Destiny Resource Services Corp. Announces Q2'09 Results

CALGARY, ALBERTA--(Marketwire - Aug. 10, 2009) - Destiny Resource Services Corp. DSC announced today its 2009 Second Quarter results. Destiny Resource Services Corp. (the "Company") provides Seismic Front-End Services to energy explorers and producers and to seismic acquisition companies in North America. Services provided are seismic line clearing (Destiny Line Clearing); shot-hole drilling (Destiny Drilling; Destiny Drilling USA) and Geospatial Services including survey and mapping (Destiny Survey & Mapping; Destiny Survey & Mapping USA); navigation, positioning and asset management technology (Destiny Navigation Technologies); and locating services (Advanced Locating Services). Common shares of Destiny Resource Services Corp. trade on The Toronto Stock Exchange under the ticker symbol DSC. /T/ FINANCIAL HIGHLIGHTS Three Months Ended Six Months Ended June 30, June 30, ($000s, except per 2009 2008 Change 2009 2008 Change share amounts) $ $ % $ $ % ---------------------------------------------------------------------------- Revenue 11,367 12,459 (9) 34,082 32,734 4 EBITDA (1) 193 436 (56) 4,082 4,026 1 Per share - basic and diluted 0.03 0.08 (56) 0.73 0.72 1 Net income (loss) for the period (604) 83 (827) 931 2,013 (54) Per share - basic and diluted (0.11) 0.01 (827) 0.17 0.36 (54) Weighted average shares outstanding for the period (000s) Basic and diluted (2) 5,582 5,582 - 5,582 5,579 0 June 30, Dec. 31, 2009 2008 Change As at $ $ % ----------------------------- Total assets 32,812 29,527 11 Working capital 4,889 3,486 40 Shareholders' equity 13,996 13,065 7 Book value per share outstanding 2.51 2.34 7 ----------------------------- (1) "EBITDA" is provided to assist investors in determining the ability of the Company to generate cash from operations. EBITDA is calculated from the consolidated statements of operations and retained earnings as gross margin less general and administrative expenses (not including gain on disposal of property and equipment). This measure does not have any standardized meaning prescribed by GAAP and may not be comparable to similar measures presented by other companies; however, the Company is consistent in its calculation of EBITDA for each reporting period. (2) There are 5,582,581 outstanding shares as at August 7, 2009. /T/ LETTER TO SHAREHOLDERS Our year unfolds for us with some successes and some frustrations. In the success column we count our relatively strong first quarter, our market share in large projects and our continual progress with developing our technologies and with their application to our businesses. From the frustration side, we note the general reduction in industry activity, seemingly longer approval and commitment timeframes and some price competition that appears to be uneconomic, or at least unsustainable. Our view is the overall demand for our services in 2009 will be somewhat below 2008, with the growth in the United States not quite making up for the reduction in Canada. As we plan for 2010, our sense is of our world continuing to unfold in much the same way. The seasonal nature of work, especially in many parts of the Western Canadian Sedimentary Basin, and the present outlook for prices for crude oil give some cause for continuing demand. On the other hand, the anticipated recovery for the economy as a whole does not look like it will bring any strong near-term growth in prices for natural gas, a requirement to trigger an uptick in demand for seismic services. As such, we anticipate a relatively active 2009-2010 winter season in Canada followed by a couple of quarters of quite modest levels of activity. In the United States, we appear to be achieving better traction for our collective operations: while overall industry activity remains at modest levels, we believe we are positioning Destiny, through our efforts and our innovation, to participate in several geographic areas. Regardless of short-term economic outlook, we remain committed to providing first class services to our industry. We will not compromise our dedication and commitment to safety, quality and integrity. That's how we do business. To achieve "safety, quality and integrity: uncompromised" we depend upon the efforts of the men and women who work for Destiny in the field, in our shops and in our offices. Our reputation for commitment to excellence is earned every day by every one of these people. To our employees, on behalf of all shareholders, "thank you". On behalf of the Board of Directors, Bruce R. Libin, Q.C., Executive Chairman and Chief Executive Officer Calgary, Alberta August 7, 2009 /T/ DESTINY RESOURCE SERVICES CORP. CONSOLIDATED BALANCE SHEETS (unaudited) June 30, 2009 December 31, 2008 $ $ ------------------------------------- ASSETS (note 2) CURRENT Cash 5,413,364 2,868,546 Accounts receivable (note 11) 11,872,217 10,403,742 Inventory 1,738,723 1,538,866 Prepaid expenses 922,481 649,923 Future income tax assets (note 4) 560,159 478,264 ------------------------------------- 20,506,944 15,939,341 Property and equipment (note 3) 11,181,657 12,322,665 Intangibles 728,805 871,040 Goodwill 394,430 394,430 ------------------------------------- 32,811,836 29,527,476 ------------------------------------- ------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT Accounts payable and accrued liabilities 9,032,133 7,272,181 Current portion of long-term debt (note 3) 1,163,000 1,218,000 Other current liabilities (note 4) 5,422,584 3,963,533 ------------------------------------- 15,617,717 12,453,714 ------------------------------------- Long-term debt (note 3) 2,035,250 2,740,500 Future income tax liabilities (note 4) 1,163,216 1,268,663 Commitments and contingencies (notes 2 and 7) Shareholders' equity Share capital 8,391,935 8,391,935 Retained earnings 5,603,718 4,672,664 ------------------------------------- 13,995,653 13,064,599 ------------------------------------- 32,811,836 29,527,476 ------------------------------------- ------------------------------------- See accompanying notes to the consolidated financial statements. DESTINY RESOURCE SERVICES CORP. CONSOLIDATED STATEMENTS OF OPERATIONS Three Months Ended Six Months Ended June 30, June 30, 2009 2008 2009 2008 (unaudited) $ $ $ $ ---------------------------------------------------------------------------- Revenue (note 11) 11,366,874 12,459,282 34,082,042 32,734,251 Direct expenses 10,855,641 11,483,627 28,852,835 27,516,954 --------------------------------------------- Gross margin 511,233 975,655 5,229,207 5,217,297 --------------------------------------------- Other expenses: General and administrative 686,706 598,391 1,545,441 1,347,393 Amortization of property and equipment and intangibles 933,029 843,673 1,850,829 1,556,384 Net interest expense (note 6) 33,116 77,786 102,203 211,896 Unrealized foreign exchange gain (368,272) (58,500) (398,566) (156,377) Gain on disposal of property and equipment (73,464) (5,269) (73,464) (8,972) --------------------------------------------- 1,211,115 1,456,081 3,026,443 2,950,324 --------------------------------------------- Income (loss) from operations before income taxes (699,882) (480,426) 2,202,764 2,266,973 Income taxes (note 4) Current tax expense 541,382 520,876 1,459,052 783,741 Future tax recovery (637,382)(1,083,810) (187,342) (529,687) --------------------------------------------- Net income tax expense (recovery) (96,000) (562,934) 1,271,710 254,054 --------------------------------------------- Net income (loss) and comprehensive income for the period (603,882) 82,508 931,054 2,012,919 Retained earnings, beginning of period 6,207,600 5,271,485 4,672,664 3,341,074 --------------------------------------------- Retained earnings, end of period 5,603,718 5,353,993 5,603,718 5,353,993 --------------------------------------------- --------------------------------------------- Per share amounts (note 5) Basic and diluted (0.11) 0.01 0.17 0.36 See accompanying notes to the consolidated financial statements. DESTINY RESOURCE SERVICES CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended Six Months Ended June 30, June 30, 2009 2008 2009 2008 (unaudited) $ $ $ $ ---------------------------------------------------------------------------- CASH FLOWS PROVIDED BY (USED IN): Operating activities: Net income (loss) (603,882) 82,508 931,054 2,012,919 Items not involving cash: Amortization of property and equipment and intangibles 933,029 843,673 1,850,829 1,556,384 Net income tax expense (recovery) (96,000) (562,934) 1,271,710 254,054 Gain on disposal of property and equipment (73,464) (5,269) (73,464) (8,972) Unrealized foreign exchange gain (368,272) (58,500) (398,566) (156,377) ------------------------------------------- Cash flows from operating activities (208,589) 299,478 3,581,563 3,658,008 Net change in non-cash working capital (note 8) 5,888,654 8,042,293 (351,644) 2,358,592 ------------------------------------------- 5,680,065 8,341,771 3,229,919 6,016,600 ------------------------------------------- Financing activities: Net change in demand bank loan - (3,128,062) - (4,782,491) Draw on long-term debt - - - 4,092,600 Repayment of long-term debt (287,308) (249,563) (600,650) (249,563) Unrealized foreign exchange gain on long-term debt principal (298,342) (55,082) (159,600) (55,082) Issuance of shares - 22,000 - 22,000 ------------------------------------------- (585,650)(3,410,707) (760,250) (972,536) ------------------------------------------- Investing activities: Business acquisition - (3,772,200) - (3,772,200) Purchase of property and equipment (614,702)(1,162,994) (729,639)(1,399,877) Proceeds on sale of property and equipment 235,516 44,500 235,516 64,300 Net change in non-cash working capital (note 8) 193,704 (74,630) 170,706 (68,424) ------------------------------------------- (185,482)(4,965,324) (323,417)(5,176,201) Unrealized foreign exchange gain on net assets held in foreign currency 368,272 58,500 398,566 156,377 ------------------------------------------- Net change in cash and cash equivalents 5,277,205 24,240 2,544,818 24,240 Cash and cash equivalents, beginning of period 136,159 - 2,868,546 - ------------------------------------------- Cash and cash equivalents, end of period 5,413,364 24,240 5,413,364 24,240 ------------------------------------------- See accompanying notes to the consolidated financial statements. /T/ MANAGEMENT'S DISCUSSION AND ANALYSIS ("MD&A") FOR Q2'09 The following discussion and analysis of financial results for the six months ended June 30, 2009 ("Q2'09") and June 30, 2008 ("Q2'08") is based on information available until August 7, 2009 (unless otherwise noted) and upon the Company's unaudited consolidated interim financial statements for the periods presented, which were prepared in accordance with Canadian generally accepted accounting principles ("GAAP"), and should be read in conjunction with the Company's audited consolidated financial statements and Annual Report for the prior fiscal year ended December 31, 2008. Certain statements included in this Management's Discussion and Analysis ("MD&A") may constitute forward-looking statements involving known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. When used in this MD&A, such statements use words such as "may", "will", "expect", "believe" and "plan". These statements reflect management's current expectations regarding future events and operating performance and are valid only as of the date hereof. These forward-looking statements involve a number of risks and uncertainties, including the impact of general economic conditions, industry conditions, changes in laws and regulations, increased competition, fluctuations in commodity prices and foreign exchange, and interest rates and stock market volatility. The Company does not reconcile past forward-looking information but presents its most current view based on the known facts on hand at the time of dissemination. Specifically the outlook section may contain forward-looking information which will be identified as such. Non-GAAP Measurements: The MD&A contains the terms Earnings Before Interest, Taxes and Depreciation and Amortization ("EBITDA") and Gross Margin which should not be considered an alternative to, or more meaningful than "net income" or "cash flow from operating activities" as determined in accordance with Canadian GAAP as an indicator of the Company's financial performance. These terms do not have any standardized meaning as prescribed by GAAP and therefore, the Company's determination of gross margin and EBITDA may not be comparable to that reported by other companies. Gross margin is calculated from the consolidated statements of operations and is defined as revenue less direct expenses. EBITDA is calculated from the consolidated statements of operations as gross margin less general and administrative expenses (not including gain on disposal of property and equipment) and adjusted for unrealized foreign exchange gains or losses. The Company calculates EBITDA consistently each quarter and evaluates its performance based on this metric. The Company considers EBITDA to be a key measure as it demonstrates the Company's ability to generate the cash necessary to pay dividends and to fund future capital investment. The calculation for gross margin and EBITDA are presented below: /T/ Three Months Ended Six Months Ended June 30, June 30, 2009 2008 2009 2008 $ $ $ $ Revenue 11,366,874 12,459,282 34,082,042 32,734,251 Direct Expenses 10,855,641 11,483,627 28,852,835 27,516,954 --------------------------------------------------- Gross margin 511,233 975,655 5,229,207 5,217,297 Less general and administrative 686,706 598,391 1,545,441 1,347,393 Foreign exchange (368,272) (58,500) (398,566) (156,377) --------------------------------------------------- --------------------------------------------------- EBITDA 192,799 435,764 4,082,332 4,026,281 --------------------------------------------------- --------------------------------------------------- /T/ REVENUE Year to date revenues for 2009 at $34.1 million represented a 4% increase over the $32.7 million over the same period last year. Revenue for Q2'09 at $11.4 million, decreased by 9% from $12.5 million in Q2'08. For Q2'09 depressed commodity prices reduced the demand for exploration activities in Canada which in turn reduced the Company's overall level of work. This was partially offset by increased US activity with the start-up of a large job at the end of the quarter. Two clients exceeded 10% of gross revenues for Q2'09 compared to only one client in Q2'08 and represented in aggregate approximately 83% of current quarter revenues (61% in 2008). GROSS MARGIN Gross margin for Q2'09 was approximately $0.5 million, representing 4.5% of revenues, a $0.5 million decrease over the $1.0 million, representing 7.8% of revenues, over the same period last year. The majority of the Q1'09 work consisted of jobs in Canada that commenced in Q4'08. For Q2'09 the majority of this work was start-up on US jobs. In any given project the timing of start-up mobilization and ending demobilization costs will effect margins in a given quarter. Year to date gross margin for 2009 at $5.2 million represented 15.3% of revenues which was very close to the $5.2 million representing 15.9% of revenues over the same period last year. Gross margins are dependent on competitive factors and the service mix over time. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses include the costs associated with the corporate head office, the lease of the Survey & Mapping division's shop and office, profit sharing and the corporate reorganization. For Q2'09 these expenses were $0.7 million compared to $0.6 million for Q2'08. For the six months ended June 30, 2009 these expenses were $1.5 million compared to $1.3 million over the same period last year. In 2009 the Company is utilizing consultants to assist with financial compliance (IFRS and CSOX) and tax work (relating to the material weakness) resulting in increased costs of approximately $0.1 million. The profit sharing plans align the Company's incentive compensation for key employees with the interests of shareholders. The plans, which replaced bonuses and the grant of stock options, are intended to have the participating employees more focused on the Company's bottom line performance and to enable the Company to retain and attract operating and executive management in a competitive environment. Subject to approval by the Board of Directors, awards from the plans are made one-half in cash and one-half in shares, which are purchased in the market. AMORTIZATION OF PROPERTY AND EQUIPMENT Amortization for Q2'09 at $0.9 million was at the same level as Q2'08. Year to date amortization expense for 2009 of $1.9 million was higher than the $1.6 million over the same six months last year. The acquisition of business assets that occurred in April 2008 was included in the current year. Total net book value of property and equipment was $11.2 million at the end of Q2'09 compared to $12.3 million at last year end. NET INTEREST EXPENSE Net interest expense of less than $0.1 million for Q2'09 was less than the $0.1 million for the same period last year. Year to date net interest expense for 2009 was $0.1 million compared to $0.2 million over the same period last year. Net interest expense arises from the Canadian demand bank loan, US long-term debt and is netted against interest income on cash balances. INCOME TAXES Management has used the benefits achieved through the corporate reorganization completed in Q1'07 against the other liabilities on the consolidated balance sheets. Part of this reorganization involved the opportunity for the Company to utilize potential tax losses that were not available prior to this reorganization. The ability of the Company to utilize these losses was not sufficiently certain to eliminate the recording of the liability. The income taxes that would otherwise be payable are therefore being shown as other liabilities. It is anticipated that this liability will remain current until its expiry in 2012 and that it will not require settlement in cash. Management uses estimates when calculating future income tax timing differences and when actual returns are filed this can cause "true-ups" in prior estimates to occur. At the point in time that these realizations occur, adjustments are made to these provisions to reflect this new information on hand. /T/ SUMMARY OF QUARTERLY RESULTS ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (000's, except per share Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 amounts) 2009 2009 2008 2008 2008 2008 2007 2007 2007 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Total Revenue 11,367 22,715 14,384 18,137 12,459 20,275 17,129 19,244 11,633 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Net income (loss) for the period (604) 1,535 212 (393) 83 1,930 129 (2,198) 177 Basic/diluted earnings per share (0.11) 0.27 0.04 (0.07) 0.01 0.35 0.02 (0.39) 0.03 Weighted average number of shares outstanding Basic 5,582 5,582 5,580 5,583 5,583 5,577 5,577 5,577 5,577 Diluted 5,582 5,582 5,580 5,583 5,583 5,577 5,577 5,580 5,594 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- The above noted Summary of Quarterly Results highlights the following: 1. The Company's business is seasonal with Q1 and Q3 traditionally being the two strongest quarters. The underlying causes of the seasonality are weather conditions, the Company being restricted from entering and conducting work in designated wildlife areas at certain times of the year and the timing of client capital spending programs. /T/ LIQUIDITY AND CAPITAL RESOURCES The Company's capital requirements consist primarily of working capital necessary to fund operations, capital expenditures related to the purchase and manufacture of operating equipment, the possibility of dividend payments and capital to finance strategic acquisitions. Sources of funds available to meet these capital requirements include cash on hand, cash flow from future operations, sale of assets, external lines of credit (bank facility with the ability to draw up to $15 million at prime plus 0.50%), equipment financing, term loans and access to equity markets. Although there is access to equity markets it is currently very limited for "small cap" companies due to current economic conditions. The Company's balance sheet as at June 30, 2009 shows net working capital of $4.9 million compared to $3.5 million at last year end. The Company will be looking at ways to reduce net working capital requirements in the future through its management of trade accounts receivable and trade accounts payable which is expected to provide cash. Despite the risks associated with cash flow relating from changes in commodity prices, reduced revenue volumes and increased operating costs, the Company's balance sheet provides a potential buffer to mitigate some or all of these effects should they occur. Current economic conditions are creating greater uncertainty in capital markets and with respect to the solvency and liquidity of many companies. The Company has not experienced changes in its operating or credit relationships with clients or suppliers to date and at present does not anticipate changes in current trade or other credit arrangements. (See also the Outlook section.) LONG-TERM DEBT On March 26, 2008 the Company obtained a $4 million USD capital loan which is secured by certain fixed assets for the purpose of better balancing capital financing with working capital financing which was used for the business asset acquisition that occurred on April 1, 2008. The term of this facility is for four years and the interest rate is based upon a choice between LIBOR plus 2.50% per annum or the bank's US base rate plus 1% per annum. Expected principal payments, made monthly, over the remaining 3 years are $1 million USD, $1 million USD and $0.8 million USD. For the six months ended June 30, 2009 a total of $0.5 million USD was repaid on this loan. The Company's US operations act as a hedge against currency fluctuations. WORKING CAPITAL Net working capital at the end of Q2'09 was $4.9 million compared to $3.5 million at the end of 2008. At the end of Q2'09 this amount included $5.4 million of cash and also $5.4 million in other current liabilities ($4 million - December 31, 2008) which is anticipated to remain current and grow until its expiry in 2012 and not require settlement in cash (see Income Taxes section). The Q2'09 calculated ratio is 1.31:1 (1.28:1 at the end of 2008) which is higher than the minimum bank covenant ratio. For clients representing more than 10% of trade accounts receivable, approximately 86% of trade accounts receivable at June 30, 2009 (73% at June 30, 2008) are with two clients (one in 2008). With respect to its largest client, the Company provides services both directly for the client's own account (for the development of seismic data for the client to sell) and indirectly for work for third party exploration and production companies, most of which are substantial oil companies and several of which specify the Company as their sub-contractor of choice when contracting with the Company's client. Approximately 88% of trade accounts receivable at June 30, 2009 were less than 60 days old (74% were less than 30 days old). PROPERTY AND EQUIPMENT Property and equipment as at June 30, 2009 was at $11.2 million which was less than the $12.3 million at December 31, 2008. Amortization (excluding intangibles) for this period was $1.7 million. Purchases net of disposals of $0.6 million were made over this period and were sustaining expenditures for the operating business. COMMITMENTS AND CONTRACTUAL OBLIGATIONS The Company's future contractual payment obligations are in the form of operating leases on premises and equipment. The Company has no hedging, capital leases or any other "off balance sheet" contractual obligations. /T/ ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (in $000's) Payments Due by Future Year ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 0-1 2 - 3 4 - 5 After Total years years years 5 years ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Operating Leases 7,503 1,639 2,260 1,567 2,037 ---------------------------------------------------------------------------- /T/ The Company, through the performance of its service obligations, is sometimes named as a defendant in litigation. The nature of these claims is usually related to personal injury or operations not considered to be complete. The Company maintains a level of insurance coverage considered appropriate by management for matters for which insurance coverage can be maintained. The statements of claim for $10 million filed in September 2003 and $0.8 million filed in September 2004 have now been resolved without any payment by the Company. SHAREHOLDERS' EQUITY Shareholder's equity increased from $13.1 million at the end of 2008 to $14 million at the end of Q2'09 and can be entirely contributed to year to date net income of $0.9 million. As at August 7, 2009, the number of issued and outstanding common shares is 5,582,581. There were no outstanding options as at June 30, 2009. BUSINESS RISKS The Company is subject to the risks and variables inherent in the oilfield services industry. Demand for products and services depend on the exploration, development and production activities of energy companies. These activities are directly affected by factors such as oil and gas commodity prices, weather, changes in legislation, exchange rates, the general state of domestic and world economies, concerns regarding fuel surpluses or shortages, substitution through imports or alternative energy sources, changes to taxation or regulatory regimes and the broad sweep of international political risks such as war, civil unrest, nationalization and expropriation or confiscation, which are all beyond the control of the Company and cannot be accurately predicted. The oil market is influenced by global supply and demand considerations and by the supply management practices of OPEC. The natural gas market is primarily influenced by North American supply and demand and by the price of competing fuels. The risks associated with external competition are minimized by concentrating Company activities in areas where it has demonstrated technical and operational advantages and by employing highly competent professional staff. Environmental standards and regulations are continually becoming more stringent in this industry and the Company is committed to maintaining its high standards. The direction to expand into the US market will create a shift in the geographic makeup of business which will require risks such as foreign exchange to be monitored and mitigated. Business risks are also mitigated by establishing strategic alliances with reputable partners, developing new technologies and methodologies as well as investigating new business opportunities. Current economic conditions are creating greater uncertainty in capital markets and with respect to the solvency and liquidity of many companies. There is the possibility that the Company may experience solvency and liquidity issues with its clients and suppliers. However at the present time this is not known and there is no expectation of this event occurring based on past experience. At this time the Company has not developed any contingency plans in relation to the possibility of this event. The risks inherent in the oilfield services industry could impact the Company's ability to meet its financial covenants on its revolving, bank operating loan facility. As at June 30, 2009 the Company had a net cash balance of $5.4 million. OUTLOOK Forward-looking information: Destiny is focused for 2009 on its competitive strengths, on efficiencies and on preparing for the future. Destiny believes its competitive strengths include its safety record, its methods of operation, its capacity to handle programs of large scale and its record of quality and innovation. Each of these areas is being nurtured, maintained, supplemented and/or promoted, as appropriate. The Company is seeking to drive down costs and to enhance efficiency, always without compromise to safety, quality and integrity. Destiny is investing in research, innovation and creativity, seeking to enhance the services we offer to our clients. The Company believes it has adequate working capital and debt and equity capital, together with a cost structure that has sufficient flexibility, to be able to adapt to changing market conditions. Given the present state of financial markets and overall liquidity issues, the Company is less certain than in prior years with its access to capital. The Company has a contractually committed term and operating loan and has no reason to believe that it cannot draw on these available credit lines when required. The Company's view is the overall demand for its services in 2009 will be somewhat below 2008, with the growth in the United States not quite making up for the reduction in Canada. As we plan for 2010, our sense is of our world continuing to unfold in much the same way. The seasonal nature of work, especially in many parts of the Western Canadian Sedimentary Basin, and the present outlook for prices for crude oil give some cause for continuing demand. On the other hand, the anticipated recovery for the economy as a whole does not look like it will bring any strong near-term growth in prices for natural gas, a requirement to trigger an uptick in demand for seismic services. As such, we anticipate a relatively active 2009-2010 winter season in Canada followed by a couple of quarters of quite modest levels of activity. In the United States, we appear to be achieving better traction for our collective operations: while overall industry activity remains at modest levels, we believe we are positioning Destiny, through our efforts and our innovation, to participate in several geographic areas. INTERNAL CONTROL OVER FINANCIAL REPORTING As at December 31, 2008, the Company identified a material weakness in its internal control over financial reporting because it did not maintain effective controls over the accounting for income taxes, including the determination and reporting of future income tax assets and liabilities and related income tax provisions. Specifically, the Company did not have adequate personnel to enable it to properly consider and apply generally accepted accounting principles for income taxes, review and monitor the accuracy and completeness of the components of the income tax provision calculations and the related future income taxes and to ensure that the rationale for certain tax positions was appropriate. During 2008, delinquent tax returns were completed for 2006 and 2007, which resulted in a difference between non-capital loss carry forwards between Canadian tax authority and Company records. The result of this was a $0.5 million shortfall in the 2007 year end provision accruals and related tax expenses, which required a correction with 2007 comparatives. The Company has taken several steps to remediate the deficiency, including ensuring that all tax filings are up to date and engaging a tax consultant to assist with accounting for income taxes. However, until this remediation has been adequately tested later this year, this material weakness could result in a material misstatement in the tax-related accounts described above that would not be prevented or detected. There was no change to the Company's ICFR that occurred during the most recent interim period that has materially affected, or is reasonably likely to materially affect, the Company's ICFR. ACCOUNTING PRONOUNCEMENTS Current In February 2008, the CICA issued Section 3064 "Goodwill and Intangible Assets", replacing Section 3062 "Goodwill and Other Intangible Assets". The new section is effective on January 1, 2009. This new guidance requires recognizing all goodwill and intangible assets in accordance with CICA Section 1000, "Financial Statement Concepts". Section 3064 eliminates the current practice of recognizing items as assets that do not meet the Section 1000 definition and recognition criteria. Under this new guidance, fewer items meet the criteria for capitalization. Section 3064 establishes standards for the recognition, measurement, presentation and disclosure of goodwill and intangible assets subsequent to its initial recognition. Standards concerning goodwill are unchanged from the standards included in the previous Section 3062. The Company has adopted this proactively without retroactive adjustment. Future In December 2008, the CICA issued Section 1582 "Business Combinations", which will replace CICA Section 1581 of the same name. Under this guidance, the purchase price used in a business combination is based on the fair value of shares exchanged at their market price at the date of the exchange. Currently the purchase price used is based on the market price of the shares for a reasonable period before and after the date the acquisition is agreed upon and announced. This new guidance generally requires all acquisition costs to be expensed, which currently are capitalized as part of the purchase price. Contingent liabilities are to be recognized at fair value at the acquisition date and re-measured at fair value through earnings each period until settled. Currently only contingent liabilities that are resolved and payable are included in the cost to acquire the business. In addition, negative goodwill is required to be recognized immediately in the earnings, unlike the current requirement to eliminate it by deducting it from the non-current assets in the purchase price allocation. Section 1582 will be effective for the Company on January 1, 2011 with prospective application. In December 2008, the CICA issued Sections 1601 "Consolidated Financial Statements" and 1602 "Non-controlling Interests", which replaces existing guidance under Section 1600 "Consolidated Financial Statements". Section 1601 establishes standards for the preparation of consolidated financial statements. Section 1602 provides guidance on accounting for a non-controlling interest in a subsidiary in consolidated financial statements subsequent to a business combination. These standards will be effective for the Company on January 1, 2011. Effective January 1, 2011 the Company is required to comply with International Financial Reporting Standards (IFRS). As such the Company will assess the requirements and impact by January 1, 2010 in order to ensure that comparatives for 2010 are in compliance. Capital Disclosures The Company's objective with the management of its capital is to allow it to maximize the profitability of its investment in assets and to create long term value and enhance returns for its shareholders. The use of debt financing is based upon the Company's overall capital structure which is determined by considering industry norms and risks associated with its business activities. The Company wishes to maintain a target debt to equity ratio of less than 2:1 which is below the defined maximum under its current banking covenant requirement (2.5:1) in order to allow it to maintain access to this type of financing at a reasonable cost. Debt is comprised of bank indebtedness, accounts payable, and all components of long-term debt. Equity is defined as total shareholders' equity less intangible assets and goodwill. As at June 30, 2009, this calculated debt to equity ratio is 0.95:1 compared to 0.95:1 at last year end and was well below the maximum covenant requirement. Financial Instruments Fair Value of Financial Instruments The Company's use of financial instruments at present is limited to working capital components and term debt financing for some capital expenditures. The Company has financial instruments consisting of accounts receivable, demand bank loan, accounts payable and long-term debt. /T/ The fair value of the Company's financial assets and liabilities: (in $000s) June 30, 2009 December 31, 2008 Carrying Amount Fair Value Carrying Amount Fair Value --------------------------------------------------------- Financial Assets Loans and receivables: Trade accounts receivable 11,233 11,233 9,403 9,403 --------------------------------------------------------- Total 11,233 11,233 9,403 9,403 --------------------------------------------------------- Financial Liabilities Other financial liabilities: Trade accounts payable 2,312 2,312 2,245 2,245 Current portion of long-term debt 1,163 1,163 1,218 1,218 Long-term debt 2,035 2,035 2,741 2,741 --------------------------------------------------------- Total 5,510 5,510 6,204 6,204 --------------------------------------------------------- /T/ Market Risk on Financial Instruments The Company is exposed to market risk and potential loss from changes in the values of financial instruments. The Company currently does not hedge against fluctuations in commodity prices, interest rates or foreign exchange rates. However, with the recent establishment of the long-term debt facility and with the expectation of increased business in the US, the Company will continue to monitor the appropriate potential benefit of hedging activities in the future. Sensitivity Analysis The following table illustrates potential effects of changes in relevant risk variables on the Company's net income for the three months ended June 30, 2009. /T/ ---------------------------------------------------------------------------- Increase or Decrease Increase or Decrease in Net Income (in $000s) ---------------------------------------------------------------------------- Interest rate +25 BPS / -25 BPS -9/ +9 ---------------------------------------------------------------------------- Foreign exchange +$0.05 / -$0.05 -227 / +227 ---------------------------------------------------------------------------- /T/ Credit Risk The Company's sales are to customers in the oil and gas industry, which results in a concentration of credit risk. The Company generally extends unsecured credit to these customers, and therefore the collection of receivables may be affected by changes in economic or other conditions and may accordingly affect the Company's overall credit risk. Management believes the risk is mitigated by the size, reputation and diversified nature of the companies to which the Company extends credit. The Company has not previously experienced any material credit losses on the collection of accounts receivable related to its operations. At the end of Q2'09, two clients exceeded 10% of gross revenue represented in aggregate approximately 83% of year to date revenue. Over the same period last year there was one client with more than 10% of revenue, representing approximately 61% of the year to date revenue. Approximately 86% of trade accounts receivable at June 30, 2009 (73% at June 30, 2008) is with two clients (one in 2008). With respect to its largest client, the Company provides services both directly for the client's own account (for the development of seismic data for the client to sell) and indirectly for work for third party exploration and production companies, most of which are substantial oil companies and several of which specify the Company as their sub-contractor of choice when contracting with the Company's client. Approximately 88% of trade accounts receivable at June 30, 2009 were less than 60 days old (74% were less than 30 days old). Foreign Exchange Risk on Financial Instruments Foreign exchange gains and losses are realized on net US working capital and long-term debt and on US denominated revenues and expenses. Gains and losses for US denominated revenues and expenses are translated into gross margin. Gains and losses on the net US working capital and long-term debt are reflected in other expenses as foreign exchange gain (loss). Liquidity Risk on Financial Instruments Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company manages this risk through its extensive budgeting and monitoring process to ensure it has sufficient cash and credit facilities to meet its obligations. The Company's objective is to maintain its current capital structure to ensure it has access to debt and equity funding as required (see Note 10). The primary risks that could affect the Company's cash flow are: (i) a significant drop in the price of crude oil or natural gas, (ii) a significant reduction in the volume of business from its most significant client, (iii) a significant increase in operating costs, or (iv) changes in bank lending practices. Although the Company has approximately $3.2 million of long-term debt it has a cash balance of $5.4 million as at June 30, 2009. The Company has the ability to draw on the demand bank loan up to a maximum of $8.2 million as calculated based on eligible receivables at that point in time. At June 30, 2009, the Company's contractual maturities relate to long-term debt and expected principal payments are $0.5 million USD for the balance of 2009, $1 million USD in each of 2010 and 2011 and $0.3 million USD in 2012. NORMAL COURSE ISSUER BID On November 13, 2007, the Toronto Stock Exchange (the "TSX") accepted a Notice of Intention to Make a Normal Course Issuer Bid filed by the Company. This expired on November 12, 2008 and there were no purchases made on this bid. On December 12, 2008, the Toronto Stock Exchange (the "TSX") accepted a Notice of Intention to Make a Normal Course Issuer Bid filed by the Company. Under the terms of the normal course issuer bid, the Company will have the right to purchase for cancellation, up to a maximum of 279,129 of its common shares, representing approximately 5% of its outstanding common shares. The Company currently has 5,582,581 common shares outstanding and its average daily trading volume for the past six months from November 30, 2008 was 3,005 common shares. The purchases, which may commence on December 12, 2008, would be made in the open market through the facilities of the TSX, up to a daily maximum of 1,502 common shares until March 31, 2009 to which after this daily maximum becomes 1,000. The normal course issuer bid will remain in effect until the earlier of December 11, 2009 or until the Company has purchased the maximum number of common shares permitted. As of August 7, 2009 no purchases have yet been made. Shareholders may obtain a copy of the Notice of Intention to Make a Normal Course Issuer Bid, without charge, by writing to the Corporate Secretary at 300, 444 - 58th Avenue S.E., Calgary, AB T2H 0P4.