Norex Exploration Services Inc.
TSX VENTURE : NRX

Norex Exploration Services Inc.

September 29, 2005 06:00 ET

Norex Reports 82% Increase in Revenues in First Quarter

CALGARY, ALBERTA--(CCNMatthews - Sept. 29, 2005) - Norex Exploration Services Inc. (TSX VENTURE:NRX) ("Norex" or the "Company") announced an 82% increase in consolidated revenue for its first quarter ended July 31, 2005 compared to its first quarter of the prior year. Revenue rose to $2.1 million from $1.2 million in the comparative quarter. Geophysical Applications Processing Inc. ("GAPS") purchased May 31, 2005 accounted for $0.7 million of the current quarterly revenue.

The extremely wet spring and early summer in Western Canada significantly impacted Norex's field operations and contributed to a consolidated net loss of $143,857 ($0.02 per share) compared to a net loss of $361,758 ($0.06 per share) in the first quarter of the prior year. EBITDA increased to $135,802 ($0.02 per share) from negative EBITDA of $245,094 ($0.04 per share) in the comparative quarter of the prior year.

"In spite of challenging weather conditions this spring and early summer in Western Canada, we posted significantly improved financial results in the quarter. Our order book going into the fall and winter is strong and we expect our improved activity levels to continue." commented Mr. Paul Crilly, President of the Company.



Financial Review

Three months ended
July 31,
(000's $ except per share amounts) 2005 2004
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Revenue $ 2,144 $ 1,180
Direct Expenses 1,712 1,224
---------------------
Gross Margin (x) 432 (44)

EBITDA (x) 136 (245)
Per share 0.02 (0.04)

Net Income (loss) (144) (362)
Per share basic and diluted (0.02) (0.06)

Capital Expenditures (1) 46 1

Basic weighted average shares outstanding (000's) 6,965 6,079

(1) Excludes the GAPS acquisition.


(x) Non-GAAP financial measures

Management's discussion and analysis includes references to financial measures commonly used in the oil and gas service industry. EBITDA is provided to assist investors in determining the ability of Norex to generate cash from operations and is calculated from the statement of operations as net income for the period plus interest on debt and capital leases, income taxes, amortization and stock-based compensation expense. Gross margin is provided to assist investors in determining Norex's ability to generate earnings from its field operations and is calculated by subtracting direct field expenses from revenue. These measures do not have any standardized meaning prescribed by GAAP and may not be comparable to similar measures presented by other companies.

First Quarter Review

Results of Operations

Revenue for the first quarter ended July 31, 2005 increased to $2.1 million compared to $1.2 million for the quarter ended July 31, 2004. The Company experienced increased activity levels in western Canada, despite poor weather conditions. GAPS' revenue, which represented two months of activity in the quarter subsequent to its purchase, totaled $0.7 million. GAPS, with offices in Guelph, Ontario and Elmira N.Y., operates as a wholly owned subsidiary of Norex. GAPS is a full service company offering data acquisition including design and planning through to permitting and data processing for oil and gas as well as groundwater exploration, mining and engineering applications. In conjunction with the Company's objective of expanding operations geographically, GAPS provided 3-Dimensional ("3D") seismic acquisition and processing services in Texas during the quarter.

Gross margins for the current quarter increased to $431,134 or 20.2% of revenue compared to negative $44,266 or negative 3.8% of revenue for the similar quarter of the prior year. As in the fourth quarter of fiscal 2005, more customers coordinated their own sub-contractor, such as surveying companies, which resulted in Norex providing a higher level of acquisition services only. The provision of acquisition services alone provides relatively better margins as a percentage of revenues in that lower margin sub-contractor based revenues are minimized. The Company also realized a reduction in equipment rental costs as a result of purchasing seismic acquisition equipment in the prior year and equipment sharing between western and eastern operations.

General and administrative expenses in the current quarter were $288,633 compared to $200,828 in the first quarter of the prior year. The general and administrative expenses of GAPS from the date of acquisition accounted for the increase in expenses.

Amortization expense increased to $240,531 compared to $101,225, reflecting $2.8 million of property, plant and equipment acquired through GAPS and $929,322 of capital expenditures made over the course of fiscal 2005.

As a result of additional term debt related to the GAPS acquisition and a capital lease entered into in November 2004, interest on long term debt increased to $36,663 in the quarter compared to $15,439 in the first quarter of the prior year.

The Company generated EBITDA of $135,802 ($0.02 per share) in the quarter ended July 31, 2005 compared to negative EBITDA of $245,094 ($0.04 per share) in the quarter ended July 31, 2004. Improved revenue and a higher gross margin percentage accounted for this increase.

A net loss of $143,857 ($0.02 per share) was incurred in the current quarter compared to a net loss of $361,758 ($0.06 per share) in the similar quarter of the prior year. The Company did not record the future benefit of tax losses generated in the quarter.

Liquidity and Capital Resources

As at July 31, 2005, the Company's working capital deficit was $1,695,269 compared to a deficit of $48,853 at April 30, 2005. The increased working capital deficit arose as a result of the GAPS acquisition, an increase in the current portion of capital lease obligations due to the structure of the repayment schedule to correspond with the seasonality of the Company's operations, and the current portion of long-term debt obtained in May 2005. Subsequent to July 31, 2005, the Company closed a private placement which provided $600,000 of proceeds net of issue costs. The Company is actively exploring alternatives to raise additional equity to bolster its working capital position.

In May 2005, the Company signed a new banking agreement for the provision of an operating line of credit to a maximum of $1,750,000 bearing interest at prime plus 1.5% and repayable on demand and a $1,500,000 term loan bearing interest at prime plus 2% repayable based on a three-year amortization of monthly payments to be determined. The facilities are secured by a General Security Agreement over all current and future assets of the Company, a $2,000,000 Royal Bank of Canada business insurance policy payable to the lender and guarantees by the Company's subsidiaries. The Company has no off-balance sheet arrangements.

Capital Spending

During the quarter ended July 31, 2005, the Company spent $46,122 on its capital expenditures comprising of field equipment and deferred financing charges.

Business Combination

In May 2005, the Norex acquired all of the issued and outstanding shares of two private companies, Geophysical Applications Processing Services Ltd. ("GAPS") and its affiliate, Geophysical Applications Inc. ("GA") for $1,066,401 cash and 1,254,589 common shares of Norex. The Company incurred $44,916 of transaction costs to effect the acquisition.

The Share Purchase Agreement (the "Agreement") provides for the appointment of a GAPS shareholder (the "shareholder") to the Company's Board of Directors, certain post-closing adjustments and a cash payment ("earn-out") payable to the shareholder at the end of the first fiscal year of the Company. The maximum earn-out will be the greater of 10% of net income before amortization of the consolidated Company and $100,000. If the Company acquires or merges with another entity during the earn-out period, the percentage used in the earn-out calculation will be adjusted downward on a pro-rata basis based on the relative size of the other entity to the Company.

Management is still completing its review of the net assets acquired in the business combination. Therefore the purchase equation is subject to change based on the final determination of assets acquired and liabilities assumed.

The exchange amount has been allocated to the fair value of the net assets acquired as follows:



Current assets $ 704,830
Property and equipment 2,899,954
Goodwill 502,141
Bank indebtedness (117,027)
Bank loans (725,000)
Other current liabilities (1,149,620)
Future income tax liability (502,493)
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$ 1,612,785
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------------------------------------------------------------------------

Exchange amount
Cash $ 1,066,401
1,254,589 common shares 401,468
Earn-out due to shareholder 100,000
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1,567,869
Transaction costs 44,916
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$ 1,612,785
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The consolidated statements of operations and retained earnings and cash flows include the results of GAPS and GA from the date of acquisition.

Share Capital

As at July 31 2005, the Company's issued share capital consisted of 7,827,387 common shares (April 30, 2005 - 6,078,675). In May 2005, the Company issued 1,748,712 common shares in conjunction with the acquisition of GAPS and a related shareholder loan conversion. An additional 1,923,077 common shares were issued in August 2005 in connection with a private placement, described under "Subsequent Events" below. As at the date of this MD&A, the Company's issued share capital consists of 9,750,464 common shares.

As at July 31, 2005, the Company had 425,000 stock options outstanding (April 30, 2005 - 325,000) with an exercise price of $1.00 each. Subsequent to July 31, 2005, the Company granted 385,000 stock options with an exercise price of $0.93 each.

Related Party Transactions

During the three months ended July 31, 2005, the Company was charged $48,000 (2004 - $46,000) by officers and directors for administrative and consulting services. These amounts are recorded at the exchange amount agreed to by the related parties.

In conjunction with the acquisition of GAPS, the Company converted $210,002 of shareholder loans into 494,123 common shares of the Company and repaid $1,625 of loans in cash.

The Company also accrued the minimum earn-out of $100,000 due to a shareholder pursuant to the terms of the acquisition.

Subsequent Events

On August 24, 2005, the Company completed the private placement of 1,923,077 common shares at $0.325 per share to two directors and an arm's length party for net proceeds of $600,000.

Outlook

Management's current focus is on increasing the utilization of the Company's current fleet of equipment, potential acquisitions and geographic expansion. Management expects seismic industry conditions to strengthen as its clients increase exploration activities to replace depleting reserves. New and more complex geological zones of interest together with better seismic acquisition technology is contributing to a general increase of activity levels in our industry. Seismic data is one of the primary tools to evaluate the potential existence of oil and gas reservoirs prior to drilling. As land prices increase, sometimes dramatically in certain western Canadian locations, seismic information is a critical risk mitigation tool for our customers prior to committing capital for land purchases and leases.

Our first quarter of the fiscal year is typically our slowest due to wet spring conditions in western Canada and the resulting inability to mobilize equipment. Conversely, the fall and winter seasons are our busiest as customers exploit freezing conditions to access locations not accessible in summer. Currently our backlog of awarded work in Western Canada indicates that we should experience strong levels of activity through to spring breakup next year.

To date GAPS has operated two crews: one crew in the Appalachian, Illinois and Michigan basin for 3D seismic; and a smaller cable crew in Ontario and surrounding regions for 2D seismic and environmental applications. Due to the volume of snowfall in eastern Canada and the northeastern US, GAPS activity levels typically slow down. We will use this opportunity to move equipment and personnel to western Canada in order to capitalize on seasonally high activity levels.

In addition to the GAPS acquisition, the Company continues to investigate other opportunities for potential acquisitions, which will further contribute to our geographic expansion and enhance the combined operations of Norex and GAPS.

Selected Financial Information

Historical quarterly information, prepared by the Company and in accordance with GAAP, is as follows:



------------------------------------------------------------------------
Fiscal 2006, Quarter ended: July 31
------------------------------------------------------------------------
$
Revenue 2,144,315
Net income (loss) (143,857)
Net income (loss) per share (0.02)
EBITDA 135,802

------------------------------------------------------------------------
Fiscal 2005, Quarter ended: April 30 January 31 October 31 July 31
------------------------------------------------------------------------
$ $ $ $
Revenue 6,875,066 3,943,645 2,140,081 1,179,734
Net income (loss) 823,639 146,823 41,976 (361,758)
Net income (loss) per share 0.14 0.02 0.01 (0.06)
EBITDA 995,485 372,674 159,338 (245,094)

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Fiscal 2004, Quarter ended: January 31 October 31 July 31
------------------------------------------------------------------------
$ $ $
Revenue 3,177,032 1,937,928 1,699,840
Net income (loss) 213,606 (272,498) (128,714)
Net income (loss) per share 0.04 (0.04) (0.02)
EBITDA 355,719 (137,698) 42,473


Business Risks and Uncertainties

The Company is exposed to several operational risks inherent in the acquisition and processing of seismic data. These risks include: commodity prices received by customers which impacts their decision to acquire new seismic data in combination with the competitive bidding process for the Company's services; the seasonality of field operations and the impact of adverse weather conditions; cost of capital risk associated with securing the needed capital to carry out the Company's operations; risk of environmental impact and credit risk of non-payment for sales contracts.

The Company maintains a comprehensive insurance program to reduce risk to an acceptable level and to protect it against significant losses. The Company's risk in regards to financial instruments is detailed in Note 12 to the audited April 30, 2005 financial statements.

Forward-looking Statements

Certain information set forth in this MD&A, including management's assessment of the Company's future plans and operations, contains forward-looking statements, which are based on the Company's current internal expectations, estimates, projections, assumptions and beliefs, which may prove to be incorrect. Some of the forward-looking statements may be identified by words such as "expects", "anticipates", "believes", "projects", "plans" and similar expressions. These statements are not guarantees of future performance and undue reliance should not be placed on them. Such forward-looking statements necessarily involve known and unknown risks and uncertainties, which may cause the Company's actual performance and financial results in future periods to differ materially from any projections of future performance or results expressed or implied by such forward-looking statements. The Company is a seismic acquisition and processing company and is exposed to a number of risks and uncertainties that are common to companies in the same business. These risks and uncertainties include demand for the Company's services which is affected by, among other things, the speculative nature of resource exploration and development activities, changes in resource prices, general economic, market and business conditions; competition for capital and skilled personnel; the ability to comply with current and future health, safety, environmental and other laws; actions by governmental or regulatory authorities including increasing taxes and changes in other regulations; and the occurrence of unexpected events involved in resource exploration.

This MD&A should not be considered all-inclusive as it excludes changes that may occur in general economic, political and environmental conditions. The Company cautions that actual performance will be affected by a number of factors, many of which are beyond its control. Investors are cautioned against attributing undue certainty to forward-looking statements.

This MD&A is dated September 29, 2005 and incorporates all relevant information and considerations to that date.

NOTICE OF NO AUDITOR REVIEW OF

INTERIM FINANCIAL STATEMENTS

Under National Instrument 51-102, Part 4, subsection 4.3(3) (a), if an auditor has not performed a review of the interim financial statements they must be accompanied by a notice indicating that the financial statements have not been reviewed by an auditor.

The accompanying unaudited interim financial statements of the Company have been prepared by and are the responsibility of the Company's management.

The Company's independent auditor has not performed a review of these financial statements in accordance with standards established by the Canadian Institute of Chartered Accountants for a review of interim financial statements by an entity's auditor.



NOREX EXPLORATION SERVICES INC.
Consolidated Balance Sheets
(unaudited)


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------------------------------------------------------------------------
July 31 April 30
2005 2005
Assets

Current assets
Accounts receivable $ 2,094,543 $ 6,165,529
Prepaids and deposits 71,958 46,209
Income taxes recoverable 51,632 -
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2,218,133 6,211,738

Goodwill 652,141 150,000
Capital assets 4,919,076 2,213,531
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$ 7,789,350 $ 8,575,269
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Liabilities and Shareholders' Equity
Current liabilities
Operating lines of credit $ 238,393 $ 543,359
Accounts payable and accrued liabilities 2,470,994 5,197,817
Demand loan - 43,119
Current portion of long-term debt 500,004 -
Current portion of capital lease obligations 604,011 476,296
Due to shareholder 100,000 -
------------------------------------------------------------------------
3,913,402 6,260,591

Long-term debt 916,662 -
Capital lease obligations 333,597 449,933
Future income taxes 502,493 -
Due to shareholders - 211,627
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5,666,154 6,922,151
------------------------------------------------------------------------

Shareholders' equity
Share capital 969,081 357,611
Contributed surplus 2,465 -
Retained earnings 1,151,650 1,295,507
------------------------------------------------------------------------
2,123,196 1,653,118
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$ 7,789,350 $ 8,575,269
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NOREX EXPLORATION SERVICES INC.
Consolidated Statements of Operations and Retained Earnings
Three months ended July 31
(unaudited)

------------------------------------------------------------------------
------------------------------------------------------------------------
2005 2004

Revenue
Seismic acquisition and processing $ 2,144,315 $ 1,179,734
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Direct expenses
Contractors 695,118 635,606
Wages, benefits and subsistence 658,049 319,431
Field supplies and consumables 231,881 182,423
Equipment rentals 81,992 65,799
Vehicle operating 45,141 20,741
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1,712,181 1,224,000
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Income (loss) before the undernoted 432,134 (44,266)

General and administrative expenses 288,633 200,828
Amortization 240,531 101,225
Interest on long-term debt and lease
obligations 36,663 15,439
Unrealized loss on foreign exchange 9,217 -
Stock-based compensation expense 2,465 -
Other income (1,518) -
------------------------------------------------------------------------

Loss for the period (143,857) (361,758)
Retained earnings, beginning of period 1,295,507 644,827
------------------------------------------------------------------------
Retained earnings, end of period $ 1,151,650 $ 283,069
------------------------------------------------------------------------
------------------------------------------------------------------------

Loss per share - basic and diluted $ (0.02) $ (0.06)
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NOREX EXPLORATION SERVICES INC.
Consolidated Statements of Cash Flows
Three months ended July 31
(unaudited)


------------------------------------------------------------------------
2005 2004
Cash provided by (used in)

Operations
Loss for the period $ (143,857) $ (361,758)
Items not involving cash
Amortization 240,531 101,225
Stock-based compensation expense 2,465 -
Unrealized loss on foreign exchange 9,217 -
------------------------------------------------------------------------
108,356 (260,533)
Change in non-cash working capital 885,915 935,597
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994,271 675,064
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Investing

Acquisition of private companies (1,111,317) -
Bank indebtedness acquired (117,027) -
Acquisition of capital assets (46,122) (1,061)
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(1,274,466) (1,061)
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Financing

Repayment of operating line of credit, net (304,966) (621,867)
Repayment of demand loans (768,119) (43,122)
Proceeds from long-term debt 1,500,000 -
Repayment of long-term debt (83,334) -
Repayment of obligations under capital lease (52,544) (9,014)
Repayment of shareholder loans (1,625) -
------------------------------------------------------------------------
289,412 (674,003)
------------------------------------------------------------------------

Unrealized loss on foreign exchange (9,217) -
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Change in cash - -
Cash, beginning of period - -
------------------------------------------------------------------------
Cash, end of period $ - $ -
------------------------------------------------------------------------
------------------------------------------------------------------------


Supplemental cash flow information:
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Interest paid $ 36,663 $ 15,439


The TSX Venture Exchange has not reviewed and does not accept responsibility for the adequacy or accuracy of this news release.

Contact Information

  • Norex Exploration Services Inc.
    Mr. Paul Crilly
    President and CFO
    (403) 291-0601
    or
    Norex Exploration Services Inc.
    Mr. Ben Berg
    Chairman and CEO
    (403) 291-0601