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Pason Reports Third Quarter 2020 Results

·39 min read

CALGARY, AB, Nov. 4, 2020 /CNW/ - Pason Systems Inc. (TSX: PSI) announced today its 2020 third quarter results.

Performance Data


Three Months Ended September 30,


Nine Months Ended September 30,


2020


2019


Change


2020


2019


Change

(CDN 000s, except per share data) (unaudited)

($)


($)


(%)


($)


($)


(%)

Revenue

23,068


72,195


(68)


123,878


227,232


(45)

EBITDA (1,2)

2,348


33,167


(93)


40,088


99,208


(60)

Adjusted EBITDA (1.2)

(1,118)


31,489



31,339


103,029


(70)

As a % of revenue

(4.8)


43.6



25.3


45.3


(2,000) bps

Funds flow from operations

4,765


29,899


(84)


31,621


89,592


(65)

Per share – basic

0.06


0.35


(83)


0.38


1.05


(64)

Per share – diluted

0.06


0.35


(83)


0.38


1.04


(63)

Cash from operating activities

5,754


37,453


(85)


61,300


83,833


(27)

Capital expenditures

807


4,058


(80)


4,694


18,591


(75)

Free cash flow (1)

4,141


33,067


(87)


56,964


65,999


(14)

Cash dividends declared

0.05


0.19


(74)


0.43


0.55


(22)

Net (loss) income

(3,957)


15,418



7,796


43,707


(82)

Net (loss) income attributable to Pason

(3,698)


15,418



8,734


43,707


(80)

Per share – basic

(0.04)


0.18



0.10


0.51


(80)

Per share – diluted

(0.04)


0.18



0.10


0.51


(80)

Total interest bearing debt






Shares outstanding end of period (#000's)

83,690


85,299


(2)


83,690


85,299


(2)



(1)

Non-IFRS financial measures are defined in the Management's Discussion and Analysis section.

(2)

Prior period amounts have been restated to conform with current year's presentation.

Q3 2020 vs Q3 2019

Following the significant decline in North America and International rig count during the first half of 2020, the third quarter saw the North American rig count stabilize before increasing slightly toward the end of the quarter, with the majority of the increase in Canada. International activity increased as COVID related restrictions eased, however, industry activity remains at or near historic lows in all the Company's key markets.

This collapse in drilling activity resulted in consolidated revenue of $23.1 million in the third quarter of 2020, a decrease of $49.1 million from the corresponding period in 2019. An increase in North American market share had a positive impact on revenue.

Adjusted EBITDA decreased to a loss of $1.1 million in the third quarter, a decrease of $32.6 million from the corresponding period in 2019. The decline in adjusted EBITDA was attributable to the $32.6 million reduction in gross profit.

Cash from operating activities was $5.8 million in the third quarter of 2020, a decrease of 85% from the corresponding period in 2019. Cash from operating activities was negatively impacted by the reduction in gross profit, offset by the Company receiving $3.3 million in government wage subsidies.

Free cash flow was $4.1 million in the third quarter of 2020, compared to $33.1 million from the corresponding period in 2019. This decrease is due to the reduction in cash from operating activities, partially offset by an 80% reduction in capital expenditures.

The Company recorded a net loss attributable to Pason of $3.7 million ($0.04 per share) in the third quarter of 2020 compared to net income attributable to Pason of $15.4 million ($0.18 per share) recorded in the corresponding period in 2019.

President's Message

The third quarter of 2020 represented the most challenging industry conditions that Pason has encountered in its history, as the ongoing COVID-19 pandemic continued to have devastating impacts on the global economy in addition to the significant health concerns it has caused. With less than 300 active land drilling rigs in North America during the quarter, industry activity was 28% lower than the second quarter and down 72% from a year ago.

Pason's revenue remains highly correlated to North American land drilling activity and, as a result, third quarter revenue of $23 million was down 68% from the third quarter of 2019. We also continue to have significantly more operating leverage than most of our energy services peers, as many of our costs are fixed in nature. As a result, we posted an Adjusted EBITDA loss of $1 million compared to positive Adjusted EBITDA of $31 million a year ago and our free cash flow was down 87% year-over-year to $4 million in the quarter.

It is notable that our quarterly Adjusted EBITDA was similar to that recorded during the depths of the previous downturn in the second quarter of 2016, yet North American land drilling activity was 35% lower in Q3-2020 than that period of time. This highlights the significant adjustments we have made to our operating cost structure over the past several years in response to lower levels of drilling. We have also been focused on reducing the capital intensity of our business, and in the third quarter recorded total capital expenditures of $807 thousand, down 80% from 2019 levels. As industry activity recovers, we expect that capital expenditures will normalize at levels more similar to those experienced in 2019; however, we expect to be able to absorb meaningful revenue growth within our existing operating cost structure.

The third quarter represents the first time we are presenting our financial results under reporting segments which better reflect how our business is managed under our streamlined organizational structure. Our North American business unit has been combined under common commercial and operational leadership and we expect to see benefits from this structure in terms of operating efficiency and how we manage our important customer relationships. We are also presenting the financial results of Energy Toolbase, our emerging business in the solar and energy storage space, separately to allow investors to better evaluate our progress in this area.

Our competitive position remained strong in the third quarter. In North America, revenue per industry day was essentially unchanged from 2019 levels, as market share gains offset reductions in revenue per EDR day driven by customer mix and a continued focus on cost reductions by customers in the face of unprecedented challenges in the industry. As a result, our 71% decrease in North American revenue closely mirrored the 72% decrease in industry activity. Our international revenue decreased 55%, reflecting the somewhat more resilient nature of activity in our major operating regions.

Energy Toolbase (ETB) continued to enhance its software suite that enables solar and energy storage developers and asset owners to model their site's expected financial returns, control the in-field assets, and monitor their performance in real-time. As the industry-leading economic analysis and proposal generation software, ETB Developer is also used to source opportunities to deploy its control systems and monitoring software. Subscriptions for ETB Developer remained consistent despite the effects of the pandemic and the sale of additional control systems through the ETB platform has strengthened our conviction that the combination of the modeling, control and monitoring tools under a common platform provides a compelling value proposition for customers.

Our balance sheet remains strong. We ended the third quarter with $169 million of cash and cash equivalents, as a result of constraining operating and capital costs, continued working capital discipline, and a lower dividend payment.

As we look to the future, the worst appears to be behind us in terms of oil and gas drilling activity. Global demand for oil has begun to recover from its lows in the second quarter, and we have seen similar strength in gas markets. The global picture for supply and demand for oil has become more balanced and the WTI oil price has stabilized around US$40 per barrel. In recent weeks, we have seen the North American land drilling count stabilize and begin to slowly increase, and activity in our international jurisdictions has also been increasing, particularly in regions where drilling was effectively shut down earlier during the pandemic.

Significant uncertainty remains around near-term forecasts of industry activity. Potential demand impacts from further waves of COVID-19 cases and questions about ongoing OPEC compliance with production agreements will impact commodity prices and drilling activity. The current consensus of industry analysts is that industry rig counts will remain low through the first half of 2021 before increasing to exit the year at much higher levels. Consolidation of the customer base has accelerated recently, both as a result of business combinations and companies exiting the industry due to financial distress. As the industry recovers, it will be characterized by a smaller number of companies with a heightened focus on technology. We have made the decision to continue to invest in critical technology and service capabilities to ensure our strong competitive position to serve those customers. This decision puts pressure on our financial results through the worst parts of the downturn, however we will remain the service provider of choice as the industry recovers.

Pason has a long history of success based on both its technology and its people and we will seize on opportunities to build on that history. I am deeply humbled and honoured to be asked to lead this organization as its next President and Chief Executive Officer and I thank our employees, customers, suppliers, shareholders and Board for their continued support of our great company.

Jon Faber
President and Chief Executive Officer
November 4, 2020

Management's Discussion and Analysis

The following discussion and analysis has been prepared by management as of November 4, 2020, and is a review of the financial condition and results of operations of Pason Systems Inc. (Pason or the Company) based on International Financial Reporting Standards (IFRS) and should be read in conjunction with the Consolidated Financial Statements and accompanying notes.

Certain information regarding the Company contained herein may constitute forward-looking statements under applicable securities laws. Such statements are subject to known or unknown risks and uncertainties that may cause actual results to differ materially from those anticipated or implied in the forward-looking statements.

All financial measures presented in this report are expressed in Canadian dollars unless otherwise indicated.

Changes in Reportable Segments

Prior to the third quarter of 2020, the Company presented three operating segments, based upon the geographic segments of the Company's core business of servicing the oil and gas industry, consisting of Canada, the United States, and International. The United States segment included Energy Toolbase Software Inc, which is the operating entity of the Company's solar and energy storage business.

In response to ongoing low activity levels across the North American land drilling market, the Company streamlined its structure and operations in the third quarter by consolidating its core US and Canadian operations. As a result of this consolidation, along with the continued investment in solar and energy storage business, the Company determined that the prior operating segments no longer reflected how management monitored and evaluated operating results. This conclusion was reached in part due to the fact that solar and energy storage business is distinct from its core business and that anticipated future operating results will be significant enough to warrant a distinct segment, as well as the consolidation of management of North American operations. These new reportable segments reflect how the Chief Executive Officer and management allocates resources and assess the performance of the Company.

All comparative figures have been reclassified to conform to the new presentation.

Impact of Hyperinflation

In 2018, the Company concluded that its Argentinian subsidiary is operating in a hyperinflationary economy. This conclusion impacts the application of two accounting standards, IAS 21, The Effects of Changes in Foreign Exchange, and IAS 29, Financial Reporting in Hyperinflationary Economies.

The impact of applying IAS 21 to the operating results of Argentina subsidiary for the third quarter of 2020 was to decrease revenue by $173 and reduce segment gross profit by $372. The impact of applying IAS 29 to the non-monetary assets and liabilities, and shareholders' equity of the Argentina subsidiary was to record a non-cash net monetary adjustment of $465 for the third quarter of 2020.

Impact on IFRS Measures


Three Months Ended September 30,


Nine Months Ended September 30,


2020


2019


Change


2020


2019


Change

(000s) (unaudited)

($)


($)


(%)


($)


($)


(%)

(Decrease) in revenue

(173)


(1,747)


(90)


(469)


(1,747)


(73)

Decrease in rental services and local administration expenses

159


1,055


(85)


369


1,055


(65)

(Increase) in depreciation expense

(358)


(258)


39


(769)


(258)


198

(Decrease) in segment gross profit

(372)


(950)


(61)


(869)


(950)


(9)

Net monetary gain presented in other expenses

465


2,376


(80)


1,280


2,376


(46)

(Increase) decrease in income tax provision

(1)


80




80


Increase in net income

92


1,506


(94)


411


1,506


(73)

Impact on Non-IFRS Measures


Three Months Ended September 30,


Nine Months Ended September 30,


2020


2019


Change


2020


2019


Change

(000s) (unaudited)

($)


($)


(%)


($)


($)


(%)

(Decrease) in revenue

(173)


(1,747)


(90)


(469)


(1,747)


(73)

Decrease in rental services and local administration expenses

159


1,055


(85)


369


1,055


(65)

Net monetary gain presented in other expenses

465


2,376


(80)


1,280


2,376


(46)

Increase in EBITDA

451


1,684


(73)


1,180


1,684


(30)

(Elimination) of net monetary gain presented in other expenses

(465)


(2,376)


(80)


(1,280)


(2,376)


(46)

(Decrease) in Adjusted EBITDA

(14)


(692)


(98)


(100)


(692)


(86)

Additional IFRS Measures

In its Consolidated Financial Statements, the Company uses certain additional IFRS measures. Management believes these measures provide useful supplemental information to readers.

Funds flow from operations

Management believes that funds flow from operations, as reported in the Consolidated Statements of Cash Flows, is a useful additional measure as it represents the cash generated during the period, regardless of the timing of collection of receivables and payment of payables. Funds flow from operations represents the cash flow from continuing operations, excluding non-cash items. Funds flow from operations is defined as net income adjusted for depreciation and amortization expense, non-cash, stock-based compensation expense, deferred taxes, and other non-cash items impacting operations.

Cash from operating activities

Cash from operating activities is defined as funds flow from operations adjusted for changes in working capital items.

Non-IFRS Financial Measures

These definitions are not recognized measures under IFRS, and accordingly, may not be comparable to measures used by other companies. These Non-IFRS measures provide readers with additional information regarding the Company's ability to generate funds to finance its operations, fund its research and development and capital expenditure program, and pay dividends.

Revenue per Industry day

Revenue per Industry day is defined as the daily revenue generated from all products that the Company is renting over all active drilling rigs in the North American business unit. This metric provides a key measure of the Company's ability to evaluate and manage product adoption, pricing, and market share penetration. Drilling days are calculated by using accepted industry sources.

EBITDA

EBITDA is defined as net income before interest income and expense, income taxes, stock-based compensation expense, and depreciation and amortization expense.

Adjusted EBITDA

Adjusted EBITDA is defined as EBITDA, adjusted for foreign exchange, impairment of property, plant, and equipment, restructuring costs, net monetary adjustments, and other items which the Company does not consider to be in the normal course of continuing operations.

Management believes that EBITDA and Adjusted EBITDA are useful supplemental measures as they provide an indication of the results generated by the Company's principal business activities prior to the consideration of how these results are taxed in multiple jurisdictions, how the results are impacted by foreign exchange or how the results are impacted by the Company's accounting policies for equity-based compensation plans.

Free cash flow

Free cash flow is defined as cash from operating activities plus proceeds on disposal of property, plant, and equipment, less capital expenditures (including changes to non-cash working capital associated with capital expenditures), and deferred development costs. This metric provides a key measure on the Company's ability to generate cash from its principal business activities after funding the capital expenditure program, and provides an indication of the amount of cash available to finance, among other items, the Company's dividend and other investment opportunities.

Overall Performance


Three Months Ended September 30,


Nine Months Ended September 30,


2020


2019


Change


2020


2019


Change

(000s) (unaudited)

($)


($)


(%)


($)


($)


(%)

Revenue












Drilling Data

12,218


37,771


(68)


64,982


120,293


(46)

Mud Management and Safety

6,515


21,243


(69)


36,132


66,059


(45)

Communications

965


4,783


(80)


6,980


15,322


(54)

Drilling Intelligence

1,052


5,141


(80)


7,657


15,702


(51)

Analytics and Other

2,318


3,257


(29)


8,127


9,856


(18)

Total revenue

23,068


72,195


(68)


123,878


227,232


(45)

The Pason Electronic Drilling Recorder (EDR) remains the Company's primary product of the North American and International business unit. The EDR provides a complete drilling data acquisition system, data networking, and drilling management tools and reports at both the wellsite and at customer offices. The EDR is the base product from which all other wellsite instrumentation products are linked. By linking these products, a number of otherwise redundant elements such as data processing, display, storage, and networking are eliminated. This ensures greater reliability and a more robust system of instrumentation for the customer.

As a result of the change in reportable segments described previously, the Company, effective for the third quarter of 2020, reports on three strategic business units: The North American (Canada and the United States) and International (Latin America, including Mexico, Offshore, the Eastern Hemisphere, and the Middle East) business units, all of which offer services to the oil and gas industry, and the Solar and Energy Storage business unit, which provides services to solar and storage developers. Revenue associated with the Solar and Energy Storage business unit is reported in analytics and other. All comparative figures have been reclassified to conform to the new presentation.

The COVID-19 pandemic has had a significant negative impact on the demand for fossil fuels and this combined with a supply imbalance has led to a decline in oil prices. As a result, the Company's customers have reduced their capital expenditure programs which has led to a precipitous fall in the active rig count in all major markets the Company operates in, which has had a significant impact on the Company's revenue.

Total revenue decreased by 68% in the third quarter of 2020 compared to the corresponding period in 2019. The decrease is attributable to the decrease in industry activity in the North American and International operating segments, partially offset by an increase in revenue from the Solar and Energy Storage business unit.

The Solar and Energy Storage business unit experienced a significant increase in revenue during the third quarter of 2020 compared to the corresponding period in 2019. The increase in revenue is predominately due to the acquisition of Energy Toolbase LLC in 2019.

Discussion of Operations

North American Operations


Three Months Ended September 30,


Nine Months Ended September 30,


2020


2019


Change


2020


2019


Change

(000s) (unaudited)

($)


($)


(%)


($)


($)


(%)

Revenue












Drilling Data

10,100


32,561


(69)


55,921


102,713


(46)

Mud Management and Safety

5,291


19,416


(73)


31,388


60,650


(48)

Communications

887


4,464


(80)


6,406


14,146


(55)

Drilling Intelligence

1,011


4,785


(79)


7,241


14,734


(51)

Analytics and Other

991


2,294


(57)


4,105


7,017


(41)

Total revenue

18,280


63,520


(71)


105,061


199,260


(47)

Rental services and local administration

10,948


24,239


(55)


46,033


73,405


(37)

Depreciation and amortization

6,554


8,813


(26)


23,528


27,015


(13)

Segment gross profit

778


30,468


(97)


35,500


98,840


(64)


Three Months Ended September 30,


Nine Months Ended September 30,


2020


2019


Change


2020


2019


Change

(unaudited)

($)


($)


(%)


($)


($)


(%)

Revenue per Industry day

667


668



704


665


6













Industry activity in the North American market decreased by 72% in the third quarter of 2020 over the 2019 comparable period. Industry activity was lowest at the start of the quarter and experienced a modest recovery throughout the quarter, most notably in Canada.

Revenue per Industry day was $667 during the third quarter of 2020, unchanged from the comparable period in 2019. A decline in product adoption and certain price concessions negatively impacted revenue per Industry day as contractors and operators continue to manage drilling costs. These factors were offset by an increase in market share. This increase in market share was primarily due to the type of rigs operating during the quarter as well as customer mix, combined with a slight uptick in new customers.

Rental services and local administration decreased by 55% in the third quarter of 2020 over the 2019 comparative period. The decrease in operating costs is attributable to the Company restructuring its organization to support current and anticipated activity levels.

Depreciation and amortization was down in the third quarter of 2020 due to the Company recognizing research and development tax credits.

International Operations


Three Months Ended September 30,


Nine Months Ended September 30,


2020


2019


Change


2020


2019


Change

(000s) (unaudited)

($)


($)


(%)


($)


($)


(%)

Revenue












Drilling Data

2,118


5,210


(59)


9,061


17,580


(48)

Mud Management and Safety

1,224


1,827


(33)


4,744


5,409


(12)

Communications

78


319


(76)


574


1,176


(51)

Drilling Intelligence

41


356


(88)


416


968


(57)

Analytics and Other

417


837


(50)


1,370


2,629


(48)

Total revenue

3,878


8,549


(55)


16,165


27,762


(42)

Rental services and local administration

2,812


4,525


(38)


11,466


15,371


(25)

Depreciation and amortization

944


1,097


(14)


2,983


3,082


(3)

Segment gross profit

122


2,927


(96)


1,716


9,309


(82)

The International business unit's revenue decreased by 55% in the third quarter of 2020 over the 2019 comparative period.

Activity levels in the Company's major international markets experienced the significant reduction in activity witnessed in North America.

Rental services and local administration decreased by 38% in the third quarter of 2020 over the 2019 comparative period. The decrease in operating costs is attributable to the Company managing staffing levels to support its current activity.

Segment gross profit was $0.1 million during the third quarter of 2020 compared to $2.9 million in the 2019 comparative period.

Solar and Energy Storage Operations


Three Months Ended September 30,


Nine Months Ended September 30,


2020


2019


Change


2020


2019


Change

(000s) (unaudited)

($)


($)


(%)


($)


($)


(%)

Revenue












Analytics and Other

910


126


622


2,652


210


1,163

Total revenue

910


126


622


2,652


210


1,163

Operating expenses and local administration (1)

1,363


445


206


4,587


1,201


282

Depreciation and amortization

5


7


(29)


18


20


(10)

Segment gross (loss)

(458)


(326)


40


(1,953)


(1,011)


93

(1) Included in rental services and local administration in the Condensed Consolidated Interim Statements of Operations

Revenue generated by the Solar and Energy Storage business unit was $0.9 million in the third quarter of 2020 compared to $0.1 million during the 2019 comparative period.

Revenue in the third quarter of 2020 reflects revenue generated from Energy Toolbase Software Inc. (ETS), the Company formed through the amalgamation of the former Pason Power entity and Energy Toolbase LLC (ETB), which was acquired in 2019 while the revenue in the third quarter of 2019 was generated from Pason Power.

Operating expenses and local administration was $1.4 million during the third quarter of 2020 compared to $0.4 million during the comparable period. The increase reflects the acquisition of ETB.

ETS and Pason Power incurred the following research and development costs, which are included in research and development in the Condensed Consolidated Interim Statement of Operations. These costs are excluded from the segment gross loss table above.


Three Months Ended September 30,


Nine Months Ended September 30,


2020


2019


Change


2020


2019


Change

(000s) (unaudited)

($)


($)


(%)


($)


($)


(%)

Research and development

759


652


16


2,534


1,966


29













Segment gross loss was $0.5 million for the third quarter of 2020 compared to a segment gross loss of $0.3 million during the 2019 comparable period.

Corporate Expenses


Three Months Ended September 30,


Nine Months Ended September 30,


2020


2019


Change


2020


2019


Change

(000s) (unaudited)

($)


($)


(%)


($)


($)


(%)

Research and development

6,237


7,564


(18)


21,036


22,969


(8)

Corporate services

2,469


3,865


(36)


8,981


11,413


(21)

Stock-based compensation

276


2,446


(89)


2,022


9,359


(78)

Other (income) expenses












Derecognition of onerous lease




(5,757)



Government wage assistance

(3,334)




(7,697)



Reorganization costs




5,554



Derecognition of lease receivable





4,289


Foreign exchange loss

113


615


(82)


145


1,269


(89)

Net interest expense - lease liability

33


159


(79)


279


404


(31)

Interest income - short term investments

(138)


(258)


(47)


(1,120)


(726)


54

Net monetary gain

(465)


(2,376)


(80)


(1,280)


(2,376)


(46)

Equity loss (income)

357


68


425


436


(156)


(379)

Other

220


83


165


286


639


(55)

Total corporate expenses

5,768


12,166


(53)


22,885


47,084


(51)

During the third quarter of 2020, due to the decline in revenue, the Company was eligible for the Canada Emergency Wage Subsidy (CEWS) program. As a result, a CEWS benefit of $3.3 million was recorded as government wage assistance. On a year to date basis, $7.7 million of CEWS benefit was recorded as government wage assistance.

During the second quarter of 2020, the Company entered into an agreement to terminate the lease at its previous US head office in Golden, Colorado. As a result, a recovery of $5.8 million was recorded as other income, which is comprised of the derecognition of a previously recorded onerous lease liability, offset by a termination payment.

During the second quarter of 2020, the Company initiated staff reduction initiatives to address the anticipated prolonged downturn in oil and gas drilling activity in all of its markets. Accordingly, the Company recorded reorganization expense of $5.6 million, which is comprised of termination and other staff related costs. This reorganization led to a decline in research and development and corporate service expenses compared to 2019.

During the second quarter of 2019, the Company was notified that the tenant leasing the Company's previous office space in Colorado, USA filed for Chapter 7 bankruptcy. As a result, the Company derecognized the lease receivable and reported $4.3 million in other expenses.

Net monetary gain is as a result of applying hyperinflation accounting to the Company's Argentinian subsidiary.

Q3 2020 vs Q2 2020
Following the significant decline in North America and International rig count during the first half of 2020, the third quarter saw North American rig count relatively stable before increasing slightly toward the end of the quarter, with the majority of the increase in Canada. However, industry activity remains at or near historic lows in all the Company's key markets.

Consolidated revenue was $23.1 million in the third quarter of 2020, a 14% decrease compared to consolidated revenue of $26.8 million in the second quarter of 2020.

Revenue in the North American business unit was $18.3 million in the third quarter of 2020, a 20% decrease compared to revenue of $23.0 million in the second quarter of 2020.

The International business unit reported revenue of $3.9 million in the third quarter of 2020, a 30% increase compared to revenue of $3.0 million in the second quarter of 2020. The increase in revenue is attributable to the easing of COVID related restrictions in certain markets, most notably in Argentina.

Adjusted EBITDA, which adjusts EBITDA for foreign exchange and certain non-recurring charges, was a loss of $1.1 million in the third quarter of 2020 compared to a loss of $0.8 million during the second quarter of 2020.

Cash from operating activities was $5.8 million in the third quarter of 2020, compared to $30.0 million in the second quarter of 2020. During the second quarter of 2020, cash from operating activities was positively impacted by the release of working capital.

The Company recorded a net loss attributable to Pason in the third quarter of 2020 of $3.7 million ($0.04 per share) compared to a net loss attributable to Pason of $4.5 million ($0.05 per share) in the second quarter of 2020.

Condensed Consolidated Interim Balance Sheets

As at

September 30, 2020

December 31, 2019

(CDN 000s) (unaudited)

($)

($)

Assets



Current



Cash and cash equivalents

169,254

161,016

Trade and other receivables

20,098

59,716

Income taxes recoverable - other

15,304

15,304

Prepaid expenses

2,318

3,621

Income taxes recoverable

5,302

2,382

Total current assets

212,276

242,039

Non-current



Property, plant and equipment

103,722

118,522

Investments

25,824

26,265

Intangible assets and goodwill

47,481

51,015

Total non-current assets

177,027

195,802

Total assets

389,303

437,841




Liabilities and equity



Current



Trade payables and accruals

28,023

34,420

Income taxes payable

2,461

3,133

Stock-based compensation liability

2,332

2,442

Lease liability

2,471

3,275

Investment - put option

10,000

15,000

Total current liabilities

45,287

58,270

Non-current



Deferred tax liabilities

9,651

8,566

Lease liability

4,513

11,532

Stock-based compensation liability

3,921

3,479

Obligation under put option

9,797

9,540

Total non-current liabilities

27,882

33,117

Equity



Share capital

162,798

166,701

Share-based benefits reserve

32,536

30,863

Foreign currency translation reserve

63,575

57,830

Equity reserve

(8,375)

(8,375)

Retained earnings

66,902

99,806

Total equity attributable to equity holders of the Company

317,436

346,825

Non-controlling interest

(1,302)

(371)

Total equity

316,134

346,454

Total liabilities and equity

389,303

437,841

Condensed Consolidated Interim Statements of Operations


Three Months Ended September 30,


Nine Months Ended September 30,


2020


2019


2020


2019

(CDN 000s, except per share data) (unaudited)

($)


($)


($)


($)

Revenue

23,068


72,195


123,878


227,232

Operating expenses







Rental services

12,956


25,779


53,291


79,837

Local administration

2,167


3,430


8,795


10,140

Depreciation and amortization

7,503


9,917


26,529


30,117


22,626


39,126


88,615


120,094








Gross profit

442


33,069


35,263


107,138

Other expenses







Research and development

6,237


7,564


21,036


22,969

Corporate services

2,469


3,865


8,981


11,413

Stock-based compensation expense

276


2,446


2,022


9,359

Other (income) expenses

(3,214)


(1,709)


(9,154)


3,343


5,768


12,166


22,885


47,084








(Loss) income before income taxes

(5,326)


20,903


12,378


60,054

Income tax provision

(1,369)


5,485


4,582


16,347

Net (loss) income

(3,957)


15,418


7,796


43,707








Net (loss) income attributable to:







Shareholders of Pason

(3,698)


15,418


8,734


43,707

Non-controlling interest

(259)



(938)


Net (loss) income

(3,957)


15,418


7,796


43,707







(Loss) Income per share






Basic

(0.04)


0.18


0.10


0.51

Diluted

(0.04)


0.18


0.10


0.51

Condensed Consolidated Interim Statements of Other Comprehensive Income


Three Months Ended September 30,

Nine Months Ended September 30,


2020


2019


2020


2019

(CDN 000s) (unaudited)

($)


($)


($)


($)

Net (loss) income

(3,957)


15,418


7,796


43,707

Items that may be reclassified subsequently to net income:





Tax recovery on net investment in foreign
operations related to an inter-company financing


9,690



10,481

Foreign currency translation adjustment

(6,476)


(5,567)


5,752


(12,274)

Other comprehensive (loss) gain

(6,476)


4,123


5,752


(1,793)

Total comprehensive (loss) income

(10,433)


19,541


13,548


41,914






Total comprehensive (loss) income attributed to:





Shareholders of Pason

(10,190)


19,541


14,479


41,914

Non-controlling interest

(243)



(931)


Total comprehensive (loss) income

(10,433)


19,541


13,548


41,914

Condensed Consolidated Interim Statements of Cash Flows


Three Months Ended September 30,


Nine Months Ended September 30,


2020


2019


2020


2019

(CDN 000s) (unaudited)

($)


($)


($)


($)

Cash from (used in) operating activities





Net (loss) income

(3,957)


15,418


7,796


43,707

Adjustment for non-cash items:





Depreciation and amortization

7,503


9,917


26,529


30,117

Stock-based compensation

276


2,446


2,022


9,359

Deferred income taxes

1,253


2,101


975


3,520

Derecognition of onerous lease



(5,757)


Derecognition of lease receivable




4,289

Hyperinflation adjustment

(451)


(1,506)


(1,182)


(1,506)

Unrealized foreign exchange loss and other

141


1,523


1,238


106

Funds flow from operations

4,765


29,899


31,621


89,592

Movements in non-cash working capital items:





Decrease in trade and other receivables

3,955


4,922


39,896


9,021

(Increase) decrease in prepaid expenses

(561)


(1,066)


1,308


(45)

(Decrease) increase in income taxes

(3,063)


3,476


1,360


4,699

Increase (decrease) in trade payables, accruals
and stock-based compensation liability

3,063


2,270


(8,079)


(3,894)

Effects of exchange rate changes

82


(1,850)


(61)


(262)

Cash generated from operating activities

8,241


37,651


66,045


99,111

Income tax paid

(2,487)


(198)


(4,745)


(15,278)

Net cash from operating activities

5,754


37,453


61,300


83,833

Cash flows from (used in) financing activities





Proceeds from issuance of common shares


239



3,366

Payment of dividends

(4,201)


(16,199)


(36,265)


(47,055)

Repurchase and cancellation of shares under NCIB

(2,193)


(1,944)


(6,276)


(13,063)

Repayment of lease liability

(667)


(840)


(1,910)


(1,893)

Net cash used in financing activities

(7,061)


(18,744)


(44,451)


(58,645)

Cash flows (used in) from investing activities





Payment on investment - put option



(5,000)


Acquisition


(23,830)



(23,830)

Additions to property, plant and equipment

(476)


(3,398)


(4,520)


(17,482)

Development costs

(331)


(660)


(174)


(1,109)

Proceeds on disposal of investment and property,
plant and equipment

81


188


888


806

Changes in non-cash working capital

(887)


(516)


(530)


(49)

Net cash used in investing activities

(1,613)


(28,216)


(9,336)


(41,664)

Effect of exchange rate on cash and cash
equivalents

(4,312)


1,239


725


(6,497)

Net (decrease) increase in cash and cash
equivalents

(7,232)


(8,268)


8,238


(22,973)

Cash and cash equivalents, beginning of period

176,486


189,133


161,016


203,838

Cash and cash equivalents, end of period

169,254


180,865


169,254


180,865

Operating Segments

The Company operates three strategic business units: The North American (Canada and the United States) and International (Latin America, including Mexico, Offshore, the Eastern Hemisphere, and the Middle East) business units, all of which offer services to the oil and gas industry, but are managed separately. The Solar and Energy Storage business unit offer services to solar and storage developers. For each of the strategic business units, the Group's senior management reviews internal management reports on a monthly basis.

Previously, the Company's operating segments were oil and gas centric and reported by geographic segment: Canada, the United States, and International (Latin America, Offshore, the Eastern Hemisphere, and the Middle East). The solar and energy storage business was previously reported under the United States business unit.

All comparative figures have been reclassified to conform to the new presentation.

The following table represents a disaggregation of revenue from contracts with customers along with the reportable segment for each category:

Three Months Ended September 30, 2020

North
America


International


Solar and
Energy Storage


Total

(unaudited)

($)


($)


($)


($)

Revenue





Drilling Data

10,100


2,118



12,218

Mud Management and Safety

5,291


1,224



6,515

Communications

887


78



965

Drilling Intelligence

1,011


41



1,052

Analytics and Other

991


417


910


2,318

Total Revenue

18,280


3,878


910


23,068

Rental services and local administration

10,948


2,812


1,363


15,123

Depreciation and amortization

6,554


944


5


7,503

Segment gross profit (loss)

778


122


(458)


442

Research and development




6,237

Corporate services




2,469

Stock-based compensation




276

Other (income)




(3,214)

Income tax provision




(1,369)

Net loss




(3,957)

Net loss attributable to Pason




(3,698)

Capital expenditures

807




807

As at September 30, 2020





Property plant and equipment

91,781


11,822


119


103,722

Intangible assets

8,986



4,395


13,381

Goodwill

8,871


2,600


22,629


34,100

Segment assets

362,464


26,273


566


389,303

Segment liabilities

68,032


4,183


954


73,169

Three Months Ended September 30, 2019
(restated)

North
America


International


Solar and
Energy Storage


Total

(unaudited)

($)


($)


($)


($)

Revenue





Drilling Data

32,561


5,210



37,771

Mud Management and Safety

19,416


1,827



21,243

Communications

4,464


319



4,783

Drilling Intelligence

4,785


356



5,141

Analytics and Other

2,294


837


126


3,257

Total Revenue

63,520


8,549


126


72,195

Rental services and local administration

24,239


4,525


445


29,209

Depreciation and amortization

8,813


1,097


7


9,917

Segment gross profit (loss)

30,468


2,927


(326)


33,069

Research and development




7,564

Corporate services




3,865

Stock-based compensation




2,446

Other (income)




(1,709)

Income tax provision




5,485

Net income




15,418

Net income attributable to Pason




15,418

Capital expenditures

3,167


891



4,058

As at September 30, 2019





Property plant and equipment

107,025


15,316


130


122,471

Intangible assets

44,453




44,453

Goodwill

8,816


2,600



11,416

Segment assets

390,233


54,572


1,357


446,162

Segment liabilities

69,293


6,066


61


75,420

Nine Months Ended September 30, 2020

North
America


International


Solar and
Energy
Storage


Total

(unaudited)

($)


($)


($)


($)

Revenue





Drilling Data

55,921


9,061



64,982

Mud Management and Safety

31,388


4,744



36,132

Communications

6,406


574



6,980

Drilling Intelligence

7,241


416



7,657

Analytics and Other

4,105


1,370


2,652


8,127

Total Revenue

105,061


16,165


2,652


123,878

Rental services and local administration

46,033


11,466


4,587


62,086

Depreciation and amortization

23,528


2,983


18


26,529

Segment gross profit (loss)

35,500


1,716


(1,953)


35,263

Research and development




21,036

Corporate services




8,981

Stock-based compensation




2,022

Other (income)




(9,154)

Income tax provision




4,582

Net income




7,796

Net income attributable to Pason




8,734

Capital expenditures

4,694




4,694

As at September 30, 2020





Property plant and equipment

91,781


11,822


119


103,722

Intangible assets

8,986



4,395


13,381

Goodwill

8,871


2,600


22,629


34,100

Segment assets

362,464


26,273


566


389,303

Segment liabilities

68,032


4,183


954


73,169


Nine Months Ended September 30, 2019
(restated)

North America


International


Solar and
Energy
Storage


Total

(unaudited)

($)


($)


($)


($)

Revenue








Drilling Data

102,713


17,580



120,293

Mud Management and Safety

60,650


5,409



66,059

Communications

14,146


1,176



15,322

Drilling Intelligence

14,734


968



15,702

Analytics and Other

7,017


2,629


210


9,856

Total Revenue

199,260


27,762


210


227,232

Rental services and local administration

73,405


15,371


1,201


89,977

Depreciation and amortization

27,015


3,082


20


30,117

Segment gross profit (loss)

98,840


9,309


(1,011)


107,138

Research and development




22,969

Corporate services




11,413

Stock-based compensation




9,359

Other expenses




3,343

Income tax provision




16,347

Net income




43,707

Net income attributable to Pason




43,707

Capital expenditures

15,835


2,756



18,591

As at September 30, 2019





Property plant and equipment

107,025


15,316


130


122,471

Intangible assets

44,453




44,453

Goodwill

8,816


2,600



11,416

Segment assets

390,233


54,572


1,357


446,162

Segment liabilities

69,293


6,066


61


75,420

Other (Income) Expenses


Three Months Ended September 30,


Nine Months Ended September 30,


2020


2019


2020


2019

(CDN 000s) (unaudited)

($)


($)


($)


($)

Derecognition of onerous lease



(5,757)


Government wage assistance

(3,334)



(7,697)


Reorganization costs



5,554


Derecognition of lease receivable




4,289

Foreign exchange loss

113


615


145


1,269

Net interest expense - lease liabilities

33


159


279


404

Interest income - short term investments

(138)


(258)


(1,120)


(726)

Net monetary gain

(465)


(2,376)


(1,280)


(2,376)

Equity loss (income)

357


68


436


(156)

Other

220


83


286


639

Other (income) expenses

(3,214)


(1,709)


(9,154)


3,343

During the third quarter of 2020, due to the decline in revenue, the Company was eligible for the Canada Emergency Wage Subsidy (CEWS) program. As a result, a CEWS benefit of $3,334 was recorded as government wage assistance. On a year to date basis, $7,697 of CEWS benefit was recorded as government wage assistance.

During the second quarter of 2020, the Company entered into an agreement to terminate the lease at its previous US head office in Golden, Colorado. As a result, a recovery of $5,757 was recorded as other income, which is comprised of the derecognition of a previously recorded onerous lease liability, offset by a termination payment.

During the second quarter of 2020, the Company initiated staff reduction initiatives to address the anticipated prolonged downturn in oil and gas drilling activity in all of its markets. Accordingly, the Company recorded reorganization expense of $5,554, which is comprised of termination and other staff related costs. This reorganization led to a decline in research and development and corporate service expenses compared to 2019.

During the second quarter of 2019, the Company was notified that the tenant leasing the Company's previous office space in Colorado, USA filed for Chapter 7 bankruptcy. As a result, the Company derecognized the lease receivable and reported $4,289 in other expenses.

Net monetary gain is as a result of applying hyperinflation accounting to the Company's Argentinian subsidiary.

Events After the Reporting Period

On November 4, 2020, the Company announced a quarterly dividend of $0.05 per share on the Company's common shares. The dividend will be paid on December 30, 2020 to shareholders of record at the close of business on December 16, 2020.

Third Quarter Conference Call

Pason will be conducting a conference call for interested analysts, brokers, investors and media representatives to review its third quarter 2020 results at 9:00 am (Calgary time) on Thursday, November 5, 2020. The conference call dial-in number is 1-888-231-8191 or 1-647-427-7450. You can access the seven-day replay by dialing 1-855-859-2056 or 1-416-849-0833, using password 5584292.

Pason Systems Inc. is a leading global provider of specialized data management systems for drilling rigs. Our solutions, which include data acquisition, wellsite reporting, remote communications, web-based information management, and analytics, enable collaboration between the rig and the office. Pason's common shares trade on the Toronto Stock Exchange under the symbol PSI.

Additional information, including the Company's Annual Report and Annual Information Form for the year ended December 31, 2019, is available on SEDAR at www.sedar.com or on the Company's website at www.pason.com.

Pason Systems Inc.

Pason Systems Inc. is a leading global provider of specialized data management systems for drilling rigs. Our solutions, which include data acquisition, wellsite reporting, remote communications, and web-based information management, enable collaboration between the rig and the office. Pason's common shares trade on the Toronto Stock Exchange under the symbol PSI.TO.

Certain information regarding the Company contained herein may constitute forward-looking information under applicable securities law. The words "anticipate", "expect", "believe", "may", "should", "will", "estimate", "project", "outlook", "forecast" or other similar words are used to identify such forward-looking information and statements. Forward-looking statements in this document may include statements, express or implied regarding the anticipated business prospects and financial performance of Pason; expectations or projections about future strategies and goals for growth and expansion; expected and future cash flows and revenues; and expected impact of future commitments. These forward-looking statements are based upon various underlying factors and assumptions, including the state of the economy and the oil and gas exploration and production business, in particular; the Company's business prospects and opportunities; and estimates of the financial and operational performance of Pason.

Forward-looking information and statements are subject to known or unknown risks and uncertainties that may cause actual results to differ materially from those anticipated or implied in the forward-looking information and statements. Risk factors that could cause actual results or events to differ materially from current expectations include, among others, the ability of Pason to successfully implement its strategic initiatives and whether such strategic initiatives will yield the expected benefits, the operating performance of Pason's assets and businesses, the price of energy commodities, competitive factors in the energy industry, changes in laws and regulations affecting Pason's businesses, technological developments, and general economic conditions.

Readers are cautioned not to place undue reliance on forward-looking statements as there can be no assurance that the plans, intentions or expectations upon which they are placed will occur. Such forward looking statements, although considered reasonable by management as of the date hereof, may prove to be incorrect and actual results may differ materially from those anticipated. Forward-looking statements contained in this press release are expressly qualified by this cautionary statement.

Additional information on risks and uncertainties and other factors that could affect Pason's operations or financial results are included in Pason's reports on file with the Canadian securities regulatory authorities and may be accessed through the SEDAR website (www.sedar.com) or through Pason's website (www.pason.com). Furthermore, any forward looking statements contained in this news release are made as of the date of this news release, and Pason does not undertake any obligation to update publicly or to revise any of the included forward-looking statements, whether as a result of new information, future events or otherwise, except as expressly required by securities law.

SOURCE Pason Systems Inc.

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