Meats, Inc. (“Company” or “Fells Point”), is a specialty protein manufacturer and distributor in the metro Baltimore, Washington DC area. Fells Point’s customer base consists primarily of menu-driven independent restaurants and fine dining establishments.
Note 2 Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements of Fells Point, and its consolidated entities (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP). All intercompany transactions and balances have been eliminated in the consolidation. Financial information as of and for the periods ended June 30, 2017 and 2016 is unaudited.
Unaudited Interim Financial Statements
The accompanying unaudited consolidated financial statements and the related interim information contained within the notes to such unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Accordingly, they do not include all the information and disclosures required by GAAP for complete financial statements. These unaudited consolidated financial statements and related notes should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the fiscal year ended December 31, 2016.
The unaudited consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements, and in the opinion of management include all normal recurring adjustments that are necessary for the fair statement of the Company’s interim period results.
Variable Interest Entity
Monroe Holdings, LLC (“Monroe”), an entity controlled by Fells Point's owners, was founded in 2009 to purchase and build-out a new production and distribution facility which is currently leased to Fells Point. Fells Point is the guarantor on Monroe's mortgage obligation. Pursuant to Accounting Standards Codification (“ASC”) Topic 810, Consolidation, the Company is required to include in its consolidated financial statements, the financial statements of its variable interest entity (“VIE”). ASC 810 requires a VIE to be consolidated if the company is subject to a majority of the risk of loss.
The following table represents the carrying amount of Monroe's assets and liabilities included in the Company's consolidated balance sheets:
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| | | June 30, 2017 (unaudited) | | December 31, 2016 |
| Cash and cash equivalents | | $ | 119 |
| | $ | 113 |
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| Property, plant and equipment, net | | $ | 2,366 |
| | $ | 2,400 |
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| Current portion of long-term debt | | $ | 201 |
| | $ | 201 |
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| Long-term debt, net of current portion | | $ | 1,572 |
| | $ | 1,673 |
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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. Significant estimates include accounts receivables allowances and valuation of long-lived assets. Actual results could differ from those estimates.
Revenue Recognition
Revenue from the sale of a product is recognized at the point at which the product is delivered to the customer. Sales discounts are recognized as a reduction of sales.
Cost of Sales
The Company records cost of sales based upon the net purchase price paid for a product, including applicable freight charges incurred to deliver the product to the Company’s warehouse, protein processing costs, and depreciation expense.
Operating Expenses
Operating expenses include the costs of facilities, product handling and replenishment, delivering, selling and general administrative activities.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of less than three months to be cash equivalents. The Company periodically maintains balances at financial institutions which may exceed Federal Deposit Insurance Corporation (“FDIC”) insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant risks on its cash in bank accounts.
Accounts Receivable
Accounts receivable consist of trade receivables from customers and are recorded net of an allowance for doubtful accounts. The allowance for doubtful accounts is determined based upon historical experience.
Inventories
Inventories consists primarily of finished goods and are valued at the lower of cost or market. Fells Point records inventory based on last cost which approximates the first-in, first-out method. At June 30, 2017 and December 31, 2016, the Company did not record an inventory reserve due to the high turnover rate and low spoilage rate of inventory.
Concentrations of Credit Risks
Financial instruments that subject the Company to concentrations of credit risk consist of cash and accounts receivables. The Company’s policy is to deposit its cash and temporary cash investments with major financial institutions. The Company distributes its food and related products to a customer base that consists primarily of leading menu-driven independent restaurants and fine dining establishments. To reduce credit risk, the Company performs ongoing credit evaluations of its customers’ financial conditions and may require personal guarantees. The Company generally does not require collateral. There is no significant receivable balance or sales with any individual customer.
Property, Plant and Equipment
Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. 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 term of the lease.
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 six months ended June 30, 2017 or during the year ended December 31, 2016.
Employee Benefit Programs
The Company established a retirement plan in accordance with section 401(k) of the Internal Revenue Code. The Company recognized expense related to the plan totaling $40 (unaudited) and $38 (unaudited) for the six months ended June 30, 2017 and June 30, 2016, respectively, and $79 for the year ended December 31, 2016.
Fair Value of Financial Instruments
As of June 30, 2017 and December 31, 2016, the Company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, and debt. The fair values of cash and cash equivalents, accounts receivable and accounts payable approximate their respective carrying values because of the short maturity of those instruments. The carrying value of the Company's debt instruments approximate fair value due to the variable interest rate pricing obtained by the Company.
Income Taxes
Fells Point has elected to be taxed as an S corporation. The District of Columbia does not honor the S Corporation tax status for state income tax purposes, thus a tax provision is recorded for the periods presented realted to those taxes. The Company accounts for income taxes in accordance with ASC 740, “Income Taxes.” Deferred tax assets or liabilities are recorded to reflect the future tax consequences of temporary differences between the financial reporting basis of assets and liabilities and their tax basis at each year-end. These amounts are adjusted, as appropriate, to reflect enacted changes in tax rates expected to be in effect when the temporary differences reverse. The Company follows certain provisions of ASC 740, “Income Taxes” which established a single model to address accounting for uncertain tax positions and clarifies the accounting for income taxes by prescribing a minimum recognition threshold that a tax position is required to meet before being recognized in the financial statements. The Company evaluates uncertain tax positions, if any, by determining if it is more likely than not to be sustained upon examination by the tax authorities. The Company records uncertain tax positions when it is estimable and probable that such liabilities have been incurred. The Company, when required, will accrue interest and penalties related to income tax matters in income tax expense.
Note 3 Property, Plant and Equipment
Property, plant and equipment as of June 30, 2017 and December 31, 2016 consisted of the following:
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| | | Useful Lives | | June 30, 2017 (unaudited) | | December 31, 2016 |
| Land | | Indefinite | | $ | 189 |
| | $ | 189 |
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| Buildings | | 39 years | | 687 |
| | 687 |
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| Machinery and equipment | | 5-10 years | | 2,161 |
| | 2,077 |
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| Computers, data processing and other equipment | | 3-7 years | | 320 |
| | 312 |
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| Leasehold improvements | | 39 years | | 4,310 |
| | 4,310 |
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| Furniture and fixtures | | 7 years | | 16 |
| | 16 |
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| | | | | 7,683 |
| | 7,591 |
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| Less: accumulated depreciation | | | | (2,786 | ) | | (2,567 | ) |
| Property, plant, and equipment, net | | | | $ | 4,897 |
| | $ | 5,024 |
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Depreciation expense was $219 (unaudited) and $160 (unaudited) for the six months ended June 30, 2017 and June 30, 2016, respectively, and $389 for the year ended December 31, 2016. The Company sold a vehicle during 2016 which resulted in a loss of $3.
Note 4 Debt Obligations
Debt obligations as of June 30, 2017 and December 31, 2016 consisted of the following:
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| | June 30, 2017 (unaudited) | | December 31, 2016 |
| Mortgage note | $ | 1,773 |
| | $ | 1,874 |
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| Less: current installments | (201 | ) | | (201 | ) |
| Total debt obligations excluding current installments | $ | 1,572 |
| | $ | 1,673 |
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Maturities of the Company's debt for each of the next five years and thereafter at December 31, 2016 are as follows:
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| | | December 31, 2016 |
| 2017 | | $ | 201 |
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| 2018 | | 201 |
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| 2019 | | 201 |
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| 2020 | | 201 |
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| 2021 | | 201 |
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| Thereafter | | 869 |
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| Total | | $ | 1,874 |
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On April 28, 2016, Monroe entered into a $2,007 mortgage note with Bank of America, N.A. used to purchase a new production and distribution facility. The interest rate on the mortgage note is equal to LIBOR plus 2%. Subject to adjustment for prepayments, Monroe is required to pay monthly principal payments of $17 through maturity on April 19, 2026. The mortgage note is fully guaranteed by Fells Point.
The mortgage note requires compliance with a minimum fixed charge coverage ratio of 1.25:1.0 and a maximum funded debt to EBITDA ratio of 2.5:1.0. As of June 30, 2017 and December 31, 2016, the Company was in compliance with all debt covenants under this agreement.
Revolving Line of Credit
On September 21, 2015 , Fells Point entered into a revolving line of credit agreement with Bank of America, N.A. with maximum available credit of $1,500 to be used for general working capital requirements. The revolving line of credit terminates on July 31, 2017. The interest rate on amounts borrowed under this line of credit bear interest equal to LIBOR plus 1.75%. The line of credit agreement requires compliance with a minimum fixed charge coverage ratio of 1.25:1.0 and a maximum funded debt to EBITDA ratio of 2.5:1.0.
The Company did not draw on the revolving line of credit during the six months ended June 30, 2017 or during the year ended December 31, 2016. As of June 30, 2017 and December 31, 2016, the Company was in compliance with all debt covenants under this agreement.
Note 5 Commitments
The Company leases vehicles under long-term operating lease agreements that expire at various dates. The Company recognizes operating lease costs, including any determinable rent increases, on a straight-line basis over the lease term. As of December 31, 2016, the Company is obligated under non-cancelable operating lease agreements to make future minimum lease payments as follows:
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| | | December 31, 2016 |
| 2017 | | $ | 389 |
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| 2018 | | 429 |
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| 2019 | | 391 |
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| 2020 | | 367 |
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| 2021 | | 304 |
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| Thereafter | | 483 |
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| Total minimum lease payments | | $ | 2,363 |
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Rent expense under operating leases amounted to $260 (unaudited) and $235 (unaudited) for the six months ended June 30, 2017 and June 30, 2016, respectively, and $484 for the year ended December 31, 2016.
Note 6 Income Taxes
The provision for income taxes consists of the following for the year ended December 31, 2016:
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| | December 31, 2016 |
| Current income tax expense | $ | 172 |
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| Deferred income tax expense | 21 |
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| Total | $ | 193 |
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Deferred taxes as of December 31, 2016 consist of the following:
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| | December 31, 2016 |
| Deferred tax assets: | |
| Bad debt reserve | $ | 13 |
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| UNICAP | 5 |
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| Total deferred tax assets | 18 |
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| Deferred tax liabilities: | |
| Prepaid expenses | (6 | ) |
| Fixed assets | (86 | ) |
| Total deferred tax liabilities: | (92 | ) |
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| Total net deferred tax liability | $ | (74 | ) |
The deferred tax provision results from the effects of net changes during the year in deferred tax assets and liabilities arising from temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and amount used for income tax purposes. The Company files income tax returns in the District of Columbia and the 2014 through 2016 tax years remain open for examination under a three-year statute of limitations. The Company records interest and penalties, if any, in income tax expense.
As of December 31, 2016, the Company did not have any material uncertain tax positions.
Note 7 Subsequent Events
On August 25, 2017, The Chefs' Warehouse, Inc. acquired the Company for approximately $33,000 including cash and stock. The final purchase price is subject to a customary working capital true-up and additional consideration payable in the form of an earn-out amount which could total approximately $12,000. Subsequent events have been evaluated through November 6, 2017, the date these financial statements were available to be issued.
