Aquam Corporation v. Coffey et al.

[Indexed as: Aquam Corp. v. Coffey]

Ontario Reports

Ontario Superior Court of Justice

Gans J.

November 2, 2018

143 O.R. (3d) 260 | 2018 ONSC 6582

Case Summary

Corporations — Shares — Valuation of shares of dissenting shareholders — Respondents dissenting from proposed amendments to company's articles to create convertible Class A and B preferred shares — Company applying to fix fair market value of dissenting shareholders' common shares — Company valued on ongoing concern basis despite its straightened financial circumstances on Valuation Day — Discounted cash flow method of evaluation used — Time delay of three months in commencement of projected cash flows being appropriate.

The respondents dissented from proposed amendments to the applicant company's articles to create convertible Class A and Class B preferred shares on the basis that the transaction was dilutive of and prejudicial to the company's common shareholders. The company applied pursuant to s. 185(18) of the Ontario Business Corporations Act, R.S.O. 1990, c. B.16 to fix the fair market value of the respondents' common shares.

Held, the application should be allowed.

The company's position that the liquidated approach to valuation should obtain because the company was in straightened financial circumstances on valuation day was not accepted. Rather, the company should be valued as an ongoing concern, using the discounted cash flow ("DCF") method of evaluation. The application of the DCF to the company without any form of time delay in the commencement of the projected cash flows would not be appropriate. A time delay of three months was appropriate in the circumstances.

Cases referred to

• Brant Investments Ltd. v. KeepRite Inc. (1991), 3 O.R. (3d) 289
• Brant Investments Ltd. v. KeepRite Inc. (1987), 60 O.R. (2d) 737
• Deer Creek Energy Ltd. v. Paulson & Co. Inc., 2008 ABQB 326
• Ford Motor Co. of Canada v. Ontario Municipal Employees Retirement Board (1997), 36 O.R. (3d) 384
• Lydia Diamond Exploration of Canada Ltd. v. von Anhalt, 2011 ONSC 3862
• RFG Private Equity Limited Partnership No. 1B v. Value Creation Inc., 2018 ABCA 85
• RFG Private Equity Limited Partnership No. 1B v. Value Creation Inc., 2016 ABQB 391
• Silber v. BGR Precious Metals Inc. (1998), 41 O.R. (3d) 147
• Smeenk v. Dexleigh Corp. (1990), 74 O.R. (2d) 385
• Terranet Inc. v. Canarab Marketing Corp., 2008 ONSC 4036

Statutes referred to

• Business Corporations Act, R.S.O. 1990, c. B.16, s. 185(4), (18), (25)

APPLICATION to fix fair value of the dissenting shareholders' shares.

Counsel:

Dena N. Varah and Brian Kolenda, for applicant. Kevin O'Brien and Robert Carson, for respondents Richard Coffey and Lisa Fielding. Richard Christopher, self-represented.

[1] GANS J.: — Aquam Corporation ("Aquam" or the "Company") has made an application pursuant to s. 185(18) of the Ontario Business Corporations Act, R.S.O. 1990, c. B.16 (the "OBCA") to fix the fair value of the common shares of its dissenting shareholders, Richard Coffey ("Coffey"), Lisa Fielding ("Fielding") and Richard Christopher ("Christopher") (collectively, the "respondents").

[2] The respondents dissented from the proposed amendments to Aquam's articles to create convertible Class A and B preferred shares (the "amendments"), which were issued as part of a $20.2 million equity financing underwritten by a consortium known as NewWorld/Credit Suisse ("NWCS"). The amendments and the consequential financing were completed on April 18, 2017 (the "transaction").

[3] Simply put, the respondents complained that the transaction was dilutive of and prejudicial to the Company's common shareholders, in which group they are included. Accordingly, they voiced their objections at the various meetings of shareholders and voted against the transaction and the amendments.

[4] Under the terms of s. 185(4) of the OBCA, "a shareholder who complies with this section is entitled, when the action approved by the resolution from which the shareholder dissents becomes effective, to be paid by the corporation the fair value of the shares held by the shareholder in respect of which the shareholder dissents, determined as of the close of business on the day before the resolution was adopted". ¹

[5] Shortly after the closing of the transaction, Aquam offered to purchase the outstanding shares of the respondents at a share price of US$0.03 per share, which offer was summarily rejected.

[6] Section 185(18) of the OBCA further provides that in the event that dissenting shareholders reject an offer of purchase, the Company is obliged to bring an application to ". . . fix a fair value for the shares of any dissenting shareholder" as of the valuation date, which the parties have agreed is April 17, 2017, the day before the transaction (the "valuation date").

[7] The sole issue in the instant application, as one might expect, is the value that I am obliged to ascribe to the respondents' shares or the "en bloc" fair market value of the Company as of the valuation date. As in many cases involving "valuations", I am faced with the difficult task of having to come to grips with the opinions of the experts retained by the parties. ² The law is clear, however, that because each case is unique and mathematical precision is virtually impossible to achieve, ". . . the final figure is as much a matter of judgment on the part of the experts as it is on the part of the trial judge". ³

Summary of Facts

[8] Aquam is an integrated pipe infrastructure solutions company, with its head office in Toronto and operations in the U.K. and the U.S. It manufactures and installs various technologies designed to rehabilitate deteriorated, failing or contaminated pipes, principally for water and natural gas pipe installations.

[9] It operates through five divisions, two of which were originally corporations owned and managed by each of the respondents Coffey and Christopher, before each sold his interest in their respective companies to Aquam in 2015 in exchange for the common shares of the Company.

[10] It would appear from a reading of the material with which I was provided, including the agreed statement of facts that counsel provided me at my insistence after the first attendance on the application that the Company sought to "exponentially" expand its revenue and earnings before interests, taxes, depreciation and amortization ("EBITDA") through the acquisition of synergistic mid-size companies. It further appears that the end-game was to take the Company public. With that object in mind, it retained the services of the investment banker, Raymond James Ltd., to act as the lead underwriter.

[11] In addition, in order to fund its corporate acquisition program, if not its continuing operations, the Company issued a series of high interest debentures in each of years 2014-2016 (the "debentures"), in addition to obtaining a working capital loan (the "Wellington loan") and the conclusion of a revenue sharing agreement (the "Grenville agreement"). Putting the matter simply, the Company was debt laden, with heavy interest and periodic debt retirement obligations.

[12] Although its assets increased markedly on a consolidated basis, as did its adjusted EBITDA, the impact of the sudden growth and the concomitant increase in its debt had a significant impact on the Company's bottom line such that its shareholders equity plummeted to unparalleled depths at year end 2016.

[13] In the meantime, the Company had a parting of the ways with its then CEO, decided to shelve its attempts at an IPO, and redirected Raymond James Ltd. to assist in the procurement of financing to shore up the Company coffers and reduce its debt. Aquam's CFO, Michael Vivaldi, who was, as well, its only affiant on the instant application, spent upwards to 75 per cent of his time attending "road shows" with prospective investors and bankers.

[14] While no doubt the Company was making "just in time" payments to its creditors in order to keep the lights on, and negotiated deferred payments for its royalty and debenture retirement obligations due throughout 2016, Vivaldi, with Raymond James Ltd. leading the charge, met with some 50 potential investors on both sides of the pond. Vivaldi candidly acknowledged that these potential investors were interested in the Company's "technology", if not its "prospects for growth".

[15] In addition to these road shows, Aquam received actual expressions or offers of interest, if not term sheets, from legitimate investment bankers and/or equity players, before, during and after the one it received from NWCS in September 2016.

[16] NWCS engaged in its own due diligence throughout Q3 and Q4 of 2016, and submitted amended and reduced offers to finance as Aquam's results trended downward in late 2016 and in early 2017. In the meantime, two other industrial-investor/investment banker firms continued to display more than "tire-kicking" interest in the Company, which added to the confusion during the negotiation of a final agreement with NWCS.

[17] At the end of January 2017, Aquam had all but abandoned or at least shelved any potential or putative suitor in favour of concluding a deal with NWCS, the latter of which consortium seemed the most likely candidate to conclude a timely agreement and one which would permit the Company to keep its debenture holders and primary bankers at bay.

The Transaction

[18] As indicated above, the final NWCS agreement was markedly different to the proposal made in September 2016. Simply put, it did not provide the Company with nearly as much up-front cash for shares and contained more stringent terms and conditions and purchase price adjustments in the event that Aquam did not reach its projected EBITDA in at least 2017.

[19] The salient monetary features of the transaction provided that

• NWCS would purchase $20.2 million of newly created Class B convertible preferred shares; and
• Aquam would use $12.45 million to
  • buy out $5 million worth of debenture of those holders who did not chose to convert their debt to equity;
  • retire $3.7 million of the Grenville agreement;
  • pay Raymond James Ltd. $1.2 million in fees; and
  • earmark $7.8 million as working capital.

Applicable Concepts

[20] The parties are in agreement that I am obliged to set a fair value for each of the respondents' ratable portion of the "en bloc" fair market value ("FMV") of the Company as of the valuation date. In arriving at this number, I am to apply the oft-repeated principle, if not valuation mantra, that FMV is "the highest price available in an open and unrestricted market between informed, prudent parties acting at arm's length and under no compulsion to act, expressed in money or money's worth". ⁴

[21] Regrettably, the repetition of this principle does very little to lead me to a just and proper conclusion.

[22] The parties are also in agreement that Ontario law, at least, is clear that dissenting shareholders, the respondents, are not entitled to benefit from the synergies of or payments called for or made under the transaction as they were offered, and declined, a continuing interest in the Company (the "Synergy Rule"). ⁵ In addition, as the applicant correctly states in its initial factum, evidence based on hindsight is not admissible to inform the analysis on the valuation date, except, in so far as it is necessary, hindsight may be applied as a "reality check" when assessing the proposed valuation. ⁶

[23] The respondents do not take issue with the concepts set out above. What is in issue, among other things, is whether or not its expert, Wayne Rudson, actually did factor the synergies of the transaction into his analysis or merely paid lip service to the aforesaid principle. ⁷

Valuation -- Positions of the Parties

Liquidation

[24] The FMV ultimately ascribed to the Company by the two experts ranged from a low of "nil" based on the liquidation approach first adopted by the applicant's valuator, Robert Low, to a high of $.94 per share, or an en bloc value of $19.3 million, offered up by the respondents' valuation expert, Wayne Rudson.

[25] Both experts agree that, in the circumstances of this case, there are two generally accepted valuation methods applicable to a business entity such as Aquam, namely treating the Company as one that must undergo a liquidation or one that is to be considered a going concern.

[26] The former, which was the first method presented by the applicant, assumes that the Company cannot obtain financing of which it was then in need and can no longer carry on business in the short term, if not in the foreseeable future. Under that scenario, the Company must undertake a voluntary liquidation and attempt to realize on the disposition of its assets or books of business in an orderly fashion or, alternatively, is forced into receivership by its creditors and its assets are disposed of on a distressed basis. The end result on this hypothesis is that, in either event, after the retirement of debt, the Company will have a nil FMV and there will be no residual value to shareholders.

[27] I am not prepared to accept the applicant's position that the liquidation approach must obtain in the circumstances of this case. While no doubt the Company on valuation date was in straightened financial circumstances, was debt-laden and had to endure high and increasing interest and royalty expenses, and was having difficulty in retaining senior management, the best opinion Mr. Low could provide on this issue was that there was an "equal likelihood of Aquam being a going concern on valuation date as not". ⁸ Respectfully, that assertion, which dots his report in several instances, does not establish this proposition on a balance of probabilities, which is fundamental to the success of this argument. ⁹

[28] That said, I am not persuaded on the evidence that the Company should not be valued on a going-concern basis, although that conclusion is tempered in some respects later in these reasons for judgment.

[29] As indicated, Aquam was in straightened circumstances, no doubt occasioned by its seemingly aggressive corporate acquisition program. Indeed, by its own acknowledgment in its then recently published annual consolidated statements, the Company made clear that it was compelled to obtain financing through debt or equity to continue its operations. I would observe parenthetically that appropriate financing could only have been achieved through some form of equity deal since its debt obligations as of the valuation date were extensive if not oppressive.

[30] As a consequence, in the year preceding April 2017, it had undertaken a concerted and planned program to refinance the Company, which, from all indications, generated more than passing interest from private equity firms and financial institutions.

[31] While no doubt the solvency ratios upon which Mr. Low relied painted a "difficult" picture, the other financial indicia described by Mr. Rudson and the underlying proprietary technology which underpinned some of the activity of the Company supports my conclusion that there was sufficient interest in Aquam as a viable but debt-laden enterprise, sufficient to attract the interest of more than mere tire-kickers. I would also observe that its accountants had not at the time of the preparation of its last annual consolidated statement issued any cautionary note that its continuation as a going concern was not possible, but for the note set out above.

[32] Furthermore, while there is some debate that this notion might offend the Synergy Rule, ¹⁰ I am of the view, as a fall-back position, that I am entitled to consider the mere fact that an agreement had been entered into in respect of the transaction, although not closed, as some evidence as to the ongoing nature of the Company, at least in the estimation of a consortium that was prepared to invest in Aquam. I hasten to add, however, that this observation, as was noted by Mr. Rudson, is not to be construed as dispositive of the issue of "going-concern".

[33] Therefore, having regard to the conclusion arrived at on this issue, I do not intend to perform any detailed analysis of the liquidation aspect of the Low report and will now move to the alternative method of valuation, which although agreed to in principle, contains significant divergent underpinnings.

Discounted Cash Flow ("DCF")

[34] Under the DCF method of valuation, an analyst attempts to determine a company's current value according to its estimated future cash flows. In this exercise, Messrs. Low and Rudson used the future or free cash flows of the Company, or the "massaged" EBITDA projections provided by management for a limited period post the valuation date. ¹¹ These cash flows are then "discounted" to current dollars in order to arrive at what the experts defined as the "enterprise value" of the Company. From this last number, each of Low and Rudson deducted, principally, the existing debt of the Company as at the valuation date, to arrive at the "en bloc" or FMV of Aquam.

[35] While there were some points of divergence between the experts as to the value of the adjustments each used in arriving at their respective future or free cash flow numbers, and to a lesser extent the amount of corporate debt deducted in arriving at their ultimate en bloc value, the most significant difference in their analysis stemmed from the discount factor each applied to the net cash flow numbers utilized ("discount factor").

[36] Furthermore, Low was of the view, in part, because of the Synergy Rule, that Aquam would not be able to avail itself of the projected future cash flow for a period of 8.5 months immediately following the valuation date ("time delay"). It was his view that one could not presume that the refinancing resulting from the transaction or anything comparable would be available to the Company for an extended period post-closing and that, basically, there would not be free or future cash flow until a new financing arrangement had been put in place. His choice of the time delay was tied to his assessment of the time it took to conclude the original arrangement with NWCS. Needless to say, Rudson took issue with this proposition since he was of the view that its adoption offended the principles of basic DCF analysis.

Discount Factor

[37] I do not intend to parse the discount factors used by each of the experts or analyze the principles of "weighted cost of capital" ("WACC") with which concept I was bogged down in my reading of the expert reports, not made much easier during the course of their brief testimony before me.

[38] As best as I understood the concepts, the higher the WACC, the greater the risk, all of which resulted in a lower valuation.

[39] Suffice it to say that the largest point of departure between the two of them is found in what each expert described as the "company-specific risk premium" ("CSRP").

[40] I was told that this last number is more than anything infused with "professional judgment" and unlike the other criteria that goes into the mix, that premium is not based on immutable or industry specific concepts that seem to underpin the other elements of the discount factor.

[41] Each expert advanced "reasonable" arguments which factored into their respective CSRP calculations, which didn't permit me to readily prefer one number in preference to the other. I hasten to observe that Mr. Low's number was rooted, if not increased, by his opinion that Aquam was insolvent and at significant risk of liquidation, with which conclusion I was not completely in agreement. In my view, his number has to be tempered somewhat.

[42] That said, neither expert disagreed with my suggestion that I would not fall into error if I chose, in the final analysis, a discount factor that reflected the average of the high and low figures that each had used in his reports after analyzing, in some detail, their respective calculation of WACC. Accordingly, they undertook to provide me with a joint position which I could then use as a multiplicand in the final calculation of FMV. ¹²

Time Delay

[43] The time delay employed by Mr. Low generated a deduction from FMV that was almost as significant as the discount factor that he employed in reducing his calculation of the enterprise value of Aquam. Although not a straight arithmetic computation as it relates to the projected EBIDTA numbers furnished by management, and required some massaging, both experts undertook to provide me, as well, with a range of amounts that I could add to or subtract from the en bloc numbers depending upon how many months, if any, I determined was the appropriate impact on the DCF analysis.

[44] It was Mr. Rudson's position that there should be no time delay attributed to the use of the projected cash flows and it was more appropriate to consider that management's projections would commence on the valuation date. While no clear rationale for this conclusion was provided in his report, in his evidence before me, if I understood him correctly, he led me to believe that a DCF analysis did not call for, or indeed permit, any deferral in the use of the future or free cash flow as projected.

[45] This evidence is to be contrasted to his report where he said, at p. 61, the following:

• The financial projections were predicated on Aquam receiving financing to fund growth, retiring existing debt, etc. . . .
• While we understand that it would be inappropriate to include in the valuation of Aquam any "post-money" specific benefits included in the New World/Credit Suisse transaction we believe that the fact that New World/Credit Suisse provided a commitment to financing on April 3, 2018, approximately 2 weeks prior to the Valuation Date, is sufficient to make the assumption that the necessary financing to allow Aquam to continue in the normal course and experience the projections that management prepared was in existence as at the Valuation Date. ¹³

[46] While I understand conceptually that DCF is a valuation method that is rooted in estimated future cash flows and, theoretically, the financial structure of the "target" company is irrelevant to this method of valuation, I am not persuaded that its application to a company such as Aquam without any form of time delay is appropriate. I make that observation for several reasons:

(a) while I did conclude that Aquam was a company to which the liquidation method did not apply, its earnings record was, at best, short lived, and its historic EBITDA numbers were generated by acquisition and not by operations;

(b) similarly, the projections of management had to be viewed cautiously, if not conservatively, since the free cash flow scenarios could only be achieved once alternative financing, most probably equity as opposed to debt financing, was in place. In my view, because of the Synergy Rule, it was improper to assume away the debt if only for purpose of concluding the free cash numbers projected by management; and

(c) Aquam, no matter how one viewed its circumstances, was facing a liquidity crisis. Some time, in my view, was needed to put its economic house in order before the free cash flow projections, which appeared aggressive in the extreme, had any chance of being realized.

[47] I hasten to observe that I am not to be taken to suggest that any part of the free cash flows would theoretically be devoted to discharge the existing debt or service that debt. I am simply not persuaded that the operation of the Company was sufficient to generate the revenue projections internally.

[48] Conversely, I am not persuaded that Mr. Low's assessment of the time delay is appropriate. In my opinion, it would not, on a theoretical basis, have taken the Company 8.5 months to put equity financing in place, had Aquam been forced to canvass the waterfront, yet again, for alternatives to the transaction after the valuation date. In the first place, that process was relatively mature as of mid-April 2017, including but not limited to the then existing activities of management and its consultant Raymond James Ltd. While speculative in some respects, I was not persuaded that the "interest" previously exhibited by Gibraltar Industries and Herax Partners could not be resurrected on a more timely basis.

[49] Accordingly, I am of the view that a time delay of three months is appropriate in the circumstances.

Reasonability Assessment

[50] During the course of argument, as I was voicing my concerns about my lack of familiarity with and understanding of the expert reports, counsel for the Coffey-Fielding respondents attempted to allay my concerns on the valuation issue by directing me to the following excerpt in the purchase agreement:

. . . Adjusted Preferred Pre-Money Valuation resulting from the Core EBITDA Adjustment and the New Initiatives EBITDA Adjustment shall in no circumstances be less than $38,000,000 but may be further reduced by a Litigation Adjustment . . . ¹⁴

As best as I understood his argument, he was suggesting that I needed to look no further than the above number to support an adjusted pre-money value for Aquam of $38 million.

[51] While this approach was appealing on certain levels, I concluded it was too facile by half. Indeed, neither expert used it as a touchstone for value either because there were no back-up documents to give credence or support to the number, or because it was never intended to be a negotiated number for the common shares, but, was part of a formula for fixing the price and number for the preference shares that were issued to NWCS as part of the transaction.

[52] I am also of the view that the other value indicators -- en Bloc, described in more detail in Figure 17 of the Rudson report ¹⁵ are of marginal assistance in arriving at the appropriate FMV, other than to show the Low numbers as something of an outlier. None of the examples are representative of a valuation coincident to valuation date without having factored into the equation some aspect of the synergies of refinancing. To apply one of the scenarios in preference to another would engage me in a mugs game.

Conclusion

[53] As a precursor to my conclusory remarks, I want to take this opportunity to thank counsel and their respective experts for providing me with the adjusted valuation analysis which I have attached to these reasons for judgment. The neutral commentary and the explanations fleshed out by Messrs. Low and Rudson were very helpful and assisted me in understanding the complexities associated with the task with which I was mandated.

[54] In the final analysis, I am of the view that the valuation should reflect a three-month delay in its implementation. In that respect, I do not intend to repeat the analysis discussed above.

[55] I adopt the numbers found in Schedule 1 to the above appendix. I am also of the opinion that the "en bloc" FMV number should be reflective of the entire financing costs, which the experts have "compromised" at $1,612,000.

[56] The "en bloc" FMV figure for Aquam Corporation as at April 17, 2017 will be set at, net, $12,300,000, rounded. On that basis, the per share value, assuming my math is correct, will be $.304 per share based on a total share number of 40,421,491.

[57] I will leave it to counsel to calculate the exact payout for each of the respondents, accordingly. I may be contacted in the unlikely event that the exact payout for each of the respondents cannot be calculated.

[58] Having regard to the result, and absent a consideration of any offers to settle, I would urge the parties to resolve the costs associated with this application without judicial involvement. In the event that such cannot be resolved, I will convene a conference call to set out the parameters for submissions, if necessary.

Application allowed.

11/10/2018

Appendix 1

VALUATION OF AQUAM CORPORATION AS AT APRIL 17, 2017

ADJUSTED VALUES

AS REQUESTED BY MR. JUSTICE GANS

VALUATION OF AQUAM CORPORATION AS AT APRIL 17, 2017

ADJUSTED VALUES

AS REQUESTED BY MR. JUSTICE GANS ON SEPTEMBER 14, 2018

INTRODUCTION

Justice Gans requested the two business valuators, Robert Low and Wayne Rudson, to prepare revised valuation calculations ¹⁶ of Aquam Corporation based on certain adjustments to their valuation reports regarding the following:

i) WACC; ii) Capital expenditures; iii) Income taxes; iv) Working capital; v) Commencement of projected cash flows (delay); vi) Interest-bearing debt; and vii) Financing costs.

Each of the adjustments are individually discussed below.

i) WACC

The difference between Low's WACC (25 per cent to 27 per cent) and Rudson's WACC (21 per cent to 23 per cent) pertains to the company specific risk premium.

As instructed by Justice Gans, a midpoint of Low's WACC and Rudso's WACC of 24 per cent was utilized in the calculations attached hereto.

ii) Capital Expenditures

Low based his capital expenditures on discussions with management. Rudson based his capital expenditures on Aquam's financial statements and projections.

As instructed by Justice Gans, the midpoint of Low's and Rudson's amounts was utilized in the calculations attached hereto.

iii) Income Taxes

Low's income taxes reflect deductible interest at 12.25 per cent on the Wellington loan until September 2019 (interest expense ceased thereafter).

Rudson's income taxes reflect deductible interest at 12.50 per cent on the Wellington loan indefinitely.

A compromise has been adopted using 12.25 per cent until September 2019 and 6 per cent (estimated cost of debt) thereafter.

iv) Working Capital

Both valuators reduced projected cash flows for increased working capital requirements which is based on growth in projected revenue. Because of the 8.5-month delay, Low utilized a lower revenue amount in 2017 than in 2016 causing the increase to projected revenues to be larger, thus increasing the first year's working capital requirements. Rudson has not considered any delay to the onset of the projections and his working capital requirements are therefore lower. The difference, therefore, flows from the delay assumption and accordingly the calculations herein reflect the difference based on the delay periods discussed below.

Low disagrees with this characterization of the working capital difference relating only to the first year of the projection. Low believes that the $400, 000 difference should have been dealt with as a mid-point of $200, 000 throughout rather than on a delay basis. Each of the amounts on the conclusion summary and Schedule 1 for iv) working capital should have been ($200, 000) with commensurate effects on the adjusted values.

v) Commencement of Projected Cash Flows (Delay)

Low delays the commencement of the projected cash flows by 8.5 months. Rudson does not delay the commencement of the projected cash flows.

For the court's consideration, the revised value of Aquam has been calculated in various increments from no delay to 8.5-month delay.

vi) Interest-Bearing Debt

Low deducted $28,046,000 of interest-bearing debt based on a letter from Gardiner Roberts LLP. Rudson deducted $27,769,000 of interest-bearing debt based on the financial statements for the period ended March 31, 2017 (difference of $277,000).

Low recently provided additional documentation supporting the debt amount of $28,046,000. This amount is utilized in the calculations attached hereto.

vii) Financing Costs

Low deducts $1,708,000 of financing costs based on financing fees for both the first tranche (April 18, 2017) and second, optional tranche (August 4, 2017) of preferred share financing provided and to be provided by NWCS. Rudson deducts $1,515,000 of financing costs based on the first tranche of financing only. A mid-point adjustment of $97,000 was made.

Financing costs are shown as an "in and out" for the consideration of the court and the midpoint of the costs for both tranches of the NWCS preferred share financing is used in determining the adjusted values that deduct financing costs.

Low believes that it is important to note that while the financing costs were calculated based on the NWCS transactions, the deduction relates to the costs of replacement financing.

CONCLUSION

The revised value of Aquam based on the above adjustments is outlined in Schedule 1 attached and summarized as follows:

Rudso's "en bloc" value $19,300,000

• Alternate delay periods are illustrated in Schedule 1 attached hereto.

Notes

¹ R.S.O. 1990, c. B.16.

² Section 185(25) permits the court to appoint its own appraiser to "assist" in the fixing of fair value, a solution I toyed with. As a half way measure, I persuaded counsel to call each of the appraisers, Robert Low and Wayne Rudson, to testify before me in a brief viva voce hearing, namely to provide me with answers to "calculation" questions that I had previously set out in earlier correspondence. These witnesses were very helpful in providing the backdrop to conclusions each had set out in his report and, indeed, as will be explained later in these reasons, undertook calculations based on our discussions during the hearing.

On another note, I would urge the Commercial Court to eschew valuation hearings that are limited to the reports or affidavits filed by experts. First, the weight of the case law indicates that viva voce evidence of experts is the preferred course to follow. Second, in the interests of costs and court time, the reports can be tabled in chief, crosses undertaken before the hearing, as in this case, or live and before the judge, leaving time for the judge to ask questions for explanation purposes in the event that she or he is still struggling with the issues and concepts. In any event, the court should have the reports well in advance so that the judge can attempt to understand their essence. I would also suggest - although this is a view not universally accepted - that the experts meet in advance of trial, without the lawyers, to see if they can come up with a modest agreed statement of principles, and leave for judicial determination but few issues upon which agreement cannot be achieved.

³ Brant Investments Ltd. v. KeepRite Inc. (1991), 3 O.R. (3d) 289 (C.A.), at para. 127.

⁴ See Terranet Inc. v. Canarab Marketing Corp., 2008 ONSC 4036 (S.C.J.), at para. 27; Brant Investments Ltd. v. KeepRite Inc. (1987), 60 O.R. (2d) 737 (H.C.J.), at p. 26; Lydia Diamond Exploration of Canada Ltd. v. von Anhalt, 2011 ONSC 3862 (S.C.J.), at para. 54.

⁵ Smeenk v. Dexleigh Corp. (1990), 74 O.R. (2d) 385 (H.C.J.), at para. 51.

⁶ See Smeenk v. Dexleigh Corp., supra, at para. 50; Lydia Diamond Exploration of Canada Ltd. v. von Anhalt, supra, at para. 60; Terranet v. Canarab Marketing Corp., supra, at para. 92. See, also, Ford Motor Co. of Canada Ltd. v. Ontario Municipal Employees Retirement Board (1997), 36 O.R. (3d) 384 (C.A.), at paras. 5-11.

⁷ I have, for purposes of my analysis, not taken into consideration the recent Alberta trial and appeal decisions in RFG Private Equity Limited Partnership No. 1B v. Value Creation Inc., 2016 ABQB 391, affd 2018 ABCA 85. In the first place, the facts of that case are markedly different from those of the instant case and the valuation exercise which played out before a very experienced commercial trial judge was of marginal relevance to the issues with which I was faced. Second, and more importantly, I am not persuaded, as the applicant argued, that the decision of the Court of Appeal of Alberta flies in the face of the previously cited Ontario jurisprudence. That said, it is my intention to apply the principles articulated in the decisions referenced above.

⁸ Robert Low, Aquam Corporation Valuation Report (February 9, 2018), appellant's application record, Volume II of II, Tab 4.

⁹ "While each party who asserts a proposition must prove it by a preponderance of evidence on the balance of probabilities, there is no burden on either side to establish value, as this is a judgment for the court to make": Deer Creek Energy Ltd. v. Paulson & Co. Inc., 2008 ABQB 326, at para. 485. See, also, Silber v. BGR Precious Metals Inc. (1998), 41 O.R. (3d) 147 (Gen. Div.).

¹⁰ See the analysis in RFG Private Equity Limited Partnership No. 1B v. Value Creation Inc., supra (C.A.), at para. 31.

¹¹ As I will touch on later in this section, each of Messrs. Low and Rudson commenced their respective DCF models with the projected EBITDA numbers developed by management for a finite period post-valuation date. They then adjusted these base numbers by the addition or deduction of certain industry accepted line items. While there is no argument in respect of the propriety of the various line item adjustment chosen, the amounts utilized by either in this regard was the subject matter of modest debate between the two experts, which they agreed before me they would endeavour to reconcile on their own. See Robert Low and Wayne Rudson, Valuation of Aquam Corporation as at April 17, 2017: Adjusted Values as Requested by Mr. Justice Gans (October 11, 2018), p. 3, attached as Appendix A to these reasons for judgment.

¹² Robert Low and Wayne Rudson, Valuation of Aquam Corporation as at April 17, 2017: Adjusted Values as Requested by Mr. Justice Gans (October 11, 2018), Appendix A, p. 1.

¹³ Wayne Rudson, Aquam Corporation Valuation Report and Review of the Low Report (April 13, 2018), responding application record of Richard Coffey and Lisa Fielding, Volume II of II, Tab 2, p. 61 (emphasis added).

¹⁴ Aquam articles of amendment (April 19, 2017), application record, Volume I of II, Tab A, p. 1T.

¹⁵ Wayne Rudson, Aquam Corporation Valuation Report and Review of the Low Report (April 13, 2018), responding application record of Richard Coffey and Lisa Fielding, Volume II of II, Tab 2, p. 49.

¹⁶ The adjustments discussed herein and calculations attached hereto do not reflect the opinions of either valuator but reflect adjusted values based on various inputs from Justice Gans and discussions between the valuators. This document was drafted by Rudson. Where Low disagreed with the comments and calculator, these are noted in italics.