Mr. Ken Rose reports

FORMATION FLUID ANNOUNCES QUARTER-END RESULTS

Formation Fluid Management Inc. has released its financial results for the three months ended Sept. 30, 2015, and 2014.

First quarter results

Key financial take-aways:

• Revenues of over $60,000;
• Gross margin of over 33 per cent;
• Decline of oil and gas prices have affected activity levels in the petroleum industry, resulting in significantly decreased earnings and cash flow for the industry.

Key milestones

The company continued performing pilot projects to create significant new applications for the Hydro-Cycle system beyond the historical remediation uses for the system.

The success in these projects will allow the company to develop year-round commercial applications for the Hydro-Cycle system, which result in clean water available for reuse.

                          FINANCIAL SUMMARY
                                                     Quarter ended Sept. 30, 
                                                       2015            2014 

Revenues                                            $60,451      $1,154,480 
EBITDA                                            ($355,491)       $478,924 
Diluted per share                                    ($0.01)          $0.01 
EBITDA as % of revenues                                (588%)            41%
Funds from operations                             ($347,165)       $478,924 
Diluted per share                                    ($0.01)          $0.01 
Net earnings (loss)                               ($463,646)       $145,931 
Basic per share                                      ($0.01)          $0.00 
Diluted per share                                    ($0.01)          $0.00 
Equipment additions, net cash                      $123,921        $683,671 

Business outlook

The company expects to see growth as a result of the following factors:

• Fabrication of an additional Hydro Pure unit is complete. This addition now provides the company with two sets of equipment. Manufacturing has also completed a combination (Hydro Clear and Hydro Pure) unit. Both new units were completed and started work in September, 2015.
• The successful completion of two major remediation projects has demonstrated the efficiency and robustness of the company's equipment, allowing Formation Fluid to offer clients the ability to clean saline spills and decontaminate produced water to potable water standards.
• The industry's continued focus on contaminated water issues is providing the company with expanding market opportunities to provide water for fracks, water flood, polymer flood and SAGD.
• An aggressive marketing program in Western Canada has resulted in numerous inquiries from several major producers.
• The company's expanded shop facilities now include testing facilities, allowing the company to provide clients with complete evaluation for their water and processing options.
• The oil industry is focusing on ways to reduce costs. The Hydro-Cycle system can clean produced water for reuse, recycling or release in oil field operations, and this can save money and conserve surface water for other uses.

The company has seen a slower growth rate than previously anticipated due to the following factors:

• Decline of oil and gas prices has affected activity levels in the petroleum industry. During the past year, oil prices have ranged from a high of approximately $70 (U.S.) per barrel to a low of $40 (U.S.) per barrel. This volatility has resulted in significantly decreased earnings and cash flow for the industry. At the time of writing, the oil price was approximately $44 (U.S.) per bbl.
• As result of decreased earnings and cash flow, oil and gas companies have delayed and cancelled both capital and operating projects.
• Oil and gas companies are refocusing their efforts on ways to cuts costs and save money. This has been detrimental to the company in the short term as projects have been delayed. The company believes that in the long term, this focus on costs will be to the company's benefit. Its Hydro-Cycle system can save oil companies in excess of 50 per cent on their water management program. The silver lining of the industry downturn is that companies now have the time and the incentive to look at cost-saving technologies like the company's Hydro-Cycle system.

Financial results

During the quarter ended Sept. 30, 2015, the company generated $60,451 (2014: $1,154,480) in revenue from water remediation services and incurred field expenses of $40,462 (2014: $400,739), resulting in gross margin of $19,989 (2014: $753,741) or 33 per cent (2014: 65 per cent), and net loss of $463,646 and one-cent basic and diluted loss per share (2014: net income of $145,931 and nil per basic and diluted income per share). Earnings before interest, taxes, depreciation and amortization for the quarter ended Sept. 30, 2015, were negative $355,491 (2014: positive $478,924). Field expenses consist of the direct costs associated with providing the water remediation services, generating the company's revenues.

In the quarter ended Sept. 30, 2015, the company used cash in operations of $130,870 (2014: cash generated from operations of $706,110). The company used net cash of $116,421 during the quarter ended Sept. 30, 2015, for capital expenditures (2014: $683,671). The capital expenditures in the current period were incurred to complete the construction of additional water-processing plants to meet expected customer demand.

The company's financing activities in the quarter ended Sept. 30, 2015, resulted in cash outflows of $69,265 corresponding to loan payable repayments. During the quarter ended Sept. 30, 2014, the company generated cash of $285,860 from proceeds from a loan payable. Total cash outflows exceeded total cash inflows during the quarter ended Sept. 30, 2015, by $316,556. During the quarter ended Sept. 30, 2014, total cash inflows exceeded total cash outflows by $308,299.

At Sept. 30, 2015, the company had cash of $41,389 and negative working capital of $789,008, (2014: cash of $2,441,755 and working capital of $2,567,384). Shareholders' equity at Sept. 30, 2015, was $4,361,980 (2014: $6,381,131).

This financial information has been prepared on a going-concern basis, with the assumption that the company will be able to realize its assets and discharge its liabilities in the normal course of business. In assessing whether or not there are material uncertainties that may lend doubt as to the ability of the company to continue as a going concern, management takes into account all available information about the future, which is at least but not limited to 12 months from the end of the reporting period. Management is aware of the material uncertainties that could cast significant doubt upon the company's ability to continue as a going concern. The company has negative cash flows from operations of $130,870, a net loss and comprehensive loss of $463,646 for the quarter ended Sept. 30, 2015, and negative working capital of $789,008 at Sept. 30, 2015. As a result, the company will need to raise additional financing within the next 12 months to meet its liabilities as they come due and to continue with its business activities.

The company's full financial statements and management's discussion and analysis are available on-line at SEDAR.

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