UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): December 17, 2018
NRC GROUP HOLDINGS CORP.
(Exact name of registrant as specified in its charter)
| Delaware | 001-38119 | 81-4838205 | ||
|
(State or other jurisdiction
of incorporation) |
(Commission File Number) |
(IRS Employer
Identification No.) |
|
3500 Sunrise Highway, Suite 200, Building 200 Great River, New York |
11739 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (631) 224-9141
Not Applicable
(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. ☐
| Item 9.01 | Financial Statements and Exhibits. |
In connection with the previously announced acquisition of Quail Run Services, LLC (“ Quail Run ”), NRC Group Holdings Corp. (the “ Registrant ”) hereby files the following financial information in accordance with Rule 3-05 of Regulation S-X.
(a) Financial Statements of Businesses Acquired
The audited financial statements of Quail Run as of and for the years ended December 31, 2017 and 2016, together with the notes thereto, are included in this Current Report on Form 8-K (this “ Current Report ”) as Exhibit 99.1 and incorporated herein by reference.
The unaudited financial statements of Quail Run as of September 30, 2018 and 2017 and for the nine months ended September 30, 2018 and 2017, together with the notes thereto, are included in this Current Report as Exhibit 99.2 and incorporated herein by reference.
(b) Pro Forma Financial Information
Unaudited pro forma condensed combined financial information, together with the notes thereto, are included in this Current Report as Exhibit 99.3 and incorporated herein by reference.
(d) Exhibits.
* Filed herewith
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.
| NRC GROUP HOLDINGS CORP. | ||
| Date: December 17, 2018 | By: | /s/ Joseph Peterson |
| Joseph Peterson | ||
| Title: | Chief Financial Officer | |
Exhibit 99.1
Management’s Report on Financial Statements
Responsibility for the integrity and objectivity of the financial information presented in the accompanying 2016 and 2017 financial statements rests with the management of Quail Run Services, LLC. The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, applying certain estimates and judgments as required.
The Company maintains a system of internal accounting controls which is designed to provide reasonable assurance as to the reliability of its financial records and the protection of its assets. The concept of reasonable assurance is based on the recognition that the cost of a system of internal control should not exceed the related benefits. Management believes the Company’s system provides this appropriate balance in all material respects.
The 2016 and 2017 financial statements have been audited by the Company’s independent auditors, Jain & Jain, P.C., Certified Public Accountants. Their role is to form an independent opinion as to the fairness with which such statements present the financial position of the Company and the results of its operations and cash flows in accordance with accounting principles generally accepted in the United States of America.
| Robby Nelson | Philip Bowman | |
| CEO, | CFO, | |
| Quail Run Services, LLC | Quail Run Services, LLC |
Independent Auditors’ Report
To the Members
Quail Run Services, LLC
Houston, Texas
We have audited the accompanying financial statements of Quail Run Services, LLC (a Texas limited liability company), which comprise the balance sheets as of December 31, 2016 and 2017, and the related statements of income (loss), changes in members’ capital, and cash flows for the years then ended, and the related notes to the financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the 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 financial statements referred to above present fairly, in all material respects, the financial position of Quail Run Services, LLC as of December 31, 2016 and 2017, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
/s/ Jain & Jain, P.C.
Sugar Land, Texas
December 10, 2018
2
Quail Run Services, LLC
Balance Sheet
| December 31, | 2017 | 2016 | ||||||
| Assets | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 216,102 | 16,071 | |||||
| Accounts receivable-trade (Notes 3 and 5) | 1,129,165 | 515,039 | ||||||
| Unbilled revenues | 90,973 | 32,808 | ||||||
| Prepaid expenses (Note 6) | 96,419 | 97,156 | ||||||
| Other receivables | 873 | 631 | ||||||
| Total current assets | 1,533,532 | 661,705 | ||||||
| Property and equipment, net (Notes 2 and 3) | 1,738,576 | 1,851,851 | ||||||
| Other assets | ||||||||
| Permits, net of accumulated amortization of $54,491 for 2017 and $41,533 for 2016 | 33,473 | 46,431 | ||||||
| Total other assets | 33,473 | 46,431 | ||||||
| $ | 3,305,581 | 2,559,987 | ||||||
The accompanying notes are an integral part of these financial statements.
3
Quail Run Services, LLC
Balance Sheet (Continued)
| December 31, | 2017 | 2016 | ||||||
| Liabilities and Members’ Capital | ||||||||
| Current liabilities | ||||||||
| Current maturities of note payable - bank (Note 3) | $ | 87,000 | 83,000 | |||||
| Accounts payable | 17,028 | 49,485 | ||||||
| Note payable - insurance (Note 4) | 41,474 | 39,797 | ||||||
| Taxes and other payables | 18,678 | 12,178 | ||||||
| Total current liabilities | 164,180 | 184,460 | ||||||
| Long-term debt | ||||||||
| Note payable - bank, net of current maturities (Note 3) | 162,475 | 249,262 | ||||||
| Total long-term debt | 162,475 | 249,262 | ||||||
| Total liabilities | 326,655 | 433,722 | ||||||
| Commitments & contingencies (Note 7) | ||||||||
| Members’ capital | 2,978,926 | 2,126,265 | ||||||
| $ | 3,305,581 | 2,559,987 | ||||||
The accompanying notes are an integral part of these financial statements.
4
Quail Run Services, LLC
Statement of Income (Loss)
| Years Ended December 31, | 2017 | 2016 | ||||||
| Revenues | ||||||||
| Wastewater treatment and disposal services (Note 5) | $ | 5,592,066 | 2,300,053 | |||||
| Cost of operations | ||||||||
| Cost of revenues, including depreciation of $176,130 for 2017 and $174,393 for 2016 (Note 6) | 1,993,401 | 1,545,776 | ||||||
| Selling, general and administrative expenses | 569,076 | 559,502 | ||||||
| Depreciation and amortization | 61,198 | 59,433 | ||||||
| Total cost of operations | 2,623,675 | 2,164,711 | ||||||
| Operating income | 2,968,391 | 135,342 | ||||||
| Other expenses | ||||||||
| Interest expense | 15,730 | 19,483 | ||||||
| Total other expenses | 15,730 | 19,483 | ||||||
| Income from continuing operations | 2,952,661 | 115,859 | ||||||
| Discontinued operations | ||||||||
| Loss from operation of discontinued component (Note 8) | - | (212,464 | ) | |||||
| Net income (loss) | $ | 2,952,661 | (96,605 | ) | ||||
The accompanying notes are an integral part of these financial statements.
5
Quail Run Services, LLC
Statement of Changes in Members’ Capital
| Years Ended December 31, | 2017 | 2016 | ||||||
| Members’ capital, beginning balance | $ | 2,126,265 | 2,262,870 | |||||
| Net income (loss) | 2,952,661 | (96,605 | ) | |||||
| Distributions | (2,100,000 | ) | (40,000 | ) | ||||
| Members’ capital, ending balance | $ | 2,978,926 | 2,126,265 | |||||
The accompanying notes are an integral part of these financial statements.
6
Quail Run Services, LLC
Statement of Cash Flows
| Years Ended December 31, | 2017 | 2016 | ||||||
| Cash flows from operating activities | ||||||||
| Net income (loss) | $ | 2,952,661 | (96,605 | ) | ||||
| Adjustments to reconcile net income to net cash provided by/(used in) operating activities: | ||||||||
| Depreciation and amortization | 237,328 | 349,282 | ||||||
| Bad debt | 531 | - | ||||||
| Loss on sale of assets | - | 21,923 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable-trade | (614,656 | ) | (177,965 | ) | ||||
| Unbilled revenues | (58,165 | ) | (20,556 | ) | ||||
| Prepaid expenses | 738 | 16,454 | ||||||
| Other receivables | (242 | ) | 1,539 | |||||
| Accounts payable | (32,460 | ) | 38,396 | |||||
| Taxes & other payables | 6,500 | (5,616 | ) | |||||
| Net cash provided by/(used in) operating activities | 2,492,235 | 126,852 | ||||||
| Cash flows from investing activities | ||||||||
| Proceeds from sale of property and equipment | - | 11,000 | ||||||
| Permits | - | (6,215 | ) | |||||
| Purchase of property and equipment | (111,094 | ) | (6,000 | ) | ||||
| Net cash provided by/(used in) investing activities | (111,094 | ) | (1,215 | ) | ||||
| Cash flows from financing activities | ||||||||
| Increase/(decrease) in note payable insurance | 1,677 | (1,172 | ) | |||||
| Payments on notes payable | (82,787 | ) | (78,668 | ) | ||||
| Distributions | (2,100,000 | ) | (40,000 | ) | ||||
| Net cash provided by/(used in) financing activities | (2,181,110 | ) | (119,840 | ) | ||||
| Net increase (decrease) in cash and cash equivalents | 200,031 | 5,797 | ||||||
| Cash and cash equivalents at the beginning of year | 16,071 | 10,274 | ||||||
| Cash and cash equivalents at the end of year | $ | 216,102 | 16,071 | |||||
| Supplemental Cash Flow Information | ||||||||
| Interest paid during the year | $ | 15,806 | 19,574 | |||||
The accompanying notes are an integral part of these financial statements.
7
Quail Run Services, LLC
Notes to Financial Statements
1. Organization and Summary of Significant Accounting Policies
Organization – Quail Run Services, LLC (a Texas limited liability company) (“QRS”; the “Company”) was formed on August 18, 2011 and operates domestic wastewater treatment facilities specifically focused on wastewater generated on well site locations. Land and equipment are leased. The Company’s state licensed facilities are designed to properly treat domestic wastewater and then discharge/reuse the processed effluent that meets or exceeds state provided effluent parameters. Currently, QRS provides treatment and disposal services for only the sewage wastewater from its five oil field locations in the Permian Basin and Eagle Ford Shale areas in the state of Texas. There is a single class of membership with each member having limited liability.
On October 2, 2018, the members of the Company (“Sellers”) entered into a Purchase Agreement with Sprint Energy Services, LLC, a Delaware limited liability company (“SES” / the “Buyer”) under which the Buyer acquired from the Sellers all of their issued and outstanding membership interests of QRS for $40,000,000, including earn-out of $15,000,000 (to be recognized when received in the future) receivable by the Sellers in future years subject to achievability of certain profitability milestones specified under the purchase agreement.
The following is a summary of significant accounting policies applied in the preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America.
Subsequent events – The Company has evaluated all events and transactions that occurred after the balance sheet dates through December 10, 2018, the date the financial statements were available to be issued. During this period, the Company did not have any material recognizable subsequent event except the sale of its membership interests to SES as stated above.
Use of estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities that exist at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and cash equivalents – For the purposes of the statement of cash flows, the Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Accounts receivable-trade – Management periodically reviews all accounts receivable to determine if any are considered uncollectible based upon the age of the receivable and the credit worthiness of the parties involved. The Company’s management has determined that no allowance is necessary at December 31, 2016 and 2017, based upon a review of outstanding receivables, historical collection information, and existing economic conditions recognized at the time of revenue recognition.
Property, equipment, and depreciation – Property and equipment are recorded at cost. Major improvements greater than $2,500 are capitalized while replacements and repairs which do not extend the lives of the assets are expensed currently. The Company follows the policy of providing straight-line depreciation over the estimated useful lives of five to twenty years. Costs of the assets sold or retired, and the related accumulated depreciation are eliminated from accounts in the year of sale or retirement and resulting gains or losses are recognized.
8
Quail Run Services, LLC
Notes to Financial Statements
Long-lived assets – The Company’s long-lived assets are reviewed for impairment in accordance with the guidance of the financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 360-10, Property, Plant, and Equipment , whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Recoverability of an asset to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted cash flows expected to be generated by the asset. If such asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. The Company has determined that there were no impairment losses for the years ended December 31, 2016 and 2017.
Permits – The Company incurs costs to obtain permits from the Texas Commission on Environmental Quality for the authorization to treat wastewater and discharge waste from each of their leased wastewater treatment facilities, as well as subsequent costs required to maintain the permits. These permit costs are amortized over the term of the permit period on a straight-line basis which estimates five to ten years.
Revenue recognition – QRS is a provider of wellsite sewage treatment services. The customers are billed per gallon of oilfield wastewater delivered to the Company for treatment. The selling price is negotiated on a customer by customer and site by site basis. Revenue is generally recognized once the following four criteria are met: (i) persuasive evidence of an agreement exists; (ii) the wastewater has been delivered to the Company for treatment; (iii) the price of the treatment service is fixed and determinable; and (iv) collection of the amounts due is reasonably assured.
Fair value of financial instruments – The Company has a number of financial instruments, none of which are held for trading purposes. The Company estimates that the fair value of all financial instruments at December 31, 2016 and 2017, do not differ materially from the aggregate carrying values of its financial instruments recorded in the accompanying balance sheet.
Income taxes – The Company was formed as a limited liability company. In lieu of corporate income taxes, the members are taxed on their proportionate share of the Company’s taxable income. Therefore, no provision or liability for federal income taxes has been included in the financial statements. The Company is subject to a gross margin tax for activities in Texas. The tax is calculated by applying a tax rate to a base that considers both revenues and expenses and therefore has characteristics of income tax. For the years ended December 31, 2016 and 2017, the Company recorded liabilities for Texas State Margin Tax, which approximated $4,800 and $16,000, respectively.
The Company follows guidance issued by the FASB which clarifies accounting for uncertainty in income taxes by prescribing the minimum recognition threshold an income tax position is required to meet before being recognized in the financial statements and applies to all income tax positions. Each income tax position is assessed using a two-step process. A determination is first made as to whether it is more likely than not that the income tax position will be sustained, based upon technical merits, upon examination by the taxing authorities. If the income tax position is expected to meet the more likely than not criteria, the benefit recorded in the financial statements equals the largest amount that is greater than 50% likely to be realized upon its ultimate settlement. The income tax position taken by the Company for any years open under various statutes of limitations is that the Company continues to be exempt from federal income taxes by virtue of being a pass-through entity. Management believes this tax position meets the more-likely-than-not threshold and, accordingly, the tax benefits of this income tax position (no federal income tax expense or liability) has been recognized for the years ended on or before December 31, 2016 and 2017.
In accordance with this guidance, the Company has elected to record income tax related interest and penalties, if any, as a component in the provision of income tax expense. For the years ended December 31, 2016 and 2017, the Company incurred no income tax related interest or penalties. The Company completed its analysis of its tax positions and believes there are no uncertain tax positions that would require recognition in the financial statements as of December 31, 2016 and 2017. The Company believes that there are no tax positions taken or expected to be taken that would significantly increase or decrease unrecognized tax benefits within the next twelve months.
9
Quail Run Services, LLC
Notes to Financial Statements
2. Property and Equipment
The cost and estimated lives of property and equipment at December 31, 2016 and 2017 are summarized as follows:
| Lives-Years |
December 31,
2016 |
December 31,
2017 |
||||||||
| Office equipment | 5 | $ | 7,632 | $ | 7,632 | |||||
| Plant equipment | 5 | 70,769 | 99,207 | |||||||
| Trailer | 5 | 162,777 | 162,777 | |||||||
| Vehicle | 5 | 30,659 | 68,659 | |||||||
| Generator | 10 | 63,815 | 63,815 | |||||||
| Leasehold improvements | 15-20 | 2,240,051 | 2,284,709 | |||||||
| 2,575,703 | 2,686,799 | |||||||||
| Less: accumulated depreciation | (723,852 | ) | (948,223 | ) | ||||||
| Property and equipment, net | $ | 1,851,851 | $ | 1,738,576 | ||||||
3. Note Payable – Bank
Due to a bank. The note is secured by certain accounts, equipment and personal guarantees by the previous members of the Company. The note was payable in monthly installments of $8,109 including interest at a rate of 4.85% per annum through September 2020. The following table summarizes the principal amounts due in future years as per the note agreement. However, as part of the sale of its membership interests stated in Note 1, the Company paid off the entire balance outstanding on this note as of October 2, 2018 which aggregated to $185,186.
| Year ending December 31, |
December 31,
2016 |
December 31,
2017 |
||||||
| 2017 | $ | 83,000 | $ | -0- | ||||
| 2018 | 87,000 | 87,000 | ||||||
| 2019 | 91,000 | 91,000 | ||||||
| 2020 | 71,262 | 71,475 | ||||||
| Total | $ | 332,262 | $ | 249,475 | ||||
4. Note Payable – Insurance
The Company financed the insurance premium payable under its various insurance policies. The premium financed for the policy period 2016-2017 were payable in monthly installments of $4,109 including interest at the rate of 7% per annum through October 2017. The premiums financed for the policy period 2017-2018 were payable in monthly installments of $3,907 including interest at the rate of 7.2% per annum through December 2018. However, as part of the sale of its membership interests stated in Note 1, the Company paid off the entire balance outstanding on this note as of October 2, 2018 which aggregated to $3,884.
10
Quail Run Services, LLC
Notes to Financial Statements
5. Concentrated Credit Risk
The Company derived approximately 39% and 27% of its revenues from two customers for the years ended December 31, 2016 and 2017, respectively. These customers made up 27% and 22% of the total accounts receivable as of December 31, 2016 and December 31, 2017, respectively. The Company operates domestic wastewater treatment facilities specifically focused on wastewater generated on well site locations in the Permian Basin and Eagle Ford Shale. Consequently, the Company’s ability to collect the amount due from customers may be affected by economic fluctuations in the industries or in the areas in which it operates.
The Company believes that changes in any of the following areas could have a material adverse effect on the Company’s future financial position or results of operations: changes in the overall demand for services offered by the Company; changes in customer relationships; changes in interest rates; fluctuation in oil drilling and/or fracking activities in Permian Basin and Eagle Ford Shale; fluctuation in overall oil prices; availability and cost of business insurance; and risks associated with changes in domestic economy and/or regulations.
Financial instruments that potentially subject the Company to credit risk are cash and cash equivalents and accounts receivable-trade. Cash balances are maintained in financial institutions which at times exceed federally insured limits. The Company monitors the financial condition of the financial institutions in which accounts are maintained and has not experienced any losses in such accounts. The Company performs ongoing credit evaluations as to the financial condition of its customers with respect to trade receivables. Generally, no collateral is required as a condition of services performed.
6. Related Party Transactions
As stated above, QRS is a provider of wellsite sewage treatment services. The Company leases the wastewater treatment plants at four of its facilities from AUC Group, L.P. (“AUC”), a related party which is approximately 5% owned by one of the previous members of the Company. The Company also has a capacity lease agreement with another related entity for one of its locations wherein the related entity owns the wastewater treatment plant. At this location, the Company leases expansion equipment for the plant from AUC. The management has indicated that all transactions and terms of this leasing arrangement with the related parties are at arm’s length. For the years ended December 31, 2016 and 2017, the Company paid approximately $554,000, and $501,000, respectively, in lease and capacity payments for such wastewater treatment plants at all its treatment facilities. The Company also paid approximately $11,000 and $19,000 during the years ended December 31, 2016 and 2017, respectively, for expenses relating to the processing of wastewater discharge permits and equipment related to the leased facilities.
As part of the lease agreements with AUC for all its locations, the Company paid $50,336 in advance lease rentals to AUC for the last month of the lease agreement period, which is reflected as prepaid expenses in the accompanying balance sheet as of December 31, 2016 and 2017. Also, one of the parcels of land on which QRS operates its treatment facilities is personally owned by one of the previous members of QRS and is currently provided rent-free.
11
Quail Run Services, LLC
Notes to Financial Statements
7. Commitments & Contingencies
The Company is subject to legal proceedings and claims which arise in the ordinary course of business. Management does not believe that the outcome of any of those matters will have a material adverse effect on the Company’s financial position, operating results, or cash flows.
As stated in Note 6, QRS has leases related to its wastewater treatment plants at all of its treatment facilities from AUC, a related party. The Company leases wastewater capacity at one of its locations from another related entity. The table below summarizes the minimum future lease payments payable to these related entities under the lease agreements:
| Year ending December 31, |
December 31,
2016 |
December 31,
2017 |
||||||
| 2017 | $ | 501,000 | $ | -0- | ||||
| 2018 | 432,000 | 432,000 | ||||||
| 2019 | 168,000 | 168,000 | ||||||
| 2020 | 36,000 | 36,000 | ||||||
| 2021 | 27,000 | 27,000 | ||||||
| Total | $ | 1,164,000 | $ | 663,000 | ||||
As stated above, QRS is a provider of wellsite sewage treatment services at five locations in Permian Basin and Eagle Ford Shale. The Company leases the land on four of these locations which these facilities operate, and as such, has entered into various land lease agreements with third parties that mature at various dates through 2021, with options to extend for an additional 5 years.
Under these land lease agreements, the Company is required to pay, as royalties in lieu of land lease rent, a percentage, varying between 5%-10%, of the gross revenues generated at its treatment facilities. These land lease payments are dependent on certain thresholds stipulated under the lease agreements relating to the price per gallon being charged by QRS to its customers and the price per barrel of crude oil staying at or above a predetermined price level.
Management indicated that during the year ended December 31, 2016, land owners gave QRS concessions on the land leases and did not require full lease payments due to the severity of oil and gas downturn at the time, while during 2017, the Company started ramping up such lease payments upon turnaround of the oil and gas activity in the region it operates in. The Company incurred land lease expenses to third parties of approximately $16,000 and $231,000 for the years ended December 31, 2016 and 2017, respectively.
12
Quail Run Services, LLC
Notes to Financial Statements
8. Discontinued Operations
As mentioned in Note 7, the Company witnessed significant drop in revenues during 2016 owed to the severity of oil and gas downturn at the time. So, in June 2016, the Company closed operations at one of its treatment facilities (the “Barnhart” facility) due to low drilling activity. Accordingly, the results of the operations at Barnhart have been classified as “Discontinued Operations” in the accompanying statement of operations for the year ended December 31, 2016 in accordance with FASB ASC 205-20, Discontinued Operations. Discontinued operations were not segregated in the accompanying statement of cash flows. Therefore, amounts for certain captions in the accompanying statement of cash flows will not agree with the respective data in the accompanying statement of operations.
The results of the discontinued operations at Barnhart facility in the statement of operations for the year ended December 31, 2016 were as follows:
| Revenues | $ | 38,359 | ||
| Cost of Operations | ||||
| Cost of revenues | 105,580 | |||
| Selling, general and administration expenses | 7,864 | |||
| Depreciation and amortization | 115,456 | |||
| Total Cost of operations | 228,900 | |||
| Operating loss | (190,541 | ) | ||
| Other expenses | ||||
| Loss on sale of assets | (21,923 | ) | ||
| Total Other expenses | (21,923 | ) | ||
| Loss from Discontinued operations at Barnhart facility | $ | (212,464 | ) |
13
Exhibit 99.2
Independent Accountants’ Review Report
To the Members of
Quail Run Services, LLC
Houston, Texas
We have reviewed the accompanying financial statements of Quail Run Services, LLC (a Texas limited liability company), which comprise the balance sheets as of September 30, 2017 and 2018, and the related statements of income, changes in members’ capital and cash flows for the nine months then ended, and the related notes to the financial statements. A review includes primarily applying analytical procedures to management’s financial data and making inquiries of company management. A review is substantially less in scope than an audit, the objective of which is the expression of an opinion regarding the financial statements as a whole. Accordingly, we do not express such an opinion.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Accountant’s Responsibility
Our responsibility is to conduct the review engagements in accordance with Statements on Standards for Accounting and Review Services promulgated by the Accounting and Review Services Committee of the AICPA. Those standards require us to perform procedures to obtain limited assurance as a basis for reporting whether we are aware of any material modifications that should be made to the financial statements for them to be in accordance with accounting principles generally accepted in the United States of America. We believe that the results of our procedures provide a reasonable basis for our conclusion.
Accountant’s Conclusion
Based on our reviews, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in accordance with accounting principles generally accepted in the United States of America.
/s/ Jain & Jain, P.C.
Sugar Land, Texas
December 10, 2018
Quail Run Services, LLC
Balance Sheet
| September 30, | 2018 | 2017 | |||||
| Assets | |||||||
| Current assets | |||||||
| Cash and cash equivalents | $ | 150,746 | 363,462 | ||||
| Accounts receivable-trade (Notes 3 and 5) | 1,463,969 | 1,106,825 | |||||
| Unbilled revenues | 112,655 | 53,692 | |||||
| Prepaid expenses (Note 6) | 61,857 | 62,041 | |||||
| Other receivables | - | 631 | |||||
| Total current assets | 1,789,227 | 1,586,651 | |||||
| Property and equipment, net (Notes 2 and 3) | 1,713,399 | 1,716,604 | |||||
| Other assets | |||||||
| Permits, net of accumulated amortization of $64,209 for 2018 and $51,252 for 2017 | 73,070 | 36,713 | |||||
| Total other assets | 73,070 | 36,713 | |||||
| $ | 3,575,696 | 3,339,968 | |||||
See notes and independent accountants’ review report
2
Quail Run Services, LLC
Balance Sheet (Continued)
| September 30, | 2018 | 2017 | |||||
| Liabilities and Members’ Capital | |||||||
| Current liabilities | |||||||
| Current maturities of note payable - bank (Note 3) | $ | 90,000 | 86,000 | ||||
| Accounts payable | 4,300 | 25,415 | |||||
| Note payable - insurance (Note 4) | 3,884 | - | |||||
| Taxes and other payables | 18,284 | 23,467 | |||||
| Total current liabilities | 116,468 | 134,882 | |||||
| Long-term debt | |||||||
| Note payable - bank, net of current maturities (Note 3) | 94,644 | 191,495 | |||||
| Total long-term debt | 94,644 | 191,495 | |||||
| Total liabilities | 211,112 | 326,377 | |||||
| Commitments & contingencies (Note 7) | |||||||
| Members’ capital | 3,364,584 | 3,013,591 | |||||
| $ | 3,575,696 | 3,339,968 | |||||
See notes and independent accountants’ review report
3
Quail Run Services, LLC
Statement of Income
| For the Nine Months Ended September 30, | 2018 | 2017 | |||||
| Revenues | |||||||
| Wastewater treatment and disposal services (Note 5) | $ | 6,833,875 | 3,957,068 | ||||
| Cost of operations | |||||||
| Cost of revenues, including depreciation of $137,051 in 2018 and $130,957 in 2017 (Note 6) | 1,783,116 | 1,450,274 | |||||
| Selling, general and administrative expenses | 566,008 | 403,269 | |||||
| Depreciation and amortization | 55,224 | 44,857 | |||||
| Total cost of operations | 2,404,348 | 1,898,400 | |||||
| Operating income | 4,429,527 | 2,058,668 | |||||
| Other expenses | |||||||
| Interest expense | 9,631 | 11,342 | |||||
| Loss on sale/disposition of assets | 2,239 | - | |||||
| Total other expenses | 11,870 | 11,342 | |||||
| Net income | $ | 4,417,657 | 2,047,326 | ||||
See notes and independent accountants’ review report
4
Quail Run Services, LLC
Statement of Changes in Members’ Capital
| For the Nine Months Ended September 30, | 2018 | 2017 | ||||||
| Members’ capital, beginning balance | $ | 2,978,927 | 2,126,265 | |||||
| Net income | 4,417,657 | 2,047,326 | ||||||
| Distributions | (4,032,000 | ) | (1,160,000 | ) | ||||
| Members’ capital, ending balance | $ | 3,364,584 | 3,013,591 | |||||
See notes and independent accountants’ review report
5
Quail Run Services, LLC
Statement of Cash Flows
| For the Nine Months Ended September 30, | 2018 | 2017 | ||||||
| Cash flows from operating activities | ||||||||
| Net income | $ | 4,417,657 | 2,047,326 | |||||
| Adjustments to reconcile net income to net cash provided by/(used in) operating activities: | ||||||||
| Depreciation and amortization | 192,276 | 175,814 | ||||||
| Loss on sale/disposition of assets | 2,239 | - | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable-trade | (334,805 | ) | (591,785 | ) | ||||
| Unbilled revenues | (21,683 | ) | (20,884 | ) | ||||
| Prepaid expenses | 34,562 | 35,115 | ||||||
| Other receivables | 873 | - | ||||||
| Accounts payable | (12,725 | ) | (24,070 | ) | ||||
| Taxes and other payables | (394 | ) | 11,289 | |||||
| Net cash provided by/(used in) operating activities | 4,278,000 | 1,632,805 | ||||||
| Cash flows from investing activities | ||||||||
| Permits | (49,315 | ) | - | |||||
| Purchase of property and equipment | (159,619 | ) | (30,849 | ) | ||||
| Net cash provided by/(used in) investing activities | (208,934 | ) | (30,849 | ) | ||||
| Cash flows from financing activities | ||||||||
| Increase/(decrease) in note payable insurance | (37,590 | ) | (39,797 | ) | ||||
| Payments on notes payable | (64,832 | ) | (54,768 | ) | ||||
| Distributions | (4,032,000 | ) | (1,160,000 | ) | ||||
| Net cash provided by/(used in) financing activities | (4,134,422 | ) | (1,254,565 | ) | ||||
| Net increase (decrease) in cash and cash equivalents | (65,356 | ) | 347,391 | |||||
| Cash and cash equivalents at the beginning of the period | 216,102 | 16,071 | ||||||
| Cash and cash equivalents at the end of the period | $ | 150,746 | 363,462 | |||||
| Supplemental Cash Flow Information | ||||||||
| Interest paid during the period | $ | 9,631 | 11,390 | |||||
See notes and independent accountants’ review report
6
Quail Run Services, LLC
Notes to Financial Statements
September 30, 2017 and 2018
1. Organization and Summary of Significant Accounting Policies
Organization – Quail Run Services, LLC (a Texas limited liability company) (“QRS”; the “Company”) was formed on August 18, 2011 and operates domestic wastewater treatment facilities specifically focused on wastewater generated on well site locations. Land and equipment are leased. The Company’s state licensed facilities are designed to properly treat domestic wastewater and then discharge/reuse the processed effluent that meets or exceeds state provided effluent parameters. Currently, QRS provides treatment and disposal services for only the sewage wastewater from its five oil field locations in the Permian Basin and Eagle Ford Shale areas in the state of Texas. There is a single class of membership with each member having limited liability.
On October 2, 2018, the members of the Company (“Sellers”) entered into a Purchase Agreement with Sprint Energy Services, LLC, a Delaware limited liability company (“SES” / the “Buyer”) under which the Buyer acquired from the Sellers all of their issued and outstanding membership interests of QRS for $40,000,000, including earn-out of $15,000,000 (to be recognized when received in the future) receivable by the Sellers in future years subject to achievability of certain profitability milestones specified under the purchase agreement.
The following is a summary of significant accounting policies applied in the preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America.
Subsequent events – The Company has evaluated all events and transactions that occurred after the balance sheet dates through December 10, 2018, the date the financial statements were available to be issued. During this period, the Company did not have any material recognizable subsequent event except the sale of its membership interests to SES as stated above.
Use of estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities that exist at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and cash equivalents – For the purposes of the statement of cash flows, the Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Accounts receivable-trade – Management periodically reviews all accounts receivable to determine if any are considered uncollectible based upon the age of the receivable and the credit worthiness of the parties involved. The Company’s management has determined that no allowance is necessary at September 30, 2017 and 2018, based upon a review of outstanding receivables, historical collection information, and existing economic conditions recognized at the time of revenue recognition.
Property, equipment, and depreciation – Property and equipment are recorded at cost. Major improvements greater than $2,500 are capitalized while replacements and repairs which do not extend the lives of the assets are expensed currently. The Company follows the policy of providing straight-line depreciation over the estimated useful lives of five to twenty years. Costs of the assets sold or retired, and the related accumulated depreciation are eliminated from accounts in the year of sale or retirement and resulting gains or losses are recognized.
7
Quail Run Services, LLC
Notes to Financial Statements
September 30, 2017 and 2018
Long-lived assets – The Company’s long-lived assets are reviewed for impairment in accordance with the guidance of the financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 360-10, Property, Plant, and Equipment , whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Recoverability of an asset to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted cash flows expected to be generated by the asset. If such asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. The Company has determined that there were no impairment losses for the nine months ended September 30, 2017 and 2018.
Permits – The Company incurs costs to obtain permits from the Texas Commission on Environmental Quality for the authorization to treat wastewater and discharge waste from each of their leased wastewater treatment facilities, as well as subsequent costs required to maintain the permits. These permit costs are amortized over the term of the permit period on a straight-line basis which estimates five to ten years.
Revenue recognition – QRS is a provider of wellsite sewage treatment services. The customers are billed per gallon of oilfield wastewater delivered to the Company for treatment. The selling price is negotiated on a customer by customer and site by site basis. Revenue is generally recognized once the following four criteria are met: (i) persuasive evidence of an agreement exists; (ii) the wastewater has been delivered to the Company for treatment; (iii) the price of the treatment service is fixed and determinable; and (iv) collection of the amounts due is reasonably assured.
Fair value of financial instruments – The Company has a number of financial instruments, none of which are held for trading purposes. The Company estimates that the fair value of all financial instruments at September 30, 2017 and 2018, do not differ materially from the aggregate carrying values of its financial instruments recorded in the accompanying balance sheet.
Income taxes – The Company was formed as a limited liability company. In lieu of corporate income taxes, the members are taxed on their proportionate share of the Company’s taxable income. Therefore, no provision or liability for federal income taxes has been included in the financial statements. The Company is subject to a gross margin tax for activities in Texas. The tax is calculated by applying a tax rate to a base that considers both revenues and expenses and therefore has characteristics of income tax. For the nine months ended September 30, 2017 and 2018, the Company recorded liabilities for Texas State Margin Tax, which approximated $12,000 and $17,000, respectively.
The Company follows guidance issued by the FASB which clarifies accounting for uncertainty in income taxes by prescribing the minimum recognition threshold an income tax position is required to meet before being recognized in the financial statements and applies to all income tax positions. Each income tax position is assessed using a two-step process. A determination is first made as to whether it is more likely than not that the income tax position will be sustained, based upon technical merits, upon examination by the taxing authorities. If the income tax position is expected to meet the more likely than not criteria, the benefit recorded in the financial statements equals the largest amount that is greater than 50% likely to be realized upon its ultimate settlement. The income tax position taken by the Company for any years open under various statutes of limitations is that the Company continues to be exempt from federal income taxes by virtue of being a pass-through entity. Management believes this tax position meets the more-likely-than-not threshold and, accordingly, the tax benefits of this income tax position (no federal income tax expense or liability) has been recognized for the months ended on or before September 30, 2017 and 2018.
8
Quail Run Services, LLC
Notes to Financial Statements
September 30, 2017 and 2018
In accordance with this guidance, the Company has elected to record income tax related interest and penalties, if any, as a component in the provision of income tax expense. For the nine months ended September 30, 2017 and 2018, the Company incurred no income tax related interest or penalties. The Company completed its analysis of its tax positions and believes there are no uncertain tax positions that would require recognition in the financial statements as of September 30, 2017 and 2018. The Company believes that there are no tax positions taken or expected to be taken that would significantly increase or decrease unrecognized tax benefits within the next twelve months.
2. Property and Equipment
The cost and estimated lives of property and equipment at September 30, 2017 and 2018 are summarized as follows:
| Lives-Years |
September 30,
2017 |
September 30,
2018 |
|||||||||
| Office equipment | 5 | $ | 7,632 | $ | 7,632 | ||||||
| Plant equipment | 5 | 86,479 | 181,663 | ||||||||
| Trailer | 5 | 162,777 | 162,777 | ||||||||
| Vehicle | 5 | 30,659 | 73,843 | ||||||||
| Generator | 10 | 63,815 | 63,815 | ||||||||
| Leasehold improvements | 15-20 | 2,255,191 | 2,315,295 | ||||||||
| 2,606,553 | 2,805,025 | ||||||||||
| Less: accumulated depreciation | (889,949 | ) | (1,102,361 | ) | |||||||
| Add: construction in progress | -0- | 10,735 | |||||||||
| Property and equipment, net | $ | 1,716,604 | $ | 1,713,399 | |||||||
3. Note Payable – Bank
Due to a bank. The note is secured by certain accounts, equipment and personal guarantees by the previous members of the Company. The note was payable in monthly installments of $8,109 including interest at a rate of 4.85% per annum through September 2020. The following table summarizes the principal amounts due in future years as per the note agreement. However, as part of the sale of its membership interests stated in Note 1, the Company paid off the entire balance outstanding on this note as of October 2, 2018 which aggregated to $185,186.
|
Year ending September 30, |
September 30,
2017 |
September 30,
2018 |
|||||
| 2018 | $ | 86,000 | $ | -0- | |||
| 2019 | 90,000 | 90,000 | |||||
| 2020 | 101,495 | 94,644 | |||||
| Total | $ | 277,495 | $ | 184,644 | |||
9
Quail Run Services, LLC
Notes to Financial Statements
September 30, 2017 and 2018
4. Note Payable – Insurance
The Company financed the insurance premium payable under its various insurance policies. The premiums financed for the policy period 2017-2018 was payable in monthly installments of $3,907 including interest at the rate of 7.2% per annum through December 2018. However, as part of the sale of its membership interests stated in Note 1, the Company paid off the entire balance outstanding on this note as of October 2, 2018 which aggregated to $3,884.
5. Concentrated Credit Risk
The Company derived approximately 38% and 34% of its revenues from three customers for the nine months then ended September 30, 2017 and 2018, respectively. These customers made up 36% and 42% of the total accounts receivable as of September 30, 2017 and September 30, 2018, respectively. The Company operates domestic wastewater treatment facilities specifically focused on wastewater generated on well site locations in the Permian Basin and Eagle Ford Shale. Consequently, the Company’s ability to collect the amount due from customers may be affected by economic fluctuations in the industries or in the areas in which it operates.
The Company believes that changes in any of the following areas could have a material adverse effect on the Company’s future financial position or results of operations: changes in the overall demand for services offered by the Company; changes in customer relationships; changes in interest rates; fluctuation in oil drilling and/or fracking activities in Permian Basin and Eagle Ford Shale; fluctuation in overall oil prices; availability and cost of business insurance; and risks associated with changes in domestic economy and/or regulations.
Financial instruments that potentially subject the Company to credit risk are cash and cash equivalents and accounts receivable-trade. Cash balances are maintained in financial institutions which at times exceed federally insured limits. The Company monitors the financial condition of the financial institutions in which accounts are maintained and has not experienced any losses in such accounts. The Company performs ongoing credit evaluations as to the financial condition of its customers with respect to trade receivables. Generally, no collateral is required as a condition of services performed.
6. Related Party Transactions
As stated above, QRS is a provider of wellsite sewage treatment services. The Company leases the wastewater treatment plants at four of its facilities from AUC Group, L.P. (“AUC”), a related party which is approximately 5% owned by one of the previous members of the Company. The Company has a capacity lease agreement with another related entity for one of its locations wherein the related entity owns the wastewater treatment plant. At this location, the Company leases expansion equipment for the plant from AUC. The management has indicated that all transactions and terms of this leasing arrangement with the related parties are at arm’s length. For the nine months ended September 30, 2017 and 2018, the Company paid approximately $393,000, and $324,000, respectively, in lease and capacity payments for such wastewater treatment plants at all its treatment facilities. The Company also paid approximately $11,000 and $15,000 during the nine months ended September 30, 2017 and 2018, respectively, for expenses relating to the processing of wastewater discharge permits and equipment related to the leased facilities.
10
Quail Run Services, LLC
Notes to Financial Statements
September 30, 2017 and 2018
As part of the lease agreements with AUC for all its locations, the Company paid $50,336 in advance lease rentals to AUC for the last month of the lease agreement period, which is reflected as prepaid expenses in the accompanying balance sheet as of September 30, 2017 and 2018.
Also, one of the parcels of land on which QRS operates its treatment facilities is personally owned by one of the previous members of QRS and is currently provided rent-free.
7. Commitments & Contingencies
The Company is subject to legal proceedings and claims which arise in the ordinary course of business. Management does not believe that the outcome of any of those matters will have a material adverse effect on the Company’s financial position, operating results, or cash flows.
As stated in Note 6, QRS has leases related to its wastewater treatment plants, at all of its treatment facilities, with AUC, a related party. The Company leases wastewater capacity at one of its locations from another related entity. The table below summarizes the minimum future lease payments payable to these related entities under the lease agreements:
|
Year ending September 30 , |
September 30,
2017 |
September 30,
2018 |
||||||
| 2018 | $ | 324,000 | $ | -0- | ||||
| 2019 | 168,000 | 168,000 | ||||||
| 2020 | 36,000 | 36,000 | ||||||
| 2021 | 36,000 | 36,000 | ||||||
| Total | $ | 564,000 | $ | 240,000 | ||||
As stated above, QRS is a provider of wellsite sewage treatment services at five locations in Permian Basin and Eagle Ford Shale. The Company leases the land on four of these locations which these facilities operate, and as such, has entered into various land lease agreements with third parties that mature at various dates through 2021, with options to extend for an additional 5 years.
Under these land lease agreements, the Company is required to pay, as royalties in lieu of land lease rent, a percentage, varying between 5%-10%, of the gross revenues generated at its treatment facilities. These land lease payments are dependent on certain thresholds stipulated under the lease agreements relating to the price per gallon being charged by QRS to its customers and the price per barrel of crude oil staying at or above a predetermined price level. For the nine months ended September 30, 2017 and 2018, the Company incurred land lease expenses to third parties of approximately $158,000 and $315,000, respectively.
11
Exhibit 99.3
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial statements are presented to illustrate the estimated effects of the acquisition of all of the issued and outstanding membership interests of Quail Run Services, LLC (“Quail Run”), on October 2, 2018 (the “Acquisition”) on the historical financial statements and results of operations of NRC Group Holdings, LLC and Subsidiaries (“NRC Group”) At the effective time of the Acquisition, Quail Run, was acquired by Sprint Energy Services, LLC a wholly-owned subsidiary of NRC Group (“Sprint”). The transaction is being accounted for as a business combination using the acquisition method with NRC Group as the accounting acquirer in accordance with ASC 805, Business Combinations. Under this method of accounting the purchase price will be allocated to Quail Run’s assets acquired and liabilities assumed based upon their estimated fair values at the date of consummation of the Acquisition.
The following unaudited pro forma condensed combined balance sheet as of September 30, 2018, and the unaudited pro forma condensed combined statements of income for the nine months ended September 30, 2018 and the year ended December 31, 2017 (collectively, the “Pro Forma Statements”) have been prepared in compliance with the requirements of Regulation S-X under the Securities Act of 1933, as amended, using accounting policies in accordance with U.S. GAAP. The unaudited pro forma condensed combined financial statements are based on NRC Group’s and Quail Run’s historical consolidated financial statements as adjusted to give effect to the Acquisition.
Accounting policies used in the preparation of the Pro Forma Statements are based on the audited consolidated financial statements of NRC Group for the year ended December 31, 2017 and the unaudited consolidated financial statements of NRC Group as of and for the nine months ended September 30, 2018.
The Acquisition was completed on October 2, 2018. The pro forma adjustments are based on preliminary estimates and currently available information and assumptions that NRC Group’s management believes are reasonable. The notes to the Pro Forma Statements provide a discussion of how such adjustments were derived and presented in the Pro Forma Statements. Changes in facts and circumstances or discovery of new information may result in revised estimates. As a result, there may be material adjustments to the Pro Forma Statements. Certain historical Quail Run and NRC Group financial statement caption amounts have been reclassified or combined to conform to NRC Group’s presentation and the disclosure requirements of the combined company.
The Pro Forma Statements should be read in conjunction with the audited consolidated financial statements of NRC Group and Quail Run as of and for the year ended December 31, 2017 and the unaudited consolidated financial statements of NRC Group and Quail Run as of and for the nine-month period ended September 30, 2018 included in the registrant’s filings with the Securities and Exchange Commission (the “SEC”).
The unaudited Pro Forma Statements give effect to the Acquisition as if it had occurred on January 1, 2017, for purposes of the unaudited pro forma condensed combined statements of income for the nine months ended September 30, 2018 and the year ended December 31, 2017. The unaudited Pro Forma Statements give effect to the Acquisition as if it had occurred on September 30, 2018, for purposes of the unaudited pro forma condensed combined balance sheet. The historical condensed combined financial statements has been adjusted to give effect to pro forma adjustments that are factually supportable, directly attributable to the Acquisition, and expected to have a continuing impact on the financial statements.
The Pro Forma Statements are presented for illustrative purposes only and may not be indicative of the results of operations that would have occurred if the events reflected therein had been in effect on the dates indicated or the results which may be obtained in the future. In preparing the Pro Forma Statements, no adjustments have been made to reflect the potential operating synergies and administrative cost savings or the costs of integration activities that could result from the combination of NRC Group and Quail Run. Actual final amounts recorded upon completion of the Acquisition will differ from the Pro Forma Statements and the differences may be material.
Unaudited Pro Forma Condensed Combined
Balance Sheet as of September 30, 2018
(in thousands)
2
Unaudited
Pro Forma Condensed Combined Statement of Income — Nine Months Ended September 30, 2018
(in thousands, except share and per share amounts)
| Pro Forma | Pro Forma | |||||||||||||||||
| NRC Group | Quail Run | Adjustments | Note 3 | Combined | ||||||||||||||
| Revenues | ||||||||||||||||||
| Net revenues | $ | 252,906 | $ | 6,834 | - | $ | 259,740 | |||||||||||
| Operating costs and expenses | ||||||||||||||||||
| Operating expenses, including cost of revenue (exclusive of depreciation and amortization) | 168,524 | 1,646 | - | 170,170 | ||||||||||||||
| General and administrative expenses | 39,427 | 566 | - | 39,993 | ||||||||||||||
| Depreciation and amortization | 21,673 | 192 | - | 21,865 | ||||||||||||||
| Management fees | 1,395 | - | - | 1,395 | ||||||||||||||
| Acquisition expense | 4,328 | - | - | 4,328 | ||||||||||||||
| Other expense, net | 2,871 | - | - | 2,871 | ||||||||||||||
| Intangibles asset amortization | - | - | 1,221 | (d) | 1,221 | |||||||||||||
| Total operating costs and expenses | 238,218 | 2,404 | 1,221 | 241,843 | ||||||||||||||
| Income from operations | 14,688 | 4,430 | (1,221 | ) | 17,897 | |||||||||||||
| Other income (expense) | ||||||||||||||||||
| Interest expense | (13,674 | ) | (10 | ) | (1,542 | ) | (e) | (15,226 | ) | |||||||||
| Foreign currency transaction loss | (26 | ) | - | - | (26 | ) | ||||||||||||
| Loss on debt extinguishment | (2,720 | ) | - | - | (2,720 | ) | ||||||||||||
| Other income (expenses) | (4 | ) | (2 | ) | - | (6 | ) | |||||||||||
| Total other expense | (16,424 | ) | (12 | ) | (1,542 | ) | (17,978 | ) | ||||||||||
| Income (loss) before provision for income taxes | (1,736 | ) | 4,418 | (2,763 | ) | (81 | ) | |||||||||||
| Provision for income taxes | 289 | - | - | 289 | ||||||||||||||
| Net income (loss) | $ | (1,447 | ) | $ | 4,418 | $ | (2,763 | ) | $ | 208 | ||||||||
3
Unaudited Pro Forma Condensed Combined
Statement of Income — Year Ended December 31, 2017
(in thousands, except share and per share amounts)
| Pro Forma | Pro Forma | |||||||||||||||||
| NRC Group | Quail Run | Adjustments | Note 3 | Combined | ||||||||||||||
| Revenues | ||||||||||||||||||
| Net revenues | $ | 277,631 | $ | 5,592 | - | $ | 283,223 | |||||||||||
| Operating costs and expenses | ||||||||||||||||||
| Operating expenses, including cost of revenue (exclusive of depreciation and amortization) | 190,610 | 1,817 | - | 192,427 | ||||||||||||||
| General and administrative expenses | 34,284 | 569 | - | 34,853 | ||||||||||||||
| Depreciation and amortization | 26,148 | 237 | - | 26,385 | ||||||||||||||
| Management fees | 1,836 | - | - | 1,836 | ||||||||||||||
| Acquisition expense | 484 | - | - | 484 | ||||||||||||||
| Other expense, net | 3,629 | - | - | 3,629 | ||||||||||||||
| Intangibles asset amortization | - | - | 1,628 | (d) | 1,628 | |||||||||||||
| Total operating costs and expenses | 256,991 | 2,623 | 1,628 | 261,242 | ||||||||||||||
| Income from operations | 20,640 | 2,969 | (1,628 | ) | 21,981 | |||||||||||||
| Other income (expense) | ||||||||||||||||||
| Interest income | 7 | - | - | 7 | ||||||||||||||
| Interest expense | (14,033 | ) | (16 | ) | (2,055 | ) | (e) | (16,104 | ) | |||||||||
| Foreign currency transaction loss | (402 | ) | - | - | (402 | ) | ||||||||||||
| Loss on debt extinguishment | (93 | ) | - | - | (93 | ) | ||||||||||||
| Total other expense | (14,521 | ) | (16 | ) | (2,055 | ) | (16,592 | ) | ||||||||||
| Income (loss) before provision for income taxes | 6,119 | 2,953 | (3,683 | ) | 5,389 | |||||||||||||
| Provision for income taxes | (447 | ) | - | - | (447 | ) | ||||||||||||
| Net income (loss) | $ | 5,672 | $ | 2,953 | $ | (3,683 | ) | $ | 4,942 | |||||||||
4
Notes to the Unaudited Pro Forma Condensed Combined Financial Information
Note 1 — Description of Transaction and Basis of Presentation
The unaudited pro forma condensed combined financial information was prepared in accordance with U.S. GAAP and pursuant to the rules and regulations of the SEC and presents the pro forma financial position and results of operations of the combined companies based upon the historical data of Quail Run and NRC Group.
Description of Transaction
Sprint Energy Services, LLC, a wholly-owned subsidiary of NRC Group acquired all of the issued and outstanding membership interests of Quail Run for (a) $25.0 million with possible adjustments for (b) net working capital adjustments, plus (c) cash balances, minus (d) outstanding indebtedness, minus (e) transaction expenses and plus (f) an earnout of up to $15.0 million (payable, at the option of NRC Group, in cash or stock) consisting of up to $5.0 million payable if Quail Run’s EBITDA in 2018 is at least $7.0 million and up to $10.0 million payable if the target’s EBITDA in 2019 is at least $12.0 million.
In connection with the Acquisition, NRC Group entered into an incremental term loan in October 2018 in the amount of $35.0 million ($26.0 million was transferred to Sprint in order to purchase Quail Run). The incremental term loan will mature in 2024 and accrue interest at a rate of LIBOR plus 5.25%. The incremental term loan is secured by a first-priority lien on all existing and after-acquired assets of the borrowers, as defined therein, and a pledge of stock of the borrowers, as defined therein, and their subsidiaries. The incremental term loan is governed under NRC Group’s credit facility and will contain the same covenants, terms and conditions.
Basis of Presentation
NRC Group has concluded that the transaction represents a business combination pursuant to Financial Accounting Standards Board Accounting Standards Codification Topic 805, Business Combinations. NRC Group has only completed a preliminary external valuation analysis of the fair market value of Quail Run’s assets to be acquired and liabilities to be assumed. Using the estimated total consideration for the transaction, NRC Group has estimated the allocations to such assets and liabilities. This preliminary purchase price allocation has been used to prepare pro forma adjustments in the unaudited pro forma condensed combined balance sheet. The final purchase price allocation will be determined when NRC Group has determined the final consideration and completed the detailed valuations and other studies and necessary calculations. The final purchase price allocation could differ materially from the preliminary purchase price allocation used to prepare the pro forma adjustments herein. The final purchase price allocation may include (i) changes in allocations to intangible assets and goodwill based on the results of certain valuations and other studies that have yet to be completed, other changes to assets and liabilities and (ii) changes to the ultimate purchase consideration. For the purposes of the unaudited pro forma condensed combined financial information, the accounting policies of Quail Run and NRC Group are aligned giving effect to certain pro forma adjustments, if any.
Note 2 — Preliminary purchase price allocation
The initial cash consideration was calculated to be approximately $23.6 million ((a)unadjusted purchase price of $25.0 million with adjustments for (b) net working capital adjustments, plus (c) cash balances, minus (d) outstanding indebtedness, and minus (e) transaction expenses).
The earnout payments were valued using a projected EBITDA, estimated weighted average cost of capital, an assumed EBITDA volatility rate, a risk-free rate and other variables. The present value of the projected earn-out payments was determined to total nearly $3.0 million. Together with the $23.6 million brings the total consideration to approximately $26.6 million.
5
| (a) Unadjusted purchase price | $ | 25,000 | ||
| Adjustments: | ||||
| (b) Net working capital adjustment | - | |||
| (c) Cash balance | 151 | |||
| (d) Outstanding indebtedness | (211 | ) | ||
| (e) Transaction expenses | (1,301 | ) | ||
| Initial cash consideration | 23,639 | |||
| (f) Earn-out | 2,956 | |||
| Total consideration | $ | 26,595 |
NRC Group has performed a preliminary valuation analysis of the fair market value of Quail Run’s assets and liabilities. The following table summarizes the allocation of the preliminary purchase price as of the date of the Acquisition (in thousands):
| Accounts receivable, net | $ | 1,407 | ||
| Prepaid expenses and other current assets | 62 | |||
| Property and equipment, net | 1,713 | |||
| Goodwill | 6,687 | |||
| Intangible assets, net | 16,676 | |||
| Other assets | 50 | |||
| Total consideration | $ | 26,595 |
Under the acquisition method of accounting, the total purchase price is allocated to the acquired tangible and intangible assets and assumed liabilities of Quail Run based on their estimated fair values as of the transaction closing date.
Note 3 — Pro Forma adjustments
The pro forma adjustments are based on preliminary estimates and assumptions that are subject to change. The following adjustments have been reflected in the unaudited pro forma condensed combined financial information:
(a) Represents an incremental term loan in the gross amount of $26.0 million (approximately $25.2 million net of deferred financing costs) that NRC Group entered into in connection with the Acquisition.
(b) Represents the elimination of the historical equity of Quail Run and the initial allocation of excess purchase price to identified intangibles, fair value adjustments and goodwill, as follows (in thousands):
| Initial cash consideration | $ | 23,639 | ||
| Earn-out | 2,956 | |||
| Total consideration | 26,595 | |||
| Members’ capital | (3,365 | ) | ||
| Write-down/(write-up) of assets: | ||||
| Accounts receivable, net | 170 | |||
| Other assets | 23 | |||
| Intangible assets | (16,676 | ) | ||
| Cash not acquired versus liabilities not assumed | (60 | ) | ||
| Goodwill | $ | 6,687 |
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(c) Reflects an adjustment of approximately $1.9 million for the estimated transaction costs for both NRC Group and Quail Run, such as adviser and legal fees and accounting expenses that were not incurred as of September 30, 2018. $1.3 million of these transaction costs relates to NRC Group and $0.6 million of these transaction costs relates to Quail Run.
(d) Represents the amortization of Customer Contracts/Relationships intangible assets related to the Acquisition of Quail Run over an average 7-year period as if the Acquisition occurred on January 1, 2017. The estimated useful lives were determined based on a review of the time period over which economic benefit is estimated to be generated as well as additional factors. Factors considered include contractual life, the period over which a majority of cash flow is expected to be generated, and/or management’s view based on historical experience with similar assets.
(e) Represents the interest expense (including amortization of deferred financing costs) on the incremental term loan as if the Acquisition occurred on January 1, 2017. Interest expense was calculated at an effective interest rate of approximately 8.1% for the nine months ended September 30, 2018 and the year ended December 31, 2018.
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