SEC Filing | Investor Relations | Williams Scotsman

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 8-K

 

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

Date of Report (Date of earliest event reported): July 24, 2018

 

WILLSCOT CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware

 

001-37552

 

82-3430194

(State or other jurisdiction of
incorporation)

 

(Commission File Number)

 

(I.R.S. Employer Identification No.)

 

901 S. Bond Street, #600

Baltimore, Maryland 21231

(Address, including zip code, of principal executive offices)

 

(410) 931-6000

(Registrant’s telephone number, including area code)

 

 

(Former name or former address, if changed since last report)

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

 

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

 

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

 

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

 

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

 

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

 

Emerging growth company x

 

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

 

 

 



 

Item 8.01                                           Other Events

 

As previously disclosed, on June 21, 2018, WillScot Corporation, a Delaware corporation (the “Company”) and its newly-formed acquisition subsidiary, Mason Merger Sub, Inc., a Delaware corporation, (“Merger Sub”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Modular Space Holdings, Inc., a Delaware corporation, (“ModSpace”) and NANOMA LLC, solely in its capacity as the representative of the Holders (as defined therein), pursuant to which Merger Sub will merge with and into ModSpace (the “Merger”) with ModSpace as the surviving entity in the Merger and continuing as an indirect subsidiary of the Company (the “ModSpace Acquisition”). The closing of the transaction is subject to certain customary closing conditions. The ModSpace Acquisition is expected to close in the third quarter of 2018.

 

This Current Report on Form 8-K is being filed in connection with the financing of the ModSpace Acquisition to provide certain historical financial statements of ModSpace and the pro forma financial information of the Company giving effect to the consummation of the ModSpace Acquisition and related transactions set forth under Item 9.01 below, which are incorporated herein by reference.

Item 9.01                                           Financial Statements and Exhibits.

 

(a) Financial statements of businesses acquired

 

The historical audited consolidated financial statements of ModSpace as of September 30, 2017 and 2016 and the period from March 3, 2017 through September 30, 2017 and from October 1, 2016 through March 2, 2017 and the years ended September 30, 2016 and 2015, together with the notes thereto and the independent auditor’s report thereon, are filed as Exhibit 99.1 to this Current Report on Form 8-K and are incorporated herein by reference.

 

The historical unaudited condensed consolidated financial statements of ModSpace as of March 31, 2018 and September 30, 2017 and for the three and six months ended March 31, 2018 and the period from March 3, 2017 through March 31, 2017, the periods from January 1, 2017 through March 2, 2017 and from October 1, 2016 through March 2, 2017, together with the notes thereto, are filed as Exhibit 99.2 to this Current Report on Form 8-K and incorporated herein by reference.

 

(b) Pro forma financial information

 

The following unaudited pro forma financial information is filed as Exhibit 99.3 hereto and is incorporated herein by reference.

 

·                       Unaudited Pro Forma Condensed Combined Balance Sheet as of March 31, 2018;

 

·                       Unaudited Pro Forma Condensed Combined Statement of Operations for the three months ended March 31, 2018;

 

·                       Unaudited Pro Forma Condensed Combined Statement of Operations for the fiscal year ended December 31, 2017; and

 

·                       Notes to the Unaudited Pro Forma Condensed Combined Financial Information.

 

(d) Exhibits

 

Exhibit
Number

 

Description

 

 

 

23.1

 

Consent of PricewaterhouseCoopers LLP.

 

 

 

99.1

 

Audited consolidated financial statements of Modular Space Holdings, Inc. as of September 30, 2017 and 2016 and the period from March 3, 2017 through September 30, 2017 and from October 1, 2016 through March 2, 2017 and the years ended September 30, 2016 and 2015, together with the notes thereto and the independent auditor’s report thereon,

 

 

 

99.2

 

Unaudited condensed consolidated financial statements of Modular Space Holdings, Inc. as of March 31, 2018 and September 30, 2017 and for the three and six months ended March 31, 2018 and the period from March 3, 2017 through March 31, 2017, the periods from January 1, 2017 through March 2, 2017 and from October 1, 2016 through March 2, 2017, together with the notes thereto.

 

 

 

99.3

 

Unaudited Pro Forma Condensed Combined Financial Information.

 

2



 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.

 

 

WillScot Corporation

 

 

 

By:

/s/ Bradley Bacon

Dated: July 24, 2018

 

Name:

Bradley Bacon

 

 

Title:

Vice President, General Counsel & Corporate Secretary

 

3


Exhibit 23.1

 

CONSENT OF INDEPENDENT AUDITORS

 

We hereby consent to the incorporation by reference in the Registration Statement on Form S-3 (No. 333-223715) of WillScot Corporation of our report dated January 16, 2018 relating to the financial statements of Modular Space Holdings, Inc. (“Successor”), which appears in this Current Report on Form 8-K.

 

/s/ PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania

July 24, 2018

 



 

CONSENT OF INDEPENDENT AUDITORS

 

We hereby consent to the incorporation by reference in the Registration Statement on Form S-3 (No. 333-223715) of WillScot Corporation of our report dated January 16, 2018, except for the changes in the manner in which the Company accounts for goodwill discussed in Note 2 to the consolidated financial statements, as to which the date is July 20, 2018 relating to the financial statements of Modular Space Holdings, Inc. (“Predecessor”), which appears in this Current Report on Form 8-K.

 

/s/ PricewaterhouseCoopers LLP

Philadelphia, Pennsylvania
July 24, 2018

 


Exhibit 99.1

 

Modular Space Holdings, Inc. and Subsidiaries

Consolidated Financial Statements

September 30, 2017 and 2016 and Period From March 3, 2017 Through September 30, 2017 (Successor) and Period From October 1, 2016 Through March 2, 2017 and the Years Ended September 30, 2016 and 2015 (Predecessor)

 



 

Modular Space Holdings, Inc. and Subsidiaries

Index

 

 

Page(s)

 

 

Reports of Independent Auditors

1

 

 

Consolidated Financial Statements

 

 

 

Balance Sheets as of September 30, 2017 (Successor) and September 30, 2016 (Predecessor)

5

 

 

Statements of Operations for the period March 3, 2017 through September 30, 2017 (Successor) and October 1, 2016 through March 2, 2017, and the years ended September 30, 2016 and 2015 (Predecessor)

6

 

 

Statements of Comprehensive Income (Loss) for the period March 3, 2017 through September 30, 2017 (Successor) and October 1, 2016 through March 2, 2017, and the years ended September 30, 2016 and 2015 (Predecessor)

7

 

 

Statements of Stockholders’ Equity for the period March 3, 2017 through September 30, 2017 (Successor) and October 1, 2016 through March 2, 2017, and the years ended September 30, 2016 and 2015 (Predecessor)

8

 

 

Statements of Cash Flows for the period March 3, 2017 through September 30, 2017 (Successor) and October 1, 2016 through March 2, 2017, and the years ended September 30, 2016 and 2015 (Predecessor)

9

 

 

Notes to Consolidated Financial Statements

10-53

 



 

Report of Independent Auditors

 

To the Board of Directors of Modular Space Holdings, Inc.

 

We have audited the accompanying consolidated financial statements of Modular Space Holdings, Inc. and its subsidiaries (Successor), which comprise the consolidated balance sheet as of September 30, 2017 and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for the period from March 3, 2017 to September 30, 2017.

 

Management’s Responsibility for the Consolidated Financial Statements

 

Management is responsible for the preparation and fair presentation of the 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 consolidated financial statements that are free from material misstatement, whether due to fraud or error.

 

Auditors’ Responsibility

 

Our responsibility is to express an opinion on the 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 consolidated financial statements are free from material misstatement.

 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements.  The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error.  In making those risk assessments, we consider internal control relevant to the Company’s preparation and fair presentation of the 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 Company’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 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Modular Space Holdings, Inc. and its subsidiaries (Successor) as of September 30, 2017 and the results of their operations and their cash flows for the period from March 3, 2017 to September 30, 2017 in accordance with accounting principles generally accepted in the United States of America.

 

1



 

Emphasis of Matter

 

As discussed in Note 1 to the consolidated financial statements, the United States Bankruptcy Court for the district of Delaware confirmed the Company’s Joint Prepackaged Plan of Reorganization (the “plan”) on February 15, 2017.  Confirmation of the plan resulted in the discharge of all claims against the Company that arose before March 2, 2017 and substantially alters or terminates all rights and interests of equity security holders as provided for in the plan.  The plan was substantially consummated on March 2, 2017 and the Company emerged from bankruptcy.  In connection with its emergence from bankruptcy, the Company adopted fresh start accounting as of March 2, 2017. Our opinion is not modified with respect to this matter.

 

 

/s/ PricewaterhouseCoopers LLP

Philadelphia, Pennsylvania

January 16, 2018

 

2



 

Report of Independent Auditors

 

To the Board of Directors of Modular Space Holdings, Inc.

 

We have audited the accompanying consolidated financial statements of Modular Space Holdings, Inc. and its subsidiaries (Predecessor), which comprise the consolidated balance sheet as of September 30, 2016 and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for the period from October 1, 2016 to March 2, 2017, and for each of the two years in the period ended September 30, 2016.

 

Management’s Responsibility for the Consolidated Financial Statements

 

Management is responsible for the preparation and fair presentation of the 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 consolidated financial statements that are free from material misstatement, whether due to fraud or error.

 

Auditors’ Responsibility

 

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

 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements.  The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error.  In making those risk assessments, we consider internal control relevant to the Company’s preparation and fair presentation of the 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 Company’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 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Modular Space Holdings, Inc. and its subsidiaries (Predecessor) as of September 30, 2016 and the results of their operations and their cash flows for the period from October 1, 2016 to March 2, 2017, and for each of the two years in the period ended September 30, 2016 in accordance with accounting principles generally accepted in the United States of America.

 

3



 

Emphasis of Matter

 

As discussed in Note 1 to the consolidated financial statements, the Company filed a petition on December 21, 2016 with the United States Bankruptcy Court for the district of Delaware for reorganization under the provisions of Chapter 11 of the Bankruptcy Code.  The Company’s Joint Prepackaged Plan of Reorganization was substantially consummated on March 2, 2017 and the Company emerged from bankruptcy.  In connection with its emergence from bankruptcy, the Company adopted fresh start accounting.  Our opinion is not modified with respect to this matter.

 

 

/s/ PricewaterhouseCoopers LLP

Philadelphia, Pennsylvania

January 16, 2018, except for the changes in the manner in which the Company accounts for goodwill discussed in Note 2 to the consolidated financial statements, as to which the date is July 20, 2018

 

4



 

Modular Space Holdings, Inc. and Subsidiaries

Consolidated Balance Sheets

September 30, 2017 (Successor) and 2016 (Predecessor)

(In thousands except share data)

 

 

 

Successor

 

 

Predecessor

 

 

 

2017

 

 

2016

 

Assets

 

 

 

 

 

 

Cash

 

$

1,476

 

 

$

859

 

Accounts receivable, net of allowance for doubtful accounts of $1,331 and $9,021, respectively (Note 2)

 

74,256

 

 

73,851

 

Lease receivables, net of allowance for doubtful accounts of $63 and $194 respectively (Note 3)

 

2,029

 

 

2,943

 

Prepaid expenses and other current assets

 

10,964

 

 

15,531

 

Total current assets

 

88,725

 

 

93,184

 

Rental equipment, net (Note 5)

 

855,402

 

 

1,028,030

 

Other property and equipment, net (Note 6)

 

127,040

 

 

121,562

 

Other intangible assets, net (Note 7)

 

13,144

 

 

4,000

 

Goodwill (Note 7)

 

 

 

9,952

 

Other non-current assets

 

1,193

 

 

1,092

 

Total assets

 

$

1,085,504

 

 

$

1,257,820

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

Accounts payable

 

$

12,073

 

 

$

10,280

 

Accrued expenses

 

35,111

 

 

58,574

 

Current portion of deferred gain on sale of other property and equipment

 

 

 

1,368

 

Advance rents

 

11,119

 

 

12,392

 

Current portion of term loans (Note 8)

 

5,664

 

 

 

Asset based revolver (Note 8)

 

454,070

 

 

596,934

 

Senior notes (Note 8)

 

 

 

369,675

 

Total current liabilities

 

518,037

 

 

1,049,223

 

Deferred gain on sale of other property and equipment

 

 

 

10,991

 

Term loans (Note 8)

 

61,949

 

 

 

Deferred income taxes (Note 11)

 

51,273

 

 

64,026

 

Total liabilities

 

631,259

 

 

1,124,240

 

Commitments and Contingencies (Note 12)

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

 

Predecessor Class A Common Stock - 28,000,000 shares of $.0001 par value per share authorized and 21,383,894 outstanding as of September 30, 2016

 

 

 

2

 

Predecessor Common Stock - 3,500,000 shares of $.01 par value per share authorized and 3,499,944 shares outstanding as of September 30, 2016

 

 

 

35

 

Successor Common Stock - 60,000,000 shares of $0.01 par value per share authorized and 29,233,375 outstanding as of September 30, 2017

 

292

 

 

 

Successor Preferred Stock - 1,000,000 shares of $0.01 par value per share authorized and 0 outstanding shares as of September 30, 2017

 

 

 

 

Predecessor Additional paid-in capital

 

 

 

 

345,905

 

Successor Additional paid-in capital

 

443,472

 

 

 

Warrants

 

4,970

 

 

 

Retained earnings (accumulated deficit)

 

1,058

 

 

(196,247

)

Accumulated other comprehensive loss

 

4,453

 

 

(16,115

)

Total stockholders’ equity

 

454,245

 

 

133,580

 

Total liabilities and stockholders’ equity

 

$

1,085,504

 

 

$

1,257,820

 

 

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

 

5



 

Modular Space Holdings, Inc. and Subsidiaries

Consolidated Statements of Operations

(In thousands except share data)

 

 

 

Successor

 

 

Predecessor

 

 

 

Period from March
3, 2017 to
September 30, 2017

 

 

Period from
October 1, 2016
to March 2, 2017

 

Year ended
September 30,
2016

 

Year ended
September 30,
2015

 

Revenues

 

 

 

 

 

 

 

 

 

 

Leasing

 

$

134,521

 

 

$

99,024

 

$

237,271

 

$

243,998

 

Sales of rental equipment

 

 

 

 

 

 

 

 

 

 

New units

 

31,788

 

 

21,542

 

62,055

 

50,738

 

Lease units

 

18,380

 

 

11,265

 

29,931

 

30,384

 

Delivery, installation and removal

 

79,924

 

 

47,920

 

136,297

 

128,005

 

Total revenues

 

264,613

 

 

179,751

 

465,554

 

453,125

 

Leasing and sales costs

 

 

 

 

 

 

 

 

 

 

Cost of rental equipment sold

 

 

 

 

 

 

 

 

 

 

New units

 

24,724

 

 

17,046

 

47,884

 

39,644

 

Lease units

 

13,342

 

 

8,865

 

22,383

 

23,464

 

Delivery, installation and removal

 

59,643

 

 

37,456

 

103,987

 

98,091

 

Depreciation

 

29,811

 

 

26,288

 

62,558

 

72,011

 

Maintenance and other

 

49,763

 

 

33,508

 

82,619

 

77,971

 

Total leasing and sales costs

 

177,283

 

 

123,163

 

319,431

 

311,181

 

Gross profit

 

87,330

 

 

56,588

 

146,123

 

141,944

 

Operating and other expenses

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

70,868

 

 

43,433

 

115,843

 

108,385

 

Interest, including amortization of deferred financing costs

 

17,516

 

 

39,642

 

74,531

 

67,616

 

Loss on reorganization items, net (Note 1)

 

 

 

97,121

 

 

 

Restructuring costs (Note 1)

 

1,722

 

 

18,142

 

7,031

 

 

Goodwill impairment charge (Note 7)

 

 

 

 

35,484

 

 

Total operating and other expenses

 

90,106

 

 

198,338

 

232,889

 

176,001

 

Net loss before income taxes

 

(2,776

)

 

(141,750

)

(86,766

)

(34,057

)

Income tax (benefit) expense (Note 11)

 

(3,834

)

 

(8,946

)

9,068

 

2,823

 

Net income (loss)

 

$

1,058

 

 

$

(132,804

)

$

(95,834

)

$

(36,880

)

 

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

 

6



 

Modular Space Holdings, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(In thousands except share data)

 

 

 

Successor

 

 

Predecessor

 

 

 

Period from
March 3, 2017 to
September 30,
2017

 

 

Period from
October 1, 2016
to March 2,
2017

 

Year ended
September 30,
2016

 

Year ended
September 30,
2015

 

Net income (loss)

 

$

1,058

 

 

$

(132,804

)

$

(95,834

)

$

(36,880

)

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

Cumulative translation adjustment

 

4,453

 

 

(633

)

2,884

 

(29,134

)

Reclassification of cumulative translation adjustment to net loss realized upon reorganization

 

 

 

16,748

 

 

 

Change in mark-to-market value of interest rate cash flow hedges net of tax of $0, $0, $1,052 and $931 in the Successor period ended September 30, 2017, Predecessor period ended March 2, 2017 and the Predecessor years ended September 30, 2016 and 2015, repectively

 

 

 

 

2,249

 

1,425

 

Other comprehensive income (loss)

 

4,453

 

 

16,115

 

5,133

 

(27,709

)

Total comprehensive income (loss)

 

$

5,511

 

 

$

(116,689

)

$

(90,701

)

$

(64,589

)

 

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

 

7



 

Modular Space Holdings, Inc. and Subsidiaries

Consolidated Statements of Stockholders’ Equity

(In thousands except share data)

 

 

 

Class A
Common Stock

 

Common Stock

 

 

 

Additional
Paid-in

 

Retained
Earnings
(Accumulated

 

Accumulated
Other
Comprehensive

 

Total
Stockholders’ 

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Warrants

 

Capital

 

Deficit)

 

Income/(Loss)

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2014 (Predecessor)

 

21,383,894

 

$

2

 

3,499,944

 

$

35

 

$

 

$

343,203

 

$

(63,533

)

$

6,461

 

$

286,168

 

Stock compensation expense (Note 10)

 

 

 

 

 

 

 

1,234

 

 

 

1,234

 

Net Loss

 

 

 

 

 

 

 

 

(36,880

)

 

(36,880

)

Other Comprehensive Loss

 

 

 

 

 

 

 

 

 

(27,709

)

(27,709

)

Balance at September 30, 2015 (Predecessor)

 

21,383,894

 

2

 

3,499,944

 

35

 

 

344,437

 

(100,413

)

(21,248

)

222,813

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock compensation expense (Note 10)

 

 

 

 

 

 

1,468

 

 

 

1,468

 

Net Loss

 

 

 

 

 

 

 

(95,834

)

 

(95,834

)

Other Comprehensive Income

 

 

 

 

 

 

 

 

5,133

 

5,133

 

Balance at September 30, 2016 (Predecessor)

 

21,383,894

 

2

 

3,499,944

 

35

 

 

345,905

 

(196,247

)

(16,115

)

133,580

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock compensation expense (Note 10)

 

 

 

 

 

 

1,377

 

 

 

1,377

 

Net Loss

 

 

 

 

 

 

 

(132,804

)

 

(132,804

)

Other Comprehensive Income

 

 

 

 

 

 

 

 

16,115

 

16,115

 

Cancellation of Predecessor equity

 

(21,383,894

)

(2

)

(3,499,944

)

(35

)

 

(347,282

)

329,051

 

 

(18,268

)

Balance at March 2, 2017 (Predecessor)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of Successor common stock and warrants

 

 

 

29,233,375

 

292

 

4,970

 

442,927

 

 

 

448,189

 

Balance at March 2, 2017 (Predecessor)

 

 

 

29,233,375

 

292

 

4,970

 

442,927

 

 

 

448,189

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at March 3, 2017 (Successor)

 

 

 

29,233,375

 

292

 

4,970

 

442,927

 

 

 

448,189

 

Stock compensation expense (Note 10)

 

 

 

 

 

 

545

 

 

 

545

 

Net Income

 

 

 

 

 

 

 

1,058

 

 

1,058

 

Other Comprehensive Income

 

 

 

 

 

 

 

 

4,453

 

4,453

 

Balance at September 30, 2017 (Successor)

 

 

$

 

29,233,375

 

$

292

 

$

4,970

 

$

443,472

 

$

1,058

 

$

4,453

 

$

454,245

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

8



 

Modular Space Holdings, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands except share data)

 

 

 

Successor

 

 

Predecessor

 

 

 

Period from
March 3, 2017 to
September 30, 2017

 

 

Period from
October 1, 2016 to
March 2, 2017

 

Year ended
September 30,
2016

 

Year ended
September 30,
2015

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

 1,058

 

 

$

 (132,804

)

$

 (95,834

)

 $(36,880

)

Adjustments to reconcile net income (loss) to net cash provided by operating activities

 

 

 

 

 

 

 

 

 

 

Non-cash interest

 

 

 

6,824

 

10,206

 

4,063

 

Provision for doubtful accounts

 

1,388

 

 

1,787

 

6,015

 

2,603

 

Provision for customer credits

 

1,729

 

 

1,887

 

4,921

 

4,613

 

Reorganization items

 

 

 

96,174

 

 

 

Stock-based compensation expense

 

545

 

 

530

 

1,468

 

1,234

 

Depreciation and amortization

 

35,281

 

 

29,707

 

70,195

 

77,716

 

Goodwill Impairment charge

 

 

 

 

 

35,484

 

 

Gain on sale of rental equipment

 

(5,038

)

 

(2,400

)

(7,548

)

(6,898

)

Gain on sale of property and equipment

 

(240

)

 

 

 

 

Deferred gain on sale of other property and equipment

 

 

 

(572

)

(1,373

)

 

Deferred income taxes, net of valuation allowance

 

(4,972

)

 

(8,929

)

7,125

 

(680

)

Changes in

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

(16,836

)

 

8,996

 

14,579

 

(7,662

)

Prepaid expenses and other assets

 

1,781

 

 

344

 

33

 

583

 

Accounts payable and accrued expenses

 

(3,295

)

 

6,733

 

(5,010

)

3,634

 

Advance rents

 

6,252

 

 

2,382

 

1,121

 

(284

)

Net cash provided by operating activities

 

17,653

 

 

10,659

 

41,382

 

42,042

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

 

 

Purchases of rental equipment and other property and equipment

 

(34,042

)

 

(23,666

)

(77,358

)

(100,074

)

Proceeds from sale of rental equipment

 

19,211

 

 

11,395

 

29,931

 

30,384

 

Proceeds from sale of other property and equipment

 

1,474

 

 

 

 

28,513

 

Leasing receivables

 

 

 

 

 

 

 

 

 

 

Originations

 

(105

)

 

(1,131

)

(1,341

)

(1,867

)

Payments received

 

1,111

 

 

1,130

 

2,153

 

3,153

 

Net cash used in investing activities

 

(12,351

)

 

(12,272

)

(46,615

)

(39,891

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

 

 

Proceeds from asset based revolver

 

261,812

 

 

247,217

 

495,737

 

451,443

 

Payments on asset based revolver

 

(286,211

)

 

(298,819

)

(482,328

)

(453,328

)

Payments on term loans

 

(3,015

)

 

 

 

 

Proceeds from rights offering investment by second lien noteholders

 

 

 

89,939

 

 

 

Financing costs paid

 

 

 

(13,892

)

(7,411

)

(264

)

Net cash provided by (used in) financing activities

 

(27,414

)

 

24,445

 

5,998

 

(2,149

)

Effect of exchange rate changes on cash

 

89

 

 

(192

)

1

 

(16

)

Net (decrease) increase in cash and cash equivalents

 

(22,023

)

 

22,640

 

766

 

(14

)

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

Beginning of year

 

23,499

 

 

859

 

93

 

107

 

End of year

 

$

1,476

 

 

$

23,499

 

$

859

 

$

93

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

 

 

 

 

Cash paid during the year for

 

 

 

 

 

 

 

 

 

 

Interest

 

$

16,034

 

 

$

16,831

 

$

45,460

 

$

61,781

 

Income tax payments (refunds), net

 

$

996

 

 

$

528

 

$

4,226

 

$

(2,083

)

Cash paid for reorganization items

 

$

16,270

 

 

$

947

 

$

 

$

 

Non cash activity during the year for:

 

 

 

 

 

 

 

 

 

 

Equipment purchases included in accounts payable

 

$

1,621

 

 

$

482

 

$

1,562

 

$

3,649

 

 

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

 

9



 

Modular Space Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(In thousands except share data)

 

1.                            Organization, Business Activity and Reorganization

 

Modular Space Holdings, Inc., a Delaware corporation and its subsidiaries (collectively, “ModSpace” or the “Company”) are engaged in the leasing, selling, buying and manufacturing of mobile offices, modular structures, and storage containers throughout the United States and Canada. The subsidiaries of Modular Space Holdings, Inc. include Modular Space Intermediate Holdings, Inc. (inactive), Modular Space Corporation (“MSC”), Resun Chippewa, LLC (“Chippewa”), Resun ModSpace, Inc. (“RMI”), ModSpace Financial Services Canada, Ltd. (“MFSC”), ModSpace Government Financial Services, Inc. (“MGFS”) (inactive), Global Multi Services S.A. (“GMS”) (inactive), and Crystal Merger Sub, Inc. (CMSI) (inactive).

 

Chippewa is a special purpose subsidiary that is a guarantor of the Company’s asset-based revolver. The operations of Chippewa are limited to the ownership of rental units and supplementary products subject to a master lease with MSC.

 

On March 16, 2016 the company and Scotsman (a wholly-owned subsidiary of Algeco Scotsman) entered into a merger agreement, whereby, among other things, the North American modular operations of Scotsman were to merge with a subsidiary of the Company. After due diligence and capital raising efforts, the parties terminated the merger in August of 2016. Legal and advisory costs in the amount of $6,149 that were associated with the terminated merger are reflected in selling, general, and administrative expenses in the 2016 Consolidated Statement of Operations. The merger agreement outlined capital raising efforts which included debt financing intended to refinance the Company’s existing revolving credit facility.

 

On June 2, 2016 the Company and its lenders entered into an amendment and forbearance agreement to extend the maturity of the Company’s revolving credit facility, which was scheduled to mature on June 6, 2016. The maturity of the Company’s revolving credit facility was extended on multiple occasions through December 19, 2016.

 

As of September 30, 2016, the Company was in default under its revolving credit facility and the Senior Notes (as defined below) due to its failure to make a maturity payment on June 6, 2016 of a portion of the revolving credit facility and the failure to pay interest on July 31, 2016 on the Senior Notes.

 

On December 21, 2016, the Company entered into a consensual prepackaged plan of reorganization pursuant to Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) more fully described below.

 

Restructuring costs include legal and advisory costs, associated with the Company’s restructuring and refinancing activities, of $1,722, $18,142 and $7,031 for the Successor (as defined below) period ended September 30, 2017, the Predecessor (as defined below) period ended March 2, 2017 and the Predecessor year ended September 30, 2016, respectively.  In addition, $6,438 of financing costs related to the amendment and forbearance of the revolving credit facility are reflected in interest including amortization of deferred financing costs, in the Consolidated Statements of Operations for the Predecessor year ended September 30, 2016.

 

10



 

Modular Space Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(In thousands except share data)

 

Emergence from Voluntary Reorganization under Chapter 11 Proceedings

 

On December 21, 2016, Modular Space Holdings, Inc. and six of its U.S. subsidiaries (the “Chapter 11 Subsidiaries”) filed voluntary petitions seeking relief under section 1121 (a) of Chapter 11 of Title 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware under the caption In re Modular Space Holdings, Inc., et al (Case No. 16-12825) (the “Chapter 11 Cases”). In connection with the filing of the Chapter 11 Cases, a recognition proceeding for the Company’s Canadian subsidiary, under Part IV of the Companies’ Creditors Arrangement Act (Canada) was filed in Toronto, Ontario, Canada before the Ontario Superior Court of Justice.  The Company and the Chapter 11 Subsidiaries received bankruptcy court confirmation of their joint prepackaged plan of reorganization (the “Plan”) on February 15, 2017, and subsequently emerged from bankruptcy on March 2, 2017 (the “Effective Date”).

 

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates continuity of operations, realization of assets and satisfaction of liabilities in the normal course of business.

 

Effect of the Bankruptcy Proceedings

 

During the bankruptcy proceedings, the Company conducted normal business activities and was authorized to pay and has paid pre-petition employee wages and benefits, and pre-petition amounts owed to certain lienholders and vendors.

 

In addition, subject to certain specific exceptions under the Bankruptcy Code, the filing of the Chapter 11 Cases automatically stayed most judicial or administrative actions against the Company and efforts by creditors to collect on or otherwise exercise rights or remedies with respect to pre-petition claims, including accrued interest on the senior secured second lien notes, during the pendency of the Chapter 11 Cases.

 

Plan of Reorganization (the “Plan”)

 

Pursuant to the Plan, the significant transactions that occurred upon emergence from bankruptcy were as follows:

 

·                  $375,000 of 10.25% senior secured second lien notes due 2019, plus outstanding and accrued interest of approximately $41,600 and second lien noteholders cash investment of $89,939 were exchanged for 97% of the post-emergence Company’s common stock;

 

·                  the Company’s pre-petition common stock was cancelled, and the current stockholders received approximately 3% of the post-emergence Company’s common stock. Warrants to purchase up to 1,250,000 common stock equity interests, or 4.3% of the reorganized Company’s equity were issued;

 

·                  the Company’s first lien lenders provided an amended and restated four-year revolving credit facility and associated term loans (the “New Credit Facility”). The total consolidated commitment under the new credit facility is $716,688, including a U.S. revolving credit facility of $496,838, a Canadian revolving credit facility of $149,222, and U.S. term loans in an original principal amount of $70,628.  See Note 8 for further information; and

 

11



 

Modular Space Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(In thousands except share data)

 

·                  on the Effective Date of the Plan, existing management incentive plans were deemed to have been terminated, cancelled, and of no further force and effect.  Subsequent to the Effective Date of the Plan, a new management incentive plan was established consisting of restricted stock units more fully described in Note 10.

 

In accordance with the Plan, the post-emergence Company’s new board of directors is made up of seven directors including the Chief Executive Officer.

 

Financial Statement Classification of Liabilities Subject to Compromise

 

As of December 21, 2017, the financial statements include amounts considered as liabilities subject to compromise, consisting of Senior Notes and accrued interest on Senior Notes, which were equitized upon emergence from bankruptcy on March 2, 2017.

 

Fresh Start Accounting

 

Upon the Company’s emergence from Chapter 11 bankruptcy, the Company adopted fresh start accounting, pursuant to FASB ASC 852, “Reorganizations”, and applied fresh start accounting to its financial statements because (i) the holders of existing voting shares of the Company prior to its emergence received less than 50% of the voting shares of the Company outstanding following its emergence from bankruptcy and (ii) the reorganization value of the Company’s assets immediately prior to confirmation of the plan of reorganization was less than the post-petition liabilities and allowed claims.  Adopting fresh start accounting results in a new reporting entity for financial reporting purposes with no beginning retained earnings or deficit as of the fresh start reporting date.

 

The cancellation of all existing shares outstanding on the Effective Date and issuance of new shares of the Successor Company caused a related change of control of the Company under ASC 852. As a result of the application of fresh start accounting, as well as the effects of the implementation of the Plan, the consolidated financial statements as of March 2, 2017 forward are not comparable with the consolidated financial statements prior to that date which were prepared on a historical basis of accounting. References to “Successor” or “Successor Company” relate to the financial position and results of operations of the reorganized Company subsequent to March 2, 2017. References to “Predecessor” or “Predecessor Company” refer to the financial position and results of operations of the Company prior to and including March 2, 2017. As a result of the application of fresh start accounting and the effects of the implementation of the Plan of Reorganization, the financial statements on or after March 3, 2017 are not comparable to the financial statements prior to that date.

 

The Company elected to apply fresh start accounting effective March 1, 2017, to coincide with the start of its normal monthly accounting period, which resulted in the Company becoming a new entity for financial reporting purposes. The Company evaluated and concluded that events between March 1, 2017 and March 3, 2017 were immaterial and use of an accounting convenience date of March 1, 2017 was appropriate. As such, fresh start accounting is reflected in the accompanying consolidated balance sheet as of September 30, 2017 and related fresh start adjustments are included in the accompanying statement of operations for the period from October 1, 2016 through March 2, 2017 (the “Predecessor 2017 Period”).

 

12



 

Modular Space Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(In thousands except share data)

 

Reorganization Value

 

Reorganization value represents the fair value of the Successor Company’s total assets and is intended to approximate the amount a willing buyer would pay for the assets immediately after restructuring. Under fresh start accounting, the Company allocated the reorganization value to individual assets based on their estimated fair values.

 

The Company’s reorganization value was derived from an estimate of enterprise value. Enterprise value represents the estimated fair value of an entity’s long-term debt and stockholders’ equity. In support of the Plan, the enterprise value of the Successor Company was estimated and approved by the bankruptcy court to be in the range of $896,000 to $1,107,000. This valuation analysis was prepared using financial projections and applying standard valuation techniques, including discounted cash flow analysis, selected comparable company analyses, and selected precedent transaction analysis.  The estimates set forth herein are not necessarily indicative of actual outcomes, and there can be no assurance that the estimates, projections or assumptions will be realized.

 

Based on the estimates and assumptions used in determining the enterprise value, the Company estimated the enterprise value to be approximately $994,477.

 

The following table reconciles the enterprise value to the estimated fair value of the Successor Company’s common stock as of the Effective Date:

 

 

 

March 2, 2017

 

Enterprise Value

 

$

994,477

 

Less: Fair value of interest bearing liabilities

 

(546,288

)

Less: Fair value of warrants tranch 1

 

(3,175

)

Less: Fair value of warrants tranch 2

 

(1,795

)

Fair value of Successor common stock

 

$

443,219

 

 

The following table reconciles the enterprise value to the estimated reorganization value as of the Effective Date:

 

 

 

March 2, 2017

 

Enterprise Value

 

$

994,477

 

Plus: Fair value of non-interest bearing liabilities

 

108,783

 

Reorganization value of Successor assets

 

$

1,103,260

 

 

13



 

Modular Space Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(In thousands except share data)

 

Consolidated Balance Sheet

 

The adjustments set forth in the following consolidated balance sheet reflect the effect of the consummation of the transactions contemplated by the Plan (reflected in the column “Reorganization Adjustments”) as well as fair value adjustments as a result of the adoption of fresh start accounting (reflected in the column “Fresh Start Adjustments”).  The explanatory notes highlight methods used to determine fair values or other amounts of the assets and liabilities as well as significant assumptions.

 

 

 

Predecessor
Company

 

Reorganization
Adjustments

 

Fresh Start
Adjustments

 

Successor
Company

 

Assets

 

 

 

 

 

 

 

 

 

Cash

 

$

1,206

 

$

22,293

(1)

$

 

$

23,499

 

Accounts receivable

 

60,963

 

 

 

60,963

 

Lease receivables

 

2,993

 

 

 

2,993

 

Prepaid expenses and other current assets

 

17,300

 

(1,064

)(2)

(4,558

)(12)

11,678

 

Total current assets

 

82,462

 

21,229

 

(4,558

)

99,133

 

Rental equipment

 

1,011,976

 

 

(150,418

)(13)

861,558

 

Other property and equipment

 

119,827

 

 

8,121

(14)

127,948

 

Goodwill and other intangibles

 

13,737

 

 

(209

)(15)

13,528

 

Other non-current assets

 

1,093

 

 

 

1,093

 

Total assets

 

$

1,229,095

 

$

21,229

 

$

(147,064

)

$

1,103,260

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

9,790

 

$

 

$

 

$

9,790

 

Accrued expenses

 

29,983

 

9,560

(3)

 

39,543

 

Current portion of deferred gain on sale of other property

 

1,368

 

 

(1,368

)(16)

 

Advance rents

 

14,769

 

 

(9,944

)(17)

4,825

 

Current portion of term loans

 

 

5,664

(4)

 

5,664

 

Asset based revolver

 

604,027

 

(138,390

)(5)

10,023

(18)

475,660

 

Liabilities subject to compromise

 

416,641

 

(416,641

)(6)

 

 

Total current liabilities

 

1,076,578

 

(539,807

)

(1,289

)

535,482

 

Deferred gain on sale of other property and equipment

 

10,418

 

 

 

(10,418

)(16)

 

Term loans

 

 

64,964

(4)

 

 

64,964

 

Deferred income taxes

 

61,439

 

7,032

(7)

(13,846

)(19)

54,625

 

Total liabilities

 

1,148,435

 

(467,811

)

(25,553

)

655,071

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

 

 

 

 

Predecessor Class A Common Stock

 

2

 

 

(2

)(20)

 

Predecessor Common Stock

 

35

 

 

(35

)(20)

 

Successor Common Stock

 

 

292

(8)

 

292

 

Predecessor Additional paid-in capital

 

346,434

 

847

(9)

(347,281

)(20)

 

Successor Additional paid-in capital

 

 

442,927

(10)

 

442,927

 

Warrants

 

 

4,970

(10)

 

4,970

 

Retained earnings/(accumulated deficit)

 

(249,063

)

40,004

(11)

209,059

(20)

 

Accumulated other comprehensive loss

 

(16,748

)

 

16,748

(20)

 

Total stockholders’ equity

 

80,660

 

489,040

 

(121,511

)

448,189

 

Total liabilities and stockholders’ equity

 

$

1,229,095

 

$

21,229

 

$

(147,064

)

$

1,103,260

 

 

14



 

Modular Space Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(In thousands except share data)

 

Reorganization Adjustments

 

1.              Reflects the net cash payments recorded as of the Effective Date from the implementation of the Plan:

 

Sources:

 

 

 

Proceeds from New Credit Facility

 

$

32,200

 

Proceeds from equity issued to second lien noteholders

 

89,939

 

Total Sources

 

$

122,139

 

 

 

 

 

Uses:

 

 

 

Repayment of prior Credit Facility

 

$

(89,939

)

Financing costs paid for New Credit Facility

 

$

(8,960

)

Predecessor accounts payable paid upon emergence

 

(947

)

Total Uses

 

(99,846

)

Net Sources

 

$

22,293

 

 

2.              Reclassification of professional fees capitalized in connection with New Credit Facility from other assets to asset based revolver.

 

3.              Reflects the settlement of accrued interest on the Senior Notes and the payment and accrual of expenses as follows:

 

Predecessor accounts payable paid upon emergence

 

$

(947

)

Accrual for professional advisor fees earned on emergence

 

10,507

 

Total increase to accrued expense

 

$

9,560

 

 

4.              Under the New Credit Facility, a portion of the loan balance amounting to $70,628 as of the Effective Date was classified as a Term Loan as more fully described in Note 8.

 

5.              Reflects net cash repayments to the prior Credit Facility and borrowings under New Credit Facility as follows:

 

Repayment of prior credit facility with proceeds from second lien noteholders

 

$

(89,939

)

Reclassification of a portion of the New Credit Facility to Term Loan

 

(70,628

)

Proceeds from New Credit Facility

 

32,200

 

Debt issuance costs incurred in connection with New Credit Facility

 

(10,023

)

Net reduction to Credit Facility borrowings

 

$

(138,390

)

 

15



 

Modular Space Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(In thousands except share data)

 

6.              The Senior Notes and the accrued interest on the Senior Notes were settled as follows in accordance with the Plan:

 

Senior Notes due 2019

 

$

375,000

 

Accrued interest on Senior Notes

 

41,641

 

Liabilities subject to compromise of the Predecessor Company (LSTC)

 

416,641

 

Fair value of equity issued to former holders of the senior notes of predecessor

 

(429,923

)

Cash proceeds received for issuance of equity to former holders of senior notes

 

89,939

 

Gain on settlement of Liabilities subject to compromise

 

$

76,657

 

 

7.              Reduction of deferred tax liability related to reorganization adjustments.

 

8.              Reflects the issuance of 29,233,375 shares of common stock, $0.01 par value, in the Successor Company.

 

9.              Reflects the accelerated recognition of stock compensation expense related to the Predecessor Company stock based compensation plans. See Note 10 for further information.

 

10.       Reflects the issuance of 29,233,375 shares of common stock at a per share fair value of $15.16 and the issuance of Warrants with a fair value of $4,970.

 

11.       Reflects the cumulative impact of reorganization adjustments impacting the statement of operations and adjustments which were made directly to accumulated deficit:

 

Gain on settlement of Liabilities subject to compromise

 

$

76,657

 

Fair value of equity issued to Predecessor Company shareholders

 

(13,297

)

Fair value of Warrants issued

 

(4,970

)

Accrual for professional advisor fees earned on emergence

 

(10,507

)

Cancellation of Predecessor Company stock options

 

(847

)

Tax expense on reorganization adjustments

 

(7,032

)

Net impact to accumulated deficit

 

$

40,004

 

 

Fresh Start Adjustments

 

12.       Reflects the write-off of unamortized historical initial direct costs for lease originations.

 

13.       Reflects the adjustment to state the Company’s rental equipment at fair value.  A combination of the cost and market approaches were utilized to determine fair value.  The market approach relies upon recent sales, asset-level attributes and estimated costs to condition assets for sale to arrive at probable selling prices.  The cost approach considers the amount required to construct or purchase a new asset of equal utility at current prices, with adjustments for physical condition and functional and economic obsolescence.

 

16



 

Modular Space Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(In thousands except share data)

 

14.       Reflects the adjustment to state the Company’s other property and equipment at fair value.  A combination of the cost and market approaches were utilized to determine fair value.  The cost approach discussed above was utilized for buildings, equipment and leasehold improvements.  A sales comparison (market) approach was utilized for land, relying upon recent selling prices of comparable properties in comparable markets.

 

15.       Reflects the write-off of Predecessor Company goodwill and indefinite-lived intangible assets totaling $13,737, the recognition of an intangible trade name and trademarks asset of $8,718 and the recognition of a lease interest asset of $4,810 based on the fair value of certain of the Company’s leased premises.  The fair value of the Company’s intangible trade name and trademarks asset was determined using a relief from royalty approach, which utilized comparable company arm’s length royalty rates based upon the Company’s products and services.  The relief from royalty approach also utilized projected revenue estimates.   The fair value of the lease interest asset was determined by comparing the difference between the net present value of market rents and contractual rents over the remaining lease terms.

 

16.       Reflects the recognition of the remaining deferred gain on sale of other property and equipment.

 

17.       Reflects the recognition of income on customer lease payments which were received in advance of the period to which they apply and for which the performance of services by the Company have been completed.

 

18.       Reflects the write-off of financing costs to state the New Credit Facility at its fair value.

 

19.       Reduction of deferred tax liability related to fresh start adjustments.

 

20.       Reflects the cancellation of the Predecessor Company equity to retained earnings, cancellation of Predecessor Company accumulated other comprehensive loss, and the cumulative impact of fresh start adjustments as discussed above.

 

Reorganization Items

 

Reorganization items represent liabilities settled, net of amounts incurred subsequent to the Chapter 11 filing as a direct result of the Plan and are classified as net loss on reorganization items in the accompanying consolidated statement of operations.

 

17



 

Modular Space Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(In thousands except share data)

 

The following table summarizes reorganization items

 

 

 

Predecessor

 

 

 

Period from
October 1, 2016
to March 2,
2017

 

Gain on settlement of liabilities subject to compromise

 

$

(76,657

)

Write-off of unamortized financing costs associated with Senior Notes

 

4,671

 

Accrual for professional advisor fees earned on emergence

 

10,507

 

Write-off of Predecessor Company accumulated other comprehensive loss

 

16,748

 

Recognition of expense on cancellation of stock based compensation plans

 

847

 

Fresh start adjustments, excluding deferred taxes

 

135,357

 

Reorganization legal and professional fees

 

5,648

 

Loss on reorganization items, net

 

$

97,121

 

 

2.                            Summary of Significant Accounting Policies

 

Change in Accounting Principle

 

Effective October 1, 2015, the Company changed accounting principles for goodwill. The Company previously amortized goodwill in accordance with Private Company Standards. The Company has adopted the accounting principle where goodwill is not amortized, but reviewed for impairment at least annually, or more frequently when events or changes in circumstances indicate that the carrying value may not be recoverable. The Company performs an annual impairment analysis of goodwill as of July 31 each fiscal year. The Company may assess its goodwill for impairment initially using a qualitative approach (“step zero”) to determine whether conditions exist to indicate that it is more likely than not the fair value of a reporting unit is less than its carrying value. If management concludes, based upon its assessment of relevant events, facts and circumstances that it is more likely than not that the reporting units carrying value is greater than its fair value, then a quantitative analysis will be performed to determine if there is any impairment. The quantitative assessment for goodwill is a two-step assessment. “Step one” requires comparing the carrying value of a reporting unit, including goodwill, to its fair value using the income approach. The income approach uses a discounted cash flow model, which involves significant estimates and assumptions, including preparation of revenue and profitability growth forecasts, selection of a discount rate, and selection of a terminal year multiple. If the fair value of the respective reporting unit exceeds its carrying amount, goodwill is not considered to be impaired and no further testing is required. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is to measure the amount of impairment loss, if any. “Step two” compares the implied fair value of goodwill to the carrying amount of goodwill. The implied fair value of goodwill is determined by a hypothetical purchase price allocation using the reporting unit’s fair value as the purchase price. If the carrying amount of goodwill exceeds the implied fair value, an impairment charge is recorded to write down goodwill to its implied fair value and is recorded as a selling, general and administrative expense within the Company’s consolidated statement of operations and comprehensive income (loss).

 

Following are the impacts to financial statement line items as a result of the change in accounting principle for the periods presented in the accompanying consolidated financial statements:

 

18



 

Modular Space Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(In thousands except share data)

 

·                  A $4,809 reduction of amortization expense and $4,809 increase to goodwill impairment charge recognized in the statement of operations for the Predecessor fiscal year ended September 30, 2016; and

 

·                  A $463 reduction of amortization expense and $463 increase to loss on reorganization items recognized in the statement of operations for the Predecessor period from October 1, 2016 to March 2, 2017.

 

A summary of the significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows:

 

Reporting Entity

 

The consolidated financial statements include the accounts of Modular Space Holdings, Inc. and its wholly owned subsidiaries Modular Space Intermediate Holdings, Inc., MSC, Chippewa, RMI, MFSC, MGFS, GMS, and CMSI.  The Company does not have any subsidiaries in which it does not own 100% of the outstanding stock.  All intercompany activity has been eliminated in the preparation of the consolidated financial statements.

 

Fresh Start Accounting

 

Upon emergence from bankruptcy on the Effective Date, the Company applied fresh start accounting, resulting in the Company becoming a new entity for financial reporting purposes (see Note 1 — Fresh Start Accounting for further information).  As a result of the application of fresh start accounting, the Company reflected the disposition of its pre-petition debt and changes in its equity structure in its balance sheet as of the Effective Date. Accordingly, all financial statements prior to March 3, 2017 are referred to as those of the “Predecessor Company”, as they reflect the periods prior to application of fresh start accounting. The balance sheet as of September 30, 2017, and the financial statements for periods subsequent to March 2, 2017, are referred to as those of the “Successor Company.”  Under fresh start accounting, the Company’s assets and liabilities were adjusted to their fair values, and a reorganization value for the entity was determined by the Company based upon the estimated fair value of the enterprise before considering values allocated to debt to be settled in the reorganization. The fresh start adjustments are material and affect the Company’s results of operations from and after March 3, 2017. As a result of the application of fresh start accounting and the effects of the implementation of the Plan of Reorganization, the financial statements on or after March 3, 2017 are not comparable to the financial statements prior to that date.  References to “Successor” or “Successor Company” relate to the financial position and results of operations of the reorganized Company subsequent to March 2, 2017. References to “Predecessor” or “Predecessor Company” refer to the financial position and results of operations of the Company prior to and including March 2, 2017.

 

Revenue Recognition

 

The Company generates revenue from leasing units and providing related products and services (including delivery, installation, maintenance, and removal of lease units and other associated products and services, and the rental of steps, decks, ramps, and furniture), and from sales of new and used rental equipment.  Where applicable, the Company’s revenue recognition policy takes into consideration the guidance for Revenue Arrangements with Multiple Deliverables.

 

The Company accounts for lease transactions as operating, sales-type or direct financing based on the terms of the contractual lease arrangement.  The Company’s primary business is conducted through operating leases.  Leasing revenue from operating leases is recognized in income on a straight-line basis over the lease term. Leasing billings for periods extending beyond month-end or

 

19



 

Modular Space Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(In thousands except share data)

 

billings in excess of earned revenue are deferred and recorded as Advance Rents in the Company’s consolidated balance sheet.

 

Revenue from delivery, maintenance, installation and removal services associated with rental activities is generally recognized upon completion of the related services.

 

Revenue from the sale of new units and used rental equipment, including delivery and installation revenue, is generally recognized upon delivery and installation of the units, since the transfer of the risks and rewards of ownership generally occurs upon delivery, installation and completion of the Company’s other obligations pursuant to the sale agreement.  Certain arrangements to sell units under long-term construction-type sales contracts are recognized under the percentage of completion method.  Under this method, income is recognized in proportion to the incurred costs to date under the contract compared to estimated total costs of the project. Revenue from short-term service-type projects is recognized when the services are complete.

 

Revenue from sales-type leases and the related accounts receivable are recognized upon delivery and installation of the equipment and the unearned interest is recognized over the lease term on a basis which results in a constant rate of return on the unrecovered lease investment.

 

Accounts Receivable

 

The Company’s accounts receivable primarily consist of amounts due from customers for operating lease rentals, services and equipment sales.  The Company sells primarily on 30-day terms, individually performs credit evaluation procedures on its customers and requires security deposits or guarantees from its customers when a significant credit risk is identified.  The Company records an allowance for doubtful accounts by charging operations in amounts equal to the estimated losses expected to be incurred in the collection of the accounts.  The Company reviews the adequacy of the provision on at least a quarterly basis.  The estimated losses are based on historical collection experience in conjunction with an evaluation of the current status of the existing accounts.  Customer accounts are written off against the allowance for doubtful accounts when management determines an account to be uncollectible. As a result of the application of fresh start accounting, the Company’s accounts receivable balance was recorded at fair value on the Effective Date.  Accordingly, the allowance for doubtful accounts reset to $0 on March 2, 2017.

 

Concentration of Credit Risk

 

Financial instruments which potentially expose the Company to concentrations of credit risk include cash and cash equivalents, and accounts receivable.

 

The Company maintains cash and cash equivalents with various major financial institutions.  Concentrations of credit risk with respect to receivables are generally limited due to the Company’s large number of customers and their geographic dispersion across the United States and Canada within many different industries.  At September 30, 2017, no customer accounts for more than 10.0% of the Company’s receivables.

 

The Company’s counterparties generally consist of large financial institutions.  The Company monitors its positions with these counterparties and the credit quality of these financial institutions.  At September 30, 2017 and 2016, the Company had no significant concentrations of credit risk.

 

20



 

Modular Space Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(In thousands except share data)

 

Rental Equipment and Other Property and Equipment

 

Rental equipment and other property, plant, and equipment are carried at cost less accumulated depreciation.  The costs of refurbishments and betterments are capitalized to the extent that the improvement significantly adds value to or extends the life of the equipment.  Maintenance and repairs are expensed as incurred.  Depreciation and amortization are provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives.  The estimated service life for rental equipment is generally 20 years, with an estimated residual value of 50% of cost.  The costs of refurbishments are depreciated over a 10-year life.  The costs of betterments are depreciated over a 4-year life.  Component parts which are included in rental equipment are depreciated over a 5-year life.  Additional lease costs on customer operating leases are depreciated over the remaining lease term.  Beginning in 2013, the Company expanded upon its refurbishment capabilities to include the rebuild of assets to bring rental equipment to new condition.  The costs of rebuilding assets are capitalized and depreciated over 20 years with an estimated residual value of 50% of cost. The net book value of the asset at the point in time the asset is rebuilt is generally reduced to the estimated value of the base running frame, by accelerating the depreciation of the asset. The estimated service lives of other property and equipment range from 3 to 39 years. The straight-line method of depreciation is used for substantially all assets for financial reporting purposes, and accelerated methods are used for tax purposes.

 

Rental equipment is reviewed for impairment whenever events or circumstances have occurred that would indicate the carrying amount may not be fully recoverable.  A key element in determining the recoverability of the rental equipment’s carrying value is the Company’s outlook as to the future market conditions for its equipment.  If the carrying amount is not fully recoverable, an impairment loss is recognized to reduce the carrying amount to fair value.  The Company would determine fair value based upon the condition of the equipment, appraised values, and the projected net cash flows from the sale and/or rental of such equipment considering current market conditions. In connection with the Company’s plan of reorganization, carrying amounts for rental equipment and other property and equipment were assessed for recoverability utilizing an undiscounted cash flow approach.  The carrying amounts were determined to be fully recoverable as of September 30, 2016.  In accordance with fresh start accounting, a reduction to the carrying value of rental equipment of $150,418 and an increase to other property and equipment of $8,121 was recorded on the Predecessor Company for the period ended March 2, 2017, respectively. See Note 1 for further information. During the Successor period ended September 30, 2017, the Company determined that no impairment triggering events were noted for rental equipment and other property and equipment.

 

The Company periodically performs assessments of the useful lives and salvage values of assets. In evaluating useful lives and salvage values, the Company considers how long assets will remain functionally efficient and effective, given levels of technology, competitive factors, and the economic environment. If the assessment indicates that the assets will be used for a period different than previously anticipated, and/or results in a different residual value at the end of the assets’ useful life, the useful life and residual values of the assets are revised, resulting in a change in estimate. Changes in estimates are accounted for on a prospective basis by depreciating the assets’ current carrying values over their revised remaining useful lives.

 

21



 

Modular Space Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(In thousands except share data)

 

Goodwill and Other Intangibles

 

Goodwill and other indefinite lived intangible assets are carried at cost and are not amortized.  The Company tests goodwill and intangible assets deemed to have an indefinite life for impairment on an annual basis, or whenever events or changes in circumstances indicate that the carrying value may not be recoverable, relying on a number of factors including operating results, business plans and future cash flows.  The Company performs the annual assessment as of July 31 each fiscal year.

 

The Company identified triggering events during 2016 and recorded an impairment charge of $35,484 as a result of the impairment analysis.  There was goodwill was recognized from the application of fresh start accounting.

 

Other intangibles are amortized on a straight-line basis over their estimated useful lives (or legal lives if shorter).  Other indefinite-lived intangible assets are carried at cost and are not amortized.  Indefinite-lived intangible assets are reviewed for impairment annually on a qualitative basis, to determine whether events or circumstances have occurred that would indicate such assets might be impaired. The Company reviews its other intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable.  If it is determined that an impairment based on expected future undiscounted cash flows exists, then the loss is recognized in the consolidated statements of operations.  The amount of the impairment is the excess of the carrying amount of the asset over the fair value of the asset.  The fair value represents expected future cash flows from the use of the assets, discounted at the rate used to evaluate potential investments.

 

In accordance with fresh start accounting, the carrying values of the Predecessor Company goodwill asset was eliminated during the Predecessor period ended March 2, 2017. In connection with the adoption of fresh start accounting, the Company reviewed its lease arrangements and determined that certain leases were at favorable market terms.  Accordingly, the Company recognized a leasehold interest asset in the amount of $4,810. In addition, in connection with the fresh start accounting valuation, the Company re-measured and established a new basis of its an indefinite-lived trade name and /trademarks asset in the amount of $8,718 as of the Successor date. See Note 1 and Note 7 for further information.  No Successor goodwill was identified in connection with the adoption of fresh start accounting.

 

Income Taxes

 

Income taxes are provided for in accordance with the liability method.  Accordingly, deferred tax liabilities and assets are recognized for temporary differences or carryforwards that will result in net taxable income or deductible amounts in future periods.  Deferred tax expense or benefit is the result of changes in the net liability for deferred taxes.

 

A valuation allowance is provided for deferred tax assets when realization of such assets is not considered to be more likely than not.  Adjustments to the deferred income tax valuation allowance are made periodically based on management’s assessment of the recoverability of the related assets.

 

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in the tax rates is recognized in income in the period that includes the enactment date.

 

22



 

Modular Space Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(In thousands except share data)

 

The Company uses a two-step approach to recognize and measure uncertain tax positions.  The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation process, if any.  The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement.  The Company’s policy for recording interest and penalties associated with audits is to record such items as a component of income before taxes.  Penalties and associated interest costs are recorded in selling, general and administrative expenses in the consolidated statements of operations.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid instruments purchased with a maturity of three months or less to be cash equivalents.  The carrying amount of these investments approximates fair value.

 

Fair Value of Financial Instruments

 

Financial instruments consist primarily of cash and cash equivalents, accounts receivable, asset based revolver and senior notes, accounts payable and derivatives.  At September 30, 2017 and 2016, with the exception of the asset based revolver, and senior notes (Note 8), the fair value of these instruments approximates the carrying amount due to the liquidity of these financial instruments or short-term maturities of these instruments.

 

Deferred Financing Costs

 

Deferred financing costs relate to costs incurred by the Company associated with its asset based revolver, senior notes and term loan arrangements.  Deferred financing costs are amortized over the life of the related debt on a straight-line basis.  Amortizing the deferred financing costs using the straight-line method approximates the effective interest method.  If a debt instrument is retired early, the related unamortized deferred financing costs are written off in the period the debt is retired.  If the debt instrument is modified or exchanged, the related unamortized financing costs are deferred and amortized over the term of the new arrangement.

 

In 2016, the Company incurred $6,438 in financing costs related to amendment and forbearance agreements, which were amortized over the respective agreement periods.  In 2017 the Company incurred $4,961 in financing costs related to amendment and forbearance agreements.

 

In accordance with fresh start accounting, the balance of the Predecessor Company deferred financing fees were eliminated during the Predecessor Company period ended March 2, 2017. See Note 1 for further information.

 

The components of deferred financing costs at September 30, 2017 and 2016 are as follows:

 

 

 

Successor

 

 

Predecessor

 

 

 

2017

 

 

2016

 

Deferred Financing Costs

 

$

 

 

$

37,243

 

Accumulated amortization

 

 

 

(30,681

)

Ending balance, September 30

 

$

 

 

$

6,562

 

 

23



 

Modular Space Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(In thousands except share data)

 

Foreign Currency Translation and Transactions

 

The Company’s balance sheet accounts of its Canadian subsidiary are translated into U.S. dollars at period end exchange rates.  Income statement amounts of the Canadian subsidiary are translated into U.S. dollars at the average exchange rate for each month within the year.  The resulting translation adjustments are recorded as a separate component of stockholders’ equity.  Gains or losses on certain long-term intercompany transactions, which are considered permanent in nature, are treated in the same manner as translation adjustments.  All other foreign currency transaction gains and losses are included in net earnings.  Gains/(Losses) included in net earnings of $47, $(47), $(294) and $(1,649) for the Successor period ended September 30, 2017, the Predecessor period ended March 2, 2017 and the Predecessor years ended September 30, 2016, and September 30, 2015 respectively, were included in selling, general and administrative expenses in the accompanying statements of operations.

 

Derivatives

 

From time to time, the Company has executed interest rate swap and interest rate cap agreements that are designated by management as cash flow hedging instruments.  The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions.  The Company’s hedging activities are transacted only with highly-rated institutions, reducing the exposure to credit risk in the event of nonperformance.  The objective of such instruments is to reduce the variability of future cash flows for interest payments on selected amounts of borrowings outstanding under a variable rate revolving credit facility and a variable rate term loan.  All such derivatives are included in the balance sheet at fair value and the changes in the fair value of these hedging instruments are recorded as other comprehensive income (loss), a component of stockholders’ equity, to the extent they are effective and in earnings when they are ineffective.  The Company did not execute any new interest rate swap or interest rate cap agreements during 2017, 2016 or 2015 and all existing swap agreements matured by May 2016.

 

Stock-Based Compensation

 

Prior to the Effective Date, the Company recognized compensation expense for time-based stock option awards granted based on the estimated grant date fair value of the award calculated using the Black-Scholes option pricing model.  Under the fair value recognition provisions, the Company recognized share-based compensation expense only for those shares expected to vest.  The Company recognized total compensation expense of share-based awards subject only to service-based vesting conditions, net of expected forfeitures, on a straight-line basis over the requisite service period of the award which is generally the vesting period.

 

In October 2009 and June 2013, pursuant to the 2009 Long-Term Incentive Pool Plan, the Company granted its employees stock options and restricted share-awards with vesting subject to performance and service-based conditions.  The Company was required to assess the probability that such performance conditions would be met.  If the likelihood of the performance condition being met was deemed probable, the Company would recognize expense over the estimated requisite service period.  The Company uses Monte Carlo simulation models to estimate the fair value of performance based stock option and restricted share awards.

 

In connection with the plan of reorganization as described in Note 1, all obligations of the Company under its Predecessor stock-based compensation plans were discharged and effectively cancelled all outstanding stock options and restricted shares.  As a result, the Company recorded a

 

24



 

Modular Space Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(In thousands except share data)

 

reorganization adjustment which reflects accelerated recognition of compensation expense of $847, representing the unrecognized stock compensation related to Predecessor awards which were cancelled in connection with the plan of reorganization.

 

Pursuant to the plan of reorganization, the Company issued restricted stock units through its Management Incentive Plan.  The fair value of restricted stock units is calculated using the Monte Carlo simulation model.  The Company recognizes compensation expense related to restricted stock units only for those units expected to vest, taking into account performance and serviced based conditions. If the likelihood of the performance condition being met is deemed probable, the Company will recognize expense over the estimated requisite service period.

 

Advertising Costs

 

The Company incurs advertising costs to support sales and marketing initiatives.  Such costs were $1,978, $1,194, $3,206 and $3,222 for the Successor period ended September 30, 2017, the Predecessor period ended March 2, 2017 and the Predecessor years ended September 30, 2016, and September 30, 2015, respectively, and are included within selling, general, and administrative expenses on the consolidated statements of operations. Advertising costs are expensed as incurred.

 

Recent Accounting Pronouncements

 

ASU No. 2014-09 - Revenue from Contracts with Customers was issued in May 2014, which establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most of the existing revenue recognition guidance. The core principle of ASU 2014-09 is that an entity recognizes revenue at the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying the new guidance, the Company must (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the contract’s performance obligations; and (5) recognize revenue when the Company satisfies a performance obligation. ASU 2014-09 applies to all contracts with customers except those that are within the scope of other topics in the FASB Accounting Standards Codification. The amendments in this Update are effective for annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019 as amended by ASU 2015-14. The impact of adopting this ASU has not been determined by the Company.

 

ASU No. 2015-14 - Revenue from Contracts with Customers, Deferral of the Effective Date, was issued in August 2015, which stated that non-public entities should apply the guidance in Update 2014-09 to annual reporting periods beginning after December 15, 2018. Non-public entities may apply the guidance in Update 2014-09 earlier as of an annual reporting period beginning after December 15, 2016. Non-public entities also may apply the guidance in Update 2014-09 earlier as of an annual reporting period beginning after December 15, 2016, and interim reporting periods within annual reporting periods beginning one year after the annual reporting period in which the entity first applies the guidance in Update 2014-09. The impact of adopting this ASU has not been determined by the Company.

 

ASU No. 2016-02 - Leases (Topic 842), was issued in February 2016, which will increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The

 

25



 

Modular Space Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(In thousands except share data)

 

amendments in this Update are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted. The impact of adopting this ASU has not been determined by the Company.

 

ASU No. 2016-09 - Improvements to Employee Share-Based Payment Accounting was issued in March 2016. The areas for simplification in this Update involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Some of the areas for simplification apply only to nonpublic entities. The amendments are effective for annual periods beginning after December 15, 2017. Early adoption is permitted for any entity in any interim or annual period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The impact of adopting this ASU has not been determined by the Company.

 

ASU No. 2016-10 - Revenue from Contracts with Customers, Identifying Performance Obligations and Licensing was issued in April 2016. This amended FASB’s new recognition guidance on identifying performance obligations to allow entities to disregard items that are immaterial in the context of the contract, clarify when a promised good or service is separately identifiable (i.e., distinct within the context of the contract) and allow an entity to elect to account for the cost of shipping and handling performed after control of a good has been transferred to the customer as a fulfillment cost (i.e., an expense). The impact of adopting this ASU has not been determined by the Company.

 

ASU No. 2016-12 - Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients was issued in May 2016 and amends ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective.  The amendments in this update clarify that, for a contract to be considered completed at transition, all (or substantially all) of the revenue must have been recognized under legacy GAAP. This Update also added an expedient to ease transition for contracts that were modified prior to adoption of the new revenue standard, clarifies how an entity should evaluate the collectability threshold and when an entity can recognize non-refundable considerations received as revenue if the arrangement does not meet the standard’s contract criteria. The amendments in this Update should be adopted concurrent with adoption of ASU 2014-09. The impact of adopting this ASU has not been determined by the Company.

 

ASU No. 2016-15 - Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force) was issued in August 2016 and provides clarification about the presentation and classification of certain cash flow items including debt prepayments, debt extinguishment costs, contingent considerations payments, and insurance proceeds, among other things. The guidance in this Update is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted. The impact of adopting this ASU has not been determined by the Company.

 

ASU No. 2016-16 - Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory was issued in October 2016. The amendments in this Update require that entities recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs as opposed to when the asset is transferred to an outside party as required under current U.S. GAAP. The guidance in this Update is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after

 

26



 

Modular Space Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(In thousands except share data)

 

December 15, 2019. Early adoption is permitted. The impact of adopting this ASU has not been determined by the Company.

 

ASU No. 2017-09 - Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting was issued in May 2017. This amendment provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The amendments in this Update are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted. The impact of adopting this ASU has not been determined by the Company.

 

Recently Adopted Guidance

 

ASU No. 2013-05 - Foreign Currency Matters (Topic 830)- Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity. This ASU addresses the accounting for the cumulative translation adjustment when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary. For the Company, the update is effective prospectively beginning on October 1, 2015. The impact of adopting this ASU is not material to the Company.

 

ASU No. 2014-12 - Compensation-Stock Compensation (Topic 718) - Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period a consensus of the FASB Emerging Issues Task Force. The amendments in this update require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The amendments in this update are effective for the Company for annual periods and interim periods beginning on October 1, 2016. Earlier adoption is permitted. Adoption of this ASU is not material to the Company.

 

ASU 2014-15 -  Presentation of Financial Statements — Going Concern, which provides guidance that explicitly requires an entity’s management to assess the entity’s ability to continue as a going concern. The new guidance requires an entity to evaluate, at each interim and annual period, whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date the financial statements are issued (or are available to be issued) and to provide related disclosures, if applicable. Management adopted ASU 2014-15 in 2016 and identified certain conditions and events which are disclosed in Note 1 to the financial statements.

 

ASU No. 2015-03 - Interest — Imputation of Interest (Subtopic 835-30) - Simplifying the Presentation of Debt Issuance Costs, was issued in April 2015 and was updated by ASU 2015-15 - Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements, in August of 2015. ASU No. 2015-03 simplifies the presentation of

 

27



 

Modular Space Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(In thousands except share data)

 

debt issuances costs. Debt issuance costs related to a recognized debt liability will be presented on the balance sheet as a direct deduction from the debt liability, similar to the presentation of debt discounts. Under current U.S. GAAP, debt issuance costs are reported on the balance sheet as assets. The costs will continue to be amortized to interest expense using the effective interest method. This standard is effective for the Company on October 1, 2016. The application of this guidance will result in a reclassification of debt financing costs from assets to a reduction of the specific debt liability, and will not affect the Company’s consolidated statement of operations or cash flow. The impact of adopting this ASU is not material to the Company.

 

ASU No. 2015-17 - Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes was issued in November 2015. The amendment requires deferred tax liabilities and assets to be classified as noncurrent. The amended guidance is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company adopted this ASU in 2017 and retrospectively applied it to 2016.

 

ASU No. 2016-03 - Effective Date and Transition Guidance was issued in March 2016. The amendments in this Update remove the effective date of the private company alternative for accounting for Goodwill and provides transition provisions that permit private companies that voluntarily elect the goodwill accounting alternative provided in Update 2014-02 to apply the accounting alternative prospectively.

 

Additionally, the amendments also include transition provisions that allow private companies to forgo a preferability assessment the first time they elect the accounting alternatives within the scope of this Update. Forgoing an initial preferability assessment allows private companies to adopt a private company accounting alternative within the scope of this Update when those companies experience a change in circumstances or management’s strategic plan.

 

Estimates

 

In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and reported revenues and expenses.  Actual results could differ from those estimates.  The most significant estimates included within the financial statements are the allowance for doubtful accounts, the estimated useful lives and residual values of the rental equipment and other property and equipment, and potential asset impairments of intangibles.

 

In recent years there have been significant challenges in many of the markets we operate as a result of a general economic downturn.  These challenges may continue to exist in future years and may result in decreased demand for our products which may have a significant impact on our business and we may need to revise certain estimates we have made.

 

Reclassifications

 

Certain prior year amounts have been reclassified to conform to the current year presentation.

 

Correction of Prior Period Errors (Predecessor)

 

In connection with the Company’s year-end close processes in 2016 and 2015, the Company identified accounting errors related to prior periods.  Prior period financial statements were not revised.  The correction of these errors resulted in an increase to pretax loss of $282, and an

28



 

Modular Space Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(In thousands except share data)

 

increase to tax expense of $1,020 in 2016 and increase to pretax loss of $2,400 in 2015.  The errors and correction thereof are not material to any affected period as the adjustments are not material to the current or prior period financial statements taken as a whole.

 

3.                            Lease Receivables

 

The components of lease receivables, which include both direct financing leases and sales-type leases, at September 30, 2017 and 2016, are as follows:

 

 

 

Successor

 

 

Predecessor

 

 

 

2017

 

 

2016

 

Minimum lease payments receivable

 

$

2,396

 

 

$

3,615

 

Allowance for doubtful accounts

 

(63

)

 

(194

)

Less unearned income

 

(304

)

 

(478

)

Net investment in lease receivables

 

$

2,029

 

 

2,943

 

 

Interest recognized on lease receivables of $159, $133, $346, and $455 for the Successor period ended September 30, 2017, the Predecessor period ended March 2, 2017 and the Predecessor years ended September 30, 2016, and September 30, 2015, respectively, is included in leasing revenue.

 

As of September 30, 2017, future minimum lease payments under non-cancellable finance leases to be received in 2018 and thereafter are as follows:

 

Fiscal year ending September 30,

 

 

 

2018

 

$

1,071

 

2019

 

623

 

2020

 

428

 

2021

 

243

 

2022

 

31

 

Thereafter

 

 

Minimum lease payments receivable

 

$

2,396

 

 

29



 

Modular Space Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(In thousands except share data)

 

4.                            Operating Lease Receivables

 

As of September 30, 2017, future minimum rental payments due to the Company under non-cancellable operating leases of rental equipment to be received in 2018 and thereafter are as follows:

 

Fiscal year ending September 30.

 

 

 

2018

 

$

88,307

 

2019

 

29,265

 

2020

 

11,147

 

2021

 

4,910

 

2022

 

1,816

 

Thereafter

 

206

 

Minimum Operating Lease Receivables

 

$

135,651

 

 

5.                            Rental Equipment

 

The components of rental equipment at September 30, 2017 and 2016 are as follows:

 

 

 

Successor

 

 

Predecessor

 

 

 

2017

 

 

2016

 

Mobile offices and modular structures

 

$

883,202

 

 

$

1,425,417

 

Additional lease costs

 

1,771

 

 

2,112

 

 

 

884,973

 

 

1,427,529

 

Less accumulated depreciation

 

(29,571

)

 

(399,499

)

Rental equipment, net

 

$

855,402

 

 

$

1,028,030

 

 

Depreciation expense of rental equipment of $29,811, $26,288, $62,558, and $72,011 for the Successor period ended September 30, 2017, the Predecessor period ended March 2, 2017 and the Predecessor years ended September 30, 2016, and September 30, 2015, respectively, is included in total leasing and sales costs in the consolidated statements of operations.  Included in depreciation expense is $493, $4,490, $7,455, and $15,206 of accelerated depreciation expense for the Successor period ended September 30, 2017, the Predecessor period ended March 2, 2017 and the Predecessor years ended September 30, 2016 and 2015, respectively, in connection with assets that were rebuilt as part of the Company’s refurbishment capabilities.

 

As a result of the application of fresh start accounting, the Company’s rental equipment was recorded at fair value on the Effective Date.  Accordingly, accumulated depreciation was reset to $0 on March 2, 2017.

 

30



 

Modular Space Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(In thousands except share data)

 

6.                            Other Property and Equipment

 

The components of other property and equipment at September 30, 2017 and 2016 are as follows:

 

 

 

Successor

 

 

Predecessor

 

 

 

2017

 

 

2016

 

Buildings

 

$

17,295

 

 

$

35,692

 

Modular Offices and related improvements

 

7,355

 

 

13,555

 

Leasehold Improvements

 

16,966

 

 

25,481

 

Computer equipment and software

 

7,767

 

 

28,794

 

Office Furniture, Fixtures, and Other

 

2,335

 

 

8,252

 

 

 

51,718

 

 

111,774

 

Less accumulated depreciation and amortization

 

(4,665

)

 

(55,055

)

 

 

47,053

 

 

56,719

 

Land

 

79,987

 

 

64,843

 

Other property and equipment, net

 

$

127,040

 

 

$

121,562

 

 

Depreciation and amortization expense of other property and equipment of $5,085, $3,419, $7,637, and $5,688 for the Successor period ended September 30, 2017, the Predecessor period ended March 2, 2017 and the Predecessor years ended September 30, 2016, and September 30, 2015, respectively, is included in selling, general and administrative expenses in the consolidated statements of operations.

 

In September 2015, the Company sold and leased-back from the buyer land and a building in California resulting in gross proceeds of $29,525 and a deferred gain of $13,731.  The net proceeds from the sale were used to pay down the Company’s asset based revolver.  The deferred gain was to be recognized on a straight-line basis over the expected lease term of 10 years, and presented as a reduction of facilities’ rent expense included in selling, general and administrative expenses in the consolidated statements of operations. The Company recognized $572 and $1,373 of amortization expense related to the deferred gain in the Predecessor periods ended March 2, 2017 and September 30, 2016.  Pursuant to the agreement, the term of the lease is 10 years with two 5-year renewal options.  The 10-year lease term resulted in a lease commitment of $15,518.  Upon adoption of fresh start accounting, the Company recognized the remaining deferred gain $11,786 as a fresh start adjustment in the Predecessor period ended March 2, 2017.  See Note 1 for further information.

 

As a result of the application of fresh start accounting, the Company’s other property and equipment was recorded at fair value on the Effective Date.  Accordingly, accumulated depreciation and amortization was reset to $0 on March 2, 2017

 

31



 

Modular Space Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(In thousands except share data)

 

7.                            Goodwill and Other Intangible Assets

 

In 2016, the Company recognized an impairment of goodwill in the amount of $35,484 related to the annual impairment review of its Canada operations.  The remaining Goodwill attributable to Canada was $9,952.

 

In applying fresh start accounting, the reorganization value, which represents the concluded enterprise value plus cash and cash equivalents and non-interesting bearing liabilities, of the Predecessor was allocated to the entity’s net assets in conformity with ASC 805.

 

In connection with the adoption of fresh start accounting, the Company reviewed its lease arrangements and determined that certain leases were at favorable market terms.  Accordingly, the Company recognized a leasehold interest asset in the amount of $4,810. In addition, in connection with the fresh start accounting valuation, the Company established an indefinite-lived trade name/trademark asset in the amount of $8,718 as of the Successor date.  No Successor goodwill was identified in connection with the adoption of fresh start accounting.

 

The following table reflects the components of goodwill and other intangible assets as of September 30, 2017 and 2016:

 

 

 

 

 

Successor
2017

 

 

Predecessor
2016

 

 

 

Remaining

 

Gross

 

 

 

 

 

 

Gross

 

 

 

 

 

 

 

Useful

 

Carrying

 

Accumulated

 

 

 

 

Carrying

 

Accumulated

 

 

 

 

 

Life (Years)

 

Amount

 

Amortization

 

Impairment

 

 

Amount

 

Amortization

 

Impairment

 

Customer relationships

 

 

 

 

 

 

$

32,514

 

$

32,514

 

$

 

Trade name / Trademark

 

Indefinite

 

8,718

 

 

 

 

4,000

 

 

 

Leasehold interest

 

7.3

 

4,810

 

384

 

 

 

 

 

 

Noncompete agreements

 

 

 

 

 

 

7,977

 

7,977

 

 

Software

 

 

 

 

 

 

1,200

 

1,200

 

 

Goodwill

 

 

 

 

 

 

44,446

 

 

35,484

 

 

 

 

 

$

13,528

 

$

384

 

$

 

 

$

90,137

 

$

41,691

 

$

35,484

 

 

The changes in the carrying amount of goodwill are as follows:

 

Balance as of September 30, 2016 (Predecessor)

 

$

9,952

 

Translation adjustment

 

(215

)

Fresh start fair value adjustment

 

(9,737

)

Balance as of March 2, 2017 (Predecessor)

 

$

 

Balance as of September 30, 2017 (Successor)

 

$

 

 

32



 

Modular Space Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(In thousands except share data)

 

8.                            Debt

 

Bankruptcy Filing

 

Pursuant to the Plan, significant transactions occurred upon emergence in connection with the Company’s borrowing arrangements.

 

The Company’s first lien lenders provided an amended and restated 4-year revolving credit facility and associated term loans. The total consolidated commitment under the new credit facility is $716,688 including a U.S. revolving credit facility of $496,838, a Canadian revolving credit facility of $149,222, and U.S. term loans in an original principal amount of $70,628.  Additionally, $375,000 of 10.25% senior secured second lien notes due 2019, plus outstanding and accrued interest of $41,641 and an $89,939 cash investment by the second lien noteholders were exchanged for 97% of the post-emergence Company’s common stock.

 

New Credit Agreement: Asset Based Revolver and Terms Loans (Successor)

 

On March 2, 2017, the Company executed the Fourth Amended and Restated Loan and Security Agreement (the “New Credit Agreement”), resulting in a $716,688 Asset Based Lending Facility (the “ABL Facility”) governed by the New Credit Agreement. The total consolidated commitment of $716,688 is comprised of a U.S. revolving credit facility of $496,838, a Canadian revolving credit facility of $149,222 (subject to scheduled quarterly reductions), and U.S. term loans in an original principal amount of $70,628 (subject to scheduled quarterly amortization). The ABL Facility is a four-year credit facility and matures on March 2, 2021. The Company’s obligations and the obligations of the borrowers and the subsidiary guarantors under the New Credit Agreement are secured by a first lien on substantially all of the Company’s assets.

 

As of September 30, 2017, there was approximately $513,886 of borrowings outstanding under the New Credit Agreement, inclusive of $67,613 of term loans as follows:

 

 

 

Successor

 

 

Predecessor

 

 

 

September 30, 2017

 

 

September 30, 2016

 

Term loans

 

67,613

 

 

 

Less: current portion of term loans

 

(5,664

)

 

 

Total long-term debt

 

$

61,949

 

 

$

 

 

Scheduled repayments of the term loans were as follows:

 

Fiscal year ending September 30,

 

 

 

2018

 

$

5,664

 

2019

 

7,788

 

2020

 

9,912

 

2021

 

44,249

 

 

 

$

67,613