NEW WEST ENERGY SERVICES INC.

Transcription

1 The following MD&A dated September 29 th, 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 three months ended July 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 three months ended July 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, providing services to the oil and gas industry. New West Drilling sells chemicals and providing engineering services primarily to for the drilling of oil and gas wells. Bearstone provides drilling waste management and other related environmental services to oil and gas companies throughout western Canada. VISION, CORE BUSINESS AND STRATEGY New West s wholly owned subsidiary, New West Drilling Fluids Inc, 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 three 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 also started up Bearstone, a new wholly owned environmental oilfield services company in June The company provides drilling waste management and other related environmental services to oil and gas companies throughout Western Canada. See detailed list of services below under Current Operations. The Company purchased 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 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. Some of these costs were for development expenses related to Bearstone s new waste tracking system. Bearstone still expects to be accretive in its first year of operation. 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 six major oil and gas companies as well as with several junior and midsized oil and gas exploration and development companies. Bearstone forecasts sales of $4.9 million for the remaining 9 months that are projected to provide a net after tax profit of 7% to 8% of sales. New West is currently very active in establishing and solidifying connections with several of the approximate 20 oil companies that maintain leases in the oilsands. Several delayed oilsands projects have been taken off the back burner and moved forward due largely to the stabilized price of oil in the mid $70 US/barrel range. New West 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 has recently hired a seasoned drilling fluids professional with several years experience in operations and sales to complement this market effort. New West will continue selling its proprietary products but such revenues are not expected to be significant as revenues from potential oil sands. 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 September 21, 2010 was 155 rigs. This number is up considerably from this time last year when only 118 rigs were working. Current rig utilization in western Canada as at September 21, 2010 was 260 rigs working versus 205 at the same time last year. Rig utilization is currently at 32.6% of available rigs but is expected to increase to over 50% during the remainder of 2010 and into the 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 July 31, 2010, the Company had a net profit of $260,982 versus a loss of $115,525 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 versus working on the same contract for only a portion of the first quarter in New West Drilling s net profit for the quarter was $438,860 offset by the net loss of Bearstone of $121,370 and New West Energy Services of $56,508. Bearstone s loss for a start up period of two months operation included development of the new waste tracking system. During the three months ended July 31, 2010, the Company recorded $nil of stock-based compensation expense for options vesting during the period versus $24,722 for the corresponding period last year. Total revenue for the three months ended July 31, 2010 was $2,547,890 versus revenue of $410,477 for the three months ended July 31, Of the total revenue of $2,547,890, New West Drilling revenue for the quarter was $1,719,775 comprised of $1,693,405 from SAGD sales, $26,370 from general drillings fluid sales. Bearstone revenue for the quarter was $828,115. The comparative quarter in 2009 of $410,477 was comprised of $365,472 from SAGD sales, $45,005 from general drilling fluid sales and $Nil from Bearstone environmental Services.. These low sales numbers from the previous year were due to the SAGD contract in effect for only a short period during the quarter plus a slow start of drilling due to a late spring breakup. 2

3 OVERALL PERFORMANCE and RESULTS OF OPERATIONS (continued) Operating Expenses: Operating expenses of $555,313 for the three months ended July 31, 2010 increased by $249,626 or 82% over the $305,687 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 $249,626 in operating expenses all relate to the additional operations of Bearstone in the amount of $252,921 for the three months ended July 31, Operating costs are expected to increase during the year with the addition of the new wholly owned subsidiary, Bearstone Environmental Solutions Inc. Bearstone operations only reflect for a two month period during the three months ended July 31, See summary below. Summary of operating expenses Consolidated For the three months For the three months Variances all companies ended July 31, 2010 ended July 31, 2009 $ $ $ Revenue and other income 2,547, ,477 2,137,413 Direct costs (cost of sales) 1,731, ,315 1,511,280 Gross margin 816, , ,133 Expenses: Salaries and benefits 192, ,446 57,681 Professional fees 128,564 47,021 81,543 Office and general 112,207 57,738 54,469 Automotive 24,980 12,953 12,027 Travel and business development 53,113 5,004 48,109 Well data and laboratory costs 12,187 10,667 1,520 Stock-based compensation -0-24,722 (24,722) Interest and bank charges 9,525 10,846 (1,321) Depreciation and amortization 22,610 2,290 20,320 Total expenses 555, , ,626 Net Income (loss) 260,982 (115,525) 376,507 Summary of operating expenses New West For the three months For the three months Variances Drillings Fluids Inc ended July 31, 2010 ended July 31, 2009 $ $ $ Revenue and other income 1,719, ,477 1,309,298 Direct costs (cost of sales) 1,035, , ,716 Gross margin 684, , ,582 Expenses: Salaries and benefits 64, ,446 (69,501) Professional fees 75,252 34,521 40,731 Office and general 56,742 53,738 3,004 Automotive 16,631 12,953 3,678 Travel and business development 11,287 5,004 6,283 Well data and laboratory costs 12,187 10,667 1,520 Stock-based compensation Interest and bank charges 6,566 10,829 (4,263) Depreciation and amortization 2,274 2,290 (16) Total expenses 245, ,448 (18,564) Net Income (loss) 438,860 (74,286) 513,146 3

4 Summary of operating expenses For the two month operations ended July 31, 2010 Bearstone Enviornmental Solutions Inc. For the three months ended July 31, 2010 For the three months ended July 31, 2009 Variances $ $ $ Revenue and other income 828, ,115 Direct costs (cost of sales) 696, ,564 Gross margin 131, ,551 Expenses: Salaries and benefits 127, ,182 Professional fees 2, ,412 Office and general 50, ,680 Automotive 8, ,349 Travel and business development 41, ,826 Well data and laboratory costs Stock-based compensation Interest and bank charges 2, ,136 Depreciation and amortization 20, ,336 Total expenses 252, ,921 Net Income (loss) (121,370) -0- (121,370) Salaries and benefits: This expense category totaling $192,127 for the quarter represents 35% of all operating expenses. This increased by $57,681 from $134,446 for salaries and benefits for the three months ended July 31, The increase of $57,681 is largely due to the additional operations of Bearstone in the amount of $127,182 for the three months ended July 31, Professional fees: Fees totaling $128,564 for the quarter ended July 31, 2010 or 24% of total operating expenses compared to $47,021 for the quarter ended July 31, Legal, consulting and audit expenses were $48,564, $80,000 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 $9,000 payable to a company owned 50% by a director of New West and $4,000 paid to a firm related to an officer and director of Bearstone. Office and general: These expenses totalling $112,207 represents 21% of total operating expenses for the quarter. This category increased from $57,738 in the same period last year. The increase is largely from Bearstone in the amount of $50,680. Interest: A decrease to $9,525 for the quarter ended July 31, 2010 from $10,846 in the same period last year is due to a decreased amount owed in loans payable. Automotive: these expenses were $24,980 versus $12,953 for the same period last year. The increase is largely due to Bearstone in the amount of $8,349. Stock-based compensation expense: the Company recorded $Nil in stock-based compensation expense versus $24,722 during the comparable quarter last year. This decrease is due to the lower number options vested compared to the same period last year Amortization: depreciation of $22,610 increased from the same period last year of $2,290 due mainly to the additions of assets to Bearstone. 4

5 OVERALL PERFORMANCE and RESULTS OF OPERATIONS Operating Expenses (continued): Travel, advertising, promotion: expenses totalling $53,113 for the quarter reflected an increase of $48,109 from the same period last year of $5,004. The increase is largely due to Bearstone in the amount of $41,826 which relate to promotional start up costs. 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: expenses totalling $12,187 increased slightly from the comparative period of $10,667. CURRENT OPERATIONS New West Drilling recently successfully completed a huge multi-well SAGD oilsands project for a major international oil and gas company. The project came in ahead of schedule and under budget. New West Drilling received a congratulatory letter from the oil and gas company for its excellent work effort and no lost time safety record. New West Drillings expects to start up another large multi-well SAGD oilsands project this fall with a second similar project following at the beginning of 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 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 32.6% of total available rigs, an 8.6% increase over the same time last year. The marketing is still calling for rig utilization over 50% during the upcoming winter drilling season. New West is really excited about its new wholly owned subsidiary, Bearstone that commenced operations in June Bearstone is expected to provide an excellent opportunity for New West 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 Bearstone has also been developing a new database program for tracking oilfields waste. This program will allow growth in the new waste tracking division that offers complete production and drilling waste manifest tracking. In addition to the environmental services offered, Bearstone utilizes 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 winter drilling season. Bearstone incurred a loss of $121,370 in the first two months of operation that were primarily directed to start up expenses. However, the company is expected to be accretive in its first year of operation. Bearstone currently provides services to over 40 oil and gas clients. Its senior management personnel have successfully re-established relationships with 6 major oil and gas companies in addition to its other several clients. 5

6 CURRENT OPERATIONS (continued) 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. The Company recently hired a seasoned drilling fluids person with several years experience in the industry in both operations and sales. 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 specially 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:, Cash of $1,774 was used from operations, from the previous period when $271,207 was used by operations. A decrease of $327,579 in accounts payable, a decrease in accounts receivable of $104,674, an increase in work in process of $293,954, a decrease in inventory of $336,066, an increase in prepaid expense of $104,573 and a net income plus items not involving cash items of $283,592 resulted in a negative cash flow. Financial Activities:, Cash of $2,100,218 was provided compared to $309,416 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. 6

7 LIQUIDITY AND CAPITAL RESOURCES (continued) Liquidity: The Company has working capital of $1,328,500 at July 31, 2010 as compared to a working capital of $471,821 as at April 30, During the quarter, 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 July 31, CONTRACTUAL OBLIGATIONS AND COMMITMENTS At July 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 $ 239,118 $ - $ - Lease other commitments 480, , , ,420 - Total contractual obligations $ 741,216 $ 537,404 $ 447,678 $ 156,420 $ - New West has 16 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. New West has signed an office lease for Bearstone in Calgary at $17,380/month until April Bearstone has a building lease payment in Medicine Hat at $5,653 per month until June 2011.\ The term loans are payable over 36 months at $9,477/month to GE Capital and $12,261/month to Canadian Western Bank. SUMMARY OF QUARTERLY RESULTS Financial Quarter Ended Oct 31/09 Jan 31/10 April 30/10 July 31/10 Revenue $ 1,081,700 $ 1,648,798 $ 1,689,336 $ 2,547,890 Cash flow (23,303) 66,994 20,687 (1,774) Net income (loss) 55, , , ,982 Per share (basic and diluted) Oct 31/08 Jan 31/09 April 30/09 July 31/09 Revenue $ 356,232 $ 656,379 $ 1,120 $ 410,477 Cash flow (266,137) (435,652) (57,761) (246,485) Net income (loss) (339,631) (335,494) (444,025) (115,525) Per share (basic and diluted) (0.01) (0.01) (0.01) (0.003) The revenue for the quarter ended October consists totally of conventional drilling fluid sales as the Company had no oilsands business in that quarter. During the third quarter ended January 31, 2009 the Company commenced 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. 7

8 SUMMARY OF QUARTERLY RESULTS (continued) 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. 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., included in professional fees are management fees in the amount of $63,000 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. 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 owner of this company is the spouse of the President and Director of Bearstone. Bearstone has hired the President on a base salary of $125,000 per year. 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 $9,000 is recorded in professional fees for the three months ended July 31, This agreement may be terminated at the end of any calendar month. During the three months ended July 31, 2010, the directors and officers and related parties of the Company participated in the purchase of 6,600,000 shares ($330,000) of the $1,707,000 private placement. During the quarter, 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. 8

9 OUTSTANDING SHARE CAPITAL As at September 29 th, 2010, April 30, 2010 and July 31, 2009 the Company had the following outstanding share capital: September 29 th, 2010 April 30, 2010 July 31, 2009 Common shares 91,780,431 56,540,431 43,034,336 Share options 500, ,000 1,450,000 Finders fee option , ,000 Warrants 35,770,000 1,630,000 1,630,000 Finders fee warrants Total fully diluted share capital 128,050,431 59,859,431 46,883,336 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 500,000 that expire in November During the three months ended July 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., no stock options were issued to any Directors, Officers or Employees but a total of 420,000 options were cancelled along with 769,000 non-transferable finders options. 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: 9

10 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. 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. 10

11 NEW ACCOUNTING STANDARDS TO BE ADOPTED (continued) 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 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 later 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 July 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. 11

12 INTERNAL CONTROLS OVER FINANCIAL REPORTING (continued) 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. 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 July 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: 12

13 RISK FACTORS (continued) (i) Access to Additional Financing: ADDITIONAL INFORMATION The Company filed a law suit against a former employee and a competitor drilling fluids company during the quarter ended October 31, 2008 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. A former employee of New West filed a claim against the company for wrongful dismissal. The claim is for the amount of $57,500 plus further special damages. The company has filed a defense to the claim on the basis the employee was dismissed with cause and management believes the chances of the employee success are low. Additional information relating to the Company is available on SEDAR at 13