MD_A - Tesla Exploration

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					                                     TESLA EXPLORATION LTD.
                       MANAGEMENT'S DISCUSSION AND ANALYSIS (MD&A)
                     For the three and six months ended June 30, 2012 and 2011

The Management’s Discussion and Analysis (“MD&A”) for Tesla Exploration Ltd. (“Tesla”
or the “Company”) has been prepared by management as of August 14, 2012 and is a
review of the financial condition and results of operations of the Company based on
International Financial Reporting Standards (“IFRS”) in Canada. Its focus is primarily a
comparison of the financial performance for the three and six months ended June 30,
2012 and 2011 and should be read in conjunction with the unaudited interim
consolidated financial statements and accompanying notes for the three and six months
ended June 30, 2012 and 2011 as well as the audited consolidated financial statements
for the year ended December 31, 2011. Readers should also refer to the “Forward-
Looking Statements” legal advisory at the end of this MD&A. All financial amounts and
measures presented in this MD&A are expressed in Canadian dollars unless otherwise
stated.

                                        SELECTED FINANCIAL HIGHLIGHTS
(000s, except per share data)                                     Three Months Ended                        Six Months Ended
(unaudited)                                                               June 30                               June 30
                                                                         2012             2011 Change          2012          2011 Change
                                                                             $               $    %               $             $    %
Revenue                                                               18,258            30,768     (41)     121,083       115,893    4
Revenue excluding reimbursables 1                                     16,915            19,589     (14)     101,821        75,049   36
Gross margin1                                                            551             1,883     (71)      34,234        18,675   83
 As a % of revenue excluding
 reimbursables 1                                                           3%             10%                   34%          25%
Net earnings                                                           (6,945)          (5,370)    (29)      10,004          189    n/m
 Per share - basic                                                      (0.31)           (0.24)    (30)        0.44          0.01   n/m
EBITDA 1                                                               (4,029)          (1,951)   (107)      24,310        11,063   120
 Per share - basic                                                      (0.18)           (0.09)   (107)        1.07          0.49   120
Cash flow from operations 1                                            (2,810)          (2,146)    (31)      22,812        10,702   113
  Per share - basic                                                     (0.12)           (0.09)    (32)        1.00          0.47   114
Weighted average shares
outstanding for the period - basic                                    22,689            22,795        n/m    22,737        22,795   n/m
Capital expenditures                                                  19,847             4,940    302        21,453         6,383   236


As at                                                                                                       June 30 December 31
                                                                                                               2012          2011 Change
                                                                                                                  $             $    %
Working capital                                                                                               6,050        10,411   (42)
Total assets                                                                                                118,915       141,088   (16)
Total long-term borrow ings 2                                                                                22,362        29,073   (23)
Equity                                                                                                       67,929        57,993   17
Shares outstanding end of period                                                                             23,051        23,166   n/m
1. See "Non-GAAP Financial Measures"
2. Includes capital lease obligations and long-term debt, including current portions.
                                   NON-GAAP FINANCIAL MEASURES

Certain measures in this MD&A do not have standardized definitions under IFRS in
Canada (“non-GAAP measures”). These non-GAAP financial measures defined below
may not be comparable to similar measures presented by other entities. The Company
is consistent in its calculation of the financial measures year over year.

“Revenue excluding reimbursables” refers to revenue generated on the services
performed directly by Tesla. A portion of the Company’s revenue from the North
American Land and International segments includes the provision of subcontracted
services from which the Company generates a nominal profit (“reimbursables”). Prior to
seismic data acquisition in North America, many customers look to Tesla to procure and
manage third-party services related to the use of shot-hole drilling, ground surveying and
line-clearing services. Internationally, Tesla may be responsible for managing third-party
services for client personnel such as transportation, meals and accommodations in the
remote areas in which Tesla works. The Company is generally reimbursed for these
expenses by its clients, plus a small administration fee. In accordance with IFRS in
Canada, these subcontracted revenue and costs are included at their gross amounts in
revenue and expenses. Subcontracted services as a percentage of total revenue will
vary from job to job. As a result, they may distort the movement of the actual gross
margins for the seismic acquisition recording services performed directly by Tesla.

“Gross margin” is provided to assist investors in determining Tesla’s ability to generate
earnings from its field operations and associated overhead and is calculated from the
Consolidated Statements of Operations as described below.

“Gross margin as a percentage of revenue excluding reimbursables” is provided to
assist readers to more clearly understand the changes in gross margins for the services
directly provided by Tesla. The following table details gross margin as a percentage of
revenue excluding reimbursables (note: the nominal administration fee earned on the
“flow-through” of subcontracted services has been included in revenue excluding
reimbursables):

                                                               Three Months Ended       Six Months Ended
                                                                     June 30                 June 30
($000's)                                                        2012        2011        2012         2011
Revenue excluding reimbursables (A)                              16,915     19,589       101,821      75,049
Reimbursable revenue                                              1,343     11,179        19,262      40,844
Total revenue (B)                                                18,258     30,768       121,083     115,893

Direct costs                                                     16,413     17,684        67,880      56,366
Reimbursable costs                                                1,294     11,202        18,969      40,852
                                                                 17,707     28,886        86,849      97,218
Gross margin (C)                                                    551      1,883        34,234      18,675
Depreciation and amortization                                     (5,060)    (4,859)      (9,750)     (9,983)
Gross profit                                                      (4,509)    (2,976)      24,484       8,692
Gross margin as a % of revenue excluding reimbursables (C/A)           3%      10%             34%      25%
Gross margin as a % of total revenue (C/B)                             3%          6%          28%      16%




                                                                                                               2
 “EBITDA” is a measure of the Company’s operating profitability. EBITDA provides an
indication of the results generated by the Company’s principal business activities prior to
how these activities are financed, assets are amortized or how the results are taxed in
various jurisdictions. EBITDA is presented because it is frequently used by securities
analysts and others for evaluating companies and their ability to service debt. EBITDA is
calculated from the Consolidated Statement of Operations and is calculated as follows:

                                                  Three Months Ended            Six Months Ended
                                                        June 30                      June 30
($000's)                                          2012            2011          2012           2011
Net income                                         (6,945)          (5,370)        10,004             189
Add back:
Finance costs, net                                   267                 331            666           774
Income tax expense                                 (2,379)          (2,265)            3,279       (622)
Depreciation and amortization                       5,060            4,859             9,750     9,983
Loss on foreign exchange                                 50              328            125           523
Share-based payments                                 195                 260            376           484
Provision for bad debts (net)                        (203)               (50)           301        (100)
Gain on sale of assets                                   (74)            (44)          (192)       (168)
EBITDA                                             (4,029)          (1,951)        24,310       11,063


“Cash flow from operations” is a measure that provides shareholders and potential
investors with additional information regarding the Company's liquidity and its ability to
generate funds to finance its operations. Management utilizes these measures to
assess the Company's ability to finance operating activities and capital expenditures.
Cash flow from operations is calculated from the Consolidated Statement of Cashflows
and is calculated as follows:

                                                 Three Months Ended             Six Months Ended
                                                       June 30                       June 30
($000's)                                          2012            2010          2012           2011
Net income                                          (6,945)         (5,370)       10,004              189
Add back:
Depreciation and amortization                        5,060           4,859         9,750          9,983
Unrealized foreign exchange (gain) loss                  (15)            47         (197)              76
Net finance costs                                        267             331           666            774
Provision for bad debts (net)                        (203)               (50)          301         (100)
Share-based payments                                     195             260           376            484
Gain on sale of securities                                    -            -             -         (102)
Gain on sale of capital assets                           (74)            (44)       (192)             (66)
Deferred income tax expense                         (1,095)         (2,180)        2,105           (536)
Cash flow from operations                           (2,810)         (2,146)       22,812         10,702
References to these non-GAAP financial measures throughout this MD&A have the
meanings set out above.




                                                                                                            3
                                       OVERVIEW

Tesla provides seismic land data acquisition in a multitude of environments in Canada
through Tesla Exploration Partnership (“Tesla Canada”), in the U.S.A. through Tesla
Exploration Inc. (“Tesla USA”), in Trinidad through Tesla Exploration Trinidad Ltd.
(“Tesla Trinidad”) and internationally in Europe and Africa through Tesla Exploration
International Limited (“Tesla International”). Tesla has international data processing
offices in the UK and Jakarta. Tesla Offshore LLC (“Tesla Offshore”) operates
geophysical hazard surveys and provides positioning services for construction and
diving operations in the Gulf of Mexico using its own vessel and other chartered vessels.

                           SECOND QUARTER OVERVIEW

The Company’s consolidated revenues including reimbursables decreased 41% to $18.3
million in the second quarter of 2012 compared to $30.8 million in the second quarter of
2011. The Company’s revenue excluding reimbursables decreased 14% to $16.9 million
from $19.6 million. Significant declines in activity levels for Tesla Canada and Tesla
International were only partially offset by an improvement in activity levels for Tesla
Offshore. The second quarter is historically a slow quarter in Canada due to spring break
up. The warm weather in Canada this spring resulted in an early end to the 2012 winter
season and limited activity levels and associated reimbursables in Canada during April
of 2012 compared to the extended winter season experienced in April of 2011. Tesla
USA had limited work during the second quarter of 2012 until the start-up of two crews in
mid-June including the first program for Tesla USA’s recently purchased wireless multi-
component “Hawk” system under an extended seismic services agreement with a multi-
client geophysical company. In the second quarter of 2011, Tesla USA operated up to
three crews but realized limited revenues with significant standby time due to poor
weather conditions. Tesla Trinidad completed the Guayaguayare program in April of
2012 contributing revenues comparable to those in the second quarter of 2011 when
front-end operations on the program were just getting underway. Tesla International was
negatively impacted by little activity in Africa during the second quarter of 2012 whereas
revenues were generated from mobilization charges and operations for two crews in
Africa during the second quarter of 2011. Activity levels in the UK and Ireland during the
second quarter of 2012 were similar to those in the second quarter of 2011. Tesla
Offshore’s geophysical and construction activity levels both improved in the second
quarter of 2012 compared to the second quarter of 2011 when operations were limited
with the continued negative impact of the Macondo oil spill on activity levels in the Gulf.

Gross margin dropped to $0.6 million in the second quarter of 2012 compared to $1.9
million in the second quarter of 2011. North American land operations saw a decrease in
activity levels for Tesla Canada while gross margin improved for Tesla USA and Tesla
Trinidad. Tesla International’s gross margin declined with the lack of work in Africa.
Tesla Offshore’s gross margin benefitted with the increase in activity. Gross margin as a
percentage of total revenue (including reimbursables) decreased to 3% in the second
quarter of 2012 from 6% in the second quarter of 2011. Gross margin percentage
remains low due to the reduced activity levels in Canada and Africa along with significant
field overheads in Canada generally incurred during the second quarter to inventory, test
and begin repairs to the large volume of equipment returned to base from the field
following spring break up. Tesla Offshore maintained its gross margin percentage during
the current quarter compared to the second quarter of 2011. Gross margin as a


                                                                                         4
percentage of revenue (excluding reimbursables) also declined to 3% in the second
quarter of 2012 compared to 10% in the second quarter of 2011.

The Company had negative EBITDA of $4.0 million ($0.18 per share) in the second
quarter of 2012 compared to negative EBITDA of $1.9 million ($0.09 per share) in the
second quarter of 2011 due to the decline in absolute gross margin along with a slight
increase in general and administrative costs.

The Company had a consolidated net loss of $6.9 million ($0.31 per share) in the
historically slower second quarter of 2012 exceeding the consolidated net loss of $5.4
million ($0.24 per share) in the second quarter of 2011 due to the factors noted above.

                             RESULTS OF OPERATIONS

REVENUE

North America Land Operations
Total revenues declined $11.6 million to $9.3 million in the second quarter of 2012 from
$20.9 million in the second quarter of 2011 due to decreases in activity in Canada and
the US, including a significant drop in reimbursables services. Revenues from Tesla
Trinidad were consistent with the comparative quarter.

In Canada, revenues decreased with the Company operating significantly fewer days in
April of 2012 compared to April of 2011 due to the warm winter weather which led to an
earlier spring break up than last year. Another wet spring in western Canada limited the
amount of work following spring break up and the Company was unable to keep a crew
fully utilized during the remainder of the second quarter, consistent with the comparative
period in 2011.

Revenues were down slightly in the US in the current quarter versus the comparative
quarter in 2011. Tesla USA had little work in April and May of 2012 but two crews started
up in June on large 3D programs including the first program for Tesla USA’s wireless
multi-component “Hawk” system. In the second quarter of 2011, the Company operated
up to three crews in a number of regions across the US, but faced significant low
revenue standby time due to poor weather conditions across many of the program areas
including the north central and north eastern US.

Tesla Trinidad generated revenues during the second quarter of 2012 with the
completion of the Guayaguayare program in April. Tesla Trinidad started up operations
in May 2011 contributing comparable revenues from front-end operations in the second
quarter of 2011 related to project management, camp services, survey, line clearance
and drilling.

On a year to date basis, total revenues for 2012 were $102.1 million, a slight
improvement over the $99.3 million generated in 2011. Additional revenues generated
by Tesla Trinidad and Tesla USA in the first quarter of 2012 relative to 2011 were
partially offset by a large reduction in reimbursable services Tesla Canada was asked to
manage for clients.




                                                                                        5
North American land operation revenues include reimbursable services relating to such
costs as helicopters, drilling, survey and line cutting which are managed by Tesla but
passed through to clients with the addition of a small administration fee. These
reimbursable services decreased to $1.0 million in the second quarter of 2012 from
$10.5 million in the second quarter of 2011 due to reduced activity levels in Canada, a
general decrease in front-end services the Company was asked to manage in the US
and the timing of front-end operations in Trinidad. On a year to date basis, reimbursable
services decreased to $18.0 million from $39.9 million mainly due to a general decrease
in front-end services the Company was asked to manage in Canada in 2012. The
amount of reimbursable services varies depending on clients’ use of front-end
outsourcing companies and the terrain where work is performed.

International Operations
International revenues decreased to $2.9 million in the second quarter of 2012
compared to $6.5 million in the second quarter of 2011.

The UK and European crew remained busy throughout the second quarter of 2012 on
projects in the UK and Ireland. This was consistent with activity levels in the second
quarter of 2011 when the crew also worked on projects in the UK and Ireland.

In east Africa, Tesla International completed the fixed fee demobilizations from Ethiopia
and the Democratic Republic of the Congo (“DRC”) during the second quarter of 2012
generating virtually no revenue. In the second quarter of 2011, revenues were
recognized on the successful client funded mobilization and start-up of a crew for a
lengthy potash project in northern Ethiopia.

Revenues generated from the UK technical services group remain steady and the group
remains fully utilized. The Jakarta processing office saw slightly improved revenues with
work on a series of projects.

On a year to date basis, International revenues totaled $11.0 million in 2012 compared
to $10.7 million in 2011. Activity levels in the UK and Europe have been consistent
throughout the year, while projects in East Africa in early 2012 generated similar
revenues to mobilization and operational fees generated on the project in northern
Ethiopia during the first half of 2011.

Offshore Operations
Tesla Offshore revenues improved to $6.8 million in the second quarter of 2012
(including $0.8 million in support of Tesla Trinidad operations) compared to $3.4 million
in the second quarter of 2011.

Geophysical activity during the second quarter of 2012 was well ahead of the second
quarter of 2011 due to improved weather and operating days, increased deep tow days
and a series of geotechnical projects. The lack of a significant lease sale (until June 20,
2012) since early in 2010 has limited the number of geophysical programs in the Gulf of
Mexico. Increased competition for these programs negatively impacted rates and the
number of programs undertaken by Tesla Offshore. Tesla Offshore benefitted from the
completion of support work for Tesla Trinidad operations during April of 2012.
Conventional construction activity saw an increase in both activity days and rates from
the comparative quarter with the start-up of the multi-year project in Alaska and a
significant increase in trawling work in the Gulf of Mexico driven by stricter regulatory


                                                                                         6
requirements. Reports revenue contributed slightly increased revenues quarter over
quarter.

On a year to date basis, Tesla Offshore revenues increased to $10.8 million in 2012
(including $2.9 million in support of Tesla Trinidad operations) from $5.9 million in 2011
as a result of support work performed in Trinidad along with growth in the geophysical
and construction businesses during the second quarter of 2012 as discussed above.

GROSS MARGIN

North America Land Operations
Operations in North America had negative gross margin of $1.6 million in the second
quarter of 2012 compared to negative gross margin of $0.4 million in the second quarter
of 2011. The decrease in gross margin is due to the decreased level of activity in
Canada partially offset by improved results in the US and Trinidad.

Tesla Canada experienced a drop in gross margin during the historically slow second
quarter when work is limited due to spring break up and field overheads are high. Field
margins were reduced by a fewer number of activity days relative to the comparative
quarter, especially in April, as warm weather led to an early spring break up. As
expected, field overhead costs were high with the large volume of owned and rented
equipment that returned from the field following spring break up. Field overhead costs
were largely unchanged quarter over quarter.

Gross margins in the US remained negative in the second quarter of 2012 but improved
compared to the second quarter of 2011. Field margins in the second quarter of 2012
were reduced as activity was limited to programs that started in June. These were
exceeded by field overheads related to vibroseis and fleet maintenance programs, the
return of rental equipment used in the first quarter of 2012 and the receipt and inventory
of the recently acquired Hawk system. Gross margin in the second quarter of 2011 was
negative due to poor weather which hampered production levels, permit delays and a
heavy weighting of low margin front end work resulting in limited field margins being
more than offset by fixed field costs.

Margins in Trinidad improved during the second quarter of 2012 compared to the second
quarter of 2011. Margins were realized during the completion of the recording phase of
the program in April of 2012. Final turnkey revenues and associated margin were also
realized upon completion of the program. Revenues earned during the second quarter of
2011 were derived from work completed by a third-party contractor on which Tesla
Trinidad earned nominal management and administration fees.

Year to date margins were $29.7 million in 2012 (representing 29% of total revenues and
35% of revenues excluding reimbursable services) compared to $15.1 million in 2011
(15% and 25%). The significant increase in absolute gross margin is due to the increase
in activity in the US and Trinidad along with improvements in gross margin percentage in
Canada. These improvements in Canada were a result of general rate improvements
driven by continued demand for 3C services, better productivity due to the mild winter
and a reduced level of rental equipment. Gross margin percentage on total revenues
also benefitted from a significantly reduced level of reimbursable costs in Canada that
contribute nominal gross margin.



                                                                                        7
International Operations
Gross margin for International was $0.1 million in the second quarter of 2012
(representing 2% of total revenues and 2% of revenues excluding reimbursable
services) compared to gross margin of $1.1 million in the second quarter of 2011 (17%
and 19%).

The current quarter saw healthy gross margins generated from a fully utilized crew in the
UK and Ireland. These margins were almost fully eroded by further cost overruns
incurred on the demobilization from Ethiopia as a result of delays due to regulatory
export issues. During the second quarter of 2011, margins were earned on projects in
the UK and Ireland along with low margin mobilization fees and start-up of operations on
the northern Ethiopia project.

The Jakarta processing office saw its gross margin improve slightly compared to the
comparative period.

Year to date margins for International were $1.3 million in 2012 (12% and 13%)
compared to $1.7 million in 2011 (17% and 18%). Margins have been limited during the
current year as margins from work in the DRC, the UK and Ireland have been eroded by
the high cost of demobilizing from Ethiopia and the DRC. Prior year margins were
depressed by a heavy weighting of low margin mobilization fees earned on the northern
Ethiopia project.

Offshore Operations
Gross margin in the second quarter of 2012 for Tesla Offshore was $2.1 million
representing 34% of the quarter's revenues compared to $1.1 million representing 34%
of revenues in the second quarter of 2011.

During the second quarter of 2012, Tesla Offshore was able to generate improved
margins with an increase in activity levels for both geophysical and construction
operations. Tesla Offshore also maintained a reasonable gross margin percentage
despite the continued lack of activity in the Gulf of Mexico. Higher margins earned on
deep tow work and geotechnical projects were offset by lower margins generated on the
completion of support work on the project in Trinidad and additional regulatory trawling
work that had been deferred from the first quarter of 2012.

Year to date margins for Tesla Offshore were $3.2 million (41%) in 2012 compared to
$1.8 million (31%) in 2011 reflecting the increased activity levels during the second
quarter of 2012. Gross margin percentage remains below historical levels due to the
depressed level of activity in the Gulf of Mexico following the Macondo oil spill.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization increased to $5.1 million in the second quarter of 2012
from $4.9 million in the second quarter of 2011. Depreciation of property and equipment
increased slightly with the start of depreciation on the recently acquired Hawk system.
Amortization of intangibles decreased as customer relationship intangibles valued in the
Norex transaction approach the end of the amortization period.

On a year to date basis, depreciation and amortization decreased to $9.8 million in 2012
from $10.0 million in 2011. Depreciation of property and equipment remained consistent


                                                                                       8
while amortization of intangibles decreased as noted above.

GENERAL AND ADMINISTRATIVE

General and administrative expenses increased to $4.6 million in the second quarter of
2012 from $4.0 million in the second quarter of 2011. The increase is a result of
increased business development costs for International operations including the start-up
of the branch office in Pakistan and general wage increases across the Company.

On a year to date basis, general and administrative costs increased to $10.6 million in
2012 from $8.0 million in 2011. The increase is a result of bonus accruals and bad debt
provisions for Tesla USA during the first quarter of 2012 along with general wage
increases across the Company.

General and administrative expenses include $0.4 million of share-based payment
charges relating to options in the first half of 2012 compared to $0.5 million in the first
half of 2011.

OTHER GAINS AND LOSSES

Other gains and losses include items that arise from financial and other matters such as
foreign exchange and realized gains or losses on the disposal of assets.

The Company recorded foreign exchange losses of less than $0.1 million in the second
quarter of 2012 compared to losses of $0.3 million in the second quarter of 2011. On a
year to date basis, these losses were $0.1 million in 2012 and $0.5 million in 2011. The
losses were a result of fluctuations in the US dollar exchange rate on US dollar
denominated net assets or liabilities held in Canada during the respective periods.

Gains on disposals of assets totaled $0.1 million during the second quarter of 2012 and
$0.2 million on a year to date basis mainly related to insurance proceeds on damaged or
stolen equipment. Gains on disposals of assets were less than $0.1 million during the
comparative periods of 2011. A $0.1 million gain on sale of securities was realized
during the first quarter of 2011.

FINANCE COSTS

Finance costs include interest on long-term debt, finance leases and operating lines.
Finance costs were $0.3 million in the second quarter of 2012 and were reduced from
those incurred in the second quarter of 2011. On a year to date basis, finance costs
decreased to $0.7 million in 2012 from $0.8 million in 2011. Interest related to debt and
finance leases declined with reduced balances outstanding while interest on operating
lines increased slightly to fund increased activity levels in North America during the early
part of 2012. Interest income is not significant.




                                                                                          9
INCOME TAXES

The Company had an income tax recovery of $2.4 million (Current - $1.3 million;
Deferred - $1.1 million) during the second quarter of 2012 compared to a $2.3 million
expense (Current - $0.1; Deferred - $2.2 million) in the second quarter of 2011. On a
year to date basis, income tax expense was $3.3 million (Current - $1.2 million; Deferred
- $2.1 million) in 2012 compared to a recovery of $0.6 million (Current - $0.1 million;
Deferred - $0.5 million) in 2011. The majority of tax in 2012 relates to Canadian
operations as a result of the seasonally strong pre-tax income in the first quarter.

The effective rates vary as a result of the mix of tax recoveries and tax provisions at
different rates for the various jurisdictions in which Tesla does business along with the
non-taxable nature of items such as share-based payment charges.

NET INCOME (LOSS)

The Company had a consolidated net loss of $6.9 million ($0.31 loss per share) in the
historically slower second quarter of 2012, a decline compared to the consolidated net
loss of $5.4 million ($0.24 loss per share) in the second quarter of 2011. The decline
was mainly driven by reduced activity levels specifically in Canada and Africa.

On a year to date basis, the Company had net income of $10.0 million ($0.44 per share)
in 2012 compared to net income of $0.2 million ($0.01 per share) in 2011. A marked
improvement in Canadian operations during the first quarter of 2012 along with better
results from Tesla Trinidad, Tesla Offshore and Tesla USA on a year to date basis were
slightly offset by a decline in Tesla International’s results.

COMPREHENSIVE INCOME (LOSS)

The Company recorded a comprehensive loss of $6.4 million in the second quarter of
2012, consisting of a $6.9 million net loss offset by $0.6 million of other comprehensive
income comprised of currency translation adjustments on foreign subsidiaries resulting
from the weakening of the Canadian dollar during the quarter. In the second quarter of
2011, the Company recorded a comprehensive loss of $5.6 million consisting of a $5.4
million net loss and $0.2 million of other comprehensive losses comprised of currency
translation adjustments on foreign subsidiaries resulting from the strengthening of the
Canadian dollar.

On a year to date basis, the Company recorded comprehensive income of $9.9 million in
2012, consisting of $10.0 million of net income offset by $0.1 million of other
comprehensive losses comprised of currency translation adjustments on foreign
subsidiaries resulting from the strengthening of the Canadian dollar. In 2011, the
Company recorded a comprehensive loss of $0.8 million consisting of $0.2 million of net
income offset by $1.0 million of other comprehensive losses comprised of currency
translation adjustments on foreign subsidiaries resulting from the strengthening of the
Canadian dollar.

Currency translation gains and losses are held in accumulated other comprehensive
income, net of taxes, until they are realized at which time they are included in income.




                                                                                      10
                       LIQUIDITY AND CAPITAL RESOURCES

At June 30, 2012 net working capital was $6.1 million (including net cash of $4.8 million)
compared to $10.4 million at December 31, 2011. Working capital increases as a result
of the positive cash flow mainly from the Canadian winter were more than offset by
$23.4 million of long-term debt and operating line repayments, $2.2 million of regular
payments on finance leases and $7.5 million of capital spending (excluding financed
additions) year to date.

The Company believes that it has the capital resources and availability to fund operating
working capital, capital expenditures related to equipment purchases and to finance
strategic acquisitions. Sources of funds available to meet these requirements include
cash flow from operations, external lines of credit, equipment financing, term loans and
public equity financings.

Operating activities
Cash flow used in operations was $2.8 million in the second quarter of 2012 a slight
increase from $2.1 million in the second quarter of 2011 due to declines in Tesla
Canada’s and Tesla International’s cash flows partially offset by improvements in cash
flows from Tesla Trinidad and Tesla Offshore.

On a year to date basis, cash flow from operations increased to $22.8 million in 2012
from $10.7 million in 2011 due to significant improvements in Tesla Canada’s cash flows
and to a lesser extent cash flows from Tesla USA, Tesla Trinidad and Tesla Offshore.

Investment in property and equipment
Investing activities consumed $5.8 million of cash during the second quarter of 2012
compared with $2.2 million in the second quarter of 2011. On a year to date basis, the
Company had invested cash of $7.3 million in 2012 compared to cash of $3.2 million in
2011.

Additions to property and equipment in 2012 totaled $21.5 million (including $13.7 million
through finance leases) of which approximately $17.9 million was growth oriented
spending on the purchase of the 10,000 station Hawk 3C wireless recording system and
support equipment. The remaining capital spend was for vehicles and field equipment to
support the Canadian winter operations along with a small amount of field equipment for
Tesla International operations.

Expenditures in 2011 related to initial payments on the purchase of 3,000 channels of
3C recording equipment, field equipment to support the Canadian winter operations
along with vehicles and camp equipment for a project in northern Ethiopia. Further, the
Company spent funds on the overhaul of the hull and generators of Tesla Offshore’s
vessel. The Company also continues to invest funds in the implementation and
development of a financial and operational ERP system.

Financing activities
Financing activities used $16.4 million of cash during the second quarter of 2012
compared to $9.4 million of cash in the second quarter of 2011. During the current
quarter, the Company used cash flow generated from first quarter operations to make
payments of $18.2 million on long-term debt, $1.2 million on finance leases and $0.2
million for interest on operating lines, leases and long-term debt. The Company also


                                                                                       11
made draws of $3.5 million on operating lines during the quarter. Operating lines are
used to manage working capital requirements, mainly in Canada, and fluctuate based on
timing of operating cash inflows and outflows and seasonality of the Canadian
operations. During the second quarter of 2011, the Company used cash flow generated
from first quarter operations to make payments of $6.8 million on long-term debt, $1.1
million on outstanding operating lines, $1.1 million on finance leases and $0.3 million for
interest on operating lines, leases and long-term debt.

Financing activities used $26.5 million of cash during the first half of 2012 compared to
$11.8 million in the first half of 2011. The Company used cash flow generated from first
quarter operations to make payments of $18.3 million on long-term debt, $5.2 million on
outstanding operating lines, $2.2 million on finance leases and $0.6 million for interest
on operating lines, leases and long-term debt. In 2011, the Company repaid $6.8 million
on long-term debt, $2.1 million on outstanding operating lines, $2.2 million on finance
leases and $0.7 million of interest payments.

During the quarter, the Company renewed its Canadian credit facility agreement
consisting of a $15 million operating loan, a $30 million revolving credit facility and a $20
million (previously $15 million) finance lease facility. These facilities provide the
Company with flexibility with respect to capital expenditures and potential acquisitions.
All facilities are available in either Canadian or US currency at Tesla’s discretion.

As of June 30, 2012, the Company was in compliance with all covenants under its credit
facility agreement.

Contractual obligations and off balance sheet arrangements

The Company has future commitments related to office building and equipment leases,
capital leases, long-term debt and vehicle and equipment rental agreements. The
annual obligations pursuant to the terms of the agreements include principal payments
and interest as follows:

$000's                             Total      2012    2013      2014        2015      > 2016
Office and equipment leases        1,384      335      467       371        178          33
Finance leases                    21,540     3,607   5,173     4,002      3,838       4,920
Long-term debt                     3,164       78    1,143       460        445       1,038
Total contractual obligations     26,088     4,020   6,783     4,833      4,461       5,991


Other than operating lease commitments relating to its premises and equipment, the
Company has no other off-balance sheet arrangements.

                                SHAREHOLDERS' EQUITY

Shareholders' equity increased to $67.9 million at June 30, 2012 from $58.0 million at
December 31, 2011. The increase was mainly due to the net income generated during
the period slightly offset by a reduction in the accumulated other comprehensive income
due to the strengthening of the Canadian dollar against the US dollar as it relates to the
translation of the Company’s US subsidiaries. Shareholders’ equity has also benefitted
from the growth in contributed surplus from share-based payment charges.




                                                                                          12
The Company commenced a Normal Course Issuer Bid (“NCIB”) effective October 14,
2011 and has repurchased and cancelled 123,415 common shares to the date of the
MD&A at an average price of $2.65 per common share.

As at the date of this MD&A, the Company had 23,050,880 common shares issued and
outstanding and 1,952,044 stock options outstanding with a weighted exercise price of
$3.19 per common share.

                                        OUTLOOK

North America Land Operations

In Canada, low natural gas prices continue to limit exploration activity during the summer
months and a wet spring deferred several projects into the fall when crops come off.
Tesla Canada activated two crews in mid-July, one in the west and one in the east with
periodic work scheduled throughout the third quarter consistent with activity levels in
2011. Current bidding activity suggests strong demand for fall and winter programs. The
Company anticipates operating up to five crews during the fourth quarter of 2012, similar
to 2011, and up to nine crews during the first quarter of 2013, an additional crew
compared to the first quarter of 2012, with a continued focus on three-component (“3C”)
technology. This increased demand should lead to continued strong crew rates and
earlier start dates where possible. Tesla is working to secure appropriate personnel and
equipment, including potential wireless solutions, to support what is shaping up to be
another busy winter season.

Tesla USA began utilizing the 10,000 station Hawk 3C system in mid-June under the
Agreement with a multi-client geophysical company. Production is exceeding planned
results and should generate improved margins from those realized under current
industry metrics. This crew expects to continue work under the Agreement for a
significant portion of 2012. A second crew was also mobilized in mid-June and will
continue working periodically throughout the remainder of the year. With the low natural
gas price, the Company continues to see a rise in activity levels in oil and liquids rich
shale plays such as the Bakken, Utica (Eastern Ohio) and Marcellus (Pennsylvania and
West Virginia). Activity is expected to increase in the Denver-Julesburg (“DJ”) Basin
during the remainder of 2012. Pricing of services continues to be the driving factor in this
market with improvements in utilization rates increasing due to requirements for higher
channel counts, wireless recording systems and third-party multi-client programs driving
the demand for services.

The project in Trinidad was completed in mid-April with equipment remaining in the
country. Tesla is working with its operating partners in Trinidad and other nearby
countries in an attempt to secure future work in the region.

International Operations

Tesla International’s UK and European crew has seen a sustained demand for
acquisition services in both the hydrocarbon and minerals sectors. Indicators suggest
that this demand will be maintained, and potentially increased, offering an opportunity for
further growth to Tesla International’s operations in this area. This crew continues to be
fully utilized and has secured projects that will see it continue work through to the end of
2012 on projects throughout the UK and Europe.



                                                                                         13
Tesla International is currently maintaining equipment in a Duty Free Zone near Djibouti,
with vibrosies units in Oman, in order to facilitate efficient mobilization to potential
projects in the region. The Company is currently pursuing projects in East Africa and
surrounding areas.

Tesla International is also in the final stages of scheduled maintenance on its vessel
fleet with other equipment back at its base in Uganda. There remains significant interest
in the Rift Valley basin trend with Tesla International well placed to exploit both transition
zone (“TZ”) and terrestrial acquisition opportunities in the area. One contract has already
been awarded and should see the TZ crew active before the end of the third quarter with
other potential opportunities for the remainder of 2012.

Bid activity remains busy with a multitude of prospective work programs in the UK and
Europe. Key areas of East Africa and North Africa are expected to see a return to
greater activity following political stabilization and the interest of some of the major
operators in developing their activities in the area. Tesla International expects to be
successful in obtaining additional work from both of these opportunities and from
exploiting some potential new areas of activity to extend its current backlog and recently
opened a branch office in Islamabad to explore opportunities in the region.

The UK technical services office remains steady with a number of processing and
interpretation projects recently awarded and underway with full utilization of capacity
expected to continue. The Jakarta processing office continues to face increased
competition and lower processing prices, but has recently being awarded some sizable
projects that will keep the office fully utilized in the coming months. Additional
opportunities continue to be pursued to maintain backlog.

Offshore Operations

The reactivation process for activity in the Gulf of Mexico is underway as the central and
eastern Gulf of Mexico lease sale was held on June 20, 2012. This is positive news for
Tesla Offshore. New lease sales generally lead to an increase in geophysical operations
as operators require geophysical surveys for the purpose of securing drilling permits and
evaluating new lease properties. Tesla Offshore has already obtained work as a direct
result of this lease sale that should keep one vessel occupied until the weather turns in
late fall.

Tesla Offshore has managed to land several significant geophysical projects that have
two geophysical vessels active well into the fall and the possibility of an additional two
geophysical vessels to be activated during the third quarter of 2012. There is potential
for a portion of this work to be carried over into the spring of 2013 dependent upon
weather in the Gulf of Mexico this fall.

Construction activity has picked up during the summer months with trawling and special
projects underway during periods of improved weather. Tesla Offshore will support up to
15 vessels throughout the third quarter before winding down early in the fourth quarter.

Tesla Offshore has increased the number of project tender responses and the amount of
attention and effort put toward opportunities outside the Gulf of Mexico. Tesla Offshore
began work on a multi-year project in Alaska, recently completed a small geophysical
project in Argentina and signed a contract for work in Israel. As long-term clients expand




                                                                                           14
into these and other areas, Tesla Offshore is configuring systems and staff to profitably
provide services to support their operations.



                                     SUMMARY OF QUARTERLY RESULTS

A summary of operating results by quarter for the past eight quarters is as follows:

                                     Q2             Q1            Q4            Q3         Q2         Q1           Q4         Q3

(000s, except per share            Jun 30         Mar 31        Dec 31       Sep 30       Jun 30     Mar 31       Dec 31     Sep 30
data)(unaudited)                    2012           2012          2011         2011        2011       2011         2010       2010

                    Revenue           18,258       102,825        62,319       47,237      30,768      85,125      40,054     26,060
              Gross margin 1              551       33,683        11,691         9,393      1,883      16,793      11,081      6,772
         Net earnings (loss)           (6,945)      17,448           719          (332)    (5,370)      5,559      (1,913)    (3,982)
           Per share - basic            (0.31)        0.77          0.03         (0.01)     (0.24)         0.24     (0.08)     (0.17)
                             1
                    EBITDA             (4,029)      28,336         7,486         5,375     (1,951)     13,013       5,472      2,404
           Per share - basic            (0.18)        1.24          0.33          0.24      (0.09)         0.57      0.24       0.11
 Cash flow from operations 1           (2,810)      26,122         5,933         5,642     (2,146)     12,898       4,869      1,528
           Per share - basic            (0.12)        1.15          0.26          0.25      (0.09)         0.57      0.21       0.07
             Working capital           6,050        34,783        10,411       11,911       4,912      20,287       7,521      5,530
 Capital expenditures, gross          19,847         1,607         4,642         1,852      4,940       1,443       6,250      6,710
                Total assets         118,915       155,936      141,088       125,075     120,523     158,158     127,815    119,237
                             2
     Long-term borrow ings            22,362        28,062        29,073       31,341      26,764      34,729      35,859     31,134
                       Equity         67,929        74,631        57,993       57,667      55,127      60,451      55,388     58,399
   Weighted average shares
   outstanding for the period         22,689        22,784        22,795       22,795      22,795      22,795      22,795     22,770
1. See "Non-GAAP Financial Measures"
2. Includes capital lease obligations and long-term debt, including current portions.

                                           SEASONALITY OF OPERATIONS

As a result of having significant operations in western Canada, the Company’s earnings
are impacted by the seasonal activity pattern of western Canada’s oil and gas
exploration industry. In northern Alberta and British Columbia, certain areas are only
accessible during the winter months creating seasonally higher revenues and earnings
for the Company. Conversely, in spring and early summer, industry oil and gas
exploration and development activity levels decrease due to wet spring conditions.
Additionally, repairs and maintenance expenditures for owned equipment damaged
during the winter season are incurred and recorded during the summer and early fall to
ensure equipment is ready for the following winter and fluctuates based on anticipated
activity levels and the status of the equipment. The Company’s earnings typically decline
in the spring and summer as a result of these seasonal conditions and expenditures.
Tesla Offshore’s operations are impacted by weather in the Gulf of Mexico resulting in
historically fewer operational days November through April and therefore lower earnings
during this period of the year. Tesla International’s land acquisition operations are
generally not significantly impacted by seasonal fluctuations and partially offset this
decline.



                                                                                                                                      15
                                BUSINESS RISKS

The Company is exposed to many risks inherent in its three business segments. These
risks and Tesla’s mitigation strategy are outlined below.

                Risk                                  Mitigation

Depressed commodity prices       Tesla maintains good client relations and obtains
                                 non-refundable deposits when possible. Tesla
                                 utilizes its geographic diversity to focus on areas
                                 where short-term commodity prices have a reduced
                                 impact on activity levels.

Program cancellations            Tesla looks to target and establish alliances with
                                 reputable customers and obtains non-refundable
                                 deposits when possible.

Competition                      Tesla will look to move resources to better markets
                                 utilizing its diverse geographic footprint. Tesla looks
                                 to distinguish itself in service, performance and
                                 technology and focuses on value-added customers.
                                 Tesla will concentrate its activities in areas where it
                                 has demonstrated technical and operational
                                 advantages.

International political risk     Tesla will look to move resources to better markets
                                 utilizing its diverse geographic footprint. Tesla works
                                 with local governments where possible and
                                 maintains appropriate insurance coverage.

Loss of core customers           Tesla looks to minimize this by maintaining a high
                                 level of job performance, good client relations, a
                                 focus on HSE and utilizing a fully trained staff. Tesla
                                 responds to issues in a timely manner through
                                 regular client communications.

Weather                          Tesla looks to exploit the seasonality in the various
                                 areas it does business and builds weather protection
                                 clauses into contracts.

Environmental and property       Tesla evaluates the risks and makes contingencies
damage                           for environmental issues. Training programs for staff
                                 ensure they are aware of issues and their corporate
                                 responsibility as provided for by HSE policies.
                                 Appropriate insurance coverage is maintained.

Errors and omissions             Tesla ensures they employ and train highly
                                 competent professional staff and maintains


                                                                                     16
                                       appropriate insurance coverage.

Technology                             Tesla monitors current trends and invests in new
                                       technology and the latest equipment to service niche
                                       markets and meet its customers’ requirements.

Labour shortages                       Tesla will target excess labour markets for its
                                       seasonal workforce. Tesla has the ability to move
                                       personnel between its divisions and offers
                                       competitive compensation packages.

Contracts                              Tesla looks to target term contracts as opposed to
                                       turnkey contracts to minimize financial risk. Policies
                                       are in place for contract review prior to commitments
                                       being made.

Financing requirements and             Tesla monitors operational results daily and strives
market perception                      to meet and exceed financial projections. Tesla
                                       manages its debt levels within its covenants and
                                       communicates with investors and analysts to raise
                                       awareness of corporate performance.

Reliance on key management             Tesla employs and trains highly competent
                                       professional staff and a succession plan is being
                                       developed.

Capital asset management               Tesla moves equipment to markets that allow for a
                                       high level of utilization and invests in equipment and
                                       markets that allow for the highest returns on
                                       investment.

Global financial instability           Tesla has diversified business lines in a number of
                                       geographical locations worldwide. Tesla looks to
                                       target and establish alliances with reputable
                                       customers and obtains non-refundable deposits
                                       when possible.


                               FINANCIAL RISK MANAGEMENT

The Company is exposed to financial risks arising from its financial assets and liabilities.
The financial risks include market risk relating to interest rates and foreign exchange
rates, credit risk and liquidity risk.

Market Risk

Market risk, the risk that the fair value or future cash flows of financial assets or liabilities
will fluctuate due to movements in market rates, is comprised of the following:




                                                                                              17
Interest rate risk

Interest rate risk is the risk that future cash flows will fluctuate as a result of changes in
market interest rates. The Company is exposed to interest rate fluctuations on its
revolving credit facility and operating loan facilities.

For the three and six months ended June 30, 2012, an increase or decrease in interest
expense for each one percent change in interest rates on floating rate debt would have
amounted to approximately $34,000 and $91,000 respectively (June 30, 2011 - $70,000
and $140,000).

Foreign exchange rate risk

As the Company operates in the U.S., U.K. and other countries, fluctuations in the
exchange rates between the Canadian dollar and foreign currencies can have a
significant effect on the fair value or future cash flows of the Company’s financial assets
and liabilities.

The Canadian entity is exposed to currency risk on foreign currency denominated
financial assets and liabilities with adjustments recognized as foreign exchange gains
and/or losses in the consolidated statement of operations.

Foreign entities with a functional currency other than the Canadian dollar expose the
Company to currency risk on the translation of these entities’ financial assets and
liabilities to Canadian dollars for consolidation. Tesla Offshore’s operations in the U.S.
have a U.S. dollar functional currency and Tesla International’s operations in the U.K.
have a Pound Sterling functional currency. Adjustments arising when translating these
foreign entities into Canadian dollars are reflected in the consolidated statement of
comprehensive income - as gains or losses on translating financial statements of foreign
operations. Fluctuations in these foreign currencies also impact the earnings of the
Company as U.S. dollar and Pound Sterling denominated earnings are translated into
the Canadian dollar reporting currency.

Foreign entities are exposed to currency risk on financial assets and liabilities
denominated in currencies other than their functional currency with adjustments
recognized in the consolidated statements of operations. Tesla International’s operations
based in the U.K. where the functional currency is the Pound Sterling will incur foreign
exchange gains and/or losses on financial assets and liabilities denominated in
currencies other than the Pound Sterling, such as the U.S. dollar or Euro. The impact of
a $0.05 strengthening of the Canadian dollar relative to the U.S. dollar at June 30, 2012
on these financial assets and liabilities would have resulted in a $61,000 reduction in
earnings (June 30, 2011 - $153,000).

Credit Risk

Credit risk refers to the possibility that a customer or counterparty will fail to fulfill its
obligations and as a result, create a financial loss for the Company.




                                                                                           18
Customers

The Company’s accounts receivables are predominantly with customers who explore for
and develop natural gas and petroleum reserves and are subject to normal industry
credit risks. The Company assesses the credit worthiness of its customers on an
ongoing basis as well as monitoring the amount and age of balances outstanding.
Accordingly, the Company views the credit risks on these amounts as normal for the
industry. The carrying amount of accounts receivable represents the maximum credit
exposure on this balance.

Payment terms with customers vary by region and contract; however, standard payment
terms are 30 days from invoice date. Historically, industry practice allows for payment up
to 90 days. The Company considers its accounts receivable excluding doubtful accounts
to be aged as follows:

                                                                       June 30,    December 31,
                                                                           2012           2011
                                                                              $              $
                             Current (0-30 days from invoice date)   10,279,330     35,764,469
                                                      31-60 days       838,645       9,218,275
                                                      61-90 days      2,413,423      2,042,771
                                             Greater than 90 days     7,427,381      2,024,156
                                                                     20,958,780     49,049,671
                                           Provision for bad debts    1,300,618        988,568
                                                                     19,658,162     48,061,103


Total accounts receivable outstanding greater than 90 days net of provisions was
$6,126,763 at June 30, 2012 (December 31, 2011 - $1,035,588). Management believes
that amounts outstanding greater than 90 days that have not been provided for will be
collected in the normal course.

Counterparties

Counterparties to financial instruments expose the Company to credit losses in the event
of non-performance. Counterparties to cash transactions are limited to high credit quality
financial institutions. The Company does not anticipate non-performance that would
materially impact the Company’s financial statements.

Liquidity Risk

Liquidity risk is the risk that the Company will encounter difficulties in meeting its
financial liability obligations. The Company manages its liquidity risk through cash and
debt management. As at June 30, 2012, the Company had cash of $8.3 million
(December 31, 2011 - $8.6 million), available unused committed bank credit and lease
facilities in the amount of $47.5 million (December 31, 2011 - $27.2 million) plus
accounts receivable and income tax receivable in the amount of $19.6 million
(December 31, 2011 - $48.5 million) for a total of $75.4 million (December 31, 2011 -
$84.3 million) available to fund the cash outflows relating to its financial liabilities. The



                                                                                            19
Company believes it has sufficient funding through its operations and the use of these
facilities to meet foreseeable cash requirements.

The timing of undiscounted cash flows relating to financial liabilities and associated
interest payments are outlined in the table below:

                                              Less Than 1
                                                     Year    2-3 Years    4-5 Years   Thereafter
                                                        $            $            $            $
Operating lines of credit                       3,521,976           -             -           -
Trade and other payables                       17,293,671           -             -           -
Income tax payable                               570,051            -             -           -
Customer deposits                                717,038            -             -           -
Long-term debt                                    77,845    1,602,791     1,482,500           -
Finance lease obligations                       6,193,561   4,578,579    10,768,022           -
                                               28,374,142   6,181,370    12,250,522           -


Fair Value of Financial Instruments

The carrying amount of cash and cash equivalents, accounts receivable, accounts
payable, and accrued liabilities and operating line of credit approximates fair value due
to the short-term nature of these financial instruments.

The carrying value of long-term debt approximates fair value due to the floating rate
nature of the 364 day revolving facility.

The fair value of fixed rate capital leases is approximately $19.1 million compared to a
carrying value of $19.4 million as the rate on existing leases are slightly higher than
current rates.

                            CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements requires management to make certain
judgments, accounting estimates and assumptions that affect the amounts reported for
assets and liabilities as at the reporting date and the amounts reported for revenues and
expenses during the period. The nature of estimation means that actual outcomes could
differ from those estimates. Accordingly, the impact of these estimates, assumptions and
judgments on the consolidated financial statements in future periods could be material.
The key sources of estimation uncertainty that have a significant risk of causing material
adjustment to the carrying amounts of assets and liabilities within the next financial year
is discussed below.

Recoverability of asset carrying values
The Company assesses its property and equipment, intangible assets, and goodwill for
possible impairment if there are events or changes in circumstances that indicate that
carrying values of the assets may not be recoverable, or at least at every reporting date.
Such indicators include changes in the group’s business plans, changes in market and
evidence of physical damage.




                                                                                             20
The assessment for impairment entails comparing the carrying value of the cash-
generating unit with its recoverable amount, that is, the higher of fair value less costs to
sell and value in use. Value in use is usually determined on the basis of discounted
estimated future net cash flows. Determination as to whether and how much an asset is
impaired involves management estimates on highly uncertain matters such as future
contract prices, the effects of inflation on operating expenses, discount rates, and the
outlook for regional market supply-and-demand conditions for seismic data acquisition.

Depreciation
Depreciation of the Company’s property and equipment incorporates estimates of useful
lives and residual values. These estimates may change as more experience is obtained
or as general market conditions change, thereby impacting the value of the Company’s
property and equipment.

Fair value of financial instruments
The estimated fair value of financial assets and liabilities, by their very nature, are
subject to measurement uncertainty. The fair values of financial instruments that are
included in the consolidated statement of financial position, except long-term debt and
finance lease obligations, approximate their carrying amounts due to the short-term
maturity of those instruments. Long-term debt and finance lease obligations are carried
at amortized cost using the effective interest method of amortization; this approximates
fair value.

Share-based payments
Issuances and grants of share options and shareholder loans are valued using the fair
value method. Management uses the Black-Scholes valuation model to estimate the fair
value of options determined at grant date. Significant assumptions affecting valuation of
options include the trading value of the Company’s shares at the date of grant, the
exercise price, the term allowed for exercise, a volatility factor relating to the Company’s
historical share price, dividend yield and the risk-free interest rate.

Income taxes
The Company is subject to income taxes in numerous jurisdictions. Significant
judgement is required in determining the worldwide provision for income taxes. There
are many transactions and calculations undertaken during the ordinary course of
business for which the ultimate tax determination is uncertain. The Company recognizes
liabilities based on the Company’s current understanding of tax laws as applied to the
Company’s circumstances. Where the final tax outcome of these matters is different
from the amounts that were initially recorded, such differences will impact the current
and deferred tax provisions in the period in which such determination is made.

Allowance for doubtful accounts
The Company performs ongoing credit evaluations of its customers and grants credit
based upon a review of historical collection experience, current aging status, financial
condition of the customer, and anticipated industry conditions. Customer payments are
regularly monitored and a provision for doubtful accounts is established based upon
specific situations and overall industry conditions.




                                                                                         21
                           ACCOUNTING POLICY CHANGES

Accounting Standards Issued But Not Yet Applied
IFRS 9, Financial Instruments, was issued in November 2009. It addresses classification
and measurement of financial assets and replaces the multiple category and
measurement models in IAS 39 for debt instruments with a new mixed measurement
model having only two categories: Amortized cost and fair value through profit or loss.
IFRS 9 also replaces the models for measuring equity instruments and such instruments
are either recognized at fair value through profit or loss or at fair value through other
comprehensive income. Where such equity instruments are measured at fair value
through other comprehensive income, dividends, to the extent not clearly representing a
return of investment, are recognized in profit or loss; however, other gains and losses
(including impairments) associated with such instruments remain in accumulated
comprehensive income indefinitely. The updated guidance includes classification and
measurement of financial liabilities and de-recognition of financial instruments. It is
effective for annual periods beginning on or after January 1, 2015.

In May 2011, the IASB issued a group of five new standards that address the scope of
the reporting entity: IFRS 10, Consolidated Financial Statements, IFRS 11, Joint
Arrangements, IFRS 12, Disclosure of Interests in Other Entities, IAS 27, Separate
Financial Statements and IAS 28, Investments in Associates.

IFRS 10 replaces all of the guidance on control and consolidation in IAS 27,
Consolidated and Separate Financial Statements and SIC-12, Consolidation – Special
Purpose Entities. IFRS 10 changes the definition of control so that the same criteria are
applied to all entities to determine control focusing on the need to have both power and
variable returns before control is present. Power is the current ability to direct the
activities that significantly influence returns. Returns must vary and can be positive,
negative or both. The renamed IAS 27 continues to be a standard dealing solely with
separate financial statements and its guidance is unchanged.

IFRS 11 has changed the definitions of joint arrangements reducing the types of joint
arrangements to two: joint operations and joint ventures. The existing policy choice of
proportionate consolidation for jointly controlled entities has been eliminated. Equity
accounting is mandatory for participants in joint ventures. Entities that participate in joint
operations will follow accounting much like that for joint assets or joint operations today.

IFRS 12 sets out the required disclosures for entities reporting under IFRS 10 and IFRS
11 replacing the disclosure requirements currently found in IAS 28. IFRS 12 requires
entities to disclose information that helps financial statement readers to evaluate the
nature, risks and financial effects associated with the entity’s interests in subsidiaries,
associates, joint arrangements and unconsolidated structured entities.

In May 2011, the IASB issued IFRS 13, Fair Value Measurement which provides for a
consistent and less complex definition of fair value, establishes a single source for
determining fair value and introduces consistent requirements for disclosure related to
fair value measurement.

The above standards are required to be applied for accounting periods beginning on or
after January 1, 2013, with earlier adoption permitted. The Company has not yet



                                                                                           22
assessed the impact of these standards or determined whether it will adopt the
standards early.

 In June 2011, the IASB issued an amendment to IAS 1, Presentation of Financial
Statements that requires companies to group items presented within Other
Comprehensive Income based on whether they may be subsequently reclassified to
profit or loss. The amendment to IAS 1 is effective for annual periods beginning on or
after July 1, 2012 with full retrospective application. Early adoption is permitted. The
Company has not yet assessed the impact of this standard or whether it will adopt the
standard early.

In June 2011, the IASB amended IAS 19, Post Employee Benefits, which amends the
recognition and measurement of defined benefit pension expense and expands
disclosures for all employee benefit plans. The amended standard should not have a
material impact on the Company’s Consolidated Financial Statements.

                     INTERNAL CONTROLS AND PROCEDURES

Disclosure Controls and Procedures
The Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) are responsible
for establishing and maintaining the Corporation’s disclosure controls and procedures.
They are assisted in this responsibility by the Corporation’s senior management team.
Disclosure controls and procedures have been designed to ensure that information
required to be disclosed by the Corporation is accumulated and communicated to senior
management as appropriate to allow timely decisions regarding required disclosure. An
evaluation of the design of the Corporation’s disclosure controls and procedures as at
June 30, 2012 was performed under the supervision of the Corporation’s senior
management. The CEO and CFO have concluded that the Corporation’s disclosure
controls and procedures are not operating effectively due to the weakness in internal
controls over financial reporting discussed below.

Management's Report on Internal Control over Financial Reporting
The Company's management, including the CEO and CFO, have assessed and
evaluated the design of the Company's internal control over financial reporting as
defined in National Instrument 52-109 as of June 30, 2012. In making this assessment,
the Company used the criteria established by the Committee of Sponsoring
Organizations (“COSO”) in the "Internal Control-Integrated Framework." These criteria
are in the areas of control environment, risk assessment, control activities, information
and communication, and monitoring. The Company's assessment included
documentation, evaluation, and testing of its internal controls over financial reporting.

Based on that evaluation, the Company’s management concluded that the Company’s
internal controls over financial reporting are effective and provide reasonable assurance
regarding the reliability of the Company’s financial reporting and its preparation of
financial statements for external purposes in accordance with IFRS in Canada, and are
designed appropriately as of June 30, 2012 except as noted below.

The Company’s management concluded that there was a material weakness during the
second quarter of 2012 in the Company’s internal controls over financial reporting
attributed to the lack of an internal review of corporate tax provision calculations
prepared by senior management. Senior management of the Company is in the process


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of training certain individuals such that an appropriate review can be performed. The
Company is pursuing alternatives to remediate this weakness.

Because of their inherent limitations, disclosure controls and procedures and internal
controls over financial reporting may not prevent errors or fraud. Control systems, no
matter how well conceived or implemented, can provide only reasonable, not absolute,
assurance that the objectives of the control systems are met.

Changes in Internal Controls over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting
during the quarter ended June 30, 2012 that have materially affected, or are reasonably
likely to materially affect, internal control over financial reporting.

                                      ADVISORIES

Forward-looking Statements
Certain information set forth in this MD&A, including management's assessment of the
Company's future plans and operations, contains forward-looking statements, which are
based on the Company's current internal expectations, estimates, projections,
assumptions and beliefs, which may prove to be incorrect. Some of the forward-looking
statements may be identified by words such as "expects", "anticipates", "believes",
"projects", "intends", "continues", "estimates", "objective", "ongoing", "may", "will",
"should", "might", "plans" and similar expressions. These statements are not guarantees
of future performance and undue reliance should not be placed on them. Such forward-
looking statements are based on current expectations, estimates and projections that
involve a number of known and unknown risks and uncertainties, which may cause the
Company's actual performance and financial results in future periods to differ materially
from any projections of future performance or results expressed or implied by such
forward-looking statements. These include, but are not limited to, the risks outlined in the
“Business Risks” section of this document.

The information contained in this MD&A should not be considered all-inclusive as it
excludes changes that may occur in general economic, political and environmental
conditions. The Company cautions that actual performance will be affected by a number
of factors, many of which are beyond its control. Investors are cautioned against
attributing undue certainty to forward-looking statements. The forward-looking
information and statements contained in this MD&A speak only as of the date hereof
and, subject to its obligations under applicable law, the Company does not intend, and
does not assume any obligation, to update these forward-looking statements if
conditions or opinions should change.




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