Defiant Resources Corporation
TSX : DFR

Defiant Resources Corporation

November 09, 2006 09:00 ET

Defiant Resources Corporation: 2006 Third Quarter Report for Three and Nine Months Ended September 30, 2006

CALGARY, ALBERTA--(CCNMatthews - Nov. 9, 2006) - Defiant Resources Corporation (TSX:DFR):

Report to Shareholders

We are pleased to present our third quarter report to shareholders.

HIGHLIGHTS

- Average production for the third quarter increased 69% to 1,195 boe per day over the second quarter's 708 boe per day.

- Production for the nine months ended September 30, 2006 averaged 875 boe per day, an increase of 253% compared to 248 boe per day for the corresponding period in 2005.

- In October, we cased a well in Grande Prairie - Clairmont for oil and gas potential which will be completed and tested over the next few weeks. This well, combined with our previously announced well at Grande Prairie East, is expected to add 100 boe per day of oil production prior to year end.

- Our current production has increased to 1,350 boe per day with the tie in of the Majeau gas well on November 3, 2006.

- We recently acquired 2,560 acres of proprietary 3D seismic at Reine which has defined additional Montney locations on 100% company lands, the first of which we expect to drill in late November.

- Preparations are complete for an active winter drilling program. We expect to drill 10 to 12 gross (8.7 to 10.2 net) wells during the fourth quarter of 2006 and the first quarter of 2007.



Three months Nine months
ended ended
September 30 September 30
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(unaudited) Unit 2006 2005 2006 2005
---------------------------------------------------------------------------

Financial

Petroleum and natural gas sales $m 5,102 2,237 11,705 4,066

Funds from operations $m 2,310 1,302 5,472 2,081

Per share - basic $ 0.11 0.09 0.29 0.15

Per share - diluted $ 0.10 0.08 0.27 0.13

Net earnings (loss) $m (522) 340 (689) 455

Per share - basic $ (0.04) 0.02 (0.04) 0.02

Per share - diluted $ (0.04) 0.02 (0.04) 0.02

Capital expenditures $m 5,652 10,394 20,547 20,027

Bank debt and working capital
deficiency $m 10,967 8,719 10,967 8,719

Operations

Production

Natural gas mcf/d 5,464 1,407 3,872 697

Light oil bbls/d 249 141 206 124

Natural gas liquids bbls/d 35 10 24 8

Total boe/d 1,195 386 875 248

Average price

Natural gas $/mcf 6.07 9.25 6.65 8.71

Light oil $/bbl 80.58 75.55 75.98 68.21

Natural gas liquids $/bbl 62.01 60.02 60.64 50.68

Boe $/boe 46.41 62.95 48.97 60.16

Field Netback $/boe 25.60 42.97 28.24 41.16

Weighted average shares
outstanding

Basic m 20,515 14,772 18,854 14,102

Diluted m 22,145 16,624 20,482 15,954


OPERATIONAL UPDATE

South East Peace River Arch "SEPRA" Core Area

Grande Prairie

Grande Prairie continues to be our most active area. We have increased our inventory of drilling opportunities in Grande Prairie as a result of our continuing success in the area. The Grande Prairie area has evolved into four distinct projects which we refer to as Grande Prairie East, Clairmont, Dimsdale and Gold Creek. Each project is at a different stage of development. Recent activities and near term plans are highlighted for each project area as follows:

Grande Prairie East ("GP East")

We have been active in GP East for two years and have had considerable success with Triassic and Cretaceous prospects including significant Dunvegan and Halfway discoveries. GP East produces 750 boe per day which represents 63% of our third quarter production. Our GP East production is currently derived from five wells which produce from the Dunvegan and Halfway formations. We believe that our success in these formations is repeatable in the other Grande Prairie project areas.

During the month of October, production was curtailed by 375 boe per day due to third party pipeline repairs. During November we expect a production curtailment of 352 boe per day when further pipeline repairs are undertaken.

The net productive capacity of our previously announced multi-zone gas and oil discovery at GP East was originally estimated to be 100 boe per day. This estimate has been reduced to 25 boe per day from the two gas zones as a result of extended testing of the Gething gas zone which indicated a limited reservoir. We are currently testing the Dunvegan zone which is producing clean oil at a rate in excess of 250 (165 net) boe per day. We plan to leave the lowest gas zone suspended and produce the Dunvegan zone at an allowable restricted net rate of 70 boe per day.

We plan to drill two wells before year-end: a Dunvegan gas development well and a Halfway exploration test well. Performance of our new Dunvegan oil well will be monitored for a month or two prior to following it up with developmental wells, possibly horizontal wells in the first quarter of 2007. The Company is evaluating the exploitation of this discovery with horizontal wells. We expect current behind pipe productive capacity together with development drilling at GP East to increase our production by 200 boe per day. This will enable Defiant to attain a production rate of 1,600 boe per day, meeting its earlier forecast exit rate.

Clairmont

At Clairmont, we produce 100 boe per day which represents 7% of our current production. This production was shut in for the month of September when a third party compressor station was equipped to remove small amounts of H2S. Production resumed in October.

During the month of October we drilled and cased a well that has oil and gas potential in the Charlie Lake and Dunvegan zones. We plan to initially complete the lowest interval of the Charlie Lake zone for oil production which we expect will produce at 30 to 60 boe per day. Our near term plans for Clairmont include drilling a development Charlie Lake gas well during the first half of 2007.

Dimsdale

We have been assembling land and seismic data in the Dimsdale project area for approximately one year. We currently have five Dunvegan and Halfway drilling locations and one high impact Charlie Lake gas play in inventory. Drilling of three of these locations is delayed as we work to resolve surface access issues. It may take six to nine months to resolve these issues.

Our near term plans for Dimsdale include drilling the two locations where we have fewer stakeholder concerns. We plan to drill a Halfway test in the first quarter of 2007 and a Dunvegan test in the second quarter of 2007.

Gold Creek

We have been assembling land and seismic data for approximately nine months at Gold Creek. We have three winter access locations in this area, two prospective for the Halfway and one for the Dunvegan formation.

Our near term plans for Gold Creek are to drill two Halfway tests in the first quarter of 2007.

Reine

Reine produces 110 boe per day which represents 8% of our current production. A recently acquired 2,560 acre proprietary 3D seismic program over a portion of the Company's 100% land, together with our geological mapping, has defined three to four Montney locations.

Our near term plans for Reine include the drilling of one Montney well in late November. Our objective is to replicate our existing well that had initially produced at a rate of 200 boe per day. These wells can be placed on stream within weeks of drilling, using the additional capacity in the pipeline we constructed in 2005. If successful, this well has the potential to further increase our exit production rate to 1,800 boe per day.

Sheldon

As previously announced, this area has approximately 150 boe per day of productive capacity behind pipe. The area requires a significant capital commitment for additional wells, a six mile pipeline and a plant facility before production can commence. Given our success in other areas, we have decided to focus our capital elsewhere at this time. We will return to this area at such time as gas prices and other factors improve the economics.

West Pembina Core Area

Majeau

In October, we completed the construction of a two mile pipeline and well site facilities at Majeau. Production commenced on November 3, 2006 at a rate of 150 boe per day.

Current plans for the area are to conduct further testing on a second location before proceeding with an additional one mile tie-in of this well. Our expectation is that the second well will maintain Majeau production at the current level for an extended period of time. We also plan to expand our seismic and land base in this area.

Other Projects

The Company will be proceeding late in the fourth quarter of 2006 or early 2007 with the winter drilling of two exciting exploration tests. The first test will be at Goose River and the second will be a Montney oil target.

Based on the successes we have had with the Dunvegan, Halfway and Montney formations, we are continuing to expand our opportunity base within the SEPRA targeting these formations.

OUTLOOK

Defiant Resources Corporation is well positioned to take advantage of new opportunities that may arise from adverse market forces such as short term depression of natural gas prices and the recent federal government announcement on taxation of income trusts. We can also benefit from reduced industry activity levels which will result in lower operating and capital costs.

We are committed to growing our Company and increasing shareholder value. Our business plans for the winter of 2006-07 include:

- We expect fourth quarter production to average 1,200 boe per day as a result of production curtailment due to third party pipeline repairs.

- Focus on exploration and development drilling at Grande Prairie and Reine which will increase our production to between 1,600 and 1,800 boe per day by year end;

- Maintain our diligence in controlling operating and capital costs;

- Drill our three highest impact exploration prospects and

- Manage our debt level in the context of current commodity prices and expected 2006 exit production rates to one year's forward annualized cash flow.

Respectfully submitted on behalf of the Board,

Rick J. Ironside, President and Chief Executive Officer

November 8, 2006

MANAGEMENT'S DISCUSSION and ANALYSIS of RESULTS of OPERATIONS and FINANCIAL CONDITION



Selected Quarterly Information

---------------------------------------------------------------------------
2006 2005
(unaudited) Unit Q3 Q2 Q1 Q4 Q3 Q2 Q1
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Financial

Petroleum and
natural gas
sales $m 5,102 3,226 3,377 3,443 2,237 1,247 582

Funds from
operations $m 2,415 1,492 1,565 2,058 1,302 682 97

Per share
- basic $ 0.12 0.08 0.09 0.12 0.09 0.05 0.01

Per share
- diluted $ 0.11 0.08 0.08 0.11 0.08 0.04 0.01

Net earnings
(loss) $m (522) (88) (79) 599 340 193 (78)

Per share
- basic $ (0.04) - - 0.03 0.02 0.01 (0.01)

Per share
- diluted $ (0.04) - - 0.03 0.02 0.01 (0.01)

Capital
expenditures $m 5,757 7,543 7,248 13,308 10,394 5,089 4,544

Bank debt and
working
capital
deficiency
(surplus) $m 10,967 7,592 11,335 5,667 8,719 (471) (4,804)

Operations

Production

Natural gas mcf/d 5,464 3,018 3,109 2,093 1,407 630 39

Light oil bbls/d 249 185 183 161 141 130 99

Natural gas
liquids bbls/d 35 20 18 8 10 10 4

Total sales boe/d 1,195 708 719 518 386 244 109

Average price

Natural gas $/mcf 6.07 6.52 7.81 12.18 9.25 7.54 7.65

Light oil $/bbl 80.58 78.41 67.10 70.97 75.55 65.68 60.86

Natural gas
liquids $/bbl 62.01 64.66 53.20 59.43 60.02 45.04 37.82

Boe $/boe 46.41 50.10 52.19 72.25 62.95 56.11 59.22

Field Netback $/boe 25.59 30.79 30.20 44.30 42.98 39.91 37.38

Weighted
average
shares
outstanding

Basic m 20,515 18,032 17,986 17,514 14,772 14,772 12,740

Diluted m 22,145 19,711 19,813 19,462 16,224 16,274 14,181


ADVISORIES

The following discussion and analysis as provided by the management of Defiant Resources Corporation ("Defiant" or the "Company") should be read in conjunction with the unaudited interim financial statements for the nine months ended September 30, 2006 and the audited financial statements for the year ended December 31, 2005. The accompanying management discussion and analysis ("MD&A") and unaudited interim financial statements have been prepared by management and were approved by the Company's Board of Directors on November 8, 2006.

Basis of Presentation - The financial data presented has been prepared in accordance with Canadian generally accepted accounting principles ("GAAP"). The reporting and measurement currency in the financial statements and in this discussion and analysis is the Canadian dollar, unless otherwise stated.

Non-GAAP Measures - Defiant evaluates performance based on net income and funds from operations. Funds from operations and funds from operations per share are not measurements defined by GAAP, but are financial terms commonly used in the oil and gas industry. The Company's funds from operations are detailed on the Statement of Cash Flow and may not be comparable to other companies. Defiant calculates funds from operations (as cash flow prior to changes in non-cash working capital) per share using the same method and shares outstanding which are used in the determination of net earnings per share. The Company considers it a key measure as it demonstrates the ability of the Company to generate the funds necessary to finance future capital investments.

Field Netbacks - Defiant also uses field netbacks as a key performance indicator. Field netbacks do not have a standardized meaning prescribed by Canadian GAAP and therefore may not be comparable with the calculation of similar measures by other companies. Field netbacks are determined by deducting royalties and operating expenses from petroleum and natural gas sales revenue.

Funds from operations and field netbacks are not intended to represent operating profits, nor should they be viewed as an alternative to other measures of financial performance calculated in accordance with GAAP.

Boe Conversion - Certain natural gas volumes have been converted to barrels of oil equivalent ("boe"), whereby one thousand cubic feet of natural gas (mcf) multiplied by six is equal to one barrel of oil (bbl), unless otherwise stated. This conversion ratio is based on an energy equivalent conversion applicable at the burner tip and does not represent a value equivalency at the wellhead.

Forward-Looking Information - Certain information regarding Defiant set forth in this document, including management's assessment of the Company's future plans and operations, contains forward-looking statements that involve substantial known and unknown risks and uncertainties. These forward-looking statements are subject to numerous risks and uncertainties, certain of which are beyond Defiant's control, including the impact of general economic conditions, industry conditions, volatility of commodity prices, currency fluctuations, imprecision of reserve estimates, environmental risks, competition from other producers, the lack of, or availability of qualified technical personnel or management, stock market volatility and ability to access capital from internal and external sources. Defiant's actual results, performance or achievement could differ materially from those expressed in, or implied by, these forward-looking statements and, accordingly, no assurance can be given that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do so, what benefits from which Defiant will derive.

Disclosure Controls and Procedures

Disclosure controls and procedures have been designed to provide reasonable assurance that information required to be disclosed by the Company is properly recorded, processed, summarized and reported within the time periods specified by securities regulations.

The Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company's disclosure controls and procedures as of September 30, 2006 and have concluded that they are adequate and effective to provide reasonable assurance that material information related to Defiant is made known to them by others within the Company.

Business Strategy

The business plan of the Company is to create profitable per share growth in the exploration for, and the development and production of, natural gas and crude oil in western Canada. Defiant pursues a growth strategy involving exploratory and development drilling augmented by strategic asset acquisitions on properties where exploitation, development and exploration opportunities exist. The Company directs approximately 10% of its capital budget to high impact exploration prospects, which have a higher degree of risk.

The Company's current areas of focus are in the West Central Alberta corridor trending from North West of Edmonton to the South Peace River Arch.

Defiant's strategy involves acquiring properties, consolidating ownership by buying additional interests in its properties and developing its properties through well and facility optimization. Our management and technical team have expertise and experience in our focus areas. We believe this creates a competitive advantage for the Company.



OPERATIONS

Sales Volumes

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Three months ended Nine months ended
September 30 September 30
2006 2005 Change 2006 2005 Change
---------------------------------------------------------------------------
Daily sales volumes
Natural gas mcf/d 5,464 1,407 288% 3,872 697 456%
Light oil bbls/d 249 141 77% 206 124 66%
Natural gas
liquids bbls/d 35 10 250% 24 8 200%
Total boe/d 1,195 386 210% 875 248 253%
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Sales volumes for the three months ended September 30, 2006 averaged 1,195 boe per day, an increase of 210% from the 386 boe per day during the comparative quarter in fiscal 2005. Natural gas volumes increased to 5,464 mcf per day, a 288% increase over the third quarter of 2005 volume of 1,407 mcf per day. This increase in gas production is the result of gas wells in Grande Prairie, Reine and Atim being placed on production during the latter half of 2005 and the first half of 2006. Defiant completed construction of its Grande Prairie sales line in late June 2006 and, as a result, third quarter gas production benefited from three new gas wells being placed on production. Offsetting this increase were decreases in gas production throughout 2006 due to plant turnarounds and pipeline repairs in Reine and Grande Prairie. During the three months ended September 30, 2006, 100 boe per day were shut in for five weeks. Light oil production increased 77% to 249 bbls per day in the third quarter compared to 141 bbls per day in the third quarter of 2005. This increase in oil production came from the new gas wells at Grande Prairie which also produce significant amounts of oil, as well as increased production at the Pembina unit due to the successful water-flood program. Natural gas liquid volumes increased to 35 bbls per day in the third quarter compared to the comparable period in 2005 in association with the increase in gas production.



Prices and Revenue

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Three months ended Nine months ended
September 30 September 30
2006 2005 Change 2006 2005 Change
---------------------------------------------------------------------------
Commodity pricing
Benchmark
Alberta Spot $/mcf 5.65 9.35 (40)% 6.39 7.88 (19)%
West Texas
Intermediate US$/bbl 70.15 63.16 11% 68.03 55.45 23%
Exchange rate US$ 0.89 0.83 7% 0.88 0.82 7%
Edmonton Par $/bbl 79.07 76.48 3% 75.53 67.95 11%
Company Prices
Natural gas price $/mcf 6.07 9.25 (34)% 6.65 8.71 (24)%
Oil price $/bbl 80.58 75.55 7% 75.98 68.21 11%
Liquids price $/bbl 62.01 60.02 3% 60.64 50.68 20%
Revenue
Natural gas sales $m 3,054 1,197 155% 7,031 1,656 325%
Oil sales $m 1,849 982 88% 4,273 2,301 86%
Liquids sales $m 199 58 243% 400 109 267%
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Total $m 5,102 2,237 128% 11,704 4,066 188%
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Canadian gas prices are referenced at Nova Inventory Transfer ("NIT") or the AECO Hub. All of Defiant's natural gas is sold on the spot market according to the AECO reference price. Natural gas pricing tends to be volatile and is affected by supply and demand, inventory levels, weather conditions and fuel switching to less expensive sources of energy. Alberta spot natural gas prices decreased 40% in the third quarter of 2006 compared to the third quarter of 2005. Natural gas prices have trended down for most of this year as storage levels continue to increase as compared to historic storage levels due to a warmer than normal winter in 2005/06 and relatively few supply disruptions since this past summer. The Company's natural gas receives a premium over the average AECO spot price because of favourable heat content adjustment.

West Texas Intermediate ("WTI") is the benchmark for North American oil prices and is the crude type against which the NYMEX futures contracts are priced. Canadian crude oil prices are based on refiners' postings at hubs such as Edmonton and Hardisty, Alberta. The Canadian postings are based on the WTI price at Cushing, Oklahoma less a transportation differential, adjusted for the US/Canadian currency exchange rate, and for relative quality and regional market conditions.

During the third quarter of 2006, North America continued to see historically high prices for WTI crude oil primarily due to concerns over supply. As a result, the average price for a barrel of WTI crude during the third quarter increased 11% to $70.15 (US) in 2006 from $63.16 (US) in 2005. Our oil is light oil which receives pricing close to the Edmonton Par benchmark price.

The Company has no hedging contracts in place and markets its crude oil and natural gas into spot markets. The Company may hedge in the future if the Board of Directors considers it appropriate.

The Canadian dollar continued to remain strong throughout the third quarter of 2006. The appreciation in the Canadian dollar eroded some of the benefits of strong commodity prices.

Sales revenues for the third quarter of 2006 increased 128% to $5.1 million from $2.2 million for the same period in 2005 as oil prices remained strong and production volumes continued to increase. The oil and natural gas revenue for the nine months ended September 30, 2006 was $11.7 million, an increase of 188% over the same period of 2005.



Royalties

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Three months ended Nine months ended
September 30 September 30
2006 2005 Change 2006 2005 Change
---------------------------------------------------------------------------
Royalties, net of
ARTC $m 986 291 239% 2,186 497 340%
Royalties per boe $ 8.97 8.19 10% 9.15 7.36 24%
Royalty rate 19% 13% 19% 12%
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Defiant's producing wells are subject to Crown, freehold and gross overriding royalties which are payable to the owners of the mineral rights. Royalty rates can vary based on a number of factors including reference pricing, royalty holidays and production rates. Crown royalty holidays are generally available to certain oil and gas production from new pool discoveries.

Total royalties for the third quarter of 2006 were $1.0 million ($8.97 per boe) compared to $0.3 million ($8.18 per boe) for the third quarter of 2005. Royalties for the nine months ended September 30, 2006 totalled $2.2 million ($9.15 per boe) compared to $0.5 million ($7.36 per boe) over the same period of 2005. The increase in royalties was due to increased gas production, offset by lower gas prices, gas cost allowance, expiry of certain royalty holidays and other adjustments.

Forecasted royalty rates for the balance of 2006, net of Alberta royalty tax credit ("ARTC"), are anticipated to average approximately 20% due to increasing gas production and rising gas prices. The Company anticipates receiving the maximum ARTC on Crown royalties during 2006. During the third quarter of 2006, the Alberta government announced that effective January 1, 2007 it will end the ARTC program, which will cause royalty rates to increase to 22-25% next year.



Operating expenses

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Three months ended Nine months ended
September 30 September 30
2006 2005 Change 2006 2005 Change
---------------------------------------------------------------------------
Operating expenses $m 1,303 419 211% 2,770 787 252%
Operating expenses per
boe $ 11.84 11.80 - 11.58 11.64 (1)%
---------------------------------------------------------------------------


Operating expenses for the three months ended September 30, 2006 were $11.84 per boe which is comparable to the same period for 2005. Operating expenses were $2.8 million or $11.58 per boe for the first nine months of 2006 compared to $0.8 million or $11.64 per boe during the comparable period of 2005. Included in operating expenses are transportation costs of $204,280 and $27,203 for the nine months ended September 30, 2006 and 2005 respectively. For the three months ended September 30, 2006 and 2005 respectively, transportation costs were $102,595 and $18,272.

The Company is successful in controlling expenses despite the prevailing inflationary environment in the oil and gas industry. The Company expects operating costs to trend downward in the future periods and average $9.50 to $10.50 per boe due to further increases in production volumes and increased competition in the service sector.



General and Administrative ("G&A") Expense and Stock Based Compensation
("SBC")

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Three months ended Nine months ended
September 30 September 30
2006 2005 Change 2006 2005 Change
---------------------------------------------------------------------------
Gross G&A $m 978 532 84% 2,409 1,668 44%
Capitalization & $m
recoveries (547) (290) 89% (1,352) (900) 50%
---------------------------------------------------------------------------
Net G&A expense $m 431 242 78% 1,057 768 38%
---------------------------------------------------------------------------
Gross SBC $m 278 36 672% 654 68 862%
Capitalization $m (125) - - (125) - -
---------------------------------------------------------------------------
Net SBC expense $m 153 36 325% 529 68 678%
---------------------------------------------------------------------------
Per boe:
Gross G&A $ 8.90 14.98 (41)% 10.08 24.70 (59)%
Capitalization &
recoveries $ (4.98) (8.16) (39)% (5.66) (13.32) (58)%
---------------------------------------------------------------------------
Net G&A expense $ 3.92 6.82 (42)% 4.42 11.36 (61)%
---------------------------------------------------------------------------
Gross SBC $ 2.53 1.01 150% 2.73 1.01 170%
Capitalization $ (1.14) - - (0.52) - -
---------------------------------------------------------------------------
Net SBC expense $ 1.39 1.01 38% 2.21 1.01 119%
---------------------------------------------------------------------------


For the nine months ended September 30, 2006 G&A expenses per boe decreased 61% to $4.42 per boe as a result of increases in production. The increase in gross expenses to $2.4 million, from $1.7 million, is payroll-related, reflecting additional senior personnel and increased compensation levels required in a highly competitive labour market.

The $0.6 million increase in stock based compensation for the nine months ended September 30, 2006 reflects the issuance of 1,139,500 stock options to employees, management and directors in 2006.

Interest

Interest expense for the three months ended September 30, 2006 was $70,719 compared to $5,453 for the three months ended September 30, 2005. For the nine months ended September 30, 2006, interest expense was $223,723, an increase from $218,270 for the corresponding period of fiscal 2005. The increase in interest expense is due to increases in bank debt during 2006 as compared to the cash position the Company had early in 2005.



Depletion, Depreciation and Accretion

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Three months ended Nine months ended
September 30 September 30
2006 2005 Change 2006 2005 Change
---------------------------------------------------------------------------
Depletion,
depreciation and
accretion $m 2,766 629 340% 5,721 1,188 382%
Depletion,
depreciation and
accretion per boe $ 25.16 17.71 42% 23.93 17.59 36%
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For the nine months ended September 30, 2006, depletion, depreciation and accretion increased 382% to $5.7 million ($23.93 per boe) from $1.2 million ($17.59 per boe) for the same period in 2005. The increase in the provision is the result of increased sales volumes and significant expenditures in land, seismic and production infrastructure, which had no direct impact on reserves additions.

The petroleum and natural gas properties were subject to a ceiling test at September 30, 2006. No write-down was required under this calculation.

Income Taxes

The provision for future income taxes for the nine months ended September 30, 2006 was a reduction of $0.1 million versus an expense of $0.4 million for the comparable period in 2005. The change in the tax provision in 2006 reflects a loss for the period and non-deductible payments for tax purposes.

At September 30, 2006, the Company had tax pools of $51 million.



Field Netback

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Three months ended Nine months ended
September 30 September 30
$ per boe 2006 2005 Change 2006 2005 Change
---------------------------------------------------------------------------
Sales price 46.41 62.95 (26)% 48.97 60.16 (19)%
Less: Royalties, net of
ARTC 8.97 8.18 10% 9.15 7.36 24%
Operating expenses 11.84 11.80 -% 11.58 11.64 (1)%
---------------------------------------------------------------------------
Field netback 25.60 42.97 (40)% 28.24 41.16 (31)%
---------------------------------------------------------------------------


Defiant's field netbacks per boe for the nine months ended September 30, 2006 decreased 31% to $28.24 from $41.16 per boe for the same period 2005. The decrease is mainly due to a higher proportion of production being gas which received a lower price in the current period than oil.



Funds from Operations and Earnings (Loss)

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Three months ended Nine months ended
September 30 September 30
2006 2005 Change 2006 2005 Change
---------------------------------------------------------------------------
Funds from operations $m 2,310 1,302 80% 5,472 2,081 159%
Basic per share $ 0.11 0.09 22% .29 0.15 93%
Diluted per share $ 0.10 0.08 25% .27 0.13 108%
Earnings (loss) $m (522) 340 (254)% (689) 455 (251)%
Basic per share $ (0.03) 0.02 (250)% (0.04) 0.03 (233)%
Diluted per share $ (0.03) 0.02 (250)% (0.04) 0.03 (233)%
Weighted average
shares outstanding
Basic m 20,515 14,772 39% 18,854 14,102 34%
Diluted m 22,145 16,624 33% 20,482 15,954 28%
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For the nine months ended September 30, 2006, funds from operations increased 159% to $5.5 million from $2.1 million in the comparable period of 2005. The increase in funds from operations for the quarter was due to the significant increase in production offset by declining gas prices. The loss for the three and nine months ended September 30, 2006 is attributable to higher depletion, depreciation and accretion rate and lower gas prices.



CAPITAL EXPENDITURES

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Three months ended Nine months ended
September 30 September 30
$m 2006 2005 Change 2006 2005 Change
---------------------------------------------------------------------------
Land and lease retentions 1,057 1,763 (40)% 3,668 1,911 92%
Seismic 234 1,256 (81)% 2,047 2,269 (98)%
Drilling and completions 3,267 5,961 (43)% 8,660 11,957 (28)%
Production facilities,
pipeline, plant
and equipment 739 1,126 (34)% 4,752 3,042 56%
Acquisitions - - - 425 - -
Dispositions - - - (50) (51) (2)%
Capitalized G&A expenses 355 290 66% 1,045 900 30%
---------------------------------------------------------------------------
5,652 10,394 (43)% 20,547 20,027 3%
---------------------------------------------------------------------------


Capital expenditures, net of dispositions, were $20.7 million compared to $20.0 million in the first nine months of last year. During the first nine months of this year, Defiant added over 21,000 net acres to its undeveloped land position, drilled 9.5 net wells, undertook several proprietary 3-D seismic programs, and incurred costs to tie in gas wells in Grande Prairie, Tangent and Majeau.

Drilling Activity

For the nine months ended September 30, 2006, Defiant drilled 11 (9.5 net) wells for a net success rate of 63%. During the third quarter, Defiant drilled 5 (3.5 net) wells and cased 4 (3.0 net) wells, for a net success rate of 86%.



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Gross Wells Net Wells

Gas D&A Total Gas D&A Total
---------------------------------------------------------------------------

Peace River Arch 4.0 3.0 7.0 3.6 3.0 6.6

West Pembina 3.0 1.0 4.0 2.4 0.5 2.9
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Total 7.0 4.0 11.0 6.0 3.5 9.5
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Exploratory wells 5.0 3.0 8.0 4.0 2.5 6.5

Development wells 2.0 1.0 3.0 2.0 1.0 3.0
---------------------------------------------------------------------------

Total 7.0 4.0 11.0 6.0 3.5 9.5
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To-date in the fourth quarter, Defiant has drilled and cased one, 100% working interest, oil well in the Peace River Arch area. The Company plans to drill up to six additional wells, 5.7 net wells, before the end of the year.

LIQUIDITY AND CAPITAL RESOURCES

The Company had drawn $7.5 million against its credit facility at September 30, 2006 (2005 - $3.1 million). The Company's credit facility, renewable annually, is with a Canadian chartered bank in the form of an $18 million revolving loan and bears interest at the bank's prime lending rate. The loan is secured by all of the Company's assets with a general security agreement. Principal repayments are required only if the borrowing base is exceeded. The Company also had a working capital deficiency of $3.5 million as at September 30, 2006. Defiant plans to fund its ongoing capital program from cash flow and its available credit facility.

As at November 8, 2006, there were 20,519,695 common shares, 2,691,021 common share purchase warrants and 1,739,500 stock options outstanding.

Related Party Transactions

The Company utilises the services of a law firm in which one of its Directors is a partner. During the nine months ended September 30, 2006 the Company expended $55,745 on legal services provided by this firm. These services related to a common share private placement and normal business operations.

Contractual Obligations and Off Balance Sheet Arrangements

Defiant has various contractual obligations and commitments arising in the normal course of operations and financing activities. These obligations and commitments have been considered when assessing the cash requirements in the above discussion of future liquidity.

On June 29, 2006 the Company issued 2,500,000 flow through common shares for gross proceeds of $10.4 million. Pursuant to the terms of the financing, the Company is obligated to spend the gross proceeds on qualifying Canadian exploration expenditures prior to December 31, 2007. As at September 30, 2006, Defiant had $7 million of such qualifying expenditures remaining to be spent.

The Company does not have any off balance sheet financial arrangements.

OUTLOOK

Activities to-date in the fourth quarter include the following:

1. Completed and tied in a Majeau gas well, placed on production November 3, 2006 adding 150 boe per day.

2. Drilled and cased one oil well in the Grande Prairie area bringing net behind-pipe production in Grande Prairie to 150 boe per day.

3. Completed and stimulated the Dunvegan oil zone at Grande Prairie East, currently testing in excess of 250 boe per day.

4. Shot and interpreted 3D seismic at Reine.

During the balance of the fourth quarter we expect to drill up to six additional wells, including wells at Grande Prairie and Reine. The Company expects to drill another four to six wells in the first quarter of 2007.

Defiant is currently producing 1,350 boe per day with an approximate 70/30 split between gas and oil and natural gas liquids. Production increased during the fourth quarter when the Majeau gas well was tied in which added approximately 150 boe per day. During the month of October approximately 800 boe per day in the Grande Prairie area were shut in for two weeks when pipeline repairs were done at third party processing facilities. We expect our GP East production will be shut in again in late November for a week while further repairs are undertaken. Grande Prairie production is temporarily constrained by 75 to 100 boe per day due to gas plant capacity limitations. The Company expects to achieve an exit rate of 1,600 boe per day when gas behind pipe, together with development drilling in Grande Prairie, is tied in during the fourth quarter. Drilling success at Reine could further increase the exit rate to 1,800 boe per day.

Natural gas prices have strengthened in the fourth quarter of 2006 reflecting increased seasonal demand. The Company expects gas prices to remain volatile in future quarters as factors such as, but not limited to, storage levels, weather, industrial consumption and lower levels of activity in the oil and gas industry will all have an impact on the supply and demand for natural gas.

Oil prices have weakened during the past several months as concerns about oil supply have dissipated while inventory levels have increased. We expect oil prices will remain volatile as geo-political and economic factors will continue to impact supply and demand for oil.

Additional Information

Additional information regarding Defiant Resources Corporation, including the Company's Annual Information Form, is available on SEDAR at www.sedar.com or on the Company's website at www.defiantresources.com.



Interim Balance Sheets
(unaudited)

---------------------------------------------------------------------------
---------------------------------------------------------------------------
September 30 December 31
2006 2005
---------------------------------------------------------------------------

Assets

Current assets
Cash $ - $ 3,777,865
Accounts receivable 2,929,674 3,555,542
Prepaid expenses and deposits 91,249 162,430
---------------------------------------------------------------------------
3,020,923 7,495,837
Petroleum and natural gas
properties (note 2) 60,468,721 45,220,769
---------------------------------------------------------------------------
$ 63,489,644 $ 52,716,606
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Liabilities
Current liabilities
Accounts payable and accrued liabilities $ 6,498,270 $ 13,172,596
Bank debt (note 3) 7,489,256 -
---------------------------------------------------------------------------
13,987,526 13,172,596

Asset retirement obligations (note 4) 1,116,584 895,055

Future income taxes (note 5) 1,718,286 240,790

Shareholders' equity
Share capital (note 6b) 44,242,965 35,926,131
Warrants (note 6c) 1,291,690 1,314,767
Contributed surplus (note 7) 765,000 111,000
Retained earnings 367,593 1,056,267
---------------------------------------------------------------------------
46,667,248 38,408,165
Commitment (note 6b)
---------------------------------------------------------------------------
$ 63,489,644 $ 52,716,606
---------------------------------------------------------------------------
---------------------------------------------------------------------------

See accompanying notes to interim financial statements.


Interim Statements of Operations and Retained Earnings
(unaudited)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Three months ended Nine months ended
September 30 September 30
2006 2005 2006 2005
---------------------------------------------------------------------------
Revenue
Petroleum and natural
gas sales $ 5,101,803 $ 2,236,723 $ 11,704,510 $ 4,065,952
Royalties, net
of ARTC (986,479) (290,694) (2,185,804) (497,340)
Interest income - 22,518 27,318 74,447
---------------------------------------------------------------------------
4,115,324 1,968,547 9,546,024 3,643,059

Expenses
Operating 1,302,452 418,967 2,769,818 786,984
General and
administrative 430,931 241,978 1,056,695 767,845
Stock based compensation 153,000 36,000 529,000 68,000
Interest 70,719 5,453 223,723 5,453
Depletion, depreciation
and accretion 2,766,280 628,870 5,720,961 1,188,489
---------------------------------------------------------------------------
4,723,382 1,331,268 10,300,197 2,816,771

Earnings (loss) before
taxes (608,058) 637,279 (754,173) 826,288

Future income taxes
(reduction) (note 5) (86,329) 297,000 (65,499) 371,000
---------------------------------------------------------------------------

Net earnings(loss) for the
period (521,729) 340,279 (688,674) 455,288
Retained earnings,beginning
of period 889,322 117,204 1,056,267 2,195
---------------------------------------------------------------------------
Retained earnings, end
of period $ 367,593 $ 457,483 $ 367,593 $ 457,483
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Earnings (loss)
per share (note 6)
Basic and diluted $ (0.03)$ 0.02 $ (0.04)$ 0.03
---------------------------------------------------------------------------

See accompanying notes to interim financial statements.


Interim Statements of Cash Flows
(unaudited)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Three months ended Nine months ended
September 30 September 30
2006 2005 2006 2005
---------------------------------------------------------------------------
Cash provided by (used in)

Operating activities
Net earnings (loss) for
the period $ (521,729)$ 340,279 $ (688,674) $ 455,288
Items not affecting cash
Depletion, depreciation
and accretion 2,766,280 628,870 5,720,961 1,188,489
Stock-based compensation 153,000 36,000 529,000 68,000
Future income taxes
(reduction) (86,329) 297,000 (65,499) 371,000
Asset retirement
obligations paid (1,078) - (24,015) (1,412)
---------------------------------------------------------------------------
Funds from operations 2,310,144 1,302,149 5,471,773 2,081,365
Changes in non-cash
working capital (note 8) 190,091 538,894 (840,407) 23,873
---------------------------------------------------------------------------
2,500,235 1,841,043 4,631,366 2,105,238
---------------------------------------------------------------------------

Financing activities
Issuance of common shares 8,333 - 10,437,502 7,522,500
Share issue costs (41,403) - (651,750) (442,240)
Increase in bank debt 4,929,577 3,127,659 7,489,256 3,127,659
---------------------------------------------------------------------------
4,896,507 3,127,659 17,275,008 10,207,919
---------------------------------------------------------------------------

Investing activities
Additions to petroleum
and natural gas
properties (5,652,213)(10,394,039) (20,547,368) (20,026,793)
Changes in non-cash
working capital
(note 8) (1,744,529) 1,238,013 (5,136,871) 5,440,073
---------------------------------------------------------------------------
(7,396,742) (9,156,026) (25,684,239) (14,586,720)
---------------------------------------------------------------------------

Change in cash - (4,187,324) (3,777,865) (2,273,563)
Cash, beginning of period - 4,187,324 3,777,865 2,273,563
---------------------------------------------------------------------------
Cash, end of period $ - $ - $ - $ -
---------------------------------------------------------------------------

Supplemental Information
---------------------------------------------------------------------------
Cash interest paid $ 70,719 $ 5,453 $ 223,723 $ 5,453
---------------------------------------------------------------------------
---------------------------------------------------------------------------

See accompanying notes to interim financial statements.


Notes to Interim Financial Statements

For the three and nine months ended September 30, 2006 and 2005
(Unaudited)


1. Basis of Presentation and Organization

The interim unaudited financial statements of Defiant Resources Corporation ("Defiant" or the "Company") for the three months and nine months ended September 30, 2006 have been prepared in accordance with Canadian Generally Accepted Accounting Principals (GAAP) and follow the same accounting principals as the financial statements for the year ended December 31, 2005. These notes are incremental to, and should be read in conjunction with, the audited financial statements for the year ended December 31, 2005.



2. Petroleum and Natural Gas Properties

---------------------------------------------------------------------------
September 30 December 31
2006 2005
---------------------------------------------------------------------------
Petroleum and natural gas assets $ 68,406,558 $ 47,508,606
Accumulated depletion and depreciation (7,937,837) (2,287,837)
---------------------------------------------------------------------------
$ 60,468,721 $ 45,220,769
---------------------------------------------------------------------------
---------------------------------------------------------------------------


In calculating the depletion and depreciation provision for the nine months ended September 30, 2006, $17.0 Million (2005 - $8.0 million) of costs relating to the undeveloped land, seismic and other items were excluded from assets subject to depletion and depreciation. No future development costs (2005 - $1.7 million) were included in the calculation of depletion and depreciation for the nine months ended September 30, 2006. During the nine months ended September 30, 2006, the Company capitalized a total of $1,170,000 (2005 - $900,000)of corporate expenses including $125,000 (2005 - $nil) of stock based compensation relating to exploration and development activities.

3. Bank Debt

The Company has an $18 million revolving term credit facility with a Canadian chartered bank, of which $7.5 million was drawn as at September 30, 2006. The credit facility bears interest at the bank's prime rate. The credit facility is a revolving demand facility, and is subject to a review each year. Borrowings under the credit facility are limited to a borrowing base determined by the bank. Principal repayments are required only if the borrowing base is exceeded. The facilities are secured by a floating charge over all of the Company's assets.



4. Asset Retirement Obligations

---------------------------------------------------------------------------
Nine months ended Year ended
September 30 December 31
2006 2005
---------------------------------------------------------------------------
Balance, beginning of period $ 895,055 $ 369,675
Liabilities incurred in period 174,583 341,559
Revisions to cost estimates - 141,736
Liabilities settled in period (24,015) (8,162)
Accretion expense 70,961 50,247
---------------------------------------------------------------------------
Balance, end of period $ 1,116,584 $ 895,055
---------------------------------------------------------------------------


The Company's asset retirement obligations are based on the net ownership interests in wells and facilities. Management estimates the costs to abandon and reclaim the wells and facilities and the estimated time period during which these costs will be incurred in the future. These costs are expected to be incurred over the next 15 years with the majority of the costs being incurred between 2015 and 2025. The undiscounted amount of the estimated costs at September 30, 2006 is $2.6 million. The estimated costs have been discounted at a credit adjusted risk free rate of nine percent and an inflation rate of two percent.

5. Future Income Taxes

Future income tax expense differs from the amount that would be computed by applying the basic combined federal and provincial statutory income tax rate of 34.50% (2005 - 37.62%) to earnings (loss) before taxes. The reasons for the differences are as follows:



---------------------------------------------------------------------------
Three months ended Nine months ended
September 30 September 30
2006 2005 2006 2005
---------------------------------------------------------------------------
Expected income tax provision $ (194,696) $ 239,745 $ (245,106) $ 310,850

Add (deduct)

Non-deductible crown payments 85,000 65,571 180,000 103,000

Resource allowance (66,000) (3,544) (154,000) (63,000)
Non-deductible stock-based
compensation 82,830 13,544 212,550 25,582

Effect of change in tax rate 4,671 (5,432) (64,499) (5,432)

Other 1,866 (12,884) 5,556 -
---------------------------------------------------------------------------
Future income taxes
(reduction) $ (86,329) $ 297,000 $ (65,499) $ 371,000
---------------------------------------------------------------------------
---------------------------------------------------------------------------

The tax effects of temporary differences that give rise to the future
income tax liability are as follows:

---------------------------------------------------------------------------
September 30 September 30
2006 2005
---------------------------------------------------------------------------
Tax liabilities
Petroleum and natural gas properties $ (2,438,664) $ (878,988)
Tax assets
Share issue costs 396,568 336,609
Asset retirement obligations 323,810 301,589
---------------------------------------------------------------------------
Net future income tax liability $ (1,718,286) $ (240,790)
---------------------------------------------------------------------------
---------------------------------------------------------------------------


6. Share Capital

a) Authorized

Unlimited number of common shares; issuable in series

Issued

b) Common shares



---------------------------------------------------------------------------
Number of
Shares Amount
---------------------------------------------------------------------------
Balance, December 31, 2004 11,822,408 $ 14,221,034
Issued for cash 5,248,851 17,522,502
Issued on exercise of warrants 7,500 9,750
Value of warrants exercised - 3,600
Issue of flow-through shares for cash 892,858 5,000,005
Share issue costs, net of future income taxes
of $420,762 - (830,760)
---------------------------------------------------------------------------
Balance, December 31, 2005 17,971,617 35,926,131
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Issued on exercise of warrants 48,078 62,501
Value of warrants exercised - 23,077
Tax effect of flow-through shares - (1,681,002)
Issue of flow-through shares for cash 2,500,000 10,375,000
Share issue costs, net of future income taxes
of $205,199 - (462,742)
---------------------------------------------------------------------------
Balance, September 30, 2006 20,519,695 $ 44,242,965
---------------------------------------------------------------------------
---------------------------------------------------------------------------


On October 13, 2005, the Company completed a private placement issue of 892,858 flow-through shares at a price of $5.60 per share for gross proceeds of $5.0 million. Pursuant to the terms of the flow-through arrangement, the Company renounced $5.0 million of Canadian exploration tax deductions and recorded the future tax adjustment associated with this renouncement in the first quarter of 2006.

On June 29, 2006, the Company completed a private placement issue of 2,500,000 flow-through shares at a price of $4.15 per share for gross proceeds of $10.4 million. Pursuant to the terms of the flow-through arrangement, the Company is committed to incur eligible Canadian exploration expenditures equal to the gross proceeds prior to December 31, 2007 and renounce the exploration expenditures to the subscribers as of December 31, 2006.

c) Common share purchase warrants

Each common share purchase warrant entitles the holder to acquire one common share of the Company for $1.30 per share.



---------------------------------------------------------------------------
Number of
Warrants Amount
---------------------------------------------------------------------------
Balance, December 31, 2004 2,746,599 $ 1,318,367
Exercise of warrants (7,500) (3,600)
---------------------------------------------------------------------------
Balance, December 31, 2005 2,739,099 1,314,767
Exercise of warrants (48,078) (23,077)
---------------------------------------------------------------------------
Balance, September 30, 2006 2,691,021 $ 1,291,690
---------------------------------------------------------------------------
---------------------------------------------------------------------------


d) Options

The Company has a stock option plan under terms of which it will grant options to acquire common shares to certain officers, directors, employees and consultants. Under terms of the plan, up to 10% of the common shares outstanding from time to time are issuable, and no more than 5% of the outstanding shares may be issued to any one person as defined by the plan.



Weighted Weighted average
Number of average exercise remaining
options price term (years)
---------------------------------------------------------------------------
Balance, December 31, 2004 $ - -
Granted 620,000 3.15 3.00
Cancelled (70,000) 3.00 3.00
---------------------------------------------------------------------------
Balance, December 31, 2005 550,000 3.17 2.27
Granted 1,139,500 3.48 3.00
---------------------------------------------------------------------------
Balance, September 30,
2006 1,689,500 $ 3.37 1.74
---------------------------------------------------------------------------


Options have a term of three years and vest over a 34 month period starting on the first anniversary date of the grant. Options granted to non-management Directors have a term of three years and vest quarterly over a one year period from the date of the grant. The options granted have exercise prices ranging from $2.75 to $3.71 per share. At September 30, 2006, 128,330 options were exercisable, with exercise prices ranging from $2.75 to $3.00.

e) Stock-based Compensation

The compensation expense is calculated based on the fair value of the stock options and warrants on the date of grant using the Black-Scholes option pricing model. The following assumptions were applied by the Company in this calculation.



Nine months ended September 30
2006 2005
---------------------------------------------------------------------------
Weighted average fair value per option $ 1.37 $ 1.06
Dividend yield nil nil
Volatility 49% 50%
Risk-free rates 3.5% 3.5%
Expected life(years) 3 3
---------------------------------------------------------------------------

f) Per share amounts

The weighted average number of shares outstanding for the determination
of basic and diluted per share amounts are as follows:

Three months ended Nine months ended
September 30 September 30
2006 2005 2006 2005
---------------------------------------------------------------------------
Basic 20,514,888 14,772,408 18,853,686 14,102,445
Diluted 22,144,556 16,624,005 20,481,578 15,954,042
---------------------------------------------------------------------------


As at September 30, 2006, 1,304,500 options were excluded from the dilution calculation as they were anti-dilutive.



7. Contributed Surplus

---------------------------------------------------------------------------
Balance, December 31, 2004 $ -
Stock based compensation expense 121,000
Cancellation of options (10,000)
---------------------------------------------------------------------------
Balance, December 31, 2005 111,000
Stock based compensation expense 654,000
---------------------------------------------------------------------------
Balance, September 30, 2006 $ 765,000
---------------------------------------------------------------------------
---------------------------------------------------------------------------


8. Other Disclosures

Changes in non-cash working capital

Three months ended Nine months ended
September 30 September 30
2006 2005 2006 2005
---------------------------------------------------------------------------
Accounts receivable $ 80,295 $(1,118,103) $ 625,868 $(2,560,690)
Prepaid expenses and
deposits 29,183 51,236 71,181 76,153
Accounts payable and
accrued liabilities (1,663,916) 2,843,774 (6,674,327) 7,948,463
---------------------------------------------------------------------------
Changes in working
capital (1,544,438) 1,776,907 (5,977,278) 5,463,946
Investing activities (1,744,529) 1,238,013 (5,136,871) 5,440,073
---------------------------------------------------------------------------
Working capital related
to operating activities $ 190,091 $ 538,894 $ (840,407) $ 23,873
---------------------------------------------------------------------------



Contact Information