Exhibit 99.1

 

 

 

 

 

 

 

 

 

 

Cox Industries, Inc. -

Industrial Group and Brokerage Group

 

 

Report on Combined Carve-Out Financial Statements

 

 

For the years ended December 31, 2017 and 2016

 

 

 

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Cox Industries, Inc. - Industrial Group and Brokerage Group

 

 

Index to Combined Carve-Out Financial Statements

 

 

 

 

 

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Independent Auditor's Report

 

To the Board of Directors

Cox Industries, Inc. - Industrial Group and Brokerage Group

Orangeburg, South Carolina

 

Report on the Financial Statements

We have audited the accompanying combined carve-out financial statements of Cox Industries, Inc. - Industrial Group and Brokerage Group, which comprise the combined carve-out balance sheets as of December 31, 2017 and 2016, and the related combined carve-out statements of income and comprehensive income, changes in invested equity and cash flows for the years then ended, and the related notes to the combined carve-out financial statements.  

 

Management's Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

 

Auditor's Responsibility

Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

 

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

 

 

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www.elliottdavis.com

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Opinion

 

In our opinion, the carve-out financial statements referred to above present fairly, in all material respects, the financial position of Cox Industries, Inc. - Industrial Group and Brokerage Group as of December 31, 2017 and 2016, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

 

Allocations

Note 2 of the combined carve-out financial statements describe the basis of accounting. The accompanying combined carve-out financial statements have been prepared from the separate records maintained by Cox Industries, Inc. - Industrial Group and Brokerage Group and may not necessarily be indicative of the conditions that would have existed or the results of operations if Cox Industries, Inc. - Industrial Group and Brokerage Group had been operated as a separate stand-alone company. Portions of certain assets, liabilities, income, and expenses represent allocations applicable to Cox Industries, Inc. and Subsidiaries as a whole. Cox Industries, Inc. - Industrial Group and Brokerage Group has also entered into significant inter-divisional transactions and our opinion is not modified with respect to this matter.

 

/s/    Elliott Davis, LLC

 

Columbia, South Carolina

February 20, 2018

 

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Cox Industries, Inc. - Industrial Group and Brokerage Group

Notes to Combined Carve-Out Financial Statements

December 31, 2017 and 2016

Note 1.Nature of Operations

 

Cox Industries, Inc. and Subsidiaries (“Cox”), a South Carolina corporation, was incorporated on December 18, 1997, for the purpose of becoming a holding company. Cox’s wholly-owned subsidiaries treat lumber, utility poles, and pilings which they sell to various retailers and utility companies.  Cox has locations in South Carolina, North Carolina, Georgia, Alabama, New Jersey and Virginia with sales being generated predominately in the Eastern United States. Cox is governed by a seven-member Board of Directors. The Board of Directors is comprised of the Chairman of the Board, Chief Executive Officer, four independent directors, and one family representative. Cox reports financial statements on a 5-4-4 fiscal calendar; whereby, all fiscal months end on a Sunday.  The fiscal year begins on January 1 and ends on December 31. These combined carve-out financial statements include the accounts of Cox Industries, Inc. - Industrial Group and Brokerage Group (“Industrial Group and Brokerage Group” or the “Company”), and its wholly-owned subsidiaries as follows: Carolina Pole, Inc. (including Leland Land, LLC), Cox Wood of Alabama, LLC, Cox Wood of Virginia, LLC, National Wood Sourcing, LLC, Sustainable Management Systems, LLC, Atlantic Pole - Georgia, LLC, Atlantic Pole - Virginia, LLC, Cox Recovery, LLC, and Ruby’s Corner, LLC.  

 

Note 2.Summary of Significant Accounting Policies

 

Basis of Presentation:

 

The accompanying combined carve-out financial statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) from the consolidated financial statements and accounting records of Cox using the historical results of operations and historical cost basis of the assets and liabilities of Cox. These financial statements have been prepared solely to demonstrate its historical results of operations, financial position, and cash flows for the indicated periods. All intercompany balances and transactions have been eliminated.

 

The accompanying financial statements include the assets, liabilities, revenues, and expenses that are specifically identifiable to Industrial Group and Brokerage Group. In addition, certain assets, liabilities, income, and costs related to Industrial Group and Brokerage Group have been allocated from Cox. Those are derived from multiple levels of the organization including geographic business unit expenses, product line expenses, and shared corporate expenses. Industrial Group and Brokerage Group receives service and support functions from Cox. Industrial Group and Brokerage Group’s operations are dependent upon Cox’s ability to perform these services and support functions. The costs associated with these services and support functions (indirect costs) have been allocated to Industrial Group and Brokerage Group using what management believes to be the most meaningful respective allocation methodologies which were primarily based on proportionate costs of goods sold, proportionate headcount, or proportionate direct labor costs. These allocated costs are primarily related to corporate administrative expenses, employee related costs including benefits for corporate and shared employees, and rental and usage fees for shared assets for the following functional groups: information technology, legal services, accounting and finance services, human resources, marketing and contract support, customer support, treasury, facility, and other corporate and infrastructural services. Allocated indirect costs, net, totaled $7,253,354 and $6,513,780, for the years ended December 31, 2017 and 2016, respectively.

 

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Cox Industries, Inc. - Industrial Group and Brokerage Group

Notes to Combined Carve-Out Financial Statements

December 31, 2017 and 2016

 

Note 2.Summary of Significant Accounting Policies, Continued

Management believes the assumptions and allocations underlying the financial statements are reasonable and appropriate under the circumstances. The expenses and cost allocations have been determined on a basis considered by management to be a reasonable reflection of the utilization of services provided to or the benefit received by Industrial Group and Brokerage Group during the periods presented relative to the total costs incurred by Cox. However, the amounts recorded for these transactions and allocations are not necessarily representative of the amounts that would have been reflected in the financial statements had Industrial Group and Brokerage Group been an entity that operated independently of Cox. Consequently, future results of operations should Industrial Group and Brokerage Group be separated from Cox will include costs and expenses that may be materially different than historical results of operations.

 

Revenue recognition:

 

Sales are primarily recognized upon the receipt of goods by customers. Finance charges on open receivables are considered earned when received. Discounts are recorded when taken by the customer.

 

Management estimates:

 

Management uses estimates and assumptions in preparing these carve-out financial statements. Those estimates and assumptions may affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and reported revenues and expenses. Significant estimates used in preparing these financial statements include those assumed in computing the allowance for doubtful accounts, inventory reserve, allocation of shared costs, and fair value of assets acquired.  Actual results could differ from those estimates.

 

Cash and cash equivalents:

 

For purposes of the statements of cash flows, all highly liquid investments purchased with original maturities of three months or less are considered to be cash equivalents.

 

Concentrations of credit risk:

 

At times the Company maintains bank deposits in excess of the federally insured limit.  Management monitors the soundness of these financial institutions and assesses risks associated with such institutions.

 

The Company sells its products to customers on credit in the ordinary course of business.  A customer’s credit history is reviewed and must meet certain standards before credit is extended.  The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information.

 

Accounts receivable:

 

Trade accounts receivable are carried at their estimated collectable amounts.

 

Notes receivable:

 

Notes receivable are stated at the principal amounts outstanding expected to be collected.  

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Cox Industries, Inc. - Industrial Group and Brokerage Group

Notes to Combined Carve-Out Financial Statements

December 31, 2017 and 2016

 

 

Note 2.Summary of Significant Accounting Policies, Continued

Allowance for doubtful accounts:

 

Accounts receivable and notes receivable are periodically evaluated for collectability based on management’s assessment of the collectability of each account and note.  An allowance for doubtful accounts is established as losses are estimated to have occurred through recognition of bad debt expense.  Notes receivable are considered uncollectable when the financial condition of the borrowers has deteriorated, adversely affecting their ability to make payments when due. When management confirms the uncollectability of a receivable, such amount is charged off to expense against the allowance for doubtful accounts.  

 

Inventories:

 

Inventories are stated at the lower of average cost (first-in, first-out) or market. Market represents current replacement cost not to exceed net realizable value. Inventory costs include material, labor, freight, and operating overhead. Inventory reserves are based on historical experience and are recorded for slow-moving inventory and for estimated shrinkage between physical inventory counts. As of December 31, 2017 and 2016, inventory reserves were $122,890.

 

Property and equipment:

 

Property and equipment are stated at cost.  Depreciation is calculated using the straight-line and accelerated methods for financial reporting and income tax purposes, respectively.  Maintenance and repairs which do not improve or extend the useful lives of assets are charged to expense as incurred. Property and equipment are reviewed on an ongoing basis for impairment based on a comparison of their carrying value to fair value.

 

Goodwill:

 

Goodwill represents the excess of the purchase price over the sum of the fair values of the tangible and identifiable intangible assets acquired, less the fair value of the liabilities assumed. Goodwill is not amortized and is reviewed annually for potential impairment. The impairment tests are performed at a reporting unit level annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. To the extent that impairment exists, write-downs to realizable value are recorded. The Company has determined that there has been no impairment of goodwill based on an analysis as of December 31, 2017.  

 

Customer list:

 

In July 2012, the Company acquired the assets of Atlantic Wood Industries, Inc., a privately held manufacturer of pressure treated poles and pilings. The assets acquired included $2.4 million of an intangible asset, other than goodwill. The $2.4 million of intangible assets acquired was assigned to a customer list and is being amortized on the straight-line method over 15 years. Amortization expense charged to operations was $160,000 for 2017 and 2016.

 

In January 2015, the Company acquired a portion of the assets of Koppers, Inc., a publicly traded company. The assets acquired included $3.4 million of an intangible asset, other than goodwill. The $3.4 million of acquired intangible assets was assigned to a customer list and is being amortized on the straight-line method over 15 years. Amortization expense charged to operations was $225,216 for 2017 and 2016.

 

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Cox Industries, Inc. - Industrial Group and Brokerage Group

Notes to Combined Carve-Out Financial Statements

December 31, 2017 and 2016

 

Note 2.Summary of Significant Accounting Policies, Continued

Investment in LLC:

 

The Company is a member of LBC Aviation, LLC (the “LLC”).  The investment is reported at cost.

 

Income taxes:

 

The Company has elected under the Internal Revenue Code to be an “S Corporation.” In lieu of corporate income taxes, the stockholders of an S Corporation are taxed on their proportionate share of the Company’s taxable income.  Cox files a consolidated federal income tax return with its subsidiaries.

 

Advertising:

 

Advertising costs are expensed as incurred.  Advertising costs for the years ended December 31, 2017 and 2016 were $143,229 and $179,095, respectively.

 

Presentation of sales tax:

 

The states in which the Company operates impose a sales tax on all of the Company’s sales to nonexempt customers.  The Company collects that sales tax from the customers and remits the amount to the appropriate state. The Company’s accounting policy is to exclude the tax collected and remitted to the states from revenues and costs of sales.

 

Research and development:

 

Research and development costs are expensed as incurred. Research and development costs for the years ended December 31, 2017 and 2016 were $21,086 and $3,600, respectively.

 

Shipping and handling costs:

 

Shipping and handling costs are included in the Company’s cost of sales.

 

Adoption of a new accounting standard:

 

Effective for the year ending December 31, 2016, the Company adopted Accounting Standards Update No. 2015-03, Interest-Imputation of Interest, and retroactively applied the new guidance to each period presented. As a result of this implementation, debt issuance costs related to a recognized debt liability are presented in the balance sheet as a direct deduction from the carrying amount of that debt liability.

 

Recently issued accounting pronouncements:

 

In May 2014, the FASB issued guidance to change the recognition of revenue from contracts with customers. The core principle of the new guidance is that an entity should recognize revenue to reflect the transfer of goods and services to customers in an amount equal to the consideration the entity receives or expects to receive. The guidance will be effective for the Company for annual periods beginning after December 15, 2018, and interim periods within annual reporting periods beginning after December 15, 2019. The Company is currently evaluating the effect that implementation of the new standard will have on its financial position, results of operations, and cash flows.

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Cox Industries, Inc. - Industrial Group and Brokerage Group

Notes to Combined Carve-Out Financial Statements

December 31, 2017 and 2016

 

 

Note 2.Summary of Significant Accounting Policies, Continued

 

Recently issued accounting pronouncements (continued):

 

In July 2015, the FASB issued amendments to the Inventory topic of the Accounting Standards Codification to require inventory to be measured at the lower of cost or net realizable value. Other than the change in the subsequent measurement guidance from the lower of cost or market to the lower of cost and net realizable value for inventory, there are no other substantive changes to the guidance on measurement of inventory. The amendments were effective for annual reporting for fiscal years beginning after December 15, 2016. The Company adopted the amendments for 2017 and the amendments did not have a material impact on the Company’s financial statements.

 

In February 2016, the FASB amended the Leases topic of the Accounting Standards Codification to revise certain aspects of recognition, measurement, presentation, and disclosure of leasing transactions. The amendments will be effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. The Company is currently evaluating the effect that implementation of the new standard will have on its financial position, results of operations, and cash flows.

 

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company's financial position, results of operations or cash flows.

 

Subsequent events:

 

In preparing these financial statements, the Company has evaluated events and transactions for potential recognition and disclosure through February 20, 2018, the date the financial statements were available to be issued.

 

Note 3.Tax Status

 

Accounting principles generally accepted in the United States of America require management to evaluate tax positions taken by the Company and recognize a tax liability (or asset) if the Company has taken an uncertain position that “more likely than not” would not be sustained upon examination by the Internal Revenue Service. Management has analyzed the tax positions taken by the Company, and has concluded that as of December 31, 2017, there are no uncertain positions taken or expected to be taken that would require recognition of a liability (or asset) or disclosure in the financial statements. The Company is subject to routine audits by taxing jurisdictions; however, there are currently no audits for any tax periods in progress.

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Cox Industries, Inc. - Industrial Group and Brokerage Group

Notes to Combined Carve-Out Financial Statements

December 31, 2017 and 2016

 

Note 4.Inventories

 

Inventories consist of the following at December 31:

 

 

Note 5.Property and Equipment

 

Depreciation expense charged to operations for the years ended December 31, 2017 and 2016, including equipment held under capital leases, totaled $2,852,195 and $2,885,787, respectively.

 

Property and equipment consists of the following at December 31:

 

 

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Cox Industries, Inc. - Industrial Group and Brokerage Group

Notes to Combined Carve-Out Financial Statements

December 31, 2017 and 2016

 

Note 6.Other Intangibles, net

 

Other intangibles consist of the following at December 31:

 

 

Amortization expense for the years following December 31, 2017 are as follows:

 

 

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Cox Industries, Inc. - Industrial Group and Brokerage Group

Notes to Combined Carve-Out Financial Statements

December 31, 2017 and 2016

 

Note 7.Long-Term Debt

 

Long-term debt consists of the following at December 31:

 

 

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Cox Industries, Inc. - Industrial Group and Brokerage Group

Notes to Combined Carve-Out Financial Statements

December 31, 2017 and 2016

 

Note 7.Long-Term Debt, Continued

 

Annual debt maturities and principal portion of long-term debt are as follows for the years ending December 31:

 

 

Note 8.Capital Leases

 

The Company leases certain equipment under agreements that are classified as capital leases. The cost of equipment under capital leases is included in the balance sheets as “Property and equipment, net” and was $1,555,118 and $1,491,401 at December 31, 2017 and 2016, respectively. Accumulated amortization of leased equipment at December 31, 2017 and 2016 was $1,378,502 and $1,260,156, respectively. Amortization of assets under capital leases is included in depreciation expense.

 

The future minimum lease payments required under the capital leases and the present value of the net minimum lease payments are as follows for the years ending December 31:

 

 

Note 9.Operating Leases

 

The Company has numerous operating lease agreements for equipment. Lease expense for the years ended December 31, 2017 and 2016 was $2,788,397 and $2,773,881, respectively.

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Cox Industries, Inc. - Industrial Group and Brokerage Group

Notes to Combined Carve-Out Financial Statements

December 31, 2017 and 2016

 

Note 9.Operating Leases, Continued

 

Future minimum lease payments for all operating leases as of December 31, 2017 are as follows:

 

 

Note 10.Commitments and Contingencies

 

From time to time, in the ordinary course of its business, the Company may be a defendant in a number of legal actions. In the opinion of management and legal counsel, the Company has adequate legal defense and/or insurance coverage for all legal actions, if any, and counsel does not believe that such actions will materially affect the Company’s operations or financial position.  Accordingly, no provision for legal settlements has been recorded in the financial statements.

 

At December 31, 2017 and 2016, the Company was contingently liable for letters of credit issued by a local bank totaling approximately $225,000. The letters of credit have been issued to various parties to secure payment of expenses related to the Company’s self-insured Worker’s Compensation plan.

 

As part of the January 2015 business combination described in Note 2, the Company also executed an agreement with the Seller to purchase a minimum of 2,500,000 pounds of chemicals each year for three years.  During the first and second years of the contract, the price was $1.77 per pound. During the third year of the contract, the price was $1.70 per pound.

 

Note 11.Related Party Note Receivable

 

At December 31, 2017, the Company has a note receivable from a related party totaling $4,671,558. The note agreement calls for quarterly principal and interest payments of $80,000, with the remaining balance due July 2036. Interest on the note accrues at the rate paid by the Company on its line of credit, plus 75 basis points. The note is secured by 150,000 restricted shares of Cox common stock. The number of shares held as security will be reduced by 20,000 shares every four years as the loan balance is paid down.

 

Note 12.Retirement Plan

 

Cox has a 401(k) profit-sharing plan (the “Plan”) to provide retirement benefits for its employees. Employees may contribute up to 60% of their annual pretax compensation to the Plan, limited to a maximum annual amount defined in the Internal Revenue Code.  At the discretion of its Board of Directors, Cox may make a discretionary matching contribution each year equal to either a specified dollar amount or a percentage of each participant’s elective deferrals. In addition, the Plan provides for discretionary contributions as determined by the Board of Directors. Such contributions to the Plan are allocated among eligible participants in the proportion of their compensation to the total compensation of all participants. Employer contributions credited to a participant’s account are 100% vested after three years.  Participants are 100% vested in their voluntary contributions. The Company contributed approximately $400,000 and $350,000 in 2017 and 2016, respectively.

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Cox Industries, Inc. - Industrial Group and Brokerage Group

Notes to Combined Carve-Out Financial Statements

December 31, 2017 and 2016

 

 

Note 13.Interest Rate Swap

 

The Company entered into an interest rate swap agreement which effectively hedged its variable interest rate exposure on the outstanding notional amount of $743,750 at December 31, 2016, of its debt to a fixed rate of 0.90%.  Under the agreement, the Company made payments of interest based on the fixed rate and received payments based on a variable rate based on one-month LIBOR on a monthly basis.  The variable rate was calculated on the second day of every month. The interest rate swap agreement matured July 3, 2017.

 

Pursuant to applicable accounting standards, the swap agreement is reflected at fair value on the Company's balance sheets with the offset reflected in accumulated other comprehensive gain.

 

Note 14.Fair Value Measurements

 

The methods used to measure fair value may produce an amount that may not be indicative of net realizable value or reflective of future fair values.  Furthermore, although the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.

The fair value measurement authoritative literature establishes a value hierarchy that prioritizes the inputs to valuation techniques used to measure fair market value.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest to unobservable inputs (Level 3).  The three levels of the fair value hierarchy are:

•Quoted prices for similar assets or liabilities in active markets;

•Quoted prices for identical or similar assets or liabilities in inactive markets;

•Inputs other than quoted prices that are observable for the asset or liability;

•Inputs that are derived principally from or corroborated by observable market data by correlation or other means.

 

If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability.

 

A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

 

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Cox Industries, Inc. - Industrial Group and Brokerage Group

Notes to Combined Carve-Out Financial Statements

December 31, 2017 and 2016

 

Note 14.Fair Value Measurements, Continued

 

Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, the Company’s own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date. The Company uses prices and inputs that are current as of the measurement date, including periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This condition could cause an instrument to be reclassified from Level 1 to Level 2 or from Level 2 to Level 3.

 

The following is a description of the valuation methodologies used for assets and liabilities measured at fair value:

Interest rate swap:  This liability is valued by a third party financial institution.

 

 

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