TerraVest Industries — Management Reports 2022

Dec 14, 2022

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MANAGEMENT’S DISCUSSION AND ANALYSIS For the year ended September 30, 2022 Dated: December 13, 2022

INTRODUCTION AND FORWARD-LOOKING STATEMENTS

This Management’s Discussion and Analysis (“MD&A”) presents management’s view of the financial position and performance of TerraVest Industries Inc. (“TerraVest” or the “Company”) for the year ended September 30, 2022 and should be read in conjunction with TerraVest’s audited consolidated financial statements for the years ended September 30, 2022 and 2021. The financial information in this MD&A has been prepared in accordance with International Financial Reporting Standards (“IFRS”). All amounts are stated in thousands of Canadian dollars, except share and per share amounts or unless otherwise stated. This discussion is prepared as at December 13, 2022 and has been prepared with all available information up to and including the date of this report. This document should be read in full including the definitions of non‐IFRS measures such as Adjusted earnings before interests, income taxes, depreciation and amortization (“EBITDA”), Cash Available for Distribution, Dividend Payout Ratio, Maintenance Capital Expenditures and Working Capital which are found in the following section of this MD&A.

This MD&A sets out management’s assessment of TerraVest’s future plans and operations and contains forward‐looking statements as defined under applicable Canadian securities legislation. These forward‐looking statements often contain words such as “anticipates”, “does not anticipate”, “believes”, “estimates”, “forecasts”, “intends”, “expects”, “does not expect”, “could”, “may”, “will”, “should”, “plans” or similar terms or variations of these words and contain estimates or assumptions about the outcome of future events. These forward‐looking statements are provided in the interest of providing readers with information regarding TerraVest. Readers are cautioned that management’s expectations, estimates and assumptions, although considered reasonable, may prove to be incorrect and readers should not place undue reliance on forward‐looking statements which are subject to risks, uncertainties, and other factors that could result in the outcome of these events being materially different from those anticipated in this MD&A. These factors and assumptions include, but are not limited to: levels of business activity in TerraVest’s segments, political conditions and events, competitive pressures, changes in government policy or regulations, commodity pricing, and general economic conditions. TerraVest’s actual results may differ materially from those expressed in, or implied by these forward‐looking statements. The forward‐looking information contained in the MD&A is expressly qualified by the cautionary statement. TerraVest does not undertake any obligation to update or release any revisions to these forward‐looking statements to reflect events or circumstances, unanticipated events or circumstances, or should its estimates or assumptions change, after the date hereof, except as expressly required by law. Additional information relating to TerraVest and the risks to which its business is subject is contained in its Annual Information Form (“AIF”), which is available on SEDAR at www.sedar.com.

NON-IFRS FINANCIAL MEASURES

Adjusted EBITDA, Cash Available for Distribution, Dividend Payout Ratio, Maintenance Capital Expenditures and Working Capital are not recognized measures under IFRS and do not have standardized meanings prescribed by IFRS. TerraVest’s definitions may differ from those of other issuers and therefore may not be comparable to similarly titled measures used by other issuers.

Adjusted EBITDA : is defined as net income adjusted for income tax expense, financing costs, depreciation, amortization, gains or losses on disposal of other property, plant and equipment, property, plant and equipment for rental and on disposal of assets held for sale, change in fair value of derivative financial instruments, change in fair value of investment in equity instruments, gains or losses on foreign exchange, non‐recurring acquisition‐related costs, impairment charges, gains or losses on remeasurement of equity interest, gain on bargain purchase and other non‐recurring and/or non‐operations related items that do not reflect the current ongoing operations of TerraVest. Management believes this is a useful metric in evaluating the ongoing operating performance of TerraVest. Readers are cautioned that adjusted EBITDA should not be construed as an alternative to net income determined in accordance with IFRS as an indicator of TerraVest’s performance.

Cash Available for Distribution : is defined as cash flow from operating activities adjusted for changes in non‐cash operating working capital, maintenance capital expenditures and repayment of lease liabilities. Management believes that cash available for distribution, as a liquidity measure, is a useful metric that provides an indication of the cash available from ongoing operations that can be distributed to shareholders as a dividend. Readers are cautioned that cash available for distribution should not be construed as an alternative to cash flow from operating activities determined in accordance with IFRS as an indicator of TerraVest’s liquidity and cash flows.

Dividend Payout Ratio : is defined as dividends paid in cash during the period divided by cash available for distribution for the period. Management believes that dividend payout ratio is a useful metric as it provides an indication of TerraVest’s ability to sustain its current dividend policy. There is no directly comparable IFRS measure for dividend payout ratio.

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Maintenance Capital Expenditures : is defined as capital expenditures made to sustain the operations of TerraVest’s operating businesses and to maintain the productive capacity of the businesses over an economic cycle, whether or not they yield significant cost or production efficiencies. Management believes that maintenance capital expenditures should be funded by cash flow from existing operating activities and, therefore, deducted in determining cash available for distribution. There is no directly comparable IFRS measure for maintenance capital expenditures.

Working Capital : is calculated by subtracting current liabilities from current assets. Management uses working capital as a measure for assessing overall liquidity. There is no directly comparable IFRS measure for working capital.

BUSINESS OVERVIEW

TerraVest is a diversified industrial company that manufactures and sells goods and services to various end‐markets including: energy, agriculture, mining, and transportation, among others. TerraVest is focused on acquiring and operating market‐leading businesses that will benefit from TerraVest’s financial and operational support. These opportunities generally center on manufactured steel products that complement TerraVest’s existing operations and provide integration benefits.

TerraVest is comprised of three operating segments: Fuel Containment, Processing Equipment and Service.

Fuel Containment Segment

Through wholly‐owned subsidiaries, TerraVest’s Fuel Containment segment is a leading provider of products and services to a variety of industries across Canada and the United States. The Fuel Containment segment manufactures products including: bulk LPG transport trailers, LPG delivery and service trucks, bulk LPG storage tanks, residential and commercial LPG tanks and dispensers, custom pressure vessels, commercial and residential refined fuel tanks, and furnaces and boilers. This segment sells its products direct to end user and through various distribution networks. The end users of the products are fuel distributors, transportation companies and industrial, commercial and residential consumers.

Processing Equipment Segment

Through subsidiaries, TerraVest’s Processing Equipment segment is a leading fabricator of equipment for various end‐markets including: upstream and midstream oil and gas processing, agriculture, transportation and mining. The Processing Equipment segment manufactures and sells a wide array of equipment such as: wellhead processing equipment and tanks, wellhead desanding units, central facilities processing equipment, NGL and LPG storage tanks, anhydrous ammonia storage tanks, bulk NGL and LPG transport trailers, bulk ammonia transport trailers and wagons, compressed gas transport trailers and a wide variety of customized processing equipment for various applications. This segment’s products and services are primarily sold to oil and gas producers, midstream companies, engineering companies, propane distributors, fertilizer distributors and transportation companies.

Service Segment

TerraVest’s Service segment provides a wide range of services to the energy sector in Western Canada including fluid hauling, water management, environmental solutions, heating, rentals and well servicing. TerraVest’s Service segment is well‐recognized for its technological innovation and industry‐leading ESG program. This segment services many of the largest energy producers in Canada.

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FOURTH QUARTER AND YEAR END REVIEW AND OUTLOOK

Business Performance

Management believes that there are certain non‐IFRS financial measures that can be used to assist shareholders in analyzing the performance of TerraVest. The table below highlights certain financial results and reconciles net income to adjusted EBITDA for the fourth quarter and year ended September 30, 2022 and the comparative periods in fiscal 2021.

	Fourth quarters ended	Fourth quarters ended	Years	ended
	Sept. 30, 2022	Sept. 30, 2021	Sept. 30, 2022	Sept.	30, 2021
	$	$	$		$
Sales	162,442	80,816	576,704		307,463
Net Income	16,953	9,388	46,770		36,410
Add (subtract):
Income tax expense	2,440	2,111	11,885		9,636
Financing costs	3,069	1,648	9,342		4,505
Depreciation and amortization	12,879	5,049	35,289		19,253
Change in fair value of derivative
financial instruments	2,014	606	1,173		(1,345)
Change in fair value of investment in
equity instruments	338	(1)	293		(3,992)
(Gain) loss on foreign exchange	(4,283)	(1,365)	(5,175)		2,119
(Gain) loss on disposal of other property, plant
and equipment	(76)	(64)	(1,110)		(475)
(Gain) loss on disposal of property, plant and
equipment for rental	(477)	(631)	(801)		(808)
(Gain) loss on disposal of intangible assets	-	‐	7		‐
(Gain) loss on remeasurement of an
equity interest	-	‐	(1,956)		‐
Gain on bargain purchase	(9,468)	‐	(9,468)		‐
Acquisition‐related cost	130	433	420		433
Adjusted EBITDA	23,519	17,174	86,669		65,736

Sales for the fourth quarter and year ended September 30, 2022 were $162,442 and $576,704 versus $80,816 and $307,463 for the prior comparable periods. This represents increases of 101% and 88% respectively. However, TerraVest acquired all of the issued and outstanding shares of ECR International, Inc. (“ECR”) in August 2021, of Mississippi Tank and Manufacturing Company (“MTC”) in March 2022 and of Platinum Energy Services LTD. (“PES”) in July 2022 as well as a controlling interest of 66.8% in Green Energy Services Inc. (“GES”) in November 2021, of which only ECR partially contributed to the prior comparable periods. Excluding ECR, GES, MTC and PES, sales for the fourth quarter and year ended September 30, 2022 were $100,180 and $373,230 versus $69,707 and $296,354 for the prior comparable periods. This represents increases of 44% and 26% respectively for TerraVest’s base portfolio (excluding ECR, GES, MTC and PES).

These increases are a result of higher demand for LPG and NGL storage and distribution equipment as well as for oil and gas processing equipment and services in Western Canada, as commodity pricing has improved throughout the year. Inflationary pressure has also contributed to the increase in sales as many of TerraVest’s businesses were structured to pass along raw material and labour cost increases. The increases in sales were partially offset by lower demand for some home heating product lines.

Net income for the fourth quarter and year ended September 30, 2022 were $16,953 and $46,770 versus $9,388 and $36,410 for the prior comparable periods. This represents increases of 81% and 28% respectively. These increases are a result of higher sales in TerraVest’s base portfolio of businesses, as well as positive contributions from ECR, GES and MTC, and the recognition of a gain on bargain purchase and on foreign exchange, partially offset by the curtailment of pandemic subsidy programs during the year, cost inflation and supply chain disruptions. TerraVest’s interest expense also increased as debt levels were higher as a result of business acquisitions and working capital expansion throughout the year. This was partially

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mitigated by the interest rate swap agreement. TerraVest also increased its depreciation and amortization expense mainly as a result of additional identifiable property, plant and equipment as well as intangible assets acquired in business acquisitions. Other variances are also highlighted in the table above.

Adjusted EBITDA for the fourth quarter and year ended September 30, 2022 were $23,519 and $86,669 versus $17,174 and $65,736 for the prior comparable periods. This represents increases of 37% and 32% respectively, which are a result of the reasons explained above.

During the year, TerraVest recognized $1,639 in net income ($12,988 for the year ended of fiscal 2021) in relation to wage subsidies as part of the Federal Government’s response to the COVID‐19 pandemic. TerraVest also recognized $813 in net income during the year ($5,107 for the year of fiscal 2021) in relation to other various government subsidies available in response to the COVID‐19 pandemic.

The table below reconciles cash flow from operating activities to cash available for distribution for the fourth quarter and year ended September 30, 2022 and the comparative periods in fiscal 2021.

	Fourth quarters ended	Fourth quarters ended	Years	ended
	Sept. 30, 2022	Sept. 30, 2021	Sept. 30, 2022	Sept.	30, 2021
	$	$	$		$
Cash Flow from (used in) Operating Activities	8,342	(1,481)	29,948		23,064
Add (subtract):
Change in non‐cash operating working capital items	11,716	14,121	38,346		23,874
Maintenance capital expenditures	(2,742)	(1,353)	(7,967)		(5,829)
Repayment of lease liabilities	(1,468)	(1,123)	(5,753)		(4,381)
Cash Available for Distribution	15,848	10,164	54,574		36,728
Dividends Paid	1,789	1,757	7,132		7,317
Dividend Payout Ratio	11%	17%	13%		20%

Cash flow from (used in) operating activities for the fourth quarter and year ended September 30, 2022 were $8,342 and $29,948 versus ($1,481) and $23,064 for the prior comparable periods. This represents increases of 663% and 30% respectively. The increases in cash flow from operating activities is largely attributable to increased net income, partially offset by increased working capital as activity levels increased throughout the year. The significant increase in steel and other raw materials pricing has also had a noticeable effect on working capital levels as well as the increase in accounts receivable. TerraVest also incurred more interest and income taxes compared to the prior comparable periods.

Maintenance capital expenditures were $2,742 for the fourth quarter ended September 30, 2022 versus $1,353 for the prior comparable period representing an increase of 103%, which is mainly explained by the timing of such expenditures. During the fourth quarter, TerraVest’s total purchase of property, plant and equipment was $8,888 of which $6,146 is considered growth capital. The growth capital incurred during the fourth quarter was used to add to the Company’s rental fleet and automate certain manufacturing processes. These growth projects are expected to result in increased capacity and greater efficiencies in several of TerraVest’s businesses.

Cash available for distribution for the fourth quarter and year ended September 30, 2022 increased by 56% and 49% respectively versus the prior comparable periods. These increases are a result of reasons explained above and previously in this MD&A.

The dividend payout ratio for the fourth quarter and year ended September 30, 2022 were 11% and 13% versus 17% and 20% respectively for the prior comparable periods.

Outlook

The business environment today remains difficult as many of the challenges created by the global pandemic continue to persist and have even been exacerbated by the geo‐political tensions in Europe. Over the past year, the Company and its employees have done an excellent job navigating the current business environment, all while keeping tight control on operating costs and improving manufacturing efficiency. The majority of TerraVest’s businesses are experiencing increased demand, particularly those with exposure to energy end‐markets. However global supply chain disruptions, labour scarcity and rapid cost inflation have made it challenging to ramp up capacity to meet this increased demand. TerraVest will remain vigilant in supporting its operations, managing its cost structure and will make targeted investments in manufacturing efficiency improvements, as well as continue to pursue its acquisition strategy as opportunities arise.

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Business Combinations

On July 4, 2022, TerraVest entered into a share purchase agreement to purchase all of the issued and outstanding shares of PES, a privately‐owned manufacturing company of wellhead processing and production equipment for the Canadian oil & gas market.

On March 11, 2022, a subsidiary of TerraVest entered into a share purchase agreement to acquire all the issued and outstanding shares of MTC, a privately‐owned manufacturing company that produces and distributes a broad range of storage and distribution equipment for the propane and compressed gas markets in North America, including transport trailers, bobtail delivery trucks, and various bulk storage tanks.

Effective on November 1, 2021, TerraVest entered into share purchase agreements to acquire an additional 41.4% of the issued and outstanding shares of GES, thereby bringing TerraVest’s ownership interest in GES to 66.8%. GES is a privately‐owned Alberta based company operating under the name Fraction Energy Services and is an industry leader in water management and environmental solutions. GES offers a diverse range of fluid management solutions including water transfer, containment, heating, fluid trucking, and oilfield rentals. The non‐controlling interest was measured at its proportionate share in GES’ identifiable net assets at acquisition date.

All business combinations have been accounted for using the acquisition method with the results of operations included in earnings from the date of acquisition.

CONSOLIDATED RESULTS OF OPERATIONS

The following section provides the financial results of TerraVest’s operations for the fourth quarter and year ended September 30, 2022 and the comparative periods in fiscal 2021.

	Fourth quarters ended	Fourth quarters ended	Years	ended
	Sept. 30, 2022	Sept. 30, 2021	Sept. 30, 2022	Sept.	30, 2021
	$	$	$		$
Sales	162,442	80,816	576,704		307,463
Cost of sales	129,011	59,161	452,318		226,829
Grossprofit	33,431	21,655	124,386		80,634
Administration expenses	17,678	7,435	54,900		26,816
Selling expenses	5,290	2,745	18,464		7,690
Financing costs	3,069	1,648	9,342		4,505
Share of associates and joint venture net
(income) loss	(47)	(217)	62		78
Other(gains)losses	(11,952)	(1,455)	(17,037)		(4,501)
	14,038	10,156	65,731		34,588
Earnings before income taxes	19,393	11,499	58,655		46,046
Income tax expense	2,440	2,111	11,885		9,636
Net Income	16,953	9,388	46,770		36,410
Allocated to non‐controllinginterests	498	(7)	1,518		(208)
Net income attributable to common shareholders	16,455	9,395	45,252		36,618
Weighted average shares outstanding – Basic	17,886,320	17,567,469	17,877,941	18,099,965
Weighted average shares outstanding – Diluted	18,100,130	17,762,042	18,093,678	18,352,184
Net income per share – Basic	$0.92	$0.53	$2.53		$2.02
Net incomeper share – Diluted	$0.91	$0.53	$2.50		$2.00

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Sales for the fourth quarter and year ended September 30, 2022 increased by 101% and 88% respectively versus the prior comparable periods. The reasons have been explained previously in this MD&A.

Gross profit for the fourth quarter and year ended September 30, 2022 both increased by 54% versus the prior comparable periods. This is primarily explained by the contribution of ECR, GES and MTC and by increased sales volume for most of TerraVest’s base portfolio businesses, partially offset by a less favorable product mix, reduced government wage subsidies and increased raw materials costs due to inflationary pressure.

Administration expenses for the fourth quarter and year ended September 30, 2022 increased by 138% and 105% respectively versus the prior comparable periods. The increases are the result of the addition of ECR, GES, MTC and PES as well as reduced government subsidies and additional wage expense to support the growth of its businesses and develop its market and product lines in renewable gases and fuels.

Selling expenses for the fourth quarter and year ended September 30, 2022 increased by 93% and 140% respectively versus the prior comparable periods. This is a result of the addition of ECR, GES and MTC, the hiring of additional sales personnel, increased travel and marketing expenses as well as reduced government wage subsidies.

Financing costs for the fourth quarter and year ended September 30, 2022 increased by 86% and 107% respectively versus the prior comparable periods. The increases are primarily explained by additional interest expense as a result of increased debt balances following the acquisitions of ECR, GES, MTC and PES and increases in interest rates since March 2022 on floating rate debt.

Other (gains) losses variance for the fourth quarter and year ended September 30, 2022 are a result of a gain on foreign exchange, on remeasurement of an equity interest and on disposal of property, plant and equipment, partially offset by unfavorable changes in fair value of derivative financial instruments and of investment in equity instruments. TerraVest also realized a gain on bargain purchase in the fourth quarter ended September 30, 2022.

Income tax expense increased for the fourth quarter and for the year ended September 30, 2022 versus the prior comparable periods. The increases are mainly explained by increased taxable earnings and the timing of income tax expense adjustments.

As a result of the above, net income attributable to common shareholders for the fourth quarter and year ended September 30, 2022 increased by 75% and 24% respectively versus the prior comparable periods.

Segmented Results

• a) Fuel Containment

Fuel Containment
	Fourth quarters ended		Years	ended
	Sept. 30, 2022	Sept. 30, 2021	Sept. 30, 2022	Sept.	30, 2021
	$	$	$		$
Sales	87,176	53,851	327,652		185,359
Net Income	2,771	6,395	27,257		28,269
Add (subtract):
Income tax expense	1,251	2,312	9,740		9,309
Financing costs	2,142	1,157	6,564		2,559
Depreciation and amortization	6,490	2,094	13,701		7,836
Change in fair value of derivative
financial instruments	2,014	606	1,173		(1,345)
(Gain) loss on foreign exchange	(2,781)	(1,071)	(3,360)		1,590
(Gain) loss on disposal of other property, plant
and equipment	74	‐	35		(49)
(Gain) loss on disposal of intangible assets	-	‐	7		‐
Acquisition‐related costs	20	433	259		433
Adjusted EBITDA	11,981	11,926	55,376		48,602

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Sales for the fourth quarter and year ended September 30, 2022 were $87,176 and $327,652 versus $53,851 and $185,359 for the prior comparable periods. This represents increases of 62% and 77% respectively. Excluding ECR and MTC, sales for the fourth quarter and year ended September 30, 2022 were $46,645 and $194,671 versus $42,742 and $174,250 for the comparable periods. This represents increases of 9% and 12% respectively. The increase in sales is the result of stronger demand for this segment’s LPG storage and distribution equipment products versus the prior comparable periods while sales for certain home heating product lines were less than the prior comparable periods.

Net income for the fourth quarter and year ended September 30, 2022 were $2,771 and $27,257 versus $6,395 and $28,269 for the prior comparable periods. This represents decreases of 57% and 4% respectively. The decreases in net income for the periods are a result of a less favorable product mix, inflation and supply chain disruptions, an increase in financing costs, an unfavorable change in the fair value of derivative financial instruments and reduced government subsidies compared to the prior comparable periods, partially offset by increased sales, the addition of ECR and MTC and gains on foreign exchange. In the fourth quarter ended September 30, 2022, this segment also recognized the entire amortization expense on the identifiable intangible assets acquired since ECR and MTC acquisition‐date.

Adjusted EBITDA for the fourth quarter and year ended September 30, 2022 were $11,981 and $55,376 versus $11,926 and $48,602 for the prior comparable periods. This represents a negligeable increase and an increase of 14% respectively, which are a result of the reasons highlighted above.

b) Processing Equipment

Processing Equipment
	Fourth quarters ended		Years	ended
	Sept. 30, 2022 Sept. 30, 2021		Sept. 30, 2022	Sept.	30, 2021
	$	$	$		$
Sales	47,554	22,716	158,634		107,435
Net Income	3,093	2,993	5,592		7,261
Add (subtract):
Income tax recovery	(1,115)	(694)	(1,575)		(777)
Financing costs	722	452	2,145		1,752
Depreciation and amortization	2,909	2,534	11,031		9,844
(Gain) loss on foreign exchange	(6)	18	(77)		18
(Gain) loss on disposal of other property, plant
and equipment	(57)	(3)	(101)		(367)
(Gain) loss on disposal of property, plant
and equipment for rental	(477)	(631)	(801)		(808)
Adjusted EBITDA	5,069	4,669	16,214		16,923

Sales for the fourth quarter and year ended September 30, 2022 were $47,554 and $158,634 versus $22,716 and $107,435 for the prior comparable periods. This represents increases of 109% and 48% respectively, which is a result of higher demand for energy processing equipment and compressed gas storage and distribution equipment in Western Canada as the increase in commodity pricing is having a positive impact on this segment’s sales.

Net income for the fourth quarter and year ended September 30, 2022 were $3,093 and $5,592 versus $2,993 and $7,261 for the prior comparable periods. This represents an increase of 3% and a decrease of 23% respectively. The variations are explained by increased sales, partially or completely offset by higher costs of raw materials, the reduction of government subsidies compared to prior comparable periods, additional cost incurred to develop new markets and product lines and increased financing costs to finance this segment’s increase in working capital. In the fourth quarter ended September 30, 2022, this segment also incurred non‐recurring relocation fees to close down one of its manufacturing plants and relocate its activities to one of its existing facilities.

Adjusted EBITDA for the fourth quarter and year ended September 30, 2022 were $5,069 and $16,214 versus $4,669 and $16,923 for the prior comparable periods. This represents an increase of 9% and a decrease of 4% respectively, which are a result of the reasons explained above.

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c) Service

Service
	Fourth quarters ended			Years	ended
	**Sept. 30, 2022 Sept. 30, **		2021	Sept. 30, 2022	Sept.	**30, **	2021
	$	$		$		$
Sales	27,629	4,242		90,163		14,638
Net Income	2,599		368	7,028		1,166
Add (subtract):
Income tax expense	623		104	1,477			37
Financing costs	205		53	633			214
Depreciation and amortization	3,480		421	10,556		1,572
(Gain) loss on foreign exchange	(6)		-	(5)			-
(Gain) loss on disposal of other property, plant
and equipment	(93)		(62)	(1,044)			(59)
Acquisition‐related cost	-		‐	19			‐
Adjusted EBITDA	6,808		884	18,664		2,930

Sales for the fourth quarter and year ended September 30, 2022 were $27,629 and $90,163 versus $4,242 and $14,638 for the prior comparable periods. This represents increases of 551% and 516% respectively. Excluding GES, sales for the fourth quarter and year ended September 30, 2022 were $5,898 and $19,670 versus $4,242 and $14,638 for the prior comparable periods. This represents increases of 39% and 34% which are primarily the result of higher commodity pricing driving increased activity by this segment’s customers.

Net income for the fourth quarter and year ended September 30, 2022 were $2,599 and $7,028 versus $368 and $1,166 for the prior comparable periods. This represents increases of 606% and 503% respectively and are a result of the addition of GES and increased sales, partly offset by reduced government subsidies, increased operating expenses as a result of inflationary pressure and increased income tax expense.

Adjusted EBITDA for the fourth quarter and year ended September 30, 2022 were $6,808 and $18,664 versus $884 and $2,930 for the prior comparable periods. This represents increases of 670% and 537% respectively, and are a result of the reasons explained above.

Quarterly Results

Quarterly Results
				For the quarters ended
	30-Sep-22	**30-Jun-22 **	**31-Mar-22 **	31-Dec-21	30-Sep-21	**30-Jun-21 **	**31-Mar-21 **	31-Dec-20
	$	$	$	$	$	$	$	$
Sales	162,442	145,134	137,764	131,364	80,816	67,830	76,477	82,340
Adjusted EBITDA	23,519	21,680	21,174	20,296	17,174	11,939	17,535	19,088
Net income attributable
to common shareholders	16,455	9,690	8,433	10,674	9,395	4,420	10,786	12,017
Net income per share
– Basic	0.92	0.54	0.47	0.60	0.53	0.25	0.58	0.65
– Diluted	0.91	0.53	0.46	0.59	0.53	0.24	0.57	0.64

TerraVest’s operating segments are seasonal in nature. The strongest quarters for TerraVest are its first and last quarters. The Processing Equipment and Service segments generally experience higher sales in the first and second quarters as majority of the drilling in Western Canada occurs during this period. The Fuel Containment segment generally experiences higher sales during the first and last quarters as demand for residential, commercial and industrial heating products increases heading into the winter months. The third quarter is typically the weakest across all segments. TerraVest takes advantage of this seasonality to build inventory levels during non‐peak demand periods, thereby allowing TerraVest to more readily meet increased levels of demand during its regular peak demand periods.

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CASH FLOW

The following table provides summary information with respect to consolidated cash flows from operating, investing and financing activities:

	Years	ended
	Sept. 30, 2022	Sept.	30, 2021
	$		$
Cash flow from operating activities	29,948		23,064
Cash flow used in investing activities	(73,951)		(52,536)
Cash flow from financing activities	45,160		9,991
Net inflows (outflows) for the year	1,157		(19,481)
Cash and bank overdrafts, beginning of year	7,481		26,717
Impact of foreign exchange on cash and bank overdrafts	396		245
Cash and bank overdrafts,end ofyear	9,034		7,481

Cash Flow from Operating Activities

TerraVest generated $29,948 of cash flow from operating activities during the year ended September 30, 2022 compared to $23,064 for the prior comparable period. The increase is mainly attributable to increased net income, partially offset by increased investment in non‐cash working capital levels versus the prior comparable period and additional interest and income taxes paid.

Cash Flow used in Investing Activities

Cash flow used in investing activities during the year ended September 30, 2022 was $73,951 compared to $52,536 for the prior comparable period. The increased use of cash is primarily a result of cash paid to acquire GES, MTC and PES as well as equity instruments in addition to increased capital expenditures. Furthermore, TerraVest had disposed of an investment in equity instruments in the prior comparable period.

Cash Flow from Financing Activities

Cash flow from financing activities during the year ended September 30, 2022 was $45,160 compared to $9,991 for the prior comparable period. TerraVest repurchased less of its common shares than the prior comparable period but increased its debt to finance increased investing activities.

DIVIDENDS

During the fourth quarter ended September 30, 2022, TerraVest has declared a dividend of $0.10 per common share payable on October 11, 2022 to shareholders of record on September 30, 2022.

Subsequent to the end of the year, TerraVest declared a dividend of $0.125 per common share payable on January 10, 2023 to shareholders of record on December 31, 2022. This represents a 25% increase over the prior quarterly dividend.

TerraVest expects to declare and pay a dividend on a quarterly basis. The dividend policy may be changed from time to time in the sole discretion of the Board of Directors. Accordingly, there can be no assurance as to the amount or timing of any dividend in the future. In assessing whether to pay a dividend and in determining the amount of the dividend, the Board of Directors will consider TerraVest’s financial condition and its then current business needs and other factors the Board of Directors may consider appropriate in the circumstances.

LIQUIDITY AND CAPITAL RESOURCES

TerraVest’s objective in managing its capital resources is to ensure that there are adequate capital resources to support the operations of its various business segments and permit opportunistic acquisitions, in order to maximize the return to shareholders. Management continually assesses TerraVest’s capital needs to meet its objectives.

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TerraVest’s principal sources of liquidity are cash on hand, secured credit facilities and cash flow generated by its operations throughout the year. As at September 30, 2022, TerraVest’s cash position, net of bank overdrafts, was $9,034 compared to $7,481 as at September 30, 2021. As at September 30, 2022, TerraVest’s consolidated working capital, excluding short‐term revolving credit facilities, was $188,609 compared to $137,385 as at September 30, 2021. TerraVest expects to be able to fund all working capital requirements, contractual obligations and capital expenditures from a combination of cash on hand, operating cash flows and existing credit facilities.

Revolving Operating Loans

TerraVest and its subsidiaries have access to revolving operating loans. Three of the revolving operating loans are based on margin requirements. The revolving operating loans are subject to certain financial covenants which are based on the results of the individual subsidiaries in which the credit facilities are held. The availability of the revolving operating loans at any given time may have an impact on TerraVest’s liquidity and available capital resources and its ability to fund its operating and future growth plans.

As at September 30, 2022, the maximum amount available was $179,204, of which $156,970 was drawn. TerraVest was in compliance with all of its financial and non‐financial covenants. For further information on the financial and non‐financial covenants, please refer to Note 15 of TerraVest’s audited consolidated financial statements for the year ended September 30, 2022.

Revolving Term Loans

Certain subsidiaries of TerraVest operating in the Processing Equipment and Service segments have access to revolving term loans totaling $29,500 that can be used to refinance existing debt and to purchase property, plant & equipment. As at September 30, 2022, $22,240 was drawn.

TerraVest was in compliance with all of its financial and non‐financial covenants. For further information on the financial and non‐financial covenants, please refer to Note 15 of TerraVest’s audited consolidated financial statements for the year ended September 30, 2022.

Share Capital

TerraVest’s common shares are listed on the Toronto Stock Exchange under the symbol “TVK”. Changes in the common shares issued and outstanding were as follows:

	As at September	30, 2022	As at September	30, 2021
	Number	Amount	Number	Amount
		$		$
Balance, beginning of year	17,567,455	141,712	18,681,250	149,284
Issued on business combination, net of
transaction costs	361,663	9,118	‐	‐
Issued on exercise of stock options	-	-	120,031	2,304
Repurchased and cancelled	(43,100)	**(363) **	(1,233,826)	(9,876)
Balance,end ofyear	17,886,018	150,467	17,567,455	141,712

During the year ended September 30, 2022, TerraVest issued 361,663 common shares on business combination. The transaction was recognized at the acquisition‐date fair value price of $25.27 per common share based on the Toronto Stock Exchange closing trading price. Transaction costs of $21 were incurred to issue the shares and were accounted as a deduction from the carrying value of the shares issued. In addition, during the year ended September 30, 2022, TerraVest repurchased 43,100 common shares (1,233,826 during the year ended September 30, 2021) under its common shares normal course issuer bid (“NCIB”) for total consideration of $982 ($21,103 during the year ended September 30, 2021). The difference between the amount paid for the common shares and their carrying value was recorded in share premium.

On March 17, 2022, TerraVest renewed its common shares NCIB under which it may repurchase 947,259 common shares. The common shares NCIB expires on March 16, 2023. On July 20, 2022, TerraVest has entered into an Automatic Share Purchase Plan (“ASPP”) in order to facilitate, on any trading day, the repurchase of common shares under its common shares NCIB. The remaining number of common shares available for repurchase under the current common shares NCIB was 904,159 as at September 30, 2022.

Subsequent to the end of the year, TerraVest repurchased 54,700 common shares under its common shares NCIB for total consideration of $1,312. The number of common shares outstanding was 17,831,318 as at December 2, 2022.

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Capital Structure

The capital structure of TerraVest consists of its revolving credit facilities, long‐term debt and shareholders’ equity attributable to common shareholders. The following table outlines TerraVest’s capital structure:

	As at	As at	As at	As at
	September	30, 2022	September	30, 2021
	$		$
Bank overdrafts		360		878
Drawn on current revolving credit facilities		3,332		251
Available on current revolving credit facilities, net of amount drawn		10,872		3,209
Drawn on long‐term revolving operating loans		153,638		87,754
Available on long‐term revolving operating loans, net of amount drawn		11,362		34,983
Long‐term debt (current and non‐current)		85,927		70,941
Shareholders’ equityattributable to common shareholders		183,573		132,055
		449,064		330,071

Other than the financial covenants and restrictive non‐financial covenants contained in the loan agreements, TerraVest is not subject to any externally imposed capital restrictions.

The Board of Directors does not establish quantitative return on capital criteria for management. TerraVest intends to maintain a flexible capital structure that is consistent with its stated objectives and adjust it in the light of changes in economic conditions and the risk characteristics of the underlying instruments. In order to maintain or adjust its capital structure, TerraVest may, from time to time, acquire shares for cancellation in connection with an SIB or an NCIB, issue new shares, raise capital through various debt instruments or refinance current debt through instruments with different characteristics.

SHARE-BASED PAYMENTS

TerraVest has a stock option plan for which options are granted to key management personnel to purchase common shares of TerraVest. On February 9, 2022, TerraVest amended and restated its existing stock option plan to a “rolling” plan, whereby the amount of common shares that may be reserved for issuance shall be up to 10% of the issued common shares outstanding from time to time. As at February 14, 2022, an aggregate of 1,792,911 common shares were reserved for issuance under the stock option plan. Of the 1,792,911 common shares reserved for issuance, 442,411 were available for grant under the stock option plan as at September 30, 2022.

The stock options outstanding and the weighted average exercise prices as at September 30, 2022 were as follows:

		Exercise	Opening		Closing	Vested and
Grant Date	Expiry Date	price	balance	Granted	balance	exercisable	Unvested
Mar. 9, 2017	Mar. 9, 2024	$9.10	267,500	‐	267,500	267,500	‐
Jan. 20, 2020	Jan. 20, 2027	$13.12	100,000	‐	100,000	66,666	33,334
Feb. 18, 2022	Feb. 18, 2032	$24.49	‐	583,000	583,000	‐	583,000
Feb. 18, 2022	Feb. 18, 2032	$26.99	‐	100,000	100,000	‐	100,000
Feb. 18, 2022	Feb. 18, 2032	$29.49	‐	100,000	100,000	‐	100,000
Feb. 18, 2022	Feb. 18, 2032	$31.99	‐	100,000	100,000	‐	100,000
Feb. 18,2022	Feb. 18,2032	$34.49	‐	100,000	100,000	‐	100,000
			367,500	983,000	1,350,500	334,166	1,016,334
Weighted average		exerciseprice	$10.19	$27.03	$22.45	$9.90

During the year ended September 30, 2022, no stock options were settled, exercised or forfeited and TerraVest granted 983,000 stock options to key management personnel.

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FINANCIAL INSTRUMENTS RISK

TerraVest is exposed to various risks in relation to financial instruments. The main type of risks are market risk, credit risk and liquidity risk. An analysis of these risks as at September 30, 2022, is provided below.

Market Risk

TerraVest is exposed to market risk, through its use of financial instruments, specifically to foreign currency risk, interest rate risk and certain commodity price risk.

Foreign Currency Risk

Foreign currency risk arises from the fluctuation of foreign exchange rates and the degree of volatility of these rates relative to the Canadian dollar. TerraVest is subject to foreign currency risk for:

• sales and operating expenses denominated in foreign currencies made by Canadian entities; and

• financial instruments denominated in foreign currency in Canadian entities.

TerraVest does not have a policy to hedge its foreign currency risk and manages its exposure to foreign currency risk by periodically entering into forward exchange contracts. Based on the net U.S. dollar exposure as at September 30, 2022, a one cent increase in the Canadian/U.S. dollar exchange rate would have had an unfavorable impact of $385 on net income ($70 for the year ended September 30, 2021). A one cent decrease in the Canadian/U.S. dollar exchange rate would have had an impact of a similar magnitude but in opposite directions on net income.

Interest Rate Risk

TerraVest does not have a policy to hedge its interest rate risk and is exposed to interest rate risk arising from fluctuations in interest rates on revolving credit facilities and long‐term debt at variable interest rates. TerraVest entered into an interest rate swap agreement to manage a portion of its exposure to interest rate risk.

For the year ended September 30, 2022, a 1% increase in the interest rate would have had an unfavorable impact of $893 on net income ($590 for the year ended September 30, 2021), calculated using the average outstanding balances during the year on revolving credit facilities and long‐term debt at variable interest rates. A 1% decrease in the interest rate would have had an impact of a similar magnitude but in opposite directions on net income.

Commodity Price Risk

TerraVest is sensitive to changes in commodity prices for crude oil and natural gas. Fluctuations in commodity prices for crude oil and natural gas have an indirect impact on TerraVest’s portfolio businesses operating in the oil and natural gas sectors. The indirect impact is the effect that the price variations have on activity levels for customers of those portfolio businesses and, therefore, the demand for goods and services. The indirect impact is not quantifiable.

Credit Risk

Credit risk is the risk that a counterparty will fail to perform its obligations to TerraVest. TerraVest’s credit risk comes mainly from accounts receivable and is mitigated through credit policies that limit transactions according to counterparties’ creditworthiness, which is assessed by considering counterparties’ financial position, past experience and other factors. In addition, a large majority of TerraVest’s clients are well established companies with a history of prompt payment. Accounts receivable amounts are presented on the consolidated statements of financial position net of the allowance for doubtful accounts. In measuring the expected credit losses, the trade receivables have been assessed on a collective basis as they possess shared credit risk characteristics. They have been grouped based on the days past due. The expected loss rates are based on the payment profile for sales based on historical credit losses. Trade receivables are written off when there is no reasonable expectation of recovery. Failure to make payments within 180 days from the invoice date and failure to engage with TerraVest on alternative payment arrangement, amongst other, may be considered indicators of no reasonable expectation of recovery. The credit risk on cash is considered negligible since cash is held in reputable financial institutions with high quality external credit ratings. TerraVest’s maximum exposure to credit risk is $118,072 as at September 30, 2022 ($71,285 as at September 30, 2021).

As at September 30, 2022, 96% (91% as at September 30, 2021) of TerraVest’s accounts receivable were less than 90 days past invoice date. TerraVest recognizes an allowance for doubtful accounts when it believes that the expected recoverable amount is lower than the actual amount of the trade receivables.

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Liquidity Risk

TerraVest’s objective is to maintain cash and cash availability to meet its liquidity requirements. TerraVest monitors its cash and trade receivable balances as well as cash flows generated from operations to meet its financial obligations. TerraVest also has access to various authorized revolving credit facilities to manage its liquidity need. For a more detailed discussion on liquidity risk, refer to the section entitled “Liquidity and Capital Resources” in this MD&A.

SIGNIFICANT ACCOUNTING POLICIES

TerraVest prepares its financial statements in accordance with IFRS. TerraVest’s accounting policies under IFRS are disclosed in Note 2 of TerraVest’s audited consolidated financial statements for the year ended September 30, 2022.

CRITICAL ACCOUNTING ESTIMATES

For a detailed discussion on the use of estimates and judgments, please refer to Note 3 of TerraVest’s audited consolidated financial statements for the year ended September 30, 2022.

CONTROLS AND PROCEDURES

As at September 30, 2022, TerraVest’s Chief Executive Officer and Chief Financial Officer, have certified that the disclosure controls and procedures, and that the internal controls over financial reporting are effective and that during the period covered by this report, TerraVest did not make any changes in internal controls over financial reporting that significantly affected or are reasonably likely to significantly affect TerraVest’s internal controls over financial reporting.

Exception

TerraVest acquired a controlling interest in GES in November 2021 and MTC in March 2022. Management has not yet completed its assessment of the design or operating effectiveness of GES and MTC disclosure controls and procedures and internal controls over financial reporting.

The following table provides significant financial information of GES and MTC as at and for the year ended September 30, 2022:

	GES		MTC
	$		$
Total assets		75,024	52,751
Total liabilities		34,046	11,525
Sales		70,493	27,875
Net income		5,073	1,108

RELATED PARTY TRANSACTIONS

For detailed information on related party identity, relationship and transactions, please refer to Note 28 of TerraVest’s audited consolidated financial statements for the year ended September 30, 2022.

RISK FACTORS

For a detailed discussion of the risk factors related to the businesses and to the structure of TerraVest, please refer to the AIF of TerraVest under the heading “Risk Factors”, which is incorporated herein by reference.

ADDITIONAL INFORMATION

Additional information relating to TerraVest, including the AIF of TerraVest, is available on SEDAR at www.sedar.com.

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