QE2 2014 MDA Q3 October
Management’s Discussion and Analysis For the nine months ended October 31, 2014
Management’s Discussion and Analysis For the nine months ended October 31, 2014 This Management’s Discussion and Analysis of financial condition and results of operations (“MD&A”) of QE2 Acquisition Corp. (“QE2” or the “Company”) is dated December 30, 2014 and should be read in conjunction with the unaudited condensed interim consolidated financial statements of the Company for the nine months ended October 31, 2014, and the audited consolidated financial statements of the Company for the years ended January 31, 2014 and 2013. These consolidated financial statements, including the comparative figures, were prepared in accordance with International Financial Reporting Standards (“IFRS”). Unless otherwise noted, all financial measures are expressed in Canadian dollars and tabular dollar amounts are in thousands. This MD&A contains forward looking information based on the Company’s current expectations and projections. For information on the material factors and assumptions underlying such forward looking information, refer to the “Forward Looking Information” advisory on page 17 of the MD&A. Additional information relating to QE2 is available on the Company’s website at www.qe2corp.com.
BUSINESS OVERVIEW QE2 is a Canadian company founded in January 2013. The Company acquires, consolidates and grows well managed, profitable, asset backed, Alberta-based businesses in the infrastructure and utility service sectors. The Company’s corporate headquarters are based in Calgary, Alberta, Canada, with operational offices throughout Alberta - Fort Saskatchewan and Calgary. The Company is strategically located near its customers. The Company’s strategy is to grow primarily in Alberta through acquisitions, organic growth from synergies realized by vertical and horizontal integration opportunities, sales and marketing channel expansion and access to available capital. The primary driver is the existing Alberta economic landscape of opportunity and the Government’s financial commitment to maintain and improve existing infrastructure, including aggressive plans to construct new infrastructure over the next 20 years.
Pillar: Street Lights and Traffic Lights The Company provides utility services which include streetlight services, painting, electrical services and traffic control. These activities are conducted from the Fort Saskatchewan, Alberta office which operates as Pillar Contracting Ltd. (“Pillar” or “Pillar Contracting”), a company that has provided services to customers since 1997. A strong customer base includes major utility companies and municipalities in Alberta and Saskatchewan.
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Candesto: Highway Signage & Guardrail Installation Services The Company’s highway signage & guardrail installation services division, Candesto Enterprises Ltd. (“Candesto” or “Candesto Enterprises”) provides assembly and installation to specification for highway signage, guardrail and miscellaneous fencing with its services primarily engaged in the new construction of roads and highways. Candesto acquired the key assets, including the existing and forward order book, of Candesto Enterprises Inc. which operated for over 20 years. Candesto strategically concentrates its activities in southern Alberta, with the bulk of its customers acting as the project general contractor, working for one of the four levels of government. MD&A section
Page
Highlights for the nine months ended October 31, 2014
3
Selected financial information
5
Results of operations
6
Capital expenditures
8
Outlook
8
Segmented information
10
Liquidity and capital resources
12
Accounting policies and estimates
15
Advisories and other guidance
16
HIGHLIGHTS FOR THE NINE MONTHS ENDED OCTOBER 31, 2014 Acquisitions One of QE2’s key strategies is the acquisition of profitable, specialized companies that focus on Alberta operations:
During the nine month period ended October 31, 2014 the Company completed its second acquisition through purchase of key operating assets of Candesto Enterprises Inc., a Calgarybased owner-operated leader in highway signage and guardrail installation products and services, for a purchase price of approximately $2.68 million. As part of the Asset Purchase Agreement (the "APA") the Company is required to secure bonding by January 31, 2015. Failure to secure bonding by the required date shall be considered a default pursuant to the terms of the APA. The acquisition was funded through a combination of cash of $193,000, $1.1 million term loan with Roynat Capital, the issuance of 1,000,000 common shares of the Company with a Put Option attached there to (the "Put Option") of $0.50 per share for a total of $500,000, and a vendor take-back loan in the amount of $850,000 to be paid over two years. The Put Option was considered to have a fair value of approximately $37,000. In October 2014, prior to the 3
Crowsnest RTO, the Company issued a Promissory Note in the amount of $200,000, due January 31, 2015, as partial consideration for satisfying the Put Option and $300,000 was paid by a group of investors for the 1,000,000 shares.
Financings
During the nine month period ended October 31, 2014, the Company further increased its facility by an additional $750,000 with ATB Financial and put in place a 5-year term loan for $1,100,000 with Roynat Capital. These facilities were used to partially fund the acquisition of Candesto.
The Company has developed strong relationships with ATB Financial and Roynat Capital which provide financial options to fund current operating requirements and future acquisitions. At October 31, 2014, the Company had undrawn amounts available under its credit facilities of approximately $824,000 (October 31, 2013 - $0), with ATB Financial.
During the nine month period ended October 31, 2014, the Company completed a convertible debenture financing for $1,298,000 gross proceeds. Canaccord was the lead agent. The financing was completed in conjunction with the Reverse Take Over discussed below.
Reverse Take Over
On February 24, 2014 it was announced that Crowsnest Acquisition Corp. (“Crowsnest”) entered into a letter of intent with the Company in respect of a proposed Qualifying Transaction pursuant to which the Company is expected to acquire Crowsnest by way of reverse takeover “Crowsnest RTO”).
On April 25, 2014, the Company announced that it had entered into an engagement letter with Canaccord Genuity Corp. (“Canaccord”), appointing Canaccord to act as QE2’s exclusive financial advisor and sponsor in connection with the Qualifying Transaction.
On October 20, 2014, 21,912,766 shares of QE2 were exchanged on an one for one basis for shares of Crowsnest with a deemed value of $0.06 per share. Total deemed consideration was $1,314,766.
The transaction resulted in a non-cash listing expense of $1,166,042 which is effectively the difference between the net assets acquired of $148,724 and the deemed consideration paid. The share capital, contributed surplus, deficit and listing expense of Crowsnest are credited to the share capital of the consolidated entity, QE2.
The company commenced trading on the TSX Venture exchange on November 4, 2014 under the symbol “QE”. 4
SELECTED FINANCIAL INFORMATION The following tables summarize selected financial information of the Company as at and for the periods indicated: Three Months Ended October 31, 2014
Three Months Ended October 31, 2013
Nine Months Ended October 31, 2014
Nine Months Ended October 31, 2013
$-
$103
$-
$237
Candesto revenue
$1,947,680
$-
$3,042,296
$-
Pillar revenue
$1,331,521
$-
$3,332,706
$-
($1,559,728)
($100,065)
($2,159,299)
($186,386)
Loss per share – basic
($0.140)
($0.021)
($0.219)
($0.075)
Loss per share – diluted
($0.140)
($0.021)
($0.219)
($0.075)
($1,765,266)
($100,065)
($2,578,636)
($186,386)
($854,428)
$(107,387)
($1,474,686)
$(181,752)
Cash used for investing activities (incl. business combination)
($78,865)
($661,279)
($121,735)
$(665,076)
Additions to financing
$623,416
741,149
$1,560,274
$901,174
INCOME STATEMENTS QE2 revenue
Loss and comprehensive loss
EBITDA STATEMENTS OF CASH FLOWS Cash from operations
As at ($)
October 31, 2014
January 31, 2014
($1,080,778)
($537,558)
Total Assets
$6,968,040
$2,174,228
Total Liabilities
$6,226,200
$1,522,802
$741,840
$651,426
BALANCE SHEETS Net Working Capital
Shareholders’ equity
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RESULTS OF OPERATIONS The Company continued to execute on its business strategy and completed its second acquisition, Candesto on April 25, 2014 which follows on the success of the Pillar acquisition in the year ended January 31, 2014. Substantially all of the Companies operations are carried out within Alberta, Canada. The ability to install, service, and maintain light standards and highway signage is affected by inclement weather. Due to the seasonal nature of the business, the results of operations for any interim period are not necessarily indicative of the results of operations to be expected for the fiscal year. Revenue For the nine months ended October 31, 2014, revenues were approximately $6,375,000 compared to $Nil for the same period in 2013. Increases in revenue for the Company were primarily due to Pillar and Candesto operations. As well, Candesto operations were consolidated into QE2 effective May 1, 2014. The activities are consistent with the prior reporting period of each entity except they were prior to the acquisition by QE2. For the three months ended October 31, 2014, revenues were approximately $3,279,000 compared to $Nil for the same period in 2013. Increases in revenue for the Company were primarily due to Pillar and Candesto operations. As well, Candesto operations were consolidated into QE2 effective May 1, 2014. These activities are consistent with the prior reporting period of each entity except they were prior to the acquisition by QE2. Revenues for the third quarter were approximately $3,279,000, compared to second quarter of approximately $2,270,000 and first quarter of $826,000. Increase in revenues on a quarter over quarter basis was primarily due to the inclusion of Candesto operations starting in the second quarter and entering the summer season which has traditionally been the busier months of the year. Operating Expenses For the nine months ended October 31, 2014, operating expenses were approximately $4,939,000 compared to $Nil for the same period in 2013. Increases in operating expenses for the Company were primarily due to Pillar and Candesto operations. As well, Candesto operations were consolidated into QE2 effective May 1, 2014. The activities are consistent with the prior reporting period of each entity except they were prior to the acquisition by QE2. For the three months ended October 31, 2014, operating expenses were approximately $2,404,000 compared to $Nil for the same period in 2013 Increases in operating expenses for the Company were
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primarily due to Pillar and Candesto operations. As well, Candesto operations were consolidated into QE2 effective May 1, 2014. These activities are consistent with the prior reporting period of each entity except they were prior to the acquisition by QE2. Operating expenses for the third quarter were approximately $2,404,000 compared to approximately $1,702,000 in the second quarter and approximately $833,000 in the first quarter. Increase in operating expenses on a quarter over quarter basis was primarily due to the inclusion of Candesto operations in the second quarter as well as increased activities they enter their busier months. General and Administrative For the nine months ended October 31, 2014, general and administrative expenses were approximately $2,014,000 as compared to $187,000 for the same period in 2013. Increases were primarily due to ongoing QE2 corporate expenses, including work related to the Candesto acquisition which was completed in April 2014 and the Crowsnest reverse take-over transaction completed in October 2014. As well, Candesto operations were consolidated into QE2 effective May 1, 2014. Pillar and Candesto activities are relatively consistent with the prior reporting period of each entity except they were prior to the acquisition by QE2. For the three months ended October 31, 2014, general and administrative expenses were approximately $1,064,000 compared to $100,000 for the same period in 2013. Increase for the Company were primarily due to ongoing QE2 corporate expenses and the addition of Pillar and Candesto activities. The Pillar and Candesto activities are relatively consistent with the prior reporting period of each entity except they were prior to the acquisition by QE2. General and administrative expenses for the third quarter were approximately $1,064,000 compared to approximately $624,000 in the second quarter and approximately $326,000 in the first quarter. Increase G&A expenses on a quarter over quarter basis was primarily due to the inclusion of Candesto operations starting in the second quarter and costs related to the Crowsnest transaction, as well as hiring of our Chief Financial Officer in June of 2014. Financing and Interest For the nine months ended October 31, 2014, financing and interest expenses were approximately $147,000 compared to $Nil for the same period in 2013. Increases in financing and interest expenses for the Company were primarily due to debt financing on the acquisition of Pillar and Candesto. For the three months ended October 31, 2014, financing and interest expenses were approximately $83,000 compared to $Nil for the same period in 2013. Increases in financing and interest expenses for the Company were primarily due to debt financing on the acquisition of Pillar and Candesto.
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Financing and interest expense for the third quarter was approximately $83,000 compared to approximately $42,000 in the second quarter and approximately $22,000 in the first quarter. Increase interest expense on a quarter over quarter basis was primarily due to interest on the Roynat loan for the acquisition of Candesto and accrued interest on the Promissory Notes and Vendor Take Back Notes that were repaid in the third quarter. Listing cost For the nine months ended October 31, 2014, listing cost was approximately $1,166,000 compared to $Nil for the same period in 2013. Listing cost relates to the Crowsnest RTO transaction that was completed in October 2014. The transaction resulted in a non-cash listing expense of $1,166,042 which is effectively the difference between the net assets acquired of $148,724 and the deemed consideration pad. The share capital, contributed surplus, deficit and listing expense of Crowsnest are credited to the share capital of the consolidated entity. Depreciation For the nine months ended October 31, 2014, depreciation was approximately $272,000 compared to $Nil for the same period in 2013. Increase in depreciation for the Company were primarily due to assets acquired in the Pillar and Candesto acquisition. For the three months ended October 31, 2014, depreciation was approximately $123,000 compared to $Nil for the same period in 2013. Increase in depreciation for the Company were primarily due to assets acquired in the Pillar and Candesto acquisition. Depreciation for the third quarter was approximately $123,000 compared to approximately $107,000 in the second quarter and $43,000 in the first quarter. Increase in depreciation was primarily due to the assets acquired in the Candesto acquisition in the second quarter and new equipment acquired right at the end of the second quarter.
CAPITAL EXPENDITURES The following table summarizes the consolidated capital expenditures made by the Company for the periods ended October 31, 2014 and 2013: Nine months ended ($) Pillar Candesto Corporate assets Total capital expenditures
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October 31, 2014
October 31, 2013
$95,928
$-
$1,098
$-
2,192
$4,734
$99,218
$4,734
Capital expenditures includes amounts funded through financing leases totaling $85,453. QE2 acquired capital assets with a fair value of approximately $573,000 as part of the Pillar acquisition and $1,017,500 as part of the Candesto acquisition which are not included in the amounts above.
OUTLOOK The economy continues to gain momentum in Western Canada and expectations are that it will continue to grow through 2014. Economists at several Canadian banks are predicting that Western Canada will lead the nation in economic growth, and the Province of Alberta is expected to be one of the leading provinces in real GDP growth and employment growth in 2014 and 2015 due to robust activity in the infrastructure and construction sectors. Management expects the Company’s operations to continue to benefit from the economic growth in Alberta. Pillar has been operating at or near capacity and QE2 fully expects Pillar will continue to deliver the streetlight services, painting, electrical and traffic control services that it has successfully provided for over 16 years. Pillar’s market is blue chip and municipalities that require or are responsible for maintenance and repair of streetlights, traffic lights, electrical infrastructure, and traffic control services, such as flagging. Pillar has a preferred vendor status with a number of its clients and is aiming to expand its tendering capability through 2014 and 2015. Pillar’s business is in good standing and is expected to contribute approximately 50% of QE2’s revenue on a consolidated basis in fiscal year 2015. The Company’s highway signage & guardrail installation subsidiary is expected to continue to perform well. Candesto will continue to deliver the road signage and guardrail products and services that it has successfully provided for over 20 years. Candesto has a preferred supplier status with a number of its clients and has a strong history of successful bidding on contracts put out to tender. Candesto’s business is in good standing and is expected to contribute approximately 50% of QE2’s revenue on a consolidated basis in fiscal year 2015. Opportunities exist between QE2’s two operating subsidiaries to cross-sell and to share equipment and knowledge share. Knowledge sharing has begun and further synergies will be activated in due course. However, it is not QE2’s intention to implement a business re-engineering or merger process with either subsidiary. QE2 anticipates that any synergies identified in the short-term will come from fostering a culture of co-management at the QE2 level rather than directly connecting the organizations with each other. It is QE2’s intention to continue to acquire and grow well-run Alberta businesses over the coming years that are a strategic fit for its growing portfolio. Management has identified a shortlist of targets which it aims to pursue over the next 3-12 months. Future acquisitions will likely be structured with a portion of the purchase price to be paid on closing and a vendor take-back component. The capital to fund this 9
transaction will likely come from a combination of equity and debt. QE2 intends to accelerate subsidiary growth in 2014 and in future years through working closely with the operating management teams to identify efficiency and expansion opportunities and by providing access to capital and expertise and leverage off the strong relationships built with existing financial institutions. QE2 will also continue to build the depth of its team.
SEGMENTED INFORMATION As of January 31, 2014, the Company operated only in the utility services business segment. As of April 25, 2014 the Company has operated in two main business segments in Alberta. The business segments presented reflect the management structure of the Company and the fashion in which management reviews business performance. The accounting policies and practices of the reportable segments are the same as those described in the Company's Audited Consolidated Financial Statements for the fiscal year ended January 31, 2014. The three reportable segments are as follows: Corporate The corporate segment provides management and administrative services to all of the Company’s subsidiaries and their respective operations.
Services The services segment provides maintenance services to the electrical utilities industry.
Construction The construction segment installs highway signage and guardrails to the infrastructure construction industry. There are varying levels of integration between Corporate and the Services and Construction reportable segments. This integration includes the provision of management services to the Services and Construction segments. These transactions are eliminated on consolidation as an inter-segment elimination.
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Nine months ended October 31, 2014
Corporate
Services $
3,332,706 3,127,579
Construction
Revenue Operating expenses Revenue less operating expenses General and administrative expenses Finance expenses Listing cost Depreciation Other expenses (income) Earnings (Loss) Before Income Taxes
$ $
$
(2,310,728)
$
(457,019)
$
608,448
Capital expenditures Segmented assets Segmented liabilities
$ $ $
2,192 42,563 1,849,543
$ $ $
10,475 2,400,085 1,256,522
$ $ $
1,098 4,525,392 3,120,135
Nine months ended October 31, 2013
128,000 -
Intersegment Eliminations
$
3,042,296 1,810,995
$
(128,000) -
2014 Total $
6,375,002 4,938,574
128,000
205,127
1,231,301
(128,000)
1,436,428
1,199,516 72,313 1,166,042 857
519,541 15,447 131,258
423,391 59,317 140,145
(128,000) -
2,014,448 147,077 1,166,042 272,260
-
(4,100)
-
-
(4,100)
$
-
$ (2,159,299)
$ $ $
-
$ $ $
Corporate
Revenue Operating expenses Revenue less operating expenses General and administrative expenses Finance expenses Depreciation Other expenses (income) Earnings (Loss) Before Income Taxes
$
237 -
$
(186,386)
Capital expenditures Segmented assets Segmented liabilities
$ $ $
4,734 60,098 831,482
Services $
-
Intersegment Eliminations
Construction $
-
$
-
13,765 6,968,040 6,226,200
2013 Total $
237 -
237
-
-
-
237
186,623 -
-
-
-
186,623 -
$
-
$
-
$
-
$
(186,386)
$ $ 2,302,786 $ 576,228
$ $ $
-
$ $ $
-
$ $ $
4,734 2,362,884 1,407,710
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Three months ended October 31, 2014 Revenue Operating expenses Revenue less operating expenses General and administrative expenses Finance expenses Listing cost Depreciation Other expenses (income) Earnings (Loss) Before Income Taxes
Capital expenditures Segmented assets Segmented liabilities
Corporate $ $
Services
Intersegment Eliminations
Construction
2014 Total
30,000
80,268
794,907
(30,000)
3,279,201 2,404,026 875, 026
703,910 31,813 1,166,042 299 -
131,168 6,080 52,484 (1,142)
259,388 44,771 70,090 -
(30,000) -
1,064,466 82,664 1,166,042 122,873 (1,142)
30,000 -
$
1,331,521 1,251,253
$
1,947,680 1,152,773
$
(30,000) -
$
$
(1,872,064)
$
(108,322)
$
420,658
$
-
$ (1,559,728)
$ $ $
42,563 1,849,543
$ $ $
2,400,085 1,256,522
$ $ $
1,350 4,525,392 3,120,135
$ $ $
-
$ $ $
Three months ended October 31, 2013
Corporate 103 -
Services $
-
Intersegment Eliminations
Construction $
-
$
-
1,350 6,968,040 6,226,200
2013 Total
$ $
$
(100,065)
$
-
$
-
$
-
$
(100,065)
Capital expenditures Segmented assets Segmented liabilities
$ $ $
1,326 60,098 831,482
$ $ $
2,302,786 576,228
$ $ $
-
$ $ $
-
$ $ $
1,326 2,362,884 1,407,710
103
-
-
-
100,168 -
-
-
-
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$
103 -
Revenue Operating expenses Revenue less operating expenses General and administrative expenses Finance expenses Depreciation Other expenses (income) Earnings (Loss) Before Income Taxes
103 100, 168 -
LIQUIDITY AND CAPITAL RESOURCES Working Capital At October 31, 2014, the Company has negative Net Working Capital of $1,080,778 (refer to Advisories and Other Guidance beginning on page 12 for additional information on Non-GAAP Financial Measures). It is anticipated that QE2’s 2014 capital and operating budgets would be funded with existing cash and cash flow from operations and available credit. The Company will require additional capital to expand its operations and support additional M&A activity. QE2 believes it will fund its activities and other requirements beyond 2014 through some form of cash flow from operations, a reasonable level of debt and additional equity. The Company cannot guarantee the availability of these sources of additional funding. Long-term Debt In April 2014, the Company entered into a Term Loan with Roynat in an aggregate amount of $1,100,000 to support the Candesto acquisition. The loan bears variable interest at CDOR BA 1-month plus between 4.50%-5.25% based on Funded Debt to EBITDA and has a term of five years maturing on th
March 15, 2019. Principal and interest payments are required monthly on the 15 of each month. The loan is secured by all assets of Candesto. The Company has the option to pre-pay any or all of the loan at any time with penalties ranging from 3%-6% of the principal repaid or 3-6 months interest at the prevailing rate at time of pre-payment on the principal repaid. Debt issuance costs associated with the transaction were initially capitalized and are amortized to net income over the life of the loan. The Company was not in compliance with one financial covenant at October 31, 2014. As a result, the balance of the loan has been classified as a current liability. Subsequent to the reporting period, Roynat has agreed to waive their right to demand immediate repayment of the loan within the next twelve months. The loan will continue under the original repayment schedule. Convertible Debentures In conjunction with the Crowsnest RTO, the Company issued $1,298,000 in convertible debentures. The debentures matures on October 20, 2016, is unsecured, with semi-annual interest only payments on June 30 and December 31, and bears interest at 12% per annum. Debenture holders have a right to exercise at a price of $0.50 per common share.
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Vendor Take Back As part of the acquisition structuring, the Company entered into 2-year Vendor Take Back loans (“VTB”) with the previous owner of Candesto. The Candesto VTB was entered into April 24, 2014 for $850,000, bears interest at prime plus 2% and is repayable in equal amounts on April 24, 2015 and 2016. Notes Payable On October 20, 2014, the Company issued a Promissory Note in the amount of $200,000 as partial consideration for satisfying the Put Option on the 1,000,000 shares issued for the acquisition. This Promissory Note matures on January 31, 2015, bears interest at 5% and has principal repayment terms of $20,000 due October 31, 2014, $30,000 due November 30, 2014, $50,000 due December 31, 2014, and $100,000 due January 31, 2015. The $20,000 payment due on October 31, 2014 has been paid. An unrelated party has advanced funds to the Company totalling $50,000 and received a Promissory Note. The Promissory Note is interest bearing at 18% per annum, unsecured and due on demand. Operating Credit Agreements The Company currently has Credit Agreements in place for each of Pillar and Candesto. The Pillar agreement was entered into on October 13, 2013 for a maximum of $500,000 or 75% of Good Receivables and bears interest at ATB prime plus two percent. The Candesto agreement was entered into on March 28, 2014 for a maximum of $750,000 or the sum of 75% of Good Receivables plus Inventory (maximum inventory allowance of $150,000) and bears interest at ATB prime plus two percent. Financial Instruments The Company classifies its financial instruments measured at fair value according to the following hierarchy based on the amount of observable inputs used to value the instrument. Assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the placement level within the fair value hierarchy.
Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2 – Inputs other than quoted prices that are observable for the asset or liability either directly or indirectly; and
Level 3 – Inputs that are not based on observable market data.
The Company’s cash and cash equivalents have been assessed on the fair value hierarchy described above and have been classified as Level 1. At October 31, 2014, the fair value of QE2’s long-term debt was $2,447,346 based on Level 2 observable quoted prices from financial institutions.
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Credit Risk As at October 31, 2014 and January 31, 2014 QE2’s cash and cash equivalents were held with 1 counterparty. The Company’s management believes that credit risk associated with these investments is low. At October 31, 2014, the largest institution held 100% of the balances. As at October 31, 2014, QE2 had approximately $3,181,114 in trade receivables, approximately 30.3% of the Company’s consolidated accounts receivable balance relates to Pillar and 69.7% relates to Candesto. Management believes collection risk on the remaining outstanding accounts receivable as at October 31, 2014 is low as the Company deals with high quality counterparties. No material amounts were past due at October 31, 2014, based on the terms with the counterparties. Commitments and Contingencies The following table summarizes QE2’s estimated future minimum commitments as at October 31, 2014 for the following five years and thereafter: 2015
2016
2017
2018
There after
2019
Total
Repayment of Term Loan (including interest)
$277,765
$263,472
Convertible debentures (including interest)
155,760
1,453,760
Notes payable (including interest)
681,562
446,250
-
-
-
-
1,127,812
Financing leases on vehicles and equipment (including interest)
100,003
93,200
124,753
33,156
15,454
-
366,338
$1,215,090
$2,256,682
$373,932
$268,042
$127,557
$-
$4,241,303
TOTAL COMMITMENTS
$249,179
$234,886
$112,103
$-
$1,137,405
1,609,520
Off Balance Sheet Arrangements The Company has certain lease agreements, all of which are reflected in the table above under the heading “Commitments and Contingencies”, which were entered into in the normal course of operations. Payments pursuant to these leases, which have been treated as operating leases, have been recorded as either Operating Expenses or G&A expenses. No asset or liability value has been assigned to these agreements on the Company’s balance sheet. The Company has no other off balance sheet arrangements.
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Equity Instruments During the nine months ended October 31, 2014, the Company issued 1,000,000 common shares in relation to the acquisition of Candesto at a deemed cost of $0.50 per share with a Put Option attached there to (the "Put Option") of $0.50 per share for a total of $500,000. The Put Option was considered to have a fair value of approximately $37,000. In October 2014, prior to the Crowsnest RTO, the Company issued a Promissory Note in the amount of $200,000, due January 31, 2015, as partial consideration for satisfying the Put Option and $300,000 was paid by a group of investors for the 1,000,000 shares During the nine month period ended October 31, 2014, the Company issued 1,832,766 units for total proceeds of $549,663. Each unit consists of one common share and one half warrant. One warrant entitles the holder to purchase one common share at a purchase price of $0.50 per share. The fair value attributable to the warrants was $110,696. In June 2014, the Company issued 26,728 broker warrants in connection with the share issuance that occurred during the period. Each warrant entitles the holder to purchase one common share at a purchase price of $0.50. In October 2014, the Company completed the Crowsnest RTO. The Company effectively issued 21,912,766 shares with a deemed value of $1,314,766. Outstanding Share Data The following table summarizes the number of share capital instruments outstanding at the date indicated: As at October 31, 2014 28,512,766
Common shares
-
Convertible securities:
2,943,110
Warrants
Related Party Transactions The purchases from related parties are in the normal course of business and are initially recognized at fair value. Related parties include companies that have common directors, officers, employees and shareholders. The nature of the purchases relate to operating and general and administrative expenses in the Company’s activities. Amounts are unsecured, non-interest bearing and due on demand. There have been no guarantees provided or received for any related party payables. Related party payables are included in accounts payables and accrued liabilities.
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ACCOUNTING POLICIES AND ESTIMATES During the three and nine months ended October 31, 2014, there were no changes to the Company’s accounting policies or use of estimates in the preparation of the unaudited interim consolidated financial statements and the notes thereto. Refer to the January 31, 2014 audited consolidated financial statements of the Company for further guidance regarding QE2’s accounting policies and use of estimates.
ADVISORIES AND OTHER GUIDANCE Non-GAAP Financial Measures The Net Working Capital financial measure in this MD&A does not have a standardized meaning which is prescribed by IFRS and is considered to be a non-GAAP measure. This measure may not be comparable to similar measures presented by other issuers and should not be considered in isolation with measures that are prepared in accordance with IFRS. The Net Working Capital measure in the MD&A (including the comparatives thereto) is determined by subtracting current liabilities from current assets on the Company’s balance sheets in the consolidated financial statements as at October 31, 2014. Net Working Capital consists mostly of cash, cash equivalents, short-term investments, accounts receivable offset by accounts payable and accrued liabilities. The Net Working Capital measure allows management and other users to evaluate the Company’s short term liquidity. Risk Factors Factors currently influencing the Company’s ability to succeed include, but are not limited to, the following:
Capital requirements;
Risks related to future acquisition activities;
Ability to obtain financing for capital requirements and acquisition opportunities;
Adverse consequences that could result from the failure of counterparties to comply with their contractual obligations;
Adverse changes to economic, market, and business conditions;
Poor weather for extended periods;
Seasonal business cycles;
Appropriate insurance coverage;
Variations in interest rates;
Reliance on, competition for, loss of and failure to attract key personnel 17
Forward Looking Information This MD&A contains forward-looking information that involves various risks, uncertainties and other factors. All information other than statements of historical fact is forward-looking information. The use of any of the words “may”, “will”, “should”, “could”, “anticipate”, “believe”, “expect”, “intend”, “plan”, “potential”, “continue”, and similar expressions and statements relating to matters that are not historical facts. These may include, without limitation, statements based on current expectations involving a number of risks and uncertainties related to pipeline and facilities construction and maintenance services associated with the oil and gas and industries and utility services and the domestic and worldwide supplies and commodity prices of oil and gas. These risks and uncertainties include, but are not limited to, seasonal weather patterns, maintaining and increasing market share, government regulation of energy and resource companies, terrorist activity, the price and availability of alternative fuels, the availability of pipeline capacity, potential instability or armed conflict in oil producing regions, overall economic environment, the success of integrating and realizing the potential of acquisitions, ability to attract and retain key personnel, technological change, demand for services provided by QE2, and fluctuations in the value of the Canadian dollar relative to the US dollar. These risks and uncertainties may cause actual results to differ from information contained herein. There can be no assurance that such forward-looking information will prove to be accurate. Actual results and future events could differ materially from those anticipated in such forward-looking information. The forward-looking information is based on the estimates and opinions of management on the dates they are made and are expressly qualified in their entirety by this notice. The Company assumes no obligation to update forward-looking information should circumstances or management’s estimates or opinions change as a result of new information or future events. Readers should not place undue reliance on forward-looking information.
18
Management’s Discussion and Analysis For the nine months ended October 31, 2014 This Management’s Discussion and Analysis of financial condition and results of operations (“MD&A”) of QE2 Acquisition Corp. (“QE2” or the “Company”) is dated December 30, 2014 and should be read in conjunction with the unaudited condensed interim consolidated financial statements of the Company for the nine months ended October 31, 2014, and the audited consolidated financial statements of the Company for the years ended January 31, 2014 and 2013. These consolidated financial statements, including the comparative figures, were prepared in accordance with International Financial Reporting Standards (“IFRS”). Unless otherwise noted, all financial measures are expressed in Canadian dollars and tabular dollar amounts are in thousands. This MD&A contains forward looking information based on the Company’s current expectations and projections. For information on the material factors and assumptions underlying such forward looking information, refer to the “Forward Looking Information” advisory on page 17 of the MD&A. Additional information relating to QE2 is available on the Company’s website at www.qe2corp.com.
BUSINESS OVERVIEW QE2 is a Canadian company founded in January 2013. The Company acquires, consolidates and grows well managed, profitable, asset backed, Alberta-based businesses in the infrastructure and utility service sectors. The Company’s corporate headquarters are based in Calgary, Alberta, Canada, with operational offices throughout Alberta - Fort Saskatchewan and Calgary. The Company is strategically located near its customers. The Company’s strategy is to grow primarily in Alberta through acquisitions, organic growth from synergies realized by vertical and horizontal integration opportunities, sales and marketing channel expansion and access to available capital. The primary driver is the existing Alberta economic landscape of opportunity and the Government’s financial commitment to maintain and improve existing infrastructure, including aggressive plans to construct new infrastructure over the next 20 years.
Pillar: Street Lights and Traffic Lights The Company provides utility services which include streetlight services, painting, electrical services and traffic control. These activities are conducted from the Fort Saskatchewan, Alberta office which operates as Pillar Contracting Ltd. (“Pillar” or “Pillar Contracting”), a company that has provided services to customers since 1997. A strong customer base includes major utility companies and municipalities in Alberta and Saskatchewan.
2
Candesto: Highway Signage & Guardrail Installation Services The Company’s highway signage & guardrail installation services division, Candesto Enterprises Ltd. (“Candesto” or “Candesto Enterprises”) provides assembly and installation to specification for highway signage, guardrail and miscellaneous fencing with its services primarily engaged in the new construction of roads and highways. Candesto acquired the key assets, including the existing and forward order book, of Candesto Enterprises Inc. which operated for over 20 years. Candesto strategically concentrates its activities in southern Alberta, with the bulk of its customers acting as the project general contractor, working for one of the four levels of government. MD&A section
Page
Highlights for the nine months ended October 31, 2014
3
Selected financial information
5
Results of operations
6
Capital expenditures
8
Outlook
8
Segmented information
10
Liquidity and capital resources
12
Accounting policies and estimates
15
Advisories and other guidance
16
HIGHLIGHTS FOR THE NINE MONTHS ENDED OCTOBER 31, 2014 Acquisitions One of QE2’s key strategies is the acquisition of profitable, specialized companies that focus on Alberta operations:
During the nine month period ended October 31, 2014 the Company completed its second acquisition through purchase of key operating assets of Candesto Enterprises Inc., a Calgarybased owner-operated leader in highway signage and guardrail installation products and services, for a purchase price of approximately $2.68 million. As part of the Asset Purchase Agreement (the "APA") the Company is required to secure bonding by January 31, 2015. Failure to secure bonding by the required date shall be considered a default pursuant to the terms of the APA. The acquisition was funded through a combination of cash of $193,000, $1.1 million term loan with Roynat Capital, the issuance of 1,000,000 common shares of the Company with a Put Option attached there to (the "Put Option") of $0.50 per share for a total of $500,000, and a vendor take-back loan in the amount of $850,000 to be paid over two years. The Put Option was considered to have a fair value of approximately $37,000. In October 2014, prior to the 3
Crowsnest RTO, the Company issued a Promissory Note in the amount of $200,000, due January 31, 2015, as partial consideration for satisfying the Put Option and $300,000 was paid by a group of investors for the 1,000,000 shares.
Financings
During the nine month period ended October 31, 2014, the Company further increased its facility by an additional $750,000 with ATB Financial and put in place a 5-year term loan for $1,100,000 with Roynat Capital. These facilities were used to partially fund the acquisition of Candesto.
The Company has developed strong relationships with ATB Financial and Roynat Capital which provide financial options to fund current operating requirements and future acquisitions. At October 31, 2014, the Company had undrawn amounts available under its credit facilities of approximately $824,000 (October 31, 2013 - $0), with ATB Financial.
During the nine month period ended October 31, 2014, the Company completed a convertible debenture financing for $1,298,000 gross proceeds. Canaccord was the lead agent. The financing was completed in conjunction with the Reverse Take Over discussed below.
Reverse Take Over
On February 24, 2014 it was announced that Crowsnest Acquisition Corp. (“Crowsnest”) entered into a letter of intent with the Company in respect of a proposed Qualifying Transaction pursuant to which the Company is expected to acquire Crowsnest by way of reverse takeover “Crowsnest RTO”).
On April 25, 2014, the Company announced that it had entered into an engagement letter with Canaccord Genuity Corp. (“Canaccord”), appointing Canaccord to act as QE2’s exclusive financial advisor and sponsor in connection with the Qualifying Transaction.
On October 20, 2014, 21,912,766 shares of QE2 were exchanged on an one for one basis for shares of Crowsnest with a deemed value of $0.06 per share. Total deemed consideration was $1,314,766.
The transaction resulted in a non-cash listing expense of $1,166,042 which is effectively the difference between the net assets acquired of $148,724 and the deemed consideration paid. The share capital, contributed surplus, deficit and listing expense of Crowsnest are credited to the share capital of the consolidated entity, QE2.
The company commenced trading on the TSX Venture exchange on November 4, 2014 under the symbol “QE”. 4
SELECTED FINANCIAL INFORMATION The following tables summarize selected financial information of the Company as at and for the periods indicated: Three Months Ended October 31, 2014
Three Months Ended October 31, 2013
Nine Months Ended October 31, 2014
Nine Months Ended October 31, 2013
$-
$103
$-
$237
Candesto revenue
$1,947,680
$-
$3,042,296
$-
Pillar revenue
$1,331,521
$-
$3,332,706
$-
($1,559,728)
($100,065)
($2,159,299)
($186,386)
Loss per share – basic
($0.140)
($0.021)
($0.219)
($0.075)
Loss per share – diluted
($0.140)
($0.021)
($0.219)
($0.075)
($1,765,266)
($100,065)
($2,578,636)
($186,386)
($854,428)
$(107,387)
($1,474,686)
$(181,752)
Cash used for investing activities (incl. business combination)
($78,865)
($661,279)
($121,735)
$(665,076)
Additions to financing
$623,416
741,149
$1,560,274
$901,174
INCOME STATEMENTS QE2 revenue
Loss and comprehensive loss
EBITDA STATEMENTS OF CASH FLOWS Cash from operations
As at ($)
October 31, 2014
January 31, 2014
($1,080,778)
($537,558)
Total Assets
$6,968,040
$2,174,228
Total Liabilities
$6,226,200
$1,522,802
$741,840
$651,426
BALANCE SHEETS Net Working Capital
Shareholders’ equity
5
RESULTS OF OPERATIONS The Company continued to execute on its business strategy and completed its second acquisition, Candesto on April 25, 2014 which follows on the success of the Pillar acquisition in the year ended January 31, 2014. Substantially all of the Companies operations are carried out within Alberta, Canada. The ability to install, service, and maintain light standards and highway signage is affected by inclement weather. Due to the seasonal nature of the business, the results of operations for any interim period are not necessarily indicative of the results of operations to be expected for the fiscal year. Revenue For the nine months ended October 31, 2014, revenues were approximately $6,375,000 compared to $Nil for the same period in 2013. Increases in revenue for the Company were primarily due to Pillar and Candesto operations. As well, Candesto operations were consolidated into QE2 effective May 1, 2014. The activities are consistent with the prior reporting period of each entity except they were prior to the acquisition by QE2. For the three months ended October 31, 2014, revenues were approximately $3,279,000 compared to $Nil for the same period in 2013. Increases in revenue for the Company were primarily due to Pillar and Candesto operations. As well, Candesto operations were consolidated into QE2 effective May 1, 2014. These activities are consistent with the prior reporting period of each entity except they were prior to the acquisition by QE2. Revenues for the third quarter were approximately $3,279,000, compared to second quarter of approximately $2,270,000 and first quarter of $826,000. Increase in revenues on a quarter over quarter basis was primarily due to the inclusion of Candesto operations starting in the second quarter and entering the summer season which has traditionally been the busier months of the year. Operating Expenses For the nine months ended October 31, 2014, operating expenses were approximately $4,939,000 compared to $Nil for the same period in 2013. Increases in operating expenses for the Company were primarily due to Pillar and Candesto operations. As well, Candesto operations were consolidated into QE2 effective May 1, 2014. The activities are consistent with the prior reporting period of each entity except they were prior to the acquisition by QE2. For the three months ended October 31, 2014, operating expenses were approximately $2,404,000 compared to $Nil for the same period in 2013 Increases in operating expenses for the Company were
6
primarily due to Pillar and Candesto operations. As well, Candesto operations were consolidated into QE2 effective May 1, 2014. These activities are consistent with the prior reporting period of each entity except they were prior to the acquisition by QE2. Operating expenses for the third quarter were approximately $2,404,000 compared to approximately $1,702,000 in the second quarter and approximately $833,000 in the first quarter. Increase in operating expenses on a quarter over quarter basis was primarily due to the inclusion of Candesto operations in the second quarter as well as increased activities they enter their busier months. General and Administrative For the nine months ended October 31, 2014, general and administrative expenses were approximately $2,014,000 as compared to $187,000 for the same period in 2013. Increases were primarily due to ongoing QE2 corporate expenses, including work related to the Candesto acquisition which was completed in April 2014 and the Crowsnest reverse take-over transaction completed in October 2014. As well, Candesto operations were consolidated into QE2 effective May 1, 2014. Pillar and Candesto activities are relatively consistent with the prior reporting period of each entity except they were prior to the acquisition by QE2. For the three months ended October 31, 2014, general and administrative expenses were approximately $1,064,000 compared to $100,000 for the same period in 2013. Increase for the Company were primarily due to ongoing QE2 corporate expenses and the addition of Pillar and Candesto activities. The Pillar and Candesto activities are relatively consistent with the prior reporting period of each entity except they were prior to the acquisition by QE2. General and administrative expenses for the third quarter were approximately $1,064,000 compared to approximately $624,000 in the second quarter and approximately $326,000 in the first quarter. Increase G&A expenses on a quarter over quarter basis was primarily due to the inclusion of Candesto operations starting in the second quarter and costs related to the Crowsnest transaction, as well as hiring of our Chief Financial Officer in June of 2014. Financing and Interest For the nine months ended October 31, 2014, financing and interest expenses were approximately $147,000 compared to $Nil for the same period in 2013. Increases in financing and interest expenses for the Company were primarily due to debt financing on the acquisition of Pillar and Candesto. For the three months ended October 31, 2014, financing and interest expenses were approximately $83,000 compared to $Nil for the same period in 2013. Increases in financing and interest expenses for the Company were primarily due to debt financing on the acquisition of Pillar and Candesto.
7
Financing and interest expense for the third quarter was approximately $83,000 compared to approximately $42,000 in the second quarter and approximately $22,000 in the first quarter. Increase interest expense on a quarter over quarter basis was primarily due to interest on the Roynat loan for the acquisition of Candesto and accrued interest on the Promissory Notes and Vendor Take Back Notes that were repaid in the third quarter. Listing cost For the nine months ended October 31, 2014, listing cost was approximately $1,166,000 compared to $Nil for the same period in 2013. Listing cost relates to the Crowsnest RTO transaction that was completed in October 2014. The transaction resulted in a non-cash listing expense of $1,166,042 which is effectively the difference between the net assets acquired of $148,724 and the deemed consideration pad. The share capital, contributed surplus, deficit and listing expense of Crowsnest are credited to the share capital of the consolidated entity. Depreciation For the nine months ended October 31, 2014, depreciation was approximately $272,000 compared to $Nil for the same period in 2013. Increase in depreciation for the Company were primarily due to assets acquired in the Pillar and Candesto acquisition. For the three months ended October 31, 2014, depreciation was approximately $123,000 compared to $Nil for the same period in 2013. Increase in depreciation for the Company were primarily due to assets acquired in the Pillar and Candesto acquisition. Depreciation for the third quarter was approximately $123,000 compared to approximately $107,000 in the second quarter and $43,000 in the first quarter. Increase in depreciation was primarily due to the assets acquired in the Candesto acquisition in the second quarter and new equipment acquired right at the end of the second quarter.
CAPITAL EXPENDITURES The following table summarizes the consolidated capital expenditures made by the Company for the periods ended October 31, 2014 and 2013: Nine months ended ($) Pillar Candesto Corporate assets Total capital expenditures
8
October 31, 2014
October 31, 2013
$95,928
$-
$1,098
$-
2,192
$4,734
$99,218
$4,734
Capital expenditures includes amounts funded through financing leases totaling $85,453. QE2 acquired capital assets with a fair value of approximately $573,000 as part of the Pillar acquisition and $1,017,500 as part of the Candesto acquisition which are not included in the amounts above.
OUTLOOK The economy continues to gain momentum in Western Canada and expectations are that it will continue to grow through 2014. Economists at several Canadian banks are predicting that Western Canada will lead the nation in economic growth, and the Province of Alberta is expected to be one of the leading provinces in real GDP growth and employment growth in 2014 and 2015 due to robust activity in the infrastructure and construction sectors. Management expects the Company’s operations to continue to benefit from the economic growth in Alberta. Pillar has been operating at or near capacity and QE2 fully expects Pillar will continue to deliver the streetlight services, painting, electrical and traffic control services that it has successfully provided for over 16 years. Pillar’s market is blue chip and municipalities that require or are responsible for maintenance and repair of streetlights, traffic lights, electrical infrastructure, and traffic control services, such as flagging. Pillar has a preferred vendor status with a number of its clients and is aiming to expand its tendering capability through 2014 and 2015. Pillar’s business is in good standing and is expected to contribute approximately 50% of QE2’s revenue on a consolidated basis in fiscal year 2015. The Company’s highway signage & guardrail installation subsidiary is expected to continue to perform well. Candesto will continue to deliver the road signage and guardrail products and services that it has successfully provided for over 20 years. Candesto has a preferred supplier status with a number of its clients and has a strong history of successful bidding on contracts put out to tender. Candesto’s business is in good standing and is expected to contribute approximately 50% of QE2’s revenue on a consolidated basis in fiscal year 2015. Opportunities exist between QE2’s two operating subsidiaries to cross-sell and to share equipment and knowledge share. Knowledge sharing has begun and further synergies will be activated in due course. However, it is not QE2’s intention to implement a business re-engineering or merger process with either subsidiary. QE2 anticipates that any synergies identified in the short-term will come from fostering a culture of co-management at the QE2 level rather than directly connecting the organizations with each other. It is QE2’s intention to continue to acquire and grow well-run Alberta businesses over the coming years that are a strategic fit for its growing portfolio. Management has identified a shortlist of targets which it aims to pursue over the next 3-12 months. Future acquisitions will likely be structured with a portion of the purchase price to be paid on closing and a vendor take-back component. The capital to fund this 9
transaction will likely come from a combination of equity and debt. QE2 intends to accelerate subsidiary growth in 2014 and in future years through working closely with the operating management teams to identify efficiency and expansion opportunities and by providing access to capital and expertise and leverage off the strong relationships built with existing financial institutions. QE2 will also continue to build the depth of its team.
SEGMENTED INFORMATION As of January 31, 2014, the Company operated only in the utility services business segment. As of April 25, 2014 the Company has operated in two main business segments in Alberta. The business segments presented reflect the management structure of the Company and the fashion in which management reviews business performance. The accounting policies and practices of the reportable segments are the same as those described in the Company's Audited Consolidated Financial Statements for the fiscal year ended January 31, 2014. The three reportable segments are as follows: Corporate The corporate segment provides management and administrative services to all of the Company’s subsidiaries and their respective operations.
Services The services segment provides maintenance services to the electrical utilities industry.
Construction The construction segment installs highway signage and guardrails to the infrastructure construction industry. There are varying levels of integration between Corporate and the Services and Construction reportable segments. This integration includes the provision of management services to the Services and Construction segments. These transactions are eliminated on consolidation as an inter-segment elimination.
10
Nine months ended October 31, 2014
Corporate
Services $
3,332,706 3,127,579
Construction
Revenue Operating expenses Revenue less operating expenses General and administrative expenses Finance expenses Listing cost Depreciation Other expenses (income) Earnings (Loss) Before Income Taxes
$ $
$
(2,310,728)
$
(457,019)
$
608,448
Capital expenditures Segmented assets Segmented liabilities
$ $ $
2,192 42,563 1,849,543
$ $ $
10,475 2,400,085 1,256,522
$ $ $
1,098 4,525,392 3,120,135
Nine months ended October 31, 2013
128,000 -
Intersegment Eliminations
$
3,042,296 1,810,995
$
(128,000) -
2014 Total $
6,375,002 4,938,574
128,000
205,127
1,231,301
(128,000)
1,436,428
1,199,516 72,313 1,166,042 857
519,541 15,447 131,258
423,391 59,317 140,145
(128,000) -
2,014,448 147,077 1,166,042 272,260
-
(4,100)
-
-
(4,100)
$
-
$ (2,159,299)
$ $ $
-
$ $ $
Corporate
Revenue Operating expenses Revenue less operating expenses General and administrative expenses Finance expenses Depreciation Other expenses (income) Earnings (Loss) Before Income Taxes
$
237 -
$
(186,386)
Capital expenditures Segmented assets Segmented liabilities
$ $ $
4,734 60,098 831,482
Services $
-
Intersegment Eliminations
Construction $
-
$
-
13,765 6,968,040 6,226,200
2013 Total $
237 -
237
-
-
-
237
186,623 -
-
-
-
186,623 -
$
-
$
-
$
-
$
(186,386)
$ $ 2,302,786 $ 576,228
$ $ $
-
$ $ $
-
$ $ $
4,734 2,362,884 1,407,710
11
Three months ended October 31, 2014 Revenue Operating expenses Revenue less operating expenses General and administrative expenses Finance expenses Listing cost Depreciation Other expenses (income) Earnings (Loss) Before Income Taxes
Capital expenditures Segmented assets Segmented liabilities
Corporate $ $
Services
Intersegment Eliminations
Construction
2014 Total
30,000
80,268
794,907
(30,000)
3,279,201 2,404,026 875, 026
703,910 31,813 1,166,042 299 -
131,168 6,080 52,484 (1,142)
259,388 44,771 70,090 -
(30,000) -
1,064,466 82,664 1,166,042 122,873 (1,142)
30,000 -
$
1,331,521 1,251,253
$
1,947,680 1,152,773
$
(30,000) -
$
$
(1,872,064)
$
(108,322)
$
420,658
$
-
$ (1,559,728)
$ $ $
42,563 1,849,543
$ $ $
2,400,085 1,256,522
$ $ $
1,350 4,525,392 3,120,135
$ $ $
-
$ $ $
Three months ended October 31, 2013
Corporate 103 -
Services $
-
Intersegment Eliminations
Construction $
-
$
-
1,350 6,968,040 6,226,200
2013 Total
$ $
$
(100,065)
$
-
$
-
$
-
$
(100,065)
Capital expenditures Segmented assets Segmented liabilities
$ $ $
1,326 60,098 831,482
$ $ $
2,302,786 576,228
$ $ $
-
$ $ $
-
$ $ $
1,326 2,362,884 1,407,710
103
-
-
-
100,168 -
-
-
-
12
$
103 -
Revenue Operating expenses Revenue less operating expenses General and administrative expenses Finance expenses Depreciation Other expenses (income) Earnings (Loss) Before Income Taxes
103 100, 168 -
LIQUIDITY AND CAPITAL RESOURCES Working Capital At October 31, 2014, the Company has negative Net Working Capital of $1,080,778 (refer to Advisories and Other Guidance beginning on page 12 for additional information on Non-GAAP Financial Measures). It is anticipated that QE2’s 2014 capital and operating budgets would be funded with existing cash and cash flow from operations and available credit. The Company will require additional capital to expand its operations and support additional M&A activity. QE2 believes it will fund its activities and other requirements beyond 2014 through some form of cash flow from operations, a reasonable level of debt and additional equity. The Company cannot guarantee the availability of these sources of additional funding. Long-term Debt In April 2014, the Company entered into a Term Loan with Roynat in an aggregate amount of $1,100,000 to support the Candesto acquisition. The loan bears variable interest at CDOR BA 1-month plus between 4.50%-5.25% based on Funded Debt to EBITDA and has a term of five years maturing on th
March 15, 2019. Principal and interest payments are required monthly on the 15 of each month. The loan is secured by all assets of Candesto. The Company has the option to pre-pay any or all of the loan at any time with penalties ranging from 3%-6% of the principal repaid or 3-6 months interest at the prevailing rate at time of pre-payment on the principal repaid. Debt issuance costs associated with the transaction were initially capitalized and are amortized to net income over the life of the loan. The Company was not in compliance with one financial covenant at October 31, 2014. As a result, the balance of the loan has been classified as a current liability. Subsequent to the reporting period, Roynat has agreed to waive their right to demand immediate repayment of the loan within the next twelve months. The loan will continue under the original repayment schedule. Convertible Debentures In conjunction with the Crowsnest RTO, the Company issued $1,298,000 in convertible debentures. The debentures matures on October 20, 2016, is unsecured, with semi-annual interest only payments on June 30 and December 31, and bears interest at 12% per annum. Debenture holders have a right to exercise at a price of $0.50 per common share.
13
Vendor Take Back As part of the acquisition structuring, the Company entered into 2-year Vendor Take Back loans (“VTB”) with the previous owner of Candesto. The Candesto VTB was entered into April 24, 2014 for $850,000, bears interest at prime plus 2% and is repayable in equal amounts on April 24, 2015 and 2016. Notes Payable On October 20, 2014, the Company issued a Promissory Note in the amount of $200,000 as partial consideration for satisfying the Put Option on the 1,000,000 shares issued for the acquisition. This Promissory Note matures on January 31, 2015, bears interest at 5% and has principal repayment terms of $20,000 due October 31, 2014, $30,000 due November 30, 2014, $50,000 due December 31, 2014, and $100,000 due January 31, 2015. The $20,000 payment due on October 31, 2014 has been paid. An unrelated party has advanced funds to the Company totalling $50,000 and received a Promissory Note. The Promissory Note is interest bearing at 18% per annum, unsecured and due on demand. Operating Credit Agreements The Company currently has Credit Agreements in place for each of Pillar and Candesto. The Pillar agreement was entered into on October 13, 2013 for a maximum of $500,000 or 75% of Good Receivables and bears interest at ATB prime plus two percent. The Candesto agreement was entered into on March 28, 2014 for a maximum of $750,000 or the sum of 75% of Good Receivables plus Inventory (maximum inventory allowance of $150,000) and bears interest at ATB prime plus two percent. Financial Instruments The Company classifies its financial instruments measured at fair value according to the following hierarchy based on the amount of observable inputs used to value the instrument. Assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the placement level within the fair value hierarchy.
Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2 – Inputs other than quoted prices that are observable for the asset or liability either directly or indirectly; and
Level 3 – Inputs that are not based on observable market data.
The Company’s cash and cash equivalents have been assessed on the fair value hierarchy described above and have been classified as Level 1. At October 31, 2014, the fair value of QE2’s long-term debt was $2,447,346 based on Level 2 observable quoted prices from financial institutions.
14
Credit Risk As at October 31, 2014 and January 31, 2014 QE2’s cash and cash equivalents were held with 1 counterparty. The Company’s management believes that credit risk associated with these investments is low. At October 31, 2014, the largest institution held 100% of the balances. As at October 31, 2014, QE2 had approximately $3,181,114 in trade receivables, approximately 30.3% of the Company’s consolidated accounts receivable balance relates to Pillar and 69.7% relates to Candesto. Management believes collection risk on the remaining outstanding accounts receivable as at October 31, 2014 is low as the Company deals with high quality counterparties. No material amounts were past due at October 31, 2014, based on the terms with the counterparties. Commitments and Contingencies The following table summarizes QE2’s estimated future minimum commitments as at October 31, 2014 for the following five years and thereafter: 2015
2016
2017
2018
There after
2019
Total
Repayment of Term Loan (including interest)
$277,765
$263,472
Convertible debentures (including interest)
155,760
1,453,760
Notes payable (including interest)
681,562
446,250
-
-
-
-
1,127,812
Financing leases on vehicles and equipment (including interest)
100,003
93,200
124,753
33,156
15,454
-
366,338
$1,215,090
$2,256,682
$373,932
$268,042
$127,557
$-
$4,241,303
TOTAL COMMITMENTS
$249,179
$234,886
$112,103
$-
$1,137,405
1,609,520
Off Balance Sheet Arrangements The Company has certain lease agreements, all of which are reflected in the table above under the heading “Commitments and Contingencies”, which were entered into in the normal course of operations. Payments pursuant to these leases, which have been treated as operating leases, have been recorded as either Operating Expenses or G&A expenses. No asset or liability value has been assigned to these agreements on the Company’s balance sheet. The Company has no other off balance sheet arrangements.
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Equity Instruments During the nine months ended October 31, 2014, the Company issued 1,000,000 common shares in relation to the acquisition of Candesto at a deemed cost of $0.50 per share with a Put Option attached there to (the "Put Option") of $0.50 per share for a total of $500,000. The Put Option was considered to have a fair value of approximately $37,000. In October 2014, prior to the Crowsnest RTO, the Company issued a Promissory Note in the amount of $200,000, due January 31, 2015, as partial consideration for satisfying the Put Option and $300,000 was paid by a group of investors for the 1,000,000 shares During the nine month period ended October 31, 2014, the Company issued 1,832,766 units for total proceeds of $549,663. Each unit consists of one common share and one half warrant. One warrant entitles the holder to purchase one common share at a purchase price of $0.50 per share. The fair value attributable to the warrants was $110,696. In June 2014, the Company issued 26,728 broker warrants in connection with the share issuance that occurred during the period. Each warrant entitles the holder to purchase one common share at a purchase price of $0.50. In October 2014, the Company completed the Crowsnest RTO. The Company effectively issued 21,912,766 shares with a deemed value of $1,314,766. Outstanding Share Data The following table summarizes the number of share capital instruments outstanding at the date indicated: As at October 31, 2014 28,512,766
Common shares
-
Convertible securities:
2,943,110
Warrants
Related Party Transactions The purchases from related parties are in the normal course of business and are initially recognized at fair value. Related parties include companies that have common directors, officers, employees and shareholders. The nature of the purchases relate to operating and general and administrative expenses in the Company’s activities. Amounts are unsecured, non-interest bearing and due on demand. There have been no guarantees provided or received for any related party payables. Related party payables are included in accounts payables and accrued liabilities.
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ACCOUNTING POLICIES AND ESTIMATES During the three and nine months ended October 31, 2014, there were no changes to the Company’s accounting policies or use of estimates in the preparation of the unaudited interim consolidated financial statements and the notes thereto. Refer to the January 31, 2014 audited consolidated financial statements of the Company for further guidance regarding QE2’s accounting policies and use of estimates.
ADVISORIES AND OTHER GUIDANCE Non-GAAP Financial Measures The Net Working Capital financial measure in this MD&A does not have a standardized meaning which is prescribed by IFRS and is considered to be a non-GAAP measure. This measure may not be comparable to similar measures presented by other issuers and should not be considered in isolation with measures that are prepared in accordance with IFRS. The Net Working Capital measure in the MD&A (including the comparatives thereto) is determined by subtracting current liabilities from current assets on the Company’s balance sheets in the consolidated financial statements as at October 31, 2014. Net Working Capital consists mostly of cash, cash equivalents, short-term investments, accounts receivable offset by accounts payable and accrued liabilities. The Net Working Capital measure allows management and other users to evaluate the Company’s short term liquidity. Risk Factors Factors currently influencing the Company’s ability to succeed include, but are not limited to, the following:
Capital requirements;
Risks related to future acquisition activities;
Ability to obtain financing for capital requirements and acquisition opportunities;
Adverse consequences that could result from the failure of counterparties to comply with their contractual obligations;
Adverse changes to economic, market, and business conditions;
Poor weather for extended periods;
Seasonal business cycles;
Appropriate insurance coverage;
Variations in interest rates;
Reliance on, competition for, loss of and failure to attract key personnel 17
Forward Looking Information This MD&A contains forward-looking information that involves various risks, uncertainties and other factors. All information other than statements of historical fact is forward-looking information. The use of any of the words “may”, “will”, “should”, “could”, “anticipate”, “believe”, “expect”, “intend”, “plan”, “potential”, “continue”, and similar expressions and statements relating to matters that are not historical facts. These may include, without limitation, statements based on current expectations involving a number of risks and uncertainties related to pipeline and facilities construction and maintenance services associated with the oil and gas and industries and utility services and the domestic and worldwide supplies and commodity prices of oil and gas. These risks and uncertainties include, but are not limited to, seasonal weather patterns, maintaining and increasing market share, government regulation of energy and resource companies, terrorist activity, the price and availability of alternative fuels, the availability of pipeline capacity, potential instability or armed conflict in oil producing regions, overall economic environment, the success of integrating and realizing the potential of acquisitions, ability to attract and retain key personnel, technological change, demand for services provided by QE2, and fluctuations in the value of the Canadian dollar relative to the US dollar. These risks and uncertainties may cause actual results to differ from information contained herein. There can be no assurance that such forward-looking information will prove to be accurate. Actual results and future events could differ materially from those anticipated in such forward-looking information. The forward-looking information is based on the estimates and opinions of management on the dates they are made and are expressly qualified in their entirety by this notice. The Company assumes no obligation to update forward-looking information should circumstances or management’s estimates or opinions change as a result of new information or future events. Readers should not place undue reliance on forward-looking information.
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