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The accompanying notes are an integral part of these statements. The accompanying notes are an integral part of these statements. The accompanying notes are an integral part of these statements. The accompanying notes are an integral part of these statements. Hazeldine Drillfield Equipment Maintenance, Inc. Notes to Financial Statements For The Years Ending December 31, 2015 And 2014 Note 1 - Summary of Significant Accounting Policies a. Nature of business Hazeldine Drillfield Equipment Maintenance, Inc (Company) was incorporated in the State of Oklahoma on January 2, 2014 and began providing equipment maintenance services to oil and gas exploration companies in the Great Plains. The Company operates under a license from the EPA to provide these services. b. Accounting Method: The Company's financial statements are prepared in accordance with the Generally Accepted Accounting Principles (GAAP) of the United States. As such, management is required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses and disclosure of contingent assets and liabilities. Actual results may differ from those estimates and assumptions. c. Revenue Recognition: Service revenue is recorded as services are performed on contract. In accordance with ASC 605-10-25-1, the Company recognizes revenue when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable and collectability is reasonably assured. d. Accounts receivable: Accounts receivable are recorded at their original carrying value less allowances for estimated uncollectible accounts. e. Supplies on Hand: Supplies on hand are stated at cost, which does not exceed market. The Company uses the first-in first-out inventory method to determine cost. f. Prepaid insurance: Prepaid insurance consists of a two-year insurance policy that will expire in 2016. g. Property, Plant, and Equipment: Property, plant, and equipment are stated at cost and depreciation is computed using the straight-line method at rates based upon the estimated useful lives of the assets. The major classes of assets owned by the Company follow: Equipment Vehicles 5 years 6 years Expenditures for repairs and maintenance are charged to expense as incurred. Expenditures for major renewals and betterments, which significantly extend the useful lives of existing plant and equipment, are capitalized and depreciated Note 1 - Summary of Significant Accounting Policies - continued h. Licensing Agreement: The licensing agreement is stated at cost less accumulated amortization. The license is amortized using the straight-line method over the five years of the license agreement. i. Investment securities: The Company purchased marketable securities, which we have classified as \"available for sale\" securities. Our marketable securities are marked to market on an annual basis, with unrealized gains and losses being excluded from earnings and reflected as a component of other comprehensive income. j. Income Taxes: Income tax expense includes federal and state income taxes currently payable and those deferred because of temporary differences between the financial statement and tax bases of assets and liabilities. The deferred income tax classified under Current Assets or Liabilities represents temporary differences relating to current assets and liabilities. The deferred income tax classified under Long Term Assets or Liabilities represents temporary differences relating to noncurrent assets and liabilities. k. Earnings per Share Earnings per share is calculated by dividing net income (loss) available to common stockholders by the weighted average shares outstanding during the year. Weighted average number of common shares outstanding during the year were 10,000 in both 2015 and 2014. Note 2 - Note Payable On March 15, 2015, the Company borrowed $320,000 at a fixed interest rate of 7.20%. Proceeds from the note were used to finance vehicles. The terms of the note require five payments of $86, 953 annually on March15, beginning in 2016. The note is secured by the vehicles and loan covenants require a minimum current ratio and a maximum long-term liabilities to equity ratio and restrict payment of dividends, increases in officers' salaries, and loans to officers. The Company is in compliance with all of the loan covenants at year end. In 2015, interest of $18,240 was incurred with $2,980 capitalized as of part of the modifications to the vehicles. No interest was paid in 2015. Note 3 - Leases and Other Commitments The company leases certain facilities and equipment under operating leases. Operating leases are not capitalized and lease payments are expensed over the life of the lease. An analysis of the 2015 and 2014 rent expense by property Note 3 - Leases and Other Commitments - continued leased In accordance with ASC 840-20-50-1 follows: Description Shop rent Office rent Trucks Furniture Total Lease Payments Less: Capitalized portion 2015 2014 $ 35,000 $ 35,000 7,000 7,000 30,000 70,000 6,000 6,000 78,000 118,000 (2,980) $ 75,020 $ 118,000 Future minimum lease commitments for all non-cancelable leases as of December 31, 2015 are as follows: Future Lease Payments 2016 2017 2018 2019 2020 Thereafter $ 48,000 48,000 48,000 - Total future minimum lease payments $ 144,000 Note 4 - Income Taxes Income tax expense (benefit) consists of the following: Current tax payable Change in deferred tax Income tax expense (benefit) 2015 2014 $ 136,377$ (20,794) (2,938) $ 115,583 $ (2,938) Reported tax payable at December 31, 2015, after applying the 2014 net operating loss tax benefit of $2,938, is $136,377. No income tax payments were made in 2015 or 2014. The effective tax rate for 2015 is 33.08% differs from the expected rate of 35% due to the benefit of lower tax rates on the first $100,000 of taxable income. The effective rate for 2014 differs from the expected rate of 35% due to the valuation allowance applied to the expected benefit at December 31, 2014. Note 4 - Income Taxes - continued The components of deferred tax assets and liabilities at December 31, 2015 and 2014 were as follow: 2015 Deferred tax asset Accounts receivable Net operating loss carryforward Deferred revenue Deferred tax asset Deferred tax liabilities Shop equipment Vehicles Deferred tax liabilities Net deferred tax asset $ 9,180 $ 19,720 28,900 (1,428) (3,470) (5,168) 2014 2,398 2,398 - $ (23,732) $ 2,398 Note 5 - Preferred and Common Stock The Company issued 500 shares of preferred stock on January 2, 2014 to each the two principals. The preferred stock has two features, it is cumulative and it is the only class of voting stock issued by the Company. The dividends for 2014 and 2015 have not been paid. The Company issued 10,000 shares of common stock on January 2, 2014 to family members of the Company principals. All shares of common stock are nonvoting shares. Note 6 - Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash: The carrying amount approximates fair market value because of the short maturity of the instruments. Marketable Securities: The fair value of the Company's investments in marketable securities is based on quoted prices for the securities after the close of trading on the relevant securities markets on December 31. Note Payable: The fair value of the Company's note payable is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. Note 6 - Fair Value of Financial Instruments - continued The estimated fair values of the Company's financial instruments at December 31, 2012 and 2011 are as follows: 2015 Carrying Amount 2014 Fair Value Financial Assets: Cash and short-term investments Marketable securities $ 360,674 65,000 $ 360,674 65,000 Financial liabilities Note payable $ 288,000 $ 288,000 Carrying Amount $2,020 - Fair Value $2,020 - - - Note 7 - Information about Major Customers The Company's source of revenue was composed of nine maintenance contracts during 2015 and six contracts during 2014. Five contracts qualify as major customers in accordance with ASC 280-10-50-42 in 20X2 and individually provided a range of 12 to 16 percent of total revenues earned during 2015. Four customers each provided a range of 14 to 26 percent of revenues earned during 2014. Note 8 - Reconciliation of Net Income (Loss) to Net Cash Flows from Operating Activities The schedule showing the reconciliation of net income for 2015 and 2014 to the net cash flows from operating activities in accordance with ASC 230-10-45-30 is presented below: 2015 Adjusted 2016 Trial Bal Fall 2016 Acct # Account Description 101 Cash 105 Accounts Receivable 106 Accounts Receivable - Progress Billings 108 Allowance for Bad Debts 111 Equity Securities - Short-term 112 Fair Value Adjustment 121 Merchandise Inventory 122 Raw Materials 123 Work in Progress 124 Manufacturing Costs - Variable 125 Manufacturing Costs - Fixed 126 Construction Work in Progress 127 Construction WIP - Progress Billings 129 Supplies on Hand 132 Prepaid Insurance 135 Prepaid Pension Expense 141 Deferred Income Tax - Current 142 NOL Tax Benefit 143 NOL Valuation Allowance 151 Land 161 Buildings 162 Buildings - Accumulated Depreciation 171 Equipment 172 Equipment - Accumulated Depreciation 181 Vehicles 182 Vehicles - Accumulated Depreciation 191 Leased Assets 192 Leased Assets - Accumulated Depreciation 201 Equity Securities - Long-term 202 Equity Securities - Equity Method 211 License 212 Goodwill 214 Pension Asset 215 Deferred Income Tax - Long-term 216 Deferred Income Tax - Pension 217 Start-up Costs 221 Deferred R&D Costs 301 Accounts Payable - Inventoriable Costs 302 Accounts Payable - Suppliers - Other Costs 303 Accounts Payable - Equipment Acquisition 305 Wages Payable 311 Interest Payable - Notes 312 Interest Payable - Lease Liablilty 313 Interest Payable - Bonds 314 Income Tax Payable 315 Deferred Income Taxes - Current Dr (Cr) 360,674 128,000 (27,000) 65,000 8,730 200 35,000 (14,000) 330,000 (55,000) 15,000 23,732 (23,074) (7,980) (18,240) (136,377) - Dr (Cr) 649,532 189,000 (27,000) 65,000 12,185 300 35,000 (21,000) 330,000 (110,000) 10,000 23,732 (10,135) (19,918) (9,392) (82,870) - Adjusting Entries ref Dr 321 Short-term Portion of L-T Notes 322 Short-term Portion of L-T Lease Liability 323 Short-term Portion of L-T Bonds 335 Unearned Revenue 401 Long-term Debt - Notes 402 Less: Current Maturity of LT Notes 403 Capital Leases - Liability 404 Less: Current Maturity of Capital Lease 405 Long-term Bonds Payable 406 Less: Current Maturity of Bonds Payable 407 Discount on Bond Payable 408 Premium on Bond Payable 414 Accrued Pension Liability 421 Deferred Income Tax - Long-term 422 Warranty Liability 423 Non-Current Pension Liability 451 Capital Stock - Preferred 452 Paid-in Capital - Preferred 461 Capital Stock - Common 462 Paid-in Capital - Common 469 Paid-in Capital - Treasury 471 OCI - Market Gain/Loss - LT Equity Securities 472 OCI - Mkt Gain/Loss Tax (Benefit) Loss 475 OCI - Prior Service Cost - Pensions 476 OCI - Deferred Pension Tax (Benefit) Expense 477 OCI - Unrecognized (Gain) Loss -Pension 491 Retained Earnings 492 Retained Earnings - Cash Dividends 493 Retained Earnings - Stock Dividends 494 Retained Earnings - Error Correction 495 Retained Earnings - Cumulative Effect 499 Treasury Stock 501 Sales Revenue 505 Service Revenue 511 Construction Revenue 521 Cost of Goods Sold - Inventory 522 Cost of Goods Sold - Air Freight 523 Cost of Goods Sold - Warehouse Rent 551 Service Costs - Direct - Crew Wages 552 Service Costs - Direct - Truck Rental 553 Service Costs - Direct - Fuel 554 Service Costs - Direct - R & M 561 Service Costs - Indirect - Shop Wages 562 Service Costs - Indirect - Shop Utilities 563 Service Costs - Indirect - Shop Rent 564 Service Costs - Indirect - Supplies 581 Cost of Contruction Revenue Earned 601 Selling & Admin - Utilities (63,913) (58,000) (288,000) 63,913 (100,000) (10,000) (10,000) 15,142 (1,220,000) 294,000 15,000 44,800 104,350 17,438 27,945 25,570 4,680 (63,913) (58,000) (224,087) 63,913 (100,000) (10,000) (10,000) (218,665) (1,943,000) 382,200 65,480 42,673 135,655 21,450 48,333 33,600 4,290 602 Selling & Admin - Office Rental 603 Selling & Admin - Medical Benefits 604 Selling & Admin - Pension Expense 605 Selling & Admin - Officers' Salaries 606 Selling & Admin - Rent - Equipment 607 Selling & Admin - Supplies 608 Selling & Admin - Other Salaries 609 Selling & Admin - Professional Fees 610 Selling & Admin - Insurance 614 Selling & Admin - Payroll and Other Taxes 615 Selling & Admin - Other 631 Selling & Admin - Sales Sal & Comm 632 Selling & Admin - Warehouse Wages 651 Selling & Admin - Bad Debts 652 Selling & Admin - Penalties 680 Start Up - Crew Training 701 Truck Depreciation 704 Shop Equipment Depreciation 706 Warehouse Depreciation 710 Amortization of Licensing Costs 711 Amortization of Start-up Costs 712 Amortization of Capital Leases 713 Amortization of R&D Costs 751 Interest Expense - Note Payable 752 Interest Expense - Capital Lease 753 Interest Expense - Bonds 801 Market (Gain) Loss - Short-term Equity Sec 802 Realised Gain - Market Equitable Securities 803 Investment Income - Mkt Eq Sec - ST 804 Investment Income - Mkt Eq Sec - LT 805 Investment Income - Equity Method Invest 808 Inventory Over/Short 809 Market Loss on Inventory 811 R&D Expense 821 Income Tax Expense - Current 822 Income Tax Expense - Deferred 860 Discontinued Operations 6,000 79,400 4,000 6,000 52,000 2,750 2,400 68,867 6,050 27,000 55,000 7,000 5,000 15,360 136,377 (20,794) 9,667 42,500 146,000 180,000 4,000 16,500 34,000 5,500 3,500 69,951 9,468 16,500 55,000 7,000 5,000 14,192 (25,000) (3,750) 205,609 - - - - - - - 2016 Adjusted Adjusting Entries ref Cr Dr (Cr) 649,532 189,000 (27,000) 65,000 12,185 300 35,000 (21,000) 330,000 (110,000) 10,000 23,732 (10,135) (19,918) (9,392) (82,870) - (63,913) (58,000) (224,087) 63,913 (100,000) (10,000) (10,000) (218,665) (1,943,000) 382,200 65,480 42,673 135,655 21,450 48,333 33,600 4,290 9,667 42,500 146,000 180,000 4,000 16,500 34,000 5,500 3,500 69,951 9,468 16,500 55,000 7,000 5,000 14,192 (25,000) (3,750) 205,609 - - - - Hazeldine Drillfield Equipment Maintenace Company, Inc. Balance Sheet December 31, Assets 2016 Current Assets Cash Marketable Securities $ 649,532 $ 65,000 2015 360,674 65,000 Hazeldine Drillfield Equipment Maintenace Company, Inc. Statement of Income For the year ended December 31, 2016 2015