Independent Auditor s Report. To the Shareholders of Xtreme Drilling and Coil Services Corp.

Transcription

1 Independent Auditor s Report To the Shareholders of Xtreme Drilling and Coil Services Corp. We have audited the accompanying consolidated financial statements of Xtreme Drilling and Coil Services Corp. (formerly known as Xtreme Coil Drilling Corp.), which comprise the consolidated statements of financial position as at December 31, 2012, December 31, 2011 and January 1, 2011 and the consolidated statements of operations, comprehensive income (loss), changes in shareholders equity and cash flows for the years ended December 31, 2012 and December 31, 2011, and the related notes, which comprise a summary of significant accounting policies and other explanatory information. Management s responsibility for the consolidated financial statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor s responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Xtreme Drilling and Coil Services Corp. (formerly known as Xtreme Coil Drilling Corp.) as at December 31, 2012, December 31, 2011 and January 1, 2011 and its financial performance and its cash flows for the years ended December 31, 2012 and December 31, 2011 in accordance with International Financial Reporting Standards. Chartered Accountants Calgary, Alberta March 8, 2013 PricewaterhouseCoopers LLP th Avenue SW, Suite 3100, Calgary, Alberta, Canada T2P 5L3 T: , F: PwC refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.

2 Formerly known as Xtreme Coil Drilling Corp. Consolidated Statements of Financial Position Assets Current assets Dec 31, 2012 Dec 31, 2011 Jan 1, 2011 Cash and cash equivalents 5,177 5,892 2,994 Accounts receivable (Note 5) 43,669 45,353 37,083 Other receivables 35 1,906 2,200 Assets held for sale (Note 6) 9,308 Prepaid expenses and other 2,021 2,090 2,551 Income tax recoverable ,967 Inventory 5,746 5,863 5,402 Non-current assets 66,347 62,038 52,197 Deferred tax asset (Note 14) 15,002 7,566 4,265 Property and equipment (Note 6) 408, , ,193 Intangible assets (Note 7) 4,220 4,523 4,793 Total Assets 494, , ,448 Liabilities and Shareholders' Equity Current liabilities Bank indebtedness (Note 10) 7,834 8,317 Accounts payable and accrued liabilities (Note 9) 26,642 26,175 10,097 Current portion of long-term debt (Note 10) 13, ,224 Long-term liabilities 47,837 26,675 30,638 Long-term debt (Note 10) 125,727 80,937 18,952 Total Liabilities 173, ,612 49,590 Shareholders' equity Share capital (Note 11) 327, , ,765 Share option reserve (Note 11) 11,572 10,338 8,585 Accumulated deficit (5,312) (4,325) (4,496) Foreign currency translation reserve (12,879) (8,596) (12,996) Total Shareholders' Equity 320, , ,858 Total Liabilities and Shareholders' Equity 494, , ,448 Contingencies and commitments (Note 15) The accompanying notes are an integral part of the consolidated financial statements. On behalf of the board of directors, Doug Dafoe Director Lawrence M. Hibbard Director

3 Formerly known as Xtreme Coil Drilling Corp. Consolidated Statements of (Loss) Income For the years ended December 31, 2012 and 2011 (in thousands of Canadian dollars, except share and per share data) Revenue 174, ,982 Expenses Operating expenses 125,528 74,742 General and administrative expenses (Note 12) 9,147 9,622 Depreciation of property and equipment (Note 6) 26,975 11,991 Amortization of intangibles (Note 7) Stock-based compensation 1,229 1,826 Foreign exchange (gain) loss (1,792) 1,790 Loss on sale of equipment Impairment of accounts receivable (Note 5) 6,235 Impairment of assets held for sale (Note 6) 3,133 Loss on damage of property and equipment 538 Other income (expense) 175 (43) Interest expense (Note 10) 7,919 2,532 (Loss) Income before tax for the year (5,497) 1,059 Tax expense (recovery) Current (Note 14) 2,666 2,571 Deferred (Note 14) (7,176) (1,683) Total tax (recovery) expense (4,510) 888 Net (loss) income for the year (987) 171 Net (loss) income per common share basic (0.01) 0.00 diluted (0.01) 0.00 Weighted average number of common shares (Note 11) basic 69,618,457 60,481,719 diluted 69,759,835 61,298,859 The accompanying notes are an integral part of the consolidated financial statements.

4 Formerly known as Xtreme Coil Drilling Corp. Consolidated Statements of Comprehensive (Loss) Income For the years ended December 31, 2012 and Net (loss) income for the year (987) 171 Other comprehensive (loss) income Unrealized (loss) gain on translating financial statements of foreign operations (4,283) 4,400 Comprehensive (loss) income for the year (5,270) 4,571 The accompanying notes are an integral part of the consolidated financial statements.

5 Xtreme Drilling and Coil Services Corp Formerly known as Xtreme Coil Drilling Corp. Consolidated Statements of Changes in Shareholders Equity For the years ended December 31, 2012 and 2011 Share capital Share option reserve Accumulated deficit Foreign currency translation reserve Total shareholders equity Balance at January 1, ,765 8,585 (4,496) (12,996) 244,858 Net income for the year Other comprehensive income Currency translation differences 4,400 4,400 Total comprehensive income 171 4,400 4,571 Employee share option scheme: Value of employees services 133 1,867 2,000 Proceeds from shares issued 56,398 (114) 56,284 Total transactions with owners 56,531 1,753 58,284 Balance at December 31, ,296 10,338 (4,325) (8,596) 307,713 Balance at January 1, ,296 10,338 (4,325) (8,596) 307,713 Net loss for the year (987) (987) Other comprehensive loss Currency translation differences (4,283) (4,283) Total comprehensive loss (987) (4,283) (5,270) Employee share option scheme: Value of employee services 105 1,339 1,444 Proceeds from shares Issued 16,796 (105) 16,691 Total transactions with owners 16,901 1,234 18,135 Balance at December 31, ,197 11,572 (5,312) (12,879) 320,578 The accompanying notes are an integral part of the consolidated financial statements.

6 Formerly known as Xtreme Coil Drilling Corp. Consolidated Statements of Cash Flows For the years ended December 31, 2012 and 2011 Cash flow provided by (used in): Operating activities Net (loss) income for the year (987) 171 Items not affecting cash: Depreciation and amortization 27,278 12,295 Stock-based compensation 1,229 1,826 Loss on sale of equipment Interest expense 6,963 2,326 Amortization of debt issuance costs Unrealized foreign exchange (gain) loss (1,659) 1,790 Deferred tax (recovery) expense (7,176) 1,683 Impairment on accounts receivable 6,235 Loss on damage 538 Impairment on assets held for sale 3,133 Interest paid (6,491) (1,534) Changes in items of working capital (Note 19) (1,692) 8,343 Net cash generated from operating activities 28,594 27,265 Financing activities Proceeds from shares issued, net of issue costs 16,192 55,304 Proceeds from exercise of stock options Proceeds from long-term debt 66, ,490 Repayment of long-term debt (5,466) (95,963) Proceeds from (repayment of) operating facility 7,834 (8,317) Debt issuance cost (1,459) (1,070) Net cash generated from financing activities 83,616 96,227 Investing activities Proceeds from sale of equipment Capital expenditures (112,260) (115,340) Increase in intangibles (34) Net cash used in investing activities (111,579) (114,896) Effect of exchange rate changes on cash and cash equivalents (1,346) (5,698) (Decrease) Increase in cash and cash equivalents (715) 2,898 Cash and cash equivalents - beginning of year 5,892 2,994 Cash and cash equivalents - end of year 5,177 5,892 There were no taxes paid on income during the years ended December 31, 2012 and The accompanying notes are an integral part of the consolidated financial statements.

7 1. General Information Xtreme Drilling and Coil Services Corp. ( Xtreme or the "Company"), formerly known as Xtreme Coil Drilling Corp., is a publically-traded company incorporated May 24, 2005, under the Business Corporations Act of Alberta. The Company s head office is located at 770, th Avenue S.W., Calgary, Alberta T2R1L5 and its registered office is located at 4300, 888 3rd Street S.W., Calgary, Alberta T2P 5C5. The Company also maintains a headquarters in Houston, Texas, has a regional office and yard in Mills, Wyoming, as well as a field office in Al- Khobar, Saudi Arabia. Xtreme designs, builds, and operates a fleet of high specification drilling rigs and coiled tubing well service units featuring leading-edge proprietary technology including AC high capacity coil injectors, deep re-entry drilling capability, modular transportation systems and continuous integration of inhouse advances in methodologies. Currently Xtreme operates two service lines: drilling services ( XDR ) and coil services ( XSR ) under contracts with oil and natural gas exploration and production companies and integrated oilfield service providers in the United States of America ( United States or US ), the Kingdom of Saudi Arabia ( Saudi Arabia ), and Canada. The Company is listed on the Toronto Stock Exchange under the symbol XDC. 2. Basis of preparation and adoption of IFRS The Company prepares its consolidated financial statements in accordance with International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standards Board ( IASB ). These financial statements were approved by the Board of Directors for issue on March 8, Summary of significant accounting policies The significant accounting policies used in the preparation of these consolidated financial statements are described below. Basis of measurement The consolidated financial statements have been prepared under the historical cost convention. Consolidation Subsidiaries are all entities over which the Company has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights currently exercisable or convertible are considered when assessing whether the Company controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Company. They are deconsolidated from the date on which control ceases. Intercompany transactions, balances and unrealized gains on transactions between companies are eliminated. The following table summarizes Xtreme s subsidiaries whose financial position and results have been consolidated in Xtreme s consolidated financial statements: 6

8 Accounting for joint ventures Percentage of Ownership Country of formation Nature of Business Xtreme Equipment, Inc. 100% United States Delaware Corporation Xtreme Drilling and Coil Services, Inc. 100% United States Texas Corporation Xtreme (Luxembourg) S.A. 100% United States Luxembourg Incorporation The Company's interests in jointly-controlled entities are accounted for by proportional consolidation. The Company combines its share of the joint venturers' individual income and expenses, assets and liabilities and cash flows on a line-by-line basis, with similar items in the Company's consolidated financial statements. Participations in Xtreme Equipment Group S.A. and Xtreme Coil Drilling Saudi Arabia Ltd. qualify for proportional consolidation. The following table summarizes Xtreme s joint ventures whose financial position and results have been proportionally consolidated in Xtreme s consolidated financial statements: Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker is responsible for allocating resources and assessing performance of the operating segments and has been identified as the Board of Directors of Xtreme. Foreign currency translation Percentage of Ownership Country of formation Nature of Business Xtreme Equipment Group S.A. 80% Luxembourg Luxembourg Incorporation Xtreme Coil Drilling Saudi Arabia Ltd. 80% Saudi Arabia Saudi Arabia Incorporation (i) Functional and presentation currency Items included in the financial statements of each of the Company s entities are measured using the currency of the primary economic environment in which the entity operates ( the functional currency ). The consolidated financial statements are presented in Canadian dollars, which is the Company s functional and presentation currency. The financial statements of entities that have a functional currency different from that of Xtreme Drilling and Coil Services Corp. are translated into Canadian dollars as follows: assets and liabilities at the closing rate at the date of the statement of financial position and income and expenses at the average rate of the period, as this is considered a reasonable approximation to actual rates. All resulting changes are recognized in other comprehensive income as cumulative translation adjustments. (ii) Transactions and balances 7

9 Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Generally, foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in currency other than an operating foreign currency are recognized in the consolidated statement of income. Cash and cash equivalents Cash and cash equivalents include cash on hand, deposits held at call with banks and other shortterm, highly liquid investments with original maturities of three months or less. Financial instruments Financial assets and liabilities are recognized when the Company becomes a party to the contractual provisions of the instrument. Financial assets are derecognized when the rights to receive cash flows from the assets have expired or have been transferred and the Company has transferred substantially all risks and rewards of ownership. Financial liabilities are derecognized when the obligation specified in the contract is discharged, cancelled or expires. At initial recognition, the Company classifies its financial instruments in the following categories: (i) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments not quoted in an active market. The Company s loans and receivables comprise trade receivables, other receivables, and cash and cash equivalents and are included in current assets due to their short-term nature. Loans and receivables are initially recognized at the amount expected to be received less, when material, a discount to reduce the receivables to fair value. Subsequently, loans and receivables are measured at amortized cost using the effective interest method less a provision for impairment. (ii) Financial liabilities at amortized cost Financial liabilities at amortized cost include accounts payable and accrued liabilities, bank indebtedness and long-term debt. Accounts payable and accrued liabilities are initially recognized at the amount required to be paid less, when material, a discount to reduce the payables to fair value. Subsequently, accounts payable and accrued liabilities are measured at amortized cost using the effective interest method. Bank indebtedness and long-term debt are recognized initially at fair value, net of any transaction costs incurred, and, subsequently, at amortized cost using the effective interest method. Financial liabilities are classified as current liabilities if payment is due within twelve months. Otherwise, they are presented as non-current liabilities. Impairment of financial assets At each reporting date, the Company assesses whether there is objective evidence that a financial asset is impaired. If such evidence exists, the Company recognizes an impairment loss as the difference between the amortized cost of the receivable and the present value of the estimated future cash flows, discounted using the instrument s original effective interest rate. The carrying amount of 8

10 the asset is reduced by this amount, either directly or indirectly, through the use of an allowance account. Impairment losses on financial assets are carried at amortized cost and are reversed in subsequent periods if the amount of the loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized. Inventory Inventory is composed of consumables and parts and is recorded at the lower of cost and net realizable value determined on a specific-item basis. The cost of inventory is comprised of the purchase price paid to a third party plus applicable duties, freight and shipping costs. Net realizable value is the estimated selling price in the ordinary course of business less applicable selling expenses. If carrying value exceeds net realizable amount, a write-down is recognized. The writedown may be reversed in a subsequent period if the circumstances which caused it no longer exist. Property and equipment Property and equipment are stated at cost less accumulated depreciation and any accumulated impairment losses. Cost includes expenditures directly attributable to the acquisition of the asset. Subsequent costs are included in the asset s carrying amount or recognized as a separate asset, as appropriate, only when it is probable the future economic benefits associated with the item will flow to the Company and the cost of the item can be measured reliably. Repairs and maintenance are charged to the statement of income during the period in which they are incurred. The cost of self-constructed assets includes the cost of materials, direct labor, and any other costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. Depreciation on assets, except for drilling and servicing equipment, is calculated using the straightline method to allocate the cost of each asset to its residual value over its estimated useful life, as follows: Office and shop equipment Vehicles and trucking equipment Drill pipe Building 1-5 years 3-10 years 3 years 39 years Xtreme records various components of drilling and servicing equipment at cost and depreciates these using a units-of-production method ranging from 3,650 to 9,125 operating days, excluding standby days, with an estimated residual value of 20 percent of historical cost. Major renovations are depreciated over the remaining useful life of the related asset or to the date of the next major renovation, whichever is earlier. During the fourth quarter of 2012, Company completed a review of the estimated useful lives of spare equipment. As such, effective October 1, 2012, management has reduced the useful life assumption on certain components of the fixed assets and has commenced depreciation of these assets over the revised estimate of useful life. This has resulted in an additional depreciation charge of $2.0 million for the three month period ended December 31,

11 The Company allocates the amount initially recognized in respect of an item of property and equipment to its significant parts and depreciates separately each such part. The carrying amount of a replaced part is derecognized when replaced. Residual values, method of amortization and useful lives of the assets are reviewed annually and adjusted if appropriate. The asset s residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. An asset s carrying amount is written down immediately to its recoverable amount if the asset s carrying amount is greater than its estimated recoverable amount. Gains and losses on disposals are determined by comparing proceeds with the carrying amount. These are included in the consolidated statement of income. Identifiable intangible assets Xtreme capitalizes legal costs incurred with the registration of its drilling and technology patents and pending patent applications. The Company amortizes drilling and technology patents and pending patent applications on a straight-line basis over a period of 20 years, which is the life of each patent. Costs of maintenance and defense of patents is expensed as incurred. Goodwill Goodwill represents the excess of the purchase price over the fair value of identifiable net assets purchased. Goodwill is not amortized. Borrowing costs Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalization. All other borrowing costs are recognized in the profit and loss in the period in which they are incurred. Impairment of non-financial assets Property and equipment and intangible assets (other than goodwill) are tested for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. For the purpose of measuring recoverable amounts, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units or CGUs ). Recoverable amount is the higher of an asset s fair value less costs to sell and value in use (being the present value of the expected future cash flows of the relevant asset or CGU, as determined by management). Goodwill is reviewed for impairment annually or at any time if an indicator of impairment exists. Management monitors goodwill for internal purposes based on its CGUs, which are its operating segments. The Company evaluates impairment losses, other than goodwill impairment, for potential reversals when events or circumstances warrant such consideration and accordingly, goodwill is assessed for impairment together with the assets and liabilities of the related segment. 10

12 The Company assesses at each year-end whether there is any objective evidence that its interests in associates are impaired. If so, the carrying value of the Company s share of the underlying assets of associates is written down to its net recoverable amount (being the higher of fair value less cost to sell and value in use) and the loss is charged to the consolidated statement of income in other gains and losses (net). Employee benefits (i) Termination benefits The Company recognizes termination benefits when it is demonstrably committed to either terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal, or providing benefits as a result of an offer made to encourage voluntary termination. Benefits falling due more than twelve months after the end of the reporting period are discounted to their present value. (ii) Stock-based compensation The Company grants stock options to certain employees of Xtreme. Stock options vest equally over three years and expire after five years. Each tranche in an award is considered a separate award with its own vesting period and grant date fair value. The fair value of each tranche is measured at the date of grant using the Black-Scholes option pricing model. Compensation expense is recognized over the tranche s vesting period by increasing share option reserve based on the number of awards expected to vest. This number is reviewed at least annually, with any change in estimate recognized immediately in compensation expense with a corresponding adjustment to share option reserve. Other liabilities Provisions for restructuring costs and legal claims, where applicable, are recognized when the Company has a present legal or constructive obligation as a result of past events, it is more likely than not an outflow of resources will be required to settle the obligation and the amount can be reliably estimated. Provisions are not recognized for future operating losses. Provisions are measured at management s best estimate of the expenditure required to settle the obligation at the end of the reporting period and are discounted to present value where the effect is material. The Company performs evaluations to identify onerous contracts and, where applicable, records provisions for such contracts. Income tax Income tax comprises current and deferred tax. Income tax is recognized in the statement of income except to the extent that it relates to items recognized directly in other comprehensive income or directly in equity, in which case the income tax is also recognized directly in other comprehensive income or equity, respectively. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted, at the end of the reporting period, and any adjustment to tax payable in respect of previous years. In general, deferred tax is recognized in respect of temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred tax is not recognized if it arises from the initial recognition of goodwill or the initial recognition of an asset or liability in a transaction other than a business combination that, at the time 11

13 of the transaction, affects neither accounting nor taxable profit or loss. Deferred income tax is provided on temporary differences arising on investments in subsidiaries and associates, except, in the case of subsidiaries, where the timing of the reversal of the temporary difference is controlled by the company and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred income tax is determined on a non-discounted basis using tax rates and laws that have been enacted or substantively enacted at the balance sheet date and are expected to apply when the deferred tax asset is realized or liability is settled. Deferred tax assets are recognized to the extent that it is probable that future taxable profit will be available against which the deductible temporary differences can be utilized. Deferred income tax assets and liabilities are presented as non-current. Revenue Revenue is measured at the fair value of the consideration received or receivable, and represents amounts receivable for goods supplied or services rendered. The Company recognizes revenue when the amount of revenue can be reliably measured; when it is probable that future economic benefits will flow to the entity; and when specific criteria have been met for each of the Company s activities, as specified below. The Company s services are generally sold based upon service orders or contracts with customers that include fixed or determinable prices based on daily, hourly, or job rates. Customer contract terms do not include provisions for significant post-service delivery obligations. Revenue is recognized when services are rendered and only when collectability is reasonably assured. Drilling and service operations revenue is recognized in the accounting period in which the services are rendered, with reference to the stage of completion of the specific transaction and assessed on the basis of the actual services provided as a proportion of the total services to be provided. Share capital Incremental costs directly attributable to the issuance of shares are recognized as a deduction from equity. Earnings per share Basic earnings per share ( EPS ) is calculated by dividing the net income (loss) for the period attributable to equity owners of Xtreme by the weighted average number of common shares outstanding during the period. Diluted EPS is calculated by adjusting the weighted average number of common shares outstanding for dilutive instruments. The number of shares included with respect to options, warrants and similar instruments is computed using the treasury stock method. Xtreme s potentially dilutive common shares comprise options granted to employees and warrants. Incentive and retention plan On April 18, 2012, the Company s shareholders approved an Incentive and Retention Plan designed to provide the Company s directors, officers and key employees and consultants with an opportunity to receive cash and/or equity-based incentives associated with common shares of the Company and 12

14 to benefit from the appreciation of the common shares. Under the incentive plan, shares granted to eligible individuals vest annually. Vested shares may be settled in cash or equity, at the discretion of the Company, at a value determined by the fair market value of the shares at the vesting date. The fair value of the services received in exchange for the grant of the options is recognized as an expense. The total amount to be expensed is determined by reference to the fair value of the shares granted including any market performance conditions, excluding the impact of any service and nonmarket performance vesting conditions, and including the impact of any non-vesting conditions. Nonmarket performance and service conditions are included in assumptions about the number of shares that are expected to vest. The total expense is recognized over the vesting period, which is the period over which all of the specified vesting conditions are to be satisfied. Accounting standards and amendments issued but not yet adopted Unless otherwise noted, the following revised standards and amendments are effective for annual periods beginning on or after January 1, 2013, with earlier application permitted. The Company has not yet assessed the impact of these standards and amendments or determined whether it will early adopt them. (i) IFRS 11 Joint Arrangements requires a venturer to classify its interest in a joint arrangement as a joint venture or joint operation. Joint ventures will be accounted for using the equity method of accounting whereas for a joint operation the venturer will recognize its share of the assets, liabilities, revenue and expenses of the joint operation. Under existing IFRS, entities have the choice to proportionately consolidate or equity account for interests in joint ventures. IFRS 11 supersedes IAS 31 Interests in Joint Ventures, and SIC-13 Jointly Controlled Entities Non-monetary Contributions by Venturers. (ii) IFRS 13, Fair Value Measurement, aims to improve consistency and reduce complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across IFRSs. The requirements, which are largely aligned between IFRSs and US GAAP, do not extend the use of fair value accounting but provide guidance on how it should be applied where its use is already required or permitted by other standards within IFRSs or US GAAP. (iii) IFRS 9, Financial Instruments, addresses the classification, measurement and recognition of financial assets and financial liabilities. IFRS 9 was issued in November 2009 and October It replaces the parts of IAS 39 that relate to the classification and measurement of financial instruments. IFRS 9 requires financial assets to be classified into two measurement categories: those measured as at fair value and those measured at amortized cost. The determination is made at initial recognition. The classification depends on the entity s business model for managing its financial instruments and the contractual cash flow characteristics of the instrument. For financial liabilities, the standard retains most of the IAS 39 requirements. The main change is that, in cases where the fair value option is taken for financial liabilities, the part of a fair value change due to an entity s own credit risk is recorded in other comprehensive income rather than the income statement, unless this creates an accounting mismatch. The Company has yet to assess IFRS 9 s full impact and intends to adopt IFRS 9 no later than the accounting period beginning on or after 1 January The Company will also consider the impact of the remaining phases of IFRS 9 when completed by the Board. (iv) IFRS 10, Consolidated Financial Statements, builds on existing principles by identifying the concept of control as the determining factor in whether an entity should be included within the consolidated financial statements of the parent company. The standard provides additional guidance 13

15 to assist in the determination of control where this is difficult to assess. The Company has yet to assess IFRS 10 s full impact and intends to adopt IFRS 10 no later than the accounting period beginning on or after 1 January (v) IFRS 12, Disclosures of Interests in Other Entities, includes the disclosure requirements for all forms of interests in other entities, including joint arrangements, associates, special purpose vehicles and other off balance sheet vehicles. The Company has yet to assess IFRS 12 s full impact and intends to adopt IFRS 12 no later than the accounting period beginning on or after 1 January There are no other IFRSs or IFRIC interpretations that are not yet effective that would be expected to have a material impact on the Company. 4. Critical accounting estimates and judgments The preparation of financial statements requires management to use judgment in applying its accounting policies and estimates and assumptions about the future. Estimates and other judgments are continuously evaluated and are based on management s experience and other factors, including expectations about future events that are believed to be reasonable under the circumstances. The following discusses the most significant accounting judgments and estimates that the Company has made in the preparation of the financial statements: Allowance for Doubtful Accounts The Company performs ongoing customer credit evaluations and grants credit based on a review of historical collection experience, current aging status, financial condition of the customer and anticipated industry conditions. Customer payments are regularly monitored and a provision for doubtful accounts is established based on specific situations and overall industry conditions. Depreciation Depreciation of the Company s property and equipment incorporates estimates of useful lives and residual values. These estimates may change as more experience is obtained or as general market conditions change, thereby impacting the value of the Company s property and equipment. Impairment of Long-lived Assets The Company evaluates its property and equipment for impairment annually and whenever events or changes in circumstances indicate the carrying amount may not be recoverable. If there is any indication of impairment, the recoverable amount of the asset is estimated to determine the impairment loss, if any. To calculate the recoverable amount, estimates are made regarding the following factors: future demand for the Company's services by oil and gas exploration and production companies, foreign currency exchange rates and interest rates, changes in the cost and availability of financing, replacement costs of drilling equipment, future repair and maintenance costs, and the Company's future operating and financial results. In assessing fair value less costs to sell, the estimated future cash flows are discounted to their present value using a discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. As a result, any impairment losses are a result of management s best estimates of expected revenues, expenses and cash flows at a specific point in time. These estimates are subject to measurement uncertainty as they are dependent on factors outside management s control. 14

16 Fair Value of Financial Instruments The Company s financial instruments included in the consolidated statement of financial position are comprised of cash and cash equivalents, accounts receivable, current liabilities, bank indebtedness and long-term debt. The fair values of financial instruments included in the consolidated statement of financial position approximate their carrying amounts due to the short-term maturity of those instruments. Long-term debt is carried at amortized cost using the effective interest method of amortization. Income Taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement amounts of existing assets and liabilities and their respective tax bases. Estimates of the Company s future taxable income have been considered in assessing the utilization of available tax losses. The Company s business is complex and the calculation of income taxes involves many complex factors as well as the Company s interpretation of relevant tax legislation and regulations. Stock-Based Compensation The fair value of options is estimated at the grant date using the Black-Scholes option pricing model, which includes underlying assumptions related to the risk-free interest rate, average expected option life, estimated forfeitures, estimated volatility of the Company s shares and anticipated dividends. The fair value of deferred stock units and performance stock units is recognized based on the market value of the Company s common shares underlying these compensation programs. 5. Trade receivables Trade receivables 1 Dec 31, 2012 Dec 31, 2011 Jan 1, 2011 Less than 90 days 38,229 24,660 16,690 Greater than 90 days and less than 180 days 2, Greater than 180 days 3,347 20,693 20,689 43,669 45,353 37,405 Less allowance for doubtful accounts (322) 43,669 45,353 37,083 1 See also Note 17 (b). In September 2012, the Company and a customer commenced a jury trial in the United States District Court for the Western District of Colorado. On September 14, 2012, the jury returned a verdict in favor of the Company in the amount of approximately $2,600 for payment of outstanding invoices and judgment was entered. The Company also filed motions for the recovery of attorney s fees, interest, and court costs. The customer filed post-trial motions, including an appeal of the decision. The Company intends to continue to pursue the claim to collect the outstanding amounts as well as the related recoveries. During the year, the Company recorded an impairment loss of $1,500 for trade accounts receivable that were not awarded under the judgment. Amounts related to the recoveries have not been reflected in the financial statements of the Company. In September 2012, the Company entered into a confidential settlement agreement to end the lawsuit filed in 2010 relating to work in the Chicontepec development project in Mexico. As a result of the settlement agreement, the Company recovered certain previously billed amounts, but recognized an impairment loss of approximately $4,700 related to the write-off of uncollected amounts. In addition, the Company recorded a benefit in general and administrative expenses of approximately $1,600 15

17 related to the recovery of legal expenses received as part of the settlement agreement. The proceeds on settlement were received during the year and amounted to approximately $13,400, including related value added taxes. 6. Property and equipment Drilling and servicing equipment Vehicles and trucking equipment Office and shop equipment Building and land Drilling and servicing equipment - CIP Total At January 1, 2011 Cost 248,721 3,093 3, , ,179 Accumulated depreciation (25,837) (1,061) (1,088) (27,986) Net book value 222,884 2,032 2, , ,193 Year Ended Dec 31, 2011 Opening net book value 222,884 2,032 2, , ,193 Additions 48,337 1, , ,340 Disposals (226) (381) (30) (637) Transfers (3,523) 238 3,285 Depreciation expense (11,143) (458) (386) (4) (11,991) Exchange differences 4, ,294 Closing net book value 261,312 3,252 1, , ,198 At December 31, 2011 Cost 298,689 4,455 3, , ,343 Accumulated depreciation (37,378) (1,203) (1,561) (4) (40,145) Net book value 261,312 3,252 1, , ,198 Year Ended Dec 31, 2012 Opening net book value 261,311 3,252 1, , ,198 Additions 25,551 1, , ,357 Disposals (35) (35) (15) (752) (837) Loss on damage of equipment (538) (538) Transfers 144, (144,760) Depreciation expense (25,570) (1,065) (333) (7) (26,975) Assets held for sale (69) (101) (12,271) (12,441) Exchange differences (3,701) 13 (13) (23) (467) (4,191) Closing net book value 401,646 3,728 1, , ,573 At Dec 31, 2012 Cost 462,679 5,783 3, , ,397 Accumulated depreciation (61,033) (2,055) (1,727) (9) (64,824) Net book value 401,646 3,728 1, , ,573 16

18 Xtreme Coil Drilling Corp. Impairment As a result of the Company s decline in market capitalization during the year, loss for the year, and sale of a coil services rig at less than net book value, an impairment test was carried out on the drilling and servicing equipment CGU s in accordance with Xtreme s accounting policy on impairment at December 31, An impairment loss is recognized for the excess of the carrying amount over its estimated recoverable amount. Drilling equipment comprised of approximately $312,000, or 76 percent of total property and equipment. The recoverable amount of the drilling equipment had been determined based on an estimate of fair value less costs to sell. Fair value less costs to sell was established with reference to a valuation completed by an independent third party valuation expert. The following table sets out the results of the impairment test for the drilling equipment CGU s: Recoverable Amount (Fair Value less Cost to Sell) Net Book Value Excess Drilling United States 341, ,434 64,228 Drilling Canada 45,145 34,411 10, , ,845 74,962 Servicing equipment comprised of approximately $90,000, or 22 percent of total property and equipment. The recoverable amounts of the servicing equipment had been determined using a value in use model. The value in use was determined by calculating the weighted average of discounted cash flows expected to result from continued use and eventual disposition. These calculations were performed by Xtreme s management and required the use of estimates. The following table sets out the results of the impairment test for the drilling equipment CGU s: Recoverable Amount (Value in Use) Net Book Value Excess Servicing United States 54,813 46,111 8,702 Servicing Other International 55,998 43,690 12, ,811 89,801 21,010 A discount rate of 14.5 percent and 17.6 percent was used for the value in use calculation for the United States and Other International CGU s, respectively. A one percent increase or decrease in the discount rate would result in a decrease or increase in excess of discounted cash flows over the carrying amount of approximately $3,000 or $2,000 for servicing equipment in the United States and Other International CGU s, respectively. If the discount rate changed as described, no impairment would be recognized for either CGU. Loss on damage of property and equipment In the third quarter of 2012, the Company experienced a fire at a drilling location. The fire damaged certain equipment and the Company recorded a loss on damage of $538, which represents the net book value of the equipment damaged. While the Company does maintain insurance on its property and equipment, the Company is uncertain as to whether it will exceed the deductible on this claim and has, therefore, not recorded any related recovery for this matter. 17

19 Assets Held For Sale In December 2012, the Company entered into a purchase and sales agreement to sell one of its newbuild XSR extended reach coiled tubing units. The buyer will operate the unit in a Middle East country outside of Xtreme s core operating area in Saudi Arabia. The sales price was approximately $9,757. As of December 31, 2012, the Company recorded the rig components and related equipment of $9,308 as assets held for sale at the estimated net realizable value in the accompanying consolidated statement of financial position and recorded an impairment of assets held for sale of $3,133 in the consolidated statement of income for the year ended December 31, The assets were delivered to the buyer and the sale was concluded in February Intangible assets At January 1, 2011 Cost 6,034 Accumulated amortization (1,241) Net book value 4,793 Year ended December 31, 2011 Opening net book value 4,793 Additions 34 Amortization for the year (304) Net book value 4,523 At January 1, 2012 Cost 6,067 Accumulated amortization (1,544) Net book value 4,523 Year ended December 31, 2012 Opening net book value 4,523 Additions Amortization for the year (303) Net book value 4,220 At December 31, 2012 Cost 6,067 Accumulated amortization (1,847) Net book value 4, Interest in joint ventures The Company proportionately consolidates its interest in two of its joint ventures. The first is Xtreme Coil Drilling S.A. Ltd., an 80 percent interest in an operating company in Saudi Arabia. The second is Xtreme Equipment Group S.A., an 80 percent interest whose purpose is to lease drilling equipment to Xtreme Saudi Arabia for its operations. The Company s proportionate interest in its joint ventures is summarized below. 18

20 Statements of Financial Positions Current assets 22,643 Non-current assets 27,161 Current liabilities 11,509 Current portion of long-term debt 3,361 Long-term liabilities Statements of Income Revenue 20,948 Expenses 15,232 Net earnings 5,716 Statements of Cash Flows Cash generated from operating activities 1,083 Cash used in investing activities (1,089) Cash used in financing activities (545) 9. Accounts payable and accrued liabilities Dec 31, 2012 Dec 31, 2011 Jan 1, 2011 Trade payables 9,866 13,499 4,543 Accrued expenses 3,524 5,287 2,953 Customer deposit on assets held for sale 2,912 Accrued payroll 3,089 3,118 1,108 Withholding taxes payable 5,268 2, Sales taxes payable Property taxes payable 1,487 1, Accounts payable and accrued liabilities 26,642 26,175 10, Debt Dec 31, 2012 Dec 31, 2011 Long-term debt Opening balance 81,437 31,176 New debt 66, ,490 Repayment of debt (5,466) (95,963) Debt issuance costs (1,459) (1,070) Amortization of debt issuance cost Unrealized (gain) loss on foreign currency translation (2,650) 1,598 Closing balance 139,088 81,437 Current portion 13, Non-current portion 125,727 80,937 Closing balance 139,088 81,437 19

21 Bank Financing On November 3, 2011, the Company entered into an agreement with a syndicate of financial institutions to increase its existing credit facility to $150,000 ( The Credit Agreement ). The Credit Agreement consists of $15,000 as a revolving operating loan facility denominated in Canadian dollars ( CAD ) to assist with financing general corporate and working capital requirements and $135,000 of an extendible loan facility denominated in United States dollars to refinance existing bank debt and to provide working capital for capital expenditures focused primarily on new-build rig contracts. The Credit Agreement assists with financing general corporate and working capital requirements and provides working capital for capital expenditures. The Credit Agreement is secured by property and equipment held in Canada and the United States, as well as cash and trade receivables in Canada and the United States of approximately $3,275 and $36,570, respectively, at December 31, The Credit Agreement is provided on a one-year, annually renewable term. If not renewed, both facilities convert to a two-year non-revolving term loan, with payments due on a quarterly basis. At December 31, 2012, the Company does not have any of the amount due under the Credit Agreement as current (December 31, 2011 nil). The interest rates on the facilities range from prime (3.0 percent at December 31, 2012) plus 1.75 percent to 3.5 percent or LIBOR (0.31 percent at December 31, 2012) plus 3.0 percent to 4.75 percent, depending upon the Company s Funded Debt to EBITDA ratio. Long-term debt has been recognized net of approximately $1,300 in unamortized transaction costs, which are recognized over the term of the facility using the effective interest rate method, assuming a two year conversion to a two-year non-revolving loan. On March 30, 2012, the Company executed the first amending agreement to the Credit Agreement. This amendment modified the funded debt to EBITDA covenant ratios to not more than 5.00 to 1.00 for the first quarter of 2012, not more than 4.30 to 1.00 for the second quarter of 2012, not more than 3.25 to 1.00 for the third quarter of 2012, and not more than 3.00 to 1.00 thereafter. On June 29, 2012, the Company completed execution of the second amending agreement to the Credit Agreement. This amendment modified the funded debt to EBITDA covenant ratios to not more than 5.00 to 1.00 for the first quarter of 2012, not more than 5.75 to 1.00 for the second quarter of 2012, not more than 4.75 to 1.00 for the third quarter of 2012, not more than 3.75 to 1.00 for the fourth quarter of 2012, and not more than 3.00 to 1.00 thereafter. On July 29, 2012, the Company executed the HSBC loan. The HSBC loan provides $10,000 nonrevolving loan facility to be used for working capital requirements and general corporate purposes. Outstanding amounts under the HSBC loan are payable in $5,000 increments due on January 31, 2013, and April 30, At December 31, 2012, the Company has classified $10,000 of the HSBC loan as current. The interest rate on HSBC loan is prime plus 4 percent. On November 2, 2012, the Company and its lenders entered into an agreement to extend the Credit Agreement maturity date from November 3, 2012, to January 1, On December 31, 2012, the Company completed execution of the fourth amending agreement to the Credit Agreement. This amendment extended the maturity date to November 2, 2013, and modified the funded debt to EBITDA ratios to not more than 4.00 to 1.00 for the fourth quarter of 2012, not more than 3.25 to 1.00 for the first quarter of 2013, and not more than 3.00 to 1.00 thereafter. The remaining terms of the Credit Agreement are substantially unchanged. As of December 31, 2012, the Company was in compliance with the covenants. 20