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| Share Name | Share Symbol | Market | Type |
|---|---|---|---|
| Orecap Invest Corp | TSXV:OCI | TSX Venture | Common Stock |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
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Canadian Sub-Surface Energy Services Corp. ("CanSub" or "the Company") (TSX:CSE)
announced today its financial and operating results for the three and twelve
month periods ended December 31, 2007.
Financial Highlights
(in thousands of dollars, except per share amounts or as otherwise noted)
----------------------------------------------------------------------------
Three Three
months months Year Year
ended ended ended ended
Dec Dec Dec Dec
31, 2007 31, 2006 % 31, 2007 31, 2006 %
(unaudited)(unaudited) Change (unaudited)(unaudited) Change
----------------------------------------------------------------------------
Revenue 16,312 19,611 (17%) 66,169 73,352 (10%)
----------------------------------------------------------------------------
Gross Margin 3,936 6,603 (40%) 15,489 24,207 (36%)
----------------------------------------------------------------------------
Gross Margin % 24.1% 33.7% (29%) 23.4% 33.0% (29%)
----------------------------------------------------------------------------
Cash Flow (1) 1,465 4,110 (64%) 5,132 15,636 (67%)
----------------------------------------------------------------------------
EBITDA (1)(2) 1,968 4,360 (55%) 6,837 16,518 (59%)
----------------------------------------------------------------------------
EBITDA (1)(2)
as a % of
revenue 12.1% 22.2% (45%) 10.3% 22.5% (54%)
----------------------------------------------------------------------------
Net Earnings
(loss) (3) (21,024) 1,616 (1,401%) (24,737) 6,966 (455%)
----------------------------------------------------------------------------
Net Earnings
(loss) per
share - basic ($1.09) $0.08 (1,463%) ($1.28) $0.45 (384%)
----------------------------------------------------------------------------
Average
number of
common shares
outstanding
(in thousands) 19,324 18,861 2.5% 19,324 15,586 24.0%
----------------------------------------------------------------------------
(1) Refer to the "Non-GAAP measures" section below for details.
(2) EBITDA means earnings before interest, taxes, depreciation and
amortization and excludes stock based compensation expense. Refer to the
section below titled "Reconciliation of Cash Flow and EBITDA to Net
Earnings".
(3) The net loss figures recorded in the Q4 2007 and Year ended December 31,
2007 periods include a one-time, non-cash charge of $21.7 million
related to impairment loss of goodwill and intangible assets.
Operational Highlights
Revenue during Q4 2007 was $16.3 million as compared to revenue of $19.6 million
recognized during Q4 2006. EBITDA was $2.0 million during Q4 2007 bringing year
to date EBITDA for calendar 2007 to $6.8 million. For 2006, EBITDA was $4.4
million in Q4 2006 and $16.5 million for the annual period. Financial results
for the 2007 year were negatively impacted by low equipment utilization rates
due primarily to the significant slow-down in natural gas drilling. The high
natural gas storage levels in North America during 2007 resulted in continuing
weakness in natural gas commodity prices prompting the reduction in natural gas
related activity in the Western Canadian Sedimentary Basin ("WCSB"). Activity
levels in the WCSB during Q4 2007 were further impacted by the Alberta
government announcement that provincial royalty rates for oil and natural gas
production would be increased commencing in 2009. As a result of this
announcement, many oil and natural gas producers put drilling and completion
programs on hold while they evaluated the economic impact of the new royalty
regime.
The lower activity levels in the WCSB during 2007 were evidenced by a reduction
of the total number of wells drilled (rig released) which dropped from 23,241
wells in calendar 2006 to 18,555 in calendar 2007 - a 20% decrease.
Due to the current industry slow-down, there has been increased pricing pressure
on most of the services offered by CanSub. As a result, CanSub has competitively
priced its services (depending on the service and geographic region) in order to
keep equipment utilized and crews working. This reduced pricing has resulted in
margin erosion, some of which has been offset by previously announced cost
cutting measures and operational optimization.
To respond to the overall drop in activity levels, CanSub continues to optimize
operations and conserve financial resources by:
- Moving equipment and manpower to areas with greater activity levels. During
the fourth quarter, CanSub established a new hub in Fort Nelson (northeast
British Columbia) and during the first quarter of 2008, established a new hub in
Hinton, Alberta. In addition, during 2007 and through the first two months of
2008, CanSub moved equipment into areas of Saskatchewan which are mainly based
around oil drilling and production activities. Oil related activity remains
strong due to the continued strength in oil prices.
- Reviewing all expenses related to manpower, equipment and facilities. CanSub
management continues to implement cost control measures in each of these areas
to ensure operating expenses are minimized without affecting the ability to
deliver quality service to the Company's clients. As announced previously, the
Company estimates that these measures will result in annualized reductions in
operating and overhead expenses of approximately $2.0 million.
- Curtailing capital expenditures on a go-forward basis. CanSub has minimal
capital expenditures budgeted for calendar 2008. Planned expenditures are
primarily comprised of: completion of one electric line unit (which went into
operation during Q1 2008), purchase of certain equipment and storage facilities
to comply with government regulations (primarily for the electric line service
line) and various maintenance capital. CanSub currently has an optimal equipment
mix at most of its operating hubs and is not planning further expansion of
equipment fleets until there is evidence of an increase in drilling and
completion activity levels. However, the Company continues to review business
opportunities that make sense strategically to take advantage of current
industry conditions.
Despite the industry slow-down, the Company's wireline division (which accounted
for 63% of total CanSub revenue in calendar 2007) has been able to sustain
reasonable utilization rates for its equipment due to its diversified service
portfolio. In addition to services related to the completion of natural gas
wells, this division also provides services related to oil wells, workovers of
producing wells and abandonments. The Company's production testing division
(which accounted for the remaining 37% of revenue in 2007) has a significant
exposure to natural gas well drilling, and has experienced the greatest negative
impact as a result of the industry slow-down.
During October 2007, the Alberta government announced royalty changes for
conventional oil and gas production as well as oilsands production in the
province. Under these changes, most of which are scheduled to take effect on
January 1, 2009, there will be an overall net increase in royalties paid by
producers for production from Alberta wells. As a result of the increased
royalties in Alberta, it is anticipated that affected conventional oil and gas
producers will shift investment dollars into the neighboring provinces of
British Columbia and Saskatchewan. CanSub is well situated to take advantage of
this change as the following Company hubs are located in or servicing areas in
British Columbia and Saskatchewan:
- Estevan, Saskatchewan - 4 electric line ("E-line") units servicing the highly
active oil basin of southeast Saskatchewan with some work in southwest Manitoba.
- Weyburn, Saskatchewan area - 7 production testing packages as well as a
portion of the Company's well optimization group servicing southeast and south
central Saskatchewan.
- Provost, Alberta - 1 E-line unit servicing east central Alberta as well as
west central Saskatchewan (near the Lloydminister area).
- Medicine Hat, Alberta - 3 E-line units, 4 slickline units and 2 swabbing units
servicing southeast Alberta and southwest Saskatchewan.
- Grande Prairie and Fairview, Alberta - 5 E-line and 6 slickline units
servicing northwest Alberta and northeast British Columbia.
- Fort Nelson, British Columbia - 2 E-line units servicing northeast British
Columbia.
During Q4 2007, the Company added 2 wireline units and 1 swabbing unit. Below is
a summary of CanSub's equipment fleet at December 31, 2007.
----------------------------------------------------------------------------
# of Wireline # of Swabbing # of Testing
Units Units packages
----------------------------------------------------------------------------
Operating fleet at
Sept. 30 2007 42 9 61
----------------------------------------------------------------------------
Additions to fleet
during Q4 2007 2 1 -
----------------------------------------------------------------------------
Operating fleet at
December 31, 2007 (1)44 10 (2)61
----------------------------------------------------------------------------
(1) Excludes two older electric line units that have been parked to reduce
costs. Included in the 44 wireline operating units are 22 E-line and 22
slickline units.
(2) Includes 52 major testing packages plus various other testing related
equipment (ie flow-back tanks, high pressure storage tanks, cold
separators) which equates to approximately 9 additional major testing
packages when fully utilized.
During February 2008, CanSub added an additional electric line unit to its
operating wireline fleet, increasing this fleet to 45 units. There are no other
operating equipment additions planned for 2008.
Canadian Sub-Surface Energy Services Corp.
Management's Discussion and Analysis
The following Management's Discussion and Analysis ("MD&A") is for the
consolidated financial statements of Canadian Sub-Surface Energy Services Corp.
("CanSub" or "the Company") as at and for the three and twelve month periods
ended December 31, 2007 and 2006. The consolidated financial statements and MD&A
have been prepared taking into consideration information available as at March
24, 2008 and should be read in conjunction with the audited financial statements
of the Company for the year ended December 31, 2007 and 2006.
Forward-looking statements
Certain statements in this MD&A, including (i) statements that may contain words
such as "anticipate", "could", "expect", "seek", "may" "intend", "will",
"believe", "should", "project", "forecast", "plan" and similar expressions,
including the negatives thereof, (ii) statements that are based on current
expectations and estimates about the markets in which the Company operates and
(iii) statements of belief, intentions and expectations about developments,
results and events that will or may occur in the future, constitute
"forward-looking statements" and are based on certain assumptions and analysis
made by the Company. Forward-looking statements in this MD&A include, but are
not limited to, statements with respect to future capital expenditures,
including the amount, nature and timing thereof; oil and natural gas prices and
demand; other development trends within the oil and natural gas industry;
business strategy; expansion and growth of the Corporation's business and
operations and other such matters. Such forward-looking statements are subject
to important risks and uncertainties, which are difficult to predict and that
may affect the Company's operations, including but not limited to the impact of
general economic conditions in Canada and the United States; industry
conditions, including the adoption of new environmental, safety and other laws
and regulations and changes in how they are interpreted and enforced; volatility
of oil and natural gas prices; oil and natural gas product supply and demand and
related demand for oilfield services; risks inherent in the Company's ability to
generate sufficient cash flow from operations to meet its current and future
obligations; increased competition; the lack of availability of qualified
personnel or labor unrest; fluctuation in foreign exchange or interest rates;
stock market volatility; opportunities available to or pursued by the Company
and other factors, many of which are beyond the control of the Company. The
Company's actual results, performance or achievements could differ materially
from those expressed in, or implied by, these forward-looking statements and,
accordingly, no assurance can be given that any of the events anticipated by the
forward-looking statements will transpire or occur, or if any of them do
transpire or occur, what benefits the Company will derive therefrom. Subject to
applicable law, the Company disclaims any intention or obligation to update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise.
February 14, 2006 Transaction between Canada West Capital and the CanSub Group
On February 14, 2006, Canada West Capital Inc. ("CWC") an inactive, public
company acquired all of the shares of Canadian Sub-Surface Energy Services Inc.,
Canadian Sub-Surface Gas Testing Inc. and 1156853 Alberta Ltd. (collectively the
"CanSub Group"). Subsequent to the acquisition, the former shareholders of the
CanSub Group held the largest percentage of common shares of the new
consolidated entity and controlled the management of the Company. Therefore the
CanSub Group was deemed to be the acquirer for accounting purposes. Accordingly,
the transaction was accounted for as a reverse takeover (using the purchase
method) whereby the assets and liabilities of CWC were recorded at their fair
market values at the February 14, 2006 transaction date. CWC changed its name to
Canadian Sub-Surface Energy Services Corp. as part of the transaction.
Internal corporate reorganization effective May 31, 2006
Immediately after the February 14, 2006 transaction, the CanSub Group of
companies became wholly-owned subsidiaries of the Company. The three entities
comprising the CanSub Group were amalgamated on May 31, 2006 and the amalgamated
entity was subsequently wound up into the Company on June 1, 2006.
During 2005, the CanSub Group established a partnership through which the
operating activities were conducted. The partnership has a June 30 year end
(with the initial year end being June 30, 2006).
Comparative Information
Since the CanSub Group has been deemed the acquirer for accounting purposes, the
comparative financial statements for the year ended December 31, 2006 include
the combined financial results of the CanSub Group from January 1 to February
14, 2006 and then the results of the Company thereafter.
Business Units and Segmentation
The Company's operations are conducted through the partnership and consist of
two main operating divisions: Wireline and Testing. The Wireline division is
comprised primarily of wireline services (which include cased-hole electric line
and slickline) and also includes swabbing and well optimization. The Testing
division includes primarily natural gas production testing services. Prior to
June 1, 2006, a portion of the electric line and slickline services in the
Wireline division were conducted through three private owner-operators, who
owned their equipment and employed the crews who worked on the units. One of the
advantages of utilizing the owner-operators is that they represented the Company
in areas where the Company did not operate. The Company realized average margins
of approximately 18% on the revenues generated by the owner operator wireline
units. On May 31, 2006, the Company acquired all of the business assets of these
three owner operators.
Acquisition of Colter Production Services on May 31, 2006
On May 31, 2006, the Company completed the acquisition of the business assets of
Colter Production Services Inc. ("Colter"), a private production testing Company
operating in Alberta. Commencing June 1, 2006 the operations from Colter have
been included in the Company's financial statements.
Seasonality
The Company's wireline and production testing operations are seasonal. The oil
and gas industry is generally more active during the winter months (historically
from November through March) as the movement of heavy equipment is easier over
frozen ground. In the spring months, road bans and wet weather can limit the
ability to move equipment and adversely impacts the Company's revenue generating
capability. Rain in the summer and fall months can also have a significant
impact on the Company's revenue. However, when equipment is not in use, crews
are not required (particularly in the Testing division) and therefore operating
costs normally decrease in slow operating periods.
Results of Operations
Revenues
The break-down of consolidated revenue between the Wireline and Testing
divisions for the three and twelve month periods ended December 31, 2007 and
2006 are as follows:
----------------------------------------------------------------------------
Three Three
months months Year Year
ended ended ended ended
Dec Dec Dec Dec
31, 2007 31, 2006 % 31, 2007 31, 2006 %
$000s (unaudited)(unaudited) Change (unaudited)(unaudited) Change
----------------------------------------------------------------------------
Wireline 10,892 12,278 (11%) 41,867 46,494 (10%)
----------------------------------------------------------------------------
Testing 5,420 7,333 (26%) 24,302 26,858 (10%)
----------------------------------------------------------------------------
Consolidated 16,312 19,611 (17%) 66,169 73,352 (10%)
----------------------------------------------------------------------------
Equipment utilization rates for both the Testing and Wireline divisions during
Q4 2007 were lower than Q4 2006 reflecting more equipment in the WCSB combined
with a reduced demand for oilfield services. Due to a continuing weakness in
natural gas prices, oil and gas producers continued to defer natural gas
drilling and completion projects. In addition, activity levels in Alberta during
the fourth quarter were negatively impacted by the announcement of the new oil
and gas royalty regime for producing oil and gas wells in Alberta. As a result
of the lower equipment utilization rates, many of CanSub's services came under
pricing pressure resulting in reduced revenues and margins.
Q4 2007 vs. Q4 2006
In Q4 2007, Wireline divisional revenue amounted to $10.9 million. Of that
amount, $9.0 million was related solely to the wireline fleet (E-line and
slickline units), which averaged 43 units in operation during the period. The
remaining $1.9 million of revenue was attributed to swabbing and well
optimization services. The wireline units completed approximately 1,555 jobs
during the current quarter at an average per job revenue of approximately
$5,794. This figure was lower than the per job revenue reported in Q3 2007
($6,209 per job) as the more lucrative northern Alberta areas saw the largest
activity declines in the months after the Alberta royalty announcement. In
addition, during Q4 2007, there was further price discounting on services due to
the continuing low equipment utilization.
In Q4 2006, Wireline divisional revenue amounted to $12.3 million. Of that
amount, $10.4 million was attributed solely to the wireline fleet (E-line and
slickline units) which averaged 35 units in operation. Swabbing and well
optimization services comprised the remaining $1.9 million in revenue. The
wireline units completed approximately 1,637 jobs at an average per job revenue
of $6,467.
A significant portion of CanSub's wireline units that were added to the fleet
over the past year have been working out of the Company's recently established
or expanded northern Alberta operating hubs of Whitecourt, Grande Prairie and
High Level. Work in these areas is generally billed out at higher rates to
customers as wells are typically deeper and more complex. As a result, it would
be expected that average per job wireline revenues would be higher in Q4 2007 as
compared to Q4 2006. However, given the reduction in activity levels in the more
lucrative northern Alberta areas during Q4 2007, combined with pricing discounts
implemented during the third and fourth quarters, the per job revenue in Q4 2007
of $5,794 was approximately 10% lower than the per job revenue recognized in Q4
2006.
Testing division revenue in Q4 2007 of $5.4 million was generated from an
in-service fleet of 61 testing packages. The Q4 2006 Testing revenue of $7.3
million was generated from an in-service fleet of 56 packages. Although the
testing fleet has increased over the past year, lower equipment utilization
combined with lower pricing resulted in the $1.6 million revenue decline. This
division has seen the greatest impact from the industry slow-down as it is
geared towards new natural gas well completions. Pricing of services in this
division is expected to remain competitive until natural gas related activities
in the WCSB recover.
Year ended December 31, 2007 vs year ended December 31, 2006
For the 2007 year, the fleet of E-line and slickline units (which averaged 40
units in operation) generated $35.0 million of the $41.9 million of Wireline
division revenue. During 2007, these units completed 5,985 jobs at a per job
revenue of $5,858. The remaining $6.9 million of revenue in this division was
generated from swabbing services ($3.8 million) and well optimization and other
($3.1 million).
For the 2006 year, the fleet of E-line and slickline units (which averaged 33
units in operation) generated $40.6 million of the $46.5 million of wireline
divisional revenue. These units completed 6,950 jobs at an average per job
revenue of $5,847. The remaining $5.9 million of revenue in this division was
generated from swabbing services ($2.9 million) and well optimization and other
($3.0 million).
As previously noted, CanSub's continued expansion into northern Alberta during
2007 gave rise to more lucrative work. However, average price increases realized
from more northern area work were offset by the effects of pricing discounts
given to clients in many of the Company's operating areas.
Testing division revenue for the 2007 year was $24.3 million generated from an
average in-service fleet of 61 packages as compared to 2006 revenue of $26.9
million generated from an average in-service fleet of 44 packages. Although
CanSub had a larger testing fleet in 2007, lower utilization rates combined with
reduced pricing lead to the reduction in revenue.
Gross Margins (refer to Non-GAAP measures below)
The break-down of gross margins between the Wireline and Testing divisions
during the current and prior periods is as follows:
----------------------------------------------------------------------------
Three Three
months months Year Year
ended ended ended ended
Dec Dec Dec Dec
31, 2007 31, 2006 % 31, 2007 31, 2006 %
$000s (unaudited)(unaudited) Change (unaudited)(unaudited) Change
----------------------------------------------------------------------------
Gross Margins:
----------------------------------------------------------------------------
Wireline 3,074 4,622 (34%) 10,186 15,561 (35%)
----------------------------------------------------------------------------
Testing 862 1,981 (56%) 5,303 8,646 (39%)
----------------------------------------------------------------------------
Consolidated 3,936 6,603 (40%) 15,489 24,207 (36%)
----------------------------------------------------------------------------
Gross Margin %:
----------------------------------------------------------------------------
Wireline 28.2% 37.6% (26%) 24.3% 33.3% (27%)
----------------------------------------------------------------------------
Testing 15.9% 27.0% (41%) 21.8% 32.2% (32%)
----------------------------------------------------------------------------
Consolidated 24.1% 33.7% (28%) 23.4% 33.0% (29%)
----------------------------------------------------------------------------
Consolidated gross margins for Q4 2007 were $3.9 million (24.1%) as compared to
Q4 2006 margins of $6.6 million or 33.7%. Year over year margin percentages fell
from 33.0% recognized in calendar 2006 to 23.4% recognized in calendar 2007. The
erosion in margin percentage primarily reflects lower equipment utilization
rates combined with more competitive pricing. In addition, set-up expenses
associated with the establishment of new bases in northern Alberta and the new
base in Fort Nelson, B.C had a negative impact on 2007 margins.
One of the largest components of operating expenses are the wages of CanSub's
field employees. CanSub has structured the compensation of most of its field
employees so that all or a portion of the wage is variable. As a result, when
industry activity is slower, the exposure to high fixed components is reduced.
When activity levels are more robust, and the Company generates more revenue,
compensation amounts increase. In the Wireline division, most of the field
employees are paid based on a base wage plus a percentage of the field revenue
they generate. In the Testing division, almost all field compensation is
variable as the field employees are paid on a day rate basis.
To counteract the effect of reduced pricing of many of CanSub's services, the
Company has implemented the following to reduce operating costs, optimize
operations and preserve margins:
- Negotiated discounts from suppliers
- Moved equipment to higher activity areas to increase utilization
- Re-positioned station managers and some office personnel to work in the field.
- Identified niche, specialty service markets for both the wireline and testing
divisons which has helped to increase equipment utilization.
Selling, general and administrative expenses
The Company's selling, general and administrative expenses ("SG&A") are recorded
on a consolidated basis and not broken out for each division as the two
divisions share the same management team as well as accounting, administration
and sales staff.
----------------------------------------------------------------------------
Three Three
months months Year Year
ended ended ended ended
Dec Dec Dec Dec
31, 2007 31, 2006 % 31, 2007 31, 2006 %
$000s (unaudited)(unaudited) Change (unaudited)(unaudited) Change
----------------------------------------------------------------------------
SG&A 1,968 2,243 (12%) 8,652 7,761 11%
----------------------------------------------------------------------------
SG&A expenses were approximately 12% lower in Q4 2007 as compared to Q4 2006.
This partially reflects the effects of cost cutting measures initiated during Q3
2007. SG&A expenses were 12% of sales in Q4 2007 as compared to 11% of sales in
Q4 2006. CanSub's management continues to review all SG&A expenses in light of
the current industry slow-down and make appropriate adjustments.
For calendar 2007, SG&A expenses were approximately 11% higher as compared to
expenses recognized during calendar 2006. The year over year increase reflects
the Company's increased staffing due to the large growth experienced during 2006
and the higher costs associated with operating as a public entity.
Stock-based compensation expense
----------------------------------------------------------------------------
Three Three
months months Year Year
ended ended ended ended
Dec Dec Dec Dec
31, 2007 31, 2006 % 31, 2007 31, 2006 %
$000s (unaudited)(unaudited) Change (unaudited)(unaudited) Change
----------------------------------------------------------------------------
Stock-based
compensation
expense 282 273 3% 1,294 1,477 (12%)
----------------------------------------------------------------------------
Stock-based compensation expense in Q4 2007 was in line with amounts recorded in
Q4 2006.
For the 2007 year, stock-based compensation expense includes approximately
$121,000 of expense associated with the re-pricing of stock options to
non-insiders of the Company which was approved by the Company's Board during
February 2007. See further discussion of the option re-pricing and other option
information in the section below titled "Stock Options".
Stock-based compensation expense for calendar 2006 includes $567,000 associated
with stock options that vested in the CanSub Group of companies just prior to
the February 14, 2006 go-public transaction.
Depreciation and amortization expense
----------------------------------------------------------------------------
Three Three
months months Year Year
ended ended ended ended
Dec Dec Dec Dec
31, 2007 31, 2006 % 31, 2007 31, 2006 %
$000s (unaudited)(unaudited) Change (unaudited)(unaudited) Change
----------------------------------------------------------------------------
Depreciation 2,166 1,563 39% 8,215 4,763 73%
----------------------------------------------------------------------------
Amortization 633 718 (12%) 2,602 1,783 46%
----------------------------------------------------------------------------
Total 2,799 2,281 23% 10,817 6,546 65%
----------------------------------------------------------------------------
Depreciation expense (which relates to depreciation of the Company's property
and equipment) amounted to $2.2 million during Q4 2007. The increase over the Q4
2006 expense amount reflects the higher property and equipment balance during
the current quarter.
Depreciation expense for calendar 2007 of $8.2 million was significantly higher
than the $4.8 million recognized for the 2006 year, reflecting much higher
property and equipment balances for the full 2007 year. These higher balances
resulted from the $35.3 million in net capital expenditures incurred during the
2006 year ($26.0 million from the Company's internal build program and an
additional $9.3 million from the acquisitions of Colter Production Services and
the three owner operators which closed in May 2006) combined with the net
capital expenditures of $15.4 million in 2007.
Amortization expense (which relates to amortization of the Company's intangible
assets) amounted to $0.6 million during Q4 2007 which was in line with the Q4
2006 amount. The majority of this expense relates to amortization of the $11.3
million of intangible assets acquired as part of the business acquisitions of
Colter and the owner operators on May 31, 2006. For the 2007 calendar year,
amortization expense was significantly higher then during 2006, as the
intangibles acquired from the business acquisitions were amortized for only part
of 2006.
Due to the impairment loss of the intangible assets recognized during Q4 2007
(see discussion below in section titled "Impairment loss on goodwill and
intangible assets") , the intangible asset balances were reduced to nil on the
balance sheet at December 31, 2007. As a result, there will be no future
amortization expense from the intangible assets acquired during 2007 and prior
years.
Interest expense
----------------------------------------------------------------------------
Three Three
months months Year Year
ended ended ended ended
Dec Dec Dec Dec
31, 2007 31, 2006 % 31, 2007 31, 2006 %
$000s (unaudited)(unaudited) Change (unaudited)(unaudited) Change
----------------------------------------------------------------------------
Interest on long-
term debt 523 97 439% 1,680 472 256%
----------------------------------------------------------------------------
Other interest 43 245 (82%) 79 430 (82%)
----------------------------------------------------------------------------
Total interest 566 342 66% 1,759 902 95%
----------------------------------------------------------------------------
Total interest expense for Q4 2007 of $0.6 million was 66% higher than the Q4
2006 interest expense of $0.3 million. The increase in 2007 primarily reflected
a net increase in the average total debt balance (comprised of bank
indebtedness, callable debt, long-term debt and capital leases) combined with
higher interest rates.
For calendar 2007, total interest expense was approximately two times greater
than interest expense recognized for the 2006 year as a result of significantly
higher average debt balances during 2007. The increased total debt reflected the
use of debt financing for CanSub's internal equipment build programs in 2006 and
2007 which amounted to approximately $41.3 million (2006 - net $25.9 million;
2007 - net $15.4 million). Equipment acquired as part of the May 2006 business
acquisitions was financed through proceeds of an equity offering.
Impairment loss on goodwill and intangible assets
During Q4 2007, CanSub recognized an impairment loss on goodwill of $14.2
million and an impairment loss on intangible assets of $7.5 million (total
impairment losses of $21.7 million).
For goodwill, a two-step impairment test was used. The first step is to identify
if a potential goodwill impairment exists. The second step measures the amount
of impairment loss to be recognized. These steps were performed as follows:
- Step 1 - identify if a potential impairment exists. The fair value of each of
the Wireline and Testing reporting units was calculated (using a multiple of
calendar 2007 EBITDA) and then compared with the carrying amounts of the related
assets in these divisions, including goodwill. Since the carrying value of the
assets for both reporting units exceeded the calculated fair values there was
evidence that impairment existed.
- Step 2 - calculation of impairment loss amount. Several measurement methods
were used to calculate the estimated fair value of goodwill including the
comparison of the carrying values of assets to fair values of the reporting
units for each of the Wireline and Testing divisions as noted in Step 1 above.
In addition, the market capitalization of CanSub (based on the Company's share
price at December 31, 2007) was compared to the book value of the Company (ie
the value of shareholders' equity) to determine the value of goodwill that was
attributed by the public markets. Based on these measurements, it was determined
that goodwill had no value at December 31, 2007 and a full impairment charge was
taken.
For intangible assets, an estimated fair value was calculated for these assets
at December 31, 2007 and then compared to their respective carrying values. The
method used to calculate the current fair values was the same calculation used
to value the intangibles when they were first acquired (as part of business
acquisitions, primarily during 2006) and involved estimating future cash flows
generated for each class of intangible assets. As a result of these
calculations, it was determined that the fair value of the intangible assets was
minimal and therefore, the full carrying value of the intangibles at December
31, 2007 was impaired.
The conditions which precipitated the impairment of both goodwill and the
intangible assets were as follows:
- weakness in natural gas commodity prices negatively impacting expectations of
industry activity levels.
- the increased oil and gas production royalties recently announced by the
Alberta government is expected to negatively impact activity levels in Alberta
areas of the WCSB in the near term.
- upward cost pressures experienced by the industry adversely affecting
operating margins.
These conditions have contributed to the decreased enterprise value of CanSub
and the fair value of CanSub's operating segments. As such, goodwill and
intangible asset impairment charges of $14.2 million and $7.5 million
respectively were recognized. As a result of these impairment charges, the
carrying value of both goodwill and intangible assets on the balance sheet at
December 31, 2007 was nil.
Current tax expense (recovery)
For the year ended December 31, 2007, CanSub recognized a net current tax
expense of $0.4 million. This expense was generated to utilize expiring ITC's of
$0.4 million which will result in nil cash taxes payable for the 2007 calendar
period.
Future income tax expense (reduction)
The Company recognized a future income tax reduction of $2.7 million in Q4 2007
bringing calendar 2007 future income tax reduction to $4.4 million. The future
income tax expense (reduction) is typically impacted by net timing differences
between amounts for tax and accounting and draw-downs of the deferred credit.
Net Earnings (loss)
The Company recorded a net loss in Q4 2007 of $21.0 million (negative $1.09 per
share - basic and diluted) as compared to net earnings of $1.6 million ($0.08
per share - basic and diluted) for Q4 2006. For calendar 2007, the Company
recorded a net loss of $24.7 million (negative $1.28 per share). The net loss
figures recorded in the Q4 2007 and Year ended December 31, 2007 periods include
a one-time, non-cash charge of $21.7 million related to impairment loss of
goodwill and intangible assets.
Retained Earnings (deficit)
On November 13, 2006, the Company's shareholders approved the reduction of the
accumulated deficit by $22.7 million which eliminated the Company's accumulated
deficit balance and resulted in a retained earnings balance at December 31, 2006
of $7.0 million. This revised retained earnings figure reflects the cumulative
earnings of CanSub since January 1, 2006, and in the opinion of the Company's
management, is more representative of the performance of the Company since the
February 14, 2006 transaction. At December 31, 2007, the Company's defict
balance was $17.8 million.
Income Tax amounts
The Company had the following estimated tax amounts available at December 31,
2007 to apply against future taxable income: non-capital losses of $15.3 million
and unclaimed scientific research and development expenditures ("SRED") of $9.4
million. In addition, the Company had approximately $1.5 million in investment
tax credits which may be claimed against taxes otherwise payable for federal
purposes and expire between 2008 and 2014. These tax amounts are subject to
review and assessment by the taxation authorities.
Share Capital
There were no changes to Share Capital during calendar 2007 and to March 24,
2008. The number of common shares outstanding remained at 19.3 million.
Stock Options
During Q4 2007, the Company granted 44,500 options and forfeited 79,500 options
for a net decrease of 35,000 options. At December 31, 2007 the Company had 1.642
million options outstanding.
During February 2007, the Company's Board of Directors approved the re-pricing
of 405,500 options held by employees of the Company (excluding directors,
officers, senior management and other insiders). The exercise prices of these
options, which ranged from $4.49 to $7.80 per option were all reduced to $4.20.
As a result of this re-pricing, an additional stock-based compensation expense
of $200,000 will be recorded over the remaining vesting period of the related
options. Of this amount, $121,000 of expense was recognized in calendar 2007.
Due to this re-pricing, substantially all of the Company's outstanding options
at December 31, 2007 had an exercise price of $4.20 which is equal to the price
of the Company's shares issued as part of the February 14, 2006 go-public
transaction. All options granted during 2007 were at exercise prices ranging
from $4.20 to $4.40.
Liquidity and Capital Resources
The Company recorded positive cash flow from operations (before changes in
non-cash working capital) of $1.5 million for Q4 2007 as compared to positive
cash flow from operations of $4.1 million in Q4 2006. Cash flow from operations
during calendar 2007 was $5.1 million as compared to $15.6 million for calendar
2006. The decrease in Cash flow in both periods primarily reflects the reduced
revenues and margins in 2007 (see Revenue and Gross Margin analysis above).
As at December 31, 2007 the Company had working capital of $0.9 million and
total long-term debt (i.e. long-term debt plus long-term portion of capital
leases) of $20.0 million for a net debt position of $19.1 million. At December
31, 2007 the Company had drawn $23.2 million of its committed, revolving
facility. The total credit under this facility is $44.0 million. The actual
amount available at any one time is equal to 75% of marginable accounts
receivable plus 50% of the net book value of property and equipment on the
Company's balance sheet less assets pledged as security for capital lease
liabilities and less certain computer equipment. This resulted in an actual
available amount from this facility of approximately $31.2 million at December
31, 2007, or an additional $8.0 million of available funds to be drawn on the
facility. However, amounts the Company is eligible to draw under the facility
are subject to CanSub meeting all related facility covenants.
The committed, revolving facility can be used to finance working capital
requirements, acquire capital assets and for business acquisitions. Under terms
of the facility, the initial Revolving Term Date (ie the date at which the
facility reverted to a three-year term loan) was scheduled to be on October 26,
2007. However, at CanSub's request, the Revolving Term Date was extended by the
bank to June 30, 2008. The Company is entitled to request a one-year renewal
past the June 30, 2008 date by giving the bank notice within 60 days prior to
June 30. If the bank does not agree to this renewal, the balance outstanding on
the facility will be capped and repaid in even principal plus interest amounts
over a three-year period commencing on July 31, 2008.
At September 30, 2007, the Company was not in compliance with one of the debt
covenants covering the revolving, committed facility which was based on the
Company's debt levels as a multiple of trailing 12-month EBITDA. Subsequent to
September 30, 2007, the bank provided CanSub with a waiver related to this
particular covenant breach. The calculation of this covenant, which is done on a
quarterly basis, has been amended by the bank for quarterly periods ended
December 31, 2007 and March 31, 2008. At December 31, 2007 the Company was in
compliance with this covenant (as amended) and also in compliance with all other
required covenants. CanSub is currently in the process of renegotiating the
terms of this committed, revolving facility in advance of the June 30, 2008
Revolving Term Date.
The Company believes that its available credit facilities and cash flow from
operating activities will provide sufficient capital resources to fund near term
capital expenditures and on-going operations. As was done in prior years, CanSub
also has the option of financing capital asset and business acquisition programs
from the proceeds of equity offerings. The Company's management continues to
evaluate cost cutting measures as well as its capital expenditure programs in
response to the current industry conditions.
Investing Activities
The Company's net capital expenditures (ie acquisitions net of proceeds from
disposals) for property and equipment during Q4 2007 amounted to $2.2 million
which brings year to date net capital expenditures to $15.4 million. Capital
expenditures incurred during Q4 2007 related primarily to 2 new wireline units
and 1 new swabbing unit placed into operation during the current quarter plus
costs of certain auxiliary equipment.
The chart below outlines the calendar 2007 fleet additions. In addition to the
new operating units, a portion of CanSub's capital expenditure program for 2007
was for the refurbishment of older equipment as well as certain auxiliary
equipment.
----------------------------------------------------------------------------
# of Wireline # of Swabbing # of Testing
Units Units packages
----------------------------------------------------------------------------
Operating fleet at
December 31, 2006 35 8 61
----------------------------------------------------------------------------
Additions during
Q1 2007 6 - -
----------------------------------------------------------------------------
Additions during
Q2 2007 - 1 -
----------------------------------------------------------------------------
Additions during
Q3 2007 3 - -
----------------------------------------------------------------------------
Units parked during
Q3 2007 (2) - -
----------------------------------------------------------------------------
Additions during
Q4 2007 2 1 -
----------------------------------------------------------------------------
Operating fleet at
December 31, 2007 44 10 61
----------------------------------------------------------------------------
The 44 wireline units in operation at December 31, 2007 were comprised of 22
E-line units and 22 slickline units. In addition, there are 2 older E-line units
that were parked at year end to reduce costs. One additional E-line unit was
placed into operation during February 2008, which brings the total operating
wireline fleet at March 24, 2008 to 45 units.
Based on the continuing industry slow-down, management has minimal capital
expenditures planned for 2008.
Financing Activities
Financing activities during Q4 2007 consisted of a decrease in the Company's
committed, revolving facility of $1.3 million and repayments of the Company's
capital lease obligations totaling $0.6 million. For calendar 2007, financing
activities consisted of a net increase in the committed, revolving facility of
$5.7 million and capital lease repayments of $2.3 million.
Related Party Transactions
All related party transactions during Q4 2007 and the year ended December 31,
2007 were in the normal course of business at market rates. Material related
party transactions are outlined in the notes to the audited December 31, 2007
financial statements.
Quarterly Financial Summary
The financial results of the Company's last eight fiscal quarters are summarized
below.
(in thousands of dollars, except per share amounts or as otherwise noted)
----------------------------------------------------------------------------
Three months Three months Three months Three months
ended Dec 31 ended Sept 30 ended June 30 ended Mar 31
2007 2007 2007 2007
(unaudited) (unaudited) (unaudited) (unaudited)
----------------------------------------------------------------------------
Revenue 16,312 17,533 7,282 25,042
----------------------------------------------------------------------------
Cash Flow (1) 1,465 2,170 (3,370) 4,867
----------------------------------------------------------------------------
EBITDA (1)(2) 1,968 2,690 (3,010) 5,189
----------------------------------------------------------------------------
EBITDA (1)(2) as a
% of revenue 12.1% 15.3% (41.8%) 20.7%
----------------------------------------------------------------------------
Net Earnings (loss) (21,024) (830) (4,597) 1,714
----------------------------------------------------------------------------
Net Earnings (loss)
per share - basic ($1.09) ($0.04) ($0.24) $0.09
----------------------------------------------------------------------------
Net Earnings (loss)
per share - diluted ($1.09) ($0.04) ($0.24) $0.09
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months Three months Three months Three months
ended Dec 31 ended Sept 30 ended June 30 ended March
2006 2006 2006 31, 2006
(unaudited) (unaudited) (unaudited) (unaudited)
----------------------------------------------------------------------------
Revenue 19,611 20,625 10,714 22,402
----------------------------------------------------------------------------
Cash Flow (1) 4,110 5,002 (29) 6,553
----------------------------------------------------------------------------
EBITDA (1)(2) 4,360 5,228 175 6,757
----------------------------------------------------------------------------
EBITDA (1)(2) as a
% of revenue 22.2% 25.3% 1.6% 30.1%
----------------------------------------------------------------------------
Net Earnings (loss) 1,616 2,192 806 2,352
----------------------------------------------------------------------------
Net Earnings per
share - basic $0.08 $0.12 $0.05 $0.25
----------------------------------------------------------------------------
Net Earnings per
share - diluted $0.08 $0.12 $0.05 $0.24
----------------------------------------------------------------------------
(1) Refer to the "Non-GAAP measures" section below for details.
(2) EBITDA means earnings before interest, taxes, depreciation and
amortization and excludes stock based compensation expense. For Q1
2006, EBITDA is also adjusted for certain equipment lease expenses that
are included in operating expenses. Refer to the section below titled
"Reconciliation of Cash Flow and EBITDA to Net Earnings".
(3) Results in the various quarters are subject to seasonality. See above
section titled "Seasonality".
Commitments and obligations
See notes to the audited financial statements for the year ended December 31,
2007 for a summary of the Company's commitments and obligations.
Off balance sheet financing arrangements
Other than the vehicle, equipment and facility leases described in the
commitments note in the audited financial statements for the year ended December
31, 2007, there are no material off balance sheet financing arrangements.
Use of estimates and assumptions
The financial statements of the Company have been prepared by management in
accordance with Canadian Generally Accepted Accounting Principals ("GAAP"). The
timely preparation of these financial statements in conformity with Canadian
GAAP requires that management make estimates and assumptions and use judgment
regarding the reported amounts of assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and
expenses during the period. The most significant are estimates for depreciation
and amortization, valuation of goodwill, valuation of intangible assets, stock
based compensation and other components of employee compensation and valuation
of future income tax assets. The financial statements have, in management's
opinion, been prepared within reasonable limits of materiality and within the
framework of the Company's accounting policies.
New accounting pronouncements
On January 1, 2007, the Company adopted the following sections of the Canadian
Institute of Chartered Accountants ("CICA") Handbook: Section 1530 -
"Comprehensive Income" and Section 3855 - "Financial Instruments - Recognition
and Measurement". The comprehensive income standard requires a separate
financial statement that captures items included in other comprehensive income
but excluded from income in accordance with Canadian GAAP. The new financial
instrument standards deal with the recording of financial instruments at fair
value in the financial statements unless certain criteria are met allowing them
to be recorded at cost or amortized cost.
The adoption of these new standards has had no material impact on the Company's
current or prior period net earnings or cash flows.
Two new Canadian accounting standards have been issued which will require
additional disclosure in the Company's financial statements commencing January
1, 2008 regarding the Company's financial instruments, as well as the Company's
capital with a description as to how the capital is managed. In addition, there
is a new standard related to the measurement and disclosure of inventory which
will be applied retrospectively effective January 1, 2008. Management is
assessing the impact of these changes.
Risks and Uncertainties
A complete discussion on the business risks and uncertainties faced by the
Company may be found under the "Risk Factors" section in the Corporation's
Annual Information Form which is available under the Corporation's profile at
www.sedar.com.
Evaluation of Disclosure Controls and Procedures
Management has designed disclosure controls and procedures to provide reasonable
assurance that material information relating to the Company is made known to the
Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") on a timely
basis in order for the Company to comply with its disclosure and financial
reporting obligations and in order to safeguard assets. The CEO and CFO have
concluded that the Company's disclosure controls and procedures, as at December
31, 2007 are designed and operating effectively in providing reasonable
assurance that material information is accumulated and made known to them on a
timely basis.
Evaluation of Internal Controls over Financial Reporting
The Company's CEO and CFO are responsible for designing internal controls over
financial reporting ("ICFR") or causing them to be designed under their
supervision in order to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with GAAP.
The Company has assessed the design of its internal controls over financial
reporting as at December 31, 2007. Based on this assessment, the Company's CEO
and CFO have concluded that the Company's ICFR is designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with GAAP.
As required, the Company records complex and non-routine transactions. These are
sometimes extremely technical in nature and require an in-depth understanding of
GAAP. To address this risk, the Company consults with third party advisors as
needed in connection with the recording and reporting of complex and non-routine
transactions. Management does not expect that the internal controls over
financial reporting would prevent all errors and fraud. A control system, no
matter how well conceived or operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met.
There were no material changes to the Company's internal controls over financial
reporting that occurred during the most recently completed year end period that
has materially affected, or is reasonably likely to materially affect, the
Company's ICFR.
Outlook
Weak natural gas prices during 2007 continued to have a negative impact on
overall industry activity levels and equipment utilization rates. In addition,
the new royalty regime announced by the Alberta government during October, 2007
may further reduce near term drilling activities, especially in Alberta. To deal
with the current downturn, CanSub has implemented various cost cutting measures
and continues to optimize operations corporately and at each operating hub. In
addition, to conserve capital going forward, the Company has minimal capital
expenditures planned in 2008.
Although the current competitive price environment has impacted the Company's
margins, CanSub continues to see reasonable utilization rates in its largest
divison - Wireline and related services. The services in this division are
geared to oil and natural gas well completions as well as to activities related
to existing, producing wells. Activity related to new and existing oil wells
remains strong given the current, robust oil prices. The Testing division, which
is involved primarily in natural gas well completion work, is still running at
lower utilization rates than the prior year at this time but remains profitable
even at reduced pricing.
The Company's management continues to closely monitor industry activity and will
make further adjustments to operating costs and capital expenditures if activity
levels during the next several quarters are lower than anticipated. Given the
Company's strong client base, geographical spread across the WCSB and
diversification of services, CanSub is positioned to respond to the industry
turnaround, anticipated later in 2008.
RECONCILIATION OF CASH FLOW AND EBITDA TO NET EARNINGS
----------------------------------------------------------------------------
Three months Three months Year ended Year ended
ended Dec 31 ended Dec 31 Dec 31 Dec 31
2007 2006 2007 2006
In $000's (unaudited) (unaudited) (unaudited) (unaudited)
----------------------------------------------------------------------------
Net earnings (loss) (21,024) 1,616 (24,737) 6,966
----------------------------------------------------------------------------
Add back (deduct):
----------------------------------------------------------------------------
Depreciation and
amortization expense 2,799 2,281 10,817 6,546
----------------------------------------------------------------------------
Future income tax
expense (reduction) (2,744) 20 (4,412) (34)
----------------------------------------------------------------------------
(Gain) loss on disposal
of capital assets (1) (246) 17 (272)
----------------------------------------------------------------------------
Stock-based compensation
expense 282 273 1,294 1,477
----------------------------------------------------------------------------
Investment tax credit
utilized 446 - 446 -
----------------------------------------------------------------------------
Impairment loss on
goodwill and
intangible assets 21,707 - 21,707 -
----------------------------------------------------------------------------
Loss on settlement of
Class B preferred
share liability - 167 - 167
----------------------------------------------------------------------------
Non-Controlling interest - - - 786
----------------------------------------------------------------------------
Cash Flow (1) 1,465 4,110 5,132 15,636
----------------------------------------------------------------------------
Long-term and other
interest expense 566 342 1,759 902
----------------------------------------------------------------------------
Current tax expense
(recovery) 383 (92) 392 (92)
----------------------------------------------------------------------------
Utilization of
investment tax credit (446) - (446) -
----------------------------------------------------------------------------
Equipment lease
expenses included in
operating expenses (2) - - - 72
----------------------------------------------------------------------------
EBITDA (1) 1,968 4,360 6,837 16,518
----------------------------------------------------------------------------
(1) Refer to "Non-GAAP Measures" section below.
(2) Certain of the Company's wireline units, swabbing units, testing
packages and related equipment in the prior year were leased through
operating leases (with the related lease payments being expensed as a
component of operating expenses in the statement of operations). If the
Company had owned these assets, the related depreciation expense would
have been an add back in determining an EBITDA figure. In order to be
comparable between the current and prior year operating periods, the
equipment lease payments expensed in the prior periods are reflected as
an add back in the Company's EBITDA calculation.
NON-GAAP MEASURES
Cash Flow from operations represents cash provided by operations prior to
excluding the impact of cash provided by (used in) non-cash working capital
changes. The cash provided by (used in) operations figure is reflected in the
Company's statement of cash flows. EBITDA represents earnings before interest,
income taxes, depreciation and amortization and stock-based compensation expense
and is a widely used financial indicator in the oilfield services sector. EBITDA
is also adjusted for certain equipment lease expenses that are recorded in
operating expenses. EBITDA is provided as a measure of operating performance
without reference to financing decisions and income tax impacts, which are not
controlled at the operating management level. Gross Margin represents revenue
less operating expenses and is another financial indicator used in the oilfield
services sector to assess performance of the business at the field level. Gross
Margin will vary quarter over quarter in relation to the seasonality of the
Company's business. Cash Flow and EBITDA are not measures determined in
accordance with Canadian Generally Accepted Accounting Principals ("GAAP") and
should not be construed as an alternative to net earnings or net cash provided
by operations. These measures as presented may not be comparable to similarly
titled measures of other companies.
Financial Statements of
CANADIAN SUB-SURFACE ENERGY SERVICES CORP.
Years ended December 31, 2007 and 2006.
CANADIAN SUB-SURFACE ENERGY SERVICES CORP.
Consolidated Balance Sheets
(in thousands of dollars)
----------------------------------------------------------------------------
December 31, December 31,
2007 2006
----------------------------------------------------------------------------
Assets
Current assets:
Accounts receivable $ 13,531 $ 19,004
Deposits and other 888 2,346
Inventory 348 302
Income taxes receivable - 99
---------------------------------------------------------------------------
14,767 21,751
Property and equipment (note 6) 50,809 43,338
Future income tax asset (note 11) 9,442 5,476
Intangible assets (note 7) - 10,073
Goodwill (note 8) - 14,177
----------------------------------------------------------------------------
$ 75,018 $ 94,815
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 7,860 $ 7,556
Current portion of long-term debt (note 9) 3,862 487
Current portion of obligations under
capital leases (note 10) 2,091 2,278
Income taxes payable 27 7
---------------------------------------------------------------------------
13,840 10,328
Long-term debt (note 9) 19,319 17,027
Obligations under capital leases (note 10) 675 2,833
Deferred credit (notes 4 and 11) 6,723 6,723
----------------------------------------------------------------------------
40,557 36,911
Shareholders' equity:
Share capital (note 12) 47,593 47,593
Contributed surplus (note 12) 4,639 3,345
Retained earnings (deficit) (17,771) 6,966
----------------------------------------------------------------------------
34,461 57,904
Commitments (note 15)
----------------------------------------------------------------------------
$ 75,018 $ 94,815
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
On behalf of the Board:
Signed "Darshan Kailly" Signed "William Tobman"
----------------------- -----------------------
Director Director
CANADIAN SUB-SURFACE ENERGY SERVICES CORP.
Consolidated Statements of Operations and Retained Earnings (Deficit)
(in thousands of dollars; except per share amounts)
----------------------------------------------------------------------------
Year ended December 31,
-------------------------------
2007 2006
----------------------------------------------------------------------------
Revenue $ 66,169 $ 73,352
Expenses:
Operating 50,680 49,145
Selling, general and administrative 8,652 7,761
Stock-based compensation 1,294 1,477
Depreciation and amortization 10,817 6,546
Interest on long-term debt 1,680 472
Other interest 79 430
Loss (gain) on disposal of equipment 17 (272)
---------------------------------------------------------------------------
73,219 65,559
----------------------------------------------------------------------------
Earnings (loss) before other items (7,050) 7,793
Other items:
Impairment loss on goodwill (note 8) 14,177 -
Impairment loss on intangible assets
(note 7) 7,530 -
Loss on settlement of Class B preferred
share liability - 167
----------------------------------------------------------------------------
21,707 167
Earnings (loss) before income taxes (28,757) 7,626
Income taxes (note 11):
Current (recovery) 392 (92)
Future (reduction) (4,412) (34)
----------------------------------------------------------------------------
(4,020) (126)
----------------------------------------------------------------------------
Earnings (loss) before non-controlling
interest (24,737) 7,752
Non-controlling interest - (786)
----------------------------------------------------------------------------
Net earnings (loss) (24,737) 6,966
Retained earnings, beginning of year 6,966 1,607
Purchase of non-controlling interest - 3,306
Cash and Class B preferred shares paid
to CanSub Group shareholders (note 1) - (27,566)
Application of deficit against share
capital - 22,653
----------------------------------------------------------------------------
Retained earnings (deficit), end of year $(17,771) $ 6,966
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Earnings (loss) per common share (note 13)
Basic $ (1.28) $ 0.45
Diluted $ (1.28) $ 0.44
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
CANADIAN SUB-SURFACE ENERGY SERVICES CORP.
Consolidated Statements of Cash Flows
(in thousands of dollars)
----------------------------------------------------------------------------
Year ended December 31,
-------------------------------
2007 2006
----------------------------------------------------------------------------
Cash provided by (used in):
Operations:
Net earnings (loss) $(24,737) $ 6,966
Impairment loss on goodwill 14,177 -
Impairment loss on intangible assets 7,530 -
Depreciation and amortization 10,817 6,546
Future income taxes (4,412) (34)
Stock based compensation 1,294 1,477
Investment tax credit utilized 446 -
Loss (gain) on disposal of equipment 17 (272)
Loss on settlement of Class B preferred
share liability - 167
Non-controlling interest - 786
----------------------------------------------------------------------------
5,132 15,636
Change in non-cash working capital related
to operating activities (note 14) 5,338 (7,345)
---------------------------------------------------------------------------
10,470 8,291
----------------------------------------------------------------------------
Financing:
Increase in long-term debt 5,667 17,514
Repayment of obligations under capital
lease (2,345) (2,340)
Decrease in amounts due from related
parties - 174
Repayment of callable debt - (1,832)
Decrease in bank indebtedness - (4,924)
Repayment of notes payable - (1,266)
Repayment of long-term debt - (206)
Repayment of shareholders' loans - (803)
Increase in obligations under capital lease - 3,448
Decrease in loans receivable - 163
Net proceeds on issuance of common shares - 49,139
Proceeds from exercise of stock options - 810
Cash portion of payment to CanSub Group
shareholders (note 1) - (26,066)
---------------------------------------------------------------------------
3,322 33,811
----------------------------------------------------------------------------
Investing:
Acquisition of businesses (375) (16,795)
Acquisition of property and equipment (15,478) (26,017)
Cash acquired on business combination
(note 4) - 1,512
Proceeds from disposal of equipment 91 109
Change in non-cash working capital related
to investing activities (note 14) 1,970 (911)
---------------------------------------------------------------------------
(13,792) (42,102)
----------------------------------------------------------------------------
Net change in cash - -
Cash, beginning of year - -
----------------------------------------------------------------------------
Cash, end of year $ - $ -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Supplementary cash flow information (note 14)
See accompanying notes to consolidated financial statements.
CANADIAN SUB-SURFACE ENERGY SERVICES CORP.
Notes to the Consolidated Financial Statements
(in thousands of dollars)
Years ended December 31, 2007 and 2006
1. Basis of presentation and nature of operations:
These consolidated financial statements include the accounts of Canadian
Sub-Surface Energy Services Corp. (formerly Canada West Capital Inc. ("CWC")),
its wholly-owned subsidiary and its wholly-owned partnership (collectively the
"Company"), and are presented in accordance with Canadian Generally Accepted
Accounting Principles ("GAAP").
The Company provides the following oilfield services in Western Canada through
its operating divisions: wireline services (including cased-hole electric line
and slickline), swabbing, well optimization and production testing.
On February 14, 2006 ("the transaction date"), CWC acquired all of the
outstanding shares of Canadian Sub-Surface Energy Services Inc., Canadian
Sub-Surface Gas Testing Inc. and 1156853 Alberta Ltd. ("115") (collectively "the
CanSub Group"). After the acquisition, the former shareholders of the CanSub
Group held the largest percentage of Class A common voting shares and controlled
the Company's management and therefore the CanSub Group was deemed the acquirer
for accounting purposes. Accordingly, the transaction has been accounted for as
a reverse takeover (using the purchase method) whereby the assets and
liabilities of CWC were recorded at their fair values at the February 14, 2006
transaction date.
For the comparative period ended December 31, 2006, the combined consolidated
financial statements from January 1, 2006 up to the February 14, 2006
transaction date are the accounts of the CanSub Group. The non-controlling
interest recorded on the income statement is attributed to a minority interest
held outside the CanSub Group. For the period between the February 14, 2006
transaction date and December 31, 2006 these consolidated financial statements
include the accounts of the Company.
CWC was incorporated on June 14, 1998 under the Business Corporations Act
(Ontario). It was then continued under the Canada Business Corporations Act on
January 13, 2004 and further continued under the Business Corporation's Act
(Alberta) subsequent to the February 14, 2006 transaction. Just prior to the
February 14, 2006 transaction, CWC was publicly traded.
The transaction between CWC and the CanSub Group can be summarized as follows:
- On December 30, 2005, CWC and the CanSub Group entered into an Arrangement
Agreement which included the reorganization of CWC's share capital, a $34,000
financing and the acquisition of the CanSub Group.
- On February 14, 2006, CWC closed the $34,000 financing (net proceeds of
$31,905 after deducting related commissions) through the issue of 8,095,237
Class A common shares at a price of $4.20 per share, and then completed the
acquisition of the CanSub Group for a net purchase price (prior to adjustment)
of $49,132. The initial purchase price consisted of the payment of $24,566 in
cash and the remaining $24,566 in shares.
- The share component consisted of 5,491,905 Class A common shares and 357,143
Class B preferred shares (both share classes valued at $4.20 per share).
- The purchase price was subsequently increased by $1,500 to a total of $50,632
as a result of the purchase price adjustment clause contained in the Arrangement
Agreement. The purchase price adjustment was paid in cash to the CanSub Group
shareholders in the third quarter of 2006.
As part of the Arrangement Agreement, CWC changed its name to Canadian
Sub-Surface Energy Services Corp. Shares of the Company commenced trading on the
TSX on February 17, 2006.
Summary of purchase price paid by CWC for acquisition of CanSub Group
shares:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Initial cash consideration on February 14, 2006 $ 24,566
Purchase price adjustment 1,500
----------------------------------------------------------------------------
Total cash portion 26,066
Value of Class B preferred shares issued 1,500
----------------------------------------------------------------------------
Total consideration paid excluding Class A common shares 27,566
Value of Class A common shares issued 23,066
----------------------------------------------------------------------------
Total purchase price $ 50,632
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Since the CanSub Group was the deemed acquirer in the transaction, the cash and
Class B preferred share consideration used to purchase all of the outstanding
shares of the CanSub Group was treated as a share buy-back, with the $27,566
applied to reduce retained earnings.
Effective May 31, 2006, the three entities comprising the CanSub Group were
amalgamated and wound up into the Company.
2. Use of estimates:
The financial statements of the Company have been prepared by management in
accordance with Canadian Generally Accepted Accounting Principles ("GAAP"). The
timely preparation of these financial statements in conformity with Canadian
GAAP requires that management make estimates and assumptions and use judgment
regarding the reported amounts of assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and
expenses during the period. The most significant are the estimates for
depreciation and amortization, valuation of goodwill, valuation of intangible
assets, stock based compensation and valuation of income tax assets.
Accordingly, actual results could differ from those estimates. The financial
statements have, in management's opinion, been prepared within reasonable limits
of materiality and within the framework of the Company's accounting policies.
3. Summary of significant accounting policies:
On January 1, 2007, the Company adopted the Canadian Institute of Chartered
Accountants ("CICA") Handbook Section 1530 "Comprehensive Income", Handbook
Section 3855 "Financial Instruments - Recognition and Measurement" and Handbook
Section 3861 "Financial Instruments - Disclosure and Presentation".
The adoption of these standards has had no material impact on the Company's
current or prior period net earnings or cash flows. The other effects of the
implementation of the new standards are described in (a) and (b) below.
(a) Comprehensive income:
The new standards introduce comprehensive income, which consists of net earnings
and other comprehensive income ("OCI"). The cumulative changes in OCI are
included in the accumulated other comprehensive income, which is presented as a
new category within shareholders' equity in the consolidated balance sheet. The
adoption of the comprehensive income standard has been made in accordance with
its transitional provisions. A statement of comprehensive income has not been
included in these consolidated financial statements as the Company has no
adjustments that are required to be reported in OCI.
(b) Financial instruments:
The financial instrument standard establishes the recognition and measurement
criteria for financial assets, financial liabilities and derivatives. All
financial instruments are required to be measured at fair value on initial
recognition of the instrument, except for certain related party transactions.
Measurement in subsequent periods depends on whether the financial instrument
has been classified as "held-for-trading", "available-for-sale",
"held-to-maturity", "loans and receivables", or "other financial liabilities" as
defined by the standard.
Financial assets and financial liabilities "held-for-trading" are measured at
fair value with changes in those fair values recognized in net earnings.
Financial assets "available-for-sale" are measured at fair value, with changes
in those fair values recognized in OCI. Financial assets "held-to-maturity",
"loans and receivables" and "other financial liabilities" are measured at
amortized cost using the effective interest method of amortization. The methods
used by the Company in determining fair value of financial instruments are
unchanged as a result of implementing the new standard.
Accounts receivable and accrued revenues are designated as "loans and
receivables". Accounts payable and accrued liabilities, and long-term debt are
designated as "other liabilities".
The adoption of the financial instruments standard has been made in accordance
with its transitional provisions.
(c) Principles of consolidation:
For the periods ended December 31, 2007 and December 31, 2006, these
consolidated financial statements include the accounts of the Company, its
wholly-owned subsidiary and its wholly owned partnership. All significant
intercompany balances and transactions have been eliminated.
(d) Inventory:
Inventory consisting of equipment and related parts held for resale is carried
at the lower of cost, determined on a first in first out basis, and net
realizable value.
(e) Property and equipment:
Property and equipment are carried at cost.
Depreciation has been calculated using the declining balance method over the
estimated useful lives of the assets at the following annual rates:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Rate
----------------------------------------------------------------------------
Trucks 25%
Truck equipment 15%
Field equipment 15%
Furniture and office equipment 20%
Computer hardware and software 30%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(f) Long-lived assets:
On a periodic basis, management assesses the carrying value of long-lived assets
for indications of impairment. Indications of impairment include items such as
an ongoing lack of profitability and significant changes in technology. When an
indication of impairment is present, the Company tests for impairment by
comparing the carrying value of the asset to its net recoverable amount. If the
carrying amount is greater than the net recoverable amount, the asset is written
down to its estimated fair value.
(g) Intangible assets:
The Company amortizes its intangible assets on a straight-line basis over their
estimated useful lives as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Term
----------------------------------------------------------------------------
Non-competition agreements 4 years
Customer relationships 10 years
Patent pending technology 3 years
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(h) Goodwill:
Goodwill represents the portion of the purchase price paid on the acquisition of
businesses in excess of the value assigned to identifiable net assets acquired.
Goodwill is tested for impairment at least annually. The impairment test is
carried out in two steps. In the first step, the carrying amount of the
reporting segment is compared with its fair value. When the fair value of a
reporting segment exceeds its carrying amount, goodwill of the reporting segment
is considered not to be impaired and the second step of the impairment test is
unnecessary. The second step is carried out when the carrying amount of a
reporting segment exceeds its fair value, in which case the implied fair value
of the reporting segment's goodwill is compared with its carrying amount to
measure the amount of the impairment loss, if any. When the carrying amount of a
reporting segment's goodwill exceeds the implied fair value of the goodwill, an
impairment loss is recognized in an amount equal to the excess.
(i) Income taxes:
The Company follows the asset and liability method of accounting for future
income taxes whereby temporary differences arising from the difference between
the tax basis of an asset or liability and its carrying amount on the balance
sheet are used to calculate future income tax liabilities or assets. Future
income tax liabilities or assets are calculated using income tax rates currently
enacted or substantively enacted in the period that the temporary differences
are expected to reverse.
(j) Revenue recognition:
The Company's services are provided based upon orders and contracts with its
customers that include fixed or determinable prices on the basis of the services
rendered method, with agreed upon daily or hourly rates plus recovery of certain
costs. Revenue is recognized when services are rendered and only when
collectibility is reasonably assured.
(k) Stock based compensation:
The Company has a stock based compensation plan as described in note 12. The
Company estimates the fair value of stock options using the Black-Scholes
valuation model.
Stock-based compensation expense, based on the estimated fair value of the
award, is recognized as an expense on a straight-line basis over the vesting
period of the option. Stock-compensation expense is initially credited to
contributed surplus and transferred to common shares when the option is
exercised. Consideration received on the exercise of stock options is also
credited to common shares.
(l) Per share amounts
Basic earnings per common share is calculated by dividing the income available
to common shareholders by the weighted average number of common shares
outstanding during the period.
Diluted earnings per common share is based on the treasury stock method. Under
this method, the weighted average number of common shares outstanding assumes
that the proceeds to be received on the exercise of dilutive share options are
used to repurchase common shares at the average market price during the period.
In addition to the accounting policies described above, two new Canadian
accounting standards have been issued which will require additional disclosure
in the Company's financial statements commencing January 1, 2008, regarding the
Company's financial instruments, as well as the Company's capital with a
description as to how it's capital is managed. There is also a new standard
related to the measurement and disclosure of inventory which will be applied
retrospectively effective January 1, 2008. Management is assessing the impact of
these changes.
4. Business acquisitions:
(a) Acquisition of Canada West Capital Inc. ("CWC"):
The February 14, 2006 transaction described in note 1 was accounted for by the
purchase method with the CanSub Group being the deemed acquirer of CWC. The
results of operations of CWC are included in the consolidated financial
statements from February 14, 2006. Consideration of $1,569 issued to the CWC
shareholders consisted of 373,689 Class A common shares (with a deemed value of
$4.20 per share).
The fair values of the net assets acquired were as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cash $ 1,512
Accounts receivable 47
Future income tax asset related to non-capital losses, unclaimed
scientific research and development expenditures and
investment tax credits 12,768
Future income tax asset - transaction costs 185
Current liabilities (768)
Preferred share liability (2,219)
Deferred credit (9,956)
----------------------------------------------------------------------------
Net assets acquired $ 1,569
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(b) Acquisition of the assets of Colter Production Services Inc. and three Owner
operators:
On May 31, 2006, the Company completed the acquisitions of the business assets
of Colter Production Services Inc. ("Colter" - a private production testing
Company), and three Owner operators ("Owner operators" - all private wireline
companies) (Southern Wireline Services Ltd., Sure Shot Perforators Ltd. and VCEE
Wireline Services Ltd.). The aggregate purchase price of the four acquisitions
was $29,956. Consideration consisted of $16,795 in cash and $13,161 in Class A
common shares (with a deemed value for accounting purposes of $7.16 per share).
Commencing June 1, 2006 the revenues and earnings from Colter and the Owner
operators are included in the Company's financial statements.
Prior to the acquisition of the Owner-operators, the Company had a business
relationship with these entities which called for them to work exclusively for
the Company. As a result of these arrangements, the Company recorded 100% of the
revenues generated by the Owner-operators equipment and reimbursed the
Owner-operators an average of 82% of those revenues. Such reimbursement was
recorded in the Company's operating expenses.
The aggregate purchase price was allocated to the estimated fair values of the
net assets acquired as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Owner -
Colter operators Total
----------------------------------------------------------------------------
Property and equipment $ 3,595 $ 5,754 $ 9,349
Intangible assets:
Customer relationships 2,717 1,057 3,774
Non-compete agreements 3,623 3,860 7,483
Future income tax liability (961) (2,465) (3,426)
Goodwill 4,709 8,067 12,776
----------------------------------------------------------------------------
Net assets acquired $ 13,683 $ 16,273 $ 29,956
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(c) Acquisition of the assets of Sky-Hook Picker Services Inc.
On June 1, 2007, the Company completed the acquisition of the business assets of
Sky-Hook Picker Services Inc. (Sky-Hook) for cash consideration of $375. The
results of operations of Sky-Hook have been included since the date of
acquisition. The transaction was accounted for using the purchase method and the
aggregate purchase price was allocated to the estimated fair values of the net
assets acquired as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Property and equipment $ 316
Intangible asset:
Customer relationships 59
----------------------------------------------------------------------------
Net assets acquired $ 375
----------------------------------------------------------------------------
----------------------------------------------------------------------------
5. Related party transactions:
Any amounts due from related parties are non-interest bearing, unsecured and
have no specified terms of repayment. All transactions with related parties have
occurred in the normal course of operations, are at arms-length terms and
conditions and are measured at the exchange amount.
(a) For the years ended December 31, 2007 and 2006:
i) Legal fees of $100 (2006 - $491) were charged by a professional services firm
in which one of the Company's directors is a partner.
ii) On November 13, 2006, the Company's shareholders approved the conversion of
991,044 Class B preferred shares to Class A common voting shares on a one-to-one
basis. Directors and officers of the Company held 439,401 of these Class B
preferred shares prior to conversion.
6. Property and equipment:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Accumulated Net book
December 31, 2007 Cost depreciation value
----------------------------------------------------------------------------
Trucks $ 11,163 $ 3,749 $ 7,414
Truck equipment 23,683 6,060 17,623
Field equipment 33,449 9,605 23,844
Furniture and office equipment 747 190 557
Computer hardware and software 2,002 770 1,232
Equipment under construction 139 - 139
----------------------------------------------------------------------------
$ 71,183 $ 20,374 $ 50,809
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Accumulated Net book
December 31, 2006 Cost depreciation value
----------------------------------------------------------------------------
Trucks $ 8,065 $ 1,955 $ 6,110
Truck equipment 16,814 3,704 13,110
Field equipment 26,736 6,080 20,656
Furniture and office equipment 348 82 266
Computer hardware and software 1,330 443 887
Equipment under construction 2,309 - 2,309
----------------------------------------------------------------------------
$ 55,602 $ 12,264 $ 43,338
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Included in property and equipment at December 31, 2007 are assets under capital
leases with a total cost of $ 7,450 (December 31, 2006 - $7,663) and net book
value of $ 5,241 (December 31, 2006 - $ 6,094).
7. Intangible assets:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Accumulated Net book
December 31, 2007 Cost amortization value
----------------------------------------------------------------------------
Customer relationships $ 3,832 $ 3,832 $ -
Non-compete agreements 7,483 7,483 -
Patent pending technology 760 760 -
----------------------------------------------------------------------------
$ 12,075 $ 12,075 $ -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Accumulated Net book
December 31, 2006 Cost amortization value
----------------------------------------------------------------------------
Customer relationships $ 3,774 $ 441 $ 3,333
Non-compete agreements 7,483 1,091 6,392
Patent pending technology 760 412 348
----------------------------------------------------------------------------
$ 12,017 $ 1,944 $ 10,073
----------------------------------------------------------------------------
----------------------------------------------------------------------------
In conjunction with the impairment test performed on goodwill (note 8), the
Company identified that the carrying value of intangible assets in both the
Wireline and Gas Testing operating segments exceeded their fair value.
Accordingly, an impairment charge of $7,530 has been recognized as an impairment
loss on intangible assets in the results of operations for the current year.
8. Impairment loss on goodwill
The Company performed an impairment test on goodwill at December 31, 2007 which
revealed that the carrying amounts of goodwill for both the Wireline and Gas
Testing operating segments exceeded their fair value. The conditions that
precipitated the impairment include a general decline in natural gas commodity
prices, and a review of oil and gas royalties by the Government of Alberta,
which reduced industry activity levels and demand for the Company's services
resulting in lower operating margins. Accordingly, an impairment charge of
$14,177 has been recognized as an impairment loss on goodwill in the results of
operations for the current year.
9. Long-term debt:
The Company has a committed, revolving credit facility in the amount of $44,000
with a major Canadian chartered bank. The amount available at any one time is
equal to 75% of marginable accounts receivable plus 50% of the net book value of
property and equipment on the Company's balance sheet less assets pledged as
security for capital lease liabilities and less certain computer equipment.
However, amounts the Company is eligible to draw under the facility are subject
to the Company meeting all related facility covenants. The facility is secured
by:
(a) a general security agreement covering all present and future property of the
Company; and
(b) assignment of all risk insurance proceeds.
On September 17, 2007, at the Company's request, the bank extended the maturity
date of the facility from October 26, 2007 to June 30, 2008 (the Revolving Term
Date). The Company is entitled to request a one year renewal of the revolving
facility by providing notice in writing to the bank at least 60 days prior to
June 30, 2008. If the bank does not agree to this renewal, the balance
outstanding on the revolving debt facility will be capped and the balance repaid
over 36 months by monthly interest plus principal payments commencing one month
from the Revolving Term Date.
Interest on the loan accrues at the bank's prime interest rate plus a variable
rate that is based on certain financial performance ratios. At December 31,
2007, the Company's interest rate was the bank's prime rate plus 1.0% per annum.
----------------------------------------------------------------------------
----------------------------------------------------------------------------
December 31, December 31,
2007 2006
----------------------------------------------------------------------------
Total $ 23,181 $ 17,514
Less: current portion 3,862 487
----------------------------------------------------------------------------
$ 19,319 $ 17,027
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Required principal repayments for the long-term debt (assuming the facility
is converted to a term loan on June 30, 2008) are as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
2008 $ 3,862
2009 7,728
2010 7,728
2011 3,863
----------------------------------------------------------------------------
10. Obligations under capital leases:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
December 31, December 31,
2007 2006
----------------------------------------------------------------------------
Total $ 2,766 $ 5,111
Less: current portion 2,091 2,278
----------------------------------------------------------------------------
$ 675 $ 2,833
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The capital lease obligations bear interest at rates ranging between 5.9% and
8.9% and are repayable in monthly principal installments of $181 plus interest.
The obligations are secured by specific equipment. The estimated repayments
required for the capital lease obligations subsequent to December 31, 2007 are
as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
2008 $ 2,091
2009 665
2010 10
----------------------------------------------------------------------------
$ 2,766
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The Company has a leasing credit facility available from a major chartered
Canadian bank with a total limit of $6,000. At December 31, 2007, there was
$2,469 drawn on this line (December 31, 2006 - $4,427).
11. Income taxes:
Income tax expense is calculated using the combined federal and provincial
statutory income tax rate. The reconciliation of income tax expense calculations
and the provision reported in the financial statements is as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Year ended December 31,
-------------------------
2007 2006
----------------------------------------------------------------------------
Earnings (loss) before income taxes $ (28,757) $ 7,626
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Combined federal and provincial income tax rate 32.42% 32.76%
Expected income tax provision (9,323) 2,498
Non-deductible expenses related to write-down of
intangibles 3,022 -
Impact of tax rate changes on future tax expense 1,813 154
Non-deductible stock based compensation expense 420 484
Other non-deductible expenses 102 117
Reassessments of prior years (54) -
Change in deferred credit - (3,232)
Income tax recovery - (98)
Other - (49)
----------------------------------------------------------------------------
Income tax expense $ (4,020) $ (126)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The components of the net future income tax asset are as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
December 31, December 31,
2007 2006
----------------------------------------------------------------------------
Non capital losses and unclaimed scientific
research and development expenses $ 6,768 $ 6,747
Intangible assets 1,619 -
Investment tax credits 1,457 1,945
Capital lease obligation 818 1,605
Transaction costs 783 1,141
----------------------------------------------------------------------------
Total assets $ 11,445 $ 11,438
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Property, equipment $ 888 $ 2,891
Intangible assets - 2,454
Partnership income 601 -
Investment tax credits (inclusion in income) 514 617
----------------------------------------------------------------------------
Total liabilities $ 2,003 $ 5,962
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net future income tax asset $ 9,442 $ 5,476
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The Company has non-capital losses of $15,287 available to reduce future
taxable income. These losses expire as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
2008 $ 4,296
2009 3,220
2010 7,159
2014 272
2015 340
----------------------------------------------------------------------------
$ 15,287
----------------------------------------------------------------------------
----------------------------------------------------------------------------
In addition, the Company has the following: research and development costs of
$9,385 which are available to reduce future taxable income and do not expire;
capital losses of $3,500 which are available to reduce future capital gains and
do not expire and investment tax credits of $1,457 which can be claimed against
federal income taxes payable and expire between 2008 and 2014.The above amounts
are subject to review and assessment by taxation authorities.
12. Share capital:
On February 13, 2006 the Company amended its articles of incorporation to alter
its authorized capital by designating the following: an unlimited number of
Class A voting shares, an unlimited number of Class B non-voting preferred
shares, an unlimited number of Class C non-voting common shares and an unlimited
number of preferred shares issuable in series. On June 20, 2007, the Company
restated its articles of incorporation to cancel the class B non-voting
preferred and Class C non-voting common share classes. The rights, privileges,
restrictions and conditions are disclosed below for each class of shares.
(a) Common shares:
(i) Authorized:
Unlimited number of Class A voting common shares
(ii) Issued and outstanding:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Number of
Class A voting common shares Amount
----------------------------------------------------------------------------
Balance at December 31, 2005 1,991 $ 500
Purchase and cancellation of CanSub Group shares (1,991) -
Issue of shares to CanSub Group shareholders 5,125,247 -
Exercise of CanSub Group options 366,658 810
Issue of shares pursuant to February 14, 2006
private placement 8,095,237 34,000
Share issue costs related to February 14, 2006
private placement - (2,095)
Increase in redemption price of CWC preferred
shares as part of the February 14, 2006
transaction - (443)
Issue of shares to former shareholders of CWC 373,689 1,569
Issue of shares pursuant to May 31, 2006 private
placement 2,533,333 19,000
Share issue costs related to May 31, 2006
private placement - (995)
Issue of shares as consideration for the May 31,
2006 asset acquisitions 1,838,534 13,161
Other transaction costs associated with private
placements of shares - (771)
Income tax benefit of transaction costs and
commissions related to private placements - 1,298
Issue of shares as payment for settlement of
Class B preferred share liability (note 5) 991,044 4,212
Application of deficit against share capital - (22,653)
----------------------------------------------------------------------------
Balance at December 31, 2007 and 2006 19,323,742 $ 47,593
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The 1,991 shares outstanding at December 31, 2005 relate to shares outstanding
of the CanSub Group prior to the February 14, 2006 transactions with CWC. Since
the CanSub Group was the deemed acquirer in the transaction with CWC, the
purchase and cancellation of the 1,991 CanSub Group shares was recorded as a
share buy-back for accounting purposes (see note 1).
On November 13, 2006, the Company's shareholders approved the application of
$22,653 of deficit against Class A common share capital.
(b) Preferred Shares:
(i) Authorized:
Unlimited number of preferred shares, issuable in one or more series with rights
and privileges to be determined by the Board of Directors.
(ii) Issued and outstanding at December 31, 2007 - nil (December 31, 2006 - nil).
(c) Stock options:
Options to purchase common shares may be granted by the Board of Directors to
directors, officers, employees, and consultants of the Company. Options vest one
third on each of the first, second and third anniversary dates of the grant date
on a cumulative basis and have a maximum term of 5 years. When stock options are
exercised, the proceeds, together with the amount of compensation expense
previously recorded in the contributed surplus is added to capital stock.
The maximum number of shares reserved for issuance under the stock option plan
or any other stock option or share purchase plan will not exceed 10% of the
total number of the Company's outstanding common shares.
The Company calculates the fair value of its options using the Black-Scholes
option pricing model. The following assumptions were used to determine the fair
value of options on the date of grant:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Weighted average risk free interest rate 4.15%
Maximum life 5 years
Vesting period 3 years
Expected dividend $nil per share
Expected share price volatility 50%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The average calculated fair value of options issued in 2007 was $1.64 per option
using the Black-Scholes option pricing model. The stock based compensation
expense of the Company for the years ending December 31, 2007 and 2006 was
$1,294 and $1,477 respectively.
Following is a summary of the stock option transactions during 2007 and
2006:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
December 31,
----------------------------------------------------------------------------
2007 2006
------------------------- --------------------------
Weighted Weighted
Number of average Number of average
Options exercise price Options exercise price
----------------------------------------------------------------------------
Class A common shares:
Outstanding at the
beginning of the year 1,548,750 $ 5.05 366,658 $ 2.21
Exercised as part of
the February 14, 2006
transaction with CWC - - (366,658) 2.21
Granted 359,250 4.22 1,689,250 5.06
Exercised - - - -
Forfeited (266,250) 4.20 (140,500) 5.25
Reduction in average
exercise price as a
result of February
20, 2007 re-pricing (0.77) -
----------------------------------------------------------------------------
Outstanding at the end
of the year 1,641,750 4.21 1,548,750 5.05
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Exercisable at the end
of the year 447,548 4.20 - -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The 366,658 stock options outstanding at December 31, 2005 were all from the
CanSub Group. Of this amount, 265,764 were fully vested at December 31, 2005
with the remaining 100,894 vested just prior to the February 14, 2006
transaction.
There were no options exercisable at December 31, 2006 as the first tranche of
options issued as part of the February 14, 2006 transaction did not vest until
February 14, 2007.
Details of the exercise prices and expiry dates of options outstanding at
December 31, 2007 are as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Weighted
average Weighted
remaining average
Number life exercise
Exercise price outstanding (years) price
-------------- ------------ ---------- ---------
$ 3.45 5,000 3.96 $3.45
$ 4.20 1,581,750 3.45 $4.20
$ 4.40 34,500 4.46 $4.40
$ 4.80 15,000 3.73 $4.80
$ 5.80 5,500 3.71 $5.80
----------------------------------------------------------------------------
----------------------------------------------------------------------------
On February 20, 2007, the Company's board of directors approved a re-pricing of
stock options held by certain employees of the Company (excluding directors,
officers and other insiders). The exercise price of 405,500 options (such
exercise prices ranging from $4.49 to $7.80) was reduced to $4.20. Stock based
compensation expense of $200 related to this re-pricing is being recognized over
the vesting period of these options.
(d) Class B non-voting preferred shares:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Number of
Shares Amount
----------------------------------------------------------------------------
Balance at December 31, 2005 - $ -
Shares issued to CanSub Group shareholders 357,143 1,500
Conversion of 4,437,307 preferred shares of CWC to
Class B shares on February 14, 2006 633,901 2,219
Increase in redemption price of CWC preferred
shares as part of the February 14, 2006
transaction - 443
Conversion of all outstanding Class B shares to
Class A common shares on a one for one basis on
November 13, 2006 (991,044) (4,162)
----------------------------------------------------------------------------
Balance at December 31, 2007 and 2006 - $ -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The Class B preferred shares that were issued during 2006 were non-voting, had a
cumulative dividend of 2.5% per annum, and were convertible at the option of the
holder to Class C non-voting common shares and had priority as to payment of the
redemption price ($4.20/share) and all declared but unpaid dividends on winding
up, liquidation or dissolution of the Company. These shares had all the
characteristics of debt and were classified as such on the balance sheet during
2006. The Class B preferred shares arose out of the Arrangement Agreement
between the CanSub Group and CWC that was effective on February 14, 2006 and
were all converted to Class C non-voting common shares on a one for one basis on
November 13, 2006. On that same date, shareholders approved an amendment to the
Company's articles which called for a subsequent conversion of these Class C
non-voting common shares into Class A voting common shares (all on a one to one
basis). As a result of this conversion, a loss on settlement of Class B
preferred share liability of $167 was recorded in the statement of earnings in
2006. On June 20, 2007, the Company restated its articles of incorporation to
cancel the class B non-voting preferred and Class C non-voting common share
classes.
(e) Contributed surplus:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Contributed surplus at December 31, 2005 $ 1,868
Stock based compensation expense during 2006 1,477
----------------------------------------------------------------------------
Contributed surplus at December 31, 2006 3,345
Stock based compensation expense during 2007 1,294
----------------------------------------------------------------------------
Contributed surplus at December 31, 2007 $ 4,639
----------------------------------------------------------------------------
----------------------------------------------------------------------------
13. Per share amounts:
The weighted average number of common shares for the year ended December 31,
2007 was 19,323,742 (December 31, 2006 - 15,586,092).
Reconciliation of earnings per share and diluted earnings per share:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
2007 2006
----------------------------------------------------------------------------
Net earnings (loss) available to common
shareholders $ (24,737) $ 6,966
Weighted average number of common
shares 19,323,742 15,586,092
Basic earnings (loss) per share $ (1.28) $ 0.45
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net earnings (loss) available to common
shareholders $ (24,737) $ 6,966
Weighted average number of common
shares 19,323,742 15,586,092
Dilutive effect of stock options - 98,806
Diluted weighted average number of
common shares 19,323,742 15,684,898
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Diluted earnings (loss) per share $ (1.28) $ 0.44
----------------------------------------------------------------------------
----------------------------------------------------------------------------
In the calculation of earnings per share for the year ended December 31, 2007,
1,641,750 options (2006 - 416,000 options) were excluded as the impact would be
anti-dilutive.
14. Supplementary cash flow information:
Changes in non-cash working capital:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Year ended
December 31,
-------------------------
2007 2006
----------------------------------------------------------------------------
Accounts receivable $ 5,473 $ (4,832)
Deposits and other 1,458 (1,944)
Accounts payable and accrued liabilities 304 214
Income taxes payable (recoverable) 119 (1,392)
Inventory (46) (302)
----------------------------------------------------------------------------
$ 7,308 $ (8,256)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Non-cash working capital change related to
operating activities $ 5,338 $ (7,345)
Non-cash working capital change related to
investing activities 1,970 (911)
----------------------------------------------------------------------------
$ 7,308 $ (8,256)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Interest paid $ 1,595 $ 902
Net cash taxes (received) paid $ (173) $ 1,287
----------------------------------------------------------------------------
----------------------------------------------------------------------------
15. Commitments:
(a) At December 31, 2007, the Company had the following annual commitments
under equipment operating lease agreements:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
2008 $ 1,201
2009 373
2010 36
2011 15
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(b) At December 31, 2007, the Company had the following annual commitments
under office and warehouse lease agreements:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
2008 $ 2,663
2009 2,494
2010 2,354
2011 2,322
2012 2,378
Thereafter 8,575
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(c) At December 31, 2007 the Company had commitments to purchase $500 of
wireline, swabbing, production testing and related equipment. Delivery of these
items is scheduled to occur in 2008.
16. Financial instruments:
(a) Fair value:
The carrying values of accounts receivable, deposits and other, income tax
receivable, accounts payable and accrued liabilities, and obligations under
capital lease approximate their fair value due to the relatively short-term
period to maturity of the instruments. The fair value of the Company's long term
debt is assumed to be approximately equal to the carrying value since the
interest rate on the debt obligation is based on the prime rate.
(b) Credit risk:
A substantial portion of the accounts receivable are with customers who are
dependent upon the oil and gas industry, and are subject to normal industry
credit risks. The Company's policy is to employ established credit approval
practices and to closely monitor accounts receivable to mitigate credit risk.
(c) Interest rate risk:
The Company is exposed to interest rate risk to the extent that long-term debt
and obligations under capital leases have variable interest rates.
17. Seasonality
The operations of the Company are seasonal. The oil and gas industry is
generally more active during the winter months as the movement of heavy
equipment is easier over frozen ground. In the spring months, road bans and bad
weather can hamper the ability to move equipment and adversely impacts the
Company's revenue generating capability. Rain in the summer and fall months can
also have a significant impact on the Company's revenue. When equipment is not
in use, crews are not required and therefore operating costs normally decrease
in slow operating periods.
18. Comparative information:
Certain comparative figures have been reclassified to conform to the current
period presentation.
19. Segmented information:
The Company's reportable operating segments, as determined by management, are
strategic operating units that offer different products and services, and do not
transact with one another. The Company has two reportable operating segments:
Wireline and Gas Testing. These two segments operate in one geographic area, the
Western Canadian Sedimentary Basin.
The Wireline segment provides primarily cased hole electric line and slick line
services as well as swabbing and well optimization services to the oil gas
industry.
The Gas Testing segment provides production testing and production evaluation
services to the oil and gas industry.
The Corporate segment includes the combined selling, general and administrative
costs related to the operating divisions.
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Year ended
December 31, 2007
-----------------------------------------------
Gas
Wireline Testing Corporate Total
----------------------------------------------------------------------------
Revenue $ 41,867 $ 24,302 $ - $ 66,169
Operating expenses 31,681 18,999 - 50,680
----------------------------------------------------------------------------
10,186 5,303 - 15,489
Selling, general and
administrative - - 8,652 8,652
Stock-based compensation - - 1,294 1,294
Depreciation and
amortization 7,251 3,566 - 10,817
----------------------------------------------------------------------------
(5,274)
Property and equipment 35,873 14,936 - 50,809
Goodwill - - - -
Intangible assets - - - -
Capital expenditures
- property and equipment 13,010 2,784 - 15,794
Capital expenditures
- intangible assets 59 - - 59
Total assets 46,087 19,489 9,442 75,018
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Year ended
December 31, 2006
-----------------------------------------------
Gas
Wireline Testing Corporate Total
----------------------------------------------------------------------------
Revenue $ 46,494 $ 26,858 $ - $ 73,352
Operating expenses 30,933 18,212 - 49,145
----------------------------------------------------------------------------
15,561 8,646 - 24,207
Selling, general and
administrative - - 7,761 7,761
Stock-based compensation - - 1,477 1,477
Depreciation and
amortization 4,404 2,142 - 6,546
----------------------------------------------------------------------------
8,423
Property and equipment 28,798 14,540 - 43,338
Goodwill 8,067 6,110 - 14,177
Intangible assets 5,495 4,578 - 10,073
Capital expenditures
- property and equipment 20,928 11,775 - 32,703
Capital expenditures
- intangible assets 4,916 6,340 - 11,256
Total assets 57,207 32,029 5,579 94,815
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Certain statements in this news release, including (i) statements that may
contain words such as "anticipate", "could", "expect", "seek", "may" "intend",
"will", "believe", "should", "project", "forecast", "plan" and similar
expressions, including the negatives thereof, (ii) statements that are based on
current expectations and estimates about the markets in which the Company
operates and (iii) statements of belief, intentions and expectations about
developments, results and events that will or may occur in the future,
constitute "forward-looking statements" and are based on certain assumptions and
analysis made by the Company. Forward-looking statements in this press release
include, but are not limited to, statements with respect to future capital
expenditures, including the amount, nature and timing thereof; oil and natural
gas prices and demand; other development trends within the oil and natural gas
industry; business strategy; expansion and growth of the Corporation's business
and operations and other such matters. Such forward-looking statements are
subject to important risks and uncertainties, which are difficult to predict and
that may affect the Company's operations, including but not limited to the
impact of general economic conditions in Canada and the United States; industry
conditions, including the adoption of new environmental, safety and other laws
and regulations and changes in how they are interpreted and enforced; volatility
of oil and natural gas prices; oil and natural gas product supply and demand and
related demand for oilfield services; risks inherent in the Company's ability to
generate sufficient cash flow from operations to meet its current and future
obligations; increased competition; the lack of availability of qualified
personnel or labor unrest; fluctuation in foreign exchange or interest rates;
stock market volatility; opportunities available to or pursued by the Company
and other factors, many of which are beyond the control of the Company. The
Company's actual results, performance or achievements could differ materially
from those expressed in, or implied by, these forward-looking statements and,
accordingly, no assurance can be given that any of the events anticipated by the
forward-looking statements will transpire or occur, or if any of them do
transpire or occur, what benefits the Company will derive therefrom. Subject to
applicable law, the Company disclaims any intention or obligation to update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise.
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