Exhibit 99.3

IOS HOLDINGS, INC

UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 and DECEMBER 31, 2013

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TABLE OF CONTENTS

 

		Page
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets		1
Consolidated Statements of Operations		2
Consolidated Statements of Changes in Stockholder’s Equity		3
Consolidated Statements of Cash Flows		4
Notes to Consolidated Financial Statements		5

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IOS HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		September 30, 2014				December 31, 2013
		(unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	836,212			$	510,731
Accounts receivable, net			23,528,841				20,557,557
Other receivables			190,080				348,321
Inventory			1,223,570				760,306
Prepaid expenses and other assets			123,570				1,398,544
Deferred tax asset (note 5)			1,276,766				—
Total current assets			27,179,039				23,575,459
Property, plant and equipment, net (note 3)			49,853,577				50,571,877
Debt issuance costs			1,892,267				2,308,208
Deposits			80,768				50,676
Goodwill (notes 1 and 2)			54,807,971				54,768,270
Intangible assets (notes 1 and 2)			40,436,001				43,617,685
Total assets		$	174,249,623			$	174,892,175
LIABILITIES AND STOCKHOLDER’S EQUITY
Current liabilities:
Accounts payable		$	2,957,295			$	4,373,014
Accrued expenses and taxes			6,801,779				2,788,273
Current portion of deferred tax liability, net (note 5)			—				230,771
Current portion of notes payable (note 4)			8,029,578				9,946,888
Total current liabilities			17,788,652				17,338,946
Notes payable, net of current portion (note 4)			92,370,683				98,370,531
Deferred tax liability (note 5)			12,099,452				10,509,939
Total liabilities			122,258,787				126,219,416
Stockholder’s equity (note 6):
Common stock, Class A, par value $100 per share, 280,000 shares authorized; 270,052 shares issued and outstanding			27,052,200				27,052,200
Common stock, Class B, par value $100 per share, 150,000 shares authorized; none issued and outstanding			—				—
Common stock, Class C, par value $100 per share, 500,000 shares authorized; 111,098 shares issued and outstanding			11,109,800				11,109,800
Additional paid-in-capital (note 7)			13,144,391				12,847,653
Retained earnings (deficit)			684,445				(2,336,894	)
Total stockholder’s equity			51,990,836				48,672,759
Total liabilities and stockholder’s equity		$	174,249,623			$	174,892,175

The accompanying notes are an integral part of the consolidated financial statements.

 

1

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IOS HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

		Nine months ended September 30,
		2014				2013
Revenues		$	89,921,214			$	79,378,203
Operating expenses
Salary, burden and related expenses (note 7)			40,718,796				35,970,932
Supplies and tools			13,084,307				11,591,261
Depreciation and amortization (note 3)			7,851,016				6,314,121
Other operating expenses			13,602,789				13,505,626
Total operating expenses			75,256,908				67,381,940
Income from operations			14,664,306				11,996,263
Other income (expense)
Interest expense (note 4)			(8,464,120	)			(7,343,837	)
Gain (Loss) on the sale of assets			46,091				(55,801	)
Management and board fees (note 9)			(615,081	)			(935,506	)
Acquisition related expenses			(281,664	)			(239,236	)
Total other expense, net			(9,314,774	)			(8,574,380	)
Income before income taxes			5,349,532				3,421,883
Income tax expense (note 5)			2,328,193				1,543,556
Net income		$	3,021,339			$	1,878,327

The accompanying notes are an integral part of the consolidated financial statements.

 

2

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IOS HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER’S EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013

 

		Common Stock
		Class A								Class B								Class C								Additional Paid-in Capital
		Number of Shares				Amount				Number of Shares				Amount				Number of Shares				Amount								Retained Earnings				Total
Balance at December 31, 2012			261,984			$	26,198,400				—			$	—				111,098			$	11,109,800			$	10,926,353			$	(3,606,804	)		$	44,627,749
Issuance of stock			—				—				—				—				—				—				—				—				—
Stock option awards (note 7)			—				—				—				—				—				—				205,996				—				205,996
Net Income			—				—				—				—				—				—				—				1,878,327				1,878,327
Balance at September 30, 2013			261,984			$	26,198,400				—			$	—				111,098			$	11,109,800			$	11,132,349			$	(1,728,477	)		$	46,712,072
Balance at December 31, 2013			270,522			$	27,052,200				—			$	—				111,098			$	11,109,800			$	12,847,653			$	(2,336,894	)		$	48,672,759
Issuance of stock			—				—				—				—				—				—				—				—				—
Stock option awards (note 7)			—				—				—				—				—				—				296,738				—				296,738
Net Income			—				—				—				—				—				—				—				3,021,339				3,021,339
Balance at September 30, 2014			270,522			$	27,052,200				—			$	—				111,098			$	11,109,800			$	13,144,391			$	684,445			$	51,990,836

The accompanying notes are an integral part of the consolidated financial statements.

 

3

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IOS HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

		Nine months ended September 30,
		2014				2013
Operating activities
Net income		$	3,021,339			$	1,878,327
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			7,851,016				6,314,121
Amortization of deferred issuance costs			415,941				336,203
Non-cash compensation			296,738				205,996
Deferred income tax expense			78,368				1,182,887
(Gain) Loss on disposal of assets			(46,091	)			55,801
Changes in operating assets and liabilities:
Trade accounts and other receivables			(2,813,043	)			(5,414,617	)
Prepaid expenses			1,274,974				1,150,836
Inventory and other assets			(493,356	)			(263,271	)
Accounts payable			(1,415,719	)			1,942,776
Accrued expenses and tax liabilities			5,224,481				188,500
Net cash provided by operating activities			13,394,648				7,577,559
Investing activities
Capital expenditures			(3,321,197	)			(10,539,905	)
Acquisition of businesses, net of cash and working capital acquired			(35,996	)			—
Net cash used in investing activities			(3,357,193	)			(10,539,905	)
Financing activities
Proceeds from notes payable			—				5,918,000
Payments of notes payable			(9,711,974	)			(4,312,500	)
Net cash (used in) provided by financing activities			(9,711,974	)			1,605,500
Net increase (decrease) in cash and cash equivalents			325,481				(1,356,846	)
Cash and cash equivalents, beginning of period			510,731				1,621,547
Cash and cash equivalents, end of period		$	836,212			$	264,701
Non cash transactions:
Non-cash in-kind PIK interest		$	1,211,072			$	610,927
Non-cash stock issuance		$	205,996			$	205,996
Supplemental disclosure:
Interest paid		$	6,847,616			$	5,760,709
Income tax paid		$	603,675			$	248,248

The accompanying notes are an integral part of the consolidated financial statements.

 

4

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IOS HOLDINGS, INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1.	Nature of Business and Significant Accounting Policies

Nature of Business

IOS Holdings, Inc. (Holdings) and its wholly-owned subsidiary, IOS Acquisitions, Inc. (Acquisition) (collectively, the Company), were formed on December 2, 2010 and incorporated under the laws of the State of Delaware. On December 27, 2012, the shareholders of IOS Holdings, Inc. exchanged their shares in Holdings for an equal number of membership units in IOS Holding Company, LLC (the Parent). As of September 30, 2014, the Parent owns 97.8% of the outstanding shares of Holdings.

On January 14, 2011, the Company acquired all of the outstanding membership units of IOS/PCI, LLC (IOS/PCI), a Louisiana-based company providing non-destructive testing (NDT), inspection and cleaning services for oil country tubular goods (OCTG) and drill tools, from locations in Louisiana, Texas and Pennsylvania.

On May 31, 2011, the Company acquired all of the outstanding common shares of Mike’s Pipe Inspection, Inc. (MPI), a Kansas-based company providing mobile, on-site NDT, inspection and related services on drill tools, drill pipe, casing and other tubular goods, from locations in Kansas, Texas, West Virginia and Pennsylvania.

On September 16, 2011, the Company acquired substantially all of the assets of Don Thorpe, Inc. (DTI), a Texas-based provider of inspection, cleaning and storage services for used tubing.

On January 31, 2012, the Company acquired all of the outstanding membership units of Castronics, LLC (Castronics), a Nebraska-based company providing OCTG threading, repair and storage services to pipe mills, distributors and oil and gas companies operating in the Rocky Mountains and Upper Midwest.

 

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IOS HOLDINGS, INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1.	Nature of Business and Significant Accounting Policies (continued)

 

Nature of Business (continued)

On December 27, 2012, the Company acquired all of the outstanding common shares of James Clark Inspections, Inc. (JCI), a Texas-based provider of NDT, inspection and repair services for drill tools, drill pipe and other tubular products and specialty fabrication and machine shop services for a variety of oil and gas customers.

On December 27, 2012, the Company acquired substantially all of the assets of Xxtreme Pipe Services, LLC (Xxtreme), a Texas-based provider of OCTG NDT, inspection, threading, repair and storage services for oil and gas companies, manufacturers and distributors.

On November 1, 2013, the Company acquired all of the outstanding common shares of OTI Operating Inc. (OTI), an Oklahoma-based company providing mobile, on-site NDT, inspection and related services on drill pipe and casing.

Basis of Presentation and Consolidation

The condensed consolidated financial statements include the accounts of IOS Holdings, Inc. and its wholly-owned subsidiary, IOS Acquisitions, Inc., and IOS Acquisitions, Inc.’s wholly owned subsidiaries, IOS/PCI, LLC, Mike’s Pipe Inspection, Inc., Castronics, LLC, James Clark Inspections, Inc., and OTI Operating Inc. All material intercompany transactions and balances have been eliminated.

Basis of Accounting

The Company maintains its accounts on the accrual method of accounting in accordance with accounting principles generally accepted in the United States of America (GAAP).

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

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IOS HOLDINGS, INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1.	Nature of Business and Significant Accounting Policies (continued)

 

Cash and Cash Equivalents

Cash and cash equivalents are defined by the Company as holdings of highly liquid investments with original maturities of three months or less. The Company periodically maintains cash at financial institutions in excess of federally insured limits. The Company has not experienced any losses and does not believe that significant credit risk exists as a result of this practice.

Accounts Receivable and Revenue Recognition

Accounts receivable arise in the normal course of business of inspection and related services. The Company ages its trade receivables using the invoice date. The Company has established an allowance for doubtful accounts based upon a progressively increasing reserve percentage corresponding to the age of the receivable. Accounts receivable are written off when the account is deemed uncollectible. As of September 30, 2014 and December 31, 2013, the Company had an allowance for doubtful accounts of approximately $301,000 and $402,000, respectively.

Revenues are recognized upon completion of services rendered. As of September 30, 2014 and December 31, 2013, the Company had accrued approximately $2,789,000 and $1,199,000, respectively, of unbilled revenue related to services provided but not yet invoiced.

Goodwill

The Company accounts for goodwill and intangible assets in accordance with ASC 350, Intangibles – Goodwill and Other (ASC 350). Goodwill is initially measured as the excess of the cost of an acquired business over the fair value of the identifiable net assets acquired. The Company does not amortize goodwill but rather reviews the carrying value for impairment annually, and whenever an impairment indicator is identified.

The measurement of goodwill impairment requires management to make estimates of cash flows as well as other fair value determinations. If the fair value of the Company’s assets and liabilities is less than its book value, an impairment loss is recorded to write down the goodwill to estimated fair value. These assumptions require significant judgment and actual results may differ from assumed and estimated amounts. Management has determined that no impairment of goodwill exists as of September 30, 2014 and December 31, 2013.

 

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IOS HOLDINGS, INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1.	Nature of Business and Significant Accounting Policies (continued)

 

Intangibles and Other Long-Term Assets

Intangible assets other than goodwill include customer relationships, non-compete agreements and trade names resulting from the acquisitions of IOS/PCI, MPI, Castronics, JCI, Xxtreme, and OTI. The customer relationships, non-compete agreements and trade names were valued based on an independent valuation using the Company’s estimate of the future value to be derived from these intangibles under the excess earnings method, the probability adjusted lost cash flows method and the relief from royalty method.

The Company amortizes customer relationships over their estimated useful lives of 15 to 20 years. The Company amortizes non-compete intangibles over their estimated useful lives of 2 to 5 years. The Company amortizes trade names over their estimated useful lives of 1 to 5 years.

The Company evaluates the recoverability of its identifiable intangible assets at least annually or whenever events or changes in circumstances indicate that its intangible assets’ carrying amounts may not be recoverable. Such circumstances could include, but are not limited to, a significant decrease in the market value of an asset, a significant adverse change in the extent or manner in which an asset is used, or an accumulation of costs significantly in excess of the amount originally expected for the acquisition of an asset. The carrying value of an identifiable intangible asset is considered impaired when its carrying value exceeds its fair value. In such an event, an impairment loss is recognized equal to the amount of that excess. The evaluation of intangible asset impairment requires the Company to make assumptions about future cash flows, discounted at a rate commensurate with the risk involved, over the estimated useful life of the asset being evaluated. These assumptions require significant judgment and actual results may differ from assumed and estimated amounts. Management has determined that no impairment of the identifiable intangible assets exists as of September 30, 2014 and December 31, 2013.

 

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IOS HOLDINGS, INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1.	Nature of Business and Significant Accounting Policies (continued)

 

Intangibles and Other Long-Term Assets (continued)

 

Amortization expense (exclusive of debt issuance costs) was approximately $3,181,683 and $3,002,427 for the nine month periods ended September 30, 2014 and 2013, respectively. Intangible assets consist of the following at September 30, 2014 and December 31, 2013:

 

2014		Gross Amount				Accumulated Amortization				Net Balance
Customer relationships		$	43,790,000			$	6,395,617			$	37,394,383
Trade names			1,835,000				1,267,585				567,415
Non-compete agreements			5,000,000				2,525,797				2,474,203
Total		$	50,625,000			$	10,188,999			$	40,436,001
2013		Gross Amount				Accumulated Amortization				Net Balance
Customer relationships		$	43,790,000			$	4,222,726			$	39,567,274
Trade names			1,835,000				967,340				867,660
Non-compete agreements			5,000,000				1,817,249				3,182,751
Total		$	50,625,000			$	7,007,315			$	43,617,685

Debt issuance costs are amortized primarily using the effective interest method over the life of the related debt agreements with a weighted average useful life of 5 years. Amortization of debt issuance costs is recorded in interest expense. As part of the November 2013 acquisition of OTI and related additional financing, the Company added $533,628 of debt issuance costs.

 

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IOS HOLDINGS, INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1.	Nature of Business and Significant Accounting Policies (continued)

 

Property, Plant, and Equipment

Property, plant and equipment are stated at cost. Expenditures for property and equipment and items that substantially increase the useful lives of existing assets are capitalized at cost and depreciated. Routine expenditures for repairs and maintenance are expensed as incurred. The cost and related accumulated depreciation of property and equipment disposed of are eliminated from the accounts, and any resulting gain or loss is recognized. Depreciation is provided utilizing the straight-line method over the estimated useful lives of the assets capitalized. Depreciation is computed on the straight-line method for financial reporting purposes using the following estimated useful lives:

 

Buildings and improvements		15 to 30 years
Machinery, equipment and vehicles		2 to 15 years
Furniture and fixtures		2 to 15 years

There was no interest capitalized for the nine month periods ended September 30, 2014 and 2013.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. The measurement of a deferred tax asset is reduced, if necessary, by a valuation allowance if it is more-likely-than-not that some portion or the entire deferred tax asset will not be realized.

ASC 740, Income Taxes (ASC 740), prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return as well as guidance on de-recognition, classification, interest and penalties and financial statement reporting disclosures. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement.

 

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IOS HOLDINGS, INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1.	Nature of Business and Significant Accounting Policies (continued)

 

Income Taxes (continued)

 

The Company recognizes interest and penalties accrued on any unrecognized tax exposures as a component of income tax expense. The Company does not have any amounts accrued relating to interest and penalties as of September 30, 2014 and December 31, 2013.

Stock Based Compensation

Stock-based compensation expense is based on the estimated grant-date fair value of all stock-based awards, net of an estimated forfeiture rate, over the requisite service period of the awards, which is generally equivalent to the vesting term. Stock-based compensation expense is recorded only for those awards expected to vest. The Company will periodically revise the estimated forfeiture rate if actual forfeitures differ from the estimates.

Excess tax benefits from the exercise of stock options will be recorded as financing cash flows. For the nine month periods ended September 30, 2014 and 2013, no excess tax benefits were reported in the statement of cash flows as the Company was in a net operating loss carryforward position. No stock options were exercised during the nine month periods ended September 30, 2014 and 2013.

 

2.	Acquisitions

On November 1, 2013, the Company acquired all of the outstanding common shares of OTI Operating Inc. (OTI), an Oklahoma-based company providing mobile, on-site NDT, inspection and related services on drill pipe and casing. The Company paid approximately $9.3 million for the purchase of OTI, including consideration of the settlement of amounts post acquisition. Identifiable intangible assets include goodwill of approximately $1 million and other amortizable intangibles, such as trademarks, non-compete agreements and customer relationships, of approximately $4.9 million. The other assets acquired in the transaction included working capital and property, plant and equipment.

 

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IOS HOLDINGS, INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

3.	Property, Plant, and Equipment

As of September 30, 2014 and December 31, 2013, property, plant and equipment consisted of the following:

 

		Life		2014				2013
Land and land improvements				$	8,396,426			$	5,400,298
Building and leasehold improvements		15 – 30 years			15,230,496				18,069,051
Machinery, equipment and vehicles		2 – 15 years			37,569,076				34,221,323
Furniture and fixture		2 – 15 years			233,392				211,190
Construction in progress					1,165,052				780,634
Total					62,594,442				58,682,496
Less: accumulated depreciation					(12,740,865	)			(8,110,619	)
Net property, plant, and equipment				$	49,853,577			$	50,571,877

Property, plant and equipment are pledged as collateral on notes payable.

 

4.	Notes Payables

As of September 30, 2014, outstanding notes payable consisted of a senior revolving loan (with $0 drawn), a senior term loan (with an original amount of $57.5 million) and a mezzanine loan (with an original amount of $40.0 million and an amended additional amount of $4.925 million). The Company also had access to a senior capital expenditures loan (with borrowings of $3.5 million). These credit facilities were entered into on December 27, 2012 in connection with the acquisitions of JCI and Xxtreme and the refinancing of the existing credit facilities, and amended on November 1, 2013 in connection with the acquisition of OTI. A summary of the outstanding long-term debt as of September 30, 2014 and December 31, 2013 is as follows:

 

		2014				2013
Senior revolving loan, with maximum borrowings of $7,500,000, payable on demand, monthly interest payments based on a combination of LIBOR plus 4.5% or prime plus 3.5% (as of September 30, 2014, the applicable rate was 6.75%), maturity of December 27, 2017, secured by Company assets.		$	—			$	2,138,000
Senior capital expenditures loan, with original principal amount of $4,700,000, monthly interest payments based on LIBOR plus 4.75% or prime plus 3.75% (as of September 30, 2014, the applicable rate was 7%), quarterly principal payments of $235,000 beginning in March 2014, maturity of December 27, 2017, secured by Company assets.			3,500,000				4,700,000
Senior term loan, with original principal amount of $57,500,000, monthly interest payments based on LIBOR plus 4.75% or prime plus 3.75% (as of September 30, 2014, the applicable rate was 7%), quarterly principal payments beginning in March 2013, with amounts ranging from $1,437,000 to $1,796,875, maturity of December 27, 2017, secured by Company assets.			46,519,293				51,750,000
Note payable, financing insurance premiums, payable over 12 months with a maturity of October 1, 2014, with an interest of 3.39%, unsecured.			—				1,052,016
Note payable, secured by equipment, monthly payment of $5,573, payable over 36 months with a maturity of November 5, 2016.			133,743				189,470
Note payable, secured by equipment, monthly payment of $48,645, payable over 36 months with a maturity of September 30, 2017.			548,220				—
Note payable to previous owners of OTI, at fixed rate of 8% per annum, commencing on November 1, 2013, due November 1, 2015, unsecured.			2,600,000				2,600,000

 

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IOS HOLDINGS, INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

4.	Notes Payables (continued)

 

		2014				2013
Mezzanine notes, with original principal amount of $40,000,000, monthly interest payments of 12% cash and quarterly variable PIK rate currently at 3.5% at September 30, 2014, no amortization, maturity of June 26, 2018. Effective November 1, 2013, PIK rate is based on the total leverage calculation at the end of the prior quarter.		$	47,099,005			$	45,887,933
Total notes payable			100,400,261				108,317,419
Less: current maturities of notes payable			(8,029,578	)			(9,946,888	)
Long-term notes payable		$	92,370,683			$	98,370,531

Maturities on notes payable due in future years as of September 30, 2014 are as follows:

 

		Year Ending
		2014				2015				2016				2017				2018
Senior capex loan		$	235,000			$	940,000			$	940,000			$	1,385,000			$	—
Senior term loan			1,437,500				7,187,500				7,187,500				30,706,793				—
Note payable (equipment)			65,363				261,453				244,735				110,412				—
Note payable (OTI)			—				2,600,000				—				—				—
Mezzanine notes			—				—				—				—				47,099,005
		$	1,737,863			$	10,988,953			$	8,372,235			$	32,202,205			$	47,099,005

Also as described above, the Company considers that the carrying value of the notes payable reflected the estimated fair value as of September 30, 2014.

 

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IOS HOLDINGS, INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

5.	Income Taxes

The Company follows the provisions of ASC Topic 740 which provides for recognition of deferred tax assets and liabilities for deductible temporary timing differences, operating loss carryforwards, and tax credit carryforwards, net of a valuation allowance for any asset for which it is more-likely-than-not will not be realized in the Company’s tax return.

The components of deferred income taxes are as follows as of September 30, 2014 and December 31, 2013:

 

		2014				2013
Deferred Tax Liabilities:
Intangible assets		$	(6,366,270	)		$	(5,281,340	)
Fixed assets			(5,649,639	)			(5,584,338	)
Section 481 adjustment			(224,709	)			(497,830	)
Prepaid expenses			(33,676	)			(456,908	)
Deferred tax liabilities, total		$	(12,274,294	)		$	(11,820,416	)
Deferred Tax Assets:
Net operating loss		$	—			$	252,775
Contributions carryover			—				12,914
Accrued liabilities and stock compensation			1,335,697				659,184
Bad debt allowance			115,911				154,833
Deferred tax assets, total			1,451,608				1,079,706
Deferred tax liability, net		$	(10,822,686	)		$	(10,740,710	)

Net deferred tax liability of $10,822,686 as of September 30, 2014 consists of current net deferred tax assets of $1,276,766 and long-term net deferred tax liabilities of $12,099,452. Net deferred tax liability of $10,740,710 as of December 31, 2013 consists of current net deferred tax liabilities of $230,771 and long-term net deferred tax liabilities of $10,509,939.

Current tax liability included in accrued expenses as of September 30, 2014 and December 31, 2013 was $2,070,778 and $406,261, respectively. The composition of income tax expense for the nine months ended September 30 was as follows:

 

		2014				2013
Current		$	2,249,825			$	360,669
Deferred			78,368				1,182,887
Income tax expense		$	2,328,193			$	1,543,556

 

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IOS HOLDINGS, INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

5.	Income Taxes (continued)

 

The reconciliation of elements of income tax expense provided for the nine months ended September 30 was as follows:

 

		2014				2013
Amount using statutory rate		$	1,976,196			$	1,269,620
State related income taxes			303,807				341,658
Impact of effective rate change on deferred items			—				(232,964	)
Nondeductible costs			117,975				131,556
Transaction costs			37,218				33,897
Other			(107,003	)			(211	)
Income tax expense		$	2,328,193			$	1,543,556

As of September 30, 2014 and December 31, 2013, the Company had concluded that there were no material uncertain tax positions. The Company plans to file the applicable extensions related to its Federal and/or state income tax returns for fiscal year 2014. Federal, state, and local taxing authorities generally have the right to examine and audit the 2012 and 2013 tax returns filed.

 

6.	Stockholder’s Equity

IOS Holdings, Inc. (Holdings) has three classes of stock as follows:

Common stock, Class A, par value $100 per share: Holdings has authorized 280,000 shares. As of September 30, 2014 and December 31, 2013, 270,522 shares were issued and outstanding. These are voting shares.

Common stock, Class B, par value $100 per share: Holdings has authorized 150,000 shares. As of September 30, 2014 and December 31, 2013, no shares were issued and outstanding. These are non-voting shares. These shares are used for stock-based compensation awards.

Common stock, Class C par value $100 per share: Holdings has authorized 500,000 shares. As of September 30, 2014 and December 31, 2013, 111,098 shares were issued and outstanding. These are voting shares.

 

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IOS HOLDINGS, INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

7.	Stock Compensation

During 2011, the Company established the 2011 Equity Incentive Plan (the Stock Option Plan) whereby employees, consultants and directors of the Company and its affiliates are eligible to be granted stock options. As of September 30, 2014 and December 31, 2013, a total of 150,000 authorized shares of the Company’s Class B common stock are reserved under the Stock Option Plan. Stock options are granted at exercise prices not less than the fair value of the stock at the date of grant. The Company determines fair value through internal valuations based on historical financial and projected information, and if available, independent valuations of the Company’s common shares.

Options vest a) over a service period of 4 years (tenured options) or b) upon meeting certain performance thresholds in a disposition event as defined in the Stock Option Plan agreement (disposition options) (Note 11). Options expire ten years from the date of grant (Note 11). As of September 30, 2014 and December 31, 2013, the Company had 16,299 and 15,110, respectively, tenured options outstanding with strike prices ranging from $100 to $296 per share, which will expire on various dates through 2021. As of September 30, 2014 and December 31, 2013, the Company had 14,110 disposition options outstanding with strike prices ranging from $100 to $240 per share, which will expire on various dates through 2023. No compensation expense is recognized in the financial statements for the disposition options.

 

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IOS HOLDINGS, INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

7.	Stock Compensation (continued)

 

The fair value of tenured options is estimated as of the date granted using the Black-Scholes model with the following weighted average assumptions used as of December 31:

 

		2014				2013
Dividend yield			-0-	%			-0-	%
Expected volatility			36.12	%			53.48	%
Risk free interest rate			2.58	%			1.73	%
Expected life (in years)			10 years				10 years

For the nine months ended September 30, 2014 and 2013, the Company recognized approximately $296,738 and $205,996, respectively, of compensation expense related to its stock option program. As of September 30, 2014 and December 31, 2013, there was approximately $974,064 and $638,000, respectively, of unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Stock Option Plan. The remaining cost is expected to be recognized over a weighted-average period of 2 years. A summary of the status of the Company’s tenured stock options for the nine months ended September 30, 2014 and year ended December 31, 2013 was as follows:

 

September 30, 2014		Number of Shares				Exercise Price Range		Average Exercise Price
Outstanding, December 31, 2013			15,110			$100.00 - $239.97		$	151.06
Granted			3,750			$296.93		$	296.93
Forfeited			(2,561	)		$100.00 - $239.97		$	163.62
Exercised			—			—			—
Outstanding, September 30, 2014			16,299					$	182.65

 

December 31, 2013		Number of Shares				Exercise Price Range		Average Exercise Price
Outstanding, December 31, 2012			13,609			$100.00 - $211.24		$	138.03
Granted			1,875			$232.41 - $239.97		$	235.43
Forfeited			(374	)		$100.00		$	100.00
Exercised			—			—			—
Outstanding, December 31, 2013			15,110					$	151.06

 

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IOS HOLDINGS, INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

8.	Concentration Risk

At September 30, 2014 and December 31, 2013, the balance due from the top five customers accounted for approximately $5,104,000 or 22% and $5,218,000 or 32% of the accounts receivable balance, and sales to the top five customers represented approximately $21,500,000 or 24% and $17,700,000 or 22% of the Company’s revenues for the nine month periods ended September 30, 2014 and 2013, respectively.

Changes in the relationship with any of these customers could materially and adversely affect the Company’s financial performance.

 

9.	Related Party Transactions

For the nine month periods ended September 30, 2014 and 2013, the Company paid approximately $520,000 and $502,000 respectively, for management fees related to supervisory and business planning services. For the nine months ended September 30, 2013, the Company paid $410,000 to a Board Member as part of a contract services agreement entered into with the acquisition of Xxtreme.

 

10.	Commitments and Contingencies

Operating Leases. At September 30, 2014 and December 31, 2013, the Company was obligated under various non-cancelable operating leases for a number of properties. Certain leases contain escalation clauses providing for increased rentals if extended. Rent expense for operating leases was approximately $2,060,132 and $2,250,432 for the nine month periods ended September 30, 2014 and 2013, respectively. Future minimum lease payments as of September 30, 2014 are as follows:

 

2014		$	307,530
2015			1,109,485
2016			890,664
2017			815,972
2018			193,775
		$	3,317,426

 

11.	Subsequent Events

Management has evaluated subsequent events through the date that the financial statements were available to be issued, May 22, 2015, and determined that there were no subsequent events requiring disclosure, except as follows:

On March 13, 2015, L.B. Foster Company (“L.B. Foster”) entered into a merger agreement with IOS Holdings, Inc. L.B. Foster acquired 100% of the outstanding shares of the Company.

 

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