CONSOLIDATED FINANCIAL STATEMENTS For the years ended 2010 and 2009
MANAGEMENT S REPORT To the Shareholders of Phoenix Oilfield Hauling Inc. The accompanying consolidated financial statements are the responsibility of management and the Board of Directors of the Company. The consolidated financial statements have been prepared by management in accordance with Canadian generally accepted accounting principles and include certain estimates that reflect management s best judgments. In preparing this report, the Company undertakes steps to ensure the information presented is accurate and conforms to applicable laws and standards, including: Management maintains accounting control systems designed to provide reasonable assurance that assets are safeguarded, transactions are properly authorized, financial records are accurately maintained and statements are generated in a timely manner. The Board of Directors oversees the management of the business and the affairs of the Company including ensuring management fulfills its responsibility for financial reporting, and is ultimately responsible for reviewing and approving the consolidated financial statements. The board carries out this responsibility principally through its Audit Committee. The Audit Committee of the Board of Directors, comprised of three members with a majority considered to be outside and unrelated directors, has reviewed the consolidated financial statements with management and the external auditors. Management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company s disclosure controls and procedures (as defined in the rules of the CSA) and has concluded that such disclosure controls and procedures are effective. Management, under the supervision of the Chief Executive Officer and Chief Financial Officer, has evaluated the design of internal controls over financial reporting and has concluded that the Company has weaknesses in its internal control over financial reporting and those weaknesses have been disclosed in the annual MD&A of the Company. An independent firm of Chartered Accountants, appointed as external auditors by the shareholders has audited the consolidated financial statements and its report is included below. Chris Challis Chris Challis President & Chief Executive Officer Douglas Eger Douglas B. Eger Chief Financial Officer Nisku, Alberta April 27, 2011
KPMG LLP Chartered Accountants 10125 102 Street Edmonton AB T5J 3V8 Canada Telephone Fax Internet (780) 429-7300 (780) 429-7379 www.kpmg.ca INDEPENDENT AUDITORS' REPORT To the Shareholders of Phoenix Oilfield Hauling Inc. We have audited the accompanying consolidated financial statements of Phoenix Oilfield Hauling Inc., which comprise the consolidated balance sheets as at 2010 and 2009 and the statements of loss and comprehensive loss and deficit and cash flows for the years then ended, and notes, comprising a summary of significant accounting policies and other explanatory information. Management's Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with Canadian generally accepted accounting principles, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform an audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinions. KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. KPMG Canada provides services to KPMG LLP.
Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Phoenix Oilfield Hauling Inc. as at 2010 and 2009, and its consolidated results of operations and its consolidated cash flows for the years then ended in accordance with Canadian generally accepted accounting principles. Emphasis of Matter Without qualifying our opinion, we draw attention to Note 1 in the consolidated financial statements which indicates that Phoenix Oilfield Hauling Inc. is in default under the terms of its credit agreements, incurred a net loss of $4.8 million during the year ended 2010 and, as of that date, the Company's current liabilities exceeded its total assets by $14.7 million. These conditions, along with other matters as set forth in Note 1, indicate the existence of a material uncertainty that may cast significant doubt about Phoenix Oilfield Hauling Inc. s ability to continue as a going concern. KPMG LLP April 26, 2011 Edmonton, Canada 2
Consolidated Balance Sheets As at 2010 and 2009 (In thousands of Canadian dollars) ASSETS 2010 2009 CURRENT ASSETS Accounts receivable $ 10,588 $ 5,946 Income taxes recoverable - 64 Prepaid expenses 576 531 11,164 6,541 Restricted cash (note 10) 27 - Equipment and leasehold improvements (note 5) 26,744 33,268 Intangible assets (note 4) 221 387 Goodwill (note 3) 351 351 $ 38,507 $ 40,547 CURRENT LIABILITIES Revolving credit facility (note 7) $ 2,372 $ 1,905 Accounts payable and accrued liabilities 4,333 2,949 Income taxes payable 66 - Current portion of long-term debt (note 8) 17,348 17,856 Current portion of obligations under capital lease (note 10) 1,906 3,506 26,025 26,216 Long-term debt (note 8) 37 63 Obligations under capital lease (note 10) 369 - Secured debentures (notes 9, 11 and 15) - 11,557 Future income taxes (note 6) 677 256 Deferred gain on sale of equipment 95 111 SHAREHOLDERS' EQUITY Share capital (note 11) 49,943 41,815 Contributed surplus (note 12) 8,825 3,036 Deficit (47,464) (42,507) 11,304 2,344 Basis of presentation - going concern (note 1) Commitments (note 13) Subsequent event (note 19) See accompanying notes to consolidated financial statements. LIABILITIES AND SHAREHOLDERS' EQUITY $ 38,507 $ 40,547 Approved by the Board: "David Werklund" Director "Gerry Gilewicz" Director
Consolidated Statements of Loss and Comprehensive Loss and Deficit For the years ended 2010 and 2009 (In thousands of Canadian dollars, except per share amounts) 2010 2009 REVENUE $ 39,823 $ 33,924 EXPENSES: Operating 30,154 25,392 Selling, general and administrative 5,863 6,826 3,806 1,706 Depreciation - equipment and leasehold improvements 4,412 5,781 Loss on disposal of equipment 1,373 501 Interest on long-term debt 2,039 4,435 Other interest 377 292 Amortization of intangible assets 166 206 Foreign exchange loss 201 547 Impairment of equipment (note 5) - 1,168 8,568 12,930 LOSS BEFORE INCOME TAXES (4,762) (11,224) INCOME TAXES (RECOVERY) (note 6): Current (226) 71 Future 421 (63) 195 8 LOSS AND COMPREHENSIVE LOSS $ (4,957) $ (11,232) DEFICIT, beginning of year (42,507) $ (31,275) DEFICIT, end of year $ (47,464) $ (42,507) Loss per common share: Basic $ (0.03) $ (0.17) Diluted $ (0.03) $ (0.17) Weighted average common shares: Basic 167,352 66,248 Diluted 167,352 66,248 See accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flows For the years ended 2010 and 2009 (In thousands of Canadian dollars) CASH PROVIDED BY (USED IN): 2010 2009 OPERATIONS: Loss $ (4,957) $ (11,232) Items not involving cash: Depreciation 4,412 5,781 Future income taxes (recovery) 421 (63) Loss on disposal of equipment 1,373 501 Stock based compensation expense (note 11) 395 352 Amortization of intangible assets 166 206 Accrued interest on secured debentures (note 9) - 1,215 Accrued interest on long-term debt (note 8) 645 - Impairment of equipment (note 5) - 1,168 Accretion expense (note 9) - 1,363 2,455 (709) Changes in non-cash working capital (note 14) (3,173) 3,971 (718) 3,262 INVESTING ACTIVITIES: Purchase of equipment and leasehold improvements (370) (1,737) Proceeds on disposal of equipment and leasehold improvements 1,709 198 1,339 (1,539) FINANCING ACTIVITIES: Increase (reduction) in revolving credit facility 467 1,511 Proceeds on issuance of common shares, net of issue costs (note 11) 1,965 - Increase in restricted cash (27) - Repayment of long-term debt (1,179) (3,104) Proceeds on sale/leaseback of equipment - 1,508 Repayment of obligations under capital lease (1,847) (1,638) (621) (1,723) CHANGE IN CASH - - CASH, beginning of year - - CASH, end of year $ - $ - Supplemental cash flow information: Interest paid $ 2,118 $ 1,991 Income taxes paid (recovered) $ (356) $ 427 Non-cash financing activities: Acquisition of equipment under capital lease $ 616 $ 1,508 Secured debentures settled with common shares $ 11,557 $ -
1. Basis of presentation going concern Phoenix Oilfield Hauling Inc. s ( the Company ) primary business activity is the transportation of products, materials and equipment required for the exploration, development and production of petroleum resources. The Company operates in Western Canada and the United States. These audited consolidated financial statements have been prepared by management in accordance with Canadian generally accepted accounting principles ( GAAP ) which 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 dates of the audited consolidated financial statements and the reported amounts of revenue and expenses during the period. Significant items subject to such estimates and assumptions include the useful lives of equipment and leasehold improvements, the valuation of equipment and leasehold improvements, and accounts receivable and future income taxes. Assumptions underlying asset valuations are impacted by the uncertainty of predictions concerning future events. By their nature, asset valuations are subjective and do not necessarily result in precise determinations. Actual results could differ materially from these estimates. These audited consolidated financial statements have been prepared on a going concern basis in accordance with Canadian GAAP. The going concern basis of presentation reflects the assumption that the Company will continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities and commitments in the normal course of business. There is significant doubt about the appropriateness of the use of the going concern assumption because the Company: experienced significant losses during the years ended 2010, 2009, 2008 and 2007; has a significant working capital deficiency as at 2010 and 2009; and is in default under the terms of its long-term debt agreements because it failed to make payments of principal due in September 2009 through December 2010 under the non-revolving term loan due to its principal lender and under the bank loan due to its secondary lender. In addition, the Company is not in compliance with certain existing financial covenants within its revolving credit facility and long-term debt agreements as at 2010. The Company has not received a waiver from its lenders for these covenant breaches or for failure to make the required principal payments. There is no certainty that these covenants will be modified and, if they are not, this violation of the covenants and failure to make the required principal payments under its lending agreements could result in a requirement to immediately repay all amounts due under the revolving credit facility and long-term debt agreements. As a result of cross covenant violations, the Company has reclassified certain scheduled repayments under certain of its capital lease facilities and long-term debt due beyond one year as a current liability. The Company entered into a forbearance agreement with its principal lender effective December 1, 2009 under which the lender agreed to forbear demanding repayment of its loans until February 28, 2010 and then by way of extension agreements further extended forbearance until June 15, 2011. The Company entered into a separate agreement with its secondary lender respecting the bank loan described in note 8 effective December 1, 2009 under which the lender agreed to forbear demanding repayment of its loans until February 28, 2010 and then by way of extension agreements further
1. Basis of Presentation (continued) extended forbearance until October 31, 2010. The Company has not requested an extension of the forbearance agreement with its secondary lender beyond that date. During the forbearance period in 2010 no principal payments were required on the Company s longterm debt. Pursuant to the most recent forbearance extensions the Company is required to make principal payments of $75 per month commencing on January 11, 2011. There is no certainty that the forbearance agreement will be extended beyond June 15, 2011. Based on the Company s current projections, Management believes it is unlikely that the Company will be in compliance with certain existing financial covenants within its revolving credit facility and long-term debt loan agreements during the next twelve months without an amendment or waiver by its lender. There is no certainty that sufficient working capital will be obtained from operations, shareholders and other external financing sources to meet the Company s liabilities and commitments as they become payable. Future operations are dependant on the Company s ability to generate sufficient profits to discharge its liabilities and service its debt and maintain the ongoing support of its lenders and shareholders. These financial statements do not reflect adjustments that would be necessary if the going concern assumption were not appropriate. If the going concern basis was not appropriate for these financial statements, then significant adjustments would likely be necessary in the carrying amount of assets and liabilities, the reported revenues and expenses, and the balance sheet classifications used. 2. Significant accounting policies a) Recent accounting pronouncements not yet adopted: i) International Financial Reporting Standards In 2008, the Canadian Accounting Standards Board (AcSB) confirmed that publicly accountable enterprises will be required to adopt International Financial Reporting Standards ( IFRS ), for interim and annual reporting purposes, beginning on or after January 1, 2011. The Company s first annual IFRS financial statement will be for the year ending December 31, 2011 and will include the comparative period for 2010. The adoption date of January 1, 2011 will require the restatement, for comparative purposes, of amounts reported by the Company for its year ended 2010, and of the opening balance sheet as at January 1, 2010. Starting in the first quarter of 2011, the Company will provide unaudited consolidated financial information in accordance with IFRS including comparative figures for 2010. b) Principles of consolidation: These consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated on consolidation.
2. Significant accounting policies (continued) c) Equipment and leasehold improvements: Equipment and leasehold improvements are recorded at cost. Depreciation is calculated using the declining balance method at rates intended to amortize the cost of the assets over their estimated useful lives. Equipment under capital leases is initially recorded at the present value of minimum lease payments at the inception of the lease. Depreciation is provided using the following methods and annual rates: Assets Method Rate Trucks, trailers and automotive equipment declining balance 15% Equipment, furniture and fixtures declining balance 15-30% Computer equipment declining balance 30% Assets under capital lease declining balance 15% Leasehold improvements are depreciated on a straight-line basis over the shorter of the lease term or their estimated useful lives. d) Impairment of long-lived assets: Long-lived assets (comprised of equipment, leasehold improvements and intangible assets subject to amortization) are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the sum of estimated undiscounted future cash flows expected to result from the use and eventual disposition of a group of assets. If the carrying amount of an asset group exceeds its estimated undiscounted future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset group. The Company made assumptions about the future cash flows expected from the use of its long-lived assets, such as: applicable industry performance and prospects; general business and economic conditions that prevail and are expected to prevail; expected growth; maintaining its customer base; and, achieving cost reductions. There can be no assurance that expected future cash flows will be realized, or will be sufficient to recover the carrying amount of long-lived assets. e) Intangible assets: Intangible assets acquired individually or as part of a group of other assets are initially recognized and measured at cost. The cost of a group of intangible assets acquired in a transaction, including those acquired in a business combination that meet the specified criteria for recognition apart from goodwill, is allocated to the individual assets acquired based on their relative fair values. Intangible assets with finite useful lives are amortized over their useful lives as follows: Assets Method Useful life Customer relationships In proportion to undiscounted future cash flows 4 to 8 years Non-competition agreements Straight-line 3 to 6 years The amortization methods and estimated useful lives of intangible assets are reviewed annually.
2. Significant accounting policies (continued) f) Goodwill: Goodwill represents the excess purchase price paid by the Company over the fair value of the tangible and identifiable intangible assets acquired and liabilities assumed in a business combination. Goodwill is not amortized but instead is tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test is carried out in two steps. In the first step, the carrying amount of the reporting unit, including goodwill, is compared with its fair value. When the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered to be impaired and the second step of the impairment test is unnecessary. The second step is carried out when the carrying amount of a reporting unit exceeds its fair value, in which case, the implied fair value of the reporting unit s goodwill, determined in the same manner as the value of goodwill is determined in a business combination, is compared with its carrying amount to measure the amount of the impairment loss, if any. An impairment in goodwill is charged to income in the period it is identified. g) Income taxes: The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, future tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Future tax assets and liabilities are measured using enacted and substantially enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on future tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the date of enactment or substantive enactment. A valuation allowance is recorded against any future income tax asset if it is more likely than not that the asset will not be realized. h) Revenue recognition: The Company recognizes revenue when the services are provided to the customer, collection of the relevant receivable is probable, persuasive evidence of an arrangement exists and the sales price is fixed or determinable. Contract terms do not include provision for post-service obligations. i) Per share amounts: Basic earnings per share is computed by dividing net earnings by the weighted average number of common shares outstanding during the period. Diluted earnings per share are calculated using the treasury stock method. The treasury stock method increases the diluted weighted average shares outstanding to include additional shares from the assumed exercise of stock options, if dilutive. The number of additional shares is calculated by assuming that outstanding in-the-money stock options were exercised and that the proceeds from such exercises, including any unamortized stock-based compensation cost, are used to acquire shares of common stock at the average market price during the year
2. Significant accounting policies (continued) j) Stock-based compensation plan: The Company accounts for all stock-based compensation expense for warrants and stock options granted to employees, officers and directors in accordance with the fair value based method of accounting. Under the fair value method, compensation cost is measured at fair value on the grant date using the Black-Scholes model and stock based compensation expense is recorded over the vesting period of the option, with a corresponding increase in contributed surplus. When the options are exercised, the proceeds received by the Company along with the amount in contributed surplus, are recorded as share capital. k) Translation of foreign currency: The financial statements of the Company s integrated United States subsidiary are translated using the temporal method. Transactions originating in foreign currencies are translated to Canadian dollars by applying exchange rates in effect at the transaction date. Monetary items denominated in foreign currencies are translated to Canadian dollars at exchange rates in effect at the balance sheet dates and non-monetary items are translated at rates of exchange in effect when the assets were acquired or obligations incurred. Foreign exchange gains and losses are included in the determination of earnings. l) Financial instruments: i) Classification and measurement All financial instruments, including derivatives, must initially be recognized at fair value on the balance sheet. The Company classifies financial instruments into one of five categories: held-for-trading, held-to-maturity, loans and receivables, available-for-sale financial assets, and other financial liabilities. Subsequent measurement and changes in fair value depend on the financial instrument s initial classification. Loans and receivables, held-to-maturity investments and other financial liabilities are measured at amortized cost using the effective interest. Held-for-trading financial instruments are measured at fair value with changes in fair value recognized in net earnings. Available-for-sale financial assets 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. The Company has classified its financial instruments as follows: Cash is classified as financial assets held for trading and is recorded at fair value; Accounts receivable is classified as loans and receivables and is initially recorded at fair value, and subsequent to initial recognition are accounted for at amortized cost using the effective interest method; The Company has classified accounts payable and accrued liabilities, amounts due under its revolving credit facility, long-term debt and secured debentures as other financial liabilities. Other financial liabilities are accounted for on initial recognition at fair value, and subsequent to initial recognition at amortized cost using the effective interest method with gains and losses reported in net income; and The Company has not classified any of its financial assets as available-for-sale or held-tomaturity, nor have any of its financial liabilities been classified as held-for-trading.
2. Significant accounting policies (continued) ii) Derivative financial instruments The Company does not hold or issue derivative financial instruments for trading or speculative purposes. iii) Transaction costs Transaction costs are incremental costs that are directly related to the acquisition or issuance of financial assets or liabilities and are accounted for as part of the respective asset or liability s carrying value at inception. The Company incurs transaction costs primarily through the issuance of secured debentures and classifies these costs in the carrying value of secured debentures on the consolidated balance sheet. The costs capitalized within long-term debt are amortized over the expected life of the related debt using the effective interest method. (iv) Fair value measurements The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible (note 17(a)). The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in on of the following levels: Level 1 inputs are unadjusted quoted prices of identical instruments in active markets. Level 2 inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs used in a valuation technique are not based on observable market data in determining fair values of these instruments. 3. Goodwill The Company tested goodwill in accordance with the accounting policy described in note 2(f). No impairment was recognized on goodwill for the years ended 2010 or 2009. The Company has determined that it has two reporting units for the purposes of the goodwill impairment test, Canada and the United States. Goodwill is entirely attributable to the Company s United States reporting unit.
4. Intangible assets As at 2010 Cost Accumulated amortization Net Book Value Customer relationships $ 7,559 $ 7,338 $ 221 Non-competition agreements 400 400 - $ 8,951 $ 8,730 $ 221 As at 2009 Cost Accumulated amortization Net Book Value Customer related intangibles $ 7,559 $ 7,205 $ 354 Non-competition agreements 400 367 33 $ 8,951 $ 8,564 $ 387 Change in intangible assets For the year ended 2010 For the year ended 2009 Amortization expense $ 166 $ 206
5. Equipment and leasehold improvements As at 2010 Cost Accumulated depreciation Net Book Value Trucks, trailers and automotive equipment $ 36,821 $ 16,067 $ 20,754 Trucks, trailers and automotive equipment under capital lease 6,013 2,069 3,944 Equipment, furniture and fixtures 4,608 2,979 1,629 Computer equipment 152 108 44 Leasehold improvements 153 83 70 Assets in progress 303-303 As at 2009 $ 48,050 $ 21,306 $ 26,744 Cost Accumulated depreciation Net Book Value Trucks, trailers and automotive equipment $ 39,794 $ 13,522 $ 26,272 Trucks, trailers and automotive equipment under capital lease 7,172 2,223 4,949 Equipment, furniture and fixtures 4,652 2,796 1,856 Computer equipment 152 93 59 Leasehold improvements 153 68 85 Assets in progress 47-47 Equipment under capital leases: $ 51,970 $ 18,702 $ 33,268 For the year ended 2010 For the year ended 2009 Equipment acquired under capital leases $ 616 $ 1,508 Depreciation expense 614 806 The Company sold certain equipment for gross proceeds of $nil (2009 - $1,508) and immediately leased the equipment back. The Company realized a gain of $nil for the year ended 2010 (2009 - $nil). The Company recorded amortization of $16 of previously deferred gains for the year ended 2010 (2009 - $18). Gains are deferred and amortized over the useful life of the leased asset. As at 2010, $303 of equipment (2009 - $47) was not yet in service and, therefore, not depreciated.
5. Equipment and leasehold improvements (continued) According to the Company s accounting policy described in note 2(f) long-lived assets (comprised of equipment, leasehold improvements and purchased intangible assets subject to amortization) are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Reduced levels of exploration and development activity by oil and gas companies in 2009 led to a corresponding reduction in demand for the Company s transportation and rental assets and lower operating margins. As a result, the Company tested the recoverability of its long-lived depreciable assets and determined that the undiscounted future cash flows over the economic life of the principal assets from its Canadian rental asset group were below its carrying value. As a result, these assets were written down to fair value. The fair value of this asset group was determined based upon discounted estimated future cash flows. The Company recognized an impairment charge of $1,168 during the fourth quarter of the year ended 2009 which is included in the caption impairment of equipment in the Statement of Loss and Comprehensive Loss and Deficit in 2009. No impairment charge was recognised for the year ended 2010. 6. Income taxes The provision for income taxes differs from the amount expected by applying the combined Federal, Provincial and State statutory income tax rate of 28.0% (2009 29.0%) to loss before income taxes. The reasons for the differences are as follows: For the year ended 2010 For the year ended 2009 Loss before income taxes $ (4,762) $ (11,224) Computed expected income tax provision (1,333) (3,255) Add (deduct): Stock compensation expense and accretion of warrants 111 497 Reduction of future tax balances due to changes in expected timing of reversals 223 600 Gain on debt settlement included in contributed surplus 1,510 - Increase (decrease) in valuation allowance (380) 2,071 Others 64 95 Provision for income taxes $ 195 $ 8
6. Income taxes (continued) The tax effects of temporary differences that give rise to significant portions of the future tax assets and future tax liabilities are as follows: As at 2010 2009 Future income tax assets: Non-capital losses $ 1,843 $ 2,875 Share issue and financing costs 44 159 Research and development expenditures 1,148 1,148 Investment tax credit and eligible capital pools 1,559 1,451 Equipment and leasehold improvements 3,165 2,424 Valuation allowance (6,877) (7,257) 882 800 Future income tax liabilities: Equipment and leasehold improvements (1,559) (1,056) (1,559) (1,056) Net future income tax liability $ (677) $ (256) The Company has non-capital losses of $6,213 (2009 - $10,741) available to reduce future taxable income. The losses expire as follows: 2014 $ 151 2015-2026 1,510 2028 204 2029 2,837 2030 1,511 $ 6,213 In addition, scientific research and development investment credits of $4,594 (2009 - $4,594) are available to reduce future taxable income and do not expire.
7. Revolving Credit Facility The revolving credit facility is secured by a general security agreement creating first security interest on all present and after acquired assets and is subject to a borrowing base formula based upon eligible accounts receivable. The maximum amount available on the revolving credit facility was $4,000 on 2010 (2009 - $3,656). As disclosed in note 1, the Company entered into a forbearance agreement with the lender effective December 1, 2009 under which the lender agreed to forbear demanding repayment of the loan until February 28, 2010 and then by way of extension agreements further extended forbearance until June 15, 2011. Pursuant to the first forbearance agreement effective December 1, 2009 the revolving credit facility bears interest at the Company s principal lender s Canadian prime rate plus 4.00%, and in the case of the extensions, the lender s Canadian prime rate plus 6.75%. The bank credit facility requires that the Company to satisfy certain financial covenants, including the maintenance of certain financial ratios. As at 2010 the Company was not in compliance with the financial covenants contained within its revolving credit facility, which have not been waived by its lender.
8. Long-term debt 2010 2009 On July 7, 2008, the Company obtained a non-revolving term loan bearing interest of its lender s Canadian bank prime rate plus 1.0% to 1.75% (based upon the rolling average over the past four quarters of Funded Debt to EBITDA) repayable in monthly blended payments of principal and interest of $335 and secured by a general security agreement and an assignment of all risk insurance on all of the borrower s real and personal property. The loan matures June 30, 2013. The lender has the right to demand repayment of this loan with 367 days notice or in the event of breach or default to demand payment immediately. As described in note 1 the Company is in default of its obligations under this facility because it failed to make required payments of $335 for the period September 2009 through December 2010 paying interest only during this period. The Company entered into a forbearance agreement with the lender effective December 1, 2009 under which the lender agreed to forbear demanding repayment of the loan until February 28, 2010 and then by way of an extension agreement further extended forbearance until June 15, 2011. During the forbearance period no principal payments were required on this facility and interest was increased to, in the case of the initial term, the lender s Canadian bank prime rate plus 4.00%, and in the case of the subsequent forbearance agreements, the lender s Canadian bank prime rate plus 6.75%. $ 12,142 $ 13,307
8. Long-term debt (continued) 2010 2009 Bank loan bearing interest at its lender s Canadian bank prime rate plus 14%, of which prime plus 0.5% is payable monthly and 13.5% accrues and is deferred until maturity of the loan. The bank loan was renegotiated in 2010 and previously bore interest, in the absence of default, at its lender s Canadian bank prime rate plus a 10% per annum fee, payable monthly, of the outstanding balance of the carrying amount of the loan. The loan is repayable by way of quarterly principal payments of $200 commencing December 31, 2008 and is secured by a general security agreement and an assignment of all risk insurance on all of the borrower s real and personal property. The loan matures November 30, 2012. As described in note 1 the Company is in default of its obligations under this facility because it failed to make required principal payments of $200 subsequent to September 2009 paying interest and fees, when applicable, only during this period. The Company entered into a forbearance agreement with the lender effective December 1, 2009 under which the lender agreed to forbear demanding repayment of its loans until February 28, 2010 and then by way of extension agreements further extended forbearance until October 31, 2010. The Company has not requested an extension of this forbearance agreement beyond that date.. During the forbearance period no principal payments were required on this facility and the interest rate was increased to 18% per annum in the case of the initial term and to 20.75% per annum in the case of the second term. Subsequent to its renegotiation the bank loan bears interest at the rate described above. 5,145 4,500 Finance contracts repayable in monthly blended payments of principal and interest of $6 including interest at rates between 5.0% and 10.5% per annum. The debt is secured by specific equipment with a carrying value of $173 at 2010 and the outstanding principal is due between April 1, 2013 and March 30, 2015. 98 112 $ 17,385 $ 17,919 Less current portion 17,348 17,856 $ 37 $ 63 The Company is not in compliance with the financial covenant requirements of the revolving credit facility, non-revolving term loan and bank loan as at 2010. Based on the Company's current projections, the Company believes it is unlikely that it will be in compliance with the certain
8. Long-term debt (continued) existing financial covenants during fiscal 2011 without an amendment or waiver of certain covenants by its lender. The Company entered into forbearance agreements with its principal lender effective December 1, 2009 that expired February 28, 2010 and were subsequently extended to expire June 15, 2011. The Company entered into a separate agreement with its secondary lender respecting the bank loan described in note 8 effective December 1, 2009 under which the lender agreed to forbear demanding repayment of its loans until February 28, 2010 and then by way of extension agreements further extended forbearance until October 31, 2010. The Company has not requested an extension of the forbearance agreement with its secondary lender beyond that date. The Company expensed fees of $234 (2009 - $118) related to the execution of the forbearance agreements. This amount has been recorded as interest expense on the consolidated statement of loss. Provided the lender does not exercise its rights under non-revolving term loan and bank loan, scheduled annual principal repayments of long-term debt in each of the next five years are as follows: 2011 $ 2,804 2012 8,934 2013 5,637 2014 7 2015 3
9. Secured debentures 2010 2009 Secured debentures: Epic debenture $ - $ 7,500 Provencher debenture - 2,500 Accrued interest - 1,557-11,557 Unamortized issuance costs - - $ - $ 11,557 a) EPIC Debenture On July 7, 2008, the Company issued the EPIC secured subordinated debenture bearing interest of 8% per annum, payable monthly, and additionally accruing deferred interest of 3% to 10% per annum based upon the relationship of the Company s trailing twelve month ratio of Funded Debt to EBITDA at review dates that are nine, eighteen and thirty months following disbursement. The EPIC secured debentures were scheduled to mature on July 7, 2011. In connection with the issuance of the EPIC debenture, the Company issued 5.0 million detachable warrants to purchase common shares of the Company, which have a contractual term of five years and had an exercise price of $0.35 and vested immediately. The Company allocated the gross proceeds received of $7.5 million by measuring the fair value of the warrants and allocating the residual to the debt. The EPIC debenture is being accreted from its original carrying value of $6,237 to its face value of $7,500 over the expected term through a charge to interest expense using the effective interest method. In January 2010, Phoenix Oilfield Hauling Inc. announced the closing of its Capital Restructuring and the closing of its Private Placement (the Re-organization ). Pursuant to the Re-organization, Werklund Capital Corp., an entity related to the Chairman of the Board of the Company, ("Werklund Co.") and 1222472 Alberta Ltd. ("Leo Co"), an entity related to a Director of the Company, each exchanged their combined secured debentures, including accrued interest, of approximately $11,557 (the "Debt") for 77,043,601 common shares of the Company. The 77,043,601 common shares were valued at $0.15 per common share, an 87.5% premium to the closing price of the Company s common shares on the date of issue. As part of the Reorganization, Werklund Co. was granted a second seat on the Board of Directors and agreed to reprice the exercise price of its 5,000,000 previously issued warrants of the Company from $0.35 to $0.15 per share. b) Provencher Debenture On July 7, 2008, the Company issued the Provencher secured subordinated debenture bearing interest of 8% per annum, payable monthly, and additionally accruing deferred interest of 4% per annum payable the earlier of the maturity date of this debenture (July 7, 2011) or the date this debenture is repaid along with any accrued interest.
9. Secured debentures (continued) Pursuant to the Re-organization described above, the Provencher secured subordinated debenture was extinguished in 2010. 10. Obligations under capital lease 2010 2009 2010 $ - $ 1,611 2011 1,507 1,673 2012 587 390 2013 281 119 2014 98 - Total minimum lease payments 2,473 3,793 Amounts representing interest at rates ranging from 5.9% to 11.0% 198 287 Present value of net minimum lease payments 2,275 3,506 Scheduled repayments due within one year 1,384 1,433 Amounts due beyond one year classified as current due to covenant breaches (note 1) 522 2,073 $ 369 $ - As described in note 1 the Company is in violation of certain of its banking covenants. Certain capital leases are due to the Company s principal lender and contain covenants such that a breach of the Company s banking covenants is an event of default under the terms of its capital leases. Accordingly the Company has classified amounts associated with these capital leases due beyond one year as a current liability. Obligations under capital lease are secured by a pledge of specific equipment with a carrying value of $3,944 at 2010 (2009 - $4,949). In addition one of the Company s lenders holds cash of $27 (2009 - $nil) as additional security for its loan which is described as restricted cash on the balance sheet. The restricted cash balance will reduce over time as the corresponding loan balance is reduced. Interest of $174 for the year ended 2010 (2009 - $268) relating to capital lease obligations has been included in interest on long-term debt.
11. Share capital a) Common shares: Authorized: Unlimited number of Common Shares without nominal or par value Unlimited number of Preferred Shares Issued and outstanding Number of common shares Amount Balance at 2009 and 2008 66,247,716 $ 41,815 Issued to settle secured debentures 77,043,601 6,163 Issued for cash 25,250,000 2,020 Shares issued for services 500,000 40 Share issuance costs - (95) Balance at 2010 169,041,317 $ 49,943 Pursuant to the Re-organization (note 9), Werklund Capital Corp., an entity related to the Chairman of the Board of the Company, ("Werklund Co.") and 1222472 Alberta Ltd. ("Leo Co"), an entity related to a Director of the Company, each exchanged their combined secured debentures, including accrued interest, of approximately $11,557 (the "Debt") for 77,043,601 common shares of the Company. The 77,043,601 common shares were valued at $0.15 per common share, an 87.5% premium to the closing price of the Company s common shares on the date of issue. As part of the Re-organization, Werklund Co. was granted a second seat on the Board of Directors and agreed to re-price the exercise price of its 5,000,000 previously issued warrants of the Company from $0.35 to $0.15 per share. Share capital was increased respecting this transaction by $0.08 per share issued, being the closing price of the Company s common shares immediately prior to the conversion, with the remainder of the carrying value of the debt recorded as an increase to contributed surplus. Share issuance costs include 500,000 shares issued as partial payment of a fairness opinion obtained respecting the transaction and both a credit to share capital of $40 respecting the value of the shares issued and a reduction in share capital of $40 respecting the fair value of the issuance cost. In connection with the Re-organization, the Company also completed a private placement (the "Private Placement") of common shares of the Company. A total of 25,250,000 common shares were issued for cash at a price of $0.08 per common share for aggregate gross proceeds of $2,020,000. Issuance costs of $55 were incurred related to the Re-organization and have been recorded as a reduction of share capital.
11. Share capital (continued) b) Stock Option Plan: On May 8, 2006, the Company received shareholder approval of its stock option plan that provides certain employees, officers and directors an incentive to acquire an equity ownership in the Company over a period of time. The current stock option plan limits the maximum number of options that can be outstanding at one time to 10% of the issued common shares. On October 7, 2010, the Company granted 11,847,892 stock options respectively to certain employees that have a maximum term of 5 years. The options granted vest over a period of time of three years and were granted at an exercise price of $0.10. The per share weighted average fair value of these stock options was $0.06 calculated using the Black-Scholes option pricing model and incorporating the following weighted average assumptions: risk-free interest rate 1.94%, expected life 5.0 years, expected dividends of nil and an expected volatility of 120%. On January 6, 2009 and January 23, 2009 the Company granted 1,525,000 and 125,000 stock options respectively to certain employees and directors that have a maximum term of 5 years. The options granted vest over a period of time of two years and were granted at an exercise price of $0.12. The per share weighted average fair value of these stock options was $0.09 calculated using the Black-Scholes option pricing model and incorporating the following weighted average assumptions: risk-free interest rate 1.85%, expected life 5.0 years, expected dividends of nil and an expected volatility of 116%. For the year ended 2010, the Company recorded stock based compensation expense of $395 (2009 - $352), with such amount being credited to contributed surplus. The number of options outstanding, their weighted average exercise price and changes through grants, exercise or forfeiture are summarized below: Number of options 2010 2009 Weighted average exercise price Number of options Weighted average exercise price Outstanding, beginning of year 4,140,000 $ 0.24 4,660,000 $ 0.54 Granted 11,847,892 0.10 1,650,000 0.12 Cancelled (1,425,000) 0.30 (1,275,000) 1.00 Forfeited (585,000) 0.37 (895,000) 0.49 Outstanding, end of year 13,977,892 $ 0.11 4,140,000 $ 0.24 Exercisable, end of year 4,541,972 $ 0.13 2,182,667 $ 0.27 Options outstanding at 2010 have a weighted average remaining contractual life of 4.5 years (2009 4.0 years).
11. Share capital (continued) Information about options outstanding at 2010: Exercise Prices as at 2010 Number outstanding Options outstanding Remaining life (years) Weighted average exercise price Number exercisable Options exercisable Weighted average exercise price $0.10 11,847,892 4.8 $0.10 2,961,974 $0.10 $0.12 1,650,000 3.0 $0.12 1,099,998 $0.12 $0.30 480,000 3.0 $0.30 480,000 $0.30 13,977,892 $0.11 4,541,972 $0.13 Information about options outstanding at 2009 Exercise Prices as at 2009 Number outstanding Options outstanding Remaining life (years) Weighted average exercise price Number exercisable Options exercisable Weighted average exercise price $0.12 1,650,000 1.6 $0.12 550,000 $0.12 $0.30 2,430,000 4.0 $ $0.30 1,572,667 $ $0.30 $1.00 60,000 4.0 $ $1.00 60,000 $ $1.00 4,140,000 $0.24 2,182,667 $ $0.27 c) Warrants to outside agents: Total number of warrants 2010 2009 Weighted average exercise price Total number of warrants Weighted average exercise price Outstanding, beginning of year 5,100,000 $ 0.35 5,100,000 $ 0.35 Granted - - - - Expired - - - - Outstanding and exercisable, end of year 5,100,000 $ 0.15 5,100,000 $ 0.35
11. Share capital (continued) Information about warrants outstanding at 2010: Exercise Prices as at 2010 Number outstanding Warrants outstanding Remaining life (years) Weighted average exercise price Warrants exercisable Number exercisable Weighted average exercise price $0.15 5,000,000 2.7 $0.15 5,000,000 $0.15 $0.35 100,000 2.7 $0.35 100,000 $0.35 5,100,000 $0.15 5,100,000 $0.15 Information about warrants outstanding at 2009 Exercise Prices as at 2009 Number outstanding Warrants outstanding Remaining life (years) Weighted average exercise price Warrants exercisable Number exercisable Weighted average exercise price $0.35 5,100,000 3.7 $0.35 5,100,000 $0.35 As described above, in connection with the Re-organization the Company agreed to re-price 5,000,000 previously issued warrants from $0.35 to $0.15 per share. The re-pricing was accounted for as a modification of the original issuance and since the modified terms of the grant made it more valuable than the original grant, the Company recorded an expense of $47 directly to contributed surplus as (i) the transaction occurred with a related party and (ii) the incremental cost was determined to be an integral part of the Re-organization. The incremental per share weighted average fair value of these warrants was approximately $0.01 calculated using the Black-Scholes option pricing model and incorporating the following weighted average assumptions: risk-free interest rate 2.47%, expected life 3.67 years, expected dividends of nil and expected volatility of 128%. All warrants issued are exercisable for one common share.