EX-4.10


  
 Exhibit 4.10

 
 FORM
51-102F4
  

BUSINESS ACQUISITION REPORT
 Item 1 – Identity
of Company
  

		1.1	Name and Address of Company

  
 FirstService Corporation
(“FirstService”)
 1140 Bay Street, Suite 4000
 Toronto,
Ontario
 M5S 2B4
  

		1.2	Executive Officer

  
 The following senior
officer of FirstService is knowledgeable about the significant acquisition and this business acquisition report:
  

Jeremy Rakusin, Chief Financial Officer
 (416) 960-9500

 
 Certain statements in this business acquisition report constitute
forward-looking statements. Readers should refer to the cautionary statement regarding forward-looking statements that appears at the end of this business acquisition report.

 
 Item 2 – Details of Acquisition

 

		2.1	Nature of Business Acquired

  

FirstService acquired 95% of the shares in the capital of Bellwether FOS Holdco, Inc. (“Global Restoration”), a commercial and
large loss property restoration firm, pursuant to the terms of a stock purchase agreement by and among FirstService Restoration, Inc., Global Restoration and Global Restoration Holdings, LLC (the “Global Acquisition”). Headquartered
in Denver, Colorado and founded in 1998, Global Restoration provides integrated end-to-end solutions encompassing mitigation, restoration and reconstruction services on behalf of blue chip, national clients which include large, multi-location
commercial customers, property owners and insurance companies. Global Restoration operates under two brands, Interstate Restoration in the U.S. and FirstOnSite Restoration in Canada, and employs approximately 1,400 staff operating out of 58 regional
offices throughout North America.
  

		2.2	Acquisition Date

  
 The Global Acquisition was completed on June 21,
2019.
  

		2.3	Consideration (all figures in US$)

  

Total consideration for the Global Acquisition was approximately $505 million, paid in cash at closing. The Global Acquisition was financed through
a combination of cash-on-hand, funds borrowed under FirstService’s existing $450 million revolving credit facility which matures in January 2023 and funds borrowed pursuant to a new term loan (implemented and drawn concurrent with the closing
of the Global Acquisition) in the aggregate amount of $440 million which matures in June 2024 and bears interest at 0.25% to 2.50% over floating preference rates, depending on certain leverage ratios.



  





 

		2.4	Effect on Financial Position

  
 There are
no plans or proposals for any material changes in the respective business affairs of FirstService or Global Restoration, other than plans to repay a portion of the funds borrowed to complete the Global Acquisition under FirstService’s revolving
credit facility and/or term loan through the proceeds of any potential securities offerings.
  

Included in this business acquisition report are unaudited pro forma consolidated statements of earnings for FirstService (the “Pro Forma
Statements of Earnings”) for the year ended December 31, 2018 and the quarter ended March 31, 2019, which are based upon the historical financial statements of FirstService and Global Restoration. The Pro Forma Statements of Earnings are
provided for illustrative purposes only and are not intended to represent, or be indicative of, the consolidated earnings of FirstService that would have been reported had the acquisition of Global Restoration been completed as of the date
presented. Accordingly, the Pro Forma Statements of Earnings should not be taken as representative of the future earnings of FirstService.
  

The unaudited pro forma adjustments are made solely for the purposes of preparing the Pro Forma Statements of Earnings. Changes are expected as
the preliminary purchase price allocation based on valuations of assets acquired and liabilities assumed are completed and as additional information becomes available. Accordingly, the pro forma income statement effect of possible changes in fair
value determinations may differ from those set forth in the Pro Forma Statements of Earnings, and such adjustments may be material. The Pro Forma Statements do not reflect the impact of any potential operational efficiencies, cost savings or
economies of scale that FirstService may achieve with respect to the combined operations of FirstService and Global Restoration.
  

The Pro Forma Statements of Earnings should be read in conjunction with FirstService’s audited consolidated financial statements for the year
ended December 31, 2018 and the unaudited consolidated financial statements for the quarter ended March 31, 2019 and the quarter ended June 30, 2019, which are available at www.sedar.com, as well as in conjunction with the audited consolidated
financial statements of FirstOnSite USA Holdings Inc. (the operating holding company held by Global Restoration) for the year ended December 31, 2018 and unaudited consolidated financial statements of FirstOnSite USA Holdings Inc. for the quarter
ended March 31, 2019 included herein.
  
 For further information
relating to the expected effect of the Global Acquisition on FirstService’s financial statements, please refer to the Pro Forma Statements of Earnings appended hereto.

 

		2.5	Prior Valuations

  
 Not applicable.



  





  

		2.6	Parties to Transaction

  
 The Global
Acquisition was not with an “informed person” (as such term is defined in Section 1.1 of National Instrument 51-102 – Continuous Disclosure Obligations), associate or affiliate of FirstService.

 

		2.7	Date of Report

  
 August 23, 2019.

 
 Item 3 – Financial Statements and Other Information

 
 The following financial statements and related notes thereto are
included as part of this Business Acquisition Report (historical financial statements are prepared in accordance with United States generally accepted accounting principles (“US GAAP”)):

 

		a)	Audited combined consolidated financial statements of FirstOnSite USA Holdings Inc. (the operating holding company held by Global Restoration) as of and for the year ended December 31, 2018,
together with the notes thereto.

  

		b)	Unaudited combined consolidated financial statements of the predecessor entities of FirstOnSite USA Holdings Inc., Bellwether International Group LLC and Delos MBHE FOS LLP, as of and for the
year ended December 31, 2017.

  

		c)	Unaudited interim condensed combined consolidated financial statements of FirstOnSite USA Holdings Inc. as of and for the three months ended March 31, 2019 (with unaudited comparatives for three
months ended March 31, 2018).

  

		d)	Unaudited pro forma consolidated statement of earnings for FirstService for the year ended December 31, 2018, which gives pro forma effect to the Global Acquisition as if it occurred on January
1, 2018.

  

		e)	Unaudited pro forma consolidated statement of earnings for FirstService for the three months ended March 31, 2019, which gives pro forma effect to the Global Acquisition as if it had occurred
on January 1, 2018.

  
 Forward-looking Statements

 
 Certain statements in this business acquisition report may include
forward-looking statements which are typically identified by words such as “believe”, “expect”, “anticipate”, “intend”, “estimate”, “plan”, “will”, “should”,
“may”, “could” and other similar expressions. Forward- looking statements include FirstService’s financial performance outlook and statements regarding goals, beliefs, strategies, objectives, plans or current expectations.
Specifically, such forward- looking statements in this business acquisition report include, but are not limited to, statements with respect to the following: the implementation and success of FirstService’s strategy for Global Restoration; that
FirstService has no plans for any material changes in the business affairs of FirstService or Global Restoration, other than plans to repay a portion of the funds borrowed for the Global Acquisition; and the expectation that a portion of the funds
borrowed for the Global Acquisition could be repaid through potential securities offerings. These statements involve known and unknown risks, uncertainties and other factors which may cause the actual results to be materially different from any
future results, performance or achievements contemplated in the forward-looking statements. Such factors include: economic conditions, especially as they relate to credit conditions and consumer spending; residential real estate property values,
resale rates and general conditions of financial liquidity for real estate transactions; extreme weather conditions impact in the demand for FirstService’s services or FirstService’s ability to perform those services; economic
deterioration impacts FirstService’s ability to recover goodwill and other intangible assets; ability to generate cash from our businesses to fund future acquisitions and meet our debt obligations; the effects of changes in foreign exchange
rates in relation to the U.S. dollar on Canadian dollar denominated revenues and expenses; competition in the markets served by FirstService; labour shortages or increases in wage and benefit costs; the effects of changes in interest rates on the
cost of borrowing; continued compliance with the financial covenants under debt agreements, or the ability to negotiate a waiver of certain covenants with lenders; unexpected increases in operating costs; changes in the frequency or severity of
insurance incidents relative to historical experience; the ability to make acquisitions at reasonable prices and successfully integrate acquired operations; changing laws and regulations; liability for employee acts or omissions, or
installation/system failure, in FirstService’s fire protection businesses; risks arising from any regulatory review and litigation; intellectual property and other proprietary rights that are material to FirstService’s business;
disruptions or security failures in our information technology systems; political conditions, including any outbreak or escalation of terrorism or hostilities; and changes in government policies. The foregoing list is not exhaustive.

 

  





 
 Additional factors and explanatory information are
identified in FirstService’s Annual Information Form for the year ended December 31, 2018 under the heading “Risk factors” (which factors are adopted herein and a copy of which can be obtained at www.sedar.com) and Annual Report on
Form 40-F filed with the United States Securities and Exchange Commission (which factors are adopted herein and a copy of which can be obtained at www.sec.gov), and other periodic filings with Canadian and US securities regulators. Forward looking
statements contained in this business acquisition report are made as of the date hereof and are subject to change. All forward-looking statements in this business acquisition report are qualified by these cautionary statements. Unless otherwise
required by applicable laws, FirstService does not intend, nor does FirstService undertake any obligation, to update or revise any forward-looking statements contained in this business acquisition report to reflect subsequent information, events,
results or circumstances or otherwise.
 
  

 
  
  

 
  

  





 
  



	 
	 
	 	 
	 	 	FirstOnSite USA Holdings Inc. and Subsidiaries
	 	 	 
	 	 	Combined Consolidated Financial Statements
	 	 
	 	 	Year Ended December 31, 2018
	 	 
	
	 

  
  

 
 

 



FirstOnSite USA Holdings Inc. and Subsidiaries



  
 Contents

 
 
 

 


  
 

	Independent Auditor’s Report	 	 	1	 
	 	 	 	 	 
	Combined Consolidated Balance Sheet	 	 	2 – 3	 
	 	 	 	 	 
	Combined Consolidated Statement of Income and Comprehensive Income	 	 	4	 
	 	 	 	 	 
	Combined Consolidated Statement of Changes in Stockholder’s Equity	 	 	5	 
	 	 	 	 	 
	Combined Consolidated Statement of Cash Flows	 	 	6 – 7	 
	 	 	 	 	 
	Summary of Significant Accounting Policies	 	 	8 – 15	 
	 	 	 	 	 
	Notes to Combined Consolidated Financial Statements	 	 	16 – 27	 
	 	 	 	 	 
	Supplementary Information:	 	 	 	 
	 	 	 	 	 
	Independent Auditor’s Report on Supplementary Information	 	 	28	 
	 	 	 	 	 
	Combining Consolidating Balance Sheet	 	 	29 – 30	 
	 	 	 	 	 
	Combining Consolidating Statement of Income and Comprehensive Income	 	 	31	 

  
  

 

 






  

	
	Tel:     817-738-2400

Fax:     817-738-1995
 www.bdo.com

	 Bank of America Tower

301 Commerce Street, Suite 2000
 Fort Worth, TX
76102
 

 
  
 Independent Auditor’s Report

 
 Board of Directors and Stockholder

FirstOnSite USA Holdings Inc. and Subsidiaries
 Fort Worth, Texas

 
 We have audited the accompanying combined consolidated financial
statements of FirstOnSite USA Holdings Inc. and Subsidiaries (the “Company”), which comprise the combined consolidated balance sheet as of December 31, 2018, and the related combined consolidated statements of income and comprehensive
income, changes in stockholder’s equity, and cash flows for the year then ended, and the related notes to the combined consolidated financial statements.
  

Management’s Responsibility for the Financial Statements
  

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

Auditor’s Responsibility
  

Our responsibility is to express an opinion on these combined consolidated financial statements based on our audit. We conducted our audit in
accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined consolidated financial statements are free
from material misstatement.
  
 An audit involves performing
procedures to obtain audit evidence about the amounts and disclosures in the combined consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of
the combined consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the combined consolidated
financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion.
An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the combined consolidated financial
statements.
  
 We believe that the audit evidence we have obtained
is sufficient and appropriate to provide a basis for our audit opinion.
  

Opinion
  

In our opinion, the combined consolidated financial statements referred to above present fairly, in all material respects, the financial position
of FirstOnSite USA Holdings Inc. and Subsidiaries at December 31, 2018, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

 
  

  
 

May 14, 2019
  

 

 
BDO USA,
LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member
firms.
 
BDO is the brand name for the BDO network
and for each of the BDO Member Firms.




FirstOnSite USA Holdings Inc. and
Subsidiaries
 

Combined Consolidated Balance Sheet



 
 

 


 
 

 
 
 


 
 

	December 31,	 	 	2018	 
	 	 	 
	Assets	 	 	 	 
	 	 	 	 	 
	Current:	 	 	 	 
	Cash and cash equivalents	 	$	264,056	 
	Accounts receivable:	 	 	 	 
	Trade, net of allowance	 	 	118,765,681	 
	Unbilled	 	 	45,155,381	 
	Inventory and supplies	 	 	2,360,762	 
	Prepaid and other	 	 	3,169,174	 
	 	 	 	 	 
	Total current assets	 	 	169,715,054	 
	 	 	 	 	 
	Property and equipment, net	 	 	13,966,703	 
	 	 	 	 	 
	Other assets:	 	 	 	 
	Advances to Parent
	 	 	57,163,731	 
	Intangible assets, net	 	 	42,326,760	 
	Goodwill	 	 	19,842,212	 
	Deferred tax assets	 	 	3,082,071	 
	Deposits	 	 	198,813	 
	 	 	 	 	 
	Total other assets	 	 	122,613,587	 
	 	 	 	 	 
	Total assets	 	$	306,295,344	 
	 	 	 	 	 
	 	 	 	Continued.
	 

  

 
2





FirstOnSite USA Holdings Inc. and
Subsidiaries
 

Combined Consolidated Balance Sheet



 
 

 


 
  

	December 31,	 	2018
	 	 	 	 	 
	 Liabilities and Stockholder's Equity	 	 	 	 
	 	 	 	 	 
	 Liabilities 	 	 	 	 
	 Current:	 	 	 	 
	 Checks drawn against future deposits	 	$	6,320,570	 
	Accounts payable - trade	 	 	33,161,817	 
	Accrued expenses	 	 	8,980,687	 
	Accrued compensation	 	 	17,094,259	 
	Income taxes payable	 	 	1,607,202	 
	Deferred revenue - billings in excess of costs	 	 	15,476,101	 
	Current maturities of long-term debt	 	 	5,500,000	 
	Current maturities of capital leases	 	 	1,289,995	 
	 	 	 	 	 
	 Total current liabilities	 	 	89,430,631	 
	 	 	 	 	 
	 Long-term liabilities:	 	 	 	 
	 Line of credit, net of debt issuance costs
	 	 	41,240,284	 
	Long-term debt, less current maturities, net of debt issuance costs	 	 	13,773,688	 
	Capital leases, less current maturities	 	 	3,409,530	 
	Deferred rent	 	 	31,430	 
	 	 	 	 	 
	 Total long-term liabilities	 	 	58,454,932	 
	 	 	 	 	 
	 Total liabilities	 	 	147,885,563	 
	 	 	 	 	 
	 Commitments and contingencies	 	 	 	 
	 	 	 	 	 
	 Stockholder's equity:	 	 	 	 
	
Common stock, no par
value, 1,000 shares authorized, 1,000 shares issued and outstanding
	 	 	70,058,395	 
	Retained earnings	 	 	88,179,322	 
	Accumulated comprehensive loss	 	 	(1,708,869	)
	Noncontrolling interest	 	 	1,880,933	 
	 	 	 	 	 
	 Total stockholder's equity	 	 	158,409,781	 
	 	 	 	 	 
	 Total liabilities and stockholder's equity	 	$	306,295,344	 

  

See summary of significant accounting policies and

notes to combined consolidated financial statements.

 

 
3





FirstOnSite USA Holdings Inc. and
Subsidiaries
 

Combined Consolidated Statement of Income and Comprehensive Income



 
 


 

 


 
  
 

	Year Ended December 31,	 	 	2018	 
	Net revenues	 	$	435,627,290	 
	 	 	 	 	 
	Cost of revenues, including depreciation of $2,732,535	 	 	281,416,782	 
	 	 	 	 	 
	 Gross profit
	 	 	154,210,508	 
	 	 	 	 	 
	 Operating expenses:	 	 	 	 
	
 Selling, general and administrative
	 	 	105,416,790	 
	Depreciation and amortization	 	 	7,984,233	 
	Transaction costs	 	 	1,331,442	 
	Gain on disposal of property and equipment	 	 	(578,563	)
	 	 	 	 	 
	 Total operating expenses
	 	 	114,153,902	 
	 	 	 	 	 
	 Income from operations
	 	 	40,056,606	 
	 	 	 	 	 
	 Other income (expense):	 	 	 	 
	
 Interest income
	 	 	2,686	 
	Interest expense	 	 	(7,745,639	)
	Foreign currency loss	 	 	(30,181	)
	Other income	 	 	663,212	 
	 	 	 	 	 
	 Total other expense
	 	 	(7,109,922	)
	 	 	 	 	 
	Income before tax expense	 	 	32,946,684	 
	 	 	 	 	 
	Franchise tax expense	 	 	1,489,122	 
	Income tax expense	 	 	6,383,419	 
	Total tax expense	 	 	7,872,541	 
	 	 	 	 	 
	 Net income
	 	$	25,074,143	 
	 	 	 	 	 
	Less: Net income attributable to noncontrolling interest
	 	 	1,541,469	 
	Net income attributable to FirstOnSite USA Holdings, Inc.	 	$	23,532,674	 
	 	 	 	 	 
	Other comprehensive loss:	 	 	 	 
	Foreign currency translation
	 	 	(1,188,401	)
	Total other comprehensive income	 	$	22,344,273	 

  

See summary of significant accounting policies and

notes to combined consolidated financial statements.

 
 

 
4





FirstOnSite USA Holdings Inc. and
Subsidiaries
 

Combined Consolidated Statement of Changes in Stockholder’s Equity



 

 


  
 

 
  


  


  

 

	 	 	 	Number of 
Shares	 	 	 	Common Stock	 	 	 	Retained Earnings	 	 	 	Accumulated Other Comprehensive Loss	 	 	 	Noncontrolling Interest	 	 	 	Total Stockholder's Equity	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Balance, January 1, 2018	 	 	1,000	 	 	$	70,058,395	 	 	$	64,646,648	 	 	$	(520,468	)	 	$	339,464	 	 	$	134,524,039	 
	Foreign currency translation	 	 	-	 	 	 	-	 	 	 	-	 	 	 	(1,188,401	)	 	 	-	 	 	 	(1,188,401	)
	Net income	 	 	-	 	 	 	-	 	 	 	23,532,674	 	 	 	-	 	 	 	1,541,469	 	 	 	25,074,143	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Balance, December 31, 2018	 	 	1,000	 	 	$	70,058,395	 	 	$	88,179,322	 	 	$	(1,708,869	)	 	$	1,880,933	 	 	$	158,409,781	 

  

See summary of significant accounting policies and

notes to combined consolidated financial statements.

 
  

 
  

 
5





FirstOnSite USA Holdings Inc. and
Subsidiaries
 

Combined Consolidated Statement of Cash Flows



 

 


 
 


 
 


 
  

	Year Ended December 31,	 	2018
	Cash flows from operating activities:	 	 	 	 
	Net income	 	$	25,074,143	 
	Adjustments to reconcile net income to net cash from operating activities	 			 
	Depreciation and amortization	 	 	10,716,768	 
	Amortization of deferred financing costs	 	 	1,237,993	 
	Change in accounts receivable allowances	 	 	(229,758	)
	Deferred income tax expense	 	 	1,138,813	 
	Gain on disposal of property and equipment	 	 	(578,563	)
	Goodwill adjustment	 	 	(47,822	)
	Profits interest compensation expense	 	 	(297,606	)
	Change in operating assets and liabilities:	 	 	 	 
	Accounts receivable trade	 	 	15,321,451	 
	Accounts receivable unbilled (costs in excess)	 	 	9,231,532	 
	Inventory and supplies	 	 	(91,457	)
	Prepaid and other and deposits	 	 	399,861	 
	Deferred revenue - billings in excess of costs	 	 	(1,222,794	)
	Accounts payable-trade and accrued expenses	 	 	(18,084,861	)
	Deferred comp plan payable	 	 	17,973	 
	Income tax payable	 	 	67,348	 
	Deferred rent	 	 	(74,524	)
	Net cash provided by operating activities	 	 	42,578,497	 
	Cash flows from investing activities:	 	 	 	 
	Proceeds from the sale of property and equipment	 	 	631,698	 
	Purchases of property and equipment	 	 	(3,388,814	)
	Net cash used in investing activities	 	 	(2,757,116	)
	Cash flows from financing activities:	 	 	 	 
	Checks drawn against future deposits	 	 	6,198,961	 
	Borrowings (repayments) on line of credit, net	 	 	8,221,598	 
	Proceeds from long-term debt	 	 	72,952,878	 
	Payments on long-term debt	 	 	(81,493,679	)
	Payments on capital leases	 	 	(1,256,447	)
	Deferred financing costs	 	 	(5,497,847	)
	Distributions to Parent	 	 	(37,494,388	)
	Net cash used in financing activities	 	 	(38,368,924	)
	Effect of exchange rate changes on cash	 	 	(1,188,401	)
	Net change in cash and cash equivalents	 	 	264,056	 
	Cash and cash equivalents, beginning of year	 	 	-	 
	Cash and cash equivalents, end of year	 	$	264,056	 

  
  
Continued. 
  

 
6





FirstOnSite USA Holdings Inc. and
Subsidiaries
 

Combined Consolidated Statement of Cash Flows



 
 

 


 
  

	 Supplemental disclosure of cash flow information:	 	 
	Cash paid for interest	 	$	6,576,138	 
	Cash paid for income and franchise taxes	 	$	8,611,236	 
	Non-cash activities:	 	 	 	 
	

Acquisition of equipment through capital lease
	 	$	1,908,984	 

  

See summary of significant accounting policies and

notes to combined consolidated financial statements.

 
  

 
  
 

 
7





FirstOnSite USA Holdings Inc. and
Subsidiaries
 

Summary of Significant Accounting
Policies




 
 

 


  


 Description of
Business
  
 FirstOnSite USA Holdings, Inc.
and its Subsidiaries (the “Company”) are engaged in providing recovery and construction services. Such services include emergency pre-planning and response, drying, mold remediation, fire and water damage restoration, reconstruction,
equipment and technology restoration and project management. The Company maintains offices in various locations in the United States and Canada, with headquarters in Fort Worth, Texas and Mississauga, Ontario Canada.

 
 Basis of Presentation

 
 The Company was formed in Delaware in January 2018 to
combine the equity interests of Bellwether International Group LLC and Subsidiaries (“Bellwether”) and Delos MBHE FOS LP and Subsidiaries (“Delos”), who are defined as entities under common control.

 
 In accordance with Accounting Standards Codification
(“ASC”) 805, Business Combinations, recognized assets and liabilities of Bellwether and Delos were transferred to the Company at their carrying amounts on the date of transfer, February 2, 2018. These combined consolidated financial
statements report the results of operations as though the transfer had occurred on January 1, 2018.
  

The accompanying combined consolidated financial statements include the activities of FirstOnSite USA Holdings Inc. and its wholly owned and
majority owned subsidiaries: FirstOnSite Restoration, Inc. (comprised of FirstOnSite Canadian Holdings, Inc. and FirstOnSite Restoration Limited) (collectively “FOS”); Interstate Restoration LLC (comprised of Interstate Restoration Group,
Inc., Colorado Fire and Flood, LLC, Mazur Holdings, Inc., Interstate Restoration – California LP and Interstate Restoration de Mexico S de R.L. de C.V.) and Interstate Restoration Hawaii LLC (collectively “IR LLC”).

 
 The Company is wholly-owned by Global Restoration Holdings LLC
through its ownership of Bellwether FOS Holdco, Inc. (collectively, the “Parent”), whose activities are excluded from these combined consolidated financial statements.

 
 Principles of Consolidation and Non-Controlling Interests

 
 These combined consolidated financial statements
have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The accompanying combined consolidated financial statements include the accounts of the Company, its wholly owned
subsidiaries, and other entities in which the Company has a controlling financial interest. In accordance with ASC 810, Consolidation, for consolidated subsidiaries that are less than wholly owned, the third-party holdings of equity interests
are referred to as noncontrolling interests. The portion of net income attributable to noncontrolling interests for subsidiaries is presented as net income applicable to noncontrolling interests on the accompanying combined consolidated statement of
income and comprehensive income, and the portion of the stockholder’s equity of such subsidiaries is presented as noncontrolling interests on the accompanying combined consolidated balance sheet and accompanying combined consolidated statement
of stockholder’s equity. All significant intercompany transactions and accounts have been eliminated.
  

 
8





FirstOnSite USA Holdings Inc. and
Subsidiaries
 

Summary of Significant Accounting
Policies




 
 

 


 

 
 Foreign Currency

 
 Revenues and expenses incurred from
operations in Canada are denominated in the local functional currency. Assets and liabilities are translated to U.S. dollars at the year-end exchange rate, and revenues and expenses are translated at average rates throughout the year. Translation
adjustments are included in accumulated other comprehensive loss, a separate component of stockholder’s equity. Transaction gains and losses denominated in a currency other than the functional currency of the Canadian operations are included in
other income (expense) on the combined consolidated statement of income and comprehensive income.
  

Operating Cycle
  

The Company’s contract services are performed under fixed and variable price contracts. The length of the Company’s contracts varies
but generally do not exceed four months. Therefore, assets and liabilities expected to be used/settled within one year are classified as current.

 
 Revenue and Cost
Recognition
  
 Revenue from
emergency response, contents restoration and construction contracts is recognized under the percentage-of-completion method, measured by the percentage of total costs incurred to date to total estimated costs. Revenue from time-and-material
contracts without stated contract amounts is recognized as costs are incurred. Revenue is generally calculated based on contractual billing rates for the services performed. This method is used because management considers expended costs to be the
best available measure of progress on these contracts. When the outcome of a construction contract cannot be estimated reliably, contract revenue is recognized only to the extent of contract costs incurred that are likely to be recoverable. Contract
revenue includes the initial amount agreed in the contract plus any variations in contract work, claims and incentive payments to the extent it is probable they will result in revenue and can be measured reliably. Because of inherent uncertainties
in estimating costs, it is at least reasonably possible that the estimates used could change in the near term.
  

For de minimis contracts with an expected completion time of 30 days or less, the Company recognizes revenue under the completed contract
method, which is not materially different from the percentage-of-completion method. The Company considers a contract complete when it has completed the work for a phase, the customer is obligated to pay for the services and the Company has no future
obligation to complete further work for that particular phase. Revenues and costs are not recorded until a contract or phase is complete. As revenues are not recorded until the contract is complete, when the Company invoices for progress billings,
these billings are recorded as deferred revenue - billings in excess of costs on the combined consolidated balance sheet.
  

 
9





FirstOnSite USA Holdings Inc. and
Subsidiaries
 

Summary of Significant Accounting
Policies




 

 


 
  
 

The Company may have, from time-to-time, billing disputes with some of its customers or the customers’ insurance providers. These disputes
arise in the ordinary course of business in the recovery and construction industry, and their impact on the Company’s accounts receivable and revenues can be reasonably estimated based on historical experience. In addition, certain revenues are
subject to the insurance provider of the customer on insurance claims based on the insurance provider’s approved rates. Accordingly, the Company maintains allowances, through charges against revenues, based on the Company’s estimates of:
(i) the ultimate resolution of the disputes and (ii) insurance and other pricing adjustments. See Note 2 - Trade Accounts Receivable.
  

From time to time, contracts receivable include claims arising from contractual disputes. In accordance with ASC 605-35-25, Revenue
Recognition: Construction–Type and Production–Type Contracts, revenues from claims are recognized only to the extent that contract costs relating to the claim have been incurred.

 
 Contract costs include all direct materials, subcontract costs,
labor costs and those indirect costs related to contract performance, such as indirect labor, depreciation, supplies and tool costs. Selling, general and administrative costs are charged to expense as incurred. Provisions for estimated losses, if
any, are made in their entirety in the year such losses are determined. Changes in job performance, job conditions and estimated profitability may result in revisions to costs and income and are recognized in the period in which the revisions are
determined.
  
 Unbilled receivables represent costs and estimated
earnings in excess of amounts billed. Deferred revenue-billings in excess of cost represent billings in excess of costs and estimated earnings on uncompleted contracts.

 
 Restoration work relating to natural disasters, such as floods and
hurricanes, is seasonal and characterized by the peak activity beginning in June through the fall months. Because the Company’s operating results can be significantly impacted by sales derived from these events during its peak season, the
quarterly and annual results of operations may fluctuate significantly depending on the number of hurricanes and floods on a national or regional basis.
  

Concentration of Credit Risk

 
 The Company’s financial
instruments exposed to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable - trade. Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally
insured limits. The Company has never experienced any losses related to these balances.
  

Receivables are recorded when earned, are typically unsecured and are derived from transactions with customers located primarily in the United
States and Canada. The Company performs ongoing credit evaluations of its customers and maintains an allowance for potential credit losses. Receivables are written off to the allowance when they are determined to be uncollectible. The allowance for
doubtful accounts is estimated based on the Company’s historical losses, the existing economic conditions in the construction industry, and the financial stability of its customers. The Company files statutory liens on construction projects
where collection problems are anticipated. Significant past due balances over 120 days and other higher risk amounts are reviewed individually for collectability. Based on current customer credit information and the opinions of the Company’s
collection attorneys, management believes the allowance for doubtful accounts is adequate. However, actual write-offs may exceed the recorded allowance.
  

 
10





FirstOnSite USA Holdings Inc. and
Subsidiaries
 

Summary of Significant Accounting
Policies




 
 

 


 

 
 Foreign exchange risk

 
 In the normal course of business, the Company is exposed
to foreign exchange transactions and translation risk. The Company does not use derivative financial instruments in relation to this risk.
  

Interest rate risk
  

The Company is exposed to interest rate risk arising from fluctuations in interest rates on its credit facilities.

 
 Liquidity risk

 
 Liquidity risk is the risk that the Company will
encounter difficulty in meeting obligations associated with financial liabilities that are settled by delivering cash or another financial asset. There are uncertainties related to the Company’s operations that include, but are not limited to,
unusual weather trends, volume of sales and customer acceptances of project completion. These uncertainties could impact the Company’s financial results and timing of cash resources. Therefore, the Company’s objective is to maintain
sufficient capacity on its credit facilities and to maintain sufficient levels of working capital to settle financial liabilities when they are contractually due. The Company manages its liquidity risk to ensure it complies with its debt
covenants.
  
 Cash and Cash Equivalents

 
 For purposes of the combined
consolidated statement of cash flows, the Company considers all highly liquid instruments with original maturities of three months or less to be cash and cash equivalents.

 
 Inventory

 
 Inventory is stated at the
lower of cost or net realizable value (first in, first out) and consists primarily of supplies used in restoration services.
  

Property and Equipment
  

Property and equipment purchased are recorded at cost, less accumulated depreciation and include improvements that significantly add to productive
capacity or extend the useful life of the related asset. Property and equipment from acquisitions are recorded at estimated fair value. Costs related to ordinary maintenance and repairs are charged to expense or to contract costs in the period in
which they are incurred. When assets are retired or disposed, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in the accompanying combined consolidated statement of income and
comprehensive income for the period. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets, which range from three to ten years. Leasehold improvement lives are estimated as the
lesser of the useful life of the asset or the lease term.
  

 
11





FirstOnSite USA Holdings Inc. and
Subsidiaries
 

Summary of Significant Accounting
Policies




 
 

 


 

 
 Advances to Parent

 
 Advances are reflective of activities with the Parent,
including a $32 million distribution financed by the Company’s term loan agreement in conjunction with the combination of the entities on February 2, 2018.
  

Long-Lived Assets
  

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be
recoverable. If the expected undiscounted future cash flow from the use of the asset and its eventual disposition is less than the carrying amount of the asset, an impairment loss is recognized and measured using the asset’s fair value. No
impairment was recorded at December 31, 2018.
  
 Goodwill and
Intangible Assets
  
 Goodwill represents the excess of
costs over the fair value of identifiable net assets of businesses acquired. Goodwill and intangible assets acquired in a business combination determined to have an indefinite useful life are not amortized, but instead are tested for impairment at
least annually. Intangible assets with finite useful lives are amortized over their respective estimated useful lives: finite-lived trademarks and trade names and non-compete agreements are amortized on a straight- line basis and customer
relationships are amortized on an accelerated basis over the expected period of benefit.
  

Intangible assets are reviewed for impairment in accordance with ASC 360-10, Impairment or Disposal of Long-Lived Assets. When facts and
circumstances indicate potential impairment of amortizable intangible assets, the Company evaluates the recoverability of the asset carrying value using estimates of undiscounted future cash flows over the remaining asset life. Any impairment loss
is measured by the excess of carrying value over fair value.
  

Goodwill impairment tests are performed on an annual basis or when events or circumstances dictate. In these tests, the fair values of each
reporting unit, or segment, is compared to the carrying amount of that reporting unit, in order to determine if impairment is indicated. If so, the implied fair value of the reporting unit’s goodwill is compared to its carrying amount, and the
impairment loss is measured by the excess of the carrying value over fair value. No impairment was recorded at December 31, 2018.
  

Debt Financing Costs
  

Costs relating to obtaining credit facilities are capitalized and amortized using the effective interest method over the term of the related debt.
Total amortization of debt financing costs of approximately $1.2 million were recognized as a component of interest expense during the year ended December 31, 2018.
  

 

 
12





FirstOnSite USA Holdings Inc. and
Subsidiaries
 

Summary of Significant Accounting
Policies




 

 


 
  

Income Taxes
  

The Company pays U.S. federal and state income taxes and foreign income taxes on the taxable income of its “C” corporations within the
combined consolidated group. The current provision for income taxes represents actual or estimated amounts payable or refundable on tax return filings each year. Deferred tax assets and liabilities are recorded for the estimated future tax effects
of temporary differences between the tax basis of assets and liabilities and amounts reported in the accompanying combined consolidated balance sheet, and for operating loss and tax credit carry forwards and carry backs. The change in deferred tax
assets and liabilities for the period measures the deferred tax provision or benefit for the period. Effects of changes in enacted tax laws on deferred tax assets and liabilities are reflected as adjustments to the tax provision or benefit in the
period of enactment. Valuation allowances are provided against deferred tax assets when it is determined that it is more likely than not that such assets will not be recovered.

 
 The Company follows ASC
740-10, Income Taxes, to account for any uncertainty in income taxes with respect to the accounting for all tax positions taken (or expected to be taken) on any income tax return. This guidance applies to all open tax periods in all tax
jurisdictions in which the Company is required to file an income tax return. Under GAAP, in order to recognize an uncertain tax benefit, the taxpayer must be more likely than not of sustaining the position, and the measurement of the benefit is
calculated as the largest amount that is more than 50 percent likely to be realized upon resolution of the benefit. The Company has determined that no uncertain tax positions have been taken or are expected to be taken that could have a material
effect on the Company’s income tax assets or liabilities.
  

Management makes judgments regarding the interpretation of tax laws that might be challenged upon an audit and cause changes to previous estimates
of tax liability. In addition, the Company operates within multiple taxing jurisdictions and is subject to an audit in these jurisdictions, as well as by the Internal Revenue Service and Canadian taxation authorities.

 
 The limited liability companies in
the group are treated for tax purposes as flow-through entities and are not subject to U.S. federal or state income taxes. U.S. federal and state income is reported and paid by the members on their respective individual U.S. personal income tax
returns.
  
 Warranties

 
 Most warranties sold by the
Company are provided by the manufacturer or subcontractors to the Company. There are certain residential customers that are given a warranty and the historical cost for this has been minimal.

 
 Fair Value of Financial
Instruments
  
 The
Company’s financial instruments consist of cash and cash equivalents, accounts receivable - trade, and debt. The carrying value of cash and cash equivalents and accounts receivable - trade approximate their fair values due to their short
maturities. The fair value of the Company’s debt approximates its carrying value due to the terms available to the Company for similar financial instruments. Stock compensation related to profits interests are measured at fair value in the
accompanying combined consolidated statement of income and comprehensive income.
  

 
13





FirstOnSite USA Holdings Inc. and
Subsidiaries
 

Summary of Significant Accounting
Policies




 

 


 
  
 

Fair Value Measurements
  

The Company follows methods of fair value measurement described under ASC 820, Fair Value Measurements and Disclosures (“ASC
820”), which establishes a common definition of fair value to be applied with existing GAAP requiring use of fair value, establishes a framework for measuring fair value, and expands disclosures about such fair value measurements.

 
 Fair value is a market-based measure considered from the perspective
of a market participant who holds the asset or owes the liability, rather than an entity-specific measure. Therefore, when market assumptions are not readily available, the Company’s own assumptions are set to reflect those that market
participants would use in pricing the asset or liability at the measurement date. ASC 820 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by
requiring that the observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset developed based on market data obtained from sources independent of the Company. Unobservable inputs
are inputs that reflect the Company’s estimates about the assumptions market participants would use in pricing the asset developed based on the best information available in the circumstances. The hierarchy is broken down into three levels
based on the reliability of inputs as follows:
  

		•	Level 1: Defined as observable inputs such as quoted prices in active markets for identical assets or
liabilities;

  

		•	Level 2: Defined as observable inputs other than Level 1 prices. These include quoted prices for similar assets or liabilities in an
active market, quoted prices for identical assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or
liabilities;

  

		•	Level 3: Defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own
assumptions.

  
 Advertising

 
 The Company expenses advertising costs at the time the
costs are incurred. Advertising expense during the year ended December 31, 2018 was insignificant.
  

Use of Estimates
  

The preparation of the combined consolidated financial statements in conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions. These estimates and assumptions may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the combined
consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates and such differences could be material.

 

 
14





FirstOnSite USA Holdings Inc. and
Subsidiaries
 

Summary of Significant Accounting
Policies




 

 


 
  
 

Change in Accounting Estimate
  

Revisions to estimated contract profits, including approved change orders, are made in the year in which circumstances requiring the revision
become known. The effect of changes in estimates of contract profits and change orders was to increase net income for the year ended December 31, 2018 by approximately $5.1 million from that which would have been reported had the revised estimates
been used as the basis of recognition of contract profits in the preceding year. Such changes in estimates include the financial impact of change orders issued in the current year whose impact on the revised estimates is not considered to have a
material effect on the overall change in contract profits.
  

New Accounting Pronouncements
  

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09 (Topic 606),
Revenue from Contracts with Customers (“ASU 2014-09”). The new revenue recognition standard supersedes all existing revenue recognition guidance. Under ASU 2014-09, an entity must recognize revenue relating to contracts with
customers that depicts the transfer of promised goods or services to customers in an amount reflecting the consideration to which the entity expects to be entitled in exchange for such goods or services. In order to meet this requirement, the entity
must apply the following steps: (i) identify the contracts with the customers; (ii) identify performance obligations in the contracts; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations per the
contracts; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. Additionally, disclosures required for revenue recognition will include qualitative and quantitative information about contracts with customers,
significant judgments and changed judgments, and assets recognized from costs to obtain or fulfill a contract. The new revenue recognition standard is effective for annual periods beginning after December 15, 2018. Management is currently evaluating
the potential impact of this new standard on the Company’s combined consolidated financial statements.
  

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), Leases (“ASU 2016-2”) which requires companies leasing
assets to recognize on their balance sheet a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term on contracts longer than one year. The lessee is
permitted to make an accounting policy election to not recognize lease assets and lease liabilities for short-term leases. How leases are recorded on the balance sheet represents a significant change from previous GAAP guidance in Topic 840. ASU
2016-02 maintains a distinction between finance leases and operating leases similar to the distinction under previous lease guidance for capital leases and operating leases. ASU 2016-02 is effective for fiscal periods beginning after December 15,
2019, and early adoption is permitted. Management is currently evaluating the potential impact of this new standard on the Company’s combined consolidated financial statements.

 
  

 
15





FirstOnSite USA Holdings Inc. and
Subsidiaries
 

Notes to Combined Consolidated Financial Statements


 

 


 
 
 

 

	1. CONTRACT BILLING STATUS	 
	 
 Cost and estimated earnings on uncompleted contracts were as follows:



 

	December 31,	 	2018
	Costs incurred on uncompleted contracts	 	$	166,935,486	 
	Estimated earnings on uncompleted contracts	 	 	75,624,112	 
	 	 	 	242,559,598	 
	Less: billings to date	 	 	(212,880,318	)
	 	 	 	 	 
	 	 	$	29,679,280	 

  

These amounts are included in the accompanying combined consolidated balance sheet under the following captions:

 

	December 31,	 	2018
	Unbilled accounts receivable	 	$	45,155,381	 
	Deferred revenue – billings in excess of costs	 	 	(15,476,101	)
	 	 	 	 	 
	 	 	$	29,679,280	 

  

	  
 2. TRADE ACCOUNTS RECEIVABLE
	 
	 
 Trade accounts receivable consisted of the following:
	 

  

	December 31,	 	2018
	Contracts receivable	 	$	124,456,165	 
	Allowance for revenue adjustments	 	 	(918,000	)
	Allowance for claims	 	 	(700,000	)
	Allowance for bad debts	 	 	(4,072,484	)
	Total allowances	 	 	(5,690,484	)
	 	 	 	 	 
	Trade accounts receivable, net	 	$	118,765,681	 

  

As of December 31, 2018, the Company had approximately $16 million of accounts receivable balances due primarily from five customers originating
during 2015 - 2018. The Company, through its collection attorneys, continues to work with the customers’ insurance carriers to obtain full payment plus any interest due under the terms of the contracts. The Company has a successful history of
collecting significant past due balances, particularly related to customer insurance claims. Management believes the customers and insurance companies have the ability and intent to pay amounts owed. However, if the financial condition of the
Company’s customers or their insurance companies were to deteriorate, adversely affecting their ability to make payments, additional allowances and or write-offs would be required.

 
 

 
16





FirstOnSite USA Holdings Inc. and
Subsidiaries
 

Notes to Combined Consolidated Financial Statements


 

 


 
  

	The Company’s contract receivable allowance accounts were as follows:	 

  

	Year Ended December 31,	 	2018
	 	 	 
	Allowance for revenue adjustments:	 	 	 	 
	 	 	 	 	 
	Balance at January 1	 	$	949,000	 
	Provision (reduction)	 	 	(31,000	)
	 	 	 	 	 
	Balance at December 31	 	$	918,000	 
	 	 	 	 	 
	Claims arising from contractual disputes:	 	 	 	 
	 	 	 	 	 
	Balance at January 1	 	$	-	 
	Provision	 	 	700,000	 
	 	 	 	 	 
	Balance at December 31	 	$	700,000	 
	 	 	 	 	 
	Allowance for bad debts:	 	 	 	 
	 	 	 	 	 
	Balance at January 1	 	$	4,971,242	 
	Provision	 	 	1,588,885	 
	Write-offs	 	 	(2,487,643	)
	 	 	 	 	 
	Balance at December 31	 	$	4,072,484	 

  

	  
 3. PROPERTY AND EQUIPMENT, NET
	 
	 
 Property and equipment consisted of the following:
	 

  

	December 31,	 	2018
	Furniture, fixtures and equipment	 	$	9,042,906	 
	Field equipment	 	 	23,352,621	 
	Vehicles	 	 	12,422,739	 
	Software licensing	 	 	2,142,381	 
	Other assets	 	 	14,400	 
	Leasehold improvements	 	 	6,986,096	 
	 	 	 	53,961,143	 
	Less: accumulated depreciation and amortization	 	 	(39,994,440	)
	 	 	 	 	 
	Total property and equipment, net	 	$	13,966,703	 

  

Depreciation expense was approximately $5.9 million during the year ended December 31, 2018.

 

 
17





FirstOnSite USA Holdings Inc. and
Subsidiaries
 

Notes to Combined Consolidated Financial Statements


 

 


 
  
 

		4.	INTANGIBLE ASSETS

  
 Intangible assets, excluding goodwill,
consisted of the following:
  
 

 

	December 31, 2018	 	 	Life	 	 	 	Gross Carrying Amount	 	 	 	Accumulated Amortization	 	 	 	Net Carrying Amount	 
	Amortized intangible assets:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Trademarks and trade names	 	 	5-14 years	 	 	$	4,806,583	 	 	$	2,749,436	 	 	$	2,057,147	 
	Non-compete agreements	 	 	5 years	 	 	 	228,890	 	 	 	96,674	 	 	 	132,216	 
	Customer relationships	 	 	5-14 years	 	 	 	45,568,600	 	 	 	9,033,203	 	 	 	36,535,397	 
	Non-amortizing intangible assets:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Trade names	 	 	Indefinite	 	 	 	3,602,000	 	 	 	-	 	 	 	3,602,000	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Total	 	 	 	 	 	$	54,206,073	 	 	$	11,879,313	 	 	$	42,326,760	 

  

 
 Amortization expense for the year ended December 31, 2018 on intangible assets was
approximately $4.8 million.
  
 Assuming no future impairments, expected amortization
expense related to amortizing intangible assets is as follows:
  

	Year Ending December 31,	Total
	2019	$4,687,693
	2020	3,916,515
	2021	3,425,307
	2022	2,952,796
	2023	2,759,899
	Thereafter	20,982,550
	 	 
	 	$38,724,760

  
 The Company has goodwill recorded from
acquisitions as follows: 
  

	 	 	FOS	 	IR LLC	 	Total
	January 1, 2018 	 	$	1,422,997	 	 	$	18,371,393	 	 	$	19,794,390	 
	Adjustments	 	 	-	 	 	 	47,822	 	 	 	47,822	 
	December 31, 2018	 	$	1,422,997	 	 	$	18,419,215	 	 	$	19,842,212	 

  

 
18





FirstOnSite USA Holdings Inc. and
Subsidiaries
 

Notes to Combined Consolidated Financial Statements


 

 


 
  
 

		5.	DEBT

  
 Debt consisted of the following:

 

	December 31, 2018	 	Term Loan	 	Revolving Line of Credit - U.S.
Operations	 	Revolving Line of Credit - Canadian Operations	 	Total
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Balance on borrowing	 	$	22,750,000	 	 	$	23,336,158	 	 	$	19,393,974	 	 	$	65,480,132	 
	Less: debt issuance costs, net	 	 	(3,476,312	)	 	 	(768,872	)	 	 	(720,976	)	 	 	(4,966,160	)
	Less: current portion	 	 	(5,500,000	)	 	 	-	 	 	 	-	 	 	 	(5,500,000	)
	 	 	$	13,773,688	 	 	$	22,567,286	 	 	$	18,672,998	 	 	$	55,013,972	 

  
 Term
Loan
  
 On February 2, 2018, the Company obtained a term
loan in the amount of $60 million maturing on February 2, 2023, with quarterly payments of $750,000 and variable interest at LIBOR plus a margin, as defined (10.84% at December 31, 2018). During 2018, the Company paid down the term loan in the
amount of $37.25 million. The term loan requires an annual excess cash flow payment, as defined, toward the balance of the borrowing no later than June 30 of the following year. The credit facility is collateralized by substantially all assets and
equity interests of the Company. The term loan is subordinated to the revolving line of credit facilities under an inter- creditor agreement between the lenders. Further, the Company’s subsidiaries serve as co- borrowers and guarantors and the
Parent additionally serves as guarantor.
  
 In February 2019, the
Company’s term loan agreement was amended to obtain an additional $50 million under the existing terms and original maturity date, with payments amended to $1,375,000 per quarter.

 
 Revolving Line of Credit – U.S. Operations

 
 On February 2, 2018, the Company obtained a revolving
line of credit initially funded at $37.5 million, which matures on February 2, 2023, with variable interest at LIBOR plus a margin, as defined on $20 million (4.73% at December 31, 2018) and variable interest at U.S. prime rate plus a margin as
defined on approximately $3.3 million (6.75% at December 31, 2018). Availability on the line of credit is limited to a defined borrowing base on IR LLC’s billed and unbilled accounts receivable with maximum borrowings of $47 million.

 
  

 
19





FirstOnSite USA Holdings Inc. and
Subsidiaries
 

Notes to Combined Consolidated Financial Statements


 
 

 


 
  

Revolving Line of Credit – Canadian Operations

 
 On February 2, 2018, the Company amended an existing
FOS line of credit which matures on February 2, 2023, with variable interest at LIBOR plus a margin, as defined on approximately $9.5 million (5.31% at December 31, 2018) and variable interest at the Canadian prime rate plus a margin as defined on
approximately $10 million (4.81% at December 31, 2018). Availability on the line of credit is limited to a defined borrowing base on FOS’s billed and unbilled accounts receivable with maximum borrowings of $34 million Canadian dollars through
October 17, 2018, increased to $45 million Canadian dollars.
  

The credit facilities are collateralized by substantially all assets and equity interests of the Company. The Company’s subsidiaries serve
as co-borrowers and guarantors and the Parent additionally serves as guarantor.
  

Bellwether’s existing revolving line of credit and term loans in the amount of approximately $49 million were refinanced with the
Company’s credit facilities described above.
  
 Delos’s
existing revolving line of credit and term loan in the amount of approximately $29 million were refinanced with the Company’s term loan and revolving line of credit described above.

 
 The Company’s credit facilities have certain financial
covenants including fixed charge coverage and leverage ratios; capital expenditures limits; along with restrictions on member distributions, additional indebtedness and cash used for future acquisitions. The Company was in compliance with such
financial covenants at December 31, 2018.
  
 At December 31, 2018,
the minimum annual principal payments for borrowings, including the February 2019 term loan amendment and including the lines of credit, are as follows:
  

	Year Ending December 31,	 	Total	 
	2019	$	5,500,000	 
	2020	 	5,500,000	 
	2021	 	5,500,000	 
	2022	 	5,500,000	 
	2023	 	43,480,132	 
	 	 	 	 
	Total long-term debt	$	65,480,132	 

  
  

 
20





FirstOnSite USA Holdings Inc. and
Subsidiaries
 

Notes to Combined Consolidated Financial Statements


 

 


 
 
  

	6. CAPITAL LEASES	 
	 
 Capital leases consisted of the following at December 31, 2018:


  

	Capital leases payable to financial institutions with interest rates ranging from 7% to 8% and maturities through December, 2023.
Monthly payments are approximately $116,000. Obligations secured by vehicles.	 	$	5,249,006	 
	 	 	 	 	 
	Less interest cost	 	 	(549,481	)
	 	 	 	4,699,525	 
	Less current portion	 	 	(1,289,995	)
	 	 	$	3,409,530	 

  
 Future maturities
of capital leases are as follows:  
  

	Year Ending December 31,	 	 	Total	 
	2019	 	$	1,712,868	 
	2020	 	 	1,468,102	 
	2021	 	 	1,135,795	 
	2022	 	 	644,453	 
	2023	 	 	287,788	 
	 	 	 	 	 
	 	 	$	5,249,006	 

  

Assets under capital lease approximate $10.5 million and related accumulated depreciation approximates $6.0 million as of December 31,
2018.
  

	7. STOCK COMPENSATION ARRANGEMENTS	 

  
 

Certain of the Bellwether contributed companies issued equity-based compensation arrangements who subsequently became employees of IR LLC.
Awards were fully vested as of the date of grant, which permitted the employees to participate in future appreciation of the respective members’ equity. The profits interests will be paid in the form of cash or a promissory note at the
Company’s discretion, or upon a terminating event, as defined within the profits interest agreement (the “Agreement”). Certain terminating events, as defined by the Agreement, require the employee to forfeit the profits interest
without compensation.
  
 In
accordance with provisions of ASC 718, Compensation – Stock Compensation (“ASC 718”) and related guidance, these profits interest awards have characteristics that determine the classification as a liability and are re-measured
at estimated fair value at each subsequent reporting period with any adjustment being recorded as compensation expense. On February 2, 2018 the profits interests were exchanged for profits interests in the Parent and the liability was transferred to
the Parent through an equity contribution. Compensation expense continues to be recorded by IR LLC associated with the change in fair value of this profits interest liability at each reporting date. Approximately $306,000 compensation expense has
been recognized in selling, general and administrative expenses in the accompanying combined consolidated statement of income and comprehensive income for the year ended December 31, 2018, with a corresponding equity contribution to the Parent.



 
21





FirstOnSite USA Holdings Inc. and
Subsidiaries
 

Notes to Combined Consolidated Financial Statements


 

 


 

 
 IR LLC granted 3% profits
interest to a key employee, which was issued upon reaching target revenues and fully vested in 2013. In accordance with provisions of ASC 718 and related guidance, this profits interest award has characteristics that determine the classification as
a liability and are re-measured at estimated fair value at each subsequent reporting period with any adjustment being recorded as compensation expense (recovery). On February 2, 2018 the profits interest in IR LLC was exchanged for a profits
interest in the Parent and the liability was transferred to the Parent through an equity contribution. Compensation expense continues to be recorded by IR LLC associated with the change in fair value of the profits interest liability at each
reporting date. Approximately $(604,000) compensation recovery has been recognized in selling, general and administrative expenses in the accompanying combined consolidated statement of income and comprehensive income for the year ended December 31,
2018 with a corresponding equity contribution to the Parent.
  

The profits interest liabilities issued by the Parent to IR LLC’s employees approximated $4.8 million at December 31, 2018.

 
 Parent Value A Units

 
 The Company’s Parent issued approximately 14
million Value A units to key employees in 2018 with a fair value of $498,700. The units vest at 25% annually over a four-year period and are contingent on continued employment with the Company or any of its subsidiaries. Certain events allow the
Parent the right, but not the obligation, to repurchase the units as specified in the agreement. In accordance with applicable accounting guidance, the awards were classified as equity by the Parent and recorded at fair value. Compensation expense
will be recorded by the Company as the requisite service is rendered, with an offsetting equity contribution to the Parent.
  

 
22





FirstOnSite USA Holdings Inc. and
Subsidiaries
 

Notes to Combined Consolidated Financial Statements


 
 

 


 
  

	8. INCOME TAXES	 
	 
 The components of income tax expense consisted of the following:


  


	 	Year Ended December 31,	 	2018
	 	Current:	 	 	 	 
	 	Federal	 	$	4,237,781	 
	 	State	 	 	886,118	 
	 	Foreign	 	 	1,609,829	 
	 	 	 	 	6,733,728	 
	 	 	 	 	 	 
	 	Deferred:	 	 	 	 
	 	 Federal	 	 	(1,097,217	)
	 	State	 	 	(131,365	)
	 	Foreign	 	 	2,367,395	 
	 	 	 	 	1,138,813	 
	 	 	 	 	 	 
	 	Income tax expense	 	$	7,872,541	 

  

The Company’s effective income tax rate is lower than what would be expected if the federal statutory rate were applied to income before
income taxes primarily because of certain expenses deductible for financial reporting purposes that are not deductible for tax purposes, including operating loss carryforwards. Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
  

 
  
  

 
 

 
23





FirstOnSite USA Holdings Inc. and
Subsidiaries
 

Notes to Combined Consolidated Financial Statements


 

 


 
  

The types of temporary differences between the tax basis of assets and liabilities that give rise to a significant portion of the deferred tax
assets and liabilities and their approximate tax effects are as follows:
  

	December 31,	 	2018
	 	 	 	 	 
	Components of net long-term deferred tax assets (liabilities):	 	 	 	 
	Basis difference in intangibles	 	$	133,443	 
	Federal and state net operating losses	 	 	490,916	 
	Allowances	 	 	11,590	 
	Accrued expenses	 	 	2,018,758	 
	Interest limitation	 	 	24,571	 
	Effect of passthrough entities	 	 	929,315	 
	Basis difference in property and equipment	 	 	(319,277	)
	Other	 	 	(207,245	)
	 	 	 	 	 
	Total net deferred tax assets	 	$	3,082,071	 

  

At December 31, 2018, the Company has approximately $2.4 million available in U.S. federal unused net operating losses that may be applied against
future U.S. taxable income, limited to 80%. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income, projections for future taxable income over the periods in which the deferred tax assets are deductible, and
the scheduled reversal of deferred tax liabilities, management believes it is more likely than not that the Company will realize its net deferred tax assets.

 

		9.	COMMITMENTS AND CONTINGENCIES

  
 Operating Lease
Commitments
  
 The Company leases land,
buildings, equipment, and vehicles under various operating leases through October 2024, certain of which contain provisions for future rent increases or periods in which rent payments are reduced (abated). In accordance with GAAP, the Company
records monthly rent expense on a straight-line basis and reflects a deferred rent liability for the difference between straight-line rent and actual rent payments.
  

 
24





FirstOnSite USA Holdings Inc. and
Subsidiaries
 

Notes to Combined Consolidated Financial Statements


 

 


 
  
 

Minimum lease payments, for each of the succeeding five years and thereafter, under operating leases with initial terms in excess of one year are, as follows:

 
 

	Years Ending December 31,	 	 
	2019	 	$	6,499,890	 
	2020	 	 	5,249,564	 
	2021	 	 	3,775,931	 
	2022	 	 	2,031,438	 
	2023	 	 	891,911	 
	Thereafter	 	 	323,238	 
	 	 	 	 	 
	 	 	$	18,771,972	 

  

Rent expense was approximately $7.0 million during the year ended December 31, 2018.

 
 Letters of Credit

 
 FOS has outstanding letters of credit of approximately $230,000 at December 31,
2018, which currently will expire April 2019.
  

Surety Bonds
  

The Company, as a condition for entering into certain construction contracts, had outstanding surety bonds totaling approximately $23 million
related to U.S. operations at December 31, 2018. There are de minimis surety bonds related to Canadian operations at December 31, 2018.

 
 Section 401(k) Retirement
Plan
  
 IR LLC has a Section
401(k) retirement plan (the “Plan”) covering certain employees. Employees are generally eligible to participate after reaching 21 years of age and attaining six months of employment. Eligible employees can contribute up to eighty percent
of their considered elective deferrals, subject to IRS limitations. In addition, the Plan allows for catch-up contributions for those participants aged 50 or older. The Company match is a discretionary percentage of considered earnings and vests
over a five-year period. The Company match for the year ended December 31, 2018 was not significant.
  

Canadian Retirement Plan

 
 FirstOnSite Restoration
Ltd. has a Registered Retirement Savings Plan (RRSP) and Deferred Profit Sharing Plan (DPSP) group retirement plan (the “Plan”) covering certain employees. Employees are generally eligible to participate after reaching 18 years of age and
attaining six months of employment. Eligible employees can contribute one point five percent (1.5%) of their pensionable earnings (excluding overtime and bonuses) to the RRSP and receive an employer match of one point five percent (1.5%) to the
DPSP. DPSP Vesting is after two years of plan membership. In addition, the Plan allows for extra voluntary contributions.
  

 
25





FirstOnSite USA Holdings Inc. and
Subsidiaries
 

Notes to Combined Consolidated Financial Statements


 

 


 
  
 

Litigation
  

The Company is subject to various claims and legal matters in the ordinary course of business. Management believes that any liability that may
ultimately result from the resolution of these matters will not have a material adverse effect on the financial condition or results of operations of the Company.
  

Indemnification of Directors and Officers

 
 Under the terms of the
Company’s operating agreements, the directors and officers of the Company have been indemnified for any action or any failure to act on behalf of the Company within the authority as directors and officers, unless the act or omission was
performed or omitted fraudulently, as defined.
  

Employment Agreements
  

The Company has entered into employment agreements with certain key employees that stipulate salary, bonus and termination provisions.

 

		10.	STOCKHOLDER’S EQUITY

  
 The
Company issued 1,000 shares to its Parent on January 30, 2018. For purposes of presentation of combination and consolidation of entities under common control, the issuance date is reflected on the first day of the year. As of December 31, 2018,
1,000 common shares are issued, authorized and outstanding.
  

Under the terms of the Company’s operating agreement, additional capital contributions are discretionary. In addition, distributions are
discretionary and may be limited by provisions in existing credit facility agreements. No distributions were paid by the Company during 2018. See summary of significant accounting policies, Advances to Parent, which discusses the cash
contribution made to the Parent during 2018.
  

Non-Controlling Interest
  

At its formation, Interstate Restoration Hawaii LLC (“IR Hawaii”) issued 2,500 units to a member representing 25% ownership interest.
Upon sale of the Company, the member has the option to put the 2,500 units back to IR Hawaii and IR Hawaii has the option to redeem the units. The redemption of the units is contingent upon a future sale of the Company and the exercise of the put or
call option, which is not certain. In accordance with ASC 480, Distinguishing Liabilities from Equity, should a sale event occur, and the redemption be exercised by the member or the Company, the then fair value of the units will be
reclassified from equity to a liability, payable as defined in the agreement.
  

		11.	RELATED PARTY TRANSACTIONS

  
 The Company
receives administrative support from members of the Parent. Amounts paid for administrative support for the year ended December 31, 2018 were $300,000.
  

 
26





FirstOnSite USA Holdings Inc. and
Subsidiaries
 

Notes to Combined Consolidated Financial Statements


 

 


  

The Company rents office space from related parties. Rents paid for these facilities for the year ended December 31, 2018 totaled approximately
$495,000.
  
 

		12.	BACKLOG (UNAUDITED)

  
 The following
schedule shows a reconciliation of backlog representing the amount of revenue the Company expects to realize from work to be performed on uncompleted contracts in progress at December 31, 2018 and from contractual agreements on which work has not
yet begun.
 
  

	 	 	 	(Unaudited)
	 	Balance, January 1, 2018	 	$	105,219,624	 
	 	New contracts	 	 	400,786,076	 
	 	Less: Contract revenue earned	 	 	(435,432,720	)
	 	 	 	 	 	 
	 	Balance, December 31, 2018	 	$	70,572,980	 

  

		13.	SUBSEQUENT EVENTS

   
 The Company has evaluated subsequent events through May 14, 2019
which is the date the combined consolidated financial statements were available to be issued. There are no material subsequent events that required recognition or additional disclosure in these combined consolidated financial statements other than
as described below:
  
 As described in Note 5, in February 2019 the
Company’s term loan agreement was amended to obtain an additional $50 million under the existing terms and original maturity date. As allowed by the term loan agreement, a $50 million distribution was made to the Parent.

 
  

 
  



 
27



 


  
 



	
	Tel:     817-738-2400   

Fax:     817-738-1995
 www.bdo.com

	 Bank of America Tower

301 Commerce Street, Suite 2000
 Fort Worth, TX
76102
 

  
  

Independent Auditor’s Report on Supplementary Information
  

 
 Board of Directors and Stockholder

FirstOnSite USA Holdings Inc. and Subsidiaries
 Fort Worth, TX

 
  
  

Our audit of the combined consolidated financial statements included in the preceding section of this report was conducted for the purpose of forming an opinion on
those statements taken as a whole. The supplementary information presented in the following section of this report is presented for purposes of additional analysis and is not a required part of the combined consolidated financial statements. Such
information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the combined consolidated financial statements. The information has been subjected to the
auditing procedures applied in the audit of the combined consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to
prepare the combined consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all
material respects in relation to the combined consolidated financial statements as a whole.
  



  
 May 14, 2019

 
  
  

 
  
  

 
  
  

 

 BDO USA, LLP, a Delaware limited
liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member
firms.
 


BDO is the brand name for the BDO network and for each of the BDO Member
Firms.

 
FirstOnSite USA Holdings Inc. and
Subsidiaries
 

Combining Consolidating Balance Sheet



 
  
 

 


 
  
 



	December 31, 2018	 	 
	FirstOnSite

USA
 Holdings,
Inc.
	 
	 	 	FirstOnSite
 Restoration, Inc.
	 	 	 	Interstate
 Restoration, 
LLC
	 	 	 	Total	 
	 	 	 	 	 	 	 	 	 
	Assets	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Cash	 	$	-	 	 	$	264,056	 	 	$	-	 	 	$	264,056	 
	Accounts receivable:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Trade, net of allowance	 	 	-	 	 	 	53,920,491	 	 	 	64,845,190	 	 	 	118,765,681	 
	Unbilled	 	 	-	 	 	 	9,849,033	 	 	 	35,306,348	 	 	 	45,155,381	 
	Intercompany receivables (payables)	 	 	(44,933,019	)	 	 	(185,939	)	 	 	45,118,958	 	 	 	-	 
	Investment in subsidiaries	 	 	26,775,111	 	 	 	(6,775,111	)	 	 	(20,000,000	)	 	 	-	 
	Inventory and supplies	 	 	-	 	 	 	690,105	 	 	 	1,670,657	 	 	 	2,360,762	 
	Prepaid and other	 	 	-	 	 	 	1,789,865	 	 	 	1,379,309	 	 	 	3,169,174	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Total current assets
	 	 	(18,157,908	)	 	 	59,552,500	 	 	 	128,320,462	 	 	 	169,715,054	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Property and equipment, net
	 	 	-	 	 	 	8,113,411	 	 	 	5,853,292	 	 	 	13,966,703	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Other assets:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Advances to Parent	 	 	26,869,195	 	 	 	-	 	 	 	30,294,536	 	 	 	57,163,731	 
	Intangible assets, net	 	 	-	 	 	 	3,927,820	 	 	 	38,398,940	 	 	 	42,326,760	 
	Goodwill	 	 	-	 	 	 	1,422,997	 	 	 	18,419,215	 	 	 	19,842,212	 
	Deferred tax assets	 	 	1,214,007	 	 	 	1,868,064	 	 	 	-	 	 	 	3,082,071	 
	Deposits	 	 	-	 	 	 	-	 	 	 	198,813	 	 	 	198,813	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
Total other
assets
	 	 	28,083,202	 	 	 	7,218,881	 	 	 	87,311,504	 	 	 	122,613,587	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Total assets
	 	$	9,925,294	 	 	$	74,884,792	 	 	$	221,485,258	 	 	$	306,295,344	 

 
 

Continued
  

 
29


 
FirstOnSite
USA Holdings Inc. and
Subsidiaries
 

Combining Consolidating Balance Sheet



 

 


 
  
 

	 	 	FirstOnSite USA

Holdings,
	 	FirstOnSite
 Restoration,
	 	Interstate
 Restoration,
	 	 
	December 31, 2018	 	Inc.	 	Inc.	 	LLC	 	Total
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Liabilities and Stockholder's (Deficit) Equity	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Liabilities:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Current:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Checks drawn against future deposits	 	$	-	 	 	$	-	 	 	$	6,320,570	 	 	$	6,320,570	 
	Accounts payable - trade	 	 	-	 	 	 	12,424,143	 	 	 	20,737,674	 	 	 	33,161,817	 
	Accrued expenses	 	 	-	 	 	 	7,227,592	 	 	 	1,753,095	 	 	 	8,980,687	 
	Accrued compensation	 	 	-	 	 	 	5,754,447	 	 	 	11,339,812	 	 	 	17,094,259	 
	Taxes (receivable) payable	 	 	177,627	 	 	 	1,429,575	 	 	 	-	 	 	 	1,607,202	 
	Deferred revenue - billings in excess of cost	 	 	-	 	 	 	4,368,404	 	 	 	11,107,697	 	 	 	15,476,101	 
	Current maturities of long-term debt	 	 	5,500,000	 	 	 	-	 	 	 	-	 	 	 	5,500,000	 
	Current maturities of capital leases	 	 	 	 	 	 	1,289,995	 	 	 	-	 	 	 	1,289,995	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Total current liabilities	 	 	5,677,627	 	 	 	32,494,156	 	 	 	51,258,848	 	 	 	89,430,631	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Long-term liabilities:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Line of credit, net of debt issuance costs of approximately $1.5 million	 	 	-	 	 	 	18,672,998	 	 	 	22,567,286	 	 	 	41,240,284	 
	Long-term debt, less current maturities, net of debt issuance costs of approximately $3.5 million	 	 	13,773,688	 	 	 	-	 	 	 	-	 	 	 	13,773,688	 
	Capital leases, less current maturities	 	 	 	 	 	 	3,409,530	 	 	 	 	 	 	 	3,409,530	 
	Deferred rent	 	 	-	 	 	 	-	 	 	 	31,430	 	 	 	31,430	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Total long-term liabilities	 	 	13,773,688	 	 	 	22,082,528	 	 	 	22,598,716	 	 	 	58,454,932	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Total liabilities	 	 	19,451,315	 	 	 	54,576,684	 	 	 	73,857,564	 	 	 	147,885,563	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Commitments and contingencies	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Stockholder's (deficit) equity:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Common stock, no par value, 1,000 shares authorized, 1,000 shares issued and outstanding	 	 	-	 	 	 	15,831,063	 	 	 	54,227,332	 	 	 	70,058,395	 
	Retained (deficit) earnings	 	 	(9,526,021	)	 	 	6,185,914	 	 	 	91,519,429	 	 	 	88,179,322	 
	Accumulated comprehensive loss	 	 	-	 	 	 	(1,708,869	)	 	 	-	 	 	 	(1,708,869	)
	Noncontrolling interest	 	 	-	 	 	 	-	 	 	 	1,880,933	 	 	 	1,880,933	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Total stockholder's (deficit) equity	 	 	(9,526,021	)	 	 	20,308,108	 	 	 	147,627,694	 	 	 	158,409,781	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Total liabilities and stockholder's equity	 	$	9,925,294	 	 	$	74,884,792	 	 	$	221,485,258	 	 	$	306,295,344	 

 

See accompanying independent auditor’s report on supplementary information.


  

 
30


 
FirstOnSite
USA Holdings Inc. and
Subsidiaries
 

Combining Consolidating Statement of Income and Comprehensive
Income




 
  
 

 


 
 


  
  



	Year Ended December 31, 2018	 	FirstOnSite USA
 Holdings, Inc.
	 	FirstOnSite
 Restoration, Inc.
	 	Interstate

Restoration,

LLC
 	 	Total
	 	 	 	 	 	 	 	 	 
	Net revenues	 	$	-	 	 	$	170,516,864	 	 	$	265,110,426	 	 	$	435,627,290	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Cost of revenues, including depreciation of $2,732,535	 	 	-	 	 	 	110,211,193	 	 	 	171,205,589	 	 	 	281,416,782	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
Gross
profit
	 	 	-	 	 	 	60,305,671	 	 	 	93,904,837	 	 	 	154,210,508	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
Operating expenses:
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Selling, general and administrative	 	 	-	 	 	 	46,905,124	 	 	 	58,511,666	 	 	 	105,416,790	 
	Depreciation and amortization	 	 	-	 	 	 	2,322,895	 	 	 	5,661,338	 	 	 	7,984,233	 
	Transaction costs	 	 	1,331,442	 	 	 	-	 	 	 	-	 	 	 	1,331,442	 
	Gain on disposal of property and equipment	 	 	-	 	 	 	(271,953	)	 	 	(306,610	)	 	 	(578,563	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
Total
operating expenses
	 	 	1,331,442	 	 	 	48,956,066	 	 	 	63,866,394	 	 	 	114,153,902	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
Income
(loss) from operations
	 	 	(1,331,442	)	 	 	11,349,605	 	 	 	30,038,443	 	 	 	40,056,606	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
Other income (expense):
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Interest income	 	 	-	 	 	 	-	 	 	 	2,686	 	 	 	2,686	 
	Interest expense	 	 	(3,796,031	)	 	 	(1,787,704	)	 	 	(2,161,904	)	 	 	(7,745,639	)
	Foreign currency loss	 	 	 	 	 	 	(30,181	)	 	 	 	 	 	 	(30,181	)
	Other income	 	 	-	 	 	 	-	 	 	 	663,212	 	 	 	663,212	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
Total other
expense
	 	 	(3,796,031	)	 	 	(1,817,885	)	 	 	(1,496,006	)	 	 	(7,109,922	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
Income
(loss) before tax expense
	 	 	(5,127,473	)	 	 	9,531,720	 	 	 	28,542,437	 	 	 	32,946,684	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
Franchise tax expense
	 	 	1,367,915	 	 	 	-	 	 	 	121,207	 	 	 	1,489,122	 
	Income tax expense	 	 	3,030,633	 	 	 	3,270,786	 	 	 	82,000	 	 	 	6,383,419	 
	Total tax expense	 	 	4,398,548	 	 	 	3,270,786	 	 	 	203,207	 	 	 	7,872,541	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
Net (loss) income
	 	 	(9,526,021	)	 	 	6,260,934	 	 	 	28,339,230	 	 	 	25,074,143	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Less: Net income attributable to noncontrolling interest	 	 	-	 	 	 	-	 	 	 	1,541,469	 	 	 	1,541,469	 
	Net (loss) income attributable to FirstOnSite USA Holdings, Inc.	 	$	(9,526,021	)	 	$	6,260,934	 	 	$	26,797,761	 	 	$	23,532,674	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
Other comprehensive loss:
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Foreign currency translation	 	 	-	 	 	 	(1,188,401	)	 	 	-	 	 	 	(1,188,401	)
	Total other comprehensive income	 	 	 	 	 	 	 	 	 	 	 	 	 	$	22,344,273	 

 

See accompanying independent auditor’s report on supplementary information.


  
  

 
31


  


 

	 
	 
	 	 
	 	 	Bellwether International Group LLC and Subsidiaries and Delos MBHE FOS LP and Subsidiaries
	 	 	 
	 	 	Combined Consolidated Unaudited Financial Statements
	 	 
	 	 	Year Ended December 31, 2017
	 	 
	
	 

   
 

 



Bellwether International Group LLC and
Subsidiaries
and Delos MBHE FOS LP and Subsidiaries



  

Contents
  

 


 
  
 



	Combined Consolidated Unaudited Balance Sheet	 	1
	 	 	 
	Combined Consolidated Unaudited Statement of Income and Comprehensive Income	 	3
	 	 	 
	Combined Consolidated Unaudited Statement of Changes in Members’ Equity/Partners’ Equity	 	4
	 	 	 
	Combined Consolidated Unaudited Statement of Cash Flows	 	5
	 	 	 
	Summary of Significant Accounting Policies	 	7
	 	 	 
	Notes to Combined Consolidated Unaudited Financial Statements	 	15

  
  

 
  
  

 
  

 





Bellwether International Group LLC and Subsidiaries
and Delos MBHE FOS LP and
Subsidiaries
 
Combined Consolidated
Unaudited Balance Sheet



 

 


 
  
 

 

	December 31,	 	 	2017	 
	 	 	 
	Assets	 	 	 	 
	 	 	 	 	 
	Current:	 	 	 	 
	Accounts receivable:	 	 	 	 
	
 

Trade, net of allowance
	 	$	133,857,374	 
	Unbilled	 	 	54,386,912	 
	Inventory and supplies	 	 	2,269,305	 
	Prepaid and other	 	 	2,921,993	 
	 	 	 	 	 
	Total current assets	 	 	193,435,584	 
	 	 	 	 	 
	Property and equipment, net	 	 	14,593,498	 
	 	 	 	 	 
	Other assets:	 	 	 	 
	Investments held for deferred comp plan	 	 	170,625	 
	Intangible assets, net	 	 	47,172,068	 
	Goodwill	 	 	19,794,390	 
	Deferred tax assets, net	 	 	2,233,332	 
	Deposits	 	 	845,857	 
	 	 	 	 	 
	Total other assets	 	 	70,216,272	 
	 	 	 	 	 
	Total assets	 	$	278,245,354	 

 

See summary of significant accounting policies and

notes to combined consolidated unaudited financial statements.

 
  

 
1






Bellwether International Group LLC and Subsidiaries
and Delos MBHE FOS LP and
Subsidiaries
 
Combined Consolidated
Unaudited Balance Sheet



 
 

 


  

	December 31,	 	2017
	 	 	 
	Liabilities and Members' Equity/Partners' Equity	 	 	 	 
	 	 	 	 	 
	Liabilities	 	 	 	 
	Current:	 	 	 	 
	Checks drawn against future deposits	 	$	121,609	 
	Accounts payable - trade	 	 	53,238,733	 
	Accrued expenses	 	 	10,010,700	 
	Accrued compensation	 	 	14,267,853	 
	Income taxes payable	 	 	1,539,854	 
	Deferred revenue - billings in excess of costs	 	 	16,698,895	 
	Current maturities of long-term debt	 	 	2,250,000	 
	Current maturities of capital leases	 	 	1,419,070	 
	 	 	 	 	 
	Total current liabilities	 	 	99,546,714	 
	 	 	 	 	 
	Long-term liabilities:	 	 	 	 
	Deferred compensation plan payable	 	 	152,652	 
	Profits interests payable	 	 	5,060,857	 
	Long-term debt, less current maturities, net of debt issuance costs	 	 	62,843,029	 
	Capital leases, less current maturities	 	 	2,627,918	 
	Deferred rent	 	 	105,954	 
	 	 	 	 	 
	Total long-term liabilities	 	 	70,790,410	 
	 	 	 	 	 
	Total liabilities	 	 	170,337,124	 
	 	 	 	 	 
	Commitments and contingencies	 	 	 	 
	 	 	 	 	 
	Members' equity	 	 	87,691,127	 
	Partners' equity	 	 	14,160,679	 
	Accumulated other comprehensive income	 	 	1,074,896	 
	Noncontrolling interest	 	 	4,981,528	 
	 	 	 	 	 
	Total members' equity/partner's equity	 	 	107,908,230	 
	 	 	 	 	 
	Total liabilities and members' equity/partners' equity	 	$	278,245,354	 

 See summary of significant accounting policies and

notes to combined consolidated unaudited financial statements.
  

 

 
2


 Bellwether International Group LLC and
Subsidiaries
and Delos MBHE FOS LP and Subsidiaries


 
 Combined Consolidated Unaudited Statement
of Income and Comprehensive Income
  

	 
	 	 	 	 
	Year Ended December 31,	 	2017	 
	 	 	 	 
	Net revenues	 	$	393,357,718	 
	 	 	 	 	 
	Cost of revenues, including depreciation of $2,171,502	 	 	246,176,981	 
	 	 	 	 	 
	Gross profit	 	 	147,180,737	 
	 	 	 	 	 
	Operating expenses:	 	 	 	 
	Selling, general and administrative	 	 	105,186,735	 
	Depreciation and amortization	 	 	8,345,469	 
	Gain on disposal of property and equipment	 	 	(148,800	)
	 	 	 	 	 
	Total operating expenses	 	 	113,383,404	 
	 	 	 	 	 
	Income from operations	 	 	33,797,333	 
	 	 	 	 	 
	Other income (expense):	 	 	 	 
	Interest income	 	 	4,694	 
	Interest expense	 	 	(4,766,439	)
	Other income	 	 	324,266	 
	 	 	 	 	 
	Total other expense	 	 	(4,437,479	)
	 	 	 	 	 
	Income before tax benefit, discontinued operations and noncontrolling interest	 	 	29,359,854	 
	 	 	 	 	 
	Franchise tax expense	 	 	219,738	 
	Income tax benefit	 	 	(291,087	)
	Total tax benefit	 	 	(71,349	)
	 	 	 	 	 
	Income from continuing operations	 	 	29,431,203	 
	Loss from discontinued operations	 	 	(12,159,730	)
	 	 	 	 	 
	Net income	 	$	17,271,473	 
	 	 	 	 	 
	Less: Net income attributable to noncontrolling interest	 	 	2,035,171	 
	Net income attributable to the Entities	 	$	15,236,302	 
	 	 	 	 	 
	Other comprehensive income:	 	 	 	 
	Foreign currency translation	 	 	1,074,896	 
	Total other comprehensive income	 	$	16,311,198	 

 See summary of significant accounting policies
and
 notes to combined consolidated unaudited financial statements.

 
 

 
3


 Bellwether International Group LLC and
Subsidiaries
and Delos MBHE FOS LP and Subsidiaries


 Combined Consolidated Unaudited Statement of Changes in Members’ Equity/Partners’ Equity

	 
	Year Ended December 31, 2017	 	Member Units	 	 	Members' Equity	 	 	Partners' Equity	 	 	 
 Accumulated Other Comprehensive Income
	 	 	Noncontrolling Interest	 	 	Total Members'/Partners' Equity	 
	Balance, January 1, 2017 	 	 	32,770	 	 	$	74,096,182	 	 	$	12,702,718	 	 	$	-	 	 	$	2,946,357	 	 	$	89,745,257	 
	Foreign currency translation 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	1,074,896	 	 	 	-	 	 	 	1,074,896	 
	Distributions 	 	 	-	 	 	 	(183,396	)	 	 	-	 	 	 	-	 	 	 	-	 	 	 	(183,396	)
	Net income 	 	 	-	 	 	 	13,778,341	 	 	 	1,457,961	 	 	 	-	 	 	 	2,035,171	 	 	 	17,271,473	 
	Balance, December 31, 2017	 	 	32,770	 	 	$	87,691,127	 	 	$	14,160,679	 	 	$	1,074,896	 	 	$	4,981,528	 	 	$	107,908,230	 

  

See summary of significant accounting policies and

notes to combined consolidated unaudited financial statements.

 
  

 
  

 
  

 
  

 
  

 
  

 
  

 
  

 
  

 
  

 

 
4


 Bellwether International Group LLC and
Subsidiaries
and Delos MBHE FOS LP and Subsidiaries


 
 Combined Consolidated Unaudited Statement of Cash Flows

	 
	 	 	 	 
	Increase (Decrease) in Cash and Cash Equivalents	 	 	 
	Year Ended December 31,	 	2017	 
	 	 	 	 
	Cash flows from operating activities:	 	 	 	 
	Net income 	 	$	17,271,473	 
	Adjustments to reconcile net income to net cash provided by operating activities	 	 	 	 
	Depreciation and amortization	 	 	10,516,971	 
	Amortization of deferred financing costs	 	 	895,323	 
	Accrued interest on subordinated debt	 	 	308,214	 
	Change in accounts receivable allowances	 	 	262,179	 
	Deferred income taxes	 	 	(3,283,159	)
	Gain on disposal of property and equipment	 	 	(148,800	)
	Bargain purchase gain on acquisition	 	 	(129,483	)
	Goodwill adjustment	 	 	(71,763	)
	Profits interest compensation expense	 	 	3,046,969	 
	Loss on disposal of discontinued operations	 	 	9,202,488	 
	Change in operating assets and liabilities:	 	 	 	 
	Accounts receivable - trade	 	 	(33,068,263	)
	Accounts receivable - unbilled	 	 	(40,764,629	)
	Inventory and supplies	 	 	(26,442	)
	Prepaid and other and deposits	 	 	(1,302,411	)
	Deferred revenue - billings in excess of costs	 	 	10,037,609	 
	Accounts payable-trade and accrued expenses	 	 	35,752,882	 
	Other long term payables	 	 	(27,724	)
	Income tax payable	 	 	988,204	 
	Deferred rent	 	 	(68,305	)
	Net cash provided by operating activities	 	 	9,391,333	 
	 	 	 	 	 
	Cash flows from investing activities:	 	 	 	 
	Proceeds from the sale of property and equipment	 	 	183,463	 
	Purchases of property and equipment	 	 	(4,352,036	)
	Cash paid for business acquisitions	 	 	(445,000	)
	Proceeds from sale of assets from discontinued operations	 	 	3,971,898	 
	Net cash used in investing activities	 	 	(641,675	)

  

See summary of significant accounting policies and

notes to combined consolidated unaudited financial statements.

 

 
5


 Bellwether International Group LLC and
Subsidiaries
and Delos MBHE FOS LP and Subsidiaries


 
 
 Combined Consolidated
Unaudited Statement of Cash Flows
  

	 
	 	 	 	 
	Year Ended December 31,	 	2017	 
	Cash flows from financing activities:	 	 	 	 
	Checks drawn against future deposits	 	 	(1,298,082	)
	Borrowings (repayments) on line of credit, net	 	 	(5,089,724	)
	Payments on long-term debt	 	 	(8,155,560	)
	Payments on capital leases	 	 	(1,274,742	)
	Proceeds from member convertible notes	 	 	6,000,000	 
	Distributions to members	 	 	(183,396	)
	Net cash used in financing activities	 	 	(10,001,504	)
	Effect of exchange rate changes on cash	 	 	1,251,846	 
	Net change in cash and cash equivalents	 	 	-	 
	 	 	 	 	 
	Cash and cash equivalents, beginning and end of year	 	$	-	 
	 	 	 	 	 
	Supplemental disclosure of cash flow information:	 	 	 	 
	Cash paid for interest	 	$	3,370,908	 
	Cash paid for income and franchise taxes	 	$	1,529,515	 
	Non-cash activities:	 	 	 	 
	
 Acquisition of equipment
through capital lease
	 	$	1,841,578	 

  

See summary of significant accounting policies and

notes to combined consolidated unaudited financial statements.

 
 

 
6


 Bellwether International Group LLC and
Subsidiaries
and Delos MBHE FOS LP and
Subsidiaries
 
Summary of Significant Accounting
Policies
 


 Description of Business

 
 Bellwether International Group LLC and Subsidiaries
(“Bellwether”) and Delos MBHE FOS LP and Subsidiaries (“Delos”) (collectively, the “Entities”) are engaged in providing recovery and construction services. Such services include emergency pre-planning and response,
drying, mold remediation, fire and water damage restoration, reconstruction, equipment and technology restoration and project management. The Entities maintain offices in various locations in the United States and Canada, with headquarters in Fort
Worth, Texas and Mississauga, Ontario Canada. Bellwether was formed in 2007 as a Colorado Limited Liability Company and Delos was formed under the laws of the Cayman Islands in 2016.

 
 Basis of Presentation

 
 These combined consolidated unaudited financial
statements present the combined activities of Bellwether and Delos, who are defined as entities under common control as of October 7, 2016 in accordance with Accounting Standards Codification (“ASC”) 805, Business Combinations. The
Entities are being presented on a combined basis in the accompanying consolidated financial statements as of January 1, 2017. The Entities were subsequently merged into a newly-formed entity, Global Restoration Holdings, LLC (“merged
entity”), on February 2, 2018.
  
 The accompanying combined
consolidated unaudited financial statements include the activities of the Entities and their wholly owned and majority owned subsidiaries: Delos MBHE FOS LP; FirstOnSite Restoration, Inc. (comprised of FirstOnSite Canadian Holdings, Inc. and
FirstOnSite Restoration Limited (collectively “FOS”); Bellwether International Group LLC; Interstate Restoration LLC (comprised of Interstate Restoration Group, Inc., Colorado Fire and Flood, LLC, Mazur Holdings, Inc., Interstate
Restoration – California LP and Interstate Restoration de Mexico S de R.L. de C.V.) and Interstate Restoration Hawaii LLC (collectively “IR LLC”); and Ally Equipment, LLC (“Ally”) through its discontinuance of operations in
October 2017.
  
 As discussed in Note 1 - Acquisitions,
business acquisitions completed during 2017 are included in the accompanying combined consolidated unaudited financial statements from the respective acquisition dates in accordance with FASB Accounting Standards Codification (“ASC” 810),
Consolidation.
  
 As discussed in Note 2 –
Discontinued Operations, Bellwether discontinued the operations of Ally during 2017. Accordingly, Ally’s activities have been classified and presented as discontinued operations as of and for the year ended December 31, 2017.

 
 Principles of Consolidation and Non-Controlling Interests

 
 These combined consolidated unaudited financial
statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of the Entities, their wholly owned subsidiaries, and other entities in which the
Entities have a controlling financial interest. In accordance with ASC 810, Consolidation, for consolidated subsidiaries that are less than wholly owned, the third-party holdings of equity interests are referred to as noncontrolling
interests. The portion of net income attributable to noncontrolling interests of subsidiaries is presented as net income applicable to noncontrolling interests on the accompanying combined consolidated unaudited statement of income and comprehensive
income, and the portion of the equity of such subsidiaries is presented as noncontrolling interest on the accompanying combined consolidated unaudited balance sheet and accompanying combined consolidated unaudited statement of members’
equity/partners’ equity. All significant intercompany transactions and accounts have been eliminated.
  



 
7


 Bellwether International Group LLC and
Subsidiaries
and Delos MBHE FOS LP and
Subsidiaries
 
Summary of Significant Accounting
Policies
 


  

Foreign Currency
  

Revenues and expenses incurred from operations in Canada are denominated in the local functional currency. Assets and liabilities are translated to
U.S. dollars at the year-end exchange rate, and revenues and expenses are translated at average rates throughout the year. Translation adjustments are included in accumulated other comprehensive income (loss), a separate component of equity.
Transaction gains and losses denominated in a currency other than the functional currency of the Canadian operations are included in other income (expense) on the combined consolidated unaudited statement of income and comprehensive income.

 
 Operating Cycle

 
 The Entities’ contract
services are performed under fixed and variable price contracts. The length of the Entities’ contracts varies but generally do not exceed four months. Therefore, assets and liabilities expected to be used/settled within one year are classified
as current.
  
 Revenue
and Cost Recognition
  
 Revenue
from emergency response, contents restoration and construction contracts is recognized under the percentage-of-completion method, measured by the percentage of total costs incurred to date to total estimated costs. Revenue from time-and-material
contracts without stated contract amounts is recognized as costs are incurred. Revenue is generally calculated based on contractual billing rates for the services performed. This method is used because management considers expended costs to be the
best available measure of progress on these contracts. When the outcome of a construction contract cannot be estimated reliably, contract revenue is recognized only to the extent of contract costs incurred that are likely to be recoverable. Contract
revenue includes the initial amount agreed in the contract plus any variations in contract work, claims and incentive payments to the extent it is probable they will result in revenue and can be measured reliably. Because of inherent uncertainties
in estimating costs, it is at least reasonably possible that the estimates used could change in the near term.
  

For de minimis contracts with an expected completion time of 30 days or less, the Entities recognize revenue under the completed contract
method, which is not materially different from the percentage-of-completion method. The Entities consider a contract complete when they have completed the work for a phase, the customer is obligated to pay for the services and the Entities have no
future obligation to complete further work for that particular phase. Revenues and costs are not recorded until a contract or phase is complete. As revenues are not recorded until the contract is complete, when the Entities invoice for progress
billings, these billings are recorded as deferred revenue - billings in excess of costs on the combined consolidated unaudited balance sheet.
  



 
8


 Bellwether International Group LLC and
Subsidiaries
and Delos MBHE FOS LP and
Subsidiaries
 
Summary of Significant Accounting
Policies
 


 The Entities may have, from time-to-time, billing disputes with some of their customers or the customers’ insurance
providers. These disputes arise in the ordinary course of business in the recovery and construction industry, and their impact on the Entities’ accounts receivable and revenues can be reasonably estimated based on historical experience. In
addition, certain revenues are subject to the insurance provider of the customer on insurance claims based on the insurance provider’s approved rates. Accordingly, the Entities maintain allowances, through charges against revenues, based on
their estimates of: (i) the ultimate resolution of the disputes and (ii) insurance and other pricing adjustments. See Note 4 - Trade Accounts Receivable.
  

From time to time, contracts receivable include claims arising from contractual disputes. In accordance with ASC 605-35-25, Revenue
Recognition: Construction–Type and Production–Type Contracts, revenues from claims are recognized only to the extent that contract costs relating to the claim have been incurred.

 
 Contract costs include all direct materials, subcontract costs,
labor costs and those indirect costs related to contract performance, such as indirect labor, depreciation, supplies and tool costs. Selling, general and administrative costs are charged to expense as incurred. Provisions for estimated losses, if
any, are made in their entirety in the year such losses are determined. Changes in job performance, job conditions and estimated profitability may result in revisions to costs and income and are recognized in the period in which the revisions are
determined.
  
 Unbilled receivables represent costs and estimated
earnings in excess of amounts billed. Deferred revenue-billings in excess of cost represent billings in excess of costs and estimated earnings on uncompleted contracts.

 
 Restoration work relating to natural disasters, such as floods and
hurricanes, is seasonal and characterized by the peak activity beginning in June through the fall months. Because the Entities’ operating results can be significantly impacted by sales derived from these events during its peak season, the
quarterly and annual results of operations may fluctuate significantly depending on the number of hurricanes and floods on a national or regional basis.
  

Concentrations of Credit Risk

 
 The Entities’ financial
instruments exposed to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable - trade. Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally
insured limits. The Entities have never experienced any losses related to these balances.
  

Receivables are recorded when earned, are typically unsecured and are derived from transactions with customers located primarily in the United
States and Canada. The Entities perform ongoing credit evaluations of their customers and maintain allowances for potential credit losses. Receivables are written off to the allowance when they are determined to be uncollectible. The allowance for
doubtful accounts is estimated based on the Entities’ historical losses, the existing economic conditions in the construction industry, and the financial stability of their customers. The Entities file statutory liens on construction projects
where collection problems are anticipated. Significant past due balances over 120 days and other higher risk amounts are unaudited individually for collectability. Based on current customer credit information and the opinions of the Entities’
collection attorneys, management believes the allowances for doubtful accounts are adequate. However, actual write-offs may exceed the recorded allowances.
  



 
9


 Bellwether International Group LLC and
Subsidiaries
and Delos MBHE FOS LP and
Subsidiaries
 
Summary of Significant Accounting
Policies
 


  
 Foreign
Exchange Risk
  
 In the normal course of business, the
Entities are exposed to foreign exchange transactions and translation risk. The Entities do not use derivative financial instruments in relation to this risk.
  

Interest Rate Risk
  

The Entities are exposed to interest rate risk arising from fluctuations in interest rates on their credit facilities.

 
 Cash and Cash Equivalents

 
 For purposes of the combined
consolidated unaudited statement of cash flows, the Entities consider all highly liquid instruments with original maturities of three months or less to be cash and cash equivalents.

 
 Inventory

 
 Inventory is stated at the lower
of cost or net realizable value (first in, first out) and consists primarily of supplies used in restoration services.
  

Property and Equipment
  

Property and equipment purchased are recorded at cost, less accumulated depreciation and include improvements that significantly add to productive
capacity or extend the useful life of the related asset. Property and equipment from acquisitions are recorded at estimated fair value. Costs related to ordinary maintenance and repairs are charged to expense or to contract costs in the period in
which they are incurred. When assets are retired or disposed, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in the accompanying combined consolidated unaudited statement of
income and comprehensive income for the period. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets, which range from three to ten years. Leasehold improvement lives are estimated
as the lesser of the useful life of the asset or the lease term.
  

Long-Lived Assets
  

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be
recoverable. If the expected undiscounted future cash flow from the use of the asset and its eventual disposition is less than the carrying amount of the asset, an impairment loss is recognized and measured using the asset’s fair value. No
impairment was recorded by the Entities at December 31, 2017.
  



 
10


 Bellwether International Group LLC and
Subsidiaries
and Delos MBHE FOS LP and
Subsidiaries
 
Summary of Significant Accounting
Policies
 


 Goodwill and Intangible Assets

 
 Goodwill represents the excess of
acquisition price over the fair value of identifiable net assets of businesses acquired. Goodwill and intangible assets acquired in a business combination determined to have an indefinite useful life are not amortized, but instead are tested for
impairment at least annually. Intangible assets with finite useful lives are amortized over their respective estimated useful lives as follows: finite-lived trademarks and trade names and non-compete agreements are amortized on a straight-line basis
and customer relationships are amortized on an accelerated basis over the expected period of benefit.
  

Goodwill impairment tests are performed on an annual basis or when events or circumstances dictate. In these tests, the fair values of each
reporting unit is compared to the carrying amount of that reporting unit, in order to determine if impairment is indicated. If so, the implied fair value of the reporting unit’s goodwill is compared to its carrying amount, and the impairment
loss is measured by the excess of the carrying value over fair value. No impairment was recorded by the Entities at December 31, 2017.

 
 Intangible assets are evaluated for
impairment in accordance with ASC 360-10, Impairment or Disposal of Long-Lived Assets. When facts and circumstances indicate potential impairment of amortizable intangible assets, the Entities evaluate the recoverability of the asset’s
carrying value using estimates of undiscounted future cash flows over the remaining asset life. Any impairment loss is measured by the excess of carrying value over fair value. No impairment was recorded by the Entities at December 31, 2017.

 
 Debt Financing Costs

 
 Costs relating to obtaining credit
facilities are capitalized and amortized using the effective interest method over the term of the related debt. The Entities recognized amortization of debt financing costs of $895,323 as a component of interest expense during the year ended
December 31, 2017. Remaining net debt financing costs were $706,306 as of December 31, 2017 and are included as a component of debt.
  

Income Taxes
  

The Entities pay U.S. federal and state income taxes and foreign income taxes on the taxable income of their “C” corporations within the
combined consolidated group. The current provision for income taxes represents actual or estimated amounts payable or refundable on tax return filings each year. Deferred tax assets and liabilities are recorded for the estimated future tax effects
of temporary differences between the tax basis of assets and liabilities and amounts reported in the accompanying combined consolidated unaudited balance sheet, and for operating loss and tax credit carry forwards and carry backs. The change in
deferred tax assets and liabilities for the period measures the deferred tax provision or benefit for the period. Effects of changes in enacted tax laws on deferred tax assets and liabilities are reflected as adjustments to the tax provision or
benefit in the period of enactment. Valuation allowances are provided against deferred tax assets when it is determined that it is more likely than not that such assets will not be recovered.

 
 

 
11


 Bellwether International Group LLC and
Subsidiaries
and Delos MBHE FOS LP and
Subsidiaries
 
Summary of Significant Accounting
Policies
 


 The limited liability companies in the combined consolidated group are treated for tax purposes as flow-through entities
and are not subject to U.S. federal or state income taxes. U.S. federal and state income is reported and paid by the members/partners on their respective individual U.S. personal income tax returns.

 
 The Entities follow ASC
740-10, Income Taxes, to account for any uncertainty in income taxes with respect to the accounting for all tax positions taken (or expected to be taken) on any income tax return. This guidance applies to all open tax periods in all tax
jurisdictions in which the Entities are required to file an income tax return. Under GAAP, in order to recognize an uncertain tax benefit, the taxpayer must be more likely than not of sustaining the position, and the measurement of the benefit is
calculated as the largest amount that is more than 50 percent likely to be realized upon resolution of the benefit. The Entities have determined that no uncertain tax positions have been taken or are expected to be taken that could have a material
effect on their income tax assets or liabilities.
  

Management makes judgments regarding the interpretation of tax laws that might be challenged upon an audit and cause changes to previous estimates
of tax liability. In addition, the Entities operate within multiple taxing jurisdictions and are subject to audit in these jurisdictions, as well as by the Internal Revenue Service and Canadian taxation authorities.

 
 Warranties

 
 Most warranties provided by the
Entities are the obligations of the manufacturer or subcontractors to the Entities. There are certain residential customers that are given a warranty and the historical cost for this has been minimal.

 
 Fair Value of Financial Instruments

 
 The Entities’ financial
instruments consist of cash and cash equivalents, accounts receivable - trade, debt, profits interests payable and deferred compensation plan payable. The carrying value of cash and cash equivalents and accounts receivable - trade approximate their
fair values due to their short maturities. The fair values of the Entities’ debt approximate their carrying values due to the terms available to the Entities for similar financial instruments. Profits interests and the investments held for
deferred compensation plan are measured at fair value in the accompanying combined consolidated unaudited statement of income and comprehensive income.
  

Fair Value Measurements
  

The Entities follow methods of fair value measurement described under ASC 820, Fair Value Measurements and Disclosures (“ASC
820”), which establishes a common definition of fair value to be applied with existing GAAP requiring use of fair value, establishes a framework for measuring fair value, and expands disclosures about such fair value measurements.

 
 

 
12


 Bellwether International Group LLC and
Subsidiaries
and Delos MBHE FOS LP and
Subsidiaries
 
Summary of Significant Accounting
Policies
 


 Fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes
the liability, rather than an entity-specific measure. Therefore, when market assumptions are not readily available, the Entities’ own assumptions are set to reflect those that market participants would use in pricing the asset or liability at
the measurement date. ASC 820 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the observable inputs be used when available.
Observable inputs are inputs that market participants would use in pricing the asset developed based on market data obtained from sources independent of the Entities. Unobservable inputs are inputs that reflect the Entities’ estimates about the
assumptions market participants would use in pricing the asset developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of inputs as follows:

 

		•	Level 1: Defined as observable inputs such as quoted prices in active markets for identical assets or
liabilities;

  

		•	Level 2: Defined as observable inputs other than Level 1 prices. These include quoted prices for similar assets or liabilities in an
active market, quoted prices for identical assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or
liabilities;

  

		•	Level 3: Defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own
assumptions.

  
 Advertising

 
 The Entities expense advertising costs at the time the
costs are incurred. Advertising expense during the year ended December 31, 2017 was insignificant.
  

Use of Estimates
  

The preparation of the combined consolidated financial statements in conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions. These estimates and assumptions may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the combined
consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates and such differences could be material.

 
 Change in Accounting Estimate

 
 Revisions to estimated contract profits, including
approved change orders, are made in the year in which circumstances requiring the revision become known. The effect of changes in estimates of contract profits and change orders was to increase the Entities’ combined net income for the year
ended December 31, 2017 by approximately $6.6 million from that which would have been reported had the revised estimates been used as the basis of recognition of contract profits in the preceding year. Such changes in estimates include the financial
impact of change orders issued in the current year whose impact on the revised estimates is not considered to have a material effect on the overall change in contract profits.

 
 

 
13


 Bellwether International Group LLC and
Subsidiaries
and Delos MBHE FOS LP and
Subsidiaries
 
Summary of Significant Accounting
Policies
 


  
 New
Accounting Pronouncements
  
 In May 2014, the Financial
Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09 (Topic 606), Revenue from Contracts with Customers (“ASU 2014-09”). The new revenue recognition standard supersedes all
existing revenue recognition guidance. Under ASU 2014-09, an entity must recognize revenue relating to contracts with customers that depicts the transfer of promised goods or services to customers in an amount reflecting the consideration to which
the entity expects to be entitled in exchange for such goods or services. In order to meet this requirement, the entity must apply the following steps: (i) identify the contracts with the customers; (ii) identify performance obligations in the
contracts; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations per the contracts; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. Additionally, disclosures
required for revenue recognition will include qualitative and quantitative information about contracts with customers, significant judgments and changed judgments, and assets recognized from costs to obtain or fulfill a contract. The new revenue
recognition standard is effective for annual periods beginning after December 15, 2018. Management is currently evaluating the potential impact of this new standard on the Entities’ combined consolidated unaudited financial statements.

 
 In February 2016, the FASB issued ASU 2016-02, Leases
(Topic 842), Leases (“ASU 2016-2”) which requires companies leasing assets to recognize on their balance sheet a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the
underlying asset for the lease term on contracts longer than one year. The lessee is permitted to make an accounting policy election to not recognize lease assets and lease liabilities for short-term leases. How leases are recorded on the balance
sheet represents a significant change from previous GAAP guidance in Topic 840. ASU 2016-02 maintains a distinction between finance leases and operating leases similar to the distinction under previous lease guidance for capital leases and operating
leases. ASU 2016-02 was originally effective for fiscal periods beginning after December 15, 2019, but has been delayed for private companies for one additional year. Management is currently evaluating the potential impact of this new standard on
the Entities’ combined consolidated unaudited financial statements.
  

 
14


 Bellwether International Group LLC and
Subsidiaries
and Delos MBHE FOS LP and
Subsidiaries
 
Notes to Combined Consolidated Unaudited Financial
Statements
 


 

		1.	ACQUISITIONS

  
 Restoration Alliance – Asset
Purchase
  
 During 2017, IR LLC purchased
equipment and customer list from Restoration Alliance for approximately $275,000 in order to expand its presence in Florida. The purchase price was allocated among the assets purchased.

 
 American Builders – Business Combination

 
 During 2017, IR LLC purchased substantially all assets
and certain liabilities of American Builders for approximately $250,000, in order to expand its presence in Ohio.
  

The Entities account for acquisitions under ASC 805, Business Combinations (“ASC 805”). Under ASC 805, an acquiring entity is
required to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree, measured at their fair values as of the acquisition date, with limited exceptions. The determination of fair values involves the use
of estimates and assumptions, along with the application of various valuation techniques. These estimates include projections of future cash flows related to specific assets and the assessment of future lives based on the expected future period of
benefit of the asset. A bargain purchase gain was recorded as the fair value of identifiable assets acquired less liabilities assumed was greater than the purchase price. Related acquisition costs were expensed as incurred.

 
 The following table summarizes the amounts of the assets acquired and
liabilities assumed which IR LLC recognized at the acquisition date:
   

	Accounts receivable	 	$	257,372	 
	Inventory	 	 	20,333	 
	Property and equipment	 	 	233,172	 
	Trade names and trademarks	 	 	39,200	 
	Non-compete agreement	 	 	20,850	 
	Backlog	 	 	59,400	 
	Accrued liabilities	 	 	(250,844	)
	Total identifiable net assets	 	 	379,483	 
	 
 Bargain purchase gain
	 	$	(129,483	)
	 
 Total consideration
	 	$	250,000	 

  

 
15


 Bellwether International Group LLC and
Subsidiaries
and Delos MBHE FOS LP and
Subsidiaries
 
Notes to Combined Consolidated Unaudited Financial
Statements
 


 

		2.	DISCONTINUED OPERATIONS

  
 Ally Equipment LLC

 
 Due to the downturn of the oil and gas industry
nationwide, Ally suffered a decline in sales and operations and operations were discontinued in October 2017. Prior to discontinuance of operations, Ally’s remaining oilfield service assets and equipment were sold for approximately $2.93
million and the remaining business activities were sold for approximately $1.05 million. In conjunction with the discontinuance of operations, the activities of Ally are presented in the accompanying combined consolidated unaudited financial
statements as discontinued operations as of and for the year ended December 31, 2017 in accordance with GAAP.
  

For the year ended December 31, 2017 revenues and expenses of Ally are presented separately under the caption “loss from discontinued
operations” in the consolidated statement of income and comprehensive income and consisted of the following:
  

	Year Ended December 31,	 	2017	 
	Revenues	 	$	7,188,516	 
	Cost of revenues, including depreciation of $841,883	 	 	(5,572,997	)
	Operating expenses, including depreciation of $136,450	 	 	(4,572,761	)
	 	 	 	(2,957,242	)
	Loss on disposal of discontinued operations	 	 	(9,202,488	)
	Net loss from discontinued operations	 	$	(12,159,730	)

  

Summarized cash flow information of Ally’s activities are as follows:
  

	Year Ended December 31,	 	2017	 
	Cash flows used in operating activities	 	$	(4,122,209	)
	Cash flows provided by investing activities	 	$	2,925,898	 

  

		3.	CONTRACT BILLING STATUS

  
 Cost and estimated earnings on
uncompleted contracts were as follows:
  

	December 31,	 	2017	 
	Costs incurred on uncompleted contracts	 	$	157,881,749	 
	Estimated earnings on uncompleted contracts	 	 	80,741,051	 
	 	 	 	238,622,800	 
	Less: billings to date	 	 	(200,934,783	)
	 	 	$	37,688,017	 

  



 
16


 Bellwether International Group LLC and
Subsidiaries
and Delos MBHE FOS LP and
Subsidiaries
 
Notes to Combined Consolidated Unaudited Financial
Statements
 


 These amounts are included in the accompanying combined consolidated unaudited balance sheet under the following captions:

 

	December 31,	 	2017	 
	Unbilled accounts receivable	 	$	54,386,912	 
	Deferred revenue – billings in excess of costs	 	 	(16,698,895	)
	 	 	 	 	 
	 	 	$	37,688,017	 

  

		4.	TRADE ACCOUNTS RECEIVABLE

  

Trade accounts receivable consisted of the following:
  

	December 31,	 	2017	 
	Contracts receivable	 	$	139,777,616	 
	Allowance for revenue adjustments	 	 	(949,000	)
	Allowance for bad debts	 	 	(4,971,242	)
	Total allowances	 	 	(5,920,242	)
	 	 	 	 	 
	Trade accounts receivable, net	 	$	133,857,374	 

  

As of December 31, 2017, IR LLC had approximately $10.2 million of accounts receivable balances due primarily from three customers originating
during 2014 - 2017. IR LLC, through its collection attorneys, continues to work with the customers’ insurance carriers to obtain full payment plus any interest due under the terms of the contracts. IR LLC has a successful history of collecting
significant past due balances, particularly related to customer insurance claims. Other than a specific allowance of $503,000 recorded related to one of these customers, IR LLC management believes the customers and insurance companies have the
ability and intent to pay amounts owed. At the date these financial statements were available to be issued, approximately $1.0 million has been collected on these balances.

 
 If the financial condition of the Entities’ customers or their
insurance companies were to deteriorate, adversely affecting their ability to make payments, additional allowances and or write-offs would be required.
  

 
17


 Bellwether International Group LLC and
Subsidiaries
and Delos MBHE FOS LP and
Subsidiaries
 
Notes to Combined Consolidated Unaudited Financial
Statements
 


 

		5.	PROPERTY AND EQUIPMENT, NET

  
 Property and equipment consisted of the following:

 

	December 31,	 	2017	 
	Furniture, fixtures and equipment	 	$	8,706,434	 
	Field equipment	 	 	23,076,186	 
	Vehicles	 	 	12,064,355	 
	Software licensing	 	 	1,841,581	 
	Other assets	 	 	428,521	 
	Leasehold improvements	 	 	6,960,174	 
	 	 	 	53,077,251	 
	Less: accumulated depreciation and amortization	 	 	(38,483,753	)
	Total property and equipment, net	 	$	14,593,498	 

  

Depreciation expense was approximately $5.4 million during the year ended December 31, 2017.

 

		6.	INTANGIBLE ASSETS

  
 Intangible assets,
excluding goodwill, consisted of the following:
  

	December 31, 2017	 	Life	 	 	Gross Carrying Amount	 	 	Accumulated Amortization	 	 	Net Carrying Amount	 
	Amortized intangible assets:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Trademarks and trade names	 	 	5-14 years	 	 	$	4,806,583	 	 	$	2,004,251	 	 	$	2,802,332	 
	Non-compete agreements	 	 	5 years	 	 	 	228,890	 	 	 	49,853	 	 	 	179,037	 
	Favorable lease asset	 	 	18 months	 	 	 	36,000	 	 	 	30,000	 	 	 	6,000	 
	Customer relationships	 	 	5-14 years	 	 	 	45,638,238	 	 	 	5,055,539	 	 	 	40,582,699	 
	 	 	 	 	 	 	 	50,709,711	 	 	 	7,139,643	 	 	 	43,570,068	 
	Non-amortizing intangible assets:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Trade names	 	 	Indefinite	 	 	 	3,602,000	 	 	 	-	 	 	 	3,602,000	 
	Total	 	 	 	 	 	$	54,311,711	 	 	$	7,139,643	 	 	$	47,172,068	 

  

Amortization expense for the year ended December 31, 2017 on intangible assets was approximately $5.1 million.

 
 

 
18


 Bellwether International Group LLC and
Subsidiaries
and Delos MBHE FOS LP and
Subsidiaries
 
Notes to Combined Consolidated Unaudited Financial
Statements
 


 Assuming no future impairments, expected amortization expense related to amortizing intangible assets is as follows:

 

	Year Ending December 31,	 	Total	 
	2018	 	$	4,551,543	 
	2019	 	 	4,723,054	 
	2020	 	 	3,943,988	 
	2021	 	 	3,447,146	 
	2022	 	 	2,974,635	 
	Thereafter	 	 	23,929,702	 
	 	 	$	43,570,069	 

  
 The Entities have
goodwill recorded from acquisitions as follows:
  

	 	 	FOS	 	 	IR LLC	 	 	Total	 
	January 1, 2017 	 	$	1,422,997	 	 	$	18,299,630	 	 	$	19,722,627	 
	Adjustments 	 	 	-	 	 	 	71,763	 	 	 	71,763	 
	December 31, 2017 	 	$	1,422,997	 	 	$	18,371,393	 	 	$	19,794,390	 

  

		7.	INVESTMENT HELD FOR DEFERRED COMPENSATION PLAN

  

In November 2011, IR LLC established a nonqualified deferred compensation plan (the “DC Plan”) covering certain employees. Participants
may defer between 90% and 100% of specific types of compensation as defined in the plan document. IR LLC may also make contributions to the DC Plan. Participants are 100% vested in their deferrals. IR LLC contributions vest 20% each year in years
two through six from the contribution date. Under terms of the DC Plan, the obligation is equal to the fair market value of the designated investments and is included in deferred compensation plan payable in the accompanying combined consolidated
unaudited balance sheet. Gains or losses on the DC Plan’s investments are recognized as increases or decreases in the Plan’s obligations. Investments designated for retirement of the Plan’s obligations are stated at fair value. These
funds are managed by an outside investment advisor. The investments under this plan consisted of only Level 1 investments in marketable securities as established by ASC 820 as of December 31, 2017. There were no participant or employer contributions
during 2017 as the DC Plan was terminated in early 2017 and all obligations are expected to be paid out one year after termination.
  

 
19


 Bellwether International Group LLC and
Subsidiaries
and Delos MBHE FOS LP and
Subsidiaries
 
Notes to Combined Consolidated Unaudited Financial
Statements
 


 

		8.	DEBT

  

Debt consisted of the following:
  

	December 31,	 	2017	 
	Bellwether revolving line of credit, secured by substantially all assets of the entity. Borrowing base limit of $23 million or the sum of 85% of eligible accounts receivable and other criteria stated in the
loan document, less the amount outstanding on the bridge loan and on outstanding letters of credit (maximum $3 million). Interest payable monthly at LIBOR index rate plus margin as defined (5.28% at December 31, 2017). Matured on November 5, 2017
and was extended to February 2, 2018. Refinanced with new lender with maturity date of February 2, 2023.	 	$	17,000,000	 
	 	 	 	 	 
	Bellwether revolving bridge loan with maximum borrowing of $5 million, subject to existing line of credit provisions with interest payable monthly at LIBOR index rate plus margin as defined (6.28% at December 31, 2017).
The bridge loan matured on November 5, 2017 and was extended through February 2, 2018. Refinanced with new lender with maturity date of February 2, 2023.	 	 	140,394	 
	 	 	 	 	 
	Bellwether term loan with quarterly payments of $675,000 beginning March 31, 2015 and interest payable monthly at LIBOR plus margin as defined (6.28% at December 31, 2017). The loan matured on November 5, 2017 and
was  extended through February 2, 2018. Refinanced with new lender with maturity date of February 2, 2023.	 	 	10,580,761	 
	 	 	 	 	 
	Bellwether equipment term loan with maximum borrowing of $7 million with interest payable monthly at fixed rate of 7.5% at December 31, 2016. 
Quarterly payments of $103,013 beginning June 30, 2016. The loan matured
on 
November 5, 2017 and was extended through February 2, 2018. Refinanced with new lender with maturity date of February 2, 2023.	 	 	3,628,591	 

  
  

 
  
  

 

 
20


 Bellwether International Group LLC and
Subsidiaries
and Delos MBHE FOS LP and
Subsidiaries
 
Notes to Combined Consolidated Unaudited Financial
Statements
 


 
  

	December 31,	 	2017	 
	Bellwether subordinated member note payable in the amount of $6 million with interest from 6% - 10% per annum with quarterly principal payments of $375,000 beginning March 2015 and maturing on November 30,
2018. Paid in full with February 2, 2018 refinance.	 	 	3,000,000	 
	 	 	 	 	 
	IR Hawaii subordinated member note payable in the amount of $725,000 with interest at 6% per annum and quarterly principal payments of $60,417 through maturity on January 1, 2019. Paid in full with February 2, 2018
refinance.	 	 	302,084	 
	 	 	 	 	 
	IR LLC subordinated LLC note payable in the amount of $800,000 with interest at 6% per annum, no stated payments, all unpaid principal and accrued but unpaid interest due at maturity on December 9,
2020. Paid in full with February 2, 2018 refinance.	 	 	800,000	 
	 	 	 	 	 
	Bellwether subordinated convertible member notes payable in the amount of $6,000,000 with interest at 22% per annum, all unpaid principal and accrued but unpaid
interest due at maturity on February 5, 2018. Paid in full with February 2, 2018 refinance.	 	 	6,000,000	 
	 	 	 	 	 
	Bellwether sub-total	 	 	41,451,830	 

  
  

 
  
  

 
  
  

 
  
  

 
21


 Bellwether International Group LLC and
Subsidiaries
and Delos MBHE FOS LP and
Subsidiaries
 
Notes to Combined Consolidated Unaudited Financial
Statements
 


  
 

	December 31,	 	2017	 
	Delos revolving loan agreement which matures on June 1, 2021, with variable interest at LIBOR plus 2.5% on a borrowing base, as defined in the agreement. Refinanced with new lender with maturity date of
February 2, 2023.	 	 	5,570,311	 
	 	 	 	 	 
	Delos revolving loan agreement which matures on June 1, 2021, with variable interest at the Canadian prime rate plus 2.5% on a borrowing base, as defined in the agreement. Refinanced with new
lender with maturity date of February 2, 2023.	 	 	11,938,223	 
	 	 	 	 	 
	Delos term loan in the amount of $2 million (Canadian) which matures on August 1, 2018 and requires 24 monthly principal payments of approximately $64,000 plus variable interest at Canadian prime rate plus 4% per annum.
Refinanced with new lender with maturity date of February 2, 2023.	 	 	464,784	 
	 	 	 	 	 
	Delos unsecured subordinated promissory note in the amount of $8 million (Canadian) with interest at 8% per annum and no stated repayment terms. Convertible to equity in FOS entities.
Original maturity date of July 5, 2017. Paid in full with February 2, 2018 refinance.	 	 	6,374,187	 
	Delos sub-total	 	 	24,347,505	 
	Total long term debt	 	 	65,799,335	 
	Less: current portion	 	 	(2,250,000	)
	Less: debt issuance costs	 	 	(706,306	)
	Long term debt, net	 	$	62,843,029	 

  

In connection with the February 2, 2018 merger, the entities obtained new senior lines of credit and a term loan which mature on February 2,
2023, both with variable rates plus margin, as defined totaling 5.75% and 9.82%, respectively at the loan date. The term loan requires quarterly principal payments of $750,000 until the amendment in February 2019 which increased the term loan by $50
million and the quarterly payments increased to $1,375,000.
  

In accordance with applicable accounting guidance, the future maturities have been reflected in the accompanying combined consolidated
unaudited financial statements in accordance with the new credit facilities and any respective amendments through the date these financial statements were available to be issued.

 
 The prior and new credit
facilities require annual excess cash flow payments, as defined, toward the balance of the borrowings no later than June 30 of the following year. The credit facilities have certain financial covenants including fixed charge coverage and leverage
ratios; capital expenditures limits; along with restrictions on member distributions, additional indebtedness and cash used for future acquisitions, with which the Entities were in compliance on December 31, 2017.

 
 

 
22


 Bellwether International Group LLC and
Subsidiaries
and Delos MBHE FOS LP and
Subsidiaries
 
Notes to Combined Consolidated Unaudited Financial
Statements
 


 The credit facilities are collateralized by substantially all assets and equity interests of the Entities. Certain
subsidiaries serve as co-borrowers and guarantors.
  
 All member
notes payable are subordinated to the current senior credit facilities and subordinated note payments may be restricted under the terms of the current senior credit facilities.

 
 As further described in Note 16 – Subsequent Events,
all term loans and lines of credit were extinguished on June 21, 2019.
  

At December 31, 2017, the minimum annual principal payments for consolidated debt, reflective of new senior credit facilities, are as follows:

 

	Year Ending December 31,	 	Total	 
	2018	 	$	2,250,000	 
	2019	 	 	5,500,000	 
	2020	 	 	5,500,000	 
	2021	 	 	5,500,000	 
	2022	 	 	5,500,000	 
	2023	 	 	41,549,335	 
	Total long-term debt	 	$	65,799,335	 

  

		9.	CAPITAL LEASES

  

Capital leases consisted of the following at December 31, 2017: 

 

	 	 	2017	 
	Capital leases payable to financial institutions with interest rates ranging from 7% to 8% and maturities through December, 2021. Monthly payments are
approximately $115,000. Obligations secured by vehicles.	 	$	4,468,471	 
	 	 	 	 	 
	Less interest cost	 	 	(421,483	)
	 	 	 	4,046,988	 
	Less current portion	 	 	(1,419,070	)
	 	 	$	2,627,918	 

  



 
23


 Bellwether International Group LLC and
Subsidiaries
and Delos MBHE FOS LP and
Subsidiaries
 
Notes to Combined Consolidated Unaudited Financial
Statements
 


 Future maturities of capital leases are as follows:

 

	Year Ending December 31,	 	Total	 
	2018	 	$	1,236,712	 
	2019	 	 	1,107,706	 
	2020	 	 	875,971	 
	2021	 	 	826,599	 
	 	 	$	4,046,988	 

  

Assets under capital lease approximate $9.5 million and related accumulated depreciation approximates $5.7 million as of December 31, 2017.

 

		10.	PROFITS INTERESTS PAYABLE

  

Certain of the Bellwether contributed companies issued equity-based compensation arrangements to individuals who subsequently became employees
of IR LLC. Awards were fully vested as of the date of grant, which permitted the employees to participate in future appreciation of the respective members’ equity. The profits interests will be paid in the form of cash or a promissory note at
Bellwether’s discretion, or upon a terminating event, as defined within the profits interest agreement (the “Agreement”). Certain terminating events, as defined by the Agreement, require the employee to forfeit the profits interest
without compensation.
  

In accordance with provisions of ASC 718, Compensation – Stock Compensation (“ASC 718”) and related guidance, these
profits interest awards have characteristics that determine the classification as a liability and are re-measured at estimated fair value at each subsequent reporting period with any adjustment being recorded as compensation expense. Compensation
expense associated with the change in fair value of these profits interests of $505,369 has been recognized in selling, general and administrative expenses in the accompanying combined consolidated unaudited statement of income and comprehensive
income for the year ended December 31, 2017.
  

IR LLC granted 3% profits interest to a key employee, which was issued upon reaching target revenues and fully vested in 2013. In accordance
with provisions of ASC 718 and related guidance, this profits interest award has characteristics that determine the classification as a liability and is re-measured at estimated fair value at each subsequent reporting period with any adjustment
being recorded as compensation expense. Compensation expense of $2,541,600 associated with the change in fair value of this profits interest has been recognized in selling, general and administrative expense in the accompanying combined consolidated
unaudited statement of income and comprehensive income for the year ended December 31, 2017. Distributions paid totaling $63,936 on this profits interests grant were recognized in selling, general and administrative expense in the accompanying
combined consolidated unaudited statement of income and comprehensive income for the year ended December 31, 2017.
  

 
24


 Bellwether International Group LLC and
Subsidiaries
and Delos MBHE FOS LP and
Subsidiaries
 
Notes to Combined Consolidated Unaudited Financial
Statements
 


  

	December 31,	 	2017	 
	 	 	 	 
	Balance at January 1	 	$	2,013,888	 
	Change in valuation	 	 	3,046,969	 
	 Balance at December 31	 	$	5,060,857	 

  

		11.	INCOME TAXES

  
 On December 22, 2017, the
U.S. Tax Cuts and Jobs Act was enacted into law. This U.S. tax reform contains several key provisions including the reduction of the U.S. federal corporate income tax rate to 21% effective January 1, 2018, among a variety of other changes. As a
result of the change in the corporate tax rate, the Entities remeasured their deferred tax assets and liabilities as of December 31, 2017 based on the rate at which they are expected to reverse in the future. This remeasurement and interpretation of
the new law is provisional subject to clarifications of the provisions of the new legislation and final calculations.
  

The components of income tax (benefit) expense consisted of the following:
  

	Year Ended December 31,	 	2017	 
	Current:	 	 	 	 
	Federal	 	$	1,451,500	 
	State	 	 	444,438	 
	Foreign	 	 	1,315,872	 
	 	 	 	3,211,810	 
	 	 	 	 	 
	Deferred:	 	 	 	 
	Federal	 	 	(365,847	)
	State	 	 	(36	)
	Foreign	 	 	(2,917,276	)
	 	 	 	(3,283,159	)
	Total tax benefit	 	$	(71,349	)

  
 The Entities’
effective income tax rate is lower than what would be expected if the federal statutory rate were applied to income before income taxes primarily because of certain expenses deductible for financial reporting purposes that are not deductible for tax
purposes, including operating loss carryforwards. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax
purposes.
  
 

 
25


 Bellwether International Group LLC and
Subsidiaries
and Delos MBHE FOS LP and
Subsidiaries
 
Notes to Combined Consolidated Unaudited Financial
Statements
 


 The types of temporary differences between the tax basis of assets and liabilities that give rise to a significant
portion of the deferred tax assets and liabilities and their approximate tax effects are as follows:
  

	December 31,	 	2017	 
	Components of net long-term deferred tax assets (liabilities):	 	 	 	 
	Basis difference in intangibles	 	$	(378,295	)
	Federal and state net operating losses	 	 	306,136	 
	Allowances	 	 	193,896	 
	Accrued expenses	 	 	569,944	 
	Capital leases	 	 	1,615,059	 
	Basis difference in property and equipment	 	 	(396,811	)
	Other	 	 	382,941	 
	 	 	 	2,292,870	 
	Valuation allowance	 	 	(59,538	)
	Total net deferred tax assets	 	$	2,233,332	 

  
 At December 31, 2017,
Bellwether has approximately $59,000 available in federal and state unused net operating losses that may be applied against future taxable income and that expire December 31, 2028. Based on the available objective evidence regarding net operating
losses of a taxable subsidiary that ceased operations, management believes it is more likely than not that the net operating losses associated with this entity will not be fully realizable. Accordingly, Bellwether provided for a valuation allowance
of approximately $59,000 against these net operating losses at December 31, 2017.
  

At December 31, 2017, Delos has approximately $4.1 million in U.S. federal unused net operating losses that may be applied against future U.S.
taxable income. Based upon the level of historical taxable income, projections for future taxable income over the periods in which the deferred tax assets are deductible, and the scheduled reversal of deferred tax liabilities, Delos management
believes it is more likely than not it will realize its net deferred tax assets and no valuation allowance has been established at December 31, 2017.
  

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment.
  

 
26


 Bellwether International Group LLC and
Subsidiaries
and Delos MBHE FOS LP and
Subsidiaries
 
Notes to Combined Consolidated Unaudited Financial
Statements
 


 

		12.	COMMITMENTS AND CONTINGENCIES

  
 Operating Lease
Commitments
  
 The
Entities lease land, buildings, equipment, and vehicles under various operating leases through October 2023, certain of which contain provisions for future rent increases or periods in which rent payments are reduced (abated). In accordance with
GAAP, the Entities record monthly rent expense on a straight-line basis and reflect a deferred rent liability for the difference between straight-line rent and actual rent payments.

 
 Minimum lease payments, for each
of the succeeding five years and thereafter, under operating leases with initial terms in excess of one year are, as follows:
  

	Years Ending December 31,	 	 	 
	2018	 	$	5,958,764	 
	2019	 	 	4,732,051	 
	2020	 	 	3,321,936	 
	2021	 	 	1,911,538	 
	2022	 	 	740,237	 
	Thereafter	 	 	67,906	 
	 	 	$	16,732,432	 

  

Rent expense was approximately $6.8 million during the year ended December 31, 2017.

 
 Letters of Credit

 
 FOS has outstanding letters of credit of approximately
$251,000 at December 31, 2017, which currently will expire in September 2019 and January 2020.
  

Surety Bonds
  

IR LLC, as a condition for entering into certain construction contracts, had outstanding surety bonds totaling approximately $18 million related to
U.S. operations at December 31, 2017. There are de minimis surety bonds related to Canadian operations at December 31, 2017.
  



 
27


 Bellwether International Group LLC and
Subsidiaries
and Delos MBHE FOS LP and
Subsidiaries
 
Notes to Combined Consolidated Unaudited Financial
Statements
 


 Section 401(k) Retirement Plan

 
 IR LLC has a Section 401(k)
retirement plan (the “Plan”) covering certain employees. Employees are generally eligible to participate after reaching 21 years of age and attaining six months of employment. Eligible employees can contribute up to eighty percent of their
considered elective deferrals, subject to IRS limitations. In addition, the Plan allows for catch-up contributions for those participants aged 50 or older. IR LLC’s match is a discretionary percentage of considered earnings and vests over a
five-year period. IR LLC’s match for the year ended December 31, 2017 was approximately $520,000.
  

Litigation
  

The Entities are subject to various claims and legal matters in the ordinary course of business. Management believes that any liability that may
ultimately result from the resolution of these matters will not have a material adverse effect on the financial condition or results of operations of the Entities.
  

Indemnification of Directors and Officers

 
 Under the terms of the
Entities’ operating agreements, the directors and officers have been indemnified for any action or any failure to act on behalf of the Entities within the authority as directors and officers, unless the act or omission was performed or omitted
fraudulently, as defined.
  

Employment Agreements
  

The Entities have entered into employment agreements with certain key employees that stipulate salary, bonus and termination provisions.

 

		13.	EQUITY

  
 Bellwether International Group
LLC
  
 Under the terms of the Bellwether
operating agreement (the “Bellwether Agreement”) the entity has one class of members’ equity and the members’ capital account is increased for capital contributions and allocation of profits and decreased for distributions and
allocation of losses.
  

Under the terms of the Bellwether Agreement, certain members will receive a preference amount upon certain liquidating events, as defined in the
Agreement. The preference amount payable upon a liquidating event is as follows: (i) $10 million, if the aggregate net proceeds are less than or equal to $50 million; (ii) $8 million if the aggregate net proceeds are greater than $50 million but
less than or equal to $75 million; (iii) $5 million if the aggregate net proceeds are greater than $75 million but less than or equal to $100 million; and (iv) none if the aggregate net proceeds are greater than $100 million.

 
 

 
28


 Bellwether International Group LLC and
Subsidiaries
and Delos MBHE FOS LP and
Subsidiaries
 
Notes to Combined Consolidated Unaudited Financial
Statements
 


 No member units were issued or redeemed during 2017.
  

Bellwether Member Unit Subscription Agreement
  

As part of the Statewide acquisition, Bellwether issued 514 units to a key employee valued at $4 million. The unit subscription agreement provides
that upon termination of employment, the member/employee has the option to put the 514 units back to Bellwether and Bellwether has the option to redeem the units. The redemption of the units is contingent upon a future termination event and the
exercise of the put or call option, which is not certain. In accordance with ASC 480 – Distinguishing Liabilities from Equity (“ASC 480”), should a termination event occur and the redemption be exercised by the employee/member
or Bellwether, the then fair value of the units will be reclassified from equity to a liability, payable as defined in the agreement.
  

IR-Hawaii Non-Controlling Interest
  

At its formation, Interstate Restoration Hawaii LLC (“IR Hawaii”) issued 2,500 units to a member representing 25% ownership interest.
Upon sale of IR Hawaii, the member has the option to put the 2,500 units back to IR Hawaii and IR Hawaii has the option to redeem the units. The redemption of the units is contingent upon a future sale of IR Hawaii and the exercise of the put or
call option, which is not certain. In accordance with ASC 480, Distinguishing Liabilities from Equity, should a sale event occur, and the redemption be exercised by the member or IR Hawaii, the then fair value of the units will be
reclassified from equity to a liability, payable as defined in the agreement.
  

Delos MBHE FOS LP
  

Partners’ capital accounts are increased for capital contributions and allocation of profits and decreased for distributions and allocation of losses.

 

		14.	RELATED PARTY TRANSACTIONS

  
 Bellwether receives
administrative support from a member. Amounts paid for administrative support for the year ended December 31, 2017 were $225,000.
  

The Entities’ rent office space from related parties. Rents paid for these facilities for the year ended December 31, 2017 totaled approximately $591,000.

 

 
29


 Bellwether International Group LLC and
Subsidiaries
and Delos MBHE FOS LP and
Subsidiaries
 
Notes to Combined Consolidated Unaudited Financial
Statements
 


 

		15.	BACKLOG (UNAUDITED)

  
 The following
schedule shows a reconciliation of backlog representing the amount of revenue the Entities expect to realize from work to be performed on uncompleted contracts in progress at December 31, 2017 and from contractual agreements on which work has not
yet begun.
  

	 	 	(Unaudited)	 
	Balance, January 1, 2017	 	$	53,281,556	 
	New contracts	 	 	443,477,372	 
	Less: Contract revenue earned	 	 	(393,011,280	)
	Balance, December 31, 2017	 	$	103,747,648	 

  

		16.	SUBSEQUENT EVENTS

  

The Entities have evaluated subsequent events through August 13, 2019 which is the date the combined consolidated unaudited financial statements
were available to be issued. There are no material subsequent events that required recognition or additional disclosure in these combined consolidated unaudited financial statements other than as described below:

 
 On February 2, 2018 the Entities were merged into a newly-formed
corporation incorporated in Delaware. In accordance with ASC 805, the assets and liabilities were transferred to the new entity at carrying value and the Entities debt facilities were refinanced with new lenders. On that date, the Entities obtained
new lines of credit and a term loan and refinanced approximately $49 million in existing debt. As allowed by the new senior credit facilities, a $32 million distribution was made to Global Restoration Holdings, LLC.

 
 In February 2019 the term loan agreement was amended to obtain an
additional $50 million under the existing terms and original maturity date. As allowed by the term loan agreement, a $50 million distribution was made to Global Restoration Holdings, LLC.

 
 On June 21, 2019, FirstService Corporation acquired 95% of Global
Restoration Holdings, LLC. The remaining 5% of equity ownership will be retained by the existing senior management team, who will stay on to continue to lead the day-to-day operations. In connection with the acquisition, approximately $115 million
was paid to terminate the existing term loan and lines of credit.
  

On July 15, 2019, IR LLC entered into an asset purchase agreement to acquire substantially all the assets of ASR Construction, Inc., a California
Corporation, for approximately $9 million, subject to working capital adjustments and contingent consideration, as defined in the asset purchase agreement. IR LLC paid cash and $2.5 million promissory note bearing interest at 5% per annum.
Transaction costs were expensed as incurred.
  
 

 
30


 Bellwether International Group LLC and
Subsidiaries
and Delos MBHE FOS LP and
Subsidiaries
 
Notes to Combined Consolidated Unaudited Financial
Statements
 


 On August 9, 2019, FOS entered into a purchase agreement to acquire substantially all the assets of JPL Disaster Recovery
a Quebec Canada entity, for approximately $4.5 million. Closing is expected to occur in approximately four weeks.
  
  

 
  
  

 
  
  

 
  
  

 
  
  

 
  
  

 
  
  

 
  
  

 
  
  

 
  
  

 
  
  

 
  
  

 
 

 
31


  


  

 
  

 
  

 
 FirstOnSite USA Holdings Inc.
and Subsidiaries
  
 Unaudited Condensed Combined Consolidated
Financial Statements
  
 Three Months Ended March 31, 2019 and 2018

 
  

 
  

 
  

 
  

 
  

 
  

 
  

 
  

 
  

 
  

 
  

 
 

  



FirstOnSite USA Holdings Inc. and
Subsidiaries


 Contents

 
  

	Unaudited Condensed Combined Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018	 	2
	 	 	 
	Unaudited Condensed Combined Consolidated Statements of Income and Comprehensive Income for the Three Months Ended March 31, 2019 and 2018	 	4
	 	 	 
	Unaudited Condensed Combined Consolidated Statements of Changes in Stockholder’s Equity for the Three Months Ended March 31, 2019 and 2018	 	5
	 	 	 
	Unaudited Condensed Combined Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018	 	6
	 	 	 
	Notes to Unaudited Condensed Combined Consolidated Financial Statements	 	8

  
  

 
  
  

 
  
  

 
 
 

  



FirstOnSite USA Holdings Inc. and
Subsidiaries


 Unaudited Condensed Combined Consolidated Balance Sheets

 
  

	 	 	March 31,
 2019
	 	 	December 31,

2018
	 
	Assets	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 
	Current:	 	 	 	 	 	 	 	 
	Cash and cash equivalents	 	$	152,266	 	 	$	264,056	 
	Accounts receivable:	 	 	 	 	 	 	 	 
	Trade, net of allowance	 	 	127,220,851	 	 	 	118,765,681	 
	Unbilled - costs in excess of billings	 	 	31,341,401	 	 	 	45,155,381	 
	Inventory and supplies	 	 	2,428,054	 	 	 	2,360,762	 
	Prepaid and other	 	 	3,280,159	 	 	 	3,169,174	 
	 	 	 	 	 	 	 	 	 
	Total current assets	 	 	164,422,731	 	 	 	169,715,054	 
	 	 	 	 	 	 	 	 	 
	Property and equipment, net	 	 	14,397,868	 	 	 	13,966,703	 
	 	 	 	 	 	 	 	 	 
	Other assets:	 	 	 	 	 	 	 	 
	Advances to Parent	 	 	107,498,503	 	 	 	57,163,731	 
	Intangible assets, net	 	 	41,308,212	 	 	 	42,326,760	 
	Goodwill	 	 	19,842,212	 	 	 	19,842,212	 
	Deferred tax assets, net	 	 	2,914,095	 	 	 	3,082,071	 
	Deposits	 	 	231,367	 	 	 	198,813	 
	Total other assets	 	 	171,794,389	 	 	 	122,613,587	 
	Total assets	 	$	350,614,988	 	 	$	306,295,344	 

  

See accompanying notes to the unaudited condensed combined consolidated financial statements.

 
  

 
  

 
 

 
2


 
FirstOnSite USA
Holdings Inc. and Subsidiaries


 Unaudited Condensed Combined Consolidated Balance Sheets

 
  

	 	 	

March 31,
 2019
	 	 	December 31,

2018
	 
	Liabilities and Stockholder's Equity	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 
	Liabilities	 	 	 	 	 	 	 	 
	Current:	 	 	 	 	 	 	 	 
	Checks drawn against future deposits	 	$	1,759,630	 	 	$	6,320,570	 
	Accounts payable - trade	 	 	26,510,756	 	 	 	33,161,817	 
	Accrued expenses	 	 	6,210,586	 	 	 	8,980,687	 
	Accrued compensation	 	 	9,545,316	 	 	 	17,094,259	 
	Income taxes payable	 	 	2,676,648	 	 	 	1,607,202	 
	Deferred revenue - billings in excess of costs	 	 	14,295,861	 	 	 	15,476,101	 
	Current maturities of long-term debt	 	 	5,500,000	 	 	 	5,500,000	 
	Current maturities of capital leases	 	 	1,596,862	 	 	 	1,289,995	 
	Total current liabilities	 	 	68,095,659	 	 	 	89,430,631	 
	 	 	 	 	 	 	 	 	 
	Long-term liabilities:	 	 	 	 	 	 	 	 
	Line of credit, net of debt issuance costs	 	 	51,082,017	 	 	 	41,240,284	 
	Long-term debt, less current maturities, net of debt issuance costs	 	 	65,056,168	 	 	 	13,773,688	 
	Capital leases, less current maturities	 	 	4,050,190	 	 	 	3,409,530	 
	Deferred rent and other	 	 	102,724	 	 	 	31,430	 
	 	 	 	 	 	 	 	 	 
	Total long-term liabilities	 	 	120,291,099	 	 	 	58,454,932	 
	 	 	 	 	 	 	 	 	 
	Total liabilities	 	 	188,386,758	 	 	 	147,885,563	 
	 	 	 	 	 	 	 	 	 
	Commitments and contingencies	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 
	Stockholder's equity:	 	 	 	 	 	 	 	 
	Common stock, no par value, 1,000 shares authorized, 1,000 shares issued and outstanding	 	 	69,988,773	 	 	 	70,058,395	 
	Retained earnings	 	 	91,637,901	 	 	 	88,179,322	 
	Accumulated comprehensive loss	 	 	(1,314,482	)	 	 	(1,708,869	)
	Noncontrolling interest	 	 	1,916,038	 	 	 	1,880,933	 
	 	 	 	 	 	 	 	 	 
	Total stockholder's equity	 	 	162,228,230	 	 	 	158,409,781	 
	 	 	 	 	 	 	 	 	 
	Total liabilities and stockholder's equity	 	$	350,614,988	 	 	$	306,295,344	 

  

See accompanying notes to the unaudited condensed combined consolidated financial statements.

 
 

 
3


 
FirstOnSite USA
Holdings Inc. and Subsidiaries


 Unaudited Condensed Combined Consolidated Statements of Income and Comprehensive Income

 
  

	For the Three Months Ended March 31,	 	2019	 	 	2018	 
	Net revenues	 	$	101,239,418	 	 	$	99,001,721	 
	 	 	 	 	 	 	 	 	 
	Cost of revenues, including depreciation of $750,075 and $765,779	 	 	64,259,070	 	 	 	63,581,452	 
	 	 	 	 	 	 	 	 	 
	Gross profit	 	 	36,980,348	 	 	 	35,420,269	 
	 	 	 	 	 	 	 	 	 
	Operating expenses:	 	 	 	 	 	 	 	 
	Selling, general and administrative	 	 	27,133,069	 	 	 	25,420,412	 
	Depreciation and amortization	 	 	1,755,939	 	 	 	1,833,745	 
	Gain on disposal of property and equipment	 	 	(5,885	)	 	 	(218,689	)
	 	 	 	 	 	 	 	 	 
	Total operating expenses	 	 	28,883,123	 	 	 	27,035,468	 
	 	 	 	 	 	 	 	 	 
	Income from operations	 	 	8,097,225	 	 	 	8,384,801	 
	 	 	 	 	 	 	 	 	 
	Other income (expense):	 	 	 	 	 	 	 	 
	Interest income	 	 	905	 	 	 	914	 
	Interest expense	 	 	(2,113,600	)	 	 	(2,045,837	)
	Foreign currency (loss) gain	 	 	(448,291	)	 	 	238,470	 
	Other income	 	 	53,223	 	 	 	37,412	 
	 	 	 	 	 	 	 	 	 
	Total other expense	 	 	(2,507,763	)	 	 	(1,769,041	)
	Income before tax expense	 	 	5,589,462	 	 	 	6,615,760	 
	Income tax expense	 	 	2,393,384	 	 	 	2,498,832	 
	Net income	 	$	3,196,078	 	 	$	4,116,928	 
	 	 	 	 	 	 	 	 	 
	Less: Net income attributable to noncontrolling interest	 	 	35,105	 	 	 	405,208	 
	Net income attributable to FirstOnSite USA Holdings, Inc.	 	$	3,160,973	 	 	$	3,711,720	 
	 	 	 	 	 	 	 	 	 
	Other comprehensive income (loss):	 	 	 	 	 	 	 	 
	Foreign currency translation	 	 	394,387	 	 	 	(490,429	)
	Total other comprehensive income	 	$	3,555,360	 	 	$	3,221,291	 

  

See accompanying notes to the unaudited condensed combined consolidated financial statements.

 
 

 
4


 
FirstOnSite USA
Holdings Inc. and Subsidiaries


 
 Unaudited
Condensed Combined Consolidated Statements of Changes in Stockholder’s Equity
  

  

	Three Months Ended March 31, 2018	 	Number of Shares	 	 	Common Stock	 	 	Retained Earnings	 	 	Accumulated Other Comprehensive

Loss
	 	 	Noncontrolling Interest	 	 	

Total Stockholder's Equity
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Balance, January 1, 2018	 	 	1,000	 	 	$	70,058,395	 	 	$	64,944,254	 	 	$	(520,468	)	 	$	339,464	 	 	$	134,821,645	 
	Foreign currency translation	 	 	-	 	 	 	-	 	 	 	-	 	 	 	(490,429	)	 	 	-	 	 	 	(490,429	)
	Stock compensation (recovery)	 	 	-	 	 	 	(558,890	)	 	 	-	 	 	 	-	 	 	 	-	 	 	 	(558,890	)
	Net income	 	 	-	 	 	 	-	 	 	 	3,711,720	 	 	 	-	 	 	 	405,208	 	 	 	4,116,928	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Balance, March 31, 2018	 	 	1,000	 	 	$	69,499,505	 	 	$	68,655,974	 	 	$	(1,010,897	)	 	$	744,672	 	 	$	137,889,254	 

  

 

	Three Months Ended March 31, 2019	 	Number of Shares	 	 	Common Stock	 	 	Retained Earnings	 	 	Accumulated Other Comprehensive

(Loss) Income
	 	 	Noncontrolling Interest	 	 	Total Stockholder's Equity	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Balance, January 1, 2019	 	 	1,000	 	 	$	69,760,789	 	 	$	88,476,928	 	 	$	(1,708,869	)	 	$	1,880,933	 	 	$	158,409,781	 
	Foreign currency translation	 	 	-	 	 	 	-	 	 	 	-	 	 	 	394,387	 	 	 	-	 	 	 	394,387	 
	Stock compensation	 	 	-	 	 	 	227,984	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	227,984	 
	Net income	 	 	-	 	 	 	-	 	 	 	3,160,973	 	 	 	-	 	 	 	35,105	 	 	 	3,196,078	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Balance, March 31, 2019	 	 	1,000	 	 	$	69,988,773	 	 	$	91,637,901	 	 	$	(1,314,482	)	 	$	1,916,038	 	 	$	162,228,230	 

  

See accompanying notes to the unaudited condensed combined consolidated financial statements.

 
  

 
  

 

 
5


 
FirstOnSite USA
Holdings Inc. and Subsidiaries


 
 

Unaudited Condensed Combined Consolidated Statements of Cash Flows

 
 

  

	Increase (Decrease) in Cash and Cash Equivalents	 	 	 
	For the Three Months Ended March 31,	 	2019	 	 	2018	 
	Cash flows from operating activities:	 	 	 	 	 	 	 	 
	Net income	 	$	3,196,078	 	 	$	4,116,928	 
	Adjustments to reconcile net income to net cash used in operating activities:	 	 	 	 	 	 	 	 
	Depreciation and amortization	 	 	2,506,014	 	 	 	2,599,524	 
	Amortization of deferred financing costs	 	 	305,649	 	 	 	214,772	 
	Change in accounts receivable allowances	 	 	7,255	 	 	 	(54,715	)
	Deferred income tax expense	 	 	167,976	 	 	 	395,405	 
	Gain on disposal of property and equipment	 	 	(5,885	)	 	 	(218,689	)
	Goodwill adjustment	 	 	-	 	 	 	(47,822	)
	Profits interest compensation expense (recovery)	 	 	227,984	 	 	 	(558,890	)
	Change in operating assets and liabilities: Accounts receivable trade	 	 	(8,462,425	)	 	 	1,639,937	 
	Accounts receivable unbilled (costs in excess)	 	 	13,813,980	 	 	 	16,376,684	 
	Inventory and supplies	 	 	(67,292	)	 	 	(55,595	)
	Prepaid and other and deposits	 	 	(143,539	)	 	 	(79,787	)
	Deferred revenue - billings in excess of costs	 	 	(1,180,240	)	 	 	(1,413,673	)
	Accounts payable-trade and accrued expenses	 	 	(16,970,105	)	 	 	(24,994,189	)
	Deferred comp plan payable	 	 	-	 	 	 	(152,652	)
	Income tax payable	 	 	1,069,446	 	 	 	1,966,299	 
	Net cash used in operating activities	 	 	(5,535,105	)	 	 	(266,463	)
	Cash flows from investing activities:	 	 	 	 	 	 	 	 
	Proceeds from the sale of property and equipment	 	 	78,379	 	 	 	218,689	 
	Purchases of property and equipment	 	 	(195,982	)	 	 	(647,629	)
	Sale of investments for deferred comp plan	 	 	-	 	 	 	170,625	 
	Net cash used in investing activities	 	 	(117,603	)	 	 	(258,315	)
	Cash flows from financing activities:	 	 	 	 	 	 	 	 
	Checks drawn against future deposits	 	 	(4,560,940	)	 	 	(121,609	)
	Borrowings on line of credit, net	 	 	12,155,063	 	 	 	13,449,322	 
	Proceeds from long-term debt	 	 	50,000,000	 	 	 	60,000,000	 
	Payments on long-term debt	 	 	-	 	 	 	(16,935,695	)
	Payments on capital leases	 	 	(947,527	)	 	 	(377,852	)
	Deferred financing costs	 	 	(1,336,500	)	 	 	(5,198,185	)
	Distributions to Parent	 	 	(50,334,772	)	 	 	(50,857,042	)
	Net cash provided by (used in) financing activities	 	 	4,975,325	 	 	 	(41,060	)
	Effect of exchange rate changes on cash	 	 	565,593	 	 	 	679,046	 
	Net change in cash and cash equivalents	 	 	(111,790	)	 	 	113,208	 
	Cash and cash equivalents, beginning of year	 	 	264,056	 	 	 	-	 
	Cash and cash equivalents, end of year	 	$	152,266	 	 	$	113,208	 

  

See accompanying notes to the unaudited condensed combined consolidated financial statements.

 

 
6


 
FirstOnSite USA
Holdings Inc. and Subsidiaries


 
 

Unaudited Condensed Combined Consolidated Statements of Cash Flows

 
  

	For the Three Months Ended March 31,	 	2019	 	 	2018	 
	Supplemental disclosure of cash flow information:	 	 	 	 	 	 	 	 
	Cash paid for interest	 	$	773,713	 	 	$	1,297,199	 
	Cash paid for income and franchise taxes	 	$	1,900,675	 	 	$	303,750	 
	Non-cash investing activities:	 	 	 	 	 	 	 	 
	Acquisition of equipment through capital lease	 	$	1,795,142	 	 	$	759,850	 

  

See accompanying notes to the unaudited condensed combined consolidated financial statements.

 
  

 
  

 
  



 
7


 
FirstOnSite USA
Holdings Inc. and Subsidiaries
 
Notes to Unaudited Condensed Combined Consolidated Financial
Statements
 


 NOTE 1 – Description of Business and Basis of Presentation

 
 Description of Business

 
 FirstOnSite USA Holdings, Inc. and its Subsidiaries
(the “Company”) are engaged in providing recovery and construction services. Such services include emergency pre-planning and response, drying, mold remediation, fire and water damage restoration, reconstruction, equipment and technology
restoration and project management. The Company maintains offices in various locations in the United States and Canada, with headquarters in Fort Worth, Texas and Mississauga, Ontario Canada.

 
 Basis of Presentation

 
 The Company was formed in Delaware in January 2018 to
combine the equity interests of Bellwether International Group LLC and Subsidiaries (“Bellwether”) and Delos MBHE FOS LP and Subsidiaries (“Delos”), who are defined as entities under common control.

 
 In accordance with Accounting Standards Codification
(“ASC”) 805, Business Combinations, recognized assets and liabilities of Bellwether and Delos were transferred to the Company at their carrying amounts on the date of transfer, February 2, 2018. These combined consolidated financial
statements report the results of operations as though the transfer had occurred on January 1, 2018.
  

The accompanying combined consolidated financial statements include the activities of FirstOnSite USA Holdings Inc. and its wholly owned and
majority owned subsidiaries: FirstOnSite Restoration, Inc. (comprised of FirstOnSite Canadian Holdings, Inc. and FirstOnSite Restoration Limited) (collectively “FOS”); Interstate Restoration LLC (comprised of Interstate Restoration Group,
Inc., Colorado Fire and Flood, LLC, Mazur Holdings, Inc., Interstate Restoration – California LP and Interstate Restoration de Mexico S de R.L. de C.V.) and Interstate Restoration Hawaii LLC (collectively “IR LLC”).

 
 The Company is wholly-owned by Global Restoration Holdings LLC
through its ownership of Bellwether FOS Holdco, Inc. (collectively, the “Parent”), whose activities are excluded from these unaudited condensed combined consolidated financial statements. Advances to Parent in the combined consolidated
balance sheets are reflective of activities of the Company with its Parent.
  

As further described in Note 15 – Subsequent Events, FirstService Corporation acquired 95% of Bellwether FOS Holdco, Inc which is the
parent company of FirstOnSite USA Holdings, Inc.
  
 Principles
of Consolidation and Non-Controlling Interests
  
 These
unaudited condensed combined consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In the opinion of management, the accompanying
unaudited condensed consolidated financial statements reflect all adjustments consisting of normal recurring adjustments necessary for a fair presentation of its financial position and results of operations. Interim results of operations are not
necessarily indicative of the results that may be achieved for the full year.
  



 
8


 
FirstOnSite USA
Holdings Inc. and Subsidiaries
 
Notes to Unaudited Condensed Combined Consolidated Financial
Statements
 


 The consolidated balance sheet as of December 31, 2018 was derived from the audited consolidated financial statements as
of that date, but does not include all disclosures, including notes required by GAAP. As such, this quarterly report should be read in conjunction with the financial statements and relates notes included in the Company’s consolidated financial
statements for the year ended December 31, 2018. The Company follows the same accounting policies for preparing quarterly and annual financial statements.
  

The accompanying unaudited condensed combined consolidated financial statements include the accounts of the Company, its wholly owned
subsidiaries, and other entities in which the Company has a controlling financial interest. In accordance with ASC 810, Consolidation, for consolidated subsidiaries that are less than wholly owned, the third-party holdings of equity interests
are referred to as noncontrolling interests. The portion of net income attributable to noncontrolling interests for subsidiaries is presented as net income applicable to noncontrolling interests on the accompanying condensed combined consolidated
statements of income and comprehensive income, and the portion of the stockholder’s equity of such subsidiaries is presented as noncontrolling interests on the accompanying condensed combined consolidated balance sheets and accompanying
condensed combined consolidated statements of stockholder’s equity. All significant intercompany transactions and accounts have been eliminated.
  

NOTE 2 – Significant Accounting Policies
  

Use of Estimates
  

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires
management to make estimates and assumptions. These estimates and assumptions may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates and such differences could be material to the combined consolidated financial statements.

 
 New Accounting Pronouncements

 
 In May 2014, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update (“ASU”) 2014-09 (Topic 606), Revenue from Contracts with Customers (“ASU 2014-09”). The new revenue recognition standard supersedes all existing revenue recognition
guidance. Under ASU 2014-09, an entity must recognize revenue relating to contracts with customers that depicts the transfer of promised goods or services to customers in an amount reflecting the consideration to which the entity expects to be
entitled in exchange for such goods or services. In order to meet this requirement, the entity must apply the following steps: (i) identify the contracts with the customers; (ii) identify performance obligations in the contracts; (iii) determine the
transaction price; (iv) allocate the transaction price to the performance obligations per the contracts; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. Additionally, disclosures required for revenue recognition
will include qualitative and quantitative information about contracts with customers, significant judgments and changed judgments, and assets recognized from costs to obtain or fulfill a contract. The new revenue recognition standard is effective
for annual periods beginning after December 15, 2018. Management is currently evaluating the potential impact of this new standard on the Company’s combined consolidated financial statements.

 
 

 
9


 
FirstOnSite USA
Holdings Inc. and Subsidiaries
 
Notes to Unaudited Condensed Combined Consolidated Financial
Statements
 


  
 In
February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), Leases (“ASU 2016-2”), which requires companies leasing assets to recognize on their balance sheet a liability to make lease payments (the lease liability) and a
right-of-use asset representing its right to use the underlying asset for the lease term on contracts longer than one year. The lessee is permitted to make an accounting policy election to not recognize lease assets and lease liabilities for
short-term leases. How leases are recorded on the balance sheet represents a significant change from previous GAAP guidance in Topic 840. ASU 2016-02 maintains a distinction between finance leases and operating leases similar to the distinction
under previous lease guidance for capital leases and operating leases. ASU 2016-02 was originally effective for fiscal periods beginning after December 15, 2019, but has been delayed for private companies for one additional year. Management is
currently evaluating the potential impact of this new standard on the Company’s consolidated financial statements.
  

In June 2016, the FASB issued ASU 2016-13 (Topic 326), Financial Instruments – Credit Losses (“ASU 2016-13”), which
requires entities to use a new forward-looking “expected loss” model that generally will result in the earlier recognition of allowances for losses. ASU 2016-13 is effective for annual periods beginning after December 15, 2020, and early
adoption is permitted. The adoption of ASU 2016-03 is not expected to have a material effect on the Company’s consolidated financial statements.
  

In January 2017, the FASB issued ASU 2017-04 (Topic 350), Intangibles – Goodwill and Other (“ASU 2017-04”), which
eliminates Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by
which the carrying amount exceeds the reporting unit’s fair value. ASU 2017-04 also eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative
step, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. ASU 2017-04 is effective for the
Company’s annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2021. Early adoption is permitted. The Company is currently evaluating the impact of ASU 2017-04 on its consolidated financial
statements.
  
 

 
10


 
FirstOnSite USA
Holdings Inc. and Subsidiaries
 
Notes to Unaudited Condensed Combined Consolidated Financial
Statements
 


 NOTE 3 – CONTRACT BILLING STATUS
  

Cost and estimated earnings on uncompleted contracts were as follows:
  

	 	 	March 31,

2019
	 	 	December 31,

2018
	 
	Costs incurred on uncompleted contracts 	 	$	153,098,695	 	 	$	166,935,486	 
	Estimated earnings on uncompleted contracts 	 	 	67,707,596	 	 	 	75,624,112	 
	 	 	 	220,806,291	 	 	 	242,559,598	 
	Less: billings to date 	 	 	(203,760,752	)	 	 	(212,880,318	)
	 	 	$	17,045,540	 	 	$	29,679,280	 

  
 These amounts are included in the accompanying
unaudited combined consolidated balance sheets under the following captions: 
  

	 	 	March 31,	 	 	December 31,	 
	 	 	2019	 	 	2018	 
	Unbilled – costs in excess of billings 	 	$	31,341,401	 	 	$	45,155,381	 
	Deferred revenue – billings in excess of costs 	 	 	(14,295,861	)	 	 	(15,476,101	)
	 	 	$	17,045,540	 	 	$	29,679,280	 

  
  

NOTE 4 – TRADE ACCOUNTS RECEIVABLE
  

Trade accounts receivable consisted of the following:
  

	 	 	March 31,	 	 	December 31,	 
	 	 	2019	 	 	2018	 
	Contracts receivable 	 	$	132,956,158	 	 	$	124,456,165	 
	Allowance for revenue adjustments 	 	 	(918,000	)	 	 	(918,000	)
	Allowance for claims 	 	 	(700,000	)	 	 	(700,000	)
	Allowance for bad debts 	 	 	(4,117,307	)	 	 	(4,072,484	)
	Total allowances 	 	 	(5,735,307	)	 	 	(5,690,484	)
	Trade accounts receivable, net 	 	$	127,220,851	 	 	$	118,765,681	 

  
 As of March 31, 2019,
the Company had approximately $16 million of accounts receivable balances due primarily from five customers originating during 2015 - 2018. The Company, through its collection attorneys, continues to work with the customers’ insurance carriers
to obtain full payment plus any interest due under the terms of the contracts. The Company has a successful history of collecting significant past due balances, particularly related to customer insurance claims. Management believes the customers and
insurance companies have the ability and intent to pay amounts owed. However, if the financial condition of the Company’s customers or their insurance companies were to deteriorate, adversely affecting their ability to make payments, additional
allowances and or write-offs would be required.
  
 

 
11


 
FirstOnSite USA
Holdings Inc. and Subsidiaries
 
Notes to Unaudited Condensed Combined Consolidated Financial
Statements
 


  
 NOTE 5 – PROPERTY AND
EQUIPMENT, NET
  
 Property and equipment consisted of the
following:
  

	 	 	March 31,

2019
	 	 	December 31,

2018
	 
	Furniture, fixtures and equipment	 	$	9,268,155	 	 	$	9,042,906	 
	Field equipment	 	 	23,509,065	 	 	 	23,352,621	 
	Vehicles	 	 	13,725,126	 	 	 	12,422,739	 
	Software licensing	 	 	2,211,439	 	 	 	2,142,381	 
	Other assets	 	 	14,400	 	 	 	14,400	 
	Leasehold improvements	 	 	7,180,313	 	 	 	6,986,096	 
	 	 	 	55,908,498	 	 	 	53,961,143	 
	Less: accumulated depreciation and amortization	 	 	(41,510,630	)	 	 	(39,994,440	)
	 	 	 	 	 	 	 	 	 
	Total property and equipment, net	 	$	14,397,868	 	 	$	13,966,703	 

  

Depreciation expense was approximately $1.4 million and $1.4 million during the three months ended March 31, 2019 and 2018, respectively.

 
  
  

 
  
  

 
  
 

 
12


 
FirstOnSite USA
Holdings Inc. and Subsidiaries
 
Notes to Unaudited Condensed Combined Consolidated Financial
Statements
 


 NOTE 6 – INTANGIBLE ASSETS
  

Intangible assets, excluding goodwill, consisted of the following:
  

	March 31, 2019	 	Life	 	Gross Carrying Amount	 	 	Accumulated Amortization	 	 	Net Carrying Amount	 
	Amortized intangible assets:	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Trademarks and trade names	 	5-14 years	 	$	3,206,366	 	 	$	2,611,878	 	 	$	594,488	 
	Contractual backlog	 	18 months	 	 	1,600,217	 	 	 	304,803	 	 	 	1,295,414	 
	Non-compete agreements	 	5 years	 	 	228,890	 	 	 	108,379	 	 	 	120,511	 
	Customer relationships	 	5-14 years	 	 	45,638,842	 	 	 	9,943,043	 	 	 	35,695,799	 
	 	 	 	 	 	50,674,315	 	 	 	12,968,103	 	 	 	37,706,212	 
	Non-amortizing intangible assets:	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Trade names	 	Indefinite	 	 	3,602,000	 	 	 	-	 	 	 	3,602,000	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Total	 	 	 	$	54,276,315	 	 	$	12,968,103	 	 	$	41,308,212	 

  

 

	December 31, 2018	 	Life	 	Gross Carrying Amount	 	 	Accumulated Amortization	 	 	Net Carrying Amount	 
	Amortized intangible assets:	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Trademarks and trade names	 	5-14 years	 	$	4,806,583	 	 	$	2,749,436	 	 	$	2,057,147	 
	Non-compete agreements	 	5 years	 	 	228,890	 	 	 	96,674	 	 	 	132,216	 
	Customer relationships	 	5-14 years	 	 	45,568,600	 	 	 	9,033,203	 	 	 	36,535,397	 
	 	 	 	 	 	50,604,073	 	 	 	11,879,313	 	 	 	38,724,760	 
	Non-amortizing intangible assets:	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Trade names	 	Indefinite	 	 	3,602,000	 	 	 	-	 	 	 	3,602,000	 
	Total	 	 	 	$	54,206,073	 	 	$	11,879,313	 	 	$	42,326,760	 

  

Amortization expense for the three months ended March 31, 2019 and 2018 on intangible assets was approximately $1.1 million and $1.1 million, respectively.

 

 
13


 
FirstOnSite USA
Holdings Inc. and Subsidiaries
 
Notes to Unaudited Condensed Combined Consolidated Financial
Statements
 


  
 Assuming no future impairments, expected amortization expense
related to amortizing intangible assets as of March 31, 2019 is as follows:
  
 

	 	 	Total	 
	2019	 	$	3,272,780	 
	2020	 	 	4,009,042	 
	2021	 	 	3,985,306	 
	2022	 	 	3,725,485	 
	2023	 	 	3,724,831	 
	Thereafter	 	 	18,988,768	 
	 	 	$	37,706,212	 

  
 NOTE 7 – DEBT

 
 Debt consisted of the following: 

 

	 	 	Balance as of	 
	 	 	March 31,
 2019
	 	 	December 31,
 2018
	 
	Term loan	 	$	72,750,000	 	 	$	22,750,000	 
	Revolving line of credit - U.S. operations	 	 	32,400,701	 	 	 	23,336,158	 
	Revolving line of credit - Canadian operations	 	 	22,484,495	 	 	 	19,393,974	 
	Total debt	 	 	127,635,196	 	 	 	65,480,132	 
	Debt issuance costs	 	 	(5,997,011	)	 	 	(4,966,160	)
	Total debt, net	 	 	121,638,185	 	 	 	60,513,972	 
	Current maturities of long-term debt	 	 	(5,500,000	)	 	 	(5,500,000	)
	Long-term debt, net of current portion and debt issuance costs	 	$	116,138,185	 	 	$	55,013,972	 

  

Term Loan
  

On February 2, 2018, the Company obtained a term loan in the amount of $60 million maturing on February 2, 2023, with quarterly payments of
$750,000 and variable interest at LIBOR plus a margin, as defined (10.76% at March 31, 2019). In February 2019, the Company’s term loan agreement was amended to obtain an additional $50 million under the existing terms and original maturity
date, with payments amended to $1,375,000 per quarter. The term loan requires an annual excess cash flow payment, as defined, toward the balance of the borrowing no later than June 30 of the following year. The credit facility is collateralized by
substantially all assets and equity interests of the Company. The term loan is subordinated to the revolving line of credit facilities under an inter-creditor agreement between the lenders. Further, the Company’s subsidiaries serve as
co-borrowers and guarantors and the Parent additionally serves as guarantor.
  



 
14


 
FirstOnSite USA
Holdings Inc. and Subsidiaries
 
Notes to Unaudited Condensed Combined Consolidated Financial
Statements
 


 As further described in Note 15 – Subsequent Events, the remaining balance on the term loan was extinguished on
June 21, 2019.
  
 Revolving Line of Credit – U.S.
Operations
  
 On February 2, 2018, the Company
obtained a revolving line of credit initially funded at $37.5 million, which matures on February 2, 2023, with variable interest at LIBOR plus a margin, as defined on $20 million (4.54% at March 31, 2019) and variable interest at U.S. prime rate
plus a margin as defined on approximately $3.3 million (6.5% at March 31, 2019). Availability on the line of credit is limited to a defined borrowing base on IR LLC’s billed and unbilled accounts receivable with maximum borrowings of $47
million.
  
 Revolving Line of Credit – Canadian
Operations
  
 On February 2, 2018, the Company
amended an existing FOS line of credit which matures on February 2, 2023, with variable interest at LIBOR plus a margin, as defined on approximately $5.3 million (5.1% at March 31, 2019) and variable interest at the Canadian prime rate plus a margin
as defined on approximately $1.7 million (4.5% at March 31, 2019). Availability on the line of credit is limited to a defined borrowing base on FOS’s billed and unbilled accounts receivable with maximum borrowings of $45 million Canadian
dollars.
  
 As further described in Note 15 – Subsequent
Events, the remaining balance on the lines of credit were extinguished on June 21, 2019.
  

The credit facilities are collateralized by substantially all assets and equity interests of the Company. The Company’s subsidiaries serve
as co-borrowers and guarantors and the Parent additionally serves as guarantor.
  

Bellwether’s existing revolving line of credit and term loans in the amount of approximately $49 million were refinanced with the
Company’s credit facilities described above.
  
 Delos’s
existing revolving line of credit and term loan in the amount of approximately $29 million were refinanced with the Company’s term loan and revolving line of credit described above.

 
 The Company’s credit facilities have certain financial covenants
including fixed charge coverage and leverage ratios; capital expenditures limits; along with restrictions on member distributions, additional indebtedness and cash used for future acquisitions. The Company was in compliance with such financial
covenants at March 31, 2019 and December 31, 2018.
  
 

 
15


 
FirstOnSite USA
Holdings Inc. and Subsidiaries
 
Notes to Unaudited Condensed Combined Consolidated Financial
Statements
 


 NOTE 8 – CAPITAL LEASES
  

Capital leases consisted of the following:  
  

	 	 	March 31,

2019
	 	 	December 31,

2018
	 
	Capital leases payable to financial institutions with interest rates ranging from 7% to 8% and maturities through December, 2023. Monthly payments are approximately $139,000
and $115,000, respectively. Obligations secured by vehicles.	 	$	6,098,816	 	 	$	5,249,006	 
	Less interest cost	 	 	(451,764	)	 	 	(549,481	)
	 	 	 	5,647,052	 	 	 	4,699,525	 
	Less current portion	 	 	(1,596,862	)	 	 	(1,289,995	)
	 	 	$	4,050,190	 	 	$	3,409,530	 

  
 Future payments of capital
leases as of March 31, 2019 are as follows:
  

	 	 	Total	 
	2019	 	$	1,398,486	 
	2020	 	 	1,670,138	 
	2021	 	 	1,320,742	 
	2022	 	 	1,243,288	 
	2023	 	 	466,162	 
	 	 	$	6,098,816	 

  

Assets under capital lease approximate $11.9 million and $10.5 million and related accumulated depreciation approximates $6.5 million and $6.0
million as of March 31, 2019 and December 31, 2018, respectively.
  
 NOTE 9 – STOCK
COMPENSATION ARRANGEMENTS
  

Certain of the Bellwether contributed companies issued equity-based compensation arrangements who subsequently became employees of IR LLC.
Awards were fully vested as of the date of grant, which permitted the employees to participate in future appreciation of the respective members’ equity. The profits interests will be paid in the form of cash or a promissory note at the
Company’s discretion, or upon a terminating event, as defined within the profits interest agreement (the “Agreement”). Certain terminating events, as defined by the Agreement, require the employee to forfeit the profits interest
without compensation.
  
 In
accordance with provisions of ASC 718, Compensation – Stock Compensation (“ASC 718”) and related guidance, these profits interest awards have characteristics that determine the classification as a liability and are re-measured
at estimated fair value at each subsequent reporting period with any adjustment being recorded as compensation expense. On February 2, 2018 the profits interests were exchanged for profits interests in the Parent and the liability was transferred to
the Parent.
  
 

 
16


 
FirstOnSite USA
Holdings Inc. and Subsidiaries
 
Notes to Unaudited Condensed Combined Consolidated Financial
Statements
 


  
 IR
LLC granted 3% profits interest to a key employee, which was issued upon reaching target revenues and fully vested in 2013. In accordance with provisions of ASC 718 and related guidance, this profits interest award has characteristics that determine
the classification as a liability and are re-measured at estimated fair value at each subsequent reporting period with any adjustment being recorded as compensation expense. On February 2, 2018 the profits interest in IR LLC was exchanged for a
profits interest in the Parent and the liability was transferred to the Parent.
  

Compensation expense continues to be recorded by IR LLC associated with the change in fair value of the profits interest liabilities at each
reporting date. Approximately $228,000 and $(559,000) compensation expense (recovery) has been recognized in selling, general and administrative expenses in the accompanying condensed combined consolidated statements of income and comprehensive
income for the three months ended March 31, 2019 and March 31, 2018, respectively.
  

The profits interest liabilities held by the Parent approximated $4.7 million and $4.8 million at March 31, 2019 and December 31, 2018,
respectively.
  
 See Note 15 – Subsequent Events which
discusses the sale that occurred on June 21, 2019.
  
 Parent
Value A Units
  
 The Company’s Parent issued
approximately 14 million Value A units to key employees in 2018 with a fair value of $498,700. The units vest at 25% annually over a four-year period and are contingent on continued employment with the Company or any of its subsidiaries. Certain
events allow the Parent the right, but not the obligation, to repurchase the units as specified in the agreement. In accordance with applicable accounting guidance, the awards were classified as equity by the Parent and recorded at fair value.
Compensation expense is recorded by the Company as the requisite service is rendered. Compensation expense during the three months ended March 31, 2019 was insignificant.

 
 

 
17


 
FirstOnSite USA
Holdings Inc. and Subsidiaries
 
Notes to Unaudited Condensed Combined Consolidated Financial
Statements
 


 NOTE 10 – INCOME TAXES
  

The components of income tax expense consisted of the following:
  

	Three Months ended March 31,	 	2019	 	 	2018	 
	Current:	 	 	 	 	 	 	 	 
	Federal and state	 	$	1,849,547	 	 	$	1,869,555	 
	Foreign	 	 	375,861	 	 	 	233,872	 
	 	 	 	2,225,408	 	 	 	2,103,427	 
	 	 	 	 	 	 	 	 	 
	Deferred:	 	 	 	 	 	 	 	 
	Federal and state	 	 	(41,620	)	 	 	(1,009,636	)
	Foreign	 	 	209,596	 	 	 	1,405,041	 
	 	 	 	167,976	 	 	 	395,405	 
	Income tax expense	 	$	2,393,384	 	 	$	2,498,832	 

  

The Company’s effective income tax rate is lower than what would be expected if the federal statutory rate were applied to income before
income taxes primarily because of certain expenses deductible for financial reporting purposes that are not deductible for tax purposes, including operating loss carryforwards. Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
  



 
18


 
FirstOnSite USA
Holdings Inc. and Subsidiaries
 
Notes to Unaudited Condensed Combined Consolidated Financial
Statements
 


 The types of temporary differences between the tax basis of assets and liabilities that give rise to a significant portion
of the deferred tax assets and liabilities and their approximate tax effects are as follows:
  

	 	 	Three Months
 Ended March 31,

2019
	 	 	Year Ended
 December 31,

2018
	 
	Components of net long-term deferred tax assets	 	 	 	 	 	 	 	 
	(liabilities):	 	 	 	 	 	 	 	 
	Basis difference in intangibles	 	$	497,670	 	 	$	133,443	 
	Federal and state net operating losses	 	 	397,893	 	 	 	490,916	 
	Allowances	 	 	11,590	 	 	 	11,590	 
	Accrued expenses	 	 	1,101,056	 	 	 	2,018,758	 
	Interest limitation	 	 	24,571	 	 	 	24,571	 
	Effect of passthrough entities	 	 	1,202,037	 	 	 	929,315	 
	Basis difference in property and equipment	 	 	(320,722	)	 	 	(319,277	)
	Other	 	 	-	 	 	 	(207,245	)
	Total net deferred tax assets, net	 	$	2,914,095	 	 	$	3,082,071	 

  

At December 31, 2018, the Company has approximately $2.4 million available in U.S. federal unused net operating losses that may be applied against
future U.S. taxable income, limited to 80%. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income, projections for future taxable income over the periods in which the deferred tax assets are deductible, and
the scheduled reversal of deferred tax liabilities, management believes it is more likely than not that the Company will realize its net deferred tax assets.
  

NOTE 11 – COMMITMENTS AND CONTINGENCIES
  

Operating Lease Commitments
  

The Company leases land, buildings, equipment, and vehicles under various operating leases through October 2024, certain of which contain
provisions for future rent increases or periods in which rent payments are reduced (abated). In accordance with GAAP, the Company records monthly rent expense on a straight-line basis and reflects a deferred rent liability for the difference between
straight-line rent and actual rent payments.
  
 

 
19


 
FirstOnSite USA
Holdings Inc. and Subsidiaries
 
Notes to Unaudited Condensed Combined Consolidated Financial
Statements
 


 Minimum lease payments, for each of the succeeding five years and thereafter, under operating leases with initial terms in excess of one year
are, as follows as of March 31, 2019:
  

	Years ending December 31,	 	 	 
	2019	 	$	5,683,798	 
	2020	 	 	6,478,369	 
	2021	 	 	4,539,734	 
	2022	 	 	2,270,658	 
	2023	 	 	1,095,480	 
	Thereafter	 	 	380,824	 
	 	 	$	20,448,863	 

  

Rent expense was approximately $1.8 million during each of the three months ended March 31, 2019 and 2018.

 
 Letters of Credit

 
 FOS has outstanding letters of credit of
approximately $230,000 at March 31, 2019 and December 31, 2018, respectively, which currently expire during periods through January 2020.
  

Surety Bonds
  

The Company, as a condition for entering into certain construction contracts, had outstanding surety bonds totaling approximately $20 million and
$23 million related to U.S. operations at March 31, 2019 and December 31, 2018, respectively. There are de minimis surety bonds related to Canadian operations at March 31, 2019 and December 31, 2018.

 
 Section 401(k) Retirement
Plan
  
 IR LLC has a Section
401(k) retirement plan (the “Plan”) covering certain employees. Employees are generally eligible to participate after reaching 21 years of age and attaining six months of employment. Eligible employees can contribute up to eighty percent
of their considered elective deferrals, subject to IRS limitations. In addition, the Plan allows for catch-up contributions for those participants aged 50 or older. The Company match is a discretionary percentage of considered earnings and vests
over a five-year period. The Company match for the three months ended March 31, 2019 and 2018 was not significant.
  

Canadian Retirement Plan

 
 FirstOnSite Restoration
Ltd. has a Registered Retirement Savings Plan (RRSP) and Deferred Profit Sharing Plan (DPSP) group retirement plan (the “Plan”) covering certain employees. Employees are generally eligible to participate after reaching 18 years of age and
attaining six months of employment. Eligible employees can contribute one point five percent (1.5%) of their pensionable earnings (excluding overtime and bonuses) to the RRSP and receive an employer match of one point five percent (1.5%) to the
DPSP. DPSP Vesting is after two years of plan membership. In addition, the Plan allows for extra voluntary contributions.
  



 
20


 
FirstOnSite USA
Holdings Inc. and Subsidiaries
 
Notes to Unaudited Condensed Combined Consolidated Financial
Statements
 


  

Litigation
  

The Company is subject to various claims and legal matters in the ordinary course of business. Management believes that any liability that may
ultimately result from the resolution of these matters will not have a material adverse effect on the financial condition or results of operations of the Company.
  

Indemnification of Directors and Officers

 
 Under the terms of the
Company’s operating agreements, the directors and officers of the Company have been indemnified for any action or any failure to act on behalf of the Company within the authority as directors and officers, unless the act or omission was
performed or omitted fraudulently, as defined.
  

Employment Agreements
  

The Company has entered into employment agreements with certain key employees that stipulate salary, bonus and termination provisions.

 
 NOTE 12 – STOCKHOLDER’S EQUITY

 
 The Company issued 1,000 shares to its Parent on January
30, 2018. For purposes of presentation of combination and consolidation of entities under common control, the issuance date is reflected on the first day of the year. As of March 31, 2019 and December 31, 2018, 1,000 common shares are issued,
authorized and outstanding.
  
 Under the terms of the
Company’s operating agreement, additional capital contributions are discretionary. In addition, distributions are discretionary and may be limited by provisions in existing credit facility agreements. No distributions were paid by the Company
during the three months ended March 31, 2019 and 2018.
  

Non-Controlling Interest
  

At its formation, Interstate Restoration Hawaii LLC (“IR Hawaii”) issued 2,500 units to a member representing 25% ownership interest.
Upon sale of the Company, the member has the option to put the 2,500 units back to IR Hawaii and IR Hawaii has the option to redeem the units. The redemption of the units is contingent upon a future sale of the Company and the exercise of the put or
call option, which is not certain. In accordance with ASC 480, Distinguishing Liabilities from Equity, should a sale event occur, and the redemption be exercised by the member or the Company, the then fair value of the units will be
reclassified from equity to a liability, payable as defined in the agreement.
  

See Note 15 – Subsequent Events which discusses the sale that occurred on June 21, 2019.

 
 

 
21


 
FirstOnSite USA
Holdings Inc. and Subsidiaries
 
Notes to Unaudited Condensed Combined Consolidated Financial
Statements
 


 NOTE 13 – RELATED PARTY TRANSACTIONS
  

The Company receives administrative support from members of the Parent. Amounts paid for administrative support for the three months ended March
31, 2019 and 2018 totaled approximately $200,000 and $171,000, respectively.
  

The Company rents office space from related parties. Rents paid for these facilities for the three months ended March 31, 2019 and 2018 totaled
approximately $160,000 and $123,000, respectively.
  
 Advances were
made to the Parent in the amount of approximately $50 million and $32 million during the three months ended March 31, 2019 and March 31, 2018, respectively and are included in Advances to Parent in the combined consolidated balance sheets.

 
 NOTE 14 – BACKLOG

 
 The following schedule shows a reconciliation of backlog
representing the amount of revenue the Company expects to realize from work to be performed on uncompleted contracts in progress at March 31, 2019 and from contractual agreements on which work has not yet begun.

 

	 	 	 	 
	Balance, January 1, 2019	 	$	70,572,980	 
	New contracts	 	 	114,840,263	 
	Less: Contract revenue earned	 	 	(101,239,418	)
	 	 	 	 	 
	Balance, March 31, 2019	 	$	84,173,825	 

  

NOTE 15 – SUBSEQUENT EVENTS
  

The Company has evaluated subsequent events through August 20, 2019 which is the date the combined consolidated financial statements were
available to be issued. There are no material subsequent events that required recognition or additional disclosure in these combined consolidated financial statements other than as described below:

 
 On June 21, 2019, FirstService Corporation acquired 95% of
Bellwether FOS Holdco, Inc which is the parent company of FirstOnSite USA Holdings, Inc. The remaining 5% of equity ownership will be retained by the existing senior management team, who will stay on to continue to lead the day-to-day operations. In
connection with the acquisition, approximately $115 million was paid to extinguish and terminate the existing term loan and lines of credit.
  



 
22


 
FirstOnSite USA
Holdings Inc. and Subsidiaries
 
Notes to Unaudited Condensed Combined Consolidated Financial
Statements
 


 On July 15, 2019, IR LLC entered into a purchase agreement to acquire substantially all the assets of ASR Construction,
Inc., a California Corporation, for approximately $9 million, subject to working capital adjustments and contingent consideration, as defined in the asset purchase agreement. IR LLC paid cash and $2.5 million promissory note bearing interest at 5%
per annum. Transaction costs were expensed as incurred.
  
 On
August 9, 2019, FOS entered into a purchase agreement to acquire substantially all the assets of JPL Disaster Recovery a Quebec Canada entity, for approximately $4.5 million. Closing is expected to occur in approximately four weeks.

 
  
  

 
  
  

 
  
  

 
  
  

 
  
  

 
  
  

 
  
  

 
  



 
23


  


  

 
  

FIRSTSERVICE CORPORATION
  

 
 PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS
 (unaudited)

 
  

 
  

 
  

 
  

 
  

 
  

 
  

 
  

 
 

  


 


 
 FIRSTSERVICE CORPORATION
 PRO
FORMA CONSOLIDATED STATEMENT OF EARNINGS
 (Unaudited)
 (in thousands of US dollars, except per share amounts)

 

	 	 	Year ended December 31, 2018	 
	 	 	FirstService	 	 	Global 
Restoration	 	 	Add(deduct) pro forma 
adjustments	 	 	Note 3	 	FirstService 
pro forma	 
	Revenues	 	$	1,931,473	 	 	$	435,627	 	 	$	-	 	 	 	 	$	2,367,100	 
	Cost of revenues	 	 	1,320,252	 	 	 	281,417	 	 	 	(2,733	)	 	c)	 	 	1,598,936	 
	Selling, general and administrative expenses	 	 	426,377	 	 	 	105,417	 	 	 	-	 	 	 	 	 	531,794	 
	Depreciation	 	 	35,257	 	 	 	2,605	 	 	 	2,733	 	 	c)	 	 	40,595	 
	Amortization of intangible assets	 	 	17,515	 	 	 	4,800	 	 	 	22,283	 	 	a)	 	 	44,598	 
	Acquisition-related items	 	 	4,504	 	 	 	1,331	 	 	 	-	 	 	 	 	 	5,835	 
	Operating earnings	 	 	127,568	 	 	 	40,057	 	 	 	(22,283	)	 	 	 	 	145,342	 
	Interest expense, net	 	 	12,620	 	 	 	7,743	 	 	 	20,043	 	 	b)	 	 	40,406	 
	Other income, net	 	 	(254	)	 	 	(633	)	 	 	-	 	 	 	 	 	(887	)
	Earnings before income tax	 	 	115,202	 	 	 	32,947	 	 	 	(42,326	)	 	 	 	 	105,823	 
	Income tax	 	 	24,922	 	 	 	7,873	 	 	 	(10,312	)	 	d)	 	 	22,483	 
	Net earnings	 	 	90,280	 	 	 	25,074	 	 	 	(32,014	)	 	 	 	 	83,340	 
	Non-controlling interest share of earnings	 	 	11,180	 	 	 	1,541	 	 	 	(167	)	 	e)	 	 	12,554	 
	Non-controlling interest redemption increment	 	 	13,235	 	 	 	-	 	 	 	-	 	 	 	 	 	13,235	 
	Net earnings attributable to Company	 	$	65,865	 	 	$	23,533	 	 	$	(31,847	)	 	 	 	$	57,551	 
	Net earnings per common share	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Basic	 	$	1.83	 	 	 	 	 	 	 	 	 	 	 	 	$	1.60	 
	Diluted	 	$	1.80	 	 	 	 	 	 	 	 	 	 	 	 	$	1.57	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Weighted average common shares outstanding	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Basic	 	 	35,952	 	 	 	 	 	 	 	 	 	 	 	 	 	35,952	 
	Diluted	 	 	36,571	 	 	 	 	 	 	 	 	 	 	 	 	 	36,571	 

  
  

 
 

  


 


 FIRSTSERVICE CORPORATION
 PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS

(Unaudited)
 (in thousands of US dollars, except per share amounts)


 

 

	 	 	Three months ended March 31, 2019	 
	 	 	FirstService	 	 	Global 
Restoration	 	 	Add(deduct) pro forma 
adjustments	 	 	Note 3	 	FirstService 
pro forma	 
	Revenues	 	$	485,655	 	 	$	101,239	 	 	$	-	 	 	 	 	$	586,894	 
	Cost of revenues	 	 	340,698	 	 	 	64,259	 	 	 	(750	)	 	c)	 	 	404,207	 
	Selling, general and administrative expenses	 	 	118,662	 	 	 	27,133	 	 	 	-	 	 	 	 	 	145,795	 
	Depreciation	 	 	8,380	 	 	 	650	 	 	 	750	 	 	c)	 	 	9,780	 
	Amortization of intangible assets	 	 	4,307	 	 	 	1,100	 	 	 	3,396	 	 	a)	 	 	8,803	 
	Acquisition-related items	 	 	678	 	 	 	-	 	 	 	-	 	 	 	 	 	678	 
	Operating earnings	 	 	12,930	 	 	 	8,097	 	 	 	(3,396	)	 	 	 	 	17,631	 
	Interest expense, net	 	 	3,569	 	 	 	2,113	 	 	 	4,903	 	 	b)	 	 	10,585	 
	Other income, net	 	 	7	 	 	 	395	 	 	 	-	 	 	 	 	 	402	 
	Earnings before income tax	 	 	9,354	 	 	 	5,589	 	 	 	(8,299	)	 	 	 	 	6,644	 
	Income tax	 	 	1,209	 	 	 	2,393	 	 	 	(3,098	)	 	d)	 	 	504	 
	Net earnings	 	 	8,145	 	 	 	3,196	 	 	 	(5,201	)	 	 	 	 	6,140	 
	Non-controlling interest share of earnings	 	 	1,796	 	 	 	35	 	 	 	157	 	 	e)	 	 	1,988	 
	Non-controlling interest redemption increment	 	 	4,020	 	 	 	-	 	 	 	-	 	 	 	 	 	4,020	 
	Net earnings attributable to Company 	 	$	2,329	 	 	$	3,161	 	 	$	(5,358	)	 	 	 	$	132	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Net earnings per common share	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Basic	 	$	0.06	 	 	 	 	 	 	 	 	 	 	 	 	$	-	 
	Diluted	 	$	0.06	 	 	 	 	 	 	 	 	 	 	 	 	$	-	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Weighted average common shares outstanding	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Basic	 	 	36,030	 	 	 	 	 	 	 	 	 	 	 	 	 	36,030	 
	Diluted	 	 	36,497	 	 	 	 	 	 	 	 	 	 	 	 	 	36,497	 

  
  

 
  

 
 

  


 


 FIRSTSERVICE CORPORATION
 NOTES TO PRO FORMA CONSOLIDATED FINANCIAL
STATEMENTS
 (Unaudited)
 (in thousands of US dollars)

 
  

		1.	Background

  
 On June 21, 2019,
FirstService Corporation (“FirstService”) acquired 95% of the shares in the capital of Bellwether FOS Holdco, Inc. (“Global Restoration”) a commercial and large loss property restoration firm, pursuant to the terms of a stock
purchase agreement by and among FirstService Restoration, Inc., Global Restoration and Global Restoration Holdings, LLC (the “Global Acquisition”). The acquisition is being accounted for by the acquisition method of accounting for business
combinations.
  
 FirstService purchased Global Restoration for an
initial purchase price of $504,567. The 5% equity interest not acquired by FirstService is held by the management team of Global Restoration and is being accounted for as redeemable non-controlling interest with an initial fair value of $25,433.

 
 Headquartered in Denver, Colorado and founded in 1998, Global
Restoration provides integrated end-to- end solutions encompassing mitigation, restoration and reconstruction services on behalf of blue chip, national clients which include large, multi-location commercial customers, property owners and insurance
companies. Global Restoration operates under two brands, Interstate Restoration in the U.S. and FirstOnSite Restoration in Canada, and employs approximately 1,400 staff operating out of 58 regional offices throughout North America.

 
 The Global Acquisition was financed through a combination of
cash-on-hand, funds borrowed under FirstService’s existing $450 million revolving credit facility which matures in January 2023 and funds borrowed pursuant to a new term loan (implemented and drawn concurrent with the closing of the Global
Acquisition) in the aggregate amount of $440 million which matures in June 2024 and bears interest at 0.25% to 2.50% over floating preference rates, depending on certain leverage ratios.

 
  

		2.	Basis of Presentation

  
 The pro forma
consolidated statements of earnings for the year ended December 31, 2018 and quarter ended March 31, 2019 are derived from historical consolidated financial statements of FirstService and Global Restoration, which were prepared in accordance with
generally accepted accounting principles (“US GAAP”) in the United States of America.
  

The Pro Forma Statements of Earnings give effect to the acquisition as if it has occurred as at:

 

		•	January 1, 2018 for the purposes of the pro forma consolidated statements of earnings for the year ended December 31, 2018 and for the quarter ended March 31, 2019, respectively.


 
 Note 3 outlines the pro forma assumptions and adjustments that have
been made. The pro forma adjustments are based on available financial information and certain provisional estimates and assumptions. FirstService may record adjustments to the preliminary purchase price allocation related to the application of the
acquisition method as disclosed in Note 2 to FirstService’s unaudited interim consolidated financial statements for the quarter ended June 30, 2019. The measurement period adjustments could be material and, as such, may have a material impact
on the Pro Forma Statements of Earnings.
  
 The Pro Forma
Statements of Earnings do not reflect the impact of any potential operational efficiencies, cost savings or economies of scale that FirstService may achieve with respect to the combined operations of FirstService and Global Restoration.

 
 The Pro Forma Statements of Earnings should be read in conjunction
with FirstService’s audited consolidated financial statements for the year ended December 31, 2018 and the unaudited interim consolidated financial statements for the three months ended March 31, 2019 and the three and six months ended June 30,
2019, as filed on SEDAR, as well as in conjunction with the audited consolidated financial statements of Global Restoration for the year ended December 31, 2018 and unaudited consolidated financial statements for the quarter ended March 31, 2019
included herein.
  
 

  


 


 In preparing the Pro Forma Statements of Earnings, management reviewed Global Restoration’s accounting policies and
financial statement presentation to identify any differences between FirstService’s and Global Restoration’s US GAAP accounting policies and financial statement presentation. Certain historical classifications have been reclassified to
conform to FirstService’s financial statement presentation and for purposes of the pro forma presentation. Additional accounting policy and financial statement presentation differences may be identified after the filing of this business
acquisition report.
  
  

		3.	Pro forma assumptions and adjustments

  

		a)	For the purposes of the Pro Forma Statements of Earnings, FirstService assumed intangible amortization as follows:

  

	 	 	Year ended December 31, 2018	 	Three months ended March 31, 2019
	 	 	 	 	 	 	 	 	 
	Amortization of intangible assets	 	$	27,083	 	 	$	4,496	 

  
 The identifiable intangible assets
acquired were assessed as per below:
  

	 	 	 	 	Estimated life
	 	 	Amount	 	in years
	 	 	 	 	 
	Customer relationships	 	$	215,800	 	 	 	12	 
	Brand	 	 	1,850	 	 	 	1	 
	Backlog	 	 	7,250	 	 	 	0.5	 
	Total acquired	 	 	224,900	 	 	 	 	 

  

		b)	Interest expense

  
 To finance the acquisition,
FirstService drew down on its existing $450,000 revolving credit facility as well as utilizing the funds borrowed pursuant to its new $440,000 term loan. The pro-forma adjustment calculates additional pro-forma interest expense as if those funds
were drawn down as of January 1, 2018:
  

	i)	 	Year ended December 31, 2018	 	$27,786
	ii)	 	Three months ended March 31, 2019	 	$7,016

   
 For the purposes of the pro
forma Statements of Earnings, the interest rate assumed to be LIBOR of 2.4% plus an applicable margin of 2.5%, resulting in an estimated rate of 4.9%.
  

Interest expense for Global Restoration was reversed as any pre-acquisition debt would not have been transferred on the date of acquisition.

 

  


 


 

		c)	Pro forma reclassification adjustments

  
 To conform with
FirstService’s financial statement presentation, the following elements have been reclassified:
  

	 	 	Year ended 
December 31, 2018	 	 	Three months ended

March 31,2019
	 
	To reclassify depreciation from cost of revenues to depreciation:	 	 	 	 	 	 	 	 
	Increase depreciation	 	$	2,733	 	 	$	750	 
	Reduce cost of revenues	 	$	2,733	 	 	$	750	 

  
  

		d)	Income tax

  
 Bellwether FOS Holdco, Inc., a
Delaware Corporation, is subject to United States federal and state income tax. A combined rate of 26.0% was applied to record income tax applicable to FirstService’s pro-forma share of the pre-tax earnings of Global Restoration, and the
related tax effects of the pro forma adjustments.
  
  

		e)	Non-controlling interest share of earnings

  
 A charge to
non-controlling interest share of earnings was recorded to reflect the 5% of Global Restoration held by redeemable non-controlling interests.