Exhibit 99.3
ST LABORATORIES GROUP, LLC
CONROE, TEXAS
FINANCIAL STATEMENTS
AND SUPPLEMENTARY INFORMATION
YEARS ENDED
DECEMBER 31, 2012, 2011
AND THE PERIOD FROM INCEPTION
(MAY 1, 2010) TO DECEMBER 31, 2010
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ST LABORATORIES GROUP, LLC
TABLE OF CONTENTS
DECEMBER 31, 2012, 2011,
AND THE PERIOD FROM INCEPTION (MAY 1, 2010) TO DECEMBER 31, 2010
| | Page |
| | |
INDEPENDENT AUDITORS’ REPORT | | 1 |
FINANCIAL STATEMENTS | | 3 |
BALANCE SHEETS | | 4 |
STATEMENTS OF INCOME | | 5 |
STATEMENTS OF CHANGES IN MEMBERS’ EQUITY | | 6 |
STATEMENTS OF CASH FLOWS | | 7 |
NOTES TO FINANCIAL STATEMENTS | | 8 |
SUPPLEMENTARY INFORMATION | | 11 |
SUPPORTING SCHEDULES OF GENERAL AND ADMINISTRATIVE EXPENSES | | 13 |
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HLSK
Hereford, Lynch, Sellars & Kirkham
Certified Public Accountants · A Professional Corporation
Conroe | Members of the | Cleveland |
1406 Wilson Rd., Suite 100 | American Institute of Certified Public Accountants | 111 East Boothe |
Conroe, Texas 77304 | Texas Society of Certified Public Accounts | Cleveland, Texas 77327 |
Tel 936-756-8127 | Private Companies Practice Section | Tel 281-592-6443 |
Metro 936-441-1338 | of the AICPA Division for Firms | Fax 281-592-7706 |
Fax 936-756-8132 | | |
INDEPENDENT AUDITORS’ REPORT
To the Members of
ST Laboratories Group, LLC
9733 Meador Road
Conroe, TX 77303
We have audited the accompanying financial statements of ST Laboratories Group, LLC (a Texas limited liability company) which comprise the balance sheets as of December 31, 2012, 2011 and for the period from inception (May 1, 2010) to December 31, 2010, and the related statements of income, changes in members’ equity, and cash flows for the years then ended, and the period from inception (May 1, 2010) to December 31, 2010, 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 ST Laboratories Group, LLC as of December 31, 2012, 2011 and the period from inception (May 1,
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2010) to December 31, 2010 and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
Our audits were conducted for the purpose of forming an opinion on the financial statements as a whole. The Supporting Schedules of General and Administrative Expenses are presented for purposes of additional analysis and are not a required part of the financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audits of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the financial statements as whole.
Hereford, Lynch, Sellars & Kirkham, P.C.
HEREFORD, LYNCH, SELLARS & KIRKHAM, P.C.
Certified Public Accountants
Conroe, Texas
October 18, 2013
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ST LABORATORIES GROUP, LLC
CONROE, TEXAS
BALANCE SHEETS
DECEMBER 31, 2012, 2011,
AND THE PERIOD FROM INCEPTION (MAY 1, 2010) TO DECEMBER 31, 2010
| | 2012 | | 2011 | | 2010 | |
ASSETS | | | | | | | |
Current Assets | | | | | | | |
Cash | | $ | 197,701 | | $ | — | | $ | 61,271 | |
Accounts Receivable | | 210,421 | | 165,031 | | 113,869 | |
Total Current Assets | | 408,122 | | 165,031 | | 175,140 | |
TOTAL ASSETS | | $ | 408,122 | | $ | 165,031 | | $ | 175,140 | |
LIABILITIES AND MEMBERS’ EQUITY | | | | | | | |
Current Liabilities | | | | | | | |
Accounts Payable | | $ | 11,704 | | $ | 91,229 | | $ | 150,000 | |
Accrued Expenses | | 9,174 | | 6,220 | | 3,785 | |
Total Current Liabilities | | 20,878 | | 97,449 | | 153,785 | |
TOTAL LIABILITIES | | 20,878 | | 97,449 | | 153,785 | |
MEMBERS’ EQUITY | | 387,244 | | 67,582 | | 21,355 | |
TOTAL LIABILITIES AND MEMBERS’ EQUITY | | $ | 408,122 | | $ | 165,031 | | $ | 175,140 | |
The accompanying notes are an integral part of these financial statements.
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ST LABORATORIES GROUP, LLC
CONROE, TEXAS
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2012, 2011,
AND THE PERIOD FROM INCEPTION (MAY 1, 2010) TO DECEMBER 31, 2010
| | 2012 | | 2011 | | 2010 | |
NET SALES | | $ | 3,223,753 | | $ | 2,131,948 | | $ | 1,282,479 | |
| | | | | | | |
COST OF SALES | | | | | | | |
Equipment Rental | | 112,669 | | 100,081 | | 70,541 | |
Freight | | 12,233 | | 6,748 | | 2,764 | |
Lab Expense and Supplies | | 283,461 | | 207,042 | | 151,984 | |
Labor | | 1,766,327 | | 1,124,445 | | 589,122 | |
| | 2,174,690 | | 1,438,316 | | 814,411 | |
GROSS PROFIT | | 1,049,063 | | 693,632 | | 468,068 | |
GENERAL AND ADMINISTRATIVE EXPENSES | | 620,871 | | 541,188 | | 291,428 | |
OPERATING INCOME | | 428,192 | | 152,444 | | 176,640 | |
OTHER INCOME (EXPENSE) | | | | | | | |
Miscellaneous Income | | — | | 3 | | — | |
INCOME BEFORE INCOME TAXES | | 428,192 | | 152,447 | | 176,640 | |
PROVISION FOR STATE INCOME TAXES | | 8,530 | | 6,220 | | 3,785 | |
NET INCOME | | $ | 419,662 | | $ | 146,227 | | $ | 172,855 | |
The accompanying notes are an integral part of these financial statements.
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ST LABORATORIES GROUP, LLC
CONROE, TEXAS
STATEMENTS OF CHANGES IN MEMBERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2012, 2011,
AND THE PERIOD FROM INCEPTION (MAY 1, 2010) TO DECEMBER 31, 2010
| | MEMBERS’
EQUITY | |
BALANCE AS OF MAY 1, 2010 | | $ | — | |
Capital Contributed | | 1,000 | |
Distributions | | (152,500 | ) |
Net Income | | 172,855 | |
BALANCE AS OF DECEMBER 31, 2010 | | 21,355 | |
Distributions | | (100,000 | ) |
Net Income | | 146,227 | |
BALANCE AS OF DECEMBER 31, 2011 | | 67,582 | |
Distributions | | (100,000 | ) |
Net Income | | 419,662 | |
BALANCE AS OF DECEMBER 31, 2012 | | $ | 387,244 | |
The accompanying notes are an integral part of these financial statements.
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ST LABORATORIES GROUP, LLC
CONROE, TEXAS
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2012, 2011,
AND THE PERIOD FROM INCEPTION (MAY 1, 2010) TO DECEMBER 31, 2010
| | 2012 | | 2011 | | 2010 | |
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | |
Cash received from customers | | $ | 3,178,363 | | $ | 2,080,789 | | $ | 1,168,610 | |
Cash paid to suppliers and employees | | (2,872,132 | ) | (2,035,840 | ) | (952,054 | ) |
State income taxes paid | | (8,530 | ) | (6,220 | ) | (3,785 | ) |
Net cash provided by operating activities | | 297,701 | | 38,729 | | 212,771 | |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | |
Capital contributed | | — | | — | | 1,000 | |
Distributions paid | | (100,000 | ) | (100,000 | ) | (152,500 | ) |
Net cash provided by financing activities | | (100,000 | ) | (100,000 | ) | (151,500 | ) |
Net increase (decrease) in cash | | 197,701 | | (61,271 | ) | 61,271 | |
Cash at beginning of year | | — | | 61,271 | | — | |
Cash at end of year | | $ | 197,701 | | $ | — | | $ | 61,271 | |
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES: | | | | | | | |
Net income | | $ | 419,662 | | $ | 146,227 | | $ | 172,855 | |
(Increase) Decrease in: | | | | | | | |
Accounts receivable | | (45,390 | ) | (51,162 | ) | (113,869 | ) |
Increase (Decrease) in: | | | | | | | |
Accounts payable | | (79,525 | ) | (58,771 | ) | 150,000 | |
Accrued expenses | | 2,954 | | 2,435 | | 3,785 | |
Net cash provided by operating activities | | $ | 297,701 | | $ | 38,729 | | $ | 212,771 | |
The accompanying notes are an integral part of these financial statements.
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ST LABORATORIES GROUP, LLC
CONROE, TEXAS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2012, 2011,
AND THE PERIOD FROM INCEPTION (MAY 1, 2010) TO DECEMBER 31, 2010
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Activities
ST Laboratories Group, LLC was organized in the State of Texas on August 10, 2009, with operations commencing on May 1, 2010, and is engaged in the performance of analytical testing using standard and proprietary methods. The Company acquired a testing lab with 30 years of serving as the standard for testing laboratories for the petroleum, petrochemical and chemical industries. The Company currently operates testing locations in Pasadena, Texas, Conroe, Texas, and Harvey, Louisiana. Chemical Specialists and Development, Inc. (CSD, Inc.) provides the work force for the Company and is reimbursed by the Company for all wages and benefits.
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 the disclosure of contingent assets and liabilities 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 Equivalents
The Company considers all highly liquid investments with a maturity of three months or less at the date of acquisition to be “cash equivalents.”
Accounts Receivable
The Company generally charges off any account deemed to be uncollectible. In the opinion of management, there is no need for a reserve for uncollectible accounts. This is based on the Company’s experience with its customers. Accounts receivable are stated at their net realizable value, which approximates their fair value.
Advertising Costs
The Company expenses advertising costs as they are incurred. Advertising expenses for the years ended December 31, 2012, 2011 and the period from inception (May 1, 2010) to December 31, 2010 were $13,183, $12,909 and $850 respectively.
Property and Equipment
The Company does not own any property or equipment. Lab facilities and equipment are rented from CSD, Inc.
Income Taxes
The Company, with the consent of its members, has elected under the Internal Revenue Code to be a limited liability company. The members of a limited liability company are taxed individually on their proportionate share of the Company’s taxable income. Therefore, no provision or liability for federal income taxes has been included in these financial statements.
Uncertain Tax Positions
Management has determined that the Company does not have any uncertain tax positions and associated unrecognized benefits or liabilities that materially impact the financial statements or related disclosures. Since tax
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ST LABORATORIES GROUP, LLC
CONROE, TEXAS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2012, 2011,
AND THE PERIOD FROM INCEPTION (MAY 1, 2010) TO DECEMBER 31, 2010
matters are subject to some degree of uncertainty, there can be no assurance that the Company’s tax returns will not be challenged by the taxing authorities and that the Company or its members will not be subject to additional tax, penalties, and interest as a result of such challenge. Generally, the Company’s tax returns remain open for three years for federal income tax examination.
Shipping and Handling Costs
Freight billed to customers is considered sales revenue and the related freight costs are considered a cost of sales.
NOTE 2 — CASH
The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk on cash and cash equivalents.
NOTE 3 — COMMITMENTS AND CONTINGENCIES
The company leases lab equipment from CSD, Inc. The original term of the lease commenced on May 1, 2010, with automatic renewal for each successive twelve (12) month period, unless either party notifies the other party of its intention to terminate the lease. Effective January 1, 2013, the rent will increase to $10,000 per month. Equipment rental expenses for the years ended December 31, 2012, 2011 and the period from inception (May 1, 2010) to December 31, 2010 were $90,000, $90,000 and $67,500 respectively.
The Company subleases a lab facility from CSD, Inc. The term of the lease entered into by CSD, Inc. commenced on August 17, 2009 and expires sixty-eight (68) months and fifteen (15) days from the commencement date, on April 30, 2015. CSD, Inc. makes monthly payments of $4,500 and ST Labs reimburses CSD, Inc. Rent expenses for the years ended December 31, 2012, 2011 and the period from inception (May 1, 2010) to December 31, 2010 $42,000, $39,500 and $40,500, respectively.
The Company leases a lab facility in Louisiana. The term of the lease commenced on May 1, 2010 and expired April 30, 2011, with automatic renewals for four (4) additional periods of twelve (12) months for a total of five (5) years, unless on or before the expiration of the term, the Company notifies the landlord of its intention not to renew the lease. Rent expense for the years ended December 2012, 2011, and the period from inception (May 1, 2010) to December 31, 2010 were $10,200, $10,200, and $7,650, respectively.
NOTE 4 — RELATED PARTY TRANSACTIONS
A reciprocal agreement exists between CSD, Inc. and the Company. CSD, Inc. provides administrative support services to the Company in exchange for all chemical testing laboratory services and materials required by CSD, Inc. The Company received a flat monthly fee of $50,000 from the commencement of the agreement in May 2010, until March 2012, when the amount was increased to $62,500 per month. A majority of the members of the Company are shareholders in CSD, Inc. The following table illustrates the amounts transacted with CSD, Inc.:
| | 2012 | | 2011 | | 2010 | |
Balance Sheet | | | | | | | |
Accounts Payable to CSD, Inc. | | $ | — | | $ | — | | $ | 150,000 | |
Income Statement | | | | | | | |
Sales to CSD, Inc. | | $ | 957,592 | | $ | 745,578 | | $ | 455,829 | |
Amounts remitted to CSD, Inc. included in Cost of Sales | | $ | 1,941,327 | | $ | 1,299,445 | | $ | 703,545 | |
Amounts remitted to CSD, Inc. included in General and Administrative expenses | | $ | 183,109 | | $ | 133,002 | | $ | 72,688 | |
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ST LABORATORIES GROUP, LLC
CONROE, TEXAS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2012, 2011,
AND THE PERIOD FROM INCEPTION (MAY 1, 2010) TO DECEMBER 31, 2010
The Consolidation Topic of the FASB Accounting Standards Codification requires nonpublic companies with a variable interest in a variable interest entity (VIE) to make certain disclosures and/or consolidate the VIE into its financial statements. The Company has evaluated its relationship with CSD, Inc. and has determined that the entity does not meet the criteria to be considered a VIE; therefore, the application of this interpretation is not applicable to the Company for the years ended December 31, 2012, 2011, and the period from inception (May 1, 2010) to December 31, 2010.
NOTE 5 — MAJOR CUSTOMERS
CSD, Inc. is a major customer for the Company. Annual sales to CSD, Inc. for the years ended December 31, 2012, 2011, and the period from inception (May 1, 2010) to December 31, 2010 represented thirty percent (30%), thirty-five percent (35%), and thirty-six percent (36%), respectively, of total sales.
NOTE 6 — FEDERAL AND STATE INCOME TAXES
The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The Company is not subject to U.S. federal, state or local income tax examinations by tax authorities for the years ended December 31, 2012, 2011, and the period from inception (May 1, 2010) to December 31, 2010.
NOTE 7 — SUBSEQUENT EVENTS
On December 13, 2012, at the annual member meeting, a motion was made, and approved, to award member bonuses totaling $185,000. Those distributions were paid in January 2013.
The Company, along with CSD, Inc., is part of a planned business acquisition by Nexeo Solutions. Nexeo Solutions has planned to complete the transaction on December 2, 2013.
Events occurring after December 31, 2012 have been evaluated through October 18, 2013, the date when these financial statements were available to be issued.
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SUPPLEMENTARY INFORMATION
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ST LABORATORIES GROUP, LLC
CONROE, TEXAS
SUPPORTING SCHEDULES OF GENERAL AND ADMINISTRATIVE EXPENSES
FOR THE YEARS ENDED DECEMBER 31, 2012, 2011,
AND THE PERIOD FROM INCEPTION (MAY 1, 2010) TO DECEMBER 31, 2010
| | 2012 | | 2011 | | 2010 | |
OPERATING EXPENSES | | | | | | | |
Advertising | | $ | 13,183 | | $ | 12,909 | | $ | 850 | |
Auto | | 25,776 | | 10,795 | | 10,498 | |
Bad Debts | | 600 | | — | | — | |
Contributions | | 1,500 | | 65 | | — | |
Dues and Subscriptions | | 4,665 | | 2,892 | | 2,673 | |
Entertainment | | 1,082 | | 1,372 | | 844 | |
License and Permits | | 3,710 | | 5,933 | | 4,630 | |
Miscellaneous | | — | | — | | 1,000 | |
Office Supplies and Postage | | 52,210 | | 35,164 | | 13,468 | |
Professional-Accounting and Legal | | 6,703 | | 5,507 | | 265 | |
Rent | | 52,200 | | 53,308 | | 48,150 | |
Repairs and Maintenance | | 33,621 | | 35,177 | | 23,303 | |
Safety | | 1,635 | | 5,839 | | 1,739 | |
Salaries-Clerical | | 141,109 | | 93,502 | | 32,188 | |
Salaries-Officers | | 175,000 | | 175,000 | | 114,423 | |
Sales and Credit Card Fees | | 19,536 | | 15,925 | | 5,742 | |
Sales and Trade Shows | | 3,956 | | 20,583 | | — | |
Taxes-Other | | 5,348 | | — | | — | |
Telephone and Communications | | 22,636 | | 14,419 | | 5,324 | |
Trash Disposal | | 2,060 | | 1,974 | | 1,375 | |
Travel | | 1,598 | | 843 | | — | |
Utilities | | 52,743 | | 49,981 | | 24,956 | |
| | $ | 620,871 | | $ | 541,188 | | $ | 291,428 | |
See notes to financial statements.
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