BENNETT ENVIRONMENTAL INC.

Transcription

1 Consolidated Financial Statements of BENNETT ENVIRONMENTAL INC.

2 KPMG LLP Chartered Accountants Telephone(416) Yonge Corporate Centre Telefax (416) Yonge Street, Suite North York, ON M2P 2H3 AUDITORS' REPORT TO THE SHAREHOLDERS We have audited the consolidated balance sheets of Bennett Environmental Inc. as at December 31, 2008 and 2007 and the consolidated statements of operations and comprehensive loss and deficit and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2008 and 2007 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles. Chartered Accountants, Licensed Public Accountants Toronto, Canada March 13, 2009

3 Consolidated Balance Sheets December 31, 2008 and Assets Current assets: Cash and cash equivalents $ 2,602,692 $ 3,909,836 Restricted cash (note 19) 1,793, ,316 Amounts receivable (note 5) 7,414,973 4,108,876 Deferred transportation costs 110, ,415 Prepaid expenses and other 701, ,264 Assets of discontinued operations - 997,333 12,623,632 11,166,040 Property, plant and equipment (note 9) 9,664,407 15,237,127 Assets of discontinued operations - 1,720,000 Assets held for sale (note 3) 3,007,284 - Other assets (note 10) - 3,293,802 $ 25,295,323 $ 31,416,969 Liabilities and Shareholders' Equity Current liabilities: Accounts payable and accrued liabilities $ 4,185,212 $ 6,211,507 Liabilities related to assets held for sale (note 3) 1,551,500 - Income taxes payable 2,363,981 1,071,032 Deferred revenue 175, ,545 Liabilities of discontinued operations - 1,811,290 Current portion of long-term liabilities (note 11) 1,019,244 2,196,890 9,295,433 12,259,264 Long-term liabilities (note 11) 3,460,152 1,945,773 Liabilities of discontinued operations - 126,415 Shareholders' equity: Share capital (note 12) 71,733,963 71,733,963 Contributed surplus (note 12) 4,085,649 3,999,179 Share purchase warrants (note 13) 429, ,056 Accumulated deficit (63,708,930) (59,076,681) 12,539,738 17,085,517 Future operations (note 1) Related party transactions (note 16) Contingencies (note 21) Commitments (note 18) $ 25,295,323 $ 31,416,969 See accompanying notes to consolidated financial statements. On behalf of the Board: Christopher Wallace, Director Ralph Neville, Director 1

4 Consolidated Statements of Operations and Comprehensive Loss Sales $ 8,289,104 $ 11,287,736 Expenses: Operating costs 5,243,498 8,945,516 Administration and business development (note 14) 5,469,809 7,655,228 Depreciation and amortization 2,177,512 2,694,742 Foreign exchange 8, ,732 Write-down for assets held for sale (note 3) 723,903 - Write-off (recovery) of long-term receivable (note 6) (700,197) 5,037,611 Interest 280,630 27,772 13,203,359 24,676,601 Loss before the undernoted (4,914,255) (13,388,865) Gain on investment - 108,249 U.S. Department of Justice (note 11(c)) 332,468 (2,750,000) Other income, including interest 362, ,465 Loss before income taxes (4,219,743) (15,656,151) Income taxes (recovery): (note 15) Current 69,473 - Future - (32,708) 69,473 (32,708) Net loss from continuing operations (4,289,216) (15,623,443) Net loss from discontinued operations (note 4) (343,033) (2,140,363) Net loss for the year, being comprehensive loss $ (4,632,249) $(17,763,806) Net loss from continuing operations per common share Basic and diluted (note 17) $ (0.16) $ (0.60) Net loss from discontinued operations per common share Basic and diluted (note 17) $ (0.01) $ (0.08) Net loss per common share Basic and diluted (note 17) $ (0.17) $ (0.68) See accompanying notes to consolidated financial statements. 2

5 Consolidated Statements of Accumulated Deficit Accumulated deficit, beginning of year $ (59,076,681) $(41,312,875) Net loss for the year (4,632,249) (17,763,806) Accumulated deficit, end of year $ (63,708,930) $(59,076,681) See accompanying notes to consolidated financial statements. 3

6 Consolidated Statements of Cash Flows Cash provided by (used in): Operations: Net loss from continuing operations $ (4,289,216) $ (15,623,443) Items not involving cash: Depreciation and amortization 2,177,512 2,694,742 Stock-based compensation 86, ,293 Write-off of long-term receivable (note 6) - 5,037,611 U.S. Department of Justice (note 11(c)) 263,468 2,750,000 Gain on disposal of property, plant and equipment - 1,278 Loss from impairment of long-lived assets 723,903 - Gain on sale of investment (88,704) (108,249) Future income taxes - (32,708) Accretion expense 146,363 30,723 Increase of tenure liability 186,956 - Changes in non-cash working capital 88,365 2,926,857 Cash provided by (used) for continuing operations (704,883) (2,017,896) Cash provided by (used) for discontinued operations 153,030 (357,460) Cash provided by (used) for operating activities (551,853) (2,375,356) Financing: Issuance of share capital, net of share issue costs - 3,917,982 Investments: Change in restricted cash (905,392) (888,316) Decrease in note receivable - 181,909 Proceeds on disposal of investment 154,678 33,249 Proceeds on disposal of property, plant and equipment - 1,750 Purchase of property, plant and equipment (4,577) (8,904) Cash provided by (used in) investing activities (755,291) (680,312) Increase (decrease) in cash and cash equivalents (1,307,144) 862,314 Cash and cash equivalents, beginning of year 3,909,836 3,047,522 Cash and cash equivalents, end of year $ 2,602,692 $ 3,909,836 Supplemental cash flow information: Interest paid $ 77,522 $ 23,563 Income tax refund 1,060,300 3,492,264 See accompanying notes to consolidated financial statements. 4

7 Notes to Consolidated Financial Statements The Company was incorporated on July 29, 1992 under the Canada Business Corporation Act and primarily carries on the business of remediating hydrocarbon contaminated soil. The treatment of contaminated soil is performed using the Company's thermal oxidation technology. In 1997, the Company commenced operations at its Récupère Sol Inc. ( RSI ) facility located in Saint Ambroise, Quebec. In 2002, the Company acquired Material Resource Recovery S.R.B.P. Inc. ("MRR") located in Cornwall, Ontario which carries on the business of remediating hazardous and non-hazardous contaminated electrical equipment and construction material. MRR was sold on December 18, 2008 to a third party (note 4). In 2004, the Company completed the construction of a new facility located in Belledune, New Brunswick to treat soil contaminated with hydrocarbons and creosote using thermal oxidation technology. During 2006, the Company completed the compliance testing and the results were accepted by the Ministry of Environment in New Brunswick. The Company has entered into an agreement to sell the net assets of its Belledune facility (note 3). On June 29, 2006, the Company formed a new subsidiary called Trans-Cycle Industries, Ltd. ("TCI"), which acquired all the net assets of Trans-Cycle Industries, Inc. located in Kirkland Lake, Ontario. TCI carries on the business of remediating and disposing of obsolete electrical equipment including transformers, ballasts, capacitors and lead-shielded cable. TCI was sold on December 18, 2008 to a third party (note 4). 1. Future operations: These consolidated financial statements have been prepared on a going concern basis, which assumes that the Company will continue in operation for the foreseeable future and be able to realize its assets and satisfy its liabilities in the normal course of business. Conditions and events exist that cast substantial doubt on the Company's ability to continue as a going concern. The Company incurred a loss of $4,289,216 from continuing operations during the year ended December 31, The Company has generated negative cash flows from operations over the last four years and has an accumulated deficit of $(63,708,930) at December 31, The Company did not operate the RSI facility in Quebec for 34 weeks during 2008 due to a lack of volume to support efficient operations. The Company closed the RSI facility on January 4, 2009 due to a lack of volume and to build up inventories. 5

8 1. Future operations (continued): The Company is continuing with its operational reorganization plans and during the year sold its MRR and TCI facilities. The Company has also entered into an agreement to sell the Belledune facility which is not operational. Continued operations depend on the Company's ability to generate future profitable operations, to obtain sufficient financing to fund future operations and, ultimately, to generate positive cash flows from operating activities. The Company is continuing to focus on securing sufficient sales volumes at profitable sales prices and to maintain the cost reduction strategies implemented during 2006, 2007 and The ability of the Company to continue as a going concern and to realize the carrying value of its assets and discharge its liabilities as they become due is dependent on the successful completion of the actions taken or planned, some of which are described above, which management believes will mitigate the adverse financial conditions faced by the Company. There is uncertainty as to whether or not these objectives will be achieved. If the Company s strategies are achieved, management believes that the Company will have sufficient cash and working capital to fund operations beyond the fourth quarter of The consolidated financial statements do not reflect adjustments that would be necessary, if the going concern assumption is not appropriate. If the going concern basis is not appropriate for these financial statements, then adjustments would be necessary in the carrying values of assets and liabilities, the reported revenue and expenses and the balance sheet classifications used. 2. Significant accounting policies: (a) Basis of consolidation: The consolidated financial statements include the accounts of the Company's wholly owned subsidiaries, Bennett Remediation Services Ltd., Bennett RemTech Ltd., Bennett Environmental U.S., Inc. ("BEIUS"), Terra-cycle Environmental USA Inc. RSI, MRR, Bennett Environmental New Brunswick Inc. and TCI. The results of operations of MRR and TCI are included in discontinued operations up to the date of sale. All material intercompany transactions and balances have been eliminated on consolidation. 6

9 2. Significant accounting policies (continued): (b) Cash and cash equivalents: Cash and cash equivalents consist of highly liquid investments having an original term to maturity of three months or less when acquired. (c) Deferred transportation costs: Deferred transportation costs relate to costs incurred to ship contaminated materials to the treatment facility and other treatment costs for materials, for which treatment is not complete. Amounts are reimbursable under the contract. Accordingly, these amounts will be expensed when the treatment of the related materials is complete. (d) Property, plant and equipment: Property, plant and equipment are recorded at cost less accumulated depreciation. Depreciation commences on property, plant and equipment once construction has been completed and the asset is available for use. Depreciation is provided for using the following methods and annual rates: Asset Basis Rate Automobiles Declining balance 30% Computer equipment Declining balance 30% Furniture and equipment Declining balance 20% Treatment equipment Declining balance 20% Kilns Straight line 10 years Land improvements Declining balance 8% to 20% Leasehold improvements Straight line Over term of lease Software Declining balance 100% Storage building and pads Straight line 20 years Treatment buildings Declining balance 20% 7

10 2. Significant accounting policies (continued): (e) Intangible assets: Deferred permitting costs represent the cost incurred related to securing permits to operate the facilities. Deferred permitting costs are amortized on a straight-basis over a period of five years, commencing in the year the permit is secured and available for use. Costs related to unsuccessful permitting efforts are expensed in the period that this determination is made. (f) Long-lived assets: Long lived assets, which comprise property, plant and equipment and definite-lived intangible assets, are amortized over their estimated useful lives. The Company reviews long-lived assets for impairment upon the occurrence of events or changes in circumstances indicating that the carrying amount may not be recoverable, or that the estimated useful life may require modification. The Company determines whether there is an impairment, when the carrying amount of the asset to be held and used exceeds the sum of the undiscounted cash flows expected from its use and disposal. If there is an impairment, the impairment amount is measured as the amount by which the carrying amount of the asset exceeds its fair value, which is calculated using discounted cash flows when quoted market prices are not available. In the third quarter of 2008 and the fourth quarter of 2007, the Company completed its impairment test for long-lived assets and determined that impairments existed (note 3). (g) Stock-based compensation: The Company accounts for all stock-based payments to employees and non-employees using the fair value based method of accounting. The Company measures the compensation cost of stock-based option awards to employees at the grant date using the Black-Scholes option pricing model to determine the fair value of the options. The compensation cost of the options is recognized as stock-based compensation expense over the relevant vesting period of the stock options. Actual forfeitures are accounted for as they occur. When the stock options are exercised, capital stock is increased by the sum of the consideration paid and the carrying value of the stock options recorded to contributed surplus. 8

11 2. Significant accounting policies (continued): (h) Revenue recognition: The Company provides highly specialized treatment of contaminated materials. In some cases, the Company is also engaged to remove and transport the contaminated materials to its facilities for processing and disposal. The Company recognizes revenue for these activities using the proportional performance method when all of the following criteria are met: (i) remediation activities are completed for each batch of material or waste stream being treated; (ii) the Company has confirmed that the contaminants have been destroyed in accordance with the contract terms; and (iii) collection is reasonably assured. For those contracts whereby the Company is engaged to transport the contaminated material from the customer's site to the Company's facilities, the transportation costs incurred are deferred until the materials have been treated and the Company has determined that the contaminants have been destroyed in accordance with the contract terms. Transportation costs are reimbursable under the terms of the contract. All other processing costs are expensed as incurred. Revenue from long-term fixed-price soil remediation contracts is recognized using the percentage of completion method, based on the ratio of costs incurred to date over estimated total costs. This method is used because management considers costs to be the best available measure of performance on these contracts. Contract costs include all direct material and wages and related benefits. Revenue related to unpriced change orders under the percentage of completion method is recognized to the extent of the costs incurred, if the amount is probable of collection. If it is probable that the contract will be adjusted by an amount that exceeds the costs attributable to the change order and the amount of the excess can be reliably estimated, revenue in excess of the costs attributable to unpriced change orders is recorded when realization is assured beyond a reasonable doubt. 9

12 2. Significant accounting policies (continued): The Company records revenue relating to claims to the extent of costs incurred and only when it is probable that the claim will result in additional contract revenue and the amount can be reasonably estimated. Claims are amounts in excess of the agreed upon contract price that the Company seeks to collect from its customers for customer-caused delays, errors in specifications and designs, contract terminations, change orders in dispute or unapproved as to both scope and price, or other causes of unanticipated additional costs. The Company did not have any long-term fixed price contracts in process during the years ended December 31, 2008 and (i) Use of estimates: The preparation of financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant areas requiring the use of estimates include the going concern assumption, determination of percentage of completion and estimated project costs and revenues for contract revenue recognition, recoverability of amounts receivable, the recoverability of deferred permitting costs, property, plant and equipment, intangible assets and other assets, the determination of stock-based compensation, the assessment of realization of future income tax balances, estimates of future obligations related to asset retirement obligations and environmental obligations and amounts accrued for litigation. Actual results could differ from those estimates. (j) Translation of foreign currency: Monetary items denominated in foreign currency are translated into Canadian dollars at exchange rates in effect at the consolidated balance sheet dates and non-monetary items are translated at rates of exchange in effect when the assets were acquired or obligations incurred. Revenue and expenses are translated at rates in effect at the time of the transactions. Foreign exchange gains and losses are included in the consolidated statement of operations. The Company's foreign subsidiary, BEIUS, is an integral part of the Company's operations and has, therefore, been translated using the temporal method. Under the temporal method, revenue and expenses are translated using the average exchange rate during the year, monetary assets and liabilities at the year-end exchange rates and non-monetary assets and liabilities at their historical exchange rates. Differences arising from currency translation are adjusted through the consolidated statement of operations. 10

13 2. Significant accounting policies (continued): (k) Financial instruments: The estimated fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than a forced or liquidation sale. These estimates, although based on the relevant market information about the financial instrument, are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. (i) Fair values: The carrying values of cash and cash equivalents, amounts receivable, deposits and accounts payable and accrued liabilities approximate their fair values because of the short-term nature of these instruments. The carrying values of long-term liabilities approximate their fair values since the interest rates are based on market rates of interest for similar debt securities. (ii) Foreign currency risk: A portion of the Company's revenue is transacted in United States dollars. Fluctuations in the exchange rates between the United States dollar and the Canadian dollar could have a material effect on the Company's business, financial condition and results of operations. The Company has entered into foreign exchange forward contracts in order to reduce the impact of fluctuating foreign exchange rates. These contracts have been marked to market, with the realized and unrealized gains or losses from changes in fair value recorded in earnings. 11

14 2. Significant accounting policies (continued): (l) Income taxes: The Company uses the asset and liability method of accounting for income taxes. Under this method, future income taxes are recognized for the future income tax consequences attributable to differences between the financial statement carrying values of assets and liabilities and their respective income tax bases (temporary differences). Changes in the net future tax asset or liability are included in earnings. Future tax assets and liabilities are measured using enacted or substantially enacted tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. The effect on future income tax assets and liabilities of a change in tax rates is included in income in the year that includes the date of enactment or substantive enactment. A valuation allowance is recorded to reduce future tax assets to an amount that is anticipated to be realized on a more-likely-than-not basis. (m) Earnings (loss) per share: Basic earnings (loss) per share is calculated based on the weighted average number of common shares outstanding during the year. Diluted earnings (loss) per share is calculated using the weighted average number of common and dilutive potential common shares outstanding during the year. Potential common shares consist of the incremental number of common shares issuable upon the exercise of stock options and warrants and are calculated using the treasury stock method. (n) Asset retirement obligations: The Company records the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible longlived assets that results from the acquisition, construction, development and/or normal use of the assets. The liability is increased by the passage of time and changes in the amount and timing of estimated future cash flows needed to settle the obligation. The cost is subsequently amortized into income on the same basis as the related asset. 12

15 2. Significant accounting policies (continued): (o) Employee future benefits: (i) A liability and expense for contractual termination benefits is recorded based on their fair value when it is probable that employees will be entitled to the benefits, and the amount can be reasonably estimated. This occurs when management approves and commits the Company to the obligation; management's termination plan specifically identifies all significant actions to be taken; actions required to fulfill management's plan are expected to begin when approved; and significant changes to the plan are not likely. (ii) A liability and expense is recorded for special termination benefits based on their fair value when management approves and commits the Company to the obligation; management's termination plan specifically identifies the target level of reduction in number of employees, job classifications and their locations; the benefit arrangement has been communicated to employees in sufficient detail to enable them to determine the type and amount of benefits they will receive upon termination; and the period of time to complete the plan of termination indicates that significant changes to the plan are not likely. (iii) The Company records a liability at the present value of the benefits expected to be paid under the agreement for the tenure agreement with the founder of the Company. The discount rate used is based on the market interest rates at the measurement date of high-quality debt instruments. (p) Recently adopted pronouncements: (i) Financial instruments: On January 1, 2008, the Company adopted the Canadian Institute of Chartered Accountants ( CICA ) Handbook Section 3862, Financial Instruments Disclosures and Section 3863, Financial Instruments Presentation. The adoption of these new standards resulted in additional disclosures with regard to financial instruments and their impact on the Company s financial position and performance, including disclosures identifying the nature and extent of risks arising from financial instruments to which the Company is exposed during the period and at the balance sheet date, and how the Company manages those risks. These new standards relate to disclosure and presentation only and did not have an impact on the Company s consolidated financial results. Refer to note 7 for further details. 13

16 2. Significant accounting policies (continued): (ii) Inventories: On January 1, 2008, the Company adopted CICA Handbook Section 3031, Inventory which establish standards for the measurement and disclosure of inventories. The main features of the new recommendations include the measurement of inventories at the lower of cost and net realizable value, with guidance on the determination of cost, including allocation of overheads and other costs to inventories. The Company adopted this new standard prospectively. The adoption of the standard did not have a significant impact on the opening inventory of the Company. The Company values inventories at the lower of cost and net realizable value. Costs include the costs that are directly incurred to bring the inventories to their present condition. The Company estimates net realizable value as the amounts the inventories are expected to be sold less estimated costs to make the sale. When circumstances that previously caused inventories to be written down below cost no longer exist or when there is clear evidence of an increase in selling price the amount of the write-down previously recorded is reversed. (iii) Capital disclosures: On January 1, 2008, the Company adopted CICA Handbook Section 1535, Capital Disclosures, which provides standards for disclosures regarding a company's capital and how it is managed. Enhanced disclosure with respect to the objectives, policies and processes for managing capital and quantitative disclosures about what a company regards as capital are required. This new standard relates to disclosure and presentation only and did not have an impact on the Company s consolidated financial results. See note 8 for further details. (iv) General standards on financial statement presentation: On April 1, 2008 the Company adopted CICA Handbook Section 1400, General Standards on Financial Statement Presentation. The amended section includes requirements to assess and disclose an entity s ability to continue as a going concern. The adoption of this standard did not have any material impact on the consolidated financial statements. 14

17 2. Significant accounting policies (continued): (v) Financial instruments, comprehensive income, hedges: On January 1, 2007, the Company adopted CICA Handbook Sections 1530, Comprehensive Income, Section 3251, Equity, Section 3855, Financial Instruments Recognition and Measurement, Section 3861, Financial Instruments Disclosure and Presentation and Section 3865, Hedges. Section 1530 establishes standards for reporting and presenting comprehensive income, which is defined as the change in equity from transactions and other events from non-owner sources. Other comprehensive income refers to items recognized in comprehensive income that are excluded from net income calculated in accordance with generally accepted accounting principles. Section 3861 establishes standards for presentation of financial instruments and nonfinancial derivatives, and identifies the information that should be disclosed about them. Section 3865 describes when and how hedge accounting can be applied as well as the disclosure requirements. Hedge accounting enables the recording of gains, losses, revenues and expenses from derivative financial instruments in the same period as for those related to the hedged item. Section 3855 prescribes when a financial asset, financial liability or non-financial derivative is to be recognized on the balance sheet and at what amount, requiring fair value or cost-based measures under different circumstances. Under Section 3855, financial instruments must be classified into one of these five categories: held-fortrading, held-to-maturity, loans and receivables, available-for-sale financial assets and other financial liabilities. All financial instruments, including derivatives, are measured on the balance sheet at fair value except for loans and receivables, held-to-maturity investments and other financial liabilities which are measured at amortized cost. Subsequent measurement and changes in fair value will depend on their initial classification, as follows: held-for-trading financial assets are measured at fair value and changes in fair value are recognized in net earnings; available-for-sale financial instruments are measured at fair value with changes in fair value recorded in other comprehensive income until the investment is derecognized or impaired at which time the amounts would be recorded in net earnings. Under adoption of these new standards, the Company designated its cash equivalents and restricted cash as held-for-trading, which is measured at fair value. Amounts receivable and long-term receivables are classified as loans and receivables, which are measured at amortized cost. Long-term receivables and deposits are carried at cost for which there is no certain repayment date. Accounts payable and accrued liabilities and long-term liabilities are classified as other financial liabilities, which are measured at amortized cost. 15

18 2. Significant accounting policies (continued): The adoption of this new standard resulted in no impact to the consolidated financial statements. (q) Recently issued pronouncements not yet adopted: (i) Goodwill and intangible assets: In February 2008, the CICA issued Handbook Section 3064, Goodwill and Other Intangible Assets. Section 3064, which replaces Section 3062, Goodwill and Other Intangible Assets, and Section 3450, Research and Development Costs. This new standard establishes standards for the recognition, measurement and disclosure of goodwill and intangible assets. The provisions relating to the definition and initial recognition of intangible assets, including internally generated intangible assets, are equivalent to the corresponding provisions of International Financial Reporting Standard, IAS 38, Intangible Assets. This new standard is effective for the Company s interim and annual financial statements relating to fiscal years beginning January 1, The Company is currently evaluating the impact of this standard. (ii) International Financial Reporting Standards: In February 2008, the Canadian Accounting Standards Board confirmed that publicly accountable enterprises will be required to report under IFRS effective for fiscal periods beginning on or after January 1, The Company has completed an initial impact assessment process focusing on differences between IFRS and the Company s accounting policies and is in the process of developing a plan to convert its consolidated financial statements to IFRS. The Company has begun to establish a project plan and identify key individuals with an initial focus on the componentization of capital assets. The Company will continue to invest in training and resources required throughout the transition period to ensure a timely conversion. Upon adoption of IFRS, it is likely that changes in accounting policies will be required that may materially impact the Company s consolidated Financial statements. 16

19 2. Significant accounting policies (continued): (iii) EIC-173, Credit Risk and the Fair Value of Financial Assets and Financial Liabilities On January 20, 2009, the Emerging Issues Committee (EIC) of the AcSB issued EIC Abstract 173, Credit Risk and Fair Value of Financial Assets and Financial Liabilities, which establishes that an entity s own credit risk and the credit risk of the counterparty should be taken into account in determining the fair value of financial assets and financial liabilities, including derivative instruments. This new standard is effective for the Company beginning January 1, 2009 and is required to be applied retrospectively, without restatement of prior years to all financial assets and financial liabilities measured at fair value. The Company is currently assessing the impact of EIC 173 on its consolidated financial statements. (iv) Consolidated Financial Statements In January 2009, the CICA issued Handbook Section 1061, Consolidated Financial Statements, which replaces the existing standards. This section establishes the standards for preparing consolidated financial statements and is effective for Earlier adoption is permitted. The Company is currently evaluating the impact of adopting this standard on its consolidated financial statements. 3. Assets and liabilities held for sale: The Company has entered into an agreement to sell the net assets of its Belledune facility for total consideration of approximately $1.5 million net of liabilities to be assumed by the purchaser. The transaction is expected to close by the end of March, The purchaser, as part of the purchase and sale agreement, will assume the outstanding property taxes and liabilities related to the soil on hand at the facility. As a result, the deferred revenue and accrued liability for the untreated soil will be eliminated upon the sale. 17

20 3. Assets and liabilities held for sale (continued): Assets held for sale relate to the Belledune facility are comprised of the following: Assets held for sale: Treatment building $ 93,886 Treatment equipment 2,122,526 Kiln 790,872 Liabilities related to assets held for sale: $ 3,007,284 Deferred revenue $ 141,700 Accrual for soil treatment 1,065,584 Accrual for property taxes 344,216 $ 1,551,500 The Company recorded an impairment charge in the second quarter of 2008 related to reducing the carrying value of the Belledune net assets to their fair value as follows: Treatment building $ 14,015 $ - Treatment equipment 316,854 - Kiln 118,063 - Deferred permitting costs 274,971 - $ 723,903 $ - 18

21 4. Discontinued operations: On December 18, 2008 the Company sold the shares of its Trans-Cycle Industries, Ltd. and Material Resource Recovery S.R.B.P. Inc. subsidiaries (the Subsidiaries ). Total consideration, net of working capital adjustments, is estimated to be $197,935 less closing costs of $43,257 resulting in a gain of $88,704. As part of the closing procedures the purchaser arranged to provide financial assurance necessary to replace the Subsidiaries deposits held by various Government agencies throughout Canada. These deposits were to be repaid to the Company when finally released by these Government agencies. As at December 31, 2008 these deposits amounted to $3,091,287 including interest and are included in Amounts Receivable. Subsequent to year end all but $10,000 of these deposits have been received by the Company. Combined revenue during the year up to the date of sale for the Subsidiaries was $5,320,404 ( $5,303,977) and the loss before income taxes was $(416,308) ( $(2,140,363)). Summary of Combined Balance Sheets of Subsidiaries sold: Net working capital deficit $ (1,499,686) Property, plant and equipment 1,458,058 Other assets 150,017 Deferred gain (42,415) Net assets $ 65, Amounts receivable: Billed $ 4,215,701 $ 3,908,846 GST & QST receivable 16, ,030 Refundable deposits (note 4) 3,091,287 - Due from purchaser of TCI and MRR 91,530 - $ 7,414,973 $ 4,108,876 19

22 6. Long-term receivables: In 2007 the Company wrote off the remaining amounts receivable totalling $5.0 million due from Defence Construction Canada ("DCC"), a federal government agency, relating to a contract undertaken in 2003 and The Company continued to pursue a claim against DCC for amounts outstanding. On December 4, 2008, the Company recorded in income $700,197 as settlement of this claim. 7. Financial instruments: The Company has exposure to the following risks from its use of financial instruments: credit risk, market risk and liquidity risk. The Board of Directors has responsibility for the review of the Company s risk management framework. The Board of Directors has mandated the Audit Committee to review how management monitors compliance of the Company s risk management policies and procedures and review the adequacy of the risk management policies and procedures. Credit risk: Credit risk arises from the potential default of a customer in meeting its financial obligation to the Company. The Company has credit evaluation, approval and monitoring processes to mitigate potential credit risk. The Company evaluates the collectability of accounts receivable and records an allowance for doubtful accounts which reduces receivables to the amount management reasonably believes will be collected. The Company is subject to a concentration of credit risk in its amounts receivable and longterm receivable. As at December 31, 2008, two customers represented 46.6% and 6% (December 31, % and 25%) respectively, of amounts receivable. Management is of the opinion that any risk of loss due to bad debts is significantly reduced due to the financial strength of its customers. The Company performs ongoing credit evaluations of its customers financial condition and requires letters of credit or other guarantees whenever deemed necessary. 20

23 7. Financial instruments (continued): The aging of amounts receivable at the reporting date was: Current $ 6,713,329 $ 3,658,966 Past due days 701, ,805 Past due greater than 90 days 1,911 9,543 Gross amounts receivable 7,416,884 4,117,314 Less: Allowance for doubtful accounts (1,911) (8,438) Total amounts receivable, net $ 7,414,973 $ 4,108,876 There was no significant change in the allowance for credit losses in the period. Credit risk exists in the event of non-performance by a counterparty to forward exchange contracts. The risk is minimized as each contract is with a major chartered bank and represents an exchange between the same party allowing for an offset in the event of nonperformance. Management does not believe there is a significant risk of non-performance by the counterparty because the portions with and the credit ratings of such counterparty are monitored. The carrying amount of financial assets represents the maximum credit exposure. maximum exposure to credit risk at the reporting date was: The Cash and cash equivalents $ 2,602,692 $ 3,909,836 Restricted cash 1,793, ,316 Amounts receivable 7,414,973 4,108,876 Deferred transportation costs 110, ,415 Total $ 11,921,656 $ 9,629,443 21

24 7. Financial instruments (continued): Market risk: Market risk is the risk that changes in market prices, such as foreign exchange rates will affect the Company s income or the value of its holding in financial instruments. (i) Foreign exchange risk: The Company periodically enters into forward exchange contracts to offset its balance sheet exposure and to hedge the cash flow risk associated with its estimated net foreign currency cash requirements and certain significant transactions. The Company did not designate its foreign exchange forward contract as a hedge of underlying assets, liabilities, firm commitments or anticipated transactions in accordance with CICA Handbook Section 3865, Hedges, and accordingly did not use hedge accounting. As a result of this, the foreign exchange forward contracts are recorded on the consolidated balance sheet at fair value in current assets when the contracts are in a gain position and in current liabilities when the contracts are in a loss position. Changes in fair value of these contracts are recognized as gains or losses in the statement of operations. The fair value of contracts represents the amount to be paid (or received) with the counterparty should the contract be settled at December 31, As of December 31, 2008, the Company has entered into foreign exchange contracts to buy approximately $1.25 million U.S., at various dates in January, 2009 with rates from $ U.S. to $ U.S. The fair value of these contracts at December 31, 2008 was an unrealized loss of $24,275 which is recorded as part of accounts payable and accrued liabilities on the balance sheet and foreign exchange loss on the statement of operations. As at December 31, 2007, the Company had entered into contracts and commitments to sell U.S. $4.0 million, at various rates from $ to $ Cdn for a total of $3,978,900. The contracts expired at various dates through to April, The fair value of the contracts as at December 31, 2007 was an unrealized gain of $13,705 which was recorded as an asset on the balance sheet and a foreign exchange gain on the statement of operations. The Company does not utilize financial instruments for speculative purposes. 22

25 7. Financial instruments (continued): The Company is exposed to the following currency risk at the reporting date: U.S. U.S. Cash, restricted cash and cash equivalents $ 1,191,857 $ 1,514,643 Amounts receivable 4,900 3,538,701 Accounts payable and accrued liabilities (2,476,891) (4,013,057) Net exposure in U.S. dollars $ (1,280,134) $ 1,040,287 After taking into consideration the forward exchange contracts in place at year end, a 10% strengthening of the Canadian dollar against the U.S. dollar would have increased loss from operations by approximately $4,000 as at December 31, 2008 (December 31, 2007 approximately $285,000). The following summary illustrates the fluctuations in the exchange rates applied during the period ended December 31, 2008: U.S. $ Opening exchange rate as at January 1, Closing exchange rate as at December 31, Average exchange rate for the three months ended December 31, Average exchange rate for the twelve months ended December 31, (ii) Liquidity risk: Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company s approach to managing liquidity risk is to monitor consolidated cash flow to ensure that there will always be sufficient liquidity to meet liabilities when due. As described in note 1, management has implemented strategies to generate positive cash flows from operating activities. If these plans are achieved the Company will have sufficient cash flows to meet amounts due. At December 31, 2008, the Company has a cash and cash equivalents balance of $2,602,692 and positive working capital of $3,328,199. The Company had no bank borrowings outstanding at December 31, 2008 and

26 7. Financial instruments (continued): (iii)fair values: The Company s financial instruments consist of cash and cash equivalents, restricted cash, amounts receivable, deferred transportation costs, accounts payable and accrued liabilities, long-term liabilities and foreign exchange contracts. The carrying value of cash and cash equivalents, restricted cash, amounts receivable, deferred transportation costs, accounts payable and accrued liabilities approximates their fair values due to the immediate or short-term maturity of these financial instruments. The carrying value of the long-term liabilities approximate fair value because the future cash flows have been discounted using a risk adjusted discount rate. The table below analyzes the Company s financial liabilities which will be settled into relevant maturity groupings based on the remaining periods at December 31, 2008 to the contractual maturity date. The amounts disclosed in this table are the contractual undiscounted cash flow. Balances within twelve months equal the carrying balance, as the impact of discounting is not significant. Payments due: Between 6 Between 1 Between 2 Greater In less than 6 months and year and 2 years and 5 than 5 Months 1 year years years years Accounts payable and accrued liabilities and long-term liabilities $ 5,435,777 $ 1,021,588 $ 322,600 $ 2,870,316 $ 711,000 24

27 8. Capital management: The Company s objective is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. Management defines capital as the Company s total shareholders equity. The Board of Directors does not establish quantitative return on capital criteria for management. The Board of Directors reviews the capital structure on a quarterly basis. In order to maintain or adjust the capital structure, the Company may purchase shares for cancellation pursuant to normal course issuer bids, issue new shares or warrants, and issue new debt. There were no changes in the Company s approach to capital management during the period. Neither the Company nor any of its subsidiaries are subject to externally imposed capital requirements. 25

28 9. Property, plant and equipment: Accumulated Net book 2008 Cost amortization value Automobiles $ 32,219 $ 25,362 $ 6,857 Computer equipment 558, ,882 97,072 Furniture and equipment 558, ,589 - Treatment equipment 9,914,989 7,330,094 2,584,895 Kilns 8,700,309 7,805, ,928 Land 163, ,228 Land improvements 162,521 85,955 76,566 Leasehold improvements 58,322 58,322 - Software 270, ,663 - Storage building and pads 5,837,550 2,304,543 3,533,007 Treatment buildings 2,972, ,782 2,307,854 $ 29,229,980 $ 19,565,573 $ 9,664,407 Accumulated Net book 2007 Cost amortization value Automobiles $ 32,219 $ 21,658 $ 10,561 Computer equipment 556, , ,153 Furniture and equipment 558, ,145 37,444 Treatment equipment 13,336,419 7,463,455 5,872,964 Kilns 9,902,061 7,259,443 2,642,618 Land 163, ,228 Land improvements 162,521 75,683 86,838 Leasehold improvements 58,322 58,322 - Software 270, ,668 2,995 Storage building and pads 5,837,550 2,012,665 3,824,885 Treatment buildings 3,047, ,886 2,460,441 $ 33,925,008 $ 18,687,881 $ 15,237,127 Amortization of property, plant and equipment for the year ended December 31, 2008 was $2,177,512 ( $2,694,742). 26

29 10. Intangible and other assets: Intangible assets: Deferred permitting costs, net of accumulated amortization of $331,402 ( $232,900) $ - $ 331,402 Other assets: Deposit with the Ontario Ministry of Environment - 2,962,400 $ - $ 3,293,802 Deferred permitting costs represent costs of obtaining an operating permit for the Belledune facility. Similar to the Belledune property, plant and equipment (note 9), effective September 1, 2006, the Company commenced amortization of the deferred permitting costs. The Company recorded an impairment charge related to the assets of Belledune as described in note 3. The Company has provided cash deposits to the Ministry of Environment of Ontario in the amount of $2,962,400 based on the storage capacity at the Cornwall and Kirkland Lake facilities (note 4). 11. Long-term liabilities: Long-term liabilities comprise the following: Tenure Severance U.S. Department agreement payable of Justice Total (a) (b) (c) Balance December 31, 2006 $ 715,636 $ 557,722 $ - $ 1,273,358 Addition - 355,977 2,750,000 3,105,977 Paid during (267,395) - (267,395) Accretion charge 30,723-30,723 Balance December 31, 2007 $ 746,359 $ 646,304 $ 2,750,000 $ 4,142,663 Addition (reduction) 186,956 - (332,468) (145,512) Paid during (75,000) (185,055) (260,055) Accretion charge 146, ,363 Foreign exchange charge , ,937 1,079, ,304 2,828,414 4,479,396 Less current portion 267, , ,357 1,019,244 Balance December 31, 2008 $ 812,095 $ - $ 2,648,057 $ 3,460,152 27

30 11. Long-term liabilities (continued): (a) The tenure agreement is between the Company and its founder and former CEO. The total value of the liability related to this agreement is $1,079,678 at December 31, 2008 which is an increase of $333,319 over the fair value as at December 31, A modification of a pre-existing agreement is responsible for $186,956 of the increase and involves changing the annual allowance payable from $69,500 payable until age 85 to $79,000 payable until age 87. The balance of the increase over the prior year is due to an accretion charge of $146,363 (2007 $30,723) which is included in administration and business development expense for the year. The Company deferred payments under this tenure agreement in October, 2006 (note 21(d)(ii)). (b) During 2007, certain employment agreements were terminated. The Company did not accrue and expense severance costs in 2008 ( $355,977). The Company deferred payments under a consulting agreement in October, 2006 (note 21(d)(ii)). (c) The Company has been involved in several phases of the Federal Creosote project in New Jersey. During 2007 the Company received, what it believes, are the final shipments of soil requiring thermal remediation from this site. This has been a multi-year project involving multiple phases and bids. Some of the bid awards have been challenged by unsuccessful bidders resulting in high levels of scrutiny of the bidding process. In September, 2006 the Company, among others, received a Grand Jury subpoena from the United States Department of Justice ( DOJ ) to preserve all documents dated on or after January 1, 2001 pertaining to the Federal Creosote Superfund contract. The Company has complied with the subpoena and cooperated in the investigation of potential anti trust violations in the environmental services industry. On July 31, 2008 the Company plead guilty to one count of conspiracy to commit fraud in United States District Court, District of New Jersey relating to its conduct with respect to bidding for the above contract (note 21(b)). 28