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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
(Amendment No. 1)

CURRENT REPORT
Pursuant to Section 13 OR 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported):  April 3, 2017
NEXEO SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)

Delaware
 
001-36477
 
46-5188282
(State or other jurisdiction of
 
(Commission File Number)
 
(IRS Employer Identification
incorporation)
 
 
 
No.)
3 Waterway Square Place, Suite 1000
 
 
The Woodlands, Texas
 
77380
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code:  (281) 297-0700
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company     o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

1



Explanatory Note
 
As reported in the Current Report on Form 8-K filed on April 3, 2017 (the “Original Form 8-K”), on April 3, 2017,  Nexeo Solutions, Inc., a Delaware corporation (the “Company”), through its wholly owned subsidiaries, completed the previously announced acquisition (the “Ultra Chem Acquisition”) of the equity interests of the Mexico City, Mexico based chemicals distribution business of Ultra Chem, S. de R.L. de C.V. and its related entities (collectively, “Ultra Chem Group”) from the Ultra Chem Group shareholders for approximately $56.8 million, net of cash acquired of $0.5 million, pursuant to that certain Stock Purchase Agreement, dated March 9, 2017 (the “Stock Purchase Agreement”). This amount excludes the assumption of $0.9 million in short-term borrowings of Ultra Chem Group, which were repaid by the Company immediately after closing.
 
This Current Report on Form 8-K/A (“Amendment No. 1”) amends and restates Item 9.01 of the Original Form 8-K in its entirety to provide the information required by Item 9.01 of Form 8-K. Amendment No. 1 is being filed solely to provide, as Exhibits 99.1 through 99.4, (i) the combined financial statements of Ultra Chem Group as of December 31, 2016, 2015 and 2014 and for the fiscal years then ended, together with the independent auditors’ report, (ii) the unaudited combined financial statements of Ultra Chem Group as of March 31, 2017 and for the three months ended March 31, 2017 and 2016 and (iii) the unaudited pro forma combined financial information as of and for the six months ended March 31, 2017 and for the Company’s fiscal year ended September 30, 2016.
 
Item 9.01 Financial Statements and Exhibits
 
(a) Financial Statements of Businesses Acquired
 
Item 9.01(a) of the Original Form 8-K is hereby amended and restated in its entirety as follows:
 
The combined financial statements of Ultra Chem Group as of December 31, 2016, 2015 and 2014 and for the fiscal years ended December 31, 2016, 2015 and 2014, together with the independent auditors’ report of Contadores y Asesores de Negocios PKF México, S.C. (“PKF Mexico”) with respect thereto, are filed as Exhibit 99.1 and 99.2 to this Amendment No. 1 and are incorporated herein by reference.
 
The unaudited combined financial statements of Ultra Chem Group as of March 31, 2017 and for the three months ended March 31, 2017 and 2016 are filed as Exhibit 99.3 to this Amendment No. 1 and are incorporated herein by reference.
 
(b) Pro Forma Financial Information
 
Item 9.01(b) of the Original Form 8-K is hereby amended and restated in its entirety as follows:
 
The unaudited pro forma combined financial information as of and for the six months ended March 31, 2017, and for the Company’s fiscal year ended September 30, 2016 are filed as Exhibit 99.4 to this Amendment No. 1 and are incorporated herein by reference.

(d)    Exhibits
Exhibit
 
Description
99.1
 
Combined Financial Statements of Ultra Chem Group as of and for the fiscal years ended December 31, 2016 and 2015, together with the independent auditors’ report.
99.2
 
Combined Financial Statements of Ultra Chem Group as of and for the fiscal years ended December 31, 2015 and 2014, together with the independent auditors’ report.
99.3
 
Unaudited Combined Financial Statements of Ultra Chem Group as of March 31, 2017 and for the three months ended March 31, 2017 and 2016.
99.4
 
Pro Forma Financial Information: Unaudited Pro Forma Combined Statement of Operations for the six months ended March 31, 2017 and for the year ended September 30, 2016; Unaudited Pro Forma Combined Balance Sheet as of March 31, 2017.


SIGNATURES
 

2



Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
 
 
NEXEO SOLUTIONS, INC
 
 
 
 
 
By:
/s/ Michael B. Farnell, Jr.
 
 
Michael B. Farnell, Jr.
 
 
Executive Vice President and Chief Administrative Officer
 
 
 
 
Dated: June 13, 2017
 

Exhibit Index
Exhibit
 
Description
99.1
 
Combined Financial Statements of Ultra Chem Group as of and for the fiscal years ended December 31, 2016 and 2015, together with the independent auditors’ report.
99.2
 
Combined Financial Statements of Ultra Chem Group as of and for the fiscal years ended December 31, 2015 and 2014, together with the independent auditors’ report.
99.3
 
Unaudited Combined Financial Statements of Ultra Chem Group as of March 31, 2017 and for the three months ended March 31, 2017 and 2016.
99.4
 
Pro Forma Financial Information: Unaudited Pro Forma Combined Statement of Operations for the six months ended March 31, 2017 and for the year ended September 30, 2016; Unaudited Pro Forma Combined Balance Sheet as of March 31, 2017.


3
exh991
ULTRA CHEM GROUP COMBINED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015, AND INDEPENDENT AUDITORS' REPORT


 
Ultra Chem Group Independent Auditors’ Report and Financial Statements 2016 and 2015 Table of Contents Page Independent Auditor’s Report 1 Combined Balance Sheets 2 Combined Statements of Income and Other Comprehensive Income 3 Combined Statements of Stockholders' Equity 4 Combined Statements of Cash Flows 5 Notes to the Combined Financial Statements 7


 
PKF México T: +52 (55) 5901 3900 | www.pkfmexico.com PKF México | Boulevard Manuel Ávila Camacho No. 184 Piso 6 | Col. Reforma Social | 11650 Ciudad de México Contadores y Asesores de Negocios PKF México, S.C. y/o PKF México Williams y Cía., S.C. es miembro de PKF International Limited, una asociación de firmas miembro legalmente independientes, y no acepta ninguna responsabilidad por las acciones o inacciones de parte de cualquier otra firma miembro. Contadores y Asesores de Negocios PKF México, S.C. y/o PKF México Williams y Cía., S.C. is member of PKF International Limited, an association of legally independent firms, and does not accept any responsibility or liability for the actions or inactions on the part of any other individual member firms. Independent Auditor’s Report To the Board of Directors and Stockholders of Ultrachem Group: We have audited the accompanying combined balance sheets of Ultrachem Group as of December 31, 2016 and 2015, and the related combined statements of income and other comprehensive income, changes in stockholders' equity, and cash flows for each of the two years in the period ended December 31, 2016. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the auditing standards generally accepted in the United States of America (USGAAS). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of Ultrachem Group at December 31, 2016 and 2015, and the combined results of its operations and its cash flows for each of the two years in the period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles. Contadores y Asesores de Negocios PKF México, S.C. Javier Durán Robles Audit Partner Mexico City March 31, 2017


 
2 Ultra Chem Group Combined Balance Sheets As of December 31, 2016 and 2015 (In U.S. dollars) Assets 2016 2015 Current assets: Cash and cash equivalents $ 291,742 $ 176,906 Accounts receivable – Net of allowance of doubtful accounts of $724,646 and $450,435 for fiscal years ended December 31, 2016 and 2015, respectively (note 3) 12,885,454 10,803,905 Other receivables 1,749 85,424 Recoverable taxes (note 5) 831,784 869,408 Inventories (note 6) 8,605,713 7,365,117 Advanced payments 176,134 189,157 Total current assets 22,792,576 19,489,917 Non-current assets: Machinery and equipment – Net (note 7) 347,898 378,597 Deferred income taxes (note 11) 256,172 172,563 Total non-current assets 604,070 551,160 Total assets $ 23,396,646 $ 20,041,077 Liabilities and stockholders' equity Current liabilities: Short-term borrowing (note 8) $ - $ 437,119 Current portion of long-term borrowing (note 8) 74,204 - Accounts payable 10,344,957 9,885,096 Other payables 80,644 254,450 Accrued liabilities 1,070 1,714 Income taxes payable (note 11) 1,239,281 1,107,550 Statutory employee profit sharing 42,255 42,956 VAT due pending collection 1,826,146 1,589,534 Total current liabilities 13,608,557 13,318,419 Long-term borrowing (note 8) 98,937 - Employee benefits (note 9) 86,515 82,028 Contingencies (note 12) - - Total Liabilities $ 13,794,009 $ 13,400,447 Stockholders' equity: Common stock (note 10) 1,112,664 1,112,664 Accumulated other comprehensive loss (263,293) (158,145) Retained earnings 4,954,960 3,902,910 Income for the year 3,798,306 1,783,201 Total stockholders' equity 9,602,637 6,640,630 Total liabilities and stockholders’ equity $ 23,396,646 $ 20,041,077 The accompanying notes are an integral part of these combined financial statements.


 
3 Ultra Chem Group Combined Statements of Income and Comprehensive Income For the years ended December 31, 2016 and 2015 (In U.S. dollars) 2016 2015 Net sales $ 61,775,443 $ 56,669,215 Cost of sales 50,111,808 47,073,137 Gross profit 11,663,635 9,596,078 General expenses 822,937 782,257 Administrative expenses 2,804,078 2,993,984 Operating expenses 1,237,649 1,810,702 Operating income 6,798,971 4,009,135 Other income (expense): Interest expense – Net (140,907) (119,821) Other income - Net 229,774 284,880 Foreign currency exchange loss – Net (955,537) (1,167,278) Income before income taxes 5,932,301 3,006,916 Income taxes (note 11) 2,133,995 1,223,715 Net income $ 3,798,306 $ 1,783,201 Other comprehensive loss (the tax effects for each component is not material) Foreign currency translation adjustment (102,309) (96,835) Employee benefits (2,839) 260 Total comprehensive income $ 3,693,158 $ 1,686,626 The accompanying notes are an integral part of these combined financial statements.


 
4 Ultra Chem Group Combined Statements of Stockholders' Equity For the years ended December 31, 2016 and 2015 (In U.S. dollars) Common Stock Retained Earnings Accumulated Other Comprehensive Loss Total Stockholders' Equity January 1, 2015 $ 1,103,922 $ 4,421,948 $ (61,570) $ 5,464,300 Capital contribution 8,742 - - 8,742 Comprehensive income: Net income - 1,783,201 - 1,783,201 Accumulated other comprehensive loss - - (96,575) (96,575) Dividends paid - (519,038) - (519,038) December 31, 2015 1,112,664 5,686,111 (158,145) 6,640,630 Comprehensive income: Net income - 3,798,306 - 3,798,306 Accumulated other comprehensive loss - - (105,148) (105,148) Dividends paid - (731,151) - (731,151) December 31,2016 $ 1,112,664 $ 8,753,266 $ (263,293) $ 9,602,637 The accompanying notes are an integral part of these combined financial statements.


 
5 Ultra Chem Group Combined Statements of Cash Flows For the years ended December 31, 2016 and 2015 (In U.S. dollars) 2016 2015 Cash flows from operating activities: Net income $ 3,798,306 $ 1,783,201 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense 119,828 114,239 Machinery and equipment write-offs - 35,689 Allowance for doubtful accounts 406,375 - Accounts receivable write-offs 29,963 216,630 Inventories write-offs 92,368 221,098 Employee benefits 16,444 14,636 Gain on the sale of machinery and equipment (5,568) - Deferred income taxes (88,131) (4,391) Changes in operating assets and liabilities: Accounts receivable (2,587,163) (1,516,983) Other receivables 92,137 5,330 Recoverable taxes 30,410 259,033 Guarantee deposits - (2,577) Advance payments (457) (7,158) Inventories (1,350,869) 578,529 Accounts payable 1,114,076 (859,125) Other payables (6,861) 18,761 Accrued liabilities 64,087 465,236 Income taxes payable 260,177 581,056 Statutory employee profit sharing 6,868 26,843 Net cash provided by operating activities 1,991,990 1,930,047 Cash flows from investing activities: Proceeds from the sale of machinery and equipment 32,662 - Acquisitions of machinery and equipment (141,115) (224,969) Net cash used in investing activities (108,453) (224,969) Cash flows from financing activities: Capital contributions - 8,742 Proceeds from notes payable 11,892,151 164,465 Repayments of notes payable (12,124,776) (1,128,019) Dividends paid (731,151) (519,038) Net cash used in financing activities (963,776) (1,473,850)


 
6 Ultra Chem Group Combined Statements of Cash Flows For the years ended December 31, 2016 and 2015 (In U.S. dollars) 2016 2015 Effect of exchange rate changes on cash and cash equivalents (804,925) (140,558) Increase in cash and cash equivalents 114,836 90,670 Cash and cash equivalents - Beginning of year 176,906 86,236 Cash and cash equivalents - End of year $ 291,742 $ 176,906 Supplemental disclosures of cash flow information: Interest paid $ 140,380 $ 120,557 Income taxes paid $ 1,392,427 $ 611,003 The accompanying notes are an integral part of these combined financial statements


 
7 Ultra Chem Group Notes to the Combined Financial Statements As of and for the years ended December 31, 2016 and 2015 (Amounts in tables are in U.S. dollars) 1. Basis of Presentation and Nature of Operations Basis of Presentation - The accompanying combined financial statements present the financial position of Ultra Chem, S de R.L. de C.V., together with its subsidiaries Ultra Chem Costa Rica Ltda. and Ultra Chem Centroamerica, S.A. (“Ultra Chem”), Global Chem, S de R.L. de C.V. (“Global Chem”), and Chem Servicios, S de R.L. de C.V. (“Chem Servicios”) (together on a combined basis, "Ultra Chem Group") as of December 31, 2016 and 2015, and the results of its operations and its cash flows for the years then ended. In these notes to our combined financial statements, the terms "Companies," "we," "our," and "us" refer to Ultra Chem, S de R.L. de C.V. and subsidiaries, Global Chem, S de R.L. de C.V., and Chem Servicios, S de R.L. de C.V. on a combined basis, as the context may require. Ultra Chem, S de R.L. de C.V. was formed as a limited liability company on May 23, 2000, pursuant to and in accordance with the Act. N. 50,791. Global Chem, S de R.L. de C.V. was formed as a limited liability company on March 28, 2007, pursuant to and in accordance with the Act. N. 130,637. Chem Servicios, S de R.L. de C.V. was formed as a limited liability company on March 7, 2007, pursuant to and in accordance with the Act. N.130,558. Ultra Chem Costa Rica, Ltda. was formed as a limited liability corporation, of which Ultra Chem, S de R.L. de C.V. owns 99.99%. Ultra Chem Centroamerica, S.A. was formed as a corporation, of which Ultra Chem, S de R.L. de C.V. owns 100%. Our fiscal year end is December 31. Nature of Operations - Ultra Chem is a distributor of chemicals and plastics in Mexico, United States, Costa Rica and Guatemala. In connection with the distribution of chemicals products, Ultra Chem provides value- added services such as custom blending, packaging and re-packaging and private-label manufacturing. Global Chem manufactures chemicals and plastics and sells mainly to Ultra Chem their products within Mexico. Chem Servicios provides personnel and management services to Ultra Chem and Global Chem. 2. Significant Accounting Policies and Recent Accounting Pronouncements Significant Accounting Policies Principles of Combination – The accompanying combined financial statements include all the accounts of the Companies with significant intercompany transactions and balances having been eliminated upon combination. Use of Estimates – Our combined financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. These principles require management to make estimates and assumptions that affect the amounts reported and disclosed in our combined financial statements. We provide allowances for doubtful accounts, which are based upon a specific review of certain outstanding receivables and consider factors such as customer credit, historical and recent transactions with the customers. In determining the amounts of the allowances, we are required to make certain estimates and assumptions. Accruals for potential liabilities related to any lawsuits or claims brought against us, determination of fair value of financial instruments, calculation of income tax assets, income tax liabilities and uncertain tax positions, valuation allowance on deferred tax assets, as well as other liabilities, require that we apply significant judgment in determining the appropriate assumptions for use in the calculation of financial estimates. We also must estimate the useful lives assigned to our assets. Actual results may differ from these estimates and assumptions. Fair Value Measurements - In accordance with the authoritative guidance on fair value measurements and disclosures, Ultra Chem Group measures nonfinancial assets and liabilities subject to nonrecurring measurement and financial assets and liabilities subject to recurring measurement based on a hierarchy that


 
8 prioritizes inputs to valuation techniques used to measure the fair value. Inputs used in determining fair value should be from the highest level available in the following hierarchy: Level 1 - Inputs based on quoted market prices in active markets for identical assets or liabilities that the reporting entity has the ability to access Level 2 - Inputs based on quoted prices for similar assets or liabilities, quoted market prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities Level 3 - Inputs are unobservable for the asset or liability and typically based on an entity's own assumptions as there is little, if any, related market activity At December 31, 2016 and 2015, the Companies had assets that under certain conditions would be subject to measurement at fair value on a nonrecurring basis, such as long-lived assets subject to fair value measurement when an impairment loss is recorded. Recognition of these assets at their fair value would be determined utilizing Level 3 inputs. Cash and Cash Equivalents – Cash and cash equivalents, mainly consists of bank balances in Mexico in Pesos and U.S. dollars, balances in Guatemala in Quetzales and U.S. dollars, and balances in Costa Rica in Colones and U.S. dollars, and other highly liquid investments with minor risks by change in value. Accounts Receivable and Allowance for Doubtful Accounts - Accounts receivable are recorded net of discounts and allowance for doubtful accounts. The Companies perform ongoing credit evaluations of its customers and generally does not require collateral from them. In the event of the collectability of a receivable is in doubt, we will record an increase in our allowance for doubtful accounts or record a direct write-off of the receivable after exhaustive efforts at collection. Inventories - Inventories are carried at the lower of cost or market using the weighted average cost method. Provisions have been made to reduce excess or obsolete inventories to their estimated market value. Advance payments – Advance payments consists primarily of prepaid insurance, prepaid taxes, prepaid operating supplies and guarantee deposits. Machinery and Equipment - Machinery and equipment is stated at cost and their components are depreciated over the estimated useful lives reported below using the straight-line method. Estimated Useful Lives Furniture and fixtures 10 years Machinery and plant equipment 10 years Vehicles 4 years Computer equipment 3-4 years Improvements 5 years Expenditures for renewals and betterments, which increase the estimated useful life or capacity of the assets, are capitalized. Repairs and maintenance that do not extend the useful life of the asset are expensed as incurred. Gains and losses on dispositions of machinery and equipment are included in costs and expenses in the accompanying combined statements of operations. Leases – Ultra Chem Group leases certain machinery and equipment in the ordinary course of business. The leases are classified as operating leases and are recognized as an expense in the combined statements of operations on a straight-line basis over the lease term. Contingencies- Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of such liability can be reasonably estimated. Gain contingencies are not recorded until management determines it is certain that the future event will become or does become a reality.


 
9 Accumulated Other Comprehensive Loss - Accumulated other comprehensive loss includes unrealized losses relating to employee benefits’ actuarial gains and losses. It also includes foreign currency translation adjustments from Mexican Peso to the U.S. dollar, because the functional currency of Global Chem and Chem Servicios is the Mexican Peso. Revenue Recognition - Revenue generated from our operations is recognized when the benefits are transferred to our customers, which occurs when products are delivered in fulfillment of their orders. Deposits collected in advance are deferred in accrued liabilities and are recognized as revenue when the benefits are transferred to our customers. Income Taxes - The Ultra Chem Group is subject to Mexican, Guatemalan and Costa Rican income taxes as levied by the respective taxing authority. Realization of future tax benefits related to deferred tax assets is dependent on many factors, including the Ultra Chem Group’s ability to generate future taxable income. The valuation allowance is adjusted in the period we determine it is more likely than not that deferred tax assets will or will not be realized. Foreign currency financial statements - The accompanying combined financial statements, have been adjusted to conform with accounting principles generally accepted in the United States of America (U.S. GAAP) and have been translated into U.S. dollars as discussed below. The financial statements are translated into US dollars (presentation currency), considering the following methodologies: Global Chem and Chem Servicios, whose functional currency and local currency is the same (Mexican Peso), convert their financial statements to the presentation currency using the following exchange rates: 1) closing for assets and liabilities; 2) historical for stockholders' equity and 3) the date of accrual for income, costs and expenses. The conversion effects are recorded in other comprehensive income. Ultra Chem, S. de R.L. de C.V., Ultra Chem Costa Rica Ltda., and Ultra Chem Centroamerica, S.A., whose local currency (Mexican Peso, Costa Rican Colon and Guatemalan Quetzal, respectively), is different from its functional currency (US dollar), convert their financial statements from the local currency to the functional currency, using the following exchange rates: 1) closing for monetary assets and liabilities; 2) historical for non-monetary assets, non-monetary liabilities and stockholders' equity, and 3) the date of accrual for income, costs and expenses, except for those that come from non-monetary items that are converted at the historical exchange rates. The conversion effects, are recorded in the foreign exchange gain (loss). Relevant exchange rates used in the preparation of the combined financial statements were as follows: (Mexican Peso per one U.S. dollar) 2016 2015 Current exchange rate as of December 31, 20.66 17.34 Weighted average exchange rate for the year ended December 31, 18.68 15.85 (Costa Rican Colon per one U.S. dollar) Current exchange rate as of December 31, 561.10 - Weighted average exchange rate for the year ended December 31, 551.04 - (Guatemalan Quetzal per one U.S. dollar) Current exchange rate as of December 31, 7.52 - Weighted average exchange rate for the year ended December 31, 7.60 - Recent Accounting Pronouncements - In May 2014 the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue Recognition (Topic 606) Revenue from Contracts with Customers. This ASU prescribes a single comprehensive model for entities to use in the accounting of revenue arising from contracts with customers and requires expanded disclosures surrounding the Company’s revenue transactions. Entities are required to adopt this ASU in annual reporting periods beginning after December 15, 2018 with early adoption permitted only as of annual reporting periods beginning after December 15, 2016. There are two transition options available to entities: the full retrospective approach or the modified retrospective approach. Under the full retrospective approach, the Ultra Chem Group would restate prior periods in compliance with Accounting Standards Codification 250, Accounting Changes and Error Corrections. Alternatively, the Ultra Chem Group may elect the modified retrospective approach, which allows for the new revenue standard to be applied to existing contracts as of the


 
10 effective date and record a cumulative catch-up adjustment to retained earnings. The Companies are in the process of evaluating the potential effects of this standard and believes it may have a significant impact on its combined financial statements. In January 2015, the FASB issued ASU 2015-01, Income Statement-Extraordinary and Unusual Items (Subtopic 225-20). The amendments in this ASU eliminate the concept of extraordinary items and will no longer require separate classification of them within the statement of operations. Presentation and disclosure guidance for items that are unusual in nature or occur infrequently are retained and are expanded to include items that are both unusual in nature and infrequently occurring. The guidance in this ASU is effective for fiscal years beginning after December 15, 2015. The adoption of this ASU did not have a material impact on the Companies’ combined financial statements. In November 2015, the FASB issued ASU 2015-17-Income Taxes (Topic 740). Balance Sheet Classification of Deferred Taxes. This ASU requires an entity to classify all deferred tax assets and liabilities as non-current. These amendments are effective for fiscal years beginning after December 15, 2017 and interim periods within annual periods beginning after December 15, 2018, although early adoption is permitted. The Companies adopted this standard during fiscal year 2015. In February 2016, the FASB issued ASU 2016-02-Leases (Topic 842). This ASU requires all leases with terms greater than 12 months, whether finance or operating, to be recorded on the balance sheet, reflecting a liability to make lease payments and a right-to-use asset representing the right to use the underlying asset for the lease term. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee will not significantly change from current U.S. GAAP. These amendments are effective for the reporting periods beginning after December 15, 2019 with early adoption permitted. An entity will be required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption. The Companies are in the process of evaluating the potential effects of this standard and believes it may have a significant impact on its combined financial statements due, in part, to its substantial number of operating leases. 3. Accounts receivable, net of allowance for doubtful accounts A summary of accounts receivable, net at December 31, 2016 and 2015 was: 2016 2015 Accounts receivable $ 13,610,100 $ 11,254,340 Allowance for doubtful accounts (724,646) (450,435) Accounts receivable, net $ 12,885,454 $ 10,803,905 The Companies directly wrote-off $29,963 and $216,630 of accounts receivable during the fiscal years ended December 31, 2016 and 2015, respectively. During fiscal year 2016, Ultra Chem Group increased the allowance for doubtful accounts by $406,375. 4. Related-party transactions A summary of amounts incurred to related parties during 2016 and 2015 is presented below: 2016 2015 Accounts receivable: Owed from Chem Servicios to Ultra Chem $ 1,702,996 $ 689,647 Owed from Chem Servicios to Global Chem 54,843 207,440 Total $ 1,757,839 $ 897,087


 
11 Accounts payable Owed to Chem Servicios from Ultra Chem $ 856,175 $ 813,545 Owed to Global Chem from Ultra Chem 147,024 83,542 Owed to Ultra Chem from Global Chem 754,640 - Total $ 1,757,839 $ 897,087 For the years ended in December 2016 and 2015, Ultra Chem Group entered into the following related party transactions: 2016 Ultra Chem Chem Servicios Global Chem Services: Sale/purchase of inventories $ 1,157,435 $ - $ 1,157,435 Administrative services 4,058,653 4,193,380 134,727 2015 Ultra Chem Chem Servicios Global Chem Services: Sale/purchase of inventories $ 1,111,431 $ - $ 1,111,431 Administrative services 3,942,428 4,094,160 151,732 Freight services 26,514 26,514 - Billed interest 7,237 7,237 - 5. Recoverable taxes Recoverable taxes at December 31, 2016 and 2015 are presented below: 2016 2015 Income taxes $ 14,343 $ 31,211 VAT receivable 817,441 838,197 $ 831,784 $ 869,408 6. Inventories A summary of amounts of inventories at December 31, 2016 and 2015 is presented below: 2016 2015 Inventories $ 8,648,460 $ 7,407,864 Obsolete inventory reserve (42,747) (42,747) Total $ 8,605,713 $ 7,365,117 The Companies directly wrote-off $92,368 and $221,098 of inventories during the fiscal years ended December 31, 2016 and 2015, respectively, due to obsolescence.


 
12 7. Machinery and equipment Machinery and equipment at December 31, 2016 and 2015 are presented below: 2016 2015 Machinery and plant equipment $ 160,936 $ 201,521 Vehicles 451,058 480,704 Furniture and fixtures 108,403 44,623 Computer equipment 96,930 86,373 Improvements 8,720 8,716 Total 826,047 821,937 Less accumulated depreciation (478,149) (443,340) Machinery and equipment – net $ 347,898 $ 378,597 Depreciation expense for the years ended December 31, 2016 and 2015 was $119,828 and $114,239, respectively. 8. Borrowings Since February 13, 2008, Ultra Chem has a short-term loan with Banco Nacional de México S.A. de C.V. the borrowing amount as of December 31, 2014, was $382,676 (USD equivalent). Additionally on December 11 and 16, 2014, Ultra Chem subscribed three notes payable for the amount of $1,017,998 total (USD equivalent) $339,333 (USD equivalent) each one, at a stated interest rate of 7%. On May 20, 2015, Ultra Chem signed a contract with Banco Nacional de México S.A. de C.V. in which the short-term loan was converted into a line of credit up to $1,441,770 (USD equivalent as of December 31, 2015) with a maturity date of May 27, 2016. In May 2016, the limit was increased up to $1,623,579 (USD equivalent). The annual interest rate was TIIE (Interbank equilibrium rate by its acronym in Spanish) plus an applicable margin of 4.0% for fiscal year ended December 31, 2015. The balance of this line of credit was paid in full in December 2016. The outstanding borrowing balances for this line of credit as of December 31, 2015 was $437,119 and weighted average interest rate of 7.42%. On April 1, 2016, Ultra Chem signed a line of credit with Banco del Bajío, S.A. up to $242,014 (USD equivalent) with a due date up to three years from the date of the first draw. The interest rate may be fixed or variable based on the agreement reached at the time of each draw. For fixed rates the bank will determine the percentage, and variable rates will be based on TIIE plus a margin determined at the date of the draw. The outstanding borrowing balance for this line of credit as of December 31, 2016 was $173,141 (USD equivalent) with an interest rate of TIIE (not to exceed 8.0%) plus a margin of 6.8% resulting in a weighted average interest rate of 11.6%. 9. Employee Benefits Information related to Chem Servicios’ seniority premium benefits and statutorily mandated severance benefits is as follows: Chem Servicios uses as its measurement date for its seniority premium and severance benefits, December 31.


 
13 Seniority Premium Benefits Severance Benefits 2016 2015 2016 2015 As of December 31: Accumulated benefit obligation $ 39,266 $ 36,221 $ 47,249 $ 45,807 Change in benefit obligation: Benefit obligation at Beginning of year $ 36,221 $ 37,643 $ 45,807 $ 43,465 Service cost 5,263 6,289 4,952 5,594 Interest cost 2,233 2,700 2,658 2,988 Actuarial (gain) loss 2,317 (3,467) 2,136 2,991 Exchange rate (6,768) (6,944) (8,304) (9,231) Benefit obligation at end of year $ 39,266 $ 36,221 $ 47,249 $ 45,807 Amounts recognized in accumulated other comprehensive income consist of: Seniority Premium Benefits Severance Benefits 2016 2015 2016 2015 Net actuarial loss (gain) $ 2,317 $ (3,467) $ 2,136 $ 2,991 Net periodic benefits cost is comprised as follows: Seniority Premium Benefits Severance Benefits 2016 2015 2016 2015 Components of net periodic Benefits cost: Service cost $ 5,263 $ 6,289 $ 4,952 $ 5,594 Interest cost 2,233 2,700 2,658 2,988 Net periodic benefits cost $ 7,496 $ 8,989 $ 7,610 $ 8,582 Seniority Premium Benefits Severance Benefits 2016 2015 2016 2015 Weighted-average assumptions used to determine benefit obligations as of December 31: Discount rate 6.5% 6.8 % 6.5% 6.8 % Rate of compensation increase 7.0% 7.0 % 7.0% 7.0 % 10. Stockholders’ equity Common stock consists of fixed and variable social parts. As of December 31, 2016 and 2015, the fixed common stock is $1,112,664. Variable capital may be increased without limitation. During the fiscal year 2015, Chem Servicios carried out an increase in common stock for the amount of $2,827 due to partners’ contribution. During the fiscal year 2015, Global Chem carried out an increase in common stock for the amount of $5,915 due to partners’ contribution.


 
14 11. Income taxes The statutory income tax rate in Mexico is 30%, in Guatemala is 25% and in Costa Rica is 30%. Income tax expense (benefit) for the years ended December 31, 2016 and 2015 was comprised of the following: 2016 2015 Current income tax expense $ 2,220,385 $ 1,227,827 Deferred income tax benefit (86,390) (4,112) Total $ 2,133,995 $ 1,223,715 The effective income tax rate for the years ended December 31, 2016 and 2015, differs from the Mexican statutory income tax rate as follows: 2016 2015 Statutory income tax rate 30% 30% Non-deductible expenses 4% 6% Inflation gain recorded for tax purposes (2%) (1%) Other effects in changes in tax law 4% 4% Effective tax rate 36% 39% 2016 2015 As of December 31, 2016 and 2015, the deferred taxes are as follows: Accounts receivable $ 217,394 $ 135,131 Inventory 12,824 12,824 Employee benefits 25,954 24,608 Total deferred tax asset $ 256,172 $ 172,563 Uncertain tax positions - The Companies had no uncertain tax positions for the fiscal years ended December 31, 2016 and 2015. 12. Commitments, contingencies and litigation Operating Leases We are a lessee of office buildings, transportation equipment, and warehouses under operating lease agreements that expire at various dates. Rent expense was $798,862 and $732,997 for the fiscal years ended December 31, 2016 and 2015, respectively. Future minimum non-cancellable rental payments as of December 31, 2016 are as follows: 2017 $ 775,352 2018 421,501 2019 397,532 2020 138,018 2021 - Thereafter - Total $ 1,732,403 From time to time, we are involved in certain litigation and claims incidental to our business. We do not believe, based on currently available information, that these matters will have a material adverse effect on our financial position, results of operations, or cash flows.


 
15 13. Subsequent events In March 2017, Ultra Chem paid off the outstanding balance of the line of credit with Banco del Bajío, S.A. and the line of credit was closed.


 
exh992
Ultra Chem Group Combined Financial Statements as of and for the Years Ended December 31, 2015 and 2014, and Independent Auditors' Report


 
Ultra Chem Group Independent Auditors’ Report and Financial Statements 2015 and 2014 Table of Contents Page Independent Auditor’s Report 1 Combined Balance Sheets 2 Combined Statements of Income and Other Comprehensive Income 3 Combined Statements of Stockholders' Equity 4 Combined Statements of Cash Flows 5 Notes to the Combined Financial Statements 7


 
T: +52 (55) 5901 3900 | www.pkfmexico.com PKF México | Boulevard Manuel Ávila Camacho No. 170 Piso 2 | Col. Reforma Social | 11650 México, D.F. Contadores y Asesores de Negocios PKF México, S.C. y/o PKF México Williams y Cía., S.C. es miembro de PKF International Limited, una asociación de firmas miembro legalmente independientes, y no acepta ninguna responsabilidad por las acciones o inacciones de parte de cualquier otra firma miembro. Contadores y Asesores de Negocios PKF México, S.C. y/o PKF México Williams y Cía., S.C. is member of PKF International Limited, an association of legally independent firms, and does not accept any responsibility or liability for the actions or inactions on the part of any other individual member firms. Independent Auditor’s Report To the Board of Directors and Stockholders of Ultrachem Group. We have audited the accompanying combined balance sheets of Ultrachem Group. as of December 31, 2015 and 2014, and the related combined statements of income and other comprehensive income, changes in stockholders' equity, and cash flows for each of the two years in the period ended December 31, 2015. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the auditing standards generally accepted in the United States of America (USGAAS). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of Ultrachem Group at December 31, 2015 and 2014, and the combined results of its operations and its cash flows for each of the two years in the period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles. Contadores y Asesores de Negocios PKF México, S.C. Javier Durán Robles Audit Partner Mexico City March 28, 2017


 
2 Ultra Chem Group Combined Balance Sheets As of December 31, 2015 and 2014 (In U.S. dollars) Assets 2015 2014 Current assets: Cash and cash equivalents $ 176,906 $ 86,236 Accounts receivable – Net of allowance of doubtful accounts of $450,435 for fiscal years ended December 31, 2015 and 2014 (note 3) 10,803,905 9,504,452 Other receivables 85,424 163,070 Recoverable taxes (note 5) 869,408 1,140,814 Inventories (note 6) 7,365,117 8,189,517 Advanced payments 189,157 112,035 Total current assets 19,489,917 19,196,124 Non-current assets: Machinery and equipment – Net (Note 7) 378,597 330,640 Deferred income taxes (Note 11) 172,563 172,288 Total non-current assets 551,160 502,928 Total assets $ 20,041,077 $ 19,699,052 Liabilities and stockholders' equity Current liabilities: Short-term borrowing (note 8) $ 437,119 $ 1,400,674 Accounts payable 9,885,096 10,748,139 Other payables 254,450 218,467 Accrued liabilities 1,714 2,593 Income taxes payable (note 11) 1,107,550 397,735 Statutory employee profit sharing 42,956 22,269 VAT due pending collection 1,589,534 1,363,767 Total current liabilities 13,318,419 14,153,644 Employee Benefits (note 9) 82,028 81,108 Contingencies (note 12) - - Total Liabilities $ 13,400,447 $ 14,234,752 Stockholders' equity: Common stock (note 10) 1,112,664 1,103,922 Accumulated other comprehensive loss (158,145) (61,570) Retained earnings 3,902,910 3,138,966 Income for the year 1,783,201 1,282,982 Total stockholders' equity 6,640,630 5,464,300 Total liabilities and stockholders’ equity $ 20,041,077 $ 19,699,052 The accompanying notes are an integral part of these combined financial statements.


 
3 Ultra Chem Group Combined Statements of Income and Comprehensive Income For the years ended December 31, 2015 and 2014 (In U.S. dollars) 2015 2014 Net sales $ 56,669,215 $ 47,443,084 Cost of sales 47,073,137 40,268,314 Gross Profit 9,596,078 7,174,770 General expenses 782,257 714,792 Administrative expenses 2,993,984 2,815,589 Operating expenses 1,810,702 2,069,830 Operating income 4,009,135 1,574,559 Other income (expense): Interest expense – Net (119,821) (80,871) Other income , net 284,880 275,118 Foreign currency exchange loss – Net (1,167,278) (15,290) Income before income taxes 3,006,916 1,753,516 Income taxes (note 11) 1,223,715 470,534 Net income $ 1,783,201 $ 1,282,982 Other comprehensive loss (the tax effects for each component is not material) Foreign currency translation adjustment (96,835) (54,678) Employee benefits 260 (3,683) Total comprehensive income $ 1,686,626 $ 1,224,621 The accompanying notes are an integral part of these combined financial statements.


 
4 Ultra Chem Group Combined Statements of Stockholders' Equity For the years ended December 31, 2015 and 2014 (In U.S. dollars) Common Stock Retained Earnings Accumulated other comprehensive loss Total Stockholders' Equity January 1, 2014 $ 851,711 $ 1,994,263 $ (3,209) $ 2,842,765 Common stock increase due to merger 252,211 1,348,302 - 1,600,513 Comprehensive income: Net income - 1,282,982 - 1,282,982 Accumulated other comprehensive loss - - (58,361) (58,361) Dividends paid - (203,599) - (203,599) December 31, 2014 1,103,922 4,421,948 (61,570) 5,464,300 Capital Contribution 8,742 - - 8,742 Comprehensive income: - - - - Net income - 1,783,201 - 1,783,201 Accumulated other comprehensive loss - - (96,575) (96,575) Dividends paid - (519,038) - (519,038) December 31,2015 $ 1,112,664 $ 5,686,111 $ (158,145) $ 6,640,630 The accompanying notes are an integral part of these combined financial statements.


 
5 Ultra Chem Group Combined Statements of Cash Flows For the years ended December 31, 2015 and 2014 (In U.S. dollars) 2015 2014 Cash flows from operating activities: Net income $ 1,783,201 $ 1,282,982 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation expense 114,239 108,450 Machinery and equipment write-offs 35,689 - Accounts receivable write-offs 216,630 235,883 Inventories write-offs 221,098 134,718 Employee benefits 14,636 19,826 Deferred income taxes (4,391) (116,288) Changes in operating assets and liabilities: Accounts receivable (1,516,983) (2,077,460) Other receivables 5,330 289,191 Recoverable taxes 259,033 (472,595) Guarantee deposits (2,577) - Advance payments (7,158) (6,250) Inventories 578,529 (3,425,693) Accounts payable (859,125) 3,177,714 Other payables 18,761 11,102 Accrued liabilities 465,236 658,302 Income taxes payable 581,056 113,348 Statutory employee profit sharing 26,843 (10,610) Net cash provided by (used in) operating activities 1,930,047 (77,380) Cash flows from investing activities: Acquisition due to merger - 38,711 Acquisitions of machinery and equipment (224,969) (186,217) Net cash used in investing activities (224,969) (147,506) Cash flows from financing activities: Capital contributions 8,742 - Proceeds from notes payable 164,465 1,880,901 Repayments of notes payable (1,128,019) (1,349,993) Dividends paid (519,038) (203,599) Net cash (used in) provided by financing activities (1,473,850) 327,309


 
6 2015 2014 Effect of exchange rate changes on cash and cash equivalents (140,558) (75,688) Increase in cash and cash equivalents 90,670 26,735 Cash and cash equivalents - Beginning of year 86,236 59,501 Cash and cash equivalents - End of year $ 176,906 $ 86,236 Supplemental disclosures of cash flow information: Interest paid $ 120.557 $ 76,047 Income taxes paid $ 611,003 $ 403,787 The accompanying notes are an integral part of these combined financial statements


 
7 Ultra Chem Group Notes to the Combined Financial Statements As of and for the years ended December 31, 2015 and 2014 (Amounts in tables are in U.S. dollars) 1. Basis of Presentation and Nature of Operations Basis of Presentation - The accompanying combined financial statements present the financial position of Ultra Chem, S de R.L. de C.V. (“Ultra Chem”), Global Chem, S de R.L. de C.V. (“Global Chem”), and Chem Servicios, S de R.L. de C.V. (“Chem Servicios”) (together on a combined basis, "Ultra Chem Group") as of December 31, 2015 and 2014, and the results of its operations and its cash flows for the years then ended. In these notes to our combined financial statements, the terms "Companies," "we," "our," and "us" refer to Ultra Chem, S de R.L. de C.V., Global Chem, S de R.L. de C.V., and Chem Servicios, S de R.L. de C.V. on a combined basis, as the context may require. Ultra Chem, S de R.L. de C.V. was formed as a limited liability company on May 23, 2000, pursuant to and in accordance with the Act. N. 50,791. Global Chem, S de R.L. de C.V. was formed as a limited liability company on March 28, 2007, pursuant to and in accordance with the Act. N. 130,637. Chem Servicios, S de R.L. de C.V. was formed as a limited liability company on March 7, 2007, pursuant to and in accordance with the Act. N.130,558. Our fiscal year end is December 31. Nature of Operations - Ultra Chem is a distributor of chemicals and plastics in Mexico and United States. In connection with the distribution of chemicals products, Ultra Chem provides value-added services such as custom blending, packaging and re-packaging, private-label manufacturing. Global Chem manufactures chemicals and plastics and sells mainly to Ultra Chem their products within Mexico. Chem Servicios provides personnel and management services to Ultra Chem and Global Chem. 2. Significant Accounting Policies and Recent Accounting Pronouncements Significant Accounting Policies Principles of Combination – The accompanying combined financial statements include all the accounts of the Companies with significant intercompany transactions and balances having been eliminated upon combination. Use of Estimates – Our combined financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. These principles require management to make estimates and assumptions that affect the amounts reported and disclosed in our combined financial statements. We provide allowances for doubtful accounts arising, which are based upon a specific review of certain outstanding receivables and consider factors such as customer credit, historical and recent transactions with the customers. In determining the amounts of the allowances, we are required to make certain estimates and assumptions. Accruals for potential liabilities related to any lawsuits or claims brought against us, determination of fair value of financial instruments, calculation of income tax assets, income tax liabilities and uncertain tax positions, valuation allowance on deferred tax assets, as well as other liabilities, require that we apply significant judgment in determining the appropriate assumptions for use in the calculation of financial estimates. We also must estimate the useful lives assigned to our assets. Actual results may differ from these estimates and assumptions.


 
8 Fair Value Measurements - In accordance with the authoritative guidance on fair value measurements and disclosures, Ultra Chem Group measures nonfinancial assets and liabilities subject to nonrecurring measurement and financial assets and liabilities subject to recurring measurement based on a hierarchy that prioritizes inputs to valuation techniques used to measure the fair value. Inputs used in determining fair value should be from the highest level available in the following hierarchy: Level 1 - Inputs based on quoted market prices in active markets for identical assets or liabilities that the reporting entity has the ability to access Level 2 - Inputs based on quoted prices for similar assets or liabilities, quoted market prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities Level 3 - Inputs are unobservable for the asset or liability and typically based on an entity's own assumptions as there is little, if any, related market activity At December 31, 2015 and 2014, the Companies had assets that under certain conditions would be subject to measurement at fair value on a nonrecurring basis, such as long-lived assets subject to fair value measurement when an impairment loss is recorded. Recognition of these assets at their fair value would be determined utilizing Level 3 inputs. Cash and Cash Equivalents – Cash and cash equivalents, include cash balances, bank deposits in Mexico and other highly liquid investments with minor risks by change in value. Accounts Receivable and Allowance for Doubtful Accounts - Accounts receivable are recorded net of discounts and allowance for doubtful accounts. The Companies perform ongoing credit evaluations of its customers and generally does not require collateral from them. In the event of the collectability of a receivable is in doubt, we will record an increase in our allowance for doubtful accounts or record a direct write-off of the receivable after exhaustive efforts at collection. Inventories - Inventories are carried at the lower of cost or market using the weighted average cost method. Provisions have been made to reduce excess or obsolete inventories to their estimated market value. Advance payments – Advance payments consists primarily of prepaid insurance, prepaid taxes, prepaid operating supplies and guarantee deposits. Machinery and Equipment - Machinery and equipment is stated at cost and their components are depreciated over the estimated useful lives reported below using the straight-line method. Estimated Useful Lives Furniture and fixtures 10 years Machinery and plant equipment 10 years Vehicles 4 years Computer equipment 3-4 years Improvements 5 years Expenditures for renewals and betterments, which increase the estimated useful life or capacity of the assets, are capitalized. Repairs and maintenance that do not extend the useful life of the asset are expensed as incurred. Gains and losses on dispositions of Machinery and equipment are included in costs and expenses in the accompanying combined statements of operations. Leases – Ultra Chem Group leases certain machinery and equipment in the ordinary course of business. The leases are classified as operating leases and are recognized as an expense in the combined statements of operations on a straight-line basis over the lease term. Contingencies- Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of such liability can be reasonably estimated. Gain contingencies are not recorded until management determines it is certain that the future event will become or does become a reality.


 
9 Accumulated Other Comprehensive Loss - Accumulated other comprehensive loss includes unrealized losses relating to Employee benefits’ actuarial gains and losses. It also includes foreign currency translation adjustments from Mexican peso to the U.S. dollar, because the functional currency of Global Chem and Chem Servicios is Mexican Peso. Revenue Recognition - Revenue generated from our operations is recognized when the benefits are transferred to our customers, which occurs when products are delivered in fulfillment of their orders. Deposits collected in advance of a customer's arrival are deferred in accrued liabilities and are recognized as revenue when the related services are provided to the customer. Income Taxes - The Ultra Chem Group is subject to Mexican income taxes on a non-basis as levied by the Mexican taxing authority as Mexican income tax ("ISR"). Realization of future tax benefits related to deferred tax assets is dependent on many factors, including the Ultra Chem Group’s ability to generate future Mexican taxable income. The valuation allowance is adjusted in the period we determine it is more likely than not that deferred tax assets will or will not be realized. Foreign currency financial statements - The accompanying combined financial statements, have been adjusted to conform with accounting principles generally accepted in the United States of America (U.S. GAAP) and have been translated into U.S. dollars as discussed below. The financial statements are translated into US dollars (presentation currency), considering the following methodologies: For Global Chem and Chem Servicios, whose functional currency and registration currency are the same (Mexican Peso), convert their financial statements to the presentation currency using the following exchange rates: 1) closing for assets and liabilities; 2) historical for stockholders' equity and 3) the date of accrual for income, costs and expenses. The conversion effects are recorded in other comprehensive income. For Ultra Chem, whose registration currency (Mexican Peso) is different from its functional currency (US dollar), convert their financial statements from the registration currency to the functional currency, using the following exchange rates: 1) closing for monetary assets and liabilities; 2) historical for non-monetary assets, non-monetary liabilities and stockholders' equity, and 3) the date of accrual for income, costs and expenses, except for those that come from non-monetary items that are converted at the historical exchange rates. The conversion effects, are recorded in the foreign exchange gain (loss). Relevant exchange rates used in the preparation of the combined financial statements were as follows (Mexican pesos per one U.S. dollar): 2015 2014 Current exchange rate as of December 31, 17.34 14.73 Weighted average exchange rate for the year ended December 31, 15.85 13.29 Recent Accounting Pronouncements - In May 2014 the FASB issued ASU 2014-09, Revenue Recognition (Topic 606) Revenue from Contracts with Customers. This ASU prescribes a single comprehensive model for entities to use in the accounting of revenue arising from contracts with customers and requires expanded disclosures surrounding the Company’s revenue transactions. Entities are required to adopt this ASU in annual reporting periods beginning after December 15, 2018 with early adoption permitted only as of annual reporting periods beginning after December 15, 2016. There are two transition options available to entities: the full retrospective approach or the modified retrospective approach. Under the full retrospective approach, the Ultra Chem Group would restate prior periods in compliance with Accounting Standards Codification 250, Accounting Changes and Error Corrections. Alternatively, the Ultra Chem Group may elect the modified retrospective approach, which allows for the new revenue standard to be applied to existing contracts as of the effective date and record a cumulative catch-up adjustment to retained earnings. The Companies are in the process of evaluating the potential effects of this standard and believes it may have a significant impact on its combined financial statements. In In January 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards


 
10 Update (“ASU”) ASU 2015-01, Income Statement-Extraordinary and Unusual Items (Subtopic 225-20). The amendments in this ASU eliminate the concept of extraordinary items and will no longer require separate classification of them within the statement of operations. Presentation and disclosure guidance for items that are unusual in nature or occur infrequently are retained and are expanded to include items that are both unusual in nature and infrequently occurring. The guidance in this ASU is effective for fiscal years beginning after December 15, 2015. The adoption of this ASU did not have a material impact on the Companies’ combined financial statements. In November 2015, the FASB issued ASU 2015-17-Income Taxes (Topic 740). Balance Sheet Classification of Deferred Taxes. This ASU requires an entity to classify all deferred tax assets and liabilities as non-current. These amendments are effective for fiscal years beginning after December 15, 2017 and interim periods within annual periods beginning after December 15, 2018, although early adoption is permitted. The deferred taxes for fiscal year ended December 31, 2014, was reclassified to conform to current year presentation. In November 2015, the FASB issued ASU 2016-02-Leases (Topic 842). This ASU requires all leases with terms greater than12 months, whether finance or operating, to be recorded on the balance sheet, reflecting a liability to make lease payments and a right-to-use asset representing the right to use the underlying asset for the lease term. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee will not significantly change from current U.S. GAAP. These amendments are effective for the reporting periods beginning after December 15, 2019 with early adoption permitted. An entity will be required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption. The Companies are in the process of evaluating the potential effects of this standard and believes it may have a significant impact on its combined financial statements due, in part, to its substantial number of operating lease. 3. Accounts receivable, net of allowance for doubtful accounts A summary of accounts receivable, net at December 31, 2015 and 2014 was: 2015 2014 Accounts receivable $ 11,254,340 $ 9,954,887 Allowance for doubtful accounts (450,435) (450,435) Accounts receivable, net $ 10,803,905 $ 9,504,452 The Companies directly wrote-off $216,630 and $235,883 of accounts receivable during the fiscal years ended December 31, 2015 and 2014, respectively. 4. Related-party transactions A summary of amounts incurred to related parties during 2015 and 2014 is presented below: 2015 2014 Accounts receivable: Owed from Chem Servicios to Ultra Chem $ 689,647 $ 615,226 Owed from Chem Servicios to Global Chem 207,440 267,450 Total $ 897,087 $ 882,676 Accounts payable Owed to Chem Servicios from Ultra Chem $ 813,545 $ 669,278 Owed to Global Chem from Ultra Chem 83,542 127,081 Owed to Ultra Chem from Global Chem - 86,317 Total $ 897,097 $ 882,676


 
11 For the years ended in December 2015 and 2014, Ultra Chem Group entered into the following party transactions: 2015 Ultra Chem Chem Servicios Global Chem Services: Sale/purchase of inventories $ 1,111,431 $ - $ 1,111,431 Administrative services 3,942,428 4,094,160 151,732 Freight services 26,514 26,514 - Billed Interest 7,237 7,237 - 2014 Ultra Chem Chem Servicios Global Chem Services: Sale/purchase of inventories $ 1,268,410 $ - $ 1,268,410 Administrative services 3,553,206 3,740,873 187,667 Freight services 90,963 90,963 - Other services 75,215 - 75,215 5. Recoverable taxes Recoverable taxes at December 31, 2015 and 2014 are presented below: 2015 2014 Income taxes $ 31,211 $ 95,968 VAT receivable 838,197 1,044,846 $ 869,408 $ 1,140,814 6. Inventories A summary of amounts of inventories at December 31, 2015 and 2014 is presented below: 2015 2014 Inventories $ 7,407,864 $ 8,232,264 Obsolete inventory reserve (42,747) (42,747) Total $ 7,365,117 $ 8,189,517 The Companies directly wrote-off $221,098 and $134,718 of inventories during the fiscal years ended December 31, 2015 and 2014, respectively due to obsolescence.


 
12 7. Machinery and equipment Machinery and equipment at December 31, 2015 and 2014 are presented below: 2015 2014 Machinery and plant equipment $ 201,521 $ 224,229 Vehicles 480,704 460,566 Furniture and fixtures 44,623 29,531 Computer equipment 86,373 78,794 Improvements 8,716 - Total 821,937 793,120 Less accumulated depreciation (443,340) (462,480) Machinery and equipment – net $ 378,597 $ 330,640 Depreciation expense for the years ended December 31, 2015 and 2014 was $114,239 and $108,450, respectively. 8. Short-term borrowing Since February 13, 2008, Ultra Chem has a short-term loan with Banco Nacional de México S.A. de C.V. the borrowing amount as of December 31, 2014, was $382,676 (USD equivalent). Additionally on December 11 and 16, 2014, Ultra Chem subscribed three notes payable for the amount of $1,017,998 total (USD equivalent) $339,333 (USD equivalent) each one, at a stated interest rate of 7%. On May 20, 2015, Ultra Chem signed a contract with Banco Nacional de México S.A. de C.V. in which the short-term loan was converted into a line of credit up to $1,441,770 (USD equivalent as of December 31 2015) with a maturity date of May 27, 2016. The annual interest rate was TIIE (Interbank equilibrium rate by its acronym in Spanish) plus an applicable margin of 4.0% for fiscal year ended December 31, 2015. The outstanding borrowing balances for this line of credit as of December 31, 2015 and 2014 was $437,119 and $1,400,674 respectively, and weighted average interest rate of 7.42% and 7%, respectively. 9. Employee Benefits Information related to Chem Servicios’ seniority premium benefits and statutorily mandated severance benefits is as follows: Chem Servicios uses as its measurement date for its seniority premium and severance benefits, December 31. Seniority Premium Benefits Severance Benefits 2015 2014 2015 2014 As of December 31: Accumulated benefit obligation $ 36,221 $ 37,643 $ 45,807 $ 43,465


 
13 Seniority Premium Benefits Severance Benefits 2015 2014 2015 2014 Change in benefit obligation: Benefit obligation at Beginning of year $ 37,643 $ 33,867 $ 43,465 $ 37,530 Service cost 6,289 4,936 5,594 4,378 Interest cost 2,700 2,275 2,988 2,417 Actuarial loss (3,467) 1,230 2,991 4,499 Exchange rate (6,944) (4,665) (9,231) (5,359) Benefit obligation at end of year $ 36,221 $ 37,643 $ 45,807 $ 43,465 Amounts recognized in accumulated other comprehensive income consist of: Seniority Premium Benefits Severance Benefits 2015 2014 2015 2014 Net actuarial loss (gain) $ (3,467) $ 1,230 $ 2,991 $ 4,499 Net periodic benefits cost is comprised as follows: Seniority Premium Benefits Severance Benefits 2015 2014 2015 2014 Components of net periodic Benefits cost: Service cost $ 6,289 $ 4,936 $ 5,594 $ 4,378 Interest cost 2,700 2,275 2,988 2,417 Net periodic benefits cost $ 8,989 $ 7,211 $ 8,582 $ 6,795 Seniority Premium Benefits Severance Benefits 2015 2014 2015 2014 Weighted-average assumptions used to determine benefit obligations as of December 31: i Discount rate 6.8 % 6.7 % 6.8 % 6.7 % Rate of compensation increase 7.0 % 7.0 % 7.0 % 7.0 % 10. Stockholders’ equity Common stock consists of fixed and variable social parts. As of December 31, 2015 and 2014 the fixed common stock is $1,112,664 and $1,103,922, respectively. Variable capital may be increased without limitation. Due to the merger of Ultra Chem with Chem Stone, S. de R.L. de C.V. and Adichem, S. de R.L. de C.V. carried out since January 1, 2014 the common stock increased in the amount of $252,211. During the fiscal year 2015, Chem Servicios carried out an increase in common stock for the amount of $2,827 due to partners’ contribution.


 
14 During the fiscal year 2015, Global Chem carried out an increase in common stock for the amount of $5,915 due to partners’ contribution. 11. Income taxes The statutory income tax rate in Mexico is 30%. Income tax expense (benefit) for the years ended December 31, 2015 and 2014 was comprised of the following: 2015 2014 Current income tax expense $ 1,227,827 $ 474,393 Deferred income tax benefit (4,112) (3,859) Total $ 1,223,715 $ 470,534 The effective income tax rate for the years ended December 31, 2015 and 2014, differs from the Mexican statutory income tax rate as follows: 2015 2014 Statutory income tax rate 30% 30% Non-deductible expenses 6% 11% Inflation gain recorded for tax purposes (1%) (15%) Other effects in changes in tax law 4% 1% Effective tax rate 39% 27% 2015 2014 As of December 31, 2015 and 2014; the deferred taxes are as follows: Accounts receivable $ 135,131 $ 135,131 Inventory 12,824 12,824 Employee benefits 24,608 24,333 Total deferred tax asset $ 172,563 $ 172,288 Uncertain tax positions - The Companies had no uncertain tax positions for the fiscal years ended December 31, 2015 and 2014. 12. Commitments, contingencies and litigation Operating Leases We are a lessee of office buildings, transportation equipment, and warehouses under operating lease agreements that expire at various dates. Rent expense was $732,997 and $722,570 for the fiscal years ended December 31, 2015 and 2014, respectively. Future minimum non-cancellable rental payments as of December 31, 2015 are as follows: 2016 $ 685,201 2017 646,185 2018 444,909 2019 416,044 2020 155,759 Thereafter - Total $ 2,348,098 From time to time, we are involved in certain litigation and claims incidental to our business. We do not believe, based on currently available information, that these matters will have a material adverse effect on our financial position, results of operations, or cash flows.


 
15


 
exh993
Ultra Chem Group Unaudited Condensed Combined Financial Statements as of March 31, 2017 and for the three months ended March 31, 2017 and 2016


 
Ultra Chem Group Unaudited Condensed Combined Financial Statements as of March 31, 2017 and for the three months ended March 31, 2017 and 2016 Table of Contents Page Unaudited Condensed Combined Balance Sheets 1 Unaudited Condensed Combined Statements of Income and Other Comprehensive Income 2 Unaudited Condensed Combined Statements of Stockholders' Equity 3 Unaudited Condensed Combined Statements of Cash Flows 4 Notes to the Unaudited Condensed Combined Financial Statements 6


 
1 Ultra Chem Group Unaudited Condensed Combined Balance Sheets As of March 31, 2017 and December 31, 2016 (In U.S. dollars) Assets March 31, 2017 December 31, 2016 Current assets: Cash and cash equivalents $ 484,166 $ 291,742 Accounts receivable – Net of allowance of doubtful accounts of $724,646 and $724,646 for the three months ended March 31, 2017 and December 31, 2016, respectively (note 3) 14,522,208 12,885,454 Other receivables 3,182 1,749 Recoverable taxes (note 5) 1,883,768 831,784 Inventories (note 6) 9,314,469 8,605,713 Advanced payments 261,723 176,134 Total current assets 26,469,516 22,792,576 Non-current assets: Machinery and equipment – Net (note 7) 367,253 347,898 Deferred income taxes 258,886 256,172 Total non-current assets 626,139 604,070 Total assets $ 27,095,655 $ 23,396,646 Liabilities and stockholders' equity Current liabilities: Short-term borrowing (note 8) $ 894,242 $ - Current portion of long-term borrowing (note 8) - 74,204 Accounts payable 12,877,430 10,344,957 Other payables 255,505 80,644 Accrued liabilities 500 1,070 Income taxes payable 1,203,543 1,239,281 Statutory employee profit sharing 46,673 42,255 VAT due pending collection 2,275,255 1,826,146 Total current liabilities 17,553,148 13,608,557 Long-term borrowing (note 8) - 98,937 Employee benefits 98,811 86,515 Contingencies - - Total Liabilities $ 17,651,959 $ 13,794,009 Stockholders' equity: Common stock 1,112,664 1,112,664 Accumulated other comprehensive loss (206,377) (263,293) Retained earnings 7,616,638 4,954,960 Income for the period 920,771 3,798,306 Total stockholders' equity 9,443,696 9,602,637 Total liabilities and stockholders’ equity $ 27,095,655 $ 23,396,646 The accompanying notes are an integral part of these unaudited condensed combined financial statements.


 
2 Ultra Chem Group Unaudited Condensed Combined Statements of Income and Comprehensive Income For the three month ended March 31, 2017 and March 31, 2016 (In U.S. dollars) March 31, 2017 March 31, 2016 Net sales $ 18,250,750 $ 13,427,211 Cost of sales 15,288,990 10,984,265 Gross profit 2,961,760 2,442,946 General expenses 200,987 191,737 Administrative expenses 841,087 659,831 Operating expenses 177,022 149,281 Operating income 1,742,664 1,442,097 Other income (expense): Interest expense – Net (35,052) (33,918) Other income - Net 12,667 102,054 Foreign currency exchange loss – Net (356,268) (596,864) Income before income taxes 1,364,011 913,369 Income taxes 443,240 488,837 Net income $ 920,771 $ 424,532 Other comprehensive income (the tax effects for each component is not material) Foreign currency translation adjustment 56,916 (710) Employee benefits - 1,419 Total comprehensive income $ 977,687 $ 425,241 The accompanying notes are an integral part of these unaudited condensed combined financial statements.


 
3 Ultra Chem Group Unaudited Condensed Combined Statements of Stockholders' Equity For the three months ended March 31, 2017 and December 31, 2016 (In U.S. dollars) Common Stock Retained Earnings Accumulated Other Comprehensive Loss Total Stockholders' Equity December 31, 2015 $ 1,112,664 $ 5,686,111 $ (158,145) $ 6,640,630 Comprehensive income: Net income - 3,798,306 - 3,798,306 Other comprehensive loss - - (105,148) (105,148) Dividends paid - (731,151) - (731,151) December 31, 2016 $ 1,112,664 $ 8,753,266 $ (263,293) $ 9,602,637 Comprehensive income: Net income - 920,771 - 920,771 Other comprehensive income - - 56,916 56,916 Dividends paid - (1,136,628) - (1,136,628) March 31, 2017 $ 1,112,664 $ 8,537,409 $ (206,377) $ 9,443,696 The accompanying notes are an integral part of these unaudited condensed combined financial statements.


 
4 Ultra Chem Group Unaudited Condensed Combined Statements of Cash Flows For the three months ended March 31, 2017 and March 31, 2016 (In U.S. dollars) March 31, 2017 March 31, 2016 Cash flows from operating activities: Net income $ 920,771 $ 424,533 Adjustments to reconcile net income to net cash used in operating activities: Depreciation expense 34,323 80,252 Employee benefits 2,987 5,057 Loss on the sale of machinery and equipment 512 - Deferred income taxes - 88,883 Changes in operating assets and liabilities: Accounts receivable (1,566,548) (511,590) Other receivables (1,256) 17,823 Recoverable taxes (1,047,444) (238,459) Advance payments (76,710) (41,373) Inventories (699,281) (523,913) Accounts payable 1,672,759 376,679 Other payables 174,695 376,360 Accrued liabilities 641,039 339,579 Income taxes payable (97,232) (711,252) Net cash used in operating activities (41,385) (317,421) Cash flows from investing activities: Proceeds from the sale of machinery and equipment 3,176 - Acquisitions of machinery and equipment (45,865) (37,452) Net cash used in investing activities (42,689) (37,452) Cash flows from financing activities: Proceeds from notes payable 6,101,396 2,778,011 Repayments of notes payable (5,410,387) (1,893,361) Dividends paid (1,136,628) (169,569) Net cash (used in) provided by financing activities (445,619) 715,081


 
5 Ultra Chem Group Unaudited Condensed Combined Statements of Cash Flows For the three months ended March 31, 2017 and March 31, 2016 (In U.S. dollars) March 31, 2017 March 31, 2016 Effect of exchange rate changes on cash and cash equivalents 722,117 42,377 Increase in cash and cash equivalents 192,424 402,585 Cash and cash equivalents - Beginning of year 291,742 176,906 Cash and cash equivalents - End of year 484,166 $ 579,491 Supplemental disclosures of cash flow information: Interest paid $ 34,155 $ 146,634 Income taxes paid $ 730,932 $ 316,635 The accompanying notes are an integral part of these unaudited condensed combined financial statements


 
6 Ultra Chem Group Notes to the Unaudited Condensed Combined Financial Statements As of March 31, 2017 and for the year ended December 31, 2016 (Amounts in tables are in U.S. dollars) 1. Basis of Presentation and Nature of Operations Basis of Presentation - The accompanying combined financial statements present the financial position of Ultra Chem, S de R.L. de C.V., together with its subsidiaries Ultra Chem Costa Rica Ltda. and Ultra Chem Centroamerica, S.A. (“Ultra Chem”), Global Chem, S de R.L. de C.V. (“Global Chem”), and Chem Servicios, S de R.L. de C.V. (“Chem Servicios”) (together on a combined basis, "Ultra Chem Group") as of March 31, 2017 and December 31, 2016, and the results of its operations and its cash flows for the three months ended March 31, 2017 and March 31, 2016. In these notes to our unaudited condensed combined financial statements, the terms "Companies," "we," "our," and "us" refer to Ultra Chem, S de R.L. de C.V. and subsidiaries, Global Chem, S de R.L. de C.V., and Chem Servicios, S de R.L. de C.V. on a combined basis, as the context may require. Ultra Chem, S de R.L. de C.V. was formed as a limited liability company on May 23, 2000, pursuant to and in accordance with the Act. N. 50,791. Global Chem, S de R.L. de C.V. was formed as a limited liability company on March 28, 2007, pursuant to and in accordance with the Act. N. 130,637. Chem Servicios, S de R.L. de C.V. was formed as a limited liability company on March 7, 2007, pursuant to and in accordance with the Act. N.130,558. Ultra Chem Costa Rica, Ltda. was formed as a limited liability corporation, of which Ultra Chem, S de R.L. de C.V. owns 99.99%. Ultra Chem Centroamerica, S.A. was formed as a corporation, of which Ultra Chem, S de R.L. de C.V. owns 100%. Our fiscal year end is December 31. Nature of Operations - Ultra Chem is a distributor of chemicals and plastics in Mexico, United States, Costa Rica and Guatemala. In connection with the distribution of chemicals products, Ultra Chem provides value- added services such as custom blending, packaging and re-packaging and private-label manufacturing. Global Chem manufactures chemicals and plastics and sells mainly to Ultra Chem their products within Mexico. Chem Servicios provides personnel and management services to Ultra Chem and Global Chem. 2. Significant Accounting Policies and Recent Accounting Pronouncements Significant Accounting Policies Principles of Combination – The accompanying combined financial statements include all the accounts of the Companies with significant intercompany transactions and balances having been eliminated upon combination. Use of Estimates – Our combined financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. These principles require management to make estimates and assumptions that affect the amounts reported and disclosed in our combined financial statements. We provide allowances for doubtful accounts, which are based upon a specific review of certain outstanding receivables and consider factors such as customer credit, historical and recent transactions with the customers. In determining the amounts of the allowances, we are required to make certain estimates and assumptions. Accruals for potential liabilities related to any lawsuits or claims brought against us, determination of fair value of financial instruments, calculation of income tax assets, income tax liabilities and uncertain tax positions, valuation allowance on deferred tax assets, as well as other liabilities, require that we apply significant judgment in determining the appropriate assumptions for use in the calculation of financial estimates. We also must estimate the useful lives assigned to our assets. Actual results may differ from these estimates and assumptions. Fair Value Measurements - In accordance with the authoritative guidance on fair value measurements and disclosures, Ultra Chem Group measures nonfinancial assets and liabilities subject to nonrecurring


 
7 measurement and financial assets and liabilities subject to recurring measurement based on a hierarchy that prioritizes inputs to valuation techniques used to measure the fair value. Inputs used in determining fair value should be from the highest level available in the following hierarchy: Level 1 - Inputs based on quoted market prices in active markets for identical assets or liabilities that the reporting entity has the ability to access Level 2 - Inputs based on quoted prices for similar assets or liabilities, quoted market prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities Level 3 - Inputs are unobservable for the asset or liability and typically based on an entity's own assumptions as there is little, if any, related market activity At March 31, 2017 and December 31, 2016, the Companies had assets that under certain conditions would be subject to measurement at fair value on a nonrecurring basis, such as long-lived assets subject to fair value measurement when an impairment loss is recorded. Recognition of these assets at their fair value would be determined utilizing Level 3 inputs. Cash and Cash Equivalents – Cash and cash equivalents, mainly consists of bank balances in Mexico in Pesos and U.S. dollars, balances in Guatemala in Quetzales and U.S. dollars, and other highly liquid investments with minor risks by change in value. Accounts Receivable and Allowance for Doubtful Accounts - Accounts receivable are recorded net of discounts and allowance for doubtful accounts. The Companies perform ongoing credit evaluations of its customers and generally does not require collateral from them. In the event of the collectability of a receivable is in doubt, we will record an increase in our allowance for doubtful accounts or record a direct write-off of the receivable after exhaustive efforts at collection. Inventories - Inventories are carried at the lower of cost or market using the weighted average cost method. Provisions have been made to reduce excess or obsolete inventories to their estimated market value. Advance payments – Advance payments consists primarily of prepaid insurance, prepaid taxes, prepaid operating supplies and guarantee deposits. Machinery and Equipment - Machinery and equipment is stated at cost and their components are depreciated over the estimated useful lives reported below using the straight-line method. Estimated Useful Lives Furniture and fixtures 10 years Machinery and plant equipment 10 years Vehicles 4 years Computer equipment 3-4 years Improvements 5 years Expenditures for renewals and betterments, which increase the estimated useful life or capacity of the assets, are capitalized. Repairs and maintenance that do not extend the useful life of the asset are expensed as incurred. Gains and losses on dispositions of machinery and equipment are included in costs and expenses in the accompanying combined statements of operations. Leases – Ultra Chem Group leases certain machinery and equipment in the ordinary course of business. The leases are classified as operating leases and are recognized as an expense in the combined statements of operations on a straight-line basis over the lease term. Contingencies- Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of such liability can be reasonably estimated. Gain contingencies are not recorded until management determines it is certain that the future event will become or does become a reality.


 
8 Accumulated Other Comprehensive Loss - Accumulated other comprehensive loss includes unrealized losses relating to employee benefits’ actuarial gains and losses. It also includes foreign currency translation adjustments from Mexican Peso to the U.S. dollar, because the functional currency of Global Chem and Chem Servicios is the Mexican Peso. Revenue Recognition - Revenue generated from our operations is recognized when the benefits are transferred to our customers, which occurs when products are delivered in fulfillment of their orders. Deposits collected in advance are deferred in accrued liabilities and are recognized as revenue when the benefits are transferred to our customers. Income Taxes - The Ultra Chem Group is subject to Mexican, Guatemalan and Costa Rican income taxes as levied by the respective taxing authority. Realization of future tax benefits related to deferred tax assets is dependent on many factors, including the Ultra Chem Group’s ability to generate future taxable income. The valuation allowance is adjusted in the period we determine it is more likely than not that deferred tax assets will or will not be realized. Foreign currency financial statements - The accompanying combined financial statements, have been adjusted to conform with accounting principles generally accepted in the United States of America (U.S. GAAP) and have been translated into U.S. dollars as discussed below. The financial statements are translated into US dollars (presentation currency), considering the following methodologies: Global Chem and Chem Servicios, whose functional currency and local currency is the same (Mexican Peso), convert their financial statements to the presentation currency using the following exchange rates: 1) closing for assets and liabilities; 2) historical for stockholders' equity and 3) the date of accrual for income, costs and expenses. The conversion effects are recorded in other comprehensive income. Ultra Chem, S. de R.L. de C.V., Ultra Chem Costa Rica Ltda., and Ultra Chem Centroamerica, S.A., whose local currency (Mexican Peso, Costa Rican Colon and Guatemalan Quetzal, respectively), is different from its functional currency (US dollar), convert their financial statements from the local currency to the functional currency, using the following exchange rates: 1) closing for monetary assets and liabilities; 2) historical for non-monetary assets, non-monetary liabilities and stockholders' equity, and 3) the date of accrual for income, costs and expenses, except for those that come from non-monetary items that are converted at the historical exchange rates. The conversion effects, are recorded in the foreign exchange gain (loss). Recent Accounting Pronouncements - In May 2014 the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue Recognition (Topic 606) Revenue from Contracts with Customers. This ASU prescribes a single comprehensive model for entities to use in the accounting of revenue arising from contracts with customers and requires expanded disclosures surrounding the Company’s revenue transactions. Entities are required to adopt this ASU in annual reporting periods beginning after December 15, 2018 with early adoption permitted only as of annual reporting periods beginning after December 15, 2016. There are two transition options available to entities: the full retrospective approach or the modified retrospective approach. Under the full retrospective approach, the Ultra Chem Group would restate prior periods in compliance with Accounting Standards Codification 250, Accounting Changes and Error Corrections. Alternatively, the Ultra Chem Group may elect the modified retrospective approach, which allows for the new revenue standard to be applied to existing contracts as of the effective date and record a cumulative catch-up adjustment to retained earnings. The Companies are in the process of evaluating the potential effects of this standard and believes it may have a significant impact on its combined financial statements. In January 2015, the FASB issued ASU 2015-01, Income Statement-Extraordinary and Unusual Items (Subtopic 225-20). The amendments in this ASU eliminate the concept of extraordinary items and will no longer require separate classification of them within the statement of operations. Presentation and disclosure guidance for items that are unusual in nature or occur infrequently are retained and are expanded to include items that are both unusual in nature and infrequently occurring. The guidance in this ASU is effective for fiscal years beginning after December 15, 2015. The adoption of this ASU did not have a material impact on the Companies’ combined financial statements.


 
9 In November 2015, the FASB issued ASU 2015-17-Income Taxes (Topic 740). Balance Sheet Classification of Deferred Taxes. This ASU requires an entity to classify all deferred tax assets and liabilities as non-current. These amendments are effective for fiscal years beginning after December 15, 2017 and interim periods within annual periods beginning after December 15, 2018, although early adoption is permitted. The Companies adopted this standard during fiscal year 2015. In February 2016, the FASB issued ASU 2016-02-Leases (Topic 842). This ASU requires all leases with terms greater than 12 months, whether finance or operating, to be recorded on the balance sheet, reflecting a liability to make lease payments and a right-to-use asset representing the right to use the underlying asset for the lease term. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee will not significantly change from current U.S. GAAP. These amendments are effective for the reporting periods beginning after December 15, 2019 with early adoption permitted. An entity will be required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption. The Companies are in the process of evaluating the potential effects of this standard and believes it may have a significant impact on its combined financial statements due, in part, to its substantial number of operating leases. 3. Accounts receivable, net of allowance for doubtful accounts A summary of accounts receivable, net at March 31, 2017 and December 31, 2016 was: March 31, 2017 December 31, 2016 Accounts receivable $ 15,246,854 $ 13,610,100 Allowance for doubtful accounts (724,646) (724,646) Accounts receivable, net $ 14,522,208 $ 12,885,454 There were no write-offs during the three months ended March 31, 2017 and March 31, 2016. 4. Related-party transactions A summary of amounts incurred to related parties during 2017 and 2016 is presented below: March 31, 2017 December 31, 2016 Accounts receivable: Owed from Chem Servicios to Ultra Chem $ 1,813,833 $ 1,702,996 Owed from Chem Servicios to Global Chem 105,065 54,843 Total $ 1,918,898 $ 1,757,839


 
10 Accounts payable: Owed to Chem Servicios from Ultra Chem $ 864,073 $ 856,175 Owed to Global Chem from Ultra Chem 301,306 147,024 Owed to Ultra Chem from Global Chem 753,519 754,640 Total $ 1,918,898 $ 1,757,839 For the three months ended in March 31, 2017 and March 31, 2016, Ultra Chem Group entered into the following related party transactions: 2017 Ultra Chem Chem Servicios Global Chem Services: Sale/purchase of inventories $ 372,131 $ - $ 372,131 Administrative services 1,221,516 1,268,020 46,504 2016 Ultra Chem Chem Servicios Global Chem Services: Sale/purchase of inventories $ 324,771 $ - $ 324,771 Administrative services 909,408 943,090 33,682 5. Recoverable taxes Recoverable taxes at March 31, 2017 and December 31, 2016 are presented below: March 2017 December 2016 Income taxes $ 697,590 $ 14,343 VAT receivable 1,186,178 817,441 $ 1,883,768 $ 831,784 6. Inventories A summary of amounts of inventories at March 31, 2017 and December 31, 2016 is presented below: March 31, 2017 December 31, 2016 Inventories $ 9,357,216 $ 8,648,460 Obsolete inventory reserve (42,747) (42,747) Total $ 9,314,469 $ 8,605,713 There were no write-offs during the three months ended March 31, 2017 and March 31, 2016.


 
11 7. Machinery and equipment Machinery and equipment at March 31, 2017 and December 31, 2016 are presented below: March 31, 2017 December 31, 2016 Machinery and plant equipment $ 185,823 $ 160,936 Vehicles 464,476 451,058 Furniture and fixtures 114,847 108,403 Computer equipment 101,216 96,930 Improvements 8,720 8,720 Total 875,082 826,047 Less accumulated depreciation (507,829) (478,149) Machinery and equipment – net $ 367,253 $ 347,898 Depreciation expense for the three months ended March 31, 2017 and March 31, 2016 was $34,323 and $80,252, respectively 8. Borrowings Since February 13, 2008, Ultra Chem has a short-term loan with Banco Nacional de México S.A. de C.V. the borrowing amount as of December 31, 2014, was $382,676 (USD equivalent). Additionally on December 11 and 16, 2014, Ultra Chem subscribed three notes payable for the amount of $1,017,998 total (USD equivalent) $339,333 (USD equivalent) each one, at a stated interest rate of 7%. On May 20, 2015, Ultra Chem signed a contract with Banco Nacional de México S.A. de C.V. in which the short-term loan was converted into a line of credit up to $1,441,770 (USD equivalent as of December 31, 2015) with a maturity date of May 27, 2016. In May 2016, the limit was increased up to $1,623,579 (USD equivalent). The annual interest rate was TIIE (Interbank equilibrium rate by its acronym in Spanish) plus an applicable margin of 4.0% for fiscal year ended December 31, 2016. The outstanding borrowing balances for this line of credit as of March 31, 2017 was $894,242 and weighted average interest rate of 6.94%. On April 1, 2016, Ultra Chem signed a line of credit with Banco del Bajío, S.A. up to $242,014 (USD equivalent) with a due date up to three years from the date of the first draw. The interest rate may be fixed or variable based on the agreement reached at the time of each draw. For fixed rates the bank will determine the percentage, and variable rates will be based on TIIE plus a margin determined at the date of the draw. The outstanding borrowing balance for this line of credit as of March 31, 2017 and December 31, 2016 was $0 and $173,141 (USD equivalent) respectively, with an interest rate of TIIE (not to exceed 8.0%) plus a margin of 6.8%. 9. Commitments, contingencies and litigation Operating Leases We are a lessee of office buildings, transportation equipment, and warehouses under operating lease agreements that expire at various dates. Rent expense was $205,392 and $188,643 for the periods ended March 31, 2017 and March 31, 2016, respectively. From time to time, we are involved in certain litigation and claims incidental to our business. We do not believe, based on currently available information, that these matters will have a material adverse effect on our financial position, results of operations, or cash flows.


 
Exhibit
Exhibit 99.4

UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION

On April 3, 2017,  Nexeo Solutions, Inc., a Delaware corporation (the “Company” or “Nexeo”), through its wholly owned subsidiaries, completed the acquisition (the “Ultra Chem Acquisition”) of the equity interests of the Mexico City, Mexico based chemicals distribution business of Ultra Chem, S. de R.L. de C.V. and its related entities (collectively, “Ultra Chem Group”) from the Ultra Chem Group shareholders for approximately $56.8 million, net of cash acquired of $0.5 million, pursuant to a Stock Purchase Agreement dated March 9, 2017 (the “Stock Purchase Agreement”). This amount excludes the assumption of $0.9 million in short-term borrowings of Ultra Chem Group, which were repaid by the Company immediately after closing. Of the purchase price, approximately $10.7 million was placed in escrow. Of this amount, approximately $1.0 million relates to the settlement of the final net working capital adjustment expected no later than 90 days following the close of the transaction. The remaining balance of approximately $9.7 million may remain in escrow for a period of up to five years and relates to potential indemnification obligations under the Stock Purchase Agreement. The escrow amount will be released as prescribed by the terms of the Stock Purchase Agreement and related documentation. The Ultra Chem Acquisition was financed with approximately $58.0 million of borrowings under the Company’s asset-based revolving credit facility.

The unaudited pro forma condensed combined statement of operations for the six months ended March 31, 2017 combines Nexeo’s condensed consolidated statement of operations for the six months ended March 31, 2017 with Ultra Chem Group’s condensed consolidated statement of operations for the six months ended March 31, 2017. In accordance with the Securities and Exchange Commission Regulation S-X 11-02(c)(3), as the fiscal year ends of each company are less than 93 days apart, the unaudited pro forma combined statement of operations for the year ended September 30, 2016 combines Nexeo’s unaudited pro forma combined statement of operations for the year ended September 30, 2016 (see further discussion below) with Ultra Chem Group’s consolidated statement of operations for the year ended December 31, 2016. These unaudited pro forma combined statements of operations give effect to the Ultra Chem Acquisition as if it had occurred on October 1, 2015, the beginning of Nexeo’s most recently completed fiscal year. The unaudited pro forma condensed combined balance sheet at March 31, 2017 combines Nexeo’s condensed consolidated balance sheet at March 31, 2017 with Ultra Chem Group’s combined balance sheet at March 31, 2017, giving effect to the Ultra Chem Acquisition as if it had occurred on March 31, 2017.

On June 9, 2016, WL Ross Holding Corp. (“WLRH”), Nexeo Solutions Holdings, LLC (“Holdings”) and certain other parties consummated a merger pursuant to the merger agreement between the parties (the “Business Combination”). WLRH was identified as the acquirer for accounting purposes and Holdings was identified as the acquiree and accounting predecessor.  The “Predecessor” activity presented in Note 2 relates to Holdings business for the periods prior to June 9, 2016.  WLRH, which includes Holdings for periods subsequent to the Business Combination, was subsequently renamed “Nexeo Solutions, Inc.” and is the “Successor” for periods after June 9, 2016, and changed its fiscal year end from December 31st to September 30th. In order to present a full 2016 fiscal year of the Company’s operations for purposes of the fiscal year ended September 30, 2016 pro forma combined financial information included herein, the unaudited pro forma combined financial information of Nexeo for the year ended September 30, 2016 combines the Successor and Predecessor periods, and makes certain pro forma adjustments to reflect the Business Combination as if it had occurred on October 1, 2015, the beginning of the Company’s most recent fiscal year as outlined below in Note 2.

The historical combined statements of operations of Ultra Chem Group have been adjusted to reflect certain reclassifications and other adjustments in order to conform to the Company’s financial statement presentation and accounting policies. The historical consolidated financial statements have been adjusted in the unaudited pro forma condensed combined financial information to give pro forma effect to events that are: (1) directly attributable to the Ultra Chem Acquisition; (2) factually supportable; and (3) with respect to the statement of operations, expected to have a continuing impact on the combined company’s results. The unaudited pro forma condensed combined financial information has been developed from and should be read in conjunction with:

the accompanying notes to the unaudited combined pro forma financial information;
the historical unaudited condensed consolidated financial statements of the Company as of and for the six months ended March 31, 2017, included in the Company’s quarterly report on Form 10-Q for the six months ended March 31, 2017;

1


the historical consolidated financial statements of the Company as of and for the fiscal year ended September 30, 2016, included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2016;
the combined financial statements of Ultra Chem Group as of and for the fiscal years ended December 31, 2016, 2015 and 2014; and
the unaudited combined financial statements of Ultra Chem Group as of March 31, 2017 and for the three months ended March 31, 2017 and 2016.

The unaudited pro forma condensed combined financial information has been prepared using the acquisition method of accounting in accordance with U.S. GAAP with the Company as the acquirer. Under the acquisition method of accounting, the purchase price is allocated to the underlying tangible and intangible assets acquired and liabilities assumed based on their respective fair market values as of the acquisition date with any excess purchase price allocated to goodwill.
 
The Company has not completed the detailed valuation studies necessary to arrive at the required estimates of the fair value of the assets acquired, the liabilities assumed and the related allocations of the purchase price in the Ultra Chem Acquisition. As a result, the unaudited pro forma adjustments are preliminary and are subject to change as additional information becomes available and as additional analyses are performed. The unaudited pro forma adjustments have been made solely for the purpose of providing the unaudited pro forma condensed combined financial information presented below. The Company has estimated the fair value of assets acquired and liabilities assumed based on discussions with members of Ultra Chem Group’s management, preliminary valuation studies, due diligence and information presented in the financial statements and accounting records of Ultra Chem Group. The valuation will be finalized as soon as practicable within the required measurement period, but in no event later than twelve months following completion of the Ultra Chem Acquisition. Any increases or decreases in the fair value of these assets and liabilities upon completion of the final valuations will result in adjustments to the balance sheet and/or statement of operations. In addition, the final purchase price of the Ultra Chem Acquisition is subject to the settlement of the final net working capital adjustment expected no later than 90 days following the close of the Ultra Chem Acquisition. The final purchase price and the final purchase price allocation may be different than that reflected in the preliminary purchase price allocation presented herein, and this difference may be material.
 
Assumptions and estimates underlying the unaudited pro forma adjustments set forth in the unaudited pro forma condensed combined financial information are described in the accompanying notes. The unaudited pro forma condensed combined financial information has been presented for illustrative purposes only and is not necessarily indicative of the operating results and financial position that would have been achieved had the Ultra Chem Acquisition occurred on the dates indicated. Further, the unaudited pro forma condensed combined financial information does not purport to project the future operating results or financial position of the Company following the Ultra Chem Acquisition. The unaudited pro forma adjustments represent management’s estimates based on information available as of the date of this unaudited pro forma condensed combined financial information and are subject to change as additional information becomes available and analyses are performed.
 
The unaudited pro forma condensed combined financial information, although helpful in illustrating the financial characteristics of the Company under one set of assumptions, does not reflect the benefits of cost-saving initiatives (or associated costs to achieve such savings), opportunities to earn additional revenue, or other factors that may result as a consequence of the Ultra Chem Acquisition and, accordingly, does not attempt to predict or suggest future results. The unaudited pro forma condensed combined financial information also excludes the effects of costs associated with any restructuring activities, integration activities or asset dispositions resulting from the Ultra Chem Acquisition, as they are currently not known, and to the extent they occur, are expected to be non-recurring and were not incurred as of the closing date of the Ultra Chem Acquisition. However, such costs could affect the combined company following the Ultra Chem Acquisition in the period the costs are incurred or recorded.





2


Nexeo Solutions, Inc.
Unaudited Pro Forma Combined Statement of Operations
For the Six Months Ended March 31, 2017
(in millions except per share data)
 
Historical Statement of
Operations Information
 
Pro Forma
 
Nexeo Solutions, Inc.
 
Ultra Chem Acquisition (Note 2)
 
Adjustments (Note 4)
 
 
Combined
Sales and operating revenues
$
1,712.5

 
$
35.3

 
$

 
 
$
1,747.8

Cost of sales and operating expenses
1,525.9

 
28.8

 

 
 
1,554.7

Gross Profit
186.6

 
6.5

 

 
 
193.1

Selling, general & administrative costs
154.5

 
3.2

 
1.4

(a)
 


 
 
 
 
 
(1.2
)
(b)
 
157.9

Transaction related costs
1.1

 
0.2

 
(0.3
)
(c)
 
1.0

Change in fair value of contingent consideration obligations
20.6

 

 

 
 
20.6

Operating income (loss)
10.4

 
3.1

 
0.1

 
 
13.6

Other income, net
2.6

 

 

 
 
2.6

Interest income (expense)
 
 
 
 
 
 
 
 
Interest income
0.2

 

 

 
 
0.2

Interest expense
(24.5
)
 
(0.1
)
 
(0.5
)
(d)
 
(25.1
)
Net income (loss) before income taxes
(11.3
)
 
3.0

 
(0.4
)
 
 
(8.7
)
Income tax expense (benefit)
(1.9
)
 
1.0

 
(0.1
)
(e)
 
(1.0
)
Net income (loss) Attributable to the Combined Operations
$
(9.4
)
 
$
2.0

 
$
(0.3
)
 
 
$
(7.7
)
 
 
 
 
 
 
 
 
 
Net loss per share available to common stockholders
 
 
 
 
 
 
 
 
    Basic and diluted
$
(0.12
)
 
 
 
 
 
 
$
(0.10
)
Weighted average number of common shares outstanding
 
 
 
 
 
 
 
 
    Basic and diluted
76,746,168

 
 
 
 
 
 
76,746,168







Nexeo Solutions, Inc.
Unaudited Pro Forma Combined Statement of Operations
For the Year Ended September 30, 2016
(in millions except per share data)
 
Pro forma Combined Financial Information (Note 2)
 
Historical Statement of Operations Information (Note 2)
 
Pro Forma
 
Nexeo Solutions, Inc.
 
Ultra Chem Acquisition
 
Adjustments (Note 4)
 
 
Combined
Sales and operating revenues
$
3,405.8

 
$
61.8

 
$

 
 
$
3,467.6

Cost of sales and operating expenses
3,030.1

 
50.1

 

 
 
3,080.2

Gross profit
375.7

 
11.7

 

 
 
387.4

Selling, general & administrative costs
303.0

 
5.8

 
2.7

(a)
 


 
 
 
 
 
(0.7
)
(b)
 
310.8

Transaction related costs

 
0.1

 
(0.1
)
(c)
 

Change in fair value of contingent consideration obligations
(11.2
)
 

 

 
 
(11.2
)
Operating income (loss)
83.9

 
5.8

 
(1.9
)
 
 
87.8

Other income, net
3.4

 
0.2

 

 
 
3.6

Interest income (expense)
 
 
 
 
 
 
 
 
Interest income
0.9

 

 

 
 
0.9

Interest expense
(47.1
)
 
(0.1
)
 
(1.1
)
(d)
 
(48.3
)
Income (loss) from continuing operations before income taxes
41.1

 
5.9

 
(3.0
)
 
 
44.0

Income tax expense (benefit)
14.5

 
2.1

 
(1.0
)
(e)
 
15.6

Net income from continuing operations
26.6

 
3.8

 
(2.0
)
 
 
28.4

Net income from discontinued operations, net of tax
0.1

 

 

 
 
0.1

Net Income (Loss) Attributable to the Combined Operations
$
26.7

 
$
3.8

 
$
(2.0
)
 
 
$
28.5

 
 
 
 
 
 
 
 
 
Net loss per share available to common stockholders
 
 
 
 
 
 
 
 
Basic
$
0.35

 
 
 
 
 
 
$
0.37

Diluted
$
0.35

 
 
 
 
 
 
$
0.37

Weighted average number of common shares outstanding
 
 
 
 
 
 
 
 
Basic
76,746,168

 
 
 
 
 
 
76,746,168

Diluted
76,802,401

 
 
 
 
 
 
76,802,401
























Nexeo Solutions, Inc.
Unaudited Pro Forma Combined Balance Sheet
As of March 31, 2017
(in millions)
 
Historical Balance Sheet
Information
 
Pro Forma
 
Nexeo Solutions, Inc.
 
Ultra Chem Acquisition (Note 2)
 
Adjustments
(Note 4)
 
 
Combined
Current Assets
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
95.3

 
$
0.5

 
$
(58.3
)
(f)
 
$
37.5

Accounts and notes receivable, net
540.4

 
14.5

 

 
 
554.9

Inventories
336.4

 
9.3

 
1.2

(g)
 
346.9

Other current assets
23.8

 
2.1

 

 
 
25.9

Total current assets
995.9

 
26.4

 
(57.1
)
 
 
965.2

 
 
 
 
 
 
 
 
 
Non-Current Assets
 
 
 
 
 
 
 
 
Property, plant and equipment, net
327.3

 
0.4

 

 
 
327.7

Goodwill
661.0

 

 
22.0

(h)
 
683.0

Other intangible assets, net of amortization
211.2

 

 
24.7

(i)
 
235.9

Deferred income taxes

1.6

 
0.2

 

 
 
1.8

Other non-current assets
10.9

 
0.1

 

 
 
11.0

Total non-current assets
1,212.0

 
0.7

 
46.7

 
 
1,259.4

Total Assets
$
2,207.9

 
$
27.1

 
$
(10.4
)
 
 
$
2,224.6

 
 
 
 
 
 
 
 
 
Current Liabilities
 
 
 
 
 
 
 
 
Short-term borrowings, current portion of long-term debt and capital lease obligations
$
47.1

 
$
0.9

 
$
(0.9
)
(f)
 
$
47.1

Accounts payable
353.3

 
12.8

 

 
 
366.1

Accrued expenses and other liabilities
37.6

 
2.9

 

 
 
40.5

Due to related party pursuant to contingent consideration obligations

5.1

 

 

 
 
5.1

Income taxes payable
2.3

 
1.0

 

 
 
3.3

Total current liabilities
445.4

 
17.6

 
(0.9
)
 
 
462.1

 
 
 
 
 
 
 
 
 
Non-Current Liabilities
 
 
 
 
 
 
 
 
Long-term debt and capital lease obligations, less current portion, net
871.3

 

 

 
 
871.3

Deferred income taxes
16.4

 

 

 
 
16.4

Due to related party pursuant to contingent consideration obligations
135.9

 

 

 
 
135.9

Other non-current liabilities
7.5

 
0.1

 

 
 
7.6

Total non-current liabilities
1,031.1

 
0.1

 

 
 
1,031.2

Total Liabilities
1,476.5

 
17.7

 
(0.9
)
 
 
1,493.3

 
 
 
 
 
 
 
 
 
Equity
 
 
 
 
 
 
 
 
Preferred Stock

 

 

 
 

Common stock

 
1.1

 
(1.1
)
(j)
 

Additional paid-in capital
761.6

 

 

 
 
761.6

Retained Earnings (Accumulated Deficit)
(19.0
)
 
8.5

 
(8.6
)
(j)
 
(19.1
)
Accumulated other comprehensive loss
(11.2
)
 
(0.2
)
 
0.2

(j)
 
(11.2
)
Total equity
731.4

 
9.4

 
(9.5
)
 
 
731.3

Total liabilities & equity
$
2,207.9

 
$
27.1

 
$
(10.4
)
 
 
$
2,224.6





NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
(in millions except per share data)

1. Description of the Ultra Chem Acquisition

On April 3, 2017,  Nexeo Solutions, Inc., a Delaware corporation (the “Company” or “Nexeo”), through its wholly owned subsidiaries, completed the acquisition (the “Ultra Chem Acquisition”) of the equity interests of the Mexico City, Mexico based chemicals distribution business of Ultra Chem, S. de R.L. de C.V. and its related entities (collectively, “Ultra Chem Group”) from the Ultra Chem Group shareholders for approximately $56.8 million, net of cash acquired of $0.5 million, pursuant to that certain Stock Purchase Agreement, dated March 9, 2017 (the “Stock Purchase Agreement”). This amount excludes the assumption of $0.9 million in short-term borrowings of Ultra Chem Group, which were repaid by the Company immediately after closing. Of the purchase price, approximately $10.7 million was placed in escrow. Of this amount, approximately $1.0 million relates to the settlement of the final net working capital adjustment expected no later than 90 days following the close of the transaction. The remaining balance of approximately $9.7 million may remain in escrow for a period of up to five years and relates to potential indemnification obligations under the Stock Purchase Agreement. The escrow amount will be released as prescribed by the terms of the Stock Purchase Agreement and related documentation. The Ultra Chem Acquisition was financed with approximately $58.0 million of borrowings under the Company’s asset-based revolving credit facility (the “ABL Facility”), which was drawn by the Company as of March 31, 2017.

2. Basis of Pro Forma Presentation

The unaudited pro forma condensed combined financial information has been prepared using the acquisition method of accounting and is based on the historical condensed consolidated financial statements of Nexeo and the Ultra Chem Group. The unaudited pro forma condensed combined statement of operations for the six months ended March 31, 2017 combines Nexeo’s condensed consolidated statement of operations for the six months ended March 31, 2017 with Ultra Chem Group’s condensed consolidated statement of operations for the six months ended March 31, 2017. In accordance with the Securities and Exchange Commission Regulation S-X 11-02(c)(3), as the fiscal year ends of each company are less than 93 days apart, the unaudited pro forma combined statement of operations for the year ended September 30, 2016 combines Nexeo’s unaudited pro forma combined statement of operations for the year ended September 30, 2016 (see further discussion below) with Ultra Chem Group’s consolidated statement of operations for the year ended December 31, 2016. These unaudited pro forma combined statements of operations give effect to the Ultra Chem Acquisition as if it had occurred on October 1, 2015, the beginning of Nexeo’s most recently completed fiscal year. The unaudited pro forma condensed combined balance sheet at March 31, 2017 combines Nexeo’s condensed consolidated balance sheet at March 31, 2017 with Ultra Chem Group’s combined balance sheet at March 31, 2017, giving effect to the Ultra Chem Acquisition as if it had occurred on March 31, 2017

On June 9, 2016, WL Ross Holding Corp. (“WLRH”), Nexeo Solutions Holdings, LLC (“Holdings”) and certain other parties consummated a merger pursuant to the merger agreement between the parties (the “Business Combination”). WLRH was identified as the acquirer for accounting purposes and Holdings was identified as the acquiree and accounting predecessor.  The “Predecessor” activity presented below relates to Holdings business for the periods prior to June 9, 2016. WLRH, which includes Holdings for periods subsequent to the Business Combination, was subsequently renamed “Nexeo Solutions, Inc.” and is the “Successor” for periods after June 9, 2016, and changed its fiscal year end from December 31st to September 30th. This acquisition was accounted for as a business combination using the acquisition method of accounting and the Successor financial statements reflect a new basis of accounting for the assets and liabilities of Holdings that is based on the fair value of net assets acquired and liabilities assumed.  The Successor period in the consolidated financial statements as of September 30, 2016 and for the fiscal year ended September 30, 2016 includes 114 days (June 9, 2016 through September 30, 2016) of the combined operating results, as well as the fiscal year ended September 30, 2016 of WLRH’s operating results, which reflect its financial activity including transaction costs and equity structure changes in preparation of the consummation of the Business Combination. The Predecessor periods in the consolidated financial statements of Nexeo represent the operating results of Holdings and its subsidiaries prior to the Business Combination. The unaudited pro forma combined financial information of Nexeo for the year ended September 30, 2016 presented herein combines the Successor and Predecessor periods, and makes certain pro forma adjustments to reflect the Business Combination as if it had occurred on October 1, 2015, the beginning of the Company’s most recent fiscal year.
 




The acquisition method of accounting is based on Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) 805, Business Combination (“ASC 805”), and uses the fair value concepts defined in FASB ASC 820, Fair Value Measurements (“ASC 805”). ASC 805 requires, among other things, that most assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date by the Company, who was determined to be the accounting acquirer.
 
ASC 820 defines the term “fair value,” sets forth the valuation requirements for any asset or liability measured at fair value, expands related disclosure requirements and specifies a hierarchy of valuation techniques based on the nature of the inputs used to develop the fair value measures. Fair value is defined in ASC 820 as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” This is an exit price concept for the valuation of the asset or liability. In addition, market participants are assumed to be buyers and sellers in the principal (or the most advantageous) market for the asset or liability. Fair value measurements for an asset assume the highest and best use by these market participants. Many of these fair value measurements can be highly subjective, and it is possible that other professionals, applying reasonable judgment to the same facts and circumstances, could develop and support a range of alternative estimated amounts.
 
Under ASC 805, acquisition-related transaction costs are not included as a component of consideration transferred but are accounted for as expenses in the periods in which such costs are incurred. Acquisition-related transaction costs expected to be incurred as part of the Ultra Chem Acquisition include estimated fees related to the issuance of long-term debt, as well as advisory, legal and accounting fees.
 
The unaudited pro forma condensed combined financial information does not reflect the impact of possible revenue or earnings enhancements, cost savings initiatives, or asset dispositions. Also, the unaudited pro forma condensed combined financial information does not reflect possible adjustments related to restructuring or integration activities that have yet to be determined or transaction or other costs following the Ultra Chem Acquisition that are not expected to have a continuing impact.





Historical Financial Information

Ultra Chem Group

The historical combined balance sheet of Ultra Chem Group as of March 31, 2017 was derived from the Ultra Chem Group’s combined unaudited financial statements as of and for the six months ended March 31, 2017, adjusted as shown below for certain reclassifications and other adjustments made to conform to the Company’s presentation and accounting policies.  


Ultra Chem Group Balance Sheet as of March 31, 2017

 
March 31, 2017, as reported
 
Reclassifications
 
March 31, 2017, after Reclassifications
Cash and cash equivalents
$
0.5

 
$

 
$
0.5

Accounts & notes receivable, net
14.5

 

 
14.5

Inventories
9.3

 

 
9.3

Other current assets
2.2

 
(0.1
)
 
2.1

Total current assets
26.5

 
(0.1
)
 
26.4

 
 
 
 
 
 
Property, plant and equipment, net
0.4

 

 
0.4

Deferred income taxes
0.2

 

 
0.2

Other non-current assets

 
0.1

 
0.1

Total non-current assets
0.6

 
0.1

 
0.7

Total assets
$
27.1

 
$

 
$
27.1

 
 
 
 
 
 
Short-term borrowings, current portion of long-term debt and capital lease obligations
$
0.9

 
$

 
$
0.9

Accounts payable
12.9

 
(0.1
)
 
12.8

Accrued expenses and other liabilities
2.6

 
0.3

 
2.9

Income tax payable
1.2

 
(0.2
)
 
1.0

Total current liabilities
17.6

 

 
17.6

 
 
 
 
 
 
Other non-current liabilities
0.1

 

 
0.1

Total non-current liabilities
0.1

 

 
0.1

Total liabilities
17.7

 

 
17.7

 
 
 
 
 
 
Common stock
1.1

 

 
1.1

Retained Earnings
8.5

 

 
8.5

Accumulated other comprehensive loss
(0.2
)
 

 
(0.2
)
Total members’ equity
9.4

 

 
9.4

Total liabilities & equity
$
27.1

 
$

 
$
27.1





The historical combined statement of operations of the Ultra Chem Group for the six months ended March 31, 2017 was derived from Ultra Chem Group’s combined unaudited financial statements for the three months ended March 31, 2017, plus the unaudited combined results of operations for the three months ended December 31, 2016, as shown in the schedule below. The historical combined statement of operations of the Ultra Chem Group for the year ended September 30, 2016 was derived from Ultra Chem Group’s combined financial statements for the fiscal year ended December 31, 2016. Certain reclassifications and other adjustments were made to these balances to conform to the Company’s presentation and accounting policies, as outlined below.

Ultra Chem Group Six Months Ended March 31, 2017 Statement of Operations
 
Three Months Ended March 31, 2017
 
Three Months
Ended
December 31, 2016
 
Reclassifications
 
Six Months Ended March 31, 2017
Sales and operating revenues
$
18.3

 
$
17.0

 
$

 
$
35.3

Cost of sales and operating expenses
15.3

 
13.5

 

 
28.8

Gross Profit
3.0

 
3.5

 

 
6.5

Selling, general & administrative costs
1.1

 
1.0

 
1.1

 
3.2

Operating expenses
0.2

 
0.6

 
(0.8
)
 

Transaction related costs

 

 
0.2

 
0.2

Operating income (loss)
1.7

 
1.9

 
(0.5
)
 
3.1

Other income (expense)

 

 

 

Interest income

 

 

 

Interest expense, net

 
(0.1
)
 

 
(0.1
)
Foreign exchange loss
(0.4
)
 
(0.1
)
 
0.5

 

Income (loss) before income taxes
1.3

 
1.7

 

 
3.0

Income tax expense
0.4

 
0.6

 

 
1.0

Net income (loss)   
$
0.9

 
$
1.1

 
$

 
$
2.0



Ultra Chem Group Fiscal Year Ended December 31, 2016 Statement of Operations
 
Year Ended
December 31, 2016
 
Reclassifications
 
Year Ended
December 31, 2016
Sales and operating revenues
$
61.8

 
$

 
$
61.8

Cost of sales and operating expenses
50.1

 

 
50.1

Gross Profit
11.7

 

 
11.7

Selling, general & administrative costs
3.7

 
2.1

 
5.8

Operating expenses
1.2

 
(1.2
)
 

Transaction related costs

 
0.1

 
0.1

Operating income (loss)
6.8

 
(1.0
)
 
5.8

Other income (expense)
0.2

 

 
0.2

Interest expense, net
(0.1
)
 

 
(0.1
)
Foreign exchange loss
(1.0
)
 
1.0

 

Income (loss) before income taxes
5.9

 

 
5.9

Income tax expense
2.1

 

 
2.1

Net income (loss)   
$
3.8

 
$

 
$
3.8






Nexeo Solutions, Inc.
        
The unaudited pro forma combined financial information of Nexeo for the year ended September 30, 2016 presented herein combines the Successor and Predecessor periods, and makes certain pro forma adjustments to reflect the Business Combination as if it had occurred on October 1, 2015, the beginning of the Company’s most recent fiscal year as outlined below:

Nexeo Solutions, Inc. Unaudited Pro Forma Statement of Operations for the Year Ended September 30, 2016
 
Successor
 
Predecessor
 
 
 
 
 
 
 
Fiscal Year Ended September 30, 2016
 
October 1, 2015 through June 8, 2016
 
Pro Forma Adjustments
 
 
 
Pro Forma Combined Fiscal Year Ended September 30, 2016
Sales and operating revenues
$
1,065.7

 
$
2,340.1

 
$

 
 
 
$
3,405.8

Cost of sales and operating expenses
957.3

 
2,068.2

 
4.6

 
(1)
 
3,030.1

Gross Profit
108.4

 
271.9

 
(4.6
)
 
 
 
375.7

Selling, general & administrative costs
91.7

 
208.9

 
2.4

 
(1)
 
303.0

Transaction related costs
21.3

 
33.4

 
(54.7
)
 
(2)
 

Change in fair value of contingent consideration obligations
(11.2
)
 

 

 
 
 
(11.2
)
Operating income (loss)
6.6

 
29.6

 
47.7

 
 
 
83.9

Other income (expense)
0.5

 
2.9

 

 
 
 
3.4

Interest income
0.8

 
0.1

 

 
 
 
0.9

Interest expense, net
(15.1
)
 
(42.3
)
 
10.3

 
(3)
 
(47.1
)
Income (loss) from continuing operations before income taxes
(7.2
)
 
(9.7
)
 
58.0

 
 
 
41.1

Income tax expense
1.2

 
4.2

 
9.1

 
(4)
 
14.5

Net income (loss) from continuing operations
$
(8.4
)
 
$
(13.9
)
 
$
48.9

 
 
 
$
26.6

Net income (loss) from discontinued operations, net of tax

 
0.1

 

 
 
 
0.1

Net income (loss) attributable to Nexeo Solutions, Inc.
$
(8.4
)
 
$
(13.8
)
 
$
48.9

 
 
 
$
26.7

 
 
 
 
 
 
 
 
 
 
Net loss per share available to common stockholders
 
 
 
 
 
 
 
 
 
Basic
$
(0.24
)
 

 

 
 
 
$
0.35

Diluted
$
(0.24
)
 

 

 
 
 
$
0.35

Weighted average number of common shares outstanding
 
 
 
 
 
 
 
 
 
Basic
35,193,789

 

 
41,552,379

 
(5)
 
76,746,168

Diluted
35,193,789

 
 
 
41,608,612

 
(5)
 
76,802,401







(1) Represents the adjustment to record the change in depreciation expense and intangible asset amortization based on the purchase price allocation of the Business Combination as follows (in millions):

 
Pro Forma adjustment for the Year Ended September 30, 2016
Historical depreciation and amortization:
 
Cost of sales and operating expenses
$
21.7

Selling, general and administrative expenses
36.6

Total historical depreciation and amortization
$
58.3

 
 
Pro forma depreciation and amortization:
 
Cost of sales and operating expenses
$
26.3

Selling, general and administrative expenses
39.0

Total pro forma depreciation and amortization
$
65.3

 
 
Net depreciation and amortization:
 
Cost of sales and operating expenses
$
4.6

Selling, general and administrative expenses
2.4

Net adjustments to depreciation and amortization
$
7.0


(2) Represents the adjustment to remove transaction related costs incurred by Nexeo during the periods presented due to their non-recurring nature.
(3)   Represents the net adjustment to interest expense associated with the incurrence of Nexeo’s new debt in connection with the Business Combination, along with the decrease in interest expense related to historical debt of Nexeo that was repaid as part of or just prior to the Business Combination. The net adjustment to interest expense is calculated as follows (in millions):

 
Pro Forma Adjustment for the Year Ended September 30, 2016
 
 
Remove interest expense on Nexeo’s historical debt
$
55.6

Recognize interest expense on Nexeo’s new debt as a result of the Business Combination
(45.3
)
Net adjustments to interest expense
$
10.3


(4)  Represents the reversal of the tax impacts on the unaudited pro forma adjustments that are being eliminated related to depreciation and amortization, transaction related costs and interest expense, and the adjustment to record the additional income tax expense resulting from the unaudited pro forma adjustments related to purchase price allocation adjustments (including additional depreciation and amortization), financing and an adjustment to record the tax expense associated with the income from operations of Nexeo that was previously taxed as a partnership. All adjustments have been calculated based on an estimated global statutory tax rate of 35%. The effective tax rate of the combined company could be significantly different depending on post-acquisition income and other activities in various foreign tax jurisdictions.

(5) Represents the adjustment to weighted average shares outstanding assuming all share activity related to the Business Combination occurred as of October 1, 2015.





3. Preliminary Purchase Price Allocation

The purchase price for the Ultra Chem Acquisition has been allocated to the assets acquired and liabilities assumed for purposes of this pro forma financial information based on their estimated relative fair values. The purchase price allocation herein is preliminary. The final purchase price allocation for the Ultra Chem Acquisition will be determined after completion of a thorough analysis to determine the fair value of all assets acquired and liabilities assumed but in no event later than one year following completion of the Ultra Chem Acquisition. Accordingly, the final acquisition accounting adjustments could differ materially from the accounting adjustments included in the pro forma financial statements presented herein. Any increase or decrease in the fair value of the assets acquired and liabilities assumed, as compared to the information shown herein, could also change the portion of purchase price allocable to goodwill and could impact the operating results of the Company following the acquisition due to differences in purchase price allocation, depreciation and amortization related to some of these assets and liabilities.

The purchase price, net of cash acquired of $0.5 million, was preliminarily allocated as follows:
Accounts receivable
$
14.5

Inventory
10.5

Other current assets
2.1

Property, plant and equipment
0.4

Intangible assets
24.7

Goodwill
22.0

Other non-current assets
0.3

Short-term borrowings (1)
(0.9
)
Accounts payable
(12.8
)
Accrued expenses and other current liabilities
(2.9
)
Income tax payable
(1.0
)
Other non-current liabilities
(0.1
)
Net Assets Acquired
$
56.8


(1) Immediately following the closing of the Ultra Chem Acquisition, the Company paid off the historical short-term borrowings of Ultra Chem Group.

Preliminary identifiable intangible assets in the pro forma financial information consists of intangibles derived from customer relationships, non-compete agreements and certain trade names. Customer relationships were valued through application of the income approach, non-compete agreements were valued using a differential cash flow approach and trade names were valued using the relief-from-royalty method under the income approach. See Note 4 for additional information.

The preliminary purchase price allocation for property, plant and equipment was based on the carrying value of such assets as it was determined to approximate fair value. Property, plant and equipment acquired consists primarily of leasehold improvements, IT and office equipment, and furniture and fixtures.

Goodwill represents the excess of the total purchase price over the fair value of the underlying net assets, largely arising from synergies expected as a result of the Ultra Chem Acquisition. Goodwill is not amortized to earnings, but instead is reviewed for impairment at least annually, absent any indicators of impairment.





4. Pro Forma Adjustments

Pro Forma Adjustments to the Statements of Operations:

(a)
To recognize amortization expense related to identified intangible assets recognized as part of the preliminary purchase price allocation (see note i below).
(b)
To remove payroll costs related to certain Ultra Chem executives who will not join the Company and to remove certain costs related to the Ultra Chem Acquisition incurred by the Company.
 
Pro Forma Adjustment for the Fiscal Year Ended September 30, 2016
 
Pro Forma Adjustment for the Six Months Ended March 31, 2017
 
 
 
 
Remove payroll costs for certain Ultra Chem executives
$
(0.7
)
 
$
(0.5
)
Remove certain costs related to the transaction incurred by Nexeo

 
(0.7
)
Total adjustments to selling, general and administrative expenses
$
(0.7
)
 
$
(1.2
)

(c)
To remove transaction related costs incurred by Ultra Chem Group and the Company during the period.
(d)
To recognize additional interest expense reflecting borrowings of approximately $58.0 million incurred by the Company in connection with the Ultra Chem Acquisition under the Company’s ABL Facility (as though the borrowings were incurred on October 1, 2015), net of the elimination of interest expense associated with Ultra Chem Group’s historical short-term debt, which was paid off immediately following the closing of the Ultra Chem Acquisition. For pro forma purposes, interest was estimated using the applicable borrowing rate under the Company’s ABL Facility as of March 31, 2017, held constant for the periods presented herein.

 
Pro Forma Adjustment for the Fiscal Year Ended September 30, 2016
 
Pro Forma Adjustment for the Six Months Ended March 31, 2017
 
 
 
 
Elimination of Ultra Chem Group interest expense
$
0.1

 
$
0.1

Additional interest expense under Nexeo’s ABL Facility
(1.2
)
 
(0.6
)
Total adjustments to interest expense
$
(1.1
)
 
$
(0.5
)

(e)
To reflect tax expense resulting from the impact of the Ultra Chem Acquisition under the Company’s tax structure, utilizing an estimated effective tax rate in Mexico of approximately 30%.





Pro Forma Adjustments to the Balance Sheet:

(f)
To reflect the use of the Company’s cash as part of the closing as follows:
 
Pro Forma Adjustment as of March 31, 2017
 
 
Payment of purchase price by Nexeo paid to the sellers of Ultra Chem Group1
$
(57.3
)
Payment of transaction costs by Nexeo 2
(0.1
)
Repayment of Ultra Chem Group’s short-term borrowings by Nexeo 3
(0.9
)
Total adjustments to cash and cash equivalents
$
(58.3
)

(1) Represents the payment of cash to the selling shareholders of Ultra Chem Group
(2) Represents an adjustment to record estimated acquisition-related transaction costs. In accordance with ASC 805, acquisition-related transaction costs and related charges are not included as a component of consideration to be transferred but are required to be expensed as incurred. The unaudited pro forma condensed combined balance sheet reflects these costs as a reduction of cash with a corresponding decrease in retained earnings. These costs are not included in the unaudited pro forma condensed combined statement of operations as they are directly related to the Business Combination and will be nonrecurring.
(3) Represents the repayment of historical debt balances owed by Ultra Chem Group.
 
(g)
To reflect the fair value adjustment to inventory as a result of the preliminary purchase price allocation of the Ultra Chem Acquisition. The fair value of inventory was established through application of the income approach, using estimates of selling prices and costs such as selling and marketing expenses to be incurred in order to dispose of the finished products and arriving at the future profitability that is expected to be generated once the inventory is sold (net realizable value).
(h)
To record preliminary goodwill resulting from the preliminary purchase price allocation of the Ultra Chem Acquisition.
(i)
To record identifiable intangible assets related to the Ultra Chem Acquisition. The identifiable intangible assets attributable to the Ultra Chem Acquisition, are comprised of the following:
 
Estimated Fair Value
 
Estimated Remaining useful life (in years)
 
Estimated Pro Forma Amortization Expense for the Year Ended September 30, 2016
 
Estimated Pro Forma Amortization Expense for the Six Months Ended March 31, 2017
Customer relationships
$
24.0

 
10
 
$
2.4

 
$
1.2

Non-compete agreements
0.4

 
2
 
0.2

 
0.1

Trade names
0.3

 
2
 
0.1

 
0.1

Total
$
24.7

 
 
 
$
2.7

 
$
1.4


As part of these preliminary estimates, customer relationships were valued using the income approach. Under this approach, revenue, operating expenses and other costs associated with existing customers were estimated in order to derive cash flows attributable to the existing customer relationships. The resulting cash flows were then discounted to present value at a rate of 17.0% to arrive at the fair value of existing customer relationships as of the valuation date. The trade names were valued through application of the income approach, involving the estimation of likely future sales and an appropriate royalty rate of 0.25%.  The non-compete agreements were valued through a differential cash flow approach, discounted to present value at a rate of 17.0%.





The amortization related to these amortizable identifiable intangible assets is reflected as a pro forma adjustment to the pro forma combined statement of operations using the straight-line method. Management has determined the estimated remaining useful life of these assets based on its consideration of relevant factors. A 10-year remaining useful life for customer relationships has been estimated based on the projected economic benefits associated with these assets. The 10-year estimated useful life represents the approximate point in the projection period in which a majority of the asset’s cash flows are expected to be realized based on assumed attrition rates. A two-year remaining useful life for the trade names has been estimated based on the period in which the Company expects a market participant would use the name prior to rebranding and the length of time the name is expected to maintain recognition and value in the marketplace. A two-year remaining useful life for the non-compete agreements has been estimated, based on the contractual term of the agreements with former shareholders and officers of Ultra Chem Group. These assumptions have been developed based on discussions with former members of Ultra Chem Group’s management and Ultra Chem Group’s historical customer data. The amount that will ultimately be allocated to these assets, and the related amount of amortization, may differ materially from this preliminary allocation.

Amortization expense was calculated using a straight-line method.

(j)
To eliminate the historical equity balances of Ultra Chem Group as of March 31, 2017. Adjustments to accumulated deficit also include the impact of transaction costs paid at closing by Nexeo of $0.1 million.