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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) ("GASFRAC") achieved revenue of $13.3 million in the second quarter of 2010 as compared to $2.3 million in the second quarter of 2010. EBITDA was $0.7 million as compared to ($0.5) million in 2009. Dwight Loree, Chief Executive Officer commented, "GASFRAC has made significant advances in our business strategy during the second quarter. -- Revenue during this historically slow quarter was strong demonstrating the increasing adoption of our LPG fracturing technology as customers recognize the benefit to their operations; -- We have enhanced our operations team and committed to increased equipment capacity to service this increasing demand for our services; -- Early in the quarter Reid MacDonald joined GASFRAC as Chief Operating Officer bringing 35 years of oil and gas industry experience; -- We have also continued to add to our field delivery team with experienced fracturing professionals.; -- We increased our horsepower and tonnage capacity and approved a $100 million capital equipment expansion program during the quarter; -- Included in this capital program is additional proppant and LPG storage and blending capacity which will allow us to increase the utilization of our fracturing horsepower which we anticipate will reach 98,500 by the first quarter of 2011; -- To fund this capital program we raised $65 million through a private placement of 13,000,000 subscription receipts at $5.00 per receipt. This private placement closed into escrow on June 30, 2010 and is thus not reflected in the second quarter financial statements; -- On August 6, 2010 we concluded an amalgamation with Kierland Capital Corporation resulting in GASFRAC becoming a public corporation on the TSX - Venture. Simultaneously, the private placement funds were released from escrow; -- Trading of our shares will commence on August 12, 2010; -- We also increased our credit facility from $20 million to $50 million effective August 5, 2010; -- Subsequent to the quarter our US subsidiary performed its first fracturing treatment in Texas in July and commenced a 22 well fracturing program in Texas on August 2, 2010. This is the beginning of an exciting new phase in GASFRAC's growth." Comparative Quarterly Financial Information (000s) Three months ended June 30 Six months ended June 30 --------------------------------------------------------- 2010 2009 2010 2009 ---------------------------------------------------------------------------- Revenue 13,323 2,295 29,229 13,621 Operating expenses 10,495 2,453 22,435 9,996 Selling, general and administrative expenses 2,099 1,505 4,031 2,759 EBITDA 624 (477) 4,663 1,899 Net (loss) income (1,266) (1,055) 406 (154) Net income (loss) per share - basic (0.04) (0.03) 0.02 (0.00) Weighted average number of shares - basic 33,163,405 32,370,000 32,998,368 32,370,000 Funds provided by (used for) operations(1) 728 (397) 4,804 2,193 Treatments 63 11 132 65 Revenue per treatment 211 209 221 200 ---------------------------------------------------------------------------- (1) Defined under Non-GAAP Measures Second Quarter Highlights Revenue for the quarter increased almost six-fold to $13.3 million from $2.3 million in 2009. The increase is a combination of a weak second quarter in 2009 and the Company's improved operating position and capacity in 2010. In 2009 the Canadian oil and gas industry experienced significantly reduced activity levels reflecting both the typical seasonal weakness and the overall global economic recession which resulted in many oil and gas producers to reduce their capital programs. In 2010 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 second quarter, the Company continued work on establishing an operating base in Texas, USA. Although no revenue was earned from USA operations during the quarter, equipment was mobilized, an operating location opened, staff employed and sales activity commenced. Costs incurred for these activities during the quarter were approximately $457. In July 2010 GASFRAC performed its first fracturing treatment in Texas and expects to commence a 22 well fracturing program in August. Financial Overview Revenues Revenue for the quarter increased almost six-fold to $13.3 million from $2.3 million in 2009. The increase is a combination of a weak second quarter in 2009 and the Company's improved operating position and capacity in 2010. In 2009 the Canadian oil and gas industry experienced significantly reduced activity levels reflecting both the typical seasonal weakness and the overall global economic recession which resulted in many oil and gas producers to reduce their capital programs. In 2010 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, two customers represented 78% of revenue and for the six month period represented 51% of revenue. During the quarter the Company completed 63 treatments at an average job price of $211 compared to 11 treatments at an average job price of $209 during Q2 2009. For the six month period revenue increased 215% to $29.2 million from $13.6 million in 2009 reflecting 132 fracturing treatments at an average rate of $221 compared to 200 treatments at an average rate of $200 in 2009. Operating Expenses Operating expenses increased to $10.5 million (78.8% of revenue) during Q2 2010 from $2.5 million (107% of revenue) in Q2 2010. The increase is due to the opening of our US operation of approximately $230 as well as increased activity in Canada. Operating costs consist primarily of product costs (propane, proppant, chemicals), cost of field staff, equipment costs and cost for our Red Deer base of operations. Components of the current operational infrastructure have been developed to maintain and support a larger scale of operations than GASFRAC has experienced to date. Operating costs in the first six months of 2010 were $22.4 million (76.8% of revenue) as compared to $10 million (73.3% of revenue in 2009). The increase as a percentage of revenue reflects US operating costs of approximately $270 (1% of revenue) and costs of standardizing previously deployed equipment. Selling, General and Administrative ("SG&A") Expenses SG&A expenses increased to $2.1 million (15.8% of revenue) during Q2 2010 from $1.5 million (65.6% of revenue) in Q2 2009. The increase is primarily due to the hiring of administrative and operations staff to support the growth in both our Canadian and US operations. These costs represent the necessary costs of building a support infrastructure for the Company's added revenue base and are anticipated to be able to support future revenue growth without significant additional growth to this cost base. SG&A costs associated with USA operations were approximately $222. For the six months ended June 30, 2010 SG&A costs increased to $4.0 million (13.8% of revenue) from $2.8 million (20.2% of revenue). Included in these costs were costs for the USA start-up of approximately $378. Amortization Amortization increased to $1.8 million during Q2 2010 from $1.2 million in Q2 2009. For the six month period amortization increased to $3.5 million compared to $2.1 million in 2009 reflecting an increase in capital assets of $13.6 million during 2010. EBITDA EBITDA increased to $0.7 million during Q2 2010 from ($0.5) million in Q2 2009. For the six month period EBITDA increased 146% to $4.7 million from $1.9 million in 2009. The increase is primarily due to an increase in revenue. Other Income Other income for the six month period included $2.0 million for insurance proceeds related to a business interruption loss from an incident that took place in November 2009. The value of the business interruption is subject to interpretation and the actual amount of proceeds received may differ from the amount recorded. To date $1.0 million has been received. Other income in the six month period ended June 30, 2009 is comprised of $638 business interruption claim from 2008 which has been settled in full, $583 from Scientific Research and Experimental Development credits resulting from the Company's research activities that year and $160 of interest income relating to interest earned on short-term investments. Net loss As the Company has increased its activity and revenue levels the fixed costs (both operational and administrative) have reduced as a percentage of revenue. In addition, as equipment becomes more effectively utilized, the relative cost of amortization is reducing. As a result, the Company had net income for the six months of $406 compared to a net loss of ($154) in 2009 and for the second quarter, the net loss was ($1,266) compared to ($1,055) in Q2 2009. Summary of Quarterly Results (000s) SEP. 30 DEC. 31 MAR. 31 JUN. 30 2008 2008 2009 2009 ---------------------------------------------------------------------------- Revenue $10,230 $ 6,817 $11,326 $ 2,295 Net income (loss) $ 1,426 $ 3,420 $ 901 ($1,055) Net income (loss) per share $ 0.08 $ 0.12 $ 0.03 ($0.03) EBITDA (1) $ 1,918 $ 2,735 $ 2,376 ($477) Funds provided by (used for) operations (1) $ 2,296 $ 3,031 $ 2,592 ($397) Capital expenditures $ 6,747 $11,922 $ 5,724 $ 9,739 Working capital (2) $50,508 $42,287 $39,156 $29,031 Shareholders' equity $81,109 $84,572 $85,555 $84,553 (1) Defined under Non-GAAP Measures (2) Working capital is defined as current assets less current liabilities (000s) SEP. 30 DEC. 31 MAR. 31 JUN. 30 2009 2009 2010 2010 ---------------------------------------------------------------------------- Revenue $ 9,662 $ 7,145 $15,906 $13,323 Net income (loss) $ 782 ($2,838) $ 1,672 ($1,266) Net income (loss) per share $ 0.02 ($0.09) $ 0.05 ($0.04) EBITDA (1) $ 2,396 ($1,322) $ 4,039 $ 624 Funds provided by (used for) operations (1) $ 3,055 ($803) $ 4,076 $ 728 Capital expenditures $ 6,658 $ 5,358 $ 6,247 $ 7,430 Working capital (2) $25,430 $19,513 $17,792 $13,484 Shareholders' equity $85,970 $83,731 $85,808 $85,379 (1) Defined under Non-GAAP Measures (2) Working capital is defined as current assets less current liabilities Liquidity and Capital Resources As at June 30, 2010 the Company had $13.5 million of working capital compared to $17.8 million at March 31, 2010. The decrease in working capital is primarily due to $7.3 million of capital expenditures during the period offset by $0.7 million of funds provided by operations. GASFRAC's capital program initiated in 2009 has an additional $8 million remaining to complete. The Company has initiated a 2010/2011 capital program of approximately $100 million. This capital is substantially focused on adding fracturing treatment capacity through horsepower and LPG and proppant delivery and storage capacity. Upon completion of this capital program the Company will have 98.5 thousand horsepower. Equipment builds have commenced and delivery is expected to occur throughout the remainder of 2010 and be completed in the first quarter of 2011. Funding for this capital will be comprised of approximately $60.5 million from the private placement (see "Subsequent Events"), credit facilities and operating cash flow. Operating The Company's funds provided by (used in) operations (as defined under Non-GAAP Measures) was $0.7 million for Q2 2010 compared to ($0.3) million for Q2 2009. The increase is due to increased levels of activity in the quarter. The Company's operating cash flows are closely tied to operating margins and SG&A expenses. Therefore, low utilization levels in the period decrease the operational leverage on our fixed cost structure. Financing As at June 30, 2010 the Company had a $20 million operating demand revolving loan facility at a variable interest rate set at prime plus 1%, of which $4.0 million was drawn down at the end of Q2 2010. There were no amounts drawn on this facility as at December 31, 2009. This facility was replaced by a new facility on August 5, 2010 (see "Subsequent Events"). Investing The Company incurred $7.4 million of capital expenditures during the second quarter of 2010 and $13.5 million for the six months ended June 30, 2010 as compared to $9.7 million and $15.4 million respectively in 2009. These capital expenditures represent investments in additional fracturing operating capacity for the Company. Subsequent Events On August 6, 2010, the Company amalgamated with Kierland Capital Corporation ("Kierland"). The amalgamation will be accounted for as a reverse takeover of Kierland, an entity that does not constitute a business by the Company. Pursuant to the terms of the transaction: (i) all of the issued and outstanding common shares of Kierland were exchanged for 156,250 common shares of Amalco; and (ii) each of the 46,585,833 (which includes the 13,000,000 subscription receipts described below) issued and outstanding GASFRAC shares were exchanged for one Amalco share. Upon completion of the transaction, the continuing entity changed its name to GASFRAC Energy Services Inc. On June 30, 2010 GASFRAC closed a private placement of 13,000,000 subscription receipts by the Company at a price of $5.00 per receipt for gross proceeds of $65 million (estimated net proceeds of $60.5 million after broker fees and transaction costs) subject to completion of the amalgamation with Kierland. Each subscription receipt entitles the holder to receive, for no additional consideration, one share of the Company, which will be freely tradable. As at June 30, 2010 the proceeds of the private placement were held in escrow pending the completion of the amalgamation and, as such, are not recognized in these financial statements. The proceeds were released from escrow to GASFRAC on August 6, 2010 and were recognized in the accounts of GASFRAC on that date. On August 5, 2010 the Company entered into a new credit facility with its banker. The new 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, and 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. Critical Accounting Policies and Estimates This MD&A is based on the Company's annual consolidated financial statements that have been prepared in accordance with Canadian GAAP. Management is required to make assumptions, judgments and estimates in the application of GAAP. GASFRAC's significant accounting policies are described in note 2 to the December 31, 2009 audited consolidated financial statements. The preparation of the consolidated financial statements requires that certain estimates and judgments be made concerning the reported amount of revenue and expenses and the carrying values of assets and liabilities. These estimates are based on historical experience and management's judgment. Anticipating future events involves uncertainty and, consequently, the estimates used by management in the preparation of the consolidated financial statements may change as future events unfold, additional experience is acquired or the environment in which the Company operates changes. The following accounting policies and practices involve the use of estimates that have a significant impact on the Company's financial results. Revenue Recognition Revenue is recognized for services upon completion and for products upon delivery. Allowance for Doubtful Accounts Receivable The Company performs ongoing credit evaluations of its customers and grants credit based upon a review of historical collection experience, current aging status, financial condition of the customer and anticipated industry conditions. Customer payments are regularly monitored and a provision for doubtful accounts is established based upon specific situations and overall industry conditions. In situations where the creditworthiness of a customer is uncertain, services are provided on receipt of cash in advance or services are declined. GASFRAC's management believes that the provision for doubtful accounts is adequate. Amortization Amortization of the Company's property and equipment incorporates estimates of useful lives and residual values. These estimates may change as more experience is obtained or as general market conditions change, thereby impacting the operation of the Company's property and equipment. Income Taxes The Company follows the liability method of accounting for income taxes, which evaluates the differences between the financial statement treatment and tax treatment of certain transactions, assets and liabilities. Future tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement amounts of existing assets and liabilities and their respective tax bases. Estimates of the Company's future taxable income have been considered in assessing the utilization of available tax losses. GASFRAC's business is complex and the calculation of income taxes involves many complex factors as well as the Company's interpretation of relevant tax legislation and regulations. GASFRAC's management believes that the future income tax provision is adequate. Stock-based Compensation GASFRAC provides stock-based compensation to directors, officers, employees and consultants in the form of stock options. The fair value of stock options are estimated at the grant date using the Black-Scholes option pricing model, which includes underlying assumptions related to the risk-free interest rate, average expected option life, estimated volatility of the Company's shares and anticipated dividends. Recent Accounting Pronouncements There have been no Canadian or US accounting pronouncements issued for the 2010 fiscal year which may have a material impact on the Company's financial statements. Business Risks A complete discussion of business risks faced by GASFRAC may be found under the "Risk Factors" section on page 58 of its Joint Information Circular and Proxy Statement dated July 7, 2010, which is available under GASFRAC's profile at www.sedar.com. Internal Controls Over Financial Reporting There have been no changes in the Company's internal controls over financial reporting during the period ended June 30, 2010 that have materially effected, or are reasonably likely to materially effect, the Company's internal controls over financial reporting. International Financial Reporting Standards ("IFRS") The Canadian Accounting Standards Board ("AcSB") published a new strategic plan that outlines the convergence of Canadian generally accepted accounting principles with IFRS over an expected five year transitional period. The changeover date for publicly-listed companies to use IFRS, replacing Canada's own generally accepted accounting principles is interim and annual financial statements for fiscal years beginning on or after January 1, 2011 with the restatement for comparative purposes of amounts reported by the Company for the year ended December 31, 2010. The Company has completed a high-level review and preliminary assessment of the differences between Canadian GAAP and IFRS and the potential effects of IFRS to its accounting and reporting processes, information systems, business processes and external disclosures. This assessment has provided insight into what are anticipated to be the most significant areas of difference applicable to the Company. The next step is to perform an in-depth review of the significant areas of difference and formulate ongoing accounting policies. Key areas addressed will also be reviewed to determine any information technology issues, the impact on internal controls over financial reporting and the impact on business activities including the effect, if any, on covenants and compensation arrangements. The Company will also continue to monitor standards development as issued by the IASB and the AcSB as well as regulatory developments as issued by the Canadian Securities Administrators, which may affect the timing, nature or disclosure of its adoption of IFRS. The following IFRS standards are considered most relevant to the Company's conversion process: IFRS 1 - First-time Adoption of IFRS, which generally requires that an entity apply all IFRS standards retrospectively, with specific mandatory exemptions, and a limited number of optional exemptions. A preliminary assessment of the available exemptions has been completed. Elections made upon transition to IFRS can have a significant impact on the level of time and effort needed for the conversion to IFRS. The following optional exemptions are the most applicable to the Company: a. Fair value as deemed cost - This exemption provides the Company with the option to elect specific fair values as the deemed cost of any qualifying item of property, plant and equipment; b. Business combinations - This exemption provides the Company with the option of not applying IFRS 3 Business Combinations to business combinations that took place before the date of transition; and c. Share-based payments - This exemption provides the Company with the option of not applying IFRS 2 to equity-settled share-based payment transactions issued after November 7, 2002 and which have vested before the date of transition. In addition to these exemptions, IFRS 1 provides other exemptions that are available on transition to IFRS. These exemptions may become useful for the Company to consider in the future. IFRS 2 - Share-based Payments requires the use of a forfeiture rate based on an estimate of the number of options expected to vest and requires that each tranche of options be treated as a separate arrangement as if graded vesting is utilized. IAS 16 - Property, Plant and Equipment requires that assets be assigned to a cash generating unit and be depreciated over the useful life of each significant component. This requires a useful life assessment at a potentially lower level than under current Canadian GAAP and potential amendments to the accounting system to enable the tracking of costs at both a component and cash generating unit level. IAS 36 - Impairment of Assets involves an impairment test at the cash generating unit level whereby the recoverable amount, defined as the higher of the fair value less costs to sell or value in use, is compared to the carrying value of the assets. Impairments are likely to be triggered at an earlier date under IFRS as this test involves a one step approach utilizing discounted cashflows at a potentially lower asset group level than currently required under Canadian GAAP. IAS 37 - Provisions, Contingent Liabilities, and Contingent Assets will require the Company to evaluate both legal and constructive obligations based on management's estimate of such items. The Company has commenced a more detailed analysis of each of the specific areas identified in the high-level comparison of Canadian GAAP to IFRS. GASFRAC does not anticipate that the transition to IFRS will require significant changes to its accounting systems. The most significant system changes relate to its fixed asset sub-system in order to separately track the components of its fixed assets. The Company is preparing a draft template for its IFRS reporting which it expects to complete during the third quarter of 2010. During the fourth quarter of 2010 GASFRAC will prepare IFRS compliant quarterly financial statements for each of the first three quarters of 2010 as these comparatives will be required for 2011 reporting. In addition, during the third and fourth quarters of 2010 GASFRAC plans to complete; formal approvals and white-papers for accounting policies and IFRS 1 elections; preparation of required transition disclosures and schedules; January 1, 2010 IFRS opening balance sheet; and a detailed system change plan and testing. Changes in Accounting Policies There were no new or amended accounting policies issued for adoption in the current period other than the adoption of accounting for restricted stock as disclosed in the interim financial statements. Non-GAAP Measures Certain supplementary measures in this MD&A do not have any standardized meaning as prescribed under Canadian GAAP and, therefore, are considered non-GAAP 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 (loss) 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: ($000s) Three months ended June 30 Six months ended June 30 ------------------------------------------------------ 2010 2009 2010 2009 ---------------------------------------------------------------------------- Net (loss) (1,055) income (1,266) 406 (154) Add back (deduct): Interest (26) income (7) (7) (160) Amortization 1,801 1,166 3,450 2,062 Future income tax provision (recovery) 96 (562) 814 151 ---------------------------------------------------------------------------- EBITDA 624 (477) 4,663 1,899 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Funds provided by (used for) 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 (used for) operations was calculated as follows: ($000s) Three months ended June 30 Six months ended June 30 ------------------------------------------------------ 2010 2009 2010 2009 ---------------------------------------------------------------------------- Cash and cash equivalents provided by (used for) operating activities 3,790 (341) 1,271 (778) Add back (deduct): Net changes in non- cash working capital (3,062) (56) 3,533 (2,971) ---------------------------------------------------------------------------- Funds provided by (used for) operations 728 (397) 4,804 2,193 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Outlook The improvement in the global economy in the first quarter of 2010 resulted in increased capital budgets for Canadian oil and natural gas production companies. Although there has been some weakening of the global economic recovery during the second quarter of 2010 this does not seem to have resulted in reduced capital budgets in Canada. With natural gas prices continuing 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. GASFRAC has completed fracturing treatments in a number of these targeted reservoirs and our customers have obtained positive results. We expect that overall demand for fracturing services, particularly in the areas noted above, will continue to be strong for the remainder of 2010. This combined with growing knowledge and acceptance of the Company's LPG fracturing technology should support continued growth of our Canadian revenue base as equipment is added throughout the remainder of 2010. While operations have only just commenced in the USA we are cautiously optimistic that we should begin experiencing a steady revenue stream from the US in the third quarter. Overall industry dynamics are similar to Canada but for GASFRAC, the key element of our initial growth in the USA will be obtaining customer acceptance of our LPG fracturing technology. 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 in 2010; -- 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 potential for GASFRAC's services in the United Sates; -- expected timing for completion of the assessment phase of GASFRAC's project plan for transition to IFRS; -- expectations with respect to the implementation phase 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 service; 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. CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 2010 As at: Jun 30, 2010 Dec 31, 2009 ---------------------------------------------------------------------------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 1,152 $ 11,643 Short term investments - - Accounts receivable 13,309 9,469 Inventory 3,764 5,499 Prepaid expenses 3,663 519 ---------------------------------------------------------------------------- 21,888 27,130 LONG TERM DEPOSITS 54 1,790 PROPERTY AND EQUIPMENT (Note 2) 71,417 61,295 OTHER ASSETS 463 358 FUTURE INCOME TAX - 775 ---------------------------------------------------------------------------- $ 93,822 $ 91,348 ---------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Bank operating line $ 3,978 $ - Accounts payable and accrued liabilities 4,426 7,617 ---------------------------------------------------------------------------- 8,404 7,617 ---------------------------------------------------------------------------- FUTURE INCOME TAX 39 - ---------------------------------------------------------------------------- SHAREHOLDERS' EQUITY SHARE CAPITAL (Note 5) 82,198 81,293 CONTRIBUTED SURPLUS 2,145 1,808 RETAINED EARNINGS 1,036 630 ---------------------------------------------------------------------------- 85,379 83,731 ---------------------------------------------------------------------------- $ 93,822 $ 91,348 ---------------------------------------------------------------------------- See accompanying notes On behalf of the Board: Dwight Loree, Director Gerald Roe, Director Three Months Ended Six Months Ended Jun 30, 2010 Jun 30, 2009 Jun 30, 2010 Jun 30, 2009 ---------------------------------------------------------------------------- REVENUE $ 13,323 $ 2,295 $ 29,229 $ 13,621 ---------------------------------------------------------------------------- EXPENDITURES Operating 10,495 2,453 22,435 9,996 Selling, general and administrative 2,099 1,505 4,031 2,759 Stock based compensation (Note 5 and 6) 98 54 135 134 Amortization 1,801 1,166 3,450 2,062 Foreign exchange loss (gain) 7 (19) (5) 54 ---------------------------------------------------------------------------- 14,500 5,159 30,046 15,005 ---------------------------------------------------------------------------- OTHER INCOME Business Interruption Claim - 638 2,030 638 Scientific Research and Experimental Development - 583 - 583 Interest Income 7 26 7 160 ---------------------------------------------------------------------------- 7 1,247 2,037 1,381 ---------------------------------------------------------------------------- NET (LOSS) INCOME BEFORE INCOME TAXES (1,170) (1,617) 1,220 (3) FUTURE INCOME TAXES EXPENSE (RECOVERY)(Note 4) 96 (562) 814 151 ---------------------------------------------------------------------------- NET (LOSS) INCOME / COMPREHENSIVE (LOSS) INCOME (1,266) (1,055) 406 (154) RETAINED EARNINGS BALANCE, BEGINNING OF THE PERIOD 2,302 3,741 630 2,840 ---------------------------------------------------------------------------- BALANCE, END OF THE PERIOD $ 1,036 $ 2,686 $ 1,036 $ 2,686 ---------------------------------------------------------------------------- Income per share Basic (0.04) (0.03) 0.02 - ---------------------------------------------------------------------------- Diluted (0.04) (0.03) 0.02 - ---------------------------------------------------------------------------- See accompanying notes Three Months Ended Six Months Ended Jun 30, 2010 Jun 30, 2009 Jun 30, 2010 Jun 30, 2009 ---------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS PROVIDED BY (USED FOR): OPERATING ACTIVITIES Net Income / Comprehensive Income $ (1,266) $ (1,055) $ 406 $ (154) Items not effecting cash: Amortization 1,801 1,166 3,450 2,062 Future income taxes expense 95 (562) 813 151 Stock based compensation 98 54 135 134 ---------------------------------------------------------------------------- 728 (397) 4,804 2,193 Changes in non-cash working capital Accounts receivable 5,602 2,560 (1,846) 1,782 Inventory 1,714 (1,283) 1,735 (2,583) Prepaid expenses (3,177) 587 (3,144) 682 Bank operating line 1,249 (882) 3,979 (702) Accounts payable and accrued liabilities (1,260) (926) (3,191) (2,150) ---------------------------------------------------------------------------- 4,856 (341) 2,337 (778) ---------------------------------------------------------------------------- FINANCING ACTIVITIES Issuance of restricted shares 202 - 202 - Issuance of common shares (net of share issue costs) 537 - 905 - ---------------------------------------------------------------------------- 739 1,107 ---------------------------------------------------------------------------- INVESTING ACTIVITIES Increase (decrease) in short term investments - (9,961) - 10,040 Decrease in long term deposits 1,654 13 1,736 13 Purchase of property and equipment (7,306) (9,719) (13,549) (15,394) Purchase of other assets (124) (20) (128) (69) Net changes in non- cash working capital 720 (1,001) (1,994) (412) ---------------------------------------------------------------------------- (5,056) (20,688) (13,935) (5,822) ---------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents For the period 539 (21,029) (10,491) (6,600) Cash and cash equivalents at beginning of period 613 32,382 11,643 17,953 ---------------------------------------------------------------------------- BALANCE, END OF THE PERIOD $ 1,152 $ 11,353 $ 1,152 $ 11,353 ---------------------------------------------------------------------------- See accompanying notes 1. BASIS OF PRESENTATION The Company's interim financial statements do not conform in all respects to the requirements of Canadian generally accepted accounting principles ("GAAP"). The Company's interim financial statements should be read in conjunction with the most recent annual financial statements. The Company's interim financial statements follow the same accounting policies and methods of their application as of the most recent annual financial statements, except where any change has been noted in the interim financial statements. The Company's financial results are directly affected by the seasonal nature of the North American oil and natural gas industry. The first and fourth quarter incorporates the winter drilling season when a disproportionate amount of the activity takes place in western Canada. During the second quarter, commonly referred to as "spring breakup", soft ground conditions typically curtail oilfield activity in all of the Company's Canadian operating areas. In addition, during excessively rainy periods in any of the Company's operating areas, equipment moves may be delayed, thereby adversely effecting revenues. 2. PROPERTY AND EQUIPMENT December 31, Accumulated June 30, 2010 2009 Net Book Cost Amortization Net Book Value Value ---------------------------------------------------------------------------- Computer Equipment & Software $ 307 $ 234 $ 73 $ 90 ---------------------------------------------------------------------------- Field Equipment 59,534 8,959 50,575 44,318 ---------------------------------------------------------------------------- Furniture & Fixtures 72 29 43 38 ---------------------------------------------------------------------------- Laboratory Equipment 262 117 145 172 ---------------------------------------------------------------------------- Leasehold Improvements 51 8 43 45 ---------------------------------------------------------------------------- LPG Portable Storage Units 12,110 1,082 11,028 7,420 ---------------------------------------------------------------------------- Plant Equipment 29 12 17 18 ---------------------------------------------------------------------------- Assets Under Construction 9,493 - 9,493 9,194 ---------------------------------------------------------------------------- $81,763 $10,438 $ 71,417 $ 61,295 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- As at June 30, 2010 and December 31, 2009, assets under construction are not subject to amortization as the assets are not yet available for use. 3. LONG-TERM DEBT On August 5, 2010 the Company entered into the new credit facility with its banker. The new credit facility includes a $15 million demand revolving loan ("Operating Loan") and a $35 million committed revolving facility ("Revolving Facility"). The Operating Loan bears interest at prime plus 1.25% and is margined by the Company's accounts receivable. The Revolving Facility bears interest at prime plus 1.4% to prime plus 1.9%, shall not exceed 50% of the net book value of the Company's capital assets, may be extended annually, if not extended shall be repayable in eight equal quarterly instalments. Both facilities are secured by a floating charge over all of the assets of the Company and are subject to certain financial covenants. 4. FUTURE INCOME TAX The net income tax provision differs from that expected by applying the combined federal and provincial income tax rate of 28.65% (2009 - 29.85%) to income taxes for the following reasons: Three months ended June 30, 2010 2009 ---------------------------------------------------------------------------- Expected combined federal and provincial income tax (recovery) ($ 336) ($ 483) Statutory and other rate differences 11 (24) Non-deductible expenses 144 9 Future income tax rate reduction 177 - Valuation allowance 114 - Other (14) (64) ---------------------------------------------------------------------------- $ 96 ($ 562) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Six months ended June 30, 2010 2009 ---------------------------------------------------------------------------- Expected combined federal and provincial income tax (recovery) $ 349 ($ 1) Statutory and other rate differences 8 43 Non-deductible expenses 135 6 Future income tax rate reduction 125 - Valuation allowance 193 - Other 4 103 ---------------------------------------------------------------------------- $ 814 $ 151 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 5. 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 Shares (#) Amount ---------------------------------------------------------------------------- Balance - December 31, 2009 32,650,000 $ 81,293 ---------------------------------------------------------------------------- Issued 183,333 406 ---------------------------------------------------------------------------- Balance - March 31, 2010 32,833,333 $ 81,699 Issued 542,500 908 Reclassified as contributed surplus (130,000) (552) Released from restricted shares 33,667 143 ---------------------------------------------------------------------------- Balance - June 30, 2010 33,279,500 82,198 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- During the period ended June 30, 2010, the company issued 542,500 common shares for cash consideration of $740 and $168 of contributed surplus. Restricted shares The Company has granted restricted shares for certain employees with an annual vesting period over five years from the date of the grant. The fair value of the shares granted is amortized to stock based compensation expense over the vesting period. During the period, the Company granted 210,000 restricted shares. The fair value of the restricted shares is $893 based on the per share price of $4.25 placed on the Company's shares on the grant date. During the period, the company reclassified 130,000 shares granted in 2009 as contributed surplus as these restricted shares have not yet vested. The fair value of these restricted shares is $552 based on the per share price of $4.25 placed on the Company's shares on the grant date. For the three month period ended June 30, 2010, restricted stock compensation of $32 was recognized. Stock options A summary of the status of the Company's outstanding stock options as of June 30, 2010 is presented below: Weighted Average Options (#) Exercise Price ($) ---------------------------------------------------------------------------- Balance - December 31, 2009 2,966,000 $ 2.89 ---------------------------------------------------------------------------- Granted 15,000 2.00 ---------------------------------------------------------------------------- Exercised (183,333) 2.00 ---------------------------------------------------------------------------- Forfeited (146,167) 3.15 ---------------------------------------------------------------------------- Balance - March 31, 2010 2,651,500 2.93 ---------------------------------------------------------------------------- Granted 405,000 4.25 ---------------------------------------------------------------------------- Exercised (250,000) 1.40 ---------------------------------------------------------------------------- Forfeited (100,000) 3.13 ---------------------------------------------------------------------------- Balance - June 30, 2010 2,706,500 $ 3.26 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- During the three month period ended June 30, 2010, the Company granted 405,000 options to employees at an exercise price of $4.25 and 250,000 options were exercised at an average price of $1.40 while 100,000 options were forfeited. The 2,706,500 options outstanding at June 30, 2010 had exercise prices ranging from $2.00 to $4.25 per share with expiry dates ranging from 2012 to 2015 Warrants issued and outstanding Weighted Average Warrants (#) Exercise Price ($) ---------------------------------------------------------------------------- Balance - December 31, 2009 2,602,500 $ 1.32 ---------------------------------------------------------------------------- Exercised 262,500 1.00 ---------------------------------------------------------------------------- Balance - June 30, 2010 2,340,000 $ 1.36 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 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, exercisable at $1.00 per share and expiring two years after the date the Company is listed on a public stock exchange. Such warrants to be escrowed and released in three (3) tranches of 500,000 warrants as follows: 500,000 warrants to be released on the dates that the market valuation for the common shares equals or exceeds $3.00 per share, a second tranche of 500,000 warrants released when market valuation equals or exceeds $4.00 per common share and a third tranche of 500,000 warrants to be released when market valuation equals or exceeds $5.00 per common share. In 2007, as part of the terms of a financing agreement, the Company issued 840,000 brokers warrants, entitling the holder to purchase common shares of the Company at $2.00 per share. The warrants will expire on May 22, 2011. During the period 262,500 broker warrants were exercised at a weighted average exercise price of $1.00 per unit. 6. STOCK BASED COMPENSATION The Company calculates the fair value of its options using the Black-Scholes option pricing model. The Company is private, therefore share price volatility was determined to be nil. The following weighted average assumptions were used to determine the fair value of options on date of grant: ---------------------------------------------------------------------------- Risk-free interest rate 1.43% - 3.05% ---------------------------------------------------------------------------- Expected life 3 - 6 years ---------------------------------------------------------------------------- Maximum life 6 years ---------------------------------------------------------------------------- Vesting Period Immediately to 3 years ---------------------------------------------------------------------------- Expected dividend $nil per share ---------------------------------------------------------------------------- Expected share price volatility 0% ---------------------------------------------------------------------------- 7. COMMITMENTS Capital Commitments The Company has entered into various agreements to purchase additional capital equipment. The total cost under these agreements is approximately $8 million. Purchasing Commitments The Company has entered into an agreement to purchase proppant over the next 12 months. The total cost under this agreement is approximately $2.8 million. 8. CAPITAL STRUCTURE The Company's capital structure is currently comprised of shareholders' equity and a $20 million operating demand revolving loan facility at a variable interest rate set at prime plus 1%. The amount drawn under this loan is not to exceed 60% of the book value of the Company's property and equipment plus 75% of the accounts receivable. As at June 30, 2010, the Company is in compliance with all the covenants related with this facility. The Company's objectives in managing capital are (i) to maintain flexibility so as to maintain the Company's ability to meet its financial obligations, and (ii) to finance growth. 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 operating line facility. 9. RELATED PARTY TRANSACTIONS During the period ended June 30, 2010, the Company paid $82 (June 30, 2009 - $64) in consulting fees to a Director. These transactions were in the normal course of operations and have been measured at the exchange amounts. 10. SUBSEQUENT EVENT On August 6, 2010, the Company amalgamated with Kierland Capital Corporation ("Kierland") The amalgamation will be accounted for as a reverse takeover of Kierland, an entity that does not constitute a business by the Company. Pursuant to the terms of the transaction: (i) all of the issued and outstanding common shares of Kierland were exchanged for 156,250 common shares of Amalco; and (ii) each of the 46,585,833 (which includes the 13,000,000 subscription receipts described below) issued and outstanding GASFRAC shares were exchanged for one Amalco share. Upon completion of the transaction, the continuing entity changed its name to GASFRAC Energy Services Inc. On June 30, 2010 GASFRAC closed a private placement of 13,000,000 subscription receipts by the Company at a price of $5.00 per receipt for gross proceeds of $65 million (estimated net proceeds of $60.5 million after broker fees and transaction costs) subject to completion of the amalgamation with Kierland. Each subscription receipt entitles the holder to receive, for no additional consideration, one share of the Company, which will be freely tradable. As at June 30, 2010 the proceeds of the private placement were held in escrow pending the completion of the amalgamation and, as such, are not recognized in these financial statements. The proceeds were released from escrow to GASFRAC on August 6, 2010 and were recognized in the accounts of GASFRAC on that date. On August 5, 2010 the Company entered into the new credit facility with its banker. The new 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 installments. Both facilities are secured by a floating charge over all of the assets of the Company and are subject to certain financial covenants. The Company will host a conference call on Thursday, August 12, 2010 at 9:00 a.m. MT (11:00 a.m. ET) to discuss the Company's results for the second quarter of 2010. To participate in the Q&A session, please call the conference call operator at 1-877-240-9772 (North America) or 1-416-340-8530 (outside North America) 15 minutes prior to the call's start time and ask for "GASFRAC Second Quarter Results Conference Call". A replay of the call will be available until August 19, 2010 by dialing 1-800-408-3053 (North America) or 1-416-695-5800 (outside North America). Playback passcode: 1085801. 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.
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