Enseco Energy Services Corp.

Enseco Energy Services Corp.

November 29, 2006 20:52 ET

Enseco Growth Continues

CALGARY, ALBERTA--(CCNMatthews - Nov. 29, 2006) - Enseco Energy Services Corp.

Highlights

- Continued integration of acquired companies

- Completed Plan of Arrangement with Nexia Biotechnologies Inc. ("Nexia") in October

- Conditional listing approval from TSX Venture Exchange

- New facilities opened in Red Deer and Edmonton

Enseco today announced its financial results and the progress it has made on its business plans. "Enseco is well poised to take advantage of positive opportunities in the oilfield services markets in which it operates," said President & CEO, Kelly Nichol. "Although the reduced activity in the industry during the quarter dampened our financial results, we are optimistic our over-riding goals of being "supplier of choice" to our customers and "employer of choice" in today's competitive labor market will allow us to perform well in the future. The investments we have made are expected to provide the base of operations we need to succeed in the future," Nichol added.

OUTLOOK

Enseco anticipates that the next two quarters leading to its March 31, 2007 yearend will see enhanced revenue as a result of the acquisitions which occurred earlier in the year, equipment additions which have occurred and will occur and normal seasonal trends. Demand for the services Enseco provides is expected to be strong through the winter months and it is expected this will contribute to improved margins. Enseco will continue to incur additional expenses to build its brand, improve its equipment, enhance safety programs, add new business lines and comply with public market requirements. These investments are intended to help Enseco attract the best employees, make it a supplier of choice to its customers and allow it to outperform its competitors and react appropriately to changes in market conditions.

Corporate Update - Plan of Arrangement

On October 16, 2006 the special meetings of holders of common shares of Nexia and holders of common shares of Enseco were held to vote on the Arrangement Agreement, as disclosed in the Information Circular. The resolutions regarding the Plan of Arrangement were approved at that time. On October 23, 2006 the arrangement was completed, resulting in the amalgamation of Nexia, Enseco and Enseco Management Corp. ("ManagementCo") which will continue as Enseco. As a result of the amalgamation, Enseco acquired Nexia's public listing and is now conditionally listed on the TSX Venture Exchange. Enseco believes its asset base and significant tax shield give it a unique advantage in the current marketplace and especially in respect of the recent policy changes regarding income trusts.



Summary of Financial and Operating Information
(000's except per share numbers)
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Three months Six months
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Total assets at September 30, 2006 $ 51,555 $ 51,555
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Total revenue - production testing $ 4,723 $ 7,128
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Total revenue - well swabbing $ 2,956 $ 4,246
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Total revenue $ 7,679 $ 11,374
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Net loss $ (842) $ (2,016)
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Net loss per share - basic $ (0.076) $ (0.203)
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diluted $ (0.076) $ (0.203)
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EBITDA 313 $ (353)
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Non-GAAP Financial Measures

In this document there are references to EBITDA, which is a non-GAAP financial measure. EBITDA refers to income (loss) before interest, accretion, income taxes, depreciation and amortization and can be calculated from the GAAP amounts included in the Company's financial statements. Management believes that EBITDA is a relevant measure to users of its financial information as it provides an indication of pre-tax earnings available for debt and equity holders. Enseco's definition of EBITDA may not be consistent with other providers of financial information and therefore may not be comparable.

Revenue

Enseco's revenue is dependent on demand for its services and the equipment and personnel it has available to meet that demand. The primary equipment assets in the current operating divisions are production testing units and swabbing rigs which have been acquired as follows:



Production Swabbing
testing units rigs Total
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Three months ended September
30, 2006:
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Total units available at June 30 35 17 52
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August 15 - purchase - 1 1
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Total units available at September 30 35 18 53
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Weighted average units available 35 17.5 52.5
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Revenue for the period $ 4,723,000 $ 2,956,000 $ 7,679,000
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Revenue per weighted average unit $ 135,000 $ 169,000 $ 146,000
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Six months ended September 30, 2006:
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Revenue for the period $ 7,128,000 $ 4,246,000 $ 11,374,000
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Revenue per weighted average unit $ 105,000 $ 143,000 $ 116,000
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Equipment utilization in the three months ended September 30 was improved over the prior quarter but was below budgeted levels. In particular, at the end of the quarter there was a drop in activity, primarily in the production testing division. This was common throughout the services sector and was a result of reduced drilling activity related to weather and to weaker natural gas pricing. Activity early in the following quarter also was below budgeted levels but has since recovered to more normal seasonal levels. It is expected that utilization will be improved during the upcoming winter months in the quarters ending December 31, 2006 and March 31, 2007, due in part to the winter access nature of Enseco's areas of operations.

Enseco's new facility in Red Deer, Alberta was opened on August 1, 2006. This facility will provide a base of operations in Central Alberta where there is a strong concentration of producing wells, allowing the Company to operate more efficiently and alleviate some of the seasonality of its operations. Additionally, subsequent to September 30, Enseco has opened a directional drilling operations center near Edmonton, Alberta that will greatly enhance our central and northern directional drilling activities.

Expenses and net loss

While margins on individual jobs remained strong, overall margins were less than anticipated during the quarter as a result of lower than expected utilization. Enseco also took the opportunity during the quarter to accelerate the maintenance program on its equipment fleet, with expenditures totaling $633,000. These expenditures include required maintenance, refurbishment and rebranding to enhance the Enseco image and preventative maintenance which will reduce downtime during busier seasons. Management believes that expenditures in this area will be reduced in future quarters as a result of this effort. A key management initiative is to ensure Enseco's equipment is well maintained so as to reduce downtime issues at customer sites. Additional expenditures during the quarter are expected to benefit future quarters as maintenance costs should be reduced and utilization improved.

Other expenses totaling approximately $500,000 were also incurred during this quarter relating to start-up and other costs related to the integration and upgrading of the acquired businesses in areas such as safety, training, advertising, consulting fees and office supplies in an effort to meet Enseco's business initiatives. Additionally, Enseco incurred $250,000 in expenses in growth areas related to the opening of the Red Deer shop and the hiring of personnel for the new wireline and directional drilling departments. These types of costs were incurred to improve future operations and financial results but resulted in higher expenses in the most recent quarter.

Additionally, general and administrative expenses are higher than in the predecessor companies and proportionately higher than that expected in future quarters as Enseco has senior operations and financial management personnel in anticipation of further growth, acquisitions in current and new service lines and to meet the increased governance and reporting requirements for a public company.

Capital assets and amortization

During the quarter, the Company spent $2.7 million on asset additions. The bulk of these expenditures related to deposits on assets which are scheduled for delivery in late 2006 and the first quarter of 2007. The Company continues to plan for growth and has orders in place for asset additions of approximately $8 million, net of deposits already paid, in the balance of the fiscal year. As well as expanding its existing capacity in well swabbing and production testing, these asset additions will also allow Enseco to offer new service lines, including wireline, directional drilling and open hole logging. Excluding acquisitions, Enseco's capital spending plans over the balance of fiscal 2007 includes:

- twelve production testing units for delivery late in 2006 and early in 2007;

- four swabbing trucks for delivery from November, 2006 to February, 2007;

- two directional drilling kits with delivery commencing in November, 2006; and

- two conventional wireline trucks for delivery starting in late 2006.

Additionally, Enseco has signed a development proposal and is completing the related formal agreement to obtain exclusive Canadian rights to use a new suite of open hole logging tools being developed by an established down hole tool manufacturer. An additional four wireline trucks are on order related to these new tools, with prototype testing expected to start in the summer of 2007 and full commercialization for the 2007/2008 winter season. Management believes that these tools will provide it with access to a market currently dominated by a very few mostly large multi-national oilfield service providers. Market penetration and therefore utilization and margins are expected to be strong. Enseco has options to take this tool to other market areas as well should it prove successful.

Enseco has a number of other production slots reserved with equipment manufacturers through 2007 and 2008 as lead times can be quite long and advance planning is required to ensure growth plans can be met.

Enseco also continues to pursue acquisition candidates and will continue to grow in this manner should negotiations with suitable candidates result in accretive value to shareholders of the Company.

The planned capital additions and potential acquisitions will be funded by cashflow from operations, additional term debt and possible equity issuances.

Interest and long-term debt

Enseco has term debt of approximately $1.9 million as at September 30, 2006. It is management's intention to increase debt levels to fund planned equipment purchases and potential acquisitions. Of the total debt, approximately $790,000 relates to vehicle loans and leases at promotional interest rates ranging from nil to 1.0% . Enseco currently has nominal interest rate risk, as only one mortgage of $239,000 bears interest at a variable prime based rate.

During the three months ended September 30, 2006, the Company acquired $916,000 of new term debt related to vehicle and equipment financing.

Enseco is currently negotiating with potential lenders to acquire financing required for its capital expenditure program.

Income taxes

Losses incurred in the three months ended September 30, 2006, the three months ended June 30, 2006 and the period from inception to March 31, 2006 have resulted in no current taxes payable.

Liquidity and Capital Resources

Cash used in operating activities for the three months ended September 30, 2006 was $1.1 million. Cash flow from operations was $0.4 million which was offset by a $1.6 million change in non-cash working capital. The non-cash working capital change was generally the result of increased activity as compared to the prior quarter, which increases accounts receivable levels. At September 30, 2006 the Company had drawn $4.0 million of its $4.5 million operating facility. At September 30, 2006 the Company was in violation of certain covenants related to this facility. The Company is negotiating additional financing to alleviate these violations. Notwithstanding the existence of these events of default, no action as a result of these events of default is planned by the bank at this time. Net of existing cash balances, the bank indebtedness was $4.2 million at September 30, 2006.



Shares outstanding
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(000's) September 30, 2006 November 28, 2006
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Preferred shares 750 -
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Common voting shares 11,148 13,836
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Common non-voting shares - 688
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Total 11,898 14,524
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Outstanding stock options 2,009 2,061
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Outstanding warrants 525 525
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Common voting shares to be issued
on conversion of debentures (a) 6,688 6,688
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Common non-voting shares to be
issued on conversion of debentures 2,062 2,062
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(a) Conversion requests have been received from most debenture holders
and Enseco and its transfer agent are in the process of issuing share
certificates related to the debentures.


Working capital

Excluding cash and bank indebtedness and the convertible debentures, the Company has positive working capital of $3.6 million as at September 30, 2006. Working capital balances are expected to increase in future periods as revenue is enhanced and the corresponding accounts receivable balances increase. The convertible debentures have been classified as a current liability as they mature in October, 2006. To date, most debenture holders have requested conversion and the process of issuing shares to the debenture holders is underway.



Quarterly financial information

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For the period (a) ended
(000's) March 31, 2006 June 30, 2006 September 30, 2006
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Revenue $ 68 $ 3,695 $ 7,679
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Net loss $ (154) $ (1,174) $ (842)
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EBITDA $ (130) $ (353) $ 313
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(a) Periods are from inception on March 6, 2006


Commitments and contingencies

Enseco has contracted obligations under various debt agreements as well as under operating and capital leases for land, building and equipment. Minimum lease and principal payments under the existing terms are as follows:



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Mortgage and
Year ending June 30 loans
(000's) payable Operating leases Capital leases
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2007 $ 378 $ 424 $ 185
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2008 $ 348 $ 364 $ 455
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2009 $ 185 $ 364 $ 167
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2010 $ 110 $ 364 $ 23
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2011 $ 41 $ 318 Nil
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Thereafter $ 45 Nil Nil
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Additionally, Enseco has purchase commitments of approximately $8 million for equipment that is expected to be delivered commencing in late 2006.

Enseco is in negotiations regarding the final purchase price of a previous acquisition and has placed $178,000 in trust pending final resolution of a tax accounting issue. Should all or a portion of the amounts in trust need to be paid, the purchase price would increase by such amount and there would be a corresponding increase in goodwill.

Employees

Since inception on March 6, 2006 to September 30, 2006, Enseco has grown to over 200 employees. Enseco's ability to deliver on its strategy is dependent on its ability to attract and retain skilled and motivated staff. The Company has committed itself to be the "employer of choice" in the service industry and has created or is creating various programs to establish itself as such. These programs include bonus plans, stock options for all employees, a stock savings plan, monthly employee newsletters and health and dental plans that are comparable with the best in the industry.

Safety, Environmental and Loss Management Responsibilities

Enseco's business has an inherent degree of risk. To mitigate this risk, Enseco has incorporated comprehensive Safety, Environmental and Loss Management Processes into its business activities. This commitment is demonstrated in our Safety and Environmental and Loss Management programs, which provide clear management expectations, detailing employee responsibilities and serving as a mechanism for ongoing stewardship and continuous improvement through a program of regularly scheduled audits and preventative maintenance. Our managers, employees and others engaged on our behalf are expected to carry out their duties in a manner designed to protect themselves, their fellow workers, the public, the environment and the physical assets of Enseco. Our executive team is also developing safety, environmental and loss management targets that will form part of their future compensation plans. In 2006, Enseco satisfactorily completed an external audit of its safety program and facilities. Enseco is also a member of PSAC (Petroleum Services Association of Canada) and participates on several PSAC committees - the "Well Testing Committee" and the "Environmental Health and Safety Committee".



ENSECO ENERGY SERVICES CORP.

Consolidated Balance Sheet
(unaudited)
(000's)

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September 30, March 31,
2006 2006
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Assets

Current assets:
Cash and cash equivalents $ 332 $ 11,074
Accounts receivable 6,740 873
Prepaid expenses 491 52
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7,563 11,999

Property, plant and equipment (note 3) 22,347 2,035

Deferred charges (Note 10) 450 --

Intangible assets, net of accumulated
amortization of $1,227 (note 2) 7,173 655

Goodwill (note 2) 14,022 1,189

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$ 51,555 $ 15,878
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Liabilities and Shareholders' Equity

Current liabilities:
Bank indebtedness (note 4) $ 4,575 $ -
Accounts payable and accrued liabilities 2,139 247
Related party notes payable (Note 5) 890 1,173
Current portion of long-term debt (Note 6) 563 73
Convertible debentures (note 10) 11,500 11,121
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19,667 12,614

Long-term debt (Note 6) 1,290 113

Preferred shares (note 7) 750 750

Future income taxes (note 2) 5,127 505
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26,834 13,982
Commitments and contingent liability (Notes 2
and 8)
Subsequent event (Note 10)

Shareholders' equity:
Share capital (Notes 7 and 10) 26,175 1,640
Contributed surplus - stock options (Note 7) 306 -
Conversion option - convertible debentures
(Note 10) 410 410
Deficit (2,170) (154)
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24,721 1,896

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$ 51,555 $ 15,878
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See accompanying notes to consolidated financial statements.


Consolidated Statement of Loss and Deficit
(Unaudited)
(000's)
Three Months ended Six Months ended
September 30 September 30
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Revenue $ 7,679 $ 11,374
Interest - 7
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7,679 11,381
Expenses:
Operating 6,297 9,552
General and administrative 1,069 1,869
Interest on long-term debt 52 141
Accretion of convertible debentures 97 379
Amortization of plant and equipment 545 946
Amortization of intangible assets 700 1,222
Loss on disposal of equipment 6 6
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8,766 14,115

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Loss before income tax (1,087) (2,734)

Future income tax reduction 245 718

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Net loss (842) (2,016)

Deficit, beginning of period (1,328) (154)

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Deficit, end of period $ (2,170) $ (2,170)
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See accompanying notes to consolidated financial statements.


Consolidated Statement of Cash Flows
(Unaudited)
(000's)

Three Months ended Six Months ended
September 30 September 30
---------------------------------------------------------------------------
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Cash provided by (used in):

Operating activities:

Net loss $ (842) $ (2,016)
Add (deduct) items not affecting cash:
Accretion of convertible debentures 97 379
Amortization of plant and equipment 545 946
Amortization of intangible assets 700 1,222
Stock option compensation expense 175 306
Loss on sale of equipment 6 6
Future income tax reduction (245) (718)
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436 125

Change in non-cash operating working capital (1,557) 3,533
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(1,121) 3,658

Investing activities:
Property, plant and equipment additions (2,732) (3,976)
Proceeds on disposition of equipment 43 43
Acquisition of Swab Services Ltd., net of
cash acquired - (6,437)
Acquisition of Swab-Co. Inc., net of cash
acquired - (8,060)
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(2,689) (18,430)
Financing activities:
Issuance of common shares, net of issue
costs - 11,964
Deferred charges (450) (450)
Related party notes payable (86) (8,679)
Advances of long-term debt 916 1,094
Advances of bank indebtedness 1,025 4,575
Repayments of long-term debt (138) (4,474)
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1,267 4,030

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Decrease in cash and cash equivalents (2,543) (10,742)

Cash and cash equivalents, beginning of
period 2,875 11,074

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Cash and cash equivalents, end of period $ 332 $ 332
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See accompanying notes to consolidated financial statements.



ENSECO ENERGY SERVICES CORP.
Notes to Consolidated Financial Statements

September 30, 2006
(Unaudited)
(all amounts in tables in 000's)


1. Significant Accounting Policies

The consolidated interim financial statements have been prepared following the same accounting policies and methods of computation as the most recent annual financial statements dated March 31, 2006. These financial statements should be read in conjunction with the annual financial statements and notes.

No comparative information is provided for income statement amounts as Enseco Energy Services Corp. ("Enseco") was incorporated on March 6, 2006.

(a) Principles of consolidation:

These consolidated financial statements include the accounts of Enseco and its wholly owned subsidiaries, Trottier Energy Services Inc. ("Trottier"), Swab Services Ltd. ("Swab"), Swab-Co. Inc. ("SwabCo"), Swab-Flo Inc. ("SwabFlo"), Enseco Partnership Management Corp. and Enseco Energy Services Partnership. All significant inter-company transactions and balances have been eliminated upon consolidation.

(b) Property, plant and equipment:

Property, plant and equipment are recorded at cost less accumulated amortization. Amortization is provided at the following rates and methods over the estimated useful lives of the assets (net of estimated residual value):



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Oilfield services equipment 10 year straight-line
Vehicles 5 year straight line
Furniture and fixtures 5 year straight line
Buildings 20 year straight line
Computer hardware 30% declining balance
Computer software 50% declining balance
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2. Business acquisitions:

On March 21, 2006, the Company completed the acquisition of all of the outstanding shares of Trottier for an aggregate purchase price of $3,010,000. The purchase price consisted of 825,000 common, non-voting shares in the Company valued at $1,650,000 plus cash of $1,360,000. The net assets acquired were as follows:



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Acquired cash $ 151
Accounts receivable 850
Other current assets 13
Equipment 1,984
Intangibles 660
Goodwill 1,189
Accounts payable and accrued liabilities (248)
Due to related parties (580)
Long term debt, including current portions (486)
Future income taxes (523)

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$ 3,010
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Immediately following the completion of the acquisition, $299,482 of the long term debt was repaid.

On April 6, 2006, the Company completed the acquisition of all of the outstanding shares of Swab for an aggregate purchase price of $12,452,000. The purchase price consisted of 4,500,000 common, non-voting shares in the Company valued at $7,094,000 plus cash of $5,358,000. The net assets acquired were as follows:



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Bank indebtedness $ (1,079)
Accounts receivable 6,813
Other current assets 183
Property, plant and equipment 9,781
Intangible assets 3,910
Goodwill 5,471
Accounts payable and accrued liabilities (1,749)
Due to related parties (5,235)
Long term debt, including current portions (2,643)
Future income taxes (3,000)

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$ 12,452
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Immediately following the completion of the acquisition, $2,097,000 of the long term debt was repaid.

On May 15, 2006, the Company completed the acquisition of all of the outstanding shares of SwabCo and SwabFlo for an aggregate purchase price of $13,925,000. The purchase price consisted of 2,123,078 common, non-voting shares in the Company valued at $5,477,000 plus cash of $8,448,000. The net assets acquired were as follows:



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Acquired cash $ 388
Accounts receivable 2,916
Other current assets 274
Property, plant and equipment 7,550
Intangible assets 3,830
Goodwill 7,362
Accounts payable and accrued liabilities (491)
Due to related parties (3,161)
Long term debt, including current portions (2,403)
Future income taxes (2,340)

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$ 13,925
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Immediately following the completion of the acquisition, $2,092,000 of the long term debt was repaid.

The net assets acquired and the allocations to the various components are estimates and may be subject to change.

3. Property, plant and equipment:



---------------------------------------------------------------------------
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Accumulated Net book
September 30, 2006 Cost amortization value
---------------------------------------------------------------------------

Oilfield services equipment $ 17,572 $ 637 $ 16,935
Vehicles 4,374 281 4,093
Computer hardware 156 16 140
Computer software 18 4 14
Furniture and fixtures 35 3 32
Land & building 1,140 7 1,133

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$ 23,295 $ 948 $ 22,347


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Accumulated Net book
March 31, 2006 Cost amortization value
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Oilfield services equipment $ 1,794 $ 4 $ 1,790
Vehicles 189 1 188
Computer hardware 35 - 35
Furniture and fixtures 22 - 22

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$ 2,040 $ 5 $ 2,035
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4. Bank indebtedness:

The Company has a $4.5 million operating facility with a chartered bank. At September 30, 2006 the Company was in violation of certain covenants related to this facility. The Company is negotiating additional financing to alleviate these violations. Notwithstanding the existence of these events of default, no action as a result of these events of default is planned by the bank at this time.

5. Related party transactions:

An Enseco director is a partner in the Company's primary legal firm. Legal fees paid and accrued in the three months ended September 30, 2006 totalled approximately $75,000.

The balance in the related party notes payable consists of the following:



---------------------------------------------------------------------------
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September 30, March 31,
2006 2006
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Enseco Management Corp., non-interest bearing, to
be paid coincident with the completion of the
Arrangement Agreement with Nexia Biotechnologies
Inc. (See Note 10) $ 500 $ 500

Due to former principals of acquired companies,
non-interest, bearing and no specified terms of
repayment 490 673
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$ 890 $ 1,173
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The sole director of Enseco Management Corp. is a director of Enseco.

6. Long-term debt:

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September 30, March 31,
2006 2006
Vehicle loans:
Various, bearing interest at rates ranging from
nil to 5.56%, repayable in monthly installments
totaling $30,292. The loans mature between
December, 2006 and August, 2010. Automotive
equipment with a net book value of $1,138,000
has been pledged as security. $ 784 $ 186
Mortgage:
Bearing interest at prime plus 1.5% repayable in
monthly installments of $3,412 plus interest,
maturing August, 2012. Land and building with
a net book value of $926,000 has been pledged
as security. 239 -
Capital leases:
Various, bearing interest at rates ranging from
1.0% to 12.7%, repayable in monthly
installments totaling $17,600. The leases
mature between December 2007 and April, 2010.
Automotive equipment with a net book value of
$890,000 has been pledged as security. 830 -
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1,853 186
Less: Current portion 563 73

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$ 1,290 $ 113
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Principal payments until maturity are as follows:

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2007 $ 563
2008 719
2009 352
2010 133
2011 41
Thereafter 45
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7. Share capital and preferred shares:

(a) Authorized

An unlimited number of voting common shares without par value.

An unlimited number of non-voting common shares without par value.

An unlimited number of preferred shares, issuable in series.

(b) Issued and outstanding:



(i) Preferred shares
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September 30, 2006 March 31, 2006
------------------- ---------------
Number of Number of
shares Amount shares Amount
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Preferred shares, 4% cumulative,
redeemable 750 $ 750 750 $ 750
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---------------------------------------------------------------------------


On March 6, 2006 the Company issued 750,000 preferred shares for gross proceeds of $750,000. The preferred shareholders are entitled to vote 60% of all votes of the Company. Subsequent to September 30, 2006 the preferred shares have been cancelled as part of the Arrangement Agreement. See Note 10.



(ii) Common shares

---------------------------------------------------------------------------
---------------------------------------------------------------------------
September 30, 2006 March 31, 2006
Number of Number of
Shares Amount Shares Amount
---------------------------------------------------------------------------

Balance, beginning of period 825 $ 1,640 - $ -
Issued through private placement 3,700 12,025 - -
Issued as consideration for
acquisitions 6,623 12,571 825 1,650
Share issuance costs incurred - (61) - (10)

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Balance, end of period 11,148 $ 26,175 825 $ 1,640
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See Note 10.


(c) Option Plan

The Company has an Option Plan under which stock options are granted to virtually all employees. The options have a five year term and vest proportionately on the first three anniversary dates following the grant.

The table below represents the status of the Company's Option Plan as at and for the six month period ended September 30, 2006.



---------------------------------------------------------------------------
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Weighted
Number of average
options exercise price
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Balance, beginning of period 1,272 $ 2.00
Granted 787 2.76
Forfeited (50) 2.40

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Balance, end of period 2,009 $ 2.29
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None of the options are exercisable as at September 30, 2006 and all have virtually their entire five year contractual life remaining.

The Company accounts for its grants of options in accordance with the fair value based method of accounting for stock based compensation. The fair value of the options granted in the six month period is $1,053,000. Compensation cost recorded in the period totaled $306,000.



The fair value of the options granted is estimated using the Black-Scholes
options pricing model on the basis of the following assumptions:

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Expected dividends nil
Expected average volatility 50%
Weighted average risk-free interest rate 3.88% to 4.53%
Expected life 5 years
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The fair value of all options granted in the period ranged from $0.97 to
$1.59 per option.


(d) Warrants

The Company has existing warrants issued to an executive officer. These warrants vest one-third annually over the next three years only if specified sales revenue targets are achieved, and vested warrants expire one year after the vesting date. The first potential vesting occurs on December 31, 2006.

The table below represents the status of the Company's warrants as at and for the period ended September 30, 2006.



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Weighted
Number of average
Warrants exercise price
---------------------------------------------------------------------------

Balance, beginning and end of period 525 $ 0.40
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---------------------------------------------------------------------------


None of the warrants are exercisable as at September 30, 2006.

No compensation cost has been recorded as it is unlikely the performance target for the first vesting date will be met and it is uncertain whether the performance targets for the second and third vesting periods will be met.

8. Commitments and contingent liability:

(a) Commitments

The Company has purchase orders outstanding for an additional $8 million of equipment for which it expects delivery in fiscal 2007.

(b) Contingent liability

Enseco is in negotiations regarding the final purchase price of a previous acquisition and has placed $178,000 in trust pending final resolution of a tax accounting issue. Should all or a portion of the amounts in trust need to be paid, the purchase price would increase by such amount and there would be a corresponding increase in goodwill.

9. Seasonality of operations:

The operations of Enseco are seasonal and are affected by weather. Operating sites are more accessible during the winter months of November through March, as the movement of heavy equipment is generally easier over frozen ground. In addition, warm winters can limit accessibility, as the equipment necessary for revenue generating activity can be restricted from access to remote locations as the result of temporary road bans. In the spring and summer months, wet weather can also hamper the ability to access work sites. Conversely, a longer, colder winter as well as a drier spring and summer season can enhance revenue generating activity.

10. Subsequent event:

On October 23, 2006 Enseco completed an Arrangement Agreement with Nexia Biotechnologies Inc. ("Nexia") and Enseco Management Corp. ("ManagementCo"). The arrangement resulted in the amalgamation of Nexia, Enseco and ManagementCo. Significant effects of the completion of the arrangement include:

i. The issuance of 2,125,000 Enseco shares to the previous Nexia shareholders

ii. The cancellation of the 750,000 preferred shares of Enseco held by Nexia

iii. The issuance of 562,500 voting shares and 687,500 non-voting shares in Enseco to ManagementCo and the elimination of the $500,000 note payable by Enseco to ManagementCo.

iv. The recognition of $450,000 in deferred charges incurred to September 30, 2006 as share issue costs.

Coincident with the completion of the Arrangement, Enseco has received conversion requests from the holders of the convertible debentures and will be issuing 6,688,000 voting shares and 2,062,000 non-voting shares of Enseco to the debenture holders.



Contact Information

  • Enseco Energy Services Corp.
    Kelly M. Nichol
    President and CEO
    (403) 806-0088
    Email: knichol@Enseco.ca