Horizon North Logistics Inc.
Annual Report 2017

Plain-text annual report

Annual Report 2017 Table of Contents Page Information on Annual Meeting ifc President’s Letter to Shareholders 3 Management’s Discussion and Analysis 4 Management’s Report to Shareholders 34 Independent Auditors’ Report to Shareholders 35 Consolidated Financial Statements 36 Notes to the Consolidated Financial Statements 40 Corporate Information obc Information on the Annual General Meeting The Annual General Meeting of holders of common shares of Horizon North Logistics Inc. will be held on the 9th day of May 2018 at 3:00 p.m. (local time) in the McMurray Room of the Calgary Petroleum Club, 319 – 5th Avenue SW, Calgary, Alberta. Shareholders are encouraged to attend and those unable to do so are requested to complete and submit the Instrument of Proxy at their earliest convenience. President’s Letter to Shareholders Dear Shareholders, I appreciate the opportunity to write this letter to you as President and CEO of Horizon North. I stepped into this position at the beginning of 2015 and immediately undertook a necessary three-year journey of transformational change. The company has grown from one with an existential reliance on the oil and gas industry to one with a diversified portfolio of offerings that is capable of weathering headwinds that may arise in any of our business sectors. While the financial performance for 2017 was not to my satisfaction I believe the numerous alterations and adjustments we made over the past 36 months will culminate in 2018 being our Year of Execution, an opportunity for our stakeholders to be rewarded. As a stakeholder you have many choices of entities to follow. I am often asked: “Why Horizon North? What sets your company apart from the others?” It is our diverse profile of strong business verticals that stand out in the industry and form the foundation for our 2018 execution strategy: • Industrial Infrastructure—We provide safe, reliable access to remote resource development and do it with a low environmental footprint, utilizing long lasting product like oak matting and environmentally responsible stabilization solutions. • Workforce Accommodations Northern Canada—Across remote parts of Canada’s North, we provide our customers world class hospitality and maintenance services across highly variable and hostile weather environments. We do this by being innovative in anticipating our customer’s needs and servicing those needs with a highly specialized team of solution-oriented experts who are humble, relationship-driven, agile and highly efficient. • Workforce Accommodations W5/W6—We are the largest provider of “open camp” rooms in this geologically prolific hydrocarbon resource. Our full turnkey solution allows for us to be nimble in finding the right geography and the right gear profile at the right value proposition. • Workforce Accommodations Oil Sands—We provide our customers in the region with a hospitality and maintenance offering that affords them the capability to service thousands of guests during the peaks and valleys of the labour demands that exist throughout the year. Our turnkey offering is underpinned by two prominent relationships with Aboriginal communities—one to the north of Fort McMurray, Alberta and one to the south of the city. • Northwest British Columbia—We maintain extremely attractive land profiles in Kitimat, Terrace and Prince Rupert that will allow us to benefit tremendously from industrial activity we believe is on the cusp of development in the region. • Modular Solutions—We pair sophisticated software integration and a vastly reduced environmental footprint with an emphasis on quality, safety, and cost and timetable certainty. This has made our modular offering the go-to choice for commercial product that includes affordable housing, hotels, condos, student housing, senior centers, and retail locations. What makes these verticals stand out and succeed is our belief in people—those we work with and our own employees. This is illustrated by three fundamental pieces that remain inviolable to us as we moved forward. • • • Safety—We are one of the few participants in our industry prepared to provide full and true disclosure of our safety records for all stakeholders to review. Our Total Recordable Incident Rate for 2017 was 0.63 and we received Gold Level Standing for Canada’s Safest Employers. Aboriginal and Community Affairs—We are investors in strong partnerships with Aboriginal communities—we have 23 partnerships across Western and Northern Canada and proudly employ 12 percent of our workforce as self-identified First Nations members. We do more than talk the talk, we offer true partnership. Human Resources—We believe our employees deserve a competitive wage and benefit plan and we continue to invest the requisite time on innovative human resource strategies to maintain that accuracy. We Believe we are building a better Horizon North for all stakeholders. Thank you for your support as we continue along our transformational journey. Rod Graham, President, CEO and Director Page | 3 Management’s Discussion and Analysis Three months and years ended December 31, 2017 and 2016 This Management’s Discussion and Analysis (“MD&A”), prepared as at March 13, 2018 focuses on key statistics from the Consolidated Financial Statements and pertains to known risks and uncertainties relating to the business carried on by Horizon North Logistics Inc. (“Horizon North” or the “Corporation”). This discussion should not be considered all-inclusive, as it does not attempt to include changes that may occur in general economic, political and environmental conditions. Annual Key Comments • • • • • Results for 2017 were stronger across most financial measures compared to 2016; The Modular Solutions business gained significant momentum throughout Q4, closing 2017 with a backlog of $43.9 million and high probability opportunities of $148.0 million compared to $10.7 million and $50.0 million for year ended 2016; The Industrial Services business announced over $80.0 million of contract awards throughout 2017 including a significant mining project in the Qikiqtaaluk region of Nunavut; Horizon North finalized two additional Aboriginal partnerships in the second half of 2017, one north and one south of Fort McMurray, Alberta. Working with and developing strong Aboriginal relationships is one of Horizon North’s core values and a key element of the Corporations oil sands strategy. Subsequent to year end, Horizon North completed a $14.0 million acquisition of the 288 bed Moose Haven Lodge south of Fort McMurray, Alberta. This acquisition was a key part of Horizon North’s strategy to secure opportunities in the Fort McMurray, Alberta area. Annual Financial Summary (1) (2) Please refer to page 27 of the Management’s Discussion and Analysis for the definitions of Non-GAAP and additional GAAP measures and reconciliation of Net Earnings to EBITDAS. Please refer to page 17 of the Management’s Discussion and Analysis for the definitions of Debt to EBITDAS. Page | 4 (000’s except per share amounts)2017 % change 2016 % change 2015Revenue $ 324,082 29 $ 250,935 (32) $ 369,889 EBITDAS(1) 30,045 5 28,661 (54) 62,460 EBITDAS as a % of revenue9%11%17%Operating loss (5,935) (73) (22,204) (565) 4,778 Operating earnings as a % of revenue(2%)(9%)1%Total loss (7,843) (61) (20,316) 2,342 (832)Total comprehensive loss (7,846) (62) (20,383) 2,530 (775)Earnings per share Basic $ (0.05) $ (0.15) $ (0.01)Diluted $ (0.05) $ (0.15) $ (0.01)Total assets $ 479,750 (1) $ 485,101 3 $ 469,504 Total loans and borrowings 74,604 (1) 75,268 31 57,527 Funds from operations 51,168 36 37,693 (36) 59,148 Net Capital (proceeds) spending (23,830) (227) 18,692 (58) 44,643 Senior debt to EBITDAS(2) 2.43:1.00 2.46:1.00 0.92:1.00 Total debt to EBITDAS(2) 2.48:1.00 2.46:1.00 0.92:1.00 Debt to total capitalization ratio(1) 0.19:1.00 0.19:1.00 0.15:1.00 Dividends declared $ 11,573 $ 11,112 $ 33,641 Dividends declared per share$ 0.08 $ 0.08 $ 0.28 Years ended December 31, Management’s Discussion and Analysis Three months and years ended December 31, 2017 and 2016 Annual Overview Results for the year ended December 31, 2017 (“2017”) were above the comparative year ended December 31, 2016 (“2016”, “comparative year”). Compared to 2016, Horizon North had stronger revenues across all operations with the Industrial Services strength coming from several significant camp equipment sales, increased catering only volumes and increased demand for access mat sales and rentals. The matting activity was primarily driven by increased activity levels in the Grande Prairie, Alberta region known as “W5/W6”. Modular Solutions completed two pivotal projects in the first half of 2017 which clearly validated the benefits of modular and drove a significant increase in project volumes for the back half of 2017. Revenues from camp rental and catering operations for 2017 increased by 10% compared to the same period of 2016 mainly as a result of camp equipment sales and stronger catering only activity which was driven by the additional Aboriginal partnerships finalized in the second half of 2017. Large camp activity levels decreased compared to 2016 as a result of several contracts which expired or ramped down during 2016 as the associated projects were completed. The lower demand resulted in revenue per average available bed (“RevPAAB”) and utilization of $39 and 51% respectively, down from $46 and 53% in 2016. The rentable bed fleet at the close of 2017 was 8,530 beds, a 9% reduction, reflective of the camp equipment sales completed in Q2 and Q4 2017. Revenues from the Rentals and Logistics segment increased compared to 2016 as a result of stronger demand for access mat sales and rentals primarily driven by higher activity levels in the W5/W6 region south of Grande Prairie. Utilization and pricing of the mat rental fleet was 76% and $0.91 per mat rental day respectively, compared to 49% and $1.07 in 2016. The mat rental fleet closed 2017 at 29,731 mats, relatively consistent with 2016. The stronger matting revenues were partially offset by a decrease in relocatable structure rental revenues. Relocatable structure rental revenues declined compared to 2016 due to a decrease in activity levels and softer pricing as a result of contract mix and downward pressure on pricing. Utilization improved slightly mainly due to the reduction in fleet size which decreased 9% compared to 2016. Modular Solutions revenues for 2017 were well above 2016 as a result of an increased number of projects compared to 2016. Two projects in the first half of 2017, an 85 room hotel in Revelstoke, British Columbia and a transitional housing complex for the Vancouver Affordable Housing Agency, demonstrated the advantages of modular construction and drove a higher volume of projects in the second half of 2017. Consolidated EBITDAS improved by 5% compared to 2016 mainly as a result of increased volumes across all operations. As a percentage of revenue consolidated EBITDAS softened slightly with stronger results from Industrial Services being offset by Modular Solutions. Industrial Services EBITDAS strengthened to 21% as a percentage of revenue compared to 18% in 2016 as a result of camp equipment sales and cost controls implemented in 2017. Modular Solutions experienced a loss due to low volumes in the first three quarters of the year and significant ramp-up activities in Q4 2017 to achieve production schedules. Depreciation and amortization for 2017 decreased compared to 2016 as a result of certain camp setup costs being fully depreciated and the disposal of camp assets throughout the year, primarily the sale of a 450 person camp in Q2 and a large camp equipment sale in Q4 of 2017. The total loss for 2017 was significantly lower compared to 2016. 2017 included a gain on disposal related to an insurance settlement for the loss of the Blacksand Executive Lodge, experienced in the 2016 Fort McMurray, Alberta wildfires, partially offset by an impairment loss on certain camp assets held for sale in Q3 of 2017 and subsequently sold in Q4. Horizon North continued to maintain a strong focus on managing the Statement of Financial Position through minimizing working capital and a reduced capital program. Total loans and borrowings were $74.6 million at December 31, 2017 compared to $75.3 million at December 31, 2016. As a result of the decreased debt and stronger EBITDAS, the Debt to EBITDAS ratio was 2.48:1.00 compared to 2.46:1.00 at December 31, 2016. Page | 5 Management’s Discussion and Analysis Three months and years ended December 31, 2017 and 2016 Outlook Horizon North’s focus in 2018 will continue to be on building out and expanding on initiatives started in 2017, initiatives intended to strengthen and diversify the Industrial Services business. For 2018, Horizon North expects the revenue and EBITDAS momentum seen in Q4 2017 to continue with the Industrial Services business anticipating moderate strengthening of activity levels as compared to 2017. Although commodity prices have shown some stability, Horizon North does not expect to see any significant strengthening in pricing from 2017 levels and will continue to focus on cost control to improve EBITDAS levels. The Modular Solutions business exited 2017 with a significant backlog and is anticipated to have positive EBITDAS in 2018 through improving efficiencies as the production rate increases to execute on backlog. The Industrial Services business will be focused on continuing to build-out and expand on the three phase strategy initiated in 2017: • • • Leverage the Aboriginal relationships entered into in the second half of 2017 which cover regions north and south of Fort McMurray, Alberta. A significant project undertaken in the second half of 2017 has shown the potential of this region and 2018 is expected to bring several similar projects; Focus on the Grande Prairie, Alberta region through securing strategic land locations positioning Horizon North to participate fully in the continued high activity levels expected in the conventional W5/W6 market; and Grow Horizon North’s presence in the mining sector, specifically on developing opportunities in northern Canada where Horizon North has a strong track record. Late in 2014 Horizon North under took several initiatives to develop and secure suitable land positions near proposed LNG project sites on British Columbia’s west coast. Horizon North maintained a longer term view of LNG development and continued these initiatives, completing the development of its land asset in Kitimat and building strong relationships with regional First Nations and the municipality. Given the recent renewed potential of LNG projects, Horizon North is now well positioned to take full advantage of opportunities as they arise. The Modular Solutions business is expected to continue its growth based on a strengthening backlog and high quality opportunity pipeline which is underpinned largely by social infrastructure and affordable housing projects, a focus by all levels of government. The backlog and opportunity pipeline are providing a higher level of visibility to the business requiring an increase in labour force at our Kamloops, British Columbia manufacturing facility to achieve a critical mass of scale and manufacturing throughput. Horizon North anticipates that Modular Solutions will continue its trend of earnings improvement and contribute positive EBITDAS throughout 2018 as increased volumes drive improved economies of scale. The strength of the Statement of Financial Position was a priority for Horizon North throughout 2017, and will continue to be a focus for 2018. Cost reduction measures across our operations and the continued centralization of certain general and administrative functions will drive improved cash flow through efficiencies. In addition to a limited and tightly managed capital program, 2018 will continue to assess Horizon North’s portfolio of assets to ensure a focus on core business lines. This combination of actions will help ensure the continued strength with respect to the financial position of Horizon North. Dividend Payment Horizon North announced today that its Board of Directors has declared a dividend for the first quarter of 2018 at $0.02 per share. The dividend is payable to shareholders of record at the close of business on March 31, 2018 to be paid on April 12, 2018. The Board of Directors regularly monitors the strength of the Statement of Financial Position, cash from operations and capital requirements to ensure the overall sustainability of Horizon North is not compromised. The dividends will be eligible dividends for Canadian tax purposes. Page | 6 Management’s Discussion and Analysis Three months and years ended December 31, 2017 and 2016 Annual Financial Results Page | 7 (000’s)Industrial Services Modular Solutions Corporate Eliminations TotalRevenue $277,409 $46,755 $- $(82) $324,082 Expenses Direct costs213,534 59,174 - (82) 272,626 Selling & administrative expenses6,438 2,207 12,766 - 21,411 EBITDAS$57,437 $(14,626) $(12,766) $- $30,045 EBITDAS as a % of revenue21%(31%)- - 9%Share based compensation241 127 806 - 1,174 Depreciation & amortization40,770 2,030 645 (2) 43,443 Impairment loss3,457 - - - 3,457 Loss (gain) on disposal of property, plant and equipment(12,185) (4) 147 (52) (12,094) Operating (loss) earnings $25,154 $(16,779) $(14,364) $54 $(5,935) Finance costs2,824 Income tax recovery(916) Total profit (loss)$(7,843) Other comprehensive income (loss)(3) Total comprehensive income (loss)(7,846) Earnings (loss) per share – basic $(0.05) – diluted$(0.05) (000’s)Industrial Services Modular Solutions Corporate Eliminations TotalRevenue $242,648 $8,287 $- $- $250,935 Expenses Direct costs193,020 11,497 (377) - 204,140 Selling & administrative expenses5,039 1,201 11,894 - 18,134 EBITDAS$44,589 $(4,411) $(11,517) $- $28,661 EBITDAS as a % of revenue18%(53%)- - 11%Share based compensation529 162 960 - 1,651 Depreciation & amortization47,115 1,888 915 (78) 49,840 Loss (gain) on disposal of property, plant and equipment(534) (15) (19) (58) (626) Operating (loss) earnings $(2,521) $(6,446) $(13,373) $136 $(22,204) Finance costs2,407 Earnings on equity Investments (126) Income tax recovery(4,169) Total profit (loss)$(20,316) Other comprehensive income (loss)(67) Total comprehensive income (loss)(20,383) Earnings (loss) per share – basic $(0.15) – diluted$(0.15) Twelve months ended December 31, 2017Twelve months ended December 31, 2016 Management’s Discussion and Analysis Three months and years ended December 31, 2017 and 2016 Fourth Quarter Key Comments • • • • Results for Q4 2017 were stronger than Q4 2016 as a result of higher volumes across all operations. The Modular Solutions business gained significant momentum throughout Q4, closing 2017 with a backlog of $43.9 million and high probability opportunities of $148.0 million compared to $10.7 million and $50.0 million for year ended 2016; Horizon North finalized two new Aboriginal partnerships in Q4 of 2017, one north and one south of Fort McMurray, Alberta. Working with and developing strong Aboriginal relationships is one of Horizon North’s core values; and Subsequent to year end, Horizon North completed a $14.0 million acquisition of the 288 bed Moose Haven Lodge south of Fort McMurray, Alberta. This acquisition was a key part of Horizon North’s strategy to secure opportunities in the Fort McMurray, Alberta area. Fourth Quarter Financial Summary (1) (2) Please refer to page 27 of the Management’s Discussion and Analysis for the definitions of Non-GAAP and additional GAAP measures and reconciliation of Net Earnings to EBITDAS. Please refer to page 17 of the Management’s Discussion and Analysis for the definitions of Debt to EBITDAS. Page | 8 (000’s except per share amounts)20172016 % change Revenue $ 82,664 $ 60,420 37 EBITDAS(1) 6,786 4,609 47 EBITDAS as a % of revenue8%8%Operating loss (4,074) (8,304) (51)Operating earnings as a % of revenue(5%)(14%)Total loss (3,885) (7,215) (46)Total comprehensive loss (3,892) (7,214) (46)Earnings per share Basic $ (0.03) $ (0.05)Diluted $ (0.03) $ (0.05)Total assets $ 479,750 $ 485,101 (1)Total loans and borrowings 74,604 75,268 (1)Funds from operations 8,705 4,183 108 Net Capital (proceeds) spending 1,645 7,655 (79)Senior debt to EBITDAS(2) 2.43:1.00 2.46:1.00 Total debt to EBITDAS(2) 2.48:1.00 2.46:1.00 Debt to total capitalization ratio(1) 0.19:1.00 0.19:1.00 Dividends declared $ 2,894 $ 2,893 Dividends declared per share $ 0.02 $ 0.02 Three months ended December 31, Management’s Discussion and Analysis Three months and years ended December 31, 2017 and 2016 Fourth Quarter Overview Results for the three months ended December 31, 2017 (“Q4 2017”) improved across all financial measures, compared to the three months ended December 31, 2016 (“Q4 2016”). The improvement was driven by higher activity levels across all operations in Industrial Services and increased project volumes in Modular Solutions. Revenues from camp rental and catering operations for Q4 2017 increased by 22% compared to Q4 2016 as a result of significantly higher catering only activity and a camp equipment sale. Higher catering only activity was primarily a result of recent Aboriginal partnerships in the Fort McMurray, Alberta area which resulted in an additional catering only contract significantly increasing catering only volumes compared to Q4 2016. Large camp activity increased, compared to Q4 2016, driven by continued strong activity in the W5/W6 region south of Grande Prairie, Alberta and higher demand in the Fort McMurray, Alberta region as a result of plant maintenance programs underway by major oil sands producers. The higher activity levels resulted in RevPAAB and utilization of $36 and 55% respectively, up from $32 and 45% in Q4 2016. Revenues from Rentals and Logistics segment for Q4 2017 were consistent with Q4 2016. Access mat utilization was 3% stronger as a result of higher activity levels but was offset by softer pricing which decreased 2% compared to Q4 2016. Relocatable structures rental utilization strengthened by 9% as a result of an increase in rental activity combined with a decrease in fleet size compared to Q4 2016. Modular Solutions revenues for Q4 2017 were above Q4 2016 as a result of the increased number and scope of projects. The projects in Q4 2017 included several government sponsored affordable housing projects, a hotel project and several commercial condominium projects compared to a single government sponsored affordable housing project and one hotel project in Q4 2016. Horizon North’s EBITDAS in Q4 2017 increased compared to Q4 2016 mainly as a result of the higher activity levels and volumes discussed above. Operating loss and loss per share for Q4 2017 improved compared to Q4 2016 as a result of stronger EBITDAS and lower depreciation and amortization expense due to camp setup costs becoming fully depreciated and used camp equipment sales throughout the year. Horizon North continued to maintain a strong focus on managing the Statement of Financial Position through minimizing working capital and a reduced capital program. Total loans and borrowings were $74.6 million at December 31, 2017 compared to $75.3 million at December 31, 2016. As a result of the decreased debt and stronger EBITDAS, the Debt to EBITDAS ratio was 2.48:1.00 compared to 2.46:1.00 at December 31, 2016. Page | 9 Management’s Discussion and Analysis Three months and years ended December 31, 2017 and 2016 Fourth Quarter Financial Results Page | 10 (000’s)Industrial Services Modular Solutions Corporate Eliminations TotalRevenue $64,055 $18,638 $- $(29) $82,664 Expenses Direct costs49,661 21,447 - (29) 71,079 Selling & administrative expenses992 648 3,159 - 4,799 EBITDAS$13,402 $(3,457) $(3,159) $- $6,786 EBITDAS as a % of revenue21%(19%)- - 8%Share based compensation81 37 243 - 361 Depreciation & amortization9,815 525 105 - 10,445 Impairment loss- - - - - Loss on disposal of property, plant and equipment54 - - - 54 Operating (loss) earnings $3,452 $(4,019) $(3,507) $- $(4,074) Finance costs533 Earnings on equity Investments (105) Income tax recovery(617) Total profit (loss)$(3,885) Other comprehensive income (loss)(7) Total comprehensive income (loss)(3,892) Earnings (loss) per share – basic $(0.03) – diluted$(0.03) (000’s)Industrial Services Modular Solutions Corporate Eliminations TotalRevenue $54,709 $5,711 $- $- $60,420 Expenses Direct costs44,360 7,304 (120) - 51,544 Selling & administrative expenses900 649 2,718 - 4,267 EBITDAS$9,449 $(2,242) $(2,598) $- $4,609 EBITDAS as a % of revenue17%(39%)- - 8%Share based compensation219 87 541 - 847 Depreciation & amortization12,568 516 220 (7) 13,297 Gain on disposal of property, plant and equipment(1,217) - - (14) (1,231) Operating earnings (loss)$(2,121) $(2,845) $(3,359) $21 $(8,304) Finance costs672 Loss on equity Investments 78 Income tax recovery(1,839) Total profit (loss)$(7,215) Other comprehensive income (loss)1 Total comprehensive income (loss)(7,214) Earnings (loss) per share – basic $(0.05) – diluted$(0.05) Three months ended December 31, 2017Three months ended December 31, 2016 Management’s Discussion and Analysis Three months and years ended December 31, 2017 and 2016 Industrial Services Industrial Services is comprised of Horizon North’s legacy operations including camp rental and catering operations, manufacturing sales, relocatable structures rentals, access mat rentals, other equipment rentals, used equipment sales, and the associated service and transportation within each operation. Revenues from Industrial Services for Q4 2017 were $64.1 million, an increase of $9.3 million or 17% compared to Q4 2016. The increase was a result of stronger large camp utilization, additional catering only contract and a significant used camp equipment sale. EBITDAS in Q4 2017 were $13.4 million, an increase of $4.0 million or 42% in comparison to Q4 2016. As a percentage of revenue, EBITDAS increased in Q4 2017 primarily as a result of increased activity levels and a difference in contract mix. Revenues from Industrial Services for 2017 were $277.4 million, an increase of $34.8 million or 14% compared to 2016. The increase was due to new catering only contracts in the second half of 2017, several significant used camp equipment sales and strong access mat sales. EBITDAS were $57.4 million, an increase of $12.8 million or 29% in comparison to 2016. As a percentage of revenue, EBITDAS increased for 2017 as a result of used camp equipment sales, business interruption insurance proceeds on the Blacksands Executive Lodge settlement in Q1 2017 and on-going cost controls. Page | 11 (000’s)20172016% change20172016% changeCamps and Catering$ 51,765 $ 42,518 22 $ 224,430 $ 204,331 10 Rentals & Logistics 12,290 12,191 1 52,979 38,317 38 Total Revenue 64,055 54,709 17 277,409 242,648 14 EBITDAS $ 13,402 $ 9,449 42 $ 57,437 $ 44,589 29 EBITDAS as a % of revenue21%17%21%18%Operating earnings (loss)$ 3,452 $ (2,121) (263)$ 25,154 $ (2,521) (1,098)Twelve months ended December 31,Three months ended December 31, Management’s Discussion and Analysis Three months and years ended December 31, 2017 and 2016 Camps & Catering Segment Camps & Catering revenues are comprised of camp rental and catering operations, the associated service and transport revenue and equipment sales. (1) (2) (3) (4) (5) One bed rental day represents the provision of one bed for one day under a combined rental and catering manday rate, or the provision of one bed for one day under an equipment rental rate for dedicated camp equipment. RevPAAB equals revenue per average available rentable bed calculated as applicable camp revenue divided by average rentable beds available in the period. Average rentable beds is equal to total average beds in the fleet over the period less beds required for staff. Utilization equals the total number of bed rental days divided by average rentable beds in the period. One catering only day equals the provision of catering and housekeeping services with no related bed rental for one day. Revenues from the Camps & Catering segment for Q4 2017 were $51.8 million, an increase of $9.2 million or 22% compared to Q4 2016. EBITDAS for the three months ended December 31, 2017 were $8.8 million, an increase of $2.6 million or 42% compared to Q4 2016. The increase in Q4 2017 segment revenues, compared to Q4 2016, was a result of higher volumes for large camps and significantly stronger catering only volumes. Several oil sands producers began their plant maintenance programs in Q4 2017 driving higher utilization of large camps in the Fort McMurray, Alberta area. Recently signed Aboriginal partnerships in the Fort McMurray, Alberta area resulted in a significant catering only contract. The increase in Q4 2017 segment EBITDAS and EBITDAS as a percentage of revenue, compared to Q4 2016, was a result of the higher activity levels. Although higher than Q4 2016, EBITDAS as a percentage of revenue continued to reflect the aggressive pricing in both large camp and catering only operations that is required in the current economic environment. Revenues from the Camps & Catering segment for 2017 were $224.4 million, an increase of $20.1 million or 10% compared to 2016 with EBITDAS increasing 24% year over year. The higher revenue and EBITDAS for 2017, compared to 2016, was a result of additional catering only contracts and several significant camp equipment sales in Q2 2017 and Q4 2017. These revenue increases were partially offset by lower activity levels in large camp operations compared to 2016. 2016 reflected a full year of operations for several significant contracts which expired or ramped down during 2017 as the associated projects were completed. The higher EBITDAS for 2017, compared to 2016, was driven by the higher volumes in catering only, business interruption insurance Page | 12 (000’s except for operational metrics)20172016% change20172016% changeLarge Camp revenue $28,629 $27,438 4 $130,274 $149,589 (13) Drill Camp revenue 2,196 2,942 (25) 9,383 8,079 16 Catering only revenue 11,180 5,463 105 34,267 20,662 66 Service revenue5,470 5,525 (1) 20,831 22,946 (9) Equipment sales revenue4,290 1,150 273 29,675 3,055 871 Total Revenue51,765 42,518 22 224,430 204,331 10 EBITDAS$8,849 $6,223 42 $43,524 35,233 24 EBITDAS as a % of revenue17%15%19%17%Operating earnings $1,637 $(2,188) (175) $21,282 (828) (2,670) Large Camp Bed rental days (1)432,736 388,517 11 1,675,516 1,734,880 (3) Revenue per bed rental day $66 $71 (7) $78 $86 (9) RevPAAB (2)$36 $32 13 $39 $46 (15) Rentable beds at period end8,530 9,339 (9) 8,530 9,339 (9) Average rentable beds (3)8,526 9,334 (9) 9,082 8,957 1 Utilization (4)55%45%22 51%53%(4) Drill Camp Bed rental days (1)18,104 24,520 (26) 75,888 65,116 17 Revenue per bed rental day $121 $120 1 $124 $124 - RevPAAB (2)$29 $35 (17) $31 $24 29 Rentable beds at period end 821 910 (10) 821 910 (10) Average rentable beds (3)821 916 (10) 841 902 (7) Utilization (4)24%29%(17) 25%20%25 Catering Only Catering only days(5)116,226 41,825 178 343,421 165,361 108 Revenue per catering only day$96 $ 131 (27) $100 $ 125 (20) Three months ended December 31,Twelve months ended December 31, Management’s Discussion and Analysis Three months and years ended December 31, 2017 and 2016 proceeds and used camp equipment sales which were partially offset by the lower large camp activity. EBITDAS as a percentage of revenue increased year over year as a result of business interruption insurance proceeds, used camp equipment sales and the focus on cost controls. Large Camp Revenues from Large Camp operations for Q4 2017 increased by $1.2 million, or 4% compared to Q4 2016. The increase was primarily driven by higher demand in the Fort McMurray, Alberta region as a result of oil sands plant maintenance programs underway. Partially offsetting the increased activity was lower pricing compared to Q4 2016, reflective of contracts in place in Q4 2016 with stronger pricing which expired throughout 2017. The increased demand for Large Camp services resulted in RevPAAB and utilization of $36 and 55% respectively, compared to $32 and 45% in Q4 2016. The increased RevPAAB was primarily result of the used camp equipment sale in Q4 2017 which decreased average available beds by 9%. Revenues from Large Camp operations for 2017 decreased by $19.3 million or 13% compared to 2016. The decrease was mainly attributable to several large contracts with more favorable rates which expired or ramped down throughout 2017. As a result of the lower activity levels in 2017 compared to 2016, RevPAAB and utilization were $39 and 51% respectively, compared to $46 and 53% in Q4 2016. Drill Camp Revenues from Drill Camp operations for Q4 2017 decreased by $0.7 million or 25% compared to Q4 2016. Although the Canadian Association of Oil Drilling Contractors (CAODC) reported Q4 2017 rig utilization of 32% compared to 26% in Q4 2016, Horizon North did not see higher rig camp utilization. Drilling activity tended to be located closer to large camps or towns thereby reducing the requirement for rig camps. The activity levels drove drill camp RevPAAB and utilization of $29 and 24% respectively compared to $35 and 29% in Q4 2016. Revenues from Drill Camp operations for 2017 increased by $1.3 million or 16% compared to 2016 mainly due to higher rig utilization. The Canadian Association of Oil Drilling Contractors (CAODC) reported year to date rig utilization of 30%, up from 18% in the same period of 2016. Drill Camp activity levels typically follow industry activity levels and are reflective of the increase in rig utilization year over year. However, large pad drilling and activity in the Grande Prairie, Alberta region tend to use large camps or local towns thereby reducing the requirement for drill camps. Catering only Revenues from the provision of catering and housekeeping services, with no associated bed rentals, for Q4 2017 increased by $5.7 million or 105% compared to same period of 2016. The increase was mainly due to additional catering contracts in the second half of 2017. Revenue per catering only day decreased by 27% primarily due to the different contract mix between the comparative quarters. Revenues from the provision of catering and housekeeping services, with no associated bed rentals, for 2017 increased by $13.6 million or 66% compared to 2016. The majority of the increased revenue, compared to 2016, was associated with a contract added in the second half of 2017. Revenue per catering only day decreased as a result of the different contract mix between the comparative periods. Page | 13 Management’s Discussion and Analysis Three months and years ended December 31, 2017 and 2016 Service Service revenues are related to the transportation, set-up and de-mobilization of camps for customers. Revenues for Q4 2017 were consistent between the comparative quarters as a result of similar volumes of projects in the comparative quarters. Revenues for 2017 decreased by $2.1 million or 9% compared to 2016. The decrease was mainly related to the lower tear out and demobilization activity in the first half of 2017 mainly due to fewer seasonal camps compared to 2016. Equipment sales Equipment sales revenues include new, in-plant camp construction and used fleet sales. Revenues for Q4 2017 increased by $3.1 million or 273% compared to Q4 2016 as a result of a significant opportunity to sell used camp equipment. Used equipment sales are key part of the fleet management strategy to reduce underutilized assets. Revenues for 2017 increased by $26.6 million compared to 2016 as a result of two significant camp equipment sales, one in Q2 and the second in Q4 2017. Page | 14 Management’s Discussion and Analysis Three months and years ended December 31, 2017 and 2016 Rentals & Logistics Segment Rentals & Logistics revenues are comprised of relocatable structures rentals, access mat rentals, other equipment rentals, used equipment sales and installation, transportation associated with the rentals and sales. Relocatable structures is comprised of office units, lavatory units, mine dry units, wellsite units and the associated equipment. Other equipment rentals include light towers, garbage bins and other miscellaneous equipment. Relocatable structures revenue includes rental revenue generated from office, lavatory and mine dry units and complexes as well the associated equipment. Access mat rental revenue includes revenues generated from the rental of traditional oak and oak edged mats. Other equipment rental revenue includes the rental of rig mats, quad mats and other ancillary equipment such as light towers and garbage bins. One rental day equals the rental of one unit for one day. Utilization equals the total number of unit rental days divided by average rentable units in the period. Average access mat rental fleet numbers reflect only owned access mats. Access mats in rental fleet at period end represents the number of owned access mats in the Matting fleet. One mat rental day equals the rental of one owned access mat for one day. One mat rental day equals the rental of one third party sub rented access mat for one day. (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) Utilization equals the total number of mat rental days owned divided by average rentable mats owned in the period. (11) (12) Revenue per mat rental day equals access mat rentals revenue divided by total access mats rental days. Represents the number of units sold in the period. Revenues from Rentals & Logistics for Q4 2017 were consistent with Q4 2016 at $12.3 million. EBITDAS for Q4 2017 were $4.6 million or 37% of revenue, an increase of $1.3 million or 41% compared to Q4 2016. Revenues from Rentals & Logistics for 2017 were $53.0 million, an increase of $14.7 million or 38% compared to 2016. EBITDAS for 2017 were $13.9 million, an increase of $4.6 million or 49% compared to 2016. The increase in revenues were primarily driven by higher activity levels across most operations. The increase in EBITDAS and EBITDAS as a percentage of revenue was a result of the higher activity levels and the mix of contracts between the comparative periods. Page | 15 (000’s except for operational metrics)20172016% change20172016% changeRelocatable structures revenue (1) $888 $1,032 (14) $3,954 $5,167 (23) Access mat rentals revenue (2)1,614 1,547 4 7,878 5,555 42 Other equipment rentals revenue (3)229 87 163 590 478 23 Installation, transportation, service, and other revenue6,301 5,459 15 28,796 21,072 37 Equipment sales revenue3,258 4,066 (20) 11,761 6,045 95 Total revenue$12,290 $12,191 1 $52,979 $38,317 38 EBITDAS$4,553 $3,226 41 $13,913 $9,356 49 EBITDAS as a % of revenue37%26%26%24%Operating earnings (loss)1,815 67 2,609 3,872 (1,693) (329) Relocatable Structures Average fleet size1,108 1,210 (8) 1,174 1,226 (4) Fleet end of period1,102 1,207 (9) 1,102 1,207 (9) Rental days (4)38,069 37,310 2 169,029 172,190 (2) Utilization (5) 37%34%9 39%38%3 Access matsAverage fleet size owned (6)30,155 29,626 2 29,783 28,503 4 Fleet end of period owned (7)29,731 29,834 - 29,731 29,834 - Rental days owned (8)1,888,513 1,790,885 5 8,263,284 5,153,593 60 Rental days third party (9)38,159 121 31,436 373,315 24,758 1,408 Total Rental Days1,926,672 1,791,006 8 8,636,599 5,178,351 67 Utilization owned (10)68%66%3 76%49%55 Revenue per mat rental day (11)$0.84 $0.86 (2) $0.91 $1.07 (15) Equipment Sales (12)Relocatable structures 26 16 63 50 70 (29) Mats3,734 9,686 (61) 16,060 12,751 26 Three months ended December 31,Twelve months ended December 31, Management’s Discussion and Analysis Three months and years ended December 31, 2017 and 2016 Relocatable structures revenue Relocatable structures revenues include the rental of relocatable structures such as office units, lavatory units, mine dry units and other associated equipment. Relocatable structures revenues for Q4 2017 decreased by $0.1 million or 14% compared to Q4 2016. The decrease in revenue was mainly a result of the equipment mix on rent compared to Q4 2016. Fleet utilization increased to 37% from 34% in Q4 2016 mainly due to the sale of used equipment between the comparative periods. Revenues for 2017 were $4.0 million, a decrease of $1.2 million or 23% compared to 2016. The decrease was primarily due to lower pricing as a result of the mix of equipment on rent year over year and downward pricing pressure. 2016 had a higher number of multi-unit complexes on rent compared to 2017. Utilization improved slightly in 2017 to 39% compared to 38% in 2016 as a result of the smaller average fleet size in 2017. Access mat rentals revenue Access mat rental revenue for Q4 2017 was consistent in the comparative periods with higher activity levels being offset by softer pricing. Rental volumes increased by 8% with 68% utilization of owned mats compared to 66% in Q4 2016 which was offset by a lower revenue per mat rental day which decreased by 2% compared to Q4 2016. The softer rates are primarily reflective of aggressive pricing agreements signed in the second half of 2016 to secure work. Revenues for 2017 were $7.9 million, an increase of $2.3 million or 42% compared to 2016. The increase was due to stronger demand for matting, particularly in the Grande Prairie, Alberta area, as a result of wet ground conditions and increased drilling programs which drove a 60% increase in owned mat rental days compared to 2016. The higher activity resulted in utilization of 76% compared to 49% in 2016 which was partially offset by weaker revenue per mat rental day. Revenue per mat rental day declined during the year to $0.91, compared to $1.07 in 2016 as a result of the aggressive pricing agreements discussed above. One pricing agreement remains in place and will expire in 2019. Installation, transportation, service, and other revenue Revenues for Q4 2017 increased by $0.8 million or 15% compared to Q4 2016. The increase in revenue was driven by the timing of mat installation and demobilization and a soil stabilization project early in Q4 2017. Revenues for 2017 increased by $7.7 million or 37% compared to 2016. The increase in revenue was driven by the higher access mat sales and rental activity and increased demand for non-rental related services such as soil stabilization. Equipment Sales Equipment sales are the sale of new and used Rentals & Logistics fleet, which is comprised of new and used mats, space rental assets and other equipment such as garbage bins and light towers. Revenues for Q4 2017 decreased by $0.8 million compared to the same period in 2016. The decrease in revenue was driven by lower mat sales with 3,734 mats sold compared to 9,686 in Q4 2016. Revenues for 2017 increased by $5.7 million compared to 2016. The increase in revenue was primarily driven by higher mat sales with 16,060 mats sold in 2017 compared to 12,751 in 2016. Direct costs Direct costs in the Industrial Services business unit for Q4 2017 were $49.7 million or 78% of revenue compared to $44.4 million or 81% of revenue for Q4 2016. Direct costs are driven by both the level and mix of business activity consisting primarily of labour, raw material, trucking, rent and utility costs. The increase of direct costs in Q4 2017, compared to Q4 2016, was mainly related to the increase in business activity. As a percentage of revenue, direct costs decreased primarily as a result of a focus on cost controls and the variation in sales mix between the comparative quarters. Direct costs in the Industrial Services business unit for 2017 were $213.5 million or 77% of revenue compared to $193.0 million or 80% of revenue for the same period of 2016. The increase in direct costs for 2017 reflects the higher business activity discussed in the sections above. Direct costs as a percentage of revenue decreased in 2017, compared to 2016 mainly attributable to the focus on cost controls and the variation in sales mix between the comparative quarters. Page | 16 Management’s Discussion and Analysis Three months and years ended December 31, 2017 and 2016 Modular Solutions Modular Solutions consists of production, transportation and installation of residential, retail and commercial modular buildings. The table below outlines the key performance metrics used by management to measure performance in the Modular Solutions operations: (1) Backlog is the total value of work that has not yet been completed that: (a) has a high certainty of being performed based on the existence of an executed contract or work order specifying job scope, value and timing; or (b) has been awarded to Horizon North, as evidenced by an executed letter of award or agreement, describing the general job scope, value and timing of such work, and where the finalization of a formal contract in respect of such work is reasonably assured and expects to be recognized in the next 12 months. Modular Solutions revenues for Q4 2017 were $18.6 million compared to $5.7 million in Q4 2016. The increase was attributable to the volume of projects between the comparative periods with Q4 2017 having significantly more projects. Projects in Q4 2017 were comprised mainly of commercial projects, including a condominium complex in Revelstoke, British Columbia, a hotel project and several affordable housing projects for Vancouver Affordable Housing Agency and BC Housing Management Commission. Revenues for 2017 were $46.8 million and consisted primarily of the production and installation of several commercial projects including an 85 room hotel and condominium development both in Revelstoke, British Columbia, multifamily housing complexes, several affordable housing projects and residential housing projects. The primary metric for Modular Solutions is the backlog of projects and timing of backlog execution. Currently, the focus for this business unit is to secure and increase backlog, which was $43.9 million at the end of December 2017 compared to $30.2 million at September 2017. With consistent backlog, revenues and plant efficiencies are expected to improve and generate more stable and predictable results. Direct costs On January 1, 2017, Horizon North established two business units, Industrial Services and Modular Solutions, and aligned the associated segments under each business unit. With the segment realignment, direct costs related to product design, engineering, procurement and project management were transitioned from the Industrial Services operations, where they were included as part of the new camp sales product line, and aligned under the Modular Solutions operations. Direct costs are comprised of labour, raw materials and transportation which vary directly with revenues and a relatively fixed component which includes rent, utilities and the design and technical services required in the bidding cycle and post award production and installation of the product. Direct costs were 115% of revenues in Q4 2017 compared to 128% in Q4 2016, the improvement was mainly driven by economies of scale from higher Q4 2017 activity levels absorbing the relatively fixed component of the direct cost. Direct costs for 2017 were 127% of revenues compared to 139% in 2016. The decrease was related to the same factors discussed above. Page | 17 (000’s)20172016% change20172016% changeModular Solutions revenue $ 18,638 $ 5,711 226 $ 46,755 $ 8,287 464 EBITDAS $ (3,457) $ (2,242) 54 $ (14,626) $ (4,411) 232 EBITDAS as a % of revenue(19%)(39%)(53) (31%)(53%)(41) Operating earnings (loss)$(4,019) $(2,845) 41 $(16,779) $(6,446) 160 Backlog (1) $ 43,878 $ 10,673 311 $ 43,878 $ 10,673 311 Three months ended December 31,Twelve months ended December 31, Management’s Discussion and Analysis Three months and years ended December 31, 2017 and 2016 Selling & Administrative Expense Selling & administrative expenses are comprised of sales and marketing costs associated with each segment, along with corporate costs which reflect head office costs and include the President and Chief Executive Officer, Senior Vice President Finance and Chief Financial Officer, Executive Vice President Quality & Health Safety and Environment (“HSE”), Vice President Aboriginal & Community Relations, Vice President Human Resources, Vice President Legal & General Counsel, Corporate Secretary, information technology, corporate accounting staff and associated costs of supporting a public company. Selling and administrative expenses for Q4 2017 were $4.8 million, an increase of $0.5 million or 12% compared to Q4 2016. The increase was mainly due to certain bad debt expenses in Q4 2017. As a percentage of revenue, selling and administrative expenses were 6% compared to 7% in the comparative quarter of 2016. For 2017, costs were $21.4 million, an increase of $3.3 million or 18% compared to 2016. The increase included $2.0 million in certain bad debt expenses, $0.6 million in sales costs related to Modular Solutions and the significant backlog growth with the remainder related information technology projects. As a percentage of revenue, selling and administrative expenses were consistent at 7%. Other Items Depreciation and amortization Depreciation of property, plant and equipment decreased by $2.6 million in Q4 2017 as compared to Q4 2016. For 2017, depreciation decreased by $8.1 million compared to 2016. The decrease was mainly a result of camp set up costs being fully depreciated and the disposal of assets throughout the year, primarily the sale of the 450 person camp in Q2 2017. The amortization of intangibles is related to the acquisition of Karoleena Inc. in June 2016 and Empire Camp Equipment Ltd. in August 2016. Financing costs Financing costs include interest on loans and borrowings. For Q4 2017, financing costs were $0.5 million compared to $0.7 million in Q4 2016. For 2017, financing costs were $2.8 million compared to $2.4 million for 2016. The increase in financing costs was mainly a result of higher average debt levels which averaged $70.1 million for the twelve months of 2017 compared to $68.7 million in the same period of 2016. The effective annualized interest rate on loans and borrowings for 2017 was 4.3% compared to 3.5% in 2016. The higher effective interest rate was driven by the tiered interest rate structure of the credit facility. Income taxes For the year ended December 31, 2017, income tax recovery was $0.9 million, an effective tax rate of 10.5%. For the year ended December 31, 2016, income tax recovery was $4.2 million, an effective tax rate of 17.0%. The decrease in income tax recovery was attributable to the increase in reported earnings for the twelve months ended December 31, 2017. Gain/Loss on disposal For Q4 2017, Horizon North recognized losses of $0.1 million compared to gains of $1.2 million in Q4 2016. The gains and losses on disposals are typically generated from normal management of operational assets. For 2017, Horizon North recognized gains of $12.1 million compared to gains of $0.6 million for 2016. The gains on disposals are typically generated from normal management of operational assets. The 2017 gains on disposal included the Q1 2017 insurance settlement in excess of book value from the Blacksand Executive Lodge assets destroyed in the Fort McMurray, Alberta wildfires in 2016. Page | 18 (000’s)20172016% change20172016% changeDepreciation of property, plant and equipment$9,763 $12,410 (21) $40,701 $48,848 (17) Amortization of Intangibles 682 887 (23) 2,742 992 176 Total depreciation and amortization$10,445 $13,297 (21) $43,443 $49,840 (13) Twelve months ended December 31,Three months ended December 31, Management’s Discussion and Analysis Three months and years ended December 31, 2017 and 2016 Liquidity and Capital Resources Liquidity is principally monitored through cash and cash equivalents and available borrowing capacity under the Corporation’s committed credit facility. The outstanding balance under the credit facility fluctuates as it is drawn to finance working capital requirements, capital expenditures, acquisitions and dividends or repaid with funds from operations, disposals and financing activities. For 2017, operating activities generated $14.7 million of cash, compared to generating $32.3 million of cash in 2016. The variance was driven by an increase in accounts receivable at the end of 2017 and the strength of operating results in early 2016. Cash from investing activities was provided by net proceeds on disposal of capital assets, including the insurance settlement in Q1 2017. Cash used in financing activities included dividend payments of $11.6 million and $2.3 million in credit facility repayment. (1) (2) Calculated as the sum of trade and other payables, deferred revenue and income taxes payable. Calculated as current assets less current liabilities, excluding loans and borrowings. Working capital at December 31, 2017 was $69.8 million compared to $40.7 million at December 31, 2016, an increase of $29.1 million. The increase in working capital was primarily due to the an increase in receivables corresponding with the increase in revenue recorded in the quarter, as well as the longer term receivables generated by Modular Solutions contracts. (3) Calculated as available bank lines less drawings on credit facility. Effective May 3, 2017, Horizon North reached agreement with its lenders to amend the credit facility. The maturity date was extended one year to March 31, 2019 to provide certainty with respect to borrowing capacity as the Corporation evaluates its capitalization and debt structure through 2017. Management initiated a reduction of total borrowing capacity from $200.0 million to $150.0 million to save standby fees. The credit facility has an available limit of $150.0 million and is secured by a $400.0 million first fixed and floating charge debenture over all assets of the Corporation and its wholly-owned subsidiaries. The interest rate is calculated on a grid pricing structure based on the Corporation’s debt to EBITDAS ratio. Debt to EBITDAS is calculated as at the quarter end for the most recently completed calendar quarter and for the 12 months ended on such date. Amounts drawn on the credit facility incur interest at bank prime rate plus 0.50% to 2.25% or the Bankers’ Acceptance rate plus 1.50% to 3.25%. The credit facility has a standby fee ranging from 0.34% to 0.73%. Page | 19 December 31,December 31,Summary of cash flows (000’s)20172016Operating activities$14,726 $32,280 Investing activties(2,553) (35,159) Financing activities(12,173) 2,879 Change in cash position $- $- December 31,December 31,Working capital position (000’s)20172016Current assets$114,694 $72,723 Current liabilities excluding loans and borrowings(1)44,944 31,977 Working capital(2)$69,750 $40,746 December 31,December 31,Borrowing capacity (000’s)20172016Bank borrowing:Available credit facility $150,000 $200,000 Drawings on credit facility73,016 75,268 Borrowing capacity(3)$76,984 $124,732 Management’s Discussion and Analysis Three months and years ended December 31, 2017 and 2016 The Maximum Senior Debt to Consolidated EBITDAS ratio covenants were amended as follows: ▪ ▪ ▪ ▪ 4.25:1.00 for quarter ending December 31, 2017 3.50:1.00 for quarter ending March 31, 2018 3.25:1.00 for quarter ending June 30, 2018 3.00:1.00 for quarters ending September 30, 2018 and thereafter As at December 31, 2017, the Corporation was in compliance with all financial and non-financial covenants as shown below: Debt Covenants Maximum Consolidated Senior debt (1) to Consolidated EBITDAS ratio (3)(4) (must be 4.25:1.00 or less) Maximum Consolidated Total debt (2) to Consolidated EBITDAS ratio (3)(5) (must be 4.25:1.00 or less) Minimum Consolidated Interest coverage ratio(6) (must be 3.00:1.00 or more) Covenants December 31, 2017 2.43:1.00 2.48:1.00 9.71:1.00 (1) (2) (3) (4) (5) (6) Senior debt is calculated as the sum of current and long-term portions of loans and borrowings less vehicle and equipment financing. Total debt is calculated as the sum of current and long-term portions of loans and borrowings. EBITDAS (Earnings before interest, taxes, depreciation, amortization, impairment, gain/loss on disposal of property, plant and equipment, and share based compensation) is not a recognized measure under International Financial Reporting Standards. Management believes that in addition to net earnings, EBITDAS is a useful supplemental measure as it provides an indication of the Corporation’s ability to generate cash flow in order to fund working capital, service debt, pay current income taxes and fund capital programs, and it is regularly provided to and reviewed by the Chief Operating Decision Maker. Horizon North’s method of calculating EBITDAS may differ from other entities and accordingly, EBITDAS may not be comparable to measures used by other entities. Senior debt to EBITDAS is calculated as the ratio of senior debt to trailing 12 months EBITDAS. Total debt to EBITDAS is calculated as the ratio of total debt to trailing 12 months EBITDAS. Interest coverage is calculated as the ratio of trailing 12 months EBITDAS to 12 months trailing interest expense on loans and borrowings. Capital Spending For the three months ended December 31, 2017, gross capital spending was $4.9 million compared to $12.4 million in the same period of 2016. Capital spending in Q4 2017 was mainly focused on maintenance capital, augmenting the access mat fleet as a result of higher utilization during Q4 2017, and the set-up capital related to the mobilization and commissioning of a camp facility. Management evaluates and manages its capital spending plans taking into account proceeds from the sale of property, plant and equipment, resulting in net proceeds from disposals of $1.6 million for 2017 compared to $7.7 million of net capital spending for 2016. For the twelve months ended December 31, 2017, gross capital spending was $20.1 million compared to $30.3 million in 2016 as a result of a focused and disciplined 2017 capital program. Capital spending during the year was mainly focused on maintenance capital, service equipment and fulfilling land improvement commitments related to the Kitimat, British Columbia property in preparation for future development. Management evaluates and manages its capital spending plans taking into account proceeds from the sale of property, plant and equipment, resulting in net proceeds from disposals for 2017 of $23.8 million compared to $18.7 million in net capital spending for 2016. The net proceeds in 2017 mainly related to the insurance claim for the loss of the Blacksand Executive Lodge, and the proceeds for the sale of 450 person camp facility received in Q2 2017. Horizon North does not currently have any material capital commitments associated with contracts to supply equipment or to purchase property, plant and equipment. Capital spending was funded primarily from cash from operations and the credit facility. Page | 20 Management’s Discussion and Analysis Three months and years ended December 31, 2017 and 2016 Quarterly Summary of Results Historically, Horizon North has been primarily a provider of products and services to the resource sector with its performance associated with the fluctuations in commodity pricing and activity levels in that sector. The previous eight quarters have been significantly impacted by reduced demand and downward pricing pressure. The allocation of manufacturing resources between external projects and internal fleet requirements along with the time and costs required to deploy camp and catering fleet assets significantly affect the timing of revenues between the quarters and impact performance. Although there is some seasonality with the first quarter generally stronger, this effect can be muted or compounded by the other factors. Trending in the Industrial Services segment was impacted by the Fort McMurray, Alberta wildfires in May 2016 and the loss of the Blacksand Executive Lodge, the acquisition of Empire Camp Services Ltd in Q3 2016, as well as a sale of a 450 bed camp facility in Q2 2017. Horizon North has transitioned away from traditional camp manufacturing by focusing the manufacturing infrastructure on permanent modular construction. This diversification strategy is intended to decrease the dependence on the resource sector and provide a smoother and more reliable business operation. The strategic initiative of business transformation was a high priority in 2016, including the acquisition of Karoleena Inc. in Q2 2016, continuing and building in 2017. Page | 21 Year to date MarchJune SeptemberDecemberDecember(000’s except per share amounts)20172017201720172017Revenue$70,488 $91,647 $79,283 82,664 $324,082 EBITDAS8,254 8,571 6,434 6,786 30,045 Operating earnings (loss)8,153 (2,500) (7,514) (4,074) (5,935) Total profit (loss)5,140 (2,949) (6,149) (3,885) (7,843) Total comprehensive income (loss)5,140 (2,950) (6,144) (3,892) (7,846) Earnings per share – basic$0.04 $(0.02) $(0.04) (0.03) $(0.05) Earnings per share – diluted$0.04 $(0.02) $(0.04) (0.03) $(0.05) Year ended MarchJuneSeptemberDecemberDecember (000’s except per share amounts)20162016201620162016Revenue$77,909 $52,509 $60,097 $60,420 $250,935 EBITDAS13,236 3,690 7,126 4,609 28,661 Operating earnings (loss)179 (9,358) (4,721) (8,304) (22,204) Total loss(256) (7,982) (4,863) (7,215) (20,316) Total comprehensive loss(325) (7,984) (4,860) (7,214) (20,383) Loss per share – basic$- $(0.06) $(0.04) $(0.05) $(0.15) Loss per share – diluted$- $(0.06) $(0.04) $(0.05) $(0.15) Three months endedThree months ended Management’s Discussion and Analysis Three months and years ended December 31, 2017 and 2016 Risks and Uncertainties Volatility of Oil, Natural Gas and Mining Industry Conditions The demand, pricing and terms for Horizon North’s products and services depend upon the level of industry activity for oil, natural gas and mineral exploration and development in the western Canadian provinces and territories. Industry conditions are influenced by numerous factors over which Horizon North has no control, including: oil, natural gas and mineral prices; expectations about future oil, natural gas and mineral prices; the cost of exploring for, producing and delivering oil, natural gas and minerals; the expected rates of declining current production; the discovery rates of new oil, natural gas and mineral reserves; available pipeline and other oil, natural gas transportation capacity; demand for oil, natural gas and minerals; weather conditions; global political, military, regulatory and economic conditions; and the ability of oil, natural gas and mining companies to raise equity capital or debt financing for exploration and development work. Current global economic events and uncertainty have the potential to significantly impact commodity pricing, changing the economic feasibility of industry development projects. No assurance can be given that expected trends in oil, natural gas and mineral production activities will continue or that demand for services provided by Horizon North will reflect the level of activity in the industry. Any prolonged substantial reduction in oil, natural gas, and mineral prices would likely affect activity levels in these industries and therefore affect the demand for the services provided by Horizon North. Competition Horizon North provides products and services to oil, natural gas and mineral exploration and production companies in the western Canadian provinces and northern territories. The service businesses in which Horizon North operates are highly competitive. To be successful, Horizon North has to provide services that meet the specific needs of its clients at competitive prices. The principal competitive factors in the markets in which Horizon North operates are service, quality, availability, reliability and performance of equipment used to perform its services, technical knowledge and experience, safety records and ongoing safety programs and price. Horizon North competes with several competitors, which offer similar services in geographic areas in which Horizon North operates. As a result of competition, Horizon North’s business, financial condition and results of operations could be adversely affected. Reduced levels of activity in the oil and natural gas and mining industries can intensify competition and result in lower revenue to Horizon North. Variations in the exploration and development budgets of oil and natural gas and mining companies, which are directly affected by fluctuations in energy prices and mineral prices, the cyclical nature and competitiveness of the oil and natural gas and mining industries and governmental regulation, will have an effect upon Horizon North’s ability to generate revenue and earnings. Horizon North’s pursuit of opportunities in permanent modular construction is in competition with other modular builders as well as traditional site built providers. To be successful, Horizon North must demonstrate the value proposition of modular construction and successfully execute projects. Credit Risk A substantial portion of Horizon North’s trade and other accounts receivable are with customers involved in the oil, natural gas and mining industries, whose revenues may be impacted by fluctuations in commodity prices. Collection of these receivables could be influenced by economic factors affecting the oil and natural gas and mining industries. Many of the Corporation’s customers require reasonable access to credit facilities and debt capital markets to finance their projects. If the availability of credit to the Corporation’s customers is reduced, they may reduce their expenditures, thereby decreasing demand for the Corporation’s products and services. A reduction in spending by the Corporation’s customers could adversely affect its operating results and financial condition. During the term of a contract, Horizon North may be required to use its working capital to fund project costs until payments are collected from the customer. A greater incidence of payment default by clients could result in a financial loss to the Corporation that could have a material adverse effect on its operating results and financial position. Page | 22 Management’s Discussion and Analysis Three months and years ended December 31, 2017 and 2016 Additional Funding Requirements Horizon North’s cash flow may not be sufficient to fund its ongoing activities at all times. From time to time, Horizon North may require additional financing. Failure to obtain such financing on a timely basis could cause Horizon North to miss certain acquisition opportunities or prevent further growth of its operations. If Horizon North’s revenues decrease, it will affect Horizon North’s ability to expend the necessary capital to maintain its operations. If Horizon North’s cash flow from operations is not sufficient to satisfy its capital expenditure requirements, there can be no assurance that additional debt or equity financing will be available to meet these requirements or terms acceptable to Horizon North. Labour Relations The largest component of Horizon North’s overall expenses is salaries, wages, benefits and payments to employees, agents and contractors. Any significant increase in these expenses could impact the financial results of Horizon North. In addition, Horizon North will be at risk if there are any labour disruptions. Horizon North believes that it has and will continue to foster a positive relationship with employees, agents and contractors. Agreements and Contracts The business operations of Horizon North depend on successful execution of contracts. The key factors which will determine whether a client will continue to use Horizon North will be service quality, availability, reliability and performance of equipment used to perform its services, technical knowledge, experience, safety record, ongoing safety programs and competitive pricing. There can be no assurance that Horizon North’s relationship with its customers will continue, and a significant reduction or total loss of the business from these customers, if not offset by sales to new or existing customers, could have a material adverse effect on Horizon North’s business, financial condition and results of operations. Significant Customers The Corporation had one major customer who generated 10% of total revenues in the twelve months of 2017 compared to one major customer who generated 11% in the twelve months of 2016. There can be no assurance that Horizon North’s relationship with its customers will continue, and a significant reduction or total loss of the business from these customers, if not offset by sales to new or existing customers, could have a material adverse effect on Horizon North’s business, financial condition and results of operations. Reliance on Key Personnel Horizon North’s success depends in large measure on certain key personnel. The loss of services of such key personnel could have a material adverse effect on Horizon North. Horizon North does not have key person insurance in effect for management. The contributions of these individuals to the immediate operations of Horizon North are likely to be of central importance. Investors must rely upon the ability, expertise, judgment, discretion, integrity and good faith of the management of Horizon North. Permits In most cases, permits issued by government agencies are required to build residential and commercial properties and to set up and operate remote work camp facilities. The issuance of permits is dependent upon water and waste treatment alternatives available, road traffic volumes and fire conditions in forested areas. Failure to receive or renew permits could have a negative impact on the business of the Camps & Catering segment and Modular Solutions. Government Regulation The operations of Horizon North are subject to a variety of federal, provincial and local laws of Canada, including laws and regulations relating to health and safety, the conduct of operations, the protection of the environment, the operation of equipment used in its operations and the transportation of materials and equipment it provides for its customers. Horizon North invests financial and managerial resources to ensure such compliance. Although such expenditures are generally not material to service providers, such laws or regulations are subject to change. Accordingly, it is impossible for Horizon North to predict the cost or impact of such laws and regulations on its future operations. Page | 23 Management’s Discussion and Analysis Three months and years ended December 31, 2017 and 2016 Environmental Regulation The Government of Canada and provincial governments in areas where Horizon North does business have been working through various forms of regulation and legislation focused on climate change and greenhouse gas emissions. Future federal legislation, together with provincial emission reduction requirements may require the reduction of emissions or emissions intensity from Horizon North’s operations and facilities and those of its customers. A number of Horizon North’s customers are involved in the oil and natural gas exploration and development industry, with specific focus on oil sands related projects. Focus and scrutiny has recently intensified on oil sands development, which could lead to incremental environmental regulation or legislation. Potential changes in requirements may result in increased operating costs and capital expenditures for oil and natural gas and mining industry participants, thereby delaying or decreasing the demand for Horizon North’s services. Management is unable to predict the impact of potential emissions targets and it is possible that changes could adversely affect Horizon North’s business, financial condition and results of operations. These regulations would likely result in higher operating costs for our customers in the region, putting further pressure on project economics, and may also impair Horizon North’s ability to provide its services economically. Merger and Acquisition Activity Horizon North considers acquisitions of complementary businesses and assets a part of the Corporation’s business strategy. Achieving the benefits of acquisitions depends in part on: the acquired assets performing as expected, successfully realizing synergies, retaining key employees and customer relationships and integrating operations in a timely and efficient manner. Such integration may require substantial management effort, time, resources and may divert management’s focus. Any acquisition could have a material adverse effect on operating results, financial condition and the price of the Corporation’s securities. Aboriginal & Community Relations A component of Horizon North’s business strategy is based on developing and maintaining positive relationships with the Aboriginal people and communities in the areas where Horizon North operates. These relationships are important to Horizon North’s operations and customers who desire to work on traditional Aboriginal lands. The inability to develop and maintain relationships and to be in compliance with local requirements could adversely affect Horizon North’s business strategy, growth and profitability. Seasonal Operations Each of Horizon North’s businesses are affected by the seasonality associated with western Canadian oil and natural gas drilling industry. The Camps & Catering segment is exposed to seasonality where the busiest months are January through March and the slowest months are April through September. The Rentals & Logistics segment is typically busiest in the spring and summer months of April through September when soft ground conditions hinder the movement of heavy equipment. The Modular Solutions segment is not impacted by seasonality. Business Continuity, Disaster Recovery and Crisis Management In the event of a serious incident, the inability to restore or replace critical capacity in a timely manner may impact Horizon North’s business and operations. A serious incident could therefore have a material adverse effect on Horizon North’s business, financial condition and results of operations. In the event of a major disaster, Horizon North has in place business continuity arrangements, including disaster recovery plans and insurance coverage to minimize any losses. Page | 24 Management’s Discussion and Analysis Three months and years ended December 31, 2017 and 2016 Cyber Security Horizon North manages cyber security risk by ensuring appropriate technologies, processes and practices are effectively designed and implemented to help prevent, detect and respond to threats as they emerge and evolve. The primary risks to Horizon North include, loss of data, destruction or corruption of data, compromising of confidential customer or employee information, leaked information, disruption of business, theft or extortion of funds, regulatory infractions, loss of competitive advantage and reputational damage. Horizon North applies technical and process controls in line with industry-accepted standards to protect its information assets and systems. Data backup and recovery processes are in place to minimize risk of data loss and resulting disruption of business. Through ongoing vigilance and regular employee awareness, Horizon North has not experienced a cyber security event of a material nature. As it is difficult to quantify the significance of such events, cyber-attacks such as, security breaches of Corporation, customer, employee, and vendor information, as well as hardware or software corruption, failure or error, telecommunications system failure, service provider error, intentional or unintentional personnel actions, malicious software, attempts to gain unauthorized access to data and other electronic security breaches that could lead to disruptions in systems, unauthorized release of confidential or otherwise protected information and the corruption of data, may in certain circumstances be material and could have an adverse effect on Horizon North’s business, financial condition and results of operations. As result of the unpredictability of the timing, nature and scope of disruptions from such attacks, Horizon North could potentially be subject to: operational delays, the compromising of confidential or otherwise protected information, destruction or corruption of data, security breaches, other manipulation or improper use of its systems and networks or financial losses, any of which could have a material adverse effect on Horizon North’s reputation and competitive position, financial condition or results of operations. Other Risks Due to the nature of Horizon North’s business, it is subject to a number of regulations, environmental laws and risks associated with lawsuits arising from accidents and claims. Horizon North manages these risks through a combination of quality management, training and by securing insurance coverage to protect the assets of Horizon North in the event of litigation. Changes in Accounting Policies Horizon North’s IFRS accounting policies are provided in note 3 to the Consolidated Financial Statements as at the years ended December 31, 2017 and 2016. As at December 31, 2017, Horizon North updated its accounting policies to include a policy on assets held for sale and provided an update on the new standards not yet adopted IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers transition. The details are provided in note 3 of the Consolidated Financial Statements as at December 31, 2017. Critical Accounting Estimates and Judgments This MD&A of the Corporation’s financial condition and results of operations is based on its consolidated financial statements which are prepared in accordance with International Financial Reporting Standards (IFRS). The presentation of these financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of provisions at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. These estimates and judgments are based on historical experience and on various assumptions that are believed to be reasonable under the circumstances. Anticipating future events cannot be done with certainty, therefore these estimates may change as new events occur, more experience is acquired and as the Corporation’s operating environment changes. The accounting estimates believed to be the most difficult, subjective or complex are the most critical to the reporting of results of operations and financial positions. They are as follows: Revenue recognition The Corporation uses the percentage-of-completion method in accounting for its construction contract revenue. Use of the percentage-of-completion method requires estimates of the stage of completion of the contract to date as a proportion of the total contract work to be performed in accordance with the accounting policy set out in the notes to the consolidated financial statements. Page | 25 Management’s Discussion and Analysis Three months and years ended December 31, 2017 and 2016 Construction Receivable Estimate The Corporation recognizes that the value of many construction contracts increases over the duration of the construction period. Change orders may be issued by customers to modify the original contract scope of work or certain conditions may result in possible disputes or claims regarding additional amounts owing may arise. Construction work related to a change order or claim may proceed, and costs may be incurred, in advance of final determination of the value of the change order. As many change orders and claims may not be settled until the end of the construction project, significant increases or decreases in revenue and income may arise during any particular accounting period. Collectability of receivables The Corporation estimates the collectability of accounts receivable, including unbilled accounts receivable related to current period service revenue. An analysis of historical bad debts, client credit-worthiness, the age of accounts receivable and current economic trends and conditions are used to evaluate the adequacy of the allowance for doubtful accounts and the collectability of receivables. Significant estimates must be made and used in connection with establishing the allowance for doubtful accounts in any accounting period. Material differences may result if management made different judgments or utilized different estimates. Asset Retirement Obligation The Corporation recognizes an asset retirement obligation (“ARO”) to account for future demobilization and reclamation of specific camps. Use of an ARO requires estimates of the asset retirement costs, timing of payments, present value discount rate and inflation rate to determine the amount recognized, in accordance with the accounting policy set out in the notes to the Consolidated Financial Statements. Impairment Impairment exists when the carrying value of an asset or cash generating unit (“CGU”) exceeds its recoverable amount, which is the higher of its fair value less costs of disposal (“FVLCOD”) and its value in use (“VIU”). The FVLCOD calculation is based on available data from binding sales transactions, conducted at arm’s length, for similar assets or observable market prices less incremental costs for disposing of the asset. If no such transactions can be identified, an appropriate valuation model is used. The VIU calculation is based on a discounted cash flow model. The cash flows are derived from the Corporation’s forecast and do not include restructuring activities that the Corporation is not yet committed to or significant future investments that will enhance the asset’s performance of the CGU being tested. The recoverable amount is sensitive to the discount rate used for the discounted cash flow model as well as the expected future cash-inflows and the growth rate used for extrapolation purposes. The Corporation is required to make a judgment regarding the need for impairment at each reporting date by evaluating conditions specific to the organization that may lead to the impairment of assets. Purchase price equations The acquired assets and assumed liabilities are generally recognized at fair value on the date the Corporation obtains control of a business. The measurement of each business combination is based on the information available on the acquisition date. The estimate of fair value of the acquired intangible assets and other assets and the liabilities are largely based on projected cash flows, discount rates and market conditions at the date of acquisition. The estimate of fair value of property, plant and equipment is based on available data from comparable sales transactions. Financial Instruments and Risk Management (a) Overview The Corporation is exposed to a number of different financial risks arising from the normal course of business operations as well as through the Corporation’s financial instruments comprised of cash and cash equivalents, trade and other receivables, trade and other payables, and loans and borrowings. These risk factors include credit risk, liquidity risk, and market risk, including currency exchange risk and interest rate risk. The Corporation’s risk management practices include identifying, analyzing and monitoring the risks faced by the Corporation. The following presents information about the Corporation’s exposure to each of the risks and the Corporation’s objectives, policies and processes for measuring and managing risk. Page | 26 Management’s Discussion and Analysis Three months and years ended December 31, 2017 and 2016 (b) Credit risk Credit risk is the risk that a customer will be unable to pay amounts due causing a financial loss. The Corporation’s practice is to manage credit risk by examining each new customer individually for credit worthiness before the Corporation’s standard payment terms are offered. The Corporation’s review may include financial statement review, credit references, or bank references. Customers that lack credit worthiness transact with the Corporation on a prepayment only basis. The Corporation constantly monitors individual customer trade receivables and accrued revenue, taking into consideration industry, aging profile, maturity, payment history and existence of previous financial difficulties in assessing credit risk. A formal review is performed each month for each subsidiary, focusing on amounts in trade receivable and accrued revenue which have been outstanding for periods which are considered abnormal for each customer. The Corporation establishes an allowance for doubtful accounts for specifically identifiable customer balances which are assessed to have credit risk exposure. The following shows the aged balances of trade and other receivables: In the twelve months ended December 31, 2017, the Corporation provided an allowance for $2,965,000 of receivables aged greater than 90 days and collected $454,000 that had previously been allowed for. The Corporation also applied $20,000 of allowance for doubtful accounts against the associated receivable balance. As at March 13, 2018, the Corporation has collected $2,484,000 on amounts outstanding more than 90 days. Construction receivables represent progress billings to customers under open construction contracts, holdback amounts billed on construction contracts which are not due until the contract work is substantially completed, amounts recognized as revenue under open construction contracts not billed to customers and highly probable claims. At December 31, 2017, included in construction receivables were holdbacks of $209,000 (2016 - $7,900). Page | 27 December 31,December 31,(000’s)20172016Trade receivables Neither impaired nor past due$ 23,161 $ 22,066 Outstanding 31-60 days 11,820 6,522 Outstanding 61-90 days 2,221 1,750 Outstanding more than 90 days 7,267 3,401 Total trade receivables$ 44,469 $ 33,739 Construction receivables Neither impaired nor past due$ 18,655 $ 2,369 Outstanding 31-60 days 918 25 Outstanding 61-90 days - 1,053 Outstanding more than 90 days 14,006 434 Total construction receivables$ 33,579 $ 3,881 Accrued revenue 12,953 10,058 Accrued construction revenue 9,695 3,361 Other receivables 1,034 6,548 Allowance for doubtful accounts (2,965) (1,043)Total trade and other receivables$ 98,765 $ 56,544 Management’s Discussion and Analysis Three months and years ended December 31, 2017 and 2016 (c) Liquidity risk Liquidity risk is the risk that the Corporation will encounter difficulty in meeting obligations associated with financial liabilities. The Corporation believes that it has access to sufficient capital through internally generated cash flows and committed credit facilities to meet current spending forecasts. To manage liquidity risk, the Corporation forecasts operational results and capital spending on a regular basis. Actual results are compared to these forecasts to monitor the Corporation’s ability to continue to meet spending forecasts. The following shows the timing of cash outflows relating to trade and other payables and loans and borrowings: (1) Trade and other payables include trade and other payables, income taxes payable, and provisions. (2) Loans and borrowings include non-interest bearing notes payable and Horizon North’s senior secured revolving term credit facility. Cash flows of Horizon North’s note payable have been recorded according to estimated utilization of specific equipment. (d) Market risk Market risk is the risk or uncertainty arising from possible market price movements and their impact on future performance of the Corporation. The market price movements that could adversely affect the value of the Corporation’s financial assets, liabilities and expected future cash flows include foreign currency exchange risk and interest rate risk. As the Corporation’s exposure to foreign currency exchange risk and interest rate risk is limited, the Corporation does not currently hedge its financial instruments. (i) Foreign currency exchange risk The Corporation has limited exposure to foreign currency exchange risk as sales and purchases are typically denominated in CAD. The Corporation’s exposure to foreign currency exchange risk arises from the purchase of some raw materials, which are denominated in USD, and foreign operations with USD functional currency. As the foreign currency exchange risks are primarily based on the realized foreign exchange, the following sensitivity analysis is to determine the impact on cash used in operating activities. The effect of a $0.01 increase in the USD/CAD exchange rate would decrease cash used in operating activities for the twelve months ended December 31, 2017 by approximately $77,000 (the twelve months ended December 31, 2016 - $26,000). This assumes that the quantity of USD raw material purchases and the foreign operations in the year remain unchanged and that the change in the USD/CAD exchange rate is effective from the beginning of the year. (ii) Interest rate risk The Corporation is exposed to interest rate risk as changes in interest rates may affect interest expense and future cash flows. The primary exposure is related to the Corporation’s revolving credit facility which bears interest at a rate of prime plus 0.5% to 2.25%. If prime were to have increased by 1.00%, it is estimated that the Corporation’s net earnings would have decreased by approximately $700,000 for the twelve months ended December 31, 2017 (the twelve months ended December 31, 2016 - $687,000). This assumes that the amount and mix of fixed and floating rate debt in the year remains unchanged and that the change in interest rates is effective from the beginning of the year. Page | 28 Trade andTrade andLoans andother payables(1)other payables(1)borrowings(2)Year 1 $ 37,936 $ - $ 30,200 $ - Year 2 - 73,016 3,248 75,268 Year 3 6,276 - - - Year 4 - - 3,121 - Year 5 and beyond 4,941 - 5,048 - $ 49,153 $ 73,016 $ 41,617 $ 75,268 December 31, 2017December 31, 2016Loans and borrowings(2) Management’s Discussion and Analysis Three months and years ended December 31, 2017 and 2016 Outstanding Shares Horizon North had 145,341,118 voting common shares issued and outstanding and exercisable options to purchase 5,170,048 shares for a total potential of 150,511,166 shares as at March 13, 2018. Off-Balance Sheet Financing Horizon North has no off-balance sheet financing. Subsequent Event On January 8, 2018, the Corporation completed an asset purchase for a 288 person camp facility south of Fort McMurray, Alberta for a total purchase price of $14.0 million. Management’s Report on Disclosure Controls and Procedures and Internal Control over Financial Reporting Disclosure Controls and Procedures Disclosure controls and procedures (DC&P) are designed to provide reasonable assurance that all relevant information is gathered and reported to management, including the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), on a timely basis so that appropriate decisions can be made regarding public disclosure. As at December 31, 2017, an evaluation was carried out, under the supervision of the CEO and the Senior Vice President Finance and CFO, of the effectiveness of the design and operation of Horizon North’s DC&P as defined by National Instrument 52-109, Certification of Disclosure in Issuers’ Annual and Interim Filings. Based on this evaluation, the CEO and Senior Vice President Finance and CFO have concluded that, as at December 31, 2017, Horizon North’s DC&P, as defined by National Instrument 52- 109, Certification of Disclosure in Issuers’ Annual and Interim Filings, were effective. Throughout 2018, Horizon North will continue to evaluate its DC&P making modifications from time-to-time as deemed necessary. There were no changes in Horizon North’s DC&P that occurred during the period ended December 31, 2017 that have materially affected, or are reasonably likely to materially affect, Horizon North’s DC&P. Internal Controls over Financial Reporting Internal controls over financial reporting (ICFR) are designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with IFRS. Management is responsible for establishing and maintaining adequate ICFR. Horizon North’s ICFR include, but are not limited to, policies and procedures addressing: • the maintenance of records that provide reasonable assurance that transactions are recorded as necessary to permit preparation of the financial statements in accordance with IFRS; • receipts and expenditures are being made only in accordance with authorizations of management and directors; • maintenance of records in reasonable detail to accurately and fairly reflect transactions and disposition of assets; and • reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on annual and interim consolidated financial statements. Because of inherent limitations, ICFR can only provide reasonable assurance and may not prevent or detect all misstatements. Additionally, projections of an evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate. As at December 31, 2017, an evaluation was carried out, under the supervision of the CEO and the Senior Vice President Finance and CFO, of the effectiveness of Horizon North’s ICFR based on the framework and criteria established in Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 2013. Page | 29 Management’s Discussion and Analysis Three months and years ended December 31, 2017 and 2016 Based on this evaluation, management concluded that the design and operating effectiveness of Horizon North’s ICFR was effective as of December 31, 2017. Throughout 2018, Horizon North will continue to evaluate its ICFR making modifications from time-to-time as deemed necessary. There were no changes in Horizon North’s ICFR that occurred during the period ended December 31, 2017 that have materially affected, or are reasonably likely to materially affect, Horizon North’s ICFR. Limitations on the Effectiveness of Disclosure Controls and Procedures and Internal Control over Financial Reporting Because of their inherent limitations, DC&P and ICFR may not prevent or detect misstatements, errors or fraud. Control systems, no matter how well conceived or implemented, can provide only reasonable, not absolute, assurance that the objectives of the control systems are met. Non-GAAP measures Certain measures in this MD&A do not have any standardized meaning as prescribed by generally accepted accounting principles (“GAAP”) and, therefore, are considered non-GAAP measures. These measures are regularly reviewed by the Chief Operating Decision Maker and provide investors with an alternative method for assessing the Corporation’s operating results in a manner that is focused on the performance of the Corporation’s ongoing operations and to provide a more consistent basis for comparison between periods. These measures should not be construed as alternatives to total profit and total comprehensive income determined in accordance with GAAP as an indicator of the Corporation’s performance. The method of calculating these measures may differ from other entities and accordingly, may not be comparable to measures used by other entities. The following non-GAAP measures are used to monitor the Corporation’s performance: EBITDAS: Earnings before interest, taxes, depreciation, amortization, impairment, gain/loss on disposal of property, plant and equipment and share based compensation (“EBITDAS”). Management believes that in addition to total profit and total comprehensive income, EBITDAS is a useful supplemental measure as it provides an indication of the Corporation’s ability to generate cash flow in order to fund working capital, service debt, pay current income taxes and fund capital programs, and it is regularly provided to and reviewed by the Chief Operating Decision Maker. Debt to total capitalization: Calculated as the ratio of debt to total capitalization. Debt is defined as the sum of current and long-term portions of loans and borrowings. Total capitalization is calculated as the sum of debt and shareholders’ equity. Reconciliation of non-GAAP measures The following provides a reconciliation of non-GAAP measures to the nearest measure under GAAP for items presented throughout the MD&A. EBITDAS Page | 30 (000’s)2017201620172016Total loss $ (3,885) $ (7,215) $ (7,843) $ (20,316)Add: Share based compensation 361 847 1,174 1,651 Depreciation & amortization 10,445 13,297 43,443 49,840 Impairment loss on re-measurment of assets held for sale - - 3,457 - (Gain) loss on disposal of property, plant and equipment 54 (1,231) (12,094) (626)Finance costs 533 672 2,824 2,407 Loss (earnings) on equity investments (105) 78 - (126)Income tax recovery (617) (1,839) (916) (4,169)EBITDAS $ 6,786 $ 4,609 $ 30,045 $ 28,661 Twelve months ended December 31,Three months ended December 31, Management’s Discussion and Analysis Three months and years ended December 31, 2017 and 2016 Related Parties The Corporation earned a management fee for the year ended December 31, 2017 of $60,000 (2016 - $60,000) for the recovery of administrative overhead related to accounting and management services provided to Arctic Oil & Gas Services Ltd (“AOGS”), a joint venture that was 50% owned by the Corporation. As at December 31, 2017, the Corporation sold the 50% investment in AOGS for total consideration of $1. AOGS earned revenue during the year ended December 31, 2017 of $1,116,000 (2016 – $1,319,000) for catering services provided to E. Gruben’s Transport Ltd, of which a director of the Corporation is the Chief Executive Officer. The amounts included in trade receivables of AOGS as at December 31, 2017 is $140,000 (2016 – $nil). The Corporation earned revenue during the year ended December 31, 2017 of $148,000 (2016 – $1,000) for catering services provided to Trican Well Service Ltd., of which a director of the Corporation is a director. There were no amounts included in trade receivables as at December 31, 2017 (2016 - $nil). All related party transactions are in the normal course of operations and have been measured at the agreed exchange amounts, which is the amount of consideration established and agreed to by the related parties and is similar to those negotiated with third parties. All outstanding balances are to be settled with cash, and none of the balances are secured. Advisories This Management’s Discussion and Analysis, prepared as at March 13, 2018 focuses on key statistics from the Consolidated Financial Statements and pertains to known risks and uncertainties relating to the business carried on by Horizon North. This discussion should not be considered all-inclusive, as it does not attempt to include changes that may occur in general economic, political and environmental conditions. Additional information related to the Corporation, including the Corporation’s annual information form, is available on SEDAR at www.sedar.com. Unless otherwise indicated, the Consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards and the reporting currency is in Canadian dollars. Caution Regarding Forward-Looking Statements and Information Certain statements contained in this MD&A constitute forward-looking statements or information (“forward-looking statements”). These statements relate to future events or future performance of Horizon North. All statements other than statements of historical fact are forward-looking statements. The use of any of the words “anticipate”, “plan”, “continue”, “estimate”, “expect”, “may”, “will”, “project”, “predict”, “potential”, “should”, “believe” and similar expressions are intended to identify forward-looking statements. In particular, such forward-looking statements include: Under the heading “Outlook” the statement that: “Horizon North’s focus in 2018 will continue to be on building out and expanding on initiatives started in 2017, initiatives intended to strengthen and diversify the Industrial Services business. For 2018, Horizon North expects the revenue and EBITDAS momentum seen in Q4 2017 to continue with the Industrial Services business anticipating moderate strengthening of activity levels as compared to 2017. Although commodity prices have shown some stability, Horizon North does not expect to see any significant strengthening in pricing from 2017 levels and will continue to focus on cost control to improve EBITDAS levels. The Modular Solutions business exited 2017 with a significant backlog and is anticipated to have positive EBITDAS in 2018 through improving efficiencies as the production rate increases to execute on backlog. Page | 31 December 31,December 31,(000's)20172016Joint venture Recovery of administrative overhead$ 60 $ 60 Included in accounts receivable - 23 Key management personnel interests Sales$ 1,264 $ 1,320 Included in accounts receivable 140 - Management’s Discussion and Analysis Three months and years ended December 31, 2017 and 2016 The Industrial Services business will be focused on continuing to build-out and expand on the three phase strategy initiated in 2017: • • • Leverage the Aboriginal relationships entered into in the second half of 2017 which cover regions north and south of Fort McMurray, Alberta. A significant project undertaken in the second half of 2017 has shown the potential of this region and 2018 is expected to bring several similar projects; Focus on the Grande Prairie, Alberta region through securing strategic land locations positioning Horizon North to participate fully in the continued high activity levels expected in the conventional W5/W6 market; and Grow Horizon North’s presence in the mining sector, specifically on developing opportunities in northern Canada where Horizon North has a strong track record. Late in 2014 Horizon North under took several initiatives to develop and secure suitable land positions near proposed LNG project sites on British Columbia’s west coast. Horizon North maintained a longer term view of LNG development and continued these initiatives, completing the development of its land asset in Kitimat and building strong relationships with regional First Nations and the municipality. Given the recent renewed potential of LNG projects, Horizon North is now well positioned to take full advantage of opportunities as they arise. The Modular Solutions business is expected to continue its growth based on a strengthening backlog and high quality opportunity pipeline which is underpinned largely by social infrastructure and affordable housing projects, a focus by all levels of government. The backlog and opportunity pipeline are providing a higher level of visibility to the business requiring an increase in labour force at our Kamloops, British Columbia manufacturing facility to achieve a critical mass of scale and manufacturing throughput. Horizon North anticipates that Modular Solutions will continue its trend of earnings improvement and contribute positive EBITDAS throughout 2018 as increased volumes drive improved economies of scale. The strength of the Statement of Financial Position was a priority for Horizon North throughout 2017, and will continue to be a focus for 2018. Cost reduction measures across our operations and the continued centralization of certain general and administrative functions will drive improved cash flow through efficiencies. In addition to a limited and tightly managed capital program, 2018 will continue to assess Horizon North’s portfolio of assets to ensure a focus on core business lines. This combination of actions will help ensure the continued strength with respect to the financial position of Horizon North” Under the heading “Modular Solutions” the statement that: “The primary metric for Modular Solutions is the backlog of projects and timing of backlog execution. Currently, the focus for this business unit is to secure and increase backlog, which was $43.9 million at the end of December 2017 compared to $30.2 million at September 2017. With consistent backlog, revenues and plant efficiencies are expected to improve and generate more stable and predictable results.” The forward-looking statements and information are based on certain assumptions made by Horizon North which include, but are not limited to, assumptions relating to: • • • • • • • • • • • • • • • industry activity for oil, natural gas and mineral exploration and development in the western Canadian provinces and northern territories; commodity prices; capital investment in the Canadian oil and gas sector; dividend payments; anticipated activity levels for 2018; operational results and capital spending; anticipated backlog in the Modular Solutions business; trade and other receivables; future operating costs and Corporation’s access to capital; the effects of regulation by governmental agencies; the competitive environment in which the Corporation operates; the ability of the Corporation to attract and retain personnel; the development of LNG and commodity transportation infrastructure; the relationships between the Corporation and its customers; and general economic and financial conditions. Page | 32 Management’s Discussion and Analysis Three months and years ended December 31, 2017 and 2016 Although Horizon North believes that the expectations and assumptions on which the forward-looking statements are based are reasonable, undue reliance should not be placed on the forward-looking statements because Horizon North cannot give any assurance that they will prove to be correct. Since forward-looking statements address future events and conditions, by their very nature they involve inherent risks and uncertainties. Actual results could differ materially from those currently anticipated due to a number of known and unknown risks and uncertainties. Such risks and uncertainties include, but are not limited to, the following: • • • • • volatility in the price and demand for oil, natural gas and minerals; fluctuations in the demand for the Corporation’s services; availability of qualified personnel; changes in regulation by governmental agencies, including environmental regulation; and other factors listed under “Risks and Uncertainties” in this MD&A and other risk factors identified in the Corporation’s annual information form. Readers are cautioned that the foregoing list of risks and uncertainties is not exhaustive. Additional information on these and other risk factors that could affect Horizon North’s operations and financial results are included in Horizon North’s annual information form which may be accessed through the SEDAR website at www.sedar.com. In addition, the reader is cautioned that historical results are not indicative of future performance. The forward-looking statements and information contained in this MD&A are made as of the date hereof and Horizon North does not undertake any obligation to update publicly or revise any forward-looking statements and information, whether as a result of new information, future events or otherwise, unless so required by applicable securities laws. Certain information set out herein may be considered as “financial outlook” within the meaning of applicable securities laws. The purpose of this financial outlook is to provide readers with disclosure regarding Horizon North’s reasonable expectations as to the anticipated results of its proposed business activities for the periods indicated. Readers are cautioned that the financial outlook may not be appropriate for other purposes. Page | 33 Management’s Report to Shareholders The accompanying consolidated financial statements of Horizon North Logistics Inc. (“Horizon North” or the “Corporation”) have been approved by the Board of Directors (the “Board”) of Horizon North and have been prepared by management in accordance with International Financial Reporting Standards. Financial statements will, by necessity, include certain amounts based on estimates and judgments. The financial information contained throughout this report has been reviewed to ensure consistency with these consolidated financial statements. Management has overall responsibility for internal controls and maintains accounting systems designed to provide reasonable assurance that transactions are properly authorized, assets safeguarded and that the financial records form a reliable base for the preparation of accurate and timely financial information. The Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of disclosure controls and procedures and internal controls over financial reporting and have concluded that they are effective. The Board oversees the management of the business and affairs of Horizon North; including ensuring management fulfills its responsibilities for financial reporting and is ultimately responsible for reviewing and approving the financial statements. The Board carries out this responsibility principally through its Audit Committee, which consists of four independent directors. An independent firm of chartered accountants, appointed as external auditor by the shareholders, has audited the consolidated financial statements and its report is included herein. The Audit Committee has reviewed the consolidated financial statements with management and the external auditor. Rod Graham President and Chief Executive Officer March 13, 2018 Scott Matson Senior Vice President Finance and Chief Financial Officer Page | 34 KPMG LLP 205 5th Avenue SW Suite 3100 Calgary AB T2P 4B9 Telephone (403) 691-8000 Fax (403) 691-8008 www.kpmg.ca INDEPENDENT AUDITORS’ REPORT To the Shareholders of Horizon North Logistics Inc. We have audited the accompanying consolidated financial statements of Horizon North Logistics Inc., which comprise the consolidated statements of financial position as at December 31, 2017 and December 31, 2016, the consolidated statements of comprehensive loss, changes in equity and cash flows for the years then ended, and notes, comprising a summary of significant accounting policies and other explanatory information. Management’s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Horizon North Logistics Inc. as at December 31, 2017 and December 31, 2016, and its consolidated financial performance and its consolidated cash flows for the years then ended in accordance with International Financial Reporting Standards. Chartered Professional Accountants March 13, 2018 Calgary, Canada KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. KPMG Canada provides services to KPMG LLP. Page | 35 Consolidated statement of financial position The accompanying notes are an integral part of the consolidated financial statements. Ann Rooney Director Rod Graham Director Page | 36 December 31,December 31,(000’s)20172016AssetsCurrent assets:Trade and other receivables (Note 12)$98,765 $56,544 Inventories (Note 13)7,427 5,259 Prepayments5,437 3,958 Income taxes receivable3,065 6,962 Total current assets114,694 72,723 Non-current assets:Property, plant and equipment (Note 15)338,122 382,771 Intangible assets (Note 16)4,348 7,090 Goodwill (Note 16) 20,545 20,348 Other assets (Note 17)2,041 2,169 Total non-current assets365,056 412,378 Total assets$479,750 $485,101 Liabilities and Shareholders’ EquityCurrent liabilities:Trade and other payables$33,001 $28,535 Deferred revenue7,008 1,777 Current portion of asset retirement obligation (Note 19)3,347 1,665 Finance lease liabilities (Note 19)1,588 - Total current liabilities44,944 31,977 Non-current liabilities:Asset retirement obligations (Note 19)11,217 11,417 Loans and borrowings (Note 18)73,016 75,268 Deferred tax liabilities (Note 11)45,509 42,752 Total liabilities174,686 161,414 Shareholders’ equity:Share capital (Note 20)286,754 286,674 Contributed surplus16,181 15,465 Accumulated other comprehensive income761 764 Retained earnings1,368 20,784 Total shareholders’ equity305,064 323,687 Total liabilities and shareholders’ equity$479,750 $485,101 Consolidated statement of comprehensive loss Twelve months ended December 31, 2017 and 2016 The accompanying notes are an integral part of the consolidated financial statements. Page | 37 December 31,December 31,(000’s except per share amounts)20172016Revenue (Note 6)$324,082 $ 250,935 Operating expenses:Direct costs (Note 7)272,626 204,140 Depreciation (Note 15)40,701 48,848 Amortization of intangible assets (Note 16)2,742 992 Impairment loss on re-measurement of assets held for sale (Note 14)3,457 - Share based compensation (Note 20)659 690 Gain on disposal of property, plant and equipment (Note 15)(12,094) (626) Direct operating expenses (Note 7)308,091 254,044 Gross profit (loss)15,991 (3,109) Selling & administrative expenses:Selling & administrative expenses (Note 8)21,411 18,134 Share based compensation (Note 20)515 961 Selling & administrative expenses (Note 8)21,926 19,095 Operating loss(5,935) (22,204) Finance costs (Note 10)2,824 2,407 Earnings from equity investments - (126) Loss before tax(8,759) (24,485) Current tax recovery(3,673) (7,043) Deferred tax expense (Note 11)2,757 2,874 Income tax recovery (Note 11)(916) (4,169) Total loss(7,843) (20,316) Other comprehensive income:Translation of foreign operations (3)(67) Other comprehensive loss, net of income tax (3)(67) Total comprehensive loss $ (7,846) $ (20,383) Loss per share:Basic (Note 21)$(0.05) $ (0.15)Diluted (Note 21)$(0.05) $ (0.15) Consolidated statement of changes in equity The accompanying notes are an integral part of the consolidated financial statements. Page | 38 AccumulatedOtherShareContributedComprehensiveRetained(000’s)CapitalSurplusIncomeEarningsTotalBalance at December 31, 2015$265,867 $14,451 $831 $52,212 $333,361 Total loss - - - (20,316) (20,316) Share based compensation (Note 20)- 1,014 - - 1,014 Translation of foreign operations- - (67) - (67) Issue of share capital, on acquisition (Note 20)20,842 - - - 20,842 Share issue costs, net of tax (Note 20)(35) - - - (35) Dividends (Note 22)- - - (11,112) (11,112) Balance at December 31, 2016$286,674 $15,465 $764 $20,784 $323,687 Total loss - - - (7,843) (7,843) Share based compensation (Note 20)- 734 - - 734 Share options exercised (Note 20)80 (18) - - 62 Translation of foreign operations- - (3) - (3) Dividends (Note 22)- - - (11,573) (11,573) Balance at December 31, 2017 $ 286,754 $ 16,181 $ 761 $ 1,368 $ 305,064 Consolidated statement of cash flows Twelve months ended December 31, 2017 and 2016 The accompanying notes are an integral part of the consolidated financial statements. Page | 39 December 31,December 31,(000’s)20172016Cash provided by (used in):Operating activities:Loss for the period$(7,843) $(20,316) Adjustments for: Depreciation (Note 15)40,701 48,848 Amortization of intangible assets (Note 16)2,742 992 Share based compensation (Note 20)1,174 1,651 Amortization of other assets (Note 17)128 132 Gain on disposal of property, plant and equipment(12,094) (626) Book value of used fleet sales21,000 8,968 Earnings on equity investments- (126) Impairment loss on re-measurement of assets held for sale (Note 14)3,457 - Unrealized foreign exchange gain (loss)(5) (68) Finance costs (Note 10)2,824 2,407 Income tax recovery (Note 11)(916) (4,169) Funds from operations51,168 37,693 Asset retirement obligation settled (Note 19)(441) (1,501) Income taxes refunded7,570 3,635 Interest paid(2,989) (2,415) Changes in non-cash working capital items (Note 27)(40,582) (5,132) Net cash flows (used in) from operating activities14,726 32,280 Investing activities:Purchase of property, plant and equipment (Note 15)(15,596) (21,887) Proceeds on sale of property, plant and equipment13,240 15,183 Business acquisition, net of cash acquired (Note 5)(197) (28,455) Net cash flows from (used in) investing activities(2,553) (35,159) Financing activities:Shares issued- (47) Proceeds from shares issued on exercise of options (Note 20)62 - Finance lease liabilities 1,588 - (Repayment of) proceeds from loans and borrowings(2,252) 16,451 Payment of dividends (Note 22)(11,571) (13,525) Net cash flows (used in) from financing activities(12,173) 2,879 Change in cash position- - Cash, beginning of period- - Cash, end of period$- $- Notes to the consolidated financial statements Years ended December 31, 2017 and 2016 1. Reporting Entity Horizon North Logistics Inc. (“Horizon North” or the “Corporation”) is a corporation registered and domiciled in Canada and is a publicly-traded company, listed on the Toronto Stock Exchange under the symbol HNL. The Corporation’s registered offices are at 900, 240-4th Avenue SW, Calgary, AB T2P 4H4. The consolidated financial statements of the Corporation as at and for the year ended December 31, 2017 comprise the Corporation and its subsidiaries and the Corporation’s interest in associates and jointly controlled entities. Horizon North provides full service solutions in workforce accommodations and camp management, matting and soil stabilization, remote power and energy generation systems, and relocatable and permanent modular structures. The Corporation provides a full range of these services to clients in the energy, mining, forestry and construction sectors anywhere in Canada. 2. Basis of Presentation (a) Statement of compliance The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”). The consolidated financial statements were authorized for issue by the Board of Directors on March 13, 2018. (b) Basis of measurement The consolidated financial statements have been prepared using the historical cost basis. Certain prior period amounts have been amended to conform to current period presentation. (c) Functional and presentation currency These consolidated financial statements are presented in Canadian dollars, which is the Corporation and subsidiaries’ functional currency with the exception of a United States (“US”) operational entity which has a US dollar functional currency. (d) Use of estimates and judgments The preparation of financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. The judgments, estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual outcomes may differ from these estimates. The judgments, estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. The judgments, estimates and assumptions that have the most significant risk of causing a material adjustment to the carrying amounts of assets and liabilities recognized in the consolidated financial statements are as follows: Estimates • • Revenue Recognition Estimate – The Corporation uses the percentage-of-completion method in accounting for its construction contract revenue. Use of the percentage-of-completion method requires estimates of the stage of completion of the contract to date as a proportion of the total contract work to be performed in accordance with the accounting policy set out in Note 3(k)(iv). Construction Receivable Estimate – The Corporation recognizes that the value of many construction contracts increase over the duration of the construction period. Change orders may be issued by customers to modify the original contract scope of work or conditions resulting in possible disputes or claims regarding additional amounts owing may arise. Construction work related to a change order or claim may proceed, and costs may be incurred, in advance of final determination of the value of the change order. As many change orders and claims may not be settled until the end of the construction project, significant increases or decreases in revenue and income may arise during any particular accounting period. Page | 40 Notes to the consolidated financial statements Years ended December 31, 2017 and 2016 2. Basis of Presentation (continued) (d) Use of estimates and judgments (continued) Estimates (continued) • • • • Collectability of receivables – The Corporation estimates the collectability of accounts receivable, including unbilled accounts receivable related to current period service revenue. An analysis of historical bad debts, client credit-worthiness, the age of accounts receivable and current economic trends and conditions are used to evaluate the adequacy of the allowance for doubtful accounts and the collectability of receivables. Significant estimates must be made and used in connection with establishing the allowance for doubtful accounts in any accounting period. Material differences may result if management made different judgments or utilized different estimates. Asset Retirement Obligation (“ARO”) – The Corporation recognizes an asset retirement obligation to account for future demobilisation and reclamation of specific camps. Use of an ARO requires estimates of the asset retirement costs, timing of payments, present value discount rate and inflation rate to determine the amount recognized in accordance with the accounting policy set out in Note 3(j). Impairment – Impairment exists when the carrying value of an asset or cash generating unit (“CGU”) exceeds its recoverable amount, which is the higher of its fair value less costs of disposal (“FVLCOD”) and its value in use (“VIU”). The FVLCOD calculation is based on available data from binding sales transactions, conducted at arm’s length, for similar assets or observable market prices less incremental costs for disposing of the asset. If no such transactions can be identified, an appropriate valuation model is used. The VIU calculation is based on a discounted cash flow model. The cash flows are derived from the Corporation’s forecast and do not include restructuring activities that the Corporation is not yet committed to or significant future investments that will enhance the asset’s performance of the CGU being tested. The recoverable amount is sensitive to the discount rate used for the discounted cash flow model as well as the expected future cash-inflows, gross margin and EBITDAS assumptions and the growth rate used for extrapolation purposes. Purchase price equations – the acquired assets and assumed liabilities are generally recognized at fair value on the date the Corporation obtains control of a business. The measurement of each business combination is based on the information available on the acquisition date. The estimate of fair value of the acquired intangible assets and other assets and the liabilities are largely based on projected cash flows, discount rates and market conditions at the date of acquisition. The estimate of fair value of property, plant and equipment is based on available data from comparable sales transactions. Judgments • Impairment – The Corporation is required to make a judgment regarding the need for impairment testing at each reporting date by evaluating conditions specific to the organization that may lead to the impairment of assets. 3. Significant Accounting Policies The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements. (a) Basis of consolidation (i) Subsidiaries Subsidiaries are entities controlled by the Corporation. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. The accounting policies of subsidiaries are aligned with the policies adopted by the Corporation. Acquisitions of non- controlling interests are accounted for as transactions with equity holders in their capacity as equity holders; therefore no goodwill is recognized as a result of such transactions. Page | 41 Notes to the consolidated financial statements Years ended December 31, 2017 and 2016 3. Significant Accounting Policies (continued) (a) Basis of consolidation (continued) (ii) Special purpose entities The Corporation has established a number of special purpose entities (“SPE”) for operating purposes. An SPE is consolidated when, based on an evaluation of the substance of its relationship with the Corporation and the SPE’s risks and rewards, the Corporation concludes that it controls the SPE. SPE’s controlled by the Corporation were established under terms that impose strict limitations on the decision-making powers of the SPE’s management and that result in the Corporation receiving the majority of the benefits related to the SPE’s operations and net assets, being exposed to the majority of risks incident to the SPE’s activities, and retaining the majority of the residual or ownership risks related to the SPE’s or their assets. (iii) Joint ventures The Corporation’s joint ventures are those entities over whose activities the Corporation has joint control, established by contractual agreement. Joint ventures are accounted for using the equity method (equity accounted investees) and are initially recognized at cost. (iv) Transactions eliminated on consolidation Intra-group balances and transactions, and any unrealized income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealized gains arising from transactions with equity accounted investees are eliminated against the investment to the extent of the Corporation’s interest in the investee. Unrealized losses are eliminated in the same way as unrealized gains, but only to the extent that there is no evidence of impairment. (b) Business combinations Business combinations are accounted for using the acquisition method. Determining whether an acquisition meets the definition of a business combination or represents an asset purchase requires judgment on a case by case basis. If the acquisition meets the definition of a business combination, the assets acquired and assumed liabilities are classified or designated based on the contractual terms, economic conditions, the Corporation’s operating and accounting policies, and other factors that exist on the acquisition date. The acquired identifiable net assets are measured at their fair value at the date of acquisition. Any excess of the purchase price over the fair value of the net assets acquired is recognized as goodwill. Transaction costs, other than those associated with the issue of debt or equity securities, that the Corporation incurs in connection with a business combination are expensed as incurred. (c) Financial instruments Page | 42 Financial InstrumentCategoryMeasurement MethodTrade and other receivables Loans and receivables Amortized costTrade and other payables Other financial liabilities Amortized cost Loans and borrowings Other financial liabilities Amortized cost Notes to the consolidated financial statements Years ended December 31, 2017 and 2016 3. Significant Accounting Policies (continued) (c) Financial instruments (continued) (i) Non-derivative financial assets The Corporation initially recognizes trade and other receivables and deposits on the date that they originate. All other financial assets (including assets designated at fair value through profit or loss) are recognized initially on the trade date at which the Corporation becomes a party to the contractual provisions of the instrument. The Corporation derecognizes a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained is recognized as a separate asset or liability. Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, there is a legal right to offset the amounts and the Corporation intends either to settle on a net basis or to realize the asset and settle the liability simultaneously. The Corporation uses the following non-derivative financial asset classification: loans and receivables. Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. These financial assets are initially recognized at fair value plus any directly attributable transaction costs. Financial assets classified as loans and receivables are measured at amortized cost using the effective interest method, less any impairment losses. (ii) Non-derivative financial liabilities The Corporation initially recognizes debt securities issued and subordinated liabilities on the date that they are originated. All other financial liabilities (including liabilities designated at fair value through profit or loss) are recognized initially on the trade date at which it becomes a party to the contractual provisions of the instrument. The Corporation derecognizes a financial liability when its contractual obligations are discharged, cancelled or expire. Bank overdrafts that are repayable on demand and form an integral part of the Corporation’s cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash flows. The Corporation uses the following non-derivative financial liability classification: other financial liabilities. Other financial liabilities are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition these financial liabilities are measured at amortized cost using the effective interest method. (iii) Share capital Common shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares and share options are recognized as a deduction from equity, net of any tax effects. (d) Assets Held for Sale Non-current assets, or disposal groups comprising assets and liabilities, are classified as held for sale if it is highly probable that they will be recovered primarily through sale rather than through continuing use. Such assets, or disposal groups, are generally measured at the lower of their carrying amount and fair value less costs to sell. Impairment losses on initial classification as held for sale or held for distribution and subsequent gains and losses on re-measurement are recognized in profit or loss. Once classified as held for sale, intangible assets and property, plant and equipment are no longer amortized or depreciated, and any equity-accounted investee is no longer equity accounted. Page | 43 Notes to the consolidated financial statements Years ended December 31, 2017 and 2016 3. Significant Accounting Policies (continued) (e) Property, plant and equipment (i) Recognition and measurement Items of property, plant and equipment are measured at cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset, acquisition costs including the cost of materials and direct labour, any other costs directly attributable to bringing the assets to a working condition for their intended use, the costs of dismantling and removing the items and restoring the site on which they are located, and borrowing costs on qualifying assets. Costs related to assets under construction are capitalized when incurred. Assets under construction are not depreciated until they are completed and available for use in the manner intended by management. When this occurs, the asset is transferred to property, plant and equipment. When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and equipment. Gains and losses on disposal of an item of property, plant and equipment are determined by comparing the proceeds from disposal with the carrying amount of property, plant and equipment, and are recognized net within operating expenses in profit or loss. Proceeds from the sale of rental equipment that is routinely sold before the end of its useful life are included in revenue and Net cash flows from operating activities. The investments in the acquisition or manufacturing of rental equipment is also included in Net cash flows from operating activities if the assets are expected to be predominantly sold before the end of their useful life, otherwise the investments are included in Net cash flows from investing activities. The Company made immaterial adjustments of $1,500,000 to the Statement of cash flows in the comparative period to present cash flows in accordance with this accounting policy. (ii) Subsequent costs The cost of replacing a major component of an item of property, plant and equipment is recognized in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Corporation, and its cost can be measured reliably. The carrying amount of the replaced major component is derecognized. The costs of the day-to-day servicing of property, plant and equipment are recognized in profit or loss as incurred. (iii) Depreciation Depreciation is calculated using the depreciable amount, which is the cost of an asset, less its residual value. Depreciation is recognized in profit or loss on a straight-line basis over the estimated useful lives of each part of an item of property, plant and equipment, since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. Leased assets are depreciated over the shorter of the lease term and their useful lives unless it is reasonably certain that the Corporation will obtain ownership by the end of the lease term. The estimated useful lives for the current and comparative periods are as follows: Depreciation methods, useful lives, and residual values are reviewed at each financial year end and adjusted if appropriate. Land and assets under construction are not depreciated. Page | 44 AssetsMethodResidual ValueUseful lifeCamp facilities Straight-line 20% 15 years Camp setup & installation Straight-line - 2 to 5 years Buildings Straight-line - 20 years Automotive & trucking equipment Straight-line - 4 to 8 years Mats Straight-line - 6 years Furniture, fixtures & other equipment Straight-line - 2 to 10 years Asset retirement obligation Straight-line - 2 to 7 years Notes to the consolidated financial statements Years ended December 31, 2017 and 2016 3. Significant Accounting Policies (continued) (f) Intangible assets (i) Goodwill Goodwill arises on the acquisition of subsidiaries, associates and joint ventures. Goodwill is measured at cost less accumulated impairment losses. In respect of equity accounted investees, the carrying amount of goodwill is included in the carrying amount of the investment. Goodwill is not amortized but is tested at least annually for impairment. (ii) Assets acquired in business combinations Non-operating intangible assets are intangible assets that are acquired as a result of a business combination, which arise from contractual or other legal rights and are transferable or separable. On initial recognition they are measured at fair value. Amortization is charged on a straight line basis to the statement of comprehensive income over their expected useful lives which are: Amortization methods, useful lives, and residual values are reviewed at each financial year-end and adjusted if appropriate. (g) Inventories Inventories are measured at the lower of cost and net realizable value. The cost of inventories is based on a weighted average or standard cost principle and includes expenditures incurred in acquiring the inventories, production or conversion costs, and other costs in bringing them to their existing location and condition. In the case of manufactured inventories and work-in-progress, cost includes an appropriate share of production overheads based on normal operating capacity. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. (h) Impairment (i) Financial assets A financial asset not carried at fair value through profit or loss is assessed at each reporting date to determine whether there is objective evidence that it is impaired. A financial asset is impaired if objective evidence indicates that a loss event has occurred after the initial recognition of the asset, and that the loss event had a negative effect on the estimated future cash flows of that asset that can be estimated reliably. Page | 45 Estimated useful livesTrade names 7 years Architectural design 5 years Customer contracts 2.5 years Notes to the consolidated financial statements Years ended December 31, 2017 and 2016 3. Significant Accounting Policies (continued) (h) Impairment (continued) (i) Financial assets (continued) Objective evidence that financial assets (including equity securities) are impaired can include default or delinquency by a debtor, restructuring of an amount due to the Corporation on terms that the Corporation would not consider otherwise, indications that a debtor or issuer will enter bankruptcy, or the disappearance of an active market for a security. In addition, for an investment in an equity security, a significant or prolonged decline in its fair value below its cost is objective evidence of impairment. The Corporation considers evidence of impairment for loans and receivables at both a specific asset and collective level. All individually significant loans and receivables are assessed for specific impairment. All individually significant loans and receivables found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified. Loans and receivables that are not individually significant are collectively assessed for impairment by grouping together receivables with similar risk characteristics. An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the asset’s original effective interest rate. Losses are recognized in profit or loss and reflected in an allowance account against receivables. Interest on the impaired asset continues to be recognized through the unwinding of the discount. When a subsequent event causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through profit or loss. (ii) Non-financial assets The carrying amounts of the Corporation’s non-financial assets, other than inventories and deferred tax assets are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. For goodwill and intangible assets that have indefinite useful lives or assets that are not yet available for use, the recoverable amount is estimated each year at the same time. The recoverable amount of an asset is the greater of its value in use and its fair value less costs of disposal. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the CGU). The corporation has identified four CGU’s: Camps and Catering, Matting, Relocatable Structures, and Manufacturing. For the purposes of goodwill impairment testing, goodwill acquired in a business combination is allocated to the CGU or group of CGU’s that are expected to benefit from the synergies of the business combination. This allocation is subject to an operating segment ceiling test and reflects the lowest level at which that goodwill is monitored for internal reporting purposes. The Corporation’s corporate assets do not generate separate cash inflows. If there is an indication that a corporate asset may be impaired, then the recoverable amount is determined for the group of CGU’s to which the corporate asset belongs. An impairment loss is recognized if the carrying amount of an asset or its CGU exceeds its estimated recoverable amount. Impairment losses are recognized in profit or loss. Impairment losses recognized in respect of CGU’s are allocated first to reduce the carrying amount of any goodwill allocated to the units and then to reduce the carrying amounts of the other assets in the unit (group of units), on a pro rata basis. An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognized in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized. Page | 46 Notes to the consolidated financial statements Years ended December 31, 2017 and 2016 3. Significant Accounting Policies (continued) (h) Impairment (continued) (ii) Non-financial assets (continued) Goodwill that forms part of the carrying amount of an investment in an associate is not recognized separately, and therefore is not tested for impairment separately. Instead, the entire amount of the investment in an associate is tested for impairment as a single asset when there is objective evidence that the investment in an associate may be impaired. (i) Employee benefits (i) Defined contribution plan The Corporation’s defined contribution plan is a post-employment benefit plan under which the Corporation pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution plans are recognized as an employee benefit expense in profit or loss when they are due. (ii) Short-term benefits Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognized for the amount expected to be paid under the short-term cash bonus plans if the Corporation has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably. (iii) Share based compensation transactions Equity-settled transactions The grant date fair value of share based compensation awards granted to officers and employees is recognized as an expense, with a corresponding increase in equity, over the period that the employees unconditionally become entitled to the awards (vesting period). The amount recognized as an expense is adjusted to reflect the number of awards for which the related service and non-market vesting conditions are expected to be met, such that the amount ultimately recognized as an expense is based on the number of awards that do meet the related service and non-market performance conditions at the vesting date. Cash-settled transactions The Corporation has a Restricted Share Unit (“RSU”) plan for eligible officers and employees of the Corporation. The fair value of the amount payable to officers and employees in respect of the RSUs, for which the participants are eligible to receive an equivalent cash value of the common shares at a future date, is recognized as an expense with a corresponding increase in liabilities over the period that the employees and officers provide the related service and become entitled to payment. The liability is re-measured at each reporting date and at the settlement date. Any changes in the fair value of the liability are recognized as selling & administrative expenses in profit or loss. (j) Provisions A provision is recognized if, as a result of a past event, the Corporation has a present legal or constructive obligation that can be estimated reliably and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax risk-free rate that reflects current market assessments of the time value of money and the risks specific to the liability. The unwinding of the discount is recognized as finance cost. As at December 31, 2017 and 2016 the Corporation has recognized a provision for Asset Retirement Obligations. Page | 47 Notes to the consolidated financial statements Years ended December 31, 2017 and 2016 3. Significant Accounting Policies (continued) (k) Revenue (i) Goods sold Revenue from the sale of goods is measured at the fair value of the consideration received or receivable. Revenue is recognized when the significant risks and rewards have transferred to the customer, collectability is reasonably assured, the associated costs can be estimated reliably, there is no continuing management involvement with the goods, and the amount of revenue can be measured reliably. The Corporation routinely sells items of property, plant and equipment that it has held for rental and such assets are transferred to inventories at their carrying amount when they cease to be rented and become held for sale. The proceeds from the sale of such assets are recognised as revenue. Transfers of risks and rewards vary depending on the individual terms of the contract of sale. For the sale of camps and mats, transfer usually occurs when the product is delivered to the customer’s site; however, in instances where the customer has provided a certificate of insurance for undelivered assets, the Corporation will recognize revenue prior to delivery. (ii) Services The Corporation’s services are generally provided based upon purchase orders or contracts with its customers that include fixed or determinable prices based upon monthly, daily, or hourly rates. Revenue is recognized when services are rendered and only when collectability is reasonably assured. (iii) Rental income Rental income is recognized in profit or loss on a straight line basis over the term of the arrangement, or on a daily or monthly rate. (iv) Construction contracts Contract revenue includes the initial amount agreed to in the contract plus any variations in contract work, claims, and incentive payments, to the extent that it is probable that they will result in revenue and can be measured reliably. As soon as the outcome of a construction contract can be estimated reliably, contract revenue is recognized in profit or loss in proportion to the stage of completion of the contract. Contract expenses are recognized as incurred unless they create an asset related to future contract activity. The stage of completion is assessed by the proportion of contract costs incurred for work performed to date compared to the estimated total contract costs. When the outcome of a construction contract cannot be estimated reliably, contract revenue is recognized only to the extent of contract costs incurred that are likely to be recoverable. An expected loss on a contract is recognized immediately in profit or loss. (l) Lease payments At inception of an arrangement, the Corporation determines whether such an arrangement is, or contains, a lease. A specific asset is the subject of a lease if fulfillment of the arrangement is dependent on the use of that specified asset. An arrangement conveys the right to use the asset if the arrangement conveys to the Corporation the right to the risks and rewards of the underlying asset. Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Leases in terms of which substantially all the risks and rewards of ownership are transferred to the Corporation are classified as finance leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the consolidated statement of comprehensive income on a straight-line basis over the period of the lease. Minimum lease payments made under finance leases are apportioned between the finance expense and the reduction of the outstanding liability. The finance expense is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. Page | 48 Notes to the consolidated financial statements Years ended December 31, 2017 and 2016 3. Significant Accounting Policies (continued) (l) Lease payments (continued) Determining whether an arrangement contains a lease: At inception or upon reassessment of the arrangement, the Corporation separates payments and other consideration required by such an arrangement into those for the lease and those for other elements on the basis of their relative fair values. If the Corporation concludes for a finance lease that it is impracticable to separate the payments reliably, an asset and a liability are recognized at an amount equal to the fair value of the underlying asset. Subsequently, the liability is reduced as payments are made and an imputed finance charge on the liability is recognized using the Corporation’s incremental borrowing rate. (m) Finance income and costs Finance income comprises interest income on funds invested. Interest income is recognized as it accrues in profit or loss, using the effective interest method. Finance costs comprise of interest expense on borrowings, unwinding of the discount on provisions, and changes in the fair value of financial assets at fair value through profit or loss. Borrowing costs that are not directly attributable to the acquisition, construction, or production of a qualifying asset are recognized in profit or loss using the effective interest method. Foreign currency gains and losses are reported on a net basis. (n) Income tax Income tax expense comprises current and deferred tax. Current tax and deferred tax are recognized in profit or loss except to the extent that it relates to a business combination, or items recognized directly in equity or other comprehensive income. Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Deferred tax is recognized in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognized for the following temporary differences: the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss, and differences relating to investments in subsidiaries and jointly controlled entities to the extent that it is probable that they will not reverse in the foreseeable future. In addition, deferred tax is not recognized for taxable temporary differences arising on the initial recognition of goodwill. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously. A deferred tax asset is recognized for unused tax losses, tax credits, and deductible temporary differences to the extent that it is probable that future taxable profits will be available against which they can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized. (o) Earnings per share The Corporation presents basic and diluted earnings per share (“EPS”) data for its common shares. Basic EPS is calculated by dividing the total profit or loss attributable to common shareholders of the Corporation by the weighted average number of common shares outstanding during the period. Diluted EPS is calculated by the weighted average number of common shares outstanding for the effects of all dilutive potential common shares, which is comprised of share options granted to employees. Page | 49 Notes to the consolidated financial statements Years ended December 31, 2017 and 2016 3. Significant Accounting Policies (continued) (p) Segment reporting A segment is a distinguishable component of the Corporation that is engaged either in providing related products or services (business segment) which is subject to risks and returns that are different from those of other segments. The business segments are determined based on the Corporation’s management and internal reporting structure. Segment results, assets and liabilities include items directly attributable to a segment, as well as those that can be allocated on a reasonable basis. Unallocated items comprise mainly investments and related revenue, loans and borrowings and related expenses, corporate assets (primarily the Corporation’s headquarters) and head office expenses, and income tax assets and liabilities. Segment capital expenditure is the total cost incurred during the period to acquire property, plant and equipment and intangible assets other than goodwill. (q) Foreign currency translation The consolidated financial statements are presented in Canadian Dollars (“CAD”). Foreign currency transactions entered into are translated into the functional currency of the operations at the exchange rate on the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are re- translated into the functional currency using the exchange rate on the period end date. Foreign currency translation gains and losses resulting from the settlement of transactions and the re-translation at period end are recognized in the statement of comprehensive income within total profit. Non-monetary items that originated in a foreign currency are translated at the exchange rate from the original transaction date. The US entity has a US Dollar (“USD”) functional currency is therefore translated to be included in the consolidated financial statements in CAD as follows: income and expenses are translated into CAD using the exchange rates on the dates of the transactions and the assets and liabilities on the statement of financial position are translated into CAD at the period end exchange rate. The effect of translation is recognized in other comprehensive income and included as translation of foreign operations in accumulated other comprehensive income within equity. Foreign currency gains and losses arising from monetary items receivable from or payable to a foreign operation, for which settlement is neither planned nor likely to occur, form a part of the exchange differences in the net investment in the foreign operations and are recognized initially in other comprehensive income. Upon disposal or partial disposal of an entity with a functional currency other than CAD, any accumulated exchange differences will be reclassified to the statement of comprehensive income within total profit. (r) New standards and interpretations not yet adopted The new standards, amendments to standards and interpretations not yet effective for the year ended December 31, 2017, and have not been applied in preparing these consolidated financial statements are disclosed below. The Corporation intends to adopt these standards, if applicable, when they become effective on or after January 1, 2018. IFRS 9 Financial Instruments - IFRS 9 Financial Instruments addresses the classification and measurement of financial assets. The new standard defines two instead of four measurement categories for financial assets with classification to be based partly on the Corporation’s business model and partly on the characteristics of the contractual cash flows from the respective financial asset. IFRS 9 requires impairment of financial assets to be based on past, current and future costs relating to the financial assets and has introduced a new expected credit loss model for calculating impairment of financial assets, replacing the incurred loss impairment model required by IAS 39. The Corporation does not expect the new impairment model to result in material changes to the valuation of its financial assets on adoption of IFRS 9. The Corporation will adopt IFRS 9 in its financial statements for the annual period beginning on January 1, 2018. Page | 50 Notes to the consolidated financial statements Years ended December 31, 2017 and 2016 3. Significant Accounting Policies (continued) (r) New standards and interpretations not yet adopted (continued) IFRS 15 Revenue from Contracts with Customers - IFRS 15 Revenue from Contracts with Customers contains a single revenue model that applies to contracts with customers and two approaches to recognize revenue: at a point in time or over time. The model features a contract-based five-step analysis of transactions to determine whether, how much and when revenue is recognized. Disclosure requirements have also been expanded. The Corporation will adopt IFRS 15 in its consolidated financial statements for the year ending December 31, 2018, using the cumulative effect method whereby the Corporation will apply the new standard as of the date of initial application with no restatement of comparative periods. The cumulative effect method adjusts the effects on revenue and expenses to the opening balance of retained earnings as at January 1, 2018. Throughout 2017, the Corporation reviewed its various revenue streams and underlying contracts with customers and assessed the appropriate method of revenue recognition under the new standard. It has been concluded that the adoption of IFRS 15 will not have a material impact on net income and financial position. The Corporation will expand the disclosures in the notes to its financial statements as prescribed by IFRS 15, including disclosing disaggregated revenue streams by product type. IFRS 16 Leases - IFRS 16 Leases introduces a single lessee accounting model and requires a lessee to recognize assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. A lessee is required to recognize a right-to-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. This standard substantially carries forward the lessor accounting requirements of IAS 17, while requiring enhanced disclosures to be provided by lessors. Transitional provisions have been provided. The Corporation intends to adopt IFRS 16 in its financial statements for the annual period beginning on January 1, 2019. The extent of the impact of adoption of the standard has not yet been determined. 4. Determination of fair values A number of the Corporation’s accounting policies and disclosures require the determination of fair value, for both financial and non-financial assets and liabilities. Fair values have been determined for measurement and/or disclosure purposes based on the following methods. When applicable, further information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability. (a) Property, plant and equipment The fair value of property, plant and equipment recognized as a result of a business combination is based on market values. The market value of property is the estimated amount for which a property could be exchanged on the date of valuation between a willing buyer and a willing seller, in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably and willingly. The fair value of items of plant, equipment, fixtures and fittings is based on the market and cost approaches using quoted market prices for similar items when available and replacement cost when appropriate. (b) Intangible assets The fair value of customer relationships acquired in a business combination is determined using the multi-period excess earnings method, whereby the subject asset is valued after deducting a fair return on all other assets that are part of creating the related cash flows. (c) Other financial assets and liabilities The fair value of other financial assets and liabilities is estimated as the present value of future cash flows, discounted at the market rate of interest at the reporting date. This fair value is determined for disclosure purposes. (d) Share-based compensation transactions The fair value of the employee share options is measured using the Black-Scholes option pricing model. Measurement inputs include the share price on measurement date, the exercise price of the instrument, the expected volatility (based on weighted average historic volatility adjusted for changes expected due to publicly available information), the weighted average expected life of the instruments (based on historical experience and general option holder behavior), the expected dividends, and the risk-free interest rate (based on government bonds). Service and non-market performance conditions are not taken into account in determining fair value. Page | 51 Notes to the consolidated financial statements Years ended December 31, 2017 and 2016 4. Determination of fair values (continued) (d) Share-based compensation transactions (continued) Units issued under the Restricted Share Unit (“RSU”) plan are initially measured based on fair market value of the Corporation’s stock price when granted. The fair value of outstanding units is re-measured at each reporting date using the Corporation’s stock price until the date of settlement. Under the terms of the RSU plan, the RSUs awarded will vest in three equal portions on the first, second and third anniversary from the grant date and will be settled in cash, in the amount equal to the fair market value of the Corporation’s stock price on that date. 5. Business Combinations (a) The Corporation did not complete any significant acquisitions in the year ended December 31, 2017. (b) Karoleena Inc. - 2016 On June 1, 2016, the Corporation acquired all of the issued and outstanding shares of Karoleena Inc., Korewerks Construction Group Inc. and Z Future Particle Corporation (collectively, "Karoleena") for total cash consideration of $833,000, the assumption of $2,090,000 of debt, and the issuance of 1,182,022 common shares of the Corporation with a fair value at the acquisition date of $1.41 per share for total consideration of $4,590,000. Karoleena was a private manufacturer of designer prefabricated modular homes and focuses on providing premium modern homes through its prefabrication process. The following summarizes the major classes of consideration transferred at the acquisition date: Cash paid Shares issued Cash and equity consideration Assumption of bank debt Total consideration transferred Amount (000’s) $ $ $ 833 1,667 2,500 2,090 4,590 The acquisition has been accounted for using the acquisition method on June 1, 2016, whereby the assets acquired and the liabilities assumed were recorded at their fair values with the surplus of the aggregate consideration relative to the fair value of the identifiable net assets recorded as goodwill. The Corporation assessed the fair values of the net assets acquired based on management’s best estimate of the market value, which takes into consideration the condition of the assets acquired, current industry conditions and the discounted future cash flows expected to be received from the assets as well as the amount it is expected to cost to settle the outstanding liabilities. Subsequent to the acquisition date, Karoleena’s operating results have been included in the Corporation’s revenues, expenses and capital spending. The following summarizes the recognized amounts of assets acquired and liabilities assumed: Cash acquired Trade receivables Other current assets Property, plant and equipment Intangible assets Current liabilities Total net identifiable assets acquired Goodwill Total consideration transferred Amount (000’s) $ $ $ 134 209 36 348 2,029 (1,479) 1,277 3,313 4,590 The goodwill arises as a result of the assembled workforce, the technical expertise and capabilities existing within the acquired business and also the synergies expected to be achieved as a result of combining Karoleena with the rest of the Corporation. None of the goodwill recognized is expected to be deductible for income tax purposes. The identified intangible assets acquired includes tradename and architectural drawings. Page | 52 Notes to the consolidated financial statements Years ended December 31, 2017 and 2016 5. Business Combinations (continued) (b) Karoleena Inc. – 2016 (continued) From the date of acquisition to December 31, 2016, Karoleena contributed $2,803,000 of revenue and $2,032,000 of loss before tax to the Corporation. If the business combination had been completed on January 1, 2016, the revenue and loss before income tax for the twelve month period ending December 31, 2016 would have been $5,276,000 and $2,934,000 respectively. The Corporation incurred costs related to the acquisition of Karoleena of $23,000 relating to due diligence and external advisory fees. These costs have been included in selling & administrative expenses on the consolidated statements of comprehensive loss. (c) Empire Camp Equipment Ltd. - 2016 On August 23, 2016, the Corporation acquired all of the issued and outstanding shares of Empire Camp Equipment Ltd. ("Empire") for total cash consideration of $28,388,000, and the issuance of 10,833,333 common shares of the Corporation with a fair value at the acquisition date of $1.77 per share for total consideration of $47,367,000. Empire is a Western Canadian focused provider of camp and wellsite buildings to the energy, mining and construction sectors. The following summarizes the major classes of consideration transferred at the acquisition date: Cash paid Shares issued Total consideration transferred $ Amount (000’s) 28,388 19,175 $ 47,563 The acquisition has been accounted for using the acquisition method on August 23, 2016, whereby the assets acquired and the liabilities assumed were recorded at their fair values with the surplus of the aggregate consideration relative to the fair value of the identifiable net assets recorded as goodwill. The Corporation assessed the fair values of the net assets acquired based on management’s best estimate of the market value, which takes into consideration the condition of the assets acquired, current industry conditions and the discounted future cash flows expected to be received from the assets as well as the amount it is expected to cost to settle the outstanding liabilities. Subsequent to the acquisition date, Empire’s operating results have been included in the Corporation’s revenues, expenses and capital spending. The following summarizes the recognized amounts of assets acquired and liabilities assumed: Cash acquired Trade receivables Other current assets Property, plant and equipment Intangible assets Deferred income tax Current liabilities Total net identifiable assets acquired Goodwill Total consideration transferred $ Amount (000’s) 436 1,299 28 26,105 6,053 (3,066) (523) $ $ 30,332 17,231 47,563 The goodwill arises as a result of the synergies existing within the acquired business and also the synergies expected to be achieved as a result of combining Empire with the rest of the Corporation. None of the goodwill recognized is expected to be deductible for income tax purposes. The identified intangible asset acquired relates to customer contracts. Page | 53 Notes to the consolidated financial statements Years ended December 31, 2017 and 2016 5. Business Combinations (continued) (c) Empire Camp Equipment Ltd. – 2016 (continued) From the date of acquisition to December 31, 2016, Empire contributed $2,880,000 of revenue and $1,059,000 of profit before tax to the Corporation. If the business combination had been completed on January 1, 2016, the revenue and profit before income tax for the twelve month period ending December 31, 2016 would have been $8,558,000 and $3,692,000 respectively. The Corporation incurred costs related to the acquisition of Empire of $113,000 relating to due diligence and external legal fees. These costs have been included in selling & administrative expenses on the consolidated statements of comprehensive loss. 6. Revenue Construction contract revenue has been determined based on the percentage of completion method. The amount of construction contract revenue results from the manufacturing of residential and commercial modular structures in the Modular Solutions segment. These units are based on specifically negotiated contracts with customers. For construction contracts in progress, the aggregate amount of contract costs incurred and recognized profits, less recognized losses, as at December 31, 2017 were $30,262,000 (2016 - $4,758,000). At December 31, 2017, advances received from customers under open construction contracts amounted to $2,627,000 (2016 - $647,000). Advances for which the related work has not been completed are presented as deferred revenue. 7. Direct Operating Expenses The amount of inventories recognized as an expense during the twelve months ended December 31, 2017 is $24,920,000 (2016 - $8,112,000). Page | 54 December 31,December 31,(000’s)20172016Rental and Catering revenue$ 205,960 $ 211,677 Construction contract revenue 46,755 8,287 Sale of used fleet 33,728 9,900 Rendering of services 31,159 21,071 Sale of goods 6,480 - $ 324,082 $ 250,935 December 31,December 31,(000’s)20172016Wages and benefits$ 137,809 $ 110,529 Job supplies 79,992 45,373 Rental equipment 4,081 4,468 Repairs & maintenance 7,590 5,982 Trucking costs 6,637 2,622 Other operating expenses 36,517 35,166 Direct costs 272,626 204,140 Depreciation 40,701 48,848 Amortization of intangibles 2,742 992 Impairment loss 3,457 - Share based compensation 659 690 Gain on disposal of property, plant and equipment (12,094) (626)$ 308,091 $ 254,044 Notes to the consolidated financial statements Years ended December 31, 2017 and 2016 8. Selling & Administrative Expenses 9. Personnel expenses The Corporation has two types of defined contribution plans: a registered defined contribution plan covering a number of its employees and a collectively bargained plan covering union employees. Under the registered defined contribution plan, the Corporation matches individual contributions up to a maximum of 5% of the employee’s annual salary. Under the collectively bargained plan, the Corporation contributes a set amount per hour worked. 10. Finance Costs 11. Income Taxes The provision for income taxes differs from that which would be expected by applying statutory rates. A reconciliation of the difference is as follows: For the year ended December 31, 2017 income tax recovery was $916,000, with an effective tax rate of 10.5%, for the year ended December 31, 2016 income tax recovery was $4,169,000, an effective tax rate of 17.0%. The decrease in income tax recovery was attributable to the increase in reported earnings for the twelve months ended December 31, 2017. Page | 55 December 31,December 31,(000’s)20172016Salaries and benefits$ 13,613 $ 13,326 Other selling & administrative expenses 7,798 4,808 Selling & administrative expenses 21,411 18,134 Share based compensation 515 961 $ 21,926 $ 19,095 December 31,December 31,(000’s)20172016Wages, salaries & benefits$ 148,597 $ 120,531 Contributions to defined contribution plans 2,825 3,324 Share based compensation 1,174 1,651 $ 152,596 $ 125,506 December 31,December 31,(000’s)20172016Interest Expenses$ 2,728 $ 2,319 Accretion of provisions 96 88 $ 2,824 $ 2,407 December 31,December 31,(000’s)20172016Loss before tax$(8,759) $ (24,485)Combined federal and provincial income tax rate27.0%27.0%Expected income tax recovery $ (2,365)$ (6,611)Non-deductible share based compensation317 446 Differences in jurisdictional tax rates271 142 Share issuance costs10 13 Revisions to prior year tax estimates(66) 490 Deferred taxes not recognized641 777 Rate differential on non-capital loss carryback258 560 Non-taxable portion of capital gain (85) (95) Other 103 109 $(916) $ (4,169) Notes to the consolidated financial statements Years ended December 31, 2017 and 2016 11. Income Taxes (continued) Deferred tax assets and liabilities (a) The Corporation has non-capital losses for Canadian tax purposes of $7,553,000 available to reduce future taxable income in Canada, and non-capital losses for United States tax purposes of $750,000 available to reduce future taxable income in the United States, which will expire as follows: (b) Unrecognized deferred tax assets and liabilities have not been recognized in respect of the following items: Tax losses not recognized expire in 2028 and beyond. The deductible temporary differences do not expire under current tax legislation. Deferred tax assets have not been recognized in respect of these items because it is not probable that future taxable profit will be available against which the subsidiary of the Corporation can utilize the benefits. The components of net deferred tax asset (liability) recognized are as follows: Page | 56 (000’s)Amount2018$ - 2019 - 2020 - 2021 - 2022 and beyond 8,303 $ 8,303 December 31,December 31,(000’s)20172016Tax losses$ 1,679 $ 777 (000’s)201720162017201620172016Property, plant and equipment$ 103 $ 30 $ (54,789)$ (51,426)$ (54,686)$ (51,396)Intangible assets 2,600 2,384 (398) (676) 2,202 1,708 Goodwill 2,038 2,180 (151) (151) 1,887 2,029 Non-capital loss carry forwards 581 479 - - 581 479 Net capital loss carry forwards 166 241 - - 166 241 Restructuring costs 65 37 - - 65 37 Asset retirement obligation 3,932 3,514 - - 3,932 3,514 Reserves 57 22 (184) (82) (127) (60)Foreign exchange adjustments 1 4 - - 1 4 Share issue costs 470 692 $ - - 470 692 Deferred tax asset - - Deferred tax liability (45,509) (42,752)$ (45,509)$ (42,752)AssetsLiabilitiesNet Notes to the consolidated financial statements Years ended December 31, 2017 and 2016 11. Income Taxes (continued) Movements in temporary differences during the year ended December 31, 2017 are as follows: Movements in temporary differences during the year ended December 31, 2016 are as follows: Page | 57 December 31,Recognized inRecognized inRecognized fromDecember 31,(000’s)2016profit and lossequityacquisition2017Property, plant and equipment$ (51,396)$ (3,290)$ - $ - $ (54,686)Intangible assets 1,708 494 - - 2,202 Goodwill 2,029 (142) - - 1,887 Non-capital loss carry forwards 479 102 - - 581 Net capital loss carry forwards 241 (75) - - 166 Restructuring costs 37 28 - - 65 Asset retirement obligation 3,514 418 - - 3,932 Reserves (60) (67) - - (127)Foreign exchange adjustments 4 (3) - - 1 Share issue costs 692 (222) - - 470 $ (42,752)$ (2,757)$ - $ - $ (45,509)December 31,Recognized inRecognized inRecognized fromDecember 31,(000’s)2015profit and lossequityacquisition2016Property, plant and equipment$ (45,701)$ (2,747)$ - $ (2,948)$ (51,396)Intangible assets 2,552 (459) - (385) 1,708 Goodwill 2,186 (157) - - 2,029 Non-capital loss carry forwards 302 (90) - 267 479 Net capital loss carry forwards 283 (42) - - 241 Restructuring costs 48 (11) - - 37 Asset retirement obligation 2,691 823 - - 3,514 Reserves (113) 53 - - (60)Foreign exchange adjustments - 4 - - 4 Share issue costs 925 (248) 15 - 692 $ (36,827)$ (2,874)$ 15 $ (3,066)$ (42,752) Notes to the consolidated financial statements Years ended December 31, 2017 and 2016 12. Trade and other receivables Construction receivables represent progress billings to customers under open construction contracts, holdback amounts billed on construction contracts which are not due until the contract work is substantially completed, amounts recognized as revenue under open construction contracts not billed to customers and highly probable claims. The Corporation estimates that the carrying value of financial assets within trade and other receivables approximate their fair value. 13. Inventories 14. Assets Held for Sale During the third quarter of 2017, the Corporation committed to a plan to sell part of the camp facility assets within the Camps & Catering segment. The Corporation classified these assets as held for sale. An impairment loss of $3,457,000 was recorded during the period as a result of measuring the assets held for sale at the lower of cost or fair value less cost to sell. The sales agreement for the camp facility assets closed in October 2017. Page | 58 December 31,December 31,(000’s)20172016Trade receivable$ 44,469 $ 33,716 Accrued receivable 12,953 10,058 Construction receivables 43,274 7,242 Loans and other receivables 1,034 6,548 Receivables due from related parties - 23 101,730 57,587 Allowance for doubtful accounts (2,965) (1,043)Trade and other receivables$ 98,765 $ 56,544 December 31,December 31,(000’s)20172016Raw materials$ 3,904 $ 2,290 Finished goods 3,523 2,969 $ 7,427 $ 5,259 Notes to the consolidated financial statements Years ended December 31, 2017 and 2016 15. Property, Plant and Equipment Page | 59 CostBalanceReclassification Impact ofBalanceDecember 31,to assets ForeignDecember 31,(000’s)2016AdditionsDisposalsheld for saleTranslation2017Camp facilities, setup & installation$456,452 $9,660 $(39,987) $(10,085) $(6) $416,034 Land & buildings62,341 2,302 (1,642) - - 63,001 Automotive & trucking equipment44,255 4,838 (4,778) - - 44,315 Mats19,954 6,082 (5,833) - - 20,203 Furniture, fixtures & other equipment8,293 (346) (1,736) - - 6,211 Asset retirement obligations12,692 1,827 (198) - - 14,321 Assets under construction1,452 648 - - - 2,100 $605,439 $25,011 $(54,174) $(10,085) $(6) $566,185 Accumulated DepreciationBalanceReclassification Impact ofBalanceDecember 31,to assets ForeignDecember 31,(000’s)2016Depreciation Disposalsheld for saleTranslation2017Camp facilities, setup & installation$157,197 $27,469 $(21,109) $(3,505) $(6) $160,046 Land & buildings12,590 1,323 (1,639) - - 12,274 Automotive & trucking equipment29,683 4,754 (3,790) - - 30,647 Mats13,309 3,959 (3,615) - - 13,653 Furniture, fixtures & other equipment4,997 1,197 (1,578) - - 4,616 Asset retirement obligations4,892 1,999 (64) - - 6,827 Assets under construction- - - - - - $222,668 $40,701 $(31,795) $(3,505) $(6) $228,063 Carrying AmountsBalanceBalanceDecember 31,December 31,(000’s)20162017Camp facilities, setup & installation$299,255 $255,988 Land & buildings49,751 50,727 Automotive & trucking equipment14,572 13,668 Mats6,645 6,550 Furniture, fixtures & other equipment3,296 1,595 Asset retirement obligations7,800 7,494 Assets under construction1,452 2,100 $382,771 $338,122 Notes to the consolidated financial statements Years ended December 31, 2017 and 2016 15. Property, Plant and Equipment (continued) Included in additions at December 31, 2017 are internal asset transfers between asset categories to more appropriately reflect the asset class. Included in disposals was the June 2017 sale of a large camp facility in the Alberta oil sands area where the customer exercised the contractual option to purchase the assets. During the second quarter of 2016, the Corporation’s Blacksand Executive Lodge (“Blacksand”) was destroyed by the Northern Alberta wildfires. As at December 31, 2016, the Corporation had recognized insurance proceeds to an amount equal to net book value of the disposed assets. The claim settlement was finalized in the first quarter of 2017 and additional proceeds related to the assets of $12,100,000 were recorded, generating a gain. Included in the period ended December 31, 2016 additions and set out in Note 5 are assets acquired in the Karoleena Inc. business combination as at the acquisition date of June 1, 2016 and assets acquired in the Empire Camp Equipment Ltd. business combination as at the acquisition date of August 23, 2016. Page | 60 CostBalanceAdditions Impact ofBalanceDecember 31,from business ForeignDecember 31,(000’s)2015AdditionsDisposalscombinationsTranslation2016Camp facilities, setup & installation$470,307 $20,401 $(60,347) $26,095 $(4) $456,452 Land & buildings55,105 7,829 (680) 87 - 62,341 Automotive & trucking equipment44,684 67 (583) 87 - 44,255 Mats18,594 8,386 (7,026) - - 19,954 Furniture, fixtures & other equipment8,063 621 (575) 184 - 8,293 Asset retirement obligations9,326 4,447 (1,081) - - 12,692 Assets under construction8,482 (7,030) - - - 1,452 $614,561 $34,721 $(70,292) $26,453 $(4) $605,439 Accumulated DepreciationBalanceImpact ofBalanceDecember 31,ForeignDecember 31,(000’s)2015Depreciation DisposalsTranslation2016Camp facilities, setup & installation$159,758 $34,460 $(37,019) $(2) $157,197 Land & buildings9,961 1,890 739 - 12,590 Automotive & trucking equipment25,264 4,973 (554) - 29,683 Mats13,135 3,832 (3,658) - 13,309 Furniture, fixtures & other equipment4,890 1,198 (1,091) - 4,997 Asset retirement obligations2,826 2,495 (429) - 4,892 Assets under construction- - - - - $215,834 $48,848 $(42,012) $(2) $222,668 Carrying AmountsBalanceBalanceDecember 31,December 31,(000’s)20152016Camp facilities, setup & installation$310,549 $299,255 Land & buildings45,144 49,751 Automotive & trucking equipment19,420 14,572 Mats5,459 6,645 Furniture, fixtures & other equipment3,173 3,296 Asset retirement obligations6,500 7,800 Assets under construction8,482 1,452 $398,727 $382,771 Notes to the consolidated financial statements Years ended December 31, 2017 and 2016 15. Property, Plant and Equipment (continued) (a) Assets under construction At December 31, 2017, included in capital assets under construction are internal information technology projects under development, fleet equipment under construction for expansion purposes and plant optimization projects. At December 31, 2016, included in assets under construction was internal information technology projects under development as well as fleet equipment under construction for both maintenance and expansion purposes. The Corporation has not capitalized any borrowing costs for the twelve months ended December 31, 2017 (2016 - $nil), due to the short term nature of construction. (b) Capital commitments At December 31, 2017 the Corporation has no outstanding commitments to purchase property, plant and equipment (2016 - $nil). (c) Finance lease arrangements Included in property, plant and equipment is equipment under finance lease arrangements with a net book value of $2,700,000 at December 31, 2017 (2016 - $nil). (d) Impairment indicators For the purpose of impairment testing, the Corporation’s assets are grouped and reviewed at the CGU level which represent the lowest level at which cash flows are generated. The Corporation reviews the carrying value of the Property, Plant and Equipment assets at each reporting period for indications of impairment and considers both qualitative and quantitative factors when determining whether an asset or CGU may be impaired. During the year ended December 31, 2017 the Corporation determined that the excess of the carrying amount of the net assets of the Corporation over the market capitalization of the Corporation was considered an indicator of impairment. This indicator of impairment was noted for the Camps & Catering, Matting, Relocatable Structures and Manufacturing CGU’s. (e) Impairment testing for cash-generating units The recoverable amounts of the CGU’s were determined based on value in use calculation using discounted future cash flows generated from the continuing use of the unit over a five year period which incorporates the Corporation’s 2018 forecast approved by the Board of Directors and estimated growth rates in subsequent years. The calculation of the value in use was based on the following key assumptions: • • • • • The approved 2018 budget uses current contracts and market conditions to project revenue. Costs are calculated using historical gross margins and additional known or pending factors. The projections were based on a five year forecasted cash flow and extrapolated over the remaining useful life of the primary assets and discounted at a pre-tax rate of 14.88% (2016 – 13.96%) for all CGU’s. The discount rate was estimated based on the Corporation’s weighted average cost of capital, taking into account the nature of the assets being valued and their specific risk profile. Based on management’s best estimates at December 31, 2017, a historic five year average utilization, direct labour hours, revenue per rentable day and profit margins, plus a 2% price inflation per year, were used to project cash flows from 2019 to 2022 in the Camps & Catering, and Matting CGU’s. Based on management’s best estimate at December 31, 2017 a 5% to 15% growth rate was used to project the cash flows from 2019 to 2022 for the Relocatable Structure and Manufacturing CGU’s. The cash flows beyond 2022 have been extrapolated using a 2% per annum growth rate. The forecasted cash flows are based on management’s best estimates of future pricing, asset utilization, rates for available equipment and costs to maintain that equipment. Page | 61 Notes to the consolidated financial statements Years ended December 31, 2017 and 2016 15. Property, Plant and Equipment (continued) (e) Impairment testing for cash-generating units (continued) The results of the tests indicated no impairment for the Camps & Catering, Matting, Relocatable Structures, and Manufacturing CGU’s as at December 31, 2017 (2016 –$nil). The most sensitive inputs to the value in use model used for all CGU’s are the discount rate, inflation rate and the growth rate: • • • All else being equal, a 1.0% increase in the discount rate for the Camps & Catering and Relocatable Structures CGU’s would have resulted in the carrying amount exceeding the recoverable amount by $6,900,000 and $1,100,000, respectively. All else being equal, a 1.0% increase in the discount rate for the Matting, and Manufacturing CGU’s would have resulted in the recoverable amount exceeding the carrying amount by $8,000,000 and $23,100,000, respectively. All else being equal, a 0.5% decrease in the inflation rates would have resulted in the recoverable amount exceeding the carrying amount for the Camps & Catering, Relocatable Structures, and Matting CGU’s by $13,100,000, $332,000 and $9,600,000, respectively. All else being equal, a 1.0% decrease in the growth rate would have resulted in the carrying amount exceeding the recoverable amount for the Relocatable Structures CGU by $41,000. All else being equal, a 1.0% decrease in the growth rate would have resulted in the recoverable amount exceeding the carrying amount for the Camps & Catering and Manufacturing CGU’s by $12,650,000 and $23,700,000, respectively. 16. Intangible Assets and Goodwill Intangible assets, other than goodwill, have finite useful lives. The amortization charges for intangible assets are included on the consolidated statement of comprehensive loss. Goodwill has an infinite life and is not amortized. Page | 62 CostBalanceAdditionsBalanceDecember 31,from businessDecember 31,(000’s)2016Additionscombinations2017Trade names$1,590 $- $- $1,590 Architectural design439 - - 439 Customer contracts6,053 - - 6,053 $8,082 $- $- $8,082 AmortizationBalanceBalanceDecember 31,December 31,(000’s)2016Amortization2017Trade names$134 $227 $361 Architectural design51 88 139 Customer contracts807 2,427 3,234 $992 $2,742 $- $3,734 Carrying AmountsBalanceBalanceDecember 31,December 31,(000’s)20162017Trade names$1,456 $1,229 Architectural design388 300 Customer contracts5,246 2,819 $7,090 $4,348 Notes to the consolidated financial statements Years ended December 31, 2017 and 2016 16. Intangible Assets and Goodwill (continued) (a) Impairment loss Intangible assets with an indefinite useful life are required to be tested annually for impairment. The Corporation considers both qualitative and quantitative factors when determining whether an asset or CGU may be impaired. (b) Impairment testing for cash-generating units containing goodwill For the purpose of impairment testing, goodwill is allocated to the Corporation’s CGU which represent the lowest level at which goodwill is monitored for internal management purposes and which are not higher than the Corporation’s operating segments. At December 31, 2017 the carrying amount of Goodwill totaling $17,232,000 was allocated to the Camps & Catering CGU as a result of the Empire acquisition and $3,313,000 was allocated to the Manufacturing CGU as a result of the Karoleena acquisition. The recoverable amounts of the CGU’s were determined based on a value in use calculation which was determined by discounting future cash flows generated from the continuing use of the unit on a five year forecast which incorporates the Corporation’s 2018 budget approved by the Board of Directors. The calculation of the value in use was based on the same key assumptions disclosed in Note 15(e). The results of the tests indicated no impairment for the Camps & Catering and Manufacturing CGU’s at December 31, 2017 (2016 –$nil impairment to the Camps & Catering CGU). Page | 63 CostBalanceAdditionsBalanceDecember 31,from businessDecember 31,(000’s)2015Additionscombinations2016Trade names$- $- $1,590 $1,590 Architectural design- - 439 439 Customer contracts- - 6,053 6,053 $- $- $8,082 $8,082 AmortizationBalanceBalanceDecember 31,December 31,(000’s)2015Amortization2016Trade names$- $134 $134 Architectural design- 51 51 Customer contracts- 807 807 $- $992 $992 Carrying AmountsBalanceBalanceDecember 31,December 31,(000’s)20152016Trade names$- $1,456 Architectural design- 388 Customer contracts- 5,246 $- $7,090 GoodwillBalance BalanceDecember 31,December 31,(000’s)20172016Balance - beginning of year$20,348 $- Additions through business combinations (Note 5b)- 3,313 Additions through business combinations (Note 5c)197 17,035 $20,545 $20,348 Notes to the consolidated financial statements Years ended December 31, 2017 and 2016 17. Other Assets The Corporation’s other assets consists of a 25 year prepaid lease for a building and land to accommodate a portion of the Corporation’s manufacturing operations in Kamloops, British Columbia with a carrying amount of $2,041,000 (2016 - $2,169,000). The amount expensed during the year ended December 31, 2017 related to the prepaid lease was $128,000 (2016 - $132,000) with 17 years remaining. 18. Loans and Borrowings The carrying value of Horizon’s debt approximates its fair value, as the majority of the debt bears interest at variable rates which approximates market rates. On May 3, 2017, the Corporation’s committed credit facility (“credit facility”) was amended. Management initiated a reduction of the available credit limit from $200,000,000 to $150,000,000 and covenants for the periods ending September 30, 2017 through 2018 were adjusted. The credit facility is secured by a $400,000,000 first fixed and floating charge debenture over all assets of the Corporation and its wholly owned subsidiaries. The interest rate is calculated on a grid pricing structure based on the Corporation’s debt to EBITDAS ratio. Debt to EBITDAS is calculated as at the most recently completed calendar quarter and for the 12 months ended on such date. Amounts drawn on the credit facility incur interest at bank prime rate plus 0.50% to 2.25% or the Bankers’ Acceptance rate plus 1.50% to 3.25%. The credit facility has a standby fee ranging from 0.34% to 0.73%. Amounts borrowed under the credit facility become due on March 31, 2019, the maturity date of the credit facility. The credit facility is subject to the following financial covenants: (1) Senior debt is calculated as the sum of current and long-term portions of loans and borrowings less vehicle and equipment financing. (2) Total debt is calculated as the sum of current and long-term portions of loans and borrowings. (3) EBITDAS (Earnings before interest, taxes, depreciation, amortization, impairment, gain/loss on disposal of property, plant and equipment, earnings from equity investments, and share based compensation) is not a recognized measure under IFRS. Management believes that in addition to net earnings, EBITDAS is a useful supplemental measure as it provides an indication of the Corporation’s ability to generate cash flow in order to fund working capital, service debt, pay current income taxes and fund capital programs, and it is regularly provided to and reviewed by the Chief Operating Decision Maker. Horizon North’s method of calculating EBITDAS may differ from other entities and accordingly, EBITDAS may not be comparable to measures used by other entities. (4) Senior debt to EBITDAS is calculated as the ratio of senior debt to trailing 12 months EBITDAS. (5) Total debt to EBITDAS is calculated as the ratio of total debt to trailing 12 months EBITDAS. (6) Interest coverage is calculated as the ratio of trailing 12 months EBITDAS to 12 months trailing interest expense on loans and borrowings. As at December 31, 2017, the Corporation was in compliance with all financial and non-financial covenants related to the Credit Facility. Principal Repayments for Loans and Borrowings Page | 64 December 31,December 31,(000’s)20172016Committed credit facility$ 73,016 $ 75,268 Covenants Calculation December 31, 2017Debt CovenantsMaximum Consolidated Senior debt (1) to Consolidated EBITDAS ratio (3)(4) 2.43:1.004.25:1.00 or lessMaximum Consolidated Total debt (2) to Consolidated EBITDAS ratio (3)(5) 2.48:1.004.25:1.00 or lessMinimum Consolidated Interest coverage ratio(6) 9.71:1.003.00:1.00 or moreDecember 31,December 31,(000’s)201720162018$ - $75,268 2019 73,016 - 2020 - - 2021 - - 2022 and beyond - - $ 73,016 $ 75,268 Notes to the consolidated financial statements Years ended December 31, 2017 and 2016 19. Asset retirement obligations, leases and commitments (a) Provisions include constructive site restoration obligations for camp projects to restore lands to previous condition when camp facilities are dismantled and removed. The estimated present value of rehabilitating the sites at the end of their useful lives has been estimated using existing technology, at inflated prices, and discounted using a risk free rate. The future value amount at December 31, 2017 was $15,899,000 (2016 - $13,889,000) and determined using risk free interest rates of 1.66% to 1.97% (2016 - 0.80% to 1.59%) and an inflation rate of 2.0% (2016 – 2.0%). The timing of these payments is dependent on various factors, such as the estimated lives of the equipment and industry activity in the region, but is anticipated to occur between 2018 and 2025. (b) The Corporation has outstanding bank letters of credit as follows: Page | 65 (000's)Amount2018$ 5,101 2019 2,660 2020 2,188 2021 2,169 2022 and beyond 3,377 $ 15,495 December 31,December 31,(000’s)20172016Current$ 3,347 $ 1,665 Non-current 11,217 11,417 Balance, end of year$ 14,564 $ 13,082 Maturity dateAmount (000's)February 1, 2018$50March 18, 2018 1,804 March 31, 201832April 14, 201850April 17, 2018200July 18, 20185September 26, 201815September 29, 201884November 2, 2018 74 Notes to the consolidated financial statements Years ended December 31, 2017 and 2016 19. Asset retirement obligations, leases and commitments (continued) (c) The Corporation has entered into finance lease agreements for equipment. The average lease term is 18 months (2016 – nil) and the obligations under finance leases are secured by the related assets. Interest rates for the underlying finance lease obligations are fixed at rates ranging from 5.2% to 5.7% per annum. The related lease liability of $1,588,000 is payable within 2018. The Corporation also rents premises and equipment under multiple operating lease contracts with varying expiration dates. The minimum lease payments under these leases over the next five years and beyond are as follows: 20. Share Capital (a) Authorized Unlimited number of voting common shares without nominal or par value. Unlimited number of preferred shares issuable in series. (b) Issued On June 1, 2016, the Corporation acquired 100% of the issued and outstanding shares of Karoleena Inc. for an aggregate purchase price of $4,590,000 including the issuance of 1,182,022 common shares of the Corporation (Note 5b). On August 23, 2016, the Corporation acquired 100% of the issued and outstanding shares of Empire Camp Equipment Ltd. for an aggregate purchase price of $47,367,000 including the issuance of 10,833,333 common shares of the Corporation (Note 5c). Page | 66 (000's)Amount2018$ 5,101 2019 2,660 2020 2,188 2021 2,169 2022 and beyond 3,377 $ 15,495 `NumberAmount (000’s)Balance at December 31, 2015 132,606,651 $ 265,867 Common shares issued 12,015,355 20,842 Share issue costs, net of tax - (35)Balance at December 31, 2016 144,622,006 $ 286,674 Share options exercised 53,333 80 Balance at December 31, 2017144,675,339 $ 286,754 Notes to the consolidated financial statements Years ended December 31, 2017 and 2016 20. Share Capital (continued) (c) Share option plan The Corporation has a share option plan for its directors, officers, and key employees whereby options may be granted, to a maximum of 10% of the issued and outstanding common shares, subject to terms and conditions. Share option vesting privileges are at the discretion of the Board of Directors and were set at three years. The Corporation uses graded vesting for share options over the period in which the option vests. All share options are equity settled with a weighted average remaining contractual life of 2.8 years and all options granted have a maximum term of 5 years. The exercise prices for options outstanding and exercisable at December 31, 2017 are as follows: The weighted average share price at the date of exercise for share options exercised during the year ended December 31, 2017 was $1.45/share (2016 – no shares exercised). Page | 67 OutstandingWeighted averageOutstandingWeighted averageoptionsexercise priceoptionsexercise priceBalance, beginning of period8,385,737 $ 4.15 7,353,154 $ 4.84 Granted2,633,000 1.46 1,800,000 1.27 Forfeited(1,012,614) 3.69 (767,417) 3.99 Expired(1,610,405) 6.28 - - Exercised(53,333) 1.16 - - Balance, end of period8,342,385 $ 2.97 8,385,737 $ 4.15 Twelve months endedTwelve months endedDecember 31, 2017December 31, 2016ExercisableWeighted averageExercisableWeighted averageoptionsexercise priceoptionsexercise priceBalance, beginning of period4,168,595 $ 5.71 2,709,455 $ 6.59 Vested1,995,285 3.31 1,817,870 4.35 Forfeited(470,617) 5.10 (358,730) 5.40 Expired(1,610,405) 6.28 - - Exercised(53,333) 1.16 - - Balance, end of period4,029,525 $ 4.43 4,168,595 $ 5.71 Twelve months endedTwelve months endedDecember 31, 2017December 31, 2016WeightedWeightedaverageWeightedaverageremainingaverageExercise priceexercise pricecontractualexercise priceper shareNumberper sharelife in yearsNumberper share$1.16 to $1.371,264,500 $1.17 3.3 388,331 $1.16 $1.38 to $1.612,328,500 1.47 4.4 - - $1.62 to $2.06330,000 1.79 3.7 110,000 1.79 $2.07 to $2.832,571,500 2.30 2.1 1,714,311 2.30 $2.84 to $9.011,847,885 7.23 1.3 1,816,883 7.29 8,342,385 $2.97 2.8 4,029,525 $4.43 Total options outstandingExercisable options Notes to the consolidated financial statements Years ended December 31, 2017 and 2016 20. Share Capital (continued) (c) Share option plan (continued) The Corporation calculated the fair value of the share options granted using the Black-Scholes pricing model to estimate the fair value of the share options issued at the date of grant. The weighted average fair market value of all options granted during the year and the assumptions used in their determination are as follows: Expected volatility is estimated by considering historic average share price volatility. For the twelve months ended December 31, 2017, share based compensation for share options included in net loss amounted to $734,000 (2016 - $1,014,000). (d) Restricted share unit plan The Corporation has a Restricted Share Unit (“RSU”) plan for its directors, officers and key employees whereby RSUs may be granted, subject to certain terms and conditions. Under the terms of the RSU plan, the awarded units will vest in three equal portions on the first, second and third anniversary from the grant date, and will be settled in cash in the amount equal to the fair market value of the Corporation’s stock price on that date. The following table summarizes the RSUs outstanding: The following table summarizes the RSUs fair value per unit at the time of issuance and as at December 31, 2017: For the twelve months ended December 31, 2017, $632,000 (2016 - $637,000) was included in accounts payable and accrued liabilities for outstanding RSUs. For the twelve months ended December 31, 2017, share based compensation for RSUs included in net loss amounted to $442,000 (2016 - $637,000), with a weighted average remaining term of 1.9 years. Page | 68 December 31, 2017December 31, 2016Weighted average fair value per option$ 0.47 $ 0.37 Weighted average forfeiture rate8.51%8.05%Weighted average grant price$ 1.46 $ 1.27 Weighted average expected life3.0 years3.0 yearsWeighted average risk free interest rate0.81%0.58%Weighted average dividend yield rate5.47%6.60%Weighted average volatility64.69%61.89% Number Units outstanding at December 31, 20161,050,600 Granted1,225,735 Forfeited(150,934) Exercised(319,394) Units outstanding at December 31, 20171,806,007 Units IssuedFair Value at Grant Date ($ per unit)Fair Value at December 31, 2017Opening, Issued in 2016 1,118,400 1.54 Issued on January 16, 2017 12,000 2.05 1.54 Issued on February 21, 2017 12,000 1.95 1.54 Issued on April 10, 2017 12,000 1.76 1.54 Issued on May 15, 2017 756,500 1.47 1.54 Issued on June 1, 2017 381,235 1.44 1.54 Issued on June 19, 2017 32,000 1.31 1.54 Issued on September 11, 2017 20,000 1.27 1.54 Notes to the consolidated financial statements Years ended December 31, 2017 and 2016 21. Earnings Per Share The calculation of basic earnings per share for the twelve months ended December 31, 2017 was based on the total loss attributable to common shareholders of $7,843,000 (2016 - $20,316,000). A summary of the common shares used in calculating earnings per share for the twelve months ended December 31, 2017 and 2016 is as follows: (1) The Corporation utilizes the treasury stock method for calculating the dilutive effect of share purchase options when the average market price of the Corporation’s common stock during the period exceeds the exercise price of the option For the twelve months ended December 31, 2017, 8,342,385 share options (2016 - 8,385,737) were excluded from the calculation of weighted average common shares outstanding - diluted as the result would be anti-dilutive. 22. Dividends For the twelve months ended December 31, 2017, the Corporation paid dividends totaling $11,571,000 (December 31, 2016 - $13,525,000). On March 13, 2018, the Corporation’s Board of Directors declared a dividend for the first quarter of 2018 at $0.02 per share. The dividend is payable to shareholders of record at the close of business on March 31, 2018 to be paid on April 12, 2018. 23. Financial Risk Management (a) Overview The Corporation is exposed to a number of different financial risks arising from normal course business operations as well as through the Corporation’s financial instruments comprised of cash and cash equivalents, trade and other receivables, trade and other payables, and loans and borrowings. These risk factors include credit risk, liquidity risk, and market risk, including currency exchange risk and interest rate risk. The Corporation’s risk management practices include identifying, analyzing, and monitoring the risks faced by the Corporation. The following presents information about the Corporation’s exposure to each of the risks and the Corporation’s objectives, policies, and processes for measuring and managing risk. Page | 69 December 31,December 31,20172016Number of common shares, beginning of period144,622,006 132,606,651 Weighted average effect of common shares issued23,594 4,568,632 Weighted average common shares outstanding – basic144,645,600 137,175,283 Effect of share purchase options(1)- - Weighted average common shares outstanding – diluted 144,645,600 137,175,283 (000’s except per share amounts)Record DateAmount per shareTotal dividend amount Amount per shareTotal dividend amount March 31$ 0.02 $ 2,892 $ 0.02 $ 2,652 June 30 0.02 2,893 0.02 2,676 September 30 0.02 2,894 0.02 2,892 December 31 0.02 2,894 0.02 2,892 $ 0.08 $ 11,573 $ 0.08 $ 11,112 20172016 Notes to the consolidated financial statements Years ended December 31, 2017 and 2016 23. Financial Risk Management (continued) (b) Credit risk Credit risk is the risk that a customer will be unable to pay amounts due, causing a financial loss; as a result, the Corporation’s maximum exposure to credit risk is the amount of trade and other receivables and cash and cash equivalents. The Corporation’s practice is to manage credit risk by examining each new customer individually for credit worthiness before the Corporation’s standard payment terms are offered. The Corporation’s review may include financial statement review, credit references, or bank references. Customers that lack credit worthiness transact with the Corporation on a prepayment only basis. The Corporation constantly monitors individual customer trade receivables, taking into consideration industry, aging profile, maturity, payment history, and existence of previous financial difficulties in assessing credit risk. A formal review is performed each month for each subsidiary, focusing on amounts which have been outstanding for periods which are considered abnormal for each customer. The Corporation establishes an allowance for doubtful accounts for specifically identifiable customer balances which are assessed to have credit risk exposure. The following shows the aged balances of trade and other receivables: In the twelve months ended December 31, 2017, the Corporation provided an allowance for $2,965,000 of receivables aged greater than 90 days and collected $454,000 that had previously been allowed for. The Corporation also applied $20,000 of allowance for doubtful accounts against the associated receivable balance. As at March 13, 2018, the Corporation has collected $2,484,000 on amounts outstanding more than 90 days. Construction receivables represent progress billings to customers under open construction contracts, holdback amounts billed on construction contracts which are not due until the contract work is substantially completed, amounts recognized as revenue under open construction contracts not billed to customers and highly probable claims. At December 31, 2017, included in construction receivables were holdbacks of $209,000 (2016 - $7,900). Page | 70 December 31,December 31,(000’s)20172016Trade receivables Neither impaired nor past due$ 23,161 $ 22,066 Outstanding 31-60 days 11,820 6,522 Outstanding 61-90 days 2,221 1,750 Outstanding more than 90 days 7,267 3,401 Total trade receivables$ 44,469 $ 33,739 Construction receivables Neither impaired nor past due$ 18,655 $ 2,369 Outstanding 31-60 days 918 25 Outstanding 61-90 days - 1,053 Outstanding more than 90 days 14,006 434 Total construction receivables$ 33,579 $ 3,881 Accrued revenue 12,953 10,058 Accrued construction revenue 9,695 3,361 Other receivables 1,034 6,548 Allowance for doubtful accounts (2,965) (1,043)Total trade and other receivables$ 98,765 $ 56,544 Notes to the consolidated financial statements Years ended December 31, 2017 and 2016 23. Financial Risk Management (continued) (c) Liquidity risk Liquidity risk is the risk that the Corporation will encounter difficulty in meeting obligations associated with financial liabilities. The Corporation believes that it has access to sufficient capital through internally generated cash flows and committed credit facilities to meet current spending forecasts. To manage liquidity risk, the Corporation forecasts operational results and capital spending on a regular basis. Actual results are compared to these forecasts to monitor the Corporation’s ability to continue to meet spending forecasts. As at December 31, 2017, the Corporation has $76,984,000 of available room on its committed credit facility (Note 18). The following shows the timing of cash outflows relating to trade and other payables and loans and borrowings: (1) (2) Trade and other payables include trade and other payables, income taxes payable, and provisions. Loans and borrowings include non-interest bearing notes payable and Horizon North’s senior secured revolving term credit facility. Cash flows of Horizon’s note payable have been recorded according to estimated utilization of specific equipment. (d) Market risk Market risk is the risk or uncertainty arising from possible market price movements and their impact on future performance of the Corporation. The market price movements that could adversely affect the value of the Corporation’s financial assets, liabilities, and expected future cash flows include foreign currency exchange risk and interest rate risk. As the Corporation’s exposure to foreign currency exchange risk and interest rate risk is limited, the Corporation does not currently hedge its financial instruments. (i) Foreign currency exchange risk The Corporation has limited exposure to foreign currency exchange risk as sales and purchases are typically denominated in CAD. The Corporation’s exposure to foreign currency exchange risk arises from the purchase of some raw materials, which are denominated in USD, and a foreign operational entity with USD functional currency. As the foreign currency exchange risks are primarily based on the realized foreign exchange, the following sensitivity analysis is to determine the impact on cash used in operating activities. The effect of a $0.01 increase in the USD/CAD exchange rate would decrease cash used in operating activities for the twelve months ended December 31, 2017 by approximately $77,000 (December 31, 2016 - $26,000). This assumes that the quantity of USD raw material purchases and the foreign operations in the year remain unchanged and that the change in the USD/CAD exchange rate is effective from the beginning of the year. (ii) Interest rate risk The Corporation is exposed to interest rate risk as changes in interest rates may affect interest expense and future cash flows. The primary exposure is related to the Corporation’s revolving credit facility which bears interest on a grid pricing structure based on the Corporation’s debt to EBITDAS ratio. Amounts drawn on the credit facility incur interest at bank prime plus 0.50% to 2.25% or the Bankers’ Acceptance rate plus 1.50% to 3.25%. If prime were to have increased by 1.00%, it is estimated that the Corporation’s net earnings would have decreased by approximately $700,000 for the twelve months ended December 31, 2017 (December 31, 2016 - $687,000). This assumes that the amount and mix of fixed and floating rate debt in the year remains unchanged and that the change in interest rates is effective from the beginning of the year. Page | 71 Trade andTrade andotherLoans and otherLoans and payables(1)Borrowings(2)Totalpayables(1)Borrowings(2)Total2017$- $- $ - $30,200 $- $30,200 201837,936 - 37,936 3,248 75,268 78,516 2019- 73,016 73,016 - - - 20206,276 - 6,276 3,121 - 3,121 2021- - - - - - 2022 and beyond4,941 - 4,941 5,048 5,048 $49,153 $73,016 $122,169 $41,617 $75,268 $116,885 December 31, 2017December 31, 2016 Notes to the consolidated financial statements Years ended December 31, 2017 and 2016 24. Capital Management The Corporation’s main objective is to build a profitable, growth-oriented company. Therefore, the Corporation’s primary capital management objective is to maintain a conservative balance sheet to maintain investor, creditor, and market confidence and to sustain future development of the business. The Corporation monitors capital through two key ratios: total loans and borrowings to EBITDAS(1) and total loans and borrowings to total loans and borrowings plus shareholders’ equity. Total loans and borrowings to EBITDAS(1) is calculated as current loans and borrowings plus long-term loans and borrowings divided by trailing 12 months EBITDAS(1). Total loans and borrowings to EBITDAS(1) is monitored from both a historical and anticipated EBITDAS(1) perspective. Total loans and borrowings to total loans and borrowings plus shareholders equity is calculated as current loans and borrowings plus long-term loans and borrowings divided by current loans and borrowings plus long-term loans and borrowings plus shareholders’ equity. The Corporation’s strategy during the twelve months ended December 31, 2017, which was unchanged from 2016, is to maintain an appropriate level of loans and borrowings in comparison to EBITDAS(1) and total loans and borrowings plus shareholders’ equity. (1) (2) EBITDAS (Earnings before interest, taxes, depreciation, amortization, impairment, gain/loss on disposal of property, plant and equipment, earnings from equity investments, and share based compensation) is not a recognized measure under IFRS. Management believes that in addition to net earnings, EBITDAS is a useful supplemental measure as it provides an indication of the Corporation’s ability to generate cash flow in order to fund working capital, service debt, pay current income taxes and fund capital programs, and it is regularly provided to and reviewed by the Chief Operating Decision Maker. Horizon North’s method of calculating EBITDAS may differ from other entities and accordingly, EBITDAS may not be comparable to measures used by other entities. The Corporation’s loans and borrowings include the committed credit facility and finance lease liabilities. The Corporation’s variable-rate committed credit facility approximates its carrying value, as it is at a floating market rate of interest. Page | 72 December 31,December 31,(000's)20172016Statement of financial position components of ratios Current loans and borrowings (2)$ 1,588 $ - Loans and borrowings (2) 73,016 75,268 Total loans and borrowings$ 74,604 $ 75,268 Shareholders' equity 305,064 323,687 Total loans and borrowings plus shareholders' equity$ 379,668 $ 398,955 Statement of comprehensive income components of ratios (trailing 12 months) Operating loss$ (5,935)$ (22,204) Depreciation 40,701 48,848 Amortization 2,742 992 Impairment loss 3,457 - Gain on disposal of property, plant and equipment (12,094) (626) Share based compensation 1,174 1,651 EBITDAS (1)$ 30,045 $ 28,661 Total loans and borrowings to EBITDAS (1)2.482.46Total loans and borrowings to total loans and borrowings plus shareholders' equity0.200.19 Notes to the consolidated financial statements Years ended December 31, 2017 and 2016 25. Operating segments Effective January 1, 2017, the Corporation re-aligned its operating segments to reflect how the Chief Operating Decision Maker monitors and allocates resources to the operations. Previously, the segments were disclosed as Camps & Catering and Rentals & Logistics. The re-alignment of the operating segments transferred the modular solutions assets into the new Modular Solutions operating segment. The Corporation continues to operate in Canada and the United States through its re-aligned operating segments: Camps & Catering, Rentals & Logistics and Modular Solutions. The Camps & Catering segment combines the camps and catering operations, and the associated services. The Rentals & Logistics segment combines all other rental operations; mat rental operations, relocatable structures rental operations, transportation operations and the associated services. The Modular Solutions segment is comprised of all modular manufacturing and installation operations for commercial and residential end markets. Corporate includes the costs of head office administration, interest costs, taxes, other corporate costs and residual assets and liabilities. The prior period comparative figures have been reclassified to conform to the new operating segments. The changes to the operating segments had an impact on the segment information reported but did not change any of the aggregate financial information reported. Information regarding the results of all segments is included below. Inter-segment pricing is determined on an arm’s length basis. The Corporation has one major customer in the Camps & Catering segment which generated 10% of total revenues for the year ended December 31, 2017 (December 31, 2016 – one major customer generated 11%). (1) EBITDAS (Earnings before interest, taxes, depreciation, amortization, impairment, gain/loss on disposal of property, plant and equipment, earnings from equity investments, and share based compensation) is not a recognized measure under IFRS. Management believes that in addition to net earnings, EBITDAS is a useful supplemental measure as it provides an indication of the Corporation’s ability to generate cash flow in order to fund working capital, service debt, pay current income taxes and fund capital programs, and it is regularly provided to and reviewed by the Chief Operating Decision Maker. Horizon North’s method of calculating EBITDAS may differ from other entities and accordingly, EBITDAS may not be comparable to measures used by other entities. Page | 73 Twelve months endedCamps &Rentals &ModularInter-segmentDecember 31, 2017 (000’s)CateringLogisticsSolutionsCorporateEliminationsTotalRevenue$224,430 $52,979 $46,755 $- $(82) $324,082 EBITDAS(1)43,524 13,913 (14,626) (12,766) - 30,045 Depreciation and amortization30,466 10,304 2,030 645 (2) 43,443 Impairment loss3,457 - - - - 3,457 (Gain) loss on disposal of assets(11,900) (285) (4) 147 (52) (12,094) Share based compensation219 22 127 806 - 1,174 Operating (loss) earnings21,282 3,872 (16,779) (14,364) 54 (5,935) Total assets346,824 62,875 64,195 5,856 - 479,750 Capital expenditures11,799 6,401 1,309 606 - 20,115 Twelve months endedCamps &Rentals &ModularInter-segmentDecember 31, 2016 (000’s)CateringLogisticsSolutionsCorporateEliminationsTotalRevenue$204,331 $38,317 $8,287 $- $- $250,935 EBITDAS(1)35,233 9,356 (4,411) (11,517) - 28,661 Depreciation and amortization36,032 11,083 1,888 915 (78) 49,840 Gain on disposal of assets(335) (199) (15) (19) (58) (626) Share based compensation364 165 162 960 - 1,651 Operating (loss) earnings(828) (1,693) (6,446) (13,373) 136 (22,204) Total assets378,803 66,096 31,020 9,182 - 485,101 Capital expenditures23,779 4,242 1,575 677 - 30,273 Notes to the consolidated financial statements Years ended December 31, 2017 and 2016 26. Related Parties The Corporation earned a management fee for the year ended December 31, 2017 of $60,000 (2016 - $60,000) for the recovery of administrative overhead related to accounting and management services provided to Arctic Oil & Gas Services Ltd (“AOGS”), a joint venture that was 50% owned by the Corporation. As at December 31, 2017, the Corporation sold the 50% investment in AOGS for total consideration of $1. AOGS earned revenue during the year ended December 31, 2017 of $1,116,000 (2016 – $1,319,000) for catering services provided to E. Gruben’s Transport Ltd, of which a director of the Corporation is the Chief Executive Officer. The amounts included in trade receivables of AOGS as at December 31, 2017 is $140,000 (2016 – $nil). The Corporation earned revenue during the year ended December 31, 2017 of $148,000 (2016 – $1,000) for catering services provided to Trican Well Service Ltd., of which a director of the Corporation is a Director. There were no amounts included in trade receivables as at December 31, 2017 (2016 - $nil). All related party transactions are in the normal course of operations and have been measured at the agreed exchange amounts, which is the amount of consideration established and agreed to by the related parties and is similar to those negotiated with third parties. All outstanding balances are to be settled with cash, and none of the balances are secured. Key management personnel are those persons that have the authority and responsibility for planning, directing and controlling the activities of the Corporation, directly or indirectly. Key management personnel of the Corporation include its executive officers and the board of directors. Key management personnel compensation for the year ended December 31, 2017 and 2016 is comprised as follows: 27. Supplemental Information Components of change in non-cash working capital balances related to operating activities: Page | 74 December 31,December 31,(000's)20172016Joint venture Recovery of administrative overhead$ 60 $ 60 Included in accounts receivable - 23 Key management personnel interests Sales$ 1,264 $ 1,320 Included in accounts receivable 140 - December 31,December 31,(000's)20172016Short-term employee benefits$ 2,148 $ 2,143 Post-employment benefits 82 61 Share based compensation 943 749 $ 3,173 $ 2,953 December 31,December 31,(000's)20172016Trade and other receivable$ (42,221)$ (2,912)Inventories (2,168) 6,057 Prepayments (1,479) (281)Trade and other payables 4,464 (316)Deferred revenue 5,231 945 Purchases of rental fleet (4,519) (8,386)Acquired working capital - (335)Finance cost payable 110 96 $ (40,582)$ (5,132) Notes to the consolidated financial statements Years ended December 31, 2017 and 2016 28. Significant Subsidiaries The consolidated financial statements of the Corporation, include the accounts of its one wholly-owned partnership, as well as five special purpose entities: The Partnership is the primary operating entity of the Corporation. (a) Special purpose entities The Corporation has a 49% interest in the ownership and voting rights of Kitikmeot, Acho, Secwepemc, HRHN, TLHN, Acden, and Sekui and maintains two out of four board of director seats in these special purpose entities (“SPE”). These SPE’s are consolidated when, based on an evaluation of the substance of its relationship with the Corporation and the SPE’s risks and rewards, the Corporation concludes that it controls the SPE. The SPE’s do not generate profit but rather have limited assets and the only non-flow through expenses are management fees paid to the partners. An aboriginal billing vehicle or partnership is required to achieve aboriginal participation and secure projects in specific regions of Canada. The Corporation’s control is established under terms that impose strict limitations on the decision-making powers of the SPE’s management. The control results in the Corporation receiving the majority of the benefits related to the SPE’s operations and net assets, being exposed to the majority of risks incident to the SPE’s activities, and retaining the majority of the residual or ownership risks related to the SPE’s or their assets. 29. Subsequent Event On January 8, 2018, the Corporation completed an asset purchase for a 288 person Camp Facility south of Fort McMurray, Alberta for a total purchase price of $14,000,000. Page | 75 Country ofDecember 31,December 31,Subsidiary NameIncorporation20172016Horizon North Camp & Catering Partnership Canada 100 100 Kitikmeot Caterers Ltd (“Kitikmeot”) Canada 49 49 Acho Horizon North Camp Services Limited Partnership (“Acho”) Canada 49 49 Secwepemc Camps & Catering Limited Partnership (“Secwepemc”) Canada 49 49 Halfway River Horizon North Limited Partnership (“HRHN”) Canada 49 49 Two Lakes Horizon North Limited Partnership (“TLHN”) Canada 49 49 Acden Horizon North Limited Partnership ("Acden") Canada 49 - Sekui Limited Partnership ("Sekui") Canada 49 - Ownership Interest (%) Corporate Information Directors Ann Rooney(1)(2) Calgary, Alberta Bradley P. D. Fedora(2)(3) Calgary, Alberta Dale E. Tremblay(2)(3) Calgary, Alberta Kevin D. Nabholz(1)(3) Calgary, Alberta Mary Garden(1)(3) Victoria, British Columbia Richard T. Ballantyne(1)(2) Salt Spring Island, British Columbia Rod Graham Calgary, Alberta Russell Newmark(2)(3) Calgary, Alberta (1) Audit Committee Member (2) Health, Safety and Environment Committee Member (3) Corporate Governance and Compensation Committee Member Corporate Office 900, 204-4th Avenue S.W. Calgary, Alberta T2P 4H4 P 403 517-4654 F 403 517-4678 Website www.horizonnorth.ca Officers Kevin D. Nabholz Chair of the Board Rod Graham President and Chief Executive Officer Scott Matson Senior Vice President Finance and Chief Financial Officer Bill Anderson Executive Vice President QHSE Jan Campbell Corporate Secretary Legal Counsel Borden Ladner Gervais LLP Calgary, Alberta Auditor KPMG LLP Calgary, Alberta Stock Exchange Listing Toronto Stock Exchange Symbol: HNL Transfer Agent AST Trust Company (Canada) Calgary, Alberta  

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