"Growth through sustainable cash flow"

Transcription

1 For the Three and Nine Months Ended September 30, 2018 "Growth through sustainable cash flow" 400, th Street SW, Calgary, Alberta T2S 2T4 Telephone Fax

2 INDEX INTRODUCTION... 2 FORWARD-LOOKING STATEMENTS... 2 SELECT FINANCIAL HIGHLIGHTS... 2 Financial Results... 2 Financial Position... 3 NATURE OF OPERATIONS... 3 OUTLOOK... 4 RESULTS OF OPERATIONS... 4 Revenue and Adjusted EBITDA... 4 Amortization Expenses... 7 Equity-based Compensation... 8 Impairment Loss... 8 Net Financing Costs... 8 Share of Joint Venture Loss (Income)... 8 Other income... 8 Change in Fair Value... 9 Provision for Income Tax... 9 Net Income and Comprehensive Income... 9 SUMMARY OF QUARTERLY RESULTS LIQUIDITY Operating Activities Investing Activities Financing Activities Distributions and Dividends Distribution / Dividend Payout Ratios Contractual Obligations CAPITAL RESOURCES Loans and Borrowings Equity CAPITAL MANAGEMENT Credit Facility Operating Facilities Debentures FINANCIAL INSTRUMENTS OFF-BALANCE SHEET ARRANGEMENTS TRANSACTIONS WITH RELATED PARTIES PROPOSED TRANSACTIONS CRITICAL ACCOUNTING ESTIMATES BUSINESS RISKS AND UNCERTAINTIES CHANGES IN ACCOUNTING POLICIES NON-GAAP MEASURES ADVISORY REGARDING FORWARD-LOOKING STATEMENTS

3 INTRODUCTION This management's discussion and analysis ("MD&A") for Mosaic Capital Corporation s ("Mosaic" or the "Company") financial condition, results of operations and cash flows for the three and nine months ended September 30, 2018, should be read in conjunction with Mosaic s unaudited condensed interim consolidated financial statements for the three and nine months ended September 30, 2018 and 2017, the audited consolidated financial statements for the years ended December 31, 2017 and 2016, the annual MD&A for the year ended December 31, 2017 and the annual information form ("AIF") for the year ended December 31, The three-month periods ended September 30, 2018 and 2017 are herein referred to as "Q3". The financial statements have been prepared in Canadian dollars, in accordance with International Financial Reporting Standards ("IFRS"). This MD&A was prepared effective November 13, Additional information relating to the Company, including the AIF, are available under Mosaic s profile on SEDAR at and on the Company's website at FORWARD-LOOKING STATEMENTS This MD&A contains forward-looking information and forward-looking statements based on certain expectations, projections and assumptions. This information is subject to a number of risks and uncertainties, many of which are beyond the Company s control. Users of this information are cautioned that actual results may differ materially. For additional information refer to the "Advisory Regarding Forward-Looking Statements". SELECT FINANCIAL HIGHLIGHTS Financial Results Revenue $ 121,407 $ 95,656 27% $ 280,496 $ 223,491 26% Adjusted EBITDA (1) $ 13,444 $ 12,220 10% $ 21,368 $ 22,832-6% per share $ 1.27 $ % $ 2.02 $ % as a % of revenue 11.07% 12.77% -13% 7.62% 10.22% -25% Net income $ 8,154 8,014 2% $ 13,516 $ 16,626-19% Net income attributable to equity holders $ 2,430 $ 3,987-39% $ 6,127 $ 6,580-7% per share $ 0.23 $ % $ 0.58 $ % Free Cash Flow (1) $ 7,051 $ 5,987 18% $ 6,956 $ 9,853-29% per share $ 0.66 $ % $ 0.66 $ % Preferred securities distributions declared (2) $ 1,512 $ 1,512 - $ 4,487 $ 5,493-18% Common share dividends declared $ 1,115 $ 1,115 - $ 3,343 $ 3,319 1% per share $ 0.11 $ 0.11 $ 0.32 $ TTM Preferred Distribution Payout Ratio (1) 73% 80% -9% TTM Combined Payout Ratio (1) 128% 118% 8% Weighted avg. common shares outstanding 10,608,058 10,566,262-10,596,095 10,107,829 1% Notes: (1) Adjusted EBITDA, Free Cash Flow, Preferred Distribution Payout Ratio, and Combined Payout Ratio are not recognized measures under IFRS. Refer to "Non-GAAP Measures". TTM is defined as trailing twelve months. (2) Includes distributions on preferred securities and private yield securities and dividends on Series A Shares of Mosaic for

4 Financial Position As at (in $000s, except as noted) September 30, 2018 December 31, 2017 Cash and cash equivalents $ 10,875 $ 9,400 Working capital $ 73,500 $ 66,352 Total assets $ 353,691 $ 328,933 Loans and borrowings $ 126,635 $ 109,811 Liabilities exchangeable with equity $ 26,863 $ 45,820 Equity $ 74,399 $ 65,770 Non-controlling interests $ 52,514 $ 57,993 Common share and other securities outstanding: Common shares 10,608,058 10,573,667 Common share purchase warrants 17,026,106 17,026,106 Convertible debentures 13,124 13,124 Options and restricted share units 1,053, ,682 For the three months ended September 30, 2018, Mosaic: increased revenue by 27% over the same period in 2017 to a record quarterly level of $121.4 million. This achievement was driven by the acquisition of Circle 5 in late 2017 as well as improved operating conditions and market share gains for portfolio companies in the Infrastructure segment; generated Adjusted EBITDA of $13.4 million, an increase of 10% over the prior year period. This gain was supported by the acquisition of Circle 5, improved profitability levels in certain portfolio companies and a reduction in corporate overhead expenses; provided dividends of $1.1 million to our shareholders; and maintained a healthy balance sheet with $10.9 million in cash, $73.5 million in working capital and Total Debt (defined herein) to EBITDA leverage of NATURE OF OPERATIONS Through controlling ownership of its subsidiaries, Mosaic operates in four business segments, providing a diversified array of products and services to a number of industry sectors across Canada and parts of the United States. Industry Sectors Products and Services Business Segments Infrastructure Diversified Energy Real Estate Construction, Agriculture, Manufacturing, Natural Energy Services Commercial, Industrial Natural Resources, Energy Resources, Energy, Agriculture, Transportation mechanical equipment provisioning & installation cement-based toppings & waterproof solutions construction, renovation, restoration & remediation services pre-cast product distribution maintenance services precision metal fabrication tool & mold fabrication scaffolding solutions commercial printing industrial supply waste water treatment water treatment cathodic protection environment containment systems rental property ownership land development The Company s common shares and convertible debentures are listed on the TSX Venture Exchange (the "TSXV") and trade under the symbols "M" and "M.DB", respectively. 3

5 OUTLOOK Mosaic s third quarter 2018 results demonstrate solid year-over-year performance gains that delivered record quarterly achievements in both revenue and Adjusted EBITDA generation. With support from our most recent acquisition of Circle 5, as well as market share gains and improved operating performance for a number of underlying portfolio companies, management is pleased to deliver third quarter results that more closely resemble the company s cash flow capability. Apart from our Energy segment, which continues to experience challenges related to wide commodity price differentials in Canada and intense competition levels in the U.S. market, Mosaic posted solid segmented Adjusted EBITDA improvements including a continued reduction in corporate overhead costs. As we enter the final months of 2018, we see the continued prospect of delivering year-over-year EBITDA growth in the fourth quarter given the scale and scope of work currently underway at our portfolio companies. While we have yet to finalize our 2019 budgeting process, we believe we have the appropriate strategies in place to drive further improvements that should position Mosaic to deliver continued growth in Mosaic s growth strategy is centered on the acquisition of controlling equity interests in new portfolio companies with a specific focus on growing Free Cash Flow per share while maintaining a strong balance sheet. Supplementing this, Mosaic s management team adds value with operational and strategic focus by actively engaging with its portfolio companies to build long-term value. Mosaic s pipeline of high quality acquisition opportunities remains robust and the Company will continue to pursue its strategy to grow through acquisitions with a focus on building an increasingly diversified portfolio of private, mid-market companies that offer strong Free Cash Flow while maintaining a healthy balance sheet. RESULTS OF OPERATIONS Revenue and Adjusted EBITDA Revenue $ 121,407 $ 95,656 27% $ 280,496 $ 223,491 26% Operating expenses 107,963 83,651 29% 259, ,324 29% Adjustments to EBITDA - (215) -100% - (665) -100% Adjusted EBITDA (1) $ 13,444 $ 12,220 10% $ 21,368 $ 22,832-6% as a % of revenue 11.07% 12.77% 7.62% 10.22% Note: (1) Adjusted EBITDA is not a recognized measure under IFRS. Refer to "Non-GAAP Measures". Revenue for Q increased 27% or $25.6 million to $121.4 million as compared to Q3 2017, driven by increased activity levels for specific portfolio companies within the Infrastructure business segment and the addition of revenue from an acquisition made in late Meanwhile, Adjusted EBITDA increased 10% or $1.2 million to $13.4 million as compared to Q The increase was predominantly driven by increased activity in specific portfolio companies and savings related to corporate overhead costs offset by customer specific project delays, unfavourable changes in product mix and competitive pressures on operating margins. The Adjusted EBITDA margin declined 170-basis points in Q as compared to the prior year period for the reasons noted above. Year-to-date, revenue increased 26% or $57.0 million to $280.5 million as compared to year-to-date 2017, largely driven by increases achieved in the Infrastructure business segment and the additional revenue related to two acquisitions made in For the first nine months of 2018, Adjusted EBITDA decreased 6% or $1.5 million to $21.4 million as compared to the first three quarters of This decline is mostly related to the continued softening of activity levels in the Canadian oilfield services industry environment impacting the Energy business segment and specific portfolio companies and project delays for specific portfolio companies in the first half of the year which was partially offset by Corporate costs declining due to the internalization of certain activities. The Adjusted EBITDA margin declined 260-basis points for the first nine months of 2018 as compared to the prior year period for the reasons noted above. 4

6 The following provides a breakdown of the operating financial performance by business segment: Revenue: Infrastructure $ 88,541 $ 64,047 38% $ 193,636 $ 147,242 32% Diversified 28,263 26,796 5% 77,320 65,959 17% Energy 4,487 4,690-4% 9,254 9,876-6% Real Estate % % Corporate Total revenue 121,407 95,656 27% 280, ,491 26% Adjusted EBITDA (1) Infrastructure 8,557 8,420 2% 14,136 14,253-1% Diversified 5,082 4,083 24% 10,960 12,092-9% Energy 985 1,210-19% 662 2,044-68% Real Estate (33) (38) 13% (124) (244) 49% Corporate (1,147) (1,455) 21% (4,266) (5,313) 20% Total adjusted EBITDA $ 13,444 $ 12,220 10% $ 21,368 $ 22,832-6% as a % of revenue 11.07% 12.77% 7.62% 10.22% Note: (1) Adjusted EBITDA is not a recognized measure under IFRS. Refer to "Non-GAAP Measures". Infrastructure Business Segment The Infrastructure business segment includes the operations of Ambassador, Bassi, Cedar, Place-Crete and SECON. The following summarizes the operating financial performance of the Infrastructure business segment: Revenue $ 88,541 $ 64,047 38% $ 193,636 $ 147,242 32% Operating expenses 79,984 55,627 44% 179, ,989 35% Adjusted EBITDA (1) $ 8,557 $ 8,420 2% $ 14,136 $ 14,253-1% as a % of revenue 9.66% 13.15% 7.30% 9.68% Note: (1) Adjusted EBITDA is not a recognized measure under IFRS. Refer to "Non-GAAP Measures". Revenue for the third quarter of 2018 increased 38% or $24.5 million over Q This was primarily due to improved activity levels at Bassi, Place-Crete and SECON. The overall increase was partially offset by a decline in contracting activity at Ambassador. For Q3 2018, Adjusted EBITDA increased 2% or $0.1 million over Q On a margin basis, this is a reduction of 349-basis points resulting from a lower-margined product mix for the increased activity levels within Bassi and continued pricing pressure for Ambassador. Year-to-date, revenue increased 32% or $46.4 million over the prior year-to-date period. This was primarily due to improved activity levels at Bassi, SECON and Place-Crete and the inclusion of revenue from Cedar which was acquired effective May 1, The overall increase was partially offset by a decline in contracting activity and pricing at Ambassador. Adjusted EBITDA decreased 1% or $0.1 million over the prior yearto-date period resulting in the adjusted EBITDA margin declining 238-basis points year-over-year due to increased competition pressuring volume and margins in Ambassador s operating region and a lower-margined product mix within Bassi s and SECON s operations. 5

7 Diversified Business Segment The Diversified business segment includes the operations of Circle 5, Industrial Scaffold, Kendall's Supply, Mackow and Printing Unlimited. The following summarizes the operating financial performance of the Diversified business segment: Revenue $ 28,263 $ 26,796 5% $ 77,320 $ 65,959 17% Operating expenses 23,181 22,713 2% 66,360 53,867 23% Adjusted EBITDA (1) $ 5,082 $ 4,083 24% $ 10,960 $ 12,092-9% as a % of revenue 17.98% 15.24% 14.17% 18.33% Note: (1) Adjusted EBITDA is not a recognized measure under IFRS. Refer to "Non-GAAP Measures". Revenue for Q increased 5% or $1.5 million over Q due to the inclusion of the operations of Circle 5 acquired effective November 1, 2017 and increased activity at Mackow from the expansion in the U.S. market offset by customer-related project deferrals for Industrial Scaffold. Adjusted EBITDA for the current quarter increased 24% or $1.0 million over Q On a margin basis, Adjusted EBITDA strengthened by 274-basis points quarter-over-quarter. This was due to the inclusion of Circle 5 mentioned above and improved operating efficiencies and expansion into the U.S. market expansion for Mackow. Year-to-date, revenue increased 17% or $11.4 million over the comparable prior year period primarily due to the inclusion of the operations of Circle 5 acquired effective November 1, Adjusted EBITDA for the first three quarters of 2018 decreased 9% or $1.4 million over the comparable 2017 period. On a margin basis, Adjusted EBITDA weakened by 416-basis points period-over-period as a result of Mackow experiencing changes in product mix in the first half of the year and customer-related project deferrals at Industrial Scaffold. Energy Business Segment The Energy business segment includes the operations of Allied Cathodic and Remote Waste. The following summarizes the operating financial performance of this segment: Revenue $ 4,487 $ 4,690-4% $ 9,254 $ 9,876-6% Operating expenses 3,502 3,480 1% 8,592 7,832 10% Adjusted EBITDA (1) $ 985 $ 1,210-19% $ 662 $ 2,044-68% as a % of revenue 21.95% 25.80% 7.15% 20.70% Note: (1) Adjusted EBITDA is not a recognized measure under IFRS. Refer to "Non-GAAP Measures". The Q revenue decrease of 4% or $0.2 million was the result of lower activity levels and a high degree of competition in the U.S. market. Adjusted EBITDA declined 19% or $0.2 million over Q3 2017, due to the reduction in revenue activities. Adjusted EBITDA margins weakened 385- basis points as described above. Year-to-date revenue decrease of 6% or $0.6 million was the result of Canadian industry activity levels continuing to be soft and a high degree of competition in the U.S. market. Adjusted EBITDA declined 68% or $1.4 million over the comparable 2017 period, as Remote incurred more fixed costs associated with securing the expansion into the U.S. market and all companies within this segment continue to experience pricing pressure as management continues focus on market share retention. Adjusted EBITDA margins weakened 1,355-basis points as described above. 6

8 Real Estate Business Segment The Real Estate business segment operates as FWPLP. The following summarizes the operating financial performance of this segment: Revenue $ 116 $ 123-6% $ 286 $ % Operating expenses % % Adjusted EBITDA (1) $ (33) $ (38) 13% $ (124) $ (244) 49% as a % of revenue % % % % Note: (1) Adjusted EBITDA is not a recognized measure under IFRS. Refer to "Non-GAAP Measures". This segment contains assets that have been reclassified as assets held for sale with an aggregate net book value of $7.3 million and an investment in a joint venture with a carrying value of $2.2 million as at September 30, The increase in Adjusted EBITDA for both the three and nine months ended September 30, 2018, was primarily due to lower operating expenses. Corporate Operating expenses $ 1,147 $ 1,670-31% $ 4,266 $ 5,978-29% External acquisition costs - (215) -100% - (665) -100% Adjusted EBITDA (1) $ (1,147) $ (1,455) 21% $ (4,266) $ (5,313) 20% Note: (1) Adjusted EBITDA is not a recognized measure under IFRS. Refer to "Non-GAAP Measures". Certain corporate expenses relate to Mosaic's involvement in the operational matters of its subsidiaries and are attributed to the Infrastructure, Energy, Diversified and Real Estate business segments. The "Corporate" information used in the table above is not a separate segment and is only presented to reconcile to the consolidated results. The decrease in corporate expenses period-over-period, was primarily due to Mosaic internalizing certain activities and 2017 included costs associated with financing activities completed in the year. Amortization Expenses Amortization expenses are incurred within all business segments, however they are reported separately from operating costs since they are non-cash period expenses. Amortization expense: Income producing properties $ - $ % $ - $ % Property, plant and equipment 1,992 1,880 6% 5,875 4,933 19% Intangible assets 3,553 1, % 10,689 4, % Total amortization expense $ 5,545 $ 3,617 53% $ 16,564 $ 9,910 67% The increase in amortization expense of property, plant and equipment and intangible assets (which include trade names, work force, customer relationships, backlog, employment agreements and non-compete agreements) was primarily driven by an increase in the respective asset categories resulting from Mosaic s recent acquisitions. 7

9 Equity-based Compensation Equity-based compensation $ 176 $ (179) 198% $ 557 $ 38 1,366% Equity-based compensation of $0.2 million for Q (2017 recovery of $0.2 million) and $0.6 million year-to-date 2018 ( $38 thousand) relate to the Company s share option plan and restricted share unit plan, whereby the Company recognized the pro rata share, over the vesting term, for the fair value of options and restricted share units granted to management and directors. Equity-based compensation is a non-cash expense. Impairment Loss Impairment loss $ 828 $ - 100% $ 828 $ - 100% A review was performed of the assets held for sale on September 30, 2018 resulting in an impairment charge of $0.8 million for the three and nine months ending September 30, 2018 ( $nil). Net Financing Costs Interest: Expense $ 1,928 $ 1,304 48% $ 5,699 $ 3,427 66% Income on cash and cash equivalents (29) (16) -81% (162) (77) 110% Accretion expense % 1,996 1,047 91% Amortization of debt issue costs % % Net finance costs $ 2,805 $ 2,207 27% $ 7,972 $ 4,604 73% as a % of average debt outstanding 7.74% 8.39% 7.28% 8.58% The increase in the effective net finance costs period-over-period was largely driven by the realignment of the Company s capital structure during fiscal Refer to "Capital Resources Loans and Borrowings" for details on Mosaic s debt facilities. Net financing costs include accretion of fair value and amortization of debt issue costs which increases the effective rate above the actual cash interest cost incurred. On a cash basis, interest expense as a percentage of average debt outstanding was 5.33% for Q (Q %) and 5.20% for the first three quarters of 2018 (first three quarters of %) which is consistent with Mosaic s overall debt facilities. Share of Joint Venture Loss (Income) Share of joint venture loss (income) $ 15 $ (112) -113% $ (159) $ (340) -53% The joint venture is between FWPLP and Harbour Equity Capital Corp. which is developing an industrial park near Regina, Saskatchewan. In Q3 2018, Mosaic realized a loss of $15,000 (Q $0.1 million income) and for the first three quarters of 2018 $0.2 million (first three quarters of $0.3 million). As of September 30, 2018, 52% of the project has been sold. Other income Other (income) loss $ (1,129) $ (19) 113% $ (1,129) $ 72 1,168% Other income for the quarter and nine months ended September 30, 2018 of $1.1 million relates to revaluation of the contingent consideration. 8

10 Change in Fair Value Common share purchase warrants $ (4,147) $ (3,158) 31% $ (14,670) $ (9,098) 61% NCI put option redemption (1,242) - 100% Change in fair value $ (4,147) $ (3,158) 31% $ (15,912) $ (9,098) 75% The common share purchase warrants (Warrants defined herein) are treated as derivative liability and are measured at fair value at the end of each reporting period. The non-cash change of $4.1 million in Q ( $3.2 million) and $14.7 million year-to-date ( $9.1 million), was driven by the decline in the Company s common share market price since December 31, 2017, which decreases the derivative liability s fair value with the offset being an increase to income. A gain of $1.2 million, year-to-date (2017 $nil), was recognized upon the redemption of a NCI put option. Refer to "Loans and Borrowings Non- Controlling Interest Put Options" for additional details. Provision for Income Tax Three months ended September 30, Nine months ended Nine 30, Income before income taxes $ 9,243 $ 9,425-1% $ 12,687 $ 16,626-23% Provision for income taxes $ 976 $ 1,411-31% $ (561) $ % effective income tax rate 10.6% 15.0% -4.4% 0.0% Included in Q was a current tax provision of $0.1 million ( $1.2 million) and a deferred tax provision of $0.8 million ( $0.2 million). Year-to-date, the Company recognized a current tax provision of $0.7 million ( $1.3 million) offset by a deferred tax reduction of $1.3 million ( $1.3 million). The variance from the expected tax provision was predominately the result of the change in fair value of the Warrants, contingent consideration payable, and distributions made to preferred security holders having different attributes for tax purposes than accounting under IFRS. At September 30, 2018, Mosaic has accumulated non-capital losses for income tax purposes of $47.1 million (December 31, $38.1 million) which expire between 2031 and 2038 and $1.5 million (December 31, $1.5 million) of net capital loss carry forwards available to reduce future years taxable capital gains. Net Income and Comprehensive Income Net income and comprehensive income attributable to: Equity holders $ 2,430 $ 3,987-39% $ 6,127 $ 6,580-7% Preferred dividends/distributions 1,512 1,512-4,487 5,493-18% Non-controlling interests 4,212 2,515 67% 2,902 4,553-36% Net income and comprehensive income $ 8,154 $ 8,014 2% $ 13,516 $ 16,626-19% Earnings per share: (1) Basic $ 0.23 $ % $ 0.58 $ % Diluted $ 0.21 $ % $ 0.55 $ % Note: (1) Pursuant to IFRS, earnings per share are calculated after giving effect to distributions on securities which rank in priority to common shares. For Q3 2018, Mosaic recognized net income and comprehensive income of $8.2 million compared to $8.0 million in Q Mosaic allocated income of $4.2 million ( $2.5 million) to non-controlling interests. Year-to-date, Mosaic recognized a net income and comprehensive income of $13.5 million compared to $16.6 million for the comparable prior year period. Mosaic allocated income of $2.9 million ( $4.6 million) to non-controlling interests. Pursuant to IFRS, earnings per share are calculated after giving effect to distributions on securities which rank in priority to common shares which include preferred securities and non-controlling interests. For Q3 2018, basic earnings per share was $0.23 (Q $0.38) and diluted earnings per share was $0.21 (Q $0.34). Year-to-date basic earnings per share was $0.58 ( $0.65 per share) and diluted earnings per share was $0.55 ( $0.69). 9

11 SUMMARY OF QUARTERLY RESULTS (in $000s, except as noted) Sep 30, 2018 Jun 30, 2018 Mar 31, 2018 Dec 31, 2017 Sep 30, 2017 Jun 30, 2017 Mar 31, 2017 Dec 31, 2016 Revenue $ 121,407 $ 91,089 $ 68,000 $ 88,650 $ 95,656 $ 69,726 $ 58,109 $ 50,859 Adjusted EBITDA $ 13,444 $ 6,141 $ 1,783 $ 5,196 $ 12,220 $ 5,350 $ 5,262 $ 3,299 Net income (loss) $ 8,154 $ (529) $ 5,891 $ (9,509) $ 8,013 $ 7,603 $ 1,010 $ (2,063) Net income (loss) attributable to equity holders $ 2,430 $ (3,015) $ 6,712 $ (11,787) $ 3,987 $ 5,019 $ (2,425) $ (2,063) Earnings (loss) / $ common share (1) Basic $ 0.23 $ (0.28) $ 0.63 $ (1.12) $ 0.38 $ 0.48 $ (0.26) $ (0.45) Diluted $ 0.21 $ (0.28) $ 0.56 $ (1.12) $ 0.34 $ 0.40 $ (0.26) $ (0.45) Note: (1) Net income (loss) attributable to equity holders and net income (loss) per common share are calculated after the declaration of distributions and dividends paid to the holders of preferred securities, Series "A" Shares and private yield securities and non-controlling interests. Certain of the Company s subsidiaries experience seasonal fluctuations in activity and financial performance. Furthermore, the timing of the acquisitions of Bassi (December 2016), Cedar (May 2017) and Circle 5 (November 2017) have impacted the quarterly results following their acquisition date. In the fourth quarter of 2017, Mosaic recognized an impairment charge of $3.8 million (fourth quarter of $6.8 million) which adversely impacts the net income and earnings per common share in the respective reporting period. In the third quarter of 2018, Mosaic recognized an impairment charge of $0.8 million (third quarter $nil) which adversely impacts the net income and earnings per common share in the respective reporting period. The impact on net income caused by the fair value adjustments of the Warrants (defined herein) is: (in $000s, except as noted) Sep 30, 2018 Jun 30, 2018 Mar 31, 2018 Dec 31, 2017 Sep 30, 2017 Jun 30, 2017 Mar 31, 2017 Dec 31, 2016 Decrease (increase) to net income $ (4,147) $ (1,540) $ (8,983) $ 4,336 $ (3,158) $ (6,805) $ 863 $ - LIQUIDITY For the nine months ended September 30, (in $000s, except as noted) Net cash provided by (used in): Operating activities $ 5,053 $ (1,873) Investing activities (3,765) (18,282) Financing activities ,926 Net increase (decrease) in cash $ 1,475 $ (9,229) Operating Activities For the first three quarters of 2018, the Company generated $5.1 million in cash from operating activities. Cash generated from operating activities before non-cash working capital items was $15.1 million ( $17.4 million). Mosaic s subsidiaries have an aggregate of $37.1 million in available operating facilities of which $2.8 million has been drawn as of September 30, Furthermore, Mosaic has a $50.0 million revolving credit facility of which $35.0 million is available to support existing working capital requirements and $15.0 million is available, subject to completion of future acquisitions. As of September 30, 2018, $30.0 million was drawn on the facility. As at September 30, 2018, Mosaic had working capital of $73.5 million (December 31, $66.4 million). Management believes that the current working capital along with the supporting operating credit facilities are sufficient to support current operating activities. 10

12 Investing Activities Net cash used in investing activities was $3.8 million for in the three quarters of Net cash used included: The gross investment of $5.6 million in capital expenditures or $4.1 million, net of financing and disposal proceeds as detailed below; and the receipt of $0.4 million in distributions from the Company s real estate joint venture. Capital Expenditures For the nine months ended September 30, 2018, Mosaic invested $5.6 million gross and $4.1 million net of financing and disposal proceeds, in capital assets. The allocation of capital expenditures between assets that will increase revenue capacity ("Growth") and assets that will maintain or support existing revenue capacity ("Sustaining") was as follows: (in $000s, except as noted) Growth Sustaining Total Business segment: Infrastructure $ 1,110 $ 1,418 $ 2,528 Diversified 1, ,388 Energy Real estate Corporate $ 3,317 $ 2,284 5,601 Capital expenditures, financed (1,050) Capital expenditures, net of financing 4,551 Proceeds on disposal of equipment (415) Capital expenditures, net of financing and proceeds on disposal $ 4,136 Growth expenditures within the Diversified segment include costs to expand Industrial Scaffolding s operating capacity. Financing Activities Net cash generated from financing activities was $0.2 million for the nine months ended September 30, Net cash generated included: a draw of $2.8 million on operating facilities; the net draw of $10.6 million on the Credit Facility; the net payment of $2.4 million in notes payable; the net payment of $0.4 million related to equity-based compensation; $3.3 million in dividends paid to the common share holders (see below); $4.5 million in distributions paid to the Preferred Securities holders (see below); and the payment of $2.5 million to non-controlling interests. Distributions and Dividends Non-controlling Interests Non-controlling interests consist of the capital contributions and accumulated earnings of the minority partners in subsidiaries of Mosaic, less distributions made to minority partners. During 2018, net income of $2.9 million ( $4.6 million) was allocated to non-controlling interests and distributions of $2.5 million ( $3.2 million) were paid to holders of the non-controlling interests. 11

13 Preferred Securities Information regarding the distributions declared and paid to holders of Preferred Securities year-to-date for 2018 and fiscal 2017 are set forth below. (in $000s, except as noted) March $ 1,479 $ 2,485 (1) June 1,496 1,496 September 1,512 1,512 December - 1,512 $ 4,487 $ 7,005 Note: (1) The payment for March 2017 includes $1.1 million distribution on legacy 10% Preferred Securities and $0.3 million distribution on Private Yield Securities, all of which were redeemed in Q Common Share Dividends Information regarding dividends declared and paid to holders of common shares year-to-date for 2018 and fiscal 2017 are set forth below. (in $000s, except as noted) Per Per Share Total Share Total January $ $ 371 $ - $ - February March ,093 April May June July August September October November December $ $ 3,343 $ $ 4,433 Mosaic currently intends to declare dividends of $0.42 per common share per annum. Effective April 2017, Mosaic changed the common share payment frequency to a monthly basis (previously quarterly basis). Mosaic s has a dividend re-investment plan ("DRIP") for its common share dividends. Under the DRIP, holders of common shares who are residents of Canada and are participating in the DRIP will have dividends relating to their common shares reinvested in common shares. The DRIP allows Mosaic to elect to have the common shares purchased on the open market or issued from treasury to satisfy the obligations of the DRIP. Distribution / Dividend Payout Ratios Mosaic s payout ratios have historically fluctuated significantly, quarter-to-quarter, due to the seasonality of some of its businesses, the effect of acquisitions and the raising of capital. As such, the Company has changed its payout ratio reporting to a TTM basis to normalize the impact of quarterly variances. The Preferred Distribution Payout Ratio and Combined Payout Ratio with the corresponding distributions and dividends were as follows: (in $000s, except as noted) Dec 31, 2017 Mar 31, 2018 Jun 30, 2018 Sep 30, 2018 TTM 2018 Free Cash Flow (1) $ 1,236 $ (891) $ 796 $ 7,051 $ 8,192 Preferred security distributions $ 1,512 $ 1,479 $ 1,496 $ 1,512 $ 5,999 Common share dividends 1,114 1,113 1,115 1,115 4,457 Total equity based distributions $ 2,626 $ 2,592 $ 2,611 $ 2,627 $ 10,456 Payout Ratios: Preferred Distribution (1) 73% Combined Distribution (1) 128% 12

14 (in $000s, except as noted) Dec 31, 2016 Mar 30, 2017 Jun 30, 2017 Sep 30, 2017 TTM 2017 Free Cash Flow (1) $ 1,069 $ 2,308 $ 1,559 $ 5,987 $ 10,922 Preferred security distributions $ 3,256 $ 2,485 $ 1,496 $ 1,512 $ 8,749 Common share dividends 865 1,093 1,111 1,115 4,184 Total equity based distributions $ 4,121 $ 3,578 $ 2,607 $ 2,627 $ 12,933 Payout Ratios: Preferred Distribution (1) 80% Combined Distribution (1) 118% Note: (1) Free Cash Flow, Preferred Distribution Payout Ratio and Combined Distribution Payout Ratio are not recognized measures under IFRS. Refer to "Non-GAAP Measures". Contractual Obligations The Company has entered into operating leases for office, shop and equipment. The following are the future commitments related to these agreements: (in $000s, except as noted) Amount 2018 $ 3, , , , Thereafter 1,890 $ 11,683 Contingent consideration related to acquisitions is dependent on the future financial performance of the business acquired and management has recognized what it believes will be the more likely amount payable. Furthermore, certain subsidiaries of Mosaic are contingently liable for contractor obligations relating to performance and completion of construction contracts. These may include contingent liabilities for subcontractors failing to meet their contractual performance obligations. Due to the inherent nature of these contractual obligations, estimating the aggregate exposure is not possible. 13

15 CAPITAL RESOURCES At September 30, 2018, Mosaic had cash and cash equivalents of $10.9 million, working capital of $73.5 million and $39.3 million in aggregate undrawn credit facilities. Loans and Borrowings Operating Facilities Certain of Mosaic s subsidiaries have various credit facilities to support operations and working capital needs. These credit facilities reside in the individual subsidiaries and as such, cannot be aggregated with the parent company. The facilities bear interest at the bank s prime lending rate plus 0.5% to 1.0% per annum. By business segment, the following is a summary of these facilities: Balance Outstanding (in $000s, except as noted) Facility Type Availability Restrictions Security Sep 30, 2018 Dec 31, 2017 Infrastructure Ambassador Revolving demand $ 3,000 AR & INV AA $ - $ - Bassi Revolving demand 2,000 75% of AR GSA & AA - - Cedar Revolving demand 1,800 75% of AR GSA Place-Crete Revolving demand 4,000 75% of AR GSA - - SECON Revolving demand 6,800 75% of AR GSA & AA 2,363 - SECON 5-year term 4,000 CAPEX GSA & AA ,600 2,576 - Diversified Circle 5 Revolving demand 5,000 AR & INV GSA - - Mackow Revolving demand 3,000 AR & INV GSA Industrial Scaffold Revolving term 7,500 75% AR GSA & AA , Total $ 37,100 $ 2,833 $ - Notes: "AR" eligible trade accounts receivables "INV" inventories "CAPEX" capital expenditures "AA" assignment of all assets "GSA" general security agreement Credit Facility On June 29, 2018, Mosaic renewed a $50.0 million revolving three-year credit facility agreement with a Canadian financial institution (the "Credit Facility") bearing interest at rates ranging from prime plus 0.50% %. $15.0 million of the Credit Facility s availability is subject to completion of future acquisitions. The Credit Facility is secured by general security agreements granted by Mosaic and certain of its subsidiaries together with an assignment of securities that Mosaic holds in certain subsidiaries as well as guarantees granted by certain of Mosaic s subsidiaries. As at September 30, 2018, $30.0 million (December $19.4 million) was outstanding. 14

16 Notes Payable Notes payable include vehicle financings, equipment loans, term loans, leasehold improvement loans, finance leases and notes payable to holders of non-controlling interests. By business segment, the following is a summary of the various notes, loans and leases outstanding: Balance Outstanding (in $000s, except as noted) Facility Type Term Rate Security Sep 30, 2018 Dec 31, 2017 Infrastructure Bassi VTB note Nov % Bassi GSA & MG $ 3,000 $ 3,000 Cedar VTB note Apr % Cedar GSA 4,333 4,333 Place-Crete Promissory note Jan % Place-Crete GSA ,578 7,668 Diversified Printing Unlimited Term loan Oct 2020 P+0.75% Mortgage Mackow VTB loan July % Mackow GSA 2,366 4,059 Industrial Scaffold Promissory note Jan % NA 6,221-9,145 4,621 Real Estate FWPLP Term loan 20 years P+1.0% Mortgage FWPLP Demand loan 20 years P+1.0% Mortgage 2,022 2,096 2,425 2,521 All segments Equipment & leasehold < 5 years < P+0.5% GSA & FC 3,180 1,905 All segments Finance leases < 5 years < 9.6% FC 4,996 6,061 All segments Unamortized discount (614) (463) Liabilities associated with assets held for sale (2,425) (2,521) Total notes payable 24,285 19,792 Current portion (6,843) (4,634) Non-current portion $ 17,447 $ 15,158 Notes: "VTB" vendor-take-back "GSA" general security agreement "MG" Mosaic guarantee "FC" first charge on specified assets Debentures Mosaic has 50,000 Debentures, with a face value of $1,000 (one thousand dollars) each issued and outstanding. The Debenture bears interest at 5%, payable quarterly, mature on January 26, 2024, are not redeemable before maturity, and the Debentures carry a security interest on all the assets of Mosaic and certain of its subsidiaries, subject only to the first priority security interest of Mosaic s Credit Facility. The following summarizes the Debentures carrying value: As at (in $000s, except as noted) Sep 30, 2018 Dec 31, 2017 Principal amount $ 50,000 $ 50,000 Unamortized discount (2,584) (2,879) Unamortized transaction costs (106) (120) $ 47,310 $ 47,001 15

17 Convertible Debentures The Company has 13,124 (December 31, ,124) convertible unsecured subordinated debentures ("Convertible Debentures"), with a face value of $1,000 (one thousand) each issued and outstanding. Interest of 7% is payable, semi-annually in arrears. The Convertible Debentures are a compound financial instrument reflecting both a debt and equity component. The carrying value of the Convertible Debentures were as follows: As at (in $000s, except as noted) Sep 30, 2018 Dec 31, 2017 Debt component Principal amount $ 13,124 $ 13,124 Less: Unamortized transaction costs (1,012) (1,169) Equity component (944) (944) Accumulated accretion expense $ 11,811 $ 11,384 Equity component Amount allocated to equity $ 944 $ 944 Less: Allocated deferred financing fees and deferred taxes (112) (128) $ 832 $ 816 The Convertible Debentures mature on December 31, The following table summarizes the contractual rights on redemption or conversion. Year Option Common Share Price Redemption Value Common Shares on Conversion Anytime Holder N/A N/A Mosaic >$11.25 Face value + interest $1,000 / 95% CSP 2021 Mosaic N/A Face value + interest $1,000 / 95% CSP Note: "CSP" common share price The Convertible Debentures are direct, subordinated unsecured obligations of the Company, subordinated to the Credit Facility and any other senior indebtedness. Mosaic has the option to settle the principal amount of the Convertible Debentures upon redemption or at maturity through the issuance of common shares. Common Share Purchase Warrants As of September 30, 2018, Mosaic had 17.0 million common share purchase warrants ("Warrants") with a carrying value of $1.1 million (December 31, $15.8 million) outstanding, entitling the holder to acquire up to 17.0 million common shares of Mosaic at a strike price of $8.81 per common share (the "Strike Price") until January 26, The holder has the option to exercise the Warrants on a cashless basis whereby they can elect to be issued a number of common shares calculated as the number of Warrants multiplied by the common share market value at time of exercise minus the Strike Price. As such, the Warrants were deemed as a derivative liability and are measured at fair value. Refer to "Financial Instruments Fair Value Warrants" for additional details. 16

18 Redeemable Non-Controlling Interest On October 17, 2017, Mosaic issued $20,000 of subordinated partnership units ("Redeemable NCI") in a newly formed limited partnership controlled by Mosaic. The Redeemable NCI bears interest at 7.0% per annum, matures on December 31, 2020 and is secured by a security interest in the assets of Circle 5. Mosaic incurred $0.6 million in transaction costs. As at (in $000s, except as noted) Sep 30, 2018 Dec 31, 2017 Principal amount $ 20,000 $ 20,000 Unamortized transaction costs (431) (570) $ 19,569 $ 19,430 Non-Controlling Interest Put Options The Company has entered into agreements with certain of its non-controlling interest partners whereby the agreements contain a put option, which provides the holder with the right to require the Company to purchase their retained interest for deemed fair market value at the time the put is exercised. The Company also negotiated reciprocal call options, which would require the same non-controlling interests to sell their retained interest to Mosaic for deemed fair market value at the time the call is exercised. The put and call options are exercisable between now and December 31, Upon the occurrence of certain unusual events, the put and call option exercise periods are accelerated. Effective January 1, 2018, Industrial Scaffold settled a put option with a non-controlling interest. Under terms of the limited partnership agreement, Industrial Scaffold redeemed the 25% non-controlling interest for $6.2 million payable over 3 years in equal annual installments in the form of a promissory note bearing interest at 5.0% per annum. The liability recognized in connection with the put options has been estimated using the guidance as defined in the agreements. The estimated future payment obligation is then discounted to its present value at each statement of financial position date. The significant unobservable inputs include the puts being exercised between now and six years at a notional aggregate fair value of $13.6 million using a discount rate of 10.0%. An increase in the deemed fair market value or a reduction in the discount rate would increase the put liability. Equity Equity increased $8.7 million to $74.4 million at September 30, 2018 from $65.8 million at December 31, The increase was mainly attributable to the settlement of the Industrial Scaffold put option and the net income and comprehensive income generated in the year. Refer to "Capital Resources Loans and Borrowings Non-Controlling Interest Put Options". Preferred Securities Mosaic has 10.0 million, Preferred Securities, with a face value of $10 (ten dollars) each issued and outstanding. The Preferred Securities bear interest at a rate of 6% per annum, payable quarterly, are unsecured obligations of Mosaic subordinate to all liabilities of Mosaic, excluding the existing Convertible Debentures. The Preferred Securities are not redeemable by Mosaic before January 26, 2022 (the "Call Date"). After the Call Date, the Preferred Securities may be redeemed at the option of Mosaic at a price per Preferred Security equal to the greater of: (i) $10 (ten dollars); and (ii) the ten-day volume weighted average trading price of the Preferred Securities. Securities Data As at November 13, 2018, the following are numbers of securities and principal amount of Mosaic s issued and outstanding securities: (in $000s, except share amounts) Number Outstanding Principal Amount Designation of class: Debentures 50,000 $ 50,000 Convertible Debentures 13,124 $ 13,124 Preferred Securities 10,000,000 $ 100,000 Common shares (1) 10,608,058 N/A Share options 724,462 N/A Restricted security units 307,162 N/A Warrants 17,026,106 N/A Note: (1) As at September 30, 2018, 304,499 common shares had been purchased and are being held by the trustee under the Mosaic equity-based compensation plan for the benefit of the plan participants. 17

19 Non-controlling Interests Separate from equity, non-controlling interests were $52.5 million at September 30, 2018 compared to $58.0 million at December 31, The decrease was largely attributable to the settlement of the Industrial Scaffold put option. Refer to "Capital Resources Loans and Borrowings - Non- Controlling Put Options" for details. CAPITAL MANAGEMENT The Company s overall capital management objectives are: (i) to finance its operations and growth-oriented activities; and (ii) to limit risk to an acceptable level to maximize equity holder value. To accomplish this, Mosaic utilizes a combination of debt and equity instruments. This capital mix is regularly monitored to ensure all externally imposed capital compliance requirements of the Company, including financial covenants are maintained. Credit Facility Under its Credit Facility, the Company is required to operate the business in normal course while maintaining a number of financial covenants which are measured quarterly. The definition of measurements used to calculate these financial covenants are in accordance with the lending agreement and are calculated based on the lender s interpretation, which may not be equal to individual financial amounts. Mosaic was in compliance with the financial covenants under the Credit Facility as of September 30, The following summarizes the key financial covenant requirements and compliance calculations as at September 30, 2018: (in $000s, except as noted) Requirement Calculated Compliant Total Debt to Gross EBITDA < Yes Net Funded Debt to EBITDA < Yes Debt Service Coverage Ratio > Yes The following outlines the detailed components and calculation of each covenant: Total Debt to Gross EBITDA and Net Funded Debt to EBITDA Ratios (in $000s, except as noted) Sep 30, 2018 Debt: Operating loans $ 2,833 Credit facility 29,990 Notes payable (secured) 20,826 Total Debt 53,649 Less Mosaic s share of cash (9,086) Net Funded Debt $ 44,563 TTM EBITDA: Gross $ 28,070 Mosaic share $ 19,773 Financial covenants: Total Debt to Gross EBITDA (less than 3.00) 1.91 Net Funded Debt to Mosaic EBITDA (less than 3.00)

20 Debt Service Coverage Ratio (in $000s, except as noted) Sep 30, 2018 TTM Cash Flow EBITDA Mosaic Share $ 16,768 Less: Mosaic s portion of unfunded sustaining capital expenditures (1,806) Mosaic s portion of cash taxes (1,198) Total TTM Cash Flow $ 16,768 TTM Fixed Charges Interest expense $ 7,299 Repayment of notes payable (secured) 2,481 Total TTM Debt Service $ 9,780 Financial covenant: Debt Service Coverage Ratio (greater than 1.50) 1.71 Operating Facilities Under its various operating facilities, Mosaic s subsidiaries are required to operate the business in normal course while maintaining a number of financial covenants. The definition of measurements used to calculate these financial covenants are in accordance with the respective individual lending agreements and are calculated based on the lender s interpretation, which may not be equal to individual financial amounts. Mosaic s subsidiaries were in compliance with the financial covenants under their respective operating facilities as of September 30, The following summarizes the key financial covenant requirements of these agreements: Frequency Debt Servicing Coverage Debt : Tangible Net Worth Equity or Tangible Net Worth Compliant Infrastructure Ambassador Annual > 1.25 < 2.5 N/A Yes Place-Crete At any time N/A N/A > $4.0 million Yes Bassi At any time N/A N/A > $2.0 million Yes Cedar At any time N/A N/A N/A Yes SECON Annual > 1.20 < 2.5 N/A Yes Diversified Industrial Scaffold At any time N/A < 1.5 N/A Yes Mackow At any time >1.20 <3.0 N/A Yes Circle 5 At any time >3.00 <1.2 N/A Yes Real Estate FWPLP Annual > 1.35 N/A N/A Yes Debentures The Debentures contain a financial covenant that total debt to gross EBITDA will not exceed 2.50 to 1.00 at the time the debt was incurred, without prior written consent. Total debt is defined to include consolidated bank debt, convertible debentures, capital lease obligations, equipment financing obligations, vendor take-back notes and other commercial notes, all to the extent they rank in priority to the Debentures. Gross EBITDA is defined as gross earnings before interest, taxes, depreciation and amortization. Mosaic is in compliance with this covenant as at September 30,

21 FINANCIAL INSTRUMENTS A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument to another entity. Upon initial recognition, all financial instruments, including derivatives, are recognized on the statement of financial position at fair value. Subsequent measurement is then based on the financial instruments being classified into one of four categories: held for trading, loans and receivables, available for sale, and financial liabilities. Mosaic has designated its financial instruments into the following categories applying the indicated measurement methods: Financial Instrument Cash and cash equivalents Trade, accrued and other receivables Trade, accrued and other payables; Credit Facility; notes payable; Debentures; Convertible Debentures; and redeemable non-controlling interest Contingent consideration. Warrants; and noncontrolling interest put options Measurement Method Amortized cost Amortized cost Amortized cost Fair value Each reporting period, Mosaic assesses whether there are any impaired financial assets, other than those classified as held for trading. An impairment loss, other than temporary, is included in net earnings. Fair Value Financial Assets Due to the short-term nature of: cash and cash equivalents; trade, accrued and other receivables; deposits and prepaid expenses; and income taxes recoverable; the Company has determined that the carrying amounts approximate fair value. Warrants The Warrants are fair-valued as at each reporting period. A change in the inputs utilized to calculate the fair value such as the Company s share price, volatility, remaining life and interest rate can have a material impact on the reported income and comprehensive income for the period. In determining the fair value of the Warrants, the Company used the Black-Scholes option pricing model with the following assumptions: average volatility rate; market price as at the reporting date; risk-free interest rate; and the remaining expected life of the Warrants. The inputs used in the Black-Scholes model are taken from observable market data. As at September 30, 2018, the Warrants were valued at $1.1 million using an option pricing model with the following assumptions: weighted average volatility rate of 30%; risk-free interest rate of 2.92%; liquidity discount of 20%; and an expected life of 5.34 years. The liquidity discount involves significant management judgement as this is an unobservable input. Non-controlling interest put options The liability recognized in connection with the put options has been estimated using the guidance as defined in the agreements. The estimated future payment obligation is then discounted to its present value at each statement of financial position date. The significant unobservable inputs include the puts being exercised between now and six years at a notional aggregate fair value of $18.5 million using a discount rate of 10.0%. An increase in the deemed fair market value or a reduction in the discount rate would increase the put liability. Credit Risk Credit risk is the risk of financial loss to Mosaic if a customer or counterparty to a financial instrument fails to meet its contractual obligations. Mosaic manages the credit exposure related to cash and cash equivalents by choosing to conduct business with Canadian financial institutions which have high credit ratings and by monitoring all short-term deposits to ensure an adequate rate of return. Currently management does not expect any counterparty, at the Mosaic level, to fail to meet its obligations. Mosaic is exposed to credit risk as an owner of businesses that extend credit to customers and tenants. Mosaic's trade receivables are due from a wide range of customers and tenants and are subject to normal credit risk. The credit quality of the trade receivables amount is considered adequate. Mosaic provides allowances for any customer accounts where collectability is doubtful. Mosaic offers a diverse variety of products and services to a wide range of customers across its subsidiaries. The majority of accounts receivable relate to trade receivables. Mosaic's management believes at this time that all receivables, net of allowances made for doubtful accounts, will be collected. 20