Destiny Resource Services Corp.
TSX : DSC

Destiny Resource Services Corp.

August 11, 2008 09:15 ET

Destiny Resource Services Corp. Announces Q2'08 Results

CALGARY, ALBERTA--(Marketwire - Aug. 11, 2008) - Destiny Resource Services Corp. (TSX:DSC) announced today its 2008 Second Quarter results.



FINANCIAL HIGHLIGHTS

Three Months Ended Six Months Ended

June 30, June 30,

2008 2007 Change 2008 2007 Change
($000s, except
per share amounts) $ $ % $ $ %
----------------------------------------------------------------------------

Revenue 12,459 11,633 7 32,734 28,830 13
EBITDA (1) 436 831 (48) 4,026 2,548 58
Per share -
basic and diluted 0.08 0.15 (48) 0.72 0.46 58
Net income for the period 83 177 (53) 2,013 1,834 10
Per share -
basic and diluted 0.01 0.03 (53) 0.36 0.33 10
Weighted average shares
outstanding for the
period(000s)
Basic (2) 5,582 5,577 0 5,579 5,577 0
Diluted (2) 5,582 5,594 (0) 5,579 5,594 (0)


June Dec.
30, 31,
2008 2007 Change

As at $ $ %
----------------------------
Total assets 30,395 29,958 1
Working capital 5,701 5,239 9
Shareholders' equity 13,746 11,711 17
Book value per share outstanding 2.46 2.10 17
----------------------------

(1) "EBITDA" is provided to assist investors in determining the ability of
the Company to generate cash from operations. EBITDA is calculated from
the consolidated statements of operations and retained earnings as
gross margin less general and administrative expenses (not including
gain on disposal of property and equipment). This measure does not have
any standardized meaning prescribed by GAAP and may not be comparable
to similar measures presented by other companies; however, the Company
is consistent in its calculation of EBITDA for each reporting period
and is presented in the MD&A.

(2) There are 5,582,581 shares and 24,500 options outstanding as at August
8, 2008.


LETTER TO SHAREHOLDERS

Fellow Shareholders,

Our results for Q2'08 are okay: importantly they are entirely in line with our expectations and consistent with our outlook for a good year overall. Q2'08 should be viewed in the context of the seasonal nature of our business (a subject of much discussion in our reporting to shareholders) and with recognition that the 2008 exploration budgets of our clients were struck in the fall of 2007, prior to the run-up in commodity prices. Budgets are not adjusted rapidly for many clients. While we are never pleased with results that are only breakeven, even for our quietest quarter, we are quite comfortable with the prospects for our year as a whole and quite optimistic with our outlook for the up-coming year.

Effective August 15, 2008 Destiny will move from the heritage names of our divisions to specialized service names under the Destiny banner. This will coincide with the launch of the new Destiny website: www.destiny-resources.com



In Canada, our division names will become:

- Destiny Drilling (formerly Double R Drilling)
- Destiny Survey & Mapping (formerly Wolf Survey & Mapping)
- Destiny Line Clearing (formerly Destiny Resources)
- Destiny Navigation Technologies (formerly Kodiak Nav Technologies)


(You will note the absence of our locating services division from the list above. With the many customers and many master-service agreements it has in place, the transition for Advanced Locating will require more time and more preparation.)



In the United States, run from our Houston office, our division names will
be:

-Destiny Drilling USA (formerly Destiny Drilling Inc.)
-Destiny Survey & Mapping USA (formerly Wolf Survey & Mapping USA)


The details and analysis of our operations for the three and six months ended June 30, 2008 are contained in the Management's Discussion and Analysis section of this report, and shareholders are encouraged to review the disclosure there. Likewise, shareholders should turn to the Outlook section of this report for more colour on our optimism.

Prior to doing so however, please take this opportunity to reflect on the contribution of the men and women who work for Destiny Resource Services Corp. Our businesses are all about service. We earn money in the field, by the hour or day, by the metre drilled, kilometre cut and surveyed, etc., not by finding resources and not from inventory gains. Our people, in the field and in our shops and offices, maintain and enhance our reputation for quality, for safety and for service. To each of them we say "Thank You".

On behalf of the Board of Directors,

Bruce R. Libin, Q.C., Executive Chairman and Chief Executive Officer



DESTINY RESOURCE SERVICES CORP.
CONSOLIDATED BALANCE SHEETS
(unaudited)

June 30, 2008 December 31, 2007
$ $
------------------------------------
ASSETS (note 4)

CURRENT

Cash 24,240 -
Accounts receivable 14,068,981 14,743,474
Inventory (note 2) 1,666,434 1,004,717
Prepaid expenses 842,970 465,055
Income taxes receivable (note 5) - 360,430
Future income tax asset (note 5) 1,022,280 517,808
------------------------------------
17,624,905 17,091,484
Property and equipment (notes 2 & 6) 11,391,020 9,303,901
Intangibles (note 2) 984,733 240,426
Goodwill (note 2) 394,430 -
------------------------------------
30,395,088 26,635,811
------------------------------------
------------------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT

Demand bank loan (note 4) - 4,782,491
Accounts payable and accrued liabilities 9,569,800 7,226,666
Income taxes payable 52,946 -
Current portion of long-term debt (note 6) 1,010,620 -
Other current liabilities (note 3) 1,290,278 -
------------------------------------
11,923,644 12,009,157
------------------------------------

Long-term debt (note 6) 2,777,335 -
Future income taxes (note 5) 1,756,745 1,781,959
Other long-term liabilities (note 3) 191,436 1,133,686

Commitments and contingencies
(notes 4 and 9)

Shareholders' equity
Share capital (note 7) 8,391,935 8,369,935
Retained earnings 5,353,993 3,341,074
------------------------------------
13,745,928 11,711,009
------------------------------------
30,395,088 26,635,811
------------------------------------
------------------------------------

See accompanying notes to the consolidated financial statements.


DESTINY RESOURCE SERVICES CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS

Three Months Ended Six Months Ended
June 30, June 30,
2008 2007 2008 2007
(unaudited) $ $ $ $
----------------------------------------------------------------------------

Revenue 12,459,282 11,633,287 32,734,251 28,829,524
Direct expenses 11,483,627 10,308,611 27,516,954 24,048,245
---------------------------------------------------
975,655 1,324,676 5,217,297 4,781,279
---------------------------------------------------
Other expenses:
General and
administrative (note 3) 539,891 493,640 1,191,016 2,233,343
Amortization of
property and equipment
and intangibles 843,673 806,276 1,556,384 1,621,843
Net interest expense
(note 8) 77,786 43,349 211,896 103,699
Loss (gain) on disposal
of property and equipment (5,269) 5,821 (8,972) (45,781)
---------------------------------------------------
1,456,081 1,349,086 2,950,324 3,913,104
---------------------------------------------------
Income (loss) from
operations before
income taxes (480,426) (24,410) 2,266,973 868,175
Income taxes (note 5)
Current tax expense
(recovery) 520,876 (201,715) 783,741 2,701,352
Future tax recovery (1,083,810) - (529,687) (3,667,330)
---------------------------------------------------
Net income tax expense
(recovery) (562,934) (201,715) 254,054 (965,978)
---------------------------------------------------
Net income (loss) and
comprehensive income
for the period 82,508 177,305 2,012,919 1,834,153
Retained earnings,
beginning of period 5,271,485 6,071,156 3,341,074 5,752,807
Dividends (note 7) - (1,338,499) - (2,676,998)
---------------------------------------------------
Retained earnings,
end of period 5,353,993 4,909,962 5,353,993 4,909,962
---------------------------------------------------
---------------------------------------------------

Per share amounts (note 7)
Basic and diluted 0.01 0.03 0.36 0.33

See accompanying notes to the consolidated financial statements.


DESTINY RESOURCE SERVICES CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Months Ended Six Months Ended
June 30, June 30,
2008 2007 2008 2007
(unaudited) $ $ $ $
----------------------------------------------------------------------------

CASH FLOWS PROVIDED BY (USED IN):

Operating activities:

Net income from operations 82,508 177,305 2,012,919 1,834,153
Items not involving cash:
Amortization of property
and equipment and
intangibles 843,673 806,276 1,556,384 1,621,843
Future income taxes (562,934) (202,104) 254,054 (965,897)
Loss (gain) on disposal
of property and equipment (5,269) 5,821 (8,972) (45,781)
-------------------------------------------------
357,978 787,298 3,814,385 2,444,318
Net change in non-cash
working capital (note 10) 8,042,293 2,499,671 2,358,592 (224,785)
--------------------------------------------------
8,400,271 3,286,969 6,172,977 2,219,533
--------------------------------------------------
Financing activities:
Net change in bank
indebtedness (3,128,062) (794,748) (4,782,491) 2,301,463
Net change in long-term
debt (note 6) (304,645) - 3,787,955 -
Issuance of shares 22,000 - 22,000 -
Dividends paid (note 7) - (1,338,499) - (2,676,998)
--------------------------------------------------
(3,410,707) (2,133,247) (972,536) (375,535)
--------------------------------------------------
Investing activities:

Business acquisition
(note 2) (3,772,200) - (3,772,200) -
Purchase of property
and equipment (1,162,994) (1,148,218) (1,399,877) (1,902,531)
Proceeds on sale of
property and equipment 44,500 60,209 64,300 115,209
Net change in non-cash
working capital (note 10) (74,630) (65,713) (68,424) (56,676)
--------------------------------------------------
(4,965,324) (1,153,722) (5,176,201) (1,843,998)
--------------------------------------------------
Change in cash and
cash equivalents 24,240 - 24,240 -
Cash and cash
equivalents, beginning
of period - - - -
--------------------------------------------------
Cash and cash equivalents,
end of period 24,240 - 24,240 -
--------------------------------------------------

See accompanying notes to the consolidated financial statements.


MANAGEMENT'S DISCUSSION AND ANALYSIS ("MD&A")
FOR Q2'08


The following discussion and analysis of financial results for the six months ended June 30, 2008 ("Q2'08") and June 30, 2007 ("Q2'07") is based on information available until August 8, 2008 (unless otherwise noted) and upon the Company's unaudited consolidated interim financial statements for the periods presented, which were prepared in accordance with Canadian generally accepted accounting principles ("GAAP"), and should be read in conjunction with the Company's audited consolidated financial statements and Annual Report for the prior fiscal year ended December 31, 2007.

Certain statements included in this Management's Discussion and Analysis may constitute forward-looking statements involving known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. When used in this MD&A, such statements use words such as "may", "will", "expect", "believe" and "plan". These statements reflect managements current expectations regarding future events and operating performance and are valid only as of the date hereof. These forward-looking statements involve a number of risks and uncertainties, including the impact of general economic conditions, industry conditions, changes in laws and regulations, increased competition, fluctuations in commodity prices and foreign exchange, and interest rates and stock market volatility.

Non-GAAP Measurements: The MD&A contains the terms Earnings Before Interest, Taxes and Depreciation and Amortization ("EBITDA") and gross margin which should not be considered an alternative to, or more meaningful than "net income" or "cash flow from operating activities" as determined in accordance with Canadian GAAP as an indicator of the Company's financial performance. These terms do not have any standardized meaning as prescribed by GAAP and therefore, the Company's determination of gross margin and EBITDA may not be comparable to that reported by other companies. Gross margin is calculated from the consolidated statements of operations and is defined as revenue less direct expenses. EBITDA is calculated from the consolidated statements of operations and retained earnings (deficit) as gross margin less general and administrative expenses (not including gain on disposal of property and equipment). The Company evaluates its performance based on EBITDA. The Company considers EBITDA to be a key measure as it demonstrates the Company's ability to generate the cash necessary to pay dividends and to fund future capital investment. The calculation for gross margin and EBITDA are presented below:



Three Months Ended Six Months Ended
June 30, June 30,
2008 2007 2008 2007
$ $ $ $
Revenue 12,459,282 11,633,287 32,734,251 28,829,524
Direct Expenses 11,483,627 10,308,611 27,516,954 24,048,245
----------------------------------------------------------------------------
Gross margin 975,655 1,324,676 5,217,297 4,781,279
Less general and
administrative 539,891 493,640 1,191,016 2,233,343
----------------------------------------------------------------------------
EBITDA 435,764 831,036 4,026,281 2,547,936
----------------------------------------------------------------------------
----------------------------------------------------------------------------


REVENUE

Revenues for Q2'08 at $12.5 million increased by 7% from the $11.6 million for Q2'07. In Canada, it would appear that E&P companies are concentrating their focus more on their sustaining operations rather than on exploration activities. The results of this focus create the situation of less overall work in this marketplace and increased competition. Despite this, the Company has been able to sustain its revenue level in Q2'08 close to Q2'07 as many of its clients specify it as their subcontractor of choice. In the US, an inherent trait in this industry is the amount of time required for permitting activities to which the Company must wait for before it can commence work. This was experienced during Q2'07 which has resulted in lower revenues in this geographic segment for the quarter but with the expectation that this work will be completed later in the year. Year to date revenues for 2008 at $32.7 million represented a 13.5% increase over the $28.8 million over the same period last year.

One client exceeded 10% of gross revenues for Q2'08 and represented in aggregate approximately 61% of current quarter revenues. Over the same period last year there was one client with more than 10% of revenue, representing approximately 52% of the quarter's revenue.

GROSS MARGIN

Gross margin for Q2'08 was approximately $1 million, representing 7.8% of revenues, and was lower than the $1.3 million representing 11.4% of revenues over the same period last year. Given the more competitive environment in Canada this has created increased downward pressure on pricing translating into lower overall margin. In the US, the long lead times in permitting resulted in less over revenues for the Q2'08 compared to Q2'07. Timing of revenues combined with infrastructure costs will cause gross margins to vary from time to time.

Year to date gross margin for 2008 at $5.2 million represented 15.9% of revenues which was compared to $4.8 million representing 16.6% of revenues over the same period last year.

Gross margins are dependent on competitive factors and the service mix over time.

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses include the costs associated with the corporate head office, the lease of the Survey & Mapping division's shop and office, profit sharing and the corporate reorganization. For Q2'08 these expenses were $0.5 million (Q2'07-$0.5 million). For year to date Q2'08 these expenses $1.2 million compared to $2.2 million over the same period as last year. Expenses for last year included approximately $0.9 million for the corporate reorganization.

The profit sharing plans were instituted to better align the Company's incentive compensation for key employees with the interests of shareholders. The plans, which replace bonuses and the grant of stock options, are intended to have the participating employees more focused on the Company's bottom line performance and to enable the Company to retain and attract operating and executive management in a competitive environment. Awards from the plans are made one-half in cash and one-half in shares, which are purchased in the market.

AMORTIZATION OF PROPERTY AND EQUIPMENT

Total amortization expense for the six months ended June 30, 2008 at $1.6 million was at the same level over the same period last year. For Q2'08 amortization expense was $0.8 million which was the same as Q2'07.

INTEREST EXPENSE

Net interest expense to the end of Q2'08 was $0.2 million compared to less than $0.1 million in net interest revenue over the same period of last year. Interest on long-term debt during Q2'08 was less than $0.2 million and interest income to the end of Q2'08 was less than $0.1 million. All interest expense for last year related to the short-term term bank operating facility.

INCOME TAXES

Management intends to apply the benefits achieved through the corporate reorganization completed in Q1'07 against the other liabilities on the balance sheet, both current and long-term, with the expectation that there will be no cash expense associated with extinguishing these other liabilities. Management uses estimates when calculating future income tax timing differences and when actual returns are filed this can cause "true-ups" in prior estimates to occur. At the point in time that these realizations occur, adjustments are made to these provisions to reflect this new information on hand.



SUMMARY OF QUARTERLY RESULTS

----------------------------------------------------------------------------
(000's, except
per share Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2
amounts) 2008 2008 2007 2007 2007 2007 2006 2006 2006
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total
Revenue 12,459 20,275 17,129 19,244 11,633 17,196 22,262 23,636 16,934
----------------------------------------------------------------------------
Net income
(loss) for
the period 83 1,930 629 (2,198) 177 1,657 1,982 1,869 504
Basic/diluted
earnings
per share 0.01 0.35 0.11 (0.39) 0.03 0.30 0.36/ 0.34 0.09
0.35
Weighted
average
number of
shares
outstanding
Basic 5,583 5,577 5,577 5,577 5,577 5,577 5,576 5,575 5,575
Diluted 5,583 5,577 5,577 5,580 5,594 5,595 5,595 5,594 5,596
----------------------------------------------------------------------------
The above noted Summary of Quarterly Results highlights the following:

1. The Company's business is seasonal with Q1 and Q3 traditionally being
the two strongest quarters. The underlying causes of the seasonality are
weather conditions, the Company being restricted from entering and
conducting work in designated wildlife areas at certain times of the
year and the timing of client capital spending programs.


LIQUIDITY AND CAPITAL RESOURCES

The Company's capital requirements consist primarily of working capital necessary to fund operations, capital expenditures related to the purchase and manufacture of operating equipment, the possibility of dividend payments and capital to finance strategic acquisitions. Sources of funds available to meet these capital requirements include cash flow from operations, external lines of credit (bank facility with the ability to draw up to $15 million at prime plus 0.50%), equipment financing, term loans and access to equity markets.

Liquidity and capital resources are dependant upon the results of operations, commodity prices, capital expenditures, debt service charges and cash dividends. The Company's balance sheet as at June 30, 2008 shows net working capital of $5.7 million and term debt of $3.8 million providing a net surplus position of $1.9 million. As at last year end net working capital was $5.2 million and a demand bank loan of $4.8 million provided a net position of $0.4 million. The Company will be looking at ways to reduce net working capital requirements in the future through its management of trade accounts receivable and trade accounts payable which is expected to provide cash. Despite the risks associated with cash flow relating from changes in commodity prices, reduced revenue volumes and increased operating costs, the Company's strong balance sheet provides a potential buffer to mitigate some or all of these effects should they occur.

LONG-TERM DEBT

On March 26, 2008 the Company obtained a $4 million USD capital loan which is secured by certain fixed assets for the purpose of better balancing capital financing with working capital financing and for the business asset acquisition that occurred on April 1, 2008 (refer to Note 2 Business Acquisition for further information). The term of this facility is for four years and the interest rate is based upon a choice between LIBOR plus 2.50% per annum or the bank's US base rate plus 1% per annum. Expected principal payments over the next 4 years are approximately $1 million USD per year. In Q2'08 a total of $0.3 million was repaid on this loan.

WORKING CAPITAL

Net working capital of $5.7 million (1.48:1) as at June 30, 2008 was higher than the $5.1 million (1.42:1) at last year end. The Company has available a $15 million (increased from $10 million) revolving demand bank operating loan facility. As at June 30, 2008 no amount was drawn on the bank line.

For clients representing more than 10% of trade accounts receivable, approximately 73% of trade accounts receivable at June 30, 2008 (63% at June 30, 2007) are with one client (two in 2007). With respect to its largest client, the Company provides services both directly for the client's own account (for the development of seismic data for the client to sell) and indirectly for work for third party exploration and production companies, most of which are substantial oil companies and several of which specify the Company as their sub-contractor of choice when contracting with the Company's client. Approximately 89% of trade accounts receivable at June 30, 2008 were less than 60 days old (78% were less than 30 days old).

PROPERTY AND EQUIPMENT

Property and equipment as at June 30, 2008 was at $11.4 million which has increased by $2.1 million from the $9.3 million at last year end. Amortization for Q2'08 was $1.6 million. Assets obtained from the US business acquisition were approximately $2.3 million. The remaining $1.4 million represented sustaining purchases less disposals for the operating business.

COMMITMENTS AND CONTRACTUAL OBLIGATIONS

The Company's future contractual payment obligations are in the form of operating leases on premises and equipment. The Company has no hedging, capital leases or any other "off balance sheet" contractual obligations.



(in $millions) Payments Due by Future Year
-----------------------------------------------
-----------------------------------------------
0-1 2-3 4-5 After
Total Years years years 5 years
-----------------------------------------------
-----------------------------------------------
Operating Leases 7.7 1.4 2.2 1.4 2.7
-----------------------------------------------


The Company, through the performance of its service obligations, is sometimes named as a defendant in litigation. The nature of these claims is usually related to personal injury or operations not considered to be complete. The Company maintains a level of insurance coverage considered appropriate by management for matters for which insurance coverage can be maintained.

In September 2003 a statement of claim was filed against the Company and two other companies seeking payment for damages and loss of income totaling $10 million. The claim alleges that faulty workmanship (by one of the Company's discontinued operations and two other companies named in the claim) led to significant damage at a major gas plant expansion project.

In September 2004 a subsequent related claim alleging faulty workmanship was filed against the Company and two other companies seeking payment of damages and loss of income totaling approximately $0.8.

The Company believes that both of the above noted claims are completely without merit, and they have been referred to counsel for the Company's insurance provider and will be vigorously defended. As neither the outcome nor the final amount of the claims can be determined, no provision for loss has been made.

SHAREHOLDERS' EQUITY

Shareholder's equity increased from $11.7 million at the end of 2007 to $13.7 million at the end of Q2'08 and can be entirely contributed to the year to date net income of $2 million.

As at August 8, 2008, the number of issued and outstanding common shares is 5,582,581 with 24,500 additional common shares reserved for potential future issuance pursuant to options outstanding under the Company's stock option plan none of which were "in-the-money" as at June 30, 2008.

BUSINESS RISKS

The Company is subject to the risks and variables inherent in the oilfield services industry. Demand for products and services depend on the exploration, development and production activities of energy companies. These activities are directly affected by factors such as oil and gas commodity prices, weather, changes in legislation, exchange rates, the general state of domestic and world economies, concerns regarding fuel surpluses or shortages, substitution through imports or alternative energy sources, changes to taxation or regulatory regimes and the broad sweep of international political risks such as war, civil unrest, nationalization and expropriation or confiscation, which are all beyond the control of the Company and cannot be accurately predicted. The oil market is influenced by global supply and demand considerations and by the supply management practices of OPEC. The natural gas market is primarily influenced by North American supply and demand and by the price of competing fuels. The risks associated with external competition are minimized by concentrating Company activities in areas where it has demonstrated technical and operational advantages and by employing highly competent professional staff. Environmental standards and regulations are continually becoming more stringent in this industry and the Company is committed to maintaining its high standards. The direction to expand into the US market will create a shift in the geographic makeup of business which will require risks such as foreign exchange to be monitored and mitigated. Business risks are also mitigated by establishing strategic alliances with reputable partners, developing new technologies and methodologies as well as investigating new business opportunities.

The risks inherent in the oilfield services industry could impact the Company's ability to meet its financial covenants on its revolving, bank operating loan facility. As at June 30, 2008 no amount was drawn on the bank line.

OUTLOOK

As a whole, 2008 appears to be a transition year for the demand for the services the Company provides to the seismic industry. Activity levels rose each year from 2002 through 2006, reflecting rising commodity prices and growing demand in North America for natural gas. This culminated with the exceptionally active and profitable year of 2006. Exploration budgets for Destiny's clients for 2007 were cast in the fall of 2006, in an atmosphere of slippage in commodity prices coupled with significant cost escalation for almost all goods and services in the oilpatch. As a result, 2007 was a year of reduced activity, as reflected in the Company's results.

Exploration budgets for 2008, generally approved prior to the recent run-up in commodity prices, also somewhat reflected industry response to the new royalty regime announced in Alberta. This combination has led to overall seismic activity in Canada around the same level as 2007. Destiny's increases in revenue in Canada are in some measure a gain in market share. As 2008 has been unfolding, commodity prices, especially crude oil, have increased considerably. Some clients are responding to the opportunity with increased budget allocations to exploration; others are indicating their intentions for the coming year and beyond.

Taken in aggregate, Destiny anticipates overall good results for 2008 and considerably enhanced demand and activity levels for 2009. Early signals have the Company believing it is basically sold out for the up-coming winter and planning for greater volume for the balance of 2009 in Canada. At the same time, Destiny believes it is achieving traction with its expansion and businesses in the United States and anticipates growing revenue and contribution from its US operations.

The principal risks to achieving expectations are commodity price and fiscal regime changes affecting the profitability of exploration to the Company's clients (about which the Company has little or no capacity to manage) and the internal challenges of maintaining quality and safety. Destiny devotes considerable time and energy to addressing our internal challenges and opportunities and believes its systems and procedures, together with the dedication and commitment of its people, are sufficient to maintain its reputation and positive outlook.

The Company believes that it has adequate working capital, cash flow from operations and access to capital to fund ongoing business requirements. Management believes the Company has a cost structure that has sufficient variability to adapt to the volatility of its industry. The Company has experienced management, at all levels of sales, operations and administration, who are motivated to achieve success in both the short and long-term term. The Company provides services principally in connection with the exploration for crude oil and natural gas, which are escalating in value and plentiful in the areas in which the Company operates.

The Company periodically encounters expansion opportunities to consider. These involve, in each case, the requirement for capital expenditures beyond the normal course and the Company may pursue any or all of these opportunities, and others that may present themselves. In doing so the Company may incur additional term debt, issue equity, retain cash that might otherwise be paid as dividends or any combination of the foregoing.

EVALUATIONS OF DC&P AND ICFR

The President & Chief Executive Officer "(CEO") and Vice-President, Finance & Chief Financial Officer ("CFO") are responsible for establishing and maintaining disclosure controls and procedures ("DC&P") and internal control over financial reporting ("ICFR") for the Company. Both the CEO and CFO confirm that there was no change to the Company's internal control over financial reporting that occurred during the most recent reporting period that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

As a consequence of the Company's small size and limited resources there exist specific control deficiencies resulting from inadequate segregation of duties as desired under an ideal control framework, although the Company does have compensating controls in place in all instances. None of these segregation of duty deficiencies has resulted in a misstatement to the financial statements. Although the possibility of a material misstatement may exist, management believes that the probability of this event is remote. Presently both the CEO and CFO oversee all material transactions and related accounting records. Also, the Audit Committee reviews the financial statements and key risks of the Company on a quarterly basis and queries management about significant transactions.

On occasion the Company records complex and non-routine transactions which can be extremely technical in nature and require an in-depth understanding of GAAP and income tax legislation. There is a risk that the reporting of these transactions may not be correctly recorded which could lead to a potential misstatement of the consolidated financial statements. The Company addresses this by consulting with third party expert advisors, where required, with the recording of these types of transactions.

ACCOUNTING PRONOUNCEMENTS

Effective January 1, 2008 the Company has adopted the new CICA Handbook accounting requirements for Capital Disclosures (Section 1535), Inventories (Section 3031), Financial Instruments - Disclosure (Section 3862) and Financial Instruments - Presentation (Section 3863).

Capital Disclosures

CICA Handbook Section 1535 requires the disclosure of qualitative and quantitative information about the Company's objectives, policies and processes for managing capital, which has been provided under note 12.

Financial Instruments

CICA Handbook Section 3862 (Financial Instruments - Disclosure) and Section 3863 (Financial Instruments - presentation) replace Section 3861 (Financial Instruments - Disclosure and Presentation) effective January 1, 2008 for the Company. Section 3862 requires the disclosure of information to allow the users to evaluate the significance of the financial instruments on the entity's financial position and performance and the nature and extent of risks arising from financial instruments and how the entity manages those risks. Section 3863 deals with the classification of financial instruments, related interest, dividends, losses and gains, and the circumstances in which financial assets and financial liabilities are offset. The additional information to comply with these standards is disclosed in note 13.

Inventory

Inventories are consumables that are used in the process of the Company providing its services to its clients. They are valued at the lower of cost and net realizable value. Costs are assigned based upon the initial invoiced amount from vendors which are then reviewed on a quarterly basis for obsolescence. Obsolescence is based upon the aging of a particular item in terms of date of last movement from which an applicable discount rate is applied. Discount rates are derived from historical experience. Changes in the obsolescence provision are expensed or recovered in the period in which they occur within general and administrative expenses.

Future Requirements

Effective for interim and annual financial statements for fiscal years beginning on or after October 1, 2008, the new CICA Handbook Section 3064 (Goodwill and Intangible Assets) will replace Section 3062 (Goodwill and Other Intangible Assets) and Section 3450 (Research and Development Costs). This new section establishes standards for the recognition, measurement, presentation and disclosure of goodwill and intangible assets including internally generated intangible assets. This new section will be effective for the Company beginning January 1, 2009.

In 2006 the Accounting Standards Board (AcSB) published a new strategic plan that will significantly affect financial reporting requirements in Canada. The AcSB strategic plan outlines the convergence of Canadian GAAP with IFRS over a five year transition period with the adoption required effective January 1, 2011. While the Company has begun to assess the adoption of IRFS for 2011, the financial impact of the transition to IRFS cannot be reasonably estimated at this time.

The Company has adopted these measures and procedures to review, record and disclose these items where required and as defined in these new sections of the CICA Handbook, including disclosure and effect of accounting standards that have been pronounced but not yet implemented.

NORMAL COURSE ISSUER BID

On November 13, 2007, the Toronto Stock Exchange (the "TSX") accepted a Notice of Intention to Make a Normal Course Issuer Bid filed by the Company. Under the terms of the normal course issuer bid, the Company will have the right to purchase for cancellation, up to a maximum of 278,854 of its common shares, representing approximately 5% of its outstanding common shares. The Company currently has 5,577,081 common shares outstanding and its average daily trading volume for the past six months from November 13, 2007 was 2,832 common shares. The purchases, which may commence on November 16, 2007, would be made in the open market through the facilities of the TSX, up to a daily maximum of 1,000 common shares. The normal course issuer bid will remain in effect until the earlier of November 15, 2008 or until the Company has purchased the maximum number of common shares permitted. As of August 8, 2008 no purchases have yet been made. Shareholders may obtain a copy of the Notice of Intention to Make a Normal Course Issuer Bid, without charge, by writing to the Corporate Secretary at 300, 444 - 58th Avenue S.E., Calgary, AB T2H 0P4.

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