Exhibit 99.3
Concrete Pumping Holdings, Inc. and Subsidiaries
Consolidated Financial Report
October 31, 2018 and 2017
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
Concrete Pumping Holdings, Inc.
6461 Downing Street
Denver, CO, 80229
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Concrete Pumping Holdings, Inc. and Subsidiaries (the “Company”) as of October 31, 2018, and 2017, the related consolidated statements of income and comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended October 31, 2018, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company and subsidiaries at October 31, 2018 and 2017, and the results of their operations and their cash flows for each of the three years in the period ended October 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB and 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 consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ BDO USA, LLP
We have served as the Company's auditor since 2018.
Dallas, Texas
January 29, 2019
Concrete Pumping Holdings, Inc. and Subsidiaries
Consolidated Balance Sheets
October 31, 2018 and 2017
2018 | 2017 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash | $ | 8,621,279 | $ | 6,925,042 | ||||
Trade receivables, net | 40,117,777 | 33,101,052 | ||||||
Inventory | 3,809,876 | 3,009,651 | ||||||
Prepaid expenses and other current assets | 3,946,332 | 3,668,835 | ||||||
Total current assets | 56,495,264 | 46,704,580 | ||||||
Property, plant and equipment, net | 201,915,440 | 175,542,135 | ||||||
Intangible assets, net | 36,429,018 | 42,034,188 | ||||||
Goodwill | 74,656,100 | 73,509,208 | ||||||
Deferred financing costs | 647,922 | 1,056,516 | ||||||
Total assets | $ | 370,143,744 | $ | 338,846,627 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Current liabilities: | ||||||||
Revolving loan | $ | 62,986,962 | $ | 65,888,871 | ||||
Current portion of capital lease obligations | 85,087 | 193,039 | ||||||
Accounts payable | 5,191,711 | 7,116,901 | ||||||
Accrued payroll and payroll expenses | 6,705,209 | 6,902,666 | ||||||
Accrued expenses and other current liabilities | 18,829,602 | 14,622,122 | ||||||
Income taxes payable | 1,151,741 | 1,577,923 | ||||||
Total current liabilities | 94,950,312 | 96,301,522 | ||||||
Long term debt, net of discount for deferred financing costs | 173,470,065 | 156,984,830 | ||||||
Contingent consideration | 1,458,077 | 968,783 | ||||||
Capital lease obligations, less current portion | 567,665 | 652,752 | ||||||
Deferred income taxes | 39,004,853 | 50,111,326 | ||||||
Total liabilities | 309,450,972 | 305,019,213 | ||||||
Redeemable preferred stock, $0.001 par value, 2,342,264 shares issued and outstanding as of October 31, 2018 and 2017 (liquidation preference of $11,239,060 and $9,845,139), respectively | 14,671,869 | 14,671,869 | ||||||
Stockholders’ equity: | ||||||||
Common stock, $0.001 par value, 15,000,000 shares authorized, 7,576,289 shares issued and outstanding | 7,576 | 7,576 | ||||||
Additional paid-in capital | 18,724,707 | 18,444,075 | ||||||
Accumulated other comprehensive income | 584,074 | 2,381,190 | ||||||
Retained earnings (accumulated deficit) | 26,704,546 | (1,677,296 | ) | |||||
46,020,903 | 19,155,545 | |||||||
Total liabilities and stockholders’ equity | $ | 370,143,744 | $ | 338,846,627 |
See notes to consolidated financial statements.
Concrete Pumping Holdings, Inc. and Subsidiaries
Consolidated Statements of Income
Years Ended October 31, 2018, 2017 and 2016
2018 | 2017 | 2016 | ||||||||||
Revenue | $ | 243,223,267 | $ | 211,210,599 | $ | 172,425,547 | ||||||
Cost of operations | 136,876,880 | 121,451,499 | 97,241,773 | |||||||||
Gross profit | $ | 106,346,387 | 89,759,100 | 75,183,774 | ||||||||
General and administrative expenses | 58,789,016 | 52,864,910 | 40,590,760 | |||||||||
Transaction costs | 7,589,825 | 4,489,517 | 3,691,466 | |||||||||
Income from operations | 39,967,546 | 32,404,673 | 30,901,548 | |||||||||
Other (expense) income: | ||||||||||||
Interest expense | (21,424,747 | ) | (22,747,848 | ) | (19,516,077 | ) | ||||||
Loss on extinguishment of debt | - | (5,161,065 | ) | (643,876 | ) | |||||||
Other income (expense), net | 54,923 | 174,177 | (54,463 | ) | ||||||||
(21,369,824 | ) | (27,734,736 | ) | (20,214,416 | ) | |||||||
Income before income taxes | 18,597,722 | 4,669,937 | 10,687,132 | |||||||||
Income tax (benefit) provision | (9,784,120 | ) | 3,756,658 | 4,453,541 | ||||||||
Net income | 28,381,842 | 913,279 | 6,233,591 | |||||||||
Less: Net loss attributable to noncontrolling interest | - | - | (36,364 | ) | ||||||||
Net income attributable to Concrete Pumping Holdings, Inc. and Subsidiaries | $ | 28,381,842 | $ | 913,279 | $ | 6,269,955 | ||||||
Less preferred shares dividends | (1,428,257 | ) | (1,811,837 | ) | (1,695,122 | ) | ||||||
Less undistributed earnings allocated to preferred shares | (6,365,083 | ) | - | (1,108,807 | ) | |||||||
Undistributed income (loss) available to common shareholders | $ | 20,588,502 | $ | (898,558 | ) | $ | 3,466,026 | |||||
Weighted average common shares outstanding | ||||||||||||
Basic | 7,576,289 | 7,576,289 | 7,576,289 | |||||||||
Diluted | 8,325,890 | 7,576,289 | 8,279,321 | |||||||||
Net income (loss) per common share | ||||||||||||
Basic | $ | 2.72 | $ | (0.12 | ) | $ | 0.46 | |||||
Diluted | $ | 2.47 | $ | (0.12 | ) | $ | 0.42 |
See notes to consolidated financial statements.
Concrete Pumping Holdings, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
Years Ended October 31, 2018, 2017 and 2016
2018 | 2017 | 2016 | ||||||||||
Net income | $ | 28,381,842 | $ | 913,279 | $ | 6,269,955 | ||||||
Other comprehensive income: | ||||||||||||
Foreign currency translation adjustment | (1,797,116 | ) | 2,381,190 | - | ||||||||
Total comprehensive income | $ | 26,584,726 | $ | 3,294,469 | $ | 6,269,955 |
See notes to consolidated financial statements.
Concrete Pumping Holdings, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
Years Ended October 31, 2018, 2017 and 2016
Accumulated | ||||||||||||||||||||||||
Other | ||||||||||||||||||||||||
Common | Additional | Noncontrolling | Comprehensive | Retained Earnings | ||||||||||||||||||||
Stock | Paid-In Capital | Interest | Income | (Accumulated Deficit) | Total | |||||||||||||||||||
Balance, October 31, 2015 | $ | 7,576 | $ | 18,658,951 | $ | 28,065 | $ | - | $ | (3,130,640 | ) | $ | 15,563,952 | |||||||||||
Stock-based compensation | - | 109,424 | - | - | - | 109,424 | ||||||||||||||||||
Net income | - | - | (36,364 | ) | - | 6,269,955 | 6,233,591 | |||||||||||||||||
Disolution of noncontrolling interest | - | - | 8,299 | - | - | 8,299 | ||||||||||||||||||
Balance, October 31, 2016 | 7,576 | 18,768,375 | - | - | 3,139,315 | 21,915,266 | ||||||||||||||||||
Stock-based compensation | - | 362,345 | - | - | - | 362,345 | ||||||||||||||||||
Repurchase of stock options | - | (686,645 | ) | - | - | - | (686,645 | ) | ||||||||||||||||
Purchased for retirement, not re-issuable | - | - | - | - | (889,825 | ) | (889,825 | ) | ||||||||||||||||
Preferred stock dividend | - | - | - | - | (4,840,065 | ) | (4,840,065 | ) | ||||||||||||||||
Net income | - | - | - | - | 913,279 | 913,279 | ||||||||||||||||||
Foreign currency translation adjustment | - | - | - | 2,381,190 | - | 2,381,190 | ||||||||||||||||||
Balance, October 31, 2017 | 7,576 | 18,444,075 | - | 2,381,190 | (1,677,296 | ) | 19,155,545 | |||||||||||||||||
Stock-based compensation | - | 280,632 | - | - | - | 280,632 | ||||||||||||||||||
Net income | - | - | - | - | 28,381,842 | 28,381,842 | ||||||||||||||||||
Foreign currency translation adjustment | - | - | - | (1,797,116 | ) | - | (1,797,116 | ) | ||||||||||||||||
Balance, October 31, 2018 | $ | 7,576 | $ | 18,724,707 | $ | - | $ | 584,074 | $ | 26,704,546 | $ | 46,020,903 |
See notes to consolidated financial statements.
Concrete Pumping Holdings, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended October 31, 2018, 2017 and 2016
2018 | 2017 | 2016 | ||||||||||
Cash flows from operating activities: | ||||||||||||
Net income | $ | 28,381,842 | $ | 913,279 | $ | 6,233,591 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation | 17,718,814 | 19,338,884 | 16,635,995 | |||||||||
Deferred income taxes | (11,106,473 | ) | 238,696 | 3,754,628 | ||||||||
Amortization of deferred financing costs | 1,689,575 | 1,863,641 | 1,751,675 | |||||||||
Accretion of debt discount | - | 275,400 | 330,480 | |||||||||
Amortization of debt premium | (60,465 | ) | (72,527 | ) | - | |||||||
Amortization of intangible assets | 7,903,732 | 7,815,141 | 5,673,548 | |||||||||
Stock-based compensation expense | 280,632 | 362,345 | 109,424 | |||||||||
Write-off of deferred financing costs included in loss on extinguishment of debt | - | 1,972,574 | 931,838 | |||||||||
Write-off of debt discount costs included in loss on extinguishment of debt | - | 1,473,392 | - | |||||||||
Debt prepayment penalty included in loss on extinguishment of debt | - | 1,440,000 | - | |||||||||
Loss (gain) on repayments of long-term debt included in loss on extinguishment of debt | - | 303,420 | (287,962 | ) | ||||||||
Dissolution of noncontrolling interest | - | - | 8,299 | |||||||||
(Gain) on the sale of property, plant and equipment | (2,622,520 | ) | (567,876 | ) | (384,988 | ) | ||||||
Accretion of contingent consideration | 526,817 | - | - | |||||||||
Net changes in operating assets and liabilities (net of acquisitions): | ||||||||||||
Trade receivables, net | (7,469,464 | ) | 212,586 | (673,660 | ) | |||||||
Inventory | (706,667 | ) | (461,824 | ) | (473,187 | ) | ||||||
Prepaid expenses and other current assets | (1,407,883 | ) | (232,495 | ) | (1,015,506 | ) | ||||||
Income taxes payable, net | (381,322 | ) | (1,277,467 | ) | (1,025,689 | ) | ||||||
Accounts payable | (1,832,398 | ) | 2,005,714 | 74,811 | ||||||||
Accrued payroll, accrued expenses and other current liabilities | 8,702,438 | (1,376,489 | ) | 4,114,143 | ||||||||
Net cash provided by operating activities | 39,616,657 | 34,226,394 | 35,757,440 | |||||||||
Cash flows from investing activities: | ||||||||||||
Purchases of property, plant and equipment | (31,738,369 | ) | (23,671,035 | ) | (22,570,712 | ) | ||||||
Proceeds from sale of property, plant and equipment | 3,238,933 | 1,009,523 | 247,041 | |||||||||
Acquisition of net assets, net of cash acquired | (21,000,000 | ) | (60,427,249 | ) | (6,650,000 | ) | ||||||
Net cash used in investing activities | (49,499,436 | ) | (83,088,761 | ) | (28,973,671 | ) | ||||||
Cash flows from financing activities: | ||||||||||||
Premium proceeds on long term debt | 600,000 | - | - | |||||||||
Proceeds on revolving loan | 237,194,598 | 266,604,233 | 155,447,066 | |||||||||
Payments on revolving loan | (239,587,567 | ) | (205,163,292 | ) | (151,839,827 | ) | ||||||
Proceeds on long term debt | 15,000,000 | 40,400,000 | - | |||||||||
Principal payments on long term debt | - | (39,104,760 | ) | (18,352,038 | ) | |||||||
Payment of deferred financing costs | - | (1,454,364 | ) | - | ||||||||
Debt prepayment penalty | - | (1,440,000 | ) | - | ||||||||
Payments on capital lease obligations | (194,190 | ) | (151,141 | ) | (68,003 | ) | ||||||
Preferred stock purchase | - | (1,400,009 | ) | - | ||||||||
Payment of preferred stock dividends | - | (4,840,065 | ) | - | ||||||||
Repurchase of stock options | - | (686,645 | ) | - | ||||||||
Net cash provided by (used in) financing activities | 13,012,841 | 52,763,957 | (14,812,802 | ) | ||||||||
Effect of foreign currency exchange rate on cash | (1,443,825 | ) | (225,068 | ) | - | |||||||
Net increase (decrease) in cash | 1,696,237 | 3,676,522 | (8,029,033 | ) | ||||||||
Cash: | ||||||||||||
Beginning of year | 6,925,042 | 3,248,520 | 11,277,553 | |||||||||
End of year | $ | 8,621,279 | $ | 6,925,042 | $ | 3,248,520 |
Concrete Pumping Holdings, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
Years Ended October 31, 2018, 2017 and 2016
2018 | 2017 | 2016 | ||||||||||
Supplemental cash flow information: | ||||||||||||
Cash paid for interest | $ | 22,167,732 | $ | 22,653,135 | $ | 17,680,951 | ||||||
Cash paid for income taxes | $ | 1,072,947 | $ | 4,356,081 | $ | 1,724,602 | ||||||
Equipment purchases included in accrued expenses | $ | 355,147 | $ | 2,172,115 | $ | 6,015,009 |
See notes to consolidated financial statements.
Note 1. Organization and Description of Business
Organization: Concrete Pumping Holdings, Inc. (CPH, the Company or Parent) was incorporated in the state of Delaware on July 14, 2014. Concrete Pumping Intermediate Holdings, LLC (CPIH), a wholly owned subsidiary of CPH, was formed on June 16, 2014, as a Delaware limited liability company to acquire, through the creation of BB Merger Sub, Inc. (BBMI) and EP Merger Sub, Inc. (EPMI), all outstanding stock of Brundage-Bone Concrete Pumping, Inc. (BBCPI, BB, or Brundage-Bone) and Eco-Pan, Inc. (Eco-Pan or EP) on August 18, 2014 (the Merger). BBMI and EPMI were formed on July 23, 2014, as Colorado corporations and wholly owned subsidiaries of CPIH to merge with and into BBCPI and EP, respectively, with BBCPI and EP being the surviving corporations. BBCPI and EP are wholly owned subsidiaries of CPIH. Concrete Pumping Property Holdings, LLC (PropCo), a wholly owned subsidiary of CPH, was incorporated in the state of Delaware on July 14, 2014, to hold certain real property that is leased to BBCPI. CPH, CPIH, BBMI and EPMI commenced operations on August 18, 2014. The equity sponsor is Peninsula Pacific Strategic Partners, LLC (the Sponsor). Refer to Note 19 below for details regarding the consummation of the merger with Industrea Acquisition Corporation on December 6, 2018.
Nature of business: Brundage-Bone was incorporated in the state of Colorado on October 31, 2011. Brundage-Bone is a concrete pumping service provider in the United States. Brundage-Bone’s core business is the provision of concrete pumping services to general contractors and concrete finishing companies. Brundage-Bone is a construction services business that provides specialized equipment with technically trained operators. Most often equipment returns to a “home base” nightly. Brundage-Bone does not contract to purchase, mix, or deliver concrete. Brundage-Bone most often contracts for its services on a per hour and per yard poured schedule customized to each market. In addition, Brundage-Bone actively sells concrete pumps, parts and service; however, the sale of parts are not a significant component of Brundage-Bone operations. Brundage-Bone has operations in Alabama, Arizona, Arkansas, California, Colorado, Florida, Georgia, Idaho, Kansas, Missouri, New Mexico, Oklahoma, Oregon, South Carolina, Tennessee, Texas, Utah, Washington and Wyoming, with its corporate headquarters in Denver, Colorado. Brundage-Bone has 80 branch locations across 22 states.
Eco-Pan was incorporated in the state of Colorado on April 4, 2003. Eco-Pan provides industrial cleanup and containment services, primarily to customers in the construction industry. Eco-Pan uses containment pans specifically designed to hold waste products from concrete and other industrial cleanup operations. Eco-Pan has operating locations in Arizona, California, Colorado, Idaho, Maryland, Oklahoma, Oregon, Texas, Utah, and Washington, with its corporate headquarters in Denver, Colorado.
In May 2015, Eco-Pan formed a joint venture, Eco-Pan Midwest, LLC (EPMW), with an initial capital contribution of $76,500, which represented 51 percent of the outstanding membership interests in EPMW. EPMW was dissolved in 2016. See Note 2 regarding principles of consolidation related to EPMW.
In November 2016, Brundage-Bone entered into two share purchase agreements to acquire two concrete pumping companies based in the United Kingdom (UK) (collectively, Camfaud): Camfaud Concrete Pumps Limited and Premier Concrete Pumping Limited, which each also owned 50 percent of the stock of South Coast Concrete Pumping Limited. In connection with the transactions, a new entity, Oxford Pumping Holdings Ltd. (Oxford), was created as a wholly owned subsidiary of Brundage-Bone to serve as a UK-based holding company. In July 2017, Camfaud acquired Reilly Concrete Pumping Limited (Reilly), another UK-based concrete pumping company. Refer to Note 3 for discussion of the acquisitions.
Camfaud’s core business is the provision of concrete pumping equipment to customers in the commercial, infrastructure and residential sectors. Camfaud is a construction services business that provides specialized concrete pumping equipment with technically trained operators. Camfaud provides the equipment operator and the equipment. Camfaud does not contract to purchase, mix or to deliver concrete. Camfaud most often contracts for its equipment services on a daily, weekly or monthly schedule customized to each market. Camfaud has 28 branch locations throughout the UK, with its corporate headquarters in Epping, Essex.
Note 2. Summary of Significant Accounting Policies
Basis of presentation: The Company follows accounting standards established by the Financial Accounting Standards Board (FASB) to ensure consistent reporting of financial condition, results of operations, and cash flows. References to generally accepted accounting principles (U.S. GAAP) in these footnotes are to the FASB Accounting Standards Codification (ASC or the Codification).
Principles of consolidation: These financial statements present the consolidated financial position of the Company and its wholly owned subsidiaries, Brundage-Bone, Camfaud, Eco-Pan, PropCo, and their respective subsidiaries (collectively, the Company) as of October 31, 2018, 2017, and 2016, and the results of operations and cash flows for the three years then ended. Until its dissolution in 2016, the accounts of EPMW were also included in the Company’s consolidated financial statements. In accordance with ASC 810, Consolidation, the portion of the Company’s equity attributable to the noncontrolling interest in EPMW was historically reported separately within the stockholders’ equity section of the consolidated balance sheets and the Company’s portion of the net loss attributable to the noncontrolling interest in EPMW reported separately below net income on the consolidated statements of income. All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of estimates: The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include accrued sales and use taxes, the liability for incurred but unreported claims under various partially self-insured polices, allowance for doubtful accounts, goodwill impairment analysis, valuation of share based compensation and accounting for business combinations. Actual results may differ from those estimates, and such differences may be material to the Company’s consolidated financial statements.
Cash: Cash includes time deposits and certificates of deposit with original maturities of three months or less.
Trade receivables: Trade receivables are carried at the original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts. Generally, the Company does not require collateral for their accounts receivable; however, the Company may file statutory liens or take other appropriate legal action when necessary on construction projects in which collection problems arise. A trade receivable is typically considered to be past due if any portion of the receivable balance is outstanding for more than 30 days. The Company does not charge interest on past-due trade receivables.
Management determines the allowance for doubtful accounts by identifying troubled accounts and by using historical experience applied to an aging of accounts. The allowance for doubtful accounts was $664,332 and $601,760 as of October 31, 2018, and 2017, respectively. Trade receivables are written off when deemed uncollectible. Recoveries of trade receivables previously written off are recorded when received.
Inventory: Inventory consists primarily of replacement parts for concrete pumping equipment. Inventories are stated at the lower of cost (first-in, first-out method) or net realizable value. The Company evaluates inventory and records an allowance for obsolete and slow-moving inventory to account for cost adjustments to market. Based on management’s analysis, no allowance for obsolete and slow-moving inventory was required as of October 31, 2018 and 2017.
Note 2. Summary of Significant Accounting Policies (Continued)
Fair value measurements: The FASB’s standard on fair value measurements establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. This standard establishes three levels of inputs that may be used to measure fair value:
Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities.
Level 3 – Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities
Deferred financing costs: The Company incurred closing costs of $12,887,000 during the Merger related to obtaining loan financing. In conjunction with the Senior Note Exchange (see Note 8) that occurred in September 2017, Brundage-Bone incurred $585,634 related to obtaining financing through additional term notes and $240,250 related to the US Revolver. In connection with the Company’s acquisition of Camfaud, costs of $625,480 were incurred by Camfaud related to the UK Revolver. Deferred financing costs related to the revolver are classified as assets and amortized on a straight-line basis over the term of the revolver, while deferred financing costs related to the term debt are shown as a direct deduction from the carrying amount of the liability and amortized over the terms of the related debt instruments under the effective interest method. Accumulated amortization related to the US Revolver fees as of October 31, 2018 and 2017, was $1,122,328 and $678,528, respectively. Accumulated amortization related to the UK Revolver fees as of October 31, 2018 and 2017 was $156,714 and $210,699, respectively. See Note 8 for discussion of the term debt financing fees.
Goodwill: The Company accounts for goodwill under ASC 350, Intangibles—Goodwill and Other (ASC 350). The Company’s goodwill was recorded as a result of the Company’s business combinations. The Company has recorded these business combinations using the acquisition method of accounting. The Company tests its recorded goodwill for impairment on an annual basis on August 31, or more often if indicators of potential impairment exist, by determining if the carrying value of each reporting unit exceeds its estimated fair value. The Company has the option to first assess qualitative factors to determine whether or not it is more than likely that the fair value of the reporting unit is less than the fair value. If the result of a qualitative test indicates it is more likely than not that the fair value of a reporting unit is less than the carrying value, a quantitative test is performed. As further detailed in “Newly adopted accounting pronouncements” below, the Company adopted Accounting Standards Update (ASU) 2017-04, and accordingly, goodwill impairment is recognized in the amount that the carrying value of the reporting unit exceeds the fair value of the reporting unit, not to exceed the amount of goodwill allocated to the reporting unit, based on the results of the Step 1 analysis.
A quantitative assessment was performed on the Company’s reporting units as of October 31, 2018. In performing the quantitative test, the Company compares the estimated fair value of the reporting unit to its carrying value. The estimated fair value exceeded the carrying value of each of the four reporting units. Future impairment reviews may require write-downs in the Company’s goodwill and could have a material adverse impact on the Company’s operating results for the periods in which such write-downs occur.
Long-lived assets: ASC 360 requires long-lived assets to be evaluated for impairment when indicators of impairment are present. If indicators are present, assets are grouped to the lowest level for which identifiable cash flows are largely independent of other asset groups and cash flows are estimated for each asset group over the remaining estimated life of each asset group. If the undiscounted cash flows estimated to be generated by the asset group is less than the asset’s carrying amount, impairment is recognized in the amount of excess of the carrying value over the fair value. No indicators of impairment were identified as of October 31, 2018 and 2017.
Note 2. Summary of Significant Accounting Policies (Continued)
Intangible assets with finite lives are being amortized on a straight-line basis, except for customer relationships, over their estimated useful lives. The customer relationships are being amortized on an accelerated basis over their estimated useful lives.
Property, plant and equipment: Property, plant and equipment are recorded at cost. Expenditures for additions and betterments are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred; however, maintenance and repairs that improve or extend the life of existing assets are capitalized. The carrying amount of assets disposed of and the related accumulated depreciation are eliminated from the accounts in the year of disposal. Gains or losses from property and equipment disposals are recognized in the year of disposal. Property, plant and equipment is depreciated using the straight-line method over the following estimated useful lives:
Buildings and improvements | 15 to 40 years | |
Capital lease assets—buildings | 40 years | |
Furniture and office equipment | 2 to 7 years | |
Machinery and equipment | 3 to 25 years | |
Transportation equipment | 3 to 7 years |
Capital lease assets are being amortized over the estimated useful life of the asset (see Note 12). Capital lease amortization is included in depreciation expense for the years ended October 31, 2018, 2017 and 2016.
Revenue recognition: The Company generates revenues primarily from concrete pumping services in both the United States and the United Kingdom. Additionally, revenues are generated from the Company’s waste management business which consists of service fees charged to customers for the delivery of our pans and containers and the disposal of the concrete waste material.
The Company recognizes revenue from these businesses when all of the following criteria are met: (a) persuasive evidence of an arrangement exists, (b) the service has been performed or delivery has occurred, (c) the price is fixed or determinable, and (d) collectability is reasonably assured. The Company’s delivery terms for replacement part sales are FOB shipping point.
The Company imposes and collects sales taxes concurrent with our revenue-producing transactions with customers and remits those taxes to the various governmental authorities as prescribed by the taxing jurisdictions in which we operate. We present such taxes in our consolidated statements of income on a net basis.
Stock-based compensation: The Company follows ASC 718, Compensation—Stock Compensation (ASC 718), which requires the measurement and recognition of compensation expense, based on estimated fair values, for all share-based awards made to employees and directors. The Company expenses the grant date fair value of the award in the consolidated statements of income over the requisite service periods on a straight-line basis. The Company accounts for forfeitures as they occur in accordance with the early adoption of ASU No. 2016-09, Compensation—Stock Compensation (ASC 718): Improvements to Employee Share-Based Payment Accounting.
Earnings per share: The Company calculates earnings per share in accordance with ASC 260, Earnings per Share. The two-class method of computing earnings per share is required for entities that have participating securities. The two-class method is an earnings allocation formula that determines earnings per share for participating securities according to dividends declared (or accumulated) and participation rights in undistributed earnings. The Company has two classes of stock: (1) Common Stock and (2) Participating Preferred Stock (“Preferred Stock”).
Basic earnings (loss) per common share is calculated by dividing net income (loss) attributable to common shareholders by the weighted average number of shares of Common Stock outstanding each period. Diluted earnings (loss) per common share is based on the weighted average number of shares outstanding during the period plus the common stock equivalents which would arise from the exercise of stock options outstanding using the treasury stock method and the average market price per share during the period. Common stock equivalents are not included in the diluted earnings (loss) per share calculation when their effect is antidilutive.
Note 2. Summary of Significant Accounting Policies (Continued)
An anti-dilutive impact is an increase in earnings per share or a reduction in net loss per share resulting from the conversion, exercise, or contingent issuance of certain securities.
Foreign currency translation: The functional currency of Camfaud is the Great British Pound (GBP). The assets and liabilities of the foreign subsidiaries are translated into US Dollars using the year-end exchange rates, and the consolidated statements of income are translated at the average rate for the year. The resulting translation adjustments are recorded as a component of comprehensive income on the consolidated statements of comprehensive income and accumulated in other comprehensive income. The functional currency of our other subsidiaries is the United States Dollar.
Income taxes: The Company complies with ASC 740, Income Taxes, which requires a liability approach to financial reporting for income taxes. The Company computes deferred income tax assets and liabilities annually for differences between the financial statements and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense includes both the current income taxes payable or refundable and the change during the period in the deferred tax assets and liabilities.
The tax benefit from an uncertain tax position is only recognized in the consolidated balance sheets if the tax position is more likely than not to be sustained upon an examination. CPIH and PropCo are no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years before 2014. Interest and penalties related to income taxes are included in the income tax provision, if any.
Camfaud files income tax returns in the UK. Camfaud’s national statutes are generally open for one year following the statutory filing period.
Business combinations: The Company applies the principles provided in ASC 805, Business Combinations, when a business is acquired. Tangible and intangible assets acquired and liabilities assumed are recorded at fair value and goodwill is recognized for any differences between the fair value of consideration transferred and the fair value of net assets acquired. Transaction costs for business combinations are expensed as incurred in accordance with ASC 805.
Concentration of credit risk: Cash balances held at financial institutions may, at times, be in excess of federally insured limits. It is management’s belief that the Company places their temporary cash balances in high-credit quality financial institutions.
The Company’s customer base is dispersed across the United States and United Kingdom. The Company performs ongoing evaluations of their customers’ financial condition and requires no collateral to support credit sales. For the years ended October 31, 2018 and 2017, no customer represented 10 percent or more of sales or trade receivables.
Seasonality: The Company’s sales are historically seasonal, with lower revenue in the first quarter and higher revenue in the fourth quarter of each year. Such seasonality also causes the Company’s working capital cash flow requirements to vary from quarter to quarter primarily depending on the variability of weather patterns with the Company generally having lower sales volume during the winter and spring months.
Vendor concentration: As of October 31, 2018 and 2017 there were three significant vendors that the Company relies upon to purchase substantially all concrete pumping boom equipment. These vendors provided sales of concrete pumping boom equipment that can be replaced with alternate vendors should the need arise.
Note 2. Summary of Significant Accounting Policies (Continued)
Newly adopted accounting pronouncements: In May 2017, the Financial Accounting Standards Board (FASB) issued ASU No. 2017-09, Compensation — Stock Compensation (ASC 718): Scope of Modification Accounting, to provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in ASC 718. The amendments in the ASU are effective for fiscal years beginning after December 15, 2017, and should be applied prospectively to an award modified on or after the adoption date. The Company elected to early adopt the amendment as of August 1, 2017, which did not have a material impact on the consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles — Goodwill and Other (ASC 350): Simplifying the Test for Goodwill Impairment. The ASU simplifies the measurement of goodwill impairment by eliminating the requirement that an entity compute the implied fair value of goodwill based on the fair values of its assets and liabilities to measure impairment. Instead, goodwill impairment will be measured as the difference between the fair value of the reporting unit and the carrying value of the reporting unit. The ASU also clarifies the treatment of the income tax effect of tax-deductible goodwill when measuring goodwill impairment loss. ASU 2017-04 will be effective for the Company beginning on November 1, 2022. The amendment must be applied prospectively with early adoption permitted. The Company elected to early adopt the amendment for the year ended October 31, 2017, which did not have a material impact on the consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-06, Derivatives and Hedging (ASC 815): Contingent Put and Call Options in Debt Instruments, which clarify the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under the amendments in this update is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence. The Company early adopted the new standard as of November 1, 2016. The adoption of the new accounting rules did not have a material impact on the Company’s financial condition, results of operations and cash flows.
Recently issued accounting pronouncements not yet effective: In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (ASC 740): Balance Sheet Classification of Deferred Taxes. This ASU simplifies the presentation of deferred income taxes by eliminating the requirement for entities to separate deferred tax liabilities and assets into current and noncurrent amounts in classified balance sheets. Instead, it requires deferred tax assets and liabilities be classified as noncurrent in the balance sheet. ASU 2015-17 is effective for financial statements issued for annual periods beginning after December 15, 2017. Early adoption is permitted, and this ASU may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The Company adopted the new standard as of October 31, 2017 on a retrospective basis, therefore all deferred income tax assets and liabilities are presented as noncurrent. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (ASC 606), requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The updated standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either a full retrospective or retrospective with cumulative effect transition method. In August 2015, the FASB issued ASU No. 2015-14 which defers the effective date of ASU 2014-09 one year making it effective for annual reporting periods beginning after December 15, 2018. The Company has not yet selected a transition method and is currently evaluating the effect that the standard will have on the consolidated financial statements.
Note 2. Summary of Significant Accounting Policies (Continued)
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (ASC 805): Clarifying the Definition of a Business, which provides guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 requires entities to use a screen test to determine when an integrated set of assets and activities is not a business or if the integrated set of assets and activities needs to be further evaluated against the framework. ASU 2017-01 will be effective for the Company beginning on November 1, 2019. The Company is currently evaluating the impact of the pending adoption of the new standard on the consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (ASC 842). The guidance in this ASU supersedes the leasing guidance in ASC 840, Leases. Under the new guidance, lessees are required to recognize lease assets and lease liabilities on the balance sheet for all leases with terms longer than twelve months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2019, and interim periods after December 15, 2020. Initially the modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available.
In July 2018, the FASB issued ASU No. 2018-11, Leases ASC 842: Targeted Improvements, wherein the Board decided to provide another transition method in addition to the existing transition method by allowing entities to initially apply the new lease standard at the adoption date (for fiscal year ending October 31, 2021 for the Company) and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption consistent with preparers’ requests. The Company is currently evaluating the impact of the pending adoption of the new standard on the consolidated financial statements.
Note 3. Business Combinations
O’Brien Companies: In April 2018, Brundage-Bone entered into an asset purchase agreement to acquire substantially all assets of Richard O’Brien Companies, Inc., O’Brien Concrete Pumping-Arizona, Inc., O’Brien Concrete Pumping-Colorado, Inc. and O’Brien Concrete Pumping, LLC (collectively, the O’Brien Companies) for cash.
This acquisition qualifies as a business combination under ASC 805. Accordingly, the Company will record all assets acquired and liabilities assumed at their acquisition-date fair values, with any excess recognized as goodwill. Goodwill represents expected synergies from combining operations and the assembled workforce. Goodwill is not amortized for book purposes but is expected to be deductible for tax purposes. The acquisition was part of the Company’s strategic plan to expand their presence in the Colorado and Arizona markets.
Note 3. Business Combinations (Continued)
The following table represents the total consideration transferred and its allocation to the assets acquired and liabilities assumed at their acquisition-date fair values:
Consideration paid: | ||||
Cash | $ | 21,000,000 | ||
Total consideration paid | $ | 21,000,000 | ||
Net assets acquired: | ||||
Inventory | $ | 140,000 | ||
Property, plant and equipment | 16,163,000 | |||
Intangible assets | 2,810,000 | |||
Total net assets acquired | 19,113,000 | |||
Goodwill | $ | 1,887,000 |
Identifiable intangible assets acquired consist of customer relationships of $2,810,000. The customer relationships were valued using the multi-period excess earnings method. The Company determined the useful life of the customer relationships to be 15 years.
Acquisition-related expenses incurred by the Company amounted to $1,068,653, which have been recognized in the consolidated statements of income for the year ended October 31, 2018.
Reilly: In July 2017, Camfaud entered into a share purchase agreement to acquire all outstanding shares of Reilly, a UK-based concrete pumping company, in exchange for cash and seller notes.
This acquisition qualifies as a business combination under ASC 805. Accordingly, the Company has recorded all assets acquired and liabilities assumed at their acquisition-date fair values, with any excess recognized as goodwill. Goodwill represents expected synergies from combining operations and the assembled workforce. Goodwill is not amortized for book purposes nor is it deductible for tax purposes. The acquisition was part of the Company’s strategic plan to expand the Camfaud footprint in the United Kingdom.
The following table represents the total consideration transferred and its allocation to the assets acquired and liabilities assumed at their acquisition-date fair values:
Consideration paid: | ||||
Cash, net of cash acquired | $ | 11,267,729 | ||
Debt issued to sellers | 1,941,150 | |||
Total consideration paid | $ | 13,208,879 | ||
Net assets acquired: | ||||
Trade accounts receivable | $ | 1,624,598 | ||
Inventory | 178,432 | |||
Prepaid expenses and other current assets | 223,619 | |||
Property, plant and equipment | 9,194,329 | |||
Intangible assets | 1,194,454 | |||
Accounts payable | (533,129 | ) | ||
Accrued expenses and other current liabilities | (971,005 | ) | ||
Deferred tax liabilities | (879,069 | ) | ||
Total net assets acquired | 10,032,229 | |||
Goodwill | $ | 3,176,650 |
Note 3. Business Combinations (Continued)
Identifiable intangible assets acquired consist of customer relationships of $552,581 and a trade name of $641,873. The customer relationships were valued using the multi-period excess earnings method. The Company determined the useful life of the customer relationships to be 15 years. The trade name was valued using the relief-from-royalty method. The Company determined the useful life of the trade name to be 20 years.
The Company also entered into loans with the former owners that are discussed in Note 8.
Acquisition-related expenses incurred by the Company amounted to $594,039, of which $0 and $594,039 have been recognized in transaction costs in the consolidated statements of income for the years ended October 31, 2018 and 2017, respectively.
Camfaud: In November 2016, Camfaud acquired two concrete pumping companies based in the UK.
This acquisition qualifies as a business combination under ASC 805. Accordingly, the Company has recorded all assets acquired and liabilities assumed at their acquisition-date fair values, with any excess recognized as goodwill. Goodwill represents expected synergies from combining operations and the assembled workforce. Goodwill is not amortized for book purposes nor is it deductible for tax purposes. The acquisition was part of the Company’s strategic plan to broaden their global presence. The acquisition was financed through additional Senior Secured Notes, a revolving loan and the seller notes.
The following table represents the total consideration transferred and its allocation to the assets acquired and liabilities assumed at their acquisition-date fair values:
Consideration paid: | ||||
Cash, net of cash acquired | $ | 49,159,520 | ||
Debt issued to sellers | 6,221,000 | |||
Contingent consideration | 908,266 | |||
Total consideration paid | $ | 56,288,786 | ||
Net assets acquired: | ||||
Trade accounts receivable | $ | 6,344,614 | ||
Inventory | 564,833 | |||
Other current assets | 726,679 | |||
Property and equipment | 25,641,272 | |||
Intangible assets | 18,574,662 | |||
Accounts payable | (1,579,842 | ) | ||
Accrued expenses and other current liabilities | (3,291,260 | ) | ||
Capital lease obligation | (183,405 | ) | ||
Deferred tax liabilities | (5,369,822 | ) | ||
Total net assets acquired | 41,427,731 | |||
Goodwill | $ | 14,861,055 |
The contingent consideration is based on average EBITDA over the 3-year period following the acquisition date and has a maximum payout of approximately $3,100,000. The Company has recorded the contingent consideration initially at fair value based on a probability-weighted approach, discounted to present value at an annual rate of 7.5 percent. The contingent consideration is presented as deferred consideration in the accompanying consolidated balance sheets and will be adjusted to fair value each reporting period until the contingency is resolved (see Note 4).
Identifiable intangible assets acquired consist of customer relationships of $15,933,225 and trade names of $2,641,437. The customer relationships were valued using the multi-period excess earnings method.
Note 3. Business Combinations (Continued)
The Company determined the useful life of the customer relationships to be 15 years. The trade name was valued using the relief-from-royalty method. The Company determined the useful life of the trade names to be 10 years.
The Company also entered into loans with the former owners that are discussed in Note 8.
Acquisition-related expenses incurred by the Company amounted to $6,608,456, of which $0, $3,566,407, $3,042,049 have been recognized in the consolidated statements of income for the years ended October 31, 2018, 2017, and 2016, respectively.
Unaudited Pro Forma Financial Information
The following unaudited pro forma financial information presents the combined results of operations for the Company and the O'Brien, Reilly and Camfaud acquisitions for the fiscal years ended October 31, 2018, 2017 and 2016, respectively. The unaudited pro forma financial information gives effect to the O'Brien acquisition as if it had occurred on November 1, 2016 and November 1, 2015 for Reilly and Camfaud. The unaudited pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the results of operations that would have been realized if the O'Brien, Reilly and Camfaud acquisition had been completed on November 1, 2016 for O'Brien and November 1, 2015 for Reilly and Camfaud, nor does it purport to project the results of operations of the combined company in future periods. The unaudited pro forma financial information does not give effect to any anticipated integration costs related to the acquired company.
The unaudited pro forma financial information is as follows:
2018 | 2017 | 2016 | ||||||||||
Revenue | $ | 243,223,267 | $ | 211,210,599 | $ | 172,425,547 | ||||||
Pro forma revenue adjustments by Business Combination: | ||||||||||||
O'Brien | 6,990,368 | 13,796,172 | - | |||||||||
Reilly | - | 6,068,988 | 10,234,834 | |||||||||
Camfaud | - | 2,288,111 | 40,295,176 | |||||||||
Total pro forma revenue | $ | 250,213,635 | $ | 233,363,870 | $ | 222,955,557 |
2018 | 2017 | 2016 | ||||||||||
Net income | $ | 28,381,842 | $ | 913,813 | $ | 6,233,591 | ||||||
Pro forma net income adjustments by Business Combination: | ||||||||||||
O'Brien | (1,012,914 | ) | (1,482,009 | ) | - | |||||||
Reilly | - | 341,452 | 1,209,435 | |||||||||
Camfaud | - | (309,078 | ) | 9,881,174 | ||||||||
Total pro forma net income | $ | 27,368,928 | $ | (535,822 | ) | $ | 17,324,200 |
Note 4. Fair Value Measurement
The carrying amounts of the Company’s cash and cash equivalents, accounts receivable, accounts payable and current accrued liabilities approximate their fair value as recorded due to the short-term maturity of these instruments, which approximates fair value. The Company’s outstanding obligations on its revolving line of credit and UK revolver are deemed to be at fair value as the interest rates on these debt obligations are variable and consistent with prevailing rates. The Company believes the carrying value of our capital lease obligations represents fair value.
The Company’s long-term debt instruments are recorded at their carrying values in the consolidated balance sheets, which may differ from their respective fair values. The fair value amount of the long-term debt instruments are derived from observable Level 2 inputs. The fair value amount of the long-term debt instruments at October 31, 2018 and October 31, 2017 is presented in the table below based on the prevailing interest rates and trading activity of the notes.
2018 | 2017 | |||||||||||||||
Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||
Senior secured notes | $ | 167,553,000 | $ | 178,025,063 | $ | 152,553,000 | $ | 156,366,825 | ||||||||
Seller notes | 8,292,050 | 8,292,050 | 8,626,150 | 8,626,150 | ||||||||||||
Capital lease obligations | 652,752 | 652,752 | 845,791 | 845,791 |
In connection with the acquisition of Camfaud, shareholders were eligible to receive earn-out payments of up to $3,100,000 if certain EBITDA targets were met (see Note 3).
As a result, the Company estimated the fair value of the contingent earn-out liability based on its probability assessment of Camfaud EBITDA achievements during the 3-year earn-out period. In developing these estimates, the Company considered its revenue and EBITDA projections, its historical results, and general macro-economic environment and industry trends. This fair value measurement was based on significant revenue and EBITDA inputs not observed in the market, which represents a Level 3 measurement. Level 3 instruments are valued based on unobservable inputs that are supported by little or no market activity and reflect the Company’s own assumptions in measuring fair value.
In accordance with the FASB’s standard on business combinations, the Company reviewed the contingent earn-out liability on a quarterly basis in order to determine its fair value. Changes in the fair value of the liability are recorded within operating expenses in the period in which the change was made. The change in the fair value of the contingent earn-out was not material from the date of acquisition to the year ending October 31, 2018.
Note 4. Fair Value Measurement (Continued)
The following table represents a reconciliation of the change in the fair value measurement of the contingent earn-out liability for the years ended October 31, 2018 and 2017, respectively the change in fair values for the periods presented are not material:
2018 | 2017 | |||||||
Beginning balance | $ | 968,783 | $ | - | ||||
Fair value of contingent earnout liability initially recorded in connection with Camfaud acquisition | - | 908,266 | ||||||
Change in fair value of contingent earnout liability included in operating expenses | 526,817 | - | ||||||
Change fair value due to foreign currency | (37,523 | ) | 60,517 | |||||
Ending balance | $ | 1,458,077 | $ | 968,783 |
The Company’s non-financial assets, which primarily consist of property and equipment, goodwill and other intangible assets, are not required to be carried at fair value on a recurring basis and are reported at carrying value. However, on a periodic basis or whenever events or changes in circumstances indicate that their carrying value may not be fully recoverable (and at least annually for goodwill), non-financial instruments are assessed for impairment and, if applicable, written down to and recorded at fair value. No adjustments were made to the carrying value of any such assets due to lack of recoverability or impairment for the fiscal years ended October 31, 2018 or 2017.
Note 5. Prepaid Expenses and Other Current Assets
The significant components of prepaid expenses and other current assets as of October 31, 2018 and 2017, are as follows:
2018 | 2017 | |||||||
Prepaid insurance | $ | 348,226 | $ | 996,391 | ||||
Prepaid licenses and deposits | 236,407 | 144,470 | ||||||
Prepaid rent | 326,254 | 204,320 | ||||||
Prepaid sponsor fees | 666,666 | 666,666 | ||||||
Other prepaids | 2,368,779 | 1,656,988 | ||||||
Total prepaid expenses and other current assets | $ | 3,946,332 | $ | 3,668,835 |
Note 6. Property, Plant and Equipment
The significant components of property, plant and equipment as of October 31, 2018 and 2017, are as follows:
2018 | 2017 | |||||||
Land, buildings and improvements | $ | 22,244,120 | $ | 21,986,324 | ||||
Capital leases—land and buildings | 909,250 | 909,250 | ||||||
Machinery and equipment | 237,093,975 | 199,185,640 | ||||||
Transportation equipment | 3,297,160 | 2,961,147 | ||||||
Furniture and office equipment | 1,485,535 | 888,504 | ||||||
265,030,040 | 225,930,865 | |||||||
Less accumulated depreciation | (63,114,600 | ) | (50,388,730 | ) | ||||
Property, plant and equipment, net | $ | 201,915,440 | $ | 175,542,135 |
Depreciation expense for the years ended October 31, 2018, 2017 and 2016, was $17,718,814, $19,338,884 and $16,635,995, respectively, of which $17,033,781, $18,691,578, $16,311,540 respectively, was included in cost of operations and $685,033, $647,306 and $324,455 respectively, was included in general and administrative expenses.
Note 7. Goodwill and Intangible Assets
The Company recognized goodwill and certain intangible assets in connection with Business Combinations (see Note 3). Goodwill is not amortized for book purposes. The following table details the changes in goodwill as of October 31, 2018 and 2017:
Balance, November 1, 2016 | $ | 54,400,319 | ||
Goodwill acquired in 2017 acquisitions | 18,037,705 | |||
Change in foreign currency rates | 1,071,184 | |||
Balance, October 31, 2017 | 73,509,208 | |||
Goodwill acquired in 2018 acquisitions | 1,887,000 | |||
Change in foreign currency rates | (740,108 | ) | ||
Balance, October 31, 2018 | $ | 74,656,100 |
Intangible assets are amortized over their useful lives on a straight-line basis, except for the customer relationships and the Camfaud trade names. The customer relationships and the Camfaud trade names are amortized on an accelerated basis using the free cash flow method. The following table summarizes the Company’s intangible assets as of October 31, 2018 and 2017:
2018 | 2017 | |||||||||||||||||||||||||||
Gross | Net | Gross | Net | |||||||||||||||||||||||||
Useful | Carrying | Accumulated | Carrying | Carrying | Accumulated | Carrying | ||||||||||||||||||||||
Life | Value | Amortization | Amount | Value | Amortization | Amount | ||||||||||||||||||||||
Customer relationship | 15 | $ | 47,641,338 | $ | (23,092,905 | ) | $ | 24,548,433 | $ | 45,521,514 | $ | (16,770,766 | ) | $ | 28,750,748 | |||||||||||||
Trade name | 15-20 | 15,412,058 | (3,540,083 | ) | 11,871,975 | 15,546,675 | (2,401,152 | ) | 13,145,523 | |||||||||||||||||||
Noncompete agreements | 3 | 495,000 | (486,390 | ) | 8,610 | 485,000 | (347,083 | ) | 137,917 | |||||||||||||||||||
$ | 63,548,396 | $ | (27,119,378 | ) | $ | 36,429,018 | $ | 61,553,189 | $ | (19,519,001 | ) | $ | 42,034,188 |
Note 7. Goodwill and Intangible Assets (Continued)
Amortization expense recognized by the Company related to intangible assets was $7,903,732, $7,815,141 and $5,673,548 for the years ended October 31, 2018, 2017 and 2016, respectively. Amortization expense as it relates to the amortization of intangible assets resides within general and administrative expense on the statement of operations. The estimated aggregate amortization expense for intangible assets over the next five fiscal years ending October 31 and thereafter is as follows:
Years ending October 31: | ||||
2019 | $ | 6,692,793 | ||
2020 | 5,528,556 | |||
2021 | 3,949,940 | |||
2022 | 3,373,733 | |||
2023 | 2,358,266 | |||
Thereafter | 14,525,730 | |||
$ | 36,429,018 |
Note 8. Long-Term Debt and Revolving Lines of Credit
Revolving line of credit: In connection with the Merger, on August 18, 2014, the Company entered into a revolving loan agreement (the Revolver) with a maximum borrowing capacity of $30,000,000, which was increased to $35,000,000 in November 2015. The Revolver bears interest at the LIBOR rate plus an applicable margin. The applicable margin resets quarterly and is (a) 2.25 percent, (b) 2.50 percent or (c) 2.75 percent if the quarterly average excess availability is (a) at least 66.67 percent, (b) less than 66.67 percent and at least 33.33 percent and (c) less than 33.33 percent, respectively. The Revolver expires on August 18, 2019. Interest is due monthly and the outstanding principal balance is due upon maturity. The Revolver is secured by substantially all assets of the Company and requires that the Company maintain a minimum fixed charge coverage ratio. In conjunction with the Senior Note Exchange (see below) in September 2017, the borrowing capacity was increased to $65,000,000 and the maturity date was extended to September 8, 2022. In addition, applicable margin for the interest rate was decreased to (a) 2.00 percent, (b) 2.25 percent or (c) 2.50 percent if the quarterly average excess availability is (a) at least 66.67 percent, (b) less than 66.67 percent and at least 33.33 percent and (c) less than 33.33 percent, respectively. On October 2, 2017, $35,000,000 of the Revolver balance was transferred to a 3-month line of credit with a separate LIBOR interest rate which was 3.56 percent as of October 31, 2017.
The Revolver requires that the Company maintain a maximum ratio of total fixed charges, which include interest, principal payments, taxes and management fees to EBITDA (earnings before interest expense, taxes, depreciation and amortization) less capital expenditures during the term of the Revolver. As of October 31, 2018 the Company was in compliance with the financial covenant under the Revolver.
The outstanding balance of the Revolver as of October 31, 2018 and 2017 was $48,735,228 and $44,597,240, respectively.
UK Revolver: In connection with the acquisition of the Camfaud in November 2016 (see Note 3), Camfaud entered into a revolving loan agreement (the UK Revolver) with a maximum borrowing capacity of approximately $28,000,000. The UK Revolver bears interest at the LIBOR rate plus 2 percent and expires in November 2019. The UK Revolver is secured by substantially all assets of Camfaud. The outstanding balance of the UK Revolver as of October 31, 2018 and 2017 was $14,251,734 and $21,291,631, respectively.
Note 8. Long-Term Debt and Revolving Lines of Credit (Continued)
The UK Revolver requires that the Company maintain a maximum ratio of total fixed charges, which include interest, principal payments, taxes and management fees to EBITDA (earnings before interest expense, taxes, depreciation and amortization) less capital expenditures during the term of the Revolver. As of October 31, 2018, the Company was in compliance with the financial covenant under the Revolver.
Senior secured notes: To finance the Merger on August 18, 2014, the Company issued senior secured notes through a high-yield bond offering under SEC Rule 144A (Senior Notes). The offering raised $140,000,000 of proceeds for the Company. The Senior Notes mature on September 1, 2021, and bear interest at 10.375 percent per annum. Interest payments are due every March 1 and September 1 commencing March 1, 2015. Principal is due upon maturity. The Senior Notes are secured by substantially all assets of the Company and contain various non-financial covenants.
The Senior Notes contain a number of significant restrictive covenants. Such restrictive covenants, among other things, restrict, subject to certain exceptions, the Company’s restricted subsidiaries’ ability to incur additional indebtedness and make guarantees; create liens on assets; pay dividends and distributions or repurchase their capital stock; make investments, loans and advances, including acquisitions; engage in mergers, consolidations, dissolutions or similar transactions; sell or otherwise dispose of assets, engage in certain transactions with affiliates; enter into certain restrictive agreements.
To finance the acquisition of the Camfaud (see Note 3), in November 2016, the Company issued additional senior secured notes of $40,000,000 as an incremental borrowing with the same terms and form as the original Senior Notes.
In January 2016, the Company repurchased and retired approximately $7,665,000 of outstanding Senior Notes for a purchase price of approximately $7,205,100 plus accrued interest of approximately $292,000. In April 2016, the Company repurchased and retired $10,000,000 of outstanding Senior Notes for a purchase price of $10,150,000 plus accrued interest of approximately $164,000. In March 2017, the Company repurchased and retired approximately $3,000,000 of outstanding Senior Notes for a purchase price of approximately $3,090,000 plus accrued interest of approximately $5,000. In May 2017, the Company repurchased and retired approximately $2,807,000 of outstanding Senior Notes for a purchase price of approximately $2,975,000 plus accrued interest of approximately $54,000. In September 2017, the Company repurchased and retired approximately $3,000,000 of outstanding Senior Notes for a purchase price of approximately $3,045,000 plus accrued interest of approximately $24,000.
As a result of these repurchases, the Company recognized a loss of $303,420 for the difference between the carrying amount of the Senior Notes, plus accrued interest, and the repurchase price, and also recognized a loss of $260,380 related to the write off of deferred loan fees (see Note 2) for the year ended October 31, 2017. There were no such repurchases for the year ended October 31, 2018. The net loss has been presented in the accompanying consolidated statements of income as a loss on extinguishment of debt for the year ended October 31, 2017. The difference between the carrying amount and the reacquisition price of the debt, net of unamortized loan fees, has been presented in the accompanying consolidated statements of income as a (loss) gain on extinguishment of debt.
On August 24, 2017, the Company issued a Notice of Early Tender to exchange their Senior Notes for newly issued senior secured notes (New Senior Notes). Substantially all investors exchanged their outstanding notes (the Senior Note Exchange), which settled in September 2017. The New Senior Notes bear interest at 10.375 percent per annum and mature on September 1, 2023. The Company will make interest payments on March 1 and September 1 of each year. The outstanding balance of the original Senior Notes outstanding as of October 31, 2018 and 2017, was $0 and $1,266,000, respectively. The outstanding balance of the New Senior Notes outstanding as of October 31, 2018 and 2017, was $167,553,000 and $151,287,000, respectively.
Note 8. Long-Term Debt and Revolving Lines of Credit (Continued)
After settlement of the New Senior Notes, the Company increased the total borrowing capacity of the Revolver, for which the proceeds were used to pay off the unsecured note and to pay accrued and unpaid dividends on the 13.5 percent participating preferred stockholders (Note13).
In conjunction with the acquisition of the O’Brien Companies (Note 3), in April 2018, the Company issued additional New Senior Notes with a principal amount of $15,000,000 at a 104 percent premium for a total purchase price of $15,600,000. The $600,000 has been recorded by the Company as a debt premium and will be amortized over the life of the New Senior Notes using the effective interest method.
Unsecured note: To finance the Merger, on August 18, 2014, the Company entered into a $30,000,000 loan agreement with one of its shareholders. The note matures on February 18, 2022, and bears interest at 12 percent per annum. Interest payments are due quarterly on February 18, May 18, August 18 and November 18 every year. Principal, along with any accrued and unpaid interest, is due upon maturity. The Company may elect to have the interest paid-in kind (PIK). If the Company elects to pay PIK interest, the accrued interest will be added to the outstanding balance of the note and payable upon maturity. As of October 31, 2018 and 2017, all interest associated with the PIK has been paid by the Company. The unsecured notes contain various non-financial covenants.
As part of the unsecured note, the Company issued 1,000,000 shares of common stock to the lender. As such, the proceeds of the unsecured note have been allocated to the debt and common stock based on their relative fair values. The amount allocated to common stock was $2,478,602, which was recorded as a discount on the debt. The discount is amortized to interest expense over the remaining life of the loan using the effective interest method. During the years ended October 31, 2017 and 2016, amortization of the discount was $275,400 and $330,480, respectively.
In connection with the Senior Note Exchange on September 8, 2017, the Company repaid the unsecured note, including accrued interest of $210,000. Upon extinguishment, the Company incurred a prepayment penalty fee of $1,440,000, which has been included in loss on debt extinguishment on the accompanying consolidated statements of income. The Company also wrote off the remaining unamortized discount of $1,473,392, which has also been included in loss on extinguishment of debt on the accompanying consolidated statements of income. The Company wrote off $1,712,194 of unamortized loan fees, including accumulated amortization of $1,088,806. Net write-off is included in the loss on extinguishment of debt on the consolidated statements of income for the year ended October 31, 2017.
Seller notes: In connection with the acquisitions of Camfaud and Reilly in November 2016 and July 2017 (see Note 3), respectively, the Company entered into loan agreements with the former owners of the Camfaud and Reilly for an aggregate amount of $6,221,000 and $1,941,150, respectively, (collectively, the Seller Notes). The Camfaud Note bears interest at 5 percent per annum and all principal plus accrued interest are due upon the earlier of; (1) 6 months after the UK Revolver is repaid in full, (2) 42 months after the acquisition date (May 2020) or (3) the date on which the Company suffers an insolvency event. The Reilly Note bears interest at 5 percent per annum and all principal plus accrued interest are due three years after the acquisition date (July 2020). The Seller Notes are unsecured.
Note 8. Long-Term Debt and Revolving Lines of Credit (Continued)
The following is a summary of the Company’s long-term debt as of October 31, 2018 and 2017:
2018 | 2017 | |||||||
Senior secured notes | $ | 167,553,000 | $ | 152,553,000 | ||||
Seller notes | 8,292,050 | 8,626,150 | ||||||
175,845,050 | 161,179,150 | |||||||
Plus unamortized premium on debt | 539,535 | 327,473 | ||||||
Less unamortized deferred financing costs | (2,914,520 | ) | (4,521,793 | ) | ||||
Total long term debt | $ | 173,470,065 | $ | 156,984,830 |
Future maturities of long-term debt are as follows:
Years ending October 31: | ||||
2019 | $ | - | ||
2020 | 8,292,050 | |||
2021 | 1,266,000 | |||
2022 | - | |||
2023 | 166,287,000 | |||
Thereafter | - | |||
$ | 175,845,050 |
Note 9. Accrued Payroll and Payroll Expenses
The following table summarizes accrued payroll expenses as of October 31, 2018 and 2017:
2018 | 2017 | |||||||
Accrued vacation | $ | 3,482,161 | $ | 3,041,238 | ||||
Accrued bonus | 1,766,013 | 2,131,945 | ||||||
Other accrued | 1,457,035 | 1,729,483 | ||||||
Total accrued payroll and payroll expenses | $ | 6,705,209 | $ | 6,902,666 |
Note 10. Accrued Expenses and Other Current Liabilities
The following table summarizes accrued expenses and other current liabilities as of October 31, 2018 and 2017:
2018 | 2017 | |||||||
Accrued insurance | $ | 4,743,247 | $ | 3,155,685 | ||||
Accrued interest | 3,091,150 | 2,830,656 | ||||||
Accrued equipment purchases | - | 2,172,115 | ||||||
Accrued sales and use tax | 4,145,047 | 2,695,141 | ||||||
Accrued property taxes | 865,061 | 750,264 | ||||||
Accrued professional fees | 3,579,008 | 862,069 | ||||||
Other | 2,406,089 | 2,156,192 | ||||||
Total accrued expenses and other liabilities | $ | 18,829,602 | $ | 14,622,122 |
Note 11. Income Taxes
The sources of income before income taxes for the years ended October 31, 2018 and 2017 are as follows:
2018 | 2017 | 2016 | ||||||||||
United States | $ | 15,076,595 | $ | 3,813,825 | $ | 10,687,132 | ||||||
Foreign | 3,521,127 | 856,112 | - | |||||||||
Total | $ | 18,597,722 | $ | 4,669,937 | $ | 10,687,132 |
Note 11. Income Taxes (Continued)
The components of the provision for income taxes for the years ended October 31, 2018, 2017 and 2016, are as follows:
2018 | 2017 | 2016 | ||||||||||
Current tax provision: | ||||||||||||
Federal | $ | (365,902 | ) | $ | 2,201,279 | $ | 156,533 | |||||
Foreign | 1,232,718 | 378,031 | - | |||||||||
State and local | 455,537 | 578,697 | 542,378 | |||||||||
Total current tax provision | 1,322,353 | 3,158,007 | 698,911 | |||||||||
Deferred tax provision (benefit): | ||||||||||||
Federal | (10,650,171 | ) | 993,603 | 3,586,058 | ||||||||
Foreign | (729,745 | ) | (132,607 | ) | - | |||||||
State and local | 273,443 | (262,345 | ) | 168,572 | ||||||||
Total deferred tax (benefit) provision | (11,106,473 | ) | 598,651 | 3,754,630 | ||||||||
Net provision for income taxes | $ | (9,784,120 | ) | $ | 3,756,658 | $ | 4,453,541 |
For the years ended October 31, 2018, 2017 and 2016, the income tax provision differs from the expected tax provision computed by applying the U.S. federal statutory rate to income before taxes as a result of the following:
2018 | 2017 | 2016 | ||||||||||
Provision for income taxes at blended U.S. statutory rate of 23.1% and 34.7% | $ | 4,309,576 | $ | 1,587,778 | $ | 3,633,625 | ||||||
State income taxes, net of federal deduction | 560,056 | 285,982 | 469,227 | |||||||||
Foreign rate differential | (178,927 | ) | (139,460 | ) | - | |||||||
Meals and entertainment | 220,234 | 270,789 | 234,353 | |||||||||
Transaction costs | 44,145 | 1,582,474 | - | |||||||||
Change in deferred tax rate | - | (116,954 | ) | 83,409 | ||||||||
Domestic manufacturing deduction | - | (254,236 | ) | (189,453 | ) | |||||||
Stock-based compensation | 64,849 | 122,844 | 36,851 | |||||||||
Contingent consideration fair value adjustment | 122,077 | - | - | |||||||||
Nontaxable Interest income net of foreign income inclusions | 39,973 | (378,068 | ) | - | ||||||||
Foreign tax credit | - | (79,791 | ) | - | ||||||||
Deferred tax on undistributed foreign earnings | (141,935 | ) | 888,576 | - | ||||||||
Impact of tax reform | (14,644,758 | ) | - | - | ||||||||
Increase in valuation allowance | - | 52,662 | - | |||||||||
Other | (179,410 | ) | (65,938 | ) | 185,529 | |||||||
Income tax provision | $ | (9,784,120 | ) | $ | 3,756,658 | $ | 4,453,541 |
Note 11. Income Taxes (Continued)
The tax effects of the temporary differences giving rise to the Company’s net deferred tax liabilities as of October 31, 2018 and 2017, are summarized as follows:
2018 | 2017 | |||||||
Deferred tax assets: | ||||||||
Accrued insurance reserves | $ | 943,054 | $ | 1,000,078 | ||||
Accrued sales and use tax | 961,863 | 997,091 | ||||||
Accrued payroll | 367,653 | 509,276 | ||||||
Foreign tax credit carryforward | 79,791 | 79,791 | ||||||
Net operating loss carryforward | 1,930,998 | 160 | ||||||
Other | 254,998 | 200,936 | ||||||
Total deferred tax assets | 4,538,357 | 2,787,332 | ||||||
Valuation allowance | (63,035 | ) | (52,662 | ) | ||||
Net deferred tax assets | 4,475,322 | 2,734,670 | ||||||
Deferred tax liabilities: | ||||||||
Intangible assets | (6,219,735 | ) | (11,879,983 | ) | ||||
Property and equipment | (36,394,087 | ) | (39,717,047 | ) | ||||
Prepaid expenses | (119,712 | ) | (352,976 | ) | ||||
Unremitted foreign earnings | (746,641 | ) | (888,576 | ) | ||||
Other | - | (7,414 | ) | |||||
Total net deferred tax liabilities | (43,480,175 | ) | (52,845,996 | ) | ||||
Net deferred tax assets | $ | (39,004,853 | ) | $ | (50,111,326 | ) |
The Company has federal net operating loss carry forwards of $8,100,000 for the period ended October 31, 2018. The Company did not have any federal net operating loss carry forwards for the period ended October 31, 2017. The Company has state net operating loss carry forwards of approximately $5,300,000 and $6,000, respectively, as of October 31, 2018 and 2017 that begin to expire in 2024.
The Company has foreign tax credit carryforwards of approximately $80,000 as of both October 31, 2018 and 2017, respectively, which begin to expire in 2027.
The Company has provided U.S. deferred taxes on cumulative earnings of all of its non-U.S. affiliates.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, carryback opportunities, and tax planning strategies in making the assessment. The Company believes it is more likely than not that it will realize the benefits of these deductible differences, net of the valuation allowance provided. The valuation allowance provided by the Company relates to foreign tax credit carry forwards.
In December 2017, the Tax Cuts and Jobs Act (the “2017 Tax Act”) was enacted. The 2017 Tax Act significantly revised the U.S. corporate income tax regime by, among other things, lowering the U.S. corporate tax rate from 35 percent to 21 percent effective January 1, 2018. The Company recognized the income tax effects of the 2017 Tax Act in its consolidated financial statements in the period the 2017 Tax Act was signed into law.
Note 11. Income Taxes (Continued)
The SEC staff recognized that entities may not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting under ASC 740 for certain income tax effects of the 2017 Tax Act in the reporting period that includes the date of enactment. In accordance with Staff Accounting Bulletin No. 118, which provides SEC staff guidance for the application of ASC 740, the Company’s consolidated financial statements for the period ended October 31, 2018 reflect the income tax effects of the 2017 Tax Act.
The 2017 Tax Act creates a requirement that certain income earned by controlled foreign corporations (“CFCs”) must be included currently in the gross income of the CFC's U.S. shareholder. The Global Intangible Low Tax Income (“GILTI”) provisions are effective for tax years beginning on or after January 1, 2018. In FASB staff Q&A Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income, the FASB staff noted that Accounting Standards Codification (“ASC”) 740 (“Topic 740”), Income Taxes, was not clear with respect to the appropriate accounting for GILTI, and accordingly, an entity may either: (1) elect to treat taxes on GILTI as period costs similar to special deductions, or (2) recognize deferred tax assets and liabilities when basis differences exist that are expected to affect the amount of GILTI inclusion upon reversal (the deferred method). The Company has not yet adopted an accounting policy related to GILTI.
As a result of the 2017 Tax Act, the Company recorded a tax benefit of $15,096,000 for the period ended October 31, 2018 related to the remeasurement of deferred tax assets and liabilities to reflect the reduction in the U.S. corporate income tax rate from 35 percent to 21 percent. The Company also recorded a tax expense of $451,000 for the period ended October 31, 2018 related to the deemed repatriation of earnings from its foreign subsidiaries, also known as the “Transition Tax”. The net of these two adjustments related to the 2017 Tax Act reflect the total impact of tax reform for the period ended October 31, 2018.
Note 12. Commitments and Contingencies
Incentive compensation plan: The Company has an Incentive Compensation Plan that has been approved by the Board of Directors. The Plan establishes a cash bonus pool for eligible employees of the Company. The balance available for the cash bonus pool is established by meeting certain performance targets. As of October 31, 2018 and 2017, the Company accrued $1,766,013 and $2,131,945, respectively, of bonuses payable under the Incentive Compensation Plan, which has been included in accrued payroll and payroll expenses in the accompanying consolidated balance sheets.
Self-insurance: BB’s automobile, general and workmen’s compensation insurance is partially self- insured. As of October 31, 2018, the general liability deductible was $100,000 per claim. Beginning in fiscal years 2010 and 2014, the workmen’s compensation and automobile policies, respectively, were fully insured. As of October 31, 2018 and 2017, management has accrued $3,151,989 and $2,418,000, respectively, for claims incurred but not reported and estimated losses reported, which is included in accrued expenses and other current liabilities in the accompanying consolidated balance sheets.
The Company offers employee health benefits via a partially self-insured medical benefit plan. Participant claims exceeding certain limits are covered by a stop-loss insurance policy. The Company contracts with a third-party administrator to process claims, remit benefits, etc. The third-party administrator requires the Company to maintain a bank account to facilitate the administration of claims. As of October 31, 2018 and 2017, the account balance was $300,000 and $234,167, respectively, and is included in cash in the accompanying consolidated balance sheets. As of October 31, 2018 and 2017, management has accrued $957,584 and $737,000, respectively, for health claims incurred but not reported based on historical claims amounts and average lag time, which is included in accrued expenses and other current liabilities in the accompanying consolidated balance sheets.
Litigation: The Company is currently involved in certain legal proceedings and other disputes with third parties that have arisen in the ordinary course of business. Management has reviewed these issues to determine if reserves are required for losses that are probable to materialize and reasonable to estimate the amount of loss in accordance with ASC 450, Contingencies (ASC 450). Management evaluates such reserves, if any, based upon several criteria, including the merits of each claim, settlement discussions, advice of outside counsel, as well as indemnification of amounts expended by the Company’s insurers or others, if any. Management and corporate counsel believe that the outcomes of the legal actions will not have a material impact and do not believe that any amounts need to be recorded for contingent liabilities in the consolidated balance sheets.
Life insurance: BB is the owner and beneficiary of term life insurance policies on the lives of its key employees. As of October 31, 2018, 2017 and 2016, the aggregate face value of the policies was $6,000,000, $4,000,000, and $10,000,000, respectively. The policies do not have a cash surrender value.
Note 12. Commitments and Contingencies (Continued)
Letters of credit: The Revolver provides for up to $5,000,000 of standby letters of credit. As of October 31, 2018 and 2017, approximately, $882,999 and $48,000, respectively, had been committed to the Company’s general liability insurance provider.
Operating leases: The Company leases facilities, equipment and vehicles under non-cancelable operating leases with various expiration dates through August 2023. Monthly lease payments range from $543 to $8,903. Total rental expense for the years ended October 31, 2018, 2017 and 2016, was $4,836,742, $2,807,484 and $1,869,973, respectively, which also includes the Company’s month-to-month leases.
The following is a summary of future minimum lease payments for the years ended October 31:
2019 | 1,971,150 | |||
2020 | 1,201,642 | |||
2021 | 812,929 | |||
2022 | 577,269 | |||
2023 | 323,458 | |||
Thereafter | 202,597 | |||
$ | 5,089,045 |
Capital leases: BB entered into two capital leases for land and buildings in Georgia and South Carolina during fiscal year 2015. The terms of the Georgia and South Carolina leases are 123 and 120 months, respectively, and contain purchase options that may be exercised at any time during the lease. The purchase price payable upon exercise of the purchase options is equal to the fair value of the leased assets less the amount of rent paid to date. The purchase price at the end of the lease is insignificant and, therefore, the leased assets are considered to transfer ownership at the end of the lease.
The land and buildings and related liabilities under the capital leases were recorded at the time of the lease at the lesser of the present value of the future payments due under the leases or the fair value of the leased assets. The amount of land and buildings and capital lease obligation originally recorded under the capital leases was $909,250. The capital lease obligation recorded as of October 31, 2018 and 2017 was $829,934 and $731,829, respectively. The net book value of the leased assets as of October 31, 2018 and 2017 was $652,752 and $851,619, respectively.
Camfaud also enters into capital leases for operating equipment. The capital lease obligation recorded as of October 31, 2017, was $113,962. The net book value of the leased assets as of October 31, 2017, was $135,452. Camfaud did not have a capital lease obligation as of October 31, 2018.
Note 12. Commitments and Contingencies (Continued)
Future payments of capital lease obligations, together with the present value of those future payments are as follows:
Fiscal years ending October 31: | ||||
2019 | $ | 108,081 | ||
2020 | 110,394 | |||
2021 | 112,776 | |||
2022 | 115,229 | |||
2023 | 117,756 | |||
Thereafter | 173,638 | |||
Total minimum lease payments | 737,874 | |||
Less the amount representing interest | (85,122 | ) | ||
Present value of minimum lease payments | $ | 652,752 |
Note 13. Stockholders’ Equity
Pursuant to the articles of incorporation, the Company was initially authorized to issue 50,000,000 shares of $0.001 par value common stock and 2,423,711 shares of $0.001 par value preferred stock. In March 2016, the Company amended the articles of incorporation to reduce the number of shares of common stock the Company is authorized to issue to 15,000,000 shares.
In connection with the Merger, the Company issued 6,576,289 shares of common stock to the Sponsor for $16,300,000. The Company also issued 1,000,000 shares of common stock to one of the lenders as part of obtaining loan financing. The amount recorded of $2,478,602 was based on an allocation of the loan proceeds based on the relative fair values of the common stock and debt. The amount was recorded as a discount on the debt, which was written off upon the Company’s repayment of the unsecured note during 2017 (see Note 8). The proceeds raised from the equity offering have been reduced by offering costs of $158,715. Also in connection with the Merger, the Company issued 2,423,711 shares of preferred stock to certain former owners of BB and EP. The preferred stock was recorded at its fair value, which was determined to be $15,182,053 as of the Merger date.
Redeemable preferred stock: The Company’s preferred stock accrues cumulative dividends at 13.5 percent per annum that must be paid before dividends are paid to any other holders of capital stock, but are not payable until declared (Preferred Dividends). Preferred Dividends accrue daily based on the liquidation preference of the underlying shares and compound quarterly. Preferred stock holders are entitled to participating dividends, distributions declared or paid, or set aside for payment on the common stock whether payments consist of cash, securities, property, or other assets. To the extent that dividend or distributions are made in the form of securities, preferred stock holders are only entitled to receive the same class securities provided to the common stock holders.
Note 13. Stockholders’ Equity (Continued)
The preferred stock also includes a liquidation preference of $4.13 per share (Liquidation Preference). Upon liquidation, dissolution or winding up of the Company, before any distributions are made to holders of common stock, holders of preferred stock are entitled to receive an amount equal to the Liquidation Preference plus all accrued but unpaid dividends. On September 8, 2017, upon settlement of the Senior Notes Exchange (see Note 8), the Company declared and paid cumulative unpaid accrued dividends of $4,840,065 to the preferred stockholders. As of October 31, 2018 and 2017 the liquidation preference of preferred stock was $11,239,060 and $9,845,139, respectively, which includes Preferred Dividends of $1,716,504 and $322,583, respectively.
On the 66th month anniversary of the original issuance date (February 18, 2020), each holder of preferred stock may redeem their shares of preferred stock to the Company for a price equal to the fair value of the preferred stock on the redemption date. If it is determined that the presence of preferred stock would have a material adverse effect on the success of a qualified public offering, the shares of preferred stock shall be converted into shares of common stock upon the closing of a qualified public offering. This redemption feature is outside the holder’s control; however, the preferred shares contain disability conditions that allow for the Company to invoke said disability notice and prevent the payment upon execution of the aforementioned conversion if the Company so deems that the Company is not in a position to allow for the conversion as it would place the Company in a difficult financial position. The carrying value of preferred stock has not been subsequently adjusted to reflect redemption value as the Company does not believe redemption is probable due to the length of time before redemption can occur.
The holders of preferred stock are entitled to vote together with the holders of common stock as a single class on all matters submitted to a vote of the holders of common stock. Each share of preferred stock is entitled to one vote.
The Company applies the accounting standards for distinguishing liabilities from equity when determining the classification and measurement of its preferred stock. Conditionally redeemable preferred shares (including preferred shares that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within the Company’s control) are classified as temporary equity.
The Company has performed an analysis of the redemption features contained within the preferred stock and has determined that embedded features other than the change in control feature identified and evaluated have been determined to be solely within the control of the issuer. Accounting Series Release (ASR) 268 requires equity instruments with redemption features that are not solely within the control of the issuer to be classified outside of permanent equity, often referred to as classification in “temporary equity”. The Company has presented such amounts as temporary equity commensurate with the aforementioned guidance.
During 2017, the Company purchased 81,447 shares of preferred stock from a stockholder for $1,400,009. The difference of $889,825 between the purchase price and original cost is included in retained earnings for the year ended October 31, 2017.
Note 14. Stock-Based Compensation
During 2015, the Company established the 2015 Equity Incentive Plan (as amended, the “2015 Plan”). Under the 2015 Plan, the Company may award stock options, restricted stock or other equity awards to certain employees, directors and consultants of the Company and its affiliates, including Brundage-Bone and Eco-Pan. The 2015 Plan permits the issuance of up to 1,622,120 shares of the Company’s common stock. The vesting period and term of each option are determined at the date of grant and generally does not exceed ten years. The options may include time-vesting and/or performance-based vesting criteria. The options may be subject to forfeiture if certain vesting requirements are not met.
Note 14. Stock-Based Compensation (Continued)
As of October 31, 2018, there were 362,560 shares of the Company’s common stock available for grant under the 2015 Plan. A summary of option activity for the years ended October 31, 2018 and 2017, is as follows:
Weighted- | ||||||||||||||||
Weighted- | Average | |||||||||||||||
Average | Remaining | Aggregate | ||||||||||||||
Exercise | Contractual | Intrinsic | ||||||||||||||
Options | Price | Life | Value | |||||||||||||
Options outstanding, October 31, 2016 | 1,529,704 | $ | 2.48 | 8.27 | $ | - | ||||||||||
Granted | 227,280 | 17.50 | ||||||||||||||
Forfeited | (286,119 | ) | 2.74 | |||||||||||||
Cancelled | (70,281 | ) | 2.48 | |||||||||||||
Options outstanding, October 31, 2017 | 1,400,584 | $ | 4.86 | 7.41 | $ | - | ||||||||||
Granted | - | - | ||||||||||||||
Forfeited | (141,024 | ) | 17.50 | |||||||||||||
Cancelled | - | - | ||||||||||||||
Options outstanding, October 31, 2018 | 1,259,560 | $ | 4.55 | 7.68 | $ | - |
There were no options granted to employees during the year ended October 31, 2018. The options granted to employees during the year ended October 31, 2017, included both time-vesting and performance-based vesting criteria. Of the 227,280 options granted, 54,000 are subject to time vesting only. The time-vesting criteria specify that 20 percent of the options will vest on each of the first five anniversaries of the grant date, subject to the holder’s continued service through the vesting date. The remaining 173,280 options granted include both time-vesting and performance-based vesting criteria. For these grants, 50 percent of the options are subject to time vesting and 50 percent are subject to performance-based vesting. The time-vesting criteria specify that 10 percent of the options shall vest on each of the first five anniversaries the grant date, subject to the holder’s continued service through the vesting date. The performance criteria stipulate that up to 10 percent of the options shall vest on each of the first five anniversaries of the grant date, based on the Company’s annual earnings before income taxes, depreciation and amortization (EBITDA) for the applicable year and provided that the Companies achieve a minimum annual EBITDA amount for that particular year, subject to the holder’s continued service through the vesting date.
The Company repurchased and cancelled 70,281 options during the year ended October 31, 2017, for $686,645. The repurchase price was less than the fair value of the options at the time of the repurchase and accordingly, no incremental compensation cost was recorded. The Company did not repurchase any options during the year ended October 31, 2018.
Compensation expense subject to the performance-based vesting criteria is recognized over the requisite service period only if the performance criteria are probable of being met. The fiscal year 2018 and 2016 EBITDA target was achieved by the Company and, therefore, the Company has recognized compensation expense related to those performance tranches. Compensation expense for time-based vesting options is recognized on a straight-line basis over the requisite service period. The fiscal year 2017 EBITDA target was not met, thus compensation expense was not recorded for the fiscal year 2017 performance vesting tranche with the exception of two individuals for which the Company waived the performance- based vesting criteria. Total compensation expense recognized by the Company for the years ended October 31, 2018, 2017 and 2016, is $280,632, $362,345 and $109,424, respectively, which has been included in general and administrative expenses on the accompanying consolidated statements of income.
Note 14. Stock-Based Compensation (Continued)
As of October 31, 2018, stock-based compensation not yet recognized in income is $801,892, which will be recognized over a weighted-average period of 2.5 years. Included in this amount is $287,818 of expense related to the performance-based awards, which will only be recognized if achievement of the performance targets is determined to be probable.
The following is a summary of options outstanding and exercisable as of October 31, 2018:
Options Outstanding | Options Exercisable | |||||||||||||||||||||
Weighted- | ||||||||||||||||||||||
Average | Weighted- | Weighted- | ||||||||||||||||||||
Number of | Remaining | Average | Number of | Average | ||||||||||||||||||
Exercise Price | Options | Contractual Life | Exercise Price | Options | Exercise Price | |||||||||||||||||
$ | 2.48 | 1,085,888 | 7.18 | $ | 2.48 | 609,368 | $ | 2.48 | ||||||||||||||
17.50 | 173,672 | 10.81 | 17.50 | 86,024 | 17.50 | |||||||||||||||||
1,259,560 | 5.74 | $ | 4.55 | 695,392 | $ | 4.34 |
The Company did not grant any options during 2018. The weighted-average grant date fair value of options granted during 2017 was $8.16 per share. The fair value of share-based payments was estimated using the Black-Scholes option-pricing model requiring the use of subjective valuation assumptions. The Black-Scholes valuation model requires several inputs, including the expected stock price volatility. Volatility was determined using observations of historical stock prices for five comparable public companies. The Company’s options have characteristics significantly different from those of traded options, and changes in input assumptions can materially affect the fair value estimates.
There were no options granted during 2018. The fair value of options granted during 2017 and 2016 was estimated using the following assumptions:
2017 | 2016 | |||
Risk-free interest rate | 1.61% | 1.05% - 1.62% | ||
Expected dividend yield | None | None | ||
Expected volatility factor | 45.37% | 29.54% - 35.27% | ||
Expected option life (in years) | 6.5 | 4 - 5 | ||
Actual forfeitures | None | 0 |
Note 15. Earnings Per Share
Under the terms and conditions of the Company’s Participating Preferred Stock Agreement, the holders of the Preferred Stock have the right to receive dividends or dividend equivalents should the Company declare dividends on its common stock on a one-for-one per-share basis. Under the two-class method, undistributed earnings is calculated by the earnings for the period less the cumulative preferred stock dividends earned for the period. The undistributed earnings are then allocated on a pro-rata basis to the common and preferred stockholders on a one-for-one per-share basis. The weighted-average number of common and preferred shares outstanding during the period is then used to calculate basic EPS for each class of shares. As a result, the undistributed earnings available to common shareholders is calculated by earnings (loss) for the period less the cumulative preferred stock dividends earned for the period less undistributed earnings allocated to the holders of the Preferred Stock.
In periods in which the Company has a net loss or undistributed net loss, basic loss per share is calculated by dividing the loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period. The two-class method is not used, because the holders of the Preferred Stock do not participate in losses.
The following is a reconciliation of the weighted average number of shares outstanding used to calculate basic EPS to those used to calculate diluted EPS for the fiscal years ended October 31, 2018, 2017 and 2016, respectively:
2018 | 2017 | 2016 | ||||||||||
Net Income (numerator): | ||||||||||||
Basic & Diluted: | ||||||||||||
Net income attributable to Concrete Pumping Holdings, Inc. and Subsidiaries | $ | 28,381,842 | $ | 913,279 | $ | 6,269,955 | ||||||
Less: Preferred stock - cumulative dividends | (1,428,257 | ) | (1,811,837 | ) | (1,695,122 | ) | ||||||
Less: Undistributed earnings allocated to preferred shares | (6,365,083 | ) | - | (1,108,807 | ) | |||||||
Net income (loss) available to common shareholders | $ | 20,588,502 | $ | (898,558 | ) | $ | 3,466,026 | |||||
Weighted average shares (denominator): | ||||||||||||
Weighted average shares - basic | 7,576,289 | 7,576,289 | 7,576,289 | |||||||||
Dilutive effect of stock options | 749,601 | - | 703,032 | |||||||||
Weighted average shares - diluted | 8,325,890 | 7,576,289 | 8,279,321 | |||||||||
Antidilutive stock options | - | 770,171 | - | |||||||||
Basic income (loss) per share | $ | 2.72 | $ | (0.12 | ) | $ | 0.46 | |||||
Diluted income (loss) per share | $ | 2.47 | $ | (0.12 | ) | $ | 0.42 |
Note 16. Employee Benefits Plan
Retirement plans: The Company offers a 401(k) plan, which covers substantially all employees of BB and EP, with the exception of certain union employees. Participating employees may elect to contribute, on a tax-deferred basis, a portion of their compensation, in accordance with Section 401(k) of the Internal Revenue Code. For the years ended October 31, 2018, 2017 and 2016, the Company’s matching contribution rate for non-collectively bargained employees was 25 percent of the first 4 percent and 50 percent of the first 7 percent of an employee’s gross earnings for BB and EP participants, respectively. The Company’s matching contribution may be changed at the discretion of the Board of Directors. Matching contributions vest 20 percent after 2 years of service and ratably thereafter until they are 100 percent vested after 6 years of service. During the years ended October 31, 2018, 2017 and 2016, certain union employees have collectively bargained for a matching contribution of 50 percent to 100 percent of the first 7 percent of base compensation that a participant contributed, and additional amounts may be contributed at the option of the Board of Directors. During the years ended October 31, 2018, 2017 and 2016, certain other union employees have collectively bargained for a defined contribution of $4.50 and $4.25 per hour worked, respectively. Retirement plan contributions for the years ended October 31, 2018, 2017 and 2016 were $576,657, $442,262 and $445,162 respectively.
Camfaud operates a Small Self-Administered Scheme (SSAS), which is the equivalent of a U.S. defined contribution pension plan. The assets of the plan are held separately from those of Camfaud in an independently administered fund. Contributions by Camfaud to the SSAS amounted to $280,677 and $179,562 for the years ended October 31, 2018 and 2017, respectively.
Multiemployer plans: BB contributes to a number of multiemployer defined benefit pension plans under the terms of collective-bargaining agreements (CBAs) that cover its union-represented employees. The risks of participating in these multiemployer plans are different from single-employer plans in the following aspects: (a) Assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating employers; (b) If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers; and (c) If BB chooses to stop participating in some of its multiemployer plans, BB may be required to pay those plans an amount based on the underfunded status of the plan, referred to as a withdrawal liability. BB has no intention of stopping its participation in any multiemployer plan.
The following is a summary of our contributions to each multiemployer pension plan for the years ended October 31, 2018, 2017 and 2016:
2018 | 2017 | 2016 | ||||||||||
California | $ | 492,430 | $ | 564,047 | $ | 603,516 | ||||||
Oregon | 232,971 | 207,735 | 196,825 | |||||||||
Washington | 216,454 | 145,517 | 124,595 | |||||||||
Total contributions | $ | 941,855 | $ | 917,299 | $ | 924,936 |
No plan was determined to be individually significant. There have been no significant changes that affect the comparability of the contributions. The Company reviews the funded status of each multiemployer defined benefit pension plan at each reporting period so as to monitor the certified zone status for each of the multiemployer defined benefit pension plans. The zone status for the multiemployer defined benefit pension plans for Oregon and Washington was Green (greater than 80 percent funded) and Yellow (less than 80 percent funded but greater than 65 percent funded) for the California multiemployer defined benefit pension plans. The funding status for the Oregon and Washington multiemployer defined benefit pension plans is at January 1, 2017 and July 1, 2017 for the California multiemployer defined benefit pension plan.
Note 16. Employee Benefits Plan (continued)
Government regulations impose certain requirements relative to multiemployer plans. In the event of plan termination or employer withdrawal, an employer may be liable for a portion of the plan’s unfunded vested benefits. BB has not received information from the plans’ administrators to determine its share of unfunded vested benefits. BB does not anticipate withdrawal from the plans, nor is BB aware of any expected plan terminations.
The Company believes that the “construction industry” multiemployer plan exception may apply if the Company did withdraw from any of its current multiemployer plans. The “construction industry” exception generally delays the imposition of withdrawal liability in connection with an employer’s withdrawal from a “construction industry” multiemployer plan unless and until that employer resumes covered operations in the relevant geographic region without a corresponding resumption of contributions to the multiemployer plan. The Company has no intention of withdrawing, in either a complete or partial withdrawal, from any of the multiemployer plans to which the Company currently contributes; however, it has been assessed a withdrawal liability in the past.
Note 17. Segment Reporting
The Company conducts its business through the following reportable segments based on geography and the nature of services sold: U.S Concrete pumping – Brundage-Bone, U.K. Concrete Pumping – Camfaud, Concrete Waste Management Services – Eco-Pan. The classifications are defined as follows:
· | U.S. Concrete Pumping – Brundage-Bone (Brundage-Bone) – consists of concrete pumping services sold to customers in the U.S. |
· | U.K. Concrete Pumping – Camfaud (Camfaud) – consists of concrete pumping services sold to customers in the U.K, which represents foreign operations. |
· | Concrete Waste Management Services – Eco-Pan (Eco-Pan) – consists of pans and containers rented to customers in the U.S and the disposal of the concrete waste material services sold to customers in the U.S. |
The accounting policies of the reportable segments are the same as those described in Note 2. The Chief Operating Decision Maker (CODM) evaluates the performance of its segments based on revenue, and measures segment performance based upon segment EBITDA (earnings before income, taxes, depreciation and amortization).
Non-allocated interest expense and various other administrative costs are reflected in Corporate. Corporate assets include cash, prepaid expenses and other current assets, property and equipment.
The following provides operating information about the Company’s reportable segments for the years ended October 31, 2018, 2017 and 2016:
2018 | 2017 | 2016 | ||||||||||
Revenue: | ||||||||||||
Brundage-Bone | $ | 164,305,836 | $ | 151,194,931 | $ | 153,488,134 | ||||||
Camfaud | 50,448,085 | 36,433,763 | - | |||||||||
Eco-Pan | 28,469,346 | 23,581,905 | 18,937,413 | |||||||||
243,223,267 | 211,210,599 | 172,425,547 |
Note 17. Segment Reporting (Continued)
EBITDA | 2018 | 2017 | 2016 | |||||||||
Brundage-Bone | $ | 34,966,513 | $ | 36,925,969 | $ | 43,763,760 | ||||||
Camfaud | 15,753,598 | 10,827,292 | - | |||||||||
Eco-Pan | 12,558,725 | 9,912,446 | 7,560,512 | |||||||||
Corporate | 2,366,179 | (3,093,897 | ) | 1,188,480 | ||||||||
$ | 65,645,015 | $ | 54,571,810 | $ | 52,512,752 |
Interest income (expense) | 2018 | 2017 | 2016 | |||||||||
Brundage-Bone | $ | (17,247,250 | ) | $ | (15,389,779 | ) | $ | (15,156,744 | ) | |||
Camfaud | (4,172,959 | ) | (3,634,811 | ) | - | |||||||
Eco-Pan | (980 | ) | 870 | - | ||||||||
Corporate | (3,558 | ) | (3,724,128 | ) | (4,359,333 | ) | ||||||
$ | (21,424,747 | ) | $ | (22,747,848 | ) | $ | (19,516,077 | ) |
Depreciation and amortization | 2018 | 2017 | 2016 | |||||||||
Brundage-Bone | $ | 15,237,041 | $ | 18,275,871 | $ | 19,420,137 | ||||||
Camfaud | 8,059,512 | 6,336,369 | - | |||||||||
Eco-Pan | 2,078,137 | 2,315,298 | 2,675,954 | |||||||||
Corporate | 247,856 | 226,487 | 213,452 | |||||||||
$ | 25,622,546 | $ | 27,154,025 | $ | 22,309,543 |
Income tax (benefit) expense | 2018 | 2017 | 2016 | |||||||||
Brundage-Bone | $ | (11,472,368 | ) | $ | 3,109,635 | $ | 4,603,472 | |||||
Camfaud | 502,974 | 245,424 | - | |||||||||
Eco-Pan | 845,572 | 2,791,138 | 703,733 | |||||||||
Corporate | 339,702 | (2,389,539 | ) | (853,664 | ) | |||||||
$ | (9,784,120 | ) | $ | 3,756,658 | $ | 4,453,541 |
Transaction costs | 2018 | 2017 | 2016 | |||||||||
Brundage-Bone | $ | 7,589,825 | $ | 4,489,517 | $ | 3,691,466 | ||||||
$ | 7,589,825 | $ | 4,489,517 | $ | 3,691,466 |
Net income (loss) | 2018 | 2017 | 2016 | |||||||||
Brundage-Bone | $ | 13,954,590 | $ | 150,684 | $ | 4,583,407 | ||||||
Camfaud | 3,018,153 | 610,688 | - | |||||||||
Eco-Pan | 9,634,036 | 4,806,880 | 4,180,825 | |||||||||
Corporate | 1,775,063 | (4,654,973 | ) | (2,530,641 | ) | |||||||
$ | 28,381,842 | $ | 913,279 | $ | 6,233,591 |
2018 | 2017 | 2016 | ||||||||||
Total Assets | ||||||||||||
Brundage-Bone | $ | 277,935,739 | $ | 244,553,325 | $ | 209,074,489 | ||||||
Camfaud | 39,167,461 | 44,866,267 | - | |||||||||
Eco-Pan | 32,781,488 | 28,961,354 | 26,738,362 | |||||||||
Corporate | 20,259,056 | 20,465,681 | 19,116,618 | |||||||||
$ | 370,143,744 | $ | 338,846,627 | $ | 254,929,469 |
Note 17. Segment Reporting (Continued)
The following provides a reconciliation from the Company’s measure of segment performance, EBITDA, to income before taxes for the years ended October 31, 2018 and 2017:
Income Before Taxes to EBITDA Reconciliation | 2018 | 2017 | 2016 | |||||||||
Income before taxes | $ | 18,597,722 | $ | 4,669,937 | $ | 10,687,132 | ||||||
Depreciation and amortization | 25,622,546 | 27,154,025 | 22,309,543 | |||||||||
Interest expense | 21,424,747 | 22,747,848 | 19,516,077 | |||||||||
EBITDA | $ | 65,645,015 | $ | 54,571,810 | $ | 52,512,752 |
The U.S. and U.K. were the only regions that accounted for more than 10 percent of the Company’s revenues in 2018, 2017 and 2016. There was no single customer that accounted for more than 10 percent of revenues in 2018, 2017 and 2016. Revenues for 2018, 2017 and 2016 and long-lived assets as of October 31, 2018 and 2017 were as follows:
Revenues | 2018 | 2017 | 2016 | |||||||||
U.S. | $ | 192,775,182 | $ | 174,776,836 | $ | 172,425,547 | ||||||
U.K. | 50,448,085 | 36,433,763 | - | |||||||||
$ | 243,223,267 | $ | 211,210,599 | $ | 172,425,547 |
Long Lived Assets | 2018 | 2017 | 2016 | |||||||||
U.S. | $ | 167,368,850 | $ | 138,012,093 | $ | 138,686,332 | ||||||
U.K. | 34,546,590 | 37,530,042 | - | |||||||||
$ | 201,915,440 | $ | 175,542,135 | $ | 138,686,332 |
Note 18. Related-Party Transactions
The Company entered into a Management Services Agreement with PGP Advisors, LLC (PGP), an affiliate of the Sponsor, on August 18, 2014, to provide advisory, consulting and other professional services. The annual fee for these services is $1,250,000, which is payable quarterly. The annual service fee was increased to $4,000,000 for fiscal year 2018 and 2019 and $2,000,000 annually thereafter. For the years ended October 31, 2018, 2017 and 2016, the Company incurred $4,348,456, $1,749,792 and $1,535,705, respectively, related to this agreement and other agreed upon expenses, which is included in general and administrative expenses on the accompanying consolidated statements of income.
In connection with the acquisition of the O’Brien Companies and Camfaud (see Note 3), the Company paid $525,000 and $1,500,000, respectively, in transaction costs to PGP that is included in transaction costs on the consolidated statements of income for the years ended October 31, 2018 and 2017.
Note 19. Subsequent Events
The Company has evaluated subsequent events through January 14, 2019, the date for which the consolidated financial statements were available for issuance, except for the matters described below, the Company has not identified any significant events for which it needs to provide disclosure.
Consummation of the Merger with Industrea Acquisition Corporation: On December 6, 2018, the Company consummated the merger as contemplated in the Agreement and Plan of Merger, dated as of September 7, 2018 (the “ Industrea Merger Agreement”), by and among the Company and Industrea Acquisition Corp. The transactions contemplated by the Merger Agreement are referred to herein as the “Business Combination”.
The Company incurred approximately $6,450,266 of seller related costs related to the Industrea Merger Agreement that have been reflected as transaction costs in the accompanying consolidated statement of income for the year ended October 31, 2018.
Upon the closing of the Business Combination, all outstanding shares of Industrea’s Class A common stock, par value $0.0001 per share (“Class A common stock”), were exchanged on a one-for-one basis for shares of the Company’s common stock, par value $0.0001 per share (“Company common stock”), and Industrea’s outstanding warrants were assumed by the Company and became exercisable for shares of the Company’s common stock on the same terms as were contained in such warrants prior to the Business Combination. The Company is the successor issuer to Industrea and has succeeded to the attributes of Industrea as the registrant.
Debt Financing: On the Closing Date, the Company entered into (i) a Term Loan Agreement (the “Term Loan Agreement”) among the Company and its subsidiaries as joint lead arrangers and joint bookrunners and (ii) a Credit Agreement (the “ABL Credit Agreement”) with Wells Fargo Bank, National Association, as agent, sole lead arranger and sole bookrunner.
Note 19. Subsequent Events (Continued)
Term Loan Agreement: The initial term loans advanced under the Term Loan Agreement on the Closing Date will mature and be due and payable in full seven years after the Closing Date, with principal amortization payments in an annual amount equal to 5.00% of the original principal amount thereof.
The initial terms loans extended under the Term Loan Agreement are in an aggregate principal amount of $357,000,000.
Interest on borrowings under the Term Loan Agreement, at the Borrower’s option, will bear interest at either (1) an adjusted Eurodollar rate or (2) an alternate base rate, in each case plus an applicable margin. The applicable margin is 6.00% with respect to Eurodollar borrowings and 5.00% with respect to base rate borrowings.
ABL Facility Principal Amount and Maturity: The ABL Credit Agreement provides borrowing availability in US Dollars and GBP up to a maximum of $60,000,000.
The ABL Credit Agreement includes borrowing capacity available for standby letters of credit of up to $7,500,000, and for other loan borrowings of up to $7,500,000. Any issuance of letters of credit or making of a swingline loan will reduce the amount available under the ABL Facility.
In addition, the ABL Credit Agreement provides the ABL Borrowers the ability to seek commitments to increase the revolving commitments thereunder, subject to certain conditions, in an aggregate principal amount not to exceed $30,000,000.
Amounts borrowed under the ABL Credit Agreement may be repaid and, subject to the terms and conditions of the ABL Credit Agreement, reborrowed at any time during the term of the ABL Credit Agreement. The loans advanced under the ABL Credit Agreement will mature and be due and payable in full five years after the Closing Date. The ABL agreement also includes certain financial covenants.
ABL Facility Interest Rate: Interest on borrowings in US Dollars under the ABL Credit Agreement, at the Borrower’s option, will bear interest at either (1) an adjusted LIBOR rate or (2) a base rate, in each case plus an applicable margin. Interest on borrowings in GBP under the ABL Credit Agreement will bear interest at an adjusted LIBOR rate plus an applicable margin. The ABL Credit Agreement is subject to two step-downs of 0.25% and 0.50% based on excess availability levels.
Note 19. Subsequent Events (Continued)
Stockholders Agreement: In connection with the Business Combination, the Company, CFLL Sponsor Holdings, LLC (f/k/a Industrea Alexandria LLC) (the “Sponsor”) and its affiliates, Industrea’s independent directors (collectively with the Sponsor and affiliates, the “Initial Stockholders”), Argand Partners Fund, LP (the “Argand Investor”), and certain holders of CPH’s capital stock (“CPH stockholders”), entered into the Stockholders Agreement. Pursuant to the Stockholders, Argand Investor and CPH stockholders have agreed to limit the transfer of shares for a period of time after closing.