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Message: Q2 Results Announced
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GasFrac Energy Services Inc. TSX : GFS  |
August 08, 2011 17:05 ET
GASFRAC Announces Second Quarter 2011 Results
CALGARY, ALBERTA--(Marketwire - Aug. 8, 2011) - GASFRAC Energy Services Inc. (TSX:GFS) -
Dwight Loree, Chief Executive Officer commented "While revenue for the quarter increased 7% to $14.2 million from $13.3 million in 2010, the severe and extended spring breakup in Canada prevented access to many customer locations during the entire quarter causing our revenues to be significantly below our expectations. Typically, breakup commences when ground frost begins to thaw in early April and continues for a period of four to six weeks. This year, an unusually wet May and June caused the soft ground conditions to continue for the entire second quarter resulting in the most extended spring breakup period in over thirty years.
A significant milestone during the quarter was the introduction of equipment and commencement of GASFRAC operations in Texas. Initially customers scheduled work to use the Company's technology on selected wells to determine the impact on production in those particular formations and conditions. We have had positive feedback from customers on the results of our operations and anticipate increased demand. In addition to the formations we have fractured during the quarter we have work scheduled in the Eagle Ford Shale in Texas and the Piceance Basin in Colorado for the third quarter.
We now have six sets of equipment available for operations with four more in build. We expect strong utilization of the sets in Canada as customers recommence activities after the breakup. In the USA we are focused on a few key formations and expect customer demand to increase as the positive results of LPG fracturing are demonstrated in these formations."
Management's Discussion and Analysis
June 30, 2011
Management's discussion and analysis ("MD&A") of the financial condition and the results of operations should be read in conjunction with the June 30, 2011 unaudited interim consolidated financial statements and the December 31, 2010 audited consolidated financial statements of GASFRAC Energy Services Inc. ("GASFRAC" or the "Company"), together with the accompanying notes. The interim consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") and with International Accounting Standard 34, "Interim Financial Reporting", as issued by the International Accounting Standard Board. Previously, the Company prepared its interim and Annual Consolidated Financial Statements in accordance with Canadian generally accepted accounting principles ("GAAP").
Readers should also refer to the "Forward-Looking Statements" legal advisory at the end of this MD&A. This MD&A has been prepared using information that is current to August 8, 2011.
All references to dollar amounts are in Canadian dollars. Figures are in 000s except share and per share data or as otherwise noted.
Unless the context otherwise requires, all references in this MD&A to "we", "us" or "our" mean GASFRAC.
Business of GASFRAC
GASFRAC was incorporated on February 13, 2006 in Canada under the Business Corporations Act in the Province of Alberta. The Company is an oil and gas well fracturing company that has developed new technology, the "LPG Fracturing Process", to enable wells to be fractured safely with LPG, more specifically propane and butane. The Company has four wholly-owned subsidiaries, GASFRAC Services GP Inc., GASFRAC Energy Services Limited Partnership, GASFRAC Luxembourg Finance (a Luxembourg incorporated entity), and GASFRAC Inc. (a U.S. incorporated entity).
Changes in Accounting Policies
On January 1, 2011, GASFRAC adopted International Financial Reporting Standards ("IFRS") for financial reporting purposes, using a transition date of January 1, 2010. The financial statements for the six months ended June 30, 2011, including required comparative information, have been prepared in accordance with IFRS 1, First-time Adoption of International Financial Reporting Standards, and with International Accounting Standard ("IAS") 34, Interim Financial Reporting, as issued by the International Accounting Standards Board ("IASB"). Previously, the Company prepared its Interim and Annual Consolidated Financial Statements in accordance with Canadian generally accepted accounting principles ("Previous GAAP"). The 2010 comparative information has been prepared in accordance with IFRS. The adoption of IFRS has not had an impact on the Company's operations, strategic decisions or cash flow. Further information on the IFRS impacts is provided in the Accounting Policies and Estimates sections of this MD&A, including reconciliations between Previous GAAP and IFRS Net Income, and other financial metrics.
Change of functional currency
As the operations of the Company's wholly owned United States ("U.S.") subsidiary continue to gain significance relative to the operations of the Company as a whole the Board of Directors has concluded that the most appropriate functional currency of the United States subsidiary is the United States Dollar, the change was effective for the Company April 1, 2011. This reflects the fact that as of the effective date of this change the majority of the subsidiary's pricing for fracing services is influenced by the U.S. dollar, the competitive and regulatory environment of the subsidiary are mainly influenced by the U.S. and the U.S. Dollar now largely influences labor, material and other costs of providing fracing services. The previous functional currency of the subsidiary was the Canadian Dollar.
Comparative Quarterly Financial Information Three months ended: June 30, 2011 June 30, 2010 ---------------------------------------------------------------------------- Revenue 14,170 13,323 Operating expenses 15,380 10,433 Selling, general and administrative expenses 3,701 2,099 EBITDA(1) (5,566) 439 Net loss (7,768) (1,282) Net loss per share - basic (0.13) (0.04) Weighted average number of shares - basic 61,313,805 33,163,405 Treatments 70 63 Revenue per treatment 202 211 ---------------------------------------------------------------------------- (1) Defined under Non-IFRS Measures
Second Quarter Highlights
Financial Overview
Revenue
Revenue for the quarter increased to $14.2 million from $13.3 million in 2010. While the Company did experience a year over year revenue increase, revenue decreased compared to the $30.5 million in the first quarter and was significantly below our expectations. The severe and extended spring breakup in Canada is the major contributing cause of revenue being less than expected for the quarter. Spring breakup is that period during the second quarter when soft ground conditions curtail activities in the Canadian oilfield such that heavy equipment, like GASFRAC's, is unable to access customer sites due to road bans or other unpassable conditions. Typically, this period commences when ground frost begins to thaw in early April and continues for a period of four to six weeks. This year, an unusually wet May and June caused the soft ground conditions to continue for the entire second quarter in the Company's operating areas in Canada. These conditions resulted in the most extended spring breakup period since 1978.
During the quarter, the Company moved equipment to Texas, USA and commenced operations there. Initially customers scheduled work to use the Company's technology on selected wells to determine the impact on production in those particular formations and conditions. Customers have indicated that, based on these results, they will determine the extent of future work (see "Outlook"). During the quarter, the Company performed ten fracturing treatments on seven different wellbores for three companies in the USA. Total revenue in the USA was $1.8 million.
During the quarter two customers accounted for approximately 53% of the Company's revenue and year to date the Company had two customers who each accounted for more than 10% of our revenues individually. These two customers accounted for approximately 37% of the Company's total revenue for the six months ended June 30, 2011.
During the quarter the Company completed 70 treatments at an average price of $202 compared to 63 treatments at an average job price of $211 during Q2 2010.
Operating Expense
Operating expense increased to $15.4 million (109% of revenue) during Q2 2011 from $10.4 million (78% of revenue) in Q2 2010. Direct field operating costs as a percentage of job revenue have remained consistent quarter over quarter. The increase in total operating costs reflects added fixed costs (field and operating support staff, facilities and equipment) put in place to support the additional sets of equipment available for revenue generation. During the quarter, utilization levels for this equipment did not support the added costs. As described in "Outlook" we anticipate improved utilization during the remainder of the year in both Canada and the USA.
Selling, General and Administrative ("SG&A") Expense
SG&A expense increased to $3.7 million (26% of revenue) during Q2 2011 from $2.1 million (16% of revenue) in Q2 2010. The SG&A costs are consistent with the $3.7 million cost in Q1 2011 and reflects support staff added in both Canada and the USA in the second half of 2010.
Amortization
Amortization increased to $3.6 million during Q2 2011 from $1.6 million in Q2 2010. The increase is due to an increase in operating property and equipment.
EBITDA
EBITDA decreased to a loss of $5.6 million during Q2 2011 from EBITDA of $0.4 million in Q2 2010. The EBITDA loss results from the reduced equipment utilization caused by the extended spring breakup. This reduced utilization caused revenues to fall significantly below initial expectations. Combined with the operating infrastructure (and related costs) to support higher revenues, the low equipment utilization resulted in the EBITDA loss for the quarter.
Net Income
Net income decreased to a loss of $7.8 million during Q2 2011 from a loss of $1.3 million during Q2 2010.
MAR. 31 JUN. 30 SEP. 30 DEC. 31 MAR. 31 Jun 30
2010 2010 2010 2010 2011 2011
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Revenue 15,906 13,323 26,590 41,087 30,452 14,170
Net income (loss) 1,729 (1,282) 2,318 1,995 (2,515) (7,768)
Net income (loss) per share
- basic 0.05 (0.04) 0.06 0.04 (0.04) (0.13)
EBITDA (1) 3,937 439 4,874 5,814 66 (5,566)
Capital expenditures 6,247 7,430 35,871 33,897 38,941 22,995
Working capital (2) 17,640 13,330 41,781 118,346 79,069 49,946
Shareholders' equity 85,957 85,758 151,606 259,445 258,217 251,374
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(1) Defined under Non-IFRS Measures
(2) Working capital is defined as current assets less current liabilities
Liquidity and Capital Resources
Three months ended June 30, 2011 2010
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Cash Provided by (used in)
Operating Activities $ 6,329 $ 6,567
Financing Activities 651 739
Investing Activities (43,236) (6,767)
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$(36,256)$ 539
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As at June 30, 2011 the Company had $49.9 million of working capital compared to $118.3 million at December 31, 2010. The decrease in working capital is primarily due to investing in capital assets offset by an increase is cash provided from operating activities.
As at June 30, 2011, the Company had approximately $92 million of capital commitments as part of the 2011 capital program. The Company anticipates being able to fund these capital expenditures through cash on hand, operating cash flows and financing which may include current or future debt facilities or equity or a combination thereof.
Operating
The Company's funds used in operations (as defined under Non-IFRS Measures) was $5.1 million for Q2 2011 compared to funds provided by operations of $0.8 million in Q2 2010. The decrease is largely due to the loss for the quarter as compared to a profit in 2010.
Financing
Net cash provided by financing activities for Q2 2011 was $0.7 million compared to $0.7 million during Q2 2010. Both result from the exercise of stock options and warrants.
As at June 30, 2011 the Company had a $15 million demand revolving loan facility and a $35 million committed revolving facility (see Note 11 of the interim consolidated financial statements). No amounts were drawn on these facilities as at June 30, 2011 or as at the date of this MD&A. The Company is in compliance with all its debt covenants.
Investing
For Q2 2011 the Company's invested $22.4 million in property and equipment to add revenue producing capacity as compared to $7.4 million in Q2 2010. For the six month period to June 30, 2011 the Company has invested $61.1 million in property and equipment as compared to $13.7 million for the same period in 2010.
Accounting Policies and Estimates
Adoption of IFRS
The Company has prepared its June 30, 2011 Interim Consolidated Financial Statements in accordance with IFRS 1, First-time Adoption of International Financial Reporting Standards, and with IAS 34, Interim Financial Reporting, as issued by the IASB. Previously, the Company prepared its financial statements in accordance with Previous GAAP. The adoption of IFRS has not had a material impact on the Company's operations, strategic decisions, cash flow and capital expenditures.
The Company's IFRS accounting policies are provided in Note 3 to the Interim Consolidated Financial Statements. In addition, Note 15 to the Interim Consolidated Financial Statements presents reconciliations between the Company's 2010 Previous GAAP results and the 2010 IFRS results. The reconciliations include the Consolidated Balance Sheets as at January 1, 2010, June 30, 2010 and December 31, 2010, and Consolidated Statements of Earnings, Comprehensive (Loss) Income and Changes in Shareholders' Equity for the three and six month periods ended June 30, 2010 and for the twelve months ended December 31, 2010.
The following provides summary reconciliations of GASFRAC's 2010 Previous GAAP and IFRS results.
MAR. 31 JUN. 30 SEP. 30 DEC. 31 Annual
2010 2010 2010 2010 2010
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Net income (loss) - Previous GAAP 1,672 (1,266) 2,585 2,062 5,053
Operating expense re: leases 33 62 32 42 169
Stock based compensation (129) (247) (494) (342)(1,212)
Amortization 159 174 200 239 772
Interest income / expense (6) (5) (5) (6) (22)
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Net income (loss) - IFRS 1,729 (1,282) 2,318 1,995 4,760
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Accounting Policy Changes
Leases
Previous GAAP considered the leases to be of a capital nature based on certain quantifiable criteria. Based on the criteria, GASFRAC concluded that the leases on the light vehicles were operating leases in nature.
Under IFRS, with the absence of the quantitative criteria provided by Previous GAAP, we determined that qualitatively, the risks and rewards of the lease reside with GASFRAC and as such, treated it as a financing lease.
Amortization
With the conversion to IFRS, GASFRAC componentized the field equipment into each of the separate components that made up the equipment. We then assessed the useful life and residual value for each of these components. Based on this assessment, certain amortization rates were modified.
Stock based compensation
Under Previous GAAP, GASFRAC accounted for certain stock based compensation plans whereby the obligation and compensation costs were accrued over the vesting period using the intrinsic value method. The intrinsic value of a share unit is the amount by which the Company's share price exceeds the exercise price of the share unit.
For certain stock-based compensation plans, IFRS requires share-based compensation be fair valued using an option pricing model, such as the Black-Scholes model, at each reporting date. Also, under IFRS, each tranche in an award is considered a separate award with its own vesting period. Further, GASFRAC adjusted the volatility of the unvested options and warrants that were issued when GASFRAC was not publically traded from 0% to 52% as IFRS does not permit the use of 0% volatility.
Accordingly, upon transition to IFRS, the Company recorded a fair value adjustment of $891 as at January 1, 2010 to increase the stock based compensation with a corresponding charge to retained earnings. GASFRAC elected to use the IFRS 1 exemption whereby the stock based compensation that had vested or settled prior to January 1, 2010 were not required to be retrospectively restated. Subsequent fair value adjustments are recorded through stock based compensation.
As part of the 2010 qualifying transaction, the amount of consideration in excess of the fair market value of assets received was offset against share issue costs under Previous GAAP. Under IFRS, the amount of consideration in excess of the fair market value of assets received was listed as an unidentifiable service cost and expensed to sales, general and administrative expense. The amount of the adjustment was $245.
Internal Controls Over Financial Reporting
There have been no changes in GASFRAC's internal controls over financial reporting during the period ended June 30, 2011, which have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
During the first quarter of 2011, GASFRAC completed an evaluation of the Company's internal controls under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures, as defined in National Instrument 52-109. Based on the evaluation, the Company's management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company's disclosure controls and procedures were designed to provide a reasonable level of assurance over the disclosure of material information, and are effective as of June 30, 2011.
Off-Balance Sheet Arrangements
The Company is not party to any off balance sheet arrangements or transactions.
Non-IFRS Measures
Certain supplementary measures in this MD&A do not have any standardized meaning as prescribed under IFRS and, therefore, are considered non-IFRS measures. These measures have been described and presented in order to provide shareholders and potential investors with additional information regarding the Company's financial results, liquidity and ability to generate funds to finance its operations. These measures may not be comparable to similar measures presented by other entities, and are further explained as follows:
EBITDA is defined as net income before interest income and expense, taxes, depreciation, amortization and non-controlling interest. EBITDA is presented because it is frequently used by securities analysts and others for evaluating companies and their ability to service debt.
EBITDA was calculated as follows:
Three months ended Six months ended
June 30, June 30,
2011 2010 2011 2010
----------------------------------------------------------------------------
Net (loss) income (7,768) (1,282) (10,283) 447
(Deduct) Add back:
Interest (income) expense, net (144) (2) (399) (2)
Amortization 3,589 1,627 6,474 3,117
Deferred income tax (benefit)
expense (1,243) 96 (1,292) 814
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EBITDA (5,566) 439 (5,500) 4,376
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Funds provided by operations is defined as cash and cash equivalents provided by (used for) operating activities before the net change in non-cash operating working capital from operating activities. Funds provided by operations is a measure that provides shareholders and potential investors with additional information regarding the Company's liquidity and its ability to generate funds to finance its operations. Management utilizes these measures to assess the Company's ability to finance operating activities and capital expenditures.
Funds provided by operations were calculated as follows:
Three months ended Six months ended
June 30, June 30,
2011 2010 2011 2010
----------------------------------------------------------------------------
Cash and cash equivalents provided by
(used for) operating activities 6,329 6,567 15,465 4,191
Add back (deduct):
Net changes in non-cash working
capital from operating activities (11,384) (5,781) (19,863) 698
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Funds provided by operations (5,055) 786 (4,398) 4,889
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Outlook
We expect the North American pressure pumping market will remain strong in 2011 due to the service intensity of the wells being drilled, energy demand and service supply levels. Although there is projected to be a significant amount of new horsepower being added to the market in 2011, it is still estimated that the market will be undersupplied based on projected rig activity. As natural gas prices continue to be soft we have observed customers targeting more of their capital budgets in oil and liquids-rich reservoirs. Further, development activity is focused on deep, unconventional and horizontal wells often requiring multi-stage fracturing.
As noted above, we expect that overall demand for fracturing services will continue to be strong for 2011 and this, combined with growing knowledge and acceptance of the Company's LPG fracturing technology, should support continued growth of our Canadian revenue base. The extended spring breakup in the second quarter severely hindered equipment utilization. A key focus of the Company in the second half of 2011 is utilization of the four operating sets of equipment available in Canada. Our major Canadian customers have indicated a strong demand for our services in the second half of 2011 in line with the development of specific project areas. Additionally, we anticipate adding new customers as interest in LPG fracturing increases based on positive production results from our customer base.
As in Canada, more drilling activity in the USA is being focused on oil and liquids rich gas. While industry dynamics are similar to Canada for GASFRAC, the key element of our initial growth in the USA will be obtaining customer acceptance of our LPG fracturing technology and on focusing on key basins where we can quickly reach sufficient mass to ensure high utilization rates. During the second quarter one area of potential ongoing work was identified and negotiations have commenced with the customer for a long-term contract. Another area of focus is the Eagle Ford region where we anticipate a high level of drilling activity and have identified customers and expect to initiate work in the region during the third quarter of 2011. We are confident that customers will experience positive results from LPG fracturing.
Forward-Looking Statements
This document contains certain statements that constitute forward-looking statements under applicable securities legislation. All statements other than statements of historical fact are forward-looking statements. In some cases, forward-looking statements can be identified by terminology such as "may", "will", "should", "expect", "plan", "anticipate", "believe", "estimate", "predict", "potential", "continue", or the negative of these terms or other comparable terminology. These statements are only as of the date of this document and we do not undertake to publicly update these forward looking statements except in accordance with applicable securities laws. These forward looking statements include, among other things:
- expectations that GASFRAC's innovative technology will provide GASFRAC with opportunities to expand GASFRAC's market share in Alberta and British Columbia;
- estimates of additional investment required to complete ongoing capital projects;
- expectations of securing financing for additional capital expenditures for 2011 and beyond;
- expectations of the duration of spring breakup in Canada in 2012;
- expectations that activity levels in Canada will remain strong and that oil and liquids rich gas drilling will offset declines in dry gas drilling;
- expectations as to capital development programs of major customers;
- 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;
- expectations that full benefit of equipment additions will be seen in 2012;
- expectations as to the ability to recruit and train sufficient personnel to meet staffing requirements;
- assumption that environmental protection requirements will not have a significant impact on GASFRAC's operations or capital budget;
- expectations as to GASFRAC's future market position in the industry;
- expectations as to the supply of raw materials;
- expectations as to the pricing of GASFRAC's services;
- expectations as to the timing of additional property and equipment in Canada and the USA;
- expectations as to the potential for GASFRAC's services in the United States;
- expectations of fracturing industry pricing and the pricing of GASFRAC services in North America in 2011;
- expectations of oil and natural gas commodity prices in 2011;
- expectations of the amount of net fracturing horsepower being added to the North American market in 2011 and its impact on GASFRAC's service prices;
These statements are only predictions and are based on current expectations, estimates, projections and assumptions, which we believe are reasonable but which may prove to be incorrect and therefore such forward-looking statements should not be unduly relied upon. In addition to other factors and assumptions which may be identified in this document, assumptions have been made regarding, among other things, industry activity; effect of market conditions on the demand for the Company's services; the ability to obtain qualified staff, equipment and services in a timely manner; the effect of current plans; the timing of capital expenditures and receipt of added equipment operating capacity; future oil and natural gas prices and the ability of the Company to successfully market its services.
By its nature, forward-looking information involves numerous assumptions, known and unknown risks and uncertainties, both general and specific, that contribute to the possibility that the predictions, forecasts, projections and other forward-looking statements will not occur. These risks and uncertainties include: changes in drilling activity; fluctuating oil and natural gas prices; general economic conditions; weather conditions; regulatory changes; the successful development and execution of technology; customer acceptance of new technology; the potential of competing technologies by market competitors; the availability of qualified staff, raw materials and propery and equipment.
GASFRAC ENERGY SERVICES INC.
Condensed Consolidated Statement of Financial Position
Unaudited (000s)
As at: Jun 30, 2011 Dec 31, 2010 Jan 1, 2010
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(Note 15) (Note 15)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 51,043 $ 98,701 $ 11,643
Accounts receivable 9,122 24,500 9,469
Inventory 19,726 7,018 5,499
Prepaid expenses 1,554 6,839 519
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81,445 137,058 27,130
PROPERTY and EQUIPMENT (Note 4) 193,495 138,051 61,557
LONG-TERM DEPOSITS 7,909 3,176 1,790
INTANGIBLE ASSETS (Note 5) 434 420 358
DEFERRED INCOME TAX BENEFIT
(Note 8) 665 - 775
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$ 283,948 $ 278,705 $ 91,610
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LIABILITIES AND SHAREHOLDERS'
EQUITY
CURRENT LIABILITIES
Accounts payable and accrued
liabilities 10,171 14,987 7,617
Unearned revenue (Note 7) 20,871 3,485 -
Current portion of lease
obligations (Note 6) 457 240 121
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31,499 18,712 7,738
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LEASE OBLIGATIONS (Note 6) 1,075 180 179
DEFERRED INCOME TAX LIABILITY
(Note 8) - 368 -
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1,075 548 179
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SHAREHOLDERS' EQUITY
SHARE CAPITAL (Note 9) 254,052 251,573 81,293
CONTRIBUTED SURPLUS 3,402 3,522 2,811
CUMULATIVE TRANSLATION
DIFFERENCES (147) - -
RETAINED EARNINGS (5,933) 4,350 (411)
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251,374 259,445 83,693
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$ 283,948 $ 278,705 $ 91,610
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See accompanying Notes to Consolidated Financial Statements.
Commitments (Note 10)
On behalf of the Board:
Dwight Loree, Director Gerald Roe, Director
GASFRAC ENERGY SERVICES INC.
Condensed Consolidated Statement of Comprehensive (loss) Income
Unaudited (000s)
Three Months Ended: Six Months Ended:
Jun 30, Jun 30, Jun 30, Jun 30,
2011 2010 2011 2010
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(Note 15) (Note 15)
REVENUE $ 14,170 $ 13,323 $ 44,622 $ 29,229
OTHER INCOME
Interest 144 2 399 2
Business interruption claim - - - 2,030
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14,314 13,325 45,021 31,261
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EXPENDITURES
Operating 15,380 10,433 40,947 22,346
Selling, general and
administrative 3,701 2,099 7,371 4,031
Stock based compensation 575 345 1,622 511
Amortization 3,589 1,627 6,474 3,117
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23,245 14,504 56,414 30,005
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(LOSS) INCOME BEFORE INCOME
TAX AND FOREIGN EXCHANGE (8,931) (1,179) (11,393) 1,256
Foreign exchange gain (loss) (80) (7) (182) 5
Deferred income tax benefit
(expense) 1,243 (96) 1,292 (814)
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NET (LOSS) INCOME (7,768) (1,282) (10,283) 447
Translation differences (147) - (147) -
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COMPREHENSIVE (LOSS) INCOME (7,915) (1,282) (10,430) 447
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(Loss) Earnings per share
Basic $ (0.13) $ (0.04) $ (0.17) $ 0.01
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Diluted $ (0.13) $ (0.04) $ (0.17) $ 0.00
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See accompanying Notes to Consolidated Financial Statements.
GASFRAC ENERGY SERVICES INC.
Condensed Consolidated Statement of Changes in Equity
Unaudited (000s)
Retained Cumulative
Share Contributed (Deficit) Translation Total
Capital Surplus Earnings Differences Equity
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Balance at
January 1, 2010 $ 81,293 $ 2,811 $ (411) $ - $ 83,693
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Total
comprehensive
income for the
period:
Net income and
comprehensive
income - - 1,729 - 1,729
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Total
comprehensive
income Jan -
Mar 2010 - - 1,729 - 1,729
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Stock based
compensation
expense -
options
and warrants - 166 - - 166
Exercise of
stock options 406 (37) - - 369
----------------------------------------------------------------------------
Balance at
March 31, 2010 $ 81,699 $ 2,940 $ 1,318 $ - $ 85,957
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----------------------------------------------------------------------------
Total
comprehensive
income for the
period:
Net income and
comprehensive
income - - (1,282) - (1,282)
----------------------------------------------------------------------------
Total
comprehensive
income Apr -
Jun 2010 - - (1,282) - (1,282)
----------------------------------------------------------------------------
Stock based
compensation
expense -
options
and warrants - 270 - - 270
Issuance of
restricted
stock - 73 - - 73
Issued for
services 128 - - - 128
Exercise of
stock options 384 (34) - - 350
Exercise of
warrants 396 (134) - - 262
Reclassification
as restricted
shares (552) 552 - - -
Released from
restricted
shares 143 (143) - - -
----------------------------------------------------------------------------
Balance at June
30, 2010 $ 82,198 $ 3,524 $ 36 $ - $ 85,758
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----------------------------------------------------------------------------
Total
comprehensive
income for the
period:
Net income and
comprehensive
income - - 4,314 - 4,314
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Total
comprehensive
income Jul -
Dec 2010 - - 4,314 - 4,314
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Stock based
compensation
expense -
options
and warrants - 460 - - 460
Issuance of
common stock 104,698 - - - 104,698
Issuance of
restricted
stock - 281 - - 281
Issuance of
subscription
receipts 61,551 - - - 61,551
Issuance on
share exchange 699 - - - 699
Exercise of
stock options 607 (62) - - 545
Exercise of
warrants 1,634 (495) - - 1,139
Released from
restricted
shares 186 (186) - - -
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Balance at
December 31,
2010 $ 251,573 $3,522 $4,350 $ - $259,445
----------------------------------------------------------------------------
Total
comprehensive
loss for the
period:
Net loss and
comprehensive
loss - - (2,515) - (2,515)
----------------------------------------------------------------------------
Total
comprehensive
loss Jan - Mar
2011 - - (2,515) - (2,515)
----------------------------------------------------------------------------
Stock based
compensation
expense -
options - 185 - - 185
Issuance of
restricted
stock - 151 - - 151
Exercise of
stock options 523 (46) - - 477
Exercise of
warrants 839 (176) - - 663
Released from
restricted
shares 97 (97) - - -
Common Stock -
Deferred Tax
Benefit (189) - - - (189)
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Total 1,270 17 - - 1,287
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Balance as
March 31, 2011 $252,843 $ 3,539 $ 1,835 $ - $258,217
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Total
comprehensive
loss for the
period:
Net loss and
comprehensive
loss - - (7,768) - (7,768)
----------------------------------------------------------------------------
Total
comprehensive
loss Apr - Jun
2011 - - (7,768) - (7,768)
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Cumulative
translation
differences - - - (147) (147)
Stock based
compensation
expense -
options - 140 - - 140
Issuance of
restricted
stock - 226 - - 226
Exercise of
stock options 205 (44) - - 161
Exercise of
warrants 949 (321) - - 628
Released from
restricted
shares 138 (138) - - -
Common Stock -
Deferred Tax
Benefit and
Share Issue
Cost (83) - - - (83)
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Total 1,209 (137) - (147) 925
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Balance as June
30, 2011 $254,052 $ 3,402 $ (5,933) $ (147) $251,374
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----------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
GASFRAC ENERGY SERVICES INC.
Condensed Consolidated Statement of Cash Flows
Unaudited (000s)
Three Months Ended: Six Months Ended:
----------------------------------------------------------------------------
Jun 30, Jun 30, Jun 30, Jun 30,
2011 2010 2011 2010
----------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS
PROVIDED
BY (USED FOR):
OPERATING ACTIVITIES
Net (loss) Income /
Comprehensive
(loss) Income $ (7,768) $ (1,282)$ (10,283) $ 447
Items not effecting
cash:
Amortization 3,589 1,627 6,474 3,117
Deferred income taxes
(benefit) expense (1,243) 96 (1,292) 814
Stock based compensation
(Note 9) 367 345 703 511
----------------------------------------------------------------------------
(5,055) 786 (4,398) 4,889
Net change in non-cash
working capital from
operating activities
(Note 13) 11,384 5,781 19,863 (698)
----------------------------------------------------------------------------
6,329 6,567 15,465 4,191
----------------------------------------------------------------------------
FINANCING ACTIVITIES
Issuance of common
shares (net of
share issue costs) 651 739 1,915 1,106
----------------------------------------------------------------------------
651 739 1,915 1,106
----------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of property and
equipment (22,355) (7,363) (61,091) (13,666)
Proceeds on disposal of
property and equipment - - 147 -
Purchase of intangible
assets (42) (124) (93) (128)
Net change in non-cash
working capital from
investing activities (20,839) 720 (3,854) (1,994)
----------------------------------------------------------------------------
(43,236) (6,767) (64,891) (15,788)
----------------------------------------------------------------------------
DECREASE IN CASH AND CASH
EQUIVALENTS FOR THE
PERIOD (36,256) 539 (47,511) (10,491)
CASH AND CASH EQUIVALENTS
AT THE BEGINNING OF
PERIOD 87,446 613 98,701 11,643
EFFECT OF EXCHANGE RATE
CHANGES (147) - (147) -
----------------------------------------------------------------------------
BALANCE, END OF THE
PERIOD $ 51,043 $ 1,152 $ 51,043 $ 1,152
----------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
GASFRAC ENERGY SERVICES INC.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
(Figures in text and tables are in 000s except share data and certain other
exceptions as indicated)
1. CORPORATE INFORMATION
GASFRAC Energy Services Inc. ("Gasfrac" or "the Company") is an oil and gas well fracturing company that has developed the "LPG Fracturing Process" to enable wells to be fractured with LPG, more specifically propane and butane.
GASFRAC is a publically traded company, incorporated and domiciled in Canada. The address and registered office is Suite 1900, 801 - 6th Avenue S.W., Calgary, Alberta, Canada, T2P 3W2.
These interim Consolidated Financial Statements were approved and authorized for issuance by the Board of Directors on August 8, 2011.
The Company's Canadian business is seasonal in nature. The lowest activity is typically experienced during the second quarter of the year when road weight restrictions are in place due to spring break up.
2. BASIS OF PREPARATION
In conjunction with the Company's annual audited Consolidated Financial Statements to be issued under International Financial Reporting Standards ("IFRS") for the year ended December 31, 2011, these interim Consolidated Financial Statements present GASFRAC's initial financial results of operations and financial position under IFRS as at and for the six months ended June 30, 2011, including 2010 comparative periods. As a result, they have been prepared in accordance with IFRS 1, "First-time Adoption of International Financial Reporting Standards" and with International Accounting Standard ("IAS") 34, "Interim Financial Reporting", as issued by the International Accounting Standards Board ("IASB"). These interim Consolidated Financial Statements do not include all the necessary annual disclosures in accordance with IFRS. Previously, the Company prepared its interim and annual Consolidated Financial Statements in accordance with Canadian generally accepted accounting principles ("Previous GAAP").
The preparation of these interim Consolidated Financial Statements resulted in changes to GASFRAC's accounting policies as compared to those disclosed in the Company's annual audited Consolidated Financial Statements for the period ended December 31, 2010 issued under Previous GAAP. A summary of the significant changes to GASFRAC's accounting policies is disclosed in Note 15 along with reconciliations presenting the impact of the transition to IFRS for the comparative periods as at January 1, 2010, as at and for the six months ended June 30, 2010, and as at and for the twelve months ended December 31, 2010.
Operating expenses as presented on the Consolidated Statement of Comprehensive (loss) Income are primarily composed of direct salaries, materials, and other direct operating costs. Selling, general, and administrative expenses as presented on the Consolidated Statement of Comprehensive (loss) Income are primarily composed of indirect salaries, head office expenses, insurance, professional fees and other indirect costs.
A summary of GASFRAC's significant accounting policies under IFRS is presented in Note 3. These policies have been retrospectively and consistently applied except where specific exemptions permitted an alternative treatment upon transition to IFRS in accordance with IFRS 1 as disclosed in Note 15.
These consolidated financial statements are presented in Canadian dollars, which is the Company's functional currency. All financial information presented in dollars has been rounded to the nearest thousand except for share and per share amounts.
These interim Consolidated Financial Statements have been prepared on a historical cost basis except for financial instruments and share based payment transactions that are measured at fair value.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements and in preparing the opening IFRS statement of financial position at January 1, 2010 for the purposes of the transition to IFRS, unless otherwise indicated.
Basis of consolidation
The financial statements of the Company consolidate the accounts of GASFRAC and its subsidiaries. All intercompany transactions, balances and unrealized gains and losses from intercompany transactions are eliminated on consolidation. Subsidiaries are those entities which GASFRAC controls by having the power to govern the financial and operating policies.
The accounting policies have been applied consistently by the Company's entities.
Measurement Uncertainty
The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses. Significant estimates include valuation of property and equipment, accounts receivable, and inventory. Actual results could differ from these estimates.
Change of functional currency
As the operations of the Company's wholly owned United States ("U.S.") subsidiary continue to gain significance relative to the operations of the Company as a whole the Board of Directors has concluded that the most appropriate functional currency of the United States subsidiary is the United States Dollar, the change was effective for the Company April 1, 2011. This reflects the fact that as of the effective date of this change the majority of the subsidiary's pricing for fracing services is influenced by the U.S. Dollar, the competitive and regulatory environment of the subsidiary are mainly influenced by the U.S. and the U.S. Dollar now largely influences labor, material and other costs of providing fracing services. The previous functional currency of the subsidiary was the Canadian Dollar.
Foreign currency translation
Monetary assets and liabilities of the Company that are denominated in foreign currencies are translated into its functional currency at the rates of exchange in effect at the period end date. Non-monetary assets and liabilities of the Company that are denominated in foreign currencies are translated into its functional currency using the exchange rate at the date of the transaction. Exchange rate differences are recorded in the Consolidated Statement of Earnings.
The financial statements of the subsidiaries that have a functional currency different from that of the Company are translated into Canadian Dollars whereby assets and liabilities are translated at the rate of exchange at the balance sheet date, revenues and expenses are translated at average quarterly exchange rates (as this is considered a reasonable approximation of actual rates), and gains and losses in translation are recognized in the shareholders' equity section as accumulated other comprehensive income.
Cash and cash equivalents
Cash and cash equivalents are held for the purpose of meeting short-term cash commitments and include bank balances and short-term investments with maturities of less than 90 days.
Inventory
Inventory consists of liquefied petroleum gas, chemicals, and proppants used to stimulate well production and are stated at the lower of cost and net realizable value. Cost is determined using the weighted average method.
Net realizable value is the estimated selling prices in the ordinary course of business, less estimated costs of completion and selling expenses.
Property and equipment
Property and equipment are recorded at cost and are amortized over their estimated economic useful lives using the straight-line method as follows:
Asset Amortization Useful life ---------------------------------------------------------------------------- Equipment Straight line 3 - 20 Years Furniture & Fixtures Straight line 5 years Leasehold Improvements Straight line Lease term ----------------------------------------------------------------------------
When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items. Assets under construction are not amortized until put into service.
Management estimates the useful life and residual value of property and equipment on expected utilization, effectiveness of maintenance programs and expected impact of technological change. Although management believes the estimated useful lives of the property and equipment are reasonable, it is possible that changes in estimates could occur which may affect the expected useful lives and residual values of the property and equipment.
Repairs and maintenance costs are charged to the consolidated statement of comprehensive (loss) income during the period in which they are incurred.
Intangible assets
Intangible assets including deferred development costs, patents and intellectual property that meet certain criteria related to technology, market and financial feasibility are deferred. Such costs are amortized upon commencement of commercial sales over the estimated economic life of the related product as follows:
Asset Depreciation Useful life ---------------------------------------------------------------------------- Patents & Intellectual Property Straight line 5 years Deferred Development Costs Straight line 5 years Other Intangible Assets Straight line 5 years ----------------------------------------------------------------------------
Costs that do not meet such criteria are charged to income in the period of expenditure.
Impairment of long-term assets
Long-term assets include property and equipment and intangible assets. The carrying values are reviewed when events or changes in circumstances indicate that the carrying value of an asset or cash generating unit may not be recoverable. For the purpose of measuring recoverable amounts, assets are grouped at the lowest levels for which there are separate identifiable cash flows (cash generating units). If indicators of impairments exist, the recoverable amount of the asset or cash generating unit is estimated as the greater of the value in use or the fair value less cost to sell. If the carrying value of the asset or cash generating unit exceeds the recoverable amount, the asset or cash generating unit is written down with an impairment recognized in net earnings. The impairment charge is the difference between the amortized cost of the asset and the present value of the estimated future cash flows.
The Company evaluates impairment losses for potential reversals when events or changes in circumstances warrant such consideration.
Revenue recognition
The Company's revenue is comprised of services and other revenue and is generally sold on agreed upon priced purchase orders or contracts with the customer. Contract terms do not include provisions for significant post-service delivery obligations. Service and other revenue is recognized when the services are provided and collectability is reasonably assured.
Deferred income tax
Deferred tax is recognized in respect to temporary differences arising in tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred tax is determined on a non-discounted basis using tax rates and laws that have been enacted or substantially enacted at the reporting date and are expected to apply when the deferred tax asset or liability is realized or settled. Deferred tax assets are recognized to the extent that it is probable that the assets can be recovered.
Deferred tax assets and liabilities are recognized in the statement of income except to the extent it relates to items recognized directly in equity, in which case the income tax is also recognized directly in equity.
Leases
Leases or other arrangements entered into for the use of an asset are classified as either finance or operating leases. Finance leases transfer to the Company substantially all of the risks and benefits incidental to ownership of the leased item. Finance leases are capitalized at the commencement of the lease term at the lower of the fair value of the leased asset or the present value of the minimum lease payments. Capitalized leased assets are amortized over the shorter of the estimated useful life of the assets and the lease term.
Stock based compensation
The Company has a restricted share plan, performance share unit plan, stock options, and warrants granted to directors, officers, employees, and consultants as described in Note 9. All forms of stock based compensation treat each tranche as a separate award with its own vesting period with stock based compensation expense recognized on the graded vesting basis. For the restricted share plan, fair values are determined using prices at the grant date and are recognized as stock based compensation expense with a corresponding credit to shareholders equity. For the performance share unit plan, fair values are determined using prices at the market date and are recognized as stock based compensation with a corresponding credit to current liabilities. Stock options and warrants are accounted for using the fair value method under which compensation expense is recorded based on the estimated fair value of the options at the grant date using the Black-Scholes option pricing model. Under this method, compensation cost attributable to stock options granted is measured at fair value at the grant date and expensed over the vesting period with a corresponding increase to contributed surplus. Upon exercise of the stock options, consideration paid together with the amount previously recognized in contributed surplus is recorded as share capital.
(Loss) Earnings per share
Basic earnings per share is calculated by dividing the net (loss) earnings for the period attributable to equity owners of GASFRAC by the weighted average number of shares outstanding during the period.
Diluted earnings per share is calculated based on the weighted average number of shares outstanding during the year adjusted by the weighted average number of common shares outstanding for dilutive instruments.
Financial instruments
Financial assets and liabilities are recognized when GASFRAC becomes a party to the contractual provisions of the instrument. Financial assets are derecognized when the rights to receive cash flows from the assets have expired or have been transferred and GASFRAC has transferred substantially all the risks and rewards of ownership.
Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously.
At initial recognition, GASFRAC classifies its financial instruments in the following categories depending on the purpose for which the instrument were acquired:
(i) Financial assets and liabilities at fair value through profit or loss: A financial asset or liability is classified in this category if acquired principally for the purpose of selling or repurchasing in the short-term. The Company does not currently have derivative financial instruments. Financial instruments in this category are recognized initially and subsequently at fair value. Transaction costs are expensed in the statement of income. Gains and losses arising from changes in fair value are presented in the statement of income within other gains and losses in the period in which they arise. Financial assets and liabilities at fair value through profit or loss are classified as current except for the portion expected to be realized or paid beyond twelve months of the balance sheet date, which is classified as non-current.
(ii) Available-for-sale investments: Available-for-sale investments are non-derivatives that are either designated in this category or not classified in any of the other categories. The Company's available-for sale assets comprise of cash and cash equivalents. Available-for-sale investments are recognized initially at fair value plus transaction costs and are subsequently carried at fair value. Gains or losses arising from changes in fair value are recognized in other comprehensive income. Available-for-sale investments are classified as non-current, unless the investment matures within twelve months, or management expects to dispose of them within twelve months. Interest on available-for-sale investments, calculated using the effective interest method, is recognized in the statement of income as part of interest income. Dividends on available-for-sale equity instruments are recognized in the statement of income as part of other gains and losses when the Company's right to receive payment is established. When an available-for-sale investment is sold or impaired, the accumulated gains or losses are moved from accumulated other comprehensive income to the statement of income and are included in other gains and losses.
(iii) Loans and receivables: Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. The Company's loans and receivables comprise of accounts receivable, and are included in current assets due to their short-term nature. Loans and receivables are initially recognized at the amount expected to be received, less, when material, a discount to reduce the loans and receivables to fair value. Subsequently, loans and receivables are measured at amortized cost using the effective interest method less a provision for impairment.
(iv) Financial liabilities at amortized cost: Financial liabilities at amortized cost include accounts payable and accrued liabilities. Trade payables are initially recognized at the amount required to be paid, less, when material, a discount to reduce the payables to fair value. Subsequently, trade payables are measured at amortized cost using the effective interest method. Bank debt and long-term debt are recognized initially at fair value, net of any transaction costs incurred, and subsequently at amortized cost using the effective interest method.
Financial liabilities are classified as current liabilities if payment is due within twelve months. Otherwise, they are presented as non-current liabilities.
Impairment of financial assets
At each reporting date, the Company assesses whether there is objective evidence that a financial asset is impaired. If such evidence exists, the Company recognizes an impairment loss, as follows:
(i) Financial assets carried at amortized cost: The loss is the difference between the amortized cost of the loan or receivable and the present value of the estimated future cash flows, discounted using the instrument's original effective interest rate. The carrying amount of the asset is reduced by this amount either directly or indirectly through the use of an allowance account.
(ii) Available-for-sale financial assets: The impairment loss is the difference between the original cost of the asset and its fair value at the measurement date, less any impairment losses previously recognized in the statement of income. This amount represents the cumulative loss in accumulated other comprehensive income that is reclassified to net income.
Impairment losses on financial assets carried at amortized cost are reversed in subsequent periods if the amount of the loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized. Impairment losses on available-for-sale equity instruments are not reversed.
Comparative figures
Certain comparative figures have been reclassified to conform to the current period's presentation.
4. PROPERTY AND EQUIPMENT
Furniture & Leasehold
Cost: Equipment Fixtures Improvements Total
----------------------------------------------------------------------------
January 1, 2010 68,704 59 51 68,814
Additions 83,412 97 4 83,513
----------------------------------------------------------------------------
December 31, 2010 152,116 156 55 152,327
Additions 38,397 409 216 39,022
Dispositions (147) - - (147)
----------------------------------------------------------------------------
March 31, 2011 190,366 565 271 191,202
Additions 22,587 257 109 22,953
----------------------------------------------------------------------------
June 30, 2011 212,953 822 380 214,155
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Accumulated Amortization:
----------------------------------------------------------------------------
January 1, 2010 7,230 21 6 7,257
Amortization 6,997 17 5 7,019
----------------------------------------------------------------------------
December 31, 2010 14,227 38 11 14,276
Amortization 2,542 335 8 2,885
Disposition (53) - - (53)
----------------------------------------------------------------------------
March 31, 2011 16,716 373 19 17,108
Amortization 3,489 49 14 3,552
----------------------------------------------------------------------------
June 30, 2011 20,205 422 33 20,660
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net Book Value:
----------------------------------------------------------------------------
January 1, 2010 61,474 38 45 61,557
----------------------------------------------------------------------------
December 31, 2010 137,889 118 44 138,051
----------------------------------------------------------------------------
March 31, 2011 173,650 192 252 174,094
----------------------------------------------------------------------------
June 30, 2011 192,748 400 347 193,495
----------------------------------------------------------------------------
Assets under Construction included in cost:
----------------------------------------------------------------------------
January 1, 2010 9,194 - - 9,194
----------------------------------------------------------------------------
December 31, 2010 47,392 - - 47,392
----------------------------------------------------------------------------
March 31, 2011 57,883 - - 57,883
----------------------------------------------------------------------------
June 30, 2011 40,057 - - 40,057
----------------------------------------------------------------------------
As at January 1, 2010, December 31, 2010, March 31, 2011 and June 30, 2011
assets under construction are not subject to amortization as the assets are
not yet available for use.
5. INTANGIBLE ASSETS
Patents & Deferred Other
Intellectual Development Intangible
Cost: Property Costs Assets Total
----------------------------------------------------------------------------
January 1, 2010 312 198 31 541
Additions 164 32 - 196
----------------------------------------------------------------------------
December 31, 2010 476 230 31 737
Additions 51 - - 51
----------------------------------------------------------------------------
March 31, 2011 527 230 31 788
Additions 42 - - 42
----------------------------------------------------------------------------
June 30, 2011 569 230 31 830
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Accumulated Amortization:
----------------------------------------------------------------------------
January 1, 2010 82 84 17 183
Amortization 82 46 6 134
----------------------------------------------------------------------------
December 31, 2010 164 130 23 317
Amortization 24 12 2 38
----------------------------------------------------------------------------
March 31, 2011 188 142 25 355
Amortization 28 11 2 41
----------------------------------------------------------------------------
June 30, 2011 216 153 27 396
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net Book Value:
----------------------------------------------------------------------------
January 1, 2010 230 114 14 358
----------------------------------------------------------------------------
December 31, 2010 312 100 8 420
----------------------------------------------------------------------------
March 31, 2011 339 88 6 433
----------------------------------------------------------------------------
June 30, 2011 353 77 4 434
----------------------------------------------------------------------------
6. LEASE OBLIGATIONS
The Company leases certain of its light vehicles under finance leases. The average lease term is 3 years. The Company has options to purchase the vehicles at the end of the lease terms. The Company's obligations under finance leases are secured by the lessors' title to the leased assets.
Interest rates underlying all obligations under finance leases are fixed at respective contract dates ranging from 5.3% to 8.9% per annum.
Future Present value of
minimum lease minimum lease
As at: payments Interest payments
----------------------------------------------------------------------------
January 1, 2010:
Less than one year 135 14 121
Between one and five years 183 4 179
More than five years - - -
----------------------------------------------------------------------------
318 18 300
----------------------------------------------------------------------------
March 31, 2010:
Less than one year 169 17 152
Between one and five years 211 7 204
More than five years - - -
----------------------------------------------------------------------------
380 24 356
----------------------------------------------------------------------------
June 30, 2010:
Less than one year 168 14 154
Between one and five years 150 4 146
More than five years - - -
----------------------------------------------------------------------------
318 18 300
----------------------------------------------------------------------------
December 31, 2010:
Less than one year 261 21 240
Between one and five years 186 6 180
More than five years - - -
----------------------------------------------------------------------------
447 27 420
----------------------------------------------------------------------------
Future Present value of
minimum lease minimum lease
As at: payments Interest payments
----------------------------------------------------------------------------
March 31, 2011:
Less than one year 335 42 293
Between one and five years 520 43 477
More than five years - - -
----------------------------------------------------------------------------
855 85 770
----------------------------------------------------------------------------
June 30, 2011:
Less than one year 553 96 457
Between one and five years 1,177 102 1,075
More than five years - - -
----------------------------------------------------------------------------
1,730 198 1,532
----------------------------------------------------------------------------
The finance lease obligation is analyzed as:
Jan 1, Mar 31, Jun 30, Dec 31, Mar 31, June 30,
As at: 2010 2010 2010 2010 2011 2011
----------------------------------------------------------------------------
Current 121 152 154 240 293 457
Non-current 179 204 146 180 477 1,075
----------------------------------------------------------------------------
300 356 300 420 770 1,532
----------------------------------------------------------------------------
7. UNEARNED REVENUE
As at June 30, 2011, a customer of the Company has prepaid for materials associated with fracturing treatments in the amount of $20,871. The Company expects that this unearned revenue will be earned in the next 12 months.
8. DEFERRED INCOME TAX
The net income tax provision differs from that expected by applying the combined federal and provincial income tax rate of 26.55% (2010 - 28.65%) to taxable income for the following reasons:
Three Month Period ended: June 30, 2011 June 30, 2010 ---------------------------------------------------------------------------- Expected combined federal and provincial income tax (benefit) $ (2,493) $ (336) Non-deductible expenses 250 144 Valuation allowance 494 114 Future income tax rate reduction 146 177 Statutory and other rate differences 360 (3) ---------------------------------------------------------------------------- Effective $ (1,243) $ 96 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Six Month Period ended: June 30, 2011 June 30, 2010 ---------------------------------------------------------------------------- Expected combined federal and provincial income tax (benefit) $ (3,025) $ 349 Non-deductible expenses 303 135 Valuation allowance 1,023 193 Future income tax rate reduction 177 125 Statutory and other rate differences 230 12 ---------------------------------------------------------------------------- Effective $ (1,292) $ 814 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- The components of the deferred income tax liability are as follows: As at: June 30, 2011 December 31, 2010 ---------------------------------------------------------------------------- Property and equipment and intangible assets $(11,011) $ (4,809) Non-capital loss carry forwards 9,122 1,476 Financing costs 2,160 2,571 Other 394 394 ---------------------------------------------------------------------------- Total deferred income tax (liability) benefit $ 665 $ (368) ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
The Company has $ 36,491 (2010 - $ 9,158) of tax pools related to non-capital losses available for carry forward to reduce taxable income in future years and expire between 2027 and 2030.
9. SHARE CAPITAL
Authorized
Unlimited number of common shares.
Unlimited number of preferred shares issuable in series with the designation, rights, privileges, restrictions and conditions of each series to be determined by the board of directors.
Issued Common Shares
2011 2010
----------------------------------------------------------------------------
Shares Amount Shares Amount
----------------------------------------------------------------------------
(#) ($) (#) ($)
Opening Balance 60,226,366 251,573 32,650,000 81,293
Issued on exercise of warrants 619,000 839 - -
Issued on exercise of options 224,500 523 183,333 406
Common Shares -
Deferred tax benefit - (189) - -
Released from restricted shares 22,000 97 - -
----------------------------------------------------------------------------
Balance - March 31 61,091,866 252,843 32,833,333 81,699
----------------------------------------------------------------------------
Issued on exercise of warrants 313,500 949 - -
Issued on exercise of options 79,967 205 542,500 908
Common Shares - Deferred tax benefit - (83) - -
Reclassified as contributed surplus - - (130,000) (552)
Released from restricted shares 25,333 138 33,667 143
----------------------------------------------------------------------------
Balance - June 30 61,510,666 254,052 33,279,500 82,198
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Restricted shares
Shares Amount
----------------------------------------------------------------------------
(#) ($)
Balance - December 31, 2010 361,917 1,607
Released to common shares (22,000) (97)
----------------------------------------------------------------------------
Balance - March 31, 2011 339,917 1,510
----------------------------------------------------------------------------
Granted 50,000 601
Released to common shares (25,333) (138)
----------------------------------------------------------------------------
Balance - June 30, 2011 364,584 1,973
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The Company has granted restricted shares for certain employees with an annual vesting period over five years from the date of the grant. During the three month period ended June 30, 2011, $ 227 of compensation expense was recorded (three month period ended June 30, 2010 - $ 74).
Performance share units
The Company grants performance stock units to officers and employees with the amount of the grant earned being linked to corporate performance and grants vesting over three years from date of grant. The performance share units are settled either in cash or Company shares at the Company's discretion. During the three month period ended June 30, 2011, no performance share units were granted (three month period ended June 30, 2010 - nil) and 56,737 performance share units have vested (three month period ended June 30, 2010 - nil). During the three month period ended June 30, 2011, $209 of compensation expense was recognized (three month period ended June 30, 2010 - nil). As at June 30, 2011, the Company has granted 410,000 performance share units of which 139,306 performance share units have vested. As at June 30, 2011, the related liability is $1,270 (three month period ended June 30, 2010 - nil).
Stock options
The Company calculates the fair value of its stock options using the Black-Scholes option pricing model. The following weighted average assumptions were used to determine the fair value of the options at the date of grant.
----------------------------------------------------------------------------
Risk-free interest rate 2.5%
Expected life 4 years
Maximum life 5 years
Volatility 52%
Expected dividend -
----------------------------------------------------------------------------
A summary of the status of the Company's outstanding stock options is
presented below:
2011 2010
----------------------------------------------------------------------------
Average Average
Exercise Exercise
Options Price Options Price
----------------------------------------------------------------------------
(#) ($) (#) ($)
Opening Balance 2,746,208 3.48 2,966,000 2.89
Granted - - 15,000 2.00
Exercised for common shares (224,500) 2.13 (183,333) 2.00
Forfeited and expired (9,000) 2.00 (146,167) 3.15
----------------------------------------------------------------------------
Balance - March 31 2,512,708 3.61 2,651,500 2.93
----------------------------------------------------------------------------
Granted - - 405,000 4.25
Exercised for common shares (79,967) 2.00 (250,000) 1.40
Forfeited and expired - - (100,000) 3.13
----------------------------------------------------------------------------
Balance - June 30 2,432,741 3.66 2,706,500 3.26
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Stock options vest over three years and expire five years from the date of grant. The 2,432,741 options outstanding at June 30, 2011 had exercise prices ranging from $2.00 to $5.00 per share with expiry dates ranging from 2012 to 2015. When stock options are exercised the proceeds, together with the amount of compensation expense previously recorded in contributed surplus are added to share capital. During the three month period ended June 30, 2011, $140 of compensation expense was recorded (three month period ended June 30, 2010 - $232).
Warrants
2011 2010
----------------------------------------------------------------------------
Average Average
Exercise Exercise
Warrants Price Warrants Price
----------------------------------------------------------------------------
(#) ($) (#) ($)
Balance - December 31 1,757,500 1.20 2,602,500 1.32
Exercised for common shares (619,000) 1.07 - -
----------------------------------------------------------------------------
Balance - March 31 1,138,500 1.28 2,602,500 1.32
Exercised for common shares (313,500) 2.00 (262,500) 1.00
----------------------------------------------------------------------------
Balance - June 30 825,000 1.00 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, vesting based on performance conditions and expiring on August 12, 2012. As at August 12, 2010 all of the purchase warrants were vested. As at June 30, 2011 825,000 (2009 - 1,500,000) founder warrants were outstanding.
During the period ended June 30, 2011, no compensation expense was recorded (three month period ended June 30, 2010 - $38).
10. COMMITMENTS
The Company has operating lease commitments for office space as follows:
Year 2011 2012 2013 2014 2015 ---------------------------------------------------------------------------- Amount $ 733 $ 1,330 $ 760 $ 525 $ 525 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
As at June 30, 2011, the Company has commitments totaling approximately $92 million relating to the construction of fixed assets in 2011 and $68 million for the purchase of operating supplies over the 18 month period ending December 31, 2012.
11. CAPITAL MANAGEMENT
The Company's strategy is to maintain a capital structure to sustain future growth of the business and retain creditor, investor and market confidence. Recognizing the cyclical nature of the oilfield services industry, the Company strives to maintain a conservative balance between long-term debt and shareholders' equity. The Company's capital structure is currently comprised of shareholders' equity and undrawn long-term bank debt. The Company may occasionally need to increase its level of long-term debt to total capitalization to facilitate growth activities.
The Company has a credit facility with a Canadian chartered bank. The credit facility includes a $15 million demand revolving loan ("Operating Loan") and a $35 million committed revolving facility ("Revolving Facility"). The Operating Loan bears interest at prime plus 1.25% and is margined by the Company's accounts receivable. The Revolving Facility bears interest at prime plus 1.4% to prime plus 1.9%, shall not exceed 50% of the net book value of the Company's capital assets, may be extended annually, if not extended shall be repayable in eight equal quarterly instalments. Both facilities are secured by a floating charge over all of the assets of the Company and are subject to certain financial covenants. As at June 30, the Company is in compliance with all the covenants related to these facilities.
The Company monitors its capital structure and makes adjustments in light of changing market conditions and new opportunities, while remaining cognizant of the cyclical nature of the oilfield services sector. To maintain or adjust its capital structure, the Company may revise its capital spending, issue new shares, issue new debt, or draw on its current short-term debt facility.
12. ENTERPRISE WIDE DISCLOSURE
As at June 30, 2011, the Company has two geographic segments being the Canadian segment and the United States segment. For the 3 month period ended June 30, 2011, 87% of the revenue was incurred by the Canadian segment (Period ended June 30, 2010, 100% of the revenue was incurred by the Canadian segment) and 13% of the revenue was incurred by the United States segment. As at June 30, 2011, the net book value of the property and equipment in the Canadian Segment was $169,057 and the net book value of the property and equipment in the United States segment was $24,438.
13. NET CHANGES IN NON-CASH WORKING CAPITAL
Three Months Ended: Six Months Ended:
----------------------------------------------------------------------------
June 30, June 30, June 30, June 30,
2011 2010 2011 2010
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Changes in non-cash working
capital from Operations:
Accounts receivable $ 12,252 $ 3,608 $ 15,378 (3,840)
Inventory (3,550) 1,714 (12,708) 1,735
Prepaid expenses 3,991 (3,177) 5,285 (3,144)
Bank operating line - 1,249 - 3,979
Current portion of lease
obligations 164 2 217 33
Unearned revenue - - 17,386 -
Accounts payable and accrued
liabilities and other 910 731 (962) (1,197)
Long-term deposits (2,383) 1,654 (4,733) 1,736
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Net change in non-cash working
capital from Operations $ 11,384 $ 5,781 $ 19,863 $ (698)
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14. RELATED PARTY TRANSACTIONS
During the three month period ended June 30, 2011, the Company paid $7 (2010 - $82) in consulting fees to two Directors. During the six month period ended June 30, 2011, the Company paid $55 (2010 - $184) in consulting fees to two Directors.
15. EXPLANATION OF TRANSITION TO IFRS:
As stated in Note 2, these are the Company's first consolidated financial statements prepared in accordance with IFRS.
The accounting policies set out in Note 3 have been applied in preparing the financial statements for the three month period ended June 30, 2011, the comparative information presented in these financial statements for the three month and six month period ending June 30, 2010 and in the preparation of an opening IFRS statement of financial position at January 1, 2010 (the Company's date of transition).
In preparing its opening IFRS statement of financial position, the Company has adjusted amounts reported previously in financial statements prepared in accordance with Previous GAAP. An explanation of how the transition from Previous GAAP to IFRS has affected the Company's financial position, financial performance and cash flows is set out in the following tables and the notes that accompany the tables.
Reconciliation of equity as previously reported under Previous GAAP to IFRS
As at: January 1, 2010 As at: June 30, 2010
----------------------------------------------------------
Previous Previous
GAAP Adj. IFRS GAAP Adj IFRS
ASSETS
CURRENT ASSETS
Cash and
equivalents $ 11,643$ - $ 11,643 $ 1,152 $ - $ 1,152
Accounts
receivable 9,469 - 9,469 13,309 - 13,309
Inventory 5,499 - 5,499 3,764 - 3,764
Prepaid expenses 519 - 519 3,663 - 3,663
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----------------------------------------------------------------------------
27,130 - 27,130 21,888 - 21,888
PROPERTY and
EQUIPMENT 61,295 262 61,557 71,417 679 72,096
INTANGIBLE ASSETS 358 - 358 463 - 463
LONG-TERM DEPOSITS 1,790 - 1,790 54 - 54
DEFERRED INCOME TAX
BENEFIT 775 - 775 -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
TOTAL ASSETS $ 91,348 $ 262 $ 91,610 $ 93,822 $ 679 $ 94,501
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----------------------------------------------------------------------------
LIABILITIES AND
SHAREHOLDERS'
EQUITY
CURRENT LIABILITIES
Bank operating
line $ - $ - $ - $ 3,978 $ - $ 3,978
Unearned revenue - - - - - -
Current lease
obligations - 121 121 - 154 154
Accounts payable
and accrued
liabilities 7,617 - 7,617 4,426 - 4,426
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----------------------------------------------------------------------------
Total current
liabilities 7,617 121 7,738 8,404 154 8,558
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LONG-TERM LEASE
OBLIGATIONS - 179 179 - 146 146
FUTURE INCOME TAX - - - 39 - 39
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total non-current
liabilities - 179 179 39 146 185
----------------------------------------------------------------------------
----------------------------------------------------------------------------
SHAREHOLDERS'
EQUITY
SHARE CAPITAL 81,293 - 81,293 82,198 - 82,198
CONTRIBUTED SURPLUS 1,808 1,003 2,811 2,145 1,379 3,524
RETAINED EARNINGS
(DEFICIT) 630 (1,041) (411) 1,036 (1,000) 36
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total equity 83,731 (38) 83,693 85,379 379 85,758
----------------------------------------------------------------------------
----------------------------------------------------------------------------
TOTAL LIABILITIES
AND EQUITY $ 91,348 $ 262 $ 91,610 $ 93,822 $ 679 $ 94,501
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----------------------------------------------------------------------------
Reconciliation of equity as previously reported under Previous GAAP to IFRS
As at: December 31, 2010
----------------------------------------------
Previous
GAAP Adj IFRS
ASSETS
CURRENT ASSETS
Cash and
equivalents $ 98,701 $ - $ 98,701
Accounts
receivable 24,500 - 24,500
Inventory 7,018 - 7,018
Prepaid expenses 6,839 - 6,839
----------------------------------------------------------------------------
----------------------------------------------------------------------------
137,058 - 137,058
PROPERTY and
EQUIPMENT 136,749 1,302 138,051
INTANGIBLE ASSETS 420 - 420
LONG-TERM DEPOSITS 3,176 - 3,176
DEFERRED INCOME TAX
BENEFIT - - -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
TOTAL ASSETS $ 277,403 $ 1,302 $ 278,705
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----------------------------------------------------------------------------
LIABILITIES AND
SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Bank operating
line $ - $ - $ -
Unearned revenue 3,486 - 3,486
Current lease
obligations - 240 240
Accounts payable
and accrued
liabilities 14,828 158 14,986
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total current
liabilities 18,314 398 18,712
----------------------------------------------------------------------------
LONG-TERM LEASE
OBLIGATIONS - 180 180
FUTURE INCOME TAX 368 - 368
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total non-current
liabilities 368 180 548
----------------------------------------------------------------------------
----------------------------------------------------------------------------
SHAREHOLDERS'
EQUITY
SHARE CAPITAL 251,326 247 251,573
CONTRIBUTED SURPLUS 1,712 1,810 3,522
RETAINED EARNINGS
(DEFICIT) 5,683 (1,333) 4,350
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total equity 258,721 724 259,445
----------------------------------------------------------------------------
----------------------------------------------------------------------------
TOTAL LIABILITIES
AND EQUITY $ 277,403 $ 1,302 $278,705
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----------------------------------------------------------------------------
Reconciliation of comprehensive income as previously reported under
Previous GAAP to IFRS
Three months ended June Six months ended June
30, 2010 30, 2010
----------------------------------------------------------
Previous Adj. IFRS Previous Adj. IFRS
GAAP GAAP
REVENUE $ 13,323 - 13,323 $ 29,229 - 29,229
OTHER INCOME
Interest 7 (5) 2 7 (5) 2
Business
Interruption
claim - - - 2,030 - 2,030
----------------------------------------------------------------------------
13,330 (5) 13,325 31,266 (5) 31,261
----------------------------------------------------------------------------
EXPENDITURES
Operating 10,495 (62) 10,433 22,435 (89) 22,346
Selling, general
and administrative 2,099 - 2,099 4,031 - 4,031
Stock based
compensation 98 247 345 135 376 511
Amortization 1,801 (174) 1,627 3,450 (333) 3,117
----------------------------------------------------------------------------
14,493 11 14,504 30,051 (46) 30,005
----------------------------------------------------------------------------
(LOSS) INCOME
BEFORE INCOME TAX (1,163) (16) (1,179) 1,215 41 1,256
Foreign exchange
(gain)/loss (7) - (7) 5 - 5
Future income
tax expense (96) - (96) (814) - (814)
----------------------------------------------------------------------------
NET (LOSS) INCOME /
COMPREHENSIVE
(LOSS) INCOME (1,266) (16) (1,282) 406 41 447
----------------------------------------------------------------------------
Explanation of the effects of the transition to IFRS
Leases
Previous GAAP considered the leases to be of a capital nature based on certain quantifiable criteria. Based on the criteria, GASFRAC concluded that the leases on its light vehicles were operating leases in nature for Previous GAAP purposes.
Under IFRS, with the absence of the quantitative criteria provided by Previous GAAP, the Company determined that qualitatively, the risks and rewards of these leases reside with GASFRAC and as such, should be treated as financing leases.
Amortization
With the conversion to IFRS, GASFRAC componentized the field equipment into each of the separate components that made up field equipment. We then assessed the useful life and residual value for each of these components. Based on this assessment, certain depreciation rates were modified.
Share based payments
Under Previous GAAP, GASFRAC accounted for certain stock based compensation plans whereby the obligation and compensation costs were accrued over the vesting period using the intrinsic value method. The intrinsic value of a share unit is the amount by which the Company's share price exceeds the exercise price of the share unit.
For certain stock-based compensation plans, IFRS requires share-based compensation be fair valued using an option pricing model, such as the Black-Scholes model, at each reporting date. Each tranche in an award is considered a separate award with its own vesting period. Further, GASFRAC adjusted the volatility of the unvested options and warrants that were issued when GASFRAC was not publically traded from 0% to 50%.
Accordingly, upon transition to IFRS, the Company recorded a fair value adjustment of $891 as at January 1, 2010 to increase the share-based compensation with a corresponding charge to retained earnings. GASFRAC elected to use the IFRS 1 exemption whereby the share-based payments that had vested or settled prior to January 1, 2010 were not required to be retrospectively restated. Subsequent fair value adjustments are recorded through stock based compensation.
As part of the 2010 Kierland transaction, the amount of consideration in excess of the fair market value of assets received was offset against share issue costs under Previous GAAP. Under IFRS, the amount of consideration in excess of the fair market value of assets received was listed as an unidentifiable transaction cost and expensed to sales, general and administrative expense. The amount of the adjustment was $245.
Adjustments to the statement of cash flows
The transition from Previous GAAP to IFRS had no significant impact on cash flows presented by GASFRAC except for stock based compensation and amortization. Any changes relating to net income would be offset by items not effecting cash such as amortization and stock based compensation or would result in a change in non-cash working capital.
The Company will host a conference call on Tuesday, August 9, 2011 at 10:00 a.m. MT (12:00 p.m. ET) to discuss the Company's results for the second quarter of 2011.
To listen to the webcast of the conference call, please enter: http://www.gowebcasting.com/2529 in your web browser or visit the Investor Information section of our website www.gasfrac.com.
To participate in the Q&A session, please call the conference call operator at 1-866-226-1792 fifteen minutes prior to the call's start time and ask for "GASFRAC Second Quarter Results Conference Call".
A replay of the call will be available until August 16, 2011 by dialing 1-800-408-3053 (North America) or 1-905-694-9451 (outside North America). Playback passcode: 5087886. The Company will also archive the conference on its website at www.gasfrac.com.
To participate in the Q&A session, please call the conference call operator at 1-866-226-1792 fifteen minutes prior to the call's start time and ask for "GASFRAC First Quarter Results Conference Call".
GASFRAC is an oil and gas service company headquartered in Calgary, Alberta, Canada, whose primary business is to provide LPG fracturing services to oil and gas companies in Canada and the USA.
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