/NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA/
CALGARY, AB, Aug. 13, 2020 /CNW/ - Cathedral Energy Services
Ltd. (the "Company" or "Cathedral") (TSX: CET) announces its
consolidated financial results for the three and six months ended
June 30, 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
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 30
|
December
31
|
|
|
|
2020
|
2019
|
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"
|
|
|
|
|
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.
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 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 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,
2020 and 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
|
40,688
|
46,882
|
Intangible
assets
|
2,693
|
3,019
|
Right of use
asset
|
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' Equity
|
|
|
Current
liabilities:
|
|
|
Trade and other
payables
|
$
|
3,881
|
$
|
11,308
|
Current taxes
payable
|
|
-
|
314
|
Lease liabilities,
current
|
2,229
|
2,145
|
Provision for
settlements, current
|
204
|
168
|
Total current
liabilities
|
6,314
|
13,935
|
Loans and
borrowings
|
5,935
|
6,000
|
Provision for
settlements, long-term
|
81
|
156
|
Lease liabilities,
long-term
|
17,152
|
18,117
|
Total non-current
liabilities
|
23,168
|
24,273
|
Total
liabilities
|
29,482
|
38,208
|
Shareholders'
equity:
|
|
|
Share
capital
|
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
|
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)
|
|
|
|
|
Three months
ended June 30
|
Six months
ended June 30
|
|
2020
|
2019
|
2020
|
2019
|
Revenues
|
$
|
8,841
|
$
|
32,550
|
$
|
28,136
|
$
|
69,792
|
Cost of
sales:
|
|
|
|
|
Direct
costs
|
(8,499)
|
(29,301)
|
(25,487)
|
(63,947)
|
Depreciation
|
(3,540)
|
(4,976)
|
(7,916)
|
(9,421)
|
Share-based
compensation
|
(18)
|
(28)
|
(39)
|
(70)
|
Total cost of
sales
|
(12,057)
|
(34,305)
|
(33,442)
|
(73,438)
|
Gross
margin
|
(3,216)
|
(1,755)
|
(5,306)
|
(3,646)
|
Selling, general and
administrative expenses:
|
|
|
|
|
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
equipment
|
515
|
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
|
|
-
|
Deferred
|
126
|
(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)
|
$
|
(6,299)
|
$
|
(14,354)
|
$
|
(10,969)
|
Loss per
share
|
|
|
|
|
Basic
|
$
|
(0.08)
|
$
|
(0.11)
|
$
|
(0.33)
|
$
|
(0.18)
|
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
|
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.