FIVE YEAR FINANCIAL HISTORY
Dollars in 000’s except per share amounts
(1) Refer to MD&A: see “NON-GAAP MEASUREMENTS”
(2) Quarterly dividend was suspended in November 2015
(3) Equipment additions exclude non-cash additions
(4) Revenues and Adjusted gross margin % for 2015 to 2017 exclude Discontinued Operations.
(5) 2015 reclassified for Discontinued Operations
Table of contents
2 Report to Shareholders
3 Management's Discussion and Analysis
18 Management's Report
19
Independent Auditors' Report
22 Consolidated Financial Statements
26 Notes to Consolidated Financial Statements
42 Officers and Directors
Annual General Meeting:
Shareholders are invited to attend the Annual General Meeting which will be held at 3:00 pm on May 12, 2020 at our Head Office 6030 – 3 Street SE,
Calgary, Alberta.
Cathedral Energy Services Ltd. - 2019 Annual Report
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20192018201720162015 (5)Revenues (4)120,276$ 160,827$ 147,095$ 80,866$ 106,243$ Adjusted gross margin % (1) (4)10%11%18%22%18%Adjusted EBITDAS (1)3,887$ 12,060$ 18,674$ 5,840$ 7,699$ Diluted per share0.08$ 0.24$ 0.39$ 0.16$ 0.21$ Cash flow - operations4,785$ 3,732$ 2,952$ 4,140$ 25,931$ Gain on disposal / (Write-down of) investment in associate and related assets-$ -$ -$ 10,865$ -$ Write-downs of goodwill, equipment and inventory-$ (1,474)$ (8,584)$ (277)$ (12,773)$ Earnings (loss) before income taxes(18,717)$ (6,139)$ (382)$ (722)$ (24,894)$ Basic per share(0.38)$ (0.12)$ (0.01)$ (0.02)$ (0.69)$ Write-down of deferred taxes related to CRA settlement-$ -$ -$ -$ (10,346)$ Derecognition of deferred tax asset-$ (13,059)$ -$ -$ -$ Net earnings (loss)(19,187)$ (17,061)$ 87$ (5,779)$ (35,342)$ Basic and diluted per share(0.39)$ (0.35)$ -$ (0.16)$ (0.97)$ Cash dividends declared per share (2)-$ -$ -$ -$ 0.12$ Equipment additions (3)6,018$ 17,391$ 11,322$ 899$ 6,908$ Net equipment additions (1)(2,708)$ 4,514$ 2,371$ (4,387)$ (4,210)$ Weighted average shares outstandingBasic (000s)49,468 49,445 47,381 36,295 36,295 Diluted (000s)49,522 49,586 47,577 36,295 36,295 Working capital20,181$ 30,599$ 31,016$ 39,324$ 13,550$ Total assets106,300$ 121,770$ 121,630$ 136,017$ 155,610$ Loans and borrowings excluding current portion6,000$ 7,000$ 46$ 26,322$ 30,477$ Shareholders' equity68,092$ 89,143$ 101,391$ 90,772$ 96,607$
REPORT TO SHAREHOLDERS
From a financial perspective, 2019 was a disappointing year. In particular, execution issues experienced the U.S operations in 2018 negatively
affected our overall 2019 activity days. This was further compounded by a year-over-year decline in the number of active rigs operating in the U.S.
market as North American operators exercised fiscal discipline and cut back their drilling activities. Free cash flow was redirected to shareholder
friendly purposes such as implementing or increasing dividends, share buybacks and repayment of debt. The average rig count for 2019 was 920,
which represents a 9% decline from 2018’s average rig count of 1,013. Cathedral’s drop in U.S. activity levels was in excess of the overall market
decline was mainly due to our mix of clients and their level of activity declines.
As was communicated to shareholders during 2019, we made significant changes to our U.S. management team to create a flatter organization while
dealing with the operations execution issues experienced historically and disappointing financial results. The U.S. team is now lead by Clayton Lagore,
our former Canadian Operations Manager. In February 2020, we filled the last senior positon within our U.S. management team by adding a Sales &
Business Development Manager. Personally, I am excited about the team we have put in place within our U.S. business unit and their ability to rebuild
that business. We believe we can regain the market share we have lost since 2H of 2018 and this will be based upon overall job execution and our
proprietary technology.
With the change in U.S. management, we saw our adjusted gross margin increase (excluding non-cash expenses) in a sequential basis from 2018
Q4 to 2019 Q3 and this was despite a quarter-over-quarter decline in revenues. A significant contributor to the adjusted gross margin improvement
was the reduction in salaried positions within fixed cost of sales expenses (the “flatter” organization noted above) and injecting managers with increased
focus on controlling costs and the ability for managers to implement changes.
On the technology front, 2019 was a productive year. In 2019 Q3, we commercialized two tools within our FUSION Measurement-While-Drilling
(“MWD”) platform. Firstly, the next generation of our FUSION Dual Telemetry (“DT”) MWD tool. This tool is based upon our industry leading electro-
magnetic (“EM”) technology with significant enhancement to the tool’s mechanical backbone, connectors and decoding software as well as adding a
high torque pulser. Overall, these enhancements have improved the tools durability, reliability and pulse telemetry capabilities. This tool is typically
used in areas where clients want the benefits of EM technology but they are operating in formations that are not considered EM friendly (difficult to get
EM signal through formations) and therefore backup pulse technology is required. Due to the strength of our EM technology, we do not require the
use of dual telemetry tools on a broad basis. Secondly, we have brought to the market our enhanced Linear Pulse (“LP”). The LP has the ability to
handle significant quantities of loss control materials (“LCM”) and has data speeds that exceed industry standards.
In addition, Cathedral commercialized a specialized series of its nDurance performance drilling motors intended primarily for use with Rotary Steerable
Systems (“RSS”). In these applications, the RSS tool is run below the drilling motor, which results in higher mechanical loading on the motor and
significant financial risk to the client (if tools are lost-in-hole). Wells using RSS are typically longer and more complex than others and have significantly
higher daily drilling costs. The downtime, and potential lost or damaged equipment costs associated with failures justifies use of a premium product.
The RSS series of motors utilize ultra-high strength materials coupled with engineering enhancements that allow the motor to function at high pressure
drops required for RSS operation. In 2019, Cathedral has expanded its specialized RSS fleet to 20 of the 5-5/8” tools, and are currently building initial
production volumes in both 5” and 7” sizes. These three configurations address the needs for virtually all North American RSS applications. In late
2019, this series of our nDurance drilling motor was used by Shell Canada in drilling the longest well in Canada at 8,510 meters (being 8.5 kilometers
or 5.3 miles) – a significant accomplishment for Shell Canada and its service providers.
For 2020, our technology focus will be bringing to the market our RapidFire™ MWD platform which commenced initial successful field trials in
December 2019. RapidFire is capable of transmitting data simultaneously via pulse and EM, allowing for high data rates and higher reliability through
redundancy. In addition, the system can be configured in either a hard mount or retrievable configuration and is rated to operating temperatures that
meet or exceed most competitive MWD systems. The second phase to be released later in 2020 will offer a retrievable downhole generator which will
reduce operating costs and allow for high power EM transmission on extended run applications.
The business environment for oil field services in general continues to be tough, however, we believe we are making progress. We continue to focus
on strategic initiatives and making changes to our business to position us favorably over the long-term. Based on our leading-edge technology and
executing our Better Performance Every Day mantra we are confident about our future prospects. We will continue to focus on what we can control –
costs, improving operational efficiencies and strategic sales and marketing of our offerings.
We are firm believers that size and scale will be a key for long-term viability of oilfield services companies and we will continue, as normal course of
business, to explore opportunities to maximize shareholder value and create that size and scale.
We thank our employees for their continued dedication and hard work and our customers, vendors and business partners for their support as we all
navigate through a very dynamic business environment. Finally, we thank our shareholders for their support and confidence in our business prospects
and strategy.
Sincerely,
Signed: "P. Scott MacFarlane"
P. Scott MacFarlane
President and Chief Executive Officer
Cathedral Energy Services Ltd.
March 12, 2020
Cathedral Energy Services Ltd. - 2019 Annual Report
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MANAGEMENT’S DISCUSSION & ANALYSIS
This Management's Discussion and Analysis ("MD&A") for the year ended December 31, 2019 provides an analysis of the consolidated results of
operations, financial position and cash flows of Cathedral Energy Services Ltd. (the "Company" or "Cathedral") and should be read in conjunction with
the audited consolidated financial statements and notes thereto for the year ended December 31, 2019, as well as the Company's 2019 interim
MD&A's. This MD&A is intended to assist the reader in the understanding and assessment of significant changes and trends, as well as the risks and
uncertainties, related to the results of the operations and financial position of the Company. Currency amounts are in '000's except for day rates and
per share amounts. This MD&A is dated March 12, 2020.
CORPORATE OVERVIEW
Cathedral Energy Services Ltd. is incorporated under the Business Corporations Act (Alberta). The Company is publicly traded on the Toronto Stock
Exchange under the symbol "CET". The Company together with its wholly owned subsidiary, Cathedral Energy Services Inc. (“INC”), is engaged in
the business of providing directional drilling services to oil and natural gas companies in western Canada and the U.S.
Cathedral is a trusted partner to North American energy companies requiring high performance directional drilling services. We work in partnership
with our customers to tailor our equipment and expertise to meet their specific geographical and technical needs. Our experience, technologies and
responsive personnel enable our customers to achieve higher efficiencies and lower project costs.
FINANCIAL HIGHLIGHTS
(1) Refer to MD&A: see “NON-GAAP MEASUREMENTS”
(2) Equipment additions exclude non-cash additions
FISCAL 2019 KEY TAKEAWAYS
Revenues decreased by $40,551 or 25% from $160,827 in 2018 to $120,276 in 2019;
Adjusted gross margin decreased from 11% to 10% due to increased equipment rentals and shop and support labour costs as a percentage of revenue
partially offset by lower repairs. Adjusted gross margin percentage improved in the second half of the year;
Adjusted EBITDAS decreased $8,173, or 68% to $3,887 in 2019 as a result of reduced revenues and reduced operating profits;
Cathedral commercialized our next generation of our FUSION™ Dual Telemetry Measurement-While-Drilling ("MWD") tool and our Linear Pulse ("LP")
tool; and
Cathedral has also commercialized a specialized series of its nDurance™ performance drilling motors which are targeted for Rotary Steerable System
("RSS") applications.
OUTLOOK
Since the start of 2020, oil prices have weakened significantly as a consequence of the softening of global demand associated with COVID 19 virus
and by the recent failure to reach a cut in oil supply from OPEC+ which was followed up by Saudi Arabia announcement that they intended to
significantly increase oil production. These two items have resulted in oil prices and global equity markets being under pressure. For North American
Cathedral Energy Services Ltd. - 2019 Annual Report
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201920182017Revenues120,276$ 160,827$ 147,095$ Adjusted gross margin % (1)10%11%18%Adjusted EBITDAS (1)3,887$ 12,060$ 18,674$ Diluted per share0.08$ 0.24$ 0.39$ Cash flow - operations4,785$ 3,732$ 2,952$ Write-downs of goodwill, equipment and inventory-$ (1,474)$ (8,584)$ Provision for settlements(425)$ -$ -$ Loss before income taxes(18,717)$ (6,139)$ (382)$ Basic per share(0.38)$ (0.12)$ (0.01)$ Derecognition of deferred tax asset-$ (13,059)$ -$ Net earnings (loss)(19,187)$ (17,061)$ 87$ Basic and diluted per share(0.39)$ (0.35)$ -$ Property and equipment additions (2)6,018$ 17,391$ 11,322$ Net equipment additions (1)(2,708)$ 4,514$ 2,371$ Weighted average shares outstandingBasic (000s)49,468 49,445 47,381 Diluted (000s)49,522 49,586 47,577 Working capital20,181$ 30,599$ 31,016$ Total assets106,300$ 121,770$ 121,630$ Loans and borrowings excluding current portion6,000$ 7,000$ 46$ Shareholders' equity68,092$ 89,143$ 101,391$
producers and oilfield services companies, the issue is now the extent and duration of this collapse in oil prices. Since January 1, 2020, WTI has
declined from approximately USD$61 to USD$31; a decline of 49%. In response the decline in WTI, many North American producers have already
announced materially reductions in their capital budgets for 2020.
Cathedral is focused on rebuilding of our U.S. business which will be guided by the new management team that was put in place in mid to late 2019
and into early 2020. Our focus is on our job execution, use of our proprietary technology and providing such quality services at a fair price – all
centered around our strategy of building a business around our mantra of “Better Performance Every Day”.
Our strategy in Canada is to maintain the optionality on future industry growth through focusing on serving stronger customers in areas we have
advantages in, maintaining a focused and lean cost structure and again leveraging our differentiated technology advantages in the Canadian market.
For 2020, our technology focus will be bringing to the market our RapidFire™ MWD platform which commenced initial successful field trials in
December 2019. RapidFire is capable of transmitting data simultaneously via pulse and electro-magnetic (“EM”), allowing for high data rates and
higher reliability through redundancy. In addition, the system can be configured in either a hard mount or retrievable configuration and is rated to
operating temperatures that meet or exceed most competitive MWD systems. The second phase to be released later in 2020 will offer a retrievable
downhole generator which will reduce operating costs and allow for high power EM transmission on extended run applications.
Our 2020 capital plan will be modest and we expect our “net equipment additions” (equipment additions less proceeds on equipment lost downhole)
to be in the range of $nil to $2.5 million (depending on level of lost-in-hole proceeds). Focus of 2020 capital plan will be motor power section additions
for premium lines, addition of RapidFire MWD tools and mud lube bearing motor upgrades. Our capital plan will be reviewed quarterly and adjusted
depending on activity levels.
We will continue to focus on what we can control – costs, improving operational efficiencies, bringing new technologies to the market and strategic
sales and marketing of our offerings.
RESULTS OF OPERATIONS - 2019 COMPARED TO 2018
Effective January 1, 2019, the Company adopted IFRS 16 Leases ("IFRS 16") (see discussion under "New Accounting Policies"). As a result of this
new accounting policy, which was adopted retrospectively without restatement of comparative results, expenditures which previously were reported
as cost of sales ("COS") or selling, general and administrative ("SG&A") expenses are now classified as lease liability obligation repayments and
finance costs (interest expense) and the related right of use asset is depreciated against net income on a straight-line basis. As finance costs and
depreciation are excluded from Adjusted EBITDAS (refer to Non-GAAP measurements), Adjusted EBITDAS for the year ended December 31, 2019
was higher in comparison to 2018 in the amount of $3,080. Previously this amount was classified as rent expense (being $2,562 in COS amounts
and $518 in SG&A amounts).
Overview
The Company completed 2019 with revenues of $120,276 compared to 2018 revenues of $160,827 a 25% decrease. 78% of 2019 revenues were
derived from the U.S. compared to 81% of revenue in 2018. 2019 Adjusted EBITDAS was $3,887 ($0.08 per share diluted) which represents a
$(8,173) or 68% decrease from $12,060 ($0.24 per share diluted) in 2018. In 2019, the Company’s loss was $(19,187) ($(0.39) per share) compared
to $(17,061) ($(0.35) in 2018. 2018 net loss includes write-downs of $14,533 (2019 - $nil).
Revenues 2019 revenues were $120,276, which represented a $40,551 decrease or 25% from 2018 revenues of $160,827.
Canadian revenues (excluding motor rental revenues) decreased to $23,127 in 2019 from $28,495 in 2018; a 19% decrease. This decrease was the
result of: i) a 15% decrease in activity days to 3,004 in 2019 from 3,541 in 2018; and ii) a 4% decrease in the average day rate to $7,699 in 2019 from
$8,047 in 2018.
The average active land rig count in Canada declined 27% in 2019 compared to 2018 (source: Baker Hughes). The decrease in the Company activity
days of 15% resulted in the Company gaining market share. The decreases in day rates was in part due to market pressures to reduce work as
industry activity declined and in part due to the mix of work performed.
U.S. revenues (excluding motor rental revenues) decreased to $92,268 in 2019 from $128,206 in 2018; a 28% decrease. This decrease was the net
result of: i) a 34% decrease in activity days to 6,805 in 2019 from 10,382 in 2018; and ii) a 10% increase in the average day rate to $13,559 in 2019
from $12,349 in 2018 (when converted to Canadian dollars).
The average active land rig count for the U.S. was down 8% in 2019 compared to 2018 (source: Baker Hughes). The Company experienced a 35%
decline in activity days resulting in a decrease in market share compared to 2018. This decline was related to reductions in clients' drilling programs
to stay within their cash flow, financial restructuring by certain clients that caused them to pause or cancel programs, as well as loss of work related
to pricing. Due to Cathedral's client mix, our decline exceeded the general market decline. Day rates in USD increased 7% to $10,206 USD in 2019
from $9,515 USD in 2018. The 2019 rate is up due to an increase in revenues from providing RSS services which are rented from a 3rd party.
Motor rentals increased in both Canada and U.S. Combined rental revenues increased to $4,881 in 2019 compared to $4,126 in 2018, an 18%
increase. The increase is due to increased availability of motors for rental due to less full service work being performed and the fact that Cathedral’s
nDuranceTM drilling motors are noted for their reliability and drilling performance.
Gross margin and adjusted gross margin Gross margin for 2019 was -6% compared to 2% in 2018. Adjusted gross margin (see Non-GAAP
Measurements) for 2019 was $12,234 or 10% compared to $18,391 or 11% for 2018.
The decrease in adjusted gross margin was due to increases in equipment rental expense and an increase in the fixed component of cost of sales.
While management has reduced the total amount of fixed cost component of costs of sales (mainly due to headcount reductions) to take into
consideration the decline in activity levels it increased as a percentage of revenue. Partially offsetting these amounts were reductions in equipment
repairs. Depreciation of equipment allocated to cost of sales increased to $19,864 in 2019 from $12,719 in 2018 due to changes in estimated of useful
lives made effective October 1, 2018. Depreciation included in cost of sales as a percentage of revenue was 17% for 2019 and 8% in 2018.
Write-down of inventory
The Company made a provision related to slow moving and obsolete inventory used to service equipment of $1,474 in
2018. There was no write-down in 2019. For 2018, the impacted inventory was used to service older revisions to tools that are obsolete as well as
Cathedral Energy Services Ltd. - 2019 Annual Report
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Revenues20192018Canada26,155$ 31,123$ United States94,121 129,704 Total120,276$ 160,827$
tools that have had lower demand since the industry down-turn. The tools with lower demand are primarily legacy non-proprietary motors that are
being used less and less each year.
Selling, general and administrative ("SG&A") expenses SG&A expenses were $13,859 in 2019; a decrease of $1,837 compared with $15,696
in 2018. As a result of the implementation of IFRS 16, there was a decrease of $518 related to amounts previously classified as rent, but currently
classified as lease liability repayments and finance costs (interest). The Company recognized a bad debt of $562 related to a U.S. customer who
entered Chapter 11 process. Additionally, there were reductions in SG&A wages and related benefits and burdens. As a percentage of revenue,
SG&A was 12% in 2019 compared to 10% in 2018.
Technology group expenses Technology group expenses are related to new product development and supporting and upgrading existing
technology. Technology group expenses consist of salaries and related benefits and burdens as well as shop supplies. Technology group activities
spent on new product development are capitalized as intangible assets. Total technology group costs were $3,333 in 2019; a decrease of $92
compared with $3,425 in 2018. The portion of total technology group costs related to new product development was $965 and this amount has been
capitalized as intangible assets (2018 - $944). Technology group costs not related to new product development were $2,368 in 2019; a decrease of
$113 compared with $2,481 in 2018.
Gain on disposal of equipment During 2019, the Company had a gain on disposal of equipment of $6,005 compared to $10,623 in 2018. These
gains mainly related to equipment lost-in-hole. Proceeds from clients on lost-in-hole equipment are based on amounts specified in client service
agreements and generally consider the replacement cost of the equipment. In most cases, the lost-in-hole proceeds exceed the net book value of the
equipment and result in a gain. The timing and amount of lost-in-hole recoveries is not in the control of the Company and therefore can fluctuate
significantly from quarter-to-quarter. In 2019, the Company received proceeds from clients on lost-in-hole recoveries of $8,726 (2018 - $12,877).
Finance costs Finance costs consist of interest expenses on operating loans, loans and borrowings and bank charges of $593 for 2019 compared
to $443 for 2018. The increase in finance costs relate to primarily to higher average debt levels in 2019.
Finance costs lease liability Increase is related to the adoption of IFRS 16 (see discussion under "New and Future Accounting Policies") effective
January 1, 2019.
Provision for settlement
In 2019 Q2, the Company made a settlement offer in respect of a wage and hour complaint (the “Complaint”) that was
filed against the Company’s wholly owned U.S. subsidiary. The Complaint alleged that employees of the previously disposed Production Testing and
Flowback division were entitled to recover unpaid or incorrectly calculated overtime wages under the Fair Labor Standards Act (“FLSA”). Payment of
this amount was made in 2019 Q4.
Foreign exchange The Company had a foreign exchange gain of $1,280 in 2019 compared to a loss of $(2,160) in 2018 due to the fluctuations of
the Canadian dollar relative to the U.S. dollar. The Company’s foreign operations are denominated in a currency other than the Canadian dollar and
therefore, upon consolidation, gains and losses due to fluctuations in the foreign currency exchange rates are recorded in Other Comprehensive
Income (“OCI”) on the balance sheet as a component of equity. However, gains and losses in the Canadian entity on U.S. denominated intercompany
balances continue to be recognized in the statement of income. Included in the 2019 foreign currency gains are unrealized gain of $1,347 (2018 –
loss of $2,260) related to intercompany balances.
Income tax In 2018 Q4, Cathedral derecognized $13,059 of deferred tax assets due to a recent history of tax losses within Cathedral's Canadian
entity. As a result of this, where there are losses in the Canadian entity that are not recognized as deferred taxes the effective tax rate is not meaningful.
Income tax expense is booked based upon expected annualized rates using the statutory rates of 26.5% for Canada and 23% for the U.S.
LIQUIDITY AND CAPITAL RESOURCES
Overview On an annualized basis, the Company’s principal source of liquidity is cash generated from operations and proceeds from equipment
lost-in-hole. In addition, the Company has the ability to fund liquidity requirements through its credit facility and the issuance of debt and/or equity.
Cash flow from operations in 2019 increased to $4,785 from $3,732 in 2018. This increase was primarily due to an increase in the collection of
receivables.
Working capital At December 31, 2019 the Company had working capital of $20,181 (2018 - $30,599).
Credit facility The Company's credit facility (the "Facility") consists of a $5 million operating facility and a $15 million extendible revolving credit
facility and expires December 31, 2021. The Facility is secured by a general security agreement over all present and future personal property. The
Facility provides a definition of EBITDA (“Credit Agreement EBITDA”) and Funded Debt to be used in calculation of financial covenants.
The financial covenants associated with the Facility are:
Consolidated Funded Debt to consolidated Credit Agreement EBITDA ratio shall not exceed 3.0:1; and
Consolidated interest coverage ratio shall not be less than 2.5:1.
The Facility bears interest at the financial institution’s prime rate plus 0.75% to 2.25% or bankers’ acceptance rate plus 1.75% to 3.00% with interest
payable monthly. Interest rate spreads for the Facility depend on the level of Funded Debt compared to the 12 month trailing Credit Agreement
EBITDA. The Facility provides a means to lock in a portion of the debt at interest rates through bankers' Acceptance (“BA”) based on the interest rate
spread on the date the BA was entered into.
Compliance with Facility covenants
Based on current available information, Cathedral expects to comply with all covenants for the next twelve months.
At December 31, 2019, the Company had drawn $6,000 of its revolving credit facility, $nil of its operating facility and had $7,223 in cash. At December
31, 2019, the Company had consolidated Funded Debt of $311 which includes six outstanding Letters Of Credit (“LOC”). The Credit Agreement
EBITDA was $4,301.
The calculation of the financial covenants under the Facility as at December 31, 2019 is as follows:
Covenant
Consolidated funded debt to consolidated Credit Agreement EBITDA ratio
Consolidated interest coverage ratio
Actual Ratio
0.1
7.3:1
Required Ratio
3.0:1 (maximum)
2.5:1 (minimum)
Contractual obligations In the normal course of business, the Company incurs contractual obligations and those obligations are disclosed in the
Company’s annual financial statements for the year ended December 31, 2019.
The Company has issued the following six LOC:
Cathedral Energy Services Ltd. - 2019 Annual Report
Page 5
three securing rent payments on property leases and renew annually with the landlords. The two LOCs are $700 CAD for the first ten years
of the lease and then reduces to $500 for the last five years of the lease. The third LOC is currently for $542 USD and increases annually
based upon annual changes in rent;
$75 USD issued for U.S. workers compensation coverage; and
two securing the Company’s corporate credit cards in the amounts of $75 CAD and $175 USD.
The following table outlines the anticipated payments related to commitments subsequent to December 31, 2019:
As at December 31, 2019, the Company’s commitment to purchase equipment is approximately $218. Cathedral anticipates expending these funds
in 2020 Q1.
Share capital At March 12, 2020, the Company has 49,468,117 common shares and 2,599,000 options outstanding with a weighted average
exercise price of $0.70.
In 2019 Q3, the Company issued 1,056,000 stock options to staff and directors with an average exercise price of $0.30 per option.
Related party transactions Cathedral has determined that the key management personnel of the Company consist of its executive officers and
directors.
In addition to their salaries and director's fees, the Company also provides non-cash benefits to directors and executive officers including participation
in the Company’s share option program.
Certain executive officers have employment agreements. Upon resignation at the Company’s request, they are entitled to termination benefits
including: i) 1.0 to 2.0 times base salary; ii) 1.0 to 2.0 times average annual bonus over the past 3 years; and iii) health, dental, life insurance and
disability coverage for 12 to 24 months.
Key management personnel (including directors) compensation comprised:
Key management personnel and director transactions
Directors and executive officers of the Company control approximately 6% of the common shares of the Company.
There have been no other transactions over the reporting period with key management personnel (2018 - nil), and no outstanding balances exist as
at period end (2018 - nil).
OFF-BALANCE SHEET ARRANGEMENTS
The Company indemnifies its directors and officers, to the extent permitted by law, against any and all claims or losses (including amounts paid in
settlement of claims) incurred as a result of their service to the Company. The maximum amount payable under these indemnities cannot be
reasonably estimated. The Company expects that it would be covered by insurance for most, but not all, tort liabilities.
2019 CAPITAL PROGRAM
During the year ended December 31, 2019 the Company invested $6,018 (2018 - $17,391) in equipment and $1,077 (2018 - $1,226) in new technology
development primarily related to MWD systems.
The following table details the current period’s net equipment additions:
Cathedral Energy Services Ltd. - 2019 Annual Report
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Total20202021202220232024ThereafterEquipment purchase obligations409$ 409$ -$ -$ -$ -$ -$ Secured revolving term loan 6,000 - - 6,000 - - - Operating lease obligations29,117 3,508 3,505 3,528 3,565 3,602 11,409 Provision for settlement491 164 164 163 Finance lease obligations91 91 - - - - - Total36,108$ 4,172$ 3,669$ 9,691$ 3,565$ 3,602$ 11,409$ 20192018Short-term employment benefits (1)1,499$ 2,379$ Share-based compensation208 341 Total expense recognized as share-based compensation1,707$ 2,720$ (1) Including severance paymentsYear endedDecember 31, 2019Equipment additions:Motors and related equipment3,388$ MWD and related equipment2,005 Other625 Total cash additions6,018 Less: proceeds on disposal of equipment (excluding capital lease settlements)(8,726) Net equipment additions (1)(2,708)$ (1)See "NON-GAAP MEASUREMENTS"
2020 CAPITAL PROGRAM
Our 2020 capital plan will be modest and we expect our “net equipment additions” (equipment additions less proceeds on equipment lost downhole)
to be in the range of $nil to $2.5 million (depending on level of lost-in-hole proceeds). Focus of 2020 capital plan will be motor power section additions
for premium lines, addition of RapidFire MWD tools and mud lube bearing motor upgrades.
RESULTS OF OPERATIONS – THREE MONTHS ENDED DECEMBER 31
Adjusted EBITDAS for the three months ended December 31, 2019 was higher in comparison to 2018 in the amount of $806 as a result of the IFRS
16 changes discussed previously. Previously this amount was classified as rent expense (being $665 in COS amounts and $141 in SG&A amounts).
Revenues and operating expenses
Revenues 2019 Q4 revenues were $19,299, which represented a decrease of $23,828 or 55% from 2018 Q4 revenues of $43,127.
Canadian revenues (excluding motor rental revenues) decreased to $6,167 in 2019 Q4 from $7,705 in 2018 Q4; a 20% decrease. This decrease was
the result of: i) a 14% decrease in activity days to 782 in 2019 Q4 from 912 in 2018 Q4 and ii) an 7% decrease in the average day rate to $7,886 in
2019 Q4 from $8,449 in 2018 Q4.
There was a 22% year-over-year decline in the average active land rig count in Canada (source: Baker Hughes) and as Cathedral's activity decline
was only 20%, there was a slight increase in market share in Canada.
U.S. revenues (excluding motor rental revenues) decreased 65% to $11,986 in 2019 Q4 from $34,573 in 2018 Q4. This decrease was the net result
of: i) a 66% decrease in activity days to 901 in 2019 Q4 from 2,677 in 2018 Q4; net of ii) a 3% increase in the average day rate to $13,303 in 2019 Q4
from $12,915 in 2018 Q4 (when converted to Canadian dollars).
The average active land rig count for the U.S. was down 23% in 2019 Q4 compared to 2018 Q4 (source: Baker Hughes). The Company experienced
a 66% decline in activity days resulting in a decrease in market share compared to 2018 Q4. This decline was related to reductions in clients' drilling
programs to stay within their cash flow, financial restructuring by certain clients that caused them to pause or cancel programs, as well as loss of work
related to pricing. Due to Cathedral's client mix, our decline exceeded the general market decline. Day rates in USD increased 3% to $10,079 USD
in 2019 Q4 from $9,760 USD in 2018 Q4. The 2019 Q4 rate is up due to an increase in revenues from providing RSS services which are rented from
a 3rd party.
Motor rentals increased in both Canada and U.S. Combined rental revenues increased to $1,146 in 2019 Q4 compared to $849 in 2018 Q4. The
increase is due to the increased availability of motors for rental due to less full service work being performed and the fact that Cathedral’s nDurance
drilling motors are noted for their reliability and drilling performance.
Gross margin and adjusted gross margin Gross margin for 2019 Q4 was -19% compared to -1% in 2018 Q4. Adjusted gross margin (see Non-
GAAP Measurements) for 2019 Q4 was $1,761 or 9% compared to $6,310 or 15% for 2018 Q4.
Adjusted gross margin, as a percentage of revenue, decreased due to increased rentals as a percentage of revenue (actual rental costs were down
year-over-year) and increased fixed component of cost of sales as a percentage of revenue (the amount was down, but not as percentage of revenues).
The increases were partially offset by lower equipment repair costs.
Depreciation of equipment allocated to cost of sales increased slightly to $5,443 in 2019 Q4 from $5,304 in 2018 Q4. Depreciation included in cost of
sales as a percentage of revenue was 28% for 2019 Q4 and 12% in 2018 Q4.
Write-down of inventory
The Company made a provision related to slow moving and obsolete inventory used to service equipment of $1,474 in
2018 Q4. There was no write-down in 2019 Q4. For 2018, the impacted inventory was used to service older revisions to tools that are obsolete as
well as tools that have had lower demand since the industry down-turn. The tools with lower demand are primarily legacy non-proprietary motors that
are being used less and less each year.
Selling, general and administrative ("SG&A") expenses SG&A expenses were $3,817 in 2019 Q4; a decrease of $888 compared with $4,705 in
2018 Q4. As a result of the implementation of IFRS 16, there was a decrease of $141 related to amounts previously classified as rent expense, but
currently classified as lease liability repayments and finance costs (interest). The Company recognized a bad debt of $562 related to a U.S. customer
who entered Chapter 11 process. Additionally, there were reductions in SG&A wages and related benefits and burdens due to a reduction in head
count. As a percentage of revenue, SG&A was 20% in 2019 Q4 compared to 11% in 2018 Q4.
Technology group expenses Technology group expenses are related to new product development and supporting and upgrading existing
technology. Technology group expenses consist of salaries and related benefits and burdens as well as shop supplies. Technology group activities
spent on new product development are capitalized as intangible assets. Total technology group costs were $700 in 2019 Q4; a decrease of $254
compared with $954 in 2018 Q4. The portion of total technology group costs related to new product development was $171 and this amount has been
Cathedral Energy Services Ltd. - 2019 Annual Report
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2019 Q42018 Q4$ Change% ChangeRevenues 19,299$ 43,127$ (23,828)$ -55%Cost of sales(23,000) (43,651) 20,651 -47%Gross margin - $(3,701)$ (524)$ (3,177)$ 606%Gross margin - %-19%-1%-18%Adjusted gross margin $ (1)1,761$ 6,310$ (4,549)$ -72%Adjusted gross margin % (1)9%15%-6%(1) Refer to MD&A "NON-GAAP MEASUREMENTS"Revenues2019 Q42018 Q4Canada6,815$ 8,146$ United States12,484 34,981 Total19,299$ 43,127$
capitalized as intangible assets (2018 Q4 - $214). Technology group costs not related to new product development were $529 in 2019 Q4; a decrease
of $211 compared with $740 in 2018 Q4. Technology group costs decreased primarily due to reduction in staffing.
Gain on disposal of equipment During 2019 Q4, the Company had a gain on disposal of equipment of $1,596 compared to $1,789 in 2018 Q4.
These gains mainly related to equipment lost-in-hole. Proceeds from clients on lost-in-hole equipment are based on amounts specified in service
agreements and, in most cases, these proceeds exceed the net book value of the equipment and result in a gain. The timing of lost-in-hole recoveries
is not in the control of the Company and therefore can fluctuate significantly from quarter-to-quarter. In 2019 Q4, the Company received proceeds on
lost-in-hole recoveries from clients of $2,836 (2018 Q4 - $2,201).
Finance costs Finance costs consist of interest expenses on operating loans, long-term debt and bank charges of $172 for 2019 Q4 versus $181
for 2018 Q4.
Finance costs lease liability Increase is related to the adoption of IFRS 16 (see discussion under "New and Future Accounting Policies") effective
January 1, 2019.
Foreign exchange The Company had a foreign exchange gain of $534 in 2019 Q4 compared to a loss of $(1,745) in 2018 Q4 due to the fluctuations
of the Canadian dollar relative to the U.S. dollar. The Company’s foreign operations are denominated in USD and therefore, upon consolidation, gains
and losses due to fluctuations in the foreign currency exchange rates are recorded as other comprehensive income on the balance sheet as a
component of equity. However, gains and losses in the Canadian entity on U.S. denominated intercompany balances continue to be recognized in
the statement of comprehensive income (loss). Included in the 2019 Q4 foreign currency loss are unrealized gain of $554 (2018 Q4 - loss of $1,814)
related to intercompany balances.
Income tax In 2018 Q4, Cathedral derecognized $13,059 of deferred tax assets due to a recent history of tax losses within Cathedral's Canadian
entity. As a result of this, where there are losses in the Canadian entity that are not recognized as deferred taxes the effective tax rate is not meaningful.
Income tax expense is booked based upon expected annualized rates using the statutory rates of 26.5% for Canada and 23% for the U.S.
NEW ACCOUNTING POLICIES
i) The Company has adopted IFRS 16 Leases ("IFRS 16") effective January 1, 2019.
The Company utilized the modified retrospective approach in application of the standard. This resulted in the recognition of a lease liability and a
corresponding recognition of a right-of-use asset. The Company has chosen to recognize the right-of-use asset on January 1, 2019 at a value equal
to the related liability of the lease. The Company also used the exemption for any capital leases recognized prior to January 1, 2019 under the previous
standards and to only apply IFRS 16 to contracts that were previously identified as leases. As such, the Company did not apply the standard to any
contracts not previously identified as containing a lease. Exemptions were utilized for short-term leases where the term is 12 months or less and for
leases of low value items. As well, the classification of cash flows were impacted as the presentation of operating lease payments previously shown
as operating cash flows will be split into financing (principal portion) and financing (interest portion) cash flows under IFRS 1616.
The modified retrospective approach does not require restatement of prior period financial information. Accordingly, comparative information in the
Company's financial statements are not restated.
As lease payments are made there is a reduction to the principal portion of the lease liability as well as an amount allocated to finance costs. The
finance cost is expensed over the lease term. The right of use asset is depreciated over the shorter of the asset's useful life and the lease term on a
straight-line basis. Cathedral uses a single discount rate for a portfolio of leases with reasonably similar characteristics.
ii) The Company also adopted IFRS Interpretations Committee ("IFRIC") issued IFRIC 23 Uncertainty over Income Tax Treatments ("IFRIC 23") which
clarifies the accounting for uncertainties in income taxes. The adoption of this standard did not have any material impact on the Company's financial
statements.
SUMMARY OF QUARTERLY RESULTS
A portion of the Company's operations is carried on in western Canada where activity levels in the oilfield services industry are subject to a degree of
seasonality. Operating activities in western Canada are generally lower during "spring breakup" which normally commences in mid to late March and
continues through to mid to late May. Operating activities generally increase in the fall and peak in the winter months from December until mid to late
March. Additionally, volatility in the weather and temperatures not only during this period, but year round, can create additional unpredictability in
operational results. Activity levels in the oil and natural gas basins in the U.S. are not subject to the seasonality to the same extent that it occurs in
western Canada.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's audited consolidated financial statements have been prepared in accordance with Generally Accepted Accounting Principles (“GAAP”)
and significant accounting policies utilized by the Company are described in note 3 to the Company's audited consolidated financial statements.
Management believes the accounting principles selected are appropriate under the circumstances and the Audit Committee of the Company has
approved the policies selected.
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DecSepJunMarDecSepJunMarThree month periods ended20192019201920192018201820182018Revenues19,299$ 31,185$ 32,550$ 37,242$ 43,127$ 42,570$ 34,973$ 40,157$ Adjusted EBITDAS (1)(702)$ 2,236$ 479$ 1,874$ 3,412$ 6,190$ (985)$ 3,443$ Adjusted EBITDAS (1) per share - diluted(0.01)$ 0.05$ 0.01$ 0.04$ 0.07$ 0.13$ (0.02)$ 0.07$ Net earnings (loss)(6,068)$ (4,153)$ (5,342)$ (3,624)$ (17,858)$ 3,001$ (2,498)$ 294$ Net earnings (loss) per share - basic and diluted(0.12)$ (0.08)$ (0.11)$ (0.07)$ (0.36)$ 0.06$ (0.05)$ 0.01$ (1) Refer to MD&A: see "NON-GAAP MEASURMENTS"
Under GAAP, the Company is required to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the audited consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. The estimates and assumptions utilized are based on experience and other information available to
management at the time the estimate or assumption is made. The estimates and assumptions used by management are constantly evaluated for
relevance under the circumstances and if circumstances on which the estimates or assumptions were based change, the impact is included in the
results of operations for the period in which the change occurs. Management believes the estimates, judgments and assumptions involved in its
financial reporting are reasonable.
The following accounting policies require management to make significant judgments and estimates in the preparation of the Company's audited
consolidated financial statements, and as such, are considered critical.
Equipment The Company makes estimates about the residual value and expected useful life of equipment. These estimates are based on
management’s historical experience and industry norms. Expected useful life and depreciation rates are as disclosed in note 3 (d) (iii) to the audited
consolidated financial statements.
Impairment of long-lived assets Equipment and intangibles are assessed for impairment when circumstances suggest that the carrying amount
may exceed the recoverable amount for the asset. These calculations require estimates and assumptions and are subject to change as new
information becomes available. These estimates include number of years of cash flow available from the assets, growth rates, pre-tax discount rates
as well as various estimates and assumptions used in the preparation of revenues and expenses used in the cash flow analysis. The assumptions
used in the impairment test of equipment and intangibles are disclosed in notes 8 and 9 to the audited consolidated financial statements.
Trade accounts receivable Trade accounts receivable require estimates to be made regarding the financial stability of the Company’s customers
and the environment in which they operate in order to assess if accounts receivable balances will be received. Credit risks for outstanding accounts
receivable are assessed regularly and an allowance for doubtful accounts is recorded based upon specific customer information and experience as
well as for groups of similar assets. See note 22 to the audited consolidated financial statements “Credit risk” for further details.
Inventory Inventory is reviewed periodically in order to determine if there is obsolescence. This estimate is based upon historic data and
management’s estimates of future demand. See note 7 to the audited consolidated financial statements for discussion of the write-downs of inventory.
Income taxes The Company uses the asset and liability method of accounting for future income taxes whereby deferred income tax assets and
liabilities are determined based on temporary differences between the accounting basis and the tax basis of the assets and liabilities, and are measured
using substantively enacted tax rates and laws expected to apply when these differences reverse. As a result, a projection of taxable income is
required for those years, as well as an assumption of the ultimate recovery/settlement period for the temporary differences.
The business and operations of the Company are complex and the Company has executed a number of significant financings, reorganizations,
acquisitions and other material transactions over the course of its history. The computation of income taxes payable as a result of these transactions
involves many complex factors as well as the Company's interpretation of relevant tax legislation and regulations. The Company's management
believes that the provision for income tax is adequate and in accordance with GAAP and applicable legislation and regulations. However, tax filing
positions are subject to review by taxation authorities who may successfully challenge the Company's interpretation of the applicable tax legislation
and regulations.
CONTROLS AND PROCEDURES
In order to ensure that information with regard to reports filed or submitted under securities legislation present fairly in all material respect the financial
information of the Company, management including the Chief Executive Officer ("CEO") and Interim Chief Financial Officer ("CFO") are responsible
for establishing and maintaining disclosure controls and procedures, as well as internal controls over financial reporting based upon The Committee
of Sponsoring Organizations of the Treadway Commission (2013 framework).
Disclosure controls and procedures The Company's disclosure controls and procedures are designed to provide reasonable assurance that
information required to be disclosed by the Company is reported within the time periods specified under securities laws, and include controls and
procedures that are designed to ensure that information is communicated to management of the Company, including the CEO and CFO, to allow
timely decisions regarding required disclosure. An evaluation of the effectiveness of the Company's disclosure controls and procedures (as defined
in Multilateral Instrument 52-109, Certification of Disclosure in Issuers' Annual Financial and Interim Filings) was conducted as at December 31, 2019.
Based on this evaluation, the CEO and CFO of Cathedral have concluded that the design and operation of the Company's disclosure controls and
procedures were effective as at December 31, 2019.
Internal controls over financial reporting Management is responsible for establishing and maintaining adequate internal controls over financial
reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with GAAP. The CEO and CFO have designed or have caused such internal controls over financial reporting (as defined in
Multilateral Instrument 52-109, Certification of Disclosure in Issuers' Annual Financial and Interim Filings) to be designed under their supervision to
provide reasonable assurance regarding the reliability of financial reporting and preparation of the Company's financial statements for external
purposes in accordance with GAAP. In addition, the CEO and CFO directed the assessment of the design and operating effectiveness of the
Company's internal controls over financial reporting as at December 31, 2019 and based upon that assessment determined that the Company's internal
controls over financial reporting were, in all material respects, appropriately designed and operating effectively.
Management of the Company believe that "cost effective" disclosure controls and procedures and internal controls over financial reporting, no matter
how well conceived or implemented, can only provide reasonable assurance, and not absolute assurance, that the objective of controls and procedures
are met. Because of inherent limitations, disclosure controls and procedures and internal control over financial reporting may not prevent errors or
fraud.
There has been no change in the Company's internal controls over financial reporting during the year ended December 31, 2019 that has materially
affected, or is reasonably likely to materially affect, the Company's internal controls over financial reporting.
RISK FACTORS
Crude Oil and Natural Gas Prices
Demand for the services provided by Cathedral is directly impacted by the prices that Cathedral's customers receive for the crude oil and natural gas
they produce. The prices received and the volumes produced have a direct correlation to the cash flow available to invest in drilling activity and other
oilfield services. The markets for oil and natural gas are separate and distinct and are largely driven by supply and demand factors. Oil is a global
commodity with a vast distribution network. As natural gas is most economically transported in its gaseous state via pipeline, its market is dependent
on pipeline infrastructure and is subject to regional supply and demand factors. Developments in the transportation of liquefied natural gas ("LNG") in
ocean going tanker ships is introducing more of an element of globalization to the natural gas market. Crude oil and natural gas prices are quite
volatile, which accounts for much of the cyclical nature of the oilfield services business.
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Prices for oil and natural gas are subject to large fluctuations in response to relatively minor changes in the supply of, and demand for, oil and natural
gas, market uncertainty and a variety of additional factors beyond the control of Cathedral. These factors include economic conditions in the U.S. and
Canada, the actions of the Organization of Petroleum Exporting Countries ("OPEC"), including the decision by Saudi Arabia to lower its selling price
for oil and to increase output, government regulation, political stability in the Middle East and elsewhere, an outbreak of a contagious disease such as
COVID-19, the foreign supply of oil and natural gas, risks of supply disruption, the price of foreign imports, technological advances improving the
efficiency of oil and natural gas extraction and production, and the availability of alternative fuel sources and other advances that reduce energy use
efficiency impacting consumption. In addition to pricing determined based on worldwide or North American supply and demand factors, there are a
number of regional factors that also influence pricing such as transportation capacity, oil and natural gas physical properties and local supply and
demand. Petroleum prices are expected to remain volatile for the near future as a result of market uncertainties over the supply and the demand of
these commodities related to the current state of the world economies, OPEC actions and credit availability and liquidity concerns in the energy
industry.
Commodity price volatility may impact exploration & production companies’ willingness to commit to capital spending, which in turn may have a
significant adverse effect the rig count and thus on the Corporation’s activity levels, business and financial results.
World crude oil prices and North American natural gas prices, including LNG, are not subject to control by Cathedral. With that in mind, Cathedral
attempts to partially manage this risk by way of maintaining cost structure that can be adjusted to reflect activity levels. A significant portion of
Cathedral's fieldwork is performed by sub-contractors and staff paid on a day rate or hourly basis which allows Cathedral to operate with lower variable
costs and fixed overhead costs in seasonally low activity periods as well as extended downturns in the oilfield services sector. In addition, Cathedral
also strives to continuously improve its operational efficiencies and reduce the cost of the equipment it deploys.
Public Health Crisis
Cathedral's business, operations and financial condition could be materially adversely affected by the outbreak of epidemics or pandemics or other
health crises, including the recent outbreak of COVID-19. On January 30, 2020, the World Health Organization declared the outbreak a global health
emergency, and on March 13, 2020 the U.S. declared that the COVID-19 outbreak in the United States constitutes a national emergency. In China,
reactions to the spread of COVID-19 have led to, among other things, significant restrictions on travel within China, temporary business closures,
quarantines and a general reduction in consumer activity. The outbreak has spread throughout Europe, the Middle East and North America, causing
companies and various international jurisdictions to impose restrictions such as quarantines, business closures and travel restrictions. While these
effects are expected to be temporary, the duration of the business disruptions internationally and related financial impact cannot be reasonably
estimated at this time. Similarly, Cathedral cannot estimate whether or to what extent this outbreak and the potential financial impact may extend to
countries outside of those currently impacted.
Such public health crises can result in volatility and disruptions in the supply and demand for oil and natural gas, global supply chains and financial
markets, as well as declining trade and market sentiment and reduced mobility of people, all of which could affect commodity prices, interest rates,
credit ratings, credit risk and inflation. In particular, oil prices have significantly weakened in response to the outbreak of COVID-19 and the concurrent
actions of Saudi Arabia (See "Risk Factors - Crude Oil and Natural Gas Prices"). The risks to Cathedral of such public health crises also include risks
to employee health and safety and a slowdown or temporary suspension of operations in geographic locations impacted by an outbreak. At this point,
the extent to which COVID-19 may impact Cathedral is uncertain; however, it is possible that COVID-19 may have a material adverse effect on the
Corporation’s business, results of operations and financial condition.
Take Away Capacity for Cathedral's Customers
Cathedral's customers rely on various transportation methods to deliver the produced oil and natural gas to the end market including: pipelines, truck
and railway. If such take away capacity becomes full and incremental capacity is not added, the price and production of hydrocarbons may be adversely
impacted resulting in lower oilfield service industry activity levels. This could have a material adverse effect on Cathedral's business operations,
financial condition, results of operations and cash flow. In Canada and the U.S. Permian Basin area, takeaway capacity issues have recently impacted
local oil pricing and net backs with the result that drilling activity levels in these areas have been negatively impacted.
Alternatives to and Changing Demand for Hydrocarbon Products
Fuel conservation measures, alternative fuel requirements, electric automobiles, increasing consumer demand for alternatives to oil and natural gas,
and technological advances in fuel economy, vehicle electrification and energy generation devices could reduce the demand for crude oil, natural gas
and other hydrocarbons. The Company cannot predict the impact of changing demand for oil and natural gas products, and any major changes may
have a material adverse effect on the Cathedral's business, financial condition, results of operations and cash flows.
Cash Dividends to Shareholders are Dependent on the Performance of Cathedral
Cathedral's ability to make dividend payments to shareholders is dependent upon the operations and business of Cathedral. In November 2015, the
Board made the decision to suspend the payment of the Company's quarterly dividend based the reductions in commodity prices and the resulting
decline in industry activity levels in 2015 and uncertainties around expected activity levels in the future. There is no assurance that dividends will be
declared at all in the future and, if declared, there is no assurance regarding the amounts of cash that may be available from Cathedral's operations
and business that could be available to fund such future dividends. The actual amount of any dividends will depend on a variety of factors, including
without limitation, the current performance, historical and future trends in the business, the expected sustainability of those trends, enacted tax
legislation which will affect future taxes payable as well as required long-term debt repayments, maintenance capital expenditures required to sustain
performance, future growth capital expenditures, effect of acquisitions or dispositions on Cathedral's business, compliance with debt covenants and
other factors that may be beyond the control of Cathedral or not anticipated by management of Cathedral.
Cathedral's dividend policy is subject to change at the discretion of its Board of Directors. In addition, Cathedral's credit facility covenants include
certain restrictions on the payment of cash dividends without the consent of the lenders in certain circumstances.
Performance of Obligations
The Company's success depends in large part on whether it fulfills its obligations with clients and maintains client satisfaction. If Cathedral fails to
satisfactorily perform its obligations, makes errors in the provision of its services, or does not perform its services to the expectations of its clients, its
clients could terminate working relationships, including master service agreements, exposing Cathedral to loss of its professional reputation and risk
of loss or reduced profits, or in some cases, the loss of a project and claims by customers for damages. Typically, Cathedral's master service
agreements do not contain any guaranteed payments and are cancellable on 30 or less days' notice.
Access to Capital
The credit facilities of Cathedral contain covenants that require it to meet certain financial tests and that restrict, among other things, the ability of
Cathedral to incur additional debt, make significant acquisitions, dispose of assets or pay dividends in certain circumstances. To the extent the cash
flow from operations is not adequate to fund Cathedral's cash requirements, external financing may be required. Lack of timely access to such
Cathedral Energy Services Ltd. - 2019 Annual Report
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additional financing, or which may not be on favorable terms, could limit the future growth of the business of Cathedral and, potentially have a material
adverse effect on the amount of cash available for dividends. To the extent that external sources of capital, including public and private markets,
become limited or unavailable, Cathedral's ability to make the necessary capital investments to maintain or expand its business and to make necessary
principal payments under its credit facility may be impaired.
Forward-looking Information May Prove Inaccurate
Numerous statements containing forward-looking information are found in this MD&A, documents incorporated by reference herein and other
documents forming part of Cathedral's public disclosure record. Such statements and information are subject to risks and uncertainties and involve
certain assumptions, some, but not all, of which are discussed elsewhere in this document. The occurrence or non-occurrence, as the case may be,
of any of the events described in such risks could cause actual results to differ materially from those expressed in the forward-looking information.
Interest Rates
Cathedral's current credit facility bears interest at a floating interest rate and, therefore, to the extent Cathedral borrows under this facility, it is at risk
of rising interest rates. Management continually monitors interest rates and would consider locking in the rate of its term debt.
Debt Service
Cathedral has a $20 million credit facility with a syndicate of lenders consisting of Alberta Treasury Branches and Export Development Canada
consisting of a revolving facility of $15 million and a $5 million operating facility with a maturity date of December 31, 2021. Although it is believed that
the credit facility is sufficient, there can be no assurance that the amount will be adequate for the financial obligations of Cathedral. As well, if Cathedral
requires additional financing such financing may not be available or, if available, may not be available on favorable terms. Cathedral's lenders have
been provided with security over substantially all of the assets of Cathedral. There is no assurance that the existing credit facility will be extended
beyond its maturity date.
In light of the current volatility in oil and natural gas prices and uncertainty regarding commodity price levels in the future there is a risk that the
Corporation could temporarily breach the covenants included in its credit facility. If the Corporation does temporarily breach these covenants, the credit
facility could become due and payable on demand.
Additional Shares
If the Board of Cathedral decides to issue additional common shares, preferred shares or securities convertible into common shares, existing
shareholders may suffer significant dilution.
Unpredictability and Volatility of Share Price
The prices at which the common shares trade cannot be predicted. The market price of the common shares could be subject to significant fluctuations
in response to variations in quarterly financial results and other factors including the payment of a dividend and prevailing financial market factors and
investor interest in the Company or the industry the Company operates in. The market price of the common shares may also be impacted by other
factors including the net asset value of Cathedral’s assets which will vary from time to time depending on factors beyond our control.
In addition, the securities markets have experienced significant market wide and sectorial price and volume fluctuations from time to time that often
have been unrelated or disproportionate to the operating performance of particular issuers. Such fluctuations may adversely affect the market price of
the common shares.
Income Tax Matters
The business and operations of Cathedral are complex and Cathedral and its predecessors have executed a number of significant financings,
reorganizations, acquisitions and other material transactions over the course of its history. The computation of income taxes payable as a result of
these transactions involves many complex factors as well as Cathedral's interpretation of relevant tax legislation and regulations.
Cathedral's management believes that the provision for income tax is adequate and in accordance with generally accepted accounting principles and
applicable legislation and regulations. However, tax filing positions are subject to review by taxation authorities who may successfully challenge
Cathedral's interpretation of the applicable tax legislation and regulations. It is also possible that tax authorities may retroactively or prospectively
amend tax legislation or its interpretation, which could affect Cathedral's current and future income taxes.
Key Personnel and Employee/Sub-contractor Relationships
Shareholders must rely upon the ability, expertise, judgment, discretion, integrity and good faith of the management and employees of Cathedral. The
success of Cathedral is dependent upon its personnel and key sub-contractors. The unexpected loss or departure of any of Cathedral's key officers,
employees or sub-contractors could be detrimental to the future operations of Cathedral. In addition, should circumstances exist that prevent
Cathedral's employees and sub-contractors from performing their duties, such as natural disasters or impacts from global pandemics like COVID-19,
it could impact Cathedral's ability to deliver its products and services. Cathedral does not maintain key man insurance on any of its officers.
The success of Cathedral's business will depend, in part, upon Cathedral's ability to attract and retain qualified personnel as they are needed.
Additionally, the ability of Cathedral to expand its services is dependent upon its ability to attract additional qualified employees. During high levels of
activity, attracting quality staff can be challenging due to competition for such services. Cathedral provides its staff with a quality working environment,
effective training, tools with current technology and competitive remuneration packages that allows it to attract and retain the quality of its workforce,
whether in the field, shop or office. There can be no assurance that Cathedral will be able to engage the services of such personnel or retain its
current personnel.
Competition
The oil and natural gas service industry in which Cathedral and its operating entities conduct business is highly competitive. Cathedral competes with
other more established companies which have greater financial, marketing and other resources and certain of which are large international oil and
natural gas service companies which offer a wider array of oil and natural gas services to their clients than does Cathedral.
At any time there may be an excess of certain classes of oilfield service equipment in North America in relation to current levels of demand. The supply
of equipment in the industry does not always correlate to the level of demand for that equipment. Periods of high demand often spur increased capital
expenditures on oilfield service equipment, and those capital expenditures may result in equipment levels which exceed actual demand. In periods of
low demand, there may be excess equipment available within the industry resulting in equipment obsolescence. Excess equipment supply in the
industry could cause competitors to lower their rates and could lead to a decrease in rates in the oilfield services industry generally, which could have
an adverse effect on revenues, cash flows and earnings in the industry and for the Company.
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Access to Parts, Consumables and Technology and Relationships with Key Suppliers
The ability of Cathedral to compete and expand will be dependent on Cathedral having access, at a reasonable cost, to equipment, parts and
components for purchased equipment for the development and acquisition of new competitive technologies. An inability to access these items and
delays in accessing these items could have a material adverse effect on Cathedral's business, financial condition, results of operations and cash flow.
Cathedral's equipment may become obsolete or experience a decrease in demand due to competing products that are lower in cost, have enhanced
performance capabilities or are determined by the market to be more preferable for environmental or other reasons. Although Cathedral has very
good relationships with its key suppliers, there can be no assurances that those sources of equipment, parts, components or relationships with key
suppliers will be maintained. If these are not maintained, Cathedral's ability to compete may be impaired. If the relationships with key suppliers come
to an end, the availability and cost of securing certain parts, components and equipment may be adversely affected.
Technology
The success and ability of Cathedral to compete depends in part on the technologies that it brings to the market, and the ability of Cathedral to prevent
others from copying such technologies. Cathedral currently relies on industry confidentiality practices ("trade secrets"), including entering into industry
standard confidentiality agreements and in some cases patents (or patents pending) to protect its proprietary technology. Cathedral may have to
engage in litigation in order to protect its intellectual property rights, including patents or patents pending, or to determine the validity or scope of the
proprietary rights of itself or others. This kind of litigation can be time-consuming and expensive, regardless of whether or not Cathedral is successful.
Additionally, certain tools, equipment or technology developed by Cathedral may be the subject of future patent infringement claims or other similar
matters which could result in litigation, the requirement to pay licensing fees or other results that could have a material adverse effect on Cathedral's
business, results of operations and financial condition.
The intellectual property rights of Cathedral may be invalidated, circumvented, challenged, infringed or required to be licensed to others. It cannot be
assured that any steps Cathedral may take to protect its intellectual property rights and other rights to such proprietary technologies that are central
to Cathedral's operations will prevent misappropriation or infringement.
Cathedral competes with other more established companies which have greater financial resources to develop new technologies. Competitors may
also develop similar or substitute tools, equipment and technology to Cathedral's thereby adversely affecting Cathedral's competitive advantage and/or
market share. There may also be changes in customer or market requirements which make Cathedral’s technology obsolete or result in a lower
demand for Cathedral’s products and services. Certain competing technologies are beginning to enter Cathedral’s market which may have a negative
impact on Cathedral long term. RSS technology is becoming more cost-effective and can be used as a substitute for certain methods currently in place
by Cathedral. As a result, there is the risk that a larger portion of Cathedral’s customer base will move away from technology provided by Cathedral.
Although Cathedral intends to adopt processes to provide similar services and develop competing technology, there is no guarantee that it will be
successful and Cathedral is likely to face a number of challenges, including intellectual property matters and economic considerations, in order to
implement new competing technology.
Potential Replacement or Reduced Use of Products and Services
Certain of Cathedral's equipment or systems may become obsolete or experience a decrease in demand through the introduction of competing
products that are lower in cost, exhibit enhanced performance characteristics or are determined by the market to be more preferable for environmental
or other reasons. A change in customer requirements, may result in some of its equipment becoming technically obsolete or creating market
obsolescence based on lower demand which has resulted in write-downs of certain equipment and associated parts inventory. In addition, the drilling
industry is experiencing a trend towards automation, the impact of which on Cathedral’s business is not yet known. Cathedral will need to keep current
with the changing market for oil and natural gas services and technological and regulatory changes. If Cathedral fails to do so, this could have a
material adverse effect on its business, financial condition, results of operations and cash flows.
Operating Risks and Insurance
Cathedral has an insurance and risk management plan in place to protect its assets, operations and employees. However, Cathedral's oilfield services
are subject to risks inherent in the oil and natural gas industry, such as equipment defects, equipment obsolesce, malfunctions, failures, natural
disasters and errors and omissions by staff, some of which may not be covered by insurance. These risks could expose Cathedral to substantial
liability for personal injury, loss of life, business interruption, property damage or destruction, pollution and other environmental damages. Cathedral
attempts to obtain indemnification from its customers by contract for some of these risks in addition to having insurance coverage. These
indemnification agreements may not adequately protect against liability from all of the consequences described above. There may be situations in
which indemnifications provided by Cathedral are not covered by insurance. In addition, Cathedral's operating activities includes a significant amount
of transportation of equipment and vehicle travel by staff and therefore is subject to the inherent risks including potential liability which could result
from, among other things, personal injury, loss of life or property damage derived from motor vehicle accidents. Cathedral carries insurance to provide
protection in the event of destruction or damage to its property and equipment, subject to appropriate deductibles and the availability of coverage.
Liability insurance is also maintained at prudent levels to limit exposure, but not necessarily fully eliminate exposure to unforeseen incidents. An annual
review of insurance coverage is completed to assess the risk of loss and risk mitigation alternatives. It is anticipated that appropriate insurance
coverage is in place and will be maintained in the future, but there can be no assurance that such insurance coverage will be available in the future
on commercially reasonable terms or be available on terms as favorable as Cathedral's current arrangements. The occurrence of a significant event
outside of the coverage of Cathedral's insurance policies could have a material adverse effect on the results of the Company. If there is an event that
is not fully insured or indemnified against, or a customer or insurer does not meet its indemnification or insurance obligations, it could result in
substantial losses.
Energy companies are demanding wells be drilled, cheaper, longer and faster than wells drilled prior to the 2015/2016 industry downturn which has
adversely impacted Cathedral’s drilling equipment and may continue to do so. Since 2017, Cathedral experienced higher than previous levels of
equipment damages and equipment lost-in-hole than previous years and the pre-industry downturn levels which in part was due to changes in customer
drilling practices.
Business continuity, disaster recovery and crisis management
An inability to restore or replace critical capacity in a timely manner may impact business and operations. A serious event could have a material
adverse effect on Cathedral's business, results of operations and financial condition. This risk is mitigated by the development of business continuity
arrangements, including disaster recovery plans and back-up delivery systems, to minimize any business disruption in the event of a major disaster.
Insurance coverage may minimize any losses in certain circumstances.
Risks Associated with Foreign Operations
In the future, Cathedral may conduct a portion of its business outside North America through a number of means including projects, joint ventures and
partnerships and other business relationships. As such, Cathedral could be exposed to risks inherent in foreign operations including, but not limited
to: loss of revenue, property and equipment as a result of expropriation and nationalization, war, civil and/or labour unrest, strikes, terrorist threats,
Cathedral Energy Services Ltd. - 2019 Annual Report
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civil insurrection and other political risks; fluctuations in foreign currency and exchange controls; increases in duties, taxes and governmental royalties
and renegotiation of contracts with governmental entities; trade and other economic sanctions or other restrictions imposed by the Canadian
government or other governments or organizations; as well as changes in laws and policies governing operations of foreign‐based companies.
Carrying on business outside of Canada gives rise to the risk of dealing with business and political systems that are different than Cathedral is
accustomed to in Canada.
Weather and Seasonality
A portion of Cathedral's operations are carried on in western Canada where activity levels in the oilfield services industry are subject to a degree of
seasonality. Operating activities in western Canada are generally lower during "spring breakup" which normally commences in March and continues
through to May. Canadian operating activities generally increase in the fall and peak in the winter months from December until late March, depending
on weather conditions.
Activity levels in the oil and natural gas basins in the U.S. are not subject to the seasonality to the same extent that it occurs in the western Canada
region, however, U.S. operations can also be impacted by weather related issues. In general, activity levels in North America can be impacted year
round by weather conditions and temperatures, including major weather events such as summer and winter storms and hurricanes which can create
additional unpredictability in operational results.
Foreign Currency Exchange Rates
Cathedral derives a significant portion of its revenues from the U.S. which are denominated in the local currency. This causes a foreign currency
exchange rate risk which Cathedral attempts to mitigate by matching local purchases in the same currency. Furthermore, Cathedral's Canadian
operations are subject to foreign currency exchange rate risk in that some purchases for parts, supplies and components in the manufacture of
equipment are denominated in USD. Cathedral's foreign currency policy is to monitor foreign current risk exposure in its areas of operations and
mitigate that risk where possible by matching foreign currency denominated expense with revenues denominated in foreign currencies. Cathedral
strives to maintain limited amounts of cash and cash equivalents denominated in foreign currency on hand and attempts to further limit its exposure
to foreign currency through collecting and paying foreign currency denominated balance in a timely fashion.
In addition, Cathedral is exposed to currency exchange risk on those of its assets denominated in U.S. dollars. Since Cathedral presents its financial
statements in Canadian dollars, any change in the value of the Canadian dollar relative to the USD during a given financial reporting period would
result in a foreign currency loss or gain on the translation of its assets measured in other currencies into Canadian dollars. Consequently, Cathedral's
reported earnings could fluctuate materially as a result of foreign exchange translation gains or losses. Other than natural hedges arising from the
normal course of business in foreign jurisdictions, Cathedral does not currently have any hedging positions.
Business Transaction Risks
Cathedral expects to continue to selectively seek mergers, acquisitions and other types of business transactions in connection with its growth strategy.
Cathedral's ability to consummate and to integrate effectively any future mergers, acquisitions or other business transactions on terms that are
favorable to it may be limited by the number of attractive transaction targets, internal demands on Cathedral's resources, internal management
capabilities and to the extent necessary, Cathedral's ability to obtain financing on satisfactory terms for larger transactions, if at all. Business
transactions may expose Cathedral to additional risks, including: difficulties in integrating administrative, financial reporting, operational and information
systems and managing newly-acquired operations and improving their operating efficiency; difficulties in maintaining uniform standards, controls,
procedures and policies through all of Cathedral's operations; entry into markets in which Cathedral has little or no direct prior experience; difficulties
in retaining key employees of the acquired operations; disruptions to Cathedral's ongoing business; and diversion of management time and resources.
Business Development Risks
In implementing its strategy, Cathedral may pursue new business or growth opportunities. There is no assurance that Cathedral will be successful in
executing those opportunities. Cathedral may have difficulty executing the its strategy because of, among other things, increased competition, difficulty
entering new markets or geographies, difficulties in introducing new products, the ability to attract qualified personnel, barriers to entry into geographic
markets, and changes in regulatory requirements.
Credit Risk
All of Cathedral's accounts receivables are with customers involved in the oil and natural gas industry, whose revenue may be impacted by fluctuations
in commodity prices. Although collection of these receivables could be influenced by economic factors affecting this industry and thereby have a
materially adverse effect on operations, management considers risk of significant loss to be minimal at this time. To mitigate this risk, Cathedral's
customers are subject to an internal credit review along with ongoing monitoring of the amount and age of receivables balances outstanding.
Reliance on Major Customers
Management of Cathedral believes it currently has a good mix of customers. In 2019, approximately 27% of the Company’s revenue was attributable
to sales transactions with two customers. In 2018, approximately 15% of the Company’s revenue was attributable to sales transactions with a single
customer. In 2017, approximately 20% of the Company’s revenue was attributable to sales transactions with a single customer. While Cathedral
believes that its relationship with existing customers is good, the loss of any one or more of these customers, or a significant reduction in business
done with Cathedral by one or more of these customers, if not offset by sales to new or existing customers, could have a material adverse effect on
Cathedral's business, results of operations and prospects and therefore on the ability to pay dividends to shareholders in the future. Mergers and
acquisitions activity in the oil and natural gas exploration and production sector can impact demand for our services as customers focus on internal
reorganization prior to committing funds to significant oilfield services. In addition, demand for Cathedral's services could be negatively affected in that
upon completion, the merger and acquisitions customers may re-direct their work to Cathedral's competitors.
Climate Change and Environmental Risks
Reputational Risks
Due to the association of the oil and natural gas industry with climate change, environmental damage and other perceived negatives, a general
unfavorable perception of the oil and natural gas industry (including the Canadian industry) has developed among some populations in more
economically developed nations. Businesses operating in the oil and natural gas industry, including energy service companies such as Cathedral,
are increasingly being specifically associated with such negatives of the oil and natural gas industry as a whole and perceived to be contributing
them. Accordingly, there is a risk that Cathedral may be associated with the perceived negatives of the oil and natural gas industry, and that such
negative association will reduce demand for the Company's securities.
A limited number of banks have recently announced their intentions to cease funding certain fossil fuel projects by a certain point in the future.
Examples include HSBC, which announced in 2018 that it will cease financing most new coal plans, oil sands projects, and artic drilling, and the
European Investment Bank, which announced in 2019 that it will stop funding oil, gas and coal projects by the end of 2021. There is a risk that if
Cathedral Energy Services Ltd. - 2019 Annual Report
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a greater portion of the population develops a negative perception of the oil and natural gas industry, more banks will implement some form of a
prohibition on funding fossil fuel projects. A decrease in funding for oil and natural gas projects may reduce demand for Cathedral's services.
Environmental Regulations
Cathedral is subject to various environmental laws and regulations enacted in the jurisdictions in which it operates which govern the manufacture,
processing, importation, transportation, handling and disposal of certain materials used in Cathedral's operations. Cathedral has established
procedures to address compliance with current environmental laws and regulations and monitors its practices concerning the handling of
environmentally hazardous materials. However, there can be no assurance that Cathedral's procedures will prevent environmental damage
occurring from spills of materials handled by Cathedral or that such damage has not already occurred. On occasion, substantial liabilities to third
parties may be incurred. Cathedral may have the benefit of insurance maintained by it or the operator; however Cathedral may become liable
for damages against which it cannot adequately insure or against which it may elect not to insure because of high costs or other reasons.
There is growing concern about the apparent connection between the burning of fossil fuels and climate change. The issue of energy and the
environment has created intense public debate in Canada, the U.S. and around the world in recent years that is likely to continue for the
foreseeable future and could potentially have a significant impact on all aspects of the economy including the demand for hydrocarbons and
resulting in lower demand for Cathedral's services. There can be no assurance that the provincial, state and local governments or the Federal
Governments of Canada and U.S. and other jurisdictions in which Cathedral enters into to provide its services will not adopt new environmental
regulations, rules or legislation or make modifications to existing regulations, rules or legislation which could increase costs paid by Cathedral's
customers. An increase in environmental related costs could reduce Cathedral's customers' earnings and/or it could make capital expenditures
by Cathedral's customers uneconomic.
Cathedral is unable to predict the total impact of the potential and forthcoming regulations upon its business. As a user of hydrocarbons in its
business for heating and vehicles, Cathedral is impacted on an operational cost basis. Cathedral's customers may face increases in operating
costs in order to comply with legislation which could have the effect of curtailing exploration and development by oil and natural gas producers
and that in turn, could adversely affect Cathedral's operations by reducing demand for its services.
Policy Risk
The Company's operations and activities emit greenhouse gasses ("GHG") which may require the Company to comply with GHG emissions
legislation at the provincial or federal level. Climate change policy is evolving at regional, national and international levels, and political and
economic events may significantly affect the scope and timing of climate change measures that are ultimately put in place. Over the past several
years both the Government of Canada and the Government of Alberta announced various programs related to climate change and have made
certain commitments regarding regulating GHG and other air pollutants.
On April 1, 2019, the Government of Canada implemented a nation-wide price on carbon emissions. The federal levy applies to all Canadian
provinces and territories in which no provincial or territorial carbon pricing mechanism has been adopted, or in which such provincial or territorial
mechanism does exist but does not meet the criteria established by the Government of Canada. Following implementation of the federal levy,
the Government of Alberta repealed the provincial carbon levy that was in effect at the time, resulting in the federal levy being applied to the
province. The direct or indirect costs of compliance with GHG-related regulations may have a material adverse effect on Cathedral's business,
financial condition, results of operations and prospects. Some of Cathedral's operations may ultimately be subject to future regional, provincial
and/or federal climate change regulations to manage GHG emissions.
Given the evolving nature of the debate related to climate change and the control of GHG and resulting requirements, it is expected that current
and future climate change regulations will have the effect of increasing Cathedral's operating expenses and in the long-term reducing the demand
for certain of its services and operations, which could result in a decrease in the Corporation's profitability and a reduction in the value of its
assets or asset write-offs.
Extreme Weather
There has been public discussion that climate change may be associated with extreme weather conditions and increased volatility in seasonal
temperatures. Extreme weather could interfere with Cathedral's operations and increase the Corporation's costs, including shortening the length
of the Canadian and U.S. drilling seasons. At this time, the Corporation is unable to determine the extent to which climate change may lead to
increased storm or weather hazards affecting its operations and on the areas the Corporation and its suppliers and customers operate in.
Legal Risk
Concerns about climate change have resulted in a number of environmental activists and members of the public opposing carbon intensive
industries. Historically, political and legal opposition to carbon intensive industries focused on public opinion and the regulatory process. More
recently, however, there has been a movement to more directly hold governments and certain companies responsible for climate change through
climate litigation. In November 2018, ENvironment JEUnesse, a Quebec advocacy group, applied to the Quebec Superior Court to certify a class
action against the Government of Canada for climate related matters. In January 2019, the City of Victoria became the first municipality in Canada
to endorse a class action lawsuit against carbon emitters for climate-related harms. There can be no assurance that such legal proceedings may
not be directed towards the Corporation, its clients or other key players in the Canadian and U.S. oil and natural gas industry.
Government Regulation
The oil and natural gas industry in Canada and the U.S. is subject to federal, provincial, state and municipal legislation and regulation governing such
matters as land tenure, commodity prices, production royalties, production rates, environmental protection controls, the exportation of crude oil, natural
gas and other products, as well as other matters. The industry is also subject to regulation by governments in such matters, including laws and
regulations relating to health and safety, the conduct of operations, the protection of the environment and the manufacture, management,
transportation, storage and disposal of certain materials used in Cathedral's operations.
Government regulations may change from time to time in response to economic or political conditions. The exercise of discretion by governmental
authorities under existing regulations, the implementation of new regulations or the modification of existing regulations affecting the crude oil and
natural gas industry could reduce demand for Cathedral's services or increase its costs, either of which could have a material adverse impact on
Cathedral.
There can be no assurance that the provincial, state and local governments or the Federal Governments of Canada and U.S. and other jurisdictions
in which Cathedral enters into to provide its services will not adopt a new royalty regime or modify the methodology of royalty calculation which could
increase the royalties paid by Cathedral's customers. An increase in royalties could reduce Cathedral's customers' earnings and/or it could make
capital expenditures by Cathedral's customers uneconomic. Although Cathedral is not a direct investor in the oil and natural gas market, it does affect
Cathedral's customers' cash flow available to invest in drilling activity and other oilfield services.
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Safety Performance
Cathedral has programs in place to address compliance with current safety and regulatory standards. Cathedral has a corporate safety manager
responsible for maintaining and developing policies and monitoring operations consistent with those policies. Poor safety performance could lead to
lower demand for Cathedral's services. Standards for accident prevention in the oil and natural gas industry are governed by company safety policies
and procedures, accepted industry safety practices, customer-specific safety requirements, and health and safety legislation. Safety is a key factor
that customers consider when selecting an oilfield service company. A decline in Cathedral's safety performance could result in lower demand for
services, and this could have a material adverse effect on revenues, cash flows and earnings. Cathedral is subject to various health and safety laws,
rules, legislation and guidelines which can impose material liability, increase costs or lead to lower demand for services.
Conflict of Interest
Certain directors of Cathedral are also directors of oil and natural gas exploration and/or production entities and conflicts of interest may arise between
their duties as directors of Cathedral and as directors of such other companies. Such conflicts must be disclosed in accordance with, and are subject
to such other procedures and remedies as apply under the ABCA.
Legal Proceedings
Cathedral is involved in litigation from time to time. No assurance can be given as to the final outcome of any legal proceedings or that the ultimate
resolution of any legal proceedings will not have a materially adverse effect on Cathedral.
Risks associated with information technology systems
Cathedral is dependent upon information technology systems in the conduct of its operations. Any significant malfunction, breakdown, downtime,
invasion, virus, cyber-attack, security breach, destruction or interruption of these systems due to equipment or software failures or by employees,
others with access to Cathedral’s systems, or unauthorized persons could negatively impact its operations. To the extent any breakdown, downtime,
malfunction, invasion, cyber-attack or security breach results in disruption to Cathedral’s operations, loss or disclosure of, or damage to, its data or
confidential information, its reputation, business, results of operations and financial condition could be materially adversely affected. Cathedral’s
systems and insurance coverage for protecting against information technology or cyber security risks may not be sufficient. Although to date Cathedral
has not experienced any material losses relating to information technology failures or cyber-attacks, it may suffer such losses in the future. Cathedral
may be required to expend significant additional resources to continue to modify or enhance its protective measures, to investigate and remediate any
information security vulnerabilities or to maintain its information technology systems in good repair.
GOVERNANCE
The Audit Committee of the Board of Directors has reviewed this MD&A and the related audited consolidated financial statements and recommended
they be approved by the Board of Directors. Following a review by the full Board, the MD&A and audited consolidated financial statements were
approved.
SUPPLEMENTARY INFORMATION
Additional information regarding the Company, including the Annual Information Form ("AIF"), is available on SEDAR at www.sedar.com.
FORWARD LOOKING STATEMENTS
This MD&A contains certain forward-looking statements and forward-looking information (collectively referred to herein as "forward-looking
statements") within the meaning of applicable Canadian securities laws. All statements other than statements of present or historical fact are forward-
looking statements. Forward-looking statements are often, but not always, identified by the use of words such as "anticipate", "achieve", "believe",
"plan", "intend", "objective", "continuous", "ongoing", "estimate", "outlook", "expect", "may", "will", "project", "should" or similar words suggesting future
outcomes. In particular, this MD&A contains forward-looking statements relating to, among other things: believe we can regain the U.S. market share
we have lost since 2H of 2018 and this will be based upon overall job execution and our proprietary technology; for 2020 our technology focus will be
bringing to the market our RapidFire MWD platform; second phase of RapidFire MWD platform to be released later in 2020 will offer a retrievable
downhole generator which will reduce operating costs and allow for high power EM transmission on extended run applications; continue to focus on
strategic initiatives and making changes to our business to position us favorably over the long-term; based on our leading-edge technology and
executing our Better Performance Every Day mantra we are confident about our future prospects; we will continue to focus on what we can control –
costs, improving operational efficiencies and strategic sales and marketing of our offerings; we are firm believers that size and scale will be a key for
long-term viability of oilfield services companies and we will continue, as normal course of business, to explore opportunities to maximize shareholder
value and create that size and scale; to the extent oil prices improve, the industry may see expanded drilling programs in 2H 2020; our U.S. business
will be rebuilt as we progress through 2020; Cathedral is targeting to regain the market share that is has lost since 2H 2018; the rebuilding of our U.S.
business will be guided by the new management team that was put in place in mid to late 2019 and into early 2020; our focus is on our job execution,
use of our proprietary technology and providing such quality services at a fair price; within the Canadian market, industry experts are projecting the
2020 average rig count to be very similar to 2019 actual average of 134; our strategy in Canada is to maintain the optionality on future industry growth
through focusing on serving stronger customers in areas we have advantages in, maintaining a focused and lean cost structure and again leveraging
our differentiated technology advantages in the Canadian market; for 2020 our technology focus will be bringing to the market our RapidFire MWD
platform; despite a challenging 2019, we are both optimistic and confident about our future prospects; we will continue to focus on what we can control
– costs, improving operational efficiencies, bringing new technologies to the market and strategic sales and marketing of our offerings; and Cathedral
expects to comply with all covenants during 2020.
The Company believes the expectations reflected in such forward-looking statements are reasonable as of the date hereof but no assurance can be
given that these expectations will prove to be correct and such forward-looking statements should not be unduly relied upon.
Various material factors and assumptions are typically applied in drawing conclusions or making the forecasts or projections set out in forward-looking
statements. Those material factors and assumptions are based on information currently available to the Company, including information obtained
from third party industry analysts and other third party sources. In some instances, material assumptions and material factors are presented elsewhere
in this MD&A in connection with the forward-looking statements. You are cautioned that the following list of material factors and assumptions is not
exhaustive. Specific material factors and assumptions include, but are not limited to:
the performance of Cathedral's business
impact of economic and social trends;
oil and natural gas commodity prices and production levels;
capital expenditure programs and other expenditures by Cathedral and its customers;
the ability of Cathedral to retain and hire qualified personnel;
the ability of Cathedral to obtain parts, consumables, equipment, technology, and supplies in a timely manner to carry out its activities;
the ability of Cathedral to maintain good working relationships with key suppliers;
Cathedral Energy Services Ltd. - 2019 Annual Report
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the ability of Cathedral to retain customers, market its services successfully to existing and new customers and reliance on major customers;
risks associated with technology development and intellectual property rights;
obsolesce of Cathedral’s equipment and/or technology;
the ability of Cathedral to maintain safety performance;
the ability of Cathedral to obtain adequate and timely financing on acceptable terms;
the ability of Cathedral to comply with the terms and conditions of its credit facility;
the ability to obtain sufficient insurance coverage to mitigate operational risks;
currency exchange and interest rates;
risks associated with future foreign operations;
risks associated with acquisitions, dispositions and business development efforts;
environmental risks;
business risks resulting from weather, disasters and related to information technology;
changes under governmental regulatory regimes and tax, environmental, climate and other laws in Canada and the U.S.; and
competitive risks.
Forward-looking statements are not a guarantee of future performance and involve a number of risks and uncertainties some of which are described
herein. Such forward-looking statements necessarily involve known and unknown risks and uncertainties, which may cause the Company's actual
performance and financial results in future periods to differ materially from any projections of future performance or results expressed or implied by
such forward-looking statements. These risks and uncertainties include, but are not limited to, the risks identified in this MD&A and in the Company's
Annual Information Form under the heading "Risk Factors". Any forward-looking statements are made as of the date hereof and, except as required
by law, the Company assumes no obligation to publicly update or revise such statements to reflect new information, subsequent or otherwise.
All forward-looking statements contained in this MD&A are expressly qualified by this cautionary statement. Further information about the factors
affecting forward-looking statements is available in the Company's current Annual Information Form that has been filed with Canadian provincial
securities commissions and is available on www.sedar.com.
NON-GAAP MEASUREMENTS
Cathedral uses certain performance measures throughout this document that are not defined under GAAP. Management believes that these measures
provide supplemental financial information that is useful in the evaluation of Cathedral’s operations and are commonly used by other oilfield companies.
Investors should be cautioned, however, that these measures should not be construed as alternatives to measures determined in accordance with
GAAP as an indicator of Cathedral’s performance. Cathedral’s method of calculating these measures may differ from that of other organizations, and
accordingly, may not be comparable.
The specific measures being referred to include the following:
"Adjusted gross margin" - calculated as gross margin plus non-cash items (depreciation and share-based compensation); is considered a primary
i)
indicator of operating performance (see tabular calculation);
"Adjusted gross margin %" - calculated as adjusted gross margin divided by revenues; is considered a primary indicator of operating performance
ii)
(see tabular calculation);
iii)
"Adjusted EBITDAS" - defined as earnings before finance costs, unrealized foreign exchange on intercompany balances, taxes, depreciation,
non-recurring costs (including severance), write-down of equipment, write-down of inventory and share-based compensation; is considered an
indicator of the Company's ability to generate funds flow from operations prior to consideration of how activities are financed, how the results are taxed
and measured and non-cash expenses (see tabular calculation);
“Net equipment additions” – is equipment additions expenditures less proceeds from equipment lost down-hole. Cathedral uses net equipment
iv)
additions to assess net cash flows related to the financing of Cathedral’s equipment additions.
The following tables provide reconciliations from GAAP measurements to non-GAAP measurements referred to in this MD&A:
Adjusted gross margin
Cathedral Energy Services Ltd. - 2019 Annual Report
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Three months ended December 31Year ended December 302019201820192018Gross margin(3,701)$ (524)$ (7,747)$ 4,018$ Add non-cash items included in cost of sales:Write-down of inventory- 1,474 - 1,474 Depreciation 5,443 5,304 19,864 12,719 Share-based compensation19 56 117 180 Adjusted gross margin1,761$ 6,310$ 12,234$ 18,391$ Adjusted gross margin %9%15%10%11%
Adjusted EBITDAS
Cathedral Energy Services Ltd. - 2019 Annual Report
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Three months ended December 31Year ended December 302019201820192018Loss before income taxes(6,332)$ (6,106)$ (18,717)$ (6,139)$ Add:Depreciation included in cost of sales5,443 5,304 19,864 12,719 Depreciation included in selling, general and administrative expenses133 71 1,161 202 Share-based compensation included in cost of sales19 56 117 180 Share-based compensation included in selling, general and administrative expenses60 151 337 454 Finance costs172 181 593 443 Finance costs lease liabilities243 - 1,010 - Subtotal(262) (343) 4,365 7,859 Unrealized foreign exchange (gain) loss on intercompany balances(554) 1,814 (1,347) 2,260 Provision for settlement- - 425 - Write-down of inventory- 1,474 - 1,474 Non-recurring expenses114 467 444 467 Adjusted EBITDAS(702)$ 3,412$ 3,887$ 12,060$
MANAGEMENT’S REPORT
The consolidated financial statements have been prepared by the management in accordance with International Financial Reporting Standards
("IFRS") which is the basis for Canadian generally accepted accounting principles and, where appropriate, reflect estimates based upon management's
judgment. Financial information contained elsewhere in the annual report has been prepared on a consistent basis with that in the consolidated
financial statements. Additionally, management prepares the Management's Discussion and Analysis ("MD&A"). The MD&A is based on the
Company's financial results prepared in accordance with IFRS. The MD&A compares the audited financial results for the years ended December 31,
2019 and December 31, 2018.
Management is also responsible for a system of internal controls which is designed to provide reasonable assurance that the Company's assets are
safeguarded and accounting systems provide timely, accurate financial reports.
The Audit Committee of the Board of Directors, which is comprised of three independent directors who are not employees of the Company, has
reviewed in detail the consolidated financial statements with management and the external auditor. The Board of Directors has approved the
consolidated financial statements on the recommendation of the Audit Committee.
KPMG LLP, an independent firm of chartered professional accountants, have examined the Company's consolidated financial statements in
accordance with Canadian generally accepted auditing standards and provided an independent professional opinion. The auditors have full and
unrestricted access to the Audit Committee to discuss their audit and their related findings as to the integrity of the financial reporting process.
Signed:
P. Scott MacFarlane
President, Chief Executive Officer and Interim Chief Financial Officer
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INDEPENDENT AUDITORS' REPORT
To the Shareholders of Cathedral Energy Service Ltd.:
Opinion
We have audited the consolidated financial statements of Cathedral Energy Services Ltd. (the “Company”), which
comprise:
the consolidated statements of financial position as at December 31, 2019 and December 31, 2018
the consolidated statements of comprehensive loss for the years then ended
the consolidated statements of changes in shareholders’ equity for the years then ended
the consolidated statements of cash flows for the years then ended
and notes to the consolidated financial statements, including a summary of significant accounting policies
(Hereinafter referred to as the “financial statements”).
In our opinion, the accompanying financial statements present fairly, in all material respects, the consolidated financial
position of the Company as at December 31, 2019 and December 31, 2018, and its consolidated financial performance
and its consolidated cash flows for the years then ended in accordance with International Financial Reporting Standards
(IFRS).
Basis for Opinion
We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under
those standards are further described in the “Auditors’ Responsibilities for the Audit of the Financial Statements” section
of our auditors’ report.
We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the
financial statements in Canada and we have fulfilled our other ethical responsibilities in accordance with these
requirements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Emphasis of Matter –Change in Accounting Policy
We draw attention to Note 3 to the financial statements which indicates that the Company has changed its accounting
policy for leases and has applied that change using the modified retrospective method.
Our opinion is not modified in respect to this matter.
Other Information
Management is responsible for the other information. Other information comprises:
the information included in Management’s Discussion and Analysis to be filed with the relevant Canadian
Securities Commissions.
the information, other than the financial statements and the auditors’ report thereon, included in a document
entitled 2019 Annual Report.
Our opinion on the financial statements does not cover the other information and we do not and will not express any
form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information identified above
and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our
knowledge obtained in the audit and remain alert for indications that the other information appears to be materially
misstated.
We obtained the information included in Management’s Discussion and Analysis filed with the relevant Canadian
Securities Commissions and the information, other than the financial statements and the auditors’ report thereon,
included in a document entitled 2019 Annual Report as at the date of this auditors’ report. If, based on the work we have
performed on this other information, we conclude that there is a material misstatement of this other information, we are
required to report that fact in the auditors’ report.
We have nothing to report in this regard.
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Responsibilities of Management and Those Charged with Governance for the Financial Statements
Management is responsible for the preparation and fair presentation of the financial statements in accordance with
International Financial Reporting Standards (IFRS), and for such internal control as management determines is
necessary to enable the preparation of financial statements that are free from material misstatement, whether due to
fraud or error.
In preparing the financial statements, management is responsible for assessing the Company’s ability to continue as a
going concern, disclosing as applicable, matters related to going concern and using the going concern basis of
accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic
alternative but to do so.
Those charged with governance are responsible for overseeing the Company’s financial reporting process.
Auditors’ Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from
material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with
Canadian generally accepted auditing standards will always detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could
reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.
As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional
judgment and maintain professional scepticism throughout the audit.
We also:
Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error,
design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and
appropriate to provide a basis for our opinion.
The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error,
as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal
control.
Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control.
Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and
related disclosures made by management.
Conclude on the appropriateness of management's use of the going concern basis of accounting and, based on
the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast
significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material
uncertainty exists, we are required to draw attention in our auditors’ report to the related disclosures in the
financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on
the audit evidence obtained up to the date of our auditors’ report. However, future events or conditions may
cause the Company to cease to continue as a going concern.
Evaluate the overall presentation, structure and content of the financial statements, including the disclosures,
and whether the financial statements represent the underlying transactions and events in a manner that achieves
fair presentation.
Communicate with those charged with governance regarding, among other matters, the planned scope and
timing of the audit and significant audit findings, including any significant deficiencies in internal control that we
identify during our audit.
Provide those charged with governance with a statement that we have complied with relevant ethical
requirements regarding independence, and communicate with them all relationships and other matters that may
reasonably be thought to bear on our independence, and where applicable, related safeguards.
Cathedral Energy Services Ltd. - 2019 Annual Report
Page 20
Obtain sufficient appropriate audit evidence regarding the financial information of the companies or business
activities within the group Company to express an opinion on the financial statements. We are responsible for
the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.
The engagement partner on the audit resulting in this auditors’ report is Jason Stuart Brown.
Signed: "KPMG LLP"
Chartered Professional Accountants
Calgary, Canada
March 13, 2020
Cathedral Energy Services Ltd. - 2019 Annual Report
Page 21
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
December 31, 2019 and 2018
Dollars in ‘000s
Approved by the Directors:
Signed: "P. Scott MacFarlane"
Signed: "Rod Maxwell"
P. Scott MacFarlane
Director
Rod Maxwell
Director
Cathedral Energy Services Ltd. - 2019 Annual Report
Page 22
20192018AssetsCurrent assets:Cash (note 5)7,223$ 6,875$ Trade receivables (note 6)14,802 35,583 Prepaid expenses1,668 1,691 Inventories (note 7)10,423 11,750 Total current assets34,116 55,899 Equipment (note 8)46,882 61,068 Intangible assets (note 9)3,019 2,827 Right of use assets (note 10)19,590 - Deferred tax assets (note 11)2,693 1,976 Total non-current assets72,184 65,871 Total assets106,300$ 121,770$ Liabilities and Shareholders' EquityCurrent liabilities:Operating loan (note 13)-$ 188$ Trade and other payables (note 12)11,308 23,868 Current taxes payable314 991 Lease liabilities, current (note 10)2,145 89 Liability for settlements, current168 164 Total current liabilities13,935 25,300 Loans and borrowings (note 13)6,000 7,000 Liability for settlements, long-term156 327 Lease liabilities, long-term (note 10)18,117 - Total non-current liabilities24,273 7,327 Total liabilities38,208 32,627 Shareholders' equity:Share capital (note 14)88,155 88,155 Contributed surplus10,864 10,410 Accumulated other comprehensive income9,934 12,252 Deficit(40,861) (21,674) Total shareholders' equity68,092 89,143 Total liabilities and shareholders' equity106,300$ 121,770$ See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
Years ended December 31, 2019 and 2018
Dollars in ‘000s except per share amounts
Cathedral Energy Services Ltd. - 2019 Annual Report
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20192018Revenues (note 19)120,276$ 160,827$ Cost of sales (notes 7 and 16):Direct costs(108,042) (142,436) Write-down of inventory (note 7)- (1,474) Depreciation(19,864) (12,719) Share-based compensation(117) (180) Total cost of sales(128,023) (156,809) Gross margin(7,747) 4,018 Selling, general and administrative expenses (note 16):Direct costs(12,361) (15,040) Depreciation(1,161) (202) Share-based compensation(337) (454) Total selling, general and administrative expenses(13,859) (15,696) (21,606) (11,678) Technology group expenses (note 16)(2,368) (2,481) Gain on disposal of equipment6,005 10,623 Loss from operating activities(17,969) (3,536) Finance costs (note 17)(593) (443) Finance costs lease liabilities(1,010) - Foreign exchange gain (loss) (note 17)1,280 (2,160) Provision for settlements(425) - Loss before income taxes(18,717) (6,139) Income tax recovery (expense) (note 11):Current(1,285) (2,297) Deferred815 4,434 Derecognition of deferred tax asset- (13,059) Total income tax expense(470) (10,922) Loss(19,187) (17,061) Other comprehensive income (loss):Foreign currency translation differences for foreign operations(2,318) 4,108 Total comprehensive loss(21,505)$ (12,953)$ Loss per shareBasic(0.39)$ (0.34)$ See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 2019 and 2018
Dollars in ‘000s
Cathedral Energy Services Ltd. - 2019 Annual Report
Page 24
AccumulatedotherTotalContributedcomprehensiveshareholders'Share capitalsurplusincomeDeficitequityBalance at December 31, 201788,059$ 9,801$ 8,144$ (4,613)$ 101,391$ Total comprehensive income (loss) for year ended December 31, 2018 - - 4,108 (17,061) (12,953) Issue of shares upon exercise of options96 (25) - - 71 Share-based compensation- 634 - - 634 Total contributions by and distributions to shareholders96 609 - - 705 Balance at December 31, 201888,155$ 10,410$ 12,252$ (21,674)$ 89,143$ Total comprehensive loss for year ended December 31, 2019 - - (2,318) (19,187) (21,505) Issue of shares upon exercise of options- - - - - Share-based compensation- 454 - - 454 Total contributions by and distributions to shareholders- 454 - - 454 Balance at December 31, 201988,155$ 10,864$ 9,934$ (40,861)$ 68,092$ See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2019 and 2018
Dollars in ‘000s
Cathedral Energy Services Ltd. - 2019 Annual Report
Page 25
20192018Cash provided by (used in):Operating activities:Loss(19,187)$ (17,061)$ Items not involving cashDepreciation21,025 12,921 Share-based compensation454 634 Income tax (recovery) expense470 10,922 Gain on disposal of equipment(6,005) (10,623) Finance costs593 443 Finance costs lease liabilities1,010 - Provision for settlement425 - Unrealized foreign exchange (gain) loss on intercompany balances(1,347) 2,260 Write-down of inventory- 1,474 Cash flow - continuing operations(2,562) 970 Changes in non-cash operating working capital (note 18)9,247 4,044 Income taxes refunded (paid)(1,900) (1,282) Cash flow - operating activities4,785 3,732 Investing activities:Equipment additions(6,018) (17,391) Intangible asset additions(1,077) (1,226) Proceeds on disposal of equipment8,726 12,877 Changes in non-cash investing working capital (note 18)(284) (562) Cash flow - investing activities1,347 (6,302) Financing activities:Change in operating loan(188) (1,045) Repayments on lease liabilities(2,095) (205) Interest paid(1,603) (443) Repayments of loans and borrowings(1,000) - Payment on settlements(604) (316) Advances on loans and borrowings- 7,000 Proceeds on share issuance from exercise of share options- 71 Restricted cash- 1,514 Cash flow - financing activities(5,490) 6,576 Effect of exchange rate on changes on cash(294) 186 Change in cash348 4,192 Cash, beginning of year6,875 2,683 Cash, end of year7,223$ 6,875$ See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2019 and 2018
Dollars in ‘000s except per share and per option amounts
1. Reporting entity
Cathedral Energy Services Ltd. (the “Company” or “Cathedral”) is a company domiciled in Canada. The Company is a publicly traded company listed
on the Toronto Stock Exchange under symbol "CET". The consolidated financial statements of the Company as at and for the year ended December
31, 2019 comprise the Company and its 100% owned subsidiary, Cathedral Energy Services Inc. ("INC"), (together referred to as “Cathedral”). INC
is incorporated in the United States of America ("U.S.") and its functional currency is U.S. dollars ("USD").
The Company and INC are primarily involved and engaged in the business of providing directional drilling services to oil and natural gas companies
in western Canada and the U.S.
2. Basis of preparation
(a) Statement of compliance
The consolidated financial statements have been prepared in accordance with Canadian Generally Accepted Accounting Principles (“GAAP”) which
are defined as International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board (“IASB”). The
consolidated financial statements were authorized for issue by the Board of Directors on March 12, 2020.
(b) Basis of measurement
The consolidated financial statements have been prepared on the historical cost basis.
(c) Functional and presentation currency
These consolidated financial statements are presented in Canadian dollars ("CAD"), which is the Company’s presentation and functional currency. All
financial information presented in dollars has been rounded to the nearest thousand except for per share amounts.
(d) Use of estimates and judgments
The preparation of the consolidated financial statements in conformity with GAAP requires management to make judgments, estimates and
assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may
differ from these estimates.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the
estimates are revised and in any future periods affected.
Areas that require management to make significant judgment and estimates in determining the amounts recognized in these consolidated financial
statements include, but are not limited to the following:
Judgments
(i) Current and deferred income taxes
The Company must make determinations on whether to record amounts for various tax pools it has available for future use. In making this
determination, the Company looks at future expectations to determine what amounts, if any, can be recognized. The Company also reviews all tax
assessments to determine which assessments it concurs with and will record in its records and which assessments it disputes and which it expects
to be changed. If the Company believes it is more likely than not that the assessment was incorrect, it does not make a provision for a liability in its
accounts. As such, the provisions for current and deferred income taxes are subject to measurement uncertainty.
(ii) Recognition of contingent liabilities
The determination if a contingent liability requires an accrual in the financial statements or only requires disclosure is an area that requires significant
judgment. In making this determination, management reviews the specific details of the contingency and may seek professional help if the matter
is of sufficient complexity. For items not recorded as contingent liabilities, there is also a determination required if the amount of claim would be
material, as only material amounts are disclosed in financial statements. As at December 31, 2019, the Company had no material contingent
liabilities.
Estimates
(i) Equipment
The Company makes estimates about the residual value and expected useful life of equipment. These estimates are impacted by estimates for
usage, technology changes, customer requirements and other factors. These estimates are based on management’s historical experience and
industry norms. Expected useful life and depreciation rates are as disclosed in note 3 (d) (iii).
(ii)
Impairment of assets
Equipment and intangibles are assessed for impairment when circumstances suggest that the carrying amount may exceed the recoverable amount
for the asset. These calculations require estimates and assumptions and are subject to change as new information becomes available. These
estimates include number of years of cash flow available from the assets, growth rates, pre-tax discount rates as well as various estimates and
assumptions used in the preparation of revenues and expenses used in the cash flow analysis.
Trade accounts receivable require estimates to be made regarding the financial stability of the Company’s customers and the environment in which
they operate in order to assess if accounts receivable balances will be received. Credit risks for outstanding accounts receivable are assessed
regularly and an allowance for doubtful accounts is recorded based upon specific customer information and experience as well as for groups of
similar assets. See note 22 “Credit risk” for further details.
Inventory is reviewed periodically in order to determine if there is obsolescence. This estimate is based upon historic data and management’s
estimates of future demand.
(iii)
Income taxes
The Company uses the asset and liability method of accounting for future income taxes whereby deferred income tax assets and liabilities are
determined based on temporary differences between the accounting basis and the tax basis of the assets and liabilities, and are measured using
Cathedral Energy Services Ltd. - 2019 Annual Report
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
substantively enacted tax rates and laws expected to apply when these differences reverse. As a result, a projection of taxable income is required
for those years, as well as an assumption of the ultimate recovery/settlement period for the temporary differences.
The business and operations of the Company are complex and the Company has executed a number of significant financings, reorganizations,
acquisitions and other material transactions over the course of its history. The computation of income taxes payable resulting from these
transactions involves many complex factors as well as the Company's interpretation of relevant tax legislation and regulations. The Company's
management believes that the provision for income tax is adequate and in accordance with GAAP and applicable legislation and regulations.
However, tax-filing positions are subject to review by taxation authorities who may successfully challenge the Company's interpretation of the
applicable tax legislation and regulations.
3. Significant accounting policies
The accounting policies set out below have been applied consistently by the Company to all periods presented in these consolidated financial
statements unless otherwise indicated.
(a) Basis of consolidation
Business combinations are accounted for using the acquisition method of accounting in which the identifiable assets acquired, liabilities assumed and
any non-controlling interest are recognized and measured at their fair value at the date of acquisition. Any excess of the purchase price plus any non-
controlling interest over the fair value of the net assets acquired is recognized as goodwill. Any deficiency of the purchase price over the fair value of
the net assets acquired is credited to net earnings.
At acquisition, goodwill is allocated to each of the CGUs to which it relates. Subsequent measurement of goodwill is at cost less any accumulated
impairment losses.
(i) Subsidiaries
Subsidiaries are entities controlled by Cathedral. The financial statements of subsidiaries are included in the consolidated financial statements from
the date that control commences until the date that control ceases. The accounting policies of subsidiaries align with the policies adopted by
Cathedral.
(ii) Transactions eliminated on consolidation
Intra-group balances and transactions, and any unrealized income, expenses, gains or losses arising from intra-group transactions, are eliminated
in preparing the consolidated financial statements.
(b) Foreign currency
(i) Foreign currency transactions
All transactions that are not denominated in an entity's functional currency are foreign currency transactions. These transactions are initially
recorded in the functional currency by applying the appropriate daily rate which best approximates the actual rate of transaction.
CAD is the functional and presentation currency of the Company. The functional currency of Cathedral's subsidiary is listed in note 1.
Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange
rate at that date. All differences are recognized in the consolidated statement of comprehensive income.
Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the
transaction.
(ii) Foreign operations
The assets and liabilities of foreign operations are translated to CAD at exchange rates at the reporting date. The income and expenses of foreign
operations are translated to CAD at exchange rates at the dates of the transactions.
Foreign currency differences are recognized in other comprehensive income and have been recognized in accumulated other comprehensive
income (‘AOCI’) in the cumulative translation. When a foreign operation is disposed of, the relevant amount in AOCI (in the cumulative translation
account) is transferred to profit or loss as part of the profit or loss on disposal. On the partial disposal of a subsidiary that includes a foreign operation,
the relevant proportion of such cumulative amount is reattributed to non-controlling interest. In any other partial disposal of a foreign operation, the
relevant proportion is reclassified to profit or loss.
(c) Financial instruments
(i) Financial assets
Initial recognition and measurement
Financial assets within the scope of IFRS 9 are classified as financial assets at amortized cost, fair value through profit or loss or fair value
through other comprehensive income, as appropriate. The Company determines the classification of its financial assets at initial recognition,
based on trade date. All financial assets are recognized initially at fair value. The Company’s financial assets include cash, and trade
receivables. All financial assets are measured at amortized cost.
Subsequent measurement
Financial assets at fair value through profit or loss
The Company has no financial assets at fair value through profit or loss.
Impairment of financial assets
A financial asset other than those carried at fair value through profit or loss is assessed for indicators of impairment at each reporting date. A
financial asset is impaired if objective evidence indicates that a loss event has occurred after the initial recognition of the asset, and that the
loss event had a negative effect on the estimated future cash flows of that asset that can be reliably estimated.
Financial assets carried at amortized cost
For financial assets carried at amortized cost, the Company applies the simplified approach to measuring expected credit losses which uses
a lifetime expected loss allowance for all trade receivables. Trade receivables are written off when there is no reasonable expectation of
Cathedral Energy Services Ltd. - 2019 Annual Report
Page 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
recovery.
(ii) Financial liabilities
Initial recognition and measurement
Financial liabilities within the scope of IFRS 9 are classified as financial liabilities at fair value through profit or loss or at amortized cost. The
Company determines the classification of its financial liabilities at initial recognition. All financial liabilities are recognized initially at fair value
and in the case of other financial liabilities, plus directly attributable transaction costs. The Company’s financial liabilities include operating
loan, trade and other payables, leases loans and borrowings and provision for settlement. All financial liabilities are measured at amortized
cost.
Subsequent measurement
After initial recognition, interest bearing loans and borrowings are subsequently measured at amortized cost using the effective interest rate
("EIR") method. Gains and losses are recognized in the consolidated statements of earnings when the liabilities are derecognized as well as
through the EIR method amortization process. The EIR amortization is included in interest expense in the consolidated statements of earnings.
Derecognition and modification
A financial liability is derecognized when the obligation under the liability is discharged, cancelled or expires. When an existing financial liability
is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such
an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the
respective carrying amounts is recognized in the consolidated statements of earnings.
(iii) Offsetting of financial instruments
Financial assets and financial liabilities are offset and the net amount reported in the consolidated statements of financial position if there is a
currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the assets and
settle the liabilities simultaneously.
(d) Equipment
(i) Recognition and measurement
Items of equipment are measured at cost less accumulated depreciation and accumulated impairment losses.
Cost includes expenditure that is directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials
and direct labour, any other costs directly attributable to bringing the assets to a working condition for their intended use, the costs of dismantling
and removing the items and restoring the site on which they are located, and borrowing costs on qualifying assets.
Purchased software that is integral to the functionality of the related equipment is capitalized as part of that equipment.
When parts of an item of equipment have different useful lives, they are accounted for as separate items (major components) of equipment.
Gains and losses on disposal of an item of equipment are determined by comparing the proceeds from disposal with the carrying amount of
equipment, and are recognized net within other income in profit or loss.
(ii) Subsequent costs
The cost of replacing a part of an item of equipment is recognized in the carrying amount of the item if it is probable that the future economic benefits
embodied within the part will flow to Cathedral, and its cost can be measured reliably. The carrying amount of the replaced part is derecognized.
The costs of the day-to-day servicing of equipment (repair and maintenance) are recognized in profit or loss as incurred.
(iii) Depreciation
Depreciation is calculated over the depreciable amount, which is the cost of an asset, or other amount substituted for cost, less its residual value.
Depreciation is recognized in profit or loss on either a straight-line or diminishing balance basis over the estimated useful lives of each part of an
item of equipment.
Items of equipment are depreciated from the date that they are installed and are available for use, or in respect of internally constructed assets,
from the date that the asset is completed and available for use.
The estimated useful lives, depreciation rates and depreciation methods for the current and comparative periods are as follows:
Depreciation methods, useful lives and residual values are reviewed at each year and adjusted if appropriate.
Cathedral Energy Services Ltd. - 2019 Annual Report
Page 28
Estimated life in yearsDepreciation ratesDepreciation methodDirectional drilling equipment5 to 825 to 37.5%Declining balanceOffice and computer equipment3.0 to 11.520 to 55%Declining balanceAutomotive equipment8 to 11.520 to 30%Declining balanceLeasehold improvements520%Straight-line
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(e)
Intangible assets
(i)
Internally generated intangible asset - Research and development
Expenditure on research activities, undertaken with the prospect of gaining new scientific or technical knowledge and understanding, is recognized
in profit or loss as incurred.
Development activities involve a plan or design for the production of new or substantially improved products and processes. Development
expenditure is capitalized only if development costs can be measured reliably, the product or process is technically and commercially feasible, future
economic benefits are probable, and Cathedral intends to and has sufficient resources to complete development and to use or sell the asset. The
expenditure capitalized includes the cost of materials, direct labour, overhead costs that are directly attributable to preparing the asset for its intended
use, and borrowing costs on qualifying assets. Other development expenditure is recognized in profit or loss as incurred.
Capitalized development expenditure is measured at cost less accumulated amortization and accumulated impairment losses.
(ii) Subsequent expenditure
Subsequent expenditure is capitalized only when it increases the future economic benefits embodied in the specific asset to which it relates. All
other expenditure, including expenditure on internally generated goodwill and brands, is recognized in profit or loss as incurred.
(iii) Amortization
Amortization is calculated on the cost of the asset less its residual value.
Amortization is recognized in profit or loss on a straight-line basis over the estimated useful lives of intangible assets from the date that they are
available for use, since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. The
estimated useful life for capitalized development costs is 5 years.
Amortization methods, useful lives and residual values are reviewed at each financial year-end and adjusted if appropriate.
(f)
Inventories
Inventories are measured at the lower of cost and net realizable value. The cost of inventories is based on the average cost principle, and includes
expenditure incurred in acquiring the inventories, production or conversion costs and other costs incurred in bringing them to their existing location
and condition.
Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses.
(g)
Impairment
(i) Financial assets (including receivables)
A financial asset other than those carried at fair value through profit or loss is assessed for indicators of impairment at each reporting date. A
financial asset is impaired if objective evidence indicates that a loss event has occurred after the initial recognition of the asset, and that the loss
event had a negative effect on the estimated future cash flows of that asset that can be reliably estimated.
Trade receivables are recognized and carried at original invoice amount less an allowance for any amounts estimated to be uncollectible. The
Company calculates an expected credit loss based on historical experience of bad debts and specific provisions created when there is objective
evidence that the collection of the full amount of a receivable is no longer probable under the terms of the original invoice. The amount of this
allowance represents management's best estimate of expected credit losses. Trade receivables are derecognized when they are assessed as
uncollectible.
(ii) Non-financial assets
The carrying amounts of Cathedral’s non-financial assets, other than inventories and deferred tax assets are reviewed at each reporting date to
determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated.
The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value
in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments
of the time value of money and the risks specific to the asset. For the purpose of impairment testing, assets that cannot be tested individually are
grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows
of other assets or groups of assets (the “cash-generating unit", or "CGU”). For the purposes of goodwill impairment testing, goodwill acquired in a
business combination is allocated to CGUs that are expected to benefit from the synergies of the combination. This allocation is subject to an
operating segment ceiling test and reflects the lowest level at which that goodwill is monitored for internal reporting purposes.
Cathedral’s corporate assets do not generate separate cash inflows. If there is an indication that a corporate asset may be impaired, then the
recoverable amount is determined for the CGU to which the corporate asset belongs.
An impairment loss is recognized if the carrying amount of an asset or its CGU exceeds its estimated recoverable amount. Impairment losses are
recognized in profit or loss. Impairment losses recognized in respect of CGUs are allocated first to reduce the carrying amount of any goodwill
allocated to the units, and then to reduce the carrying amounts of the other assets in the unit (group of units) on a pro rata basis.
An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognized in prior periods are assessed at
each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change
in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does
not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized.
(h) Employee benefits
(i) Termination benefits
Termination benefits are recognized as an expense when Cathedral is committed demonstrably, without realistic possibility of withdrawal, to a formal
detailed plan either to terminate employment before the normal retirement date, or to provide termination benefits because of an offer made to
encourage voluntary redundancy. Termination benefits for voluntary redundancies are recognized as an expense if Cathedral has made an offer of
voluntary redundancy, it is probable that the offer will be accepted, and the number of acceptances can be estimated reliably. If benefits are payable
more than 12 months after the reporting period, then they are discounted to their present value.
Cathedral Energy Services Ltd. - 2019 Annual Report
Page 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ii) Short-term employee benefits
Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided.
A liability is recognized for the amount expected to be paid under short-term cash bonus or profit-sharing plans if Cathedral has a present legal or
constructive obligation to pay this amount because of past service provided by the employee, and the obligation can be estimated reliably.
(iii) Share-based payment transactions – equity settled
The grant date fair value of share-based payment awards granted to employees, directors and consultants is recognized as an employee expense,
with a corresponding increase in equity, over the period that the employees unconditionally become entitled to the awards (vesting period). The
amount recognized as an expense is adjusted to reflect the number of awards for which the related service and non-market vesting conditions are
expected to be met, such that the amount ultimately recognized as an expense is based on the number of awards that do meet the related service
and non-market performance conditions at the vesting date.
Share-based payment arrangements in which Cathedral receives goods or services as consideration for its own equity instruments are accounted
for as equity-settled share-based payment transactions.
(i) Revenue
The Company provides directional drilling services. Revenue is recognized when a customer obtains control of the good or services. Determining the
timing of the transfer of control (at a point in time or over time) requires judgement. Revenue for these services are recognized over time based on
drilling days. Invoices are generated at the end of the job and are due based on the Master Service Agreement with client or Cathedral's signed Terms
and Conditions, generally 30 or 60 days. Cathedral’s services are generally sold based upon service orders or contracts with customers that include
fixed or determinable prices based upon daily, hourly or job rates.
(j) Finance income and costs
Finance costs comprise interest expense on borrowings, bank charges and other interest and foreign exchange gains or losses. Borrowing costs that
are not directly attributable to the acquisition, construction or production of a qualifying asset are recognized in profit or loss using the effective interest
method.
Foreign currency gains and losses are reported on a net basis.
(k)
Income tax
Income tax expense comprises current and deferred tax. Current tax and deferred tax are recognized in profit or loss except to the extent that it relates
to a business combination, or items recognized directly in equity or in other comprehensive income.
Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at
the reporting date, and any adjustment to tax payable in respect of previous years.
Deferred tax is recognized in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for taxation purposes. Deferred tax is not recognized for the following temporary differences: the initial recognition of assets or
liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss, and differences relating to
investments in subsidiaries to the extent that it is probable that they will not reverse in the foreseeable future. In addition, deferred tax is not recognized
for taxable temporary differences arising on the initial recognition of goodwill. Deferred tax is measured at the tax rates that are expected to be applied
to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax
assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by
the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis
or their tax assets and liabilities will be realized simultaneously.
A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future
taxable income will be available against which they can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the
extent that it is no longer probable that the related tax benefit will be realized. However, as the Company's Canadian entity has a history of recent tax
losses, the Company only recognizes deferred tax assets to the extent that there is convincing other evidence that sufficient taxable income will be
available to realize the tax pools.
(l) Earnings per share
Cathedral presents basic and diluted earnings per share ("EPS") data for its common shares. Basic EPS is calculated by dividing the profit or loss
attributable to common shareholders of the Company by the weighted average number of common shares outstanding during the period. Diluted EPS
is determined by adjusting the profit or loss attributable to common shareholders and the weighted average number of common shares outstanding,
adjusted for own shares held, for the effects of all dilutive potential common shares, which comprise share options granted to employees, directors
and consultants.
(m) New accounting standards
(i) Revenue
The Company has adopted IFRS 15 Revenue from Contracts with Customers ("IFRS 15") and IFRS 9 Financial Instruments ("IFRS 9") at January
1, 2018. The adoption of these standards did not have a material effect on the Company's financial statements.
Under IFRS 15, revenue is recognized when a customer obtains control of the good or services. Determining the timing of the transfer of control
(at a point in time or over time) requires judgement.
The Company provides directional drilling services. Revenue for these services are recognized over time based on drilling days. Invoices are
generated at the end of the job and are due based on the Master Service Agreement with client or Cathedral's signed Terms and Conditions,
generally 30 or 60 days.
(ii) Financial instruments
Under IFRS 9, financial assets and liabilities are classified and measured at amortized cost, fair value through other comprehensive income or
fair value through profit and loss. The classification of financial assets and liabilities is generally based on the business model in which the asset
or liability is managed and its contractual cash flow characteristics. Financial assets held within a business model whose objective is to collect
Cathedral Energy Services Ltd. - 2019 Annual Report
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
contractual cash flows and whose contractual terms give rise to cash flows on specified dates that are solely payments of principal and interest
on the principal amount outstanding are measured at amortized cost. After their initial fair value measurement, trade receivable, trade and other
payables, operating loan, provision for settlement and loans and borrowings are classified and measured at amortized cost using the effective
interest rate method. Upon initial recognition of a non-derivative financial asset, a loss allowance is recorded for expected credit losses (ECL).
Loss allowances for trade receivables are measured based on lifetime ECL, based on historical loss information adjusted for current economic
and credit conditions.
Under the previous standard, cash, restricted cash equivalents and trade receivable were classified as loans and receivables and operating loan,
trade and other payables, provision for settlement and loans and borrowings were classified as other financial liabilities. These are now all
classified as amortized cost. There were no changes to the carrying amount recognized in financial statements for any of these items.
(iii) Leases
The Company has adopted IFRS 16 Leases ("IFRS 16") effective January 1, 2019.
The Company utilized the modified retrospective approach in application of the standard. This resulted in the recognition of a lease liability and
a corresponding recognition of a right-of-use asset. The Company has chosen to recognize the right-of-use asset on January 1, 2019 at a value
equal to the related liability of the lease. The Company also used the exemption for any capital leases recognized prior to January 1, 2019 under
the previous standards and to only apply IFRS 16 to contracts that were previously identified as leases. As such, the Company did not apply the
standard to any contracts not previously identified as containing a lease. Exemptions were utilized for short-term leases where the term is 12
months or less and for leases of low value items. As well, the classification of cash flows were impacted as the presentation of operating lease
payments previously shown as operating cash flows will be split into financing (principal portion) and financing (interest portion) cash flows under
IFRS 16.
The modified retrospective approach does not require restatement of prior period financial information. Accordingly, comparative information in
the Company's financial statements are not restated.
As lease payments are made there is a reduction to the principal portion of the lease liability as well as an amount allocated to finance costs.
The finance cost is expensed over the lease term. The right of use asset is depreciated over the shorter of the asset's useful life and the lease
term on a straight-line basis. Cathedral uses a single discount rate for a portfolio of leases with reasonably similar characteristics.
The recognition of the present value of minimum lease payments using the Company's incremental borrowing rate on January 1, 2019 resulted
in an addition of $22,356 in right of use assets and lease liabilities. There were no adjustments to the opening deficit. The Company has
recognized lease liabilities in relation to lease arrangements previously disclosed as operating lease commitments. Upon recognition, the
Company's average incremental borrowing rate used in measuring lease liabilities was 4.7%. The leases recognized were all for rental of office
and shop locations.
(iv) Uncertainty over income tax treatments
The Company also adopted IFRS Interpretations Committee ("IFRIC") issued IFRIC 23 Uncertainty over Income Tax Treatments ("IFRIC 23")
which clarifies the accounting for uncertainties in income taxes. The adoption of this standard did not have any material impact on the Company's
financial statements.
4. Determination of fair values
A number of Cathedral’s accounting policies and disclosures require the determination of fair value, for both financial and non-financial assets and
liabilities. Currently all amounts are recognized at their amortized cost. Fair values would be determined for measurement and/or disclosure purposes
based on the following methods. When applicable, further information about the assumptions made in determining fair values is disclosed in the notes
specific to that asset or liability.
(a) Trade receivables
The fair value of trade receivables is estimated as the present value of future cash flows, discounted at the market rate of interest at the reporting date.
This fair value is determined for disclosure purposes.
(b) Non-derivative financial liabilities
Fair value, which is determined for disclosure purposes, is calculated based on the present value of future principal and interest cash flows, discounted
at the market rate of interest at the reporting date. For leases, the market rate of interest is determined by reference to similar lease agreements.
(c) Share-based payment transactions
The fair value of the employee share options is measured using the Black-Scholes option-pricing model. Measurement inputs include the share price
on measurement date, the exercise price of the instrument, the expected volatility (based on weighted average historic volatility adjusted for changes
expected due to publicly available information), the weighted average expected life of the instruments (based on historical experience and general
option holder behavior), the expected dividends, forfeiture rate per annum and the risk-free interest rate (based on government bonds). Service and
non-market performance conditions are not taken into account in determining fair value.
5. Cash
The Company’s cash consists of balances in accounts with financial institutions. This balance does not include any term deposits and temporary
investments or overdrafts.
6. Trade receivables
All of the Company’s amounts are trade receivables. This balance does not include any related party amounts or other loans and receivables. All
amounts are current assets. The Company’s exposure to credit and currency risks, and impairment losses related to trade receivables is disclosed in
note 22.
7.
Inventories
All of the Company’s inventories are composed of raw materials and consumables. There are no finished goods inventories. For the year ended
December 31, 2019, raw materials and consumables recognized as cost of sales were $32,206 (2018 - $45,295). At December 31, 2019, a review of
expected demand for inventory balances to be used in equipment repairs was conducted. In 2019, a write-down of $nil (2018 - $1,474) on inventory
was recognized.
Cathedral Energy Services Ltd. - 2019 Annual Report
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Equipment
Leased automotive equipment
The Company leases equipment under a number of finance lease agreements. The leased equipment secures the related lease obligations (see note
14). During 2019, there were non-cash fixed asset additions of $nil (2018 - $nil) related to finance lease arrangements.
Review for impairment and direct write-offs
The Company reviews the carrying value of equipment and intangible assets at each reporting period to determine if there are indicators of impairment.
The Company determined an impairment test for the sole directional drilling CGU was not required as at December 31, 2018. An impairment test was
conducted at December 31, 2019 due to declines in industry drilling activity.
Cathedral Energy Services Ltd. - 2019 Annual Report
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Effects ofBalancemovements inBalanceDecember 31Write-off fullyexchangeDecember 31Cost2017AdditionsdepreciatedDisposalsrates2018Directional Drilling equipment126,555$ 18,906$ -$ (6,846)$ 236$ 138,851$ Office and computer equipment8,356 153 - (27) 151 8,633 Automotive equipment under capital lease1,296 - - (147) 91 1,240 Automotive equipment1,213 - - (63) 88 1,238 Leasehold improvements1,072 71 (592) - (2) 549 Total138,492$ 19,130$ (592)$ (7,083)$ 564$ 150,511$ Effects ofBalancemovements inBalanceDecember 31Write-off fullyexchangeDecember 31Accumulated depreciation2017AdditionsdepreciatedDisposalsrates2018Directional Drilling equipment69,539$ 12,125$ -$ (2,906)$ 157$ 78,915$ Office and computer equipment7,580 308 - (24) 143 8,007 Automotive equipment under capital lease1,000 28 - (116) 75 987 Automotive equipment970 73 - (45) 75 1,073 Leasehold improvements1,020 28 (592) - 5 461 Total80,109$ 12,562$ (592)$ (3,091)$ 455$ 89,443$ Effects ofBalancemovements inBalanceDecember 31Write-off fullyexchangeDecember 31Cost2018AdditionsdepreciatedDisposalsrates2019Directional Drilling equipment138,851$ 6,713$ (110)$ (5,556)$ (144)$ 139,754$ Office and computer equipment8,633 281 (7,903) (107) (93) 811 Automotive equipment under capital lease1,240 - - (837) (38) 365 Automotive equipment1,238 156 - (52) (55) 1,287 Leasehold improvements549 - (95) (21) (5) 428 Total150,511$ 7,150$ (8,108)$ (6,573)$ (335)$ 142,645$ Effects ofBalancemovements inBalanceDecember 31Write-off fullyexchangeDecember 31Accumulated depreciation2018AdditionsdepreciatedDisposalsrates2019Directional Drilling equipment78,915$ 16,975$ (110)$ (1,917)$ (105)$ 93,758$ Office and computer equipment8,007 252 (7,903) - (89) 267 Automotive equipment under capital lease987 107 - (763) (30) 301 Automotive equipment1,073 67 - (38) (47) 1,055 Leasehold improvements461 19 (95) - (3) 382 Total89,443$ 17,420$ (8,108)$ (2,718)$ (274)$ 95,763$ Net book values20192018Directional Drilling equipment45,996$ 59,936$ Office and computer equipment544 626 Automotive equipment under capital lease64 253 Automotive equipment232 165 Leasehold improvements46 88 Total46,882$ 61,068$
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The recoverable amount of the CGU was determined using the discounted cash flow model for value-in-use for the CGU. This was determined based
on a detailed budget of revenues which was prepared based upon revenue forecasted by heads of sales departments. The budget was prepared with
consultation of senior operating managers and accounting staff based upon existing costs, historical information and anticipated cost reductions. The
detailed budget was used to prepare a high level for the next ten years. Variable costs were adjusted based on percentage of sales, while fixed costs
were maintained at current levels per activity day. U.S. cash flow projections thereafter have been extrapolated based on a 5% per annum growth
rate for the first three years and at 2.5% thereafter; Canadian cash flows were extrapolated at a 2.5% per annum growth. The forecasted cash flows
are based on management’s best estimates of pricing, activity levels, costs to maintain equipment and a pre‐tax discount rate of 17% per annum. A
terminal value was used based on the annual growth rate for cash flows through the remainder of the segment’s life. Based on these cash flows to
determine value in use, there was no impairment of equipment or intangible assets at December 31, 2019.
9.
Intangible assets
The Company’s intangible assets consist of materials and wages related to equipment development and improvement. The Company reviews the
accumulated costs at least quarterly. The 2019 internally developed additions contain $1,041 of technology group wages related to new product
development (2018 - $943).
10. Right of use asset and lease liabilities
Lease liabilities
At December 31, 2018, the Company had lease liabilities of $89 related to existing vehicle capital leases.
The maturity analysis of the undiscounted contractual balances of the lease liabilities is as follows:
Cathedral Energy Services Ltd. - 2019 Annual Report
Page 33
20192018CostBalance at January 14,219$ 2,993$ Internally developed additions1,077 1,226 Balance at end of year5,296$ 4,219$ Accumulated amortizationBalance at January 11,392$ 1,040$ Amortization for year885 352 Balance at end of year2,277$ 1,392$ Net carrying value at end of year3,019$ 2,827$ Right of use asset - Real property20192018Balance, beginning of year-$ -$ Initial recognition22,356 - Depreciation(2,718) - Exchange adjustments(48) - Balance, end of year19,590$ -$ Lease liabilitiesRealVehiclesPropertyTotalBalance, December 31, 201889$ -$ 89$ Initial recognition January 1, 201922,356 22,356 Interest8 1,002 1,010 Payments(39) (3,058) (3,097) Exchange adjustments(27) (69) (96) Subtotal31$ 20,231$ 20,262$ Less current portion(31) (2,114) (2,145) Lease liabilities, long-term-$ 18,117$ 18,117$ In one year or less3,019$ In more than one year, but not more than five years11,272 In more than five years10,418 Total24,709$
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Deferred tax assets and income tax expense
In 2018 Q4, Cathedral derecognized $13,059 of deferred tax assets due to a recent history of tax losses within Cathedral's Canadian entity.
Recognized deferred tax assets and liabilities
Deferred tax assets are attributable to the following:
Un-recognized deferred tax assets:
There are un-recognized deferred tax assets of $18,414 (2018 - $15,281) related to the following Canadian tax attributes:
Deferred tax assets have not been recognized in respect of the deductible temporary differences at December 31, 2019 or 2018 due to a recent history
of taxable losses in Canada. The non-capital losses have expiries ranging from 2035 to 2039 and investment tax credits have expiries from 2026 to
2037. The remaining tax attributes do not expire.
Movement in temporary differences during the year
Cathedral Energy Services Ltd. - 2019 Annual Report
Page 34
20192018Equipment(4,650)$ (7,512)$ Non-capital loss carry forwards6,011 6,320 Accrued expenses deductible in future years92 1,726 Inventory valuation allowance1,012 1,128 Intangible assets157 193 Provision for settlement71 121 Total2,693$ 1,976$ Gross amountTax effectGross amountTax effectNon-capital loss carry forwards35,194$ 8,341$ 17,003$ 4,591$ Scientific research and development expenditures17,531 4,155$ 17,531 4,733 Investment tax creditsn/a5,116 n/a5,116 Net capital loss carry forwards3,385 802$ 3,116 841 Total56,110$ 18,414$ 37,650$ 15,281$ 20192018BalanceBalanceDecember 31RecognizedRecognizedDecember 312017in profitin OCI2018Equipment(8,009)$ 434$ 63$ (7,512)$ Non-capital loss carry forwards9,302 (2,982) - 6,320 Accrued expenses deductible in future years- 1,726 - 1,726 Scientific research and development expenditures4,786 (4,786) - - Investment tax credits3,323 (3,323) - - Inventory valuation allowance749 379 - 1,128 Intangible assets207 (14) - 193 Provision for settlement180 (59) - 121 Total10,538$ (8,625)$ 63$ 1,976$ BalanceBalanceDecember 31RecognizedRecognizedDecember 312018in profitin OCI2019Equipment(7,512)$ 2,960$ (98)$ (4,650)$ Non-capital loss carry forwards6,320 (309) - 6,011 Accrued expenses deductible in future years1,726 (1,634) - 92 Inventory valuation allowance1,128 (116) - 1,012 Intangible assets193 (36) - 157 Provision for settlement121 (50) - 71 Total1,976$ 815$ (98)$ 2,693$
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The income taxes are based upon the estimated annual effective rates of 26.25% (2018 – 27%) for Canadian entities and 22.75% (2018 – 22.5%)
for U.S. entities. The income tax expense for the period is comprised as follows:
Income tax expense for 2019 and 2018 differs from the amount that would be expected by applying the expected statutory income tax rates for the
following reasons:
12. Trade and other payables
The Company’s exposure to currency and liquidity risk related to trade and other payables is disclosed in note 22.
13. Operating loan and Loans and borrowings
The Company's credit facility (the "Facility") consists of a $5 million operating facility and a $15 million extendible revolving credit facility and expires
December 31, 2021. The Facility is secured by a general security agreement over all present and future personal property. The Facility provides a
definition of EBITDA (“Credit Agreement EBITDA”) and Funded Debt to be used in calculation of financial covenants.
The financial covenants associated with the Facility are:
Consolidated Funded Debt to consolidated Credit Agreement EBITDA ratio shall not exceed 3.0:1; and
Consolidated interest coverage ratio shall not be less than 2.5:1.
As is customary, the facility includes a material adverse change clause as an event of default which would enable the lender to demand immediate
repayment of amounts outstanding if an event were to occur which is reasonably determined by the lender to represent a material adverse effect which
cannot be cured by Cathedral within the time period permitted under the facility.
The Facility bears interest at the financial institution’s prime rate plus 0.75% to 2.25% or bankers’ acceptance rate plus 1.75% to 3.00% with interest
payable monthly. Interest rate spreads for the Facility depend on the level of Funded Debt compared to the 12 month trailing Credit Agreement
EBITDA. The Facility provides a means to lock in a portion of the debt at interest rates through bankers' Acceptance (“BA”) based on the interest rate
spread on the date the BA was entered into.
Cathedral Energy Services Ltd. - 2019 Annual Report
Page 35
20192018Current tax (expense) recovery:Current period(729)$ (2,538)$ U.S. Franchise taxes(277) - Adjustment to prior period provisions(279) 241 Total current tax expense(1,285) (2,297) Deferred tax (expense) recovery:Origination and reversal of temporary differences815 4,111 Adjustment to prior period provisions- 323 Total deferred tax recovery815 4,434 Derecognition of deferred tax asset- (13,059) Income tax recovery (expense)(470)$ (10,922)$ 20192018Expected statutory tax rate26%27%Loss before income tax(18,717)$ (6,139)$ Effective tax rate applied to loss before income tax4,913$ 1,658$ Derecognition of deferred tax asset- (13,059) U.S. Franchise taxes(277) - Unrecognized changes in Canadian deferred tax assets(3,131) - Adjustment to deferred taxes for change in effective tax rates(1,848) (8) Income taxed in jurisdictions with different tax rates(139) (225) Non-deductible expenses(180) (243) Adjustment to prior year tax provisions(279) 564 Non-taxable portion of gain on disposal of property and equipment281 387 Other190 4 Total tax expense(470)$ (10,922)$ 20192018Trade payables5,938$ 14,597$ Accrued payables5,370 9,271 Total11,308$ 23,868$ 20192018Current liabilities:Operating loan-$ 188$ Non-current liabilities:Secured revolving term loan6,000 7,000 Total6,000$ 7,000$
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Compliance with Facility covenants
Based on current available information, Cathedral expects to comply with all covenants for the next twelve months.
At December 31, 2019, the Company had drawn $6,000 of its revolving credit facility, $nil of its operating facility and had $7,223 in cash. At December
31, 2019, the Company had consolidated Funded Debt of $311 which includes six outstanding Letters Of Credit (“LOC”). The Credit Agreement
EBITDA was $4,301.
The calculation of the financial covenants under the Facility as at December 31, 2019 is as follows:
Covenant
Consolidated funded debt to consolidated Credit Agreement EBITDA ratio
Consolidated interest coverage ratio
Actual Ratio
0.1
7.3:1
Required Ratio
3.0:1 (maximum)
2.5:1 (minimum)
14. Share capital
Authorized: An unlimited number of common shares and an unlimited number of preferred shares (issuable in series).
Common shares issued:
Issuance of common shares
Nil common shares (2018 - 84,166) were issued as a result of the exercise of vested options. Options were exercised at an average strike price of $nil
per option (2018 - $0.85). All issued shares are fully paid.
Issuance of share options
The Company's share based compensation plan is a "rolling number" type option plan which provides that the number of authorized but unissued
common shares that may be subject to options granted under the share option plan at any time can be up to 10% of the number of common shares
outstanding from time to time.
Under the plan, the exercise price of each option at the date of issuance equals the volume adjusted weighted average trading value of the Company's
common shares for the five days prior to the grant, and has a maximum term till expiry of ten years. Options issued in 2015 Q4 and subsequent vest
over a period of two years, options issued in 2015 Q3 and earlier vest over three years from the date of grant as employees, directors or consultants
render continuous service to the Company.
A summary of the status of the Company's equity based compensation plan as at December 31, 2019 and 2018, and changes during the years then
ended is presented below:
The range of exercise prices for the options outstanding at December 31, 2019 is as follows:
During the year ended December 31, 2019, the Company has recorded share-based compensation expense of $454 (2018 - $634) related to the
share option plan.
Cathedral Energy Services Ltd. - 2019 Annual Report
Page 36
NumberAmountNumberAmountIssued, beginning of period49,468,117 88,155$ 49,383,951 88,059$ Issued on exercise of options- - 84,166 96 Issued, end of period49,468,117 88,155$ 49,468,117 88,155$ 20192018WeightedWeightedaverageaverageNumberexercise priceNumberexercise priceOutstanding, beginning of year3,670,334 1.20$ 2,947,000 1.85$ Granted1,056,000 0.30 1,040,500 0.92 Expired or forfeited(967,834) 1.67 (233,000) 3.08 Exercised- - (84,166) 0.85 Outstanding, end of year3,758,500 0.82$ 3,670,334 1.20$ Exercisable, end of year2,118,117 1.05$ 1,607,665 1.46$ 20192018WeightedWeighted averageaverage remainingWeighted averageExercise price rangeNumberexercise pricelife (in years)Numberexercise price$0.30 to $0.501,044,000 0.30$ 2.66 - -$ $0.51 to $1.00894,500 0.92 1.68 298,177 0.92 $1.01 to $1.131,820,000 1.08 0.39 1,820,000 1.08 $0.30 to $1.13 total3,758,500 0.82$ 1.33 2,118,177 1.05$ Total outstanding optionsExercisable
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the year ended December 31, 2019, the Company granted 1,056,000 share options. The following table sets out the assumptions used in
applying the Black-Scholes model for the options issued as well as the resulting fair value:
15. Earnings (loss) per share
Basic earnings per share
The calculation of basic earnings per share at December 31, 2019 was based on the loss attributable to common shareholders of $(19,187) (2018 –
$(17,061)) and a weighted average number of common shares outstanding of 49,468,117 (2018 – 49,445,205), calculated as follows:
Weighted average number of ordinary shares
Diluted earnings per share
As both years have a loss, there is no dilutive effect on earnings per share. The weighted average number of common shares outstanding of
49,522,376 (2018 – 49,546,567) is calculated as follows:
Weighted average number of common shares (diluted)
At December 31, 2019, 2,629,166 options (2018 – 1,598,500) were excluded from the diluted weighted average number of common shares calculation
as their effect would have been anti-dilutive. The average market value of the Company’s common shares for purposes of calculating the dilutive effect
of share options was based on quoted market prices for the period during which the options were outstanding.
16. Nature of expenses
The nature of expenses can be specified as follows:
Cathedral Energy Services Ltd. - 2019 Annual Report
Page 37
2019 Q3Number of options issued1,056,000 Exercise price0.30$ Fair value per option (weighted average)0.12$ Expected annual dividend per share-$ Risk-free interest rate (weighted average)1.6%Expected share price volatility (weighted average)60.6%Forfeiture rate per annum10.0%20192018Issued January 149,468,117 49,383,951 Effect of shares issued during the year- 61,254 Weighted average number of common shares49,468,117 49,445,205 20192018Weighted average number of common shares (basic)49,468,117 49,445,205 Effect of share options on issue54,259 101,362 Weighted average number of common shares (diluted)49,522,376 49,546,567 Selling, generalCost of sales& administrativeTechnologyTotalYear ended December 31, 2019Depreciation and amortization(19,864)$ (1,161)$ -$ (21,025)$ Share-based compensation(117) (337) - (454) Staffing costs, excluding share-based compensation(46,502) (6,989) (2,137) (55,628) Repairs and maintenance(30,699) - - (30,699) Other expenses(30,841) (5,372) (231) (36,444) Total(128,023)$ (13,859)$ (2,368)$ (144,250)$ Year ended December 31, 2018Depreciation and amortization(12,719)$ (202)$ -$ (12,921)$ Write-down of inventory(1,474)$ -$ -$ (1,474) Share-based compensation(180) (454) - (634) Staffing costs, excluding share-based compensation(57,927) (9,203) (2,341) (69,471) Repairs and maintenance(45,292) - - (45,292) Other expenses(39,217) (5,837) (140) (45,194) Total(156,809)$ (15,696)$ (2,481)$ (174,986)$
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. Foreign exchange gain (loss) and finance costs
18. Changes in non-cash working capital
The components of changes in non-cash working capital are as follows:
19. Operating segments
The Company and its wholly owned subsidiary are engaged in the business of providing directional drilling services to oil and natural gas companies
in western Canada and the U.S., and is viewed as a single operating segment by the chief operating decision maker of the Company for the purpose
of resource allocation and assessing performance.
The amounts related to each geographic segment are as follows:
Geographical information
The Company conducts operations in the following geographic areas:
Major customer
In 2019 revenues from two customers of the Company represented approximately 27% (2018 –one customer at 15%) of the Company’s total revenues.
20. Commitments
In the normal course of business, the Company incurs contractual obligations. As at December 31, 2019, the Company’s commitment to purchase
equipment is approximately $218. Cathedral anticipates expending these funds in 2020 Q1.
The Company has issued the following six LOC:
three securing rent payments on property leases and renew annually with the landlords. The first two LOCs are for $700 CAD for the first
ten years of the lease and then reduce to $500 for the last five years of the lease. The second LOC is currently for $542 USD and increases
annually based upon annual changes in rent;
$75 USD issued for U.S. workers compensation coverage; and
two securing the Company’s corporate credit cards in the amounts of $75 CAD and $175 USD.
Cathedral Energy Services Ltd. - 2019 Annual Report
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20192018Foreign exchange gain (loss):Realized foreign exchange gain (loss)(67)$ 100$ Unrealized foreign exchange gain (loss) on intercompany balances1,347 (2,260) Foreign exchange gain (loss)1,280$ (2,160)$ Finance costsInterest on revolving term loan(343)$ (182)$ Interest on operating loan(87) (75) Standby fees(66) (46) Other interest(97) (140) Finance costs(593)$ (443)$ 20192018Trade receivables20,781$ (927)$ Inventories1,327 (1,507) Prepaid expenses and deposits23 (231) Trade and other payables(12,560) 4,583 Impact of foreign exchange rate differences(608) 1,564 Total changes in non-cash working capital8,963 3,482 Changes in investing non-cash working capital(284) (562) Changes in operating non-cash working capital9,247$ 4,044$ Year endedYear endedDecember 31, 2019December 31, 2018December 31, 2019December 31, 2018Canada26,155$ 31,123$ 33,752$ 39,755$ United States94,121 129,704 38,432 26,116 Total120,276$ 160,827$ 72,184$ 65,871$ RevenuesNon-current assets
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
21. Related parties
Key management personnel compensation
Cathedral has determined that the key management personnel of the Company consist of its executive officers and directors.
In addition to their salaries and director's fees, the Company also provides non-cash benefits to directors and executive officers including participation
in the Company’s share option program (see note 15).
Certain executive officers have employment agreements. Upon resignation at the Company’s request, they are entitled to termination benefits
including: i) 1.5 to 2.0 times base salary; ii) 1.5 to 2.0 times average annual bonus over the past 3 years; and iii) health, dental, life insurance and
disability coverage for 18 to 24 months.
Key management personnel (including directors) compensation comprised:
Key management personnel and director transactions
Directors and executive officers of the Company control approximately 6% of the common shares of the Company.
There have been no other transactions over the reporting period with key management personnel (2018 - nil), and no outstanding balances exist as
at period end (2018 - nil).
22. Financial risk management and financial instruments
Overview
The Company has exposure to the following risks from its use of financial instruments:
●
●
●
credit risk
liquidity risk
market risk
This note presents information about the Company’s exposure to each of the above risks, the Company’s objectives, policies and processes for
measuring and managing risk, and the Company’s management of capital.
Risk management framework
The Board of Directors has overall responsibility for the establishment and oversight of the Company’s risk management framework. The Company’s
risk management policies are established to identify and analyze the risks faced by the Company, to set appropriate risk limits and controls, and to
monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the
Company’s activities.
Credit risk
Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations,
and arises principally from the Company’s receivables from customers.
Trade receivables
The Company’s exposure to credit risk is influenced mainly by the individual characteristics of each customer. However, management also considers
the demographics of the Company’s customer base, including the default risk of the industry and country in which customers operate, as these factors
may have an influence on credit risk. Approximately 20% of the Company’s receivables are attributable to sales transactions with a single customer
(2018 - 15%).
The Company has established a credit policy under which each new customer is analyzed individually for creditworthiness before the Company’s
standard payment and delivery terms and conditions are offered. The Company’s review includes external ratings, when available. Customers that fail
to meet the Company’s benchmark creditworthiness generally are restricted to services on a prepayment basis only.
In monitoring customer credit risk, customers are grouped according to their credit characteristics, including whether they are an individual or legal
entity, geographic location, industry, aging profile, maturity and existence of previous financial difficulties. Customers that are considered as “high risk”
are closely monitored, and future sales may be made on a prepayment basis.
The Company does not require collateral in respect of trade receivables.
The Company establishes an allowance for impairment that represents its estimate of incurred losses in respect of trade receivables and investments.
The main components of this allowance are a specific loss component that relates to individually significant exposures, and a collective loss component
established for groups of similar assets in respect of losses that have been incurred but not yet identified. The collective loss allowance is determined
based on historical data of payment statistics for similar financial assets.
Exposure to credit risk
The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date was:
Carrying amount
Cathedral Energy Services Ltd. - 2019 Annual Report
Page 39
20192018Short-term employment benefits (1)1,499$ 2,379$ Share-based compensation208 341 Total expense recognized as share-based compensation1,707$ 2,720$ (1) Including severance payments
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The maximum exposure to credit risk for trade receivables at the reporting date by geographic region was:
Carrying amount
The Company’s most significant customer accounts for $3,121 of the trade receivables carrying amount at December 31, 2019 (2018 - $3,953).
Impairment losses
The aging of trade receivables at the reporting date was:
The Company has a total allowance for impairment of $641 at December 31, 2019 (2018 - $384). The movement in the allowance for impairment in
respect of trade receivables during the year was as follows:
At December 31, 2019 an impairment loss of $555 (2018 - $326) was recognized relating to customers that have been unable to make payments in
accordance with normal terms and conditions, mainly due to economic circumstances. The Company believes that the unimpaired amounts that are
past due are still collectible, based on historic payment behavior and an analysis of the underlying customers’ ability to pay.
Impairment losses
The allowance accounts in respect of trade receivables are used to record impairment losses unless the Company is satisfied that no recovery of the
amount owing is possible; at that point the amounts are considered irrecoverable and are written off against the financial asset directly.
Liquidity risk
Liquidity risk is the risk that the Company will encounter difficulty in meeting the obligations associated with its financial liabilities that are settled by
delivering cash or another financial asset. The Company’s approach to managing liquidity is to ensure, as far as possible, that it will always have
sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage
to the Company’s reputation.
The following are the contractual maturities of financial liabilities, including estimated interest payments and excluding the impact of netting agreements
based upon the secured revolving term loan being renewed on the same terms and not converted to a non-revolving term loan.
It is not expected that the cash flows included in the maturity analysis could occur significantly earlier, or at significantly different amounts.
Market risk
Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the Company’s income
or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within
acceptable parameters, while optimizing the return.
Currency risk
The Company is exposed to currency risk on working capital and borrowings that are denominated in a currency other than the respective functional
currencies of Company entities, primarily CAD, but USD. The currencies in which these transactions primarily are denominated are CAD and USD.
Generally, borrowings are denominated in currencies that match the cash flows generated by the underlying operations of the Company, primarily
dollar. This provides a partial economic hedge without derivatives being entered into and therefore hedge accounting is not applied in these
circumstances.
Cathedral Energy Services Ltd. - 2019 Annual Report
Page 40
20192018Trade receivables14,802$ 35,583$ 20192018Canada4,911$ 7,851$ United States9,891 27,732 Total14,802$ 35,583$ 2019 Gross2018 GrossNot past due11,375$ 31,864$ Past due 61-90 days2,534 2,491 Past due over 91 days1,507 1,612 Total15,416$ 35,967$ 20192018Balance, beginning of year384$ 58$ Current year provisions555 326 Reversals of losses previously recognized(298) - Balance, end of year641$ 384$ December 31, 2019 Carrying amount Contractual cash flow Under 6 months 6-12 months 1-2 years 2-5 years ThereafterSecured revolving term loan6,000$ 6,000$ -$ -$ 6,000$ -$ -$ Lease liabilities20,262 24,743 1,543 1,510 3,020 8,252 10,418 Trade and other payables11,308 11,308 11,308 - - - - Provision for settlement324 324 84 84 156 - - 37,894$ 42,375$ 12,935$ 1,594$ 9,176$ 8,252$ 10,418$
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cathedral's foreign currency policy is to monitor foreign current risk exposure in its areas of operations and mitigate that risk where possible by
matching foreign currency denominated expense with revenues denominated in foreign currencies. Cathedral strives to maintain limited amounts of
cash and cash equivalents denominated in foreign currency on hand and attempts to limit its exposure to foreign currency through collecting and
paying foreign currency denominated balance in a timely fashion.
The Company’s exposure to foreign currency risk related to USD denominated balances as follows:
The following significant exchange rates applied during the year:
Sensitivity analysis
A 10% strengthening of CAD against USD at December 31, 2019 would decrease equity and other comprehensive income by $46 (2018 - $1,573).
The analysis assumes that all other variables, in particular interest rates remain constant. The analysis is performed on the same basis for 2018, albeit
that the reasonably possible foreign exchange rate variances were different.
A weakening of CAD at December 31, 2019 would have had the equal but opposite effect on USD amounts, on the basis that all other variables remain
constant.
Interest rate risk
At the reporting date the interest rate profile of the Company’s interest-bearing financial instruments was:
Cash flow sensitivity analysis for variable rate instruments
A 1% increase in the Company’s financial institution’s lending rate would cause interest expense to increase by approximately $60 (2018 - $72) per
annum based upon the balance of financial institution indebtedness and long-term debt with a floating interest rate outstanding as at December 31,
2019.
Fair values of financial instruments
The Company has designated its trade and other payables as other financial liabilities carried at amortized cost. Trade receivable are designated as
loans and receivables, measured at amortized cost. The Company’s carrying values of these items approximate their fair value due to the relatively
short periods to maturity of the instruments. Loans and borrowings have been designated as other financial liability, and are measured at amortized
cost. The fair value of loans and borrowings included in the consolidated statement of financial position approximates carrying values as the
indebtedness is subject to floating rates of interest.
The Company has no financial instruments that are recorded at fair values.
Capital management
The Board of Directors’ policy is to maintain a strong capital base to maintain investor, creditor and market confidence and to sustain future
development of the business. Management and the Board of Directors monitor capital using loans and borrowings, including current portion to total
capitalization and funded debt to earnings before interest, taxes, depreciation, amortization and share-based compensation (“Credit Agreement
EBITDA”) both of which are defined in the credit agreement.
The Board of Directors seeks to maintain a balance between the higher returns that might be possible with higher levels of borrowings and the
advantages and security afforded by a sound capital position. In response to the overall decline in activity levels and profitability, the Company
implemented a number of cost cutting initiatives to protect the Company’s balance sheet.
The Company’s loans and borrowings to total capitalization and Credit Agreement EBITDA ratios at the end of the reporting period are disclosed in
note 13.
There were no changes in the Company’s approach to capital management during the year.
Cathedral Energy Services Ltd. - 2019 Annual Report
Page 41
USD20192018Cash3,938$ 4,795$ Trade receivables7,614 20,336 Trade payables(6,364) (12,070) Lease liabilities(4,561) (19) Provision for settlement(240) (360) Total387$ 12,682$ 20192018December 31, 2019December 31, 2018USD $1 to CAD1.33$ 1.30$ 1.30$ 1.36$ Average rateReporting date spot rateFixed rate carrying valueVariable rate carrying valueFixed rate carrying valueVariable rate carrying valueFinancial liabilities20,262$ 6,000$ 89$ 7,188$ December 31, 2019December 31, 2018
OFFICERS
P. Scott MacFarlane, President, Chief Executive Officer and Interim Chief Financial Officer
Randy H. Pustanyk, Executive Vice President
David Diachok, Vice President, Sales
DIRECTORS
Rod Maxwell
Scott Sarjeant
Ian S. Brown
Dale E. Tremblay
P. Scott MacFarlane
Randy H. Pustanyk
AUDITORS
KPMG LLP
Calgary, Alberta
LEGAL COUNSEL
Burstall LLP
Calgary, Alberta
REGISTRAR AND TRANSFER AGENT
Computershare Trust Company of Canada
Calgary, Alberta
FINANCIAL INSTITUTIONS
Alberta Treasury Branches
Export Development Canada
STOCK EXCHANGE LISTING
Toronto Stock Exchange (TSX: CET)
6030 – 3rd Street S.E.
Calgary, Alberta T2H 1K2
Tel: 403.265.2560 Fax: 403.262.4682
www.cathedralenergyservices.com