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Section 1: 8-K/A (8-K/A)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 8-K/A

(Amendment No. 1)

 


 

CURRENT REPORT

Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

 

Date of Report (Date of earliest event reported): August 15, 2018 (June 1, 2018)

 


 

GMS INC.

(Exact name of registrant as specified in charter)

 


 

Delaware

 

001-37784

 

46-2931287

(State or Other Jurisdiction
of Incorporation)

 

(Commission
File Number)

 

(I.R.S. Employer
Identification No.)

 

100 Crescent Centre Parkway, Suite 800
Tucker, Georgia

 

30084

(Address of Principal Executive Offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (800) 392-4619

 


 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

 

o                      Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

o                      Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

o                      Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

o                      Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

 

Emerging growth company  o

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act  o

 

 

 



 

Explanatory Note

 

On June 4, 2018, GMS Inc. filed a Current Report on Form 8-K (the “Initial Filing”) to report, among other things, that it completed its previously announced acquisition of WSB Titan on June 1, 2018.  This Current Report on Form 8-K/A is being filed as an amendment to the Initial Filing to provide the financial statements and pro forma financial information required by Items 9.01(a) and 9.01(b) of Form 8-K that were excluded from the Initial Filing in reliance on the instructions to such items.

 

Item 9.01. Financial Statements and Exhibits.

 

(a)  Financial Statements of Businesses Acquired.

 

The audited consolidated balance sheets of Master Titan Holdings LP as of December 31, 2017 and December 31, 2016 and the audited consolidated statements of income and comprehensive income, changes in partners’ equity and cash flows for the year ended December 31, 2017 and the period from formation on March 18, 2016 to December 31, 2016, and the notes related thereto, are filed as Exhibit 99.1 and incorporated herein by reference.

 

(b)  Pro Forma Financial Information.

 

The unaudited pro forma condensed combined financial information as of and for the year ended April 30, 2018, and the notes related thereto, are filed as Exhibit 99.2 and incorporated herein by reference.

 

(d)  Exhibits.

 

Exhibit

 

Description

23.1

 

Consent of PricewaterhouseCoopers LLP, independent auditors

99.1

 

Audited consolidated balance sheets of Master Titan Holdings LP as of December 31, 2017 and December 31, 2016 and audited consolidated statements of income and comprehensive income, changes in partners’ equity and cash flows for the year ended December 31, 2017 and the period of incorporation on March 18, 2016 to December 31, 2016, and the notes related thereto

99.2

 

Unaudited pro forma condensed combined financial information as of and for the year ended April 30, 2018, and the notes related thereto

 

2



 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

 

 

GMS INC.

 

 

 

 

 

 

Date: August 15, 2018

By:

/s/ H. Douglas Goforth

 

 

Name:

H. Douglas Goforth

 

 

Title:

Chief Financial Officer

 

3


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Section 2: EX-23.1 (EX-23.1)

Exhibit 23.1

 

 

Consent of Independent Auditor

 

We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-217772 and 333-221940) and Form S-3 (No. 333-221986) of GMS Inc. of our report dated April 30, 2018 relating to the financial statements of Master Titan Holdings LP, which appears in this Current Report on Form 8-K.

 

 

(Signed) “PricewaterhouseCoopers LLP”

 

 

Chartered Professional Accountants, Licensed Public Accountants

Toronto, Canada

August 15, 2018

 

 

PricewaterhouseCoopers LLP

18 York Street Suite 2600, Toronto, Ontario, Canada M5J OB2

T: +1 416 941 8383, F: +1 416 814 3220

 

“PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.

 


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Section 3: EX-99.1 (EX-99.1)

Exhibit 99.1

 

Master Titan Holdings LP

 

Consolidated Financial Statements
December 31, 2017 and 2016

 



 

 

April 30, 2018

 

Independent Auditor’s Report

 

To the Unitholders of
Master Titan Holdings LP

 

We have audited the accompanying consolidated financial statements of Master Titan Holdings LP and its subsidiaries, which comprise the consolidated statements of financial position as at December 31, 2017 and December 31, 2016 and the related consolidated statements of income and comprehensive income, of changes in partners’ equity and of cash flows for the year ended December 31, 2017 and the period from incorporation on March 18, 2016 to December 31, 2016, which, as described in note 1 to the consolidated financial statements, have been prepared on the basis of International Financial Reporting Standards as issued by the International Accounting Standards Board.

 

Management’s responsibility for the consolidated financial statements

 

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with International Financial Reporting Standards, as issued by the International Accounting Standards Board; this includes the design, implementation and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

 

Auditor’s responsibility

 

Our responsibility is to express an opinion on the consolidated financial statements based on our audit. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Company’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of significant accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

 

PricewaterhouseCoopers LLP

PwC Tower, 18 York Street, Suite 2600, Toronto, Ontario, Canada M5J 0B2

T: +1 416 863 1133, F: +1 416 365 8215

 

“PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.

 



 

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

 

Opinion

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Master Titan Holdings LP and its subsidiaries as at December 31, 2017 and December 31, 2016, and the results of operations and their cash flows for the year ended December 31, 2017 and the period from incorporation on March 18, 2016 to December 31, 2016 in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.

 

 

Chartered Professional Accountants, Licensed Public Accountants

 



 

Master Titan Holdings LP

Consolidated Statements of Financial Position

As at December 31, 2017 and 2016

 

 

 

2017
$

 

2016
$

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents (note 5)

 

888,932

 

4,571,110

 

Trade accounts receivable (note 6)

 

85,046,370

 

79,555,793

 

Inventories (note 7)

 

65,648,298

 

60,024,448

 

Prepaid expenses

 

2,789,700

 

6,597,692

 

Loans receivable and advances (note 8)

 

2,240,084

 

199,210

 

 

 

156,613,384

 

150,948,253

 

Long-term assets

 

 

 

 

 

Loans to related parties (note 14)

 

37,924,952

 

 

Loans receivable and advances (note 8)

 

5,518,507

 

4,205,862

 

Property, plant and equipment (note 9)

 

34,052,071

 

29,158,126

 

Intangible assets (note 10)

 

108,514,285

 

130,465,714

 

Goodwill (note 10)

 

102,887,927

 

101,643,927

 

 

 

288,897,742

 

265,473,629

 

 

 

445,511,126

 

416,421,882

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

Bank indebtedness (note 5)

 

47,991,899

 

34,058,947

 

Accounts payable and accrued liabilities

 

23,467,116

 

34,532,582

 

Long-term debt (note 11)

 

9,252,000

 

12,260,000

 

Contingent consideration - LP Units (note 4)

 

 

9,275,171

 

 

 

80,711,015

 

90,126,700

 

Long-term liabilities

 

 

 

 

 

Long-term debt (note 11)

 

168,479,668

 

102,508,815

 

Contingent consideration - LP Units (note 4)

 

78,729,785

 

44,865,828

 

Other long-term payables

 

2,453,023

 

2,398,810

 

 

 

249,662,476

 

149,773,453

 

 

 

330,373,491

 

239,900,153

 

Partners’ Equity

 

 

 

 

 

 

 

 

 

 

 

Capital stock

 

 

 

 

 

General partnership units (note 12)

 

600

 

600

 

Limited partnership units (note 12)

 

103,736,968

 

175,242,333

 

 

 

 

 

 

 

Retained earnings

 

11,400,067

 

1,278,796

 

 

 

115,137,635

 

176,521,729

 

 

 

445,511,126

 

416,421,882

 

 

On Behalf of the Board

 

 

Director

 

Director

 

The accompanying notes are an integral part of these consolidated financial statements.

 



 

Master Titan Holdings LP

Consolidated Statements of Income and Comprehensive Income

 

 

 

Year ended
December 31,
2017
$

 

Period from
incorporation
on March 18,
2016 to
December 31,
2016
$

 

Net sales (note 15)

 

589,248,231

 

365,011,542

 

 

 

 

 

 

 

Cost of sales

 

390,364,792

 

243,841,456

 

 

 

 

 

 

 

Net sales less cost of sales

 

198,883,439

 

121,170,086

 

 

 

 

 

 

 

Operating expenses (income)

 

 

 

 

 

Wages, salaries and benefits

 

72,607,869

 

45,311,780

 

Vehicle

 

13,213,220

 

7,990,369

 

Occupancy costs

 

14,800,016

 

9,628,103

 

Repairs and maintenance

 

3,305,220

 

2,082,454

 

Bank charges

 

4,036,507

 

2,625,310

 

Marketing

 

5,218,466

 

2,932,999

 

Office

 

5,796,113

 

3,184,706

 

Depreciation

 

9,205,285

 

7,081,861

 

Amortization of intangible assets

 

21,951,429

 

14,634,286

 

Management fees

 

601,298

 

378,120

 

Other income (note 16)

 

(5,067,717

)

(3,198,029

)

 

 

145,667,706

 

92,651,959

 

Operating income

 

53,215,733

 

28,518,127

 

 

 

 

 

 

 

Other expenses

 

 

 

 

 

Interest

 

8,701,980

 

5,589,927

 

Transaction and other costs (note 4)

 

838,205

 

10,888,726

 

Other expenses

 

337,110

 

64,446

 

Consideration to former shareholders and change in fair value (note 4)

 

33,048,349

 

10,703,899

 

Loss (gain) on disposal

 

168,818

 

(7,667

)

 

 

43,094,462

 

27,239,331

 

Net income and comprehensive income - End of period

 

10,121,271

 

1,278,796

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 



 

Master Titan Holdings LP

Consolidated Statements of Changes in Partners’ Equity

For the year ended December 31, 2017 and period from incorporation on March 18, 2016 to December 31, 2016

 

 

 

Limited
partners

$

 

General
partners

$

 

Retained
earnings

$

 

Total

$

 

 

 

 

 

 

 

 

 

 

 

Partners’ equity - March 18, 2016

 

 

 

 

 

Capital contributions

 

 

 

 

 

 

 

 

 

GP units

 

 

600

 

 

600

 

Class A-1 units

 

87,821,262

 

 

 

87,821,262

 

Class A-2 units

 

7,803,738

 

 

 

7,803,738

 

 

 

95,625,000

 

600

 

 

95,625,600

 

Partners’ equity - April 29, 2016

 

 

 

 

 

 

 

 

 

Issued as part of business combination (note 4)

 

 

 

 

 

 

 

 

 

Class A-2 units

 

57,537,333

 

 

 

57,537,333

 

Class B-1 units

 

11,040,000

 

 

 

11,040,000

 

Class B-2 units

 

11,040,000

 

 

 

11,040,000

 

 

 

79,617,333

 

 

 

79,617,333

 

 

 

175,242,333

 

600

 

 

175,242,933

 

Net income and comprehensive income for the period

 

 

 

1,278,796

 

1,278,796

 

Partners’ equity - December 31, 2016

 

175,242,333

 

600

 

1,278,796

 

176,521,729

 

Partners’ equity - January 1, 2017

 

175,242,333

 

600

 

1,278,796

 

176,521,729

 

Capital contributions

 

 

 

 

 

 

 

 

 

Issued capital

 

 

 

 

 

 

 

 

 

Class A special unit option

 

100,000

 

 

 

100,000

 

Class B special unit option

 

100,000

 

 

 

100,000

 

Return of capital

 

 

 

 

 

 

 

 

 

Class A-1 units

 

(53,467,216

)

 

 

(53,467,216

)

Class A-2 units

 

(18,160,944

)

 

 

(18,160,944

)

Class A special unit option

 

(43,637

)

 

 

(43,637

)

Class B special unit option

 

(33,568

)

 

 

(33,568

)

 

 

(71,505,365

)

 

 

(71,505,365

)

 

 

103,736,968

 

600

 

1,278,796

 

105,016,364

 

Net income and comprehensive income for the period

 

 

 

10,121,271

 

10,121,271

 

Partners’ equity - December 31, 2017

 

103,736,968

 

600

 

11,400,067

 

115,137,635

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 



 

Master Titan Holdings LP

Consolidated Statements of Cash Flows

 

 

 

Year ended
December 31,
2017
$

 

Period from
incorporation
on March 18,
2016 to
December 31,
2016
$

 

Cash provided by (used in)

 

 

 

 

 

 

 

 

 

 

 

Operating activities

 

 

 

 

 

Net income for the period

 

10,121,271

 

1,278,796

 

Items not involving cash

 

 

 

 

 

Depreciation

 

9,205,285

 

7,081,861

 

Amortization of intangible assets

 

21,951,429

 

14,634,286

 

Amortization of deferred financing fees

 

502,083

 

300,208

 

Loss (gain) on disposal

 

168,818

 

(7,667

)

Consideration to former shareholders and change in fair value

 

33,048,349

 

10,703,899

 

Interest on contingent consideration

 

869,821

 

645,457

 

 

 

75,867,056

 

34,636,840

 

Changes to non-cash working capital items

 

 

 

 

 

Trade accounts receivable

 

(2,908,577

)

14,917,338

 

Inventories

 

(3,249,850

)

(2,603,794

)

Prepaid expenses

 

3,807,992

 

(4,837,508

)

Loans receivable and advances

 

(3,353,519

)

(825,095

)

Accounts payable and accrued liabilities

 

(11,065,466

)

(10,286,728

)

 

 

59,097,636

 

31,001,053

 

Investing activities

 

 

 

 

 

Payments in relation to previous business acquisition

 

(9,275,171

)

 

Business acquisition (note 4)

 

(11,000,000

)

(267,459,732

)

Purchase of property, plant and equipment (note 9)

 

(9,689,846

)

(2,708,430

)

Proceeds from disposal of property, plant and equipment (note 9)

 

221,798

 

858,460

 

 

 

(29,743,219

)

(269,309,702

)

Financing activities

 

 

 

 

 

Capital contributions received (note 12)

 

200,000

 

95,625,600

 

Return of capital (note 12)

 

(71,705,365

)

 

Loans to related parties (note 14)

 

(37,924,952

)

 

Increase in term loans

 

84,377,000

 

122,600,000

 

Repayment of term loan

 

(20,473,000

)

(7,403,395

)

Net increase in bank indebtedness

 

13,932,952

 

34,058,947

 

Financing fees

 

(1,443,230

)

(2,001,393

)

 

 

(33,036,595

)

242,879,759

 

Net change in cash during the period

 

(3,682,178

)

4,571,110

 

Cash and cash equivalents - Beginning of period

 

4,571,110

 

 

Cash and cash equivalents - End of period

 

888,932

 

4,571,110

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 



 

Master Titan Holdings LP

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

 

1                      Nature of operations and summary of significant accounting policies

 

Nature of operations

 

Master Titan Holdings LP (the Company) is a general partnership formed on March 18, 2016 pursuant to the Partnership Act (Manitoba) whose partners are TorQuest Fund III GP Inc., through its ownership interest in T1 2016 Investors LP and Master Titan Holdings GP Inc.

 

The Company’s principal business activity is the purchase and distribution of drywall, lumber, commercial and residential building materials and construction material throughout Canada. On April 29, 2016, the Company commenced operations through the purchase of the net assets of several entities as described in note 4.

 

The Company has several locations throughout British Columbia, Alberta, Saskatchewan, Manitoba and Ontario. The Company’s headquarters are located at 50 Royal Group Crescent, Vaughan, Ontario, Canada L4H 1X9.

 

Summary of significant accounting policies

 

·                           Basis of presentation

 

These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB), and with interpretations of the International Financial Reporting Committee which the Canadian Accounting Standards Board has approved for incorporation into Part 1 of the Chartered Professional Accountants of Canada Handbook - Accounting. The Company consolidates all entities which it controls. The principal subsidiaries of the Company include the following:

 

·                       WatBlock GP (WatBlock)

·                       Watson LP (through its ownership interest in WatBlock LP) (Watson)

·                       Slegg LP (Slegg)

·                       BC Ceilings LP (BCC)

·                       Core Acoustics Titan LP (Core Acoustics)

·                       Shoemaker LP (Shoemaker)

·                       WSB Titan Amalco (WSB Titan)

 

The accounting policies set out below have been applied consistently throughout the subsidiaries to all periods presented in these consolidated financial statements. The board of directors approved these consolidated financial statements on April 30, 2018.

 

1



 

Master Titan Holdings LP

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

 

·                      Basis of consolidation

 

·                       Subsidiaries

 

Subsidiaries are all those entities over which the Company has the power over the investee, is exposed or has rights to variable returns from its involvement with the investee and has the ability to affect these returns through its power over the investee. Subsidiaries are fully consolidated from the date on which control is transferred to the Company and de-consolidated from the date that control ceases.

 

·                       Intercompany transactions

 

Intercompany balances, unrealized gains and losses, and income and expenses arising from intercompany transactions are eliminated in preparing the consolidated financial statements.

 

·                      Foreign currency translation

 

The functional currency of the Company and its subsidiaries and the presentation currency of the consolidated financial statements is the Canadian dollar.

 

·                       Foreign currency transactions

 

Transactions in foreign currencies are translated into the functional currency at the exchange rate prevailing at the date of the transaction.

 

·                      Financial assets

 

·                       Classification

 

The Company classifies its financial assets into the following categories: at fair value through profit or loss, loans and receivables, and available-for-sale. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition.

 

·                       Financial assets at fair value through profit or loss

 

Financial assets at fair value through profit or loss are financial assets held-for-trading. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term. Derivatives are also categorized as held-for-trading unless they are designated as hedges. Assets in this category are classified as current assets if expected to be settled within 12 months, otherwise they are classified as non-current.

 

2



 

Master Titan Holdings LP

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

 

·                       Loans and receivables

 

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the end of the reporting period. These financial assets are classified as non-current assets.

 

·                       Available-for-sale financial assets.

 

Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless the investment matures or management intends to dispose of it within 12 months of the end of the reporting period.

 

As at December 31, 2017 and 2016, the Company only had loans and receivables.

 

·                       Offsetting financial instruments

 

Financial assets and liabilities are offset and the net amount reported in the consolidated statements of financial position when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis or realize the asset and settle the liability simultaneously.

 

·                       Trade and other accounts receivable

 

Accounts receivable consist of amounts due from customers from product sales in the normal course of business. Trade receivables are carried at amounts due, net of a provision for amounts estimated to be uncollectible.

 

·                       Cash

 

Cash comprises cash balances and demand deposits with banks and other short-term highly liquid investments subject to insignificant risk of changes in value.

 

·                      Inventories

 

Inventories are mainly comprised of goods held for resale. Inventories are stated at the lower of cost and net realizable value. Cost is calculated on a weighted average basis, including freight-in costs (where applicable), net of any purchase rebates. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs necessary to make the sale. Cost of sales represents the cost of inventory recognized as an expense during the period.

 

3



 

Master Titan Holdings LP

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

 

·                      Property, plant and equipment

 

Property, plant and equipment are recorded at historical cost less accumulated depreciation and accumulated impairment losses.

 

The useful lives of property and equipment are reviewed at least annually and the depreciation charge is adjusted for prospectively. Property, plant and equipment are depreciated over their estimated useful lives as follows:

 

Vehicles and trucks

 

30% - 40% declining balance

Furniture and fixtures

 

8% - 20% declining balance

Buildings

 

4% declining balance

Machinery and equipment

 

30% declining balance

Leasehold improvements

 

straight-line over the term of the lease

 

Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognized within other income and other expenses in the consolidated statements of income and comprehensive income.

 

·                      Goodwill and intangible assets

 

·                       Goodwill

 

All business combinations are accounted for by applying the acquisition method. Under this method, the purchase price is allocated to assets acquired, liabilities and contingent liabilities assumed (the net assets), based on their estimated fair values as at the acquisition date. Any excess of the purchase price over the estimated fair value of the net assets acquired is allocated to goodwill.

 

Goodwill is stated at cost less any accumulated impairment losses. Goodwill is allocated to cash generating units (CGUs) or group of CGUs, which corresponds to the level at which goodwill is internally monitored. Goodwill is not amortized but is tested for impairment annually or as soon as there is an indication the CGU may be impaired.

 

The carrying value of goodwill CGU is compared to the recoverable amount, which is the higher of value in use and the fair value less costs to sell. Any impairment is recognized immediately as an expense and is not subsequently reversed.

 

4



 

Master Titan Holdings LP

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

 

·                       Intangible assets

 

Intangible assets other than goodwill are stated at cost less accumulated amortization and impairment losses (see note 10).

 

Identifiable intangible assets existing at the date of acquisition in a business combination are recognized as part of the purchase accounting and are measured at fair value. Intangible assets are considered identifiable if they arise from contractual or legal rights or are separable and are amortized over the life of the legal right.

 

Customer relationships and customer contracts are recognized when the acquired entity establishes relationships with key customers through contracts. Customer relationships and customer contracts are measured using an excess profit method and are amortized over their estimated useful lives of seven and five years, respectively, on a straight-line basis.

 

Brands are recognized when the acquired entity has words, names, symbols, devices or a combination thereof, used by the Company to distinguish them from those manufactured or sold by others. Brands are measured using the excess savings from owning the rights and are amortized over their estimated useful lives of five years on a straight-line basis.

 

In accordance with IFRS, for the purposes of assessing the impairment of property, plant and equipment, management has identified CGUs based on the smallest group of assets that are capable of generating largely independent cash inflows. CGUs have been identified to be those based on operating divisions.

 

·                       Calculation of the recoverable amount

 

The recoverable amount of non-financial assets or CGUs is the greater of their fair value less costs to sell and the value in use. In assessing fair value, the estimated future cash flows are discounted to their present value using a discount rate before tax that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash flows, the recoverable amount is determined for the CGU to which the asset belongs. The Company performs impairment tests of goodwill at the division level, which represents the lowest level within the entity at which operations are monitored by management for the purpose of measuring the return on investment.

 

·                      Financial liabilities

 

·                       Long-term debt

 

Long-term debt is recognized initially at fair value less associated financing fees. Subsequent to initial recognition, long-term debt is stated at amortized cost using the effective interest rate method. Financial liabilities are classified as current liabilities if payment is due within 12 months. Otherwise, they are presented as non-current liabilities.

 

5



 

Master Titan Holdings LP

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

 

·                       Financing fees

 

Financing fees are incremental costs that are directly associated with the issuance of the financial liability. Financing fees include costs and commissions paid to agents and advisers.

 

·                      Recognition of contingent consideration

 

The Company recognizes the fair value of contingent consideration relating to its business acquisitions at the date the transaction closes. When the consideration is subject to the financial performance of the business being acquired, the Company revalues the contingent consideration liabilities at each subsequent reporting date and on settlement. Consideration that is earned by the former shareholders outside of the financial performance of the business or tied to vesting periods are recorded as earned and are included in the consolidated statements of income and comprehensive income. The contingent shares are either issued in escrow and subsequently released to the counterparty, or are issued at a later date, and the amount varies based on the business being acquired achieving predetermined earnings targets over a specified period.

 

Contingent consideration for certain businesses acquired are issued in LP units at the date of acquisition and subsequently settled in either equity or cash, depending on the agreement, when the contingency is resolved.

 

Subsequent changes in fair value between reporting periods are included in the determination of net income. Shares issued or released from escrow in the final settlement of contingent consideration are recognized in share capital at their fair value at the time of issue or release with a corresponding reduction in the contingent consideration liability. The current portion of contingent consideration is based on the Company’s estimate of the value that will be payable within 12 months.

 

·       Revenue

 

Revenue arising from the sale of goods is presented in net sales in the consolidated statements of income and comprehensive income. Sales are recognized when the significant risks and rewards of ownership have been transferred to the buyer, which usually occurs with shipment of the product.

 

Sales are recognized net of sales rebates and discounts.

 

The Company may, from time to time, enter into direct sales (as opposed to warehouse sales) whereby the product is sent directly from the supplier to the customer without any physical transfer to and from the Company’s warehouse. The Company is acting as principal in this relationship and bears the credit risk associated with the sales, and therefore recognizes the gross amount of the sale transaction. Sales are recognized when the significant risks and rewards of ownership have been transferred to the buyer, which usually occurs with shipment of the product.

 

6



 

Master Titan Holdings LP

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

 

·                      Income taxes

 

The Company, as a limited partnership, is not subject to income taxes. The taxable income or loss of the partnership is allocated to the partners for tax purposes.

 

·                      Partnership distributions

 

The Company makes distributions to its partners, subject to certain restrictions within its credit agreement, such as remaining within certain financial covenants.

 

·       Reclassification of comparative period presentation

 

Certain prior year amounts have been reclassified to conform to the current period presentation. These reclassifications had no effect on the reported results of operations, only classifications of certain operating expenses.

 

2                      Accounting standards and interpretations not yet in effect

 

A number of new standards and amendments to standards and interpretations are effective for annual periods beginning after January 1, 2017, and have not been applied in preparing these consolidated financial statements.

 

IFRS 9, Financial Instruments

 

IFRS 9, Financial Instruments (IFRS 9), was issued by the IASB in July 2014 and will replace International Accounting Standard (IAS) 39, Financial Instruments - Recognition and Measurement. IFRS 9 introduces a model for classification and measurement, a single, forward-looking expected loss impairment model and a substantially reformed approach to hedge accounting. The new single principle based approach for determining the classification of financial assets is driven by cash flow characteristics and the business model in which an asset is held. The new model also results in a single impairment model being applied to all financial instruments, which will require more timely recognition of expected credit losses. It also includes changes in respect of own credit risk in measuring liabilities elected to be measured at fair value, so that gains caused by the deterioration of an entity’s own credit risk on such liabilities are no longer recognized in profit or loss. The standard is effective for accounting periods beginning on or after January 1, 2018. Early adoption is permitted. The Company is still evaluating the effect of this standard.

 

IFRS 15, Revenue from Contracts with Customers

 

IFRS 15, Revenue from Contracts with Customers (IFRS 15), deals with revenue recognition and establishes principles for reporting useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. Revenue is recognized when a customer obtains control of a good or service and thus has the ability to direct the use and obtain the benefits from the good or service. The standard replaces IAS 18, Revenue, and IAS 11, Construction Contracts, and related interpretations. The standard is effective for annual periods beginning on or after

 

7



 

Master Titan Holdings LP

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

 

January 1, 2018 and earlier application is permitted. Based on the Company’s contracts and the products it sells, it is estimated that the standard will have no significant impact on the recognition of net sales.

 

IFRS 16, Leases

 

The IASB published a new standard, IFRS 16, Leases (IFRS 16), on January 15, 2016. The new standard brings most leases on-balance sheet for lessees under a single model, eliminating the distinction between operating and finance leases. Lessor accounting however remains largely unchanged and the distinction between operating and finance leases is retained. IFRS 16 supersedes IAS 17, Leases, and related interpretations, and is effective for periods beginning on or after January 1, 2019, with earlier adoption permitted if IFRS 15 has also been applied. The Company is in the process of assessing the impact of the new standard.

 

3       Critical accounting estimates and judgments

 

The preparation of the consolidated financial statements requires management to make estimates and judgments in applying the Company’s accounting policies that affect the reported amounts and disclosures made in the consolidated financial statements and accompanying notes.

 

Within the context of these consolidated financial statements, a judgment is a decision made by management in respect of the application of an accounting policy, a recognized or unrecognized financial statement amount and/or note disclosure, following an analysis of relevant information that may include estimates and assumptions. Estimates and assumptions are used mainly in determining the measurement of balances recognized or disclosed in the consolidated financial statements and are based on a set of underlying data that may include management’s historical experience, knowledge of current events and conditions and other factors that are believed to be reasonable under the circumstances. Management continually evaluates the estimates and judgments it uses.

 

The following are the accounting policies subject to judgments and key sources of estimation uncertainty that the Company believes could have the most significant impact on the amounts recognized in the consolidated financial statements. The Company’s significant accounting policies are disclosed in note 2.

 

Consolidation

 

The Company uses judgment in determining the entities that it controls and therefore consolidates. The Company controls an entity when the Company has the existing rights that give it the current ability to direct the activities that significantly affect the entity’s returns. The Company consolidates all of its wholly owned subsidiaries. Judgment is applied in determining whether the Company controls the entities in which it does not have ownership rights or does not have full ownership rights. Most often, judgment involves reviewing contractual rights to determine if rights are participating (giving power over the entity) or protective rights (protecting the Company’s interest without giving it power).

 

8



 

Master Titan Holdings LP

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

 

Impairment of non-financial assets (goodwill, intangible assets and fixed assets)

 

Management is required to use judgment in determining the grouping of assets to identify their CGUs for the purposes of testing fixed assets for impairment. Judgment is further required to determine appropriate groupings of CGUs, for the level at which goodwill and intangible assets are tested for impairment. In addition, judgment is used to determine whether a triggering event has occurred requiring an impairment test to be completed.

 

For the annual impairment tests of goodwill, the following table summarizes the critical assumptions that were used in estimating the recoverable amount, which was based on fair value less cost of disposal, using discounted cash flows for the various entities:

 

Assumptions

 

Range

 

 

 

 

 

Terminal growth factor

 

2.0% to 3.0%

 

Estimated average revenue growth rate

 

6.0% to 8.0%

 

Discount rate

 

8.9% to 12.5%

 

 

The recoverable amount of CGUs is mostly sensitive to the discount rate used. The discount rate was determined on the basis of the weighted average cost of capital calculated for the Company. The weighted average cost of capital reflects the time value of money and the risk specific to the asset for which cash flow projections have not already been adjusted, considering the financial structure and financing conditions of an average market participant.

 

Contingent consideration

 

Contingent consideration that is classified as equity is not remeasured at subsequent reporting dates and its subsequent settlement is accounted for within equity. Contingent consideration that is classified as a liability is remeasured at subsequent reporting dates in accordance with IAS 39 and IAS 37, Provisions, Contingent Liabilities and Contingent Assets, as appropriate. The remeasured liability is based on management’s best assessment of the related inputs used in the valuation models, such as future cash flows and discount rates. Future performance results that differ from management’s estimates could result in changes to liabilities recorded, which are recorded as they arise through profit or loss.

 

4                           Business combinations

 

a)                  On May 31, 2017, the Company acquired certain net assets of Dodd’s Lumber (the Dodd’s acquisition), which included primarily the land, building and other fixed assets, as well as certain working capital balances. For accounting purposes, the Dodd’s acquisition was considered a business under IFRS 3, Business Combinations. As a result, the transaction has been accounted for as a business combination. Transaction costs incurred by the Company related to the transaction have been expensed.

 

9



 

Master Titan Holdings LP

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

 

The Company accounted for the Dodd’s acquisition using the acquisition method of accounting. Under this method, the Company allocates the purchase price to tangible and intangible assets acquired and liabilities assumed based on estimated fair values at the date of acquisition, with the excess of the purchase price amount being allocated to goodwill. The values of the net assets acquired, which is based on management’s estimate of fair value, and consideration given, are as follows:

 

 

 

$

 

Accounts receivable

 

2,582,000

 

Inventory

 

2,374,000

 

Fixed assets

 

4,800,000

 

Goodwill

 

1,244,000

 

 

 

 

 

Total cash consideration paid

 

11,000,000

 

 

Transaction costs of $166,994 were incurred in relation to the Dodd’s acquisition and expensed in the consolidated statements of income and comprehensive income.

 

b)                  On April 29, 2016, the Company acquired the net assets of six entities (the initial acquisition), Watson Building Supplies Incorporated, Slegg Building Materials Limited, Shoemaker Drywall Supplies (A Partnership), BC Ceiling Systems Limited, Canadian Acoustical Ceiling Supply Limited and Core Acoustics Limited (collectively the Sellers).

 

Under the terms of the agreement, the Sellers received 57,537,333 of Class A-2 units, 11,040,000 Class B-1 units and 11,040,000 Class B-2 units, cash payment of $267,459,732, contingent consideration at a fair value of $42,826,453 and deferred consideration at a fair value of $2,364,000.

 

10



 

Master Titan Holdings LP

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

 

 

 

 

 

 

 

 

 

BC

 

Core

 

 

 

 

 

 

 

Watson

 

Slegg

 

Shoemaker

 

Ceilings

 

Acoustics

 

 

 

 

 

 

 

LP

 

LP

 

LP

 

LP

 

Titan LP

 

Other

 

Total

 

 

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

Consideration

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash consideration

 

113,129,003

 

67,325,000

 

70,900,000

 

5,400,000

 

208,334

 

2,000,300

 

258,962,637

 

Other long-term payables

 

 

 

 

2,174,000

 

190,000

 

 

2,364,000

 

Contingent consideration

 

8,816,000

 

28,979,000

 

3,743,453

 

1,288,000

 

 

 

42,826,453

 

LP units

 

56,629,000

 

11,740,000

 

11,040,000

 

 

208,333

 

 

79,617,333

 

Additional consideration (working capital adjustments)

 

6,024,098

 

5,624,101

 

(3,355,103

)

190,000

 

13,999

 

 

8,497,095

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

184,598,101

 

113,668,101

 

82,328,350

 

9,052,000

 

620,666

 

2,000,300

 

392,267,518

 

Net assets acquired

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

25,372,989

 

26,311,343

 

40,887,085

 

1,570,646

 

331,068

 

 

94,473,131

 

Inventories

 

12,773,939

 

31,515,660

 

12,280,477

 

770,538

 

80,040

 

 

57,420,654

 

Prepaid assets

 

347,892

 

792,695

 

482,393

 

24,704

 

112,500

 

 

1,760,184

 

Loans receivable and advances

 

498,083

 

1,052,572

 

 

29,022

 

 

2,000,300

 

3,579,977

 

Property, plant and equipment

 

10,828,723

 

11,013,100

 

12,259,365

 

260,409

 

20,753

 

 

34,382,350

 

Accounts payable and accrued liabilities

 

(9,753,943

)

(11,842,254

)

(22,173,340

)

(707,518

)

(342,255

)

 

(44,819,310

)

Loans payable

 

(1,273,395

)

 

 

 

 

 

(1,273,395

)

Intangible assets

 

98,900,000

 

18,400,000

 

25,800,000

 

2,000,000

 

 

 

145,100,000

 

Goodwill

 

46,903,813

 

36,424,985

 

12,792,370

 

5,104,199

 

418,560

 

 

101,643,927

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

184,598,101

 

113,668,101

 

82,328,350

 

9,052,000

 

620,666

 

2,000,300

 

392,267,518

 

 

11



 

Master Titan Holdings LP

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

 

Transaction costs of $7,462,726 were incurred in relation to the initial acquisition and are expensed in the consolidated statements of income and comprehensive income.

 

As part of the initial acquisition, the Company committed to pay former shareholders contingent consideration based on defined targets achieved by the Company’s subsidiaries. The targets and payouts are summarized below:

 

 

 

Fair value of
consideration

at initial
acquisition

 

Maximum
payout

 

Payout

 

 

 

 

 

$

 

$

 

date

 

Target

 

Class D units (BC Ceilings)

 

1,288,000

 

4,050,000

 

April 28, 2020

 

EBITDA

 

Class D units (Slegg)

 

20,055,000

 

26,928,485

 

April 28, 2020

 

EBITDA

 

Class E-1 units (Slegg)

 

3,499,000

 

4,697,515

 

April 28, 2020

 

EBITDA

 

Class F units (other)

 

8,816,000

 

9,639,000

 

April 28, 2020

 

performance of business

 

Inventory payout (Shoemaker) (i)

 

3,743,453

 

3,787,000

 

March 28, 2017

 

inventory target

 

Inventory payout (Slegg) (i)

 

5,425,000

 

7,713,660

 

December 27, 2017

 

inventory target

 

 

 

 

 

 

 

 

 

 

 

 

 

42,826,453

 

56,815,660

 

 

 

 

 

 


(i)                  During the year, the Company paid $9,275,171 related to the inventory payout for Shoemaker and Slegg.

 

During the year, as a result of the expectation of achieving certain targets, the fair value of certain contingent consideration increased by $5,573,032 and was accrued in the current period.

 

In addition, the Company is obligated to pay additional consideration (contingent payments) not included in the total consideration above to certain former shareholders based on defined criteria. The Company is obligated to pay the following contingent payments:

 

·                       The Company is obligated to additional consideration if the average of certain operating results for the Shoemaker business for the period from April 29, 2016 to April 28, 2020 exceeds defined thresholds. The contingent payments vary based on the achieved result to a maximum of $60,000,000 payable April 28, 2020. As the obligation to pay the contingent payment is conditional on the continued employment of the former shareholder who is also a key executive, the amounts accrued are recorded as period expenses. The amount accrued in the current period is $17,763,380 (2016 - $5,953,619).

 

·                       The Company is also obligated to additional consideration if the cumulative sales for the period from April 29, 2016 to April 28, 2019 and sales for the period from April 29, 2019 to April 28, 2020 to certain former shareholders of Watson exceed defined thresholds. The contingent payments vary based on the achieved sales targets to a maximum of $22,500,000 payable on April 29, 2019 and a further $17,500,000 payable on April 29, 2020. As the obligation to pay these contingent payments is conditional on meeting certain volumes purchased by the former shareholder, the amounts accrued are recorded as period expenses. The amount accrued in the current period is $9,711,937 (2016 - $4,750,280).

 

12



 

Master Titan Holdings LP

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

 

The contingent expenses are included in the consideration to former shareholders in the consolidated statements of income and comprehensive income and are accrued in contingent consideration on the consolidated statements of financial position.

 

All the contingent consideration will become immediately due and payable upon a liquidity event.

 

5                      Cash and cash equivalents

 

Cash and cash equivalents consist of the following:

 

 

 

2017

 

2016

 

 

 

$

 

$

 

 

 

 

 

 

 

Cash and cash equivalents

 

850,171

 

4,541,418

 

Petty cash

 

38,761

 

29,692

 

 

 

 

 

 

 

 

 

888,932

 

4,571,110

 

 

The bank indebtedness of the Company consists of the following:

 

 

 

2017

 

2016

 

 

 

$

 

$

 

 

 

 

 

 

 

Accounts in overdraft

 

991,899

 

2,989,946

 

Line of credit (note 11)

 

47,000,000

 

31,069,001

 

 

 

 

 

 

 

 

 

47,991,899

 

34,058,947

 

 

6                      Trade accounts receivable

 

Trade accounts receivable include taxes collected on behalf of the fiscal authorities. The taxes amounted to $861,744 (2016 - $2,461,324).

 

Trade accounts receivable of the Company consist of the following:

 

 

 

2017

 

2016

 

 

 

$

 

$

 

 

 

 

 

 

 

Trade accounts receivable

 

86,222,082

 

83,188,347

 

Allowance for doubtful accounts

 

(1,175,712

)

(3,632,554

)

 

 

 

 

 

 

 

 

85,046,370

 

79,555,793

 

Trade accounts receivable

 

 

 

 

 

0 to 60 days

 

77,310,918

 

70,056,482

 

60 to 90 days

 

5,333,534

 

5,278,028

 

Over 90 days

 

3,577,630

 

7,853,837

 

Less: Allowance for doubtful accounts

 

(1,175,712

)

(3,632,554

)

 

 

 

 

 

 

 

 

85,046,370

 

79,555,793

 

 

13



 

Master Titan Holdings LP

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

 

 

 

2017

 

2016

 

 

 

$

 

$

 

 

 

 

 

 

 

Rollforward of allowance for doubtful accounts

 

 

 

 

 

Balance at the beginning of the period

 

(3,632,554

)

(6,564,081

)

Allowance made during the year

 

(454,979

)

(424,420

)

Amounts written off during the year

 

2,589,999

 

3,085,993

 

Reversal of provision for amounts collected

 

321,822

 

269,954

 

 

 

 

 

 

 

 

 

(1,175,712

)

(3,632,554

)

 

The allowance for doubtful accounts primarily comprises trade receivables overdue more than 90 days.

 

7                      Inventories

 

The Company’s inventory is comprised of finished goods inventory.

 

Inventories of the Company consist of the following:

 

 

 

2017

 

2016

 

 

 

$

 

$

 

 

 

 

 

 

 

Inventory

 

66,548,298

 

61,138,475

 

Inventory provision

 

(900,000

)

(1,114,027

)

 

 

 

 

 

 

 

 

65,648,298

 

60,024,448

 

 

The cost of inventories recognized as an expense and included in cost of sales amounted to $390,364,792 (2016 - $243,841,456).

 

8                      Loans receivable and advances

 

Loans receivable and advances consist of the following:

 

 

 

2017
$

 

2016
$

 

 

 

 

 

 

 

Loan (i)

 

2,000,000

 

2,000,000

 

Loans and advances to customers

 

5,758,591

 

2,405,072

 

 

 

 

 

 

 

 

 

7,758,591

 

4,405,072

 

Less: Current portion of loans receivable and advances

 

2,240,084

 

199,210

 

 

 

 

 

 

 

 

 

5,518,507

 

4,205,862

 

 

14



 

Master Titan Holdings LP

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

 


(i)                  As part of the initial acquisition (note 4), the Company assumed an interest bearing loan of $2,000,000 advanced to Ontario Acoustic Supply Inc., maturing on August 17, 2018. The loan agreement bears interest at 3% and additional interest of $340,000 per annum. During the period, the Company received total interest of $400,000 (2016 - $266,667).

 

Advances to customers bear interest at rates from prime plus 3% to prime plus 6% based on the credit risk of the customer and are secured. Maturity dates for the advances to customers range from February 2018 to January 2025.

 

15



 

Master Titan Holdings LP

Notes to Consolidated Financial Statements

December 31, 2017

 

9                      Property, plant, and equipment

 

 

 

 

 

Furniture

 

Machinery

 

 

 

Vehicles

 

 

 

 

 

Land and

 

and

 

and

 

Leasehold

 

and

 

 

 

 

 

buildings

 

fixtures

 

equipment

 

improvements

 

trucks

 

Total

 

 

 

$

 

$

 

$

 

$

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance - January 1, 2017

 

4,007,711

 

2,013,100

 

4,981,294

 

3,034,234

 

20,998,033

 

35,034,372

 

Acquired in business combination (note 4)

 

4,400,000

 

 

400,000

 

 

 

4,800,000

 

Additions

 

 

887,362

 

970,479

 

1,946,992

 

5,885,013

 

9,689,846

 

Disposals

 

 

(50,000

)

(395,078

)

(416,940

)

(1,391,077

)

(2,253,095

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8,407,711

 

2,850,462

 

5,956,695

 

4,564,286

 

25,491,969

 

47,271,123

 

Less: Accumulated depreciation

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance - January 1, 2017

 

27,020

 

253,532

 

832,182

 

318,707

 

4,444,805

 

5,876,246

 

Amortization expense

 

93,376

 

427,834

 

1,454,383

 

789,410

 

6,440,282

 

9,205,285

 

Disposals

 

 

(21,200

)

(354,203

)

(260,310

)

(1,226,766

)

(1,862,479

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

120,396

 

660,166

 

1,932,362

 

847,807

 

9,658,321

 

13,219,052

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net book value - December 31, 2017

 

8,287,315

 

2,190,296

 

4,024,333

 

3,716,479

 

15,833,648

 

34,052,071

 

 

Depreciation expense of $9,205,285 (2016 - $7,081,861) is recorded in the consolidated statements of income and comprehensive income. During the period, the Company did not write off any fully depreciated assets.

 

16



 

Master Titan Holdings LP

Notes to Consolidated Financial Statements

December 31, 2017

 

 

 

 

 

Furniture

 

Machinery

 

 

 

Vehicles

 

 

 

 

 

Land and

 

and

 

and

 

Leasehold

 

and

 

 

 

 

 

buildings

 

fixtures

 

equipment

 

improvements

 

trucks

 

Total

 

 

 

$

 

$

 

$

 

$

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquired in business combination (note 4)

 

4,007,711

 

1,861,391

 

4,764,284

 

2,623,760

 

21,125,204

 

34,382,350

 

Additions

 

 

151,709

 

423,048

 

471,022

 

1,662,651

 

2,708,430

 

Disposals

 

 

 

(206,038

)

(60,548

)

(1,789,822

)

(2,056,408

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,007,711

 

2,013,100

 

4,981,294

 

3,034,234

 

20,998,033

 

35,034,372

 

Less: Accumulated depreciation

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation expense

 

27,020

 

253,532

 

1,016,195

 

368,956

 

5,416,158

 

7,081,861

 

Disposals

 

 

 

(184,013

)

(50,249

)

(971,353

)

(1,205,615

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

27,020

 

253,532

 

832,182

 

318,707

 

4,444,805

 

5,876,246

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net book value - December 31, 2016

 

3,980,691

 

1,759,568

 

4,149,112

 

2,715,527

 

16,553,228

 

29,158,126

 

 

17



 

Master Titan Holdings LP

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

 

10               Goodwill and intangible assets

 

Goodwill and intangible assets of the Company consist of the following:

 

 

 

Intangible assets

 

 

 

 

 

Customer

 

Customer

 

 

 

 

 

 

 

 

 

relationships

 

contracts

 

Brand

 

Total

 

Goodwill

 

 

 

$

 

$

 

$

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

 

 

 

 

 

Acquired in business combination

 

123,700,000

 

19,400,000

 

2,000,000

 

145,100,000

 

101,643,927

 

December 31, 2016

 

123,700,000

 

19,400,000

 

2,000,000

 

145,100,000

 

101,643,927

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: Accumulated amortization

 

 

 

 

 

 

Amortization expense

 

11,780,952

 

2,586,667

 

266,667

 

14,634,286

 

 

December 31, 2016

 

11,780,952

 

2,586,667

 

266,667

 

14,634,286

 

 

 

 

111,919,048

 

16,813,333

 

1,733,333

 

130,465,714

 

101,643,927

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

123,700,000

 

19,400,000

 

2,000,000

 

145,100,000

 

101,643,927

 

Acquired in business combination

 

 

 

 

 

1,244,000

 

December 31, 2017

 

123,700,000

 

19,400,000

 

2,000,000

 

145,100,000

 

102,887,927

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: Accumulated amortization

 

11,780,952

 

2,586,667

 

266,667

 

14,634,286

 

 

Amortization expense

 

17,671,429

 

3,880,000

 

400,000

 

21,951,429

 

 

December 31, 2017

 

29,452,381

 

6,466,667

 

666,667

 

36,584,715

 

 

Carrying amount - December 31, 2017

 

94,247,619

 

12,933,333

 

1,333,333

 

108,514,285

 

102,887,927

 

 

Goodwill

 

As described in note 1, goodwill is reviewed for impairment annually, or at any time if an indicator of impairment exists. Key assumptions used in recoverable amount computations are described in note 3.

 

As at December 31, 2017, goodwill was tested for impairment as described above and the calculations did not evidence any impairment as the recoverable amount of the CGUs exceeded their carrying amount by a substantial amount.

 

18



 

Master Titan Holdings LP

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

 

The aggregate goodwill carrying amounts allocated to each CGU are as follows:

 

 

 

2017

 

2016

 

 

 

$

 

$

 

 

 

 

 

 

 

Watson LP

 

47,322,373

 

47,322,373

 

Slegg LP

 

37,668,985

 

36,424,985

 

Shoemaker LP

 

17,896,569

 

17,896,569

 

 

 

 

 

 

 

 

 

102,887,927

 

101,643,927

 

 

11               Debt

 

 

 

2017

 

2016

 

 

 

$

 

$

 

 

 

 

 

 

 

Outstanding balance of term loan

 

180,374,000

 

116,470,000

 

Term loan, short-term portion

 

(9,252,000

)

(12,260,000

)

 

 

 

 

 

 

 

 

171,122,000

 

104,210,000

 

Deferred financing fees

 

(2,642,332

)

(1,701,185

)

 

 

 

 

 

 

Term loan, long-term portion, net of deferred financing costs

 

168,479,668

 

102,508,815

 

 

On April 29, 2016, the Company entered into a credit agreement with a syndicate of lenders for senior debt financing. The credit agreement provided for a five-year $122,600,000 term loan maturing on April 29, 2021 (the Term Loan) and a revolving credit facility of $88,000,000 (the Revolving Facility, collectively the Facilities). The facilities bore interest at the Canadian prime rate plus a marginal rate based on the level determined by the total debt to EBITDA ratio as at the end of the most recently completed fiscal quarter or fiscal year. The marginal rate ranged from 0.5% to 2.0%.

 

On June 28, 2017, the credit agreement was amended (the Amendment), extending the term loan maturity date to June 28,2022 and increasing the Term Loan facility to $185,000,000 and the Revolving Facility to $105,000,000, of which $47,000,000 is outstanding at period-end (bank indebtedness).

 

The Amendment was accounted for as a modification of debt, as the terms of the Amendment were not substantially different from the original credit agreement. Therefore, the costs associated with the modification were treated as an adjustment to the carrying value of the long-term debt and amortized over the remaining term of the modified debt.

 

Costs incurred to establish the initial credit agreement in 2016 totalled $2,001,393 and costs incurred to establish the amended agreement in 2017 were $1,443,230. The total remaining costs are amortized over the remaining term of the modified debt maturing on June 28, 2022.

 

19



 

Master Titan Holdings LP

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

 

The schedule of repayments of long-term debt based on maturity is as follows:

 

 

 

$

 

 

 

 

 

2018

 

9,252,000

 

2019

 

9,252,000

 

2020

 

9,252,000

 

2021

 

9,252,000

 

2022

 

143,366,000

 

 

 

 

 

 

 

180,374,000

 

 

The credit agreement contains restrictions related to the Company’s ability to distribute earnings to its partners when certain financial covenants are breached. As at December 31, 2017, the Company was in compliance with these covenants.

 

12               Partners’ equity

 

On March 18, 2016, the Company accepted capital contributions from the following entities:

 

 

 

$

 

 

 

 

 

TI 2016 Investors Limited Partnership

 

95,000,000

 

Master Titan Holdings GP Inc.

 

600

 

 

 

 

 

 

 

95,000,600

 

 

On April 29, 2016, as a part of the business combination, the Company issued additional partnership units as partial consideration for the purchase of the Acquired Assets. The Company issued partnership units to the following entities:

 

 

 

$

 

 

 

 

 

Shoemaker Drywall Supplies (A Partnership)

 

11,040,000

 

Watson Building Supplies Inc.

 

46,990,000

 

Slegg Building Materials Ltd.

 

11,740,000

 

Core Acoustics Ltd.

 

208,333

 

2032068 Ontario Inc.

 

3,500,000

 

1955258 Ontario Inc.

 

6,139,000

 

 

 

 

 

 

 

79,617,333

 

 

On June 30, 2016, TI 2016 Investors Limited Partnership provided $625,000 of additional capital contributions.

 

The company also issued a $200,000 loan to Master Titan Holdings Option Corporation (OptionCo) during the year. The loan bears interest at 2% annually. OptionCo directed the Company to use the proceeds from the loan to fund the subscription for 100,000 Class A special units and 76,924 Class B special units. The Class A and Class B special units have a fixed distribution equal to the cost of financing at 2% annually. These units are exercisable upon a liquidity event and redeemable for 176,924 Class A-1 Master Limited Partnership units.

 

20



 

Master Titan Holdings LP

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

 

On June 28, 2017, the Company returned capital to certain partners in the amount of $71,705,365.

 

At the end of the period, the Company had the following partnership units outstanding, which are classified as equity or liability, depending on their features:

 

 

 

 

 

Amount

 

 

 

 

 

 

 

2017

 

Return

 

 

 

 

 

Units

 

2016

 

Activity

 

of capital

 

2017

 

 

 

#

 

$

 

$

 

$

 

$

 

Equity units

 

 

 

 

 

 

 

 

 

 

 

GP units

 

600

 

600

 

 

 

600

 

Class A-1 units

 

87,763,570

 

87,821,262

 

 

(53,467,216

)

34,354,046

 

Class A-2 units

 

65,341,071

 

65,341,071

 

 

(18,160,944

)

47,180,127

 

Class A special unit option

 

100,000

 

 

100,000

 

(43,637

)

56,363

 

Class B-1 units

 

11,040,000

 

11,040,000

 

 

 

11,040,000

 

Class B-2 units

 

11,040,000

 

11,040,000

 

 

 

11,040,000

 

Class B special unit option

 

76,924

 

 

100,000

 

(33,568

)

66,432

 

 

 

 

 

 

 

 

 

 

 

 

 

Total units classified as equity

 

175,362,165

 

175,242,933

 

200,000

 

(71,705,365

)

103,737,568

 

 

 

 

 

 

 

 

 

 

 

 

 

Liability units

 

 

 

 

 

 

 

 

 

 

 

Class C-1 units (Watson)

 

7,500,000

 

1,787,187

 

3,399,634

 

 

5,186,821

 

Class C-2 units (Watson)

 

5,000,000

 

612,345

 

2,494,108

 

 

3,106,453

 

Class C-3 units (Watson)

 

5,000,000

 

1,189,532

 

2,118,020

 

 

3,307,552

 

Class C-4 units (Watson)

 

5,000,000

 

1,161,216

 

1,700,175

 

 

2,861,391

 

Class D-1 units (Watson)

 

7,500,000

 

 

 

 

 

Class D-2 units (Watson)

 

5,000,000

 

 

 

 

 

Class D-3 units (Watson)

 

5,000,000

 

 

 

 

 

Class D-4 units (Watson)

 

1

 

 

 

 

 

Class D units (BCC)

 

4,050,000

 

1,306,923

 

73,084

 

 

1,380,007

 

Class D units (Shoemaker)

 

51,720,000

 

5,132,020

 

15,312,034

 

 

20,444,054

 

Class D units (Slegg)

 

26,928,485

 

20,356,626

 

5,205,527

 

 

25,562,153

 

Class E-1 units (Slegg)

 

4,697,515

 

3,551,341

 

907,825

 

 

4,459,166

 

 

21



 

Master Titan Holdings LP

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

 

 

 

 

 

Amount

 

 

 

 

 

 

 

2017

 

Return

 

 

 

 

 

Units

 

2016

 

Activity

 

of capital

 

2017

 

 

 

#

 

$

 

$

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

Class E-2 units (Shoemaker)

 

8,280,000

 

821,599

 

2,451,346

 

 

3,272,945

 

Class F units (other)

 

9,639,000

 

8,947,039

 

202,204

 

 

9,149,243

 

 

 

 

 

 

 

 

 

 

 

 

 

Total units classified as liability

 

145,315,001

 

44,865,828

 

33,863,957

 

 

78,729,785

 

 

 

 

 

 

 

 

 

 

 

 

 

Total units classified as liability and equity

 

320,677,166

 

220,108,761

 

34,063,957

 

(71,705,365

)

182,467,353

 

 

13               Commitments and contractual obligations

 

The Company and its subsidiaries have entered into several lease agreements for premises for various terms expiring up to the year 2030. The following table details the due dates of the Company’s operating leases and service agreements, estimated contingent consideration and estimated term loan repayment:

 

 

 

Operating
leases and
service
agreements
$

 

Contingent
consideration
$

 

Term loan
repayment
(including
interest)
$

 

2018

 

9,430,359

 

 

15,892,816

 

2019

 

8,880,716

 

22,500,000

 

15,550,122

 

2020

 

3,666,537

 

144,837,333

 

15,207,428

 

2021

 

3,160,019

 

 

14,864,734

 

2022

 

3,130,646

 

 

147,425,544

 

Thereafter

 

4,196,997

 

 

 

 

 

 

 

 

 

 

 

 

 

32,465,274

 

167,337,333

 

208,940,644

 

 

The minimum lease payments shown above are for non-cancellable operating leases for buildings as at December 31, 2017. The total expense for operating lease contracts was $13,081,869 (2016 - $8,633,550) for the period ended December 31, 2017. Interest payments included in contractual obligations are based on current prevailing interest rates (note 17).

 

The company has issued a letter of credit totalling $500,000 (2016 - $500,000).

 

22



 

Master Titan Holdings LP

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

 

14               Related parties

 

Related party transactions that are in the normal course of operations and have commercial substance are made under competitive terms and conditions or in accordance with the agreements with the related party.