ENERGOLD DRILLING CORP.

Transcription

1 ENERGOLD DRILLING CORP. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Unaudited 1

2 NOTICE OF NO REVIEW BY AUDITOR In accordance with National Instrument Continuous Disclosure Obligations of the Canadian Securities Administrators WE HEREBY GIVE NOTICE THAT the interim condensed consolidated financial statements which follow this notice have not been reviewed by an auditor. 2

3 Interim Condensed Consolidated Statements of Financial Position Unaudited ASSETS March 31, 2017 December 31, 2016 Current assets Cash and cash equivalents $ 8,515 13,715 Restricted cash Trade and other receivables 16,892 11,530 Income taxes receivable 1,690 2,124 Available-for-sale investments 4,929 4,751 Inventories 47,749 47,934 79,882 80,170 Non-current assets Property, plant and equipment 21,331 23,057 Goodwill and intangible assets 5,603 5,707 Deferred income tax assets ,223 28,811 LIABILITIES $ 107, ,981 Current liabilities Bank indebtedness (Note 4) $ 7,994 6,260 Trade and other payables 10,828 10,953 Convertible debenture (Note 7) 13,455 13,419 Current income tax payable 512 1,742 Deferred revenue 1, ,807 33,311 Non-current liabilities Bank indebtedness (Note 4) Due to related party (Note 9) 1,764 2,344 Finance leases (Note 6) Deferred income tax liabilities 3,291 3,421 5,770 6,544 39,577 39,855 SHAREHOLDERS EQUITY Share capital 95,368 95,368 Contributed surplus 8,664 8,664 Warrants 1,747 1,747 Equity component of convertible debenture (Note 7) Accumulated other comprehensive income 2, Accumulated deficit (40,267) (37,280) Total equity attributable to Energold Drilling Corp. shareholders 67,970 69,548 Non-controlling interest (442) (422) 67,528 69,126 $ 107, ,981 ON BEHALF OF THE BOARD: F.W. Davidson, Director M.A. Corra, Director - The accompanying notes form an integral part of these consolidated financial statements 3

4 Interim Condensed Consolidated Statements of Loss For the three months ended March 31 Unaudited Revenue $ 19,064 $ 16,612 Direct costs 14,564 14,815 Gross profit (excluding amortization) 4,500 1,797 Indirect and administrative expenses Accounting, audit and legal Amortization 2,102 2,280 Bad debt (recovery) expense (133) 115 Investor relations, marketing and travel Management fees and consulting Office, rent, insurance and sundry 903 1,031 Office salaries and services 2,187 2,407 Share-based payments ,818 7,173 Operating loss (1,318) (5,376) Other income (expenses) Equity loss from IMPACT Silver Corp. - (32) Foreign exchange gain (loss) (753) 38 Finance and other income (Note 5) Finance cost (Note 5) (709) (754) Loss on disposal of available-for-sale investments (59) - Loss on disposal of assets (320) (161) (1,819) (875) Loss before taxes (3,137) (6,251) Deferred income taxes recovery (519) (283) Current income and other taxes expense Net loss $ (3,007) $ (6,335) Attributable to: Equity holders of Energold Drilling Corp. $ (2,987) $ (6,268) Non-controlling interest $ (20) $ (67) Loss per share attributable to equity shareholders of Energold Drilling Corp. Loss per share Basic and diluted (Note 8c) $ (0.05) $ (0.13) Weighted average number of shares outstanding Basic and diluted (Note 8c) 54,659,939 48,181,247 - The accompanying notes form an integral part of these consolidated financial statements 4

5 Interim Condensed Consolidated Statements of Comprehensive Loss Unaudited For the three months ended March 31, Net loss $ (3,007) $ (6,335) Items that may be reclassified to net loss Other comprehensive income Unrealized gain on available-for-sale short term investments Cumulative translation adjustment 1,260 (5,081) Total comprehensive loss $ (1,598) $ (11,101) Attributable to: Equity holders of Energold Drilling Corp. $ (1,578) $ (11,034) Non-controlling interest (20) (67) $ (1,598) $ (11,101) - The accompanying notes form an integral part of these interim condensed consolidated financial statements 5

6 Interim Condensed Consolidated Statement of Changes in Equity For the three months ended March 31 Unaudited Share Capital ($) Contributed Surplus ($) Equity component of convertible debenture ($) Accumulated Other Comprehensive Income ($) Noncontrolling interest ($) Retained Earnings ($) Total Shareholders Equity ($) Shares Outstanding Warrants ($) Balance at January 1, ,181,247 91,454 8, ,070 (240) (18,901) 91,049 Net loss for the period (67) (6,268) (6,335) Share-based payments Unrealized gain on investments classified as available-for-sale Cumulative translation adjustment (5,081) - - (5,081) Balance at March 31, ,181,247 91,454 8, ,304 (307) (25,169) 80,039 Balance at January 1, ,659,939 95,368 8,664 1, (422) (37,280) 69,126 Net loss for the period (20) (2,987) (3,007) Unrealized gain on investments classified as available-for-sale Cumulative translation adjustment , ,260 Balance at 54,659,939 95,368 8,664 1, ,083 (442) (40,267) 67,528 The accompanying notes form an integral part of these consolidated financial statements 6

7 Interim Condensed Consolidated Statement of Cash Flows Unaudited For the three months ended March 31, Cash provided by (used in) Operating activities Net loss $ (3,007) $ (6,335) Items not affecting cash: Amortization 2,102 2,280 Finance costs - 80 Share-based payments - 91 Deferred income taxes recovery (519) (283) Equity loss from IMPACT Silver Corp Loss on disposal of assets and available-for-sale investments Bad debt (recovery) expense (133) 115 Accretion related to convertible debenture (Note 7) Unrealized loss (gain) on foreign exchange 336 (708) Change in non-cash working capital (Note 11) (5,927) 5,458 (6,733) 922 Investing activities Acquisition of Cros-Man, net of cash acquired - (3,008) Proceeds on sale of assets Proceeds on sale of available-for-sale investments Purchase of property, plant and equipment (289) (145) Restricted cash 8 (454) 30 (3,553) Financing activities Proceeds from bank facility 2,134 - Repayment of bank facility - (2,935) Proceeds from credit facility - 4,500 Repayment of credit facility (369) (219) Proceeds from finance leases - 41 Repayment of finance leases (261) (488) Repayment of loan from related party (1) - 1, Net decrease in cash (5,200) (1,732) Cash at the beginning of the period 13,715 13,561 Cash at the end of the period $ 8,515 $ 11,829 Interest paid $ 507 $ 503 Income taxes paid $ 970 $ The accompanying notes form an integral part of these consolidated financial statements 7

8 1. Nature of operations Energold Drilling Corp. (the Company ) provides, directly and through its subsidiaries, drilling services for parties principally in North America, Mexico, the Caribbean, Central America, South America, Europe and Africa. The Company, through its subsidiary, also designs and manufactures specialty/customized drilling rigs and associated equipment for water well, mineral exploration and geotechnical drilling companies. Additionally, the Company, through its subsidiaries, provides drilling and other services to the energy sector in Canada and the United States ( U.S. ). The Company is located at Granville Street, Vancouver, British Columbia, Canada, V6C 1X8. Going concern These consolidated financial statements have been prepared on a going concern basis, which assumes that the Company will be able to realize its assets and discharge its liabilities in the normal course of business as they come due into the foreseeable future. In Q1-2017, the Company incurred a net loss of $3.0 million and had cash outflows from operating activities of $6.7 million. At, the Company had unrestricted cash of $8.5 million, current assets of $79.9 million and working capital of $46.1 million. The Company is due to repay its existing convertible debenture of $13.5 million in July Based on existing unrestricted cash balances and expected cash flows from operations, the Company will need to generate funds from other sources in order to repay the entire obligation. On February 14, 2017, the Company announced a $20 million convertible debt financing to replace the existing facility and various other bank loans. As of the date of these consolidated financial statements, the financing is expected to close by June 15, The Company s ability to continue as a going concern is dependent upon its ability to generate cash flow from operations and, to the extent that this is not sufficient, to obtain additional funding from loans, equity financings or through other arrangements. While the Company has been successful in arranging financing in the past, the success of such initiatives cannot be assured. These conditions cast doubt on the validity of the going concern assumption. These consolidated financial statements do not reflect the adjustments to the carrying values of assets and liabilities and the reported expenses and balance sheet classifications that would be necessary were the going concern assumption deemed to be inappropriate. These adjustments could be material. 2. Basis of presentation Statement of compliance The Company s interim condensed consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standards Board ( IASB ) applicable to the preparation of interim financial statements, including IAS 34, Interim Financial Reporting and do not include all of the information required for annual financial statements. All material intercompany balances have been eliminated. As all the disclosures required by IFRS are not included, these interim statements should be read in conjunction with the audited financial statements of the Company for the year ended December 31, 2016, which have been prepared in accordance with IFRS. Except when otherwise stated, all amounts are presented in thousands of Canadian ( CDN ) dollars, which is the presentation currency of the Company. These interim condensed consolidated financial statements were approved by the Board of Directors on May 24,

9 3. Business combination On March 4, 2016, the Company acquired all the outstanding shares of Cros-Man Direct Underground Ltd. ("Cros-Man") and accounted for the transaction as a business combination. Based in Manitoba, Canada, Cros- Man is a horizontal directional drilling company, servicing the telecommunications, water, sewage, hydro and energy sectors in Canada. The results of operations of Cros-Man from March 4, 2016 forward are included in these financial statements. The assets acquired and liabilities assumed were recorded at their estimated fair values. Fair value of assets and liabilities acquired Cash $ 492 Trade and other receivables 706 Income taxes receivable 145 Trade and other payables (83) Due to vendors (910) Net working capital acquired 350 Other receivables 106 Property, plant and equipment 2,327 Intangible assets 2,330 Deferred income tax liability (994) Net assets acquired $ 4,119 Consideration Cash payment $ 3,500 Deferred payment 2,200 Total consideration $ 5,700 Goodwill $ 1,581 The excess of the acquisition cost of the business over the estimated fair values of the identifiable net assets acquired is recognized as goodwill. The goodwill balance arises primarily as a result of the synergies existing within the acquired business. The total consideration for the acquisition was $5.7 million of which $3.5 million was paid on closing date in cash and $2.2 million is payable to the vendors over a three year period. The deferred payment to the vendors is recorded at fair value and includes fixed payments of $0.7 million (of which $0.4 million was paid in Q1-2017) due in 2017 and $0.8 million due in each of 2018 and As well, the vendors have the opportunity to earn a performance incentive of up to $0.5 million per year for the next three years following the closing date as it targets certain growth metrics. As of, the deferred payment amount was $1.8 million of which $0.8 million is included in current trade and other payables and $1.0 million is included in non-current other payables. 9

10 4. Bank indebtedness March 31, 2017 December 31, 2016 Current $ 7,994 $ 6,260 Non-current $ 8,112 $ 6,379 In April 2015, one of the Company s subsidiaries entered into a credit facility from Export Development Canada in the amount of $0.8 million USD. The purpose of the loan was to assist in financing the acquisition of capital assets. Interest on the outstanding principal amount is calculated at the rate of interest equal to the sum of the U.S. Prime Rate plus 5% per annum. The loan is payable over a term of three years. The loan is guaranteed by Bertram Drilling Corp. and Energold Drilling Corp. As of, the amount outstanding on this credit facility is $0.3 million USD. In July 2015, the Company entered into a credit facility from Export Development Canada in the amount of up to $2.0 million USD. The purpose of the loan was to assist in financing the general working capital of the Company s subsidiaries. Interest on the outstanding principal amount is calculated at the rate of interest equal to the sum of the U.S. Prime Rate plus 5.5% per annum. The loan is guaranteed by Bertram Drilling Corp. and Energold de Mexico. As of, the amount outstanding on this credit facility is $2.0 million USD. Bertram Drilling Corp. has a revolving credit facility authorized to a maximum of $3.5 million. Borrowings cannot exceed the aggregate of 75% of Canadian accounts receivable balance less than 90 days old and not from a related party. The loan bears interest at the bank's prime lending rate plus 1.0% per annum. As of, the amount outstanding on this credit facility is $2.1 million. Bertram also has a term loan of $1.5 million that bears an interest rate at the bank s prime rate plus 1.75%. As of, the amount outstanding on this credit facility is $1.0 million. A reducing facility was authorized to a maximum of $1.4 million by way of leases. The finance leases bear interest between 3.86% and 4.15% (see note 6). A general security agreement and a floating charge on all present and after-acquired real property have been pledged as security for the above borrowings. Energold Drilling Corp., as Bertram s parent company, has provided a guarantee and postponements of claim and general security agreements to a maximum of $9.0 million. In March 2016, one of the Company s subsidiaries entered into a credit facility with Royal Bank of Canada in the amount of $2.5 million. The purpose of the loan was to partially finance the acquisition of Cros-Man. The loan bears interest at the bank's prime lending rate plus 1.75% per annum. A general security agreement and a floating charge on all present and after-acquired real property have been pledged as security for the above borrowings. Bertram Drilling Corp. has provided a guarantee and postponements of claim. As of, the amount outstanding on this credit facility is $1.8 million. As of, the Company was not in compliance with financial covenants on the Bertram Drilling Corp. term loan ($1.0 million outstanding at ), and the Cros-Man loan ($1.8 million outstanding at March 31, 2017). The Company has classified the full amount of the loans as current. The Company has received confirmation from that bank stating that it will not recall the loan. A revolving line of credit for Bertram Drilling Inc., the U.S. subsidiary of the Company, is authorized to a maximum of $1 million USD, which bears interest at 3.9% per annum. Equipment, inventories, and trade accounts receivable have been pledged as security. No amount is outstanding on this line of credit at. 10

11 5. Finance income and cost For the three months ended March 31, Bank fees and interest expense $ 201 $ 170 Finance lease expense Interest and accretion expense on convertible debenture Finance cost $ 709 $ 754 Finance income $ 16 $ Finance lease arrangements Finance leasing arrangements: At, Bertram s finance lease obligations were $1.0 million, of which $0.5 million is current and is included within trade and other payables and $0.5 million is long term. The remaining leases belong to the Company s subsidiary, Cros-Man. Finance lease liabilities are as follows: Minimum lease payments Present value of minimum lease payments March December 31, , 2016 March 31, 2017 December 31, 2016 Not more than one year $ 515 $ 704 $ 500 $ 675 Later than one year and not later than five years $ 1,122 $ 1,374 $ 1,097 $ 1,335 Less: future finance charges (25) (39) - - Present value of minimum lease payments $ 1,097 $ 1,335 $ 1,097 $ 1,335 11

12 7. Convertible Debenture ( CD ) On July 21, 2014, the Company completed a $13.5 million secured convertible debenture issue which bears interest at 12.85% calculated annually, payable quarterly, with a maximum term of three years (Energold holds a call provision). The CDs are convertible into common shares of the Company at a conversion price of $3.00 per share subject to a minimum conversion of $50,000 (if converted in part). Related parties of the Company purchased convertible debentures having a principal face value of $3.0 million, representing 22.0% of the offering. The convertible debentures are generally secured against all the assets of the Company and specifically secured by a pledge of 6,980,001 common shares of IMPACT Silver Corp. owned by the Company and 1,000 ordinary shares of Dando Drilling Corp. owned by the Company. On initial recognition, the Company fair valued the debt component using a cash flow model discounted at current interest rate of 14%. The value of the debt component was $13.1 million and the equity component was assigned the residual amount of $0.4 million. Using the effective interest rate method and the 14% rate implicit in the calculation, the difference of $0.4 million, characterized as the debt discount is accreted to income over the term of the CD. Convertible debenture as of December 31, 2016 $ 13,419 Accretion of debt discount for the three months of Convertible debenture as of $ 13,455 The convertible debenture contains financial and non-financial covenants customary for a facility of this size and nature. As at, the Company was in compliance with all covenants. On February 14, 2017, the Company announced that it had entered into a binding term sheet with Extract Advisors LLC ("Extract"), a New York and Toronto-based natural resources investment fund manager, for a $20 million, secured convertible loan ("Convertible Loan"). Extract, through funds it manages, has agreed to finance $15 million principal amount of the Convertible Loan and the balance will be provided by a syndicate of lenders to include existing debenture holders, new investors and insiders of the Company. Energold intends to use the proceeds to repay its current loans including $13.5 million of secured convertible debenture due July 2017, as well as certain credit facilities with Royal Bank of Canada and the Export Development Bank of Canada. The deal is anticipated to close in Q

13 8. Equity The Company is authorized to issue an unlimited number of common shares. The Company s shares have no par value. a) Stock Options The Company has established a stock option plan whereby the board of directors may, from time to time, grant options to directors, officers, employees or consultants. Under the stock option plan 5,465,994 options have been authorized for issuance, of which 2,250,000 have been allocated at March 31, Options granted must be exercised no later than five years from date of grant or such lesser period as determined by the Company s board of directors and are settled in cash. The exercise price of an option is not less than the closing price on the Exchange on the last trading day preceding the grant. The directors, subject to the policies of the TSX Venture Exchange, may determine and impose terms upon how each grant of options shall become vested. Options vest 25% on the date granted and 25% every six months thereafter. A summary of the Company s stock option plan at and the changes for the three months ended on these dates is as follows: Weighted Average Number Exercise Price At January 1, ,468, Exercised (12,500) 0.45 Expired (1,165,625) 3.84 Forfeited (10,000) 0.45 At December 31, ,280, Expired (30,000) 5.13 At 2,250, The following table summarizes information about the stock options outstanding at : Exercise Price Per Share Number of Options Outstanding Weighted Average Remaining Life (Years) Number of Options Exercisable $0.45 1,750, ,306,875 $ , ,000 2,250, ,806,875 The fair value of the services provided cannot be reliably measured; therefore, the fair value of each option granted is estimated at the time of grant using the Black-Scholes option pricing model. Option pricing models require the input of highly subjective assumptions including the expected share price volatility. Changes in the subjective input assumptions can materially affect the fair value estimate. The total fair value of share-based payment expense on stock options granted to employees and consultants of the Company for the three months ended was nil (March 31, 2016 $0.1 million). 13

14 8. Equity - continued b) Warrants On July 6, 2016, the Company completed a public offering in which the Company issued 5,750,000 units at a price of $1.00 per unit for aggregate gross proceeds of $5.8 million, including the full exercise of the agents option to increase the public offering in the amount of $0.8 million. Each unit comprises one common share and one common share purchase warrant. Each warrant is exercisable for one common share at a price of $1.75 per share expiring following January 6, In consideration for the services of the underwriters, they were paid a cash commission of 6% of the gross proceeds of the offering and non-transferable common share purchase warrants ( compensation warrant ) equal to 6% of the shares issued pursuant to the offering. Each compensation warrant entitles the holder to acquire one common share of the Company at an exercise price of $1.00 expiring following January 6, On July 22, 2016, the Company completed a non-brokered private placement of 716,192 units at a price of $1.00 per unit for aggregate gross proceeds of $0.7 million. Each unit comprises one common share and one common share purchase warrant. Each warrant is exercisable for one common share at a price of $1.75 per share expiring following January 22, Weighted Average Exercise Number Price At January 1, Granted 6,811, At December 31, ,811, At 6,811, The fair value of the services provided cannot be reliably measured; therefore, the fair value of each warrant granted is estimated at the time of grant using the Black-Scholes option pricing model with assumptions as follows: July 6, 2016 July 6, 2016 July 22, ,750, , ,192 Risk-free interest rate 0.48% 0.48% 0.55% Expected dividend yield Nil Nil Nil Expected share price volatility 120% 111% 120% Expected warrant life in years Pricing models require the input of highly subjective assumptions including the expected share price volatility. Changes in the subjective input assumptions can materially affect the fair value estimate, and therefore the existing models do not necessarily provide a reliable single measure of the fair value of the Company s warrants. c) Loss Per Share Details of the calculation of loss per share are set out below: For the three months ended March 31, Net loss: $ (3,007) $ (6,335) Attributable to non-controlling interest Attributable to shareholders of EGD $ (2,987) $ (6,268) Weighted average number of shares outstanding Basic and diluted 54,659,939 48,181,247 Loss per share Basic and diluted $ (0.05) $ (0.13) 14

15 9. Related party transactions Related party transactions are recorded at arms-length which is the amount of consideration paid or received as agreed by the parties. Related party transactions not disclosed elsewhere are as follows: a) In 2014, five directors of the Company, the chief executive officer, the chairman of the board, the audit committee chair, the former audit committee chair (retired from the position in 2014), and a general director, purchased a total of $1.9 million CD. In addition, a person related to the chief executive officer purchased $0.1 million CD. A trust related to officers of Bertram Drilling Corp., purchased $1.0 million CD. As of, the outstanding payable to related parties on the CD was $3.0 million (December 31, $3.0 million). b) During the three months ended, net fees in the amount of $0.1 million were incurred (March 31, $nil) from a company related to an officer of Bertram for helicopter services performed in Canada and the U.S. As at, there was a net payable balance of $0.1 million (December 31, 2016 $0.5 million). c) In October and November 2016, the Company entered into a loan facilities with a company related to an officer of Bertram and expires on April 4, 2018 and May 15, 2018, respectively.. The loans bear interest at 4.7% per annum. As of, the amount outstanding on the loan facility is $0.8 million (December 31, 2016 $0.8 million). d) As at, a deferred payment of $1.8 million is due to the vendor of Cros-Man who remains a director of the newly acquired subsidiary (December 31, 2016 $2.2 million). See Note Key management personnel compensation Key management includes directors and senior executives. The remuneration of directors and other members of key management personnel are as follows: For the three months ended March 31, Salaries and fees $ 392 $ 401 Share based compensation - 51 $ 392 $ 452 Amounts payable to related parties $ 37 $ Additional information to the consolidated statements of cash flows Changes in non-cash working capital: For the three months ended March 31, Trade and other receivables $ (5,046) $ 5,833 Income taxes receivable Inventories 572 (9) Trade and other payables (124) (1,390) Current income tax payable (1,235) (167) Due to (from) related party (625) 231 Deferred revenue $ (5,927) $ 5,458 15

16 12. Segmented information The Company has three operating segments: Minerals; Manufacturing; and Energy. The segments are determined based on the reports reviewed by the Chief Executive Officer (who is considered the chief operating decision maker) to make decisions about resources to be allocated to the segment and assess its performance and for which discrete financial information is available. Details are as follows: For the three months ended March 31, Revenue Minerals $ 9,624 $ 8,472 Energy 7,751 6,135 Manufacturing 1,689 2,005 $ 19,064 $ 16,612 (Loss) earnings Minerals $ (828) $ (1,877) Energy 142 (1,923) Manufacturing (1,100) (2,052) Corporate - Canada (1,221) (483) $ (3,007) $ (6,335) Amortization Minerals $ 375 $ 407 Energy 1,675 1,755 Manufacturing Corporate - Canada $ 2,102 $ 2,280 16

17 12. Segmented information continued March 31, December 31, As at Assets Minerals $ 63,997 $ 64,344 Energy 28,497 27,611 Manufacturing 5,474 5,582 Corporate - Canada 9,137 11,444 $ 107,105 $ 108,981 Property, plant and equipment Minerals $ 7,344 $ 7,425 Energy 13,575 15,189 Manufacturing Corporate - Canada $ 21,331 $ 23,057 Intangibles Minerals $ 1,710 $ 1,710 Manufacturing Energy 3,506 3,600 $ 5,603 $ 5,707 Geographic information For the three months ended March 31, As at As at December 31, 2016 Property, plant and equipment Property, plant and equipment Intangible Intangible Revenue Revenue assets assets Mexico and the Caribbean $ 5,676 $ 5,412 $ 1,822 $ - $ 1,765 $ - South America 634 1,391 1,510 1,710 1,588 1,710 Africa, Asia and Other 4,704 2,201 3,016-2,853 - Canada 7,136 4,107 9,810 3,506 11,027 3,600 United States of America 615 2,028 3,607-4,001 - United Kingdom and Europe 299 1,473 1, , $ 19,064 $ 16,612 $ 21,331 $ 5,603 $ 23,057 $ 5,707 17

18 16. Economic dependence Significant customers The Company received revenues from the following customer in the minerals segment that amounted to greater than 10% of total Company revenues. For the three months ended March 31, $ % $ % Customer A 4, ,