Posted: Tuesday, April 3, 2018
UrtheCast Corp. (TSX:UR) ("UrtheCast" or the "Company") today announces financial results for the three and twelve months ended on December 31, 2017 and provides an update on its financial condition.
Revenue was $40.4 million in 2017 compared to $111.3 million in 2016, or $49.9 million when excluding the non-cash revenue of $61.4 million in 2016 related to the Company's cameras on the International Space Station (the "ISS Cameras").
Engineering services revenue of $32.6 million in 2017, compared to $34.7 million in 2016, decreased due to a change in the expected completion date of one of our engineering services contracts, which resulted in revenue being recognized over a longer period, and also due to lower revenue being recognized on one of our contracts for the provision of space hardware, as a higher percentage of the work was completed in the prior year. Earth Observation ("EO") imagery revenue of $7.8 million in 2017, compared to $15.2 million in 2016, was significantly lower due to ongoing delay in securing a major contract award.
The net loss of $31.8 million and negative adjusted EBITDA of $3.2 million in 2017 increased when compared to the net loss of $29.3 million and positive adjusted EBITDA of $5.6 million in 2016, primarily as a result of the lower revenues, which were only partially offset by the lower operating costs set out above.
Outlook and Going Concern
The Company continues to face significant liquidity challenges with recurring operating losses and negative cash flows.
As at March 31, 2018, the Company had (i) less than $7.5 million in cash on hand, a decrease of $4.5 million from its previously announced cash position of $12 million as at February 28, 2018, and a decrease of $15.7 million since December 31, 2017; and (ii) $16.6 million in restricted cash. Based on the Company's forecasted cash flows for the next twelve months, the Company's current cash flow from operations may not be sufficient to cover its commitments, obligations and operating costs. The Company will need to complete the UrtheDaily Financing described below in order to pay for its ongoing costs of operations as well as service its working capital deficiency, meet its commitments to lenders and fund the development of the UrtheDaily Constellation. There can be no assurance that any such financing will be completed on the terms described below or at all.
Management for the Company has concluded that material uncertainties regarding the Company's ability to secure adequate financing to fund its working capital deficiency and meet its commitments to lenders raise significant doubt as to the ability of UrtheCast to continue as a going concern and therefore has included notice of such in the Company's audited financial statements. Please refer to Note 1 of the Company's consolidated financial statements for the year ended December 31, 2017 for more information.
The Company's auditor has included an Emphasis of Matter paragraph in its independent auditor's report of the Company's audited financial statements with respect to conditions and matters that indicate the existence of a material uncertainty that may cast significant doubt about the Company's ability to continue as a going concern.
Notwithstanding the foregoing, the Company's financial statements have been prepared on a going concern basis, meaning that the Company will be able to realize its assets and discharge its liabilities in the normal course of operations. The financial statements do not reflect adjustments that would be necessary if the going concern assumption was not appropriate. If the going concern assumption was not appropriate for these financial statements, adjustments to the carrying value of the assets and liabilities, reported expenses and statement of financial position classifications would be necessary. Such adjustments could be material.
(i) Update on Senior Secured Facility
UrtheCast announced today that it has received permission from a syndicate of lenders (the "Senior Lenders") to release certain terms of the senior secured facility for the UrtheDaily project (the "UrtheDaily Senior Secured Facility"). The terms below have been negotiated by the Company and the Senior Lenders, but any transaction is subject to finalization of definitive documentation, satisfactory to both parties, which is ongoing. The loan will make available to the Company US$142 million in two equal drawdowns subject to such finalized documentation and upon satisfaction of the conditions precedent described below.
The UrtheDaily Senior Secured Facility will accrue interest at 12% per annum, 7% of which may be satisfied by payment in kind ("PIK") and accrued to the loan principal until August 30, 2020. The UrtheDaily Senior Secured Facility will mature on the fifth anniversary of the closing date, upon which the UrtheDaily Senior Secured Facility will be repayable in full. After August 30, 2020, the Company must prepay the UrtheDaily Senior Secured Facility with 100% of the free cash flow attributable to the UrtheDailyTM Constellation, however, this may be reduced subject to certain financial covenants. In addition, the Company may refinance this facility at any time with no break fee.
As a condition precedent for the UrtheDaily Senior Secured Facility closing, the Company must raise subordinated capital (such as in the Subordinated Capital Financing described below) of at least US$25 million. In addition, the Company will be required to effectuate the refinancing of an existing credit facility and may therefore need to raise as much as an additional $25 million of subordinated capital acceptable to the Senior Lenders. The availability of the first and second drawdowns will also be subject to the Company maintaining certain maximum leverage and total contracted value ratios, as ordinarily required of debt financing facilities of this type.
The Company will pay a US$1.75 million arrangement fee and a commitment fee equal to 7% per annum of the undrawn loan commencing 12 months after the closing date. The Company will also grant the Senior Lenders a number of common share purchase warrants equal to 5% of the issued and outstanding common shares of the Company (the "Common Shares") after the closing of the UrtheDaily Senior Secured Facility.
The Senior Lenders will be entitled to a royalty equal to 10% (adjusted to 5% if the UrtheDaily Senior Secured Facility is repaid within 39 months of closing) of the gross revenues generated by the UrtheDailyTM Constellation unless previously terminated by the Company.
The Company expects to be in line to close the facility over the next two weeks, although there can be no assurance that the transaction will be closed on the terms described above or on any other terms. On closing of the transaction, a copy of the credit agreement will be filed and will be available for viewing and download on SEDAR (www.sedar.com) and readers are encouraged to review it in its entirety.
(ii) Update on Subordinated Capital Financing
On March 9, 2018, the Company announced that the proposed UrtheDaily Senior Secured Facility included a drawdown condition that the Company receive US$45 million from subordinated capital sources. US$20 million of this amount is still available to the Company through vendor financing.
Under the current terms of the UrtheDaily Senior Secured Facility described above, the remaining US$25 million of subordinated capital is now also a condition to closing the UrtheDaily Senior Secured Facility, and the Company will be required to refinance an existing credit facility and may therefore need to raise up to an additional US$25 million of subordinated capital acceptable to the Senior Lenders.
The Company is in the process of progressing a private placement of securities to satisfy the initial US$25 million of subordinated capital required to close the UrtheDaily Senior Secured Facility. To supplement the commitments received to date, the Company announces that it is launching a brokered private placement through Clarus Securities Inc. and Cannacord Genuity Corp. Any such private placement would result in the issuance of securities that would ordinarily require prior shareholder approval. If shareholder approval is required by the Toronto Stock Exchange, there can be no assurance that an exemption from such shareholder approval will be available or that such shareholder approval, if required, will be obtained. We refer you to the Company's disclosure on SEDAR (www.sedar.com) for any details on the brokered private placement.
The Company is also in advanced negotiations with a Canadian private equity group to provide a backstop commitment that will potentially provide additional financing of up to US$25 million of subordinated capital that may be required, which commitment will be subject to completing the initial US$25 million subordinated capital financing described above. The private placement remains subject to certain conditions, including the Company entering into definitive documentation with the Senior Lenders. Pursuant to the terms of the private placement there may be restrictions on the use proceeds, where at least 50% of such proceeds are to be applied to the UrtheDaily Constellation.
Strategic Review Process
In October 2017, the Company formed a Special Committee comprised of independent directors to review and respond to expressions of interest from leading industry players interested in exploring potential partnerships and transaction structures to exploit the Company's leading SAR-IP and engineering talent to capitalize on the growing interest by the US and Canadian governments in SAR technology, and to explore other strategic alternatives potentially available to the Company.
While no decision on any particular alternative has been reached at this time, the Company continues to receive interest from third parties, including in areas outside of traditional channels, such as licensing the SAR-IP to other companies, selling SAR-IP payloads for inclusion on others' satellites or deployment of the SAR-IP technology in a variety of innovative Smallsat configurations, which the Company's SAR-IP supports. There can be no assurance that this process will result in any transaction. The Company does not currently intend to disclose further developments with respect to this process, unless and until the Board of Directors approves a specific transaction or otherwise concludes its review of strategic alternatives.
Deferral of Long-Term Debt Covenant and Deferral of Principal Repayment
Due to the lower than expected revenues in 2017 in our EO business, prior to the end of the year we requested, and received, a waiver of the annual leverage ratio covenant from our lender with respect to our €25 million term loan. The lender also granted a six-month deferral of the annual €4 million principal repayment, which was due on December 11, 2017.
Impairment Charge for ISS Cameras
In the fourth quarter of 2017, due to the significant uncertainty over whether the Company would be able to monetize the ISS Cameras, either through a sale or through alternate means, management of the Company determined that the remaining carrying value of the assets should be written down to nil, resulting in an additional impairment allowance of $8.7 million being recorded in the fourth quarter of 2017 and $9.4 million in the year.
SELECTED FINANCIAL INFORMATION
The following table provides selected financial information of the Company, which was derived from, and should be read in conjunction with, the consolidated financial statements for the year ended December 31, 2017. All financial information is in thousands of Canadian dollars, unless otherwise noted, and except for number of shares and per share amounts.
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