McCoy Global 2018 Third Quarter Financial Statements
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CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
September 30, 2018
Notes to the Condensed Consolidated Interim Financial Statements
For the three and nine months ended September 30, 2018
(in thousands of Canadian dollars, except share data or unless otherwise specified) (unaudited)
- Nature of Operations
McCoy Global Inc. (“McCoy”, “McCoy Global” or the “Corporation”) is incorporated and domiciled in Canada and is a leading provider of equipment and technologies designed to support wellbore integrity and assist with collecting critical data for the global energy industry. McCoy Global’s core products are used predominantly during the well construction phase for both land and offshore wells during both oil and gas exploration and development.
The Corporation is engaged in the following:
- design, production and distribution of capital equipment to support wellbore integrity and to support capital equipment sales through aftermarket products and services such as technical support, consumables, and replacement parts;
- design, production and distribution of data collection technologies used in rugged applications for the global energy industry as well as in construction, marine and aerospace;
- repair, maintenance, and calibration of the Corporation’s capital equipment and similar competitor products; and
- rental of the Corporation’s capital equipment.
Set out below are McCoy’s principal operations:
|Operating Name||Country of Incorporation||Operating Region||Ownership Interest|
|McCoy Global Canada Corp.||Canada||Canada||100%|
|McCoy Global FZE||United Arab Emirates||Eastern Hemisphere||100%|
|McCoy Global USA, Inc.||United States||United States, Central America & Latin America||100%|
McCoy and its subsidiary companies are collectively referred to herein as the “Corporation.”
The address of the registered office of the Corporation is DLA Piper (Canada) LLP, Livingston Place, 1000 - 250 2nd Street SW, Calgary, Alberta. The Corporation is listed on the Toronto Stock Exchange (“TSX”) under the symbol “MCB.”
- Statement of Compliance
These condensed consolidated interim financial statements have been prepared in accordance with International Accounting Standard 34, Interim Financial Reporting, as issued by the International Accounting Standards Board and should be read in conjunction with the Corporation’s annual financial statements for the year ended December 31, 2017 which have been prepared in accordance with International Financial Reporting Standards (“IFRS”).
The accounting policies followed in these condensed consolidated interim financial statements are consistent with those of the previous financial year, other than those described below.
Impact of standards issued but not yet applied:
IFRS 16 Leases
IFRS 16 was issued in January 2016. It will result in almost all leases being recognized on the statement of financial position, as the distinction between operating and finance leases is removed. Under the new standard, an asset (the right to use the leased item) and a financial liability to pay rentals are recognized. The only exceptions are short-term and low-value leases. The standard will primarily affect the accounting for the Corporation’s operating leases. The Corporation has not yet quantified its lease related assets and liabilities or determined the impact on operating results and the classification of cash flows. The standard is mandatory and will be adopted by the Corporation commencing with the interim period beginning January 1, 2019.
New accounting pronouncements adopted in 2018
IFRS 9 Financial Instruments
IFRS 9 replaces the provisions of lAS 39 that relate to the recognition, classification and measurement of financial assets and financial liabilities, derecognition of financial instruments, impairment of financial assets and hedge accounting. The standard was adopted on January 1, 2018, with the only impact being with respect to revising the Corporation’s impairment methodology for its trade and other receivables.
The Corporation applies the simplified approach to measuring expected credit losses, which uses a lifetime expected credit loss allowance for all trade receivables. The adoption of this standard has not had a material impact on the condensed interim financial statements.
IFRS 15 Revenue from Contracts with Customers
The Corporation adopted IFRS 15, effective January 1, 2018. The Corporation considered factors such as customer contracts with unique revenue recognition considerations, the nature and type of goods and services offered, the degree to which contracts include multiple performance obligations or variable consideration, and the pattern in which revenue is currently recognized, among other things.
The adoption of IFRS 15 resulted in certain procedural changes in accounting for revenue, however accounting policies and the timing of revenue recognition for all revenue streams remains the same.
Management continues to evaluate the potential measurement, transitional and disclosure impacts, if any, of other amendments to IFRS effective January 1, 2019 and onward on the Corporation’s consolidated financial statements.
- Fair value of financial assets and liabilities
The fair value of financial instruments included in working capital approximates fair value due to their short-term or demand nature.
The fair value of the Corporation’s non-current borrowings approximates fair value based on interest rates and terms currently available.
- Restructuring provision and charges
In the second quarter of 2018, McCoy completed its strategic initiative to deliver significant operational efficiencies and re-align the Corporation’s cost structure to a lower revenue environment by:
- transitioning McCoy’s production facility in Edmonton, Alberta to Broussard, Louisiana. This resulted in the closure of operations in Edmonton and the ramp up of production capabilities in Broussard. Canadian customers continue to be supported through a service and rental facility in Edmonton; and
- consolidating McCoy’s Eastern Hemisphere operations to the United Arab Emirates. McCoy continues to support the European and Asia Pacific regions with a lower cost structure model.
Restructuring charges as at and for the period ended September 30, 2018 are summarized as follows:
|Onerous lease contracts||Severance pay and benefits||Other direct costs||Restructuring provisions|
|Accrued balance, December 31, 2017||1,225||395||440||2,060|
|Costs recognized, net of recoveries||65||212||662||939|
|Payments and allowances||(556)||(607)||(1,102)||(2,265)|
|Restructuring provisions, September 30, 2018||734||-||-||734|
|Total provisions, September 30, 2018||2,744|
In the normal course of operations, McCoy may be subject to lawsuits, investigations and other claims, including environmental,
labor, product, and customer disputes, among other matters. The Corporation has estimated certain provisions which have been recorded in Other provisions, in the table above. Although it is not always possible to estimate the extent of potential costs, if any, the ultimate resolution of all such pending matters is not anticipated to have a material adverse impact on the financial performance, financial position or liquidity of McCoy.
The net realizable value of capital equipment and related accessories included in inventories, was assessed on a product line basis. Judgment was used in assessing the net realizable value of each item of capital equipment, including accessories. All other items in inventory were assessed for obsolescence at a distinct part level. A writedown is taken if management determines that the carrying value of the inventory items exceeds the net recoverable value. When the circumstances that previously caused inventories to be written down below cost no longer exist or when there is clear evidence of an increase in net realizable value because of changed economic circumstances, the amount of the writedown is reversed. The maximum amount of any reversal is the original writedown, such that the new carrying amount is the lower of the cost and the revised net realizable value. During the three and nine months ended September 30, 2018, a recovery of $418 and $1,010, respectively, was recognized relating to inventory writedown reversals (three and nine months ended September 30, 2017, an expense of $831 and $2,548, respectively).
- Impairment of Intangible Assets
During the second quarter of 2018, the Corporation reviewed certain development costs related to technology projects and determined that the future economic benefits expected from the use of these assets was uncertain. Accordingly, an impairment charge of $902 (2017 - $nil) was recognized.
- Property, plant and equipment
Based on additional experience gained with the Corporation’s rental fleet, the useful lives of certain assets in the fleet were revised from 6 – 10 years to 2 – 4 years in the second quarter of 2018. This resulted in an additional depreciation expense of $993 in the three months ended June 30, 2018 and $61 in the three months ended September 30, 2018 and will impact future periods as follows:
|Future period impact|
|Three months ended December 31, 2018||60|
|Year ending December 31, 2019||218|
During the three months ended March 31, 2018 the Corporation repaid all outstanding borrowings under the credit facility that was in place at December 31, 2017 and subsequently cancelled the facility. This resulted in a repayment of $4,930.
Also in the first quarter of 2018, the Corporation then entered into a $500 credit facility to support the cash management of the Corporation. As per the terms of the credit facility, the credit facility is secured by $500 in cash and cash equivalents which are to be held under the Creditor’s authority as security. The $500 of cash and cash equivalents held as collateral is presented as restricted cash on the condensed consolidated interim statements of financial position.
During the three months ended June 30, 2018 the Corporation entered into a term loan agreement for $4.0 million USD. The loan has a term of four years and is repayable in equal quarterly payments of principal, plus interest. Interest is calculated at either Libor plus 5.05% or the US Prime Rate plus 3.55%, at the Corporation’s option. Under the term loan agreement, the Corporation’s wholly owned subsidiary, McCoy Global USA, Inc. provided a general security agreement over all present and after acquired property and the Corporation provided a guarantee. There are no financial covenants associated with the term loan agreement. The Corporation is subject to certain conditions under the term loan agreement, including a material adverse change clause.
Changes in liabilities for which cash flows have been classified as financing activities in the condensed consolidated statements of cash flow are as follows:
|Balance, December 31, 2017||4,930|
|Repayments of borrowings||(4,930)|
|Proceeds of borrowings||5,147|
|Foreign exchange adjustment||35|
|Balance, September 30, 2018||4,909|
On May 30, 2018, the Corporation announced a normal course issuer bid (NCIB). The Corporation may purchase, for cancellation, up to a maximum 1,379,041 common shares, equal to five percent of the public float of 27,580,839 common shares as at May 23, 2018. The Corporation is also limited under the NCIB to purchasing no more than 2,241 common shares on any given day, subject to the block purchase exemption under the TSX rules. The NCIB will continue until May 19, 2019. Purchases will be made on the open market through the TSX or alternative platforms at the market price of such shares. All shares purchased under the NCIB will be cancelled.
|Nine months ended||Year
|September 30, 2018||September 30, 2018||December 31,
|Weighted average cost||$||1.38||1.38||1.29||1.35||2.07|
Total cost includes share repurchase amount and costs to implement the NCIB.
As at September 30, 2018, 52,600 shares were repurchased and not yet cancelled.
Subsequent to September 30, 2018, 16,000 shares were repurchased under the NCIB at a weighted average cost of $1.14.