ENTREC CORPORATION Interim Consolidated Financial Statements (unaudited) September 30, 2018

Transcription

1 ENTREC CORPORATION Interim Consolidated Financial Statements September 30,

2 REVIEW OF INTERIM FINANCIAL STATEMENTS Under National Instrument , Part 4, subsection 4.3(3)(a), if an auditor has not performed a review of the interim consolidated financial statements, the statements must be accompanied by a notice indicating that the financial statements have not been reviewed by an auditor. The accompanying unaudited interim consolidated financial statements of the Company have been prepared by ENTREC Corporation management. The Company s independent auditor has not performed a review of the accompanying unaudited interim consolidated financial statements in accordance with the standards established by CPA Canada for a review of interim financial statements by an entity s auditor.

3 Interim Consolidated Statements of Financial Position As at (thousands of Canadian dollars) September 30 December 31 ASSETS Current assets Cash Trade and other receivables 38,992 34,313 Income taxes receivable Inventory 1,784 2,022 Prepaid expenses and deposits 3,430 2,497 44,436 39,424 Non-current assets Long-term deposits and other assets Property, plant and equipment 172, ,071 Intangible assets Total assets 217, ,496 LIABILITIES AND SHAREHOLDERS EQUITY Current liabilities Trade and other payables 13,651 11,203 Income taxes payable Current portion of deferred leasehold inducements Current portion of long-term debt (note 5) Current portion of obligations under finance lease (note 6) ,243 12,372 Non-current liabilities Deferred leasehold inducements 8,177 8,591 Long-term debt (note 5) 134, ,679 Obligations under finance lease (note 6) Convertible debentures (note 7) 17,200 16,268 Deferred income taxes 6,049 9,707 Total liabilities 181, ,705 Shareholders equity Share capital (note 8) 133, ,113 Contributed surplus 10,523 10,294 Convertible debentures equity (note 7) 1,028 1,028 Deficit (110,421) (100,715) Accumulated other comprehensive income 1,509 1,071 Total shareholders equity 35,831 44,791 Total liabilities and shareholders equity 217, ,496 (see accompanying notes) 3

4 Interim Consolidated Statements of Loss (thousands of Canadian dollars, except per share amounts) Three Months Ended Sept 30 Sept 30 Nine Months Ended Sept 30 Sept 30 Revenue (notes 13 and 14) 43,400 36, , ,888 Direct costs 34,691 30, ,616 91,861 Gross profit 8,709 6,373 20,772 18,027 Operating expenses General and administrative expenses 3,819 3,743 10,829 10,535 Depreciation of property, plant and equipment 4,872 5,158 14,886 16,025 Amortization of intangible assets Share-based compensation Loss (gain) on disposal of property, plant and equipment 121 (204) 90 (346) 8,931 8,972 26,316 27,215 Loss before finance items and income taxes (222) (2,599) (5,544) (9,188) Finance items (note 11) Finance costs 2,771 2,250 8,022 6,335 Foreign exchange gain on long-term debt (1,837) - (378) (856) 934 2,250 7,644 5,479 Loss before income taxes (1,156) (4,849) (13,188) (14,667) Income taxes Current (315) Deferred (1,003) (1,089) (3,658) (2,965) (964) (1,081) (3,482) (3,280) Net loss (192) (3,768) (9,706) (11,387) Loss per share basic (note 10) (0.00) (0.03) (0.09) (0.10) Loss per share diluted (note 10) (0.00) (0.03) (0.09) (0.10) (see accompanying notes) 4

5 Interim Consolidated Statements of Comprehensive Loss (thousands of Canadian dollars) Three Months Ended Sept 30 Sept 30 Nine Months Ended Sept 30 Sept 30 Net loss (192) (3,768) (9,706) (11,387) Other comprehensive (loss) income Exchange differences on translation of foreign operations (342) (334) 438 (521) Other comprehensive (loss) income (342) (334) 438 (521) Total comprehensive loss (534) (4,102) (9,268) (11,908) (see accompanying notes) 5

6 Interim Consolidated Statements of Shareholders Equity (thousands of Canadian dollars) Share capital Contributed surplus Convertible debentures - equity Deficit Accumulated other comprehensive income Total Balance, Dec. 31, ,944 9,891 1,028 (86,399) 1,639 59,103 Net loss (11,387) - (11,387) Other comprehensive loss (521) (521) Total comprehensive loss (11,387) (521) (11,908) Share-based compensation Shares issued pursuant to restricted shares 100 (100) Balance, Sept 30, 133,044 10,307 1,028 (97,786) 1,118 47,711 Balance, Dec. 31, 133,113 10,294 1,028 (100,715) 1,071 44,791 Net loss (9,706) - (9,706) Other comprehensive income Total comprehensive loss (9,706) 438 (9,268) Share-based compensation Shares issued pursuant to restricted shares 79 (79) Balance, Sept 30, 133,192 10,523 1,028 (110,421) 1,509 35,831 (see accompanying notes) 6

7 Interim Consolidated Statements of Cash Flows Nine months ended (thousands of Canadian dollars) Sept 30 Sept 30 Operating activities Net loss (9,706) (11,387) Items not affecting cash: Depreciation of property, plant and equipment 14,886 16,025 Amortization of intangible assets Share-based compensation Loss (gain) on disposal of property, plant and equipment 90 (346) Amortization of deferred leasehold inducements (447) (456) Amortization of deferred financing costs 1,084 1,292 Foreign exchange gain on long-term debt (378) (856) Deferred income taxes (3,658) (2,965) 2,382 2,308 Net change in non-cash operating working capital (note 12) (2,155) (6,558) Cash provided by (used in) operating activities 227 (4,250) Investing activities Purchase of property, plant and equipment (4,226) (4,308) Proceeds on disposal of property, plant and equipment 4,305 7,438 Change in long-term deposits and other assets (1) (20) Cash provided by investing activities 78 3,110 Financing activities Proceeds from issuance of long-term debt 82,640 30,648 Repayment of long-term debt (82,580) (28,438) Repayment of obligations under finance lease (423) (881) Cash (used in) provided by financing activities (363) 1,329 Net change in cash (58) 189 Cash, beginning of period Cash, end of period Supplemental cash flow information (note 12) (see accompanying notes) 7

8 1. Nature of operations ENTREC Corporation ( ENTREC or the Company ) is a heavy haul transportation and crane solutions provider to the oil and natural gas, construction, petrochemical, mining and power generation industries. The common shares of ENTREC trade on the Toronto Stock Exchange (the Exchange ) under the trading symbol ENT. The Company s head office is located in Acheson, Alberta. The Company s registered office is located at 1400, th Avenue SW, Calgary, Alberta T2P 3N9. ENTREC s operations follow a slightly seasonal pattern, with revenue traditionally being lower in the three months ending June 30 and the three months ending December 31 than in the other quarters of the year. Due to this seasonality, the revenue and net loss reported for the three and nine months ended September 30, may not reflect that of revenue and net loss on an annual basis. The Company s unaudited consolidated interim financial statements for the three and nine months ended September 30, were authorized for issuance in accordance with a resolution of the Board of Directors on November 7,. 2. Basis of presentation The unaudited interim consolidated financial statements for the three and nine months ended September 30, were prepared in accordance with International Accounting Standard (IAS) 34 Interim Financial Reporting. The unaudited interim consolidated financial statements do not include all the information and disclosures required in the annual financial statements, and should be read in conjunction with the Company s audited annual consolidated financial statements for the year ended December 31,. The accounting policies adopted in the preparation of the Company s unaudited interim consolidated financial statements are consistent with those followed in the preparation of the Company s audited annual consolidated financial statements for the year ended December 31,, subject to the accounting changes noted in note 4. The preparation of these unaudited interim consolidated financial statements requires management to make judgments, estimates, and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, revenues, and expenses. Actual results may differ from these estimates. The significant judgments made by management in applying the Company s accounting policies and the key sources of estimation uncertainty were consistent with those that applied to the Company s December 31,, audited annual consolidated financial statements, except as disclosed in note 14. These unaudited interim consolidated financial statements are presented in Canadian dollars, the Company s functional currency. The unaudited interim consolidated financial statements were prepared on a historical cost basis, except for share-based payment arrangements that were measured at fair value. Financial figures throughout the text and in tables are rounded to the nearest thousand (000), except where otherwise indicated. 3. Basis of consolidation The unaudited interim consolidated financial statements include the accounts of ENTREC and its subsidiaries as at September 30, and for the periods then ended. Subsidiaries are fully consolidated from their effective date of acquisition, being the date on which the Company obtains control, and continue to be consolidated until the date that such control ceases. Unrealized exchange gains and losses on foreign subsidiaries are recognized in accumulated other comprehensive income and subsequently recognized in net income in the event of disposal. The subsidiaries statements of financial position were prepared as at September 30,, using consistent accounting policies. All inter-company balances were eliminated in full. 8

9 4. Accounting changes The following new accounting standards were adopted effective January 1,. IFRS 15 Revenue from Contracts with Customers IFRS 15 was issued in May 2014 and established a five-step model to account for revenue arising from contracts with customers. Under IFRS 15, revenue is recognized at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. The new revenue standard supersedes all previous revenue recognition requirements under IFRS. ENTREC adopted IFRS 15 for the annual period beginning on January 1,, using the modified retrospective application method. Using this method, the Company applied the new standard as of the date of initial application with no restatement of comparative periods. ENTREC s primary service offering is the provision of transportation and crane services. These services involve the physical process of transporting or lifting commodities and goods using company owned equipment or 3 rd party equipment. Generally, ENTREC s services are provided based on orders and contracts with customers that include fixed or determinable prices charged at daily, hourly or contracted rates. Contract terms do not include provisions for post-service obligations. ENTREC recognizes the amount of revenue to which it expects to be entitled for the transfer of promised services to customers. Having completed the five-step analysis, ENTREC identified contracts with customers and performance obligations therein, determined transaction price and its allocation to performance obligations and confirmed the appropriateness of its revenue recognition policy being over time as the transportation and crane services are rendered. The adoption of IFRS 15 did not have any material impact on ENTREC s overall revenue recognition policy, consolidated financial position or results of operations. Revenue has been disaggregated into categories based on the type of service provided as well as the geographic region where the services were provided. See note 13. IFRS 9 Financial Instruments Effective January 1,, ENTREC adopted IFRS 9 Financial Instruments, which replaced IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 provides a revised model for the recognition and measurement of financial assets, financial liabilities, and some contracts to buy or sell non-financial items. Financial assets and liabilities are classified and measured at amortized cost, fair value through comprehensive income or fair value through profit and loss. The classification of financial assets and liabilities is generally based on the business model in which the asset or liability is managed and its contractual cash flow characteristics. Financial assets held within a business model whose objective is to collect contractual cash flows and whose contractual terms give rise to cash flows on specified dates that are solely payments of principal and interest on the principal amount outstanding are measured at amortized cost. After their initial fair value measurement, trade and other receivables, trade and other payables, long-term debt, and convertible debentures are classified and measured at amortized cost using the effective interest rate method. Upon initial recognition of a non-derivative financial asset, a loss allowance is recorded for the expected credit losses. Loss allowances for trade and other receivables are measured based on lifetime expected credit losses. 9

10 4. Accounting changes (continued) The adoption of IFRS 9 did not have any material impact on the Company s consolidated financial statements. The following table shows the original measurement categories and carrying amounts for each financial asset and liability under IAS 39 and the subsequent measurement and carrying amount upon adoption of IFRS 9 as at January 1,. Measurement Category Carrying Amount IFRS 9 IAS 39 IFRS 9 IAS 39 Financial assets: Cash Amortized cost Loans and receivables Trade and other receivables Amortized cost Loans and receivables 34,313 34,313 Financial liabilities: Trade and other payables Amortized cost Other financial liabilities 11,203 11,203 Long-term debt Amortized cost Other financial liabilities 135, ,679 Convertible debentures Amortized cost Other financial liabilities 16,268 16,268 Future accounting changes IFRS 16 Leases In January 2016 the IASB issued a new standard on leases, IFRS 16 Leases. IFRS 16 will be effective for annual periods beginning on or after January 1, The new standard introduces a single lessee accounting model and requires a lessee to recognize assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. A lessee is required to recognize a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligations to make lease payments. The lease liability will be recorded at the present value of the future lease payments due under the lease. For lessors, IFRS 16 is expected to have little change from existing accounting standards (IAS 17 Leases). ENTREC intends to adopt IFRS 16 for its annual period beginning on January 1, 2019 using the modified retrospective application method. Using this method, ENTREC will apply the new standard as of the date of initial application with no restatement of comparative periods. Any effect on ENTREC s assets and liabilities from the adoption of IFRS 16 will be recognized as an adjustment to the opening balance of retained earnings (deficit) as at January 1,

11 4. Accounting changes (continued) ENTREC is completing its evaluation of the new standard and currently expects that the adoption of IFRS 16 will have a material effect on its consolidated financial statements. The majority of ENTREC s shop and yard locations are leased from 3rd parties with minimum lease terms that are typically longer than 12 months. Under IAS 17, these leases are treated as operating leases whereby the lease payments are expensed on a straight-line basis over the lease term. However, upon the adoption of IFRS 16, ENTREC will be required to recognize an asset and corresponding liability for all lease commitments that extend beyond 12 months. Please see note 6 of ENTREC s consolidated financial statements for the year ended December 31, for a preliminary quantitative assessment of the impact of adopting IFRS Long-term debt The Company has a 172,500 senior secured asset-based credit facility (the ABL Facility ) with a syndicate of lenders led by Wells Fargo Capital Finance Corporation Canada. The ABL Facility is used to fund ENTREC s capital expenditures, business acquisitions, and for general corporate purposes. The ABL Facility requires payments of interest only until its maturity on October 10, The ABL Facility is also subject to a requirement that ENTREC s convertible debentures due June 30, 2021 be repaid or extended prior to March 31, If the convertible debentures are not repaid or extended prior to March 31, 2021, the maturity date of the ABL Facility will also be March 31, Amounts borrowed bear interest, at ENTREC s option, at bank prime, CDOR, or LIBOR rates, plus a credit spread based on a sliding scale, determined by the Company s excess borrowing capacity. A standby fee is calculated at the rate of 0.25% per annum on the facility s unused portion. The average effective interest rate on the ABL Facility at September 30, was 5.42% (December 31, 4.42%). The Company may prepay all or any of the ABL Facility at any time. In addition, the Company has a 5,000 operating facility ( Operating Facility ) with Canadian Western Bank to finance ENTREC s day-to-day operations. The Operating Facility requires payments of interest only until its maturity in March Amounts borrowed under the Operating Facility bear interest at the bank s prime lending rate plus 150 basis points. The ABL Facility and Operating Facility are collateralized by substantially all of ENTREC s assets, including ENTREC s accounts receivable and property, plant and equipment. At September 30,, the carrying amount of ENTREC s assets was 217,

12 5. Long-term debt (continued) As at September 30 December 31 Long-term debt ABL Facility carried in CAD 34, ,988 Long-term debt ABL Facility carried in USD (78,382 USD) 101, Long-term debt Operating Facility 630 4,539 Less: unamortized transaction costs (904) (1,055) 135, ,679 Less: current portion (630) - 134, ,679 Minimum principal repayments required over the next five years as at September 30, were as follows: As at September 30, Amount Within one year 630 After one year but less than five years 135, ,417 The movement in long-term debt during the nine months ended September 30, and was as follows: Amount Balance, as at December 31, ,435 Proceeds from issuance of long-term debt 30,648 Repayment of long-term debt (28,438) Amortization of deferred financing costs 268 Foreign exchange gain on long-term debt (856) Balance, as at September 30, 131,057 Balance, as at December 31, 135,679 Proceeds from issuance of long-term debt 82,640 Repayment of long-term debt (82,580) Amortization of deferred financing costs 152 Foreign exchange gain on long-term debt (378) Balance, as at September 30, 135,513 12

13 6. Obligations under finance lease During the three and nine months ended September 30,, the Company acquired automotive equipment through finance lease of 166 (three and nine months ended September 30, nil). The Company s obligations under finance lease bear interest at annual rates ranging from 4.4% to 7.2% per annum and are repayable in current monthly blended principal and interest payments of 49, maturing at dates ranging from September to June All of ENTREC s obligations under finance lease are collateralized by automotive equipment with a net book value of 305 at September 30, (December 31, 429). Future minimum lease payments required over the next five years for obligations under finance lease were as follows: As at September 30 December 31 Within one year After one year but less than five years Total minimum lease payments Less: amounts representing a weighted average imputed interest rate of 5.4% (December 31, 4.5%) (17) (11) Balance of obligations under finance lease Less: current portion (304) (584) Convertible debentures The Company has outstanding 21,800 principal of convertible unsecured subordinated debentures (the Debentures ). The Debentures have an annual coupon rate of 8.50%, payable semi-annually, mature on June 30, 2021 and are convertible, at the holder s option, into common shares of ENTREC at a conversion price of 1.00 per share. The Company may redeem the Debentures, in whole or in part, at any time up to June 30, 2021, at a price equal to the principal amount thereof plus accrued and unpaid interest to, but excluding the date of redemption. Finance-related revenues and expenses associated with the Debentures consisted of: Three Months Ended Nine Months Ended Sept 30 Sept 30 Sept 30 Sept 30 Interest expense on principal value ,394 1,617 Notional interest representing accretion expense , ,326 2,641 The Debentures trade on the Exchange under the symbol ENT.DB. At September 30,, the market value of the Debentures, as traded on the Exchange, was 20,

14 8. Share capital Authorized - Unlimited number of voting common shares without nominal or par value Authorized Unlimited number of preferred shares Issued - common shares Number of shares Amount As at December 31, 109,617, ,113 Activity during the nine months ended September 30, : Shares issued exercise of restricted shares 176, Issued and outstanding at September 30, 109,793, , Share Option Plan and restricted share plan Share Option Plan The Company has adopted an incentive share option plan in accordance with the policies of the Exchange (the Share Option Plan ) for the benefit of its directors, officers, employees and other key personnel. The Share Option Plan provides that the option terms and price shall be fixed by the directors subject to the price restrictions and other requirements of the Exchange. ENTREC recorded the following activity in the number of share options issued under the Share Option Plan: Number of share options Weighted average exercise price () Share options outstanding as at December 31, 6,425, Activity during the nine months ended September 30, : Share options expired (675,000) 1.53 Share options forfeited (400,000) 0.26 Share options outstanding as at September 30, 5,350, Share options outstanding as at September 30, 6,700, Share options exercisable as at September 30, 2,650, Share options exercisable as at September 30, 2,162,

15 9. Share Option Plan and restricted share plan (continued) The following summarizes the outstanding and exercisable share options as at September 30, : Outstanding Exercisable Weighted average exercise price () Number of share options Weighted average life remaining (years) Weighted average exercise price () Number of share options ,725, , , , ,162, , ,162, , , , ,350, ,650,000 During the three and nine months ended September 30,, share-based compensation expense of 36 and 120 (three and nine months ended September 30, 61 and 235), respectively, was recognized pursuant to ENTREC s Share Option Plan with an offsetting credit to contributed surplus. Restricted share plan The Company has established an employee share ownership plan, known as the restricted share plan, under which key employees and directors are granted the right to receive an allotted number of common shares from treasury at a deemed value equal to the observable market price of ENTREC s common shares at the grant date. ENTREC recorded the following activity in the number of restricted shares: Number of restricted shares Restricted shares outstanding as at December 31, 3,157,501 Activity during the nine months ended September 30, : Restricted shares granted 1,307,500 Restricted shares exercised (176,266) Restricted shares forfeited (481,767) Restricted shares outstanding as at September 30, 3,806,968 During the three and nine months ended September 30,, share-based compensation expense of 62 and 188 (three and nine months ended September 30, 94 and 281), respectively, was recognized pursuant to ENTREC s restricted share plan with an offsetting credit to contributed surplus. Of the restricted shares outstanding at September 30, 1,830,235 (September 30, 1,282,101) were exercisable. 15

16 9. Share Option Plan and restricted share plan (continued) On January 1,, the Company granted 1,307,500 restricted shares to employees and directors, including 48,000 to officers and 350,000 to directors of the Company. The restricted shares granted to employees and officers vest at 20% per year over five years commencing January 1, The restricted shares granted to non-management directors vested immediately prior to the Company s annual general meeting of shareholders in May. All of the restricted shares expire on January 1, Common shares reserved for issuance pursuant to restricted share awards granted, together with any common shares reserved for issuance pursuant to options to purchase common shares under the Share Option Plan, shall not exceed 10% of the Company s issued and outstanding common shares, from time to time. 10. Loss per share ( and number of shares in 000 s) Three Months Ended Nine Months Ended Sept 30 Sept 30 Sept 30 Sept 30 Net loss (192) (3,768) (9,706) (11,387) Basic weighted average number of shares 109, , , ,516 Dilutive effect of outstanding share options and restricted shares Diluted weighted average number of shares 109, , , ,516 Loss per share basic (0.00) (0.03) (0.09) (0.10) Loss per share diluted (0.00) (0.03) (0.09) (0.10) For the three and nine months ended September 30, and, all of the Company s outstanding share options and restricted shares were anti-dilutive and, therefore, were not considered in computing diluted loss per share. For the three and nine months ended September 30, and, the outstanding Debentures were also anti-dilutive and not considered in computing diluted loss per share. 16

17 11. Finance costs Three Months Ended Nine Months Ended Sept 30 Sept 30 Sept 30 Sept 30 Interest long-term debt 1,961 1,329 5,670 3,654 Interest convertible debentures ,326 2,641 Interest obligations under finance lease Interest bank indebtedness and other short-term obligations Finance costs 2,771 2,250 8,022 6,335 Foreign exchange gain on long-term debt (1,837) - (378) (856) Net finance costs 934 2,250 7,644 5, Supplemental cash flow information a) Changes in non-cash operating working capital: Nine months ended Sept 30 Sept 30 Trade and other receivables (4,318) (7,387) Inventory Prepaid expenses and deposits (933) (777) Income taxes receivable / payable Trade and other payables 2,448 1,208 (2,155) (6,558) b) Non-cash investing and financing activities: During the nine months ended September 30,, ENTREC acquired 166 of automotive equipment through obligations under finance lease (note 6). c) Income taxes paid (received) and interest paid: Nine months ended Sept 30 Sept 30 Income taxes paid Income taxes received (357) (725) Interest paid 6,457 4,486 17

18 13. Segmented reporting The Company s activities are conducted in two geographic segments: Canada and the United States. All activities in both segments are related to the provision of heavy haul transportation and crane services to the oil and natural gas, construction, petrochemical, mining and power generation industries. Direct costs and general and administrative expenses directly attributable to the two operating segments are included as operating expenses for those segments. There are no significant inter-segment revenues. Segment contribution represents earnings before income taxes for each operating segment prior to unallocated corporate items. ENTREC uses segment contribution as a key measure to analyze the financial performance of its geographic business segments. Selected financial information by reportable segment is disclosed as follows: Three months ended September 30, Canada United States Total Revenue 21,608 21,792 43,400 Depreciation of property, plant and equipment 3,556 1,316 4,872 Segment (loss) contribution (471) 2,999 2,528 Unallocated items: Corporate costs 2,510 Amortization of intangible assets 21 Share-based compensation 98 Gain on disposal of property, plant and equipment 121 Finance items 934 Loss before income taxes (1,156) Capital expenditures ,162 Three months ended September 30, Canada United States Total Revenue 22,485 14,180 36,665 Depreciation of property, plant and equipment 4, ,158 Segment (loss) contribution (173) Unallocated items: Corporate costs 2,748 Amortization of intangible assets 120 Share-based compensation 155 Loss on disposal of property, plant and equipment (204) Finance items 2,250 Loss before income taxes (4,849) Capital expenditures 568 1,067 1,635 18

19 13. Segmented reporting (continued) Nine months ended September 30, Canada United States Total Revenue 70,188 57, ,388 Depreciation of property, plant and equipment 11,231 3,655 14,886 Segment (loss) contribution (1,339) 3,518 2,179 Unallocated items: Corporate costs 7,122 Amortization of intangible assets 203 Share-based compensation 308 Gain on disposal of property, plant and equipment 90 Finance items 7,644 Loss before income taxes (13,188) Capital expenditures 1,097 3,295 4,392 Nine months ended September 30, Canada United States Total Revenue 72,793 37, ,888 Depreciation of property, plant and equipment 13,826 2,199 16,025 Segment (loss) contribution (973) 853 (120) Unallocated items: Corporate costs 8,413 Amortization of intangible assets 485 Share-based compensation 516 Gain on disposal of property, plant and equipment (346) Finance items 5,479 Loss before income taxes (14,667) Capital expenditures 2,357 1,951 4,308 Selected asset information by geographic region is as follows: As at September 30 December 31 Property, plant and equipment Canada 120, ,658 United States 52,037 45,413 All of the Company s intangible assets are located in Canada. 172, ,071 19

20 13. Segmented reporting (continued) Disaggregated revenue information by type of service is provided as follows: Three months ended September 30, Canada United States Total Revenue related to owned/leased equipment fleet Cranes 10,815 11,207 22,022 Automotive equipment 5,596 4,566 10,162 Trailers 1,300 1,230 2,530 Other equipment ,111 17,365 35,476 Labour revenue (not directly applied to equipment) 1, ,859 3 rd party contractor, wire lifting and permitting revenue 1,801 3,708 5,509 Other revenue Total revenue 21,608 21,792 43,400 Three months ended September 30, Canada United States Total Revenue related to owned/leased equipment fleet Cranes 11,473 4,139 15,612 Automotive equipment 5,843 3,623 9,466 Trailers 1,474 1,196 2,670 Other equipment ,144 9,405 28,549 Labour revenue (not directly applied to equipment) 1,439 2,305 3,744 3 rd party contractor, wire lifting and permitting revenue 1,098 2,460 3,558 Other revenue Total revenue 22,485 14,180 36,665 20

21 13. Segmented reporting (continued) Nine months ended September 30, Canada United States Total Revenue related to owned/leased equipment fleet Cranes 33,356 25,409 58,765 Automotive equipment 18,416 10,894 29,310 Trailers 4,671 3,485 8,156 Other equipment 1,479 1,022 2,501 57,922 40,810 98,732 Labour revenue (not directly applied to equipment) 3,975 5,000 8,975 3 rd party contractor, wire lifting and permitting revenue 5,585 11,316 16,901 Other revenue 2, ,780 Total revenue 70,188 57, ,388 Nine months ended September 30, Canada United States Total Revenue related to owned/leased equipment fleet Cranes 34,489 9,869 44,358 Automotive equipment 20,566 9,682 30,248 Trailers 5,371 2,890 8,261 Other equipment 1,334 1,118 2,452 61,760 23,559 85,319 Labour revenue (not directly applied to equipment) 3,575 5,847 9,422 3 rd party contractor, wire lifting and permitting revenue 4,956 7,751 12,707 Other revenue 2,502 (62) 2,440 Total revenue 72,793 37, , Related-party transactions Subsidiaries As at September 30,, the Company owned 100% of the following material subsidiaries, which were consolidated in the Company s consolidated financial statements: Name ENTREC Engineering Ltd. ENTREC Cranes & Heavy Haul (Western) Ltd. ENTREC Cranes & Heavy Haul Inc. Jurisdiction of Incorporation Alberta, Canada British Columbia, Canada Arizona, United States 21

22 14. Related-party transactions (continued) Transactions with related parties JV Driver Group of Companies ( JV Driver ) During the three and nine months ended September 30,, the Company recognized revenue of 1,176 and 1,609 (three and nine months ended September 30, 531 and 1,973), respectively, and incurred general and administrative expenses of 47 and 142 (three and nine months ended September 30, 48 and 138), respectively, with JV Driver, a group of companies under common control that hold in excess of 10% of the issued and outstanding common shares of ENTREC and of which an ENTREC director is an officer and director. Included in the above revenue for the nine months ended September 30, was 754 related to a construction project in the United States that was completed in March. For this project, ENTREC provided heavy haul transportation services to JV Driver. In addition, JV Driver requested that ENTREC hire a specific 3 rd party sub-contractor to provide crane services to JV Driver on the project. JV Driver subsequently disputed a significant portion of the revenue amount and asserted back charges to ENTREC related to the lack of performance by the 3 rd party sub-contractor. Through a mediation process, ENTREC has now settled the contract dispute and recognized additional revenue of 461 USD (597 CAD) related to this project during the three months ended September 30,. Other related-party transactions During the three and nine months ended September 30,, the Company generated revenue of 609 and 683 (three and nine months ended September 30, 167 and 218), respectively, and incurred direct costs of 2 and 170 (three and nine months ended September 30, 6 and 90), respectively, related to transportation services with the Manitoulin Group of Companies, a group of companies under common control that hold in excess of 10% of the issued and outstanding common shares of ENTREC and of which an ENTREC director is an officer. During the three and nine months ended September 30,, the Company generated revenue of 19 and 61 (three and nine months ended September 30, 29 and 112), respectively, related to sub-lease and repairs and maintenance services and purchased property, plant and equipment of nil (nine months ended September 30, 100) from Current Financial Corp, a company of which four ENTREC officers own a combined 58% of the outstanding common shares. 22

23 14. Related-party transactions (continued) During the three and nine months ended September 30,, the Company incurred direct costs of 105 and 315 (three and nine months ended September 30, 105 and 315), respectively, related to the lease of premises from Four Way Developments Ltd., a company of which an ENTREC officer owns 37.5% of the outstanding common shares. During the three and nine months ended September 30, the Company incurred direct costs of 43 and 136 (three and nine months ended September 30, 38 and 143), respectively, related to the lease of premises from Ridgewood Inns Ltd., a company of which two ENTREC officers own a combined 28% of the outstanding common shares. During the three and nine months ended September 30, the Company incurred general and administrative expenses of 158 and 221 (three and nine months ended September 30, 33 and 147), respectively, related to legal services with Nerland Lindsay LLP, a partnership of which an ENTREC director is a partner. ENTREC s related-party transactions were conducted in the normal course of operations and were measured at their fair values, which were established and agreed to as consideration by the related parties. At September 30,, amounts owing from these related parties and included in trade and other receivables was 921 (December 31, 2,985). At September 30,, amounts owing to these related parties and included in trade and other payables was 195 (December 31, 84). Included in prepaid expenses and deposits at September 30, was 127 (December 31, 79) pursuant to related-party transactions. Key management personnel compensation The Company s key management personnel comprise its directors and officers. Aggregate compensation during the periods presented was as follows: Three Months Ended Nine Months Ended Sept 30 Sept 30 Sept 30 Sept 30 Salaries and other short-term employee benefits ,017 1,130 Director fees Share-based compensation expense Total compensation to key management personnel ,223 1,441 The amounts disclosed in the table are the amounts recognized as an expense related to key management personnel and directors during the respective reporting periods. 23

24 15. Capital management ENTREC s overall capital management objectives are: (i) to finance its operations and growth-oriented activities; and (ii) to limit risk to an acceptable level in order to maximize shareholder value. To accomplish these objectives, ENTREC uses a combination of debt and equity. The mix is reviewed and adjusted appropriately along with changes in economic conditions. The capital mix is also regularly monitored to ensure all externally imposed capital requirements on ENTREC s debt, such as certain financial covenants, are fulfilled. Capital is defined by ENTREC to include all funded debt (convertible debentures, long-term debt, obligations under finance lease, and the current portions thereof) and shareholders equity. The calculations of funded debt and total capital are as follows: As at September 30 December 31 Current portion of long-term debt Current portion of obligations under finance lease Long-term debt 134, ,679 Convertible debentures 17,200 16,268 Obligations under finance lease Funded debt 153, ,619 Shareholders equity 35,831 44,791 Total capital 188, ,410 Debt management The ABL Facility and Operating Facility are subject to compliance with financial covenants. The Company is required to maintain a minimum excess borrowing capacity of 15,000 at all times. In addition, the Company is also subject to a springing fixed charge coverage ratio ( FCCR ) covenant of 1.0x and a springing capital expenditure covenant, which limits ENTREC s annual capital expenditures to 120% of annual plan, should its excess borrowing capacity decline to an amount below the lesser of: (i) 12.5% of the Company s total borrowing capacity or (ii) 12.5% of the total ABL Facility of 172,500. ENTREC is also subject to the capital expenditure covenant and restricted from paying dividends or repurchasing its common shares should its FCCR not exceed 1.0x. The total amount available under the ABL Facility is calculated from the value of ENTREC s accounts receivable and property, plant and equipment. Eligible equipment utilized in the borrowing base calculation is valued by a third party appraiser and is included in the borrowing base at an amount equal to 85% of net orderly liquidation value. 24

25 15. Capital management (continued) At September 30,, based on ENTREC s fleet and accounts receivable at that date, the borrowing base under the ABL Facility was 158,889. Based on borrowings and letters of credit utilized at September 30,, the Company had an excess borrowing capacity of 22,795. As the excess borrowing capacity exceeded 19,861 or 12.5% of the borrowing base, ENTREC was not subject to the FCCR covenant at September 30,. At September 30,, ENTREC s excess borrowing capacity of 22,795 exceeded this threshold by 2,934. At September 30,, ENTREC s excess borrowing capacity also exceeded the minimum 15,000 requirement. The definition of FCCR is in accordance with the lending agreement and is calculated based on the lender s interpretation, which may not be equal to individual financial statement figures. FCCR is calculated on a trailing 12-month basis and is defined in the lending agreement to be the ratio of EBITDA ( Bank EBITDA ) to fixed charges ( Fixed Charges ). Bank EBITDA is defined in the lending agreement to be net income (loss) before extraordinary gains and losses, interest income and expense, gains and losses on disposals of property, plant and equipment and other long lived assets, income taxes, depreciation and amortization, non-cash share-based compensation, unrealized risk management or foreign exchange losses, losses on the revaluation of embedded derivatives, and impairments of property, plant and equipment, intangible assets and goodwill. Fixed Charges is defined in the lending agreement to be the sum of interest expense, scheduled principal repayments of indebtedness, unfunded capital expenditures, cash dividends and distributions, and current income taxes. At September 30,, ENTREC s FCCR was 1.40x, which exceeded the FCCR springing covenant level of 1.0x. Under the terms of the ABL Facility, ENTREC is also restricted from voluntarily prepaying subordinated debt obligations exceeding 1,000, paying dividends or repurchasing its common shares, and completing business acquisitions exceeding 10,000 in any calendar year should its excess borrowing capacity not exceed the levels of 43,125, 38,813, and 30,187, respectively. With an excess borrowing base capacity of 22,795, ENTREC was restricted from these activities at September 30,. The lenders may approve exceptions to these restrictions upon mutual agreement with ENTREC. 16. Commitments, contingencies and guarantees ENTREC has entered into operating leases for office and shop premises, and equipment that provide for minimum annual lease payments as follows: As at September 30 December 31 Within one year 12,028 10,722 After one year but less than five years 28,383 26,962 After five years 53,496 57,942 Total minimum lease payments 93,907 95,626 Total minimum sublease payments expected to be received

26 16. Commitments, contingencies and guarantees (continued) During the three and nine months ended September 30,, 3,706 and 10,357, respectively, was recognized as an expense in respect of operating leases (three and nine months ended September 30, 3,014 and 8,758, respectively). Sublease rental income for the three and nine months ended September 30, was 253 and 922 (three and nine months ended September 30, 367 and 1,273), respectively. Contingencies From time to time ENTREC is subject to claims and lawsuits arising in the ordinary course of operations. The Company carries liability insurance, subject to certain deductible and policy limits, against certain of these claims. As at September 30, the Company was not involved in any legal disputes that would be expected to have a material impact on its financial results. Guarantees a) ENTREC had an outstanding letter of credit at September 30, with a maximum limit of 40 for the benefit of the Minister of Transportation of the Province of British Columbia, drawn under its ABL Facility, relating to transportation permitting requirements in B.C. b) ENTREC had an outstanding letter of credit at September 30, with a maximum limit of 60 for the benefit of Parkland County Planning and Development, drawn under its ABL Facility, relating to certain leasehold improvements. c) ENTREC had outstanding letter of credits at September 30, with a maximum limit of 25 CAD and 100 USD, drawn under its ABL Facility, relating to certain Canada and US customs bonds. d) In the normal course of business, ENTREC enters into agreements that include indemnities in favour of third parties such as engagement letters with advisors and consultants, and service agreements. ENTREC has also agreed to indemnify its directors, officers, and employees in accordance with ENTREC s constating documents and bylaws. Certain agreements do not limit ENTREC s liability and, therefore, it is not possible to estimate ENTREC s potential liability under these indemnities. In certain cases, ENTREC has recourse against third parties with respect to these indemnities. In addition, ENTREC maintains insurance that may provide coverage against certain claims under these indemnities. ENTREC believes it would be able to satisfy all of the obligations above without disrupting normal business operations. 26

27 17. Financial instruments Foreign currency risk ENTREC is exposed to foreign currency risk in relation to its USD denominated long-term debt and U.S. based operations. Therefore, there is risk of earnings fluctuations arising from changes in and the degree of volatility of foreign exchange rates arising on foreign assets and liabilities. Under its ABL Facility, ENTREC held 78,382 USD of long-term debt at September 30,. In addition, a significant portion of ENTREC s operations are conducted in the United States. Based on ENTREC s long-term debt denominated in USD at September 30,, a 5% increase or decrease in exchange rates would change ENTREC s loss before income taxes by approximately 5,059. Based on ENTREC s assets and liabilities held in its U.S. operations at September 30,, a 5% increase or decrease in exchange rates would change ENTREC s other comprehensive income by approximately 1,041. ENTREC does not currently use derivative financial instruments to reduce its exposure to foreign currency risk. 18. Subsequent events Acquisition of Capstan Hauling Ltd. On October 1,, ENTREC acquired Capstan Hauling Ltd. ( Capstan ). Based in Grande Prairie, Alberta, Capstan is a leading provider of heavy haul transportation services to the oil and natural gas industry in northwest Alberta and north-east B.C. The aggregate consideration paid at closing consisted of: (i) the issuance of common shares in a subsidiary of ENTREC at a value of 4,000; (ii) a promissory note of 3,000 bearing interest at an annual rate of 5.00% and due September 30, 2023; and (iii) cash of 10,000 less outstanding debt and finance lease obligations at closing and less certain holdback amounts. The final purchase price remains subject to adjustment based on Capstan s working capital as at September 30, as well as other post-closing adjustments. The target working capital balance is 3,700. Also included in the acquisition of Capstan was real estate assets valued at approximately 6,000. ENTREC is currently pursuing a sale-leaseback transaction related to the real estate assets. In conjunction with the acquisition, Current Financial Corp., a non-arm s length party, provided a bridge financing loan to ENTREC in the amount of 3,500. The bridge financing loan was incurred to help temporarily finance the acquisition of Capstan until such time as ENTREC is able to complete its planned sale lease-back of the Capstan real estate. Pursuant to the terms of the lenders approval of the acquisition, ENTREC is required to complete the sale lease-back by December 31, or a later date as mutually agreed. The common shares of a subsidiary of ENTREC that were issued to the vendors will be presented as a minority interest in ENTREC s consolidated statement of financial position. In addition, subject to the approval of the Toronto Stock Exchange ( TSX ) at the time of conversion, and based on the fair market value at the time of conversion, these common shares are convertible into common shares of ENTREC at the greater of: (i) the 10 day weighted average trading price of ENTREC common shares on the TSX at the time of conversion and (ii) 0.40 per share. 27