Condensed Interim Consolidated Financial Statements (Unaudited) Lonestar West Inc. June 30, 2015 Second Quarter 2015

Transcription

1 Condensed Interim Consolidated Financial Statements (Unaudited) Lonestar West Inc. June 30, 2015 Second Quarter 2015

2 CONDENSED INTERIM CONSOLIDATED STATEMENTS OF FINANCIAL POSITION June 30, 2015 December 31, 2014 (unaudited) (audited) ASSETS Current assets: Cash $ 1,462,891 $ 1,621,683 Accounts receivable 17,379,222 15,757,975 Prepaid expenses and deposits 483,833 1,070,967 19,325,946 18,450,625 Non-current assets: Property and equipment (note 5) 58,546,439 51,127,409 Investments 38,692 38,692 Intangible assets 1,446,116 1,697,151 Goodwill 3,506,674 3,280,881 Deferred tax asset - 294,672 LIABILITIES AND SHAREHOLDERS' EQUITY $ 82,863,867 $ 74,889,430 Current liabilities: Operating line of credit (note 6) $ 5,243,561 $ 4,104,586 Accounts payable and accrued liabilities 3,191,970 4,743,936 Current portion of term debt (note 7) 8,116,658 5,796,536 Current portion of finance lease obligations (note 8) 598, ,044 Current portion of promissory notes 803,663-17,954,502 15,219,102 Non-current liabilities: Promissory notes 1,032,989 2,479,971 Term debt (note 7) 17,579,833 10,544,017 Finance lease obligations (note 8) 1,077,555 1,347,776 Deferred tax liability 1,302,282 1,384,995 38,947,161 30,975,861 Shareholders' equity: Share capital 38,565,735 38,565,735 Contributed surplus 594, ,591 Accumulated other comprehensive income 1,390, ,337 Retained earnings 3,365,901 3,936,906 43,916,706 43,913,569 $ 82,863,867 $ 74,889,430 signed "James Horvath" Director signed "David Prussky" Director The accompanying notes are an integral part of these condensed interim consolidated financial statements

3 CONDENSED INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (Unaudited) Three months Six months June 30, June 30, June 30, June 30, Revenue $ 10,643,600 $ 9,555,922 $ 23,956,581 $ 21,074,881 Operating 8,654,634 7,817,491 18,532,402 16,422,835 Selling, general and administration 1,371, ,737 2,573,358 1,669,409 Depreciation and amortization (note 5) 1,716, ,404 3,283,086 1,748,347 Other 47, , , ,451 Total expenses 11,789,818 9,781,991 24,544,184 20,003,042 (Loss) Income from operations (1,146,218) (226,069) (587,603) 1,071,839 Other income (expenses) Interest on term debt (note 7) (302,517) (135,952) (484,939) (252,222) Interest on finance lease obligations (note 8) (20,179) (32,074) (45,397) (76,524) Gain on disposal of property and equipment - 5,605-5,605 Litigation settlement - 242, ,114 Realized loss on foreign exchange (31,973) (30,617) (4,721) (54,866) Change in fair value of promissory notes (note 4) 827, ,145 - (Loss) Income before income taxes (673,742) (176,993) (295,515) 935,946 Provision for (recovery of) income taxes 108,228 (44,249) 275, ,986 (Loss) Net income (781,970) (132,744) (571,005) 701,960 Other comprehensive income (loss) Foreign currency translation adjustment 165,518 (106,383) 527,525 32,398 Total comprehensive (loss) income $ (616,452) $ (239,127) $ (43,480) $ 734,358 (Loss) Earnings per share (note 9): Basic $ (0.03) $ (0.01) $ (0.02) $ 0.03 Diluted $ (0.03) $ (0.01) $ (0.02) $ 0.03 Weighted average number of common shares: Basic 29,158,053 23,693,540 29,158,053 22,947,010 Diluted 29,158,053 23,693,540 29,158,053 23,237,054 The accompanying notes are an integral part of these condensed interim consolidated financial statements

4 CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Unaudited) Share capital Contributed surplus Retained earnings Accumulated other comprehensive income Total Balance, January 1, 2014 $ 16,961,919 $ 486,596 $ 2,864,369 $ 132,791 $ 20,445,675 Net income , ,960 Common shares issued 20,487, ,487,376 Common shares issued under option plan 367,220 (126,220) ,000 Share-based payments - 85, ,841 Foreign currency translation adjustment ,398 32,398 Balance, June 30, 2014 $ 37,816,515 $ 446,217 $ 3,566,329 $ 165,189 $ 41,994,250 Balance, January 1, 2015 $ 38,565,735 $ 547,591 $ 3,936,906 $ 863,337 $ 43,913,569 Loss - - (571,005) - (571,005) Foreign currency translation adjustment , ,525 Share-based payments - 46, ,617 Balance, June 30, 2015 $ 38,565,735 $ 594,208 $ 3,365,901 $ 1,390,862 $ 43,916,706 The accompanying notes are an integral part of these condensed interim consolidated financial statements

5 CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Three months Six months June 30, June 30, June 30, June 30, Cash flows from operating activities: Net income $ (781,970) $ (132,744) $ (571,005) $ 701,960 Share-based payments (3,131) 78,285 46,617 85,841 Realized loss on foreign exchange 31,973 30,617 4,721 54,866 Change in fair value of promissory notes (note 4) (827,145) - (827,145) - Depreciation and amortization 1,716, ,104 3,283,086 1,748,310 Provision for income taxes 108,228 (44,249) 275, ,986 Income taxes paid (46,942) - (46,942) - Gain on disposal of property and - (5,605) - (5,605) equipment 197, ,408 2,164,822 2,819,358 Changes in non-cash operating working (1,760,089) 1,807,416 (2,197,772) 621,456 capital (note 10): Cash provided by (used in) operating activities (1,562,908) 2,660,824 (32,950) 3,440,814 Cash flows from investing activities: Purchase of property and equipment (388,515) (4,827,934) (7,846,732) (13,634,437) Proceeds from disposal of other assets - 561, ,966 Acquisition - (5,793,450) (2,451,600) (5,793,450) Cash used in investing activities (388,515) (10,059,418) (10,298,332) (18,865,921) Cash flows from financing activities: Proceeds from term debt 1,988,995 1,535,984 12,369,572 3,551,700 Repayment of term debt (1,665,267) (685,270) (3,050,563) (1,254,078) Repayment of finance lease obligations (74,049) (174,909) (279,988) (486,098) Proceeds from share issuance (net) - 18,885,323-18,885,323 Proceeds from exercise of options - 64, ,000 Proceeds from (repayment of) operating 590,631 (4,802,058) 1,138,975 - line of credit Cash provided by financing activities 840,310 14,823,070 10,177,996 20,937,847 Foreign currency effect on cash 601 (57,277) (5,506) (78,589) Net increase (decrease) in cash (1,110,512) 7,367,199 (158,792) 5,434,151 Cash, beginning of period 2,573,403 1,366,111 1,621,683 3,299,159 Cash, end of period $ 1,462,891 $ 8,733,310 $ 1,462,891 $ 8,733,310 The accompanying notes are an integral part of these condensed interim consolidated financial statements

6 1. NATURE OF OPERATIONS Lonestar West Inc. ("Lonestar") was incorporated on June 5, 2008 under the laws of the Canada Business Corporations Act. On December 17, 2008, Lonestar completed an initial public offering ("IPO"). Lonestar s shares are publicly traded on the TSX Venture Exchange under the symbol "LSI". Lonestar provides the technical application of hydro-vacuum, vacuum, water truck and auxillary services, primarily to infrastructure and oil and gas customers. The registered business address is Site 5, RR#1, Box 1, Sylvan Lake, Alberta, T4S 1X6. 2. BASIS OF PREPARATION Statement of compliance The condensed interim financial statements include the financial statements of Lonestar and the following subsidiaries: % equity interest Country of Name Incorporation June 30, 2015 December 31, 2014 Lonestar Sylvan Inc. Canada 100% 100% Lonestar Vacuum Inc. Canada 100% 100% Lonestar West USA Inc. U.S.A. 100% 100% Lonestar West Enterprises, LLC U.S.A. 100% 100% Lonestar West Services, LLC U.S.A. 100% 100% These condensed interim consolidated financial statements have been prepared in accordance with International Accounting Standards ( IAS ) 34 Interim Financial Reporting. These condensed interim financial statements do not include all of the information required for full annual financial statements, and should be read in conjunction with the annual financial statements for the year December 31, 2014, which have been prepared in accordance with International Financial Reporting Standards ( IFRS ). These condensed interim consolidated financial statements were approved and authorized for issue by the Board of Directors on August 20, Seasonality There are factors causing quarterly variances that may not be reflective of the Company s future performance. The Company s earnings generally follow the seasonal activity pattern of western Canada s oil and gas industry because of the significance of its operations in Canada. The oil and gas industry in this region is typically more active during the winter months as the movement of heavy equipment over frozen ground is generally easier. Rain through spring, summer and fall reduces activity levels because of the weather s effect on ground conditions and consequently its load bearing capacity. The Company s operations in other parts of the United States are generally less affected by the weather and are less seasonal by nature. As a result of the seasonal variations, quarterly operating results should not be relied upon as any indication of result for any future period

7 2. BASIS OF PREPARATION (continued) Basis of measurement These condensed interim consolidated financial statements were prepared on a going concern basis, under the historical cost convention except for certain financial instruments measured at fair value through profit or loss and share-based payment transactions which are measured at fair value. Functional and presentation currency Items included in these condensed interim consolidated financial statements are measured using the currency of the primary economic environment in which the entity operates ( the functional currency ). The functional currency of Lonestar`s Canadian subsidiaries is the Canadian dollar. The functional currency of Lonestar`s United States subsidiaries is the United States dollar. The presentation currency of the Company is the Canadian dollar. 3. SIGNIFICANT ACCOUNTING POLICIES These condensed interim consolidated financial statements follow the same accounting policies and methods of computation as the most recent annual consolidated financial statements of the Company for the year December 31, BUSINESS COMBINATIONS Acquisition of Firehawk Services Ltd. On February 20, 2015 the Company completed the acquisition of certain assets of Fort McMurray, Alberta based Firehawk Services Ltd. ( Firehawk ) for an estimated purchase price of $2,699,056. The Company initially made payments of $2,477,300 for automotive and equipment. An additional $136,756 is currently estimated to be payable as deferred consideration over a period of five years if certain performance triggers events are met. The acquisition of Firehawk brings the Lonestar Lease Operator program to an end and increased the Company s corporate fleet. The details of the acquisition are as follows: Automotive and equipment $ 2,451,600 Non-compete agreement 62,804 Deferred tax liability (3,925) Goodwill 188,577 $ 2,699,056 The components of the purchase price were as follows: Long term debt $ 2,477,300 Deferred consideration 221,756 $ 2,699,

8 4. BUSINESS COMBINATIONS (continued) The purchase price allocation on the acquisition is preliminary, as the Company is working to quantify the opening fair values, and the estimates of additional consideration that may be payable on an earn out basis. Therefore the fair value of the assets acquired, and the intangible assets arising from the acquisition and related income taxes cannot be determined as of the date of these financial statements. Acquisition of Vamp Oilfield Services Inc. On June 20, 2014 the Company acquired certain assets of Vamp Oilfield Services Inc. ( Vamp ) a Moose Jaw, Saskatchewan based oilfield service company. Included in the purchase price were promissory notes ( Notes ). Under these Notes, the Company agreed to pay the seller a total of $2,250,000 over five years if certain annual performance thresholds were met. The Company assigned a value of $1,865,740 to the Notes which represented their fair value at the acquisition date. The notes were re-evaluated as at June 30, 2015 and based on the performance of these assets as it relates to the annual performance thresholds set pursuant to the acquisition agreement, their fair value has been revised to $1,038,595. The difference between the previously determined fair value and current fair value has been recognized during the period June 30, The Notes will continue to be re-evaluated at each reporting date

9 5. PROPERTY AND EQUIPMENT Automotive under finance lease Computer equipment Leasehold improvements Building under construction Assets not in use Land Total Automotive Equipment Cost January 1, 2015 $ 50,006,255 $ 3,038,464 $ 1,690,729 $ 93,523 $ 224,891 $ 2,887,967 $ 367,077 $ 995,000 $ 59,303,906 Additions 7,227,305 21,756 13,827-34, ,764 7,846,732 Additions through acquisition 2,410,000-41, ,451,600 Translation adjustment 18,566 47, ,150 June 30, 2015 $ 59,662,126 $ 3,086,423 $ 1,760,099 $ 108,961 $ 224,891 $ 2,922,047 $ 916,841 $ 995,000 $ 69,676,388 Accumulated Depreciation January 1, 2015 $ 6,993,488 $ 515,943 $ 425,612 $ 47,496 $ 184,804 $ 9,154 $ - $ - $ 8,176,497 Depreciation 2,623, ,341 85,946 11,413 13,649 57, ,940,523 Translation adjustment 6,428 5, ,929 June 30, 2015 $ 9,623,091 $ 669,991 $ 511,473 $ 59,788 $ 198,453 $ 67,153 $ - $ - $ 11,129,949 Net Book Value December 31, 2014 $ 43,012,767 $ 2,522,521 $ 1,265,117 $ 46,027 $ 40,087 $ 2,878, ,077 $ 995,000 $ 51,127,409 June 30, 2015 $ 50,039,035 $ 2,416,432 $ 1,248,626 $ 49,173 $ 26,438 $ 2,854,894 $ 916,841 $ 995,000 $ 58,546,

10 6. OPERATING LINE OF CREDIT As at June 30, 2015, the Company has available a $6,000,000 (December 31, $6,000,000) revolving demand credit facility. The facility bears interest at the lender s base prime rate plus 1.0% (December 31, 2014 prime plus 1.0%) and has an outstanding balance of $5,243,561 at June 30, 2015 (December 31, $4,104,586). The facility is secured by a general security agreement over all Company assets and assignment of key man life insurance. The operating line is subject to financial covenants that are tested on a quarterly and annual basis. Working Capital Ratio: Current Assets to Current Liabilities to be 1.25 to 1.00 or greater, calculated quarterly. Current Liabilities are calculated less the current portion of term debt and finance leases. Debt to Tangible Net Worth: Cannot exceed 3.00 to 1.00, as calculated quarterly. Debt is defined as total liabilities less deferred income taxes. Tangible net worth is defined as the aggregate of shareholders equity, plus shareholders loans (if fully assigned and postponed to the Bank), less intangible assets and goodwill. Debt Service Coverage Ratio: Cannot be less than 1.25 to 1.00, as calculated at the Borrowers fiscal year end. The debt service coverage ratio is defined as the ratio of cash flow from operations (being net income after tax plus depreciation plus non-cash charges or provisions plus losses on sale of capital assets less gains on sale of capital assets) plus interest paid to service all debt obligations including capital leases divided by the annual principal and interest debt obligations including finance leases over the same period. The calculation of the ratios as of June 30, 2015 and December 31, 2014 is as follows: Ratio As at June 30, 2015 As at December 31, 2014 Calculation Requirement Calculation Requirement Working Capital or greater or greater Debt to Tangible Net Worth or less or less Debt Service Coverage Ratio N/A N/A or greater 7. TERM DEBT June 30, December 31, Vehicle financing, payable in monthly bl instalments of $620,421, bearing interest at rates ranging from 2.49% to 8.45%, due September 2015 to April Secured by specific equipment with a net book value of $29,797,504 (December 31, $18,967,217). $ 25,613,525 $16,305,587 Translation adjustment at period end 82,966 34,966 Total term debt 25,696,491 16,340,553 Less: current portion 8,116,658 5,796,536 Long term debt $ 17,579,833 $ 10,544,

11 7. TERM DEBT (continued) Principal repayments for the next five years are as follows: July 1, 2015 June 30, 2016 $ 8,116,658 July 1, 2016 June 30, ,107,299 July 1, 2017 June 30, ,466,840 July 1, 2018 June 30, ,511,618 July 1, 2019 June 30, ,494,076 $ 25,696, FINANCE LEASE OBLIGATIONS June 30, December 31, Finance lease obligations, payable in monthly bl instalments of $56,162, bearing interest at rates ranging from 3.59% to 6.50%, due June 2016 to March Secured by specific equipment with a net book value of $2,416,432 (December 31, $2,447,463). $ 1,641,831 $ 1,868,941 Translation adjustment at period end 34,374 52,879 Total finance lease obligations 1,676,205 1,921,820 Less: current portion 598, ,044 Finance lease obligations $ 1,077,555 $ 1,347,776 Minimum lease repayments for the next four years are as follows: July 1, 2015 June 30, 2016 $ 664,170 July 1, 2016 June 30, ,429 July 1, 2017 June 30, ,287 July 1, 2018 June 30, ,970 1,787,856 Less: imputed interest 111,651 1,676,205 Less: current portion 598,650 $ 1,077,

12 9. EARNINGS PER SHARE Basic earnings per share ( EPS ) Basic EPS is calculated by dividing net income (the numerator) by the weighted average number of common shares outstanding (the denominator) during the period. The denominator is calculated by adjusting the shares issued at the beginning of the period by the number of shares issued and brought back during the period, multiplied by a time-weighting factor. The weighted average number of common shares is calculated as follows: Three months June 30, 2015 Three months June 30, 2014 Issued common shares, beginning of period 29,158,053 22,448,575 Effect of stock options exercised - 52,967 Effect of share issuance - 1,132,275 Effect of share issuance related to asset acquisition - 59,723 Weighted average number of common shares 29,158,053 23,693,540 Six months June 30, 2015 Six months June 30, 2014 Issued common shares, beginning of period 29,158,053 22,093,575 Effect of stock options exercised - 254,144 Effect of share issuance - 569,265 Effect of share issuance related to asset acquisition - 30,026 Weighted average number of common shares 29,158,053 22,947,010 Diluted EPS Diluted EPS is calculated by adjusting the number of shares for the effects of dilutive options. The effects of anti-dilutive potential shares are ignored in calculating diluted EPS. All options are considered anti-dilutive when the Company is in a loss position. For the three and six months June 30, 2015 and for the three months June 30, 2014, the average market price of the Company s common shares exceeded the exercise price of certain stock options, but since the assumed exercise of the options decreased the basic loss per share, the options did not have a dilutive effect

13 9. EARNINGS PER SHARE (continued) The weighted average number of dilutive potential shares is calculated as follows: Three months June 30, 2015 Three months June 30, 2014 Weighted average number of common shares (basic) 29,158,053 23,693,540 Effect of share options - - Diluted weighted average number of common shares 29,158,053 23,693,540 Six months June 30, 2015 Six months June 30, 2014 Weighted average number of common shares (basic) 29,158,053 22,947,010 Effect of share options - 290,044 Diluted weighted average number of common shares 29,158,053 23,237, CHANGES IN NON-CASH BALANCES RELATING TO OPERATIONS Three months June 30, 2015 Three months June 30, 2014 Accounts receivable (536,974) 1,854,243 Prepaid expenses and deposits 307, ,147 Accounts payable and accrued liabilities (1,530,498) (149,974) Changes in non-cash working capital (1,760,089) 1,807,416 Six months June 30, 2015 Six months June 30, 2014 Accounts receivable (1,194,543) 312,458 Prepaid expenses and deposits 624, ,546 Accounts payable and accrued liabilities (1,627,525) (554,548) Changes in non-cash working capital (2,197,772) 621,

14 11. FINANCIAL INSTRUMENTS The fair value of financial assets and liabilities, together with the carrying amounts shown in the statement of financial position, are as follows: Fair value hierarchy level June 30, 2015 December 31, 2014 Carrying Fair Carrying Fair amount value amount value Assets carried at amortized cost Cash 1 $ 1,462,891 $ 1,462,891 $ 1,621,683 $ 1,621,683 Accounts receivable 2 17,379,222 17,379,222 15,757,975 15,757,975 Investments held for sale Investments 1,2 38,692 38,692 38,692 38,692 $ 18,880,805 $ 18,880,805 $ 17,418,350 $ 17,418,350 Liabilities carried at amortized cost Operating line of credit 1 $ 5,243,561 $ 5,243,561 $ 4,104,586 $ 4,104,586 Term debt 2 25,696,491 23,132,538 16,340,553 14,657,799 Finance lease 2 1,676,205 1,540,549 1,921,820 1,769,232 obligations Promissory notes 2 1,836,652 1,836,652 2,479,971 2,479,971 Accounts payable and accrued liabilities 2 3,191,970 3,191,970 4,743,936 4,743,936 $ 37,644,879 $ 34,945,270 $ 29,590,866 $ 27,755,524 The fair value of financial assets and liabilities classified as cash, loans and receivable and other financial liabilities, except for term debt and finance lease obligations, approximate their carrying values due to the relatively short-term nature of these financial instruments. Fair values of financial instruments are determined by reference to quoted bid or asking price, as appropriate, in active market at period-end dates. In the absence of an active market, the Company determines fair value by using valuation techniques that refer to observable market data or estimated market prices. Fair values determined using valuation models require the use of assumptions about the amount and timing of estimated future cash flows and discount rates. Fair value estimates are made at a specific point in time, based on the relevant market information and information about the financial instruments. These estimates are subjective in nature and involve uncertainties and matters of significant judgement and, therefore, cannot be determined with precision. It is possible that the assumptions in establishing fair value amounts will differ from future outcomes and the impact of such variations could be material. The fair value of the Company s term debt and finance lease obligations is determined by discounting cash flows required under the respective debt agreements at the interest rate estimated to be used for loans with similar terms at the balance sheet date

15 11. FINANCIAL INSTRUMENTS (continued) Interest Rates Used for Determining Fair Value The interest rates used to discount estimated cash flows on long term debt and finance lease obligations, when applicable, are based on the government yield curve at the reporting date plus an adequate credit spread and were 4.5% for the six months June 30, 2015 and the year December 31, SUBSEQUENT EVENT On August 14, 2015 the Company completed the acquisition of certain assets of Hewitt Specialty Services, LLC ( Hewitt ), an arm s length hydrovac service company, for total consideration of $1.3 million US dollars. In consideration of the acquisition, the Company cancelled accounts receivable due from Hewitt of approximately $500,000 US dollars and issued unsecured promissory notes (the Notes ) that mature over a five year period totalling $500,000 US dollars. The Notes are non-interest bearing and subject to certain performance thresholds being achieved. In addition, 299,496 common shares of the Company were issued at a price of $1.31 CND dollars for a total of $300,000 US dollars in the aggregate. 13. COMPARATIVE INFORMATION Certain comparative figures have been reclassified to conform to the current period`s presentation