Exhibit 99.4

 

GEODynamics, Inc. and Subsidiaries

 

Consolidated Financial Report

 

September 30, 2017 and 2016

 

 

 

 

C O N T E N T S

 

	Page
Independent Auditor’s Review Report	3
Consolidated Financial Statements
Consolidated Balance Sheets	4
Consolidated Statements of Income	6
Consolidated Statements of Comprehensive Income	7
Consolidated Statements of Stockholder’s Equity	8
Consolidated Statements of Cash Flows	9
Notes to Consolidated Financial Statements	10

 

 

 

Independent Auditor’s Review Report

 

To the Stockholder

GEODynamics, Inc. and Subsidiaries

 

Report on the Financial Statements

 

We have reviewed the accompanying consolidated financial statements of GEODynamics, Inc. and Subsidiaries as of September 30, 2017, for the three-month and nine-month periods then ended and the September 30, 2016 nine-month period then ended.

 

Management’s Responsibility

 

Management is responsible for the preparation and fair presentation of the interim financial information in accordance with accounting principles generally accepted in the United States of America; this responsibility includes the design, implementation, and maintenance of internal control sufficient to provide a reasonable basis for the preparation and fair presentation of interim financial information in accordance with accounting principles generally accepted in the United States of America.

 

Auditor’s Responsibility

 

Our responsibility is to conduct our review in accordance with auditing standards generally accepted in the United States of America applicable to reviews of interim financial information. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial information. Accordingly, we do not express such an opinion.

 

Conclusion

 

Based on our review, we are not aware of any material modifications that should be made to the accompanying interim financial information for it to be in accordance with accounting principles generally accepted in the United States of America.

 

WEAVER AND TIDWELL, L.L.P.

 

Fort Worth, Texas

January 15, 2018

 

 

AN INDEPENDENT MEMBER OF	WEAVER AND TIDWELL, L.L.P.	2821 WEST SEVENTH STREET, SUITE 700, FORT WORTH, TX 76107
BAKER TILLY INTERNATIONAL	CERTIFIED PUBLIC ACCOUNTANTS AND ADVISORS	P: 817.332.7905 F: 817.429.5936

 

 

GEODynamics, Inc. and Subsidiaries

 

Consolidated Balance Sheets

 

September 30, 2017 and 2016

 

		2017				2016
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	7,206,551			$	6,934,339
Trade accounts receivable, net of allowance for doubtful accounts of $1,041,562 and $330,560 at September 30, 2017 and 2016, respectively			31,105,827				14,767,979
Inventories, net			36,523,436				28,630,684
Prepaid expenses			1,607,942				1,843,398
Total current assets			76,443,756				52,176,400
PROPERTY AND EQUIPMENT, at cost, net			14,512,619				12,907,438
GOODWILL			2,803,494				1,301,565
DEFERRED TAX ASSET			1,243,554				—
OTHER INTANGIBLE ASSETS			866,143				677,118
OTHER ASSETS			185,030				195,997
TOTAL ASSETS		$	96,054,596			$	67,258,518

 

The Notes to Consolidated Financial Statements are 

an integral part of these statements.

 

 

		2017				2016
LIABILITIES AND STOCKHOLDER’S EQUITY
CURRENT LIABILITIES
Accounts payable		$	9,712,666			$	3,019,147
Accrued liabilities			5,159,532				1,521,433
Income taxes payable			2,622,102				—
Deferred revenue			307,094				—
Line of credit			16,056,471				—
Current portion of long-term debt			614,465				861,036
Current portion of capital lease obligation			130,913				132,427
Current portion of deferred gain on sale of land			135,839				32,745
Due to related parties			850,000				940,000
Total current liabilities			35,589,082				6,506,788
Deferred gain on sale of land			1,660,941				253,384
Long-term debt			564,555				1,202,092
Deferred tax liability			—				344,915
Line of credit			—				17,056,471
Capital lease obligation			710,257				932,461
Total liabilities			38,524,835				26,296,111
STOCKHOLDER’S EQUITY
Common stock; $1 par value; 150,000 shares authorized, issued and outstanding			150,000				150,000
Additional paid-in capital			18,153,866				18,153,866
Accumulated equity			39,047,388				22,658,541
Accumulated other comprehensive income			178,507				—
Total stockholder’s equity			57,529,761				40,962,407
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY		$	96,054,596			$	67,258,518

 

The Notes to Consolidated Financial Statements are 

an integral part of these statements.

 

 

GEODynamics, Inc. and Subsidiaries

 

Consolidated Statements of Income

 

Periods Ended September 30, 2017 and 2016

 

		THREE MONTHS				NINE MONTHS
		2017				2017				2016
SALES, NET		$	45,837,731			$	117,364,589			$	50,914,209
COST OF SALES			25,734,727				69,818,308				36,561,382
Gross profit			20,103,004				47,546,281				14,352,827
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES			7,844,379				21,484,713				13,289,251
Income from operations			12,258,625				26,061,568				1,063,576
OTHER INCOME (EXPENSE)
Miscellaneous income (expense)			(55,143	)			(66,609	)			43,576
Interest expense			(179,268	)			(506,923	)			(513,254	)
INCOME BEFORE INCOME TAX EXPENSE			12,024,214				25,488,036				593,898
INCOME TAX (EXPENSE) REFUND			(3,928,091	)			(8,256,084	)			295,791
NET INCOME		$	8,096,123			$	17,231,952			$	889,689

 

The Notes to Consolidated Financial Statements are 

an integral part of these statements.

 

 

GEODynamics, Inc. and Subsidiaries

 

Consolidated Statements of Comprehensive Income

 

Periods Ended September 30, 2017 and 2016

 

		THREE MONTHS				NINE MONTHS
		2017				2017				2016
NET INCOME		$	8,096,123			$	17,231,952			$	889,689
Foreign currency translation adjustments			52,616				178,507				—
COMPREHENSIVE INCOME		$	8,148,739			$	17,410,459			$	889,689

 

The Notes to Consolidated Financial Statements are

an integral part of these statements.

 

 

GEODynamics, Inc. and Subsidiaries

 

Consolidated Statements of Stockholder’s Equity

 

Periods Ended September 30, 2017 and 2016

 

		Common Stock								Additional Paid-in				Accumulated				Accumulated Other Comprehensive				Total Stockholder’s
		Shares				Amount				Capital				Equity				Income				Equity
BALANCE, December 31, 2015			150,000			$	150,000			$	18,153,866			$	21,768,852			$	—			$	40,072,718
Net income			—				—				—				889,689				—				889,689
BALANCE, September 30, 2016			150,000			$	150,000			$	18,153,866			$	22,658,541			$	—			$	40,962,407
BALANCE, December 31, 2016			150,000			$	150,000			$	18,153,866			$	21,815,436			$	—			$	40,119,302
Net income			—				—				—				17,231,952				—				17,231,952
Translation adjustment			—				—				—				—				178,507				178,507
BALANCE, September 30, 2017			150,000			$	150,000			$	18,153,866			$	39,047,388			$	178,507			$	57,529,761

 

The Notes to Consolidated Financial Statements are 

an integral part of these statements.

 

 

GEODynamics, Inc. and Subsidiaries

 

Consolidated Statements of Cash Flows

 

Periods Ended September 30, 2017 and 2016

 

		THREE MONTHS				NINE MONTHS
		2017				2017				2016
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	8,096,123			$	17,231,952			$	889,689
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			885,201				2,599,361				2,445,874
Deferred income taxes			396,072				(1,588,468	)			(591,453	)
Gain on disposal of property			(2,463	)			(2,463	)			(2,877	)
Changes in operating assets and liabilities:
Trade accounts receivable			(4,875,497	)			(16,696,701	)			2,120,992
Inventories			(4,684,526	)			(7,465,749	)			6,257,434
Prepaid expenses			551,899				(45,169	)			393,884
Other assets			(50,045	)			(58,112	)			(26,001	)
Income taxes payable			1,728,545				3,536,215				201,938
Accounts payable			(1,459,345	)			4,752,231				(4,110,426	)
Deferred revenue			13,901				307,094				—
Deferred gain on sale of land			1,546,417				1,546,417				32,582
Accrued liabilities			(961,104	)			3,365,684				(1,729,965	)
Net cash provided by operating activities			1,185,178				7,482,292				5,881,671
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures			(3,977,054	)			(6,418,973	)			(2,238,928	)
Acquisition of a business			—				(2,209,253	)			—
Proceeds from sale of property			1,731,871				1,731,871				24,500
Net cash used in investing activities			(2,245,183	)			(6,896,355	)			(2,214,428	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowing under revolving lines of credit			—				(1,000,000	)			—
Payments on notes payable			(223,313	)			(720,238	)			(768,247	)
Payments on capital lease			(119,877	)			(190,511	)			(99,364	)
Net cash used in financing activities			(343,190	)			(1,910,749	)			(867,611	)
Effect of exchange rate changes on cash			52,616				178,507				—
Net change in cash			(1,350,579	)			(1,146,305	)			2,799,632
CASH, beginning of period			8,557,130				8,352,856				4,134,707
CASH, end of period		$	7,206,551			$	7,206,551			$	6,934,339
SUPPLEMENTARY CASH FLOW INFORMATION
Interest paid		$	128,485			$	506,146			$	513,254
Income taxes paid		$	3,358,000			$	5,830,000			$	152,000

 

The Notes to Consolidated Financial Statements are 

an integral part of these statements.

 

 

GEODynamics, Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements 

 

Note 1. Significant Accounting Policies

 

The accounting policy relative to the carrying value of property and equipment is indicated in the caption on the balance sheet. Nature of operations and other significant accounting policies are as follows:

 

Nature of Operations

 

GEODynamics, Inc. (the Company) (Parent), a Delaware corporation, is a global technology and manufacturing leader in perforating, downhole completions, intervention, and wireline solutions. They provide their products and services to domestic and international customers in the oil and gas industry.

 

On August 31, 2012, the Company acquired 100% of the membership interests of Legacy Oil Tools, LLC.

 

On May 12, 2015, the Company acquired the assets and inventory of Connor Oil Tools, LLC. These items are included in the balance sheet of GEODynamics, Inc. from that date onwards.

 

On October 26, 2016, the Company established a wholly owned Subsidiary: GEODynamics UK Limited, in Aberdeen, Scotland.

 

On January 1, 2017 the Company acquired the assets of Paradigm GeoKey Services Limited, located in the United Kingdom, for an aggregate purchase price of $2,209,253 in cash. GEODynamics UK Limited, Paradigm GeoKey Services Limited, and Legacy Oil Tools, in Millsap, Texas are consolidated with the Parent to form GEODynamics, Inc. (collectively referred to as the Company).

 

Basis of Presentation

 

The consolidated financial statements include the accounts of the parent and subsidiaries. All significant intercompany transactions, balances and profits have been eliminated.

 

The accompanying consolidated financial statements have been prepared by the Company, without audit, and reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting. In the opinion of management, the consolidated financial statements reflect all adjustments (of a normal and recurring nature) which are necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. The results of operations for the three and nine months ended September 30, 2017, and the nine months ended September 2016, are not necessarily indicative of the results to be expected for the entire fiscal year.

 

These unaudited consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's annual financial statements for the year ended December 31, 2016.

 

 

GEODynamics, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Cont'd)

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, related revenues and expenses and disclosure of gain and loss contingencies at the date of the consolidated financial statements. Actual results could differ from those estimates.

 

Cash and Cash Equivalents

 

Cash and cash equivalents include cash on hand and deposits with banks with original maturities of three months or less.

 

The Company regularly maintains cash balances at financial institutions which could exceed FDIC insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents.

 

Accounts Receivable

 

The Company has provided an allowance for doubtful accounts based on prior experience, reviews of individual accounts, historical losses, existing economic conditions, and management’s evaluation of other pertinent factors. Accounts are written off as they are deemed uncollectible based on a periodic review of accounts.

 

Inventories

 

Inventories are stated at the lower of cost (first-in, first out basis) or market value.

 

Property and Equipment

 

Property and equipment are capitalized at cost and depreciated primarily using the straight-line method over the estimated useful lives of the various assets. Improvements that substantially increase the useful life of property are capitalized. Expenditures for normal maintenance and repairs are expensed as incurred. The cost of property and equipment sold or otherwise retired and the related accumulated depreciation is removed from the accounts and any resulting gain or loss is included in operating results. The useful lives for purposes of calculating depreciation are as follows:

 

Vehicles (years)		2	-	5
Machinery and equipment (years)		3	-	7
Office equipment (years)		3	-	5
Leasehold improvements (years)		5	-	7

 

Goodwill

 

In accordance with U.S. generally accepted accounting principles relating to goodwill, the Company is required to evaluate the goodwill on an annual basis for potential impairment. During the nine months ended September 30, 2017 and 2016, there were no impairment charges to goodwill.

 

 

GEODynamics, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Cont'd)

 

Revenue Recognition

 

The Company recognizes revenue from sales of product when the customer takes title to the products and the related risks and rewards of ownership of the product have transferred to the customer and from services when they are delivered to the customer. Sales tax collected is not included in net sales.

 

Shipping and Handling Costs

 

The Company records shipping and handling costs in cost of goods sold.

 

Advertising

 

The Company expenses all advertising costs as incurred. Amounts expensed for advertising costs for the nine months ended September 30, 2017 and 2016 were $442,113 and $214,985, respectively, and $180,402 for the three months ended September 30, 2017.

 

Income Taxes

 

The Company accounts for federal income taxes under an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. In estimating future tax consequences, all expected future events other than enactments of changes in the tax law or rates are considered. The Company provides a valuation allowance for the amount of the deferred tax assets not expected to be realized.

 

The Company is also subject to state income tax on the portion of its income earned in Texas.

 

Legacy Oil Tools, LLC is a limited liability company under the provisions of the Internal Revenue Code.

 

Generally accepted accounting principles (GAAP) requires that the Company recognize the impact of a tax position that is more likely than not to be disallowed upon examination, including resolution of any appeals or litigation processes, based upon the technical merits of the position. Tax positions taken related to the Company’s tax status and federal and state filing requirements have been reviewed, and management is of the opinion that they would more likely than not be sustained by examination. Accordingly, the Company has not recorded an income tax liability for uncertain tax benefits. As of September 30, 2017, the Company’s tax years 2014 and thereafter remain subject to examination for federal tax purposes and 2013 and thereafter remain subject to examination for state tax purposes.

 

Concentrations of Credit Risk

 

The Company extends credit to its customers primarily in the oil and gas industry, which results in accounts receivable arising from its normal business activities. The Company does not require collateral from its customers, but routinely assesses the financial strength of the customers and, based upon factors surrounding the credit risk of the customers, believes that its credit risk exposure from accounts receivable is limited. Such estimate of the financial strength of the customers may be subject to change in the near term.

 

One customer comprised 25% and 23% of total sales for the nine months ended September 30, 2017 and 2016, respectively, and 28% for the three months ended September 30, 2017.

 

 

GEODynamics, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Cont'd)

 

Recent Accounting Pronouncements

 

In July 2015, the FASB issued ASU 2015-11, “Inventory”, which changes the way inventory is valued for companies that measure inventory utilizing the first-in, first-out, or average cost methods to the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The guidance is effective for fiscal periods beginning after December 15, 2016 and is applied prospectively with earlier application permitted. The Company adopted this guidance for the nine month period ended September 30, 2017 and did not materially impact the consolidated balance sheet or income statement.

 

In November 2015, the FASB issued ASU 2015-17, “Income Taxes”, which requires all deferred tax assets and liabilities to be classified as non-current on the balance sheet instead of separating deferred taxes into current and non-current amounts. The guidance is effective for annual and interim periods beginning after December 15, 2017, and may be adopted on either a prospective or retrospective basis.

 

In February 2016, the FASB issued ASU 2016-02, “Leases”, a comprehensive new standard that amends various aspects of existing accounting guidance for leases, including the recognition of a right of use asset and a lease liability for leases with a duration greater than one year. The guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. The Company has not completed a review of the new guidance; however, the Company anticipates that upon adoption of the standard the Company will recognize additional assets and corresponding liabilities related to leases on the Company’s consolidated balance sheet.

 

In May 2014, the FASB issued ASU No. 2014-09, which amends ASC Topic 606, “Revenue from Contracts with Customers”. The amendments in this ASU are intended to provide a more robust framework for addressing revenue issues, improve comparability of revenue recognition practices and improve disclosure requirements. The amendments in this accounting standard update are effective for interim and annual reporting periods beginning after December 15, 2017 and December 15, 2018 for public and private entities, respectively. This ASU can be adopted either retrospectively or as a cumulative effect adjustment as of the date of adoption. The Company has not completed a review of the new guidance.

 

Note 2. Inventories

 

Inventories are comprised of the following at September 30:

 

		2017				2016
Raw materials		$	16,461,076			$	9,259,386
Finished goods			22,174,835				21,072,036
Less: Inventory reserve			(2,112,475	)			(1,700,738	)
		$	36,523,436			$	28,630,684

 

 

GEODynamics, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Cont'd)

 

Note 3.     Property and Equipment

 

Property and equipment consists of the following at September 30:

 

		2017				2016
Land		$	—			$	178,078
Vehicles			512,255				487,067
Machinery and equipment			16,936,897				14,932,523
Office equipment			1,340,505				1,253,754
Leasehold improvements			9,209,383				8,961,611
Construction in progress			3,412,490				559,874
			31,411,530				26,372,907
Accumulated depreciation			(16,898,911	)			(13,465,469	)
Property and equipment, net		$	14,512,619			$	12,907,438

 

Depreciation expense for the nine months ended September 30, 2017 and 2016 was $2,485,419 and $2,318,021 respectively, and $861,135 for the three months ended September 30, 2017.

 

Note 4.     Intangible Assets

 

Intangible assets consisted of the following at September 30:

 

		2017				2016
Customer list (15 years)		$	525,229			$	525,226
Non-compete agreements (4 years)			154,374				154,374
Patents (10 years)			829,956				485,234
Patents (5 years)			151,685				151,685
Trade name (2 years)			40,065				40,065
Intangible assets			30,390				30,390
			1,731,699				1,386,974
Accumulated amortization			(865,556	)			(709,856	)
		$	866,143			$	677,118

 

Amortization expense for the nine months ended September 30, 2017 and 2016 was $113,942 and $127,853, respectively, and $24,506 for the three months ended September 30, 2017. Estimated future amortization is as follows:

 

2017		$	34,837
2018			116,594
2019			109,009
2020			109,009
2021			109,009
2022			109,009
Thereafter			248,286

 

 

GEODynamics, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Cont'd)

 

Note 5. Sale of Land

 

During 2008, the Company sold a tract of land to an unrelated third party for approximately $724,000. The proceeds of the sale exceeded the cost of the land by approximately $589,000. Concurrent with the sale of the land the Company signed a lease agreement with the buyer to lease back the land and a building, which the buyer was to construct to the Company’s specifications. The construction was completed during 2009, and the Company began leasing the premises in March of 2009. Beginning in March 2009 the lease was recorded as an operating lease. The gain on sale was deferred and will be recognized ratably over the term of the lease.

 

In September 2017, the Company sold land and buildings to a related party for approximately $1,724,000. The proceeds of the sale exceeded the cost of the land and buildings by approximately $1,546,000. Concurrent with the sale, the Company signed a lease agreement with the buyer to lease back the land and buildings. The Company began leasing the premises in September 2017 at which time it was recorded as an operating lease. The gain on sale was deferred and will be recognized ratably over the term of the lease.

 

Note 6. Line Of Credit

 

As of September 30, 2017 and 2016, the Company maintained a revolving line of credit agreement with a bank. The line of credit has a maximum commitment of $30,000,000 and $35,000,000 at September 30, 2017 and 2016, respectively, and bears interest at the daily one month LIBOR rate plus 2.25% (3.49% and 2.77% at September 30, 2017 and 2016, respectively). The agreement expires April 30, 2018. The agreement requires the Company to maintain certain financial ratios and comply with certain technical covenants. At September 30, 2017 and 2016, the Company was in compliance with respect to these covenants. The outstanding balance as of September 30, 2017 and 2016 was $16,056,471 and $17,056,471, respectively. The line of credit is secured by substantially all of the assets of the Company. The line of credit is also guaranteed by the Company’s sole stockholder.

 

Note 7. Long-Term Debt

 

Long-term debt at September 30 consists of the following:

 

		2017				2016
Notes payable to a bank, due in monthly installments totaling $74,031, including interest ranging from 4.01% to 5.42%, maturing through December 2019; collateralized by equipment		$	1,179,020			$	2,063,128
			1,179,020				2,063,128
Less current portion of long-term debt			614,465				861,036
		$	564,555			$	1,202,092

 

 

The principal amounts of long-term debt maturing in each of the periods subsequent to September 30, 2017 are as follows:

 

2017		$	213,322
2018			531,948
2019			433,750
		$	1,179,020

 

 

GEODynamics, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Cont'd)

 

Note 8. Property Under Capital Lease

 

The Company has entered into agreements for the lease of property with total costs of $1,555,879 at September 30, 2017 and 2016, which are classified as capital leases. Accumulated amortization on these assets was $601,373 and $537,632 at September 30, 2017 and 2016, respectively. Amortization expense is included in depreciation expense.

 

The following is a schedule by year of future minimum lease payments under the capital lease obligations together with the present value of the net minimum lease payments as of September 30, 2017:

 

2017		$	32,620
2018			177,507
2019			179,282
2020			181,075
2021			182,886
2022			184,715
Thereafter			15,406
Total minimum lease payments			953,491
Less amount representing interest			112,321
Present value of net minimum lease payments			841,170
Less current portion			130,913
Non-current portion		$	710,257

 

Note 9.     Stock Option Plan

 

GEODynamics, B.V., the Company’s parent, adopted an employee stock option plan on May 23, 2007. The purpose of the plan is to attract and retain key management employees and members of the board of directors and to provide such persons with a proprietary interest in the Company through the granting of nonqualified stock options. Under the plan, all options are fully vested as of the grant date. The participant may exercise a stock option at any time. No options have a contractual life in excess of 10 years. As of September 30, 2017 and 2016, there were 138,837 and 211,337 options that were both outstanding and exercisable, respectively. The weighted average exercise price of shares outstanding at September 30, 2017 and 2016 was $6.22 and $5.46 a share, respectively. Per the terms of the employee stock option plan, no further stock options may be granted as of the termination date of July 14, 2015.

 

Effective March 1, 2012, GEODynamics, B.V. established an additional employee retention plan, the Phantom Unit Plan (PUP), which provides for the issuance of shares of phantom stock as part of a non-qualified deferred compensation arrangement. Each share of phantom stock represents a contractual right to receive an amount in cash equal to the spread between the fair value on the date of grant and the fair value per share of the Company’s stock upon an exchange event. Awards are fully vested three to five years after the grant date or up to a maximum of 100% or 80% of the number of granted units in the event of a change of control or the occurrence of an employee’s experience of an unforeseeable emergency.

 

 

GEODynamics, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Cont'd)

 

Accounting Standards Codification (ASC) Topic 718, Compensation – Stock Compensation, addresses the accounting for the share-based payment transactions in which a company receives goods or services in exchange for: (a) equity instruments of the Company, or (b) liabilities that are based on the fair value of the Company’s equity instruments or that may be settled by the issuance of such equity instruments. ASC Topic 718 focuses primarily on accounting for transactions in which a company obtains employee services in share-based payment transactions. ASC Topic 718 generally requires that liability-classified awards such as the PUP be accounted for using a fair value based method at the grant date and subsequently remeasured each reporting period until the award is settled.

 

GEODynamics, B.V. had 1,154,631 and 1,005,631 phantom units outstanding under the plan as of September 30, 2017 and 2016, respectively, which have been granted to employees of the Company. During the nine months ended September 30, 2017, 65,000 units were granted, 187,900 units vested, and no unvested units were forfeited. During the nine months ended September 31, 2016, 530,000 units were granted and 67,550 units vested, and 20,800 unvested units were forfeited. Compensation cost associated with vested units under the plan and unrecognized compensation cost associated with unvested units under the plan totaled $0 for the nine months ended September 30, 2017 and 2016 due to no change of control event or the occurrence of an employee’s experience of an unforeseeable emergency. Refer to Note 14 related to change of control subsequent to September 30, 2017.

 

Note 10. Income Taxes

 

Deferred income tax assets and liabilities for the Company are computed annually for temporary differences between financial statement and tax bases 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 be realized. Income tax expenses are the taxes payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.

 

The income tax provision differs from that computed by applying statutory rates to income before income tax expense (refund) primarily because of property basis adjustments required by tax regulations.

 

On December 22, 2017, legislation was signed into law which enacts significant changes to U.S. tax and related laws, including certain key U.S. federal income tax provisions applicable to oilfield service and manufacturing companies such as the Company. These include, but are not limited to, the following: a reduction in the maximum U.S. corporate tax rate to 21% beginning in 2018 from 35% in 2017, allows for the immediate expensing of certain property placed in service after September 27, 2017, elimination of certain manufacturing deductions after 2017 and limitations on the deductibility of Interest expense after 2017. U.S. state or other regulatory bodies have not announced potential changes to existing laws and regulations which may result from the new U.S. tax and related laws. The Company continues to evaluate the effect of the provisions of the recently enacted U.S. tax and related laws on the Company’s operations as well as the impact of these changes on its consolidated financial statements.

 

 

GEODynamics, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Cont'd)

 

The components of income tax expense (refund) for the periods ended September 30, 2017 and 2016 are as follows:

 

		THREE MONTHS				NINE MONTHS
		2017				2017				2016
Current taxes – federal		$	5,042,540			$	9,134,277			$	76,051
Deferred taxes – federal			(1,395,079	)			(1,345,769	)			(282,921	)
Current taxes – state			358,952				544,050				(18,751	)
Deferred taxes – state			(78,322	)			(76,474	)			(70,170	)
		$	3,928,091			$	8,256,084			$	(295,791	)

 

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at September 30, 2017 and 2016 are presented below:

 

		2017				2016
Deferred tax asset (liability)
Depreciation and amortization		$	(1,077,769	)		$	(1,318,525	)
Deferred gain on sale of land			617,396				100,735
Vacation accrual			(1,216	)			(1,217	)
Capitalized patents			340,000				—
Accrued commissions			178,004				29,687
Inventory adjustments			715,662				578,251
263A adjustment			36,714				—
State taxes			80,632				10,533
Bad debt expense			354,131				255,621
Total net deferred tax asset (liability)		$	1,243,554			$	(344,915	)

 

Net deferred tax assets (liabilities) consist of the following at September 30, 2017 and 2016:

 

		2017				2016
Deferred tax asset – current		$	1,243,554			$	—
Deferred tax liability - non current			—				(344,915	)
		$	1,243,554			$	(344,915	)

 

Note 11. Commitments And Contingencies

 

The Company leases various equipment, vehicles and office facilities (see Note 5) under operating leases. Included in general and administrative expense and cost of sales for the nine months ended September 30, 2017 and 2016 is approximately $2,481,000 and $2,215,000, respectively, and $425,000 for the three months ended September 30, 2017 under operating lease agreements. At September 30, 2017, the approximate future minimum rental payments under noncancelable operating leases are as follows:

 

2017		$	831,408
2018			3,373,916
2019			2,951,186
2020			2,611,877
2021			2,318,601
2022			2,245,683
Thereafter			2,076,813
		$	16,409,484

 

 

GEODynamics, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Cont'd)

 

Note 12. Related Party Transactions

 

Included in due to related parties at September 30, 2017 and 2016 is $850,000 and $940,000, respectively, due to the Company’s sole stockholder, GEODynamics, B.V., related to the purchase of Legacy Oil Tools, LLC.

 

The Company has a month-to-month lease agreement with an owner of GEODynamics, B.V. for office facilities. Lease expense recorded under this agreement was $42,750 for each of the periods ended September 30, 2017 and 2016, respectively, and $14,250 for the three months ended September 30, 2017.

 

The Company has a lease agreement with an owner of GEODynamics, B.V. and an officer of the Company for office facilities. Lease expense recorded under this agreement was $90,000 for each of the periods ended September 30, 2017 and 2016, respectively, and $30,000 for the three months ended September 30, 2017.

 

The Company sold land and buildings to an owner of GEODynamics, B.V. and then entered into a sale-leaseback with that owner as described in Note 5.

 

The Company has consulting agreements with two individuals who are owners of GEODynamics, B.V. under which it paid $301,667 and $282,500 in the nine months ended September 30, 2017 and 2016, respectively, and $107,500 for the three months ended September 30, 2017.

 

Note 13. 401(K) Plan

 

The Company sponsors a 401(k) Plan (the Plan) covering qualified employees. Employees may contribute a portion of their compensation to the Plan each year, and the Company makes discretionary contributions. Employer contributions related to the Plan were $289,927 and $260,305 for the nine months ended September 30, 2017 and 2016, respectively, and $108,570 for the three months ended September 30, 2017, which are included in general and administrative expenses.

 

Note 14. Subsequent Events

 

The Company evaluated for recognition or disclosure all events or transactions that occurred after September 30, 2017 through January 15, 2018, the date these consolidated financial statements were available to be issued noting the below subsequent event.

 

Effective January 12, 2018, GEODynamics, B.V. sold 100% of the outstanding stock of the Company to Oil States International, Inc. The purchase consideration received by GEODynamics, B.V. was in excess of the Company’s stockholder’s equity as of September 30, 2017. In connection with the transaction, the change of control provisions for the phantom units and options referenced in Note 9 were triggered and the resulting obligation to the unit holders is the responsibility of GEODynamics, B.V.

 

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