/NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA/
CALGARY, AB, June 24, 2020 /CNW/ - Cathedral Energy
Services Ltd. (the "Company" or "Cathedral") (TSX: CET) announces
its consolidated financial results for the three months ended
March 31, 2020 and 2019.
Dollars in 000's except per share amounts.
This news release contains "forward-looking statements"
within the meaning of applicable Canadian securities laws.
For a full disclosure of forward-looking statements and the risks
to which they are subject, see "Forward-Looking Statements" later
in this news release.
FINANCIAL HIGHLIGHTS
Dollars in 000's except per share
amounts
|
|
|
|
Three months ended
March 31
|
|
|
|
|
2020
|
|
2019
|
Revenues
|
|
|
$
|
19,295
|
$
|
37,242
|
Adjusted gross margin
% (1)
|
|
|
|
12%
|
|
7%
|
Adjusted EBITDAS
(1)
|
|
|
$
|
1,012
|
$
|
1,874
|
Diluted per
share
|
|
|
$
|
0.02
|
$
|
0.04
|
As % of
revenues
|
|
|
|
5%
|
|
5%
|
Cash flow - operating
activities
|
|
|
$
|
(1,943)
|
$
|
(854)
|
Loss from operating
activities
|
|
|
$
|
(4,426)
|
$
|
(3,705)
|
Basic per
share
|
|
|
$
|
(0.09)
|
$
|
(0.07)
|
Impairments and
direct write-downs
|
|
|
$
|
(6,994)
|
$
|
-
|
Loss before income
taxes
|
|
|
$
|
(14,123)
|
$
|
(3,568)
|
Basic per
share
|
|
|
$
|
(0.29)
|
$
|
(0.07)
|
Loss
|
|
|
$
|
(12,590)
|
$
|
(3,624)
|
Basic per
share
|
|
|
$
|
(0.25)
|
$
|
(0.07)
|
Equipment additions -
cash basis
|
|
|
$
|
855
|
$
|
1,963
|
Weighted average
shares outstanding
|
|
|
|
|
|
|
Basic
(000s)
|
|
|
|
49,468
|
|
49,468
|
Diluted
(000s)
|
|
|
|
49,468
|
|
49,469
|
|
|
|
|
|
|
|
|
|
|
|
March 31
|
|
December
31
|
|
|
|
|
2020
|
|
2019
|
Working
capital
|
|
|
$
|
20,435
|
$
|
20,181
|
Total
assets
|
|
|
$
|
94,883
|
$
|
106,300
|
Loans and borrowings
excluding current portion
|
|
|
$
|
6,000
|
$
|
6,000
|
Shareholders'
equity
|
|
|
$
|
59,069
|
$
|
68,092
|
|
|
|
|
|
|
|
(1) Refer to
"NON-GAAP MEASUREMENTS"
|
|
|
|
|
|
|
2020 Q1 KEY TAKEAWAYS
Revenues decreased by $17,947 or
48% from $37,242 in 2019 Q1 to
$19,295 in 2020 Q1;
Adjusted gross margin increased from 7% to 12% primarily due to
a decrease in repairs and field labour offset by an increase in the
fixed component of cost of sales on a percentage of revenue
basis;
Despite the 48% drop in revenue, loss from operating activities
per share decreased to only $0.09
compared to $0.07 in 2019 Q1 due to
cost control measures the Company has implemented since the end of
2019 Q1;
Total Adjusted EBITDAS decreased $862, from $1,874
to $1,012 in 2020 Q1 as a result of
reduced revenues offset by increase in adjusted gross margin;
Net debt (drawn credit facility less cash on hand) at end of
2020 Q1 was $1,155;
During 2020 Q1, the Company recorded a non-cash impairment and
direct write-down charge related to right of use and intangible
assets of $6,994; and
The Company is in the process of finalizing an amendment to
its credit facility to provide temporary covenant relief
commencing 2020 Q2 and ending 2021 Q1. The changes have been
approved by the Company and its Lender and the final agreement is
expected to be completed and signed prior to June 30, 2020.
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 but the sustainability of
such price improvement is subject to significant
uncertainty.
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.
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
In both U.S. and Canada,
Cathedral's service offerings are considered an essential service
and therefore we are operating throughout the COVID-19
pandemic. The health and safety of our workplace, employees,
clients, vendors and the public at large is a top priority for
Cathedral and part of our guiding principles. With the onset
of the COVID-19 pandemic, Cathedral implemented our multi-stage
response plan to protect our stakeholders and our staff have
adapted accordingly to this new way of operating our
business.
The COVID-19 pandemic and its macroeconomic effects have
contributed to an uncertain outlook for the oilfield service
industry. The resulting supply and demand imbalance for oil,
and related decline in oil prices, has dramatically changed
drilling activity in Cathedral's operating areas. Since early
March 2020, U.S. rig count has
declined 66% to 266 rigs. On a year-over-year basis, the
Canadian rig count is down 86%. Relative to prior year
operating levels, we are expecting operating levels to remain
depressed for the balance of 2020. The main driver for
Cathedral's revenue is the price for oil and natural gas, and for
the near term, oil prices are expected to be challenged. As a
result, Cathedral's management team will 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. Cathedral's management team has
navigated through previous downturns and we expect to do the same
this time.
Cathedral's largest cost is labour and with the forecasted
decline in activity levels management was in the unfortunate
position of having to lay off a significant amount of staff.
Since mid-March, we have reduced our fixed labour costs associated
with office and shop staff that has resulted in an annualized cost
saving of $4,328. Management
will continue to monitor its cost structure and adjust as necessary
to match expected operating levels.
Management continues to evaluate and apply for U.S. and Canadian
federal, state and provincial government relief programs for which
Cathedral qualifies. To date, the main relief programs that
Cathedral is participating in is the Canada Emergency Wage Subsidy ("CEWS") and
U.S. Paycheck Protection Program ("PPP").
To date, Cathedral has applied for and received $436 in CEWS funding for the first two claim
periods ending May 9, 2020. The
Company is currently compiling information to file for the
3rd period ending June 6,
2020. The program has recently been extended to cover through
to August 29, 2020, but details on
the extended period have not been released.
On May 8, 2020, Cathedral received
loan proceeds of $750 USD under U.S.
PPP. The proceeds will be used to support payroll
expenditures for Cathedral's U.S. employees. A portion of the
loan 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.
On the technology forefront, despite low activity levels, we
have been able to field test our RapidFire™ MWD platform and we are
pleased with the initial results. Commercializing our
RapidFire MWD platform is a key initiative for 2020 however testing
and commercial deployment are being negatively impacted by reduced
drilling activity. RapidFire is capable of transmitting data
simultaneously via pulse and electro-magnetic ("EM"), allowing for
high data rates and higher reliability through redundancy. In
addition, the system can be configured in either a hard mount or
retrievable configuration and is rated to operating temperatures
that meet or exceed most competitive MWD systems. The second
phase, initially planned to be released later in 2020, will offer a
retrievable downhole generator, which will reduce operating costs
and allow for high power EM transmission on extended run
applications. Our nDurance™ drilling motors continue to draw
interest due to material improvements in drilling
performance. Our performance achievements with existing
clients are expected to be leveraged into new rental
opportunities.
2020 CAPITAL
PROGRAM
During the three months ended March 31,
2020, the Company invested $855 (2019 - $1,963) in equipment. The following table
details the current period's net equipment additions:
|
|
Three months
ended
|
|
|
March 31,
2019
|
Equipment
additions:
|
|
|
|
Motors
|
$
|
|
530
|
MWD
|
|
|
299
|
Other
|
|
|
26
|
Total cash
additions
|
|
|
855
|
Less: proceeds on
disposal of equipment
|
|
|
(1,176)
|
|
|
|
|
Net equipment
additions (1)
|
$
|
|
(321)
|
(1)See "NON-GAAP
MEASUREMENTS"
|
|
|
|
Our 2020 capital plan will be modest and we expect our "net
equipment additions" (equipment additions less proceeds on
equipment lost downhole) to be in the range of $nil to $2.5 million (depending on level of lost-in-hole
proceeds). 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 MARCH 31
|
|
|
Revenues
|
2020
|
2019
|
Canada
|
$
|
7,336
|
$
|
7,364
|
United
States
|
|
11,959
|
|
29,878
|
Total
|
$
|
19,295
|
$
|
37,242
|
Revenues 2020 Q1 revenues were $19,295, which represented a decrease of
$17,947 or 48% from 2019 Q1 revenues
of $37,242.
Canadian revenues (excluding motor rental revenues) decreased to
$5,945 in 2020 Q1 from $6,446 in 2019 Q1; an 8% decrease. This
decrease was the result of: i) a 7% decrease in activity days to
810 in 2020 Q1 from 874 in 2019 Q1 and ii) a less than 1% decrease
in the average day rate to $7,340 in
2020 Q1 from $7,375 in 2019
Q1.
There was a 15% year-over-year decline in the average active
land rig count in Canada (source:
Baker Hughes) which compares to Cathedral's activity decline of
7%. Due to Cathedral's client mix, our decline was less than
the general market decline.
U.S. revenues (excluding motor rental revenues) decreased 60% to
$11,704 in 2020 Q1 from $29,426 in 2019 Q1. This decrease was the
net result of: i) a 62% decrease in activity days to 865 in 2020 Q1
from 2,269 in 2019 Q1; and ii) a 4% increase in the average day
rate to $13,531 in 2020 Q1 from
$12,969 in 2019 Q1 (when converted to
Canadian dollars).
The average active land rig count for the U.S. was down 24% in
2020 Q1 compared to 2019 Q1 (source: Baker Hughes). The
Company experienced a 65% decline in activity days resulting in a
decrease in market share compared to 2019 Q1. This decline
was related to reductions in clients' drilling programs to stay
within their cash flow, financial restructuring by certain clients
that caused them to pause or cancel programs, as well as loss of
work related to pricing. Due to Cathedral's client mix, our
decline exceeded the general market decline. Day rates in USD
increased 3% to $10,079 USD in 2020
Q1 from $9,756 USD in 2019 Q1.
The 2020 Q1 rate is up due to an increase in revenues from
providing rotary steerable system (RSS) services which are rented
from a 3rd party.
Motor rentals increased in Canada and were down slightly in the
U.S. Combined rental revenues increased to $1,646 in 2020 Q1 compared to $1,370 in 2019 Q1. The increase is due to
the increased availability of motors for rental due to less full
service work being performed and the fact that Cathedral's nDurance
drilling motors are noted for their reliability and drilling
performance. Approximately 60% of the motor rental revenue
related to Cathedral's motors used on RSS jobs.
Gross margin and adjusted gross
margin Gross margin for 2020 Q1 was
-11% compared to -7% in 2019 Q1. Adjusted gross margin (see
Non-GAAP Measurements) for 2020 Q1 was $2,307 or 12% compared to $2,596 or 7% for 2019 Q1.
Adjusted gross margin, as a percentage of revenue, increased due
to decreases in equipment repairs and lower field labour partially
offset by higher rentals as a percentage of revenue (actual rental
costs were down year-over-year) and increased fixed component of
cost of sales as a percentage of revenue (the amount was down, but
not as percentage of revenues).
Depreciation of equipment allocated to cost of sales decreased
to $4,376 in 2020 Q1 from
$5,004 in 2019 Q1. Depreciation
included in cost of sales as a percentage of revenue was 23% for
2020 Q1 and 13% in 2019 Q1.
Selling, general and administrative ("SG&A")
expenses SG&A expenses were $2,810 in 2020 Q1; a decrease of $563 compared with $3,373 in 2019 Q1. There were reductions in
SG&A wages and related benefits and burdens due to a reduction
in head count as well as decreases in almost all categories of
expenses due to efforts to reduce spending. As a percentage
of revenue, SG&A was 15% in 2020 Q1 compared to 9% in 2019
Q1.
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.
Total technology group costs were $725 in 2020 Q1; a decrease of $180 compared with $905 in 2019 Q1. The portion of total
technology group costs related to new product development was
$195 and this amount has been
capitalized as intangible assets (2019 Q1 - $230). Technology group costs not related
to new product development were $530
in 2020 Q1; a decrease of $145
compared with $675 in 2019 Q1.
Total technology group costs decreased primarily due to reduction
in staffing.
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 Q1, the Company had a gain on disposal of equipment of
$1,004 compared to $2,793 in 2019 Q1. 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 Q1, the Company received proceeds
on disposal of equipment of $1,176
(2019 Q1 - $3,962).
Finance costs Finance costs
consist of interest expenses on operating loans, long-term debt and
bank charges of $29 for 2020 Q1
versus $143 for 2019 Q1.
Finance costs lease liability The
lease liability interest decreased slightly to $238 from $262.
Foreign exchange The Company had
a foreign exchange loss of $2,436 in
2020 Q1 compared to a gain of $542 in
2019 Q1 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 Q1 foreign currency loss are
unrealized loss of $2,464 (2019 Q1 -
gain of $527) 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 allow to be carried back to 2018 and
recovered.
In 2019 Q1, 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 26.5% 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 Q1 decreased to a use of funds of
$1,943 compared to use of funds of
$854 in 2019 Q1. This decrease was
primarily due to the impact of changes in working capital in 2020
Q1 and reduced the Company's cash balances.
Working capital At March 31, 2020, the Company had working capital
of $20,435 (December 31, 2019 - $20,181).
Credit facility At March 31, 2020, the Company's credit facility
(the "Facility") consists of a $5
million operating facility and a $15
million extendible revolving credit facility and expires
December 31, 2020. 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 financial covenants associated with the Facility 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.
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.
Compliance with Facility covenants
At March 31, 2020, the Company had
drawn $6,000 of its revolving credit
facility, $nil of its operating facility and had $4,845 in cash. At March 31, 2020, the Company had consolidated
funded debt of $3,049 that includes
five outstanding letters of credit ("LOC") which are included in
the funded debt calculation. For the trailing twelve months
ended March 31, 2020, Credit
Agreement EBITDA was $2,483.
The calculation of the financial covenants under the Facility as
at March 31, 2020 is as follows:
Covenant
|
Actual
Ratio
|
Required
Ratio
|
Consolidated funded
debt to consolidated Credit Agreement EBITDA ratio
|
1.2:1
|
3.0:1
(maximum)
|
Consolidated interest
coverage ratio
|
6.0:1
|
2.5:1
(minimum)
|
The Company was in compliance with all covenants at March 31, 2020.
The Company is in the process of finalizing the following
changes to its credit agreement:
- A reduction in facility to $12
million;
- The consolidated funded debt to consolidated Credit Agreement
EBITDA ratio covenant is waived from 2020 Q2 through 2021 Q1 (the
"covenant relief period");
- The consolidated interest coverage ratio is waived during
the covenant relief period if funded debt is no more than
$6 million;
- A new funded debt to tangible net worth ("TNW") ratio is in
place during the covenant relief period. This ratio is to be
no more than 10% for 2020 Q2 and Q3 and no more than 15% in 2020 Q4
and 2021 Q1. 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;
- During the covenant relief period 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 $2,000,000
- 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; and
- The Borrower has a one-time option to exit the covenant relief
period.
The changes have been approved by the Company and its Lender and
the final agreement is expected to be completed and signed prior to
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 March 31, 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.
Share capital At June 24, 2020, the Company has 49,468,117 common
shares and 2,420,500 options outstanding with a weighted average
exercise price of $0.71.
FORWARD LOOKING STATEMENTS
This news release 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 forward-looking
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 news release contains
forward-looking statements relating to, among other things: the
sustainability of oil and gas price improvement is subject to
significant uncertainty; 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 result in Cathedral's ability to continue
ongoing operations; we are expecting operating levels to remain
depressed for the balance of 2020; for the near term, oil prices
are expected to be challenged; reductions to fixed labour costs
associated with office and shop staff is expected to result in an
annualized cost saving of $4,328;
Cathedral estimates that approximately 70% of the PPP loan proceeds
$525 USD may be forgiven, if the U.S.
Treasury guidelines are met; the second phase of RapidFire MWD
platform, initially planned to be released later in 2020, will
offer a retrievable downhole generator, which will reduce operating
costs and allow for high power EM transmission on extended run
applications; our nDurance™ drilling motors continue to draw
interest due to material improvements in drilling performance; our
performance achievements with existing clients are expected to be
leveraged into new rental opportunities; the final amended credit
agreement is expected to be completed and signed prior to
June 30, 2020; 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
March 31
|
|
|
|
2020
|
|
2019
|
Gross
margin
|
|
$
|
(2,090)
|
$
|
(2,450)
|
Add non-cash items
included in cost of sales:
|
|
|
|
|
|
Depreciation
|
|
|
4,376
|
|
5,004
|
Share-based
compensation
|
|
|
21
|
|
42
|
|
|
|
|
|
|
Adjusted gross
margin
|
|
$
|
2,307
|
$
|
2,596
|
|
|
|
|
|
|
Adjusted gross margin
%
|
|
|
12%
|
|
7%
|
Adjusted EBITDAS
|
|
|
Three months ended
March 31
|
|
|
|
2020
|
|
2019
|
Loss before income
taxes
|
|
$
|
(14,123)
|
$
|
(3,568)
|
Add:
|
|
|
|
|
|
Depreciation included
in cost of sales
|
|
|
4,376
|
|
5,004
|
Depreciation included
in selling, general and administrative expenses
|
|
|
132
|
|
192
|
Share-based
compensation included in cost of sales
|
|
|
21
|
|
42
|
Share-based
compensation included in selling, general and administrative
expenses
|
|
|
41
|
|
107
|
Finance
costs
|
|
|
29
|
|
143
|
Finance
costs
|
|
|
238
|
|
262
|
|
|
|
|
|
|
Subtotal
|
|
|
(9,286)
|
|
2,182
|
Impairment and direct
write-downs
|
|
|
6,994
|
|
-
|
Unrealized foreign
exchange (gain) loss on intercompany balances
|
|
|
2,464
|
|
(527)
|
Non-recurring
expenses
|
|
|
840
|
|
219
|
|
|
|
|
|
|
Total Adjusted
EBITDAS
|
|
$
|
1,012
|
$
|
1,874
|
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL
POSITION
March 31,
2020 and 2019
Dollars in '000s
(unaudited)
|
|
March 31
|
|
December
31
|
|
|
2020
|
|
2019
|
Assets
|
|
|
|
|
Current
assets:
|
|
|
|
|
Cash
|
$
|
4,845
|
$
|
7,223
|
Trade
receivables
|
|
15,015
|
|
14,802
|
Prepaid
expenses
|
|
1,471
|
|
1,668
|
Inventories
|
|
9,957
|
|
10,423
|
Current tax
recoveries
|
|
892
|
|
-
|
|
|
|
|
|
Total current
assets
|
|
32,180
|
|
34,116
|
Equipment
|
|
43,975
|
|
46,882
|
Intangible
assets
|
|
2,926
|
|
3,019
|
Right of use
asset
|
|
12,538
|
|
19,590
|
Deferred tax
assets
|
|
3,264
|
|
2,693
|
|
|
|
|
|
Total non-current
assets
|
|
62,703
|
|
72,184
|
Total
assets
|
$
|
94,883
|
$
|
106,300
|
|
|
|
|
|
Liabilities and
Shareholders' Equity
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
Trade and other
payables
|
$
|
9,357
|
$
|
11,308
|
Current taxes
payable
|
|
-
|
|
314
|
Lease liabilities,
current
|
|
2,219
|
|
2,145
|
Provision for
settlements, current
|
|
169
|
|
168
|
|
|
|
|
|
Total current
liabilities
|
|
11,745
|
|
13,935
|
Loans and
borrowings
|
|
6,000
|
|
6,000
|
Provision for
settlements, long-term
|
|
127
|
|
156
|
Lease liabilities,
long-term
|
|
17,942
|
|
18,117
|
|
|
|
|
|
Total non-current
liabilities
|
|
24,069
|
|
24,273
|
Total
liabilities
|
|
35,814
|
|
38,208
|
|
|
|
|
|
Shareholders'
equity:
|
|
|
|
|
Share
capital
|
|
88,155
|
|
88,155
|
Contributed
surplus
|
|
10,926
|
|
10,864
|
Accumulated other
comprehensive income
|
|
13,439
|
|
9,934
|
Deficit
|
|
(53,451)
|
|
(40,861)
|
|
|
|
|
|
Total shareholders'
equity
|
|
59,069
|
|
68,092
|
Total liabilities and
shareholders' equity
|
$
|
94,883
|
$
|
106,300
|
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 months ended March 31, 2020 and 2019
Dollars in '000s
except per share amounts
(unaudited)
|
|
Three months
ended March 31
|
|
|
2020
|
|
2019
|
Revenues
|
$
|
19,295
|
$
|
37,242
|
Cost of
sales:
|
|
|
|
|
Direct
costs
|
|
(16,988)
|
|
(34,646)
|
Depreciation
|
|
(4,376)
|
|
(5,004)
|
Share-based
compensation
|
|
(21)
|
|
(42)
|
Total cost of
sales
|
|
(21,385)
|
|
(39,692)
|
Gross
margin
|
|
(2,090)
|
|
(2,450)
|
Selling, general and
administrative expenses:
|
|
|
|
|
Direct
costs
|
|
(2,637)
|
|
(3,074)
|
Depreciation
|
|
(132)
|
|
(192)
|
Share-based
compensation
|
|
(41)
|
|
(107)
|
Total selling,
general and administrative expenses
|
|
(2,810)
|
|
(3,373)
|
|
|
(4,900)
|
|
(5,823)
|
Technology group
expenses
|
|
(530)
|
|
(675)
|
Gain on disposal of
equipment
|
|
1,004
|
|
2,793
|
Loss from operating
activities
|
|
(4,426)
|
|
(3,705)
|
Finance
costs
|
|
(29)
|
|
(143)
|
Finance costs lease
liability
|
|
(238)
|
|
(262)
|
Foreign exchange gain
(loss)
|
|
(2,436)
|
|
542
|
Impairment and direct
write-downs
|
|
(6,994)
|
|
-
|
|
|
|
|
|
Loss before income
taxes
|
|
(14,123)
|
|
(3,568)
|
Income tax recovery
(expense):
|
|
|
|
|
Current
|
|
1,187
|
|
-
|
Deferred
|
|
346
|
|
(56)
|
Total income tax
recovery (expense)
|
|
1,533
|
|
(56)
|
Loss
|
|
(12,590)
|
|
(3,624)
|
Other comprehensive
income (loss):
|
|
|
|
|
Foreign currency
translation differences for foreign operations
|
|
3,505
|
|
(1,046)
|
|
|
|
|
|
Total comprehensive
loss
|
$
|
(9,085)
|
$
|
(4,670)
|
|
|
|
|
|
Loss per
share
|
|
|
|
|
Basic
|
$
|
(0.25)
|
$
|
(0.07)
|
CONDENSED CONSOLIDATED STATEMENT OF CASH
FLOWS
Three months ended March
31, 2020 and 2019
Dollars in '000s
(unaudited)
|
|
Three months
ended March 31
|
|
|
2020
|
|
2019
|
Cash provided by
(used in):
|
|
|
|
|
Operating
activities:
|
|
|
|
|
Loss before income
taxes
|
$
|
(12,590)
|
$
|
(3,624)
|
Items not involving
cash
|
|
|
|
|
Depreciation
|
|
4,508
|
|
5,196
|
Share-based
compensation
|
|
62
|
|
149
|
Income tax expense
(recovery)
|
|
(1,533)
|
|
56
|
Gain on disposal of
equipment
|
|
(1,004)
|
|
(2,793)
|
Impairment and direct
write-downs
|
|
6,994
|
|
-
|
Finance
costs
|
|
29
|
|
143
|
Finance costs lease
liability
|
|
238
|
|
262
|
Unrealized foreign
exchange (gain) loss on intercompany balances
|
|
2,464
|
|
(527)
|
|
|
|
|
|
Cash flow -
continuing operations
|
|
(832)
|
|
(1,138)
|
Changes in non-cash
operating working capital
|
|
(1,080)
|
|
287
|
Income taxes
paid
|
|
(31)
|
|
(3)
|
|
|
|
|
|
Cash flow - operating
activities
|
|
(1,943)
|
|
(854)
|
|
|
|
|
|
Investing
activities:
|
|
|
|
|
Equipment
additions
|
|
(855)
|
|
(1,963)
|
Intangible asset
additions
|
|
(238)
|
|
(385)
|
Proceeds on disposal
of equipment
|
|
1,176
|
|
3,962
|
Changes in non-cash
investing working capital
|
|
(3)
|
|
(1,262)
|
|
|
|
|
|
Cash flow - investing
activities
|
|
80
|
|
352
|
|
|
|
|
|
Financing
activities:
|
|
|
|
|
Change in operating
loan
|
|
-
|
|
(188)
|
Repayments on loans
and borrowings
|
|
(588)
|
|
(574)
|
Interest
paid
|
|
(267)
|
|
(405)
|
Payment on
settlements
|
|
(42)
|
|
(40)
|
|
|
|
|
|
Cash flow - financing
activities
|
|
(897)
|
|
(1,207)
|
Effect of exchange
rate on changes on cash
|
|
382
|
|
(130)
|
Change in
cash
|
|
(2,378)
|
|
(1,839)
|
Cash, beginning of
period
|
|
7,223
|
|
6,875
|
Cash, end of
period
|
$
|
4,845
|
$
|
5,036
|
Cathedral Energy Services Ltd. (the "Company" or
"Cathedral"), based in Calgary,
Alberta is incorporated under the Business Corporations Act
(Alberta) and operates in the U.S.
under Cathedral Energy Services Inc. The Company is publicly
traded on the Toronto Stock Exchange under the symbol "CET".
Cathedral, is a trusted partner to North American energy companies
requiring high performance directional drilling services. We
work in partnership with our customers to tailor our equipment and
expertise to meet their specific geographical and technical
needs. Our experience, technologies and responsive personnel
enable our customers to achieve higher efficiencies and lower
project costs. For more information, visit
www.cathedralenergyservices.com.
SOURCE Cathedral Energy Services Ltd.