WAVEFRONT TECHNOLOGY SOLUTIONS INC.

Transcription

1 Unaudited Interim Condensed Consolidated Financial Statements of WAVEFRONT TECHNOLOGY SOLUTIONS INC. Second Quarter Ended February 29, 2012 and February 28, 2011 TABLE OF CONTENTS INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Condensed consolidated statements of financial position 1 Condensed consolidated statements of comprehensive loss 2 Condensed consolidated statements of changes in equity 3 Condensed consolidated statements of cash flows 4 NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANICAL STATEMENTS Note 1 Nature of operations and corporate information 5 Note 2 Basis of presentation and adoption of IFRS 5 Note 3 Significant accounting policies 6 Note 4 Property, plant and equipment 6 Note 5 Intangible assets 7 Note 6 Jointly controlled assets 9 Note 7 Share capital 9 Note 8 Expenses by nature 12 Note 9 Loss per share 13 Note 10 Net change in non-cash working capital items 14 Note 11 Related party transactions 14 Note 12 Segmented reporting 15 Note 13 Transition to IFRS 19 Note 14 Seasonality of operations 23

2 Interim Condensed Consolidated Statements of Financial Position ASSETS February 29, August 31, Note CURRENT ASSETS Cash and cash equivalents $ 18,125,679 $ 24,510,593 Trade and other receivables 1,067,559 1,045,043 Inventories 404, ,925 Prepaid expenses 486, ,298 20,084,597 26,071,859 NON-CURRENT ASSETS Deposits 91, ,880 Property, plant and equipment 4 5,522,329 5,357,777 Intangible assets 5 4,489, ,774 Goodwill 1,222,217 1,222,217 LIABILITIES AND SHAREHOLDERS' EQUITY $ 31,409,748 $ 33,254,507 CURRENT LIABILITIES Trade accounts payable and accrued liabilities 1,083,754 1,044,298 NON-CURRENT LIABILITIES Decommissioning liability 291, ,541 1,375,445 1,422,839 SHAREHOLDERS' EQUITY Share capital 7a 66,421,609 66,320,249 Contibuted Surplus 7d 8,437,426 8,112,618 Deficit (44,824,732) (42,601,199) 30,034,303 31,831,668 $ 31,409,748 $ 33,254,507 The accompanying notes are an integral part of these interim condensed consolidated financial statements Page 1 of 23

3 Interim Condensed Consolidated Statements of Comprehensive Loss For the six months ended For the three months ended February 29, February 28, February 29, February 28, Note (Note 13) (Note 13) Revenue $ 2,506,557 $ 1,801,664 $ 1,395,002 $ 937,753 Cost of sales (excluding amortization, depreciation and depletion) 8 551, , , ,858 General and administrative 8 2,400,673 1,900,245 1,333, ,694 Sales and Marketing 8 1,117,608 1,002, , ,556 Amortization, depreciation, and depletion 567, , , ,214 Research and development 8 188, ,310 73,197 93,675 4,825,770 4,233,484 2,646,997 1,850,997 OPERATING LOSS (2,319,213) (2,431,820) (1,251,995) (913,244) Financing costs (11,393) (29,104) (28,036) (16,822) Financing income 107, ,404 47,660 65,140 Net finance income 95,680 97,300 19,624 48,318 NET LOSS AND COMPREHENSIVE LOSS $ (2,223,533) $ (2,334,520) $ (1,232,371) $ (864,926) LOSS PER COMMON SHARE Basic and diluted 9 $ (0.03) $ (0.03) $ (0.01) $ (0.01) The accompanying notes are an integral part of these interim condensed consolidated financial statements Page 2 of 23

4 Interim Condensed Consolidated Statements of Changes in Shareholders' Equity Six months ended February 29, 2012 and February 28, 2011 Share-based Share Payment Note Capital Reserve Deficit Total Balance at September 1, 2010 $ 66,288,967 $ 7,477,519 $ (38,125,985) $ 35,640,501 Net loss and comprehensive loss - - (2,334,520) (2,334,520) Share-based payments - 316, ,015 Stock options exercised 26,039 (11,388) - 14,650 Balance at February 28, ,315,006 7,782,146 (40,460,505) 33,636,645 Net loss and comprehensive loss - - (2,140,694) (2,140,694) Stock options exercised 5,243 (2,294) - 2,949 Recognition of shared-based payments - 332, ,766 Balance at August 31, ,320,249 8,112,618 (42,601,199) 31,831,668 Net loss and comprehensive loss - - (2,223,533) (2,223,533) Stock options exercised 101,360 (46,261) - 55,099 Recognition of shared-based payments - 371, ,069 Balance at February 29, 2012 $ 66,421,609 $ 8,437,426 $ (44,824,732) $ 30,034,303 The accompanying notes are an integral part of these interim condensed consolidated financial statements Page 3 of 23

5 Interim Condensed Consolidated Statements of Cash Flow For the six months ended For the three months ended February 29, February 28, February 29, February 28, Note OPERATING ACTIVITIES Net loss $ (2,223,533) $ (2,334,520) $ (1,232,371) $ (864,926) Items not affecting cash Amortization, depreciation, depletion and accretion expenses 552, , , ,366 Share-based payments 7d 371, , , ,850 Loss (gain) on disposal of property, plant and equipment 4,825 (4,891) 248 2,636 (1,295,023) (1,598,129) (735,681) (492,074) Net change in non-cash working capital items 10 (330,513) (767,143) (237,291) (471,699) Cash used in operating activities (1,625,536) (2,365,272) (972,972) (963,773) INVESTING ACTIVITIES Purchase of property, plant and equipment (707,026) (331,362) (220,224) (298,430) Proceeds on disposal of property, plant and equipment 3,738 9, Additions to intangible assets (4,111,189) (51,288) (4,099,424) (23,302) Cash used in investing activities (4,814,477) (372,970) (4,319,640) (320,852) FINANCING ACTIVITIES Proceeds from options exercised 55,099 14,650 1,099 - Cash provided by financing activities 55,099 14,650 1,099 - NET DECREASE IN CASH AND CASH EQUIVALENTS (6,384,914) (2,723,592) (5,291,513) (1,284,625) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 24,510,593 29,442,956 23,417,192 28,003,989 CASH AND CASH EQUIVALENTS, END OF PERIOD $ 18,125,679 $ 26,719,364 $ 18,125,679 $ 26,719,364 Supplementary Information Interest paid 2,156 2, The accompanying notes are an integral part of these interim condensed consolidated financial statements Page 4 of 23

6 1. NATURE OF OPERATIONS AND CORPORATE INFORMATION Wavefront Technology Solutions Inc. (the Corporation ) is incorporated under the Canada Business Corporations Act. The Corporation s principal business activities involve the licensing and utilization of the Corporation s patented process for the enhancement and improvement of oil recovery and oil well stimulation ( Powerwave TM ), and the optimization of groundwater remediation ( Primawave TM ) approaches. In the oil sector the Corporation s strategy is to leverage its intellectual property through licenses of the technology to service providers, and to provide site licenses to oil producers. In the environmental sector the Corporation s strategy is to provide site licenses to those involved in groundwater clean-up. 2. BASIS OF PRESENTATION AND ADOPTION OF IFRS The Corporation prepares its consolidated financial statements in accordance with Canadian generally accepted accounting principles ( GAAP ) as set out in the Handbook of the Canadian Institute of Chartered Accountants ( CICA Handbook ). In 2010, the CICA Handbook was revised to incorporate International Financial Reporting Standards ( IFRS ), and now requires publicly accountable enterprises to apply such standards effective for years beginning on or after January 1, In these financial statements, the term Canadian GAAP refers to Canadian GAAP before the adoption of IFRS. These interim consolidated financial statements have been prepared in accordance with IFRS applicable to the preparation of interim financial statements, including International Accounting Standards (IAS) 34, Interim Financial Reporting, and IFRS 1, First Time Adoption of IFRS. Subject to certain transition elections, the Corporation has consistently applied the same accounting policies in its opening IFRS statement of financial position at September 1, 2010, and throughout all periods presented, as if these policies had always been in effect. Consequently, comparative figures for fiscal 2011 have been restated to give effect to these changes. Note 13 discloses the impact of the transition to IFRS on the Corporation s reported equity as at February 28, 2011, including the nature and effect of significant changes in accounting policies from those used in the Corporation s consolidated financial statements for the year ended August 31, The policies applied in these interim consolidated financial statements are based on IFRS issued and outstanding as of April 24, 2012, the date the Board of Directors approved the financial statements. Any subsequent changes to IFRS that are given effect in the Company s annual financial statements for the year ending August 31, 2012, could result in restatement of these interim consolidated financial statements, including the transition adjustments recognized on change-over to IFRS. Page 5 of 23

7 The interim consolidated financial statements should be read in conjunction with the Corporation s Canadian GAAP annual financial statements for the year ended August 31, 2011, and the Corporation s interim financial statements for the quarter ended November 30, 2011 that were also prepared in accordance with IFRS applicable to interim financial statements. 3. SIGNIFICANT ACCOUNTING POLICES These interim consolidated financial statements have been prepared using the same accounting policies as set out in the financial statements of the Corporation for the period ended November 30, 2011, except for the following: Foreign currency translation Translation of foreign entities The functional currency of the Corporation s foreign subsidiary is the currency of the primary economic environment in which it operates. During the reporting period, the Corporation s foreign entity s functional currency changed to that of the US dollar. The change in the translation of the foreign entities did not have a material impact on the Corporation s financial statements. 4. PROPERTY, PLANT AND EQUIPMENT Oilfield Computer, property, Tools automotive plant and and and office Leasehold As at February 29, 2012 equipment Equipment equipment improvements Total Cost Balance at August 31, 2011 $ 1,131,173 $ 5,846,398 $ 808,133 $ 562,021 $ 8,347,725 Additions 72, ,795 30,653 11, ,026 Disposals - (56,511) - - (56,511) Impairments (72,655) (72,655) Balance at February 29, ,131,173 6,381, , ,944 8,925,585 Accumulated depreciation and impairment Balance at August 31, 2011 (305,265) (2,087,536) (573,832) (23,315) (2,989,948) Additions (38,486) (365,971) (27,667) (29,132) (461,256) Disposals - 47, ,948 Balance at February 29, 2012 (343,751) (2,405,559) (601,499) (52,447) (3,403,256) Net book value Balance at February 29, 2012 $ 787,422 $ 3,976,123 $ 237,287 $ 521,497 $ 5,522,329 Page 6 of 23

8 Oilfield Computer, property, Tools automotive plant and and and office Leasehold As at August 31, 2011 equipment Equipment equipment improvements Total Cost Balance at September 1, 2010 $ 1,131,173 $ 5,343,871 $ 810,133 $ - $ 7,285,177 Additions - 847, , ,021 1,536,746 Disposals - (345,336) (128,862) - (474,198) Balance at August 31, ,131,173 5,846, , ,021 8,347,725 Accumulated depreciation and impairment Balance at September 1, 2010 (238,002) (1,497,353) (629,863) - (2,365,218) Additions (67,263) (731,419) (69,919) (23,315) (891,916) Disposals - 141, , ,186 Balance at August 31, 2011 (305,265) (2,087,536) (573,832) (23,315) (2,989,948) Net book value Balance at August 31, 2011 $ 825,908 $ 3,758,862 $ 234,301 $ 538,706 $ 5,357,777 Property, plant and equipment includes tools and equipment under construction of $273,306 (February 28, $757,226), which is not being depreciated. Depreciation expense for the six months ended February 29, 2012 was $461,724 (February 28, $398,078). 5. INTANGIBLE ASSETS Trade Fully-paid As at February 29, 2012 Patents name up license Total Cost Balance at August 31, 2011 $ 609,092 $ - $ 106,990 $ 716,082 Additions 4,092,562 18,627-4,111,189 Balance at February 29, ,701,654 18, ,990 4,827,271 Accumulated depreciation and impairment Balance at August 31, 2011 (199,604) - (32,704) (232,308) Amortization (103,173) - (2,382) (105,555) Balance at February 29, ,777-35, ,863 Net book value Balance at February 29, 2012 $ 4,398,877 $ 18,627 $ 71,904 $ 4,489,408 Page 7 of 23

9 Fully-paid As at August 31, 2011 Patents up license Total Cost Balance at September 1, 2010 $ 523,736 $ 106,990 $ 630,726 Additions 85,356-85,356 Balance at August 31, , , ,082 Accumulated depreciation and impairment Balance at September 1, 2010 (151,636) (27,776) (179,412) Amortization (47,968) (4,928) (52,896) Balance at August 31, 2011 (199,604) (32,704) (232,308) Net book value Balance at August 31, 2011 $ 409,488 $ 74,286 $ 483,774 Amortization expense for the six months ended February 29, 2012 was $105,555 (February 28, $ 25,748). Effective December 23, 2011, the Corporation acquired four patents and the trade name of Vortech Inc., a privately-held Texas company that provided specialized tools for the clean-up of oil well bore damage, stimulation of production and injection and drilling operations. Consideration was US $4 million (CAD $4,083,281) cash. Based on analysis by an independent professional, the fair values ascribed to the acquired intangible assets were as follows: Fair Value Indefinite-life intangible asset Trade name $ 18,627 Finite-life intangible assets Pulsating jet tool patent 2,703,891 Self adjusting nozzle patent 1,158,810 Pulsating bit sub patent 155,573 Internal slip connector patent 46,380 $ 4,083,281 Page 8 of 23

10 6. JOINTLY CONTROLLED ASSETS The Corporation conducts its oilfield activities under the terms of production sharing contracts which it considers jointly-controlled operations. The Corporation has included its share of the following: Six months ended Year ended February 29, August 31, Current assets $ 33,411 $ 2,900 Non-current assets 787, ,433 Current liabilities - - $ 820,827 $ 813,333 Six months ended Three months ended February 29, February 28, February 29, February 28, Revenue $ 107,176 $ 82,401 $ 50,609 $ 32,674 Expenses 65,810 48,818 34,956 22,087 $ 41,366 $ 33,583 $ 15,653 $ 10,587 At February 29, 2012, there were no capital commitments for the Corporation s jointly controlled assets. 7. SHARE CAPITAL The Corporation s issued share capital is as follows: a) Issued common shares The changes in the Corporation s outstanding common shares were as follows: Number Stated capital Balance at August 31, ,844,574 $ 66,320,249 Stock options exercised (1)(2) 101, ,360 Balance at February 29, ,946,240 $ 66,421,609 Page 9 of 23

11 (1) (2) The 101,666 incentive stock options exercised during the six months ended February 29, 2012, were at prices of $0.54 and $0.64 for gross proceeds of $55,100. Subsequent to the reporting period, a director of the Corporation exercised 10,000 incentive stock options at a price of $0.97 for gross proceeds of $9,700. b) Warrants A summary of the status of the Corporation s share purchase warrants is presented below: Number Exercise price Outstanding at August 31, ,219,085 $2.75 Exercised - - Granted - - Outstanding at February 29, ,219,085 $2.75 Subsequent to the reporting period all 5,219,085 share purchase warrants expired un-exercised. c) Stock-based compensation plan The Corporation maintains an Employee, Director, Officer and Consultant Stock Option Plan under which the Corporation may grant incentive stock options for up to 10,771,583 shares of the Corporation at an exercise price equal to or greater than the market price of the Corporation s stock at the date of grant. All stock options awarded are exercisable for a period of five years and vest in equal tranches at three (3) month intervals over a period of eighteen (18) months. Movements in stock options during the period A summary of the status of the Corporation s Stock Option Plan is presented below: Number Weighted average exercise price Outstanding at August 31, ,581,500 $ 1.15 Granted 415, Exercised (101,666) 0.54 Cancelled (61,000) 1.65 Expired - - Outstanding at February 29, ,833,834 $ 1.10 Page 10 of 23

12 Fair value of stock options granted during the period The fair value for the compensation costs of stock options issued to both employees and nonemployees were calculated using the Black-Scholes option pricing model resulting in an additional charge to general and administrative expense with a corresponding increase in share-based payment reserve, assuming the following: Inputs into the model Six months ended February 29, 2012 Share price at date of grant $ 0.66 & $ 0.73 Exercise price $ 0.66 & $ 0.73 Risk-free rate (based on 5 year Government of Canada bond) 1.43% & 1.24% Expected volatility 93.98% & 93.49% Dividend rate 0% Expected life 5 years Weighted average value of options granted during the period $ 0.47 & $ 0.52 The weighted average fair value of stock options granted during the six months ended February 29, 2012 was $0.45 (year ended August 31, $0.90). During the six months ended February 29, 2012, the Corporation incurred $371,069 (six months ended February 28, $316,015) in compensation expense relating to outstanding stock options. The amounts computed according to the Black-Scholes pricing model may not be indicative of the actual values realized upon the exercise of the stock options by the holders. Stock options exercised during the period The 101,666 incentive stock options exercised during the six months ended February 29, 2012, were at exercised at prices of $0.54 and $0.66 for gross proceeds of $55,100. d) Contributed surplus Balance at August 31, 2011 $ 8,112,618 Share-based payment 371,069 Stock options exercised (46,261) Balance at February 29, 2012 $ 8,437,426 Page 11 of 23

13 8. EXPENSES BY NATURE Cost of sales Cost of sales includes the following select information: Six months ended Three months ended February 29, February 28, February 29, February 28, Wages, and other short-term employment benefits $ 299,890 $ 367,457 $ 247,883 $ 236,068 Inventory consumed and direct third party costs 308, , ,308 (62,749) Share-based payments 11,271 8,495 4,625 4,849 Write-down (gain) of property, plant and equipment (72,655) - (72,655) - Loss (gain) on sale of property, plant and equipment 4,825 10, ,690 $ 551,538 $ 560,543 $ 307,409 $ 195,858 General and Administrative General and administrative expense includes the following select information: Six months ended Three months ended February 29, February 28, February 29, February 28, Wages, and other short-term employment benefits $ 773,571 $ 604,307 $ 407,390 $ 319,932 Office 453, , , ,767 Professional 371, , , ,754 Consultant 230, , ,069 69,103 Share-based payments 167, ,532 85,191 94,991 Repairs and maintenance 166, ,949 94,774 42,363 Vehicle 122, ,119 66,814 50,165 Listing and public company expenses 112,912 75,848 75,806 33,446 Miscellaneous 1, Bad debts 789 3,075 2,145 (4,091) $ 2,400,673 $ 1,900,245 $ 1,333,408 $ 909,694 Page 12 of 23

14 Sales and Marketing Sales and marketing expenses include the following select information: Six months ended Three months ended February 29, February 28, February 29, February 28, Advertising, printing and promotion $ 578,363 $ 495,634 $ 308,492 $ 192,324 Wages, and other short-term employment benefits 353, , , ,248 Share-based payments 170,013 93,383 85,812 56,446 Seminars and trade shows 16,188 15,198 7,195 3,538 $ 1,117,608 $ 1,002,411 $ 608,331 $ 446,556 Research and Development Research and development expenses include the following select information: Six months ended Three months ended February 29, February 28, February 29, February 28, Direct materials $ 95,750 $ 190,190 $ 14,708 $ 20,553 Wages, and other short-term employment benefits 70, ,516 47,258 57,559 Share-based payments 22,145 27,604 11,231 15,563 $ 188,671 $ 339,310 $ 73,197 $ 93, LOSS PER SHARE The following table sets forth the details of the denominator used for the computation of the basic and diluted loss per share for the periods February 29, 2012 and February 28, 2011: February 29, February 28, (# of shares) Basic weighted average shares outsanding during period 82,847,871 82,833,538 Dilutive effect of "in-the-money" share purchase warrants - - Dilutive effect of "in-the-money" stock options 362,255 1,231,009 Diluted weighted average shares during the period 83,210,126 84,064,547 Page 13 of 23

15 10. NET CHANGE IN NON-CASH WORKING CAPITAL ITEMS Six months ended Three months ended February 29, February 28, February 29, February 28, Working capital changes Trade and other receivables $ (22,516) $ (286,508) $ (230,800) $ (301,358) Prepaid expenses (344,162) (92,227) (106,922) (2,362) Inventories (30,974) (115,007) 63,310 (30,613) Deposits 27,683 3,619 1,759 6,626 Trade accounts payable and accrued liabilities 39,456 (277,020) 35,362 (143,992) $ (330,513) $ (767,143) $ (237,291) $ (471,699) 11. RELATED PARTY TRANSACTIONS Revenue transactions The Corporation has entered into a twelve month Powerwave TM License agreement to provide up to three Powerwave TM licenses and systems at a rate of $2,400 per month per Powerwave TM license, plus any associated installation fees with a company whose executive officer is also a director of the Corporation. There is a 100% discount to the Powerwave TM licensing fee for the first four months of the agreement. The monetary transaction is measured at the exchange amount. For the six months ended February 29, 2012, the Corporation recorded $86,400 (six months ended February 28, $15,605) in revenue related to Powerwave TM tool installation and licensing fees, with $37,800 (August 31, $15,120) included in trade and other receivables. Page 14 of 23

16 12. SEGMENTED REPORTING The Corporation determines its reportable segments based on the structure of its operations, which are focused in two principal business segments - the deployment of technology and equipment to third parties in return for rental and royalty income and the development of oil and gas properties utilizing the Corporation s Powerwave TM technology and equipment. Operating segments Six months ended February 29, 2012 Equipment Oil and Corporate and gas and technology properties other Total External revenues $ 2,380,166 $ 126,391 $ - $ 2,506,557 Inter-segment revenues ,380, ,391-2,506,557 Costs of good sold 500,238 51, ,538 General and administrative 1,421,900 44, ,837 2,400,673 Sales and marketing 660, ,202 1,117,608 Amortization, depreciation and deplection 525,074 38,957 3, ,280 Research and development 188, ,671 3,296, ,193 1,394,288 4,825,770 OPERATING LOSS (916,123) (8,802) (1,394,288) (2,319,213) Financing costs (9,322) (2,071) - (11,393) Financing income 1, , ,073 Net financing income (7,789) (2,071) 105,540 95,680 NET LOSS AND COMPREHENSIVE LOSS (923,912) (10,873) (1,288,748) (2,223,533) Segemented Assets 12,972, ,746 17,664,916 31,409,748 Capital Expenditures 4,810,945-7,270 4,818,215 Page 15 of 23

17 Six months ended February 28, 2011 Equipment Oil and Corporate and gas and technology properties other Total External revenues $ 1,695,857 $ 105,807 $ - $ 1,801,664 Inter-segment revenues ,695, ,807-1,801,664 Costs of good sold 480,507 80, ,543 General and administrative 1,576,064 32, ,721 1,900,245 Sales and marketing 635, ,149 1,002,411 Amortization, depreciation - and deplection 377,027 42,370 11, ,975 Research and development 339, ,310 3,408, , ,448 4,233,484 OPERATING LOSS (1,712,313) (49,059) (670,448) (2,431,820) Financing costs (17,088) (12,016) - (29,104) Financing income 1, , ,404 Net financing income (15,701) (12,016) 125,017 97,300 NET LOSS AND COMPREHENSIVE LOSS (1,728,014) (61,075) (545,431) (2,334,520) Segemented Assets 7,995, ,391 26,004,406 34,893,048 Capital Expenditures 346,451-36, ,650 Segment assets comprise of property, plant and equipment, intangible assets, goodwill, inventories and debtors. Assets owned by head office and employed by a segment are allocated to that segment. Capital expenditures comprises of additions to property, plant and equipment and intangible assets. Geographic segments Revenue for six months ended Segment assets February 29, February 28, February 29, February 28, Canada $ 2,003,771 $ 1,408,022 $ 30,875,884 $ 34,432,606 United States 355, , , ,442 International 146,832 42, $ 2,506,557 $ 1,801,664 $ 31,409,748 $ 34,893,048 Page 16 of 23

18 For its geographic segments, the Corporation has allocated assets based on their physical location and revenue based on the location of the customer. Significant customers During the six months ended February 29, 2012, the Corporation recorded revenue from 47 customers (six months ended February 28, customers). Sales in the six months ended February 29, 2012 from the top three customers amounted to $649,057, $329,092 and $304,110, which represented 25.9%, 13.1% and 12.1% respectively, of total revenue. Sales in the six months ended February 28, 2011 from the top three customers amounted to $536,609, $429,777 and $212,231, which represented 32.1%, 25.7% and 12.7% respectively, of total revenue. Three months ended February 29, 2012 Equipment Oil and Corporate and gas and technology properties other Total External revenues $ 1,335,328 $ 59,674 $ - $ 1,395,002 Inter-segment revenues ,335,328 59,674-1,395,002 Costs of good sold 283,233 24, ,409 General and administrative 809,674 24, ,735 1,333,408 Sales and marketing 336, , ,331 Amortization, depreciation and deplection 304,374 18,654 1, ,652 Research and development 73, ,197 1,806,844 67, ,324 2,646,997 OPERATING LOSS (471,516) (8,155) (772,324) (1,251,995) Financing costs (26,365) (1,671) - (28,036) Financing income ,978 47,660 Net financing income (25,683) (1,671) 46,978 19,624 NET LOSS AND COMPREHENSIVE LOSS (497,199) (9,826) (725,346) (1,232,371) Segemented Assets 12,972, ,746 17,664,916 31,409,748 Capital Expenditures 4,312,378-7,270 4,319,648 Page 17 of 23

19 Three months ended February 28, 2011 Equipment Oil and Corporate and gas and technology properties other Total External revenues $ 894,018 $ 43,735 $ - $ 937,753 Inter-segment revenues ,018 43, ,753 Costs of good sold 161,790 34, ,858 General and administrative 844,332 25,335 40, ,694 Sales and marketing 258, , ,556 Amortization, depreciation and deplection 190,404 8,992 5, ,214 Research and development 93, ,675 1,548,901 68, ,701 1,850,997 OPERATING LOSS (654,883) (24,660) (233,701) (913,244) Financing costs (6,355) (10,467) - (16,822) Financing income ,242 65,140 Net financing income (5,457) (10,467) 64,242 48,318 NET LOSS AND COMPREHENSIVE LOSS (660,340) (35,127) (169,459) (864,926) Segemented Assets 7,995, ,391 26,004,406 34,893,048 Capital Expenditures 306,528-15, ,732 Segment assets comprise of property, plant and equipment, intangible assets, goodwill, inventories and debtors. Assets owned by head office and employed by a segment are allocated to that segment. Capital expenditures comprises of additions to property, plant and equipment and intangible assets. Geographic segments Revenue for three months ended February 29, February 28, Canada $ 1,154,586 $ 745,138 United States 154, ,812 International 86,242 35,803 $ 1,395,002 $ 937,753 Page 18 of 23

20 For its geographic segments, the Corporation has allocated assets based on their physical location and revenue based on the location of the customer. 13. TRANSITION TO IFRS Impact of adoption of IFRS accounting policies The following provides a summary of the most significant changes in policy resulting in differences in transitioning the consolidated financial statements from Canadian GAAP to IFRS. Note that only material adjustments are discussed qualitatively below and that a reader may not be able to directly tie numbers with a specific letter reference to the various reconciliations of the consolidated financial statements on the preceding pages. IFRS 2 - Share-based Payments Canadian GAAP - Forfeitures of awards are recognized as they occur. IFRS - An estimate is required at the time the award is granted of the number of awards expected to vest, which is revised if subsequent information indicates that actual forfeitures are likely to differ from the estimate. As a result, the Corporation adjusted its expense to reflect this difference. IAS 1 - Presentation of Financial Statements At the Transition Date, the Corporation made several changes to the presentation of its consolidated statements of financial position. These changes are primarily the result of renaming accounts as a result of differences in IFRS terminology. Also, IFRS permits the components of net loss to be classified by either their function or nature. The Corporation has chosen to present by function. Under Canadian GAAP, the income and expenses were presented as a hybrid between function and nature. IAS 37 Provisions, contingent liabilities and contingent assets Canadian GAAP - Decommissioning liabilities were discounted at a weighted average creditadjusted risk-free interest rate of 9.49%. IFRS - Under IAS 37, the estimated cash flows related to decommissioning liabilities have been risk adjusted, therefore, the provision has been discounted at a risk-free rates of 1.21% and 3.47% based on Government of Canada long-term benchmark bonds. Page 19 of 23

21 This resulted in a $58,763 increase to the decommissioning liabilities with a $42,464 increase to the Corporation's deficit at the September 1, 2010 Transition Date. This further resulted in an $42,464 increase to deferred income tax assets with a corresponding increase to the Corporation's valuation allowance at the Transition Date. Under Canadian GAAP, accretion expense was calculated through the application of a creditadjusted risk-free to the Corporation s discounted decommissioning liabilities. IAS 37 requires the application of a risk-free rate in determining the amount of accretion to be included with the finance costs in the statement of comprehensive loss for the period. This difference along with changes to decommissioning liabilities resulted in a decrease to accretion expense included as finance costs in the consolidated comprehensive statement of income loss of $24,724 for the year ended August 31, 2011 with a commensurate decrease to deficit. Such changes further resulted in an increase to decommissioning liabilities of $33,215 as at August 31, 2011 and an increase to property, plant and equipment of $15,475 at August 31, As explained in Note 2, these financial statements are interim consolidated financial statements prepared by the Corporation under IFRS. The Corporation s transition date to IFRS was September 1, 2010 and, accordingly, the Corporation has prepared its opening IFRS balance sheet as at that date. In preparing its opening IFRS balance sheet and comparative information for fiscal 2011, the Corporation has adjusted amounts previously reported in financial statements prepared in accordance with previous Canadian GAAP ( previous GAAP ). The differences identified are detailed in the following sections, which include reconciliations of equity and comprehensive income for comparative periods as well as explanations for the adjustments. In preparing its opening IFRS consolidated statement of financial position, the Corporation has adjusted amounts reported previously in consolidated financial statements prepared in accordance with Canadian GAAP. An explanation of how the transition from Canadian GAAP to IFRS has affected the Corporation s financial position, financial performance and cash flows is set out in the following tables and the notes that accompany the tables. Page 20 of 23

22 Reconciliation of consolidated statement of financial position as at February 28, 2011 As at February 28, 2011 Canadian Canadian Transition GAAP IFRS IFRS IFRS GAAP accounts notes balance adjustments balance accounts ASSETS ASSETS CURRENT ASSETS CURRENT ASSETS Cash and cash equivalents $ 26,719,364 $ - $ 26,719,364 Cash and cash equivalents Accounts receivable 1,151,600-1,151,600 Trade and other receivables Prepaid expenses 175, ,928 Prepaid expenses Inventory 214, ,976 Inventories 28,261,868-28,261,868 NON-CURRENT ASSETS NON-CURRENT ASSETS Deposits 99,954-99,954 Deposits Property, plant and equipment 4,832,155 15,965 4,848,120 Property, plant and equipment Intangible assets 476, ,854 Intangible assets Goodwill 1,222,217-1,222,217 Goodwill $ 34,893,048 $ 15,965 $ 34,909,013 LIABILITIES AND LIABILITIES AND SHAREHOLDERS' EQUITY SHAREHOLDERS' EQUITY CURRENT LIABILITIES CURRENT LIABILITIES Accounts payable and Trade accounts payable and accrued liabilities $ 896,475 $ - $ 896,475 accrued liabilities Provisions - - Provisions 896, ,475 NON-CURRENT LIABILITIES NON-CURRENT LIABILITIES Asset retirement obligation 330,405 45, ,892 Decommissioning liability 1,226,880 45,487 1,272,367 SHAREHOLDERS' EQUITY SHAREHOLDERS' EQUITY Share capital 66,315,006-66,315,006 Share capital Contributed surplus 7,782,145-7,782,145 Share-based payment reserve Deficit (40,430,983) (29,522) (40,460,505) Deficit 33,666,168 (29,522) 33,636,646 $ 34,893,048 $ 15,965 $ 34,909,013 Reconciliation of equity as at February 28, 2011 As at February 28, 2011 Canadian Canadian Transition GAAP IFRS IFRS IFRS GAAP accounts notes balance adjustments balance accounts SHAREHOLDERS' EQUITY SHAREHOLDERS' EQUITY Share capital 66,315,006-66,315,006 Share capital Contributed surplus 7,782,145-7,782,145 Share-based payment reserve Deficit (40,430,983) (29,522) (40,460,505) Deficit 33,666,168 (29,522) 33,636,646 $ 33,666,168 $ (29,522) $ 33,636,646 Page 21 of 23

23 Reconciliation of consolidated statement of comprehensive loss for the six and three months ended February 28, 2011 Six months ended February 28, 2011 Three months ended February 28, 2011 Canadian Canadian Canadian Transition GAAP IFRS IFRS IFRS GAAP IFRS IFRS IFRS IFRS GAAP accounts notes balance adjustments reclassification balance balance adjustments reclassification balance accounts Revenue $ - $ - $ 1,801,664 $ 1,801,664 $ - $ - $ 937,753 $ 937,753 Revenue Service revenue and royalties 1,695,857 - (1,695,857) - 894,018 - (894,018) - Production revenue and operator fees, net of taxes and royalties 105,807 - (105,807) - 43,735 - (43,735) - Interest and other 126,404 - (126,404) - 65,140 - (65,140) - 1,928,068 - (126,404) 1,801,664 1,002,893 - (65,140) 937,753 Cost of sales , , , ,858 Cost of sales General and administrative General and administrative expenses 2,199,508 - (299,263) 1,900,245 1,056,152 - (146,458) 909,694 expenses Selling, marketing and travel 510, ,579 1,002, , , ,556 Selling and marketing Direct costs 476,066 - (476,066) - 153,368 - (153,368) - Amortization, depreciation, Amortization, depreciation, and depletion expenses 438,209 (11,533) 4, , ,050 (5,684) 5, ,214 and depletion expenses Stock-based compensation 316,015 - (316,015) - 170,850 - (170,850) - Research and development 229, , ,310 33,469-60,206 93,675 Research and development Write-down of property, plant and equipment Listing and public company fees 75,848 - (75,848) - 33,446 - (33,446) - Foreign exchange loss (gain) 31,945 (1,409) (30,536) - 22,578 - (22,578) - Interest expense 2,867 - (2,867) (92) - Loss (gain) on disposal of property, plant and equipment (4,891) - 4,891-2,636 - (2,636) - Subtotal 4,275,530 (12,942) (29,104) 4,233,484 1,873,503 (5,684) (16,822) 1,850,997 OPERATING LOSS (2,347,462) 12,942 (97,300) (2,431,820) (870,610) 5,684 (48,318) (913,244) OPERATING LOSS (ii) - - (29,104) (29,104) - - (16,822) (16,822) Finance costs , , ,140 65,140 Finance income ,300 97, ,318 48,318 Net finance income NET LOSS AND NET LOSS AND COMPREHENSIVE LOSS $ (2,347,462) $ 12,942 $ - $ (2,334,520) $ (870,610) $ 5,684 $ - $ (864,926) COMPREHENSIVE LOSS LOSS PER COMMON SHARE LOSS PER COMMON SHARE Basic and diluted $ (0.03) $ - $ - $ (0.03) $ (0.01) $ - $ - $ (0.01) Basic and diluted Page 22 of 23

24 14. SEASONALITY OF OPERATIONS Oilfield services offered by the Corporation are seasonable and related to the product offering and geographical extent to which products were offered for sale. The Corporation s pump and bailer product offering, in relation to oilfield services, are rental and sale of downhole equipment. At present, the target geographical area of the product offering is Alberta and Saskatchewan. Due to temperature influences on ground conditions, the months of December, March and April have lower activities. The Corporation focuses its resources on Powerwave TM and Primawave TM technologies. There are no known seasonal fluctuations in regards to oil production, where the Corporation has mineral rights or enters into licensing or usage agreements in either targeted implementation sectors. As such, management believes that this seasonality of operations will have minimal affects moving forward. Page 23 of 23