QE2 2014 Q3 Consolidated Interim Financial Statements
QE2 ACQUISITION CORP. Condensed Interim Consolidated Financial Statements For the nine months ended October 31, 2014 and 2013 (unaudited)
Notice of No Auditors’ Review of Interim Financial Statements Under National Instrument 51-102, Part 4, subsection 4.3(3)(a) if an auditor has not performed a review of the interim financial statements, they must be accompanied by a notice indicating that the financial statements have not been reviewed by an auditor. The Company’s independent auditor has not performed a review of the accompanying condensed consolidated interim financial statements in accordance with standards established by the Canadian Institute of Chartered Accountants for a review of the interim financial statements. The accompanying unaudited condensed consolidated interim financial statements of the Company for the nine months ended October 31, 2014 have been prepared by and are the responsibility of the Company’s management and are approved by the Company’s Audit Committee and Board of Directors.
2
QE2 ACQUISITION CORP. Condensed Interim Consolidated Statements of Financial Position As at (Expressed in Canadian Dollars)
Notes ASSETS Current Cash Trade and other receivables Inventory Prepaid expenses Non-current Property and equipment Goodwill
7 8
Total Assets
October 31, 2014 (unaudited)
January 31, 2014 (audited)
59,125 3,181,114 67,090 6,415
9,819 731,636 7,100
3,313,744
748,555
1,489,788 2,164,508
662,974 762,699
6,968,040
2,174,228
824,176 1,845,866 683,812 1,040,668
315,831 342,969 561,246 66,067
4,394,522
1,286,113
425,000 1,406,678
236,689
6,226,200
1,522,802
3,400,887 (2,659,047)
1,151,174 (499,748)
741,840
651,426
6,968,040
2,174,228
LIABILITIES AND SHAREHOLDERS’ EQUITY Current Bank indebtedness Accounts payable and accrued liabilities Notes payable Current portion of long-term debt
9 10 11
Non-current Notes payable Long-term debt
10 11
Total Liabilities Shareholders’ Equity Share capital Deficit
12
Total Liabilities and Shareholders’ Equity Going concern (Note 2) Commitments (Note 11)
Approved and authorized on behalf of the Board of Directors
“Mihali Belantis”
“Joe Gagliardi”
Director
Director
The accompanying notes are an integral part of these condensed interim consolidated financial statements.
Page 1
QE2 ACQUISITION CORP. Condensed Interim Consolidated Statements of Loss and Comprehensive Loss (unaudited) (Expressed in Canadian Dollars)
For the three months ended October 31,
For the nine months ended October 31,
2014
2013
2014
2013
Revenue
3,279,201
103
6,375,002
237
Expenses Operating costs General and administrative Finance Listing cost Depreciation
2,404,026 1,064,465 82,665 1,166,042 122,873
100,168 -
4,938,574 2,014,448 147,077 1,166,042 272,260
186,623 -
4,840,071
100,168
8,538,401
186,623
(1,560,870)
(100,065)
(2,163,399)
(186,386)
1,142
-
4,100
-
(1,559,728)
(100,065)
(2,159,299)
(186,386)
0.140
0.021
0.219
0.075
Notes
6 7
Total expenses Loss from operations Other income Gain on disposal of property and equipment
7
Loss and comprehensive loss for the period Basic and diluted loss per share ($)
13
The accompanying notes are an integral part of these condensed interim consolidated financial statements.
Page 2
QE2 ACQUISITION CORP. Condensed Interim Consolidated Statements of Changes in Equity (Expressed in Canadian Dollars) (unaudited)
Number of shares Balance at January 31, 2013 Shares issued for cash Shares issued for business acquisition Loss and comprehensive loss for the period Balance at October 31, 2013
1,000,000 6,100,000
Share capital $
Total Shareholders’ equity
Deficit
10 901,164
$
-
$
10 901,164
1,000,000
250,000
-
250,000
-
-
(186,386)
(186,386)
8,100,000
$
1,151,174
$
(186,386)
$
964,788
Balance at January 31, 2014 8,100,000 Shares issued for business acquisition (Note 5) 1,000,000 Shares issued for cash (Note 12(b)) 1,832,766 Conversion of Class A shares (Note 12(b)) 10,980,000 Shares eliminated in RTO transaction (Note 6) (21,912,766) Shares of Crowsnest retained in RTO transaction (Note 6) 6,600,000 Shares issued in RTO transaction (Note 6) 21,912,766 Equity portion of convertible debentures Issuance costs of convertible debentures Loss and comprehensive loss for the period -
$
1,151,174
$
(499,748)
$
651,426
Balance at October 31, 2014
$
28,512,766
337,471 549,663
-
337,471 549,663
-
-
-
-
-
-
-
-
-
1,314,766
-
1,314,766
51,971
-
51,971
(4,158)
-
(4,158)
-
(2,159,299)
(2,159,299)
3,400,887
$
(2,659,047)
$
The accompanying notes are an integral part of these condensed interim consolidated financial statements.
741,840
Page 3
QE2 ACQUISITION CORP. Condensed Interim Consolidated Statement of Cash Flows
For the nine months ended October 31, (Expressed in Canadian Dollars) (unaudited)
Notes Operating activities Loss for the period Non-cash adjustments to reconcile profit from operations to net cash flows: Listing cost Depreciation Gain on disposal of property and equipment
7 7
2014
2013
(2,159,299)
(186,386)
1,166,042 272,260 (4,100)
-
Cash flows used in operating activities before the following: Net change in non-cash working capital relating to operating activities: Trade and other receivables Inventory Prepaid expenses Accounts payable and accrued liabilities
(725,097)
(186,386)
(1,999,846) 26,588 685 1,222,984
(5,248) (600) 10,482
Net cash flows used in operating activities
(1,474,686)
(181,752)
(99,218) 21,744 148,724 (192,985)
(4,734) (660,342)
Net cash flows used in investing activities
(121,735)
(665,076)
Financing activities Proceeds from notes payable Repayment of notes payable Proceeds from long-term debt Financing costs Repayment of long-term debt Shares issued Share issuance costs Increase in bank indebtedness
276,563 (781,247) 1,383,453 (99,681) (187,211) 549,663 (4,158) 508,345
901,174 -
1,645,727
901,174
Net increase in cash Cash, beginning of period
49,306 9,819
54,346 10
Cash, end of period
59,125
54,356
120,515
-
Investing activities Purchase of property and equipment Proceeds on sale of property and equipment Net assets acquired on RTO Cash paid on business acquisitions
Net cash flows from financing activities
Supplemental cash flow information: Income taxes paid Interest paid
7 7 6 5
12 8
The accompanying notes are an integral part of these condensed interim consolidated financial statements.
Page 4
QE2 ACQUISITION CORP. Notes to the Condensed Interim Consolidated Financial Statements
For the nine months ended October 31, 2014 and 2013 (Expressed in Canadian Dollars) (unaudited)
1.
Incorporation and operations QE2 Acquisition Corp. (“QE2” or the “Company”) was incorporated on January 25, 2013 under the Business Corporations Act of Alberta. QE2, through its wholly owned subsidiaries, Pillar Contracting Ltd. (“Pillar”) and Candesto Enterprises Ltd. ("Candesto"), provides a variety of services in the government infrastructure construction and maintenance industry. Pillar provides installation and maintenance of street light standards and traffic control signals. Candesto provides installation and maintenance of highway guardrails, fencing, and overhead signage. Substantially all of the Company’s 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. On October 20, 2014, the Company completed a reverse take-over ("RTO") of Crowsnest Acquisition Corp. ("Crowsnest"), a Capital Pool Company ("CPC") listed on the TSX Venture Exchange (Note 6). Crowsnest acquired 100% of the shares of the Company in exchange for 21,912,766 shares of Crowsnest. As a result of the share exchange, QE2 is considered to have control. While Crowsnest is the legal acquirer, the accounting acquirer is QE2 and these financial statements are consolidated and presented with QE2 as the reporting entity. Concurrent with the reverse take-over, QE2 Acquisition Corp. changed its name to QE2 Holdings and Crowsnest Acquisition Corp. changed its name to QE2 Acquistion Corp. The Company's shares are listed on the TSXV under the symbol "QE". The Company’s head office and principal address is #4034, 909 - 17th Avenue S.W., Calgary, Alberta, T2T 0A4. These condensed interim consolidated financial statements were authorised for issue in accordance with a resolution of the Board of Directors on December 30, 2014.
2.
Going concern The condensed interim consolidated financial statements have been prepared on the basis of accounting principles applicable to a “going concern”, which assumes that the Company will continue operation in the foreseeable future and will be able to realize its assets and discharge its liabilities in the normal course of operations. As at October 31, 2014 the Company had negative working capital of $1,080,778 (January 31, 2014 - $537,558), net loss of $2,159,299 (2013 - $186,386) and accumulated losses of $2,659,047. During the period ended October 31, 2014, the Company incurred a listing cost of $1,162,042 in conjunction with the Crowsnest Reverse Take-over Transaction. This expense is classified as a share based payment and charged or credited to the share capital of the Company (Note 6). These conditions indicated the existence of a material uncertainty that may cast significant doubt about the Company's ability to continue as a going concern. The Company’s ability to continue as a going concern is dependent upon its ability to continue to obtain financing to meet current and future obligations. The condensed interim consolidated financial statements do not include any adjustments to the amounts and classifications of assets and liabilities, and reported revenues and expenses, that might be necessary should the Company be unable to continue as a going concern, and therefore, be required to realize its assets and discharge its liabilities other than in the normal course of business and at carrying amounts different from those reflected in the accompanying financial statements. Any such adjustments could be material.
3.
Basis of preparation Statement of compliance These condensed interim consolidated financial statements have been prepared in accordance with International Accounting Standard (“IAS”) 34, “Interim Financial Reporting” using accounting policies consistent with International Financial Reporting Standards (“IFRS”). The condensed interim consolidated financial statements do not include all of the information required for full annual financial statements and should be read in conjunction with the Company’s annual consolidated financial statements for the year ended January 31, 2014. Basis of preparation The condensed interim consolidated financial statements of the Company are presented in Canadian dollars which is the Company’s functional currency and have been prepared on a historical cost basis, except for certain financial instruments that have been measured at fair value.
Page 5
QE2 ACQUISITION CORP. Notes to the Condensed Interim Consolidated Financial Statements
For the nine months ended October 31, 2014 and 2013 (Expressed in Canadian Dollars) (unaudited)
3.
Basis of preparation (continued from previous page) Use of judgments and estimates Management is required to make estimates, judgments and assumptions that affect the application of policies and reported amounts of assets, liabilities, income and expenses. Management reviews these judgments, estimates and assumptions on an ongoing basis, including those related to depreciation, fair values of financial instruments, recoverability of assets and income taxes. Actual results may differ from these estimates and these differences could be material. In preparing these condensed interim consolidated financial statements, the significant judgments made by management in applying the Company's accounting policies and the key sources of estimation uncertainty were the same as those that applied to the annual audited consolidated financial statements as at and for the year ended January 31, 2014. Management makes judgments in determining its cash generating units (“CGUs”) and evaluates the geography, cash flows and infrastructure of its assets in making such determinations. Based on this assessment, two CGU’s have been identified: electrical utility maintenance services and roadway infrastructure services.
4.
Summary of significant accounting policies These condensed interim consolidated financial statements have been prepared, for all periods presented, following the same accounting policies and methods of computation as described in Note 2 and Note 3 to the financial statements for the year ended January 31, 2014. Additional information required to supplement certain accounting as disclosed in the consolidated financial statements for the year ended January 31, 2014 is provided below: New accounting policies: On February 1, 2014, the Company adopted the following new standards and amendments that became effective for annual periods on or after January 1, 2014: 1.
IAS 36, “Impairment of Assets”. The amendments reduce the circumstances in which the recoverable amount of CGUs is required to be disclosed and clarifies the disclosures required when an impairment loss has been recognized or reversed in the period.
2.
IFRS Interpretations Committee (“IFRIC”) 21 “Levies”, clarifies that an entity recognizes a liability for a levy when the activity that triggers payment, as identified in the relevant legislation, occurs.
The adoption of the standards had no material impact on the amounts recorded in the Company’s condensed interim consolidated financial statements. Accounting standards issued but not yet effective: The Company has reviewed new and revised accounting pronouncements that have been issued but are not yet effective. IFRS 9 will replace the guidance of IAS 39, “Financial Instruments: Recognition and Measurement.” This standard eliminates the existing IAS 39 categories of held to maturity, available-for-sale and loans receivable. Financial assets will be classified into one of two categories: amortized cost or fair value. The extent of the impact of the adoption of IFRS 9 has not yet been determined. 5.
Business combination On April 25, 2014, the Company closed an asset purchase agreement (“Asset Acquisition”) with an unrelated private company, to acquire their operating assets for aggregate cash and share consideration of $2,680,456. The operating assets were rolled into Candesto Enterprises Ltd. ("Candesto"), who provides installation and maintenance of highway guardrails, fencing and overhead signage. The acquisition has been accounted for using the acquisition method of accounting with an effective date of February 1, 2014, whereby the assets acquired and the liabilities assumed are recorded at their fair values.
Page 6
QE2 ACQUISITION CORP. Notes to the Condensed Interim Consolidated Financial Statements
For the nine months ended October 31, 2014 and 2013 (Expressed in Canadian Dollars) (unaudited)
5.
Business combination (continued from previous page)
The following summarizes the assets acquired and the total consideration paid: Amount Net working capital Inventory Property and equipment Goodwill
$
167,469 93,678 1,017,500 1,401,809
$
2,680,456
The acquisition was funded as follows: Amount Proceeds from long term debt Vendor take back loan Issuance of 1,000,000 class B shares Cash
$
1,100,000 1,050,000 337,471 192,985
$
2,680,456
The allocations and determinations of the consideration described above are preliminary and subject to changes upon final adjustments. From the date of acquisition to October 31, 2014, Candesto contributed approximately $3,042,295 of revenue and $608,358 of earnings before tax to the Company. If the business combination had been completed on February 1, 2014, an estimated $3,642,669 of revenue and $720,023 of earnings before tax for the period ended October 31, 2014 would have been recorded. The Company incurred acquisition-related costs of approximately $122,125 relating to due diligence costs and legal fees. These costs have been expensed and included in general and administrative costs on the consolidated statements of comprehensive income.
6.
Reverse take-over of Crowsnest Acquisition Corp. ("Crowsnest RTO" or "RTO") On October 20, 2014, Crowsnest Acquistion Corp. ("Crowsnest") acquired all the issued and outstanding shares of QE2 Acquisition Corp. The transaction is intended to serve as Crowsnest's "Qualifying Transaction" pursuant to the policies of the TSX Venture Exchange. Total Crowsnest shares issued and outstanding just prior to closing was 6,600,000. Total QE2 shares issued and outstanding just prior to closing was 21,912,766. The QE2 shares were exchanged for Crowsnest shares on a one for one basis. The substance of the transaction is a reverse take-over as a result of the share exchange with QE2 shareholders owning 21,912,766 of the 28,512,766 total shares outstanding. The purchase price allocation can be summarized as follows: 21,912,766 common shares valued at $0.06 per share
$
1,314,766
Total consideration
$
1,314,766
Purchase price allocation: Net working capital
$
Listing expense on acquisition
148,724 1,166,042
$
1,314,766
Page 7
QE2 ACQUISITION CORP. Notes to the Condensed Interim Consolidated Financial Statements
For the nine months ended October 31, 2014 and 2013 (Expressed in Canadian Dollars) (unaudited)
6.
Reverse take-over of Crowsnest Acquisition Corp. ("Crowsnest RTO" or "RTO") (continued from previous page) The transaction is accounted for as a continuation of QE2 whereby new shares are issued for the net assets of Crowsnest, including the public company listing expense which is deemed to be the difference between the consideration paid for Crowsnest shares and the net assets of Crowsnest. The share capital, contributed surplus and deficit of Crowsnest are charged or credited to the share capital of the consolidated entity and the public company listing expense is a compound of the deficit of the consolidated entity. The allocations and determinations of the consideration described above are preliminary and subject to changes upon final adjustments.
7.
Property and equipment Automotives Cost Balance January 31, 2013 Additions from business combination Additions Disposals
$ $
Balance January 31, 2014 Additions from business combination (Note 5) Additions Disposals Balance October 31, 2014 Accumulated depreciation Balance January 31, 2013 Depreciation Disposals
-
Buildings
$
-
Computers
$
-
Equipment
$
-
Total
$
-
306,082 118,483 (9,295)
1,203 -
12,780 8,672 -
252,935 17,684 -
573,000 144,839 (9,295)
415,270
1,203
21,452
270,619
708,544
823,923 (36,370)
30,690 -
1,387 8,009 -
161,500 91,209 (21,526)
1,017,500 99,218 (57,896)
$
1,202,823
$
31,893
$
30,848
$
501,802
$
1,767,366
$
(44,818) 9,295
$
(127) -
$
(1,936) -
$
(7,984) -
$
(54,865) 9,295
Balance January 31, 2014 Depreciation Disposals
(35,523) (206,442) 31,584
(127) (701) -
Balance October 31, 2014
$
(210,381)
$
Net book value January 31, 2014
$
379,747
October 31, 2014
$
992,442
(1,936) (4,479) -
(7,984) (60,638) 8,668
(45,570) (272,260) 40,252
(828)
$
(6,415)
$
(59,954)
$
(277,578)
$
1,076
$
19,516
$
262,635
$
662,974
$
31,065
$
24,433
$
441,848
$
1,489,788
During the nine month period ended October 31, 2014, property and equipment with a net book value of $17,644 were sold for proceeds of $21,744, generating a gain on disposal of $4,100 (2013 - $Nil). Included in property and equipment is equipment under finance lease arrangements with a net book value of $305,417 at October 31, 2014 (January 31, 2014 - $90,474).
Page 8
QE2 ACQUISITION CORP. Notes to the Condensed Interim Consolidated Financial Statements
For the nine months ended October 31, 2014 and 2013 (Expressed in Canadian Dollars) (unaudited)
8.
Goodwill October 31, 2014
January 31, 2014
Balance – beginning of period Additions through business combination (Note 5)
762,699 1,401,809
762,699
Balance – end of period
2,164,508
762,699
There are no indications that goodwill is impaired as at October 31, 2014.
9.
Bank indebtedness Bank indebtedness is comprised of an Alberta Treasury Branch (“ATB”) demand operating facility with a borrowing base equal to the lesser of a) 75% of earned accounts receivable less amounts due over 90 days or b) $1,250,000 (January 31, 2014 - $500,000). Interest is payable at prime plus 2% (January 31, 2014 – prime plus 2%). This facility is secured by $500,000 of personal guarantees and postponement of claim by two shareholders, and a general security agreement providing first charge and security interest in all present and after-acquired property and equipment. The demand operating facility is not subject to financial covenants.
10.
Notes payable As part of the consideration paid for the Asset Acquisition (Note 5), the Company entered into a Loan Agreement wherein the vendor received a Vendor Take Back Promissory Note (“VTBP Note”) in the amount of $850,000. The VTBP Note is due on April 25, 2016 with annual principal payments of $425,000 plus interest due on each anniversary date, bearing interest at ATB’s Prime lending rate plus 2% (January 31, 2014 - prime rate plus 2%). 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. The total interest accrued on the notes payable was $28,812 at October 31, 2014.
Page 9
QE2 ACQUISITION CORP. Notes to the Condensed Interim Consolidated Financial Statements
For the nine months ended October 31, 2014 and 2013 (Expressed in Canadian Dollars) (unaudited)
11.
Long-term debt and commitments October 31, 2014
January 31, 2014
Roynat loan with an effective interest of 6.575% (stated interest of 6.47%) per annum, monthly principal payments of $18,333 plus interest, due April 25, 2019, secured by property and equipment with a carrying value of $947,445 and personal guarantees by two shareholders totaling $300,000.
990,002
-
Convertible debentures (net of fair value of equity portion) bearing interest at 12% per annum, semi-annual interest payments on June 30 and December 31, unsecured, and matures on October 20, 2016. Debenture holders may exercise the right to convert at an exercise price of $0.50 per common share. The fair value of the equity portion of $51,971 is included in the share capital of the Company.
1,246,030
-
Bank of Nova Scotia loans bearing fixed interest at rates ranging from 0% - 5.98% per annum, monthly payments ranging from $487 - $906, due dates ranging from August 2018 to February 2019, secured by automotives with a carrying value of $123,587 (January 31, 2014 - $149,348).
147,231
170,737
WS Leasing Ltd. finance leases bearing interest at rates ranging from 9.95% 11.50% per annum, monthly payments ranging from $850 - $1,000 including interest, due ranging from December 2016 to January 2017, secured by automotives with a carrying value of $76,903 (January 31, 2014 – 90,475).
77,952
88,526
Ally Credit Canada Ltd. loans bearing fixed interest at rates ranging from 1.99% 5.99% per annum, monthly payments ranging from $483 - $1,086 including interest, due ranging from July 2016 to November 2016, secured by automotives with a carrying value of $33,360 (January 31, 2014 - $50,964).
29,717
43,444
Element Fleet Management Inc. finance leases bearing interest at rates ranging from 4.23% - 7.33% per annum, monthly payments ranging from $304 - $1,719 including interest, due dates ranging from July 2017 to August 2017, secured by equipment with a carrying value of $83,571.
81,080
-
Royal Bank of Canada loan bearing variable interest at 5.15% per annum, monthly payments of $751 including interest, due May 2014
-
49
2,572,012 (124,667) 2,447,346 (1,040,668)
302,756 302,756 (66,067)
1,406,678
236,689
Unamortized financing cost Less current portion
The Company is required to comply with certain covenants associated with the Roynat loan. The Company was not in compliance with one covenant at October 31, 2014. As a result, the balance of the loan has been classified as current. 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. Estimated future principal payments are as follows: 2015 2016 2017 2018 2019
245,679 1,489,026 334,625 252,902 125,114 2,447,346
The Company has operating commitments relating to premise leases. Estimated annual commitments are as follows: 16,210 2015
Page 10
QE2 ACQUISITION CORP. Notes to the Condensed Interim Consolidated Financial Statements
For the nine months ended October 31, 2014 and 2013 (Expressed in Canadian Dollars) (unaudited)
12.
Share capital
a)
Authorized shares Unlimited number of common voting shares; Unlimited number of preferred non-voting shares of no nominal or par value.
b) Issued and outstanding As at October 31, 2014 the Company has the following classes of shares issued and outstanding: Class A
Number of shares
$
1,220,000 (1,220,000)
55,010 (55,010)
-
-
Number of shares
$
6,880,000 1,832,766 1,000,000 12,200,000 (21,912,766)
1,096,164 549,663 337,471 55,010 (2,038,308)
-
-
Number of shares
$
Balance, January 31, 2014 Assumed on Crowsnest RTO Class B shares exchanged on Crowsnest RTO Equity portion of convertible debentures Share issuance cost
6,600,000 21,912,766 -
1,314,766 2,038,308 51,971 (4,158)
Balance, October 31, 2014
28,512,766
3,400,887
Balance, January 31, 2014 10 to 1 Conversion to Class B common shares Balance, October 31, 2014 Class B Balance, January 31, 2014 Issued for cash Issued as consideration in business combination (Note 5) 10 to 1 conversion of Class A common shares Exchanged on Crowsnest RTO (Note 6) Balance, October 31, 2014 Common shares
During the period, 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 full 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. The Company has total warrants outstanding and exercisable of 2,943,110 convertible into one Common share at an exercise price of $0.50 (January 31, 2014 – there were 2,000,000 warrants outstanding and exercisable). The warrants expire on dates ranging from May 2016 to October 2016. The warrants have a fair value of $351,881. The assumptions used to calculate the fair values were: risk free rate of 1.0%; share price ranging from $0.25 - $0.30 per share; expected life ranging from 24 - 36 months; volatility of 100%. No warrants were exercised during the period.
Page 11
QE2 ACQUISITION CORP. Notes to the Condensed Interim Consolidated Financial Statements
For the nine months ended October 31, 2014 and 2013 (Expressed in Canadian Dollars) (unaudited)
13.
Loss per share The basic and diluted number of common shares used to calculate loss per share are as follows: Three months ended October 31,
Weighted average number of shares for basic and diluted loss per share
Nine months ended October 31,
2014
2013
2014
2013
11,152,766
4,700,000
9,865,205
2,497,080
For the period ended October 31, 2014, the above table excludes 15,740,000 escrowed shares (2013 - Nil) and 2,943,110 warrants (2013 – Nil). 14.
Related parties Transactions with related parties The following table provides the total amount of transactions that have been entered into with related parties for the nine month period ended October 31: Transactions with related parties
Amounts owed to related parties
October 31, 2013
$36,579
$6,233
October 31, 2014
$728,736
$203,206
The transactions with 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. As at October 31, 2014, key management and directors of the Company control 22% (January 31, 2014 – 50%) of the voting shares of the Company. 15.
Segmented information The Company’s reportable operating segments, as determined by management, are strategic operating units that offer different products and services. The accounting policies of each reportable segment are the same as those described in Note 4. The Company has three reportable segments 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.
Page 12
QE2 ACQUISITION CORP. Notes to the Condensed Interim Consolidated Financial Statements
For the nine months ended October 31, 2014 and 2013 (Expressed in Canadian Dollars) (unaudited)
15.
Segmented information (continued from previous page) 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. Nine months ended October 31, 2014
Corporate $
$
(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
$
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
$
128,000 -
Services
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 (4,100)
423,391 59,317 140,145 -
(128,000) -
2,014,448 147,077 1,166,042 272,260 (4,100)
$
-
$ (2,159,299)
$ $ $
-
$ $ $
Corporate $
-
Construction $
-
$
-
2013 Total $
237 -
Revenue Operating expenses Revenue less operating expenses General and administrative expenses Finance expenses Depreciation Other expenses (income) Earnings (Loss) Before Income Taxes
$
$
(186,386)
$
-
$
-
$
-
$
(186,386)
Capital expenditures Segmented assets Segmented liabilities
$ $ $
4,734 60,098 831,482
$ $ $
2,302,786 576,228
$ $ $
-
$ $ $
-
$ $ $
4,734 2,362,884 1,407,710
$
237 -
Services
Intersegment Eliminations
13,765 6,968,040 6,226,200
237
-
-
-
237
186,623 -
-
-
-
186,623 -
Page 13
QE2 ACQUISITION CORP. Notes to the Condensed Interim Consolidated Financial Statements
For the nine months ended October 31, 2014 and 2013 (Expressed in Canadian Dollars) (unaudited)
15.
Segmented information (continued from previous page) Three months October 31, 2014
Intersegment Eliminations
ended Corporate $
1,331,521 1,251,253
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
$
$
(1,872,064)
$
(108,322)
$
420,658
Capital expenditures Segmented assets Segmented liabilities
$ $ $
42,563 1,849,543
$ $ $
2,400,085 1,256,522
$ $ $
1,350 4,525,392 3,120,135
$
30,000 -
Services $
1,947,680 1,152,773
$
(30,000) -
2014 Total $
3,279,201 2,404,026
30,000
80,268
794,907
(30,000)
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)
$
-
$ (1,559,728)
$ $ $
-
$ $ $
Corporate $
-
Construction $
-
$
-
2013 Total $
103 -
Revenue Operating expenses Revenue less operating expenses General and administrative expenses Finance expenses Depreciation Other expenses (income) Earnings (Loss) Before Income Taxes
$
$
(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 -
Services
Intersegment Eliminations
1,350 6,968,040 6,226,200
103
-
-
-
103
100,168 -
-
-
-
100,168 -
Page 14
QE2 ACQUISITION CORP. Notes to the Condensed Interim Consolidated Financial Statements
For the nine months ended October 31, 2014 and 2013 (Expressed in Canadian Dollars) (unaudited)
16.
Capital management The Company’s objective in capital management is to ensure adequate sources of capital are available to carry out its planned capital program, to achieve operational growth and increased cash flow so as to sustain future development of the business and to maintain shareholder confidence. The Company manages its capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of its assets. Management considers capital to be the Company’s current assets less current liabilities, total debt facilities and shareholders’ equity as the components of capital to be managed. In order to maintain or adjust the capital structure, the Company may issue shares, raise debt and/or adjust its capital spending to manage its projected debt levels. The capital for operations to date has been primarily provided from operating cash flows, share issuances and debt financing. The Company’s capital structure is as follows:
Current assets Current liabilities (excluding current portion of long-term debt and notes payable) Long-term debt Notes payable Shareholders’ equity
17.
October 31, 2014
January 31, 2014
3,313,744 (2,670,042) (2,447,346) (1,108,812) 741,840
748,555 (658,800) (302,756) (561,246) 651,426
(2,170,616)
(122,821)
Financial instruments and risk management The Company’s activities expose it to a variety of financial risks: credit risk, liquidity risk, and interest rate risk. The Company’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Company’s financial performance. Risk management is carried out by senior management, in particular, the Board of Directors. There were no changes in the Company’s assessment of risks from the use of financial instruments or in the financial risk management policies of the Company since January 31, 2014. Fair values The Company's financial instruments consist of cash, trade and other receivables, bank indebtedness, accounts payable and accrued liabilities, notes payable, and long-term debt. The fair values of the Company’s current financial assets and liabilities approximate their carrying values due to their short-term maturities. The fair value of the Company’s notes payable, non-current notes payable and long-term debt approximates its carrying value as interest rates attached to the debt instruments approximates market rates of interest and there is a short-term time frame to maturity.
Page 15
Notice of No Auditors’ Review of Interim Financial Statements Under National Instrument 51-102, Part 4, subsection 4.3(3)(a) if an auditor has not performed a review of the interim financial statements, they must be accompanied by a notice indicating that the financial statements have not been reviewed by an auditor. The Company’s independent auditor has not performed a review of the accompanying condensed consolidated interim financial statements in accordance with standards established by the Canadian Institute of Chartered Accountants for a review of the interim financial statements. The accompanying unaudited condensed consolidated interim financial statements of the Company for the nine months ended October 31, 2014 have been prepared by and are the responsibility of the Company’s management and are approved by the Company’s Audit Committee and Board of Directors.
2
QE2 ACQUISITION CORP. Condensed Interim Consolidated Statements of Financial Position As at (Expressed in Canadian Dollars)
Notes ASSETS Current Cash Trade and other receivables Inventory Prepaid expenses Non-current Property and equipment Goodwill
7 8
Total Assets
October 31, 2014 (unaudited)
January 31, 2014 (audited)
59,125 3,181,114 67,090 6,415
9,819 731,636 7,100
3,313,744
748,555
1,489,788 2,164,508
662,974 762,699
6,968,040
2,174,228
824,176 1,845,866 683,812 1,040,668
315,831 342,969 561,246 66,067
4,394,522
1,286,113
425,000 1,406,678
236,689
6,226,200
1,522,802
3,400,887 (2,659,047)
1,151,174 (499,748)
741,840
651,426
6,968,040
2,174,228
LIABILITIES AND SHAREHOLDERS’ EQUITY Current Bank indebtedness Accounts payable and accrued liabilities Notes payable Current portion of long-term debt
9 10 11
Non-current Notes payable Long-term debt
10 11
Total Liabilities Shareholders’ Equity Share capital Deficit
12
Total Liabilities and Shareholders’ Equity Going concern (Note 2) Commitments (Note 11)
Approved and authorized on behalf of the Board of Directors
“Mihali Belantis”
“Joe Gagliardi”
Director
Director
The accompanying notes are an integral part of these condensed interim consolidated financial statements.
Page 1
QE2 ACQUISITION CORP. Condensed Interim Consolidated Statements of Loss and Comprehensive Loss (unaudited) (Expressed in Canadian Dollars)
For the three months ended October 31,
For the nine months ended October 31,
2014
2013
2014
2013
Revenue
3,279,201
103
6,375,002
237
Expenses Operating costs General and administrative Finance Listing cost Depreciation
2,404,026 1,064,465 82,665 1,166,042 122,873
100,168 -
4,938,574 2,014,448 147,077 1,166,042 272,260
186,623 -
4,840,071
100,168
8,538,401
186,623
(1,560,870)
(100,065)
(2,163,399)
(186,386)
1,142
-
4,100
-
(1,559,728)
(100,065)
(2,159,299)
(186,386)
0.140
0.021
0.219
0.075
Notes
6 7
Total expenses Loss from operations Other income Gain on disposal of property and equipment
7
Loss and comprehensive loss for the period Basic and diluted loss per share ($)
13
The accompanying notes are an integral part of these condensed interim consolidated financial statements.
Page 2
QE2 ACQUISITION CORP. Condensed Interim Consolidated Statements of Changes in Equity (Expressed in Canadian Dollars) (unaudited)
Number of shares Balance at January 31, 2013 Shares issued for cash Shares issued for business acquisition Loss and comprehensive loss for the period Balance at October 31, 2013
1,000,000 6,100,000
Share capital $
Total Shareholders’ equity
Deficit
10 901,164
$
-
$
10 901,164
1,000,000
250,000
-
250,000
-
-
(186,386)
(186,386)
8,100,000
$
1,151,174
$
(186,386)
$
964,788
Balance at January 31, 2014 8,100,000 Shares issued for business acquisition (Note 5) 1,000,000 Shares issued for cash (Note 12(b)) 1,832,766 Conversion of Class A shares (Note 12(b)) 10,980,000 Shares eliminated in RTO transaction (Note 6) (21,912,766) Shares of Crowsnest retained in RTO transaction (Note 6) 6,600,000 Shares issued in RTO transaction (Note 6) 21,912,766 Equity portion of convertible debentures Issuance costs of convertible debentures Loss and comprehensive loss for the period -
$
1,151,174
$
(499,748)
$
651,426
Balance at October 31, 2014
$
28,512,766
337,471 549,663
-
337,471 549,663
-
-
-
-
-
-
-
-
-
1,314,766
-
1,314,766
51,971
-
51,971
(4,158)
-
(4,158)
-
(2,159,299)
(2,159,299)
3,400,887
$
(2,659,047)
$
The accompanying notes are an integral part of these condensed interim consolidated financial statements.
741,840
Page 3
QE2 ACQUISITION CORP. Condensed Interim Consolidated Statement of Cash Flows
For the nine months ended October 31, (Expressed in Canadian Dollars) (unaudited)
Notes Operating activities Loss for the period Non-cash adjustments to reconcile profit from operations to net cash flows: Listing cost Depreciation Gain on disposal of property and equipment
7 7
2014
2013
(2,159,299)
(186,386)
1,166,042 272,260 (4,100)
-
Cash flows used in operating activities before the following: Net change in non-cash working capital relating to operating activities: Trade and other receivables Inventory Prepaid expenses Accounts payable and accrued liabilities
(725,097)
(186,386)
(1,999,846) 26,588 685 1,222,984
(5,248) (600) 10,482
Net cash flows used in operating activities
(1,474,686)
(181,752)
(99,218) 21,744 148,724 (192,985)
(4,734) (660,342)
Net cash flows used in investing activities
(121,735)
(665,076)
Financing activities Proceeds from notes payable Repayment of notes payable Proceeds from long-term debt Financing costs Repayment of long-term debt Shares issued Share issuance costs Increase in bank indebtedness
276,563 (781,247) 1,383,453 (99,681) (187,211) 549,663 (4,158) 508,345
901,174 -
1,645,727
901,174
Net increase in cash Cash, beginning of period
49,306 9,819
54,346 10
Cash, end of period
59,125
54,356
120,515
-
Investing activities Purchase of property and equipment Proceeds on sale of property and equipment Net assets acquired on RTO Cash paid on business acquisitions
Net cash flows from financing activities
Supplemental cash flow information: Income taxes paid Interest paid
7 7 6 5
12 8
The accompanying notes are an integral part of these condensed interim consolidated financial statements.
Page 4
QE2 ACQUISITION CORP. Notes to the Condensed Interim Consolidated Financial Statements
For the nine months ended October 31, 2014 and 2013 (Expressed in Canadian Dollars) (unaudited)
1.
Incorporation and operations QE2 Acquisition Corp. (“QE2” or the “Company”) was incorporated on January 25, 2013 under the Business Corporations Act of Alberta. QE2, through its wholly owned subsidiaries, Pillar Contracting Ltd. (“Pillar”) and Candesto Enterprises Ltd. ("Candesto"), provides a variety of services in the government infrastructure construction and maintenance industry. Pillar provides installation and maintenance of street light standards and traffic control signals. Candesto provides installation and maintenance of highway guardrails, fencing, and overhead signage. Substantially all of the Company’s 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. On October 20, 2014, the Company completed a reverse take-over ("RTO") of Crowsnest Acquisition Corp. ("Crowsnest"), a Capital Pool Company ("CPC") listed on the TSX Venture Exchange (Note 6). Crowsnest acquired 100% of the shares of the Company in exchange for 21,912,766 shares of Crowsnest. As a result of the share exchange, QE2 is considered to have control. While Crowsnest is the legal acquirer, the accounting acquirer is QE2 and these financial statements are consolidated and presented with QE2 as the reporting entity. Concurrent with the reverse take-over, QE2 Acquisition Corp. changed its name to QE2 Holdings and Crowsnest Acquisition Corp. changed its name to QE2 Acquistion Corp. The Company's shares are listed on the TSXV under the symbol "QE". The Company’s head office and principal address is #4034, 909 - 17th Avenue S.W., Calgary, Alberta, T2T 0A4. These condensed interim consolidated financial statements were authorised for issue in accordance with a resolution of the Board of Directors on December 30, 2014.
2.
Going concern The condensed interim consolidated financial statements have been prepared on the basis of accounting principles applicable to a “going concern”, which assumes that the Company will continue operation in the foreseeable future and will be able to realize its assets and discharge its liabilities in the normal course of operations. As at October 31, 2014 the Company had negative working capital of $1,080,778 (January 31, 2014 - $537,558), net loss of $2,159,299 (2013 - $186,386) and accumulated losses of $2,659,047. During the period ended October 31, 2014, the Company incurred a listing cost of $1,162,042 in conjunction with the Crowsnest Reverse Take-over Transaction. This expense is classified as a share based payment and charged or credited to the share capital of the Company (Note 6). These conditions indicated the existence of a material uncertainty that may cast significant doubt about the Company's ability to continue as a going concern. The Company’s ability to continue as a going concern is dependent upon its ability to continue to obtain financing to meet current and future obligations. The condensed interim consolidated financial statements do not include any adjustments to the amounts and classifications of assets and liabilities, and reported revenues and expenses, that might be necessary should the Company be unable to continue as a going concern, and therefore, be required to realize its assets and discharge its liabilities other than in the normal course of business and at carrying amounts different from those reflected in the accompanying financial statements. Any such adjustments could be material.
3.
Basis of preparation Statement of compliance These condensed interim consolidated financial statements have been prepared in accordance with International Accounting Standard (“IAS”) 34, “Interim Financial Reporting” using accounting policies consistent with International Financial Reporting Standards (“IFRS”). The condensed interim consolidated financial statements do not include all of the information required for full annual financial statements and should be read in conjunction with the Company’s annual consolidated financial statements for the year ended January 31, 2014. Basis of preparation The condensed interim consolidated financial statements of the Company are presented in Canadian dollars which is the Company’s functional currency and have been prepared on a historical cost basis, except for certain financial instruments that have been measured at fair value.
Page 5
QE2 ACQUISITION CORP. Notes to the Condensed Interim Consolidated Financial Statements
For the nine months ended October 31, 2014 and 2013 (Expressed in Canadian Dollars) (unaudited)
3.
Basis of preparation (continued from previous page) Use of judgments and estimates Management is required to make estimates, judgments and assumptions that affect the application of policies and reported amounts of assets, liabilities, income and expenses. Management reviews these judgments, estimates and assumptions on an ongoing basis, including those related to depreciation, fair values of financial instruments, recoverability of assets and income taxes. Actual results may differ from these estimates and these differences could be material. In preparing these condensed interim consolidated financial statements, the significant judgments made by management in applying the Company's accounting policies and the key sources of estimation uncertainty were the same as those that applied to the annual audited consolidated financial statements as at and for the year ended January 31, 2014. Management makes judgments in determining its cash generating units (“CGUs”) and evaluates the geography, cash flows and infrastructure of its assets in making such determinations. Based on this assessment, two CGU’s have been identified: electrical utility maintenance services and roadway infrastructure services.
4.
Summary of significant accounting policies These condensed interim consolidated financial statements have been prepared, for all periods presented, following the same accounting policies and methods of computation as described in Note 2 and Note 3 to the financial statements for the year ended January 31, 2014. Additional information required to supplement certain accounting as disclosed in the consolidated financial statements for the year ended January 31, 2014 is provided below: New accounting policies: On February 1, 2014, the Company adopted the following new standards and amendments that became effective for annual periods on or after January 1, 2014: 1.
IAS 36, “Impairment of Assets”. The amendments reduce the circumstances in which the recoverable amount of CGUs is required to be disclosed and clarifies the disclosures required when an impairment loss has been recognized or reversed in the period.
2.
IFRS Interpretations Committee (“IFRIC”) 21 “Levies”, clarifies that an entity recognizes a liability for a levy when the activity that triggers payment, as identified in the relevant legislation, occurs.
The adoption of the standards had no material impact on the amounts recorded in the Company’s condensed interim consolidated financial statements. Accounting standards issued but not yet effective: The Company has reviewed new and revised accounting pronouncements that have been issued but are not yet effective. IFRS 9 will replace the guidance of IAS 39, “Financial Instruments: Recognition and Measurement.” This standard eliminates the existing IAS 39 categories of held to maturity, available-for-sale and loans receivable. Financial assets will be classified into one of two categories: amortized cost or fair value. The extent of the impact of the adoption of IFRS 9 has not yet been determined. 5.
Business combination On April 25, 2014, the Company closed an asset purchase agreement (“Asset Acquisition”) with an unrelated private company, to acquire their operating assets for aggregate cash and share consideration of $2,680,456. The operating assets were rolled into Candesto Enterprises Ltd. ("Candesto"), who provides installation and maintenance of highway guardrails, fencing and overhead signage. The acquisition has been accounted for using the acquisition method of accounting with an effective date of February 1, 2014, whereby the assets acquired and the liabilities assumed are recorded at their fair values.
Page 6
QE2 ACQUISITION CORP. Notes to the Condensed Interim Consolidated Financial Statements
For the nine months ended October 31, 2014 and 2013 (Expressed in Canadian Dollars) (unaudited)
5.
Business combination (continued from previous page)
The following summarizes the assets acquired and the total consideration paid: Amount Net working capital Inventory Property and equipment Goodwill
$
167,469 93,678 1,017,500 1,401,809
$
2,680,456
The acquisition was funded as follows: Amount Proceeds from long term debt Vendor take back loan Issuance of 1,000,000 class B shares Cash
$
1,100,000 1,050,000 337,471 192,985
$
2,680,456
The allocations and determinations of the consideration described above are preliminary and subject to changes upon final adjustments. From the date of acquisition to October 31, 2014, Candesto contributed approximately $3,042,295 of revenue and $608,358 of earnings before tax to the Company. If the business combination had been completed on February 1, 2014, an estimated $3,642,669 of revenue and $720,023 of earnings before tax for the period ended October 31, 2014 would have been recorded. The Company incurred acquisition-related costs of approximately $122,125 relating to due diligence costs and legal fees. These costs have been expensed and included in general and administrative costs on the consolidated statements of comprehensive income.
6.
Reverse take-over of Crowsnest Acquisition Corp. ("Crowsnest RTO" or "RTO") On October 20, 2014, Crowsnest Acquistion Corp. ("Crowsnest") acquired all the issued and outstanding shares of QE2 Acquisition Corp. The transaction is intended to serve as Crowsnest's "Qualifying Transaction" pursuant to the policies of the TSX Venture Exchange. Total Crowsnest shares issued and outstanding just prior to closing was 6,600,000. Total QE2 shares issued and outstanding just prior to closing was 21,912,766. The QE2 shares were exchanged for Crowsnest shares on a one for one basis. The substance of the transaction is a reverse take-over as a result of the share exchange with QE2 shareholders owning 21,912,766 of the 28,512,766 total shares outstanding. The purchase price allocation can be summarized as follows: 21,912,766 common shares valued at $0.06 per share
$
1,314,766
Total consideration
$
1,314,766
Purchase price allocation: Net working capital
$
Listing expense on acquisition
148,724 1,166,042
$
1,314,766
Page 7
QE2 ACQUISITION CORP. Notes to the Condensed Interim Consolidated Financial Statements
For the nine months ended October 31, 2014 and 2013 (Expressed in Canadian Dollars) (unaudited)
6.
Reverse take-over of Crowsnest Acquisition Corp. ("Crowsnest RTO" or "RTO") (continued from previous page) The transaction is accounted for as a continuation of QE2 whereby new shares are issued for the net assets of Crowsnest, including the public company listing expense which is deemed to be the difference between the consideration paid for Crowsnest shares and the net assets of Crowsnest. The share capital, contributed surplus and deficit of Crowsnest are charged or credited to the share capital of the consolidated entity and the public company listing expense is a compound of the deficit of the consolidated entity. The allocations and determinations of the consideration described above are preliminary and subject to changes upon final adjustments.
7.
Property and equipment Automotives Cost Balance January 31, 2013 Additions from business combination Additions Disposals
$ $
Balance January 31, 2014 Additions from business combination (Note 5) Additions Disposals Balance October 31, 2014 Accumulated depreciation Balance January 31, 2013 Depreciation Disposals
-
Buildings
$
-
Computers
$
-
Equipment
$
-
Total
$
-
306,082 118,483 (9,295)
1,203 -
12,780 8,672 -
252,935 17,684 -
573,000 144,839 (9,295)
415,270
1,203
21,452
270,619
708,544
823,923 (36,370)
30,690 -
1,387 8,009 -
161,500 91,209 (21,526)
1,017,500 99,218 (57,896)
$
1,202,823
$
31,893
$
30,848
$
501,802
$
1,767,366
$
(44,818) 9,295
$
(127) -
$
(1,936) -
$
(7,984) -
$
(54,865) 9,295
Balance January 31, 2014 Depreciation Disposals
(35,523) (206,442) 31,584
(127) (701) -
Balance October 31, 2014
$
(210,381)
$
Net book value January 31, 2014
$
379,747
October 31, 2014
$
992,442
(1,936) (4,479) -
(7,984) (60,638) 8,668
(45,570) (272,260) 40,252
(828)
$
(6,415)
$
(59,954)
$
(277,578)
$
1,076
$
19,516
$
262,635
$
662,974
$
31,065
$
24,433
$
441,848
$
1,489,788
During the nine month period ended October 31, 2014, property and equipment with a net book value of $17,644 were sold for proceeds of $21,744, generating a gain on disposal of $4,100 (2013 - $Nil). Included in property and equipment is equipment under finance lease arrangements with a net book value of $305,417 at October 31, 2014 (January 31, 2014 - $90,474).
Page 8
QE2 ACQUISITION CORP. Notes to the Condensed Interim Consolidated Financial Statements
For the nine months ended October 31, 2014 and 2013 (Expressed in Canadian Dollars) (unaudited)
8.
Goodwill October 31, 2014
January 31, 2014
Balance – beginning of period Additions through business combination (Note 5)
762,699 1,401,809
762,699
Balance – end of period
2,164,508
762,699
There are no indications that goodwill is impaired as at October 31, 2014.
9.
Bank indebtedness Bank indebtedness is comprised of an Alberta Treasury Branch (“ATB”) demand operating facility with a borrowing base equal to the lesser of a) 75% of earned accounts receivable less amounts due over 90 days or b) $1,250,000 (January 31, 2014 - $500,000). Interest is payable at prime plus 2% (January 31, 2014 – prime plus 2%). This facility is secured by $500,000 of personal guarantees and postponement of claim by two shareholders, and a general security agreement providing first charge and security interest in all present and after-acquired property and equipment. The demand operating facility is not subject to financial covenants.
10.
Notes payable As part of the consideration paid for the Asset Acquisition (Note 5), the Company entered into a Loan Agreement wherein the vendor received a Vendor Take Back Promissory Note (“VTBP Note”) in the amount of $850,000. The VTBP Note is due on April 25, 2016 with annual principal payments of $425,000 plus interest due on each anniversary date, bearing interest at ATB’s Prime lending rate plus 2% (January 31, 2014 - prime rate plus 2%). 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. The total interest accrued on the notes payable was $28,812 at October 31, 2014.
Page 9
QE2 ACQUISITION CORP. Notes to the Condensed Interim Consolidated Financial Statements
For the nine months ended October 31, 2014 and 2013 (Expressed in Canadian Dollars) (unaudited)
11.
Long-term debt and commitments October 31, 2014
January 31, 2014
Roynat loan with an effective interest of 6.575% (stated interest of 6.47%) per annum, monthly principal payments of $18,333 plus interest, due April 25, 2019, secured by property and equipment with a carrying value of $947,445 and personal guarantees by two shareholders totaling $300,000.
990,002
-
Convertible debentures (net of fair value of equity portion) bearing interest at 12% per annum, semi-annual interest payments on June 30 and December 31, unsecured, and matures on October 20, 2016. Debenture holders may exercise the right to convert at an exercise price of $0.50 per common share. The fair value of the equity portion of $51,971 is included in the share capital of the Company.
1,246,030
-
Bank of Nova Scotia loans bearing fixed interest at rates ranging from 0% - 5.98% per annum, monthly payments ranging from $487 - $906, due dates ranging from August 2018 to February 2019, secured by automotives with a carrying value of $123,587 (January 31, 2014 - $149,348).
147,231
170,737
WS Leasing Ltd. finance leases bearing interest at rates ranging from 9.95% 11.50% per annum, monthly payments ranging from $850 - $1,000 including interest, due ranging from December 2016 to January 2017, secured by automotives with a carrying value of $76,903 (January 31, 2014 – 90,475).
77,952
88,526
Ally Credit Canada Ltd. loans bearing fixed interest at rates ranging from 1.99% 5.99% per annum, monthly payments ranging from $483 - $1,086 including interest, due ranging from July 2016 to November 2016, secured by automotives with a carrying value of $33,360 (January 31, 2014 - $50,964).
29,717
43,444
Element Fleet Management Inc. finance leases bearing interest at rates ranging from 4.23% - 7.33% per annum, monthly payments ranging from $304 - $1,719 including interest, due dates ranging from July 2017 to August 2017, secured by equipment with a carrying value of $83,571.
81,080
-
Royal Bank of Canada loan bearing variable interest at 5.15% per annum, monthly payments of $751 including interest, due May 2014
-
49
2,572,012 (124,667) 2,447,346 (1,040,668)
302,756 302,756 (66,067)
1,406,678
236,689
Unamortized financing cost Less current portion
The Company is required to comply with certain covenants associated with the Roynat loan. The Company was not in compliance with one covenant at October 31, 2014. As a result, the balance of the loan has been classified as current. 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. Estimated future principal payments are as follows: 2015 2016 2017 2018 2019
245,679 1,489,026 334,625 252,902 125,114 2,447,346
The Company has operating commitments relating to premise leases. Estimated annual commitments are as follows: 16,210 2015
Page 10
QE2 ACQUISITION CORP. Notes to the Condensed Interim Consolidated Financial Statements
For the nine months ended October 31, 2014 and 2013 (Expressed in Canadian Dollars) (unaudited)
12.
Share capital
a)
Authorized shares Unlimited number of common voting shares; Unlimited number of preferred non-voting shares of no nominal or par value.
b) Issued and outstanding As at October 31, 2014 the Company has the following classes of shares issued and outstanding: Class A
Number of shares
$
1,220,000 (1,220,000)
55,010 (55,010)
-
-
Number of shares
$
6,880,000 1,832,766 1,000,000 12,200,000 (21,912,766)
1,096,164 549,663 337,471 55,010 (2,038,308)
-
-
Number of shares
$
Balance, January 31, 2014 Assumed on Crowsnest RTO Class B shares exchanged on Crowsnest RTO Equity portion of convertible debentures Share issuance cost
6,600,000 21,912,766 -
1,314,766 2,038,308 51,971 (4,158)
Balance, October 31, 2014
28,512,766
3,400,887
Balance, January 31, 2014 10 to 1 Conversion to Class B common shares Balance, October 31, 2014 Class B Balance, January 31, 2014 Issued for cash Issued as consideration in business combination (Note 5) 10 to 1 conversion of Class A common shares Exchanged on Crowsnest RTO (Note 6) Balance, October 31, 2014 Common shares
During the period, 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 full 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. The Company has total warrants outstanding and exercisable of 2,943,110 convertible into one Common share at an exercise price of $0.50 (January 31, 2014 – there were 2,000,000 warrants outstanding and exercisable). The warrants expire on dates ranging from May 2016 to October 2016. The warrants have a fair value of $351,881. The assumptions used to calculate the fair values were: risk free rate of 1.0%; share price ranging from $0.25 - $0.30 per share; expected life ranging from 24 - 36 months; volatility of 100%. No warrants were exercised during the period.
Page 11
QE2 ACQUISITION CORP. Notes to the Condensed Interim Consolidated Financial Statements
For the nine months ended October 31, 2014 and 2013 (Expressed in Canadian Dollars) (unaudited)
13.
Loss per share The basic and diluted number of common shares used to calculate loss per share are as follows: Three months ended October 31,
Weighted average number of shares for basic and diluted loss per share
Nine months ended October 31,
2014
2013
2014
2013
11,152,766
4,700,000
9,865,205
2,497,080
For the period ended October 31, 2014, the above table excludes 15,740,000 escrowed shares (2013 - Nil) and 2,943,110 warrants (2013 – Nil). 14.
Related parties Transactions with related parties The following table provides the total amount of transactions that have been entered into with related parties for the nine month period ended October 31: Transactions with related parties
Amounts owed to related parties
October 31, 2013
$36,579
$6,233
October 31, 2014
$728,736
$203,206
The transactions with 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. As at October 31, 2014, key management and directors of the Company control 22% (January 31, 2014 – 50%) of the voting shares of the Company. 15.
Segmented information The Company’s reportable operating segments, as determined by management, are strategic operating units that offer different products and services. The accounting policies of each reportable segment are the same as those described in Note 4. The Company has three reportable segments 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.
Page 12
QE2 ACQUISITION CORP. Notes to the Condensed Interim Consolidated Financial Statements
For the nine months ended October 31, 2014 and 2013 (Expressed in Canadian Dollars) (unaudited)
15.
Segmented information (continued from previous page) 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. Nine months ended October 31, 2014
Corporate $
$
(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
$
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
$
128,000 -
Services
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 (4,100)
423,391 59,317 140,145 -
(128,000) -
2,014,448 147,077 1,166,042 272,260 (4,100)
$
-
$ (2,159,299)
$ $ $
-
$ $ $
Corporate $
-
Construction $
-
$
-
2013 Total $
237 -
Revenue Operating expenses Revenue less operating expenses General and administrative expenses Finance expenses Depreciation Other expenses (income) Earnings (Loss) Before Income Taxes
$
$
(186,386)
$
-
$
-
$
-
$
(186,386)
Capital expenditures Segmented assets Segmented liabilities
$ $ $
4,734 60,098 831,482
$ $ $
2,302,786 576,228
$ $ $
-
$ $ $
-
$ $ $
4,734 2,362,884 1,407,710
$
237 -
Services
Intersegment Eliminations
13,765 6,968,040 6,226,200
237
-
-
-
237
186,623 -
-
-
-
186,623 -
Page 13
QE2 ACQUISITION CORP. Notes to the Condensed Interim Consolidated Financial Statements
For the nine months ended October 31, 2014 and 2013 (Expressed in Canadian Dollars) (unaudited)
15.
Segmented information (continued from previous page) Three months October 31, 2014
Intersegment Eliminations
ended Corporate $
1,331,521 1,251,253
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
$
$
(1,872,064)
$
(108,322)
$
420,658
Capital expenditures Segmented assets Segmented liabilities
$ $ $
42,563 1,849,543
$ $ $
2,400,085 1,256,522
$ $ $
1,350 4,525,392 3,120,135
$
30,000 -
Services $
1,947,680 1,152,773
$
(30,000) -
2014 Total $
3,279,201 2,404,026
30,000
80,268
794,907
(30,000)
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)
$
-
$ (1,559,728)
$ $ $
-
$ $ $
Corporate $
-
Construction $
-
$
-
2013 Total $
103 -
Revenue Operating expenses Revenue less operating expenses General and administrative expenses Finance expenses Depreciation Other expenses (income) Earnings (Loss) Before Income Taxes
$
$
(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 -
Services
Intersegment Eliminations
1,350 6,968,040 6,226,200
103
-
-
-
103
100,168 -
-
-
-
100,168 -
Page 14
QE2 ACQUISITION CORP. Notes to the Condensed Interim Consolidated Financial Statements
For the nine months ended October 31, 2014 and 2013 (Expressed in Canadian Dollars) (unaudited)
16.
Capital management The Company’s objective in capital management is to ensure adequate sources of capital are available to carry out its planned capital program, to achieve operational growth and increased cash flow so as to sustain future development of the business and to maintain shareholder confidence. The Company manages its capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of its assets. Management considers capital to be the Company’s current assets less current liabilities, total debt facilities and shareholders’ equity as the components of capital to be managed. In order to maintain or adjust the capital structure, the Company may issue shares, raise debt and/or adjust its capital spending to manage its projected debt levels. The capital for operations to date has been primarily provided from operating cash flows, share issuances and debt financing. The Company’s capital structure is as follows:
Current assets Current liabilities (excluding current portion of long-term debt and notes payable) Long-term debt Notes payable Shareholders’ equity
17.
October 31, 2014
January 31, 2014
3,313,744 (2,670,042) (2,447,346) (1,108,812) 741,840
748,555 (658,800) (302,756) (561,246) 651,426
(2,170,616)
(122,821)
Financial instruments and risk management The Company’s activities expose it to a variety of financial risks: credit risk, liquidity risk, and interest rate risk. The Company’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Company’s financial performance. Risk management is carried out by senior management, in particular, the Board of Directors. There were no changes in the Company’s assessment of risks from the use of financial instruments or in the financial risk management policies of the Company since January 31, 2014. Fair values The Company's financial instruments consist of cash, trade and other receivables, bank indebtedness, accounts payable and accrued liabilities, notes payable, and long-term debt. The fair values of the Company’s current financial assets and liabilities approximate their carrying values due to their short-term maturities. The fair value of the Company’s notes payable, non-current notes payable and long-term debt approximates its carrying value as interest rates attached to the debt instruments approximates market rates of interest and there is a short-term time frame to maturity.
Page 15
