Sun Country Well YE12FS · Calgary, Alberta, Canada T2P 3R5 T. 403.298.1500 F. 403.298.5814 e-mail: [email protected] . Sun Country Well Servicing Inc. ... Share capital Common

Sun Country Well Servicing Inc.

Consolidated Financial Statements

Year Ending December 31, 2012

Auditors' Report

To the ShareholdersSun Country Well Servicing Inc.

We have audited the consolidated statement of financial position of Sun Country Well Servicing

Inc. as at December 31, 2012 and the consolidated statements of income and comprehensive loss,

changes in equity and cash flows for the period from incorporation on June 22, 2009 to December

31, 2009. These financial statements are the responsibility of the Company's management. Our

responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with Canadian generally accepted auditing standards.

Those standards require that we plan and perform an audit to obtain reasonable assurance

whether the financial statements are free of material misstatement. An audit includes examining,

on a test basis, evidence supporting the amounts and disclosures in the financial statements. An

audit also includes assessing the accounting principles used and significant estimates made by

management, as well as evaluating the overall financial statement presentation.

In our opinion, these consolidated financial statements present fairly, in all material respects, the

financial position of the Company as at December 31, 2012 and the results of its operations and its

cash flows for the period then ended in accordance with International Financial Reporting

Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB").

CHARTERED ACCOUNTANTS

Calgary, AlbertaApril 22, 2013

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This office is independently owned and operated by Collins Barrow Calgary LLP. The Collins Barrow trademarks are used under license.

Collins Barrow Calgary LLP 1400 First Alberta Place 777 – 8th Avenue S.W. Calgary, Alberta, Canada T2P 3R5 T. 403.298.1500 F. 403.298.5814 e-mail: [email protected]

Sun Country Well Servicing Inc.Consolidated Statement of Financial Position(Expressed in Canadian dollars)

December 31, 2012

Notes 2012 2011

Assets

Current assetsCash $ 541,294 $ 1,126Accounts receivable 4 3,487,923 2,745,374Prepaid expenses 14,130 17,250

Total current assets 4,043,347 2,763,750

Non-current assetsProperty and equipment 5 18,602,626 16,118,197

Total assets $ 22,645,973 $ 18,881,947

Liabilities

Current liabilitiesOperating loan 6 $ - $ 975,286Accounts payable and accrued liabilities 7 756,168 642,874Demand term loans 8 9,734,132 8,004,464

Total current liabilities 10,490,300 9,622,624

Non-current liabilitiesDeferred tax liabilities 9 1,139,542 352,782

Total liabilities 11,629,842 9,975,406

Shareholders' Equity

Share capital 10 10,170,799 9,336,859Contributed surplus 11 38,696 726,747Retained earnings (deficit) 806,636 (1,157,065)

Total shareholders' equity 11,016,131 8,906,541

Total liabilities and shareholders' equity $ 22,645,973 $ 18,881,947

Commitments (note 17)

See accompanying notes to the consolidated financial statements.

Approved and authorized for issue on behalf of the Board of Directors on April 22, 2013.

(signed) "Don Jones" , Director

(signed) "Rob Wasylyniuk" , Director

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Sun Country Well Servicing Inc.Consolidated Statement of Income and Comprehensive Income(Expressed in Canadian dollars)

For the Year Ended December 31, 2012

Notes 2012 2011

RevenueService rigs $ 17,949,463 $ 12,124,872Office rental 16,640 15,253Mobile home rental 47,605 39,550

18,013,708 12,179,675

ExpensesField payroll 7,502,130 5,253,203Other field 2,628,697 1,889,704Operations 1,214,548 823,698General and administrative 1,031,717 949,686Mobile home operations 24,094 24,381

12,401,186 8,940,672

Income (loss) before the under noted 5,612,522 3,239,003

Interest 372,215 283,157

Share-based compensation10(a)

and (e) 145,889 314,366Loss on disposal of assets 351 4,904Depreciation 5 2,343,957 1,711,461

Income before tax $ 2,750,110 $ 925,115

Income tax expense - deferred 9 786,760 343,547

Net income and comprehensive income $ 1,963,350 $ 581,568


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Sun Country Well Servicing Inc.Consolidated Statement of Changes in Shareholders' Equity(Expressed in Canadian dollars)


Share capitalCommon

shares

Share capitalPreferred

sharesContributed

surplus

Retainedearnings(deficit)

Totalshareholders'

equity

Balance at January 1, 2011 $ 8,591,727 $ 12 $ 1,157,501 $ (1,738,633) $ 8,010,607

Share-based compensation (note 10(e)) 21,682 - 292,684 - 314,366

Conversion of preferred shares(note 10(d)) 723,444 (6) (723,438) - -

Net income and comprehensive income forthe year - - - 581,568 581,568

Balance at December 31, 2011 9,336,853 6 726,747 (1,157,065) 8,906,541

Share-based compensation (note 10(e)) 110,502 - 35,387 - 145,889

Conversion of preferred shares (note 10(c)) 723,444 (6) (723,438) - -

Net income and comprehensive income forthe year - - - 1,963,350 1,963,350

Balance at December 31, 2012 $ 10,170,799 $ - $ 38,696 $ 806,285 $ 11,015,780


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Sun Country Well Servicing Inc.Consolidated Statement of Cash Flows(Expressed in Canadian dollars)


2012 2011Cash provided by (used in):

Net income (loss) for the year $ 1,963,350 $ 581,568Adjustments for:Share-based compensation 145,889 314,366Depreciation 2,343,957 1,711,461Loss on disposal of assets 351 4,904Deferred income tax 786,760 343,547

Net cash inflow from operations before changes in non-cash working capital 5,240,307 2,955,846

Changes in non-cash working capital:Accounts receivable (742,549) (1,237,585)Prepaid expenses 3,120 2,536Accounts payable and accrued liabilities 113,294 83,625

(626,135) (1,151,424)

Net cash inflow from operating activities 4,614,172 1,804,422

Financing activitiesProceeds from (repayments of) operating loan, net (975,286) 738,454Proceeds from demand term loans - 1,880,556Repayment of demand term loans (1,870,332) (1,109,313)Changes in non-cash working capital:

Net cash inflow (outflow) from financing activities (2,845,618) 1,509,697

Investing activitiesPurchase of property and equipment (1,228,386) (1,569,338)

Changes in non-cash working capital:Accounts payable and accrued liabilities - (1,743,977)

Net cash outflow from investing activities (1,228,386) (3,313,315)

Net increase in cash 540,168 804

Cash, beginning of period 1,126 322

Cash, end of period $ 541,294 $ 1,126

Interest paid $ 372,215 $ 276,937

Non-cash transactions:

During the year ended December 31, 2012, the Company issued 38,236 (2011 - 14,650) common shares todirectors in compensation for services provided valued at $110,502 (2011 - $21,682) (note 10(a)).

During the year ended December 31, 2012, the Company acquired property and equipment of $3,600,000 (2011 -$3,600,000) utilizing the demand term loan facility.


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Sun Country Well Servicing Inc.Notes to Consolidated Financial Statements

December 31, 2012(Expressed in Canadian dollars)

1. Nature of operations

Sun Country Well Servicing Inc. and its subsidiary (the "Company”) provide well completion andproduction services to oil and natural gas exploration and development companies in south easternSaskatchewan. The Company also rents office and mobile homes to tenants in Saskatchewan. TheCompany was incorporated under the laws of the province of Alberta on June 22, 2009. TheCompany's head office is located at 101 Supreme Street, Box 1646, Estevan, Saskatchewan,Canada, S4A 1C8, and the corporate office is located in Cochrane, Alberta, Canada.

2. Basis of preparation

(a) Statement of compliance

The consolidated financial statements have been prepared in accordance with InternationalFinancial Reporting Standards (“IFRS”) as issued by the International Accounting StandardsBoard (“IASB”) and interpretations of the International Financial Reporting InterpretationsCommittee (“IFRIC”).

The consolidated financial statements were authorized for issue by the Board of Directors (the"Board") on April 22, 2013.

(b) Basis of measurement

The consolidated financial statements are presented in Canadian dollars and have beenprepared on a historical cost basis, except for held-for-trading financial assets that aremeasured at fair value with changes in fair value recorded in earnings. See note 16 for themethods used to measure fair values.

(c) Functional and presentation currency

These consolidated financial statements are presented in Canadian dollars, which is thefunctional currency of the Company and its subsidiary.

(d) Use of estimates and judgments

The preparation of the consolidated financial statements in conformity with IFRS requiresmanagement to make judgments, estimates and assumptions that affect the reported amountsof assets and liabilities, disclosure of contingent assets and liabilities at the date of theconsolidated financial statements and the reported amount of revenue and expenses during theperiod. The estimates and associated assumptions are based on historical experience andvarious other factors that are believed to be reasonable under the circumstances, the results ofwhich form the basis of making the judgments about the carrying values of assets and liabilitiesthat are not readily apparent from other resources. Actual results may differ from theseestimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions toaccounting estimates are recognized in the period in which the estimate is revised if the revisionaffects only that period or in the period of the revision and future periods if the revision affectsboth current and future periods.

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The Company performs ongoing credit evaluations of its customers and grants credit basedupon a review of historical collection experience, current aging status, financial condition of thecustomer and anticipated industry conditions. Customer payments are regularly monitored anda provision for doubtful accounts is established based upon specific situations and overallindustry conditions.

Amounts recorded for depreciation are based on the estimated useful lives of the underlyingassets. Useful lives are based on management’s best estimate using knowledge of past events,and as such are subject to measurement uncertainty. The estimates are reviewed at leastannually and are updated if expectations change as a result of physical wear and tear and legalor other limits to use. It is possible that changes in these factors may cause changes in theestimated useful lives of the Company’s property, plant and equipment in the future.

The Company's assets are segregated into cash-generating units based on their ability togenerate largely independent cash flows and used for impairment testing. The determination ofthe Company's cash-generating units is subject to management's judgment.

Impairment of property and equipment exists when the carrying value of an asset or cashgenerating unit ("CGU") exceeds its recoverable amount, which is the higher of its fair valueless costs to sell and its value in use. The fair value less costs to sell calculation is based onavailable data from binding sales transactions in an arm’s length transaction of similar assets orobservable market prices less incremental costs for disposing of the asset. The value in usecalculation is based on a discounted cash flow model. The cash flows are derived from thebudgeted net cash flows to be generated by the asset or CGU over the next five years and donot include restructuring activities that the Company is not yet committed to or significant futureinvestments that will enhance the asset’s performance of the asset or CGU being tested. Therecoverable amount is most sensitive to the discount rate used for the discounted cash flowmodel as well as the expected future cash inflows and the growth rate used for extrapolationpurposes.

The fair value of stock options and preferred shares is estimated at the grant date using theBlack-Scholes option pricing model, which includes underlying assumptions related to the valueof the corporation's shares at grant date, the risk-free interest rate, average expected option life,estimated forfeitures and estimated volatility of the Company’s shares, and the timing andlikelihood of performance milestones being met on the preferred shares. The fair value of theshares issued under the share incentive plan is recognized based on the estimated marketvalue of the Company’s shares, the vesting period of the plan and the estimated forfeitures.

Provisions for current taxes are made using the best estimate of the amount expected to bepaid based on a qualitative assessment of all relevant factors. The Company reviews theadequacy of these provisions at the end of the reporting period. However, it is possible that atsome future date an additional liability could result from audits by taxation authorities.

The Company follows the liability method of accounting for deferred income taxes. Under thismethod, deferred income tax assets and liabilities are recorded based on temporary differencesbetween the carrying amount of the balance sheet items and their corresponding tax bases. Inaddition, the future benefits of income tax assets, including unused tax losses, are recognized,subject to a valuation allowance, to the extent that it is probable that such future benefits willultimately be realized. Deferred income tax assets and liabilities are measured usingsubstantively enacted tax rates and laws expected to apply when the tax liabilities or assets areto be either settled or realized.

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Where the final outcome of these tax-related matters is different from the amounts that wereinitially recorded, such differences will affect the tax provisions in the period in which suchdetermination is made.

3. Significant accounting policies

(a) Principles of consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary 101163483 Saskatchewan Ltd. ("101 Sask").

(b) Subsidiaries

A subsidiary is an entity controlled by the Company. Control exists when the Company has thepower, directly or indirectly, to govern the financial and operational policies of an entity to obtainbenefits from its activities. In assessing control, potential voting rights that are presentlyexercisable are taken into account.

The financial statements of subsidiaries are included in the consolidated financial statementsfrom the date that control commences until the date that control ceases and all intercompanytransactions are eliminated.

(c) Accounts receivable

Accounts receivable are initially recognized at fair value and thereafter stated at amortized costless impairment for bad and doubtful debts.

Impairment losses for bad and doubtful debts are measured as the difference between thecarrying amount of the financial asset and the present value of estimated future cash flows.

(d) Property and equipment

Property and equipment are stated at cost less accumulated depreciation and accumulatedimpairment losses. Cost includes expenditures that are directly attributable to the acquisition ofthe asset. Subsequent costs are included in the asset’s carrying amount or recognized as aseparate asset, as appropriate, only when it is probable that future economic benefitsassociated with the item will flow to the Company and the cost can be measured reliably. Thecarrying amount of a replaced asset is derecognized when replaced. Repairs and maintenancecosts are charged to the statement of income during the period in which they are incurred.

The major categories of property and equipment are depreciated on the following basis:

Expected life Residual valueBasis of

depreciation

Service rigs 20,000 service hours 10%units-of-service

hoursHeavy duty vehicles and

trailers 10 years 10% straight-lineOther field equipment 3 to 10 years - straight-lineComputers, furniture and

office equipment 5 years - straight-lineLeasehold improvements Term of lease - straight-lineMobile homes 15 years - straight-line

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Both the useful life of an asset and its residual value, if any, are re-assessed at the end of eachreporting period.

Gains or losses arising from the retirement or disposal of an item of property and equipment aredetermined as the difference between the net disposal proceeds and the carrying amount of theitem and are recognized in the statement of income on the date of retirement or disposal.

(e) Impairment

The carrying value of long-term assets is reviewed annually for indicators that the carryingvalue of an asset or cash-generating unit may not be recoverable. If indicators of impairmentexist, the recoverable amount of the asset or cash-generating unit is estimated. If the carryingvalue of the asset or cash-generating unit exceeds the recoverable amount, the asset or cash-generating unit is written down with an impairment recognized in net income.

The recoverable amount of an asset or cash-generating unit is the greater of its fair value lesscosts to sell and its value in use. Fair value is determined to be the amount for which the assetcould be sold for in an arm’s length transaction. Value in use is determined by estimating thepresent value of the future net cash flows to be derived from the continued use of the asset orcash generating unit in its present form.

Reversals of impairments are recognized when there are indicators that an impairment lossrecognized in prior periods may no longer exist, or may have decreased. In this event, thecarrying amount of the asset or cash-generating unit is increased to its revised recoverableamount with an impairment reversal recognized in net earnings. The revised recoverableamount is limited to the original carrying amount less depreciation as if no impairment had beenrecognized for the asset or cash-generating unit for prior periods.

(f) Trade and other payables

Trade and other payables are initially recognized at fair value and subsequently stated atamortized cost.

(g) Share-based compensation

The Company has a stock option plan which is described in note 10(e). In addition, theCompany had preferred shares that were convertible into common shares as described in note10(c). The fair value of the stock options and the conversion feature of preferred shares ismeasured at the grant date and recognized as share-based compensation expense, with acorresponding increase in contributed surplus over the vesting period. The Company measuresshare based payments to non-employees at the fair value of the goods or services received atthe date of receipt of the goods or services. If the fair value of the goods or services cannot bemeasured reliably, the value of the options/warrants granted will be used, measured using theBlack-Scholes option-pricing model. A forfeiture rate is estimated on the grant date and isadjusted to reflect the actual number of stock options and preferred shares that will ultimatelyvest. When the stock options or the conversion feature of preferred shares is exercised, theamount previously recorded to contributed surplus is reclassified as share capital.

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(h) Income tax

Income tax expense comprises current and deferred tax. Income tax expense is recognized inprofit or loss except to the extent that it relates to items recognized directly in equity, in whichcase it is recognized in equity.

Current tax is the expected tax payable on the taxable income for the year, using tax ratesenacted or substantively enacted at the balance sheet date, plus any adjustment to tax payablein respect of previous years.

Deferred tax assets and liabilities arise from deductible and taxable temporary differencesrespectively, being the differences between the carrying amounts of assets and liabilities forfinancial reporting purposes and their tax bases. Deferred tax assets also arise from unusedtax losses and unused tax credits. All deferred tax liabilities, and all deferred tax assets to theextent that it is probable that future taxable profits will be available against which the assets canbe utilized, are recognized.

The amount of deferred tax recognized is measured based on the expected manner ofrealization or settlement of the carrying amount of the assets and liabilities, using tax ratesenacted or substantively enacted at the balance sheet date. Deferred tax assets and liabilitiesare not discounted.

The carrying amount of a deferred tax asset is reviewed at each balance sheet date and isreduced to the extent that it is no longer probable that sufficient taxable profits will be availableto allow the related tax benefit to be utilized. Any such reduction is reversed to the extent that itbecomes probable that sufficient taxable profits will be available.

Current tax balances and deferred tax balances, and movements therein, are presentedseparately from each other and are not offset.

(i) Revenue

Service Rigs

Revenue is recognized when services are rendered, provided it is probable that the economicbenefits will flow to the Company and the revenue and applicable costs can be measuredreliably. The Company's services are generally provided based on fixed or determinable hourlyrates.

Office and Mobile Home Rental

Revenue is recognized on a straight-line basis over the term of occupancy based on themonthly or daily lease rate as negotiated with tenants, provided it is probable that the economicbenefits will flow to the Company and the revenue and applicable costs can be measuredreliably.

(j) Interest paid

The Company has classified interest paid on long-term debt as an operating activity on theconsolidated statement of cash flows.

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(k) Financial instruments

(i) Classification and measurement

Financial instruments are measured at fair value on initial recognition of the instrument.Measurement in subsequent periods depends on whether the financial instrument hasbeen classified as "fair value through profit or loss", "loans and receivables", "available-for-sale", "held-to-maturity", or "financial liabilities measured at amortized cost" asdefined by lAS 39, "Financial Instruments: Recognition and Measurement".

Financial assets and financial liabilities classified as "fair value through profit or loss" areeither classified as "held for trading" or "designated at fair value through profit or loss"and are measured at fair value, with changes in fair value recognized in the incomestatement. Transaction costs are expensed when incurred. The Company hasdesignated cash as "held for trading".

Financial assets and financial liabilities classified as "loans and receivables", "held-to-maturity", or "financial liabilities measured at amortized cost" are measured at amortizedcost using the effective interest method. "Loans and receivables" are non-derivativefinancial assets with fixed or determinable payments that are not quoted in an activemarket. "Held-to-maturity" financial assets are non-derivative investments that an entityhas the positive intention and ability to hold to maturity. "Financial liabilities measured atamortized cost" are those financial liabilities that are not designated as "fair value throughprofit or loss" and that are not derivatives. The Company has designated accountsreceivable as "loans and receivables" and operating loan, accounts payable and accruedliabilities and demand term loans as "financial liabilities measured at amortized cost". TheCompany has no assets that have been designated as "held to maturity".

Financial assets classified as "available-far-sale" are measured at fair value, withchanges in fair value recognized in other comprehensive income. "Available-for-sale"financial assets are non-derivatives that are either designated in this category or notclassified in any of the other categories. The Company has no financial assets in thiscategory.

The significance of inputs used in making fair value measurements are examined andclassified according to a fair value hierarchy. Fair values of assets and liabilities includedin level 1 are determined by reference to quoted prices in active markets for identicalassets and liabilities. Assets and liabilities in Level 2 include valuations using inputs otherthan quoted prices for which all significant outputs are observable, either directly orindirectly, and are based on valuation models and techniques where the inputs arederived from quoted indices. Level 3 valuations are based on inputs that areunobservable and significant to the overall fair value measurement.

(ii) Equity instruments

Common and preferred shares are classified as equity. Incremental costs directlyattributable to the issue of common and preferred shares and stock options arerecognized as a deduction from equity, net of any tax effects.

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(iii) Impairment

The Company assesses at each balance sheet date, whether there is objective evidencethat financial assets, other than those designated as fair value through profit or loss areimpaired. When impairment has occurred, the cumulative loss is recognized in thestatement of income (loss). For financial assets carried at amortized cost, the amount ofthe impairment loss recognized is the difference between the asset's carrying amountand the present value of estimated future cash flows, discounted at the financial asset'soriginal effective interest rate. When an "available-far-sale" financial asset is consideredto be impaired, cumulative gains or losses previously recognized in other comprehensiveincome are reclassified to the statement of income (loss) in the period. Impairment lossesmay be reversed in subsequent periods.

(l) New accounting standards, interpretations and amendments to existing standards not yetimplemented

IAS 1 Presentation of Financial Statements

IAS 1 was amended by the IASB in June 2011 requires companies to group items presentedwithin Other Comprehensive Income based on whether they may be subsequently reclassifiedto profit or loss. Items in other comprehensive income will be required to be presented in twocategories: items that will be reclassified into profit or loss and those that will not be reclassified.The flexibility to present a statement of comprehensive income as one statement or twoseparate statements of profit and loss and other comprehensive income remains unchanged.The amendments to IAS 1 are effective for annual periods beginning on or after July 1, 2012.Earlier application is permitted.

IFRS 7 Financial Instruments Disclosures

IFRS 7 was amended by the IASB in December 2011 to provide additional information aboutoffsetting of financial assets and financial liabilities. Additional disclosures will be required toenable users of financial statements to evaluate the effect or potential effect of nettingarrangements on the entity’s financial position. The amendments are effective for annualperiods beginning on or after January 1, 2013.

IFRS 7 was amended to provide additional information about offsetting of financial assets andfinancial liabilities. Additional disclosures will be required to enable users of financialstatements to evaluate the effect or potential effect of netting arrangements on the entity’sfinancial position.

IFRS 9 Financial Instruments

IFRS 9 was issued by the IASB in October 2010 and will replace IAS 39 Financial Instruments:Recognition and Measurement. IFRS 9 uses a single approach to determine whether a financialasset is measured at amortized cost or fair value, replacing the multiple rules in IAS 39. Theapproach in IFRS 9 is based on how an entity manages its financial instruments in the contextof its business model and the contractual cash flow characteristics of the financial assets. Mostof the requirements in IAS 39 for classification and measurement of financial liabilities werecarried forward unchanged to IFRS 9. The new standard also requires a single impairmentmethod to be used, replacing the multiple impairment methods in IAS 39. IFRS 9 is effective forannual periods beginning on or after January 1, 2015. Earlier application is permitted.

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IFRS 10 Consolidated Financial Statements

IFRS 10 was issued by the IASB in May 2011. IFRS 10 establishes principles for thepresentation and preparation of consolidated financial statements when an entity controls oneor more other entities. IFRS 10 replaces the consolidation requirements in SIC-12Consolidation-Special Purpose Entities and IAS 27 Consolidated and Separate FinancialStatements and is effective for annual periods beginning on or after January 1, 2013. Earlierapplication is permitted.

IFRS 10 establishes principles for the presentation and preparation of consolidated financialstatements when an entity controls one or more other entities. A new definition of ‘control’ hasbeen established. IFRS 10 replaces the consolidation requirements in SIC-12 Consolidation-Special Purpose Entities and IAS 27 Consolidated and Separate Financial Statements.

IFRS 13 Fair Value Measurement

IFRS 13 was issued by the IASB in May 2011. IFRS 13 provides a consistent and less complexdefinition of fair value, establishes a single source of guidance for determining fair value andintroduces consistent requirements for disclosures related to fair value measurement. The newstandard clarifies that fair value is the price that would be received to sell an asset, or paid totransfer a liability in an orderly transaction between market participants, at the measurementdate. The standard is effective for annual periods beginning on or after January 1, 2013. Earlierapplication is permitted.

The Company has not yet begun the process of assessing the impact that the new andamended standards will have on its financial statements or whether to early adopt any of thenew requirements.

4. Accounts receivable

2012 2011

Trade receivables $ 3,487,923 $ 2,745,374

All of the trade and other receivables are expected to be recovered within one year.

Trade receivables are due within 30 days from the date of billing. See note 16 for further details onthe Company's credit risk.

The aging analysis of trade receivables that are neither individually nor collectively considered to beimpaired are as follows:

2012 2011

Current $ 1,584,590 $ 1,310,76831 - 60 days 1,424,646 1,234,90361 - 90 days 319,756 199,38991 + days 158,931 314

$ 3,487,923 $ 2,745,374

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Trade receivables are primarily from publicly traded oil and natural gas exploration and productioncompanies. Given the size and financial strength of the oil and natural gas producers, managementbelieves that no impairment allowance is necessary in respect of these balances as there has notbeen a significant change in credit quality and the balances are still considered fully recoverable. TheCompany does not hold any collateral over these balances.

During the years ended December 31, 2012 and 2011, the Company had no bad debt expense orallowance for bad debts.

5. Property and equipment

Service rigs

Heavy dutyvehicles

and trailersOther fieldequipment

Computers,furniture,

officeequipment and

leaseholdimprovements

Mobilehomes Total

Cost

Balance at January 1,2011 $ 8,657,158 $ 3,970,230 $ 916,738 $ 42,534 $ 166,200 $ 13,752,860

Additions 2,872,462 1,716,601 518,762 61,513 - 5,169,338Disposals - - (4,005) (3,748) - (7,753)Balance at December

31, 2011 11,529,620 5,686,831 1,431,495 100,299 166,200 18,914,445

Additions 2,883,293 1,439,062 447,138 58,893 - 4,828,386Disposals - - - (753) - (753)Balance at December

31, 2012$ 14,412,913 $ 7,125,893 $ 1,878,633 $ 158,439 $ 166,200 $ 23,742,078

Accumulated depreciation

Balance at January 1,2011 $ 649,640 $ 276,334 $ 155,330 $ 3,560 $ 2,772 $ 1,087,636

Disposal adjustments - - (1,892) (957) - (2,849)Depreciation charge for

the year 996,510 438,800 251,254 13,809 11,088 1,711,461Balance at December

31, 2011 1,646,150 715,134 404,692 16,412 13,860 2,796,248

Disposal adjustments - - - (402) - (402)Depreciation charge for

the period 1,367,423 583,520 355,238 23,147 14,629 2,343,957Balance at December

31, 2012$ 3,013,573 $ 1,298,654 $ 759,930 $ 39,157 $ 28,489 $ 5,139,803

Net book value

As at December 31,2011 $ 9,883,470 $ 4,971,697 $ 1,026,803 $ 83,887 $ 152,340 $ 16,118,197

As at December 31,2012 $ 11,399,340 $ 5,827,239 $ 1,118,703 $ 119,282 $ 137,711 $ 18,602,275

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6. Operating loan

The Company has available a $3,000,000 (2011 - $3,000,000) demand revolving loan (the “OperatingLoan”) bearing interest at a Canadian chartered bank’s prime rate plus 1.25% (2011 - 1.5%) perannum. The Operating Loan is available by way of overdraft on the Company’s bank account and isnot to exceed the aggregate of 75% of accounts receivable which have been outstanding not morethan 60 days, minus priority claims. The Operating Loan is secured by a general security agreementand an assignment of risk insurance. The Operating Loan is secured jointly with the Rig Loans asdescribed in note 8. The Operating Loan and Rig Loans are subject to loan covenants as described innote 15.

7. Accounts payable and accrued liabilities

2012 2011

Trade creditors $ 449,965 $ 336,213Other payables and accrued liabilities 254,317 264,458GST 51,886 42,203

$ 756,168 $ 642,874

All of the accounts payable and accrued liabilities are expected to be settled within one year.

8. Demand term loans

2012 2011

Rig 4 Loan - Initial advance of $1,781,482 on August31, 2010. Repayable in blended monthlypayments of $33,179. Full repayment is due onAugust 25, 2015 if not demanded earlier. $ 1,005,468 $ 1,349,301

Rig 5 Loan - Initial advance of $1,880,556 onDecember 7, 2010. Repayable in blended monthlypayments of $35,234. Full repayment is due onNovember 25, 2015 if not demanded earlier. 1,145,637 1,507,305

Rig 6 Loan - Initial advance of $1,880,556 on January25, 2011. Repayable in blended monthlypayments of $35,234. Full repayment is due onJanuary 25, 2016 if not demanded earlier. 1,209,603 1,568,429

Rig 7 Loan - Initial advance of $1,800,000 on August29, 2011. Repayable in blended monthlypayments of $33,604. Full repayment is due onAugust 25, 2016, if not demanded earlier. 1,359,316 1,692,401

Rig 8 Loan - Initial advance of $1,800,000 onDecember 21, 2011. Repayable in blendedmonthly payments of $33,604. Full repayment isdue on December 31, 2016 if not demandedearlier.

1,473,581 1,800,000

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Rig 9 Loan - Initial advance of $1,800,000 on August15, 2012. Repayable in blended monthlypayments of $33,523. Full repayment is due onAugust 25, 2017 if not demanded earlier. 1,695,052 -

Rig 10 Loan - Initial advance of $1,800,000 onNovember 19, 2012. Repayable in blendedmonthly payments of $33,557. Full repayment isdue on November 25, 2017 if not demandedearlier. 1,774,875 -

101 Sask Loan - Initial advance of $105,000 onOctober 18, 2010. Repayable in blended monthlypayments of $1,677. Full repayment is due onOctober 31, 2016 if not demanded earlier. 70,600 87,028

$ 9,734,132 $ 8,004,464

The loans obtained to finance the purchase of Rigs 4 through 10 (the "Rig Loans") were advancedunder a demand term loan facility made available by a Canadian chartered bank. The facility has alimit of $10,808,117 (2011 - $8,618,325) and is available by way of separate term loan draws againsteach of the rigs. Advances are not to exceed 60% of the net book value of all capital assets. Alladvances under the facility bear interest at the bank's prime rate plus 1.50% (2011 - 1.60%) perannum and are repayable in equal blended monthly installments of principal and interest based on anamortization period of 60 months. All amounts are payable on demand and all advances, in anyevent, must be repaid within 60 months of the initial advance. The loans are jointly secured with theOperating Loan as described in note 6. The Operating Loan and Rig Loans are subject to loancovenants as described in note 15.

101 Sask Loan was advanced to the Company's subsidiary for the purchase of two mobile homes tobe used for housing employees. Advances bear interest at the bank's prime rate plus 1.50% (2011 -1.75%) per annum and are repayable in blended monthly installments of principal and interest basedon an amortization period of 72 months. All amounts are payable on demand and all advances, in anyevent, must be repaid by October 31, 2016. The loan is secured by a general security agreementover 101 Sask, assignment of risk insurance and a $105,000 (2011 - $105,000) limited corporateguarantee from the Company.

Assuming renewal at similar terms, the estimated principal payments due are as follows:

2013 $2,332,9112014 2,595,3882015 2,613,2592016 1,560,4512017 632,123

$9,734,132

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9. Income taxes

Reconciliation of effective tax rate:

2012 2011

Income before income tax $ 2,750,110 $ 925,115Expected tax rate 26.92% 28.4%Expected income tax expense 740,330 262,733Share-based compensation 39,273 89,280Rate changes and other 7,157 (8,466)

$ 786,760 $ 343,547

Significant components of deferred income taxes are as follows:

2012 2011

Deferred tax liabilitiesProperty and equipment $ 1,692,890 $ 1,198,134

Less deferred tax assetsNon-capital losses (549,138) (839,247)Unamortized share issue costs and other (4,210) (6,105)

Net deferred tax liability $ 1,139,542 $ 352,782

At December 31, 2012, the Company and its subsidiary had unused non-capital loss carry forwards ofapproximately $2,032,050 which may be applied to reduce future years' taxable income. The losscarry forwards expire as follows:

2030 $ 1,194,1802031 837,870

$ 2,032,050

The movements of deferred tax assets and liabilities are shown below:

BalanceJanuary 1,

2011

Recognizedin profit or

loss

BalanceDecember 31,

2011

Recognizedin profit or

loss

BalanceDecember 31,

2012

Property and equipment $ 630,685 $ 567,449 $ 1,198,134 $ 494,756 $ 1,692,890Non-capital losses (614,249) (224,998) (839,247) 290,109 (549,138)Unamortized share issue costs and

other (7,201) 1,096 (6,105) 1,895 (4,210)

$ 9,235 $ 343,547 $ 352,782 $ 786,760 $ 1,139,542

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10. Share capital

AuthorizedUnlimited number of voting common shares with no stated par value6 Class A voting preferred shares with no stated par value6 Class B voting preferred shares with no stated par value6 Class C voting preferred shares with no stated par value

Issued and outstanding:

Common share capitalClass A preferred

share capitalClass B preferred

share capitalClass C preferred

share capital

Number ofshares

Statedcapital

Numberof

sharesStatedcapital

Numberof

sharesStatedcapital

Numberof

sharesStatedcapital

Total statedcapital

Balance at January 1,2011 8,211,960 $ 8,591,727 - $ - 6 $ 6 6 $ 6 $ 8,591,739

Conversion of preferredshares

723,444 723,444 - - (6) (6) - - 723,438

Share-basedcompensation todirectors

14,650 21,682 - - - - - - 21,682

Balance, December 31,2011

8,950,054 9,336,853 - - - - 6 6 9,336,859

Conversion of preferredshares

723,444 723,444 - - - - (6) (6) 723,438

Share-basedcompensation todirectors

38,236 110,502 - - - - - - 110,502

Balance, December 31,2012

9,711,734 $ 10,170,799 - $ - - $ - - $ - $ 10,170,799

(a) Common shares

During the year ended December 31, 2012, the Company issued 723,444 (2011 - 723,444)common shares to two directors/officers and an officer of the Company and their familymembers upon conversion of the 6 Class C preferred shares (2011 - 6 Class B preferredshares) as detailed below.

On December 31, 2012, the Company issued 38,236 (2011 - 14,650) common shares to theCompany's four non-executive directors as compensation for attending Board of Directors andcommittee meetings. The fair value of the common shares was $110,502 (2011 - $21,682) onthe date of issuance and the amount was recorded as an expense in share-basedcompensation.

(b) Preferred shares

Each Class C preferred share is entitled to receive a non-cumulative dividend at the rate of$0.03 per share per year, at the discretion of the Board of Directors.

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(c) Class C preferred shares

During the year ended December 31, 2012, the Company converted 6 Class C preferred sharesinto 723,444 common shares of the Company. The Company met the Class C conversionmilestone as of December 31, 2011 as the Company's operating margin for a full year hasreached 25% or greater. Operating margin for a given period is defined as the ratio of EBITDA(income before interest, taxes, amortization and depreciation) over total revenue for the period.The holders of the shares had the right to convert each Class C preferred share into the greaterof (i) 120,574 common shares or (ii) the number of common shares that is equal to 1.25% of thenumber of common shares issued and outstanding on the date the Company achieves themilestone, excluding the common shares issued on the prior conversion of the Class A andClass B preferred shares.

The number of common shares issued and outstanding at December 31, 2011 was 8,950,054and 1.25% of these shares were less than 120,574. Therefore, each Class C preferred sharewas converted into 120,574 common shares for a total of 723,444 common shares. Uponconversion, $723,438 relating to share-based compensation expense recorded in the periodended December 31, 2010 and December 31, 2011 for the Class C preferred shares wastransferred to common share capital from contributed surplus and $6 in Class C preferred sharecapital was transferred to common share capital.

(d) Class B

During the year ended December 31, 2011, the Company converted 6 Class B preferred sharesinto 723,444 common shares of the Company. The Company met the Class B conversionmilestone as of December 31, 2010 as the Company's operating margin for a full year hasreached 21% or greater. Operating margin for a given period is defined as the ratio of EBITDA(income before interest, taxes, amortization and depreciation) over total revenue for the period.The holders of the shares had the right to convert each Class B preferred share into the greaterof (i) 120,574 common shares or (ii) the number of common shares that is equal to 1.25% of thenumber of common shares issued and outstanding on the date the Company achieves themilestone, excluding the common shares issued on the prior conversion of the Class Apreferred shares.

The number of common shares issued and outstanding at December 31, 2010 was 8,211,960and 1.25% of these shares were less than 120,574. Therefore, each Class B preferred sharewas converted into 120,574 common shares for a total of 723,444 common shares. Uponconversion, $723,438 relating to share-based compensation expense recorded in the periodended December 31, 2010 for the Class B preferred shares was transferred to common sharecapital from contributed surplus and $6 in Class B preferred share capital was transferred tocommon share capital.

(e) Stock-based compensation

The Company adopted a stock option plan under which options are granted to directors,officers, employees and consultants of the Company. During the year ended December 31,2012, options were granted to purchase 60,000 (2011 - 45,000) shares at the price of $1.70(2011 - $1.48) per share. The options shall vest on the basis of one-third of the option shareson each of the first, second and third anniversaries of the grant date.

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The following options have been awarded under the stock option plan:

2012 2011

NumberExercise

Price NumberExercise

Price

Outstanding, beginning of year $ 45,000 $ 1.48 $ - $ -Granted 60,000 1.70 45,000 1.48

Outstanding, end of year $ 105,000 $ 1.61 $ 45,000 $ 1.48

The following table summarizes the expiry terms and exercise prices of the Company'soutstanding stock options as at December 31, 2012:

Date of GrantOutstanding

Options

WeightedAverageExercise

Price

Remainingcontractuallife (years)

Number ofstock

optionsexercisable

October 28, 2011 45,000 $ 1.48 3.82 15,000May 16, 2012 60,000 1.70 4.37 -

Outstanding, end of year $ 105,000 $ 1.61 $ 4.13 15,000

Compensation costs of $35,387 (2011 - $3,309) have been recorded in the consolidatedstatement of income, with a corresponding increase to contributed surplus for the year endedDecember 31, 2012.

The fair value of each option granted for the year ended December 31, 2012 was estimatedusing the Black-Scholes option pricing model. The weighted average assumptions used for the2012 grants were a risk-free interest rate of 1.34% (2011 - 0.99%), expected life of 3 years(2011 - 3 years), 70% (2011 - 70%) volatility of expected market prices and no dividends.Volatility was calculated by analyzing market volatility of public companies in the oilfield serviceindustry. A forfeiture rate of NIL% was used when recording share-based compensation as it isexpected that the officers and management will continue with the Company over the vestingperiod. The fair value of the options issued was $0.79 (2011 - $0.69) per option.

11. Contributed surplus

A summary of the Company's contributed surplus is presented as follows:

2012 2011

Balance, beginning of period $ 726,747 $ 1,157,501Share-based compensation - Preferred Shares - 289,375Share-based compensation - Stock Options 35,387 3,309Transfer to share capital on conversion of preferred shares (723,438) (723,438)

Balance, end of period $ 38,696 $ 726,747

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12. Significant customers

During the year ended December 31, 2012, revenue from the provision of rigs of $13,627,026 (2011 -$8,117,882), representing 76% (2011 - 67%) of total service rigs revenue, was to five (2011 - four) oiland natural gas companies. Included in accounts receivable is $2,549,046 (2011 - $1,854,252),representing 73% (2011 - 68%) of total accounts receivable, from these oil and natural gascompanies.

13. Management compensation

During the year ended December 31, 2012, salaries and benefits for key management personnel,defined as the Company's executive officers, was $629,603 (2011 - $488,546). In addition, share-based compensation for key management personnel and their close family members was $NIL (2011- $289,375). Share-based compensation for key management personnel consists of the amortizationof the fair value of the conversion option on preferred shares (note 10). The compensation todirectors consisting of the fair value of shares issued to the directors was $110,502 (2011 - $21,682)for the year ended December 31, 2012.

14. Employee wages and benefits

During the year ended December 31, 2012, employee and management salaries and benefits totaled$7,191,451 (2011 - $5,065,131), of which $5,948,754 (2011 - $4,137,539) is included as field payrollexpenses, $637,816 (2011 - $438,996) is included as operations expenses and $604,881 (2011 -$486,596) is included as general and administrative expenses.

15. Capital management

The Company’s primary objectives when managing capital are to safeguard the Company’s ability tocontinue as a going concern and provide returns to shareholders.

The Company defines “capital” as the total of the operating loan, demand term loans, long-term debtand all components of equity.

The Company’s capital structure is regularly reviewed and managed. Adjustments are made to thecapital structure in light of changes in economic conditions affecting the Company.

The Company is subject to the following bank covenants on its Operating Loan and Rig Loans:

Current ratio not less than 1.25:1 tested quarterly. Demand term loans, current portion of long-term debt and payables relating to rig builds are excluded from current liabilities.

Debt to tangible net worth not to exceed 2.50:1 tested quarterly. Debt excludes any deferred taxliability. Tangible net worth is defined as equity less any intangible assets.

Debt service coverage ratio not to be less than 1.25:1 tested annually. Debt service coverageratio is calculated as EBITDA (net income before interest, taxes and depreciation) for the trailing12 month period divided by principal and interest payments over the same corresponding period.

As at December 31, 2012, the Company has a calculated current ratio of 5.35:1, a debt to tangible networth ratio of 0.95:1 and a debt service coverage ratio of 2.51:1.

All covenants were met for the year ended December 31, 2012.

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There have been no changes to the Company's capital management structure during the year.

16. Financial instruments and risk management

The Company is exposed to credit, liquidity and interest rate risks in the normal course of theCompany’s operations. These risks are mitigated by the Company’s financial management policiesand practices described below.

(a) Credit risk

The Company’s credit risk is primarily attributable to accounts receivable. Accounts receivableare due primarily from publicly traded oil and natural gas producers.

The Company’s exposure to credit risk is influenced mainly by the individual characteristics ofeach customer and by general economic conditions affecting the oil and natural gas industry.Management believes the default risk is minimal.

Further quantitative disclosures in respect of the Company’s exposure to credit risk arising fromaccounts receivable, are set out in notes 4 and 12.

The Company is also exposed to credit risk associated with cash. The risk is mitigated as thecash is maintained with a major financial institution.

The maximum exposure to credit risk is represented by the carrying amount of each financialasset on the statement of financial position.

(b) Liquidity risk

The Company’s policy is to regularly monitor current and expected liquidity requirements toensure that it maintains sufficient reserves of cash to meet its liabilities when due.

The Company has no contractual obligations other than accounts payable and accruedliabilities (note 7), operating loan and demand term loans (notes 6 and 8) and futurecommitments as disclosed in notes 17.

(c) Interest rate risk

The Company is exposed to interest rate risk to the extent that operating loan and demand termloans bear interest at floating interest rates. For the period ended December 31, 2012, ifinterest rates had been 1% lower, with all other variables held constant, after tax net earningsfor the period would have been approximately $64,000 (2011 - $65,000) higher due to lowerinterest expense. An equal but opposite impact would have occurred to net earnings hadinterest rates been 1% higher.

(d) Fair values

The fair values of the Company’s cash, accounts receivable, accounts payable and accruedliabilities, operating loan and demand term loans approximate their carrying values due to theirshort-term nature, or because they bear interest at market rates.

Cash is measured at fair value based on a Level 1 designation.

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17. Commitments

The Company is committed under various leases for an office in Cochrane, a shop in Estevan, mobilehome lots in Estevan and vehicles for its officers. Lease payments recognized as an expense duringthe period were $176,585 (2011 - $156,060). The future minimum lease payments exclusive ofoccupancy costs are as follows:

2013 $ 201,2382014 129,5032015 81,4002016 72,0002017 12,000

$ 496,141

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Sun Country Well YE12FS · Calgary, Alberta, Canada T2P 3R5 T. 403.298.1500 F. 403.298.5814 e-mail: [email protected] . Sun Country Well Servicing Inc. ... Share capital Common

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