Sonic Technology Solutions Inc. (TSXV: SNV) Initiating ......Siddharth Rajeev, B.Tech, MBA Sonic...

Investment Analysis for Intelligent Investors

Siddharth Rajeev, B.Tech, MBAAnalyst

Kevin Liu, BBA, BScResearch Associate

March 25, 2008

2008 Fundamental Research Corp. www.researchfrc.com Siddharth Rajeev, B.Tech, MBA

PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT

Sonic Technology Solutions Inc. (TSXV: SNV)–Initiating Coverage; Advancing new applications in theenergy and materials sectors

Sector/Industry: Energy/Sonic www.sonictsi.com

Market Data (as of March 25, 2008)Current Price C$0.25Fair Value C$1.37Rating* BUYRisk* 4 (Speculative)52 Week Range C$0.23–C$0.65Shares O/S 41,324,068Market Cap C$10.33 mmCurrent Yield N/AP/E (forward) N/AP/B 1.13YoY Return -45.7%YoY TSXV -21.3%

*see back of report for rating and risk definitions

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Investment Highlights

Sonic’s patented technology has the capability of generating industrial-scale sonic energy. SonoprocessTMtechnologies are the world’s first and only use of large-scale sonic energy in industrial applications.

Sonic commercialized its technology in the environmental sector in2006, by developing a process for the remediation of soil and waste.

2007 was a turn around year for the company, as it moved from acompany purely focusing on the environmental sector, to a companythat has the potential to enter several other markets at the same time.

Sonic is now actively focusing on using sonic energy to enhancerecovery of oil sands, upgrade heavy oil, and process fly ash for use as asubstitute to cement. In addition to cost-savings, the application of theSonoprocessTM technology will also lead to lower greenhouse gasemissions.

In order to get a perspective on the potential market size, if Sonic breaksinto the energy and materials sectors, we estimate that a 1% marketshare of the global market for heavy oil upgrading and fly ash sectorswould translate into annual revenues of $65.70 million and $111.72million, respectively, for Sonic and its partners.

Sonic has a partnership with Shell Canada to implement theirtechnology in the oil sands industry. The next 12 months promises to bean exciting period for the company and their partners as they confirmthe viability of the SonoprocessTM technology in the energy andmaterials sectors, and progress their projects to commercialization.

Sonic Technology Solutions Inc., based in Vancouver, Canada, has a patented technology to generate industrial-scale sonic energy.Sonic’s patented SonoprocessTM technology is the world’s first and only industrial-scale sonic generator technology. Aftersuccessfully commercializing its technology in the environmental sector, the company is now actively trying to commercialize thetechnology’s application in the energy (heavy oil and oil sands) and the materials sectors.

F i n a n c i a l S u m m a r y ( Y E D e c 3 1 )( C $ ) 2 0 0 5 2 0 0 6 2 0 0 7 E 2 0 0 8 ER e v e n u e 1 , 1 1 4 , 4 3 9 1 , 6 6 5 , 7 0 6 1 , 4 8 6 , 9 6 0 1 , 6 3 5 , 6 5 6G r o s s M a r g i n - 7 2 . 7 0 % - 1 1 0 . 0 7 % - 4 7 . 7 2 % - 2 5 . 0 0 %N e t I n c o m e ( 6 , 2 0 6 , 4 4 5 ) ( 7 , 2 9 9 , 3 2 8 ) ( 4 , 6 9 2 , 4 9 1 ) ( 4 , 1 8 1 , 6 3 6 )E P S ( b a s i c ) ( 0 . 4 1 ) ( 0 . 3 2 ) ( 0 . 1 1 ) ( 0 . 1 0 )C a s h 1 , 9 4 7 , 8 0 2 1 , 7 5 1 , 9 0 8 9 7 0 , 4 1 3 8 9 , 0 3 3A s s e t s 1 1 , 0 0 2 , 4 9 1 1 0 , 7 7 4 , 6 0 5 9 , 3 3 3 , 0 2 1 8 , 2 9 4 , 5 2 1

D e b t t o C a p i t a l * 1 1 . 1 3 % 0 . 0 0 % 3 . 5 5 % 3 . 7 6 %R O E - 9 1 % - 5 7 % - 5 2 % - 5 8 %R O I C - 8 1 % - 5 7 % - 5 1 % - 5 6 %

* I n c l u d e s o n l y l e a s e o b l i g a t i o n s ; t h e c o m p a n y d o e s n o t h a v e a n y i n t e r e s t p a y i n g d e b t

Siddharth Rajeev, B.Tech, MBA Sonic Technology Solutions Inc.–Initiating Coverage



CompanyOverview

Sonic Technology Solutions Inc., based in Vancouver, Canada, owns the intellectualproperty rights to the world’s first and only technology to generate industrial-scale sonicenergy. Although sonic energy has been used in the past to enhance several physical,chemical and biological processes, applications on large-scale process were limited, asexisting technologies were neither cost-effective nor efficient. The company’s unique and innovative SonoprocessTM technology, we believe, has significantly increased the potentialof applying sonic energy in large-scale industrial processes.

The company has already proved the viability of their SonoprocessTM technology in theenvironmental sector by developing a process for the remediation of soil and waste. TheSonic Treatment System (the system used for environmental applications) is now consideredone of the most sustainable solutions for polychlorinated biphenyl (PCB) contaminated siteremediation, and the technology is licensed in Canada, Japan, Australia and Mexico (PCB isconsidered one of the 12 most persistent organic pollutants by the UN Stockholmconvention).

After their success in the environmental sector, the company is now actively focusing oncommercializing its technology in the following three sectors - a) use of sonic energy toenhance recovery of oil sands, b) upgrading heavy oil, and c) processing fly ash (one of theresidues generated in the combustion of coal) for use as a substitute to cement. The chartbelow shows a summary of the company’s current focus areas.

(Develops and holds allSonoprocessTM IP)

Sonic EnvironmentalSolutions Inc.

100% ownedConsidered one of the

most sustainable solutionsfor PCB contaminatedsite remediation

Commercializedapplication

Licensed technology inCanada, Japan, Australiaand Mexico

100% ownedPartnership with Shell–

entered into a three phasedevelopment program

Application–enhance oilsands recovery

PetroSonic EnergySystems Inc.

40% ownedApplication–upgrading

heavy oilPlans to install a pilot plant

in 2008

Fly Ash

100% owned‘Proof of concept’ stageApplication–condition

fly ash to substitutecement in concrete;lower cementproduction results inlower CO2 emissions

Seeking a JV Partner

Sonic protects its intellectual property through international patents for its sonic generatortechnology. 2007 was a turn around year for the company, as it moved from a companypurely focusing on the environmental sector, to a company that has the potential to enter




History

Sonic’s SonoprocessTM

Technology

purely focusing on the environmental sector, to a company that has the potential to enterseveral other markets at the same time. In 2007, Sonic announced their partnership withShell Canada to implement their technology in the oil sands industry, and joint ventured withPetroSonic Energy Systems to pursue their technology in improving the existing processes ofupgrading heavy oil. The next 12 months promises to be an exciting period for the companyand their partners as they confirm the viability of the SonoprocessTM technology in theenergy and materials sectors, and progress their projects to commercialization.

The company was founded in December 2002 as “Sonic Environmental Solutions Inc.” after it acquired the intellectual property rights to its sonic generator technology. In order tofurther develop the technology for use in environmental applications, the company acquiredthree companies, namely SESI System Inc., Contech PCB Containment Technology Inc.,and Terra-Kleen Response Group Inc.

In June 2007, the company changed its name to Sonic Technology Solutions Inc. to reflectthe fact that their technology has several other industrial applications, in addition to itsapplication in the environmental sector.

Sonic currently has 11 employees. Insiders own approximately 5.4%, and institutions (RABCapital Plc and Mavrix Fund Management Inc. are the top two holders) own approximately32% of the total number of outstanding shares. Sonic’s shares are currently trading on the TSX Venture Exchange (TSXV: SNV) and the Frankfurt Stock Exchange (FDZ.GR).

Before taking a look at the various applications of the technology, we believe, it is essentialthat investors get a clear understanding of the company’s innovative and unique SonoprocessTM technology.

Although Sonic energy has been proven to be beneficial in the past for many chemical,physical or biological processes, the use of sonic energy in large-scale process applicationswere limited until now. High-frequency ultrasound has been used in the past for variousapplications, but they did not provide the robustness, economics and industrial capabilitiesthat Sonic’s technology can provide. In the next section, we take a look at how the company’s SonoprocessTM technology generates intense sound energy.

Principle: The SonoprocessTM technology is based on the very simple phenomenon thatwhen objects are driven into their natural resonance frequency, they have the potential togenerate significant amounts of energy that can even be destructive. When objects are driveninto their natural frequency (the frequency at which a system naturally vibrates once it hasbeen set into motion), they fall into resonance - a tendency to oscillate at maximumamplitude. When objects oscillate at high amplitude, they cause the air around them to moveand thereby, generate sound energy. At resonance, even small periodic forces can producelarge amplitude vibrations.

An example will help readers attain a better understanding. Tap a fork and hold it over theopening of a can as shown below. One can notice that the sound gets louder when the fork isheld closer to the can opening.




This phenomenon is called resonance. In this case, the can acts like a resonating chamber.The vibrating tuning fork held near the opening causes the can and the air in the can tovibrate, and the sound becomes intensified and amplified.

Sonic Generator:Sonic’s technology is based on the tuning fork example illustrated above. Instead of using a tuning fork, Sonic generator technology drives a 14-foot long bar,weighing 2.8 tonnes, into resonance (shown below). Sonic energy from the bar, whentransmitted to a closed chamber (like the can in the above example), is significantlyamplified. When materials are pumped into this closed chamber, they are subject to intenseagitation and vibration. This agitation action can be used to break up materials, grindparticles, enhance chemical reactions, emulsification, etc.

Source: Sonic Technology Solutions

The steel bar is driven into resonance by electromagnetism. The unit is activated by a seriesof low-frequency pulses, which is taken through large magnets (at the two ends of the unit)and into the steel bar (14 inches in diameter). As varying current flows through the magnets,it forces the bar to vibrate at its natural resonance. It is estimated that the intensity of thesonic energy produced by the bar when transferred to a reaction chamber is at least 10




Low RiskBusiness Model

sonic energy produced by the bar when transferred to a reaction chamber is at least 10times more powerful than conventional industrial mixing systems.

Applications: Basically, Sonic’s technology can be used for any process that involves energy-intensive separation, grinding or mixing, and therefore, the technology has very wideindustrial applications. The major applications of industrial scale sonic energy that havecurrently been identified are as follows.

Energy–High intensity sound energy can be used to improve existing technologies usedto upgrade heavy oil, and to enhance oil recovery by displacing bitumen from oil sands

Material–Process waste to valuable products. This application has two advantages–1)it helps cut greenhouse gas emissions and waste in the environment; 2) by convertingwaste to valuable products, the technology increases the marketability and value ofwaste. Sonic is currently focusing on conditioning fly ash (one of the residues generatedin the combustion of coal) to substitute cement in concrete.

Environmental treatment –Sonic energy can be used to remove persistent organicpollutants (POPs) that persist, and are hazardous to the environment; Sonic has alreadyproven the benefits of sonic energy in this space, and because of the advantages overalternative technologies, their technology is considered one of the most sustainablesolutions for PCB contaminated site remediation.

Bio-waste and Bio-Energy treatment –This is another market, we believe, whichoffers good upside potential. Sonic energy can be used in de-watering and cell disruption,and therefore, applications in pre-conditioning materials for chemical and biologicaldigesting, processing bio-product and enhance bio-oil recovery.

Chemical Processing–Sonic energy can be used to enhance chemical reactions.Others – Processes for food emulsions, mixing, grinding, pulverization, de-

agglomeration.

The fact that the company has already commercialized the SonoprocessTM technology in theenvironmental space, we believe, indicates that the technology is feasible. Sonic is currentlyfocusing on commercializing its technology in other applications. The important thing tonote here is that the company does not intend to develop an alternate process for any ofthe applications listed above, but plans to use industrial power sonic energy to improveefficiencies of existing processes that will potentially lead to cost-benefits.

Instead of developing and marketing its products for different applications, Sonic’s strategyis to partner with suitable industry players, who in turn will work towards the development,marketing and commercialization of the technology for different applications. Sonic, in turn,will benefit by receiving licensing fees upfront, royalties from the application of thetechnology and/or through equity investments in their partners.

The advantage of this model is that it allows the company to focus on severalapplications at the same time, and simultaneously reduce financial and business risksfor the company. For example, Sonic has licensed its Sonic Treatment Solution (forenvironmental applications) to various partners in Canada, Japan, Australia and Mexico. Thepartners will be responsible for further penetration in their respective markets. The advantage




Heavy Oil andOil Sands

to Sonic is that, Sonic will continue to receive royalties, typically 50% of net earnings, fromtheir partners.

Among the applications listed earlier, the company is currently focusing on commercializingits technology in the following three sectors:

1. Upgrading heavy oil2. Enhance oil recovery by extracting bitumen from oil sands3. Condition fly ash to cut greenhouse gas emissions, and to increase the value of the fly ash

by making it a substitute to cement

The company has already progressed to the proof of concept stage and independentvalidations for these three applications. Considering the demand for such a technology inthese markets, we believe that the company has significant upside potential, if and when itcommercializes the technology in at least one of these applications. In this report, we havemainly discussed the potential of the Sonic generator technology in these applications, inaddition to its potential for further penetration in the environmental sector worldwide.However, note that it does not in anyway suggest that the applications of the SonoprocessTM

technology are restricted to just these sectors.

Our outlook on the potential market for the SonoprocessTM technology in the energy sector(heavy oil and oil sands industries) follows.

Total heavy oil and bitumen reserves exceed conventional crude oil reserves: Accordingto the Energy Information Association (EIA), the sum of recoverable heavy oil resources(434 billion bbl) and recoverable natural bitumen (651 billion bbl) exceeds conventional(light) oil reserves (952 billion bbl). The following chart presents the distribution of theworld's known recoverable oil resources and reserve type.

Distribution of the world's known recoverable oil resourcesand reserves by type (in billion bbl)

47%

21%

32% Conventional (light) oilreserves

Recoverable Heavy OilResources

Recoverable NaturalBitumen

Source: EIA

According to Schlumberger (NYSE: SLB), total heavy oil and bitumen reserves account for70% of the total global oil reserves. The chart below shows the regional distribution ofestimated technically recoverable heavy oil and natural bitumen in billions of barrel.According to the EIA, South America has the largest amount of technically recoverable




According to the EIA, South America has the largest amount of technically recoverableheavy oil (265.7 billion bbl), representing about 61.2% of the world total, while NorthAmerica has the largest amount of technically recoverable natural bitumen (530.9 billionbbl), representing about 81.6% of the world total.

Regional Distribution of estimated technically recoverable heavy oil and naturalbitumen in billions bbl

Heavy Oil

N.America S. America Africa Europe

Middle East Asia Russia

Natural Bitumen

N.America S. America Africa Europe

Middle East Asia Russia

Source: EIA

Heavy oil production growth to exceed light oil production growth: According to theEIA, global heavy oil production (heavy sour & high TAN) is expected to increase at acompounded annual growth rate (CAGR) of 2.31% from 2005 to 2020, while worldproduction of light oil (light sweet & light sour) is expected to grow at a CAGR of only1.18% during the same period. The following chart shows world oil production forecast bycrude oil quality.

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L ig h t O i l H e a vy O i l

S o u r c e : EIA

F o r e c a s t f o r W o r l d O i l P r o d u c t i o n b y C r u d e O il Q u a l i t y1 9 9 0 - 2 0 2 0 ( i n m i ll io n b p d )




UpgradingHeavy Oil–Expecting toconstruct aprototype in2008

Alberta oil sands production is expected to increase with capital spending: TheCanadian Energy Research Institute estimates capital spending of $77.4 billion on oil sandsprojects in the period 2004 to 2020 (as shown in the chart below). The chart on the rightshows the expected growth in oil sands production in Alberta through 2015.

Producing heavy oils and oil sands bitumen has been a concern for producers primarilybecause of the low recovery rates and the high costs associated with the extraction andrefining process. Sonic has partnered with PetroSonic Energy Systems Inc. to applySonoprocessTM technology in improving the efficiencies of the existing processes used toupgrade heavy oil, and thereby offer significant cost-benefits to producers. PetroSonic is aprivate company founded by CEO Dr. David Kahn who specializes in heavy oil productionand processing, and has worked with heavy oil companies that were acquired by companiessuch as Ivanhoe Energy (TSX: IE), Pearl Exploration and Production Ltd. (TSXV: PXX) andMegaWest Energy Corp. (OTC: MGWSF). Sonic and PetroSonic Energy entered into anagreement in May 2007.

Heavy oil, like bitumen, is heavier and more viscous than conventional crude oil. Therefore,like bitumen from oil sands, heavy oil has to be upgraded to reduce viscosity (vis-breaking)to allow shipment by pipeline, and to improve quality by reducing sulphur content (de-asphalting). By upgrading heavy oil, producers can receive more value for the produced oiland reduce transportation costs.

According to the agreement, PetroSonic intends to develop a proof of concept in the firstphase. Preliminary results indicated that de-asphalting and vis-breaking may be possibleusing sonic energy. Sonic announced they would advance to include third party evaluation ofthe test results and the process economics. Following the successful completion of the firststage, Sonic will have a 40% interest in PetroSonic. In the second phase, both companieswill work together on a prototype installation in the field. If successful, PetroSonic will havethe right to obtain a global license from Sonic to use the SonoprocessTM. Sonic, in additionto having a 40% equity interest in the company, will also receive royalties from theapplication of SonoprocessTM. A provisional patent application has been made.

PetroSonic’s objective is to use high-intensity sonic energy to improve the conventional de-




Enhanced OilSands Recovery–Partnershipwith Shell

asphalting and vis-breaking processes, and thereby reduce costs and improve the quality ofoil. Sonic’s management believes that, if implemented, the SonoprocessTM technology canhelp producers improve their netback by about $6/bbl. At crude oil prices of $80/bbl, thesecost cuttings reflect an improvement of 7.5% in netback. Assuming that Sonic receivestolling fees of at least $3/bbl from producers in exchange for processing heavy oil, weestimate, the company can generate annual revenues of about $2.19 million from a singlejunior oil company producing at 2,000 bpd.

In order to get a perspective on the size of the potential market; our estimate of globalheavy oil production that Sonic can target is estimated at about 2.2 billion barrels peryear. Therefore, even a 1% market share in this space for PetroSonic would implyannual revenues of $65.70 million.

The company established their subsidiary, SonoOil, in 2006, with the objective to develop,use and market the SonoprocessTM technology in the oil sands industry.

Oil sands, when mined commercially, contain an average of 10-12% bitumen, 83-85%mineral matter, and 4-6% water. Oil sands are typically extracted either by open-pit miningor in-situ recovery methods (which includes steam, chemical and solvent injection). In theopen-pit mining method, the sands are dug up by large hydraulic and electrically poweredshovels. The mined oil sands then undergo a hot-water process separation (water is added tosand and then agitated) in a separation cell to separate bitumen from sand, water andminerals. As a result of the high temperature and agitation, bitumen separates from the oilsands, and floats to the top of the separation vessel, where the bitumen can be skimmed off.Chemical addition, flotation and light solvent dilation are other techniques used to separatebitumen.

Recovered bitumen does not flow freely, as it is heavier and more viscous than crude oil.Compared to crude oil, bitumen contains too much carbon and less hydrogen. Thus, cokingprocesses (which involves thermally cracking of the fractions) and hydrocracking processes(adding hydrogen) are normally used to remove carbon from the heavy fractions of bitumen.

Sonic’s objective is to use SonoprocessTM to facilitate the extraction processes mentionedabove to improve the overall flow rates and recovery of bitumen. Sonic, with the help of theAlberta Research Council (ARC), has identified the following specific applications of itsSonoprocessTM technology in this sector.

1. Extraction process of naptha and bitumen from surface mining plants2. Influence viscosity by modifying the primary separation operations of surface mining

plants3. Basic separation technologies4. Diluent reduction through pipeline sonication

As mentioned earlier, SonoprocessTM will not replace any existing technology, but will beretrofitted to existing systems to improve their efficiency. The company has completed proofof principle work on an oil sands related application with the help of some financial aid from




ConditioningFly Ash–Substitute toCement

the Industrial Research Assistance Program (IRAP).

Partnership with Shell Canada: On August 15, 2007, Sonic announced that they signed anagreement with Shell Canada Energy to apply SonoprocessTM in the oil sands industry.

Shell Canada, one of the largest integrated petroleum companies in Canada, is one of themajor players in the oil sands industry. Shell, along with Chevron (NYSE: CVX) andMarathon (NYSE: MRO), currently produces about 160,000 barrels per day (bpd) from theAthabasca Oil Sands, and have approval to produce 470,000 bpd.

Both Shell and Sonic will work together in developing a process to increase efficiencies ofcertain aspects of the Athabasca Oil Sands Prospects (AOSP) project, which is a jointventure between Shell, Chevron and Western Oil Sands. We believe, the fact that Shell haschosen Sonic in their efforts to increase the recovery rates of oil sands, indicates the potentialof industrial power sonic energy in the oil sands industry.

According to the agreement, the main objectives of the proposed three phase developmentprogram are:

1. Confirm the effectiveness of SonoprocessTM on viscosity2. Construct prototype equipment, and3. Evaluate the pilot plant unit

Shell is currently conducting phase one. If results are positive, the project will move to thesecond phase, when Sonic will join Shell in designing and constructing a pilot plant. Sonic’s capital investment in the project will depend on the results of each phase. Both companieswill own the project and any intellectual property created. Under the agreement, bothcompanies will equally benefit from the subsequent licensing and commercialization of theprocess. Sonic will also benefit from sale of its sonic generators.

In order to protect the companies’ competitive positions, Sonic has not disclosed much information on the project. Therefore, we are not in a position to precisely quantify thepotential cost savings for oil sands producers from adopting SonoprocessTM. However, ifsuccessful, we believe, this project will be a significant breakthrough for the entire oil sandsindustry.

The third major application that the company is currently focusing on is to apply theSonoprocessTM technology to condition fly ash produced from coal power plants. Byconditioning fly ash, the technology serves two purposes:

Condition fly ash for use as a substitute to cement for concreteAchieve carbon credits by reducing cement production

It is estimated that 7%–60% of the total cement content in concrete can be replaced with flyash. However, because of its size and carbon content, fly ash is normally not used tosubstitute cement. Currently, 65% of the fly ash in North America ends up in landfills. Sonic

TM




believes that SonoprocessTM can condition fly ash to achieve preferred particle size (bygrinding) and cut down carbon content by facilitating the separation of freed carbon fromashes. By converting waste to a valuable product, we believe, SonoprocessTM has thepotential to generate significant interest in this sector.

In addition, there are benefits in using sonicated ash to cement:

Reduce greenhouse gas emissions - Cement producers today are facing difficulties inmeeting market demand due to environmental concerns. Production of cement emits CO2.It is estimated that 1 ton of cement generates 1.25 ton of CO2. CO2 emissions fromcement production are estimated to account for 7–8% of total greenhouse gas emissionsin the world from human activities. By replacing cement with fly ash, Sonic’s technology will help cut greenhouse gas emissions, and achieve carbon credits.

Adding fly ash reduces permeability of concrete, thereby increasing durability andstrength.

Cheaper than cement: It is estimated that the value of fly ash as a substitute for cementranges between $70 and $100 per tonne, which is relatively lower than the price ofcement.

Partnership with Natural Resources Canada - Sonic has previously worked with Canmet(a research and development arm of Natural Resources Canada) on the conditioning of flyash from fluidized bed coal fired power stations to achieve carbon credits. Preliminary workon the study gave positive results, and indicated the feasibility of this project.

Sonic has filed a preliminary patent application for this process, and as a result, they receivedfinancial aid from IRAP. Just like the energy sector, Sonic is seeking potential partners tocommercialize their technology in this sector.

Strong Global Cement Consumption Forecasts: According to a report by Ocean ShippingConsultants Ltd. (OSC), world production and consumption of cement increased 633 milliontonnes during the period between 2001 and 2005, with almost 70% of this overall growth(440 million tonnes) coming from East Asia alone, and 76 million tonnes from other Asiancountries. Based on the OSC report, world consumption of cement is forecast to continue toincrease, from 2.28 billion tonnes in 2005, to around 3.13 billion tonnes by 2015, and 3.56billion tonnes by 2020. The following graph shows the increasing trend of cementconsumption (in million tonnes).




Source: Ocean Shipping Consultants Ltd.

The OSC report expects global cement consumption to grow approximately 19.75% in 2005-2010, slowing to 14.5% in the next half-decade and 13.75% in 2015-2020. According to thereport, of the total 1.28 billion tonnes forecasted increase in world cement consumption in2005-2020, over 72% is expected to come from Asia. China is expected to remain the largestnational consumer of cement in the world, accounting for close to half of global cementconsumption in 2010 (World Cement Industry).

Cement prices: According to the U.S. Geological Survey (USGS), global production andprices of cement have increased significantly between 1970 and 2004 (572 million metrictons at $19.70/t in 1970 versus 2,130 million metric tons at $79.50/t in 2004). The followingchart shows historical cement prices and world production.

World Cement Porduction and Prices, 1970 - 2004

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500

1,000

1,500

2,000

2,500

1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003

Wo

rld

Pro

du

ctio

n

0.0010.0020.0030.0040.0050.0060.0070.0080.0090.00

Pri

ce

World production, in million metric tons (t) Unit value ($/t)

Source: U.S. Geological Survey (USGS)

We believe supply and demand plays a critical role in determining cement prices. Based onstrong global cement demand forecasts, we expect cement price will continue to stay high inthe forecast period.




Positive outlook for Fly Ash Usage: According to the American Coal Ash Association(ACAA), fly ash production in 2006 amounted to 72.4 million tons, compared to 71.1million tons in 2005, and 70.8 million tons in 2004. According to the ACAA, the utilizationrate (usage of fly ash over production) increased to about 44.8% in 2006 (32.4 million tonsused out of 72.4 million tons of production), compared to about 39.7% in 2004 (28.1 milliontons used out of 70.8 million tons of production). In addition, the usage of fly ash in theproduction of concrete and cement has also increased, to about 19.2 million tons in 2006(15.04 million tons consumed in concrete, concrete products and grout, and about 4.15million tons consumed in cement production), compared to 16.5 million tons in 2004 (usedas a replacement for Portland cement in concrete manufacturing and as a component of thekiln feed to produce clinker).

A wide range of government agencies, including the Environmental Protection Agency, theFederal Highway Administration, the U.S. Army Corps of Engineers and the U.S. Bureau ofReclamation, supports the use of coal fly ash in concrete. According to the ACCA,producing one ton of cement generates more than one ton of CO2, and this emission can beeliminated by replacing a ton of cement production with a ton of fly ash, resulting in about a10 million ton reduction in CO2 emissions annually. In light of the global movement toreduce greenhouse gases and high cement prices, we believe the production andutilization rate for fly ash will continue to increase in the future.

Trading Carbon Credits: By conditioning fly ash, the SonoprocessTM technology helps inachieving carbon credits.

The Kyoto Protocol, an international agreement between more than 170 countries with theobjective of reducing greenhouse gases, has developed frameworks to trade carbon and othergreenhouse gas credits. Particularly, the protocol stipulates quotas on the maximum amountof greenhouse gases for each country, and these countries then set emission quotas for localbusinesses and organizations. A business is granted an allowance of credits, with each unitusually representing the right to emit one metric ton of carbon dioxide or other equivalentgreenhouse gases. If a business has not used up its quota, it can sell the unused allowances ascarbon credits. Businesses that exceed their quotas can buy additional allowances privatelyor via open markets. The carbon credits can be traded in the international market, subject tovalidation by the UNFCCC (United Nations Framework Convention on Climate Change).

Various exchanges have been set up for the trading of carbon credits including the EuropeanClimate Exchange and Chicago Climate Exchange. The following chart illustrates thehistorical prices of the Chicago Climate Exchange’s CFI 2008 contract for the period between April 2006 and March 2008. The Chicago Climate Exchange’s CFI contracts are a cash product with a contract size of 100 metric tons. As shown from the chart below, theprices of the CFI 2008 contract has increased significantly recently, closing at $5.05 as ofMarch 19, 2008.




Environmental -Commercializedapplication

Source: Chicago Climate Exchange

In December 2007, the New York Mercantile Exchange (NYMEX) launched The GreenExchange for trading carbon emissions and other environmental products. Green Exchangepartners include Evolution Markets Inc., Morgan Stanley Capital Group Inc., Credit Suisse,JPMorgan, Merrill Lynch, Tudor Investment Corp., ICAP and Constellation Energy.

The recent increase in prices of CFI contracts and the launch of the Green Exchangeclearly indicate the increase in demand for carbon credits, which we believe, willfurther increase the value proposition of the SonoprocessTM technology.

Potential market size for Sonic: The global market for cement was 2.28 billion tonnes peryear in 2005 (according to OSC). The potential market for fly ash is 159.60 million tonnesper year (based on a conservative assumption that fly ash can replace 7% of cement). If weassume a 1% market share for Sonic, it would translate into annual revenues of $111.72million (assuming the value of fly ash is $70/tonne). Note that this estimate does not reflectthe additional benefits from carbon credits.

Sonic commercialized its SonoprocessTM technology in the environmental sector before theydecided to focus on other applications. Using high-intensity sonic energy, the company’s Sonic Treatment Solution is used for the treatment of soils and sediments contaminated withpersistent organic pollutants (POPs), like polychlorinated biphenyls (PCB), dioxins andfurans (PCDD and PCDF), and toxic volatile and semi-volatile organics (VOCs).

Sonic Treatment Solutions specializes in treating PCB contaminated soil. PCB, which isconsidered one of the 12 most persistent organic pollutants by the UN Stockholmconvention, is a synthetic chemical compound consisting of chlorine, carbon and hydrogen.Because PCBs are fire-resistant, nonconductive, have low volatility and are chemicallystable, they have several applications, including use in insulating fluids, coolants, paints,plastic, and pesticides. However, since it is chemically very stable, they do not decompose,and therefore, they are very persistent in the environment. PCB is toxic, and therefore PCB-contaminated soils pose an enormous environmental problem. PCBs can cause cancer and




affect the immune, reproductive, nervous and endocrine systems. Although PCB usage wasbanned in North America in 1977, they continue to enter the environment through theimproper disposal of PCB–containing materials and accidental incidents.

Technology: After acquiring the intellectual property rights to its sonic generatortechnology, Sonic acquired three companies operating in the soil remediation space, namelySESI System Inc., Contech PCB Containment Technology Inc. and Terra-Kleen ResponseGroup. An independent report from URS Canada Inc. indicated that the Sonic process cansuccessfully reduce PCB contamination to less than 0.005% (the threshold for “special waste” as defined by B.C.) and even as low as 0.0002%, from a typical concentration of 0.1%. The entire unit is mobile, and therefore, it allows the process to be done on-site. Thebenefit to this is that companies do not have to transport hazardous material to far off placesfor treatment, and thereby eliminate public concerns and liabilities.

Basically, Sonic performs soil remediation in two steps:

a) Extract and separate contaminants using the Terra-Kleen extraction technologyb) Permanently destruct contaminants using Sonic energy

The diagram below shows a typical Sonic Treatment Solution.


a) Extraction and separation using the Terra-Kleen technology - This process




concentrates all the PCB in soil, and reduces the volume of contaminated waste materialto as low as 2% of the original. By keeping the volume of the contaminated soil to aminimum, transportation and processing costs involved in the disposal (or destruction) ofwaste are significantly lowered. Sonic acquired this technology in December 2005. Thistechnology has been in effective use for the past 15 years, and is established in the U.S. asan EPA approved mobile treatment system for onsite remediation. The technology hasbeen implemented in several sites, including the U.S. EPA Superfund, the U.S Dept ofDefense, the U.S. Dept of Energy and other commercial clients.

This process reduces the volume of contaminated waste material in four steps:

1) Contaminated soil is initially placed into extraction bins (blue tank)2) The contaminants are dissolved in a proprietary biodegradable and non-toxic extract

solvent, which is transferred from a solvent storage tank (orange tank)3) The extract solution is then drained from the soil and transferred to the extract

solution storage tank (brown tank).4) Organic contaminants are separated from the solvent through chemical regeneration

in a proprietary solvent purification station (red tank)

The contaminant concentrate is then destructed in the next stage by the proprietary sonicgenerators. A picture of a demonstration plant is shown below.





b) SonoprocessTM destruction: The low-volume concentrate is first mixed with a solvent,and pumped inside a closed chamber, where it is subject to high-intensity sonic energy.High-intensity sonic creates fine sodium dispersion and regenerates it throughout theprocess. The solvent is then chemically treated by conventional de-chlorination resultingin a non-toxic industrial waste. The advantage of using sonic energy in de-chlorination isthat the sonic generators finely disperse sodium, which under the influence of intensesound energy, facilitates complete reaction with chlorides, and effective de-chlorination ofthe chlorinated molecules, such as PCB.

The by-products of the process are sodium chloride (salt) and biphenyl, which is alow-grade fuel. Although the company’s focus at the moment is on PCB removal, thesystem can be easily modified to remove other persistent soil contaminants.

Alternative Technology: The most commonly used technology for destroying PCBs isincineration, which is essentially passing contaminated soil through a high temperaturecombustion chamber to destroy the PCBs. The table below shows how the Sonic TreatmentSolution is a better alternative.

Incineration Sonic Treatment Solutio n

PollutionCauses air emissions when combustion is

incomplete. No emissions

Transportation

There are fewer than 20 incinerators in NorthAmerica. Contaminated soil has to be

transported to a facility, which can be costlyand cause p ublic concerns.

Treatment is done on-site

Re-usage oftreated soil

Incinerators destroy the soil, therefo re, new soilhas to be imported to the remediated site.

Treated soil retains its physical properties;treated soil can be backfilled

ProhibitedDue to air emissions, incineration is prohibited

in many areas, including Japan.Not Prohibited

EnergyCo nsumption

Conducted at high-energy (1200C)Consumes very little energy; Also, one of theby-products is bip henyl, which is a low-grade

fuel.

Co stsAccording to Sonic, transpo rtation and thermal

treatment typically range between $700 -$ 1,100 per tonne

Sonic estimates costs to be around $500 - $70 0per tonne.

Sonic Treatment Solutions (including SonoprocessTM destruction) have been installed inthree projects to date. The first commercial contract was for a project in Delta, BC, toprocess 3,000 tons soil at $500/tonne for $1.5 million in revenues. The other two projectswere for a site in Sault Ste. Marie, Ontario (625 tonnes of soil) and Greater Toronto (1,700tonnes of soil).

Sonic has received regulatory approvals in BC (Canada), Ontario (Canada), the U.S, Victoria(Australia) and Japan for the Sonic treatment system. The sonic PCB Sonoprocess™ is patented in the USA and Japan and patents are pending in over 20 other countries. Thesystem also has ISO 14001:2004 and OHSAS 18001: 1999 registrations.




The company’s technology is currently licensed in four countries.

1. Canada–Quantum Murray L.P.; an operating partnership of Newport Partners IncomeFund TSX:NPF.UN-T) –signed agreement in late 2007 - net proceeds will be shared onan equal basis. Sonic will also receive $0.50 million from Quantum, payable uponQuantum securing its first PCB remediation contract.

2. Japan (only the Terra Kleen extraction technology is licensed) –Mitsubishi HeavyIndustries, Ltd. –Sonic will receive a royalty of 2.25% of revenues, after MHI has hadsales of approximately US$22 million. As of September 30, 2007, approximately US$9.90million has been completed by MHI.

3. Australia – (only the Terra Kleen extraction technology is licensed) –VeoliaEnvironmental Services–Sonic will receive royalties of 50% of profits.

4. Mexico –Phoenix Group Mexico - signed an option agreement in late 2007 - netproceeds will be shared on an equal basis.

Sonic will focus on expanding to other regions, especially Asia.

PCB Market Potential

The primary factors driving this sector are the real estate market, which is creatingdemand for sites to be cleaned up for redevelopment, and government regulationsrequiring remediation and setting standards.

According to the World Health Organization (WHO), PCB production started in the late1920s, and since 1929, about 2 billion kg of PCBs have been produced commercially,with about 0.2 billion kg of the amount still remaining in mobile environmental reservoirs.

In addition to thousands of brownfields (abandoned/under-used fields) that need to beremediated for re-development, the U.S. Environmental Protection Agency estimatedthere are at least 55 million tonnes of PCB contaminated earth in more than 500 sitesdesignated as priority sites for cleanup.

In Canada, the market for the remediation of PCB contaminated soil is expected to grow,driven by pending federal regulations requiring the clean up and treatment of all PCBcontaminated sites by December 31, 2009. According to the B.C. Environmental IndustryAssociation, the waste removal market (from soil, air and water) is worth about $2 billionannually. According to a Globe Foundation report to the Environmental TechnologiesForum, as of October 2003, there were 7,000 contaminated sites in B.C. alone, with 44sites being added every month.

Potential market for Sonic: The cost for Sonic to build the entire unit is just over $2million. Considering that an average project will have throughput of 15,000 tonnes in 220days, we believe the payback period is less than a year. The company can achieve netrevenues of $3.75 million (assuming revenues of $500/tonne and gross margins of 50%) in220 days.




Managementand Directors

Brief biographies of management and board of directors as provided by the company follow.

David Coe –Chairman: Mr. Coe was CEO of Dairyland for sixteen years from 1986 to2001. From 1981 until he became CEO, Mr. Coe was Operations Manager and then COO.Mr. Coe helped grow the business from a regional organization of two plants into a nationalcompany with plants from coast to coast selling its own national brands. During Mr. Coe'stenure, sales at Dairyland grew from $180 Million to $1.7 Billion with the organizationgrowing to employ over 3,400 people. Mr. Coe started his business and management careerat Warner Lambert, a manufacturer and marketer of pharmaceuticals, cosmetics andconfectionary. Working in all three divisions, it was here that he earned his reputation as atrouble-shooter. As production manager in Canada, he worked on numerous assignments inthe USA, Central America, and the Caribbean. Throughout his career, Mr. Coe has served ona number of industry, company & cultural boards and clubs, as well as being a boardmember and President of the Terminal City Club in Vancouver. He has served anunprecedented two terms as the Chairman of Canada's National Dairy Council. In 1998 hewas listed by the Financial Post as one of the top 200 CEO's in Canada and one of the top 20executives in BC.

Richard Ilich - Director, Secretary & Co-founder: Mr. Ilich is the President of theTownline Group of Companies in Richmond, B.C. which, since 1983, has been activelyinvolved in all facets of land development through construction, financing and marketing inthe residential and commercial real estate markets of Greater Vancouver. Over the years,Townline and Mr. Ilich have been recognized for many achievements, including severalprestigious awards. Mr. Ilich is a highly experienced and respected member of theconstruction and land development community in North America. He is a member of theCity of Richmond's Technical Building Committee for the 2010 Olympics. In the past, hehas also been involved with the City of Richmond Design Panel as well as numerous otherdevelopment and home builder's associations.

Roderick O. McElroy, B.Sc., M.Sc., Ph.D. –Director: Dr. McElroy is a processtechnology specialist with over 30 years of experience ranging from laboratory and pilot-scale test work (BC Research, 1970 - 1988) through to industrial scale feasibility assessment,design and plant operations (Fluor Daniel Wright Ltd., 1988 - 2002). Dr. McElroy's keytechnology areas at Sonic include: test work, design for successful commercialization,project execution, critical evaluation of technology opportunities and the sourcing of cost-effective engineering and other technical services. Dr. McElroy received his B.Sc.(Chemistry, Honours) from the University of Alberta (1965), M.Sc. (Materials Science) fromMcMaster University (1967), and his PhD (Hydrometallurgy) from the University of BritishColumbia (1972).

Adam R. Sumel - Chief Executive Officer, President, Director & Co-founder: Mr.Sumel has been the driving force behind the creation and development of Sonic. He wasformerly a partner in Canwest Leasing Inc., an independent sales and leasing company. Hehas 21 years experience in all aspects of business: sales, service, financing and management.Over the years, he has consistently demonstrated highly effective communication, teambuilding and organizational skills. Mr. Sumel serves on the Board of Directors to the British




Financials

Columbia Environmental Industry Association (BCEIA) and on the Executive Committee ofthe National Brownfield Association's BC chapter, which he helped found.

Lisa Sharp, C.G.A. - Chief Financial Officer: Ms. Sharp is a Certified General Accountantand has over 15 years experience in senior management roles in a variety of industries. Shehas held the position of Controller at Sonic for the past two years, prior to being promoted toCFO. Before her tenure at Sonic, Ms. Sharp was the Controller of a large environmentalremediation company in British Columbia with operations in Western Canada.

James Hill, B.Sc., M.B.A., Ph.D., P. Eng. - Executive Vice President: Dr. Hill has over 20years experience in technology commercialization. He was formerly President and ChiefOperating Officer of BC Research Inc., at the University of British Columbia. Following theprivatization of BC Research in 1993, Dr. Hill helped transform it into a vibrant contractresearch and technology incubator. Dr. Hill was previously Vice President of Engineeringand Product Development for Innovac, including all manufacturing and applications supportfor international customers in the environment, fisheries and food industries. Dr. Hill is aP.Eng. and received a B.Sc. Mechanical Engineering (First Class Honours) from theUniversity of Durham, England, and a PhD in the Aerodynamics of Turbomachinery fromthe University of Newcastle Upon Tyne, England in 1971. In 1989, Dr. Hill received a MBAfrom Simon Fraser University where he specialized in strategic management and publicpolicy.

The company currently generates all its revenues from the first three commercial contractsfor the environmental applications. Sonic started generating revenues in FY2004. The chartbelow shows the company’s revenues since then.

Revenues and Gross Margins

$0

$400,000

$800,000

$1,200,000

$1,600,000

$2,000,000

2004 2005 2006 2007E-120%

-80%

-40%

0%

40%

Revenues Gross Margins

Sonic’s revenues and gross margins are yet to stabilize as they are transitioning from a development company to commercialization. Revenues have grown from $1.09 million inFY2004 to $1.67 million in FY2006, reflecting a CAGR of 23.4%. However, revenuesdropped YOY in the first nine months of FY2007, from $1.18 million to $1.05 million, adecrease of 10.7%.




Cash Flows

Cash andLiquidityPosition

Gross margins have been highly volatile in the past, as they ranged between -110% and 29%during FY2004–2006. Gross margins in the first nine months of FY2007 were -48% versus-66% in the comparable period in the previous year. We estimate that the company canachieve long-term gross margins of 50% going forward.

Our revenue forecasts for FY2007 and FY2008 are $1.49 million and $1.64 million,respectively.

All margins were negative in FY2006. The table below shows margins since FY2004.

Margins 2004 2005 2006 2007EGross 29% -73% -110% -47.72%EBITDA -215% -401% -339% -269.31%EBIT -241% -444% -408% -338.43%EBT -228% -557% -438% -330.81%Net Margin -228% -557% -438% -330.81%

General &Administrative expenses in FY2006 were $3.34 million versus $2.74 million inFY2005, an increase of 20.8%. One positive aspect in the first nine months of FY2007, wasthat the company was able to cut down its G&A expenses by 17.1% YOY, from $2.39million to $1.98 million.

EBITDA in FY2006, and the first nine months of FY2007, were ($5.64 million) and ($2.83million), respectively. Sonic posted a net loss of $7.30 million in FY2006, and $3.49 millionin the first nine months of FY2007, versus $6.21 million and $4.80 million in the comparableperiods in the previous year.

Our forecasts for net losses in FY2007, and FY2008, are $4.69 million (EPS: -$0.11) and$4.18 million (EPS: -$0.10), respectively.

The company spent $4.75 million on operations in FY2006 ($3.37 million in FY2005) and$3.54 million in the first nine months of FY2007 ($3.54 million in the comparable period inthe previous year). As for investing activities, the company spent $0.77 million in FY2006($3.12 million in FY2005) and $0.53 million in the first nine months of FY2007 ($0.27million in the comparable period in the previous year) on property, plant and equipment andpatent maintenance costs.

Operating and investing activities were primarily funded by equity financings. The companyraised $5.38 million, and $3.99 million, in FY2006, and the first nine months of FY2007,respectively. We believe, Sonic will have to raise $3.20 million to fund its operating andinvesting activities in FY2008.

At the end of Q3-2007, the company had cash and working capital of $1.66 million and$2.26 million, respectively, versus $1.75 million and $0.81 million at the end of FY2006.




Stock Optionsand Warrants

Valuation

Sonic is yet to achieve profitability; therefore all profitability ratios were negative in the past.Debt to Capital was 0.5% at the end of Q3-2007, versus 11.1% at the end of FY2005. Thecompany does not have any interest paying debt at this time.

We estimate the company has about 5.62 million stock options outstanding (all of them arecurrently ‘out-of-the-money’) with a weighted average exercise price of $1.05 per share, and maturity dates between September 2008 and December 2012.

The company also has 14.60 million warrants outstanding (all of them are currently ‘out-of-the-money) with a weighted average exercise price of $0.76 per share and maturity datesbetween March 2008 and April 2009.

We have valued Sonic based on a Discounted Cash Flow (DCF) analysis. Our fair valueestimate on the company is based on a scenario analysis shown in the table below.

Although we believe the company will focus on entering other sectors going forward, ourscenario analysis is only based on the company’s potential in three markets, namely the environmental, heavy oil upgrade and materials (fly ash) sectors. Since it is too early to getan estimate on the potential cost savings for oil sands producers from adopting

TM

Scenario Analysis ($/share)

1 application (1) Environmental applications $0.50

2 applications (2) Environmental and Heavy Oil Upgrade (1% market share) $0.83(3) Environmental and Fly Ash (1% market share) $1.09

(4) Environmental and Heavy Oil Upgrade (2% market share) $1.27(5) Environmental and Fly Ash (2% market share) $1.64

3 applications (6) Environmental, Heavy Oil Upgrade(1% market share) and Fly Ash (1% market share) $1.53(7) Environmental, Heavy Oil Upgrade(2% market share) and Fly Ash (2% market share) $2.75

Probability weighted average $1.37

Liquidity Analysis 2005 2006 Q3-2007Working Capital $1,234,442 $808,208 $2,255,518Current Ratio 1.64 1.32 2.93Debt /Equity 12.5% 0.0% 0.5%Debt/Capital 11.1% 0.0% 0.5%

Profitability Analysis 2005 2006Return on Avg Assets -66.3% -43.6%Return on Avg Equity -90.8% -57.3%Return on Average Invested Capital -80.7% -57.3%

Activity Analysis 2005 2006Days Inventory Outstanding 26 43Days Accounts Receivable 28 175Days Accounts Payable 133 372Cash Conversion Cycle (79) (154)




SonoprocessTM, we have not accounted for the company’s potential in the oil sands sector.

Scenario 1 assumes that the company will continue to penetrate the environmental sector, butwill not be able to break into the energy and materials sectors.

Scenarios 2, 3, 4 and 5 assume that the company will be able to break into one sector (heavyoil upgrade or fly ash), in addition to the environmental sector. While Scenarios 2 and 3assume that the company will be able to achieve a global market share of 1%, scenarios 4and 5 assume that the company will be able to attain a 2% market share.

Scenarios 6 and 7 assume that the company will be able to break into both the heavy oilupgrade and fly ash markets, in addition to the environmental sector.

Investors should note that our target market share assumptions are conservative estimates, aswe believe that the company will be able to attain higher market shares if the company andtheir partners are able to commercialize their SonoprocessTM technologies in these sectors.

By assigning an equal probability of occurrence to each of the seven scenarios, we havedetermined the fair value of the company as $1.37 per share. It is worth noting that thecompany is undervalued at current price levels even based only on Scenario 1 (where weassume that the company will not be able to break into the energy and materials sector).

A summary of our DCF valuation based on Scenario 6 (where we assume the company willbe able to break into both heavy oil upgrade and fly ash markets, and attain a global marketshare of 1% in both markets) is shown below.

DCF Valuation Model (in C$)2008E 2009E 2010E 2011E 2012E

FFO ($2,770,838) ($3,104,199) ($2,706,066) ($965,011) $3,069,790Investment in WC ($166,128) $380,350 ($242,089) ($696,230) ($1,201,766)CFO ($2,936,966) ($2,723,849) ($2,948,155) ($1,661,241) $1,868,024CAPEX ($1,000,000) ($3,050,000) ($3,050,000) ($5,050,000) ($5,050,000)FCF ($3,936,966) ($5,773,849) ($5,998,155) ($6,711,241) ($3,181,976)PV ($3,443,812) ($4,417,952) ($4,014,681) ($3,929,289) ($1,629,618)

2013E 2014E 2015E TerminalFFO $10,519,828 $17,942,782 $31,684,278 $36,914,288Investment in WC ($1,651,149) ($2,543,093) ($4,660,617) ($4,434,636)CFO $8,868,679 $15,399,690 $27,023,661 $32,479,652CAPEX ($5,050,000) ($5,050,000) ($5,050,000) ($5,050,000)FCF $3,818,679 $10,349,690 $21,973,661 $27,429,652PV $1,710,724 $4,055,756 $7,532,249 $83,060,807

Discount Rate 14.32%Terminal Growth Rate 3%Total PV $78,924,184Cash - Debt $3,878,068Equity Value (C$) $82,802,252Shares O/S (dil) 54,124,068Value per share $1.53




Rating

Risks

The weighted average cost of capital of 14.3% was calculated as shown below.

We did not conduct a comparables analysis at this time as we do not believe the companyhas a direct comparable.

Therefore, based on our valuation models and analysis of the potential of thecompany’s sonic generator technology, we initiate coverage on Sonic Technology Solutions Inc. with a BUY rating, and a fair value estimate of $1.37 per share. Our fairvalue estimate reflects upside potential of 448% from current price levels.

Investors should note that our valuation only accounts for the company’s upside potential in the heavy oil upgrade, fly ash, and environmental sectors (assuming a market share of 1% -2%). It is important to note that our valuation is heavily dependent on the company’s ability to commercialize their SonoprocessTM technology in the heavy oil upgrade and fly ashmarkets. Our valuation will change significantly if the company is unable to do so.

The following risks, though not exhaustive, will cause our estimates to differ from actualresults:

The company’s growth will depend heavily on its ability to commercialize the application of SonoprocessTM technology in different sectors.

Further penetration in the environmental sector will depend on its ability to license itstechnology.

Failure to prove the viability of the SonoprocessTM technology in the energy sector willput downward pressure on our valuation.

We believe, the company has to raise approximately $3.20 million in FY2008. Ourvaluation models assume that the equity financing will take place at current share prices.If share prices drop from current prices, it would negatively impact our valuation due toshare dilution.

We rate the shares Risk 4 (Speculative).

16.6%8.0%

20.0%80.0%35.0%

14.32%

* Average cost of equity of industrial equipment and components (Yahoo Finance)

Debt / Capital (long-term avg)Equity / Capital (long-term avg)Tax

WACC

Calculation of Weighted Average Costof Capital (WACC)

Cost of Equity*Cost of Debt




Appendix

STATEMENTS OF OPERATIONS(in C$) 2004 2005 2006 2007E 2008E

Revenues 1,093,387 1,114,439 1,665,706 1,486,960 1,635,656

COGS 780,996 1,924,634 3,499,119 2,196,603 2,044,570

Gross Profit 312,391 (810,195) (1,833,413) (709,643) (408,914)

ExpensesGeneral & Administration 1,904,736 2,744,434 3,314,283 2,584,413 2,433,940Stock-based compensation 760,524 915,838 493,871 484,061 163,566

EBITDA (2,352,869) (4,470,467) (5,641,567) (3,778,117) (3,006,420)

Amortization 284,019 479,226 1,160,334 1,027,740 1,247,232

EBIT (2,636,888) (4,949,693) (6,801,901) (4,805,857) (4,253,652)

Interest Income 142,589 40,534 (229,158) 68,365 72,016Other Income 45,000Loss on write down of Investments and others (1,297,278) (272,237)

EBT (2,494,299) (6,206,437) (7,303,296) (4,692,491) (4,181,636)

Taxes/(Income Tax Recovery) 127 8 (3,968) - -

Net Earnings for the period (2,494,426) (6,206,445) (7,299,328) (4,692,491) (4,181,636)

Basic and diluted loss per share (0.18) (0.41) (0.32) (0.11) (0.10)




BALANCE SHEETS(in C$) 2005 2006 2007E 2008E

Assets

Cash and cash equivalents 1,947,802 1,751,908 970,413 89,033Accounts receivable 127,599 711,825 892,176 981,394Prepaid expenses and deposits 153,902 242,827 223,044 245,348Other Receivables 318,406 195,946 6,207 -Work in progress 375,438 181,040Inventory 252,835 260,855 219,660 204,457

Current Assets 3,175,982 3,344,401 2,311,500 1,520,232

Property, plant and equipment 3,367,936 3,470,938 3,873,746 4,561,938Deferred development and financing costs 1,070,652 883,633 805,451 805,451Patents and intangible assets 3,387,921 3,075,633 2,342,324 1,406,900

Total Assets 11,002,491 10,774,605 9,333,021 8,294,521

Liabilities & Shareholders' Equity

Accounts Payables & Accrued Liabilities 1,279,003 2,241,725 1,098,301 1,022,285Due to related parties 19,637 259,468 2,302 2,302Acquisition payment 584,750 35,000 - -Short-term loans 58,150Obligation under capital lease - 147,931 144,414

Current Liabilities 1,941,540 2,536,193 1,248,534 1,169,001

Deferred rent inducement 70,037 52,528 -Convertible debentures 949,185Obligation under capital lease - 144,414 129,062

Shareholder's EquityShare Capital 16,400,927 22,953,387 26,941,839 30,141,839Contributed surplus 2,158,614 3,419,708 3,877,936 3,915,957Deficit (10,517,812) (18,187,211) (22,879,702) (27,061,338)Shareholder's Equity 8,041,729 8,185,884 7,940,073 6,996,458

Total Liabilities & Shareholders' Equity 11,002,491 10,774,605 9,333,021 8,294,521




STATEMENTS OF CASH FLOWS(in C$) 2004 2005 2006 2007E 2008E

Operating ActivitiesNet earnings for the period (2,494,426) (6,206,445) (7,299,328) (4,692,491) (4,181,636)

Items not involving cashDepreciation 284,019 479,226 1,160,334 1,027,740 1,247,232Deferred financing fees 120,394 -Write down and leasehold inducements 1,306,772 247,189Stock based compensation 861,015 957,028 571,110 484,061 163,566

(1,349,392) (3,463,418) (5,200,301) (3,180,690) (2,770,838)

Changes in non-cash operating working capital (283,198) 90,049 451,439 (892,018) (166,128)

Cash from from (used in) operations (1,632,463) (3,373,497) (4,748,862) (4,072,708) (2,936,966)

Investing activitiesPP & E (1,508,583) (2,830,674) (745,437) (659,743) (1,000,000)Patents (67,443) (51,835) (28,322) (37,496) -

Deferred development costs and others (450,661) (233,263)(2,026,687) (3,115,772) (773,759) (697,239) (1,000,000)

Financing activitiesEquity 2,341,271 2,540,561 5,384,877 3,988,452 3,200,000Debt 34,737 (58,150) (144,414)

2,341,271 2,575,298 5,326,727 3,988,452 3,055,586

Increase (decrease) in cash (1,317,879) (3,913,971) (195,894) (781,495) (881,380)

Cash beginning of period 7,170,652 5,861,773 1,947,802 1,751,908 970,413

Cash end of period 5,852,773 1,947,802 1,751,908 970,413 89,033




Buy–Annual expected rate of return exceeds 12% or the expected return is commensurate with riskHold–Annual expected rate of return is between 5% and 12%Sell–Annual expected rate of return is below 5% or the expected return is not commensurate with riskSuspended or Rating N/A— Coverage and ratings suspended until more information can be obtained from the company regarding recent events.

Fundamental Research Corp. Risk Rating Scale:1 (Low Risk) - The company operates in an industry where it has a strong position (for example a monopoly, high market share etc.) or operates in a regulatedindustry. The future outlook is stable or positive for the industry. The company generates positive free cash flow and has a history of profitability. The capitalstructure is conservative with little or no debt.

2 (Below Average Risk) - The company operates in an industry where the fundamentals and outlook are positive. The industry and company are relatively lesssensitive to systematic risk than companies with a Risk Rating of 3. The company has a history of profitability and has demonstrated its ability to generate positive freecash flows (though current free cash flow may be negative due to capital investment). The company’s capital structure is conservative with little to modest use of debt.

3 (Average Risk) - The company operates in an industry that has average sensitivity to systematic risk. The industry may be cyclical. Profits and cash flow aresensitive to economic factors although the company has demonstrated its ability to generate positive earnings and cash flow. Debt use is in line with industry averages,and coverage ratios are sufficient.

4 (Speculative) - The company has little or no history of generating earnings or cash flow. Debt use is higher. These companies may be in start-up mode or in aturnaround situation. These companies should be considered speculative.

5 (Highly Speculative) - The company has no history of generating earnings or cash flow. They may operate in a new industry with new, and unproven products.Products may be at the development stage, testing, or seeking regulatory approval. These companies may run into liquidity issues, and may rely on external funding.These stocks are considered highly speculative.

Disclaimers and DisclosureThe opinions expressed in this report are the true opinions of the analyst about this company and industry. Any “forward looking statements” are our best estimates and opinions based upon information that is publicly available and that we believe to be correct, but we have not independently verified with respect to truth orcorrectness. There is no guarantee that our forecasts will materialize. Actual results will likely vary. The analyst and Fundamental Research Corp. “FRC” does not own any shares of the subject company, does not make a market or offer shares for sale of the subject company, and does not have any investment banking businesswith the subject company. Fees of less than $30,000 have been paid by SNV to FRC. The purpose of the fee is to subsidize the high costs of research andmonitoring. FRC takes steps to ensure independence including setting fees in advance and utilizing analysts who must abide by CFA Institute Code of Ethics andStandards of Professional Conduct. Additionally, analysts may not trade in any security under coverage. Our full editorial control of all research, timing of release ofthe reports, and release of liability for negative reports are protected contractually. To further ensure independence, SNV has agreed to a minimum coverage termincluding an initial report and three updates. Coverage can not be unilaterally terminated. Distribution procedure: our reports are distributed first to our web-basedsubscribers on the date shown on this report then made available to delayed access users through various other channels for a limited time. The performance of FRC’s research is ranked by Investars. Full rankings and are available at www.investars.com.

The distribution of FRC’s ratings are as follows: BUY (79%), HOLD (9%), SELL (4%), SUSPEND (8%).To subscribe for real-time access to research, visit http://www.researchfrc.com/subscription.htm for subscription options.

This report contains "forward looking" statements. Forward-looking statements regarding the Company and/or stock’s performance inherently involve risks and uncertainties that could cause actual results to differ from such forward-looking statements. Factors that would cause or contribute to such differences include, but arenot limited to, continued acceptance of the Company's products/services in the marketplace; acceptance in the marketplace of the Company's new productlines/services; competitive factors; new product/service introductions by others; technological changes; dependence on suppliers; systematic market risks and otherrisks discussed in the Company's periodic report filings, including interim reports, annual reports, and annual information forms filed with the various securitiesregulators. By making these forward looking statements, Fundamental Research Corp. and the analyst/author of this report undertakes no obligation to update thesestatements for revisions or changes after the date of this report. A report initiating coverage will most often be updated quarterly while a report issuing a rating mayhave no further or less frequent updates because the subject company is likely to be in earlier stages where nothing material may occur quarter to quarter.Fundamental Research Corp DOES NOT MAKE ANY WARRANTIES, EXPRESSED OR IMPLIED, AS TO RESULTS TO BE OBTAINED FROM USING THISINFORMATION AND MAKES NO EXPRESS OR IMPLIED WARRANTIES OR FITNESS FOR A PARTICULAR USE. ANYONE USING THIS REPORTASSUMES FULL RESPONSIBILITY FOR WHATEVER RESULTS THEY OBTAIN FROM WHATEVER USE THE INFORMATION WAS PUT TO.ALWAYS TALK TO YOUR FINANCIAL ADVISOR BEFORE YOU INVEST. WHETHER A STOCK SHOULD BE INCLUDED IN A PORTFOLIO DEPENDSON ONE’S RISK TOLERANCE, OBJECTIVES, SITUATION, RETURN ON OTHER ASSETS, ETC. ONLY YOUR INVESTMENT ADVISOR WHO KNOWSYOUR UNIQUE CIRCUMSTANCES CAN MAKE A PROPER RECOMMENDATION AS TO THE MERIT OF ANY PARTICULAR SECURITY FORINCLUSION IN YOUR PORTFOLIO. This REPORT is solely for informative purposes and is not a solicitation or an offer to buy or sell any security. It is notintended as being a complete description of the company, industry, securities or developments referred to in the material. Any forecasts contained in this report wereindependently prepared unless otherwise stated, and HAVE NOT BEEN endorsed by the Management of the company which is the subject of this report. Additionalinformation is available upon request. THIS REPORT IS COPYRIGHT. YOU MAY NOT REDISTRIBUTE THIS REPORT WITHOUT OUR PERMISSION.Please give proper credit, including citing Fundamental Research Corp and/or the analyst, when quoting information from this report.

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Sonic Technology Solutions Inc. (TSXV: SNV) Initiating ......Siddharth Rajeev, B.Tech, MBA Sonic...

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