Condensed Interim Consolidated Financial Statements For the nine months ended January 31, 2015 and (Expressed in Canadian dollars) (Unaudited)

Transcription

1 Condensed Interim Consolidated Financial Statements For the nine months ended January 31, 2015 and 2014 (Expressed in Canadian dollars)

2 NOTICE TO READER The accompanying unaudited condensed interim consolidated financial statements as of January 31, 2015 have been prepared by management of New West Energy Services Inc., and have not been reviewed by the Company s independent auditors. They should be read in conjunction with the audited annual consolidated financial statements for the year ended April 30, Readers are cautioned that these statements may not be appropriate for their intended purposes.

3 NEW WEST ENERGY SERVICES INC. CONDENSED INTERIM CONSOLIDATED STATEMENTS OF FINANCIAL POSITION AS AT Audited January 31, 2015 April 30, 2014 ASSETS Current assets Cash and cash equivalents $ 328,933 $ 289,317 Accounts receivable, work in process and prepaids (Note 5) 6,983,655 8,120,202 Inventory 68,141 60,689 7,380,729 8,470,208 Investments (Note 4) 12,081 12,081 Property and equipment (Note 6) 9,496,066 7,159,694 Intangible assets (Note 7) 55,206 75,572 Goodwill (Notes 3 & 8) 874,000 1,524,000 Deferred income tax asset (Note 3) 729, ,515 $ 18,547,670 $ 17,798,070 LIABILITIES Current liabilities Bank Indebtedness (Note 9) $ 2,010,958 $ 2,564,603 Accounts payable and accrued liabilities 2,024,563 1,398,524 Contingent Liability (Note 18) - 200,000 Demand loans (Note 9) 852,052 1,340,576 Current portion of long-term debt (Note 9) 289, ,393 Current portion of obligation under capital lease (Note 10) 1,088, ,536 6,265,831 6,271,632 Long-term debt (Note 9) 412, ,560 Obligation under capital lease (Note 10) 3,097, ,340 9,776,414 7,858,532 SHAREHOLDERS' EQUITY Share capital (Note 11) 31,123,911 31,123,911 Contributed surplus 3,582,821 3,582,821 Deficit (25,935,476) (24,767,194) 8,771,256 9,939,538 $ 18,547,670 $ 17,798,070 See accompanying notes to the condensed interim consolidated financial statements Signed on behalf of the Board: "William A. Rand" William A. Rand, Director "Gerry E. Kerkhoff" Gerry E. Kerkhoff, Director 2

4 NEW WEST ENERGY SERVICES INC. CONDENSED INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME FOR THE NINE MONTHS ENDED JANUARY 31 For the three months ended For the nine months ended REVENUE Environmental, Vacuum and other $ 6,853,690 $ 6,376,551 $ 18,730,040 $ 14,787,404 DIRECT COSTS Environmental, Vacuum and other 5,262,497 4,932,463 14,629,592 11,025,206 GROSS MARGIN 1,591,193 1,444,088 4,100,448 3,762,198 OPERATING EXPENSES General and administrative expenses (Note 12) 1,327,238 1,060,331 3,540,714 2,919,942 Trial phase provisions ,581 Share based payments ,996 Interest 96,157 44, ,386 95,098 Amortization (Notes 6 & 7) 357, ,260 1,015, ,576 1,780,915 1,333,557 4,791,803 3,876,193 Net (Loss) income from operations before income tax (189,722) 110,531 (691,355) (113,995) Loss on goodwill impairment (Notes 3 & 8) (650,000) - (650,000) - Income taxes (Note 3) Deferred income tax recovery (provision) 47,430 (27,672) 173,073 29,190 Net (Loss) income and Comprehensive Income for the period $ (792,292) $ 82,859 $ (1,168,282) $ (84,805) Income per share, Basic & Diluted (Note 11) $ (0.008) $ $ (0.012) $ (0.001) Weighted average number of shares - Basic & Diluted (Note 11) 96,780,431 94,791,390 96,780,431 94,791,390 See accompanying notes to the condensed interim consolidated financial statements 3

5 NEW WEST ENERGY SERVICES INC. CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY FOR THE PERIOD ENDED JANUARY 31, 2015 AND 2014 (unaudited) Capital Stock Contributed Total Number of shares Amount Surplus Deficit Equity and warrants Balance, April 30, ,780,431 $ 31,123,911 $ 3,582,821 $ (24,767,194) $ 9,939,538 Expired warrants Share based payments Net (Loss) income for the period (401,233) (401,233) Balance - July 31, ,780,431 31,123,911 3,582,821 (25,168,427) 9,538,305 Share based payments Net income for the period ,243 25,243 Balance - October 31, ,780,431 31,123,911 3,582,821 (25,143,184) 9,563,548 Share based payments Net (loss) income for the period (792,292) (792,292) Balance - January 31, ,780,431 31,123,911 3,582,821 (25,935,476) 8,771,256 Balance, April 30, ,920,431 $ 32,414,710 $ 1,982,026 $ (24,752,168) $ 9,644,568 Expired warrants (34,140,000) (1,590,799) 1,590, Share based payments Net Income for the period ,663 3,663 Balance - July 31, ,780,431 30,823,911 3,572,825 (24,748,505) 9,648,231 Issue of common shares 3,000, , ,000 Share based payments - - 9,996-9,996 Net (Loss) income for the period (171,327) (171,327) Balance - October 31, ,780,431 31,123,911 3,582,821 (24,919,832) 9,786,900 Share based payments Net income for the period ,859 82,859 Balance - January 31, ,780,431 31,123,911 3,582,821 (24,836,973) 9,869,759 See accompanying notes to the condensed interim consolidated financial statements 4

6 NEW WEST ENERGY SERVICES INC. CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED JANUARY 31 For the three months ended For the nine months ended Cash flows from Operating Activities Net (Loss) income from operations $ (792,292) $ 82,859 $ (1,168,282) $ (84,805) Add (deduct): Items not involving cash: Share-based payments ,996 Amortization 357, ,260 1,015, ,576 Loss on goodwill impairment (Notes 3 & 8) 650, ,000 - Deferred income tax (recovery) provision (Note 3) (47,430) 27,672 (173,073) (29,190) 167, , , ,577 Changes in working capital: Decrease (increase) in accounts receivable work in process and prepaids (164,944) (1,638,770) 1,136,547 (2,661,935) Decrease (Increase) in inventory - (17,332) (7,452) (30,609) Increase (decrease) in accounts payable and accrued liabilities 347,137 (372,800) 426,039 1,202, ,991 (1,690,111) 1,879,482 (1,063,758) Cash flows from Financing Activities Proceeds from demand loans ,275 Repayment of demand loans (143,937) (159,503) (488,523) (429,858) Proceeds from long-term debt - 2,454,695-2,454,695 Repayment of long-term debt (70,402) (125,372) (208,873) (171,163) Repayment of bank indebtedness 37, ,940 (553,645) 1,033,684 Proceeds from obligation under capital lease - - 3,431,823 - Repayment of obligation under captial lease (286,252) - (688,940) - Proceeds from issuance of shares ,000 (462,667) 2,365,760 1,491,842 3,571,633 Cash flows from Investing Activities Capital expenditures - property and equipment (281,436) (990,993) (4,218,265) (2,874,513) Business combinations (1,800,000) Proceeds from sale of property and equipment 540,555 28, ,557 92, ,119 (962,993) (3,331,708) (4,582,409) Net change in cash and cash equivalents 146,443 (287,344) 39,616 (2,074,534) Cash and cash equivalents, beginning of the period 182, , ,317 2,366,063 Cash and cash equivalents, end of the period $ 328,933 $ 291,529 $ 328,933 $ 291,529 Cash and cash equivalents, end of the period Cash from operations $ 328,933 $ 578,873 $ 328, ,873 Short-term deposits $ 328,933 $ 578,873 $ 328,933 $ 578,873 Supplemental cash flow information Interest paid $ 96,157 $ 44,966 $ 235,386 $ 95,098 See accompanying notes to the condensed interim consolidated financial statements. 5

7 1. GENERAL INFORMATION New West Energy Services Inc. (the Company ) was incorporated under the laws of the Canada Business Corporations Act on February 11, The Company provides oilfield services to oil and gas exploration and production companies in Canada. The Company s head office, records and registered office are located at # th Avenue S.W., Calgary, Alberta. These condensed interim consolidated financial statements were approved and authorized for issuance by the Board of Directors on March 31, The Company has two wholly owned operating subsidiaries, BearStone Environmental Solutions Inc. ( BearStone ) and Porterco Oilfield Services Inc. ( Porterco ). BearStone provides environmental services and operates a fleet of specialized vacuum and tank trucks to the upstream oil and gas industry throughout western Canada. Porterco provides trucks and trailers for hauling contaminated drill cuttings as well as providing equipment fabrication and rental services in the Slave Lake and surrounding areas of Alberta. Porterco now operates under the BearStone Vacuum Truck Services. On September 30, 2013 the Company closed the share purchase agreement to acquire all of the issued and outstanding common shares of Alberta Ltd. (which included all the assets of Tippin D. Oilfield Services Ltd. and 40 Creek Oilfield Services Ltd.) for an aggregate purchase price of $1.8 million. This was comprised of $1.3 million in cash, the issuance of 3,000,000 common shares in the capital of the Company at a deemed price of $0.10 per share and a post closing payment of $200,000 which is payable as an earn out upon achieving certain performance thresholds over a twelve month period post closing of the transaction. During the second quarter the closing payment was executed as the thresholds were all met as per the purchase agreement. The new services operate under BearStone Vacuum Truck Services which is a division of the wholly owned subsidiary BearStone Environmental Solutions Inc. This service will continue providing combo, straight and hydrovac trucks as well as end dump water and tank truck with bulk transport trailers to the drilling completions and production sectors of the oil and gas industry, predominantly in the Peace region of Northwestern Alberta and Northeastern B.C. 2. BASIS OF PRESENTATION These condensed interim consolidated financial statements of the Company for the nine months ending January 31, 2015, have been prepared in accordance with International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standards Board ( IASB ). These condensed interim consolidated financial statements should be read in conjunction with the annual financial statements for the year ended April 30, These condensed interim consolidated financial statements are presented in Canadian dollars, which is the functional currency and presentation currency of the Company and each of its subsidiaries. 3. SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies followed in these condensed interim consolidated financial statements are consistent with those applied in the Company s annual financial statements for the year ended April 30, Income Taxes Deferred tax is recorded using the liability method, providing for temporary differences, between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax provided is based on the expected manner of realization or settlement of the carrying amount of assets and liabilities, using the tax rates enacted or substantively enacted at the balance sheet date. A deferred tax asset is recognized only to the extent that it is probable that future taxable profits will be available against which the asset can be utilized. With the acquisition of additional operating assets and the likelihood of future profits, the Company has calculated and recorded a deferred tax asset for the nine months ended January 31, Goodwill Goodwill arising on the acquisition of a business is carried at cost and established at the date of acquisition of the business less accumulated impairment, if any. For the purpose of impairment testing, goodwill is allocated to each of the Company s cash-generating units that is expected to benefit from the synergies of the combination. 6

8 A cash-generating unit to which goodwill has been allocated is tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than its carrying amount, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro rata based on the carrying amount of the each asset in the unit. Any impairment loss for goodwill is recognized directly in profit or loss. An impairment loss recognized for goodwill is not reversed in subsequent periods. On disposal of the relevant cash-generating unit, the attributable amount of goodwill is included in the determination of profit and loss on disposal. Future Accounting Policies Not Yet Adopted In November 2009, the IASB published IFRS 9, Financial Instruments, which covers the classification and measurement of financial assets as part of its project to replace IAS 39, Financial Instruments: Recognition and Measurement. In October 2010, the requirements for classifying and measuring financial liabilities were added to IFRS 9. Under this guidance, entities have the option to recognize financial liabilities at fair value through earnings. If this option is elected, entities would be required to reverse the portion of the fair value change due to own credit risk out of earnings and recognize the change in other comprehensive income. IFRS 9 is effective for the Company on May 1, Early adoption is permitted and the standard is required to be applied retrospectively. This is not expected to be a significant impact on the Company upon implementation of the issued standard. IFRS 15 Revenue from Contracts with Customers IFRS 15 will supersede the current revenue recognition guidance including IAS 18 Revenue, IAS 11 Construction Contracts and the related interpretations when it becomes effective. The core principle of IFRS 15 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Under IFRS 15, an entity recognizes revenue when (or as) a performance obligation is satisfied, i.e. when control of the goods or services underlying the particular performance obligation is transferred to the customer. Far more prescriptive guidance has been added in IFRS 15 to deal with specific scenarios. Furthermore, extensive disclosures are required by IFRS 15. This standard is effective for annual periods beginning on or after January 1, The Company will adopt this standard when it becomes effective. The Company has currently not assessed the impact of adopting this standard. 4. INVESTMENTS Genway Biotech Inc. January 31, 2015 April 30, ,500 Preferred Shares at impaired cost $ 1 $ 1 111,907 Common Shares, at cost 12,080 12,080 Total $ 12,081 $ 12, ACCOUNTS RECEIVABLE, WORK IN PROCESS AND PREPAIDS January 31, 2015 April 30, 2014 Accounts Receivable $ 4,652,594 $ 6,496,457 Work in Process 2,069,966 1,474,237 Prepaids 261, ,508 Total $ 6,983,655 $ 8,120,202 7

9 6. PROPERTY AND EQUIPMENT Trucks and Trailers Field and Office Equpment Leasehold Improvements Cost at April 30, 2014 $ 7,901,067 $ 687,077 $ 24,537 $ 8,612,681 Current period additions 2,290, ,293-2,420,962 Current period disposals (57,500) - - (57,500) Cost at July 31, 2014 $ 10,134,236 $ 817,370 $ 24,537 $ 10,976,143 Current period additions 1,465,769 50,098-1,515,867 Current period disposals (416,112) (68,957) - (485,069) Cost at October 31, 2014 $ 11,183,893 $ 798,511 $ 24,537 $ 12,006,941 Current period additions 273,576 7, ,436 Current period disposals (471,695) (244,139) - (715,834) Cost at January 31, 2015 $ 10,985,774 $ 562,232 $ 24,537 $ 11,572,543 Accumulated amortization at April 30, 2014 $ 1,293,091 $ 150,882 $ 9,014 $ 1,452,987 Current period retirements (11,930) - - (11,930) Current period amortization 252,696 38,844 1, ,766 Accumulated amortization at July 31, 2014 $ 1,533,857 $ 189,726 $ 10,240 $ 1,733,823 Current period retirements (182,268) (2,369) - (184,637) Current period amortization 310,088 40,526 1, ,840 Accumulated amortization at October 31, 2014 $ 1,661,677 $ 227,883 $ 11,466 $ 1,901,026 Current period retirements (122,965) (52,315) - (175,280) Current period amortization 300,925 48,580 1, ,731 Accumulated amortization at January 31, 2015 $ 1,839,637 $ 224,148 $ 12,692 $ 2,076,477 Net book value at January 31, 2015 $ 9,146,137 $ 338,084 $ 11,845 $ 9,496,066 Trucks and Trailers Field and Office Equipment Leasehold Improvements Cost at April 30, 2013 $ 4,269,108 $ 485,987 $ 21,264 $ 4,776,359 Current period additions 384,275 10, ,339 Current period disposals (55,000) - - (55,000) Cost at July 31, 2013 $ 4,598,383 $ 496,051 $ 21,264 $ 5,115,698 Current period additions 2,338, ,495 2,173 2,449,904 Current period disposals (56,455) (23,000) - (79,455) Cost at October 31, 2013 $ 6,880,164 $ 582,546 $ 23,437 $ 7,486,147 Current period additions 923,003 66,744 1, ,847 Current period disposals (28,000) - - (28,000) Cost at January 31, 2014 $ 7,775,167 $ 649,290 $ 24,537 $ 8,448,994 Accumulated amortization at April 30, 2013 $ 679,187 $ 76,745 $ 4,692 $ 760,624 Current period retirements (17,827) (2,453) - (20,280) Current period amortization 122,486 18,330 1, ,878 Accumulated amortization at July 31, 2013 $ 783,846 $ 92,622 $ 5,754 $ 882,222 Current period retirements (15,351) - - (15,351) Current period amortization 132,011 20,592 1, ,665 Accumulated amortization at October 31, 2013 $ 900,506 $ 113,214 $ 6,816 $ 1,020,536 Current period retirements (140) - - (140) Current period amortization 202,755 21,101 1, ,955 Accumulated amortization at January 31, 2014 $ 1,103,121 $ 134,315 $ 7,915 $ 1,245,351 Net book value at January 31, 2014 $ 6,672,046 $ 514,975 $ 16,622 $ 7,203,643 Net Book Value - April 30, 2014 $ 6,607,976 $ 536,195 $ 15,523 $ 7,159,694 Net Book Value - January 31, 2015 $ 9,146,137 $ 338,084 $ 11,845 $ 9,496,066 Included in trucks and trailers is equipment under capital lease obligations with a cost of $5,672,403 ( $Nil) and accumulated amortization of $524,136 (2014 -$Nil). TOTAL TOTAL 8

10 7. INTANGIBLE ASSETS Cost at April 30, 2014 and 2013 $ 135,774 $ 135,774 Current period additions - - Current period disposals - - Cost at July 31, 2014 and 2013 $ 135,774 $ 135,774 Current period additions - - Current period disposals - - Cost at October 31, 2014 and 2013 $ 135,774 $ 135,774 Current period additions - - Current period disposals - - Cost at January 31, 2015 and 2014 $ 135,774 $ 135,774 Accumulated amortization at April 30, 2014 and 2013 $ 60,202 $ 46,749 Current period retirements - - Current period amortization 6,788 3,388 Accumulated amortization at July 31, 2014 and 2013 $ 66,990 $ 50,137 Current period retirements - - Current period amortization 6,789 3,388 Accumulated amortization at October 31, 2014 and 2013 $ 73,779 $ 53,525 Current period retirements - - Current period amortization 6,789 3,299 Accumulated amortization at January 31, 2015 and 2014 $ 80,568 $ 56,824 Net book value at April 30, 2014 and 2013 $ 75,572 $ 89,025 Net book value at January 31, 2015 and 2014 $ 55,206 $ 78, GOODWILL January 31, 2015 April 30, 2014 Cost Balance at beginning of period $ 1,524,000 $ 650,000 Additional amounts recognized from business combinations occurring during the period (note 18) - 874,000 Balance at end of period $ 1,524,000 $ 1,524,000 Accumulated impairment losses Balance at beginning of period $ - $ - Impairment loss recognized during the period 650,000 - Balance at end of period $ 650,000 $ - Net book value $ 874,000 $ 1,524,000 Goodwill has been allocated for impairment testing purposes to the following cash generating units: - Slave Lake geographic area $650,000 - Beaverlodge geographic area $874,000 The goodwill associated with Slave Lake geographic area arose when the Company acquired Porterco Oilfields Services Inc. in The business has continued to operate on a satisfactory basis but without achieving any significant increase in market share. Effective April 30, 2014, all major operating assets of Porterco were transferred to Bearstone. Porterco s 9

11 financial performance was below expectations in the first 3 quarters of This was caused by a significant decline in demand for hauling services in the Slave Lake are due to low oil price. In addition, a key member of the management team responsible for Porterco s operation departed the Company during this period, in effect ceasing the operation in the area. The directors of the Company have consequently determined to write off the goodwill directly related to Porterco in the amount of $650,000. No other write-down of assets of Porterco is considered necessary. The impairment loss has been included in Q3 loss as Other loss. 9. DEBT January 31, 2015 April 30, 2014 Bank indebtedness $ 2,010,958 $ 2,564,603 Demand loans 852,052 1,340,576 Long-term debt 702, ,953 Total debt $ 3,565,090 $ 4,816,132 During the year ended April 30, 2014, the Company entered into an omnibus acknowledgement with the Canadian Western Bank ( CWB ) in which the lender has offered to provide loan financing up to the amount of $5,932,000. The agreement is fully guaranteed by BearStone and Porterco providing a first security by way of pledging as collateral all current and post acquired property. As at January 31, 2015 the Company has used a total of $4,821,070 of the omnibus acknowledgement with $2,010,958 in Bank Indebtedness and $2,810,112 in Obligations under Capital Lease. Bank Indebtedness The Company has a $3,000,000 line of credit agreement, as part of the omnibus acknowledgment, with CWB and is secured by accounts receivables, subject to margin requirements of 75% of trade receivables. A daily balance rate of 1.50% per annum above the prime lending rate of 3% is charged. The current balance at January 31, 2015 was $2,010,958. Demand Loans The Company has demand loans, in addition to the omnibus acknowledgement above, with CWB used to purchase equipment. The current balance at January 31, 2015 was $852,052. These demand loans range up to 48 months with interest ranging from 5.05% to 5.45%. The combined monthly principal and interest payments on the demand loans are $38,782. These loans are classified as Demand Loans as the Canadian Western Bank reserves the right to execute demand if in default of the loans. Long-Term Debt January 31, 2015 April 30, 2014 Total amount $ 702,080 $ 910,953 Less current portion 289, ,393 $ 412,723 $ 633,340 The long-term debt is comprised of loans from various vendors to purchase equipment. These loans range up to 48 months with interest from 4.98% to 8.32%. The combined monthly principal and interest payments are $26,326. Principal repayments over the next five years are anticipated to be as follows: 2016 $ 289, , , , $ 702,080 10

12 10. OBLIGATION UNDER CAPITAL LEASE January 31, 2015 April 30, 2014 Total amount $ 4,186,761 $ 1,443,876 Less current portion 1,088, ,536 $ 3,097,860 $ 953,340 The obligations under capital lease are comprised of various vendors and the omnibus acknowledgment with CWB. These obligations range up to 60 months with interest from 4.37% to 8.00%. The combined monthly lease payments are $107,675. Included in property and equipment are trucks and trailers that have been pledged as collateral for these obligations with net book value of $5,148,267 ( $Nil). As at January 31, 2015 the Company has incurred $2,810,112 of the omnibus acknowledgment with CWB. Lease payments over the next five years are anticipated to be as follows: 2016 $ 1,088, ,040, , , ,476 Total obligation $ 4,186,761 As part of all these agreements, the Company is required to maintain the following debt covenants for CWB: cash flow coverage ratio of not less than 1.25:1, debt to tangible net worth ratio not greater than 3:1, and current ratio not less than 1.25:1. The cash flow coverage ratio and the current ratio covenants have not been met as at January 31, CWB reviews the cash flow coverage ratio covenant on an annual basis and the current ratio covenant on a quarterly basis. CWB has been notified of this deficiency and the Company does not anticipate CWB taking any action at this time. 11. SHARE CAPITAL Authorized (i) Preferred shares - unlimited number, issuable in series (none issued) (ii) Common shares - unlimited number without nominal or par value. Issued and outstanding Common shares As at January 31, 2015 and April 30, 2014, the Company had 96,780,431 common shares outstanding. Stock Options The Company has a rolling Stock Option Plan that has been approved by the shareholders and allows the Company s Board of Directors to grant up to 10% of the Company s outstanding shares to its officers, directors, key employees and consultants. As at January 31, 2015 and April 30, 2014 there were no stock options issued and outstanding: Warrants As at January 31, 2015 there were no warrants issued and outstanding. Earnings Per Share Basic earnings per share are computed by dividing net earnings by the weighted average shares outstanding during the reported period. The weighted average number of shares outstanding (basic and diluted) during the period ended January 31, 2015 was 96,780,431 ( ,791,390). 11

13 12. GENERAL AND ADMINISTRATIVE EXPENSES January 31, 2015 January 31, 2014 Consulting fees $ 43,801 $ 56,046 Office and general 267, ,406 Loss on sale of assets 99, Professional fees 21,611 10,857 Rent expense 122,266 92,345 Salaries and wages 751, ,525 Salary benefits 20,642 22,152 Total $ 1,327,238 $ 1,060, SEGMENTED INFORMATION The Company operates in three segments that are Corporate, Environmental and Vacuum Services. Management defines these segments based on the type of revenue earned. All of the Company s revenue is earned in Canada and all of its assets are located in Canada. Segmented information for the nine months ended January 31, 2015 and 2014 are as follows: For the nine months ended January 31, 2015 Environmental Vacuum Truck Inter-company Corporate Services Services elimination Total $ $ $ Revenue - 6,893,575 11,915,274 (78,809) 18,730,040 Direct costs - 4,933,050 9,775,351 (78,809) 14,629,592 Gross margin - 1,960,525 2,139,923 4,100,448 Interest expense 249 5, , ,386 Amortization - - 1,015,703-1,015,703 Earnings before income tax (46,345) (114,087) (530,923) - (691,355) Loss on goodwill impairment (650,000) Deferred income tax recovered ,073 Total assets 908,983 2,345,320 15,293,367-18,547,670 Note the above figures are prior to any inter-company management fees For the nine months ended January 31, 2014 Environmental Vacuum Truck Inter-company Corporate Services Services elimination Total $ $ $ Revenue 7,766 7,174,825 7,604,813-14,787,404 Direct costs - 5,034,967 5,990,239-11,025,206 Gross margin 7,766 2,139,858 1,614,574-3,762,198 Interest expense 547 4,080 90,471-95,098 Amortization , ,576 Earnings before income tax 487, ,109 81, ,353 Deferred income tax recovered ,190 Total assets 2,711,909 3,937,700 10,358,948-17,008,557 Note the above figures are prior to any inter-company management fees 12

14 14. CAPITAL MANAGEMENT Capital Management The Company manages its capital structure in order to ensure sufficient resources are available to meet operational requirements, to allow it to enhance existing product offerings as well as develop new ones and to maintain the Company s ability to operate. The externally imposed capital requirements are related to long-term debt and are disclosed in Note 9. The Company seeks to manage capital to provide adequate funding for its operations while limiting dilution for its existing shareholders. Management considers its cash and cash equivalents, demand loans, long-term debt, obligations under capital lease and shareholder s equity as capital, which consists of the following: January 31, 2015 April 30, 2014 January 31, 2014 Cash and cash equivalents $ 328,933 $ 289,317 $ 291,529 Bank indebtedness 2,010,958 2,564,603 1,033,684 Demand loans 852,052 1,340,576 1,469,778 Long-term debt 702, ,953 2,462,735 Obligations under capital lease 4,186,761 1,443,876 - Shareholder s equity 8,771,256 9,939,538 9,869,759 Total Capitalization $ 16,852,040 $ 16,488,863 $ 15,127, RELATED PARTY TRANSACTIONS The Company has engaged the services of Black Dot Consulting Ltd. since July 2010 to provide marketing and consulting services at a current rate of $5,000 per month. A total of $15,000 is included in consulting fees expense for the three months ended January 31, 2015 ( $15,000). A total of $45,000 is included in consulting fees expense for the nine months ended January 31, 2015 ( $45,000). Black Dot is related to an officer and director of BearStone. The agreement can be terminated at the end of any calendar month. The Company had agreed to pay $10,000 per month to Cory Holdings Ltd., a company owned by the general manager of one of the Company s subsidiaries, since September 2012 for the rental of a warehouse, office and yard in Slave Lake, Alberta. A total of $nil is recorded in rent expense for the three months ended January 31, 2015 ( $30,000). A total of $60,000 is recorded in rent expense for the nine months ended January 31, 2015 ( $90,000). This agreement expired at the end of October 31, In addition, the Company has also engaged Rand Edgar Investment Corp. ( REIC ), a company owned by one of the directors of the Company. REIC is paid or has accrued $6,000 per month for providing administrative services to the Company. This engagement commenced in June A total of $18,000 is recorded in professional fees for the three months ended January 31, 2015 ( $18,000). A total of $54,000 is recorded in professional fees for the nine months ended January 31, 2015 ( $54,000). This agreement may be terminated at the end of any calendar month. The Company has determined that its key management personnel consist of its executive management and its Board of Directors. Included in the Company s consolidated operating expenses for the three key individuals are the following compensation expenses for the nine months ended January 31, 2015: Short term salary and benefits of $279,000 ( $218,167) Included in total commitments disclosed in Note 16 are contract payments of $174,162 and conditional retention bonuses of $125,000 payable to one of the executives. Also during the quarter in lieu of payment of a conditional retention bonus worth $150,000 to a key executive, the Company has agreed to sell assets worth at net book value of $100,000 to this individual. 16. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT Credit Risk Credit risk is the risk of an unexpected loss if a customer or third party to a financial instrument fails to meet its contractual obligations. The Company s cash is held through large Canadian financial institutions which are guaranteed. 13

15 Substantially all of the Company s accounts receivable are due from customers in the oil and natural gas industry and are subject to normal industry credit risks. The Company s subsidiaries have a balanced flow of customers. The carrying amount of cash and accounts receivable represents the maximum credit exposure. Liquidity Risk Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company manages liquidity risk through the management of its capital structure and financial leverage as outlined in Note 14 Capital Management. Market Risk Market risk is the risk that fair value of future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises of three types of risk: interest rate risk, currency risk and other price risk. It is management s opinion that the Company is not exposed to significant interest rate risk, currency risk or other price risk because the Company does not transact in other currencies and the demand loans and long-term debt have a fixed interest rate charge. Sensitivity Analysis The Company has designated its cash and cash equivalents as held-for-trading which is measured at fair value. As of January 31, 2015, the carrying and fair value amounts of the Company s financial instruments are approximately equal. Receivables are classified for accounting purposes as loans and receivables, which are measured at an amortized cost which equals fair market value. Accounts payable and accrued liabilities are classified for accounting purposes as other financial liabilities, which are measured at amortized costs which also equal fair market value. Based on management s knowledge and experience of the financial markets, the Company believes that movements in interest rates that are reasonably possible over the next twelve months will not have a significant impact on the Company. 17. COMMITMENTS The Company has commitments under operating leases for office, warehouse and lab premises along with contracts and conditional retention bonus for a key management employee. The estimated amounts for the next five years are: 2016 $ 645, , , , ,900 $ 1,707, BUSINESS COMBINATIONS During the year ended April 30, 2014, in the second quarter on September 30, 2013, the Company closed the share purchase agreement to acquire all of the issued and outstanding common shares of Alberta Ltd. (which includes all assets of Tippin D Oilfield Services Ltd. and 40 Creek Oilfield Services Ltd.) for an aggregate price of $1.8 million, comprised of $1.3 million in cash, the issuance of 3,000,000 common shares in the capital of the Company at a deemed price of $0.10 per share and a post closing payment of $200,000 payable as an earn out upon achieving certain performance thresholds over a twelve month period post close. During the quarter the closing payment was executed as the thresholds were all met as per the purchase agreement. The new service was amalgamated into the operations of BearStone Vacuum Truck Services which is a division of the wholly owned subsidiary BearStone Environmental Solutions Inc. The acquisition was made to diversify the existing drilling related services offered from the completion and production sectors which is expected to yield increased margins and experience less seasonal fluctuations in activity when compared to drilling related services. The acquisition is also strategic in offering existing services in a key geographic area of Northwestern Alberta which allows for future growth into Northeastern British Columbia where LNG projects are expected. This additional acquisition will continue providing combo vacuum, hydrovac, tank truck and bulk transport services to the completions and production sectors of the oil and gas industry from its base in Beaverlodge. Key Management were retained part of the acquisition and Daniel Huys (former principal) acts as Area Manager for BearStone Vacuum Services going forward. 14

16 The agreement price was allocated as follows: Property and Equipment $ 926,000 Goodwill 874,000 Total $ 1,800,000 The acquired assets contributed $5,420,050 to the Company s consolidated revenue and a loss of $1,343 to the Company s consolidated net income and comprehensive income for the period from May 1, 2014 to January 31, The Company s acquisition of the assets of Alberta Ltd. resulted in recording of goodwill of $874,000. The value of goodwill consists of, but is not limited to, the following key factors: - based on multiples - maintaining key client contracts - retention of key management - strong complements to the existing business plan based on location and services offered. The Company did not incur any goodwill impairment adjustment on the above for the period ended January 31, Additional information relating to the Company is available on SEDAR at 15