PHOENIX OILFIELD HAULING INC. CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31, 2011 and 2010

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1 PHOENIX OILFIELD HAULING INC. CONSOLIDATED FINANCIAL STATEMENTS

2 MANAGEMENT S RESPONSIBILITY FOR CONSOLIDATED FINANCIAL STATEMENTS The management of Phoenix Oilfield Hauling Inc. (the "Company") is responsible for the preparation and integrity of the accompanying consolidated financial statements and all other information contained in this report. The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") and include amounts that are based on management s informed judgments and estimates where necessary. The Company has established internal accounting control systems which are designed to provide reasonable assurance regarding the reliability of the Company s financial reporting and the preparation of the consolidated financial statements together with the other financial information for external purposes in accordance with IFRS. The Board of Directors, through its Audit Committee, monitors management s financial and accounting policies and practices and the preparation of these consolidated financial statements. The Audit Committee meets periodically with the external auditors and management to review the work of each and the propriety of the discharge of their responsibilities. The Audit Committee reviews the consolidated financial statements of the Company with management and the external auditors prior to submission to the Board of Directors for final approval. The Board of Directors also reviews the consolidated financial statements before they are finalized. The external auditors have full and free access to the Audit Committee to discuss auditing and financial reporting matters. The Audit Committee reviews the independence of the external auditors and pre-approves audit and permitted non-audit services and fees. The Shareholders have appointed KPMG LLP as the Company s independent auditors, and in that capacity, they have audited the consolidated financial statements in accordance with Canadian generally accepted auditing standards. signed "David Werklund" Interim President and Chief Executive Officer April 18, 2012 signed "Bharat Mahajan" Chief Financial Officer and Vice President, Finance

3 KPMG LLP Chartered Accountants Street Edmonton AB T5J 3V8 Canada Telephone Fax Internet (780) (780) INDEPENDENT AUDITORS REPORT To the Shareholders of Phoenix Oilfield Hauling Inc. We have audited the accompanying consolidated financial statements of Phoenix Oilfield Hauling Inc., which comprise the consolidated statements of financial position as at December 31, 2011, December 31, 2010 and January 1, 2010, the consolidated statements of income and comprehensive income, changes in equity and cash flow for the years ended December 31, 2011 and December 31, 2010, 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 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. 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 LLP ), a Swiss cooperative. KPMG Canada provides services to KPMG LLP.

4 Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Phoenix Oilfield Hauling Inc. as at December 31, 2011, December 31, 2010 and January 1, 2010, and its consolidated financial performance and its consolidated cash flows for the years ended December 31, 2011 and December 31, 2010 in accordance with International Financial Reporting. KPMG LLP April 18, 2012 Edmonton, Canada 2

5 PHOENIX OILFIELD HAULING INC. CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (In thousands of Canadian dollars) Note December 31, 2011 ASSETS December 31, 2010 January 1, 2010 Current assets: Cash $ 2,245 $ 850 $ 259 Trade and other receivables 9 16,083 10,588 5,946 Current tax receivable Prepaid expenses 2, ,348 12,014 6,800 Non-current assets: Restricted cash Equipment and leaseholds 10 32,243 26,407 26,514 Intangible assets Goodwill Total assets $ 52,942 $ 39,020 $ 33,944 LIABILITIES AND SHAREHOLDERS EQUITY Current liabilities: Revolving credit facility 14 $ - $ 3,222 $ 2,164 Trade and other payables 13 8,599 4,333 2,949 Current tax payable Current portion of loans and borrowings 14-17,348 17,856 Current portion of obligations under finance lease ,906 3,506 8,942 26,875 26,475 Non-current liabilities: Loans and borrowings 14 19, Obligations under finance lease Deferred tax liabilities 8 2, Convertible debentures 15 4,180-11,557 Deferred gain on sale of equipment ,213 1,178 11,987 Shareholders equity: Share capital 16 53,436 49,943 41,815 Contributed surplus 15,16 9,509 8,895 3,152 Accumulated other comprehensive loss (63) (177) - Deficit (45,095) (47,694) (49,485) 17,787 10,967 (4,518) Total liabilities and shareholders equity $ 52,942 $ 39,020 $ 33,944 The accompanying notes are an integral part of these consolidated financial statements. Approved by the Board of Directors David Werklund Director Gerry Gilewicz Director 3

6 PHOENIX OILFIELD HAULING INC. CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (In thousands of Canadian dollars, except per share amounts) Note Years ended December 31, Revenue $ 72,161 $ 39,823 Expenses: Direct operating 5,6 54,947 34,310 Selling and administrative 5,6 10,257 5,860 Results from operating activities 6,957 (347) Reversal of impairment of equipment 25 - (5,178) Foreign exchange (gain) loss (204) 429 Finance costs 7 2,838 2,416 Income before income taxes 4,323 1,986 Income taxes: 8 Current tax expense (recovery) 130 (226) Deferred tax expense 1, , Net income 2,599 1,791 Other comprehensive income (loss): Foreign currency translation differences 114 (177) Comprehensive income $ 2,713 $ 1,614 Earnings per share Basic 17 $ 0.45 $ 0.32 Diluted 17 $ 0.45 $ 0.32 Weighted average number of commons shares outstanding: Basic 17 5,788 5,579 Diluted 17 5,847 5,579 The accompanying notes are an integral part of these consolidated financial statements. 4

7 PHOENIX OILFIELD HAULING INC. CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (In thousands of Canadian dollars) Note Share Capital Contributed Surplus Accumulated Other Comprehensive Loss Deficit Total Balance, January 1, 2010 $ 41,815 $ 3,152 $ - $ (49,485) $ (4,518) Net income - - 1,791 1,791 Foreign currency translation differences (177) (177) Common shares issued 16 2, ,020 Common shares issued for services Share issue costs 16 (95) (95) Stock-based compensation expense Common shares issued to settle secured debentures 16 6,163 5, ,557 Balance, December 31, 2010 $ 49,943 $ 8,895 $ (177) $ (47,694) $ 10,967 Note Share Capital Contributed Surplus Accumulated Other Comprehensive Loss Deficit Total Balance, January 1, 2011 $ 49,943 $ 8,895 $ (177) $ (47,694) $ 10,967 Net income ,599 2,599 Foreign currency translation differences Common shares issued 16 3, ,420 Common shares issued to settle liabilities 16, Share purchase loan 16,24 (39) (39) Stock based compensation expense Equity portion of convertible debenture, net of tax 15, Balance, December 31, 2011 $ 53,436 $ 9,509 $ (63) $ (45,095) $ 17,787 The accompanying notes are an integral part of these consolidated financial statements. 5

8 PHOENIX OILFIELD HAULING INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, (In thousands of Canadian dollars) Note Cash provided by (used in) Operating activities: Net income $ 2,599 $ 1,791 Items not affecting cash: Depreciation of equipment and leaseholds 5 3,977 3,533 Amortization of intangible assets Current tax expense (recovery) (226) Finance costs 7 2,838 2,416 Foreign exchange (gain) loss (204) 429 Loss (gain) on disposal of equipment and leaseholds (119) 509 Reversal of impairment of equipment 25 - (5,178) Stock-based compensation expense Deferred tax expense 8 1, ,332 4,201 Changes in non-cash balances relating to operations 19 (2,469) (3,303) Income taxes (paid) recovered (71) 356 Realized foreign exchange gain (loss) 90 (153) Finance costs paid 7 (2,838) (1,771) Net cash provided by (used in) operating activities 6,044 (670) Investing activities: Purchase of equipment and leaseholds (8,296) (370) Proceeds from disposal of equipment and leaseholds 203 1,709 Net cash provided by (used in) investing activities (8,093) 1,339 Financing activities: Increase (reduction) in revolving credit facility 14 (3,222) 1,058 Proceeds on issuance of convertible debenture, net of issue costs 15 4,605 - Proceeds on issuance of common shares, net of issue costs 16 3,381 1,965 Proceeds from loans and borrowings, net of transaction costs 14 25,793 - Repayments of loans and borrowings 14 (23,691) (1,179) Decrease (Increase) in restricted cash 27 (27) Repayment of obligations under finance lease 14 (3,456) (1,847) Net cash used in financing activities 3,437 (30) Effect of foreign exchange rate changes on cash balances 7 (48) Increase in cash 1, Cash, beginning of period Cash, end of period $ 2,245 $ 850 The accompanying notes are an integral part of these consolidated financial statements. Supplemental disclosures: Equipment purchased under finance lease 10 $ 1,330 $ 617 Liabilities settled with common shares 16 $ 131 $ 11,557 6

9 1. Reporting Entity The Company was incorporated pursuant to the laws of the Province of Alberta and is a publicly-traded company listed on the TSX Venture Exchange ("TSXV") under the symbol "PHN". The Company s registered office is Suite 1600, th Avenue S.W., Calgary, Alberta, T2P 3C4. The Company s primary business activity is the provision of specialized equipment and services for the transportation of equipment required for the exploration, development and production of petroleum resources. The Company operates in Western Canada and the United States. On November 28, 2011, the Company completed a 30:1 share consolidation of all its outstanding common shares. As such, all common shares, per common share amounts, stock option and warrant figures in the current and comparative periods have been adjusted to reflect this change. 2. Basis of Preparation a) Statement of Compliance These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS"). These are the Company s first annual consolidated financial statements prepared in accordance with IFRS and IFRS 1 First-time Adoption of International Financial Reporting Standards has been applied. IFRS 1 sets out the requirements that the Company must follow when it adopts IFRS for the first time as the basis for preparing its consolidated financial statements. The Company is required to establish its IFRS accounting policies for the year ending December 31, 2011, and apply these retrospectively to determine the IFRS opening statement of financial position at the Company s date of transition of January 1, To assist companies in the transition process, the Standard permits a number of specified exemptions from the general principle of retrospective restatement. The Company has elected a number of specified exemptions from the general principal of retrospective application as follows: i. The Company has applied the business combinations exemption in IFRS 1. It has not restated business combinations that took place prior to the Company s date of transition to IFRS. ii. The Company has elected to set the previously accumulated foreign currency translation adjustments to nil at the Company s date of transition to IFRS. This exemption has been applied to the Company s foreign operations in accordance with IFRS 1. The application of this exemption is detailed in Note 25. iii. The Company has applied IFRS 2 to equity instruments that were granted after November 7, 2002 that vest after January 1, Effective January 1, 2010, the Company retrospectively changed its method of recognizing stock-based compensation to a graded vesting schedule compared to the previously used straight line method. Estimates made under IFRS at January 1, 2010 are consistent with estimates made for the same date under previous GAAP. An explanation of how the transition from previous GAAP to IFRS has affected the reported financial position, financial performance and cash flows of the Company is set out in Note 25. These notes include reconciliations of equity and total comprehensive income for comparative periods as at the date of transition under previous GAAP to those reported for those periods and at the date of transition under IFRS. These consolidated financial statements were authorized for issue by the Board of Directors on April 18, The policies applied in these consolidated financial statements are based upon IFRS issued and effective as of December 31,

10 b) Seasonality There are factors causing quarterly variances that may not be reflective of the Company s future performance. The Company's earnings generally follow the seasonal activity pattern of western Canada's oil and gas industry because of the significance of its operations in Canada. The oil and gas industry in western Canada is typically more active during the winter months as the movement of heavy equipment over frozen ground is generally easier. Rain through the spring, summer and fall reduces activity levels because of the weather s effect on ground conditions and consequently its load bearing capacity. The Company s operations in the United States are generally less affected by weather and are less seasonal by nature. As a result of these seasonal variations, quarterly operating results should not be relied upon as any indication of results for any future period. c) Basis of Measurement These consolidated financial statements have been prepared on the historical cost basis. d) Functional and Presentation Currency These consolidated financial statements are presented in Canadian dollars which is the Company s functional currency. The Company s United States ( "U.S.") subsidiary has a functional currency of U.S. dollars, and the Company s Canadian subsidiaries have a functional currency of Canadian dollars. As the Company has operations in the United States, the consolidated financial results may vary between periods due to the effect of foreign exchange fluctuations in translating the revenues and expenses of its operations in the United States to Canadian dollars. All financial information presented in Canadian dollars has been rounded to the nearest thousand except for share and per share amounts. e) Use of Estimates and Judgments The preparation of the consolidated financial statements in conformity with IFRS requires management to make judgments, estimates, and assumptions. The carrying amount of assets, liabilities, accruals, contingent liabilities, as well as the determination of fair values, reported income and expense in these consolidated financial statements depends on the use of estimates, judgments and assumptions. Actual results may differ materially from these estimates. Estimates, judgments and underlying assumptions are reviewed on an ongoing basis and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected. Significant estimates used in the preparation of these consolidated financial statements include estimation and discounting of cash flows for impairment testing, estimates of future earnings used for the recognition of deferred tax assets, estimates and assumptions used in the determination of the allowance for doubtful accounts, estimates of the useful lives of equipment and leaseholds and estimating the fair value of the debt and equity components of the convertible debentures. Significant judgments applied in the preparation of these consolidated financial statements include the determination of cash generating units ("CGU") and the determination of the functional currency of the Company s U.S. operations. The determination of CGUs (refer to Note 3(f)) was based on management s judgment in assessing shared i nfrastructure, independence of revenue earned, operating asset utilization, geographic proximity and exposure to similar risks. The determination of the Company s U.S. operations functional currency was based on management s judgment in assessing the denomination of the currency in which sales are priced, expenses are incurred and the operations reside. Information about accounting policies that have the most significant effect on the amounts recognized in the consolidated financial statements is included in Note 3. 8

11 3. Significant Accounting Policies The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements and in preparing the opening IFRS statement of financial position as at January 1, 2010 for the purposes of the transition to IFRS. The accounting policies have also been applied consistently by Company entities. a) Basis of Consolidation These consolidated financial statements include the accounts of the Company and its subsidiaries. Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Company obtains control, and continue to be consolidated until the date that such control ceases to exist. The financial statements of the subsidiaries are prepared for the same reporting period as the Company, using consistent accounting policies. All significant intercompany balances and transactions have been eliminated on consolidation. b) Business Combinations The acquisitions of businesses are accounted for using the acquisition method. The consideration for each acquisition is measured at the aggregate of the fair values, at the date of exchange, of assets obtained, liabilities incurred or assumed, and equity instruments issued by the Company in exchange for control of the acquired business. The acquired business identifiable assets, liabilities and contingent liabilities are recognized at their fair values at the acquisition date. To the extent the fair value of consideration paid exceeds the fair value of the net identifiable tangible and intangible assets, goodwill is recognized. To the extent the fair value of consideration paid is less than the fair value of net identifiable tangible assets and intangible assets, the excess is recognized in income. Goodwill is not depreciated, but is measured at cost less any accumulated impairment losses. Transaction costs incurred in connection with a business combination, such as legal fees, due diligence fees and other professional and consulting fees are expensed as incurred. c) Translation of Foreign Currency i. Foreign Currency Transactions Transactions in foreign currencies are translated to the respective functional currencies of the Company and its subsidiaries at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between amortized cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortized cost in foreign currency translated at the exchange rate at the end of the reporting period. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value was determined. Foreign currency differences arising on retranslation are recognized in income or loss. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. 9

12 ii. Foreign Operations The assets and liabilities of foreign operations are translated to Canadian dollars at exchange rates applicable at each reporting date. The income and expenses of foreign operations are translated to Canadian dollars at exchange rates at the dates of the transactions. Foreign currency translation differences are recognized in other comprehensive income in the cumulative translation account. Foreign exchange gains or losses arising from a monetary item 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 other comprehensive income in the cumulative translation account. d) Financial Instruments The Company s financial assets and liabilities are classified into the following categories: Classification Measurement Cash Loans and receivables Amortized cost Trade and other receivables Loans and receivables Amortized cost Trade and other payables Other financial liabilities Amortized cost Loans and borrowings Other financial liabilities Amortized cost Revolving credit facility Other financial liabilities Amortized cost Convertible debentures Other financial liabilities Amortized cost The Company has not classified any of its financial instruments as held-to-maturity, at fair value through income or loss, or available for sale. i. Non-derivative Financial Assets The Company initially recognizes loans and receivables and deposits on the date that they originated. All other financial assets (including assets designated at fair value through income or loss) are recognized initially on the trade date at which the Company becomes a party to the contractual provisions of the instrument. The Company derecognizes a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Company is recognized as a separate asset or liability. Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Company has a legal right to offset the amounts and intends either to settle on a net basis or to realize the asset and settle the liability simultaneously. The Company s non-derivative financial assets are comprised solely of loans and receivables. Loans and receivables Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition loans and receivables are measured at amortized cost using the effective interest method, less any impairment losses. Loans and receivables comprise trade and other receivables. 10

13 ii. Non-derivative Financial Liabilities The Company initially recognizes debt securities issued and subordinated liabilities on the date that they are originated. All other financial liabilities (including liabilities designated at fair value through income or loss) are recognized initially on the trade date at which the Company becomes a party to the contractual provisions of the instrument. The Company derecognizes a financial liability when its contractual obligations are discharged or cancelled or expire. Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Company has a legal right to offset the amounts and intends either to settle on a net basis or to realize the asset and settle the liability simultaneously. The Company has the following non-derivative financial liabilities: loans and borrowings, revolving credit facility, and trade and other payables. Such financial liabilities are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition these financial liabilities are measured at amortized cost using the effective interest method. iii. Share Capital Common shares are classified as equity. Incremental costs directly attributable to the issue of common shares and share options are recognized as a deduction from equity, net of any tax effects. e) Equipment and leasehold improvements Equipment and leasehold improvements are recorded at cost less accumulated depreciation and accumulated impairment losses. Depreciation on additions and disposals is prorated from the month of purchase or disposal. Depreciation is recognized in income or loss on a declining balance basis over the estimated useful lives of each part of an item of Equipment and leasehold improvements, since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. Leased assets are depreciated over the shorter of the lease term and their useful lives unless it is reasonably certain that the Company will obtain ownership by the end of the lease term. Depreciation is recorded annually at the following depreciation rates: Asset Method Rate Trucks, trailers and automotive equipment declining balance 15% Equipment, furniture and fixtures declining balance 15-30% Computer equipment declining balance 30% Assets under finance lease declining balance 15% Cost includes expenditures that are directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the assets to a working condition for their intended use, the costs of dismantling and removing the items and restoring the site on which they are located, and borrowing costs on qualifying assets for which the commencement date for capitalization is on or after January 1, When parts of an item of equipment and leasehold improvements have different useful lives, they are accounted for as separate items (major components) of equipment and leasehold improvements. The cost of day -to-day servicing of equipment and leasehold improvements are recognized in direct operating expenses. Gains and losses on disposal of an item of equipment and leasehold improvements are determined by comparing the proceeds from disposal with the 11

14 carrying amount of equipment and leasehold improvements, and are recognized net within direct operating expenses in the consolidated statement of comprehensive income. Depreciation methods, useful lives and residual values are reviewed at the end of each reporting period and adjusted if appropriate. No revisions to estimates were made in 2011 or f) Goodwill Goodwill is the amount that results when the fair value of consideration transferred for an acquired business exceeds the net fair value of the identifiable assets, liabilities and contingent liabilities recognized. When the Company enters into a business combination, the acquisition method of accounting is used. Goodwill is assigned, as of the date of the business combination, to CGU or groups of CGU s that are expected to benefit from the business combination. Each cash generating unit represents the lowest level at which goodwill is monitored for internal management purposes and it is never larger than an operating segment. Following initial recognition, goodwill is measured at cost less accumulated impairment losses. Goodwill is reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. Impairment is determined by assessing the recoverable amount of the cash-generating unit or units to which the goodwill relates. Where the recoverable amount of the cash-generating unit or units is less than the carrying amount, an impairment loss is recognized. g) Intangible Assets Intangible assets acquired individually or as part of a group of other assets are initially recognized and measured subsequently at cost less accumulated depreciation and accumulated impairment losses. The cost of a group of intangible assets acquired in a transaction, including those acquired in a business combination that meet the specified criteria for recognition apart from goodwill, is allocated to the individual assets acquired based on their relative fair values. Amortization is recognized in income or loss based on the amortization methods noted below over the estimated useful lives of the intangible asset, other than goodwill, from the date that they are available for use, since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. The estimated useful life and depreciation method are reviewed annually and adjusted if appropriate. The estimated useful lives and amortization methods of the Company s intangible assets are as follows: Assets Method Useful life Customer relationships In proportion to undiscounted future cash flows 4 to 8 years Non-competition agreements Straight-line 3 to 6 years h) Leases At inception of an arrangement, the Company determines whether such an arrangement contains a lease. Leasing contracts are classified as either finance or operating leases. The Company separates payments and other consideration required by such an arrangement into those for the lease and those for other elements on the basis of their relative fair values at inception. Leases where 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 finance expense and the reduction of the outstanding liability. The finance 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 liability. 12

15 Assets which are subject to operating leases are not recognized in the Company s statement of financial position. Payments made under operating leases are recognized in income or 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 and are recognized on a straight-line basis over the term of the lease. Contingent lease payments are accounted for in the period in which they are incurred. i) Impairment i. Financial Assets (including loans and receivables) A financial asset not carried at fair value through income or loss is assessed at each reporting date to determine whether there is objective evidence that it is impaired. A financial asset is impaired if objective evidence indicates that a loss event has occurred after the initial recognition of the asset, and that the loss event had a negative effect on the estimated future cash flows of that asset that can be estimated reliably. Objective evidence that financial assets are impaired can include default or delinquency by a debtor, restructuring of an amount due to the Company on terms that the Company would not otherwise consider, indications that a debtor or issuer will enter bankruptcy, or the disappearance of an active market for a security. In addition, for an investment in an equity security, a significant or prolonged decline in its fair value below its cost is objective evidence of impairment. The Company considers evidence of impairment for receivables at both a specific asset and collective level. All individually significant receivables are assessed for specific impairment. All individually significant receivables found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified. Receivables that are not individually significant are collectively assessed for impairment by grouping together receivables with similar risk characteristics. In assessing collective impairment the Company uses historical trends of the probability of default, timing of recoveries and the amount of loss incurred, adjusted for management s judgement as to whether current economic and credit conditions are such that the actual losses are likely to be greater or less than suggested by historical trends. An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the asset s original effective interest rate. Losses are recognized in income or loss and reflected in an allowance account against receivables. Interest on the impaired asset continues to be recognized through the unwinding of the discount. When a subsequent event causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through income or loss. ii. Non-financial Assets The carrying amounts of the Company s non-financial assets, other than deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset s recoverable amount is estimated. For goodwill, and intangible assets that have indefinite useful lives or that are not yet available for use, the recoverable amount is estimated at least each year at the same time, December 31. Recoverability is measured by comparing the carrying amount of the asset or the CGU to which the asset belongs to the higher of its greater of its value in use and its fair value less costs to sell ( "FVLCS"). Value in use is calculated using the estimated discounted future cash flows expected to be generated by the asset or its CGU. The Company estimates FVLCS based upon current prices for similar assets. If the carrying amount of the asset, or its respective CGU, exceeds its estimated recoverable amount, the difference is recognized as an impairment charge. The Company does not have corporate assets that cannot be directly allocated to the CGUs. 13

16 An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognized in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized. Impairment losses are recognized in the statement of comprehensive income. Impairment losses recognized in respect of CGUs are allocated first to reduce the carrying amounts of any goodwill allocated to the CGU and then to reduce the carrying amount of other assets in the CGU on a pro rata basis. j) Employee Benefits i. Termination Benefits Termination benefits are recognized as an expense when the Company is committed demonstrably, without realistic possibility of withdrawal, to a formal detailed plan to either terminate employment before the normal retirement date, or to provide termination benefits as a result of an offer made to encourage voluntary redundancy. Termination benefits for voluntary redundancies are recognized as an expense if the Company has made an offer of voluntary redundancy, it is probable that the offer will be accepted, and the number of acceptances can be estimated reliably. If benefits are payable more than 12 months after the reporting period, then they are discounted to their present value. ii. Employee Benefits A defined contribution plan is a post-employment benefit plan under which an entity pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution pension plans are recognized as an employee benefit expense in income or loss in the periods during which services are rendered by employees. The Canada Pension Plan and any Registered Retirement Savings Plan contributions correspond to a defined contribution plan. Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognized for the amount expected to be paid under short-term cash bonus or profitsharing plans if the Company has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee, and the obligation can be estimated reliably. iii. Share-based Payment Transactions k) Provisions The Company accounts for stock-based compensation expense for warrants and stock options granted to employees, officers and directors in accordance with the fair value based method of accounting using the Black-Scholes model. Under the fair value method, the fair value of options and warrants are calculated at the date of grant and that value is recorded as compensation expense over the vesting periods of those grants, with a corresponding increase to contributed surplus less an estimated forfeiture rate. The forfeiture rate is based on past experience of actual forfeitures. When options are exercised, the proceeds received by the Company, along with the amount in contributed surplus, will be credited to share capital. A provision is recognized if, as a result of a past event, the Company has a present legal or constructive obligation that can be estimated reliably, and it is probable 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 unwinding of the discount is recognized as finance cost. 14

17 A provision for onerous contracts is recognized when the expected benefits to be derived by the Company from a contract are lower than the unavoidable cost of meeting its obligations under contract. The provision is measured at the present value of the lower of expected cost of terminating the contract and the expected net cost of continuing with the contract. Before a provision is established, the Company recognizes any impairment loss on the assets associated with that contract. l) Revenue Revenue comprises the fair value of the consideration received or receivable for the sale of services in the ordinary course of the Company s activities. Revenue is shown net of value-added tax, returns, rebates and discounts and after eliminating sales within the Company. Contract terms generally do not include provisions for post-service obligations. The Company recognizes revenue when the service is provided to the customer, amount of revenue can be reliably measured, it is probable that future economic benefits will flow to the Company, and persuasive evidence of an arrangement exists. In certain circumstances, the Company uses the percentage of completion method to account for revenue earned on service contracts. In such cases, when the outcome of a contract can be estimated reliably, revenue is recognized as the services are rendered. Expenses are recognized as incurred unless they create an asset related to future activity. When the outcome of a contract cannot be estimated reliably, revenue is recognized only to the extent of costs incurred that are likely to be recoverable. An expected loss on a contract is recognized immediately. Work in progress represents the gross unbilled amount expected to be collected from customers for service contract work performed to date. m) Finance Costs Finance costs comprise interest expense on borrowings, impairment losses on financial assets and amortization of transaction costs and discounts associated with borrowings. Borrowing costs that are not directly attributable to the acquisition, construction or production of a qualifying asset are recognized in income or loss using the effective interest method. n) Foreign Exchange Foreign currency gains and losses are reported on a net basis. o) Income Tax Income tax expense is comprised of current and deferred tax. Current tax and deferred tax are recognized in income or loss except to the extent that it relates to a business combination, or items recognized directly in equity or in other comprehensive income. Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Deferred tax is recognized in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognized for the following temporary differences: the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable income or loss, and differences relating to investments in subsidiaries to the extent that it is probable that they will not reverse in the foreseeable future. In addition, deferred tax is not recognized for taxable temporary differences arising on the initial recognition of goodwill. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable 15

18 right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously. A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future taxable income will be available against which they can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized. p) Earnings per Share The Company presents basic and diluted earnings per share ("EPS") data for its common shares. Basic EPS is calculated by dividing the income or loss attributable to common shareholders of the Company by the weighted average number of common shares outstanding during the period, adjusted for own shares held. Diluted EPS is determined by adjusting the income or loss attributable to common shareholders and the weighted average number of common shares outstanding, adjusted for own shares held, for the effects of all dilutive potential common shares, which are comprised of share options and warrants granted. q) Segment Reporting An operating segment is a component of the Company that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Company s other components. The Company operates in one dominant industry segment, which involves the transportation of products, materials, and equipment required for the exploration, development and production of petroleum resources. The operating results of this segment 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. r) New Standards and Interpretations not yet Adopted A number of new standards, and amendments to standards and interpretations, are not yet effective for the year ended December 31, 2011, and have not been applied in preparing these consolidated financial statements. Management is currently reviewing the standards to determine the impact on the Company s financial statements. IFRS 9 Financial Instruments In December 2011 the International Accounting Standards Board ("IASB") issued an amendment to defer the mandatory effective date of IFRS 9 to annual periods beginning on or after January 1, The new standard specifies that financial assets will be classified into one of two categories on initial recognition: financial assets measured at amortized cost or financial assets measured at fair value. Gains or losses on remeasurement of financial assets measured at fair value will be recognized in income or loss, except that for an investment in an equity instrument which is not held-fortrading. The classification and measurement of financial liabilities remain generally unchanged; however, fair value changes attributable to changes in the credit risk for financial liabilities designated at fair value through income or loss are to be recorded in other comprehensive income unless the treatment would create or enlarge an accounting mismatch in income or loss. These amounts are not subsequently reclassified to income or loss. The Company is currently reviewing the standard to determine the impact on the consolidated financial statements. Amendments to IAS 28 Investments in Associates and Joint Ventures In May 2011 the IASB revised IAS 28 to correspond to the guidance provided in IFRS 10 Consolidated Financial Statements and IFRS 11 Joint Arrangements. The amendments to IAS 28 are effective for annual periods beginning on or after January 1, The extent of the impact of adoption of the amendments has not yet been determined. IFRS 10 Consolidated Financial Statements In May 2011 the IASB issued IFRS 10 which establishes principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities. IFRS 10 replaces the consolidation requirements 16

19 in SIC-12 Consolidation Special Purpose Entities and IAS 27 Consolidated and Separate Financial Statements and is effective for annual periods beginning on or after January 1, Earlier application is permitted. IFRS 10 builds on existing principles by identifying the concept of control as the determining factor in whether an entity should be included within the consolidated financial statements of the parent company. The standard provides additional guidance to assist in the determination of control where this is difficult to assess. The extent of the impact of adoption of IFRS 10 has not yet been determined. IFRS 11 Joint Arrangements In May 2011 the IASB issued IFRS 11 which provides an improved reflection of joint arrangements by focusing on the rights and obligations of the arrangement, rather than its legal form (as is currently the case). The standard addresses inconsistencies in the reporting of joint arrangements by requiring a single method to account for interests in jointly controlled entities. IFRS 11 replaces IAS 31 Interest in Joint Ventures and is effective for annual periods beginning on or after January 1, The extent of the impact of adoption of IFRS 11 has not yet been determined. IFRS 12 Disclosure of Interests in Other Entities In May 2011 the IASB issued IFRS 12. This is a new and comprehensive standard on disclosure requirements for all forms of interests in other entities, including subsidiaries, joint arrangements, associates and unconsolidated structured entities. IFRS 12 is effective for annual periods beginning on or after January 1, Earlier application is permitted. The extent of the impact of adoption of IFRS 12 has not yet been determined. IFRS 13 Fair Value Measurement In May 2011 the IASB issued new guidance on fair value measurement and disclosure requirements for IFRS. The harmonization of fair value measurement and disclosure requirements internationally is expected to improve consistency and reduce complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across IFRS. The amendments are effective for annual periods beginning on or after January 1, The Company intends to adopt IFRS 13 prospectively in its financial statements for the annual period beginning on January 1, The extent of the impact of adoption of IFRS 13 has not yet been determined. IAS 1 Presentation of Financial Statements Presentation of items of Other Comprehensive Income (OCI) In June 2011 the IASB issued amendments to IAS 1 which will require entities to present separately items of OCI that may be reclassified to income or loss in the future from items that would never be reclassified to income or loss. Consequently, those entities that present items of OCI before related tax effects will have to allocate the aggregated tax amount between these categories. The amendments to IAS 1 are effective for annual periods beginning on or after July 1, The extent of the impact of adoption of the amendments has not yet been determined. Amendments to IAS 32 and IFRS 7, Offsetting Financial Assets and Liabilities In December 2011 the IASB issued amendments to IAS 32 to clarify that an entity currently has a legally enforceable right to set-off if that right is: not contingent on a future event; and enforceable both in the normal course of business and in the event of default, insolvency or bankruptcy of the entity and all counterparties. The amendments to IAS 32 also clarify when a settlement mechanism provides for net settlement or gross settlement that is equivalent to net settlement. The amendments to IFRS 7 contain new disclosure requirements for financial assets and liabilities that are: offset in the statement of financial position; or subject to master netting arrangements or similar arrangements. The effective date for the amendments to IAS 32 is annual periods beginning on or after January 1, 2014 and the effective date for the amendments to IFRS 7 is annual periods beginning on or after January 1, The extent of the impact of adoption of the amendments has not yet been determined. 17