Audited Consolidated Financial Statements of Lonestar West Inc. For the Years Ended December 31, 2016 and 2015

Transcription

1 Audited Consolidated Financial Statements of Lonestar West Inc. For the Years Ended December 31, 2016 and 2015

2 Management's Responsibility To the Shareholders of Lonestar West Inc. (the Company ): Management is responsible for the preparation and presentation of the accompanying consolidated financial statements, including responsibility for significant accounting judgments and estimates in accordance with International Financial Reporting Standards. This responsibility includes selecting appropriate accounting principles and methods, and making decisions affecting the measurement of transactions in which objective judgment is required. In discharging its responsibilities for the integrity and fairness of the consolidated financial statements, management designs and maintains the necessary accounting systems and related internal controls to provide reasonable assurance that transactions are authorized, assets are safe guarded and financial records are properly maintained to provide reliable information for the preparation of consolidated financial statements. The Board of Directors and Audit Committee are composed primarily of Directors who are neither management nor employees of the Company. The Board is responsible for overseeing management in the performance of its financial reporting responsibilities, and for approving the financial information included in the annual report. The Board fulfils these responsibilities by reviewing the financial information prepared by management and discussing relevant matters with management and external auditors. The Board is also responsible for recommending the appointment of the Company's external auditors. KPMG LLP, an independent firm of Chartered Professional Accountants, is appointed by the shareholders to audit the consolidated financial statements and report directly to them; their report follows. The external auditors have full and free access to, and meet periodically and separately with, both the Audit Committee and management to discuss their audit findings. April 24, 2017 Signed James Horvath Chief Executive Officer Signed Delanie Hill Chief Financial Officer

3 KPMG LLP 2200, St NW Edmonton AB T5J 0H3 Telephone (780) Fax (780) INDEPENDENT AUDITORS REPORT To the Shareholders of Lonestar West Inc. We have audited the accompanying consolidated financial statements of Lonestar West Inc., which comprise the consolidated statements of financial position as at December 31, 2016 and December 31, 2015, the consolidated statements of comprehensive loss, changes in equity and cash flows for the years then ended, and notes, comprising a summary of significant accounting policies and other explanatory information. Management s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. KPMG Canada provides services to KPMG LLP.

4 consolidated financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Lonestar West Inc. as at December 31, 2016 and December 31, 2015, and its consolidated financial performance and its consolidated cash flows for the years then ended in accordance with International Financial Reporting Standards. Emphasis of Matter Without modifying our opinion, we draw attention to Note 2 in the consolidated financial statements which indicates that Lonestar West Inc. has negative working capital, a loss from operations for the year and is forecasting to not be in compliance with certain quarterly financial covenants in connection with its operating line of credit throughout the year. These conditions, along with other matters as set forth in Note 2 in the consolidated financial statements, indicate the existence of a material uncertainty that casts significant doubt about Lonestar West Inc. s ability to continue as a going concern. Chartered Professional Accountants April 24, 2017 Edmonton, Canada 2

5 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION December 31, 2016 December 31, 2015 ASSETS Current assets: Cash $ 2,263,264 $ 1,942,040 Accounts receivable (note 7) 9,519,072 15,640,634 Prepaid expenses and deposits 592, ,992 12,375,046 18,112,666 Non-current assets: Property and equipment (note 8) 48,789,373 56,178,517 Investments (note 9) 1,452 32,402 Intangible assets (note 10) - 107,974 Deferred tax asset (note 19) - 1,362,522 LIABILITIES AND SHAREHOLDERS' EQUITY $ 61,165,871 $ 75,794,081 Current liabilities: Operating line of credit (note 13) $ 4,416,418 $ 4,758,518 Accounts payable and accrued liabilities (note 14, 18) 4,103,557 3,176,329 Current portion of term debt (note 15) 6,569,067 8,237,000 Current portion of finance lease obligations (note 16) 521, ,247 Current portion of promissory notes (note 12, 27) 205, ,495 15,816,550 17,365,589 Non-current liabilities: Term debt (note 15) 11,030,692 15,162,753 Finance lease obligations (note 16) 192, ,731 Promissory notes (note 12, 27) 695,501 1,278,786 Debentures (note 17) 2,300,000 1,500,000 Deferred tax liability (note 19) - 9,163 30,034,977 36,148,022 Shareholders' equity: Share capital (note 20) 38,958,075 38,958,075 Contributed surplus (note 20, 21) 754, ,476 Accumulated other comprehensive income (note 20c) 2,204,379 2,567,972 Retained earnings (10,786,308) (2,435,464) Going concern (note 2) Commitments and contingencies (note 30) 31,130,894 39,646,059 $ 61,165,871 $ 75,794,081 signed "James Horvath" Director signed "David Prussky" Director The accompanying notes are an integral part of these consolidated financial statements

6 CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS Year ended Year ended December 31, December 31, Revenue (note 22) $ 42,641,196 $ 50,304,204 Operating (note 18, 23) 35,919,366 40,127,955 Selling, general and administration (note 18, 23) 5,690,255 5,656,177 Depreciation and amortization (note 8,10) 6,121,344 6,866,566 Other 358, ,088 Total expenses 48,089,068 53,257,786 Loss from operations (5,447,872) (2,953,582) Other (expenses) income Interest on term debt (note 15) (956,959) (967,280) Interest on finance lease obligations (note 16) (49,622) (101,249) Interest on debentures (note 17) (213,572) (9,627) Change in fair value of promissory notes (note 12) 447,132 1,225,377 Impairment of goodwill and intangible assets (notes 10, 11) (107,974) (5,673,544) Gain (loss) on disposal of property and equipment (note 8) 106,692 (19,242) Litigation settlement (note 30) (331,363) - Excise tax contingent loss (note 30) (604,000) - Realized gain (loss) on foreign exchange 53,321 (87,179) Loss before income taxes (7,104,217) (8,586,326) Provision for (recovery of) income taxes (note 19) 1,246,627 (2,213,956) Loss (8,350,844) (6,372,370) Other comprehensive loss Unrealized loss on investment (note 9) - (6,289) Foreign currency translation adjustment (363,593) 1,710,924 Total comprehensive loss $ (8,714,437) $ (4,667,735) Loss per share (note 24): Basic $ (0.28) $ (0.22) Diluted $ (0.28) $ (0.22) Weighted average number of common shares: Basic 29,457,549 29,269,646 Diluted 29,457,549 29,269,646 The accompanying notes are an integral part of these consolidated financial statements

7 CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY Share Accumulated other Contributed comprehensive Retained capital surplus income earnings Total Balance, January 1, 2015 $ 38,565,735 $ 547,591 $ 863,337 $ 3,936,906 $ 43,913,569 Loss (6,372,370) (6,372,370) Unrealized loss on investments - - (6,289) - (6,289) Foreign currency translation adjustment - - 1,710,924-1,710,924 Common shares issued 392, ,340 Share-based payment - 321,756 expense - 321,756 Fair value of common shares granted for future - (313,871) - - (313,871) services Balance, December 31, 2015 $ 38,958,075 $ 555,476 $ 2,567,972 $ (2,435,464) $ 39,646,059 Loss (8,350,844) (8,350,844) Foreign currency translation adjustment - - (363,593) - (363,593) Share-based payment expense - 199, ,272 Balance, December 31, 2016 $ 38,958,075 $ 754,748 $ 2,204,379 $(10,786,308) $ 31,130,894 The accompanying notes are an integral part of these consolidated financial statements

8 CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended December 31, 2016 Year ended December 31, 2015 Cash flows from operating activities: Loss $ (8,350,844) $ (6,372,370) Share-based payments expense 199, ,756 Realized (gain) loss on foreign exchange (53,321) 87,179 Depreciation and amortization 6,121,344 6,866,566 Impairment of intangible assets and goodwill 107,974 5,673,544 Change in fair value of promissory notes (447,132) (1,225,377) Interest expense 1,378,984 1,350,494 Interest paid (1,392,759) (1,297,923) (Gain) loss on disposal of property and equipment (106,692) 19,242 Income tax expense (recovery) 1,246,627 (2,262,188) Income taxes paid (14,821) (46,941) (1,311,368) 3,113,982 Changes in non-cash working capital (note 25) 6,810,914 (484,333) Cash provided by operating activities 5,499,546 2,629,649 Cash flows from investing activities: Purchase of property and equipment (744,568) (9,173,339) Proceeds from disposal of property and equipment 2,088, ,359 Proceeds on sale of investments 30,950 - Cash paid on acquisition - (2,451,600) Cash provided by (used in) investing activities 1,374,763 (10,960,580) Cash flows from financing activities: Proceeds from term debt 5,771,254 13,784,011 Repayment of term debt (11,571,247) (6,724,892) Proceeds from debentures 800,000 1,500,000 Repayment of finance lease obligations (701,544) (566,328) Repayment of promissory note (490,845) - (Repayment of) advances from operating line of credit (342,100) 653,932 Cash (used in) provided by financing activities (6,534,482) 8,646,723 Foreign currency effect on cash (18,603) 4,565 Net increase in cash 321, ,357 Cash, beginning of year 1,942,040 1,621,683 Cash, end of year 2,263,264 1,942,040 Supplemental cash flow information (note 25) The accompanying notes are an integral part of these consolidated financial statements

9 1. NATURE OF OPERATION Lonestar West Inc. ("Lonestar") was incorporated on June 5, 2008 under the laws of the Canada Business Corporations Act. On December 17, 2008, Lonestar completed an initial public offering ("IPO"). Lonestar s shares are publicly traded on the TSX Venture Exchange under the symbol "LSI". Lonestar provides the technical application of hydro-vacuum, vacuum, water truck and auxiliary services, primarily to infrastructure and oil and gas customers. The registered business address is 105 Kuusamo Drive, Red Deer County, Alberta, T4E 2J5. 2. GOING CONCERN These consolidated financial statements have been prepared on a going concern basis, which presumes the Company will continue its operations for the foreseeable future and will be able to realize its assets and discharge its liabilities and commitments in the normal course of business. As at December 31, 2016 the Company has negative working capital of $3,441,504, a loss of $8,350,844 for the year and is forecasting to not be in compliance with its quarterly EBITDA covenant and quarterly current ratio covenant throughout the year. These factors create a material uncertainty that may cast significant doubt with respect to the ability of the Company to continue as a going concern. The Company s plans to address this material uncertainty include: The diversification of revenues to the petroleum, mining, infrastructure and utilities sectors; Increasing utilization of existing assets through relocation to geographical areas with higher demand; and Implementing operational cost savings measures including consolidating the Company s operating bases. Subsequent to December 31, 2016, the Company executed an amendment of its revolving demand credit facility (note 13 and 29) which amended the following terms: Reduced the Company s operating line of credit limit from $6,000,000 to $5,000,000; Increased the interest charged on the Company s operating line of credit from prime plus 1% to prime plus t to 3.0%; and Removed the requirement for the Company to comply with the EBITDA covenant for the quarter ended March 31, 2017 (note 29). The ability of the Company to continue as a going concern and to realize the carrying value of its assets and discharge its liabilities when due is dependent on continued support from its lenders and the successful completion of the planned actions noted above. There is no certainty that these and other strategies will be sufficient to permit the Company to continue as a going concern. These financial statements do not reflect the adjustments and classifications of assets, liabilities, revenues and expenses which would be necessary if the Company was unable to continue as a going concern. If the going concern basis was not appropriate for these consolidated financial statements, then adjustments would be necessary to the carrying value of assets and liabilities, the reported revenues and expenses, and the consolidated statement of financial position classifications used

10 3. BASIS OF PREPARATION Statement of compliance These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ). They were approved and authorized for issue by the Company s Board of Directors on April 24, The consolidated financial statements include the financial statements of Lonestar and the subsidiaries listed in the following table: % equity interest Name Country of Incorporation December 31, 2016 December 31, 2015 Lonestar Sylvan Inc. Canada 100% 100% Lonestar Vacuum Inc. Canada 100% 100% Lonestar West USA Inc. U.S.A. 100% 100% Lonestar West Enterprises, LLC U.S.A. 100% 100% Lonestar West Services, LLC U.S.A. 100% 100% Basis of measurement These consolidated financial statements were prepared on a going concern basis, under the historical cost convention except for certain financial instruments measured at fair value through profit or loss and share-based payment transactions which are measured at fair value. Functional and presentation currency Items included in these consolidated financial statements are measured using the currency of the primary economic environment in which the entity operates ( the functional currency ). The functional currency of Lonestar`s Canadian subsidiaries is the Canadian dollar. The functional currency of Lonestar`s United States subsidiaries is the United States dollar. The presentation currency of the Company is the Canadian dollar. 4. SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the periods presented, except for the new accounting policies adopted as outlined in Note 6. Basis of consolidation These consolidated financial statements incorporate the financial statements of Lonestar and its whollyowned subsidiaries. Subsidiaries are consolidated from the date of acquisition, being the date on which Lonestar obtains control, and continue to be consolidated until the date that such control ceases. The financial statements of the subsidiaries are prepared for the same reporting period as the parent, using consistent accounting policies. All intra-company balances, income and expenses, unrealized gains and losses resulting from intra-company transactions are eliminated in full

11 4. SIGNIFICANT ACCOUNTING POLICIES (continued) Business combinations Business combinations are accounted for using the acquisition method of accounting in which the identifiable assets acquired, liabilities assumed and any non-controlling interest are recognized and measured at their fair value at the date of acquisition. Any excess of the purchase price plus any noncontrolling interest over the fair value of the net assets acquired is recognized as goodwill. Any deficiency of the purchase price over the fair value of the net assets acquired is credited to profit or loss. Transaction costs, other than those associated with the issue of debt or equity securities, that the Company incurs in connection with a business combination are expensed as incurred. Any contingent consideration to be transferred by the acquirer will be recognized at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration, which is deemed to be an asset or liability, will be recognized in accordance with IAS 39 either in earnings. If the contingent consideration is classified as equity, it shall not be re-measured and its final settlement shall be accounted for within equity. Revenue The Company evaluates whether it is appropriate to record the gross amount of its revenues and related costs by considering a number of factors, including, among other things, whether the Company is the primary obligor under the arrangement and has latitude in establishing prices. Hydro-vacuum and vacuum revenue is derived from providing hydro-excavation or vacuum services to customers. The Company is the primary obligor in these transactions and has latitude in establishing prices. Accordingly, revenue is recorded on a gross basis, excluding any taxes, when the service has been performed, the related costs are incurred, the revenues can be reliably measured and when collectability is reasonably assured. There are no post-service obligations. Sub-contract lease operator revenue is derived from lease operators providing hydro-excavation services to customers operating under the Lonestar name. Management has reviewed the primary indicators of the lease operator transactions such as: The lease operator provides the service to the customer operating as Lonestar. The Company has control over who performs the service by dispatching all units. The Company is responsible for all billing and collecting of revenues. The Company is responsible for setting all rates and submitting all requests for proposals. The Company holds the Master Service Agreement with the customers. The lease operator receives a set percentage of lease operator revenues generated. The lease operator operates under the Company s safety program, and The Company and the lease operator are impacted if there is an issue with the service. Taking all of the above into consideration Management has made the judgement that the Company is the primary obligor in these transactions and has sole latitude in establishing prices. Accordingly, revenue is recorded on a gross basis, excluding any taxes, when the service has been performed, the related costs are incurred, the revenues can be reliably measured and when collectability is reasonably assured. There are no post-service obligations. As disclosed in note 12, effective February 20, 2015 the Company ceased its use of lease operators

12 4. SIGNIFICANT ACCOUNTING POLICIES (continued) Non-derivative financial instruments Non-derivative financial instruments are recognized when the Company becomes a party to the contractual provisions of the instrument. Financial assets are derecognized when the rights to receive cash flows from the assets have expired or have been transferred and the Company has transferred substantially all risks and rewards of ownership. Non-derivative financial instruments are recognized initially at fair value plus, for instruments not at fair value through profit or loss, any directly attributable transaction costs. At initial recognition, all financial instruments are classified in one of the following categories depending on the purpose for which the instruments were acquired: Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss ( FVTPL ) are financial assets held for trading or that are designated as such upon initial recognition by management. Such assets are held for trading if they are acquired principally for the purpose of selling in the short-term. These assets are initially recognized, and subsequently carried, at fair value, with changes recognized in the consolidated statement of comprehensive loss. Transaction costs are expensed. There were no financial assets classified at fair value through profit or loss. Available-for-sale Financial assets classified as available-for-sale are measured at fair value, with changes in fair value recognized in other comprehensive loss. When an asset in this category is derecognized or determined to be impaired, the cumulative gain or loss previously recognized in equity is transferred to profit or loss for the period. Assets in this category include investments. Loans and receivables These assets are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and receivables are subsequently measured at amortized cost using the effective interest rate method, less any impairment losses, with interest income recognized on an effective yield basis. Assets in this category include cash and accounts receivable. Financial liabilities at fair value through profit or loss Financial liabilities classified as FVTPL include financial liabilities held for trading and financial liabilities designated upon initial recognition at FVTPL. Such liabilities are carried in the consolidated statement of financial position at fair value, with changes in fair value recognized in comprehensive loss. Liabilities in this category include promissory notes. Other financial liabilities Other financial liabilities are subsequently measured at amortized cost using the effective interest method, with interest expense recognized on an effective yield basis. Liabilities in this category include accounts payable and accrued liabilities, term debt and debentures. Equity instruments An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs

13 4. SIGNIFICANT ACCOUNTING POLICIES (continued) Intangible assets Intangible assets include customer relationships and non-compete agreements which qualify for recognition as an intangible asset as a result of acquisition in a business combination. They are accounted for using the cost model whereby capitalized costs are amortized on a straight-line basis over the useful lives, as these assets are considered finite, net of accumulated impairment losses, if any. Residual values and useful lives are reviewed at each reporting date. The following useful lives are applied: Useful life (years straight line) Customer relationships 3 5 Non-compete agreements 3 5 Amortization has been recognized in profit or loss for the period. Property and equipment Property and equipment is carried at cost less accumulated depreciation and accumulated impairment losses. Such cost includes the cost of replacing part of the equipment and borrowing costs for long-term construction projects if the recognition criteria are met. Depreciation is charged using the straight-line method based on estimated useful lives. Where an item of equipment comprises major components with different useful lives, the components are accounted for as separate items but shown as one item in the consolidated financial statements. Depreciation is calculated on a straight-line method to write-off the cost of the assets to their residual values over their estimated useful lives. The depreciation rates applicable to each category are as follows: Useful life (years straight line) Automotive 5 to 25 Automotive under finance lease 5 to 25 Equipment 3 to 10 Building 25 Computer equipment 3 to 5 Leasehold improvements 5 Expenditures incurred to replace a component of an item of property and equipment that is accounted for separately, including major inspections and overhaul expenditures, are capitalized. Directly attributable expenses incurred for major capital projects and site preparation are capitalized until the asset is brought to a working condition for its intended use. The costs of day-to-day servicing are recognized in profit or loss as incurred. These costs are more commonly referred to as maintenance and repairs. The depreciation method, useful life and residual values are assessed annually

14 4. SIGNIFICANT ACCOUNTING POLICIES (continued) Leases Leases in terms of which the Company assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition, the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset. Minimum lease payments made under finance leases are apportioned between the interest expense and the reduction of the outstanding liability. The interest expense is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. Other leases are operating leases and the leased assets are not recognized in the Company s consolidated statement of financial position. Payments made under operating leases are recognized in loss on a straight-line basis over the term of the lease. Lease incentives received are recognized as an integral part of the total lease expense, over the term of the lease. Impairment Financial assets A financial asset is assessed at each reporting date to determine whether there is any objective evidence that it is impaired. Significant financial difficulties of a debtor, probability that the debtor will enter bankruptcy or financial reorganization, and default or delinquency in payments are considered indicators that the financial asset is impaired. The amount recognized as the impairment is the difference between the asset s carrying amount and the estimated future cash flows. The carrying amount of the asset is reduced through the use of an allowance account, and the amount of the loss is recognized in the consolidated statement of comprehensive loss. When a financial asset is uncollectible, it is written off against the allowance account for financial assets. Non-financial assets excluding goodwill At the end of each reporting period, the Company reviews the carrying amounts of its long lived assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Company estimates the recoverable amount of the cash generating unit ( CGU ) to which the asset belongs. Where a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual CGU s, or otherwise they are allocated to the smallest group of CGU s for which a reasonable and consistent allocation basis can be identified. Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset or CGU is estimated to be less than its carrying amount, the carrying amount of the asset or CGU is reduced to its recoverable amount. An impairment loss is recognized immediately in the consolidated statement of comprehensive loss. Where an impairment loss subsequently reverses for assets with a finite useful life, the carrying amount of the asset or CGU is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset or CGU in prior periods. A reversal of an impairment loss is recognized immediately in the consolidated statement of comprehensive loss

15 4. SIGNIFICANT ACCOUNTING POLICIES (continued) Borrowing costs Borrowing costs directly associated with the acquisition, construction or production of a qualifying asset are capitalized when a substantial period of time is required to make the asset ready for its intended use. All other borrowing costs are recognized as an expense in the period in which they are incurred. Income taxes Income tax expense consists of current and deferred tax expense. Current and deferred tax is recognized in profit or loss except to the extent that it relates to items recognized directly in equity or other comprehensive loss. Current tax is recognized and measured at the amount expected to be recovered from or payable to the taxation authorities based on the income tax rates enacted or substantively enacted at the end of the reporting period and includes any adjustment to taxes payable in respect of previous periods. Deferred tax is recognized on any temporary differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax bases used in the computation of taxable earnings. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period when the asset is realized and the liability is settled. The effect of a change in the enacted or substantively enacted tax rates is recognized in profit or loss or in equity depending on the item to which the adjustment relates. Deferred tax assets are recognized to the extent future recovery is probable. At each reporting period end, deferred tax assets are reduced to the extent that it is no longer probable that sufficient taxable earnings will be available to allow all or part of the asset to be recovered. Share-based payments The Company grants stock options to buy common shares of the Company to directors, officers, employees and service providers. The Board of Directors grants such options for periods of up to 5 years, with vesting periods determined at its sole discretion and at prices equal to or greater than the closing market price on the day preceding the date the options were granted. The Company uses the Black-Scholes pricing model to estimate the fair value of equity-settled awards at the grant date. For options granted to service providers, the same method of valuation is used unless the value of services provided is more readily determinable. The expense is recognized over the vesting period, which is the period over which all of the specified vesting conditions are satisfied, with a corresponding increase in contributed surplus. For awards with graded vesting, the fair value of each tranche is recognized over its respective vesting period. When recognizing the fair value of each tranche over its respective vesting period, the Company incorporates an estimate of the number of options expected to vest and revises that estimate when subsequent information indicates that the number of options expected to vest differs from previous estimates. No expense is recognized for awards that do not ultimately vest, except for equity-settled awards where vesting is conditional upon a market or non-vesting condition which are treated as vesting irrespective of whether or not the market or non-vesting condition is satisfied, provided that all other performance and/or service conditions are satisfied. Any consideration paid on exercise of stock options is credited to share capital together with the amounts originally recorded as contributed surplus

16 4. SIGNIFICANT ACCOUNTING POLICIES (continued) Loss per share Basic loss per share is computed by dividing the loss available to common shareholders by the weighted average number of shares outstanding during the period. The number of shares is calculated by adjusting the shares issued at the beginning of the period by the number of shares bought back or issued during the period, multiplied by a time-weighting factor. Diluted loss per share is computed by adjusting the number of shares for the effects of dilutive options and other dilutive potential common shares. The effects of anti-dilutive potential common shares are ignored in calculating diluted loss per share. All options and other potential common shares are considered anti-dilutive when the Company is in a loss position. Provisions A provision is recognized if, as a result of a past event, the Company has a present obligation, legal or constructive, that can be estimated reliably, and it is more likely than not that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The increase in the provision due to the passage of time is recognized as a finance cost in the consolidated statement of comprehensive loss. Foreign currency translation and transactions For foreign entities whose functional currency is not the Canadian dollar, the Company translates assets and liabilities at period-end exchange rates and income and expense accounts at average exchange rates to the presentation currency. Adjustments resulting from these translations are reflected in the accumulated other comprehensive income. Transactions of Canadian entities in foreign currencies are translated at rates in effect at the time of the transaction. Foreign currency monetary assets and liabilities are translated at current rates. Foreign currency non-monetary assets and liabilities are translated at the rate in effect at the time of the transaction. Gains or losses from the changes in exchange rates are recognized in profit or loss in the period of occurrence. Foreign exchange gains or losses arising from a monetary item that is receivable from or payable to a foreign operation, the settlement of which is neither planned nor likely to occur in the foreseeable future and which in substance is considered to form part of the net investment in the foreign operation, are recognized in the accumulated other comprehensive income (loss). Segment reporting An operating segment is a component of the Company that engages in business activities from which it may earn revenue and incur expenses. The Company operates in one dominant industry segment, which involves the provision of hydro-vacuum and vacuum services to the petroleum, mining and utility sectors. The Company operates in two geographic business segments and 1 corporate segment based on the area where services are performed, within Canada or in the United States. The operating results of these segments are reviewed regularly by the Company`s Chief Executive Officer to make decisions about resources to be allocated to the segment and assess its performance. The Company identifies hydro-vacuum and vacuum services as one segment due to the fact that these revenue streams are managed as one unit, use similar technology and work at the same locations

17 4. SIGNIFICANT ACCOUNTING POLICIES (continued) Goodwill The Company measures goodwill as the fair value of the consideration transferred less the net recognized amount (generally fair value) of the identifiable assets acquired and the liabilities assumed, all measured as of the acquisition date. Since goodwill results from the application of the acquisition method of accounting for a business combination, it is inherently imprecise and requires judgement in the determination of the fair value of assets and liabilities. Goodwill is allocated as of the date of the business combination to the Company s CGU s. Goodwill is not amortized, but is tested for impairment at least annually. An impairment loss in respect of goodwill is not reversed. On the disposal or termination of a previously acquired business, any remaining balance of associated goodwill is included in the determination of the gain or loss on disposal. Any goodwill balances in subsidiaries whose functional currency is not the Canadian dollar are translated at period end exchange rates and recognized in accumulated other comprehensive income. 5. CRITICAL ACCOUNTING JUDGMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY The preparation of the consolidated financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and contingent liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Estimates and judgments are continuously evaluated and are based on management s experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. However, actual outcomes can differ from these estimates. Estimates The key sources of estimation uncertainty that have a significant risk of causing material adjustment to the amounts recognized in the consolidated financial statements are: Impairment of non-financial assets Impairment exists when the carrying value of an asset or CGU exceeds its recoverable amount, which is the higher of its fair value less costs to sell and its value in use. The fair value less costs to sell calculation is based on available data from binding sales transactions in an arm s length transaction of similar assets or observable market prices less incremental costs for disposing of the asset. The value in use calculation is based on a discounted cash flow model. The cash flows are derived from the budget for the next five years and do not include restructuring activities that the Company is not yet committed to or significant future investments that will enhance the asset s performance of the cash generating unit being tested. The recoverable amount is most sensitive to the discount rate used for the discounted cash flow model as well as the expected future cash inflows and the growth rate used for extrapolation purposes. Allowance for doubtful accounts The Company makes an allowance for doubtful accounts based on an assessment of the recoverability of receivables. Allowances are applied to receivables where events or changes in circumstances indicate the carrying amounts may not be recoverable. Management specifically analyzes historical payment history for customers, customer credit worthiness and economic trends when making a judgement to evaluate the adequacy of the allowance for doubtful accounts. Where the expectation is different from the original estimate, such difference will impact the carrying value of receivables

18 5. CRITICAL ACCOUNTING JUDGMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY (continued) Share-based payment transactions The Company measures the cost of share-based payment transactions with employees by reference to the fair value of the equity instruments. Estimating fair value for share-based payment transactions requires determining the most appropriate valuation model, which is dependent on the terms and conditions of the grant. This estimate also requires determining and making assumptions about the most appropriate inputs to the valuation model including the expected life, volatility and dividend yield of the share option. The assumptions and models used for estimating fair value for share-based payment transactions are disclosed in Note 21. Useful lives of property and equipment The Company estimates the useful lives of property and equipment based on the period over which the assets are expected to be available for use. The estimated useful lives of property and equipment are reviewed periodically and are updated if expectations differ from previous estimates due to physical wear and tear, technical or commercial obsolescence and legal or other limits on the use of the relevant assets. In addition, the estimation of the useful lives of property and equipment are based on internal technical evaluation and experience with similar assets. It is possible, however, that future results of operations could be materially affected by changes in the estimates brought about by changes in factors mentioned above. The amounts and timing of recorded expenses for any period would be affected by changes in these factors and circumstances. A reduction in the estimated useful lives of the property and equipment would increase the recorded expenses and decrease the non-current assets. Taxes Provisions for taxes are made using the best estimate of the amount expected to be paid based on a qualitative assessment of all relevant factors. The Company reviews the adequacy of these provisions at the end of the reporting period. However, it is possible that at some future date an additional liability could result from audits by taxing authorities. Where the final outcome of these tax-related matters is different from the amounts that were initially recorded, such differences will affect the tax provisions in the period in which such determination is made. Provisions for deferred taxes are calculated using the tax rates and laws enacted at the end of the reporting period in which the deferred income tax asset is expected to be realized or the deferred income tax liability is expected to be settled. Deferred tax assets are recognized when it is probable that there will be taxable profits available for the deductible temporary differences to be utilized. Deferred tax liabilities are recognized for all taxable temporary differences. Purchase price allocation The acquired assets and assumed liabilities are recognized at fair value on the date the Company effectively obtains control. The measurement of each business combination is based on the information available on the acquisition date. The estimate of fair value of the acquired intangible assets (including goodwill), property and equipment, other assets and the liabilities assumed are based on assumptions. The measurement is largely based on projected cash flows, discount rates and market conditions at the date of acquisition

19 5. CRITICAL ACCOUNTING JUDGMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY (continued) Judgments The key sources of judgment that have a significant risk of causing material adjustment to the amounts recognized in the consolidated financial statements are: Determining cash generating units For the purpose of assessing impairment of tangible and intangible assets, assets are grouped at the lowest level of separately identified cash flows which make up the CGU. Determination of what constitutes a CGU is subject to management judgement. The asset composition of a CGU can directly impact the recoverability of assets included within the CGU. In assessing the recoverability of tangible and intangible assets, each CGU s carrying value is compared to the greater of its fair value less costs to sell and value in use. Management has determined that the appropriate CGU s for the Company are The Canadian Division, Moose Jaw, Saskatchewan, Lonestar West Enterprises, LLC and Lonestar West Services, LLC. 6. NEW ACCOUNTING POLICIES The Corporation adopted the amendment to IAS 1 on January 1, There was no material impact to the consolidated financial statements as a result of the adoption of the amendments. Future accounting changes: IFRS 9 Financial Instruments IFRS 9 addresses the classification and measurement requirements of financial assets and liabilities and is intended to improve transparency in the disclosure of expected credit losses and is intended to improve the overall usefulness of financial instruments by users by revising the current hedge accounting requirements. The Company intends to adopt IFRS 9 in its financial statements for the annual period beginning on January 1, IFRS 15 Revenue from Contracts with Customers IFRS 15 is a single and comprehensive framework for revenue recognition that replaces previous revenue Standards. The Company intends to adopt IFRS 15 in its financial statements for the annual period beginning on January 1, IFRS 16 Leases IFRS 16 provides a single lessee accounting model, requiring lessee s to recognize assets and liabilities for all leases unless a lease term is 12 months or less or the underlying asset has a low value. Lessors continue to classify leases as operating or finance, with IFRS 16 s approach to lessor accounting substantially unchanged from its predecessor, IAS 17. The Company intends to adopt IFRS 16 in its financial statements for the annual period beginning on January 1, The extent of the impact of adoption of these standards has not yet been determined

20 7. ACCOUNTS RECEIVABLE December 31, 2016 December 31, 2015 Trade receivables $ 8,990,536 $ 16,548,383 Allowance for doubtful accounts (2,954) (1,487,040) Other receivables 192, ,008 Payroll advances - 5,493 Holdback receivable 104, ,790 GST receivable 234,953 - The aging analysis of trade receivables is as follows: $ 9,519,072 $ 15,640,634 Neither past due nor impaired Past due but not impaired Total 1-45 days days days > 120 days December 31, 2016 $ 8,987,582 $ 4,946,681 $ 1,588,011 $ 718,714 $ 1,734,176 December 31, 2015 $ 15,061,343 $ 8,142,577 $ 3,237,779 $ 1,379,701 $ 2,301,286 The normal collection on receivables can be over 90 days due to the continuing challenging economic conditions experienced in the oilfield industry. Any amounts deemed uncollectible by management are recorded by specific invoice to the allowance for doubtful accounts at the time the amount is considered potentially uncollectible as the Company does not recognize a general provision for bad debts. As of December 31, 2016, $824,106 (December 31, $1,487,040) of invoices have been taken to bad debts or written off during the year and all other receivables are considered collectible. A general security agreement is held over all Company assets in respect to the revolving demand credit facility (note 13)

21 8. PROPERTY AND EQUIPMENT Automotive under finance lease Computer equipment Leasehold improvements Assets not yet in use Land Total Automotive Equipment Building Cost January 1, 2015 $ 50,006,255 $ 3,038,464 $ 1,690,729 $ 93,523 $ 224,891 $ 2,887,967 $ 367,077 $995,000 $ 59,303,906 Additions 8,850,747-35,867 29, , ,284-9,173,339 Additions through acquisition 2,410,000-41, ,451,600 Translation adjustment 52, ,788 20,574 5, ,422 Disposals (837,213) (837,213) December 31, 2015 $ 60,482,094 $ 3,159,252 $ 1,788,770 $ 128,830 $ 224,891 $2,993,857 $ 518,361 $ 995,000 $ 70,291,055 Additions 476, ,571 6,500 8, , ,568 Adjustments 651,881 (475,978) ,101 (212,004) - - Translation adjustment (12,378) (22,280) (3,912) (1,425) (39,995) Disposals (3,198,400) (457,450) (3,655,850) December 31, 2016 $ 58,399,565 $ 2,203,544 $ 1,785,498 $ 167,976 $ 231,391 $ 3,038,843 $ 517,961 $ 995,000 $ 67,339,778 Accumulated Depreciation January 1, 2015 $ 6,993,488 $ 515,943 $ 425,612 $ 47,496 $ 184,804 $ 9,154 $ - $ - $ 8,176,497 Depreciation 5,478, ,625 99,503 25,100 24, , ,043,127 Translation adjustment (75,748) 21,486 98,201 2, ,525 Disposals (153,611) (153,611) December 31, 2015 $ 12,242,402 $ 836,054 $ 623,316 $ 75,182 $ 209,594 $ 125,990 $ - $ - $ 14,112,538 Depreciation 5,483, , ,947 37,151 10, , ,121,344 Adjustments 172,299 (172,299) Translation adjustment (3,464) (4,555) (904) (393) (9,316) Disposals (1,456,193) (217,968) (1,674,161) December 31, 2016 $ 16,438,837 $ 722,962 $ 809,359 $ 111,940 $ 219,841 $ 247,466 $ - $ - $ 18,550,405 Net Book Value December 31, 2015 $ 48,239,692 $ 2,323,198 $ 1,165,454 $ 53,648 $ 15,297 $ 2,867,867 $ 518,361 $ 995,000 $ 56,178,517 December 31, 2016 $ 41,960,728 $ 1,480,582 $ 976,139 $ 56,036 $ 11,550 $ 2,791,377 $ 517,961 $ 995,000 $ 48,789,