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Share Name | Share Symbol | Market | Type |
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Lifestyle Global Brands Limited | TSXV:GBE | TSX Venture | Common Stock |
Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
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0.00 | 0.00% | 0.015 | 0.005 | 0.02 | 0 | 01:00:00 |
Grand Banks Energy Corporation (TSX VENTURE:GBE): MANAGEMENT'S DISCUSSION AND ANALYSIS This Management's Discussion and Analysis ("MD&A") should be read in conjunction with the unaudited financial statements of Grand Banks Energy Corporation ("Grand Banks" or the "Company") and accompanying notes for the three months ended March 31, 2008 and 2007. In this MD&A, production and reserves information are commonly reported in units of barrels of oil equivalent ("boe"). For purposes of computing such units, natural gas is converted to equivalent barrels of oil using a conversion factor of six thousand cubic feet to one barrel of oil. This conversion ratio of 6:1 is based on an energy equivalent wellhead value for the individual products. Such disclosures of boes may be misleading, particularly if used in isolation. Readers should be aware that historical results are not necessarily indicative of future performance. This MD&A and the unaudited interim financial statements and accompanying notes have been prepared by management and approved by the Audit Committee of the Board of Directors of Grand Banks and include information to May 27, 2008. These interim financial statements have not been reviewed or audited on behalf of the shareholders by the Company's independent external auditors. All financial measures presented in this Annual Report are expressed in Canadian dollars unless otherwise indicated. Overview On April 29, 2008, the Company announced it had entered into an agreement with Fairborne Energy Ltd. ("Fairborne") pursuant to which Fairborne has made an offer (the "Offer") to acquire all of the issued and outstanding common shares of the Company by way of a takeover bid. Under the terms of the Offer, Fairborne will pay $2.90 cash per share and assume the Company's debt for an estimated purchase price of $112.0 million. The Offer is be subject to certain conditions, including the deposit of not less than 66 2/3% of the outstanding common shares of the Company (on a fully diluted basis), receipt of regulatory approvals and other customary conditions. The board of directors of Grand Banks has unanimously determined that the Offer is fair, from a financial point of view, to holders of Grand Banks common shares and is in the best interest of Grand Banks and its shareholders. The board of directors has unanimously resolved to recommend that the holders of Grand Banks common shares accept the Offer and tender their Grand Banks common shares to the Offer. A Directors' Circular setting out the recommendation of the board of directors of Grand Banks in relation to the Offer along with the formal offer documents were mailed to holders of securities of Grand Banks on May 7, 2008. The Company recorded average sales of natural gas, crude oil and liquids during the three months ended March 31, 2008 of 1,454 boe/d as compared to 792 boe/d for the corresponding period of 2007. The sales volumes for the period rose as a result of the production from the Tower Creek 02-21 natural gas well and from the Company's horizontal development drilling program on its Three Forks/Torquay light oil play along the Saskatchewan/Manitoba border. During the first quarter of 2008, the Company continued to see strong production performance from the Tower Creek 02-21 well and was successful in drilling three (2.85 net) horizontal wells on its Three Forks/Torquay light oil play. First quarter revenues, cash flow and earnings have continued to rise with higher natural gas and oil production and strong commodity prices. The following table summarizes the results for the three months ended March 31, 2008 and 2007: ---------------------------------------------------------------------------- For the Three Months Ended March 31, 2008 2007 Change Change ---------------------------------------------------------------------------- (000s, except per share amounts) ($) ($) ($) (%) Financial Results Gross revenues 9,726 4,124 5,602 136 Income (loss) before income taxes 2,907 (320) 3,227 1008 Net income (loss) 1,995 (320) 2,315 723 Per share - basic 0.06 (0.01) 0.07 700 Per share - diluted 0.06 (0.01) 0.07 700 Funds flow from operations (1) 5,737 1,885 3,852 204 Per share - basic 0.18 0.06 0.12 200 Per share - diluted 0.17 0.06 0.11 183 Additions to property and equipment 5,428 2,939 2,489 85 Proceeds on disposal of property and equipment - - - - Total assets 59,665 50,618 9,047 18 Working capital (deficiency) (12,227) (10,382) (1,845) (18) Asset retirement obligation (including current portion) 1,301 1,253 48 4 Flow-through share obligations - 2,864 (2,864) (100) ---------------------------------------------------------------------------- (000s) (#) (#) (#) (%) Share Data Equity outstanding Common shares 32,559 32,396 163 1 Stock options 2,514 3,121 (607) (19) ---------------------------------------------------------------------------- Fully diluted 35,073 35,517 (444) (1) ---------------------------------------------------------------------------- Sales Volumes (average) Crude oil and liquids (bbls/d) 724 616 108 18 Natural gas (mcf/d) 4,382 1,056 3,326 315 Average boe/d (6:1) 1,454 792 662 84 ---------------------------------------------------------------------------- Product Prices (average) Crude oil and liquids ($/bbl) 93.20 61.51 31.69 52 Natural gas ($/mcf) 9.00 7.51 1.49 20 ---------------------------------------------------------------------------- ($/boe) ($/boe) ($/boe) (%) Netback Analysis Oil and gas revenue (6:1) 73.50 57.86 15.64 27 Royalty expense 12.66 11.58 1.08 9 Operating costs 10.76 9.25 1.51 16 ---------------------------------------------------------------------------- Netback 50.08 37.03 13.05 35 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (1) Funds flow from operations is a non-GAAP measure that represents net income plus depletion, depreciation and accretion, stock-based compensation, future taxes and other non-cash expenses. See further discussion under Non-GAAP Measures in the Management's Discussion and Analysis. Sales Volumes ---------------------------------------------------------------------------- Three Months Ended March 31, 2008 2007 Change ---------------------------------------------------------------------------- (%) Crude oil and liquids (bbls/d) 724 616 18 Natural gas (mcf/d) 4,382 1,056 315 Average boe/d (6:1) 1,454 792 84 ---------------------------------------------------------------------------- In the first quarter of 2008, average sales volumes on a boe basis increased by 84% due to the natural gas production at Tower Creek along with the new oil production from Saskatchewan and Manitoba. Natural gas sales volumes increased 315% due to the 3.2 mmcf/d of new natural gas sales at Tower Creek offset by natural production declines at the Company's other gas producing properties. Currently gross production from the 02-21 well is over 22 mmcf/d of raw gas; the Company's net share of sales gas is approximately 3.2 mmcf/d or 540 boe/d. Oil and liquid sales in the first quarter increased 18% on the strength of new production from the new wells drilled in Saskatchewan and Manitoba in the later half of 2007 and the first quarter of 2008. These production increases were partially offset by natural declines in production from existing wells at Kingsford and Frys East, Saskatchewan. All of the Company's sales volumes consisted of natural gas and light to medium gravity crude oil, with no heavy oil. Gross Revenues ---------------------------------------------------------------------------- Three Months Ended March 31, 2008 2007 Change ---------------------------------------------------------------------------- (000s) ($) ($) (%) Crude oil and liquids 6,137 3,408 80 Natural gas 3,587 714 402 Other income 2 2 - ---------------------------------------------------------------------------- 9,726 4,124 136 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- The 136% increase in revenues for the first quarter of 2008 was due to the 84% higher sales volumes as noted above and the 52% increase in prices realized for crude oil and liquids and the 20% rise in natural gas prices. The improvement in average oil prices was due to the combination of higher world oil prices, offset by a stronger Canadian dollar but then partially corrected by an improvement in the overall quality of crude oil produced by the Company. The Company has not hedged any of its production. Royalty Expenses ---------------------------------------------------------------------------- Three Months Ended March 31, 2008 2007 Change ---------------------------------------------------------------------------- (000s) ($) ($) (%) Royalty expenses 1,675 825 103 ---------------------------------------------------------------------------- $/boe 12.66 11.58 9 ---------------------------------------------------------------------------- Royalty rate 17.2% 20.0% (14) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- The increase in royalty expenses in the first quarter on a boe basis was due to higher commodity prices offset by the new oil wells being on "royalty holiday". The Tower Creek well came off of royalty holiday in the later half of January, 2007. The overall royalty expense for the quarter doubled due to the increase in sales values, the impact of which was partially offset by the royalty holiday on the new production in Saskatchewan and Manitoba. The effective royalty rate for the quarter declined due to the aforementioned royalty holidays. Production Expenses ---------------------------------------------------------------------------- Three Months Ended March 31, 2008 2007 Change ---------------------------------------------------------------------------- (000s) ($) ($) (%) Production Expenses 1,424 659 116 ---------------------------------------------------------------------------- $/boe 10.76 9.25 16 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Production expenses in the first quarter of 2008 increased by 116% over 2007 as the result of the 84% increase in production levels and higher per unit operating costs at Tower Creek. Depletion, Depreciation and Accretion ---------------------------------------------------------------------------- Three Months Ended March 31, 2008 2007 Change (000s) ($) ($) (%) ---------------------------------------------------------------------------- Depletion and depreciation 2,726 1,930 41 Accretion of Asset Retirement Obligations 19 18 6 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 2,745 1,948 41 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- $/boe 20.74 27.34 (24) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- The increase in depletion and depreciation expense in the first quarter was due to higher production volumes offset by the lower depletion and depreciation rate per boe. The lower depletion rate was due to the addition of new proven oil reserves in Saskatchewan and Manitoba in 2007 and 2008, plus the significant conversion of probable reserves to proved reserves at Tower Creek in the later half of 2007 and the upward revisions of reserves in 2007 and 2008 at Tower Creek. Interest ---------------------------------------------------------------------------- Three Months Ended March 31, 2008 2007 Change ---------------------------------------------------------------------------- (000s) ($) ($) (%) Interest Expenses 186 157 18 ---------------------------------------------------------------------------- $/boe 1.41 2.20 (36) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- The increase in interest costs was the result of the increase in interest on bank indebtedness related to higher outstanding balances partially offset by lower interest rates in 2008. There was no interest in 2008 related to unspent flow through obligations compared to $49,000 in 2007. General and Administrative Costs ---------------------------------------------------------------------------- Three Months Ended March 31, 2008 2007 Change ---------------------------------------------------------------------------- (000s) ($) ($) (%) Gross General and Administrative costs 810 669 21 Overhead recovered (117) (71) (65) Overhead capitalized - - - ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 693 598 16 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- $/boe 5.24 8.39 (38) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- General and administrative costs, net of overhead recovered, for the three months ended March 31, 2008 increased by 16% over the comparative period of 2007. This increase was due to the cost of expanded operations and management changes resulting in higher salaries, consulting fees and associated personnel costs. Additionally, office rent and business taxes increased with the Company expanding its office space in the fourth quarter of 2007. The decrease in the cost per boe in the first quarter related to the 84% increase in production volumes. Stock-Based Compensation ---------------------------------------------------------------------------- Three Months Ended March 31, 2008 2007 Change ---------------------------------------------------------------------------- (000s) ($) ($) (%) Stock-Based Compensation 96 257 (63) ---------------------------------------------------------------------------- $/boe 0.73 3.61 (80) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Stock-based compensation costs for the first quarter of 2008 decreased $161,000 as no new stock options were issued during this period. Stock-based compensation costs are amortized over the vesting period, which is two years from the date of grant. Net Income (Loss) Grand Banks recorded net income of $1,995,000 ($0.06 per share) for the three months ended March 31, 2008 compared with net loss of $320,000 ($0.01 per share) for the same period in 2007. The improvement in net earnings was due primarily to higher net sales revenues related to gas production from Tower Creek, higher oil production from new wells drilled and higher commodity prices. Earnings also benefited from the reduction in depletion and depreciation rates which have improved due to lower finding and development costs and the conversion of probable reserves to proved reserves in 2007. Liquidity and Capital Resources At March 31, 2008, the Company had a working capital deficiency of $12,227,000 (including $10,202,000 drawn on its revolving bank loan) and $759,000 drawn on its non-revolving reducing term facility compared to a working capital deficiency of $12,437,000 (including $11,213,000 drawn on its revolving bank loan) and $855,000 drawn on its non-revolving reducing term facility at December 31, 2007. At March 31, 2008, the Company had a $19,000,000 ($19,000,000 - December 31, 2007) revolving line of credit agreement with a Canadian financial institution. The line of credit bears interest at prime rate plus 0.25% per annum and the non-revolving term facility bears interest at 7.5% and is repayable in 22 blended monthly payments of principal and interest of $37,000. For the three months ended March 31, 2008, the Company had funds flow from operations of $5,737,000. (See "Non-GAAP Measures.") The Company has not declared any dividends. Based on our December 31, 2007 reserve evaluation, the Company believes its lines of credit could be expanded and these expanded lines of credit and funds flow from operations are expected to exceed the Company's working capital commitments for the forthcoming year. Financing and Investing Activities The Company has had discussions with its lender about increasing the amount available under its revolving line of credit however has not pursued these discussions given the pending takeover of the Company. ---------------------------------------------------------------------------- Three Months Ended March 31, 2008 2007 Change ---------------------------------------------------------------------------- (000s) ($) ($) (%) Land & property acquisitions 126 267 (53) Geological and geophysical 181 - - Drilling and completion 4,296 1,288 234 Equipment and gathering 821 1,372 (40) G&A capitalized - - - Office equipment 4 12 (67) ---------------------------------------------------------------------------- 5,428 2,939 85 Proceeds of disposition - - - ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Additions to property and equipment, net of proceeds 5,428 2,939 85 ---------------------------------------------------------------------------- Capital expenditures in the first quarter of 2008 were focused on the drilling, completing and equipping of the three (2.85 net) horizontal oil wells drilled in Manitoba. Capital spending in the first quarter of 2007 reflected lower levels of activity as the Company focused it resources on the construction of new production facilities at Tower Creek. Financial Instruments Grand Banks has not entered into any commodity or financial instrument hedges; however, it does carry various forms of financial instruments, all of which are recognized in the Company's financial statements. Unless otherwise indicated in the financial statements, it is management's opinion that the Company is not exposed to excessive interest, currency or credit risks arising from these financial instruments. The fair values of these financial instruments approximate their carrying values, unless otherwise indicated. The Company has no unrecognized gains or losses on its financial instruments. Obligations ---------------------------------------------------------------------------- As of March 31, 2008 Payments Due By Period --------------------------------------------- Less Than 1 1 - 3 4 - 5 After 5 Total Year Years Years Years ---------------------------------------------------------------------------- (000s) ($) ($) ($) ($) ($) Office lease 1,228 251 670 307 - Natural gas transportation 789 357 432 - - Lease rentals land 657 110 241 209 97 Asset retirement obligations 3,838 72 328 141 3,297 ---------------------------------------------------------------------------- Total contractual obligations 6,512 790 1,671 657 3,394 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Transactions with Related Parties All related party transactions are in the normal course of operations and have been measured at the agreed to exchange amounts, which is the amount of consideration established and agreed to by the related parties and which is similar to those negotiated with third parties. (a) The Company conducts oil and gas exploration and development activities and related transactions with organizations managed or controlled by directors. These transactions are negotiated and conducted using standard industry agreements and terms. The amounts associated with these transactions are insignificant to the operations of the Company. (b) Included in general and administrative expenses are consulting fees of $55,000 (2007 - $87,000) incurred with companies controlled by officers of the Company for the three months ended March 31, 2008. (c) Included in general and administrative expenses are legal fees of $5,000 (2007 - $8,000) incurred with a firm in which one of the Company's officers was a partner for the three months ended March 31, 2008. (d) Included in general and administrative expenses is $14,000 (2007 - $14,000) paid for directors' fees to independent directors for the three months ended March 31, 2008. Summary of Quarterly Results Eight-Quarter Comparison The quarterly results are prepared without audit or review by the Company's independent auditors. The following table summarizes the Company's financial and operating highlights for the past eight quarters. Sales volumes are the average for the periods shown, net to the Company, before the deduction of royalties. ---------------------------------------------------------------------------- Three Months Ended Jun.30, Sep.30, Dec.31, 2006 2006 2006 ---------------------------------------------------------------------------- Sales Volumes Crude oil and liquids (bbls/d) 527 569 633 Natural gas (mcf/d) 1,561 1,464 1,363 Average boe/d (6:1) 787 813 860 ---------------------------------------------------------------------------- ($) ($) ($) Product Prices Crude oil and liquids ($/bbl) 67.10 70.17 59.21 Natural gas ($/mcf) 6.02 5.89 6.88 Oil equivalent ($/boe) 56.86 59.68 54.48 ---------------------------------------------------------------------------- (000s, except per share amounts) ($) ($) ($) Financial Results Gross revenues 4,088 4,469 4,315 Net income (loss) (439) 226 1,265 Per share - basic (0.01) (0.01) 0.04 Per share - diluted (0.01) (0.01) 0.04 Funds flow from operations 2,209 2,475 2,219 Additions to property and equipment, net of proceeds 5,426 6,097 7,237 Total assets 42,371 44,526 52,251 Working capital (deficiency) (6,011) (9,571) (10,562) Flow-through share obligation 1,800 740 3,855 Asset retirement obligation 753 837 1,223 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Three Months Ended Mar.31, Jun.30, Sep.30, Dec.31, Mar.31, 2007 2007 2007 2007 2008 ---------------------------------------------------------------------------- Sales Volumes Crude oil and liquids (bbls/d) 616 554 642 638 724 Natural gas (mcf/d) 1,056 1,026 3,324 4,235 4,382 Average boe/d (6:1) 792 725 1,196 1,344 1,454 ---------------------------------------------------------------------------- ($) ($) ($) ($) ($) Product Prices Crude oil and liquids ($/bbl) 61.51 67.42 76.39 81.86 93.20 Natural gas ($/mcf) 7.51 7.98 5.42 6.43 9.00 Oil equivalent ($/boe) 57.86 62.81 56.07 59.14 73.50 ---------------------------------------------------------------------------- (000s, except per share amounts) ($) ($) ($) ($) ($) Financial Results Gross revenues 4,124 4,152 6,172 7,316 9,726 Net income (loss) (320) 328 686 2,631 1,995 Per share - basic (0.01) 0.01 0.02 0.08 0.06 Per share - diluted (0.01) 0.01 0.02 0.08 0.06 Funds flow from operations 1,885 2,086 3,289 4,266 5,737 Additions to property and equipment, net of proceeds 2,939 314 8,990 2,552 5,428 Total assets 50,618 53,479 56,024 56,474 59,665 Working capital (deficiency) (10,382) (8,721) (14,280) (12,437) (12,227) Flow-through share obligation 2,864 1,475 - - - Asset retirement obligation 1,253 1,214 1,248 1,260 1,301 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Sales Volumes From the second quarter of 2006 until the fourth quarter of 2006, total sales volumes increased modestly as natural gas volume declines at Virginia Hills were offset by new oil sales volumes from new wells at Kingsford, Saskatchewan and Sinclair, Manitoba. Overall natural gas and oil volumes declined in the first half of 2007 as the Company concentrated on the tie-in of wells drilled in 2006, particularly the Tower Creek gas discovery. The third quarter of 2007 reflected the initial effects of the Tower Creek natural gas discovery well drilled in mid-2006, that commenced production during the last week of June, 2007. Natural gas production in the fourth quarter increased due to normalized operations at Tower Creek and have remained relatively steady in the first quarter of 2008 as net sales volumes from the Tower Creek well have average 3.2 mmcf/d. Oil production in the first half of 2007 declined due to the lack of development drilling activity prior to the third quarter of 2007. Oil production increased during the second half of 2007 as horizontal development wells at Frys, Saskatchewan and Sinclair, Manitoba were drilled and came on production throughout the third quarter. Further increases in oil production were seen in the first quarter of 2008 as drilling and recompletion operations continued in Manitoba. Gross Revenues Gross sales revenues from the second quarter of 2006 to the second quarter of 2007 remained relatively flat as changes in sales volumes were met with the opposite change in pricing. Revenues rose in the third quarter of 2007 due to new sales volumes from Tower Creek and the Three Forks/Torquay oil wells along the Saskatchewan/Manitoba border. Revenues continued to rise in the fourth quarter due to increase gas volumes from Tower Creek and higher commodity prices. Revenues in the first quarter of 2008 continued to increase as oil production volumes rose and commodity prices continue to increase. All of the Company's natural gas, crude oil and liquids are sold at spot prices, which are subject to world and North America supply and demand fundamentals. Net Income (Loss) The Company incurred a modest loss in the second quarter of 2006. In the third quarter of 2006, the Company recorded net income of $226,000 as the increased proved reserves from the Tower Creek well reduced the depletion rate. The fourth quarter of 2006 also showed net income of $1,265,000 as a result of a lower depletion rate combined with a future tax recovery of $1,306,000, related to the issue of flow-through shares. The Company recorded a net loss of $320,000 in the first quarter of 2007 as lower sales revenues, higher general and administrative expenses and interest costs more than offset the improvements in depletion and depreciation expense. The net income of $328,000 recorded in the second quarter of 2007 is primarily due to the lower depletion and depreciation expense. In the third quarter of 2007 the Company recorded net income of $686,000 on the strength of higher sales and improved depletion and depreciation rates. This trend continue in the fourth quarter of 2007 as higher gas sales and commodity prices combined with a future tax recovery resulted in the largest earnings the Company has ever recorded. Net income in the first quarter of 2008 was also bolstered by record production levels and record oil prices along with strong gas prices and reduced depletion and depreciation rates. Additions to Property and Equipment Grand Banks' capital program, focused on drilling development oil wells in Saskatchewan mixed with exploratory natural gas wells in Alberta, has ranged between $5,000,000 and $7,000,000 per quarter, until the first quarter of 2007 when the Company deferred some of its drilling plans to focus its capital resources on the tie-in of wells drilled in 2006. During the second quarter of 2007, the Company completed the facilities required to place the Tower Creek 02-21 well on production. The Company also drilled one horizontal oil well in the Frys area of Saskatchewan and started drilling a second one, both of which came on production in July of 2007. Additionally, the Company was active on the acquisition and divesture front in the second quarter of 2007. Firstly, after consolidating its position in its Stoughton/Viewfield property, the Company disposed of its interest in this property for net proceeds of nearly $8,200,000. Secondly, Grand Banks acquired an additional 3.5% working interest in the Tower Creek 02-21 well, facilities and related lands for $3,500,000. During the third quarter of 2007, the Company drilled four more wells and shot two 3D seismic programs on its Three Forks/Torquay play. The Company also abandoned the second well it was drilling in the Tower Creek area after encountering serious hole problems during drilling. Capital expenditures in the fourth quarter were limited as the Company only drilled one new well and recompleted another as it focused its resources on advancing its growth opportunities in Saskatchewan and Manitoba by consolidating land positions and completing its technical work on the Three Forks/Torquay play. During the first quarter of 2008, the Company focused its capital spending on the drilling of three new horizontal wells in Manitoba. Working Capital (Deficiency) Throughout 2006 and into the first quarter of 2008, the Company has been working with a net working capital deficit (including revolving bank loans as a current liability) as it has raised less flow through capital and focused more of its operations on development activities. Exploration drilling success as well as development drilling success has allowed the Company to prudently leverage its balance sheet while capital spending has exceeded funds flow from operations. The working capital deficiency at March 31, 2008 stood at $12,227,000 which represents less than one year's funds flow from operations based on an annualized fourth quarter funds flow from operations of $5,737,000. Asset Retirement Obligations The asset retirement obligations grew from $753,000 in the second quarter of 2006 to $1,301,000 in the first quarter of 2008 as the Company continued to drill wells that are required to be abandoned and reclaimed at some point in the future. The asset retirement obligation represents the present value of future abandonment and reclamation cost for the Company's interest in the wells. These amounts include the current portion of asset retirement obligations, which are included in working capital. Other Items Outstanding Shares, Options and Warrants The following table is a summary of the Company's share capital structure: ---------------------------------------------------------------------------- As at March 31, May 27, 2008 2008 ---------------------------------------------------------------------------- (000s) (#) (#) Common shares outstanding 32,559 32,559 Options outstanding 2,514 2,511 ---------------------------------------------------------------------------- Fully diluted 35,073 35,070 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Weighted Average Weighted Exercise Average Shares Price Term ---------------------------------------------------------------------------- (#000s) ($) (Years) Options outstanding at December 31, 2007 2,517 1.30 4.0 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Options outstanding at March 31, 2008 2,514 1.30 3.8 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Options vested at March 31, 2008 1,990 1.28 2.8 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Accounting Policy Changes Effective January 1, 2008 the Company adopted CICA Handbook Section 1535 "Capital Disclosures", which requires companies to disclose their objectives, policies and processes for managing capital, and in addition, whether the company has complied with any externally imposed capital requirements. See Note 9 (c) for related disclosure. Effective January 1, 2008 the Company adopted CICA Handbook Section 3862 "Financial Instruments - Disclosures" and Section 3863 "Financial Instruments - Presentation". These standards require companies to provide incremental disclosures regarding the significance of financial instruments for the entity's financial position and performance and the nature, extent and management of risks arising from financial instruments to which the entity is exposed. See Note 9 (a) for related disclosure. In January 2006, the CICA Accounting Standards Board ("AcSB") adopted a strategic plan for the direction of accounting standards in Canada. As part of that plan, accounting standards in Canada for public companies are expected to converge with International Financial Reporting Standards ("IFRS") by January 1, 2011. The Company continues to monitor and assess the impact of convergence of Canadian GAAP and IFRS. Critical Accounting Estimates Management is required to make judgments, assumptions and estimates in the application of generally accepted accounting principles that have a significant impact on the financial results of the Company. Reserve estimates have a significant impact on income or loss, as they are a key component in the calculation of depletion and depreciation and site restoration costs. A change in the reserve quantity estimates will result in a corresponding change in depletion, depreciation and site restoration costs. In addition, if capitalized costs are determined to be in excess of the calculated ceiling, which is based on reserve quantities and values, the excess must be written off as an expense. The reserves and estimated future net cash flow from the assets of Grand Banks have been independently evaluated. Future site restoration costs are estimated and amortized over the life of reserves. These costs were estimated by management using industry standard guidelines. A change in estimated future site restoration costs will change the amortization of site restoration costs included in depletion and depreciation expense. Non-GAAP Measures Funds flow from operations is not a recognized measure under Canadian generally accepted accounting principles ("GAAP"). Management believes that funds flow from operations is a useful measure of financial performance. For the purposes of funds flow from operations calculations, the following table reconciles the non-GAAP financial measures "funds flow from operations" to "net income," the most comparable measure calculated in accordance with GAAP: ---------------------------------------------------------------------------- Three Months Ended March 31, 2008 2007 ---------------------------------------------------------------------------- (000s) ($) ($) Net income 1,995 (320) Adjustments for: Depletion, depreciation and accretion 2,745 1,948 Stock-based compensation 96 257 Future income taxes 912 - Asset retirement costs incurred (11) - ---------------------------------------------------------------------------- Funds flow from operations 5,737 1,885 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Netback is the average per unit of volume for oil and gas revenues less royalties and production costs incurred. Netback is expressed in terms of dollars per boe and is calculated in accordance with National Instrument 51-101 Standards of Disclosure for Oil and Gas Activities. Forward-Looking Statements This Annual Report contains forward-looking or outlook information with respect to Grand Banks. The use of any of the words "anticipate," "continue," "estimate," "expect," "may," "will," "project," "should," "believe," "outlook," and similar expressions are intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in the Company's forward-looking statements. Consequently, all of the forward-looking statements made in this Annual Report are qualified by these cautionary statements and there can be no assurance that actual results or developments anticipated by the Company will be realized, or that they will have the expected consequences or effects on the Company or its business or operations. The Company assumes no obligation to update publicly any such forward-looking statements, whether as a result of new information, future events or otherwise. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of the risk factors set forth below and elsewhere in this MD&A. - Volatility in market prices for oil and natural gas. - Risks inherent in the Company's operations. - Geological, technical, drilling and processing problems. - General economic conditions. - Industry conditions, including fluctuation in the price of oil and natural gas. - Governmental regulations. - Fluctuation in foreign exchange and interest rates. - Unanticipated events that can reduce production or cause production to be shut-in or delayed. - Failure to obtain industry partners and other third party consents and approvals, when required. - The need to obtain required approvals from regulatory authorities. - The other factors discussed in the "Operational and Other Business Risks" section of this MD&A. Operational and Other Business Risks Need to Replace and Grow Reserves The future oil and natural gas production of Grand Banks, and therefore future cash flows, are highly dependent upon ongoing success in exploring its current and future undeveloped land base, exploiting the current producing properties and acquiring or discovering additional reserves. Without reserve additions through exploration, acquisition or development activities, reserves and production will decline over time as reserves are depleted. The business of discovering, developing or acquiring reserves is capital intensive. To the extent cash flows from operations are insufficient and external sources of capital become limited or unavailable, the ability of Grand Banks to make the necessary capital investments to maintain and expand its oil and natural gas reserves may be impaired. There can be no assurance that the Company will be able to find and develop or acquire additional reserves to replace and grow production at acceptable costs. Exploration, Development and Production Risks Oil and natural gas exploration involves a high degree of risk, which even a combination of experience, knowledge and careful evaluation may not be able to overcome. There is no assurance that expenditures made on future exploration by Grand Banks will result in new discoveries of oil and natural gas in commercial quantities. It is difficult to project the costs of implementing an exploratory drilling program due to the inherent uncertainties of drilling in unknown formations, the costs associated with encountering various drilling conditions such as over pressured zones, tools lost in the hole and changes in drilling plans and locations as a result of prior exploratory wells or additional seismic data and interpretations thereof. The long-term commercial success of Grand Banks depends on its ability to find, acquire, develop and commercially produce oil and natural gas reserves. No assurance can be given that the Company will be able to continue to locate satisfactory properties for acquisition or participation. Moreover, if such acquisitions or participation are identified, Grand Banks may determine that current markets, terms of acquisition and participation or pricing conditions make such acquisitions or participations uneconomic. Future oil and gas exploration may involve unprofitable efforts, not only from dry wells, but from wells that are productive but do not produce sufficient net revenues to return a profit after drilling, operating and other costs. Completion of a well does not assure a profit on the investment or recovery of drilling, completion and operating costs. In addition, drilling hazards or environmental damage could greatly increase the cost of operations, and various field operating conditions may adversely affect the production from successful wells. These conditions include delays in obtaining governmental approvals or consents, shut-ins of connected wells resulting from extreme weather conditions, insufficient storage or transportation capacity or other geological and mechanical conditions. While diligent well supervision and effective maintenance operations can contribute to maximizing production rate over time, production delays and declines from normal field operating conditions cannot be eliminated and can be expected to adversely affect revenue and cash flow levels to varying degrees. In addition, oil and gas operations are subject to the risks of exploration, development and production of oil and natural gas properties, including encountering unexpected formations or pressures, premature declines of reservoirs, blowouts, sour gas releases, fires and spills. Losses resulting from the occurrence of any of these risks could have a materially adverse effect on future results of operations, liquidity and financial condition. Reserve Estimates The production forecast and recoverable estimates contained in the Company's engineering report are only estimates and the actual production and ultimate recoverable reserves from the properties may be greater or less than the reserve estimates of Paddock Lindstrom & Associates Ltd. ("Paddock Lindstrom"). There are numerous uncertainties inherent in estimating quantities of reserves and cash flows to be derived from, including many factors that are beyond the control of Grand Banks. The reserve and cash flow information set forth herein represent estimates only. The reserves and estimated future net cash flow from the assets of Grand Banks have been independently evaluated at December 31, 2007 and updated by management to March 31, 2008. These evaluations include a number of assumptions relating to factors such as initial production rates, production decline rates, ultimate recovery of reserves, timing and amount of capital expenditure, marketability of production, future prices of oil and natural gas, operating costs and royalties and other government levies that may be imposed over the producing life of the reserves. These assumptions were based on price forecasts in use at the date the relevant evaluations were prepared and many of these assumptions are subject to change and are beyond the control of the Company. Actual production and cash flows derived therefrom will vary from these evaluations, and such variations could be material. The foregoing evaluations are based in part on the assumed success of exploitation activities intended to be undertaken in future years. The reserves and estimated cash flows to be derived therefrom contained in such evaluations will be reduced to the extent that such exploitation activities do not achieve the level of success assumed in the evaluations. Volatility of Oil and Natural Gas Prices The operational results and financial condition of Grand Banks will be dependent on the prices received for oil and natural gas production. Oil and natural gas prices have fluctuated widely during recent years and are determined by supply and demand factors, including weather and general economic conditions as well as conditions in other oil and natural gas regions. Any decline in oil and natural gas prices could have an adverse effect of the operations, proved reserves and financial conditions of Grand Banks and could result in a reduction of the net production revenue of the Company causing a reduction in its oil and gas acquisition and development activities. In addition, bank borrowings that might be made available to the Company are typically determined in part by the borrowing base of the reserves of Grand Banks. A sustained material decline in prices from historical average prices could reduce the borrowing base of the Company, therefore reducing the bank credit available to Grand Banks and possibly requiring that a portion of such bank debt be repaid. Grand Banks uses the full cost method of accounting for oil and natural gas properties. Under this accounting method, capitalized costs are reviewed on a quarterly basis for impairment to ensure that the carrying amount of these costs is recoverable based on expected future cash flows. Operational Hazards and Other Uncertainties Oil and natural gas exploration operations are subject to all the risks and hazards typically associated with such operations, including hazards such as fire, explosion, blowouts and oil spills, each of which could result in substantial damage to oil and natural gas wells, production faculties, other property and the environment or in personal injury. In accordance with industry practice, Grand Banks is not fully insured against all of these risks, nor are all such risks insurable. Although Grand Banks maintains liability insurance, where available, in an amount that it considers adequate and consistent with industry practice, the nature of these risks is such that liabilities could exceed policy limits, in which event Grand Banks could incur significant costs that could have a material adverse affect upon its financial condition. Business interruption insurance may also be purchased for selected facilities, to the extent that such insurance is available. Oil and natural gas production operations are also subject to all the risks typically associated with such operations, including premature decline of reservoirs and the invasion of water into producing formations. Oil and natural gas exploration and development activities are dependent on the availability of drilling and related equipment in the particular areas where such activities will be conducted. Demand for such equipment or access restrictions may affect the availability and/or cost of such equipment to Grand Banks and may delay exploration and development activities. To the extent Grand Banks is not the operator of its oil and gas properties, the Company will be dependent on other operators for timing of activities related to non-operating properties and will be largely unable to direct or control the activities of the operators. Although property title reviews are completed according to industry standards prior to the purchase of most oil and natural gas producing properties or the commencement of drilling wells, such reviews do not guarantee or certify that an unforeseen defect in the chain of title will not arise to defeat the claim of Grand Banks, which could result in the reduction of the revenue received by the Company. Competition There is strong competition relating to all aspects of the oil and natural gas industry. Grand Banks actively competes for capital, skilled personnel, undeveloped land, reserve acquisitions, access to drilling rigs, service rigs and other equipment, access to processing facilities and pipeline and refining capacity, and in all other aspects of its operations with a substantial number of other organizations, many of which may have greater technical and financial resources than Grand Banks. Key Personnel The success of Grand Banks depends in large measure on certain key personnel. The loss of the services of such key personnel could have a material adverse affect on the Company. Grand Banks does not have key person insurance in effect for management. The contributions of these individuals to the immediate operations of Grand Banks are likely to be of central importance. In addition, the competition for qualified personnel in the oil and natural gas industry is intense and there can be no assurance that the Company will be able to continue to attract and retain all personnel necessary for the development and operation of its business. Environmental Risks The oil and natural gas industry is subject to environmental regulations pursuant to a variety of international conventions and Canadian federal, provincial and municipal laws, regulations and guidelines. A breach of such regulations may result in the imposition of fines or issuances of clean-up orders in respect of Grand Banks or its assets. Such regulations may be changed to impose higher standards and potentially more costly obligations on the Company. There can be no assurance that future environmental costs will not have a material adverse affect on Grand Banks. Other Information Additional information regarding Grand Banks Energy Corporation's reserves and other data is available on the Company's website at www.grandbanksenergy.com and on the Canadian Securities Administrators' System for Electronic Document Analysis and Retrieval ("SEDAR") at www.sedar.com. GRAND BANKS ENERGY CORPORATION 2008 First Quarter Interim Report (Unaudited) BALANCE SHEETS ---------------------------------------------------------------------------- March 31 December 31 2008 2007 ---------------------------------------------------------------------------- (000s) ($) ($) ASSETS Current Cash and cash equivalents - - Accounts receivable 5,637 4,225 Prepaid expenses and deposits 247 291 ---------------------------------------------------------------------------- 5,884 4,516 Property and equipment (Note 3) 53,597 50,862 Future tax asset 184 1,096 ---------------------------------------------------------------------------- 59,665 56,474 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Revolving bank loan (Note 4) 10,202 11,213 Current portion of long-term bank loan (Note 4) 405 397 Accounts payable and accrued liabilities 7,432 5,270 Current portion of asset retirement obligation (Note 5) 72 73 ---------------------------------------------------------------------------- 18,111 16,953 Long-term bank loan (Note 4) 354 458 Asset retirement obligation (Note 5) 1,229 1,187 ---------------------------------------------------------------------------- 19,694 18,598 ---------------------------------------------------------------------------- Shareholders' Equity Share capital (Note 6) 30,371 30,365 Share purchase loans (48) (48) Contributed surplus (Note 7) 2,693 2,599 Retained earnings 6,955 4,960 ---------------------------------------------------------------------------- 39,971 37,876 ---------------------------------------------------------------------------- Subsequent Event (Note 12) 59,665 56,474 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- See accompanying notes to the financial statements. On behalf of the Board of Directors: (Signed) (Signed) W.J. McNAUGHTON THOMAS BAMFORD Chairman of the Audit Committee Director STATEMENTS OF OPERATIONS, COMPREHENSIVE INCOME (LOSS) AND RETAINED EARNINGS ---------------------------------------------------------------------------- For the Three Months Ended March 31, 2008 2007 ---------------------------------------------------------------------------- (000s, except per share amounts) ($) ($) Revenue Crude oil and liquids 6,137 3,408 Natural gas 3,587 714 Other income 2 2 ---------------------------------------------------------------------------- 9,726 4,124 Less: royalties (1,675) (825) ---------------------------------------------------------------------------- 8,051 3,299 ---------------------------------------------------------------------------- Expenses Production 1,424 659 General and administrative 693 598 Interest 186 157 Stock-based compensation (Note 8) 96 257 Depletion, depreciation and accretion 2,745 1,948 ---------------------------------------------------------------------------- 5,144 3,619 ---------------------------------------------------------------------------- Income (loss) before taxes 2,907 (320) Future income taxes 912 - ---------------------------------------------------------------------------- Net income (loss) and comprehensive income (loss) for the period 1,995 (320) Retained earnings, beginning of period 4,960 1,635 ---------------------------------------------------------------------------- Retained earnings, end of period 6,955 1,315 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Income per share (Note 6(c)) Basic 0.06 (0.01) Diluted 0.06 (0.01) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- See accompanying notes to the financial statements. STATEMENTS OF CASH FLOWS ---------------------------------------------------------------------------- For the Three Months Ended March 31, 2008 2007 ---------------------------------------------------------------------------- (000s) ($) ($) Cash flows from operating activities Net income (loss) 1,995 (320) Adjustments for: Depletion, depreciation and accretion 2,745 1,948 Stock-based compensation 96 257 Future income taxes 912 - Asset retirement obligations settled (Note 5) (11) - ---------------------------------------------------------------------------- 5,737 1,885 Changes in non-cash operating working capital balances (Note 11) (312) 856 ---------------------------------------------------------------------------- 5,425 2,741 ---------------------------------------------------------------------------- Cash flows from financing activities Issue of shares, net 4 509 Increase in long-term debt - 1,200 Repayment of long-term debt (96) (66) Increase in revolving bank loan (1,011) (1,580) Changes in non-cash operating working capital balances (Note 11) - - ---------------------------------------------------------------------------- (1,103) 63 ---------------------------------------------------------------------------- Cash flows from investing activities Proceeds on disposal of property and equipment - - Additions to property and equipment (5,428) (2,939) Change in non-cash investing working capital (Note 11) 1,106 135 ---------------------------------------------------------------------------- (4,322) (2,804) ---------------------------------------------------------------------------- Decrease in cash and cash equivalents - - Cash and cash equivalents, beginning of period - - ---------------------------------------------------------------------------- Cash and cash equivalents, end of period - - ---------------------------------------------------------------------------- See accompanying notes to the financial statements. NOTES TO FINANCIAL STATEMENTS March 31, 2008 and 2007 1. Nature of Operations Grand Banks Energy Corporation's ("Grand Banks" or "the Company") principal business is the exploration, development and production of crude oil and natural gas properties. The Company was originally incorporated on June 25, 1969 under the British Columbia Companies Act and changed its name from Pacific Amber Resources Ltd. to Grand Banks Energy Corporation in 2003. The Company has been continued under the Alberta Business Corporations Act. The Company's common voting shares are listed on the TSX Venture Exchange. The unaudited interim financial statements of the Company have been prepared by management in accordance with Canadian generally accepted accounting principles ("GAAP"), using the same accounting policies as those set out in Note 2 to the financial statements for the year ended December 31, 2007 except for the changes discussed in the Note 2 below. The disclosures in these interim financial statements are incremental to those included in the annual financial statements and certain disclosures which are required to be included in the notes to the annual financial statements have been condensed or omitted. The interim financial statements should be read in conjunction with the financial statements for the year ended December 31, 2007. The financial statements of the Company as at March 31, 2008 and 2007 have been compiled by management and approved by the Company's Audit Committee on May 27, 2008. These interim financial statements and MD&A have not been reviewed or audited on behalf of the shareholders by the Company's independent external auditors, Deloitte & Touche LLP. 2. Changes in Accounting Policies Effective January 1, 2008 the Company adopted CICA Handbook Section 1535 "Capital Disclosures", which requires companies to disclose their objectives, policies and processes for managing capital, and in addition, whether the company has complied with any externally imposed capital requirements. See Note 9 (c) for related disclosure. Effective January 1, 2008 the Company adopted CICA Handbook Section 3862 "Financial Instruments - Disclosures" and Section 3863 "Financial Instruments - Presentation". These standards require companies to provide incremental disclosures regarding the significance of financial instruments for the entity's financial position and performance and the nature, extent and management of risks arising from financial instruments to which the entity is exposed. See Note 9 (a) for related disclosure. In January 2006, the CICA Accounting Standards Board ("AcSB") adopted a strategic plan for the direction of accounting standards in Canada. As part of that plan, accounting standards in Canada for public companies are expected to converge with International Financial Reporting Standards ("IFRS") by January 1, 2011. The Company continues to monitor and assess the impact of convergence of Canadian GAAP and IFRS. 3. Property and Equipment ---------------------------------------------------------------------------- Accumulated Depletion and Net Book Cost Amortization Value ---------------------------------------------------------------------------- (000s) ($) ($) ($) March 31, 2008 Petroleum and natural gas properties 87,233 33,724 53,509 Furniture and equipment 176 88 88 ---------------------------------------------------------------------------- 87,409 33,812 53,597 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- December 31, 2007 Petroleum and natural gas properties 81,776 31,004 50,772 Furniture and equipment 172 82 90 ---------------------------------------------------------------------------- 81,948 31,086 50,862 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Future development costs relating to proved reserves of $14,586,000 (December 31, 2007 - $15,752,000) have been included in the depletion calculation. The Company did not capitalize any general and administrative costs during the three months ended March 31, 2008 or 2007. The Company excluded $2,947,000 (December 31, 2007 - $2,745,000) of undeveloped properties from the depletion calculation as follows: ---------------------------------------------------------------------------- March 31 December 31 2008 2007 ---------------------------------------------------------------------------- (000s) ($) ($) Unproven costs Land 1,665 1,599 Geological and geophysical 1,282 1,146 Drilling and completion - - ---------------------------------------------------------------------------- 2,947 2,745 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- The company performed a ceiling test calculation at March 31, 2008 to assess the recoverable value of its oil and gas properties. The undiscounted value of future net revenues from the Company's proved reserves exceeded the carrying value of the oil and gas properties at March 31, 2008. 4. Bank Indebtedness (a) Revolving Bank Loan At March 31, 2008, the Company had a $19,000,000 (December 31, 2007 - $19,000,000) revolving line of credit agreement with a Canadian financial institution. The line of credit bears interest at prime plus 0.25% per annum, is secured by the assets of the Company, and is due on demand. At March 31, 2008 the effective rate under the revolving line of credit was 5.50% (December 31, 2007 - 6.25%). At March 31, 2008, the Company was in compliance with all covenants related to this credit facility. (b) Long-Term Bank Loan At March 31, 2008 the Company had drawn $759,000 (December 31, 2007 - $855,000) on its long-term credit facility with the same Canadian financial institution. This credit facility bears interest at 7.5%. This credit facility is fully drawn and the outstanding balance is repayable through blended monthly payments of interest and principal of $37,000. The balance is repayable over the next 22 months, the final installment being due January 31, 2010. This credit facility is secured by the assets of the Company, including a specific charge on the Tower Creek property. 5. Asset Retirement Obligation The following table presents the reconciliation of the beginning and ending aggregate carrying amount of the obligation associated with the retirement of oil and gas properties: ---------------------------------------------------------------------------- March 31 December 31 2008 2007 ---------------------------------------------------------------------------- (000s) ($) ($) Balance, beginning of year 1,260 1,223 Liabilities incurred in year 33 151 Asset retirement obligations settled (11) (111) Liabilities disposed of in year - (75) Accretion expense 19 72 ---------------------------------------------------------------------------- 1,301 1,260 Less current portion 72 73 ---------------------------------------------------------------------------- Balance, end of year 1,229 1,187 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- The undiscounted amount of cash flows, required over the estimated reserve life of the underlying assets, to settle the obligation, adjusted for inflation is estimated at $3,838,000 (2007 - $3,790,000). The obligation was calculated using a credit-adjusted risk free discount rate of 8% and an inflation rate of 2%. It is expected that this obligation will be funded from the Company's general resources at the time the costs are incurred with the majority of costs expected to occur between 2009 and 2036. No funds have been set aside to settle this obligation. 6. Share Capital (a) Authorized The authorized share capital consists of an unlimited number of common shares without nominal or par value. (b) Issued and Outstanding ---------------------------------------------------------------------------- Shares Amount (000s) (#) ($) ---------------------------------------------------------------------------- Balance, December 31, 2007 32,556 30,365 Issued on exercise of options (Note 6(d)) 3 4 Transfer from contributed surplus - 2 ---------------------------------------------------------------------------- Balance at March 31, 2008 32,559 30,371 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (c) Per Share Amounts The following table summarizes the calculation of basic net income (loss) and diluted net income (loss) per share for the three months ended March 31, 2008 and 2007: ---------------------------------------------------------------------------- March 31, 2008 2007 ---------------------------------------------------------------------------- (000s, except per share amounts) ($) ($) Net income (loss) available to common shareholders 1,995 (320) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Weighted average number of common shares Outstanding basic 32,557 32,135 Dilutive effect of stock options 596 - ---------------------------------------------------------------------------- Weighted average number of common shares Outstanding diluted 33,153 32,135 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Net Income per share Basic 0.06 (0.01) Diluted 0.06 (0.01) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (d) Stock Options The Option Plan allows directors, employees and consultants to be granted incentive based compensation under the Option Plan while allowing a rolling maximum of 10% of the number of issued and outstanding shares from time-to-time to be granted under the Option Plan. Options may be granted under the Option Plan at an exercise price and vesting provisions as set by the Board of Directors of the Company from time-to-time, subject to the limitations of any stock exchange on which the common shares are listed. As at March 31, 2008, the Company had the following stock options outstanding: ---------------------------------------------------------------------------- Option Weighted Price Average Share Per Share Exercise Options Range Price ---------------------------------------------------------------------------- (#000s) ($) ($) ---------------------------------------------------------------------------- Outstanding, December 31, 2007 2,517 1.00 1.68 1.30 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Granted - - - Exercised (3) 1.40 - 1.68 1.56 Expired - - - ---------------------------------------------------------------------------- Outstanding, March 31, 2008 2,514 1.00 - 1.68 1.30 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (e) Stock Options (continued) The following table summarizes information about the stock options outstanding at March 31, 2008: ---------------------------------------------------------------------------- Options Outstanding Options Currently Exercisable ---------------------------------------------------------------------------- Weighted Weighted Average Weighted Average Weighted Remaining Average Remaining Average Share Contractual Exercise Share Contractual Exercise Option Price Options Life Price Options Life Price ---------------------------------------------------------------------------- ($) (#000s) (Years) ($) (#000s) (Years) ($) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- March 31, 2008 1.00 10 3.1 1.00 10 3.1 1.00 1.05 790 2.2 1.05 790 2.2 1.05 1.25 307 3.3 1.25 307 3.3 1.25 1.30 140 5.3 1.30 47 4.3 1.30 1.40 913 5.0 1.40 483 2.5 1.40 1.65 352 3.8 1.65 352 3.8 1.65 1.68 2 4.7 1.68 1 4.0 1.68 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 2,514 3.8 1.30 1,990 2.8 1.28 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 7. Contributed Surplus ---------------------------------------------------------------------------- March 31 December 31 2008 2007 ---------------------------------------------------------------------------- (000s) ($) ($) Balance, beginning of period 2,599 2,448 Stock compensation costs 96 656 Transfer to share capital upon exercise of options (2) (505) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Balance, end of year 2,693 2,599 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 8. Stock Compensation The Company records stock-based compensation expense over the vesting period for all common share options granted to employees, consultants, officers and directors. While no stock options were granted during the three month period ended March 31, 2008, stock-based compensation expense of $96,000 (2007 - $257,000) was recorded using the Black-Scholes option pricing model with the following assumptions for the options granted in 2007: ---------------------------------------------------------------------------- March 31, 2008 2007 ---------------------------------------------------------------------------- Dividend yield Nil Nil Expected volatility (%) - 45 Risk free rate of return (%) - 4.5 Weighted average life (years) - 6 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 9. Financial Instruments (a) Financial Risk The Company is exposed to financial risk in a range of financial instruments including cash and cash equivalents, accounts receivable, deposits, accounts payable and accrued liabilities, revolving bank and long-term bank loans. The Company manages its exposure to financial risks by operating in a manner that minimizes its exposure to the extent practical. The main financial risks affecting the Company are discussed below: (i) Credit Risk Credit risk arises when a failure by counter parties to discharge their obligations could reduce the amount of future cash inflows from financial assets on hand at the balance sheet date. A majority of the Company's financial assets at the balance sheet date arise from crude oil, natural gas liquids and natural gas sales. Industry standard dictates that commodity sales are settled on the 25th day of the month following the month of production. The Company markets the majority of its oil and natural gas to two marketers and, therefore, is subject to concentration risk which is mitigated by the Company's policy to utilize larger petroleum and natural gas marketers with good credit ratings and industry reputations. In addition, when joint operations are conducted on behalf of a joint venture partner relating to capital expenditures, costs of such operations are paid for in advance to the Company by way of a cash call by the partner of the operation being conducted. The Company assesses quarterly if there should be any impairment of the financial assets of the Corporation. During the three month period ended March 31, 2008, there was no impairment required on any of the financial assets of the Company. The carrying value of accounts receivable and deposits approximates their fair value due to the relatively short periods to maturity on these instruments. The maximum exposure to credit risk is represented by the carrying amount on the balance sheet. There are no material financial assets that the Company considers past due. As at March 31, 2008, the Company considers its accounts receivable to be aged as follows: ---------------------------------------------------------------------------- Aging ---------------------------------------------------------------------------- (000 s) ($) Current (less than 90 days) 5,085 Past due (more than 90 days) 552 ---------------------------------------------------------------------------- Total 5,637 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (ii) Market Risk Foreign Exchange Risk The prices received by the Company for the production of crude oil, natural gas and natural gas liquids are primarily determined in reference to U.S. dollars but are settled with the Company in Canadian dollars. The Company's cash flow from commodity sales will therefore be impacted by fluctuations in foreign exchange rates. A $0.01 increase or decrease in the Canadian / U.S. exchange rate would have impacted the cash flow of the Company for the three months ended March 31, 2008 by approximately $81,000. The Company considers this risk to be limited and therefore does not hedge its foreign exchange risk. Interest Rate Risk Interest rate risk refers to the risk that the value of a financial instrument or cash flows associated with the instrument will fluctuate due to changes in market interest rates. The Company is exposed to interest rate risk as it borrows funds at floating interest rates as disclosed in Note 4. The Company currently does not use interest rate hedges or fixed interest rate contracts to manage the Company's exposure to interest rate fluctuations. A 1% increase or decrease in interest rates would have impacted the cash flow of the Company during the quarter ended March 31, 2008 by approximately $28,000. Commodity Price Risk Commodity price risk is the risk that the fair value of future cash flows will fluctuate as a result of changes in commodity prices. Significant changes in commodity prices can materially impact the Company's borrowing base supporting its revolving bank loan credit facility. Lower commodity prices can also reduce the Company's ability to raise capital. Commodity prices are impacted by world economic events that dictate the levels of supply and demand. The Company may attempt to mitigate commodity price risk from time to time through the use of financial derivatives however currently has not done so. (iii) Liquidity Risk Liquidity risk includes the risk that, as a result of our operational liquidity requirements: - The Company will not have sufficient funds to settle a transaction on the due date; - The Company will be forced to sell financial assets at a value which is less than what they are worth; or - The Company may be unable to settle or recover a financial asset at all. The Company's operating cash requirements including amounts projected to complete our existing capital expenditure program are continuously monitored and adjusted as input variables change. These variables include but are not limited to, available bank lines, oil and natural gas production from existing wells, results from new wells drilled, commodity prices, cost overruns on capital projects and changes to government regulations relating to prices, taxes, royalties, land tenure, allowable production and availability of markets. As these variables change, liquidity risks may necessitate the need for the Company to conduct equity issues or obtain project debt financing. The Company also mitigates liquidity risk by maintaining an insurance program to minimize exposure to insurable losses. At March 31, 2008, the Company was in compliance with its banking covenants regarding working capital and net debt to annualized quarterly cash flow. The working capital covenant requires the ratio of current assets to current liabilities (excluding bank debt) to be maintained at a minimum level of 1.0:1.0. At March 31, 2008, the ratio was 2.0:1.0. The net debt to annualized quarterly cash flow covenant requires the ratio of net debt to annualized quarterly cash flow not to exceed 2.5:1.0. At March 31, 2008 the ratio was 0.5:1.0. (b) Fair Value of Financial Instruments The Company's financial instruments as at March 31, 2008 include cash and cash equivalents, accounts receivable, deposits, accounts payable and accrued liabilities, revolving bank and long-term bank loans. The fair value of cash and cash equivalents, accounts receivable, advances and accounts payable and accrued liabilities approximate their carrying value due to their short term to maturity. The Company's revolving bank loan bears interest at a floating market rate and accordingly the fair market value approximates the carrying value. The fixed rate long-term bank loan, which has a carrying value of $759,000 at March 31, 2008, has a fair value of $773,000. (c) Capital Management The Company's capital structure consists of shareholders' equity, a revolving bank loan, a long-term bank loan and working capital. The Company's objectives when managing its capital structure is to safeguard the entity's ability to continue as a going concern, so that it can continue to provide returns for shareholders and benefits for other stakeholders. The Company sets the amount of capital in proportion to risk. The Company manages the capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets. The Company's objective is met by retaining adequate equity to provide for the possibility that cash flows from assets will not be sufficient to meet future cash flow requirements. The Board of Directors does not establish quantitative return on capital criteria for management; but rather promotes year over year sustainable profitable growth. The Company is not subject to any externally imposed capital requirements other than covenants on its revolving line of credit facility with its lender to maintain its working capital ratio (excluding bank debt) at a minimum level of 1.0:1.0 and its net debt to annualized quarterly cash flow ratio at a maximum level of 2.5:1.0. 10. Related Party Transactions All related party transactions are in the normal course of operations and have been measured at the agreed to exchange amounts, which is the amount of consideration established and agreed to by the related parties and which is similar to those negotiated with third parties. The Company had the following related party transactions: (a) The Company conducts oil and gas exploration and development activities and related transactions with organizations managed or controlled by directors. These transactions are negotiated and conducted using standard industry agreements and terms. The amounts associated with these transactions are insignificant to the operations of the Company. (b) Included in general and administrative expenses are consulting fees of $55,000 (2007 - $87,000) incurred with companies controlled by officers of the Company for the three months ended March 31, 2008. (c) Included in general and administrative expenses are legal fees of $5,000 (2007 - $8,000) incurred with a firm in which one of the Company's officers was a partner for the three months ended March 31, 2008. (d) Included in general and administrative expenses is $14,000 (2007 - $14,000) paid for directors' fees to independent directors for the three months ended March 31, 2008. 11. Statement of Cash Flows (a) Changes in non-cash working capital balances are comprised of the following: ---------------------------------------------------------------------------- March 31, 2008 2007 ---------------------------------------------------------------------------- (000s) ($) ($) Accounts receivable (1,412) 1,310 Prepaid expenses and deposits 44 38 Accounts payable and accrued liabilities 2,162 (357) ---------------------------------------------------------------------------- 794 991 ---------------------------------------------------------------------------- Less amounts related to investing activities 1,106 135 Less amounts related to financing activities - - ---------------------------------------------------------------------------- Amounts related to operating activities (312) 856 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (b) In the three months ended March 31, 2008, the cash interest paid was $258,000 (2007 - $179,000). 12. Subsequent Event On April 29, 2008, the Company announced it had entered into an agreement with Fairborne Energy Ltd. ("Fairborne") pursuant to which Fairborne has made an offer (the "Offer") to acquire all of the issued and outstanding common shares of the Company by way of a takeover bid. Under the terms of the Offer, Fairborne will pay $2.90 cash per share and assume the Company's debt for an estimated purchase price of $112.0 million. The Offer is subject to certain conditions, including the deposit of not less than 66 2/3% of the outstanding common shares of the Company (on a fully diluted basis), receipt of regulatory approvals and other customary conditions. The formal offer documents were mailed to holders of securities of Grand Banks on May 7, 2008.
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