Bennett Environmental Inc. (TSX:BEV) (the "Company" or "BEI") today announced
its first quarter 2008 results for the period ending March 31, 2008. In
commenting on the results Mr. Christopher Wallace, Chairman, expressed his
confidence stating that "The Company's management is continuing to move the
Company in the correct direction. The improvement in results over the previous
quarter and over the same quarter for the previous year clearly show this. The
Company continues to seek increased revenue as required to return to
profitability."
Mr. Jack Shaw, President and CEO of the Company, added the following comments on
the results. "We processed material at our Saint Ambroise facility during the
month of March, and as always there was a positive impact on our financial
results. The quality of our operating team and the strength of our technology
are demonstrated in each of our campaign burns. Our challenge continues to be to
source adequate volume at appropriate prices for the facility." In looking to
the rest of the year Mr. Shaw made the following observations, "At this time we
are not planning on operating Saint Ambroise during the second quarter.
Consistent with our results in 2007 we expect that the majority of our planned
volume will be received and processed in the third and fourth quarter. It is
also important to note that while we have numerous proposals outstanding we have
not yet entered into new contracts. This too is consistent with our 2007
experience where our new contracts were not entered into until near the end of
the second quarter. We are actively bidding work for both our Cornwall and
Kirkland Lake facilities as well and we continue to believe that the regulation
change anticipated at the end of June with respect to the storage and management
of PCB's will positively impact our overall business."
The Company also issued the following update to a previous announcement made May
2, 2008 regarding a lawsuit initiated against the Company and others by the
prime contractor for the Federal Creosote project. The Company has been advised
that the prime contractor intends to withdraw the separate claim against BEI and
others and intends to proceed with this claim by way of amending a previously
initiated claim against one of the other parties. The Company has been advised
that the plaintiff seeks damages of $3.1 U.S. million as opposed to the $5.3
U.S. million previously announced. The outcome of this matter is not
determinable and no amount has been recorded in the Company's financial
statements in respect of the complaint. Should the claim ultimately be served on
the Company management intends to contest it vigorously.
Forward Looking Statements
Certain statements contained in this press release and in certain documents
incorporated by reference into this press release constitute forward-looking
statements. The use of any of the words "anticipate", "continue", "estimate",
"expect", "may", "will", "project", "should", "believe" and "confident" and
similar expressions are intended to identify forward-looking statements. These
statements involve known and unknown risks, uncertainties and other factors that
may cause actual results or events to differ materially from those anticipated
in such forward-looking statements. BEI believes that the expectations reflected
in those forward-looking statements are reasonable but no assurance can be given
that these expectations will prove to be correct and such forward-looking
statements included in, or incorporated by reference into, this press release
should not be unduly relied upon. These statements speak only as of the date of
this press release. BEI undertakes no obligation to publicly update or revise
any forward-looking statements, whether as a result of new information, future
events or otherwise.
About Bennett Environmental Inc.
Bennett Environmental Inc. is a North American leader in high temperature
treatment services for the treatment of contaminated soil and has provided
thermal solutions to contamination problems throughout Canada and the U.S.
Bennett Environmental's technology provides for the safe, economical and
permanent solution to contaminated soil. Independent testing has consistently
proven that the technology operates well within the most stringent criteria in
North America. For information, please visit the Bennett Environmental website
at: www.bennettenv.com.
BENNETT ENVIRONMENTAL INC.
Interim Consolidated Balance Sheets
(Expressed in Canadian dollars)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
March 31, December 31,
2008 2007
----------------------------------------------------------------------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 4,671,391 $ 3,872,569
Restricted cash 922,223 888,316
Amounts receivable 2,320,481 4,872,752
Current portion of long-term receivables
(note 3) 85,155 87,465
Inventory 58,533 117,845
Deferred transportation costs 129,074 732,657
Prepaid expenses and other 609,930 594,436
---------------------------------------------------------------------------
8,796,787 11,166,040
Long-term receivables (note 3) - 42,000
Property, plant and equipment 16,135,913 16,744,677
Other assets 3,430,711 3,464,252
----------------------------------------------------------------------------
$ 28,363,411 $ 31,416,969
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 6,519,881 $ 7,479,833
Income taxes payable 1,187,327 1,072,416
Deferred revenue 889,923 1,510,125
Current portion of long-term liabilities
(note 4) 2,173,580 2,196,890
----------------------------------------------------------------------------
10,770,711 12,259,264
Long-term liabilities (note 4) 1,995,616 1,945,773
Deferred gain 84,415 126,415
Shareholders' equity:
Share capital (note 5) 71,733,963 71,733,963
Contributed surplus 4,035,129 3,999,179
Share purchase warrants 429,056 429,056
Deficit (60,685,479) (59,076,681)
---------------------------------------------------------------------------
15,512,669 17,085,517
Future operations (note 1)
Contingencies (note 10)
----------------------------------------------------------------------------
$ 28,363,411 $ 31,416,969
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to interim consolidated financial statements.
BENNETT ENVIRONMENTAL INC.
Interim Consolidated Statements of Operations and Comprehensive Loss
(Expressed in Canadian dollars)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Three months ended
March 31,
2008 2007
---------------------------------------------------------------------------
(Unaudited)
Sales $ 3,546,538 $ 1,731,321
Expenses:
Operating costs 3,006,729 1,867,630
Administration and business development 1,421,581 1,901,284
Depreciation and amortization 647,009 767,445
Foreign exchange 141,811 (2,645)
Interest 33,558 26,357
--------------------------------------------------------------------------
5,250,688 4,560,071
---------------------------------------------------------------------------
Loss before the undernoted (1,704,150) (2,828,750)
Other income, including interest 95,352 181,175
---------------------------------------------------------------------------
Loss before income taxes (1,608,798) (2,647,575)
Income taxes:
Future - 7,335
--------------------------------------------------------------------------
- 7,335
---------------------------------------------------------------------------
Net loss and comprehensive loss for the period $ (1,608,798) $ (2,654,910)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Loss per share: (note 6)
Basic and diluted $ (0.06) $ (0.11)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
See accompanying notes to interim consolidated financial statements.
BENNETT ENVIRONMENTAL INC.
Interim Consolidated Statements of Shareholders' Deficit
(Express in Canadian dollars)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months ended
March 31,
2008 2007
----------------------------------------------------------------------------
(Unaudited)
Shareholders' deficit, beginning of period $ (59,076,681) $(41,312,875)
Net loss and comprehensive loss for the period (1,608,798) (2,654,910)
----------------------------------------------------------------------------
Shareholders' deficit, end of period $ (60,685,479) $(43,967,785)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to interim consolidated financial statements.
BENNETT ENVIRONMENTAL INC.
Interim Consolidated Statements of Cash Flows
(Express in Canadian dollars)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months ended
March 31,
2008 2007
----------------------------------------------------------------------------
(Unaudited)
Cash provided by (used in):
Operations:
Loss for the period $ (1,608,798) $ (2,654,910)
Items not involving cash:
Depreciation and amortization 647,009 767,445
Stock-based compensation 35,950 172,409
Department of Justice investigation contingency 101,533 -
Deferred gain (42,000) (41,785)
Future income taxes - 7,335
Change in non-cash operating working capital:
Amounts receivable 2,552,271 249,610
Deferred transportation costs 603,583 (730,061)
Prepaid expenses and other (15,494) 67,479
Inventory 59,312 (27,118)
Accounts payable and accrued liabilities (959,952) 84,315
Income taxes receivable/payable 114,911 3,162,054
Deferred revenue (620,202) (56,750)
Severance payable - 1,340
Severance payments (75,000) -
Change in restricted cash (33,907) (682,114)
----------------------------------------------------------------------------
759,216 319,249
Financing:
Repayments of long-term liabilities - (263,793)
Issuance of share capital, net of share issue
costs - 3,911,132
---------------------------------------------------------------------------
- 3,647,339
Investments:
Decrease in note receivable 44,310 227,421
Proceeds on disposal of property, plant and
equipment - 1,000
Purchase of property, plant and equipment (4,704) (24,141)
---------------------------------------------------------------------------
39,606 204,280
----------------------------------------------------------------------------
Increase in cash and cash equivalents 798,822 4,170,868
Cash and cash equivalents, beginning of period 3,872,569 2,870,358
----------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 4,671,391 $ 7,041,226
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Supplemental cash flow information:
Interest paid $ 28,156 $ 2,680
Income taxes paid - 70,548
Income tax refund 123,386 3,232,601
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to interim consolidated financial statements.
BENNETT ENVIRONMENTAL INC.
Notes to Interim Consolidated Financial Statements
(Expressed in Canadian dollars)
Three months ended March 31, 2008 and 2007
(Unaudited)
1. Future operations:
These interim 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 $1,608,798 during the three months ended March 31,
2008. The Company has an accumulated deficit of $60,685,479 at March 31, 2008.
The Company did not operate the RSI facility in Quebec for 64 days during the
three months ended March 31, 2008 in an attempt to build up production volumes
for more efficient operations. The Company reopened the RSI facility from March
3, 2008 to March 29, 2008. The Belledune facility has not yet commenced
operations.
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. This
includes being able to secure sufficient sales volumes at profitable sales
prices and to continue with cost reduction strategies implemented during 2006
and 2007.
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 first quarter of 2009.
The interim 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 presentation
These interim consolidated financial statements have been prepared in accordance
with Canadian generally accepted accounting principles for interim financial
statements and accordingly, do not include all disclosures required for annual
financial statements. These consolidated financial statements follow the same
accounting policies and methods of their application as the most recent annual
financial statements except as disclosed in note 2(c) to these interim
consolidated financial statements. In the opinion of management, all
adjustments, including reclassifications and normal recurring adjustments
necessary to present fairly the financial position, results of operations and
retained earnings and cash flows at March 31, 2008 and for all periods
presented, have been made. Interim results are not necessarily indicative of the
results for a full year.
These interim consolidated financial statements should be read in conjunction
with the December 31, 2007 annual consolidated financial statements.
(b) 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.
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 three month period ended March 31, 2008 and 2007.
(c) Change in accounting policies
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.
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. For the three months ended March 31, 2008, cost of inventory sales,
which have been included as part of operating expenses totalled $315,000. Sales
of inventory items for the period totalled $370,000.
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.
(d) Recent accounting pronouncements
The Canadian Accounting Standards Board will require all public companies to
adopt International Financial Reporting Standards ("IFRS") for interim and
annual financial statements relating to fiscal years beginning on or after
January 1, 2011. Companies will be required to provide IFRS comparative
information for the previous fiscal year. The convergence from Canadian GAAP to
IFRS will be applicable for the Company for the first quarter of 2011 when the
Company will prepare both the current and comparative financial information
using IFRS. The Company expects the transition to IFRS to impact financial
reporting, business processes and information systems. The Company will assess
the impact of the transition to IFRS and will invest in training and resources
throughout the transition period to facilitate a timely conversion.
3. Long-term receivables:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Long-term
amount Promissory Note
receivable note receivable Total
----------------------------------------------------------------------------
(i)
Balance, December 31, 2007 $ 5,037,611 $ 129,465 $ 184,184 $ 5,351,260
Received - (42,000) - (42,000)
Accrued interest - (2,310) - (2,310)
----------------------------------------------------------------------------
Balance, March 31, 2008 5,037,611 85,155 184,184 5,306,950
Less current portion - (85,155) - (85,155)
Less allowance for doubtful
amounts (5,037,611) - (184,184) (5,221,795)
----------------------------------------------------------------------------
Long-term receivables $ - $ - $ - $ -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(i) The promissory note of $129,465 bears interest at 5.5% per annum,
compounded semi-annually and has a term of three years. Principal
payments of $42,000 are due on January 1 and July 1 of each year,
together with accrued and unpaid interest. The promissory note
receivable, related to the sale of the odorant business, is secured by
a first charge against substantially all of the assets sold and a
personal guarantee of $100,000 by the purchaser.
The allowance for doubtful accounts remains unchanged from December 31,
2007.
4. Long-term liabilities:
Long-term liabilities comprise the following:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Department of
Justice
Investigation
Tenure Severance Contingent
agreement payable Liability Total
----------------------------------------------------------------------------
(note 10(c) note 10(b))
(iv))
Balance December 31, 2007 $ 746,359 $ 646,304 $ 2,750,000 $ 4,142,663
Foreign exchange - - 101,533 101,533
Paid - (75,000) - (75,000)
----------------------------------------------------------------------------
746,359 571,304 2,851,533 4,169,196
Less current portion (150,586) (571,304) (1,451,690) (2,173,580)
----------------------------------------------------------------------------
Balance March 31, 2008 $ 595,773 $ - $ 1,399,843 $ 1,995,616
----------------------------------------------------------------------------
----------------------------------------------------------------------------
5. Share capital:
(a) The authorized share capital of the Company consists of an unlimited number
of common shares and an unlimited number of Series I non-voting redeemable
preferred shares. No Series I, non-voting redeemable preferred shares have been
issued.
(b) The issued share capital of the Company is as follows:
------------------------------------------------------------------------
------------------------------------------------------------------------
Common
shares Amount
------------------------------------------------------------------------
Total issued shares, March 31, 2008 27,018,675 $ 71,805,842
Shares repurchased in 2004 and held in treasury (11,500) (71,879)
------------------------------------------------------------------------
Balance, March 31, 2008 27,007,175 $ 71,733,963
------------------------------------------------------------------------
------------------------------------------------------------------------
(c) Stock option activity for the three months ended March 31, 2008 is as follows:
---------------------------------------------------------
---------------------------------------------------------
---------------------------------------------------------
Weighted
average
exercise
Options price
---------------------------------------------------------
Outstanding,
December 31, 2007 881,000 $ 2.71
Granted - -
Exercised - -
Cancelled - -
---------------------------------------------------------
Outstanding, March 31, 2008 881,000 $ 2.71
---------------------------------------------------------
---------------------------------------------------------
The following table summarizes information relating to outstanding and
exercisable options at March 31:
Range of Number
exercise prices of options
2008 2007
---------------------------------------------------------
$ 0.67 - $ 1.73 730,000 1,200,000
$ 2.67 - $ 3.55 6,000 446,000
$ 4.11 - $ 7.10 50,000 220,000
$ 7.20 - $ 9.10 - 100,000
$14.29 - $22.05 95,000 125,000
---------------------------------------------------------
881,000 2,091,000
---------------------------------------------------------
---------------------------------------------------------
No stock options were issued during the three months ended March 31, 2008.
At March 31, 2008, the Company has 1,080,000 outstanding warrants (2007 --
1,080,000) which are exchangeable into common shares of the Company at the
holder's option on a one-for-one basis, at ay time between March 1, 2008 and
March 1, 2010, at a price of $0.77 for the first 540,000 warrants exercised and
at $0.87 with respect to the remaining 540,000 warrants. No warrants have been
exercised during the period.
6. Loss per share:
The reconciliation of the loss for the period and weighted average number of
common shares used to calculate basic and diluted loss per share is as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months ended
March 31,
2008 2007
----------------------------------------------------------------------------
Loss for the period -- basic and diluted $ (1,608,798) $ (2,654,910)
Loss per common share -- basic and
diluted $ (0.06) $ (0.11)
Weighted average number of
shares - basic and diluted 27,007,175 23,404,585
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Options aggregating 881,000 (2007 -- 2,091,000) and warrants aggregating
1,080,000 (2007 -- 1,080,000) have not been included in the computation of
diluted loss per share as they are considered anti-dilutive.
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. As at March 31, 2008, two customers represented 28% and 15%
(December 31, 2007 -- 48% and 21%) 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.
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 parties allowing for
an offset in the event of non-performance. Management does not believe there is
a significant risk of non-performance by the counterparties because the portions
with and the credit ratings of such counterparties are monitored.
The carrying amount of financial assets represents the maximum credit exposure.
The maximum exposure to credit risk at the reporting date was:
---------------------------------------------------------
---------------------------------------------------------
March 31, December 31,
2008 2007
---------------------------------------------------------
Cash and cash equivalents $ 4,671,391 $ 3,872,569
Restricted cash 922,223 $ 888,316
Accounts receivable 2,320,481 4,872,752
Deferred transportation costs 129,074 732,657
Long-term receivables 85,155 129,465
---------------------------------------------------------
Total $ 8,128,324 $ 10,495,759
---------------------------------------------------------
---------------------------------------------------------
The aging of accounts receivable at the reporting date was:
-----------------------------------------------------------------
-----------------------------------------------------------------
March 31, December 31,
2008 2007
-----------------------------------------------------------------
Current $ 1,335,944 $ 4,289,885
Past due 31-90 days 928,305 560,366
Past due greater than 90 days 69,855 36,124
-----------------------------------------------------------------
Gross accounts receivable 2,334,104 4,886,375
Less: Allowance for doubtful accounts (13,623) (13,623)
-----------------------------------------------------------------
Total accounts receivable, net $ 2,320,481 $ 4,872,752
-----------------------------------------------------------------
-----------------------------------------------------------------
There was no change in the allowance for credit losses in the period.
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.
Foreign exchange risk:
The Company is a net seller of U.S. dollars with U.S. dollar receipts from sales
exceeding U.S. dollar denominated purchases. As a net seller of U.S. funds, the
Company is negatively affected by a strong Canadian currency. However, this is
somewhat reduced by the favourable effect of a strong Canadian dollar on the
Company's transportation costs in U.S. dollars. The Company 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. Basis of fair value of contracts represents the amount to be paid
(or received) with the counterparty should the contract be settled at March 31,
2008.
As of March 31, 2008 the Company has entered into foreign exchange contracts to
sell approximately $1.6 million U.S., at various dates in April through May 2008
with rates from $0.9898 U.S. to $1.0001 U.S. The fair value of these contracts
at March 31, 2008 was an unrealized loss of $52,205 (December 31, 2007 - $13,705
gain) which is recorded as an accrued liability on the balance sheet and foreign
exchange loss on the statement of operations and comprehensive loss.
The Company does not utilize financial instruments for speculative purposes.
The Company is exposed to the following currency risk at March 31, 2008:
--------------------------------------------------------------
--------------------------------------------------------------
U.S. $
--------------------------------------------------------------
Cash, restricted cash and cash equivalents $ 1,013,890
Accounts receivable 1,359,204
Accounts payable and accrued liabilities (3,349,911)
--------------------------------------------------------------
Total $ (976,817)
--------------------------------------------------------------
--------------------------------------------------------------
A 10% strengthening (weakening) of the Canadian dollar against the U.S. dollar
would have increased (decreased) earnings from operations by $240,803 as at
March 31, 2008.
The following summary illustrates the fluctuations in the exchange rates applied
during the period ended March 31, 2008:
-----------------------------------
-----------------------------------
U.S. $
-----------------------------------
Opening exchange rate 0.9913
Closing exchange rate 1.0279
Average exchange rate 1.0041
-----------------------------------
-----------------------------------
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 March 31, 2008,
the Company has a cash and cash equivalents balance of $4,671,391. While the
Company has negative working capital of $1,973,924 at March 31, 2008, management
has the ability to negotiate the deferral of certain current liabilities.
Of the $922,223 held in restricted cash, $644,910 will be returned to the
Company in the next six months and will be available to pay financial
liabilities.
The Company had no bank borrowings outstanding at March 31, 2008 or December 31,
2007.
Fair values:
The Company's financial instruments consist of cash and cash equivalents,
restricted cash, amounts receivable, deferred transportation costs, note
receivable and promissory note, 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 note receivable and promissory note approximate their
fair values due to the interest rates on the note receivable and promissory note
being comparable to market rates.
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.
The table below analyzes the Company's financial liabilities which will be
settled into relevant maturity groupings based on the remaining periods at March
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
In less than 6 months and year and 2 years and 5
months 1 year years years
----------------------------------------------------------------------------
Accounts Payable and
accrued liabilities and
Long-term liabilities $6,519,881 $2,173,580 $ 139,000 $ 2,094,844
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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.
9. Segmented information:
(a) Geographic information:
The Company operates in one reportable operating segment, which involves the
business of remediating contaminated soil and other waste materials. All
significant property, plant and equipment are located in Canada. The table below
summarizes sales by country:
----------------------------------------------------------------
----------------------------------------------------------------
Three months ended
March 31,
2008 2007
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Sales by country:
Customers domiciled in the United States $1,678,390 $ 23,353
Customers domiciled in Canada 1,868,148 1,707,968
----------------------------------------------------------------
$3,546,538 $ 1,731,321
----------------------------------------------------------------
----------------------------------------------------------------
(b) Major customers:
For the quarter ended March 31, 2008, revenues from two customers represented
approximately 25% and 20% (2007 - 15% and 9%), respectively, of total revenues.
10. Contingencies:
(a) Federal Creosote project
Subsequent to the end of the first quarter of 2008, the prime contractor on the
Federal Creosote project filed a complaint against the Company in a US court.
The complaint also names a director and officer, an officer and a senior manager
who are no longer with the Company. The complaint claims these three individuals
colluded with an employee of the prime contractor relating to, among other
things, the awarding of the Federal Creosote project during the years 2002
through 2004. The Company has not been served with the complaint and, as such,
litigation has not formally commenced. On a joint and several basis, the
complaint seeks approximately $3.1 million US in damages from the Company, other
parties unrelated to the Company and the director, officer and senior manager
formerly with the Company. The outcome of this matter is not determinable and no
amount has been recorded in the Company's financial statements in respect of the
complaint. Management intends to defend against this complaint vigorously.
On April 25, 2008 the plaintiff informed the US court that it intends to
withdraw its complaint. The Company believes this change to be procedural and
expects the plaintiff to file an amended complaint making similar claims as
described above.
(b) Department of Justice Investigation:
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. The Company has estimated that its liability with respect to this
matter to be $2,750,000 and has recorded this amount in 2007. During the quarter
ended March 31, 2008, the unrealized foreign exchange on this liability amounted
to $101,533. No current officer or director was at the Company at the time when
the matters giving rise to this contingency occurred. It is the Company's
intention to continue to cooperate with agencies of the United States government
concerning these matters and to preserve its good standing with the
Environmental Protection Agency.
The Company anticipates that the amounts will be payable over a six year period
(note 4).
(c) Other:
(i) During 2005, the Company was served with a claim in the amount of $5,000,000
by a consultant retained by a former CEO claiming breach of contract. The claim
was submitted to arbitration and $145,000 was recorded as an expense in 2005 as
the Company's estimate of its obligation under the arbitrator's decision. Upon
appeal by the consultant, the arbitrator's decision was overturned with the
Company being liable for additional amounts estimated to be $315,000 which were
expensed in 2007. The Company believes that it has adequately provided for and
expensed amounts related to this claim.
(ii) During 2005, a former employee filed a wrongful dismissal suit against the
Company claiming damages in the amount of $270,000. In 2005, the Company
expensed $46,000 as its best estimate of potential loss based on its initial
offer to settle. During the first quarter of 2008, the Company settled the claim
for $105,701. The Company has accrued the settlement in its 2007 consolidated
financial statements and expensed the additional cost of approximately $60,000.
(iii) The Company has filed a formal claim in the Ontario Superior Court of
Justice against Defence Construction Canada ("DDC") of $9.0 million plus
punitive damages to receive the amounts incurred related to the Saglek contract.
(iv) During 2006, the Company was served with a claim by a former CEO claiming
breach of contract alleging that the Company was required to establish a secure
pension. The Company acknowledges that it has a pension obligation due to the
former CEO pursuant to a contract and currently has $746,359 recorded in
long-term liabilities. During 2007, the Company and the former CEO agreed to
secure the pension obligation with a charge against certain of the Company's
fixed assets.
(v) During 2006, a former CEO of the Company entered into a settlement agreement
with the OSC where he acknowledged, with certain caveats, violating provisions
of the Securities Act. Based on a provision of the Canada Business Corporations
Act and legal advice, the Company determined that it had the right to recover
funds that had been paid for the defense of the former CEO relative to the
matter. As a result, the Company deferred payments required under the former
CEO's pension agreement and consulting agreement as an offset to monies advanced
for his defense.
(vi) During 2007, the Company was served with a claim by the same CEO claiming
recovery of fines and costs paid pertaining to Ontario Securities Commission
("OSC") matters. The former CEO maintains that he acted appropriately and that
the Company is required to indemnify him for the $300,000 paid by him to the
OSC, plus $100,000 in punitive damages. As part of this claim the former CEO
also maintains that the Company does not have the right of offset discussed
above.
During the first quarter of 2008, the Ontario Superior Court of Justice ruled in
favour of the former CEO and the Company was ordered to pay $300,000,
representing the amount paid by the former CEO to the Ontario Securities
Commission. As well, the judgment indicates that the former CEO was entitled to
indemnification and that the amounts offset against pension and consulting
liabilities as described in (v) are to be paid. This amount was accrued and
expensed in the Company's 2007 consolidated financial statements. The Company
has reviewed the decision and believes that the former CEO's acknowledgement of
violating the Securities Act precludes him from being eligible for
indemnification. The Company is appealing the Court's decision.
(vii) The Company terminated an employment arrangement in 2007 and recorded as
an expense $280,000 in accordance with this employee's employment contract in
its 2007 consolidated financial statements. In the first quarter of 2008, the
Company was served with a claim by this employee claiming breach of contract for
$540,000. A formal motion of defense has been filed with the courts. Management
will vigorously defend the claim.
(viii) During a routine audit, the Ministry of Revenue of Quebec ("MRQ")
identified in a letter received in 2005 that the Company's subsidiary in Quebec
has incorrectly deducted input tax credits for Quebec sales tax ("QST") related
to utilities. QST legislation denies such input tax credits for a service-type
business. A proposed adjustment letter was received by the Company in 2005
requiring the Company to pay $1.1 million. After various meetings with the MRQ
during 2006, management has negotiated a settlement with the MRQ on the
ineligible portion of the input tax credits providing for payment by the
Company, in the amount of $0.6 million, including interest and penalties, which
was accrued in the 2006 consolidated financial statements. After reviewing the
situation during the first quarter of 2007 an additional $0.1 million was
accrued and expensed. The Company has settled with the MRQ and paid its
liability. No additional adjustments or accrual was required during the balance
of 2007.
(ix) In the ordinary course of business, lawsuits have been filed against and by
the Company. In the opinion of management, the outcome of the lawsuits now
pending will involve amounts that would not have a material adverse effect on
the consolidated position of the Company. However, should any loss result from
the resolution of these claims, such loss would be charged against income in the
year the claim is resolved.
11. Disposition of odorant assets:
On April 13, 2006, the Company entered into an agreement to sell certain assets
associated with its odorant business for $322,000 to Midland Resource Recovery
Inc. in exchange for a promissory note (note 3).
Upon the sale, the Company recorded a deferred gain which will be recognized as
the promissory note is collected. During the period ended March 31, 2008, the
Company collected against the note and recorded a gain on the disposition of
$42,000 (three months ended March 31, 2007 - $42,000), thereby decreasing the
deferred gain balance to $84,415 at March 31, 2008 (2007 - $126,415).
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