ASC Codification
sameie2546
Case_02_McNelis.docxCase 02 SS2019 ACCT 5365
General Background
Las Cruces, Inc. (the “Company”) is a leading online marketplace for college-related paraphernalia and connects consumers with multiple retailers. The Company’s website, www.lascruces.com, enables consumers to search for, compare and apply for a variety of college-related memorabilia. The Company provides consumers with research, news articles, expert advice and online tools to help them select purchases and gifts based on their individual needs. Its online marketplace matches consumers actively seeking college-related materials with retailers and allows retailers to solicit and approve purchases in a manner that is more cost effective than traditional offline channels.
We have been engaged to audit the consolidated balance sheet of Las Cruces,, Inc. (the “Company”) as of December 31, 2018 and the consolidated balance sheet of Las Cruces, L.P. (the “Predecessor”) as of December 31, 2017, and the related consolidated statements of operations, stockholders equity and partners’ capital, and cash flows for the period from September 15, 2018 (inception) to December 31, 2018 (representing the Company); and the period from January 1, 2018 through October 30, 2018, the year ended December 31, 2017, and the period from March 25, 2016 to December 31, 2016 for Las Cruces, L.P. (representing the Predecessor); and the period from January 1, 2016 through March 24, 2016 for TAMUCT, L.P. (representing the Predecessor’s Predecessor).
To recap:
During the three years ended December 31, 2018, there have been three separate entities operating as the Company, as follows:
TAMUCT,LP++++++++LasCruces,LP+++++++++++++++++ Las Cruces, Inc.
|-----------------|-----------|-----------------------|-----------------|--------------------------|
1/1/16 3/23/16 12/31/16 12/31/17 10/30/18 12/31/18
.
Acquisition of Predecessor Entity
In September 2018, a syndicate of investors led by Calk Ventures created a holding company called Calk Holdings, Inc. and a 100% owned subsidiary Calk.com, Inc. The purpose of the two entities was to purchase all assets of Las Cruces, LP (the Predecessor), an operating company. Las Cruces, LP (the Predecessor) had net tangible assets of $10 million.
On October 30, 2017, the Company issued approximately 9.9 million shares of Series A redeemable preferred stock (Series A) and 1 million shares of common stock to investors, raising approximately $63.8 million. $63,799,000 was allocated to the preferred shares as the shares were ultimately redeemable for the initial issuance price plus any future accrued dividends. The common stock was given a value of $1,000, based on its par of $0.001. Simultaneous with the preferred stock issuance, the Company obtained approximately $75 million in debt to fund the acquisition.
The Company then acquired the Predecessor, paying approximately $133.5 million cash to the Predecessor, as well as issuing approximately 2.2 million shares of Series A-1 Preferred Stock valued at $16,504,747 ($7.818057 per share) and 1,000,000 shares of common stock. The former owner was paid in cash and also retained approximately 20% ownership in the new company.
Preferred Stock Features
As mentioned above, the Company issued Series A and Series A-1 Convertible Redeemable Preferred Stock. The conversion characteristics for both the Series A and Series A-1 instruments are as follows: each outstanding share of preferred stock will be converted into i) the number of fully paid and nonassessable shares of common stock which results from dividing the conversion price per share in effect for the preferred stock at the time of conversion into the conversion value of the preferred stock and ii) one fully paid and nonassessable share of Series B (or B-1) redeemable preferred stock per share of preferred stock (i.e. 1 share of Series A converted into 1 share of Series B + 1 share of common stock). The conversion price for Series A is $6.390727 and for Series A-1 is $7.818057. The business purpose behind these preferred stock arrangements is to allow the holders of the Series A and A-1 instruments to convert into the combination of both Series B and B-1 preferred stock, respectively and common stock. In addition, this allows the holders to redeem the Series B shares while maintaining their ownership percentage in the Company (i.e., no dilution).
Questions:
1. What is the proper accounting treatment for the purchase of the assets of Las Cruces, LP (Predecessor)?
2. What affect does the former owner’s continuing ownership have on the accounting treatment?
3. How should Las Cruces, Inc. (the Company) account for the preferred stock?
a. Where on the balance sheet should these financial instruments be classified?
b. How should these financial instruments be measured each year?
c. Does ASC 470 apply to these financial instruments?
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