Mr. Geoff Clark reports

ACCELEWARE LTD. REPORTS THIRD QUARTER 2023 FINANCIAL AND OPERATING RESULTS

Acceleware Ltd. has released its financial and operating results for the nine months ended Sept. 30, 2023. 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 nine months ended Sept. 30, 2023, and management's discussion and analysis 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 the three months ended Sept. 30, 2023, encouraged by positive results to date, the company worked closely with industry partners to determine the most appropriate next steps in the workover. Several options were analyzed that could allow for demonstration of RF XL in an operational environment, and each was ranked by probability of success. During third quarter 2023, a refined configuration of RF XL was finalized, including many upgraded components, improved deployment tools and modified operational procedures based on experience to date. Please refer to the RF XL pilot update section herein for more information and to the MD&A for a complete RF XL pilot update.

The company had cash on hand of $300,000 (Dec. 31, 2022: $1.1-million), up to $4.4-million of amounts committed but not yet received from government grants and three major oil sands producers (Dec. 31, 2022: $1.4-million), and negative working capital, excluding cash, of $2.9-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. On Dec. 3, 2022, the company signed a promissory note payable for $678,774, bearing interest at 9.45 per cent per annum and secured with a general security agreement over the company's assets. The principal and accrued interest of the promissory note are included in working capital. As at Sept. 30, 2023, $746,849 of principal and accrued interest remains outstanding, and the counterparty has agreed to amended terms. Repayment is expected on or about Dec. 31, 2023, and the interest rate was increased to 11.85 per cent per annum beginning July 1, 2023.

In addition, recent highlights during the three months ended Sept. 30, 2023, included the following:

• On Nov. 6, 2023, Acceleware announced non-dilutive, non-repayable financing from the Clean Resource Innovation Network (CRIN) 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. This financing is intended to accelerate clean technology development and commercialization for the oil and gas industry. No amounts have been received as of Nov. 21, 2023.
• On Aug. 21, 2023, Acceleware closed a non-brokered private placement of units, which consisted of one common share of the company and one common share purchase warrant. The company distributed a total of 1,949,036 units at a price of 23 cents per unit for total gross proceeds of $448,278. The proceeds will be used to finance a portion of the RF XL pilot workover and for general corporate purposes.
• On Aug. 2, 2023, Acceleware 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 had invited Acceleware to submit a proposal for subsequent project phases, which could lead to the development of a commercial-scale drying platform. Acceleware has submitted a proposal and awaits approval from IMII.

RF XL project update

The Acceleware team recommenced on-site workover operations on Aug. 8, 2023, after completion in the first half of 2023 of extensive design, procurement, shop testing and derisking of repaired parts, upgraded components, run-in-hole procedures and deployment tooling. While challenges were encountered in redeploying upgraded components subsurface, to the best of the company's management's knowledge, the RF XL pilot has demonstrated greater success than any radio frequency pilot to date. The company has met with its industry partners to develop and discuss options to resume testing. Technical plans and next steps for resuming operations were designed following these collaborative discussions. Each alternative plan has a range of probability, cost and timeline for deployment. Although the challenge in resuming operations results in additional cost and time, the updated technical plans allow Acceleware to deploy upgraded components to improve operations or address known concerns. Acceleware remains encouraged by the operation of the RF XL pilot, in particular by no known operability concerns of the RF XL technology itself.

Acceleware is looking to proceed with the option that has the highest probability of success and lowest risk, backed by the most partner support. 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 financing, partner investment, availability of rigs, weather conditions at site, supply chain availability, delivery timing, and the successful deployment of repairs and components.

Using the most likely scenarios moving forward, Acceleware estimates a range of net cost for the RF XL pilot of between $30-million and $33-million. Net cost includes estimated gross costs of between $31-million and $35-million offset by an estimated $1.0-million to $2.0-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 the cost estimate stemming from the number of alternatives being studied, each with its own cost profile. There is also 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 the three months ended Sept. 30, 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 Sept. 30, 2023, were approximately $28.0-million (Dec. 31, 2022: $25.9-million). The remaining cash committed but not yet received from SDTC, ERA and CRIN including holdbacks receivable was $3.5-million as at Sept. 30, 2023 (Dec. 31, 2022: $1.0-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 Sept. 30, 2023 (Dec. 31, 2022: $1.4-million).

Quarter in review

Revenue of $100,000 was generated in the three months ended Sept. 30, 2023, compared with $100,000 in the three months ended Sept. 30, 2022, and $100,000 in the previous quarter ended June 30, 2023. Revenue in Q3 2023 included software and maintenance revenue. Revenue was slightly stronger in Q3 2023 in the HPC segment for FDTD software compared with third quarter 2022 and second quarter 2023, but was lower for seismic software due to less demand. There continues to be variability in the RF heating segment for revenue related to services in applying CTI to industrial heating. While interest has increased in the intelligent electric heating service offering, there was no revenue in Q3 2023. Acceleware did not receive any data revenue payments during Q3 2023, Q3 2022 or Q2 2023 for the RF XL pilot. These payments, when historically 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 Q3 2023 was $1.3-million compared with a comprehensive loss of $1.0-million for Q3 2022 and a comprehensive loss of $1.1-million for Q2 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, comprehensive loss was higher for higher interest costs related to current liabilities financing the company's working capital and fluctuating levels of research and development spending and government assistance for R&D activities.

Gross R&D expenses incurred in Q3 2023 were $800,000 compared with $600,000 in Q3 2022 and $600,000 in Q2 2023. R&D spending was higher in Q3 2023 compared with Q3 2022 and Q2 2023 due to on-site workover activities. Government assistance received in Q3 2023 was $100,000 and nil in Q3 2022 and Q2 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 replaced Alberta's 10-per-cent scientific research and experimental development refundable tax credit that was eliminated as at Dec. 31, 2019. The company met the eligibility criteria, claimed eligible R&D expenditures for 2021 and 2022, and received and recognized $400,000 in first quarter 2023 and $100,000 in third quarter 2023. In Q3 2022 and Q2 2023, there was $0-million government assistance received and recognized related to the RF XL pilot. Government assistance offsets gross R&D costs.

General and administrative expenses incurred in Q3 2023 were $600,000 compared with $500,000 in Q3 2022 and $500,000 in Q2 2023. There were higher non-cash payroll-related costs incurred in Q3 2023 due to the timing of option grants, higher professional fees and lower salaries as 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 service revenue streams for the nine months ended Sept. 30, 2023, compared with $300,000 for the nine months ended Sept. 30, 2022. Although revenue is more diversified in 2023 with a significant contribution from service revenue, revenue was lower due to lower demand for HPC software and maintenance revenue. Service revenue relates to RF simulation and experimental studies paid by customers interested in applying CTI for their industrial heating needs. Industries outside of heavy oil have also become interested in utilizing CTI for industrial heating, including mining, agriculture and hydrogen. Acceleware did not receive any non-refundable milestone cash payments during the nine months ended Sept. 30, 2022, compared with $1.2-million received during the nine months ended Sept. 30, 2022. When received, these payments are recorded in deferred revenue.

Total comprehensive loss for the nine months ended Sept. 30, 2023, was $2.7-million compared with $3.8-million for the nine months ended Sept. 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 and interest expense due to short- and long-term debt financing.

Gross R&D expenses for the nine months ended Sept. 30, 2023 were $2.2-million compared with $4.5-million incurred during the nine months ended Sept. 30, 2022, due to lower-cost R&D activity on the RF XL pilot during the nine months ended Sept. 30, 2023. There was a significant amount of non-recurring installation costs for the RF XL pilot incurred in the early part of 2022. Federal and provincial government assistance of $600,000 was recognized in the nine months ended Sept. 30, 2023, compared with $1.3-million for the nine months ended Sept. 30, 2022, as the ERA, SDTC and Alberta Innovates grants for the RF XL pilot near completion.

G&A expenses incurred during the nine months ended Sept. 30, 2023, were $1.4-million compared with $1.5-million for the nine months ended Sept. 30, 2022, a decrease of $100,000 primarily due to lower salaries as the company continues to prioritize cost management, partially offset by higher non-cash payroll-related costs for option grants.

As at Sept. 30, 2023, Acceleware had negative working capital of $2.6-million (Dec. 31, 2022: negative working capital of $600,000), including cash and cash equivalents of $300,000 (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. During the nine months ended Sept. 30, 2023, Acceleware submitted the first claim for reimbursement under the new $3-million CRIN grant financing agreement noted above. No amounts have been received as of Nov. 21, 2023. Increasing the deficit is deferred revenue of $4.35-million as at Sept. 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 international financial reporting standard 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 cleantechnology decarbonization technologies composed of two business units: radio frequency heating technology and seismic imaging software.

Acceleware is piloting RF XL, its patented low-cost low-carbon production technology for heavy oil and oil sands, that is materially different from any heavy oil recovery technique used today. Acceleware's vision is that electrification of heavy oil and oil sands production can be made possible through RF XL, supporting a transition to much cleaner energy production that can quickly bend the emission curve downward. With clean electricity, Acceleware's RF XL technology could eliminate greenhouse gas emissions associated with heavy oil and oil sands production. RF XL uses no water, requires no solvent, has a small physical footprint, can be redeployed from site to site and can be applied to a multitude of reservoir types. Acceleware is also actively developing partnerships for RF heating of other industrial applications using the company's proprietary CTI.

Acceleware and Saa Dene Group (co-founded by Jim Boucher) have created Acceleware | Kisastwew to raise the profile, adoption and value of Acceleware technologies. The shared vision of the partnership is to improve the environmental and economic performance of the energy sector by supporting ideals that are important to indigenous peoples, including respect for land, water and clean air.

The company's seismic imaging software solutions are state of the art for high-fidelity imaging, providing the most accurate and advanced imaging available for oil exploration in complex geologies. Acceleware is a public company listed on Canada's TSX Venture Exchange under the trading symbol AXE.

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