Management s Discussion & Analysis Twelve months ended December 31, 2013

Transcription

1 Hyduke Energy Services Inc Avenue Nisku, Alberta, Canada, T9E 7X9 Telephone: (780) Facsimile: (780) TSX Symbol: HYD Website: Management s Discussion & Analysis Twelve months ended December 31, 2013 This management s discussion and analysis ( MD&A ) for Hyduke Energy Services Inc. ( Hyduke or the Company ) should be read in conjunction with the audited consolidated financial statements and accompanying notes for the year ended December 31, Hyduke trades on the Toronto Stock Exchange under the symbol HYD. Additional regulatory information relating to Hyduke, including the Company s Annual Information Form ( AIF ), can be found at the System for Electronic Document Analysis and Retrieval web site at This MD&A is as of March 25, 2014 and all dollar amounts presented are expressed in Canadian dollars. Amounts presented in the MD&A are generally rounded to the nearest thousand. BASIS OF PRESENTATION AND TRANSITION TO IFRS The accompanying consolidated financial statements for the year ended December 31, 2013 are prepared in accordance with International Financial Reporting Standards ( IFRS ) as required by the Canadian Accounting Standards Board for Canadian publicly accountable enterprises. COMPANY OVERVIEW Hyduke is an integrated oilfield services company with over thirty years experience in the manufacture, repair and distribution of oilfield equipment and supplies in Canada and worldwide. Hyduke specializes in providing customized, integrated solutions to the drilling and well service industries including: Turn-Key Equipment - drilling rig and service rig packages including in-house design, engineering and drafting, major component procurement and overall project management; Life Cycle Management - inspection, certification, service, repair and supply services throughout the operating life of the drilling or well service rig; and Single Source Supply - providing new capital equipment, repair and maintenance on existing capital equipment and supply of operating consumables. Hyduke is headquartered in Nisku, Alberta, Canada and has facilities in Edmonton, Calgary, Nisku, Leduc, Red Deer and Lloydminster, Alberta, Canada and Houston, Texas, United States of America. In 2012, the Company operated in four segments: Manufacturing, Distribution, Corporate Services and Other Services. In 2013, the Company has revised its segments to better organize the subsidiaries around the different products and services they offer and how management and the Board of Directors reviews the financial performance of the subsidiaries. During the year, the Company restructured its business operations into two operating segments and one corporate services segment as follows: Hyduke Rig Equipment: the Hyduke Rig Equipment segment includes the design, manufacture and refurbishment of land-based drilling rigs, workover rigs, drilling and well service support equipment.

2 Hyduke Supply and Service: the Hyduke Supply and Service segment includes the procurement and distribution of spare parts, equipment components, operating supplies and pneumatic controls to the drilling and well service industries, the service and repair of drilling rig, workover rig, service rig and truck mounted equipment, and the inspection and certification of drilling rig and well service equipment. Corporate Services: The Corporate Services segment includes costs for management and administration, sales and marketing, accounting and finance and engineering and drafting services provided to all Hyduke operating segments. Additionally, during the year the Company discontinued its well service equipment manufacturing operation that had been based in Edmonton, Alberta, Canada. FORWARD LOOKING STATEMENTS This report contains certain forward-looking statements under the heading Outlook and elsewhere concerning future events or the Company s operations, anticipated financial performance, business prospects and strategies of Hyduke. Forward-looking information typically contains statements with words such as anticipate, believe, estimate, expect, plan, intend or similar words suggesting future outcomes or outlooks on, without limitation, estimates of business activity, supply and demand for the Company s products, the estimated amounts and timing of capital expenditures, anticipated future debt levels, or other expectations, beliefs, plans, objectives, assumptions or statements about future events or performance. Readers are cautioned not to place undue reliance on forward-looking information. By its nature, forwardlooking information involves numerous assumptions, inherent risks and uncertainties both general and specific that may cause actual future results to differ materially from those contemplated and contribute to the possibility that the predictions, forecasts, projections and other forward-looking statements will not occur. These factors may affect anticipated earnings or assets and include, but are not limited to: industry activity levels, market liquidity, customer credit risk, competition, oil and gas prices, product liability, fixed price contracts, development of new products, uninsured and underinsured losses, access to additional financing, source of supply of raw material and third party components, availability of key personnel, agreements and contracts, government regulations, foreign exchange exposure, interest rate risk, international scope of operations, environmental health and safety regulations and Hyduke s anticipation of and success in managing the risks implied by the foregoing. The Company cautions that the foregoing list of important factors is not exhaustive. The Company believes that the expectations reflected in the forward-looking statements are reasonable, but no assurance can be given that these expectations will prove to be correct and such forward-looking statements included in this report should not be unduly relied upon. The forwardlooking statements in this report speak only as of the date of this report. Hyduke undertakes no obligation to update publicly or otherwise revise any forward-looking information, whether as a result of new information, future events or otherwise, except as required pursuant to applicable securities legislation. NON-IFRS MEASURES OF FINANCIAL PERFORMANCE The Company uses both IFRS and non-ifrs measures as indicators of financial performance and believes that these non-ifrs measures provide useful supplemental information to investors. EBITDAS and Gross Profit are non-ifrs measures used by the Company. The Company s method of calculating EBITDAS and Gross Profit may differ from other companies and may not be comparable to similar measures presented by other companies. For additional information refer to Non-IFRS Measures section later in this MD&A. 2

3 SELECTED ANNUAL INFORMATION AND SUMMARY OF QUARTERLY RESULTS Selected Annual Information For the 12 months ended ($000 s, except ratios) December 31, 2013 December 31, 2012* December 31, 2011* Total assets 44,300 58,155 55,529 Total current assets 30,417 43,066 40,720 Total cash and short term deposits 2,228 1,843 4,824 Total liabilities 17,497 26,246 24,476 Total current liabilities 16,654 16,111 21,915 Total bank indebtedness Nil 1,200 Nil Total interest bearing debt 8,433 8,669 1,149 Total equity 26,804 31,909 31,053 Total revenue continuing operations 60, ,582 77,007 Gross profit 1 continuing operations 7,822 13,902 12,509 Gross profit (%) 13.0% 13.4% 16.2% EBITDAS 1 continuing operations (1,495) 5,321 5,281 Profit (loss) continuing operations (3,100) 2,122 3,571 Profit (loss) (5,054) 795 1,709 Profit (loss) per share basic ($) (0.21) Profit (loss) per share diluted ($) (0.21) Current ratio (current assets divided by current liabilities) Debt to equity ratio (interest bearing debt divided by shareholders equity) 1 Gross profit and EBITDAS are non-ifrs measures and are defined under NON-IFRS MEASURES to to to to to to 1.00 *Certain amounts shown here do not correspond to the 2012 and 2011 financial statements and reflect adjustments made, refer to Note 3.1 of the Financial Statements 3

4 Selected Quarterly Financial Information ($000 s, except per share data) Fiscal Year Ended December 31, Q4 Q3 Q2 Q1 Fiscal Year Ended December 31, 2012 Q4 2012* 2012 Q Q Q1 enues continuing operations 13,119 18,577 12,107 16,588 20,515 24,822 26,980 31,263 Gross profit 1 continuing operations 1,554 2,525 1,603 2,140 1,781 3,258 3,188 5,675 Gross profit (%) 11.9% 13.6% 13.2% 12.9% 8.7% 13.1% 11.8% 18.2% EBITDAS 1 continuing operations Profit (loss) continuing operations (1,604) 584 (518) 43 (232) 1, ,671 (1,970) 32 (825) (337) (617) ,361 Profit (loss) (3,158) (317) (1,148) (431) (1,263) ,975 Profit (loss) per share basic ($) (0.130) (0.013) (0.047) (0.018) (0.052) Profit (loss) per share diluted ($) (0.130) (0.013) (0.047) (0.018) (0.052) Gross profit and EBITDAS are non-ifrs measures and are defined earlier under Non-IFRS Measures. *Certain amounts shown here do not correspond to the 2012 financial statements and reflect adjustments made, refer to Note 3.1 of the Financial Statements BALANCE SHEET MEASURES Balance sheet measures remain strong with a current ratio at 1.83 to 1.00 and a debt to equity ratio of 0.31 to Current ratio has decreased over the prior year with the significant decrease in larger, long-term projects and an accompanying decrease in working capital assets. Debt to equity ratio has decreased over the prior year due to the net loss during the year. Total assets of $44.3 million as at December 31, 2013 represents a decrease of $13.9 million (23.8%) from the prior year. Total current asset decrease of $12.6 million relates primarily to a decrease in trade and other receivables of $9.8 million and unbilled revenue of $3.2 million, a result from a decrease in revenues. Total liabilities of $17.5 million as at December 31, 2013 represents an increase of $8.8 million (33.3%) from the prior year. Total current liabilities increase of $0.5 million relates primarily to a decrease in trade and other payables of $3.2 million and a decrease in unearned revenue of $2.4 million offset by the reclass of the term debt to current $7.9 million. OVERALL PERFORMANCE Fiscal 2013 revenues of $60,391,134 decreased $43.2 million (42%) over the prior year which was due primarily to significant revenues from in long-term projects for international customers in the prior year. Approximately 45% of the Company s revenues in 2012 were from international customers compared to 27% in the current year. Fiscal 2013 gross profit (refer to NON-IFRS MEASURES) of $7,821,998 decreased $6.1 million (44%) over the prior year and was due to decreased revenue levels in addition to a decrease in gross profit percentage of 0.5% points. Fiscal 2013 EBITDAS (refer to NON-IFRS MEASURES) decreased $6.8 million (128%) over the prior year and is due primarily declines in revenue levels and decreases in gross profit percentages in addition to increases in general and administrative costs and other expenses. Management is focused on reducing operating costs and infrastructure while minimizing any potential negative impact on revenue producing 4

5 capability. Management is actively monitoring anticipated activity levels to optimize the level of available human and capital resources and increase labour efficiencies where possible. Fiscal 2013 loss from continuing operations of $3.1 million represent a decline of $5.2 million over the prior year. The 42% decline in revenue and the gross margin decrease of 44% contributed to $6.1 million of the decrease. This is offset by a $1.0 million increase in future tax recovery. OUTLOOK The 2013 fiscal year was very challenging for Hyduke. It was characterized by a sharp decline in international equipment sales and the subsequent significant drop in revenue versus Further, 2013 was not a strong year for Hyduke s main client base in Canada, contractors that build, own and operate drilling and well servicing rigs. According to data from June-Warren Nickles Energy group, drilling rig operating days in 2013 were 102,900, the lowest since the recession of This figure was 28,200 operating days or 22% lower than in 2011, a year when Hyduke was profitable. The total number of wells drilled was 11,157, a slight increase over 11,124 wells in 2012 but substantially lower the total wells drilled for each of nine prior years with the exception of Less wells drilled means less activity for well servicing rigs, a key Hyduke client group. At the Annual General and Special Meeting of Shareholders on June 13, 2013, there was a major change in the composition of the Board of Directors of the Company. The new board undertook to engage executive management in a complete operational and strategic review of all operations with a view to improving financial performance and efficiency. This process has led to significant changes that are intended to improve efficiency and profits by reducing Hyduke s business lines, focusing on those operations with the greatest margins or potential and leading Hyduke towards a future that exploits its full potential. This process resulted in several significant changes to the Company. A non-performing division was closed and discontinued and two other operatons have been planned for discontinuance in Fixed costs such as administration and building leases have been reduced and further reductions are anticipated. Changes were made to the Executive Management team. All aspect of Hyduke s business operations are undergoing a complete review. Because of the unpredictability and high sales cost of international revenues, part of the go-forward focus will be on ensuring maximum participation in domestic markets. Management is of the view that the cumulative impact of the changes that have been made and will be made will result in a Company built on a more predictable income stream leading to a return to profitability. Hyduke is of the view that the growth in total revenue available to the end user Exploration and Production (E&P) companies in Canada will drive business for Hyduke s main clients, contractors operating drilling and well servicing rigs and associated support equipment. The recovery of the price of natural gas may help reactivate some of the smaller drilling and service rigs that have been idled in recent years. Putting suspended gas wells back on stream because they are now economic to produce will drive business for well servicing rig contractors. The base market in which Hyduke operates in Canada is robust and the board and management is taking the appropriate steps to ensure Hyduke participates. 5

6 In the short term, the significant drop in international sales and downturn in domestic activity, combined with an excessively complex corporate structure and high fixed costs, has resulted in substantial operating losses. This is reflected in Hyduke s 2013 financial results. Management is of the view that the steps that began last summer with the strategic review executed by the new Board of Directors and the resulting and ongoing actions will lead Hyduke to a place where it is again profitable. From this foundation, Hyduke will execute a more focused and strategic growth strategy that exploits and builds upon its strong client base and the solid macro-market foundations in which its clients operate. RESULTS OF OPERATIONS enues: enues by Operating Segment Three Months Ended Year Ended ($000 s) Dec 31, Dec 31, Dec 31, Sept 30, Dec 31, Rig Equipment 5,289 11,161 15,929 34,716 76,547 Supply and Service 8,516 8,061 8,801 29,469 31,450 Corporate Services ,140 1,569 4,498 Elimination upon consolidation (691) (781) (5,355) (5,363) (8,913) Total revenues 13,119 18,577 20,515 60, ,582 enues by Geographical Segment ($ 000 s) Year Ended Dec 31, 2013 % of Total enues Year Ended Dec 31, 2012 % of Total enues Canadian Oilfield Services 44,178 73% 56,756 55% International Oilfield Services 16,213 27% 46,826 45% Total revenue 60, % 103, % enues by Geographical Segment ($ 000 s) Three Months Ended Dec 31, 2013 % of Total enues Three Months Ended Sept 30, 2013 % of Total enues Three Months Ended Dec 31, 2012 % of Total enues Canadian Oilfield Services 9,884 75% 13,185 71% 12,535 61% International Oilfield Services 3,235 25% 5,392 29% 7,980 39% Total revenues 13, % 18, % 20, % On a year-over-year basis, revenues of $60.4 million for the year ended December 31, 2013 represents a 42% decrease or $43.2 million over the prior year. Total revenue of $13.1 million for the three months ended December 31, 2013, represents a decrease of 29% or $5.5 million over the prior quarter (i.e. three months 6

7 ended September 30, 2013). On a year-over-year basis, revenues for the three months ended December 31, 2013 represents a 36% decrease or $7.4 million over the same period in the prior year. The reduced revenues in the quarter ended December 31, 2013 are due to two factors. First, an international rig equipment package was principally completed in the prior quarter and two turn key drilling rig packages were completed in the prior year resulting in higher revenue numbers in those periods. Second, capital spending on new equipment in the Canadian market was significantly reduced by Canadian drilling and well service contractors in the fourth quarter. On a year-over-year basis, rig equipment segment revenues of $34.7 million for the year ended December 31, 2013 represents a 55% decrease or $41.8 million from the prior year. The primary reason for this decrease is the majority of the work performed on three turn-key drilling rig packages awarded in the second half of 2011 was performed in Rig equipment segment revenues of $5.3 million for the three months ended December 31, 2013 represents a decrease of 53% or $5.9 million from the prior quarter. The decline in revenue from the prior quarter is due to the completion of international rig equipment package in the third quarter of 2013 and a reduction of capital spending on new equipment in the Canadian market. On a year-over-year basis, supply and service segment revenues of $29.5 million for the year ended December 31, 2013 represents a slight decrease of $2.0 million (6%) from the prior year. This is due to a fairly steady level of rig activity as measured by wells drilled on a year-over-year basis. On a year-over-year basis, supply and service revenues for the fourth quarter were consistent, again reflecting comparable drilling and well service activity from one year to the next. The increase in supply and service revenues in the fourth quarter over the third quarter reflects the seasonality of drilling and well servicing whereby the industry is significantly more active in the winter months. Corporate services revenue for the fiscal year was $1.6 million compared to $4.5 million in the prior year. The decrease of $2.9 million is due the completion of an international service contract being completed in Russia in Corporate Services revenue of $5 thousand for the three months ended December 31, 2013 is $0.1 million lower than the prior quarter and has decreased $1.1 million over the prior year. Hyduke has been successful in developing international markets as international revenue has remained a significant portion of total revenues. For fiscal 2013, international revenues of $16.2 million represents 27% of total revenues. For the three months ended December 31, 2013, international revenues decreased from $8.0 million to $3.2 million over the same period in the prior year. In 2012, Hyduke was continuing work on large international projects which was completed in the first quarter of Although Hyduke is ensuring it mains a strong focus on the domestic market, Hyduke continues to work on a significant amount of proposals for international opportunities. 7

8 Gross Profit: Gross Profit by Operating Segment Year Ended December 31, 2012 December 31, 2013 ($) (%) ($) (%) Rig Equipment 2, % 8, % Supply and Service 4, % 4, % Corporate Services % % Elimination upon consolidation 611 (95) Total gross margin 7, % 13, % Gross Profit (Loss) by Operating Segment Three Months Ended Dec 31, 2012 Dec 31, 2013 Sept 30, 2013 ($) (%) ($) (%) ($) (%) Rig Equipment (528) (10)% 1, % (256) (1.6%) Supply and Service 1, % 1, % 1, % Corporate Services (41) (820%) % % Elimination upon consolidation 967 (81) 362 Total gross margin 1, % 2, % 1, % On a year-over-year basis, gross profit of $7.8 million for the year ended December 31, 2013 represents a 44% decrease or $6.1 million over the prior year. The decrease in gross profit dollars is due to a decrease in revenues on a year-over-year basis. On a year-over-year basis, gross profit percentage decreased from 13.4% in 2012 to 13.0% in 2013 and is due to reduced margin realized in the manufacturing segment. For the three months ended December 31, 2013, total gross profit decreased significantly over comparable quarters due to the completion of international rig equipment packages that were nearly completed in the third quarter of 2013 and turn key rig projects that were completed or nearing completion during the fourth quarter of For the year ended December 31, 2013, rig equipment segment gross profits decreased approximately $5.6 million and realized a reduction in gross profit percentages from 10.8% in the prior year to 7.7% in the current year. The primary reason for the decrease is lower revenue levels during the year. The negative gross profit realized in the current year fourth quarter is as a result of realizing lower margins on fixed priced projects and adjustment of revenue recognized on large projects commencing in prior quarters. Hyduke recognizes that it has struggled with budget overruns on fixed price contracts. As a result, Hyduke has made changes to the management team and is placing greater efforts on enforcing employee accountability. Supply and service segments gross profits and gross profit percentages are consistent over comparable periods. 8

9 Selling and Distribution Expenses: Selling and Distribution Expenses Three Months Ended Dec 31, 2013 Sept 30, 2013 Dec 31, 2012 ($000 s) Dec 31, 2013 Year Ended Dec 31, 2012 Selling and Distribution Expenses % % % % % Selling and Distribution expenses have remained consistent at approximately 1% of revenues for the twelve months ending December 31, Selling and distribution expenses have decreased $261 thousand (26%) over the same period in the prior year and is due to a decrease in personnel in the sales and marketing department and a decrease in international marketing trips. For the three months ending December 31, 2013, selling and distribution expenses have decreased $49 thousand (20%) over the same period in the prior year and is due to the timing of international marketing trips and a reduction in sales and marketing personnel. General and Administrative Expenses General and Administrative Three Months Ended Expenses Dec 31, 2013 Sept 30, 2013 Dec 31, 2012 ($000 s) Dec 31, 2013 Year Ended Dec 31, 2012 Administration and employment 1, % 1, % 1, % 5, % 4, % Office and automation % % % 1, % 2, % Consulting and professional % % % % 1, % Amortization of intangibles and deferred finance fees % % % % % Depreciation of property, plant and equipment % % % % % Impairment on Intangibles % % - - Total general and administrative expenses 2, % 2, % 2, % 9, % 9, % 9

10 Total general and administrative expenses on a year-over-year basis have decreased $211 thousand (2%) and are due primarily to decreases in consulting and professional ($696 thousand) and office and automation ($254 thousand) offset by an increase in administration and employment ($797 thousand). On a year-over-year basis, administration and employment expenses increased $0.8 million to $5.6 million. In 2013, executive and senior management resources were invested into the rig equipment segment with the mandate to improve revenue and margin levels. Unable to achieve these targets, reductions in administration and employment were executed in the first quarter of Administration and employment expense of $1.4 million for the three months ended December 31, 2013 increased $0.3 million or 28% over the same period in the prior year. This increase is largely the due to the increase in executive and senior manager levels in On a year-over-year basis, office and automation expense decreased $254 thousand and is due to a reduction in insurance costs due to lower unbilled revenue levels in the United States, a reduction in equipment rentals in the manufacturing segment in Canada and an overall decrease in office supplies and office maintenance due to decreased activity levels experienced during the year. On a year-over-year basis, consulting and professional expense decreased $696 thousand and is due to professional services incurred in 2012 to advise regarding the Arrangement Agreement and the attempted acquisition of Hyduke by a third party. Depreciation of property, plant and equipment decreased $78 thousand on a year over year basis due to the purchases of rapidly depreciated assets such as computer software and computer equipment in Amortiztion of intangibles decreased $171 thousand over the prior year and is due to the amortization of deferred financing fees related to working capital financing for three significant turn-key drilling rig projects in In conjunction with the discontinuance of the well service manufacturing unit, the rig drawing library of Hyduke was reviewed for impairment. An impairment of $188 thousand was recorded upon review of the rig drawing library of the parent Company. Other Operating (Income) Expenses Other Operating (Income) Expenses Three Months Ended Year Ended ($000 s) Dec 31, 2013 Sept 30, 2013 Dec 31, 2012 Dec 31, 2013 Dec 31, 2012 Rental and other income (36) (0.3%) (23) (0.1%) (63) (0.3%) (116) (0.2%) (179) (0.2%) Bad debts (recovery) 1, % (10) (0.1%) % 1, % % Total other operating income 1, % (33) (0.2%) % % (98) (0.1%) 10

11 Historically, the percentage of bad debt to total sales has been at nominal levels due to disciplined credit granting, accounts receivable monitoring and collection processes. Based on a review of all accounts greater than 90 days old at December 31, 2013, the allowance for doubtful accounts was increased to reflect the increased risk associated with the age of the receivable. Management s intention is to aggressively continue their collection efforts. Financial results Financial Results Three Months Ended Year Ended ($000 s) Dec 31, 2013 Sept 30, 2013 Dec 30, 2012 Dec 31, 2012 Dec 31, 2013 ($) % ($) % ($) % ($) % ($) % Interest results % % % % % Loss (gain) on foreign exchange transactions (174) (1.3%) % 3 0.0% % % Total financial results (54) (0.4%) % % % % Interest expenses of $120 thousand for the three months ended December 31, 2013 is consistent with the prior quarter and a decrease of $124 thousand over the same period in the prior year and is due to decreased levels of term debt, finance leases and bank indebtedness. LIQUIDITY AND CAPITAL RESOURCES During the year ended December 31, 2013, cash flow (used in) from operations before working capital changes amounted to ($4.1) million compared to $2.0 million in the prior year and is related to lower profits. Cash flow from changes in working capital for fiscal 2013 amounted to cash provided of $6.6 million which was a result of significant reductions in accounts receivable and inventories. Overall, cash provided by operating activities was $2.5 million for fiscal Capital expenditures on property, plant and equipment and intangible assets during the year ended December 31, 2013, were $0.7 million, compared to $1.4 million for the prior year. The expenditures in 2012 were primarily for expansion of operations into the United States in addition replacement of existing assets, including software and computer systems. During the year ended December 31, 2013, the Company issued 136,600 shares for net proceeds of $50,542. Advances under finance lease obligations amounted to $18 thousand for the year ended December 31, 2013 compared to $280 thousand during the prior year. The finance leases commencing in 2013 related to the purchase of new computer equipment. During 2012, the Company refinanced its term debt with its current debt lender. During 2012, the Company received proceeds of $8.5 million and made repayments of $1.0 million. In 2013, the Company made all scheduled repayments under the term debt agreement. As of December 31, 2013, the Company exceeded the maximum fixed charges coverage ratio covenant, which placed it in breach of its debt covenants. This entitles the bank to make demand of the credit facilities 11

12 at any time. The Company s access to advances under the credit facility is subject to ongoing negotiations with the lender and the Company s term debt has been reclassified to current. The Company maintains positive communication with its lenders and they are supportive of the restructuring of operations within the Company. Bank indebtedness as at December 31, 2013 was nil compared to a balance of $1.2 million at December 31, At December 31, 2013 the Company had a positive working capital position of $13.8 million compared to $27.0 million at December 31, Unbilled revenue represents costs and expected margin on unbilled jobs in progress at year-end and is reduced by progress billings as production milestones are met. Unbilled revenue at December 31, 2013 was $2.8 million compared to $6.1 million at December 31, Wherever possible, on long-term contracts, Hyduke actively manages cash flow demands through negotiating deposits and progress payments from its customers. This ensures that unbilled revenue amounts are significantly less than the realizable value of the projects in the event of customer default. Additionally, international customer credit is managed through letters of credit and ensuring equipment is not released until final payment is received. CONTRACTUAL OBLIGATIONS The following table summarizes contractual obligations due on long-term debt, premises, operating and finance commitments as at December 31, 2013: Payments Due by Period Contractual Obligations Dec Dec Dec Dec Dec (000 s) Total Term loan 8, ,370 - Premises leases 2,898 1, Operating leases commitments Finance lease commitments Total contractual obligations 11,507 1,804 1,213 1,029 7,460 1 RELATED PARTY TRANSACTIONS The Company rented premises space from a former director of the Company. Under the rental arrangements, the Company paid base rent of $410,796 during the year ending December 31, 2013 ( $410,796) and paid all required operating costs associated with the rented premises. These transactions are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties. With the conflicted directors abstaining, all related party transactions are approved by the Board of Directors, who consider market conditions to ensure that the related party transactions occur at fair market value. OUTSTANDING SHARE DATA As at December 31, 2013, the Company had 24,326,264 common shares outstanding and 950,000 share options outstanding. As of March 25, 2014, the Company has 24,326,264 common shares outstanding and 930,000 share options outstanding. 12

13 CRITICAL ACCOUNTING ESTIMATES This MD&A of the Company s financial condition and results of operations is based on its consolidated financial statements which are prepared in accordance with IFRS. The Company s significant accounting policies are described in the notes of its consolidated financial statements. The preparation of these financial statements requires that certain estimates and judgments be made that affect the reported assets, liabilities, revenues and expenses. These estimates and judgments are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Anticipating future events cannot be done with certainty, therefore these estimates may change as new events occur, more experience is acquired and as the Company s operating environment changes. RISK FACTORS The Company business is impacted by the following risk factors: industry activity levels, access to labor, market liquidity, customer credit risk, competition, oil and gas prices, product liability, fixed price contracts, development of new products, uninsured and underinsured losses, access to additional financing, source of supply of raw material and third party components, availability of key personnel, agreements and contracts, government regulations, foreign exchange exposure, interest rate risk, international scope of operations and environmental, health and safety regulations. For details on these risk factors, please review the Company s Annual Information Form available on RECENT ACCOUNTING PRONOUNCEMENTS IFRS 9 Financial Instruments IFRS 9, as issued, reflects the first phase of the IASB s work on the replacement of IAS 39 and applies to classification and measurement of financial assets and financial liabilities as defined in IAS 39. The standard was initially effective for annual periods beginning on or after 1 January 2013, but Amendments to IFRS 9 Mandatory Effective Date of IFRS 9 and Transition Disclosures, issued in December 2011, moved the mandatory effective date to 1 January In subsequent phases, the IASB is addressing hedge accounting and impairment of financial assets. The adoption of the first phase of IFRS 9 will have an effect on the classification and measurement of the Company s financial assets, but will not have an impact on classification and measurements of the Company s financial liabilities. The Company will quantify the effect in conjunction with the other phases, when the final standard including all phases is issued. IAS 32 Offsetting Financial Assets and Financial Liabilities - Amendments to IAS 32 These amendments clarify the meaning of currently has a legally enforceable right to set-off and the criteria for non-simultaneous settlement mechanisms of clearing houses to qualify for offsetting. These are effective for annual periods beginning on or after 1 January These amendments are not expected to be relevant to the Company. Other than the above standards not yet assessed in terms of impact, there were no new accounting pronouncements issued by the IASB that are expected to have a material impact on Hyduke. 13

14 DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROLS OVER FINANCIAL REPORTING Disclosure controls and procedures The Company s management, including the Interim Chief Operating Officer and the Chief Financial Officer, has reviewed and evaluated the effectiveness of the Company s disclosure controls and procedures (as defined in National Instrument Certification of Disclosure in Issuers Annual and Interim Filings) as of December 31, Management concluded that, as of December 31, 2013, the disclosure controls and procedures were effective and provide reasonable assurance that material information relating to the Company and its consolidated subsidiaries was made known to them by others within these entities to allow timely decisions regarding required disclosure. Appropriate disclosure decisions require that management be aware of the information required by the various applicable securities legislation. Management recognizes that it is important to utilize advisors and the Company s Board of Directors to assist in recognizing, interpreting, understanding and complying with the various securities legislation and accounting disclosure requirements. Internal controls over financial reporting Management has also designed internal controls over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. In accordance with National Instrument , management designed and assessed the effectiveness of internal controls over financial reporting as of December 31, 2013 based on the criteria set forth in Internal Control Integrated Framework as issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that assessment, management concluded that, as of December 31, 2013, internal controls over financial reporting were effective and provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. There have been no changes in the Company s internal controls over financial reporting during the first quarter that have materially affected, or are reasonably likely to materially affect, the Company s internal controls over financial reporting in the future. Notwithstanding the foregoing, no assurance can be made that the Company s controls over disclosure and financial reporting and related procedures will detect or prevent all failures of employees within the Company to disclose material information otherwise required to be set forth in the Company s reports. NON-IFRS MEASURES The Company uses certain non-ifrs measures as indicators of financial performance and believes that these non-ifrs measures provide useful supplemental information to investors. EBITDAS and gross profit are measures used by the Company that do not have a standardized meaning prescribed by IFRS. The Company s method of calculating EBITDAS and gross profit may differ from other companies and may not be comparable to similar measures presented by other companies. Included below are tables calculating or reconciling these non-ifrs measures where applicable. EBITDAS is defined as earnings before interest, taxes, depreciation and amortization, gain or loss on sale of property, plant and equipment, gain or loss on foreign exchange, and stock-based compensation. EBITDAS is not intended to represent an alternative to net income determined in accordance with IFRS as an indicator of the Company s performance. 14

15 Gross profit is defined as revenue less cost of sales. Cost of sales includes direct materials, direct labor, variable and fixed manufacturing overhead, and other costs closely associated with the manufacture of goods; costs of service and supply inventory including costs required to locate the inventory in its current location; provisions to reduce inventory to estimated net realizable value; and contract loss provisions. The following table reconciles net income to EBITDAS from continuing operations: Year Ended December 31, 2013 $ December 31, 2012 $ December 31, 2011 $ Profit (loss) from continuing (3,100) 2,122 3,572 operations Depreciation expense 1,432 1,692 1,342 Impairment of intangibles Income tax expense (recovery) (565) 578 (8) Interest expense Share based compensation Gain (loss) on foreign exchange EBITDAS (1,495) 5,321 5,281 15

16 CORPORATE INFORMATION CORPORATE MANAGEMENT Derek Petrie, CGA Interim Chief Operating Officer Boris Makowecki Executive Vice President David Beatty Vice President Operations Veronica Dutchak, CA Chief Financial Officer Donald Pylypchan, CA Chief of Financial Reporting DIRECTORS John Pinsent, FCA Chairman of the Board David Yager Independent businessman Doug Bachman Independent businessman Patrick Ross Independent businessman HEAD OFFICE WEBSITE Avenue Nisku, Alberta, T9E 7X9 Telephone: (780) Facsimile: (780)