UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
(Amendment No. 1)
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): October 25, 2018
NINE ENERGY SERVICE, INC.
(Exact name of registrant as specified in its charter)
Delaware | 001-38347 | 80-0759121 | ||
(State or Other Jurisdiction of Incorporation) |
(Commission File Number) |
(IRS Employer Identification No.) |
2001 Kirby Drive, Suite 200
Houston, Texas 77019
(Address of principal executive offices)
(281) 730-5100
(Registrants telephone number, including area code)
N/A
(Former name or former address, if changed since last report.)
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:
☐ |
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
☐ |
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
☐ |
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
☐ |
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company ☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Introductory Note
As previously reported in the Current Report on Form 8-K filed with the Securities and Exchange Commission by Nine Energy Service, Inc. (the Company) on October 26, 2018 (the Original Form 8-K), on October 25, 2018 (the Closing Date), the Company completed its acquisition (the Magnum Acquisition) of all of the equity interests of Magnum Oil Tools International, LTD, Magnum Oil Tools GP, LLC and Magnum Oil Tools Canada Ltd. (collectively, Magnum) pursuant to a Securities Purchase Agreement, dated as of October 15, 2018.
This Current Report on Form 8-K/A (this Amendment) is filed solely for the purpose of amending the Original Form 8-K to provide the financial statements of Magnum and the pro forma information required by Items 9.01(a) and 9.01(b), respectively, of Form 8-K.
No other modifications to the Original Form 8-K are being made by this Amendment. This Amendment should be read in connection with the Original Form 8-K, which provides a more complete description of the Magnum Acquisition.
Item 9.01 Financial Statements and Exhibits.
(a) |
Financial statements of businesses acquired . |
The audited combined financial statements of Magnum as of and for the years ended December 31, 2017 and 2016, and the notes related thereto, are attached to this Amendment as Exhibit 99.1 and are incorporated herein by reference. In addition, the audited combined financial statements of Magnum as of and for the year ended December 31, 2015, and the notes related thereto, are attached to this Amendment as Exhibit 99.2 and are incorporated herein by reference.
The unaudited combined financial statements of Magnum as of September 30, 2018 and for the nine months ended September 30, 2018 and 2017, and the notes related thereto, are attached to this Amendment as Exhibit 99.3 and are incorporated herein by reference.
(b) |
Pro forma financial information . |
The unaudited pro forma condensed combined balance sheet of the Company as of September 30, 2018 and the unaudited pro forma condensed combined statements of operations of the Company for the nine months ended September 30, 2018 and the year ended December 31, 2017, and the notes related thereto, are attached to this Amendment as Exhibit 99.4 and are incorporated herein by reference.
(d) Exhibits .
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
Dated: January 10, 2019 | NINE ENERGY SERVICE, INC. | |||||
By: |
/s/ Clinton Roeder |
|||||
Clinton Roeder Senior Vice President and Chief Financial Officer (Principal Financial Officer) |
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-222660) of Nine Energy Service, Inc. of (i) our report dated August 30, 2018, except as to note 1, which is as of December 26, 2018, relating to the audited combined financial statements of Magnum Oil Tools as of and for the years ended December 31, 2017 and 2016, which appears in this Current Report on Form 8-K/A and (ii) our report dated December 26, 2018 relating to the audited combined financial statements of Magnum Oil Tools as of and for the year ended December 31, 2015, which appears in this Current Report on Form 8-K/A.
/s/ Fisher, Herbst & Kemble, P.C.
San Antonio, Texas
January 10, 2019
Exhibit 99.1
MAGNUM OIL TOOLS
A UDITED C OMBINED F INANCIAL S TATEMENTS
AS OF AND FOR THE YEARS ENDED
D ECEMBER 31, 2017 A ND 2016
M AGNUM O IL T OOLS
A UDITED C OMBINED F INANCIAL S TATEMENTS
AS OF AND FOR THE YEARS ENDED
D ECEMBER 31, 2017 AND 2016
Contents
Audited Combined Financial Statements |
||||
Independent Auditors Report |
1 | |||
Combined Balance Sheets |
3 | |||
Combined Statements of Income |
4 | |||
Combined Statements of Comprehensive Income |
5 | |||
Combined Statements of Partners Capital |
6 | |||
Combined Statements of Cash Flows |
7 | |||
Notes to the Combined Financial Statements |
8 |
Independent Auditors Report
To the Members of the Audit Committee and Management
Magnum Oil Tools
Corpus Christi, Texas
We have audited the accompanying combined financial statements of Magnum Oil Tools (the Company), which comprise the combined balance sheets as of December 31, 2017 and 2016, and the related combined statements of income, comprehensive income, partners capital, and cash flows for the years then ended, and the related notes to the combined financial statements.
Managements Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these combined financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of combined financial statements that are free from material misstatements, whether due to fraud or error.
Auditors Responsibility
Our responsibility is to express an opinion on these combined financial statements based on our audit. We conducted our audit in accordance with U.S. generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the combined financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the combined financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entitys preparation and fair presentation of the combined 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 entitys 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 combined 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 combined financial statements referred to above present fairly, in all material respects, the financial position of Magnum Oil Tools as of December 31, 2017 and 2016, and the results of their operations and their cash flows for the years then ended in accordance with U.S. generally accepted accounting principles.
/s/ Fisher, Herbst & Kemble, P.C. |
San Antonio, Texas |
August 30, 2018, except as to note 1, which is as of December 26, 2018 |
MAGNUM OIL TOOLS
COMBINED BALANCE SHEETS
DECEMBER 31, 2017 AND 2016
2017 | 2016 | |||||||
ASSETS |
||||||||
Current Assets |
||||||||
Cash and cash equivalents |
$ | 19,187,825 | $ | 23,101,383 | ||||
Accounts receivable - net of allowance for doubtful accounts of $1,391,411 and $1,214,804 |
19,918,358 | 11,535,005 | ||||||
Inventories |
29,408,364 | 11,826,962 | ||||||
Other receivables |
1,288,987 | 800,308 | ||||||
Prepaid expenses |
789,707 | 1,223,161 | ||||||
|
|
|
|
|||||
Total Current Assets |
70,593,241 | 48,486,819 | ||||||
Non-current Assets |
||||||||
Property, plant and equipment, net |
2,861,927 | 3,892,030 | ||||||
Related party receivables |
289 | 190,128 | ||||||
Deposits |
50,382 | 61,682 | ||||||
Other assets |
1,548,397 | 4,665 | ||||||
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|
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Total Assets |
$ | 75,054,236 | $ | 52,635,324 | ||||
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LIABILITIES AND PARTNERS CAPITAL |
||||||||
Current Liabilities |
||||||||
Accounts payable |
$ | 1,302,508 | $ | 1,136,645 | ||||
Accrued expenses |
4,626,306 | 2,688,393 | ||||||
Income tax payable |
27,529 | 62,881 | ||||||
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|
|
|
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Total Current Liabilities |
5,956,343 | 3,887,919 | ||||||
Non-Current Liabilities |
||||||||
Related party payable |
1,723,405 | 1,469,613 | ||||||
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|
|
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Total Liabilities |
7,679,748 | 5,357,532 | ||||||
Partners Capital |
||||||||
Partners capital |
67,920,409 | 48,033,278 | ||||||
Accumulated other comprehensive loss |
(545,921 | ) | (755,486 | ) | ||||
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Total Partners Capital |
67,374,488 | 47,277,792 | ||||||
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Total Liabilities and Partners Capital |
$ | 75,054,236 | $ | 52,635,324 | ||||
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See notes to the combined financial statements.
3
MAGNUM OIL TOOLS
COMBINED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2017 AND 2016
2017 | 2016 | |||||||
SALES |
$ | 89,587,993 | $ | 57,368,287 | ||||
COST OF SALES |
53,968,108 | 44,133,209 | ||||||
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|
|
|
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GROSS PROFIT |
35,619,885 | 13,235,078 | ||||||
OPERATING EXPENSES |
||||||||
Advertising |
240,016 | 238,206 | ||||||
Bad debts |
176,607 | 228,239 | ||||||
Depreciation and amortization |
299,818 | 263,987 | ||||||
Entertainment and travel |
367,081 | 407,842 | ||||||
Information technology expense |
153,716 | 182,182 | ||||||
Insurance |
1,715,862 | 1,762,351 | ||||||
Management fees |
484,370 | 138,687 | ||||||
Occupancy expense |
564,353 | 560,014 | ||||||
Office expense |
105,943 | 92,617 | ||||||
Professional fees |
854,358 | 953,791 | ||||||
Salaries, wages and benefits |
8,387,986 | 7,808,255 | ||||||
Other operating expenses |
67,410 | 9,682 | ||||||
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Total operating expenses |
13,417,520 | 12,645,853 | ||||||
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OPERATING INCOME |
22,202,365 | 589,225 | ||||||
OTHER INCOME (EXPENSE) |
||||||||
Miscellaneous income |
533,888 | 539,013 | ||||||
Interest income |
1,949 | 14 | ||||||
Gain on sale of assets |
5,448 | 33,507 | ||||||
Abandonment loss |
(100,740 | ) | (54,368 | ) | ||||
Other losses - See Note 2 |
(575,820 | ) | | |||||
Interest expense |
(9,531 | ) | (8,128 | ) | ||||
Other expense |
(1,726 | ) | (4,801 | ) | ||||
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|
|
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Total other income (expense) |
(146,532 | ) | 505,237 | |||||
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INCOME BEFORE PROVISION FOR INCOME TAXES |
22,055,833 | 1,094,462 | ||||||
PROVISION FOR INCOME TAXES |
22,128 | 153,299 | ||||||
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NET INCOME |
$ | 22,033,705 | $ | 941,163 | ||||
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See notes to the combined financial statements.
4
MAGNUM OIL TOOLS
COMBINED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2017 AND 2016
2017 | 2016 | |||||||
NET INCOME |
$ | 22,033,705 | $ | 941,163 | ||||
OTHER COMPREHENSIVE INCOME |
||||||||
Changes in unrealized gains and losses on foreign currency translation |
209,565 | 66,497 | ||||||
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Other comprehensive income |
209,565 | 66,497 | ||||||
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Comprehensive Income |
$ | 22,243,270 | $ | 1,007,660 | ||||
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See notes to the combined financial statements.
5
MAGNUM OIL TOOLS
COMBINED STATEMENTS OF PARTNERS CAPITAL
YEARS ENDED DECEMBER 31, 2017 AND 2016
Partners
Capital |
Accumulated
Other Comprehensive Income (Loss) |
Total Partners
Capital |
||||||||||
Balance at January 1, 2016 |
$ | 60,597,898 | $ | (821,983 | ) | $ | 59,775,915 | |||||
Partner distributions |
(13,505,783 | ) | | (13,505,783 | ) | |||||||
Change in accumulated other comprehensive income - foreign currency translation |
| 66,497 | 66,497 | |||||||||
Net income from the year |
941,163 | | 941,163 | |||||||||
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Balance at December 31, 2016 |
48,033,278 | (755,486 | ) | 47,277,792 | ||||||||
Partner distributions |
(2,146,574 | ) | | (2,146,574 | ) | |||||||
Change in accumulated other comprehensive income - foreign currency translation |
| 209,565 | 209,565 | |||||||||
Net income from the year |
22,033,705 | | 22,033,705 | |||||||||
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Balance at December 31, 2017 |
$ | 67,920,409 | $ | (545,921 | ) | $ | 67,374,488 | |||||
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|
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See notes to the combined financial statements.
6
MAGNUM OIL TOOLS
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2017 AND 2016
2017 | 2016 | |||||||
OPERATING ACTIVITIES |
||||||||
Net income |
$ | 22,033,705 | $ | 941,163 | ||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
||||||||
Change in obsolete inventory reserve |
1,090,383 | 2,496,275 | ||||||
Depreciation and amortization expense |
1,130,749 | 1,310,200 | ||||||
Bad debt - accounts receivable |
176,607 | 228,239 | ||||||
Abandonment loss |
100,740 | 54,368 | ||||||
Gain on sale of fixed assets |
(5,448 | ) | (33,507 | ) | ||||
Effect of exchange rate changes on cash |
209,565 | 66,497 | ||||||
Net change in: |
||||||||
Accounts receivable |
(8,559,960 | ) | 1,569,430 | |||||
Other receivables |
(488,679 | ) | 165,264 | |||||
Inventories |
(18,572,465 | ) | 3,076,775 | |||||
Deposits |
11,300 | (500 | ) | |||||
Prepaid expenses and other assets |
(1,110,278 | ) | 366,221 | |||||
Related party receivables |
189,839 | 607,330 | ||||||
Related party payables |
253,792 | 557,088 | ||||||
Accounts payable |
165,863 | (17,552 | ) | |||||
Accrued expenses |
1,937,913 | 349,366 | ||||||
Income tax payable |
(35,352 | ) | (66,821 | ) | ||||
Settlement obligation |
| (1,000,000 | ) | |||||
Distributions payable |
| (2,632,080 | ) | |||||
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Net cash provided by (used in) operating activities |
(1,471,726 | ) | 8,037,756 | |||||
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INVESTING ACTIVITIES |
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Proceeds from sale of fixed assets |
37,383 | 100,283 | ||||||
Purchase of property and equipment |
(332,641 | ) | (175,540 | ) | ||||
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Net cash used in investing activities |
(295,258 | ) | (75,257 | ) | ||||
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FINANCING ACTIVITIES |
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Partner distributions |
(2,146,574 | ) | (13,505,783 | ) | ||||
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Net cash used in financing activities |
(2,146,574 | ) | (13,505,783 | ) | ||||
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DECREASE IN CASH AND CASH EQUIVALENTS |
(3,913,558 | ) | (5,543,284 | ) | ||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR |
23,101,383 | 28,644,667 | ||||||
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CASH AND CASH EQUIVALENTS AT END OF YEAR |
$ | 19,187,825 | $ | 23,101,383 | ||||
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See notes to the combined financial statements.
7
MAGNUM OIL TOOLS
NOTES TO THE COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
1. |
NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES |
Nature of Operations These combined financial statements for Magnum Oil Tools (the Company) include the following business operations:
Magnum Oil Tools International, LTD (MOTI), a Texas limited partnership, is a diversified organization engaged in a wide variety of business activities, providing energy related products and services on a global basis. As of December 31, 2017, MOTI has a finite life and will cease to exist October 6, 2056.
Magnum Oil Tools Canada Ltd (MOT Canada), a limited liability corporation, purchases finished goods exclusively from MOTI for resale to international customers
Magnum Oil Tools GP, LLC (MOT GP), a limited liability company, provides management services exclusively to MOTI.
Basis of Preparation These combined financial statements reflect the Companys financial position, results of operations and cash flows in conformity with U.S. generally accepted accounting principles (GAAP). The combined financial position, results of operations and cash flows of the Company may not be indicative of the Company had it been a separate stand-alone entity during the periods presented, nor are the results stated herein indicative of what the Companys financial position, results of operations and cash flows may be in the future.
These combined financial statements include all of the Companys majority-owned subsidiaries and all of its wholly owned entities. All intercompany balances and transactions have been eliminated.
Use of Estimates The preparation of combined financial statements in conformity with GAAP requires management to make estimates and assumptions that may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the combined financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Management believes that these estimates and assumptions provide a reasonable basis for the fair presentation of the combined financial statements. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the estimate of inventory valuation and allowance for doubtful accounts.
8
MAGNUM OIL TOOLS
NOTES TO THE COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
1. |
NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (continued) |
Foreign Currency Translation The functional currency for MOT Canada is the local currency. Adjustments resulting from translating local currency financial statements to U.S. dollars are reflected in accumulated other comprehensive income.
Cash and Cash Equivalents For the purpose of presentation in the combined financial statements of cash flows, cash and cash equivalents are defined as all bank deposits and short-term securities with original maturities of three months or less. The majority of cash and cash equivalents of the Company are maintained with major financial institutions in the United States and Canada; these financial institutions are subject to the Federal Deposit Insurance Corporation (FDIC) and the Canada Deposit Insurance Corporation (CDIC), respectively. The FDIC insurance coverage is $250,000 per depositor. The CDIC insurance coverage is $100,000 (Canadian dollars) per depositor. As such, interest bearing, non-transaction account deposits with these financial institutions may exceed the amount of insurance provided on such deposits; however, these deposits typically may be redeemed upon demand and therefore, bear minimal risk. As of December 31, 2017, the maximum credit risk exposure is $18,805,055. In monitoring this credit risk, the Company periodically evaluates the stability of the financial institutions with which it has deposits.
Property, Plant and Equipment, Net Property, plant and equipment are stated at cost, less accumulated depreciation. Improvements or betterments of a permanent nature are capitalized. Expenditures for maintenance and repairs are charged to expense when incurred. The cost of assets retired or otherwise disposed of, and the related accumulated depreciation, are eliminated from the accounts in the year of disposal. Gains or losses resulting from property disposals are credited or charged to current operations.
The Company provides for depreciation and amortization using the straight-line method over the estimated useful lives of the assets. Building improvements are depreciated over a period ranging from five to thirty-nine years, machinery and equipment are depreciated over a period ranging from three to seven years, furniture and fixtures are depreciated over seven years, software is amortized over three years, and vehicles are depreciated over a period of five years. The expected useful lives of property, plant and equipment are reviewed annually.
9
MAGNUM OIL TOOLS
NOTES TO THE COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
1. |
NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (continued) |
Inventories Inventories consist of raw materials for the production of finished goods, and finished goods which include a variety of consumable downhole completion products. They are stated at the lower of average cost or net realizable value and are reviewed periodically for obsolescence. Inventory costs are relieved using specific identification in the execution of tools sales.
As of December 31, 2017 and 2016, inventories consisted of the following:
2017 | 2016 | |||||||
Components (inclusive of raw material) |
$ | 19,862,510 | $ | 7,232,089 | ||||
Finished goods (assemblies) |
8,957,572 | 4,580,032 | ||||||
Work in progress |
588,282 | 14,841 | ||||||
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$ | 29,408,364 | $ | 11,826,962 | |||||
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Prepaid Expense Prepaid expenses represent payments for insurance and supplies that will benefit future periods.
Accounts Receivable and Allowance for Doubtful Accounts Accounts receivables primarily consist of amounts due for oil tool sales and related services already performed. The allowance for doubtful accounts is established based on estimated losses through a provision for bad debts charged to earnings. Losses are charged against the allowance when management believes the uncollectibility of a receivable is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The Company provides an assessment of allowances based on an analysis of historic trends of collection and cancellation activity. This estimate is impacted by a number of factors, including changes in the economy, relocations, and demographic or competitive changes in areas of operation. Consequently, an adverse change in those factors could affect the Companys estimate of its bad debts. The allowance for doubtful accounts as of December 31, 2017 and 2016 was $1,391,411 and $1,214,804, respectively.
Accounts Payable and Accruals Liabilities are recognized for amounts to be paid in the future for goods and services received, whether billed by the supplier or not.
10
MAGNUM OIL TOOLS
NOTES TO THE COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
1. |
NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (continued) |
Revenue Recognition The Company accounts for its revenues using the accrual basis of accounting. Revenues from product sales are recognized when risk associated with ownership has passed to the customer. Generally, the date of delivery corresponds to the date upon which the customer takes title to the product and assumes all risk and rewards of ownership.
Income Taxes MOTI files a Form 1065, U.S. Return of Partnership Income. MOT GP files a Form 1120S, U.S. Income Tax Return for an S Corporation.
The aforementioned partnerships and corporations are not taxpaying entities for federal income tax purposes; accordingly, a provision for income taxes for these entities has not been recorded in the accompanying combined financial statements. The respective income or losses are reflected in the partners and shareholders individual or corporate tax returns in accordance with their ownership percentages. The partners and shareholders quarterly estimated tax payments are funded by the entities to satisfy their individual tax obligations.
MOT Canada is a Canadian entity which is subject to relevant foreign tax jurisdictions. MOT Canada files an Alberta Corporate Income Tax Return AT1 to the Alberta Tax and Revenue Administration. MOT Canada also files a T2 Corporation Income Tax Return to the Canada Revenue Agency.
Such expenses derived from the aforementioned tax jurisdictions are included with provisions for income taxes as presented in the Companys combined statements of income.
The Company does pay franchise taxes, which are considered income taxes under the authoritative guidance. The tax jurisdictions which impose a franchise tax include the state of Texas; at December 31, 2017, the Company has a prepaid franchise tax balance of $56,810 which is included in other receivables in its combined balance sheet. As of December 31, 2016, the Company has a franchise tax liability in the amount of $29,404 which is included in income tax payable in its combined balance sheet. Other relevant state tax jurisdictions include the filing of composite tax returns for the states of Colorado, Louisiana, Mississippi, North Dakota, Ohio, Oklahoma, Pennsylvania, and West Virginia. These returns are filed to eliminate the need for non-residents to file an individual tax return on their earnings from a resident company. As of December 31, 2017, the Company had a prepaid balance of $1,231,400 related to state taxes which is included in other receivables in its combined balance sheet. As of December 31, 2016, the Company did not record a prepaid balance for state taxes.
11
MAGNUM OIL TOOLS
NOTES TO THE COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
1. |
NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (continued) |
The Company has adopted the provisions of FASB Accounting Standards Codification 740, Income Taxes (ASC 740), effective January 1, 2009. ASC 740 provides guidance regarding the recognition, measurement, presentation and disclosure in its combined financial statements of tax positions taken or expected to be taken on a tax return, including the decision whether to file or not to file in a particular jurisdiction. U.S. generally accepted accounting principles require the Company management to evaluate tax positions taken by the Company and recognize a tax liability (or asset) if the Company has taken an uncertain position that more likely than not would not be sustained upon examination by the Internal Revenue Service. The Companys management has analyzed the tax positions taken by the Company, and has concluded that as of December 31, 2017 , there are no uncertain positions taken or expected to be taken that would require recognition of a liability (or asset) or disclosure in its combined financial statements. The Company is subject to routine audits by taxing jurisdictions; however, there are currently no audits for any tax periods in progress. The Companys management believes it is no longer subject to income tax examinations for years prior to 2014.
Concentration of Credit Risk Financial instruments which potentially subject the Company to concentrations of credit risk include cash, cash equivalents, and accounts receivable.
The Companys financial condition, and results of operations, are highly dependent upon the prevailing market prices of, and demand for, oil and natural gas. The Company cannot predict future oil and gas demand with any degree of certainty. Sustained weakness in the oil and gas markets may adversely affect its financial condition and results of operations. Similarly, any improvement in oil and gas prices can have a favorable impact on the Companys financial condition, results of operations and capital resources.
The Company manages credit risk related to accounts receivable through credit approvals, credit limits and monitoring procedures. The Company routinely assesses the financial strength of its customers and, based upon factors surrounding the credit risk, establishes an allowance, if required, for uncollectible accounts and, as a consequence, believes that its accounts receivable credit risk exposure beyond such allowance is limited.
Advertising The Company expenses all advertising costs as incurred. Advertising costs totaled approximately $240,016 and $238,206 for the years ended December 31, 2017 and 2016.
12
MAGNUM OIL TOOLS
NOTES TO THE COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
1. |
NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (continued) |
Statements of Cash Flows Supplemental information on cash flows for the years ended December 31, 2017 and 2016 was as follows:
2017 | 2016 | |||||||
Cash paid during the year for taxes |
$ | 1,382,264 | $ | 138,868 | ||||
Cash paid during the year for interest |
$ | 9,531 | $ | 8,128 |
Employee Advances During the year, the Company made advances to employees to be repaid from their earnings over a specified time agreed to by the Company and the employee. At December 31, 2017 and 2016, the employee advances totaled $777 and $307, respectively, which is included in other receivables in the Companys combined balance sheet.
2. |
RELATED PARTY TRANSACTIONS |
The Company leases office space in Corpus Christi and Midland, Texas from an affiliated entity related through common ownership. During 2017 and 2016, $1,066,895 and $1,142,512, respectively of rental expense was paid to this affiliate. These leases are classified as operating leases for which the non-cancelable portion of the respective obligations exceeding twelve months have been included in Note 5.
Included in the Companys combined balance sheets are related party receivables (payables) as follows:
2017 | 2016 | |||||||
Fajitaville Grille North Beach, Inc. |
$ | 165 | $ | 741 | ||||
Marinaville, LLC |
$ | | $ | 2,300 | ||||
Advanced Solids Control, LLC |
$ | | $ | 120,225 | ||||
WTF Insurance Company Ltd |
$ | | $ | 66,862 | ||||
WTF Rentals, LLC |
$ | 124 | $ | | ||||
Magnum International IC-DISC, Inc. |
$ | (1,685,618 | ) | $ | (39,452 | ) | ||
Frazier Technologies, LLC |
$ | (37,787 | ) | $ | (309,353 | ) | ||
WTF Insurance Company Ltd |
$ | | $ | (1,120,808 | ) |
13
MAGNUM OIL TOOLS
NOTES TO THE COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
2. |
RELATED PARTY TRANSACTIONS (continued) |
During the years ended December 31, 2017 and 2016, the Company also provided management and accounting services to various entities related through common ownership. These amounts are reflected as miscellaneous income in the Companys combined statements of income. The following schedule summarizes the total management and accounting fees earned for the years ended December 31, 2017 and 2016 from related parties:
2017 | 2016 | |||||||
Advanced Solids Control, LLC |
$ | 297,012 | $ | 132,138 | ||||
Marinaville, LLC |
| 28,800 | ||||||
Fajitaville Grille North Beach, Inc. |
| 2,000 | ||||||
Gulf Beach Operations, LLC |
| 2,000 | ||||||
Frazier Technologies, LLC |
75,000 | 125,000 | ||||||
Magnum International IC-DISC, Inc. |
30,000 | 30,000 | ||||||
WTF Insurance Company Ltd |
50,000 | 106,862 | ||||||
WTF Properties, LLC |
10,000 | 10,000 | ||||||
|
|
|
|
|||||
Total |
$ | 462,012 | $ | 436,800 | ||||
|
|
|
|
During the year ended December 31, 2017, the Company wrote off related party receivables related to Advance Solids Control, LLC that were deemed to be uncollectible in the amount of $575,820 and reflected as other losses in its combined statements of income.
14
MAGNUM OIL TOOLS
NOTES TO THE COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
3. |
PROPERTY, PLANT AND EQUIPMENT |
The following is a summary of property and equipment, at cost, less accumulated depreciation as of December 31, 2017 and 2016:
2017 | 2016 | |||||||
Machinery and equipment |
$ | 5,382,725 | $ | 5,417,182 | ||||
Buildings improvements |
552,123 | 518,882 | ||||||
Furniture and fixtures |
540,639 | 537,966 | ||||||
Software |
598,337 | 755,999 | ||||||
Vehicles |
953,062 | 978,195 | ||||||
|
|
|
|
|||||
8,026,886 | 8,208,224 | |||||||
Less: accumulated depreciation and amortization |
(5,164,959 | ) | (4,316,194 | ) | ||||
|
|
|
|
|||||
Total property and equipment, net |
$ | 2,861,927 | $ | 3,892,030 | ||||
|
|
|
|
Depreciation and amortization expense related to property and equipment was $1,130,749 and $1,310,200 for the years ended December 31, 2017 and 2016, respectively.
In 2017 and 2016, the Company retired furniture, fixtures and equipment with a cumulative unamortized cost basis of $100,740 and $54,368, respectively, which is presented as abandonment loss in the Companys combined statements of income.
During 2017, the Company also sold or traded furniture, vehicles and setting tools for proceeds of $37,383 resulting in a gain of $5,448 . During 2016, the Company also sold or traded furniture, vehicles and setting tools for proceeds of $100,283 resulting in a gain of $33,507.
4. |
DEFINED CONTRIBUTION PLAN |
The Company provides post-retirement benefits to employees in the form of a Profit Sharing Plan and 401(k) Plan. As of December 31, 2017, in order to maintain safe harbor status, the Company offered a safe harbor matching contribution equal to 100% of salary deferrals that do not exceed 3% of a participants compensation plus 50% of salary deferrals between 3% and 5%. The Company may also offer a discretionary contribution to its employees, eligible for the Profit Sharing Plan.
15
MAGNUM OIL TOOLS
NOTES TO THE COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
4. |
DEFINED CONTRIBUTION PLAN (continued) |
Total contributions to the plan for the year ended December 31, 2017 were $358,708 in safe harbor matches and $367,072 in profit sharing contributions. Total contributions to the plan for the year ended December 31, 2016 were $213,563 in safe harbor matches and $578,384 in profit sharing contributions.
5. |
COMMITMENTS AND CONTINGENCIES |
Legal The Company has been and may in the future be involved as a party to various legal proceedings, which are incidental to the ordinary course of business. The Company regularly analyses current information and, as necessary, provides accruals for probable liabilities on the eventual disposition of these matters. In the opinion of management and legal counsel, as of December 31, 2017, there were no threatened or pending legal matters that would have a material impact on the Companys combined financial statements.
Leases Operating lease agreements include leases for transportation equipment, machinery, and office space. Rental expense of $1,630,283 and $1,344,561 was recorded for the years ended December 31, 2017 and 2016, respectively, and is included in occupancy expense and cost of sales in the Companys combined statements of income.
Future net minimum lease payments for non-cancellable operating leases were as follows:
2018 |
$ | 1,645,041 | ||
2019 |
1,507,190 | |||
2020 |
1,265,416 | |||
2021 |
1,107,661 | |||
2022 |
1,106,829 | |||
Thereafter |
1,098,508 | |||
|
|
|||
Total |
$ | 7,730,645 | ||
|
|
Purchase Commitments On September 29, 2017, the Company entered into an exclusive distribution agreement with a third-party supplier. The agreement required prepayment to the supplier in the amount of $2 million and an additional payment of $500,000 was required as a pre-payment for future product purchases. The agreement also required a purchase minimum of product for the period ending December 31, 2017 and the Company will negotiate the minimum required for each year subsequent to December 31, 2017.
16
MAGNUM OIL TOOLS
NOTES TO THE COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
5. |
COMMITMENTS AND CONTINGENCIES (continued) |
For the coming year ended December 31, 2018, the Company must purchase a minimum of forty-eight thousand pounds of product which approximates $432,000. The terms of this agreement mature on September 29, 2021, with provisions to renew for a successive one year term. As of December 31, 2017, the Company had a prepaid balance for purchases from this vendor of approximately $1,875,800 , of which $579,800 is included in prepaid expenses and $1,296,000 is included in other assets in the Companys combined balance sheets.
Debt The Company is a guarantor on loans entered into by companies related through common ownership. The promissory notes are collateralized by property and various assets of the borrower with maturity dates ranging from 2018 to 2020. The total monthly installment amounts are approximately $29,000, with outstanding balances of approximately $3,796,000 and $7,267,000 as of December 31, 2017 and 2016. The Company is required to perform upon the related companies default for any present or future obligations. The related companies are performing on their debt obligations; therefore, no amount of the guaranteed debt is included in the Companys combined financial statements.
6. |
INCOME TAXES |
The Companys provision for income taxes for the years ended December 31, 2017 and 2016 is comprised of the following:
2017 | 2016 | |||||||
State income tax |
$ | (35,614 | ) | $ | 120,616 | |||
Foreign income tax - Canada |
57,742 | 32,683 | ||||||
|
|
|
|
|||||
Total provision for income taxes |
$ | 22,128 | $ | 153,299 | ||||
|
|
|
|
17
MAGNUM OIL TOOLS
NOTES TO THE COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
6. |
INCOME TAXES (continued) |
The Companys provision for income taxes differed from the statutory rate of 34% as follows:
2017 | 2016 | |||||||
Tax expense at statutory rate |
$ | 7,579,648 | $ | 372,117 | ||||
Add effects of: |
||||||||
Income on pass thru entities |
(7,186,326 | ) | 25,736 | |||||
State income tax |
(1,522 | ) | 120,616 | |||||
Excludible income under Section 831(b) |
(332,897 | ) | (356,371 | ) | ||||
Capital loss carryforward |
(7,904 | ) | 1,651 | |||||
Dividend received deduction |
(21,323 | ) | (7,429 | ) | ||||
Rate differential |
(7,548 | ) | (3,021 | ) | ||||
|
|
|
|
|||||
Total provision for income taxes |
$ | 22,128 | $ | 153,299 | ||||
|
|
|
|
As of December 31, 2017 and 2016, the Company had no deferred tax assets.
7. |
SUBSEQUENT EVENTS |
On October 25, 2018, the Company was acquired by a public entity. As part of the acquisition, MOTIs finite life was eliminated.
The Company has performed a review of subsequent events through the date of the opinion, which is the date the combined financial statements were available for issuance, and concludes there were no other events, except as mentioned above, or transactions occurring during this period that required recognition or disclosure in the combined financial statements. Any events occurring after this date have not been factored into the combined financial statements being presented.
18
MAGNUM OIL TOOLS
NOTES TO THE COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
8. |
RECENTLY ISSUED AUTHORITATIVE GUIDANCE |
ASU 2016-02, Leases (Topic 842). In February 2016, the FASB amended existing guidance that requires lessees recognize the following for all leases (with the exception of short term leases) at the commencement date (1) A lease liability, which is a lessees obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) A right-of-use asset, which is an asset that represents the lessees right to use or control the use of a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary; lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The amendments will be effective for financial statements issued for fiscal years beginning after December 15, 2019. The Company is currently evaluating the impact this change will have on the Companys combined financial statements, but believes it will have little impact on operating results but will create significant additional assets and debt obligations, primarily related to leased premises and equipment treated as operating leases under current GAAP.
ASU 2014-09, Revenue from Contracts with Customers (Topic 606). In May 2014, the FASB amended existing guidance related to revenue from contracts with customers. This amendment supersedes and replaces nearly all existing revenue recognition guidance, including industry-specific guidance, establishes a new control-based revenue recognition model, changes the basis for deciding when revenue is recognized over time or at a point in time, provides new and more detailed guidance on specific topics and expands and improves disclosures about revenue. In addition, this amendment specifies the accounting for some costs to obtain or fulfill a contract with a customer. The amendments will be effective for annual periods beginning after December 15, 2018 and are expected to have a significant impact on the Companys combined financial statements. Management is finalizing their assessment and have identified that most revenue line items are within the scope of this new guidance. Management does not expect the new standard to result in a material change for revenue because the majority of the Companys current recognition policies will not be changed. Significant disclosures are expected to be noted in future periods.
Several other Accounting Standards were proposed and approved with effective dates ranging from fiscal year 2017 to fiscal year 2021. The new authoritative guidance except as noted above is not expected to have a significant impact to the Companys combined financial statements.
19
Exhibit 99.2
M AGNUM O IL T OOLS
A UDITED C OMBINED F INANCIAL S TATEMENTS
AS OF AND FOR THE YEAR ENDED
D ECEMBER 31, 2015
M AGNUM O IL T OOLS
A UDITED C OMBINED F INANCIAL S TATEMENTS
A S OF AND FOR THE YEAR ENDED
D ECEMBER 31, 2015
Contents
Audited Combined Financial Statements | ||||
Independent Auditors Report |
1 | |||
Combined Balance Sheet |
3 | |||
Combined Statement of Income |
4 | |||
Combined Statement of Comprehensive Income |
5 | |||
Combined Statement of Partners Capital |
6 | |||
Combined Statement of Cash Flows |
7 | |||
Notes to the Combined Financial Statements |
8 |
Independent Auditors Report
To the Members of the Audit Committee and Management
Magnum Oil Tools
Corpus Christi, Texas
We have audited the accompanying combined financial statements of Magnum Oil Tools (the Company), which comprise the combined balance sheet as of December 31, 2015, and the related combined statements of income, comprehensive income, partners capital, and cash flows for the year then ended, and the related notes to the combined financial statements.
Managements Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these combined financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of combined financial statements that are free from material misstatements, whether due to fraud or error.
Auditors Responsibility
Our responsibility is to express an opinion on these combined financial statements based on our audit. We conducted our audit in accordance with U.S. generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the combined financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the combined financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entitys preparation and fair presentation of the combined 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 entitys 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 combined 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 combined financial statements referred to above present fairly, in all material respects, the financial position of Magnum Oil Tools as of December 31, 2015, and the results of their operations and their cash flows for the year then ended in accordance with U.S. generally accepted accounting principles.
/s/ Fisher, Herbst & Kemble, P.C. |
San Antonio, Texas |
December 26, 2018 |
MAGNUM OIL TOOLS
COMBINED BALANCE SHEET
DECEMBER 31, 2015
ASSETS |
||||
Current Assets |
||||
Cash and cash equivalents |
$ | 28,644,667 | ||
Accounts receivable - net of allowance for doubtful accounts of $986,565 |
13,332,672 | |||
Inventories |
17,400,012 | |||
Other receivables |
965,572 | |||
Prepaid expenses |
1,588,208 | |||
|
|
|||
Total Current Assets |
61,931,131 | |||
Non-current Assets |
||||
Property, plant and equipment, net |
5,147,835 | |||
Related party receivables |
787,457 | |||
Deposits |
61,182 | |||
Other assets |
5,837 | |||
|
|
|||
Total Assets |
$ | 67,933,442 | ||
|
|
|||
LIABILITIES AND PARTNERS CAPITAL |
||||
Current Liabilities |
||||
Accounts payable |
$ | 1,154,197 | ||
Accrued expenses |
3,339,025 | |||
Distributions payable |
2,632,080 | |||
Income tax payable |
129,702 | |||
|
|
|||
Total Current Liabilities |
7,255,004 | |||
Non-Current Liabilities |
||||
Related party payable |
902,524 | |||
|
|
|||
Total Liabilities |
8,157,528 | |||
Partners Capital |
||||
Partners capital |
60,597,897 | |||
Accumulated other comprehensive loss |
(821,983 | ) | ||
|
|
|||
Total Partners Capital |
59,775,914 | |||
|
|
|||
Total Liabilities and Partners Capital |
$ | 67,933,442 | ||
|
|
See notes to the combined financial statements.
3
MAGNUM OIL TOOLS
COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 2015
SALES |
$ | 109,771,233 | ||
COST OF SALES |
71,807,315 | |||
|
|
|||
GROSS PROFIT |
37,963,918 | |||
OPERATING EXPENSES |
||||
Advertising |
1,282,569 | |||
Bad debts |
986,565 | |||
Depreciation and amortization |
1,417,369 | |||
Entertainment and travel |
2,119,130 | |||
Information technology expense |
816,657 | |||
Insurance |
3,463,464 | |||
Management fees |
207,542 | |||
Occupancy expense |
3,976,510 | |||
Office expense |
251,173 | |||
Professional fees |
1,695,389 | |||
Salaries, wages and benefits |
20,780,160 | |||
Other operating expenses |
137,377 | |||
|
|
|||
Total operating expenses |
37,133,905 | |||
|
|
|||
OPERATING INCOME |
830,013 | |||
OTHER INCOME (EXPENSE) |
||||
Miscellaneous income |
1,268,558 | |||
Interest income |
230 | |||
Gain on sale of assets |
35,892 | |||
Abandonment loss |
(166,955 | ) | ||
Other losses - See Note 6 |
(1,000,000 | ) | ||
Interest expense |
(10,652 | ) | ||
Other expense |
(32,466 | ) | ||
|
|
|||
Total other income |
94,607 | |||
|
|
|||
INCOME BEFORE PROVISION FOR INCOME TAXES |
924,620 | |||
PROVISION FOR INCOME TAXES |
177,545 | |||
|
|
|||
NET INCOME |
$ | 747,075 | ||
|
|
See notes to the combined financial statements.
4
MAGNUM OIL TOOLS
COMBINED STATEMENT OF COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31, 2015
NET INCOME |
$ | 747,075 | ||
OTHER COMPREHENSIVE INCOME |
||||
Changes in unrealized gains and losses on foreign currency translation |
(610,660 | ) | ||
|
|
|||
Other comprehensive loss |
(610,660 | ) | ||
|
|
|||
Comprehensive Income |
$ | 136,415 | ||
|
|
See notes to the combined financial statements.
5
MAGNUM OIL TOOLS
COMBINED STATEMENT OF PARTNERS CAPITAL
YEAR ENDED DECEMBER 31, 2015
Partners
Capital |
Accumulated
Other Comprehensive Income (Loss) |
Total Partners
Capital |
||||||||||
Balance at January 1, 2015 |
$ | 83,571,424 | $ | (211,323 | ) | $ | 83,360,101 | |||||
Partner distributions |
(23,720,602 | ) | | (23,720,602 | ) | |||||||
Change in accumulated other comprehensive loss -foreign currency translation |
| (610,660 | ) | (610,660 | ) | |||||||
Net income from the year |
747,075 | | 747,075 | |||||||||
|
|
|
|
|
|
|||||||
Balance at December 31, 2015 |
$ | 60,597,897 | $ | (821,983 | ) | $ | 59,775,914 | |||||
|
|
|
|
|
|
See notes to the combined financial statements.
6
MAGNUM OIL TOOLS
COMBINED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2015
OPERATING ACTIVITIES |
||||
Net income |
$ | 747,075 | ||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
||||
Change in obsolete inventory reserve |
17,291,923 | |||
Depreciation and amortization expense |
1,417,369 | |||
Bad debt - accounts receivable |
986,565 | |||
Abandonment loss |
166,955 | |||
Gain on sale of fixed assets |
(35,892 | ) | ||
Effect of exchange rate changes on cash |
(610,660 | ) | ||
Net change in: |
||||
Accounts receivable |
15,139,302 | |||
Other receivables |
2,848,293 | |||
Inventories |
7,140,231 | |||
Deposits |
(17,282 | ) | ||
Prepaid expenses and other assets |
(554,646 | ) | ||
Related party receivables |
(701,502 | ) | ||
Related party payables |
(3,112,531 | ) | ||
Accounts payable |
(754,435 | ) | ||
Accrued expenses |
274,244 | |||
Income tax payable |
129,702 | |||
Distributions payable |
2,632,080 | |||
|
|
|||
Net cash provided by operating activities |
42,986,791 | |||
|
|
|||
INVESTING ACTIVITIES |
||||
Proceeds from sale of fixed assets |
224,533 | |||
Purchase of property and equipment |
(2,663,793 | ) | ||
|
|
|||
Net cash used in investing activities |
(2,439,260 | ) | ||
|
|
|||
FINANCING ACTIVITIES |
||||
Partner distributions |
(23,720,602 | ) | ||
|
|
|||
Net cash used in financing activities |
(23,720,602 | ) | ||
|
|
|||
INCREASE IN CASH AND CASH EQUIVALENTS |
16,826,929 | |||
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR |
11,817,738 | |||
|
|
|||
CASH AND CASH EQUIVALENTS AT END OF YEAR |
$ | 28,644,667 | ||
|
|
See notes to the combined financial statements.
7
MAGNUM OIL TOOLS
NOTES TO THE COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2015
1. |
NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES |
Nature of Operations These combined financial statements for Magnum Oil Tools (the Company) include the following business operations:
Magnum Oil Tools International, LTD (MOTI) , a Texas limited partnership, is a diversified organization engaged in a wide variety of business activities, providing energy related products and services on a global basis. As of December 31, 2015, MOTI has a finite life and will cease to exist October 6, 2056.
Magnum Oil Tools Canada Ltd (MOT Canada) , a limited liability corporation, purchases finished goods exclusively from MOTI for resale to international customers
Magnum Oil Tools GP, LLC (MOT GP) , a limited liability company, provides management services exclusively to MOTI.
Basis of Preparation These combined financial statements reflect the Companys financial position, results of operations and cash flows in conformity with U.S. generally accepted accounting principles (GAAP). The combined financial position, results of operations and cash flows of the Company may not be indicative of the Company had it been a separate stand-alone entity during the periods presented, nor are the results stated herein indicative of what the Companys financial position, results of operations and cash flows may be in the future.
These combined financial statements include all of the Companys majority-owned subsidiaries and all of its wholly owned entities. All intercompany balances and transactions have been eliminated. The accounting policies set out below have been applied in preparing the combined financial statements for the year ended December 31, 2015.
Use of Estimates The preparation of combined financial statements in conformity with GAAP requires management to make estimates and assumptions that may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the combined financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Management believes that these estimates and assumptions provide a reasonable basis for the fair presentation of the combined financial statements. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the estimate of inventory valuation and allowance for doubtful accounts.
8
MAGNUM OIL TOOLS
NOTES TO THE COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2015
1. |
NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (continued) |
Foreign Currency Translation The functional currency for MOT Canada is the local currency. Adjustments resulting from translating local currency financial statements to U.S. dollars are reflected in accumulated other comprehensive income (loss).
Cash and Cash Equivalents For the purpose of presentation in the combined financial statements of cash flows, cash and cash equivalents are defined as all bank deposits and short-term securities with original maturities of three months or less. The majority of cash and cash equivalents of the Company are maintained with major financial institutions in the United States and Canada; these financial institutions are subject to the Federal Deposit Insurance Corporation (FDIC) and the Canada Deposit Insurance Corporation (CDIC), respectively. The FDIC insurance coverage is $250,000 per depositor. The CDIC insurance coverage is $100,000 (Canadian dollars) per depositor. As such, interest bearing, non-transaction account deposits with these financial institutions may exceed the amount of insurance provided on such deposits; however, these deposits typically may be redeemed upon demand and therefore, bear minimal risk. As of December 31, 2015, the maximum credit risk exposure is $28,948,262 . In monitoring this credit risk, the Company periodically evaluates the stability of the financial institutions with which it has deposits.
Property, Plant and Equipment, Net Property, plant and equipment are stated at cost, less accumulated depreciation. Improvements or betterments of a permanent nature are capitalized. Expenditures for maintenance and repairs are charged to expense when incurred. The cost of assets retired or otherwise disposed of, and the related accumulated depreciation, are eliminated from the accounts in the year of disposal. Gains or losses resulting from property disposals are credited or charged to current operations.
The Company provides for depreciation and amortization using the straight-line method over the estimated useful lives of the assets. Building improvements are depreciated over a period ranging from five to thirty-nine years, machinery and equipment are depreciated over a period ranging from three to seven years, furniture and fixtures are depreciated over seven years, software is amortized over three years, and vehicles are depreciated over a period of five years. The expected useful lives of property, plant and equipment are reviewed annually.
9
MAGNUM OIL TOOLS
NOTES TO THE COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2015
1. |
NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (continued) |
Inventories Inventories consist of raw materials for the production of finished goods, and finished goods which include a variety of consumable downhole completion products. They are stated at the lower of average cost or net realizable value and are reviewed periodically for obsolescence. Inventory costs are relieved using specific identification in the execution of tools sales.
As of December 31, 2015, inventories consisted of the following:
Components (inclusive of raw material) |
$ | 8,294,089 | ||
Finished goods (assemblies) |
8,866,698 | |||
Work in progress |
239,225 | |||
|
|
|||
$ | 17,400,012 | |||
|
|
Prepaid Expense Prepaid expenses represent payments for insurance and supplies that will benefit future periods.
Accounts Receivable and Allowance for Doubtful Accounts Accounts receivables primarily consist of amounts due for oil tool sales and related services already performed. The allowance for doubtful accounts is established based on estimated losses through a provision for bad debts charged to earnings. Losses are charged against the allowance when management believes the uncollectibility of a receivable is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The Company provides an assessment of allowances based on an analysis of historic trends of collection and cancellation activity. This estimate is impacted by a number of factors, including changes in the economy, relocations, and demographic or competitive changes in areas of operation. Consequently, an adverse change in those factors could affect the Companys estimate of its bad debts. The allowance for doubtful accounts as of December 31, 2015 was $986,565 .
Accounts Payable and Accruals Liabilities are recognized for amounts to be paid in the future for goods and services received, whether billed by the supplier or not.
10
MAGNUM OIL TOOLS
NOTES TO THE COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2015
1. |
NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (continued) |
Revenue Recognition The Company accounts for its revenues using the accrual basis of accounting. Revenues from product sales are recognized when risk associated with ownership has passed to the customer. Generally, the date of delivery corresponds to the date upon which the customer takes title to the product and assumes all risk and rewards of ownership.
Income Taxes MOTI files a Form 1065, U.S. Return of Partnership Income. MOT GP files a Form 1120S, U.S. Income Tax Return for an S Corporation.
The aforementioned partnerships and corporations are not taxpaying entities for federal income tax purposes; accordingly, a provision for income taxes for these entities has not been recorded in the accompanying combined financial statements. The respective income or losses are reflected in the partners and shareholders individual or corporate tax returns in accordance with their ownership percentages. The partners and shareholders quarterly estimated tax payments are funded by the entities to satisfy their individual tax obligations.
MOT Canada is a Canadian entity which is subject to relevant foreign tax jurisdictions. MOT Canada files an Alberta Corporate Income Tax Return AT1 to the Alberta Tax and Revenue Administration. MOT Canada also files a T2 Corporation Income Tax Return to the Canada Revenue Agency.
Such expenses derived from the aforementioned tax jurisdictions are included with provisions for income taxes as presented in the combined statement of income. The Company does pay franchise taxes, which are considered income taxes under the authoritative guidance.
The tax jurisdictions which impose a franchise tax include the state of Texas; at December 31, 2015, the Companys outstanding franchise tax liability was $102,037 which is composed of the balance of income tax payable in its combined balance sheet. Other relevant state tax jurisdictions include the filing of composite tax returns for the states of Arkansas, Colorado, Louisiana, Mississippi, Montana, North Dakota, Ohio, Oklahoma, Pennsylvania, and Utah. These returns are filed to eliminate the need for non-residents to file an individual tax return on their earnings from a resident company. As of December 31, 2015, the Company had a prepaid balance of $344,204 related to state taxes which is included in prepaid expenses in its combined balance sheet.
11
MAGNUM OIL TOOLS
NOTES TO THE COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2015
1. |
NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (continued) |
The Company has adopted the provisions of FASB, Accounting Standards Codification 740, Income Taxes (ASC 740) , effective January 1, 2009. ASC 740 provides guidance regarding the recognition, measurement, presentation and disclosure in its combined financial statements of tax positions taken or expected to be taken on a tax return, including the decision whether to file or not to file in a particular jurisdiction. U.S. generally accepted accounting principles require the Company management to evaluate tax positions taken by the Company and recognize a tax liability (or asset) if the Company has taken an uncertain position that more likely than not would not be sustained upon examination by the Internal Revenue Service. The Companys management has analyzed the tax positions taken by the Company, and has concluded that as of December 31, 2015 , there are no uncertain positions taken or expected to be taken that would require recognition of a liability (or asset) or disclosure in its combined financial statements. The Company is subject to routine audits by taxing jurisdictions; however, there are currently no audits for any tax periods in progress. The Companys management believes it is no longer subject to income tax examinations for years prior to 2014.
Concentration of Credit Risk Financial instruments which potentially subject the Company to concentrations of credit risk include cash, cash equivalents, and accounts receivable.
The Companys financial condition, and results of operations, are highly dependent upon the prevailing market prices of, and demand for, oil and natural gas. The Company cannot predict future oil and gas demand with any degree of certainty. Sustained weakness in the oil and gas markets may adversely affect its financial condition and results of operations. Similarly, any improvement in oil and gas prices can have a favorable impact on the Companys financial condition, results of operations and capital resources.
The Company manages credit risk related to accounts receivable through credit approvals, credit limits and monitoring procedures. The Company routinely assesses the financial strength of its customers and, based upon factors surrounding the credit risk, establishes an allowance, if required, for uncollectible accounts and, as a consequence, believes that its accounts receivable credit risk exposure beyond such allowance is limited.
Advertising The Company expenses all advertising costs as incurred. Advertising costs totaled approximately $1,282,569 for the year ended December 31, 2015.
12
MAGNUM OIL TOOLS
NOTES TO THE COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2015
1. |
NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (continued) |
Statement of Cash Flows Supplemental information on cash flows for the year ended December 31, 2015 were as follows:
Cash paid during the year for taxes |
$ | 1,295,181 | ||
Cash paid during the year for interest |
$ | 10,652 |
Employee Advances During the year, the Company made advances to employees to be repaid from their earnings over a specified time agreed to by the Company and the employee. At December 31, 2015, the employee advances totaled $2,666, which is included in other receivables in the Companys combined balance sheet.
2. |
RELATED PARTY TRANSACTIONS |
The Company leases office space in Corpus Christi and Midland, Texas from an affiliated entity related through common ownership. During 2015, $1,148,702 of rental expense was paid to this affiliate. These leases are classified as operating leases for which the non-cancelable portion of the respective obligations exceeding twelve months have been included in Note 5.
Included in the Companys combined balance sheet as of December 31, 2015 are related party receivables (payables) as follows:
Fajitaville Grille North Beach, Inc. |
$ | 2,000 | ||
Frazier Technologies LLC |
$ | 125,000 | ||
Gulf Beach Operations, LLC |
$ | 2,000 | ||
Magnum International IC-DISC, Inc. |
$ | 64,102 | ||
Marinaville, LLC |
$ | 3,500 | ||
WTF Insurance Company Ltd |
$ | 580,855 | ||
WTF Properties LLC |
$ | 10,000 | ||
Frazier Technologies LLC |
$ | (902,524 | ) |
13
MAGNUM OIL TOOLS
NOTES TO THE COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2015
2. |
RELATED PARTY TRANSACTIONS (continued) |
During the year ended December 31, 2015, the Company also provided management and accounting services to various entities related through common ownership. These amounts are reflected as miscellaneous income in the Companys combined statement of income. The following schedule summarizes the total management and accounting fees earned for the year ended December 31, 2015 from related parties:
Advanced Solids Control, LLC |
$ | 72,000 | ||
Marinaville, LLC |
42,000 | |||
Fajitaville Grille North Beach, Inc. |
24,000 | |||
Gulf Beach Operations, LLC |
24,000 | |||
Frazier Technologies, LLC |
902,524 | |||
Magnum International IC-DISC, Inc. |
565,898 | |||
WTF Insurance Company Ltd |
1,111,025 | |||
WTF Properties, LLC |
10,000 | |||
|
|
|||
Total |
$ | 2,751,447 | ||
|
|
3. |
PROPERTY, PLANT AND EQUIPMENT |
The following is a summary of property and equipment, at cost, less accumulated depreciation as of December 31, 2015:
Machinery and equipment |
$ | 5,295,538 | ||
Buildings improvements |
513,914 | |||
Furniture and fixtures |
575,777 | |||
Software |
790,001 | |||
Vehicles |
1,248,790 | |||
|
|
|||
8,424,020 | ||||
Less: accumulated depreciation and amortization |
(3,276,185 | ) | ||
|
|
|||
Total property and equipment, net |
$ | 5,147,835 | ||
|
|
14
MAGNUM OIL TOOLS
NOTES TO THE COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2015
3. |
PROPERTY, PLANT AND EQUIPMENT (continued) |
Depreciation and amortization expense related to property and equipment was $1,413,200 for the year ended December 31, 2015.
In 2015, the Company retired furniture, fixtures and equipment with a cumulative unamortized cost basis of $166,955 , which is presented as abandonment loss in the Companys combined statement of income.
During 2015, the Company also sold or traded furniture, vehicles and setting tools for proceeds of $224,947 resulting in a gain of $35,892 .
4. |
DEFINED CONTRIBUTION PLAN |
The Company provides post-retirement benefits to employees in the form of a Profit Sharing Plan and 401(k) Plan. As of December 31, 2015, in order to maintain safe harbor status, the Company offered a safe harbor matching contribution equal to 100% of salary deferrals that do not exceed 3% of a participants compensation plus 50% of salary deferrals between 3% and 5%. The Company may also offer a discretionary contribution to its employees, eligible for the Profit Sharing Plan. Total contributions to the plan for the year ended December 31, 2015 were $425,445 in safe harbor matches and $435,848 in profit sharing contributions.
5. |
COMMITMENTS AND CONTINGENCIES |
Legal The Company has been and may in the future be involved as a party to various legal proceedings, which are incidental to the ordinary course of business. The Company regularly analyses current information and, as necessary, provides accruals for probable liabilities on the eventual disposition of these matters. In the opinion of management and legal counsel, as of December 31, 2015, there were no threatened or pending legal matters that would have a material impact on the Companys combined financial statements.
Leases Operating lease agreements include leases for transportation equipment, machinery, and office space. Rental expense of $2,403,690 was recorded for the year ended December 31, 2015, and is included in occupancy expense in the Companys combined statement of income.
15
MAGNUM OIL TOOLS
NOTES TO THE COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2015
5. |
COMMITMENTS AND CONTINGENCIES (continued) |
Future net minimum lease payments for non-cancellable operating leases were as follows:
2016 |
$ | 1,558,661 | ||
2017 |
1,207,529 | |||
2018 |
728,556 | |||
2019 |
153,645 | |||
2020 |
23,200 | |||
|
|
|||
Total |
$ | 3,671,591 | ||
|
|
Debt The Company is a guarantor on loans entered into by companies related through common ownership. The promissory notes are collateralized by property and various assets of the borrower with maturity dates ranging from 2018 to 2020. The total monthly installment amounts are approximately $61,000, with outstanding balances of approximately $6,990,043 as of December 31, 2015. The Company is required to perform upon the related companies default for any present or future obligations. The related companies are performing on their debt obligations; therefore, no amount of the guaranteed debt is included in the Companys combined financial statements.
Line of Credit On August 18, 2016, the Company renewed an existing line of credit with a financial institution in the amount of $8,000,000, which includes terms as outlined in the original note. The original note was dated August 17, 2015, in the amount of $10,000,000 with interest at the prime rate as published by The Wall Street Journal plus 0.250 percentage points and is measured on a daily basis. Interest is due monthly and all principal and accrued interest is due and payable on the maturity date. As of December 31, 2015, the Company had not taken any advances on the line of credit.
6. |
OTHER LOSSES |
On May 18, 2017, the Company reached an agreement regarding billing errors to a customer which included amounts related to prior periods, resulting in a $1,000,000 settlement due in 2017.
16
MAGNUM OIL TOOLS
NOTES TO THE COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2015
7. |
INCOME TAXES |
The Companys provision for income taxes is as follows for the year ended December 31, 2015:
State income tax |
$ | 120,147 | ||
Foreign income tax - Canada |
57,398 | |||
|
|
|||
Total provision for income taxes |
$ | 177,545 | ||
|
|
The provision for income tax differed from the statutory rate of 34% as follows:
Tax expense at statutory rate |
$ | 314,371 | ||
Add effects of: |
||||
Income on pass thru entities |
(314,371 | ) | ||
State income tax |
120,147 | |||
Foreign income tax |
57,398 | |||
|
|
|||
Total provision for income taxes |
$ | 177,545 | ||
|
|
As of December 31, 2015, the Company had no deferred tax assets.
8. |
SUBSEQUENT EVENTS |
On October 25, 2018, the Company was acquired by a public entity. As part of the acquisition, MOTIs finite life was eliminated.
The Company has performed a review of subsequent events through the date of the opinion, which is the date the combined financial statements were available for issuance, and concludes that except for the subsequent event note above, there were no other events or transactions occurring during this period that required recognition or disclosure in the combined financial statements. Any events occurring after this date have not been factored into the combined financial statements being presented.
17
MAGNUM OIL TOOLS
NOTES TO THE COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2015
9. |
RECENTLY ISSUED AUTHORITATIVE GUIDANCE |
ASU 2016-02, Leases (Topic 842). In February 2016, the FASB amended existing guidance that requires lessees recognize the following for all leases (with the exception of short term leases) at the commencement date (1) A lease liability, which is a lessees obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) A right-of-use asset, which is an asset that represents the lessees right to use or control the use of a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary; lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The amendments will be effective for financial statements issued for fiscal years beginning after December 15, 2019. The Company is currently evaluating the impact this change will have on the Companys combined financial statements, but believes it will have little impact on operating results but will create significant additional assets and debt obligations, primarily related to leased premises and equipment treated as operating leases under current GAAP.
ASU 2014-09, Revenue from Contracts with Customers (Topic 606). In May 2014, the FASB amended existing guidance related to revenue from contracts with customers. This amendment supersedes and replaces nearly all existing revenue recognition guidance, including industry-specific guidance, establishes a new control-based revenue recognition model, changes the basis for deciding when revenue is recognized over time or at a point in time, provides new and more detailed guidance on specific topics and expands and improves disclosures about revenue. In addition, this amendment specifies the accounting for some costs to obtain or fulfill a contract with a customer. The amendments will be effective for annual periods beginning after December 15, 2018 and are expected to have a significant impact on the Companys combined financial statements. Management is finalizing their assessment and have identified that most revenue line items are within the scope of this new guidance. Management does not expect the new standard to result in a material change for revenue because the majority of the Companys current recognition policies will not be changed. Significant disclosures are expected to be noted in future periods.
Several other Accounting Standards were proposed and approved with effective dates ranging from fiscal year 2017 to fiscal year 2021. The new authoritative guidance except as noted above is not expected to have a significant impact to the Companys combined financial statements.
18
Exhibit 99.3
M AGNUM O IL T OOLS
U NAUDITED C OMBINED F INANCIAL S TATEMENTS
A S OF S EPTEMBER 30, 2018 A ND
F OR T HE N INE M ONTHS E NDED
S EPTEMBER 30, 2018 A ND 2017
MAGNUM OIL TOOLS
UNAUDITED COMBINED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2018 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017
Contents
Unaudited Combined Financial Statements |
||||
Unaudited Combined Balance Sheet |
1 | |||
Unaudited Combined Statements of Income |
2 | |||
Unaudited Combined Statements of Comprehensive Income |
3 | |||
Unaudited Combined Statements of Partners Capital |
4 | |||
Unaudited Combined Statements of Cash Flows |
5 | |||
Notes to the Unaudited Combined Financial Statements |
6 |
MAGNUM OIL TOOLS
UNAUDITED COMBINED BALANCE SHEET
SEPTEMBER 30, 2018
ASSETS |
||||
Current Assets |
||||
Cash and cash equivalents |
$ | 8,252,028 | ||
Accounts receivable - net of allowance for doubtful accounts of $753,070 |
33,492,826 | |||
Inventories |
52,941,805 | |||
Other receivables |
1,208,512 | |||
Prepaid expenses |
1,134,126 | |||
|
|
|||
Total Current Assets |
97,029,297 | |||
Non-current Assets |
||||
Property, plant and equipment, net |
2,697,089 | |||
Related party receivables |
3,190 | |||
Deposits |
85,474 | |||
Other assets |
986,608 | |||
|
|
|||
Total Assets |
$ | 100,801,658 | ||
|
|
|||
LIABILITIES AND PARTNERS CAPITAL |
||||
Current Liabilities |
||||
Accounts payable |
$ | 5,325,721 | ||
Accrued expenses |
4,450,799 | |||
Income tax payable |
928,326 | |||
|
|
|||
Total Current Liabilities |
10,704,846 | |||
Non-Current Liabilities |
||||
Related party payable |
4,039,381 | |||
|
|
|||
Total Liabilities |
14,744,227 | |||
Partners Capital |
||||
Partners capital |
86,687,796 | |||
Accumulated other comprehensive loss |
(630,365 | ) | ||
|
|
|||
Total Partners Capital |
86,057,431 | |||
|
|
|||
Total Liabilities and Partners Capital |
$ | 100,801,658 | ||
|
|
See notes to the unaudited combined financial statements.
1
MAGNUM OIL TOOLS
UNAUDITED COMBINED STATEMENTS OF INCOME
NINE MONTHS ENDED SEPTEMBER 30,
2018 | 2017 | |||||||
SALES |
$ | 113,840,579 | $ | 64,184,837 | ||||
COST OF SALES |
67,095,018 | 38,127,795 | ||||||
|
|
|
|
|||||
GROSS PROFIT |
46,745,561 | 26,057,042 | ||||||
OPERATING EXPENSES |
||||||||
Advertising |
287,416 | 140,868 | ||||||
Bad debts |
122,905 | 170,416 | ||||||
Benefits |
| 25,863 | ||||||
Depreciation and amortization |
161,550 | 192,220 | ||||||
Entertainment and travel |
421,822 | 254,075 | ||||||
Information technology expense |
230,383 | 113,118 | ||||||
Insurance |
1,936,915 | 1,270,737 | ||||||
Management fees |
351,261 | 110,780 | ||||||
Occupancy expense |
604,676 | 334,267 | ||||||
Office expense |
118,834 | 38,642 | ||||||
Professional fees |
838,286 | 551,140 | ||||||
Salaries, wages and benefits |
7,275,785 | 6,201,127 | ||||||
Other operating expenses |
78,506 | 115,661 | ||||||
|
|
|
|
|||||
Total operating expenses |
12,428,339 | 9,518,914 | ||||||
|
|
|
|
|||||
OPERATING INCOME |
34,317,222 | 16,538,128 | ||||||
OTHER INCOME (EXPENSE) |
||||||||
Miscellaneous income |
174,380 | 436,442 | ||||||
Interest income |
35 | 1,540 | ||||||
Gain (loss) on sale of assets |
175,985 | (4,197 | ) | |||||
Abandonment loss |
(18,791 | ) | (97,914 | ) | ||||
Other losses |
(36,717 | ) | | |||||
Interest expense |
(8,121 | ) | (8,287 | ) | ||||
|
|
|
|
|||||
Total other income |
286,771 | 327,584 | ||||||
|
|
|
|
|||||
INCOME BEFORE PROVISION FOR INCOME TAXES |
34,603,993 | 16,865,712 | ||||||
PROVISION FOR INCOME TAXES |
1,100,765 | 115,642 | ||||||
|
|
|
|
|||||
NET INCOME |
$ | 33,503,228 | $ | 16,750,070 | ||||
|
|
|
|
See notes to the unaudited combined financial statements.
2
MAGNUM OIL TOOLS
UNAUDITED COMBINED STATEMENTS OF COMPREHENSIVE INCOME
NINE MONTHS ENDED SEPTEMBER 30,
2018 | 2017 | |||||||
NET INCOME |
$ | 33,503,228 | $ | 16,750,070 | ||||
OTHER COMPREHENSIVE INCOME (LOSS) |
||||||||
Changes in unrealized gains and losses on foreign currency translation |
(84,444 | ) | 142,742 | |||||
|
|
|
|
|||||
Other comprehensive income (loss) |
(84,444 | ) | 142,742 | |||||
|
|
|
|
|||||
Comprehensive Income |
$ | 33,418,784 | $ | 16,892,812 | ||||
|
|
|
|
See notes to the unaudited combined financial statements.
3
MAGNUM OIL TOOLS
UNAUDITED COMBINED STATEMENTS OF PARTNERS CAPITAL
NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017
Partners
Capital |
Accumulated
Other Comprehensive Income (Loss) |
Total Partners
Capital |
||||||||||
Balance at January 1, 2017 |
$ | 48,033,278 | $ | (755,486 | ) | $ | 47,277,792 | |||||
Partner distributions |
(2,144,571 | ) | | (2,144,571 | ) | |||||||
Change in accumulated other comprehensive income (loss) - foreign currency translation |
| 142,742 | 142,742 | |||||||||
Net income - nine months ended September 30, 2017 |
16,750,070 | | 16,750,070 | |||||||||
|
|
|
|
|
|
|||||||
Balance at September 30, 2017 |
$ | 62,638,777 | $ | (612,744 | ) | $ | 62,026,033 | |||||
|
|
|
|
|
|
|||||||
Balance at January 1, 2018 |
$ | 67,920,409 | $ | (545,921 | ) | $ | 67,374,488 | |||||
Partner distributions |
(14,735,841 | ) | | (14,735,841 | ) | |||||||
Change in accumulated other comprehensive income (loss) - foreign currency translation |
| (84,444 | ) | (84,444 | ) | |||||||
Net income - nine months ended September 30, 2018 |
33,503,228 | | 33,503,228 | |||||||||
|
|
|
|
|
|
|||||||
Balance at September 30, 2018 |
$ | 86,687,796 | $ | (630,365 | ) | $ | 86,057,431 | |||||
|
|
|
|
|
|
See notes to the unaudited combined financial statements.
4
MAGNUM OIL TOOLS
UNAUDITED COMBINED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30,
2018 | 2017 | |||||||
OPERATING ACTIVITIES |
||||||||
Net income |
$ | 33,503,228 | $ | 16,750,070 | ||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
||||||||
Change in obsolete inventory reserve |
(3,750,806 | ) | (1,526,384 | ) | ||||
Depreciation and amortization expense |
669,091 | 872,076 | ||||||
Bad debt - accounts receivable |
122,905 | 170,416 | ||||||
Abandonment loss |
18,791 | 97,914 | ||||||
(Gain) loss on sale of fixed assets |
(175,985 | ) | 4,557 | |||||
Effect of exchange rate changes on cash |
(84,444 | ) | 142,742 | |||||
Net change in: |
||||||||
Accounts receivable |
(13,697,373 | ) | (7,502,709 | ) | ||||
Other receivables |
80,475 | (678,454 | ) | |||||
Inventories |
(19,782,635 | ) | (11,909,768 | ) | ||||
Deposits |
(35,092 | ) | 11,300 | |||||
Prepaid expenses and other assets |
217,370 | (1,040,438 | ) | |||||
Related party receivables |
(2,901 | ) | (369,328 | ) | ||||
Related party payables |
2,315,976 | (772,547 | ) | |||||
Accounts payable |
4,023,213 | 1,371,990 | ||||||
Accrued expenses |
61,742 | 348,007 | ||||||
Income tax payable |
900,797 | (58,464 | ) | |||||
|
|
|
|
|||||
Net cash provided by (used in) operating activities |
4,384,352 | (4,089,020 | ) | |||||
|
|
|
|
|||||
INVESTING ACTIVITIES |
||||||||
Proceeds from sale of fixed assets |
243,219 | 37,386 | ||||||
Purchase of property and equipment |
(590,278 | ) | (110,204 | ) | ||||
|
|
|
|
|||||
Net cash used in investing activities |
(347,059 | ) | (72,818 | ) | ||||
|
|
|
|
|||||
FINANCING ACTIVITIES |
||||||||
Partner distributions |
(14,735,841 | ) | (2,144,571 | ) | ||||
|
|
|
|
|||||
Net cash used in financing activities |
(14,735,841 | ) | (2,144,571 | ) | ||||
|
|
|
|
|||||
DECREASE IN CASH AND CASH EQUIVALENTS |
(10,698,548 | ) | (6,306,409 | ) | ||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
18,950,576 | 23,101,383 | ||||||
|
|
|
|
|||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
$ | 8,252,028 | $ | 16,794,974 | ||||
|
|
|
|
See notes to the unaudited combined financial statements.
5
MAGNUM OIL TOOLS
NOTES TO THE UNAUDITED COMBINED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2018 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017
1. |
NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES |
Nature of Operations These unaudited combined financial statements for Magnum Oil Tools (the Company) include the following business operations:
Magnum Oil Tools International, LTD (MOTI), a Texas limited partnership, is a diversified organization engaged in a wide variety of business activities, providing energy related products and services on a global basis. As of September 30, 2018, MOTI has a finite life and will cease to exist October 6, 2056.
Magnum Oil Tools Canada Ltd (MOT Canada), a limited liability corporation, purchases finished goods exclusively from MOTI for resale to international customers.
Magnum Oil Tools GP, LLC (MOT GP), a limited liability company, provides management services exclusively to MOTI.
Basis of Preparation These unaudited combined financial statements reflect the Companys financial position, results of operations and cash flows in conformity with U.S. generally accepted accounting principles (GAAP). The combined financial position, results of operations and cash flows of the Company may not be indicative of the Company had it been a separate stand-alone entity during the periods presented, nor are the results stated herein indicative of what the Companys financial position, results of operations and cash flows may be in the future.
These unaudited combined financial statements have not been audited by independent accountants. In the opinion of management, these unaudited combined financial statements reflect all adjustments necessary to fairly state the Companys financial position at September 30, 2018 and its results of operations and cash flows for the nine months ended September 30, 2018 and 2017. All such adjustments are of a normal recurring nature. The results of interim periods are not necessarily indicative of annual results.
These unaudited combined financial statements include all of the Companys majority-owned subsidiaries and all of its wholly owned entities. All intercompany balances and transactions have been eliminated.
6
MAGNUM OIL TOOLS
NOTES TO THE UNAUDITED COMBINED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2018 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017
1. |
NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (continued) |
Use of Estimates The preparation of unaudited combined financial statements in conformity with GAAP requires management to make estimates and assumptions that may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited combined financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Management believes that these estimates and assumptions provide a reasonable basis for the fair presentation of the unaudited combined financial statements. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the estimate of inventory valuation and allowance for doubtful accounts.
Foreign Currency Translation The functional currency for MOT Canada is the local currency. Adjustments resulting from translating local currency financial statements to U.S. dollars are reflected in accumulated other comprehensive income.
Cash and Cash Equivalents For the purpose of presentation in the unaudited combined financial statements of cash flows, cash and cash equivalents are defined as all bank deposits and short-term securities with original maturities of three months or less. The majority of cash and cash equivalents of the Company are maintained with major financial institutions in the United States and Canada; these financial institutions are subject to the Federal Deposit Insurance Corporation (FDIC) and the Canada Deposit Insurance Corporation (CDIC), respectively. The FDIC insurance coverage is $250,000 per depositor. The CDIC insurance coverage is $100,000 (Canadian dollars) per depositor. As such, interest bearing, non-transaction account deposits with these financial institutions may exceed the amount of insurance provided on such deposits; however, these deposits typically may be redeemed upon demand and therefore, bear minimal risk. As of September 30, 2018, the maximum credit risk exposure is $7,820,471 . In monitoring this credit risk, the Company periodically evaluates the stability of the financial institutions with which it has deposits.
Property, Plant and Equipment, Net Property, plant and equipment are stated at cost, less accumulated depreciation. Improvements or betterments of a permanent nature are capitalized. Expenditures for maintenance and repairs are charged to expense when incurred. The cost of assets retired or otherwise disposed of, and the related accumulated depreciation, are eliminated from the accounts in the year of disposal. Gains or losses resulting from property disposals are credited or charged to current operations.
7
MAGNUM OIL TOOLS
NOTES TO THE UNAUDITED COMBINED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2018 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017
1. |
NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (continued) |
The Company provides for depreciation and amortization using the straight-line method over the estimated useful lives of the assets. Building improvements are depreciated over a period ranging from five to thirty-nine years, machinery and equipment are depreciated over a period ranging from three to seven years, furniture and fixtures are depreciated over seven years, software is amortized over three years, and vehicles are depreciated over a period of five years. The expected useful lives of property, plant and equipment are reviewed annually.
Inventories Inventories consist of raw materials for the production of finished goods, and finished goods which include a variety of consumable downhole completion products. Finished goods consist of raw materials, labor, direct and indirect costs. They are stated at the lower of average cost or net realizable value and are reviewed periodically for obsolescence. Inventory costs are relieved using specific identification in the execution of tools sales.
Inventories consisted of the following as of September 30, 2018:
Components (inclusive of raw material) |
$ | 37,835,572 | ||
Finished goods (assemblies) |
14,250,315 | |||
Work in progress |
855,918 | |||
|
|
|||
$ | 52,941,805 | |||
|
|
Prepaid Expense Prepaid expenses represent payments for insurance and supplies that will benefit future periods.
Accounts Receivable and Allowance for Doubtful Accounts Accounts receivables primarily consist of amounts due for oil tool sales and related services already performed. The allowance for doubtful accounts is established based on estimated losses through a provision for bad debts charged to earnings. Losses are charged against the allowance when management believes the uncollectibility of a receivable is confirmed. Subsequent recoveries, if any, are credited to the allowance.
8
MAGNUM OIL TOOLS
NOTES TO THE UNAUDITED COMBINED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2018 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017
1. |
NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (continued) |
The Company provides an assessment of allowances based on an analysis of historic trends of collection and cancellation activity. This estimate is impacted by a number of factors, including changes in the economy, relocations, and demographic or competitive changes in areas of operation. Consequently, an adverse change in those factors could affect the Companys estimate of its bad debts. The allowance for doubtful accounts as of September 30, 2018 was $753,070 .
Accounts Payable and Accruals Liabilities are recognized for amounts to be paid in the future for goods and services received, whether billed by the supplier or not.
Revenue Recognition The Company accounts for its revenues using the accrual basis of accounting. Revenues from product sales are recognized when risk associated with ownership has passed to the customer. Generally, the date of delivery corresponds to the date upon which the customer takes title to the product and assumes all risk and rewards of ownership.
Income Taxes MOTI files a Form 1065, U.S. Return of Partnership Income. MOT GP files a Form 1120S, U.S. Income Tax Return for an S Corporation.
The aforementioned partnerships and corporations are not taxpaying entities for federal income tax purposes; accordingly, a provision for income taxes for these entities has not been recorded in the accompanying unaudited combined financial statements. The respective income or losses are reflected in the partners and shareholders individual or corporate tax returns in accordance with their ownership percentages. The partners and shareholders quarterly estimated tax payments are funded by the entities to satisfy their individual tax obligations.
MOT Canada is a Canadian entity which is subject to relevant foreign tax jurisdictions. MOT Canada files an Alberta Corporate Income Tax Return AT1 to the Alberta Tax and Revenue Administration. MOT Canada also files a T2 Corporation Income Tax Return to the Canada Revenue Agency. Such expenses derived from the aforementioned tax jurisdictions are included with provisions for income taxes as presented in the Companys unaudited combined statements of income.
9
MAGNUM OIL TOOLS
NOTES TO THE UNAUDITED COMBINED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2018 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017
1. |
NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (continued) |
The Company does pay franchise taxes, which are considered income taxes under the authoritative guidance. The tax jurisdictions which impose a franchise tax include the state of Texas; at September 30, 2018, the Company had a net franchise tax payable balance of $80,505 , which is included in its unaudited combined balance sheet.
Other relevant state tax jurisdictions include the filing of composite tax returns for the states of Colorado, Louisiana, Mississippi, North Dakota, Ohio, Oklahoma, Pennsylvania, and West Virginia. These returns are filed to eliminate the need for non-residents to file an individual tax return on their earnings from a resident company. As of September 30, 2018, the Company had a net prepaid balance of $332,035 related to state income taxes.
The Company has adopted the provisions of FASB, Accounting Standards Codification 740, Income Taxes (ASC 740) , effective January 1, 2009. ASC 740 provides guidance regarding the recognition, measurement, presentation and disclosure in its unaudited combined financial statements of tax positions taken or expected to be taken on a tax return, including the decision whether to file or not to file in a particular jurisdiction. U.S. generally accepted accounting principles require the Company management to evaluate tax positions taken by the Company and recognize a tax liability (or asset) if the Company has taken an uncertain position that more likely than not would not be sustained upon examination by the Internal Revenue Service. The Companys management has analyzed the tax positions taken by the Company, and has concluded that as of September 30, 2018 , there are no uncertain positions taken or expected to be taken that would require recognition of a liability (or asset) or disclosure in its unaudited combined financial statements. The Company is subject to routine audits by taxing jurisdictions; however, there are currently no audits for any tax periods in progress. The Companys management believes it is no longer subject to income tax examinations for years prior to 2014.
Concentration of Credit Risk Financial instruments which potentially subject the Company to concentrations of credit risk include cash, cash equivalents, and accounts receivable.
The Companys financial condition, and results of operations, are highly dependent upon the prevailing market prices of, and demand for, oil and natural gas. The Company cannot predict future oil and gas demand with any degree of certainty. Sustained weakness in the oil and gas markets may adversely affect its financial condition and results of operations.
10
MAGNUM OIL TOOLS
NOTES TO THE UNAUDITED COMBINED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2018 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017
1. |
NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (continued) |
Similarly, any improvement in oil and gas prices can have a favorable impact on the Companys financial condition, results of operations and capital resources.
The Company manages credit risk related to accounts receivable through credit approvals, credit limits and monitoring procedures. The Company routinely assesses the financial strength of its customers and, based upon factors surrounding the credit risk, establishes an allowance, if required, for uncollectible accounts and, as a consequence, believes that its accounts receivable credit risk exposure beyond such allowance is limited.
Advertising The Company expenses all advertising costs as incurred. Advertising costs totaled approximately $287,416 and $140,868 for the nine months ended September 30, 2018 and 2017, respectively.
Statements of Cash Flows Supplemental information on cash flows for the nine months ended September 30, 2018 and 2017 was as follows:
2018 | 2017 | |||||||
Cash paid during the period for taxes |
$ | 6,200 | $ | 1,231,926 | ||||
Cash paid during the period for interest |
$ | 8,121 | $ | 8,287 |
Employee Advances During the year, the Company made advances to employees to be repaid from their earnings over a specified time agreed to by the Company and the employee. At September 30, 2018, the employee advances totaled $2,844 , which is included in other receivables in the Companys unaudited combined balance sheet.
2. |
RELATED PARTY TRANSACTIONS |
The Company leases office space in Corpus Christi and Midland, Texas from an affiliated entity related through common ownership. For the nine months ended September 30, 2018 and 2017, $987,670 and $808,095, respectively, of rental expense was paid to this affiliate. These leases are classified as operating leases for which the non-cancelable portion of the respective obligations exceeding twelve months have been included in Note 5.
11
MAGNUM OIL TOOLS
NOTES TO THE UNAUDITED COMBINED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2018 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017
2. |
RELATED PARTY TRANSACTIONS (continued) |
Included in the Companys unaudited combined balance sheet at September 30, 2018 are related party receivables (payables) as follows:
Fajitaville Grille North Beach, Inc. |
$ | 1,493 | ||
NBH LLC |
$ | 1,697 | ||
Magnum International IC-DISC, Inc. |
$ | (4,039,381 | ) |
During the nine months ended September 30, 2018 and 2017, the Company also provided management and accounting services to various entities related through common ownership. These amounts are reflected as miscellaneous income in the Companys unaudited combined statements of income.
The following table summarizes the total management and accounting fees earned from related parties, for the nine months ended September 30:
2018 | 2017 | |||||||
Frazier Technologies, LLC |
$ | | $ | 75,000 | ||||
Magnum International IC-DISC, Inc. |
30,000 | 30,000 | ||||||
WTF Insurance Company, Ltd |
50,000 | 50,000 | ||||||
WTF Rentals, LLC |
30,000 | | ||||||
WTF Properties, LLC |
10,000 | 10,000 | ||||||
|
|
|
|
|||||
Total |
$ | 120,000 | $ | 165,000 | ||||
|
|
|
|
During the nine months ended September 30, 2018 and 2017, the Company had other expenses for commissions and insurance premiums of $5,472,928 and $1,410,937, respectively, paid to two entities related through common ownership. These amounts are reflected in cost of sales and insurance expense in the Companys unaudited combined statements of income.
12
MAGNUM OIL TOOLS
NOTES TO THE UNAUDITED COMBINED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2018 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017
3. |
PROPERTY, PLANT AND EQUIPMENT |
The following is a summary of property and equipment, at cost, less accumulated depreciation as of September 30, 2018:
Machinery and equipment |
$ | 5,283,335 | ||
Buildings improvements |
640,313 | |||
Furniture and fixtures |
543,838 | |||
Software |
775,218 | |||
Vehicles |
523,608 | |||
|
|
|||
7,766,312 | ||||
Less: accumulated depreciation and amortization |
(5,069,223 | ) | ||
|
|
|||
Total property and equipment, net |
$ | 2,697,089 | ||
|
|
Depreciation and amortization expense related to property and equipment was $669,091 and $872,076 for the nine months ended September 30, 2018 and 2017, respectively.
For the nine months ended September 30, 2018, the Company retired furniture, fixtures and equipment with a cumulative unamortized cost basis of $156,650 and a loss of $18,791 , which is presented as abandonment loss in the Companys unaudited combined statement of income.
For the nine months ended September 30, 2017, the Company retired furniture, fixtures and equipment with a cumulative unamortized cost basis of $280,522 and a loss of $97,914, which is presented as abandonment loss in the Companys unaudited combined statement of income.
For the nine months ended September 30, 2018, the Company also sold or traded furniture, vehicles and setting tools for proceeds of $243,219 resulting in a gain of $175,985 . For the nine months ended September 30, 2017, the Company also sold or traded furniture, vehicles and setting tools for proceeds of $37,386 resulting in a loss of $4,557.
13
MAGNUM OIL TOOLS
NOTES TO THE UNAUDITED COMBINED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2018 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017
4. |
DEFINED CONTRIBUTION PLAN |
The Company provides post-retirement benefits to employees in the form of a Profit Sharing Plan and 401(k) Plan. For the nine months ended September 30, 2018 and 2017, in order to maintain safe harbor status, the Company offered a safe harbor matching contribution equal to 100% of salary deferrals that do not exceed 3% of a participants compensation plus 50% of salary deferrals between 3% and 5%. The Company may also offer a discretionary contribution to its employees, eligible for the Profit Sharing Plan. Total contributions to the plan for the nine months ended September 30, 2018 were $313,455 in safe harbor matches and $279,764 in profit sharing contributions. Total contributions to the plan for the nine months ended September 30, 2017 were $256,798 in safe harbor matches and $274,860 in profit sharing contributions.
5. |
COMMITMENTS AND CONTINGENCIES |
Legal The Company has been and may in the future be involved as a party to various legal proceedings, which are incidental to the ordinary course of business. The Company regularly analyses current information and, as necessary, provides accruals for probable liabilities on the eventual disposition of these matters. In the opinion of management and legal counsel, as of September 30, 2018, there were no threatened or pending legal matters that would have a material impact to the Companys unaudited combined financial statements.
Leases Operating lease agreements include leases for transportation equipment, machinery, and office space. Rental expense of $1,680,148 and $1,147,580 was recorded for the period ended September 30, 2018 and 2017, respectively; which is included in occupancy expense and cost of sales in the Companys unaudited combined statements of income.
Future net minimum lease payments for non-cancelable operating leases were as follows:
2019 |
$ | 2,121,718 | ||
2020 |
1,902,314 | |||
2021 |
1,508,770 | |||
2022 |
1,239,152 | |||
2023 |
1,180,029 | |||
Thereafter |
292,581 | |||
|
|
|||
Total |
$ | 8,244,564 | ||
|
|
14
MAGNUM OIL TOOLS
NOTES TO THE UNAUDITED COMBINED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2018 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017
5. |
COMMITMENTS AND CONTINGENCIES (continued) |
Purchase Commitments On September 29, 2017, the Company entered into an exclusive distribution agreement with a third-party supplier. The agreement required prepayment to the supplier in the amount of $2,000,000 and an additional payment of $500,000 was required as a pre-payment for future product purchases. The agreement also required a purchase minimum of product annually and the Company will negotiate the minimum required for each annual period.
For the coming year ended December 31, 2019, the Company must purchase a minimum of twenty-four thousand pounds of product which approximates $216,000. The terms of this agreement mature on September 29, 2021, with provisions to renew for a successive one year term. As of September 30, 2018, the Company had a prepaid balance for purchases from this vendor of $1,401,013 , of which $579,800 is included in prepaid expenses and $821,213 is included in other assets in the Companys unaudited combined balance sheet.
Debt The Company is a guarantor on a loan entered into by a company related through common ownership. The promissory notes are collateralized by property and various assets of the borrower with maturity dates of February 23, 2020. The total monthly installment is approximately $24,000, with outstanding balance of $3,000,262 as of September 30, 2018. The Company is required to perform upon the related companies default for any present or future obligations. The related company is performing on their debt obligations; therefore, no amount of the guaranteed debt is included in the Companys unaudited combined financial statements.
6. |
INCOME TAXES |
The Companys provision for income taxes is as follows for the nine months ended September 30:
2018 | 2017 | |||||||
State income tax |
$ | 1,052,957 | $ | 114,299 | ||||
Foreign income tax - Canada |
47,808 | 1,343 | ||||||
|
|
|
|
|||||
Total provision for income taxes |
$ | 1,100,765 | $ | 115,642 | ||||
|
|
|
|
15
MAGNUM OIL TOOLS
NOTES TO THE UNAUDITED COMBINED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2018 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017
6. |
INCOME TAXES (continued) |
The Companys provision for income taxes differed from the statutory rate of 21% and 34% as follows:
2018 | 2017 | |||||||
Tax expense at statutory rate |
$ | 7,266,839 | $ | 5,734,342 | ||||
Add effects of: |
||||||||
Income on pass thru entities |
(7,266,839 | ) | (5,734,342 | ) | ||||
State income tax |
1,052,957 | 114,299 | ||||||
Foreign income tax |
47,808 | 1,343 | ||||||
|
|
|
|
|||||
Total provision for income taxes |
$ | 1,100,765 | $ | 115,642 | ||||
|
|
|
|
As of September 30, 2018, the Company had no deferred tax assets.
7. |
SUBSEQUENT EVENTS |
On October 25, 2018, the Company was acquired by a public entity. As part of the acquisition, MOTIs finite life was eliminated.
In preparing the accompanying unaudited combined financial statements, the Company has reviewed, as necessary, events that occurred after September 30, 2018, up until the issuance of the financial statements, which occurred on December 26, 2018. Except for the subsequent event noted above, there were no events or transactions occurring during this period that required recognition or disclosure in the Companys unaudited combined financial statements. Any events occurring after this date have not been factored into the unaudited combined financial statements being presented.
16
MAGNUM OIL TOOLS
NOTES TO THE UNAUDITED COMBINED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2018 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017
8. |
RECENTLY ISSUED AUTHORITATIVE GUIDANCE |
ASU 2016-02, Leases (Topic 842). In February 2016, the FASB amended existing guidance that requires lessees recognize the following for all leases (with the exception of short term leases) at the commencement date (1) A lease liability, which is a lessees obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) A right-of-use asset, which is an asset that represents the lessees right to use or control the use of a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary; lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The amendments will be effective for financial statements issued for fiscal years beginning after December 15, 2019. The Company is currently evaluating the impact this change will have on its unaudited combined financial statements, but believes it will have little impact on operating results but will create significant additional assets and debt obligations, primarily related to leased premises and equipment treated as operating leases under current GAAP.
ASU 2014-09, Revenue from Contracts with Customers (Topic 606). In May 2014, the FASB amended existing guidance related to revenue from contracts with customers. This amendment supersedes and replaces nearly all existing revenue recognition guidance, including industry-specific guidance, establishes a new control-based revenue recognition model, changes the basis for deciding when revenue is recognized over time or at a point in time, provides new and more detailed guidance on specific topics and expands and improves disclosures about revenue. In addition, this amendment specifies the accounting for some costs to obtain or fulfill a contract with a customer. The amendments will be effective for annual periods beginning after December 15, 2018 and are expected to have a significant impact on the Companys unaudited combined financial statements. Management is finalizing their assessment and have identified that most revenue line items are within the scope of this new guidance. Management does not expect the new standard to result in a material change for revenue because the majority of the Companys current recognition policies will not be changed. Significant disclosures are expected to be noted in future periods.
Several other Accounting Standards were proposed and approved with effective dates ranging from fiscal year 2018 to fiscal year 2021. The new authoritative guidance except as noted above is not expected to have a significant impact to the Companys unaudited combined financial statements.
17
Exhibit 99.4
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
On October 25, 2018 (the Closing Date), pursuant to the terms of a Securities Purchase Agreement, dated October 15, 2018 (the Magnum Purchase Agreement), Nine Energy Service, Inc. (the Company) acquired all of the equity interests of Magnum Oil Tools International, LTD, Magnum Oil Tools GP, LLC and Magnum Oil Tools Canada Ltd. (such entities collectively, Magnum and such acquisition, the Magnum Acquisition) for approximately $334.5 million in upfront cash consideration, subject to customary adjustments, and 5.0 million shares of the Companys common stock, which were issued to the sellers of Magnum in a private placement. The Magnum Purchase Agreement also includes the potential for additional future payments in cash of (i) up to 60% of net income (before interest, taxes and certain gains or losses) for the E-Set tools business in 2019 through 2025 and (ii) up to $25.0 million based on sales of certain dissolvable plug products in 2019 (the Magnum Earnout).
On the Closing Date, the Company issued $400.0 million principal amount of 8.750% Senior Notes due 2023 (the Notes) at par. The Notes were issued under an indenture, dated as of October 25, 2018, by and among the Company, certain subsidiaries of the Company and Wells Fargo, National Association, as trustee. The Notes are senior unsecured obligations of the Company. The Notes are fully and unconditionally guaranteed on a senior unsecured basis by each of the Companys current domestic subsidiaries and by certain future subsidiaries.
On the Closing Date, the Company entered into a credit agreement, dated as of October 25, 2018, by and among the Company, Nine Energy Canada Inc., JPMorgan Chase Bank, N.A. as administrative agent and as an issuing lender, and certain other financial institutions party thereto as lenders and issuing lenders, that permits aggregate borrowings of up to $200.0 million, subject to a borrowing base, including a Canadian tranche with a sub-limit of up to $25.0 million and a sub-limit of $50.0 million for letters of credit (the New Credit Facility). The New Credit Facility will mature five years from the Closing Date, or, if earlier, on the date that is 180 days before the scheduled maturity date of the Notes if they have not been redeemed or repurchased by such date. Concurrent with the effectiveness of the New Credit Facility, the Company borrowed approximately $35.0 million.
The proceeds from the Notes, together with cash on hand and borrowings under the New Credit Facility, were used to (i) fund the upfront cash consideration of the Magnum Acquisition, (ii) fully repay the term loan borrowings under the Companys existing credit agreement (the Legacy Term Loans) and (iii) pay fees and expenses associated with the issuance of the Notes, the Magnum Acquisition and the New Credit Facility.
The following unaudited pro forma condensed combined financial statements are based on the Companys historical consolidated financial statements and Magnums historical combined financial statements as adjusted to give effect to the Magnum Acquisition and the related financing transactions. The unaudited pro forma condensed combined statements of operations for the nine months ended September 30, 2018 and the year ended December 31, 2017 give effect to these transactions as if they had occurred on January 1, 2017. The
unaudited pro forma condensed combined balance sheet as of September 30, 2018 gives effect to these transactions as if they had occurred on September 30, 2018. The unaudited pro forma condensed combined financial statements and related notes are presented for illustrative purposes only and are not necessarily indicative of the financial position that would have existed or the financial results that would have occurred if the Magnum Acquisition and the related financing transactions had been consummated on the dates indicated, nor are they necessarily indicative of the Companys future financial position or operating results.
The assumptions and estimates underlying the unaudited adjustments to the pro forma condensed combined financial statements are described in the accompanying notes, which should be read together with the pro forma condensed combined financial statements. These estimates are based on currently available information and certain assumptions that the Company believes are reasonable. The pro forma adjustments reflected herein are limited to amounts that are directly attributable to the Magnum Acquisition and the related financing transactions, factually supportable and, with respect to the pro forma condensed combined statement of operations, are expected to have a continuing impact. These pro forma adjustments will differ from the actual adjustments, and the differences may be material. In particular, the upfront cash consideration has not been finalized for the customary adjustments noted above and the Company has not fully completed the valuation procedures necessary to arrive at the final estimate of the fair value of the assets acquired and liabilities assumed. The unaudited pro forma condensed combined financial statements do not reflect the realization of any expected cost savings or other synergies from the Magnum Acquisition as a result of restructuring activities and other planned cost savings initiatives following the completion of the Magnum Acquisition.
The unaudited pro forma condensed combined financial statements should be read together with the Companys historical financial statements, which are included in the Companys latest Annual Report on Form 10-K and subsequent Quarterly Reports on Form 10-Q, and Magnums historical financial statements, which are included in the Current Report on Form 8-K (the Report) to which these pro forma condensed combined financial statements are an exhibit.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 2018
(in thousands)
Nine
Historical 9/30/2018 |
Magnum
Historical 9/30/2018 |
Combined
Historical 9/30/2018 |
RECLASSIFICATION
9/30/2018 |
PRO FORMA
ADJUSTMENTS (NOTE 4) 9/30/2018 |
PRO FORMA
Combined 9/30/2018 |
|||||||||||||||||||
Cash and cash equivalents |
$ | 86,534 | $ | 8,252 | $ | 94,786 | $ | | $ | (58,760 | )(a) | $ | 36,026 | |||||||||||
Accounts receivable, net |
162,437 | 33,493 | 195,930 | 36 | | 195,966 | ||||||||||||||||||
Other receivables |
| 1,208 | 1,208 | (1,208 | ) | | | |||||||||||||||||
Income taxes receivable |
84 | | 84 | 1,169 | | 1,253 | ||||||||||||||||||
Inventories, net |
29,571 | 52,942 | 82,513 | | 9,640 | (b) | 92,153 | |||||||||||||||||
Prepaid expenses and other current assets |
7,035 | 1,134 | 8,169 | 3 | | 8,172 | ||||||||||||||||||
Notes receivable from shareholders |
10,551 | | 10,551 | | | 10,551 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total current assets |
296,212 | 97,029 | 393,241 | | (49,120 | ) | 344,121 | |||||||||||||||||
Property and equipment, net |
257,447 | 2,697 | 260,144 | | 1,023 | (c) | 261,167 | |||||||||||||||||
Goodwill |
93,756 | | 93,756 | | 201,001 | (d) | 294,757 | |||||||||||||||||
Intangible assets, net |
57,892 | | 57,892 | | 254,000 | (e) | 311,892 | |||||||||||||||||
Other long-term assets |
1,144 | 1,076 | 2,220 | | 3,794 | (f) | 6,014 | |||||||||||||||||
Notes receivable from shareholders |
| | | | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total assets |
$ | 706,451 | $ | 100,802 | $ | 807,253 | $ | | $ | 410,698 | $ | 1,217,951 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Current portion of long-term debt |
$ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||
Accounts payable |
49,497 | 5,326 | 54,823 | 1,563 | | 56,386 | ||||||||||||||||||
Accrued expenses |
44,600 | 4,451 | 49,051 | (1,563 | ) | (117 | )(g) | 47,371 | ||||||||||||||||
Income taxes payable |
| 928 | 928 | | | 928 | ||||||||||||||||||
Current portion of capital lease obligations |
372 | | 372 | | | 372 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total current liabilities |
94,469 | 10,705 | 105,174 | | (117 | ) | 105,057 | |||||||||||||||||
Long-term debt |
114,048 | | 114,048 | | 312,952 | (h) | 427,000 | |||||||||||||||||
Deferred income taxes |
5,983 | | 5,983 | | | 5,983 | ||||||||||||||||||
Long-term lease obligations |
1,266 | | 1,266 | | | 1,266 | ||||||||||||||||||
Contingent consideration |
| | | | 23,029 | (i) | 23,029 | |||||||||||||||||
Other long-term liabilities |
55 | 4,039 | 4,094 | | (4,039 | )(j) | 55 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total liabilities |
215,821 | 14,744 | 230,565 | | 331,825 | 562,390 | ||||||||||||||||||
Common stock |
251 | | 251 | | 50 | 301 | ||||||||||||||||||
Additional paid-in capital |
564,229 | | 564,229 | | 177,300 | 741,529 | ||||||||||||||||||
Accumulated other comprehensive income (loss) |
(4,121 | ) | (630 | ) | (4,751 | ) | | 630 | (4,121 | ) | ||||||||||||||
Retained earnings (accumulated deficit) |
(69,729 | ) | 86,688 | 16,959 | | (99,107 | ) | (82,148 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total stockholders equity |
490,630 | 86,058 | 576,688 | | 78,873 | (k) | 655,561 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total liabilities and stockholders equity |
$ | 706,451 | $ | 100,802 | $ | 807,253 | $ | | $ | 410,698 | $ | 1,217,951 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the Unaudited Pro Forma Condensed Combined Financial Statements.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2018
(in thousands)
Nine
Historical 9/30/2018 |
Magnum
Historical 9/30/2018 |
Combined
Historical 9/30/2018 |
RECLASSIFICATION
9/30/2018 |
PRO FORMA
ADJUSTMENTS (NOTE 4) 9/30/2018 |
PRO FORMA
Combined 9/30/2018 |
|||||||||||||||||||
Revenues |
$ | 597,726 | $ | 113,841 | $ | 711,567 | $ | | $ | | $ | 711,567 | ||||||||||||
Cost of revenues (exclusive of depreciation and amortization) |
467,700 | 67,095 | 534,795 | (507 | ) | (4,039 | )(j) | 530,249 | ||||||||||||||||
General and administrative |
53,282 | 12,267 | 65,549 | | (1,434 | )(l) | 61,824 | |||||||||||||||||
(2,291 | )(m) | |||||||||||||||||||||||
Depreciation |
39,982 | 162 | 40,144 | 507 | 140 | (c) | 40,791 | |||||||||||||||||
Amortization of intangibles |
5,653 | | 5,653 | | 11,050 | (e) | 16,703 | |||||||||||||||||
Loss on equity method investment |
270 | | 270 | | | 270 | ||||||||||||||||||
Gain on sale of property and equipment |
(1,701 | ) | | (1,701 | ) | (176 | ) | | (1,877 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
565,186 | 79,524 | 644,710 | (176 | ) | 3,426 | 647,960 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Income (loss) from operations |
32,540 | 34,317 | 66,857 | 176 | (3,426 | ) | 63,607 | |||||||||||||||||
Other income, net |
| 287 | 287 | (176 | ) | | 111 | |||||||||||||||||
Interest expense |
(6,313 | ) | | (6,313 | ) | | (23,347 | )(n) | (29,660 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
(6,313 | ) | 287 | (6,026 | ) | (176 | ) | (23,347 | ) | (29,549 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Income (loss) before income taxes |
26,227 | 34,604 | 60,831 | | (26,773 | ) | 34,058 | |||||||||||||||||
Provision for income taxes |
1,875 | 1,101 | 2,976 | | 1,162 | (o) | 4,138 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net income (loss) |
$ | 24,352 | $ | 33,503 | $ | 57,855 | $ | | $ | (27,935 | ) | $ | 29,920 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Income (loss) per share: |
||||||||||||||||||||||||
Basic |
$ | 1.05 | $ | 1.06 | ||||||||||||||||||||
Diluted |
$ | 1.03 | $ | 1.05 | ||||||||||||||||||||
Weighted average common shares outstanding |
||||||||||||||||||||||||
Basic |
23,264,014 | 5,000,000 | (p) | 28,264,014 | ||||||||||||||||||||
Diluted |
23,603,922 | 5,000,000 | (p) | 28,603,922 |
See accompanying notes to the Unaudited Pro Forma Condensed Combined Financial Statements.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2017
(in thousands)
Nine
Historical 12/31/2017 |
Magnum
Historical 12/31/2017 |
Combined
Historical 12/31/2017 |
RECLASSIFICATION
12/31/2017 |
PRO FORMA
ADJUSTMENTS (NOTE 4) 12/31/2017 |
PRO FORMA
Combined 12/31/2017 |
|||||||||||||||||||
Revenues |
$ | 543,660 | $ | 89,588 | $ | 633,248 | $ | | $ | | $ | 633,248 | ||||||||||||
Cost of revenues (exclusive of depreciation and amortization) |
448,467 | 53,968 | 502,435 | (831 | ) | (1,686 | )(j) | 499,918 | ||||||||||||||||
General and administrative |
49,552 | 13,118 | 62,670 | | (1,122 | )(l) | 61,548 | |||||||||||||||||
Depreciation |
53,422 | 300 | 53,722 | 831 | 187 | (c) | 54,740 | |||||||||||||||||
Amortization of intangibles |
8,799 | | 8,799 | | 14,733 | (e) | 23,532 | |||||||||||||||||
Impairment of intangibles |
3,800 | | 3,800 | | | 3,800 | ||||||||||||||||||
Impairment of goodwill |
31,530 | | 31,530 | | | 31,530 | ||||||||||||||||||
Loss on equity method investment |
368 | | 368 | | | 368 | ||||||||||||||||||
(Gain) loss on sale of property and equipment |
4,688 | | 4,688 | (5 | ) | | 4,683 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
600,626 | 67,386 | 668,012 | (5 | ) | 12,112 | 680,119 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Income (loss) from operations |
(56,966 | ) | 22,202 | (34,764 | ) | 5 | (12,112 | ) | (46,871 | ) | ||||||||||||||
Other expense, net |
| (146 | ) | (146 | ) | (5 | ) | | (151 | ) | ||||||||||||||
Interest expense |
(15,703 | ) | | (15,703 | ) | | (23,844 | )(n) | (39,547 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
(15,703 | ) | (146 | ) | (15,849 | ) | (5 | ) | (23,844 | ) | (39,698 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Income (loss) before income taxes |
(72,669 | ) | 22,056 | (50,613 | ) | | (35,956 | ) | (86,569 | ) | ||||||||||||||
Provision (benefit) for income taxes |
(4,987 | ) | 22 | (4,965 | ) | | (2,610 | )(o) | (7,575 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net income (loss) |
$ | (67,682 | ) | $ | 22,034 | $ | (45,648 | ) | $ | | $ | (33,346 | ) | $ | (78,994 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Income (loss) per share: |
||||||||||||||||||||||||
Basic |
$ | (4.55 | ) | $ | (3.97 | ) | ||||||||||||||||||
Diluted |
$ | (4.55 | ) | $ | (3.97 | ) | ||||||||||||||||||
Weighted average common shares outstanding |
||||||||||||||||||||||||
Basic |
14,887,006 | 5,000,000 | (p) | 19,887,006 | ||||||||||||||||||||
Diluted |
14,887,006 | 5,000,000 | (p) | 19,887,006 |
See accompanying notes to the Unaudited Pro Forma Condensed Combined Financial Statements.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
Note 1 Basis of presentation
The Magnum Acquisition was accounted for under the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations. As the acquirer for accounting purposes, the Company has estimated the fair value of Magnums assets acquired and liabilities assumed and conformed the accounting policies of Magnum to its own accounting policies.
Note 2 Reclassifications
Certain reclassification adjustments have been made to the unaudited pro forma condensed combined financial statements to conform Magnums combined balance sheet as of September 30, 2018 and Magnums combined statements of operations for the nine months ended September 30, 2018 and the year ended December 31, 2017 to the Companys presentation, as follows:
|
The Company recognizes goods and services received but not invoiced as accounts payable whereas Magnum recognizes these amounts as accrued expenses. |
|
The Company recognizes state income tax and Texas franchise tax refunds due to the Company as income taxes receivable, miscellaneous accounts receivable as accounts receivable and employee advances as prepaid expenses and other current assets whereas Magnum recognizes these amounts as other receivables. |
|
The Company recognizes depreciation as a separate component of operating income or loss, whereas Magnum recognizes a portion of these amounts as cost of revenue. |
|
The Company recognizes gains or losses on sale of assets as a separate component of operating income or loss, whereas Magnum recognizes these amounts as non-operating income or expense. |
Note 3 Calculation of purchase consideration and preliminary purchase price allocation
The following table summarizes the fair value of purchase consideration transferred on the Closing Date (in thousands):
Proceeds from newly issued Notes and New Credit Facility |
$ | 296,622 | ||
Cash provided from operations |
58,760 | |||
|
|
|||
Total upfront cash consideration |
$ | 355,382 | ||
Issuance of the Companys common shares |
177,350 | (1) | ||
Contingent consideration |
23,029 | (2) | ||
|
|
|||
Total purchase consideration |
$ | 555,761 | ||
|
|
(1) Represents 5.0 million shares issued to the sellers of Magnum, which have been valued at the closing price per share ($35.47) of the Companys common stock on the Closing Date.
(2) Represents the Companys estimated fair value of the Magnum Earnout. The estimated fair value of the Magnum Earnout was determined using the income approach which requires a forecast of all of the expected future cash flows. The Company engaged a third-party valuation specialist to assist in the estimated fair value determination of the Magnum Earnout. The estimated fair value of the Magnum Earnout is preliminary and based upon available information and certain assumptions, known at the time of the Report, which management believes are reasonable. This preliminary fair value estimate for the Magnum Earnout may change as additional information becomes available and such changes could be material. Subsequent to the final determination of the fair value as part of the purchase price allocation, the Magnum Earnout will be revalued on quarterly basis. Any changes in value will be recorded in operating income (loss) in the Companys consolidated statement of operations.
The Company has performed a preliminary valuation analysis of the fair market value of Magnums assets and liabilities. The following table summarizes the preliminary allocation of the purchase price as of September 30, 2018 (in thousands):
Cash and cash equivalents |
$ | 8,252 | ||
Accounts receivable, net |
33,529 | |||
Inventories |
62,582 | |||
Income taxes receivable |
1,169 | |||
Prepaid expenses and other current assets |
1,137 | |||
Property and equipment, net |
3,720 | |||
Goodwill |
201,001 | |||
Intangible assets |
254,000 | |||
Other long-term assets |
1,076 | |||
Accounts payable |
(5,326 | ) | ||
Accrued expenses |
(4,451 | ) | ||
Income taxes payable |
(928 | ) | ||
Other long-term liabilities |
| |||
|
|
|||
Total consideration |
$ | 555,761 | ||
|
|
This preliminary purchase price allocation has been used to prepare pro forma adjustments in the unaudited pro forma condensed combined balance sheet and income statements. The final purchase price allocation will be determined when the Company has completed all detailed valuations and necessary calculations, which is expected to be finalized within the next twelve months. The final allocation could differ materially from the preliminary allocation used in the pro forma adjustments. The final allocation may include (i) changes in identifiable net assets, (ii) changes in fair values of inventory and property, plant and equipment, (iii) changes in allocations to intangible assets such as customer relationships, trade names, technology, non-compete agreements and in-process research and development as well as goodwill, (iv) changes to the fair value of the Magnum Earnout and (v) other changes to assets and liabilities.
Note 4 Pro forma adjustments
The pro forma adjustments are based on the Companys preliminary estimates and assumptions that are subject to change. The following adjustments have been reflected in the unaudited pro forma condensed combined financial statements:
(a) Represents the net decrease in cash and cash equivalents in connection with the Magnum Acquisition, which is comprised of the following (in thousands):
Proceeds from the issuance of the Companys Notes, net of deferred financing costs of $8.0 million |
$ | 392,000 | ||
Proceeds from borrowings under the Companys New Credit Facility |
35,000 | |||
|
|
|||
Subtotal |
427,000 | |||
Less: Payment of outstanding principal on the Companys Legacy Term Loans |
(115,274 | ) | ||
Less: Payment of outstanding interest on the Companys Legacy Term Loans |
(117 | ) | ||
Less: Payment of deferred financing costs under the Companys New Credit Facility |
(3,794 | ) | ||
Less: Payment of upfront cash consideration of Magnum Acquisition |
(355,382 | ) | ||
Less: Payment of estimated transaction costs in connection with the Magnum Acquisition |
(11,193 | ) | ||
|
|
|||
Pro forma adjustment to cash and cash equivalents |
$ | (58,760 | ) | |
|
|
(b) Represents the estimated adjustment to step up Magnums inventory to an estimated fair value of $62.6 million, an increase of $9.6 million from its carrying value. The estimated fair value calculation is preliminary and subject to change. The estimated fair value was determined based on the estimated selling price of the inventory less the remaining manufacturing and selling costs and a normal profit margin on those manufacturing and selling efforts.
(c) Represents the adjustment of $1.0 million to increase the basis in the acquired property and equipment to an estimated fair value of $3.7 million. The estimated fair value of acquired property and equipment is expected to be amortized on a straight-line basis over their estimated useful lives, which range from 3 to 10 years. The estimated fair value and useful life calculations are preliminary and subject to changes after the Company finalizes its review of the specific types, nature, age, condition and location of Magnums property and equipment. The following table summarizes the changes in estimated depreciation expense (in thousands):
Nine Months
Ended September 30, 2018 |
Year Ended
December 31, 2017 |
|||||||
Estimated Magnum depreciation expense |
$ | 809 | $ | 1,318 | ||||
Less: Magnums historical depreciation expense |
(669 | ) | (1,131 | ) | ||||
|
|
|
|
|||||
Pro forma adjustment to depreciation expense |
$ | 140 | $ | 187 | ||||
|
|
|
|
(d) Represents the preliminary goodwill associated with the Magnum Acquisition as presented in Note 3. Goodwill represents the estimate of the excess of the purchase price over the fair value of the assets acquired and liabilities assumed.
(e) Represents the adjustment to state acquired identifiable intangible assets, consisting of customer relationships, trade names, technology, non-compete agreements and in-process research and development, at their estimated fair value.
The following table summarizes the estimated fair values of the identifiable intangible assets, their estimated useful lives and the related impact to amortization expense (in thousands):
Pro Forma Amortization Expense | ||||||||||||||||
Useful Life | Fair Value |
Nine Months Ended
September 30, 2018 |
Year Ended
December 31, 2017 |
|||||||||||||
Customer relationships |
10 | $ | 30,000 | $ | 2,250 | $ | 3,000 | |||||||||
Trade name |
Indefinite | 65,000 | | | ||||||||||||
Technology |
15 | 155,000 | 7,750 | 10,333 | ||||||||||||
Noncompete agreements |
2.1 | 3,000 | 1,050 | 1,400 | ||||||||||||
In-process research and development |
Indefinite | 1,000 | | | ||||||||||||
|
|
|||||||||||||||
Pro forma adjustments to intangible assets |
|
$ | 254,000 | |||||||||||||
|
|
|
|
|
|
|||||||||||
$ | 11,050 | $ | 14,733 | |||||||||||||
|
|
|
|
The estimated fair value of the identifiable intangible assets was determined primarily using the income approach which requires a forecast of all of the expected future cash flows. The Company engaged a third-party valuation specialist to assist in the estimated fair value determination. The estimated fair value of the identifiable intangible assets is expected to be amortized on a straight-line basis over their estimated useful lives, which represents the periods in which the identifiable intangible assets are expected to provide a material economic benefit.
These estimates of fair value and useful lives are preliminary in nature and will likely differ from final amounts the Company will calculate after the completion of its detailed valuation analysis, and the difference could have a material impact on the unaudited pro forma condensed combined financial statements. With other assumptions held constant, a 10% change to the estimated fair value of the identifiable intangible assets would result in an increase or decrease to amortization expense of $1.5 million annually.
(f) Represents the capitalization of deferred financing costs associated with the Companys New Credit Facility.
(g) Represents the payment of accrued interest associated with the Companys Legacy Term Loans at the Closing Date.
(h) Represents the issuance of the Notes and the borrowings under the New Credit Facility to fund a portion of the upfront cash consideration of the Magnum Acquisition partially offset with the repayment of the Legacy Term Loans. The net increase to long-term debt included the following (in thousands):
Issuance of the Companys Notes, net of deferred financing costs of $8.0 million |
$ | 392,000 | ||
Borrowings under the Companys New Credit Facility |
35,000 | |||
|
|
|||
Subtotal |
427,000 | |||
Less: Payment of the Legacy Term Loans net of deferred financing costs of $1.2 million |
(114,048 | ) | ||
|
|
|||
Pro forma adjustment to long-term debt |
$ | 312,952 | ||
|
|
(i) Represents the Companys preliminary estimate of contingent consideration associated with the Magnum Earnout. This amount is included in the preliminary estimated fair value of the consideration transferred on the Closing Date.
(j) Represents the amount of sales commissions due from or paid by Magnum to an intercompany entity as part of a tax-planning strategy. The intercompany entity is not included in the Magnum Acquisition.
(k) Represents the Companys issuance of common stock to the sellers of Magnum as partial consideration for the Magnum Acquisition, partially offset with the elimination of the historical equity of Magnum and estimated transaction costs in connection with the Magnum Acquisition, as follows (in thousands):
Proceeds from the issuance of 5.0 million of the Companys common shares at $35.47 a share |
$ | 177,350 | ||
Less: Historical equity of Magnum at September 30, 2018 |
(86,058 | ) | ||
Less: Write-off of deferred financing costs associated with the Legacy Term Loans |
(1,226 | ) | ||
Less: Payment of estimated transaction costs in connection with the Magnum Acquisition |
(11,193 | ) | ||
|
|
|||
Pro forma adjustment to equity |
$ | 78,873 | ||
|
|
(l) Represents the amount of insurance premiums paid by Magnum to a captive insurance entity under common ownership for additional insurance coverage. The entity is not included in the Magnum Acquisition and the related insurance policies will not be replaced subsequent to the close of the transaction.
(m) Represents the elimination of nonrecurring transaction costs incurred during the nine months ended September 30, 2018 that are directly related to the Magnum Acquisition.
(n) Represents the net increase to interest expense resulting from interest on the Companys Notes, interest on borrowings under the Companys New Credit Facility and the amortization of new deferred financing costs, partially offset with the elimination of interest expense and deferred financing costs associated with the Legacy Term Loans, as follows (in thousands):
Nine Months Ended
September 30, 2018 |
Year Ended
December 31, 2017 |
|||||||
Interest expense on the Companys Notes and New Credit Facility |
$ | 27,891 | $ | 37,188 | ||||
Amortization of new deferred financing costs |
1,769 | 2,359 | ||||||
|
|
|
|
|||||
$ | 29,660 | $ | 39,547 | |||||
Less: Elimination of interest expense and deferred financing costs associated with the Companys Legacy Term Loans |
(6,313 | ) | (15,703 | ) | ||||
|
|
|
|
|||||
Pro forma adjustment to interest expense |
$ | 23,347 | $ | 23,844 | ||||
|
|
|
|
(o) Represents the income tax effect of pro forma adjustments based on the estimated blended federal and state statutory tax rate of 12.15% for the nine months ended September 30, 2018 and 8.75% for the year ended December 31, 2017.
(p) Represents 5.0 million shares issued to the sellers of Magnum on the Closing Date, which increased the Companys pro-forma weighted-average shares outstanding for the nine months ended September 30, 2018 and the year ended December 31, 2017, respectively.