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Share Name | Share Symbol | Market | Type |
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Dynastar (Tier2) | TSXV:DDC | TSX Venture | Common Stock |
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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 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 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: ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 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) ---------------------------------------------------------------------------- Total $ (1,347,873) $ 1,138,458 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 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: ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- U.S. $ ---------------------------------------------------------------------------- Opening exchange rate 1.0279 Closing exchange rate 1.0197 Average exchange rate 1.0101 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 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 ---------------------------------------------------------------------------- $ 1,398,297 $ 5,272,808 $ 4,944,835 $ 7,004,130 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (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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