Horizon North Logistics Inc.
Annual Report 2018

Plain-text annual report

Annual Report 2018 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 33 Independent Auditors’ Report to Shareholders 34 Consolidated Financial Statements 38 Notes to the Consolidated Financial Statements 42 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 3rd day of May 2019 at 9:00 a.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, Over the past four years, Horizon North has changed dramatically. A previous reliance on services provided for oil and gas clients has been replaced by a diverse portfolio of offerings across two divisions – Industrial Services and Modular Solutions – that will, along with the strongest balance sheet among our peers, allow us to grow and weather headwinds in any of the industries we serve. On the Industrial Services side of our business, our reputation is well-established as a leading provider of turn-key camp, hospitality, access and maintenance solutions. Our 2019 strategy in this division is focused on four key areas of Canada: • Oil Sands – Underpinned by two prominent relationships with Aboriginal communities north and south of Fort McMurray, we have a nimble, turn-key offering in this region which allows for hospitality and maintenance services to align with the fluctuating labour demands that exist throughout the year. • Montney/Duvernay (W5/W6) – We continue to be the largest provider of open camp rooms in this prolific hydrocarbon resource basin, as well as a leading provider of hospitality and management services in customer-owned facilities. This region also profiles our access solutions, including matting and soil stabilization, which serve as a key entry point for us to future opportunities, demonstrating our capability to provide a full suite of efficient, high-quality services to our clients. • Northern Canada – Our specialized, solution-driven teams are experts in the unique aspects of working in the North. Through their expertise and the support of key Inuit partnerships, we provide our customers in northern Canada with world-class hospitality and maintenance services that meet the demands of the highly variable, remote environments. The recent opening of an 800-person camp in the northern reaches of Baffin Island where we provide hospitality, management and maintenance services is an ideal illustration of our capabilities in a unique area of the world. • West Coast – With a positive final investment decision from LNG Canada in 2018, our 57-acre land profile at the entrance to Kitimat will act as a substantial platform for us in 2019 and beyond. The first phase of our world-class Crossroads open lodge is projected to open in the spring with 240 rooms and will expand to more than 800 rooms as activity in the region grows. The mixed-use community that surrounds the lodge will demonstrate the wide array of modular products we offer, including hotel, office/retail space, and single- and multi-family residential. On the Modular Solutions side of our business, we will continue a focus on growing our backlog of projects and driving economies of scale in our facilities. To meet growing demand, we executed two acquisitions in 2018 which substantially increased our manufacturing capacity, adding facilities in Aldergrove and Calgary. The ability to provide effective solutions in the Lower Mainland, Alberta and Saskatchewan will bolster the work being done at our center of excellence in Kamloops and will position Horizon North even more strongly as one of Canada’s leaders in modular construction. One area where our “disruption for construction” model is beginning to play a significant role is affordable housing, the need for which has become a key conversation in many areas of our country. Over the past two years, Horizon North has built a reputation in this market as a partner of choice, due in large part to our efforts in British Columbia to assist government agencies in providing courageous and creative solutions to supportive housing for those experiencing homelessness. Our recent acquisitions will allow us to continue our leadership in supporting this noble cause in other areas of Canada. In all aspects of our work, there are common links that remain fundamental to us as we move forward and grow. It begins with our commitment to safety, which was demonstrated once again by our award of Gold Level Standing in the Manufacturing division for Canada’s Safest Employers. Our investment in strong partnerships with Aboriginal communities is also a critical pillar of our business. Through 24 strong partnerships across western and northern Canada, we work to provide economic benefits and community support to the individuals and families who call the areas home. Finally, we remain dedicated to our Horizon North employees, with a commitment to an innovative, collaborative work environment for all members of our team. Thank you for your continued support on our journey. Rod Graham, President, CEO and Director Page | 3 Management’s Discussion and Analysis Three months and years ended December 31, 2018 and 2017 This Management’s Discussion and Analysis (“MD&A”), prepared as at March 12, 2019 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. We encourage readers to read the “Caution Regarding Forward-Looking Statements and Information” section at the end of this document. About Horizon North Horizon North is a publicly listed corporation (TSX: HNL.TO) providing a full range of industrial, commercial, and residential products and services. Our Industrial Services business supplies workforce accommodations, camp management services, access solutions, maintenance and utilities. Our Modular Solutions business integrates modern design concepts and technology with state of the art, off-site manufacturing processes; producing high quality building solutions for commercial and residential offerings including offices, hotels, and retail buildings, as well as distinctive single detached dwellings and multi-family residential structures. As a result of our diverse product and service offerings, Horizon North is uniquely positioned to meet the needs of our customers in numerous sectors, anywhere in Canada. Annual Key Comments • • • • • • The Modular Solutions business improved significantly in 2018 achieving positive EBITDAS and increasing by $25.1 million compared to 2017. Backlog exiting the year was $88.8 million compared to $43.9 million in 2017 with the funnel of high- quality, high probability opportunities also increasing, closing 2018 approximately $290.0 million compared to $148.0 million exiting 2017; Horizon North successfully completed two acquisitions in 2018: Shelter Modular Inc., a modular manufacturing company based in Aldergrove, British Columbia including a 32,760 sq. ft. facility, and the custom manufacturing business of C&V Portable Accommodations Ltd. including an 87,000 sq. ft facility based in Rocky View County, Alberta bringing total manufacturing square footage to 193,630 sq. ft.; The Industrial Services business announced several contract awards for over $118.0 million: a hospitality services contract south of Fort McMurray, Alberta, several camp services contracts for customers in the Montney region of Alberta and British Columbia, and a 150-bed camp facility for a liquified petroleum gas (“LPG”) project located in Prince Rupert, British Columbia; On January 8, 2018, Horizon North completed the $14.0 million strategic asset acquisition of the 288 bed Moose Haven Lodge south of Fort McMurray, Alberta to secure opportunities in the Fort McMurray, Alberta area; Horizon North initiated the mobilization and installation of the first phase of 260 beds of a potential 1,000 bed open camp facility in Kitimat, British Columbia as part of the execution of its west coast liquefied natural gas (“LNG”) strategy; Horizon North’s balance sheet improved as a result of continued focus on reducing working capital and a disciplined capital program, as well as through net proceeds received from a bought deal equity financing of $47.5 million that closed on June 25, 2018 to support the execution of the Corporation’s LNG strategy and anticipated growth in the Modular Solutions business; and • Horizon North continued its dividend policy and paid its 29th consecutive quarterly dividend. Page | 4 Management’s Discussion and Analysis Three months and years ended December 31, 2018 and 2017 Annual Financial Summary (000’s except per share amounts) 2018 % change 2017 % change 2016 Years ended December 31, Revenue EBITDAS(1) EBITDAS as a % of revenue Operating loss Operating loss as a % of revenue Total loss Total comprehensive loss Loss per share Basic Diluted Total assets $ 394,245 22 $ 324,082 29 $ 250,935 36,683 22 30,045 5 28,661 9% 9% 11% (7,296) 23 (5,935) (73) (22,204) (2%) (2%) (9%) (8,196) 5 (7,843) (61) (20,316) (8,196) 4 (7,846) (62) (20,383) $ (0.05) $ (0.05) $ (0.05) $ (0.05) $ (0.15) $ (0.15) $ 472,410 (2) $ 479,750 (1) $ 485,101 Total loans and borrowings 31,666 (58) 74,604 (1) 75,268 Funds flow Net Capital spending (proceeds) Total Debt to EBITDAS(2) Debt to total capitalization ratio(1) Dividends declared Dividends declared per share 39,685 (28) 55,308 47 37,693 21,866 (192) (23,830) (227) 18,692 0.86:1.00 0.09:1.00 2.48:1.00 0.19:1.00 2.46:1.00 0.19:1.00 $ 12,762 $ 0.08 $ 11,573 $ 0.08 $ 11,112 $ 0.08 (1) (2) Please refer to Management’s Report on Disclosure Controls and Procedures and Internal Control over Financial Reporting section 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 Liquidity and Capital Resources section of the Management’s Discussion and Analysis for the definitions of Total Debt to EBITDAS. Annual Overview Results for the year ended December 31, 2018 (“2018”) were somewhat mixed in relation to the comparative year ended December 31, 2017 (“2017” or “comparative year”). The revenue increase compared to 2017 was driven by the ramp up of the Modular Solutions business and increased manufacturing capacity, along with increased camp installation work in the Camp & Catering segment. Partially offsetting these increases, Camp & Catering segment revenues from equipment sales decreased as a result of a significant camp equipment sale in Q2 2017 which generated $20.0 million in revenues and $6.0 million in EBITDAS. Rentals & Logistics segment revenues also decreased compared to 2017 due to lower demand for matting sales. Industrial Services Revenues from Industrial Services for 2018 decreased compared to the same period of 2017 mainly due to the Q2 2017 camp equipment sale noted above. Excluding the sale, Camp & Catering revenues increased compared to 2017 following a 38% increase in the demand for catering only activity and an increase in camp installation work related to previously announced contract awards. Camp rental and catering activity softened compared to 2017 with a 7% decrease in bed rental days offset by the camp installation work, noted above, increasing the revenue per bed rental day to $98 or by 11%. Rentals & Logistics revenues decreased compared to 2017 primarily due to a 43% decrease in mat sales. This decrease was partially offset by the continued strong demand for access mat rentals along the northern British Columbia and Alberta border. Modular Solutions Modular Solutions revenues for 2018 were significantly higher than 2017 as a result of increased capacity to execute the growing backlog of projects. Compared to 2017, capacity increased significantly as a result of ramping up direct headcount at the Kamloops, British Columbia plant and through the acquisitions of the Aldergrove, British Columbia and the Rocky View County, Alberta facilities. The increase in throughput capacity facilitated the execution of higher volumes of backlog and generated much stronger revenues. The number and scope of projects increased in 2018 consisting largely of government sponsored affordable Page | 5 Management’s Discussion and Analysis Three months and years ended December 31, 2018 and 2017 housing projects for government housing agencies in British Columbia and commercial projects, compared to a variety of smaller projects in 2017. Other Financial Measures EBITDAS for 2018 increased $6.6 million or 22% and remained unchanged as a percentage of revenue compared to 2017. The increase in EBITDAS was a result of the significant improvement in the Modular Solutions business related to the impact of increased contract volume and efficiencies gained by economies of scale. Horizon North’s Total Debt to EBITDAS ratio was 0.86:1.00 at December 31, 2018 compared to 2.48:1.00 at December 31, 2017 as a result of a bought deal equity financing completed in Q2 2018 with net proceeds of $47.5 million used to reduce debt. Horizon North continued to maintain a strong focus on managing the Statement of Financial Position through minimizing working capital and closely managing the capital program. Outlook In 2019, Horizon North will continue to diversify both its portfolio of offerings and customer base through a focus on its two operating divisions: Industrial Services and Modular Solutions. Industrial Services In 2019, Horizon North will continue to leverage its reputation as a leading provider of turn-key camp, hospitality, access and maintenance solutions with focus on the following four key areas: • Oil Sands – Horizon North expects to leverage its operational footprint and history, along with two prominent relationships with Aboriginal communities north and south of Fort McMurray, to pursue full turn-key opportunities as well as catering and hospitality opportunities in customer-owned facilities; • Montney/Duvernay – Horizon North is the largest provider of open camp services in this area and is a market leader in providing catering and hospitality services in customer-owned facilities. Horizon North will continue to leverage existing assets and relationships while looking to develop additional areas of opportunity to support ongoing activity in this area; • Northern Canada – Horizon North has a long history and expertise in providing hospitality, management and maintenance services across Canada’s northern regions. In 2019, Horizon North will continue to focus on developing and expanding its capabilities and footprint across Canada’s highly variable and remote northern regions; and • West Coast – Horizon North initiated the first phase of development on its 57-acre parcel of land located at the entrance to Kitimat, British Columbia in late 2018. In 2019, Horizon North expects to open the first phase of its world-class Crossroads open lodge with 260 beds ready in the spring and plans to expand to a potential 1,000 beds as activity in the region grows. Modular Solutions For 2019, Horizon North’s focus is to continue to grow its backlog of modular construction projects and drive economies of scale in our facilities and project execution capabilities. Horizon North will continue to focus on hotel development, multi-family residential development and social, student and senior infrastructure development. Horizon North completed two acquisitions in 2018 to provide additional capacity in western Canada and is actively investigating opportunities to expand its geographic footprint to service other areas of Canada with strong demand profiles for our unique construction model. Statement of Financial Position The strength of the Statement of Financial Position remains a key priority and Horizon North took several steps in 2018 to significantly reduce its overall debt and leverage position. This strong position will allow Horizon North to undertake an expanded capital program in 2019 with a budget of $50.4 million focused on its Crossroads open lodge project in Kitimat, BC, refreshing and providing the ability for moderate growth of its matting rental fleet and supporting the expanding Modular Solutions business. Page | 6 Management’s Discussion and Analysis Three months and years ended December 31, 2018 and 2017 Dividend Payment Horizon North announced today that its Board of Directors has declared a dividend for the first quarter of 2019 at $0.02 per share. The dividend is payable to shareholders of record at the close of business on March 31, 2019 to be paid on April 15, 2019. 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 | 7 Management’s Discussion and Analysis Three months and years ended December 31, 2018 and 2017 Annual Financial Results Twelve months ended December 31, 2018 (000’s) Revenue Expenses Direct costs Selling & administrative expenses EBITDAS EBITDAS as a % of revenue Share based compensation Depreciation & amortization (Gain) loss on disposal of property, plant and equipment Operating earnings (loss) Finance costs Earnings on equity Investments Income tax recovery Total loss Other comprehensive income Total comprehensive loss Loss per share – basic – diluted (000’s) Revenue Expenses Direct costs Selling & administrative expenses EBITDAS EBITDAS as a % of revenue $ $ $ $ $ Share based compensation Depreciation & amortization Impairment loss (Gain) loss on disposal of property, plant and equipment Corporate Eliminations Total $ (3,179) $ 394,245 Industrial Services Modular Solutions 264,269 $ 133,155 $ 219,750 4,550 119,385 3,304 - - 13,752 39,969 $ 10,466 $ (13,752) $ 15% 8% 507 39,466 (715) 711 $ 216 1,395 245 2,028 425 409 8,610 $ (16,614) $ Twelve months ended December 31, 2017 Corporate Eliminations Total $ (82) $ 324,082 Industrial Services Modular Solutions 277,409 $ 46,755 $ 213,534 6,438 59,174 2,207 - - 12,766 57,437 $ (14,626) $ (12,766) $ 21% 241 40,770 3,457 (12,185) (31%) 127 2,030 - (4) - 806 645 - 147 (3,179) - - - - $ 3 (3) $ $ $ $ 335,956 21,606 36,683 9% 2,751 41,289 (61) (7,296) 2,894 (67) (1,927) (8,196) - (8,196) (0.05) (0.05) $ (82) - - - - (2) - (52) 54 $ $ $ $ 272,626 21,411 30,045 9% 1,174 43,443 3,457 (12,094) (5,935) 2,824 (916) (7,843) (3) (7,846) (0.05) (0.05) Page | 8 Operating earnings (loss) $ 25,154 $ (16,779) $ (14,364) $ Finance costs Income tax recovery Total loss Other comprehensive loss Total comprehensive loss Loss per share – basic – diluted Management’s Discussion and Analysis Three months and years ended December 31, 2018 and 2017 Fourth Quarter Key Comments • Q4 2018 financial results were the strongest since Q1 2017 driven primarily by improved Modular Solutions performance; • The Modular Solutions business improved significantly in 2018 achieving positive EBITDAS and increasing by $25.1 million compared to 2017. Backlog exiting the year was $88.8 million compared to $43.9 million in 2017 with the funnel of high- quality, high probability opportunities also increasing, closing 2018 approximately $290.0 million compared to $148.0 million exiting 2017; and • The Industrial Services business announced several camp service contracts: • • • a hospitality services contract south of Fort McMurray, Alberta through its Aboriginal partnership with Chipewyan Prairie Dene First Nations; a contract extension in the Grande Prairie, Alberta area; and a 150-bed facility for an LPG project located in Prince Rupert, British Columbia. Fourth Quarter Financial Summary (000’s except per share amounts) Revenue EBITDAS(1) EBITDAS as a % of revenue Operating earnings (loss) Operating earnings (loss) as a % of revenue Total income (loss) Total comprehensive income (loss) Earnings (loss) per share Basic Diluted Total assets Total loans and borrowings Funds flow Net Capital spending Total Debt to EBITDAS(2) Debt to total capitalization ratio(1) Dividends declared Dividends declared per share Three months ended December 31, 2018 2017 % change $ 118,045 $ 82,664 43 13,654 6,786 101 12% 2,240 2% 1,413 8% (4,074) (155) (5%) (3,885) (136) 1,413 (3,892) (136) $ $ $ 0.01 $ (0.03) 0.01 $ (0.03) 472,410 $ 479,750 (2) 31,666 74,604 (58) 17,294 6,868 152 5,130 1,645 212 0.86:1.00 0.09:1.00 2.48:1.00 0.19:1.00 $ $ 2,894 $ 0.02 $ 0.02 3,285 (1) (2) Please refer to Management’s Report on Disclosure Controls and Procedures and Internal Control over Financial Reporting section 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 Liquidity and Capital Resources section of the Management’s Discussion and Analysis for the definitions of Debt to EBITDAS. Page | 9 Management’s Discussion and Analysis Three months and years ended December 31, 2018 and 2017 Fourth Quarter Overview Results for the three months ended December 31, 2018 (“Q4 2018”) improved across all financial measures, compared to the three months ended December 31, 2017 (“Q4 2017”). The revenue increase compared to 2017 was driven by the Modular Solutions and Camp & Catering segments, partially offset by the Rentals & Logistics segment. Industrial Services Revenues from Industrial Services for Q4 2018 increased compared to Q4 2017 mainly due to higher camp installation activity in the northeast region of British Columbia and stronger access mat rentals. This was offset by softer mat sales and lower related installation and transportation services. Camp rental and catering activity levels increased compared to Q4 2017 with utilization of 54% or up 4% and revenue per bed rental day at $107, an increase of 39%, due to camp installation activity with no associated bed rental days. Catering only activity remained consistent compared to Q4 2017 with stronger revenue per catering only day, higher by 9%, as a result of different contract mix. Rentals & Logistics revenues decreased compared to Q4 2017 primarily due to a decrease in equipment sales and a reduction in related installation and transportation services. These were somewhat offset by increased demand and stronger pricing for mat rental activity along the northern British Columbia and Alberta border. Modular Solutions Modular Solutions revenues for Q4 2018 were significantly higher than Q4 2017 as a result of increased capacity to execute the growing backlog of projects. Compared to Q4 2017, capacity increased significantly as a result of ramping up direct headcount at the Kamloops, British Columbia plant and the acquisition of the Aldergrove, British Columbia facility. In addition, the acquisition of the Rocky View County, Alberta facility in November 2018 allowed for a further ramp up of production exiting 2018. The increase of throughput capacity facilitated the execution of higher volumes of backlog and generated much stronger revenues. The volume of government sponsored affordable housing projects in Q4 2018 was considerably higher compared to Q4 2017. Other Financial Measures Horizon North’s Q4 2018 EBITDAS increased by $6.9 million or 101% compared to Q4 2017. As a percentage of revenue, EBITDAS were 12% compared to 8% in Q4 2017. The increase in EBITDAS was primarily driven by significantly improved operating results in the Modular Solutions segment compared to Q4 2017. Horizon North continued to maintain a strong focus on managing its Statement of Financial Position through minimizing working capital and closely managing the capital program. Total loans and borrowings were $31.7 million at December 31, 2018 compared to $74.6 million at December 31, 2017. The decrease was mainly due to completion of the bought deal equity financing in Q2 2018 with net proceeds of $47.5 million used to reduce debt and improve EBITDAS. As a result of the decreased debt and stronger EBITDAS, the total Debt to EBITDAS ratio was 0.84:1.00 at December 31, 2018 compared to 2.48:1.00 at December 31, 2017. Page | 10 Management’s Discussion and Analysis Three months and years ended December 31, 2018 and 2017 Fourth Quarter Financial Results Three months ended December 31, 2018 Corporate Eliminations Total $ (163) $ 118,045 $ $ $ $ $ $ (000’s) Revenue Expenses Direct costs Selling & administrative expenses EBITDAS EBITDAS as a % of revenue Share based compensation Depreciation & amortization (Gain) loss on disposal of property, plant and equipment Operating earnings (loss) Finance costs Income tax expense Total income Other comprehensive income Total comprehensive income Earnings per share – basic – diluted (000’s) Revenue Expenses Direct costs Selling & administrative expenses EBITDAS EBITDAS as a % of revenue Share based compensation Depreciation & amortization Loss on disposal of property, plant and equipment Operating earnings (loss) Finance costs Earnings on equity Investments Income tax recovery Total loss Other comprehensive loss Total comprehensive loss Loss per share – basic – diluted - - - - Industrial Services Modular Solutions 74,429 $ 43,779 $ 62,379 981 11,069 $ 15% 134 9,711 (102) 36,495 780 6,504 $ 15% 63 385 237 3,919 (3,919) $ 481 91 409 1,326 $ 5,819 $ (4,900) $ Three months ended December 31, 2017 Industrial Services Modular Solutions 64,055 $ 18,638 $ 49,661 992 13,402 $ 21% 81 9,815 54 21,447 648 (3,457) $ (19%) 37 525 - 3,159 (3,159) $ 243 105 - 3,452 $ (4,019) $ (3,507) $ Corporate Eliminations Total $ (29) $ 82,664 (163) - - - - $ 5 (5) $ $ $ $ 98,711 5,680 13,654 12% 678 10,192 544 2,240 374 453 1,413 - 1,413 0.01 0.01 (29) - - - - - - $ $ $ $ $ 71,079 4,799 6,786 8% 361 10,445 54 (4,074) 533 (105) (617) (3,885) (7) (3,892) (0.03) (0.03) Page | 11 Management’s Discussion and Analysis Three months and years ended December 31, 2018 and 2017 Industrial Services Industrial Services is comprised of two segments, Camps & Catering and Rentals & Logistics. (000’s) Camps & Catering Rentals & Logistics Total revenue EBITDAS EBITDAS as a % of revenue Operating earnings Camps & Catering Segment Three months ended December 31, Twelve months ended December 31, 2018 $ 65,357 $ % change 51,765 26 2017 2018 220,117 $ $ % change 224,430 (2) 2017 9,072 12,290 (26) 44,152 52,979 (17) 74,429 64,055 16 264,269 277,409 (5) $ 11,069 15% $ 13,402 (17) $ 21% 39,969 15% $ 57,437 21% (30) $ 1,326 $ 3,452 (62) $ 711 $ 25,154 (97) Camps & Catering revenues are comprised of three revenue streams: camp rental and catering revenue which include the service and transport revenue associated with camp setup and demobilization activity; catering only revenue consisting mainly of catering and housekeeping activities; and used equipment sales revenue. Three months ended December 31, Twelve months ended December 31, 2017 % change (000’s except for operational metrics) Camp rental and catering revenue Catering only revenue Equipment sales revenue Total revenue EBITDAS EBITDAS as a % of revenue Operating earnings (loss) Camp rental and catering revenue Bed rental days (1) Revenue per bed rental day Rentable beds at period end Average rentable beds (2) Utilization (3) Catering only revenue Catering only days(4) Revenue per catering only day $ $ $ $ $ 2018 51,432 $ 12,109 1,816 65,357 8,440 $ 13% 1,303 $ 481,185 107 $ 9,635 9,613 54% 2017 % change 36,295 11,180 4,290 51,765 8,849 17% 1,637 468,944 77 10,172 10,168 50% $ $ $ $ 42 8 (58) 26 (5) (20) 3 39 (5) (5) 2018 165,663 $ 47,132 7,322 220,117 27,565 $ 13% (2,086) $ 160,488 34,267 29,675 224,430 43,524 19% 21,282 1,692,280 1,827,292 98 $ 9,635 9,554 49% 88 10,172 10,764 47% 115,429 105 $ 116,226 96 (1) 9 $ 473,604 100 $ 343,421 100 3 38 (75) (2) (37) (110) (7) 11 (5) (11) 38 - (1) (2) (3) (4) 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. Average rentable beds are 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 2018 were $65.4 million, an increase of $13.6 million or 26% compared to Q4 2017. The increase in Q4 2018 segment revenues was a result of higher camp set-up activity in the northeastern British Columbia region related to the mobilization of several contracts announced earlier in the year. EBITDAS for Q4 2018 were $8.4 million, a decrease of $0.4 million or 5% compared to Q4 2017. The decrease in Q4 2018 segment EBITDAS and EBITDAS as a percentage of revenue was a result of Q4 2018 having a higher proportion of revenue from lower margin camp set-up projects compared to Q4 2017. Revenues from the Camps & Catering segment for 2018 decreased $4.3 million or 2% compared to 2017. The decrease was primarily related to a camp equipment sale which occurred in Q2 2017. Excluding equipment sales, revenues increased 8% as a result of significantly stronger catering only activity. EBITDAS for 2018 decreased $16.0 million or 37% compared to 2017. Excluding the equipment sales realized in Q2 2017, EBITDAS decreased 27% primarily due to the change in revenue mix between the comparative periods with 2018 having less higher margin camp activity and increased lower margin catering only and camp set-up activity. Page | 12 Management’s Discussion and Analysis Three months and years ended December 31, 2018 and 2017 Camp rental and catering revenue Revenues from Camp Rental and Catering operations for Q4 2018 increased by $15.1 million or 42% compared to Q4 2017. The increase in Q4 2018 was driven by a 3% increase in activity levels and 39% increase in revenue per manday mainly related to the service revenue associated with camp set-up activity with no associated bed rentals. Revenues from Camp Rental and Catering operations for 2018 increased by $5.2 million or 3% compared to 2017. The increase year over year was driven by higher camp set-up activity in the northeastern British Columbia region offset by a 7% decrease in volume. The lower volumes were mainly attributable to low occupancy in several camps in the Fort McMurray, Alberta area. Catering only revenue Revenues from the provision of catering and housekeeping services, with no associated bed rentals, for Q4 2018 increased by $0.9 million or 8% compared to Q4 2017. The increase was mainly due to the second phase of a significant catering contract in Nunavut beginning operations in late Q4 2018. Revenue per catering only day increased by 9% primarily due to the different contract mix between the comparative quarters. Revenues for 2018 increased by $12.9 million or 38% compared to 2017 as a result of a significant long-term catering contract entered into in the second half of 2017 and the startup of the second phase of the significant contract noted above. Revenue per catering only day stayed consistent for 2018. Equipment sales revenue Equipment sales revenues include new camp construction and used fleet sales. Revenues for Q4 2018 decreased by $2.5 million or 58% compared to Q4 2017 as a result of a camp equipment sale in the comparative period. Used equipment sales are a key part of the fleet management strategy to ensure an appropriate equipment portfolio. Revenues for 2018 decreased by 75% compared to 2017 primarily due to a significant camp equipment sale which occurred in Q2 2017. Page | 13 Management’s Discussion and Analysis Three months and years ended December 31, 2018 and 2017 Rentals & Logistics Segment Rentals & Logistics revenues are comprised of four revenue streams: relocatable structures which is comprised of office units, lavatory units, mine dry units, wellsite units and the associated equipment; mat rentals which consists of access mats and includes rig mats and the associated equipment; used equipment sales; and installation, transportation and service associated with the rentals and sales. Three months ended December 31, Twelve months ended December 31, 2017 % change 2017 % change (000’s except for operational metrics) Relocatable structures revenue (1) Mat rental revenue (2) Equipment sales revenue Installation, transportation, service, and other revenue Total revenue EBITDAS EBITDAS as a % of revenue Operating earnings Relocatable Structures Average fleet size Fleet end of period Rental days (3) Utilization (4) Mat rental Average fleet size (5) Fleet end of period (6) Mat rental days (7) Utilization (8) Revenue per mat rental day (9) Equipment Sales (10) Relocatable structures Mats $ $ $ $ 2018 1,206 $ 2,451 1,458 3,957 1,004 1,724 3,253 6,309 9,072 $ 12,290 2,629 $ 29% 23 1,017 918 42,624 46% 35,231 34,606 3,648 30% 965 1,178 1,173 38,904 36% 31,101 29,800 2,082,171 1,927,770 64% 1.18 $ 12 2,073 67% 0.89 26 3,734 $ $ $ 20 42 (55) (37) (26) (28) (98) (14) (22) 10 13 16 8 33 $ (54) (44) 2018 5,077 $ 11,447 6,245 21,383 44,152 $ 12,404 $ 28% 2,797 1,112 918 186,667 46% 36,178 34,606 4,424 7,892 11,842 28,821 52,979 13,913 26% 3,872 1,260 1,173 172,451 37% 32,739 29,800 10,191,014 8,645,129 77% 1.12 $ 96 9,139 72% 0.91 50 16,060 15 45 (47) (26) (17) (11) (28) (12) (22) 8 11 16 18 23 92 (43) Relocatable structures revenue includes rental revenue generated from office, lavatory and mine dry units and complexes as well the associated equipment. 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 mat rental fleet numbers reflect all owned and third-party mats. (1) (2) Mat rental revenue includes revenues generated from the rental of mats. (3) (4) (5) (6) Mats in rental fleet at period end represents the number of owned mats and third-party mats in the Matting fleet. (7) (8) (9) (10) One mat rental day equals the rental of one mat for one day. Utilization equals the total number of mat rental days divided by average rentable mats in the period. Revenue per mat rental day equals mat rentals revenue divided by total mat rental days. Represents the number of units sold in the period. Revenues from the Rentals & Logistics segment for Q4 2018 decreased $3.2 million or 26% compared to Q4 2017. The decrease was primarily related to lower mat sales and a reduction in the associated installation and transportation services for matting and soil stabilization activity compared to Q4 2017. The lower mat sales were a result of higher mat rental demand with the majority of mat production allocated to the rental fleet in response to increased demand. The mat rental demand is mainly a result of the ongoing high level of activity in the Duvernay and Montney regions along the northern British Columbia and Alberta border. EBITDAS as a percentage of revenue was relatively consistent at 29% compared to 30% in Q4 2017. Revenues from the Rentals & Logistics segment for 2018 decreased $8.8 million or 17% compared to 2017. The decrease in revenue was driven by lower mat sales combined with the associated transport installation activity and lower soil stabilization activity compared to 2017. EBITDAS as a percentage of revenue was 28% compared to 26% in 2017. The increase in EBITDAS as a percentage of revenue was a result of higher mat rental demand combined with stronger revenue per mat rental day compared to 2017. Page | 14 Management’s Discussion and Analysis Three months and years ended December 31, 2018 and 2017 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 2018 increased by $0.2 million or 20% compared to Q4 2017. The increase was a result of higher activity levels with Q4 2018 rental days up 10% combined with stronger pricing compared to Q4 2017. Revenues for 2018 increased $0.7 million or 15% compared to 2017. The increase was primarily a result of the 8% increase in rental days and stronger pricing compared to 2017. The mix of equipment on rent was comprised of more multi-unit complexes and saw generally stronger pricing compared to 2017. Utilization improved by 9% as a result of the stronger activity levels and a smaller fleet size from the continuous focus on fleet management, selling the less productive rental units in 2018. Mat rental revenue Mat rental revenue for Q4 2018 increased $0.7 million or 42% compared to Q4 2017. The increase was a result of stronger pricing combined with higher mat rental demand. Rental rates were $1.18 per mat rental day compared to $0.89 per mat rental day in Q4 2017 as a result of a more favourable contract environment in 2018 and stronger demand along the northern British Columbia and Alberta border. Compared to Q4 2017, activity levels increased with mat rental days up 8% mainly as a result of mats remaining on rent further into the season. Revenue for 2018 increased by $3.6 million or 45% compared to 2017 as a result of higher activity levels and stronger pricing along the northern British Columbia and Alberta border. The strengthening demand drove an 18% increase in mat rental days and 23% increase in revenue per mat rental day compared to 2017. Equipment sales revenue 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. Equipment sales revenues for Q4 2018 decreased by $1.8 million or 55% compared to Q4 2017. The decrease was driven by lower Q4 2018 mat sales with only 2,073 mats sold compared to 3,734 in Q4 2017. The majority of Q4 2018 mat production was allocated to refreshing and increasing the mat rental fleet as a result of higher mat rental demand. Revenues for 2018 decreased by $5.6 million or 47% compared to 2017. The decrease was driven by lower mat sales with only 9,139 mats sold compared to 16,060 in 2017. The majority of new mat production in 2018 was used to refresh and increase the rental mat fleet resulting in fewer new mat sales and the majority of mat sales in 2018 being used mats. Installation, transportation, service, and other revenue Installation, transportation, service, and other revenue include the revenues associated to the mobilization and installation of rental fleet, mat management services, and soil stabilization services. Revenues for Q4 2018 decreased by $2.4 million or 37% compared to Q4 2017. The decrease was driven primarily by the reduction in mat installation services as a result of timing of mat rental activity and a decrease in soil stabilization activity due to weather related soil conditions compared to Q4 2017. Revenues for 2018 decreased by $7.4 million or 26% compared to 2017. The decrease was driven primarily by the reduction in mat sales which usually have transportation and installation work associated with the sales and lower volumes of soil stabilization projects year over year. Industrial Services Direct Costs Direct costs in the Industrial Services business unit for Q4 2018 were $62.4 million or 84% of revenue compared to $49.7 million or 78% of revenue for Q4 2017. 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 $12.7 million in direct costs in Q4 2018 compared to Q4 2017 was primarily related to higher camp installation activity, and a significant number of third-party mats on rent to fulfill rental demand. As a percentage of revenue, direct costs increased as a result of an increase in low margin camp installation work and the rental cost associated with third party mats decreased rental margins. Page | 15 Management’s Discussion and Analysis Three months and years ended December 31, 2018 and 2017 Direct costs in the Industrial Services business unit for 2018 were $219.8 million or 83% of revenue compared to $213.5 million or 77% of revenue for 2017. The increase in direct costs for 2018 was mainly related to the increase in catering only activity and the increase in camp installation work. As a percentage of revenue, direct costs increased primarily as a result of a camp equipment sale in Q2 2017 which had a strong margin, higher camp installation costs and an increase in lower margin catering only activity in 2018 compared to 2017. 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: (000’s) Modular Solutions revenue EBITDAS EBITDAS as a % of revenue Operating earnings (loss) Backlog (1) (1) Three months ended December 31, Twelve months ended December 31, 2018 43,779 6,504 15% $ $ 5,819 $ 88,825 $ 2017 18,638 (3,457) (19%) (4,019) 43,878 % change 135 (288) (245) 102 $ $ $ $ 2018 133,155 10,466 8% $ $ 8,610 $ 88,825 $ 2017 46,755 (14,626) (31%) (16,779) 43,878 % change 185 (172) (151) 102 $ $ $ $ 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 segment revenues for Q4 2018 were $43.8 million compared to $18.6 million in Q4 2017. The increase was attributable to the significant increase in the backlog between the comparative periods and increased capacity to execute. Projects in Q4 2018 were comprised mainly of commercial projects, including a hostel project, and several affordable housing projects for government housing agencies in British Columbia. Revenues for 2018 were $133.2 million compared to $46.8 million in 2017. The increase included the production and installation of affordable housing projects for government housing agencies in British Columbia, an 85-room hotel in Oliver, British Columbia, a hostel project and several residential housing projects. A key metric for the Modular Solutions segment 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 $88.8 million at the end of 2018 compared to $43.9 million at the end of 2017. Modular Solutions direct costs 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 83% of revenues in Q4 2018 compared to 115% in Q4 2017. The improvement was mainly driven by economies of scale from higher activity levels absorbing the relatively fixed component of the direct costs. Direct costs for 2018 were 90% of revenues compared to 127% in 2017. The improvement was mainly driven by higher activity levels absorbing the relatively fixed component of the direct costs. Page | 16 Management’s Discussion and Analysis Three months and years ended December 31, 2018 and 2017 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 Named Executive Officers of the Corporation, Corporate Secretary, information technology, corporate accounting staff and associated costs of supporting a public company. Selling & administrative expenses for Q4 2018 were $5.7 million, an increase of $0.9 million compared to Q4 2017. As a percentage of revenue, selling and administrative expenses were 5% compared to 6% in the comparative quarter of 2017. Selling & administrative expenses for 2018 were $21.6 million, an increase of $0.2 million compared to 2017. As a percentage of revenue, selling and administrative expenses for 2018 were 5% compared to 7% in 2017. Other Items Depreciation and amortization (000’s) Depreciation of property, plant and equipment Amortization of intangibles Total depreciation and amortization $ $ 2018 9,508 $ 684 10,192 $ 2017 % change 9,763 682 10,445 - (3) (2) $ $ 2018 38,540 $ 2,749 41,289 $ 2017 % change 40,701 2,742 43,443 - (5) (5) Three months ended December 31, Twelve months ended December 31, Depreciation of property, plant and equipment in Q4 2018 was relatively unchanged compared to Q4 2017 as a result of a camp equipment sale in Q2 2017 offset by the purchase of a 288-person camp facility south of Fort McMurray, Alberta during Q1 2018 and the capital required for new contracts. Depreciation of property, plant and equipment for 2018 decreased by $2.2 million or 5% in 2018 compared to 2017. The decrease was mainly a result of certain camp setup assets being fully depreciated and fleet disposals throughout the period partially offset by the set-up capital and equipment required for new contracts at the end of 2018. 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 2018, financing costs were $0.4 million, a decrease of $0.2 million compared to Q4 2017. For 2018, financing costs were relatively unchanged compared to 2017 at $2.9 million. The financing costs were driven by higher average debt levels in the first half of 2018 which averaged $80.5 million and an increase in the effective interest rate compared to a higher average debt level in 2017. The average debt levels for 2018 decreased to $57.4 million compared to $70.1 million in 2017 as a result of the proceeds received from the bought deal equity financing that closed in Q2 2018. The effective interest rate on loans and borrowings for 2018 was 5.3% compared to 4.3% in 2017. The higher effective interest rate was driven by increases in the Bank of Canada prime rate partially offset by the tiered interest rate structure of the credit facility and lower debt levels. Income taxes For the year ended December 31, 2018, income tax recovery was $1.9 million (2017 - $0.9 million), with an effective tax rate of 19.0% (2017 – 10.5%). The increase in income tax recovery was attributable to a larger net loss for the year ended December 31, 2018 combined with the decrease in permanent differences resulting from the legislative rate change and rate differential on loss carryback in the prior year, as well as fewer unrecognized non-capital losses in foreign jurisdictions in the current year. Gain/Loss on disposal For Q4 2018, the loss on disposal was $0.5 million compared to a loss on disposal of $0.1 million in Q4 2017. The gains and losses on disposals are typically generated from ongoing feet management of operational assets. For 2018, the gain on disposal was $0.1 million compared to a gain of $12.1 million for 2017. Included in the gain on disposal in 2017 was the insurance settlement in excess of book value from the Blacksand Executive Lodge assets destroyed in the Fort McMurray, Alberta wildfires in 2016. Page | 17 Management’s Discussion and Analysis Three months and years ended December 31, 2018 and 2017 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. Summary of cash flows (000’s) Operating activities Investing activties Financing activities Change in cash position December 31, December 31, 2018 37,542 $ (27,487) (10,055) - $ 2017 14,726 (2,553) (12,173) - $ $ For 2018, operating activities generated $37.5 million of cash, compared to $14.7 million of cash in 2017. The variance was driven primarily by the collection of aged accounts receivable in 2018. Cash used in investing activities for 2018 included the purchase of a 288-person camp facility south of Fort McMurray, Alberta compared to the insurance settlement received in 2017. Cash used in financing activities included dividend payments and the net effect of the bought deal equity financing completed in Q2 2018. Working capital position (000’s) Current assets Current liabilities excluding loans and borrowings(1) Working capital(2) (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. December 31, December 31, 2018 116,125 $ 54,012 62,113 $ 2017 114,694 44,944 69,750 $ $ Working capital at December 31, 2018 was $62.1 million compared to $69.8 million at December 31, 2017, a decrease of $7.7 million. The decrease in working capital was primarily due to an increase in payables as a result of the ramp up of materials required for ongoing project execution at December 31, 2018 compared to the comparative period. Borrowing capacity (000’s) Bank borrowing: Available credit facility Drawings on credit facility Borrowing capacity(3) December 31, December 31, 2018 2017 $ $ 150,000 $ 30,894 119,106 $ 150,000 73,016 76,984 (3) Calculated as available bank lines less drawings on credit facility. Effective March 27, 2018, Horizon North reached an agreement with its lenders to amend its credit facility. The maturity date was extended to September 30, 2020 to provide certainty with respect to borrowing capacity as the Corporation evaluated its capitalization and debt structure through 2018. 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 | 18 Management’s Discussion and Analysis Three months and years ended December 31, 2018 and 2017 As at December 31, 2018, the Corporation was in compliance with all financial and non-financial covenants as shown below: Debt Covenants Maximum Consolidated Senior debt (1) to Consolidated Adjusted EBITDAS ratio (3)(4) (must be 3.00:1.00 or less) Maximum Consolidated Total debt (2) to Consolidated Adjusted 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 Calculation December 31, 2018 0.84:1.00 0.86:1.00 12.02:1.00 (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, share based compensation, impairment, gain/loss on disposal of property, plant and equipment, and earnings from equity investments) is not a recognized measure under IFRS. Management believes that in addition to total profit and total comprehensive income, EBITDAS is a useful supplemental earnings measure as it provides an indication of the Corporation’s operating performance 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, 2018, gross capital spending was $10.1 million compared to $4.9 million in the same period of 2017. Capital spending in Q4 2018 was mainly focused on augmenting the access mat fleet to support the strong mat rental utilization, and the set-up capital related to the mobilization and commissioning of camp facilities. Management evaluates and manages its capital spending plans taking into account proceeds from the sale of property, plant and equipment, resulting in net capital spending of $5.1 million for 2018 compared to $1.6 million for 2017. For the twelve months ended December 31, 2018, gross capital spending was $38.3 million compared to $20.1 million in 2017. Capital spending in 2018 was mainly related to the purchase of a 288-person camp facility south of Fort McMurray, Alberta, capital required to meet contract requirements and expanding the access mat fleet as a result of higher utilization. Management evaluates and manages its capital spending plans taking into account proceeds from the sale of property, plant and equipment, resulting in net capital spending of $21.9 million for 2018, compared to $23.8 million of net proceeds from disposal for 2017. The net proceeds in 2017 mainly related to the insurance claim for the loss of the Blacksand Executive Lodge and the proceeds from the 450-person camp 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 | 19 Management’s Discussion and Analysis Three months and years ended December 31, 2018 and 2017 Quarterly Summary of Results (000’s except per share amounts) Revenue EBITDAS Operating earnings (loss) Total income (loss) Total comprehensive income (loss) Earnings (loss) per share – basic Earnings (loss) per share – diluted (000’s except per share amounts) Revenue EBITDAS Operating (loss) earnings Total (loss) income Total comprehensive (loss) income (Loss) earnings per share – basic (Loss) earnings per share – diluted Three months ended 2018 2018 December September 2018 June 118,045 $ 100,022 $ 93,603 $ 13,654 2,240 1,413 1,413 0.01 0.01 $ $ 11,710 1,308 (157) (112) (0.00) (0.00) $ $ 6,886 (3,800) (3,390) (3,435) (0.02) (0.02) $ $ Three months ended 2017 2017 December September 2017 June 82,664 $ 79,283 $ 91,647 $ 6,786 (4,074) (3,885) (3,892) (0.03) (0.03) $ $ 6,434 (7,514) (6,149) (6,144) (0.04) (0.04) $ $ 8,571 (2,500) (2,949) (2,950) (0.02) (0.02) $ $ $ $ $ $ $ $ 2018 March 82,575 4,433 (7,044) (6,062) (6,062) (0.04) (0.04) 2017 March 70,488 8,254 8,153 5,140 5,140 0.04 0.04 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 with the settlement of the insurance claim collected in Q1 2017 and a significant camp equipment sale that occurred in Q2 2017. Horizon North, as a key part of its bifurcation strategy, has focused its manufacturing infrastructure on permanent modular construction projects rather than traditional camp manufacturing. This diversification strategy has decreased the Corporation’s exposure to commodity prices reducing volatility and providing a more stable business operation. The strategic initiative of business transformation was a high priority in 2016 continuing and building in 2017. The momentum continued to build during 2018 in the Modular Solutions segment with a significant increase in positive earnings as a result of strong backlog growth and increased manufacturing capacity with the acquisitions of Shelter Modular Inc., and the custom manufacturing business of C&V Portable Accommodations Ltd. Page | 20 Management’s Discussion and Analysis Three months and years ended December 31, 2018 and 2017 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 | 21 Management’s Discussion and Analysis Three months and years ended December 31, 2018 and 2017 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 two major customers who generated 39% of total revenues in the twelve months of 2018 compared to one major customer who generated 10% of total revenues in 2017. 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 | 22 Management’s Discussion and Analysis Three months and years ended December 31, 2018 and 2017 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 | 23 Management’s Discussion and Analysis Three months and years ended December 31, 2018 and 2017 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. Trade Relations On September 30, 2018, the United States, Mexico and Canada announced the completion of negotiations concerning the North American Free Trade Agreement, signalling their intention to adopt a new United States-Mexico-Canada Agreement (“USMCA”). The proposed USMCA remains subject to further legal review and the domestic ratification procedures of each of the United States, Mexico and Canada. As the final terms and ratification of the USMCA remain uncertain, it is currently unclear how this agreement may affect Canada and what effects the final terms will have on the Corporation. Fort McMurray Proposed Camp Restrictions In January 2019, the councillors of the Regional Municipality of Wood Buffalo voted in favour of imposing a moratorium on new oilsands camps within a 75 kilometre radius of Fort McMurray. The proposed moratorium, if implemented, could negatively impact growth opportunities, new business and revenues for the Camps & Catering segment in the Fort McMurray region. 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, 2018 and 2017. As at December 31, 2018, Horizon North updated its accounting policies to include the adoption of IFRS 9 - Financial Instruments and IFRS 15 - Revenue from Contracts with Customers transition and provided an update on the new standard not yet adopted IFRS 16 Leases transition. The details are provided in note 3 of the Consolidated Financial Statements as at December 31, 2018. 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 Page | 24 Management’s Discussion and Analysis Three months and years ended December 31, 2018 and 2017 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 recognizes revenue over time for its construction contracts and estimates progress of these contracts by comparing costs incurred to the total expected costs of the project. Determining the timing of the transfer of control – at a point in time or over time – requires judgement. 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. Page | 25 Management’s Discussion and Analysis Three months and years ended December 31, 2018 and 2017 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. (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: (000’s) Trade receivables Neither impaired nor past due Outstanding 31-60 days Outstanding 61-90 days Outstanding more than 90 days Total trade receivables Construction receivables Neither impaired nor past due Outstanding 31-60 days Outstanding 61-90 days Outstanding more than 90 days Total construction receivables Accrued revenue Accrued construction revenue Other receivables Allowance for doubtful accounts Total trade and other receivables December 31, December 31, 2018 2017 $ 16,944 $ 23,161 4,908 11,820 2,068 2,221 4,549 7,267 $ 28,469 $ 44,469 $ 13,658 $ 18,655 73 918 1,055 - 2,124 14,006 $ 16,910 $ 33,579 30,687 12,953 29,000 9,695 960 1,034 (3,059) (2,965) $ 102,967 $ 98,765 In the twelve months ended December 31, 2018, the Corporation provided an allowance for $3.1 million of receivables aged greater than 90 days and collected $32,000 that had previously been allowed for. The Corporation also applied $1.1 million of allowance for doubtful accounts against the associated receivable balance. As at March 12, 2019, the Corporation has collected $0.6 million on amounts outstanding more than 90 days. Page | 26 Management’s Discussion and Analysis Three months and years ended December 31, 2018 and 2017 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, 2018, included in construction receivables were holdbacks of $6.9 million (2017 - $0.2 million). (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: Year 1 Year 2 Year 3 Year 4 Year 5 and beyond December 31, 2018 December 31, 2017 Trade and payables(1) $ 51,937 $ Loans and borrowings(2) $ - Trade and payables(1) Loans and borrowings(2) 37,936 $ - 4,382 30,894 - 73,016 - - 6,276 - 424 - - - 6,641 63,384 $ - $ 30,894 4,941 49,153 $ - $ 73,016 (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, 2018 by approximately $62,400 (twelve months ended December 31, 2017 - $77,000). 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 0.50% 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 $0.6 million for the twelve months ended December 31, 2018 (December 31, 2017 - $0.7 million). 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 | 27 Management’s Discussion and Analysis Three months and years ended December 31, 2018 and 2017 Outstanding Shares Horizon North had 164,268,988 voting common shares issued and outstanding and exercisable options to purchase 5,818,549 shares for a total potential of 170,087,537 shares as at March 12, 2019. Off-Balance Sheet Financing Horizon North has no off-balance sheet financing. Management’s Report on Disclosure Controls and Procedures and Internal Control over Financial Reporting Disclosure Controls and Procedures The Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”) have designed, or caused to be designed under their supervision, disclosure controls and procedures (“DC&P”) as defined in National Instrument 52-109 of the Canadian Securities Administrators, to provide reasonable assurance that: (i) material information relating to the Corporation is made known to the CEO and the CFO by others, particularly during the period in which the interim filings are being prepared; and (ii) information required to be disclosed by the Corporation in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation. Throughout 2019, 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, 2018 that have materially affected, or are reasonably likely to materially affect, Horizon North’s DC&P. Internal Controls Over Financial Reporting The CEO and the CFO have designed, or caused to be designed under their supervision, internal controls over financial reporting (“ICFR”) as defined in National Instrument 52-109 of the Canadian Securities Administrators, in order to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. There were no changes to the Corporation’s ICFR during the period ended December 31, 2018 that have materially affected, or are reasonably likely to materially affect, the Corporation’s ICFR. In accordance with the requirements of NI 52-109, an evaluation of the effectiveness of DC&P and ICFR was carried out under the supervision of the CEO and CFO at December 31, 2018. Based on this evaluation, the CEO and CFO have concluded that the Corporation’s DC&P and ICFR were effective as at December 31, 2018. 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. Page | 28 Management’s Discussion and Analysis Three months and years ended December 31, 2018 and 2017 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 earnings measure as it provides an indication of the Corporation’s operating performance 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 (000’s) Total income (loss) Add: Share based compensation Depreciation & amortization Finance costs Three months ended December 31, Twelve months ended December 31, 2018 2017 2018 2017 $ 1,413 $ (3,885) $ (8,196) $ (7,843) 678 361 2,751 1,174 10,192 10,445 41,289 43,443 374 533 2,894 2,824 Impairment loss on re-measurment of assets held for sale - - - 3,457 Loss (gain) on disposal of property, plant and equipment 544 54 (61) (12,094) Earnings from equity investments Income tax expense (recovery) EBITDAS Related Parties (000's) Joint venture Recovery of administrative overhead Key management personnel interests Sales Included in accounts receivable - (105) (67) - 453 (617) (1,927) (916) $ 13,654 $ 6,786 $ 36,683 $ 30,045 December 31, December 31, 2018 2017 $ - $ 60 $ 256 $ 1,264 84 140 The Corporation earned revenue during the year ended December 31, 2018 of $0.3 million (2017 – $0.1 million) for catering services provided to Trican Well Service Ltd., of which a director of the Corporation is a Director. There was $0.1 million (2017 - $nil) included in trade receivables as at December 31, 2018. 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. Page | 29 Management’s Discussion and Analysis Three months and years ended December 31, 2018 and 2017 Advisories This Management’s Discussion and Analysis, prepared as at December 31, 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 “Annual Key Comments” the statements that: • “The Modular Solutions business improved significantly in 2018 achieving positive EBITDAS and increasing by $25.1 million compared to 2017. Backlog exiting the year was $88.8 million compared to $43.9 million in 2017 with the funnel of high- quality, high probability opportunities also increasing, closing 2018 approximately $290.0 million compared to $148.0 million exiting 2017; and • Horizon North continued its dividend policy and paid its 29th consecutive quarterly dividend” Under the heading “Outlook” the statement that: “In 2019, Horizon North will continue to diversify both its portfolio of offerings and customer base through a focus on its two operating divisions: Industrial Services and Modular Solutions. Industrial Services In 2019, Horizon North will continue to leverage its reputation as a leading provider of turn-key camp, hospitality, access and maintenance solutions with focus on the following four key areas: • Oil Sands – Horizon North expects to leverage its operational footprint and history, along with two prominent relationships with Aboriginal communities north and south of Fort McMurray, to pursue full turn-key opportunities as well as catering and hospitality opportunities in customer-owned facilities; • Montney/Duvernay – Horizon North is the largest provider of open camp services in this area and is a market leader in providing catering and hospitality services in customer-owned facilities. Horizon North will continue to leverage existing assets and relationships while looking to develop additional areas of opportunity to support ongoing activity in this area; • Northern Canada – Horizon North has a long history and expertise in providing hospitality, management and maintenance services across Canada’s northern regions. In 2019, Horizon North will continue to focus on developing and expanding its capabilities and footprint across Canada’s highly variable and remote northern regions; and • West Coast – Horizon North initiated the first phase of development on its 57-acre parcel of land located at the entrance to Kitimat, British Columbia in late 2018. In 2019, Horizon North expects to open the first phase of its world-class Crossroads open lodge with 260 beds ready in the spring and plans to expand to a potential 1,000 beds as activity in the region grows. Modular Solutions For 2019, Horizon North’s focus is to continue to grow its backlog of modular construction projects and drive economies of scale in our facilities and project execution capabilities. Horizon North will continue to focus on hotel development, multi-family residential development and social, student and senior infrastructure development. Horizon North completed two acquisitions Page | 30 Management’s Discussion and Analysis Three months and years ended December 31, 2018 and 2017 in 2018 to provide additional capacity in western Canada and is actively investigating opportunities to expand its geographic footprint to service other areas of Canada with strong demand profiles for our unique construction model. Statement of Financial Position The strength of the Statement of Financial Position remains a key priority and Horizon North took several steps in 2018 to significantly reduce its overall debt and leverage position. This strong position will allow Horizon North to undertake an expanded capital program in 2019 with a budget of $50.4 million focused on its Crossroads open lodge project in Kitimat, BC, refreshing and providing the ability for moderate growth of its matting rental fleet and supporting the expanding Modular Solutions business.” Under the heading “Dividend Payment” regarding the payment of a dividend to shareholders of record at the close of business on March 31, 2019 to be paid on April 15, 2019. Under the heading “Modular Solutions” the statement that: “A key metric for the Modular Solutions segment 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 $88.8 million at the end of 2018 compared to $43.9 million at the end of 2017.” Under the heading “Liquidity and Capital Resources” the statement that: “The maturity date was extended to September 30, 2020 to provide certainty with respect to borrowing capacity as the Corporation evaluated its capitalization and debt structure through 2018.” Under the heading “Quarterly Summary of Results” the statement that: “Horizon North, as a key part of its bifurcation strategy, has focused its manufacturing infrastructure on permanent modular construction projects rather than traditional camp manufacturing. This diversification strategy has decreased the Corporation’s exposure to commodity prices reducing volatility and providing a more stable business operation.” 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; the impacts of a positive FID from LNG Canada with respect to the Kitimat LNG project; capital investment in the Canadian oil and gas sector; dividend payments; anticipated activity levels for 2019; 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. 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; Page | 31 Management’s Discussion and Analysis Three months and years ended December 31, 2018 and 2017 • • • 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 | 32 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 12, 2019 Scott Matson Senior Vice President Finance and Chief Financial Officer Page | 33 KPMG LLP 205 5th Avenue SW Suite 3100 Calgary AB T2P 4B9 Tel (403) 691-8000 Fax (403) 691-8008 www.kpmg.ca INDEPENDENT AUDITORS’ REPORT To the Shareholders of Horizon North Logistics Inc. Opinion We have audited the consolidated financial statements of Horizon North Logistics Inc. (the "Company"), which comprise: • • • • the consolidated statements of financial position as at December 31, 2018 and December 31, 2017; the consolidated statements of comprehensive income (loss) for the years then ended; the consolidated statements of changes in shareholders’ equity for the years then ended; the consolidated statements of cash flows for the years then ended; • and notes to the consolidated financial statements, including a summary of significant accounting policies. Hereinafter referred to as the “financial statements”. In our opinion, the accompanying financial statements present fairly, in all material respects, the consolidated financial position of the Company as at December 31, 2018 and December 31, 2017, and its consolidated financial performance and its consolidated cash flows for the years then ended in accordance with International Financial Reporting Standards (“IFRS”). Basis for Opinion We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the “Auditors’ Responsibilities for the Audit of the Financial Statements” section of our auditors’ report. We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in Canada and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. 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 | 34 Other Information Management is responsible for the other information. Other information comprises: • • the information included in Management’s Discussion and Analysis to be filed with the relevant Canadian Securities Commissions; the information, other than the financial statements and the auditors’ report thereon, including in a document likely to be entitled “2019 Annual Report”. Our opinion on the financial statements does not cover the other information and we do not and will not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. We obtained the Management’s Discussion and Analysis to be filed with the relevant Canadian Securities Commissions as at the date of this auditors’ report. If, based on the work we have performed on this other information, we conclude that there is a material misstatement of this other information, we are required to report that fact in the auditors’ report. We have nothing to report in this regard. Information, other than the financial statements and the auditors’ report thereon, included in a document likely to be entitled “2018 Annual Report” is expected to be made available to us after the date of this auditors’ report. If, based on the work we will perform on this other information, we conclude that there is a material misstatement of this other information, we are required to report that fact to those charged with governance. Responsibilities of Management and Those Charged with Governance for the Financial Statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with IFRS, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, management is responsible for assessing the Company’s ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Company‘s financial reporting process. 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 Auditors’ Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. • The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. • Obtain an understanding of internal control relevant to the audit 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 Company's internal control. • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. • Conclude on the appropriateness of management's use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors’ report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors’ report. However, future events or conditions may cause the Company to cease to continue as a going concern. • Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represents the underlying transactions and events in a manner that achieves fair presentation. • Communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. 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 | 36 • Provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. • Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the group Company to express an opinion on the financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. The engagement partner on the audit resulting in this auditors’ report is Reinier Deurwaarder. Chartered Professional Accountants Calgary, Canada March 12, 2019 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 | 37 Consolidated statements of financial position (000’s) Assets Current assets: December 31, December 31, 2018 2017 Trade and other receivables (Note 12) $ 102,967 $ 98,765 Inventories (Note 13) Prepayments Income taxes receivable Total current assets Non-current assets: Property, plant and equipment (Note 14) Intangible assets (Note 15) Goodwill (Note 15) Other assets (Note 16) Total non-current assets Total assets Liabilities and Shareholders’ Equity Current liabilities: Trade and other payables Deferred revenue (Note 6) Income taxes payable Current portion of asset retirement obligations (Note 18) Finance lease liabilities Total current liabilities Non-current liabilities: Asset retirement obligations (Note 18) Loans and borrowings (Note 17) Deferred tax liabilities (Note 11) Total liabilities Shareholders’ equity: Share capital (Note 20) Contributed surplus Accumulated other comprehensive income Retained earnings Total shareholders’ equity $ $ 8,782 4,376 - 7,427 5,437 3,065 116,125 114,694 327,123 1,599 24,792 2,771 356,285 338,122 4,348 20,545 2,041 365,056 472,410 $ 479,750 48,113 $ 2,075 1,217 1,835 772 54,012 11,447 30,894 39,314 33,001 7,008 - 3,347 1,588 44,944 11,217 73,016 45,509 135,667 174,686 338,377 17,195 761 (19,590) 336,743 286,754 16,181 761 1,368 305,064 Total liabilities and shareholders’ equity $ 472,410 $ 479,750 The accompanying notes are an integral part of the consolidated financial statements. Ann Rooney Director Rod Graham Director Page | 38 Consolidated statements of comprehensive loss Years ended December 31, 2018 and 2017 (000’s except per share amounts) Revenue (Note 6) Operating expenses: Direct costs (Note 7) Depreciation (Note 14) Amortization of intangible assets (Note 15) Impairment loss on re-measurement of assets held for sale Share based compensation (Note 20) Gain on disposal of property, plant and equipment Direct operating expenses Gross profit Selling & administrative expenses: Selling & administrative expenses (Note 8) Share based compensation (Note 20) Selling & administrative expenses Operating loss Finance costs Earnings from equity investments Loss before tax Current tax expense (recovery) Deferred tax (recovery) expense Income tax recovery (Note 11) Total loss Other comprehensive income: Translation of foreign operations Other comprehensive loss, net of income tax Total comprehensive loss Loss per share: Basic and Diluted (Note 21) The accompanying notes are an integral part of the consolidated financial statements. December 31, December 31, 2018 2017 $ 394,245 $ 324,082 335,956 38,540 2,749 - 1,382 (61) 378,566 15,679 21,606 1,369 22,975 (7,296) 2,894 (67) (10,123) 1,004 (2,931) (1,927) (8,196) - - 272,626 40,701 2,742 3,457 659 (12,094) 308,091 15,991 21,411 515 21,926 (5,935) 2,824 - (8,759) (3,673) 2,757 (916) (7,843) (3) (3) $ $ (8,196) $ (7,846) (0.05) $ (0.05) Page | 39 Consolidated statements of changes in equity (000’s) Balance at December 31, 2016 Total loss Share based compensation (Note 20) Share options exercised (Note 20) Translation of foreign operations Dividends (Note 22) Share Capital 286,674 $ Contributed Surplus 15,465 $ $ Accumulated Other Comprehensive Income 764 $ - - - - 80 - 734 (18) - - - - - - (3) Balance at December 31, 2017 $ 286,754 $ 16,181 $ 761 $ Total loss Share based compensation (Note 20) Share options exercised (Note 20) Issue of share capital (Note 20) Share issue costs, net of tax (Note 20) Dividends (Note 22) - - 181 53,330 (1,888) - - 1,047 (33) - - - - - - - - - Retained Earnings 20,784 $ Total 323,687 (7,843) (7,843) - - - (11,573) 1,368 $ (8,196) - - - - (12,762) 734 62 (3) (11,573) 305,064 (8,196) 1,047 148 53,330 (1,888) (12,762) Balance at December 31, 2018 $ 338,377 $ 17,195 $ 761 $ (19,590) $ 336,743 The accompanying notes are an integral part of the consolidated financial statements. Page | 40 Consolidated statements of cash flows Years ended December 31, 2018 and 2017 (000’s) Cash provided by (used in): Operating activities: Loss for the period Adjustments for: Depreciation (Note 14) Amortization of intangible assets (Note 15) Share based compensation (Note 20) Amortization of other assets (Note 16) Gain on disposal of property, plant and equipment Book value of used fleet sales Earnings on equity investments Impairment loss on re-measurement of assets held for sale Unrealized foreign exchange loss Finance costs Income tax recovery (Note 11) Asset retirement obligation settled (Note 18) Income taxes paid Interest paid Funds flow Changes in non-cash working capital items (Note 27) Net cash flows from operating activities Investing activities: Purchase of property, plant and equipment (Note 14) Proceeds on disposal of property, plant and equipment Business acquisition, net of cash acquired (Note 5) Net cash flows used in investing activities Financing activities: Shares issued, net of share issue costs (Note 20) Finance lease liabilities Repayment of loans and borrowings Payment of dividends (Note 22) Net cash flows used in financing activities Change in cash position Cash, beginning of period Cash, end of period The accompanying notes are an integral part of the consolidated financial statements. December 31, 2018 December 31, 2017 $ (8,196) $ (7,843) 38,540 2,749 2,751 128 (61) 8,201 (67) - - 2,894 (1,927) (5,424) 3,136 (3,039) 39,685 (2,143) 37,542 (30,859) 7,994 (4,622) (27,487) 47,561 (1,804) (43,441) (12,371) (10,055) - - - $ $ 40,701 2,742 1,174 128 (12,094) 21,000 - 3,457 (5) 2,824 (916) (441) 7,570 (2,989) 55,308 (40,582) 14,726 (15,596) 13,240 (197) (2,553) 62 1,588 (2,252) (11,571) (12,173) - - - Page | 41 Notes to the consolidated financial statements Years ended December 31, 2018 and 2017 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 corporation, 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, 2018 comprise of the Corporation and its subsidiaries and the Corporation’s interest in associates and jointly controlled entities. Horizon North provides a full range of industrial, commercial, and residential products and services. Industrial services include workforce accommodations, camp management services, access solutions, maintenance and utilities. The Corporation’s Modular Solutions division integrates modern design concepts and technology with state of the art, off-site manufacturing processes; producing high quality building solutions for commercial and residential offerings including offices, hotels, and retail buildings, as well as distinctive single detached dwellings and multi- family residential structures. 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 12, 2019. (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 recognizes revenue over time for its construction contracts and estimates progress of these contracts by comparing costs incurred to the total expected costs of the project. 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 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 | 42 Notes to the consolidated financial statements Years ended December 31, 2018 and 2017 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(i). 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. Revenue Recognition – The Corporation is required to make a judgment in determining the timing of the transfer of control– at a point in time or over time - for the recognition of revenue. Page | 43 Notes to the consolidated financial statements Years ended December 31, 2018 and 2017 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. (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 SPEs’ risks and rewards, the Corporation concludes that it controls the SPE. SPEs controlled by the Corporation were established under terms that impose strict limitations on the decision-making powers of the SPEs’ management and that result in the Corporation receiving the majority of the benefits related to the SPEs’ operations and net assets, being exposed to the majority of risks incident to the SPEs’ activities, and retaining the majority of the residual or ownership risks related to the SPEs or their assets. (iii) 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 Effective January 1, 2018, the Corporation adopted IFRS 9 - Financial Instruments, which replaced IAS 39 - Financial Instruments: Recognition and Measurement. The adoption of IFRS 9 did not have a material impact on the Corporation’s Consolidated Financial Statements. IFRS 9 contains three principal classification categories for financial assets: measured at amortized cost, fair value through other comprehensive income (“FVOCI”) and fair value through profit or loss (“FVTPL”). The previous IAS 39 categories of held to maturity, loans and receivables and available for sale are eliminated. The classification of financial assets under IFRS 9 is generally based on the business model in which a financial asset is managed and its contractual cash flow characteristics. Derivatives embedded in contracts where the host is a financial asset in the scope of the standard are never separated. Instead, the hybrid financial instrument as a whole is assessed for classification. Page | 44 Notes to the consolidated financial statements Years ended December 31, 2018 and 2017 3. Significant Accounting Policies (continued) (c) Financial instruments (continued) Impairment of financial assets: IFRS 9 replaces the “incurred loss” model in IAS 39 with an “expected credit loss” model. The new impairment model applies to financial assets measured at amortized cost, and contract assets and debt instruments at FVOCI. Under IFRS 9, credit losses are recognized earlier than IAS 39. IFRS 9 largely retains the existing requirements in IAS 39 for the classification and measurement of financial liabilities. The differences between the two standards did not impact the Corporation at the time of transition. The adoption of IFRS 9 has not had a significant effect on the Corporation’s accounting policies related to financial liabilities. Financial Instrument Trade and other receivables Trade and other payables Loans and borrowings (i) Non-derivative financial assets IAS 39 Category Loans and receivables Other financial liabilities Other financial liabilities IFRS 9 Category Amortized cost Amortized cost Amortized cost The initial classification of a financial asset depends upon the Corporation’s business model for managing its financial assets and the contractual terms of the cash flows. There are three measurement categories into which the Corporation classified its financial assets: • • • Amortized Cost: Includes assets that are held within a business model whose objective is to hold assets to collect contractual cash flows and its contractual terms give rise on specified dates to cash flows that represent solely payments of principal and interest; FVOCI: Includes assets that are held within a business model whose objective is achieved by both collecting contractual cash flows and selling the financial assets, where its contractual terms give rise on specified dates to cash flows that represent solely payments of principal and interest; or FVTPL: Includes assets that do not meet the criteria for amortized cost or FVOCI and are measured at fair value through profit or loss. This includes all derivative financial assets. The Corporation initially recognizes trade and other receivables on the date that they originate. All other financial assets are recognized initially on the trade date at which the Corporation becomes a party to the contractual provisions of the instrument. The Corporation’s financial assets, trade and other receivables, are initially recognized at fair value plus any directly attributable transaction costs. Subsequently, loans and receivables are measured at amortized cost using the effective interest method, less any impairment losses. 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. (ii) Non-derivative financial liabilities The Corporation’s financial liabilities are categorized as measured at amortized cost. The Corporation initially recognizes debt securities issued and subordinated liabilities on the date that they are originated. All other financial liabilities 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. Page | 45 Notes to the consolidated financial statements Years ended December 31, 2018 and 2017 3. Significant Accounting Policies (continued) (c) Financial instruments (continued) (ii) Non-derivative financial liabilities (continued) 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. 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) 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. (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. Page | 46 Notes to the consolidated financial statements Years ended December 31, 2018 and 2017 3. Significant Accounting Policies (continued) (d) Property, plant and equipment (continued) (iii) Depreciation (continued) The estimated useful lives for the current and comparative periods are as follows: Assets Camp facilities Camp setup & installation Buildings Automotive & trucking equipment Mats Furniture, fixtures & other equipment Asset retirement obligation Method Residual Value Useful life Straight-line Straight-line Straight-line Straight-line Straight-line Straight-line Straight-line 20% - - - - - - 15 years 2 to 5 years 20 years 4 to 8 years 6 years 2 to 10 years 1 to 9 years 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. (e) 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: Trade names Architectural design Customer contracts Estimated useful lives 7 years 5 years 2.5 years Amortization methods, useful lives, and residual values are reviewed at each financial year-end and adjusted if appropriate. (f) 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. Page | 47 Notes to the consolidated financial statements Years ended December 31, 2018 and 2017 3. Significant Accounting Policies (continued) (g) 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. 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 using the “expected credit loss” model and recognizes expected credit losses as a loss allowance. The Corporation recognizes an amount equal to the lifetime expected credit losses based on the Corporation’s historical experience and including forward-looking information. The carrying amount of these assets in the consolidated statement of financial position is net of any loss allowance. 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 post-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 CGUs: 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 CGUs 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 CGUs 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 CGUs 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. Page | 48 Notes to the consolidated financial statements Years ended December 31, 2018 and 2017 3. Significant Accounting Policies (continued) (g) Impairment (continued) (ii) Non-financial assets (continued) 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. 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 an impairment may exist. (h) 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 its eligible officers and employees. 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. (i) 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, 2018 and 2017 the Corporation has recognized a provision for Asset Retirement Obligations. Page | 49 Notes to the consolidated financial statements Years ended December 31, 2018 and 2017 3. Significant Accounting Policies (continued) (j) Revenue Effective January 1, 2018, the Corporation adopted IFRS 15 - Revenue from Contracts with Customers replacing IAS 11 - Construction Contracts, IAS 18 - Revenue and several revenue-related interpretations. IFRS 15 establishes a comprehensive framework for determining whether, how much and when revenue is recognized. The impacts of adopting IFRS 15 on the Corporation’s Consolidated Statement of Financial Position as at December 31, 2018, the Consolidated Statement of Comprehensive Loss and the Consolidated Statement of Cash Flow, did not result in adjustments and did not materially impact the timing or measurement of revenue. However, IFRS 15 contains new disclosure requirements. The Corporation has adopted IFRS 15 using the modified retrospective method, with the effect of initially applying this standard recognized at the date of initial application, January 1, 2018. Accordingly, the information presented for 2017 has not been restated, it is presented, as previously reported, under IAS 18, IAS 11 and related interpretations. Revenue is measured based on the consideration specified in a contract with a customer and excludes amounts collected on behalf of third parties. The Corporation recognizes revenue when it transfers control of the product or service to a customer, which is generally when title passes from the Corporation to its customer or when the customer receives the benefits from the service. The Corporation recognizes revenue from the following major products and services: (i) Camp rental and catering revenue The Corporation provides camp rental and catering services to its customers. Depending on the customer’s requirements contracts may be for camp rental only, catering and maintenance services only, or both camp rental and catering services. Revenue from the camp rental and catering services are recognized over time as services are performed. Occupancy days or mandays at the applicable day rate are used to measure recognizable revenue of the camp. Minimum mandays are included in certain contracts and contract variability, as a result of fluctuating mandays, is recognized in the period in which the mandays occur. (ii) Construction contract revenue Construction 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 highly probable that a significant revenue reversal will not occur. The Corporation recognizes revenue over time for its construction contracts, and estimates progress of these contracts by comparing costs incurred to the total expected costs of the project. Contract expenses are recognized as incurred unless they create an asset related to future contract activity. An expected loss on a contract is recognized immediately in profit or loss. (iii) Rendering of services The Corporation provides access mat rental, relocatable structure rental, and transportation services to customers. Revenue from rendering of these services are recognized over time. Rental days are used to measure the rental fleet revenue. Revenue is recognized at the applicable day rate for each asset rented, based on rates specified in each contract, and as the services are performed. (iv) Sale of used fleet 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 held for rent. The proceeds from the sale of such assets are recognized as revenue at a point in time when control of the assets transfers. (v) Sale of other goods Revenue from the sale of other goods is measured at the fair value of the consideration received or receivable. The Corporation recognizes revenue when it transfers control of the product or service to a customer, which is generally when title passes from the Corporation to its customer, collectability is reasonably assured, the associated costs can be estimated reliably, and there is no continuing management involvement with the goods. The Corporation recognizes revenue from the sale of other goods at a point in time. Page | 50 Notes to the consolidated financial statements Years ended December 31, 2018 and 2017 3. Significant Accounting Policies (continued) (k) 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. 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. (l) 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. (m) 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. Page | 51 Notes to the consolidated financial statements Years ended December 31, 2018 and 2017 3. Significant Accounting Policies (continued) (m) Income tax (continued) 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. (n) 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. (o) 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. (p) 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 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. Page | 52 Notes to the consolidated financial statements Years ended December 31, 2018 and 2017 3. Significant Accounting Policies (continued) (q) New standards and interpretations not yet adopted The new standards, amendments to standards and interpretations not yet effective for the year ended December 31, 2018, and not 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, 2019. 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 will adopt IFRS 16 in its financial statements for the annual period beginning on January 1, 2019, using the modified retrospective method where the Corporation recognizes its right-to-use assets and lease liabilities both equal to present value of the lease obligations. Throughout 2018, the Corporation reviewed all its rental and lease related contracts to evaluate the impact on the financial statements. With the modified retrospective method Horizon North expects the financial statement impact to be a $16.0 million addition of right-of-use assets as well as lease liabilities with no changes in retained earnings on January 1, 2019. From the lessor accounting side, the Corporation reviewed its various revenue streams and underlying contracts with customers, and the Corporation will include those that are applicable to the disclosure requirements as prescribed by IFRS 16 for the annual period beginning on January 1, 2019. 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) 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. (c) 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. 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. Page | 53 Notes to the consolidated financial statements Years ended December 31, 2018 and 2017 5. Business Combinations (a) Shelter Modular Inc. ("Shelter") On April 16, 2018, the Corporation acquired all of the issued and outstanding shares of Shelter Modular Inc. for $3.6 million, payable in a combination of common shares of Horizon North (“Horizon Shares”) and assumption of existing debt. The Corporation issued 983,004 common shares with a fair value at the acquisition date of $2.37 per share for a total value of $2.3 million at closing. Shelter is a full-service modular manufacturing company based in Aldergrove, British Columbia. The following summarizes the major classes of consideration transferred at the acquisition date: Shares issued Assumption of debt Total consideration Amount (000’s) $ 2,330 1,318 $ 3,648 The acquisition was accounted using the acquisition method on April 16, 2018, 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 included 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 was expected to cost to settle the outstanding liabilities. The following summarizes the recognized amounts of assets acquired and liabilities assumed: Net working capital Property, plant and equipment Deferred tax asset Total net identifiable assets acquired Goodwill Total consideration Amount (000’s) $ (1,867) 339 2,566 $ 1,038 2,610 $ 3,648 The goodwill arises as a result of the synergies expected to be achieved as a result of combining Shelter with the rest of the Corporation. None of the goodwill recognized is expected to be deductible for income tax purposes. There are no identified intangible assets acquired. From the date of acquisition to December 31, 2018, Shelter contributed $1.4 million of revenue and $0.3 million of earnings before tax to the Corporation. If the business combination had been completed on January 1, 2018, the revenue and loss before income tax for the year ending December 31, 2018 would have been $3.3 million and $0.2 million respectively. The Corporation incurred costs related to the acquisition of Shelter of $0.2 million relating to share issuance, due diligence and external advisory fees. The cost related to the share issuance totaling $48,000 were included in share capital on the balance sheet. The costs related to the due diligence and external advisory fees totaling $0.2 million were included in selling & administrative expenses on the consolidated statement of comprehensive loss. Page | 54 Notes to the consolidated financial statements Years ended December 31, 2018 and 2017 5. Business Combinations (continued) (b) C&V Portable Accommodations Ltd. (“C&V”) On November 1, 2018, the Corporation acquired all the operating assets and inventory of the custom manufacturing business of C&V for total cash consideration of $3.3 million. The operating assets acquired include the existing leasehold of 87,000 square feet of manufacturing space, employees, and equipment. The acquisition was accounted using the acquisition method on November 1, 2018, whereby the assets acquired 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 included the condition of the assets acquired, and current industry conditions as well as the amount it was expected to cost to settle the outstanding liabilities. The following summarizes the recognized amounts of assets acquired: Net working capital Property, plant and equipment Total net identifiable assets acquired Goodwill Total consideration Amount (000’s) $ 838 838 $ 1,676 1,637 $ 3,313 The allocations and determinations of the consideration described above are preliminary and subject to changes upon final adjustments. The goodwill arises as a result of the assembled workforce, the technical expertise and capabilities existing within the acquired facility and also the synergies expected to be achieved as a result of combining the manufacturing facility with the rest of the Corporation. From the date of acquisition to December 31, 2018, the acquired custom manufacturing business of C&V contributed $1.1 million of revenue and $0.3 million of loss before tax to the Corporation. The Corporation incurred costs related to the acquisition of the custom manufacturing business of C&V of $31,500 relating to due diligence and external advisory fees. Page | 55 Notes to the consolidated financial statements Years ended December 31, 2018 and 2017 6. Revenue The Corporation recognizes revenue from the following major products and services: Type of Product or Service Line Camp Rental and Catering revenue Construction contract revenue Rendering of services Sale of used fleet Sale of other goods (a) Disaggregation of revenue Accounting policy Customer obtains control of the goods or services over time Customer obtains control of the goods or services over time Customer obtains control of the goods or services over time Customer obtains control of the goods or services at a point in time Customer obtains control of the goods or services at a point in time In the following table, revenue is disaggregated by major products and service lines and timing of revenue recognition. The table also includes a reconciliation of the disaggregated revenue with the Corporations’ reportable segments. Twelve months ended December 31, 2018 (000’s) Products & Service Lines Camps & Catering Rentals & Logistics Modular Solutions Inter-segment Eliminations Total Camp Rental and Catering revenue $ 181,950 $ - $ - $ - $ 181,950 Construction contract revenue - - 133,155 - 133,155 Rendering of services Sale of used fleet Sale of other goods Timing of Revenue Recognition 32,215 37,933 - (308) 69,840 5,952 5,328 - (2,871) 8,409 - 891 - - 891 $ 220,117 $ 44,152 $ 133,155 $ (3,179) $ 394,245 Products and services transferred over time $ 214,165 $ 37,933 $ 133,155 $ (308) $ 384,945 Products and services transferred at a point in time 5,952 6,219 - (2,871) 9,300 $ 220,117 $ 44,152 $ 133,155 $ (3,179) $ 394,245 Twelve months ended December 31, 2017 (000’s) Products & Service Lines Camps & Catering Rentals & Logistics Modular Solutions Inter-segment Eliminations Total Camp Rental and Catering revenue $ 179,392 $ - $ - $ - $ 179,392 Construction contract revenue - - 46,755 - 46,755 Rendering of services Sale of used fleet Sale of other goods Timing of Revenue Recognition 15,362 41,233 - (82) 56,513 28,463 5,266 - - 33,729 1,213 6,480 - - 7,693 $ 224,430 $ 52,979 $ 46,755 $ (82) $ 324,082 Products and services transferred over time $ 194,754 $ 41,233 $ 46,755 $ (82) $ 282,660 Products and services transferred at a point in time 29,676 11,746 - - 41,422 $ 224,430 $ 52,979 $ 46,755 $ (82) $ 324,082 Page | 56 Notes to the consolidated financial statements Years ended December 31, 2018 and 2017 6. Revenue (continued) (b) Contract balances The following table provides information about receivables, contract assets and contract liabilities from contracts with customers. (000’s) Receivables, which are included in trade and other accounts receivables Contract assets, which are included in trade and other accounts receivables Contract liabilities, which are included in deferred revenue December 31, January 1, 2018 2018 $ 73,967 $ 89,070 29,000 9,695 2,075 7,008 The contract assets relate to the Corporation’s rights to consideration for work completed but not billed at the reporting date. The contract assets are transferred to receivables when the rights become unconditional. This usually occurs when the Corporation issues an invoice to the customer. The contract liabilities relate to the advance consideration received from customers for which revenue is recognized over time. The amount of $7.0 million recognized in contact liabilities at the beginning of the period has been recognized as revenue for the year ended December 31, 2018. 7. Direct Operating Expenses (000’s) Wages and benefits Job supplies Rental equipment Repairs & maintenance Trucking costs Other operating expenses Direct costs Depreciation Amortization of intangibles Impairment loss Share based compensation Gain on disposal of property, plant and equipment December 31, December 31, 2018 2017 $ 179,173 $ 137,809 92,267 79,992 5,909 4,081 8,122 7,590 6,818 6,637 43,667 36,517 335,956 272,626 38,540 40,701 2,749 2,742 - 3,457 1,382 659 (61) (12,094) $ 378,566 $ 308,091 The amount of inventories recognized as an expense during the twelve months ended December 31, 2018 is $60.3 million (2017 - $24.9 million). 8. Selling & Administrative Expenses (000’s) Salaries and benefits Other selling & administrative expenses Selling & administrative expenses Share based compensation December 31, December 31, 2018 2017 $ 14,673 $ 13,613 6,933 7,798 21,606 21,411 1,369 515 $ 22,975 $ 21,926 Page | 57 Notes to the consolidated financial statements Years ended December 31, 2018 and 2017 9. Personnel expenses (000’s) Wages, salaries & benefits Contributions to defined contribution plans Share based compensation December 31, December 31, 2018 2017 $ 190,705 $ 148,597 3,141 2,825 2,751 1,174 $ 196,597 $ 152,596 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 (000’s) Interest Expense Accretion of provisions 11. Income Taxes December 31, December 31, 2018 2017 $ 2,659 $ 2,728 235 96 $ 2,894 $ 2,824 The provision for income taxes differs from that which would be expected by applying statutory rates. A reconciliation of the difference is as follows: (000’s) Income (loss) before tax Combined federal and provincial income tax rate Expected income tax expense (recovery) Non-deductible share based compensation Differences in jurisdictional tax rates Share issuance costs Revisions to prior year tax estimates Deferred taxes not recognized Rate differential on non-capital loss carryback Non-taxable portion of capital gain Non-deductible and other December 31, 2018 December 31, 2017 $ (10,123) $ (8,759) 27.0% 27.0% $ (2,733) $ (2,365) 283 317 (69) 271 - - 10 (66) 406 641 - (10) 258 (85) 196 103 $ (1,927) $ (916) For the year ended December 31, 2018 income tax recovery was $1.9 million (2017 - $0.9 million), with an effective tax rate of 19.0% (2017 – 10.5%). The increase in income tax recovery was attributable to a larger net loss for the year ended December 31, 2018 combined with the decrease in permanent differences resulting from the legislative rate change and rate differential on loss carryback in the prior year, as well as fewer unrecognized non-capital losses in foreign jurisdictions in the current year. Deferred tax assets and liabilities (a) The Corporation has non-capital losses for Canadian tax purposes of $30.4 million available to reduce future taxable income in Canada, and non-capital losses for United States tax purposes of $0.8 million available to reduce future taxable income in the United States, which will expire after 2022. Page | 58 Notes to the consolidated financial statements Years ended December 31, 2018 and 2017 11. Income Taxes (continued) Deferred tax assets and liabilities (continued) (b) Deferred tax assets have not been recognized in respect of the following items: (000’s) Tax losses December 31, December 31, 2018 2017 $ 2,049 $ 1,679 Tax losses not recognized expire in 2028 and beyond. 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: (000’s) Assets 2018 2017 Liabilities 2018 2017 Net 2018 2017 Property, plant and equipment $ 137 $ 103 $ (53,267) $ (54,789) $ (53,130) $ (54,686) Intangible assets Goodwill 3,041 2,600 (328) (398) 2,713 2,202 1,913 2,038 (151) (151) 1,762 1,887 Non-capital loss carry forwards 6,628 581 - - 6,628 581 Net capital loss carry forwards - 166 - - - 166 Restructuring costs 69 65 - - 69 65 Asset retirement obligation 3,586 3,932 - - 3,586 3,932 Reserves 434 57 (2,174) (184) (1,740) (127) Foreign exchange adjustments 1 1 - - 1 1 Share issue costs $ 797 470 $ - - 797 470 Deferred tax asset Deferred tax liability $ - $ - (39,314) (45,509) $ (39,314) $ (45,509) Movements in temporary differences during the year ended December 31, 2018 are as follows: (000’s) Property, plant and equipment Intangible assets Goodwill Non-capital loss carry forwards Net capital loss carry forwards Restructuring costs Asset retirement obligation Reserves Foreign exchange adjustments Share issue costs December 31, 2017 December 31, 2018 $ (54,686) $ 1,517 $ - $ 39 $ (53,130) Recognized in profit and loss Recognized in equity Recognized from business combination 2,202 511 - - 2,713 1,887 (125) - - 1,762 581 3,517 - 2,530 6,628 166 (166) - - - 65 4 - - 69 3,932 (346) - - 3,586 (127) (1,613) - - (1,740) 1 - - - 1 470 (371) 698 - 797 $ (45,509) $ 2,928 $ 698 $ 2,569 $ (39,314) Page | 59 Notes to the consolidated financial statements Years ended December 31, 2018 and 2017 11. Income Taxes (continued) Deferred tax assets and liabilities (continued) Movements in temporary differences during the year ended December 31, 2017 are as follows: (000’s) Property, plant and equipment Intangible assets Goodwill Non-capital loss carry forwards Net capital loss carry forwards Restructuring costs Asset retirement obligation Reserves Foreign exchange adjustments Share issue costs 12. Trade and other receivables (000’s) Trade receivable Accrued receivable Construction receivables Other receivables Allowance for doubtful accounts Trade and other receivables December 31, 2016 December 31, 2017 $ (51,396) $ (3,290) $ - $ - $ (54,686) Recognized in profit and loss Recognized in equity Recognized from business combination 1,708 494 - - 2,202 2,029 (142) - - 1,887 479 102 - - 581 241 (75) - - 166 37 28 - - 65 3,514 418 - - 3,932 (60) (67) - - (127) 4 (3) - - 1 692 (222) - - 470 $ (42,752) $ (2,757) $ - $ - $ (45,509) December 31, December 31, 2018 2017 $ 28,469 $ 44,469 30,687 12,953 45,910 43,274 960 1,034 106,026 101,730 (3,059) (2,965) $ 102,967 $ 98,765 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 (000’s) Raw materials Finished goods December 31, December 31, 2018 2017 $ 4,228 $ 3,904 4,554 3,523 $ 8,782 $ 7,427 Page | 60 Notes to the consolidated financial statements Years ended December 31, 2018 and 2017 14. Property, Plant and Equipment Cost (000’s) Camp facilities, setup & installation Land & buildings Automotive & trucking equipment Mats Furniture, fixtures & other equipment Asset retirement obligations Assets under construction Accumulated Depreciation (000’s) Camp facilities, setup & installation Land & buildings Automotive & trucking equipment Mats Furniture, fixtures & other equipment Asset retirement obligations Assets under construction Carrying Amounts (000’s) Camp facilities, setup & installation Land & buildings Automotive & trucking equipment Mats Furniture, fixtures & other equipment Asset retirement obligations Assets under construction $ $ $ $ Balance December 31, 2017 416,034 63,001 44,315 20,203 6,211 14,321 2,100 566,185 Balance December 31, 2017 160,046 12,274 30,647 13,653 4,616 6,827 - 228,063 Balance December 31, 2017 255,988 50,727 13,668 6,550 1,595 7,494 2,100 338,122 $ $ $ $ $ $ Additions 25,368 2,097 3,342 8,737 1,157 3,907 (1,445) 43,163 Depreciation 23,553 2,138 4,461 4,185 676 3,527 - 38,540 $ $ $ $ Disposals (30,355) (5,979) (3,993) (4,705) (1,514) (3,646) - (50,192) $ $ Disposals (21,624) (1,400) (3,124) (2,990) (702) (3,553) - (33,393) Additions from Business Combinations Impact of Foreign Translation - 377 173 - 627 - - 1,177 $ $ $ $ - - - - - - - - Impact of Foreign Translation - - - - - - - - Balance December 31, 2018 411,047 59,496 43,837 24,235 6,481 14,582 655 560,333 Balance December 31, 2018 161,975 13,012 31,984 14,848 4,590 6,801 - 233,210 Balance December 31, 2018 249,072 46,484 11,853 9,387 1,891 7,781 655 327,123 $ $ $ $ $ $ On January 8, 2018, the Corporation purchased a 288 person Camp Facility south of Fort McMurray, Alberta for an aggregate purchase price of $14.0 million including the issuance of 665,779 common shares of the Corporation with a fair value of $1.50 per share for a total value of $1.0 million. As set out in Note 5, the Corporation acquired assets in the Shelter business combination as at the acquisition date of April 16, 2018 with a fair value of $0.3 million and on November 1, 2018, the Corporation acquired assets in the C&V business combination with a fair value of $0.8 million. Page | 61 Notes to the consolidated financial statements Years ended December 31, 2018 and 2017 14. Property, Plant and Equipment (continued) Cost (000’s) Camp facilities, setup & installation Land & buildings Automotive & trucking equipment Mats Furniture, fixtures & other equipment Asset retirement obligations Assets under construction Accumulated Depreciation (000’s) Camp facilities, setup & installation Land & buildings Automotive & trucking equipment Mats Furniture, fixtures & other equipment Asset retirement obligations Assets under construction Carrying Amounts (000’s) Camp facilities, setup & installation Land & buildings Automotive & trucking equipment Mats Furniture, fixtures & other equipment Asset retirement obligations Assets under construction $ $ $ $ Balance December 31, 2016 456,452 62,341 44,255 19,954 8,293 12,692 1,452 605,439 Balance December 31, 2016 157,197 12,590 29,683 13,309 4,997 4,892 - 222,668 Balance December 31, 2016 299,255 49,751 14,572 6,645 3,296 7,800 1,452 382,771 $ $ $ $ $ $ Additions 9,660 2,302 4,838 6,082 (346) 1,827 648 25,011 Depreciation 27,469 1,323 4,754 3,959 1,197 1,999 - 40,701 $ $ $ $ Reclassification to assets held for sale (10,085) - - - - - - (10,085) Reclassification to assets held for sale (3,505) - - - - - - (3,505) $ $ $ $ Disposals (39,987) (1,642) (4,778) (5,833) (1,736) (198) - (54,174) Disposals (21,109) (1,639) (3,790) (3,615) (1,578) (64) - (31,795) $ $ $ $ Impact of Foreign Translation (6) $ - - - - - - (6) $ Impact of Foreign Translation (6) $ - - - - - - (6) $ $ $ Balance December 31, 2017 416,034 63,001 44,315 20,203 6,211 14,321 2,100 566,185 Balance December 31, 2017 160,046 12,274 30,647 13,653 4,616 6,827 - 228,063 Balance December 31, 2017 255,988 50,727 13,668 6,550 1,595 7,494 2,100 338,122 (a) Assets under construction At December 31, 2018 and December 31, 2017, included in capital assets under construction are internal information technology projects under development, and fleet equipment under construction for expansion purposes. The Corporation has not capitalized any borrowing costs for the twelve months ended December 31, 2018 (2017 - nil), due to the short-term nature of construction. (b) Finance lease arrangements Included in property, plant and equipment is equipment under finance lease arrangements with a net book value of $1.0 million at December 31, 2018 (2017 - $2.7 million). Page | 62 Notes to the consolidated financial statements Years ended December 31, 2018 and 2017 14. Property, Plant and Equipment (continued) (c) 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, 2018 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 CGUs. (d) Impairment testing for cash-generating units The recoverable amounts of the CGUs 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 2019 budget 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 2019 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 post-tax rate of 13.90% (2017 – 14.88%) for all CGUs. 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, 2018, 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 2020 to 2023 in the Camps & Catering, and Matting CGUs. Based on management’s best estimate at December 31, 2018 a 5% to 15% growth rate was used to project the cash flows from 2020 to 2023 for the Camps & Catering and Relocatable Structures CGUs. The cash flows beyond 2023 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. The results of the tests indicated no impairment for the Camps & Catering, Matting, Relocatable Structures, and Manufacturing CGUs as at December 31, 2018 (2017 –$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 CGUs would have resulted in the carrying amount exceeding the recoverable amount by $2.9 million. All else being equal, a 0.5% decrease in the inflation rates would not have resulted in any of the CGUs carrying amounts exceeding the recoverable amounts. All else being equal, a 1.0% decrease in the growth rate would not have resulted in any of the CGUs carrying amounts exceeding the recoverable amounts. Page | 63 Notes to the consolidated financial statements Years ended December 31, 2018 and 2017 15. 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. Cost (000’s) Trade names Architectural design Customer contracts Amortization (000’s) Trade names Architectural design Customer contracts Carrying Amounts (000’s) Trade names Architectural design Customer contracts $ $ $ $ Balance December 31, 2017 1,590 439 6,053 8,082 Balance December 31, 2017 361 139 3,234 3,734 Balance December 31, 2017 1,229 300 2,819 4,348 $ $ $ $ $ $ Disposals - - - - Amortization 234 88 2,427 2,749 $ $ $ $ Additions from business combinations - - - - $ $ $ - $ $ $ Balance December 31, 2018 1,590 439 6,053 8,082 Balance December 31, 2018 595 227 5,661 6,483 Balance December 31, 2018 995 212 392 1,599 Page | 64 Notes to the consolidated financial statements Years ended December 31, 2018 and 2017 15. Intangible Assets and Goodwill (continued) Cost (000’s) Trade names Architectural design Customer contracts Amortization (000’s) Trade names Architectural design Customer contracts Carrying Amounts (000’s) Trade names Architectural design Customer contracts Goodwill (000’s) Balance - beginning of year Additions through business combinations (Note 5) $ $ $ $ Balance December 31, 2016 1,590 439 6,053 8,082 Balance December 31, 2016 134 51 807 992 Balance December 31, 2016 1,456 388 5,246 7,090 $ $ $ $ $ $ Additions from business combinations - - - - Additions - - - - $ $ Amortization 227 88 2,427 2,742 Balance December 31, 2017 1,590 439 6,053 8,082 Balance December 31, 2017 361 139 3,234 3,734 Balance December 31, 2017 1,229 300 2,819 4,348 $ $ $ $ $ $ Balance Balance December 31, December 31, 2018 20,545 $ 4,247 24,792 $ 2017 20,348 197 20,545 $ $ (a) 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, 2018, Goodwill, with a carrying amount of $17.2 million was allocated to the Camps & Catering CGU and $7.6 million was allocated to the Manufacturing CGU. The recoverable amounts of the CGUs 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 2019 budget approved by the Board of Directors. Additionally, information in relation to the impairment test is disclosed in Note 14(e). The results of the tests indicated no impairment for the Camps & Catering and Manufacturing CGU’s at December 31, 2018 (2017 – nil). Page | 65 Notes to the consolidated financial statements Years ended December 31, 2018 and 2017 16. 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 $1.9 million (2017 - $2.0 million). The amount expensed during the year ended December 31, 2018 related to the prepaid lease was $0.1 million (2017 - $0.1 million) with 16 years remaining on the contract. Also included in the Corporation’s other assets is an investment held for sale measured at fair value through profit and loss. At December 31, 2018 the financial asset had a fair value of $0.9 million (2017 - $Nil). 17. Loans and Borrowings (000’s) Committed credit facility December 31, 2018 December 31, 2017 $ 30,894 $ 73,016 The carrying value of Horizon’s debt approximates its fair value, as debt bears interest at variable rates which approximates market rates. On March 27, 2018, the Corporation amended its committed credit facility (“credit facility”) extending the maturity date to September 30, 2020. The credit facility has an available limit of $150.0 million and is secured with 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 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%. The credit facility is subject to the following financial covenants: Debt Covenants Maximum Consolidated Senior debt (1) to Consolidated Adjusted EBITDAS ratio (3)(4) (must be 3.00:1.00 or less) Maximum Consolidated Total debt (2) to Consolidated Adjusted 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 Calculation December 31, 2018 0.84:1.00 0.86:1.00 12.02:1.00 (1) Senior debt is calculated as the sum of current and long-term portions of total loans and borrowings less vehicle and equipment financing. (2) Total debt is calculated as the sum of current and long-term portions of total loans and borrowings. (3) EBITDAS (Earnings before interest, taxes, depreciation, amortization, share based compensation, impairment, gain/loss on disposal of property, plant and equipment, and earnings from equity investments) is not a recognized measure under IFRS. Management believes that in addition to total profit and total comprehensive income, EBITDAS is a useful supplemental earnings measure as it provides an indication of the Corporation’s operating performance 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 Adjusted EBITDAS to 12 months trailing interest expense on loans and borrowings. As at December 31, 2018, the Corporation was in compliance with all financial and non-financial covenants related to the Credit Facility. Page | 66 Notes to the consolidated financial statements Years ended December 31, 2018 and 2017 18. Asset retirement obligations Provisions include constructive site restoration obligations for camp projects to restore lands to previous condition when camp facilities are dismantled and removed. (000’s) Balance, beginning of year Additions Discount rate change Accretion of provisions Asset retirement obligations settled Revisions Balance, end of year December 31, 2018 December 31, 2017 $ 14,564 $ 13,082 1,620 (254) 96 (441) 461 3,768 (23) 235 (5,424) 162 $ 13,282 $ 14,564 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, 2018 was $14.3 million (2017 - $15.9 million) and determined using risk free interest rates of 1.85% to 2.13% (2017 - 1.66% to 1.97%) and an inflation rate of 2.0% (2017 – 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 2019 and 2028. (000’s) Current Non-current Balance, end of year 19. Leases and commitments (a) The Corporation has outstanding bank letters of credit as follows: Maturity date February 1, 2019 February 25, 2019 July 18, 2019 August 21, 2019 September 26, 2019 September 29, 2019 November 2, 2019 December 31, 2018 December 31, 2017 $ 1,835 $ 3,347 11,217 $ 13,282 $ 14,564 11,447 $ Amount (000's) 50 25 5 53 15 84 74 (b) The Corporation has entered into finance lease agreements for equipment with an average lease term 36 months (2017 – 18 months) 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 5.0% to 5.3% per annum. 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: (000's) 2019 2020 2021 2022 2023 and beyond Amount $ 5,397 5,247 4,854 4,029 4,683 $ 24,210 Page | 67 Notes to the consolidated financial statements Years ended December 31, 2018 and 2017 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 Balance at December 31, 2016 Share options exercised Balance at December 31, 2017 Share options exercised Bought-deal equity financing Common shares issued Share issue costs, net of tax of $0.7 million Balance at December 31, 2018 Amount (000’s) 144,622,006 $ 286,674 Number 80 53,333 144,675,339 $ 286,754 87,666 181 17,857,200 50,000 1,648,783 3,330 - 164,268,988 (1,888) $ 338,377 On January 8, 2018, the Corporation acquired Moose Haven Lodge for an aggregate purchase price of $14.0 million including the issuance of 665,779 common shares of the Corporation with a fair value of $1.50 per share for a total value of $1.0 million. On April 16, 2018, the Corporation acquired all of the issued and outstanding shares of Shelter Modular Inc. for an aggregate purchase price of $3.6 million including the issuance of 983,004 common shares of the Corporation with a fair value of $2.37 per share for a total value of $2.3 million (Note 5). On June 25, 2018, the Corporation closed a bought deal equity financing agreement with a syndicate of underwriters that purchased 17,857,200 common shares of the Corporation for resale to the public, including overallotment, at a price of $2.80 per common share for gross proceeds of $50.0 million. In connection with the offering, the Corporation incurred approximately $2.5 million in transaction costs which included $2.3 million in agent fees. Total transaction costs, net of tax, were applied against the proceeds in share capital during the year ended December 31, 2018. (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 2.5 years and all options granted have a maximum term of 5 years. Page | 68 Notes to the consolidated financial statements Years ended December 31, 2018 and 2017 20. Share Capital (continued) (c) Share option plan (continued) Year ended December 31, 2018 Year ended December 31, 2017 Outstanding Weighted average Outstanding Weighted average options exercise price options exercise price Balance, beginning of period 8,342,385 $ 2.97 8,385,737 $ 4.15 Granted Forfeited Expired Exercised 2,115,707 2.53 2,633,000 1.46 (388,350) (224,000) (87,666) 3.42 6.73 1.68 (1,012,614) 3.69 (1,610,405) 6.28 (53,333) 1.16 Balance, end of period 9,758,076 $ 2.78 8,342,385 $ 2.97 Balance, beginning of period Vested Forfeited Expired Exercised Year ended December 31, 2018 Year ended December 31, 2017 Exercisable Weighted average Exercisable Weighted average options exercise price options exercise price 4,029,525 $ 4.43 4,168,595 $ 5.71 2,165,855 (308,349) (224,000) (87,666) 1.78 3.91 6.73 1.68 1,995,285 3.31 (470,617) 5.10 (1,610,405) 6.28 (53,333) 1.16 Balance, end of period 5,575,365 $ 3.38 4,029,525 $ 4.43 The exercise prices for options outstanding and exercisable at December 31, 2018 are as follows: Exercise price per share $1.16 to $1.37 $1.38 to $1.53 $1.54 to $2.40 $2.41 to $3.09 $3.10 to $8.13 Total options outstanding Exercisable options Weighted average exercise price per share 1.17 1.47 2.17 2.76 7.27 2.78 Number 1,204,500 $ 2,226,834 3,239,207 1,564,000 1,523,535 9,758,076 $ Weighted average remaining contractual life in years 2.3 3.4 1.8 4.5 0.5 2.5 Weighted average exercise price per share 1.16 1.47 2.26 - 7.27 3.38 Number 766,498 $ 707,832 2,577,500 - 1,523,535 5,575,365 $ The weighted average share price at the date of exercise for share options exercised during the year ended December 31, 2018 was $2.53/share (2017 – $1.45/share). Page | 69 Notes to the consolidated financial statements Years ended December 31, 2018 and 2017 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: Fair value per option Forfeiture rate Grant price Expected life Risk free interest rate Dividend yield rate Volatility December 31, 2018 December 31, 2017 $ 0.81 $ 0.47 9.21% 8.51% $ 2.53 $ 1.46 3.0 years 1.96% 3.15% 54.78% 3.0 years 0.81% 5.47% 64.69% Expected volatility is estimated by considering historic average share price volatility. For the twelve months ended December 31, 2018, share based compensation for share options included in operating earnings (loss) amounted to $1.0 million (December 31, 2017 – $0.7 million). (d) Restricted share unit plan The Corporation has a Restricted Share Unit (“RSU”) plan for its directors, officers and key employees whereby RSUs may be granted, subject to certain terms and conditions. Under the terms of the RSU plan, the awarded units will vest in three equal portions on the first, second and third anniversary from the grant date, and will be settled in cash in the amount equal to the fair market value of the Corporation’s stock price on that date. The following table summarizes the RSUs outstanding: Units outstanding at December 31, 2017 Granted Forfeited Settled Units outstanding at December 31, 2018 Number 1,806,007 1,106,148 (172,258) (747,283) 1,992,614 The following table summarizes the RSUs fair value per unit at the time of issuance and as at December 31, 2018: Opening balance Issued on March 15, 2018 Issued on March 26, 2018 Issued on April 17, 2018 Issued on June 1, 2018 Issued on July 30, 2018 Issued on September 4, 2018 Issued on November 2, 2018 Issued on December 3, 2018 Fair Value at Grant Date ($ per unit) Fair Value at December 31, 2018 ($ per unit) 1.97 2.15 2.40 2.98 2.47 2.44 2.71 2.18 1.80 1.80 1.80 1.80 1.80 1.80 1.80 1.80 1.80 Units Issued 1,806,007 228,426 21,900 15,021 766,603 12,198 50,000 6,000 6,000 As at December 31, 2018, $0.3 million (2017 - $0.6 million) was included in accounts payable and accrued liabilities for outstanding RSUs. For the year ended December 31, 2018, share based compensation for RSUs included in operating earnings (loss) amounted to $1.7 million (2017 - $0.4 million), with a weighted average remaining term of 1.0 years. Page | 70 Notes to the consolidated financial statements Years ended December 31, 2018 and 2017 21. Earnings Per Share The calculation of basic earnings per share for the twelve months ended December 31, 2018 was based on the total loss attributable to common shareholders of $8.2 million (2017 – $7.8 million). A summary of the common shares used in calculating earnings per share is as follows: Number of common shares, beginning of period Weighted average effect of common shares issued Weighted average common shares outstanding – basic Effect of share purchase options (1) Weighted average common shares outstanding – diluted December 31, December 31, 2018 144,675,339 2017 144,622,006 10,644,950 23,594 155,320,289 144,645,600 - - 155,320,289 144,645,600 (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, 2018, 9,758,076 share options (2017 – 8,342,385) 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, 2018, the Corporation paid dividends totaling $12.4 million respectively (December 31, 2017 - $11.6 million). (000’s except per share amounts) Record Date March 31 June 30 September 30 December 31 2018 2017 Amount per share Total dividend amount Amount per share Total dividend amount $ 0.02 $ 2,907 $ 0.02 $ 2,892 0.02 3,285 0.02 2,893 0.02 3,285 0.02 2,894 0.02 3,285 0.02 2,894 $ 0.08 $ 12,762 $ 0.08 $ 11,573 On March 12, 2019, the Corporation’s Board of Directors declared a dividend for the first quarter of 2019 at $0.02 per share. The dividend is payable to shareholders of record at the close of business on March 31, 2019 to be paid on April 15, 2019. 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 | 71 Notes to the consolidated financial statements Years ended December 31, 2018 and 2017 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: (000’s) Trade receivables Neither impaired nor past due Outstanding 31-60 days Outstanding 61-90 days Outstanding more than 90 days Total trade receivables Construction receivables Neither impaired nor past due Outstanding 31-60 days Outstanding 61-90 days Outstanding more than 90 days Total construction receivables Accrued revenue Accrued construction revenue Other receivables Allowance for doubtful accounts Total trade and other receivables December 31, December 31, 2018 2017 $ 16,944 $ 23,161 4,908 11,820 2,068 2,221 4,549 7,267 $ 28,469 $ 44,469 $ 13,658 $ 18,655 73 918 1,055 - 2,124 14,006 $ 16,910 $ 33,579 30,687 12,953 29,000 9,695 960 1,034 (3,059) (2,965) $ 102,967 $ 98,765 In the twelve months ended December 31, 2018, the Corporation provided an allowance for $3.1 million of receivables aged greater than 90 days and collected $32,000 that had previously been allowed for. The Corporation also applied $1.1 million of allowance for doubtful accounts against the associated receivable balance. As at March 12, 2019, the Corporation has collected $0.6 million 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, 2018, included in construction receivables were holdbacks of $6.9 million (2017 - $0.2 million). Page | 72 Notes to the consolidated financial statements Years ended December 31, 2018 and 2017 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, 2018, the Corporation has $118.3 million of available room on its committed credit facility (Note 17). The following shows the timing of cash outflows relating to trade and other payables and loans and borrowings: December 31, 2018 December 31, 2017 Trade and other payables(1) Loans and Borrowings(2) Total $ - $ - $ - $ 51,937 - 51,937 4,382 30,894 35,276 - - - 424 - 424 2018 2019 2020 2021 2022 2023 and beyond 6,641 - 6,641 Trade and other payables(1) 37,936 - 6,276 - 4,941 - Loans and Borrowings(2) - $ 73,016 - - - - Total 37,936 73,016 6,276 - 4,941 - $ 63,384 $ 30,894 $ 94,278 $ 49,153 $ 73,016 $ 122,169 (1) (2) Trade and other payables include trade and other payables, income taxes payable, and provisions. Loans and borrowings include Horizon North’s senior secured revolving term credit facility. (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, 2018 by approximately $62,400 (December 31, 2017 - $77,000). 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 $0.6 million for the twelve months ended December 31, 2018 (December 31, 2017 - $0.7 million). 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 | 73 Notes to the consolidated financial statements Years ended December 31, 2018 and 2017 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, 2018, which was unchanged from 2017, is to maintain an appropriate level of loans and borrowings in comparison to EBITDAS(1) and total loans and borrowings plus shareholders’ equity. (000's) Statement of financial position components of ratios Current loans and borrowings (2) Loans and borrowings (2) Total loans and borrowings Shareholders' equity Total loans and borrowings plus shareholders' equity Statement of comprehensive income components of ratios (trailing 12 months) Operating loss Depreciation Amortization Impairment loss Gain on disposal of property, plant and equipment Share based compensation EBITDAS (1) Total loans and borrowings to EBITDAS (1) Total loans and borrowings to total loans and borrowings plus shareholders' equity December 31, December 31, 2018 2017 $ 772 $ 1,588 30,894 73,016 $ 31,666 $ 74,604 336,743 305,064 $ 368,409 $ 379,668 $ (7,296) $ (5,935) 38,540 40,701 2,749 2,742 - 3,457 (61) (12,094) 2,751 1,174 $ 36,683 $ 30,045 0.86 0.09 2.48 0.20 (1) EBITDAS (Earnings before interest, taxes, depreciation, amortization, share based compensation, impairment, gain/loss on disposal of property, plant and equipment, and earnings from equity investments) is not a recognized measure under IFRS. Management believes that in addition to total profit and total comprehensive income, EBITDAS is a useful supplemental earnings measure as it provides an indication of the Corporation’s operating performance 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. (2) 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 | 74 Notes to the consolidated financial statements Years ended December 31, 2018 and 2017 25. Operating segments The Corporation operates in Canada through three 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. Information regarding the results of all segments is included below. Inter-segment pricing is determined on an arm’s length basis. Twelve months ended December 31, 2018 (000’s) Revenue (1) EBITDAS Depreciation and amortization (Gain) loss on disposal of assets Share based compensation Operating (loss) earnings Total assets Capital expenditures Twelve months ended December 31, 2017 (000’s) Revenue (1) EBITDAS Depreciation and amortization Impairment loss on re-measurment of assets held for sale (Gain) loss on disposal of assets Share based compensation Operating earnings (loss) Total assets Capital expenditures Camps & Catering Rentals & Logistics Modular Solutions Corporate Inter-segment Eliminations $ 220,117 $ 44,152 $ 133,155 $ - $ (3,179) $ 27,565 29,465 (174) 360 (2,086) 344,297 26,385 12,404 10,001 (541) 147 2,797 54,436 10,356 10,466 1,395 245 216 8,610 70,810 2,416 Camps & Catering Rentals & Logistics Modular Solutions $ 224,430 $ 52,979 $ 46,755 $ 43,524 30,466 3,457 (11,900) 219 21,282 346,824 11,799 13,913 10,304 - (285) 22 3,872 62,875 6,401 (14,626) 2,030 - (4) 127 (16,779) 64,195 1,309 (13,752) 425 409 2,028 (16,614) 2,867 288 Corporate - $ (12,766) 645 - 147 806 (14,364) 5,856 606 3 (3) - - - - - Inter-segment Eliminations (82) $ - - (2) (52) 54 - - - Total 394,245 36,683 41,289 (61) 2,751 (7,296) 472,410 39,445 Total 324,082 30,045 43,443 3,457 (12,094) 1,174 (5,935) 479,750 20,115 (1) EBITDAS (Earnings before interest, taxes, depreciation, amortization, share based compensation, impairment, gain/loss on disposal of property, plant and equipment, and earnings from equity investments) is not a recognized measure under IFRS. Management believes that in addition to total profit and total comprehensive income, EBITDAS is a useful supplemental earnings measure as it provides an indication of the Corporation’s operating performance 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. 26. Related Parties (000's) Joint venture Recovery of administrative overhead Key management personnel interests Sales Included in accounts receivable December 31, December 31, 2018 2017 $ - $ 60 $ 256 $ 1,264 84 140 Page | 75 Notes to the consolidated financial statements Years ended December 31, 2018 and 2017 26. Related Parties (continued) For the year ended December 31, 2017, the Corporation earned a management fee of $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. During the year ended December 31, 2017, AOGS earned revenue of $1.1 million 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 were $0.1 million. The Corporation earned revenue during the year ended December 31, 2018 of $0.3 million (2017 – $0.1 million) for catering services provided to Trican Well Service Ltd., of which a director of the Corporation is a Director. There was $0.1 million (2017 - $nil) included in trade receivables as at December 31, 2018. 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 named executive officers and the board of directors. Key management personnel compensation for the year ended December 31, 2018 and 2017 is comprised as follows: (000's) Short-term employee benefits Post-employment benefits Share based compensation December 31, December 31, 2018 2017 $ 2,936 $ 2,148 65 82 1,510 943 $ 4,511 $ 3,173 27. Supplemental Information Components of change in non-cash working capital balances related to operating activities: (000's) Trade and other receivable Inventories Prepayments Investment held for sale Trade and other payables Deferred revenue Purchases of rental fleet Finance cost payable December 31, December 31, 2018 2017 $ (3,364) $ (42,221) (2,168) (1,479) (1,355) 1,061 (858) 14,721 (4,933) (7,409) (6) - 4,464 5,231 (4,519) 110 $ (2,143) $ (40,582) Page | 76 Notes to the consolidated financial statements Years ended December 31, 2018 and 2017 28. Significant Subsidiaries The consolidated financial statements of the Corporation include the accounts of its one wholly-owned partnership, as well as ten special purpose entities: Subsidiary Name Horizon North Camp & Catering Partnership Kitikmeot Camp Solutions Limited (“Kitikmeot”) Acho Horizon North Camp Services Limited Partnership (“Acho”) Secwepemc Camp & Catering Limited Partnership (“Secwepemc”) Halfway River Horizon North Camp Services Limited Partnership (“HRHN”) Two Lakes Horizon North Camp Services Limited Partnership (“TLHN”) Tahltan Horizon North Services Inc.("Tahltan") Acden Horizon North Limited Partnership ("Acden") Sekui Limited Partnership ("Sekui") Eclipse Camp Solutions Incorporated ("Eclipse") Skin Tyee Horizon North Camp Services Limited Partnership ("STHN") The Partnership is the primary operating entity of the Corporation. (a) Special purpose entities Ownership Interest (%) Country of December 31, December 31, Incorporation 2018 2017 Canada Canada Canada Canada Canada Canada Canada Canada Canada Canada Canada 100 100 49 49 49 49 49 49 49 49 49 49 49 49 49 49 49 49 49 49 The Corporation has a 49% interest in the ownership and voting rights of Kitikmeot, Acho, Secwepemc, HRHN, TLHN, Tahltan, Acden, Sekui, Eclipse, and STHN 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. Seasonality Some 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. Modular Solutions segment is not impacted by seasonality. Page | 77 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 Calgary, Alberta  

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