GASFRAC Announces Fourth Quarter 2010 Results

Marketwired

CALGARY, ALBERTA--(Marketwire - March 10, 2011) - GASFRAC Energy Services Inc. ("GASFRAC") (TSX VENTURE:GFS - News) achieved revenue of $41.1 million in the fourth quarter of 2010 as compared to $7.1 million in the fourth quarter of 2009. EBITDA was $6.1 million as compared to an EBITDA loss of ($1.3 million) in 2009.Dwight Loree, Chief Executive Officer commented, "The results this quarter show that GASFRAC has achieved a firm foothold in the Canadian market. Revenues for the quarter were well above our revenues for the entire 2009 year and more than five times 2009 fourth quarter results. Revenue of $96.9 million for 2010 were more than triple that of $30.4 million in 2009. At the same time EBITDA for the year of $16.1 million is more than five times the $3.0 million earned in 2009.I am confident that we have the team that can support continued growth in Canada as we add revenue producing capacity with our new equipment build. Further, I am optimistic that our USA operations in Texas will contribute to our growth with the delivery of two sets of fracturing equipment in March and April."Management's Discussion and AnalysisDecember 31, 2010The consolidated financial statements have been prepared 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 management discussion and analysis ("MD&A"). This MD&A has been prepared using information that is current to March 10, 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 GASFRACGASFRAC Energy Services Company Inc. ("GASFRAC" or the "Company") 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 three wholly-owned subsidiaries, GASFRAC Services GP Inc., GASFRAC Energy Services Limited Partnership and GASFRAC Inc. (a U.S. incorporated entity).




Comparative Annual Financial Information

2010 2009 2008
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Revenue 96,906 30,428 23,522
Operating expenses 72,190 21,016 16,803
Selling, general and
administrative expenses 10,579 6,227 3,844
EBITDA (1) 16,112 2,973 4,549
Net income 5,053 (2,210) 4,096
Net income per share - basic 0.13 (0.07) 0.05
Weighted average number of shares
- basic 38,920,602 32,380,356 21,380,384
Treatments performed 419 142 142
Revenue per treatment 231 214 165
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(1) Defined under Non-GAAP Measures

Overview of 20102010 was a year of transition and expansion for GASFRAC. The changes, improvements and additions that took place should allow the Company to continue to expand its operations to meet a growing demand for its services. During the year advances made in our business strategy included:- Growing revenue to $96.9 million from $30.4 million in 2009;- Achieving a net income of $5.1 million compared to a loss of ($2.2 million) in 2009;- Performing 419 fracturing treatments as compared to 142 in 2009;- Building a strong management team with the addition of several well experienced personnel in operating, technical, sales and financial positions;- Increasing our revenue generating capacity with the addition of equipment in 2010 and commitment to add further equipment - three sets to be delivered in Q1 of 2011 and 4 additional sets in Q4 of 2011;- Performance of our first fracturing operations in Texas;- Becoming a publicly traded company;- Maintaining a strong balance sheet with equity financings of $65 million in June 2010 and $109 million in December 2010.Financial OverviewRevenuesRevenue for the year increased 219% to $96.9 million from $30.4 million in 2009. The increase reflects an increase of 195% in the number of treatments performed in 2010 (419) as compared to 2009 (142) combined with an increase in average revenue per treatment to $231 in 2010 from $214 in 2009. The increase in number of treatments was driven by continued acceptance of the Company's technology in Canada and an increase in equipment capacity for service delivery. The Company continues to balance the demands of its significant customers for limited equipment with the requests of new customers to utilize the LPG technology. During the year, the Company earned revenues from more than forty customers with three of these customers representing 63% of revenue.Operating ExpensesWith the increase in revenue, operating expenses increased to $72.2 million (74.5% of revenue) during 2010 from $21.0 million (69.1% of revenue) in 2009. The increase as a percentage of revenue reflects the cost of maintaining the US operation during the fourth quarter ($1.3 million), mobilization costs for equipment redeployed to Canada ($0.3 million) and recruiting and training personnel for equipment to be delivered in the first quarter of 2011 ($3.0 million). Operating costs consist primarily of product costs (propane, proppant, chemicals), cost of field staff, equipment costs and the cost for maintaining two operational bases. Components of the current operational infrastructure have been developed to maintain and support a larger scale of operations than GASFRAC has experienced to date.Selling, General and Administrative ("SG&A") ExpensesSG&A expenses increased to $10.6 million (10.9% of revenue) during 2010 from $6.2 million (20.5% of revenue) in 2009. The increase is due to the hiring of administrative and operations staff to support the growth in both our Canadian and US operations. The relative decrease in SG&A as a percentage of revenue reflects the scalability of this cost base.AmortizationAmortization increased to $7.9 million in 2010 from $5.0 million in 2009 reflecting an increase in operating capital assets of $83.4 million during 2010.EBITDAEBITDA increased to $16.1 million during 2010 from $3.0 million in 2009 as a result of increased revenues and margins.Other IncomeOther income during 2010 included $2.8 million for insurance proceeds related to a business interruption loss from a mobilization incident that took place in November 2009 and which has been settled in full.Other income for 2009 is comprised of $638 business interruption claim from 2008 which has been settled in full, $583 from Scientific Research and Experimental Development credits resulting from the Company's research activities and $201 of interest income relating to interest earned on short-term investments.Net IncomeAs the Company has increased its activity and revenue levels the fixed costs have reduced as a percentage of revenue. In addition, as equipment becomes more effectively utilized, the relative cost of amortization is reducing. As a result, the Company had net income for the year of $5,053 compared to a net loss in 2009 of ($2,210).



Summary of Quarterly Results
(000s)
MAR. 31 JUN. 30 SEP. 30 DEC. 31
2009 2009 2009 2009
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Revenue $ 11,326 $ 2,295 $ 9,662 $ 7,145
Net income (loss) $ 901 $ (1,055) $ 782 $ (2,838)
Net income (loss)
per share (basic) $ 0.03 $ (0.03) $ 0.02 $ (0.09)
EBITDA (1) $ 2,376 $ (477) $ 2,396 $ (1,322)
Capital expenditures $ 5,724 $ 9,739 $ 6,658 $ 5,358
Working capital (2) $ 39,156 $ 29.031 $ 25,430 $ 19,513
Shareholders' equity $ 85,555 $ 84,553 $ 85,970 $ 83,731


MAR. 31 JUN. 30 SEP. 30 DEC. 31
2010 2010 2010 2010
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Revenue $ 15,906 $ 13,323 $ 26,590 $ 41,087
Net income (loss) $ 1,672 $ (1,266) $ 2,585 $ 2,062
Net income (loss)
per share (basic) $ 0.05 $ (0.04) $ 0.06 $ 0.04
EBITDA (1) $ 4,039 $ 624 $ 5,336 $ 6,113
Capital expenditures $ 6,247 $ 7,430 $ 35,871 $ 33,897
Working capital (2) $ 17,792 $ 13,484 $ 42,005 $ 118,744
Shareholders' equity $ 85,808 $ 85,379 $ 150,999 $ 258,721

(1) Defined under Non-GAAP Measures
(2) Working capital is defined as current assets less current liabilities

RevenuesRevenue for the fourth quarter of 2010 was $41.1 million, an almost six-fold increase compared to $7.1 million in the fourth quarter of 2009. There were 148 treatments performed in the fourth quarter of 2010 at an average revenue of $278 per treatment as compared to 46 treatments in the same quarter of 2009 at an average revenue per treatment of $155. The increased volume of treatments reflects both the increased acceptance of the Company's LPG fracturing technology and the increased number of equipment sets(crews) the Company has in place. The improved average revenue per treatment in the quarter results from larger average job size in 2010 as compared to 2009 as the Company has deployed its 100 tonne equipment in 2010 whereas only 32 tonne equipment was available in 2009. In addition, during the fourth quarter of 2010 the Company had a greater percentage of large vertical fracture jobs which tend to have a greater average treatment revenue than horizontal fractures. The Company continues to balance the demands of its significant customers for limited equipment with the requests of new customers to utilize the LPG technology. During the quarter two customers accounted for 65.5% of the Company's revenue.Operating ExpensesWith the increase in revenue, operating expenses increased to $31.7 million (77.1% of revenue) during the fourth quarter of 2010 from $6.3 million (88.7% of revenue) in the fourth quarter of 2009. During the fourth quarter the Company redeployed fracturing equipment from Texas to Canada to meet the market demand in Canada. In anticipation of mobilizing equipment back to the USA in the first quarter of 2011, the Company did not downsize USA operations and, as such, incurred $1.3 million of operating costs associated with those operations during the quarter. Further, the Company incurred costs of approximately $0.3 million to mobilize the equipment to Canada and approximately $0.8 million of training and staffing costs for crews hired in anticipation of delivery of additional fracturing sets in Q1 2011. Operating costs consist primarily of product costs (propane, proppant, chemicals), cost of field staff, equipment costs and the cost for two operational bases. Components of the current operational infrastructure have been developed to maintain and support a larger scale of operations than GASFRAC has experienced to date.Selling, General and Administrative ("SG&A") ExpensesSG&A expenses increased to $3.3 million (8.0% of revenue) during the fourth quarter of 2010 from $0.8 million (11.8% of revenue) in the fourth quarter of 2009. The increase is primarily due to the hiring of administrative and operations staff to support the growth in both our Canadian and US operations. These costs represent the necessary costs of building a support infrastructure for the Company's added revenue base and are anticipated to be able to support future revenue growth without significant additional growth to this cost base.AmortizationAmortization increased to $2.5 million in the fourth quarter of 2010 from $1.6 million in fourth quarter of 2009 reflecting an increase in operating capital assets during the year.EBITDAEBITDA increased to $6.1 million during the fourth quarter of 2010 from an EBITDA loss of ($1.3) million in the fourth quarter of 2009 as a result of increased revenues and margins.Other IncomeOther income for the fourth quarter of 2010 included $0.7 million for insurance proceeds related to a business interruption loss from mobilization incident that took place in November 2009 and which has been settled in full.Net IncomeAs the Company has increased its activity and revenue levels, the fixed costs have reduced as a percentage of revenue. In addition, as equipment becomes more effectively utilized, the relative cost of amortization is reducing. As a result, the Company had net income for the fourth quarter of 2010 of $2.1 million compared to a net loss in the fourth quarter of 2009 of ($2,838).



Liquidity and Capital Resources

Year ended December 31, 2010 2009
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Cash Provided by (used in)
Operating Activities $ 3,326 $ (438)
Financing Activities 167,135 100
Investing Activities (83,403) (5,972)
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$ 87,058 $ (6,310)
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As at December 31, 2010 the Company had $119 million of working capital compared to $19.5 million at December 31, 2009. The increase in working capital is primarily due to funds provided from operations(as defined under Non-GAAP Measures) of $16.9 million and $166.3 million raised through the Company's June private placement and December bought deal financing offset by $83.2 million of capital expenditures made to increase the revenue earning capacity.The Company had approximately $41 million of capital commitments remaining in respect of its 2010 capital program and has initiated a 2011 capital program of $150 million. The Company anticipates being able to fund these capital expenditures through cash on hand, operating cash flows and current debt facilities.OperatingThe Company's funds provided by operations (as defined under Non-GAAP Measures) was $16.9 million for 2010 as compared to $4.4 million in 2009. The increase is due to the Company's increased revenue. With the Company's growth, a large portion of these funds from operations was invested in added working capital ($13.6 million as compared to $4.9 million in 2009).FinancingNet cash provided by financing activities for 2010 was $167.1 million largely consisting of a private placement of equity in June of $61.6 million and a bought deal equity financing in December of $104.7 million. This compares to net cash from financing in 2009 of $100 from the exercise of stock options.As at December 31, 2010 the Company had a $15 million demand revolving loan facility and a $35 million committed revolving facility (see Note 10 of the consolidated financial statements). No amounts were drawn on these facilities as at December 31, 2010 or as at the date of this MD&A. The Company is in compliance with all its debt covenants.InvestingFor 2010 the Company's net cash used for investing activities was $83.4 million as compared to $6.0 million in 2009. For 2010, the Company invested $83.2 million in capital equipment to add revenue producing capacity and $1.4 million of long-term deposits on supplier agreements for key raw materials. Offsetting these investments was an increase of $1.4 million in accounts payable for capital equipment. In 2009, The Company invested $27.3 million in capital equipment which was offset by an increase in accounts payable of $1.5 million and a reduction in short term investments of $19.9 million.



Commitments and contractual obligations

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

Year 2011 2012 2013 2014 2015
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Amount $ 2,197 $ 1,606 $ 911 $ 573 $ 573
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As at December 31, 2010, the Company has commitments totaling approximately $41 million (2009 - $8 million) relating to the construction of fixed assets in 2011 and $86 million (2009 - $3 million) for the purchase of operating supplies.Critical Accounting Policies and EstimatesThis MD&A is based on the Company's annual consolidated financial statements that have been prepared in accordance with Canadian GAAP. Management is required to make assumptions, judgments and estimates in the application of GAAP. GASFRAC's significant accounting policies are described in note 2 of the December 31, 2010 audited consolidated financial statements. The preparation of the consolidated financial statements requires that certain estimates and judgments be made concerning the reported amount of revenue and expenses and the carrying values of assets and liabilities. These estimates are based on historical experience and management's judgment. Anticipating future events involves uncertainty and, consequently, the estimates used by management in the preparation of the consolidated financial statements may change as future events unfold, additional experience is acquired or the environment in which the Company operates changes. The following accounting policies and practices involve the use of estimates that have a significant impact on the Company's financial results.Revenue RecognitionThe 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.Allowance for Doubtful Accounts ReceivableThe Company performs ongoing credit evaluations of its customers and grants credit based upon a review of historical collection experience, current aging status, financial condition of the customer and anticipated industry conditions. Customer payments are regularly monitored and a provision for doubtful accounts is established based upon specific situations and overall industry conditions. In situations where the creditworthiness of a customer is uncertain, services are provided on receipt of cash in advance or services are declined. GASFRAC's management believes that the provision for doubtful accounts is adequate.AmortizationAmortization of the Company's property and equipment incorporates estimates of useful lives and residual values. These estimates may change as more experience is obtained or as general market conditions change, thereby impacting the operation of the Company's property and equipment.Income TaxesThe Company follows the liability method of accounting for income taxes, which evaluates the differences between the financial statement treatment and tax treatment of certain transactions, assets and liabilities. Future tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement amounts of existing assets and liabilities and their respective tax bases. Estimates of the Company's future taxable income have been considered in assessing the utilization of available tax losses. GASFRAC's business is complex and the calculation of income taxes involves many complex factors as well as the Company's interpretation of relevant tax legislation and regulations. GASFRAC's management believes that the future income tax provision is adequate.Stock based CompensationThe Company has a stock-based compensation plan, which is described in Note 7. The Company applies the Black-Scholes option pricing model to value its stock options. 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. The Company has not incorporated an estimated forfeiture rate for stock options that will not vest, rather the Company will account for actual forfeitures as they occur.The Company has a performance share unit and a restricted share plan as described in note 7.Recent Accounting PronouncementsThere have been no Canadian or US accounting pronouncements issued for the 2010 fiscal year which may have a material impact on the Company's financial statements.Off-Balance Sheet ArrangementsThe Company is not party to any off balance sheet arrangements or transactions.Related Party TransactionsDuring the year, the Company paid $287 (2009 - $334) in consulting fees to two Directors. These transactions were in the normal course of operations and have been measured at the exchange amounts.



Outstanding Share Data
Common Shares Warrants Stock Options
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Balance - December 31, 2008 32,370,000 2,602,500 2,621,000
Issued / granted 230,000 - 435,000
Issued / exercised 50,000 - (50,000)
Cancelled / forfeited - - (40,000)
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Balance - December 31, 2009 32,650,000 2,602,500 2,966,000
Issued / granted 26,061,700 - 670,000
Issued / exercised 1,514,666 (845,000) (669,666)
Cancelled / forfeited - - (246,167)
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Balance - December 31, 2010 60,226,366 1,757,500 2,720,167
Issued / exercised 368,500 (319,000) (49,500)
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Balance - March 10, 2011 60,594,866 1,438,500 2,670,667
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Financial InstrumentsThe Company's financial instruments recognized on the balance sheet consist of cash and cash equivalents, short term investments, accounts receivable, unearned revenue, accounts payable, and accrued liabilities. The following is a summary of the accounting model the Company has elected to apply to each of its significant categories of financial instruments:



Cash and cash equivalents Held for trading
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Short term investments Held for trading
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Accounts receivable Loans and receivables
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Accounts payable and accrued liabilities Held for trading
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Credit riskThe Company's accounts receivable balances are with customers in the oil and gas industry and are subject to normal industry credit risks. The Company assesses the credit worthiness of all of its customers. The Company's trade receivables as at December 31, 2010 are aged as follows:



December 31, 2010 December 31, 2009
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Current (0 - 30 days) $ 9,752 $ 2,838
31 - 60 days 11,339 3,590
Over 61 Days 745 2,258
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Total $ 21,836 $ 8,686
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Fair valuesThe fair value of the Company's financial instruments included on the consolidated balance sheet approximate their carrying amounts due to their short term maturity.The additional disclosures regarding fair value measurements of financial instruments as required by recent amendments made to Section 3862 Financial Instruments - presentation and disclosure of the Canadian Institute of Chartered Accountants ("CICA") handbook are presented below. A fair value hierarchy is presented below that distinguishes the significance of the inputs used in determining the fair value measurements of various financial instruments. The hierarchy contains the following levels: Level 1 uses inputs based on quoted prices, Level 2 uses observable inputs other than quoted prices and Level 3 uses inputs that are not based on observable market data.



Carrying Value as at Estimated Fair Value as at
December 31, December 31, 2010
2010 2009 Level 1 Level 2 Level 3
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Cash and cash equivalents $ 98,701 $ 11,643 $ - $98,701 $ -
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Liquidity riskLiquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company has a positive cash position and further manages its liquidity risk by continuously monitoring forecasts and actual cash flows and has secured a credit line with a major Canadian bank. Currently, the Company's cash and cash equivalents and the Company's secured line of credit are sufficient to meet its financial obligations.Market riskMarket risk is the risk that changes in market prices, such as interest rates or foreign exchange rates will affect the Company's income or the value of its financial instruments. The Company does not believe that the results of operations or cash flow would be affected to a significant degree by a sudden change in market interest rates. The Company does not believe that that the results of operations or cash flow would be affected to a significant degree by a sudden change in foreign exchange rate.Business RisksThe business of GASFRAC is subject to certain risks and uncertainties, including those listed below. Prior to making any investment decision regarding GASFRAC, investors should carefully consider, among other things, the risk factors set forth below.Volatility of Industry ConditionsThe demand, pricing and terms for GASFRAC's fracturing and well stimulation services largely depend upon the level of exploration and development activity for North American natural gas and, to a lesser extent, oil. Industry conditions are influenced by numerous factors over which GASFRAC has no control, including the level of oil and natural gas prices, expectations about future oil and natural gas prices, the cost of exploring for, producing and delivering oil and natural gas, the decline rates for current production, the discovery rates of new oil and natural gas reserves, available pipeline and other oil and natural gas transportation capacity, weather conditions, political, military, regulatory and economic conditions, and the ability of oil and natural gas companies to raise equity capital or debt financing. A material decline in global oil and natural gas prices or North American activity levels as a result of any of the above factors could have a material adverse effect on GASFRAC's business, financial condition, results of operations and cash flows. Because of the current economic environment and related decrease in demand for energy, natural gas exploration and development in North America has decreased from peak levels in 2008. Warmer than normal winters in North America, among other factors, may adversely impact demand for natural gas and, therefore, demand for oilfield services. If the economic conditions deteriorate further or do not improve, the decline in natural gas exploration and development could cause a decline in the demand for GASFRAC's services. Such decline could have a material adverse effect on GASFRAC's business, financial condition, results of operations and cash flows.Demand for Oil and Natural GasFuel conservation measures, alternative fuel requirements, increasing consumer demand for alternatives to oil and natural gas, and technological advances in fuel economy and energy generation devices could reduce the demand for crude oil and other hydrocarbons. GASFRAC cannot predict the impact of changing demand for oil and natural gas products, and any major changes could have a material adverse effect on GASFRAC's business, financial condition, results of operations and cash flows.SeasonalityGASFRAC's financial results are directly affected by the seasonal nature of the North American oil and natural gas industry. The first quarter incorporates the winter drilling season when a disproportionate amount of the activity takes place in western Canada. During the second quarter, soft ground conditions typically curtail oilfield activity in all of GASFRAC's Canadian operating areas such that many rigs are unable to move about due to road bans. This period, commonly referred to as "spring breakup", occurs earlier in the year in southeastern Alberta than it does in northern Alberta and northeastern British Columbia. Consequently, this is GASFRAC's weakest three-month revenue period. Additionally, if an unseasonably warm winter prevents sufficient freezing, GASFRAC may not be able to access well sites and GASFRAC's operating results and financial condition may therefore be adversely affected. The demand for fracturing and well stimulation services may also be affected by severe winter weather in North America. In addition, during excessively rainy periods in any of GASFRAC's operating areas, equipment moves may be delayed, thereby adversely affecting revenues. The volatility in the weather and temperature can therefore create unpredictability in activity and utilization rates, which can have a material adverse effect on GASFRAC's business, financial condition, results of operations and cash flows.Concentration of Customer BaseGASFRAC's customer base consists of over forty oil and natural gas exploration and production companies, ranging from large multinational public companies to small private companies. Notwithstanding GASFRAC's broad customer base, GASFRAC had three significant customers that collectively accounted for approximately 63 percent of GASFRAC's revenue for the year ended December 31, 2010. GASFRAC's strong relationships with exploration and production companies may result in increased concentration of revenues during periods of reduced activity levels such as the first three months of the year. However, there can be no assurance that GASFRAC's relationship with its primary customers will continue, and a significant reduction or total loss of the business from these customers, if not offset by sales to new or existing customers, would have a material adverse effect on GASFRAC's business, financial condition, results of operations and cash flows.CompetitionEach of the markets in which GASFRAC participates is highly competitive. To be successful, a service provider must provide services that meet the specific needs of oil and natural gas exploration and production companies at competitive prices. The principal competitive factors in the markets in which GASFRAC operates are product and service quality and availability, technical knowledge and experience, reputation for safety and price. GASFRAC competes with large national and multinational oilfield service companies that have greater financial and other resources. These companies offer a wide range of well stimulation services in all geographic regions in which GASFRAC operates. In addition, GASFRAC competes with several regional competitors. As a result of competition, it may suffer from a significant reduction in revenue or be unable to pursue additional business opportunities.Equipment Inventory LevelsBecause of the long-life nature of oilfield service equipment and the lag between when a decision to build additional equipment is made and when the equipment is placed into service, the inventory of oilfield service equipment in the industry does not always correlate with the level of demand for service equipment. Periods of high demand often spur increased capital expenditures on equipment, and those capital expenditures may add capacity that exceeds actual demand. This capital overbuild could cause GASFRAC's competitors to lower their rates and could lead to a decrease in rates in the oilfield services industry generally, which could have a material adverse effect on GASFRAC's business, financial condition, results of operations and cash flows.Sources, Pricing and Availability of Raw Materials and Component PartsGASFRAC sources its raw materials, such as proppant, chemicals, nitrogen, carbon dioxide and diesel fuel, and component parts, from a variety of suppliers in North America. Should GASFRAC's suppliers be unable to provide the necessary raw materials and component parts at an acceptable price or otherwise fail to deliver products in the quantities required, any resulting delays in the provision of services could have a material adverse effect on GASFRAC's business, financial condition, results of operations and cash flows.Capital-Intensive IndustryGASFRAC's business plan is subject to the availability of additional financing for future costs of operations or expansion that might not be available, or may not be available on favourable terms. GASFRAC's activities may also be financed partially or wholly with debt, which could increase GASFRAC's debt levels above industry standards. The level of GASFRAC's indebtedness from time to time could impair GASFRAC's ability to obtain additional financing in the future on a timely basis to take advantage of business opportunities that may arise. If GASFRAC's cash flow from operations is not sufficient to fund GASFRAC's capital expenditure requirements, there can be no assurance that additional debt or equity financing will be available to meet these requirements or, if available, on favourable terms.Patents and Proprietary TechnologyGASFRAC's success will depend, in part, on its ability to obtain patents, maintain trade secret protection and operate without infringing on the rights of third parties. The LPG Fracturing Process patents for the U.S., Canada and International markets remain in examination. However, there can be no assurance that any issued patents will provide GASFRAC with any competitive advantages or will not be successfully challenged by any third parties, or that the patents of others will not have an adverse effect on the ability of GASFRAC to do business. In addition, there can be no assurance that others will not independently develop similar products, duplicate some or all of GASFRAC's products, or, if patents are issued to GASFRAC, design their products so as to circumvent the patent protection that may be held by GASFRAC. In addition, GASFRAC could incur substantial costs in lawsuits in which GASFRAC attempts to enforce its own patents against other parties.Operational RisksGASFRAC's operations are subject to hazards inherent in the oil and natural gas industry, such as equipment defects, malfunction and failures, and natural disasters which result in fires, vehicle accidents, explosions and uncontrollable flows of natural gas or well fluids that can cause personal injury, loss of life, suspension of operations, damage to formations, damage to facilities, business interruption and damage to or destruction of property, equipment and the environment. These hazards could expose GASFRAC to substantial liability for personal injury, wrongful death, property damage, loss of oil and natural gas production, pollution, contamination of drinking water and other environmental damages. GASFRAC continuously monitors its activities for quality control and safety, and although it maintains insurance coverage that it believes to be adequate and customary in the industry, such insurance may not be adequate to cover GASFRAC's liabilities and may not be available in the future at rates that GASFRAC considers reasonable and commercially justifiable.Availability of Qualified StaffAttracting and retaining qualified workers is necessary for GASFRAC to provide reliable services to its customers. With high industry activity there is also high demand for qualified workers and, as such, it is a challenge for GASFRAC to add a significant number of workers to support its planned growth. The Company attempts to overcome this challenge by offering an attractive compensation package, providing an in-depth training program, and offering career growth opportunities.Availability of Debt FinancingThe Company has facilities with its bank for $50 million of debt financing as discussed in Note 5 of the 2010 Consolidated Audited Financial Statements. Should GASFRAC be unable to renew these facilities in the amount it requires or on terms acceptable to it, significant liquidity issues could result.Financing of future growthGASFRAC's future growth strategy is subject to the availability of financing to support the acquisition of additional capital equipment. This growth may be fully or partially financed with debt which may or may not be available at the time required. Should such debt financing not be available as required it could result in a delay in the Company's ability to grow its operations. Should the Company obtain debt financing there are no assurances that debt levels may increase above industry standards due to the impact of seasonal or cyclical trends or other factors.Management StewardshipThe successful operation of GASFRAC's business depends upon the abilities, expertise, judgment, discretion, integrity and good faith of GASFRAC's executive officers, employees and consultants. In addition, GASFRAC's ability to expand its services depends upon its ability to attract qualified personnel as needed. The demand for skilled oilfield employees is high, and the supply is limited. If GASFRAC loses the services of one or more of its executive officers or key employees, it could have a material adverse effect on GASFRAC's business, financial condition, results of operations and cash flows.Regulations Affecting the Oil and Natural Gas IndustryThe operations of GASFRAC's customers are subject to or impacted by a wide array of regulations in the jurisdictions in which they operate. As a result of changes in regulations and laws relating to the oil and natural gas industry, GASFRAC's customers' operations could be disrupted or curtailed by governmental authorities. The high cost of compliance with applicable regulations could cause customers to discontinue or limit their operations and may discourage companies from continuing development activities. As a result, demand for GASFRAC's services could be substantially affected by regulations adversely impacting the oil and natural gas industry. Changes in environmental requirements may negatively impact demand for GASFRAC's services. For example, oil and natural gas exploration and production may decline as a result of environmental requirements (including land use policies responsive to environmental concerns). A decline in exploration and production, in turn, could materially and adversely affect GASFRAC.Government RegulationsGASFRAC's operations are subject to a variety of federal, provincial, state and local laws, regulations and guidelines in all the jurisdictions in which it operates, including laws and regulations relating to health and safety, the conduct of operations, taxation, the protection of the environment and the manufacture, management, transportation and disposal of certain materials used in GASFRAC's operations. GASFRAC has invested financial and managerial resources to ensure such compliance and expects to continue to make such investments in the future. Such laws or regulations are subject to change and could result in material expenditures that could have a material adverse effect on GASFRAC's business, financial condition, results of operations and cash flows. It is impossible for GASFRAC to predict the cost or impact of such laws and regulations on GASFRAC's future operations. In particular, GASFRAC is subject to increasingly stringent laws and regulations relating to importation and use of hazardous materials, radioactive materials and explosives, environmental protection, including laws and regulations governing air emissions, water discharges and waste management. GASFRAC incurs, and expects to continue to incur, capital and operating costs to comply with environmental laws and regulations. The technical requirements of these laws and regulations are becoming increasingly complex, stringent and expensive to implement. These laws may provide for "strict liability" for damages to natural resources or threats to public health and safety. Strict liability can render a party liable for damages without regard to negligence or fault on the part of the party. Some environmental laws provide for joint and several strict liabilities for remediation of spills and releases of hazardous substances.GASFRAC uses and generates hazardous substances and wastes in its operations. In addition, some of GASFRAC's current properties are, or have been, used for industrial purposes. Accordingly, GASFRAC could become subject to potentially material liabilities relating to the investigation and cleanup of contaminated properties, and to claims alleging personal injury or property damage as the result of exposures to, or releases of, hazardous substances. In addition, stricter enforcement of existing laws and regulations, new laws and regulations, the discovery of previously unknown contamination or the imposition of new or increased requirements could require GASFRAC to incur costs or become the basis of new or increased liabilities that could reduce GASFRAC's earnings and cash available for operations. GASFRAC believes it is currently in substantial compliance with applicable environmental laws and regulations.GASFRAC is a provider of hydraulic fracturing services, a process that creates fractures extending from the well bore through the rock formation to enable natural gas or oil to move more easily through the rock pores to a production well. Bills pending in the United States House of Representatives and Senate have asserted that chemicals used in the fracturing process could adversely affect drinking water supplies. The proposed legislation would require the reporting and public disclosure of chemicals used in the fracturing process. This legislation, if adopted, could establish an additional level of regulation at the federal level that could lead to operational delays and increased operating costs. The adoption of any future federal or state laws or implementing regulations imposing reporting obligations on, or otherwise limiting, the hydraulic fracturing process could make it more difficult to complete natural gas and oil wells and could have a material adverse effect on GASFRAC's business, financial condition, results of operations and cash flows.Climate Change InitiativesCanada is a signatory to the United NationsFramework Convention on Climate Change and has adopted the Kyoto Protocol established thereunder to set legally binding targets to reduce nation-wide emissions of carbon dioxide, methane, nitrous oxide and other so-called "greenhouse gases". Details regarding Canada's implementation of the Kyoto Protocol remain unclear. On April 26, 2007, the Government of Canada released its Regulatory Framework for Air Emissions which outlines proposed new requirements governing the emission of greenhouse gases and industrial air pollutants in accordance with the Government's Notice of Intent to Develop and Implement Regulations and Other Measures to Reduce Air Emissions, which was released on October 19, 2006. A further plan setting out the federal government's proposed framework for regulating greenhouse gas emissions was released on March 10, 2008. The framework and associated public documents provide some, but not full, detail on new greenhouse gas and industrial air pollutant limits and compliance mechanisms that the government intends to apply to various industrial sectors, including oil and natural gas producers. Details on potential legislation to enact the proposed regulatory framework for greenhouse gases remain unavailable.Since November 2008, the Government of Canada has expressed an interest in pursuing a potential harmonization of future Canadian greenhouse gas regulation with future regulation in the United States, pursuant to a bilateral treaty, raising uncertain implications for greenhouse gas emission requirements to be applied to Canadian industry, including the oil and natural gas sector. Future federal legislation, including potential international or bilateral requirements enacted under Canadian law, together with provincial emission reduction requirements, such as those in effect under Alberta's Climate Change and Emissions Management Act, and potential further provincial requirements, may require the reduction of emissions or emissions intensity from GASFRAC's operations and facilities. Mandatory emissions reductions may result in increased operating costs and capital expenditures for oil and natural gas producers, thereby decreasing the demand for GASFRAC's services. The mandatory emissions reductions may also impair GASFRAC's ability to provide GASFRAC's services economically. GASFRAC is unable to predict the impact of current and pending emission reduction legislation on GASFRAC and it is possible that such impact may have a material adverse effect on GASFRAC's business, financial condition, results of operations and cash flows.CustomersCustomers are generally invoiced for our services in arrears. As a result, we are subject to our customers delaying or failing to pay invoices. Risk of payment delays or failure to pay is increased during periods of weak economic conditions due to potential reduction in cash flow and access to capital of our customers.The Market Price of the Common Shares May Be VolatileThe trading price of securities of oilfield service companies is subject to substantial volatility. The volatility is often based on factors both related to and not related to the financial performance or prospectus of the companies involved. The market price of the GASFRAC Common Shares could be subject to significant fluctuations in response to our operating results, financial condition and other internal factors. Factors that could affect the market price that are not directly related to GASFRAC's performance include commodity prices and market perceptions of the attractiveness of particular industries for investment. The price at which the Common Shares will trade cannot be accurately predicted.Internal Controls Over Financial ReportingDuring the fourth quarter, GASFRAC initiated 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 December 31, 2010.There have been no changes in the Company's internal controls over financial reporting during the period ended December 31, 2010 that have materially affected, or are reasonably likely to materially effect, the Company's internal controls over financial reporting.International Financial Reporting Standards ("IFRS")The Canadian Accounting Standards Board ("AcSB") published a new strategic plan that outlines the convergence of Canadian generally accepted accounting principles with IFRS over an expected five year transitional period. The changeover date for publicly-listed companies to use IFRS, replacing Canada's own generally accepted accounting principles is interim and annual financial statements for fiscal years beginning on or after January 1, 2011 with the restatement for comparative purposes of amounts reported by the Company for the year ended December 31, 2010.The Company has completed a high-level review and preliminary assessment of the differences between Canadian GAAP and IFRS and the potential effects of IFRS to its accounting and reporting processes, information systems, business processes and external disclosures. This assessment has provided insight into what are anticipated to be the most significant areas of difference applicable to the Company. The next step is to perform an in-depth review of the significant areas of difference and formulate ongoing accounting policies. Key areas addressed will also be reviewed to determine any information technology issues, the impact on internal controls over financial reporting and the impact on business activities including the effect, if any, on covenants and compensation arrangements.The Company will also continue to monitor standards development as issued by the AcSB as well as regulatory developments as issued by the Canadian Securities Administrators, which may affect the timing, nature or disclosure of its adoption of IFRS.The following IFRS standards are considered most relevant to the Company's conversion process:IFRS 1 - First-time Adoption of IFRS, which generally requires that an entity apply all IFRS standards retrospectively, with specific mandatory exemptions, and a limited number of optional exemptions. A preliminary assessment of the available exemptions has been completed.Elections made upon transition to IFRS can have a significant impact on the level of time and effort needed for the conversion to IFRS. The following optional exemptions are the most applicable to the Company:a) Fair value as deemed cost - This exemption provides the Company with the option to elect specific fair values as the deemed cost of any qualifying item of property and equipment;b) Business combinations - This exemption provides the Company with the option of not applying IFRS 3, Business Combinations to business combinations that took place before the date of transition; andc) Share-based payments - This exemption provides the Company with the option of not applying IFRS 2, Share-Based Payments to equity-settled share-based payment transactions issued after November 7, 2002 and which have vested before the date of transition.The Company has completed a more detailed analysis of each of the specific areas identified in the high-level comparison of Canadian GAAP to IFRS.GASFRAC does not anticipate that the transition to IFRS will require significant changes to its accounting systems. The most significant system changes relate to its fixed asset sub-system in order to separately track the components of its fixed assets.During the fourth quarter of 2010 GASFRAC substantially completed calculations for IFRS compliant quarterly financial statements for each of the first three quarters of 2010 as these comparatives will be required for 2011 reporting. In addition, during the fourth quarter of 2010 GASFRAC has substantially completed; white-papers for accounting policies and IFRS 1 elections; preparation of required transition disclosures and schedules; January 1, 2010 IFRS opening balance sheet amounts; testing of the calculation of the opening balance sheet amounts as well as the quarterly financial statements for each of the first three quarters of 2010.Changes in Accounting PoliciesThere were no new or amended accounting policies issued for adoption in the current period.Non-GAAP MeasuresCertain supplementary measures in this MD&A do not have any standardized meaning as prescribed under Canadian GAAP and, therefore, are considered non-GAAP 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:

($000s) Three months ended Twelve months ended
December 31 December 31
----------------------------------------
2010 2009 2010 2009
----------------------------------------------------------------------------
Net income 2,062 (2,838) 5,053 (2,210)
Add back (deduct):
Interest income (71) (16) (107) (201)
Amortization 2,452 1,525 7,929 5,024
Future income tax provision 1,670 7 3,237 360
----------------------------------------------------------------------------
EBITDA 6,113 (1,322) 16,112 2,973
----------------------------------------------------------------------------
----------------------------------------------------------------------------

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. 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 was calculated as follows:

($000s) Three months ended Twelve months ended
December 31 December 31
----------------------------------------
2010 2009 2010 2009
----------------------------------------------------------------------------
Cash and cash equivalents provided by
(used for) operating activities 1,004 404 3,326 (438)
Add back (deduct):
Net changes in non-cash working
capital 5,621 (1,209) 13,601 4,885
----------------------------------------------------------------------------
Funds provided by operations 6,625 (805) 16,927 4,447
----------------------------------------------------------------------------
----------------------------------------------------------------------------

OutlookWe expect the North American pressure pumping market will remain strong in 2011 due to the service intensity of the wells being drilled, energy demand and service supply levels. Although there is projected to be a significant amount of new horsepower being added to the market in 2011, it is still estimated that the market will be undersupplied based on projected rig activity. As natural gas prices continue to be soft we have observed customers targeting more of their capital budgets in oil and liquids-rich reservoirs. Further, development activity is focused on deep, unconventional and horizontal wells often requiring multi-stage fracturing.As noted above, we expect that overall demand for fracturing services will continue to be strong for 2011 and this, combined with growing knowledge and acceptance of the Company's LPG fracturing technology, should support continued growth of our Canadian revenue base. We do note however that we anticipate a reduction in anticipated revenues for the first quarter of 2011 due to the Company's self imposed cessation of operations for 19 days while it investigated (and resolved) a well-site incident as described in our press releases of January 16, 2011 and January 20, 2011. The incident has been fully resolved and we do not expect any further interruption of services as a result of this incident.As in Canada, more drilling activity in the USA is being focused on oil and liquids rich gas. While industry dynamics are similar to Canada for GASFRAC, the key element of our initial growth in the USA will be obtaining customer acceptance of our LPG fracturing technology and on focusing on key basins where we can quickly reach sufficient mass to ensure high utilization rates. We are planning for deployment of two sets of equipment to USA locations early in 2011 and are optimistic that customer acceptance of the technology will result in significant utilization of the equipment.With the backdrop of anticipated strong demand in the overall fracturing industry in North America, growing acceptance of the Company's technology and added revenue producing capacity at GASFRAC with the added capital equipment, we expect to be able to continue to increase our revenue base through 2011.Forward-Looking StatementsThis 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 beyond 2010;- 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 additional fluid management equipment will allow the Company to increase the utilization of its horsepower;- 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 capital equipment in Canada and the USA;- expectations as to the potential for GASFRAC's services in the United States;- 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 2011;- expectations of the amount of net fracturing horsepower being added to the North American market in 2011 and its impact on GASFRAC's service prices;- expected timing for completion of the assessment and implementation phases of GASFRAC's project plan for transition to IFRS;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 capital equipment.



GASFRAC ENERGY SERVICES INC.

CONSOLIDATED FINANCIAL STATEMENTS

FOR THE TWELVE MONTHS ENDED

DECEMBER 31, 2010


GASFRAC ENERGY SERVICES INC.
Consolidated Balance Sheets
(000s)

As at: Dec 31, 2010 Dec 31, 2009
----------------------------------------------------------------------------

ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 98,701 $ 11,643
Accounts receivable 24,500 9,469
Inventory 7,018 5,499
Prepaid expenses 6,839 519
----------------------------------------------------------------------------
137,058 27,130

FUTURE INCOME TAX BENEFIT (Note 6) - 775
LONG TERM DEPOSITS 3,176 1,790
PROPERTY AND EQUIPMENT (Note 3) 136,749 61,295
OTHER ASSETS (Note 4) 420 358
----------------------------------------------------------------------------

$ 277,403 $ 91,348
----------------------------------------------------------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 14,828 $ 7,617
Unearned revenue 3,486 -
----------------------------------------------------------------------------
18,314 7,617
FUTURE INCOME TAX (Note 6) 368 -
----------------------------------------------------------------------------
18,682 7,617
----------------------------------------------------------------------------

SHAREHOLDERS' EQUITY
SHARE CAPITAL (Note 7) 251,326 81,293
CONTRIBUTED SURPLUS (Note 8) 1,712 1,808
RETAINED EARNINGS 5,683 630
----------------------------------------------------------------------------

258,721 83,731
----------------------------------------------------------------------------
$ 277,403 $ 91,348
----------------------------------------------------------------------------
See accompanying notes

On behalf of the Board:

Dwight Loree, Director

Gerald Roe, Director

GASFRAC ENERGY SERVICES INC.

Consolidated Statements of Operations, Comprehensive Income (Loss) and
Retained Earnings (000s)

Twelve Months Ended Dec 31, 2010 Dec 31, 2009
----------------------------------------------------------------------------

REVENUE $ 96,906 $ 30,428
----------------------------------------------------------------------------

EXPENDITURES
Operating 72,190 21,016
Selling, general and administrative 10,579 6,227
Stock based compensation (Note 2) 708 1,273
Amortization 7,929 5,024
Foreign exchange loss 73 160
----------------------------------------------------------------------------
91,479 33,700
----------------------------------------------------------------------------

OTHER INCOME
Business interruption claim (Note 15) 2,756 638
Scientific research and experimental
development - 583
Interest income 107 201
----------------------------------------------------------------------------
2,863 1,422
----------------------------------------------------------------------------

NET INCOME (LOSS) BEFORE INCOME TAXES 8,290 (1,850)

FUTURE INCOME TAXES EXPENSE (Note 6) 3,237 360
----------------------------------------------------------------------------

NET INCOME (LOSS) / COMPREHENSIVE
INCOME (LOSS) 5,053 (2,210)

RETAINED EARNINGS
BALANCE, BEGINNING OF THE YEAR 630 2,840
----------------------------------------------------------------------------

BALANCE, END OF THE YEAR $ 5,683 $ 630
----------------------------------------------------------------------------

Income (Loss) per share
Basic $ 0.13 ($ 0.07)
----------------------------------------------------------------------------
Diluted $ 0.12 ($ 0.07)
----------------------------------------------------------------------------
See accompanying notes

GASFRAC ENERGY SERVICES INC.

Consolidated Statements of Cash Flows (000s)

Twelve Months Ended Dec 31, 2010 Dec 31, 2009
----------------------------------------------------------------------------

CASH AND CASH EQUIVALENTS PROVIDED BY (USED
FOR):
OPERATING ACTIVITIES
Net Income (Loss) / Comprehensive Income (Loss) $ 5,053 $ (2,210)
Items not effecting cash:
Amortization 7,929 5,024
Future income taxes expense 3,237 360
Stock based compensation 708 1,273
----------------------------------------------------------------------------
16,927 4,447
Net change in non-cash working capital (Note 12) (13,601) (4,885)
----------------------------------------------------------------------------
3,326 (438)
----------------------------------------------------------------------------

FINANCING ACTIVITIES
Issuance of common shares (net of share issue
costs) 167,135 100
----------------------------------------------------------------------------

INVESTING ACTIVITIES
Decrease in short term investments - 19,883
(Increase) decrease in long term deposits (1,386) 162
Purchase of property and equipment (83,248) (27,349)
Purchase of other assets (197) (130)
Net changes in non-cash working capital 1,428 1,462
----------------------------------------------------------------------------
(83,403) (5,972)
----------------------------------------------------------------------------

Increase (decrease) in cash and cash equivalents
For the year 87,058 (6,310)
Cash and cash equivalents at beginning of year 11,643 17,953
----------------------------------------------------------------------------
BALANCE, END OF THE YEAR $ 98,701 $ 11,643
----------------------------------------------------------------------------
See accompanying notes

GASFRAC ENERGY SERVICES INC.Notes to the Consolidated Financial StatementsDecember 31, 2010 and December 31, 2009(Figures in text and tables are in 000s except share data and certain other exceptions as indicated)1. NATURE OF OPERATIONS AND BASIS OF PRESENTATIONGASFRAC Energy Services Inc. ("GASFRAC" or the "Company") was incorporated on February 13, 2006 in Canada under the Business Corporations Act in the Province of Alberta. The Company is a 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.These consolidated financial statements include the accounts of the Company's wholly owned subsidiaries GASFRAC Energy Services Limited Partnership, GASFRAC Services GP Inc., and GASFRAC Inc. (a US incorporated entity).The Company's financial statements have been prepared in Canadian dollars in accordance with Canadian generally accepted accounting principles ("GAAP"). Management is required to make estimates and assumptions that affect 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 during the reported period. The significant estimates of the Company include estimates relating to accounts receivable, property and equipment, stock based compensation, and future income tax. Actual results could differ from these estimates.The Company's financial results are directly affected by the seasonal nature of the North American oil and natural gas industry. The first and fourth quarter incorporates the winter drilling season when a disproportionate amount of the activity takes place in western Canada. During the second quarter, commonly referred to as "spring breakup", soft ground conditions typically curtail oilfield activity in all of the Company's Canadian operating areas. In addition, during excessively rainy periods in any of the Company's operating areas, equipment moves may be delayed, thereby adversely effecting revenues.On August 6, 2010, the Company amalgamated with Kierland Capital Corporation ("Kierland"). The amalgamation was accounted for as a reverse takeover of Kierland, an entity that did not constitute a business by the Company. Pursuant to the terms of the transaction: (i) all of the issued and outstanding common shares of Kierland were exchanged for 156,250 common shares of Amalco; and (ii) each of the 46,585,833 issued and outstanding GASFRAC shares were exchanged for one Amalco share. Upon completion of the transaction, the continuing entity changed its name to GASFRAC Energy Services Inc.2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESThe following is a summary of significant accounting policies used in the preparation of these financial statements:ConsolidationThese consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. All inter-company balances and transactions have been eliminated on consolidation.Cash and cash equivalentsCash 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.Scientific research and experimental development ("SRED")Non-refundable investment tax credits for SRED activities are recorded when the Company has reasonable assurance that the credit will be realized. Management makes a number of estimates and assumptions in determining the expenditures eligible for the investment tax credit claim.InventoryInventory consists of liquefied petroleum gas, chemicals, and proppants used to stimulate well production and is stated at the lower of cost and net realizable value. Cost is determined using the weighted average method.Property and equipmentProperty and equipment are recorded at cost and are amortized over their estimated economic useful lives using the straight-line method over the following terms:



Equipment 3 - 10 Years
----------------------------------------------------------------------------
Leasehold Improvements Lease term
----------------------------------------------------------------------------
Furniture and fixtures 5 Years
----------------------------------------------------------------------------

Assets under construction are not amortized until put into service.Management estimates the useful life and salvage 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 salvage values of the property and equipment.Major betterments are capitalized. Repairs and maintenance expenditures which do not extend the useful life of the property and equipment are expensed.Impairment of Long-Lived AssetsLong-lived assets include property and equipment and other assets. They are tested for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable. An impairment loss is recognized when the carrying amount of the assets exceeds the sum of the undiscounted future cash flows expected from use and eventual disposal. Estimates of undiscounted future net cash flows are calculated using estimated future utilization, sales prices and margins, operating expenditures and other costs. These estimates are subject to risk and uncertainties, and it is possible that changes in estimates could occur which may impact the expected recoverability of the Company's long-lived assets.Other assetsOther assets including deferred development costs, patents and intellectual property that meet certain criteria related to technology, market and financial feasibility under Canadian generally accepted accounting principles, are deferred. Such costs are amortized over the estimated economic life of the related product starting upon commencement of commercial sales. Costs that do not meet such criteria are charged to income in the period of expenditure.Revenue recognitionThe 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.Income taxesThe Company follows the liability method of determining the provision for income taxes. Under this method, future incomes taxes are determined based on temporary differences between the tax bases of assets and liabilities and their carrying amounts in the financial statements, using the substantively enacted tax rates. Future tax assets are recognized where their recoverability is more likely than not.The calculation of the provision for income taxes involves tax regulations, legislation and interpretations which are subject to change. There are also tax matters that have yet to be confirmed by taxation authorities; however; management believes the provision for income taxes is reasonable.Stock based compensationThe Company has a stock-based compensation plan, which is described in Note 7. The Company applies the Black-Scholes option pricing model to value its stock options. 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. The Company has not incorporated an estimated forfeiture rate for stock options that will not vest, rather the Company will account for actual forfeitures as they occur.The Company has a performance share unit and a restricted share plan as described in note 7.Translation of foreign currenciesTransactions in foreign currencies are translated into Canadian dollars at rates in effect at the date of the transaction. Assets and liabilities denominated in foreign currencies are translated at the exchange rates in effect at each accounting period end date. Exchange gains or losses are included in net income.For the Company's wholly owned integrated foreign subsidiary, the temporal method of translating foreign currencies has been used. Under this method, monetary items are translated into Canadian dollars at the exchange rates in effect at each accounting period end date. Non-monetary items and their related amortization are translated at their historical exchange rates. Revenues and expenses are translated at average exchange rates during the period. Gains or losses arising from the translation of the financial statements of these foreign subsidiaries are included in net income.Earnings per shareBasic earnings per share is calculated using the weighted average number of shares outstanding during the year. Under the treasury stock method, diluted earnings per share is calculated based on the weighted average number of shares outstanding during the year, adjusted by the total of additional common shares that would have been issued assuming exercise of all stock options, restricted shares and warrants with exercise prices at or below the average market price for the year, offset by the reduction in common shares that would be purchased with the exercise proceeds.Recently issued accounting pronouncementsBusiness combinations, consolidated financial statements and non-controlling interestsIn January 2009, CICA issued Section 1582, Business Combinations; Section 1601, Consolidated Financial Statements; and Section 1602, Non-controlling Interests. These sections replace the former Section 1581, Business Combinations, and Section 1600, Consolidated Financial Statements, and establish new sections for accounting for a non-controlling interest in a subsidiary. Section 1582 is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after January 1, 2011. Sections 1601 and 1602 apply to interim and annual consolidated financial statements relating to years beginning on or after January 1, 2011. The Company is currently assessing the effect these standards may have on its results of operations and consolidated financial statements.



3. PROPERTY AND EQUIPMENT

December 31, December 31,
As at: 2010 2009
----------------------------------------------------------------------------
Cost:
Equipment $ 103,983 $ 59,037
Furniture & Fixtures 156 59
Leasehold Improvements 55 51
Assets Under Construction 47,392 9,194
----------------------------------------------------------------------------
151,586 68,341
----------------------------------------------------------------------------
Accumulated Depreciation:
Equipment 14,788 7,019
Furniture & Fixtures 38 21
Leasehold Improvements 11 6
Assets Under Construction - -
----------------------------------------------------------------------------
14,837 7,046
----------------------------------------------------------------------------
Net Book Value:
Equipment 89,195 52,018
Furniture & Fixtures 118 38
Leasehold Improvements 44 45
Assets Under Construction 47,392 9,194
----------------------------------------------------------------------------
$ 136,749 $ 61,295
----------------------------------------------------------------------------
----------------------------------------------------------------------------

As at December 31, 2010 and December 31, 2009, assets under construction are not subject to amortization as the assets are not yet available for use.



4. OTHER ASSETS

December 31, December 31,
2010 2009
----------------------------------------------------------------------------
Cost:
Patents & Intellectual Property $ 477 $ 312
Deferred Development Costs 230 198
Prepaid Lease Agreements 31 31
----------------------------------------------------------------------------
738 541
----------------------------------------------------------------------------
Accumulated Depreciation:
Patents & Intellectual Property 163 82
Deferred Development Costs 131 84
Prepaid Lease Agreements 24 17
----------------------------------------------------------------------------
318 183
----------------------------------------------------------------------------
Net Book Value:
Patents & Intellectual Property 314 230
Deferred Development Costs 99 114
Prepaid Lease Agreements 7 14
----------------------------------------------------------------------------
$ 420 $ 358
----------------------------------------------------------------------------
----------------------------------------------------------------------------

5. LONG-TERM DEBTDuring 2010, the Company entered into the new credit facility with a Canadian chartered bank. The new credit facility includes a $15 million demand revolving loan ("Operating Loan") and a $35 million committed revolving facility ("Revolving Facility"). The Operating Loan bears interest at prime plus 1.25% and is margined by the Company's accounts receivable. The Revolving Facility bears interest at prime plus 1.4% to prime plus 1.9%, shall not exceed 50% of the net book value of the Company's capital assets, may be extended annually, if not extended shall be repayable in eight 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.6. FUTURE INCOME TAXThe net income tax provision differs from that expected by applying the combined federal and provincial income tax rate of 28.65% (2009 - 29.85%) to income taxes for the following reasons:



Year ended December 31, 2010 2009
----------------------------------------------------------------------------
Expected combined federal and provincial income tax $ 2,375 $ (530)
Statutory and other rate differences 299 441
Non-deductible expenses 203 177
Future income tax rate reduction (294) 64
Valuation allowance 654 208
----------------------------------------------------------------------------
Effective / Actual $ 3,237 $ 360
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The components of the future income tax asset and liability are as follows:

As at December 31, 2010 2009
----------------------------------------------------------------------------
Property and equipment and other assets $ (4,809) $ (3,274)
Non-capital loss carry forwards 2,338 3,062
Financing costs 2,571 830
Other 394 394
Valuation Allowance (862) (237)
----------------------------------------------------------------------------
Total future income tax (liability) benefit $ (368) $ 775
----------------------------------------------------------------------------
----------------------------------------------------------------------------

The Company has $ 5,897 (2009 - $ 10,413) of tax pools related to non-capital losses available for carry forward to reduce taxable income in future years and expire between 2027 and 2029. The Company also has $ 1,569 (2009 - $1,569) of tax pools related to SR&ED available for carry forward to reduce taxable income in future years and do not expire.7. SHARE CAPITALAuthorized 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

2010 2009
----------------------------------------------------------------------------
Shares Amount Shares Amount
----------------------------------------------------------------------------
(#) ($) (#) ($)
Balance - January 1 32,650,000 81,293 32,370,000 80,205
Issued on private placement 13,000,000 61,551 - -
Issued on bought deal 12,929,450 104,698 - -
Issued on exercise of options 669,666 1,397 50,000 110
Issued on share exchange (Note 1) 156,250 453 - -
Issued upon exercise of warrants 845,000 2,030 -
Issued for services 30,000 128 230,000 978
Reclassified as restricted shares (130,000) (552) - -
Released from restricted shares 76,000 328 - -
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Balance - December 31 60,226,366 251,326 32,650,000 81,293
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On June 30, 2010 GASFRAC closed a private placement of 13,000,000 subscription receipts by the Company at a price of $5.00 per receipt for gross proceeds of $65 million (net cash proceeds of $60.6 million after broker fees and transaction costs and deferred tax recovery of $1.0 million).On December 22, 2010 GASFRAC closed a bought deal of 12,929,450 common shares by the Company at a price of $8.45 for gross proceeds of $109 million (net cash proceeds of $104 million after broker fees and transaction costs and deferred tax recovery of $1.1 million).



Restricted shares

2010 2009
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Shares Amount Shares Amount
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(#) ($) (#) ($)
Balance - January 1 127,917 542 - -
Granted 310,000 1,394 130,000 553
Released to common shares (76,000) (329) (2,083) (11)
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Balance - December 31 361,917 1,607 127,917 542
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The Company has granted restricted shares for certain employees with an annual vesting period over five years from the date of the grant. During the year, the Company granted 310,000 restricted shares and restricted stock compensation of $163 was recognized.Performance share unitsThe Company grants performance share units to officers and employees with the amount of the grant earned being linked to corporate performance and grants vesting over three years from date of grant. The performance stock units are settled either in cash or Company shares. During the year, the Company granted 250,000 performance share units and 20,833 vested (2009 - nil). During the year, $191 of compensation expense was recognized for performance share units (2009 - nil).Changes in the Company's obligations under performance share units, which arise from fluctuations in the market value of the Company's shares underlying the compensation program, are recorded as the share price changes.Stock optionsThe Company calculates the fair value of its 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.



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Risk-free interest rate 1.5%
Expected life 3 years
Maximum life 5 years
Volatility 0% - 55%
Expected dividend 0
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A summary of the status of the Company's outstanding stock options is
presented below:

2010 2009
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Average Average
Exercise Exercise
Options Price Options Price
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(#) ($) (#) ($)
Balance - January 1 2,966,000 2.89 2,621,000 2.63
Granted 670,000 4.51 435,000 4.25
Exercised for common shares (669,666) 2.00 (50,000) 2.00
Forfeited and expired (246,167) 3.14 (40,000) 2.00
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Balance - December 31 2,720,167 3.47 2,966,000 2.89
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Stock options vest over three years and expire five years from the date of grant. The 2,720,167 options outstanding (1,295,333 exercisable) at December 31, 2010 had exercise prices ranging from $2.00 to $5.00 per share with expiry dates ranging from 2011 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 year, $229 of compensation expense was recognized.Warrants



2010 2009
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Average Average
Exercise Exercise
Warrants Price Warrants Price
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(#) ($) (#) ($)
Balance - January 1 2,602,500 1.32 2,602,500 1.32
Exercised for common shares (845,000) 1.57 - -
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Balance - December 31 1,757,500 1.20 2,602,500 1.32
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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 December 31, 2010 1,400,000 (2009 - 1,500,000) founder warrants were outstanding.In 2006, as part of the terms of a financing agreement, the Company issued 262,500 brokers warrants, entitling the holders to purchase common shares of the Company at $1.00 per share. In 2007, as part of the terms of a financing agreement, the Company issued 840,000 brokers warrants, entitling the holders to purchase common shares of the Company at $2.00 per share. As at December 31, 2010, 357,500 (2009 - 1,102,500) broker warrants, expiring May 22, 2011, were outstanding.During the year, $49 of compensation expense was recognized ($49 - founders warrants, Nil - broker warrants).



8. CONTRIBUTED SURPLUS

2010 2009
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Amount Amount
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Balance - January 1 $ 1,808 $ 1,527
Stock option SBC expense 229 255
Fair value of warrants 49 36
Exercise of stock options (133) (10)
Exercise of warrants (629) -
Issuance of restricted stock 388 -
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Balance - December 31 $ 1,712 $ 1,808
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9. CONTRACTUAL OBLIGATIONS

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

Year 2011 2012 2013 2014 2015
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Amount $ 2,197 $ 1,606 $ 911 $ 573 $ 573
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As at December 31, 2010, the Company has commitments totaling approximately $41 million (2009 - $8 million) relating to the construction of fixed assets in 2011 and $86 million (2009 - $3 million) for the purchase of operating supplies over the two year period ending December 31, 2012.10. CAPITAL MANAGEMENTThe 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 $15 million operating demand revolving loan facility and a $35 million committed revolving facility which are subject to various financial and non financial covenants. The covenants are monitored on a regular basis and controls are in place to ensure the Company maintains compliance with these covenants. As at December 31, 2010, the Company is in compliance with all the covenants related with this 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 operating line facility.11. FINANCIAL INSTRUMENTS AND RISK MANAGEMENTThe Company's financial instruments recognized on the balance sheet consist of cash and cash equivalents, short term investments, accounts receivable, unearned revenue, accounts payable, and accrued liabilities. The following is a summary of the accounting model the Company has elected to apply to each of its significant categories of financial instruments:



Cash and cash equivalents Held for trading
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Accounts receivable Loans and receivables
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Accounts payable and accrued liabilities Held for trading
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Credit riskThe Company's accounts receivable balances are with customers in the oil and gas industry and are subject to normal industry credit risks. These balances represent the Companies total credit exposure. During the year, the Company earned revenues from more than forty customers with three of these customers representing 63% of revenue. The Company assesses the credit worthiness of all of its customers and none of these balances are impaired (2009 - Nil). The Company's trade receivables as at December 31, 2010 are aged as follows:



December 31, December 31,
2010 2009
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Current (0 - 30 days) $ 9,752 $ 2,838
31 - 60 days 11,339 3,590
Over 61 Days 745 2,258
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Total $ 21,836 $ 8,686
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Fair valuesThe fair value of the Company's financial instruments included on the consolidated balance sheet approximate their carrying amounts due to their short term maturity.The additional disclosures regarding fair value measurements of financial instruments as required by recent amendments made to Section 3862 are presented below. A fair value hierarchy is presented below that distinguishes the significance of the inputs used in determining the fair value measurements of various financial instruments. The hierarchy contains the following levels: Level 1 uses inputs based on quoted prices, Level 2 uses observable inputs other than quoted prices and Level 3 uses inputs that are not based on observable market data.



Estimated Fair Value as at
Carrying Value as at December 31, 2010
December 31,2010 Level 1 Level 2 Level 3
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Cash and cash equivalents $ 98,701 $ - $ 98,701 $ -
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Estimated Fair Value as at
Carrying Value as at December 31, 2009
December 31,2009 Level 1 Level 2 Level 3
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Cash and cash equivalents $ 11,643 $ - $ 11,643 $ -
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Liquidity riskLiquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company has a positive cash position and further manages its liquidity risk by continuously monitoring forecasts and actual cash flows and has secured a credit line with a major Canadian bank (Note 10). Currently, the Company's cash and cash equivalents and the Company's secured line of credit are sufficient to meet its financial obligations.Market riskMarket risk is the risk that changes in market prices, such as interest rates or foreign exchange rates will affect the Company's income or the value of its financial instruments. The Company does not believe that the results of operations or cash flow would be affected to a significant degree by a sudden change in market interest rates. The Company does not believe that that the results of operations or cash flow would be affected to a significant degree by a sudden change in foreign exchange rate.



12. SUPPLEMENTAL CASH FLOW INFORMATION

December 31, December 31,
Year Ended 2010 2009
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Changes in non-cash working capital from
Operations:
Accounts receivable $ (15,031) $ (1,319)
Inventory (1,519) (4,702)
Prepaid expenses (6,320) 1,038
Accounts payable and accrued liabilities 5,783 98
Unearned revenue 3,486 -
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Net change in non-cash working capital $ (13,601) $ (4,885)
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13. GEOGRAPHICAL AREASDuring the year, the Company had revenue in the US of $5,623 (2009 - $2,601).14. RELATED PARTY TRANSACTIONSDuring the year, the Company paid $287 (2009 - $334) in consulting fees to two Directors. These transactions were in the normal course of operations and have been measured at the exchange amounts.15. BUSINESS INTERRUPTION CLAIMIn 2010, the Company submitted an insurance claim for repair costs and business interruption loss from a mobilization incident that occurred in 2009.The Company will host a conference call on Friday, March 11, 2011 at 10:00 a.m. MT (11:00 a.m. ET) to discuss the Company's 2010 results.To participate in the Q&A session, please call the conference call operator at 1-866-226-1792 fifteen minutes prior to the call's start time and ask for "GASFRAC Fourth Quarter Results Conference Call".A replay of the call will be available until March 19, 2011 by dialing 1-800-408-3053 (North America) or 1-905-694-9451 (outside North America). Playback passcode: 7636633.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.Requests for shareholder information should be directed to James M Hill.????????Neither TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this release.
Contact:
James M Hill
GASFRAC Energy Services Inc.
Chief Financial Officer
403-515-3387
jhill@gasfrac.com
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