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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