INDEPENDENT AUDITORS’ REPORT
To the Members of
Erick Flowback Services LLC
Erick, Oklahoma
We have audited the accompanying balance sheet of Erick Flowback Services LLC (the “Company”) as of December 31, 2011, and the related statements of income, members’ equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audit 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 of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Erick Flowback Services LLC as of December 31, 2011, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
/s/ Briggs & Veselka Co.
Houston, Texas
May 24, 2012
ERICK FLOWBACK SERVICES LLC
BALANCE SHEET
DECEMBER 31, 2011
|
| | |
| Current assets | | |
| Cash and cash equivalents | | $ 1,910,097 |
| Accounts receivable | | 9,088,815 |
| Employee advances | | 291,755 |
| Prepaid expenses | | 49,900 |
| Total current assets | | 11,340,567 |
| | | |
| Property and equipment, net | | 15,486,069 |
| Other assets | | 24,667 |
| | | |
| TOTAL ASSETS | | $ 26,851,303 |
| | | |
| LIABILITIES AND MEMBERS’ EQUITY | | |
| Current liabilities | | |
| Accounts payable | | $ 1,745,905 |
| Factoring liability, net | | 7,452,516 |
| Accrued expenses | | 572,072 |
| Line of credit | | 1,522,285 |
| Current portion of long-term debt | | 315,981 |
| Total current liabilities | | 11,608,759 |
| | | |
| Long-term debt | | 1,431,291 |
| Total liabilities | | 13,040,050 |
| | | |
| Members’ equity | | 13,811,253 |
| | | |
| TOTAL LIABILITIES AND MEMBERS’ EQUITY | | $ 26,851,303 |
The accompanying notes are an integral part of these financial statements.
2
ERICK FLOWBACK SERVICES LLC
STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 2011
|
| | |
| Revenues | | $ 41,442,768 |
| Cost of revenues | | 22,367,846 |
| | | |
| Gross profit | | 19,074,922 |
| | | |
| Operating expenses | | 3,110,507 |
| | | |
| Income from operations | | 15,964,415 |
| | | |
| Other income (expense) | | |
| Interest income | | 15,527 |
| Interest expense | | (912,076) |
| Other | | (29,168) |
| Total other expense, net | | (925,717) |
| | | |
| NET INCOME | | $ 15,038,698 |
The accompanying notes are an integral part of these financial statements.
3
ERICK FLOWBACK SERVICES LLC
STATEMENT OF MEMBERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2011
|
| |
| BALANCE AT JANUARY 1, 2011 | $ 4,564,381 |
| | |
| Net income | 15,038,698 |
| | |
| Distributions to members | (5,791,826) |
| | |
| BALANCE AT DECEMBER 31, 2011 | $ 13,811,253 |
The accompanying notes are an integral part of these financial statements.
4
ERICK FLOWBACK SERVICES LLC
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2011
|
| | |
| Cash flows from operating activities | | |
| Net income | | $ 15,038,698 |
| Adjustments to reconcile net income to net cash from operating activities: | | |
| Depreciation | | 1,896,161 |
| Loss on sale of property and equipment | | 280,603 |
| Changes in operating assets and liabilities: | | |
| Accounts receivable | | (7,980,886) |
| Employee advances | | (170,130) |
| Prepaid expenses | | (49,900) |
| Other assets | | (24,667) |
| Accounts payable | | 536,604 |
| Accrued expenses | | 319,628 |
| Net cash from operating activities | | 9,846,111 |
| | | |
| Cash flows from investing activities | | |
| Purchases of property and equipment | | (11,737,724) |
| Proceeds from sale of property and equipment | | 37,366 |
| Net cash from investing activities | | (11,700,358) |
| | | |
| Cash flows from financing activities | | |
| Distributions to members | | (5,791,826) |
| Change in Factoring liability | | 7,452,516 |
| Net borrowings under line of credit | | 1,522,285 |
| Borrowings on notes payable | | 960,000 |
| Repayments of notes payable | | (395,340) |
| Net cash from financing activities | | 3,747,635 |
| | | |
| Net change in cash and cash equivalents | | 1,893,388 |
| | | |
| Cash and cash equivalents, beginning of year | | 16,709 |
| | | |
| Cash and cash equivalents, end of year | | $ 1,910,097 |
| | | |
| Supplemental disclosure of cash flow information: | | |
| Interest paid | | $ 912,076 |
| Noncash investing and financing activities | | |
| Financing of property and equipment acquisitions | | $ 613,025 |
The accompanying notes are an integral part of these financial statements.
5
ERICK FLOWBACK SERVICES LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011
NOTE 1 – NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Erick Flowback Services LLC (the “Company”) was incorporated on February 7, 2007 in the State of Oklahoma. The Company provides professional flowback services to the oil and gas industry primarily in Oklahoma, Pennsylvania, Texas and Ohio.
Basis of Presentation – The Company’s year-end is December 31st. The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). A summary of the significant accounting policies applied in the preparation of the accompanying financial statements follows.
Management Estimates – The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as well as certain financial statement disclosures. While management believes that the estimates and assumptions used in the preparation of the financial statements are appropriate, actual results could differ from these estimates.
Cash and Cash Equivalents – The Company considers all highly-liquid instruments purchased with a maturity date of three months or less to be cash equivalents.
Revenue Recognition – Revenue from flowback services is recognized when the services have been provided. Equipment rental income is recognized ratably as it is earned.
Concentration of Credit Risk – At times, the Company maintains deposits in federally insured financial institutions in excess of federally insured limits. Management monitors the credit ratings and concentration of risk with these financial institutions on a continuing basis to safeguard cash deposits.
Accounts Receivable – The Company does business and extends credit to its customers based on an evaluation of each customer’s financial condition, generally without requiring collateral. Exposure to losses on receivables is evaluated continuously by Company management. No allowance for doubtful accounts has been provided as Company management deems all accounts receivable fully collectible at December 31, 2011 based upon a review of outstanding receivables, historical collection experience and existing economic conditions.
Property and Equipment – Property and equipment are presented at cost less accumulated depreciation. All acquisitions of property and equipment of a clearly immaterial nature and all expenditures for repairs, maintenance, renewals, and betterments that do not materially prolong the useful lives of assets are expensed. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. The cost of leasehold improvements is amortized over the lesser of the estimated useful lives of the assets or the length of the related leases including renewals. When property and equipment is sold or otherwise disposed of, the cost and related accumulated depreciation are eliminated from the accounts and any resulting gain or loss is reflected in income.
ERICK FLOWBACK SERVICES LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011
Property and equipment are stated at cost and depreciated using the straight-line method over the following estimated useful lives of the assets:
|
| | |
| Assets | | Life |
| | | |
| Building and building improvements | | 15 - 39 Years |
| Machinery and equipment | | 5 - 7 Years |
| Office furniture and equipment | | 5 - 7 Years |
| Vehicles and transportation equipment | 5 - 7 Years |
Factoring Arrangement – During 2010, the Company had an agreement with a factoring company to finance its cash flow needs. Invoices of preapproved customers were submitted to the factoring company and the Company received 91% of the invoices in cash. The factoring company initially charged a 0.90% fee on the face value of the factored receivables for each 10-day period the receivable remained uncollected. After the receivable is outstanding for 90 days the entire 9% withheld upfront was applied as the fee for that balance even if collected after the 90-day period. The factoring agreement was without recourse. Hence, invoices submitted to the factoring company were not reported as receivables in the financial statements.
In August 2011, the Company entered into a new factoring agreement replacing its previous agreement. Under the new factoring agreement, the factoring company provides cash advances against open receivable prior to collection. Invoices of preapproved customers are submitted to the factoring company and the Company receives 90% of the invoices in cash. Factoring fees are deducted from collected receivables and are calculated based on three-month LIBOR + 5%, subject to a minimum of $7,500 monthly. Also, the Company pays a $60,000 facility fee annually. The Company is responsible for receivables that remain uncollectible after 90 days under recourse provisions within the factoring agreement. Hence, these invoices are reported as receivables and the cash advances are reported as a factoring liability in the financial statements.
During 2011, factoring fees totaled $840,444. These are included in interest expense in the financial statements.
Fair Value Measurements – The carrying value of cash and cash equivalents, accounts receivable and accounts payable, as reflected in the balance sheets, approximate fair value because of the short-term maturity of these instruments. The estimated fair value of long-term debt with similar terms and remaining maturities is not significantly different than the carrying value of the debt. The Company has no assets or liabilities measured at fair value on a recurring or nonrecurring basis.
Impairment of Long-Lived Assets – The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The recoverability of an asset to be held and used is measured by a comparison of the carrying amount of the asset to future net undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount the carrying value of the assets exceeds the fair value of the assets. No impairment charges were recorded in 2011.
Income Taxes – The Company operates as a limited liability corporation and is taxed for federal purposes as a partnership. The Company’s taxable income or loss is reported on the income tax returns of its members. Uncertain tax positions are recognized in the financial statements only if that position is more-likely-than not of being sustained upon examination by taxing authorities, based on the technical merits of the position. As of December 31, 2011, there were no uncertain tax positions recorded.
ERICK FLOWBACK SERVICES LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011
The Company files income tax returns in the U.S. federal and state jurisdictions. The Company’s periodic tax returns filed in 2008 and thereafter are subject to examination by taxing authorities in accordance with the normal statutes of limitations in the applicable jurisdictions.
Recently Issued Accounting Pronouncements – In May 2011, the Financial Accounting Standards Board (FASB) issued an update to Accounting Standards Codification (ASC) 820, Fair Value Measurement. The Accounting Standards Update (ASU) conforms certain sections of ASC 820 to International Financial Reporting Standards in order to provide a single converged guidance on the measurement of fair value. This update also expands the existing disclosure requirements for fair value measurements. This ASU is effective for interim and annual periods beginning after December 15, 2011. The adoption of this ASU is not expected to have a material impact, if any, on the Company’s financial statements.
In June 2011, the FASB issued an update to ASC 220, Comprehensive Income. This ASU requires entities to present components of comprehensive income in either a continuous statement of comprehensive income or two separate but consecutive statements that would include reclassification adjustments for items that are reclassified from other comprehensive income to net income on the face of the financial statements. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of this ASU is not expected to have a material impact, if any, on the Company’s financial statements.
In September 2011, the FASB issued an update to ASC 350, Intangibles – Goodwill and Other. This ASU amends the guidance in ASC 350-20 on testing for goodwill impairment. The revised guidance allows entities testing for goodwill impairment to have the option of performing a qualitative assessment before calculating the fair value of the reporting unit. The ASU does not change how goodwill is calculated or assigned to reporting units, nor does it revise the requirement to test annually for impairment. The ASU is limited to goodwill and does not amend the annual requirement for testing other indefinite-lived intangible assets for impairment. The ASU is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of this ASU is not expected to have a material impact, if any, on the Company’s financial statements.
The Company has implemented all new accounting pronouncements and does not believe that there are any other new accounting pronouncements that have been issued that may have a material impact on its financial statements.
ERICK FLOWBACK SERVICES LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011
NOTE 2 – PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31:
|
| | | | | |
| Building and building improvements | | | | $ 140,881 | |
| Vehicles and transportation equipment | | | | 1,899,177 | |
| Office furniture and equipment | | | | 30,516 | |
| Machinery and equipment | | | | 16,036,520 | |
| | | | | 18,107,094 | |
| Less: accumulated depreciation | | | | (2,669,257) | |
| Land | | | | 48,232 | |
| | | | | | |
| Total property and equipment, net | | | | $ 15,486,069 | |
Depreciation expense totaled to $1,896,161 for 2011. Of this total, $7,836 was included in operating expenses.
NOTE 3 – ECONOMIC DEPENDENCY
For 2011 two customers comprised the majority of the Company’s revenue. Revenue from these customers totaled $28,198,881 representing approximately 68% of total revenues.
As of December 31, 2011, the amounts due from these customers included in accounts receivable was $6,112,812 representing approximately 67% of total accounts receivable.
ERICK FLOWBACK SERVICES LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011
NOTE 4 – LONG-TERM DEBT
Long-term debt consisted of the following at December 31:
|
| | |
| Note payable in monthly installments of $1,498 including interest at 6.73%, secured by | | |
| equipment, due June 2012. | | $ 9,695 |
| | | |
| Note payable in monthly installments of $965 including interest at 6.98%, secured by | | |
| equipment, due September 2012. | | 8,341 |
| | | |
| Note payable in monthly installments of $5,307 including interest at 5.5%, secured by | | |
| equipment, due December 2012. | | 61,943 |
| | | |
| Note payable in monthly installments of $1,381 including interest at 5.89%, secured by | | |
| equipment, due March 2013. | | 18,574 |
| | | |
| Note payable in monthly installments of $853 including interest at 7.79%, secured by | | |
| equipment, due July 2013. | | 13,499 |
| | | |
| Note payable in monthly installments of $661 including interest at 6.99%, secured by | | |
| equipment, due April 2014. | | 16,271 |
| | | |
| Note payable in monthly installments of $974 including interest at 11.75%, secured by | | |
| equipment, due November 2014. | | 27,522 |
| | | |
| Note payable in monthly installments of $1,644 including interest at 7.49%, secured by | | |
| equipment, due November 2014. | | 29,600 |
| | | |
| Note payable in monthly installments of $11,348 including interest at 7.3%, secured by | | |
| equipment, due November 2014. | | 953,908 |
| | | |
| Note payable in monthly installments of $637 including interest at 7.04%, secured by | | |
| equipment, due March 2015. | | 23,148 |
| | | |
| Note payable in monthly installments of $817 including interest at 8.99%, secured by | | |
| equipment, due August 2015. | | 31,097 |
| | | |
| Note payable in monthly installments of $733 including interest at 8.45%, secured by | | |
| equipment, due August 2015. | | 27,621 |
| | | |
| Note payable in monthly installments of $924 including interest at 6.51%, secured by | | |
| equipment, due November 2015. | | 68,032 |
| | | |
| Note payable in monthly installments of $674 including interest at 8.99%, secured by | | |
| equipment, due December 2015. | | 27,076 |
| | | |
| Note payable in monthly installments of $694 including interest at 8.99%, secured by | | |
| equipment, due December 2015. | | 27,869 |
| | | |
| Note payable in monthly installments of $501 including interest at 7.04%, secured by | | |
| equipment, due March 2016. | | 8,696 |
| | | |
| Note payable in monthly installments of $346 including interest at 7.04%, secured by | | |
| equipment, due March 2016. | | 15,481 |
ERICK FLOWBACK SERVICES LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011
|
| | |
| Note payable in monthly installments of $805 including interest at 8.74%, secured by | | |
| equipment, due August 2016. | | $ 36,057 |
| | | |
| Note payable in monthly installments of $744 including interest at 6.99%, secured by | | |
| equipment, due August 2016. | | 35,980 |
| | | |
| Note payable in monthly installments of $746 including interest at 6.99%, secured by | | |
| equipment, due August 2016. | | 36,811 |
| | | |
| Note payable in monthly installments of $796 including interest at 8.89%, secured by | | |
| equipment, due September 2016. | | 37,350 |
| | | |
| Note payable in monthly installments of $745 including interest at 5.90%, secured by | | |
| equipment, due September 2016. | | 37,488 |
| | | |
| Note payable in monthly installments of $794 including interest at 8.56%, secured by | | |
| equipment, due October 2016. | | 37,757 |
| | | |
| Note payable in monthly installments of $619 including interest at 9.89%, secured by | | |
| equipment, due November 2016. | | 29,078 |
| | | |
| Note payable in monthly installments of $857 including interest at 9.59%, secured by | | |
| equipment, due December 2016. | | 40,550 |
| | | |
| Note payable in monthly installments of $826 including interest at 11.06%, secured by | | |
| equipment, due December 2016. | | 37,946 |
| | | |
| Note payable in monthly installments of $1,017 including interest at 6.89%, secured by | | |
| equipment, due December 2016. | | 49,882 |
| | | 1,747,272 |
| Less: current portion | | (315,981) |
| | | |
| Total long-term debt | | $ 1,431,291 |
| | | |
Future maturities of long-term debt are summarized as follows:
|
| | |
| For the Year Ending | | |
| December 31, | | Amount |
| | | |
| 2012 | | $ 315,981 |
| 2013 | | 232,889 |
| 2014 | | 979,757 |
| 2015 | | 137,474 |
| 2016 | | 81,171 |
| | | |
| Total | | $ 1,747,272 |
ERICK FLOWBACK SERVICES LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011
NOTE 5 – LINE OF CREDIT
In November 2011, the Company obtained a $2,000,000 line of credit from a bank. The line of credit bears interest at the bank’s Base Rate which was 7.8% at December 31, 2011. The line of credit requires monthly payments of interest only with the total outstanding balance plus any accrued interest due upon maturity in November 2012. The line of credit is secured by pledge of all property and assets of the Company and the guaranties of its member owners.
NOTE 6 – RELATED PARTY TRANSACTIONS
During 2011 the Company made an agreement to pay a commission to a member’s brother for design and construction of certain flowback equipment. The commission is calculated on a percentage basis of flowage through the tanks. For 2011, the commission expense paid was $1,757,605.
During 2011, the Company purchased equipment during from a company which the members hold partial ownership in the amount of $632,716.
NOTE 7 – LEASE COMMITMENTS
The Company leases buildings under noncancelable operating leases. Future minimum lease payments under these noncancelable leases consisted of the following as of December 31, 2011:
|
| | |
| For the Year Ending | | |
| December 31, | | Amount |
| | | |
| 2012 | | $ 246,812 |
| 2013 | | 227,013 |
| 2014 | | 218,014 |
| 2015 | | 218,015 |
| 2016 | | 146,016 |
| Thereafter | | 696,000 |
| | | |
| Total | | $ 1,751,870 |
Total operating lease expense incurred for 2011 was $174,383.
NOTE 8 – SUBSEQUENT EVENTS
The Company has evaluated subsequent events through May 24, 2012, the date these financial statements were available to be issued and is not aware of any subsequent events that would have a material impact on the accompanying financial statements.
