Condensed Consolidated Interim Financial Statements

Transcription

1 Q Condensed Consolidated Interim Financial Statements Critical Control Energy Services Corp. September 30, 2016 NOTICE OF NO AUDITOR REVIEW OF CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS The accompanying unaudited condensed consolidated interim financial statements of the Corporation have been prepared by and are the responsibility of the Corporation s management. The Corporation s independent auditor has not performed a review of these financial statements in accordance with the standards established by the Canadian Institute of Chartered Accountants for a review of condensed consolidated interim financial statements.

2 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION As at September 30, December 31, ($ thousands) - unaudited Note Assets Current assets Cash and cash equivalents Accounts receivable 7,665 11,598 Unbilled revenue Inventory 2,806 3,179 Prepaid expenses ,581 16,136 Deposits Tax credit recoverable Deferred income taxes 3,260 2,350 Property and equipment 3,554 4,252 Intangible assets and goodwill 20,215 20,750 39,526 44,318 Liabilities Current liabilities Bank indebtedness 6 5,825 7,079 Accounts payable and accrued liabilities 3,581 4,361 Deferred revenue Current portion of provisions Current portion of long-term debt 6 1,387 5,042 Current portion of deferred lease inducements ,819 18,000 Provisions Long-term debt 6 3, Deferred lease inducements ,069 18,302 Shareholders' Equity Common shares 31,862 31,720 Contributed surplus 1,598 1,632 Accumulated other comprehensive income 1,779 1,866 Deficit (10,782) (9,202) 24,457 26,016 39,526 44,318 (See Notes to the Condensed Consolidated Interim Financial Statements)

3 CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) Three months ended Nine months ended September 30, September 30, ($ thousands) - unaudited Note Revenue 8 7,578 10,300 24,554 30,526 Expenses Operating expense 11 4,478 6,989 14,653 19,646 General and administrative 11 2,370 3,107 7,853 9,451 Research and development Foreign exchange 11 (124) (415) 544 (783) Depreciation and amortization ,632 2,068 Loss (gain) on sale of asset (3) Other expenses , , (3,425) (1,553) (4,498) Finance costs Loss before income taxes (221) (3,592) (2,463) (4,870) Income taxes (recovery) (551) (1,359) (978) (1,626) Net earnings (loss) before discontinued operations 330 (2,233) (1,485) (3,244) Loss (income) from discontinued operations, net of tax (492) Net earnings (loss) 330 (2,444) (1,580) (2,752) Other comprehensive income (loss) Foreign currency translation adjustment, net of tax 12 1,380 (87) 1, ,380 (87) 1,845 Total comprehensive income (loss) 342 (1,064) (1,667) (907) Earnings per share Net earnings Basic / Diluted 0.01 (0.04) (0.03) (0.05) Net earnings - continuing operations Basic / Diluted 0.01 (0.04) (0.03) (0.06) (See Notes to the Condensed Consolidated Interim Financial Statements) Page 2

4 CONSOLIDED STATEMENTS OF CHANGES IN EQUITY For the nine months ended September 30, 2016 and 2015 Accumulated other Common Contributed comprehensive Total ($ thousands) - unaudited Shares surplus income (1) Deficit equity Balance at December 31, ,720 1,632 1,866 (9,202) 26,016 Comprehensive income (loss) - - (87) (1,580) (1,667) Employee share purchase plan proceeds Shares issued from treasury under employee share purchase plan 83 (83) Shares issued from treasury under deferred common shares 59 (59) Share-based payments Balance at September 30, ,862 1,598 1,779 (10,782) 24,457 Balance at December 31, ,463 1,590 (5,679) ,008 Comprehensive income (loss) - - 1,845 (2,752) (907) Employee share purchase plan proceeds - (5) - - (5) Shares issued from treasury under deferred common shares 92 (92) Shares issued from treasury under employee share purchase plan 3 (3) Share-based payments Balance at September 30, ,558 1,635 (3,834) (2,118) 27,241 (1) Accumulated other comprehensive income (loss) consists of foreign currency translation adjustment, net of tax. All amounts will be reclassified to profit or loss when specific conditions are met. Page 3

5 CONSOLIDATED STATEMENTS OF CASH FLOW For the nine months ended September 30, ($ thousands) - unaudited Note Cash flows provided by (used in) Operating activities Net earnings (loss) before discontinued operations (1,485) (3,244) Adjustments for: Depreciation and amortization 1,632 2,068 Loss on disposal of property and equipment 9 - Foreign exchange (783) Finance costs Income taxes (recovery) (978) (1,626) Bargain purchase price - (762) Other Income taxes - paid (11) (55) Income taxes - recovery Interest - paid (544) (229) Funds provided (used in) by continuing operations 317 (3,955) Change in non-cash working capital 2, ,579 (3,142) Investing activities Purchase of measurement services, net assets 3 - (1,973) Acquisition of business, net assets 3 (54) - Purchase of property and equipment (234) (506) Purchase of software (211) (81) Proceeds on sale of property and equipment 18 - Additions to product development costs (727) (731) (1,208) (3,291) Financing activities Proceeds from employee share purchase plan 7 2 Proceeds from bank indebtedness 26,819 4,481 Repayment of bank indebtedness (28,430) (2,551) Proceeds from long-term debt 3,000 2,679 Repayment of long-term debt (3,206) (1,214) (1,810) 3,397 Cash flow from discontinued operations 4-3,530 Effect of translation of foreign currency cash 51 (14) Net (decrease) increase in cash (388) 480 Cash and cash equivalents, beginning of period 815 1,805 Cash and cash equivalents, end of period 427 2,285 (See Notes to the Condensed Consolidated Interim Financial Statements) Page 4

6 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. STRUCTURE OF CORPORATION Organization Critical Control Energy Services Corp. (the Corporation or Critical Control ) is incorporated in Alberta and domiciled in Canada. The registered address of the Corporation is 1400, Avenue SW, Calgary, Alberta T2P 3N9. Critical Control is a publicly-traded company listed on the Toronto Stock Exchange ( TSX ) under symbol CCZ. These condensed consolidated interim financial statements of the Corporation as at and for the three and nine month period ended September 30, 2016, are available upon request from the Corporation s head office at Suite 800, th Avenue SE, Calgary, Alberta, Canada T2G 0R1, at or at Operations Critical Control provides solutions for the collection, control, and analysis of measurement and operational data related to the oil and gas wells across North America. We provide services to capture data, cloud-based software to visualize and manage it, and business intelligence to make quicker and more informed operational decisions. In assessing performance of the segments and the allocation of resources to the segments, executive management evaluates gross margin, operating income, and earnings (loss) before tax directly attributable to each segment. All of the Corporation s identifiable assets are located in Canada and the United States. The reportable segments are managed separately because of the unique characteristics and requirements of each business. The Software business provides the following services to its upstream and midstream oil and gas clients: Measurement Data Management: Gas chart integration and reporting; web-based monitoring and control of electronic devices at the well site; and cost-efficient data validation. Regulatory Compliance and Risk Management: Integrated pipeline and asset profiles management; intelligent fluid analysis management; and streamlined, auditable meter calibration. Production and Financial Accounting: Production accounting; financial and joint interest accounting; capital projects management; land and contracts management; production asset management; and facility processing contract management. The Services business provides the following services to its upstream and midstream oil and gas clients: Gas Measurement Field Services: inclusive of natural gas meter installation, calibration, and monitoring. Gas and Liquid Analysis: gas composition management services including gas sample analysis and data management tools; Certification and Proving: calibration and certification of measurement meters and gas measurement equipment. Equipment and Fabrication: assembly and sale of gas measurement and related equipment. Page 5

7 2. BASIS OF PREPARATION Statement of compliance: These condensed consolidated interim financial statements were 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. These condensed consolidated interim financial statements were prepared using International Accounting Standard (IAS) 34 - Interim Financial Reporting as at and for the period ended September 30, These condensed consolidated interim financial statements were authorized for issuance by the Board of Directors as of November 9, These condensed consolidated interim financial statements were prepared by management and follow the same accounting policies and methods as the audited consolidated financial statements as at and for the year-ended December 31, 2015, as described in Note 27. These condensed consolidated interim financial statements do not contain all of the disclosures required for the annual consolidated financial statements. As a result, these condensed consolidated interim financial statements should be read in conjunction with the Corporation s previous annual consolidated financial statements for the year-ended December 31, 2015, prepared in accordance with IFRS as issued by the IASB. Basis of measurement: The consolidated financial statements have been prepared on the historical cost basis. Functional and presentation currency: The consolidated financial statements are presented in Canadian dollars, which is the Corporation s functional currency. All financial information presented in dollars has been rounded to the nearest thousand except for share and per share amounts. Use of estimates and judgments: The preparation of the condensed consolidated interim financial statements requires management to make judgments and estimates that affect the reported amounts of assets, liabilities, income and expenses. Judgments and estimates are continually evaluated and are based on historical experience and expectations of future events. While judgments and estimates used by Critical Control are believed to be reasonable under current circumstances, actual results could differ. The Corporation has applied significant judgments on a basis consistent with the prior year. 3. ACQUISITIONS The acquisitions and business combinations have been accounted for using the acquisition method under IFRS 3, and the results of operations have been included in the consolidated statements of operations and comprehensive income (loss) from the date of acquisition. Acquisition of ScadaView Effective February 10, 2016, the Corporation acquired, through its subsidiary, Critical Control Energy Services Inc., certain assets of ScadaView Data (Canada) Corp. of Calgary, Alberta related to field data capture. The purchase price was $0.1 million, of which 20% was paid in February 2016 with the remainder to be paid November The net assets will be allocated to the Software operating segment. Revenue and earnings before income taxes generated from the acquisition are minimal. The pro-forma revenue and earnings before income taxes are estimated to be minimal. External legal fees and due diligence costs in relation to the acquisition were minimal. These cost have been included in other expenses in the condensed consolidated interim financial statements. Page 6

8 Measurement services acquisition Effective April 1, 2015, the Corporation acquired, through its subsidiary, Gas Analytical Services, Inc., certain assets of Legacy Measurement Solutions, Inc. of Dallas, Texas relating to the interpretation of gas charts, the provision of gas and liquids analysis, and the provision of measurement related field services ( Measurement Services Acquisition ). The purchase price of US$2.0 million was paid 80% on the first closing with the remainder paid on the second closing date of December 15, The net assets acquired have been allocated to the Software and Services operating segments. Revenue generated from the net assets for the three and nine months ended September 30, 2016 are US$1.3 million and US$3.9 million, respectively (2015: US$1.4 million and US$3.5 million, respectively). Earnings before income tax contributed from the net assets for the three and nine months ended September 30, 2016 are less than US$0.1 million and US$0.2 million, respectively (2015: US$0.1 million and US$0.2 million, respectively). The gain on the acquisition is attributed mainly to the onerous leases that were acquired as part of the acquisition related to three office leases in areas that the Corporation does not currently plan to utilize due to underdeveloped market opportunities in the area. These onerous leases were added to the provisions in the second quarter of Field services acquisition Effective December 4, 2015, the Corporation acquired, through its subsidiary, Gas Analytical Services, Inc., certain assets of Fleaux Services of Louisiana, L.L.C. of Shreveport, Louisiana related to gas measurement field services. The purchase price was US$0.2 million, of which US$0.2 million was paid in December 2015 with the remainder paid July 1, The net assets acquired have been allocated to the Services operating segment. Revenue generated from the net assets for the three and nine months ended September 30, 2016 are US$0.2 million and US$0.4 million, respectively (2015: US$Nil). Earnings before income tax contributed from the net assets for the three and nine months ended September 30, 2016 are less than US$0.1 million (2015: US$Nil). 4. DISCONTINUED OPERATIONS Through a series of transactions in March and May of 2015, Critical Control sold its Service Bureau Operations segment. Management committed to a plan to sell this segment before March 31, 2015, following a strategic decision to place greater focus on the Corporation s key competencies being the Energy Services businesses in Canada and the US. The comparative consolidated statement of operations and comprehensive income (loss) for the three months ended March 31, 2015 and related disclosures have been restated to present the discontinued operations separately from continuing operations. On March 12, 2015, the Corporation announced the sale of a portion of its Service Bureau Operations, specifically the operations based in Quebec, Ontario, and Manitoba, for gross proceeds of $1.0 million under an asset sale. On March 27, 2015, the Corporation announced closing of the sale of another component of its Service Bureau Operations, specifically the operations consisting of reselling imaging equipment, preventative maintenance contracts, and third party document imaging software, for gross proceeds of $1.7 million. On May 4, 2015, the Corporation announced the sale of the final component of its Service Bureau Operations, specifically the operations based in Alberta, for gross proceeds of $1.3 million. Under the terms of the three asset purchase agreements, all accounts receivable, liabilities and certain other working capital associated with the businesses prior to the sale were retained by the Corporation, other than a portion of the Corporation s onerous lease obligations that was assumed by the purchaser. Page 7

9 The gain on sale of discontinued operations is net of a goodwill impairment loss of $0.3 million. Three months ended Nine months ended September 30, September 30, ($ thousands) - unaudited Revenue ,280 Expenses Operating expense ,345 General and administrative Foreign exchange Depreciation and amortization Loss (gain) on disposal of assets (1,442) Other expenses (210) (95) 1,046 Finance costs Earning before income taxes - (211) (95) 1,044 Income taxes Net (loss) income - (211) (95) 492 The cash flow from discontinued operations is as follows: For the three and nine months ended September 30, ($ thousands) Cash flows from (used in) discontinued operations Operating activities - 1,064 (Loss) gain on disposal of assets - (1,442) Investing activities - 3,908 Net cash flow - 3, PROVISIONS Onerous Onerous ($ thousands) Leases Contract Total Balance as at December 31, Provision used during the period (411) (200) (611) Change in estimate (76) - (76) Effect of movement in exchange rates (20) - (20) Balance as at September 30, In the first quarter of 2016, the lease located in Fort Lupton, CO was added to onerous leases, as a change in estimate. In the second quarter of 2016, the lease located in Muncy, PA lease was settled and deducted from onerous leases, as a change in estimate. The Corporation does not currently plan to utilize the leased locations due to underdeveloped market opportunities, and has thus recognized an onerous lease provision. The net obligation of the onerous leases has been estimated based on sublease Page 8

10 agreements expected to be in place. The provision is based on management s best estimate of the sublease rates that will be negotiated, the timing, and the discount rates. The onerous contract provision relates to a significant ProMonitor Schematics implementation project in the Software operating segment. The project started in late 2013 and is scheduled to be completed in The provision is reviewed and reassessed on a periodic basis by management. 6. LONG-TERM DEBT As at September 30, December 31, ($ thousands) Note Demand term loans b - 2,614 Secured bank term loan ($3.0 million) b 3,000 - Secured bank term loan (US$1.1 million) c 1,484 2,245 Secured finance contracts Finance leas e liabilities ,582 5,098 Current portion 1,387 5,042 Long-term portion 3, On August 16, 2016 the Corporation entered into a revised credit facility agreement with its lender. Significant details of the facility are summarized below. (a) A revolving demand operating credit up to $8.5 million to support working capital requirements in Canada and the US. (b) On May 9, 2016, the demand term loan was repaid and replaced with a $3.0 million committed term loan. This committed term loan matures on April 30, The Corporation shall make interest only payments for the first twelve months. Beginning in May 2017, the Corporation shall start making monthly principal payments. (c) A committed term loan of US$1.1 million to fund repayment of the Corporation s previous bank term loan and unsecured promissory note. This committed term loan matures on April 30, Interest is also payable monthly, calculated at the same rates as the US dollar demand operating credit. The credit facility is secured by the following: A general security agreement creating a first-priority security interest in all present and future undertaking and personal property of the Corporation; and Upstream guarantees from all material subsidiaries of the Corporation, secured by general security agreements and UCC filings as considered appropriate. A guarantee from Export Development Canada (EDC) with respect to the $3.0 million committed term loan. The credit facility agreement requires adherence to certain financial covenants, including a Debt to Capitalization ratio not to exceed 0.38 to 1.00 and a minimum Adjusted Debt Service ratio of 1.10 in the second quarter of As at September 30, 2016, the Corporation is in compliance with its financial covenants. Page 9

11 7. EARNINGS PER SHARE Basic earnings per share for the three and nine months periods ended September 30, 2016 and 2015 is based on the net earnings attributable to shareholders, as reported in the consolidated statements of operations and comprehensive income (loss), and the weighted average number of common shares outstanding in the period. Diluted earnings per share for the three and nine months ended September 30, 2016 and 2015 is based on the net earnings attributable to shareholders as reported in the consolidated statements of operations and comprehensive income (loss) and basic weighted average number of common shares outstanding, both adjusted for dilutive factors as follows: Three months ended Nine months ended September 30, September 30, Weighted average of common shares Basic 58,284,896 57,875,131 58,146,880 57,641,048 Diluted 58,736,406 57,875,131 58,146,880 57,641,048 The average market value of the Corporation s shares for purposes of calculating the dilutive effect of deferred common shares was based on quoted market prices for the period during which the deferred common shares were outstanding. The following potential common shares were excluded from the weighted average number of common shares outstanding (diluted) for 2016 because they were antidilutive: 1,876,635 deferred common shares; 155,187 shares reserved under the Employee Share Purchase Plan; and 8. REVENUE Three months ended Nine months ended September 30, September 30, ($ thousands) Recurring 6,302 7,900 20,039 21,516 Non-recurring 1,276 2,400 4,515 9,010 7,578 10,300 24,554 30, OTHER EXPENSES Three months ended Nine months ended September 30, September 30, ($ thousands) Acquisition related charges Bargain purchase price (762) Provision of onerous lease - - (76) 598 Write-down for inventory obsolescence Write-down for allowance for doubtful accounts - 1,217-1,217 Termination benefits 16 1, ,057 Other non-recurring expenses , ,668 Other non-recurring expenses, during the second quarter of 2016, the Corporation had a Microsoft license audit and incurred a one-time charge relating to 2013 to 2015 activities of $0.4 milllion. Page 10

12 10. SEGMENTED INFORMATION The following presents the results of Critical Control s operating segments: Three months ended September 30, Software Software Services Services Corporate Corporate Total Total ($ thousands) Revenue Recurring 3,783 4,493 2,519 3, ,302 7,900 Non-recurring ,028 2, ,276 2,400 4,031 4,872 3,547 5, ,578 10,300 Expenses Operating expense 1,775 2,400 2,703 4, ,478 6,989 Research and development Depreciation and amortization Loss on sale of asset (3) (3) - 2,331 3,175 2,891 4, ,222 8,060 1,700 1, ,356 2,240 General and administrative ,370 3,107 2,370 3,107 Foreign exchange (124) (415) (124) (415) Other expenses , ,973 Finance costs Income taxes (551) (1,359) (551) (1,359) Discontinued operations Net income (loss) 1,700 1, (2,026) (4,684) 330 (2,444) Purchase of property, equipment, and intangible assets For nine months ended September 30, Software Software Services Services Corporate Corporate Total Total ($ thousands) Revenue Recurring 11,961 13,493 8,078 8, ,039 21,516 Non-recurring 1,048 1,105 3,467 7, ,515 9,010 13,009 14,598 11,545 15, ,554 30,526 Expenses Operating expense 5,816 6,947 8,837 12, ,653 19,646 Research and development Depreciation and amortization 1,060 1, ,632 2,068 Loss on sale of asset ,606 9,314 9,409 13, ,015 22,688 5,403 5,284 2,136 2, ,539 7,838 General and administrative ,853 9,451 7,853 9,451 Foreign exchange (783) 544 (783) Other expenses , ,668 Finance costs Income taxes (978) (1,626) (978) (1,626) Discontinued operations (492) 95 (492) Net income (loss) 5,403 5,284 2,136 2,554 (9,119) (10,590) (1,580) (2,752) Purchase of property, equipment, and intangible assets , ,560 As at September 30, Software Software Services Services Corporate Corporate Total Total ($ thousands) Property and equipment ,734 4, ,554 5,053 Intangible assets and goodwill 20,215 20, ,215 20,012 Total assets 28,049 23,802 11,477 15, ,526 39,801 Page 11

13 11. EXPENSES BY NATURE The Corporation presents certain expenses in the consolidated statements of operations and comprehensive income (loss) by function. The following table presents those expenses by nature: Three months ended Nine months ended September 30, September 30, ($ thousands) Expenses Salaries, subcontractors, and benefits 4,159 5,834 14,235 16,543 Material and supplies 916 1,897 2,882 6,450 External services and facilities 1,731 2,287 5,273 5,872 Share-based payment ,848 10,096 22,506 29,097 Allocated to: Operating expense 4,478 6,989 14,653 19,646 General and administrative 2,370 3,107 7,853 9,451 6,848 10,096 22,506 29,097 Foreign exchange Foreign exchange - realized Foreign exchange - unrealized (133) (422) 544 (815) (124) (415) 544 (783) Finance costs Bank related charges Interest on bank indebtedness Interest on long-term debt Deferred financing costs on long-term debt CHANGE IN PRESENTATION Critical Control has changed the presentation of statement of operations and comprehensive income (loss) to improve disclosure of the Corporation s operations. The change has resulted in the reclassification of certain revenue and expenses. The change in presentation has been applied retroactively. Page 12

14 The table below summarizes the movement of the revenue and expenses: For the three months ended September 30, 2015 ($ thousands) Note Reported Adjustment Revised Revenue 10,300-10,300 Operating expenses 7,775-6,989 a - (374) - b - (452) - c General and administration 3,123-3,107 a - (420) - b c - (40) - d - (8) - Research and development Foreign exchange e - (415) (415) Depreciation and amortization a a Other expenses d 1,769 1,204 2,973 12, ,725 (2,644) (438) (3,425) Finance costs d 948 (1,196) 167 e (3,592) - (3,592) Income taxes (recovery) (1,359) - (1,359) (2,233) - (2,233) Loss (gain) from discontinued operations Net loss (2,444) - (2,444) For the nine months ended September 30, 2015 ($ thousands) Note Reported Adjustment Revised Revenue 30,526 30,526 Operating expenses 21,145 19,646 a (852) b (767) c 120 General and administration 10,003 9,451 a (1,216) b 767 c (120) d 17 Research and development Foreign exchange e - (783) (783) Depreciation and amortization a ,068 a 1,216 Other expenses d 2,464 1,204 3,668 34, ,024 (4,060) (438) (4,498) Finance costs d 810 (1,221) 372 e 783 (4,870) - (4,870) Income taxes (recovery) (1,626) (1,626) (3,244) (3,244) Loss (gain) from discontinued operations (492) (492) Net loss (2,752) (2,752) Page 13

15 (a) Depreciation and amortization Depreciation and amortization previously within cost of revenue and selling and administration has been disclosed separately to improve visibility and disclosure. (b) Office leases A portion of the operating leases for locations in Canada and the United States was allocated to cost of revenue. This has been reclassified to general and administration to improve disclosure of the direct expenditure, and external services and facilities expenditures. (c) Operations supervisors Operations supervisors previously treated as administration have been reclassified from selling and administration to operating expense to better reflect the direct expenditure costs. (d) Accounts receivable impairment Accounts receivable impairment previously in finance costs have been reclassified to general and administrative expense and other expenses. (e) Foreign exchange Foreign exchange previously in finance costs have been reclassified to its own financial statement line item to improve disclosure. 13. COMPARATIVE FIGURES Certain comparative figures have been reclassified to the financial statement presentation adopted in the current period. Page 14