CALGARY, ALBERTA--(CCNMatthews - May 1, 2006) - Leader Energy Services Ltd. ("Leader" or the "Company") (TSX VENTURE:LEE) today released first quarter 2006 results for the period ended March 31, 2006.
Overall Performance and Quarterly Review
(in '000s of dollars except per unit amounts)
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March 31, March 31, $
Financial Review 2006 2005 Variance %
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Revenue $ 11,246 $ 6,238 $ 5,008 80
EBITDAS(1) 4,594 2,622 1,964 75
Income before income taxes 3,828 2,055 1,773 86
Net Income 2,444 1,806 638 35
Earnings per share (diluted) $ 0.07 $ 0.10 $ (0.03) (30)
Cash flow from operations(2) 4,637 2,574 2,063 80
Cash flow from operations per share
(diluted) $ 0.13 $ 0.14 $ (0.01) (7)
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(1) EBITDAS means earnings from continuing operations before interest,
taxes, amortization, and stock based compensation. Readers are
cautioned that EBITDAS is generally regarded as an indirect measure
of operating cash flow, and, as such, the Company believes it is a
significant indicator of success of public companies, and is
particularly relevant to readers within the investment community.
(2) Cash flow is defined as "cash provided by operating activities
before changes in non-cash working capital." Cash flow and cash flow
per share are measures that provide shareholders and potential
investors with additional information regarding the Company's
liquidity and its ability to generate funds to finance its
operations.
Cash flow and cash flow per share are not measures that
have any standardized meaning prescribed by Canadian GAAP, and
accordingly may not be comparable to similar measures used by other
companies.
First Quarter Highlights:
The first quarter ending March 31, 2006 ("the period") was a record quarter for the Company, as revenue and EBITDAS increased by 80% and 75% respectively over the same period last year. Revenue growth for the period exceeded management expectations. In spite of delays in equipment deliveries, the Company was still able to meet internal revenue and profitability forecasts for the period due to higher nitrogen pumping volumes and favorable operating conditions in March. In terms of comparison to last year, revenue totaled $11.2 million for the quarter, versus $6.2 million relative to the same period last year, an 80% increase.
Leader generated income before income taxes of $3.83 million for the first quarter of 2006, an increase of 86% from $2.06 million in the first quarter of 2005. Net income for the period rose to $2.44 million from $1.81 million, a 35% increase over the period. In the prior year, the Company's tax provision in the first quarter was $0.25 million, an effective rate of 12% for the quarter due to the recognition of a future tax asset due to increasing profitability for the Company, which reduced the Company's tax provision for the first quarter of 2005. Leader had a tax provision of $1.38 million, for an effective tax rate of 36% for the first quarter of 2006, which reflects the quarter's increased profitability compared to the relatively low rate in the prior year.
Earnings per share (basic) for the period decreased 20% from $0.10 per share to $0.08 per share. Diluted earnings per share decreased 30% from $0.10 to $0.07 per share. This decrease can be attributed to several factors. The future tax asset that was recognized due to increasing profitability, discussed in the preceding paragraph, contributed to lower future tax for the first quarter of 2005. As well, the Company's weighted number of shares increased significantly during the period, by 14.4 million shares on an average basis, and 17.6 million on a diluted basis. This significant increase was due to an increase of 19.2 million shares issued between January 1, 2005 to the end of the first quarter of 2006. The full impact on revenue and earnings per share will not be fully realized until 2007, when current build-outs of cementing and well stimulation equipment have been completed and are being utilized.
For the three months ended March 31, 2006, operating cash flow before changes in non-cash working capital items totaled $4.6 million, or $0.13 per share (diluted) compared to $2.6 million or $0.14 per share (diluted) during the same period last year. As discussed in the highlights section, the cash flow per share amounts from the first quarter of 2006 reflect the dilutive impact of the $37 million in equity raised in the prior year, and the full operating cash flow impacts of these financings will not be fully realized until the end of 2007.
Comparative Income Statements and Selected Balance Sheet Information
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(figures in '000s, except March 31, March 31, $
per unit amounts) 2006 2005 Variance %
------------------------------------------------------------------------
Revenue $ 11,246 $ 6,238 $ 5,008 80
EBITDAS 4,594 2,622 1,964 75
Income before income taxes 3,828 2,055 1,773 86
Net Income 2,444 1,806 638 35
Earning per share (basic) $ 0.08 $ 0.10 $ (0.02) (20)
Earnings per share (diluted) $ 0.07 $ 0.10 $ (0.03) (30)
Cash flow from operations 4,637 2,574 2,063 80
Cash flow from operations per share
(basic) $ 0.14 $ 0.14 $ (0.00) 0
Cash flow from operations per share
(diluted) $ 0.13 $ 0.14 $ (0.01) (7)
Weighted average shares outstanding
(basic) 32,687 18,302 14,385 79
Weighted average shares outstanding
(diluted) 36,445 18,867 17,578 93
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March 31, December 31,
2006 2005
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Total assets $ 61,841 $ 54,270
Long-term debt(1) 2,612 2,838
Shareholders' equity 50,753 46,535
Working capital 18,955 21,891
Shares issued and outstanding 33,276 32,370
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(1) Includes current portion of long term debt.
Summary of Quarterly Results (000's - unaudited):
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Q1 Q4 Q3 Q2
2006 2005 2005 2005
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Revenue 11,246 6,618 3,819 1,845
Income (loss) before income taxes 3,828 1,044 244 (1,430)
- per share basic 0.12 0.03 0.01 (0.07)
- per share diluted 0.11 0.03 0.01 (0.07)
Net Income (loss) 2,444 732 187 (1,181)
- per share basic 0.08 0.02 0.01 (0.06)
- per share diluted 0.07 0.02 0.01 (0.06)
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Q1 Q4 Q3 Q2
2005 2004 2004 2004
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Revenue 6,238 3,725 1,824 720
Income (loss) before income taxes 2,055 621 (80) (760)
- per share basic 0.11 0.06 (0.01) (0.11)
- per share diluted 0.11 0.06 (0.01) (0.11)
Net Income (loss) 1,806 825 (80) (760)
- per share basic 0.10 0.07 (0.01) (0.11)
- per share diluted 0.10 0.07 (0.01) (0.11)
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Divisional Highlights and Outlook
Well Stimulation Division:
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Operating Statistics
($ thousands except per operating March 31, March 31, %
day amounts) 2006 2005 Change
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Revenue $ 11,246 $ 6,238 80%
Operating Expenses 5,264 2,709 94%
Operating Income 5,982 3,529 70%
Number of Operating Days 964 637 51%
Revenue per Operating Day 11,666 9,793 19%
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The period saw record activity for Leader's well stimulation division, as the Company continued to expand and diversify its customer base. The Company continues to perform more work on deeper wells, which provide greater margins than shallower work. During the first quarter of 2006 Leader averaged 8 nitrogen pumping units and 7 coiled tubing units in service, compared to 5 and 4 units respectively for the same period last year. Two additional nitrogen pumpers were brought online during the quarter, as well as one medium and one deep coiled tubing unit, bringing the Company's well stimulation fleet to a total of 9 nitrogen pumping units and 7 coiled tubing units at the end of the period, which significantly contributed to the Company's increasing activity.
The Company saw the benefit of rate increases that occurred in late 2005, increases in nitrogen pumping volumes and an increasing amount of work on deeper wells as the Company realized a 19% increase in revenue per operating day, from $9,793 to $11,666. Additional equipment capacity was the primary catalyst to increase the number of operating days to 964 from 637, a 51% increase from the prior year's first quarter, and as a result, the Company experienced record first quarter revenue, generating $11.2 million, an 80% increase from the prior year. The Company reached internal expectations despite delays in the expected build-out of two nitrogen pumping units, and its deep coiled tubing unit.
Operating costs totaled $5.3 million for the quarter, or 46.8% of revenue, versus $2.7 million and 43.4% respectively for the same period last year. Excessive non-recoverable labour costs have led to increased operational payroll costs for the quarter. Management has addressed this issue by reorganizing its operational hierarchy at its primary location in Grande Prairie. Also, the well stimulation and completion services experienced higher than normal costs in dealing with logistical issues around supplying services to clients throughout the WCSB. These issues are expected to alleviate as the Company broadens its operational reach through the construction of additional equipment.
Further expansion plans for the year include the fabrication of six additional nitrogen pumping units and five additional coiled tubing units. All of these units will be deployed during the fourth quarter. By year-end 2006, the Company will operate 12 coiled tubing units and 16 nitrogen pumping units, a 189% increase in fleet size since the first quarter of 2005.
Cementing Services:
The Company is looking forward to the commencement of cementing operations. The cement laboratory is fully operational as of April 30, and the cement blending plants for the Brooks, Grande Prairie and Red Deer locations are expected to commence operations May 31, June 30 and July 31 respectively. Manufacturing of the cementing units is proceeding according to plan, and the Company expects to take delivery of two single and two twin cementing pumpers during June, with the remaining 67% becoming available at varying intervals between July and September, for a total of 5 twin cementers, 7 single cementers, 15 bulkers and 4 lay-down trailers. The new operation centers, which are separate structures from the blending plants, in Grande Prairie, Brooks and Red Deer will be completed in July, August and September respectively.
The Company continues to incur pre-operational expenditures of a non-capital nature. In accordance with EIC-27, interest revenue and expenses incurred until time of commercial deployment are being deferred at which time the deferred items will be amortized over a reasonable amount of time not to exceed five years.
Flameless Services:
Flameless services continue to be a dynamic business aspect as the Company, in conjunction with some of its customers, continues to design and develop new applications for this technology such as a waste water evaporation system.
Aggressive marketing efforts continue with the waste water evaporation system. Since the broader marketing effort began in January 2006, the Company has commissioned the construction of 10 more units, the first of which should be released from manufacturing in May. The Company has established preliminary marketing contact with over 70 companies in Canada. While all conversations with these prospective customers have been quite encouraging, the Company believes that recent weakness in the spot price of natural gas has changed the economic benefit of the service, and consequently curtailed the enthusiasm to implement these systems immediately. Management believes that as gas prices strengthen over the balance of 2006, customers will quickly adopt Leader's solution for dealing with the waste waters that are a byproduct of natural gas production.
Due to time constraints with the build out of new equipment and design elements of the flameless boiler, the Company was unable to place a significant amount of resources into a prototype boiler in the first quarter of 2006 as anticipated. During the second quarter of 2006 the Company will commence field trials of the newly modified unit which will be used to determine if the unit can meet industry standards for heat generation.
Non-operational Discussion and Analysis General and Administrative Expenses: ($ thousands) March 31, 2006 March 31, 2005 ------------------------------------------------------------------------ General and administrative expenses $ 1,388 $ 907 % of revenue 12.3% 14.5%
General and administrative (G&A) expenses totaled $1.4 million for the quarter, or 12.3% of revenues versus $0.9 million and 14.5% respectively, relative to the same period last year. The increase in G&A this year over last is attributed to a 45% increase in staff levels required in order to keep up with the demands of growing operations, increased overhead costs required to facilitate expansion to a new office location, increased selling expenses required for the Company's expanding customer base, and increased professional and listing fees due to the Company's public reporting requirements, offset by a $139,000 charge incurred in March 31, 2005 for refinancing of capital leases. Overall expenditure levels as a percentage of revenues are decreasing as revenues increase and overhead burdens become a smaller component of the Company's operations. The Company expects administrative costs to continue to decrease as a percentage of revenue during fiscal 2006, as the cementing division commences operations, and overhead to run additional well stimulation units decreases.
Stock Compensation Expense
The Company's stock compensation awards in the quarter have resulted in stock compensation of $342,000 for the period of which $237,000 was expensed (March 31, 2005 - $255,000) and the balance of $105,000 was included in pre-operating costs. This has decreased from the comparable period due to deferral of certain stock compensation costs, and the Company extending vesting terms on all option grants subsequent to December 1st by one year. This expense has been calculated by management using various assumptions using the Black-Scholes option-pricing model, and is an estimate of the compensation expense dependant upon certain conditions existing at the time of issuance of the related options.
Amortization Expense
Amortization expense increased significantly to $564,000 during the period, from $234,000 during the first quarter of 2005. This is due to the significant increase in the depreciable asset base of the Company. The increase is not proportionate to the increase in capital assets due to land purchased during the prior year, and certain assets under construction that were not depreciated/amortized as of March 31, 2006.
Finance
Total assets increased from $54.3 million at December 31, 2005 to $61.8 million at March 31, 2006. This is due primarily to a $6.1 million increase in accounts receivable owing to record revenues during the period, which should translate into significant working capital inflows during the second quarter.
The remaining $17 million in cash and cash equivalents (discussed in the next section) from the $37 million in equity financings completed in 2005 has been earmarked for capital expansion, primarily in the cementing division, for expansion of the Company's facilities in Grande Prairie and Red Deer, and for building cementing facilities in Brooks. The $9 million credit facility secured in the prior year to assist in this expansion has not been drawn on as of the end of the period. Capital asset expansion during the period can be broken down as follows, with the use of funds indicated:
($ thousands)
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Capital funds available at December 31, 2005 $ 23,037
Warrant and option proceeds received during period 1,358
Asset purchases funded through working capital 989
Well Stimulation Equipment (3,636)
Cementing Equipment (4,189)
Land & Buildings Expansion (503)
Flameless Technology Purchases (111)
----------
Capital funds available at March 31, 2006 $ 16,945
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----------
Liquidity, Capital Resources and Use of Funds
At March 31, 2006 the Company held cash and cash equivalents of $17 million and had a positive working capital position of $19 million. The entire amount of cash and cash equivalents held at the end of the period were held in marketable securities remaining from proceeds from the $37 million in equity financings completed during the prior year which continue to be used to fund the 2006 capital expansion programs for the Company's well stimulation and cementing services. Marketable securities designated for future capital expansion bear interest rates of 3.74% to 3.75%. The period began to reflect the benefits of the proceeds from the prior year's equity issuances, for which the use of proceeds is reflected in the following table:
Use of Proceeds (Original Private Placements and SFOD - December 2004-
February 2005)
-------------------------------------------
Estimated Actual
Equity Delivery/ Delivery/
Allocation Execution Execution
-------------------------------------------
Well stimulation equipment $ 5,988,000 Aug - Oct 2005 -
Sept 2005 January 2006
Flameless equipment 998,000 Nov 2005 Delayed
Support equipment 2,085,000 Various Various
Debenture and shareholder loan
retirement 1,883,000 Mar 2005 Mar 2005
------------
Subtotal $10,954,000
Proceeds of issues ($12
million net of brokerage
fees) 11,040,000
------------
Working Capital $ 86,000
------------
------------
Use of Proceeds - Bought Deal Private Placement and $9 million credit
facility
-------------------------------------------
Actual
Equity Delivery/ Delivery/
Allocation Execution Execution
-------------------------------------------
Land/building expansion $10,000,000 July- July-
September September
2006 2006
Cementing equipment 22,500,000 April-August June-September
2006 2006
------------
Subtotal $32,500,000
------------
------------
Capital lease obligations at the end of the period were held by two financial institutions. $2.52 million carries per annum interest rates of 5.9% to 6.4% over a four-year term maturing January and August of 2009. Monthly payments on these obligations total $79,000 including principle and interest. $90,000 carries per annum interest rates ranging from 7% to 7.75% over a four-year term and maturing at various times between July 2006 and 2007. Monthly payments on this obligation total $10,000, including principle and interest. All finance obligations are subject to security on the specific assets and subordinated general assignment on all other assets within the Company.
The 5-year continuity schedule below highlights the lease obligations of the Company over the next five years as of March 31, 2006, less imputed interest. It should be noted that only four years are on the schedule due to the Company's capital leases all having terms that will end in the year 2009.
2006 $ 783
2007 971
2008 950
2009 152
----------
2,856
Less imputed interest (244)
----------
$ 2,612
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The Company meets short term financing requirements with a bank operating line of $2.5 million of which $1.0 million was still available to the Company at March 31, 2006. The bank loan is a demand operating facility, bearing interest at 1% (December 31, 2005 - 1%) above the prime lending rate. The effective rate at March 31, 2006 is 6.5%.
The oil and gas services industry is subject to seasonal fluctuations in activity levels, especially during the first and second quarter of any calendar year. These seasonal changes, often referred to as winter drilling and spring breakup, either augment or draw down on the cash resources of the Company. The Company's cash position at any point in time is also dependent on weather conditions. It is management's opinion that with the activity levels the industry is currently experiencing, the recent equity issuances, and increased operating cash flows from an increased fleet of capital assets, that all cash flow requirements will be easily met.
Outlook
The Canadian Association of Drilling Contractors is forecasting a record 26,000 wells to be drilled in western Canada in 2006, the fourth year in a row that drilling activity has increased. Demand for the Company's services remains strong and barring inclement weather conditions, calls for equipment suggest that summer activity levels may commence earlier than usual. Given the current commodity environment this demand is expected to continue into the immediate future. This should prove timely for the Company as a surge in demand for services and a lack of equipment capacity in the industry coincides with the introduction of cementing services and further expansion of coiled tubing and nitrogen pumping equipment.
As stated in previous press releases, management is formulating a strategy to provide coiled tubing, nitrogen pumping and cementing operations in the United States. To broaden its scope of services, this strategy may include business acquisitions. Leader anticipates making further disclosure in this regard during the second quarter.
Leader Energy Services Ltd.
Balance Sheets
March 31, December 31,
2006 2005
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(Stated in thousands of dollars) (unaudited) (audited)
Assets
Current
Cash and cash equivalents $ 16,945 $ 23,037
Accounts receivable 10,345 4,229
Prepaid expenses and deposits 530 424
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27,820 27,690
Deferred charges 20 20
Pre-operating costs (Note 4) 991 447
Property and equipment (Note 5) 32,780 25,013
Intangible assets 230 223
Future taxes - 877
---------- ----------
$ 61,841 $ 54,270
Liabilities and Shareholders' Equity
Current
Bank indebtedness (Note 6) $ 1,479 $ 832
Accounts payable and accrued liabilities 6,490 4,065
Current portion of obligations under capital
lease (Note 7) 896 902
---------- ----------
8,865 5,799
Obligations under capital lease (Note 7) 1,716 1,936
Future taxes (Note 8) 507 -
---------- ----------
11,088 7,735
---------- ----------
Equity instruments (Note 9) 50,606 49,170
Contributed surplus (Note 9) 1,209 871
Deficit (1,062) (3,506)
---------- ----------
50,753 46,535
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$ 61,841 $ 54,270
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On behalf of the Board:
signed Director
--------------
Rodney Hauser
signed Director
--------------
Richard Skeith
Leader Energy Services Ltd.
Statements of Operations and Deficit
March 31, March 31,
For the three months ended 2006 2005
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(Stated in thousands of dollars, except (unaudited) (unaudited)
for per share amounts)
Revenue $ 11,246 $ 6,238
Expenses
Operating 5,264 2,709
General and administrative 1,388 907
Amortization 564 234
Stock compensation 237 255
Interest on capital lease obligations 42 73
Interest on long-term debt - 49
---------- ----------
7,495 4,227
---------- ----------
Income from operations 3,751 2,011
---------- ----------
Other income (expense)
Interest from investments 85 44
Loss on disposal of property and
equipment (8) -
---------- ----------
77 44
---------- ----------
Income before income taxes 3,828 2,055
Future income tax expense 1,384 249
---------- ----------
Net income for the period 2,444 1,806
Deficit, beginning of period (3,506) (5,050)
---------- ----------
Deficit, end of period $ (1,062) $ (3,244)
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Earnings per common share - basic $ 0.08 $ 0.10
Earnings per share - diluted $ 0.07 $ 0.10
Weighted average number of shares
outstanding -basic ('000s) 32,687 18,302
Weighted average number of shares
outstanding - diluted ('000s) 36,367 18,867
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Leader Energy Services Ltd.
Statements of Cash Flows
March 31, March 31,
For the three months ended 2006 2005
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(Stated in thousands of dollars) (unaudited) (unaudited)
Cash flows from operating activities
Net income for the period $ 2,444 $ 1,806
Adjustments for:
Amortization 564 234
Amortization of deferred charges - 30
Stock compensation 237 255
Future tax expense 1,384 249
Loss on disposal of property and equipment 8 -
---------- ----------
4,637 2,574
Change in non-cash working capital balances
Accounts receivable (6,116) (2,187)
Prepaid expenses and deposits (106) (54)
Accounts payable and accrued liabilities (377) (233)
Deferred revenue - (65)
---------- ----------
(1,962) 35
---------- ----------
Cash flows from investing activities
Additions to property and equipment and
intangibles (8,439) (1,318)
Changes in non-cash working capital due
to investing activities 2,798 285
Additions to pre-operating costs (439) -
Proceeds on disposal of property and equipment 95 -
---------- ----------
(5,985) (1,033)
---------- ----------
Cash flows from financing activities
Bank indebtedness 648 (166)
Issue of share capital, net of share issue costs 1,432 7,262
Repayment of obligations under capital lease (225) (133)
Repayment of shareholders loan - (416)
Repayment of subordinated debentures - (1,027)
---------- ----------
1,855 5,520
---------- ----------
Increase (decrease) in cash and cash
equivalents (6,092) 4,522
Cash (bank indebtedness), beginning of period 23,037 3,871
---------- ----------
Cash (bank indebtedness), end of period $ 16,945 $ 8,393
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Supplemental Information
Interest paid $ 76 $ 513
1. Basis of Presentation
These interim financial statements were prepared using accounting policies consistent with those used in the preparation of Leader Energy Services Ltd.'s ("the Company's") audited financial statements for the year ended December 31, 2005. The preparation of financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. The interim financial statements have, in management's opinion, been properly prepared using careful judgment within reasonable limits of materiality. These interim financial statements do not include all the note disclosure required for annual financial statements, and as a result, these interim financial statements should be read in conjunction with the Company's audited financial statements for the year ended December 31, 2005 contained in the Company's 2005 annual report.
2. Seasonality of Operations
The Corporation's operations are carried out in Canada. The ability to move equipment in the Canadian oil and natural gas fields is dependent on the following weather conditions.
As warm weather returns in the spring, ground frost thaws, rendering many secondary roads incapable of supporting the weight of heavy equipment until completely dried. The duration of "spring breakup" directly impacts the Corporation's activity levels. Several exploration and development areas in Northern and Central Alberta and Northeastern British Columbia, the Company's area of operations, are only accessible during winter months when the ground is frozen hard enough to support its equipment. The timing of freeze-up and spring breakup affect the Company's ability to move equipment in and out of these locations. Consequently, late March through May is the Company's slowest time.
3. Significant Accounting Policies
In addition to the accounting policies discussed in the annual financial statements dated December 31, 2005, the Company adopted the following accounting policy during the period.
(a) Foreign currency translation
For foreign divisions whose functional currency is the Canadian dollar, the Company translates monetary assets and liabilities at end of period exchange rates, and non-monetary items are translated at historical rates. Income and expense accounts are translated at the average rates in effect during the year. Gains or losses from changes in exchange rates are recognized in income in the year of occurrence.
Transactions of Canadian divisions in foreign currencies are translated at rates in effect at the time of the transaction. Foreign currency monetary assets and liabilities are translated at current rates. Gains or losses from changes in exchange rates are recognized in income in the year of occurrence.
4. Pre-operating Costs
Pre-operating costs represent certain incremental costs incurred during the start-up of the Company's cementing division, U.S. division and for certain administrative costs incurred with regard to development of the Company's evaporation system. Amortization of these costs will occur based on the expected period and pattern of benefit of the deferred expenditures when the pre-operation period has ended, and are segregated in the following table:
March 31, 2006 December 31, 2005
-----------------------------------------
Cementing division 772 367
United States division 128 -
Flameless division 91 80
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Balance, end of period 991 447
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-----------------------------------------
5. Property and Equipment
March 31, 2006 December 31, 2005
-------------------------------------------------------------
Net Net
Accumulated Book Accumulated Book
Cost Amortization Value Cost Amortization Value
-------------------------------------------------------------
Land and
buildings $ 5,432 $ - $ 5,432 $ 4,930 $ - $ 4,930
Equipment 29,904 2,975 26,929 22,277 2,548 19,729
Furniture/
fixtures 583 164 419 481 127 354
-------------------------------------------------------------
$35,919 $ 3,139 $32,780 $27,688 $ 2,675 $25,013
-------------------------------------------------------------
-------------------------------------------------------------
Included in property and equipment are assets financed by capital leases
with a cost of $9,175,000 (December 31, 2005 - $9,026,000) and a net
book value of $7,156,000 (December 31, 2005 - $7,126,000) as at March
31, 2006.
As at March 31, 2006, $10,474,000 (December 31, 2005 - $6,450,000) in
depreciable property and equipment was not being amortized, as they were
not yet in use at the end of the period.
6. Bank Indebtedness
The bank loan is a demand operating facility bearing interest at 1% (December 31, 2005 - 1%) above the bank's prime lending rate. The effective rate at March 31, 2006 was 6.5% (December 31, 2005 - 6%). The limit on this facility is $2,500,000 (December 31, 2005 - $2,500,000).
During the prior year, the Company negotiated a new credit facility for a demand non-revolving capital loan. The facility bears interest at 1% above the bank's prime lending rate. The effective rate at March 31, 2006 was 6.5% (December 31, 2005 - 6%). The limit on this facility is $9,000,000, none of which has been drawn by the Company at the end of the period.
These facilities are secured by:
- Demand operating facility
- Master lease agreements
- A general security agreement creating a first priority security interest in all present and after acquired personal property of the Company and a floating charge over all of the Company's present and after acquired real property
- Assignment of risk insurance on Company's property
- Demand mortgages on buildings
During the prior year, the Company also negotiated a new credit facility for an additional $300,000 USD letter of credit, of which no balance has been drawn. The facility bears interest at 1.5% above the bank's prime lending rate. The effective rate at March 31, 2006 was 7.0% (December 31, 2005 - 6.5%). The facility is to be secured by specified property and equipment.
7. Obligations Under Capital Lease
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March 31, December 31,
2006 2005
-------------------------
Capital lease bearing interest at 5.93% per
annum, payable in monthly installments of $49,
maturing January 25, 2009 $ 1,485 $ 1,609
Capital lease bearing interest at 6.38% per
annum, payable in monthly installments of $30,
maturing August 24, 2009 1,039 1,112
Capital leases bearing interest at 7.00% to
7.75% per annum, payable in monthly
installments of $10, maturing July 15, 2006
to July 1, 2007 88 117
-------------------------
2,612 2,838
Less: current portion due within one year (896) (902)
-------------------------
$ 1,716 $ 1,936
-------------------------
-------------------------
The minimum lease payments for the next five years are as follows:
2006 $ 783
2007 971
2008 950
2009 152
----------
2,856
Less imputed interest (244)
----------
$ 2,612
----------
----------
All loans above are blended monthly payments and all leases are
collateralized by specific property and equipment as disclosed in
Note 4.
8. Future Taxes
Future income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts for income tax purposes. The components of the Company's future income tax assets and liabilities are as follows:
March 31, December 31,
Nature of temporary differences 2006 2005
-----------------------------
Property and equipment $(5,147) $ (3,646)
Property and equipment under construction 3,521 2,193
Non-capital losses 502 1,549
Share issue costs 828 864
Pre-operating costs (211) (83)
-----------------------------
Future income tax asset (liability) $ (507) $ 877
-----------------------------
-----------------------------
9. Equity Instruments
(a) Authorized
Unlimited number of Common shares
Unlimited number of Preferred shares, issuable in series
(b) Common shares issued and outstanding
March 31, 2006 December 31, 2005
------------------------------------
Number Number
of Amounts of Amounts
('000s) ('000s)
------------------------------------
Balance, beginning of period 32,370 $ 48,336 14,098 $ 12,319
Exercise of broker warrants 354 444 1,136 1,402
Exercise of private placement
warrants 530 901 1,428 2,431
Exercise of options 9 13 198 260
Shares issued to employee (1) 13 74 - -
Fair value of warrants exercised - 277 - 302
Fair value of options exercised - 4 - 30
Convertible debenture - - 960 1,528
Private placement - - 1,353 1,394
Short form offering - - 1,600 1,900
Private placement - - 3,400 3,509
Bought deal private placement - - 8,197 25,000
Share issue costs, net of tax
effect (December 31, 2005-$1,042)(2) - (55) - (1,739)
------------------------------------------------------------------------
Balance, end of period 33,276 $ 49,994 32,370 $ 48,336
------------------------------------------------------------------------
Warrants issued and outstanding
Balance, beginning of period 3,566 $ 834 2,456 $ -
Private placement - - 879 251
Short form offering - - 240 100
Private placement - - 2,210 741
Exercise of broker warrants (354) (167) (1,136) (134)
Exercise of private placement
warrants (530) (110) (1,428) (170)
Additional broker warrants issued(2) 105 55 345 46
------------------------------------------------------------------------
Balance, end of period 2,787 612 3,566 834
------------------------------------------------------------------------
------------------------------------------------------------------------
Total equity instruments 36,063 $ 50,606 35,936 $ 49,170
------------------------------------
------------------------------------
(1) On January 19, 2006, the Company issued 13,000 shares to an
employee pursuant to an employment agreement at $5.75 per share,
for gross proceeds of $74,000.
(2) On February 18, 2005 the Company completed its third and final
closing of the private placement with the issuance of 3,400,000
Units for gross proceeds of $4,250,000. As previously described,
each Unit consists of one common share and one half of a warrant,
each whole warrant entitling the holder to subscribe for one common
share for $1.70 for a two year period from closing. All Units were
subject to a hold period until June 19, 2005. The agent for this
offering received a commission of $340,000 and was granted broker
warrants to acquire up to 510,000 Units at $1.25 per Unit for a two
year period from date of closing. Upon exercise of these warrants,
the agent is entitled to one half warrant for each common share
warrant exercised, at an exercise price of $1.70 per share, for a
maximum of 255,000 shares. 210,000 of these half warrants were
issued during the period, resulting in 105,000 full warrants
issued, resulting in a fair value of allocation of $55,000 during
the period.
(c) Earnings per share
Earnings per share has been calculated based on the weighted average number of common shares outstanding during the period of 32,687,000 (March 31, 2005 - 18,302,000). A reconciliation of the denominator for the diluted per share calculations is outlined below (table stated in thousands of shares):
March 31, 2006 March 31, 2005
----------------------------------------
Basic weighted-average shares 32,687 18,302
Effect of dilutive stock options 1,139 157
Effect of dilutive warrants 2,541 408
----------------------------------------
Dilutive weighted-average shares 36,367 18,867
----------------------------------------
----------------------------------------
(d) Stock options
The Company has established a stock option plan (the "Plan") whereby the Company may grant options to purchase common shares to directors, officers, employees, and consultants. On March 31, 2006, up to 3.33 million common shares were issued or available for issuance under the plan. When granted, the options have a five year term. The vesting dates for the remaining options are as follows:
Grant date Unvested options Vesting dates
------------------------------------------------------------------------
January 21, 2005 496 January 21, 2005-2007
March 17, 2005 35 March 17, 2005-2007
July 5, 2005 33 October 5, 2006-2008
November 1, 2005 221 February 1, 2006-2008
November 21, 2005 33 February 21, 2006-2008
December 15, 2005 679 December 1, 2007-2009
December 28, 2005 75 December 1, 2007-2009
January 17, 2006 70 January 17, 2007-2009
February 14, 2006 25 February 14, 2007-2009
--------
1,667
--------
--------
The following table details the stock options issued and outstanding:
Weighted
Number of Option Average
Shares Price per Exercise
('000s) Share Range Price
------------------------------------------------------------------------
Options outstanding, December 31, 2004 169 $1.20 $1.20
Issued January 21, 2005 1,529 $1.50 $1.50
Issued March 17, 2005 104 $1.60 $1.60
Issued July 5, 2005 50 $2.55 $2.55
Issued November 1, 2005 332 $3.65 $3.65
Issued November 21, 2005 50 $3.45 $3.45
Issued December 15, 2005 679 $4.20 $4.20
Issued December 28, 2005 75 $4.20 $4.20
Exercised (198) $1.20 - $1.50 $1.31
Forfeited (30) $1.50 $1.50
----------------------------------
----------------------------------
Options outstanding, December 31, 2005 2,760 $1.20 - $4.20 $2.55
----------------------------------
----------------------------------
Exercised (9) $1.50 $1.50
Forfeited (12) $1.50 - $4.20 $3.90
Issued January 17, 2006 70 $5.50 $5.50
Issued February 14, 2006 25 $4.85 $4.85
----------------------------------
----------------------------------
Options outstanding, March 31, 2006 2,834 $1.20 - $5.50 $2.64
----------------------------------
----------------------------------
Options exercisable at March 31, 2006 1,167 $1.20 - $3.65 $1.74
----------------------------------
The following table summarizes information about the stock options
outstanding at March 31, 2006:
Weighted
Average
Weighted Number Exercise
Weighted Average of Price of
Average Remaining Options Options
Options Option Exercise Contractual Currently Currently
Outstanding price Price Life Exercisable Exercisable
('000s) ('000s)
------------------------------------------------------------------------
47 $1.20 $1.20 2.36 years 47 $1.20
1,402 $1.50 $1.50 3.81 years 906 $1.50
104 $1.60 $1.60 3.96 years 69 $1.60
50 $2.55 $2.55 4.27 years 17 $2.55
332 $3.65 $3.65 4.59 years 111 $3.65
50 $3.45 $3.45 4.65 years 17 $3.45
679 $4.20 $4.20 4.67 years - -
75 $4.20 $4.20 4.67 years - -
70 $5.25 $5.25 4.80 years - -
25 $4.85 $4.85 4.88 years - -
------------------------------------------------------------------------
------------------------------------------------------------------------
$1.20-
2,834 $5.50 $2.65 4.17 years 1,167 $1.74
------------------------------------------------------------------------
------------------------------------------------------------------------
The fair values of the share options issued by the Company were
estimated using the Black Scholes option-pricing model. For all
issuances, the following assumptions have been made: dividend yield
nil; and weighted average life of five years. Other assumptions that
have changed with ensuing issuances have been outlined in the following
table:
Number of Fair value
options of stock Risk-free
granted Option options Interest
Grant date ('000s) price Volatility ('000s) Rate
------------------------------------------------------------------------
January 21, 2005 1,529 $ 1.50 30% $ 608 2.56%
March 17, 2005 104 $ 1.60 41% $ 58 2.56%
July 5, 2005 50 $ 2.55 49% $ 43 3.30%
November 1, 2005 332 $ 3.65 59% $ 550 3.84%
November 21, 2005 50 $ 3.45 59% $ 81 3.87%
December 15, 2005 679 $ 4.20 60% $ 1,187 3.92%
December 28, 2005 75 $ 4.20 60% $ 131 3.92%
January 17, 2006 70 $ 5.25 61% $ 131 3.92%
February 14, 2006 25 $ 4.85 64% $ 54 4.06%
The fair value of options granted during the period total $185,000
(March 31, 2005 - $66,000).
(e) Warrants
The Company has granted warrants to various investors and agents of the
Company as follows:
Warrants Weighted
Number of Price Average
Warrants per Share Exercise
('000s) Range Price
--------------------------------------------
Warrants outstanding,
December 31, 2004 2,456 $1.20 - $1.70 $1.54
Issued January 31 -
private placement 879 $1.25 - $1.70 $1.60
Issued February 10 - short
form offering 240 $1.25 $1.25
Issued February 18 - private
placement 2,210 $1.25 - $1.70 $1.60
Additional broker warrants
issued 345 $1.70 $1.70
Exercised (2,564) $1.20 - $1.70 $1.49
--------------------------------------------
--------------------------------------------
Warrants outstanding,
December 31, 2005 3,566 $1.25 - $1.70 $1.62
--------------------------------------------
Additional broker warrants
issued 105 $1.70 $1.70
Exercised (884) $1.25 - $1.70 $1.52
--------------------------------------------
Warrants exercisable at
March 31, 2006 2,787 $1.25 - $1.70 $1.62
--------------------------------------------
--------------------------------------------
The following table summarizes information about the warrants
outstanding at March 31, 2006:
Weighted
Average
Weighted Exercise
Weighted Average Number of Price of
Average Remaining Warrants Warrants
Warrants Warrant Exercise Contractual Currently Currently
Outstanding price Price Life Exercisable Exercisable
('000s) ('000s)
------------------------------------------------------------------------
984 $1.70 $1.70 0.73 years 984 $1.70
220 $1.70 $1.70 0.84 years 220 $1.70
$1.25 -
1,583 $1.70 $1.61 0.89 years 1,582 $1.61
------------------------------------------------------------------------
$1.25 -
2,787 $1.70 $1.65 0.83 years 2,787 $1.62
------------------------------------------------------------------------
------------------------------------------------------------------------
(f) Shares held in escrow
The following table summarizes information about the shares in escrow at
March 31, 2006:
Shares held
in Escrow Release
Issue date ('000s) rate Future release dates
---------------------------------------------------
May 27, 2006, and
August 3, 2003(1) 133 20% November 27, 2006
October 4, 2004 1,288 25% May 4, 2006
---------------------------------------------------
Shares in Escrow at
March 31, 2006 1,421 25%
(1) Shares placed in escrow pursuant to the initial public offering for
Pd&e in November 2003.
(g) Contributed surplus
The effect on contributed surplus from the recognized portion of the
fair value of the stock compensation is outlined in the following
table:
Amount
------------------------------------------------------------------------
Contributed surplus, December 31, 2004 $ 8
------------------------------------------------------------------------
Stock compensation expense 636
Deferred stock compensation 257
Stock options exercised (30)
------------------------------------------------------------------------
Contributed surplus, December 31, 2005 871
Stock compensation expense 237
Deferred stock compensation 105
Stock options exercised (4)
------------------------------------------------------------------------
Contributed surplus, March 31, 2006 1,209
------------------------------------------------------------------------
------------------------------------------------------------------------
Deferred stock compensation has been recorded as pre-operating costs,
and will be amortized when operations commence.
10. Related Party Transactions
Except as disclosed elsewhere in these financial statements, the Company had the following related party transactions:
(a) During the period, the Company recorded legal fees in the amount of $28,000 for services provided by a firm of which a director of the Company is a partner, all of which has been recorded as general and administrative costs. Of this amount, $19,000 remains in accounts payable at the end of the period.
(b) During the period, the Company recorded $18,000 in consulting services to a company of which a director is the principal.
All related party transactions that are in the normal course of operations have been measured at the agreed to exchange amounts, which is the amount of consideration established and agreed to by the related parties and which is similar to those negotiated with third parties.
11. Financial Instruments
As disclosed in the significant accounting policies in the 2005 annual financial statements, the Company holds various forms of financial instruments. The nature of these instruments and the Company's operations expose the Company to interest rate, credit and fair value risk. The Company manages its exposure to these risks by operating in a manner that minimizes its exposure to the extent practical.
Credit risk
A significant portion of the Company's trade accounts receivable is from companies in the oil and gas industry and, as such, the Company is exposed to all the risks associated with that industry. As at March 31, 2006, three (March 31, 2005 - one) companies accounted for 46% (March 31, 2005 - 43%) of the total accounts receivable. Of the revenue earned, 41% (March 31, 2005 - 52%) was earned from three (March 31, 2005 - two) customers.
12. Subsequent Events
(a) Private placement warrants totaling 40,250 were exercised between year end and the release of the financial statements. The units, which carried an exercise price of $1.70 per unit, provided $68,000 to the Company which was recorded as share capital.
(b) Options totaling 50,000 were granted to a director of the Company at $4.00 per share. The options will vest over three years, with one third vesting on each anniversary date of the date of issuance.
FOR FURTHER INFORMATION PLEASE CONTACT:
Leader Energy Services Ltd.
Rod Hauser
President & CEO
(403) 265-5400
Email: r.hauser@leaderenergy.com
Leader Energy Services Ltd.
Jim Ashbaugh, CMA
Senior VP Finance & CFO
(403) 265-5400
Email: j.ashbaugh@leaderenergy.com
Leader Energy Services Ltd.
Jason Krueger, CFA
Director, Investor Relations
(403) 374-1234
Email: jason@redwood-capital.com
