H Y D U K E E N E R G Y S E R V I C E S I N C.

Transcription

1 H Y D U K E E N E R G Y S E R V I C E S I N C. I N T E R I M C O N D E N S E D C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S ( U N A U D I T E D ) M A R C H 3 1,

2 Hyduke Energy Service Inc. National Instrument Continuous Disclosure Obligations Notice Pursuant to Part 4.3. (3) of National Instrument , these unaudited condensed consolidated financial statements of Hyduke Energy Services Inc. for the three months period ended have not been reviewed by the Company s auditors. Energy Services Inc. Page 2

3 TABLE OF CONTENTS Table of Contents... 3 Interim Consolidated Statement of Financial Position... 4 Interim Consolidated Statement of Comprehensive Loss... 5 Interim Consolidated Statement of Changes in Equity... 6 Interim Consolidated Statement of Cash Flow... 7 Notes to the Interim Consolidated Financial Statements General information Nature of operations Summary of significant accounting policies Contingencies Interest bearing debt Share capital Discontinued operations Segmented information Capital management Comparative figures Business acquisition Post reporting date events Energy Services Inc. Page 3

4 INTERIM CONSOLIDATED STATEMENT OF FINANCIAL POSITION Notes ASSETS As at March As at December CURRENT ASSETS Cash 7,486, ,363 Trade and other receivables 6,020,668 2,095,018 Assets held for sale 424, ,718 Inventories 8,289,756 4,461,191 Unbilled revenue 1,028, ,623 Prepaid expenses and other assets 250, ,787 23,501,028 8,543,700 NON-CURRENT ASSETS Property, plant and equipment 13,010,533 9,591,383 Intangible assets 721,652 78,943 13,732,185 9,670,326 TOTAL ASSETS 37,233,213 18,214,026 LIABILITIES AND EQUITY CURRENT LIABILITIES Trade and other payables 6,668,372 2,966,460 Income tax payable 55,074 88,792 Unearned revenue 3,994,392 64,067 Current portion of interest bearing debt (5) 6,936,412 6,912,203 Liabilities held for sale 96, ,393 17,750,650 10,160,915 NON-CURRENT LIABILITIES Interest bearing debt (5) 342,000 56, ,000 56,968 TOTAL LIABILITIES 18,092,650 10,217,883 EQUITY Share capital (6) 33,607,752 21,532,425 Contributed surplus 1,578,819 1,575,223 Deficit (16,046,008) (15,111,505) TOTAL EQUITY 19,140,563 7,996,143 TOTAL LIABILITIES AND EQUITY 37,233,213 18,214,026 Energy Services Inc. Page 4

5 INTERIM CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS For the three months ended March 31 (Unaudited) Notes (restated)* Revenues 6,033,368 2,913,754 Cost of goods sold (5,328,197) (3,051,134) Gross margin 705,171 (137,380) Selling and distributive expenses (211,157) (143,939) General administrative expenses (1,314,463) (1,393,867) Other operating expenses (3) (3,508) Other operating income 43, ,309 Loss from operations before tax and financial results (776,921) (1,568,385) Interest (164,730) (119,973) (Loss) gain on foreign exchange transaction 4,554 (24,008) Financial results (160,176) (143,981) Loss before tax (937,097) (1,712,366) Income tax expense - - Loss for the period from continuing operations (937,097) (1,712,366) Discontinued operations Profit (loss) after tax for the period from discontinued operations (7) (26,204) (587,797) Reclassification of foreign currency translation reserve - discontinued operations 28, ,281 Total comprehensive loss for the reporting period (934,503) (2,054,880) Profit (loss) per share Basic Continuing operations (0.03) (0.22) Net loss (0.03) (0.27) Diluted Continuing operations (0.03) (0.22) Net loss (0.03) (0.27) * Certain amounts shown here do not correspond to the 2016 consolidated financial statements and reflect adjustments made, refer Note 3.1 and Note 10. Energy Services Inc. Page 5

6 INTERIM CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Share capital Contributed surplus Deficit Foreign currency translation Total equity Balance as at January 1, ,532,425 1,513,127 (7,347,250) - 15,698,302 Loss for period - - (2,054,880) - (2,054,880) Stock-based compensation - 16, ,398 Foreign currency translation , ,281 Reclassification of foreign currency translation reserve (245,281) (245,281) Balance as at March 31, ,532,425 1,529,525 (9,402,130) - 13,659,820 Share capital Contributed surplus Deficit Foreign currency translation Total equity Balance as at January 1, ,532,425 1,575,223 (15,111,505) - 7,996,143 Loss for period - - (934,503) - (934,503) Stock-based compensation - 3, ,596 Shares issued on private placement (net) 12,075, ,075,327 Foreign currency translation ,798 28,798 Reclassification of foreign currency translation reserve (28,798) (28,798) Balance as at 33,607,752 1,578,819 (16,046,008) - 19,140,563 Energy Services Inc. Page 6

7 INTERIM CONSOLIDATED STATEMENT OF CASH FLOW For the three months ended March 31 (Unaudited) Notes OPERATING ACTIVITIES: Net loss for the period from continuing operations (937,097) (1,712,366) Net (loss) profit from discontinued operations (26,204) (587,797) Items not affecting cash: Depreciation of property, plant and equipment 147, ,084 Amortization of intangible assets 6,758 7,330 Other amortization 1,375 8,914 Gain (loss) on disposition of property, plant and equipment Foreign currency translation 28, ,281 Stock-based compensation expense 3,596 16,398 Gross cash flow (774,832) (1,855,579) Changes in inventory (1,805,715) 1,165,917 Changes in trade and other receivables (2,423,008) 2,241,340 Changes in unbilled revenue (708,678) 441,277 Changes in prepaid expenses and other assets (83,475) 87,090 Changes in trade and other payables 216,390 (1,619,800) Changes in unearned revenue 2,035, ,882 Changes in other receivables/payables 49,445 (31,593) Changes in working capital balances (2,719,692) 2,472,113 Cash flow provided by (used in) discontinued operations 259,750 (758,685) Cash flow provided by (used in) operating activities (3,234,774) (142,151) INVESTING ACTIVITIES: Purchase of property, plant and equipment (185,918) (33,003) Additions to intangible assets (38,541) - Proceeds from sales of property, plant and equipment - 29,300 Business acquisition (1,633,379) - Cash flow used in investing activities (1,857,838) (3,703) FINANCING ACTIVITIES: Proceeds from private placement 11,766,503 - Additions to deferred financing fees (5,500) - Repayment of term loan - (70,050) Repayment of obligations under finance leases (11,133) (21,438) Cash used by discontinued operations (1,724) (3,577) Cash flow provided by (used in) financing activities 11,748,146 (95,065) Change in cash 6,655,534 (240,919) Cash at the beginning of the period 831,363 2,074,829 Cash at the end of the period 7,486,897 1,833,910 Energy Services Inc. Page 7

8 NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS 1. GENERAL INFORMATION Hyduke Energy Services Inc. (the "Company" or Hyduke ) is the ultimate parent Company. The Company is a limited liability company incorporated and domiciled in Canada. The address of the Company s registered office and its principal place of business is th Street, Nisku, Alberta, T9E 7X8, Canada. The Company s shares are listed on the Toronto Stock Exchange. The unaudited interim consolidated financial statements of the Company for the three months ended March 31, 2017 were authorized for issue in accordance with a resolution of the Board of Directors on May 10, NATURE OF OPERATIONS Hyduke Energy Services Inc. is an integrated oilfield services company with over thirty-eight years of experience in the manufacture, repair and distribution of oilfield equipment and supplies in Canada and worldwide. The Company engages in two distinct but synergistic businesses: Industrial supply and distribution to the drilling and service rig industry Manufacturing, assembly and service of oilfield equipment, storage tanks and custom steel fabrication The Company operates its businesses through a number of subsidiaries operating in three segments: Manufacturing & Fabrication Manufacturing & Fabrication segment includes the design, manufacture, refurbishment and repair of landbased drilling rigs, well servicing rig, drilling support equipment, workover support equipment, storage tanks, custom steel fabrication and custom machining. Supply & Service Supply & Service segment includes the procurement and distribution of spare parts, equipment components, operating supplies and pneumatic controls for the drilling and well service industries, the service and repair of drilling rigs, and the inspection and certification of drilling rig and well service equipment. Corporate Services The Corporate Services segment includes costs for management and administration, accounting and finance function and drafting and design services provided to all companies within the Hyduke group. The accounting policies of the segments are the same as those described in Note 3. Intersegment transactions are entered into under terms and conditions similar to those with unrelated parties and are eliminated upon consolidation. Energy Services Inc. Page 8

9 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 3.1. Basis of preparation and adoption of IFRS The consolidated financial statements have been prepared on a historical cost basis. The consolidated financial statements are reported in Canadian dollars which is the functional currency of the reporting entity, Hyduke Energy Services Inc. The discontinued operations disclosures were applied retrospectively as required by IFRS 5 and the comparative information for the immediately preceding period 2016 is restated to show the impact that the discontinued operations would have had on the comparative financial statements. Statement of Compliance The interim condensed consolidated financial statements have been prepared in accordance with International Accounting Standard 34: Interim Financial Reporting and do not include all of the information required for full annual financial statements. The same accounting policies were followed in the preparation of these interim condensed consolidated financial statements as were followed in the preparation of the annual consolidated financial statements for the year ended December 31, Accordingly, these interim condensed consolidated financial statements should be read together with the annual consolidated financial statements for the year ended December 31, Going Concern The consolidated financial statements are prepared on a going concern basis, which assumes the Company will be able to realize on its assets and discharge its liabilities in the normal course of operations as they become due. The Company has incurred a net loss of 7,764,255 as at December 31, 2016 and 934,503 in the first quarter of The Company had not drawn on its revolving demand loan and was in breach on that loan as at. As at December 31, 2016 additional equity, new or amended debt arrangements and/or operating developments to generate profits were needed to meet the Company s business objectives. While the Company has taken actions since December 31, 2016, including raising net equity proceeds of 12 million and obtaining an amendment to its term loan facility, further actions are required to reach positive operating cash flow to reduce the uncertainty over the ability of the Company to meet its funding requirements including obtaining access to its operating facility and repaying, amending or replacing its long term financing. If for any reason the Company is unable to continue as a going concern, it could impact the Company s ability to realize assets at their recognized values, in particular intangibles, property, plant and equipment or other assets to meet liabilities in the ordinary course of business at amounts stated in the consolidated financial statements. The consolidated financial statements do not reflect any adjustments to the carrying values of assets and liabilities, the reported revenue, expenses and consolidated statements of financial position classifications that would be necessary if the going concern assumption was to be determined to be inappropriate Principles of consolidation On January 1, 2016, the Company completed a corporate reorganization to simplify the legal structure. The Company s wholly-owned subsidiary Alberta Ltd. (operating as Reliable Airflow Sales & Service and BW Rig Supply) amalgamated with CanWest Crane and Equipment Ltd. and T&T Inspections Ltd. The resulting entity is BW Rig Supply Inc. The Company s wholly-owned subsidiaries Hyduke Drilling Solutions Inc. and Hyduke Machining Solutions Inc. amalgamated and continue operations as Hyduke Drilling Solutions Inc Alberta Ltd., an inactive holding Company, was dissolved. The consolidated financial statements include the accounts of the Energy Services Inc. Page 9

10 Company and the wholly-owned subsidiaries BW Rig Supply Inc., Hyduke Drilling Solutions Inc. and Hyduke Energy Services US Inc. The financial statements of the subsidiaries are prepared for the same reporting year as the Parent Company, Hyduke Energy Services Inc., using consistent accounting policies. All intercompany transactions and balances have been eliminated in the preparation of these consolidated financial statements. Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Company obtains control, and continue to be consolidated until the date that such control ceases. All companies included in the consolidated financial statements have December 31 as the year end. 4. CONTINGENCIES In the normal conduct of operations, various legal claims or actions are pending against the Company in connection with its products and services and/or other commercial matters. The outcome of these claims is not currently determinable and related potential losses, if any, cannot be reasonably estimated. The amount of loss, if any, incurred upon resolution of these matters will be recorded in the period in which the uncertainty regarding the matter is resolved and the amount of the loss can be reasonably estimated. 5. INTEREST BEARING DEBT As at March As at December Term loan 7,019,794 6,866,614 Less: unamortized financing fees (4,126) - Carrying amount term loan 7,015,668 6,866,614 Obligations under finance lease 262, ,557 Total interest bearing debt 7,278,412 6,969,171 Less current portion of interest bearing debt 6,936,412 6,912,203 Non-current interest bearing debt 342,000 56, Term loan In February 2012, the Company refinanced its term loan with its current term loan lender. The original principal amount of 8,500,000 bore interest at the term lender s floating base rate plus 4.25% per annum and required monthly blended instalments of principal and interest. The maturity date of this loan is August 15, The applicable interest rate at was 9.8% (December 31, %). As collateral for the term loan, the term lender holds a first ranking security interest in all long-term assets of the Company and a second ranking security interest in all current assets of the Company. The terms require that the Company maintains a certain minimum financial ratios including a working capital ratio of a minimum of 1.5:1 to be calculated quarterly, a debt to equity ratio of a maximum of 1.5:1 to be calculated quarterly, and minimum EBITDAS to be calculated quarterly and annually. In June 2016, the Company amended its term loan agreement to modify the minimum EBITDAS covenant, revise the interest rate Energy Services Inc. Page 10

11 charged to the term lender s floating base rate plus 8.4% and postpone all principal payments for a period of thirteen months commencing July 15, The Company was in breach of its minimum working capital ratio and its minimum EBITDAS covenant at December 31, On January 23, 2017, the Company signed an amendment to its term loan agreement conditional upon the Company successfully raising a minimum of 8 million of equity by. The amendment revised the definition of the working capital ratio going forward to exclude all amounts regarding the term loan balance from the definition of current liabilities. In addition, the amendment replaced the minimum EBITDAS covenant with a revised minimum EBITDAS for each of the quarterly periods in As a result of this amendment the Company is not in breach of this agreement at. Upon the acquisition of Western Manufacturing Ltd., the Company assumed a term loan with a principle amount of 153,180 and an interest rate of 7.0%. Scheduled principal repayments required on the term loans to maturity are as follows: ,866, , , , ,330 Total 7,019, Obligations under finance leases The Company has finance leases for automotive equipment and computer equipment. As at, the Company's obligations under finance leases included leases bearing interest at various rates from 4.75% to 12.23% and are due at various times from 2017 to Contractual future minimum lease payments including interest under finance leases together with the present value of the net minimum lease payments are as follows: As at March As at December Within one year 253,962 61,252 After one year but less than five years 18,297 48,138 Total minimum lease payments 272, ,390 Future interest charge (9,515) (6,833) Present value of minimum lease payments 262, ,557 Energy Services Inc. Page 11

12 6. SHARE CAPITAL Authorized Unlimited number of common shares with no par or stated value Unlimited number of preferred shares issuable in series with no par or stated value Common shares issued and outstanding December 31, 2016 Shares Amount Shares Amount Balance beginning of period 30,796,264 21,532,425 30,796,264 21,532,425 Shares issued on private placement 37,647,057 11,766, Issued on acquisition 735, , Balance, end of period 69,178,616 33,607,752 30,796,264 21,532,425 Share options At the Annual General Meeting of the Shareholders held on June 16, 2015, the shareholders approved the adoption of a new equity incentive plan, replacing a share option plan adopted in Under the equity incentive plan, the Board of Directors may grant stock based, stock denominated or other long term incentives to directors, officers and employees of the Company. The Compensation and Corporate Governance Committee of the Board of Directors will determine the parameters of the incentive including the vesting conditions, the exercise price and the expiry date, provided that the exercise price shall be no less than the weighted average trading price of the Common Shares on the Toronto Stock Exchange for the five days immediately preceding the date of the grant and the term of the option shall not exceed a period of five years. The aggregate number of common shares reserved for issuance shall not exceed 10% of the issued and outstanding common shares. For complete details of the equity incentive plan, please refer to the Company s Information Circular dated May 12, 2015 filed on Sedar. During the three months ending, the Company issued 2,000,000 stock options. The Company has outstanding share options to directors, officers and employees to purchase 3,094,772 (December 31, ,194,772) common shares, which expire five years from the date of granting the options. The following table presents the changes to the options outstanding during the year: December 31, 2016 Shares Weighted average exercise price Shares Weighted average exercise price Outstanding beginning of period 1,194, ,259, Granted 2,000, , Exercised Forfeited/expired (100,000) 0.78 (215,000) 0.69 Outstanding, end of period 3,094, ,194, Options exercisable, end of period 994, , Energy Services Inc. Page 12

13 Exercise price Shares Options outstanding Weighted average remaining contractual life in years Options exercisable Shares Weighted average exercise price , , , , , , , , , , ,000, ,094, , Deferred share units During the three months ended, the Company granted 325,000 deferred share units (2016 nil). The following table presents the changes to the deferred share units outstanding during the year: December 31, 2016 Share units Fair Value Share units Fair Value Outstanding beginning of period 250, Granted 325, , Exercised Forfeited/expired Deferred units, end of period 575, , DISCONTINUED OPERATIONS During the year ended December 31, 2016, the Company discontinued the operations of its custom machining facility located in Calgary, Alberta (Hyduke Machining Solutions). The majority of the workforce was released on April 1, The Company exited the leased facility at the end of November 30, The majority of the property, plant and equipment and inventory was sold in September 2016, with the remaining being held for resale. The remaining net working capital of 104,140 ( ,080) will be settled in due course. During the year ended December 31, 2015, the Company discontinued the operations of its crane repair facility located in Edmonton, Alberta (Canwest Crane and Equipment Ltd.). The majority of the workforce was released at the end of June The Company exited the leased facility at the end of July The remaining property, plant and equipment comprised primarily of shop equipment is being held for resale. The remaining net working capital of 246,920 ( ,432) will be settled in due course. During the year ended December 31, 2014, the Company discontinued the operations of its machining facility based in Nisku, Alberta, (Hyduke Mechanical and Machining), its manufacturing facility in Houston, Texas (Hyduke Energy Services US), and its painting and sandblasting facility in Leduc, Alberta (Big Rig Energy Services Inc. Page 13

14 Sandblasting, Painting and Repair). The Company discontinued its Hyduke Well Service Solutions manufacturing facility in Edmonton, Alberta during the year ended December 31, The results of the discontinued operations for the quarter are presented below: Discontinued prior to January 1, 2015 Canwest Crane & Equipment Ltd. Hyduke Machining Solutions For the period ended March Revenue 23, ,004 45, , ,363 Less intercompany sales (990) Net revenue 23, ,004 45, , ,373 Expenses (38,565) (250,761) (162,901) (46,392) (261,742) (465,996) Less intercompany purchases Net expenses (38,565) (250,761) (162,901) (46,392) (261,742) (465,906) Loss on impairment of assets Net profit (loss) before tax (15,565) (250,761) 1,103 (503) (11,742) (336,533) Income tax recovery Net profit (loss) from discontinued operations (15,565) (250,761) 1,103 (503) (11,742) (336,533) The following table shows the carrying value of assets and liabilities of the discontinued operations at March 31, 2017: Discontinued prior to January 1, 2015 Canwest Crane & Equipment Hyduke Machining Solutions Cash 1, ,939 Receivables - 15, , ,537 Inventory - 237,390 8, ,283 Prepaids Property, plant & equipment - 2,557 20,949 23,506 Deposits - 3,854 1,517 5,371 Total assets 1, , , ,461 Payables (24,939) - (2,771) (27,710) Unearned revenue - (12,381) (39,498) (51,879) Obligations under capital lease - - (16,812) (16,812) Total liabilities (24,939) (12,381) (59,081) (96,401) Net assets (23,000) 246, , ,060 The net cash flows incurred by the discontinued operations are, as follows: Total Discontinued prior to January 1, 2015 Canwest Crane & Equipment Hyduke Machining Solutions Total Operating 14, ,614 84, ,432 Financing - - (1,724) (1,724) Net cash (outflow) inflow 14, ,614 83, ,708 Energy Services Inc. Page 14

15 8. SEGMENTED INFORMATION Operating segments are defined as components of the Company for which separate financial information is available that is evaluated regularly by the chief operating decision maker in allocating resources and assessing performance. The chief operating decision maker of the Company is the Chief Executive Officer. The Company operates its businesses through a number of subsidiaries operating in three segments (see note 2): Manufacturing and Fabrication Supply and Service Corporate Services Summarized segmented information is as follows for the three months ending and 2016: (In thousands of dollars) Manufacturing and Fabrication Supply and Service Corporate Services Elimination Entries Total Revenue 2,840 1,358 3,264 1, (77) (22) 6,033 2,914 Intersegment revenue (75) (22) - - Net income (loss) before tax Depreciation & amortization (390) (832) 124 (238) (671) (643) 0 1 (937) (1,712) (2) (9) Total Assets (In thousands of dollars) As at March As at December Manufacturing and Fabrication 23,984 11,051 Supply and Service 5,563 5,292 Corporate Services 7,262 1,154 Discontinued operations Total 37,233 18,214 The Company operates in two geographical segments - oilfield services provided in Canada and internationally. 1,939 of the Company s assets are located in the United States and the balance remaining is located in Canada at. Revenue related to each geographical segment is as follows: (In thousands of dollars) Three months ended Mar 31, 2017 Three months ended Mar 31, 2016 Canadian Oilfield Services 5,713 2,596 International Oilfield Services Total 6,033 2,914 Energy Services Inc. Page 15

16 9. CAPITAL MANAGEMENT The Company s objectives when managing capital are to safeguard its ability to continue as a going concern, to provide an adequate return to shareholders, to meet external capital requirements on the Company s debt and credit facilities and preserve financial flexibility in order to benefit from potential opportunities that may arise. The capital structure of the Company consists of cash, bank indebtedness, long-term debt and equity, comprised of share capital, contributed surplus and retained earnings. The Company manages the capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets. To maintain or adjust the capital structure, the Company may attempt to issue or re-acquire shares, acquire or dispose of assets, adjust the amount of cash and bank indebtedness through the refinancing of existing bank debt facilities to change amounts or terms and adjust long-term debt balances through the increase or decrease of floating or fixed rate debt. The Company typically monitors its capital using measures that are consistent with the main covenants under its revolving demand loan. The agreement requires the Company to maintain a working capital ratio, a debt to EBITDA ratio and a fixed charges coverage ratio. As at, total managed capital was 26,421,975 (December 31, ,965,314) consisting of shareholders equity of 19,140,563 (December 31, ,996,143), and interest bearing debt of 7,281,412 (December 31, ,969,171). The Company has maintained compliance with all covenants on its term loan for the period ended. Management is discussing options with its credit facility lender to address trailing twelve month income related covenants while the Company anticipates improved results as industry conditions improve. The Company is also examining options to replace its term debt, which matures August 31, 2017, with another long-term debt facility. For the period ended, the Company made all scheduled payments on its debt facilities, adhered to all covenants on its term debt, raised equity capital to improve its capital structure and engaged in discussions with its credit facility lender and potential long-term debt providers. Through these actions, the Company achieved its capital management objectives but recognizes that continued actions to achieve compliance with credit facility covenants and replace its term facility upon maturity are required. 10. COMPARATIVE FIGURES During the period ended March 31, 2016, management reviewed and reclassified certain amounts related to selling and distributive expenses, general and administrative expenses, other operating income and expenses, interest expense and loss on foreign exchange to cost of sales. This reclassification was reversed in the period ended March 31, These reclassifications have resulted in a first quarter decrease to COGS of 926,251 in There is no effect on net earnings. 11. BUSINESS ACQUISITION The Company acquired 100% of the outstanding shares of Western Manufacturing Ltd. ( Western ) in March 2017 for consideration of 1,942,203, comprised of payment of an outstanding operating credit facility of 1,633,379 and issuance of Hyduke common shares valued at 308,824. The consideration is subject to an adjustment based upon finalization of the closing balance sheet of Western. The initial allocation of the purchase price, subject to Energy Services Inc. Page 16

17 finalization, is shown below. (In thousands of dollars) Current assets 3,709 Property, plant and equipment 3,435 Intangible assets 610 Current liabilities (5,460) Long-term debt (352) 1, POST REPORTING DATE EVENTS The Company acquired 100% of the outstanding shares of Avalanche Metal Industries Ltd. on April 3, Energy Services Inc. Page 17