On December 16, 2021, the Company entered into an equity purchase agreement with Arcadia, Inc., a California corporation, the shareholders of Arcadia, Inc. and certain other parties (the “Equity Purchase Agreement”). On December 23, 2021, pursuant to the Equity Purchase Agreement, the Company completed the acquisition of a 60% controlling interest in Arcadia Products, LLC, a Colorado limited liability company resulting from the conversion of Arcadia, Inc. (collectively, “Arcadia”) for closing consideration of $261,000 in cash (excluding $7,654 in acquired cash) and 551,458 shares of its common stock, par value $0.05 per share. A portion of the cash consideration was placed into escrow and was subject to certain post-closing adjustments.

DMC acquired Arcadia as part of its strategy of building a diversified portfolio of industry-leading businesses with differentiated products and services. Arcadia supplies architectural building products, including exterior and interior framing systems, curtain walls, windows, doors, and interior partitions to the commercial construction market; and also supplies customized windows and doors to the high-end residential construction market.

The acquisition was funded by the Company through cash and marketable securities, equity, and debt financing. Assets acquired and liabilities assumed have been recorded at their fair values. Certain fair values were determined by management using the assistance of third-party valuation specialists. The valuation methods used to determine the fair value of intangible assets included the income approach—excess earnings method for customer relationships and customer backlog and the income approach—relief from royalty method for the trade name acquired. A number of assumptions and estimates were involved in the application of these valuation methods, including forecasts of revenues, costs of revenues, operating expenses, tax rates, capital expenditures, customer attrition, discount rates and working capital changes.

The following table sets forth the preliminary and final components of the fair value of total consideration transferred and net assets acquired. Measurement period adjustments were recognized in the period in which the adjustments were determined and calculated as if the accounting had been completed as of the acquisition date.


	Preliminary		Measurement Period Adjustments		Final
	December 23, 2021				December 31, 2022
Cash, including cash acquired(1)	$	268,654	$	2,034	$	270,688
Equity	21,716		—		21,716
Future contractual consideration to be paid(2)	—		1,110		1,110
Total fair value of consideration transferred	290,370		3,144		293,514

Assets acquired:
Cash and cash equivalents	$	7,654	$	—	$	7,654
Accounts receivable	31,456		—		31,456
Inventories	60,503		—		60,503
Prepaid expenses and other	2,438		(187)		2,251
Property, plant and equipment(3)	17,323		4,770		22,093
Goodwill(4)	141,266		459		141,725
Intangible assets(5)	254,500		—		254,500
Other long-term assets(6)	122		41,858		41,980
Total assets acquired	515,262		46,900		562,162
Liabilities assumed:
Accounts payable	8,792		—		8,792
Other current liabilities(6)	22,520		4,785		27,305

Other long-term liabilities(6)	—		36,876		36,876
Total liabilities assumed	31,312		41,661		72,973
Redeemable noncontrolling interest(7)	193,580		2,095		195,675
Total assets acquired and liabilities assumed	$	290,370	$	3,144	$	293,514

(1) Cash sources of funding included $150,000 in new term loan debt and $118,654 of cash and marketable securities on hand. During the year ended December 31, 2022, working capital estimates at the time of acquisition were finalized. In April 2022, $640 was returned to the Company from the funds previously placed into escrow. In August 2022, the Company paid the prior shareholders of Arcadia $2,674 in additional consideration to compensate for certain tax impacts of the transaction, as provided in the Equity Purchase Agreement.

(5) Intangible assets consist of $210,500 of customer relationships, $22,000 of trade name, and $22,000 of customer backlog after measurement period adjustments. During the year ended December 31, 2022, the Company reclassified $500 from customer relationships to customer backlog due to changes in purchase price allocation estimates. A useful life of 15 years was assigned to both customer relationships and trade name, while a useful life of 7 months was assigned to customer backlog, and as such, customer backlog was fully amortized as of December 31, 2022.

(6) The measurement period adjustments within "Other long-term assets", "Other current liabilities", and "Other long-term liabilities" primarily relate to $41,219 of right-of-use assets, $4,343 of current lease liabilities, and $36,876 of long-term lease liabilities, respectively. These balances were recorded within the Consolidated Balance Sheet as of December 31, 2021; however, they were excluded from the preliminary purchase price footnote given their immaterial impact on total net assets acquired.

The results of Arcadia's operations have been included in DMC's Consolidated Financial Statements since December 23, 2021, the date of the acquisition. For the year ended December 31, 2021, Arcadia had no sales activity due to a planned shutdown between the acquisition date and December 31, 2021, but it did incur total expenses of $2,020, including manufacturing expenses recorded within cost of products sold of $1,044, selling, general and administrative expenses of $613, and amortization of purchased intangible assets of $363.

The limited liability company operating agreement for Arcadia (the “Operating Agreement”) contains a right for the Company to purchase the remaining interest in Arcadia from the minority interest holder on or after the third anniversary of the acquisition closing date (“Call Option”). Similarly, the minority interest holder of Arcadia has the right to sell its remaining interest in Arcadia to the Company on or after the third anniversary of the acquisition closing date (“Put Option”). Both the Call Option and Put Option enable the respective holder to exercise their rights based upon a predefined calculation as included within the Operating Agreement.

The Company initially accounted for the noncontrolling interest at its acquisition date fair value. We determined that neither the Call Option nor the Put Option meet the definition of a derivative under ASC 815 Derivatives and Hedging as the Operating Agreement does not allow for contractual net settlement, the options cannot be settled outside the Operating Agreement through a market mechanism, and the underlying shares are deemed illiquid as they are not publicly traded and thus not considered readily convertible to cash. Additionally, the settlement price for both options is based upon a predefined calculation tied to adjusted earnings rather than a fixed price, and the formula is based upon a multiple of Arcadia’s average adjusted earnings over a three-year period. As such, we have concluded that the Call Option and Put Option are embedded within the noncontrolling interest and therefore do not represent freestanding instruments.

Given that the noncontrolling interest is subject to possible redemption with redemption rights that are not entirely within the control of the Company, we have concluded that the noncontrolling interest should be accounted for in accordance with ASC 480 Distinguishing Liabilities from Equity ("ASC 480"). The noncontrolling interest is also probable of redemption, as the only criteria for the security to become redeemable is the passage of time. As such, the redeemable noncontrolling interest is classified in temporary equity, separate from the stockholders’ equity section, in the Consolidated Balance Sheets.

At each balance sheet date subsequent to acquisition, two separate calculations must be performed to determine the value of the redeemable noncontrolling interest. First, the redeemable noncontrolling interest must be accounted for in accordance with ASC 810 Consolidation (“ASC 810”) whereby income (loss) and cash distributions attributable to the redeemable noncontrolling interest holder are ascribed. After this occurs, applicable provisions of ASC 480 must be considered to determine whether any further adjustment is necessary to increase the carrying value of the redeemable noncontrolling interest. An adjustment would only be necessary if the estimated settlement amount of the redeemable noncontrolling interest, per the terms of the Operating Agreement, exceeds the carrying value calculated in accordance with ASC 810. If such adjustment is required, the impact is immediately recorded to retained earnings and therefore does not impact the Consolidated Statements of Operations or Comprehensive Income (Loss).

As of December 31, 2022, the redeemable noncontrolling interest is $187,522 in comparison to our previous estimate at December 31, 2021 of $197,196. The decrease is attributable to a decline in the estimated settlement amount of the redeemable noncontrolling interest due to a reduction in average adjusted earnings.

In order to equalize after-tax consideration to the redeemable noncontrolling interest holder relative to an alternative transaction structure, immediately following the closing of the acquisition, the Company loaned approximately $24,902 to the redeemable noncontrolling interest holder. The loan was evidenced by an unsecured promissory note, and the loan will be repaid out of proceeds from the sale of the redeemable noncontrolling interest holder’s interests in Arcadia, whether received upon exercise of the Put Option, the Call Option or upon sales to third parties permitted under the terms of the Operating Agreement. The loan must be repaid in full by December 16, 2051 and is recorded within "Other assets" in the Consolidated Balance Sheets.

Pro forma financial information is presented for informational purposes and is not intended to represent or be indicative of the actual results of operations of the combined business that would have been reported had the acquisition of Arcadia been completed at the beginning of fiscal year 2020, nor is it representative of future operating results of the Company.

ASC 805 requires pro forma adjustments to reflect the effects of fair value adjustments, transaction costs, capital structure changes, the tax effects of such adjustments, and also requires nonrecurring adjustments to be prepared and presented. The adjustments to the historical Arcadia financial results include removal of nonrecurring transaction costs. Results were further adjusted to reflect a full period of (a) fair value adjustments related to inventory and incremental intangible asset amortization, (b) interest expense with the higher principal and interest rates associated with the Company's term loan incurred to finance, in part, the acquisition of Arcadia, (c) the effects of integration costs on the results of Arcadia's operations, and (d) the effects of adjustments on income taxes.