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ACT Energy Technologies Ltd. Interim / Quarterly Report 2020
42523_rns_2020-08-14_94e62075-3f00-4343-8d61-e62e78b85294.pdf
Interim / Quarterly Report
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FINANCIAL HIGHLIGHTS
Dollars in 000's except per share amounts
| Three months ended June 30 | Six months ended June 30 | |||
|---|---|---|---|---|
| 2020 | 2019 | 2020 | 2019 | |
| Revenues | $8,841 | $32,550 | $28,136 | $69,792 |
| Adjusted gross margin % (1) | 4% | 10% | 9% | 8% |
| Adjusted EBITDAS (1) | $(823) | $479 | $235 | $2,353 |
| Basic and diluted per share | $(0.02) | $0.01 | $- | $0.05 |
| As % of revenues | -9% | 1% | 1% | 3% |
| Cash flow- operating activities | $(641) | $(262) | $(2,584) | $(1,116) |
| Loss from operating activities | $(4,720) | $(4,668) | $(9,146) | $(8,373) |
| Basic per share | $(0.10) | $(0.09) | $(0.18) | $(0.17) |
| Impairments and direct write-downs | $- | $- | $(6,994) | $- |
| Loss | $(3,815) | $(5,342) | $(16,405) | $(8,966) |
| Basic per share | $(0.08) | $(0.11) | $(0.33) | $(0.18) |
| Equipment additions (recovery) - cash basis | $(86) | $1,564 | $769 | $3,527 |
| Weighted average shares outstanding | ||||
| Basic (000s) | 49,468 | 49,468 | 49,468 | 49,468 |
| Diluted (000s) | 49,468 | 49,468 | 49,468 | 49,469 |
| June 302020 | December 312019 | |||
| Working capital | $18,261 | $20,181 | ||
| Total assets | $83,346 | $106,300 | ||
| Loans and borrowings excluding current portion | $5,935 | $6,000 | ||
| Shareholders' equity | $53,864 | $68,092 |
(1) Refer to "NON-GAAP MEASUREMENTS"
MANAGEMENT'S DISCUSSION & ANALYSIS
This Management's Discussion & Analysis ("MD&A") for the three months ended June 30, 2020 should be read in conjunction with the annual audited consolidated financial statements and notes thereto for the year ended December 31, 2019, as well as the MD&A in the 2019 Annual Report of Cathedral Energy Services Ltd. (the "Company" or "Cathedral"). This MD&A has been prepared as of August 13, 2020. Dollar amounts are in '000's except for day rates and per share amounts.
2020 Q2 KEY TAKEAWAYS
Revenues decreased by $23,709 or 73% from $32,550 in 2019 Q2 to $8,841 in 2020 Q2;
Adjusted gross margin decreased from 10% to 4% primarily due an increase in the fixed component of cost of sales on a percentage of revenue basis offset by lower field labour;
Total Adjusted EBITDAS decreased $1,302, from $479 to $(823) in 2020 Q2 as a result of reduced revenues;
Net debt (secured revolving term loan less cash on hand) at end of 2020 Q2 was $1,170; and
The Company finalized an amendment to its credit facility to provide temporary covenant relief commencing 2020 Q2 and ending 2021 Q1.
COVID-19
In March 2020, the World Health Organization declared a global pandemic due to COVID-19. In response to the COVID-19 outbreak, governments around the world implemented measures to control the spread of the virus including closure of non-essential businesses and implementing travel bans and stay-at-home restrictions. These actions contributed to the material deterioration in global economy including a dramatic decline in demand for oil, which resulted in a material decrease in the price for oil. The decline in oil prices has negatively affected current and forecasted drilling activities in Cathedral's operating areas of U.S. and Canada. In response to the decline in oil prices, OPEC+ agreed to production reductions in April 2020 and recently extended reductions to the end of July. In addition, North American oil and natural gas producers have shut-in production due to low oil prices. Recently governmental bodies have started to remove restrictions related to COVID-19 and gradually re-opening businesses. This has resulted in an increase in demand for crude oil and resulted in an improvement in world oil prices. Oil prices have improved significantly since the drop in early March 2020 and are now in the $40 USD range.
The Company has made significant changes to its cost structure including laying off staff, reducing compensation, closing facilities, eliminating discretionary expenses, deferring tool repairs and reducing capital expenditures, to better match our cost structure to expected operating levels. The collapse in oil prices has negatively affected our client's cash flows and, as a result, in certain situations resulted in slower collection of accounts receivable and increased risk related to potential non-payment. Subject to market conditions and actual results, it is possible that the Company will be required to enter into discussions with its lender to amend the revised covenants under its credit facility.
All of these developments could have a material adverse effect on Cathedral's business, financial condition, results of operations, cash flows, ability to collect on accounts receivable and future impairments of Company assets. The duration and extent of business interruption and the financial impact cannot be reasonably determined and if it continues for an extended period, it could negatively impact Cathedral's ability to continue ongoing operations.
OUTLOOK
The COVID-19 pandemic and its macroeconomic effects continue to provide for an uncertain outlook for the oilfield service industry. Operating rig activity in U.S. and Canada remain at record lows and improvement is expected to be sluggish. Industry experts are forecasting 2020 Q3 to be the low in the U.S. active rig count with very modest improvements in activity levels are we progress through 2020 and into 2021. In Canada, the usual spring breakup related to weather turned into an economic breakup as oil prices did not warrant further drilling activity. Recently there has been an improvement in Canadian drilling rig activity but active rigs are down 66% on a year-over-year basis.
Operationally, our team has been executing on our Better Performance Every Day mantra and setting record drilling results for our clients. Those successes have and are expected to be, leveraged to attract new clients.
The significant adjustments to our fixed and variable cost structure that started at the tail end of Q1 continued into Q2 as we moved to better match our costs to expected operating levels. We continue to monitor our costs and are making further adjustments to our cost structure as warranted. In 2020 Q2, we recorded the benefit of $637 from the Canada Emergency Wage Subsidy ("CEWS") and Cathedral expects to apply and receive further benefits until the program expires. In 2020 Q3, we expect to finalize the portion of the U.S. Paycheck Protection Program ("PPP") that will be forgiven. We currently estimate that approximately 70% of the loan proceeds ($525 USD) may be forgiven, if the U.S. Treasury guidelines for forgiveness are met.
Cathedral's management team continues to focus on what it can control – cost structure, improving operational efficiencies, bringing new technologies to the market and strategic sales and marketing of our offerings.
2020 CAPITAL PROGRAM
During the six months ended June 30, 2020, the Company invested $769 (2019 - $3,527) in equipment. The following table details the current period's net equipment additions:
| Six months ended | |
|---|---|
| June 30, 2020 | |
| Equipment additions: | |
| Motors | $561 |
| MWD | 181 |
| Other | 27 |
| Total cash additions | 769 |
| Less: proceeds on disposal of equipment | (1,786) |
| Net equipment additions (1) | $(1,017) |
| (1)See "NON-GAAP MEASUREMENTS" |
Our 2020 capital plan will be modest and we expect our proceeds on disposal of equipment to exceed cash additions. Focus of 2020 capital plan will be motor power section additions for premium lines, addition of RapidFire MWD tools and mud lube bearing motor upgrades.
RESULTS OF OPERATIONS – THREE MONTHS ENDED JUNE 30
| Revenues | 2020 | 2019 |
|---|---|---|
| Canada | $1,130$ | 3,651 |
| United States | 7,711 | 28,899 |
| Total | $8,841$ | 32,550 |
Revenues 2020 Q2 revenues were $8,841, which represented a decrease of $23,709 or 73% from 2019 Q2 revenues of $32,550.
Canadian revenues (excluding motor rental revenues) decreased to $570 in 2020 Q2 from $2,911 in 2019 Q2; an 80% decrease. This decrease was the result of: i) a 79% decrease in activity days to 79 in 2020 Q2 from 375 in 2019 Q2 and ii) a 7% decrease in the average day rate to $7,217 in 2020 Q2 from $7,763 in 2019 Q2.
There was a 70% year-over-year decline in the average active land rig count in Canada (source: Baker Hughes) which compares to Cathedral's activity decline of 80%. Due to Cathedral's client mix, our decline was greater than the general market decline. The decrease in day rates was due to a reduction in certain ancillary revenues.
U.S. revenues (excluding motor rental revenues) decreased 74% to $7,456 in 2020 Q2 from $28,544 in 2019 Q2. This decrease was the result of: i) a 69% decrease in activity days to 627 in 2020 Q2 from 2,013 in 2019 Q2; and ii) a 16% decrease in the average day rate to $11,892 in 2020 Q2 from $14,180 in 2019 Q2 (when converted to Canadian dollars).
The average active land rig count for the U.S. was down 67% in 2020 Q2 compared to 2019 Q2 (source: Baker Hughes). The Company experienced a 60% decline in activity days resulting in an increase in market share compared to 2019 Q2. Day rates in USD decreased 19% to $8,551 USD in 2020 Q2 from $10,595 USD in 2019 Q2. The 2020 Q2 rate is down due to a decrease in revenues from providing rotary steerable system (RSS) services which are rented from a 3rd party and a reduction in certain ancillary revenues.
Motor rentals decreased in both Canada and the U.S. Combined rental revenues decreased to $815 in 2020 Q2 compared to $1,096 in 2019 Q2. The decrease is due to the decrease in drilling activity in 2020 Q2.
Government grants The Company recognized the benefit from the Canada Emergency Wage Subsidy ("CEWS") program of $637 (2019 - $nil) which reduced salary expenses as follows:
- Cost of sales $261;
- Selling, general and administrative expenses $264; and
- Technology group expenses $112.
Gross margin and adjusted gross margin Gross margin for 2020 Q2 was -36% compared to -5% in 2019 Q2. Adjusted gross margin (see Non-GAAP Measurements) for 2020 Q2 was $342 or 4% compared to $3,249 or 10% for 2019 Q2.
Adjusted gross margin, as a percentage of revenue, decreased due to the increase in the fixed component of cost of sales as a percentage of revenue (these costs decreased $2,960, but the total increased as percentage of revenues) offset slightly by lower field labour and inspection expense.
Depreciation of equipment allocated to cost of sales decreased to $3,540 in 2020 Q2 from $4,976 in 2019 Q2. Depreciation included in cost of sales as a percentage of revenue was 40% for 2020 Q2 and 15% in 2019 Q2.
Selling, general and administrative ("SG&A") expenses SG&A expenses were $1,814 in 2020 Q2; a decrease of $1,296 compared with $3,110 in 2019 Q2. There were reductions in SG&A wages and related benefits and burdens due to a reduction in head count and wage rollbacks as well as decreases in almost all categories of expenses due to efforts to reduce spending. As a percentage of revenue, SG&A was 21% in 2020 Q2 compared to 10% in 2019 Q2.
Technology group expenses Technology group expenses are related to new product development and supporting and upgrading existing technology. Technology group expenses consist of salaries and related benefits and burdens as well as shop supplies. Technology group activities spent on new product development are capitalized as intangible assets.
Technology group expenses were $205 in 2020 Q2; a decrease of $355 compared with $560 in 2019 Q2. The portion of total technology group costs related to new product development in 2019 Q2 was $269 and this amount has been capitalized as intangible assets (2020 Q2 - $nil). In light of the current market, Cathedral has consolidated its MWD repairs and, as part of this realignment, combined our Technology Group and MWD repair department. This has resulted in a reduction in overall head count of the combined group and will result in limited new product development in the near term.
Gain on disposal of equipment During 2020 Q2, the Company had a gain on disposal of equipment of $515 compared to $757 in 2019 Q2. These gains mainly related to equipment lost-in-hole. Proceeds from clients on lost-in-hole equipment are based on amounts specified in service agreements and, in most cases, these proceeds exceed the net book value of the equipment and result in a gain. The timing of lost-in-hole recoveries is not in the control of the Company and therefore can fluctuate significantly from quarter-to-quarter. In 2020 Q2, the Company received proceeds on disposal of equipment of $610 (2019 Q2 - $919).
Finance costs Finance costs consist of interest expenses on operating loans, long-term debt and bank charges of $89 for 2020 Q2 versus $139 for 2019 Q2.
Finance costs lease liability The lease liability interest decreased slightly to $239 from $256.
Foreign exchange The Company had a foreign exchange gain of $1,107 in 2020 Q2 compared to a gain of $483 in 2019 Q2 due to the fluctuations of the Canadian dollar relative to the U.S. dollar. The Company's foreign operations are denominated in USD and therefore, upon consolidation, gains and losses due to fluctuations in the foreign currency exchange rates are recorded as other comprehensive income on the balance sheet as a component of equity. However, gains and losses in the Canadian entity on U.S. denominated intercompany balances continue to be recognized in the statement of comprehensive income (loss). Included in the 2020 Q2 foreign currency loss are unrealized gain of $1,104 (2019 Q2 - gain of $516) related to intercompany balances.
Income tax In 2019 Q2, Cathedral derecognized $13,059 of deferred tax assets due to a recent history of tax losses within Cathedral's Canadian entity. As a result of this, where there are losses in the Canadian entity that are not recognized as deferred taxes the effective tax rate is not meaningful. Income tax expense is booked based upon expected annualized rates using the statutory rates of 25.5% for Canada and 23% for the U.S.
RESULTS OF OPERATIONS – SIX MONTHS ENDED JUNE 30
| Revenues | 2020 | 2019 |
|---|---|---|
| Canada | $8,466 | $11,015 |
| United States | 19,670 | 58,777 |
| Total | $28,136 | $69,792 |
Revenues 2020 revenues were $28,136, which represented a decrease of $41,656 or 60% from 2019 revenues of $69,792.
Canadian revenues (excluding motor rental revenues) decreased to $6,515 in 2020 from $9,357 in 2019; a 30% decrease. This decrease was the result of: i) a 29% decrease in activity days to 889 in 2020 from 1,249 in 2019 and ii) a 2% decrease in the average day rate to $7,329 in 2020 from $7,492 in 2019.
There was a 14% year-over-year decline in the average active land rig count in Canada (source: Baker Hughes) which compares to Cathedral's activity decline of 29%. Due to Cathedral's client mix, our decline was greater than the general market decline. The decrease in day rates was due to a reduction in certain ancillary revenues.
U.S. revenues (excluding motor rental revenues) decreased 67% to $19,160 in 2020 from $57,970 in 2019. This decrease was the result of: i) a 65% decrease in activity days to 1,492 in 2020 from 4,282 in 2019; and ii) a 5% decrease in the average day rate to $12,842 in 2020 from $13,538 in 2019 (when converted to Canadian dollars).
The average active land rig count for the U.S. was down 41% in 2020 compared to 2019 (source: Baker Hughes). The Company experienced a 65% decline in activity days resulting in an increase in market share compared to 2019. Day rates in USD decreased 7% to $9,437 USD in 2020 from $10,150 USD in 2019. The 2020 rate is down due to a decrease in revenues from reduction in certain ancillary revenues and change in client mix.
Motor rentals increased in Canada but decreased in the U.S. Combined rental revenues decreased very slightly to $2,460 in 2020 compared to $2,465 in 2019.
Government grants The Company recognized the benefit from the CEWS program of $637 (2019 - $nil) which reduced salary expenses as follows:
- Cost of sales $261;
- Selling, general and administrative expenses $264; and
- Technology group expenses $112.
Gross margin and adjusted gross margin Gross margin for 2020 was -19% compared to -5% in 2019. Adjusted gross margin (see Non-GAAP Measurements) for 2020 was $2,649 or 9% compared to $5,845 or 8% for 2019.
Adjusted gross margin, as a percentage of revenue, increased due to decrease in repairs, field labour and inspection expenses offset by the increase in the fixed component of cost of sales as a percentage of revenue (these costs decreased $4,706, but the total increased as percentage of revenues).
Depreciation of equipment allocated to cost of sales decreased to $7,916 in 2020 from $9,421 in 2019. Depreciation included in cost of sales as a percentage of revenue was 28% for 2020 and 13% in 2019.
Selling, general and administrative ("SG&A") expenses SG&A expenses were $4,624 in 2020; a decrease of $2,418 compared with $7,042 in 2019. There were reductions in SG&A wages and related benefits and burdens due to a reduction in head count and wage rollbacks as well as decreases in almost all categories of expenses due to efforts to reduce spending. As a percentage of revenue, SG&A was 16% in 2020 compared to 10% in 2019.
Technology group expenses Technology group expenses are related to new product development and supporting and upgrading existing technology. Technology group expenses consist of salaries and related benefits and burdens as well as shop supplies. Technology group activities spent on new product development are capitalized as intangible assets.
Technology group expenses were $735 in 2020; a decrease of $500 compared with $1,235 in 2019. The portion of total technology group costs related to new product development in 2020 was $195 and this amount has been capitalized as intangible assets (2019 - $499). In light of the current market, Cathedral has consolidated its MWD repairs and, as part of this realignment, combined our Technology Group and MWD repair department. This has resulted in a reduction in overall head count of the combined group and will result in limited new product development in the near term.
Gain on disposal of equipment During 2020, the Company had a gain on disposal of equipment of $1,519 compared to $3,550 in 2019. These gains mainly related to equipment lost-in-hole. Proceeds from clients on lost-in-hole equipment are based on amounts specified in service agreements and, in most cases, these proceeds exceed the net book value of the equipment and result in a gain. The timing of lost-in-hole recoveries is not in the control of the Company and therefore can fluctuate significantly from quarter-to-quarter. In 2020, the Company received proceeds on disposal of equipment of $1,786 (2019 - $4,881).
Finance costs Finance costs consist of interest expenses on operating loans, long-term debt and bank charges of $118 for 2020 versus $282 for 2019.
Finance costs lease liability The lease liability interest decreased slightly to $477 from $518.
Provision for settlement In 2019, the Company made a settlement in respect of a wage and hour complaint (the "Complaint") that was filed against the Company's wholly owned U.S. subsidiary. The Complaint alleged that employees of the previously disposed Production Testing and Flowback division were entitled to recover unpaid or incorrectly calculated overtime wages under the Fair Labor Standards Act.
Foreign exchange The Company had a foreign exchange loss of $1,329 in 2020 compared to a gain of $1,025 in 2019 due to the fluctuations of the Canadian dollar relative to the U.S. dollar. The Company's foreign operations are denominated in USD and therefore, upon consolidation, gains and losses due to fluctuations in the foreign currency exchange rates are recorded as other comprehensive income on the balance sheet as a component of equity. However, gains and losses in the Canadian entity on U.S. denominated intercompany balances continue to be recognized in the statement of comprehensive income (loss). Included in the 2020 foreign currency loss are unrealized loss of $1,360 (2019 - gain of $1,043) related to intercompany balances.
Impairment and direct write-downs Due to the decline in projected drilling activity for the remainder of 2020 and into 2021 as a result of the decrease in oil and natural gas prices, the Company determined that indicators of impairment existed as at March 31, 2020. The Company made a provision as a result of impairment test and direct write-downs of $6,994 in 2020 Q1 to right of use assets $6,834 and intangibles $160. As part of the Company's response to changes in drilling activity, the decision was made to consolidate its repair activities and there are plans to close or significantly reduce activities at certain locations and the right of use asset for these locations was written down to $nil. There were $160 intangible projects in progress where it is uncertain when or if staff resources will be available to bring the projects to commercialization. As such these projects were written down to $nil. There were no impairments or direct write-downs in 2019 Q1.
Income tax Due to U.S. legislative changes in 2020, an adjustment to prior year provision has been made to recognize the U.S. Federal portion of 2019 tax losses that will now be allowed to be carried back to 2018 and recovered.
In 2019, Cathedral derecognized $13,059 of deferred tax assets due to a recent history of tax losses within Cathedral's Canadian entity. As a result of this, where there are losses in the Canadian entity that are not recognized as deferred taxes the effective tax rate is not meaningful. Income tax expense is booked based upon expected annualized rates using the statutory rates of 25.5% for Canada and 23% for the U.S.
LIQUIDITY AND CAPITAL RESOURCES
Overview On an annualized basis, the Company's principal source of liquidity is cash generated from operations and proceeds from equipment lost-in-hole. In addition, the Company has the ability to fund liquidity requirements through its credit facility and the issuance of debt and/or equity. Cash flow - operating activities in 2020 decreased to a use of funds of $2,584 compared to use of funds of $1,116 in 2019. This decrease was primarily due to the impact of increased loss due to significantly lower revenues.
Working capital At June 30, 2020, the Company had working capital of $18,261 (December 31, 2019 - $20,181).
Credit facility In June 2020, the Company was able to amend its credit facility (the "Facility") for temporary covenant relief. At June 30, 2020, the Company's Facility consists of a $12 million extendible revolving credit facility which expires June 30, 2022. Previously, the Company had a syndicated facility that totaled $20 million, but this was in excess of current needs. The facility was reduced primarily to lower stand-by fees. With the decrease in the total facility, there is now only one lender and a single facility. Previously there were two lenders in a syndicate. The Facility is secured by a general security agreement over all present and future personal property. The Facility provides a definition of EBITDA ("Credit Agreement EBITDA") to be used in calculation of financial covenants.
The Facility bears interest at the financial institution's prime rate plus 0.75% to 2.25% or bankers' acceptance rate plus 1.75% to 3.00% with interest payable monthly. Interest rate spreads for the Facility depend on the level of funded debt compared to the 12 month trailing Credit Agreement EBITDA. The Facility provides a means to lock in a portion of the debt at interest rates through bankers' acceptance ("BA") based on the interest rate spread on the date the BA was entered into.
The covenant relief period ("CR period") commences on June 30, 2020 and ends on the earlier of March 31, 20121 or the date of written notice by the lender requesting an end to the CR period.
The financial covenants associated with the Facility excluding the CR period are:
Consolidated funded debt to consolidated Credit Agreement EBITDA ratio shall not exceed 3.0:1; and Consolidated interest coverage ratio shall not be less than 2.5:1.
During the CR period, the consolidated funded debt to consolidated Credit Agreement EBITDA ratio is waived and the consolidated interest coverage ratio is waived during the covenant relief period if funded debt is no more than $6 million. During the CR period, the following apply:
- Consolidated funded debt to tangible net worth ("TNW") ratio is to be no more than 10% for 2020 Q2 and Q3 and no more than 15% in 2020 Q4 and 2021 Q2. TNW is defined as shareholders' equity plus subordinated debt less investments in or amounts owed by any related party which does not constitute subordinated debt;
- Advances are limited to $10 million;
- During the covenant relief period aggregate capital expenditures (excluding non-cash utilization of existing inventory) for the fiscal year ended December 31, 2020, are not to exceed $2,000; and
- During the covenant relief period interest increases to bear interest at the financial institution's prime rate plus 1.75% to 3.25% or bankers' acceptance rate plus 3.00% to 4.25% with interest payable monthly.
Compliance with Facility covenants
At June 30, 2020, the Company had drawn $5,935 of its credit facility and had $3,747 in cash. At June 30, 2020, the Company had consolidated funded debt of $3,792 that includes six outstanding letters of credit ("LOC") which are included in the funded debt calculation. TNW was $52,023.
The calculation of the financial covenants under the Facility as at June 30, 2020 is as follows:
| Covenant | Actual Ratio | Required Ratio |
|---|---|---|
| Consolidated funded debt to TNW ratio | 7.3% | 10.0% (maximum) |
The Company was in compliance with all revised covenants at June 30, 2020.
Contractual obligations In the normal course of business, the Company incurs contractual obligations and those obligations are disclosed in the Company's annual financial statements for the year ended December 31, 2019.
As at June 30, 2020, the Company's has no commitment to purchase equipment.
The Company has issued the following six LOC:
- three securing rent payments on property leases and renew annually with the landlords. Two LOCs total $700 CAD for the first ten years of the lease and then reduces to $500 for the last five years of the lease. The third LOC is currently for $613 USD and increases annually based upon annual changes in rent;
- $75 USD issued for U.S. workers compensation coverage; and
- two securing the Company's corporate credit cards in the amounts of $75 CAD and $175 USD.
Share capital At August 13, 2020, the Company has 49,468,117 common shares and 2,416,500 options outstanding with a weighted average exercise price of $0.71.
CONTROLS AND PROCEDURES
The Chief Executive Officer ("CEO") and the Chief Financial Officer ("CFO") are responsible for designing disclosure controls and procedures ("DC&P") and internal controls over financial reporting ('ICFR') as defined in National Instrument 52-109 Certification of Disclosure in Issuer's Annual and Interim Filings ("52-109"), or causing them to be designed under their supervision, in order to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.
Cathedral's DC&P have been designed to provide reasonable assurance that material information relating to Cathedral is made known to the CEO and the CFO by others and that information required to be disclosed by Cathedral in its annual filings, interim filings or other reports filed or submitted by Cathedral under securities legislation is recorded, processed, summarized and reported within the time periods specified in applicable securities legislation.
Because of their inherent limitations, DC&P and ICFR may not prevent or detect all misstatements, errors or fraud. Control systems, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control systems are met.
The CEO and CFO have concluded that there have been no changes in internal controls for the period ended on March 31, 2020 that have materially affected, or are reasonably likely to materially affect, Cathedral's ICFR.
RISK FACTORS
The MD&A for the year ended December 31, 2019, which is included in the Company's 2019 Annual Report, includes an overview on risk factors associated with the Company and its operating entities. Those risk factors remain in effect as at June 30, 2020.
GOVERNANCE
The Audit Committee of the Board of Directors has reviewed this MD&A and the related unaudited condensed consolidated interim financial statements and recommended they be approved to the Board of Directors. Following a review by the full Board, the MD&A and financial statements were approved.
NEW AND FUTURE ACCOUNTING POLICIES
There were no new or amended standards issued during the three months ended March 31, 2020 that are applicable to the Company in future periods.
SUMMARY OF QUARTERLY RESULTS
| Jun | Mar | Dec | Sep | Jun | Mar | Dec | Sep | |
|---|---|---|---|---|---|---|---|---|
| Three month periods ended | 2020 | 2020 | 2019 | 2019 | 2019 | 2019 | 2018 | 2018 |
| Revenues | $8,841 | $ 19,295 | $ 19,299 | $ 31,185 | $ 32,550 | $ 37,242 | $ 43,127 | $ 42,570 |
| Adjusted EBITDAS (1)Adjusted EBITDAS (1) per share - | $(823) | $1,012 | $(702) | $2,236 | $479 | $1,874 | $3,412 | $6,190 |
| diluted | $(0.02) | $0.02 | $(0.01) | $0.05 | $0.01 | $0.04 | $0.07 | $0.13 |
| Net earnings (loss) | $ (3,815) | $ (12,590) | $ (6,068) | $ (4,153) | $ (5,342) | $ (3,624) | $ (17,858) | $3,001 |
| Net earnings (loss) per share - basicand diluted | $(0.08) | $(0.25) | $(0.12) | $(0.08) | $(0.11) | $(0.07) | $(0.36) | $0.06 |
(1) Refer to MD&A: see "NON-GAAP MEASURMENTS"
FORWARD LOOKING STATEMENTS
This MD&A contains certain forward-looking statements and forward-looking information (collectively referred to herein as "forward-looking statements") within the meaning of applicable Canadian securities laws. All statements other than statements of present or historical fact are forwardlooking statements. Forward-looking statements are often, but not always, identified by the use of words such as "anticipate", "achieve", "believe", "plan", "intend", "objective", "continuous", "ongoing", "estimate", "outlook", "expect", "may", "will", "project", "should" or similar words suggesting future outcomes. In particular, this MD&A contains forward-looking statements relating to, among other things: these COVID-19 developments could have a material adverse effect on Cathedral's business, financial condition, results of operations, cash flows, ability to collect on accounts receivable and future impairments of Company assets; the duration and extent of business interruption and the financial impact cannot be reasonably determined and if it continues for an extended period, it could negatively impact Cathedral's ability to continue ongoing operations; and projected capital expenditures and commitments and the financing thereof; improvement is expected to be sluggish; industry experts are forecasting 2020 Q3 to be the low in the U.S. active rig count with very modest improvements in activity levels are we progress through 2020 and into 2021; those successes have and are expected to be, leveraged to attract new clients; Cathedral expects to apply and receive further benefits until the CEWS program expires; in 2020 Q3, we expect to finalize the portion of the U.S. PPP that will be forgiven; we currently estimate that approximately 70% of the loan proceeds ($525 USD) may be forgiven; and projected capital expenditures and commitments and the financing thereof.
The Company believes the expectations reflected in such forward-looking statements are reasonable as of the date hereof but no assurance can be given that these expectations will prove to be correct and such forward-looking statements should not be unduly relied upon.
Various material factors and assumptions are typically applied in drawing conclusions or making the forecasts or projections set out in forward-looking statements. Those material factors and assumptions are based on information currently available to the Company, including information obtained from third party industry analysts and other third party sources. In some instances, material assumptions and material factors are presented elsewhere in this MD&A in connection with the forward-looking statements. You are cautioned that the following list of material factors and assumptions is not exhaustive. Specific material factors and assumptions include, but are not limited to:
- the performance of Cathedral's business
- impact of economic and social trends;
- oil and natural gas commodity prices and production levels;
- capital expenditure programs and other expenditures by Cathedral and its customers;
- the ability of Cathedral to retain and hire qualified personnel;
- the ability of Cathedral to obtain parts, consumables, equipment, technology, and supplies in a timely manner to carry out its activities;
- the ability of Cathedral to maintain good working relationships with key suppliers;
- the ability of Cathedral to retain customers, market its services successfully to existing and new customers and reliance on major customers;
- risks associated with technology development and intellectual property rights;
- obsolesce of Cathedral's equipment and/or technology;
- the ability of Cathedral to maintain safety performance;
- the ability of Cathedral to obtain adequate and timely financing on acceptable terms;
- the ability of Cathedral to comply with the terms and conditions of its credit facility;
- the ability to obtain sufficient insurance coverage to mitigate operational risks;
- currency exchange and interest rates;
- risks associated with future foreign operations;
- risks associated with acquisitions, dispositions and business development efforts;
- environmental risks;
- business risks resulting from weather, disasters and related to information technology;
- changes under governmental regulatory regimes and tax, environmental, climate and other laws in Canada and the U.S.; and
- competitive risks.
Forward-looking statements are not a guarantee of future performance and involve a number of risks and uncertainties some of which are described herein. Such forward-looking statements necessarily involve known and unknown risks and uncertainties, which may cause the Company's actual performance and financial results in future periods to differ materially from any projections of future performance or results expressed or implied by such forward-looking statements. These risks and uncertainties include, but are not limited to, the risks identified in this MD&A and in the Company's Annual Information Form under the heading "Risk Factors". Any forward-looking statements are made as of the date hereof and, except as required by law, the Company assumes no obligation to publicly update or revise such statements to reflect new information, subsequent or otherwise.
All forward-looking statements contained in this MD&A are expressly qualified by this cautionary statement. Further information about the factors affecting forward-looking statements is available in the Company's current Annual Information Form that has been filed with Canadian provincial securities commissions and is available on www.sedar.com.
NON-GAAP MEASUREMENTS
Cathedral uses certain performance measures throughout this document that are not defined under GAAP. Management believes that these measures provide supplemental financial information that is useful in the evaluation of Cathedral's operations and are commonly used by other oilfield companies. Investors should be cautioned, however, that these measures should not be construed as alternatives to measures determined in accordance with GAAP as an indicator of Cathedral's performance. Cathedral's method of calculating these measures may differ from that of other organizations, and accordingly, may not be comparable.
The specific measures being referred to include the following:
i) Adjusted gross margin" - calculated as gross margin plus non-cash items (depreciation and share-based compensation); is considered a primary indicator of operating performance (see tabular calculation);
ii) "Adjusted gross margin %" - calculated as adjusted gross margin divided by revenues; is considered a primary indicator of operating performance (see tabular calculation);
iii) "Adjusted EBITDAS" - defined as earnings before finance costs, unrealized foreign exchange on intercompany balances, taxes, depreciation, non-recurring costs (including severance), write-down of equipment, write-down of inventory and share-based compensation; is considered an indicator of the Company's ability to generate funds flow from operations prior to consideration of how activities are financed, how the results are taxed and measured and non-cash expenses (see tabular calculation);
iv) "Net equipment additions" – is equipment additions expenditures less proceeds from equipment lost down-hole. Cathedral uses net equipment additions to assess net cash flows related to the financing of Cathedral's equipment additions.
The following tables provide reconciliations from GAAP measurements to non-GAAP measurements referred to in this MD&A:
Adjusted gross margin
| Three months ended June 30 | Six months ended June 30 | ||||||
|---|---|---|---|---|---|---|---|
| 2020 | 2019 | 2020 | 2019 | ||||
| Gross margin | $(3,216) | $ | (1,755) | $(5,306) | $ | (3,646) | |
| Add non-cash items included in cost of sales: | |||||||
| Depreciation | 3,540 | 4,976 | 7,916 | 9,421 | |||
| Share-based compensation | 18 | 28 | 39 | 70 | |||
| Adjusted gross margin | $342 | $ | 3,249 | $2,649 | $ | 5,845 | |
| Adjusted gross margin % | 4% | 10% | 9% | 8% |
Adjusted EBITDAS
| Three months ended June 30 | Six months ended June 30 | |||
|---|---|---|---|---|
| 2020 | 2019 | 2020 | 2019 | |
| Loss before income taxes | $(3,941) | $(4,966) | $(18,064) | $(8,534) |
| Add: | ||||
| Depreciation included in cost of sales | 3,540 | 4,976 | 7,916 | 9,421 |
| Depreciation included in selling, general and administrative | ||||
| expenses | 147 | 19 | 279 | 770 |
| Share-based compensation included in cost of sales | 18 | 28 | 39 | 70 |
| Share-based compensation included in selling, general and | ||||
| administrative expenses | 46 | 77 | 87 | 184 |
| Finance costs | 89 | 139 | 118 | 282 |
| Finance costs lease liabilities | 239 | 256 | 477 | 518 |
| Subtotal | 138 | 529 | (9,148) | 2,711 |
| Impairment and direct write-downs | - | - | 6,994 | - |
| Unrealized foreign exchange (gain) loss on intercompany | ||||
| balances | (1,104) | (516) | 1,360 | (1,043) |
| Provision for settlement | - | 386 | - | 386 |
| Non-recurring expenses | 143 | 80 | 1,029 | 299 |
| Total Adjusted EBITDAS | $(823) | $479 | $235 | $2,353 |
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
June 30, 2012 and December 31, 2019 Dollars in '000s (unaudited)
| June 30 | December 31 | |
|---|---|---|
| 2020 | 2019 | |
| Assets | ||
| Current assets:Cash | $3,747 | $7,223 |
| Trade receivables | 8,959 | 14,802 |
| Prepaid expenses | 1,282 | 1,668 |
| Inventories | 9,726 | 10,423 |
| Current tax recoveries | 861 | - |
| Total current assets | 24,575 | 34,116 |
| Equipment (note 3) | 40,688 | 46,882 |
| Intangible assets | 2,693 | 3,019 |
| Right of use asset (note 4) | 12,113 | 19,590 |
| Deferred tax assets | 3,277 | 2,693 |
| Total non-current assets | 58,771 | 72,184 |
| Total assets | $83,346 | $106,300 |
| Liabilities and Shareholders' EquityCurrent liabilities: | ||
| Trade and other payables | $3,881 | $11,308 |
| Current taxes payable | - | 314 |
| Lease liabilities, current (note 4) | 2,229 | 2,145 |
| Provision for settlements, current | 204 | 168 |
| Total current liabilities | 6,314 | 13,935 |
| Loans and borrowings (note 5) | 5,935 | 6,000 |
| Provision for settlements, long-term | 81 | 156 |
| Lease liabilities, long-term (note 4) | 17,152 | 18,117 |
| Total non-current liabilities | 23,168 | 24,273 |
| Total liabilities | 29,482 | 38,208 |
| Shareholders' equity: | ||
| Share capital (note 6) | 88,155 | 88,155 |
| Contributed surplus | 10,990 | 10,864 |
| Accumulated other comprehensive income | 11,985 | 9,934 |
| Deficit | (57,266) | (40,861) |
| Total shareholders' equity | 53,864 | 68,092 |
| Total liabilities and shareholders' equity | $83,346 | $106,300 |
See accompanying notes to condensed consolidated interim financial statements.
Notice of No Auditor Review of Unaudited Condensed Consolidated Interim Financial Statements
Under National Instrument 51-102, Part 4, subsection 4.3(3)(a), if an auditor has not performed a review of the interim financial statements, they must be accompanied by a notice indicating that the financial statements have not been reviewed by an auditor.
The accompanying unaudited condensed consolidated interim financial statements of Cathedral Energy Services Ltd. (the "Company") have been prepared by and are the responsibility of the Company's management. The Company's independent auditor has not performed a review of these unaudited condensed consolidated interim financial statements in accordance with standards established by the Chartered Professional Accountants of Canada for a review of interim financial statements by an entity's auditor
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS
Three and six months ended June 30, 2020 and 2019 Dollars in '000s except per share amounts (unaudited)
| 2020Revenues (note 7)$8,841Cost of sales:Direct costs(8,499)Depreciation(3,540)Share-based compensation(18)Total cost of sales(12,057)Gross margin(3,216)Selling, general and administrative expenses: | Three months ended June 30 | Six months ended June 30 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2019 | 2020 | 2019 | ||||||||
| $ | 32,550 | $ | 28,136 | $ | 69,792 | |||||
| (29,301) | (25,487) | (63,947) | ||||||||
| (4,976) | (7,916) | (9,421) | ||||||||
| (28) | (39) | (70) | ||||||||
| (34,305) | (33,442) | (73,438) | ||||||||
| (1,755) | (5,306) | (3,646) | ||||||||
| Direct costs(1,621) | (3,014) | (4,258) | (6,088) | |||||||
| Depreciation(147) | (19) | (279) | (770) | |||||||
| Share-based compensation(46) | (77) | (87) | (184) | |||||||
| Total selling, general and administrative expenses(1,814) | (3,110) | (4,624) | (7,042) | |||||||
| (5,030) | (4,865) | (9,930) | (10,688) | |||||||
| Technology group expenses(205) | (560) | (735) | (1,235) | |||||||
| Gain on disposal of equipment515 | 757 | 1,519 | 3,550 | |||||||
| Loss from operating activities(4,720) | (4,668) | (9,146) | (8,373) | |||||||
| Finance costs(89) | (139) | (118) | (282) | |||||||
| Finace costs lease liabilities(239) | (256) | (477) | (518) | |||||||
| Provision for settlement- | (386) | - | (386) | |||||||
| Foreign exchange gain (loss)1,107 | 483 | (1,329) | 1,025 | |||||||
| Impairment and direct write-downs- | - | (6,994) | - | |||||||
| Loss before income taxes(3,941) | (4,966) | (18,064) | (8,534) | |||||||
| Income tax recovery (expense): | ||||||||||
| Current- | - | 1,187 | - | |||||||
| Deferred126 | (376) | 472 | (432) | |||||||
| Total income tax recovery (expense)126 | (376) | 1,659 | (432) | |||||||
| Loss(3,815) | (5,342) | (16,405) | (8,966) | |||||||
| Other comprehensive income (loss):Foreign currency translation differences for foreign | ||||||||||
| operations(1,454) | (957) | 2,051 | (2,003) | |||||||
| Total comprehensive loss$(5,269) | ||||||||||
| Loss per shareBasic$(0.08) | $ | (6,299) | $ | (14,354) | $ | (10,969) |
See accompanying notes to condensed consolidated interim financial statements.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Three and six months ended June 30, 2020 and 2019 Dollars in '000s (unaudited)
| Accumulated | |||||
|---|---|---|---|---|---|
| other | Total | ||||
| Contributed | comprehensive | shareholders' | |||
| Share capital | surplus | income | Deficit | equity | |
| Balance at December 31, 2018 | $88,155 | $10,410 | $12,252 | $(21,674) | $89,143 |
| Total comprehensive loss for six months | |||||
| ended June 30, 2019 | - | - | (2,003) | (8,966) | (10,969) |
| Share-based compensation | - | 254 | - | - | 254 |
| Balance at June 30, 2019 | $88,155 | $10,664 | $10,249 | $(30,640) | $78,428 |
| Balance at December 31, 2019 | $88,155 | $10,864 | $9,934 | $(40,861) | $68,092 |
| Total comprehensive income (loss) for six months | |||||
| ended June 30, 2020 | - | - | 2,051 | (16,405) | (14,354) |
| Share-based compensation | - | 126 | - | - | 126 |
| Balance at June 30, 2020 | $88,155 | $10,990 | $11,985 | $(57,266) | $53,864 |
See accompanying notes to condensed consolidated interim financial statements.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Three and six months ended June 30, 2020 and 2019 Dollars in '000s (unaudited)
| Three months ended June 30 | Six months ended June 30 | |||||
|---|---|---|---|---|---|---|
| 2020 | 2019 | 2020 | 2019 | |||
| Cash provided by (used in): | ||||||
| Operating activities: | ||||||
| Loss | $(3,815) | $(5,342) | $(16,405) | $ | (8,966) | |
| Items not involving cash | ||||||
| Depreciation | 3,687 | 4,995 | 8,195 | 10,191 | ||
| Share-based compensation | 64 | 105 | 126 | 254 | ||
| Income tax expense (recovery) | (126) | 376 | (1,659) | 432 | ||
| Gain on disposal of equipment | (515) | (757) | (1,519) | (3,550) | ||
| Finance costs | 89 | 139 | 118 | 282 | ||
| Finance costs lease liability | 239 | 256 | 477 | 518 | ||
| Provision for settlement | - | 386 | - | 386 | ||
| Unrealized foreign exchange (gain) loss on | ||||||
| intercompany balances | (1,104) | (516) | 1,360 | (1,043) | ||
| Impairment and direct write-downs | - | - | 6,994 | - | ||
| Cash flow- continuing operations | (1,481) | (358) | (2,313) | (1,496) | ||
| Changes in non-cash operating working capital | 839 | 1,130 | (241) | 1,417 | ||
| Income taxes paid | 1 | (1,034) | (30) | (1,037) | ||
| Cash flow- operating activities | (641) | (262) | (2,584) | (1,116) | ||
| Investing activities: | ||||||
| Equipment additions | 86 | (1,564) | (769) | (3,527) | ||
| Intangible asset additions | 26 | (273) | (212) | (658) | ||
| Proceeds on disposal of equipment | 610 | 919 | 1,786 | 4,881 | ||
| Changes in non-cash investing working capital | (55) | 564 | (58) | (698) | ||
| Cash flow- investing activities | 667 | (354) | 747 | (2) | ||
| Financing activities: | ||||||
| Change in operating loan | - | 1,691 | - | 1,503 | ||
| Repayments on loans and borrowings | (622) | (541) | (1,210) | (1,115) | ||
| Interest paid | (328) | (395) | (595) | (800) | ||
| Payment on settlements | - | - | (42) | (40) | ||
| Cash flow- financing activities | (950) | 755 | (1,847) | (452) | ||
| Effect of exchange rate on changes on cash | (174) | (116) | 208 | (246) | ||
| Change in cash | (1,098) | 23 | (3,476) | (1,816) | ||
| Cash, beginning of period | 4,845 | 5,036 | 7,223 | 6,875 | ||
| Cash, end of period | $3,747 | $5,059 | $3,747 | $ | 5,059 |
See accompanying notes to condensed consolidated interim financial statements.
Three and six months ended June 30, 2020 and 2019
Dollars in '000s except per share amounts (unaudited)
1. Reporting entity
Cathedral Energy Services Ltd. (the "Company" or "Cathedral") is a company domiciled in Canada. The Company is a publicly traded company listed on the Toronto Stock Exchange under symbol "CET". The consolidated financial statements of the Company as at and for the period ended March 31, 2020 comprise the Company and its 100% owned subsidiary, Cathedral Energy Services Inc. ("INC"), (together referred to as "Cathedral"). INC is incorporated in the United States of America ("U.S.") and its functional currency is U.S. dollars ("USD").
The Company and INC are primarily involved and engaged in the business of providing directional drilling services to oil and natural gas companies in western Canada and the U.S.
2. Basis of preparation
(a) Statement of compliance
These unaudited condensed consolidated interim financial statements have been prepared in accordance with International Accounting Standard 34, Interim Financial Reporting ("IAS 34") ("IFRS" or "GAAP").
Accordingly, certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with IFRS, as issued by the International Accounting Standards Board ("IASB"), have been omitted or condensed. It also requires management to exercise judgment in applying the Company's accounting policies. These unaudited condensed consolidated interim financial statements should be read in conjunction with the Company's consolidated financial statements for the year ended December 31, 2019, which are included in the Company's 2019 Annual Report.
The unaudited condensed consolidated interim financial statements were authorized for issue by the Board of Directors on August 13, 2020.
(b) Basis of measurement
The unaudited condensed consolidated interim financial statements have been prepared on the historical cost basis.
(c) Functional and presentation currency
These unaudited condensed consolidated interim financial statements are presented in Canadian dollars ("CAD"), which is the Company's functional currency. All financial information presented in dollars has been rounded to the nearest thousand except for share and per share amounts.
(d) Significant accounting policies
These unaudited condensed interim consolidated financial statements have been prepared in accordance with IFRS using the same accounting policies as outlined in note 3 of the consolidated financial statements for the year ended December 31, 2019 and have been applied consistently by the Company, except as described below:
(i) Accounting for government grants
The Company applied IAS 20 - Accounting for Government Grants and Disclosure of Government Assistance in relation to receiving the Canada Emergency Wage Subsidy ("CEWS") as part of the federal government of Canada's response to the COVID-19 health pandemic. Government assistance is recognized only when there is reasonable assurance that (a) the Company will comply with any conditions attached to the grant and (b) the grant will be received. The government grants and/or subsidies are recognized in profit or loss on a systematic basis over the periods in which the Company recognizes the expense for the related costs for which the grants and/or subsidies are intended to compensate. The Company has elected to present these amounts to offset the related expense.
(e) Future Accounting Pronouncements
There were no new or amended standards issued during the period ended March 31, 2020 that are applicable to the Company in future periods.
(f) Use of estimates and judgements
The preparation of the condensed consolidated interim financial statements in conformity with GAAP requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected. The significant judgements made by management in applying the Company's accounting policies and the information used in assessing uncertainty and have not changed significantly since December 31, 2019.
In March 2020, the World Health Organization declared a global pandemic due to COVID-19. In response to the COVID-19 outbreak, governments around the world implemented measures to control the spread of the virus including closure of non-essential businesses and implementing travel bans and stay-at-home restrictions. These actions contributed to the material deterioration in global economy including a dramatic decline in demand for oil, which resulted in a material decrease in the price for oil. The decline in oil prices has negatively affected current and forecasted drilling activities in Cathedral's operating areas of U.S. and Canada. In response to the decline in oil prices, OPEC+ agreed to production reductions in April 2020 and recently extended reductions to the end of July. In addition, North American oil and natural gas producers have shut-in production due to low oil prices. Recently governmental bodies have started to remove restrictions related to COVID-19 and gradually re-opening businesses. This has resulted in an increase in demand for crude oil and resulted in an improvement in world oil prices. Oil prices have improved significantly since the drop in early March 2020 and are now in the $40 USD range.
The Company has made significant changes to its cost structure including laying off staff, reducing compensation, closing facilities, eliminating discretionary expenses, deferring tool repairs and reducing capital expenditures, to better match our cost structure to expected operating levels. The collapse in oil prices has negatively affected our client's cash Subject to market conditions and actual results, it is possible that the Company will be required to enter into discussions with its lender to amend the revised covenants under its credit facility.
All of these developments could have a material adverse effect on Cathedral's business, financial condition, results of operations, cash flows, ability to collect on accounts receivable and future impairments of Company assets. The duration and extent of business interruption and the financial impact
cannot be reasonably determined and if it continues for an extended period, it could negatively impact Cathedral's ability to continue ongoing operations.
3. Equipment
During the period, there were additions to drilling equipment of $769 (2019 - $3,527).
4. Right of use asset and lease liabilities
| Right of use asset - Real Property | June 30 | December 31 |
|---|---|---|
| 2020 | 2019 | |
| Balance, start of period | 19,590 | $- |
| Initial recognition | - | 22,356 |
| Depreciation | (1,045) | (2,718) |
| Impairments and direct write-downs | (6,834) | - |
| Exchange adjustments | 402 | (48) |
| Balance, end of period | $12,113 | $19,590 |
Lease liabilities
| Lease liabilities | Real | ||
|---|---|---|---|
| Vehicles | Property | Total | |
| Balance, December 31, 2019 | $31 | $20,231 | $20,262 |
| Interest | - | 470 | 470 |
| Disposals | (2) | - | (2) |
| Payments | (5) | (1,611) | (1,616) |
| Exchange adjustments | - | 267 | 267 |
| Subtotal | $24 | $19,357 | $19,381 |
| Less current portion | (24) | (2,205) | (2,229) |
| Lease liabilities, long-term | $- | $17,152 | $17,152 |
The maturity analysis of the undiscounted contractual balances of the lease liabilities is as follows:
| In one year or less | $3,043 |
|---|---|
| In more than one year, but not more than five years | 453 |
| In more than five years | 11,723 |
| Total | $15,219 |
5. Impairments and direct write-downs
Review for impairment and direct write-offs
The Company reviews the carrying value of equipment and intangible assets at each reporting period to determine if there are indicators of impairment. The Company determined an impairment test for the sole directional drilling CGU was required as at March 31, 2020 due to the existing and projected decline in drilling activity. The Company did not identify any triggers for further impairment testing or impairment reversal at June 30, 2020.
The recoverable amount of the CGU was determined using the discounted cash flow model for value-in-use for the CGU. This was determined based on a detailed budget of revenues for the remainder of 2020 and for 2021 on a quarterly basis which was prepared based upon revenue forecasted by heads of sales departments. The budget was prepared with consultation of senior operating managers and accounting staff based upon existing costs, historical information and anticipated cost reductions. The detailed budget was used to prepare a high level for the next ten years. Variable costs were adjusted based on percentage of sales, while fixed costs were maintained at current levels per activity day.
It is estimated that U.S. operations will experience an approximate 50% decrease in 2020. It is then estimated that activity will remain relatively flat in 2021, but will increase by 25% in 2022. Subsequently, growth rates in 2023 to 2025 range from 5% to 10% and 2% thereafter. For Canada, activity in 2020 is estimated to decrease approximately 55%. It is then estimated that activity will grow by 24% in 2021 and 10% in 2022. Subsequently, growth rates in 2023 to 2025 range from 2.5% to 5% and 2% thereafter
The forecasted cash flows are based on management's best estimates of pricing, activity levels, costs to maintain equipment and a pre‐tax discount rate of 17% per annum. A terminal value was used based on the annual growth rate for cash flows through the remainder of the segment's life.
The most sensitive inputs to the value in use model are the discount rate and the U.S. activity growth rate:
- A 0.5% increase in the discount rate would have resulted in an additional impairment of $2.7 million;
- A 1% decrease to U.S. activity growth in each of 2021 and 2022 would have resulted in an additional impairment of $0.9 million
Additionally, there were write-downs of $160 related to intangible projects in progress where there was uncertainty related to commercialization of the project in a reasonable time frame.
6. Loans and borrowings
| June 30 | December 31 | |
|---|---|---|
| 2020 | 2019 | |
| Non-current liabilities: | ||
| Secured revolving term loan | $4,917 | $6,000 |
| U.S. Paycheck Protection Program loan ("PPP") | 1,018 | - |
| Total | $5,935 | $6,000 |
PPP
On May 8, 2020, Cathedral received approval under an application for a "PPP" of $750 USD. The loan will bear interest at 1% per annum and will mature on May 8, 2022. The proceeds will be used to support payroll expenditures for Cathedral's U.S. employees. A portion of the loan proceeds may be forgivable in accordance with certain U.S. Treasury guidelines. Cathedral estimates that approximately 70% of the loan proceeds ($525 USD) may be forgiven, if the U.S. Treasury guidelines are met. Management continues to evaluate and apply for any additional U.S. and Canadian federal, state and provincial government relief programs for which Cathedral qualifies.
At June 30, 2020, the Company had not recognized any potential amount of forgiveness of the loan as the period of coverage had not ended.
Bank facility
In June 2020, the Company was able to amend its credit facility (the "Facility") for temporary covenant relief. At June 30, 2020, the Company's Facility consists of a $12 million extendible revolving credit facility which expires June 30, 2022. Previously, the Company had a syndicated facility that totaled $20 million, but this was in excess of current needs. The facility was reduced primarily to lower stand-by fees. With the decrease in the total facility, there is now only one lender and a single facility. Previously there were two lenders in a syndicate. The Facility is secured by a general security agreement over all present and future personal property. The Facility provides a definition of EBITDA ("Credit Agreement EBITDA") to be used in calculation of financial covenants.
The Facility bears interest at the financial institution's prime rate plus 0.75% to 2.25% or bankers' acceptance rate plus 1.75% to 3.00% with interest payable monthly. Interest rate spreads for the Facility depend on the level of funded debt compared to the 12 month trailing Credit Agreement EBITDA. The Facility provides a means to lock in a portion of the debt at interest rates through bankers' acceptance ("BA") based on the interest rate spread on the date the BA was entered into.
The covenant relief period ("CR period") commences on June 30, 2020 and ends on the earlier of March 31, 20121 or the date of written notice by the lender requesting an end to the CR period.
The financial covenants associated with the Facility excluding the CR period are:
Consolidated funded debt to consolidated Credit Agreement EBITDA ratio shall not exceed 3.0:1; and Consolidated interest coverage ratio shall not be less than 2.5:1.
During the CR period, the consolidated funded debt to consolidated Credit Agreement EBITDA ratio is waived and the consolidated interest coverage ratio is waived during the covenant relief period if funded debt is no more than $6 million. During the CR period, the following apply:
- Consolidated funded debt to tangible net worth ("TNW") ratio is to be no more than 10% for 2020 Q2 and Q3 and no more than 15% in 2020 Q4 and 2021 Q2. TNW is defined as shareholders' equity plus subordinated debt less investments in or amounts owed by any related party which does not constitute subordinated debt;
- Advances are limited to $10 million;
- During the covenant relief period aggregate capital expenditures (excluding non-cash utilization of existing inventory) for the fiscal year ended December 31, 2020, are not to exceed $2,000; and
- During the covenant relief period interest increases to bear interest at the financial institution's prime rate plus 1.75% to 3.25% or bankers' acceptance rate plus 3.00% to 4.25% with interest payable monthly.
Compliance with Facility covenants
At June 30, 2020, the Company had drawn $5,935 of its credit facility and had $3,747 in cash. At June 30, 2020, the Company had consolidated funded debt of $3,792 that includes six outstanding letters of credit ("LOC") which are included in the funded debt calculation. TNW was $52,023.
The calculation of the financial covenants under the Facility as at June 30, 2020 is as follows:
| Covenant | Actual Ratio | Required Ratio |
|---|---|---|
| Consolidated funded debt to TNW ratio | 7.3% | 10.0% (maximum) |
The Company was in compliance with all revised covenants at June 30, 2020.
7. Share capital
Authorized: An unlimited number of common shares and an unlimited number of preferred shares (issuable in series).
Common shares issued:
| Six months ended | ||
|---|---|---|
| June 30, 2020 | ||
| Number | Amount | |
| Issued, beginning and end of period | 49,468,117 | $88,155 |
Basic earnings (loss) per share
The calculation of basic earnings per share for the three and six months ended June 30, 2020 was based on the loss attributable to common shareholders of $(3,815) and $(12,590) (2019 – $(5,342) and $(8,966)). As there were no changes to issued shares, the issued shares equals the
weighted average number of common shares.
Diluted earnings (loss) per share
There is no diluted calculation in 2020 or 2019 as the Company incurred a loss. The weighted average number of common shares outstanding after adjustment for the effects of all dilutive potential common shares as follows:
Weighted average number of common shares (diluted)
| Three months ended June 30 | Six months ended June 30 | ||||
|---|---|---|---|---|---|
| 2020 | 2019 | 2020 | 2019 | ||
| Weighted average number of common shares (basic) | 49,468,117 | 49,468,117 | 49,468,117 | 49,468,117 | |
| Effect of share options on issue | - | 92 | - | 602 | |
| Weighted average number of common shares (diluted) at end of | |||||
| period | 49,468,117 | 49,468,209 | 49,468,117 | 49,468,719 |
At June 30, 2020, 2,420,500 options (2019 – 2,863,750 options) were excluded from the diluted weighted average number of common shares calculation as their effect would have been anti-dilutive. The average market value of the Company's common shares for purposes of calculating the dilutive effect of share options was based on quoted market prices for the period during which the options were outstanding.
8. Revenue
a) Disaggregation of revenue
The following table reconciles revenue by geographic location:
| Three months ended June 30 | Six months ended June 30 | ||||||
|---|---|---|---|---|---|---|---|
| 2020 | 2019 | 2020 | 2019 | ||||
| Canada | $1,130 | $ | 3,651 | $ | 8,466 | $ | 11,015 |
| United States | 7,711 | 28,899 | 19,670 | 58,777 | |||
| Total | $8,841 | $ | 32,550 | $ | 28,136 | $ | 69,792 |
b) Seasonality of operations
A portion of the Company's operations are carried on in western Canada where activity levels in the oilfield services industry are subject to a degree of seasonality. Operating activities in western Canada are generally lower during "spring breakup" which normally commences in mid to late March and continues through to May. Operating activities generally decrease in the fall and peak in the winter months from December until mid to late March. Additionally, volatility in the weather and temperatures not only during this period, but year round, can create additional unpredictability in operational results. Activity levels in the oil and natural gas basins in the U.S. are not subject to the seasonality to the same extent that it occurs in the western Canada region.
9. Government grants
For the three and six months ended June 30, 2020, the Company recognized the benefit from the CEWS program of $637 (2019 - $nil) which reduced salary expenses as follows:
- Cost of sales $261;
- Selling, general and administrative expenses $264; and
- Technology group expenses $112.
10. Commitments
In the normal course of business, the Company incurs contractual obligations and those obligations are disclosed in the Company's MD&A for the year ended December 31, 2019. As at June 30, 2020, the Company's has no commitment to purchase equipment.
The Company has issued the following six LOC:
- three securing rent payments on property leases and renew annually with the landlords. Two LOCs total $700 CAD for the first ten years of the lease and then reduces to $500 for the last five years of the lease. The third LOC is currently for $542 USD and increases annually based upon annual changes in rent;
- $75 USD issued for U.S. workers compensation coverage; and
- two securing the Company's corporate credit cards in the amounts of $75 CAD and $175 USD.
11. Credit risk
Exposure to credit risk
The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk for trade receivables at the reporting date by geographic region was:
Carrying amount
| June 30 | December 31 | |
|---|---|---|
| 2020 | 2019 | |
| Canada | $2,208 | $4,911 |
| United States | 6,751 | 9,891 |
| Total | $8,959 | $14,802 |
The aging of trade receivables at the reporting date was:
| June 30, | December 31, | |
|---|---|---|
| 2020 | 2019 | |
| Not past due | $4,300 | $11,375 |
| Past due 61-90 days | 762 | 2,534 |
| Past due over 91 days | 3,975 | 1,507 |
| Total gross | $9,037 | $15,416 |
| Allowance for doubtful accounts | (78) | (614) |
| Accounts receivable | $8,959 | $14,802 |
Subsequent to June 30, 2020, the Company collected $1,946 of the past due over 91 days balance.
The Company has a total allowance for impairment of $78 at March 31,2020 (December 31, 2019 - $614). The movement in the allowance for impairment in respect of trade receivables during 2020 was as follows:
| 2020 | |
|---|---|
| Balance, beginning of period | $614 |
| Current year provisions | 46 |
| Receivables written-off against the provision | (555) |
| Reversals of losses previously recognized | (27) |
| Balance, end of period | $78 |
For the period ended June 30, 2020 a provision for doubtful accounts of $46 (December 31, 2019 - $555) was recognized relating to customers that have been unable to make payments in accordance with normal terms and conditions, mainly due to economic circumstances. The Company believes that the unimpaired amounts that are past due are still collectible, based on historic payment behavior, payments made after quarter end and an analysis of the underlying customers' ability to pay.
The allowance accounts in respect of trade receivables are used to record impairment losses unless the Company is satisfied that no recovery of the amount owing is possible; at that point the amounts are considered irrecoverable and are written off against the financial asset directly.
12. Comparative figures
Certain comparative figures have been reclassified to conform to current year presentation.