Mr. Geoff Clark reports

ACCELEWARE LTD. REPORTS SECOND QUARTER 2023 FINANCIAL AND OPERATING RESULTS

Acceleware Ltd. has released its financial and operating results for six months ended June 30, 2023 (Q2 2023). All figures are in Canadian dollars unless otherwise noted. Acceleware's quarter-end results reflect contributions from the company's two business units, radio frequency (RF) heating for industrial applications using the company's proprietary clean tech inverter (CTI), including enhanced oil recovery (RF XL), and high-performance computing (HPC) scientific software. This news release should be read in conjunction with the company's unaudited interim condensed financial statements and the accompanying notes for the six months ended June 30, 2023, and management's discussion and analysis (MDA) thereto, together with the audited financial statements for the year ended Dec. 31, 2022, notes and MD&A thereto, all of which are available on Acceleware's website or on SEDAR+.

Highlights

In Q2 2023, the company continued to make progress on the workover for the pilot test of RF heating technology at Marwayne, Alta., and based on observations to date, remains confident that RF XL will become viable as a critical technology in the effort to decarbonize heavy oil and oil sands production. Initial data analysis, backed up with subsequent history-matching simulations and further analyses, provide strong evidence that the operation of the RF XL pilot in 2022 resulted in sustained RF heating of the formation around the heating well prior to a pause in operations for a maintenance workover. The final timing and cost of the workover remain dependent on availability of service rigs, supply chain availability and the successful deployment of upgraded components. Please refer to the RF XL pilot update section below for more information, and to the MDA for a complete RF XL pilot update.

The company had cash on hand of $100,000 (Dec. 31, 2022 -- $1.1-million), up to $4.4-million (Dec. 31, 2022 -- $1.4-million) of amounts committed but not yet received or receivable from grants and three major oil sands producers, and negative working capital, excluding cash, of $2.1-million (Dec. 31, 2022 -- $1.8-million). The company actively manages its cash flow requirements with a combination of cash generated from operations, external financing and capital raising activities.

In addition, recent highlights during the three months ended June 30, 2023, included:

• Subsequent to June 30, 2023, Acceleware signed an agreement with a Canadian not-for-profit corporation providing non-dilutive, non-repayable financing of up to $3-million for the RF XL pilot. The financing will be paid upon completion of certain milestones and is reimbursement for costs incurred between Jan. 1, 2022, and March 31, 2024.
• During Q2 2023, Acceleware successfully concluded an exploring innovations project with the International Minerals Innovation Institute (IMII), which validated the potential to use RF energy from Acceleware's CTI to dry potash and other mineral commodities. IMII subsequently announced that it has invited Acceleware to submit a proposal for subsequent project phases which could lead to the development of a commercial-scale drying platform.
• On June 6, 2023, Acceleware announced a non-brokered private placement of units at a price of 23 cents per unit for gross proceeds of up to $2-million. Each unit consists of one common share in the capital of the company and one common share purchase warrant. Each warrant entitles the holder to acquire one common share of Acceleware at 30 cents for a period of 24 months from the date of the issuance of the warrant. In the event the common shares trade at a closing price at or greater than 69 cents per common share for a period of 30 consecutive trading days, the company may accelerate the expiry date of the warrants by giving notice to the holders thereof, and in such case, the warrants will expire on the 30th day after the date on which such notice is given. The offering is expected to close on Aug. 21, 2023.

RF XL project update

The Acceleware team commenced final on-site workover operations on Aug. 8, 2023, after completion in the first half of 2023 extensive design, procurement, shop testing and derisking of repaired parts, upgraded components, run-in-hole procedures, and deployment tooling. Based on initial progress, Acceleware now anticipates this stage of the operation to take approximately four to six weeks, contingent upon weather and other factors. Power-up and heating are expected to commence shortly thereafter.

As previously communicated in the MD&A for the year ended Dec. 31, 2022, the Acceleware team was able to complete an inspection of the removable and non-removeable components of the proprietary down-hole RF XL system. The inspection activities included visual inspection, various electrical and mechanical measurements, down-hole video analysis, and other engineering techniques to obtain detailed data on the condition of the components. This inspection enabled the team to identify several opportunities expected to improve the performance of the RF XL system and rectify issues that required repair. These upgrades and repairs would not have been possible without pausing operations to perform the replacement of the distributed temperature sensing system (DTS) and have resulted in the addition of valuable intellectual property.

While down-hole operations carry a degree of risk, Acceleware has worked to mitigate that risk by developing a plan using standard down-hole technologies and selecting proven service providers to ensure the best opportunity for success. Upon successful completion of these final workover steps, RF XL components and DTS will be reassembled, and heating operations will resume. Completion of the remaining workover tasks is expected to result in increased power injected into the reservoir, and in turn a meaningful increase in reservoir temperature within a few months of resuming heating. The final timing and cost of the workover remain dependent on availability of service rigs, weather conditions at site, supply chain availability, delivery timing, and the successful deployment of repairs and components.

Acceleware anticipates the net cost of the RF XL pilot to be from $26-million to $27-million. Net cost includes estimated gross costs of $27-million to $28-million offset by an estimated $1-million to $2-million in proceeds from the sale of produced oil. Estimated proceeds from the sale of produced oil have been determined for the economic life of the RF XL pilot well. There is uncertainty in estimating proceeds from the sale of produced oil due to fluctuating oil prices and simulated production volumes. Operating and maintenance cost estimates remain subject to fluctuating commodity prices, in particular electricity, supply chain disruption costs, and any additional unforeseen mechanical or electrical engineering costs that could still potentially be encountered in a complex, commercial-scale pilot program of this nature. While the RF XL pilot heating phase was planned for at least six months, this period will be extended in light of the workover to allow Acceleware to capture additional information on the operation of the technology and its efficiency.

Financial summary

Overall spending in Q2 2023 remained conservative as the company continued to determine thoughtful and cost-conscious final steps in the workover for the RF XL pilot. A workover program began in late 2022 and continues to date. Construction work on the RF XL pilot was completed in early March, 2022, followed by commencement of operations which continued throughout most of 2022 until operations were paused for the workover. RF XL pilot expenses as at June 30, 2023, were approximately $27.3-million (Dec. 31, 2022 -- $25.9-million). The remaining cash committed but not yet received from SDTC, ERA and a Canadian not-for-profit corporation including hold-backs receivable was $3.5-million as at June 30, 2023 (Dec. 31, 2022 -- $1-million receivable from SDTC, ERA and Alberta Innovates) and amounts committed but not yet received or receivable from three major oil sands producers were $1.4-million as at June 30, 2023 (Dec. 31, 2022 -- $1.4-million).

Quarter in review

Revenue of $100,000 was generated in Q2 2023 compared with $100,000 in the three months ended June 30, 2022 (Q2 2022), and $100,000 in the previous quarter ended March 31, 2023 (Q1 2023). Revenue in Q2 2023 included consulting services revenue as well as software and maintenance revenue. Revenue is lower for the HPC segment due to less demand for FDTD and seismic software while services revenue in the RF heating segment continued to generate revenue with industry interest in alternative application for the CTI. Acceleware did not receive any data revenue payments during Q2 2023 or Q1 2023 for the RF XL pilot compared with $800,000 in Q2 2022. These payments, when received, were recorded in deferred revenue. Data revenue equal to the amount recorded in deferred revenue will be recognized as revenue at the end of the RF XL pilot or when the data contracts are terminated, whichever is earlier.

Total comprehensive loss for Q2 2023 was $1.1-million compared with a comprehensive loss of $900,000 for Q2 2022 and a comprehensive loss of $300,000 for Q1 2023. Comprehensive loss in all periods was impacted by changes in value of the derivative financial instruments embedded within the convertible debenture. These fluctuations are driven primarily by the fluctuation in the company's share price. Additionally, research and development expenses were higher in Q2 2023 and Q2 2022 compared with Q1 2023 due to a higher level of government assistance recognized in Q1 2023.

Gross R&D expenses incurred in Q2 2023 were $600,000 compared with $1.2-million in Q2 2022 and $800,000 in Q1 2023. R&D spending was lower in Q2 2023 compared with Q2 2022 due to lower costs for the remaining workover activities. Gross R&D expenses incurred in Q2 2022 include costs for operating the RF XL pilot. Gross R&D expenses were lower in Q2 2023 as compared with Q1 2023 due to a lower level of activity on the workover. Government assistance fluctuated during all periods with the highest level of funding recognized in Q1 2023. The government of Alberta's Innovation Employment Grant (IEG) to support research and development was effective Jan. 1, 2021, and provides a grant of up to 20 per cent of eligible R&D expenses incurred in Alberta. This new grant effectively replaces Alberta's 10-per-cent scientific research and experimental development refundable tax credit that was eliminated as of Dec. 31, 2019. The company met the eligibility criteria, claimed eligible R&D expenditures for 2021, and received and recognized $400,000 in Q1 2023. In Q2 2023 there was nil government assistance received and recognized related to the workover and $200,000 government assistance recognized in Q2 2022 related to the RF XL pilot. Government assistance offsets gross R&D costs.

General and administrative (G&A) expenses incurred in Q2 2023 were $500,000 compared with $500,000 in Q2 2022 and $300,000 in Q1 2023. There were additional legal and professional fees incurred in connection with the private placements in Q2 2022 and higher non-cash payroll-related costs incurred in Q2 2023 due to the timing of option grants. The company continues to prioritize cost control given uncertain economic conditions.

Year to date in review

Revenue of $200,000 was generated from the company's software, maintenance and services revenue streams for the six months ended June 30, 2023, compared with $200,000 for the six months ended June 30, 2022. There was lower RF heating software revenue and lower HPC maintenance revenue for the six months ended June 30, 2023, offset by higher RF heating services revenue. Services revenue relates to RF simulation and experimental studies paid by customers interested in applying CTI for their industrial heating needs. Certain industries have become interested in alternative applications of CTI for industrial heating, including mining, agriculture and hydrogen in 2023.

Total comprehensive loss for the six months ended June 30, 2023, was $1.4-million compared with $2.8-million for the six months ended June 30, 2022, due to lower R&D spending for the RF XL pilot. There are fluctuations in both periods related to changes in fair value of the derivative financial instruments embedded in the convertible debentures.

Gross R&D expenses for the six months ended June 30, 2023, were $1.4-million compared with $3.9-million incurred during the six months ended June 30, 2022, due to decreased R&D activity related to final steps of the RF XL pilot workover during the six months ended June 30, 2023. Operating costs for the RF XL pilot were incurred in the six months ended June 30, 2022. Federal and provincial government assistance of $400,000 was recognized in the six months ended June 30, 2023, compared with $1.3-million for the six months ended June 30, 2022, as the RF XL pilot nears completion.

G&A expenses incurred during the six months ended June 30, 2023, were $900,000 compared with $1-million for the six months ended June 30, 2022, a decrease of $100,000 due primarily to lower legal and professional fees for the convertible debenture in the six months ended June 30, 2023, partially offset by higher non-cash payroll-related costs for option grants. The company continues to prioritize cost management.

As at June 30, 2023, Acceleware had negative working capital of $2-million (Dec. 31, 2022 -- negative working capital of $600,000) including cash and cash equivalents of $100,000 (Dec. 31, 2021 -- $1.1-million). The decrease in working capital is attributable to the timing of receipt and recognition of government and partner financing and related R&D spending. Subsequent to June 30, 2023, Acceleware submitted the first claim for reimbursement under the new $3-million financing arrangement noted above. No amounts have been received as of Aug. 17, 2023. Increasing the deficit is deferred revenue of $4.35-million as at June 30, 2023 (Dec. 31, 2022 -- $4.35-million). Despite receiving non-refundable cash payments for these amounts, the milestone payments have not met all requirements for revenue recognition under IFRS (international financial reporting standards) 15 Revenue from Contracts with Customers. These amounts will be recognized as revenue and increase shareholders' equity when RF XL pilot heating is complete or the data revenue contracts are terminated, whichever is earlier.

In the interests of matching cash requirements with a combination of cash generated from operations, external financing and capital raising activities, the company actively manages its cash flow and investments in new products. Acceleware intends to maximize cash generated from operations through several initiatives which include continuing to focus on higher-gross-margin software products that are marketed through a combination of direct and reseller models; minimizing operating expenses where possible; and limiting capital expenditures. As the company continues to develop its RF heating technology, new R&D investments will be financed through a combination of internal cash flow from the HPC business, project financing agreements, government assistance and external financing, when available.

About Acceleware Ltd.

Acceleware is an innovator of clean tech decarbonization technologies comprising two business units: radio frequency heating technology and seismic imaging software.

We seek Safe Harbor.