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To the Shareholders of
Aspin Kemp and Associates Holding Corp.
We have audited the accompanying consolidated financial statements of Aspin Kemp and
Associates Holding Corp., which comprise the consolidated balance sheet as at
December 31, 2017, and the consolidated statements of income, retained earnings, and cash
flows for the year then ended, and a summary of significant accounting policies and other
explanatory information.
Auditor's responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on
our audit. We conducted our audit in accordance with Canadian generally accepted auditing
standards. Those standards require that we comply with ethical requirements and plan and
perform the audit to obtain reasonable assurance about whether the consolidated financial
statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and
disclosures in the consolidated financial statements. The procedures selected depend on the
auditor's 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, the auditor considers 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. An audit also includes evaluating the
appropriateness of accounting policies used and the reasonableness of accounting estimates
made by management, as well as evaluating the overall presentation of the consolidated
financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a
basis for our audit opinion.
Charlottetown, Canada
March 29, 2018 Chartered Professional Accountants
Revenue
Systems (Page 21) $ 21,278,487 $ 17,067,596
Services (Page 22) 11,350,746 14,770,096
32,629,233 31,837,692
20,847,307 25,209,565
Closing inventory 3,444,246 4,027,420
17,403,061 21,182,145
Income taxes
Current 2,863,391 1,213,995
Future 411,418 961,580
3,274,809 2,175,575
Assets
Current
Cash and cash equivalents $ 15,195,602 $ 6,462,879
Receivables (Note 5) 15,998,185 14,006,859
Inventory (Note 6) 3,444,246 4,027,420
Prepaid expenses and advances to suppliers 132,987 70,689
Current portion of restricted cash - 900,459
Income taxes recoverable - 526,089
Investments in actively traded entities, at fair value 1,980,842 1,906,847
36,751,862 27,901,242
Investment in jointly controlled enterprise, at cost 17,536 17,536
Investment in non-controlled related company, at cost 52,154 37,847
Property and equipment (Note 7) 3,075,027 3,139,867
Assets under capital lease (Note 8) 814,471 827,055
Future income taxes 566,392 977,810
$ 41,277,442 $ 32,901,357
Liabilities
Current
Payables and accruals $ 2,385,093 $ 2,729,575
Warranty provision accrual 200,000 200,000
Deferred revenue 3,505,209 2,000,569
Income taxes payable 1,427,656 -
Foreign exchange contract liability - 2,047,259
Current portion of long-term debt (Note 10) 55,560 86,610
Current portion of capital lease obligation (Note 11) 31,069 29,853
7,604,587 7,093,866
Long-term debt (Note 10) 1,917,694 1,078,189
Capital lease obligation (Note 11) 660,690 691,759
Deferred government assistance 50,000 50,000
10,232,971 8,913,814
Shareholders' equity
Share capital (Note 12) 12,000,020 12,000,020
Retained earnings 19,044,451 11,987,523
31,044,471 23,987,543
$ 41,277,442 $ 32,901,357
Director Director
Operating
Net income $ 10,310,379 $ 6,871,133
Items not involving cash
Amortization 442,944 452,976
Government assistance (519,130) (381,879)
Future income taxes 411,418 961,580
Interest expense, fair value adjustment 146,508 62,155
Change in fair value of foreign currency contracts (2,047,259) (3,901,159)
8,744,860 4,064,806
Change in non-cash working capital items
Receivables (3,277,538) 1,450,003
Inventory 583,174 4,586,984
Advances to suppliers (62,298) 313,156
Restricted cash 900,459 941,106
Income taxes 1,453,745 (3,943,125)
Payables and accruals 1,441,730 (2,248,004)
Deferred revenue 1,504,640 (2,042,276)
11,288,772 3,122,650
Financing
Repayment of long-term debt (116,463) (118,260)
Issuance of long-term debt 1,266,082 1,096,205
Repayment of capital lease (29,853) (28,685)
Premium on redemption of shares (899,999) (899,999)
Dividends paid (2,353,452) (2,567,484)
(2,133,685) (2,518,223)
Investing
Capital asset additions (362,676) (56,926)
Change in investments held in actively traded entities (73,995) (121,643)
Advances from related and non-controlling entities 14,307 26,006
(422,364) (152,563)
1. Nature of operations
Aspin Kemp and Associates Holding Corp. is a private company incorporated under the Canada
Business Corporations Act. The Company specializes in developing, manufacturing, installing,
maintaining and documenting engineering solutions to a worldwide client base, primarily in the
marine and offshore oil and gas industries.
During the year, it was determined the future income asset and expense were understated in
previous years. The understatement related to recognizing the future tax asset from the loss on
foreign exchange contracts. The consolidated financial statements have been corrected
retrospectively to reflect the appropriate future income tax asset and future income tax recovery
for each period presented. As a result of the correction, the following financial statement items as
at December 31, 2016, were increased as follows:
Previously
reported Adjustments Restated
The consolidated financial statements have been prepared in accordance with Canadian
accounting standards for private enterprises (“ASPE”) and are in accordance with Canadian
generally accepted accounting principles.
Principals of consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned
subsidiaries. Significant intercompany transactions are eliminated upon consolidation. The
subsidiaries of the Company consist of Aspin Kemp & Associates Inc. and Aspin Kemp &
Associates PTE. LTD.
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Aspin Kemp and Associates Holding Corp.
Notes to the consolidated financial statements
December 31, 2017
Revenue recognition
Profits from system delivery fixed price contracts are recognized on the percentage of completion
basis. The percentage of completion is determined by calculating the actual cost of work
performed to date to the estimated total cost for each contract as it relates to the estimated labour
costs. On an on-going basis, the estimation process and related inputs are revised as information
becomes available. Changes in estimated costs are reflected in the percentage of completion
calculation of the system delivery contracts in the period as the change in estimate occurs. Any
projected loss is recognized immediately for accounting purposes.
For all contracts in progress, when costs incurred plus recognized profits (less recognized losses)
exceed progress billings, the surplus is recognized as unbilled systems revenue. For contracts in
progress where progress billings exceed costs incurred plus recognized profits (less recognized
losses), the surplus is recognized as deferred revenue. Included in system delivery revenue is
revenue relating to the commissioning phase of the overall system delivery contracts.
Commissioning revenue is recognized as the service is performed and is billed to an agreed upon
fee schedule based on number of man days and daily rates. If there are disputes or claims
regarding additional payments owing as a result of change in contract specifications, delays,
additional work, etc., the Company’s accounting policy is to record all costs relating to
commissioning, but not to record related revenues anticipated from these disputes until resolved.
Field services revenue is recognized as time and materials are expended and earned for
contracted work.
Parts resale revenue is recognized when the revenue is earned and the products are shipped. All
revenue is recognized when the amounts are measurable, the price is determinable and collection
is reasonably assured.
Documentation and training revenues are recognized as the services are performed.
The Company is eligible to claim investment tax credits on its scientific research and experimental
development ("SRED") carried out in Canada. Due to the uncertainty in having their claims
approved, the Company records the investment tax refunds as a credit to income in the period
received.
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Aspin Kemp and Associates Holding Corp.
Notes to the consolidated financial statements
December 31, 2017
In addition, the Company is eligible to receive a refund of provincial corporate taxes paid in the
year based on the criteria established in the Advanced Marine Technology Tax Rebate Incentive
Agreement with the Province of Prince Edward Island. During the year, the Company recognized
$2,084,665 under the provincial corporate tax rebate incentive program, of which $762,108 related
to the December 31, 2016 year end and $1,322,557 relates to the December 31, 2017 year end.
Long-term investments
Long-term investments where the Company does not have control or significant influence are
accounted for by the cost method. Investments are written down to recognize losses when there
has been an impairment in value.
Inventory
Inventory is valued at the lower of cost and net realizable value. Cost is determined on a first in
first out basis. Net realizable value is the estimated selling price in the ordinary course of business
less any applicable selling expenses. Inventory also includes work in process which is determined
by the percentage of completion of the fixed price contracts. Work in process consists of the cost
of parts and components relating to the manufacturing contracts ongoing.
Buildings 2% Straight-line
Leasehold improvements 10% Straight-line
Furniture and fixtures 20% Straight-line
Computer equipment 33% Straight-line
Computer software 50% Straight-line
Equipment 20% Straight-line
Vehicles 20% Straight-line
Solar panels 2 1/2% Straight-line
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Aspin Kemp and Associates Holding Corp.
Notes to the consolidated financial statements
December 31, 2017
Income taxes
The Company uses the future income tax method for determining income taxes. Under this
method, future tax assets and liabilities are determined according to differences between their
respective carrying amounts and tax basis. Future tax assets and liabilities are measured based on
enacted or substantially enacted tax rates and laws at the date of the consolidated financial
statements for the years in which these temporary differences are expected to reverse.
Adjustments to these balances are recognized in earnings as they occur.
Development costs
Development costs on internally generated intellectual property are expensed as incurred.
Financial instruments
The Company considers any contract creating a financial asset, liability or equity instrument as a
financial instrument, except in certain limited circumstances. The Company accounts for the
following as financial instruments:
A financial asset or liability is recognized when the Company becomes party to contractual
provisions of the instrument.
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Aspin Kemp and Associates Holding Corp.
Notes to the consolidated financial statements
December 31, 2017
The Company presents preferred shares issued in a tax planning arrangement as equity at their
par value and any related dividends paid thereon as a charge to retained earnings.
Financial assets and financial liabilities are subsequently measured according to the following
methods:
Use of estimates
The preparation of consolidated financial statements in conformity with Canadian accounting
standards for private enterprises requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the year. Significant items subject to such estimates and
assumptions include the percentage of completion of systems delivery, valuation of accounts
receivable, inventory obsolescence, estimated warranty provision, fair value of long-term debt
terms, and the estimated useful lives of property and equipment. Actual results could differ from
the estimates used in these consolidated financial statements.
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Aspin Kemp and Associates Holding Corp.
Notes to the consolidated financial statements
December 31, 2017
Measurement uncertainty
The amounts recorded for sales of systems delivery are based on management’s assumptions on
the percentage of completion of these contracts. The key driver of the estimates is the labour costs
incurred to date compared to the estimated total labour costs to complete the contract. Though
considered reasonable by management, these estimates are subject to measurement uncertainty.
$ 2,044,256 $ 1,876,457
$ 15,998,185 $ 14,006,859
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Aspin Kemp and Associates Holding Corp.
Notes to the consolidated financial statements
December 31, 2017
$ 3,444,246 $ 4,027,420
2017 2016
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Aspin Kemp and Associates Holding Corp.
Notes to the consolidated financial statements
December 31, 2017
9. Bank indebtedness
At year end the Company had access to a revolving line of credit of $8,000,000 involving standby
letters of credit totalling $1,000,000 and loans that bear interest at prime plus 0.25% and are due
on demand. Total credit extended is limited to the calculations involving values of the Company’s
trade accounts receivable and inventory less prior ranking claims. At year end, no amounts were
outstanding on the revolving line of credit.
In addition, there were two demand credit facilities for standby letters of credit with the Canadian
Imperial Bank of Commerce (CIBC) as part of the Account Performance Security Guarantee
Program (APSGP) of Export Development Canada (EDC). One has a credit limit of US
$3,000,000, which does not allow terms of more than 48 months, and related EDC APSGP
coverage is 100%. The other has a credit limit of US $12,000,000, which does not allow terms of
more than 36 months and related EDC APSGP coverage is 100%.
The Company has provided the following security of the bank indebtedness; a first priority security
interest in all present and future personal property of the Company and its Canadian subsidiary, an
acknowledged assignment of adequate fire and other perils insurance, guarantees from the
Company and its Canadian wholly owned subsidiary, a Performance Security Guarantee Blanket
Policy from Export Development Canada – one in the amount of US $3,000,000 and a second for
US $12,000,000, a standard CIBC international swaps and derivatives association agreement is
required to be maintained for foreign exchange contracts with terms in excess of 12 months and a
collateral mortgage in the principal amount of $3,000,000 over the property at 9 Myrtle Street,
Stratford, PEI.
As well, quarterly covenants need to be met and restrictions exist concerning capital expenditures,
debt liens, dividends, business combinations, investments, disposition of property, change in
business activities and change in effective control. Internal and external reporting requirements
are also in place.
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Aspin Kemp and Associates Holding Corp.
Notes to the consolidated financial statements
December 31, 2017
Less: Debt discount on favorable interest and repayment terms (695,563) (324,834)
1,973,254 1,164,799
Less: current portion 55,560 86,610
Annual principal repayments in each of the next five years are due as follows: 2018 - $55,560;
2019 - $55,560; 2020 - $55,560; 2021 - $55,560; 2022 - $55,560.
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Aspin Kemp and Associates Holding Corp.
Notes to the consolidated financial statements
December 31, 2017
Future minimum lease payments payable to Finance PEI, repayable in monthly blended
instalments of $4,848 including interest of 4% as at December 31, 2017, are as follows:
2018 $ 58,174
2019 58,174
2020 58,174
2021 58,174
2022 58,174
Subsequent years 649,611
940,481
Less amount representing interest 248,722
691,759
Less current portion 31,069
$ 660,690
During the year, the Company redeemed 7,718 common shares for cash consideration of
$900,000.
2017 2016
$ 12,000,020 $ 12,000,020
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Aspin Kemp and Associates Holding Corp.
Notes to the consolidated financial statements
December 31, 2017
The Company has received a $50,000 advance from Innovation PEI to assist with the
development of a commercial-scale wind turbine. Innovation PEI is to receive a 10% royalty of the
revenue from subsequent sales of these wind turbines for two years following the first wind turbine
sale. If the Company decides the wind turbine will not be completed, the advance must be repaid
within a 30 day period. Consistent with the prior year, the wind turbine is still in its development
stage.
Approximately 76% (2016 – 81%) of the Company’s sales are derived from two customers. Should
these customers substantially curtail their dealings and influence on the Company, management is
of the opinion that continued viable operations would be in question.
15. Guarantees
In the normal course of operations, the Company provides letters of guarantee issued by the
Canadian Imperial Bank of Commerce (CIBC) related to advance payments and warranties on
contracts. These letters of credit are insured under the Account Performance Security Guarantee
Program (APSGP) of Export Development Canada (EDC). The letters provide irrevocable
guarantees of repayment in the event of failure by the Company to fulfill the terms and conditions
of the related contracts provided a specific process is followed.
$ 5,556,021
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Aspin Kemp and Associates Holding Corp.
Notes to the consolidated financial statements
December 31, 2017
Nature of
transaction $ Amount $ AR/AP
The controlling shareholder of the Company is a majority shareholder in Atlantic Advanced Power
Technologies, hIslander Ltd., and 101230 PEI Inc. The controlling shareholder is also a
shareholder in Red Sands Development Ltd. and 2001170 Ontario Inc. Aspin Kemp & Associates
Holding Corp. is a 50% shareholder in Zekatex Ltd. Transocean Canada Drilling Services Ltd. and
MAN Diesel & Turbo are voting shareholders in Aspin Kemp & Associates Holding Corp. The
transactions with these entities were in the normal course of operations and are measured at the
exchange value which is the amount of consideration established and agreed to by the related
party.
During the year, the Company leased office space in Owen Sound for $7,250 per month. The
Owen Sound lease expires December 2020. The Company also leases a facility in Roseneath,
PEI, for $20,972 per month with the lease expiring in May 2019. The Company also leased an
office in Halifax, NS, for $3,345 per month with related payments increasing annually and the
lease expiring in September 2018. The Company also leases office space in Montague, PEI for
$4,450 per month with the lease expiring in February 2019.
The Company has an agreement with Foss Maritime Company (“Foss”), a corporation located in
Seattle, Washington, and XeroPoint Energy (“XeroPoint”), a PEI corporation. The three parties
entered into an agreement to design harbour tugboats using hybrid diesel power generation and
propulsion systems. The agreement specified that the Company and XeroPoint were to provide
engineering and project coordination services to Foss in connection with the design and
implementation of the system on a harbour tugboat currently being designed by Foss.
XeroPoint owns the patent for the hybrid system technology and the Company must pay XeroPoint
a royalty per kilowatt (“KW”) of installed electrical propulsion motors for use of this patent. The
Company must pay Foss a one-time commission (based on the size of the system manufactured)
if the Company uses the technology in conjunction with a party that does not contract with Foss to
construct the vessel.
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Aspin Kemp and Associates Holding Corp.
Notes to the consolidated financial statements
December 31, 2017
In normal course of business, the Company can be subject to various liens and claims, some of
which may result in litigation. If such liens and claims prove to have merit, management would
make an accrual for these claims in the period which the settlement has been determined to be
likely and where the amount can be reasonably estimated. The Company is not aware of any
likely claims outstanding.
The significant financial risks to which the Company is exposed are credit risk, liquidity risk,
interest rate risk, currency risk and concentrations of financial risk.
Credit risk
Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other
party by failing to discharge an obligation. The Company’s exposure to credit risk arises from its
accounts receivables and loan receivables. As at December 31, 2017, the Company has one
counterparty which represents 49% (2016 – 81%) of the outstanding receivables. The Company
does not obtain collateral or other security to support the accounts receivable subject to credit risk
but mitigates this risk by dealing only with what management believes to be financially sound
counterparties and accordingly, does not anticipate a significant loss.
Liquidity risk
Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated
with financial liabilities. The Company ensures that it has sufficient capital to meet short term
financial obligations after taking into account its operations and cash on hand. The Company
controls liquidity risk by management of working capital, cash flows and the availability of
borrowing facilities.
Currency risk
Currency risk is the risk that fair value or future cash flows of a financial instrument will fluctuate
because of changes in foreign exchange rates. During the year, 90% (2016 – 92%) of the
Company’s revenues were denominated in U.S. dollars (“USD”) currency and purchases of
approximately 53% denominated mainly in USD. The Company has used currency call options to
reduce its level of currency risk. of which there were none outstanding at year end. As of
December 31, 2017, the Company has $372,611 in foreign currency payables as well as
$8,599,949 in foreign currency receivables. The Company has recognized a change in fair value
of $2,047,259 in the consolidated statement of income on its foreign currency commitments. The
Company does not use hedge accounting to account for these derivative instruments. The fair
value of the foreign currency commitments is measured by the counterparty to the commitments.
19
Aspin Kemp and Associates Holding Corp.
Notes to the consolidated financial statements
December 31, 2017
Certain comparative balances have been reclassified from those previously presented to conform
to the presentation of the 2017 consolidated financial statements.
20
Aspin Kemp and Associates Holding Corp.
Consolidated schedule of Systems revenue
Year ended December 31 2017 2016
$ 21,278,487 $ 17,067,596
21
Aspin Kemp and Associates Holding Corp.
Consolidated schedule of Services revenue
Year ended December 31 2017 2016
$ 11,350,746 $ 14,770,096
22
Aspin Kemp and Associates Holding Corp.
Consolidated schedule of general and administrative
expenses
Year ended December 31 2017 2016
$ 3,685,240 $ 3,485,296
23