Management s Discussion & Analysis Nine months ended Sept 30, 2013

Transcription

1 Hyduke Energy Services Inc Avenue Nisku, Alberta, Canada, T9E 7X9 Telephone: (780) Facsimile: (780) TSX Symbol: HYD Website: Management s Discussion & Analysis Nine months ended Sept 30, 2013 This management s discussion and analysis ( MD&A ) for Hyduke Energy Services Inc. ( Hyduke or the Company ) should be read in conjunction with the unaudited consolidated financial statements and accompanying notes for the nine months ended September 30, 2013 and the audited consolidated financial statements and accompanying notes for the years ended December 31, 2012 and Hyduke trades on the Toronto Stock Exchange under the symbol HYD. Additional regulatory information relating to Hyduke, including the Company s Annual Information Form ( AIF ), can be found at the System for Electronic Document Analysis and Retrieval web site at This MD&A is as of November 8, 2013 and all dollar amounts presented are expressed in Canadian dollars. Amounts presented in the MD&A are generally rounded to the nearest thousand. BASIS OF PRESENTATION AND TRANSITION TO IFRS The accompanying consolidated financial statements for the nine months ended September 30, 2013 and the year ended December 31, 2012 are prepared in accordance with International Financial Reporting Standards ( IFRS ) as required by the Canadian Accounting Standards Board for Canadian publicly accountable enterprises. COMPANY OVERVIEW Hyduke is an integrated oilfield services company with over thirty-five years experience in the manufacture, repair and distribution of oilfield equipment and supplies in Canada and worldwide. Hyduke specializes in providing customized, integrated solutions to the drilling and well service industries including: Turn-Key Equipment - drilling rig, work-over rig and service rig packages including in-house design, engineering and drafting, major component procurement and overall project management; Life Cycle Management - inspection, certification, service, repair and supply services throughout the operating life of the drilling, work-over or well service rig; and Single Source Supply - providing new capital equipment, repair and maintenance on existing capital equipment and supply of operating consumables. Hyduke is headquartered in Nisku, Alberta, Canada and has facilities in Edmonton, Calgary, Nisku, Leduc, Red Deer and Lloydminster, Alberta and Houston, Texas, USA. During the nine months, the Company restructured its business operations into two operating segments and one corporate services segment as follows: Hyduke Rig Equipment: the Hyduke Rig Equipment segment includes the design, manufacture and refurbishment of land-based drilling rigs, workover rigs, well service rigs, drilling and well service support equipment. Hyduke Supply and Service: the Hyduke Supply and Service segment includes the procurement and distribution of spare parts, equipment components, operating supplies and pneumatic controls to the drilling

2 and well service industries, the service and repair of drilling rig, workover rig, service rig and truck mounted equipment, and the inspection and certification of drilling rig and well service equipment. Corporate Services: The Corporate Services segment includes costs for management and administration, sales and marketing, accounting and finance and engineering and drafting services provided to all Hyduke operating segments. Additionally, during the nine months the Company discontinued its well service equipment manufacturing operation that had been based in Edmonton, Alberta, Canada. FORWARD LOOKING STATEMENTS This report contains certain forward-looking statements under the heading Outlook and elsewhere concerning future events or the Company s operations, anticipated financial performance, business prospects and strategies of Hyduke. Forward-looking information typically contains statements with words such as anticipate, believe, estimate, expect, plan, intend or similar words suggesting future outcomes or outlooks on, without limitation, estimates of business activity, supply and demand for the Company s products, the estimated amounts and timing of capital expenditures, anticipated future debt levels, or other expectations, beliefs, plans, objectives, assumptions or statements about future events or performance. Readers are cautioned not to place undue reliance on forward-looking information. By its nature, forward-looking information involves numerous assumptions, inherent risks and uncertainties both general and specific that may cause actual future results to differ materially from those contemplated and contribute to the possibility that the predictions, forecasts, projections and other forward-looking statements will not occur. These factors may affect anticipated earnings or assets and include, but are not limited to: industry activity levels, market liquidity, customer credit risk, competition, oil and gas prices, product liability, fixed price contracts, development of new products, uninsured and underinsured losses, access to additional financing, source of supply of raw material and third party components, availability of key personnel, agreements and contracts, government regulations, foreign exchange exposure, interest rate risk, international scope of operations, environmental health and safety regulations and Hyduke s anticipation of and success in managing the risks implied by the foregoing. The Company cautions that the foregoing list of important factors is not exhaustive. The Company believes that the expectations reflected in the forwardlooking 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 report should not be unduly relied upon. The forward-looking statements in this report speak only as of the date of this report. Hyduke undertakes no obligation to update publicly or otherwise revise any forward-looking information, whether as a result of new information, future events or otherwise, except as required pursuant to applicable securities legislation. NON-IFRS MEASURES OF FINANCIAL PERFORMANCE The Company uses both IFRS and non-ifrs measures as indicators of financial performance and believes that these non-ifrs measures provide useful supplemental information to investors. EBITDAS and Gross Profit are non-ifrs measures used by the Company. The Company s method of calculating EBITDAS and Gross Profit may differ from other companies and may not be comparable to similar measures presented by other companies. For additional information refer to Non-IFRS Measures section later in this MD&A. EBITDAS is defined as earnings before interest, taxes, depreciation and amortization, gain or loss on sale of property, plant and equipment, gain or loss on foreign exchange, and stock-based compensation. EBITDAS 2

3 is not intended to represent an alternative to net income determined in accordance with IFRS as an indicator of the Company s performance. Gross profit is defined as revenue less cost of sales. Cost of sales includes direct materials, direct labor, variable and fixed manufacturing overhead, and other costs closely associated with the manufacture of goods; costs of service and supply inventory including costs required to locate the inventory in its current location; provisions to reduce inventory to estimated net realizable value; and contract loss provisions. SELECTED ANNUAL INFORMATION AND SUMMARY OF QUARTERLY RESULTS Selected Financial Position Information ($000 s, except ratios) September 30, 2013 December 31, 2012 December 31, 2011 Total assets 50,069 58,155 55,529 Total current assets 35,125 43,066 40,720 Total cash 1,920 1,843 4,824 Total liabilities 20,093 26,246 24,476 Total current liabilities 10,557 16,111 21,915 Total bank indebtedness Nil 1,200 Nil Total interest bearing debt 8,522 8,669 1,149 Total equity 29,975 31,909 31,053 Current ratio (current assets divided by current liabilities) Debt to equity ratio (interest bearing debt divided by shareholders equity) 3.33 to 1: to to to to to 1.00 Total assets of $50.1 million as at September 30, 2013 represents a decrease of $8.1 million (14%) from December 31, 2012 and is due primarily to a reduction in current assets. Total current asset decrease of $7.9 million relates primarily to an $8.4 million reduction in accounts receivable offset by an increase in unbilled revenue of $0.5 million. Total liabilities of $20.1 million as at September 30, 2013 represents a decrease of $6.2 million (23%) from December 31, 2012 and is due primarily to a decrease in current liabilities. Total current liabilities decrease of $5.6 million relates primarily to a decrease in bank indebtedness of $1.2 million, a decrease of unearned revenue of $1.3 million and a decrease in accounts payable of $2.4 million. The Company continues to maintain a very strong financial position with a current ratio at 3.3 to 1.00 and a debt to equity ratio of 0.28 to

4 Selected Quarterly Financial Information ($000 s, except per share data) 2013 Q3 Fiscal Year Ended December Q Q Q4 enues continuing operations 18,577 12,107 16,588 20,515 Gross profit 1 continuing operations 2,525 1,603 2,140 1,751 Gross profit (%) 13.6% 13.2% 12.9% 8.5% EBITDAS 1 continuing operations 584 (518) 45 (242) Profit (loss) continuing operations 32 (825) (337) (658) Loss (317) (1,148) (431) (1,264) Loss per share basic ($) (0.013) (0.047) (0.018) (0.052) Loss per share diluted ($) (0.013) (0.047) (0.018) (0.052) 1 Gross profit and EBITDAS are non-ifrs measures and are defined earlier under Non-IFRS Measures. Selected Quarterly Financial Information ($000 s, except per share data) 2012 Q3 Fiscal Year Ended December Q Q Q4 enues continuing operations 24,822 26,980 31,263 27,718 Gross profit 1 continuing operations 3,258 3,188 5,675 4,793 Gross profit (%) 13.1% 11.8% 18.2% 17.3% EBITDAS 1 continuing operations 1, ,671 2,605 Profit continuing operations ,361 1,747 Profit ,975 1,094 Profit per share basic ($) Profit per share diluted ($) Gross profit and EBITDAS are non-ifrs measures and are defined earlier under Non-IFRS Measures. OVERALL PERFORMANCE Note: For purposes of this MD&A, the following terminology is used: Current Quarter means the three months ended September 30, 2013 Prior Quarter means the three months ended June 30, 2013 Previous Year Quarter means the three months ended September 30, 2012 Current Quarter revenues from continuing operations of $18.6 million represents an increase of $6.5 million (53%) over the Prior Quarter. The increase is due to increased revenues in the Manufacturing segment of approximately $2.1 million and increased revenues in the Supply and Service segment of $3.1 million. Current Quarter gross profit from continuing operations of $2.5 million increased $0.9 million (58%) over the Prior Quarter and is due to increased revenues. Current Quarter gross profit percentage of 13.6% increased 0.4 percentage points over the Prior Quarter. 4

5 Current quarter EBITDAS from continuing operations of $0.6 million increased $1.1 million over the Prior Quarter and is due to a 53% increase in revenue and a 58% increase in gross profit. OUTLOOK The oilfield services industry in Canada has undergone major changes in the past five years as exploration and production (E&P) companies change their focus from natural gas to oil and liquids and from vertical to horizontal wells. The number of wells drilled has declined sharply with activity characterized as fewer, deeper and longer wells requiring less rigs. As a result, Hyduke is experiencing low Canadian industry activity. However, Hyduke remains focused on growing our market share in the Canadian market, developing our Houston operations into a key platform of our manufacturing and service strategy and continuing to develop international customers in order to participate in the worldwide turn-key rig market. Additionally, we continue to challenge our manufacturing team to realize greater gross profits and are actively restructuring our operations to reduce our footprint costs, realize on labor efficiencies and increasingly, use our Houston operation as a low-cost manufacturing alternative to Canada. Over the past five years, Hyduke has also experienced low gross profit margin percentages in our equipment manufacturing operations. In response, Hyduke continues to look at streamlining and restructuring these operations to reduce footprint costs, increase productivity efficiencies and develop the Houston operation as a lower-cost manufacturing alternative to Alberta. Canadian new well drilling activity in 2013 (experienced to date and expected for the remainder of the year) and a slowdown in new equipment commitments is negatively impacting domestic revenue in Industry expectations for western Canada for new wells drilled in 2013 are forecast to be slightly lower than that experienced in The Canadian Association of Oilwell Drilling Contractors (CAODC) has forecast the number of wells to be drilled for calendar 2013 to be 10,409, 6% lower than 2012 activity. As noted above, the major change in the type of wells drilled and continued low gas prices leads Hyduke to believe that a recovery or change to historical levels and types of activity is unlikely. On October 30, 2013 the Petroleum Services Association of Canada (PSAC) released its 2014 drilling forecast. PSAC sees 10,800 wells drilled on a completion basis in 2014, a reduction from 10,960 in 2013 (forecast) and 10,088 in The PSAC forecast indicates that the total number of metres drilled in 2014 will be 23.0 million, up from 22.5 million in 2013 and 22.1 million in The average meters per well is estimated to be 2,125 in 2014, up from 2,050 in 2012 and 1,996 in This indicates a bias towards drilling and well servicing rigs with greater horsepower and higher depth capacity and that existing smaller equipment will be underutilized. One area that looks promising in Canada is the requirement for more large drilling rigs in the 6,000 metre depth range to drill prospects like the Duvernay, Montney and Horn River in northwest Alberta and northeast British Columbia. The potential for LNG exports from the west coast of B.C. will increase demand for rigs in this depth capacity. Hyduke will be actively pursuing opportunities to participate in this anticipated Canadian rig fleet expansion. Internationally, Hyduke continues to actively market its products and services in the United States, Russian Federation, Central and Eastern Europe, Mexico, South America and the Middle East. While the project decision making cycle is longer on international work, active quoting continues on a significant number of 5

6 international opportunities. The Company continues to invest in product development and personnel in order to achieve more consistent success winning international projects. Continued development of the international market will have a positive impact on Hyduke. International projects tend to be larger, more turn-key in nature and have significant benefits throughout Hyduke due to the integrative nature of the Hyduke s products and service offerings. Not only will the manufacturing segments of the organization benefit, but a positive impact will be felt in the Life Cycle Management businesses such as repair and maintenance, inspections and certification, and consumables. The Company will continue to focus on increasing market share through marketing Hyduke s Life Cycle Management and Single Source Supplier platforms to customers. These platforms benefit customers by offering continued support throughout the useful life of their equipment and by offering a wide array of consistent, reliable services from a single source. Improved manufacturing margins is a major focus. Areas such as engineering, drafting, project management, electrical, hydraulic and mechanical functions are being reviewed and improved as opportunities are identified. In some cases this is requiring investment that may not yield immediate revenue but will improve margins going forward. As an offset to productivity investments, management is continually seeking cost reductions in areas like support staff reductions and facility restructuring that do not impair revenue generating capability. We are optimistic the efforts of our sales and marketing team will result in a more consistent stream of future significant turn-key projects. The type of drilling rigs required to drill tight oil and shale gas reservoirs worldwide is materially different that the capabilities of current equipment resulting in significant investements in new, bigger and more powerful rigs with extended depth capacity. Additionally, management focus on manufacturing processes, project management and the strategic investment in key areas of manufacturing processes will result improved operating margins. As the market changes, the Company is in a process of continuous strategic review of the best way to minimize the negative impacts of the structural changes our drilling and well servicing clients are enduring while simultaneously examining how to best participate in the new drilling equipment requirements in Canada, the United States and worldwide. The objective is to ensure Hyduke remains what it has been for decades a stable, respected, active and profitable supplier of equipment, products and services for the drilling and well servicing industry. 6

7 RESULTS OF OPERATIONS enues enues by Operating Segment Three Months Ended Nine Months Ended ($000 s) Sept 30, June 30, Sept 30, Sept 30, Sept 30, Rig Equipment 11,161 9,030 17,745 29,428 60,619 Supply and Service 8,061 4,996 6,882 20,953 22,650 Corporate Services , ,356 Elimination upon consolidation , ,043-3,559 Total revenues 18,577 12,107 24,823 47,272 83,066 enues by Geographical Segment Three Months Ended Nine Months Ended ($000 s) Sept 30, 2013 June 30, 2013 Sept 30, 2012 Sept 30, 2013 Sept 30, 2012 Canadian oilfield services International oilfield services ($) % of ($) % of ($) % of ($) % of 13,184 71% 9,429 78% 15,666 63% 34,294 73% 44,213 53% 5,393 29% 2,678 22% 9,157 37% 12,978 27% 38,846 47% Total revenues 18, % 12, % 24, % 47, % 83, % Total revenue for the Current Quarter has increased 53% over the Prior Quarter and has decreased 25% over the Previous Year Quarter. Total revenue for the nine months ended September 30, 2013 has decreased 43% over the prior year. The increase over the Prior Quarter is due primarily to increased international equipment projects and increases in supply and service activity. The decreases over the prior year are due primarily to one reason. The Company completed three significant turn-key rig projects in 2012 and does not have that level of projects in International revenues will fluctuate from year to year as the revenues tend to be associated with larger rig equipment projects which will impact the periods depending on when the projects are awarded and completed. Rig Equipment segment revenue of $11.2 million for the Current Quarter represents an increase of $2.1 million (24%) over the Prior Quarter. This is primarily due to a $6 million turn-key drilling rig equipment project for an international customer that was begun in the second quarter and is expected to be completed in the fourth quarter. Approximately 50% of this contract was completed in the third quarter. Canadian Rig Equipment activity has been consistent quarter over quarter and is consistent with a domestic industry that is flat with respect to capital spending on new rig equipment. Rig Equipment segment revenue of $29.4 million for the nine months ended September 30, 2013 represents a decrease of $31.2 million (52%) over the same period in the prior year. The majority of this decrease is due to the completion of three significant turn-key drilling rig projects in August 2012, October 2012 and March Supply and Service segment revenue of $8.1 million for the Current Quarter represents an increase of $3.1 million (62%) over the Prior Quarter and an increase of $1.2 million (17%) over the Previous Year Quarter. 7

8 The increase over the Prior Quarter is primarily due to an increase of $2.6 million in supply revenue of which $0.8 million is due to an international supply order. The remainder of the increase is due to equipment repair services. The increase over the Previous Year Quarter is due equally to increases in supply activity and equipment services activity. For the nine months ended September 30, 2013, revenue of $21.0 million represents a decrease of $1.7 million (8%) over the same period in the prior year and is due to a very slow second quarter in enue will fluctuate from period to period due to the seasonality of drilling and well service operations and fluctuations in activity from year to year. Gross Profit Gross Profit by Operating Segment Three Months Ended Nine Months Ended Sept 30, 2013 June 30, 2013 Sept 30, 2012 Sept 30, 2013 Sept 30, 2012 ($) (%) ($) (%) ($) (%) ($) (%) ($) (%) Rig Equipment 1, % % 2, % 3, % 8, % Supply and Service 1, % % % 3, % 3, % Corporate Services % (4) -0.2% % % % Elimination Entry Total gross profit 2, % 1, % 3, % 6, % 12, % Total gross profit of $2.5 million in the Current Quarter represents an increase of $0.9 million (58%) over the Prior Quarter and is due to a combination of a 53% increase in revenues and an increase of 0.4 gross profit percentage point. Rig Equipment segment gross profit of $1.3 million in the Current Quarter represents an increase of $0.4 million (36%) over the Prior Quarter and is due to a combination of a 24% increase in revenues and an increase in gross profit of 1.1 percentage points. The increase in gross profit percentage points is due to strong performance on a $6 million turn-key drilling rig project for an international customer. Rig Equipment segment gross profit of $3.2 million for the nine months ended September 30, 2013 represents a decrease of $5.4 million (63%) over the same period in the prior year and is due to a significantly higher revenue in the prior year associated with three turn-key drilling rig projects that were completed in 2012 and early Supply and Service segment gross profit of $1.2 million in the Current Quarter represents an increase of $0.5 million (75%) over the Prior Quarter and is due to a combination of a 62% increase in revenues and an increase in gross profit of 1.2 percentage points. The increase in gross profit percentage points is primarily due to the effect of an international supply contract whose revenues are being earned in the Current Quarter. This international supply contract is incremental to the ongoing supply operations and as a result, the entire contribution margin (revenue less direct costs) is realized in the gross profit number resulting in an increase in gross profit percentage. Supply and Service segment gross profit of $3.3 million for the nine months ended September 30, 2013 represents a decrease of $0.1 million (2%) over the same period in the prior year and is due to an 8% reduction in revenue offset by an increase in gross profit percentage of 0.9 percentage points. 8

9 Selling and Distribution Expenses Selling and distribution expenses Three Months Ended Nine Months Ended ($000 s) Sept 30, 2013 June 31, 2013 Sept 30, 2012 Sept 30, 2013 Sept 30, 2012 Selling and distribution expenses % % % % % Selling and distribution expenses for the nine months ended Sept 30, 2013 have decreased $211 thousand (28%) and is due primarily to fluctuations in sales personnel (85%). General and Administrative Expenses General and Administrative Expenses Three Months Ended Nine Months Ended ($000 s) Sept 30, 2013 June 30, 2013 Sept 30, 2012 Sept 30, 2013 Sept 30, 2012 Administration and employment 1, % 1, % 1, % 4, % 3, % Office and automation % % % 1, % 1, % Consulting and professional % % % % 1, % Amortization of intangibles and deferred finance fees % % % % % Depreciation of property, plant and equipment % % % % % Total general & administrative expenses 2, % 2, % 2, % 6, % 7, % Total general and administrative expenses in the Current Quarter of $2.2 million have decreased $0.1 million (6%) with the Prior Quarter and have decreased $0.1 million (8%) from the Previous Year Quarter. For the nine months ended September 30, 2013, total general and administrative expenses have decreased $469 thousand (6%). Administration and employment expense of $1.4 million for the Current Quarter has decreased $45 thousand (3%) over the Prior Quarter and increased $222 thousand over the Previous Year Quarter. The Company has been reducing corporate overhead in clerical, administrative and supervisor areas. At the 9

10 same time the company has been investing in certain key areas of the business in an effort to improve manufacturing profit margins. Specifically, the Company has increased staffing and capacity in project management, engineering and drafting, electrical, hydraulic and mechanical functions. Office and automation expense of $442 thousand for the Current Quarter represents a decrease of approximately $36 thousand over the Prior Quarter and a decrease of $105 thousand over the Previous Year Quarter. The decrease is due to a decline in computer, office supplies, and office maintenance. Consulting and professional expense of $442 thousand for the Current Quarter represents a decrease of $36 thousand over the Prior Quarter due to a decline in legal advisory services. Higher levels were required in the Prior Quarter due to the Company s Annual General Meeting. Other Operating (Income) Expenses Other Operating (Income) Expenses Three Months Ended Nine Months Ended ($000 s) Sept 30, 2013 June 30, 2013 Sept 30, 2012 Sept 30, 2013 Sept 30, 2012 Rental and other income % % % % % Bad debts % % % % % Total other operating income (expenses) % % % % Other operating income and expenses are generally immaterial and are consistent with prior periods. Financial results Financial Results Three Months Ended Nine Months Ended ($000 s) Sept 30, 2013 June 30, 2013 Sept 30, 2012 Sept 30, 2013 Sept 30, 2012 ($) % ($) % ($) % ($) % ($) % Interest results % % % % % Loss (gain) on foreign exchange transactions % % % % % Total financial results % % % % % Interest expenses of $131 thousand for the Current Quarter represents a decrease of $7 thousand (6%) over the Prior Quarter and a decrease of $113 thousand (47%) over the Previous Year Quarter. On a year over year basis, interest expenses decreased due to a decline in use of the operating facility. 10

11 LIQUIDITY AND CAPITAL RESOURCES During the nine months ended September 30, 2013, cash provided in operating activities, including the change in non-cash working capital balances was $2.0 million compared to cash used by operating activities of $17.2 million in the prior year. The current year decline in cash used is due to decreased working capital requirements due to a decline in activity. Capital expenditures on property, plant and equipment and intangible assets during the nine months ended September 30, 2013, were $0.6 million, compared to $1.6 million for the prior year. There were $19 thousand of advances under finance lease obligations for the nine months ended September 30, 2013 compared to $227 thousand during the prior year. The finance leases commencing in 2012 related to the purchase of new computer equipment and shop equipment for the expansion in Texas. Term loan and finance lease repayments were $62 thousand for the nine months ended September 30, 2013 compared to $963 in the prior year. During the nine months ended September 30, 2012, the Company received net proceeds from term loan of $7,600,000. Bank indebtedness was in the amount of nil for the nine months ended September 30, 2013 versus a balance of $1.2 million at December 31, At September 30, 2013 the Company had a positive working capital position (refer to NON-IFRS MEASURES) of $24.6 million verses $27.0 million at December 31, Unbilled revenue represents costs and expected margin on unbilled jobs in progress at year-end and is reduced by progress billings as production milestones are met. Unbilled revenue at September 30, 2013 was $6.6 million compared to $6.1 million at December 31, Wherever possible, on long-term contracts, Hyduke actively manages cash flow demands through negotiating deposits and progress payments from its customers. This ensures that unbilled revenue amounts are significantly less than the realizable value of the projects in the event of customer default. Additionally, international customer credit is managed through letters of credit and ensuring equipment is not released until final payment is received. Income tax payable of $0.2 million represents a tax cushion. CONTRACTUAL OBLIGATIONS AND CONTINGENCIES The following table summarizes contractual obligations due on long-term debt, premises, operating and finance commitments as at September 30, 2013: Contractual Obligations Dec 31 Dec Dec Dec Dec Total Term loan 8,249,300 64, , , ,200 7,369,600 Premise leases 3,161, ,946 1,251, , ,952 73,860 Operating leases commitments 70,870 11,394 33,389 17,866 7, Finance lease commitments 349,460 41, , ,355 47,155 3,718 Total contractual obligations 11,830, ,996 1,696,245 1,177, ,579 7,448,128 11

12 RELATED PARTY TRANSACTIONS Two subsidiaries of Hyduke rented two separate facilities from a former director of Hyduke. During the period the former director was considered a related party, under the rental arrangements, the subsidiaries paid base rent of $103,032 during the nine months ended September 30, 2013 ( $309,097) and paid all required operating costs associated with the rented premises. This transaction was measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties. With the conflicted directors abstaining, all related party transactions are approved by the Board of Directors, who consider market conditions to ensure that the related party transactions occur at fair market value. OUTSTANDING SHARE DATA As at September 30, 2013, the Company had 24,207,764 common shares outstanding and 1,248,000 share options outstanding. As of November 8, 2013, the Company has 24,326,264 common shares outstanding and 960,000 share options outstanding. CRITICAL ACCOUNTING ESTIMATES This MD&A of the Company s financial condition and results of operations is based on its consolidated financial statements which are prepared in accordance with IFRS. The Company s significant accounting policies are described in the notes of its consolidated financial statements. The preparation of these financial statements requires that certain estimates and judgments be made that affect the reported assets, liabilities, revenues and expenses. These estimates and judgments are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Anticipating future events cannot be done with certainty, therefore these estimates may change as new events occur, more experience is acquired and as the Company s operating environment changes. RISK FACTORS The Company business is impacted by the following risk factors: industry activity levels, access to labor, market liquidity, customer credit risk, competition, oil and gas prices, product liability, fixed price contracts, development of new products, uninsured and underinsured losses, access to additional financing, source of supply of raw material and third party components, availability of key personnel, agreements and contracts, government regulations, foreign exchange exposure, interest rate risk, international scope of operations and environmental, health and safety regulations. For details on these risk factors, please review the Company s Annual Information Form available on DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROLS OVER FINANCIAL REPORTING Disclosure controls and procedures The Company s management, including the President and Chief Executive Officer and the Chief Financial Officer, has reviewed and evaluated the effectiveness of the Company s disclosure controls and procedures (as defined in National Instrument Certification of Disclosure in Issuers Annual and Interim Filings) as of September 30, Management concluded that, as of September 30, 2013, the disclosure controls and procedures were effective and provide reasonable assurance that material information relating to the Company and its consolidated subsidiaries was made known to them by others within these entities to 12

13 allow timely decisions regarding required disclosure. Appropriate disclosure decisions require that management be aware of the information required by the various applicable securities legislation. Management recognizes that it is important to utilize advisors and the Company s Board of Directors to assist in recognizing, interpreting, understanding and complying with the various securities legislation and accounting disclosure requirements. Internal controls over financial reporting Management has also designed internal controls over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. In accordance with National Instrument , management designed and assessed the effectiveness of internal controls over financial reporting as of December 31, 2012 based on the criteria set forth in Internal Control Integrated Framework as issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that assessment, management concluded that, as of December 31, 2012, internal controls over financial reporting were effective and provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. There have been no changes in the Company s internal controls over financial reporting during the first two quarters that have materially affected, or are reasonably likely to materially affect, the Company s internal controls over financial reporting in the future. Notwithstanding the foregoing, no assurance can be made that the Company s controls over disclosure and financial reporting and related procedures will detect or prevent all failures of employees within the Company to disclose material information otherwise required to be set forth in the Company s reports. NON-IFRS MEASURES The Company uses certain non-ifrs measures as indicators of financial performance and believes that these non-ifrs measures provide useful supplemental information to investors. EBITDAS and gross profit are measures used by the Company that do not have a standardized meaning prescribed by IFRS. The Company s method of calculating EBITDAS and gross profit may differ from other companies and may not be comparable to similar measures presented by other companies. Included below are tables calculating or reconciling these non-ifrs measures where applicable. Reconciliation of Non-IFRS Measures The following tables presents the calculation of gross profit. Sept 30, 2013 $ Quarter Ended Sept 30, 2012 $ enue 18,577 24,823 Cost of goods sold 16,051 21,566 Gross profit 2,525 3,258 13

14 The following table reconciles net income to EBITDAS. Net income (loss) Amortization and depreciation expense Income tax expense Interest expense Stock based compensation Sept 30, 2013 $ (20) 130 Quarter Ended Sept 30, 2012 $ 3 Loss on foreign exchange EBITDAS 584 1,

15 CORPORATE INFORMATION CORPORATE MANAGEMENT Gordon McCormack, CA President and Chief Executive Officer David Beatty Vice President Operations Veronica Dutchak, CA Chief Financial Officer Marcel Claveau Vice President Manufacturing Boris Makowecki Executive Vice President Michael Symchuk President of Rig Equipment Don Pylypchan Chief of Financial Reporting Derek Petrie, CGA Director of Inspections and Certifications DIRECTORS John Pinsent, FCA Chairman of the Board David Yager Independent businessman Gordon McCormack, CA President and Chief Executive Officer Patrick Ross Independent businessman Doug Bachman Independent businessman HEAD OFFICE WEBSITE Avenue Nisku, Alberta, T9E 7X9 Telephone: (780) Facsimile: (780)