FIVE YEAR FINANCIAL HISTORY
Dollars in 000’s except per share amounts
(1) Refer to MD&A: see “NON-GAAP MEASUREMENTS”
(2) Equipment additions exclude non-cash additions
(3) Revenues and Adjusted gross margin % for 2017 exclude Discontinued Operations.
Table of contents
1 Report to Shareholders
2 Management's Discussion and Analysis
18 Management's Report
19
Independent Auditors' Report
23 Consolidated Financial Statements
27 Notes to Consolidated Financial Statements
46 Officers and Directors
Annual General Meeting:
Shareholders are invited to attend the Annual General Meeting which will be held at 2:30 pm on May 12, 2022 at our Head Office 6030 – 3 Street SE,
Calgary, Alberta.
20212020201920182017Revenues (3)62,524$ 40,574$ 120,276$ 160,827$ 147,095$ Gross margin-2%-25%-6%3%11%Adjusted gross margin % (1) (3)18%12%10%11%18%Adjusted EBITDAS (1)4,520$ (116)$ 3,887$ 12,060$ 18,674$ Cash flow - operations(3,499)$ 1,191$ 4,785$ 3,732$ 2,952$ Reversals of Impairments (Impairments and direct write-offs)614$ (6,822)$ -$ (1,474)$ (8,584)$ Loss before income taxes(8,626)$ (25,417)$ (18,717)$ (6,139)$ (382)$ Basic per share(0.13)$ (0.51)$ (0.38)$ (0.12)$ (0.01)$ De-recognition of deferred tax asset-$ (2,647)$ -$ (13,059)$ -$ Net earnings (loss)(8,626)$ (27,731)$ (19,187)$ (17,061)$ 87$ Basic and diluted per share(0.13)$ (0.56)$ (0.39)$ (0.35)$ -$ Equipment additions (2)5,617$ 2,474$ 6,018$ 17,391$ 11,322$ Weighted average shares outstandingBasic (000s)65,031 49,468 49,468 49,445 47,381 Diluted (000s)65,740 49,468 49,522 49,586 47,577 Working capital14,117$ 7,680$ 20,181$ 30,599$ 31,016$ Total assets75,423$ 64,280$ 106,300$ 121,770$ 121,630$ Loans and borrowings excluding current portion5,035$ 1,560$ 6,000$ 7,000$ 46$ Shareholders' equity42,504$ 39,974$ 68,092$ 89,143$ 101,391$
REPORT TO SHAREHOLDERS
To my fellow Shareholders,
As I look back over my first year as CEO at Cathedral, I am happy with the progress we have made in growing Cathedral’s operations while maintaining
our high-quality customer service and providing reliable, industry-leading technology. On their own, our results are impressive, but to have achieved
them amid challenging industry and economic circumstances, with ongoing global events, is a significant accomplishment.
2021 – Shaping a strong future for Cathedral
During the first half of 2021, we strengthened our team of talented executives to lead Cathedral through the next important chapter in its evolution.
Our management team is well positioned to guide Cathedral with a broad range of complementary skills, including extensive operational, technological
and financial experience.
Together, our team has developed a clear plan for Cathedral’s future; a plan that will establish Cathedral as one of North America’s leading directional
drillers. We are expanding our existing customer base and operations with our reliable, innovative technology and high-quality service. In addition to
organic growth, the directional drilling sector is poised for more consolidation and we see several opportunities to add value for customers and
shareholders through strategic acquisitions. The sector is comprised of many small private operators who have struggled through the past few
challenging years. We believe that consolidation is needed to create a sustainable, efficient sector that can thrive in the future, and that Cathedral is
well-positioned to lead that charge.
We have a disciplined approach to acquisitions, only pursuing opportunities that provide strategic growth in select locations, add proven management
teams aligned with Cathedral’s long-term success and add value on a per-share basis, while also maintaining our conservative balance sheet.
Following this careful approach, we successfully completed two important acquisitions in 2021. In July, we acquired Precision Drilling’s directional
drilling assets, expanding our customer base in both Canada and the U.S., creating a strategic marketing alliance to support future sales through
integrated service offerings with Precision and receiving investment in Cathedral’s technology advancement. In September, we followed the Precision
deal by acquiring the operating assets of Valiant Energy Services, further expanding our customer base in Canada and strengthening the operations
team in Canada.
In addition to completing these strategic acquisitions, we drove improved performance across our operations with increased profitability, higher activity
levels, and expanded market share in Canada. Our team continued to operate safely in 2021 with no lost time injuries, only one recordable incident
and a TRIF rate of 0.34 to conclude the year.
Below is a snapshot of some of our progress during the year:
2022 and beyond – A leading North American directional driller
As we move into 2022, industry conditions and valuations continue to support acquisitions and we believe additional consolidation opportunities for
Cathedral exist. To date, we have successfully completed the acquisition of Discovery Downhole Services, providing us with strategic growth in the
U.S. motor technology rental business. We will continue to carefully evaluate opportunities as they arise, selectively looking for ways to add value and
grow strategically.
Directional drilling technology is evolving and we understand that re-investing in our products and providing innovative, competitive technology is key
to maintaining and growing our customer base. We are continuing to develop new ideas, push our boundaries and find new ways of improving our
services, including investing in technology used to enable and enhance remote and automated drilling.
We are focused on seamlessly integrating our recent acquisitions, while continuing to provide the high-quality, reliable service our customers have
come to expect from Cathedral. Industry conditions remain strong, with increased commodity prices driving higher activity levels, and we are optimistic
for improved performance in 2022. We will continue to advance our growth plans, with targeted market share in Canada of 18% or more, and a more
significant market share ranging in 5-10% in the U.S. in the next one to two years.
Finally, I would like to express my sincere appreciation to the entire Cathedral team who have worked tirelessly to meet the needs of our customers,
to work safely and to advance our ambitious plans for Cathedral.
On behalf of the Board of Directors and management team, thank you for your continued support.
Sincerely,
Tom Connors
President and CEO
MANAGEMENT’S DISCUSSION & ANALYSIS
This Management's Discussion and Analysis ("MD&A") for the year ended December 31, 2021 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, 2021, as well as the Company's 2021 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 10, 2022.
NON-GAAP MEASUREMENTS
Cathedral uses certain performance measures throughout this document that are not defined under Canadian Generally Accepted Accounting
Principles (“GAAP”). These measures are Adjusted gross margin, Adjusted gross margin % and Adjusted EBITDAS. 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
service 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); and
iii)
"Adjusted EBITDAS" - defined as earnings before finance costs, unrealized foreign exchange on intercompany balances, taxes, depreciation,
non-recurring costs (including severance and non-cash provision for bad debts), 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).
The following tables provide reconciliations from GAAP measurements to non-GAAP measurements referred to in this MD&A:
Adjusted gross margin
Adjusted EBITDAS
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.
Three months ended December 31Year ended December 312021202020212020Gross margin701$ (2,368)$ (1,402)$ (10,190)$ Add non-cash items included in cost of sales:Depreciation 3,323 3,560 12,372 14,996 Share-based compensation23 7 89 63 Adjusted gross margin4,047$ 1,199$ 11,059$ 4,869$ Adjusted gross margin %17%16%18%12%Three months ended December 31Year ended December 312021202020212020Loss before income taxes(1,097)$ (3,183)$ (8,626)$ (25,417)$ Add:Depreciation included in cost of sales3,323 3,560 12,372 14,996 Depreciation included in selling, general and administrative expenses134 146 535 572 Share-based compensation included in cost of sales23 7 89 63 Share-based compensation included in selling, general and administrative expenses51 15 152 144 Finance costs(53) 60 196 291 Finance costs lease liabilities189 218 794 918 Subtotal2,570 823 5,512 (8,433) Impairments and direct write-downs(614) (172) (614) 6,822 Unrealized foreign exchange (gain) loss on intercompany balances(78) (1,678) (366) (929) Non-recurring expenses(605) 592 (12) 2,424 Adjusted EBITDAS1,273$ (435)$ 4,520$ (116)$
FINANCIAL HIGHLIGHTS
(1) Refer to MD&A: see “NON-GAAP MEASUREMENTS”
(2) Equipment additions exclude non-cash additions
FISCAL 2021 KEY TAKEAWAYS
Revenues increased by 54% from $40,574 in 2020 to $62,524 in 2021;
Adjusted gross margin increased from 12% to 18% primarily due to a decrease in the fixed portion of cost of sales as a percentage of revenue partially
offset by increased repairs and field labour expenses;
Adjusted EBITDAS increased from a loss of ($116) in 2020 to a gain of $4,520 in 2021 because of increased revenues and increased adjusted gross
margin;
There has been significant changes to the Company's management team in 2021. Tom Connors was appointed CEO in Q1 and Q2 saw Ian Graham,
CFO, and Fawzi Irani, Senior Vice President, U.S. Operations join Cathedral. They join Randy Pustanyk, Executive VP, to complete the new core
management team;
During 2021, the Company completed private placements totaling $3,376;
In 2021 Q3, the Company completed two acquisitions as detailed below; and
The Company recorded an impairment reversal of $768 in the current period as a result of a sublease on its right of use asset, which was partially
offset by an inventory write-down of $154 for a net reversal of $614.
2021 ACQUISITIONS
On July 23, 2021, the Company announced the closing of Cathedral’s acquisition of Precision Drilling Corporation's ("Precision") directional drilling
business (the “Transaction”) for a purchase price of $6,350. The Transaction includes the operating assets and personnel of Precision’s directional
drilling business (including its operations facility in Nisku, Alberta), and a $3,000 cash investment by Precision to support growth and expansion of
Cathedral, including continuing the buildout of RapidFireTM measurement-while-drilling guidance systems and nDuranceTM drilling motors. Additionally,
the Transaction is expected to enhance margins as expenses related to rental equipment used by Precision are replaced with proprietary Cathedral
tools.
Cathedral issued 13,400,000 common shares (the “Consideration Shares”) along with warrants to purchase an additional 2,000,000 common shares
of Cathedral at a price of $0.60 per common share within a two-year period after closing. In addition to a 4-month statutory hold period on the
Consideration Shares, the parties have agreed to contractual restrictions on resale as follows: 25% of the Consideration Shares are restricted until
January 22, 2022; a further 25% of the Consideration Shares are restricted until July 22, 2022; and a further 50% of the Consideration Shares are
restricted until July 22, 2023, subject to certain exceptions.
The Company has allocated the $6,350 purchase as follows:
Cash $3,000
Land and building $1,500; and
Equipment $1,850.
The Company has expensed $139 in costs related to the Transaction. As the acquired assets were integrated into Cathedral's existing directional
202120202019Revenues62,524$ 40,574$ 120,276$ Gross margin-2%-25%-6%Adjusted gross margin % (1)18%12%10%Adjusted EBITDAS (1)4,520$ (116)$ 3,887$ Cash flow - operations(3,499)$ 1,191$ 4,785$ Reversals of Impairments (Impairments and direct write-offs)614$ (6,822)$ -$ Loss before income taxes(8,626)$ (25,417)$ (18,717)$ Basic per share(0.13)$ (0.51)$ (0.38)$ De-recognition of deferred tax asset-$ (2,647)$ -$ Loss(8,626)$ (27,731)$ (19,187)$ Basic per share(0.13)$ (0.56)$ (0.39)$ Property and equipment additions (2)5,617$ 2,474$ 6,018$ Weighted average shares outstandingBasic (000s)65,031 49,468 49,468 Diluted (000s)65,740 49,468 49,522 Working capital14,117$ 7,680$ 20,181$ Total assets75,423$ 64,280$ 106,300$ Loans and borrowings excluding current portion5,035$ 1,560$ 6,000$ Shareholders' equity42,504$ 39,974$ 68,092$
drilling operations it is impracticable to breakout the revenue and profit or loss of the acquired assets since the acquisition.
In addition, on September 7, 2021 the Company completed the acquisition of the operating assets of Valiant Energy Services Ltd. (“Valiant”), an
Alberta-based directional drilling company, for a purchase price of $1,500 and allocated $1,485 to equipment and $15 to inventory related to service
of those tools. The purchase price was satisfied through the issuance of 3,464,204 common shares of Cathedral to Valiant. These shares will be
subject to a 4-month statutory hold period. The Company has expensed $41 in costs related to this acquisition. The principal owner of Valiant, Mr.
Vaugn Spengler, has entered into a long-term performance-based agreement to remain with Cathedral and will continue to focus on opportunities to
support and expand the existing customer base.
OUTLOOK
Industry fundamentals continue to signal a positive North American oilfield services market for 2022.
Rig count figures for Canada at the end of 2021 were directly in line with the five-year pre-COVID average for that time of year. Analysts are consistently
modifying their 2022 projections upwards with consensus now close to 57,000 activity days for the Western Canadian Sedimentary Basin (“WCSB”),
a better than 27% increase over 2021. While most basins in the U.S. are just now reaching pre-COVID rig count ranges, the Permian has matched
and the Haynesville has surpassed their five-year pre-COVID averages. These two plays have driven the U.S. land rig count in 2021 and projections
for 2022 have also been adjusted higher. Consensus now sees an average active U.S. land rig count of almost 640 rigs for the coming year vs. the
2021 count of 464 rigs, a 37% year-over-year improvement. (source: ATB Capital Markets, Baker Hughes Company, BMO Capital Markets, Peters &
Co Limited, Raymond James Ltd., Stifel Canada and TD Securities Inc.)
Although recent North American headlines regarding inflation and the Russian invasion of the Ukraine have increased the volatility of the hydrocarbon
indexes, most are trading at 5-7 year highs. These commodity prices are bolstering the balance sheets of the energy producers globally including the
Company\s customers in both Canada and the U.S. To date, they have used the free cash flow generated by these price levels to prioritize debt
reduction and the return of proceeds to shareholders. However, growing rig counts and analyst estimates appear to indicate that Cathedral’s customers
will start to direct a greater share of these funds to capital spending in 2022.
Labour continues to be the primary bottleneck for the service sector, as oilfield service companies are challenged to crew all the equipment they
presently have demand for. This scenario could persist for much of the coming year. As noted previously, the ongoing combination of improved
sector activity and stronger commodity prices coupled with constrained labour and supply chains, should translate to a constructive pricing environment
for service businesses in 2022.
RESULTS OF OPERATIONS - 2021 COMPARED TO 2020
Revenues 2021 revenues were $62,524, which represented an increase of $21,950 or 54% from 2020 revenues of $40,574.
Canadian revenues (excluding motor rental revenues) increased to $43,300 in 2021 from $11,104 in 2020; a 290% increase. This increase was the
result of: i) a 282% increase in activity days to 5,952 in 2021 from 1,558 in 2020 and ii) a 2% increase in the average day rate to $7,275 in 2021 from
$7,127 in 2020.
Based on publicly disclosed Canadian drilling and directional drilling days, Cathedral’s market share for 2021 was 14.3% compared to 5.5% in 2020.
The increase in day rates was due to an increase in day rates to compensate for escalating operating costs, including field labour rates.
U.S. revenues (excluding motor rental revenues) decreased 45% to $14,211 in 2021 from $25,662 in 2020. This decrease was the result of: i) 31%
decrease in activity days to 1,526 in 2021 from 2,197 in 2020; and ii) a 20% decrease in the average day rate to $9,312 in 2021 from $11,680 in 2020
(when converted to Canadian dollars).
Cathedral’s U.S. business pre-COIVID was primarily concentrated in Oklahoma in the Anadarko basin and this region experienced a disproportionately
severe down-turn due the COVID-19 pandemic. In response, the Company made the strategic decision to reposition its business in Houston to focus
on Texas and the Permian basin. This required a new management and sales team which was in place by 2021 Q3. While Cathedral U.S. recovery
has lagged the industry as a result of these significant changes, 2021 second half revenues increased by 30% over the first six month of the year.
The average active land rig count for the U.S. was up 10% in 2021 compared to 2020 (source: Baker Hughes). The Company experienced a 34%
decline in activity resulting in a decrease in market share compared to 2020. Day rates in USD decreased 14% to $7,439 USD in 2021 from $8,654
USD in 2020. The 2021 rate is down due to a decrease in revenues from providing rotary steerable system (RSS) services which are rented from a
3rd party and a reduction in certain ancillary revenues.
Motor rentals for Canada were roughly at the same level as 2020, but this was augmented by increases in the U.S. Combined rental revenues
increased to $5,014 in 2021 compared to $3,808 in 2020. U.S. rental revenues have increased due to a focus on increasing sales for this business
line.
Government grants The Company recognized the benefit from the Canadian Emergency Wage Subsidy (“CEWS”) program of $916 (2020 - $1,776)
and $nil (2020 - $992) from U.S. Paycheck Protection Program (“PPP”) which reduced salary expenses as follows:
Cost of sales $544 (2020 - $1,665);
Selling, general and administrative expenses $298 (2020 - $812); and
Technology group expenses $74 (2020 - $291).
Additionally, the Company received $518 (2020 - $280) from Canadian Emergency Rent Subsidy (“CERS”), which reduced cost of sales $424 (2020
- $221) and selling, general and administrative $94 (2020 - $59).
The 2021 CEWS claims were at reduced levels due to the increase in revenues in 2021.
Gross margin and adjusted gross margin Gross margin for 2021 was -2% compared to -25% in 2020. Adjusted gross margin (see Non-GAAP
Measurements) for 2021 was $11,059 or 18% compared to $4,869 or 12% for 2020.
Adjusted gross margin improved due to a decrease in the fixed portion of cost of sales as a percentage of revenue partially offset by increases repairs
and field labour expenses.
Revenues20212020Canada45,961$ 13,837$ United States16,563 26,737 Total62,524$ 40,574$ Depreciation of equipment allocated to cost of sales decreased to $12,372 in 2021 from $14,996 in 2020 due to the aging of the assets as the Company
uses a declining-balance depreciation for most items. Depreciation included in cost of sales as a percentage of revenue was 20% for 2021 and 37%
in 2020.
Selling, general and administrative ("SG&A") expenses SG&A expenses were $9,059 in 2021; an increase of $164 compared with $8,895 in
2020. This increase was primarily due to a reduction/recovery of bad debts in 2021 offset by increased wages and lower wage assistance received
in 2021. As a percentage of revenue, SG&A was 14% in 2021 compared to 22% in 2020.
Technology group expenses Technology group expenses were $747 in 2021; a decrease of $205 compared with $952 in 2020. 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.
Gain on disposal of equipment During 2021, the Company had a gain on disposal of equipment of $2,681 compared to $1,680 in 2020. 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.
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 2021, the
Company received proceeds on disposal of equipment of $3,553 (2020 - $2,603).
Finance costs Finance costs consisting of interest expenses on loans and borrowings and bank charges net of interest charged on past due
accounts receivable were $196 for 2021 versus $291 for 2020. Included in 2021 amount was interest revenue of $173 (2020 - $nil).
Finance costs lease liability The lease liability interest decreased slightly to $794 from $918.
Foreign exchange The Company had a foreign exchange gain of $277 in 2021 compared to $971 in 2020 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 2021 foreign currency gains are unrealized gains of $366 (2020 - $929) related to intercompany
balances.
Impairment and direct write-downs
In 2021 there was a reversal on a U.S. right of use asset that was subleased in the amount of $768 and
partially offset by write-down of inventory of $154 for a net reversal of $664. The inventory write-down relates to parts that are unlikely to be used to
repair the Company's tools.
In the prior year, due to the decline in projected drilling activity in 2020 the Company determined that indicators of impairment existed. . In Q1, the
Company, as a result of the impairment test wrote-down our assets in the amount of $6,994. The write- down was associated with our right of use
assets ($6,834) and intangibles ($160). As part of the Company’s response to changes in drilling activity, the decision was made to consolidate its
repair activities and close or significantly reduce activities at certain locations. The right of use asset for these locations was written down to $nil.
There were $160 intangible projects in progress where it was uncertain when or if staff resources would be available to bring the projects to
commercialization. As such these projects were written down to $nil.
Income tax Previously, Cathedral derecognized deferred tax assets due to a recent history of tax losses within both of Cathedral's legal entities.
Income tax expense is booked based upon expected annualized rates using the statutory rates of 25.5% for Canada and 23% for the U.S.
LIQUIDITY AND CAPITAL RESOURCES
Overview On an annualized basis, the Company’s principal source of liquidity is cash generated from operations and proceeds from equipment
lost-in-hole. In addition, the Company has the ability to fund liquidity requirements through its credit facility and the issuance of debt and/or equity.
Cash flow - operations in 2021 decreased to a use of cash of ($3,499) compared to a source of cash of $1,991 in 2020. The decrease in 2021 was
primarily due to fund the 84% increase in working capital resulting from the improvement in North American oilfield service activity, partially offset by
increases in cash flow from improved drilling activity in 2021 and Cathedral's increase in Canadian market share.
Working capital At December 31, 2021, the Company had working capital of $14,117 (December 31, 2020 - $7,680).
Credit facility
Bank facility
The Company's bank credit facility (the "Facility") consists of a $12,000 extendible revolving credit facility with a single lender which was amended
and extended in 2021 Q2 to expire June 30, 2023. The Facility is secured by a general security agreement over all present and future personal
property. The Facility provides a definition of EBITDA (“Credit Agreement EBITDA”) to be used in calculation of financial covenants. The Facility
bears interest at the financial institution’s prime rate plus 1.75% to 3.25% or bankers’ acceptance rate plus 3.00% to 4.25% 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' acceptances (“BA”) based on the interest rate
spread on the date the BA was entered into.
In June 2021, the Company amended and extended its Facility. Commencing with the fiscal period ending September 30, 2021 (“2021 Q3”) and
ending with the fiscal period ending March 31, 2022 (“2022 Q1”), the definition of Credit Agreement EBITDA will be based on pro-rating Credit
Agreement EBITDA to a 12-month equivalent (“Consolidated EBITDA Annualization Period”). The calculations are as follows:
For the fiscal period ending 2021 Q3, the Credit Agreement EBITDA is the calculated amount for the 3 months of 2021 Q3 times four;
For the fiscal period ending December 31, 2021 (“2021 Q4”), the Credit Agreement EBITDA is the calculated amount for the 3 months of
2021 Q3 plus the 3 months of 2021 Q4 times two;
For the fiscal period ending 2022 Q1, the Credit Agreement EBITDA is the calculated amount for the 3 months of 2021 Q3 plus the 3 months
of 2021 Q4 plus the 3 months of 2022 Q1 divided by 3 and then times 4;
During the Consolidated EBITDA Annualization Period, the Facility will bear interest at the maximum rates for the ranges noted;
The Company, at its one-time option, can choose to exit the Consolidated EBITDA Annualization Period and revert back to the original
definition of Credit Agreement EBITDA and the Facility will bear interest at the applicable rates. For the fiscal period ending June 30, 2022
(“2022 Q2”), the Credit Agreement EBITDA will revert back to the trailing 12-month calculation.
The Facility also features the following amendments:
There is no cap in place and the Company has access to the full $12,000 Facility;
Aggregate capital expenditures (excluding non-cash utilization of existing inventory) for the fiscal year ended December 31, 2021, are not
to exceed $9,000; and
Consolidated funded debt to tangible net worth (“TNW”) ratio will no longer be tested after 2021 Q2.
The financial covenants associated with the Facility that will be tested commencing 2021 Q3 are:
Consolidated funded debt to consolidated Credit Agreement EBITDA ratio shall not exceed 3.0:1; and
Consolidated Credit Agreement EBITDA to consolidated interest ratio shall not be less than 2.5:1.
Compliance with Facility covenants
At December 31, 2021, the Company had drawn $5,035 of its bank facility and had $2,898 in cash. The Company was in compliance with all
covenants at December 31, 2021.
Current facility - Highly Affected Sectors Credit Availability Program (“HASCAP”)
In conjunction with the credit amendment and extension referenced above, the Company applied for and received a further $1,000 of liquidity
from HASCAP. The incremental $1,000 non-revolving loan is fully drawn and further augments Cathedral’s liquidity to $13,000 in combination
with the Company’s ability to access the full $12,000 Facility. The demand loan has an interest rate of 4% and is amortized over a ten-year
period. Repayment terms are interest only for the first year, and principal plus interest for the remaining nine years, payable on a monthly basis.
The HASCAP Loan is secured by a general security interest over all present and after acquired personal property of the Company granted in
favour of ATB.
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, 2021.
As at December 31, 2021, the Company’s has a commitment to purchase equipment of $362 which is expected to be incurred in 2022 Q1.
The Company has issued the following six letters of credit ("LOC"):
three securing rent payments on property leases and renew annually with the landlords. Two LOCs total $700 CAD for the first ten years
of the lease and then reduce to $500 for the last five years of the leases. The third LOC is currently for $630 USD and increases annually
based upon annual changes in rent;
two securing the Company’s corporate credit cards in the amounts of $75 CAD and $175 USD; and
one in lieu of cash deposit for utilities in the amounts of $55 CAD.
The following table outlines the anticipated payments related to commitments subsequent to December 31, 2021:
Subsequent events On February 11, the Company announced the closing of its acquisition of the operating assets of Discovery Downhole Services
(“Discovery”) for a purchase price of $20,800 (the “Discovery Transaction”). The Discovery Transaction was funded by:
the issuance of 5,254,112 common shares of Cathedral (the “Acquisition Shares”) to Discovery;
a non-brokered private placement of 14,659,000 common shares of Cathedral (“Private Placement Shares”) at a price of $0.44 per share
for gross proceeds of $6,450 (the “Private Placement”);
$11,710 cash financed by a term loan from Cathedral’s existing primary bank lender ATB (the “Term Loan”) as part of the Company’s
amended and restated credit agreement (the “Credit Agreement”) entered into by the Company and ATB concurrently with the closing of
the Discovery Transaction. This is in addition to existing $12,000 Facility; and
Additionally, Cathedral will pay customary fees and expenses at prevailing market rates to ATB as a condition of the Term Loan and the
Credit Agreement.
Cathedral has retained key Discovery personnel under employment and consulting contracts to ensure a seamless customer service experience,
successful integration and long-term alignment with Cathedral’s strategy.
The Acquisition Shares and Private Placement Shares will be subject to a four-month statutory hold period under applicable Canadian securities
laws, in addition to such other restrictions as may apply under applicable securities laws of jurisdictions outside of Canada. The Acquisition Shares
will be subject to further contractual restrictions on resale as follows: 25% are restricted until February 10, 2023; a further 25% of are restricted until
August 10, 2023; and a further 50% are restricted until February 10, 2024, subject to certain exceptions.
While the Term Loan will be amortized over five years it has a maturity of June 2023 as with the existing Facility. The amortization will be based on a
variable interest rate consistent with the Company’s existing credit facility interest rates with required monthly payments of principal and interest.
Cathedral will be subject to a quarterly fixed charge coverage ratio as defined in the Credit Agreement which shall not be less than 1.25. The
consolidated interest coverage ratio will no longer be tested after 2021 Q4 and the limit on aggregate capital expenditures has been eliminated for
2022 and beyond. The Credit Agreement also includes the granting of a security interest over the assets acquired in the Discovery Transaction. At
closing of the Discovery Transaction, Cathedral is in compliance with the terms and conditions of the Term Loan and Credit Agreement.
Share capital At March 10, 2022, the Company has 100,135,265 common shares, 2,575,000 common share purchase warrants and 6,638,700
options outstanding with a weighted average exercise price of $0.35.
Total20222023202420252026ThereafterEquipment purchase obligations362$ 362$ -$ -$ -$ -$ -$ Secured revolving term loan 5,035 - 5,035 - - - - HASCAP loan1,000 58 100 100 100 100 542 Finance lease obligations18,506 2,821 2,673 2,684 2,590 2,439 5,299 Total24,903$ 3,241$ 7,808$ 2,784$ 2,690$ 2,539$ 5,841$
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 7% of the common shares of the Company.
Cathedral issued 650,000 units to its newly appointed President, CEO and Director at a subscription price of $0.20 per unit, using a loan provided by
Cathedral on commercial terms of $130. Each unit consists of one common share and one-half of one warrant. Each whole warrant will entitle the
holder to purchase one common share at an exercise price of $0.24 per common share for a period of three years from the closing date of the private
placement which was February 8, 2021.
There have been no other transactions over the reporting period with key management personnel (2020 - nil), and no other outstanding balances exist
as at period end (2020 - nil).
2021 CAPITAL PROGRAM
During the year ended December 31, 2021 the Company invested $5,617 (2020 - $2,474) in equipment (excluding non-cash additions).
The following table details the current period’s net equipment additions:
The additions of $5,617 were partially funded by proceeds on disposal of equipment of $3,553.
2022 CAPITAL PROGRAM
The Company's estimated 2022 gross capital plan is approximately $14,900, excluding any potential acquisitions. The primary additions under the
2022 capital plan will be approximately $9,500 for new mud motors and related parts with the remaining $5,400 on MWD and ancillary assets.
RESULTS OF OPERATIONS – THREE MONTHS ENDED DECEMBER 31
Revenues and operating expenses
Revenues 2021 Q4 revenues were $23,710, which represented an increase of $16,262 or 218% from 2020 Q4 revenues of $7,448.
Canadian revenues (excluding motor rental revenues) increased to $17,637 in 2021 Q4 from $3,740 in 2020 Q4; a 372% increase. This increase was
the result of: i) a 310% increase in activity days to 2,269 in 2021 Q4 from 553 in 2020 Q4 and ii) a 15% increase in the average day rate to $7,773 in
2021 Q4 from $6,764 in 2020 Q4.
20212020Short-term employment benefits2,033$ 1,236$ Share-based compensation198 117 Total expense recognized as share-based compensation2,231$ 1,353$ Year endedDecember 31, 2021Equipment additions:Motors and related equipment3,495$ MWD and related equipment2,107 Other15 Total cash additions5,617$ 2021 Q42020 Q4$ Change% ChangeRevenues 23,710$ 7,448$ 16,262$ 218%Cost of sales(23,009) (9,816) (13,193) 134%Gross margin - $701$ (2,368)$ 3,069$ -130%Gross margin - %3%-32%35%Adjusted gross margin $ (1)4,047$ 1,199$ 2,848$ 238%Adjusted gross margin % (1)17%16%1%(1) Refer to MD&A "NON-GAAP MEASUREMENTS"Revenues2021 Q42020 Q4Canada18,535$ 4,042$ United States5,175 3,406 Total23,710$ 7,448$
Based on publicly disclosed Canadian drilling and directional drilling days, Cathedral’s market share for 2021 Q4 was 18.1% compared to 7.7% in
2020 Q4. Day rates increased due to certain ancillary revenues along with overall change in client mix.
U.S. revenues (excluding motor rental revenues) increased 49% to $4,765 in 2021 Q4 from $3,201 in 2020 Q4. This increase was the result of: i) a
28% increase in activity days to 459 in 2021 Q4 from 359 in 2020 Q4; and ii) a 16% increase in the average day rate to $10,381 in 2021 Q4 from
$8,915 in 2020 Q4 (when converted to Canadian dollars).
The average active land rig count for the U.S. was up 84% in 2021 Q4 compared to 2020 Q4 (source: Baker Hughes). The Company experienced a
28% increase in activity resulting in a decrease in market share compared to 2020 Q4. Day rates in USD increased 21% to $8,256 USD in 2021 Q4
from $6,843 USD in 2020 Q4. Revenue day rates increased due to an increase in revenues from providing RSS services which are rented from a 3rd
party.
Motor rentals increased in both Canada and the U.S. Combined rental revenues increased to $1,308 in 2021 Q4 compared to $507 in 2020 Q4.
Rentals were up due to the industry increase in drilling activity.
Government grants The Company did not qualify for CEWS and CERS claims in Q4 of 2021 due to the increase in revenues for the quarter.
In Q4 of 2020, the Company recognized $399 of CEWS benefits which reduced salary expenses as follows:
Cost of sales $187;
Selling, general and administrative expenses $154; and
Technology group expenses $58.
In Q4 of 2020, the Company recognized the benefit from the CERS program of $280 which reduced cost of sales $221 and selling, general and
administrative $59.
Gross margin and adjusted gross margin Gross margin for 2021 Q4 was 3% compared to -32% in 2020 Q4. Adjusted gross margin (see Non-
GAAP Measurements) for 2021 Q4 was $4,047 or 17% compared to $1,199 or 16% for 2020 Q4.
Adjusted gross margin, as a percentage of revenue, increased due to lower repairs and a reduction in fixed costs as percentage of revenue, partially
offset by increases in field labour expenses and rentals.
Depreciation of equipment allocated to cost of sales decreased to $3,323 in 2021 Q4 from $3,560 in 2020 Q4 due to the aging of the assets as the
Company uses a declining-balance depreciation for most items. Depreciation included in cost of sales as a percentage of revenue was 14% for 2021
Q4 and 48% in 2020 Q4.
Selling, general and administrative ("SG&A") expenses SG&A expenses were $2,804 in 2021 Q4; an increase of $732 compared with $2,072 in
2020 Q4. There were increases in SG&A wages, commissions and reduced CEWS grants partially offset by recovery of bad debts in 2021 Q4
compared to expense in 2020 Q4. As a percentage of revenue, SG&A was 12% in 2021 Q4 compared to 28% in 2020 Q4.
Technology group expenses Technology group expenses were $214 in 2021 Q4; an increase of $74 compared with $140 in 2020 Q4. 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.
Gain (loss) on disposal of equipment During 2021 Q4, the Company had a gain on disposal of equipment of $664 compared to a loss of ($183)
in 2020 Q4. These gains are mainly related to equipment lost-in-hole. Proceeds from clients on lost-in-hole equipment are based on amounts specified
in service agreements. 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 2021 Q4, the Company received proceeds on disposal of equipment of $1,275 (2020 Q4 - $184).
Finance costs Finance costs consisting of interest expenses on loans and borrowings and bank charges net of interest charged on past due
accounts receivable were a net revenue of ($53) for 2021 Q4 versus expense of $60 for 2020 Q4. Included in 2021 Q4 amount was interest revenue
of $172 (2020 Q4 - $nil).
Finance costs lease liability The lease liability interest decreased slightly to $189 from $218.
Foreign exchange The Company had a foreign exchange gain of $78 in 2021 Q4 compared to $1,686 in 2020 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 2021 Q4 foreign currency loss are unrealized gain of $136 (2020 Q4 –$1,678) related to intercompany
balances.
Impairment and direct write-downs
In 2021 there was a reversal on a U.S. right of use asset that was subleased in the amount of $768 which
was partially offset by write-down of inventory of $154 for a net reversal of $664. The inventory write-down relates to parts that are unlikely to be used
to repair the Company's tools.
In 2020 Q4, the Company entered into a sub-lease for one of the properties previously written down and reversed $549 equal to the sublease asset.
Additionally, in 2020 Q4 there was a write-down on slow moving inventory of $377 for a net reversal of $172.
Income tax Previously, Cathedral derecognized deferred tax assets due to a recent history of tax losses within both of Cathedral's legal entities.
Income tax expense is booked based upon expected annualized rates using the statutory rates of 25.5% for Canada and 23% for the U.S.
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 early to
mid-March. Additionally, volatility in the weather and temperatures not only during this period, but also 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 GAAP and significant accounting policies utilized
by the Company are described in note 4 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.
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. Significant judgement is required to assess when indicators of impairment exist, and impairment
testing is required. The assessment of indicators of impairment is based on management’s judgment of whether there are internal and external factors
that would indicate that the directional drilling cash generating unit (“CGU”) and specifically the non-financial assets within the CGU, are impaired.
These factors include future cash flows, expected industry activity levels, commodity price developments and market capitalization. The determination
of the recoverable amount of the CGU requires estimates and assumptions that are subject to change as new information becomes available. These
include estimates of future cash flows, 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 determination of a CGU is also based on management’s judgment and is an assessment
of the smallest group of assets that generate cash inflows independently of other assets.
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 24 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 8 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 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).
DecSepJuneMarDecSepJunMarThree month periods ended20212021202120212020202020202020Revenues23,710$ 20,127$ 7,322$ 11,365$ 7,448$ 4,990$ 8,841$ 19,295$ Adjusted EBITDAS (1)1,273$ 5,170$ (2,683)$ 825$ (435)$ 84$ (823)$ 1,057$ Adjusted EBITDAS (1) per share - diluted0.02$ 0.07$ (0.05)$ 0.02$ (0.01)$ 0.00$ (0.02)$ 0.02$ Net inocme (loss)(1,097)$ 403$ (5,846)$ (2,086)$ (6,171)$ (5,014)$ (3,815)$ (12,590)$ Net income (loss) per share - diluted(0.01)$ 0.01$ (0.11)$ (0.04)$ (0.12)$ (0.10)$ (0.08)$ (0.25)$ (1) Refer to MD&A: see "NON-GAAP MEASURMENTS"
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, 2021.
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, 2021.
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, 2021 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, 2021 that has materially
affected, or is reasonably likely to materially affect, the Company's internal controls over financial reporting.
RISK FACTORS
Public Heath Emergencies including COVID-19 Pandemic
In March 2020, the World Health Organization declared a global pandemic due to COVID-19. In response to the COVID-19 outbreak, governments
around the world implemented measures to control the spread of the virus, including closing non-essential businesses and implementing travel bans
and stay-at-home restrictions. These measures resulted in volatility and disruptions in regular business operations, supply chains and financial markets,
as well as declining trade and market sentiment, and contributed to a material deterioration in the global economy, including a dramatic decline in the
demand for oil, which resulted in a material decrease in the price of oil.
In 2020 and early 2021, Cathedral made significant changes to its cost structure including laying off staff, reducing compensation, closing facilities,
eliminating discretionary expenses, deferring tool repairs and reducing capital expenditures. These efforts were undertaken to better match Cathedral's
cost structure to its expected operating levels at those times and manage the financial risk presented by Cathedral's contract counterparties and
potentially their ability to perform contractual obligations.
Many of restrictions imposed by governmental bodies to limit the spread of COVID-19 have since been relaxed as of the date hereof amid optimism
that the COVID-19 pandemic is receding following the Omicron variant-driven wave in late 2021 and early 2022. However, the COVID-19 pandemic
or a similar public health epidemic continues to pose a material risk to Cathedral's business, operations and financial condition should governments
be forced to reintroduce the restrictions of 2020 and 2021. 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. 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.
International Conflict
International conflict and other geopolitical tensions and events, including war, military action, terrorism, trade disputes, and international responses
thereto have historically led to, and may in the future lead to, uncertainty or volatility in global energy and financial markets. Russia's recent invasion
of Ukraine has led to sanctions being levied against Russia by the international community and may result in additional sanctions or other international
action, any of which may have a destabilizing effect on commodity prices and global economies more broadly. Volatility in commodity prices may
adversely affect our business, financial condition and results of operations. Reductions in commodity prices may affect oil and natural gas activity
levels and therefore adversely affect the demand for, or price of, our services.
The extent and duration of the current Russian-Ukrainian conflict and related international action cannot be accurately predicted at this time and the
effects of such conflict may magnify the impact of the other risks identified in this Annual Information Form, including those relating to commodity price
volatility and financial conditions. The situation is rapidly changing and unforeseeable impacts, including on Cathedral, our stakeholders and
counterparties on which we rely and transact with, may materialize and may have an adverse effect on our business, results of operation and financial
condition.
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.
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") and OPEC Plus, government regulation, political stability in the
Middle East and elsewhere, an outbreak of a public health emergency 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 E&P 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 a variable cost structure that can be scaled 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.
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, takeaway capacity issues have impacted local oil pricing and net backs with the
result that drilling activity levels 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 Corporation 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.
Performance of Obligations
The Corporation'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
additional financing, or which may not be on favorable terms, could limit the future growth of the business of Cathedral. 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 AIF, 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.
Business Transaction Risks
Cathedral has recently completed the Precision Transaction, the Valiant Transaction and the Discovery Transaction. Achieving the benefits of
acquisitions depends on successfully consolidating functions and integrating operations and procedures in a timely and efficient manner and our ability
to realize the anticipated growth opportunities and synergies from combining the acquired businesses and operations with ours. 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.
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.
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.
Credit Facility
Although it is believed that the size of the Amended 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 lender has 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.
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 prevailing financial market factors and investor interest in the
Corporation or the industry the Corporation 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 the ongoing
COVID-19 pandemic, 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 Corporation.
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 Corporation. 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 continuously demanding wells be drilled, cheaper, longer and faster, which has adversely impacted Cathedral’s drilling
equipment and may continue to do so.
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,
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 early to mid-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 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 diverse mix of customers. In 2021, approximately 17% of the Corporation’s revenue was
attributable to sales transactions with one customer. In 2020, approximately 29% of the Corporation’s revenue was attributable to sales transactions
with one customer. In 2019, approximately 27% of the Corporation’s revenue was attributable to sales transactions with two customers. 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. Mergers and acquisitions activity in the oil and natural gas exploration and production
sector, which increased in late 2020 and continued into 2021, 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 Risk
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 Corporation'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. There
is a risk that if 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
or if Cathedral requires additional financing, such financing may not be available or, if available, may not be available on favorable terms.
Environmental and Other Government Regulation Risk
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, greenhouse gas ("GHG") emissions 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 new environmental regulations, rules or legislation or make modifications to existing
regulations, rules or legislation which could lower the demand for hydrocarbons, increase Cathedral’s costs and/or make capital expenditures by
Cathedral's customers uneconomic.
Cathedral is subject to various environmental laws and regulations 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.
All of these developments have had, and could in the future have, a material adverse effect on Cathedral’s business, financial condition, results of
operations, cash flows, ability to collect on accounts receivable and future impairments of Company assets.
Policy Risk
The Corporation's operations and activities emit GHG which may require the Corporation 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. Some of Cathedral's
operations may ultimately be subject to future regional, provincial and/or federal climate change regulations to manage GHG emissions.
On January 20, 2021, as part of his administration's efforts to address climate change, the President of the United States issued Executive Order
13990 Protecting Public Health and the Environment and Restoring Science to Tackle the Climate Crisis which, among other things, revoked the
March 2019 permit for the Keystone XL pipeline. Once completed, the Keystone XL pipeline was anticipated to provide significant capacity to transport
oil from Alberta to refineries Illinois and Texas, and also to oil tank farms and an oil pipeline distribution center in Cushing, Oklahoma. Furthermore,
on January 27, 2021, the President of the United States of America issued Executive Order 14008 Tackling the Climate Crisis at Home and Abroad
which, among other things, paused the issuances of new oil and natural gas leases on public lands or in offshore waters pending completion of a
comprehensive review and reconsideration of Federal oil and gas permitting and leasing practices, including potential climate and other impacts
associated with oil and gas activities on public lands or in offshore waters. The Executive Order directed that, as part of this analysis, consideration
also be made whether to adjust royalties associated with coal, oil, and gas resources extracted from public lands and offshore waters, or take other
actions, to account for corresponding climate costs. In November 2021, the U.S. Department of the Interior released its Report on the Federal Oil and
Gas Leasing Program, prepared in response to Executive Order 14008, which recommended, among other things, to increase the oil and gas royalty
rate, bonding rates and other fees for drillers on Federal lands. The impact of such Executive Orders, the released report and any further regulations
imposed or actions taken by the Federal Government and/or any State Government of the United States of America, may have a material adverse
effect on Cathedral's business, financial condition, results of operations and prospects.
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 Risk
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. The certification was ultimately denied by the Quebec Court of Appeal. 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.
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
Circumstances may arise from time to time where our members of the board or executive officers are also directors or officers of other companies,
which have conflicting interests to those of Cathedral. 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: industry fundamentals continue to signal a
positive North American oilfield services market for 2022; analysts are consistently modifying their 2022 projections upwards with consensus now
close to 57,000 activity days for the Western Canadian Sedimentary Basin (“WCSB”), a better than 27% increase over 2021; projections for 2022
U.S. land rig count have also been adjusted higher; consensus now sees an average active U.S. land rig count of almost 640 rigs for the coming year
vs. the 2021 count of 464 rigs, a 37% year-over-year ; growing rig counts and analyst estimates appear to indicate that E&Ps will start to direct a
greater share of these funds to capital spending in 2022; the ongoing combination of improved sector activity and stronger commodity prices coupled
with constrained labour and supply chains, should translate to a constructive pricing environment for service businesses in 2022; industry conditions
and valuations continue to support acquisitions and we believe additional consolidation opportunities for Cathedral exist; we are optimistic for improved
performance in 2022; we will continue to advance our growth plans, with targeted market share in Canada of 18% or more, and a more significant
market share ranging in 5-10% in the U.S. in the next one to two years; commitments; 2022 capital program and financing of the program.
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;
the ongoing impact of the global health crisis and COVID-19;
capital expenditure programs and other expenditures by Cathedral and its customers;
the ability of Cathedral to retain and hire qualified personnel;
the ability of Cathedral to obtain parts, consumables, equipment, technology, and supplies in a timely manner to carry out its activities;
the ability of Cathedral to maintain good working relationships with key suppliers;
the ability of Cathedral to retain customers, market its services successfully to existing and new customers and reliance on major customers;
risks associated with technology development and intellectual property rights;
obsolesce of Cathedral’s equipment and/or technology;
the ability of Cathedral to maintain safety performance;
the ability of Cathedral to obtain adequate and timely financing on acceptable terms;
the ability of Cathedral to comply with the terms and conditions of its credit facility;
the ability to obtain sufficient insurance coverage to mitigate operational risks;
currency exchange and interest rates;
risks associated with future foreign operations;
the ability of Cathedral to integrate its transactions and the benefits of any 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.
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,
2021 and December 31, 2020.
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: "Tom Connors"
Tom Connors
President and Chief Executive Officer
Cathedral Energy Services Ltd.
March 10, 2022
Signed: "Ian Graham"
Ian Graham
Chief Financial Officer
Cathedral Energy Services Ltd.
March 10, 2022
INDEPENDENT AUDITORS' REPORT
To the Shareholders of Cathedral Energy Services 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, 2021 and December 31, 2020;
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, 2021 and December 31, 2020, and its consolidated financial performance
and its consolidated cash flows for the years then ended in accordance with International Financial Reporting Standards
(IFRS) as Issued by the International Accounting Standards Board (IASB).
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 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.
Key Audit Matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements for the year
ended December 31, 2021. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion
thereon, and we do not provide a separate opinion on these matters.
We have determined the matter described below to be the key audit matter to be communicated in our auditors’ report.
Assessment of indicators of impairment for the directional drilling cash generating unit (“CGU”)
Description of the matter
We draw attention to Note 2(d)(ii) “Estimates”, Note 3(g)(ii) and Note 9 to the financial statements. The carrying amounts of the Company’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. The assessment of indicators of impairment is based on management’s judgment of whether there are internal and external factors that
would indicate that the directional drilling CGU and specifically the non-financial assets within the CGU, are impaired. These factors include future
cash flows, expected industry activity levels, commodity price developments and market capitalization. As at December 31, 2021, management
determined no indicators of impairment existed for the directional drilling CGU
Why the matter is a key audit matter
We identified the assessment of indicators of impairment for the directional drilling CGU as a key audit matter. Significant
auditor judgement was required in evaluating the internal and external factors included in the Company’s indicators of
impairment analysis
How the matter was addressed in the audit
The primary procedures we performed to address this key audit matter included the following
We evaluated the Company’s assessment of impairment indicators by:
comparing internal and external factors, including expected industry activity levels and commodity price
developments analyzed by the Company to relevant external market data or internal source documents
comparing the CGU’s future cash flows for 2022 to historical results and considering the impact of changes in
conditions and events affecting the CGU
evaluating the changes in market capitalization over the year and its impact on the Company’s impairment
indicator analysis.
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 auditor’s report thereon, included in a document
likely to be entitled “2021 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, or otherwise appears to be materially misstated.
We obtained the information included in Management’s Discussion and Analysis filed with the relevant Canadian
Securities Commissions as at the date of this auditors’ report and the information, other than the financial statements
and the auditors’ report thereon, included in a document entitled “2021 Annual Report” filed with the relevant Canadian
Securities Commissions 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.
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) as issued by the International Accounting Standards Board (IASB),
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 represents 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.
Obtain sufficient appropriate audit evidence regarding the financial information of the entities 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.
Determine, from the matters communicated with those charged with governance, those matters that were of
most significance in the audit of the financial statements of the current period and are therefore the key audit
matters. We describe these matters in our auditors’ report unless law or regulation precludes public disclosure
about the matter or when, in extremely rare circumstances, we determine that a matter should not be
communicated in our auditors’ report because the adverse consequences of doing so would reasonably be
expected to outweigh the public interest benefits of such communication.
The engagement partner on the audit resulting in this auditors’ report is Jason Grodziski.
Signed “KPMG LLP”
Chartered Professional Accountants
Calgary, Canada
March 14, 2022
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
December 31, 2021 and 2020
Dollars in ‘000s
Approved by the Directors:
Signed: "Tom Connors"
Signed: "Rod Maxwell"
Tom Connors
Director
Rod Maxwell
Director
20212020AssetsCurrent assets:Cash (note 6)2,898$ 1,034$ Trade receivables (note 7)15,609 4,784 Prepaid expenses1,438 709 Inventories (note 8)8,423 8,118 Total current assets28,368 14,645 Equipment (note 9)35,044 35,620 Intangible assets (note 10)1,491 2,244 Right of use assets (note 11)10,520 11,771 Total non-current assets47,055 49,635 Total assets75,423$ 64,280$ Liabilities and Shareholders' EquityCurrent liabilities:Trade and other payables (note 12)11,069 4,425 Current taxes payable55 140 Loans and borrowings, current (note 13)1,000 - Lease liabilities, current (note 11)2,127 2,247 Liability for settlements, current- 153 Total current liabilities14,251 6,965 Loans and borrowings (note 13)5,035 1,560 Lease liabilities, long-term (note 11)13,633 15,781 Total non-current liabilities18,668 17,341 Total liabilities32,919 24,306 Shareholders' equity:Share capital (note 14)98,918 88,155 Contributed surplus11,793 11,071 Accumulated other comprehensive income9,011 9,340 Deficit(77,218) (68,592) Total shareholders' equity42,504 39,974 Total liabilities and shareholders' equity75,423$ 64,280$ See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
Years ended December 31, 2021 and 2020
Dollars in ‘000s except per share amounts
20212020Revenues (note 20)62,524$ 40,574$ Cost of sales (notes 8 and 16):Direct costs(51,465) (35,705) Depreciation(12,372) (14,996) Share-based compensation(89) (63) Total cost of sales(63,926) (50,764) Gross margin(1,402) (10,190) Selling, general and administrative expenses (note 16):Direct costs(8,372) (8,179) Depreciation(535) (572) Share-based compensation(152) (144) Total selling, general and administrative expenses(9,059) (8,895) Technology group expenses (note 16)(747) (952) Gain on disposal of equipment2,681 1,680 Loss from operating activities(8,527) (18,357) Finance costs(196) (291) Finance costs lease liabilities(794) (918) Foreign exchange gain (note 17)277 971 Reversals of impairments (impairments and direct write-downs) (note 8, 9, 10 and 11)614 (6,822) Loss before income taxes(8,626) (25,417) Income tax recovery (expense) (note 18):Current- 333 Derecognition of deferred tax asset- (2,647) Total income tax expense- (2,314) Loss(8,626) (27,731) Other comprehensive income (loss):Foreign currency translation differences for foreign operations(329) (594) Total comprehensive loss(8,955)$ (28,325)$ Loss per share (note 15)Basic(0.13)$ (0.56)$ See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 2021 and 2020
Dollars in ‘000s
AccumulatedotherRetainedTotalContributedcomprehensiveearningsshareholders'Share capitalsurplusincome(deficit)equityBalance at December 31, 201988,155$ 10,864$ 9,934$ (40,861)$ 68,092$ Total comprehensive loss for yearended December 31, 2020- - (594) (27,731) (28,325) Share-based compensation- 207 - - 207 Balance at December 31, 202088,155$ 11,071$ 9,340$ (68,592)$ 39,974$ Total comprehensive loss for yearended December 31, 2021- - (329) (8,626) (8,955) Issue of shares on private placement3,342 34 - - 3,376 Issue of shares on business acquisition5,896 454 6,350 Issue of shares on asset acquisition1,500 1,500 Issue of shares from option exercise25 (7) 18 Share-based compensation- 241 - - 241 Balance at December 31, 202198,918$ 11,793$ 9,011$ (77,218)$ 42,504$ See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2021 and 2020
Dollars in ‘000s
20212020Cash provided by (used in):Operating activities:Loss(8,626)$ (27,731)$ Items not involving cashDepreciation12,907 15,568 Share-based compensation241 207 Income tax (recovery) expense- 2,314 Gain on disposal of equipment(2,681) (1,680) Finance costs196 291 Finance costs lease liabilities794 918 (Reversals of impairments) impairments and direct write-downs(614) 6,822 Unrealized foreign exchange gain on intercompany balances(366) (929) Cash flow - continuing operations1,851 (4,220) Changes in non-cash operating working capital (note 19)(5,263) 5,343 Income taxes refunded (paid)(87) 68 Cash flow - operating activities(3,499) 1,191 Investing activities:Equipment additions(5,617) (2,474) Intangible asset additions- (251) Cash received related to acquisition (note 5)3,000 - Proceeds on disposal of equipment3,553 2,603 Changes in non-cash investing working capital (note 19)(59) 768 Cash flow - investing activities877 646 Financing activities:Proceeds on share issue3,394 - Repayments on lease liabilities(2,234) (2,110) Interest paid including lease liabilities(990) (1,209) Repayments of loans and borrowings(3,924) (5,386) Advances on loans and borrowings8,399 946 Payment on settlements(151) (173) Cash flow - financing activities4,494 (7,932) Effect of exchange rate on changes on cash(8) (94) Change in cash1,864 (6,189) Cash, beginning of year1,034 7,223 Cash, end of year2,898$ 1,034$ See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2021 and 2020
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, 2021 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 xx, 2022.
(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.
In March 2020, the World Health Organization declared a global pandemic due to COVID-19. COVID-19 had a significant impact on global markets
from that point to present. As the situation continues to evolve, the magnitude of its impact on the economy, commodity prices, drilling activity remains
uncertain at this time.
All of these developments have had, and could in the future have, a material adverse effect on Cathedral’s business, financial condition, results of
operations, cash flows, and ability to collect on accounts receivable and future impairments of Company assets. There also may be negative impact
on supply chain, availability and costs related to personnel, market pricing and customer demand. These factors may impact the Company's
profitability, liquidity and cash flows.
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, 2021, the Company had no material unaccrued
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. Significant judgement is required to assess when indicators of impairment exist, and impairment testing is required. The assessment
of indicators of impairment is based on management’s judgment of whether there are internal and external factors that would indicate that the
directional drilling cash generating unit (“CGU”) and specifically the non-financial assets within the CGU, are impaired. These factors include future
cash flows, expected industry activity levels, commodity price developments and market capitalization. The determination of the recoverable amount
of the CGU requires estimates and assumptions that are subject to change as new information becomes available. These include estimates of
future cash flows, 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 determination of a CGU is also based on management’s judgment and is an assessment of the
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
smallest group of assets that generate cash inflows independently of other assets.
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 24 “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
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.
(iv) Liquidity
As part of its capital management process, the Company prepares a forecast / budget. Management and the board of directors use the forecast /
budget to direct and monitor the strategy and ongoing operations and liquidity of the Company. Forecasts / budgets are subject to significant
judgment and estimates relating to activity levels, future cash flows and the timing thereof and other factors which may or may not be within the
control of the Company. See further discussions relating to liquidity in notes 2, 14 and 24.
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.
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 are not adjusted and continue to be measured at 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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
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, directly attributable transaction costs. The Company’s financial liabilities include operating loan,
trade and other payables, leases liability 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 declining 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
(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 or cash generating unit'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 of disposal. 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
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
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.
(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 in 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) Government grants
The Company applied IAS 20 "Accounting for Government Grants and Disclosure of Government assistance" in relation to receiving the Canadian
Emergency Wage Subsidy ("CEWS"), the Canadian Emergency Rent Subsidy ("CERS") and forgiveness of the U.S. Paycheck Protection Program
("PPP") loan. Government assistance is recognized only when there is reasonable assurance that the Company will comply with any conditions
attached to the grant and the grant will be received. The amounts are recognized in profit or loss on a systematic basis over the periods in which the
Company recognizes the expenses for the related costs for which the grants are intended to compensate. The Company has elected to present these
amounts net of the related expense (note 16).
(k) 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.
(l) Leases
(i) Lessee
At the inception of a contract, the Company assesses whether a contract is or contains a lease. The Company then determines if the Company
has the right to obtain substantially all of the economic benefits from the use of the asset throughout the period of use and that, the Company has
the right to direct the use of the identified assets. The term of the lease is defined as the non-cancellable period of the lease, plus periods in which
there is reasonable certainty that the Company will exercise and option to extend or to cancel the lease.
When a lease is identified, a right of use asset and a lease liability are recognized at the present value of the lease payments discounted using the
interest rate implicit in the lease or if that rate is not determinable at the Company's incremental rate of borrowing. Payments on the lease have a
finance cost component, which are reported on the consolidated statement of comprehensive income, and a liability repayment portion.
The initial cost of right of use assets are adjusted for any lease incentives received and any initial direct costs. Right of use assets are depreciated
over the shorter of the lease term or the useful life of the assets. Right of use assets are presented net of accumulated depreciation and impairment
losses.
(ii) Lessor
Leases, including subleases, which transfer substantially all the risks and benefits of ownership of the property to the lessee are accounted for as
finance leases, while all other leases are accounted for as operating leases.
Finance leases are recorded as a net investment in a finance lease. The present value of minimum lease receivable under such arrangements are
recorded as an investment in finance lease and the finance income is recognized in a manner that produces a consistent rate of return on the
investment in the finance lease and is included in revenue.
Operating lease and sublease income is recognized in the consolidated statement of comprehensive income as it is earned over the term of the
lease.
(m) 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
(n) 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.
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.
(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. Acquisitions
On July 23, 2021, the Company announced the closing of Cathedral’s acquisition of Precision Drilling Corporation's ("Precision") directional drilling
business (the “Transaction”) for a purchase price of $6,350. The Transaction includes the operating assets and personnel of Precision’s directional
drilling business (including its operations facility in Nisku, Alberta which the Company intends to resell), and a $3,000 cash from Precision to support
growth and expansion of Cathedral, including continuing the buildout of RapidFireTM measurement-while-drilling guidance systems and nDuranceTM
drilling motors. Additionally, the Transaction is expected to enhance margins as expenses related to rental equipment used by Precision are replaced
with proprietary Cathedral tools.
Cathedral issued 13,400,000 common shares (the “Consideration Shares”) along with warrants to purchase an additional 2,000,000 common shares
of Cathedral at a price of $0.60 per common share within a two-year period after closing. In addition to a 4-month statutory hold period on the
Consideration Shares, the parties have agreed to contractual restrictions on resale as follows: 25% of the Consideration Shares are restricted until
January 22, 2022; a further 25% of the Consideration Shares are restricted until July 22, 2022; and a further 50% of the Consideration Shares are
restricted until July 22, 2023, subject to certain exceptions.
The Company allocated the $6,350 purchase as follows:
Cash $3,000
Land and building $1,500; and
Equipment $1,850.
The Company expensed $139 in costs related to the Transaction. As the acquired assets were integrated into Cathedral's existing directional drilling
operations it is impracticable to breakout the revenue and profit or loss of the acquired assets since the acquisition.
In addition, on September 7, 2021 the Company completed the acquisition of the operating assets of Valiant Energy Services Ltd. (“Valiant”), an
Alberta-based directional drilling company, for a purchase price of $1,500 and allocated $1,485 to equipment and $15 to inventory related to service
of those tools. The purchase price was satisfied through the issuance of 3,464,204 common shares of Cathedral to Valiant. These shares are
subject to a 4-month statutory hold period. The Company expensed $41 in costs related to this acquisition. The principal owner of Valiant, Mr.
Vaugn Spengler, entered into a long-term performance-based agreement to remain with Cathedral and will continue to focus on opportunities to
support and expand the existing customer base.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. 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.
7. 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. The
Company’s exposure to credit and currency risks, and impairment losses related to trade receivables is disclosed in note 24.
8.
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, 2021, raw materials and consumables recognized as cost of sales were $5,966 (2020 - $4,288). At December 31, 2021, a review of
expected demand for inventory balances to be used in equipment repairs was conducted and a write-down of $154 (2020 - $377) on inventory was
recognized.
9. Equipment
Effects ofBalancemovements inBalanceDecember 31Write-off fullyexchangeDecember 31Cost2019AdditionsdepreciatedDisposalsrates2020Directional Drilling equipment139,754$ 2,413$ (67,094)$ (2,990)$ (67)$ 72,016$ Automotive equipment1,652 23 - (896) (137) 642 Office and computer equipment811 26 (90) (47) 1 701 Leasehold improvements428 12 - - (2) 438 Total142,645$ 2,474$ (67,184)$ (3,933)$ (205)$ 73,797$ Effects ofBalancemovements inBalanceDecember 31Write-off fullyexchangeDecember 31Accumulated depreciation2019AdditionsdepreciatedDisposalsrates2020Directional Drilling equipment93,758$ 12,551$ (67,094)$ (2,134)$ (53)$ 37,028$ Automotive equipment1,356 77 - (832) (140) 461 Office and computer equipment267 155 (90) (43) 1 290 Leasehold improvements382 17 - - (1) 398 Total95,763$ 12,800$ (67,184)$ (3,009)$ (193)$ 38,177$ Effects ofBalancemovements inBalanceDecember 31exchangeDecember 31Cost2020AdditionsDisposalsrates2021Directional Drilling equipment72,016$ 8,830$ (4,058)$ (48)$ 76,740$ Automotive equipment642 107 (109) 1 641 Office and computer equipment701 15 (8) - 708 Leasehold improvements438 - - - 438 Land and building- 1,500 - - 1,500 Total73,797$ 10,452$ (4,175)$ (47)$ 80,027$ Effects ofBalancemovements inBalanceDecember 31exchangeDecember 31Accumulated depreciation2020AdditionsDisposalsrates2021Directional Drilling equipment37,028$ 9,959$ (3,190)$ (33)$ 43,764$ Automotive equipment461 73 (106) (3) 425 Office and computer equipment290 97 (8) - 379 Leasehold improvements398 17 - - 415 Total38,177$ 10,146$ (3,304)$ (36)$ 44,983$
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Review for impairment and direct write-offs
The Company assesses whether there are any external and internal indicators of impairment that exist for the Company’s sole cash generating unit
(“CGU”), the directional drilling CGU, at the end of each reporting period. As at December 31, 2021, management determined no indicators of
impairment existed.
In the prior year, the Company determined that sufficient impairment indicators existed and conducted an impairment test as required on the Company’s
directional drilling CGU. As a result, the Company recorded impairment / write-downs totaling $6,285 associated with certain right-of-use assets (see
note 11) that were determined to be no longer in use during the year ended December 31, 2020. Additionally, there were write-downs of intangible
assets (see note 10) totaling $160 related to projects in progress where there was uncertainty related to the ultimate commercialization of the project
in a reasonable time frame.
The recoverable amount of the CGU was determined using a discounted cash flow model based on value-in-use. This was higher than the fair value
less costs to sell model. Inherent in the value in use approach there are key assumptions that are subjective and represent reasonable estimates with
respect to factors affecting operations. These assumptions are sensitive to change and could affect fair value. The discount rate used to calculate the
net present value of future cash flows is based on estimates of the Company’s weighted average cost of capital, adjusted to consider the nature of the
assets being valued and their specific risk profile. The future 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 of 2% for future cash
flows through the remainder of the CGU’s life.
The most sensitive inputs to the value in use model at December 31, 2020 were the discount rate and the U.S. revenue growth rates:
A 0.5% increase in the discount rate would have resulted in an impairment of $2,700; and
A 1% decrease to U.S. activity growth in each of 2021 and 2022 would have resulted in an impairment of $900.
10.
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 2021 internally developed additions contain $nil of technology group wages related to new product
development (2020 - $251).
In 2020 write-downs of $160 were recorded on intangible projects in progress where there was uncertainty related to commercialization of the project
within a reasonable time frame.
11. Right of use assets and lease liabilities
In 2020 Q3, the Company entered into a sublease for one of its properties and in 2021 Q2, the Company entered into a sublease on another property
that went into effect in 2021 Q3. These subleases expire in April 2023 and June 2023 respectively and as neither transfers substantially all the risks
and benefits of ownership of the property to the lessee, these subleases are treated as operating leases. In 2021 a recovery of $768 was recorded
Net book values20212020Directional Drilling equipment32,976$ 34,988$ Automotive equipment216 181 Office and computer equipment329 411 Leasehold improvements23 40 Land and building1,500 - Total35,044$ 35,620$ 20212020CostBalance at January 13,763$ 4,138$ Internally developed additions- 251 Write-off fully amortized- (466) Direct write-downs- (160) Balance at end of year3,763$ 3,763$ Accumulated amortizationBalance at January 11,519$ 1,119$ Amortization for year753 866 Write-off fully amortized- (466) Balance at end of year2,272$ 1,519$ Net carrying value at end of year1,491$ 2,244$ Right of use assets - Real property20212020Balance, beginning of year11,771$ 19,590$ Impairments and direct write-downs (note 9)- (6,834) Reversal of impairments768 549 Amortization(2,007) (1,848) Effects of movements in exchange rates(12) 314 Balance, end of year10,520$ 11,771$
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2020 - $549) based upon the discounted value of expected sublease payments.
Lease liabilities
The maturity analysis of the undiscounted contractual balances of the lease liabilities is as follows:
12. Trade and other payables
The Company’s exposure to currency and liquidity risk related to trade and other payables is disclosed in note 24.
13. Loans and borrowings
Bank facility
The Company's bank credit facility (the "Facility") consists of a $12,000 extendible revolving credit facility with a single lender which was amended
and extended in 2021 Q2 to expire June 30, 2023. The Facility is secured by a general security agreement over all present and future personal
property. The Facility provides a definition of EBITDA (“Credit Agreement EBITDA”) to be used in calculation of financial covenants. The Facility
bears interest at the financial institution’s prime rate plus 1.75% to 3.25% or bankers’ acceptance rate plus 3.00% to 4.25% 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' acceptances (“BA”) based on the interest rate
spread on the date the BA was entered into.
In June 2021, the Company amended and extended its Facility. Commencing with the fiscal period ending September 30, 2021 (“2021 Q3”) and
ending with the fiscal period ending March 31, 2022 (“2022 Q1”), the definition of Credit Agreement EBITDA will be based on pro-rating Credit
Agreement EBITDA to a 12-month equivalent (“Consolidated EBITDA Annualization Period”). The calculations are as follows:
For the fiscal period ending 2021 Q3, the Credit Agreement EBITDA is the calculated amount for the 3 months of 2021 Q3 times four;
For the fiscal period ending December 31, 2021 (“2021 Q4”), the Credit Agreement EBITDA is the calculated amount for the 3 months of
2021 Q3 plus the 3 months of 2021 Q4 times two;
For the fiscal period ending 2022 Q1, the Credit Agreement EBITDA is the calculated amount for the 3 months of 2021 Q3 plus the 3 months
of 2021 Q4 plus the 3 months of 2022 Q1 divided by 3 and then times 4;
During the Consolidated EBITDA Annualization Period, the Facility will bear interest at the maximum rates for the ranges noted;
The Company, at its one-time option, can choose to exit the Consolidated EBITDA Annualization Period and revert back to the original
definition of Credit Agreement EBITDA and the Facility will bear interest at the applicable rates. For the fiscal period ending June 30, 2022
(“2022 Q2”), the Credit Agreement EBITDA will revert back to the trailing 12-month calculation.
Lease liabilitiesRealVehiclesProperty2020Balance, December 31, 201931$ 20,231$ 20,262$ Lease buy-outs(2) - (2) Interest5 913 918 Payments(16) (2,998) (3,014) Effects of movements in exchange rates(1) (135) (136) Balance, December 31, 202017$ 18,011$ 18,028$ Less current portion(17) (2,230) (2,247) Lease liabilities, long-term-$ 15,781$ 15,781$ Lease liabilitiesRealVehiclesProperty2021Balance, December 31, 202017$ 18,011$ 18,028$ Lease buy-outs(2) - (2) Interest- 794 794 Payments(8) (3,020) (3,028) Effects of movements in exchange rates- (32) (32) Balance, December 31, 20217$ 15,753$ 15,760$ Less current portion(7) (2,120) (2,127) Lease liabilities, long-term-$ 13,633$ 13,633$ In one year or less2,820$ In more than one year, but not more than five years10,387 In more than five years5,299 Total18,506$ 20212020Trade payables10,473$ 3,118$ Accrued payables596 1,307 Total11,069$ 4,425$
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Facility also features the following amendments:
There is no cap in place and the Company has access to the full $12,000 Facility;
Aggregate capital expenditures (excluding non-cash utilization of existing inventory) for the fiscal year ended December 31, 2021, are not
to exceed $9,000; and
Consolidated funded debt to tangible net worth (“TNW”) ratio will no longer be tested after 2021 Q2.
The financial covenants associated with the Facility that will be tested commencing 2021 Q3 are:
Consolidated funded debt to consolidated Credit Agreement EBITDA ratio shall not exceed 3.0:1; and
Consolidated Credit Agreement EBITDA to consolidated interest ratio shall not be less than 2.5:1.
Compliance with Facility covenants
At December 31, 2021, the Company had drawn $5,035 of its bank facility and had $2,898 in cash. The Company was in compliance with all
covenants at December 31, 2021.
Subsequent to year end, the Company amended its credit facility as described in note 23.
Current facility - Highly Affected Sectors Credit Availability Program (“HASCAP”)
In conjunction with the credit amendment and extension referenced above in June 2021, the Company applied for and received a further $1,000
of liquidity from HASCAP. The incremental $1,000 non-revolving loan is fully drawn and is in addition to the Company’s $12,000 Facility. The
demand loan has an interest rate of 4% and is amortized over a ten-year period. Repayment terms are interest only for the first year, and principal
plus interest for the remaining nine years, payable on a monthly basis. The HASCAP Loan is secured by a general security interest over all
present and after acquired personal property of the Company granted in favour of ATB.
Paycheck Protection Program
On May 8, 2020, Cathedral received approval of an application for a U.S. Paycheck Protection Program (“PPP”) loan of $750 USD. The proceeds
were used to support payroll expenditures for Cathedral’s U.S. employees. The loan proceeds were forgiven accordance with certain U.S.
Treasury guidelines. At September 30, 2020, the Company recognized a reduction in cost of sales and SGA wages in the amount of $750 USD.
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
Cathedral entered into a non-brokered private placement of 500,000 units with its new President, CEO and Director, at a subscription price of $0.20
per unit for a subscription amount of $100. Each unit consists of one Cathedral common share and one-half of one common share purchase warrant.
Each whole warrant entitles the holder to purchase one common share at an exercise price of $0.24 per common share for a period of three years
from the closing date of the private placement which was February 8, 2021.
In addition, Cathedral issued 650,000 units to its new President, CEO and Director at a subscription price of $0.20 per unit, using a loan provided by
Cathedral on commercial terms of $130. Each unit consists of one common share and one-half of one warrant. Each whole warrant entitles the holder
to purchase one common share at an exercise price of $0.24 per common share for a period of three years from the closing date of the private
placement which was February 8, 2021.
12,654,500 shares were issued on May 31, 2021 on a Bought Deal. Shares were issued at $0.25 per share. There were $16 in share issue costs
that have been deducted against the gross proceeds of $3,162.
13,400,000 shares were issued July 22, 2021 related to the Precision Transaction. The shares were issued at $0.44 per share. As this is accounted
for as a business combination, there are no issue costs deducted against the proceeds.
3,464,204 shares were issued September 7, 2021 related to the Valiant asset acquisition. The shares were issued at $0.43 per share. There are no
issue costs deducted against the proceeds.
63,332 common shares were issued as a result of the exercise of vested options. Options were exercised at an average strike price of $0.29 per
option. All issued shares are fully paid.
Issuance of share options
The Company's share-based compensation plan is a "rolling number" type option plan which provides that the number of authorized but unissued
common shares that may be subject to options granted under the share option plan at any time can be up to 10% of the number of common shares
outstanding from time to time.
Under the plan, the exercise price of each option at the date of issuance equals the volume adjusted weighted average trading value of the Company's
common shares for the five days prior to the grant and have a maximum term of three years. Options vest over a period of two years.
A summary of the status of the Company's equity-based compensation plan as at December 31, 2021 and 2020, and changes during the years then
NumberAmountNumberAmountIssued, beginning of period49,468,117 88,155$ 49,468,117 88,155$ Issued on private placement13,804,500 3,342 - - Issue of shares on business acquisition13,400,000 5,896 - - Issue of shares on assets acquisition3,464,204 1,500 - - Issued on exercise of options63,332 25 - - Issued, end of period80,200,153 98,918$ 49,468,117 88,155$ 20212020
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ended is presented below:
The range of exercise prices for the options outstanding at December 31, 2021 is as follows:
During the year ended 2021, the Company granted the following options:
600,000 stock options were granted to the new President, CEO and Director, with an exercise price or $0.18 per option which will expire
February 8, 2024;
335,000 were granted to other employees at an exercise price of $0.26 which expire February 15, 2024;
700,000 were granted to other employees at an exercise price of $0.27 of which 200,000 expire on August 31, 2022 and 500,000 expire
April 19, 2024;
450,000 were granted to other employees at an exercise price of $0.31 which expire May 26, 2024;
2,796,100 were granted to officers, directors and employees as the annual option grant at an exercise price of $0.50 which expire August
12, 2024; and
172,300 were granted to employees at an exercise price of $0.46 which expire December 2, 2024.
The following is a summary of other assumptions used in applying the Black-Scholes model for the options issued as well as the resulting fair value:
Expected annual dividend per share is $0;
Risk free interest rate ranges from 0.2% to 1.0%;
Expected share price volatility (weighted average) ranges from 94% to 127%; and
Forfeiture rate for employees is 10%; for officers and directors this is 0%.
The resultant fair values of the options range from $0.11 to $0.30.
15. Earnings (loss) per share
Basic earnings per share
The calculation of basic earnings per share at December 31, 2021 was based on the loss attributable to common shareholders of $(8,626) (2020 –
$(27,731)) and a weighted average number of common shares outstanding of 65,030,795 (2020 – 49,468,117), calculated as follows:
Weighted average number of ordinary shares
Diluted earnings per share
As both years have a loss, there is no dilutive effect on earnings per share. The weighted average number of common shares outstanding of
65,739,674 (2020 – 49,468,117) is calculated as follows:
Weighted average number of common shares (diluted)
At December 31, 2021, 5,233,600 options (2020 – 2,552,600) were excluded from the diluted weighted average number of common shares calculation
WeightedWeightedaverageaverageNumberexercise priceNumberexercise priceOutstanding, beginning of year2,552,600 0.41$ 3,758,500 0.82$ Granted5,053,400 0.40 887,600 0.12 Exercised(63,332) 0.29 - - Expired or forfeited(881,968) 0.80 (2,093,500) 1.03 Outstanding, end of year6,660,700 0.35$ 2,552,600 0.41$ Exercisable, end of year1,271,365 0.26$ 1,041,300 0.73$ 20212020WeightedWeighted averageaverage remainingWeighted averageExercise price rangeNumberexercise pricelife (in years)Numberexercise price$0.11 to $0.201,427,100 0.15$ 1.92 274,365 0.12$ $0.21 to $0.301,832,000 0.28 1.37 997,000 0.29 $0.31 to $0.40450,000 0.31 2.40 - - $0.41 to $0.502,951,600 0.50 2.63 - - $0.12 to $0.50 total6,660,700 0.35$ 2.12 1,271,365 0.26$ Total outstanding optionsExercisable20212020Issued January 149,468,117 49,468,117 Effect of shares issued during the year15,562,678 - Weighted average number of common shares65,030,795 49,468,117 20212020Weighted average number of common shares (basic)65,030,795 49,468,117 Effect of share options on issue708,879 - Weighted average number of common shares (diluted)65,739,674 49,468,117
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
The Company recognized the benefit from CEWS program of $916 (2020 - $1,776) and $nil (2020 - $992) from the U.S. Paycheck Protection Program
(“PPP”) which reduced salary expenses as follows:
Cost of sales $544 (2020 - $1,665);
Selling, general and administrative expenses $298 (2020 - $812); and
Technology group expenses $74 (2020 - $291).
Additionally, the Company received $518 (2020 - $280) from CERS which reduced cost of sales $424 (2020 - $221) and selling, general and
administrative $94 (2020 - $59).
17. Foreign exchange gain
18.
Income tax expense
In 2020 Q4, Cathedral derecognized $2,647 of deferred tax assets due to a recent history of tax losses within Cathedral's U.S. 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 $28,557 (2020 - $27,507) related to the following Canadian tax attributes:
Deferred tax assets have not been recognized in respect of the deductible temporary differences at December 31, 2021 or 2020 due to a recent history
of taxable losses. The non-capital losses have expiries ranging from 2035 to 2041 and investment tax credits have expiries from 2026 to 2037. The
remaining tax attributes do not expire.
Selling, generalCost of sales& administrativeTechnologyTotalYear ended December 31, 2020Depreciation and amortization(14,996)$ (572)$ -$ (15,568)$ Share-based compensation(63) (144) - (207) Staffing costs, excluding share-based compensation(15,921) (4,062) (922) (20,905) Repairs and maintenance(9,265) - - (9,265) Other expenses(10,519) (4,117) (30) (14,666) Total(50,764)$ (8,895)$ (952)$ (60,611)$ Year ended December 31, 2021Depreciation and amortization(12,372)$ (535)$ -$ (12,907)$ Share-based compensation(89) (152) - (241) Staffing costs, excluding share-based compensation(26,766) (5,622) (732) (33,120) Repairs and maintenance(15,739) - - (15,739) Other expenses(8,960) (2,750) (15) (11,725) Total(63,926)$ (9,059)$ (747)$ (73,732)$ 20212020Foreign exchange gain (loss):Realized foreign exchange gain (loss)(89)$ 42$ Unrealized foreign exchange gain on intercompany balances366 929 Foreign exchange gain277$ 971$ 20212020Equipment(2,122)$ (3,019)$ Non-capital loss carry forwards1,635 2,517 Inventory valuation allowance487 502 Total-$ -$ Gross amountTax effectGross amountTax effectNon-capital loss carry forwards77,377$ 17,597$ 67,309$ 16,005$ Right of use assets less related lease liability3,561 776$ 4,615 1,050$ Scientific research and development expenditures18,678 4,296$ 18,678 4,483$ Investment tax creditsn/a5,162 n/a5,162 Net capital loss carry forwards3,158 726$ 3,215 772$ Provision for settlement- -$ 153 35$ Total102,774$ 28,557$ 93,970$ 27,507$ 20212020
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Movement in temporary differences during the year
The income taxes are based upon the estimated annual effective rates of 23% (2020 – 24%) for Canadian entities and 21.8% (2020 – 22.75%) for
U.S. entities. The income tax expense for the period is comprised as follows:
Income tax expense for 2021 and 2020 differs from the amount that would be expected by applying the expected statutory income tax rates for the
following reasons:
19. Changes in non-cash working capital
The components of changes in non-cash working capital are as follows:
20. 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.
BalanceBalanceDecember 31RecognizedRecognizedDecember 312019in profitin OCI2020Equipment(4,493)$ 1,520$ (46)$ (3,019)$ Non-capital loss carry forwards6,011 (3,494) - 2,517 Accrued expenses deductible in future years92 (92) - - Inventory valuation allowance1,012 (510) - 502 Provision for settlement71 (71) - - Total2,693$ (2,647)$ (46)$ -$ BalanceBalanceDecember 31RecognizedRecognizedDecember 312020in profitin OCI2021Equipment(3,019)$ 897$ -$ (2,122)$ Non-capital loss carry forwards2,517 (882) - 1,635 Inventory valuation allowance502 (15) - 487 Total-$ -$ -$ -$ 20212020Current tax (expense) recovery:U.S. Franchise taxes50$ (141)$ Adjustment to prior period provisions(50) 474 Total current tax (expense) recovery- 333 Derecognition of deferred tax asset- (2,647) Income tax expense-$ (2,314)$ 20212020Expected statutory tax rate23%24%Loss before income tax(8,626)$ (25,417)$ Effective tax rate applied to loss before income tax1,984$ 6,100$ U.S. Franchise taxes- (141) Unrecognized changes in deferred tax assets(2,009) (9,093) Adjustment to deferred taxes for change in effective tax rates- 45 Income taxed in jurisdictions with different tax rates(38) (83) Non-deductible expenses(74) 185 Adjustment to prior year tax provisions- 474 Non-taxable portion of gain on disposal of property and equipment137 199 Total tax expense-$ (2,314)$ 20212020Trade receivables(10,825)$ 10,018$ Inventories(443) 1,928 Prepaid expenses and deposits(729) 959 Trade and other payables6,645 (6,883) Impact of foreign exchange rate differences30 89 Total changes in non-cash working capital(5,322) 6,111 Changes in investing non-cash working capital(59) 768 Changes in operating non-cash working capital(5,263)$ 5,343$
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amounts related to each geographic segment are as follows:
Geographical information
The Company conducts operations in the following geographic areas:
Major customer
In 2021 revenues from one customer of the Company represented approximately 17% (2020 – one customer at 29%) of the Company’s total revenues.
21. Commitments
In the normal course of business, the Company incurs contractual obligations. As at December 31, 2021, the Company’s commitment to purchase
equipment is approximately $362. Cathedral anticipates expending these funds in 2022 Q1.
The Company has issued the following six letters of credit ("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 third LOC is currently for $630 USD and increases
annually based upon annual changes in rent;
two securing the Company’s corporate credit cards in the amounts of $75 CAD and $175 USD; and
one in lieu of cash deposit for utilities in the amounts of $55 CAD.
22. 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.
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 7% of the common shares of the Company.
Cathedral issued 650,000 units to its newly appointed President, CEO and Director at a subscription price of $0.20 per unit, using a loan provided by
Cathedral on commercial terms of $130. Each unit will consist of one common share and one-half of one warrant. Each whole warrant will entitle the
holder to purchase one common share at an exercise price of $0.24 per common share for a period of three years from the closing date of the private
placement which was February 8, 2021.
There have been no other transactions over the reporting period with key management personnel (2020 - nil), and no other outstanding balances exist
as at period end (2020 - nil).
23. Subsequent events
Subsequent events On February 11, the Company announced the closing of its acquisition of the operating assets of Discovery Downhole Services
(“Discovery”) for a purchase price of $20,800 (the “Discovery Transaction”). The Discovery Transaction was funded by:
the issuance of 5,254,112 common shares of Cathedral (the “Acquisition Shares”) to Discovery;
a non-brokered private placement of 14,659,000 common shares of Cathedral (“Private Placement Shares”) at a price of $0.44 per share
for gross proceeds of $6,450 (the “Private Placement”);
$11,710 cash financed by a term loan from Cathedral’s existing primary bank lender ATB (the “Term Loan”) as part of the Company’s
amended and restated credit agreement (the “Credit Agreement”) entered into by the Company and ATB concurrently with the closing of
the Discovery Transaction. This is in addition to existing $12,000 Facility; and
Additionally, Cathedral will pay customary fees and expenses at prevailing market rates to ATB as a condition of the Term Loan and the
Credit Agreement.
Cathedral has retained key Discovery personnel under employment and consulting contracts to ensure a seamless customer service experience,
successful integration and long-term alignment with Cathedral’s strategy.
The Acquisition Shares and Private Placement Shares will be subject to a four-month statutory hold period under applicable Canadian securities
laws, in addition to such other restrictions as may apply under applicable securities laws of jurisdictions outside of Canada. The Acquisition Shares
will be subject to further contractual restrictions on resale as follows: 25% are restricted until February 10, 2023; a further 25% of are restricted until
August 10, 2023; and a further 50% are restricted until February 10, 2024, subject to certain exceptions.
While the Term Loan will be amortized over five years it has a maturity of June 2023 as with the existing Facility. The amortization will be based on a
Year endedYear endedDecember 31, 2021December 31, 2020December 31, 2021December 31, 2020Canada45,961$ 13,837$ 17,574$ 11,824$ United States16,563 26,737 29,481 37,811 Total62,524$ 40,574$ 47,055$ 49,635$ RevenuesNon-current assets20212020Short-term employment benefits2,033$ 1,236$ Share-based compensation198 117 Total expense recognized as share-based compensation2,231$ 1,353$ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
variable interest rate consistent with the Company’s existing credit facility interest rates with required monthly payments of principal and interest.
Cathedral will be subject to a quarterly fixed charge coverage ratio as defined in the Credit Agreement which shall not be less than 1.25. The
consolidated interest coverage ratio will no longer be tested after 2021 Q4 and the limit on aggregate capital expenditures has been eliminated for
2022 and beyond. The Credit Agreement also includes the granting of a security interest over the assets acquired in the Discovery Transaction. At
closing of the Discovery Transaction, Cathedral is in compliance with the terms and conditions of the Term Loan and Credit Agreement.
24. 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 17% of the Company’s revenues are attributable to sales transactions with one customer (2020 -
29% from one customer).
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
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 $1,132 of the trade receivables carrying amount at December 31, 2021 (2020 - $3,121).
Impairment losses
The aging of trade receivables at the reporting date was:
20212020Trade receivables15,609$ 4,784$ 2,021 2020Canada13,094$ 3,015$ United States2,515 1,769 Total15,609$ 4,784$ 2021 Gross2020 GrossNot past due14,926$ 4,541$ Past due 61-90 days384 84 Past due over 91 days398 1,557 Total15,708$ 6,182$
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has a total allowance for impairment of $99 at December 31, 2021 (2020 - $1,398). The movement in the allowance for impairment in
respect of trade receivables during the year was as follows:
At December 31, 2021 an impairment loss of $nil (2020 - $1,425) 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, CAD and 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'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, 2021 would increase (decrease) equity and other comprehensive income by $138 (2020
- $475). The analysis assumes that all other variables, in particular interest rates remain constant. The analysis is performed on the same basis for
2020, albeit that the reasonably possible foreign exchange rate variances were different.
20212020Balance, beginning of year1,398$ 641$ Current year provisions- 1,425 Write-off of provisions(481) - Reversals of losses previously recognized(818) (668) Balance, end of year99$ 1,398$ December 31, 2021 Carrying amount Contractual cash flow Under 6 months 6-12 months 1-2 years 3-5 years ThereafterLoans and borrowings6,035$ 6,035$ -$ 50$ 5,135$ 300$ 550$ Lease liabilities15,760 18,506 1,414 1,407 2,673 7,713 5,299 Trade and other payables11,069 11,069 11,069 - - - - 32,864$ 35,610$ 12,483$ 1,457$ 7,808$ 8,013$ 5,849$ USD20212020Cash2,374$ 888$ Trade receivables1,990 1,390 Trade payables(2,105) (1,923) Lease liabilities(3,348) (3,997) Provision for settlement- (120) Total(1,089)$ (3,762)$ 20212020December 31, 2021December 31, 2020USD $1 to CAD1.25$ 1.35$ 1.26$ 1.27$ Average rateReporting date spot rate
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A weakening of CAD at December 31, 2021 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 (2020 - $16) per
annum based upon the balance of financial institution indebtedness and long-term debt with a floating interest rate outstanding as at December 31,
2021.
Fair values of financial instruments
The Company has designated its trade and other payables as other financial liabilities carried at amortized cost. Trade receivable are designated as
loans and receivables, measured at amortized cost. The Company’s carrying values of these items approximate their fair value due to the relatively
short periods to maturity of the instruments. Loans and borrowings have been designated as other financial liability and are measured at amortized
cost. The fair value of loans and borrowings included in the consolidated statement of financial position approximates carrying values as the
indebtedness is subject to floating rates of interest.
The Company has no financial instruments that are recorded at fair values.
Capital management
The Board of Directors’ policy is to maintain a strong capital base to maintain investor, creditor and market confidence and to sustain future
development of the business. Management and the Board of Directors monitor capital using loans and borrowings, including current portion to total
capitalization and funded debt to earnings before interest, taxes, depreciation, amortization and share-based compensation (“Credit Agreement
EBITDA”) both of which are defined in the credit agreement.
The Board of Directors seeks to maintain a balance between the higher returns that might be possible with higher levels of borrowings and the
advantages and security afforded by a sound capital position.
The Company’s Credit Agreement EBITDA ratios at the end of the reporting period is disclosed in note 13.
There were no changes in the Company’s approach to capital management during the year.
Fixed rate carrying valueVariable rate carrying valueFixed rate carrying valueVariable rate carrying valueFinancial liabilities15,760$ 6,035$ 18,028$ 1,560$ December 31, 2021December 31, 2020
OFFICERS
Tom Connors, President and Chief Executive Officer
Ian Graham, Chief Financial Officer
Randy H. Pustanyk, Executive Vice President
Fawzi Irani, Senior Vice President, U.S. Operations
David Diachok, Vice President, Sales
DIRECTORS
Rod Maxwell
Scott Sarjeant
Ian S. Brown
Dale E. Tremblay
Shuja Goraya
Tom Connors
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 INSTITUTION
Alberta Treasury Branches
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