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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
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HEAD OFFICE
AKITA Drilling Ltd., 1000, 333 - 7th Ave SW
Calgary, Alberta T2P 2Z1 Canada
www.akita-drilling.com
2021
ANNUAL REPORT