ORBIT GARANT DRILLING INC.

Transcription

1 Consolidated financial statements of ORBIT GARANT DRILLING INC. June 30, 2008

2 Samson Bélair/Deloitte & Touche s.e.n.c.r.l. 155, avenue Dallaire Rouyn-Noranda QC J9X 4T3 Canada Tél. : Téléc. : Auditors' Report To the shareholders of Orbit Garant Drilling Inc. We have audited the consolidated balance sheets of Orbit Garant Drilling Inc. as at June 30, 2008 and 2007 and the consolidated statements of earnings and comprehensive income, retained earnings and accumulated other comprehensive loss and cash flows for the year ended June 30, 2008 and for the nine-month period ended June 30, These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the company as at June 30, 2008 and 2007 and the results of its operations and its cash flows for the year ended June 30, 2008 and for the nine-month period ended June 30, 2007 in accordance with Canadian generally accepted accounting principles. Chartered Accountants Rouyn-Noranda, August 29, 2008

3 Consolidated statement of earnings and comprehensive income June 30, June 30, (12 months) (9 months) $ $ CONTRACT REVENUE 82,142,216 36,732,820 COST OF CONTRACT REVENUE 53,339,052 26,132,158 GROSS PROFIT 28,803,164 10,600,662 EXPENSES General and administrative 5,830,834 1,989,799 Amortization of capital assets 3,318,298 1,673,821 Amortization of intangible assets 4,022,002 2,464,935 Management fees 250, ,500 Integration fees 363, ,697 Loss (gain) on sale of capital assets 22,691 (130,461) Foreign exchange losses 19,305 17,131 Interest on long-term debt 1,362, ,796 Interest and bank charges 599, ,867 15,788,720 7,521,085,085 EARNINGS BEFORE THE FOLLOWING ITEMS 13,014,444 3,079,577 OTHER REVENUE SHARE IN NET EARNINGS OF A COMPANY SUBJECT TO SIGNIFICANT INFLUENCE EARNINGS BEFORE INCOME TAXES AND NON- CONTROLLING INTEREST - 88, ,652-13,425,096 3,167,631 INCOME TAXES (Note 11) Current 5,779,690 2,082,857 Future (1,736,647) (898,599) 4,043,043 1,184,258 EARNINGS BEFORE NON-CONTROLLING INTEREST 9,382,053 1,983,373 NON-CONTROLLING INTEREST - 84,280 NET EARNINGS 9,382,053 1,899,093 OTHER COMPREHENSIVE LOSS NET OF $0 (June 30, 2007, $6,313) OF INCOME TAXES Unrealized losses on available-for-sale investments (4,165) (30,359) COMPREHENSIVE INCOME 9,377,888 1,868,734 Earnings per share (Note 10) Basic Diluted Page 2

4 Consolidated statement of retained earnings and accumulated other comprehensive loss STATEMENT OF RETAINED EARNINGS June 30, June 30, (12 months) (9 months) $ $ BALANCE, BEGINNING OF YEAR 1,899,093 - NET EARNINGS 9,382,053 1,899,093 DIVIDENDS (133,456) - BALANCE, END OF YEAR 11,147,690 1,899,093 STATEMENT OF ACCUMULATED OTHER COMPREHENSIVE LOSS BALANCE, BEGINNING OF YEAR (30,359) - OTHER COMPREHENSIVE LOSSES ON AVAILABLE- FOR-SALE INVESTMENTS (4,165) (30,359) BALANCE, END OF YEAR (34,524) (30,359) STATEMENT OF CONTRIBUTED SURPLUS BALANCE, BEGINNING OF YEAR - - STOCK-BASED COMPENSATION TO EMPLOYEES (Note 10) 450,177 - BALANCE, END OF YEAR 450,177 - Page 3

5 Consolidated balance sheet June 30, June 30, $ $ ASSETS CURRENT ASSETS Cash 8,406,502 - Cash - in trust - 188,556 Accounts receivable 19,457,458 12,510,821 Inventories 17,623,122 10,518,346 Prepaid expenses 273, ,402 45,760,147 23,467,125 LONG-TERM INVESTMENTS (Note 5) 867, ,116 CAPITAL ASSETS (Note 6) 19,962,716 18,612,212 GOODWILL (Note 7) 19,697,965 17,422,044 INTANGIBLE ASSETS (Note 7) 8,223,063 12,245,065 94,511,377 72,148,562 Page 4

6 Consolidated balance sheet June 30, June 30, $ $ LIABILITIES CURRENT LIABILITIES Bank overdraft (Note 8) 2,409,634 1,494,525 Bank loan (Note 8) 5,290,000 1,500,000 Accounts payable and accrued liabilities 11,531,237 7,228,104 Client deposits 1,728, ,355 Earn-out payable, non-interest bearing - 2,000,000 Advances from shareholders, non-interest bearing, no specific term of repayment - 631,198 Income taxes payable 1,493,917 2,049,122 Current portion of long-term debt (Note 9) 3,463,856 3,596,702 25,916,973 18,969,006 LONG-TERM DEBT (Note 9) 2,359,634 20,877,193 FUTURE INCOME TAXES (Note 11) 3,748,810 6,707,193 32,025,417 46,553,392 COMMITMENTS (Note 3 and 13) SHAREHOLDERS' EQUITY Share capital (Note 10) 50,922,617 23,726,436 Contributed surplus 450,177-51,372,794 23,726,436 Retained earnings 11,147,690 1,899,093 Accumulated other comprehensive loss (34,524) (30,359) 11,113,166 1,868,734 62,485,960 25,595,170 94,511,377 72,148,562 APPROVED BY THE BOARD (signed) Eric Alexandre, Director (signed) Jean-Yves Laliberté, Director Page 5

7 Consolidated statement of cash flows June 30, June 30, (12 months) (9 months) $ $ OPERATING ACTIVITIES Net earnings 9,382,053 1,899,093 Items not affecting cash: Amortization of capital assets 3,318,298 1,673,821 Amortization of intangible assets 4,022,002 2,464,935 Loss (gain) on sale of capital assets 22,691 (130,461) Stock-based compensation 450,177 - Amortization of financing costs 37,572 11,708 Future income taxes (1,736,647) (898,599) Share in net earnings of a company subject to significant influence (410,652) - Non-controlling interest - 84,280 15,085,494 5,104,777 Changes in non-cash operating working capital items (Note 12) (9,068,174) (3,485,913) 6,017,320 1,618,864 INVESTING ACTIVITIES Business acquisition, iti including bank overdraft of $156, for the 9 months period ended June 30, 2007 (Note 3) (4,275,921) (31,576,382) Variation of cash - in trust 188,556 (188,556) Advances to a shareholder company (58,883) - Acquisition of capital assets (4,753,381) (2,351,020) Proceeds from sale of capital assets 61, ,978 (8,837,741) (33,833,980) Page 6

8 Consolidated statement of cash flows June 30, June 30, (12 months) (9 months) $ $ FINANCING ACTIVITIES Increase in bank loan 3,790,000 1,500,000 Proceeds from long-term debt 3,150,000 37,803,892 Repayment of long-term debt (21,731,010) (18,754,240) Financing costs paid (90,662) - Share issue costs paid (4,155,579) - Advances from shareholders (631,198) 631,198 Advances from a shareholder company (16,305) 16,305 Reduction of stated capital - (988,564) Dividend paid (133,456) - Issue of share capital 30,130,024 10,512,000 10,311,814 30,720,591 NET VARIATION OF CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS, BEGINNING OF THE YEAR CASH AND CASH EQUIVALENTS, END OF YEAR (Note 12) 7,491,393 (1,494,525) (1,494,525) - 5,996,868 (1,494,525) Additional information (Note 12) Page 7

9 1. DESCRIPTION OF BUSINESS Orbit Garant Drilling Inc. (the "company"), amalgamated under the Canada Business Corporations Act, operates mainly an underground and surface diamond drilling business. The company has operations in Canada, United States and Central and South America. 2. AMALGAMATION Orbit Garant resulted from the amalgamation under the Canada Business Corporations Act of Forages Garant & Frères Inc., Garant Drilling GP Inc., Canada Inc. and Ironbridge Equity Holdings Inc. pursuant to articles of amalgamation dated January 31, The resulting company, then named Forages Garant & Frères Inc., changed its name to Forages Orbit Garant Inc. / Orbit Garant Drilling Inc. pursuant to a Certificate of Amendment dated January 31, 2007 and subsequently to Forage Orbit Garant Inc. / Orbit Garant Drilling Inc. pursuant to a Certificate of Amendment dated March 6, Forages Garant & Frères Inc. resulted from the amalgamation of Canada Inc. and Forages Garant & Frères Inc. under a Certificate of Amalgamation dated October 1, Garant Drilling GP Inc., Ironbridge Equity Holdings Inc., Canada Inc. and Garant Drilling LP were created on September 16, 2006 and Canada Inc. was created on September 25, Garant Drilling LP was dissolved on January 30, The net assets of each constituent company is as follows based on the net assets of each company as if the amalgamation had occurred on September 16, 2006 being the date of incorporation of Canada Inc.: Net assets $ Canada Inc. 100 Garant Drilling GP Inc. 100 Ironbridge Equity Holdings Inc Canada Inc Elimination of inter-company investment (300) 1 The consolidated financial statements for the nine-months ended June 30, 2007, reflect the results of operations as if this amalgamation had occurred on September 16, 2006 (no operations between September 16 and 29, 2006). Page 8

10 3. BUSINESS ACQUISITIONS Acquisition of Forages Garant & Frères Inc. On September 30, 2006, pursuant to a share agreement between Canada Inc. and the shareholders of Forages Garant & Frères Inc., Canada Inc. acquired all issued and outstanding shares of Forages Garant & Frères Inc. for a total consideration of $17,530,771 (excluding acquisition costs) payable through the issuance of 2,500,000 common shares of Canada Inc. and $15,030,771 in cash. The results of operations of Forages Garant & Frères Inc. are included in the consolidated financial statements from the effective date of acquisition. On September 30, 2006, Forages Garant & Frères Inc. was dissolved, pursuant to an amalgamation of the companies under the Canadian Business Corporations Act, in Canada Inc. which changed its name to Forages Garant & Frères Inc. Following this transaction, an amount of $5,364,444 has been accounted for as goodwill, $7,000,000 as customer relationship and $910,000 as non-compete agreement. These amounts are not deductible for income tax purposes. Acquisition of Forage Orbit Inc. On January 31, 2007, pursuant to a share agreement between the company and the shareholders of Forage Orbit Inc. ("Orbit"), the company acquired all issued and outstanding shares of Orbit for a total consideration of $24,031,195 (excluding acquisition costs) payable through the issuance of 11,538,000 common shares of the company and $12,493,195 in cash. The results of operations of Orbit are included in the consolidated financial statements from the effective date of acquisition. Following this transaction, an amount of $9,731,938 has been accounted for as goodwill, $5,600,000 as customer relationship and $1,200,000 as non-compete agreement. These amounts are not deductible for income tax purposes. Acquisition of the shares of Drift Exploration Drilling Inc. (US) and Drift de Mexico SACV and assets of Phyl-Don Holdings and Management Ltd. On April 16, 2007, the company acquired all issued and outstanding shares of Drift Exploration Drilling Inc. (a US company) and Drift de Mexico SACV for a total cash consideration of $140,713 (excluding acquisition costs) and all operating inventories and capital assets of Phyl-Don Holdings and Management Ltd. for a cash consideration of $1,460,000. The results of operations of the respective entities are included in the consolidated financial statements from the effective date of acquisitions. Following this transaction, an amount of $191,111 has been accounted for as goodwill. Acquisition of Québec Inc. (Soudure Royale Concept) On May 31, 2007, the company acquired 25% of the outstanding common shares of Québec Inc. for a consideration of $165,000 (excluding acquisition costs) payable through the issuance of 109,870 common shares of the company. Following this transaction, an amount of $178,831 has been accounted for as goodwill. With this transaction, the company holds 100% of the issued and outstanding shares of Québec Inc. Page 9

11 3. BUSINESS ACQUISITIONS (continued) The purchase price of the above transactions was allocated to the net assets acquired on the basis of their estimated fair values as follows: $ Accounts receivable 9,094,988 Inventories 8,781,160 Prepaid expenses 53,225 Capital assets 18,086,530 Investment in a company subject to significant influence 128,788 Long-term investments 310,000 Intangible assets Customer relationship 12,600,000 Non-compete agreement 2,110,000 Goodwill 15,466,324 Bank overdraft (156,634) Accounts payable and accrued liabilities (6,570,050) Client deposits (570,845) Income taxes payable (702,403) Long-term debt (5,396,230) Future income taxes (7,612,105) Purchase price 45,622,748 Consideration Cash (including acquisition costs of $2,295,069) 31,419,748 Issuance of common shares 14,203,000 Total consideration 45,622,748 Contingent consideration The purchase price of Forages Garant & Frères Inc. was subject to an adjustment of an amount of up to $2,000,000 calculated on the achievement of specified earnings targets during the nine-month period ended June 30, The specified earnings have been achieved on June 30, 2007 and a payable amount of $2,000,000 has been accounted for as an increase of goodwill and was paid on September 30, The purchase price of Orbit is subject to an adjustment of an amount up to $2,250,000 calculated on the achievement of specified earnings levels over the periods ended January 31, 2008, 2009 and If the specified earnings are achieved, a payable amount will be accounted for as an increase of goodwill. The specified earnings have been achieved for the period ended January 31, Further, concurrent with the IPO, a part of the gross proceeds from the initial public offering ("IPO") was use to pay the total contingent consideration of $2,250,000 and has been accounted for during the year ended June 30, 2008, as an increase of goodwill. Also, during the year ended June 30, 2008, an amount of $25,921 was accounted for as an increase in goodwill representing additional acquisition costs related to these acquisitions. Page 10

12 4. SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles and reflect the following significant accounting policies: Principles of consolidation The consolidated financial statements includes the accounts of the company and its wholly-owned subsidiaries as follows: Orbit Garant Drilling, a General Partnership Québec Inc. (75% since January 31, 2007 and 100% since May 31, 2007) (Note 3) Canada Inc. Drift Exploration Drilling Inc. (since April 16, 2007) (Note 3) Drift de Mexico SACV (since April 16, 2007) (Note 3) Financial instruments Financial assets and financial liabilities are initially recognized at fair value and their subsequent measurement is dependent on their classification as described below. Their classification depends on the purpose, p for which the financial instruments were acquired or issued, their characteristics and the company s designation of such instruments. Settlement date accounting is used. Classification Cash Accounts receivable Investments in shares Advances to a shareholder company Bank overdraft Bank loan Accounts payable and accrued liabilities Client deposits Earn-out payable Advances from shareholders Long-term debt Held for trading Loans and receivables Available-for-sale Loans and receivables Other liabilities Other liabilities Other liabilities Other liabilities Other liabilities Other liabilities Other liabilities Page 11

13 4. SIGNIFICANT ACCOUNTING POLICIES (continued) Financial instruments (continued) Held for trading Held for trading financial assets are financial assets typically acquired for resale prior to maturity or that are designated as held for trading. They are measured at fair value at the balance sheet date. Fair value fluctuations including interest earned, interest accrued, gains and losses realized on disposal and unrealized gains and losses are included in the statement of earnings. Financial liabilities designated as held for trading are those non-derivative financial liabilities that the company elects to designate on initial recognition as instruments that it will measure at fair value through other interest expense. These are accounted for in the same manner as held for trading assets. The company has not designated any non-derivative financial liabilities as held for trading. Available-for-sale Available-for-sale financial assets are those non-derivative financial assets that are designated as available-for-sale, or that are not classified as loans and receivables, held-to-maturity or held-for-trading investments. Except as mentioned below, available-for-sale financial assets are carried at fair value with unrealized gains and losses included in accumulated other comprehensive income until realized when the cumulative gain or loss is transferred to the statement of earnings. Available-for-sale financial assets that do not have quoted market prices in an active market are recorded at cost. Interest on interest-bearing available-for-sale financial assets is calculated using the effective interest method. Loans and receivables Loans and receivables are accounted for at amortized cost using the effective interest method. Other liabilities Other liabilities are recorded at amortized cost using the effective interest method and include all financial liabilities, other than derivative instruments. Transaction costs Transaction costs related to held for trading financial assets are expensed as incurred. Transaction costs related to available-for-sale financial assets, held-to-maturity financial assets, other liabilities and loans and receivables are netted against the carrying value of the asset or liability and are then recognized over the expected life of the instrument using the effective interest method. Effective interest method The company uses the effective interest method to recognize interest income or expense which includes transaction costs or fees, premiums or discounts earned or incurred for financial instruments. Page 12

14 4. SIGNIFICANT ACCOUNTING POLICIES (continued) Cash and cash equivalents Cash and cash equivalents include cash and bank overdraft of which the balance often fluctuates between the available cash amount and the indebtedness. Inventories The company maintains an inventory of operating supplies, drill rods and drill bits. Inventories are valued at the lower of cost and replacement cost. Cost is determined on the first-in, first-out basis. Used inventories are valued at 50% of cost. Investments Investments in companies over which the company exercices significant influence are accounted for using the equity method. The company's share of income (loss) from these companies is presented in the statement of earnings. Capital assets The capital assets are valued at cost and amortization is calculated using the straight-line method based on their estimated useful life using the following periods: Parking Buildings Office equipment Drilling equipment Machinery and equipment Computer equipment Vehicles Leasehold improvements 10 years 5 to 20 years 5 years 5 to 10 years 5 years 3 to 5 years 5 years 5 years Goodwill Goodwill representing the excess of purchase price over fair value of the net identifiable assets of acquired businesses is tested for impairment annually or more frequently when an event or circumstance occurs that indicates that goodwill might be impaired. When the carrrying amount exceeds the fair value, an impairment loss is recognized in the statement of earnings in an amount equal to the excess. Page 13

15 4. SIGNIFICANT ACCOUNTING POLICIES (continued) Intangible assets Intangible assets are accounted for at cost. Amortization is based on their estimated useful life using the straightline method and the following periods: Customer relationship Non-compete agreement 42 months 5 years Impairment of long-lived assets Long-lived assets are tested for recoverability whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. An impairment loss is recognized when their carrying value exceeds the total undiscounted cash flows expected from their use and eventual disposition. The amount of the impairment loss if any is determined as the excess of the carrying value of the asset over its fair value. Income taxes The company uses the asset and liability method of accounting for income taxes. Under this method, future income tax assets and liabilities are recorded to account for future tax effects of differences between the value of the assets and liabilities on the balance sheet and their tax values, by using the tax rates in effect for the year during which the differences are expected to reverse. Management reduces the carrying value of the future income tax assets by a valuation allowance when it is more likely than not that some portion of the asset will not be realized. Foreign currency translation Integrated foreign operation and accounts denominated in foreign currency are translated as follows: monetary assets and liabilities are translated at the exchange rates in effect at the balance sheet date. Non-monetary assets and liabilities are translated at historical rates. Revenues and expenses are translated at average rates for the period except for amortization, which is translated at historical rates. Translation gains or losses are included in earnings. Page 14

16 4. SIGNIFICANT ACCOUNTING POLICIES (continued) Revenue recognition Revenue from drilling contracts is recognized on the basis of actual meterage drilled for each contact. Revenue from ancillary services is recorded when the service is rendered. The company recognizes revenue when persuasive evidence of an arrangement exists, service has been rendered, the price to the buyer is fixed or determinable and collection is reasonably assured. Earnings per share Earnings per share are calculated using the weighted daily average number of shares outstanding during the year. Diluted earnings per share are determined as net earnings divided by the weighted average number of diluted common shares for the year. Diluted common shares reflect the potential dilutive effect of exercising the stock options based on the treasury stock method. Stock options The company uses the fair value method to account for stock options. In accordance with this method, compensation cost is measured at the fair value of the option at the grant date and is amortized to earnings over the vesting period. Use of estimates The preparation of financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates. Significant areas requiring the use of management estimates relate to the useful lives of capital assets and intangible assets for amortization purposes, depreciation of goodwill, inventory valuation, determination of bad debt allowance, purchase price allocation related to business acquisitions, income and other taxes, amounts recorded as accrued liabilities and stock-based compensation. Future accounting changes a) Inventories In June 2007, the Canadian Institute of Chartered Accountants ("CICA") issued Section 3031, Inventories, replacing Section 3030, Inventories. The new Section will be applicable to financial statements relating to fiscal years beginning on or after January 1, Accordingly, the company will adopt the new standards for its fiscal year beginning July 1, It provides more guidance on the measurement and disclosure requirements for inventories. (For example, it requires that fixed and variable production overheads be systematically allocated to the carrying amount of inventory.) The company does not expect that the adoption of this new Section will have a material impact on its consolidated financial statements. Page 15

17 4. SIGNIFICANT ACCOUNTING POLICIES (continued) Future accounting changes (continued) b) Financial instruments In December 2006, the CICA issued Section 3862, Financial Instruments - Disclosures; Section 3863, Financial Instruments - Presentation; and Section 1535, Capital Disclosures. All three Sections will be applicable to financial statements relating to fiscal years beginning on or after October 1, Accordingly, the company will adopt the new standards for its fiscal year beginning July 1, Section 3862 on financial instruments disclosures, requires the disclosure of information about: a) the significance of financial instruments for the entity's financial position and performance and b) the nature and extent of risks arising from financial instruments to which the entity is exposed during the period and at the balance sheet date, and how the entity manages those risks. Section 3863 on the presentation of financial instruments is unchanged from the presentation requirements included in Section Section 1535 on capital disclosures requires the disclosure of information about an entity's objectives, policies and processes for managing capital. The company does not expect that the adoption of these new Sections will have a material impact on its consolidated financial statements. c) Goodwill and intangible assets In February 2008, the Canadian Institute of Chartered Accountants ("CICA") issued Section 3064, Goodwill and intangible assets, replacing Section 3062, Goodwill and other intangible assets and Section 3450, Research and development costs. Various changes have been made to other sections of the CICA Handbook for consistency purposes. The new Section will be applicable to financial statements relating to fiscal years beginning on or after October 1, Accordingly, the company will adopt the new standards for its fiscal year beginning July 1, It establishes standards for the recognition, measurement, presentation and disclosure of goodwill subsequent to its initial recognition and of intangible assets by profit-oriented enterprises. Standards concerning goodwill are unchanged from the standards included in the previous Section The company does not expect that the adoption of this new Section will have a material impact on its consolidated financial statements. d) International Financial Reporting Standards In 2006, the Canadian Accounting Standards Board (AcSB) published a new strategic plan that will significantly affect the financial reporting requirements applicable to Canadian companies. The AcSB strategic plan outlines the convergence of Canadian accounting standards with international standards (IFRS) over an anticipated fiveyear transition period. In February 2008, the AcSB announced that 2011 would be the changeover date for public entities to move from Canadian GAAP to IFRS. Consequently, the company's transition date of July 1, 2011 will require the restatement for comparative purposes of amounts reported by the company for the year ending June 30, While the company has begun assessing the adoption of IFRS, the impact of this transition on the consolidated financial statements cannot be estimated at this time. Page 16

18 5. LONG-TERM INVESTMENTS June 30, June 30, $ $ Company subject to significant influence: Canada Inc. (Usinage X-SPEC): 4,000 class A shares, representing 40% of the voting shares, participating, at equity method 96,000 class I shares, non-participating, non-voting, maximum dividend of 8% per year, redeemable at the option of the company at $96,000, at cost 443,440 32,788 96,000 96, , ,788 Others: 104,000 shares of Explorateurs-Innovateurs de Québec inc., at cost (representing 4.80% of the voting and participating shares) 83,300 shares of Typhoon Exploration Inc., at fair value (cost $50,000) Advances to a shareholder company, variable interest rates, no specific terms of repayment 260, ,000 9,163 13,328 58, , , , ,116 Page 17

19 6. CAPITAL ASSETS Net book value Accumulated June 30, Cost amortization 2008 $ $ $ Land 118, ,001 Parking 20,000 7,000 13,000 Buildings 1,124, ,998 1,004,129 Office equipment 146,553 46, ,417 Drilling equipment 18,557,731 3,780,067 14,777,664 Machinery and equipment 426, , ,163 Computer equipment 659, , ,983 Vehicles 3,853, ,835 3,044,946 Leasehold improvements 94,532 24,119 70,413 25,000,071 5,037,355 19,962,716 Land Parking Buildings Office equipment Drilling equipment Machinery and equipment Computer equipment Net book value Accumulated June 30, Cost amortization 2007 $ $ $ 118, ,001 20,000 3,000 17,000 1,051,784 45,748 1,006, ,682 15,794 97,888 15,695,077 1,272,622 14,422, ,300 61, , ,704 33, ,382 2,776, ,169 2,487,197 Vehicles Leasehold improvements 45,654 12,674 32,980 20,345,568 1,733,356 18,612,212 Page 18

20 7. GOODWILL AND INTANGIBLE ASSETS Net book value Accumulated June 30, Cost amortization 2008 $ $ $ Goodwill 19,697,965-19,697,965 Intangible assets, limited life: Customer relationship 12,600,000 5,828,436 6,771,564 Non-compete agreement 2,110, ,501 1,451,499 14,710,000 6,486,937 8,223,063 Net book value Accumulated June 30, Cost amortization 2007 $ $ $ Goodwill 17,422,044-17,422,044 Intangible assets, limited life: Customer relationship 12,600,000 2,228,436 10,371,564 Non-compete agreement 2,110, ,499 1,873,501 14,710,000 2,464,935 12,245, BANK OVERDRAFT AND BANK LOAN The company has an authorized line of credit for an amount of $7,000,000 bearing interest at prime rate renewable on June 26, Any funds advanced pursuant to this line of credit are secured by a first rank hypothec on the universality of all present and future assets. On June 30, 2008, the prime rate was 5.75% (June 30, 2007, 6%). The rate is variable with the quarterly calculation of a financial ratio and can vary from prime rate plus 0% to 1%. Under the terms of the bank loan agreement, the company must satisfy certain restrictive covenants as to minimum financial ratios. Page 19

21 9. LONG-TERM DEBT June 30, June 30, $ $ Loan bearing interest at prime rate plus 0.25%, payable by quarterly payments of $714,286 plus interest, maturing June 2012, secured by a first rank hypothec on the universality of all present and future assets a) b) c) Bank acceptance bearing interest at the rate of the bank acceptance rate plus 1.75%, payable by quarterly payments of $300,000 plus interest, maturing June 2012, secured by a first rank hypothec on the universality of all present and future assets a) b) c) Contracts, non-interest bearing, payable in an aggregate monthly instalments of $3,618, maturing from September 2008 to June 2012, secured by vehicles 5,186, ,316 24,368,560 43,246 89,030 5,823,490 24,457,590 Current portion (3,463,856) (3,596,702) 2,359,634 20,860,888 Advance from a shareholder company, variable interest rates, no specific terms of repayment - 16,305 2,359,634 20,877,193 a) b) c) The rate is variable with the quarterly calculation of a financial ratio and can vary from prime rate plus 0.25% to 1.25% (June 30, 2007, bank acceptance rate plus 1.75% to 2.75%). An unamortized amount of $212,782 (June 30, 2007, $159,692), representing financing fees, has been presented in deduction of the long-term debt. This amount is being amortized to earnings over the term of the debt, using the effective interest method. The company has an authorized long-term debt facility of a maximum amount of $20,000,000 and a capital expenditure facility of a maximum amount of $6,000,000. Under the terms of the long-term debt agreement, the company must satisfy certain restrictive convenants as to minimum financial ratios. Principal payments required in each of the next four years are as follows: $ ,463, ,339, , ,122 Page 20

22 10. SHARE CAPITAL Authorized, an unlimited number of common and preferred shares: Common shares, participating and voting Preferred shares, rights' privileges, restrictions and conditions shall be provided before their issuance by a resolution of the board of directors of the company Issued: June 30, 2008 June 30, 2007 Number of Number of shares $ shares $ Balance, beginning of year 24,749,870 23,816, Shares issued: For cash a) b) 13,333 20,000 10,511,999 10,511,999 Upon initial public offering, net of share issue costs c) 7,505,006, 27,086,181, - - For business acquisitions a) (Note 3) ,147,870 14,203,000 For share purchase financing d) 13,333 20,000 90,000 90,000 Reduction of stated capital a) (988,564) 32,281,542 50,942,617 24,749,870 23,816,436 Share purchase financing d) - (20,000) - (90,000) Balance, end of year 32,281,542 50,922,617 24,749,870 23,726,436 a) Issuance during the nine-month period ended June 30, 2007: On September 16, 2006, the company issued 1 common share for an amount of $1 in cash. On September 30, 2006, the company issued 2,058,719 common shares for an amount of $2,058,719 in cash. On December 31, 2006, the company issued 5,441,280 common shares for an amount of $5,441,280 in cash. On September 30, 2006, the company issued 2,500,000 common shares as part of the consideration for the acquisition of Forages Garant & Frères Inc. (see Note 3). On January 31, 2007 by way of resolution, the company reduced its common shares stated capital by $988,564 in exchange for cash. On January 31, 2007, the company issued 2,012,000 common shares and received as consideration $2,012,000 in cash. Page 21

23 10. SHARE CAPITAL (continued) a) Issuance during the nine-month period ended June 30, 2007 (continued): On January 31, 2007, the company issued 11,538,000 common shares as part of the consideration of the acquisition of Forage Orbit Inc. (see Note 3). On April 16, 2007, the company issued 1,000,000 common shares and received as consideration $1,000,000 in cash. On May 31, 2007, the company issued 109,870 common shares and received as consideration an investment in Québec Inc. in the amount of $165,000 (see Note 3). b) Issuance during the year ended June 30, 2008: On August 20, 2007, the company issued 13,333 common shares and received as consideration $20,000 in cash. c) Initial public offering: On June 20, 2008, the company filed a prospectus, p for it's initial public offering, qualifying the offering of 15,000,000 common shares in the capital of the company of which (i) 7,505,006 common shares were issued and sold by Orbit Garant at a price of $4.00 per share for gross proceeds to Orbit Garant of $30,020,024, and (ii) 7,494,994 common shares being sold by certain of the existing shareholders at the time of Orbit Garant (the "Secondary Offering") at a price of $4.00 per common share for gross proceeds to these shareholders of $29,979,976. The underwriters received a cash fee of $3,600,000 (6% of the gross proceeds) ($1,801,201 paid by the company and $1,798,799 paid by the shareholders) and an additional fee of $216,000 ($108,072 paid by the company and $107,928 paid by the shareholders). Other share issue costs amount to $2,246,306 for total share issue costs of $4,155,579 for the company. Further, a future income tax asset in the amount of $1,221,736 has been recorded as an offset to share issue costs. d) Share purchase financing: On August 20, 2007, 13,333 (June 30, 2007, 90,000) common shares were issued to employees of the company at $1.50 (June 30, 2007, $1.00) per common share under the company's share purchase plan. The company granted a five-years loan in the amount of $20,000 (June 30, 2007, $90,000) to employees pursuant to the terms and conditions set out in a promissory note secured by a pledge of the securities. The loan was repayable at the earlier of (i) the date the shares were sold or, (ii) at the maturity date of the loan. Interest on the principal of the loan is calculated and compounded annually at a rate of 8%. On November 13, 2007 and June 26, 2008, the company received a total amount of $90,000 and this amount was applied in reduction of the loan. Page 22

24 10. SHARE CAPITAL (continued) 2007 stock option plan: In January 2007, the Board of Directors adopted a stock option plan (the «2007 stock option plan»). The purpose of this plan is to retain, motivate and reward qualified directors, officers, employees and consultants of the company. On August 20, 2007, 38,500 stock options (June 30, 2007, 1,017,000) have been granted giving the option to purchase a common share for an exercise price of $1,50 (June 30, 2007, $1) per share which represents the fair value of a common share at the date of the grant. These options have a maximum life of 10 years following the date of the grant and can only be exercised upon the occurence of a liquidity event as defined in the stock option agreement. Since a liquidity event is not considered to be probable until the event occurs, no compensation cost is recognized until a liquidity event occurs. On June 26, 2008, the company completed an initial public offering ("IPO"). Since an IPO is considered as a liquidity event, the compensation cost is recognized starting on June 26, On June 26, 2008, concurrent with the IPO, the vesting and expiry terms of the oustanding options were modified and will now vest at the rate of 50% 31 days after the closing date of the IPO and 25% on each of the first and second anniversary of the closing date of the IPO and will expire 10 years after the grant date stock option plan: Also, on June 26, 2008, the company established the new option plan (the «2008 stock option plan»), which is intended to aid in attracting, retaining and motivating the company s officers, employees, directors and consultants. The new option plan has been prepared in accordance with TSX s policies on listed company security-based compensation arrangements. Persons eligible to be granted options under the new option plan are any director, officer or employee of Orbit Garant or of any subsidiary, corporation controlled by any such person or a family trust of which at least one trustee is any such person and all of the beneficiaries of which are such person and his or her spouse or children. The aggregate number of common shares which may be issued from treasury under the new option plan or reserved for issuance upon the exercise of options under the 2008 stock option plan shall not exceed 10% of the issued and outstanding common shares after giving effect to the June 26, 2008 offering less the number of options issued under the prior option plan. The number of common shares which may be reserved for issuance pursuant to options granted under the new option plan, together with common shares reserved for issuance from treasury under any other employee-related plan of the company or options for services granted by the company, to any one person shall not exceed 5% of the then aggregate issued and outstanding common shares. Page 23

25 10. SHARE CAPITAL (continued) 2008 stock option plan (continued): The Board of Directors, through the recommendation of the compensation and corporate governance committee, will administer the 2008 stock option plan and will determine, among other things, optionees, vesting periods, exercise price and other attributes of the options, in each case pursuant to the 2008 stock option plan, applicable securities legislation and the rules of the TSX. Unless otherwise determined by the Board of Directors, options will vest at a rate of 20% per annum commencing 12 months after the date of grant and will expire no later than 10 years after the grant date options are forfeited when the option holder ceases to be a director, officer or employee of the company. The exercise price for any option may not be less than the fair market value (the closing price of the common shares on the TSX on the last trading day on which common shares traded prior to such day, or the average of the closing bid and ask prices over the last five trading days if no trades accrued over that period) of the common shares at the time of the grant of the option. Details regarding the stock options outstanding are as follows: Number Average Average of options exercise price remaining life $ Outstanding as of October 1, Granted during the year 1,017, years Outstanding and non exercisable as of June 30, ,017, years Granted during the year 663, years Cancelled during the year (7,500) years Outstanding and non exercisable as of June 30, ,673, years Page 24

26 10. SHARE CAPITAL (continued) The company's calculations of the fair value of options granted were made using the Black-Scholes optionpricing model. The following table summarizes the grant date and modification date fair value calculations with weighted average assumptions: Modification of the 2007 Granted stock option Granted in 2008 plan in 2007 Risk-free interest rate 3.38% 3.38% 4.10% Expected life 7 years - 5 years Expected volatility 49% - 46% Expected dividend yield 0% 0% 0% Fair value of options granted $2.17 $0.46 Expected life before modification - 1 day - Expected life after modification - 5 years - Expected volatility before modification 10% - Expected volatility after modification 41% - Fair value of the modification - $ During the year ended June 30, 2008, the total expense related to stock-based compensation to employees amounting to $450,177 has been recorded and presented in general and administrative expenses (nil for the 9 months ended June 30, 2007). Page 25

27 10. SHARE CAPITAL (continued) Earnings per share Diluted earnings per common share were calculated based on net earnings divided by the average number of common shares outstanding taking into account the dilutive effect of stock options using the treasury stock method. Earnings per share - basic June 30, June 30, (12 months) (9 months) $ $ Net earnings available to common shareholders 9,382,053 1,899,093 Average basic number of common shares outstanding 24,855,130 17,760,450 Earnings per share - basic Earnings per share - diluted Net earnings available to common shareholders 9,382,053 1,899,093 Average basic number of common shares outstanding 24,855,130 17,760,450 Adjustment to average number of common shares Stock options 781, ,600 Average diluted number of common shares outstanding 25,636,318 18,574,050 Earnings per share - diluted Page 26

28 11. INCOME TAXES Income tax expense comprises the following: June 30, June 30, (12 months) (9 months) $ $ Current 5,779,690 2,082,857 Future (1,736,647) (898,599) 4,043,043 1,184,258 Income tax expense differs from the amounts calculated by applying canadian statutory rates (federal and provincial) of 32.02% (2007, 34.43%) to the earnings before income taxes and non-controlling interest as follows: Earnings before income taxes and non-controlling interest June 30, June 30, (12 months) (9 months) $ $ 13,425,096 3,167,631 Income taxes based on statutory rates 4,298,716 1,090,581 Increase (decrease) of income taxes due to the following: Non-deductible expenses 36,481 19,904 Non-deductible stock-based compensation expense 144,147 - Non-taxable portion of capital gain - (31,946) Non-taxable share in net earnings of a company subject to significant influence (131,491) - Effect of corporate tax rate modification (265,500) 76,025 Other items (39,310) 29,694 Total income taxes 4,043,043 1,184,258 Future income taxes are based on differences between the accounting and tax values of assets and liabilities and consist of the following as at the dates presented: June 30, June 30, $ $ Future income tax assets related to share issue costs 977,515 - Future income tax liabilities: Long-term investments 76,450 81,710 Capital assets 2,194,374 2,777,226 Intangible assets 2,455,501 3,848,257 Total future income tax liabilities 4,726,325 6,707,193 Net future income tax liabilities 3,748,810 6,707,193 Page 27

29 12. ADDITIONAL INFORMATION RELATING TO THE STATEMENT OF CASH FLOWS Changes in non-cash operating working capital items June 30, June 30, (12 months) (9 months) $ $ Accounts receivable (6,946,637) (3,415,833) Inventories (7,104,776) (1,737,186) Prepaid expenses (23,663) (196,177) Accounts payable and accrued liabilities 4,303, ,054 Client deposits 1,258,974 (101,490) Income taxes payable (555,205) 1,346,719 (9,068,174) (3,485,913) Cash and cash equivalents Cash 8,406,502 - Bank overdraft (2,409,634) (1,494,525) 5,996,868 (1,494,525) Non-cash investing and financing activities Issuance of share in consideration of business acquisitions (see Note 3) Liabilities related to business acquisitions - 14,203,000-2,040,000 Other information Interest paid 1,961,917 1,062,663 Income taxes paid 6,334, ,138 Page 28

30 13. COMMITMENTS Under the terms of operating leases of business premises expiring 2009 and 2011, the company is committed to make minimum payments totaling $191,000 as at June 30, 2008 detailed as follows: $ , , , RELATED PARTY TRANSACTIONS The company is related to Québec Inc., Ontario Inc. due to the significant influence exercised by these companies on Orbit Garant Drilling Inc. The company is also related to Canada Inc. (Usinage X-SPEC) due to the significant influence exercised by the company. During the year, the company entered into the following transactions with its related companies: June 30, June 30, (12 months) (9 months) $ $ Sales 122,521 27,633 Purchases 2,756, ,514 Rent 111,000 37,500 Management fees 250, ,500 These above transactions were made within the normal course of operations and have been recorded at the exchange amount which is the amount of consideration established and agreed to by related parties. During the year ended June 30, 2007, the company paid, to Ontario Inc. business acquisitions fees in the amount of $500,000 and IPO transaction fees in the amount of $50,000. During the year ended June 30, 2008, the company paid, to Ontario Inc., IPO transaction fees in the amount of $450,000. These transactions were not made within the normal course of operations and have been recorded at the exchange amount. As at June 30, 2008, accounts payable and accrued liabilities include a balance of $886,556 (June 30, 2007, $157,854) resulting from these transactions. Page 29

31 15. FINANCIAL INSTRUMENTS Currency risk The company realizes a part of its activities in U.S. dollars and is thus exposed to foreign exchange fluctuations. The company does not actively manage this risk. As at June 30, 2008, the company has cash in U.S. dollars for an amount of $244,957 (June 30, 2007, $204,551) and accounts receivable in U.S. dollars for an amount of $512,882 (June 30, 2007, $449,685). Credit risk The company provides credit to its customers in the normal course of its operations. It carries out, on a continuing basis, credit checks on its customers and maintains provisions for contingent credit losses. Three major customers represent 33% respectively by customer, 12%, 11% and 10% of the company's trade accounts receivable as at June 30, 2008 (June 30, 2007, three major customers represent 34% respectively by costumer, 13%, 11% and 10%). Two major customers represent 24% of the contract revenue for the year ended June 30, 2008, respectively by customer, 13% and 11%. Three major customers represent 34% of the contract revenue for the 9 month period ended June 30, 2007, respectively by customer, 10%, 10% and 14%. Interest rate risk The company is subject to interest rate risk since a significant part of the long-term debt bears interest at variable rates. Fair value The fair value of cash, accounts receivable, bank overdraft, bank loan, accounts payable and accrued liabilities, client deposits and advances from shareholders is approximately equal to their carrying values due to their shortterm maturity. The fair value of long-term debt approximates its carrying value as it bears interest at variable rate and has financing conditions similar to those currently available to the company. Page 30

32 16. SEGMENTED INFORMATION The company operates in three geographic segments, Drilling Canada, Drilling International (US, Central and South America) and Manufacturing Canada. The services provided in each of the reportable drilling segments are essentially the same. The accounting policies of the segments are the same as those described in Note 4. Management evaluates performance based on gross profit in these three geographic segments before interest, general corporate expenses and income taxes. Data relating to each of the company's reportable segments is presented as follows: June 30, June 30, (12 months) (9 months) $ $ Contract revenue Drilling Canada 67,685,486 31,277,094 Drilling International 8,383,809 4,089,851 Manufacturing Canada 6,072,921 1,365,875 82,142,216 36,732,820 Gross profit Drilling Canada 22,548,090 7,917,865 Drilling International 3,901,784 2,311,779 Manufacturing Canada 2,353, ,018 28,803,164 10,600,662 Interest 1,962,080 1,062,663 General corporate expenses 13,415,988 6,454,648 Income taxes 4,043,043 1,184,258 19,421,111 8,701,569 Net earnings 9,382,053 1,899,093 Identifiable assets Drilling and Manufacturing Canada 87,870,298 65,522,410 International 6,641,079 6,626,152 94,511,377 72,148,562 Capital assets Drilling and Manufacturing Canada 18,217,149 16,375,814 International 1,745,567 2,236,398 19,962,716 18,612,212 Amortization Drilling and Manufacturing Canada 7,097,885 4,023,783 International 242, ,973 7,340,300 4,138,756 Page 31