Exhibit 99.2
FLOWCHEM HOLDINGS, LLC
AND SUBSIDIARIES
Condensed Consolidated Financial Statements
As of March 31, 2017 and December 31, 2016 and for the Three Months
Ended March 31, 2017 and 2016
(Unaudited)
FLOWCHEM HOLDINGS, LLC AND SUBSIDIARIES
Contents
| Page |
| |
Condensed Consolidated Financial Statements (Unaudited) | |
| |
Condensed Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016 | 3 |
| |
Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2017 and 2016 | 4 |
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Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2017 and 2016 | 5 |
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Notes to Condensed Consolidated Financial Statements | 6 - 11 |
2
Condensed Consolidated Financial Statements
(Unaudited)
FLOWCHEM HOLDINGS, LLC AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
| | March 31, | | | December 31, | |
| | 2017 | | | 2016 | |
| | | | | | | | |
Assets | | | | | | | | |
| | | | | | | | |
Current Assets | | | | | | | | |
Cash and cash equivalents | | $ | 3,636,622 | | | $ | 6,592,281 | |
Receivables, net of allowance of $108,000, respectively | | | 15,662,440 | | | | 16,187,180 | |
Inventories | | | 6,316,708 | | | | 4,304,426 | |
Other current assets | | | 580,998 | | | | 309,282 | |
| | | | | | | | |
Total Current Assets | | | 26,196,768 | | | | 27,393,169 | |
| | | | | | | | |
Property, Plant, and Equipment, net | | | 21,041,474 | | | | 20,585,565 | |
| | | | | | | | |
Other Intangible Assets, net | | | 51,653,969 | | | | 53,337,633 | |
| | | | | | | | |
Goodwill | | | 116,369,900 | | | | 116,369,900 | |
| | | | | | | | |
Total Assets | | $ | 215,262,111 | | | $ | 217,686,267 | |
| | | | | | | | |
Liabilities and Members’ Equity | | | | | | | | |
| | | | | | | | |
Current Liabilities | | | | | | | | |
Accounts payable | | $ | 3,694,498 | | | $ | 3,901,351 | |
Accrued expenses | | | 798,345 | | | | 1,188,416 | |
Accrued interest | | | 509,991 | | | | 555,413 | |
Income taxes payable | | | 131,070 | | | | 109,885 | |
Capital lease obligations | | | - | | | | 146,371 | |
Current maturities of debt, net of debt discount and debt issuance costs | | | 5,655,300 | | | | 6,219,357 | |
| | | | | | | | |
Total Current Liabilities | | | 10,789,204 | | | | 12,120,793 | |
| | | | | | | | |
Long-Term Debt, net of current maturities and debt discount and debt issuance costs | | | 82,070,330 | | | | 89,738,286 | |
| | | | | | | | |
Deferred Income Taxes | | | 1,269,632 | | | | 1,144,379 | |
| | | | | | | | |
Total Liabilities | | | 94,129,166 | | | | 103,003,458 | |
| | | | | | | | |
Commitments and Contingencies (Note 8) | | | | | | | | |
| | | | | | | | |
Members’ Equity | | | 121,132,945 | | | | 114,682,809 | |
| | | | | | | | |
Total Liabilities and Members’ Equity | | $ | 215,262,111 | | | $ | 217,686,267 | |
See accompanying notes to the unaudited condensed consolidated financial statements.
3
FLOWCHEM HOLDINGS, LLC AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(Unaudited)
Three Months Ended March 31, | | 2017 | | | 2016 | |
| | | | | | | | |
Net Sales | | $ | 21,758,807 | | | $ | 19,382,434 | |
| | | | | | | | |
Cost of Sales | | | 10,204,084 | | | | 9,227,316 | |
| | | | | | | | |
Gross Profit | | | 11,554,723 | | | | 10,155,118 | |
| | | | | | | | |
Operating Expenses | | | | | | | | |
Selling, general and administrative | | | 1,283,592 | | | | 1,153,782 | |
Management fees | | | 243,883 | | | | 213,265 | |
Amortization expense | | | 1,683,664 | | | | 1,683,664 | |
| | | | | | | | |
Total Operating Expenses | | | 3,211,139 | | | | 3,050,711 | |
| | | | | | | | |
Income from Operations | | | 8,343,584 | | | | 7,104,407 | |
| | | | | | | | |
Other (Income) Expenses | | | | | | | | |
Interest expense | | | 1,658,914 | | | | 1,973,578 | |
Other expenses | | | 88,198 | | | | 88,264 | |
Gain on insurance claim | | | - | | | | (609,204 | ) |
| | | | | | | | |
Total Other Expenses | | | 1,747,112 | | | | 1,452,638 | |
| | | | | | | | |
Income Before Income Tax Expense | | | 6,596,472 | | | | 5,651,769 | |
| | | | | | | | |
Income Tax Expense | | | 146,336 | | | | 7,553 | |
| | | | | | | | |
Net Income | | $ | 6,450,136 | | | $ | 5,644,216 | |
See accompanying notes to the unaudited condensed consolidated financial statements.
4
FLOWCHEM HOLDINGS, LLC AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended March 31, | | 2017 | | | 2016 | |
| | | | | | | | |
Cash Flows from Operating Activities | | | | | | | | |
Net income | | $ | 6,450,136 | | | $ | 5,644,216 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | |
Depreciation | | | 522,828 | | | | 387,070 | |
Amortization of intangible assets | | | 1,683,664 | | | | 1,683,664 | |
Amortization of debt discount and debt issuance costs | | | 222,479 | | | | 222,478 | |
Deferred tax expense (benefit) | | | 125,253 | | | | (16,878 | ) |
(Gain) on insurance claim | | | - | | | | (609,204 | ) |
Changes in operating assets and liabilities: | | | | | | | | |
Receivables | | | 524,740 | | | | 526,842 | |
Inventories | | | (2,012,282 | ) | | | (1,881,720 | ) |
Other current assets | | | (271,716 | ) | | | (1,556,815 | ) |
Accounts payable | | | (206,853 | ) | | | (2,510,094 | ) |
Accrued expenses | | | (390,071 | ) | | | (1,249,787 | ) |
Accrued interest | | | (45,422 | ) | | | (30,855 | ) |
Income taxes payable | | | 21,185 | | | | 24,430 | |
| | | | | | | | |
Net Cash Provided By Operating Activities | | | 6,623,941 | | | | 633,347 | |
| | | | | | | | |
Cash Flows from Investing Activities | | | | | | | | |
Proceeds from disposal of assets | | | 113,750 | | | | - | |
Proceeds from insurance claim | | | - | | | | 2,358,438 | |
Purchases of property, plant, and equipment | | | (1,092,487 | ) | | | (1,937,451 | ) |
| | | | | | | | |
Net Cash Used In Investing Activities | | | (978,737 | ) | | | 420,987 | |
| | | | | | | | |
Cash Flows from Financing Activities | | | | | | | | |
Principal payments for capital lease obligations | | | (146,371 | ) | | | (15,477 | ) |
Payments on long-term debt | | | (8,454,492 | ) | | | (5,461,867 | ) |
| | | | | | | | |
Net Cash Used In Financing Activities | | | (8,600,863 | ) | | | (5,477,344 | ) |
| | | | | | | | |
Net Decrease in Cash and Cash Equivalents | | | (2,955,659 | ) | | | (4,423,010 | ) |
| | | | | | | | |
Cash and Cash Equivalents - Beginning of Period | | | 6,592,281 | | | | 7,657,718 | |
| | | | | | | | |
Cash and Cash Equivalents - End of Period | | $ | 3,636,622 | | | $ | 3,234,708 | |
| | | | | | | | |
Supplemental Cash Flow Information | | | | | | | | |
Cash paid for interest | | $ | 1,595,798 | | | $ | 1,949,323 | |
| | | | | | | | |
Cash paid (refund) for income taxes | | $ | (102 | ) | | $ | - | |
See accompanying notes to the unaudited condensed consolidated financial statements.
5
FLOWCHEM HOLDINGS, LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. | Organization and Nature of Operations |
Flowchem Holdings, LLC (“Holdings”) is a Delaware limited liability company which was formed in October 2013. Effective December 6, 2013, Holdings acquired Flowchem Ltd. and Subsidiaries and then simultaneously merged Flowchem Ltd. into Flowchem, LLC (“Flowchem”) at which time planned principal operations commenced. Holdings is primarily engaged in manufacturing and distribution of chemical drag reduction agents for use in the crude and refined oil pipeline industry worldwide as well as providing field and delivery services for its customers. The Company is headquartered in Waller, Texas.
The Holdings operating agreement states that Holdings will remain in existence until termination and dissolution in accordance with the Members’ agreement.
Interim Financial Information
The unaudited condensed consolidated financial statements of the Company are prepared in conformity with accounting principles generally accepted in the United States of America, or GAAP, for interim financial reporting. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted. Therefore, these condensed consolidated financial statements should be read along with the annual audited consolidated financial statements and notes thereto for the years ended December 31, 2016, 2015 and 2014. The balances as of December 31, 2016, were derived from the audited consolidated financial statements. In management’s opinion, all adjustments necessary for a fair statement are reflected in the interim periods presented.
3. | Recent Accounting Pronouncement |
In May 2014, the Financial Accounting Standards Board (‘‘FASB’’) issued Accounting Standards Update (‘‘ASU’’) 2014-09, Revenue from Contracts with Customers. ASU 2014-09 supersedes existing revenue recognition requirements in GAAP and requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. Additionally, it requires expanded disclosures regarding the nature, amount, timing, and certainty of revenue and cash flows from contracts with customers. The ASU is effective for annual and interim reporting periods beginning after December 15, 2016, using either a full or a modified retrospective application approach. The Company is in the initial stages of evaluating the effect of the standard on the consolidated financial statements and continues to evaluate the available transition methods.
In February 2016, the FASB issued ASU No, 2016-02, Leases, amending the current accounting for leases. Under the new provisions, all lessees will report a right-of-use asset and a liability for the obligation to make payments for all leases with the exception of those leases with a term of 12 months or less. All other leases will fall into one of two categories: (i) a financing lease or (ii) an operating lease. Lessor accounting remains substantially unchanged with the exception that no leases entered into after the effective date will be classified as leveraged leases. For sale leaseback transactions, a sale will only be recognized if the criteria in the new revenue recognition standard are met. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim within that reporting period, using a modified retrospective approach. Early adoption is permitted. The Company is in the initial stages of evaluating the effect of the standard on the consolidated financial statements.
6
FLOWCHEM HOLDINGS, LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses. The amendments in ASU 2016-13 require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The amendment is effective for public entities for annual reporting periods beginning after December 15, 2019, however early application is permitted for reporting periods beginning after December 15, 2018. The Company is in the initial stages of evaluating the effect of the standard on the consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 reduces diversity in practice in how certain transactions are classified in the statement of cash flows. The guidance addresses specific cash flow issues for which current GAAP is either unclear or does not include specific guidance. ASU 2016-15 is effective for annual and interim periods beginning after December 15, 2017. The Company is currently assessing the potential impact of ASU 2016-15 on the consolidated financial statements of cash flows.
In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. The ASU is effective for annual and interim impairment tests performed in periods beginning after December 15, 2019. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. The ASU will be applied prospectively. We currently do not expect that the adoption of this standard will have a material impact on our consolidated financial statements.
Inventories consist of the following:
| | March 31, | | | December 31, | |
| | 2017 | | | 2016 | |
| | | | | | | | |
Finished goods | | $ | 2,858,370 | | | $ | 1,281,340 | |
Work-in-progress | | | 2,517,026 | | | | 2,372,000 | |
Raw materials | | | 941,312 | | | | 651,086 | |
| | | | | | | | |
Inventories | | $ | 6,316,708 | | | $ | 4,304,426 | |
The Company’s policy is to record inventory obsolescence as a reduction to its inventory based on a review of inventory quantities on hand and estimated sales forecasts based on sales history and anticipated future demand. At March 31, 2017 and December 31, 2016, no inventory obsolescence reserves were established by the Company.
7
FLOWCHEM HOLDINGS, LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
5. | Property, Plant, and Equipment |
Property, plant, and equipment consist of the following:
| | Estimated | | | March 31, | | | December 31, | |
| | Useful Lives | | | 2017 | | | 2016 | |
| | | | | | | | | | | | |
Land | | - | | | $ | 1,533,482 | | | $ | 1,426,547 | |
Plant | | 33 years | | | | 5,607,801 | | | | 2,505,350 | |
Building | | 15 years | | | | 3,323,576 | | | | 3,323,576 | |
Equipment & machinery | | 3-10 years | | | | 10,948,719 | | | | 10,584,612 | |
Autos & trucks | | 5 years | | | | 2,393,996 | | | | 2,133,952 | |
| | | | | | | 23,807,574 | | | | 19,974,037 | |
Less: accumulated depreciation | | | | | | | (4,238,213 | ) | | | (3,926,637 | ) |
| | | | | | | 19,569,361 | | | | 16,047,400 | |
Equipment not yet placed in service | | | | | | | 1,472,113 | | | | 4,538,165 | |
| | | | | | | | | | | | |
Property, plant, and equipment, net | | | | | | $ | 21,041,474 | | | $ | 20,585,565 | |
Provisions for depreciation have been computed, on a straight-line basis, over the estimated useful lives of the assets. Depreciation expense was approximately $523,000 and $387,000 for the three months ended March 31, 2017 and 2016, respectively, and is included in cost of sales in the condensed consolidated statements of income.
In July 2015, the Company’s Brookshire facility suffered a loss due to fire. Facility building and equipment were destroyed in the fire. The loss was covered by the Company’s insurance policy. The Company recognized a gain of approximately $609,000 from insurance proceed net of related costs for the three months ended March 31, 2016. The insurance claims were fully settled in August 2016.
6. | Other Intangible Assets |
Other intangible assets consist of the following:
| | March 31, 2017 | |
| | Estimated | | Original | | | Accumulated | | | Net | |
| | Useful Lives | | Amount | | | Amortization | | | Amount | |
| | | | | | | | | | | | | | |
Trade names | | Indefinite | | $ | 12,314,000 | | | $ | - | | | $ | 12,314,000 | |
Customer relationships | | 8 years | | | 37,529,000 | | | | (15,584,959 | ) | | | 21,944,041 | |
Patents | | 12 years | | | 23,944,000 | | | | (6,628,940 | ) | | | 17,315,060 | |
Non-compete covenant | | 5 years | | | 241,000 | | | | (160,132 | ) | | | 80,868 | |
| | | | | | | | | | | | | | |
Total | | | | $ | 74,028,000 | | | $ | (22,374,031 | ) | | $ | 51,653,969 | |
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FLOWCHEM HOLDINGS, LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
| | December 31, 2016 | |
| | Estimated | | Original | | | Accumulated | | | Net | |
| | Useful Lives | | Amount | | | Amortization | | | Amount | |
| | | | | | | | | | | | | | |
Trade names | | Indefinite | | $ | 12,314,000 | | | $ | - | | | $ | 12,314,000 | |
Customer relationships | | 8 years | | | 37,529,000 | | | | (14,412,178 | ) | | | 23,116,822 | |
Patents | | 12 years | | | 23,944,000 | | | | (6,130,107 | ) | | | 17,813,893 | |
Non-compete covenant | | 5 years | | | 241,000 | | | | (148,082 | ) | | | 92,918 | |
| | | | | | | | | | | | | | |
Total | | | | $ | 74,028,000 | | | $ | (20,690,367 | ) | | $ | 53,337,633 | |
Amortization expense for the finite-lived other intangible assets was approximately $1,684,000 for each of the three months ended March 31, 2017 and 2016.
As of March 31, 2017, future amortization expense for other intangible assets is as follows:
12 Months Period Ending March 31, | | | | |
| | | | |
2018 | | $ | 6,734,658 | |
2019 | | | 6,719,127 | |
2020 | | | 6,686,458 | |
2021 | | | 6,686,458 | |
2022 | | | 5,174,874 | |
Thereafter | | | 7,338,394 | |
| | | | |
| | $ | 39,339,969 | |
On December 6, 2013, the Company entered into a Senior Secured Credit Agreement (“Credit Agreement”) with various financial institutions for an original amount of $77,000,000. On October 9, 2015, the Company modified its Credit Agreement to increase the original amount borrowed. The modified agreement allowed the Company to borrow an additional amount of approximately $62,000,000 before fees paid to the institutions of approximately $1,400,000. As part of the modification, the $1,400,000 was treated as a discount to the principal balance and is being amortized to interest expense over the life of the Credit Agreement using the straight line method which approximates the effective interest method. Amortization expense related to the debt discount was approximately $111,000 for the three months ended March 31, 2017 and 2016, and is included in interest expense in the condensed consolidated statements of income. A portion of the proceeds were used to pay off long-term debt with an affiliate, as well as make equity distributions to its members. The Company had approximately $89,209,000 and $97,663,000 outstanding under the Credit Agreement as of March 31, 2017 and December 31, 2016, respectively.
Under the Credit Agreement, the Company also obtained access to a revolving credit facility in an aggregate principal amount not to exceed $7,500,000, which may be used for general working capital purposes, capital expenditures, and permitted acquisitions. The unused borrowing capacity is subject to a commitment fee of 0.5% per year and all outstanding amounts under the revolving credit facility are due upon maturity of the Credit Agreement on December 6, 2018. There were no amounts outstanding on the revolving credit facility as of March 31, 2017 and December 31, 2016.
9
FLOWCHEM HOLDINGS, LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Outstanding amounts under the Credit Agreement bear interest at LIBOR or a base rate, plus an applicable margin that ranges from 7.00% to 7.50% for base rate loans and from 6.00% to 6.50% for LIBOR loans, based upon the Company’s leverage ratio on a consolidated basis. At March 31, 2017, interest on the Credit Agreement was 6.50%.
The outstanding principal balance of the Credit Agreement is scheduled to be repaid through varying periodic principal payments with all remaining unpaid interest and principal due upon maturity at December 6, 2018. In addition to the scheduled periodic payments, the Company is required to pay an additional principal amount equal to the difference between (i) 50% of the Excess Cash Flow of
the Company’s fiscal year (as defined in the Credit Agreement) minus (ii) the aggregate amount of optional prepayments of the Credit Agreement made during the fiscal year. As part of the 2015 Credit Agreement modification, the Company received a waiver deferring the Excess Cash Flow requirement until 2017.
The Credit Agreement is secured by all property and assets of the Company. Furthermore, the Credit Agreement obligates the Company to comply with customary affirmative, financial, and restrictive covenants including financial reporting, governance, and notification requirements. At March 31, 2017, the Company was in compliance with these requirements.
Effective January 1, 2016, the Company adopted ASU 2015-03, “Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs,” which requires debt issuance costs to be presented in the consolidated balance sheet as a direct deduction from the carrying value of the associated debt liabilities, and amortization of those costs should be reported as interest expenses. Future maturities of long-term debt as of March 31, 2017 are as follows:
| | | | | | Unamortized Debt | | | | | |
| | | | | | Discount and Debt | | | | | |
12 Months Period Ending March 31, | | Debt | | | Issuance Costs | | | Total | |
| | | | | | | | | | | | |
2018 | | $ | 6,545,214 | | | $ | (889,914 | ) | | $ | 5,655,300 | |
2019 | | | 82,663,607 | | | | (593,277 | ) | | | 82,070,330 | |
| | | | | | | | | | | | |
| | $ | 89,208,821 | | | $ | (1,483,191 | ) | | $ | 87,725,630 | |
8. | Commitments and Contingencies |
From time to time the Company may be involved in claims and litigation arising in the ordinary course of business. Because there are inherent uncertainties in the ultimate outcome of such matters, it is presently not possible to determine the ultimate outcome of any potential claims or litigation against the Company; however, management believes that the outcome of such matters will not have a material adverse effect on the Company’s financial position, results of operation or liquidity.
9. | Related Party Transactions |
For the three months ended March 31, 2017 and 2016, the Company recognized approximately $244,000 and $213,000, respectively, in management fees with the majority member of the Company, which is included in the accompanying condensed consolidated statements of income. At March 31, 2017 and December 31, 2016, approximately $0 and $81,000, respectively, was due to the majority member.
10
FLOWCHEM HOLDINGS, LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Through September 2016, the Company had a shared services arrangement with another portfolio company of the majority member whereby certain administrative services and personnel costs were shared.
The Company’s customer concentration may impact its overall credit risk, either positively or negatively, in that these entities may be similarly affected by changes in economic or other conditions affecting the chemicals industry.
For the three months ended March 31, 2017, the Company generated approximately 31% of its sales from two customers (18% and 14%). The amount due from these customers at March 31, 2017 was approximately $5,135,000. For the three months ended March 31, 2016, the Company generated approximately 24% of its sales from two customers (14% and 10%). The amount due from these customers at March 31, 2016 was approximately $754,000.
Management has evaluated subsequent events through June 14, 2017, the date which the financial statements were available to be issued.
The Company entered into an agreement to be acquired by a third party company in April 2017 for cash of $495 million. The acquisition is anticipated to close in June 2017.
11
