GasFrac Energy Services Inc.
TSX : GFS

GasFrac Energy Services Inc.

November 07, 2011 09:15 ET

GASFRAC Announces Third Quarter 2011 Results

CALGARY, ALBERTA--(Marketwire - Nov. 7, 2011) - GASFRAC Energy Services Inc. (TSX:GFS)

Dwight Loree, Chief Executive Officer commented "I am pleased to announce that revenue in the third quarter increased 116% to $57.4 million as compared to $26.6 million in the third quarter of 2010. Further, EBITDA increased to $11.0 million from $4.9 million and net income to $5.9 million ($0.10 per share) from $2.3 million ($0.06 per share) representing increases of 125% and 155% respectively.

Late in the quarter we signed a long-term contract with Husky and began operations under that contract in the fourth quarter. We anticipate that this contract will initially utilize two of the four sets of equipment currently in Canada and expect more sets will be required as work under the contract expands.

During the second quarter two sets of equipment were mobilized to GASFRAC's operations in Texas. Since that time we have performed fracturing operations for several companies in a number of different formations, including a six week project in Colorado. Revenues from US operations have grown consistently each month from $0.6 million in May to $12.9 million in October.

GASFRAC also announced the appointment of senior oilfield services executive Zeke Zeringue as the company's Chief Executive Officer. Details of this appointment and Mr. Zeringue's biography are contained in a separate press release issued today.

Management's Discussion and Analysis

September 30, 2011

Management's discussion and analysis ("MD&A") of the financial condition and the results of operations should be read in conjunction with the September 30, 2011 unaudited interim consolidated financial statements and the December 31, 2010 audited consolidated financial statements of GASFRAC Energy Services Inc. ("GASFRAC" or the "Company"), together with the accompanying notes. The interim consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") and with International Accounting Standard 34, "Interim Financial Reporting", as issued by the International Accounting Standard Board. Previously, the Company prepared its interim and Annual Consolidated Financial Statements in accordance with Canadian generally accepted accounting principles ("GAAP").

Readers should also refer to the "Forward-Looking Statements" legal advisory at the end of this MD&A. This MD&A has been prepared using information that is current to November 7, 2011.

All references to dollar amounts are in Canadian dollars. Figures are in '000s except share and per share data or as otherwise noted.

Unless the context otherwise requires, all references in this MD&A to "we", "us" or "our" mean GASFRAC.

Business of GASFRAC

GASFRAC was incorporated on February 13, 2006 in Canada under the Business Corporations Act in the Province of Alberta. The Company is an oil and gas well fracturing company that has developed new technology, the "LPG Fracturing Process", to enable wells to be fractured safely with LPG, more specifically propane and butane. The Company has four wholly-owned subsidiaries, GASFRAC Services GP Inc., GASFRAC Energy Services Limited Partnership, GASFRAC Luxembourg Finance (a Luxembourg incorporated entity), and GASFRAC Inc. (a U.S. incorporated entity).

Changes in Accounting Policies

On January 1, 2011, GASFRAC adopted International Financial Reporting Standards ("IFRS") for financial reporting purposes, using a transition date of January 1, 2010. The interim financial statements for the nine months ended September 30, 2011, including required comparative information, have been prepared in accordance with IFRS 1, First-time Adoption of International Financial Reporting Standards, and with International Accounting Standard ("IAS") 34, Interim Financial Reporting, as issued by the International Accounting Standards Board ("IASB"). Previously, the Company prepared its interim and annual consolidated financial statements in accordance with Canadian generally accepted accounting principles ("Previous GAAP"). The 2010 comparative information has been prepared in accordance with IFRS. The adoption of IFRS has not had an impact on the Company's operations, strategic decisions or cash flow. Further information on the IFRS impacts is provided in the Accounting Policies and Estimates sections of this MD&A, including reconciliations between Previous GAAP and IFRS Net Income, and other financial metrics.

Change of functional currency

As the operations of the Company's wholly owned United States ("U.S.") subsidiary continue to gain significance relative to the operations of the Company as a whole the Board of Directors has concluded that the most appropriate functional currency of the United States subsidiary is the United States Dollar, the change was effective for the Company April 1, 2011. This reflects the fact that as of the effective date of this change the majority of the subsidiary's pricing for fracing services is influenced by the U.S. dollar, the competitive and regulatory environment of the subsidiary are mainly influenced by the U.S. and the U.S. Dollar now largely influences labor, material and other costs of providing fracing services. The previous functional currency of the subsidiary was the Canadian Dollar.

Comparative Quarterly Financial Information

Three months ended: September 30, 2011 September 30, 2010
Revenue 57,437 26,590
Operating expenses 42,318 18,046
Selling, general and administrative expenses 4,423 3,202
EBITDA(1) 10,960 4,874
Net income 5,911 2,318
Net income per share – basic 0.10 0.06
Weighted average number of shares – basic 61,567,001 41,244,816
Treatments 191 137
Revenue per treatment 191 194

(1) Defined under Non-IFRS Measures

Third Quarter Highlights

Financial Overview

Revenue

Revenue for the quarter increased to $57.4 million from $26.6 million in 2010. The increase in revenue is comprised of increased activity in Canada, a full quarter of activity in the USA and completion of services and materials to Husky upon the signing of a long-term contract in late September.

Revenue from US operations in the quarter was $12.6 million as compared to $5.6 million in 2010. During the second quarter of 2011, the Company moved equipment to Texas, USA and commenced operations there. Initially customers scheduled work to use the Company's technology on selected wells to determine the impact on production in those particular formations and conditions resulting in $1.8 million of revenue in the second quarter. Revenues from US operations have increased each month from initial equipment delivery, growing from $0.6 million in May to $7.9 million in September. During the third quarter, the Company earned revenues from nine customers and fracturing activity was performed in several different formations including the Canyon Sands, Wolfcamp, Navarro, Morrow, Eagle Ford and Williams Fork. A total of 34 fracturing treatments were performed.

While the effects of Spring Breakup continued through the month of July, revenues from the Canadian operations were $44.8 million as compared to $21.0 million in the same quarter of 2010. This increase represents improved activity in August and September (after the impact of Spring Breakup in the Company's operating locations in July) as well as the completion of services and sale of materials to Husky of $20.9 million. Late in September, the Company signed a long-term agreement with Husky and commenced operations under this contract in the fourth quarter.

During the quarter two customers accounted for approximately 47% of the Company's revenue and year to date the Company had three customers who each accounted for more than 10% of our revenues individually. These three customers accounted for approximately 43% of the Company's total revenue for the nine months ended September 30, 2011.

Operating Expense

Operating expense increased to $42.3 million (73.7% of revenue) during Q3 2011 from $18.0 million (67.9% of revenue) in Q3 2010. The increase in total operating costs reflects the increased revenue generating capacity and related costs required to support this capacity.

Selling, General and Administrative ("SG&A") Expense

SG&A expense increased to $4.4 million (7.7% of revenue) during Q3 2011 from $3.2 million (12% of revenue) in Q3 2010. The SG&A costs include $0.2 million of professional fees related to completion of the Company's debt syndication.

Amortization

Amortization increased to $4.6 million during Q3 2011 from $1.8 million in Q3 2010. The increase is due to an increase in operating property and equipment put in place to increase the Company's revenue generation capacity.

EBITDA

EBITDA increased to $11.0 million during Q3 2011 from $4.9 million in Q3 2010. The EBITDA increase reflects the Company's increased revenue.

Net Income

Net income increased to $5.9 million during Q3 2011 from $2.3 million during Q3 2010. The increased profit includes $1.0 million of foreign exchange gain. The Company's tax rate was 7.3% (2010 – 15.9%) reflecting the benefits of previously unrecognized tax loss carry forwards from US operations.

Summary of Quarterly Results

Mar. 31
2010
Jun. 30
2010
Sep. 30
2010
Dec. 31
2010
Mar. 31
2011
Jun 30
2011
Sep. 30
2011
Revenue 15,906 13,323 26,590 41,087 30,452 14,170 57,437
Net income (loss) 1,729 (1,282 ) 2,318 1,995 (2,515 ) (7,768 ) 5,911
Net income (loss) per share – basic 0.05 (0.04 ) 0.06 0.04 (0.04 ) (0.13 ) 0.10
EBITDA (1) 3,937 439 4,874 5,814 66 (5,566 ) 10,960
Capital expenditures 6,247 7,430 35,871 33,897 38,941 22,995 32,920
Working capital (2) 17,640 13,330 41,781 118,346 79,069 49,946 33,998
Shareholders' equity 85,957 85,758 151,606 259,445 258,217 251,374 262,436

(1) Defined under Non-IFRS Measures

(2) Working capital is defined as current assets less current liabilities

Liquidity and Capital Resources

Three months ended September 30, 2011 2010
Cash Provided by (used in)
Operating Activities $ (18,738 ) $ (2,940 )
Financing Activities 1,151 62,147
Investing Activities (20,200 ) (13,319 )
$ (37,787 ) $ 45,888

As at September 30, 2011 the Company had $34.0 million of working capital compared to $118.3 million at December 31, 2010. The decrease in working capital is primarily due to investing in capital assets of $89.2 million during the nine months ended September 30, 2011.

As at September 30, 2011, the Company had approximately $68 million of capital commitments as part of the 2011 capital program. The Company anticipates being able to fund these capital expenditures through cash on hand, operating cash flows and financing which may include current or future debt facilities or equity or a combination thereof.

Operating

The Company's funds provided by operations (as defined under Non-IFRS Measures) was $11.7 million for Q3 2011 compared to $5.3million in Q3 2010. The increase is largely due to the improved revenues and resulting profit improvement for the quarter as compared to 2010.

Financing

Net cash provided by financing activities for Q3 2011 was $1.1 million compared to $62.1 million during Q3 2010. The funds in 2011 resulted from the exercise of stock options. In the third quarter of 2010 the Company completed a private placement of 13,000,000 shares at $5.00 per share for net proceeds after share issuance cost of $61.6 million.

During the quarter, the Company completed a new bank syndication for a $10 million operating facility and a $90 million revolving facility (see Note 11 of the interim consolidated financial statements). No amounts were drawn on these facilities as at September 30, 2011. The Company is in compliance with all its debt covenants.

Investing

For Q3 2011 the Company invested $28.2 million in property and equipment to add revenue producing capacity as compared to $35.9 million in Q3 2010. For the nine month period to September 30, 2011 the Company has invested $89.2 million in property and equipment as compared to $49.6 million for the same period in 2010.

Accounting Policies and Estimates

Adoption of IFRS

The Company has prepared its September 30, 2011 Interim Consolidated Financial Statements in accordance with IFRS 1, First-time Adoption of International Financial Reporting Standards, and with IAS 34, Interim Financial Reporting, as issued by the IASB. Previously, the Company prepared its financial statements in accordance with Previous GAAP. The adoption of IFRS has not had a material impact on the Company's operations, strategic decisions, cash flow and capital expenditures.

The Company's IFRS accounting policies are provided in Note 3 to the Interim Consolidated Financial Statements. In addition, Note 15 to the Interim Consolidated Financial Statements presents reconciliations between the Company's 2010 Previous GAAP results and the 2010 IFRS results. The reconciliations include the Consolidated Balance Sheets as at January 1, 2010, June 30, 2010 and December 31, 2010, and Consolidated Statements of Earnings, Comprehensive (Loss) Income and Changes in Shareholders' Equity for the three and nine month periods ended September 30, 2010 and for the twelve months ended December 31, 2010.

The following provides summary reconciliations of GASFRAC's 2010 Previous GAAP and IFRS results.

MAR. 31
2010
JUN. 30
2010
SEP. 30
2010
DEC. 31
2010
Annual
2010
Net income (loss) – Previous GAAP 1,672 (1,266 ) 2,585 2,062 5,053
Operating expense re: leases 33 62 32 42 169
Stock based compensation (129 ) (247 ) (494 ) (342 ) (1,212 )
Amortization 159 174 200 239 772
Interest income / expense (6 ) (5 ) (5 ) (6 ) (22 )
Net income (loss) – IFRS 1,729 (1,282 ) 2,318 1,995 4,760

Accounting Policy Changes

Leases

Previous GAAP considered the leases to be of a capital nature based on certain quantifiable criteria. Based on the criteria, GASFRAC concluded that the leases on the light vehicles were operating leases in nature.
Under IFRS, with the absence of the quantitative criteria provided by Previous GAAP, we determined that qualitatively, the risks and rewards of the lease reside with GASFRAC and as such, treated it as a financing lease.

Amortization

With the conversion to IFRS, GASFRAC componentized the field equipment into each of the separate components that made up the equipment. We then assessed the useful life and residual value for each of these components. Based on this assessment, certain amortization rates were modified.

Stock based compensation

Under Previous GAAP, GASFRAC accounted for certain stock based compensation plans whereby the obligation and compensation costs were accrued over the vesting period using the intrinsic value method. The intrinsic value of a share unit is the amount by which the Company's share price exceeds the exercise price of the share unit.

For certain stock-based compensation plans, IFRS requires share-based compensation be fair valued using an option pricing model, such as the Black-Scholes model, at each reporting date. Also, under IFRS, each tranche in an award is considered a separate award with its own vesting period. Further, GASFRAC adjusted the volatility of the unvested options and warrants that were issued when GASFRAC was not publically traded from 0% to 52% as IFRS does not permit the use of 0% volatility.

Accordingly, upon transition to IFRS, the Company recorded a fair value adjustment of $891 as at January 1, 2010 to increase the stock based compensation with a corresponding charge to retained earnings. GASFRAC elected to use the IFRS 1 exemption whereby the stock based compensation that had vested or settled prior to January 1, 2010 were not required to be retrospectively restated. Subsequent fair value adjustments are recorded through stock based compensation.

As part of the 2010 qualifying transaction, the amount of consideration in excess of the fair market value of assets received was offset against share issue costs under Previous GAAP. Under IFRS, the amount of consideration in excess of the fair market value of assets received was listed as an unidentifiable service cost and expensed to sales, general and administrative expense. The amount of the adjustment was $245.

Internal Controls Over Financial Reporting

There have been no changes in GASFRAC's internal controls over financial reporting during the period ended September 30, 2011, which have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

During the first quarter of 2011, GASFRAC completed an evaluation of the Company's internal controls under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures, as defined in National Instrument 52-109. Based on the evaluation, the Company's management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company's disclosure controls and procedures were designed to provide a reasonable level of assurance over the disclosure of material information, and are effective as of September 30, 2011.

Off-Balance Sheet Arrangements

The Company is not party to any off balance sheet arrangements or transactions.

Non-IFRS Measures

Certain supplementary measures in this MD&A do not have any standardized meaning as prescribed under IFRS and, therefore, are considered non-IFRS measures. These measures have been described and presented in order to provide shareholders and potential investors with additional information regarding the Company's financial results, liquidity and ability to generate funds to finance its operations. These measures may not be comparable to similar measures presented by other entities, and are further explained as follows:

EBITDA is defined as net income before interest income and expense, taxes, depreciation, amortization and non-controlling interest. EBITDA is presented because it is frequently used by securities analysts and others for evaluating companies and their ability to service debt.

EBITDA was calculated as follows:

Three months ended September 30 , Nine months ended September 30 ,
2011 2010 2011 2010
Net income (loss) 5,911 2,318 (4,372 ) 2,765
(Deduct) Add back:
Interest (income) expense, net (31 ) (24 ) (416 ) (20 )
Amortization 4,617 1,827 11,092 4,944
Deferred income tax (benefit) expense 463 753 (829 ) 1,567
EBITDA 10,960 4,874 5,475 9,256

Funds provided by operations is defined as cash and cash equivalents provided by (used for) operating activities before the net change in non-cash operating working capital from operating activities. Funds provided by operations is a measure that provides shareholders and potential investors with additional information regarding the Company's liquidity and its ability to generate funds to finance its operations. Management utilizes these measures to assess the Company's ability to finance operating activities and capital expenditures.

Funds provided by operations were calculated as follows:

Three months ended September 30 , Nine months ended September 30 ,
2011 2010 2011 2010
Cash and cash equivalents (used for) provided by operating activities (18,738 ) (2,940 ) (3,461 ) 917
Add back:
Net changes in non-cash working capital from operating activities 30,439 8,219 11,683 9,251
Funds provided by operations 11,701 5,279 8,222 10,168

Outlook

We expect the North American pressure pumping market will remain strong in 2012. While there is some concern as to the level of capital budgets for exploration and development companies in 2012 we expect that expenditures will be flat to marginally down year over year. Further, capital budgets are expected to continue to move to oil and liquids-rich reservoirs and away from natural gas. This trend is positive for GASFRAC as the vast majority of our activity is in oil and liquids-rich reservoirs. Further, development in these reservoirs tends to be service intensive, often requiring multi-stage fracturing.

We currently have six sets of equipment operating (four in Canada and two in the USA). We anticipate delivery of the four sets currently in build in the first quarter of 2012. The expanded fleet size will allow us to have a greater geographic spread of equipment and revenue in 2012 helping to alleviate the extent of the impact of Spring Breakup. Further, the work under the recently signed contract with Husky is pad fracturing which will allow us to continue a portion of this work through breakup.

In Canada, we anticipate dedicating two sets of equipment to the Husky contract which is focused on their development at Ansell. This work should achieve high utilization levels due to the scope of work and the fact that it involves pad fracturing (reducing movement time for the equipment). The preliminary development plan in place for this liquids-rich formation at Ansell in west central Alberta includes the potential drilling of up to 2,600 Cardium and deeper Mannville wells which are mainly comprised of horizontal wells. We further anticipate that demand in the deep basin will remain strong.

As in Canada, more drilling activity in the USA is being focused on oil and liquids rich gas. From initial mobilization of equipment to the US in the second quarter we have experienced consistent monthly revenue growth from $0.6 million in May to $12.9 million in October. To date in the US we have performed fracturing services for 15 customers in numerous reservoirs. This has allowed us to introduce our LPG fracturing technology to a wide range of potential customers for their assessment. We remain confident that customer acceptance of our LPG fracturing technology will continue to grow based on results. While we have not to date signed any long term contracts with US customers, this will be a focus for us in 2012.

Forward-Looking Statements

This document contains certain statements that constitute forward-looking statements under applicable securities legislation. All statements other than statements of historical fact are forward-looking statements. In some cases, forward-looking statements can be identified by terminology such as "may", "will", "should", "expect", "plan", "anticipate", "believe", "estimate", "predict", "potential", "continue", or the negative of these terms or other comparable terminology. These statements are only as of the date of this document and we do not undertake to publicly update these forward looking statements except in accordance with applicable securities laws. These forward looking statements include, among other things:

  • expectations that GASFRAC's innovative technology will provide GASFRAC with opportunities to expand GASFRAC's market share in Alberta and British Columbia;
  • estimates of additional investment required to complete ongoing capital projects;
  • expectations of securing financing for additional capital expenditures for 2011 and beyond;
  • expectations of the duration of spring breakup in Canada in 2012;
  • expectations that activity levels in Canada will remain strong and that oil and liquids rich gas drilling will offset declines in dry gas drilling;
  • expectations as to volume of work pursuant to long-term contract with Husky;
  • expectations as to capital development programs of major customers;
  • expectations that GASFRAC has or can obtain sufficient funding to meet its capital plan;
  • expectations that additional operating equipment will be delivered and provide GASFRAC the ability to service demand for large multi-stage treatments;
  • expectations that full benefit of equipment additions will be seen in 2012;
  • expectations as to the ability to recruit and train sufficient personnel to meet staffing requirements;
  • assumption that environmental protection requirements will not have a significant impact on GASFRAC's operations or capital budget;
  • expectations as to GASFRAC's future market position in the industry;
  • expectations as to the supply of raw materials;
  • expectations as to the pricing of GASFRAC's services;
  • expectations as to the timing of additional property and equipment in Canada and the USA;
  • expectations as to the potential for GASFRAC's services in the United Sates;
  • expectations of fracturing industry pricing and the pricing of GASFRAC services in North America in 2011;
  • expectations of oil and natural gas commodity prices in 2012;
  • expectations of the amount of net fracturing horsepower being added to the North American market in 2012 and its impact on GASFRAC's service prices;

These statements are only predictions and are based on current expectations, estimates, projections and assumptions, which we believe are reasonable but which may prove to be incorrect and therefore such forward-looking statements should not be unduly relied upon. In addition to other factors and assumptions which may be identified in this document, assumptions have been made regarding, among other things, industry activity; effect of market conditions on the demand for the Company's services; the ability to obtain qualified staff, equipment and services in a timely manner; the effect of current plans; the timing of capital expenditures and receipt of added equipment operating capacity; future oil and natural gas prices and the ability of the Company to successfully market its services.

By its nature, forward-looking information involves numerous assumptions, known and unknown risks and uncertainties, both general and specific, that contribute to the possibility that the predictions, forecasts, projections and other forward-looking statements will not occur. These risks and uncertainties include: changes in drilling activity; fluctuating oil and natural gas prices; general economic conditions; weather conditions; regulatory changes; the successful development and execution of technology; customer acceptance of new technology; the potential of competing technologies by market competitors; the availability of qualified staff, raw materials and propery and equipment.

GASFRAC ENERGY SERVICES INC.

CONDENSED INTERIM CONSOLIDATED

FINANCIAL STATEMENTS

(unaudited)

FOR THE NINE MONTHS ENDED

SEPTEMBER 30, 2011

(Canadian Dollars)

As at:Sep 30, 2011 Dec 31, 2010Jan 1, 2010
(Note 15)(Note 15)
ASSETS
CURRENT ASSETS
Cash and cash equivalents$13,089 $98,701$11,643
Accounts receivable 34,230 24,500 9,469
Inventory 8,729 7,018 5,499
Prepaid expenses 1,023 6,839 519
57,071 137,058 27,130
PROPERTY and EQUIPMENT (Note 4) 221,819 138,051 61,557
LONG-TERM DEPOSITS 7,879 3,176 1,790
INTANGIBLE AND OTHER ASSETS (Note 5) 799 420 358
DEFERRED INCOME TAX BENEFIT (Note 8) 64 - 775
$287,632 $278,705$91,610
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities$22,253 $14,987$7,617
Unearned revenue (Note 7) - 3,485 -
Current portion of lease obligations (Note 6) 820 240 121
23,073 18,712 7,738
LEASE OBLIGATIONS (Note 6) 2,123 180 179
DEFERRED INCOME TAX LIABILITY (Note 8) - 368 -
2,123 548 179
SHAREHOLDERS' EQUITY
SHARE CAPITAL (Note 9) 255,388 251,573 81,293
CONTRIBUTED SURPLUS 3,620 3,522 2,811
CUMULATIVE TRANSLATION DIFFERENCES 3,450 - -
RETAINED EARNINGS (22) 4,350 (411)
262,436 259,445 83,693
$287,632 $278,705$91,610
See accompanying Notes to Consolidated Financial Statements.
Commitments (Note 10)
On behalf of the Board: Dwight Loree, Director
Gerald Roe, Director
Three Months Ended: Nine Months Ended:
Sep 30, 2011 Sep 30, 2010 Sep 30, 2011 Sep 30, 2010
(Note 15) (Note 15)
REVENUE$57,437 $26,590 $102,059 $55,819
OTHER INCOME
Interest 93 29 518 36
Foreign exchange gain 963 - 780 -
Business interruption claim - - - 2,030
58,493 26,619 103,357 57,885
EXPENDITURES
Operating 42,318 18,046 83,264 40,386
Selling, general and administrative 4,423 3,202 11,780 7,233
Stock based compensation 699 381 2,320 892
Amortization 4,617 1,827 11,092 4,944
Foreign exchange loss - 87 - 82
Finance cost 62 5 102 16
52,119 23,548 108,558 53,553
INCOME (LOSS) BEFORE INCOME TAX 6,374 3,071 (5,201) 4,332
Deferred income tax (expense) benefit (463) (753) 829 (1,567)
NET INCOME (LOSS) 5,911 2,318 (4,372) 2,765
Translation differences 3,597 - 3,450 -
COMPREHENSIVE INCOME (LOSS) 9,508 2,318 (922) 2,765
Earnings (Loss) per share
Basic$0.10 $0.06 $(0.07)$0.08
Diluted$0.09 $0.04 $(0.07)$0.05
See accompanying Notes to Consolidated Financial Statements.
Share Capital Contributed Surplus Retained (Deficit) Earnings Cumulative Translation Differences Total Equity
Balance at January 1, 2010$81,293 $2,811 $(411)$- $83,693
Total net income and comprehensive income Jan – June 2010 - - 447 - 447
Stock based compensation expense – options and warrants - 436 - - 436
Issuance of restricted stock - 73 - - 73
Issued for services 128 - - - 128
Exercise of stock options 790 (71) - - 719
Exercise of warrants 396 (134) - - 262
Reclassification as restricted shares (552) 552 - - -
Released from restricted shares 143 (143) - - -
Balance at June 30, 2010$82,198 $3,524 $36 $- $85,758
Total net income and comprehensive income July – Sept 2010 - - 2,318 - 2,318
Stock based compensation expense – options and warrants - 261 - - 261
Issuance of restricted stock - 121 - - 121
Issuance of subscription receipts 61,569 - - - 61,569
Issuance on share exchange 699 - - - 699
Exercise of warrants 1,332 (452) - - 880
Released from restricted shares 89 (89) - - -
Balance at September 30, 2010$145,887 $3,365 $2,354 $- $151,606
Total net income and comprehensive income Oct – Dec 2010 - - 1,996 - 1,996
Stock based compensation expense – options and warrants - 200 - - 200
Issuance of common stock 104,698 - - - 104,698
Issuance of subscription receipts (18) (18)
Issuance of restricted stock - 159 - - 159
Exercise of stock options 607 (62) - - 545
Exercise of warrants 302 (43) - - 259
Released from restricted shares 97 (97) - - -
Balance at December 31, 2010$251,573 $3,522 $4,350 $- $259,445
Total net loss Jan – June 2011 - - (10,283) - (10,283)
Cumulative translation differences - - - (147) (147)
Stock based compensation expense – options - 325 - - 325
Issuance of restricted stock - 377 - - 377
Exercise of stock options 728 (90) - - 638
Exercise of warrants 1,788 (497) - - 1,291
Released from restricted shares 235 (235) - - -
Common Stock – Deferred Tax Benefit and Share Issue Costs (272) - - - (272)
Total 2,479 (120) (10,283) (147) (8,071)
Balance as June 30, 2011$254,052 $3,402 $(5,933)$(147)$251,374
Total net income July – Sept 2011 - - 5,911 - 5,911
Cumulative translation differences - - - 3,597 3,597
Stock based compensation expense – options - 356 - - 356
Issuance of restricted stock - 185 - - 185
Exercise of stock options 1,355 (204) - - 1,151
Released from restricted shares 119 (119) - - -
Common Stock – Deferred Tax Benefit (138) - - - (138)
Total 1,336 218 5,911 3,597 11,062
Balance as September 30, 2011$255,388 $3,620 $(22)$3,450 $262,436
See accompanying Notes to Consolidated Financial Statements.
Three Months Ended: Nine Months Ended:
Sep 30, 2011 Sep 30, 2010 Sep 30, 2011 Sep 30, 2010
CASH AND CASH EQUIVALENTS (USED FOR) PROVIDED BY:
OPERATING ACTIVITIES
Net Income (Loss)$5,911 $2,318 $(4,372)$2,765
Items not effecting cash:
Amortization 4,617 1,827 11,092 4,944
Deferred income taxes expense (benefit) 463 753 (829) 1,567
Stock based compensation 699 381 2,320 892
Finance cost 11 - 11 -
11,701 5,279 8,222 10,168
Net change in non-cash working capital from
operating activities (Note 13)
(30,439) (8,219) (11,683) (9,251)
(18,738) (2,940) (3,461) 917
FINANCING ACTIVITIES
Issuance of common shares (net of share issue costs) 1,151 62,147 3,078 63,254
1,151 62,147 3,078 63,254
INVESTING ACTIVITIES
Purchase of property and equipment (28,196) (35,898) (89,208) (49,563)
Proceeds on disposal of property and equipment - - 147 -
Purchase of intangible and other assets (418) - (511) (96)
Net change in non-cash working capital from
investing activities
8,414 22,579 4,560 20,885
(20,200) (13,319) (85,012) (28,774)
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS FOR THE PERIOD (37,787) 45,888 (85,395) 35,397
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF PERIOD 51,043 1,152 98,701 11,643
EFFECT OF EXCHANGE RATE CHANGES (167) - (217) -
BALANCE, END OF THE PERIOD$13,089 $47,040 $13,089 $47,040
See accompanying Notes to Consolidated Financial Statements.

GASFRAC ENERGY SERVICES INC.Notes to the Condensed Consolidated Financial Statements

(unaudited)

(Figures in text and tables are in 000s except share data and certain other exceptions as indicated)

1. CORPORATE INFORMATION

GASFRAC Energy Services Inc. ("Gasfrac" or "the Company") is an oil and gas well fracturing company that has developed the "LPG Fracturing Process" to enable wells to be fractured with LPG, more specifically propane and butane.

GASFRAC is a publically traded company, incorporated and domiciled in Canada. The address and registered office is Suite 1900, 801 – 6th Avenue S.W., Calgary, Alberta, Canada, T2P 3W2.

These interim Consolidated Financial Statements were approved and authorized for issuance by the Board of Directors on November 7, 2011.

The Company's Canadian business is seasonal in nature. The lowest activity is typically experienced during the second quarter of the year when road weight restrictions are in place due to spring break up.

2. BASIS OF PREPARATION

In conjunction with the Company's annual audited Consolidated Financial Statements to be issued under International Financial Reporting Standards ("IFRS") for the year ended December 31, 2011, these interim Condensed Consolidated Financial Statements present GASFRAC's initial financial results of operations and financial position under IFRS as at and for the nine months ended September 30, 2011, including 2010 comparative periods. As a result, they have been prepared in accordance with IFRS 1, "First-time Adoption of International Financial Reporting Standards" and with International Accounting Standard ("IAS") 34, "Interim Financial Reporting", as issued by the International Accounting Standards Board ("IASB"). These interim Consolidated Financial Statements do not include all the necessary annual disclosures in accordance with IFRS. Previously, the Company prepared its interim and annual Consolidated Financial Statements in accordance with Canadian generally accepted accounting principles ("Previous GAAP").

The preparation of these interim Consolidated Financial Statements resulted in changes to GASFRAC's accounting policies as compared to those disclosed in the Company's annual audited Consolidated Financial Statements for the period ended December 31, 2010 issued under Previous GAAP. A summary of the significant changes to GASFRAC's accounting policies is disclosed in Note 15 along with reconciliations presenting the impact of the transition to IFRS for the comparative periods as at January 1, 2010, as at and for the nine months ended September 30, 2010, and as at and for the twelve months ended December 31, 2010.

Operating expenses as presented on the Consolidated Statement of Comprehensive (loss) Income are primarily composed of direct salaries, materials, and other direct operating costs. Selling, general, and administrative expenses as presented on the Consolidated Statement of Comprehensive (loss) Income are primarily composed of indirect salaries, head office expenses, insurance, professional fees and other indirect costs.

A summary of GASFRAC's significant accounting policies under IFRS is presented in Note 3. These policies have been retrospectively and consistently applied except where specific exemptions permitted an alternative treatment upon transition to IFRS in accordance with IFRS 1 as disclosed in Note 15.

These consolidated financial statements are presented in Canadian dollars, which is the Company's functional currency. All financial information presented in dollars has been rounded to the nearest thousand except for share and per share amounts.

These interim Consolidated Financial Statements have been prepared on a historical cost basis except for financial instruments and share based payment transactions that are measured at fair value.

3. SUMMARY OF 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 at January 1, 2010 for the purposes of the transition to IFRS, unless otherwise indicated.

Basis of consolidation

The financial statements of the Company consolidate the accounts of GASFRAC and its subsidiaries. All intercompany transactions, balances and unrealized gains and losses from intercompany transactions are eliminated on consolidation. Subsidiaries are those entities which GASFRAC controls by having the power to govern the financial and operating policies.
The accounting policies have been applied consistently by the Company's entities.

Measurement uncertainty

The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses. Significant estimates include valuation of property and equipment, accounts receivable, and inventory, estimates of stock based compensation expense input variables and determination of valuation of tax pools for deferred income tax expense calculations. Actual results could differ from these estimates.

Functional currency

As the operations of the Company's wholly owned United States ("U.S.") subsidiary continue to gain significance relative to the operations of the Company as a whole the Board of Directors has concluded that the most appropriate functional currency of the United States subsidiary is the United States Dollar, the change was effective for the Company April 1, 2011. This reflects the fact that as of the effective date of this change the majority of the subsidiary's pricing for fracing services is influenced by the U.S. Dollar, the competitive and regulatory environment of the subsidiary are mainly influenced by the U.S. and the U.S. Dollar now largely influences labour, material and other costs of providing fracing services. The previous functional currency of the U.S. subsidiary was the Canadian Dollar.

Foreign currency translation

Monetary assets and liabilities of the Company that are denominated in foreign currencies are translated into its functional currency at the rates of exchange in effect at the period end date. Non-monetary assets and liabilities of the Company that are denominated in foreign currencies are translated into its functional currency using the exchange rate at the date of the transaction. Exchange rate differences are recorded in the Consolidated Statement of Earnings.

The financial statements of the subsidiaries that have a functional currency different from that of the Company are translated into Canadian Dollars whereby assets and liabilities are translated at the rate of exchange at the balance sheet date, revenues and expenses are translated at average quarterly exchange rates (as this is considered a reasonable approximation of actual rates), and gains and losses in translation are recognized in the shareholders' equity section as accumulated other comprehensive income.

Cash and cash equivalents

Cash and cash equivalents are held for the purpose of meeting short-term cash commitments and include bank balances and short-term investments with maturities of less than 90 days.

Inventory

Inventory consists of liquefied petroleum gas, chemicals, and proppants used to stimulate well production and are stated at the lower of cost and net realizable value. Cost is determined using the weighted average method.

Net realizable value is the estimated selling prices in the ordinary course of business, less estimated costs of completion and selling expenses.

Property and equipment

Property and equipment are recorded at cost and are amortized over their estimated economic useful lives using the straight-line method as follows:

Asset Amortization Useful life
Equipment Straight line 3 – 20 Years
Furniture & Fixtures Straight line 5 years
Leasehold Improvements Straight line Lease term

When parts of an item of property and equipment have different useful lives, they are accounted for as separate items. Assets under construction are not amortized until put into service.

Management estimates the useful life and residual value of property and equipment on expected utilization, effectiveness of maintenance programs and expected impact of technological change. Although management believes the estimated useful lives of the property and equipment are reasonable, it is possible that changes in estimates could occur which may affect the expected useful lives and residual values of the property and equipment.

Repairs and maintenance costs are charged to the consolidated statement of comprehensive (loss) income during the period in which they are incurred.

Intangible assets

Intangible assets including deferred development costs, patents and intellectual property that meet certain criteria related to technology, market and financial feasibility are deferred. Such costs are amortized upon commencement of commercial sales over the estimated economic life of the related product as follows:

Asset Depreciation Useful life
Patents & Intellectual Property Straight line 5 years
Deferred Development Costs Straight line 5 years
Other Intangible Assets Straight line 5 years

Costs that do not meet such criteria are charged to income in the period of expenditure.

Impairment of long-term assets

Long-term assets include property and equipment and intangible assets. The carrying values are reviewed when events or changes in circumstances indicate that the carrying value of an asset or cash generating unit may not be recoverable. For the purpose of measuring recoverable amounts, assets are grouped at the lowest levels for which there are separate identifiable cash flows (cash generating units). If indicators of impairments exist, the recoverable amount of the asset or cash generating unit is estimated as the greater of the value in use or the fair value less cost to sell. If the carrying value of the asset or cash generating unit exceeds the recoverable amount, the asset or cash generating unit is written down with an impairment recognized in net earnings. The impairment charge is the difference between the amortized cost of the asset and the present value of the estimated future cash flows.

The Company evaluates impairment losses for potential reversals when events or changes in circumstances warrant such consideration.

Revenue recognition

The Company's revenue is comprised of services and other revenue and is generally sold on agreed upon priced purchase orders or contracts with the customer. Contract terms do not include provisions for significant post-service delivery obligations. Service and other revenue is recognized when the services are provided and collectability is reasonably assured.

Deferred income tax

Deferred tax is recognized in respect to temporary differences arising in tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred tax is determined on a non-discounted basis using tax rates and laws that have been enacted or substantially enacted at the reporting date and are expected to apply when the deferred tax asset or liability is realized or settled. Deferred tax assets are recognized to the extent that it is probable that the assets can be recovered.

Deferred tax assets and liabilities are recognized in the statement of income except to the extent it relates to items recognized directly in equity, in which case the income tax is also recognized directly in equity.

Leases

Leases or other arrangements entered into for the use of an asset are classified as either finance or operating leases. Finance leases transfer to the Company substantially all of the risks and benefits incidental to ownership of the leased item. Finance leases are capitalized at the commencement of the lease term at the lower of the fair value of the leased asset or the present value of the minimum lease payments. Capitalized leased assets are amortized over the shorter of the estimated useful life of the assets and the lease term.

Employee Benefits

a) Short-Term Employee Benefits

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 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 amount can be readily estimated.

b) Stock based compensation

The Company has a restricted share plan, performance share unit plan and stock option plan as described in Note 9. All forms of stock based compensation treat each tranche as a separate award with its own vesting period with stock based compensation expense recognized on the graded vesting basis. For the restricted share plan, fair values are determined using prices at the grant date and are recognized as stock based compensation expense with a corresponding credit to shareholders equity. For the performance share unit plan, units vest based on time and performance criteria and expire no later than December 31 of the third calendar year following the year in which the grant occurs. Management makes an assessment for each grant of units on how likely the PSUs might vest. Fair values are determined using prices at the market date and are recognized as stock based compensation with a corresponding credit to current liabilities. Stock options and warrants are accounted for using the fair value method under which compensation expense is recorded based on the estimated fair value of the options at the grant date using the Black-Scholes option pricing model. Under this method, compensation cost attributable to stock options granted is measured at fair value at the grant date and expensed over the vesting period with a corresponding increase to contributed surplus. Upon exercise of the stock options, consideration paid together with the amount previously recognized in contributed surplus is recorded as share capital.

Earnings (Loss) per share

Basic earnings per share is calculated by dividing the net earnings (loss) for the period attributable to equity owners of GASFRAC by the weighted average number of shares outstanding during the period.

Diluted earnings per share is calculated based on the weighted average number of shares outstanding during the year adjusted by the weighted average number of common shares outstanding for dilutive instruments.

Financial instruments

Financial assets and liabilities are recognized when GASFRAC 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 GASFRAC has transferred substantially all the risks and rewards of ownership.

Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously.

At initial recognition, GASFRAC classifies its financial instruments in the following categories depending on the purpose for which the instrument were acquired:

  1. Financial assets and liabilities at fair value through profit or loss: A financial asset or liability is classified in this category if acquired principally for the purpose of selling or repurchasing in the short-term. The Company does not currently have derivative financial instruments. Financial instruments in this category are recognized initially and subsequently at fair value. Transaction costs are expensed in the statement of income. Gains and losses arising from changes in fair value are presented in the statement of income within other gains and losses in the period in which they arise. Financial assets and liabilities at fair value through profit or loss are classified as current except for the portion expected to be realized or paid beyond twelve months of the balance sheet date, which is classified as non-current.

  2. Available-for-sale investments: Available-for-sale investments are non-derivatives that are either designated in this category or not classified in any of the other categories. The Company's available-for sale assets comprise of cash and cash equivalents. Available-for-sale investments are recognized initially at fair value plus transaction costs and are subsequently carried at fair value. Gains or losses arising from changes in fair value are recognized in other comprehensive income. Available-for-sale investments are classified as non-current, unless the investment matures within twelve months, or management expects to dispose of them within twelve months. Interest on available-for-sale investments, calculated using the effective interest method, is recognized in the statement of income as part of interest income. Dividends on available-for-sale equity instruments are recognized in the statement of income as part of other gains and losses when the Company's right to receive payment is established. When an available-for-sale investment is sold or impaired, the accumulated gains or losses are moved from accumulated other comprehensive income to the statement of income and are included in other gains and losses.

  3. Loans and receivables: Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. The Company's loans and receivables comprise of accounts receivable, and are included in current assets due to their short-term nature. Loans and receivables are initially recognized at the amount expected to be received, less, when material, a discount to reduce the loans and receivables to fair value. Subsequently, loans and receivables are measured at amortized cost using the effective interest method less a provision for impairment.

  4. Financial liabilities at amortized cost: Financial liabilities at amortized cost include accounts payable and accrued liabilities. Trade payables are initially recognized at the amount required to be paid, less, when material, a discount to reduce the payables to fair value. Subsequently, trade payables are measured at amortized cost using the effective interest method. Bank debt and long-term debt are recognized initially at fair value, net of any transaction costs incurred, and subsequently at amortized cost using the effective interest method.

    Financial liabilities are classified as current liabilities if payment is due within twelve months. Otherwise, they are presented as non-current liabilities.

Impairment of financial assets

At each reporting date, the Company assesses whether there is objective evidence that a financial asset is impaired. If such evidence exists, the Company recognizes an impairment loss, as follows:

  1. Financial assets carried at amortized cost: The loss is the difference between the amortized cost of the loan or receivable and the present value of the estimated future cash flows, discounted using the instrument's original effective interest rate. The carrying amount of the asset is reduced by this amount either directly or indirectly through the use of an allowance account.

  2. Available-for-sale financial assets: The impairment loss is the difference between the original cost of the asset and its fair value at the measurement date, less any impairment losses previously recognized in the statement of income. This amount represents the cumulative loss in accumulated other comprehensive income that is reclassified to net income.

Impairment losses on financial assets carried at amortized cost are reversed in subsequent periods if the amount of the loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized. Impairment losses on available-for-sale equity instruments are not reversed.

Comparative figures

In addition to the adoption of IFRS, certain comparative figures have been reclassified to conform to the current period's presentation.

4. PROPERTY AND EQUIPMENT

Cost: Equipment Furniture & Fixtures Leasehold Improvements Total
January 1, 2010 68,704 59 51 68,814
Additions 83,412 97 4 83,513
December 31, 2010 152,116 156 55 152,327
Additions 60,984 666 325 61,975
Dispositions (147 ) - - (147 )
June 30, 2011 212,953 822 380 214,155
Additions 32,418 482 20 32,920
September 30, 2011 245,371 1,304 400 247,075
Accumulated Amortization:
January 1, 2010 7,230 21 6 7,257
Amortization 6,997 17 5 7,019
December 31, 2010 14,227 38 11 14,276
Amortization 6,031 384 22 6,437
Disposition (53 ) - - (53 )
June 30, 2011 20,205 422 33 20,660
Amortization 4,485 92 19 4,596
September 30, 2011 24,690 514 52 25,256
Net Book Value:
January 1, 2010 61,474 38 45 61,557
December 31, 2010 137,889 118 44 138,051
June 30, 2011 192,748 400 347 193,495
September 30, 2011 220,681 790 348 221,819
Assets under Construction included in cost:
January 1, 2010 9,194 - - 9,194
December 31, 2010 47,392 - - 47,392
June 30, 2011 40,057 - - 40,057
September 30, 2011 51,569 - - 51,569

As at January 1, 2010, December 31, 2010, June 30, 2011 and September 30, 2011 assets under construction are not subject to amortization as the assets are not yet available for use.

5. INTANGIBLE AND OTHER ASSETS

Cost: Patents & Intellectual Property Deferred Development Costs Deferred Commitment Fee Other Intangible Assets Total
January 1, 2010 312 198 - 31 541
Additions 164 32 - - 196
December 31, 2010 476 230 - 31 737
Additions 93 - - - 93
June 30, 2011 569 230 - 31 830
Additions 18 - 400 - 418
September 30, 2011 587 230 400 31 1,248
Accumulated Amortization:
January 1, 2010 82 84 - 17 183
Amortization 82 46 - 6 134
December 31, 2010 164 130 - 23 317
Amortization 52 23 - 4 79
June 30, 2011 216 153 - 27 396
Additions 29 11 11 2 53
September 30, 2011 245 164 11 29 449
Net Book Value:
January 1, 2010 230 114 - 14 358
December 31, 2010 312 100 - 8 420
June 30, 2011 353 77 - 4 434
September 30, 2011 342 66 389 2 799

Pursuant to the credit facilities described in note 11, the Company incurred a loan commitment fee. This fee will be amortized over the term of the facility of 36 months.

6. LEASE OBLIGATIONS

The Company leases certain of its light vehicles under finance leases. The average lease term is 3 years. The Company has options to purchase the vehicles at the end of the lease terms. The Company's obligations under finance leases are secured by the lessors' title to the leased assets.

Interest rates underlying all obligations under finance leases are fixed at respective contract dates ranging from 5.3% to 8.9% per annum.

As at: Future minimum lease payments Interest Present value of minimum lease payments
January 1, 2010:
Less than one year 135 14 121
Between one and five years 183 4 179
More than five years - - -
318 18 300
June 30, 2010:
Less than one year 168 14 154
Between one and five years 150 4 146
More than five years - - -
318 18 300
September 30, 2010:
Less than one year 234 10 224
Between one and five years 51 3 48
More than five years - - -
285 13 272
December 31, 2010:
Less than one year 261 21 240
Between one and five years 186 6 180
More than five years - - -
447 27 420
June 30, 2011:
Less than one year 553 96 457
Between one and five years 1,177 102 1,075
More than five years - - -
1,730 198 1,532
September 30, 2011:
Less than one year 1,008 188 820
Between one and five years 2,304 181 2,123
More than five years - - -
3,312 369 2,943

The finance lease obligation is analyzed as:

Jan 1 , Jun 30 , Sep 30 , Dec 31 , Jun 30 , Sep 30 ,
As at: 2010 2010 2010 2010 2011 2011
Current 121 154 224 240 457 820
Non-current 179 146 48 180 1,075 2,123
300 300 272 420 1,532 2,943

7. UNEARNED REVENUE

The unearned revenue balance as at June 30, 2011 of $20,871 (December 31, 2010 $3,485) was earned in full during the 3 months ended September 30, 2011.

8. DEFERRED INCOME TAX

The net income tax provision differs from that expected by applying the combined federal and provincial income tax rate of 26.55% (2010 - 28.65%) to taxable income for the following reasons:

Three Month Period ended: Sep 30, 2011 Sep 30, 2010
Expected combined federal and provincial income tax expense $ 1,434 $ 957
Non-deductible expenses 195 29
Valuation allowance (653 ) (136 )
Future income tax rate reduction (84 ) (115 )
Statutory and other rate differences (429 ) 18
Effective $ 463 $ 753
Nine Month Period ended: Sep 30, 2011 Sep 30, 2010
Expected combined federal and provincial income tax (benefit) expense $ (1,591 ) $ 1,306
Non-deductible expenses 499 164
Valuation allowance 370 57
Future income tax rate reduction 93 10
Statutory and other rate differences (200 ) 30
Effective $ (829 ) $ 1,567
The components of the deferred income tax liability are as follows:
December 31 ,
As at: Sep 30, 2011 2010
Property and equipment and intangible assets $ (8,330 ) $ (4,809 )
Non-capital loss carry forwards 6,041 1,476
Financing costs 1,959 2,571
Other 394 394
Total deferred income tax (liability) benefit $ 64 $ (368 )

The Company has $ 24,170 (2010 - $ 9,158) of Canadian tax pools related to non-capital losses available for carry forward to reduce taxable income in future years and expire between 2027 and 2030.

9. SHARE CAPITAL

Authorized

Unlimited number of common shares.

Unlimited number of preferred shares issuable in series with the designation, rights, privileges, restrictions and conditions of each series to be determined by the board of directors.

Issued Common Shares

2011 2010
Shares Amount Shares Amount
(# ) ($ ) (# ) ($ )
Opening Balance 60,226,366 251,573 32,650,000 81,293
Issued on exercise of warrants 932,500 1,788 262,500 396
Issued on exercise of options 304,467 728 433,333 790
Issued for service - - 30,000 128
Common Shares – Deferred tax benefit - (272 ) - -
Reclassified as contributed surplus - - (130,000 ) (552 )
Released from restricted shares 47,333 235 33,667 143
Balance – June 30 61,510,666 254,052 33,279,500 82,198
Issued on private placement - - 13,000,000 61,569
Issued on exercise of warrants - - 440,000 1,332
Issued on exercise of options 455,408 1,355 - -
Issued on share exchange - - 156,250 699
Common Shares – Deferred tax benefit - (138 ) - -
Released from restricted shares 22,417 119 20,333 89
Balance – September 30 61,988,491 255,388 46,896,083 145,887

The weighted average number of common shares outstanding for the nine months ended September 30, 2011 was 61,399,131 basic and 63,557,013 diluted (nine months ended September 30, 2010 – 35,821,806 basic and 49,845,189 diluted). The difference between basic and diluted shares for the nine months ended September 30, 2011 is attributable to the dilutive effect of stock options issued by the Company.

Restricted shares

Shares Amount
(# ) ($ )
Balance – December 31, 2010 361,917 1,607
Granted 50,000 601
Released to common shares (47,333 ) (235 )
Balance – June 30, 2011 364,584 1,973
Released to common shares (22,417 ) (119 )
Balance – September 30, 2011 342,167 1,854

During the three month period ended September 30, 2011, $185 of compensation expense was recorded (three month period ended September 30, 2010 – $121).

Performance share units

The Company grants performance stock units to officers, directors and employees with the amount of the grant earned being linked to corporate performance and grants vesting over one to three years from date of grant. The performance share units are settled either in cash or Company shares at the Company's discretion. During the three month period ended September 30, 2011, 98,500 performance share units were granted ), 100,000 performance share units were cancelled and performance share units have vested (respective amounts for the three month period ended September 30, 2010 were nil in each case). During the three month period ended September 30, 2011, $158 of compensation expense was recognized (three month period ended September 30, 2010 – nil). As at September 30, 2011, the Company has granted 408,500 performance share units of which performance share units have vested. As at September 30, 2011, the related liability is $1,428 (period ended September 30, 2010 – nil).

Stock options

The Company calculates the fair value of its stock options using the Black-Scholes option pricing model. The following weighted average assumptions were used to determine the fair value of the options at the date of grant.

Risk-free interest rate 2.5%
Expected life 4 years
Maximum life 5 years
Volatility 52%
Expected dividend -

A summary of the status of the Company's outstanding stock options is presented below:

2011 2010
Options Average Exercise Price Options Average Exercise Price
(# ) ($ ) (# ) ($ )
Opening Balance 2,746,208 3.48 2,966,000 2.89
Granted - - 420,000 4.17
Exercised for common shares (304,467 ) 2.10 (433,333 ) 1.65
Forfeited and expired (9,000 ) 2.00 (246,167 ) 3.14
Balance – June 30 2,432,741 3.66 2,706,500 3.26
Granted 50,000 8.15 225,000 4.96
Exercised for common shares (455,408 ) 2.53 - -
Forfeited and expired (33,333 ) 4.25 - -
Balance – September 30 1,994,000 4.03 2,931,500 3.39

Stock options vest over three years and expire five years from the date of grant. The 1,994,000 options outstanding at September 30, 2011 had exercise prices ranging from $2.00 to $8.15 per share with expiry dates ranging from 2012 to 2015. When stock options are exercised the proceeds, together with the amount of compensation expense previously recorded in contributed surplus are added to share capital. During the three month period ended September 30, 2011, $356 of compensation expense was recorded (three month period ended September 30, 2010 – $251).

Warrants

2011 2010
Warrants Average Exercise Price Warrants Average Exercise Price
(# ) ($ ) (# ) ($ )
Balance – December 31 1,757,500 1.20 2,602,500 1.32
Exercised for common shares (932,500 ) 1.38 (262,500 ) 1.00
Balance – June 30 825,000 1.00 2,340,000 1.36
Exercised for common shares - - (440,000 ) 2.00
Balance – September 30 825,000 1.00 1,900,000 1.21

As part of an employment agreement with the founding officer of the Company, 1,500,000 share purchase warrants were issued effective May 10, 2006, entitling the founding officer to purchase common shares of the Company at $1.00 per share, vesting based on performance conditions and expiring on August 12, 2012. As at August 12, 2010 all of the purchase warrants were vested. As at September 30, 2011 825,000 (2009 – 1,500,000) founder warrants were outstanding.

During the period ended September 30, 2011, no compensation expense was recorded (three month period ended September 30, 2010 – $10).

10. COMMITMENTS

The Company has operating lease commitments for office space as follows:

Year 2011 2012 2013 2014 2015
Amount $ 420 $ 1,486 $ 740 $ 501 $ 501

As at September 30, 2011, the Company has commitments totaling approximately $68 million relating to the construction of fixed assets in 2011 and $72 million for the purchase of operating supplies over the 27 month period ending December 31, 2013.

11. CAPITAL MANAGEMENT

The Company's strategy is to maintain a capital structure to sustain future growth of the business and retain creditor, investor and market confidence. Recognizing the cyclical nature of the oilfield services industry, the Company strives to maintain a conservative balance between long-term debt and shareholders' equity. The Company's capital structure is currently comprised of shareholders' equity and undrawn long-term bank debt. The Company may occasionally need to increase its level of long-term debt to total capitalization to facilitate growth activities.

The Company has a credit agreement with a syndication of Canadian chartered banks. The credit agreement includes a $10 million operating facility and a $90 million revolving facility. The facilities bear interest at prime plus 0.75% to prime plus 3.75%. The credit agreement may be extended annually. If it is not extended it shall be repayable in seven equal quarterly instalments. Both facilities are secured by a floating charge over all of the assets of the Company and are subject to certain financial covenants. As at September 30, 2011 the Company is in compliance with all the covenants related to these facilities. As at September 30, 2011, the Company has not drawn upon either facility.

The Company monitors its capital structure and makes adjustments in light of changing market conditions and new opportunities, while remaining cognizant of the cyclical nature of the oilfield services sector. To maintain or adjust its capital structure, the Company may revise its capital spending, issue new shares, issue new debt, or draw on its current short-term debt facility.

12. ENTERPRISE WIDE DISCLOSURE

As at September 30, 2011, the Company has two geographic segments being the Canadian segment and the United States segment. For the three month period ended September 30, 2011, 78% of the revenue was incurred by the Canadian segment (Period ended September 30, 2010, 79% of the revenue was incurred by the Canadian segment) and 22% of the revenue was incurred by the United States segment (Period ended September 30, 2010, 21% of the revenue was incurred by the United States segment). As at September 30, 2011, the net book value of the property and equipment in the Canadian Segment was $166,991 (December 31, 2010 $ 137,711) and the net book value of the property and equipment in the United States segment was $54,827 (December 31, 2010 $ 340).

13. NET CHANGES IN NON-CASH WORKING CAPITAL

Three Months Ended: Nine Months Ended:
Sep 30 , Sep 30 , Sep 30 , Sep 30 ,
2011 2010 2011 2010
Changes in non-cash working capital from Operations:
Accounts receivable $ (24,392 ) $ (5,666 ) $ (8,948 ) $ (9,506 )
Inventory 11,042 (1,531 ) (1,667 ) 204
Prepaid expenses 538 2,565 5,822 (579 )
Bank operating line - (3,978 ) - -
Unearned revenue (20,871 ) - (3,485 ) -
Accounts payable and accrued liabilities and other 3,214 3,397 1,298 1,900
Long-term deposits 30 (3,006 ) (4,703 ) (1,270 )
Net change in non-cash working capital from Operations $ (30,439 ) $ (8,219 ) $ (11,683 ) $ (9,251 )

14. RELATED PARTY TRANSACTIONS

During the three month period ended September 30, 2011, the Company paid $5 (2010 – $135) in consulting fees to a Director. During the nine month period ended September 30, 2011, the Company paid $60 (2010 - $319) in consulting fees to two Directors.

During the three month period ended September 30, 2011, fracturing treatment services to the value of $ 1,854 (2010 - $ nil) were rendered to a customer which shares a Director with the Company.

15. EXPLANATION OF TRANSITION TO IFRS:

As stated in Note 2, these are the Company's first consolidated financial statements prepared in accordance with IFRS.

The accounting policies set out in Note 3 have been applied in preparing the financial statements for the three month period ended September 30, 2011, the comparative information presented in these financial statements for the three month and nine month period ending September 30, 2010 and in the preparation of an opening IFRS statement of financial position at January 1, 2010 (the Company's date of transition).

In preparing its opening IFRS statement of financial position, the Company has adjusted amounts reported previously in financial statements prepared in accordance with Previous GAAP. An explanation of how the transition from Previous GAAP to IFRS has affected the Company's financial position, financial performance and cash flows is set out in the following tables and the notes that accompany the tables.

Reconciliation of equity as previously reported under Previous GAAP to IFRS

As at: January 1, 2010 As at: September 30, 2010 As at: December 31, 2010
Previous GAAP Adj. IFRS Previous GAAP Adj IFRS Previous GAAP Adj IFRS
ASSETS
CURRENT ASSETS
Cash and equivalents $ 11,643 $ - $ 11,643 $ 47,040 $ - $ 47,040 $ 98,701 $ - $ 98,701
Accounts receivable 9,469 - 9,469 18,975 - 18,975 24,500 - 24,500
Inventory 5,499 - 5,499 5,295 - 5,295 7,018 - 7,018
Prepaid expenses 519 - 519 1,098 - 1,098 6,839 - 6,839
27,130 - 27,130 72,408 - 72,408 137,058 - 137,058
PROPERTY and EQUIPMENT 61,295 262 61,557 105,270 878 106,148 136,749 1,302 138,051
INTANGIBLE ASSETS 358 - 358 454 - 454 420 - 420
LONG-TERM DEPOSITS 1,790 - 1,790 3,060 - 3,060 3,176 - 3,176
DEFERRED INCOME TAX BENEFIT 775 - 775 210 - 210 - - -
TOTAL ASSETS $ 91,348 $ 262 $ 91,610 $ 181,402 $ 878 $ 182,280 $ 277,403 $ 1,302 $ 278,705
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Unearned revenue - - - - - - 3,485 - 3,485
Current lease obligations - 121 121 - 224 224 - 240 240
Accounts payable and
accrued liabilities
7,617 - 7,617 30,403 (1 ) 30,402 14,829 158 14,987
Total current liabilities 7,617 121 7,738 30,403 223 30,626 18,314 398 18,712
LONG-TERM LEASE OBLIGATIONS - 179 179 - 48 48 - 180 180
FUTURE INCOME TAX - - - - - - 368 - 368
Total non-current liabilities - 179 179 - 48 48 368 180 548
SHAREHOLDERS' EQUITY
SHARE CAPITAL 81,293 - 81,293 145,641 246 145,887 251,326 247 251,573
CONTRIBUTED SURPLUS 1,808 1,003 2,811 1,737 1,628 3,365 1,712 1,810 3,522
RETAINED EARNINGS (DEFICIT) 630 (1,041 ) (411 ) 3,621 (1,267 ) 2,354 5,683 (1,333 ) 4,350
Total equity 83,731 (38 ) 83,693 150,999 607 151,606 258,721 724 259,445
TOTAL LIABILITIES AND EQUITY $ 91,348 $ 262 $ 91,610 $ 181,402 $ 878 $ 182,280 $ 277,403 $ 1,302 $ 278,705

Reconciliation of comprehensive income as previously reported under Previous GAAP to IFRS

Three months ended September 30, 2010 Nine months ended September 30, 2010
Previous GAAP Adj. IFRS Previous GAAP Adj. IFRS
REVENUE $ 26,590 $ - $ 26,590 $ 55,819 $ - $ 55,819
OTHER INCOME
Interest 29 - 29 36 - 36
Business Interruption claim - - - 2,030 - 2,030
26,619 - 26,619 57,885 - 57,885
EXPENDITURES
Operating 18,078 (32 ) 18,046 40,513 (127 ) 40,386
Selling, general and administrative 2,957 245 3,202 6,988 245 7,233
Stock based compensation 132 249 381 267 625 892
Amortization 2,027 (200 ) 1,827 5,477 (533 ) 4,944
Finance cost - 5 5 - 16 16
23,194 267 23,461 53,245 226 53,471
(LOSS) INCOME BEFORE INCOME TAX 3,425 (267 ) 3,158 4,640 (226 ) 4,414
Foreign exchange (gain) / loss (87 ) - (87 ) (82 ) - (82 )
Future income tax expense (753 ) - (753 ) (1,567 ) - (1,567 )
NET (LOSS) INCOME / COMPREHENSIVE (LOSS) INCOME 2,585 (267 ) 2,318 2,991 (226 ) 2,765

Explanation of the effects of the transition to IFRS

Leases

Previous GAAP considered the leases to be of a capital nature based on certain quantifiable criteria. Based on the criteria, GASFRAC concluded that the leases on it's light vehicles were operating leases in nature for Previous GAAP purposes.

Under IFRS, with the absence of the quantitative criteria provided by Previous GAAP, the Company determined that qualitatively, the risks and rewards of these leases reside with GASFRAC and as such, should be treated as financing leases.

Amortization

With the conversion to IFRS, GASFRAC broke out the field equipment into each of the separate components that made up field equipment. We then assessed the useful life and residual value for each of these components. Based on this assessment, certain depreciation rates were modified.

Share based payments

Under Previous GAAP, GASFRAC accounted for certain stock based compensation plans whereby the obligation and compensation costs were accrued over the vesting period using the intrinsic value method. The intrinsic value of a share unit is the amount by which the Company's share price exceeds the exercise price of the share unit.

For certain stock-based compensation plans, IFRS requires share-based compensation be fair valued using an option pricing model, such as the Black-Scholes model, at each reporting date. Each tranche in an award is considered a separate award with its own vesting period. Further, GASFRAC adjusted the volatility of the unvested options and warrants that were issued when GASFRAC was not publically traded from 0% to 50%.

Accordingly, upon transition to IFRS, the Company recorded a fair value adjustment of $891 as at January 1, 2010 to increase the share-based compensation with a corresponding charge to retained earnings. GASFRAC elected to use the IFRS 1 exemption whereby the share-based payments that had vested or settled prior to January 1, 2010 were not required to be retrospectively restated. Subsequent fair value adjustments are recorded through stock based compensation.

As part of the 2010 Kierland transaction, the amount of consideration in excess of the fair market value of assets received was offset against share issue costs under Previous GAAP. Under IFRS, the amount of consideration in excess of the fair market value of assets received was listed as an unidentifiable transaction cost and expensed to sales, general and administrative expense. The amount of the adjustment was $245.

Adjustments to the statement of cash flows

The transition from Previous GAAP to IFRS had no significant impact on cash flows presented by GASFRAC except for stock based compensation and amortization. Any changes relating to net income would be offset by items not effecting cash such as amortization and stock based compensation or would result in a change in non-cash working capital.

The Company will host a conference call on Tuesday, November 8, 2011 at 9:00 a.m. MT (11:00 p.m. ET) to discuss the Company's results for the third quarter of 2011.

To listen to the webcast of the conference call, please enter: http://www.gowebcasting.com/2930 in your web browser or visit the Investor Information section of our website www.gasfrac.com.

To participate in the Q&A session, please call the conference call operator at 1-800-952-6845 or 1-416-695-6616 fifteen minutes prior to the call's start time and ask for "GASFRAC Third Quarter Results Conference Call".

A replay of the call will be available until November 15, 2011 by dialing 1-800-408-3053 (North America) or 1-905-694-9451 (outside North America). Playback passcode: 6133358.

GASFRAC is an oil and gas service company headquartered in Calgary, Alberta, Canada, whose primary business is to provide LPG fracturing services to oil and gas companies in Canada and the USA.

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