Divergent Energy Services Corp.

Transcription

1 As at September 30, 2016 and for the three and nine month periods ended September 30, 2016 and 2015 (Amounts are in USD $000 s, except per share data) Dated: November 18, 2016

2 INTRODUCTION This Management s Discussion & Analysis discussion ( MD&A ) of the financial condition and results of operations of Divergent Energy Services Corp. ( the Corporation or Divergent ) for the period ended September 30, 2016, contains information current to and is dated November 18, It should be read in conjunction with the Unaudited Condensed Consolidated Interim Financial Statements for the three and nine month periods as at and ended September 30, 2016, ( Q ) and the Audited Consolidated Financial Statements dated December 31, 2015, and notes thereto as well as other information which is available on SEDAR at All amounts contained herein are in United States Dollars unless otherwise indicated. The Corporation conducts business through its domestic parent and foreign subsidiaries. The Corporation s Unaudited Condensed Consolidated Interim Financial Statements have been prepared in accordance with International Accounting Standards ( IAS ) 34 Interim Financial Reporting. The Corporation s significant accounting policies under IFRS are included in Note 3 to the annual financial statements, with the addition of policies as noted in the Q Unaudited Condensed Consolidated Interim Financial Statements; both can be found on SEDAR at This MD&A contains certain statements that constitute forward-looking statements under the meaning of applicable securities laws. Please see Forward-Looking Statements at the end of this document, for a discussion concerning the Corporation s use of such information. This MD&A and Q Unaudited Condensed Consolidated Interim Financial Statements were reviewed by the Audit Committee of the Corporation s Board of Directors on November 18, 2016, and approved by Divergent s Board of Directors on November 18, The following MD&A for the Corporation has been prepared by management as of November 18, 2016, and is a review of the financial condition and results of operations of the Corporation. This MD&A has been prepared in accordance with the requirements of National Instrument and covers the period from January 1, 2016, to November 18, 2016, unless otherwise noted. CORPORATE PROFILE Divergent is a publicly traded entity on the Canadian Venture Exchange (TSX-V) under the symbol DVG. Except where the context otherwise requires, Divergent or the Corporation, shall refer to Divergent Energy Services Corp. and its consolidated subsidiaries. The Corporation's business consists of two operating segments consisting of the Artificial lift systems and the Project management and financing segment. Divergent s products are sold primarily into the US. The Corporation offers normal and customary trade terms to its customers, no significant part of which is of an extended nature. Special inventory requirements are not necessary, and customer merchandise return rights do not extend beyond normal warranty provisions. The market for the Corporation's products is highly competitive and includes diversified accounts by size and type. The Corporation has not been actively involved in Mexico since January SUMMARY DESCRIPTION OF BUSINESS Artificial Lift Systems ( ALS ) The ALS division provides electric submersible pumping products including the commercialization of an electromagnetic reciprocating submersible pump technology. Divergent currently services Wyoming and Colorado from its facility in Gillette, WY, which generates 100% of the revenue for the division. Three distinct product lines are currently offered: Linear Electromagnetic Submersible Pumps ( Linear Pump ) The Linear Pump uses permanent magnet motor technology that duplicates conventional rod pump movement without rod strings or surface lifting equipment. All moving parts are contained within the submersible pump housing, eliminating rod and tubing wear, making the Linear Pump ideal for placement into horizontal wellbores. The Linear Pump is installed similar to an ESP at the bottom of the well on production tubing with electric cable running to surface. Testing and product development has been conducted in a Saskatchewan oil well, and the product line is expected to begin generating revenue in Electric Submersible Pump Systems ( ESP ) ESP products and services primarily target production operations in the oil and gas industry. ESP products are designed to lift large volumes of fluid from both oil and gas wells. Electric Submersible Progressing Cavity Pump Systems ( ESPCP ) ESPCP products and services primarily target production operations in the oil and gas industry. Divergent pioneered the introduction of ESPCP s to the Powder River Basin. 2

3 Project Management and Financing ( PMF ) The PMF division formerly operated in Mexico through its 100% owned subsidiary CDN Oilfield Technologies & Solutions, S. de R.L. de C.V. ( COTS Mexico ). The division provided working capital for oilfield construction and infrastructure projects from which it generated fees. The division is focused on the collection of outstanding receivables from completed projects. OPERATIONS AND FINANCIAL HIGHLIGHTS Revenue and Gross Profit from the ALS division increased 233% and 108% respectively for the three month period ended September 30, 2016 as compared to the same period in 2015, demonstrating Divergent s continued resilience during a prolonged reduction in oil and gas activity levels. During Q3 2016, Divergent expanded its Artificial Lift division to take advantage of opportunities to grow market share. The operating and financial highlights for the three and nine months ended September 30, 2016 and 2015 can be summarized as follows: Three Months Ended September Nine Months Ended September Revenue $3,969 $1,192 $8,728 $3,799 Net loss for the period (164) (882) (2,907) (4,430) Total assets 5,220 6,817 5,220 6,817 Total liabilities 9,024 7,336 9,024 7,736 Shareholders equity (deficit) (3,804) (519) (3,804) (519) Loss per share basic and diluted ($0.00) ($0.00) ($0.03) ($0.05) REVENUE, COST OF SALES AND GROSS PROFIT ALS- US ALS Canada PMF Three Months Ended September 30, Three Months Ended September 30, Three Months Ended September 30, Sales $ 3,969 $ 1,192 $ - $ - $ - $ - Cost of sales 3, Gross profit $ 668 $ 321 $ - $ - $ - $ - Gross profit % 17% 27% N/A N/A N/A N/A ALS - US ALS Canada PMF Nine Months Ended September 30, Nine Months Ended September 30, Nine Months Ended September 30, Sales $ 8,728 $ 3,490 $ - $ - $ - $ 309 Cost of sales 7,001 2, Gross profit $ 1,727 $ 1,029 $ - $ - $ - $ 287 Gross profit % 20% 30% N/A N/A N/A 93% 3

4 Revenue grew significantly during the quarter as a result of increased market-share and a moderate upswing in the demand for submersible pumps from the Coalbed Methane Gas producers in Wyoming whose gas demand is tied to power generation. The use of methane for power generation is expected to continue to increase as governments move to reduce the number of coal-burning power plants. Gross margins in the ALS segment were affected by a number of unexpected costs associated with the rapid increase in activity in the quarter. Freight costs increased as inventory levels of certain pumps and motors depleted faster than ocean freight deliveries could arrive. Nearly 100% of the ALS products have long lead times of up to 90 days from date of order. As a result of this issue, and the desire to have much more inventory on hand, the Corporation has changed its supply chain strategy in order to protect the Corporation from further excessive freight costs. Inventory procurement, shipping, and warehousing has been outsourced to a global distribution expert. This new partner will procure and hold inventory, and the Corporation will draw from that inventory on an as needed basis. This change is expected to free up working capital with a marginal increase to product cost (the distributor is able to purchase products at significant discounts due to larger volume purchases and advance payments). Management anticipates margins to recover as early as Q1 2017, as new processes and the full value of the new supply chain partner contribute to operational efficiencies, as well as new pricing schedules for 2017 that are anticipated to deliver some pricing relief from the suppressed prices during the previous two years industry slowdown. General and administrative expenses ( G&A ) % Change For the three months ended March 31, $769 $826 (7%) For the three months ended June 30, (1%) For the three months ended September 30, % For the nine months ended September 30, $2,435 $2,396 2% G&A expenses in the third quarter increased by 13% in 2016 from 2015, and for the nine month period ended September 30, 2016 increased 2% from the comparative period in As revenue continues to grow we expect the G&A to continue to decrease as a percentage of sales. Management anticipates that operations can continue to expand with limited need to increase overhead. Product development costs % Change For the three months ended March 31, $178 $203 (12%) For the three months ended June 30, (87%) For the three months ended September 30, (91%) For the nine months ended September 30, $246 $532 (54%) Product development costs include the purchase of prototypes (in 2015) and second-generation electromagnetic motors (in 2016), freight, testing and third party services associated with deployment of the Linear Pumps. As the product line nears commercialization these costs are expected to continue to decrease. Provision for bad debts % Change For the three months ended March 31, $768 $1,602 (52%) For the three months ended June 30, - - N/A For the three months ended September 30, - 74 N/A For the nine months ended September 30, $768 $1,676 (46%) The Corporation wrote-off advances and long-term receivables due from its Mexican operation that were highly uncertain for timing and collectability, hence they were deemed uncollectible by management. 4

5 Settlement of contingent consideration % Change For the three months ended March 31, $- $238 N/A For the three months ended June 30, - - N/A For the three months ended September 30, - - N/A For the nine months ended September 30, $- $238 N/A Prior to the closure of the Karlington subsidiary, the fair value of the contingent liability relating to the acquisition of Karlington Artificial Lift in 2012 was satisfied during the year of 2015 with the payment of 1,000,000 common shares of the Corporation to the Corporation s managers of this operation. The Corporation sold the agriculture and mining related inventory to its managers of Karlington during Q in exchange for 1,000,000 common shares of the Corporation owned by the managers. This resulted in a write down of inventory being the difference between the cost of the inventory and the market value of the Corporation s common shares at December 31, Net Finance Expense Three months ended September 30, Nine months ended September 30, Foreign exchange income (loss) $263 $554 ($416) $386 Interest expense (121) (86) (346) (353) Accretion expense (42) (78) (122) (238) Net discount on long term-loan Net finance income (expense) $100 $390 ($884) ($153) The Corporation recorded net finance income and (expense) of $100 and ($390) for the three months ended September 30, 2016 and 2015, respectively. For the nine months ended September 30, 2016 and 2015, the net finance (expense) was ($884) and ($153), respectively. During the three month period ended September 30, 2016 the Corporation recorded a gain on foreign exchange of $263 compared to a gain of $554 in Q primarily due to the movement in the rate of the Canadian dollar against the US Dollar. The USD denominated loans between the Corporation and its subsidiaries are no longer being recognized as net investments thus the foreign exchange gains or losses are being recognized in net income versus accumulated other comprehensive income. Compared to the prior period, the Corporation did not incur as much expense with regards to interest and accretion due to the carrying value of the debentures being lower in the current period. Income Tax Expense The Corporation s income taxes for the period ended September 30, 2016 amounted to $30 in current income tax expense and $Nil in deferred income taxes in comparison to Q whereby the Corporation incurred $30 in current tax and an expense of $554 in deferred tax. The current tax for Q and Q relates to interest and penalties in Mexico. The deferred tax expense of $554 in Q relates to the foreign exchange on the intercompany loans that was recognized through Accumulated other comprehensive income. Statement of Equity Accumulated other comprehensive income In the three and nine month periods ended September 30, 2016, accumulated other comprehensive income decreased by $259 and increased by $33, respectively as compared to increases of $147 and $150 for the same periods in The net increase was primarily from unrealized foreign currency translation gains on the intercompany loans to COTS Mexico and Extreme from the functional currency of CAD to the reporting currency in USD. 5

6 Property and equipment The Corporation sold property which included the land and building located in Gillette, Wyoming for net proceeds of $403, on July 11, The related mortgage balance of $64 was paid out in full. The net book value of the land and building at December 31, 2015 was $393. The Corporation has leased larger premises in Gillette, Wyoming, at a cost of $13.5 per month, which will facilitate the Corporation meeting the increasing demand of its customers. SUMMARY OF QUARTERLY RESULTS (UNAUDITED) USD Q Q Q Q Revenue $3,969 $2,640 $2,119 $1,969 Net loss for the period (164) (545) (2,201) (1,025) Net loss per share (0.00) (0.01) (0.02) (0.01) USD Q Q Q Q Revenues $1,192 $1,240 $1,367 $1,360 Net loss for the period (882) (1,161) (2,387) (2,093) Net loss per share (0.01) (0.01) (0.02) (0.02) OUTLOOK The Corporation expects continued strong demand for the products and services in its ALS division. ESP sales set records both on a monthly (August 2016) and quarterly basis (Q3 2016). Our business has historically been focused on providing equipment for the dewatering of the coal bed methane ( CBM ) gas wells in the Powder River Basin of Wyoming, a region that continues to see strong demand for ESP s due to the increased use of natural gas for power generation. The Corporation s first oil ESP installed in Colorado continues to run, and management expects additional sales in this market in the near term. The North American market for ESP s is expected to exceed $2.5 billion in 2016 and continue to grow at an annualized rate of 9%, according to industry market research. Divergent continues to make significant progress towards commercialization of its unique Linear Pump. The third deployment of the Linear Pump, installed on November 14, 2016, incorporated changes to the pump shaft design based on the previous two deployments in The Corporation has other potential clients actively searching for candidate oil wells in their inventory in which the Linear Pump could be installed. The outlook for each of the operating divisions is as follows: Artificial Lift Systems New revenues from the commercialization of the Linear Pump, both in Canada and the United States. Strong activity and increasing revenue from natural gas CBM ESP product sales in Wyoming. We are currently the largest provider of ESP products and services for CBM gas producers in the region of the Powder River basin. New revenues from the oil well ESP market. It is expected to significantly increase revenue on a per job basis due to the higher horsepower requirements for oil well pumps. Continued success and growth which has already enabled us to attract highly skilled and motivated people who increase the depth of our service offering and have allowed us to expand our products into Colorado. Project Management and Financing The Corporation is not pursuing any future work from this segment. We continue to pursue the collection of outstanding receivables that amount to USD $804. The Corporation s long-term strategy is to become a leading supplier of submersible pumping products that reduce costs, energy consumption, and carbon footprint. The commercialization of our Linear Pump will provide oil companies with the opportunity to reduce production costs, lower operating expenses, and minimize environmental footprint, while providing Divergent with differentiation within a competitive and growing market. 6

7 Cash and Liquidity The Corporation had cash balances of $908 and $77 at September 30, 2016, and December 31, 2015, respectively. The Corporation increased its accounts payable by $1,303 by way of credit line with a supplier, it reduced its debt by $137 and received $187 for the issue of common shares. The Corporation also has outstanding 10% debentures amounting to $4,171 (CAD $5,750) due on December 31, The unaudited condensed consolidated interim financial statements have been prepared on a going concern basis. The going concern basis of presentation assumes that the Corporation will continue in operation for the foreseeable future and be able to realize its assets and discharge its liabilities and commitments in the normal course of business. The unaudited condensed consolidated interim financial statements do not reflect adjustments that would be necessary if the going concern assumption were not appropriate. If the going concern basis were not appropriate for these financial statements, then adjustments would be necessary to the classification and carrying amounts of the assets and liabilities and the reported revenues and expenses. The material uncertainties that cast significant doubt on the Corporation s ability to continue as a going concern are set forth below. The Corporation has an accumulated deficit of $25,860 at September 30, The Corporation has experienced a history of net losses and cash outflows from operating activities, which continued during the nine month period ended September 30, 2016, where the Corporation recognized a net loss of $2,907. Notwithstanding that the Corporation has breakeven working capital at September 30, 2016, this amount includes approximately $804 in outstanding advances due from an unrelated third party in Mexico recognized on the statement of financial position at September 30, There is uncertainty as to when the Corporation will collect these advances. The Corporation s debentures, amounting to CAD $5,750, mature December 31, There is uncertainty as to whether the Corporation will be able to repay these obligations without obtaining additional future debt or equity financings and accounts payable in excess of a year old amounting to $1,300. The Corporation will require between $500 and $1,500 for the deployment of the commercial version of the Submersible Electric Linear Motor, depending on the rate of adoption. The Corporation sold its land and building in Gillette, Wyoming on July 11, 2016 for net proceeds of $403 to improve its liquidity position. The Corporation s management and Board of Directors continue to seek alternative means of debt and equity financings in order to fund additional projects and operations in North America and to provide for the ultimate repayment of the debentures. The Corporation issued common shares through a non-brokered private placement and raising aggregate proceeds of CAD $244 which closed on April 22, The Corporation has identified the need for additional equity financing however it has not been successful in raising additional new capital. The unaudited condensed consolidated interim financial statements do not reflect adjustments that would be necessary if the going concern assumption were not appropriate. If the going concern basis were not appropriate for these financial statements, then adjustments would be necessary to the classification and carrying amounts of the assets and liabilities and the reported revenues and expenses to reflect a liquidation basis of accounting. FINANCIAL INSTRUMENTS Commitments Long-Term Debt (including Debentures) Pursuant to the truck loans between the Group s US subsidiary and a US bank, the obligations are secured by vehicles having a net book value of $16 (December 31, $21). The Corporation s debentures mature on December 31, 2017 and have a face value at maturity of CAD $5,750. Principal repayments: Total , $4,230 7

8 Lease Commitments The Corporation has entered into operating leases for the use of premises and vehicles. Minimum annual operating lease payments are summarized for the years as follows: Total Premises and office equipment $95 $283 $280 $280 $280 $1,218 Vehicles $122 $395 $343 $296 $280 $1,436 Summary of Share Capital As at September 30, 2016 and November 18, 2016 the Corporation had 98,298,732 common shares issued and outstanding with stated share capital value of $16,343. 5,750,000 warrants were outstanding at September 30, 2016 and November 18, As at September 30, 2016 and November 18, 2016 the Corporation had 7,575,000 stock options outstanding. RISKS AND UNCERTAINTIES - FINANCIAL RISK MANAGEMENT Risk Management Framework The Board of Directors has overall responsibility for the establishment and oversight of the Corporation s risk management framework including developing and monitoring the Corporation s risk management policies. The Corporation s risk management policies are established to identify and analyze the risks faced by the Corporation, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Corporation s activities. Credit Risk Credit risk is the risk of financial loss to the Corporation if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Corporation s receivables from customers. The Corporation has experienced significant credit risk in Mexico and has ceased any future operations as a result. The Corporation has $804 which remains outstanding from its Mexican operation and expects to collect prior to end of fiscal Trade receivables and advances The accounts receivable include a customer of the Artificial Lift Systems segment which represents 70% at September 30, 2016 (Q %) and accounts receivable from a customer of the Project Management and Financing segment which amounts to 100% at Q (Q %) of their respective segments. As at September 30, 2016 approximately 95% (Q3 2015: 74%) of the Artificial Lift Systems segment sales are attributable to one customer 100% of project management and finance fees are attributable to one customer in Q (Q Nil). The Group has established allowances for impairment of trade receivables and advances during Q of $768 ( $1,602). Liquidity Risk Liquidity risk is the risk that the Corporation may encounter difficulty in meeting the obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. The Corporation s approach to managing liquidity risk is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Corporation s reputation. In addition please see the Cash and Liquidity section on Page 7. Market Risk Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the Corporation s income or the value of its financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimizing returns. The Corporation is dependent upon a small number of large well-established organizations for its business. The level of market risk to which the Corporation is exposed is dependent on market conditions, expectations of future price or market rate movements and the composition of the Corporation s financial assets and liabilities. The Corporation regularly monitors market risk exposure, tolerances and control processes in order to manage the exposure related to changes in market risk to stay within acceptable market risk limits. Currency Risk The Corporation is exposed to currency risk on sales and purchases that are denominated in a currency other than the respective functional currencies of Corporation entities, primarily the US dollar, CDN dollar and Mexican Peso. The Corporation does not hedge its foreign currency transactions but does endeavor to contract its business to US dollar equivalency. Interest on borrowings is denominated in the currency of the borrowing. Generally, borrowings are denominated in Canadian dollars. 8

9 Interest Rate Risk Interest rate risk arises from changes in market interest rates that may affect the fair value or future cash flows from the Corporation s financial assets or liabilities. The Corporation is exposed to interest rate risk on certain debt instruments and short term investments to the extent of changes in the underlying market interest rates. Cash flow exposure to interest rate risk is minimal at this time as substantially all of the Corporation s borrowings bear interest at fixed rates. Contingencies From time to time, the Corporation is subject to legal proceedings, assessments and claims in the ordinary course of business. At this time, in the opinion of management, none of these matters are reasonably expected to have a material adverse effect on the Corporation s financial position. The Mexican Tax authorities are challenging certain deductions taken in the 2011 taxation year that they believe should have been deferred until the taxation year ending December 31, The potential result of this assessment is an additional $750 in taxes owed for fiscal 2011 and a further $730 in assessed penalties and interest. Management is currently in the process of appealing this reassessment, based on the fact the Mexican Tax authorities missed their filing deadline. Management has been advised by external legal and taxation experts that it is more likely than not that the Corporation will win their appeal to have the tax reassessment dismissed. Accordingly, management has not recognized any liability in respect to this tax reassessment. Capital Management The Corporation defines its capital as equity and loan capital, which is monitored on the basis a debt-to-capitalization ratio. For the purposes of this calculation, debt includes current and long-term portions of borrowed funds, including debentures, and capitalization is calculated as the total of debt and share capital. The Corporation s objective when managing its capital is to strike a balance between maintaining investor, creditor and market confidence while sustaining future development of the Corporation. The Corporation has identified the need for additional equity financing however it has not been successful in raising additional new capital. The Corporation s existing debt agreements do not require maintenance of any financial ratios. There were no changes to the Corporation s approach to capital management during the period ended September 30, The Corporation is not subjected to any internally or externally imposed capital requirements. The debt-to-capitalization ratio was as follows: September 30, 2016 December 31, 2015 Debt $4,230 $3,964 Share capital 16,343 15,955 Debt-to-Capitalization ratio 26% 25% Critical Accounting Policies and Estimates The Corporation prepares its interim condensed consolidated financial statements in accordance with IFRS. In preparing its financial statements, management is required to make various estimates and judgments in determining the reported amounts of assets and liabilities, revenues and expenses, as well as the disclosure of commitments and contingencies. Management bases its estimates and judgments on its own experience and various other assumptions believed to be reasonable at the time and under the circumstances in existence when the financial statements were prepared. Anticipating future events cannot be done with certainty; therefore, these estimates may change as new events occur, more experience is acquired or the Corporation s operating environment changes. More detailed information regarding the accounting estimates believed by management to require the most difficult, subjective or complex judgments and which are material to the Corporation s financial reporting results are discussed in the Corporation s financial statements for the year ended December 31,

10 In addition the following accounting standards and amendments have been issued but not yet adopted: Leases On January 13, 2016, the IASB issued IFRS 16, Leases ( IFRS 16 ), which requires entities to recognize lease assets and lease obligations on the statement of financial position. For lessees, IFRS 16 removes the classification of leases as either operating leases or finance leases, effectively treating all leases as finance leases. Certain short-term leases (less than 12 months) and leases of low-value assets are exempt from the requirements, and may continue to be treated as operating leases. IFRS 16 is effective for years beginning on or after January 1, 2019, with early adoption permitted. The Corporation does not believe there will be any material effect on the Consolidated Financial Statements. Revenue On May 28, 2014, the IASB issued IFRS 15, Revenue From Contracts With Customers ( IFRS 15 ) replacing IAS 11, Construction Contracts, IAS 18, Revenue and several revenue-related interpretations. IFRS 15 establishes a single revenue recognition framework that applies to contracts with customers. The standard requires an entity to recognize revenue to reflect the transfer of goods and services for the amount it expects to receive, when control is transferred to the purchaser. Disclosure requirements have also been expanded. IFRS 15 is effective for annual periods beginning on or after January 1, Early adoption is permitted. The standard may be applied retrospectively or using a modified retrospective approach. The Corporation does not believe there will be any material effect on the Consolidated Financial Statements. Financial Instruments On July 24, 2014, the IASB issued the final version of IFRS 9, Financial Instruments ( IFRS 9 ) to replace IAS 39, Financial Instruments: Recognition and Measurement ( IAS 39 ). IFRS 9 introduces a single approach to determine whether a financial asset is measured at amortized cost or fair value and replaces the multiple rules in IAS 39. The approach is based on how an entity manages its financial instruments in the context of its business model and the contractual cash flow characteristics of the financial assets. For financial liabilities, IFRS 9 retains most of the IAS 39 requirements; however, where the fair value option is applied to financial liabilities, the change in fair value resulting from an entity s own credit risk is recorded in accumulated other comprehensive Income rather than net earnings, unless this creates an accounting mismatch. In addition, a new expected credit loss model for calculating impairment on financial assets replaces the incurred loss impairment model used in IAS 39. The new model will result in more timely recognition of expected credit losses. IFRS 9 is effective for years beginning on or after January 1, Early adoption is permitted. The Corporation is currently assessing the impact of adopting IFRS 9 on the Consolidated Financial Statements. Emerging Markets The Corporation had operations in Mexico where there were inherent risks associated with an emerging market. The Corporation had implemented various controls relative to operations of its Mexican subsidiary, including controls ensuring compliance with the Corruption of Foreign Public Officials Act. The Corporation has ceased entering new contractual obligations in Mexico in OFF BALANCE SHEET ARRANGEMENTS The Corporation has no off balance sheet arrangements, other than operating leases. 10

11 Forward-looking Statements This MD&A contains certain statements that constitute forward-looking statements. These statements relate to future events or the Corporation s future performance. All statements, other than statements of historical fact, that address activities, events or developments that the Corporation or a third party expects or anticipates will or may occur in the future, are forward-looking statements. These include the Corporation s future growth, results of operations, performance and business prospects and opportunities; prevailing economic conditions; commodity prices; sourcing, pricing and availability of raw materials, components and parts, equipment, suppliers, facilities and skilled personnel; dependence on major customers; uncertainties in weather and temperature affecting the duration of the service periods and the activities that can be completed; regional competition; and other factors, many of which are beyond the Corporation s control. These other factors include future prices of oil and natural gas and oil and natural gas industry activity, including the effect of changes in commodity prices on oil and natural gas exploration and development activity, the ability to complete strategic acquisitions and realize the anticipated benefits of any acquisitions that are completed, the Corporation s outlook regarding the competitive environment it operates in, and the assumptions underlying any of the foregoing. Forward-looking statements are often, but not always, identified by the use of words such as seek, anticipate, plan, continue, estimate, expect, may, will, project, predict, potential, targeting, intend, could, might, should, believe and similar expressions. These statements involve known and unknown risks, uncertainties and other factors, many of which are beyond the Corporation s control, including those discussed under Risks and Uncertainties and elsewhere in this MD&A that may cause actual results or events to differ materially from those anticipated in such forward-looking statements. The Corporation believes that the expectations reflected in those forward-looking statements are reasonable, but no assurance can be given that these expectations will prove to be correct and such forward-looking statements included in this MD&A should not be unduly relied upon. These statements speak only as of the date of this MD&A. The Corporation does not intend, and does not assume any obligation, to update these forward-looking statements, whether as a result of new information, future events or otherwise, except as required under applicable securities laws. The forward-looking statements contained in this MD&A are expressly qualified by this cautionary statement. 11

12 Corporate Information DIRECTORS AND OFFICERS Corporate Information Ken Bagan (1) (2) (3) Chairman John Grisdale (2) (3) (4) Director Martin Hall (1) (2) Director Rob Riecken (1) (2) (3) (4) Director Ken Berg (4) Chief Executive Officer President, Director Scott Hamilton Chief Financial Officer and Secretary (1) Member of the Audit Committee (2) Member of the Corporate Governance and Nominating Committee (3) Member of the Compensation Committee (4) Member of the Health, Safety and Environment Committee CORPORATE OFFICE Divergent Energy Services Corp. 1500, th Avenue SW Calgary, Alberta T2P 2X6 Phone: Fax: BANK HSBC Calgary, Alberta LEGAL COUNSEL Burstall Winger Zammit LLP Calgary, Alberta AUDITORS KPMG LLP Calgary, Alberta STOCK EXCHANGE TSX Venture Calgary, Alberta TRANSFER AGENT AND REGISTRAR Computershare Calgary, Alberta