Bennett Environmental Inc. (TSX:BEV) (the "Company" or "BEI") announced today
its second quarter results for the period ended June 30, 2008. In commenting on
the results, Mr. Christopher Wallace, Chairman of the Board, observed that the
absence of activity at the Company's Saint Ambroise facility had a negative
impact on the overall financial results. However, the Company's dependence on
Saint Ambroise for its overall financial performance has been clear for some
time. What these results show is that the Company has clearly reduced its
ongoing operating costs, its cash flow requirements and, as a result, has
lowered the level of revenue required for profitable operations. "Due to the low
level of market activity, it is imperative that we reduce our operating costs
and cash outflows to ensure that we have the maximum opportunity for success,
both operationally and financially when projects do occur. The reduction in
Administrative expense in excess of $1.3 million in Q2 2008 compared to the same
period in 2007 demonstrates the Company's continuing resolve to ensure the
appropriate overhead cost structure is in place. Even adjusting for
non-recurring items that occurred in Q2 2007, the reduction in these costs was
approximately 32%." Mr. Wallace went on to comment "These demonstrated
sustainable cost reductions coupled with the relationships that the Company
continues to strengthen with major decision makers and influencers of projects
positions the Company for future projects and provides support for the strategic
alternatives initiative being led by Blackmont."
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)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
June 30, December 31,
2008 2007
----------------------------------------------------------------------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 3,966,730 $ 3,872,569
Restricted cash (note 2(e)) 915,832 888,316
Amounts receivable 1,160,084 4,872,752
Current portion of long-term
receivables (note 4) 86,310 87,465
Inventory 115,522 117,845
Deferred transportation costs 150,013 732,657
Prepaid expenses and other 790,267 594,436
---------------------------------------------------------------------------
7,184,758 11,166,040
Long-term receivables (note 4) - 42,000
Property, plant and equipment 12,103,487 16,744,677
Assets held for sale (note 3) 3,007,284 -
Other assets 3,122,198 3,464,252
----------------------------------------------------------------------------
$ 25,417,727 $ 31,416,969
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued
liabilities $ 4,553,995 $ 7,479,833
Liabilities related to assets
held for sale (note 3) 1,207,284 -
Income taxes payable 2,000,000 1,072,416
Deferred revenue 702,629 1,510,125
Current portion of long-term
liabilities (note 5) 2,161,999 2,196,890
---------------------------------------------------------------------------
10,625,907 12,259,264
Long-term liabilities (note 5) 1,984,449 1,945,773
Deferred gain 84,415 126,415
Shareholders' equity:
Share capital (note 6) 71,733,963 71,733,963
Contributed surplus 4,054,386 3,999,179
Share purchase warrants 429,056 429,056
Deficit (63,494,449) (59,076,681)
---------------------------------------------------------------------------
12,722,956 17,085,517
Future operations (note 1)
Contingencies (note 11)
----------------------------------------------------------------------------
$ 25,417,727 $ 31,416,969
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----------------------------------------------------------------------------
See accompanying notes to interim consolidated financial statements.
BENNETT ENVIRONMENTAL INC.
Interim Consolidated Statements of Operations and Deficit
(Expressed in Canadian dollars)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
2008 2007 2008 2007
----------------------------------------------------------------------------
(Unaudited) (Unaudited)
Sales $ 1,398,297 $ 5,272,808 $ 4,944,835 $ 7,004,130
Expenses:
Operating costs 1,716,996 3,879,613 4,723,726 5,747,240
Administration
and business
development 1,230,687 2,605,100 2,652,268 4,506,389
Amortization 649,193 777,407 1,296,203 1,544,852
Impairment of
long-lived
assets (note 3) 723,903 - 723,903 -
Foreign exchange (104,097) 99,783 37,714 97,138
Interest - 12,923 32,514 39,279
----------------------------------------------------------------------------
4,216,682 7,374,826 9,466,328 11,934,898
----------------------------------------------------------------------------
Loss before
the undernoted (2,818,385) (2,102,018) (4,521,493) (4,930,768)
Gain on investment - 33,249 - 33,249
Other income,
including interest 94,317 139,916 188,627 321,091
----------------------------------------------------------------------------
Loss before
income taxes (2,724,068) (1,928,853) (4,332,866) (4,576,428)
Income taxes
(recovery):
Current 84,902 - 84,902 -
Future - - - 7,335
----------------------------------------------------------------------------
84,902 - 84,902 7,335
----------------------------------------------------------------------------
Loss and
comprehensive
loss for the
period (2,808,970) (1,928,853) (4,417,768) (4,583,763)
Deficit, beginning
of period (60,685,479) (43,967,785) (59,076,681) (41,312,875)
----------------------------------------------------------------------------
Deficit, end of
period $(63,494,449) $(45,896,638) $(63,494,449) $(45,896,638)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Loss per share:
(note 7)
Basic and
diluted $ (0.10) $ (0.07) $ (0.16) $ (0.18)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to interim consolidated financial statements.
BENNETT ENVIRONMENTAL INC.
Interim Consolidated Statements of Cash Flows
(Express in Canadian dollars)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
2008 2007 2008 2007
----------------------------------------------------------------------------
(Unaudited) (Unaudited)
Cash provided by (used
in):
Operations:
Loss for the
period $ (2,808,970) $ (1,928,853) $ (4,417,768) $ (4,583,763)
Items not
involving cash:
Amortization 649,193 777,406 1,296,203 1,544,851
Stock-based
compensation 19,257 111,833 55,207 284,242
Department of
Justice
investigation
contingency (22,748) - 78,785 -
Loss (gain) on
disposal of
property, plant
and equipment - - (42,000) (41,785)
Loss from
impairment of
long-lived
Assets (note 3) 723,903 - 723,903 -
Gain on
investment - (33,249) - (33,249)
Future income
taxes (recovery) - - - 7,335
Change in non-cash
operating working
capital:
Amounts
receivable 1,160,397 (1,299,943) 3,712,668 (1,050,333)
Deferred
transportation
costs (20,939) 419,514 582,644 (310,547)
Prepaid expenses
and other (180,337) 127,688 (195,831) 195,167
Inventory (56,989) 76,762 2,323 49,644
Accounts payable
and accrued
liabilities (1,965,886) 915,498 (2,925,838) 999,813
Liabilities
related to
assets held
for sale
(note 3) 1,207,284 - 1,207,284 -
Income taxes
receivable
/payable 812,673 (210,980) 927,584 2,951,074
Deferred revenue (187,294) (74,152) (807,496) (130,902)
Severance payable - 279,637 - 280,977
Change in
restricted cash 6,391 (21,357) (27,516) (703,471)
----------------------------------------------------------------------------
(664,065) (860,196) 170,152 (540,947)
Financing:
Repayments of
long-term
liabilities - (3,602) (75,000) (267,395)
Issuance
(redemption)
of share
capital, net
of share issue
costs - 6,850 - 3,917,982
---------------------------------------------------------------------------
- 3,248 (75,000) 3,650,587
Investments:
Decrease
(Increase) in
note receivable (1,155) (2,310) 43,155 225,111
Proceeds on
disposal of
investment - 33,250 - 33,250
Proceeds on
disposal of
property, plant
and equipment - - - 1,000
Purchase of
property, plant
and equipment (39,441) (60,749) (44,146) (84,890)
---------------------------------------------------------------------------
(40,596) (29,809) (991) 174,471
----------------------------------------------------------------------------
Increase (decrease)
in cash and cash
equivalents (704,661) (886,757) 94,161 3,284,111
Cash and cash
equivalents,
beginning of period 4,671,391 7,041,226 3,872,569 2,870,358
----------------------------------------------------------------------------
Cash and cash
equivalents, end
of period $ 3,966,730 $ 6,154,469 $ 3,966,730 $ 6,154,469
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Supplemental cash
flow information:
Interest paid $ 10,470 $ 4,873 $ 38,625 $ 7,553
Income taxes paid - 3,322 - 73,870
Income tax refund 937,371 - 1,060,757 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 and six months ended June 30, 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 $4,417,768 during the six months ended June 30, 2008.
The Company has an accumulated deficit of $63,494,449 at June 30, 2008. The
Company did not operate the RSI facility in Quebec for 155 days during the six
months ended June 30, 2008 in an attempt to build up production volumes for more
efficient operations. The Company reopened the RSI facility only from March 3,
2008 to March 29, 2008. In addition, the Company has decided to sell the
Belledune facility which is not operational.
Continued operations depend on the Company's ability to generate future
profitable operations, to obtain sufficient financing to fund future operations
and, ultimately, to generate positive cash flows from operating activities. 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 second 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 June 30, 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 six month period ended June 30, 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 8 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 six months ended June 30, 2008, cost of inventory sales, which
have been included as part of operating expenses totalled $552,500. Sales of
inventory items for the period totalled $650,000.
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 9 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.
(e) Restricted cash
As at June 30, 2008, the Company had restricted cash of $915,832 (2007 -
$888,316) which includes $10,335 (2007 - $10,180) as required under the
Company's corporate credit card agreement; $658,503 (2007 - $638,212) required
for letters of credit and $246,994 (2007 - $239,924) required for foreign
exchange hedging agreements.
3. Assets and liabilities held for sale:
During the second quarter of 2008, the Company made a decision to sell the net
assets of its Belledune facility for total consideration of approximately $1.8
million. The Company is negotiating with a purchaser to sell the net assets and
it is expected that the transaction will close by the end of August, 2008. The
purchaser, as part of the purchase and sale agreement, will assume title and
liabilities related to the soil on hand at the facility. As a result, the
deferred revenue and accrued liability for the untreated soil will be eliminated
upon the sale.
Assets held for sale relate to the Belledune facility are comprised of the
following:
Assets held for sale:
Treatment building $ 93,886
Treatment equipment 2,122,526
Kiln 790,872
----------------------------------------------------------------------------
$ 3,007,284
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities related to assets held for sale:
Deferred revenue $ 141,700
Accrual for soil treatment 1,065,584
----------------------------------------------------------------------------
$ 1,207,284
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The Company recorded an impairment charge in the second quarter of 2008 related
to reducing the carrying value of the Belledune net assets to their fair value
as follows:
Treatment building $ 14,015
Treatment equipment 316,854
Kiln 118,063
Deferred permitting costs 274,971
----------------------------------------------------------------------------
$ 723,903
----------------------------------------------------------------------------
----------------------------------------------------------------------------
4. 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 - (45,465) - (45,465)
Accrued interest - 2,310 - 2,310
----------------------------------------------------------------------------
Balance, June 30, 2008 5,037,611 86,310 184,184 5,308,105
Less current portion - (86,310) - (86,310)
Less allowance for
doubtful amounts (5,037,611) - (184,184) (5,221,795)
----------------------------------------------------------------------------
Long-term receivables $ - $ - $ - $ -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(i) The promissory note of $86,310 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.
5. Long-term liabilities:
Long-term liabilities comprise the following:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Department of
Justice
Investigation
Tenure Severance Contingent
agreement payable Liability Total
----------------------------------------------------------------------------
(note 11(b))
Balance December 31,
2007 $ 746,359 $ 646,304 $ 2,750,000 $ 4,142,663
Unrealized foreign
exchange translation - - 78,785 78,785
Paid - (75,000) - (75,000)
----------------------------------------------------------------------------
746,359 571,304 2,828,785 4,146,448
Less current portion (150,586) (571,304) (1,440,109) (2,161,999)
----------------------------------------------------------------------------
Balance June 30, 2008 $ 595,773 $ - $ 1,388,676 $ 1,984,449
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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 $595,773 recorded in
long-term liabilities and $150,586 as a current liability. 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.
6. 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, June 30, 2008
and December 31, 2007 27,018,675 $ 71,805,842
Shares repurchased in 2004 and held in treasury (11,500) (71,879)
----------------------------------------------------------------------------
Balance, June 30, 2008 and December 31, 2007 27,007,175 $ 71,733,963
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(c) Stock option activity for the six months ended June 30, 2008, is as
follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Weighted
average
exercise
Options price
----------------------------------------------------------------------------
Outstanding, December 31, 2007 881,000 $ 2.71
Granted - -
Exercised - -
Cancelled/expired (180,000) 8.72
----------------------------------------------------------------------------
Outstanding, June 30, 2008 701,000 $ 1.17
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The following table summarizes information relating to outstanding and
exercisable options at June 30:
Range of Number
exercise prices of options
2008 2007
----------------------------------------------------------------------------
$ 0.67 - $ 1.73 680,000 1,000,000
$ 2.67 - $ 3.55 6,000 346,000
$ 4.11 - $ 7.10 10,000 220,000
$ 7.20 - $ 9.10 - 30,000
$14.29 - $22.05 5,000 125,000
----------------------------------------------------------------------------
701,000 1,721,000
----------------------------------------------------------------------------
----------------------------------------------------------------------------
No stock options were issued during the six months ended June 30, 2008 (2007 - nil).
At June 30, 2008, the Company has 1,080,000 outstanding warrants (2008 -
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.
7. 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 Six months
ended June 30, ended June 30,
2008 2007 2008 2007
----------------------------------------------------------------------------
Loss for the period $(2,808,970) $(1,928,853) $(4,417,678) $(4,583,763)
Loss per share
- basic and diluted (0.10) (0.07) (0.16) (0.18)
Weighted average
number of shares 27,007,175 27,007,175 27,007,175 25,215,882
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Options aggregating 701,000 (2007 - 1,721,000) 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.
8. 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 June 30, 2008, two customers represented 20% and 12% (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:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
June 30, December 31,
2008 2007
----------------------------------------------------------------------------
Cash and cash equivalents $ 3,966,730 $ 3,872,569
Restricted cash 915,832 888,316
Amounts receivable 1,160,084 4,872,752
Deferred transportation costs 150,013 732,657
Long-term receivables 86,310 129,465
----------------------------------------------------------------------------
Total $ 6,278,969 $ 10,495,759
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The aging of amounts receivable at the reporting date was:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
June 30, December 31,
2008 2007
----------------------------------------------------------------------------
Current $ 640,647 $ 4,289,885
Past due 31-90 days 514,563 560,366
Past due greater than 90 days 14,122 36,124
----------------------------------------------------------------------------
Gross amounts receivable 1,169,332 4,886,375
Less: Allowance for doubtful accounts (9,248) (13,623)
----------------------------------------------------------------------------
Total amounts receivable, net $ 1,160,084 $ 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 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 June 30,
2008.
As of June 30, 2008 the Company has entered into foreign exchange contracts to
buy approximately $1.2 million U.S., at various dates in July through August
2008 with rates from $1.0048 U.S. to $1.0248 U.S. The fair value of these
contracts at June 30, 2008 was an unrealized gain of $13,780 (December 31, 2007
- $13,705 gain) which is recorded as a prepaid on the balance sheet and foreign
exchange gain 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 the reporting date:
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June 30, December 31,
2008 2007
U.S. U.S.
----------------------------------------------------------------------------
Cash, restricted cash and cash equivalents $ 1,512,019 $ 1,515,631
Amounts receivable 350,167 3,635,884
Accounts payable and accrued liabilities (3,210,059) (4,013,057)
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Total $ (1,347,873) $ 1,138,458
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A 10% strengthening (weakening) of the Canadian dollar against the U.S. dollar
would have increased (decreased) earnings from operations by $14,502 as at June
30, 2008.
The following summary illustrates the fluctuations in the exchange rates applied
during the period ended June 30, 2008:
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----------------------------------------------------------------------------
U.S. $
----------------------------------------------------------------------------
Opening exchange rate 1.0279
Closing exchange rate 1.0197
Average exchange rate 1.0101
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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 June 30, 2008,
the Company has a cash and cash equivalents balance of $3,966,730. While the
Company has negative working capital of $3,441,149 at June 30, 2008, management
has the ability to negotiate the deferral of certain current liabilities.
Of the $915,832 held in restricted cash, $658,503 will be returned to the
Company in the next six months and will be available to provide working capital
to fund operations.
The Company had no bank borrowings outstanding at June 30, 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 June
30, 2008 to the contractual maturity date. The amounts disclosed in this table
are the contractual undiscounted cash flow. Balances within twelve months equal
the carrying balance, as the impact of discounting is not significant.
Payments due:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Between 6 Between 1 Between 2 Greater
In less than 6 months and year and 2 years and 5 than 5
Months 1 year years years years
----------------------------------------------------------------------------
Accounts
payable
and accrued
liabilities
and
long-term
liabilities $ 5,761,279 $ 2,161,999 $ 139,000 $ 1,666,676 $ 417,000
----------------------------------------------------------------------------
9. 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.
10. 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 Six months ended
June 30, June 30,
2008 2007 2008 2007
----------------------------------------------------------------------------
Sales by country:
Customers domiciled
in the United States $ 10,137 $ 3,865,681 $ 1,688,527 $ 3,889,034
Customers domiciled
in Canada 1,388,160 1,407,127 3,256,308 3,115,096
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$ 1,398,297 $ 5,272,808 $ 4,944,835 $ 7,004,130
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(b) Major customers:
For the quarter and six months ended June 30, 2008, revenues from two customers
represented approximately 20% and 10%, 18% and 14% (2007 - 73% and 3%, 55% and
6%), respectively, of total revenues.
11. Contingencies:
(a) Federal Creosote project
During the second quarter of 2008, the prime contractor on the Federal Creosote
project filed a complaint against the Company in a U.S. 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. On
a joint and several basis, the complaint seeks approximately $1.1 million U.S.
plus the value of additional gratuities. The majority of the counts within the
complaint seek damages on a joint and several basis from multiple defendants,
including 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.
(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 complied with the subpoena and cooperated in the
investigation of potential anti trust violations in the environmental services
industry. In July, 2008 the Company plead guilty to one count of conspiracy to
commit fraud in United States District Court, District of New Jersey relating to
its conduct with respect to bidding for the above contract. Final sentencing is
expected to be concluded in November of 2008. The Company has estimated that its
liability with respect to this matter to be $2.77 million U.S. and has recorded
this amount in 2007. During the quarter ended June 30, 2008, the unrealized
foreign exchange gain on this liability amounted to $22,748 (six months ended
June 30, 2008 unrealized exchange loss of $78,785). No current officer, or
director of the Company, was employed 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 5).
(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) 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.
(iii) 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 OSC. 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.
(iv) 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.
(v) During the first quarter of 2007, the Company settled a QST matter for $0.6
million. Of this amount, $0.1 million was expensed in the first quarter of 2007
as the balance had been previously accrued.
(vi) 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.
12. 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 5).
Upon the sale, the Company recorded a deferred gain which will be recognized as
the promissory note is collected. During the six month period ended June 30,
2008, the Company collected against the note and recorded a gain on the
disposition of $42,000 (six months ended June 30, 2007 - $42,000), thereby
decreasing the deferred gain balance to $84,415 at June 30, 2008 (2007 -
$168,415).
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