Norex Exploration Services Inc.

Norex Exploration Services Inc.

August 25, 2005 08:00 ET

Norex Reports Record Fourth Quarter and Fiscal Year Results

CALGARY, ALBERTA--(CCNMatthews - Aug. 25, 2005) - On the strength of internal operating improvements and an increase in seismic activity in Western Canada, Norex Exploration Services Inc. (TSX VENTURE:NRX) ("Norex" or the "Company") announced record revenue and profitability for its fourth quarter and fiscal year ended April 30, 2005.

"We are starting to realize the benefits of strategic initiatives taken in 2004, as evidenced by our significantly improved performance," commented Mr. Ben Berg, Chairman and CEO.

"The acquisition of Geophysical Applications Processing Inc. ("GAPS"), the closing of a private placement, and our expansion into the United States, all completed subsequent to our recent fiscal year end, will provide the groundwork for Norex's future growth. However, the unprecedented rainfall this spring and early summer in Western Canada will delay the positive impact of these initiatives until our second quarter," said Mr. Paul Crilly, President.

Financial Review

Three months ended Year ended
(000's $ except per April 30, April 30,
share amounts) 2005 2004 2005 2004

Revenue $ 6,875 $ 4,589 $ 14,139 $ 11,403
Direct Expenses 5,682 4,114 12,065 10,080
Gross Margin (a) 1,193 475 2,074 1,323

EBITDA (a) 995 253 1,282 513
Per share 0.16 0.04 0.21 0.8

Net Income (loss) 824 101 651 (86)
Per share basic
and diluted 0.14 0.02 0.11 (0.01)

Capital Expenditures (1) 95 34 929 381

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

(1) Includes acquisitions via capital leases

(a) 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, and amortization
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.

Fourth Quarter Review

Results of Operations

Revenue for the quarter ended April 30, 2005 increased 50% to $6.9 million compared to $4.6 million for the quarter ended April 30, 2004. A general increase in industry activity levels, Norex's ability to add new customers to its client base in Western Canada and the activation of its second field crew contributed to the improvement in revenue. Although strong commodity prices spurred increased industry exploration activity, Norex did not experience any significant pricing improvements for the provision of its services. The Company expects that seismic acquisition prices will improve later in calendar 2005 as demand for services continues to remain strong.

Gross margins for the current quarter increased to $1.2 million or 17.3% of revenue compared to $0.5 million or 10.3% of revenue for the similar quarter of the prior year. Certain customers coordinated their own sub-contractors in the quarter, such as surveying companies, which resulted in Norex providing only seismic acquisition services. 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 current year.

General and administrative expenses in the current quarter were $232,338 compared to $278,145. The decrease in expenses was the result of a strategic decision to consolidate offices in Calgary and unusually high professional fees in the comparative quarter due to an aborted acquisition transaction.

The following table summarizes information about general and administrative expenses for the three months ended April 30 (certain 2004 figures have been reclassified to conform with current classification):

Three months ended April 30
2005 2004
Office rent, maintenance, supplies $ 78,785 $ 88,843
Professional consultants 36,952 86,554
Salaries and benefits 53,808 57,618
Management fees 49,000 21,500
Shareholder expenses 7,782 4,442
Miscellaneous 6,011 19,188
$ 232,338 $ 278,145

The Company generated EBITDA of $1.0 million ($0.16 per share) in the quarter ended April 30, 2005 compared to $0.3 million ($0.04 per share) in the similar quarter of the prior year. Improved revenue and a higher gross margin percentage accounted for this increase.

Net income rose to $0.8 million ($0.14 per share) in the current quarter from $0.1 million ($0.02 per share) in the comparative quarter of the prior year. The Company utilized previously unrecorded tax losses to eliminate the effect of the expected current tax provision in the quarter.

Fiscal 2005 Annual Review

Norex Exploration Services Inc. is incorporated under the Business Corporation Act (Alberta) and its common shares trade on the TSX Venture Exchange. The Company is a geophysical services company that provides specialized seismic services including seismic data acquisition. The Company and its wholly owned subsidiary, Norex Geophysical Inc., were amalgamated on May 1, 2004.

Results of Operations

Seismic acquisition and processing services resulted in sales of $14,138,526 for the year ended April 30, 2005 as compared to $11,403,484 for 2004, representing a 24% increase. The increase in revenue was due to higher industry activity levels resulting from increased oil and gas exploration budgets. As a result, the Company experienced an increase in awarded contracts and operated a second crew to meet the demand. The Company's gross margin improved to $2.1 million or 14.7% of revenue compared to $1.3 million or 11.6% of revenue for fiscal 2004. The improvement in gross margin percentage can be attributed to fewer data acquisition projects requiring the full complement of sub-contractors thereby reducing direct costs and the Company's processing operations being temporarily on hold for future relocation. Furthermore, as a result of the Company acquiring additional field equipment in the year, equipment rental expenses for the year ended April 30, 2005 were reduced by $296,000 as compared to that for the year ended April 30, 2004.

General and administrative expenses for the year ended April 30, 2005 were $830,980 compared to $873,132 for the prior year. The decrease in general and administrative expenses for the comparisons on a year-over-year and quarter-over-quarter basis can be attributed the following primary items: a reduction in rent and other office expenses for the last four months of the year due to the consolidation of the Company's operations into one location as of March 1, 2005 and a reduction in the use of professional consultants as the prior year/quarter included costs related to an aborted corporate acquisition, offset by an increase in management fees which were reduced in the prior year due to weak Company performance in 2004.

The following table summarizes information about general and administrative expenses for the years ended April 30 (certain 2004 figures have been reclassified to conform with current classification):

Year ended April 30
2005 2004
Office rent, maintenance, supplies $ 339,593 $ 386,853
Professional consultants 69,394 116,844
Salaries and benefits 197,226 180,254
Management fees 182,250 153,000
Shareholder expenses 17,322 15,584
Miscellaneous 25,195 20,597
$ 830,980 $ 873,132

Amortization expense increased to $537,860 in fiscal 2005 compared to $508,678 in the prior year due to capital expenditures of $929,322 and $381,403 in the respective years. Interest on debt and capital leases decreased to $93,863 in 2005 from $106,179 in 2004 as a result of a reduction in a demand loan and a small reduction in capital lease obligations.

Net income for the year ended April 30, 2005 was $650,680 ($0.11 per share) compared to a loss of $101,678 ($0.01 per share). A substantial increase in revenues combined with improved margins accounted for the improved profitability. The Company utilized tax losses from prior years to eliminate its tax expense in the current year leaving approximately $278,000 of non-capital losses to be utilized in subsequent periods.

Liquidity and Capital Resources

As at April 30, 2005, the Company's working capital deficit was $48,853 compared to $289,998 at April 30, 2004. The improvement in the Company's working capital is primarily due to the success of the 2005 fourth quarter results. The Company's current assets increased by $2,529,739 while current liabilities increased by only $2,288,594. The increase in current assets relates to receivables for the large contracts completed in March 2005. The increase in current liabilities relates to an increase in accounts payable commensurate with operating activities and additional current debt related to the capital lease obligation for the geophones purchased in the third quarter offset by a reduction in the outstanding balance of the operating line of credit and demand loan. As at April 30, 2005, the Company was in compliance with the established financial covenants of the existing banking agreement.

In May 2005, subsequent to the acquisition described under "Subsequent Events", below, 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 year ended April 30, 2005, the Company spent $929,322 on its capital spending program compared to $381,403 during 2004. 2005 capital spending is summarized as follows:

Capital assets, April 30, 2004 $ 1,822,069
Cash purchases 139,696
Purchase via capital lease 789,626
Amortization (537,860)
Capital assets, April 30, 2005 $ 2,213,531

The capital purchase through a capital lease occurred in November 2004 and relates to an agreement to purchase geophones for which rental payments over the next three years are applied against the purchase cost. Previously the Company had been renting this equipment and expects the purchase to reduce geophone rental costs in the order of 60% to 70%, which would equate to savings of $300,000 to $400,000 in a typical year.

Share Capital

As at April 30, 2005, the Company's issued share capital consisted of 6,078,675 common shares (April 30, 2004 - 6,078,675). In May 2005, the Company issued 1,748,712 common shares in conjunction with the acquisition and shareholder loan conversion, and an additional 1,923,077 common shares 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 April 30, 2005, the Company had 325,000 stock options outstanding (April 30, 2004 - 375,000). During the year ended April 30, 2005, 50,000 options were cancelled upon the termination of an employee. In May 2005, the Company granted 100,000 stock options in conjunction with the acquisition described under "Subsequent Events", below. As at the date of this MD&A, the Company has 425,000 stock options outstanding.

As at April 30, 2005, all previously escrowed shares had been released.

Related Party Transactions and Balances

During the year ended April 30, 2005, the Company was charged $182,250 (2004 - $158,500) by officers and directors for administrative and consulting services. These amounts are recorded at the exchange amount agreed to by the related parties.

Advances from shareholders in the amount of $211,627 (2004 - $222,001) are non-interest bearing, unsecured with no fixed terms of repayment. The advances are converted to common shares of the Company in May 2005 as described under "Subsequent Events", below.


Under the terms of lease agreements for its premises and vehicle operating leases, the Company is committed to the following payments:

2006 $ 218,405
2007 $ 160,722
2008 $ 51,210

Selected Financial Information

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

Three months ended
fiscal 2005 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)

Three months ended
fiscal 2004 April 30 January 31 October 31 July 31
$ $ $ $
Revenue 4,588,684 3,177,032 1,937,928 1,699,840
Net income (loss) 101,032 213,606 (272,498) (128,714)
Net income (loss)
per share 0.02 0.04 (0.04) (0.02)
EBITDA 252,685 355,719 (137,698) 42,473

Subsequent Events

In May 2005, the Company 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 the Company. GAPS' activity in eastern Canada, the northeastern U.S. and Texas is typically cyclical in the opposite seasons of Norex, which the Company expects will create a stronger unity and a more uniform revenue base throughout the year.

In connection with the above acquisition, the amount due to shareholders on the closing date was converted to 494,123 common shares of the Company.

In addition the Company granted 100,000 stock options to an officer of the Company. The options vest immediately, are exercisable at $1.00 per share and expire in January 2007.

The acquisition also provides for a cash payment ("earn-out"), subject to certain conditions, to be paid to the officer at the end of each of the first three successive fiscal years of the Company, commencing with the fiscal year ending April 30, 2006. The maximum earn-out in each of the three years 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.

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.


Management is focusing on an expansion of current operations, potential acquisitions and geographic expansion. Management expects seismic industry conditions to strengthen as its clients increase exploration activities to replace depleting reserves. The Company continues to upgrade its equipment and is actively pursuing and marketing its unique surface energy source, Enviro-vibes. Given the acquisition of GAPS, the Company anticipates that the Enviro-vibes will have significant applications in Eastern Canada, Northeastern U.S. and Texas.

GAPS, with offices in Guelph, Ontario and Elmira N.Y. will be operated 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. 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.

The equipment used by GAPS is compatible with that used by Norex. Since the Eastern season is reciprocal to that of Norex in the Western Canadian basin, the equipment can be moved back and forth in the spring and the fall thereby reducing rental charges considerably.

The seismic data processing facilities have been moved to Guelph to supplement GAPS existing processing capabilities. Much of the data acquisition performed by GAPS includes data processing as part of the acquisition contract. This is in contrast to Western Canada where the norm is to separate processing from the acquisition contractor.

The fourth quarter of Norex's fiscal 2005 year turned out to be a record quarter for the Company. In contrast, and as is typical of Western Canadian seismic activity, the first quarter of fiscal 2006 will be a disappointment due to road bans and an extraordinarily wet spring as wet conditions invariably immobilize seismic crews. The Company expects to report an operating loss in the quarter.

As indicated in previous press releases, activity in the Northeastern U.S. basins is increasing. Despite a slower than expected first quarter, we anticipate that GAPS marketing exposure and reputation for delivering a quality product will stand the Company in good stead in the very near future. Further to this, GAPS has commenced operations on a large 2D in the Gaspe Peninsula using GAPS' four large truck-mount vibe units. GAPS has also been awarded a contract for a September 3D job in New Brunswick and 2D work in New York. In short, Norex's design for geographic exposure and expansion is starting to show results through the GAPS acquisition.

Norex supervisory staff and four Enviro-vibes in combination with GAPS recording equipment and staff will be re-commencing operations in September for a number of 3D's in the Dallas Fort Worth region. We continue to actively market our services in Texas in anticipation of additional work in 2006.

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.
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 consolidated financial statements.

Critical Accounting Estimates

In the application of accounting policies, management is often required to make judgments based on underlying estimates and assumptions about future events and their effects. Underlying estimates and assumptions are based on historical experience and other factors that management believes to be reasonable under the circumstances. These estimates and assumptions are subject to change as new events occur and additional information is obtained. The Company believes the following are the most critical accounting estimates used in the determination of its financial results:

Impairment of Long-Lived Assets

The Company is required to review the carrying value of all property and equipment, including the carrying value of mineral properties, for potential impairment. Impairment is indicated if the carrying value of the long-lived asset is not recoverable by the future undiscounted cash flows. If impairment is indicated, the amount by which the carrying value exceeds the estimated fair value of the long-lived asset is charged to earnings.

Income Taxes

The Company records future tax assets and liabilities to account for the expected future tax consequences of events that have been recorded in its consolidated financial statements and its tax returns. These amounts are estimates and the actual tax consequences may differ from the estimates due to changing tax rates and regimes, as well as changing estimates of cash flows and capital expenditures in current and future periods. A valuation allowance is recorded to the extent that there is uncertainty regarding utilization of future tax assets.

New Canadian Accounting Pronouncements

The Canadian Institute of Chartered Accountants ("CICA") has issued a number of accounting pronouncements, some of which may impact the Company's reported results and financial position in future periods:

Comprehensive Income / Financial Instruments / Hedges

The CICA issued new standards in early 2005 for Comprehensive Income (CICA 1530), Financial Instruments (CICA 3855) and Hedges (CICA 3865), which will be effective for the reporting year-end 2007. The new standards will bring Canadian rules in line with current rules in the US. The standards will introduce the concept of "Comprehensive Income" to Canadian GAAP and will require that an enterprise (a) classify items of comprehensive income by their nature in a financial statement and (b) display the accumulated balance of comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. Derivative contracts will be carried on the balance sheet at their mark-to-market value, with the change in value flowing to either net income or comprehensive income. Gains and losses on instruments that are identified as hedges will flow initially to comprehensive income and be brought into net income at the time the underlying hedged item is settled. It is expected that this standard will be effective for 2007 reporting. Any instruments that do not qualify for hedge accounting will be marked-to-market with the adjustment (tax effected) flowing through the income statement.

As the Company does not have any hedges in place, these new pronouncements do not impact the Company's current financial position.

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 August 24, 2005 and incorporates all relevant information and considerations to that date.


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.

Statements of Operations and Retained Earnings
For the three and twelve months ended April 30
April 30, April 30,
2005 2004

Current assets
Accounts receivable $ 6,165,529 3,650,172
Prepaids and deposits 46,209 31,827
6,211,738 3,681,999

Goodwill 150,000 150,000
Capital assets 2,213,531 1,822,069
$ 8,575,569 5,654,068

Liabilities and Shareholders' Equity
Current liabilities
Operating line of credit $ 543,359 855,332
Accounts payable and accrued liabilities 5,197,817 2,736,595
Demand loan 43,119 215,607
Current portion of capital lease obligations 476,296 164,463
6,260,591 3,971,997

Capital lease obligations 449,933 457,632
Due to shareholders 211,627 222,001
6,922,151 4,651,630

Shareholders' equity
Share capital 357,611 357,611
Retained earnings 1,295,507 644,827
1,653,118 1,002,438
$ 8,575,269 $ 5,654,068

Statements of Operations and Retained Earnings
For the three and twelve months ended April 30

Three months ended Year ended
April 30, April 30,
2005 2004 2005 2004

Seismic acquisition
and processing $ 6,875,066 $ 4,588,684 $ 14,138,526 $ 11,403,484

Direct expenses
Contractors 2,218,374 1,953,848 6,005,380 4,339,254
Wages, benefits
and subsistence 1,085,123 923,879 2,645,747 2,764,281
Field supplies and
consumables 1,552,237 184,142 2,116,144 1,420,841
Equipment rentals 720,929 991,814 1,080,815 1,376,945
Vehicle operating 105,819 60,069 217,028 178,591
5,682,482 4,113,752 12,065,114 10,079,912

Income before
the undernoted 1,192,584 474,932 2,073,412 1,323,572
and shop expenses 232,338 278,145 830,980 873,132
Amortization 142,740 119,216 537,860 508,678
Interest on debt
and capital leases 29,106 31,994 93,863 106,179
Other income (35,239) (10,086) (39,971) (16,927)
Gain on sale of capital
assets - (45,812) - (45,812)
Net income (loss) for
the period before
taxes 823,639 101,475 650,680 (101,678)
Income tax provision
(recovery) - 443 - (15,104)
Net income (loss)
for the period 823,639 101,032 650,680 (86,574)
Retained earnings,
beginning of period 471,868 543,795 644,827 731,401
Retained earnings,
end of period $ 1,295,507 $ 644,827 $ 1,295,507 $ 644,827

Net income (loss)
per share
- basic and diluted $ 0.14 $ 0.02 $ 0.11 $ (0.01)

Statements of Cash Flows
For the three and twelve months ended April 30
Three months ended Year ended
April 30, April 30,
2005 2004 2005 2004

Cash provided by (used in):
Net income (loss)
for the period $ 856,851 $ 101,032 $ 650,680 $ (86,574)
Items not involving
Amortization 231,573 119,216 537,860 508,678
Gain on sale of
capital assets - (45,812) - (45,812)
1,088,424 174,436 1,188,540 376,292
Change in non-cash
working capital (733,295) (109,254) (68,517) 22,514
355,129 65,182 1,120,023 398,806

Acquisition of
capital assets (95,084) (34,254) (139,696) (381,403)
Proceeds from
disposal of capital
assets - 68,500 - 68,500
(95,084) 34,246 (139,696) (312,903)

(Repayment of) proceeds
from operating line 81,681 (30,601) (311,973) 188,037
Repayment of demand
loan (43,122) (30,124) (172,488) (46,050)
Repayment of
obligations under
capital lease (288,230) (99,905) (485,492) (227,890)
Repayment of amounts
due to shareholders (10,374) - (10,374) -
(260,045) (99,428) (980,327) (85,903)
Change in cash - - - -

Cash, beginning
of period - - - -

Cash, end of period $ - $ - $ - $ -

Supplemental cash
flow information:

Interest paid $ 29,106 $ 31,994 $ 93,863 $ 106,179

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
    Norex Exploration Services Inc.
    Mr. Ben Berg
    Chairman and CEO
    (403) 291-0601