NEW WEST ENERGY SERVICES INC.

Transcription

1 The following MD&A dated December 23 rd, 2010 focuses on key statistics from the consolidated financial statements and pertains to known risks and uncertainties related to the oilfield service industry in Canada where the Company operates. This discussion should not be considered all-inclusive, as it excludes changes that occur in general economic, political and environmental conditions. This discussion and analysis of the financial condition and results of operations for the six months ended October 31, 2010, should be read in conjunction with the consolidated financial statements and related notes and material contained in the Company s annual report for the year ended April 30, FORWARD-LOOKING STATEMENTS Certain statements contained in the six months ended October 31, 2010, including the statements contained in this MD&A, constitute forward-looking statements. Such forward-looking statements involve a number of known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements that speak only as of the date the statements were made, and readers are advised to consider such forward-looking statements in light of the risks set forth above. BUSINESS OF THE COMPANY The Company s business activities are carried out through its wholly owned subsidiaries New West Drilling Fluids Inc. ( New West Drilling ) of Calgary, Alberta, and BearStone Environmental Solutions Inc. ( BearStone ), of Calgary, Alberta, both providing services to the oil and gas industry. New West Drilling sells chemicals and provides field engineering services primarily for the drilling of oil and gas wells. BearStone provides environmental services and operates a fleet of specialized vacuum and water trucks to the upstream oil and gas industry throughout western Canada. VISION, CORE BUSINESS AND STRATEGY New West s wholly owned subsidiary, New West Drilling Fluids Inc., in operation since 1999, has developed several water based drilling fluid systems that form the core of the company s products. One of the systems is patented and all of the others are proprietary. The patented system named BITUDRIL has proven to be very effective and has been the product of choice for four major oil companies in the development of their steam assisted gravity drainage ( SAGD ) oil sands projects. Bitudril is expected to form a major part of New West s revenue base. New West s other wholly owned subsidiary, BearStone, is an environmental oilfield services company that commenced operations in June The company provides environmental services and operates a fleet of specialized vacuum and water trucks to the upstream oil and gas industry throughout Western Canada. See detailed list of services below under Current Operations. The Company started operations this year with the purchase of several vacuum/water trucks and other assets for $1,100,000 utilizing funds from a private placement of New West common shares for the acquisition. The purchase included taking over several active contracts and hiring of key seasoned management and field personnel to operate the company. BearStone also acquired two additional trucks for $419,000 on a term financing basis. BearStone incurred a start up loss of $121,370 in the first two months of operations consisting of a first month start up loss of $65,045 with the balance incurred in the second month of operations. For the second quarter ended October 31, 2010 BearStone successfully turned a profit before tax of $221,057. The business outlook for the remainder of 2010 and through the ensuing winter drilling season is very positive. 1

2 VISION, CORE BUSINESS AND STRATEGY (continued) BearStone has re-established old customer relationships with various major oil and gas companies as well as with several junior and midsized oil and gas exploration and development companies. Currently BearStone has over forty (40) active clients and is forecasting sales of approximately $5 million for the remaining 6 months that are projected to provide a net after tax profit of 7% to 10% of sales. New West Drilling continues to be very active in establishing and solidifying connections with several of the oil companies that maintain leases in the oilsands. The number of primary leaseholders in the Athabasca oilsands region of Alberta has now reached 91 oil companies. Several previously delayed oilsands projects are now moving forward due largely to the stabilized price of oil in the mid $70/$90 US/barrel range. Regulatory approvals and financings are being finalized by several primary leaseholders. Information provided by the Energy Resources Conservation Board, Daily Oil Bulletin and Strategy West as of October 2010 reveals 25 oilsands project applications awaiting regulatory approval, 20 projects under construction and/or operating with an additional 16 oilsands projects having received regulatory approval. New West Drilling was recently awarded a large SAGD contract with a major oilsands operator, providing drilling fluid products and field service that is expected to extend over a period of 2 years. The Company also recently recommenced another large SAGD contract with an international oilfield company that it has worked for over the past 2 years. New West Drilling was also recently awarded a 190 core well project in the oilsands for a third large oilsands operator. New West Drilling s priority strategies over the next six months are to concentrate its drilling fluids efforts on upcoming oilsands drilling opportunities and to expand the market share for the new environmental service businesses throughout Western Canada. Along with this, the Company plans to utilize the many personal relationships and marketing strength of the senior management of BearStone to build the customer base in conventional exploration/development as well. New West Drilling has recently hired a seasoned drilling fluids professional with several years experience in operations and sales to complement this market effort. BearStone has also recently hired a V.P. of Sales and Marketing with over ten years of sales experience. Drilling activity in the Province of Alberta has picked up in 2010 with the Province of Alberta revamping their royalty schedules paid by oil and gas producers in March The new provincial government policy has been favourably received by the oil and gas companies resulting in increased exploration and development activity this year. The number of drilling rigs currently working in Alberta as at December 7, 2010 was 310 rigs. This number is up considerably from this time last year when only 222 rigs were working. Current rig utilization in western Canada as at December 7, 2010 was 455 rigs working versus 339 at the same time last year. Rig utilization is currently at 57% of available rigs and is expected to remain over 50% during the remainder of 2010 and into the 2011 winter drilling season. Drilling activity for natural gas remains extremely slow. There is an abundance of this commodity on the market due to the slow down in industrial utilization and new found sources of shale gas that have kept market prices down. OVERALL PERFORMANCE and RESULTS OF OPERATIONS Consolidated Revenue: For the three-month period ended October 31, 2010, the Company had a net loss of $42,725 versus a profit of $55,867 for the corresponding period last year. The year over year difference in the quarterly results is largely reflected in New West Drilling working on a large SAGD contract for the full quarter in 2009 versus having no SAGD work during the second quarter ended October 31, The net loss for the quarter of $42,725 is composed of New West Drilling s net loss of $227,817, the net profit of BearStone of $221,057 and New West Energy Services head office costs of $35,965. 2

3 OVERALL PERFORMANCE and RESULTS OF OPERATIONS (continued) Consolidated Revenue: (continued) For the six-month period ended October 31, 2010, the Company had a net profit of $218,257 versus a loss of $59,658 for the corresponding period last year. The year over year difference in the quarterly results is largely reflected in New West Drilling working on a large SAGD contract for the first quarter 2010 versus working on the same contract for only a portion of the first quarter in The net profit for the six months ended of $218,257 is composed of New West Drilling s net profit of $211,043, the net profit for BearStone of $99,687 and New West Energy Services head office costs of $92,473. Total revenue for the three months ended October 31, 2010 was $2,527,254 versus revenue of $1,081,700 for the three months ended October 31, Of the total revenue of $2,527,254, New West Drilling revenue for the quarter was $176,536 comprised of $Nil from SAGD sales and $176,536 from general drillings fluid sales. BearStone revenue for the quarter was $2,350,718. The comparative quarter in 2009 of $1,081,700 was comprised of $956,009 from SAGD sales, $125,691 from general drilling fluid sales and $Nil from BearStone (which was not in existence at the time). These low sales numbers of New West Drilling for the quarter ended October 31, 2010 were due to having no SAGD contract in effect for the three month period versus having full SAGD contract in effect during the comparable period in Total revenue for the six months ended October 31, 2010 was $5,075,144 versus revenue of $1,492,177 for the six months ended October 31, Of the total revenue of $5,075,144, New West Drilling revenue for the six months was $1,896,311 comprised of $1,693,405 from SAGD sales and $202,906 from general drillings fluid sales. BearStone revenue for the six months was $3,178,833. The comparative six months in 2009 of $1, was comprised of $1,321,481 from SAGD sales, $170,696 from general drilling fluid sales and $Nil from BearStone (which was not in existence at the time). New West Drilling revenue for the six months ended October 31, 2010 was almost entirely from a large SAGD contract that ran throughout the first quarter ended July 31, This is compared to last year when the SAGD revenues were earned throughout the second quarter of Operating Expenses: Operating expenses of $796,431 for the three months ended October 31, 2010 increased by $439,563 or 123% over the $356,868 of expenses incurred for the comparable period last year. The Company incurred $nil of stock-based compensation expense for the quarter, compared to $nil during the same quarter last year. The increase of $439,563 in operating expenses all relate to the additional operations of BearStone in the amount of $514,088 for the three months ended October 31, Operating costs are expected to increase during the year with the addition of the new wholly owned subsidiary, BearStone Environmental Solutions Inc. Operating expenses of $1,397,373 for the six months ended October 31, 2010 increased by $734,818 or 110% over the $662,555 of expenses incurred for the comparable period last year. The Company incurred $nil of stock-based compensation expense for the quarter, compared to $24,722 during the same quarter last year. The increase of $734,818 in operating expenses all relate to the additional operations of BearStone in the amount of $812,638 for the six months ended October31, Operating costs are expected to increase during the year with the addition of the new wholly owned subsidiary, BearStone Environmental Solutions Inc. 3

4 OVERALL PERFORMANCE and RESULTS OF OPERATIONS (continued) Operating Expenses: (continued) Summary of operating expenses Consolidated For the three months For the three months Variances all companies ended October 31, 2010 ended October 31, 2009 $ $ $ Revenue and other income 2,527,254 1,081,700 1,445,554 Direct costs (cost of sales) 1,773, ,965 1,104,583 Gross margin 753, , ,971 Expenses: Salaries and benefits 423,137 87, ,719 Professional fees 120, ,066 (23,833) Office and general 118,859 66,527 52,332 Automotive 15,004 18,383 (3,379) Travel and business development 46,372 17,499 28,873 Well data and laboratory costs 10,484 10, Stock-based compensation Interest and bank charges 16,177 10,511 5,666 Depreciation and amortization 46,165 2,251 43,914 Total expenses 796, , ,563 Net Income (loss) (42,725) 55,867 (98,592) Salaries and benefits: This expense category totaling $423,137 for the quarter represents 53% of all operating expenses. This increased by $335,719 from $87,418 for salaries and benefits for the three months ended October 31, The increase of $335,719 is due to the additional operations of BearStone. This expense category totaling $669,242 for the six months ended October 31, 2010 represents 48% of all operating expenses. This increased by $447,378 from $221,864 for salaries and benefits for the six months ended October 31, The increase of $447,378 is due to the additional operations of BearStone. Professional fees: Fees totaling $120,233 for the quarter ended October 31, 2010 or 15% of total operating expenses compared to $144,066 for the quarter ended October 31, Legal, consulting and audit expenses were $33,233, $87,000 and, $nil respectively. Consulting expenses include fees of $63,000 to companies owned wholly or partially by directors and officers of New West Drilling Fluids Inc. Also included in this category was $12,000 payable to a company owned 50% by a director of New West and $12,000 paid to a firm related to an officer and director of BearStone. Fees totaling $248,797 for the six months ended October 31, 2010 or 18% of total operating expenses compared to $191,087 for the six months ended October 31, Legal, consulting and audit expenses were $81,797, $167,000 and, $nil respectively. Consulting expenses include fees of $126,000 to companies owned wholly or partially by directors and officers of New West Drilling Fluids Inc. Also included in this category was $21,000 payable to a company owned 50% by a director of New West and $20,000 paid to a firm related to an officer and director of BearStone. Office and general: These expenses totalling $118,859 represents 15% of total operating expenses for the quarter. This category increased from $66,527 in the same period last year. The increase is due to the additional operations of BearStone. Expenses totalling $231,066 represents 16% of total operating expenses for the quarter. This category increased from $124,265 in the same period last year. The increase is due to the additional operations of BearStone. 4

5 OVERALL PERFORMANCE and RESULTS OF OPERATIONS (continued) Operating Expenses: (continued) Interest: Interest increased to $16,177 for the quarter ended October 31, 2010 from $10,511 in the same period last year as a result of the BearStone borrowing. Interest increased to $25,702 for the six months ended October 31, 2010 from $21,357 in the same period last year. Automotive: For the three months ended October 31, 2010 these expenses were $15,004 versus $18,383 for the same period last year. The decrease results from less usage due to reduced site visits. these expenses were $31,635 versus $31,336 for the same period last year. Stock-based compensation expense: For the three months ended October 31, 2010 the Company recorded $Nil in stock-based compensation expense versus $Nil during the comparable quarter last year., the Company recorded $Nil in stock-based compensation expense versus $24,722 during the comparable period last year. The decrease is due to the lower number of options vested compared to the same period last year. Amortization: For the three months ended October 31, 2010 depreciation of $46,165 increased from the same period last year of $2,251 due mainly to the addition of BearStone assets. depreciation of $68,775 increased from the same period last year of $4,541 due mainly to the additions of BearStone assets. Travel, advertising, promotion: For the three months ended October 31, 2010 expenses totalling $46,372 for the quarter reflected an increase of $28,873 from the same period last year of $17,499. The Company anticipates spending more money on business development over the next year to maintain and continue to expand its customer base. expenses totalling $99,485 for the six months ended October 31, 2010 reflected an increase of $76,982 from the same period last year of $22,503. The Company anticipates spending more money on business development over the next year to maintain and continue to expand its customer base. Well data and laboratory costs: For the three months ended October 31, 2010 expenses totalling $10,484 increased slightly from the comparative period of $10,213. expenses totalling $22,671 increased slightly from the comparative period of $20,880. CURRENT OPERATIONS New West Drilling recently successfully completed a large multi-well SAGD oilsands project for a major international oil and gas company in July The project was put on hold at that time. New West Drilling recommenced this SAGD work in November 2010 providing its patented and trademarked Bitudril fluid system and field technological expertise. This project is expected to continue throughout the year

6 CURRENT OPERATIONS (continued) In addition, New West Drilling was recently awarded another large SAGD contract from a second major oil and gas company. This project is planned to start in January 2011 and will continue for approximately two years. New West Drilling is also providing drilling fluid products for multi core well projects. The company is actively soliciting other oilsands projects that are expected to start up in 2011 and These projects had been previously held back primarily due to the volatility in the price of oil. However, with oil trading stabilized in the mid $70/$90 US per barrel range, several SAGD drilling applications have come forth recently for regulatory approval. With respect to conventional oil and gas exploration and development, the activity in the western Canada oil and gas industry has continued to expand with rig utilization 57% of total available rigs, a 17% increase over the same time last year. Total western Canada rig utilization is expected to remain over 50% throughout the winter drilling season. New West s other wholly owned subsidiary, BearStone that commenced operations in June 2010, has had a very successful start up in its first five months of operation. BearStone is expected to provide an excellent opportunity for New West Drilling to diversify into the environmental services area of the oil and gas industry. New West executive are well aware of the proven marketing and entrepreneur strengths the senior management team of BearStone bring to the whole picture. BearStone has successfully maintained several key contracts within the industry and are providing the following services: - Drilling waste sampling, testing and disposal - Treatment of toxic or contaminated drilling waste - Pre-disturbance site assessments - Sump suitability assessments - Pre-post drilling water well testing - In house client consulting - Oilfield waste and manifest tracking - Floatation vacuum trucks for drilling waste disposal - Tandem water trucks for oilfield ice road construction and general drilling rig service In addition to the environmental services offered, BearStone also operates a fleet of specialized vacuum trucks for the disposal of drilling waste and also provides water trucks to haul make up water to the drilling rig during operations and building of ice roads during the winter drilling season. BearStone incurred a start up loss of $121,370 in the first two months of operation. They successfully turned the company into a profitable position during the second quarter ended October 31, 2010 showing a profit before taxes of $221,057. The company is expected to be accretive in its first year of operation. BearStone currently provides services to over 40 oil and gas clients, including various major exploration and development companies. Current operations include providing drilling waste management services on over 55 drilling rigs and equipment utilization of approximately 68%. These numbers are expected to increase to over 70 drilling rigs and 80% equipment utilization during the next few months. New West s strategy is to combine the marketing strengths of BearStone to build its customer base and profitability. The Company expects this will lead to substantial increased work within the oilsands and conventional exploration/development areas. New West Drilling and BearStone have recently hired two seasoned individuals with several years experience in the industry in both operations and sales. 6

7 CURRENT OPERATIONS (continued) New West Drilling firmly believes it has one of, if not the best, SAGD drilling fluid systems on the market and is its intention to ensure all prospective clients are aware of this system. The potential SAGD work volume is substantial drilling fluid contracts are awarded in multi-well programs that can extend for months. This provides the Company stable long-term cash flow and the ability to better plan future operations. Drilling for natural gas is expected to continue to be very slow over the foreseeable future, except for the region of northeast British Columbia, due to an abundance of shut-in gas including the new found supplies of shale gas being developed in North America. The Company continues to promote its other special chemical products that have the potential to create substantial revenues in the drilling and completions markets. The Company continues to be pro-active environmentally in the industry, pursuing new technologies for cleaning up oilsands SAGD waste drill cuttings. Please refer to for further information. CAPABILITY TO DELIVER RESULTS A comprehensive review of the major factors that influence the Company s ability to deliver results is described in the Company s Annual Report for the year ended April 30, These factors remain unchanged. A outline of these factors is listed as follows: a) The employment of adequate qualified employees, b) Access to sufficient financial resources, c) Development of competitive and top of the line systems/products, d) Seasonality and cyclicality and weather conditions, e) Trends and the outlook for oil and gas prices, f) Government and environmental regulation and risk management, g) Acceptance by our customers of our systems and products, LIQUIDITY AND CAPITAL RESOURCES Cash Flow from Operations: For the three months ended October 31, 2010, cash of $317,103 was used in operations, from the previous period when $23,303 was used by operations. An increase of $588,492 in accounts payable, an increase in accounts receivable of $409,012, an increase in work in process of $312,261, an increase in inventory of $230,306, a decrease in prepaid expense of $42,544 and a net income plus items not involving cash items of $3,440 resulted in a negative cash flow., cash of $318,877 was used in operations, from the previous period when $294,510 was used in operations. An increase of $260,913 in accounts payable, an increase in accounts receivable of $304,338, an increase in work in process of $606,215, a decrease in inventory of $105,760, a increase in prepaid expense of $62,029 and a net income plus items not involving cash items of $287,032 resulted in a negative cash flow 7

8 LIQUIDITY AND CAPITAL RESOURCES (continued) Financial Activities: For the three months ended October 31, 2010, cash of $52,883 was used compared to $20,262 being used in the same period last year., cash of $2,047,335 was provided compared to $289,154 being provided in the same period last year. The increase is due to the Company completing a private financing in the amount of net proceeds of $1,680,038. Liquidity: The Company has working capital of $1,328,451 at October 31, 2010 as compared to a working capital of $471,821 as at April 30, During the six months, the Company raised net proceeds of $1,680,038 from a nonbrokered private placement to assist with working capital. OFF-BALANCE SHEET ARRANGEMENTS The Company has no off-balance sheet arrangements at October 31, CONTRACTUAL OBLIGATIONS AND COMMITMENTS At October 31, 2010, New West had the following contractual obligations: Next 12 months months Payments due by period months months After 48 months Term loans payable $ 260,856 $ 260,856 $ 173,904 $ - $ - Lease other commitments 466, , , ,198 - Total contractual obligations $ 726,872 $ 495,582 $ 382,464 $ 138,198 $ - New West has 13 months remaining on an office sub-lease at $13,975/month and on leased laboratory premises in south-east Calgary at $3,022.44/month. During the quarter ended October 31, 2010, New West Drilling leased a new truck for its oilsands project for a two year period expiring September 5 th, 2012 at an expense of $848 per month. Subsequent to October 31, 2010, New West Drilling leased two additional new trucks for its oilsands projects at a total cost of $1,758 per month (not included in above totals). These leases will expire in October 2012 and November New West has signed an office lease for BearStone in Calgary at $17,380/month until April BearSstone has a building lease payment in Medicine Hat at $5,653 per month until June 30 th, The term loans are payable over 36 months at $9,477/month to GE Capital and $12,261/month to Canadian Western Bank. 8

9 SUMMARY OF QUARTERLY RESULTS Financial Quarter Ended Jan 31/10 April 30/10 July 31/10 Oct 31/10 Revenue $ 1,648,798 $ 1,689,336 $ 2,547,890 $ 2,527,254 Cash flow 66,994 20,687 (1,774) (317,103) Net income (loss) 280, , ,982 (42,725) Per share (basic and diluted) (0.00) Jan 31/09 April 30/09 July 31/09 Oct 31/09 Revenue $ 656,379 $ 1,120 $ 410,477 $ 1,081,700 Cash flow (435,652) (57,761) (246,485) (23,303) Net income (loss) (335,494) (444,025) (115,525) 55,867 Per share (basic and diluted) (0.01) (0.01) (0.003) During the third quarter ended January 31, 2009 the Company revenue was from the commencing of a new SAGD oilsands contract. The total revenue in the quarter from this source was $426,426 with the balance of $229,952 representing general drilling fluid sales. The SAGD oilsands contract was put on hold in late January 2009 and did not restart until early June As a result there was no SAGD revenue in the fourth quarter ended April 30, Of the total revenue of $410,477 in the first quarter ended July 31, 2009, $365,472 was SAGD revenue with the balance representing sale of proprietary products. The SAGD contract ran continually through the end of the second quarter October 31, 2009 providing $956,009 revenue to the Company out of total quarterly revenue of $1,081,700, the difference representing general drilling fluid sales and sale of proprietary products. Revenues for the quarter ended January 31, 2010 in the amount of $1,648,798 primarily reflect SAGD sales of $1,155,080 on the continuing multi-well project that restarted in June The balance was in conventional drilling mud sales and sale of proprietary products totaling $493,718. For the quarter ended April 30, 2010, revenues from the continuation of the SAGD contract totaled $1,570,136 with the balance of $119,200 from conventional drilling fluid sales. Revenue for the quarter ended July 31, 2010 is almost entirely SAGD revenue $1,693,405 from the oilsands project that continued to run throughout the quarter with the balance of $26,370 representing conventional sales. This SAGD project was completed at the end of July 2010 with a plan to restart in November Therefore, there was no SAGD revenue during the second quarter ended October 31, New West Drilling did have revenue of $176,536 during the quarter from conventional chemical sales. BearStone added revenue of $2,350,718 during the second quarter ended October 31, Fluctuations in these revenues can change quarter over quarter depending on any problems and/or delays by the drilling contractor or operational matters/decisions of the oil company TRANSACTIONS WITH RELATED PARTIES The Company engaged the services of Alberta Ltd. and Westhaven Securities Inc. commencing August 2005 and November 2006 for $10,000 and $11,000 per month respectively. The President and Vice-President of New West s wholly owned subsidiary New West Drilling Fluids Inc. control the two companies. They provide the Company with technical direction, advisory services relating to general corporate development, financial matters, raising additional capital, strategic planning and other matters relating to the financial affairs of the Company. These agreements may be terminated at the end of any calendar month. For the three months ended October 31, 2010, included in professional fees are management fees in the amount of $63,000 (six months ended October 31, 2010 are $126,000) that have been paid or accrued to companies controlled by the President and Vice-President of the Company s wholly owned subsidiary, New West Drilling Fluids Inc. 9

10 TRANSACTIONS WITH RELATED PARTIES (continued) The Company also has engaged the services of Black Dot Consulting Ltd. commencing July 2010 to provide marketing and consulting services at $4,000 per month. The firm is related to an officer and director of BearStone. The Company has also engaged Rand Edgar Investment Corporation ( REIC ), a company partially owned by a director of the Company. REIC is paid or accrued $3,000 per month for providing administrative and accounting services to the Company. This fee commenced in June 2007 and $12,000 is recorded in professional fees for the three months ended October 31, 2010 (six months ended October 31, 2010 are $21,000). The fee was increased from $3,000 per month to $6,000 per month commencing October 31, This agreement may be terminated at the end of any calendar month. During the six months ended October 31, 2010, the directors and officers of the Company and related parties participated in the purchase of 6,600,000 shares ($330,000) of the $1,707,000 private placement completed in June, During the six months ended October 31, 2010, the Company has repaid to two of the Company s directors a total of $270,696 for outstanding advances and deferred fees that assisted the Company to maintain its working capital prior to the private placement. There were no loans outstanding to Company directors during the second quarter ended October 31, Subsequent to quarter ended October 31, 2010, a director of the Company (Mr. William A. Rand) acquired 7,000,000 common shares of the Company for an aggregate cash consideration of $350,000 by way of a private purchase and sale. Mr. Rand now owns and controls, directly or indirectly, 14,377,070 common shares of the Company representing approximately 15.7% of the Company s issued and outstanding common shares. The acquisition was made for investment purposes. OUTSTANDING SHARE CAPITAL As at December 23 rd, October 31 st and April 30 th, 2010 the Company had the following outstanding share capital: December 23 rd, 2010 October 31, 2010 April 30, 2010 Common shares 91,780,431 91,780,431 56,540,431 Share options , ,000 Finders fee option ,000 Warrants 35,770,000 35,770,000 1,630,000 Finders fee warrants Total fully diluted share capital 127,550, ,050,431 59,859,431 During the year ended April 30, 2008, the shareholders approved a change in the Employee Stock Option Plan from a fixed number of 2,000,000 stock options authorized to be issued, to 10% of issued and outstanding shares of the Company. As a result the Company is now authorized to issue up to 9,178,043 options. Total options currently issued under this plan total Nil. For the three months ended October 31, 2010, no stock options were issued to any Directors, Officers or Employees but subsequent to October 31, 2010 a total of 500,000 options were cancelled. For the three months ended October 31, 2010 no warrants were exercised or expired., no stock options were issued to any Directors, Officers or Employees but a total of 920,000 options were cancelled along with 769,000 non-transferable finders options. 10

11 OUTSTANDING SHARE CAPITAL (continued) During the six months ended October 31, 2010, the Company issued 34,140,000 units at a price of $0.05 per unit for a total amount of $1,707,000. Each unit consists of one common share plus one warrant to purchase a further common share at $0.10 per share for a period of three years expiring July 8, The Company also paid a finder s fee for the asset purchase of BearStone by the issuance of 1,100,000 common shares to parties who are now employees of BearStone. During the six months ended October 31, 2010 no warrants were exercised or expired. CRITICAL ACCOUNTING ESTIMATES Management is responsible for applying judgment in preparing accounting estimates. Certain estimates and related disclosures included within the financial statements are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ significantly from management s current judgments. An accounting estimate is considered critical only if it requires the Company to make assumptions about matters that are highly uncertain at the time the accounting estimate is made, and different estimates the Company could have used would have a material impact on the Company s financial condition or results of operations. A comprehensive review of the major critical accounting estimates is described in the Company s Annual Report for the year ended April 30, These critical accounting estimates remain unchanged. An outline of the critical accounting estimates is listed as follows: (a) Revenue recognition, (b) Estimates of collectability of accounts receivable, (c) Estimates of depreciation and amortization, (d) Estimates of tax pools and their recoverability, and (e) Stock options: FINANCIAL INSTRUMENTS Accounts Receivable and Risk Management Activities Collection of receivables is within days of invoice and is not expected to present any credit risk due to the size and financial strength of the Company s customers. Fair Values The carrying values of accounts receivable, work in process, inventories, prepaid, accounts payable and accrued liabilities approximates their fair value due to the relatively short periods to maturity of the instruments. The carrying value of other long-term debt instruments is also determined to be at fair values as the current market rates for the same or similar debt instruments that may be available to the Company is believed to exceed the terms and conditions currently in place. 11

12 CRITICAL ACCOUNTING POLICIES AND CHANGES IN ACCOUNTING POLICIES The accounting policies followed by the Company are set out in Note 2 to the audited financial statements for the year ended April 30, 2010, and have been consistently followed in the preparation of the interim financial statements except that the Company had adopted the following Canadian Institute of Chartered Accountants guidelines effective the Company s first interim period commencing May 1, Business Combinations: The CICA issued Section 1582 of the CICA Handbook, Business Combinations, Section 1601, Consolidated Financial Statements and Section 1602, Non-controlling Interests. These new sections replace Section 1581, Business Combinations and Section 1600, Consolidated Financial Statements and establish a new section for accounting for non-controlling interest in a subsidiary. Section 1582 establishes standards for the accounting for a business combination. The section applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after January 1, Section 1601 establishes standards for the preparation of consolidated financial statements. Section 1602 establishes standards for accounting for a non-controlling interest in a subsidiary in consolidated financial statements subsequent to a business combination. These changes are effective for fiscal periods beginning on or after January 1, 2011, earlier application is permitted and will be adopted for the Company s fiscal period beginning on May 1, All three sections must be adopted concurrently. Management is currently evaluating the impact of the adoption of these sections on the Company s financial statements. NEW ACCOUNTING STANDARDS TO BE ADOPTED International Financial Reporting Standards ( IFRS ) In 2006, Canada s Accounting Standards Board ( AcSB ) published a new strategic plan that outlines the convergence of Canadian Generally Accepted Accounting Principles ( GAAP ) with IFRS over an expected transition period of five years. In February 2008, the AcSB announced that the changeover would take place beginning on January 1, 2011 affecting interim and annual financial statements relating to fiscal years beginning on or after January 1, The Company will continue to monitor on an ongoing basis the revisions being made by AcSB to the Canadian accounting standards to conform to IFRS. Any revisions that will result in a change in the accounting policy of the Company, on adoption of IFRS effective January 1, 2011, will be disclosed as policy changes in the financial statements. The Company anticipates the areas of revisions to the accounting standards prior to the IFRS adoption date of January 1, 2011 that may affect the Company s accounting policies are: property plant and equipment measurement and impairment, contingent liabilities, stock-based compensation, financial reporting, internal controls over financial reporting, taxes and IT systems and process. The Company s team of implementation has outlined a plan which includes: - Recognize and determine appropriate changes to accounting policies and any required amendments to the financial disclosures; - Identify and implement changes in associated areas of processes and information systems; - Comply with internal control requirements; and - Education and training of internal and external staff 12

13 NEW ACCOUNTING STANDARDS TO BE ADOPTED (continued) With IFRS to Canadian GAAP, there are significant differences on recognition, measurement and disclosure. Although the Company has not yet determined the full effects of adopting IFRS, the Company has determined that a key area where the changes to IFRS may be significant is with respect to property, plant and equipment. The Company continues to be engaged in the detailed assessment phase on identifying any accounting differences between GAAP and IFRS. The detailed assessment and the design phase, which includes designing business process changes and providing training to employees, is scheduled to be completed this year. KEY PERFORMANCE DRIVERS The Company believes the following key performance drivers are critical to the success of its business. Customer acceptance of its proprietary and patented products. Oil and natural gas prices and the resulting cash flows, access to debt and equity financing and capital expenditures of its customers. Forecast expectations of its customers as to future oil and gas prices. Expectations of its customers as to oil and gas exploration and development prospects primarily in the Western Canada Sedimentary Basin. Interest rates, the state of the capital markets and the Company s ability to access debt and equity markets. Weather, which impacts both the ability to operate in the field as well as the overall demand for natural gas and heating oil. Effect of non-market forces such as government incentives for renewable energy and regulatory changes, all of which create market uncertainty and affects industry activity levels. Access to and retention of qualified personnel. INTERNAL CONTROLS OVER FINANCIAL REPORTING The Company has reviewed its internal controls over financial reporting and believes that as at October 31, 2010 and as of the Report Date, its system of internal controls over financial reporting as defined under MI is sufficiently designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the Company s GAAP. However, certain weaknesses exist in the Company s systems of internal control over financial reporting. These weaknesses arise primarily from the limited number of personnel employed in the accounting and financial reporting area, a situation that is common in many smaller companies. As a consequence of this situation: a) it is not feasible to achieve the complete segregation of duties; and b) the Company does not have full in house expertise in complex areas of financial accounting, and taxation. The Company s management, including the Certifying Officers, does not expect that its internal controls and procedures will prevent all error and all fraud. However, the Company believes that the weaknesses identified in its systems of internal control are mitigated by the thorough review of the Company s financial statements by senior management, the audit committee of the board of directors, and by consulting with external experts. 13

14 INTERNAL CONTROLS OVER FINANCIAL REPORTING (continued) In addition, senior management is active in the Company s day-to-day operations and in monitoring the Company s financial reporting. Regardless, these mitigating factors cannot completely eliminate the possibility that a material misstatement will occur as a result of the weaknesses identified in the Company s internal controls over financial reporting. A cost effective system of internal controls over financial reporting, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the internal controls over financial reporting are achieved. DISCLOSURE CONTROLS AND PROCEDURES The Company maintains disclosure controls and procedures designed to ensure that information in its financial reports is recorded, processed, summarized and reported within the time periods specified by applicable provincial securities legislation and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. The Chief Executive Officer, the President of New West Drilling Fluids Inc., and the Chief Financial Officer, together with management, have evaluated the effectiveness of the Company s disclosure controls and procedures as of October 31, Based on this evaluation, the Chief Executive Officer, the President of New West Drilling Fluids Inc. and the Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures is sufficient to provide reasonable assurance regarding the reliability of the financial reporting and the preparation of financial statements in accordance with Canadian Generally Accepted Accounting Principals. RISK FACTORS Certain activities of the Company are affected by factors that are beyond its control or influence. The business and activities of the Company are directly affected by fluctuations in the levels of exploration, development and production activity carried on by its customers, which in turn, is dictated by numerous factors including world energy prices and government policies. Any addition to or elimination or curtailment of government incentives or other material changes to government regulation of the energy industry in Canada could have a significant impact on the oilfield service industry in Canada of which the Company is a part. A comprehensive review of the major risk factors is described in the Company s Annual Report for the year ended April 30, These major risk factors remain unchanged. An outline of the major risk is listed as follows but the reader is encouraged to review the description of each factor as set out in the Company s Annual Report. (a) Industry Conditions: (b) Credit Risk: (c) Competition: (d) Employees: (e) Relationships with Key Suppliers and Development of New Technology: (f) Environmental Liability Risks: (g) Seasonality: (h) Potential Operating Risk and Insurance: (i) Access to Additional Financing: 14

15 ADDITIONAL INFORMATION The Company filed a law suit against a former employee and a competitor drilling fluids company during the 2009 year end for breaches of the former employee s employment duties, fiduciary duties and duties of confidence to the Company. The former employee has counterclaimed for unpaid sales commissions and expenses that the Company believes are unfounded. Subsequent to the end of the period, subject to formal documents, the parties have agreed to settle the lawsuit on a cost basis along with the Company receiving an acknowledgment of return of its patent rights. Additional information relating to the Company is available on SEDAR at 15