ESE.V - ESTec Systems Corp.

ESTec Systems Corporation Due Diligence

Symbol: ESE.V
Price: $0.095
Common Shares: 10,461,629
Insider/Institutional Holdings: 8,933,955 (85.4% as per Information Circular on Sedar)
***Only 1,527,674 retail shares***
website: http://www.estec.com/

2015 Q1 Financial Results
ASSETS
Cash: $448,156
Receivables: $716,316
Inventory: $410,635
Income Tax Recoverable: $74,549
Prepaid Expenses: $77,810
Property & Equipment: $139,287
Intangible Assets: $305,164
Goodwill: $774,478
Total Assets: $2,946,396

LIABILITIES
Payables: $631,269
Deposits: $34,335
Current portion of debt: $83,364
Remaining Debt: $1,007,175 (Due by July 2026, see MD&A Highlights)
Advance from parties: $465,650
Total Liabilities: $2,221,793

2014 Year end and 2015 Q1 Results

2014 Total Sales
Revenue: $5,834,345
Gross Profit: $3,219,573
Net Income: $656,878 - $0.063c EPS
**Stock is trading at exactly 1.5 times last year’s earnings which is way too low**

2015 Q1 Sales
Revenue: $1,298,639
Gross Profit: $655,650
Net Income: $86,200 - $0.008c EPS
**much of the sales are US based, which adds to revenue when converted to CDN dollars**
Over 5 quarters, ESE has done a total of $7,132,984 in sales with net income of $743,078
MD&A Highlights

ESTec Systems Corp. is a holding company that owns Allan R. Nelson Engineering (1997) Inc. and Encore Electronics Inc. Allan R. Nelson Engineering (1997) Inc. (ARN) is a group of professional engineers and technologists who carry diverse skills and a variety of professional backgrounds. The company is located in Edmonton, Alberta ARN provides forensic engineering & design engineering services to the oil and gas, mining, manufacturing, transportation and forestry industries. The largest part of ARN’s business is forensic engineering. Committed to continuous improvement, ARN utilizes state-of-the-art software to provide timely and competitive solutions for our clients. Encore Electronics Inc. is an electronics design and manufacturing business located in Saratoga Springs, New York. Its product line includes signal conditioners, strain gage amplifiers, vibration monitoring equipment and computer controlled signal conditioning instrumentation.

Edmonton – 25 November 2015
Once again this quarter is impacted by the continuing low price of oil. The engineering division shows almost a 40% decrease in revenue over the same period last year. On a straight US dollar basis the electronics division is down slightly, although after adjusting for currency, the Canadian dollar value of the first quarter sales are up slightly from the first quarter last year. Overall our revenues are down about 10% from the first quarter last year.

The Allan R. Nelson Engineering division has reduced staffing and continues to monitor costs. We anticipate continued slow revenue for the foreseeable future due to the continued low price of oil and the resulting impacts on the Alberta economy.

While revenue potential for Encore Electronics continues to look good, slow parts delivery in the first quarter has pushed some customer deliveries into the second quarter. The net effect is that while still profitable, the level of profit is down from this quarter last year.

The company has positive working capital. Over the next year the company expects to meet all cash requirements from cash flow. While the Company has a significant amount of its receivables invested in a small number of clients, these funds are largely attributable to insurance clients and they have reserves allocated to pay these receivables.

A demand non-revolving term facility has been negotiated to cover the cash requirements to purchase Encore Electronics Inc. Debt repayment is scheduled over 15 years to July 2026 to be repaid from the operating profits of Encore Electronics Inc.

2012 was the game changing year for ESE when revenue started to increase substantially and yearly losses turned into major profits. Revenue between 2009 to 2012 was under $2.5 million per year. Afterwards it was always over $5 million. Assets started to increase and liabilities decreased. This was all done without dilution. ESE is leveraged towards the US dollar and this is a major benefit right now as a Canadian based company. Below are the yearly breakdowns from 2012 to 2015 + Q1 2016

Year End: 2012
Total Assets: $2,415,938
Total Liabilities: $2,577,937
Revenue: $5,113,248
Earnings: $197,953 or $0.018c

Year End: 2013
Total Assets: $2,838,026
Total Liabilities: $2,634,966
Revenue: $5,578,487
Earnings: $374,557 or $0.035c

Year End: 2014
Total Assets: $2,462,691
Total Liabilities: $2,481,167
Revenue: $5,248,724
Earnings: Loss of $232,038 – Read MD&A statement below (Due to oil price starting to drop)

The financial results for the year ended June 30, 2014 show a loss as compared to a profit at June 30, 2013. The decrease in comprehensive income can be attributed primarily to Allan R. Nelson Engineering (1997) Inc showing a significant loss during 2014. This was exacerbated by reduced profits in the Encore Electronics business unit. Allan R. Nelson Engineering saw its year start off with several major projects being put on hold or cancelled by clients as they anticipated market changes. Our clients told us that many of these projects were due to restart soon, however that status remained throughout most of the year.

Year End: 2015
Total Assets: $2,911,638
Total Liabilities: $2,273,047
Revenue: $5,834,345
Earnings: $656,878 or $0.063c – As you can see, the company made changes and was profitable again

This year has seen modest improvements in sales in both the engineering business and the electronics manufacturing business. Combined with modest improvements on the cost side we have had a significant improvement in the bottom line for both business units. Engineering has attained just short of break even and the electronics manufacturing has doubled its bottom line contribution to the business. During the year the company continued to capitalize R&D into new products. Management is confident that the potential market for these new products exceeds the capitalized value of the R&D. A significant portion of this year’s income is a direct result of increases in the value of the US dollar investments in our electronics manufacturing subsidiary in the United States.

Quarter: Q1 2016
Total Assets: 2,946,395
Total Liabilities: $2,221,793
Revenue: $1,298,639
Earnings: $86,200 or $0.0082c

If you read the MD&A, this quarter had some issues with orders and of course decreased demand from the oil engineering subsidiary. However, with the US dollar rising and added orders coming in Q2 that were supposed to be in Q1, it’s inevitable that ESE.V will keep putting out profitable quarters and paying off liabilities while increasing their assets. Their callable debt only has a small portion to be paid yearly and then will be fully paid by 2026, so there is little concern in this department.

From MD&A: Once again this quarter is impacted by the continuing low price of oil. The engineering division shows almost a 40% decrease in revenue over the same period last year. On a straight US dollar basis the electronics division is down slightly, although after adjusting for currency, the Canadian dollar value of the first quarter sales are up slightly from the first quarter last year. Overall our revenues are down about 10% from the first quarter last year. The Allan R. Nelson Engineering division has reduced staffing and continues to monitor costs. We anticipate continued slow revenue for the foreseeable future due to the continued low price of oil and the resulting impacts on the Alberta economy. While revenue potential for Encore Electronics continues to look good, slow parts delivery in the first quarter has pushed some customer deliveries into the second quarter. The net effect is that while still profitable, the level of profit is down from this quarter last year

ESTEC Q2 Results(Ending December 31st 2015) Released February 29th 2016

Symbol: ESE.V
Price: $0.12c
Common Shares: 10,461,629
Insider/Institutional Holdings: 8,933,955 (85.4% as per Information Circular on Sedar)
***Only 1,527,674 retail shares***
website: http://www.estec.com/

Financial Results

ASSETS
Cash: $592,583 - $0.056c a share
Receivables: $829,120
Inventory: $269,333
Tax Recoverable: $36,084
Prepaid Expenses: $59,326
Property & Equipment: $136,477
Intangible Assets: $311,380
Goodwill: $803,206
Total Assets: $3,037,509

Liabilities:
Bank Debt: $150,000
Payables: $557,097
Customer Deposits: $41,798
Callable Debt: $84,222
Remaining Debt: $985,738(Due by July 2026, see MD&A Highlights below)
Advances: $465,579
Total Liabilities: $2,284,434

Q2 Sales( 3 Months)
Revenue: $1,476,862
Net Income: $28,473

Q1-Q2 Sales( 6 Months)
Revenue: $2,775,501
Net Income: $114,673

2014 Total Sales
Revenue: $5,834,345
Net Income: $656,878

Over the last 6 quarters, ESE has maintained its sales with a total of $8,609,846(average of $1.43 million per quarter) and earned $771,551($0.073c) a share in cash.

MD&A Highlights

ESTec Systems Corp. is a holding company that owns Allan R. Nelson Engineering (1997) Inc. and Encore Electronics Inc. Allan R. Nelson Engineering (1997) Inc. (ARN) is a group of professional engineers and technologists who carry diverse skills and a variety of professional backgrounds. The company is located in Edmonton, Alberta. Encore Electronics Inc. is an electronics design and manufacturing business located in Saratoga Springs, New York. Its product line includes signal conditioners, strain gage amplifiers, vibration monitoring equipment and computer controlled signal conditioning instrumentation.

The second quarter shows the impact of the low price of oil. Engineering sales are down about 40% over last year this quarter. The electronics business has remained stable. There is a gain relative to last year in Canadian Dollars due to the drop in value of the Canadian Dollar. The engineering business is experiencing a small increase in the number of jobs being quoted, but that has not yet turned into an increase in the volume of work. We expect current economic conditions to continue through the fiscal year. Management will adjust the cost structure during the third and fourth quarters to reflect forecasted revenue. The Encore Electronics business continues to perform to expectations. Management of Encore is actively working on diversifying their customer base to reduce economic dependence on one customer.

Liquidity

The Company’s liquidity requirements are met through the cash generated from operations. Management monitors and manages its liquidity risk through regular review of its financial liabilities against the constraints of its available financial assets.

The company has positive working capital. Over the next year the company expects to meet all cash requirements from cash flow. While the Company has a significant amount of its receivables invested in a small number of clients, these funds are largely attributable to insurance clients and they have reserves allocated to pay these receivables.

A demand non-revolving term facility has been negotiated to cover the cash requirements to purchase Encore Electronics Inc. Debt repayment is scheduled over 15 years to July 2026 to be repaid from the operating profits of Encore Electronics Inc.

In the second quarter, the Allan R. Nelson Engineering subsidiary continued to suffer from low activity in the Oil & Gas industry due to the low price of oil. The Encore Electronics subsidiary continued to perform on an even basis relative to last year. Management has been reviewing the sales and marketing efforts to see if additional opportunities can be identified.

During the quarter no stock options were granted to employees and directors of the company. During the year, in the first quarter, 235,000 options expired.

Liquidity risk is the risk that the Company may not have cash to meet its financial liabilities as they come due. The Company has sufficient credit facilities to meet its current and long term financial needs.

ESTec Systems Corp 9 Month Results(Ending March 31st 2016)
Price: $0.105
Common Shares: 10,461,629
Insider Holdings: 85.4% as per the last information circular

Financials

Assets
Cash: $318,378
Receivables: $1,190,733
Inventory: $316,717
Tax Recoverable: $69,335
Prepaid Expenses: $77,942
Property & Equipment: $124,694
Intangible Assets: $296,049
Goodwill: $753,702
Total Assets: $3,147,550

Liabilities
Bank Debt: $265,000
Payables: $682,211
Customer Deposits: $34,335
Callable Debt: $85,203
Total Callable Debt: $963,970(Due July 2026 as per their MD&A)
Advances from parties: $465,460
Total Liabilities: $2,496,179

Below is a breakdown of sales in both the Engineering and Electronics departments over 9 months in 2016, 1 year in 2015, and 1 year in 2014. The goal is to show that although sales in Engineering are decreasing, the sales in Encore Electronics are increasing and should eventually make up for prior losses, especially if the company continues to cut costs from its engineering department. As the US economy improves, so will electronics sales since this asset is US based. Encore sells parts to major corporations such as Microsoft, GE, GM, Ford, NASA, etc: http://encore-elec.com/about-us/our-customers/

2016 Sales after 9 months(This will obviously increase with Q4 results)
Engineering - $905,361 – Net Loss of $272,683
Electronics - $3,224,296 – Net income of $234,450
Total Assets This Quarter - $3,147,550
Total Liabilities This Quarter - $2,496,179

2015 Sales after 1 year
Engineering - $2,159,901 – Net Loss of $121,360
Electronics - $3,674,444 – Net Income of $656,550
Total Assets Year End - $2,911,449
Total Liabilities Year End - $2,273,047

2014 Sales after 1 year
Engineering - $2,017,208 – Net Loss of $499,565
Electronics - $3,231,516 – Net Income of $267,994
Total Assets Year End - $2,462,691
Total Liabilities Year End - $2,481,167

Over three years, Assets continue to increase and liabilities seem to bounce in between the $2.2 to $2.5 million range.
MD&A Highlights

Edmonton – 25 May 2016 The third quarter reflects the continuing impact of the decline in oil prices on our engineering operation. Revenues from Allan R. Nelson Engineering are down as compared to last year. Revenue from Encore remains stable and includes the effect of the exchange rate differential. We do not expect current economic conditions to change through the balance of the fiscal year. As a result Allan R. Nelson Engineering will continue to face challenges. During the third quarter Allan R. Nelson Engineering has adjusted its cost structure to offset its reduction in revenue. We will continue to monitor and adjust as required. The Encore Electronics business continues to perform to expectations. Management of Encore is actively working on diversifying their customer base to reduce economic dependence on a small number of customers.

The company has negative working capital. Over the next year the company expects to meet all cash requirements from cash flow. While the Company has a significant amount of its receivables invested in a small number of clients, these funds are largely attributable to insurance clients and they have reserves allocated to pay these receivables.

A demand non-revolving term facility has been negotiated to cover the cash requirements to purchase Encore Electronics Inc. Debt repayment is scheduled over 15 years to July 2026 to be repaid from the operating profits of Encore Electronics Inc.

During the first quarter the Company signed an amended demand loan agreement. (see note 3 and 11 of the financial statements). See also discussion on liquidity risk.
The bank revolving demand facility #1 is authorized to a total of $275,000 CAD with interest payable at prime plus 3.55%. At March 31, 2016 the prime rate is 2.7%. At March 31, 2016 $265,000 (June 2015, $65,000) was outstanding on this credit facility. A general security agreement and a guarantee and postponement of claim of $300,000 by ESTec have been pledged as collateral for the credit facility.

In the third quarter, the Allan R. Nelson Engineering subsidiary continued to feel the effects of low activity in the Oil & Gas industry. The Encore Electronics subsidiary continued to perform on a comparable basis relative to last year. Management has been reviewing the sales and marketing efforts to see if additional opportunities can be identified.

During the quarter no stock options were granted to employees and directors of the company. In the first quarter of the year 235,000 options expired.

Found some great information on ESTec including a private company that's invested in them, background on the CEO and a chart showing that volume has picked up over the last few quarters and this is the first time in a decade it's started to build. below are the links.

Haanz Group and ARN(ESE's first subsidiary): http://www.haanz-group.com/index.php...d=50&Itemid=86

ESE CEO Article: http://www.canadianpetroleumhalloffa...an-Nelson.html

Stock volume chart: http://bigcharts.marketwatch.com/int...time=20&freq=2

Encore Electronics clients(ESE's second subsidiary): http://encore-elec.com/about-us/our-customers/

I made this comparison sheet after ESE acquired Encore Electronics in May 2011. As you can see, revenue from the Encore Electronics subsidiary has gone up almost 1000% in 5 years. We are still waiting for Q4 results, but I am confident that Encore Electronics sold around $4 million US dollars in 2016. However, this positive cash flow is offset by Allan R Engineering which I hope the company has reduced costs from or should consider closing down. If you look at Encore Electronics website, they deal with some major groups like the US Government, NASA, Ford, Toyota, and major corporations. Therefore, if their products are good for the most high end clients, then any company would want to use them. This means their growth potential could increase substantially and major deals could come at anytime. If oil prices ever do come back, then the Engineering department should also start producing positive cash flow. Another advantage of Encore Electronics over Allan R Engineering is that it's a US subsidiary, that means the conversion from US to Canadian dollars will only add extra cash to ESE's balance sheet.

2011 Year End
Allan R Engineering - $1,843,864 – Loss of $179,101
Encore Electronics - $422,616 – Loss of $215,547
Total Sales for 2011 - $2,266,480 - Total loss of $394,648

2012 Year End
Allan R Engineering - $2,722,196 – Net Income $438,388
Encore Electronics - $2,391,052 – Loss of $257,351
Total Sales of 2012 - $5,113,248 - Total net income of $181,037

2013 Year End
Allan R Engineering - $2,397,536 – Loss of $45,488
Encore Electronics - $3,178,949 – Net Income $397,902
Total Sales for 2013 - $5,576,485 - Total net income of $352,414

2014 Year End
Allan R Engineering - $2,017,208 – Loss of $499,565
Encore Electronics - $3,231,516 – Net Income $267,994
Total Sales for 2014 - $5,248,724 - Total loss of $231,571

2015 Year End
Allan R Engineering - $2,159,901 – Loss of $121,360
Encore Electronics - $3,674,444 – Net Income $656,550
Total Sales for 2015 - $5,834,345 - Total net income of $535,190

2016(9 Months)
Allan R Engineering - $905,361 – Loss of $272,683
Encore Electronics - $3,224,296 – Net Income $234,450
Sales for 9 Months - $4,129,657 - Total loss of $38,233

List of Encore Electonics Clients: http://encore-elec.com/about-us/our-customers/

ESTec receives 12-cent-a-share offer from numbered co.



2016-10-24 18:14 MT - News Release


Mr. Mark Bamford reports

ESTEC SYSTEMS CORP. ENTERS INTO LETTER OF INTENT FOR A GOING PRIVATE TRANSACTION

ESTec Systems Corp. has entered into a letter of intent with 2000285 Alberta Ltd. (AcquisitionCo), an entity controlled indirectly by Anthony B. Nelson, a director, officer and shareholder of the company. The LOI sets out the non-binding intention of the parties to negotiate and enter into a definitive agreement pursuant to which AcquisitionCo would, through a series of transactions, acquire all of the issued and outstanding common shares in the capital of the company. Pursuant to the proposed transaction, shareholders of the company who are not also shareholders of AcquisitionCo (or an affiliated entity) at the time of closing of the transaction would receive 12 cents in cash for each common share held.

The transaction is anticipated to be structured as an amalgamation of AcquisitionCo and ESTec under the laws of the Province of Alberta. Provided all conditions and approvals are met, upon closing of the transaction, shareholders of ESTec immediately prior to the time of closing (other than shareholders of ESTec who are also shareholders of AcquisitionCo or its affiliates) would be entitled to receive one redeemable preferred share of the amalgamated entity for each common share held. Each redeemable preferred share would be immediately redeemed for 12 cents in cash. Shareholders of the amalgamated entity (or an affiliate thereof) following the cash distribution to minority shareholders upon closing of the transaction would consist of the Nelson family and other ESTec shareholders acting jointly and in concert with the Nelson family. It is anticipated that the interested shareholders will transfer substantially all of their common shares to AcquisitionCo (or an affiliate thereof) immediately prior to the closing of the transaction.

Under the LOI, the company and AcquisitionCo shall use their reasonable commercial efforts to negotiate a definitive agreement in respect of the transaction by Oct. 31, 2016.

Pursuant to Multilateral Instrument 61-101, the proposed transaction is a business combination, and the completion of the transaction will require simple majority approval of the company's minority shareholders. Of the 10,461,629 currently issued and outstanding common shares, interested shareholders own or control, directly or indirectly, approximately 7,726,758 common shares in aggregate, and the votes attached to such shares would be excluded for the purposes of obtaining minority shareholder approval under MI 61-101.

The board of directors of the company formed an independent special committee, consisting of David Wright and Barbara Fraser, in connection with the transaction. The special committee has retained Quantum Advisory Inc. to provide a fairness opinion with respect to whether the consideration offered under the transaction is fair from a financial point of view to the ESTec shareholders (other than AcquisitionCo or its affiliates). The special committee will review and recommend or reject that the board approve the transaction, after considering all aspects of the transaction and the outcome of the fairness opinion to be provided from the company's financial adviser. The board may proceed to approve the transaction at a later date and advise that shareholders vote in favour of the transaction after considering the recommendation of the special committee, all aspects of the transaction and the outcome of the fairness opinion to be provided from the company's financial adviser.

The acquisition price of 12 cents represents a 26-per-cent premium to the closing price of the common shares on Oct. 21, 2016, and a premium of approximately 32 per cent to the 30-day weighted-average price of the common shares on the TXV Venture Exchange up to and including Oct. 21, 2016. Following completion of the transaction, it is anticipated that the common shares will be delisted from the TSX Venture Exchange, and the company will apply to the applicable securities commissions to cease to be a reporting issuer.

The company and AcquisitionCo have agreed, on a binding basis, to a period of exclusivity commencing on the date hereof and ending on the earlier of the date the LOI is terminated or the date that a definitive agreement in connection with the transaction is executed, during which period the company will work exclusively and in good faith with AcquisitionCo in an effort to negotiate a definitive agreement and will not solicit or initiate discussions regarding any other business combination or sale of material assets. The company has also provided AcquisitionCo the right to match any unsolicited acquisition proposals.

The transaction is subject to a number of conditions, including the receipt of the required shareholder approvals and regulatory and TSX Venture Exchange approval. It is anticipated that an annual and special meeting of shareholders of the company will be held on or about Dec. 9, 2016, at which the transaction would be considered and that meeting materials in respect of such meeting will be mailed on or about Nov. 17, 2016. The transaction must be approved by 66-2/3rds per cent of all shareholders of ESTec, as well as a simple majority of the company's minority shareholders (as described herein). It is anticipated that closing of the transaction would occur within seven business days of shareholder approval and, in any event, not later than Dec. 30, 2016.

We seek Safe Harbor.

© 2016 Canjex Publishing Ltd. All rights reserved.