HSE Integrated Ltd. - Cost Controls Conserve Capital As Revenue Declines 30% in Second Quarter Ended June 30, 2009



    CALGARY, Aug. 12 /CNW/ - HSE Integrated Ltd. ("HSE", "Our", "We", or the
"Company") today announced its financial results for the second quarter and
first six months of the 2009 fiscal year ended June 30, 2009.
    Total revenue for the quarter declined 30.3% to $19.6 million from $28.1
million for the same period in the 2008 fiscal year. For the six month period,
revenue declined 24.6% from $55.7 million to $42.0 million. These significant
contractions in HSE's business reflect the impact of both a severe recession
in North America and a major downturn in conventional oil and gas well
drilling and capital spending in western Canada compared to prior years.
    These revenue declines had a very negative impact on operating margins.
For the quarter, the operating margin declined 69.4% to $1.4 million (7.3% of
revenue) from $4.6 million (16.5% of revenue) in the prior year. For the six
month period, the operating margin contracted 64.7% to $3.4 million (8.1% of
revenue) from $9.7 million (17.4% of revenue) in the 2008 fiscal year.
    In response to the contraction in business, the Company has focused on
cost control wherever possible. Sales, general and administrative expenses
("SG&A") for the quarter declined 23.9% to $1.9 million from $2.5 million in
the prior year. For the first six months, SG&A declined 15.8% to $4.1 million
from $4.8 million in fiscal 2008.
    HSE reported a loss for the quarter of $1.9 million (a loss of $0.05 per
share) compared to a loss of $0.6 million (a loss of $0.02 per share) in Q2
2008. For the six month period the loss was $3.7 million (a loss of $0.10 per
share) compared to a loss of $0.6 million (a loss of $0.02 per share) for the
prior year.
    EBITDA for the quarter declined 120.6% from $2.2 million in Q2 2008 to
($0.5) million in Q2 2009. For the six month period ended June 30, EBITDA fell
113.8% from $4.8 million in 2008 to ($0.7) million in 2009.
    The bulk of the revenue decline took place in the Oilfield portion of the
Company's activities, the segment of the business related to health and safety
services for conventional oil and gas exploration, drilling, completion and
workover activities. Because of the collapse in crude oil and natural gas
prices and the global credit crisis that took place in the latter half of
2008, HSE's client E&P companies drastically reduced capital and operating
expenditures in the second quarter and first half of the current fiscal year.
Oilfield revenues in Q2 fell 50.2% to $4.3 million from $8.7 million in 2008
and accounted for only 22.1% of total business. For the six month period,
Oilfield revenue declined 40.8% from $24.6 million to $14.6 million. Oilfield
represented only 34.7% of total business compared to 44.3% in 2008 and 55.6%
for the same period in 2007. Due to the sharp decline in drilling and capital
expenditures referenced above, all companies supporting this sector are
experiencing similar business contractions in Canada and the United States.
    Revenue generated from Industrial health and safety services also
declined in the second quarter, primarily as a result of postponement of
scheduled plant shutdown and maintenance services in western Canada as a
cost-cutting measure and intense pricing pressure from competitors desperate
to secure business. For the quarter, Industrial revenues declined 21.4% from
$19.4 million to $15.2 million. This is the first time this portion of HSE's
business has experienced a significant revenue decline. For the first six
months, Industrial revenues declined 11.7% from $31.0 million to $27.4
million.
    In the second quarter Industrial health and safety services accounted for
77.9% of total revenue, up from 69.1% in 2008 and 66.5% in 2007. For the first
six months the same figures are 65.3%, 55.7% and 44.4% respectively. To
highlight the Company's continued diversification of its client base compared
to two years ago, the contracted Industrial revenues in Q2 were still 18.5%
higher than in 2007. For the first six months of the current fiscal year,
Industrial revenues were still 30.3% higher than for the same period two years
ago.
    The Company's balance sheet remained strong. At June 30, 2009, working
capital (excluding current portions of debt repayments) was $18.4 million
compared to $21.7 million at June 30, 2008 and $19.5 million at March 31,
2009. Bank debt remained unchanged from year end and March 31 at $10.8
million. HSE had $5.9 million in cash or cash equivalents on hand at June 30,
2009 compared to $0.2 million at June 30, 2008 and $1.1 million at March 31,
2009. Accounts receivables plus cash at June 30, 2009 exceeded all cash
liabilities by $4.5 million.
    The modest reduction in working capital at June 30, 2009 and increase in
cash on hand compared to March 31, 2009 despite a 30.3% decline in revenue
reflects HSE's determination to reduce costs and manage cashflow as
effectively as possible without permanently impairing the Company's ability to
return to historic levels of revenue and operating margin when the various
sectors of the economy in which HSE operates recover.
    At June 30, 2009 HSE had net tangible assets per share of $1.01. Tangible
assets include cash, accounts receivable, inventory and book value of capital
assets (property, plant and equipment). Tangible liabilities include accounts
payable, income taxes payable, capital leases, bank debt and long-term
equipment loans.
    David Yager, Chairman and CEO, offered the following comments for HSE's
second quarter 2009 financial results:
    "Despite operating in an extremely difficult business environment, HSE is
doing what it must to operate as efficiently as possible with the intention of
conserving working capital and maintaining the Company's ability to exploit a
recovery when it occurs. Based on communications with clients, the Company is
now cautiously optimistic that contraction in demand for its products and
services has stopped and the go-forward trend will be an increase in demand in
most industries and markets. It appears the worst is behind us. However, it is
unlikely the rate of revenue recovery will be as fast as revenue reduction
experienced in the first half of the current year.
    Regardless, the discipline tough economic times have forced upon our
organization and labor markets makes us cautiously optimistic that HSE can
earn a higher operating margin on the same revenue than in prior years. Part
of this is internal, based on the way we pay our field service personnel,
particularly in western Canada. Part of this is external where the end of the
economic boom has tempered what were continually rising costs in every area,
particularly labor and direct operating expenses.
    The downturn in conventional oil and gas drilling in western Canada is
unprecedented in modern times. The oilfield service sector has the capacity to
drill in excess of 20,000 new wells annually. In 2009 drilling of new wells
will likely be at 40% of that level. Fortunately for HSE, five years ago we
began development of business opportunities in new industries and markets such
as oilsands, refining, power generation, utilities, petrochemical, forestry,
manufacturing, food and beverage, and the east coast offshore. While it is
difficult to measure from total revenue, HSE continues to grow through new
clients and markets. However, recession-based shrinkage in established markets
obscures our success.
    HSE's staff has done an outstanding job helping our Company through this
difficult period. Management and the Board of Directors recognize the
company-wide sacrifice. But considering the economy in which HSE is operating
- and the devastation that the recession has inflicted on so many companies in
so many markets and industries - our Company will emerge from this downturn as
a stronger player in its field and remain a challenging, exciting and
rewarding career opportunity."
    For further information and analysis please see the attached Management
Discussion and Analysis and Financial Statements.

    CONFERENCE CALL

    HSE will be hosting a conference call to discuss their results at 1:30 PM
(Eastern Daylight Time), 11:30 AM (Mountain Daylight Time) on Thursday, August
13, 2009.

    
    Dial-In Number: 1-866-250-4910 or 1- 416-644-3428

    Conference Replay until September 13, 2009: 1-416-640-1917 or
1-877-289-8525 (Passcode: 21312984 followed by the pound sign)

    Webcast: http://www.newswire.ca/en/webcast/viewEvent.cgi?eventID(equal 
sign)2773540
    

    HSE is an integrated, national supplier of industrial Health, Safety and
Environmental services. From its head office in Calgary, Alberta, it serves
its clients from field service locations in Alberta, British Columbia,
Saskatchewan, Ontario, Nova Scotia, New Brunswick, Newfoundland-Labrador and
Michigan. HSE also operates in Midland, Texas, through a jointly owned company
called Boots & Coots HSE Services LLC. HSE trades on the TSX under the symbol
"HSL".

    Forward Looking Statements

    This news release contains forward-looking information and statements
(collectively "forward-looking statements") within the meaning of applicable
securities laws concerning, among other things, the Company's prospects,
expected revenues, expenses, profits, financial position, strategic direction,
and growth initiatives, all of which are subject to risks, uncertainties and
assumptions. These forward-looking statements are identified by their use of
terms and phrases such as expect, anticipate, estimate, believe, may, will,
would, could, might, intend, plan, continue, ongoing, project, objective and
other similar terms and phrases. These forward-looking statements are based on
certain assumptions and analyses made by the Company based on its experience
and assessment of current conditions, known trends, expected future
developments and other factors it believes are appropriate under the
circumstances. Such forward-looking statements are subject to inherent risks
and uncertainties. There is significant risk that the forward-looking
statements will not prove to be accurate. Readers are cautioned not to place
undue reliance on forward-looking statements as a number of factors could
cause actual future results and events to differ materially from that
expressed in the forward-looking statements. Accordingly this news release is
subject to the disclaimer and qualified by the assumptions and risk factors
referred to in the Management Discussion and Analysis in the 2009 second
quarter report, in the 2008 annual report, and in other filings with
securities commissions in Canada as reported in the Company's profile at
www.sedar.com. Any forward-looking statements in this news release speak only
as of the date of this news release. Except as required by law, the Company
disclaims any intention to update or revise any forward-looking statements to
reflect new events or circumstances

    Non GAAP Measures

    This report makes reference to EBITDA, a measure that is not recognized
under generally accepted accounting principles (GAAP). Management believes
that, in addition to net earnings, EBITDA is a useful supplementary measure.
EBITDA provides investors with an indication of earnings before provisions for
interest, taxes, amortization, gains or losses on the disposal of property and
equipment, foreign exchange gains or losses, and the non-cash effect of
stock-based compensation expense. Investors should be cautioned that EBITDA
should not be construed as an alternative to net earnings determined by GAAP
as an indication of the Company's performance. This method of calculating
EBITDA may differ from that of other companies and accordingly may not be
comparable to measures used by other companies.

    
    HSE Integrated Ltd.
    Management Discussion and Analysis ("MD&A")
    For the Quarter and Year to Date Ended June 30, 2009 and 2008
    

    The following management discussion and analysis is dated August 12,
2009, and is a review of the financial results of HSE Integrated Ltd. ("HSE",
"We", "Our", or the "Company") for the quarter and year to date ended June 30,
2009 and 2008. This MD&A should be read in conjunction with HSE's other
documents filed on SEDAR at www.sedar.com. Unless otherwise disclosed, the
financial information presented in this discussion has been prepared in
accordance with Canadian generally accepted accounting principles ("GAAP") and
takes into consideration information available to management up to August 12,
2009. Unless otherwise stated, dollar figures presented are expressed in
thousands of Canadian dollars and per-share figures in dollars per
weighted-average common share. The following MD&A contains forward-looking
information and statements. We refer you to the end of the MD&A for the
disclaimer on forward looking statements.

    
    Selected Financial Information

    -------------------------------------------------------------------------
                     Three     Three                 Six       Six
                    Months    Months   Quarter    Months    Months      Year
                     Ended     Ended     Over-     Ended     Ended      Over
                   June 30,  June 30,  Quarter   June 30,  June 30,     Year
                      2009      2008  % Change      2009      2008  % Change
                 ------------------------------------------------------------
    Revenue       $ 19,566  $ 28,087    (30.3%) $ 41,967  $ 55,656    (24.6%)
    Operating and
     materials      18,145    23,440    (22.6%)   38,555    45,992    (16.2%)
                 ------------------------------------------------------------
    Operating
     margin          1,421     4,647    (69.4%)    3,412     9,664    (64.7%)
    Operating
     margin %         7.3%     16.5%                8.1%     17.4%
                 ------------------------------------------------------------

    Selling,
     general &
     admini-
     strative     $  1,872  $  2,460    (23.9%) $  4,079  $  4,844    (15.8%)

    Net loss        (1,928)     (568)  (239.4%)   (3,734)     (579)  (544.9%)
    - per share
     basic &
     diluted         (0.05)    (0.02)  (150.0%)    (0.10)    (0.02)  (400.0%)
                 ------------------------------------------------------------
    EBITDA(1)        ($451) $  2,187   (120.6%)    ($667) $  4,820   (113.8%)
    EBITDA %         (2.3%)     7.8%               (1.6%)     8.7%
                 ------------------------------------------------------------
    Total assets                                $ 60,745  $ 72,232
    Total long-term
     liabilities                                  16,462    20,474
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    See Non-GAAP Measures for (1)
    

    Financial Review

    Overview

    HSE operates in a single industry segment of industrial health and safety
services provision. The Company provides a package of integrated asset, worker
and community safety protection services including: on-site safety
supervision; gas detection; fixed and mobile air quality monitoring; breathing
equipment rentals and services; fixed and mobile firefighting and fire
protection services and equipment; worker shower (decontamination) services;
on-site medical services; worker safety training; industrial hygiene services;
and safety management and consulting services.
    Total revenue for the quarter decreased 30.3% from $28,087 in 2008 to
$19,566 in 2009. Operating margin of $1,421 was 7.3% of revenues, down from
$4,647 or 16.5% in 2008. Selling, general and administrative expense ("SG&A")
decreased to $1,872 from $2,460 in the prior year, but as a percentage of
revenue SG&A increased from 8.8% of revenue in fiscal 2008 to 9.6% in 2009.
HSE reported a loss of $1,928 or ($0.05) per share compared to a loss of $568
or ($0.02) per share in the prior year. EBITDA was $(451) or (2.3%) of revenue
in 2009, down 120.6% from $2,187 or 7.8% of revenue in 2008.
    Total revenue for the six month period declined 24.6% from $55,656 in
2008 to $41,967 in 2009. Operating margin of $3,412 was 8.1% of revenue
compared to $9,664 or 17.4% of revenue in the prior year. SG&A was $4,079 for
the period, a 15.8% decline from $4,844 in the prior year. However, as a
percentage of revenue SG&A increased from 8.7% of revenue to 9.7%. The company
reported a loss of $3,734 or ($0.10) per share compared to a loss of $579 or
($0.02) per share for the first six months of the 2008 fiscal year. EBITDA for
the period was ($667) compared to $4,820 a year ago.
    Included in expenses are one-time charges of $516 ($282 in the first
quarter of the year and $234 in the second quarter) related to cost reduction
initiatives undertaken by the Company. These initiatives are described below.

    Revenue

    The Company currently provides services to customers in two main business
areas: Oilfield health and safety ("Oilfield") and Industrial health and
safety services ("Industrial"). Oilfield services are provided to customers
who operate within the conventional upstream, or "wellhead", sector of the oil
and gas industry. This includes oil and gas well exploration, drilling,
completion and workover operations. Industrial services are provided to
customers operating in a wide variety of other industries, including:
non-conventional upstream oil development and production (including oilsands
extraction); oil and gas processing and refining; petrochemicals; pulp and
paper; utilities; power generation; and diverse manufacturing industries. It
also includes worker safety training and safety management and consulting
services. The Company tracks billings to customers by defined revenue
grouping, but uses a common pool of equipment and manpower resources to
provide these services. Management and administration services are provided
from a common personnel pool.
    The revenue for these revenue groups is shown below:

    
    -------------------------------------------------------------------------
                             Quarter   Quarter      Year   Quarter      Year
                               ended     ended      over     ended      over
                             June 30,  June 30,   year %   June 30,   year %
                                2009      2008    change      2007    change
    -------------------------------------------------------------------------
    Oilfield                 $ 4,317   $ 8,667   (50.2)%   $ 6,486     33.6%
    Industrial                15,249    19,420   (21.4)%    12,866     50.9%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Total Revenue            $19,566   $28,087   (30.3)%   $19,352     45.1%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    As a % of Revenue:
    Oilfield                   22.1%     30.9%               33.5%
    Industrial                 77.9%     69.1%               66.5%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Total Revenue             100.0%    100.0%              100.0%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    -------------------------------------------------------------------------
                                 Six       Six                 Six
                              months    months      Year    months      Year
                               ended     ended      over     ended      over
                             June 30,  June 30,   year %   June 30,   year %
                                2009      2008    change      2007    change
    -------------------------------------------------------------------------
    Oilfield                 $14,577   $24,628   (40.8)%   $26,285    (6.3)%
    Industrial                27,390    31,028   (11.7)%    21,015     47.6%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Total Revenue            $41,967   $55,656     24.6%   $47,300     17.7%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    As a % of Revenue:
    Oilfield                   34.7%     44.3%               55.6%
    Industrial                 65.3%     55.7%               44.4%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Total Revenue             100.0%    100.0%              100.0%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    Oilfield
    --------
    
    Oilfield revenues in the second quarter decreased by 50.2% in 2009
compared to 2008 from $8,667 to $4,317. For the first six months of the
current fiscal year, Oilfield health and safety services revenue was $14,577,
40.8% lower than $24,628 generated in the same period in the 2008 fiscal year.
Services delivered to this group of clients comprised only 34.7% of revenue
compared to 44.3% in the prior year. This significant year-over-year decline
is due to lower overall activity levels in Western Canada in the conventional
upstream, or "wellhead", sector of the oil and gas industry: oil and natural
gas well drilling, completion and workover (repair and maintenance) operations
in the Western Canadian Sedimentary Basin. Compared to the same period in the
prior year, this significant revenue decrease was caused by several negative
external events including lower oil prices, lower natural gas prices, reduced
access to debt and equity capital by Company clients, and the introduction of
increased Crown royalties in Alberta, a major market for HSE.
    Services provided in the Oilfield sector are primarily oriented towards
supporting the development of natural gas with a higher level of health and
safety protection required for the development of sour gas - reserves of
natural gas containing hydrogen sulphide - and crude oil containing sour gas.
Some oil reservoirs tend to go "sour" over time due to the injection of water
for secondary recovery, thus increasing the requirement for safety services.
The primary driver of revenue fluctuations in comparative reporting periods
relates to a major decline in all forms of conventional oilfield activity in
the markets served including drilling, new well completions, and well workover
activities.
    The overall depressed economic environment for the conventional oil and
gas industry has also put pressure on the prices HSE can charge its clients
for services provided. To compensate for vastly reduced commodity prices,
clients are seeking pricing relief for input services including health and
safety. Therefore, in many cases HSE has been forced to adjust its pricing
downward in order to maintain clients and market share. To compensate for
lower prices, HSE has undertaken a series of internal cost reduction measures
to maintain acceptable operating margins. These initiatives are discussed in
detail under the discussion of Operating Materials Expense and Selling General
and Administrative Expense below.
    In the second quarter of 2009, the Company's venture with Boots & Coots
International Well Control, Inc. - Boots & Coots HSE Services LLC ("BCHSE") -
generated increasing revenues as BCHSE gained customer acceptance as a capable
provider of worker and asset production services. Assets employed included
motorized combination fire/shower units, breathing air trailers,
trailer-mounted decontamination units, breathing apparatus and electronic gas
detection equipment. Working from locations in Odessa, Texas and Oklahoma
City, Oklahoma, BCHSE increased its client base and revenues. While total
revenue generated was modest, the Company is pleased with customer acceptance
of the equipment, service and branding in light of the significant oilfield
activity downturn that U.S. markets are also experiencing.

    
    Industrial
    ----------
    
    The Industrial health and safety services component of the Company's
total revenue also declined in the second quarter of 2009 due to the negative
effects of the global recession which include reduced commodity prices, plant
shutdowns, project cancellations or delays, and the postponement of scheduled
plant maintenance expenditures to some future date to save cash. This trend
took place to some degree in virtually every industry and geographical sector
in which HSE operates.
    Industrial revenue decreased $4,171 (21.4%) to $15,249 from $19,420 in
the same period in the prior year. Industrial health and safety services
comprised 77.9% of total revenues, up from 69.1% in 2008. Without a
significant recovery in Oilfield activity, Industrial revenues will continue
to be greater than Oilfield revenues for the foreseeable future.
    The year-over-year Industrial health and safety revenues generated varied
widely depending upon the service location. Western Canadian plant shutdown
and turnaround revenue declined for two reasons: facility operators postponed
scheduled maintenance to conserve cash and the Company lost some bids on price
as competitors slashed prices to sustain revenue and activity. As a group,
revenue from locations in Ontario and Michigan increased because of one large
plant shutdown. Locations in Atlantic Canada provided the most stable
Industrial revenue stream on a year-over-year basis, however overall business
declined in these markets as well. The new location in St. John's,
Newfoundland & Labrador, generated revenue for the first time in the second
quarter.
    For the period ended June 30, 2009, the Company had one customer
representing more than 10% of revenue (2008 - one). The Company had sales of
approximately $2.4 million to the customer during the quarter.
    For the six months ended June 30, 2009 HSE's Industrial revenue was
$27,390, a decline of 11.7% from the same period in fiscal 2008. Revenues from
these clients accounted for 65.3% of total revenue compared to 55.7% a year
ago. The growth in Industrial health and safety revenue in the period as a
percentage of total revenue was caused by the more significant decline in
Oilfield health and safety revenue.

    Operating and Materials Expense and Operating Margin

    Operating and materials expense consists of costs directly attributable
to the delivery of health and safety services to customers. These include:
wages and benefits for field employees and contractors; equipment rentals and
leases; field service center property costs; transportation; fuel;
consumables; equipment repairs and maintenance; and field office
administration including field sales.
    Operating and materials expense for the quarter ended June 30, 2009
totaled $18,145 or 92.7% of revenue as compared to $23,440 or 83.5% of revenue
in 2008. Operating margin for the quarter declined from $4,647 (16.5 % of
revenue) in the second quarter of 2008 to $1,421 (7.3 % of revenue) in 2009.
    For the first six months operating and materials totaled $38,555 or 91.9%
of revenue compared to $45,992 or 82.6% of revenue for the period ended June
30, 2008. Operating margin for the first six months declined from $9,664 or
17.4% of revenue last year to $3,412 or 8.1% of revenue in 2009.
    The decrease in operating margins is due to a number of factors. The
Company's fixed field service location operating costs were spread over a
significantly lower revenue base. Recognizing the impact of the economic
downturn on the Company's operations, HSE undertook a series of cost reduction
initiatives beginning in mid-January. During the first quarter of 2009,
initiatives included layoffs of approximately 10% of full-time staff, salary
reductions for all non-field employees in Western Canada of 5%, salary
reductions from 10% to 20% for management and executives, a company-wide
hiring freeze, and a series of operating costs reductions involving travel,
advertising and entertainment expenses.
    A new system of paying field service technicians came into effect June 1.
Previously, most field service personnel in Western Canada were paid a base
salary together with a job bonus. Effective June 1, this was changed to an
hourly pay structure similar to that already in place for the Company's
Eastern operations. For Western operations, this change directly links field
service personnel expense to revenue for the first time.
    One time charges of $516 ($282 in the first quarter and $234 in the
second quarter) associated with the implementation of these cost reduction
initiatives have been reflected in net income. Management remains confident
that, based on its historical revenue mix, these cost reductions should reduce
the average monthly revenue required to achieve break even EBITDA to
approximately $6.0 to $6.5 million per month.
    Included in operating expenses is an addition to the provision for
doubtful accounts of $106 to reflect increased collection risks as a result of
the deterioration in the general business environment. The allowance for
doubtful accounts receivable was $1,210 (6.8% of trade accounts receivable) at
the end of the quarter. During the quarter the Company wrote off $386 of
previously allowed for receivables after all methods of recovery were
exhausted. The largest portion of these was a receivable for $333 that had
been allowed for in 2007.

    Selling, General and Administrative Expense

    Selling, general and administrative ("SG&A") expense consists of costs
not directly attributable to the delivery of services to customers. These
include costs generally associated with the following: corporate head-office
functions and services; administrative personnel; corporate sales and
marketing costs; liability insurance; professional fees; and investor
relations expenses.
    SG&A for the quarter totaled $1,872 (9.6% of revenue), down from $2,460
(8.8% of revenue) in the prior year. Personnel costs declined as staff numbers
declined year-over-year and the impact of salary reductions on March 1, 2009
came into effect. Travel and advertising costs declined as part of a
company-wide initiative to reduce all costs in response to reduced operating
levels. Offsetting the SG&A cost reductions achieved by the foregoing was the
inclusion of expenses related to BC HSE Services LLC for the first time in
2009.
    For the first six months SG&A declined to $4,079 from $4,844 in the prior
year. However, as a percentage of revenue SG&A increased to 9.7% from 8.7% in
2008.

    EBITDA and Net Loss

    EBITDA (see "Non-GAAP Measures") in the quarter decreased from $2,187 in
the second quarter of 2008 to ($451) in the current quarter. The EBITDA
decrease was primarily because of significant revenue declines on a
year-over-year basis. For the first six months EBITDA was ($667) compared to
$4,820 in the 2008 fiscal year.
    Total amortization for the quarter was $1,692, down from $1,920 in 2008.
Property and equipment amortization declined compared to the prior year at
$1,554 (down from $1,722) as the Company controlled the pace of capital
additions during 2008 and the first and second quarter of 2009. Intangible
assets amortization declined to $138 from $198 in 2008 as certain amortization
periods expired during 2008, particularly for non-competition provisions.
    Stock-based compensation for the quarter was $99 (2008 - $155). The
decrease is primarily due to a reduction in the number of outstanding unvested
options offset in this quarter by a stock option grant in May 2009.
    Interest on long term debt and other interest and bank charges decreased
from $331 in 2008 to $120 in 2009. Interest on the Company's variable rate
bank debt decreased as interest rates dropped. On average, the Company's
average borrowing rate was approximately 2.6% lower in the second quarter of
2009 than in the equivalent quarter in 2008. This saved the company
approximately $70 in interest charges. As well, the Company had significantly
lower levels of overall debt throughout the current quarter than it had in the
second quarter of 2008. Capital lease obligations at June 30, 2009 were $1,409
lower than at June 30, 2008. Long-term debt was reduced by $3,410 compared to
June 30, 2008.
    For the second quarter of 2009, the loss on disposal of property and
equipment was $126 with proceeds on sale of $312. Partially offsetting the
loss is the amortization of a deferred gain on sale / leaseback of assets as
discussed in the 2008 annual MD&A. The remainder of asset divestitures
consisted of retirement of vehicles replaced through the Company's fleet
management program.
    HSE had a $572 income tax recovery for the quarter versus an income tax
recovery of $79 for 2008. The change can be attributed primarily to a decrease
in taxable income in the year.
    Net loss for the quarter was $1,928 or $(0.05) per share versus a loss of
$568 or ($0.02) per share in 2008. The year-over-year decline was primarily
due to the decrease in EBITDA as described above.

    Current Quarter versus Q1 2009

    Revenue for the second quarter decreased 12.7% to $19,566 from $22,401 in
the first quarter. This was caused by significant reductions in revenues from
Oilfield health and safety services. Industrial revenue increased $3,108 from
$12,141 in the first quarter to $15,249 in the second quarter because most
plant shutdown and turnaround activities take place in the non-winter months
of the second and third quarters. Oilfield revenue decreased $5,943 from
$10,260 to $4,317. This was caused by spring break-up and the general
deterioration of the conventional upstream oil and gas industry in North
America compared to 2008.
    Operating expenses decreased by $2,265 from $20,410 (91.1% of revenue) to
$18,145 million (92.7% of revenue). Operating cost decreases reflect one month
of the field staff pay restructuring, total manpower reductions, and other
cost containment activities.
    SG&A declined from the first quarter by $335. The decrease reflected a
full quarter of salary reductions, manpower reductions and restrictions on
travel and other discretionary expenditures.

    Liquidity and Capital Resources

    The Company's principal sources of capital are cash flows from
operations, borrowings under an established credit facility with its senior
lender and equity financing.
    The Company, through the conduct of its operations, has undertaken
certain contractual obligations as noted in the following table:

    
    -------------------------------------------------------------------------
    Years ended December 31,    2009    2010    2011    2012    2013   Total
    -------------------------------------------------------------------------
    Capital lease
     obligations             $   312     252     103       6       - $   673
    Vehicle operating leases   1,197   2,319   1,603     429       5   5,553
    Property & other leases    1,483   2,610   1,786   1,236     815   7,930
    Long-term debt                21  10,854     818       -       -  11,693
    -------------------------------------------------------------------------
    Total contractual
     obligations             $ 3,013  16,035   4,310   1,671     820 $25,849
    -------------------------------------------------------------------------

    Liquidity
    
    At the end of the second quarter, the draw against the revolving facility
was $10,829, and there was no draw against the operating facility. At June 30
the Company had cash on hand of $5,923.
    During the first and second quarter of 2009, the Company's credit
facilities included a $25 million three-year interest-only revolving facility
and a $7.5 million operating facility. The revolving facility had a maturity
date of June 25, 2010, with an ability to extend the term at the lender's
option. The operating facility was renewable annually on June 24 and was
margined to accounts receivable. Both the operating facility and the revolving
facility were subject to certain covenants including a covenant regarding the
ratio of senior debt to cash flows (as defined in the agreement), a current
ratio covenant, an interest coverage covenant and certain other positive and
negative covenants that are typical for these types of facilities. The credit
facilities were collateralized under a general security agreement.
    In the first quarter of 2009, anticipating a continuation of the
challenging business environment for Oilfield health and safety services for
the remainder of 2009 and possibly 2010, management identified the need to
amend its existing credit facilities. The Company approached its senior
secured lender in March 2009 to discuss modifying the existing facilities. On
July 29, 2009, the Company amended its existing credit facilities with its
current lender. The amended facility replaces the facilities described above
with a single $15 million operating facility. This amended facility, which
matures July 27, 2010, is margined to property and equipment and accounts
receivable. The amended facility bears interest at the bank's prime rate (or
U.S. base rate) plus a fixed margin or at bankers' acceptance rates with a
fixed stamping fee. An additional standby fee is also required on any unused
portion of the credit facility. The amended facility is subject to certain
covenants including a covenant with respect to the ratio of total liabilities
to net worth (as defined in the agreement), a current ratio covenant, an
interest coverage covenant and other positive and negative covenants. The
credit facility continues to be collateralized under a general security
agreement. The Company complied with all covenants required under the amended
credit facility.

    Cash Provided by (Used in) Operations

    Cash provided by operations in the quarter was $5,349 in 2009 compared to
$4,244 for 2008. Reduced revenue levels in the quarter resulted in negative
EBITDA and break-even operating cash flow excluding changes in working
capital. However, collections of accounts receivable improved significantly
when compared to 2008 as transition issues with the implementation of a new
billing system effective January 1, 2008 delayed cash collections during 2008

    Cash Provided by (Used in) Financing and Investing

    During the quarter, the Company had no need to draw on its operating
line. The Company also made scheduled debt reductions of $385 towards capital
lease and other long term debt obligations.
    Purchases of property and equipment for the second quarter amounted to
$437, the majority of which was revenue generating health safety services
rental equipment. Proceeds from disposal of property and equipment were $312.

    Working Capital

    At June 30, 2009, the Company had working capital (not including current
portion of long-term debt obligations) of $18,368. This compares to $20,514 on
December 31, 2008 and $21,717 at June 30, 2008. The change from December 31,
2008 relates to changes in non-cash working capital as collections of
receivables during the quarter were partially offset by reductions in payables
and accruals. The change from the balance at the end of the second quarter of
2008 related to improved cash position offset by reductions in non-cash
working capital, particularly accounts receivable. The Company's cash position
improved from $249 on June 30, 2008 to $5,923 at June 30, 2009.

    Outlook

    Due to a series of international and domestic economic events that took
place in the last half of 2008, the business climate in the first six months
of 2009 was the most challenging for HSE in its modern history. This began in
2004 with aggressive expansion that would eventually include 17 acquisitions.
Although individual predecessor component companies of HSE may have endured
business cycles and downturns, the current economic climate was our first
major challenge as a combined group. But because of the experience of senior
management, the relative strength of HSE's balance sheet, and a corporate
business model that focused on a diversity of essential services provided to a
diversity of clients in several regions, HSE has weathered the storm and is
cautiously optimistic that the worst is behind in terms of prospects and
opportunities.

    Oilfield

    In the first half of 2009, conventional oil and gas drilling, completion
and workover activity in Canada declined sharply compared to all previous
years in the 21st century. According to well completion figures compiled by
the Canadian Association of Drilling Contractors ("CAODC"), the average number
of wells drilled annually in Canada from 2001 to 2008 was 19,714. By contrast,
in the six month period to June 30, 2009 only 5,938 wells had been drilled. On
July 7, 2009 the CAODC revised its drilling forecast for the current year
downward to 8,787 total new wells drilled, the lowest figure since 1992.
Although by the end of June the price of oil had recovered substantially from
a low of $34 in December of 2008, it still remained about half of what it sold
for a year ago. The price of natural gas remains similarly depressed.
    In response to the foregoing, HSE has undertaken a meaningful cost
reduction strategy, while still maintaining the core technical staff and
delivery capability required to remain in the business and service clients
when activity improves.
    Effective April 1, 2009, the government of Alberta introduced drilling
activity royalty credits and a one-year reduced royalty period that expires
March 31, 2010. The purpose was to spur drilling activity and employment. The
two elements of the program significantly improve the economics of
conventional oil and gas exploration and development drilling. This program
was extended to March 31, 2011 in another announcement on June 25, 2009.
Reduced drilling and service costs have also improved investment economics.
However, because of continued tight equity and debt markets, the only
companies that can take full advantage of the stimulus are companies with
strong balance sheets and/or discretionary internal cash flow. Although debt
and equity markets have improved somewhat in the past few months resulting in
the ability of some of the Exploration and Production sector players to raise
capital, the overall climate in which Canada's conventional upstream oil and
gas industry operates remains severely challenged compared to prior year.
    Saskatchewan and British Columbia have not been spared the effects of the
downturn. Low natural prices are discouraging activity in northeast B.C.
despite exciting new shale gas discoveries and an attractive fiscal regime.
Lower oil prices and tightened equity and debt markets are having a similar
impact on activity in Saskatchewan.
    Natural gas prices continue to generate uncertainty. Current prices are
low and analysts are starting to understand that unconventional shale gas
exploitation in Canada and the United States may permanently change North
American gas markets. Royalty incentive packages like those offered in Alberta
are still not attractive enough to justify developing many gas deposits.
    Nevertheless, the indication from HSE's clients for Oilfield health and
safety services is that the worst is behind us. Activity will improve, but the
pickup will not take place at the same rate as the decline. Oil prices have
more than doubled from the multi-year lows experienced in late 2008. Although
gas prices remain soft, this situation is regarded as temporary. A sharp
decline in natural gas drilling across North America and slow but steady
improvement in the economy has created a situation where supply and demand
will come into balance.
    The focus for the Oilfield side of HSE in Canada is cost control and the
best possible service to ensure customer loyalty.
    In the United States, the joint venture with Boots & Coots Services, Inc.
operating as Boots & Coots HSE Services, LLC ("BCHSE") enjoyed revenue growth
and customer acceptance in the second quarter. While this project does not yet
generate positive cash flow, client interest in specific services and the need
for a modern and more professionalized approach to Oilfield health and safety
in general cause the Company to believe the long-term potential for BCHSE is
meaningful.

    Industrial

    The outlook for the Company's Industrial health and safety services
varies significantly because of the variety of markets and industries in which
HSE operates. Although Industrial revenues in the second quarter were down on
a year-over-year basis for the first time since HSE began expansion into new
markets five years ago, the broad range of services, clients and regions
ensures that this area of the Company will be the first to return to growth.
    The oilsands region of northeast Alberta continues to look promising for
several reasons. Production from new and existing extraction operations remain
at full capacity, aided by higher prices that have ensured the vast majority
of the oil produced sells for greater than development costs. The startup of
Esso's Kearl Lake oilsands project was a positive development for the region.
Because of tight economics, most customers are examining new ways of doing
business that could yield efficiency gains and/or operating cost reductions.
HSE has long believed that outsourcing certain health and safety functions to
an expert service provider is a viable alternative to in-house methods. This
means that HSE's opportunities can grow in this market whether or not the
whole market grows.
    Although other Industrial safety work in western Canada - primarily plant
shutdown and turnaround services - has declined so far in 2009 so facility
operators could conserve cash, the outlook for the remainder of the year has
improved. This maintenance and repair work is essential for the ongoing
operation of facilities. With the amount of work that was postponed in 2009,
this segment of HSE's total business mix looks promising for 2010.
    HSE's Ontario client base is diverse and is affected by the recession in
different ways. Many of the facilities that were shuttered in the first half
of 2009, such as steel mills and auto assembly plants, are re-opening which
will increase HSE's business later this year. An agreement with the Laborers'
Union to use unionized manpower on plant safety operations that was
implemented in July of 2009 looks promising for this specific market where
most of the client facilities are also unionized. A similar arrangement in New
Brunswick has been highly satisfactory for HSE, the laborers' union and
clients. Ontario and the industrial Midwest of the United States remain large
markets with significant opportunity.
    Despite a decline in revenues year-over-year, the Atlantic region of
Canada remains a bright spot for HSE in 2009 and beyond. The Company's new
service location in St. John's, Newfoundland-Labrador ("NL") will serve the
offshore oil and gas industry and act as a regional base for large industrial
projects in industries like hydro-electric construction projects, mining and
mineral processing.
    Marketing to new clients continues in all regions. HSE believes the
ultimate potential for the Industrial health and safety revenues is many times
greater than the Company has generated thus far.

    Cost Control and Short-Term Outlook

    Much of the attention of senior management in the first half of 2009 was
on cost control in order to be able to work as efficiently as possible and
maintain the strongest possible balance sheet and working capital position
until the many segments of the economy in which HSE operates begin to recover.
    While the general cost reduction plan was conceived in the first quarter,
much of the execution took place in the second quarter. Of particular
significance going forward is the change in field service technician pay
structure from a base salary plus day bonus to an hourly wage. This has
benefits for both management and field service staff. For management, the cost
of supporting field personnel when they are not working on revenue producing
jobs is greatly reduced; for field service personnel, it allows a worker the
opportunity to earn more money than under the previous regime. This program
was fully implemented on June 1, 2009. June's financial results indicated that
this significant undertaking did indeed yield the desired outcome.
    All other discretionary expenses, including items such as travel,
advertising, entertainment and investor relations remain sharply curtailed
until it is clear business has improved. Management believes it has taken all
the prudent steps necessary to bring operating expenses in line with revenue
for the remainder of 2009 while still maintaining the technical capability
essential for quality service and sufficient capacity to be able to fill the
known order book and client demand. HSE remains largely intact in the sense
that no major business units or field service locations have been sold off or
closed in order to survive the financial downturn.
    The outlook for all of HSE's business units is marginally positive,
particularly when compared to three consecutive quarters of contraction that
took place in late 2008 and the first half of 2009. Credit markets are easing.
Equity markets are functioning again. Some commodity prices like oil are up
sharply while all others have at least quit declining. Clients are looking at
their businesses with a view to expansion again instead of slashing all
unnecessary costs to ensure survival. Although HSE has not yet lost any major
competitors, several smaller ones have shut down. This may ease competitive
pressures going forward.
    Therefore, the Company reports with some confidence that the worst is
over for HSE and the Company anticipates a return to revenue growth. However,
returning to record levels of revenues enjoyed in 2008 will take longer than
it did to decline from record to current levels.

    
    Quarterly Results

    -------------------------------------------------------------------------
                                2009                       2008
    -------------------------------------------------------------------------
                            Q2        Q1       Q4       Q3       Q2       Q1
    -------------------------------------------------------------------------
    Revenue             19,566   $22,401  $29,905  $28,202  $28,087  $27,569
    Net earnings (loss) (1,928)   (1,806)     431      396     (568)     (11)
    EBITDA(1)             (451)     (216)   2,713    2,858    2,187    2,633
    -------------------------------------------------------------------------
    Income (loss) per
     share - basic
     and diluted         (0.05)    (0.05)   $0.01    $0.01   $(0.02)   $0.00
    -------------------------------------------------------------------------


    -------------------------------------
                                2007
    -------------------------------------
                            Q4        Q3
    -------------------------------------
    Revenue             $26,464  $23,578
    Net earnings (loss)  (9,173) (15,920)
    EBITDA(1)             2,601    1,376
    --------------------------------------
    Income (loss) per
     share - basic
     and diluted         $(0.25)  $(0.42)
    --------------------------------------
    --------------------------------------
    See Non-GAAP Measures for (1)
    

    HSE's business has two offsetting seasonal components. Revenue for
Oilfield health and safety services is historically highest in first and
fourth quarters and lowest in the second quarter because this sector uses
equipment that can only access well locations during certain times of the year
and because of the effects of weather on field activity. Industrial revenue
includes a mix of year-round contracts and "turnarounds" - scheduled major
maintenance projects and repair activities on client facilities. These
turnarounds tend to be scheduled during the second and third quarters to avoid
the possibility of adverse effects from freezing weather. As a result,
Industrial revenue tends to be highest in the second and third quarters.

    
    Revenue by quarter for the last eight quarters is as follows
    -------------------------------------------------------------------------
                                2009                       2008
    -------------------------------------------------------------------------
                            Q2        Q1       Q4       Q3       Q2       Q1
    -------------------------------------------------------------------------
    Oilfield             4,317   $10,260  $14,597  $12,039   $8,667  $15,961
    Industrial          15,249    12,141   15,308   16,163   19,420   11,608
    -------------------------------------------------------------------------
    Total revenue       19,566   $22,401  $29,905  $28,202  $28,087  $27,569
    -------------------------------------------------------------------------


    ----------------------------------------------
                                    2007
    ----------------------------------------------
                            Q4        Q3       Q2
    ----------------------------------------------
    Oilfield            $15,879  $11,722   $6,486
    Industrial           10,585   11,856   12,866
    ----------------------------------------------
    Total revenue       $26,464  $23,578  $19,352
    ----------------------------------------------
    ----------------------------------------------


    Related Party Transactions

    During the quarter, the Company had the following transactions with
related parties all of which are measured at exchange amounts:

    -   During the second quarter of 2009, the Company paid rent and property
        taxes for a regional office to a corporation related to a Director of
        the Company in the amount of $103 (2008 - $105)

    -   During the second quarter of 2009, the Company also paid rent of $74
        (2008 - $78) for a regional office to a corporation controlled by a
        Senior Manager of the Company.

    Critical Accounting Policies and Estimates
    
    HSE prepares its consolidated financial statements in accordance with
Canadian generally accepted accounting principles. In doing so, management is
required to make various estimates and judgments in determining the reported
amounts of assets, liabilities, revenues and expenses, as well as the
disclosure of commitments and contingencies. Management bases its estimates
and judgments on historical experience and on various other assumptions that
are believed to be reasonable under the circumstances. Estimates and
assumptions are reviewed periodically, and actual results may differ from
those estimates under different assumptions or conditions. Management must use
its judgment related to uncertainties in order to make these estimates and
assumptions.
    The accounting policies and estimates believed to require the most
difficult, subjective or complex judgments and which are material to the
Company's financial reporting results include: allowance for doubtful
accounts, impairment of long-lived assets, amortization of property and
equipment, and future income tax liabilities. A full description of the
methods for determining these accounting policies and estimates, as well as
the risks related to the possible effects of changes in these policies and
estimates, can be found in HSE's 2008 Annual Report.

    Accounting Pronouncements

    On January 1, 2009 the Company adopted the revised Canadian accounting
standards regarding Goodwill and Intangible Assets. These standards provide
guidance with respect to the recognition, measurement and disclosure of
goodwill and intangible assets. The provisions of the new standards relating
to the definition of intangible assets and their initial recognition have been
changed to coincide with those in the equivalent International Financial
Reporting Standard. This change had no effect on the Company's reported
results.

    Accounting Standards pending adoption

    In January 2009, the AcSB issued three new recommendations regarding
business combinations, consolidated financial statements and non-controlling
interests. While these standards are effective for fiscal years beginning on
or after January 1, 2011, early adoption is permitted provided that all three
standards are adopted simultaneously. The Company is currently in the process
of evaluating the new standards. The new standards include:

    
    -  Section 1582, which will replace Section 1581, deals with accounting
       for business combinations. The new standard harmonizes Canadian
       accounting standards with IFRS 3 - Business Combinations. Section 1582
       is applicable prospectively to business combinations entered into
       after adoption.
    -  Sections 1601 and 1602 together will replace existing section 1600.
       Section 1601 provides standards for the preparation of consolidated
       financial statements, while section 1602 provides standards with
       respect to accounting for non-controlling interests in subsidiaries.
       The new standard harmonizes Canadian accounting standards with
       proposed revisions to IAS 27 - Business Combinations. It makes
       changes to the circumstances under which the Company must consolidate
       an entity, as well as to disclosure requirements.
    

    International Financial Reporting Standards

    The CICA's Accounting Standards Board has confirmed that IFRS will be
adopted as Canadian GAAP for publicly accountable entities in Canada for
interim and annual financial statements relating to fiscal years beginning on
or after January 1, 2011. The Company expects the transition to IFRS to impact
financial reporting, business processes and information technology
requirements. As part of the conversion, the Company will be required to
report its interim results for the quarter ended March 31, 2011, including
comparatives for the quarter ended March 31, 2010, using IFRS. The Company
will also be required to prepare an opening balance sheet at January 1, 2010
converting its balances as previously reported under Canadian GAAP to the
amounts that would have been reported under IFRS.
    The Company has started an IFRS conversion project and is currently
evaluating the impact of the change to IFRS on the results of its operations,
financial position and disclosures.
    To date, the Company has identified the following accounting standards
that apply to the Company where IFRS standards are different from those under
existing Canadian GAAP:

    
    -   Financial instruments
    -   Property and equipment
    -   Intangible assets
    -   Impairment testing of long-lived assets
    -   Business combinations and non-controlling interests
    -   Income taxes
    -   Contingencies
    -   Leases
    -   Stock-based compensation
    

    Of these areas, business combinations and property and equipment
conversions are expected to have the most pervasive impact on the Company's
processes and reported results.
    Accounting for business combinations under IFRS differs from existing
Canadian GAAP with respect to accounting for non-controlling interest,
treatment of transaction costs incurred as part of the acquisition, valuation
of share consideration given as part of an acquisition, treatment of
contingent consideration given as part of an acquisition, accounting for
future income taxes associated with an acquisition, and treatment of
restructuring costs incurred as part of an acquisition.
    Property and equipment accounting under IFRS requires that significant
components that make up an asset be separately tracked within fixed assets,
that the cost of each significant component be amortized over the estimated
useful life of that component, and that any replacements of significant
components be accounted for as disposals and acquisitions.
    IFRS 1, First-Time Adoption of International Financial Reporting
Standards, provides the framework for the initial conversion from Canadian
GAAP to IFRS. The standard generally requires that the Company's results be
retroactively restated at January 1, 2010 to the results that would have been
reported if the Company had been operating under IFRS since incorporation,
with the adjustments that arise as a result of this restatement being
recognized in retained earnings. However, IFRS provides for certain optional
exemptions upon conversion to IFRS. The significant exemptions available to
the Company include:

    
    -   An exemption allowing business combinations to be accounted for under
        IFRS standards starting at a date of the Company's choosing, rather
        than requiring that all acquisitions be restated as they would have
        been under IFRS
    -   An exemption allowing an entity to value fixed asset components at
        their fair value at the conversion date, rather than retroactively
        restating amortization of components and recording disposals and
        additions of components that were expensed as required under existing
        Canadian GAAP
    -   The ability to apply IFRS accounting for stock-based compensation on
        a prospective basis to stock options granted and vested prior to
        transition.
    -   The ability to assess whether an arrangement constitutes a lease, and
        accordingly falls under the IFRS standards for leases, as at the
        conversion date rather than retroactively for all leases entered into
        since incorporation.
    

    The Company is currently evaluating which, if any, of these exemptions
will be applied.

    Financial and Other Instruments

    The Company's financial instruments include cash and cash equivalents,
accounts receivable, bank indebtedness, accounts payable and accrued
liabilities, income taxes payable, obligations under capital leases and
long-term debt. The carrying value of these instruments approximates their
fair value either because of their short maturities or because the interest
rates to which they are subject approximate market rates.
    The Company is exposed to the following risks as a result of its use of
financial instruments:

    
    -   credit risk
    -   liquidity risk
    -   market risk
    

    These risks, and the Company's method of mitigating the risks, are
described in the Management Discussion and Analysis included in the Company's
2008 Annual Report.

    Business Risks

    The activities the Company undertakes involve a number of risks and
uncertainties, some of which are: economic and market events including
disruptions in international credit markets and reductions in macroeconomic
activity; business cyclicality within the industries in which HSE's customers
operate; availability of qualified staff; competitive conditions including
pricing pressures; risks of customer credit default; deterioration in the
financial condition of financial institutions and insurance companies that HSE
deals with; availability of financing at competitive rates; changes in foreign
exchange rates and interest rates and litigation and contingencies. Additional
risks and uncertainties that the Company may be unaware of, or that were
determined to be immaterial may also become important factors that affect the
Company. A discussion of the business risks faced by the Company are included
in the Management Discussion and Analysis included in the Company's 2008
Annual Report.

    Internal Control Over Financial Reporting

    There have been no changes in the Company's internal control over
financial reporting during the quarter ended June 30, 2009 that have
materially affected, or are reasonably likely to materially affect, its
internal control over financial reporting.

    Common Shares Outstanding

    At August 12, 2009 and December 31, 2008 there were 37,575,675 common
shares of HSE outstanding. At June 30, 2009, the Company had options
outstanding to issue 2,712,166 shares at a weighted average exercise price of
$1.55 per share. Of these options, 1,508,301 were exercisable. At August 12,
2009, there were 2,690,500 options outstanding at a weighted average exercise
price of $1.54 per share. Of these options, 1,486,635 were exercisable.

    Non-GAAP Measures

    This report makes reference to EBITDA, a measure that is not recognized
under generally accepted accounting principles. Management believes that, in
addition to net earnings, EBITDA is a useful supplementary measure. EBITDA
provides investors with an indication of earnings before provisions for
interest and bank charges, taxes, amortization, foreign exchange gains or
losses, gains or losses on the disposal of property and equipment and the
non-cash effect of stock-based compensation expense. Investors should be
cautioned that EBITDA should not be construed as an alternative to net
earnings determined by GAAP as an indication of the Company's performance.
HSE's method of calculating EBITDA may differ from that of other companies
and, accordingly, may not be comparable to measures used by other companies.

    
    EBITDA Calculation

    -------------------------------------------------------------------------
    For the Six Months Ended June 30                          2009      2008
    -------------------------------------------------------------------------
    Net loss                                              $ (3,734) $   (579)
    Add (deduct):
      Amortization                                           3,431     4,145
      Stock-based compensation                                 149       290
      Interest and bank charges                                269       628
      Foreign exchange loss                                     11         -
      Loss on disposal of property and equipment               219       326
      Income tax                                            (1,012)       10
    -------------------------------------------------------------------------
    EBITDA                                                $   (667) $  4,820
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Quarterly EBITDA Calculation

                            2009                          2008
    -------------------------------------------------------------------------
                        Q2        Q1        Q4        Q3        Q2        Q1
    -------------------------------------------------------------------------
    Net earnings
     (loss)       $ (1,928) $ (1,806) $    431  $    396  $   (568) $    (11)
    Add (deduct):
      Amorti-
       zation     $  1,692     1,739     1,399     1,821     1,920     2,125
      Impairment
       of goodwill
       and
       intangible
       assets            -         -         -         -       100         -
      Stock-based
       compensation     99        50        95        23       155       135
      Interest and
       bank
       charges         120       149       200       288       331       297
      Foreign
       exchange
       loss (gain)      12        (1)      (35)        4         2        (2)
      Loss on
       disposal of
       property and
       equipment       126        93       193       129       326         -
      Income taxes    (572)     (440)      430       197       (79)       89
    -------------------------------------------------------------------------
    EBITDA        $   (451) $   (216) $  2,713  $  2,858  $  2,187  $  2,633
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                            2007
    ---------------------------------
                        Q4        Q3
    ---------------------------------
    Net earnings
     (loss)       $ (9,173) $(15,920)
    Add (deduct):
      Amorti-
       zation        2,243     2,004
      Impairment
       of goodwill
       and
       intangible
       assets       10,505    15,000
      Stock-based
       compensation    255       186
      Interest and
       bank
       charges         311       309
      Foreign
       exchange
       loss (gain)      12        22
      Loss on
       disposal of
       property and
       equipment       103        99
      Income taxes  (1,655)     (324)
    ---------------------------------
    EBITDA        $  2,601  $  1,376
    ---------------------------------
    ---------------------------------
    

    Forward-Looking Statements

    Certain statements in this MD&A constitute forward-looking information
and statements (collectively "forward-looking statements") within the meaning
of applicable securities laws. These forward-looking statements concern, among
other things, the Company's prospects, expected revenues, expenses, profits,
financial position, strategic direction and growth initiatives, all of which
involve known and unknown risks, uncertainties and other factors which may
cause actual results, performance or achievements of the Company to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. When used in this
MD&A, such forward-looking statements use such words as expect, anticipate,
estimate, believe, may, will, would, could, might, intend, plan, continue,
ongoing, project, objective, should and other similar terms and phrases. This
forward-looking information reflects the Company's current expectations
regarding future events and operating performance based on assumptions and
analyses made by the Company based on its experience and an assessment of
current conditions, known trends, expected future developments and other
factors which management believe to be appropriate under the circumstances.
    The forward-looking statements contained in this MD&A reflect several
material factors, expectations and assumptions including, without limitation:
economic conditions within Canada and the United States, both in general and
within specific industries; demand for the Company's services by customers in
various industries and geographic locations; pricing levels for the Company's
services; commodity prices; foreign currency exchange rates; interest rates;
access to financing; the Company's future operating results and financial
condition; and competition within particular markets or for particular
services.
    Forward-looking statements involve significant risks and uncertainties
and should not be read as a guarantee of future performance or results, and
will not necessarily be an accurate indication of whether or not such results
will be achieved. A number of factors could cause actual results to differ
materially from the results discussed in the forward-looking statements
including, but not limited to, the factors discussed above and other risk
factors discussed herein and listed from time to time in the Company's reports
and public disclosure documents including its annual report, annual
information form and other filings with securities commissions in Canada as
reported under the Company's profile at www.sedar.com.
    The Company cautions that the foregoing list of assumptions, risks and
uncertainties is not exhaustive. The forward-looking statements contained in
this MD&A speak only as of the date of this MD&A, and the Company assumes no
obligation to publicly update or revise them to reflect new events or
circumstances, except as may be required pursuant to applicable laws.

    Additional Information

    Additional information relating to HSE is available under our profile on
the SEDAR website at www.sedar.com and at www.hseintegrated.com.



    
    HSE Integrated Ltd.
    Consolidated Balance Sheets
                                                       June 30   December 31
    (Stated in thousands), (unaudited)                    2009          2008
    -------------------------------------------------------------------------

    ASSETS
    Current
      Cash and cash equivalents                      $   5,923     $   1,114
      Accounts receivable (note 4)                      16,662        25,740
      Inventory                                            240           222
      Prepaid expenses and other assets                  1,356         1,897
                                                    -------------------------
                                                        24,181        28,973

    Property and equipment                              33,042        36,173
    Intangible assets                                    3,522         3,788
                                                    -------------------------

                                                     $  60,745     $  68,934
                                                    -------------------------
                                                    -------------------------

    LIABILITIES
    Current
      Accounts payable and accrued liabilities       $   5,206     $   8,096
      Income taxes payable                                 607           363
      Current portion of obligations
       under capital lease                                 426           922
      Current portion of long-term debt (note 3)            35            98
      Current portion of deferred gain                     137           137
                                                    -------------------------
                                                         6,411         9,616

    Deferred gain                                          387           455
    Obligations under capital lease                        197           370
    Long-term debt (note 3)                             11,600        11,628
    Future income taxes                                  4,278         5,278
                                                    -------------------------
                                                        22,873        27,347
                                                    -------------------------

    SHAREHOLDERS' EQUITY
      Share capital                                     60,040        60,040
      Contributed surplus                                4,663         4,559
      Deficit                                          (26,870)      (23,136)
      Accumulated other comprehensive income                39           124
                                                    -------------------------
                                                        37,872        41,587
                                                    -------------------------

                                                     $  60,745     $  68,934
                                                    -------------------------
                                                    -------------------------

    Contingencies (note 9)
    Subsequent event (note 3)


       See accompanying notes to the consolidated financial statements.



    HSE Integrated Ltd.
    Consolidated Statements of Loss

                                      Three Months ended    Six Months ended
                                              June 30             June 30
    -------------------------------------------------------------------------
    (Stated in thousands),
    (unaudited)                           2009      2008      2009      2008
    -------------------------------------------------------------------------

    REVENUE                           $ 19,566    28,087  $ 41,967    55,656
                                     ----------------------------------------

    COSTS
      Operating and materials           18,145    23,440    38,555    45,992
      Selling, general and
       administrative                    1,872     2,460     4,079     4,844
      Amortization of
       property and equipment            1,554     1,722     3,165     3,590
      Amortization of
       intangible assets                   138       198       266       455
      Stock-based compensation
       (note 7)                             99       155       149       290
      Interest on long-term debt           103       271       234       538
      Other interest and bank charges       17        60        35        90
      Foreign exchange loss                 12         2        11         -
      Goodwill impairment                    -       100         -       100
      Loss on disposal of property
       and equipment                       126       326       219       326
                                     ----------------------------------------
                                        22,066    28,734    46,713    56,225
                                     ----------------------------------------

    LOSS BEFORE INCOME TAXES            (2,500)     (647)   (4,746)     (569)
                                     ----------------------------------------

    Income taxes
      Current provision                      -       174         -       410
      Future reduction                    (572)     (253)   (1,012)     (400)
                                     ----------------------------------------
                                          (572)      (79)   (1,012)       10
                                     ----------------------------------------


    NET LOSS                          $ (1,928)     (568) $ (3,734)     (579)
                                     ----------------------------------------
                                     ----------------------------------------

    Loss per share
      Basic and diluted               $  (0.05)    (0.02) $  (0.10)    (0.02)
                                     ----------------------------------------
                                     ----------------------------------------


    Weighted average
     shares outstanding
      Basic                             37,576    37,568    37,576    37,568
      Diluted                           37,576    37,568    37,576    37,568
                                     ----------------------------------------
                                     ----------------------------------------

       See accompanying notes to the consolidated financial statements.



    HSE Integrated Ltd.
    Consolidated Statements of Other Comprehensive Loss

                                      Three Months ended    Six Months ended
                                              June 30             June 30
    -------------------------------------------------------------------------
    (Stated in thousands),
    (unaudited)                           2009      2008      2009      2008
    -------------------------------------------------------------------------

    Net Loss                          $ (1,928)     (568) $ (3,734)     (579)

    Other comprehensive loss
      Foreign currency loss on
       translating financial
       statements of self-sustaining
       foreign operations                  (43)        -       (85)        -

                                     ----------------------------------------
    Other comprehensive loss          $ (1,971)     (568) $ (3,819)     (579)
                                     ----------------------------------------
                                     ----------------------------------------



    Consolidated Statements of Deficit and Accumulated Other
    Comprehensive Income

                                      Three Months ended    Six Months ended
                                              June 30             June 30
    -------------------------------------------------------------------------
    (Stated in thousands),
    (unaudited)                           2009      2008      2009      2008
    -------------------------------------------------------------------------

    Deficit, beginning of period      $(24,942)  (23,395) $(23,136)  (23,384)

    Net Loss                            (1,928)     (568)   (3,734)     (579)

                                     ----------------------------------------
    Deficit, end of period            $(26,870)  (23,963) $(26,870)  (23,963)
                                     ----------------------------------------
                                     ----------------------------------------

    Accumulated other comprehensive
     income, beginning of period      $     82         -  $    124         -

    Foreign currency loss on
     translating financial statements
     of self-sustaining operations         (43)        -       (85)        -
                                     ----------------------------------------
    Accumulated other comprehensive
     income, end of period            $     39         -  $     39         -
                                     ----------------------------------------
                                     ----------------------------------------

       See accompanying notes to the consolidated financial statements.



    HSE Integrated Ltd
    Consolidated Statements of Cash Flows

                                      Three Months ended    Six Months ended
                                              June 30             June 30
    -------------------------------------------------------------------------
    (Stated in thousands),
    (unaudited)                           2009      2008      2009      2008
    -------------------------------------------------------------------------

    Cash provided by (used in)

    Operations
      Net loss                        $ (1,928)     (568) $ (3,734)     (579)
        Charges to income not
         involving cash:
          Amortization                   1,692     1,920     3,431     4,045
          Stock-based compensation          99       155       149       290
          Future income tax               (572)     (253)   (1,012)     (400)
          Goodwill impairment                -       100         -       100
          Loss on disposal of
           property and equipment          126       326       219       326
        Changes in non-cash working
         capital (note 8)                5,932     2,564     6,877    (2,159)
                                     ----------------------------------------

    Cash provided by operations          5,349     4,244     5,930     1,623
                                     ----------------------------------------

    Financing
      Repayment of operating
       line of credit                        -    (3,711)        -         -
      Repayment of bank indebtedness         -      (438)        -      (616)
      Repayment of obligations
       under capital lease                (318)     (422)     (669)     (749)
      Repayment of long-term debt          (67)     (103)     (104)     (166)
      Issuance of share capital,
       net of costs                          -         -         -         -
                                     ----------------------------------------

    Cash used in financing                (385)   (4,674)     (773)   (1,531)
                                     ----------------------------------------

    Investing
      Purchase of property
       and equipment                      (437)   (1,139)     (901)   (1,661)
      Acquisitions                           -      (100)        -      (100)
      Proceeds from disposal of
       property and equipment              312     1,918       521     1,918
                                     ----------------------------------------

    Cash provided by
     (used in) investing                  (125)      679      (380)      157
                                     ----------------------------------------

    Cash flow from operating,
     financing and investing
     activities                          4,839       249     4,777       249

    Effect of exchange rate
     on cash and cash equivalents           23         -        32         -
                                     ----------------------------------------
                                     ----------------------------------------

    Net change in cash
     and cash equivalents                4,862       249     4,809       249

    Cash and cash equivalents,
     beginning of period                 1,061         -     1,114         -
                                     ----------------------------------------
                                     ----------------------------------------

    Cash and cash equivalents,
     end of period                    $  5,923       249  $  5,923       249
                                     ----------------------------------------
                                     ----------------------------------------

       See accompanying notes to the consolidated financial statements.



    -------------------------------------------------------------------------
    HSE Integrated Ltd.
    Notes to the consolidated financial statements
    For the three and six month periods ended June 30, 2009 and 2008
    (Stated in thousands of dollars), (unaudited)
    -------------------------------------------------------------------------

    NOTE 1 - BASIS OF PRESENTATION

    These unaudited interim consolidated financial statements of HSE
    Integrated Ltd. ("HSE" or "the Company") have been prepared following the
    same accounting policies and methods of computation as the audited annual
    consolidated financial statements of the Company for the year ended
    December 31, 2008, except as outlined in note 2. The disclosures provided
    below are incremental to those included with the audited annual
    consolidated financial statements and certain disclosures which are
    normally required to be included in the notes to the annual consolidated
    financial statements have been condensed or omitted. These unaudited
    interim consolidated financial statements should be read in conjunction
    with the audited consolidated financial statements and notes for the
    Company for the year ended December 31, 2008.

    These unaudited interim consolidated financial statements include the
    accounts of the Company and its subsidiaries which, with the exception of
    Boots & Coots HSE Services LLC (owned 90%), are wholly owned. Unless
    otherwise specified all amounts are stated in thousands of Canadian
    dollars except for per-share amounts, which are stated in dollars per
    weighted-average share.

    These consolidated financial statements have been prepared in accordance
    with Canadian generally accepted accounting principles ("GAAP"). In
    preparing these consolidated financial statements, management is required
    to make estimates and assumptions that affect reported amounts of assets
    and liabilities and disclosure of contingent assets and liabilities as at
    the date of the financial statements and the reported amounts of revenue
    and expenses during the reported period. Actual results could differ from
    these estimates.

    HSE's business has two offsetting seasonal components. Revenue for
    Oilfield health and safety services is historically highest in the first
    and fourth quarters and lowest in the second quarter because this sector
    uses equipment that can only access well locations during certain times
    of the year and because of the effects of weather on field activity.
    Industrial revenue includes a mix of year-round contracts and
    "turnarounds" - scheduled major maintenance projects and repair
    activities on client facilities. These turnarounds tend to be scheduled
    during the second and third quarters to avoid the possibility of adverse
    effects from freezing weather. As a result, Industrial revenue tends to
    be highest in the second and third quarters.

    -------------------------------------------------------------------------

    NOTE 2 - CHANGE IN ACCOUNTING POLICIES

    On January 1, 2009 the Company adopted the revised Canadian accounting
    standards regarding Goodwill and Intangible Assets. These standards
    provide guidance with respect to the recognition, measurement and
    disclosure of goodwill and intangible assets. The provisions of the new
    standards relating to the definition of intangible assets and their
    initial recognition have been changed to coincide with those in the
    equivalent International Financial Reporting Standard. This change had no
    effect on the Company's reported results.

    Accounting Standards pending adoption

    In February 2008, the Accounting Standards Board ("AcSB") confirmed the
    changeover to International Financial Reporting Standards (IFRS) from
    Canadian GAAP will be required for publicly accountable enterprises
    effective for interim and annual financial statements relating to fiscal
    years beginning on or after January 1, 2011. The AcSB issued an
    "omnibus" exposure draft of IFRS with comments due by July 31, 2008,
    wherein early adoption by Canadian entities is also permitted. The
    Canadian Securities Administrators ("CSA") has also issued Concept Paper
    52-402, which requested feedback on the early adoption of IFRS as well as
    the continued use of US GAAP by domestic issuers. In March 2009, the AcSB
    issued a second exposure draft regarding the adoption of IFRS. This
    exposure draft clarified the definition of publicly accountable
    enterprises, proposed to provide additional introductory material for the
    CICA Handbook as part of the adoption of IFRS, and updated the IFRS
    standards to be included in the CICA Handbook to include those standards
    which had changed since the initial omnibus exposure draft was issued.

    The eventual changeover to IFRS represents changes due to new accounting
    standards. The transition from current Canadian GAAP to IFRS is a
    significant undertaking that may materially affect the Company's reported
    financial position and results of operations.

    In January 2009, the AcSB issued three new recommendations regarding
    business combinations, consolidated financial statements and non-
    controlling interests. While these standards are effective for fiscal
    years beginning on or after January 1, 2011, early adoption is permitted
    provided that all three standards are adopted simultaneously. The Company
    is currently in the process of evaluating the new standards. The new
    standards include:

        -  Section 1582, which will replace Section 1581, deals with
           accounting for business combinations. The new standard harmonizes
           Canadian accounting standards with IFRS 3 - Business Combinations.
           Section 1582 is applicable prospectively to business combinations
           entered into after adoption.

        -  Sections 1601 and 1602 together will replace existing section
           1600. Section 1601 provides standards for the preparation of
           consolidated financial statements, while section 1602 provides
           standards with respect to accounting for non-controlling interests
           in subsidiaries. The new standard harmonizes Canadian accounting
           standards with proposed revisions to IAS 27 - Business
           Combinations. It makes changes to the circumstances under which
           the Company must consolidate an entity, as well as to disclosure
           requirements.

    -------------------------------------------------------------------------

    NOTE 3 - OPERATING FACILITIES and LONG-TERM DEBT

    During the first and second quarter of 2009, the Company's credit
    facilities included a $25 million three-year interest-only revolving
    facility and a $7.5 million operating facility. The revolving facility
    had a maturity date of June 25, 2010 with an ability to extend the term
    at the lender's option. The operating facility was renewable annually on
    June 24 and was margined to accounts receivable. Both the operating
    facility and the revolving facility were subject to certain covenants
    including a covenant regarding the ratio of senior debt to cash flows (as
    defined in the agreement), a current ratio covenant, an interest coverage
    covenant and certain other positive and negative covenants that are
    typical for these types of facilities. The credit facilities were
    collateralized under a general security agreement.

    On July 29, 2009, the Company amended its existing credit facilities
    with its current lender. The amended facility replaces the facilities
    described above with a single $15 million operating facility. The amended
    facility matures July 27, 2010. The amended credit facility bears
    interest at the bank's prime rate (or U.S. base rate) plus a fixed margin
    or at bankers' acceptance rates with a fixed stamping fee. An additional
    standby fee is also required on any unused portion of the credit
    facilities. The amended facility is margined to property and equipment
    and accounts receivable. It is subject to certain covenants including a
    covenant regarding the ratio of total liabilities to net worth (as
    defined in the agreement), a current ratio covenant, an interest coverage
    covenant and other positive and negative covenants. The credit facility
    continues to be collateralized under a general security agreement. The
    Company complied with all covenants required under the amended credit
    facility.

    Deferred financing costs associated with the credit facility have been
    shown as a reduction in the carrying value of long term debt and are
    being expensed over the term of the debt using the effective interest
    rate method.

    -------------------------------------------------------------------------

                                                       June 30   December 31
                                                          2009          2008
                                                    -------------------------
    Equipment financing contracts bearing interest
     at rates averaging 4.2% (2008 - 2.93%), payable
     in blended monthly payments of $5 (2008 - $12)
     secured by specific equipment.                  $      54     $     131

    Interest only credit facility                       10,829        10,829
                                                    -------------------------
                                                        10,883        10,960
    Accrued consideration on share purchase
     acquisition                                           810           810
                                                    -------------------------
                                                        11,693        11,770
    Less current portion                                   (35)          (98)
                                                    -------------------------
                                                        11,658        11,672
    Less unamortized debt issue costs                      (58)          (44)
                                                    -------------------------

                                                     $  11,600     $  11,628
                                                    -------------------------

    Under the terms of the amended credit facility described above,
    outstanding principal repayments are due as follows:

                      Calendar years:
                      2009                        $      21
                      2010                           10,854
                      2011                              818
                                                 -----------
                                                     11,693
                      Less: current portion             (35)
                                                 -----------
                      Long-term portion before
                       unamortized debt issue
                       costs                      $  11,658
                                                 -----------
                                                 -----------

    -------------------------------------------------------------------------

    NOTE 4 - FINANCIAL RISK MANAGEMENT

    Overview

    The Company is exposed to the following risks from its use of financial
    instruments:
        -  credit risk
        -  liquidity risk
        -  market risk

    The Board of Directors has overall responsibility for the establishment
    and oversight of the Company's risk management framework. The Company's
    Audit Committee oversees how management monitors compliance with the
    Company's risk management practices and reviews the adequacy of the risk
    management framework in relation to the risks faced by the Company. The
    Company's risk management practices are established to identify and
    analyze the risks faced by the Company, to set appropriate risk limits
    and controls, and to monitor risks and adherence to limits.

    Credit risk

    Credit risk is the risk of financial loss to the Company if a customer or
    counterparty to a financial instrument fails to meet its contractual
    obligations, and arises principally from the Company's receivables from
    customers.

    The Company's accounts receivable are due from customers in a variety of
    industries including a significant proportion with customers operating in
    the energy and manufacturing industries. The ability of customers within
    the energy industry to pay us is partially affected by fluctuations in
    the price they receive for various hydrocarbon products. Customers in
    both these industries may also face particular challenges in their
    ability to secure debt and equity financing. The maximum credit exposure
    associated with trade accounts receivable is the carrying value.

    The Company follows a credit policy under which the Company reviews each
    new customer individually for credit worthiness before the Company's
    standard payment and delivery terms and conditions are offered. The
    Company's review includes external ratings, where available, and trade
    references. Customers that fail to meet the Company's credit worthiness
    criteria may transact with the Company only on a prepayment basis. On an
    on going basis, the Company also reviews the payment patterns of its
    existing customers and the customers' continued credit worthiness.

    Trade accounts receivable are recorded at the invoiced amount and do not
    bear interest. The allowance for doubtful accounts is the Company's best
    estimate of the amount of probable credit losses in the Company's
    existing accounts receivable. The Company determines the allowance by
    reviewing individual accounts past due for collectability, historical
    write-off experience, and overall account aging. The Company reviews its
    allowance for doubtful accounts on a continuous basis as new information
    becomes available and reviews past due amounts at least monthly.


                                           June 30, 2009   December 31, 2008
                                      ---------------------------------------
    Trade accounts receivable         $           17,872              27,145
    Allowance for doubtful accounts               (1,210)             (1,405)
                                      ---------------------------------------
    Total trade accounts receivable   $           16,662              25,740
                                      ---------------------------------------
                                      ---------------------------------------

    The aging of trade receivables is as follows:

                                           June 30, 2009   December 31, 2008
                                      ---------------------------------------
                                        Gross  Allowance    Gross  Allowance
    Current (0 - 30 days from
     invoice date)                    $ 10,086              13,465         -
    Past due 1-30 days                   3,249        45     6,633         -
    Past due 31-90 days                  3,296       215     5,949       481
    More than 90 days                    1,241       950     1,098       924
                                      ---------------------------------------
    Total                             $ 17,872     1,210    27,145     1,405
                                      ---------------------------------------
                                      ---------------------------------------

    The movement in the allowance for doubtful accounts receivables in
    respect of trade receivables during the quarter is as follows:

                                                    2009                2008
                                      ---------------------------------------

    Balance, April 1                  $            1,490               1,153
    Bad debt provision                               106                   -
    Write-offs net of
     recoveries                                     (386)                 (2)
                                      ---------------------------------------
    Balance, June 30                  $            1,210               1,151
                                      ---------------------------------------
                                      ---------------------------------------

    -------------------------------------------------------------------------

    NOTE 5 - RELATED PARTY TRANSACTIONS

    During the quarter, the Company had the following transactions with
    related parties, all of which are measured at exchange amounts:

    -   During the second quarter of 2009, the Company paid rent and property
        taxes for a regional office to a corporation related to a Director of
        the Company in the amount of $103 (2008 - $105)
    -   During the second quarter of 2009, the Company also paid rent of $74
        (2008 - $78) for a regional office to a corporation controlled by a
        Senior Manager of the Company.

    NOTE 6 - SEGMENT INFORMATION

    Management has determined that the Company operates in a single industry
    segment, which involves the provision of industrial health, safety and
    environmental monitoring services. Substantially all of the Company's
    operations, assets, revenues, and employees are in Canada. For the
    quarter ended June 30, 2009, the Company had one customer representing
    more than 10% of revenue (June 30, 2008 - one). The Company had sales of
    approximately $2.4 million to the customer during the quarter (June 30,
    2008 - $3.3 million).

    At June 30, 2009 US operations comprised less than 1% of revenues and
    assets of the Company.

    The Company provides services to two main groups of customer industries.
    "Oilfield" services are provided to customers in the conventional
    upstream, or "wellhead", sector of the oil and gas industry.
    "Industrial" services are provided to customers in a variety of other
    industries including: non-conventional upstream oil development and
    production (including oil sands extraction); oil and gas processing;
    petrochemicals; pulp and paper; utilities; power generation; and
    manufacturing. It also includes worker safety training and safety
    management and consulting services. The Company tracks revenues provided
    to each customer group as a method to predict future operating activity.
    Revenue by customer group is as follows:

                                      Three Months ended    Six Months ended
                                             June 30             June 30
                                          2009      2008      2009      2008
                                      ---------------------------------------
    Oilfield                          $  4,317     8,667  $ 14,577    24,628
    Industrial                          15,249    19,420    27,390    31,028
                                      ---------------------------------------
    Total Revenue                     $ 19,566    28,087  $ 41,967    55,656
                                      ---------------------------------------

    As a % of Revenue:
    Oilfield                             22.1%     30.9%     34.7%     44.3%
    Industrial                           77.9%     69.1%     65.3%     55.7%
                                      ---------------------------------------
    Total Revenue                       100.0%    100.0%    100.0%    100.0%

    -------------------------------------------------------------------------

    NOTE 7 - STOCK-BASED COMPENSATION PLANS

    Incentive stock option plan

    The weighted average fair value of options granted for the quarter ended
    June 30, 2009 was $0.26. The fair value of each option granted was
    estimated on the date of grant using the Modified Black-Scholes option-
    pricing model with the following assumptions:

                                                 June 30         December 31
                                                   2009              2008
                                     ----------------------------------------
    Vesting period (years)                             3                   3
    Risk-free interest rate                        1.69%               2.11%
    Expected life (years)                              5                   5
    Price volatility                              92.78%              89.70%
                                      ---------------------------------------
                                      ---------------------------------------

    Pursuant to the stock option plan, a maximum of 10% of the issued and
    outstanding common shares of the Company are reserved from time to time,
    for issuance to eligible participants. Option prices and vesting terms
    are determined by the directors at the time of granting at an exercise
    price no less than market on the grant date. The term of options granted
    does not exceed five years.

    Information about outstanding stock options is as follows:


                                         Quarter ended         Year ended
                                             June 30,         December 31,
                                              2009                2008
                                     ------------------- --------------------
                                               Weighted             Weighted
                                                Average              Average
                                               Exercise             Exercise
                                      Options     Price    Options     Price
                                     ------------------- --------------------
    Outstanding, beginning of
     period                          2,533,499  $   1.88 2,379,998  $   2.15
    Granted                            650,000      0.36   735,000      0.99
    Exercised                                -         -    (8,000)     0.50
    Forfeited                         (471,333)     1.72  (573,499)     1.86
                                     ------------------- --------------------

    Outstanding, end of period       2,712,166  $   1.55 2,533,499  $   1.88
                                     ------------------- --------------------
                                     ------------------- --------------------

    Exercisable at end of period     1,508,301  $   2.14 1,335,810  $   2.16
                                     ------------------- --------------------
                                     ------------------- --------------------

    The following table summarizes information about stock options
    outstanding at June 30, 2009:


                                       Weighted
                            Exercise    average
               Options       prices   remaining     Number
             outstanding       $          life    exercisable
             -------------------------------------------------
               1,165,000   0.25-1.19      4.38        178,330
                 853,500   1.20-2.14      2.00        668,647
                 318,666   2.15-3.09      1.69        286,324
                 375,000   3.10-4.04      1.78        375,000
             -------------------------------------------------
               2,712,166        1.55      2.95      1,508,301
             -------------------------------------------------
             -------------------------------------------------

    Deferred share unit plan

    On January 16, 2007, 15,000 deferred share units ("DSUs") were granted to
    non-executive directors. An additional 15,000 DSUs were granted on May
    15, 2008. On December 15, 2008 3,000 of the DSUs were settled for $1.

    For the 2009 year, the directors' retainers and meeting fees are being
    paid with DSU's. During the second quarter ended June 30, 2009, 130,970
    DSU's were granted. The total DSU's outstanding at June 30, 2009 were
    157,970.

    The units are revalued quarterly and any change in value is included as
    an increase or decrease in stock based compensation expense and accrued
    liabilities. The expense recognized for the quarter ended June 30, 2009
    was $43 (quarter ended June 30, 2008 - $16).

    NOTE 8 - SUPPLEMENTARY CASH FLOW INFORMATION

                                       Three Months ended   Six Months ended
    Increase (decrease) in non-cash          June 30             June 30
     working capital from operations      2009      2008      2009      2008
                                      ---------------------------------------

    Accounts receivable               $  6,795     2,885  $  9,084    (2,964)
    Inventory                               (8)       (2)      (19)       (5)
    Prepaid expenses and other assets      143      (143)      552        10
    Income tax recoverable/payable          (3)      150       238       380
    Accounts payable and accrued
     liabilities                          (995)     (326)   (2,978)      420
                                      ---------------------------------------
    Net change in non-cash working
     capital                          $  5,932     2,564  $  6,877    (2,159)
                                      ---------------------------------------
                                      ---------------------------------------

    NOTE 9 - CONTINGENCIES

    In the ordinary course of business activities, the Company may be
    contingently liable for litigation and claims with customers, suppliers,
    former employees, and third parties. Management believes that adequate
    provisions have been recorded in the accounts where applicable. Although
    it may not be possible to estimate accurately the extent of potential
    costs and losses, if any, management believes that the ultimate
    resolution of such contingencies would not have a material effect on the
    financial position of the Company.
    





For further information:

For further information: HSE Integrated Ltd., David Yager, Chairman &
CEO, Telephone: (403) 266-1833, E-Mail: dyager@hseintegrated.com; Lori
McLeod-Hill, CFO, Telephone: (403) 266-1833, E-Mail:
lmcleod-hill@hseintegrated.com

Organization Profile

HSE Integrated Ltd.

More on this organization


Custom Packages

Browse our custom packages or build your own to meet your unique communications needs.

Start today.

CNW Membership

Fill out a CNW membership form or contact us at 1 (877) 269-7890

Learn about CNW services

Request more information about CNW products and services or call us at 1 (877) 269-7890