Akita Drilling Ltd.
Annual Report 2021

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A K I T A D R I L L I N G 2 0 2 1 A n n u a l R e p o r t HEAD OFFICE AKITA Drilling Ltd., 1000, 333 - 7th Ave SW Calgary, Alberta T2P 2Z1 Canada www.akita-drilling.com 2021 ANNUAL REPORT CORPORATE INFORMATION Officers Linda A. Southern-Heathcott Executive Chair and Chief Executive Officer Banker ATB Financial Calgary, Alberta Darcy Reynolds Vice President, Finance and Chief Financial Officer Raymond T. Coleman President, USA Division Colin A. Dease President, Canadian Operations, Corporate Secretary and Legal Counsel Craig W. Kushner Director of Human Resources Head Office AKITA Drilling Ltd., 1000, 333 - 7th Avenue SW Calgary, Alberta T2P 2Z1 403.292.7979 Counsel Bennett Jones LLP Calgary, Alberta Auditors PricewaterhouseCoopers LLP Calgary, Alberta Registrar and Transfer Agent TSX Trust Company Calgary, Alberta and Toronto, Ontario 1.800.387.0825 Share Symbol/TSX Class A Non-Voting (AKT.A) Class B Common (AKT.B) Website www.akita-drilling.com Directors Loraine M. Charlton Corporate Director Calgary, Alberta Douglas A. Dafoe President and CEO Ember Resources Inc. Calgary, Alberta Harish K. Mohan Corporate Director Calgary, Alberta Dale R. Richardson Vice President, Sentgraf Enterprises Ltd. Calgary, Alberta Nancy C. Southern Chairman, President and Chief Executive Officer, ATCO Ltd., Canadian Utilities Limited, and CU Inc. Calgary, Alberta Linda A. Southern-Heathcott Executive Chair and Chief Executive Officer, AKITA Drilling Ltd. President and Chief Executive Officer, Spruce Meadows Ltd., President, Team Spruce Meadows Inc., Calgary, Alberta Henry G. Wilmot Corporate Director Calgary, Alberta Charles W. Wilson Corporate Director Boulder, Colorado 2 AKITA DRILLING | 2021 Annual Report AKITA DRILLING | 2021 Annual Report 81 CORPORATE PROFILE AKITA Drilling Ltd. is a premier oil and gas drilling contractor with drilling operations throughout North America. The Company strives to be the industry leader in customer relations, First Nations, Métis and Inuit partnerships, employee expertise, safety, equipment quality and drilling performance. In addition to conventional drilling, the Company specializes in pad and other purpose-built drilling rigs and is active in directional, horizontal and underbalanced drilling providing specialized drilling services to a broad range of independent and multinational oil and gas companies. AKITA currently employs, at full operations, approximately 1,000 people. The Company has ownership in 36 drilling rigs in all depth ranges. AKITA DRILLING | 2021 Annual Report 11 CONTENTS 1 Corporate Profile 6 4 Letter to the Shareowners 8 Operational Performance Share Performance 10 36 Management's Discussion and Analysis Management's Responsibility for Financial Reporting 38 44 Independent Auditor's Report Consolidated Financial Statements 48 78 Notes to Consolidated Financial Statements 10 Year Financial Review 81 Corporate Information 2 2 AKITA DRILLING | 2021 Annual Report AKITA DRILLING | 2021 Annual Report FORWARD-LOOKING STATEMENTS From time to time AKITA Drilling Ltd. (“AKITA” or the “Company”) makes written and verbal forward- looking statements. These forward-looking statements include but are not limited to comments (cid:90)ith re(cid:86)(cid:83)ect t(cid:82) (cid:82)ur (cid:82)(cid:69)(cid:77)ective(cid:86) and (cid:86)trate(cid:74)ie(cid:86), financial c(cid:82)nditi(cid:82)n, the re(cid:86)ult(cid:86) (cid:82)f (cid:82)ur (cid:82)(cid:83)erati(cid:82)n(cid:86) and our business, our outlook for our industry and our risk management discussion. Forward looking (cid:86)tate(cid:80)ent(cid:86) are t(cid:92)(cid:83)icall(cid:92) identified (cid:90)ith (cid:90)(cid:82)rd(cid:86) (cid:86)uch a(cid:86) (cid:180)(cid:69)elieve(cid:181), (cid:180)ex(cid:83)ect(cid:181), (cid:180)f(cid:82)reca(cid:86)t(cid:181), (cid:180)antici(cid:83)ate(cid:181), “intend”, “estimate”, “plan” and “project” and similar expressions of future or conditional events such as “will”, “may”, “should”, “could” or “would". By their nature these forward-looking statements involve numerous assumptions, inherent risks and uncertaintie(cid:86), (cid:69)(cid:82)th (cid:74)eneral and (cid:86)(cid:83)ecific, and the ri(cid:86)(cid:78) that (cid:83)redicti(cid:82)n(cid:86) and (cid:82)ther f(cid:82)r(cid:90)ard(cid:16)l(cid:82)(cid:82)(cid:78)in(cid:74) statements will not be achieved. We caution readers of this Annual Report not to place undue reliance on these forward-looking statements as a number of important factors could cause actual future results to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements. F(cid:82)r(cid:90)ard(cid:16)l(cid:82)(cid:82)(cid:78)in(cid:74) (cid:86)tate(cid:80)ent(cid:86) (cid:80)a(cid:92) (cid:69)e in(cid:193)uenced (cid:69)(cid:92) fact(cid:82)r(cid:86) (cid:86)uch a(cid:86) (cid:83)revailin(cid:74) ec(cid:82)n(cid:82)(cid:80)ic c(cid:82)nditi(cid:82)n(cid:86) (including as may be affected by the COVID-19 pandemic); the level of exploration and development activity carried on by AKITA’s customers, world crude oil prices and North American natural gas prices; (cid:74)l(cid:82)(cid:69)al li(cid:84)uified natural (cid:74)a(cid:86) (cid:11)(cid:47)(cid:49)(cid:42)(cid:12) de(cid:80)and, (cid:90)eather, acce(cid:86)(cid:86) t(cid:82) ca(cid:83)ital (cid:80)ar(cid:78)et(cid:86)(cid:30) and (cid:74)(cid:82)vern(cid:80)ent (cid:83)(cid:82)licie(cid:86)(cid:17) We caution that the foregoing list of factors is not exhaustive and that while relying on forward-looking statements to make decisions with respect to AKITA, investors and others should carefully consider the foregoing factors, as well as other uncertainties and events, prior to making a decision to invest in AKITA. Except where required by law, the Company does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by it or on its behalf. Additional information about these and other factors can be found under the "Business Risk and Risk Management" section of the Management's Discussion and Analysis of this 2021 Annual Report for AKITA. Annual Meeting The annual meeting (the “Meeting”) of the shareholders of AKITA DRILLING LTD. (the “Company”) will be held in a virtual only format via live webcast on Tuesday, May 10, 2022 at 10:00 a.m. Mountain Daylight Time. Details on how to access the Meeting can be found in the Company’s Management Proxy Circular. AKITA DRILLING | 2021 Annual Report 3 LETTER TO THE SHAREOWNERS LETTER TO THE SHAREOWNERS AKITA Drilling Ltd.’s net loss for the year ended December 31, 2021 was $20,990,000 (net loss of $0.53 per share (basic and diluted)) on revenue of $110,088,000 compared to a net loss of $93,274,000 ($2.35 loss per share (basic and diluted)) on revenue of $119,664,000 in 2020. The Company recorded an asset impairment loss of $80,000,000 in 2020. Adjusting for the asset impairment loss, the Company’s net loss in 2020 was $20,674,000 (net loss of $0.52 per (cid:86)hare (cid:11)(cid:69)a(cid:86)ic and diluted(cid:12)(cid:12)(cid:17) Fund(cid:86) (cid:193)(cid:82)(cid:90) fr(cid:82)(cid:80) (cid:82)(cid:83)erati(cid:82)n(cid:86) f(cid:82)r 2021 was $7,454,000 compared to $10,322,000 in 2020, while net cash used in operating activities for 2021 was $3,461,000 compared to net cash from operating activities of $22,860,000 in 2020. The impact of the mitigation strategies to lessen the spread of the global pandemic eased over the course of 2021, and the price of oil began to recover, increasing 37% in the year. At the same time, the price of natural gas increased 67% in the (cid:92)ear(cid:17) (cid:55)he(cid:86)e (cid:86)i(cid:74)nificant i(cid:80)(cid:83)r(cid:82)ve(cid:80)ent(cid:86) in c(cid:82)(cid:80)(cid:80)(cid:82)dit(cid:92) prices increased demand for drilling services in both Canada and the United States and resulted in improved activity for both AKITA’s Canadian and US operations. In Canada, the Company’s operating days increased to 1,594 in 2021 from 945 in 2020, a 69% increase. Operating margin increased in 2021 to $9,068,000 from $8,254,000 in 2020, however, this increase was only 10% compared to the 69% increase in activity. The Canadian operating margin was not commensurate with the level of increased activity, 4 AKITA DRILLING | 2021 Annual Report LETTER TO THE SHAREOWNERS as low day rates established in 2020 continued to characterize US, and the Company is expecting to secure steady day rate industry day rates over 2021. Costs also increased in the year, improvements as 2022 unfolds. largely attributable to supply chain disruptions and escalating in(cid:83)ut and la(cid:69)(cid:82)ur c(cid:82)(cid:86)t(cid:86)(cid:17) (cid:43)(cid:82)(cid:90)ever, the(cid:86)e in(cid:193)ati(cid:82)nar(cid:92) c(cid:82)(cid:86)t(cid:86) In both Canada and the US, our focus for 2022 will be to keep a were largely offset by the Canadian Emergency Wage Subsidy fir(cid:80) (cid:74)ri(cid:83) (cid:82)n ex(cid:83)en(cid:86)e(cid:86) (cid:90)hile (cid:83)u(cid:86)hin(cid:74) da(cid:92)rate(cid:86) hi(cid:74)her a(cid:86) activit(cid:92) (“CEWS”) of $3,450,000 which mitigated increased operating in the industry builds. Further, the Canadian division has an costs (2020 - $1,820,000). opportunity to improve its activity level as it works to resolve critical crew labour constraints that have limited activity levels On November 23, 2021, the Canadian Association of Energy over Q1 of 2022. A modest capital budget is planned for the Contractors (“CAOEC”) released its 2022 industry drilling year and debt repayment is the overarching focus moving forecast, estimating 58,111 operating days for the Canadian forward. drilling industry in 2022 up from 45,843 actual operating days in 2021. The 2021 forecast was based upon commodity We would like to express a special thanks to AKITA’s employees price assumptions of USD $62.37 per barrel for crude oil f(cid:82)r their hard (cid:90)(cid:82)r(cid:78) and (cid:86)acrifice(cid:86) thr(cid:82)u(cid:74)h the(cid:86)e challen(cid:74)in(cid:74) and CAD $2.99 per mcf for natural gas. Based on the CAOEC times impacted by the pandemic as well as labour shortages. forecast it would appear that 2022 will be better than 2021, We also wish to acknowledge the contribution of our directors, however, increased activity in Canada may be tempered by the whose thoughtful counsel and guidance have helped to create, availability of experienced crews which are in very short supply in the industry. In the US, AKITA’s operating days increased to 2,817 in 2021 from 2,555 in 2020, a 12% increase in operating days. This increase in operating days did not translate into higher operating margins, however, which fell to $13,427,000 in 2021 fr(cid:82)(cid:80) (cid:7)(cid:21)(cid:19),(cid:21)(cid:28)(cid:26),(cid:19)(cid:19)(cid:19) in (cid:21)(cid:19)(cid:21)(cid:19)(cid:17) O(cid:83)eratin(cid:74) rate(cid:86) (cid:90)ere (cid:86)i(cid:74)nificantl(cid:92) lower on average in 2021 than in 2020 for the Company in the US as the active rig count in the US over 2021 did not reach activity levels that resulted in materially improved day rates. The active rig count has continued to improve in the maintain and grow a strong and successful Company. Finally, we acknowledge AKITA shareowners for their continued (cid:86)u(cid:83)(cid:83)(cid:82)rt and c(cid:82)nfidence in the C(cid:82)(cid:80)(cid:83)an(cid:92)(cid:17) On behalf of the Board of Directors, Linda A. Southern-Heathcott Executive Chair and Chief Executive Officer March 10, 2022 AKITA DRILLING | 2021 Annual Report 5 OPERATIONAL PERFORMANCE OPERATIONAL PERFORMANCE Revenue ($000's) Net Loss ($000's) 200,000 180,000 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 0 (10,000) (20,000) (30,000) (40,000) (50,000) (60,000) (70,000) (80,000) (90,000) (100,000) (110,000) 2017 2018 2019 2020 2021 2017 2018 2019 2020 2021 Funds Flow from Continuing Operations ($000's) Capital Expenditures ($000's) 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 25,000 20,000 15,000 10,000 5,000 0 2017 2018 2019 2020 2021 2017 2018 2019 2020 2021 6 AKITA DRILLING | 2021 Annual Report RESPECT COMMITMENT FOUNDATIONAL VALUES INTEGRITY At AKITA - integrity, respect and commitment are the foundational values and guiding principles engrained into every aspect of our operations. AKITA DRILLING | 2021 Annual Report 7 SHARE PERFORMANCE SHARE PERFORMANCE The graph below compares the cumulative return over the last five years on the Class A Non-Voting shares and Class B Common shares of the Company from December 31, 2021 with the cumulative total return of the S&P/TSX Composite Stock Index and the TSX Energy Services Sub-Index over the same period, assuming reinvestment of dividends. Five Year Total Return on $100 Investment 200 150 100 50 0 2016 2017 2018 2019 2020 2021 Dec 31, 2016 Dec 31, 2017 Dec 31, 2018 Dec 31, 2019 Dec 31, 2020 Dec 31, 2021 AKITA Class A Non-Voting Shares AKITA Class B Common Shares S&P/TSX Composite Index TSX Energy Services Sub-Index 100 100 100 100 105 99 109 78 54 60 99 56 17 21 122 39 7 27 129 12 13 33 161 8 8 AKITA DRILLING | 2021 Annual Report SHARE PERFORMANCE Share Performance Weighted average number of Class A and Class B shares 17,988,552 17,969,415 24,551,542 39,608,191 39,608,191 Total number of Class A and Class B shares 17,945,661 39,608,191 39,608,191 39,608,191 39,608,191 Market prices for Class A Non-Voting shares High $ 9.88 $ 8.38 $ 4.42 $ 1.22 $ 1.54 2017 2018 2019 2020 2021 Low $ 6.52 $ 3.41 $ 0.75 $ 0.25 $ 0.50 Close $ 7.36 $ 4.07 $ 1.19 $ 0.48 $ 0.94 Volume 1,324,111 2,192,522 8,875,748 21,339,080 7,153,646 Market prices for Class B Common shares High $ 9.95 $ 8.16 $ 4.48 $ 2.89 $ 3.00 Low $ 6.94 $ 3.77 $ 1.25 $ 0.67 $ 0.98 Close $ 7.61 $ 4.60 $ 1.57 $ 0.77 $ 2.46 Volume 41,479 19,313 53,746 45,986 28,601 Dividend History AKITA began paying dividends to shareholders in 1996. In July 2019, AKITA suspended its dividend program in light of the current economic environment. Dividends per share ($) 2017 0.34 2018 0.34 2019 0.17 2020 0.00 2021 0.00 AKITA DRILLING | 2021 Annual Report 9 MANAGEMENT’S DISCUSSION & ANALYSIS MANAGEMENT’S DISCUSSION & ANALYSIS The following management’s discussion and analysis (“MD&A”) of the financial condition and results of operations is intended to help the reader understand the current and prospective financial position and operating results of AKITA Drilling Ltd. (“AKITA” or the “Company”). The MD&A discusses the operating and financial results for the year ended December 31, 2021, is dated March 10, 2022, and takes into consideration information available up to that date. The MD&A is based on the audited annual consolidated financial statements of AKITA for the year ended December 31, 2021. The MD&A should be read in conjunction with the audited annual consolidated financial statements and related notes for the year ended December 31, 2021, prepared in accordance with International Financial Reporting Standards (“IFRS”). Additional information is available on AKITA’s website (www.AKITA-Drilling.com) and all previous public filings, including the most recently filed Annual Report and Annual Information Form, are available through SEDAR (www.sedar.com). All amounts are denominated in Canadian dollars (CAD) and stated in thousands unless otherwise identified. Introduction (cid:36)(cid:46)(cid:44)(cid:55)(cid:36) i(cid:86) a (cid:83)re(cid:80)ier Canadian (cid:82)il and (cid:74)a(cid:86) drillin(cid:74) c(cid:82)ntract(cid:82)r (cid:90)ith a (cid:193)eet (cid:82)f (cid:22)(cid:25) drillin(cid:74) ri(cid:74)(cid:86)(cid:17) (cid:36)(cid:46)(cid:44)(cid:55)(cid:36) (cid:83)r(cid:82)vide(cid:86) c(cid:82)ntract drillin(cid:74) (cid:86)ervice(cid:86) thr(cid:82)u(cid:74)h t(cid:90)(cid:82) (cid:74)e(cid:82)(cid:74)ra(cid:83)hical (cid:86)e(cid:74)(cid:80)ent(cid:86)(cid:29) Canada and the (cid:56)nited (cid:54)tate(cid:86) (cid:11)(cid:180)(cid:56)(cid:54)(cid:181)(cid:12)(cid:17) (cid:58)ith a (cid:193)eet (cid:82)f (cid:21)(cid:19) ri(cid:74)(cid:86), (cid:36)(cid:46)(cid:44)(cid:55)(cid:36)(cid:183)(cid:86) Canadian divi(cid:86)i(cid:82)n (cid:82)(cid:83)erate(cid:86) in Alberta, British Columbia, Saskatchewan, and from time to time, in the Yukon and the Northwest Territories. The Canadian division operates both wholly-owned rigs and rigs that are partially owned by AKITA and First Nations, Métis or Inuit joint venture partners including Akita Mistiyapew Aski Drilling Ltd., a joint venture between AKITA and Saulteau First Nation, Akita Equtak Drilling Ltd., a joint venture between AKITA and the Inuvialuit Development Corporation, and Akita Wood Buffalo Drilling Ltd., a joint venture between AKITA and Chipewyan Prairie First Nation, Fort McMurray 468 First Nation, Fort McKay Métis Nation, Fort Chipewyan Métis Local 125, and C(cid:82)n(cid:78)lin (cid:48)(cid:112)ti(cid:86) (cid:47)(cid:82)cal (cid:20)(cid:28)(cid:22)(cid:17) Each (cid:77)(cid:82)int venture ha(cid:86) defined (cid:74)e(cid:82)(cid:74)ra(cid:83)hical (cid:69)(cid:82)undarie(cid:86) and an e(cid:84)uit(cid:92) intere(cid:86)t in (cid:86)elect (cid:36)(cid:46)(cid:44)(cid:55)(cid:36) ri(cid:74)(cid:86)(cid:17) (cid:36)(cid:46)(cid:44)(cid:55)(cid:36)(cid:183)(cid:86) (cid:56)(cid:54) divi(cid:86)i(cid:82)n c(cid:82)nduct(cid:86) (cid:82)(cid:83)erati(cid:82)n(cid:86) (cid:90)ith a (cid:193)eet (cid:82)f (cid:20)(cid:25) ri(cid:74)(cid:86) in C(cid:82)l(cid:82)rad(cid:82), (cid:58)(cid:92)(cid:82)(cid:80)in(cid:74), (cid:55)exa(cid:86), (cid:56)tah, (cid:49)e(cid:90) (cid:48)exic(cid:82), and O(cid:78)lah(cid:82)(cid:80)a(cid:17) (cid:58)ith a f(cid:82)cu(cid:86) (cid:82)n the efficient (cid:83)r(cid:82)vi(cid:86)i(cid:82)n (cid:82)f drillin(cid:74) (cid:86)ervice(cid:86), ri(cid:74)(cid:82)r(cid:82)u(cid:86) cre(cid:90) trainin(cid:74), ri(cid:74) (cid:80)aintenance and (cid:86)afet(cid:92) (cid:83)r(cid:82)ce(cid:86)(cid:86)e(cid:86) and adherence to a leading quality assurance-quality control program, AKITA strives to ensure it is well positioned to meet the most demanding requirements of global operators who offer long-lasting resource-based drilling programs. The Company has utilized this strategy to enhance its development of pad drilling rigs designed for both heavy oil and unconventional natural gas formations. 10 AKITA DRILLING | 2021 Annual Report MANAGEMENT’S DISCUSSION & ANALYSIS Financial Highlights $Thousands except per share amounts 2021 2020 Change % Change Revenue Operating expenses Operating margin (1) Margin % (1) Net cash from (used in) operating activities (cid:36)d(cid:77)u(cid:86)ted fund(cid:86) (cid:193)(cid:82)(cid:90) fr(cid:82)(cid:80) (cid:82)(cid:83)erati(cid:82)n(cid:86) (1) Per share Net loss Per share Capital expenditures Weighted average shares outstanding Total assets Total debt 110,088 89,835 20,253 18% (3,561) 7,454 0.19 20,990 0.53 16,416 39,608 247,574 86,156 119,664 91,855 27,809 23% 22,860 10,322 0.26 93,274 2.35 7,593 39,608 251,521 74,303 (9,576) (2,020) (7,556) (5%) (26,421) (2,868) (0.07) (72,284) (1.82) 8,823 - (3,947) 11,853 (8%) (2%) (27%) (22%) (116%) (28%) (27%) (77%) (77%) 116% 0% (2%) 16% (1) (cid:54)ee (cid:5)(cid:49)(cid:82)n(cid:16)(cid:42)(cid:36)(cid:36)(cid:51) and (cid:54)u(cid:83)(cid:83)le(cid:80)entar(cid:92) Financial (cid:48)ea(cid:86)ure(cid:86)(cid:181) near the end (cid:82)f thi(cid:86) (cid:48)(cid:39)(cid:9)(cid:36) f(cid:82)r further detail(cid:17) General Overview A number of forces converged in 2021 to create a turbulent environment for the North American drilling industry. Substantially improved commodity pricing led to an increase in oil and gas drilling and overall improved industry rig utilization. The Company’s operating days increased to 4,465 in 2021, up from 3,500 in 2020. This increase in activity did not translate into higher results however, as day rates in the industry remained at very low levels for the majority of the year, and only beginning to increase near the end of the year as activity continued to strengthen. The effect of low day rates was exacerbated by increased costs over the course of the year. The Company recorded a net loss of $20,990,000 in 2021 compared to a loss of $93,274,000 ($20,674,000 after adjusting for the $80,000,000 a(cid:86)(cid:86)et i(cid:80)(cid:83)air(cid:80)ent l(cid:82)(cid:86)(cid:86)(cid:12) in (cid:21)(cid:19)(cid:21)(cid:19)(cid:17) (cid:36)d(cid:77)u(cid:86)ted fund(cid:86) (cid:193)(cid:82)(cid:90) fr(cid:82)(cid:80) (cid:82)(cid:83)erati(cid:82)n(cid:86) decrea(cid:86)ed t(cid:82) (cid:7)(cid:26),(cid:23)(cid:24)(cid:23),(cid:19)(cid:19)(cid:19) in (cid:21)(cid:19)(cid:21)(cid:20) fr(cid:82)(cid:80) (cid:7)(cid:20)(cid:19),(cid:22)(cid:21)(cid:21),(cid:19)(cid:19)(cid:19) in (cid:21)(cid:19)(cid:21)(cid:19)(cid:17) The Company more than doubled its capital spending in 2021 to $16,416,000 from $7,593,000 in 2020. This capital was required to reactivate idle assets, upgrade equipment to meet customer demand and replace old or worn out drill pipe. This high capital spend c(cid:82)(cid:80)(cid:83)ared t(cid:82) ad(cid:77)u(cid:86)ted fund(cid:86) (cid:193)(cid:82)(cid:90) fr(cid:82)(cid:80) (cid:82)(cid:83)erati(cid:82)n(cid:86) (cid:11)(cid:7)(cid:26),(cid:23)(cid:24)(cid:23),(cid:19)(cid:19)(cid:19)(cid:12) (cid:90)a(cid:86) re(cid:84)uired t(cid:82) (cid:83)(cid:82)(cid:86)iti(cid:82)n the (cid:193)eet (cid:90)ell f(cid:82)r a (cid:86)ucce(cid:86)(cid:86)ful and active (cid:21)(cid:19)(cid:21)(cid:21)(cid:17) Funding for this capital investment was primarily through drawing on the Company’s credit facility, which increased to $86,156,000 at December 31, 2021 from $74,303,000 at the same time in the prior year AKITA DRILLING | 2021 Annual Report 11 MANAGEMENT’S DISCUSSION & ANALYSIS Industry Overview WTI Prices ($USD/bbl) (1) Alberta Natural Gas Price ($CAD/GJ) (2) 2021 2020 2019 90.00 80.00 70.00 60.00 50.00 40.00 30.00 20.00 10.00 6.0 5.0 4.0 3.0 2.0 1.0 0 JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC Industry Utilization Canada (3) US Active Rig Count (4) 50% 40% 30% 20% 10% 0% 1,200 1,000 800 600 400 200 JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC 1) Source: U.S. Energy Information Administration (cid:21)(cid:12) (cid:54)(cid:82)urce(cid:29) (cid:49)atural (cid:42)a(cid:86) Exchan(cid:74)e (cid:11)(cid:5)(cid:49)(cid:42)(cid:59)(cid:5)(cid:12) 3) Source: Canadian Association of Energy Contractors ("CAOEC") 4) Source: Baker Hughes North American Rotary Rig Count Oil and gas contract drilling activity is cyclical and is affected by numerous factors, most importantly world crude oil prices, North (cid:36)(cid:80)erican natural (cid:74)a(cid:86) (cid:83)rice(cid:86) and increa(cid:86)in(cid:74)l(cid:92) internati(cid:82)nal (cid:47)(cid:49)(cid:42) (cid:83)ricin(cid:74)(cid:17) Crude (cid:82)il (cid:83)rice(cid:86) have (cid:69)een rec(cid:82)verin(cid:74) (cid:86)ince the l(cid:82)(cid:90)(cid:86) in (cid:36)(cid:83)ril of 2020, reaching levels not seen since 2014 by the end of 2021. Natural gas prices, which were not impacted as heavily as crude oil prices by the global pandemic, have increased well above 2019 and 2020 levels, and like WTI prices, are now at levels not seen since 2014. The demand for crude oil has continued to grow as the effects to mitigate the impact of the pandemic lessen and supply has not kept up with this demand, causing prices to continue to rise. (cid:44)n Canada, indu(cid:86)tr(cid:92) utili(cid:93)ati(cid:82)n, (cid:90)hich c(cid:82)lla(cid:83)(cid:86)ed in the fir(cid:86)t (cid:84)uarter (cid:82)f (cid:21)(cid:19)(cid:21)(cid:19) (cid:69)ecau(cid:86)e (cid:82)f the (cid:74)l(cid:82)(cid:69)al (cid:83)ande(cid:80)ic, i(cid:86) n(cid:82)(cid:90) a(cid:69)(cid:82)ve (cid:21)(cid:19)(cid:20)(cid:28) level(cid:86)(cid:17) (cid:36)ctivit(cid:92) level(cid:86) in the Canadian indu(cid:86)tr(cid:92) have reached a (cid:83)(cid:82)int (cid:90)here drillin(cid:74) c(cid:82)ntract(cid:82)r(cid:86) are a(cid:69)le t(cid:82) increa(cid:86)e da(cid:92) rate(cid:86) f(cid:82)r the fir(cid:86)t ti(cid:80)e in several years and a recovery in the Canadian industry appears to be starting in earnest. This positivity in the Canadian industry is being tempered by the fact that rates are increasing from extremely low benchmark rates that were established in the downturn, then further de(cid:83)re(cid:86)(cid:86)ed durin(cid:74) the hei(cid:74)ht (cid:82)f the (cid:83)ande(cid:80)ic due t(cid:82) (cid:86)i(cid:74)nificant (cid:86)u(cid:83)(cid:83)l(cid:92) chain i(cid:86)(cid:86)ue(cid:86) (cid:90)hich are drivin(cid:74) c(cid:82)(cid:86)t(cid:86) hi(cid:74)her, and (cid:69)(cid:92) an inability to secure additional labour. Access to labour is expected to be the key constraint to a rapid recovery in drilling activity in the Canadian industry. In the US, industry activity has been slowly increasing since the lows seen in the third quarter of 2020 but is still well below 2019 levels, with 586 active rigs at the end of 2021 compared to 805 active rigs at the end of 2019. Despite high oil and gas prices, changing fundamentals in the US oil and gas industry have meant large multinational oil and gas companies have not increased their demand for drilling services, which has kept the active rig count low. This slower recovery in the US has constrained the industry’s ability to raise (cid:82)(cid:83)eratin(cid:74) rate(cid:86), (cid:90)hich have (cid:69)een declinin(cid:74) (cid:86)ince the fir(cid:86)t (cid:84)uarter (cid:82)f (cid:21)(cid:19)(cid:21)(cid:19) u(cid:83) until the (cid:86)ec(cid:82)nd (cid:84)uarter (cid:82)f (cid:21)(cid:19)(cid:21)(cid:20)(cid:17) 12 AKITA DRILLING | 2021 Annual Report MANAGEMENT’S DISCUSSION & ANALYSIS Results by Segment Canada $Thousands except per day amounts 2021 2020 Change % Change Revenue Canada Revenue from joint venture drilling rigs Flow through charges (1) Adjusted revenue Canada (1) 28,290 15,893 28,466 5,094 (3,512) (6,835) 40,671 26,725 Operating and maintenance expenses Canada 21,489 20,954 (176) 10,799 3,323 13,946 535 Operating and maintenance expenses from joint venture drilling rigs 13,626 4,352 9,274 Flow through charges (1) Adjusted operating and maintenance expenses Canada (1) Adjusted operating margin(1) Margin %(1) Operating days Adjusted revenue per operating day (1) Adjusted operating and maintenance per operating day (1) 19,826 Adjusted operating margin per operating day (1) Utilization (1) Rig count (3,512) (6,835) 3,323 31,603 18,471 13,132 9,068 8,254 814 22% 1,594 25,515 5,689 22% 31% 945 28,280 19,546 8,734 13% (9%) 649 (2,765) 280 (3,045) 9% 20 20 - (1%) 212% (49%) 52% 3% 213% (49%) 71% 10% (29%) 69% (10%) 1% (35%) 69% 0% (1) (cid:54)ee (cid:180)(cid:49)(cid:82)n(cid:16)(cid:42)(cid:36)(cid:36)(cid:51) and (cid:54)u(cid:83)(cid:83)le(cid:80)entar(cid:92) Financial (cid:48)ea(cid:86)ure(cid:86)(cid:5) near the end (cid:82)f thi(cid:86) (cid:48)(cid:39)(cid:9)(cid:36) f(cid:82)r further detail(cid:17) (cid:56)tili(cid:93)ati(cid:82)n rate(cid:86) are a (cid:78)e(cid:92) (cid:86)tati(cid:86)tic f(cid:82)r the drillin(cid:74) indu(cid:86)tr(cid:92) (cid:86)ince the(cid:92) t(cid:92)(cid:83)icall(cid:92) directl(cid:92) affect t(cid:82)tal revenue and in(cid:193)uence (cid:83)ricin(cid:74)(cid:17) (cid:39)urin(cid:74) 2021, AKITA achieved 1,594 operating days in Canada, which corresponds to an annual utilization rate of 22%, compared to a 2021 industry average of 25% and a 2020 utilization rate for the Company of 13% (945 days). The increase in AKITA’s operating days in 2021 compared to 2020 is attributable to the increase in activity for AKITA’s joint venture rigs that increased 496 days year over year as activity in the oil sands improved in the second half of 2021. Canadian adjusted revenue of $40,671,000 in 2021 was 52% higher than 2020 adjusted revenue of $26,725,000, due to increased activity in 2021 but was offset by lower average day rates. Adjusted revenue per day decreased to $25,515 in 2021 from $28,280 in 2020. Lower adjusted revenue per day in Canada compared to 2020 was due to two factors: the mix of rigs working in 2021, with more lower margin rigs working in 2021, and labour contract revenue earned in 2020 that was not earned in 2021 which accounted for $1,034 of the total decrease in adjusted revenue per day. Included in the Canadian operating results is AKITA’s share of revenue and costs from its joint ventures, as AKITA provides the same drilling services through its joint venture drilling rigs as it does its wholly- owned rigs. Adjusted operating and maintenance expenses are tied to activity levels and increased to $31,603,000 in 2021 from $18,471,000 in 2020, equal to a 69% increase in operating costs, which is in-line with the 69% increase in operating days. On a per day basis, ad(cid:77)u(cid:86)ted (cid:82)(cid:83)eratin(cid:74) and (cid:80)aintenance c(cid:82)(cid:86)t(cid:86) re(cid:80)ained e(cid:86)(cid:86)entiall(cid:92) (cid:193)at, (cid:92)ear (cid:82)ver (cid:92)ear(cid:17) (cid:44)ncrea(cid:86)in(cid:74) c(cid:82)(cid:86)t(cid:86) in the indu(cid:86)tr(cid:92) f(cid:82)r (cid:86)u(cid:83)(cid:83)lie(cid:86) a(cid:86) well as labour costs were offset by the Canadian Emergency Wage Subsidy (“CEWS”) of $3,450,000 in 2021 compared to $1,820,000 in 2020. AKITA DRILLING | 2021 Annual Report 13 MANAGEMENT’S DISCUSSION & ANALYSIS (cid:44)n (cid:21)(cid:19)(cid:21)(cid:20), (cid:36)(cid:46)(cid:44)(cid:55)(cid:36) deli(cid:86)ted (cid:82)ne (cid:82)f it(cid:86) (cid:86)in(cid:74)le ri(cid:74)(cid:86) in Canada and (cid:80)(cid:82)ved a hi(cid:74)h (cid:86)(cid:83)ecificati(cid:82)n (cid:36)C tri(cid:83)le ri(cid:74) fr(cid:82)(cid:80) the n(cid:82)rthern (cid:56)nited (cid:54)tate(cid:86) t(cid:82) Canada t(cid:82) addre(cid:86)(cid:86) the (cid:74)r(cid:82)(cid:90)in(cid:74) de(cid:80)and f(cid:82)r efficient hi(cid:74)h (cid:86)(cid:83)ecificati(cid:82)n tri(cid:83)le drillin(cid:74) ri(cid:74)(cid:86)(cid:17) (cid:55)he Canadian ri(cid:74) (cid:193)eet theref(cid:82)re, re(cid:80)ained constant at 20 rigs in both 2021 and 2020. AKITA’s Canadian segment provided drilling services to 15 different customers in 2021 (2020 - eight different customers), including four customers that each provided more than 10% of AKITA’s Canadian revenue for the year (2020 – four customers). United States $Thousands except per day amounts (CAD) 2021 2020 Change % Change Revenue US Flow through charges (1) Adjusted revenue US (1) Operating and maintenance expenses US Flow through charges (1) Adjusted operating and maintenance expenses US (1) Adjusted operating margin (1) Margin % (1) Operating days Adjusted revenue per operating day (1) 81,798 91,198 (10,374) (10,821) 71,424 80,377 68,371 70,901 (10,374) (10,821) 57,997 13,427 19% 60,080 20,297 25% 2,871 2,555 24,878 31,459 Adjusted operating and maintenance per operating day (1) 20,201 23,515 Adjusted operating margin per operating day (1) 4,677 7,944 (9,400) 447 (8,953) (2,530) 447 (2,083) (6,870) (6%) 316 (6,581) (3,314) (3,267) 5% (10%) 4% (11%) (4%) 4% (3%) (34%) (24%) 12% (21%) (14%) (41%) 12% (6%) Utilization (1) Rig count 46% 41% 16 17 (1) (1 ) (cid:54)ee (cid:180)(cid:49)(cid:82)n(cid:16)(cid:42)(cid:36)(cid:36)(cid:51) and (cid:54)u(cid:83)(cid:83)le(cid:80)entar(cid:92) Financial (cid:48)ea(cid:86)ure(cid:86)(cid:5) near the end (cid:82)f thi(cid:86) (cid:48)(cid:39)(cid:9)(cid:36) f(cid:82)r further detail(cid:17) Activity levels in the US over 2021 improved for both AKITA and in industry over the low levels seen in 2020, albeit at a measured pace. Operating days increased 12% to 2,871 in 2021 from 2,555 in 2020. The active rig count for AKITA grew from nine rigs in January of 2021, to 13 rigs by the end of 2021. Despite the increase in operating days, adjusted revenue decreased to $71,424,000 in 2021 from $80,377,000 in 2020. The decrease in adjusted revenue per day to $24,878 in 2021 from $31,459 in 2020 drove the decrease in total adjusted revenue. High day rates in (cid:21)(cid:19)(cid:20)(cid:28) that carried int(cid:82) the fir(cid:86)t half (cid:82)f (cid:21)(cid:19)(cid:21)(cid:19) declined (cid:86)i(cid:74)nificantl(cid:92) in the (cid:86)ec(cid:82)nd half (cid:82)f (cid:21)(cid:19)(cid:21)(cid:19), due t(cid:82) the de(cid:80)and de(cid:86)tructi(cid:82)n re(cid:86)ultin(cid:74) fr(cid:82)(cid:80) eff(cid:82)rt(cid:86) t(cid:82) (cid:80)iti(cid:74)ate the (cid:86)(cid:83)read (cid:82)f the (cid:74)l(cid:82)(cid:69)al (cid:83)ande(cid:80)ic(cid:17) (cid:47)(cid:82)(cid:90) da(cid:92) rate(cid:86) (cid:83)er(cid:86)i(cid:86)ted thr(cid:82)u(cid:74)h the fir(cid:86)t three (cid:84)uarter(cid:86) (cid:82)f (cid:21)(cid:19)(cid:21)(cid:20) cau(cid:86)in(cid:74) avera(cid:74)e da(cid:92) rate(cid:86) t(cid:82) decrea(cid:86)e (cid:21)(cid:20)(cid:8) (cid:92)ear(cid:16)(cid:82)ver(cid:16)(cid:92)ear(cid:17) (cid:55)he C(cid:82)(cid:80)(cid:83)an(cid:92) al(cid:86)(cid:82) received c(cid:82)ntract cancellati(cid:82)n revenue in the fir(cid:86)t (cid:84)uarter (cid:82)f (cid:21)(cid:19)(cid:21)(cid:19) of $1,655,000 which contributed to higher day rates in 2020. Revenue in the US accounted for 62% of the Company’s total 2021 adjusted revenue, down from 76% in 2020. Adjusted operating and maintenance costs decreased to $57,997,000 in 2021 from $60,080,000 in 2020 despite higher operating days in 2021. Adjusted operating and maintenance costs per day decreased to $20,201 in 2021 from $23,515 in 2020 due to two factors. First, the rigs that operated in 2021 had steadier drilling programs throughout the year and experienced lower daily maintenance costs by working longer without interruption. Second, move costs incurred in 2020 of $1,000,000 added to operating and maintenance costs in 2020. In the US, AKITA provided drilling services to 29 different customers in 2021 (2020 – 13 customers), including one customer that provided more than 10% of AKITA’s US revenue for the year (2020 – two customers). 14 AKITA DRILLING | 2021 Annual Report MANAGEMENT’S DISCUSSION & ANALYSIS Seasonality The Canadian drilling industry is seasonal with activity typically building in the fall as the ground freezes and peaking during the winter months. Northern transportation routes become available once areas with muskeg conditions freeze to allow the movement of drilling rigs and other heavy equipment. The peak Canadian drilling season ends with "spring break-up" at which time drilling operations are curtailed due to seasonal road bans (temporary prohibitions on road use) and restricted access to agricultural land as frozen ground tha(cid:90)(cid:86)(cid:17) (cid:55)he (cid:86)u(cid:80)(cid:80)er drillin(cid:74) (cid:86)ea(cid:86)(cid:82)n (cid:69)e(cid:74)in(cid:86) (cid:90)hen r(cid:82)ad (cid:69)an(cid:86) are lifted(cid:17) (cid:54)(cid:82)(cid:80)e area(cid:86) are (cid:86)u(cid:69)(cid:77)ect t(cid:82) envir(cid:82)n(cid:80)ental (cid:82)rder(cid:86) f(cid:82)r (cid:86)(cid:83)ecific well leases which can prevent drilling activity during certain periods when authorities prioritize wildlife or habitat protections. Such restrictions may affect activity levels and operating results. While activity in the northern part of the US is subject to a degree of seasonality, it is less affected by spring break-up than AKITA’s operations in northern Canada. Other areas in the US where AKITA conducts drilling operations are infrequently subject to weather constraints, especially in the southern states, but may experience operational restrictions for other reasons. While seasonality can affect all rig classes, pad drilling rigs are generally less susceptible to seasonality than conventional drilling rigs. Depreciation and Amortization Expense $Millions Depreciation and amortization expense 2021 28.8 2020 32.7 Change % Change (3.9) (12%) The decrease in depreciation and amortization expense to $28,838,000 during 2021 from $32,681,000 during 2020, is due to the impact of the $80,000,000 asset impairment loss the Company recorded in 2020. AKITA depreciates its drilling rig assets on a straight-line basis where the estimated useful lives and residual values of various rig components have been chosen to match the expected life of that component. In 2021, drilling rig depreciation accounted for 97% of total depreciation expense, compared to 97% in 2020. While AKITA conducts some of its drilling operations via joint ventures, the drilling rigs used to conduct those activities are owned jointly by AKITA and its joint venture partners, and not by the joint ventures themselves. As the joint ventures do not hold any property, plant, or equipment assets directly, the Company’s depreciation expense includes depreciation on assets involved in both wholly-owned and joint venture activities. Selling and Administrative Expenses $Millions Selling and administrative expenses 2021 12.2 2020 12.7 Change % Change (0.5) (4%) Selling and administrative expenses decreased to $12,213,000 in 2021 from $12,686,000 in 2020 due to the payment of a one- ti(cid:80)e l(cid:82)n(cid:74) (cid:86)ervice retirin(cid:74) all(cid:82)(cid:90)ance (cid:82)f (cid:7)(cid:22),(cid:20)(cid:20)(cid:26),(cid:19)(cid:19)(cid:19) in (cid:21)(cid:19)(cid:21)(cid:19) and (cid:90)a(cid:86) (cid:82)ff(cid:86)et (cid:69)(cid:92) additi(cid:82)nal (cid:86)taffin(cid:74) re(cid:84)uire(cid:80)ent(cid:86) needed t(cid:82) (cid:80)eet increased activity levels in 2021. Also contributing to the decrease in selling and administrative costs is the receipt of COVID-19 related government grants totaling $552,000 in 2021 and $448,000 in 2020. Selling and administrative expenses equated to 11% of revenue in both 2021 and 2020. The single largest component of selling and ad(cid:80)ini(cid:86)trative ex(cid:83)en(cid:86)e(cid:86) i(cid:86) (cid:86)alarie(cid:86) and (cid:69)enefit(cid:86) (cid:90)hich acc(cid:82)unted f(cid:82)r (cid:23)(cid:23)(cid:8) (cid:82)f the(cid:86)e ex(cid:83)en(cid:86)e(cid:86) in (cid:21)(cid:19)(cid:21)(cid:20) (cid:11)(cid:21)(cid:19)(cid:21)(cid:19) (cid:178) (cid:26)(cid:24)(cid:8)(cid:12)(cid:17) AKITA DRILLING | 2021 Annual Report 15 MANAGEMENT’S DISCUSSION & ANALYSIS Asset Impairment $Millions Asset impairment loss 2021 - 2020 80.0 Change % Change (80.0) (100%) The Company did not identify any changes in the indicators of asset impairment or impairment reversals or any new indicators of asset impairment since the asset impairment test that was carried out as at December 31, 2020. Therefore, no further assessment on asset impairment was performed as there have been no changes in circumstances that indicate that the carrying amount of property, plant and equipment does not exceed its recoverable amount as at December 31, 2021. (cid:44)n the fir(cid:86)t (cid:84)uarter (cid:82)f (cid:21)(cid:19)(cid:21)(cid:19), the C(cid:82)(cid:80)(cid:83)an(cid:92) rec(cid:82)rded an i(cid:80)(cid:83)air(cid:80)ent l(cid:82)(cid:86)(cid:86) (cid:82)f (cid:7)(cid:22)(cid:19),(cid:19)(cid:19)(cid:19),(cid:19)(cid:19)(cid:19) in each (cid:82)f it(cid:86) Canadian and (cid:56)(cid:54) Ca(cid:86)h (cid:42)eneratin(cid:74) (cid:56)nit(cid:86) (cid:11)(cid:180)C(cid:42)(cid:56)(cid:86)(cid:181)(cid:12) re(cid:86)(cid:83)ectivel(cid:92)(cid:17) (cid:44)n the f(cid:82)urth (cid:84)uarter (cid:82)f (cid:21)(cid:19)(cid:21)(cid:19), (cid:69)(cid:82)th C(cid:42)(cid:56)(cid:86) (cid:90)ere te(cid:86)ted a(cid:74)ain f(cid:82)r i(cid:80)(cid:83)air(cid:80)ent and the C(cid:82)(cid:80)(cid:83)an(cid:92)(cid:10)(cid:86) (cid:56)(cid:54) C(cid:42)(cid:56)(cid:86) carrying amount exceeded the recoverable amount, resulting in an additional impairment of $20,000,000. The total impairment loss for the year ended December 31, 2020 was $80,000,000. (cid:55)he rec(cid:82)vera(cid:69)le a(cid:80)(cid:82)unt(cid:86) (cid:82)f the(cid:86)e C(cid:42)(cid:56)(cid:86) (cid:90)ere deter(cid:80)ined u(cid:86)in(cid:74) a di(cid:86)c(cid:82)unted ca(cid:86)h (cid:193)(cid:82)(cid:90) (cid:80)(cid:82)del(cid:17) (cid:36)(cid:86)(cid:86)u(cid:80)(cid:83)ti(cid:82)n(cid:86) u(cid:86)ed in the di(cid:86)c(cid:82)unted ca(cid:86)h (cid:193)(cid:82)(cid:90) (cid:80)(cid:82)del(cid:86) include the C(cid:82)(cid:80)(cid:83)an(cid:92)(cid:183)(cid:86) (cid:37)(cid:82)ard (cid:82)f (cid:39)irect(cid:82)r(cid:86) a(cid:83)(cid:83)r(cid:82)ved (cid:69)ud(cid:74)et(cid:86) and an avera(cid:74)e revenue (cid:74)r(cid:82)(cid:90)th rate ran(cid:74)in(cid:74) fr(cid:82)(cid:80) (cid:24)(cid:8) t(cid:82) (cid:20)(cid:24)(cid:8) (cid:82)ver a (cid:20)(cid:19) (cid:92)ear (cid:83)eri(cid:82)d de(cid:83)endin(cid:74) (cid:82)n the C(cid:42)(cid:56) (cid:69)ein(cid:74) anal(cid:92)(cid:93)ed(cid:17) (cid:44)n f(cid:82)reca(cid:86)tin(cid:74) it(cid:86) (cid:83)r(cid:82)(cid:77)ected ca(cid:86)h (cid:193)(cid:82)(cid:90)(cid:86) the C(cid:82)(cid:80)(cid:83)an(cid:92) a(cid:86)(cid:86)u(cid:80)ed a (cid:86)l(cid:82)(cid:90) recovery commencing in 2021 for both Canada and the US with improvements in activity and revenue per day over the forecast period. (cid:39)i(cid:86)c(cid:82)unted future ca(cid:86)h (cid:193)(cid:82)(cid:90)(cid:86) are deter(cid:80)ined (cid:69)(cid:92) a(cid:83)(cid:83)l(cid:92)in(cid:74) a di(cid:86)c(cid:82)unt rate (cid:82)f (cid:20)(cid:23)(cid:17)(cid:24)(cid:8)(cid:17) (cid:55)hi(cid:86) valuati(cid:82)n ha(cid:86) an (cid:44)F(cid:53)(cid:54) fair value hierarch(cid:92) (cid:82)f Level 3. Additionally, in the fourth quarter, management also obtained external equipment appraisals from independent third party experts which supported the fair value less cost to sell. (cid:36)(cid:86)(cid:86)et i(cid:80)(cid:83)air(cid:80)ent te(cid:86)tin(cid:74) i(cid:86) (cid:86)u(cid:69)(cid:77)ect t(cid:82) nu(cid:80)er(cid:82)u(cid:86) a(cid:86)(cid:86)u(cid:80)(cid:83)ti(cid:82)n(cid:86), inherent ri(cid:86)(cid:78)(cid:86) and uncertaintie(cid:86), (cid:69)(cid:82)th (cid:74)eneral and (cid:86)(cid:83)ecific, and the ri(cid:86)(cid:78) that the (cid:83)redicti(cid:82)n(cid:86) (cid:90)ill n(cid:82)t (cid:69)e reali(cid:93)ed(cid:17) (cid:36)(cid:86) a re(cid:86)ult, the f(cid:82)ll(cid:82)(cid:90)in(cid:74) (cid:86)en(cid:86)itivit(cid:92) anal(cid:92)(cid:86)i(cid:86) ha(cid:86) (cid:69)een (cid:83)erf(cid:82)r(cid:80)ed (cid:82)ver the (cid:86)i(cid:74)nificant assumptions to recognize that additional outcomes are possible: (cid:135) Chan(cid:74)ed future revenue a(cid:86)(cid:86)u(cid:80)(cid:83)ti(cid:82)n(cid:86) (cid:69)(cid:92) (cid:24)(cid:8) re(cid:86)ultin(cid:74) in increa(cid:86)e(cid:86) t(cid:82) the C(cid:82)(cid:80)(cid:83)an(cid:92)(cid:183)(cid:86) C(cid:42)(cid:56)(cid:86) fr(cid:82)(cid:80) (cid:7)(cid:20)(cid:24) (cid:80)illi(cid:82)n t(cid:82) (cid:7)(cid:22)(cid:24) (cid:80)illi(cid:82)n (cid:83)er C(cid:42)(cid:56) and reducti(cid:82)n(cid:86) ran(cid:74)in(cid:74) fr(cid:82)(cid:80) (cid:7)(cid:20)(cid:24) (cid:80)illi(cid:82)n t(cid:82) (cid:7)(cid:22)(cid:24) (cid:80)illi(cid:82)n (cid:83)er C(cid:42)(cid:56)(cid:30) and (cid:135) Chan(cid:74)ed the C(cid:82)(cid:80)(cid:83)an(cid:92)(cid:183)(cid:86) (cid:83)re(cid:16)tax di(cid:86)c(cid:82)unt rate (cid:69)(cid:92) (cid:20)(cid:8) re(cid:86)ultin(cid:74) in reducti(cid:82)n(cid:86) (cid:69)et(cid:90)een (cid:7)(cid:23) (cid:80)illi(cid:82)n and (cid:7)(cid:20)(cid:20) (cid:80)illi(cid:82)n (cid:83)er C(cid:42)(cid:56) and increa(cid:86)e(cid:86) fr(cid:82)(cid:80) (cid:7)(cid:23) (cid:80)illi(cid:82)n t(cid:82) (cid:7)(cid:20)(cid:19) (cid:80)illi(cid:82)n (cid:83)er C(cid:42)(cid:56)(cid:17) As drilling rigs are long lived assets, no sensitivity adjustment was made for the projected forecast period. As the base case test represented management’s best estimates, these sensitivity reductions were not included in the asset impairment loss reported. 16 AKITA DRILLING | 2021 Annual Report MANAGEMENT’S DISCUSSION & ANALYSIS Equity Income from Joint Ventures Equity income from joint ventures is comprised of the following: $Millions Proportionate share of revenue from joint ventures (cid:51)r(cid:82)(cid:83)(cid:82)rti(cid:82)nate (cid:86)hare (cid:82)f (cid:82)(cid:83)eratin(cid:74) (cid:9) (cid:80)aintenance expenses from joint ventures Proportionate share of selling and administrative expenses from joint ventures Equity income from joint ventures 2021 15.9 13.6 0.3 2.0 2020 Change % Change 5.1 4.4 0.1 0.6 10.8 9.2 0.2 1.4 212% 209% 200% 233% (cid:55)he C(cid:82)(cid:80)(cid:83)an(cid:92) (cid:83)r(cid:82)vide(cid:86) the (cid:86)a(cid:80)e drillin(cid:74) (cid:86)ervice(cid:86) and utili(cid:93)e(cid:86) the (cid:86)a(cid:80)e (cid:80)ana(cid:74)e(cid:80)ent, financial and re(cid:83)(cid:82)rtin(cid:74) c(cid:82)ntr(cid:82)l(cid:86) f(cid:82)r it(cid:86) (cid:77)(cid:82)int venture activities as it does for its wholly-owned operations. The analyses of these activities are incorporated throughout the relevant (cid:86)ecti(cid:82)n(cid:86) (cid:82)f thi(cid:86) (cid:48)(cid:39)(cid:9)(cid:36) relatin(cid:74) t(cid:82) activit(cid:92), revenue (cid:83)er da(cid:92) a(cid:86) (cid:90)ell a(cid:86) (cid:82)(cid:83)eratin(cid:74) ex(cid:83)en(cid:86)e(cid:86)(cid:17) (cid:55)he increa(cid:86)e in revenue f(cid:82)r the C(cid:82)(cid:80)(cid:83)an(cid:92)(cid:183)(cid:86) (cid:83)r(cid:82)(cid:83)(cid:82)rti(cid:82)nate (cid:86)hare (cid:82)f (cid:77)(cid:82)int venture(cid:86) (cid:92)ear(cid:16)(cid:82)ver(cid:16)(cid:92)ear relate(cid:86) t(cid:82) the increa(cid:86)ed activit(cid:92) in (cid:54)(cid:36)(cid:42)(cid:39) drillin(cid:74) (cid:90)hich i(cid:86) the (cid:78)e(cid:92) (cid:80)ar(cid:78)et f(cid:82)r the Company’s joint venture rigs. Other Income (Loss) $Millions Interest income Interest expense Loss on sale of assets Net other gains Total other loss 2021 - (3.6) - 0.6 (3.0) 2020 Change % Change - (5.6) (0.2) - (5.8) - n/a 2.0 0.2 0.6 2.8 36% 100% n/a 48% During 2021, the Company recorded interest expense of $3,553,000 (2020 – $5,637,000). The reduction of the Company’s interest expense relates to the repayment of the Company’s high interest US dollar denominated debt that was assumed with the acquisition (cid:82)f (cid:59)tre(cid:80)e (cid:39)rillin(cid:74) C(cid:82)r(cid:83)(cid:17) in (cid:21)(cid:19)(cid:20)(cid:27) and re(cid:83)aid durin(cid:74) (cid:21)(cid:19)(cid:21)(cid:19)(cid:17) During 2020, the Company disposed of non-core assets resulting in a loss of $156,000 with total proceeds of $2,142,000 (2021 – nil). In 2021 the Company had a net other gain of $559,000 compared to a loss of $35,000 in 2020. The net other gain in 2021 was due primarily to the disposition of fully depreciated property. AKITA DRILLING | 2021 Annual Report 17 MANAGEMENT’S DISCUSSION & ANALYSIS Income Tax Recovery $Millions, except income tax rate (%) Current tax recovery Deferred tax recovery Total income tax recovery Effective income tax rate 2021 - (0.8) (0.8) 24.5% 2020 Change % Change (0.1) (9.3) (9.4) 24.6% 0.1 8.5 8.6 100% 91% 91% AKITA had an income tax recovery of $792,000 in 2021 compared to an income tax recovery of $9,427,000 in 2020. Deferred tax recovery decreased to $792,000 in 2021 from $9,311,000 in 2020 due to the impact of the asset impairment loss recorded in 2020. A net deterred tax asset has not been recognized for $69 million (2020 - $67 million). This amount is primarily related to non-capital losses carried forward. (cid:55)(cid:82)tal (cid:74)r(cid:82)(cid:86)(cid:86) tax l(cid:82)(cid:86)(cid:86)e(cid:86) availa(cid:69)le t(cid:82) the c(cid:82)(cid:80)(cid:83)an(cid:92) are (cid:7)(cid:23)(cid:19)(cid:19),(cid:24)(cid:22)(cid:26),(cid:19)(cid:19)(cid:19) (cid:90)ith (cid:7)(cid:22)(cid:25)(cid:28),(cid:27)(cid:25)(cid:25),(cid:19)(cid:19)(cid:19) in the (cid:56)(cid:54) and (cid:7)(cid:22)(cid:19),(cid:25)(cid:26)(cid:20),(cid:19)(cid:19)(cid:19) in Canada(cid:17) (cid:55)he fir(cid:86)t of these losses will begin to expire in 2031. Net Loss, Net Cash From (Used In) Operating Activities and Adjusted Funds Flow from Operations $Millions Net loss Net cash from (used in) operating activities (cid:36)d(cid:77)u(cid:86)ted fund(cid:86) (cid:193)(cid:82)(cid:90) fr(cid:82)(cid:80) (cid:82)(cid:83)erati(cid:82)n(cid:86) (1) 2021 (21.0) (3.5) 7.5 2020 (93.3) 22.9 10.3 Change % Change 72.3 (26.4) (2.8) 77% (115%) (27%) (1) (cid:54)ee (cid:5)(cid:49)(cid:82)n(cid:16)(cid:42)(cid:36)(cid:36)(cid:51) and (cid:54)u(cid:83)(cid:83)le(cid:80)entar(cid:92) Financial (cid:48)ea(cid:86)ure(cid:86)(cid:5) near the end (cid:82)f thi(cid:86) (cid:48)(cid:39)(cid:9)(cid:36) f(cid:82)r further detail(cid:17) During 2021, the Company recorded a net loss of $20,990,000 (net loss of $0.53 per Class A Non-Voting and Class B Common share (basic and diluted)) compared to a net loss of $93,274,000 (net loss of $2.35 per Class A Non-Voting and Class B Common share (basic and diluted(cid:12)(cid:12) in (cid:21)(cid:19)(cid:21)(cid:19)(cid:17) (cid:55)he (cid:83)ri(cid:80)ar(cid:92) fact(cid:82)r in(cid:193)uencin(cid:74) net inc(cid:82)(cid:80)e in (cid:21)(cid:19)(cid:21)(cid:19) (cid:90)a(cid:86) the (cid:7)(cid:27)(cid:19),(cid:19)(cid:19)(cid:19),(cid:19)(cid:19)(cid:19) a(cid:86)(cid:86)et i(cid:80)(cid:83)air(cid:80)ent l(cid:82)(cid:86)(cid:86)(cid:17) (cid:36)fter ad(cid:77)u(cid:86)tin(cid:74) for the impairment and the deferred tax impact, the Company’s net loss for 2020 was $20,674,000, which was in line with the loss of $20,990,000 in 2021. Net cash from (used in) operating activities decreased to a loss of $3,461,000 in 2021 compared to a gain of $22,860,000 in 2020 primarily due to changes in non-cash working capital between 2021 and 2020. The strong start to 2020 followed by a steady decrease created a positive change in non-cash working capital of $12,975,000 in 2020 compared to opposite conditions in 2021; a weak start to the year and building activity through the year which created a negative change in non-cash working capital of $8,867,000. (cid:36)d(cid:77)u(cid:86)ted fund(cid:86) (cid:193)(cid:82)(cid:90) fr(cid:82)(cid:80) (cid:82)(cid:83)erati(cid:82)n(cid:86), (cid:90)hich i(cid:86) n(cid:82)t i(cid:80)(cid:83)acted (cid:69)(cid:92) chan(cid:74)e(cid:86) in n(cid:82)n(cid:16)ca(cid:86)h (cid:90)(cid:82)r(cid:78)in(cid:74) ca(cid:83)ital decrea(cid:86)ed in (cid:21)(cid:19)(cid:21)(cid:20) c(cid:82)(cid:80)(cid:83)ared t(cid:82) (cid:21)(cid:19)(cid:21)(cid:19) (cid:69)ut t(cid:82) a le(cid:86)(cid:86)er extent than net ca(cid:86)h fr(cid:82)(cid:80) (cid:82)(cid:83)erati(cid:82)n(cid:86)(cid:17) (cid:36)d(cid:77)u(cid:86)ted fund(cid:86) (cid:193)(cid:82)(cid:90) fr(cid:82)(cid:80) (cid:82)(cid:83)erati(cid:82)n(cid:86) decrea(cid:86)ed t(cid:82) (cid:7)(cid:26),(cid:23)(cid:24)(cid:23),(cid:19)(cid:19)(cid:19) in (cid:21)(cid:19)(cid:21)(cid:20), down from $10,322,000 in 2020, a 30% decrease year-over-year. The 8% decrease in revenue in 2021 from 2020 with only a 2% c(cid:82)rre(cid:86)(cid:83)(cid:82)ndin(cid:74) decrea(cid:86)e in c(cid:82)(cid:86)t(cid:86) are the cau(cid:86)e (cid:82)f the decrea(cid:86)e in ad(cid:77)u(cid:86)ted fund(cid:86) (cid:193)(cid:82)(cid:90) fr(cid:82)(cid:80) (cid:82)(cid:83)erati(cid:82)n(cid:86), (cid:82)ff(cid:86)et (cid:86)(cid:82)(cid:80)e(cid:90)hat due t(cid:82) l(cid:82)(cid:90)er interest expenses in 2021 ($3,553,000) compared to 2020 ($5,637,000). 18 AKITA DRILLING | 2021 Annual Report MANAGEMENT’S DISCUSSION & ANALYSIS Summary of Quarterly Results (cid:55)he f(cid:82)ll(cid:82)(cid:90)in(cid:74) ta(cid:69)le (cid:86)h(cid:82)(cid:90)(cid:86) (cid:78)e(cid:92) (cid:86)elected (cid:84)uarterl(cid:92) financial inf(cid:82)r(cid:80)ati(cid:82)n f(cid:82)r the C(cid:82)(cid:80)(cid:83)an(cid:92)(cid:29) $Thousands, except per share (unaudited) Mar. 31 Jun. 30 Sep. 30 Dec. 31 Annual Totals Three Months Ended 2021 Revenue Net loss 27,171 18,651 29,906 34,360 110,088 (3,651) (6,108) (6,433) (4,798) (20,990) Loss per share (basic and diluted) ($) Adjusted funds flow from operations (1) (0.09) 3,719 (0.15) 1,056 (0.16) 252 (0.13) 2,427 (0.53) 7,454 Cash flow from (used in) operations (5,692) 10,118 (1,560) (6,327) (3,461) 2020 Revenue Net loss 53,572 26,359 18,849 20,884 119,664 (52,257) (5,221) (8,203) (27,593) (93,274) Loss per share (basic and diluted) ($) (cid:36)d(cid:77)u(cid:86)ted fund(cid:86) (cid:193)(cid:82)(cid:90) fr(cid:82)(cid:80) (cid:11)u(cid:86)ed in(cid:12) (cid:82)(cid:83)erati(cid:82)n(cid:86) (1) Ca(cid:86)h (cid:193)(cid:82)(cid:90) fr(cid:82)(cid:80) (cid:82)(cid:83)erati(cid:82)n(cid:86) (1.32) 10,154 (0.13) 2,099 4,583 13,621 (0.21) (669) 3,374 (0.69) (2.35) (1,263) 10,321 1,282 22,860 2019 Revenue Net loss 52,342 39,119 42,610 41,819 175,890 (1,470) (5,067) (5,397) (7,941) (19,875) Loss per share (basic and diluted) ($) (cid:36)d(cid:77)u(cid:86)ted fund(cid:86) (cid:193)(cid:82)(cid:90) fr(cid:82)(cid:80) (cid:82)(cid:83)erati(cid:82)n(cid:86) (1) (0.04) 7,828 (0.13) 1,559 Ca(cid:86)h (cid:193)(cid:82)(cid:90) fr(cid:82)(cid:80) (cid:11)u(cid:86)ed in(cid:12) (cid:82)(cid:83)erati(cid:82)n(cid:86) (4,287) 24,903 (0.14) 3,076 (735) (0.19) 462 1,677 (0.50) 12,925 21,558 (1) (cid:54)ee (cid:5)(cid:49)(cid:82)n(cid:16)(cid:42)(cid:36)(cid:36)(cid:51) and (cid:54)u(cid:83)(cid:83)le(cid:80)entar(cid:92) Financial (cid:48)ea(cid:86)ure(cid:86)(cid:5) near the end (cid:82)f thi(cid:86) (cid:48)(cid:39)(cid:9)(cid:36) f(cid:82)r further detail(cid:17) Key trends over the past 12 quarters, after giving consideration to the seasonal nature of AKITA’s operations, are as follows: (cid:135) (cid:53)evenue in the fir(cid:86)t (cid:84)uarter (cid:82)f (cid:21)(cid:19)(cid:20)(cid:28) and (cid:21)(cid:19)(cid:21)(cid:19) (cid:90)a(cid:86) ver(cid:92) (cid:86)i(cid:80)ilar (cid:69)ut the i(cid:80)(cid:83)act (cid:82)f CO(cid:57)(cid:44)(cid:39)(cid:16)(cid:20)(cid:28) (cid:82)n de(cid:80)and can (cid:69)e (cid:86)een (cid:90)hen c(cid:82)(cid:80)(cid:83)arin(cid:74) the second to the fourth quarters of 2020 to the same periods in 2019; (cid:135) (cid:55)he i(cid:80)(cid:83)act (cid:82)f CO(cid:57)(cid:44)(cid:39)(cid:16)(cid:20)(cid:28) c(cid:82)ntinued int(cid:82) (cid:21)(cid:19)(cid:21)(cid:20) (cid:90)here revenue in the fir(cid:86)t and (cid:86)ec(cid:82)nd (cid:84)uarter(cid:86) (cid:90)a(cid:86) (cid:90)ell (cid:69)el(cid:82)(cid:90) (cid:21)(cid:19)(cid:21)(cid:19) and (cid:21)(cid:19)(cid:20)(cid:28)(cid:30) • The effect of increased activity can be seen in the increased revenue in the third and fourth quarter of 2021; and • Net cash from operating activities is not directly correlated to market strength on a quarterly basis. Changes in the balance of this account are tied to the timing of changes in various non-cash working capital accounts. AKITA DRILLING | 2021 Annual Report 19 MANAGEMENT’S DISCUSSION & ANALYSIS Fourth Quarter Analysis (cid:39)urin(cid:74) the f(cid:82)urth (cid:84)uarter (cid:82)f (cid:21)(cid:19)(cid:21)(cid:20), activit(cid:92) f(cid:82)r the C(cid:82)(cid:80)(cid:83)an(cid:92) increa(cid:86)ed (cid:86)i(cid:74)nificantl(cid:92) c(cid:82)(cid:80)(cid:83)ared t(cid:82) the (cid:83)ri(cid:82)r (cid:92)ear(cid:17) O(cid:83)eratin(cid:74) da(cid:92)(cid:86) in Canada increased to 498 in the fourth quarter of 2021 from 100 in the same period of 2020. US activity increased to 829 operating days from 507 operating days in the fourth quarter of 2020. Higher oil prices drove activity higher in the quarter. The decrease in revenue per day was a result of having more lower margin rigs working in both Canada and the US. AKITA incurred a net loss of $4,798,000 (net loss of $0.13 per Class A Non-Voting and Class B Common share (basic and diluted)) for the fourth quarter of 2021 compared to a net loss of $27,593,000 (net loss of $0.69 basic and diluted) in the fourth quarter of (cid:21)(cid:19)(cid:21)(cid:19)(cid:17) (cid:55)he decrea(cid:86)e in net l(cid:82)(cid:86)(cid:86) in (cid:21)(cid:19)(cid:21)(cid:20) fr(cid:82)(cid:80) (cid:21)(cid:19)(cid:21)(cid:19) i(cid:86) a re(cid:86)ult (cid:82)f the a(cid:86)(cid:86)et i(cid:80)(cid:83)air(cid:80)ent l(cid:82)(cid:86)(cid:86) rec(cid:82)rded in the C(cid:82)(cid:80)(cid:83)an(cid:92)(cid:183)(cid:86) (cid:56)(cid:54) C(cid:42)(cid:56) in the f(cid:82)urth (cid:84)uarter (cid:82)f (cid:21)(cid:19)(cid:21)(cid:19)(cid:17) (cid:36)d(cid:77)u(cid:86)ted fund(cid:86) (cid:193)(cid:82)(cid:90) fr(cid:82)(cid:80) (cid:82)(cid:83)erati(cid:82)n(cid:86) increa(cid:86)ed t(cid:82) (cid:7)(cid:21),(cid:23)(cid:21)(cid:26),(cid:19)(cid:19)(cid:19) in the f(cid:82)urth (cid:84)uarter (cid:82)f (cid:21)(cid:19)(cid:21)(cid:20) fr(cid:82)(cid:80) a l(cid:82)(cid:86)(cid:86) (cid:82)f (cid:7)(cid:20),(cid:21)(cid:25)(cid:21),(cid:19)(cid:19)(cid:19) in the f(cid:82)urth (cid:84)uarter (cid:82)f (cid:21)(cid:19)(cid:21)(cid:19)(cid:17) (cid:55)he increa(cid:86)e in fund(cid:86) (cid:193)(cid:82)(cid:90) fr(cid:82)(cid:80) (cid:82)(cid:83)erati(cid:82)n(cid:86) i(cid:86) due t(cid:82) a l(cid:82)n(cid:74) (cid:86)ervice retirin(cid:74) all(cid:82)(cid:90)ance (cid:82)f (cid:7)(cid:22) million that was recorded in the fourth quarter of 2020 as well as increased activity in the fourth quarter of 2021. Three Year Annual Financial Summary (cid:55)he f(cid:82)ll(cid:82)(cid:90)in(cid:74) ta(cid:69)le hi(cid:74)hli(cid:74)ht(cid:86) (cid:36)(cid:46)(cid:44)(cid:55)(cid:36)(cid:183)(cid:86) annual financial re(cid:86)ult(cid:86) f(cid:82)r the la(cid:86)t three (cid:92)ear(cid:86)(cid:29) $Thousands, except per share (unaudited) Revenue Net loss Loss per share (basic and diluted) Dividends per Class A Non-Voting and Class B Common share (1) (cid:36)d(cid:77)u(cid:86)ted fund(cid:86) (cid:193)(cid:82)(cid:90) fr(cid:82)(cid:80) (cid:82)(cid:83)erati(cid:82)n(cid:86) (2) Net cash from (used in) operating activities Year-end working capital Year-end shareholders' equity Year-end total assets 2021 110,088 (20,990) (0.53) - 7,454 (3,633) 6,502 131,485 247,574 2020 119,664 (93,274) (2.35) - 10,322 22,860 8,683 152,266 251,521 2019 175,890 (19,875) (0.50) 0.17 12,925 21,558 4,155 245,134 369,116 (1) The Company's dividend program was suspended in July of 2019. (2) (cid:54)ee (cid:5)(cid:49)(cid:82)n(cid:16)(cid:42)(cid:36)(cid:36)(cid:51) and (cid:54)u(cid:83)(cid:83)le(cid:80)entar(cid:92) Financial (cid:48)ea(cid:86)ure(cid:86)(cid:5) near the end (cid:82)f thi(cid:86) (cid:48)(cid:39)(cid:9)(cid:36) f(cid:82)r further detail(cid:17) Liquidity and Capital Resources At December 31, 2021, AKITA had $6,502,000 in working capital (working capital ratio of 1.27:1) with $1,773,000 of cash, compared to a working capital of $8,683,000 (working capital ratio of 1.56:1) and $7,108,000 cash for the previous year. In 2021, AKITA used $3,461,000 in cash from operating activities. Positive cash was generated from joint venture distributions ($492,000) and from proceeds on sales of assets ($272,000). During the same period, cash was used for capital expenditures of $16,416,000 which was funded primarily through debt, which increased by $11,717,000 in the year. Accounts payable at year-end included $12,095,000 in accrued expenses, the majority of which relates to routine operations with 18% related to one-time items. The Company has a syndicated credit agreement with the Company’s principal banker as the agent on the syndication and three other Canadian banks in the syndication. The operating loan facility totals $110,000,000 with the term ending in 2023. The credit 20 AKITA DRILLING | 2021 Annual Report MANAGEMENT’S DISCUSSION & ANALYSIS agreement was amended on July 17, 2020, to include a covenant relief period that extended to June 30, 2021. The facility has been further amended to add additional quarters of covenant relief, to June 30, 2023. The interest rate during the covenant relief period ranges from 225 to 350 basis points over prime interest rates depending on the Funded Debt (1) to Tangible Net Worth (1) Ratio until September 2022 at which time it reverts to a Funded Debt (1) to EBITDA (1) Ratio. Security for this facility includes all present and after- ac(cid:84)uired (cid:83)er(cid:86)(cid:82)nal (cid:83)r(cid:82)(cid:83)ert(cid:92) and a fir(cid:86)t (cid:193)(cid:82)atin(cid:74) char(cid:74)e (cid:82)ver all (cid:82)ther (cid:83)re(cid:86)ent and after(cid:16)ac(cid:84)uired (cid:83)r(cid:82)(cid:83)ert(cid:92) includin(cid:74) real (cid:83)r(cid:82)(cid:83)ert(cid:92)(cid:17) (cid:55)he financial c(cid:82)venant(cid:86) are(cid:29) 1. The Funded Debt(1) to Tangible Net Worth(1) (cid:53)ati(cid:82)(cid:29) the C(cid:82)(cid:80)(cid:83)an(cid:92) (cid:86)hall en(cid:86)ure that f(cid:82)r the fi(cid:86)cal (cid:84)uarter(cid:86) ended (cid:39)ece(cid:80)(cid:69)er (cid:22)(cid:20), (cid:21)(cid:19)(cid:21)(cid:20) to June 30, 2022, the Funded Debt(1) to Tangible Net Worth(1) (cid:53)ati(cid:82) (cid:86)hall n(cid:82)t (cid:69)e (cid:80)(cid:82)re than (cid:19)(cid:17)(cid:26)(cid:24)(cid:29)(cid:20)(cid:17)(cid:19)(cid:19)(cid:17) F(cid:82)r the fi(cid:86)cal (cid:84)uarter(cid:86) ended September 30, 2022 and beyond, the Funded Debt(1) to Tangible Net Worth(1) reverts back to a Funded Debt(1) to EBITDA(1) Ratio at the following levels: (i) 5.00:1.00 as at the Fiscal Quarter ending September 30, 2022; (ii) 4.50:1.00 as at the Fiscal Quarter ending December 31, 2022; (iii) 4.00:1.00 as at the Fiscal Quarter ending March 31, 2023; and (iv) 3.50:1.00 as at the Fiscal Quarter ending June 30, 2023. The Funded Debt(1) to Tangible Net Worth(1) Ratio shall be calculated quarterly on the last day of each Fiscal Quarter on a rolling four quarter basis; 2. The EBITDA(1) to Interest Expense(1) Ratio: the Company shall ensure that: (cid:11)i(cid:12) F(cid:82)r the fi(cid:86)cal (cid:84)uarter ended (cid:39)ece(cid:80)(cid:69)er (cid:22)(cid:20), (cid:21)(cid:19)(cid:21)(cid:20), the E(cid:37)(cid:44)(cid:55)(cid:39)(cid:36)(1) to Interest Expense(1) Ratio shall not be less than 2.00:1.00; (cid:11)ii(cid:12) F(cid:82)r the fi(cid:86)cal (cid:84)uarter ended (cid:48)arch (cid:22)(cid:20), (cid:21)(cid:19)(cid:21)(cid:21), the E(cid:37)(cid:44)(cid:55)(cid:39)(cid:36)(1) to Interest Expense(1) Ratio shall not be less than 2.50:1.00; (cid:11)iii(cid:12) F(cid:82)r the fi(cid:86)cal (cid:84)uarter ended (cid:45)une (cid:22)(cid:19), (cid:21)(cid:19)(cid:21)(cid:21), the E(cid:37)(cid:44)(cid:55)(cid:39)(cid:36)(1) to Interest Expense(1) Ratio shall not be less than 2.75:1.00; and (cid:11)iv(cid:12) F(cid:82)r the fi(cid:86)cal (cid:84)uarter ended (cid:54)e(cid:83)te(cid:80)(cid:69)er (cid:22)(cid:19), (cid:21)(cid:19)(cid:21)(cid:21) and (cid:69)e(cid:92)(cid:82)nd, the E(cid:37)(cid:44)(cid:55)(cid:39)(cid:36)(1) to Interest Expense(1) Ratio shall not be less than 3.00:1.00. The EBITDA(1) to Interest Expense(1) Ratio shall be calculated quarterly on the last day of each Fiscal Quarter on a rolling four quarter basis; and 3. A minimum trailing twelve month EBITDA(1) test is required quarterly until June 30, 2022, with the minimum EBITDA(1) varying each period in line with agreed upon forecasts. Upon the end of the Covenant Relief Period the Company’s covenants revert back to: (i) Funded Debt(1) to EBITDA(1) Ratio of not more than 3.00:1.00, and (ii) EBITDA(1) to Interest Expense(1) Ratio of not less than 3.00:1.00 Financial Covenants at December 31, 2021 At December 31, 2021, the Company was in compliance with its covenants with a Funded Debt(1) to Tangible Net Worth(1) Ratio of 0.65:1.00, an EBITDA(1) to Interest Expense(1) Ratio of 2.45:1.00 and a trailing twelve month EBITDA(1) in excess of the $7,721,000 minimum threshold. (1) (cid:54)ee (cid:5)(cid:49)(cid:82)n(cid:16)(cid:42)(cid:36)(cid:36)(cid:51) and (cid:54)u(cid:83)(cid:83)le(cid:80)entar(cid:92) Financial (cid:48)ea(cid:86)ure(cid:86)(cid:5) near the end (cid:82)f the (cid:48)(cid:39)(cid:9)(cid:36) f(cid:82)r further detail (cid:82)n ter(cid:80)(cid:86) defined in the C(cid:82)(cid:80)(cid:83)an(cid:92)(cid:10)(cid:86) credit facilit(cid:92)(cid:17) AKITA DRILLING | 2021 Annual Report 21 MANAGEMENT’S DISCUSSION & ANALYSIS The facility also includes a borrowing base calculation which is the sum of: (i) 75% of Eligible Accounts Receivable(1); plus (ii) 50% of orderly liquidation value of all Eligible Rig Assets(1); less (iii) Priority Payables(1) of the Loan Parties. At December 31, 2021, the Company’s borrowing base totalled $135,742,000. (cid:55)he (cid:82)(cid:83)eratin(cid:74) l(cid:82)an facilit(cid:92) ha(cid:86) (cid:69)een cla(cid:86)(cid:86)ified a(cid:86) l(cid:82)n(cid:74)(cid:16)ter(cid:80) de(cid:69)t a(cid:86) the credit a(cid:74)ree(cid:80)ent ha(cid:86) n(cid:82) re(cid:84)uired re(cid:83)a(cid:92)(cid:80)ent (cid:82)(cid:69)li(cid:74)ati(cid:82)n(cid:86) (cid:83)ri(cid:82)r to the end of the loan facility term. The Company borrowed $85,000,000 from this facility as at December 31, 2021 (December 31, 2020 - $75,000,000). The Company's objectives when managing capital are: • to safeguard the Company's ability to continue as a going concern, so that it can continue to provide returns for shareholders and (cid:69)enefit(cid:86) f(cid:82)r (cid:82)ther (cid:86)ta(cid:78)eh(cid:82)lder(cid:86)(cid:30) and • to augment existing resources in order to meet further growth opportunities. The Company manages the capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the Company may adjust the amount of dividends paid to shareholders, repurchase shares, issue new shares, sell assets or take on long-term debt. Property, Plant and Equipment Capital expenditures totaled $16,416,000 in 2021 ($7,593,000 in 2020). Capital spending in 2021 was as follows: $9,750,000 (cid:11)(cid:21)(cid:19)(cid:21)(cid:19) (cid:16) (cid:7)(cid:21),(cid:28)(cid:21)(cid:19),(cid:19)(cid:19)(cid:19)(cid:12) f(cid:82)r certificati(cid:82)n(cid:86) and (cid:82)verhaul(cid:86), (cid:7)(cid:21),(cid:23)(cid:21)(cid:28),(cid:19)(cid:19)(cid:19) (cid:11)(cid:21)(cid:19)(cid:21)(cid:19) (cid:16) (cid:7)(cid:20),(cid:24)(cid:28)(cid:21),(cid:19)(cid:19)(cid:19)(cid:12) in drill (cid:83)i(cid:83)e and drill c(cid:82)llar(cid:86) and (cid:7)(cid:22),(cid:27)(cid:21)(cid:23),(cid:19)(cid:19)(cid:19) (2020 - $3,081,000) for drilling rig equipment and upgrades and $413,000 in other capital assets. During 2021, the Company sold ancillary assets for $272,000 (2020 - $2,142,000) that resulted in a loss of $26,000 (2020 – gain of $156,000). Future Outlooks and Strategy The drilling industry is cyclical and certain key factors that have an impact on AKITA’s results are beyond management’s control. (cid:47)i(cid:78)e (cid:82)ther drillin(cid:74) c(cid:82)ntract(cid:82)r(cid:86), (cid:36)(cid:46)(cid:44)(cid:55)(cid:36) i(cid:86) ex(cid:83)(cid:82)(cid:86)ed t(cid:82) the effect(cid:86) (cid:82)f (cid:193)uctuatin(cid:74) (cid:82)il and (cid:74)a(cid:86) (cid:83)rice(cid:86) and chan(cid:74)e(cid:86) in the ex(cid:83)l(cid:82)rati(cid:82)n and devel(cid:82)(cid:83)(cid:80)ent (cid:69)ud(cid:74)et(cid:86) (cid:82)f it(cid:86) cu(cid:86)t(cid:82)(cid:80)er(cid:86)(cid:17) (cid:55)he (cid:82)utl(cid:82)(cid:82)(cid:78) f(cid:82)r the drillin(cid:74) indu(cid:86)tr(cid:92) ha(cid:86) i(cid:80)(cid:83)r(cid:82)ved (cid:86)i(cid:74)nificantl(cid:92) (cid:82)ver the (cid:83)a(cid:86)t (cid:92)ear(cid:17) (cid:58)ith (cid:82)il and gas prices at levels not seen since 2014 demand for drilling services continues to improve. (cid:55)he drillin(cid:74) indu(cid:86)tr(cid:92) in Canada ha(cid:86) i(cid:80)(cid:83)r(cid:82)ved (cid:86)i(cid:74)nificantl(cid:92) (cid:82)ver the (cid:92)ear (cid:90)ith activit(cid:92) rec(cid:82)verin(cid:74) en(cid:82)u(cid:74)h t(cid:82) (cid:86)ee (cid:80)eanin(cid:74)ful i(cid:80)(cid:83)r(cid:82)ve(cid:80)ent(cid:86) in day rates. These higher rates will be somewhat offset by higher costs as supply issues and labour shortages impact the industry. (cid:55)he C(cid:82)(cid:80)(cid:83)an(cid:92) i(cid:86) antici(cid:83)atin(cid:74) (cid:54)(cid:36)(cid:42)(cid:39) drillin(cid:74) t(cid:82) (cid:69)e the (cid:80)(cid:82)(cid:86)t active f(cid:82)r the C(cid:82)(cid:80)(cid:83)an(cid:92) in (cid:21)(cid:19)(cid:21)(cid:21) (cid:90)ith (cid:86)tead(cid:92) (cid:83)r(cid:82)(cid:74)ra(cid:80)(cid:86) currentl(cid:92) (cid:86)cheduled for the balance of the year. (cid:55)he rec(cid:82)ver(cid:92) in the (cid:56)(cid:54) ha(cid:86) (cid:69)een (cid:80)uch (cid:86)l(cid:82)(cid:90)er in than in Canada, (cid:69)ut c(cid:82)ntinue(cid:86) at a (cid:80)ea(cid:86)ured (cid:83)ace(cid:17) (cid:55)he active ri(cid:74) c(cid:82)unt finall(cid:92) (cid:83)a(cid:86)(cid:86)ed the 600 rig mark in early January nearing the point where pricing power will return to the industry. The Company is optimistic that this (cid:74)r(cid:82)(cid:90)th trend (cid:90)ill c(cid:82)ntinue thr(cid:82)u(cid:74)h (cid:21)(cid:19)(cid:21)(cid:21) all(cid:82)(cid:90)in(cid:74) (cid:80)eanin(cid:74)ful rate increa(cid:86)e(cid:86) f(cid:82)r the C(cid:82)(cid:80)(cid:83)an(cid:92)(cid:183)(cid:86) (cid:56)(cid:54) (cid:193)eet(cid:17) (cid:36)(cid:86) the C(cid:82)(cid:80)(cid:83)an(cid:92) i(cid:86) currentl(cid:92) (1) (cid:54)ee (cid:5)(cid:49)(cid:82)n(cid:16)(cid:42)(cid:36)(cid:36)(cid:51) and (cid:54)u(cid:83)(cid:83)le(cid:80)entar(cid:92) Financial (cid:48)ea(cid:86)ure(cid:86)(cid:5) near the end (cid:82)f the (cid:48)(cid:39)(cid:9)(cid:36) f(cid:82)r further detail (cid:82)n ter(cid:80)(cid:86) defined in the C(cid:82)(cid:80)(cid:83)an(cid:92)(cid:10)(cid:86) credit facilit(cid:92)(cid:17) 22 AKITA DRILLING | 2021 Annual Report MANAGEMENT’S DISCUSSION & ANALYSIS only working on shorter term contracts, multiple rate increases are possible in the year. The focus in the US for 2022 will be on keeping the ri(cid:74)(cid:86) that are currentl(cid:92) (cid:90)(cid:82)r(cid:78)in(cid:74) active and c(cid:82)ntinue t(cid:82) drive efficiencie(cid:86) and (cid:86)ta(cid:69)ilit(cid:92) in the (cid:56)(cid:54) (cid:82)(cid:83)erati(cid:82)n(cid:86)(cid:17) A focus of the Company in 2022 will be on strengthening it's balance sheet, by focusing on debt repayment with a limited capital program. With rates improving and the activity forecast looking strong for the year, the Company is optimistic that 2022 will be a far stronger year than the last few. Financial Instruments (cid:55)he C(cid:82)(cid:80)(cid:83)an(cid:92)(cid:183)(cid:86) financial a(cid:86)(cid:86)et(cid:86) and lia(cid:69)ilitie(cid:86) include ca(cid:86)h, acc(cid:82)unt(cid:86) receiva(cid:69)le, acc(cid:82)unt(cid:86) (cid:83)a(cid:92)a(cid:69)le, accrued lia(cid:69)ilitie(cid:86) and financial instruments. Fair values approximate carrying values unless otherwise stated. (cid:55)he C(cid:82)(cid:80)(cid:83)an(cid:92) i(cid:86) ex(cid:83)(cid:82)(cid:86)ed t(cid:82) ri(cid:86)(cid:78)(cid:86) cau(cid:86)ed (cid:69)(cid:92) (cid:193)uctuati(cid:82)n(cid:86) in currenc(cid:92) exchan(cid:74)e rate(cid:86)(cid:17) (cid:56)(cid:54) c(cid:82)ntract(cid:86) are den(cid:82)(cid:80)inated in (cid:56)nited (cid:54)tate(cid:86) dollars and, accordingly, a material decrease in the value of the US dollar could negatively impact revenues. The Company does not currently use hedges to offset this risk. Management continues to consider the credit risk associated with accounts receivable to be generally low. AKITA has conservative credit-granting procedures and in certain situations requires customers to make advance payment prior to provision of services or takes other measures to mitigate credit risk. Provisions have been estimated by management and are included in the accounts to recognize potential credit losses. Off Balance Sheet Transactions AKITA has not entered into any arrangements that involve off balance sheet transactions. Related Party Transactions (cid:36)(cid:46)(cid:44)(cid:55)(cid:36) i(cid:86) affiliated (cid:90)ith the (cid:36)(cid:55)CO (cid:42)r(cid:82)u(cid:83) (cid:82)f c(cid:82)(cid:80)(cid:83)anie(cid:86) and (cid:90)ith (cid:54)(cid:83)ruce (cid:48)ead(cid:82)(cid:90)(cid:86), an e(cid:84)ue(cid:86)trian (cid:86)h(cid:82)(cid:90) (cid:77)u(cid:80)(cid:83)in(cid:74) facilit(cid:92), thr(cid:82)u(cid:74)h it(cid:86) (cid:80)a(cid:77)(cid:82)rit(cid:92) shareholder. All related party transactions in 2021 and 2020 were made in the normal course of business with regular payment terms and have been recorded at the paid amounts. In 2021, operating purchases totalled $781,000, and included sponsorship and advertising of $175,000, operational costs of $534,000 and other miscellaneous purchases of $72,000. At December 31, 2021, the outstanding commitment of the Company’s multi-year sponsorship and advertising contract with Spruce Meadows was $350,000. Costs incurred related to this contract during 2021 were $175,000 (2020 - $175,000). Costs and related services are consistent with parties dealing at arm’s length. The Company is related to its joint ventures. The following table summarizes transactions and annual balances with its joint ventures. These transactions were made in the normal course of business with regular payment terms and have been recorded at the paid amounts. $Thousands Operating and maintenance expenses Selling and administrative expenses Year-end due to AKITA from joint venture partners Year-end due to AKITA from joint ventures 2021 2,880 350 1,709 1,564 2020 837 115 991 123 23 AKITA DRILLING | 2021 Annual Report 23 MANAGEMENT’S DISCUSSION & ANALYSIS Commitments and Contingencies From time to time, the Company enters into drilling contracts with its customers that are for extended periods. At December 31, 2021, the Company had no drilling rigs with multi-year contracts. The Company has entered into a two year contract with a related party to provide sponsorship and advertising at an annual cost of $175,000. At December 31, 2021, the Company had capital expenditure commitments of $1,743,000 (2020 – $422,000). Class A Non-Voting and Class B Common Shares Authorized An unlimited number of Class A Non-Voting shares An unlimited number of Class B Common shares Issued $Thousands, except share amounts Class A Non-Voting Class B Common Total Number of Shares Consideration Number of Shares Consideration Number of Shares Consideration December 31, 2020 37,954,407 144,898 1,653,784 1,366 39,608,191 146,264 Shares issued in 2021 - - - - - - December 31, 2021 37,954,407 144,898 1,653,784 1,366 39,608,191 146,264 At March 10, 2022, the Company had 37,954,407 Class A Non-Voting shares and 1,653,784 Class B Common shares outstanding. At that date, there were also 1,332,500 stock options outstanding, of which 490,500 were exercisable. Accounting Estimates (cid:55)he (cid:83)re(cid:83)arati(cid:82)n (cid:82)f (cid:36)(cid:46)(cid:44)(cid:55)(cid:36)(cid:183)(cid:86) c(cid:82)n(cid:86)(cid:82)lidated financial (cid:86)tate(cid:80)ent(cid:86) re(cid:84)uire(cid:86) (cid:80)ana(cid:74)e(cid:80)ent t(cid:82) (cid:80)a(cid:78)e e(cid:86)ti(cid:80)ate(cid:86) and a(cid:86)(cid:86)u(cid:80)(cid:83)ti(cid:82)n(cid:86) that affect the re(cid:83)(cid:82)rted a(cid:80)(cid:82)unt(cid:86) (cid:82)f a(cid:86)(cid:86)et(cid:86) and lia(cid:69)ilitie(cid:86) and di(cid:86)cl(cid:82)(cid:86)ure (cid:82)f c(cid:82)ntin(cid:74)ent lia(cid:69)ilitie(cid:86) a(cid:86) at the date (cid:82)f the c(cid:82)n(cid:86)(cid:82)lidated financial statements as well as reported amounts for revenue and expenses for the year. Estimates and judgments are continually evaluated and are based upon historical experience and other factors including expectations of future events that are believed to be reasonable in the circumstances. Actual outcomes, however, can differ materially from such estimates. The Company makes assumptions relating to transactions that were incomplete at the Statement of Financial Position date. Depending on the actual transaction, total assets and liabilities of the Company as well as results of operations, including net income, could be either understated or overstated as a result of differences between amounts accrued for incomplete transactions and the subsequent actual balances. (cid:55)he (cid:83)re(cid:83)arati(cid:82)n (cid:82)f (cid:36)(cid:46)(cid:44)(cid:55)(cid:36)(cid:183)(cid:86) c(cid:82)n(cid:86)(cid:82)lidated financial (cid:86)tate(cid:80)ent(cid:86) re(cid:84)uire(cid:86) (cid:80)ana(cid:74)e(cid:80)ent t(cid:82) (cid:80)a(cid:78)e (cid:86)i(cid:74)nificant e(cid:86)ti(cid:80)ate(cid:86) relatin(cid:74) t(cid:82) the u(cid:86)eful lives of drilling rigs. Depreciation methods and rates have been selected so as to amortize the net cost of each asset over its expected useful life to its estimated residual value. The estimated useful lives, residual values and depreciation methods are reviewed at the end of each annual reporting period. (cid:36)(cid:46)(cid:44)(cid:55)(cid:36)(cid:183)(cid:86) de(cid:83)reciati(cid:82)n e(cid:86)ti(cid:80)ate(cid:86) d(cid:82) n(cid:82)t have an(cid:92) effect (cid:82)n the chan(cid:74)e(cid:86) t(cid:82) the financial c(cid:82)nditi(cid:82)n f(cid:82)r the C(cid:82)(cid:80)(cid:83)an(cid:92), a(cid:86) de(cid:83)reciati(cid:82)n i(cid:86) a non-cash item. However, total assets and results of operations, including net income, could be either understated or overstated as a result of excessively high or low depreciation estimates. 24 AKITA DRILLING | 2021 Annual Report MANAGEMENT’S DISCUSSION & ANALYSIS At each reporting date, the Company assesses whether there are indicators of asset impairment. If such indicators exist, the Company performs an asset impairment test and, if required, the Company recognizes an asset impairment loss calculated as the lesser of the difference (cid:69)et(cid:90)een the a(cid:80)(cid:82)rti(cid:93)ed c(cid:82)(cid:86)t (cid:82)f the a(cid:86)(cid:86)et and the (cid:83)re(cid:86)ent value (cid:82)f the e(cid:86)ti(cid:80)ated future ca(cid:86)h (cid:193)(cid:82)(cid:90)(cid:86) (cid:82)r the rec(cid:82)vera(cid:69)le amount. The carrying amount of the asset is reduced by the impairment loss. Impairment losses recognized in prior periods are assessed at each reporting date for any indicators that the impairment loss may no longer exist or may have decreased. In the event that an impairment loss reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but only to the extent that the carrying amount does not exceed the amount that would have been determined had no impairment loss been recognized on the asset in prior periods. (cid:36)(cid:46)(cid:44)(cid:55)(cid:36)(cid:183)(cid:86) a(cid:86)(cid:86)et i(cid:80)(cid:83)air(cid:80)ent e(cid:86)ti(cid:80)ate(cid:86) d(cid:82) n(cid:82)t have an(cid:92) effect (cid:82)n the chan(cid:74)e(cid:86) t(cid:82) financial c(cid:82)nditi(cid:82)n f(cid:82)r the C(cid:82)(cid:80)(cid:83)an(cid:92), a(cid:86) an(cid:92) a(cid:86)(cid:86)et (cid:90)rite down would be a non-cash item. However, total assets and results of operations, including net income, could be overstated as a result (cid:82)f (cid:83)r(cid:82)(cid:77)ecti(cid:82)n(cid:86) (cid:82)f di(cid:86)c(cid:82)unted future ca(cid:86)h (cid:193)(cid:82)(cid:90)(cid:86) that are t(cid:82)(cid:82) hi(cid:74)h(cid:17) (cid:36) (cid:86)i(cid:74)nificant e(cid:86)ti(cid:80)ate u(cid:86)ed in the (cid:83)re(cid:83)arati(cid:82)n (cid:82)f (cid:36)(cid:46)(cid:44)(cid:55)(cid:36)(cid:183)(cid:86) c(cid:82)n(cid:86)(cid:82)lidated financial (cid:86)tate(cid:80)ent(cid:86) relate(cid:86) t(cid:82) the l(cid:82)n(cid:74)(cid:16)ter(cid:80) defined (cid:69)enefit pension liability for certain employees and retired employees that was recorded as $5,188,000 at December 31, 2021 (2020 - (cid:7)(cid:24),(cid:26)(cid:20)(cid:19),(cid:19)(cid:19)(cid:19)(cid:12)(cid:17) Chan(cid:74)e(cid:86) in (cid:36)(cid:46)(cid:44)(cid:55)(cid:36)(cid:183)(cid:86) (cid:83)en(cid:86)i(cid:82)n lia(cid:69)ilit(cid:92) e(cid:86)ti(cid:80)ate(cid:86) d(cid:82) n(cid:82)t have an(cid:92) effect (cid:82)n the chan(cid:74)e(cid:86) t(cid:82) the financial c(cid:82)nditi(cid:82)n (cid:82)f the C(cid:82)(cid:80)(cid:83)an(cid:92), (cid:86)ince the defined (cid:69)enefit (cid:83)en(cid:86)i(cid:82)n i(cid:86) a n(cid:82)n(cid:16)ca(cid:86)h ite(cid:80)(cid:17) (cid:43)(cid:82)(cid:90)ever, t(cid:82)tal lia(cid:69)ilitie(cid:86) and re(cid:86)ult(cid:86) (cid:82)f (cid:82)(cid:83)erati(cid:82)n(cid:86), includin(cid:74) net income, could be either understated or overstated as a result of pension estimates that are either too high or too low. AKITA utilizes the services of a third party to assist in the actuarial estimate of the Company’s pension expense and liability. For 2021, a key assumption is the 2.9% discount rate (2020 – 2.3%). The Company makes assumptions relating to deferred income taxes, including future tax rates, timing of reversals of timing differences and the anticipated tax rules that will be in place when timing differences reverse. Consequently, total liabilities of the Company as well as results of operations, including net income, could be either understated or overstated. Business Risks and Risk Management (cid:55)he f(cid:82)ll(cid:82)(cid:90)in(cid:74) inf(cid:82)r(cid:80)ati(cid:82)n i(cid:86) a (cid:86)u(cid:80)(cid:80)ar(cid:92) (cid:82)nl(cid:92) (cid:82)f certain ri(cid:86)(cid:78) fact(cid:82)r(cid:86) relatin(cid:74) t(cid:82) the (cid:69)u(cid:86)ine(cid:86)(cid:86) (cid:82)f (cid:36)(cid:46)(cid:44)(cid:55)(cid:36) and i(cid:86) (cid:84)ualified in it(cid:86) entiret(cid:92) (cid:69)(cid:92) reference to and must be read in conjunction with the detailed information appearing elsewhere in this document. Shareholders and potential shareholders should consider carefully the information contained herein and, in particular, the following risk factors: Crude Oil and Natural Gas Prices Fluctuations and uncertainty surrounding the future price of commodities could lead to changes in demand for oil and natural gas, and may impact the economics of planned drilling projects and ongoing production projects, resulting in the curtailment, reduction, delay or postponement of such projects f(cid:82)r an indefinite (cid:83)eri(cid:82)d (cid:82)f ti(cid:80)e(cid:17) (cid:55)he (cid:83)rice (cid:36)(cid:46)(cid:44)(cid:55)(cid:36)(cid:183)(cid:86) cu(cid:86)t(cid:82)(cid:80)er(cid:86) receive for their production has a direct impact on the cash (cid:193)(cid:82)(cid:90) availa(cid:69)le t(cid:82) the(cid:80) and the (cid:86)u(cid:69)(cid:86)e(cid:84)uent de(cid:80)and f(cid:82)r drillin(cid:74) services provided by AKITA. An extended period of lower oil and natural gas prices could result in a decline in demand and day rates. High volatility in crude oil and natural gas prices may also impact AKITA’s customers’ capital programs, causing delays in spending and lower overall demand for drilling services. Pandemic Risk On March 11, 2020, the World Health Organization declared a global pandemic in relation to the spread of COVID-19. As the virus spread across the world, many businesses closed and isolation and social distancing practices were implemented to reduce the spread. The virus and its impact on transacting business resulted in a decline in the world economy. Among other effects, demand for oil decreased materially over the (cid:69)alance (cid:82)f (cid:21)(cid:19)(cid:21)(cid:19), (cid:90)hich re(cid:86)ulted in a (cid:86)i(cid:74)nificant reducti(cid:82)n in demand for the Company’s drilling services. In addition to the reduced demand for drilling services, the pandemic presented operational challenges for the Company’s staff and rig crews as an outbreak of COVID-19 at a rig site could lead to suspended or cancelled operations. AKITA DRILLING | 2021 Annual Report 25 MANAGEMENT’S DISCUSSION & ANALYSIS The COVID-19 pandemic persisted throughout 2021, and by the fourth quarter caused severe disruptions with the emergence of the omicron variant. While AKITA implemented a policy to mitigate the negative effects of the virus in 2020, COVID-19 related risk remains, and we are not able to estimate the ongoing severity or duration of the pandemic impact going forward. Debt Service AKITA has a syndicated credit facility. Variations in interest rates and principal repayments, under the terms of the facility, c(cid:82)uld re(cid:86)ult in (cid:86)i(cid:74)nificant chan(cid:74)e(cid:86) in the a(cid:80)(cid:82)unt re(cid:84)uired t(cid:82) be applied to debt service before payment of any amounts by AKITA. Although management’s view is that AKITA’s current facilit(cid:92) i(cid:86) (cid:86)ufficient, there i(cid:86) n(cid:82) a(cid:86)(cid:86)urance that it (cid:90)ill (cid:69)e ade(cid:84)uate f(cid:82)r the future financial (cid:82)(cid:69)li(cid:74)ati(cid:82)n(cid:86) (cid:82)f (cid:36)(cid:46)(cid:44)(cid:55)(cid:36) (cid:82)r that additional funds can be obtained if required. AKITA’s credit facility is a revolving facility which matures on September 11, 2023 and is subject to annual extensions of an additional year on each anniversary date of the closing date, contingent upon the consent of the lenders holding two- thirds of the aggregate commitments under the facility. To the extent the facility is not extended, the drawn down principal would be due on the maturity date. Interest payments are required quarterly and are based on the Canadian prime rate for Canadian prime rate loans and the US prime rate for US rate loans. Leverage and Restrictive Covenants AKITA has third party debt service obligations under its credit facility. The degree to which AKITA is leveraged could have important consequences to shareholders, including: (cid:20)(cid:17) a (cid:83)(cid:82)rti(cid:82)n (cid:82)f the c(cid:82)n(cid:86)(cid:82)lidated ca(cid:86)h (cid:193)(cid:82)(cid:90) fr(cid:82)(cid:80) (cid:82)(cid:83)erati(cid:82)n(cid:86) could be dedicated to the payment of the principal and interest on indebtedness, thereby reducing cash available for other initiatives; and 2. certain borrowings are at variable rates of interest, which exposes AKITA to the risk of increased interest rates. AKITA's ability to make scheduled payments of principal and intere(cid:86)t (cid:82)n, (cid:82)r t(cid:82) refinance, it(cid:86) inde(cid:69)tedne(cid:86)(cid:86) (cid:90)ill de(cid:83)end (cid:82)n it(cid:86) future (cid:82)(cid:83)eratin(cid:74) (cid:83)erf(cid:82)r(cid:80)ance and ca(cid:86)h (cid:193)(cid:82)(cid:90), (cid:90)hich are (cid:86)u(cid:69)(cid:77)ect to prevailing economic conditions, prevailing interest rate level(cid:86) and financial, c(cid:82)(cid:80)(cid:83)etitive, (cid:69)u(cid:86)ine(cid:86)(cid:86) and (cid:82)ther fact(cid:82)r(cid:86), many of which are beyond its control. AKITA’s credit facilities contain certain customary operating covenants that limit the discretion of management to incur additional indebtedness, to create liens or other encumbrances, to pay dividends or make certain other payments, investments, loans and guarantees and to sell or otherwise dispose of assets and merge or consolidate with another entity. In addition, AKITA is required to satisfy and (cid:80)aintain t(cid:90)(cid:82) financial rati(cid:82) te(cid:86)t(cid:86), (cid:39)e(cid:69)t t(cid:82) E(cid:37)(cid:44)(cid:55)(cid:39)(cid:36) and E(cid:37)(cid:44)(cid:55)(cid:39)(cid:36) to Interest Expense. A failure to comply with the obligations in the agreements in respect of the credit facilities could result in an event of default which, if not cured or waived, could permit acceleration of the repayment of the relevant indebtedness. If the repayment of the indebtedness under the credit facilities were to be accelerated, there can be no assurance that AKITA's a(cid:86)(cid:86)et(cid:86) (cid:90)(cid:82)uld (cid:69)e (cid:86)ufficient t(cid:82) re(cid:83)a(cid:92) the de(cid:69)t(cid:17) Currentl(cid:92) (cid:36)(cid:46)(cid:44)(cid:55)(cid:36) i(cid:86) in a c(cid:82)venant relief (cid:83)eri(cid:82)d (cid:90)here(cid:69)(cid:92) the financial c(cid:82)venant(cid:86) are relaxed or waived until June 30, 2023. Competition The contract drilling industry is highly competitive and includes a lar(cid:74)e nu(cid:80)(cid:69)er (cid:82)f drillin(cid:74) c(cid:82)ntract(cid:82)r(cid:86) (cid:90)ith varied ri(cid:74) (cid:193)eet(cid:86)(cid:17) Drilling contracts are usually awarded through a competitive bid process with pricing, rig suitability and availability being (cid:83)ri(cid:80)ar(cid:92) driver(cid:86) in the (cid:69)id (cid:83)r(cid:82)ce(cid:86)(cid:86)(cid:17) Other fact(cid:82)r(cid:86) that in(cid:193)uence the (cid:69)id (cid:83)r(cid:82)ce(cid:86)(cid:86) include(cid:29) (cid:80)(cid:82)(cid:69)ilit(cid:92) and efficienc(cid:92) (cid:82)f the ri(cid:74), experience and quality of service provided by rig crews, safety record of the rig as well as the contractor as a whole, and the adaptability of equipment to utilize new technologies. Rigs can be moved from one region to another depending on the competitive environment within that region and therefore a contractor’s competitive advantage in a region can be quickly eroded by other contractors moving in equipment from other regions. Reduced levels of activity in the oil and gas industry can also increase competition and therefore lower day rates. Operating Hazards AKITA’s operations are subject to numerous hazards inherent t(cid:82) the drillin(cid:74) indu(cid:86)tr(cid:92), includin(cid:74) (cid:69)ut n(cid:82)t li(cid:80)ited t(cid:82)(cid:29) fire(cid:86) (cid:82)r ex(cid:83)l(cid:82)(cid:86)i(cid:82)n(cid:86), h(cid:92)dr(cid:82)car(cid:69)(cid:82)n in(cid:193)ux (cid:82)r (cid:78)ic(cid:78)(cid:86), l(cid:82)(cid:86)(cid:86) (cid:82)f (cid:90)ell c(cid:82)ntr(cid:82)l, well blow-outs, cratering, collapse of the well, damage to, 26 AKITA DRILLING | 2021 Annual Report or loss of, drilling equipment and equipment lost down the hole. AKITA’s insurance policies and contractual indemnity rights may not adequately cover all losses, and therefore, the Company may not have adequate insurance coverage or rights to indemnity for all risks. Pollution and environmental risks may not be fully insurable. AKITA generally attempts to obtain contractual protection against uninsured operating risks from its customers. However, customers who provide contractual inde(cid:80)nificati(cid:82)n (cid:83)r(cid:82)tecti(cid:82)n (cid:80)a(cid:92) n(cid:82)t in all ca(cid:86)e(cid:86) (cid:80)aintain ade(cid:84)uate in(cid:86)urance (cid:82)r (cid:82)ther(cid:90)i(cid:86)e have the financial re(cid:86)(cid:82)urce(cid:86) inde(cid:80)nificati(cid:82)n (cid:82)(cid:69)li(cid:74)ati(cid:82)n(cid:86)(cid:17) nece(cid:86)(cid:86)ar(cid:92) (cid:36)(cid:46)(cid:44)(cid:55)(cid:36)(cid:183)(cid:86) inde(cid:80)nificati(cid:82)n arran(cid:74)e(cid:80)ent(cid:86) (cid:80)a(cid:92) not adequately protect it against liability or loss from all operating hazards. Further, certain states in the US where AKITA operates have anti-indemnity legislation that could (cid:83)reclude (cid:82)(cid:83)erat(cid:82)r inde(cid:80)nificati(cid:82)n in certain circu(cid:80)(cid:86)tance(cid:86)(cid:17) (cid:55)he (cid:82)ccurrence (cid:82)f a (cid:86)i(cid:74)nificant event that ha(cid:86) n(cid:82)t (cid:69)een full(cid:92) in(cid:86)ured (cid:82)r inde(cid:80)nified a(cid:74)ain(cid:86)t, the failure (cid:82)f a cu(cid:86)t(cid:82)(cid:80)er t(cid:82) (cid:80)eet it(cid:86) inde(cid:80)nificati(cid:82)n (cid:82)(cid:69)li(cid:74)ati(cid:82)n(cid:86) t(cid:82) the C(cid:82)(cid:80)(cid:83)an(cid:92), (cid:82)r the a(cid:83)(cid:83)lica(cid:69)ilit(cid:92) (cid:82)f anti(cid:16)inde(cid:80)nificati(cid:82)n le(cid:74)i(cid:86)lati(cid:82)n c(cid:82)uld (cid:80)ateriall(cid:92) and adver(cid:86)el(cid:92) affect the re(cid:86)ult(cid:86) (cid:82)f (cid:82)(cid:83)erati(cid:82)n(cid:86) and financial condition. in(cid:86)urance (cid:82)r t(cid:82) (cid:86)u(cid:83)(cid:83)(cid:82)rt their Dependence on Major Customers AKITA earned 33% of its total revenue in 2021 from one major customer. This was the only customer who individually provided over 10% of the Company’s revenue for the year. The l(cid:82)(cid:86)(cid:86) (cid:82)f (cid:82)ne (cid:82)r (cid:80)(cid:82)re (cid:80)a(cid:77)(cid:82)r cu(cid:86)t(cid:82)(cid:80)er(cid:86) (cid:82)r a (cid:86)i(cid:74)nificant reducti(cid:82)n in the business done with any customer without offsetting new revenue could have a material adverse effect on AKITA’s business, results of operations and prospects. Seasonal Nature of Industry In Canada, the level of activity in the contract drilling industry, (cid:83)articularl(cid:92) f(cid:82)r c(cid:82)nventi(cid:82)nal ri(cid:74)(cid:86), i(cid:86) in(cid:193)uenced (cid:69)(cid:92) (cid:86)ea(cid:86)(cid:82)nal weather patterns. Spring breakup, which typically occurs between mid-March and mid-June, makes the ground unstable leaving many secondary roads temporarily incapable of supporting the weight of heavy equipment, thereby reducing drilling activity levels. In addition, during excessively rainy periods, equipment moves may be delayed, thereby adversely affecting revenue. Typically, there is greater demand for contract drilling services in the winter as freezing permits the movement and operation of heavy equipment. Drilling activities tend to increase in the MANAGEMENT’S DISCUSSION & ANALYSIS fall as the ground begins to freeze and peak in the winter months of November through February as areas having muskeg conditions also become accessible to drilling operations. Variability in the weather can therefore create unpredictability in activity and utilization rates. Unusually warm weather may limit access to drilling sites and could have a material adverse effect (cid:82)n the C(cid:82)(cid:80)(cid:83)an(cid:92)(cid:183)(cid:86) (cid:69)u(cid:86)ine(cid:86)(cid:86), financial c(cid:82)nditi(cid:82)n, re(cid:86)ult(cid:86) (cid:82)f (cid:82)(cid:83)erati(cid:82)n(cid:86) and ca(cid:86)h (cid:193)(cid:82)(cid:90)(cid:86)(cid:17) (cid:42)enerall(cid:92) (cid:86)(cid:83)ea(cid:78)in(cid:74), (cid:36)(cid:46)(cid:44)(cid:55)(cid:36)(cid:183)(cid:86) (cid:56)(cid:54) (cid:82)(cid:83)erati(cid:82)n(cid:86) are le(cid:86)(cid:86) affected by seasonality than AKITA’s Canadian operations. Areas in the US where AKITA operates are infrequently subject to weather constraints like hurricanes in the southern states, but the Company may experience operational constraints such as (cid:193)(cid:82)(cid:82)d(cid:86), (cid:69)li(cid:93)(cid:93)ard(cid:86) and (cid:82)ther extre(cid:80)e (cid:90)inter c(cid:82)nditi(cid:82)n(cid:86) in the Rocky Mountain region in addition to operational restrictions for a variety of other reasons. These restrictions could have a (cid:80)aterial adver(cid:86)e effect (cid:82)n the C(cid:82)(cid:80)(cid:83)an(cid:92)(cid:183)(cid:86) (cid:69)u(cid:86)ine(cid:86)(cid:86), financial c(cid:82)nditi(cid:82)n, re(cid:86)ult(cid:86) (cid:82)f (cid:82)(cid:83)erati(cid:82)n(cid:86) and ca(cid:86)h (cid:193)(cid:82)(cid:90)(cid:86)(cid:17) Volatility of Industry Conditions The demand, pricing and terms for contract drilling services are dependent upon the level of industry activity for Canadian and US crude oil and natural gas exploration and development. (cid:44)ndu(cid:86)tr(cid:92) c(cid:82)nditi(cid:82)n(cid:86) are in(cid:193)uenced (cid:69)(cid:92) nu(cid:80)er(cid:82)u(cid:86) fact(cid:82)r(cid:86) which AKITA does not control including (without limitation): current crude oil and natural gas prices, expectations about future crude oil and natural gas prices, the cost of exploring for, producing and delivering crude oil and natural gas, the expected rates of decline in current production for AKITA’s customers, discovery rates of new oil and gas reserves by (cid:36)(cid:46)(cid:44)(cid:55)(cid:36)(cid:183)(cid:86) cu(cid:86)t(cid:82)(cid:80)er(cid:86), (cid:86)ufficient cre(cid:90) la(cid:69)(cid:82)ur, availa(cid:69)le (cid:83)i(cid:83)eline and other oil and gas transportation capacity, weather conditions, political, regulatory and economic conditions, in(cid:193)uence(cid:86) fr(cid:82)(cid:80) (cid:86)(cid:83)ecial intere(cid:86)t (cid:74)r(cid:82)u(cid:83)(cid:86), the u(cid:86)e (cid:82)f ener(cid:74)(cid:92) generated from sources that are not crude oil or natural gas based, the ability of oil and gas companies to raise equity ca(cid:83)ital (cid:82)r de(cid:69)t financin(cid:74) and techn(cid:82)l(cid:82)(cid:74)ical advance(cid:86) in the exploration and production of crude oil and natural gas. The level of activity in both the Canadian and US oil and gas exploration and production industry is volatile. No assurance can be given that the expected trends in oil and gas exploration and production activities will continue or that demand for c(cid:82)ntract drillin(cid:74) (cid:86)ervice(cid:86) (cid:90)ill re(cid:193)ect the level (cid:82)f activit(cid:92) in the industry. Recent global economic events and uncertainty have (cid:86)i(cid:74)nificantl(cid:92) affected c(cid:82)(cid:80)(cid:80)(cid:82)dit(cid:92) (cid:83)ricin(cid:74)(cid:17) (cid:58)hile c(cid:82)(cid:80)(cid:80)(cid:82)dit(cid:92) AKITA DRILLING | 2021 Annual Report 27 MANAGEMENT’S DISCUSSION & ANALYSIS pricing has recovered over the course of 2021 to pre-pandemic levels, a return to a prolonged substantial reduction in crude oil and natural gas prices would likely lead to a reduction in oil and gas production levels and therefore adversely affect the demand for drilling services to oil and gas customers. Any elimination or curtailment of government incentives or adverse changes in government regulation could have a (cid:86)i(cid:74)nificant i(cid:80)(cid:83)act (cid:82)n the c(cid:82)ntract drillin(cid:74) indu(cid:86)tr(cid:92) in Canada (cid:82)r in the US. These factors could lead to a decline in demand for AKITA’s services which could result in a material adverse effect (cid:82)n (cid:36)(cid:46)(cid:44)(cid:55)(cid:36)(cid:183)(cid:86) (cid:69)u(cid:86)ine(cid:86)(cid:86), financial c(cid:82)nditi(cid:82)n, re(cid:86)ult(cid:86) (cid:82)f (cid:82)(cid:83)erati(cid:82)n(cid:86) and ca(cid:86)h (cid:193)(cid:82)(cid:90)(cid:86)(cid:17) Labour The contract drilling industry is dependent upon attracting, developing and maintaining a skilled and safe workforce. During periods of peak activity levels, AKITA is susceptible to increased labour costs as a result of a competitive labour market or may be faced with a lack of experienced personnel to operate AKITA’s equipment. AKITA is also faced with the challenge of retaining employees during periods of low utili(cid:93)ati(cid:82)n(cid:17) (cid:55)he C(cid:82)(cid:80)(cid:83)an(cid:92)(cid:183)(cid:86) financial re(cid:86)ult(cid:86) de(cid:83)end, at lea(cid:86)t in part, upon its ability to attract, develop and maintain a skilled work force, while maintaining a cost structure that varies with activity levels. In 2021, by the fourth quarter, crew labour shortages were common throughout the drilling industry and became a restraint to expanded drilling activity. AKITA has implemented measures to improve its ability to attract and retain additional drilling hands, but there is no certainty that the crew labour shortage will be alleviated, or when. A number of AKITA’s key customers evaluate the ability of contract drilling companies to provide and maintain a high standard of safe operations prior to their selecting a drilling contractor for the provision of drilling services. AKITA’s financial (cid:86)ucce(cid:86)(cid:86) i(cid:86) related t(cid:82) it(cid:86) a(cid:69)ilit(cid:92) t(cid:82) c(cid:82)ntinue t(cid:82) (cid:80)eet those expectations. Capital Overbuild in Contract Drilling Industry (cid:39)rillin(cid:74) ri(cid:74)(cid:86) have a l(cid:82)n(cid:74) life (cid:86)(cid:83)an(cid:17) Further, there i(cid:86) a (cid:86)i(cid:74)nificant lag between when the decision to build a rig is made and when the construction is complete. Although new build rigs have not (cid:80)ateriali(cid:93)ed (cid:82)ver the la(cid:86)t five (cid:92)ear(cid:86), hi(cid:74)h de(cid:80)and t(cid:92)(cid:83)icall(cid:92) spurs greater capital expenditures by drilling contractors which could, in turn, lead to excessive supply in future periods. A potential capital overbuild could lead to a general reduction in rates in the industry as a whole, which could have a material adver(cid:86)e effect (cid:82)n (cid:36)(cid:46)(cid:44)(cid:55)(cid:36)(cid:183)(cid:86) (cid:69)u(cid:86)ine(cid:86)(cid:86), financial c(cid:82)nditi(cid:82)n, re(cid:86)ult(cid:86) (cid:82)f (cid:82)(cid:83)erati(cid:82)n(cid:86) and ca(cid:86)h (cid:193)(cid:82)(cid:90)(cid:86)(cid:17) (cid:55)he c(cid:92)clical nature (cid:82)f (cid:36)(cid:46)(cid:44)(cid:55)(cid:36)(cid:183)(cid:86) (cid:69)u(cid:86)ine(cid:86)(cid:86) (cid:80)a(cid:78)e(cid:86) the i(cid:80)(cid:83)act (cid:82)f thi(cid:86) ri(cid:86)(cid:78) (cid:86)i(cid:74)nificant(cid:17) Access to Additional Financing (cid:36)(cid:46)(cid:44)(cid:55)(cid:36) (cid:80)a(cid:92) find it nece(cid:86)(cid:86)ar(cid:92) in the future t(cid:82) (cid:82)(cid:69)tain additi(cid:82)nal de(cid:69)t (cid:82)r e(cid:84)uit(cid:92) financin(cid:74) t(cid:82) (cid:86)u(cid:83)(cid:83)(cid:82)rt (cid:82)n(cid:74)(cid:82)in(cid:74) (cid:82)(cid:83)erati(cid:82)n(cid:86), undertake capital expenditures or undertake acquisitions or other business combination activities. There can be no guarantee that AKITA will have access to the required capital as its ability to do so is dependent on, among other factors, the overall state of capital markets, interest rates, the oil and gas industry as well as the appetite for investment in the (cid:82)ilfield drillin(cid:74) indu(cid:86)tr(cid:92)(cid:17) Further, a(cid:86) an (cid:82)ilfield (cid:86)ervice company, AKITA’s ability to obtain additional debt or equity financin(cid:74) c(cid:82)uld (cid:69)e c(cid:82)n(cid:86)trained (cid:69)(cid:92) (cid:83)re(cid:86)(cid:86)ure fr(cid:82)(cid:80) inve(cid:86)t(cid:82)r(cid:86) and environmental groups to divest from fossil fuel related inve(cid:86)t(cid:80)ent(cid:86)(cid:17) (cid:36)n ina(cid:69)ilit(cid:92) t(cid:82) (cid:82)(cid:69)tain nece(cid:86)(cid:86)ar(cid:92) financin(cid:74), (cid:82)n terms that are acceptable to AKITA, could limit AKITA’s growth and could have a material adverse effect on AKITA’s business, financial c(cid:82)nditi(cid:82)n and ca(cid:86)h (cid:193)(cid:82)(cid:90)(cid:86) in the future(cid:17) (cid:36)cce(cid:86)(cid:86) t(cid:82) financin(cid:74) al(cid:86)(cid:82) i(cid:80)(cid:83)act(cid:86) (cid:36)(cid:46)(cid:44)(cid:55)(cid:36)(cid:183)(cid:86) cu(cid:86)t(cid:82)(cid:80)er(cid:86), (cid:83)(cid:82)tentiall(cid:92) li(cid:80)itin(cid:74) capital budgets and therefore the demand for AKITA’s services. Foreign Exchange and Foreign Operations Risk AKITA’s expansion into the United States increases the Company’s exposure to risks inherent in foreign operations. (cid:55)he C(cid:82)(cid:80)(cid:83)an(cid:92) i(cid:86) ex(cid:83)(cid:82)(cid:86)ed t(cid:82) ri(cid:86)(cid:78)(cid:86) cau(cid:86)ed (cid:69)(cid:92) (cid:193)uctuati(cid:82)n(cid:86) in currency exchange rates. US contracts are denominated in United States dollars and, accordingly, a material decrease in the value of the United States dollar could negatively impact revenues. In addition to foreign exchange, risks include, but are not limited to: different taxation regimes, potential litigation and potential political protectionist measures. While AKITA has increased its insurance coverage to offset the increased chance of litigation and has engaged third party experts to assist in taxation matters, there can be no assurance that the Company will be fully effective in mitigating foreign operation risks. Such risks could have material adverse effects on (cid:36)(cid:46)(cid:44)(cid:55)(cid:36)(cid:183)(cid:86) (cid:69)u(cid:86)ine(cid:86)(cid:86), financial c(cid:82)nditi(cid:82)n, re(cid:86)ult(cid:86) (cid:82)f (cid:82)(cid:83)erati(cid:82)n(cid:86) and ca(cid:86)h (cid:193)(cid:82)(cid:90)(cid:86)(cid:17) 28 AKITA DRILLING | 2021 Annual Report Regulation of Industry AKITA’s operations are subject to a variety of federal, provincial, state and local laws, regulations and guidelines relating to health and safety, the conduct of operations, the operation of equipment used in drilling operations and the transportation of materials and equipment provided to customers. Compliance with, or breaches of, such laws, or costs or implications of changes to such laws, regulations and guidelines could have a (cid:80)aterial effect (cid:82)n (cid:36)(cid:46)(cid:44)(cid:55)(cid:36)(cid:183)(cid:86) (cid:69)u(cid:86)ine(cid:86)(cid:86), financial c(cid:82)nditi(cid:82)n, re(cid:86)ult(cid:86) (cid:82)f (cid:82)(cid:83)erati(cid:82)n(cid:86) and ca(cid:86)h (cid:193)(cid:82)(cid:90)(cid:86)(cid:17) Carbon Emissions, Climate Change Activism and Environmental Regulations While AKITA’s operations, and those of its customers, are subject to numerous laws, regulations and guidelines governing the management, transportation and disposal of hazardous substances and other waste materials and otherwise relating to the protection of the environment, the trend in environmental regulation has been to impose more restrictions and limitations on activities that may impact the environment, particularly regarding the generation of carbon emissions. AKITA operates in jurisdictions that have regulated, or proposed to regulate, industrial carbon emissions. Laws and regulations implemented to reduce carbon emissions have (cid:83)(cid:82)tential t(cid:82) i(cid:80)(cid:83)(cid:82)(cid:86)e (cid:86)i(cid:74)nificant c(cid:82)(cid:80)(cid:83)liance c(cid:82)(cid:86)t(cid:86) (cid:82)n the (cid:82)il and gas, potash and mining companies that the Company provides drilling services for. Consequently, future oil and gas, potash and mining development could face increased operating costs relating to increased carbon regulation which could result in a reduced demand for the drilling services that AKITA provides. In recent years, public support for climate change action and pressure by climate activists to shift from fossil fuels to alternative and renewable energy technology has grown. impact could reduce demand Climate change activism for hydrocarbons in favour of lower carbon intense fuels. Further, within Canada, increased climate change activism has translated to opposition to new pipeline approvals, to ongoing oil sands development and to the practice of hydraulic fracturing. In the US, the Biden Administration has implemented restrictions of drilling permits on federal lands and has stopped the construction of the Keystone pipeline. Laws, regulations and guidelines relating to carbon emissions, spills, releases, and discharges of hazardous substances or other waste materials into the environment, requiring removal MANAGEMENT’S DISCUSSION & ANALYSIS or remediation of pollutants or contaminants are increasingly becoming more stringent and can impose civil and criminal penalties for violations. Some of the laws, regulations and guidelines that apply to AKITA’s operations also authorize the recovery of natural resource damages by governmental authorities, injunctive relief and the imposition of stop, control, remediation and abandonment orders. The costs arising from compliance with such laws, regulations and guidelines may be material to AKITA. While AKITA maintains liability insurance, including insurance for environmental claims, there can be no assurance that insurance will continue to be available to AKITA on commercially reasonable terms, that the possible types of liabilities that may be incurred by AKITA will be covered by AKITA’s insurance, or that the dollar amount of such liabilities will not exceed AKITA’s policy limits. Even a partially uninsured claim, if successful and (cid:82)f (cid:86)ufficient (cid:80)a(cid:74)nitude, c(cid:82)uld have a (cid:80)aterial adver(cid:86)e effect on AKITA’s business, results of operations and prospects. Key Management The success and growth of AKITA are dependent upon its key management personnel. The loss of services of any of such persons without suitable replacements could have a material adverse effect on the business and operations of AKITA. While this risk is mitigated by ongoing succession planning, no assurance can be provided that AKITA will be able to retain key management members. Dilution AKITA’s articles permit the issuance of an unlimited number of Class A Non-Voting and Class B Common shares, and the C(cid:82)(cid:80)(cid:83)an(cid:92) (cid:80)a(cid:92) (cid:80)a(cid:78)e future ac(cid:84)ui(cid:86)iti(cid:82)n(cid:86) (cid:82)r enter int(cid:82) financin(cid:74)(cid:86) or other transactions involving the issuance of securities of AKITA which may be dilutive. Supply Chain Risk AKITA purchases equipment, raw materials, components and parts from suppliers located in Canada and the US, and fr(cid:82)(cid:80) ti(cid:80)e t(cid:82) ti(cid:80)e, internati(cid:82)nal (cid:86)u(cid:83)(cid:83)lier(cid:86)(cid:17) (cid:42)l(cid:82)(cid:69)al (cid:86)u(cid:83)(cid:83)l(cid:92) chain disruptions began in March of 2020 after economic activity was curtailed in order to contain the outbreak of the COVID-19 pandemic. The supply chain disruptions manifested in reduced inventory for many of the Company’s suppliers. Recognizing the risks presented by the disruptions to the AKITA DRILLING | 2021 Annual Report 29 MANAGEMENT’S DISCUSSION & ANALYSIS supply chain, AKITA’s operations team aims to anticipate the equipment, raw materials, components and parts it may need (cid:90)ith (cid:86)ufficient lead ti(cid:80)e t(cid:82) (cid:83)r(cid:82)cure (cid:86)a(cid:80)e(cid:17) (cid:49)(cid:82)t(cid:90)ith(cid:86)tandin(cid:74) this effort, however, the ongoing supply chain disruptions may result in AKITA’s vendors delaying delivery, or being unable to deliver, such equipment, raw materials, components or parts when ordered. As drilling activity increases, so too does the risk of an undersupplied inventory of equipment, raw materials, components and parts. In the event the Company is not able to secure equipment, raw materials, components or parts that are critical to it’s operations, it could force the Company to suspend operations and have a material adverse effect (cid:82)n (cid:36)(cid:46)(cid:44)(cid:55)(cid:36)(cid:183)(cid:86) (cid:69)u(cid:86)ine(cid:86)(cid:86) and financial c(cid:82)nditi(cid:82)n(cid:17) fuel Energy Alternatives AKITA’s management cannot predict the impact of changing demand for crude oil and natural gas products. Fuel conservation measures, alternative requirements, opposition to fossil fuel energy, increasing consumer demand for alternatives to crude oil and gas and technological advances in fuel economy and energy generation devices could reduce the demand for crude oil, natural gas and other liquid hydrocarbons. Any major change in demand for crude oil, natural gas or other liquid hydrocarbons could result in a reduction in the demand for drilling services and could have a (cid:80)aterial adver(cid:86)e effect (cid:82)n (cid:36)(cid:46)(cid:44)(cid:55)(cid:36)(cid:183)(cid:86) (cid:69)u(cid:86)ine(cid:86)(cid:86), financial c(cid:82)nditi(cid:82)n, re(cid:86)ult(cid:86) (cid:82)f (cid:82)(cid:83)erati(cid:82)n(cid:86) and ca(cid:86)h (cid:193)(cid:82)(cid:90)(cid:17) Risk Management AKITA manages its risks by: • maintaining a conservative balance sheet that includes a low cost structure for the Company; • having its risk management committee deliberate periodically to assess, evaluate and develop a plan to deal with the risk conditions for the Company; • developing an annual strategic business plan and budget to help determine the levels of capital and operating expenditures; • continuously developing long-term relationships with a core base of customers who maintain ongoing drilling programs during all phases of the economic cycle; • obtaining multi-year drilling contracts when tailoring rig construction or reconfiguration to customer demand; • maintaining an efficient fleet of drilling rigs through a rigorous ongoing maintenance program; • continually upgrading its rig fleet; • employing well-trained, experienced and responsible employees; • ensuring that all employees comply with clearly defined safety standards; • reducing health, safety and operational risk by maintaining its rigorous safety policies and procedures; • improving the skills of its employees through training programs; • maintaining effective systems of internal control to safeguard assets and ensure timely and accurate reporting of financial results; • maintaining comprehensive insurance policies with respect to its operations; • reducing environmental risk through the implementation of industry-leading standards, policies and procedures; • exploring opportunities to decarbonize its operations; • developing and maintaining a succession plan to provide for a smooth transition in the event of key personnel turnover; • diversifying into the US market where demand for drilling services is correlated to West Texas Intermediate pricing rather than Western Canadian Select pricing as in Canada and which allows AKITA to generate revenue denominated in US currency; and • expanding beyond oil and natural gas to drill geothermal wells, carbon capture wells and hydrogen storage wells in an aim to ensure it plays a meaningful role in energy transition. Furthermore, in response to the COVID-19 pandemic, the Company actively assessed and responded to the effects of the COVID-19 pandemic on employees, customers, suppliers and service providers, and evaluated governmental actions being taken to curtail its spread. The Company successfully implemented a mandatory work-from-home program for those employees who could perform their day-to-day activities working remotely. At our operation facilities and for active rig personnel, in accordance with applicable laws, the Company implemented measures to safeguard employees unable to work remotely through enhanced administrative controls, employee monitoring strategies, more rigorous cleaning practices, as well as physical distancing and through provision of personal protective equipment. 30 AKITA DRILLING | 2021 Annual Report MANAGEMENT’S DISCUSSION & ANALYSIS Disclosure Controls and Internal Controls Over Financial Reporting As of December 31, 2021, the Company’s management evaluated the effectiveness of the Company’s disclosure controls and procedures as required by the Canadian Securities Administrators (“CSA”). This evaluation was performed under the supervision of, and (cid:90)ith the (cid:83)artici(cid:83)ati(cid:82)n (cid:82)f the Executive Chair and Chief Executive Officer (cid:11)(cid:180)CEO(cid:181)(cid:12) and the (cid:57)ice (cid:51)re(cid:86)ident, Finance and Chief Financial Officer (cid:11)(cid:180)CFO(cid:181)(cid:12)(cid:17) Disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in d(cid:82)cu(cid:80)ent(cid:86) filed (cid:90)ith the (cid:86)ecuritie(cid:86) re(cid:74)ulat(cid:82)r(cid:92) auth(cid:82)ritie(cid:86) i(cid:86) rec(cid:82)rded, (cid:83)r(cid:82)ce(cid:86)(cid:86)ed, (cid:86)u(cid:80)(cid:80)ari(cid:93)ed and re(cid:83)(cid:82)rted (cid:82)n a ti(cid:80)el(cid:92) (cid:69)a(cid:86)i(cid:86)(cid:17) (cid:55)he controls also seek to assure that this information is accumulated and communicated to management, including the CEO and CFO, as appropriate, to allow timely decisions on required disclosure. Based on this evaluation, the CEO and CFO have concluded that the Company’s disclosure controls and procedures were effective at December 31, 2021. (cid:36)(cid:86) (cid:82)f (cid:39)ece(cid:80)(cid:69)er (cid:22)(cid:20), (cid:21)(cid:19)(cid:21)(cid:20), (cid:80)ana(cid:74)e(cid:80)ent evaluated the effectivene(cid:86)(cid:86) (cid:82)f the C(cid:82)(cid:80)(cid:83)an(cid:92)(cid:183)(cid:86) internal c(cid:82)ntr(cid:82)l (cid:82)ver financial re(cid:83)(cid:82)rtin(cid:74) a(cid:86) required by the CSA. This evaluation was performed utilizing the framework developed by the Committee of Sponsoring Organizations of the Treadway Commission, as revised effective May 14, 2013, under the supervision of, and with the participation of the CEO and CFO. (cid:55)he C(cid:82)(cid:80)(cid:83)an(cid:92)(cid:183)(cid:86) internal c(cid:82)ntr(cid:82)l (cid:82)ver financial re(cid:83)(cid:82)rtin(cid:74) i(cid:86) de(cid:86)i(cid:74)ned t(cid:82) (cid:83)r(cid:82)vide rea(cid:86)(cid:82)na(cid:69)le a(cid:86)(cid:86)urance re(cid:74)ardin(cid:74) the relia(cid:69)ilit(cid:92) (cid:82)f financial re(cid:83)(cid:82)rtin(cid:74) and the (cid:83)re(cid:83)arati(cid:82)n (cid:82)f financial (cid:86)tate(cid:80)ent(cid:86) in acc(cid:82)rdance (cid:90)ith (cid:44)F(cid:53)(cid:54)(cid:17) (cid:37)a(cid:86)ed (cid:82)n thi(cid:86) evaluati(cid:82)n, the CEO and CFO have c(cid:82)ncluded that the C(cid:82)(cid:80)(cid:83)an(cid:92)(cid:183)(cid:86) internal c(cid:82)ntr(cid:82)l (cid:82)ver financial re(cid:83)(cid:82)rtin(cid:74) (cid:90)a(cid:86) effective at December 31, 2021. (cid:55)here (cid:90)a(cid:86) n(cid:82) chan(cid:74)e in the C(cid:82)(cid:80)(cid:83)an(cid:92)(cid:183)(cid:86) internal c(cid:82)ntr(cid:82)l (cid:82)ver financial re(cid:83)(cid:82)rtin(cid:74) that (cid:82)ccurred durin(cid:74) the (cid:83)eri(cid:82)d that (cid:69)e(cid:74)an (cid:82)n Oct(cid:82)(cid:69)er 1, 2021, and ended December 31, 2021 that materially affected, or is reasonably likely to materially affect, the Company’s internal c(cid:82)ntr(cid:82)l (cid:82)ver financial re(cid:83)(cid:82)rtin(cid:74)(cid:17) (cid:55)here (cid:90)a(cid:86) al(cid:86)(cid:82) n(cid:82) chan(cid:74)e in the C(cid:82)(cid:80)(cid:83)an(cid:92)(cid:183)(cid:86) internal c(cid:82)ntr(cid:82)l (cid:82)ver financial re(cid:83)(cid:82)rtin(cid:74) that ha(cid:86) (cid:82)ccurred since December 31, 2021. Non-GAAP and Supplementary Financial Measures Non-GAAP Financial Measures Adjusted Revenue and Operating and Maintenance Expenses in Canada Revenue and operating and maintenance expenses in AKITA’s Canadian operating segment include revenue and expenses from AKITA’s wholly-owned drilling rigs as well as its share of joint venture revenue and expenses. Excluded from the adjusted revenue and expenses in (cid:36)(cid:46)(cid:44)(cid:55)(cid:36)(cid:10)(cid:86) Canadian (cid:82)(cid:83)eratin(cid:74) (cid:86)e(cid:74)(cid:80)ent are (cid:193)(cid:82)(cid:90) thr(cid:82)u(cid:74)h char(cid:74)e(cid:86) that are (cid:69)illed t(cid:82) (cid:82)(cid:83)erat(cid:82)r(cid:86) and re(cid:83)aid t(cid:82) the C(cid:82)(cid:80)(cid:83)an(cid:92)(cid:17) (cid:55)he v(cid:82)lu(cid:80)e and ti(cid:80)in(cid:74) (cid:82)f the (cid:193)(cid:82)(cid:90) thr(cid:82)u(cid:74)h char(cid:74)e(cid:86) can artificiall(cid:92) i(cid:80)(cid:83)act the (cid:82)(cid:83)erati(cid:82)nal (cid:83)er da(cid:92) anal(cid:92)(cid:86)i(cid:86) and, a(cid:86) a re(cid:86)ult, (cid:80)ana(cid:74)e(cid:80)ent and certain inve(cid:86)t(cid:82)r(cid:86) (cid:80)a(cid:92) find the c(cid:82)(cid:80)(cid:83)ara(cid:69)ilit(cid:92) (cid:69)et(cid:90)een (cid:83)eri(cid:82)d(cid:86) i(cid:86) i(cid:80)(cid:83)r(cid:82)ved (cid:90)hen the(cid:86)e (cid:193)(cid:82)(cid:90) thr(cid:82)u(cid:74)h char(cid:74)e(cid:86) are excluded fr(cid:82)(cid:80) revenue (cid:83)er da(cid:92) and (cid:82)(cid:83)eratin(cid:74) and (cid:80)aintenance ex(cid:83)en(cid:86)e (cid:83)er da(cid:92)(cid:17) (cid:55)he (cid:193)(cid:82)(cid:90) thr(cid:82)u(cid:74)h char(cid:74)e(cid:86) d(cid:82) n(cid:82)t have an(cid:92) i(cid:80)(cid:83)act (cid:82)n the C(cid:82)(cid:80)(cid:83)an(cid:92)(cid:183)(cid:86) net earnin(cid:74)(cid:86) a(cid:86) the amounts offset each other. Adjusted Revenue and Operating and Maintenance Expenses in the United States Excluded fr(cid:82)(cid:80) ad(cid:77)u(cid:86)ted revenue and ex(cid:83)en(cid:86)e(cid:86) in (cid:36)(cid:46)(cid:44)(cid:55)(cid:36)(cid:10)(cid:86) (cid:56)(cid:54) (cid:82)(cid:83)eratin(cid:74) (cid:86)e(cid:74)(cid:80)ent are (cid:193)(cid:82)(cid:90) thr(cid:82)u(cid:74)h char(cid:74)e(cid:86) that are (cid:69)illed t(cid:82) (cid:82)(cid:83)erat(cid:82)r(cid:86) and re(cid:83)aid t(cid:82) the C(cid:82)(cid:80)(cid:83)an(cid:92)(cid:17) (cid:55)he v(cid:82)lu(cid:80)e and ti(cid:80)in(cid:74) (cid:82)f the (cid:193)(cid:82)(cid:90) thr(cid:82)u(cid:74)h char(cid:74)e(cid:86) can artificiall(cid:92) i(cid:80)(cid:83)act the (cid:82)(cid:83)erati(cid:82)nal (cid:83)er da(cid:92) anal(cid:92)(cid:86)i(cid:86) and a(cid:86) a re(cid:86)ult (cid:80)ana(cid:74)e(cid:80)ent and certain inve(cid:86)t(cid:82)r(cid:86) (cid:80)a(cid:92) find the c(cid:82)(cid:80)(cid:83)ara(cid:69)ilit(cid:92) (cid:69)et(cid:90)een (cid:83)eri(cid:82)d(cid:86) i(cid:86) i(cid:80)(cid:83)r(cid:82)ved (cid:90)hen the(cid:86)e (cid:193)(cid:82)(cid:90) thr(cid:82)u(cid:74)h AKITA DRILLING | 2021 Annual Report 31 MANAGEMENT’S DISCUSSION & ANALYSIS char(cid:74)e(cid:86) are excluded fr(cid:82)(cid:80) revenue (cid:83)er da(cid:92) and (cid:82)(cid:83)eratin(cid:74) and (cid:80)aintenance ex(cid:83)en(cid:86)e (cid:83)er da(cid:92)(cid:17) (cid:55)he (cid:193)(cid:82)(cid:90) thr(cid:82)u(cid:74)h char(cid:74)e(cid:86) d(cid:82) n(cid:82)t have any impact on the Company’s net earnings as the amounts offset each other. Adjusted Funds Flow from Operations (cid:36)d(cid:77)u(cid:86)ted fund(cid:86) (cid:193)(cid:82)(cid:90) fr(cid:82)(cid:80) (cid:82)(cid:83)erati(cid:82)n(cid:86) i(cid:86) n(cid:82)t a rec(cid:82)(cid:74)ni(cid:93)ed (cid:42)(cid:36)(cid:36)(cid:51) (cid:80)ea(cid:86)ure under (cid:44)F(cid:53)(cid:54) and u(cid:86)er(cid:86) (cid:82)f thi(cid:86) (cid:48)(cid:39)(cid:9)(cid:36) (cid:86)h(cid:82)uld n(cid:82)te that (cid:36)(cid:46)(cid:44)(cid:55)(cid:36)(cid:183)(cid:86) (cid:80)eth(cid:82)d (cid:82)f deter(cid:80)inin(cid:74) ad(cid:77)u(cid:86)ted fund(cid:86) (cid:193)(cid:82)(cid:90) fr(cid:82)(cid:80) (cid:82)(cid:83)erati(cid:82)n(cid:86) (cid:80)a(cid:92) differ fr(cid:82)(cid:80) (cid:80)eth(cid:82)d(cid:86) u(cid:86)ed (cid:69)(cid:92) (cid:82)ther c(cid:82)(cid:80)(cid:83)anie(cid:86) and include(cid:86) ca(cid:86)h (cid:193)(cid:82)(cid:90) from operating activities before working capital changes, equity income from joint ventures, and income tax amounts paid or recovered durin(cid:74) the (cid:83)eri(cid:82)d(cid:17) (cid:49)(cid:82)nethele(cid:86)(cid:86), (cid:80)ana(cid:74)e(cid:80)ent and certain inve(cid:86)t(cid:82)r(cid:86) (cid:80)a(cid:92) find ad(cid:77)u(cid:86)ted fund(cid:86) (cid:193)(cid:82)(cid:90) fr(cid:82)(cid:80) (cid:82)(cid:83)erati(cid:82)n(cid:86) t(cid:82) (cid:69)e a u(cid:86)eful measurement to evaluate the Company’s operating results at year-end and within each year, since the seasonal nature of the business affects the comparability of non-cash working capital changes both between and within periods. $Thousands Net cash from (used in) operating activities Income tax recoverable Current income tax recovery Interest paid Interest expense (cid:51)(cid:82)(cid:86)t(cid:16)e(cid:80)(cid:83)l(cid:82)(cid:92)(cid:80)ent (cid:69)enefit(cid:86) (cid:83)aid Equity income from joint ventures Change in non-cash working capital (cid:36)d(cid:77)u(cid:86)ted fund(cid:86) (cid:193)(cid:82)(cid:90) fr(cid:82)(cid:80) (cid:82)(cid:83)erati(cid:82)n(cid:86) 2021 (3,461) - - 3,422 (3,553) 198 1,981 8,867 7,454 2020 22,860 (275) 116 5,479 (5,637) 104 650 (12,975) 10,322 Terms Defined in the Company’s Credit Facility (cid:55)he f(cid:82)ll(cid:82)(cid:90)in(cid:74) ter(cid:80)(cid:86) are defined in the C(cid:82)(cid:80)(cid:83)an(cid:92)(cid:10)(cid:86) credit facilit(cid:92) and are u(cid:86)ed in the calculati(cid:82)n (cid:82)f the C(cid:82)(cid:80)(cid:83)an(cid:92)(cid:10)(cid:86) financial c(cid:82)venant(cid:86)(cid:29) (cid:180)E(cid:37)(cid:44)(cid:55)(cid:39)(cid:36)(cid:5) (cid:80)ean(cid:86), f(cid:82)r an(cid:92) fi(cid:86)cal (cid:83)eri(cid:82)d, the (cid:49)et (cid:44)nc(cid:82)(cid:80)e (cid:82)f the Canadian (cid:37)(cid:82)rr(cid:82)(cid:90)er (cid:82)n a c(cid:82)n(cid:86)(cid:82)lidated (cid:69)a(cid:86)i(cid:86) in acc(cid:82)rdance (cid:90)ith (cid:42)(cid:36)(cid:36)(cid:51) (cid:69)ut without duplication, plus (in each case, for the Canadian Borrower on a consolidated basis but without duplication): a) all amounts deducted in the calculation of Net Income in respect of Interest Expense; (cid:69)(cid:12) all a(cid:80)(cid:82)unt(cid:86) deducted in the calculati(cid:82)n (cid:82)f (cid:49)et (cid:44)nc(cid:82)(cid:80)e in re(cid:86)(cid:83)ect (cid:82)f the (cid:83)r(cid:82)vi(cid:86)i(cid:82)n f(cid:82)r inc(cid:82)(cid:80)e taxe(cid:86) (cid:11)in acc(cid:82)rdance (cid:90)ith (cid:42)enerall(cid:92) Accepted Accounting Principles); c) all amounts deducted in the calculation of Net Income in respect of non-cash items including, without limitation, depletion, accretion (to the extent not included in clause (a) above), depreciation, amortization and future income tax liabilities; d) all amounts deducted in the calculation of Net Income in respect of equity loss, minority interests, extraordinary losses, non- recurring losses (including losses on the sale of property, plant and equipment) and any non-cash impairment charges and any other non-cash charges; e(cid:12) all ca(cid:86)h di(cid:86)tri(cid:69)uti(cid:82)n(cid:86) received in (cid:86)uch (cid:83)eri(cid:82)d fr(cid:82)(cid:80) (cid:83)er(cid:86)(cid:82)n(cid:86) (cid:90)hich are n(cid:82)t (cid:42)uarant(cid:82)r(cid:86)(cid:30) f) all amounts deducted in the calculation of Net Income in respect of discretionary management bonuses, fees and other compensation declared and payable to the directors or shareholders of the Canadian Borrower on commercially reasonable terms. For the avoidance of doubt, bonuses, fees or other compensation that the Canadian Borrower, on a consolidated basis, is contractually required to pay may not be added back; 32 AKITA DRILLING | 2021 Annual Report MANAGEMENT’S DISCUSSION & ANALYSIS g) all amounts deducted in the calculation of Net Income in respect of share based compensation; h) unrealized foreign exchange losses incurred in the ordinary course of business; "Funded Debt" means, as of any date of determination, with respect to the Canadian Borrower on a consolidated basis, all Indebtedness, but excluding obligations owing between any Loan Parties and less all cash and Cash Equivalents denominated in Canadian Dollars and U.S. Dollars held by the Loan Parties up to a maximum of $10,000,000 and which are: (i) in accounts with the Agent which are (cid:86)u(cid:69)(cid:77)ect t(cid:82) (cid:51)erfected (cid:54)ecurit(cid:92) (cid:44)ntere(cid:86)t(cid:86) and ri(cid:74)ht(cid:86) (cid:82)f (cid:86)et(cid:16)(cid:82)ff in fav(cid:82)ur (cid:82)f the (cid:36)(cid:74)ent(cid:30) (cid:82)r (cid:11)ii(cid:12) in acc(cid:82)unt(cid:86) (cid:90)ith a financial in(cid:86)tituti(cid:82)n acceptable to the Agent (acting reasonably) which are subject to Perfected Security Interests and a blocked account control agreement in favour of and satisfactory to the Agent. (cid:5)(cid:44)ntere(cid:86)t Ex(cid:83)en(cid:86)e(cid:5) (cid:80)ean(cid:86) f(cid:82)r an(cid:92) fi(cid:86)cal (cid:83)eri(cid:82)d, in re(cid:86)(cid:83)ect (cid:82)f the Canadian (cid:37)(cid:82)rr(cid:82)(cid:90)er (cid:82)n a c(cid:82)n(cid:86)(cid:82)lidated (cid:69)a(cid:86)i(cid:86) a(cid:86) deter(cid:80)ined in acc(cid:82)rdance (cid:90)ith (cid:42)(cid:36)(cid:36)(cid:51), the a(cid:74)(cid:74)re(cid:74)ate c(cid:82)(cid:86)t (cid:82)f credit (cid:82)ut(cid:86)tandin(cid:74) durin(cid:74) that (cid:83)eri(cid:82)d includin(cid:74), (cid:90)ith(cid:82)ut li(cid:80)itati(cid:82)n, intere(cid:86)t char(cid:74)e(cid:86) (cid:11)includin(cid:74) f(cid:82)r postponed Indebtedness), capitalized interest, the interest component of Financial Leases, fees payable in respect of letters of credit and letters of guarantee, discounts incurred and fees payable in respect of bankers' acceptance advances. "Eligible Accounts Receivable" means at any time, any Account Receivable of the Loan Parties (net of any credit balance, returns, trade discounts, or unbilled amounts or retention) that meets and at all times continues to meet all of the standards of eligibility (and the Canadian Borrower by including such account in any computation of the Borrowing Base shall be deemed to represent and warrant to the Agent and the Lenders that to the knowledge of the Canadian Borrower all of the following statements are accurate and complete with respect to such account): a) it is a valid and legally enforceable obligation of the applicable Account Debtor; b) such account is genuine as appearing on its face or as represented in the books and records of the Canadian Borrower on a consolidated basis; c) such account is free from valid claims regarding rescission, cancellation or avoidance, whether by operation of Applicable Law or (cid:82)ther(cid:90)i(cid:86)e, and exce(cid:83)t t(cid:82) the extent (cid:82)f an(cid:92) reducti(cid:82)n (cid:80)ade (cid:83)ur(cid:86)uant t(cid:82) (cid:83)ara(cid:74)ra(cid:83)h (cid:11)e(cid:12) (cid:82)f thi(cid:86) definiti(cid:82)n i(cid:86) net (cid:82)f all then a(cid:83)(cid:83)lica(cid:69)le holdbacks and prepayment credits; d) such account does not relate to services not as of yet completed; e(cid:12) (cid:90)ith(cid:82)ut li(cid:80)itin(cid:74) the (cid:74)eneralit(cid:92) (cid:82)f (cid:83)ara(cid:74)ra(cid:83)h (cid:11)c(cid:12) (cid:82)f thi(cid:86) definiti(cid:82)n, i(cid:86) n(cid:82)t (cid:86)u(cid:69)(cid:77)ect t(cid:82) an(cid:92) (cid:82)ff(cid:86)et, c(cid:82)unterclai(cid:80) (cid:82)r (cid:82)ther defence (cid:82)n the part of the Account Debtor or any claim by the Account Debtor that denies liability in whole or in part; and, if the Account Debtor denies liability only in part, the undisputed portion of the Account Receivable shall be allowed so long as the Account Debtor has agreed that it will pay such portion not in dispute in accordance with its terms; f) such Account Receivable is not outstanding more than 90 days after billing date, provided that the under 90 day portion may be included; (i) where the over 90 day portion is less than 10% of all Accounts Receivable of such Account Debtor and its Related Parties; (ii) the Agent and the Lenders have nevertheless designated the Account Receivable as good; or (iii) where the Account (cid:39)e(cid:69)t(cid:82)r ha(cid:86) l(cid:82)n(cid:74) ter(cid:80) de(cid:69)t (cid:82)(cid:69)li(cid:74)ati(cid:82)n(cid:86) rated n(cid:82) (cid:90)(cid:82)r(cid:86)e than (cid:37)(cid:37)(cid:37) (cid:69)(cid:92) (cid:54)(cid:9)(cid:51) (cid:82)r (cid:39)(cid:37)(cid:53)(cid:54) (cid:47)i(cid:80)ited(cid:30) g) it is owed by an Account Debtor whose principal place of business is located in Canada or the United States, unless otherwise supported by a letter of credit acceptable to the Agent, in its discretion; h) it is denominated in either Canadian Dollars or United States Dollars; i) j) it is subject to a Perfected Security Interest in favour of the Agent; such account is, and at all times will be, free and clear of all Security Interests other than Priority Payables (to the extent deducted in calculating the Borrowing Base) and any Permitted Encumbrances; k) such account is not in respect of a builders lien or similar holdbacks; AKITA DRILLING | 2021 Annual Report 33 MANAGEMENT’S DISCUSSION & ANALYSIS l) the Account Receivable does not arise from a sale or lease to or rendering of services to a Related Party of any Loan Party, or, in each ca(cid:86)e, t(cid:82) their re(cid:86)(cid:83)ective (cid:36)ffiliate(cid:86)(cid:30) Any Eligible Accounts Receivable which are at any time Eligible Accounts Receivable but which subsequently fail to meet any of the foregoing requirements shall immediately cease to be an Account Receivable. "Tangible Net Worth" means, as of any date of determination, with respect to the Canadian Borrower on a consolidated basis, the sum of Shareholders' Equity and Subordinated Debt, less: a) any amount that would be included on the consolidated balance sheet of the Canadian Borrower prepared in accordance with (cid:42)(cid:36)(cid:36)(cid:51) a(cid:86) an inve(cid:86)t(cid:80)ent in (cid:82)r a(cid:86) a(cid:80)(cid:82)unt(cid:86) (cid:82)(cid:90)ed (cid:69)(cid:92) an(cid:92) (cid:53)elated (cid:51)art(cid:92) (cid:90)hich d(cid:82)e(cid:86) n(cid:82)t c(cid:82)n(cid:86)titute (cid:54)u(cid:69)(cid:82)rdinated (cid:39)e(cid:69)t(cid:30) and b) any amount included in the assets column on the consolidated balance sheet of the Canadian Borrower in respect of Intangibles. Non-GAAP Ratios (cid:180)(cid:36)d(cid:77)u(cid:86)ted fund(cid:86) (cid:193)(cid:82)(cid:90) fr(cid:82)(cid:80) (cid:82)(cid:83)erati(cid:82)n(cid:86) (cid:83)er (cid:86)hare(cid:181) i(cid:86) calculated (cid:82)n the (cid:86)a(cid:80)e (cid:69)a(cid:86)i(cid:86) a(cid:86) net l(cid:82)(cid:86)(cid:86) (cid:83)er cla(cid:86)(cid:86) (cid:36) and cla(cid:86)(cid:86) (cid:37) (cid:86)hare (cid:69)a(cid:86)ic and diluted, utilizing the basic and diluted weighted average number of class A and class B shares outstanding during the periods presented. “Adjusted revenue per operating day” may be useful to analysts, investors, other interested parties and management as a measure of pricing strength and is calculated by dividing adjusted revenue by the number of operating days for the period. “Adjusted operating and maintenance expenses per operating day” may be useful to analysts, investors, other interested parties and (cid:80)ana(cid:74)e(cid:80)ent a(cid:86) it de(cid:80)(cid:82)n(cid:86)trate(cid:86) a de(cid:74)ree (cid:82)f c(cid:82)(cid:86)t c(cid:82)ntr(cid:82)l and (cid:83)r(cid:82)vide(cid:86) a (cid:83)r(cid:82)x(cid:92) f(cid:82)r (cid:86)(cid:83)ecific in(cid:193)ati(cid:82)n rate(cid:86) incurred (cid:69)(cid:92) the C(cid:82)(cid:80)(cid:83)an(cid:92)(cid:17) Supplementary Financial Measures (cid:36) (cid:86)u(cid:83)(cid:83)le(cid:80)entar(cid:92) financial (cid:80)ea(cid:86)ure(cid:29) a(cid:12) i(cid:86), (cid:82)r i(cid:86) intended t(cid:82) (cid:69)e, di(cid:86)cl(cid:82)(cid:86)ed (cid:82)n a (cid:83)eri(cid:82)dic (cid:69)a(cid:86)i(cid:86) t(cid:82) de(cid:83)ict the hi(cid:86)t(cid:82)rical (cid:82)r ex(cid:83)ected future financial (cid:83)erf(cid:82)r(cid:80)ance, financial (cid:83)(cid:82)(cid:86)iti(cid:82)n (cid:82)r ca(cid:86)h (cid:193)(cid:82)(cid:90) (cid:82)f the C(cid:82)(cid:80)(cid:83)an(cid:92)(cid:30) (cid:69)(cid:12) i(cid:86) n(cid:82)t (cid:83)re(cid:86)ented in the financial (cid:86)tate(cid:80)ent(cid:86) (cid:82)f the C(cid:82)(cid:80)(cid:83)an(cid:92)(cid:30) c(cid:12) i(cid:86) n(cid:82)t a n(cid:82)n(cid:16)(cid:42)(cid:36)(cid:36)(cid:51) financial (cid:80)ea(cid:86)ure(cid:30) and d(cid:12) i(cid:86) n(cid:82)t a n(cid:82)n(cid:16)(cid:42)(cid:36)(cid:36)(cid:51) rati(cid:82)(cid:17) (cid:54)u(cid:83)(cid:83)le(cid:80)entar(cid:92) financial (cid:80)ea(cid:86)ure(cid:86) (cid:83)re(cid:86)ented and di(cid:86)cu(cid:86)(cid:86)ed in thi(cid:86) (cid:48)(cid:39)(cid:9)(cid:36) are a(cid:86) f(cid:82)ll(cid:82)(cid:90)(cid:86)(cid:29) • “Operating Margin %” – represents operating margin as a percentage of revenue. • “Adjusted Operating Margin %” – represents adjusted operating margin as a percentage of adjusted revenue. • “Utilization” – represents the operating days achieved divided by the maximum operating days based on the number of days in the year and the rigs available. 34 AKITA DRILLING | 2021 Annual Report MANAGEMENT’S DISCUSSION & ANALYSIS Forward-Looking Statements From time to time AKITA makes forward-looking statements. These statements include but are not limited to comments with respect to (cid:36)(cid:46)(cid:44)(cid:55)(cid:36)(cid:183)(cid:86) (cid:82)(cid:69)(cid:77)ective(cid:86) and (cid:86)trate(cid:74)ie(cid:86), financial c(cid:82)nditi(cid:82)n, re(cid:86)ult(cid:86) (cid:82)f (cid:82)(cid:83)erati(cid:82)n(cid:86), the (cid:82)utl(cid:82)(cid:82)(cid:78) f(cid:82)r indu(cid:86)tr(cid:92) and ri(cid:86)(cid:78) (cid:80)ana(cid:74)e(cid:80)ent di(cid:86)cu(cid:86)(cid:86)i(cid:82)n(cid:86)(cid:17) (cid:44)n (cid:83)articular, f(cid:82)r(cid:90)ard(cid:16)l(cid:82)(cid:82)(cid:78)in(cid:74) inf(cid:82)r(cid:80)ati(cid:82)n in thi(cid:86) (cid:48)(cid:39)(cid:9)(cid:36) include(cid:86), (cid:69)ut i(cid:86) n(cid:82)t li(cid:80)ited t(cid:82), reference(cid:86) t(cid:82) the (cid:82)utl(cid:82)(cid:82)(cid:78) f(cid:82)r the drillin(cid:74) indu(cid:86)tr(cid:92) (cid:11)includin(cid:74) the de(cid:80)and f(cid:82)r drillin(cid:74) (cid:86)ervice(cid:86) and da(cid:92) rate(cid:86), (cid:86)u(cid:83)(cid:83)l(cid:92) i(cid:86)(cid:86)ue(cid:86) and la(cid:69)(cid:82)ur (cid:86)h(cid:82)rta(cid:74)e(cid:86)(cid:12), the C(cid:82)(cid:80)(cid:83)an(cid:92)(cid:10)(cid:86) (cid:54)(cid:36)(cid:42)(cid:39) drillin(cid:74) activit(cid:92), debt repayment, and the Company's capital program. (cid:36)lth(cid:82)u(cid:74)h the C(cid:82)(cid:80)(cid:83)an(cid:92) (cid:69)elieve(cid:86) that the ex(cid:83)ectati(cid:82)n(cid:86) re(cid:193)ected in the f(cid:82)r(cid:90)ard(cid:16)l(cid:82)(cid:82)(cid:78)in(cid:74) inf(cid:82)r(cid:80)ati(cid:82)n are rea(cid:86)(cid:82)na(cid:69)le (cid:69)a(cid:86)ed (cid:82)n the information available on the date such statements are made and processes used to prepare the information, such statements are not guarantees of future performance and no assurance can be given that these expectations will prove to be correct. By their nature, the(cid:86)e f(cid:82)r(cid:90)ard(cid:16)l(cid:82)(cid:82)(cid:78)in(cid:74) (cid:86)tate(cid:80)ent(cid:86) inv(cid:82)lve nu(cid:80)er(cid:82)u(cid:86) a(cid:86)(cid:86)u(cid:80)(cid:83)ti(cid:82)n(cid:86), inherent ri(cid:86)(cid:78)(cid:86) and uncertaintie(cid:86), (cid:69)(cid:82)th (cid:74)eneral and (cid:86)(cid:83)ecific, and theref(cid:82)re carr(cid:92) the ri(cid:86)(cid:78) that the (cid:83)redicti(cid:82)n(cid:86) and (cid:82)ther f(cid:82)r(cid:90)ard(cid:16)l(cid:82)(cid:82)(cid:78)in(cid:74) (cid:86)tate(cid:80)ent(cid:86) (cid:90)ill n(cid:82)t (cid:69)e reali(cid:93)ed(cid:17) (cid:53)eader(cid:86) (cid:82)f thi(cid:86) (cid:48)(cid:39)(cid:9)(cid:36) are cautioned not to place undue reliance on these statements as a number of important factors could cause actual future results to differ materially from the plans, objectives, estimates and intentions expressed in such forward-looking statements. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of, among other things, prevailing economic conditions (including as may be affected by the COVID-19 pandemic); the level of exploration and devel(cid:82)(cid:83)(cid:80)ent activit(cid:92) carried (cid:82)n (cid:69)(cid:92) (cid:36)(cid:46)(cid:44)(cid:55)(cid:36)(cid:183)(cid:86) cu(cid:86)t(cid:82)(cid:80)er(cid:86), (cid:90)(cid:82)rld crude (cid:82)il (cid:83)rice(cid:86) and (cid:49)(cid:82)rth (cid:36)(cid:80)erican natural (cid:74)a(cid:86) (cid:83)rice(cid:86)(cid:30) (cid:74)l(cid:82)(cid:69)al li(cid:84)uified natural (cid:74)a(cid:86) (cid:11)(cid:47)(cid:49)(cid:42)(cid:12) de(cid:80)and, (cid:90)eather, acce(cid:86)(cid:86) t(cid:82) ca(cid:83)ital (cid:80)ar(cid:78)et(cid:86)(cid:30) and (cid:74)(cid:82)vern(cid:80)ent (cid:83)(cid:82)licie(cid:86)(cid:17) (cid:58)e cauti(cid:82)n that the f(cid:82)re(cid:74)(cid:82)in(cid:74) li(cid:86)t (cid:82)f fact(cid:82)r(cid:86) is not exhaustive and that while relying on forward-looking statements to make decisions with respect to AKITA, investors and others should carefully consider the foregoing factors, as well as other uncertainties and events, prior to making a decision to invest in AKITA. Except where required by law, the Company does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by it or on its behalf. Upcoming Accounting Standard Changes Certain new or amended standards or interpretations have been issued by the International Accounting Standards Board or the International Financial Reporting Interpretations Committee that are not required to be adopted in the current period. There are no standards and interpretations that have been issued, but are not yet effective, that the Company anticipates will have a material effect (cid:82)n the financial (cid:86)tate(cid:80)ent(cid:86) (cid:82)nce ad(cid:82)(cid:83)ted(cid:17) Other Information Additional information is provided by the Company in its Annual Information Form, Notice of Annual Meeting and Information Circular all dated March 10, 2022. Copies of these documents including additional copies of the Annual Report for the year ended December 31, (cid:21)(cid:19)(cid:21)(cid:20) (cid:80)a(cid:92) (cid:69)e (cid:82)(cid:69)tained u(cid:83)(cid:82)n re(cid:84)ue(cid:86)t fr(cid:82)(cid:80) the (cid:57)ice (cid:51)re(cid:86)ident, Finance and Chief Financial Officer (cid:82)f the C(cid:82)(cid:80)(cid:83)an(cid:92) at (cid:20)(cid:19)(cid:19)(cid:19), (cid:22)(cid:22)(cid:22) (cid:178) (cid:26)th Avenue S.W., Calgary, Alberta, T2P 2Z1 or at www.sedar.com. AKITA DRILLING | 2021 Annual Report 35 MANAGEMENT’S RESPONSIBILIT Y FOR FINANCIAL REPORTING MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL REPORTING (cid:55)he acc(cid:82)(cid:80)(cid:83)an(cid:92)in(cid:74) c(cid:82)n(cid:86)(cid:82)lidated financial (cid:86)tate(cid:80)ent(cid:86) (cid:82)f (cid:36)(cid:46)(cid:44)(cid:55)(cid:36) Drilling Ltd., Management's Discussion and Analysis and other information relating to AKITA contained in this Annual Report are the responsibility of management and have been approved by the (cid:37)(cid:82)ard (cid:82)f (cid:39)irect(cid:82)r(cid:86)(cid:17) (cid:55)he c(cid:82)n(cid:86)(cid:82)lidated financial (cid:86)tate(cid:80)ent(cid:86) have been prepared in accordance with accounting policies detailed in the n(cid:82)te(cid:86) t(cid:82) the c(cid:82)n(cid:86)(cid:82)lidated financial (cid:86)tate(cid:80)ent(cid:86) and are in conformity with International Financial Reporting Standards (also referred to as “IFRS”) using methods appropriate for the industry in which the Company operates. Where necessary, management made estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of c(cid:82)ntin(cid:74)ent a(cid:86)(cid:86)et(cid:86) and lia(cid:69)ilitie(cid:86) a(cid:86) at the date (cid:82)f the financial statements including estimates related to transactions and operations that were incomplete at year-end, the useful lives of drillin(cid:74) ri(cid:74)(cid:86) and (cid:82)ther a(cid:86)(cid:86)et(cid:86), the (cid:80)ea(cid:86)ure(cid:80)ent (cid:82)f the defined (cid:69)enefit (cid:83)en(cid:86)i(cid:82)n lia(cid:69)ilit(cid:92), a(cid:86)(cid:86)u(cid:80)(cid:83)ti(cid:82)n(cid:86) ar(cid:82)und future inc(cid:82)(cid:80)e tax calculations and the measurement of asset impairments. Financial information throughout this Annual Report is c(cid:82)n(cid:86)i(cid:86)tent (cid:90)ith the c(cid:82)n(cid:86)(cid:82)lidated financial (cid:86)tate(cid:80)ent(cid:86) exce(cid:83)t a(cid:86) noted. (cid:48)ana(cid:74)e(cid:80)ent en(cid:86)ure(cid:86) the inte(cid:74)rit(cid:92) (cid:82)f the c(cid:82)n(cid:86)(cid:82)lidated financial statements by maintaining a system of internal control. This 36 36 AKITA DRILLING | 2021 Annual Report 36 AKITA DRILLING | 2021 Annual Report AKITA DRILLING | 2021 Annual Report MANAGEMENT’S RESPONSIBILIT Y FOR FINANCIAL REPORTING system of internal control is based on the control criteria The Board of Directors, through its Audit Committee comprised framework of the Committee of Sponsoring Organizations of the (cid:82)f f(cid:82)ur inde(cid:83)endent direct(cid:82)r(cid:86) a(cid:86) defined in (cid:49)ati(cid:82)nal (cid:44)n(cid:86)tru(cid:80)ent Treadway Commission published in their report titled, Internal 52-110 – Audit Committees (“NI 52-110”), and one director who Control – Integrated Framework, as revised effective May 14, is exempt from the independence requirements of NI 52-110, 2013. The system is designed to provide reasonable assurance (cid:82)ver(cid:86)ee(cid:86) (cid:80)ana(cid:74)e(cid:80)ent(cid:10)(cid:86) re(cid:86)(cid:83)(cid:82)n(cid:86)i(cid:69)ilitie(cid:86) f(cid:82)r financial re(cid:83)(cid:82)rtin(cid:74)(cid:17) that transactions are executed as authorized and accurately The Audit Committee meets regularly with management and the recorded; that assets are safeguarded; and that accounting inde(cid:83)endent audit(cid:82)r(cid:86) t(cid:82) di(cid:86)cu(cid:86)(cid:86) auditin(cid:74) and financial (cid:80)atter(cid:86) rec(cid:82)rd(cid:86) are (cid:86)ufficientl(cid:92) relia(cid:69)le t(cid:82) (cid:83)er(cid:80)it the (cid:83)re(cid:83)arati(cid:82)n (cid:82)f and to gain assurance that management is carrying out its financial (cid:86)tate(cid:80)ent(cid:86) that c(cid:82)nf(cid:82)r(cid:80) in all (cid:80)aterial re(cid:86)(cid:83)ect(cid:86) responsibilities. with accounting principles generally accepted in Canada. The Company maintains disclosure controls and procedures designed to ensure that information required to be disclosed in reports is disclosed, processed and summarized and reported (cid:90)ithin (cid:86)(cid:83)ecified ti(cid:80)e (cid:83)eri(cid:82)d(cid:86)(cid:17) (cid:44)nternal c(cid:82)ntr(cid:82)l(cid:86) are (cid:80)(cid:82)nit(cid:82)red through self-assessments and are reinforced through a Code of Business Conduct, which sets forth the Company’s commitment Linda A. Southern–Heathcott Darcy Reynolds to conduct business with integrity, and within both the letter and Executive Chair and Vice President, Finance the spirit of the law. Chief Executive Officer and Chief Financial Officer PricewaterhouseCoopers LLP, the Company's independent March 10, 2022 auditors, have conducted an examination of the consolidated financial (cid:86)tate(cid:80)ent(cid:86) and have had full acce(cid:86)(cid:86) t(cid:82) the (cid:36)udit Committee. AKITA DRILLING | 2021 Annual Report 37 AKITA DRILLING | 2021 Annual Report 37 AKITA DRILLING | 2021 Annual Report 37 INDEPENDENT AUDITOR'S REPORT 38 AKITA DRILLING | 2021 Annual Report INDEPENDENT AUDITOR'S REPORT AKITA DRILLING | 2021 Annual Report 39 INDEPENDENT AUDITOR'S REPORT 40 AKITA DRILLING | 2021 Annual Report INDEPENDENT AUDITOR'S REPORT AKITA DRILLING | 2021 Annual Report 41 INDEPENDENT AUDITOR'S REPORT 42 AKITA DRILLING | 2021 Annual Report CONSOLIDATED FINANCIAL STATEMENTS Consolidated Statements of Financial Position $Thousands ASSETS Current Assets Cash Accounts receivable Prepaid expenses and other Non-current Assets Other long-term assets Investments in joint ventures Right-of-use assets Property, plant and equipment TOTAL ASSETS LIABILITIES Current Liabilities December 31 2021 December 31 2020 $ 1,773 $ 7,108 27,228 1,222 30,223 1,677 2,376 1,829 15,128 1,834 24,070 1,782 887 2,199 211,469 222,583 $ 247,574 $ 251,521 Note 12 Note 11 Note 9 Note 10 Accounts payable and accrued liabilities Note 12 $ 20,748 $ 13,916 Deferred revenue Current portion of lease obligations Current portion of long-term debt Non-current Liabilities Deferred income taxes Deferred share units Pension liability Lease obligations Long-term debt Total Liabilities SHAREHOLDERS' EQUITY Class A and Class B shares Contributed surplus Note 15 Note 14 Note 7 Note 18 Note 19 Note 15 Note 14 Note 17 Accumulated other comprehensive income (loss) (cid:53)etained earnin(cid:74)(cid:86) (cid:11)deficit(cid:12) Total Equity TOTAL LIABILITIES AND EQUITY (cid:55)he acc(cid:82)(cid:80)(cid:83)an(cid:92)in(cid:74) n(cid:82)te(cid:86) are an inte(cid:74)ral (cid:83)art (cid:82)f the(cid:86)e financial (cid:86)tate(cid:80)ent(cid:86)(cid:17) Approved by the Board, Director Director 44 AKITA DRILLING | 2021 Annual Report 282 974 1,717 23,721 1,138 262 5,188 1,341 84,439 116,089 146,264 5,452 (35) (20,196) 131,485 422 1,049 - 15,387 1,859 77 5,710 1,919 74,303 99,255 146,264 5,197 11 794 152,266 $ 247,574 $ 251,521 CONSOLIDATED FINANCIAL STATEMENTS Consolidated Statements of Net Loss & Comprehensive Loss $Thousands, except per share amounts REVENUE COSTS AND EXPENSES Operating and maintenance Depreciation and amortization Asset impairment loss Selling and administrative Total Costs and Expenses For the Year Ended December 31 2021 2020 Note 4 $ 110,088 $ 119,664 Note 6 Note 10 Note 10 Note 6 89,835 28,838 - 12,213 130,886 91,855 32,681 80,000 12,686 217,222 Revenue Less Costs and Expenses (20,798) (97,558) EQUITY INCOME FROM JOINT VENTURES Note 11 1,981 650 OTHER INCOME (LOSS) Interest income Interest expense (cid:42)ain (cid:11)l(cid:82)(cid:86)(cid:86)(cid:12) (cid:82)n (cid:86)ale (cid:82)f a(cid:86)(cid:86)et(cid:86) Net other gains (losses) Total Other Loss Loss Before Income Taxes 5 (3,553) 26 557 (2,965) 35 (5,637) (156) (35) (5,793) (21,782) (102,701) Income tax recovery Note 7 (792) (9,427) NET LOSS FOR THE PERIOD ATTRIBUTABLE TO SHAREHOLDERS (20,990) (93,274) OTHER COMPREHENSIVE INCOME (LOSS) (cid:44)te(cid:80)(cid:86) that (cid:90)ill n(cid:82)t (cid:86)u(cid:69)(cid:86)e(cid:84)uentl(cid:92) (cid:69)e recla(cid:86)(cid:86)ified t(cid:82) (cid:83)r(cid:82)fit (cid:82)r l(cid:82)(cid:86)(cid:86) Remeasurement of pension liability and other (cid:44)te(cid:80)(cid:86) that (cid:80)a(cid:92) (cid:69)e (cid:86)u(cid:69)(cid:86)e(cid:84)uentl(cid:92) recla(cid:86)(cid:86)ified t(cid:82) (cid:83)r(cid:82)fit (cid:82)r l(cid:82)(cid:86)(cid:86) Foreign currency translation adjustment Total Other Comprehensive Income (220) 266 46 314 (90) 224 COMPREHENSIVE LOSS FOR THE PERIOD ATTRIBUTABLE TO SHAREHOLDERS $ (20,944) $ (93,050) NET LOSS PER CLASS A AND CLASS B SHARE Note 3 Basic Diluted $ (0.53) $ (2.35) $ (0.53) $ (2.35) (cid:55)he acc(cid:82)(cid:80)(cid:83)an(cid:92)in(cid:74) n(cid:82)te(cid:86) are an inte(cid:74)ral (cid:83)art (cid:82)f the(cid:86)e financial (cid:86)tate(cid:80)ent(cid:86)(cid:17) AKITA DRILLING | 2021 Annual Report 45 CONSOLIDATED FINANCIAL STATEMENTS Consolidated Statements of Changes in Shareholders’ Equity Attributable to the Shareholders of the Company Class A Non-Voting Shares Class B Common Shares Total Class A and Class B Shares Contributed Surplus Accumulated Other Comprehensive Income (Loss) Retained Earnings (Deficit) Total Equity $ 144,898 $ 1,366 $ 146,264 $ 5,015 $ (213) $ 94,068 $ 245,134 — — — — — — — — — — — — — — — 182 — (93,274) (93,274) 538 (314) — — — — 538 (314) 182 $ 144,898 $ 1,366 $ 146,264 $ 5,197 $ 11 $ 794 $ 152,266 — — — — — — — — — — — — — — — 255 — (20,990) (20,990) (266) 220 — — — — (266) 220 255 $ 144,898 $ 1,366 $ 146,264 $ 5,452 $ (35) $ (20,196) $ 131,485 $Thousands BALANCE AT DECEMBER 31, 2019 Net loss for the year Foreign currency translation adjustment Remeasurement of pension liability Stock options expense BALANCE AT DECEMBER 31, 2020 Net loss for the year Foreign currency translation adjustment Remeasurement of pension liability Stock options expense BALANCE AT DECEMBER 31, 2021 (cid:55)he acc(cid:82)(cid:80)(cid:83)an(cid:92)in(cid:74) n(cid:82)te(cid:86) are an inte(cid:74)ral (cid:83)art (cid:82)f the(cid:86)e financial (cid:86)tate(cid:80)ent(cid:86)(cid:17) 46 AKITA DRILLING | 2021 Annual Report CONSOLIDATED FINANCIAL STATEMENTS Consolidated Statements of Cash Flows $Thousands OPERATING ACTIVITIES Net loss Non-cash items included in net loss: Depreciation and amortization Asset impairment loss Deferred income tax recovery (cid:39)efined (cid:69)enefit (cid:83)en(cid:86)i(cid:82)n (cid:83)lan ex(cid:83)en(cid:86)e Stock options expense Deferred share units expense (recovery) (cid:42)ain (cid:11)l(cid:82)(cid:86)(cid:86)(cid:12) (cid:82)n (cid:86)ale (cid:82)f a(cid:86)(cid:86)et(cid:86) (cid:42)ain (cid:82)n (cid:90)indu(cid:83) (cid:82)f (cid:86)u(cid:69)(cid:86)idiar(cid:92) Change in non-cash working capital Equity income from joint ventures (cid:51)(cid:82)(cid:86)t(cid:16)e(cid:80)(cid:83)l(cid:82)(cid:92)(cid:80)ent (cid:69)enefit(cid:86) Interest expense Interest paid Current income tax recovery Income taxes recoverable Net Cash From (Used In) Operating Activities INVESTING ACTIVITIES Capital expenditures Change in non-cash working capital related to capital Distributions from investments in joint ventures Change in long-term assets Proceeds from sale of assets Net Cash Used In Investing Activities FINANCING ACTIVITIES Change in debt Change in lease obligations Loan commitment fee Net Cash From (Used In) Financing Activities Effect of Foreign Exchange on Cash Increase (Decrease) In Cash Cash, beginning of year CASH, END OF YEAR For The Year Ended December 31 2021 2020 $ (20,990) $ (93,274) Note 10 Note 7 Note 19 Note 18 Note 13 Note 11 28,838 - (792) 20 255 252 (26) (103) (8,867) (1,981) (198) 3,553 (3,422) Note 7 - - 32,681 80,000 (9,311) 19 182 (131) 156 - 12,975 (650) (104) 5,637 (5,479) (116) 275 (3,461) 22,860 Note 10 Note 13 Note 11 Note 14 (16,416) 3,929 492 (82) 272 (11,805) 11,717 (1,328) (192) 10,197 (266) (5,335) 7,108 (7,593) (930) 1,411 (10) 2,142 (4,980) (9,953) (1,187) (165) (11,305) 533 7,108 - $ 1,773 $ 7,108 (cid:55)he acc(cid:82)(cid:80)(cid:83)an(cid:92)in(cid:74) n(cid:82)te(cid:86) are an inte(cid:74)ral (cid:83)art (cid:82)f the(cid:86)e financial (cid:86)tate(cid:80)ent(cid:86)(cid:17) AKITA DRILLING | 2021 Annual Report 47 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTES CONTENTS 49 51 55 BUSINESS AND ENVIRONMENT RESULTS FOR THE YEAR LONG-TERM ASSETS 1. General Information 2. Basis of Preparation 49 49 3. Net Loss per Share 4. Revenue 5. Government Subsidies 6. Expenses by Nature 7. Income Taxes 8. Segmented Information 65 61 WORKING CAPITAL DEBT AND EQUITY 12. Financial Instruments 61 14. Debt 13. Change in Non-Cash Working Capital 65 15. Lease Obligations 16. Capital Management 17. Share Capital 9. Right-of-Use Assets 10. Property, Plant and Equipment 11. Investments in Joint Ventures 55 57 60 70 PERSONNEL 18. Share-Based Compensation Plans 19. Employee Future Benefits 70 73 51 51 52 53 53 55 65 67 69 69 75 OTHER NOTES 20. Commitments and Contingencies 21. Related Party Transactions 75 75 48 48 AKITA DRILLING | 2021 Annual Report AKITA DRILLING | 2021 Annual Report NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2021 and December 31, 2020 BUSINESS AND ENVIRONMENT 1. General Information AKITA Drilling Ltd. and its subsidiaries (the “Company” or “AKITA”) provide contract drilling services, primarily to the oil and gas industry, in Canada and the United States (“US”). The Company owns and operates 36 drilling rigs (35.65 net of joint venture ownership). The Company conducts certain rig operations via joint ventures with First Nations, Métis or Inuit partners whereby rig assets are jointly owned. While joint venture interests are at least 50% owned by the Company, in each case the joint venture is governed on a joint basis. (cid:55)he C(cid:82)(cid:80)(cid:83)an(cid:92) i(cid:86) a li(cid:80)ited lia(cid:69)ilit(cid:92) c(cid:82)(cid:80)(cid:83)an(cid:92) inc(cid:82)r(cid:83)(cid:82)rated and d(cid:82)(cid:80)iciled in (cid:36)l(cid:69)erta, Canada(cid:17) (cid:55)he addre(cid:86)(cid:86) (cid:82)f it(cid:86) re(cid:74)i(cid:86)tered (cid:82)ffice i(cid:86) (cid:20)(cid:19)(cid:19)(cid:19), 333 – 7th Avenue SW, Calgary, Alberta. The Company is listed on the Toronto Stock Exchange. The Company is controlled by Sentgraf Enterprises Ltd. and its controlling share owner, the Southern family. 2. Basis of Preparation (cid:55)he c(cid:82)n(cid:86)(cid:82)lidated financial (cid:86)tate(cid:80)ent(cid:86) f(cid:82)r the (cid:92)ear ended (cid:39)ece(cid:80)(cid:69)er (cid:22)(cid:20), (cid:21)(cid:19)(cid:21)(cid:20), have (cid:69)een (cid:83)re(cid:83)ared in acc(cid:82)rdance (cid:90)ith (cid:44)nternati(cid:82)nal Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). These consolidated financial (cid:86)tate(cid:80)ent(cid:86) have (cid:69)een (cid:83)re(cid:83)ared under the hi(cid:86)t(cid:82)rical c(cid:82)(cid:86)t c(cid:82)nventi(cid:82)n, exce(cid:83)t a(cid:86) (cid:86)(cid:83)ecificall(cid:92) (cid:86)tated (cid:90)ithin the(cid:86)e n(cid:82)te(cid:86)(cid:17) (cid:55)he(cid:86)e c(cid:82)n(cid:86)(cid:82)lidated financial (cid:86)tate(cid:80)ent(cid:86) (cid:90)ere a(cid:83)(cid:83)r(cid:82)ved (cid:69)(cid:92) the C(cid:82)(cid:80)(cid:83)an(cid:92)(cid:183)(cid:86) (cid:37)(cid:82)ard (cid:82)f (cid:39)irect(cid:82)r(cid:86) (cid:82)n (cid:48)arch (cid:20)(cid:19), (cid:21)(cid:19)(cid:21)(cid:21)(cid:17) Consolidation (cid:55)he c(cid:82)n(cid:86)(cid:82)lidated financial (cid:86)tate(cid:80)ent(cid:86) (cid:82)f the C(cid:82)(cid:80)(cid:83)an(cid:92) c(cid:82)n(cid:86)(cid:82)lidate the acc(cid:82)unt(cid:86) (cid:82)f (cid:36)(cid:46)(cid:44)(cid:55)(cid:36) and it(cid:86) (cid:86)u(cid:69)(cid:86)idiarie(cid:86) (cid:90)hich are entitie(cid:86) (cid:82)ver which the Company has control. Control exists when the Company has the power, directly or indirectly, to direct the relevant activities (cid:82)f an entit(cid:92) (cid:86)(cid:82) a(cid:86) t(cid:82) (cid:82)(cid:69)tain (cid:69)enefit fr(cid:82)(cid:80) it(cid:86) activitie(cid:86)(cid:17) (cid:54)u(cid:69)(cid:86)idiarie(cid:86) are full(cid:92) c(cid:82)n(cid:86)(cid:82)lidated fr(cid:82)(cid:80) the date (cid:82)n (cid:90)hich c(cid:82)ntr(cid:82)l i(cid:86) tran(cid:86)ferred to the Company and are deconsolidated from the date that control ceases. Inter-company transactions, balances and unrealized gains and losses from inter-company transactions are eliminated on consolidation. AKITA DRILLING | 2021 Annual Report 49 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Functional and Presentation Currency (cid:44)te(cid:80)(cid:86) included in the financial (cid:86)tate(cid:80)ent(cid:86) (cid:82)f each (cid:82)f the C(cid:82)(cid:80)(cid:83)an(cid:92)(cid:10)(cid:86) entitie(cid:86) are (cid:80)ea(cid:86)ured u(cid:86)in(cid:74) the currenc(cid:92) (cid:82)f the (cid:83)ri(cid:80)ar(cid:92) ec(cid:82)n(cid:82)(cid:80)ic environment in which the entity operates ("the functional currency"). The functional currency of the Company and its Canadian subsidiaries is the Canadian dollar ("CAD") while the functional currency of its US subsidiaries is the US dollar ("USD"). (cid:55)he c(cid:82)n(cid:86)(cid:82)lidated financial (cid:86)tate(cid:80)ent(cid:86) are (cid:83)re(cid:86)ented in C(cid:36)(cid:39), (cid:90)hich i(cid:86) the C(cid:82)(cid:80)(cid:83)an(cid:92)(cid:10)(cid:86) (cid:83)re(cid:86)entati(cid:82)n currenc(cid:92)(cid:17) Foreign Currency Translation (i) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies at year-end exchange rates are recognized in the statement of net income and comprehensive income. (cid:11)ii(cid:12) (cid:42)r(cid:82)u(cid:83) c(cid:82)(cid:80)(cid:83)anie(cid:86) (cid:55)he re(cid:86)ult(cid:86) and financial (cid:83)(cid:82)(cid:86)iti(cid:82)n (cid:82)f f(cid:82)rei(cid:74)n (cid:82)(cid:83)erati(cid:82)n(cid:86) that have a functi(cid:82)nal currenc(cid:92) different fr(cid:82)(cid:80) the (cid:83)re(cid:86)entati(cid:82)n currenc(cid:92) are translated into the presentation currency as follows: (cid:135) a(cid:86)(cid:86)et(cid:86) and lia(cid:69)ilitie(cid:86) f(cid:82)r each (cid:86)tate(cid:80)ent (cid:82)f financial (cid:83)(cid:82)(cid:86)iti(cid:82)n (cid:83)re(cid:86)ented are tran(cid:86)lated at the cl(cid:82)(cid:86)in(cid:74) rate at the date (cid:82)f that balance sheet; • income and expenses for each statement of net income and comprehensive income are translated at average exchange rates (unless this is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and • all resulting exchange differences are recognized in other comprehensive income (“OCI”). Estimates and Judgments (cid:55)he (cid:83)re(cid:83)arati(cid:82)n (cid:82)f the(cid:86)e c(cid:82)n(cid:86)(cid:82)lidated financial (cid:86)tate(cid:80)ent(cid:86) re(cid:84)uired (cid:80)ana(cid:74)e(cid:80)ent t(cid:82) (cid:80)a(cid:78)e e(cid:86)ti(cid:80)ate(cid:86) and (cid:77)ud(cid:74)(cid:80)ent(cid:86)(cid:17) E(cid:86)ti(cid:80)ate(cid:86) and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable in the circumstances. Actual results could differ materially from these estimates. Estimates and judgments (cid:90)hich are (cid:80)aterial t(cid:82) the c(cid:82)n(cid:86)(cid:82)lidated financial (cid:86)tate(cid:80)ent(cid:86) are f(cid:82)und in the f(cid:82)ll(cid:82)(cid:90)in(cid:74) n(cid:82)te(cid:86)(cid:29) • Note 4 - Revenue • Note 7 - Income Taxes • Note 9 - Right of Use Assets • Note 10 - Property, Plant and Equipment • Note 12 – Financial Instruments (cid:135) (cid:49)(cid:82)te (cid:20)(cid:28) (cid:178) E(cid:80)(cid:83)l(cid:82)(cid:92)ee Future (cid:37)enefit(cid:86) In March 2020, the World Health Organization declared a global pandemic related to COVID-19. To date, the COVID-19 related economic (cid:86)l(cid:82)(cid:90)d(cid:82)(cid:90)n ha(cid:86) re(cid:86)ulted in (cid:86)i(cid:74)nificant v(cid:82)latilit(cid:92) in the (cid:86)t(cid:82)c(cid:78) (cid:80)ar(cid:78)et(cid:86), (cid:74)l(cid:82)(cid:69)al (cid:82)il de(cid:80)and and (cid:83)rice(cid:86) re(cid:86)ultin(cid:74) in (cid:82)n(cid:74)(cid:82)in(cid:74) uncertaint(cid:92) (cid:86)urr(cid:82)undin(cid:74) 50 AKITA DRILLING | 2021 Annual Report NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS the future impact of COVID-19 on demand and prices for the Company’s drilling services. In the current environment, assumptions about future commodity prices, exchange rates, interest rates and customer credit performance are subject to greater variability than normal re(cid:86)ultin(cid:74) in a hi(cid:74)her a(cid:80)(cid:82)unt (cid:82)f uncertaint(cid:92) in the e(cid:86)ti(cid:80)ate(cid:86) and (cid:77)ud(cid:74)(cid:80)ent(cid:86) c(cid:82)ntained in the C(cid:82)(cid:80)(cid:83)an(cid:92)(cid:183)(cid:86) financial (cid:86)tate(cid:80)ent(cid:86)(cid:17) RESULTS FOR THE YEAR 3. Net Loss per Share Basic earnings per share is calculated by dividing the net income (loss) for the period attributable to shareholders of the Company by the weighted average number of Class A Non-Voting and Class B Common shares outstanding during the period. Diluted earnings per share is calculated by adjusting the weighted average number of Class A Non-Voting and Class B Common shares outstanding to assume conversion of all dilutive potential Class A Non-Voting shares, typically stock options granted to directors and employees. The calculation is performed for the stock options to determine the number of shares that could have been acquired at fair value (determined as the average quarterly or annual, as appropriate, market share price of the Company’s outstanding Class A Non- Voting shares) based on the monetary value of the subscription rights attached to outstanding stock options. The number of shares calculated as above is compared with the number of shares that would have been issued assuming the exercise of stock options. Net loss ($Thousands) Weighted average outstanding shares Incremental shares for diluted loss calculation (1) Weighted average outstanding shares for loss per share - diluted Loss per share - basic Loss per share - diluted Year Ended December 31 2021 December 31 2020 $ (20,990) $ (93,274) 39,608,191 39,608,191 - - 39,608,191 39,608,191 $ (0.53) $ (2.35) $ (0.53) $ (2.35) (1) For the year ended December 31, 2021 and the year ended December 31, 2020, the outstanding shares that would have been issued under the Stock Option Plan were excluded in calculating the weighted average number of diluted shares as the Company incurred a net loss during the year and therefore the shares were considered anti-dilutive. 4. Revenue IFRS 15 Revenue from Contracts with Customers – Accounting Policies (cid:53)evenue i(cid:86) rec(cid:82)(cid:74)ni(cid:93)ed (cid:90)hen the C(cid:82)(cid:80)(cid:83)an(cid:92) (cid:86)ati(cid:86)fie(cid:86) a (cid:83)erf(cid:82)r(cid:80)ance (cid:82)(cid:69)li(cid:74)ati(cid:82)n (cid:69)(cid:92) tran(cid:86)ferrin(cid:74) (cid:83)r(cid:82)(cid:80)i(cid:86)ed (cid:74)(cid:82)(cid:82)d(cid:86) (cid:82)r (cid:86)ervice(cid:86) t(cid:82) a cu(cid:86)t(cid:82)(cid:80)er and the amount recorded is measured at the fair value of the consideration received. A typical contract with a customer includes (cid:83)erf(cid:82)r(cid:80)ance (cid:82)(cid:69)li(cid:74)ati(cid:82)n(cid:86) t(cid:82) (cid:83)r(cid:82)vide drillin(cid:74) (cid:86)ervice(cid:86) and ri(cid:74) e(cid:84)ui(cid:83)(cid:80)ent, (cid:90)hich are (cid:86)ati(cid:86)fied (cid:82)ver ti(cid:80)e(cid:17) Once deter(cid:80)ined, the tran(cid:86)acti(cid:82)n price will be allocated to each performance obligation based on stand-alone selling prices. Where stand-alone selling prices are not directly observable, the Company will make an estimate based on expected cost-plus margin. AKITA DRILLING | 2021 Annual Report 51 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (cid:58)here (cid:83)(cid:82)(cid:86)(cid:86)i(cid:69)le, the C(cid:82)(cid:80)(cid:83)an(cid:92) (cid:90)ill a(cid:83)(cid:83)l(cid:92) the (cid:83)ractical ex(cid:83)edient n(cid:82)t t(cid:82) di(cid:86)cl(cid:82)(cid:86)e the tran(cid:86)acti(cid:82)n (cid:83)rice f(cid:82)r un(cid:86)ati(cid:86)fied (cid:83)erf(cid:82)r(cid:80)ance if the performance obligation is part of a contract that has an original expected duration of one year or less. The Company does not expect to have any contracts where the period between the transfer of the promised goods or services to the customer and payment by the customer exceeds one year. Consequently, the Company does not adjust any of the transaction prices for the time value of money. The receipt of unearned contract revenue is recorded as deferred revenue until the contracted passage of time has occurred. Contract cancellation revenue is recognized when both parties to the contract have agreed upon an amount, collection is probable, and the Company does not have any further services to render in order to earn the revenue. Significant Estimates and Judgments – Relative Stand-Alone Selling Price The majority of the Company’s contracts contain both a lease and a service element. IFRS 15, “Revenue from Contracts with Customers” requires that contract revenue be presented separately from lease revenue. In this case, the transaction price will be allocated to each of the lease and service elements based on the stand-alone selling prices. Where these are not directly observable, they are estimated based on expected cost-plus margin. The Company’s revenue streams are comprised of the following: $Thousands Contract drilling services Rig lease rental Total revenue Significant Customers Year Ended December 31 2021 December 31 2020 $ 59,082 $ 62,491 51,006 57,173 $ 110,088 $ 119,664 During 2021 one customer (2020 – two customers) provided more than 10% of the Company’s revenue. While the loss of one or more (cid:82)f the(cid:86)e cu(cid:86)t(cid:82)(cid:80)er(cid:86) (cid:80)a(cid:92) have a (cid:80)aterial adver(cid:86)e effect (cid:82)n the financial re(cid:86)ult(cid:86) (cid:82)f the C(cid:82)(cid:80)(cid:83)an(cid:92), in (cid:80)ana(cid:74)e(cid:80)ent(cid:183)(cid:86) a(cid:86)(cid:86)e(cid:86)(cid:86)(cid:80)ent, the future viability of the Company is not dependent upon these major customers. 5. Government Subsidies (cid:42)(cid:82)vern(cid:80)ent (cid:86)u(cid:69)(cid:86)idie(cid:86) are rec(cid:82)(cid:74)ni(cid:93)ed (cid:90)hen there i(cid:86) rea(cid:86)(cid:82)na(cid:69)le a(cid:86)(cid:86)urance that the (cid:86)u(cid:69)(cid:86)id(cid:92) (cid:90)ill (cid:69)e received and that the C(cid:82)(cid:80)(cid:83)an(cid:92) (cid:90)ill c(cid:82)(cid:80)(cid:83)l(cid:92) (cid:90)ith all relevant c(cid:82)nditi(cid:82)n(cid:86)(cid:17) (cid:42)(cid:82)vern(cid:80)ent (cid:86)u(cid:69)(cid:86)idie(cid:86) related t(cid:82) current ex(cid:83)en(cid:86)e(cid:86) are rec(cid:82)rded a(cid:86) a reducti(cid:82)n (cid:82)f the related expenses. (cid:55)he C(cid:82)(cid:80)(cid:83)an(cid:92) (cid:84)ualified f(cid:82)r the Canada E(cid:80)er(cid:74)enc(cid:92) (cid:58)a(cid:74)e (cid:54)u(cid:69)(cid:86)id(cid:92) (cid:11)(cid:180)CE(cid:58)(cid:54)(cid:181)(cid:12) (cid:83)r(cid:82)(cid:74)ra(cid:80)(cid:17) (cid:55)he (cid:83)r(cid:82)(cid:74)ra(cid:80) (cid:90)a(cid:86) in effect fr(cid:82)(cid:80) (cid:48)arch (cid:20)(cid:24), (cid:21)(cid:19)(cid:21)(cid:19) to October 23, 2021 and provided a 75 percent wage subsidy, to a maximum of $847 per employee per week. For the year ended December 31, 2021, the Company recorded $4,002,000 (December 31, 2020 - $2,269,000) from the CEWS program. (cid:55)he C(cid:82)(cid:80)(cid:83)an(cid:92) (cid:84)ualified f(cid:82)r the Canada E(cid:80)er(cid:74)enc(cid:92) (cid:53)ent (cid:54)u(cid:69)(cid:86)id(cid:92) (cid:11)(cid:180)CE(cid:53)(cid:54)(cid:181)(cid:12) (cid:83)r(cid:82)(cid:74)ra(cid:80)(cid:17) F(cid:82)r the (cid:92)ear ended (cid:39)ece(cid:80)(cid:69)er (cid:22)(cid:20), (cid:21)(cid:19)(cid:21)(cid:20), the Company recorded $242,000 (December 31, 2020 - $nil) from the CERS program. 52 AKITA DRILLING | 2021 Annual Report NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 6. Expenses by Nature The Company presents certain expenses in the consolidated Statements of Net Loss and Comprehensive Loss by function. The following table presents those expenses by their nature: $Thousands Expenses (cid:54)alarie(cid:86), (cid:90)a(cid:74)e(cid:86) and (cid:69)enefit(cid:86) Materials and supplies Repairs and maintenance External services and facilities Total expenses Allocated to: Operating and maintenance Selling and administrative Total expenses 7. Income Taxes Year Ended December 31 2021 December 31 2020 $ 57,202 $ 60,855 16,294 19,674 8,878 18,340 15,707 9,639 $ 102,048 $ 104,541 $ 89,835 $ 91,855 12,213 12,686 $ 102,048 $ 104,541 Income taxes are comprised of current and deferred income taxes. Current taxes are calculated using tax rates and tax laws that have been enacted or substantively enacted at the end of the reporting year. Deferred tax is recognized, using the liability method, on temporary differences arising between the tax basis of assets and liabilities and their carr(cid:92)in(cid:74) a(cid:80)(cid:82)unt(cid:86) in the c(cid:82)n(cid:86)(cid:82)lidated financial (cid:86)tate(cid:80)ent(cid:86)(cid:17) (cid:39)eferred taxe(cid:86) are (cid:80)ea(cid:86)ured u(cid:86)in(cid:74) tax rate(cid:86) that are enacted (cid:82)r substantively enacted at the end of the reporting period and are expected to apply when the deferred tax asset is realized or the liability is settled. Deferred tax assets are recognized to the extent that it is probable that the assets can be recovered. Income taxes are comprised of the following: $Thousands Current tax recovery Deferred tax recovery Total income tax recovery Year Ended December 31 2021 December 31 2020 $ - $ (116) (792) (9,311) $ (792) $ (9,427) AKITA DRILLING | 2021 Annual Report 53 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The following table reconciles the income tax expense (recovery) using a weighted average Canadian federal and provincial rate of 24.48% (2020 – 25.17%) to the reported tax recovery. The rate decrease is due to changes in the jurisdictions the Company operates in(cid:17) (cid:55)he rec(cid:82)ncilin(cid:74) ite(cid:80)(cid:86) re(cid:83)re(cid:86)ent, a(cid:86)ide fr(cid:82)(cid:80) the i(cid:80)(cid:83)act (cid:82)f tax rate differential(cid:86) and chan(cid:74)e(cid:86), n(cid:82)n(cid:16)taxa(cid:69)le (cid:69)enefit(cid:86) (cid:82)r n(cid:82)n(cid:16)deducti(cid:69)le ex(cid:83)en(cid:86)e(cid:86) ari(cid:86)in(cid:74) fr(cid:82)(cid:80) (cid:83)er(cid:80)anent difference(cid:86) (cid:69)et(cid:90)een the l(cid:82)cal tax (cid:69)a(cid:86)e and the financial (cid:86)tate(cid:80)ent(cid:86)(cid:17) $Thousands Loss before income taxes Expected income tax at the statutory rate Add (deduct): Change in income tax rates Permanent differences Jurisdictional rate difference Change in unrecognized deferred tax asset Return to provision adjustment Other Total income tax recovery The deferred tax balance consists of the following: Year Ended December 31 2021 December 31 2020 $ (21,782) $ (102,701) (5,328) (25,853) 2,331 44 361 2,001 (223) 22 36 47 1,193 15,248 (40) (58) $ (792) $ (9,427) $Thousands Property, Plant and Equipment Defined Benefit Pension Plan Benefits Non-Capitlal Losses Other Total Balance as at December 31, 2019 $ 41,857 $ (1,286) $ (23,518) $ (5,781) $ 11,272 Charged (credited) to net loss Credited to OCI (8,177) - (37) (102) 2,971 - - (4,068) (9,311) Balance as at December 31, 2020 33,680 (1,425) (20,547) (9,849) Charged (credited) to net loss Charged to OCI 1,267 - 16 71 (2,744) - 669 - (102) 1,859 (792) 71 Balance as at December 31, 2021 $ 34,947 $ (1,338) $ (23,291) $ (9,180) $ 1,138 A net deferred tax asset has not been recognized for $69 million (2020 – $67 million). This amount is primarily related to non-capital losses carried forward. Total gross tax losses available to the Company are $400,537,000 with $369,866,000 in the US and $30,671,000 in Canada. The fir(cid:86)t (cid:82)f the(cid:86)e l(cid:82)(cid:86)(cid:86)e(cid:86) (cid:90)ill (cid:69)e(cid:74)in t(cid:82) ex(cid:83)ire in (cid:21)(cid:19)(cid:22)(cid:20)(cid:17) 54 AKITA DRILLING | 2021 Annual Report NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Significant Estimates and Judgments - Deferred Income Taxes The Company makes estimates and judgments relating to the measurement of deferred income taxes, including future tax rates, timing of reversals of temporary timing differences and the anticipated tax rules that will be in place when timing differences reverse. 8. Segmented Information The Company has one operating segment providing contract drilling services primarily to the oil and gas industry. From time to time, the Company is involved in other forms of drilling related to potash mining and the development of storage caverns. The Company determines its operating segments based on internal information, regularly reviewed by management, to allocate resources and assess performance. (cid:42)e(cid:82)(cid:74)ra(cid:83)hical inf(cid:82)r(cid:80)ati(cid:82)n i(cid:86) (cid:83)r(cid:82)vided (cid:69)el(cid:82)(cid:90)(cid:29) $Thousands Revenue Revenue less costs and expenses Year Ended December 31, 2021 Year Ended December 31, 2020 Canada US Total Canada US Total $ 28,290 $ 81,798 $ 110,088 $ 28,466 $ 91,198 $ 119,664 $ (9,965) $ (10,833) $ (20,798) $ (43,106) $ (54,452) $ (97,558) $Thousands Canada US Total Canada US Total Property, plant and equipment $ 60,496 $ 150,973 $ 211,469 $ 53,394 $ 169,189 $ 222,583 December 31, 2021 December 31, 2020 LONG-TERM ASSETS 9. Right-of-Use Assets IFRS 16 "Leases" - Accounting Policies (cid:55)he C(cid:82)(cid:80)(cid:83)an(cid:92) lea(cid:86)e(cid:86) vari(cid:82)u(cid:86) (cid:82)ffice(cid:86), (cid:92)ard(cid:86), ri(cid:74) e(cid:84)ui(cid:83)(cid:80)ent, vehicle(cid:86) and (cid:82)ffice e(cid:84)ui(cid:83)(cid:80)ent(cid:17) (cid:47)ea(cid:86)e c(cid:82)ntract(cid:86) are t(cid:92)(cid:83)icall(cid:92) (cid:80)ade f(cid:82)r fixed (cid:83)eri(cid:82)d(cid:86) (cid:82)f t(cid:90)(cid:82) t(cid:82) five (cid:92)ear(cid:86), (cid:69)ut (cid:80)a(cid:92) have exten(cid:86)i(cid:82)n (cid:82)r ter(cid:80)inati(cid:82)n (cid:82)(cid:83)ti(cid:82)n(cid:86)(cid:17) (cid:47)ea(cid:86)e ter(cid:80)(cid:86) are ne(cid:74)(cid:82)tiated (cid:82)n an individual (cid:69)a(cid:86)i(cid:86) and c(cid:82)ntain a wide range of different terms and conditions. The lease agreements do not impose any covenants, but leased assets may not be used as security for borrowing purposes. Lease right-of-use (“ROU”) assets arising from a lease are initially measured on a present value basis. The initial measurement of the ROU assets is comprised of the following: AKITA DRILLING | 2021 Annual Report 55 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS • the amount of the initial measurement of the lease liability; • any lease payments made at or before the commencement date less any lease incentives received; • any initial direct costs; and • restoration costs. ROU assets are depreciated over the lease term on a straight-line basis. Payments associated with short-term leases and leases of low-value assets are recognized on a straight-line basis as an expense in the statement of net income and comprehensive income. Short-term leases are leases with a lease term of 12 months or less. Low-value assets are c(cid:82)(cid:80)(cid:83)ri(cid:86)ed (cid:82)f (cid:82)ffice and (cid:44)(cid:55) (cid:86)(cid:82)ft(cid:90)are(cid:17) ROU assets are reviewed for internal and external indicators of impairment at each reporting date or when facts and circumstances suggest that the carrying amount may exceed its recoverable amount. If indicators of impairment exist, the recoverable amount of the ROU asset is estimated as the greater of value-in-use (“VIU”) and fair value less costs of disposal (“FVLCOD”). VIU is estimated as the present value of the future ca(cid:86)h (cid:193)(cid:82)(cid:90)(cid:86) ex(cid:83)ected t(cid:82) ari(cid:86)e fr(cid:82)(cid:80) the c(cid:82)ntinuin(cid:74) u(cid:86)e (cid:82)f the (cid:53)O(cid:56) a(cid:86)(cid:86)et(cid:17) F(cid:57)(cid:47)CO(cid:39) i(cid:86) deter(cid:80)ined (cid:69)(cid:92) e(cid:86)ti(cid:80)atin(cid:74) the di(cid:86)c(cid:82)unted after(cid:16)tax future net ca(cid:86)h (cid:193)(cid:82)(cid:90)(cid:86)(cid:17) (cid:44)f the rec(cid:82)vera(cid:69)le a(cid:80)(cid:82)unt (cid:82)f the (cid:53)O(cid:56) a(cid:86)(cid:86)et i(cid:86) le(cid:86)(cid:86) than the carr(cid:92)in(cid:74) a(cid:80)(cid:82)unt, an i(cid:80)(cid:83)air(cid:80)ent l(cid:82)(cid:86)(cid:86) i(cid:86) rec(cid:82)(cid:74)ni(cid:93)ed(cid:17) Continuity of ROU Assets $Thousands Land and property Rig equipment Office equipment and software Vehicles Total Balance as at December 31, 2019 $ 1,743 $ 486 $ 548 $ 174 $ 2,951 Additions Amortization expense Balance as at December 31, 2020 Additions Disposals Amortization expense 187 (474) 1,456 - - (449) - (210) 276 - 204 (317) 435 763 (114) (162) - (376) - (142) 32 - (4) (28) 391 (1,143) 2,199 763 (118) (1,015) Balance as at December 31, 2021 $ 1,007 $ - $ 822 $ - $ 1,829 Significant Estimates and Judgments In determining the lease term, management considers all facts and circumstances that create an economic incentive to exercise an extension option, or not exercise a termination option. Extension options (or periods after termination options) are only included in the lease term if the lease is reasonably certain to be extended (or not terminated). (cid:55)he a(cid:86)(cid:86)e(cid:86)(cid:86)(cid:80)ent i(cid:86) revie(cid:90)ed if a (cid:86)i(cid:74)nificant event (cid:82)r a (cid:86)i(cid:74)nificant chan(cid:74)e in circu(cid:80)(cid:86)tance(cid:86) (cid:82)ccur(cid:86) (cid:90)hich affect(cid:86) thi(cid:86) a(cid:86)(cid:86)e(cid:86)(cid:86)(cid:80)ent and that is within the control of the lessee. 56 AKITA DRILLING | 2021 Annual Report NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 10. Property, Plant and Equipment Accounting Policies (cid:51)r(cid:82)(cid:83)ert(cid:92), (cid:83)lant and e(cid:84)ui(cid:83)(cid:80)ent (cid:11)(cid:51)(cid:51)(cid:9)E(cid:12) i(cid:86) rec(cid:82)(cid:74)ni(cid:93)ed at c(cid:82)(cid:86)t le(cid:86)(cid:86) accu(cid:80)ulated de(cid:83)reciati(cid:82)n and i(cid:80)(cid:83)air(cid:80)ent(cid:17) Cost includes expenditures directly attributable to the acquisition of the asset. The cost of assets constructed by the Company includes the cost of all materials and services used in the construction and direct labour on the project. Costs cease to be capitalized as soon as the asset is ready for productive use. Subsequent costs associated with equipment upgrades that result in increased capabilities or (cid:83)erf(cid:82)r(cid:80)ance enhance(cid:80)ent(cid:86) (cid:82)f (cid:51)(cid:51)(cid:9)E are ca(cid:83)itali(cid:93)ed(cid:17) C(cid:82)(cid:86)t(cid:86) incurred t(cid:82) re(cid:83)air (cid:82)r (cid:80)aintain (cid:51)(cid:51)(cid:9)E are char(cid:74)ed t(cid:82) ex(cid:83)en(cid:86)e a(cid:86) incurred(cid:17) The carrying amount of a replaced asset is derecognized when replaced. (cid:55)he (cid:51)(cid:51)(cid:9)E ca(cid:86)h (cid:74)eneratin(cid:74) unit(cid:86) (cid:11)(cid:180)C(cid:42)(cid:56)(cid:86)(cid:181)(cid:12) are revie(cid:90)ed f(cid:82)r internal and external indicat(cid:82)r(cid:86) (cid:82)f i(cid:80)(cid:83)air(cid:80)ent at each re(cid:83)(cid:82)rtin(cid:74) date (cid:82)r when facts and circumstances suggest that the carrying amount may exceed its recoverable amount. Internal and external factors (cid:86)uch a(cid:86) (cid:11)i(cid:12) a (cid:86)i(cid:74)nificant chan(cid:74)e in the (cid:80)ar(cid:78)et ca(cid:83)itali(cid:93)ati(cid:82)n (cid:82)f the C(cid:82)(cid:80)(cid:83)an(cid:92)(cid:183)(cid:86) (cid:86)hare (cid:83)rice(cid:30) (cid:11)ii(cid:12) chan(cid:74)e(cid:86) in c(cid:82)nditi(cid:82)n(cid:86) (cid:82)f drillin(cid:74) ri(cid:74) a(cid:86)(cid:86)et(cid:86)(cid:30) (iii) changes in oil and gas prices in the market; (iv) changes in forecasted activity or earnings and (v) changes in interest rates or other market rates of return, are evaluated by management in determining whether there are any indicators of impairment or impairment reversal. (cid:44)f indicat(cid:82)r(cid:86) (cid:82)f i(cid:80)(cid:83)air(cid:80)ent exi(cid:86)t, the rec(cid:82)vera(cid:69)le a(cid:80)(cid:82)unt (cid:82)f the C(cid:42)(cid:56) i(cid:86) e(cid:86)ti(cid:80)ated a(cid:86) the (cid:74)reater (cid:82)f (cid:57)(cid:44)(cid:56) and F(cid:57)(cid:47)CO(cid:39)(cid:17) (cid:57)(cid:44)(cid:56) i(cid:86) e(cid:86)ti(cid:80)ated a(cid:86) the (cid:83)re(cid:86)ent value (cid:82)f the future ca(cid:86)h (cid:193)(cid:82)(cid:90)(cid:86) ex(cid:83)ected t(cid:82) ari(cid:86)e fr(cid:82)(cid:80) the c(cid:82)ntinuin(cid:74) u(cid:86)e (cid:82)f a C(cid:42)(cid:56)(cid:17) F(cid:57)(cid:47)CO(cid:39) i(cid:86) deter(cid:80)ined (cid:69)(cid:92) e(cid:86)ti(cid:80)atin(cid:74) the di(cid:86)c(cid:82)unted after(cid:16)tax future net ca(cid:86)h (cid:193)(cid:82)(cid:90)(cid:86) (cid:82)r thr(cid:82)u(cid:74)h the u(cid:86)e (cid:82)f external e(cid:84)ui(cid:83)(cid:80)ent a(cid:83)(cid:83)rai(cid:86)al(cid:86) (cid:82)(cid:69)tained fr(cid:82)(cid:80) inde(cid:83)endent third (cid:83)art(cid:92) valuati(cid:82)n ex(cid:83)ert(cid:86), le(cid:86)(cid:86) an e(cid:86)ti(cid:80)ated c(cid:82)(cid:86)t t(cid:82) (cid:86)ell(cid:17) (cid:44)f the rec(cid:82)vera(cid:69)le a(cid:80)(cid:82)unt (cid:82)f the C(cid:42)(cid:56) i(cid:86) le(cid:86)(cid:86) than the carr(cid:92)in(cid:74) a(cid:80)(cid:82)unt, an i(cid:80)(cid:83)air(cid:80)ent l(cid:82)(cid:86)(cid:86) i(cid:86) rec(cid:82)(cid:74)ni(cid:93)ed(cid:17) (cid:36)n i(cid:80)(cid:83)air(cid:80)ent l(cid:82)(cid:86)(cid:86) i(cid:86) all(cid:82)cated t(cid:82) the C(cid:42)(cid:56) and then t(cid:82) reduce the carr(cid:92)in(cid:74) a(cid:80)(cid:82)unt(cid:86) (cid:82)f the a(cid:86)(cid:86)et(cid:86) in the C(cid:42)(cid:56)(cid:17) Impairment losses recognized in prior periods are assessed at each reporting date for any indicators that the impairment losses may no longer exist or may have decreased. In the event that an impairment loss reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but only to the extent that the carrying amount does not exceed the amount that would have been determined had no impairment loss been recognized on the asset in prior periods. The amount of the reversal is recognized in net earnings. Significant Estimates and Judgments Useful Lives of Drilling Rigs (cid:39)e(cid:83)reciati(cid:82)n i(cid:86) rec(cid:82)(cid:74)ni(cid:93)ed (cid:82)n (cid:51)(cid:51)(cid:9)E excludin(cid:74) land(cid:17) (cid:39)e(cid:83)reciati(cid:82)n (cid:80)eth(cid:82)d(cid:86) and rate(cid:86) have (cid:69)een (cid:86)elected (cid:86)(cid:82) a(cid:86) t(cid:82) a(cid:80)(cid:82)rti(cid:93)e the net c(cid:82)(cid:86)t of each asset over its expected useful life to its estimated residual value. The estimated useful lives, residual values and depreciation methods are reviewed at the end of each annual reporting period. Major renovations are depreciated over the remaining useful life of the related asset or to the date of the next major renovation, whichever is sooner. Future Cash Flows (cid:44)(cid:80)(cid:83)air(cid:80)ent te(cid:86)tin(cid:74) inv(cid:82)lve(cid:86) the u(cid:86)e (cid:82)f e(cid:86)ti(cid:80)ate(cid:86) and (cid:77)ud(cid:74)(cid:80)ent(cid:86) in the calculati(cid:82)n (cid:82)f future ca(cid:86)h (cid:193)(cid:82)(cid:90)(cid:86) (cid:90)hich include future revenue (cid:83)r(cid:82)(cid:77)ecti(cid:82)n(cid:86), di(cid:86)c(cid:82)unt rate(cid:86), (cid:83)r(cid:82)(cid:69)a(cid:69)ilitie(cid:86) (cid:82)f ca(cid:86)h (cid:193)(cid:82)(cid:90) varia(cid:69)ilit(cid:92), future ca(cid:83)ital and (cid:82)(cid:83)eratin(cid:74) c(cid:82)(cid:86)t(cid:86), (cid:86)alva(cid:74)e value(cid:86) and inc(cid:82)(cid:80)e taxe(cid:86) and may consider the report of an external appraiser. AKITA DRILLING | 2021 Annual Report 57 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Depreciation Methods (cid:36) (cid:86)u(cid:80)(cid:80)ar(cid:92) (cid:82)f de(cid:83)reciati(cid:82)n (cid:80)eth(cid:82)d(cid:82)l(cid:82)(cid:74)ie(cid:86) f(cid:82)r the C(cid:82)(cid:80)(cid:83)an(cid:92)(cid:183)(cid:86) (cid:51)(cid:51)(cid:9)E cla(cid:86)(cid:86)e(cid:86) a(cid:86) at (cid:39)ece(cid:80)(cid:69)er (cid:22)(cid:20), (cid:21)(cid:19)(cid:21)(cid:20) i(cid:86) a(cid:86) f(cid:82)ll(cid:82)(cid:90)(cid:86)(cid:29) Equipment Class Drilling rigs Major inspection and overhaul expenditures Drill pipe and other ancillary drilling equipment Furniture, fixture(cid:86) and e(cid:84)ui(cid:83)(cid:80)ent Buildings Depreciation Method Depreciation Rates Straight-line Straight-line Straight-line Straight-line Straight-line 10 to 20 years 3 to 5 years 2 to 8 years 10 years 10 to 20 years (cid:55)he (cid:86)alva(cid:74)e value(cid:86) f(cid:82)r the drillin(cid:74) ri(cid:74) e(cid:84)ui(cid:83)(cid:80)ent ran(cid:74)e(cid:86) fr(cid:82)(cid:80) (cid:93)er(cid:82) t(cid:82) (cid:20)(cid:19)(cid:8) de(cid:83)endin(cid:74) (cid:82)n the (cid:86)(cid:83)ecific ri(cid:74) c(cid:82)(cid:80)(cid:83)(cid:82)nent(cid:17) (cid:55)here are n(cid:82) salvage values for the remaining equipment classes. Impairment of Assets The Company did not identify any changes in the indicators of asset impairment or impairment reversals or any new indicators of asset impairment since the asset impairment test that was carried out as at December 31, 2020. Therefore, no further assessment on asset i(cid:80)(cid:83)air(cid:80)ent (cid:90)a(cid:86) (cid:83)erf(cid:82)r(cid:80)ed a(cid:86) there have (cid:69)een n(cid:82) chan(cid:74)e(cid:86) in circu(cid:80)(cid:86)tance(cid:86) that indicate that the carr(cid:92)in(cid:74) a(cid:80)(cid:82)unt (cid:82)f (cid:51)(cid:51)(cid:9)E d(cid:82)e(cid:86) n(cid:82)t exceed its recoverable amount as at December 31, 2021. (cid:44)n the fir(cid:86)t (cid:84)uarter (cid:82)f (cid:21)(cid:19)(cid:21)(cid:19), the C(cid:82)(cid:80)(cid:83)an(cid:92) rec(cid:82)rded an i(cid:80)(cid:83)air(cid:80)ent l(cid:82)(cid:86)(cid:86) (cid:82)f (cid:7)(cid:22)(cid:19),(cid:19)(cid:19)(cid:19),(cid:19)(cid:19)(cid:19) in each (cid:82)f it(cid:86) Canadian and (cid:56)(cid:54) C(cid:42)(cid:56)(cid:86) re(cid:86)(cid:83)ectivel(cid:92)(cid:17) (cid:44)n the f(cid:82)urth (cid:84)uarter (cid:82)f (cid:21)(cid:19)(cid:21)(cid:19), (cid:69)(cid:82)th C(cid:42)(cid:56)(cid:86) (cid:90)ere te(cid:86)ted a(cid:74)ain f(cid:82)r i(cid:80)(cid:83)air(cid:80)ent and the C(cid:82)(cid:80)(cid:83)an(cid:92)(cid:10)(cid:86) (cid:56)(cid:54) C(cid:42)(cid:56)(cid:86) carr(cid:92)in(cid:74) a(cid:80)(cid:82)unt exceeded the recoverable amount resulting in an additional impairment of $20,000,000. The total impairment loss for the year ended December 31, 2020 was $80,000,000. (cid:55)he rec(cid:82)vera(cid:69)le a(cid:80)(cid:82)unt(cid:86) (cid:82)f the(cid:86)e C(cid:42)(cid:56)(cid:86) (cid:90)ere deter(cid:80)ined u(cid:86)in(cid:74) a di(cid:86)c(cid:82)unted ca(cid:86)h (cid:193)(cid:82)(cid:90) (cid:80)(cid:82)del(cid:17) (cid:36)(cid:86)(cid:86)u(cid:80)(cid:83)ti(cid:82)n(cid:86) u(cid:86)ed in the di(cid:86)c(cid:82)unted ca(cid:86)h (cid:193)(cid:82)(cid:90) (cid:80)(cid:82)del(cid:86) include the C(cid:82)(cid:80)(cid:83)an(cid:92)(cid:183)(cid:86) (cid:37)(cid:82)ard (cid:82)f (cid:39)irect(cid:82)r(cid:86) a(cid:83)(cid:83)r(cid:82)ved (cid:69)ud(cid:74)et(cid:86) and an avera(cid:74)e revenue (cid:74)r(cid:82)(cid:90)th rate ran(cid:74)in(cid:74) fr(cid:82)(cid:80) (cid:24)(cid:8) t(cid:82) (cid:20)(cid:24)(cid:8) (cid:82)ver a (cid:20)(cid:19) (cid:92)ear (cid:83)eri(cid:82)d de(cid:83)endin(cid:74) (cid:82)n the C(cid:42)(cid:56) (cid:69)ein(cid:74) anal(cid:92)(cid:93)ed(cid:17) (cid:44)n f(cid:82)reca(cid:86)tin(cid:74) it(cid:86) (cid:83)r(cid:82)(cid:77)ected ca(cid:86)h (cid:193)(cid:82)(cid:90)(cid:86) the C(cid:82)(cid:80)(cid:83)an(cid:92) a(cid:86)(cid:86)u(cid:80)ed a (cid:86)l(cid:82)(cid:90) recovery commencing in 2021 for both Canada and the US with improvements in activity and revenue per day over the forecast period. (cid:39)i(cid:86)c(cid:82)unted future ca(cid:86)h (cid:193)(cid:82)(cid:90)(cid:86) are deter(cid:80)ined (cid:69)(cid:92) a(cid:83)(cid:83)l(cid:92)in(cid:74) a di(cid:86)c(cid:82)unt rate (cid:82)f (cid:20)(cid:23)(cid:17)(cid:24)(cid:8)(cid:17) (cid:55)hi(cid:86) valuati(cid:82)n ha(cid:86) an (cid:44)F(cid:53)(cid:54) fair value hierarch(cid:92) (cid:82)f Level 3. Additionally, in the fourth quarter, management also obtained external equipment appraisals from independent third party experts which supported the fair value less cost to sell. (cid:36)(cid:86)(cid:86)et i(cid:80)(cid:83)air(cid:80)ent te(cid:86)tin(cid:74) i(cid:86) (cid:86)u(cid:69)(cid:77)ect t(cid:82) nu(cid:80)er(cid:82)u(cid:86) a(cid:86)(cid:86)u(cid:80)(cid:83)ti(cid:82)n(cid:86), inherent ri(cid:86)(cid:78)(cid:86) and uncertaintie(cid:86), (cid:69)(cid:82)th (cid:74)eneral and (cid:86)(cid:83)ecific, and the ri(cid:86)(cid:78) that the (cid:83)redicti(cid:82)n(cid:86) (cid:90)ill n(cid:82)t (cid:69)e reali(cid:93)ed(cid:17) (cid:36)(cid:86) a re(cid:86)ult, the f(cid:82)ll(cid:82)(cid:90)in(cid:74) (cid:86)en(cid:86)itivit(cid:92) anal(cid:92)(cid:86)i(cid:86) ha(cid:86) (cid:69)een (cid:83)erf(cid:82)r(cid:80)ed (cid:82)ver the (cid:86)i(cid:74)nificant assumptions to recognize that additional outcomes are possible: (cid:135) Chan(cid:74)ed future revenue a(cid:86)(cid:86)u(cid:80)(cid:83)ti(cid:82)n(cid:86) (cid:69)(cid:92) (cid:24)(cid:8) re(cid:86)ultin(cid:74) in increa(cid:86)e(cid:86) t(cid:82) the C(cid:82)(cid:80)(cid:83)an(cid:92)(cid:183)(cid:86) C(cid:42)(cid:56)(cid:86) fr(cid:82)(cid:80) (cid:7)(cid:20)(cid:24) (cid:80)illi(cid:82)n t(cid:82) (cid:7)(cid:22)(cid:24) (cid:80)illi(cid:82)n (cid:83)er C(cid:42)(cid:56) and reducti(cid:82)n(cid:86) ran(cid:74)in(cid:74) fr(cid:82)(cid:80) (cid:7)(cid:20)(cid:24) (cid:80)illi(cid:82)n t(cid:82) (cid:7)(cid:22)(cid:24) (cid:80)illi(cid:82)n (cid:83)er C(cid:42)(cid:56)(cid:30) and (cid:135) Chan(cid:74)ed the C(cid:82)(cid:80)(cid:83)an(cid:92)(cid:183)(cid:86) (cid:83)re(cid:16)tax di(cid:86)c(cid:82)unt rate (cid:69)(cid:92) (cid:20)(cid:8) re(cid:86)ultin(cid:74) in reducti(cid:82)n(cid:86) (cid:69)et(cid:90)een (cid:7)(cid:23) (cid:80)illi(cid:82)n and (cid:7)(cid:20)(cid:20) (cid:80)illi(cid:82)n (cid:83)er C(cid:42)(cid:56) and increa(cid:86)e(cid:86) fr(cid:82)(cid:80) (cid:7)(cid:23) (cid:80)illi(cid:82)n t(cid:82) (cid:7)(cid:20)(cid:19) (cid:80)illi(cid:82)n (cid:83)er C(cid:42)(cid:56)(cid:17) As drilling rigs are long lived assets, no sensitivity adjustment was made for the projected forecast period. As the base case test represented management’s best estimates, these sensitivity reductions were not included in the asset impairment loss reported. 58 AKITA DRILLING | 2021 Annual Report NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Property, Plant and Equipment Continuity Cost $Thousands Land and Buildings Drilling Rigs Other Total Balance as at December 31, 2019 $ 8,302 $ 561,716 $ 9,410 $ 579,428 Additions Disposals Balance as at December 31, 2020 Additions Disposals 94 (1,261) 7,135 - - 7,230 (8,786) 560,160 15,828 (3,380) 269 (574) 9,105 696 (162) 7,593 (10,621) 576,400 16,524 (3,542) Balance as at December 31, 2021 $ 7,135 $ 572,608 $ 9,639 $ 589,382 Accumulated Depreciation $Thousands Land and Buildings Drilling Rigs Other Total Balance as at December 31, 2019 $ 1,874 $ 241,406 $ 7,821 $ 251,101 Disposals Depreciation expense Asset writedown and impairment loss Balance as at December 31, 2020 Disposals Depreciation expense (72) 316 - (7,834) 30,123 80,000 (417) 600 - (8,323) 31,039 80,000 2,118 343,695 8,004 353,817 - 290 (3,137) 26,441 (160) 662 (3,297) 27,393 Balance as at December 31, 2021 $ 2,408 $ 366,999 $ 8,506 $ 377,913 Net Book Value $Thousands As at December 31, 2019 As at December 31, 2020 As at December 31, 2021 Land and Buildings Drilling Rigs Other Total $ 6,428 $ 320,310 $ 1,589 $ 328,327 $ 5,017 $ 216,465 $ 1,101 $ 222,583 $ 4,727 $ 205,609 $ 1,133 $ 211,469 (cid:36)t (cid:39)ece(cid:80)(cid:69)er (cid:22)(cid:20), (cid:21)(cid:19)(cid:21)(cid:20), the C(cid:82)(cid:80)(cid:83)an(cid:92) had (cid:7)(cid:21),(cid:19)(cid:22)(cid:28),(cid:19)(cid:19)(cid:19) in (cid:51)(cid:51)(cid:9)E that (cid:90)a(cid:86) n(cid:82)t (cid:69)ein(cid:74) de(cid:83)reciated, a(cid:86) the(cid:86)e a(cid:86)(cid:86)et(cid:86) (cid:90)ere under c(cid:82)n(cid:86)tructi(cid:82)n (December 31, 2020 – $468,000). (cid:44)n additi(cid:82)n t(cid:82) de(cid:83)reciati(cid:82)n (cid:82)n it(cid:86) (cid:51)(cid:51)(cid:9)E, the C(cid:82)(cid:80)(cid:83)an(cid:92) had a(cid:80)(cid:82)rti(cid:93)ati(cid:82)n ex(cid:83)en(cid:86)e (cid:82)f (cid:7)(cid:20),(cid:23)(cid:23)(cid:24),(cid:19)(cid:19)(cid:19) f(cid:82)r the (cid:92)ear ended (cid:39)ece(cid:80)(cid:69)er (cid:22)(cid:20), (cid:21)(cid:19)(cid:21)(cid:20) (2020 - $1,642,000). AKITA DRILLING | 2021 Annual Report 59 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 11. Investments in Joint Ventures The Company conducts certain rig operations via joint ventures with First Nations, Métis or Inuit partners whereby rig assets are jointly owned. Currently, there are eight different First Nations, Métis or Inuit groups with equity investments in six of AKITA’s drilling rigs. These equity investments are facilitated through joint venture agreements. Each joint venture operates the drilling rig with the joint venture partners’ owning a share of each drilling rig directly. The equity ownership of the drilling rigs for each First Nations, Métis or Inuit partner varies between rigs and groups and ranges from 5% to 50% per group per rig. While joint venture interests are at least 50% owned by the Company, in each case the joint venture is governed on a joint basis. The accounting policies of the joint ventures are consistent with the policies described herein. The Company has assessed the nature of its joint arrangements and determined them to be joint ventures. Joint ventures are accounted for using the equity method of accounting whereby the Company’s share of individual assets and liabilities are recognized as an investment in the joint venture account on the consolidated Statements of Financial Position, and revenues and expenses are recognized as equity income from investments in joint ventures on the consolidated Statements of Net Income and Comprehensive Income. The following table lists the Company’s active joint ventures. All joint ventures operate in Canada. AKITA Ownership Interest 85% 85% 85% 70% 90% 50% Investments in Joint Ventures $ 1,648 650 (1,411) 887 1,981 (492) $ 2,376 Active Joint Ventures AKITA Wood Buffalo Joint Venture 25 AKITA Wood Buffalo Joint Venture 26 AKITA Wood Buffalo Joint Venture 27 AKITA Wood Buffalo Joint Venture 28 Akita Mistiyapew Aski Joint Venture 56 AKITA Equtak Joint Venture 61 Continuity of Investments in Joint Ventures $Thousands Balance as at December 31, 2019 Net income for the year ended December 31, 2020 Distributions for the year ended December 31, 2020 Balance as at December 31, 2020 Net income for the year ended December 31, 2021 Distributions for the year ended December 31, 2021 Balance as at December 31, 2021 60 AKITA DRILLING | 2021 Annual Report NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Summarized Joint Venture Financial Information (cid:55)hi(cid:86) (cid:86)u(cid:80)(cid:80)ari(cid:93)ed financial inf(cid:82)r(cid:80)ati(cid:82)n i(cid:86) a rec(cid:82)nciliati(cid:82)n (cid:82)f the C(cid:82)(cid:80)(cid:83)an(cid:92)(cid:183)(cid:86) inve(cid:86)t(cid:80)ent(cid:86) in (cid:77)(cid:82)int venture(cid:86) t(cid:82) the a(cid:74)(cid:74)re(cid:74)ate (cid:82)f the a(cid:80)(cid:82)unt(cid:86) included in the (cid:44)F(cid:53)(cid:54) financial (cid:86)tate(cid:80)ent(cid:86) (cid:82)f the (cid:77)(cid:82)int venture(cid:86) (cid:90)hich include (cid:69)(cid:82)th the C(cid:82)(cid:80)(cid:83)an(cid:92)(cid:183)(cid:86) and (cid:77)(cid:82)int venture (cid:83)artner(cid:86)(cid:183) interests. $Thousands Cash Other current assets Non-current assets Total assets Current liabilities Net assets December 31, 2021 December 31, 2020 AKITA % JV Partner % Total AKITA % JV Partner % Total $ 685 $ 175 $ 860 $ 231 $ 68 $ 299 3,857 790 4,647 55 - 4,597 (2,221) 965 (513) 55 5,562 (2,734) 915 55 1,201 (314) 159 - 227 (103) 1,074 55 1,428 (417) $ 2,376 $ 452 $ 2,828 $ 887 $ 124 $ 1,011 $Thousands Revenue Operating and maintenance expenses Selling and administrative expenses Net income and comprehensive income Year Ended December 31, 2021 Year Ended December 31, 2020 AKITA % JV Partner % Total AKITA % JV Partner % Total $ 15,893 $ 3,433 $ 19,326 $ 5,094 $ 769 $ 5,863 13,626 2,957 16,583 4,352 690 5,042 286 60 346 92 12 104 $ 1,981 $ 416 $ 2,397 $ 650 $ 67 $ 717 WORKING CAPITAL 12. Financial Instruments Accounting Policies (cid:39)ue t(cid:82) the (cid:86)h(cid:82)rt(cid:16)ter(cid:80) nature (cid:82)f the C(cid:82)(cid:80)(cid:83)an(cid:92)(cid:183)(cid:86) financial in(cid:86)tru(cid:80)ent(cid:86), fair value(cid:86) a(cid:83)(cid:83)r(cid:82)xi(cid:80)ate carr(cid:92)in(cid:74) value(cid:86) unle(cid:86)(cid:86) (cid:82)ther(cid:90)i(cid:86)e (cid:86)tated(cid:17) (cid:55)he C(cid:82)(cid:80)(cid:83)an(cid:92) di(cid:86)cl(cid:82)(cid:86)e(cid:86) it(cid:86) financial in(cid:86)tru(cid:80)ent(cid:86) (cid:90)ithin a hierarch(cid:92) (cid:83)ri(cid:82)riti(cid:93)in(cid:74) the in(cid:83)ut(cid:86) t(cid:82) fair value (cid:80)ea(cid:86)ure(cid:80)ent(cid:86) at the f(cid:82)ll(cid:82)(cid:90)in(cid:74) three levels: • Level 1 – unadjusted quoted prices in active markets for identical assets or liabilities; • Level 2 – inputs other than quoted prices that are observable for the asset or liability either directly or indirectly; and • Level 3 – inputs that are not based on observable market data. AKITA DRILLING | 2021 Annual Report 61 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Classification and measurement (cid:55)he C(cid:82)(cid:80)(cid:83)an(cid:92) cla(cid:86)(cid:86)ifie(cid:86) it(cid:86) financial in(cid:86)tru(cid:80)ent(cid:86) in the f(cid:82)ll(cid:82)(cid:90)in(cid:74) (cid:80)ea(cid:86)ure(cid:80)ent cate(cid:74)(cid:82)rie(cid:86) de(cid:83)endin(cid:74) (cid:82)n the C(cid:82)(cid:80)(cid:83)an(cid:92)(cid:183)(cid:86) (cid:69)u(cid:86)ine(cid:86)(cid:86) (cid:80)(cid:82)del f(cid:82)r (cid:80)ana(cid:74)in(cid:74) financial a(cid:86)(cid:86)et(cid:86) and the c(cid:82)ntractual ter(cid:80)(cid:86) (cid:82)f the ca(cid:86)h (cid:193)(cid:82)(cid:90)(cid:86)(cid:29) (i.) Financial assets at amortized cost: (cid:36)(cid:86)(cid:86)et(cid:86) that are held f(cid:82)r c(cid:82)llecti(cid:82)n (cid:82)f c(cid:82)ntractual ca(cid:86)h (cid:193)(cid:82)(cid:90)(cid:86) (cid:90)here th(cid:82)(cid:86)e ca(cid:86)h (cid:193)(cid:82)(cid:90)(cid:86) re(cid:83)re(cid:86)ent (cid:86)(cid:82)lel(cid:92) (cid:83)a(cid:92)(cid:80)ent(cid:86) (cid:82)f (cid:83)rinci(cid:83)al and intere(cid:86)t are (cid:80)ea(cid:86)ured at a(cid:80)(cid:82)rti(cid:93)ed c(cid:82)(cid:86)t(cid:17) (cid:44)ntere(cid:86)t inc(cid:82)(cid:80)e fr(cid:82)(cid:80) the(cid:86)e financial a(cid:86)(cid:86)et(cid:86) i(cid:86) included in finance inc(cid:82)(cid:80)e u(cid:86)in(cid:74) the effective intere(cid:86)t rate (cid:80)eth(cid:82)d(cid:17) (cid:36)n(cid:92) (cid:74)ain (cid:82)r l(cid:82)(cid:86)(cid:86) ari(cid:86)in(cid:74) (cid:82)n derec(cid:82)(cid:74)niti(cid:82)n i(cid:86) rec(cid:82)(cid:74)ni(cid:93)ed directl(cid:92) in (cid:83)r(cid:82)fit (cid:82)r l(cid:82)(cid:86)(cid:86) and (cid:83)re(cid:86)ented in (cid:82)ther (cid:74)ain(cid:86) (cid:82)r l(cid:82)(cid:86)(cid:86)e(cid:86), t(cid:82)(cid:74)ether (cid:90)ith f(cid:82)rei(cid:74)n exchan(cid:74)e (cid:74)ain(cid:86) and l(cid:82)(cid:86)(cid:86)e(cid:86)(cid:17) (cid:36)(cid:86) at (cid:39)ece(cid:80)(cid:69)er (cid:22)(cid:20), (cid:21)(cid:19)(cid:21)(cid:20), the C(cid:82)(cid:80)(cid:83)an(cid:92)(cid:183)(cid:86) financial assets in this category include cash and accounts receivable. (ii.) Financial liabilities at amortized cost: Financial liabilities that are measured at amortized cost are initially recognized at the amount required to be paid less, when (cid:80)aterial, a di(cid:86)c(cid:82)unt t(cid:82) reduce the (cid:83)a(cid:92)a(cid:69)le(cid:86) and accrued lia(cid:69)ilitie(cid:86) t(cid:82) fair value(cid:17) (cid:54)u(cid:69)(cid:86)e(cid:84)uentl(cid:92), financial lia(cid:69)ilitie(cid:86) are (cid:80)ea(cid:86)ured at a(cid:80)(cid:82)rti(cid:93)ed c(cid:82)(cid:86)t u(cid:86)in(cid:74) the effective intere(cid:86)t rate (cid:80)eth(cid:82)d(cid:17) (cid:36)(cid:86) at (cid:39)ece(cid:80)(cid:69)er (cid:22)(cid:20), (cid:21)(cid:19)(cid:21)(cid:20), the C(cid:82)(cid:80)(cid:83)an(cid:92)(cid:10)(cid:86) financial lia(cid:69)ilitie(cid:86) in thi(cid:86) category include accounts payable and accrued liabilities and its operating loan facility. (iii.)Fair value through other comprehensive income (“FVOCI”): (cid:36)(cid:86)(cid:86)et(cid:86) that are held f(cid:82)r c(cid:82)llecti(cid:82)n (cid:82)f c(cid:82)ntractual ca(cid:86)h (cid:193)(cid:82)(cid:90)(cid:86) and f(cid:82)r (cid:86)ellin(cid:74) the financial a(cid:86)(cid:86)et(cid:86), (cid:90)here the a(cid:86)(cid:86)et(cid:86)(cid:183) ca(cid:86)h (cid:193)(cid:82)(cid:90)(cid:86) represent solely payments of principal and interest, are measured at FVOCI. Movements in the carrying amount are taken through OCI, except for the recognition of impairment gains or losses, interest revenue and foreign exchange gains and losses (cid:90)hich are rec(cid:82)(cid:74)ni(cid:93)ed in (cid:83)r(cid:82)fit (cid:82)r l(cid:82)(cid:86)(cid:86)(cid:17) (cid:58)hen the financial a(cid:86)(cid:86)et i(cid:86) derec(cid:82)(cid:74)ni(cid:93)ed, the cu(cid:80)ulative (cid:74)ain (cid:82)r l(cid:82)(cid:86)(cid:86) (cid:83)revi(cid:82)u(cid:86)l(cid:92) rec(cid:82)(cid:74)ni(cid:93)ed in OC(cid:44) i(cid:86) recla(cid:86)(cid:86)ified fr(cid:82)(cid:80) e(cid:84)uit(cid:92) t(cid:82) (cid:83)r(cid:82)fit (cid:82)r l(cid:82)(cid:86)(cid:86) and rec(cid:82)(cid:74)ni(cid:93)ed in (cid:82)ther (cid:74)ain(cid:86) (cid:82)r l(cid:82)(cid:86)(cid:86)e(cid:86) and i(cid:80)(cid:83)air(cid:80)ent ex(cid:83)en(cid:86)e(cid:86) are (cid:83)re(cid:86)ented a(cid:86) a (cid:86)e(cid:83)arate line ite(cid:80) (cid:82)n the (cid:86)tate(cid:80)ent (cid:82)f (cid:83)r(cid:82)fit (cid:82)r l(cid:82)(cid:86)(cid:86)(cid:17) (cid:36)(cid:86) at (cid:39)ece(cid:80)(cid:69)er (cid:22)(cid:20), (cid:21)(cid:19)(cid:21)(cid:20), the C(cid:82)(cid:80)(cid:83)an(cid:92) held n(cid:82) financial in(cid:86)tru(cid:80)ent(cid:86) in this category. (cid:11)iv(cid:17)(cid:12) Fair value thr(cid:82)u(cid:74)h (cid:83)r(cid:82)fit (cid:82)r l(cid:82)(cid:86)(cid:86) (cid:11)(cid:180)F(cid:57)(cid:51)(cid:47)(cid:181)(cid:12)(cid:29) Assets that do not meet the criteria for amortized cost or FVOCI are measured at FVPL. A gain or loss on a debt investment that is (cid:86)u(cid:69)(cid:86)e(cid:84)uentl(cid:92) (cid:80)ea(cid:86)ured at F(cid:57)(cid:51)(cid:47) i(cid:86) rec(cid:82)(cid:74)ni(cid:93)ed in (cid:83)r(cid:82)fit (cid:82)r l(cid:82)(cid:86)(cid:86) and (cid:83)re(cid:86)ented net (cid:90)ithin (cid:82)ther (cid:74)ain(cid:86) (cid:82)r l(cid:82)(cid:86)(cid:86)e(cid:86) in the (cid:83)eri(cid:82)d in (cid:90)hich it ari(cid:86)e(cid:86)(cid:17) Financial a(cid:86)(cid:86)et(cid:86) at F(cid:57)(cid:51)(cid:47) are financial a(cid:86)(cid:86)et(cid:86) held f(cid:82)r tradin(cid:74)(cid:17) (cid:39)erivative(cid:86) are al(cid:86)(cid:82) cate(cid:74)(cid:82)ri(cid:93)ed a(cid:86) held f(cid:82)r tradin(cid:74) and (cid:80)ea(cid:86)ured at F(cid:57)(cid:51)(cid:47) unle(cid:86)(cid:86) the(cid:92) are de(cid:86)i(cid:74)nated a(cid:86) hed(cid:74)e(cid:86)(cid:17) (cid:36)(cid:86) at (cid:39)ece(cid:80)(cid:69)er (cid:22)(cid:20), (cid:21)(cid:19)(cid:21)(cid:20), the C(cid:82)(cid:80)(cid:83)an(cid:92) held n(cid:82) financial in(cid:86)tru(cid:80)ent(cid:86) in this category. Impairment of financial assets The Company assesses, on a forward-looking basis, the expected credit losses associated with its debt instruments carried at amortized c(cid:82)(cid:86)t(cid:17) (cid:55)he i(cid:80)(cid:83)air(cid:80)ent (cid:80)eth(cid:82)d(cid:82)l(cid:82)(cid:74)(cid:92) a(cid:83)(cid:83)lied de(cid:83)end(cid:86) (cid:82)n (cid:90)hether there ha(cid:86) (cid:69)een a (cid:86)i(cid:74)nificant increa(cid:86)e in credit ri(cid:86)(cid:78)(cid:17) Financial Instrument Risk Exposure and Management (cid:55)he C(cid:82)(cid:80)(cid:83)an(cid:92) i(cid:86) ex(cid:83)(cid:82)(cid:86)ed t(cid:82) the f(cid:82)ll(cid:82)(cid:90)in(cid:74) ri(cid:86)(cid:78)(cid:86) a(cid:86)(cid:86)(cid:82)ciated (cid:90)ith it(cid:86) financial in(cid:86)tru(cid:80)ent(cid:86)(cid:29) Credit risk Credit ri(cid:86)(cid:78) i(cid:86) the ri(cid:86)(cid:78) (cid:82)f financial l(cid:82)(cid:86)(cid:86) if a cu(cid:86)t(cid:82)(cid:80)er (cid:82)r c(cid:82)unter(cid:83)art(cid:92) t(cid:82) a financial in(cid:86)tru(cid:80)ent fail(cid:86) t(cid:82) (cid:80)eet it(cid:86) c(cid:82)ntractual (cid:82)(cid:69)li(cid:74)ati(cid:82)n(cid:86) and arises primarily from the Company’s trade and other receivables. The credit risk is managed via the Company’s credit-granting 62 AKITA DRILLING | 2021 Annual Report NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (cid:83)r(cid:82)cedure(cid:86) (cid:90)hich include an evaluati(cid:82)n (cid:82)f the cu(cid:86)t(cid:82)(cid:80)er(cid:183)(cid:86) financial c(cid:82)nditi(cid:82)n and (cid:83)a(cid:92)(cid:80)ent hi(cid:86)t(cid:82)r(cid:92)(cid:17) (cid:44)n certain circu(cid:80)(cid:86)tance(cid:86) the Company may require customers to make advance payment prior to the provision of services, issue a letter of credit or take other measures to reduce credit risk. F(cid:82)r trade receiva(cid:69)le(cid:86), the C(cid:82)(cid:80)(cid:83)an(cid:92) a(cid:83)(cid:83)lie(cid:86) the (cid:86)i(cid:80)(cid:83)lified a(cid:83)(cid:83)r(cid:82)ach t(cid:82) (cid:80)ea(cid:86)urin(cid:74) ex(cid:83)ected credit l(cid:82)(cid:86)(cid:86)e(cid:86) (cid:90)hich u(cid:86)e(cid:86) a lifeti(cid:80)e ex(cid:83)ected loss allowance for all trade receivables. To measure the expected credit losses, trade receivables and contract assets have been grouped based on shared credit-risk characteristics and analyzed. Accounts receivable are written-off when there is no reasonable expectation of recovery. Indicators that there is no reasonable expectation of recovery include, amongst others, the failure of a debtor to engage in a repayment plan with the Company and a failure to make contractual payments for a period greater than 180 days past due. The terms of the Company’s contracts generally require payment within 30 days. The Company continuously monitors the recoverability of its accounts receivable balances and subject to agreed payment terms, generally considers the balance to be overdue when it ages (cid:82)ver (cid:28)(cid:19) da(cid:92)(cid:86)(cid:17) (cid:44)n (cid:80)ana(cid:74)e(cid:80)ent(cid:183)(cid:86) (cid:77)ud(cid:74)(cid:80)ent there i(cid:86) n(cid:82) (cid:86)i(cid:74)nificant credit ri(cid:86)(cid:78) ex(cid:83)(cid:82)(cid:86)ure in the (cid:69)alance(cid:86) (cid:82)ut(cid:86)tandin(cid:74) at(cid:29) $Thousands Within 30 days 31 to 60 days 61 to 90 days Over 90 days Estimated credit losses Total accounts receivable December 31 2021 $ 22,195 3,747 852 1,109 (675) December 31 2020 $ 11,934 2,078 - 1,791 (675) $ 27,228 $ 15,128 Significant Estimates and Judgments – Estimated Credit Losses (cid:55)he l(cid:82)(cid:86)(cid:86) all(cid:82)(cid:90)ance(cid:86) f(cid:82)r financial a(cid:86)(cid:86)et(cid:86) are (cid:69)a(cid:86)ed (cid:82)n a(cid:86)(cid:86)u(cid:80)(cid:83)ti(cid:82)n(cid:86) a(cid:69)(cid:82)ut ri(cid:86)(cid:78) (cid:82)f default and ex(cid:83)ected l(cid:82)(cid:86)(cid:86) rate(cid:86)(cid:17) (cid:55)he C(cid:82)(cid:80)(cid:83)an(cid:92) u(cid:86)e(cid:86) judgment in making these assumptions and selecting the inputs to the impairment calculation, based on the Company’s past history, existing market conditions as well as forward-looking estimates at the end of each reporting period. Liquidity risk (cid:47)i(cid:84)uidit(cid:92) ri(cid:86)(cid:78) i(cid:86) the ri(cid:86)(cid:78) that the C(cid:82)(cid:80)(cid:83)an(cid:92) (cid:90)ill n(cid:82)t (cid:69)e a(cid:69)le t(cid:82) (cid:80)eet it(cid:86) financial (cid:82)(cid:69)li(cid:74)ati(cid:82)n(cid:86) a(cid:86) the(cid:92) c(cid:82)(cid:80)e due(cid:17) (cid:55)he C(cid:82)(cid:80)(cid:83)an(cid:92) (cid:80)iti(cid:74)ate(cid:86) li(cid:84)uidit(cid:92) ri(cid:86)(cid:78) thr(cid:82)u(cid:74)h (cid:80)ana(cid:74)e(cid:80)ent (cid:82)f it(cid:86) (cid:90)(cid:82)r(cid:78)in(cid:74) ca(cid:83)ital (cid:69)alance, (cid:80)(cid:82)nit(cid:82)rin(cid:74) actual and f(cid:82)reca(cid:86)ted ca(cid:86)h (cid:193)(cid:82)(cid:90)(cid:86) and u(cid:86)in(cid:74) it(cid:86) (cid:82)(cid:83)eratin(cid:74) loan facility when necessary. At December 31, 2021, this risk was limited by $7.4 million in a positive working capital balance and $25.0 million available in the Company’s undrawn banking facility. (cid:44)f future re(cid:86)ult(cid:86) d(cid:82) n(cid:82)t (cid:80)eet the C(cid:82)(cid:80)(cid:83)an(cid:92)(cid:183)(cid:86) ex(cid:83)ectati(cid:82)n(cid:86) there i(cid:86) a ri(cid:86)(cid:78) that the C(cid:82)(cid:80)(cid:83)an(cid:92) c(cid:82)uld (cid:69)e (cid:82)ff(cid:86)ide (cid:90)ith it(cid:86) financial c(cid:82)venant(cid:86) in it(cid:86) (cid:69)an(cid:78)in(cid:74) facilit(cid:92) and l(cid:82)(cid:86)e the a(cid:69)ilit(cid:92) t(cid:82) dra(cid:90) (cid:82)n the facilit(cid:92) t(cid:82) (cid:80)eet it(cid:86) financial (cid:82)(cid:69)li(cid:74)ati(cid:82)n(cid:86) (cid:82)r have t(cid:82) re(cid:83)a(cid:92) the a(cid:80)(cid:82)unt(cid:86) (cid:82)ut(cid:86)tandin(cid:74) on the facility. The Company maintains a positive working relationship with the banks in its syndicated facility and on July 17, 2020, entered int(cid:82) an a(cid:80)endin(cid:74) a(cid:74)ree(cid:80)ent (cid:90)ith it(cid:86) lender(cid:86) in the (cid:86)(cid:92)ndicate t(cid:82) (cid:83)r(cid:82)vide a five (cid:84)uarter c(cid:82)venant relief (cid:83)eri(cid:82)d(cid:17) (cid:55)he facilit(cid:92) (cid:90)a(cid:86) further amended quarterly to add additional quarters of covenant relief to June 30, 2023 (Note 14). AKITA DRILLING | 2021 Annual Report 63 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Maturity information regarding the Company’s long-term debt is as follows: $Thousands Less than 1 Year 1-3 Years Total Bank credit facility - principal Bank credit facility - interest Total $ 1,717 $ 84,439 $ 86,156 3,946 3,538 7,484 $ 5,663 $ 87,977 $ 93,640 Maturity information regarding the Company’s long-term lease obligations is as follows: $Thousands Lease obligations Less than 1 Year 2-3 Years 4-5 Years Total $ 974 $ 1,326 $ 15 $ 2,315 Lease obligations - interest 103 72 1 176 Total $ 1,077 $ 1,398 $ 16 $ 2,491 Foreign currency exchange - transaction risk F(cid:82)rei(cid:74)n currenc(cid:92) exchan(cid:74)e tran(cid:86)acti(cid:82)n ri(cid:86)(cid:78) i(cid:86) the ri(cid:86)(cid:78) that future ca(cid:86)h (cid:193)(cid:82)(cid:90)(cid:86) (cid:90)ill (cid:193)uctuate a(cid:86) a re(cid:86)ult (cid:82)f chan(cid:74)e(cid:86) in f(cid:82)rei(cid:74)n currenc(cid:92) exchange rates. The Company’s geographical divisional operations are primarily denominated in their local currency with limited ex(cid:83)(cid:82)(cid:86)ure t(cid:82) f(cid:82)rei(cid:74)n currenc(cid:92) exchan(cid:74)e tran(cid:86)acti(cid:82)n ri(cid:86)(cid:78) thr(cid:82)u(cid:74)h ca(cid:83)ital ex(cid:83)enditure(cid:86) (cid:82)r financial in(cid:86)tru(cid:80)ent(cid:86)(cid:17) Fr(cid:82)(cid:80) ti(cid:80)e t(cid:82) ti(cid:80)e the company may enter into forward currency contracts to manage this risk. Foreign currency exchange - translation risk The Company is exposed to foreign currency exchange translation risk as revenues, expenses and working capital from its US operations are denominated in USD. In addition, the Company’s foreign subsidiaries are subject to unrealized foreign currency exchange translation gains or losses on consolidation. Interest rate risk (cid:55)he C(cid:82)(cid:80)(cid:83)an(cid:92) i(cid:86) ex(cid:83)(cid:82)(cid:86)ed t(cid:82) chan(cid:74)e(cid:86) in intere(cid:86)t rate(cid:86) (cid:82)n (cid:69)(cid:82)rr(cid:82)(cid:90)in(cid:74)(cid:86) under it(cid:86) (cid:82)(cid:83)eratin(cid:74) l(cid:82)an facilit(cid:92) (cid:90)hich i(cid:86) (cid:86)u(cid:69)(cid:77)ect t(cid:82) (cid:193)(cid:82)atin(cid:74) intere(cid:86)t rates. Commodity risk (cid:55)he C(cid:82)(cid:80)(cid:83)an(cid:92) i(cid:86) ex(cid:83)(cid:82)(cid:86)ed t(cid:82) the effect(cid:86) (cid:82)f (cid:193)uctuatin(cid:74) crude (cid:82)il and natural (cid:74)a(cid:86) (cid:83)rice(cid:86) thr(cid:82)u(cid:74)h the re(cid:86)ultant chan(cid:74)e(cid:86) in the ex(cid:83)l(cid:82)rati(cid:82)n and development budgets of its customers. 64 AKITA DRILLING | 2021 Annual Report NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Accounts Payable and Accrued Liabilities Accounts payable and accrued liabilities are comprised of the following: $Thousands Trade payables Statutory liabilities Accrued expenses (cid:51)(cid:82)(cid:86)t(cid:16)e(cid:80)(cid:83)l(cid:82)(cid:92)(cid:80)ent (cid:69)enefit(cid:86) December 31 2021 December 31 2020 $ 6,987 $ 7,415 503 12,916 342 504 5,907 90 Total accounts payable and accrued liabilities $ 20,748 $ 13,916 13. Change in Non-Cash Working Capital $Thousands Change in non-cash working capital: Accounts receivable Prepaid expenses and other Accounts payable and accrued liabilities Deferred revenue Change in non-cash working capital Pertaining to: Operating activities Investing activities For The Year Ended December 31 2021 December 31 2020 $ (12,113) $ 16,980 612 6,692 (129) 130 (5,026) (39) $ (4,938) $ 12,045 $ (8,867) $ 12,975 3,929 (930) Change in non-cash working capital $ (4,938) $ 12,045 DEBT AND EQUITY 14. Debt Operating Loan Facility The Company has a syndicated credit agreement with the Company’s principal banker as the agent on the syndication and three other Canadian banks in the syndication. The operating loan facility totals $110,000,000 with the term ending in 2023. The credit agreement was amended on July 17, 2020, to include a covenant relief period that extended to June 30, 2021. The facility has been AKITA DRILLING | 2021 Annual Report 65 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS further amended to add additional quarters of covenant relief, to June 30, 2023. The interest rate during the covenant relief period ranges from 225 to 350 basis points over prime interest rates depending on the Funded Debt(1) to Tangible Net Worth(1) Ratio until September 2022 at which time it reverts to a Funded Debt(1) to EBITDA(1) Ratio. Security for this facility includes all present and after- ac(cid:84)uired (cid:83)er(cid:86)(cid:82)nal (cid:83)r(cid:82)(cid:83)ert(cid:92) and a fir(cid:86)t (cid:193)(cid:82)atin(cid:74) char(cid:74)e (cid:82)ver all (cid:82)ther (cid:83)re(cid:86)ent and after(cid:16)ac(cid:84)uired (cid:83)r(cid:82)(cid:83)ert(cid:92) includin(cid:74) real (cid:83)r(cid:82)(cid:83)ert(cid:92)(cid:17) (cid:55)he financial c(cid:82)venant(cid:86) are(cid:29) 1. The Funded Debt(1) to Tangible Net Worth(1) (cid:53)ati(cid:82)(cid:29) the C(cid:82)(cid:80)(cid:83)an(cid:92) (cid:86)hall en(cid:86)ure that f(cid:82)r the fi(cid:86)cal (cid:84)uarter(cid:86) ended (cid:39)ece(cid:80)(cid:69)er (cid:22)(cid:20), (cid:21)(cid:19)(cid:21)(cid:20) to June 30, 2022, the Funded Debt(1) to Tangible Net Worth(1) (cid:53)ati(cid:82) (cid:86)hall n(cid:82)t (cid:69)e (cid:80)(cid:82)re than (cid:19)(cid:17)(cid:26)(cid:24)(cid:29)(cid:20)(cid:17)(cid:19)(cid:19)(cid:17) F(cid:82)r the fi(cid:86)cal (cid:84)uarter(cid:86) ended September 30, 2022 and beyond, the Funded Debt(1) to Tangible Net Worth(1) reverts back to a Funded Debt(1) to EBITDA(1) Ratio at the following levels: (i) 5.00:1.00 as at the Fiscal Quarter ending September 30, 2022; (ii) 4.50:1.00 as at the Fiscal Quarter ending December 31, 2022; (iii) 4.00:1.00 as at the Fiscal Quarter ending March 31, 2023; and (iv) 3.50:1.00 as at the Fiscal Quarter ending June 30, 2023. The Funded Debt(1) to Tangible Net Worth(1) Ratio shall be calculated quarterly on the last day of each Fiscal Quarter on a rolling four quarter basis; 2. The EBITDA(1) to Interest Expense(1) Ratio: the Company shall ensure that: (cid:11)i(cid:12) F(cid:82)r the fi(cid:86)cal (cid:84)uarter ended (cid:39)ece(cid:80)(cid:69)er (cid:22)(cid:20), (cid:21)(cid:19)(cid:21)(cid:20), the E(cid:37)(cid:44)(cid:55)(cid:39)(cid:36)(1) to Interest Expense(1) Ratio shall not be less than 2.00:1.00; (cid:11)ii(cid:12) F(cid:82)r the fi(cid:86)cal (cid:84)uarter ended (cid:48)arch (cid:22)(cid:20), (cid:21)(cid:19)(cid:21)(cid:21), the E(cid:37)(cid:44)(cid:55)(cid:39)(cid:36)(1) to Interest Expense(1) Ratio shall not be less than 2.50:1.00; (cid:11)iii(cid:12) F(cid:82)r the fi(cid:86)cal (cid:84)uarter ended (cid:45)une (cid:22)(cid:19), (cid:21)(cid:19)(cid:21)(cid:21), the E(cid:37)(cid:44)(cid:55)(cid:39)(cid:36)(1) to Interest Expense(1) Ratio shall not be less than 2.75:1.00; and (cid:11)iv(cid:12) F(cid:82)r the fi(cid:86)cal (cid:84)uarter ended (cid:54)e(cid:83)te(cid:80)(cid:69)er (cid:22)(cid:19), (cid:21)(cid:19)(cid:21)(cid:21) and (cid:69)e(cid:92)(cid:82)nd, the E(cid:37)(cid:44)(cid:55)(cid:39)(cid:36)(1) to Interest Expense(1) Ratio shall not be less than 3.00:1.00. The EBITDA(1) to Interest Expense(1) Ratio shall be calculated quarterly on the last day of each Fiscal Quarter on a rolling four quarter basis; and 3. A minimum trailing twelve month EBITDA(1) test is required quarterly until June 30, 2022, with the minimum EBITDA(1) varying each period in line with agreed upon forecasts. Upon the end of the Covenant Relief Period the Company’s covenants revert back to: (i) Funded Debt(1) to EBITDA(1) Ratio of not more than 3.00:1.00, and (ii) EBITDA(1) to Interest Expense(1) Ratio of not less than 3.00:1.00. At December 31, 2021, the Company was in compliance with its covenants with a Funded Debt(1) to Tangible Net Worth(1) Ratio of 0.65:1.00, an EBITDA(1) to Interest Expense(1) Ratio of 2.45:1.00 and a trailing twelve month EBITDA(1) in excess of the $7,721,000 minimum threshold. (1) (cid:53)eader(cid:86) (cid:86)h(cid:82)uld (cid:69)e a(cid:90)are that each (cid:82)f the E(cid:37)(cid:44)(cid:55)(cid:39)(cid:36), Funded (cid:39)e(cid:69)t, (cid:44)ntere(cid:86)t Ex(cid:83)en(cid:86)e, Eli(cid:74)i(cid:69)le (cid:36)cc(cid:82)unt(cid:86) (cid:53)eceiva(cid:69)le, (cid:51)ri(cid:82)rit(cid:92) (cid:51)a(cid:92)a(cid:69)le(cid:86) and Eli(cid:74)i(cid:69)le (cid:53)i(cid:74) (cid:36)(cid:86)(cid:86)et(cid:86) have (cid:86)(cid:83)ecificall(cid:92) (cid:86)et (cid:82)ut definiti(cid:82)n(cid:86) in the l(cid:82)an facilit(cid:92) a(cid:74)ree(cid:80)ent and are n(cid:82)t nece(cid:86)(cid:86)aril(cid:92) defined (cid:69)(cid:92) (cid:82)r c(cid:82)n(cid:86)i(cid:86)tent (cid:90)ith either (cid:42)(cid:36)(cid:36)(cid:51) (cid:82)r deter(cid:80)inati(cid:82)n(cid:86) (cid:69)(cid:92) (cid:82)ther u(cid:86)er(cid:86) f(cid:82)r (cid:82)ther (cid:83)ur(cid:83)(cid:82)(cid:86)e(cid:86)(cid:17) 66 AKITA DRILLING | 2021 Annual Report NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The facility also includes a borrowing base calculation which is the sum of: (i) 75% of Eligible Accounts Receivable(1); plus (ii) 50% of orderly liquidation value of all Eligible Rig Assets(1); less (iii) Priority Payables(1) of the Loan Parties. At December 31, 2021, the Company’s borrowing base totalled $135,742,000. (cid:55)he credit facilit(cid:92) include(cid:86) a (cid:7)(cid:20)(cid:19),(cid:19)(cid:19)(cid:19),(cid:19)(cid:19)(cid:19) (cid:82)(cid:83)eratin(cid:74) line (cid:82)f credit that i(cid:86) cla(cid:86)(cid:86)ified a(cid:86) current, (cid:74)iven the C(cid:82)(cid:80)(cid:83)an(cid:92) ex(cid:83)ect(cid:86) t(cid:82) (cid:86)ettle the balance within a normal operating cycle. The maturity date aligns with the total credit facility. At December 31, 2021, the current portion of debt was $1,717,000 (December 31, 2020 – $ Nil). The balance outstanding under the credit loan facility, net of unamortized loan fee(cid:86), i(cid:86) cla(cid:86)(cid:86)ified a(cid:86) l(cid:82)n(cid:74)(cid:16)ter(cid:80) de(cid:69)t a(cid:86) the credit a(cid:74)ree(cid:80)ent ha(cid:86) n(cid:82) re(cid:84)uired re(cid:83)a(cid:92)(cid:80)ent (cid:82)(cid:69)li(cid:74)ati(cid:82)n(cid:86) (cid:83)ri(cid:82)r t(cid:82) the end (cid:82)f the l(cid:82)an facilit(cid:92) term. The Company borrowed $86,700,000 in total from this facility as at December 31, 2021 (December 31, 2020 - $75,000,000). Continuity of Debt $Thousands Debt Balance as at December 31, 2020 $ 74,303 Drawn on credit facility Repayment of debt Net deferred loan fees 16,590 (4,873) 136 Balance as at December 31, 2021 $ 86,156 Current portion Long-term portion $ 1,717 84,439 Balance as at December 31, 2021 $ 86,156 15. Lease Obligations IFRS 16 “Leases” – Accounting Policies (cid:55)he C(cid:82)(cid:80)(cid:83)an(cid:92) lea(cid:86)e(cid:86) vari(cid:82)u(cid:86) (cid:82)ffice(cid:86), (cid:92)ard(cid:86), ri(cid:74) e(cid:84)ui(cid:83)(cid:80)ent, vehicle(cid:86) and (cid:82)ffice e(cid:84)ui(cid:83)(cid:80)ent(cid:17) (cid:47)ea(cid:86)e c(cid:82)ntract(cid:86) are t(cid:92)(cid:83)icall(cid:92) (cid:80)ade f(cid:82)r fixed (cid:83)eri(cid:82)d(cid:86) (cid:82)f t(cid:90)(cid:82) t(cid:82) five (cid:92)ear(cid:86), (cid:69)ut (cid:80)a(cid:92) have exten(cid:86)i(cid:82)n (cid:82)r ter(cid:80)inati(cid:82)n (cid:82)(cid:83)ti(cid:82)n(cid:86)(cid:17) (cid:47)ea(cid:86)e ter(cid:80)(cid:86) are ne(cid:74)(cid:82)tiated (cid:82)n an individual (cid:69)a(cid:86)i(cid:86) and contain a wide range of different terms and conditions. The lease agreements do not impose any covenants, but leased assets may not be used as security for borrowing purposes. (1) (cid:53)eader(cid:86) (cid:86)h(cid:82)uld (cid:69)e a(cid:90)are that each (cid:82)f the E(cid:37)(cid:44)(cid:55)(cid:39)(cid:36), Funded (cid:39)e(cid:69)t, (cid:44)ntere(cid:86)t Ex(cid:83)en(cid:86)e, Eli(cid:74)i(cid:69)le (cid:36)cc(cid:82)unt(cid:86) (cid:53)eceiva(cid:69)le, (cid:51)ri(cid:82)rit(cid:92) (cid:51)a(cid:92)a(cid:69)le(cid:86) and Eli(cid:74)i(cid:69)le (cid:53)i(cid:74) (cid:36)(cid:86)(cid:86)et(cid:86) have (cid:86)(cid:83)ecificall(cid:92) (cid:86)et (cid:82)ut definiti(cid:82)n(cid:86) in the l(cid:82)an facilit(cid:92) a(cid:74)ree(cid:80)ent and are n(cid:82)t nece(cid:86)(cid:86)aril(cid:92) defined (cid:69)(cid:92) (cid:82)r c(cid:82)n(cid:86)i(cid:86)tent (cid:90)ith either (cid:42)(cid:36)(cid:36)(cid:51) (cid:82)r deter(cid:80)inati(cid:82)n(cid:86) (cid:69)(cid:92) (cid:82)ther u(cid:86)er(cid:86) f(cid:82)r (cid:82)ther (cid:83)ur(cid:83)(cid:82)(cid:86)e(cid:86)(cid:17) AKITA DRILLING | 2021 Annual Report 67 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Lease obligations arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value of the following lease payments: (cid:135) fixed (cid:83)a(cid:92)(cid:80)ent(cid:86) le(cid:86)(cid:86) an(cid:92) lea(cid:86)e incentive(cid:86) receiva(cid:69)le(cid:30) • amounts expected to be payable by the lessee under residual value guarantees; • the exercise price of a purchase option if the lessee is reasonably certain to exercise that option; and (cid:135) (cid:83)a(cid:92)(cid:80)ent(cid:86) (cid:82)f (cid:83)enaltie(cid:86) f(cid:82)r ter(cid:80)inatin(cid:74) the lea(cid:86)e, if the lea(cid:86)e ter(cid:80) re(cid:193)ect(cid:86) the le(cid:86)(cid:86)ee exerci(cid:86)in(cid:74) that (cid:82)(cid:83)ti(cid:82)n(cid:17) Each lea(cid:86)e (cid:83)a(cid:92)(cid:80)ent i(cid:86) all(cid:82)cated (cid:69)et(cid:90)een the lia(cid:69)ilit(cid:92) and finance c(cid:82)(cid:86)t(cid:17) (cid:55)he finance c(cid:82)(cid:86)t i(cid:86) char(cid:74)ed t(cid:82) (cid:83)r(cid:82)fit (cid:82)r l(cid:82)(cid:86)(cid:86) (cid:82)ver the lea(cid:86)e period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be determined, the lessee’s incremental borrowing rate is used, being the rate that the lessee would have to pay to borrow the funds necessary to obtain an asset of similar value in a similar economic environment with similar terms and conditions. The discount rates range from 5.01% to 6.06%. Lease Obligations The Company recorded $171,000 in interest expense related to its lease obligations for the year ended December 31, 2021 (2020 - $198,000). Continuity of Lease Obligations $Thousands Land and property Rig equipment Office equipment and software Vehicles Total Balance as at December 31, 2019 $ 2,563 $ 501 $ 613 $ 181 $ 3,858 Change in lease obligations Lease additions Lease terminations Balance as at December 31, 2020 Change in lease obligations Lease additions Lease terminations (635) 187 - 2,115 (629) (162) - - 339 (163) - - (244) 219 (109) 479 (332) 682 - - 35 (32) - - (176) - (3) 406 (109) 2,968 (1,156) 682 (179) (146) (1,187) Balance as at December 31, 2021 $ 1,486 $ - $ 829 $ - $ 2,315 $Thousands Current portion Long-term portion Land and property Rig equipment Office equipment and software Vehicles Total $ 636 $ - $ 338 $ - $ 974 850 - 491 - 1,341 Balance as at December 31, 2021 $ 1,486 $ - $ 829 $ - $ 2,315 68 AKITA DRILLING | 2021 Annual Report NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 16. Capital Management The Company has determined capital to include long-term debt and share capital. The Company's objectives when managing capital are: • to safeguard the Company's ability to continue as a going concern, so that it can continue to provide returns for shareholders and (cid:69)enefit(cid:86) f(cid:82)r (cid:82)ther (cid:86)ta(cid:78)eh(cid:82)lder(cid:86)(cid:30) and • to augment existing resources in order to meet growth opportunities. The Company manages the capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the Company may adjust the amount of dividends paid to shareholders, repurchase shares, issue new shares, sell assets or take on long-term debt. 17. Share Capital Authorized: • An unlimited number of Series Preferred shares, issuable in series, designated as First Preferred shares, no par value • An unlimited number of Series Preferred shares, issuable in series, designated as Second Preferred shares, no par value • An unlimited number of Class A Non-Voting shares, no par value • An unlimited number of Class B Common shares, no par value Issued: • All issued shares are fully paid The shares outstanding at December 31, 2021 and December 31, 2020 are: Number of shares Shares outstanding Class A Non-Voting Class B Common Total 37,954,407 1,653,784 39,608,191 Each Class B Common share may be converted into one Class A Non-Voting share at the shareholder’s option. The holders of Class A Non-Voting shares have no right to participate if a takeover bid is made for Class B Common shares unless: • an offer to purchase Class B Common shares is made to all or substantially all holders of Class B Common shares; • at the same time, an offer to purchase Class A Non-Voting shares on the same terms and conditions is not made to the holders of Class A Non-Voting shares; and • holders of more than 50% of the Class B Common shares do not reject the offer in accordance with the terms of AKITA's articles of incorporation. If these three pre-conditions are met, then the holders of Class A Non-Voting shares will be entitled to exchange each Class A Non-Voting share for one Class B Common share for the purpose of depositing the resulting Class B Common shares pursuant to the terms of the takeover bid. AKITA DRILLING | 2021 Annual Report 69 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The Class A Non-Voting shares and Class B Common shares rank equally in all other respects. Incremental costs attributable to the issue of new shares or options are recorded as a reduction in equity, net of income taxes. Shares repurchased by the Company are recorded as a reduction of shareholders’ equity based upon the consideration paid, including any directly incremental costs, net of income taxes. All shares repurchased by the Company are cancelled upon repurchase. PERSONNEL 18. Share-Based Compensation Plans The Company has three share-based compensation plans. Stock options qualify as an equity-settled share-based compensation plan while deferred share units (“DSUs”) and share appreciation rights (“SARs”) qualify as cash-settled share-based compensation plans. For all three of the share-based compensation plans, associated services received are measured at fair value and are calculated by multiplying the number of options, DSUs or SARs expected to vest with the fair value of one option, DSU or SAR as of the grant date. Stock Options (cid:54)u(cid:69)(cid:77)ect t(cid:82) the a(cid:83)(cid:83)r(cid:82)val (cid:82)f the C(cid:82)(cid:80)(cid:83)an(cid:92)(cid:183)(cid:86) (cid:37)(cid:82)ard (cid:82)f (cid:39)irect(cid:82)r(cid:86), the C(cid:82)(cid:80)(cid:83)an(cid:92)(cid:183)(cid:86) C(cid:82)r(cid:83)(cid:82)rate (cid:42)(cid:82)vernance, (cid:49)(cid:82)(cid:80)inati(cid:82)n, C(cid:82)(cid:80)(cid:83)en(cid:86)ati(cid:82)n and (cid:54)ucce(cid:86)(cid:86)i(cid:82)n C(cid:82)(cid:80)(cid:80)ittee (cid:80)a(cid:92) de(cid:86)i(cid:74)nate direct(cid:82)r(cid:86), (cid:82)fficer(cid:86), e(cid:80)(cid:83)l(cid:82)(cid:92)ee(cid:86) and (cid:82)ther (cid:83)er(cid:86)(cid:82)n(cid:86) (cid:83)r(cid:82)vidin(cid:74) (cid:86)ervice(cid:86) t(cid:82) the C(cid:82)(cid:80)(cid:83)an(cid:92) t(cid:82) (cid:69)e (cid:74)ranted options to purchase Class A Non-Voting shares. The vesting provisions and exercise period (which cannot exceed 10 years) are determined at the time of the grant. Each tranche is considered a separate award with its own vesting period and grant date fair value. The fair value of each tranche is measured at the date of grant using either the Binomial or the Black Scholes option pricing model. The number of awards expected to vest is reviewed at least annually, with any impact being recognized immediately. The following table summarizes stock options reserved, granted and available for future issuance: Number of options Reserved under the current stock option plan Balance at beginning of year Expired Cancelled (cid:42)ranted Available for future issuance December 31 2021 December 31 2020 3,100,000 855,500 - - (490,000) 365,500 3,100,000 292,000 172,500 746,000 (355,000) 855,500 70 AKITA DRILLING | 2021 Annual Report NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS A summary of the Company’s stock options is presented below: 2021 2020 Number of Options Weighted Average Exercise Price Number of Options Weighted Average Exercise Price Options outstanding at January 1 842,500 $ 2.80 1,406,000 $ 8.20 (cid:42)ranted Cancelled Expired 490,000 $ 1.01 355,000 $ 0.44 - $ - (746,000) $ 10.55 - $ - (172,500) $ 8.50 Options outstanding at December 31 1,332,500 $ 2.14 842,500 $ 2.80 Options exercisable at December 31 490,500 $ 2.79 249,000 $ 3.60 The following table summarizes outstanding stock options at December 31: Vesting Period (Years) 5 5 5 5 Exercise Price $ 5.62 $ 3.93 $ 0.44 $ 1.01 Number Outstanding 162,500 327,500 352,500 490,000 Weighted Average Contractual Life Deferred Share Units 2021 Remaining Contractual Life (Years) 6.7 7.2 6.5 7.3 7.0 Number Exercisable Number Outstanding 97,500 81,000 70,500 98,980 162,500 327,500 352,500 2020 Remaining Contractual Life (Years) 7.7 8.2 7.5 7.8 Number Exercisable 97,500 81,000 70,500 The Company has a cash-settled share-based long-term incentive compensation plan for certain employees. Each DSU granted equates to one Class A Non-Voting share and entitles the holder to receive a cash payment equal to the Company’s share price on the payment date. DSU holders are entitled to share in dividends, which are credited as additional DSUs, at each dividend payment date. DSUs vest immediately but are not exercisable until resignation or retirement from management and/or the Board of Directors. Units issued under the Company’s DSU plan are measured at fair value using the intrinsic value method when granted and subsequently re-measured at each reporting date using the Company’s Class A Non-Voting share price at the reporting date with the associated expense (recovery) recognized in selling and administrative expense. The Company assumes a zero forfeiture rate. AKITA DRILLING | 2021 Annual Report 71 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS A summary of the Company’s DSU plan is presented below: Deferred share units outstanding as at January 1 159,882 $ 77 187,011 $ 222 2021 2020 Deferred Share Units (#) Fair Value ($000's) Deferred Share Units (#) Fair Value ($000's) (cid:42)ranted Redeemed Change in fair value 190,000 - 190 - - - (27,129) 62 Deferred share units outstanding as at December 31 349,882 $ 329 159,882 (14) (131) $77 Deferred share units allocated to: 2021 2020 Deferred Share Units (#) Fair Value ($000's) Deferred Share Units (#) Fair Value ($000's) Accounts payable and accrued liabilities 71,157 $ 67 - $ - Non-current liabilities 278,725 262 159,882 77 Deferred share units outstanding as at December 31 349,882 $ 329 159,882 $ 77 Share Appreciation Rights (cid:54)(cid:36)(cid:53)(cid:86) (cid:80)a(cid:92) (cid:69)e (cid:74)ranted t(cid:82) direct(cid:82)r(cid:86), (cid:82)fficer(cid:86) and (cid:78)e(cid:92) e(cid:80)(cid:83)l(cid:82)(cid:92)ee(cid:86) (cid:82)f the C(cid:82)(cid:80)(cid:83)an(cid:92)(cid:17) (cid:55)he ve(cid:86)tin(cid:74) (cid:83)r(cid:82)vi(cid:86)i(cid:82)n(cid:86) (cid:11)(cid:90)hich ran(cid:74)e fr(cid:82)(cid:80) three t(cid:82) ei(cid:74)ht years) and exercise period (which cannot exceed 10 years) are determined at the time of grant. The holder is entitled on exercise to receive a cash payment from the Company equal to any increase in the market price of the Class A Non-Voting shares over the base value of the SAR exercised. The base value is equal to the closing price of the Class A Non-Voting shares on the day before the grant. Share-Based Compensation Expense The fair value of the services received is recognized as selling and administrative expense. In the case of equity-settled share-based payment plans, the selling and administrative expense results in a corresponding increase in contributed surplus over the vesting period of the respective plan. When stock options are exercised, shares are issued and the amount of the proceeds, together with the amount recorded in contributed surplus, is recognized in share capital. For cash-settled share-based payment plans, a corresponding liability is recognized. The fair value of the cash-settled share-based payment plans is remeasured at each Statement of Financial Position date through the Statement of Net Income and Comprehensive Income until settlement. Share-based compensation expense (recovery) consists of the following: $Thousands Stock option expense Deferred share unit expense (recovery) Total share-based compensation expense 72 AKITA DRILLING | 2021 Annual Report Year Ended December 31 2021 $ 255 252 $ 507 December 31 2020 $ 182 (131) $ 51 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The stock option expense was determined using the Binomial model based on the following assumptions. Expected volatility is calculated (cid:69)(cid:92) exa(cid:80)inin(cid:74) a hi(cid:86)t(cid:82)rical (cid:25)(cid:19) (cid:80)(cid:82)nth (cid:11)(cid:24) (cid:92)ear(cid:12) tradin(cid:74) hi(cid:86)t(cid:82)r(cid:92) u(cid:83) t(cid:82) the (cid:74)rant date, (cid:90)here (cid:86)i(cid:74)nificant (cid:82)utlier(cid:86) are excluded t(cid:82) (cid:83)r(cid:82)vide a better estimate. Risk-free interest rate Expected volatility Dividends yield rate Option life Weighted average share price Forfeiture rate Fair value of options 2021 1.10% 79% 0.00% 5.4 years $ 1.01 0.00% 2020 0.72% 72% 0.00% 5.4 years $ 0.44 0.00% $ 0.66 $ 0.27 19. Employee Future Benefits (cid:55)he C(cid:82)(cid:80)(cid:83)an(cid:92) ha(cid:86) a defined c(cid:82)ntri(cid:69)uti(cid:82)n (cid:83)en(cid:86)i(cid:82)n (cid:83)lan, re(cid:74)i(cid:86)tered under the (cid:36)l(cid:69)erta E(cid:80)(cid:83)l(cid:82)(cid:92)(cid:80)ent (cid:51)en(cid:86)i(cid:82)n (cid:51)lan(cid:86) (cid:36)ct, (cid:90)hich c(cid:82)ver(cid:86) substantially all of its Canadian employees. Under the provisions of the plan, the Company contributes 5% of regular earnings for eligible employees on a current basis. In addition, Canadian employees having eligible terms of service are subject to admission into the Company’s group RRSP. The Company makes contributions on behalf of these plans to a separate entity and has no le(cid:74)al (cid:82)r c(cid:82)n(cid:86)tructive (cid:82)(cid:69)li(cid:74)ati(cid:82)n(cid:86) t(cid:82) (cid:83)a(cid:92) further c(cid:82)ntri(cid:69)uti(cid:82)n(cid:86) if the (cid:83)lan(cid:86) d(cid:82) n(cid:82)t h(cid:82)ld (cid:86)ufficient a(cid:86)(cid:86)et(cid:86) t(cid:82) (cid:83)a(cid:92) the e(cid:80)(cid:83)l(cid:82)(cid:92)ee (cid:69)enefit(cid:86) relating to employee service in current or prior periods. The Company has a 401(k) plan, registered under the Employment Retirement Income Security Act of 1974, which covers all of its United States employees. Under the provisions of the plan, the Company contributes 3% of regular earnings for eligible employees on a current basis. C(cid:82)ntri(cid:69)uti(cid:82)n(cid:86) t(cid:82) the C(cid:82)(cid:80)(cid:83)an(cid:92)(cid:183)(cid:86) defined c(cid:82)ntri(cid:69)uti(cid:82)n (cid:83)en(cid:86)i(cid:82)n (cid:83)lan, (cid:74)r(cid:82)u(cid:83) (cid:53)(cid:53)(cid:54)(cid:51) and the (cid:23)(cid:19)(cid:20)(cid:11)(cid:78)(cid:12) (cid:83)lan are rec(cid:82)(cid:74)ni(cid:93)ed a(cid:86) e(cid:80)(cid:83)l(cid:82)(cid:92)ee (cid:69)enefit ex(cid:83)en(cid:86)e (cid:90)hen the(cid:92) are due(cid:17) (cid:55)he C(cid:82)(cid:80)(cid:83)an(cid:92) ha(cid:86) e(cid:86)ta(cid:69)li(cid:86)hed an unre(cid:74)i(cid:86)tered defined (cid:69)enefit (cid:83)en(cid:86)i(cid:82)n (cid:83)lan f(cid:82)r certain current and retired e(cid:80)(cid:83)l(cid:82)(cid:92)ee(cid:86)(cid:17) (cid:55)he defined (cid:69)enefit (cid:83)en(cid:86)i(cid:82)n (cid:83)lan, (cid:90)hich (cid:83)r(cid:82)vide(cid:86) f(cid:82)r (cid:83)en(cid:86)i(cid:82)n(cid:86) (cid:69)a(cid:86)ed u(cid:83)(cid:82)n the a(cid:74)e (cid:82)f the retiree at the date (cid:82)f retire(cid:80)ent, i(cid:86) n(cid:82)n(cid:16) contributory and unfunded. The Company obtains an actuarial valuation from an independent actuary subsequent to each year- end or if circumstances change. The most recent evaluation was dated January 12, 2022, and was utilized in measuring the December 31, 2021 balances. (cid:55)he defined (cid:69)enefit (cid:83)en(cid:86)i(cid:82)n (cid:83)lan lia(cid:69)ilit(cid:92) i(cid:86) the (cid:83)re(cid:86)ent value (cid:82)f the defined (cid:69)enefit (cid:82)(cid:69)li(cid:74)ati(cid:82)n at the (cid:54)tate(cid:80)ent (cid:82)f Financial (cid:51)(cid:82)(cid:86)iti(cid:82)n date(cid:17) (cid:55)he c(cid:82)(cid:86)t (cid:82)f the defined (cid:69)enefit (cid:83)en(cid:86)i(cid:82)n (cid:83)lan i(cid:86) deter(cid:80)ined u(cid:86)in(cid:74) the (cid:83)r(cid:82)(cid:77)ected unit credit (cid:80)eth(cid:82)d(cid:17) (cid:55)he defined (cid:69)enefit (cid:83)en(cid:86)i(cid:82)n (cid:82)(cid:69)li(cid:74)ati(cid:82)n i(cid:86) deter(cid:80)ined (cid:69)(cid:92) di(cid:86)c(cid:82)untin(cid:74) the e(cid:86)ti(cid:80)ated future ca(cid:86)h (cid:82)ut(cid:193)(cid:82)(cid:90)(cid:86) u(cid:86)in(cid:74) intere(cid:86)t rate(cid:86) (cid:82)f hi(cid:74)h(cid:16)(cid:84)ualit(cid:92) Canadian denominated corporate bonds that have terms to maturity approximating the terms of the related pension liability. Past (cid:86)ervice c(cid:82)(cid:86)t(cid:86) are rec(cid:82)(cid:74)ni(cid:93)ed in net inc(cid:82)(cid:80)e (cid:90)hen incurred(cid:17) (cid:51)(cid:82)(cid:86)t(cid:16)e(cid:80)(cid:83)l(cid:82)(cid:92)(cid:80)ent (cid:69)enefit(cid:86) ex(cid:83)en(cid:86)e i(cid:86) c(cid:82)(cid:80)(cid:83)ri(cid:86)ed (cid:82)f the intere(cid:86)t (cid:82)n the net defined (cid:69)enefit lia(cid:69)ilit(cid:92), calculated u(cid:86)in(cid:74) a di(cid:86)c(cid:82)unt rate (cid:69)a(cid:86)ed (cid:82)n (cid:80)ar(cid:78)et (cid:92)ield(cid:86) (cid:82)n hi(cid:74)h (cid:84)ualit(cid:92) (cid:69)(cid:82)nd(cid:86), and the current service cost. Remeasurements consisting of actuarial gains and losses, the actual return on plan assets (excluding the net interest component) and any change in the asset ceiling are recognized in other comprehensive income. AKITA DRILLING | 2021 Annual Report 73 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Continuity of Defined Benefit Pension Liability $Thousands 2021 2020 (cid:36)ctuarial (cid:83)re(cid:86)ent value (cid:82)f defined (cid:69)enefit (cid:82)(cid:69)li(cid:74)ati(cid:82)n a(cid:86) at (cid:45)anuar(cid:92) (cid:20) $ 5,800 $ 5,298 Interest cost Current service cost (cid:37)enefit(cid:86) (cid:83)aid Unrealized actuarial (gain) loss 132 21 (198) (292) 158 19 (90) 415 Actuarial present value of defined benefit obligation as at December 31 $ 5,463 $ 5,800 $Thousands Pension liability allocated to: 2021 2020 Accounts payable and accrued liabilities $ 275 $ 90 Non-current liabilities 5,188 5,710 Pension liability outstanding as at December 31 $ 5,463 $ 5,800 Key Assumptions Discount rate at beginning of the year Anticipated retirement age of plan members Year Ended December 31 2021 2.3% 66 years December 31 2020 3.0% 65 to 67 years The Company’s pension expense is recorded in selling and administrative expenses and interest expense and is comprised of the following: Year Ended December 31 2021 December 31 2020 $ 132 $ 158 21 153 1,664 19 177 1,893 $ 1,817 $ 2,070 $Thousands (cid:39)efined (cid:69)enefit (cid:83)en(cid:86)i(cid:82)n (cid:83)lan Interest cost Service cost Ex(cid:83)en(cid:86)e f(cid:82)r defined (cid:69)enefit (cid:83)lan Ex(cid:83)en(cid:86)e f(cid:82)r defined c(cid:82)ntri(cid:69)uti(cid:82)n (cid:83)lan(cid:86) Total expense 74 AKITA DRILLING | 2021 Annual Report NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Significant Estimates and Judgments – Defined Benefit Pension Liability (cid:54)i(cid:74)nificant e(cid:86)ti(cid:80)ate(cid:86) u(cid:86)ed in the (cid:83)re(cid:83)arati(cid:82)n (cid:82)f (cid:36)(cid:46)(cid:44)(cid:55)(cid:36)(cid:183)(cid:86) financial (cid:86)tate(cid:80)ent(cid:86) relate t(cid:82) the (cid:80)ea(cid:86)ure(cid:80)ent (cid:82)f the n(cid:82)n(cid:16)current defined (cid:69)enefit (cid:83)en(cid:86)i(cid:82)n lia(cid:69)ilit(cid:92) f(cid:82)r (cid:86)elected current and retired e(cid:80)(cid:83)l(cid:82)(cid:92)ee(cid:86) that (cid:90)a(cid:86) rec(cid:82)rded a(cid:86) (cid:7)(cid:24),(cid:20)(cid:27)(cid:27),(cid:19)(cid:19)(cid:19) at (cid:39)ece(cid:80)(cid:69)er (cid:22)(cid:20), (cid:21)(cid:19)(cid:21)(cid:20) (December 31, 2020 - $5,710,000). AKITA utilizes the services of a third party to assist in the actuarial estimate of the Company’s defined (cid:69)enefit (cid:83)en(cid:86)i(cid:82)n ex(cid:83)en(cid:86)e and lia(cid:69)ilit(cid:92)(cid:17) (cid:36)t (cid:39)ece(cid:80)(cid:69)er (cid:22)(cid:20), (cid:21)(cid:19)(cid:21)(cid:20), a (cid:78)e(cid:92) a(cid:86)(cid:86)u(cid:80)(cid:83)ti(cid:82)n i(cid:86) the di(cid:86)c(cid:82)unt rate (cid:82)f (cid:21)(cid:17)(cid:28)(cid:8) (cid:11)(cid:21)(cid:19)(cid:21)(cid:19) (cid:178) (cid:21)(cid:17)(cid:22)(cid:8)(cid:12)(cid:17) Fr(cid:82)(cid:80) the (cid:83)er(cid:86)(cid:83)ective (cid:82)f a (cid:86)en(cid:86)itivit(cid:92) anal(cid:92)(cid:86)i(cid:86), a (cid:20)(cid:8) decrea(cid:86)e in the di(cid:86)c(cid:82)unt rate (cid:90)(cid:82)uld re(cid:86)ult in a (cid:7)(cid:26)(cid:19)(cid:20),(cid:19)(cid:19)(cid:19) increa(cid:86)e in the defined (cid:69)enefit (cid:82)(cid:69)li(cid:74)ati(cid:82)n (cid:90)hile a (cid:20)(cid:8) increa(cid:86)e in the di(cid:86)c(cid:82)unt rate (cid:90)(cid:82)uld re(cid:86)ult in a (cid:7)(cid:24)(cid:27)(cid:20),(cid:19)(cid:19)(cid:19) decrea(cid:86)e in the defined (cid:69)enefit (cid:82)(cid:69)li(cid:74)ati(cid:82)n(cid:17) (cid:36)dditi(cid:82)nall(cid:92), if (cid:80)e(cid:80)(cid:69)er(cid:86)(cid:183) live(cid:86) (cid:86)h(cid:82)uld (cid:69)e (cid:82)ne (cid:92)ear l(cid:82)n(cid:74)er than actuarial ex(cid:83)ectati(cid:82)n(cid:86), the defined (cid:69)enefit (cid:82)(cid:69)li(cid:74)ati(cid:82)n (cid:90)(cid:82)uld increa(cid:86)e (cid:69)(cid:92) $109,000. Except for the impact on the discount rate used in the pension assumptions, recent changes in the global economy and related (cid:80)ar(cid:78)et(cid:86) have n(cid:82)t (cid:82)ther(cid:90)i(cid:86)e affected the (cid:80)ea(cid:86)ure(cid:80)ent (cid:82)f the C(cid:82)(cid:80)(cid:83)an(cid:92)(cid:183)(cid:86) defined (cid:69)enefit (cid:83)en(cid:86)i(cid:82)n lia(cid:69)ilit(cid:92)(cid:17) OTHER NOTES 20. Commitments and Contingencies From time to time, the Company enters into drilling contracts with its customers that are for extended periods. At December 31, 2021, the Company had no drilling rigs with multi-year contracts. The Company has entered into a two year contract with a related party to provide sponsorship and advertising at an annual cost of $175,000. At December 31, 2021, the Company had capital expenditure commitments of $1,743,000 (2020 – $422,000). 21. Related Party Transactions All related party transactions were made in the normal course of business with regular payment terms and have been recorded at the amounts agreed upon with the related parties. a) ATCO Group and Spruce Meadows (cid:55)he C(cid:82)(cid:80)(cid:83)an(cid:92) i(cid:86) related t(cid:82) the (cid:36)(cid:55)CO (cid:42)r(cid:82)u(cid:83) (cid:82)f c(cid:82)(cid:80)(cid:83)anie(cid:86) and t(cid:82) (cid:54)(cid:83)ruce (cid:48)ead(cid:82)(cid:90)(cid:86) thr(cid:82)u(cid:74)h it(cid:86) c(cid:82)ntr(cid:82)llin(cid:74) (cid:86)hareh(cid:82)lder (cid:11)(cid:86)ee (cid:49)(cid:82)te (cid:20) (cid:178) (cid:42)eneral (cid:44)nf(cid:82)r(cid:80)ati(cid:82)n(cid:12)(cid:17) (cid:55)he tran(cid:86)acti(cid:82)n(cid:86) and (cid:92)ear(cid:16)end (cid:69)alance(cid:86) (cid:90)ith th(cid:82)(cid:86)e affiliate(cid:86) are (cid:83)re(cid:86)ented in the f(cid:82)ll(cid:82)(cid:90)in(cid:74) ta(cid:69)le(cid:29) AKITA DRILLING | 2021 Annual Report 75 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS $Thousands Revenue (computer services, rent) Purchases Property, plant and equipment (wellsite trailers) Sponsorship and advertising (Note 20) Selling and administrative Operating Year-end accounts payable b) Joint ventures and joint venture partners Year Ended December 31 2021 December 31 2020 $ $ $ $ $ $ 89 - 175 72 534 47 $ $ $ $ $ $ 85 57 175 49 570 31 The Company is related to its joint ventures and joint venture partners. The joint ventures’ and joint venture partners’ transactions and year balances with AKITA are presented in the following table: $Thousands Operating costs Selling and administrative costs $Thousands Due to AKITA from joint venture partners Due to AKITA from joint ventures c) Key management compensation Year Ended December 31 2021 $ 2,880 $ 350 December 31 2021 $ $ 1,709 1,564 December 31 2020 $ $ 837 115 December 31 2020 $ $ 991 123 (cid:46)e(cid:92) (cid:80)ana(cid:74)e(cid:80)ent include(cid:86) the (cid:82)fficer(cid:86) and direct(cid:82)r(cid:86) (cid:82)f the C(cid:82)(cid:80)(cid:83)an(cid:92)(cid:17) (cid:55)he c(cid:82)(cid:80)(cid:83)en(cid:86)ati(cid:82)n (cid:83)aid (cid:82)r (cid:83)a(cid:92)a(cid:69)le t(cid:82) (cid:78)e(cid:92) (cid:80)ana(cid:74)e(cid:80)ent f(cid:82)r (cid:86)ervice(cid:86) in the ca(cid:83)acit(cid:92) a(cid:86) either (cid:82)fficer(cid:86) (cid:82)r direct(cid:82)r(cid:86) i(cid:86) (cid:86)h(cid:82)(cid:90)n in the f(cid:82)ll(cid:82)(cid:90)in(cid:74) ta(cid:69)le(cid:29) $Thousands (cid:54)alarie(cid:86), direct(cid:82)r(cid:10)(cid:86) fee(cid:86) and (cid:82)ther (cid:86)h(cid:82)rt(cid:16)ter(cid:80) (cid:69)enefit(cid:86) Long-service retiring allowance (cid:51)(cid:82)(cid:86)t(cid:16)e(cid:80)(cid:83)l(cid:82)(cid:92)(cid:80)ent (cid:69)enefit(cid:86) Share-based payments Long-service retiring allowance payable Year Ended December 31 2021 December 31 2020 $ $ $ $ $ 1,335 - 72 498 - $ $ $ $ $ 1,431 3,177 141 132 1,500 76 AKITA DRILLING | 2021 Annual Report NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS We value our people, our partners, and our environment both in our words and our actions. We treat all those we encounter with dignity— demonstrating care and concern by listening to understand and speaking to be understood. AKITA DRILLING | 2021 Annual Report 77 10 YEAR FINANCIAL REVIEW 10 YEAR FINANCIAL REVIEW $Thousands (except per share) Summary of Operations Revenue Income (loss) before income taxes Income taxes expense (recovery) Net income (loss) As a percentage of average shareholders’ equity Earnings (loss) per Class A and Class B share (basic) Fund(cid:86) (cid:193)(cid:82)(cid:90) fr(cid:82)(cid:80) (cid:82)(cid:83)erati(cid:82)n(cid:86) As a percentage of average shareholders’ equity Financial Position at Year End (cid:58)(cid:82)r(cid:78)in(cid:74) ca(cid:83)ital (cid:11)deficienc(cid:92)(cid:12) Current ratio Total assets Shareholders’ equity per share Other Capital expenditures (net) Depreciation and amortization Dividends paid per share Annual Ranking 8 6 6 7 8 6 9 7 8 8 9 10 10 7 5 9 9 2021 2020 2019 2018 2017 2016 2015 2014 2013 2012 $ $ $ $ $ $ $ $ $ $ $ $ $ $ 110,088 (21,782) (792) (20,990) (16.0%) (0.53) 7,454 5.7% 6,496 1.27 247,574 131,485 3.32 16,416 28,838 - - $ $ $ $ $ $ $ $ $ $ $ $ $ $ 119,664 (102,701) (9,427) (93,274) (61.3%) (2.03) 10,322 6.8% $ $ $ $ $ $ 175,890 (24,679) (4,804) (19,875) (8.1%) (0.50) 12,925 5.3% 8,683 $ 4,032 1.56 1.14 251,521 152,266 3.84 7,593 32,681 - - $ $ $ $ $ $ $ 369,116 245,134 6.19 15,238 36,763 10,101 0.17 118,361 (12,228) 3,651 (15,939) (5.9%) (0.65) 14,306 5.3% $ 11,166 1.31 $ 403,641 $ 271,728 6.86 17,546 26,614 7,942 0.34 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 71,198 (53,230) (14,053) (39,177) (22.5%) (2.18) 6,607 3.8% 15,528 2.02 207,497 174,455 9.72 20,348 27,126 6,100 0.34 $ $ $ $ $ $ $ $ $ $ $ $ $ $ 61,061 $ 112,488 165,274 168,111 $ 203,440 7,535 $ (44,544) 28,121 35,682 $ 38,413 2,206 $ (10,579) 5,329 $ (33,965) 2.4% (14.2%) 0.30 $ (1.89) 7,042 21,079 8.3% 1.17 9,167 $ 9,658 26,515 $ 28,755 11.3% 1.48 $ 13.5% 1.60 34,500 $ 38,510 56,195 57,619 $ 59,474 15.7% 16.0% 22.2% 24.6% 28.0% 34,907 $ 16,002 $ (5,028) $ 40,645 $ 31,214 4.49 2.45 0.90 2.93 1.70 257,907 $ 254,516 340,926 291,748 $ 292,994 219,646 $ 220,200 259,841 245,288 $ 223,998 12.24 $ 12.27 14.48 13.65 $ 12.49 13,193 $ 17,960 103,949 35,113 $ 65,356 23,959 $ 36,748 30,200 26,825 $ 24,342 6,100 $ 0.34 $ 6,101 0.34 6,015 0.34 5,567 $ 5,038 0.32 $ 0.28 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 78 AKITA DRILLING | 2021 Annual Report $Thousands (except per share) Summary of Operations Revenue Income (loss) before income taxes Income taxes expense (recovery) Net income (loss) As a percentage of average shareholders’ equity Earnings (loss) per Class A and Class B share (basic) Fund(cid:86) (cid:193)(cid:82)(cid:90) fr(cid:82)(cid:80) (cid:82)(cid:83)erati(cid:82)n(cid:86) As a percentage of average shareholders’ equity Financial Position at Year End (cid:58)(cid:82)r(cid:78)in(cid:74) ca(cid:83)ital (cid:11)deficienc(cid:92)(cid:12) Current ratio Total assets Shareholders’ equity per share Other Capital expenditures (net) Depreciation and amortization Dividends paid per share Annual Ranking 8 6 6 7 8 6 9 7 8 8 9 7 5 9 9 10 10 $ $ $ $ $ $ $ $ $ $ $ $ $ $ 110,088 (21,782) (792) (20,990) (16.0%) (0.53) 7,454 5.7% 6,496 1.27 247,574 131,485 3.32 16,416 28,838 - - $ $ $ $ $ $ $ $ $ $ $ $ $ $ 119,664 175,890 (102,701) (24,679) (9,427) (4,804) (93,274) (19,875) (61.3%) (2.03) (8.1%) (0.50) 10,322 12,925 6.8% 5.3% 8,683 $ 4,032 1.56 1.14 251,521 369,116 152,266 245,134 3.84 6.19 7,593 32,681 - - 15,238 36,763 10,101 0.17 $ $ $ $ $ $ $ $ $ $ $ $ $ 10 YEAR FINANCIAL REVIEW 2021 2020 2019 2018 2017 2016 2015 2014 2013 2012 $ $ $ $ $ $ 118,361 (12,228) 3,651 (15,939) (5.9%) (0.65) 14,306 5.3% $ 11,166 1.31 $ 403,641 $ 271,728 $ $ $ $ $ 6.86 17,546 26,614 7,942 0.34 $ $ $ $ $ $ $ $ $ $ $ $ $ $ 71,198 (53,230) (14,053) (39,177) (22.5%) (2.18) 6,607 3.8% 15,528 2.02 207,497 174,455 9.72 20,348 27,126 6,100 0.34 $ $ $ $ $ $ $ $ $ $ $ $ $ $ 61,061 $ 112,488 7,535 $ (44,544) 2,206 $ (10,579) 5,329 $ (33,965) 2.4% (14.2%) 0.30 $ (1.89) 34,500 $ 38,510 15.7% 16.0% $ $ $ $ $ $ $ $ $ $ $ $ 165,274 28,121 7,042 21,079 8.3% 1.17 56,195 22.2% 168,111 $ 203,440 35,682 $ 38,413 9,167 $ 9,658 26,515 $ 28,755 11.3% 1.48 $ 13.5% 1.60 57,619 $ 59,474 24.6% 28.0% 34,907 $ 16,002 $ (5,028) $ 40,645 $ 31,214 4.49 2.45 0.90 2.93 1.70 257,907 $ 254,516 219,646 $ 220,200 12.24 $ 12.27 13,193 $ 17,960 23,959 $ 36,748 6,100 $ 0.34 $ 6,101 0.34 $ $ $ $ $ $ $ 340,926 259,841 14.48 103,949 30,200 6,015 0.34 $ $ $ $ $ $ $ 291,748 $ 292,994 245,288 $ 223,998 13.65 $ 12.49 35,113 $ 65,356 26,825 $ 24,342 5,567 $ 5,038 0.32 $ 0.28 AKITA DRILLING | 2021 Annual Report 79 CORPORATE INFORMATION Officers Linda A. Southern-Heathcott Executive Chair and Chief Executive Officer Banker ATB Financial Calgary, Alberta Darcy Reynolds Vice President, Finance and Chief Financial Officer Raymond T. Coleman President, USA Division Colin A. Dease President, Canadian Operations, Corporate Secretary and Legal Counsel Craig W. Kushner Director of Human Resources Head Office AKITA Drilling Ltd., 1000, 333 - 7th Avenue SW Calgary, Alberta T2P 2Z1 403.292.7979 Counsel Bennett Jones LLP Calgary, Alberta Auditors PricewaterhouseCoopers LLP Calgary, Alberta Registrar and Transfer Agent TSX Trust Company Calgary, Alberta and Toronto, Ontario 1.800.387.0825 Share Symbol/TSX Class A Non-Voting (AKT.A) Class B Common (AKT.B) Website www.akita-drilling.com Directors Loraine M. Charlton Corporate Director Calgary, Alberta Douglas A. Dafoe President and CEO Ember Resources Inc. Calgary, Alberta Harish K. Mohan Corporate Director Calgary, Alberta Dale R. Richardson Vice President, Sentgraf Enterprises Ltd. Calgary, Alberta Nancy C. Southern Chairman, President and Chief Executive Officer, ATCO Ltd., Canadian Utilities Limited, and CU Inc. Calgary, Alberta Linda A. Southern-Heathcott Executive Chair and Chief Executive Officer, AKITA Drilling Ltd. President and Chief Executive Officer, Spruce Meadows Ltd., President, Team Spruce Meadows Inc., Calgary, Alberta Henry G. Wilmot Corporate Director Calgary, Alberta Charles W. Wilson Corporate Director Boulder, Colorado 2 AKITA DRILLING | 2021 Annual Report AKITA DRILLING | 2021 Annual Report 81 A K I T A D R I L L I N G 2 0 2 1 A n n u a l R e p o r t HEAD OFFICE AKITA Drilling Ltd., 1000, 333 - 7th Ave SW Calgary, Alberta T2P 2Z1 Canada www.akita-drilling.com 2021 ANNUAL REPORT

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