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Vertex Resource Group Ltd. Reports Third Quarter 2020 Results

Sherwood Park, Alberta, November 12, 2020 (TSXV:VTX) – Vertex Resource Group Ltd. (“Vertex” or the “Company”) reports its financial and operational results for the three and nine months ending September 30, 2020.  The following should be read in conjunction with the Management Discussion and Analysis (“MD&A”) and the condensed consolidated interim financials statements of Vertex for the three and nine months ended September 30, 2020, which are available on SEDAR at www.sedar.com.

The economic uncertainty and contraction which commenced with the emergence of COVID-19 as a major threat in late Q1 has continued throughout 2020.  This has been evidenced by government lockdown related restrictions and COVID-19 mitigation strategies which have impacted the demand for energy products and services and for all other industries which Vertex serves.  This has resulted in reduced revenues and operating gross margins.  However, the impact has been mitigated  by prudent cost cutting measures, recurring and stable revenue streams, and the fact that Vertex’s business has been deemed essential in Canada and the United States given the importance of its services.

In the third quarter of 2020, despite ongoing challenges presented by the COVID-19 pandemic, Vertex continued to deliver strong adjusted EBITDA and net income, an improvement over Q3 2019 and Q2 2020.  Despite reduced activity, profitability was improved as a result of Management’s efforts to control and reduce costs, as well as benefiting from receiving the Canadian Emergency Wage Subsidy (“CEWS”).  The Company’s balance sheet continues to strengthen because of these efforts with excess funds from operations being used to accelerate debt repayment.

Vertex’s diversification efforts with continued expansion in the utilities and telecommunications sectors and growth in our US operations have also helped to mitigate the revenue declines. The Company is maintaining its focus on cost containment, operating efficiencies, geographic diversification, and sector diversification.

From an environmental consulting perspective, the expected increase in abandonment and reclamation (A&R) projects from major government funding has been delayed as contracting and funding mechanisms were being developed during Q2 and Q3 resulting in delayed project awards.  Vertex expects significant revenue opportunities in this area through 2022, having already won various projects  which are expected to kick off in the near to medium term, and very significant remaining unallocated funding.

Key financial results for the three and nine months ended September 30, 2020 and 2019 are as follows:

HIGHLIGHTS
 Three months ended June 30,  Nine months ended June 30,
(in thousands of Canadian Dollars)
2020 2019 % Change 2020 2019 % Change
Revenue 32,067 43,655 -27% 98,794 127,406 -22%
Gross profit 9,558 10,172 -6% 27,798 30,235 -8%
Adjusted EBITDA (1) 6,822 6,475 5% 18,846 17,834 6%
Free cash flow 6,592 4,399 50% 17,770 14,670 21%
Adjusted EBITDA per share, basic and diluted 0.07 0.07 5% 0.21 0.20 6%

(1) See “Non-IFRS Financial Measures”

HIGHLIGHTS FOR THE THREE MONTHS ENDING SEPTEMBER 30, 2020

The Company generated $32.1 million in revenues compared to $43.7 million in Q3 2019, while reported gross margin increased to 29.8% from 23.3%.

Adjusted EBIDTA during the third quarter amounted to $6.8 million compared to $6.5 million in Q3 2019, with adjusted EBITDA as a percentage of revenue increasing to 21.3% up from 14.8% in Q3 2019.  The third quarter result is the highest over the past eight quarters.

Net income for the period was $1.5 million compared to a loss of $0.5 million in Q3 2019.

Free cash flow amounted to $6.6 million compared to $4.4 million in Q3 2019 (free cash flow is defined as adjusted EBITDA less maintenance capital expenditures net of disposal proceeds).

Success in the $1.7 billion abandonment and site rehabilitation funding programs, with expectations of continued success in 2021 and 2022.  .

HIGHLIGHTS FOR THE NINE MONTHS ENDING SEPTEMBER 30, 2020

Revenue decreased from $127.4 million in 2019 to $98.8 million for the same period in 2020, while reported gross margin improved to 28.1% from 23.7%.

Adjusted EBITDA amounted to $18.7 million for the nine months of 2020 compared to $17.8 million in 2019.

Net income was at a break-even level after removing the impact of restructuring expenses and impairment charges.  Reported net loss was $4.8 million compared to $2.4 million the prior year.

Free cash flow amounted to $17.8 million compared to $14.7 million in the nine months ended September,30, 2019.

Debt reduction of $10.7 million since December 31, 2019 and $13.0 million since September 30, 2019.

OUTLOOK

The economic uncertainty and contraction which commenced with the advent of COVID-19 in late Q1 has continued throughout 2020, evidenced by delays in construction projects, government imposed restrictions limiting access to work sites, significantly reduced demand and volume for energy products, ongoing price competition, and reductions in capital spending.  Vertex’s growing reputation, strong presence in various geographic areas, relationships with clients, and diversified complement of services have allowed it to withstand the economic pressures better than other service providers offering a single service or those that have operations in only one geographic region.  Strong client relationships, effective safety programs, strong quality control, a reputation for meeting commitments, and various government support and stimulus programs mitigated the potential for material reductions in gross margins.

Revenues are projected to continue to improve in Q4 from the low point experienced in Q2.   However, current activity and revenue levels are still expected to be softer than last year’s levels.  At this date demand for Vertex’s services are expected to improve in 2021 above the levels experienced in 2020 due to various government programs for reclamation and abandonment of environmental liabilities, improved capital spending across multiple industries, unfettered access to work sites, recovery of energy production, elimination of Alberta government production curtailments, increased natural gas developments and prices, reinstatement of major customer maintenance programs,  and continued diversification.  These expectations may change from period to period if economic activity is further dampened, new government safety measures are enacted, or supply/demand conditions remain unsettled.  The CEWS program has been extended until June 2021 and Vertex will continue to participate in all periods for which we meet the eligibility requirements.

Vertex intends to be nimble and agile as an organization, with continued focus on operational efficiencies, process efficiencies, enhanced technology developments and implementation; combined with bundling of our services and solutions for our customers.  While strong competition for projects and contracts, along with competitive pricing, is expected to persist for the near to medium term; Vertex expects to continually generate strong, free cashflows from operations, further strengthen our healthy financial position, and ready itself for the increased demand that is expected to occur when Western Canada’s energy market recovers with the completion of major pipelines over the next three years.  Vertex also expects to continue benefitting from the ongoing demand for NGL’s, such as butane and propane, and the increasing demand for cleanup of environmental liabilities.  In addition, the Company expects to realize the full year of benefits in 2021 from the cost savings and organizational changes made in 2020.

Vertex is very well positioned to work closely with our Indigenous partners, customers and the provincial governments of Alberta, Saskatchewan, and British Columbia and the Canadian federal government to participate in the various environmental liability clean up programs in 2021 and 2022.  In addition, Vertex is a prime contractor for the Alberta Orphan Well Association, the Saskatchewan Orphan Well Association and the BC Oil & Gas Commission.  Vertex anticipates an increased level of activity from all these programs in 2021 as the various government agencies and departments have now been able to develop and refine the funding mechanisms, the absence of which largely impeded activity in 2020.  The Company also plans to continue expanding its services to municipalities, utilities, renewables and the telecommunications sector and will continue its geographic diversification efforts in British Columbia, Ontario, and the U.S.  In addition, the natural gas industry in Alberta and British Columbia is expected to grow significantly with the development of LNG Canada’s Kitimat, BC plant, the Coastal Gas Link Pipeline, and the Nova Gas Transmission Pipeline over the next two to three years.

ABOUT VERTEX

Since 1962, Vertex has been a leading North American provider of environmental services. Headquartered in Sherwood Park, Alberta, Vertex employs a staff of approximately 550 employees and lease operators that provide services to help clients achieve their developmental and operational goals. From initial site selection, consultation and regulatory approval, through construction, operation and maintenance, to conclusion and environmental cleanup, Vertex provides a wide array of services to customers operating in industries such as energy, mining, utilities, private development, public infrastructure, construction, telecommunications, forestry, agriculture and government.

Vertex principally operates in western Canada, select locations in the United States, and with current expansion into Ontario.

For further information please contact:

Terry Stephenson, CEO, or Imran Ally, CFO at 780-464-3295

NON-IFRS FINANCIAL MEASURES

This news release includes certain terms or performance measures that are not defined under International Financial Reporting Standards (“IFRS”), including “Adjusted EBITDA”. The data presented is intended to provide additional information that should not be considered in isolation or as a substitute measure of performance prepared in accordance with IFRS. The non-IFRS measures should be read in conjunction with the Company’s financial statements and accompanying notes.

“Adjusted EBITDA” is a non-financial measure which is calculated by adjusting net (loss) income for the sum of income taxes, finance costs including interest accretion on lease liabilities, gain on bargain purchase, depreciation of property and equipment and right of use assets, amortization of intangible assets, share-based compensation, restructuring costs and impairment.  The Company uses Adjusted EBITDA as an indicator of its principal business activities operational performance prior to consideration of how its activities are financed and the impact of taxation, non-cash depreciation and amortization,  restructuring costs and other non-cash expenses such as impairments required under IFRS. Adjusted EBITDA does not have a standardized meaning prescribed by IFRS and is not necessarily comparable to similar measures provided by other companies. Adjusted EBITDA is used by many analysts as an important analytical tool and management of Vertex believes it is useful for providing readers with additional clarity on Vertex’s operational performance. This measure is also considered important by the Company’s lenders in determining compliance by the Company with the financial covenants under its lending arrangements. Reconciliations of Adjusted EBITDA to net income are provided in the MD&A under the heading “Operational and Financial Highlights – Adjusted EBITDA”.

FORWARD-LOOKING INFORMATION

Any “financial outlook” or “future oriented financial information” in this press release, as defined by applicable securities laws, has been approved by management of Vertex. Such financial outlook or future oriented financial information is provided for the purpose of providing information about management’s current expectations and plans relating to the future. Readers are cautioned that reliance on such information may not be appropriate for other circumstances.

Certain statements contained in this news release constitute “forward-looking information”. When used in this document or by any of the Company’s management, the words “may”, “would”, “will”, “intend”, “plan”, “propose”, “anticipate” and “believe” are intended to identify forward-looking information. In particular, but without limiting the foregoing, this document contains forward-looking information and statements pertaining to the following: the Company’s key strategies, objectives and competitive strengths; anticipated expenses; growth opportunities in the Company’s reportable and operating segments in 2020; supply and demand for the Company’s services; activity levels in the energy industry and other industries in which the Company operates; future development activities; and the Company’s ability to retain existing clients and attract new business, particularly business outside of the energy industry. Such statements reflect the Company’s forecasts, estimates and expectations, as they relate to the Company’s current views based on its experience and expertise with respect to future events, and are subject to certain risks, uncertainties, and assumptions.

The forward-looking information and statements contained in this document reflect several material factors and expectations and assumptions of the Company, including, without limitation: that the Company will continue to conduct its operations in a manner consistent with past operations; positive future trends in revenue, gross profit margin, Adjusted EBITDA, Bank EBITDA and net income; the general continuance of current or, where applicable, assumed industry conditions; the mix of revenue from non-energy customers in 2020; pricing of the Company’s services; the Company’s ability to market successfully to current and new clients; the Company’s ability to obtain qualified personnel and equipment in a timely and cost-effective manner; the Company’s future debt levels; the impact of competition on the Company; the Company’s ability to obtain financing on acceptable terms; the general continuance of current or, where applicable, assumed industry conditions; the continuance of existing tax, royalty and regulatory regimes; the impact of seasonal weather conditions; client activity levels; anticipated market recovery; the Company’s anticipated business strategies and expected success; the Company’s ability to utilize its equipment; levels of deployable equipment; and future sources of funding for the Company’s capital program.

Factors that could cause the forward-looking information in this news release to change or to be inaccurate include, but are not limited to: volatility of the energy industry and other industries; dependence on customer contracts and market acceptance; the Company’s growth strategy may not achieve anticipated results; potential litigation claims; difficulty in attracting and retaining skilled personnel; adverse litigation judgments, settlements and exposure to liability resulting from legal proceedings could reduce profits or limit Vertex’s ability to operate; the market for Vertex’s products and services is subject to extensive government and regulatory approvals; health, safety and environment laws and regulations may require the Company to make substantial expenditures or cause it to incur substantial liabilities; the Company may fail to realize anticipated benefits of future acquisitions; Vertex’s indebtedness may adversely affects its financial flexibility and competitive position; competition in the industries in which Vertex operates; downturns in general economic and market conditions; operational hazards and unforeseen interruptions for which Vertex may not be adequately insured; positive covenants in Vertex’s material contracts could limit its ability to operate; third party credit risk; conservation measures and technological advances may reduce demand for hydrocarbons; loss of the Company’s information and computer systems or cyber-attacks; director and officer conflicts of interest; a reassessment by tax authorities of Vertex’s income calculations; volatility in the price of the Company’s common shares; and the risk factors set forth under the heading “Risk Factors” in the Company’s Annual Information Form filed under the Company’s SEDAR profile at www.sedar.com. The Company undertakes no obligation to update these forward-looking statements, other than as required by applicable law.

Neither the TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in the policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this press release.

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