Consolidated Financial Statements Year Ending
Collins Barrow Calgary LLP 1400 First Alberta Place 777 8 th Avenue SW Calgary, Alberta T2P 3R5 Canada T: (403.298.1500) F: (403.298.5814) Email: calgary@collinsbarrow.com www.collinsbarrow.com Independent Auditors' Report To the Shareholders of Sun Country Well Servicing Inc. We have audited the accompanying consolidated financial statements of Sun Country Well Servicing Inc. and its subsidiary, which comprise the consolidated statement of financial position as at, and the consolidated statement of loss and comprehensive loss, consolidated statement of changes in shareholders' equity and consolidated statement of cash flows for the year then ended, and 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. Auditors' Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit 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 auditors' 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. This office is independently owned and operated by Collins Barrow Calgary LLP. The Collins Barrow trademarks are owned by Collins Barrow National Cooperative Incorporated and are used under license. -2-
We believe that the audit evidence we have obtained 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 Sun Country Well Servicing Inc. and its subsidiary as at, and their financial performance and their cash flows for the year then ended in accordance with International Financial Reporting Standards. Calgary, Canada April 25, 2018 CHARTERED PROFESSIONAL ACCOUNTANTS -3-
Consolidated Statement of Financial Position Notes 2017 2016 Assets Current assets Cash $ 41,672 $ 11,181 Accounts receivable 4 1,190,310 1,477,029 Prepaid expenses 20,234 17,480 Total current assets 1,252,216 1,505,690 Non-current assets Property and equipment 5 11,291,795 13,076,906 Total assets $ 12,544,011 $ 14,582,596 Liabilities Current liabilities Accounts payable and accrued liabilities 7 $ 494,235 $ 593,416 Total current liabilities 494,235 593,416 Non-current liabilities Non-revolving term loan 8 2,550,000 2,550,000 Deferred tax liabilities 9 494,569 1,020,332 Total liabilities 3,538,804 4,163,748 Shareholders' Equity Share capital 10 10,418,173 10,382,173 Contributed surplus 11 271,926 230,040 Deficit (1,684,892) (193,365) Total shareholders' equity 9,005,207 10,418,848 Total liabilities and shareholders' equity $ 12,544,011 $ 14,582,596 Commitments (note 17) Subsequent events (notes 8 and 18) See accompanying notes to the consolidated financial statements. Approved and authorized for issue on behalf of the Board of Directors on April 25, 2018. (signed) "Don Jones" (signed) "Rob Wasylyniuk", Director, Director -4-
Consolidated Statement of Loss and Comprehensive Loss For the Year Ended Notes 2017 2016 Revenue Service rigs $ 8,043,870 $ 8,334,880 Office rental 1,727 1,624 8,045,597 8,336,504 Expenses Field payroll 14 3,967,030 4,076,495 Other field 1,931,956 1,723,084 Operations 14 1,141,893 990,239 General and administrative 13,14 936,266 1,095,650 Bad debt 4-202,876 7,977,145 8,088,344 Income from operations 68,452 248,160 Other income (losses) Interest expense (146,831) (127,572) Share-based compensation 10,13 (77,886) (74,695) Gain (loss) on disposal of assets 27,189 (3,000) Depreciation 5 (1,888,214) (1,964,273) (2,085,742) (2,169,540) Loss before tax (2,017,290) (1,921,380) Tax recovery - deferred 9 (525,763) (490,520) Net loss and comprehensive loss $ (1,491,527) $ (1,430,860) See accompanying notes to the consolidated financial statements. -5-
Consolidated Statement of Changes in Shareholders' Equity For the Year Ended Notes Share capital Common shares Contributed surplus Retained earnings (deficit) Total shareholders' equity Balance at December 31, 2015 $ 10,346,173 $ 191,345 $ 1,237,495 $ 11,775,013 Share-based compensation 10 36,000 38,695-74,695 Net loss and comprehensive loss for the year - - (1,430,860) (1,430,860) Balance at December 31, 2016 10,382,173 230,040 (193,365) 10,418,848 Share-based compensation 10 36,000 41,886-77,886 Net loss and comprehensive loss for the year - - (1,491,527) (1,491,527) Balance at $ 10,418,173 $ 271,926 $ (1,684,892) $ 9,005,207 See accompanying notes to the consolidated financial statements. -6-
Consolidated Statement of Cash Flows For the Year Ended 2017 2016 Cash provided by (used in): Operating activities Net loss for the year $ (1,491,527) $ (1,430,860) Adjustments for: Share-based compensation 77,886 74,695 Depreciation 1,888,214 1,964,273 Loss (gain) on disposal of assets (27,189) 3,000 Deferred tax (525,763) (490,520) (78,379) 120,588 Changes in non-cash working capital: Accounts receivable 286,719 155,973 Prepaid expenses (2,754) (10,012) Accounts payable and accrued liabilities (99,181) (126,340) Equipment loan - (157,442) 184,784 (137,821) Net cash inflow (outflow) from operating activities 106,405 (17,233) Financing activities Repayment of demand term loans - (2,902,314) Proceeds from issuance of non-revolving term loan - 2,550,000 Net cash outflow from financing activities - (352,314) Investing activities Purchase of property and equipment (144,485) (240,011) Disposal of property and equipment 68,571 - Net cash outflow from investing activities (75,914) (240,011) Net increase (decrease) in cash 30,491 (609,558) Cash, beginning of year 11,181 620,739 Cash, end of year $ 41,672 $ 11,181 Interest paid $ 146,831 $ 127,572 Non-cash transactions: During the year ended, the Corporation issued 25,532 (2016-26,087) common shares to directors in compensation for services provided valued at $36,000 (2016 - $36,000) (note 10(a)). See accompanying notes to the consolidated financial statements. -7-
1. Nature of operations Sun Country Well Servicing Inc. (the "Corporation ) provides well completion and production services to oil and natural gas exploration and development companies in south eastern Saskatchewan and Alberta. The Corporation's wholly owned subsidiary 101163483 Saskatchewan Ltd. ("101 Sask") is inactive. The Corporation was incorporated under the laws of the province of Alberta on June 22, 2009. The Corporation's head office is located at 101 Supreme Street, Box 1646, Estevan, Saskatchewan, Canada, S4A 1C8, and the corporate office is located in Cochrane, Alberta, Canada. 2. Basis of preparation (a) Statement of compliance The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standards Board ( IASB ) and interpretations of the IFRS Interpretations Committee. The consolidated financial statements were authorized for issue by the Board of Directors on April 25, 2018. (b) Basis of measurement The consolidated financial statements are presented in Canadian dollars and have been prepared on a historical cost basis, except for certain financial assets or liabilities that are measured at fair value with changes in fair value recorded in earnings. See note 16 for the methods used to measure fair values. (c) Functional and presentation currency These consolidated financial statements are presented in Canadian dollars, which is the functional currency of the Corporation and its subsidiary. (d) Use of estimates and judgments The preparation of the consolidated financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of revenue and expenses during the period. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgments about the carrying values of assets and liabilities that are not readily apparent from other resources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. -8-
The Corporation performs ongoing credit evaluations of its customers and grants credit based upon 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 upon specific situations and overall industry conditions. Amounts recorded for depreciation are based on the estimated useful lives of the underlying assets. Useful lives are based on management s best estimate using knowledge of past events, and as such are subject to measurement uncertainty. The estimates are reviewed at least annually and are updated if expectations change as a result of physical wear and tear and legal or other limits to use. It is possible that changes in these factors may cause changes in the estimated useful lives of the Corporation s property and equipment in the future. The Corporation's assets are segregated into cash-generating units ("CGUs") based on their ability to generate largely independent cash flows and used for impairment testing. The determination of the Corporation's CGUs is subject to management's judgment. Impairment of property and equipment exists when the carrying value of an asset or CGU exceeds its recoverable amount, which is the higher of its fair value less cost of disposal and its value in use. The fair value less costs of disposal calculation is based on available data from binding sales transactions in an arm s length transaction of similar assets or observable market prices less incremental costs for disposing of the asset. The value in use calculation is based on a discounted cash flow model. The cash flows are derived from the budgeted net cash flows to be generated by the asset or CGU over the next five years and do not include restructuring activities that the Corporation is not yet committed to or significant future investments that will enhance the asset s performance of the asset or CGU being tested. The recoverable amount is most sensitive to the discount rate used for the discounted cash flow model as well as the expected future cash inflows and the growth rate used for extrapolation purposes. The fair value of stock options is estimated at the grant date using the Black-Scholes option pricing model, which includes underlying assumptions related to the value of the Corporation's shares at grant date, the risk-free interest rate, average expected option life, estimated forfeitures and estimated volatility of the Corporation s shares. The fair value of shares issued as director compensation is estimated based on the fair value of the services received by comparing to market expectations if payment for their services were to be paid in cash. Provisions for current taxes are made using the best estimate of the amount expected to be paid based on a qualitative assessment of all relevant factors. The Corporation reviews the adequacy of these provisions at the end of the reporting period. However, it is possible that at some future date an additional liability could result from audits by taxation authorities. Tax interpretations, regulations and legislation in the various jurisdictions in which the Corporation operates are subject to change. As such, taxes are subject to measurement uncertainty. -9-
3. Significant accounting policies (a) Principles of consolidation The consolidated financial statements include the accounts of the Corporation and its wholly owned subsidiary 101 Sask. (b) Subsidiaries A subsidiary is an entity controlled by the Corporation. Control exists when the Corporation has the power, directly or indirectly, to govern the financial and operational policies of an entity to obtain benefits from its activities. In assessing control, potential voting rights that are presently exercisable are taken into account. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases and all intercompany transactions are eliminated. (c) Property and equipment Property and equipment are stated at cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditures that are 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 that future economic benefits associated with the item will flow to the Corporation and the cost can be measured reliably. The carrying amount of a replaced asset is derecognized when replaced. Repairs and maintenance costs are charged to the statement of loss and comprehensive loss during the period in which they are incurred. The major categories of property and equipment are depreciated on the following basis: Expected life Residual value Basis of depreciation Service rigs 20,000 service hours 10% units-of-service hours Heavy duty vehicles and trailers 10 years 10% straight-line Other field equipment 3 to 10 years - straight-line Computers, furniture and office equipment 5 years - straight-line Leasehold improvements Term of lease - straight-line Both the useful life of an asset and its residual value, if any, are re-assessed at the end of each reporting period. Gains or losses arising from the retirement or disposal of an item of property and equipment are determined as the difference between the net disposal proceeds and the carrying amount of the item and are recognized in the statement of loss and comprehensive loss on the date of retirement or disposal. -10-
(d) Impairment of non-financial assets The carrying value of the Corporation's non-financial assets is reviewed annually for indicators that the carrying value of an asset or CGU may not be recoverable. If indicators of impairment exist, the recoverable amount of the asset or CGU is estimated. If the carrying value of the asset or CGU exceeds the recoverable amount, the asset or CGU is written down with an impairment recognized in net loss. The recoverable amount of an asset or CGU is the greater of its fair value less costs of disposal and its value in use. Fair value is determined to be the amount for which the asset could be sold for in an arm s length transaction. The fair value less costs of disposal values used to determine the recoverable amounts are classified as Level 3 fair value measurements. Refer to note 3 (k)(i) for information on fair value hierarchy. Value in use is determined by estimating the present value of the future net cash flows to be derived from the continued use of the asset or CGU in its present form. Reversals of impairments are recognized when there are indicators that an impairment loss recognized in prior periods may no longer exist, or may have decreased. In this event, the carrying amount of the asset or CGU is increased to its revised recoverable amount with an impairment reversal recognized in net earnings. The revised recoverable amount is limited to the original carrying amount less depreciation as if no impairment had been recognized for the asset or CGU for prior periods. (e) Share-based compensation The Corporation has a stock option plan which is described in note 10. The fair value of the stock options is measured at the grant date and recognized as share-based compensation expense, with a corresponding increase in contributed surplus over the vesting period. The Corporation measures share based payments to non-employees at the fair value of the goods or services received at the date of receipt of the goods or services. If the fair value of the goods or services cannot be measured reliably, the value of the stock options granted will be used, measured using the Black-Scholes option-pricing model. A forfeiture rate is estimated on the grant date and is adjusted to reflect the actual number of stock options that will ultimately vest. When the stock options are exercised, the amount previously recorded to contributed surplus is reclassified as share capital. (f) Tax Tax expense is comprised of current and deferred tax. Tax expense is recognized in profit or loss except to the extent that it relates to items recognized directly in equity, in which case the tax is also recognized in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the statement of financial position date, plus any adjustment to tax payable in respect of previous years. -11-
Deferred tax assets and liabilities arise from deductible and taxable temporary differences respectively, being the differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax bases. Deferred tax assets also arise from unused tax losses and unused tax credits. All deferred tax liabilities, and all deferred tax assets to the extent that it is probable that future taxable profits will be available against which the assets can be utilized, are recognized. The amount of deferred tax recognized is measured based on the expected manner of realization or settlement of the carrying amount of the assets and liabilities, using tax rates enacted or substantively enacted at the statement of financial position date. Deferred tax assets and liabilities are not discounted. The carrying amount of a deferred tax asset is reviewed at each statement of financial position date and is reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow the related tax benefit to be utilized. Any such reduction is reversed to the extent that it becomes probable that sufficient taxable profits will be available. Current tax balances and deferred tax balances, and movements therein, are presented separately from each other and are not offset. (g) Revenue Service Rigs Revenue is recognized when services are rendered, provided it is probable that the economic benefits will flow to the Corporation and the revenue and applicable costs can be measured reliably. The Corporation's services are generally provided based on fixed hourly rates. Office Rental Revenue is recognized on a straight-line basis over the term of occupancy based on the monthly or daily lease rate as negotiated with tenants, provided it is probable that the economic benefits will flow to the Corporation and the revenue and applicable costs can be measured reliably. (h) Interest paid The Corporation has classified interest paid on the non-revolving term loan as an operating activity on the consolidated statement of cash flows. (i) Financial instruments (i) Classification and measurement Financial instruments are measured at fair value on initial recognition of the instrument. Measurement in subsequent periods depends on whether the financial instrument has been classified as "fair value through profit or loss", "loans and receivables", "available-for-sale", "held-to-maturity", or "financial liabilities measured at amortized cost" as defined by las 39, "Financial Instruments: Recognition and Measurement". -12-
Financial assets and financial liabilities classified as "fair value through profit or loss" are either classified as "held for trading" or "designated at fair value through profit or loss" and are measured at fair value, with changes in fair value recognized in the consolidated statement of loss and comprehensive loss. Transaction costs are expensed when incurred. The Corporation has designated cash as "fair value through profit or loss". Financial assets and financial liabilities classified as "loans and receivables", "held-tomaturity", or "financial liabilities measured at amortized cost" are measured at amortized cost using the effective interest method. "Loans and receivables" are nonderivative financial assets with fixed or determinable payments that are not quoted in an active market. "Held-to-maturity" financial assets are non-derivative investments that an entity has the positive intention and ability to hold to maturity. "Financial liabilities measured at amortized cost" are those financial liabilities that are not designated as "fair value through profit or loss" and that are not derivatives. The Corporation has designated accounts receivable as "loans and receivables" and accounts payable and accrued liabilities and non-revolving term loan as "financial liabilities measured at amortized cost". The Corporation has no assets that have been designated as "held to maturity". Financial assets classified as "available-far-sale" are measured at fair value, with changes in fair value recognized in other comprehensive income. "Available-for-sale" financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. The Corporation has no financial assets in this category. The significance of inputs used in making fair value measurements are examined and classified according to a fair value hierarchy. Fair values of assets and liabilities included in level 1 are determined by reference to quoted prices in active markets for identical assets and liabilities. Assets and liabilities in Level 2 include valuations using inputs other than quoted prices for which all significant outputs are observable, either directly or indirectly, and are based on valuation models and techniques where the inputs are derived from quoted indices. Level 3 valuations are based on inputs that are unobservable and significant to the overall fair value measurement. (ii) Equity instruments Common shares are classified as equity. Incremental costs directly attributable to the issue of common shares and stock options are recognized as a deduction from equity, net of any tax effects. -13-
(iii) Impairment The Corporation assesses at each statement of financial position date, whether there is objective evidence that financial assets, other than those designated as fair value through profit or loss are impaired. When impairment has occurred, the cumulative loss is recognized in the consolidated statement of loss and comprehensive loss. For financial assets carried at amortized cost, the amount of the impairment loss recognized is the difference between the asset's carrying amount and the present value of estimated future cash flows, discounted at the financial asset's original effective interest rate. When an "available-for-sale" financial asset is considered to be impaired, cumulative gains or losses previously recognized in other comprehensive income are reclassified to the consolidated statement of loss and comprehensive loss in the period. Impairment losses may be reversed in subsequent periods. (j) Future accounting policies The Corporation has not adopted the following recent standards issued by the IASB: IFRS 9 - Financial Instruments IFRS 9 introduces a single approach to determine whether a financial asset is measured at amortized cost or fair value and replaces the multiple rules in IAS 39. The approach is based on how an entity manages its financial instruments in the context of its business model and the contractual cash flow characteristics of the financial assets. For financial liabilities, IFRS 9 retains most of the requirements of IAS 39; however, where the fair value option is applied to financial liabilities, any change in fair value resulting from an entity s own credit risk is recorded in other comprehensive income rather than the statement of income (loss). In addition, IFRS 9 introduces a new expected credit loss model for calculating impairment of financial assets, replacing the incurred loss impairment model required by IAS 39. Sun Country determined that the new impairment model will not result in material changes to the valuation of its financial assets on adoption of IFRS 9. IFRS 9 also contains a new model to be applied for hedge accounting. The Corporation does not currently apply hedge accounting to its risk management contracts and does not currently intend to apply hedge accounting to any of its existing risk management contracts on adoption of IFRS 9. The standard will come into effect for annual periods beginning on or after January 1, 2018, with earlier adoption permitted. IFRS 9, as well a consequential amendments to IFRS 7, Financial Instruments: Disclosures, will be applied on a retrospective basis by Sun Country on January 1, 2018. Sun Country has determined that the adoption of IFRS 9 will not have a material impact on the measurement and carrying values of the Corporation s financial assets or liabilities. IFRS 15 - Revenue from Contracts with Customers IFRS 15 provides a single, principles-based five-step model to be applied to all contracts with customers. The standard requires an entity to recognize revenue to reflect the transfer of goods and services for the amount it expects to receive, when control is transferred to the purchaser. Disclosure requirements have also been expanded. The standard is required to be adopted either retrospectively or using a modified retrospective approach for annual periods beginning on or after January 1, 2018, with earlier adoption permitted. -14-
The Corporation will retrospectively adopt IFRS 15 on January 1, 2018. The Corporation has completed reviewing its various revenue streams and underlying contracts with customers. The Corporation concluded that the adoption of IFRS 15 will not have a material impact on Sun Country's net income (loss) and financial position. IFRS 16 - Leases IFRS 16 achieves the goal of bringing leases onto the statement of financial position for lessees. There will be a single lease accounting model for all leases and there will no longer be a classification test between finance and operating leases. The lessee will recognize a right of use asset and a lease liability and the lease will be treated as an asset on a financial basis. There will be an optional exemption from the above for short-term leases, defined at 12 months or less, and an option for portfolio accounting on leases that have similar criteria. From the lessor's perspective, there will still be a dual lease accounting model that follows the criteria set out in IAS 17 (previous leases standard). IFRS 16 is applicable for annual periods beginning on or after January 1, 2019. IFRS 16 is being assessed to determine its impact on the Corporation's results and financial position. 4. Accounts receivable 2017 2016 Trade receivables $ 1,165,541 $ 1,476,210 Other receivables - 819 Accrued receivables 24,769 - $ 1,190,310 $ 1,477,029 All of the trade and other receivables are expected to be recovered within one year. Trade receivables are due within 30 days from the date of billing. The Corporation considers all receivables outstanding greater than 90 days to be past due. See note 16 for further details on the Corporation's credit risk. The aging analysis of trade receivables that are neither individually nor collectively considered to be impaired are as follows: 2017 2016 Current $ 617,524 $ 718,210 31-60 days 526,876 659,733 61-90 days 21,141 98,267 $ 1,165,541 $ 1,476,210 Trade receivables are primarily from publicly traded oil and natural gas exploration and production companies. The Corporation does not hold any collateral over these balances. During the year ended, the Corporation wrote off $NIL (2016 - $202,876) of accounts receivable which management determined to be uncollectible. -15-
5. Property and equipment Cost Service rigs Heavy duty vehicles and trailers Other field equipment Computers, furniture, office equipment and leasehold improvements Balance at December 31, 2015 $ 15,856,633 $ 7,856,901 $ 2,666,158 $ 150,724 $ 26,530,416 Additions - - 239,012 999 240,011 Disposals - (3,000) - - (3,000) Balance at December 31, 2016 15,856,633 7,853,901 2,905,170 151,723 26,767,427 Additions - 5,865 125,796 12,824 144,485 Disposals - - (78,225) (848) (79,073) Balance at $ 15,856,633 $ 7,859,766 $ 2,952,741 $ 163,699 $ 26,832,839 Total Accumulated depreciation Balance at December 31, 2015 $ 6,484,833 $ 3,392,173 $ 1,732,962 $ 116,280 $ 11,726,248 Depreciation charge for the year 959,833 707,799 286,617 10,024 1,964,273 Balance at December 31 2016 7,444,666 4,099,972 2,019,579 126,304 13,690,521 Disposals - - (36,940) (751) (37,691) Depreciation charge for the year 927,990 705,684 243,980 10,560 1,888,214 Balance at $ 8,372,656 $ 4,805,656 $ 2,226,619 $ 136,113 $ 15,541,044 Net book value As at December 31, 2016 $ 8,411,967 $ 3,753,929 $ 885,591 $ 25,419 $ 13,076,906 As at $ 7,483,977 $ 3,054,110 $ 726,122 $ 27,586 $ 11,291,795 6. Operating loan The Corporation has available a $500,000 (2016 - $500,000) demand revolving loan (the Operating Loan ) bearing interest at a Canadian chartered bank s prime rate plus 1.5% (2016-1.5%) per annum. The Operating Loan is available by way of overdraft on the Corporation s bank account and is not to exceed the aggregate of 75% of accounts receivable which have been outstanding not more than 90 days, minus priority claims. The Operating Loan is secured by a general security agreement and an assignment of risk insurance. The Operating Loan is subject to loan covenants as described in note 15. As at, $NIL (2016 - $NIL) had been drawn on the loan. 7. Accounts payable and accrued liabilities 2017 2016 Trade creditors $ 282,555 $ 380,604 Other payables and accrued liabilities 193,111 192,304 Goods and services tax 18,569 20,508 $ 494,235 $ 593,416 All of the accounts payable and accrued liabilities are expected to be settled within one year. -16-
8. Non- Revolving Term Loan Loan of $2,550,000 on October 1, 2016 from a company with a common significant shareholder. $ 2,550,000 $ 2,550,000 The loan bears interest at TD Canada Trust's prime rate plus 2.8% and interest only payments are due monthly. The interest only payments commenced on October 31, 2016 and were scheduled to conclude on January 31, 2018. During the year, $145,280 (2016 - $126,909) of interest was paid on this loan and included in interest expense. Subsequent to year end, the loan has been renegotiated whereby the interest only period is extended to October 31, 2018 and shall thereafter be repaid in equal blended monthly instalments of principal and interest based on the amortization period of 60 months. The loan is secured by a general security agreement creating a first priority security interest over the Corporation's Service Rigs 8, 9, 10 and 11. The scheduled blended and interest principal payments are due as follows: 2018 $ 85,000 2019 510,000 2020 510,000 2021 510,000 2022 510,000 Subsequent to 2022 425,000 $ 2,550,000 9. Taxes Reconciliation of effective tax rate: 2017 2016 Loss before tax $ (2,017,290) $ (1,921,380) Expected tax rate 27% 27% Expected tax recovery (544,668) (518,773) Share-based compensation 21,029 20,168 Rate changes and other (2,124) 8,085 Tax recovery $ (525,763) $ (490,520) -17-
Significant components of deferred taxes are as follows: 2017 2016 Deferred tax liabilities Property and equipment $ 2,209,360 $ 2,418,028 Less deferred tax assets Non-capital losses (1,714,791) (1,396,034) Unamortized share issue costs and other - (1,662) Net deferred tax liability $ 494,569 $ 1,020,332 At, the Corporation and its subsidiary had unused non-capital loss carry forwards of approximately $6,470,189 which may be applied to reduce future years' taxable income. The loss carry forwards expire as follows: 2030 $ 607,467 2031 837,870 2033 221,518 2035 1,939,260 2036 1,564,381 1,299,693 $ 6,470,189 The movements of deferred tax assets and liabilities are shown below: Balance December 31, 2015 Recognized in profit or loss Balance December 31, 2016 Recognized in profit or loss Balance December 31, 2017 Property and equipment $ 2,487,722 $ (69,694) $ 2,418,028 $ (208,668) $ 2,209,360 Non-capital losses (974,462) (421,572) (1,396,034) (318,757) (1,714,791) Unamortized share issue costs and other (2,408) 746 (1,662) 1,662 - $ 1,510,852 $ (490,520) $ 1,020,332 $ (525,763) $ 494,569-18-
10. Share capital Authorized Unlimited number of voting common shares with no stated par value Issued and outstanding: Common share capital Number of shares Stated capital Balance at December 31, 2015 9,788,730 $ 10,346,173 Share-based compensation to directors 26,087 36,000 Balance, December 31, 2016 9,814,817 10,382,173 Share-based compensation to directors 25,532 36,000 Balance, 9,840,349 $ 10,418,173 (a) Common shares During the year ended, the Corporation issued 25,532 (2016-26,087) common shares to the Corporation's three non-executive directors as compensation for attending Board of Directors and committee meetings. The fair value of the common shares was $36,000 (2016 - $36,000) on the date of issuance and the amount was recorded as an expense in share-based compensation. (b) Share-based compensation The Corporation adopted a stock option plan under which options are granted to directors, officers, employees and consultants of the Corporation. During the year ended December 31, 2017, 75,000 (2016 - NIL) options were granted under the plan. The options granted in 2017 shall vest on the basis of one-third of the option shares on each of the first, second and third anniversaries of the grant date. The following options have been awarded under the stock option plan: 2017 2016 Number Weighted Average Exercise Price Number Weighted Average Exercise Price Outstanding, beginning of year 180,000 $ 1.97 225,000 $ 1.87 Granted 75,000 1.41 - - Expired 60,000 1.70 45,000 1.48 Outstanding, end of year 195,000 $ 1.84 180,000 $ 1.97-19-
The following table summarizes the expiry terms and exercise prices of the Corporation's outstanding stock options as at : Date of Grant Outstanding options Exercise price Weighted average remaining contractual life (years) Number of stock options exercisable April 22, 2013 60,000 $ 2.10 0.31 60,000 April 23, 2015 60,000 $ 2.11 2.31 40,000 May 31, 2017 75,000 $ 1.41 4.42 - Outstanding, end of year 195,000 2.50 100,000 Share-based compensation of $41,886 (2016 - $38,695) have been recorded in the consolidated statement of Ioss and comprehensive loss, with a corresponding increase to contributed surplus for the year ended. The fair value of each option granted for the year ended, was estimated using the Black-Scholes option pricing model. The weighted average assumptions used for the 2017 grants were a risk-free interest rate of 0.94%, expected life of 5 years, 91% volatility of expected share prices and no dividends. Volatility was calculated by analyzing market volatility of public companies in the oilfield service industry. A forfeiture rate of NIL% was used when recording share-based compensation as it is expected that the employees will continue with the Corporation over the vesting period. The fair value of the options issued was $1.41 per option. 11. Contributed surplus A summary of the Corporation's contributed surplus is: 2017 2016 Balance, beginning of year $ 230,040 $ 191,345 Share-based compensation - stock options 41,886 38,695 Balance, end of year $ 271,926 $ 230,040 12. Significant customers During the year ended, revenue from the provision of rigs of $5,517,211 (2016 - $7,337,412), representing 68% (2016-88%) of total service rigs revenue, was to three (2016 - four) oil and natural gas companies. Included in accounts receivable is $645,006 (2016 - $1,202,706), representing 55% (2016-72%) of total accounts receivable, from these oil and natural gas companies. 13. Management compensation During the year ended, salaries and benefits for key management personnel, defined as the Corporation's executive officers, was $652,500 (2016 - $691,084) which is included in general and administrative expenses. The share-based compensation to directors was $36,000 (2016 - $36,000) for the year ended. -20-
14. Employee wages and benefits During the year ended, employee and management salaries and benefits totaled $4,734,290 (2016 - $4,748,722), of which $3,399,347 (2016 - $3,418,257) is included as field payroll expenses, $666,396 (2016 - $648,735) is included as operations expenses and $668,547 (2016 - $681,730) is included as general and administrative expenses. 15. Capital management The Corporation s primary objectives when managing capital are to safeguard the Corporation s ability to continue as a going concern and provide returns to shareholders. The Corporation defines capital as the total of the operating loan, non-revolving term loan and all components of equity. A summary of the Corporation's "capital" is: 2017 2016 Non-revolving term loan $ 2,550,000 $ 2,550,000 Equity 9,005,207 10,418,848 $ 11,555,207 $ 12,968,848 The Corporation s capital structure is regularly reviewed and managed. Adjustments are made to the capital structure in light of changes in economic conditions affecting the Corporation. The Corporation is subject to the following bank covenants on its Operating Loan (note 6): Current ratio not less than 1.25:1 tested monthly. Current portion of long-term debt and payables relating to rig builds are excluded from current liabilities. Debt to tangible net worth as defined by the agreement, not to exceed 2.50:1 tested monthly. The Corporation is in compliance with all bank covenants as at. There have been no changes to the Corporation's capital management structure during the year. 16. Financial instruments and risk management The Corporation is exposed to credit, liquidity and interest rate risks in the normal course of the Corporation s operations. These risks are mitigated by the Corporation s financial management policies and practices described below. (a) Credit risk Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. The Corporation s credit risk is primarily attributable to accounts receivable. Accounts receivable are due primarily from publicly traded oil and natural gas producers. -21-
The Corporation s exposure to credit risk is influenced mainly by the individual characteristics of each customer and by general economic conditions affecting the oil and natural gas industry. Management believes the default risk is minimal. Further quantitative disclosures in respect of the Corporation s exposure to credit risk arising from accounts receivable, are set out in notes 4 and 12. The Corporation is also exposed to credit risk associated with cash. The risk is mitigated as the cash is maintained with a major financial institution. The maximum exposure to credit risk is represented by the carrying amount of each financial asset on the consolidated statement of financial position. (b) Liquidity risk Liquidity risk is the risk that the Corporation will encounter difficulty in meeting obligations associated with financial liabilities. The Corporation s policy is to regularly monitor current and expected liquidity requirements to ensure that it maintains sufficient reserves of cash to meet its liabilities when due. The Corporation has no contractual obligations other than accounts payable and accrued liabilities (note 7), non-revolving term loan (note 8) and future commitments (note 17). (c) Interest rate price risk Interest rate price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Corporation is exposed to interest rate risk to the extent that the non-revolving term loan (note 8) bears interest at floating interest rates. For the year ended, if interest rates had been 1% lower, with all other variables held constant, after tax net earnings for the period would have been approximately $19,000 (2016 - $19,000) higher due to lower interest expense. An equal but opposite impact would have occurred to net earnings had interest rates been 1% higher. (d) Fair values The fair values of the Corporation s accounts receivable, accounts payable and accrued liabilities and non-revolving term loan approximate their carrying values due to their shortterm nature or because they bear interest at variable rates. Cash is measured at fair value based on a Level 1 designation. -22-
17. Commitments The Corporation is committed under various leases for an office in Cochrane, a shop in Estevan, and vehicles for its officers. Lease payments recognized as an expense during the year were $171,286 (2016 - $185,834). The future minimum lease payments exclusive of occupancy costs are as follows: 2018 $ 173,385 2019 173,946 2020 148,971 2021 134,706 2022 28,979 $ 659,987 18. Subsequent events On January 1, 2018, the Corporation amalgamated with its subsidiary 101 Sask. On February 15, 2018, the non-revolving term loan (note 8) was renegotiated for a nine-month extension on the interest only payments period. Per the new agreement, equal blended monthly installments of principal and interest will begin on November 1, 2018 and be payable on the last day of each month. -23-