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Share Name | Share Symbol | Market | Type |
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Gasfrac Energy Services | TSXV:GFS | TSX Venture | Common Stock |
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GASFRAC Energy Services Inc. (TSX VENTURE:GFS) Dwight Loree, Chief Executive Officer commented "Revenue for the quarter increased 91% to $30.5 million from $15.9 million in 2010. However, this revenue was below our expectations due to capacity constraints resulting from a well site incident on January 14, 2011 which resulted in us suspending operations for a three week period. Subsequently we also added several data collection and monitoring systems to our operating procedures to enhance safety. This additional data monitoring capability exceeded the bandwidth of the data vans as currently configured resulting in an additional short-term constraint on revenue capacity which has now been alleviated. The net result of the shutdown and bandwidth limitation was to reduce the Company's effective revenue generation capacity during the quarter to 60% of that originally planned. With the added equipment from our capital build now coming on line, I expect revenue capacity to significantly increase in for the second half of the year." Management's discussion and analysis ("MD&A") of the financial condition and the results of operations should be read in conjunction with the March 31, 2011 unaudited interim consolidated financial statements and the December 31, 2010 audited consolidated financial statements of GASFRAC Energy Services Inc. ("GASFRAC" or the "Company"), together with the accompanying notes. The interim consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") 1, "First-time Adoption of International Financial Reporting Standards" and with International Accounting Standard 34, "Interim Financial Reporting", as issued by the International Accounting Standard Board. Previously, the Company prepared its interim and Annual Consolidated Financial Statements in accordance with Canadian generally accepted accounting principles ("GAAP"). Readers should also refer to the "Forward-Looking Statements" legal advisory at the end of this MD&A. This MD&A has been prepared using information that is current to May 9, 2011. All references to dollar amounts are in Canadian dollars. Figures are in 000s except share and per share data or as otherwise noted. Unless the context otherwise requires, all references in this MD&A to "we", "us" or "our" mean GASFRAC. Business of GASFRAC GASFRAC Energy Services Company Inc. ("GASFRAC" or the "Company") was incorporated on February 13, 2006 in Canada under the Business Corporations Act in the Province of Alberta. The Company is an oil and gas well fracturing company that has developed new technology, the "LPG Fracturing Process", to enable wells to be fractured safely with LPG, more specifically propane and butane. The Company has four wholly-owned subsidiaries, GASFRAC Services GP Inc., GASFRAC Energy Services Limited Partnership, GASFRAC Luxembourg Finance, and GASFRAC Inc. (a U.S. incorporated entity). Changes in Accounting Policies On January 1, 2011, GASFRAC adopted International Financial Reporting Standards ("IFRS") for financial reporting purposes, using a transition date of January 1, 2010. The financial statements for the three months ended March 31, 2011, including required comparative information, have been prepared in accordance with IFRS 1, First-time Adoption of International Financial Reporting Standards, and with International Accounting Standard ("IAS") 34, Interim Financial Reporting, as issued by the International Accounting Standards Board ("IASB"). Previously, the Company prepared its Interim and Annual Consolidated Financial Statements in accordance with Canadian generally accepted accounting principles ("Previous GAAP"). Unless otherwise noted, 2010 comparative information has been prepared in accordance with IFRS. The adoption of IFRS has not had an impact on the Company's operations, strategic decisions and cash flow. Further information on the IFRS impacts is provided in the Accounting Policies and Estimates Section of this MD&A, including reconciliations between previous GAAP and IFRS Net Earnings, Operating Earnings and other financial metrics. Comparative Quarterly Financial Information Three months ended: March 31, 2011 March 31, 2010 ---------------------------------------------------------------------------- Revenue 30,452 15,906 Operating expenses 25,567 11,907 Selling, general and administrative expenses 3,670 1,932 EBITDA(1) 66 3,943 Net (loss) income (2,515) 1,729 Net (loss) income per share - basic (0.04) 0.05 Weighted average number of shares - basic 60,662,082 32,674,444 Treatments 139 78 Revenue per treatment 219 204 ---------------------------------------------------------------------------- (1) Defined under Non-IFRS Measures First Quarter Highlights Financial Overview Revenues Revenue for the quarter increased 91% to $30.5 million from $15.9 million in 2010. The increase reflects a combination of added equipment capacity as well as additional demand for our services in Canada. However, revenue for the quarter was below our expectations due to capacity constraints resulting from a well site incident on January 14, 2011. As the Company has previously described in press releases, the incident was caused by a premature mechanical failure. The Company took the precaution of discontinuing all fracturing operations until it determined the cause of the incident. As a result, operations for the quarter were shut down for a three week period. Further, as a result of its review, the Company added several data collection and monitoring systems to its operating procedures. This additional data monitoring capability exceeded the bandwidth of the data vans as currently configured thus requiring the use of two data vans per fracturing job. This requirement for two data vans per job effectively removed one fracturing set from operations until additional monitoring bandwidth was added to each equipment set. This was completed early in the second quarter. The net result of the shutdown and bandwidth limitation was to reduce the Company's effective revenue generation capacity during the quarter to 60% of that originally planned. In 2011, the demand for fracturing services in Canada has improved significantly and the Company has participated in this improvement due to increased acceptance of its LPG fracturing technology and added equipment capacity. During the quarter, three customers represented 56% of revenue. During the quarter the Company completed 139 treatments at an average price of $219 compared to 78 treatments at an average job price of $204 during Q1 2010. Operating Expenses Operating expenses increased to $25.6 million (84% of revenue) during Q1 2011 from $11.9 million (75% of revenue) in Q1 2010. In addition to the increase related to revenue volume, the increase is comprised of three components. First, direct field costs increased by approximately 4 percentage points ($1.2 million) resulting from standby charges incurred during the shutdown and equipment rental costs. Second, repair costs incurred as a result of the January 14, 2011 incident were $0.5 million. Third, our US operation incurred fixed operating costs of $0.8 million during the quarter. Selling, General and Administrative ("SG&A") Expenses SG&A expenses increased to $3.7 million (12% of revenue) during Q1 2011 from $3.6 in Q4 2010 and $1.9 million (12% of revenue) in Q1 2010. The increase is primarily due to the hiring of administrative and operations staff to support the growth in both our Canadian and US operations. Amortization Amortization increased to $2.9 million during Q1 2011 from $1.5 million in Q1 2010. The increase is due to an increase in operating capital assets. EBITDA EBITDA decreased to $0.1 million during Q1 2011 from $4.0 million in Q1 2010. The decrease is largely due to the revenue capacity limitation experienced during the quarter without a reduction in the cost base built to support the higher revenue. Net Income Net income decreased to a loss of $2.5 million during Q1 2011 from net income of $1.7 million during Q1 2010. Summary of Quarterly Results MAR. 31 JUN. 30 SEP. 30 DEC. 31 MAR. 31 2010 2010 2010 2010 2011 ---------------------------------------------------------------------------- Revenue 15,906 13,323 26,590 41,087 30,452 Net income (loss) 1,729 (1,282) 2,318 1,995 (2,515) Net income (loss) per share (basic) 0.05 (0.04) 0.06 0.04 (0.04) EBITDA (1) 3,943 440 4,874 5,814 66 Capital expenditures 6,247 7,430 35,871 33,897 38,941 Working capital (2) 17,640 13,330 41,781 118,346 79,069 Shareholders' equity 85,957 85,758 151,606 259,445 258,217 ---------------------------------------------------------------------------- (1) Defined under Non-IFRS Measures (2) Working capital is defined as current assets less current liabilities Liquidity and Capital Resources As at March 31, 2011 2010 ---------------------------------------------------------------------------- Cash Provided by (used in) Operating Activities $ 26,327 $ (5,124) Financing Activities 1,050 341 Investing Activities (38,632) (6,247) ---------------------------------------------------------------------------- $ (11,255) $ (11,030) ---------------------------------------------------------------------------- As at March 31, 2011 the Company had $79.1 million of working capital compared to $118.3 million at December 31, 2010. The decrease in working capital is primarily due to investing in capital assets offset by an increase is cash provided from operating activities. The Company had approximately $101 million of capital commitments as part of the 2011 capital program. The Company anticipates being able to fund these capital expenditures through cash on hand, operating cash flows and current debt facilities. Operating The Company's funds provided by operations (as defined under Non-IFRS Measures) was $1.4 million for Q1 2011 compared to $4.1 million in 2010. The decrease is largely due to the loss for the quarter as compared to a profit in 2010. Financing Net cash provided by financing activities for Q1 2011 was $1.0 million compared to $0.3 million during Q1 2010. Both result from the exercise of stock options and warrants. As at March 31, 2011 the Company had a $15 million demand revolving loan facility and a $35 million committed revolving facility (see Note 11 of the interim consolidated financial statements). No amounts were drawn on these facilities as at March 31, 2011 or as at the date of this MD&A. The Company is in compliance with all its debt covenants. Investing For Q1 2011 the Company's net cash used for investing activities was $41.3 million as compared to $6.2 million in Q1 2010. The Company invested $38.9 million in capital equipment to add revenue producing capacity. In 2010, The Company invested $6.2 million in capital equipment. Accounting Policies and Estimates Adoption of IFRS The Company has prepared its March 31, 2011 Interim Consolidated Financial Statements in accordance with IFRS 1, First-time Adoption of International Financial Reporting Standards, and with IAS 34, Interim Financial Reporting, as issued by the IASB. Previously, the Company prepared its financial statements in accordance with Canadian GAAP, or previous GAAP. The adoption of IFRS has not had a material impact on the Company's operations, strategic decisions, cash flow and capital expenditures. The Company's IFRS accounting policies are provided in Note 3 to the Interim Consolidated Financial Statements. In addition, Note 15 to the Interim Consolidated Financial Statements presents reconciliations between the Company's 2010 previous GAAP results and the 2010 IFRS results. The reconciliations include the Consolidated Balance Sheets as at January 1, 2010, March 31, 2010 and December 31, 2010, and Consolidated Statements of Earnings, Comprehensive (Loss) Income and Changes in Shareholders' Equity for the three months ended March 31, 2010 and for the twelve months ended December 31, 2010. The following provides summary reconciliations of GASFRAC's 2010 GAAP and IFRS result. MAR. 31 JUN. 30 SEP. 30 DEC. 31 Annual 2010 2010 2010 2010 2010 ---------------------------------------------------------------------------- Net income (loss) - Previous GAAP 1,672 (1,266) 2,585 2,062 5,053 Operating Expense re: leases 33 62 32 42 169 Share Based Payments (129) (247) (494) (342) (1,212) Amortization 159 174 200 239 772 Interest income / Expense (6) (5) (5) (6) (22) ---------------------------------------------------------------------------- Net income (loss) - IFRS 1,729 (1,282) 2,318 1,995 4,760 ---------------------------------------------------------------------------- Accounting Policy Changes Leases Previous GAAP will consider the leases to be of a capital nature based on certain quantifiable criteria. Based on the criteria, GASFRAC concluded that the leases on the light vehicles were operating leases in nature. With the absence of the quantitative criteria provided by Previous GAAP, we determined that qualitatively, the risks and rewards of the lease reside with GASFRAC and as such, treated it as a financing lease. Depreciation With the conversion to IFRS, GASFRAC broke out the field equipment into each of the separate components that made up field equipment. We then assessed the useful life and residual value for each of these components. Based on this assessment, certain depreciation rates were modified. Stock based compensation Under Previous GAAP, GASFRAC accounted for certain stock based compensation plans whereby the obligation and compensation costs were accrued over the vesting period using the intrinsic value method. The intrinsic value of a share unit is the amount by which the Company's share price exceeds the exercise price of the share unit. For certain stock-based compensation plans, IFRS requires share-based compensation be fair valued using an option pricing model, such as the Black-Scholes model, at each reporting date. Each tranche in an award is considered a separate award with its own vesting period. Further, GASFRAC adjusted the volatility of the unvested options and warrants that were issued when GASFRAC was not publically traded from 0% to 50%. Accordingly, upon transition to IFRS, the Company recorded a fair value adjustment of $891 as at January 1, 2010 to increase the share-based compensation with a corresponding charge to retained earnings. GASFRAC elected to use the IFRS 1 exemption whereby the share-based payments that had vested or settled prior to January 1, 2010 were not required to be retrospectively restated. Subsequent IFRS fair value adjustments are recorded through stock based compensation. As part of the 2010 Kierland transaction, the amount of consideration in excess of the fair market value of assets received was offset against share issue costs under Previous GAAP. Under IFRS, the amount of consideration in excess of the fair market value of assets received was listed as an unidentifiable transaction cost and expensed to sales, general and administrative expense. The amount of the adjustment was $245. Internal Controls Over Financial Reporting During the first quarter, GASFRAC completed an evaluation of the Company's internal controls under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures, as defined in National Instrument 52-109. Based on the evaluation, the Company's management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company's disclosure controls and procedures were designed to provide a reasonable level of assurance over the disclosure of material information, and are effective as of March 31, 2011. Off-Balance Sheet Arrangements The Company is not party to any off balance sheet arrangements or transactions. Non-IFRS Measures Certain supplementary measures in this MD&A do not have any standardized meaning as prescribed under IFRS and, therefore, are considered non-IFRS measures. These measures have been described and presented in order to provide shareholders and potential investors with additional information regarding the Company's financial results, liquidity and ability to generate funds to finance its operations. These measures may not be comparable to similar measures presented by other entities, and are further explained as follows: EBITDA is defined as net income before interest income and expense, taxes, depreciation, amortization and non-controlling interest. EBITDA is presented because it is frequently used by securities analysts and others for evaluating companies and their ability to service debt. EBITDA was calculated as follows: Three months ended March 31 2011 2010 ---------------------------------------------------------------------------- Net (loss) income (2,515) 1,729 Add back (deduct): Interest (income) expense (255) 6 Amortization 2,885 1,490 Deferred income tax (benefit) expense (49) 718 ---------------------------------------------------------------------------- EBITDA 66 3,943 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Funds provided by operations is defined as cash and cash equivalents provided by (used for) operating activities before the net change in non-cash operating working capital. Funds provided by operations is a measure that provides shareholders and potential investors with additional information regarding the Company's liquidity and its ability to generate funds to finance its operations. Management utilizes these measures to assess the Company's ability to finance operating activities and capital expenditures. Funds provided by operations were calculated as follows: Three months ended March 31 2011 2010 ---------------------------------------------------------------------------- Cash and cash equivalents provided by (used for) operating activities 26,327 (5,124) Add back (deduct): Net changes in non-cash working capital (25,670) 9,227 ---------------------------------------------------------------------------- Funds provided by operations 657 4,103 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Outlook We expect the North American pressure pumping market will remain strong in 2011 due to the service intensity of the wells being drilled, energy demand and service supply levels. Although there is projected to be a significant amount of new horsepower being added to the market in 2011, it is still estimated that the market will be undersupplied based on projected rig activity. As natural gas prices continue to be soft we have observed customers targeting more of their capital budgets in oil and liquids-rich reservoirs. Further, development activity is focused on deep, unconventional and horizontal wells often requiring multi-stage fracturing. As noted above, we expect that overall demand for fracturing services will continue to be strong for 2011 and this, combined with growing knowledge and acceptance of the Company's LPG fracturing technology, should support continued growth of our Canadian revenue base. While we experienced a constraint on revenue producing capacity in the first quarter of 2011 due to our voluntary three week operational shutdown, we do not expect to recapture that revenue during the second quarter of 2011 as the Canadian Spring breakup is expected to be longer than usual. As a result, second quarter revenues from Canada will reflect reduced revenue days. However, we anticipate four crews operating in Canada for the entire second half of 2011 which will allow a significant increase in revenue activity in the second half. As in Canada, more drilling activity in the USA is being focused on oil and liquids rich gas. While industry dynamics are similar to Canada for GASFRAC, the key element of our initial growth in the USA will be obtaining customer acceptance of our LPG fracturing technology and on focusing on key basins where we can quickly reach sufficient mass to ensure high utilization rates. One set of equipment was deployed to Texas in April 2011 with a second set scheduled for later in the second quarter. The Company has identified a number of customers which plan to perform LPG fracturing operations to determine the efficacy of the technology on their formations. Revenue levels in the US will be a factor of the timing and results of these assessments and the resultant levels of customer adoption of LPG fracturing technology. We are confident that customers will experience positive results from LPG fracturing. Forward-Looking Statements This document contains certain statements that constitute forward-looking statements under applicable securities legislation. All statements other than statements of historical fact are forward-looking statements. In some cases, forward-looking statements can be identified by terminology such as "may", "will", "should", "expect", "plan", "anticipate", "believe", "estimate", "predict", "potential", "continue", or the negative of these terms or other comparable terminology. These statements are only as of the date of this document and we do not undertake to publicly update these forward looking statements except in accordance with applicable securities laws. These forward looking statements include, among other things: - expectations that GASFRAC's innovative technology will provide GASFRAC with opportunities to expand GASFRAC's market share in Alberta and British Columbia; - estimates of additional investment required to complete ongoing capital projects; - expectations of securing financing for additional capital expenditures beyond 2010; - expectations of the duration of Spring breakup in Canada in 2011; - expectations that GASFRAC has or can obtain sufficient funding to meet its capital plan; - expectations that additional operating equipment will be delivered and provide GASFRAC the ability to service demand for large multi-stage treatments; - assumption that environmental protection requirements will not have a significant impact on GASFRAC's operations or capital budget; - expectations as to GASFRAC's future market position in the industry; - expectations as to the supply of raw materials; - expectations as to the pricing of GASFRAC's services; - expectations as to the timing of additional capital equipment in Canada and the USA; expectations as to the potential for GASFRAC's services in the United Sates; - expectations of fracturing industry pricing and the pricing of GASFRAC services in North America in 2011; - expectations of oil and natural gas commodity prices in 2011; - expectations of the amount of net fracturing horsepower being added to the North American market in 2011 and its impact on GASFRAC's service prices; - expected timing for completion of the assessment and implementation phases of GASFRAC's project plan for transition to IFRS; These statements are only predictions and are based on current expectations, estimates, projections and assumptions, which we believe are reasonable but which may prove to be incorrect and therefore such forward-looking statements should not be unduly relied upon. In addition to other factors and assumptions which may be identified in this document, assumptions have been made regarding, among other things, industry activity; effect of market conditions on the demand for the Company's services; the ability to obtain qualified staff, equipment and services in a timely manner; the effect of current plans; the timing of capital expenditures and receipt of added equipment operating capacity; future oil and natural gas prices and the ability of the Company to successfully market its services. By its nature, forward-looking information involves numerous assumptions, known and unknown risks and uncertainties, both general and specific, that contribute to the possibility that the predictions, forecasts, projections and other forward-looking statements will not occur. These risks and uncertainties include: changes in drilling activity; fluctuating oil and natural gas prices; general economic conditions; weather conditions; regulatory changes; the successful development and execution of technology; customer acceptance of new technology; the potential of competing technologies by market competitors; the availability of qualified staff, raw materials and capital equipment. GASFRAC ENERGY SERVICES INC. INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) FOR THE THREE MONTHS ENDED MARCH 31, 2011 GASFRAC ENERGY SERVICES INC. Consolidated Statement of Financial Position (unaudited) (000s) As at: Mar 31, 2011 Dec 31, 2010 Jan 1, 2010 ---------------------------------------------------------------------------- (Note 15) (Note 15) ASSETS CURRENT ASSETS Cash and cash equivalents $ 87,446 $ 98,701 $ 11,643 Accounts receivable 21,374 24,500 9,469 Inventory 16,176 7,018 5,499 Prepaid expenses 5,545 6,839 519 ---------------------------------------------------------------------------- 130,541 137,058 27,130 PROPERTY and EQUIPMENT (Note 4) 174,094 138,051 61,557 INTANGIBLE ASSETS (Note 5) 433 420 358 LONG-TERM DEPOSITS 5,528 3,176 1,790 DEFERRED INCOME TAX BENEFIT - - 775 ---------------------------------------------------------------------------- TOTAL ASSETS $ 310,596 $ 278,705 $ 91,610 ---------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Current portion of lease obligations (Note 6) $ 293 $ 240 $ 121 Unearned revenue (Note 7) 20,871 3,485 Accounts payable and accrued liabilities 30,308 14,987 7,617 ---------------------------------------------------------------------------- Total current liabilities 51,472 18,712 7,738 ---------------------------------------------------------------------------- LONG-TERM LEASE OBLIGATIONS (Note 6) 477 180 179 DEFERRED INCOME TAX LIABILITY (Note 8) 430 368 - ---------------------------------------------------------------------------- Total non-current liabilities 907 548 179 ---------------------------------------------------------------------------- SHAREHOLDERS' EQUITY SHARE CAPITAL (Note 9) 252,843 251,573 81,293 CONTRIBUTED SURPLUS 3,539 3,522 2,811 RETAINED EARNINGS 1,835 4,350 (411) ---------------------------------------------------------------------------- Total equity 258,217 259,445 83,693 ---------------------------------------------------------------------------- TOTAL LIABILITIES AND EQUITY $ 310,596 $ 278,705 $ 91,610 ---------------------------------------------------------------------------- See accompanying Notes to Consolidated Financial Statements. On behalf of the Board: Dwight Loree, Director Gerald Roe, Director GASFRAC ENERGY SERVICES INC. Consolidated Statement of Comprehensive (loss) Income (unaudited) (000s) Three Months Ended: Mar 31, 2011 Mar 31, 2010 ---------------------------------------------------------------------------- (Note 15) REVENUE $ 30,452 $ 15,906 OTHER INCOME Interest income 255 - Business interruption claim - 2,030 ---------------------------------------------------------------------------- 30,707 17,936 ---------------------------------------------------------------------------- EXPENDITURES Operating 25,567 11,913 Selling, general and administrative 3,670 1,932 Stock based compensation 1,047 166 Amortization 2,885 1,490 ---------------------------------------------------------------------------- 33,169 15,501 ---------------------------------------------------------------------------- (LOSS) PROFIT BEFORE INCOME TAX (2,462) 2,435 Foreign exchange loss (gain) 102 (12) Deferred income tax (benefit) expense (49) 718 ---------------------------------------------------------------------------- NET (LOSS) INCOME / COMPREHENSIVE (LOSS) INCOME (2,515) 1,729 (Loss) Earnings per share Basic $ (0.04) $ 0.05 ---------------------------------------------------------------------------- Diluted $ (0.04) $ 0.05 ---------------------------------------------------------------------------- See accompanying Notes to Consolidated Financial Statements. GASFRAC ENERGY SERVICES INC. Consolidated Statement of Changes in Equity (unaudited) (000s) Share Contributed Retained Capital Surplus Earnings Total Equity ---------------------------------------------------------------------------- Balance at January 1, 2010 $ 81,293 $ 2,811 $ (411) $ 83,693 ---------------------------------------------------------------------------- Total comprehensive income for the period: Net income and comprehensive income - - 1,729 1,729 ---------------------------------------------------------------------------- Total comprehensive income Jan - Mar 2010 - - 1,729 1,729 ---------------------------------------------------------------------------- Exercise of stock options 406 (37) - 369 SBC expense - options and warrants - 166 - 166 ---------------------------------------------------------------------------- Balance at March 31, 2010 $ 81,699 $ 2,940 $ 1,318 $ 85,957 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Total comprehensive income for the period: Net income and comprehensive income - - 3,032 3,032 ---------------------------------------------------------------------------- Total comprehensive income Apr - Dec 2010 - - 3,032 3,032 ---------------------------------------------------------------------------- Transactions with shareholders: Issuance of common stock 104,698 - - 104,698 Issuance of restricted stock - 354 - 354 Issuance of subscription receipts 61,551 - - 61,551 Issuance on share exchange 699 - - 699 Issued for services 128 - - 128 SBC expense - options and warrants - 730 - 730 Exercise of stock options 991 (96) - 895 Exercise of warrants 2,030 (629) - 1,401 Released from restricted shares 329 (329) - - Reclassification as restricted shares (552) 552 - - ---------------------------------------------------------------------------- Total 169,874 582 - 170,456 ---------------------------------------------------------------------------- Balance at December 31, 2010 $ 251,573 $ 3,522 $ 4,350 $ 259,445 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Total comprehensive income for the period: Net loss and comprehensive loss - - (2,515) (2,515) ---------------------------------------------------------------------------- Total comprehensive income Jan - Mar 2011 - - (2,515) (2,515) ---------------------------------------------------------------------------- Transactions with shareholders: Stock based compensation expense - options - 185 - 185 Issuance of restricted stock - 151 - 151 Exercise of stock options 523 (46) - 477 Exercise of warrants 839 (176) - 663 Released from restricted shares 97 (97) - - Common Stock - Deferred Tax Benefit (189) - - (189) ---------------------------------------------------------------------------- Total 1,270 17 - 1,287 ---------------------------------------------------------------------------- Balance as March 31, 2011 $ 252,843 $ 3,539 $ 1,835 $ 258,217 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- See accompanying Notes to Consolidated Financial Statements. GASFRAC ENERGY SERVICES INC. Consolidated Statement of Cash Flows (unaudited) (000s) Three Months Ended: Mar 31, 2011 Mar 31, 2010 ---------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS PROVIDED BY (USED FOR): OPERATING ACTIVITIES Net (loss) Income / Comprehensive (loss) Income $ (2,515) $ 1,729 Items not effecting cash: Amortization 2,885 1,490 Deferred income taxes (benefit) expense (49) 718 Stock based compensation (Note 9) 336 166 ---------------------------------------------------------------------------- 657 4,103 Net change in non-cash working capital (Note 13) 25,670 (9,227) ---------------------------------------------------------------------------- 26,327 (5,124) ---------------------------------------------------------------------------- FINANCING ACTIVITIES Issuance of common shares (net of share issue costs) 700 368 Payment of finance lease liabilities 350 (27) ---------------------------------------------------------------------------- 1,050 341 ---------------------------------------------------------------------------- INVESTING ACTIVITIES Purchase of property and equipment (38,728) (6,243) Proceeds on disposal of property and equipment 147 - Purchase of intangible assets (51) (4) ---------------------------------------------------------------------------- (38,632) (6,247) ---------------------------------------------------------------------------- Decrease in cash and cash equivalents for the period (11,255) (11,030) Cash and cash equivalents at beginning of period 98,701 11,643 ---------------------------------------------------------------------------- BALANCE, END OF THE PERIOD $ 87,446 $ 613 ---------------------------------------------------------------------------- See accompanying Notes to Consolidated Financial Statements. GASFRAC ENERGY SERVICES INC. Notes to the Consolidated Financial Statements (unaudited) March 31, 2011 (Figures in text and tables are in 000s except share data and certain other exceptions as indicated) 1. CORPORATE INFORMATION GASFRAC Energy Services Inc. ("Gasfrac" or "the Company") is an oil and gas well fracturing company that has developed the "LPG Fracturing Process" to enable wells to be fractured with LPG, more specifically propane and butane. GASFRAC is a publically traded company, incorporated and domiciled in Canada. The address and registered office is Suite 1900, 801 - 6th Avenue S.W., Calgary, Alberta, Canada, T2P 3W2. These interim Consolidated Financial Statements were approved and authorized for issuance by the Board of Directors on May 9, 2011. The Company's Canadian business is seasonal in nature. The lowest activity is typically experienced during the second quarter of the year when road weight restrictions are in place due to spring break up. 2. BASIS OF PREPARATION In conjunction with the Company's annual audited Consolidated Financial Statements to be issued under International Financial Reporting Standards ("IFRS") for the year ended December 31, 2011, these interim Consolidated Financial Statements present GASFRAC's initial financial results of operations and financial position under IFRS as at and for the three months ended March 31, 2011, including 2010 comparative periods. As a result, they have been prepared in accordance with IFRS 1, "First-time Adoption of International Financial Reporting Standards" and with International Accounting Standard ("IAS") 34, "Interim Financial Reporting", as issued by the International Accounting Standards Board ("IASB"). These interim Consolidated Financial Statements do not include all the necessary annual disclosures in accordance with IFRS. Previously, the Company prepared its interim and annual Consolidated Financial Statements in accordance with Canadian generally accepted accounting principles ("previous GAAP"). The preparation of these interim Consolidated Financial Statements resulted in selected changes to GASFRAC's accounting policies as compared to those disclosed in the Company's annual audited Consolidated Financial Statements for the period ended December 31, 2010 issued under previous GAAP. A summary of the significant changes to GASFRAC's accounting policies is disclosed in Note 15 along with reconciliations presenting the impact of the transition to IFRS for the comparative periods as at January 1, 2010, as at and for the three months ended March 31, 2010, and as at and for the twelve months ended December 31, 2010. Operating expenses as presented on the Consolidated Statement of Comprehensive (loss) Income are primarily composed of direct salaries, materials, and other direct operating costs. Selling, general, and administrative expenses as presented on the Consolidated Statement of Comprehensive (loss) Income are primarily composed of indirect salaries, head office expenses, insurance, professional fees and other indirect costs. A summary of GASFRAC's significant accounting policies under IFRS is presented in Note 3. These policies have been retrospectively and consistently applied except where specific exemptions permitted an alternative treatment upon transition to IFRS in accordance with IFRS 1 as disclosed in Note 15. These consolidated financial statements are presented in Canadian dollars, which is the Company's functional currency. All financial information presented in dollars has been rounded to the nearest thousand except for share and per share amounts. These interim Consolidated Financial Statements have been prepared on a historical cost basis except for financial instruments and share based payment transactions that are measured at fair value. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements and in preparing the opening IFRS statement of financial position at January 1, 2010 for the purposes of the transition to IFRS, unless otherwise indicated. The accounting policies have been applied consistently by Company's entities. Basis of consolidation These consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. All inter-company balances and transactions have been eliminated on consolidation. Measurement Uncertainty The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses. Actual results could differ from these estimates. Foreign currency translation Monetary assets and liabilities of the Company that are denominated in foreign currencies are translated into its functional currency at the rates of exchange in effect at the period end date. Non-monetary assets and liabilities of the Company that are denominated in foreign currencies are translated into its functional currency using the exchange rate at the date of the transaction. Exchange rate differences are recorded in the Consolidated Statement of Earnings. For the accounts of the foreign operation, revenue and expenses are translated using average rates for the period. Monetary assets and liabilities of the foreign operation are translated into its functional currency at the exchange rate in effect at the period end date. Non-monetary assets and liabilities of the foreign operation are translated into its functional currency using the exchange rate at the date of the transaction. Cash and cash equivalents Cash and cash equivalents are held for the purpose of meeting short-term cash commitments and include bank balances and short-term investments with maturities of less than 90 days. Inventory Inventory consists of liquefied petroleum gas, chemicals, and proppants used to stimulate well production and is stated at the lower of cost and net realizable value. Cost is determined using the weighted average method. Property and equipment Property and equipment are recorded at cost and are amortized over their estimated economic useful lives using the straight-line method as follows: Asset Depreciation Useful life ---------------------------------------------------------------------------- Equipment Straight line 3 - 20 Years Furniture & Fixtures Straight line 5 years Leasehold Improvements Straight line Lease term ---------------------------------------------------------------------------- When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and equipment. Assets under construction are not amortized until put into service. Management estimates the useful life and residual value of property and equipment on expected utilization, effectiveness of maintenance programs and expected impact of technological change. Although management believes the estimated useful lives of the property and equipment are reasonable, it is possible that changes in estimates could occur which may affect the expected useful lives and residual values of the property and equipment. Major betterments are capitalized. Repairs and maintenance expenditures which do not extend the useful life of the property and equipment are expensed. Intangible assets Intangible assets including deferred development costs, patents and intellectual property that meet certain criteria related to technology, market and financial feasibility are deferred. Such costs are amortized upon commencement of commercial sales over the estimated economic life of the related product as follows: Asset Depreciation Useful life ---------------------------------------------------------------------------- Patents & Intellectual Property Straight line 5 years Deferred Development Costs Straight line 5 years Other Intangible Assets Straight line 5 years ---------------------------------------------------------------------------- Costs that do not meet such criteria are charged to income in the period of expenditure. Impairment of Long-Term Assets Long-term assets include property and equipment and intangible assets. The carrying value are reviewed when events or changes in circumstances indicate that the carrying value of an asset or cash generating unit may not be recoverable. For the purpose of measuring recoverable amounts, assets are grouped at the lowest levels for which there are separate identifiable cash flows (cash generating units). If indicators of impairments exist, the recoverable amount of the asset or cash generating unit is estimated as the greater of the value in use or the fair value less cost to sell. If the carrying value of the asset or cash generating unit exceeds the recoverable amount, the asset or cash generating unit is written down with an impairment recognized in net earnings. The impairment loss is the difference between the amortized cost of the asset and the present value of the estimated future cash flows. The Company evaluates impairment losses for potential reversals when events or changes in circumstances warrant such consideration. Revenue recognition The Company's revenue is comprised of services and other revenue and is generally sold on agreed upon priced purchase orders or contracts with the customer. Contract terms do not include provisions for significant post-service delivery obligations. Service and other revenue is recognized when the services are provided and collectability is reasonably assured. Deferred income tax Deferred tax is recognized in respect to temporary differences arising in tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred tax is determined on a non-discounted basis using tax rates and laws that have been enacted or substantially enacted at the reporting date and are expected to apply when the deferred tax asset or liability is settled. Deferred tax assets are recognized to the extent that it is probable that the assets can be recovered. Deferred tax assets and liabilities are recognized in the statement of income except to the extent it relates to items recognized directly in equity, in which case the income tax is also recognized directly in equity. Leases Leases or other arrangements entered into for the use of an asset are classified as either finance or operating leases. Finance leases transfer to the Company substantially all of the risks and benefits incidental to ownership of the leased item. Finance leases are capitalized at the commencement of the lease term at the lower of the fair value of the leased asset or the present value of the minimum lease payment. Capitalized leased assets are amortized over the shorter of the estimated useful life of the assets and the lease term. All other leases are classified as operating leases and the payments are amortized on a straight line basis over the lease term. Stock based compensation The Company has a restricted share plan, performance share unit plan, stock options, and warrants granted to directors, officers, employees, and consultants as described in Note 9. All forms of stock based compensation treat each tranche as a separate award with its own vesting period with stock based compensation expense recognized on the graded vesting basis. For the restricted share plan, fair values are determined using prices at the grant date and are recognized as stock based compensation costs with a corresponding credit to shareholders equity. For the performance share unit plan, fair values are determined using prices at the market date and are recognized as stock based compensation with a corresponding credit to current liabilities. Stock options and warrants are accounted for using the fair value method under which compensation expense is recorded based on the estimated fair value of the options at the grant date using the Black-Scholes option pricing model. Under this method, compensation cost attributable to stock options granted is measured at fair value at the grant date and expensed over the vesting period with a corresponding increase to contributed surplus. Upon exercise of the stock options, consideration paid together with the amount previously recognized in contributed surplus is recorded as share capital. (Loss) Earnings per share Basic earnings per share is calculated by dividing the net (loss) earnings for the period attributable to equity owners of GASFRAC by the weighted average number of shares outstanding during the period. Diluted earnings per share is calculated based on the weighted average number of shares outstanding during the year adjusted by the weighted average number of common shares outstanding for dilutive instruments. Financial instruments Financial assets and liabilities are recognized when GASFRAC becomes a party to the contractual provisions of the instrument. Financial assets are derecognized when the rights to receive cash flows from the assets have expired or have been transferred and GASFRAC has transferred substantially all the risks and rewards of ownership. Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously. At initial recognition, GASFRAC classifies its financial instruments in the following categories depending on the purpose for which the instrument were acquired. Financial assets (i) Fair value through profit or loss. A financial asset can be classified as fair value through profit or loss only if it is designated at fair value through profit or loss or held-for-trading. GASFRAC's financial assets at fair value through profit or loss are held-for-trading financial assets. These assets are comprised of derivatives or assets acquired or incurred principally for the purpose of selling or repurchasing in the near term. GASFRAC's foreign exchange contracts are derivatives and are recorded at fair value with changes in fair value included in profit or loss. GASFRAC does not apply hedge accounting to its derivative instruments. (ii) Held-to-maturity. These assets are non-derivative financial assets with fixed or determinable payments and fixed maturities that GASFRAC has the positive intention and ability to hold until maturity. These assets are measured at amortized cost using the effective interest method. If there is objective evidence that the investment is impaired, impairment losses are included in profit or loss. (iii) Loans and receivables. These assets are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. These assets are measured at amortized cost using the effective interest method. Any gains or losses on the realization of receivables are included in profit or loss. (iv) Impairment of financial assets. All financial assets except for those at fair value through profit or loss are subject to review for impairment at each reporting date. Financial assets are impaired when there is any objective evidence that a financial asset or a group of financial assets are impaired. Impairment losses on financial assets carried at amortized cost are reversed in subsequent periods if the amount of the loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized. Financial liabilities (i) Fair value through profit or loss. These liabilities are comprised of derivatives or liabilities acquired or incurred principally for the purpose of selling or repurchasing in the near term. They are measured at fair value with changes in fair value included in profit or loss. (ii) Other financial liabilities. They are measured at amortized cost using the effective interest method. Any gains or losses in the realization of other financial liabilities are included in profit or loss. Fair values Fair values of financial assets and liabilities are based upon quoted market prices available from active markets or are otherwise determined using a variety of valuation techniques and models using quoted market prices. GASFRAC uses the counterparty close out approach with regard to the entities own credit risk adjustment in fair valuing financial liabilities. 4. PROPERTY AND EQUIPMENT Furniture & Leasehold Cost: Equipment Fixtures Improvements Total ---------------------------------------------------------------------------- January 1, 2010 68,704 59 51 68,814 Additions 83,412 97 4 83,513 ---------------------------------------------------------------------------- December 31, 2010 152,116 156 55 152,327 ---------------------------------------------------------------------------- Additions 38,103 409 216 38,728 Dispositions (147) - - (147) ---------------------------------------------------------------------------- March 31, 2011 190,366 565 271 191,202 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Accumulated Depreciation: ---------------------------------------------------------------------------- January 1, 2010 7,230 21 6 7,257 Amortization 6,997 17 5 7,019 ---------------------------------------------------------------------------- December 31, 2010 14,227 38 11 14,276 ---------------------------------------------------------------------------- Amortization 2,542 335 8 2,885 Disposition 53 - - 53 ---------------------------------------------------------------------------- March 31, 2011 16,716 373 19 17,108 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Net Book Value: ---------------------------------------------------------------------------- January 1, 2010 61,474 38 45 61,557 ---------------------------------------------------------------------------- December 31, 2010 137,889 118 44 138,051 ---------------------------------------------------------------------------- March 31, 2011 173,650 192 252 174,094 ---------------------------------------------------------------------------- Assets under Construction included in cost: ---------------------------------------------------------------------------- January 1, 2010 9,194 - - 9,194 ---------------------------------------------------------------------------- December 31, 2010 47,392 - - 47,392 ---------------------------------------------------------------------------- March 31, 2011 57,883 - - 57,883 ---------------------------------------------------------------------------- As at January 1, 2010, December 31, 2010 and March 31, 2011 assets under construction are not subject to amortization as the assets are not yet available for use. 5. INTANGIBLE ASSETS Patents & Deferred Other Intellectual Development Intangible Cost: Property Costs Assets Total ---------------------------------------------------------------------------- January 1, 2010 312 198 31 541 Additions 164 32 - 196 ---------------------------------------------------------------------------- December 31, 2010 476 230 31 737 ---------------------------------------------------------------------------- Additions 51 - - 51 ---------------------------------------------------------------------------- March 31, 2011 527 230 31 788 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Accumulated Depreciation: ---------------------------------------------------------------------------- January 1, 2010 82 84 17 183 Amortization 82 46 6 134 ---------------------------------------------------------------------------- December 31, 2010 164 130 23 317 ---------------------------------------------------------------------------- Amortization 24 12 2 38 ---------------------------------------------------------------------------- March 31, 2011 188 142 25 355 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Net Book Value: ---------------------------------------------------------------------------- January 1, 2010 230 114 14 358 ---------------------------------------------------------------------------- December 31, 2010 312 100 8 420 ---------------------------------------------------------------------------- March 31, 2011 339 88 6 433 ---------------------------------------------------------------------------- 6. LEASE OBLIGATIONS The Company leased certain of its light vehicles under finance leases. The average lease term is 3 years. The Company has options to purchase the vehicles at the end of the lease terms. The Company's obligations under finance leases are secured by the lessors' title to the leased assets. Interest rated underlying all obligations under finance leases are fixed at respective contract dates ranging from 6.9% to 8.8% per annum. Present value of Future minimum minimum lease As at: lease payments Interest payments ---------------------------------------------------------------------------- January 1, 2010: Less than one year 135 14 121 Between one and five years 183 4 179 More than five years - - - ---------------------------------------------------------------------------- 318 18 300 ---------------------------------------------------------------------------- March 31, 2010: Less than one year 169 17 152 Between one and five years 211 7 204 More than five years - - - ---------------------------------------------------------------------------- 380 24 356 ---------------------------------------------------------------------------- December 31, 2010: Less than one year 261 21 240 Between one and five years 186 6 180 More than five years - - - ---------------------------------------------------------------------------- 447 27 420 ---------------------------------------------------------------------------- March 31, 2011: Less than one year 335 42 293 Between one and five years 520 43 477 More than five years - - - ---------------------------------------------------------------------------- 855 85 770 ---------------------------------------------------------------------------- The finance lease obligation is analyzed as: Jan 1, Mar 31, Dec 31, Mar 31, As at: 2010 2010 2010 2011 ---------------------------------------------------------------------------- Current 121 152 240 293 Non-current 179 204 180 477 ---------------------------------------------------------------------------- 300 356 420 770 ---------------------------------------------------------------------------- 7. UNEARNED REVENUE As at March 31, 2011, a customer of the Company has prepaid for materials associated with fracturing treatments in the amount of $20,871. The Company expects that this unearned revenue will be used in the next 12 months. 8. DEFERRED INCOME TAX The net income tax provision differs from that expected by applying the combined federal and provincial income tax rate of 26.55% (2010 - 28.65%) to taxable income for the following reasons: Period ended: March 31, 2011 March 31, 2010 ---------------------------------------------------------------------------- Expected combined federal and provincial income tax(benefit) $ (532) $ 733 Non-deductible expenses 53 11 Valuation allowance 529 61 Statutory and other rate differences (99) (87) ---------------------------------------------------------------------------- Effective $ (49) $ 718 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- The components of the deferred income tax liability are as follows: December 31, As at: March 31, 2011 2010 ---------------------------------------------------------------------------- Property and equipment and intangible assets $ (6,672) $ (4,809) Non-capital loss carry forwards 3,507 1,476 Financing costs 2,341 2,571 Other 394 394 ---------------------------------------------------------------------------- Total deferred income tax (liability) benefit $ (430) $ (368) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- The Company has $ 14,030 (2010 - $ 5,897) of tax pools related to non-capital losses available for carry forward to reduce taxable income in future years and expire between 2027 and 2030. 9. SHARE CAPITAL Authorized Unlimited number of common shares. Unlimited number of preferred shares issuable in series with the designation, rights, privileges, restrictions and conditions of each series to be determined by the board of directors. Issued Common Shares 2011 2010 ---------------------------------------------------------------------------- Shares Amount Shares Amount ---------------------------------------------------------------------------- (#) ($) (#) ($) Opening Balance 60,226,366 251,573 32,650,000 81,293 Issued on exercise of warrants 619,000 839 - - Issued on exercise of options 224,500 523 183,333 406 Common Stock - Deferred Tax - - Benefit - (189) Released from restricted shares 22,000 97 - - ---------------------------------------------------------------------------- Balance - March 31 61,190,577 252,843 32,833,333 81,699 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Restricted shares Shares Amount ---------------------------------------------------------------------------- (#) ($) Balance - December 31, 2010 361,917 1,607 Released to common shares (22,000) (97) ---------------------------------------------------------------------------- Balance - March 31, 2011 339,917 1,510 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- The Company has granted restricted shares for certain employees with an annual vesting period over five years from the date of the grant. During the period ended March 31, 2011, $150 of compensation expense was recorded (three month period ended March 31, 2010 - nil). Performance share units The Company grants performance stock units to officers and employees with the amount of the grant earned being linked to corporate performance and grants vesting over three years from date of grant. The performance stock units are settled either in cash or Company shares at the Company's discretion. During the three month period ended March 31, 2011, 160,000 performance share units were granted (three month period ended March 31, 2010 - nil) and 44,374 vested (three month period ended March 31, 2010 - nil). During the period ended March 31, 2011, $711 of compensation expense was recognized (three month period ended March 31, 2010 - nil). As at March 31, 2011, the company has granted 410,000 performance share units of which 82,569 performance share units have vested. As at March 31, 2011, the related liability is $1,062 (three month period ended March 31, 2010 - nil). Stock options The Company calculates the fair value of its options using the Black-Scholes option pricing model. The following weighted average assumptions were used to determine the fair value of the options at the date of grant. ---------------------------------------------------------------------------- Risk-free interest rate 2.5% Expected life 4 years Maximum life 5 years Volatility 52% Expected dividend 0 ---------------------------------------------------------------------------- A summary of the status of the Company's outstanding stock options is presented below: 2011 2010 ---------------------------------------------------------------------------- Average Average Exercise Exercise Options Price Options Price ---------------------------------------------------------------------------- (#) ($) (#) ($) Opening Balance 2,746,208 3.48 2,966,000 2.89 Granted - - 15,000 2.00 Exercised for common shares (224,500) 2.13 (183,333) 2.00 Forfeited and expired (9,000) 2.00 (146,167) 3.15 ---------------------------------------------------------------------------- Balance - March 31 2,512,708 3.61 2,651,500 2.93 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Stock options vest over three years and expire five years from the date of grant. The 2,512,708 options outstanding at March 31, 2011 had exercise prices ranging from $2.00 to $5.00 per share with expiry dates ranging from 2012 to 2015. When stock options are exercised the proceeds, together with the amount of compensation expense previously recorded in contributed surplus are added to share capital. During the period ended March 31, 2011, $185 of compensation expense was recorded (three month period ended March 31, 2010 - $142). Warrants 2011 2010 ---------------------------------------------------------------------------- Average Average Exercise Exercise Warrants Price Warrants Price ---------------------------------------------------------------------------- (#) ($) (#) ($) Balance - December 31 1,757,500 1.20 2,602,500 1.32 Exercised for common shares (619,000) 1.07 - - ---------------------------------------------------------------------------- Balance - March 31 1,138,500 1.28 2,602,500 1.32 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- As part of an employment agreement with the founding officer of the Company, 1,500,000 share purchase warrants were issued effective May 10, 2006, entitling the founding officer to purchase common shares of the Company at $1.00 per share, vesting based on performance conditions and expiring on August 12, 2012. As at August 12, 2010 all of the purchase warrants were vested. As at March 31, 2011 825,000 (2009 - 1,500,000) founder warrants were outstanding. In 2006, as part of the terms of a financing agreement, the Company issued 262,500 brokers warrants, entitling the holders to purchase common shares of the Company at $1.00 per share. In 2007, as part of the terms of a financing agreement, the Company issued 840,000 brokers warrants, entitling the holders to purchase common shares of the Company at $2.00 per share. As at March 31, 2011 313,500 (2009 - 1,102,500) broker warrants, expiring May 22, 2011, were outstanding. During the period ended March 31, 2011, no compensation expense was recorded (three month period ended March 31, 2010 - $24). 10. CONTRACTUAL OBLIGATIONS The Company has operating lease commitments for office space as follows: Year 2011 2012 2013 2014 2015 ---------------------------------------------------------------------------- Amount $ 1,104 $ 1,364 $ 786 $ 549 $ 549 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- As at March 31, 2011, the Company has commitments totaling approximately $101 million relating to the construction of fixed assets in 2011 and $77 million for the purchase of operating supplies over the 21 month period ending December 31, 2012. 11. CAPITAL MANAGEMENT The Company's strategy is to maintain a capital structure to sustain future growth of the business and retain creditor, investor and market confidence. Recognizing the cyclical nature of the oilfield services industry, the Company strives to maintain a conservative balance between long-term debt and shareholders' equity. The Company's capital structure is currently comprised of shareholders' equity and undrawn long-term bank debt. The Company may occasionally need to increase its level of long-term debt to total capitalization to facilitate growth activities. The Company has a credit facility with a Canadian chartered bank. The credit facility includes a $15 million demand revolving loan ("Operating Loan") and a $35 million committed revolving facility ("Revolving Facility"). The Operating Loan bears interest at prime plus 1.25% and is margined by the Company's accounts receivable. The Revolving Facility bears interest at prime plus 1.4% to prime plus 1.9%, shall not exceed 50% of the net book value of the Company's capital assets, may be extended annually, if not extended shall be repayable in eight equal quarterly instalments. Both facilities are secured by a floating charge over all of the assets of the Company and are subject to certain financial covenants. As at March 31, the Company is in compliance with all the covenants related to these facilities. The Company monitors its capital structure and makes adjustments in light of changing market conditions and new opportunities, while remaining cognizant of the cyclical nature of the oilfield services sector. To maintain or adjust its capital structure, the Company may revise its capital spending, issue new shares, issue new debt, or draw on its current short-term debt facility. 12. ENTERPRISE WIDE DISCLOSURE As at March 31, 2011, the Company has two geographic segments being the Canadian segment and the United States segment. For the 3 month period ended March 31, 2011, 100% of the Revenue was incurred by the Canadian segment (Period ended March 31, 2010, 100%). As at March 31, 2011, the net book value of the property and equipment in the Canadian Segment was $149,910 and the net book value of the property and equipment in the United States segment was $24,184. 13. SUPPLEMENTAL CASH FLOW INFORMATION Period Ended March 31, 2011 March 31, 2010 ---------------------------------------------------------------------------- Changes in non-cash working capital from Operations: Accounts receivable $ 3,126 $ (7,448) Inventory (9,158) 21 Prepaid expenses 1,294 33 - 2,730 Current portion of lease obligations 53 - Unearned revenue 17,386 - Accounts payable and accrued liabilities and other 15,321 (4,645) Long-term deposits (2,352) 82 ---------------------------------------------------------------------------- Net change in non-cash working capital from Operations $ 25,670 $ (9,227) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 14. RELATED PARTY TRANSACTIONS During the three month period ended March 31, 2011, the Company paid $48 (2010 - $102) in consulting fees to two Directors. 15. EXPLANATION OF TRANSITION TO IFRS: As stated in Note 2, these are the Company's first consolidated financial statements prepared in accordance with IFRS. The accounting policies set out in Note 3 have been applied in preparing the financial statements for the three month period ended March 31, 2011, the comparative information presented in these financial statements for the three month period ending March 31, 2010 and in the preparation of an opening IFRS statement of financial position at January 1, 2010 (the Company's date of transition). In preparing its opening IFRS statement of financial position, the Company has adjusted amounts reported previously in financial statements prepared in accordance with Previous GAAP. An explanation of how the transition from Previous GAAP to IFRS has affected the Company's financial position, financial performance and cash flows is set out in the following tables and the notes that accompany the tables. Reconciliation of equity as previously reported under Canadian GAAP to IFRS 1-Jan-10 31-Mar-10 --------------------------------------------------------- Canadian Canadian GAAP Adj. IFRS GAAP Adj IFRS ASSETS CURRENT ASSETS Cash and equivalents $ 11,643 $ - $ 11,643 $ 613 $ - $ 613 Accounts receivable 9,469 - 9,469 16,917 - 16,917 Inventory 5,499 - 5,499 5,478 - 5,478 Prepaid expenses 519 - 519 486 - 486 ---------------------------------------------------------------------------- 27,130 - 27,130 23,494 - 23,494 PROPERTY and EQUIPMENT 61,295 262 61,557 65,886 505 66,391 INTANGIBLE ASSETS 358 - 358 365 - 365 LONG-TERM DEPOSITS 1,790 - 1,790 1,708 - 1,708 DEFERRED INCOME TAX BENEFIT 775 - 775 57 - 57 ---------------------------------------------------------------------------- TOTAL ASSETS $ 91,348 $ 262 $ 91,610 $ 91,510 $ 505 $ 92,015 ---------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Bank operating line $ - $ - $ - $ 2,730 $ - $ 2,730 Unearned revenue - - - - - - Current lease obligations - 121 121 - 152 152 Accounts payable and accrued liabilities 7,617 - 7,617 2,972 - 2,972 ---------------------------------------------------------------------------- Total current liabilities 7,617 121 7,738 5,702 152 5,854 ---------------------------------------------------------------------------- LONG-TERM LEASE OBLIGATIONS - 179 179 - 204 204 FUTURE INCOME TAX - - - - - - ---------------------------------------------------------------------------- Total non-current liabilities - 179 179 0 204 204 ---------------------------------------------------------------------------- SHAREHOLDERS' EQUITY SHARE CAPITAL 81,293 - 81,293 81,699 - 81,699 CONTRIBUTED SURPLUS 1,808 1,003 2,811 1,807 1,133 2,940 RETAINED EARNINGS (DEFICIT) 630 (1,041) (411) 2,302 (984) 1,318 ---------------------------------------------------------------------------- Total equity 83,731 (38) 83,693 85,808 149 85,957 ---------------------------------------------------------------------------- TOTAL LIABILITIES AND EQUITY $ 91,348 $ 262 $ 91,610 $ 91,510 $ 505 $ 92,015 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 31-Dec-10 ------------------------------- Canadian GAAP Adj IFRS ASSETS CURRENT ASSETS Cash and equivalents $ 98,701 $ - $ 98,701 Accounts receivable 24,500 - 24,500 Inventory 7,018 - 7,018 Prepaid expenses 6,839 - 6,839 137,058 - 137,058 PROPERTY and EQUIPMENT 136,749 1,302 138,051 INTANGIBLE ASSETS 420 - 420 LONG-TERM DEPOSITS 3,176 - 3,176 DEFERRED INCOME TAX BENEFIT - - - ---------------------------------------------------------------------------- TOTAL ASSETS $ 277,403 $ 1,302 $ 278,705 ---------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Bank operating line $ - $ - $ - Unearned revenue 3,486 - 3,486 Current lease obligations - 240 240 Accounts payable and accrued liabilities 14,828 160 14,987 ---------------------------------------------------------------------------- Total current liabilities 18,314 400 18,712 ---------------------------------------------------------------------------- LONG-TERM LEASE OBLIGATIONS - 180 180 FUTURE INCOME TAX 368 - 368 ---------------------------------------------------------------------------- Total non-current liabilities 368 180 548 ---------------------------------------------------------------------------- SHAREHOLDERS' EQUITY SHARE CAPITAL 251,326 881 251,573 CONTRIBUTED SURPLUS 1,712 1,176 3,522 RETAINED EARNINGS (DEFICIT) 5,683 (1,333) 4,350 ---------------------------------------------------------------------------- Total equity 258,721 724 259,445 ---------------------------------------------------------------------------- TOTAL LIABILITIES AND EQUITY $ 277,403 $ 1,302 $ 278,705 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Reconciliation of comprehensive income as previously reported under Canadian GAAP to IFRS Three months ended Year Ended March 31, 2010 December 31, 2010 ------------------------------------------------------- Canadian Canadian GAAP Adj. IFRS GAAP Adj. IFRS REVENUE 15,906 - 15,906 96,906 - 96,906 OTHER INCOME Business Interruption claim 2,030 - 2,030 2,756 - 2,756 ---------------------------------------------------------------------------- 17,936 - 17,936 99,662 - 99,662 ---------------------------------------------------------------------------- EXPENDITURES Operating 11,940 (33) 11,907 72,190 (167) 72,023 Selling, general and administrative 1,932 - 1,932 10,579 244 10,823 Stock based compensation 37 129 166 708 967 1,675 Amortization 1,649 (159) 1,490 7,929 (772) 7,157 ---------------------------------------------------------------------------- 15,558 (63) 15,495 91,406 272 91,678 ---------------------------------------------------------------------------- RESULTS FROM OPERATIONS 2,378 63 2,441 8,256 (272) 7,984 ---------------------------------------------------------------------------- Finance income - - - 107 - 107 Finance costs - (6) (6) - (21) (21) ---------------------------------------------------------------------------- - (6) (6) 107 (21) 86 ---------------------------------------------------------------------------- PROFIT BEFORE INCOME TAX 2,378 57 2,435 8,363 (293) 8,070 Foreign exchange gain / (loss) 12 - 12 (73) - (73) Future income tax expense (718) - (718) (3,237) - (3,237) ---------------------------------------------------------------------------- NET INCOME (LOSS) 1,672 57 1,729 5,053 (293) 4,760 ---------------------------------------------------------------------------- Explanation of the effects of the transition to IFRS Leases Previous GAAP will consider the leases to be of a capital nature based on certain quantifiable criteria. Based on the criteria, GASFRAC concluded that the leases on the light vehicles were operating leases in nature for previous GAAP purposes. With the absence of the quantitative criteria provided by previous GAAP, the Company determined that qualitatively, the risks and rewards of the leases reside with GASFRAC and as such, should be treated as a financing lease. Depreciation With the conversion to IFRS, GASFRAC broke out the field equipment into each of the separate components that made up field equipment. We then assessed the useful life and residual value for each of these components. Based on this assessment, certain depreciation rates were modified. Share based payments Under Previous GAAP, GASFRAC accounted for certain stock based compensation plans whereby the obligation and compensation costs were accrued over the vesting period using the intrinsic value method. The intrinsic value of a share unit is the amount by which the Company's share price exceeds the exercise price of the share unit. For certain stock-based compensation plans, IFRS requires share-based compensation be fair valued using an option pricing model, such as the Black-Scholes model, at each reporting date. Each tranche in an award is considered a separate award with its own vesting period. Further, GASFRAC adjusted the volatility of the unvested options and warrants that were issued when GASFRAC was not publically traded from 0% to 50%. Accordingly, upon transition to IFRS, the Company recorded a fair value adjustment of $891 as at January 1, 2010 to increase the share-based compensation with a corresponding charge to retained earnings. GASFRAC elected to use the IFRS 1 exemption whereby the share-based payments that had vested or settled prior to January 1, 2010 were not required to be retrospectively restated. Subsequent IFRS fair value adjustments are recorded through stock based compensation. As part of the 2010 Kierland transaction, the amount of consideration in excess of the fair market value of assets received was offset against share issue costs under Previous GAAP. Under IFRS, the amount of consideration in excess of the fair market value of assets received was listed as an unidentifiable transaction cost and expensed to sales, general and administrative expense. The amount of the adjustment was $245. Adjustments to the statement of cash flows The transition from Previous GAAP to IFRS had no significant impact on cash flows generated by GASFRAC except for stock based compensation and amortization. Any changes relating to net income would be offset by items not effecting cash such as amortization and stock based compensation or would result in a change in non-cash working capital. The Company will host a conference call on Tuesday, May 10, 2011 at 10:00 a.m. MT (12:00 p.m. ET) to discuss the Company's first quarter 2011 results. To participate in the Q&A session, please call the conference call operator at 1-866-226-1792 fifteen minutes prior to the call's start time and ask for "GASFRAC First Quarter Results Conference Call". GASFRAC is an oil and gas service company headquartered in Calgary, Alberta, Canada, whose primary business is to provide LPG fracturing services to oil and gas companies in Canada and the USA. Requests for shareholder information should be directed to James M Hill.
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