UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIESEXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year endedJune 30, 2007
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934
For the transition period from __________________to _________________
OR
[ ] SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934
Date of event requiring this shell company report_________________
Commission file number000-50971
BLUE EARTH REFINERIES INC.
(Exact name of Registrant as specified in its charter)
Not Applicable
(Translation of Registrant's name into English)
British Virgin Islands
(Jurisdiction of incorporation or organization)
Suite 803, 8/F, Dina House, Ruttonjee Centre, 11 Duddell Street, Central,
Hong Kong SAR, China
(Address of office)
Copy of communications to:
Virgil Z. Hlus, Esq.
Clark Wilson LLP
Barristers and Solicitors
Suite 800 – 885 West Georgia Street
Vancouver, British Columbia, Canada V6C 3H1
Telephone: 604-687-5700
Facsimile: 604-687-6314
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Securities registered or to be registered pursuant to Section 12(b) of the Act.
| Title of Class | Name of each exchange on which registered |
| Not Applicable | Not Applicable |
Securities registered or to be registered pursuant to Section 12(g) of the Act.
Ordinary Shares
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
Not Applicable
(Title of Class)
Indicate the number of outstanding shares of each of the issuer's classes of capital or ordinary stock as of
the close of the period covered by the annual report.
There were 15,142,836 ordinary shares outstanding as at June 30, 2007.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act.
[ ] YES [X] NO
If this report is an annual or transition report, indicate by check mark if the registrant is not required to
file reports pursuant to Section 13 or 15(d) of the Securities Act of 1934.
[X] YES [ ] NO
Note – Checking the box above will not relieve any registrant required to file reports to Section 13 or
15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
[X] YES [ ] NO
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark which financial statement item the registrant has elected to follow.
[ ] ITEM 17 [X] ITEM 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
[ ] YES [X] NO
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TABLE OF CONTENTS
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1
PART I
Financial Information and Accounting Principles
The financial statements and summaries of financial information contained in this document are reported in United States dollars ("$") unless otherwise stated. "CAN$" means Canadian dollars and "€" means Euro, the legal tender used by the majority of European Union member states. A "tonne" is one metric ton or 2204.6 pounds. All such financial statements have been prepared in accordance with United States generally accepted accounting principles.
Forward-Looking Statements
Except for the statements of historical fact contained herein, some information presented in this annual report constitutes forward-looking statements. When used in this annual report, the words "estimate", "project", "believe", "anticipate", "intend", "expect", "predict", "may", "should", the negative thereof or other variations thereon or comparable terminology are intended to identify forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of our Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include changes in project parameters as plans continue to be refined, future prices of cobalt, as well as those factors discussed in the section entitled "Risk Factors". Although we have attempted to identify important factors that could cause actual results to differ materially, there may be other factors that cause actual results not to be as anticipated, estimated or intended. There can be no assurance that such statements will prove to be accurate as actual results and future events could differ materially from those anticipated in such statements. Accordingly, prospective investors should not place undue reliance on forward-looking statements. The forward-looking statements in this annual report speak only as to the date hereof. We do not undertake any obligation to release publicly any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.
As used in this annual report, the terms "we", "us", "our", "Company" and "Blue Earth" mean Blue Earth Refineries Inc., unless otherwise indicated.
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Item 1. Identity of Directors, Senior Management and Advisers
A. Directors and Senior Management.
Not applicable.
B. Advisers.
Not applicable.
C. Auditors.
Not applicable.
Item 2. Offer Statistics and Expected Timetable
Not applicable.
Item 3. Key Information
A. Selected financial data.
The following table summarizes selected consolidated financial data for our Company prepared in accordance with United States generally accepted accounting principles for the years ended June 30, 2007, 2006, 2005, 2004 and 2003. The information in the table was extracted from the detailed consolidated financial statements and related notes included in this annual report and the reports that were previously filed and should be read in conjunction with such financial statements and with the information appearing under the heading, "Operating and Financial Review and Prospects".
| For the Years Ended June 30 | |||||||||||||||
| (US dollars, in thousands, except basic and diluted earnings (loss) per ordinary share) | |||||||||||||||
| 2007 | 2006 | 2005 | 2004 | 2003 | |||||||||||
| Sales of cobalt | $ | 28,255 | $ | 18,134 | $ | 15,419 | $ | 5,019 | $ | 1,048 | |||||
| Operating income (loss) | 8,125 | (1,642 | ) | (849 | ) | (303 | ) | (268 | ) | ||||||
| Income (loss) before provision | |||||||||||||||
| for income taxes | 10,376 | (3,324 | ) | (3,724 | ) | (477 | ) | (2,555 | ) | ||||||
| Net income (loss) | 10,376 | (3,324 | ) | (3,724 | ) | (477 | ) | (2,555 | ) | ||||||
| Basic and diluted earnings (loss) | |||||||||||||||
| per ordinary share | 0.69 | (0.22 | ) | (0.24 | ) | (0.03 | ) | (0.16 | ) | ||||||
| Weighted average ordinary | |||||||||||||||
| shares outstanding (in | |||||||||||||||
| thousands of shares) | 15,143 | 15,375 | 15,555 | 15,555 | 15,555 | ||||||||||
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| As at June 30 | |||||||||||||||
| (US dollars, in thousands, except cash dividend per ordinary share) | |||||||||||||||
| 2007 | 2006 | 2005 | 2004 | 2003 | |||||||||||
| Total assets | $ | 49,765 | $ | 46,747 | $ | 50,247 | $ | 55,107 | $ | 46,928 | |||||
| Total liabilities | 3,613 | 3,085 | 3,526 | 3,179 | 935 | ||||||||||
| Shareholders' equity | 46,152 | 43,662 | 46,721 | 51,928 | 45,993 | ||||||||||
| Ordinary stock | 15,143 | 15,143 | 15,555 | 15,555 | 15,555 | ||||||||||
| Cash dividend | 7,571 | - | 1,842 | - | - | ||||||||||
| Cash dividend per ordinary share | 0.50 | - | 0.12 | - | - | ||||||||||
B. Capitalization and indebtedness.
Not applicable.
C. Reasons for the offer and use of proceeds.
Not applicable.
D. Risk factors.
The information included in this annual report includes, or is based upon, estimates, projections or other forward-looking statements. Such forward-looking statements include any projections or estimates made by us and our management in connection with our business operations. While these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgement regarding the direction of our business, actual results will almost always vary, sometimes significantly, from any estimates, predictions, projections, assumptions or other future performance suggested herein.
Such estimates, projections or other forward-looking statements involve various risks and uncertainties as outlined below. We caution the reader that important factors in some cases have affected and could affect actual results in the future, and cause actual results to differ from the results expressed in any such estimates, projections or other forward-looking statements. Prospective investors should consider carefully the risk factors set out below.
Risks Associated with Refining
Our subsidiary faces logistical issues which may affect its ability to ship product on a regular and reliable basis, which could negatively impact the demand for our cobalt or our operational costs, and reduce the economic viability of our operations.
Our subsidiary faces many logistical issues both in the shipping of finished product and the flow of incoming supplies and spares. The remote nature of the location of our refinery facility, only 40 miles from the Democratic Republic of Congo border in western Uganda, means that deliveries cannot be scheduled on a regular and reliable basis.
Our subsidiary faces logistical issues as it has to import most of the supplies and spare parts that it requires to operate which may affect its ability to operate the refinery on a continual and consistent basis, which could increase our operating costs and as a result reduce the economic viability of our operations.
Most of the materials needed for the operation of the plant are imported into Uganda from various sources worldwide, including North America, the European Union, Australia and South Africa. This remoteness
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necessitates long pre-order periods, often several months in advance. Most shipments are by vessels and arrive through port of Mombassa, Keyna. This port is incredibly congested due to huge increase in traffic into East Africa in the past decade. It is estimated that there are presently in excess of 5,000 containers awaiting onward shipping from Mombassa to destinations in northern Kenya and Uganda.
Once the container has cleared the port there is a further three day road journey to our refinery including the Ugandan border clearance to be negotiated. Transport vehicles are often in poor condition and the state of the roads can vary enormously. It is not unusual for critical supplies to be delayed while a replacement truck is located and dispatched to solve a breakdown problem. A major delay in an incoming shipment of a single process product could cause a temporary shut-down of the entire plant and the subsequent extended re-start process.
Our subsidiary faces logistical issues as it has to export all of its cobalt to various world markets which may affect its ability to ship product on a regular and reliable basis, which could negatively impact the demand for our cobalt or our operational costs, and reduce the economic viability of our operations.
The same problems are to be managed in reverse when shipping cobalt to the world markets. Trucks are not available locally and must come from Kampala to move the sealed containers to Mombassa. Once again the port congestion can cause delays in lading. All of this results in extended periods between packaged product ready for shipment and the bill of lading documents to facilitate payment by the customer.
Our subsidiary's cobalt refining operations are subject to market forces beyond our control which could negatively impact the demand for our cobalt or our operational costs, and reduce the economic viability of our operations.
Currently, we earn revenues exclusively from the sale of cobalt that is refined by our subsidiary Kasese Cobalt Company Limited. The marketability of cobalt is affected by numerous factors beyond our control. These factors include government regulations relating to prices, taxes, royalties, allowable production, imports and exports, any of which can increase our operational costs or reduce our refining capacity. In addition, cobalt prices are volatile, and supply and demand for cobalt fluctuates. Consumers, fearing further price increases, tend to increase their purchases in times of rising prices and, anticipating further price decreases, reduce purchases in times of price decline. If the demand for cobalt were to decline, or if we were to incur significantly higher operational and regulatory compliance costs and taxes, our economic viability would deteriorate and the continuation of our business would be threatened.
Our revenues are largely dependent upon cobalt prices that are subject to dramatic and unpredictable fluctuations. A significant drop in cobalt prices could threaten our ability to continue operations.
The current demand for and supply of cobalt are the fundamental influences on the metal's prices, as are technical trends, currency exchange rates, inflation rates, changes in global economies, political factors and a number of other factors. The supply of cobalt, in turn, consists of a combination of mine production and existing stock held by governments, producers, financial institutions, and consumers. As a result, cobalt prices are subject to dramatic and unpredictable fluctuations.
Due to weak cobalt prices in 2002, the Kasese Cobalt Company refinery was placed on a care and maintenance program under which all cobalt production ceased by September 2002 and operations recommenced approximately one year later when cobalt prices improved.
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We may not be able to obtain the required permits to continue our refining operations.
The operations of our subsidiary Kasese Cobalt Company require permits and licences from various governmental authorities. Obtaining such permits is a complex and time consuming process involving numerous agencies. The time involved and success in obtaining such permits is contingent upon many variables not within the control of our Company or Kasese Cobalt Company. The failure to obtain such permits or a renewal of such permits could limit or bring to a halt our business, operations and future prospects, and could significantly reduce our ability to generate revenues. Currently, we have all operating permits and licenses needed to conduct the business of Kasese Cobalt Company. Some licenses and permits are only issued on an annual or multi-annual basis and these must be re-applied for when expired. Examples of such annual permits are those required for electrical generation, electricity sales, explosive storage and blasting, and a withholding tax exemption for Kasese Cobalt Company. Examples of multi-year (3 to 5 years) permits are those required for effluent discharge and water extraction by Kasese Cobalt Company from the Mubuku River.
We are subject to environmental protection legislation with which we must comply or suffer sanctions from regulatory authorities. Changes to existing, or the introduction of, new legislation may prove to be too burdensome to permit us to continue business operations.
Our cobalt refining activities are subject to laws and regulations controlling not only the refining of cobalt tailings, but also the possible effects of such activities upon the environment. Environmental legislation provides for restrictions and prohibitions on spills, releases or emissions of various substances produced in association with certain mineral refining operations, such as seepage from tailings disposal areas, which could result in environmental pollution. A violation of such legislation may result in the imposition of substantial fines and penalties. In addition, certain types of operations require the submission and approval of environmental impact statements. Environmental legislation is evolving in a manner which generally means stricter standards and enforcement, increased fines and penalties for non-compliance, more stringent environmental assessments of existing plant and proposed projects and higher legal and social responsibility for companies and their officers, directors and employees. Permits from a variety of regulatory authorities are required for many aspects of mineral refining operations. Current and future legislation and regulations could cause additional expense, capital expenditures, restrictions and delays in the exploitation of Kasese Cobalt Company's pyrite stockpile, the extent of which cannot be predicted. It is possible that the costs and delays associated with compliance with such laws and regulations could become such that we may decide to discontinue operations.
The refining industry is highly competitive and there is no assurance that we will achieve success in our refining operations.
The cobalt refining business is competitive. We will continue to compete with other refinery companies, many of which have greater financial and technical resources than us, in the production of cobalt and the acquisition of attractive cobalt properties. There is increasing competition for a limited number of cobalt refining opportunities within Africa and elsewhere and, as a result of this competition, we may be unable to produce cobalt on terms acceptable to us.
We are a single-metal producer and a prolonged drop in the market price for cobalt may force us to discontinue our operations.
We are a single metal producer, so if the market price of cobalt falls below the cost of production, we may be required to cease operations and again place the Kasese Cobalt Company refinery on a care and maintenance program until the market price of cobalt improves or we may be required to permanently close. Most companies produce cobalt in concert with the production of one or more other metals. In
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such cases, cobalt is usually the secondary metal and as long as the production of the major metal is economic, cobalt will continue to be produced and sold as a contribution to overheads, without absorbing an economic share of production and overhead costs. This is not the case with our Company. Our dependence on the refining of a single metal means that if cobalt market prices fall and remain depressed for a sustained period of time, we may be unable to fund a care and maintenance program, in which case we may be forced to dispose of our cobalt refineries.
The supply of pyrite at the Kasese Cobalt Company refinery is limited. Once the supply of pyrite is exhausted, we may discontinue our operations at Kasese.
The feedstock at Kasese Cobalt Company is limited to the stockpiles. There is no alternative supply at this time. Once the current pyrite stockpile is exhausted, which we anticipate will be in approximately 5.0 years based on the current targeted production, we may discontinue our operations at Kasese.
Seasonality affects our power source. Interruptions to our power source may adversely affect our production rate and cobalt quality, and could therefore adversely affect our financial condition.
The cobalt production of Kasese Cobalt Company is subject to seasonal variation in the wet and dry seasons in Uganda. During the two dry seasons of the year, low water levels in the Mubuku River will preclude the generation of the seven to eight megawatts of power necessary to operate the Kasese Cobalt Company refinery. During these periods the refinery must rely to some extent on the Ugandan electrical grid to supply the shortfall. The refinery is equipped with diesel generators, but the high cost of diesel-generated power makes it an unsustainable power source, except in times of very high cobalt prices. Ugandan electrical grid power failures are common, especially during the peak hours of consumption between 6 PM and 10 PM. If interruptions to our power supply are prolonged or frequent enough to adversely affect the production rate and quality of Kasese Cobalt Company cobalt, we may be forced to halt our business.
Our proprietary right to license the cobalt extraction process used at the Kasese Cobalt Company refinery is uncertain.
Our proprietary right to license the cobalt extraction process used at the Kasese Cobalt Company refinery is uncertain. The Bureau de Recherches Géologiques et Minères (a French company operating in the geoscience research and development field), who were instrumental in the early stages of the process development, could potentially claim a proprietary interest in the cobalt extraction process if an outside third party attempts to use this process technology. If this were to occur, we would assert our rights to a royalty and, as a last resort, may negotiate an agreement with the Bureau de Recherches Géologiques et Minères to share any royalty extracted. The ownership of the cobalt extraction process technology rights do not affect our operations, but may affect any royalty rights to which we become entitled.
The supply of limestone is vital to our production process. If the supply of limestone is interrupted, we may discontinue our operations.
Among other raw materials, limestone is vital to the production process and we consume between 4,000 and 5,000 tonnes per month. The present quarry has been largely exhausted of quality limestone and new supply arrangements must be made if production is to continue. If a new supply cannot be procured, our production process may discontinue. Furthermore, the new supply of limestone may affect our cost structure and our cash break-even price, depending on the quality of the limestone and the transportation costs.
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Political Risks
We may be adversely affected by corruption, political or economic instability, or threat of expropriation in Uganda, where our subsidiary, Kasese Cobalt Company, is located.
Our operating subsidiary, Kasese Cobalt Company, is located in Uganda where business activities may be affected by corruption, political instability, economic instability and threat of expropriation. Any changes in political or economic conditions which may adversely affect our business are beyond our control. The risks include civil unrest, expropriation, and high rates of inflation. Any one or more of these factors could compromise Kasese Cobalt Company's ability to achieve its targeted cobalt refining capacity and control its operating costs, or otherwise interfere with normal operation of the Kasese Cobalt Company refinery.
Our production facility is located in a region which is adversely affected by political and/or economic turmoil and social unrest.
Our production facility is located 50 kilometers from the border with the Democratic Republic of Congo. Ugandan rebel groups conduct raids into Uganda and during July 2007, such armed clashes with the Ugandan armed forces resulted in deaths of 50 combatants. Ugandan squatters are presently trying to occupy our land held for necessary reserve for our tailings dam. There have been clashes with fire arms being discharged and threats of death against our employees. Our employees at the worksite have been subject to threats of kidnap in 2007. In the immediate vicinity, we have an outbreak of the diseases of ebola which is causing labour shortages. Some of our key operating personnel are non African natives and if they leave Uganda, we may not be able to continue our production.
Financing Risks
We generate cash flow from a single source and may require additional funds to maintain business operations.
We currently generate cash flow from operations and there can be no assurance that future operations will generate sufficient cash flow to satisfy our ongoing cash requirements. In the past, Kasese Cobalt Company has relied on working capital loans. Given current high market prices for cobalt, we anticipate that we will realize sufficient cash flow from the sale of cobalt by Kasese Cobalt Company to cover our cash requirements for the next twelve months. If our revenues prove to be insufficient to meet our cash requirements, we may be required to issue additional shares or seek debt financing to finance our operations. We currently do not have a relationship with an investment bank who will undertake to provide us with working capital loans or any credit facilities. Without adequate cash flow from operations, and if we fail to obtain equity or debt financing when needed, there is a risk that our business operations would be significantly reduced or our business would fail.
Our international operations make us subject to fluctuations in foreign currency exchange rates which in turn may affect our results.
Being engaged in the business of processing and refining, our international operations make us subject to foreign currency fluctuations. Such fluctuations may adversely affect our financial positions and results. Our management may not take any steps to address foreign currency fluctuations that will eliminate all adverse effects and any steps taken may not be effective to eliminate all adverse effects. Accordingly, we may suffer losses due to adverse foreign currency fluctuations.
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The royalty payments we are required to make reduces the free cash flow available to us by 10%, and may adversely affect the viability of our operations.
We are required to pay royalties of 10% of the cash flow, as defined in the royalty agreement, generated by our Kasese Cobalt Company operation, as defined in the royalty agreement, up to a total of $10 million. The absolute amount of the royalty to be paid will depend on the level of free cash flow and this will depend on the price of cobalt. Due to the on-going royalty payments, the free cash flow available to us is reduced by 10% until an aggregate of $10 million is paid.
Risks Relating to Company Personnel
We are dependent on the services of qualified employees with experience in cobalt refining operations, and the loss of such employees may result in discontinuance of our operations.
We will continue to compete with other refinery companies in connection with the recruitment and retention of qualified employees with the skills and experience necessary for cobalt refining operations. At the present time, there is a supply of qualified workers available for operations at our Kasese Cobalt Company refinery. The continuation of such supply depends upon a number of factors, including, principally, the demand occasioned by other projects. In the immediate vicinity, we have an outbreak of the diseases of ebola, HIV and other diseases which is causing labour shortages. In the case of our operations in Uganda, due to the remoteness and civil unrest, new qualified workers may be difficult to find. There is unrest due to the civil war against the Lords Revolutionary Army in the northern part of Uganda. The civil wars in the eastern part of the Democratic Republic of Congo and in the Dafur region of Sudan are in close proximity to Uganda and may have the same deterrent effect. Without qualified employees, we will not be able to operate the refinery.
Conflicts of interest may arise as a result of our directors and officers being directors and officers of other companies.
The following persons are directors, officers and/or shareholders of other companies: the Chairman of the board of directors of Kasese Cobalt Company is also the Chairman of the board of directors of Kilembe Mines Limited; a director of Kasese Cobalt Company is also the President and Chief Operating Officer of Kilembe Mines. The President and director of our Company and the President and director of Mass Financial Corp. are the same individual. While we are engaged in the business of cobalt processing and refining, such associations may give rise to conflicts of interest from time to time. Our directors are required by law to act honestly and in good faith with a view to our best interests and to disclose any interest that they may have in any project or opportunity of ours. If a conflict of interest arises at a meeting of our board of directors, any director in a conflict must disclose his interest and abstain from voting on such matter. Conflicts may cause lost opportunities for us. In determining whether or not we will participate in any project or opportunity, our directors will primarily consider the degree of risk to which we may be exposed and our financial position at the time. Our directors and officers are free to accept other positions either as directors or employees of other companies, in which case these other positions may impact on the amount of time they are able to focus on our operations. Officers of our subsidiary Kasese Cobalt Company are full-time employees of that company and do not devote any significant time to other commercial activities.
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Kilembe Mines has exercised its sole right to appoint three of the eight directors of Kasese Cobalt Company, which appointments may result in a divergence of opinion in regards to how to operate Kasese Cobalt Company.
The board of directors of Kasese Cobalt Company consists of eight members. Of these members, Kilembe Mines has appointed three members and we have appointed four members to this board of directors. The eighth member is appointed by the remaining board members. If required, the Managing Director has an extra deciding vote. As a result, Kilembe Mines may seek to appoint three directors who may not agree with the decisions made by our appointees to the board. Under such circumstances, the operation of our Company may be disrupted.
The operations at our Kasese Cobalt Company refinery may be adversely affected due to a work stoppage by the unionized workforce.
Kasese Cobalt Company has approximately 260 employees, of which 103 employees belong to a non-compulsory Ugandan national union, Uganda Mines Metal and Allied Workers Union. With a unionized workforce, we need to enter into collective bargaining and any unresolved issues in negotiations could lead to work stoppages that would adversely affect our business by bringing our refinery operations to a halt.
Risks Relating to an Investment in our Securities
Our Articles of Association contain provisions indemnifying our officers and directors against all costs, charges and expenses incurred by them.
Our Articles of Association contain provisions that state, subject to applicable law, we shall indemnify every one of our directors or officers against all losses or liabilities which our directors or officers may sustain or incur in the execution of their duties. Our Articles of Association further state that no director or officer shall be liable for any loss, damage or misfortune which may happen to, or be incurred by us in the execution of their duties. Such limitations on liability may reduce the likelihood of litigation against our officers and directors and may discourage or deter our shareholders from suing our officers and directors based upon breaches of their duties to us, though such an action, if successful, might otherwise benefit us and our shareholders.
Investors of our Company may not be able to sell their shares, as our shares are not publicly traded on any securities exchange or national securities quotation system.
Our shares are not listed or quoted for trading on any securities exchange or national securities quotation system although they are traded over the counter (“OTC”) on the pink sheets electronic OTC market. Accordingly, our shareholders may be unable to sell their shares. We currently have no intention to list or otherwise qualify our ordinary shares for trading on any national securities exchange or securities quotation system.
United States investors may not be able to enforce their civil liabilities against us or our directors, controlling persons and officers.
It may be difficult to bring and enforce suits against us. We were incorporated under theInternational Business Companies Act(British Virgin Islands). All of our directors and officers are residents of countries other than the United States, and all of our assets are located outside of the United States. Consequently, it may be difficult for United States investors to effect service of process in the United States upon our directors or officers, or to realize in the United States upon judgments of United States
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courts predicated upon civil liabilities under the United StatesSecurities Exchange Act of 1934, as amended. There is substantial doubt whether an action could be brought successfully outside the United States against any of such persons or us predicated solely upon such civil liabilities.
We may not be able to declare and pay dividends or distribute cash by way of a return of capital.
Any future payment of dividends or distributions will be determined by our board of directors on the basis of our earnings, debt collection, financial requirements and other factors relevant to cash availability.
Item 4. Information on our Company
A. History and development of our Company.
We were incorporated in the Territory of the British Virgin Islands under theInternational Business Companies Act on November 25, 2003, under the name Nature Extrac Limited. We changed our corporate name to Blue Earth Refineries Inc. effective July 8, 2004.
Our registered office is located at Akara Building, 24 De Castro Street, Wickhams Cay I, Road Town, Tortola, British Virgin Islands. Our registered agent is Mossack Fonseca & Co. (B.V.I.) Ltd., P.O. Box 3136, Road Town, Tortola, British Virgin Islands.
Sale of 36569 Yukon
36569 Yukon held a cobalt refining plant in Lorrain Township, approximately 450 kilometres north of Toronto, Ontario, Canada. The plant has never operated commercially and has no operating history, due to the lack of a suitable source of cobalt at attractive pricing. In December 2006, we sold all of our interest in 36569 Yukon, including a long-term income debenture $5.4 million (€4,242,000) (principal amount) and a receivable of $1.9 million (CDN$2,142,104) under a credit facility for gross consideration of $2.7 million. Consideration received consisted of units in two British Virgin Islands open-ended investment companies. Out of the gross consideration, our Company repaid 36569 Yukon's liability of $261,188 due to Mass Financial and paid a commission of $195,106 at 8% to MFC Corporate Services SA (formerly MFC Merchant Bank SA, a subsidiary of Mass Financial). We assigned units of investment companies to settle the debt liability due to Mass Financial and deducted the commission. We received units in FE Global Undervalued Investments Ltd. and in Global Convertible Megatrend Ltd. as net consideration on December 29, 2006.
B. Business overview.
Current Operations
Our business assets consist of our 75% interest in Kasese Cobalt Company, a company which holds and operates a cobalt refinery in Kasese, Uganda.
Information Concerning Kasese Cobalt Company
Name and Incorporation
Kasese Cobalt Company was incorporated in the Republic of Uganda on June 24, 1992. The head office of Kasese Cobalt Company is located at the cobalt refinery located at Kasese/Mbarara Road, P.O. Box 524, Kasese, Uganda. The registered office of Kasese Cobalt Company is located at c/o Livingstone
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Registrars (U), Rwenzori House, P.O. Box 10314, Kampala, Uganda. Kasese Cobalt Company's business is administered principally from its head office and a logistics office at Suite WI, 3 Mukwasi House, Lumumba Avenue, Kampala.
Description of our interest in Kasese Cobalt Company
We own 75% of the outstanding share capital in Kasese Cobalt Company.
Kilembe Mines, which is 100% owned by the government of the Republic of Uganda, owns 25% of the outstanding share capital in Kasese Cobalt Company. Under the development agreement between the Ugandan Government and Kasese Cobalt Company, Kilembe Mines has the right to appoint three members to the board of directors and Blue Earth has the right to appoint four members.
Kilembe Mines is indebted to Kasese Cobalt Company in the amount of $1,634,256 and this amount has been fully reserved as a doubtful debt in the accounts of Kasese Cobalt Company. This debt is to be repaid out of dividends received by Kilembe Mines from Kasese Cobalt Company and, since Kasese Cobalt Company owes us a debt in the principal amount of approximately $120 million as at June 30, 2007, it is unlikely that dividends will be paid by Kasese Cobalt Company to its shareholders in the near future. However, it is expected that Kasese Cobalt Company will pay down the debt owed to us when Kasese Cobalt Company generates surplus cash from its operations.
We may distribute to our shareholders cash that we will receive from Kasese Cobalt Company as loan payments, net of any expenses, expenditures and funding for the refinery operations, by way of dividends and/or distributions.
Description of Business of Kasese Cobalt Company
Kasese Cobalt Company operates a cobalt project located in southwest Uganda and recovers the cobalt contained in a pyrite stockpile from a former copper mine. The metal refining operations involve the bioleaching of pyrite concentrate, solvent extraction of the dissolved cobalt and recovery through electro-winning. The Kasese Cobalt Company project, which is located approximately 420 kilometres west of Kampala, includes the Mubuku III hydro-electric power station that has a maximum deliverable capacity of about 9.9 megawatts. While the cobalt refinery was on care and maintenance status prior to recommencing operations in early 2004, electricity generated at Mubuku was sold to the state-owned grid of the Ugandan Electrical Transmission Company Limited. The feedstock at Kasese Cobalt Company is limited to the stockpiles and there is no alternative supply. Once the current pyrite stockpile is exhausted, which we anticipate will be in approximately 5.0 years based on the current targeted production, we will discontinue our operations of Kasese's refinery.
The project grew out of a feasibility study on the reopening of the Kilembe copper mine that had operated from 1956 to 1978. While it was not economic to recommence copper mining operations, an alternative was to produce cobalt from a pyrite stockpile using bio-leaching technology. The stockpile near Kasese graded 1.38% cobalt. Kasese Cobalt Company subsequently acquired the rights to the pyrite stockpile from Kilembe Mines under an agreement, which is set to expire in June 2012 unless Kasese Cobalt Company elects to extend it for an additional maximum term of 25 years. Kasese Cobalt Company may terminate the agreement at any time, if the refinery operation is not considered commercially viable.
When operating at full capacity, the power requirements of the Kasese Cobalt Company refinery range between seven and eight megawatts. There are three power sources available to the refinery: the plant is connected to the Ugandan power grid, on site equipment at the plant includes four diesel generators with a capacity of one Megawatt each, and the plant is serviced by a company owned river fed hydro-electric
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facility of three generation units with a capacity of 3.3 megawatts each. Excess power, when available, can be sold into Ugandan Electrical Transmission Company's power grid for local use.
Kasese Cobalt Company resumed a full-year normal operations and produced metal in 2005. Cobalt output at full capacity is 60 tonnes per month or 720 tonnes annually. The build-up in production, after a shutdown, is gradual due to the required increase in bacteria in the bio-leach tanks.
The Kasese Cobalt Company property is currently a fully operational cobalt bio-leach, solvent extraction and electro-winning refinery.
Description of the Feedstock
The feedstock at Kasese Cobalt Company is limited to the stockpiles and there is no alternative supply at this time. Once the current pyrite stockpile is exhausted, which we anticipate will be in approximately 5.0 years based on the current targeted production, we may discontinue our operations at Kasese. The feedstock of the refinery is a cobalt rich pyrite stockpile which was the result of 26 years and 16 million tonnes of copper mining by Kilembe Mines. The average grade of the stockpile was initially determined by Kilembe Mines, based on concentrator records between 1956 and 1982, as 1.36% cobalt. This average grade of cobalt was confirmed with the further analysis completed by Seltrust in 1982 (1.35% cobalt) and by Kilembe Mines in 1987 (1.4% cobalt). These results were further confirmed by Bureau de Recherches Géologiques et Minères in the original pre-feasibility study (1.27%) and the feasibility study (1.34%) . These grades were further confirmed by OMAC Laboratories Ltd. of Galway, Ireland by an analysis of 41 samples for an average of 1.43% cobalt.
Kasese Cobalt Company monitors the cobalt contained in the refinery plant feed on a daily basis and although such testing indicates a 1.40% cobalt feed since the beginning of operations, it continues to use the assayed test average of 1.38% in the calculation of reserves. The composition of the Kasese Cobalt Company refinery pyrite stockpile as determined by daily leach feed testing was as follows for June 30, 2007:
Composition of the Kasese Cobalt Company Refinery
Pyrite Stockpile at June 30, 2007
| Composite | High (%) | Low (%) | ||
| Cobalt | 1.64 | 1.17 | ||
| Copper | 0.66 | 0.26 | ||
| Nickel | 0.19 | 0.14 | ||
| Iron | 37.74 | 17.07 | ||
| Sulphur | 50.21 | 33.47 |
A detailed drilling and survey program, which has not been updated since November 2000, then established the volume of the remaining stockpiles as 709,000 tonnes at that time. Using the numbers from the November 2000 program and considering process consumption, we estimate this volume may have been reduced to approximately 387,000 tonnes by June 30, 2007.
The stockpile is located on the higher elevation of a 74 hectare site which is leased from Kilembe Mines. It is consumed by the application of high pressure water using two water cannons operating at 70 cubic metres per hour. The resulting slurry flows by gravity through a series of control trenches to a sump pump from where it is pumped to the processing plant through stainless steel pipes.
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Principal Holders of Voting Securities of Kasese Cobalt Company
We own 1,674 B class shares or 75% of the share capital of Kasese Cobalt Company. The Government of the Republic of Uganda, through its ownership of Kilembe Mines, owns 566 A class shares or 25% of the share capital of Kasese Cobalt Company.
Revenues
Current monthly cobalt production is projected at approximately 60 tonnes as of August 31, 2007. The revenue generated will depend upon sale volume, monthly production tonnage, ability to deliver and the cobalt price for the quality produced.
Principal Market
Kasese Cobalt Company markets its production through our agent, Mass Financial.
Seasonality of our Business
Kasese Cobalt Company's cobalt production is subject to seasonal variation in the wet and dry seasons in western Uganda. During the two dry spells per year (January/February and June/July), the output of the Mubuku III power station is reduced. During these periods, power failures of the national grid cause interruptions to production, which cause a loss of production quantity as well as a deterioration of quality. The wet season may also cause temporary disruptions to the ability to deliver production to Mombassa due to local road conditions. The on-site diesel generators cannot always compensate for national grid failures in time of low output from the Mubuku III power station.
Sources and Availability of Raw Materials
The source of raw materials for the Kasese Cobalt Company refinery is restricted to the pyrite stockpile located on the Kasese Cobalt Company refinery property. This stockpile contained an estimate of 920,000 tonnes of pyrite when the project was started (which was later reduced as the result of a more detailed survey in November 2000), and on June 30, 2007, there were approximately 387,000 tonnes remaining that may be processed. At the expected rate of consumption, the remaining stockpile will be exhausted in June 2012. As a result, our Company’s business has a limited lifespan. At that time, the site will have to be rehabilitated and abandoned. Due to the remoteness of the Kasese Cobalt Company site, it is not economic to import raw material to extend the life of the refinery.
Patents and Licenses; Industrial, Commercial and Financial Contracts; and New Manufacturing Processes
Kasese Cobalt Company has all the required permits and licenses to conduct its present business. These are extensive and varied, ranging from government royalty agreements and effluent discharge permits to a local business license. The process utilized by Kasese Cobalt Company was developed, in concert with the Bureau de Recherches Géologiques et Minères, during the planning and commissioning of the project. The process has subsequently been modified to such an extent that it has evolved into a process unique unto itself. There is no assurance that Bureau de Recherches Géologiques et Minères would not claim a proprietary interest in the process, and in previous years, there were discussions as to who held the proprietary rights to the cobalt extraction process. Kasese Cobalt Company is of the opinion that all proprietary rights to the process utilized by Kasese Cobalt Company are the property of Kasese Cobalt Company.
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Kasese Cobalt Company enters into various contracts for the supply of limestone (which have expired), hydrated lime, petroleum, energy and chemicals used in the production process in the normal course of business. Other permits and licenses include: waste water discharge, surface water abstraction, withholding tax exemption, keeping financial records in US dollars, limestone blasting, embedded power producer sales, power generation, cobalt export, employees union agreement, property.
Competitive Conditions
Many of our competitors are national or international companies with far greater resources, capital and facilities than us. Most of these companies produce cobalt in concert with the production of one or more other metals. In such cases cobalt is usually produced as a secondary metal and is considered as a contribution to overheads instead of absorbing an economic share of production and overhead costs for as long as the production of the major metal or metals is economic. This is not the case with our Company, which is currently engaged in the recovery and refining of cobalt only. The feedstock at Kasese Cobalt Company is limited to the stockpiles. As there is no alternative supply at this time, our Company’s business has a limited lifespan. Our dependence on the refining of a single metal means that if cobalt market prices fall and remain depressed for a sustained period of time, we will be forced to halt our business operations and to again place our facilities on a care and maintenance program or close the refinery.
If, after a shutdown, the market price of cobalt were to improve sufficiently to make our refining operations once again economically viable, the reactivation phase would take several months and even longer and substantial capital and if changes in technology, permit requirements, environmental legislation or other operational considerations require us to undertake significant upgrades to our facilities. Those of our competitors who may have been able to fund the operational status of their facilities through the production and sale of other metals during the period of our care and maintenance program would likely be able to recommence their cobalt refining operations much more quickly than us, and thereby stand a much better chance of taking a lead in market share for cobalt sales.
Governmental Regulations
Refining operations are subject to a wide range of government regulations such as restrictions on production, price controls, tax increases, expropriation of property, environmental protection, protection of agricultural territory or changes in conditions under which minerals may be marketed, any of which could have the effect of reducing or preventing us from exploiting any pyrite deposits on our property.
C. Organizational Structure.
The names of our subsidiaries, their jurisdiction of incorporation, our percentage voting ownership and the owner of such interests are as follows:
| Jurisdiction of | Shareholding of | |||||
| Incorporation or | the Owner of | |||||
| Name of Subsidiary | Organization | Owner of Interests | Interests | |||
| Kasese Cobalt Company Limited | Uganda | Blue Earth Refineries Inc. | 75.0% | |||
| Blue Earth Refineries (Canada) Inc. | Yukon, Canada | Blue Earth Refineries Inc. | 100.0% |
D. Property, Plants and Equipment.
Our office is located at Suite 803, 8/F, Dina House, RuttonjeeCentre, 11 Duddell Street, Central, Hong Kong SAR, China. This space accommodates all of our executive and administrative offices. We have a registered office at Akara Building, 24 De Castro Street, Wickhams Cay I, Road Town, Tortola, British Virgin Islands.
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We believe that our existing facilities are adequate for our needs through the end of the year ending June 30, 2008. Should we require additional space at that time, or prior thereto, we believe that such space can be secured on commercially reasonable terms.
Kasese Cobalt Company Cobalt Refinery
Due to weak cobalt prices, we placed the plant on a care and maintenance program under which all cobalt production ceased by September 2002. Due to improved cobalt prices, operations were recommenced at the plant in December 2003, and we are now engaged in the extraction of cobalt from the pyrite stockpile. As of June 30, 2007, the stockpile contained approximately 387,000 tonnes of material with an average grade of 1.38% cobalt. There is no alternative supply. Once the current pyrite stockpile is exhausted, which we anticipate will be in approximately 5.0 years based on the current targeted production, we will discontinue our operations of Kasese's refinery. As a result, our Company’s business has a limited lifespan. The plant recovers cobalt metal from cobalt concentrate using a combination of bio-leaching, solvent extraction and electro-winning. Site construction of the plant commenced in November 1997 and was completed on July 1, 1999. Plant commissioning ran into various difficulties which continued from completion until June 30, 2001. The plant currently employs approximately 260 personnel.
Cobalt output at the refinery is budgeted at 60 tonnes per month or 720 tonnes annually. The original design parameters of the project included an annual refining capacity of 1,000 tonnes of cobalt. The Kasese Cobalt Company refinery has never been or will ever be able to attain the targeted refining capacity, resulting in higher refining costs per unit produced.
Kasese Cobalt Company owns a hydro-electric power station with three hydro-electric generation units with a combined capacity of 9.9 megawatts. The power requirements of the Kasese Cobalt Company refinery range between seven and eight megawatts. Subject to various government approval, we may sell excess power into the Ugandan Electrical Transmission Company's power grid. The hydro-power plant is approximately 22 kilometres from the cobalt refinery. Demands for electricity on the western Ugandan power grid continue to be in excess of generating capacity during heavy load periods. But there is no assurance that such sales will occur.
The site of the refinery is three miles south of Kasese on the Kasese to Mbarara Road. The latitude and longitude references are 30 degrees, 5 minutes east and 0 degrees, 9 minutes north. The refinery site is 1,250 metres long by 750 metres wide. There is a further 40 hectares of adjacent land owned by Kasese Cobalt Company which is available for tailings pond expansion.
Kasese Cobalt Company utilizes bioleaching as the primary stage of cobalt removal. There are five bioleaching tanks each with a production utilization capacity of 1,280 cubic metres. During normal production, these tanks contain 23.5 tonnes of cobalt in solution. The tanks are mechanically agitated while air is being forced through the pyrite solution to create the necessary environment for the bioleach bacteria to break down the raw material into a solution which can be fed through the iron removal and stabilization phases of the process.
In the iron removal stage, the solution pH is adjusted to precipitate the iron content and a belt filter process removes the solids contained in the solution. The belt filter has a rated capacity of 65 cubic metres per hour.
The solution is then fed into the lower terrace for solvent extraction of the other metals in solution. Using pH adjustment and various chemicals, the trace metals are separated into different streams. Zinc is extracted followed by copper then cobalt and finally nickel. Copper and nickel are recovered in the form of hydroxides. These processes result in an electrolyte solution containing between 4.5 and 5.0 grams of
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cobalt per litre, which is then electroplated into 99.8% cobalt metal in the electrowinning tank house. The cobalt is, by electrolysis, plated onto cathodes which are then removed in rotation and the cobalt metal is recovered for cleaning, burnishing and crushing into the final product, crushed cathode cobalt.
Effluent from the process is treated to precipitate contaminates and discharged into tailings dams. Once the discharge complies with environmental discharge standards, it is then released to the Rokoki River at a maximum rate of 104 cubic metres per hour.
Plan of Operations
Our current overall plan is to operate the Kasese Cobalt Company refinery only during such time when cobalt market price makes operations profitable until its pyrite stockpile is exhausted. Our immediate focus is to try to achieve a steady capacity with saleable quality of the production while the cobalt price is at the present levels. Our secondary goal is to reduce the costs of production through the reduction in the volume of refining chemicals being consumed.
Item 5. Operating and Financial Review and Prospects
The following discussion and analysis of our financial condition and results of operations for the years ended June 30, 2007, 2006 and 2005 should be read in conjunction with our consolidated financial statements and related notes included in this annual report. Our financial statements included in this annual report were prepared in accordance with United States of America's generally accepted accounting principles.
A. Operating results.
Our results of operations have been, and may continue to be, affected by many factors of a global nature, including security, economic and market conditions, raw materials, logistic, the availability of capital, the level and volatility of prices and interest rates, currency values, commodities prices and other market indices, technological changes, the availability of credit, inflation and legislative and regulatory developments and predetermined reserves of which we have a limited supply. Factors of a local nature, which include the political, social, financial and economic stability, the availability of capital, technology, workers, engineers and management, geological factors and weather conditions, also affect our results of operations. See "Key Information – Risk Factors". As a result of the economic and competitive factors discussed above, our results of operations may vary significantly from period to period. As a result of our Company's limited reserves, our business has a limited lifespan.
The market for cobalt is negotiated between the producers or an intermediary traders and the end users. Cobalt is not listed on any trading exchange, so no official current market price exists. BHP Billion Limited offers small quantities (usually five or ten tonne lots) for sale on its company web site. The London-based Metal Bulletin magazine is published weekly and gives high and low prices for 99.3% and 99.8% cobalt. These prices are produced from information made available to the magazine and do not purport to reflect the average of all transactions. Many producers and customers enter into long term contracts for the supply of a given volume of cobalt at prices that are fixed or determined by formula based on Metal Bulletin quotes. Within the two concentrate grades of 99.3% and 99.8% there is a large variation in level of various impurities measured in parts per million. Some impurities are of a major concern to some consumers and not to others, depending on the final product incorporating the metal. Thus the market is further complicated by these different levels of acceptability. Due to the recent volatility of prices, consumers have purchased heavily when prices were rising, fearing higher costs and have avoided any inventory build up as prices fall, waiting for better prices.
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Year Ended June 30, 2007 Compared to Year Ended June 30, 2006
Our Company sold 1.4 million pounds of cobalt for $28.3 million in the fiscal year 2007, compared to 1.6 million pounds of cobalt for $18.1 million in the fiscal year 2006. The average price realized was $20.46 per pound in the fiscal year 2007, compared to $11.27 per pound in the fiscal year 2006.
The cost of sales was $16.5 million for the fiscal years 2007 and 2006, respectively. The cost of sales included depreciation charges of $5.0 million and $5.8 million and the rehabilitation expense was $0.2 million and $0.2 million in fiscal years 2007 and 2006, respectively. The gross profit was $11.7 million and $1.6 million for the fiscal years 2007 and 2006, respectively. The increase in gross profit was due to an increase in the price of cobalt.
The general and administrative expenses were $3.6 million and $3.3 million for the fiscal years 2007 and 2006, respectively. The increase of approximately 9% is primarily due to an increase in business activities. The operating income was $8.1 million for the fiscal year 2007, compared to operating loss of $1.6 million in the same period in 2006.
We recognized an equity loss of $nil and $1.9 million for the fiscal years 2007 and 2006, respectively, representing our proportionate share in the operating loss of our equity method investee. In December 2006, we sold all of our interest in our equity method investee and did not have any equity income or loss in the current fiscal year. We recognized an accounting gain of $1.3 million and $nil on the sale of the equity method investee in fiscal years 2007 and 2006, respectively.
Net income was $10.4 million (or basic earnings per share of $0.69) for the fiscal year 2007, compared to a net loss of $3.3 million (or basic loss per share of $0.22) for the fiscal year 2006.
Year Ended June 30, 2006 Compared to Year Ended June 30, 2005
Our Company sold 1.6 million pounds of cobalt for $18.1 million in the fiscal year 2006, compared to 1.1 million pounds of cobalt for $15.4 million in the fiscal year 2005. The average price realized was $11.27 per pound in the fiscal year 2006, compared to $13.50 per pound in the fiscal year 2005.
The cost of sales was $16.5 million and $12.5 million for the fiscal years 2006 and 2005, respectively. The cost of sales included depreciation charges of $5.8 million and $4.6 million and the rehabilitation expense was $0.2 million and $0.1 million in fiscal years 2006 and 2005, respectively. The gross profit was $1.6 million and $3.0 million for the fiscal years 2006 and 2005, respectively. The decrease in gross profit was due to lower realized prices in 2006.
The general and administrative expenses were $3.3 million and $3.8 million for the fiscal years 2006 and 2005, respectively. The decrease was primarily due to insurance expenses reduced by $0.3 million in fiscal year 2006. The operating loss was $1.6 million and $0.8 million for the fiscal years 2006 and 2005, respectively.
We recognized an equity loss of $1.9 million and $2.9 million for the fiscal years 2006 and 2005, respectively, representing our proportionate share in the operating loss of our equity method investee.
Net loss was $3.3 million (or basic loss per share of $0.22) and $3.7 million (or basic loss per share of $0.24) for each of the fiscal years 2006 and 2005, respectively.
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Application of Critical Accounting Policies
The preparation of financial statements in conformity with applicable generally accepted accounting principles requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.
Our management routinely makes judgements and estimates about the effects of matters that are inherently uncertain. As the number of variables and assumptions affecting the probable future resolution of the uncertainties increase, these judgements become even more subjective and complex. We have identified certain accounting policies, described below, that are the most important to the portrayal of our current financial condition and results of operations. Our significant accounting policies are disclosed in Note 1 to our consolidated financial statements included in this annual report.
Revenue Recognition
Our Company's primary business is cobalt refining and our revenue primarily comes from the sale of cobalt. Our Company receives orders from the sales agent, and ships the finished goods as instructed. The revenue is recognized when the finished goods are on vessel where the buyers take over title of the goods, the terms of the sales are known and complied with and no significant Company obligations remain and collectibility is reasonably assured.
Valuation of Equity Method Investments and Available for Sale Securities
Until our sale of 36569 Yukon in December 2006, we had an equity method investment which was accounted for by the equity method. Under the equity method, the investment was initially recorded at cost, then reduced by dividends and increased or decreased by our proportionate share of the investee's net earnings or loss.
Our Company’s available for sale securities are stated at their quoted market bid price as an active market is available. Any unrealized holding gains or losses are reported as a separate component of comprehensive income until realized.
When there has been a loss in value other than a temporary decline, the equity method investment and available for sale securities would be written down to recognize the loss.
A decline in value may be only temporary in nature or may reflect conditions that are more persistent. Declines may be attributable to general market conditions, either globally or regionally, that reflect the prospects of the economy as a whole or prospects of a particular industry or a particular company. Such declines may or may not indicate the likelihood of ultimate recovery of the carrying amount of a security. We regularly reviewed our position to determine whether an other than temporary decline existed.
In determining whether the decline in value was other than temporary, quoted market price, if available, was not the only deciding factor. We considered, but such consideration was not limited to, the following factors:
| (a) | trend of the quoted market price and trading volume, if available; | |
| (b) | financial position and results for a period of years; | |
| (c) | liquidity or going concern problems of the investee; |
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| (d) | changes in or reorganization of the investee and/or its future business plan; | |
| (e) | outlook of the investee's industry; | |
| (f) | the current fair value of the investment (based upon an appraisal thereof) relative to its carrying value; and | |
| (g) | our business plan and strategy to divest the security or to restructure the investee. |
Impairment of Long-Lived Assets
We test our long-lived assets for recoverability whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable and an impairment loss is measured as the amount by which their carrying amounts exceed their fair value using the estimated future undiscounted cash flows. The estimated future undiscounted cash flows, based on reasonable and supportable assumptions and projections, require our management to make subjective judgments. Depending on the assumptions and estimates used, the estimated future undiscounted cash flows can vary within a wide range of outcomes. Our management considers the likelihood of possible outcomes in determining the best estimate of future undiscounted cash flows.
Rehabilitation Provision
Our refinery activities are subject to various laws, statutes, ordinances and contracts governing the protection of the environment. We adopted Financial Accounting Standards Board Statement ("FAS") No. 143,Accounting for Asset Retirement Obligations, which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs.
FAS No. 143 applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or the normal operation of a long-lived asset, except for certain obligations of lessees. A legal obligation is an obligation that a party is required to settle as a result of an existing or enacted law, statute, ordinance, or written or oral contract or by legal construction of a contract under the doctrine of promissory estoppel.
In compliance with the FAS No. 143, we recognize the fair value of a liability for an asset retirement obligation in the period in which it is incurred if a reasonable estimate of fair value can be made. If a reasonable estimate of fair value cannot be made in the period the asset retirement obligation is incurred, the liability shall be recognized when a reasonable estimate of fair value can be made. Upon initial recognition of a liability for an asset retirement obligation, we capitalize an asset retirement cost by increasing the carrying amount of the related long-lived asset by the same amount as the liability. In periods subsequent to initial measurement, we recognize period-to-period changes in the liability for an asset retirement obligation resulting from (a) the passage of time and (b) revisions to either the timing or the amount of the original estimate of undiscounted cash flows.
Accounting for the rehabilitation provision requires management to make estimates of the future costs that we will incur to complete the reclamation and remediation work required to comply with the current laws, statutes, ordinances and contacts. We make these estimates based on the current data. We also need to make interpretation of such laws, statutes, ordinances and contacts, and our interpretation may be different from that of the lawmakers, regulatory agencies or other contracting parties. Furthermore, future changes and amendment to the laws, statutes, ordinances and contracts usually increase the extent of the reclamation and remediation work required to be performed. Actual costs incurred in the future periods
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could differ our current estimates. Any such increases in the future costs could have material adverse impact on our financial positions and result of operations.
Inventories
Our inventories consist of primarily spare parts and materials, and to a lesser degree work-in-progress and finished goods. Spare parts and materials are stated at the lower of the weighted average cost or replacement cost. We review the valuation of inventory periodically. The primary factors that affect the valuation of inventory include the short-term and long-term metals prices and the current production process which includes, but not limited to, the input factors such as labor, fuel and energy, materials and supplies, the quality of the finished goods, the production level, productivity and efficiency.
Work-in-progress represents materials that are currently in the process of being converted into a saleable product. We measure the work-in-progress in terms of a percentage of finished goods. Such estimation is based on our production and process engineering reports. The work-in-progress is valued at the weighted average cost of production and the net realizable value of its finished product less additional cost to complete, whichever is lower.
Finished goods of cobalt are stated at the lower of weighted production cost or net realizable value. The production costs include the material cost, depreciation, direct labor and manufacturing overhead.
We review the valuation of the work-in-progress and finished goods periodically, and not less than on a quarterly basis.
The allocation of cost to work-in-progress and finished goods involves the use of estimates and assumptions, which include the production and engineering data. A degree of judgment is involved in determining such assumptions and estimates and no assurance can be given that actual results will not differ significantly from the corresponding estimates and assumptions, until all work-in-progress has been converted into finished goods.
We review our inventory activity reports regularly, and perform a stock count at least once a year. We review our inventory activity reports as part of our production planning and control procedure, as well as financial control. During such review, we identify the slow-moving, obsolete or excess spare parts and materials, if any. Our production engineers may modify our production process, to a limited extent, to use such slow-moving or excess materials in the production, or put them into alternative use. The slow-moving items may indicate that such items are damaged. Management usually reviews the inventory activity reports with our finance department to determine whether a write-down or valuation allowance is required. Unless the items are badly damaged, the review of the slowing moving, excess or obsolete items and their alternative use are judgmental and their ultimate outcome may be different from what we estimate. At June 30, 2007, our Company had no equity method investments.
Recent Developments
In September 2007, we entered into a Syndicated Unpriced Forward Sale Derivative Agreement with Mass Financial Corp. (together with its subsidiaries – “Mass”). We agreed to deliver 696 metric tons of our cobalt products over a term of one year in exchange for an initial prepayment amount of $18,400,000, with a floor price of $12 per lb. Adjustment amounts, first six months being 45% of balance between the floor price and the resale price, and seven to twelve months being (i) in case the resale price per lb. is equal or less than $20, 75%, or (ii) in case the resale price exceeds $20, 75% of the balance between the floor price and $20 plus 25% of the balance between $20 and the resale price, as determined in the future, will be paid 15 days after each calendar quarter. Pursuant to an Underwriting and Syndication Agreement
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between our Company and Mass, we agreed to pay Mass an underwriting fee of 10% of the prepayment amount and a syndication fee of $670,000. The syndication fee was paid by 239,286 shares of our common stock valued at $2.80 per share.
In addition, we declared a cash distribution of $1.00 per share to our holders of ordinary shares, totalling $15.5 million in September 2007.
B. Liquidity and capital resources.
As of June 30, 2007, we had cash on hand of $1.6 million and as of June 30, 2006, we had cash on hand of $1.8 million.
Operating Activities
The operating activities provided cash of $7.5 million in the fiscal year 2007, compared to $1.3 million in the fiscal year 2006. Cash provided by operating activities increased in the fiscal year 2007, largely due to net income of $10.4 million as compared to net loss of $3.3 million in the fiscal year 2006. The increase in cash flow from operating activities reflected the higher price of cobalt in the current year.
At present, the revenue earned by us comes from cobalt sales of Kasese Cobalt Company.
We believe that these arrangements will permit us to generate sufficient cash flow from operations to meet our working capital and other requirements for the next twelve months. There are no material capital expenditure commitments at the Kasese Cobalt Company refinery. Given current market demand for Kasese cobalt, we anticipate that our cash flow from Kasese Cobalt Company will meet our operating expenses.
Investing Activities
The investing activities used cash of $0.1 million and $0.2 million on capital assets in the fiscal years 2007 and 2006, respectively.
Financing Activities
The financing activities used cash of $7.6 million on dividend payment during the fiscal year 2007, compared to $23,000 on the repurchase of shares during the fiscal year 2006.
Our Company declared and paid a cash distribution of $0.50 per share to our holders of ordinary shares, totalling $7.6 million in fiscal year 2007.
We had no material commitments to acquire assets or operating businesses at June 30, 2007. We do not anticipate any acquisition of businesses or commitments to projects in the future. We intend to pay to our shareholders a distribution by way of return of capital in the future, subject to availability of cash and our capital requirements.
Foreign Currency
Substantially all of our operations are conducted in US dollars.
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Derivative Instruments
Derivatives are financial instruments, the payments of which are linked to the prices, or relationships between prices, of securities or commodities, interest rates, currency exchange rates or other financial measures. Derivatives are designed to enable parties to manage their exposure to interest rates and currency exchange rates, and security and other price risks.
We do not have any derivative instruments which are subject to the requirements of FAS No. 133,
Accounting for Derivative Instruments and Hedging Activities.
Inflation
We do not believe that inflation has had a material impact on our revenues or income over the past two fiscal years. However, increases in inflation could result in increases in our expenses, which may not be readily recoverable in the price of products sold to our customers. To the extent that inflation results in rising interest rates and has other adverse effects on capital markets and the economy, it could adversely affect our financial position and profitability.
C. Research and development, patents, licenses, etc.
We do not currently, and did not previously, have research and development policies in place. Over the past three fiscal years, we have not expended any material amounts on research or development.
D. Trend information.
The commodity price of cobalt has a direct impact on our revenue prospects and our ability to raise capital. Generally in 2007, the trend for the price of cobalt has been upward. However, management is not optimistic with the current price.
E. Off-balance sheet arrangements.
We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resource that is material to investors.
F. Tabular disclosure of contractual obligations.
| Payments Due by Period | ||||||||||||
| (in thousands) | ||||||||||||
| Contractual Obligations as at | Less than | 2 – 3 | 4 – 5 | More than | ||||||||
| June 30, 2007 | 1 Year | Years | Years | 5 Years | ||||||||
| Long-term obligations | $ | - | $ | - | $ | - | $ | - | ||||
| Capital lease obligations | - | - | - | - | ||||||||
| Operating lease obligations | 4 | 4 | - | - | ||||||||
| Purchase obligations | 150 | - | - | - | ||||||||
| Other long-term liabilities reflected | - | - | - | 3,000 | ||||||||
| on the balance sheet under GAAP(1) | ||||||||||||
| Total | $ | 154 | $ | 4 | $ | - | $ | 3,000 | ||||
(1) Rehabilitation Provision.
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Cash outlays for our contractual obligations and commitments identified above are expected to be funded by cash on hand. Purchase obligations can typically be cancelled with little or no financial penalty.
G. Safe harbor.
The safe harbor provided in Section 27A of the Securities Act and Section 21E of the Exchange Act ("statutory safe harbors") shall apply to forward-looking information provided pursuant to Item 5.E and F. All information set out in Item 5.E.1 and 5.E.2 is deemed to be a forward looking statement as that term is defined in the statutory safe harbors, except for historical facts.
Item 6. Directors, Senior Management and Employees
A. Directors and senior management.
The following table sets forth the names, business experience and function/areas of expertise of each of our directors and officers:
| Name Office Held Age | Area of Experience and Functions in Blue Earth | ||
| Michael J. Smith Director, President and Secretary Age: 59 | Director since 2004. As director, Mr. Smith is responsible for the management affairs of our Company, our day-to-day operations, our financing functions and for developing our strategic direction. | ||
| Rajesh Kumar Singhal Director Age: 45 | Director since 2005. As a director, Mr. Singhal is responsible for the management and supervision of the affairs and business of our Company. | ||
| Nowroz Jal Cama Director Age: 63 | Director since 2005. As a director, Mr. Jal Cama is responsible for supervision of the affairs and business of our Company. |
Michael J. Smith – Director, President, Chief Executive Officer and Secretary
Michael J. Smith has been our President, Chief Executive Officer, Secretary and a director since 2004. Mr. Smith has extensive experience in advisory services, corporate finance and restructuring. Mr. Smith was the President and Chief Executive Officer of KHD Humboldt Wedag International from 1996 to March 7, 2006 when Mr. Smith resigned from such positions. Mr. Smith has been the Chief Financial Officer from 2003 to October 15, 2007 and Secretary of KHD Humboldt Wedag International and a director since 1986. KHD Humboldt Wedag International is a publicly traded company listed on the New York Stock Exchange with its common shares registered with the SEC under theSecurities Exchange Act of 1934. Mr. Smith is also Chief Executive Officer, Chief Financial Officer and a director of Cathay Merchant Group, Inc., a public company with its common shares registered with the SEC under theSecurities Exchange Act of 1934. Mr. Smith is also the President and a director of Mass Financial.
Rajesh Kumar Singhal – Director
Rajesh Kumar Singhal has been a director since 2005. Rajesh Kumar Singhal obtained a Diploma in Tool and Die Making from NTTF Tellicherry Kerola and is employed as a training officer.
Nowroz Jal Cama – Director
Nowroz Jal Cama has been a director since 2005. Nowroz Jal Cama has extensive experience in banking,
24
corporate finance and human resources development. From 2005 to June 2007, Nowroz Jal Cama was a director of Sasamat Capital Corporation (a related party prior to its merger with and into KHD Humboldt Wedag International).
There are no family relationships between any of our executive officers or directors. There are no arrangements or understandings with major shareholders, customers, suppliers or others pursuant to which any person referred to above was selected as a director or executive officer.
B. Compensation.
Executive Compensation
The following table provides a summary of compensation paid by us during the fiscal year ended June 30, 2007 to our President and Secretary and to our next four most highly paid executive officers who received a combined salary and bonus during such period in excess of $100,000:
SUMMARY COMPENSATION TABLE
| Annual Compensation | Long Term Compensation | ||||||||||||
| Securities | |||||||||||||
| Other | Under | All other | |||||||||||
| Name and Principal | Annual | Options/SARs | Compen- | ||||||||||
| Position | Year | Salary | Bonus | Compensation | Granted | sation | |||||||
| Michael J. Smith | 2007 | 85,000 | Nil | Nil | Nil | Nil | |||||||
| President, Secretary | |||||||||||||
| and Director | |||||||||||||
Option Grants During the Most Recently Completed Financial Year
We did not grant any stock options to our directors and executive officers as compensation for services during the financial year ended June 30, 2007.
Aggregated Option Exercises During the Most Recently Completed Financial Year and Financial Year-End Option Values
No options were exercised during the financial year ended June 30, 2007.
Option and SAR Repricing
No options were repriced during the financial year ended June 30, 2007.
Directors' Compensation
During the 2007 fiscal year, Michael J. Smith did not receive any compensation as a director of our Company. Rajesh K. Singhal and Nowroz Jal Cama received $600 per month as compensation as a director of our Company and $150 for each meeting of directors that they attended. We also reimburse our directors and officers for expenses incurred in connection with their services as our directors and officers.
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Stock Option Plan
We do not currently have a stock option plan.
C. Board practices.
The election and retirement of our directors are provided for in our Articles of Association. Each director holds office until his or her successor takes office or until his or her death, resignation or removal.
At our annual meeting of shareholders held in 2004, five directors were elected for five year terms. In 2005, four of our directors, Mr. Shuming Zhao, Dr. Kelvin Yao, Dr. Stefan Feuerstein and Ms. Silke Brossmann, each resigned independently. Dr. Feuerstein resigned on March 9, 2005, Mr. Zhao and Dr. Yao resigned on March 15, 2005 and Ms. Brossmann resigned on April 11, 2005. Two of the resulting vacancies on our board of directors were filled by a resolution of our remaining director. Mr. Rajesh Kumar Singhal and Mr. Nowroz Jal Cama were appointed as directors to fill the vacancies created by these resignations. Each of them will serve the remaining terms of the directorships to which they were appointed. Commencing with the 2009 annual meeting of shareholders, and as permitted under the corporate law of the British Virgin Islands, our directors will be divided into five classes: Class I, Class II, Class III, Class IV and Class V, as equal in number as possible.
Audit Committee
We do not currently have an audit committee.
Compensation Committee
We do not currently have a compensation committee.
D. Employees.
As of June 30, 2007, Kasese Cobalt Company, our operating subsidiary, had approximately 260 employees, of which 103 employees belonged to a non-compulsory Ugandan national union, Uganda Mines Metal and Allied Workers Union. Their current collective agreement is to expire on January 31, 2008. We expect to extend the agreement to January 2009 with similar terms.
E. Share ownership.
There were 15,493,941 ordinary shares of our Company issued and outstanding as of November 14, 2007. The number of our ordinary shares owned by our directors or executive officers as of that date were:
| Name | Number of Ordinary Shares | |||
| Office Held | Beneficially Owned | Percentage(1) | ||
| Michael J. Smith(2) | 1,639,400(3) | 10.6% | ||
| Rajesh Kumar Singhal | Nil | Nil | ||
| Nowroz Jal Cama | Nil | Nil |
| (1) | Based on 15,493,941 ordinary shares issued and outstanding as at November 14, 2007. |
| (2) | Michael J. Smith is the President and a director of Mass Financial Corp. |
| (3) | This number includes 85,000 directly held by Michael Smith and 1,554,400 held by Mass Financial Corp. |
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Item 7. Major Shareholders and Related Party Transactions
A. Major shareholders.
The following table sets forth, as of November 14, 2007, the only persons known to us to be the beneficial owner of more than five (5%) of our ordinary shares:
| Percentage of | ||||
| No. of Ordinary | Outstanding | |||
| Name of Shareholder | Shares Owned | Ordinary Shares(1) | ||
| Peter Kellogg | 4,863,546(2) | 31.4%(2) | ||
| Mass Financial Corp. | 1,554,400 | 10.0% | ||
| Lloyd I. Miller, III | 1,903,203(3) | 12.3%(3) | ||
| The PNC Financial Services Group, Inc.(4) | 1,056,965(4) | 6.8%(4) |
| (1) | Based on 15,493,941 ordinary shares issued and outstanding as at November 14, 2007. | |
| (2) | In the public filings made by Peter Kellogg with respect to his shares in our Company, 4,290,846 shares are held by IAT Reinsurance Company Ltd., 522,700 shares are held by a foundation which is jointly administered by Mr. Kellogg and his wife and 50,000 shares are held by a partnership controlled by Mr. Kellogg. Mr. Kellogg disclaims beneficial ownership of the shares owned by IAT Reinsurance Company. | |
| (3) | In the public filings made by Lloyd I. Miller, III with respect to his shares in our Company, Lloyd I. Miller, III shares voting and dispositive control over 1,903,203 shares as an investment advisor to the trustee of certain family trusts and with respect to shares owned by his wife. | |
| (4) | In the public filings made by The PNC Financial Services Group with respect to shares in our Company, the company disclosed that such shares are held directly or indirectly through subsidiaries of The PNC Financial Services Group. Such shares are held in trust accounts for an undisclosed beneficiary in which Lloyd I. Miller, Jr. was grantor and PNC Bank, National Association serves as trustee. |
B. Related party transactions.
Other than as disclosed herein, to the best of our knowledge, there have been no material transactions since the beginning of our preceding three financial years to the date hereof to which we were or are a party and in which any of our directors or officers, any relative or spouse of any director or officer, or any individual owning, directly or indirectly, an interest in our voting power that gives it significant influence over us, has or will have a direct or indirect material interest nor were any of our directors or officers, any relatives or spouses of such directors or officers, or any individuals owning, directly or indirectly, an interest in our voting power that gives them significant influence over us, indebted to us during this period.
In 2004, Kasese Cobalt Company entered into an exclusive distribution agreement for an initial term ending December 31, 2014, to sell all of the cobalt produced by Kasese Cobalt Company with MFCC, a subsidiary of Mass Financial. In June 30, 2005, MFCC charged agency fees of $1.50 per pound of cobalt sold. Our Company renegotiated agency fees with MFCC and from July 1, 2005 to June 30, 2006, the agency fees were revised to $0.50 per pound of cobalt sold. MFCC also charged fees for additional services rendered to our Company. Total marketing cost of $1.3 million, $1.3 million and $2.2 million were paid or payable to MFCC for the years ended June 30, 2007, 2006 and 2005, respectively.
Our Company has an amount due in the ordinary course from (to) MFCC in the amount of $4.8 million and $3.5 million at June 30, 2007 and 2006, respectively. During the years ended June 30, 2007, 2006
27
and 2005, our Company purchased supplies and materials amounting to $nil, $nil and $1.4 million from MFCC.
Kilembe Mines owes our Company $1.6 million in an unsecured loan which is payable through forfeiture of any future dividends if payable by Kasese Cobalt Company. This amount is fully reserved because of the uncertainty that Kasese Cobalt Company will pay dividends.
During 2007, the Company paid $0.2 million to a subsidiary of Mass Financial as a commission to arrange the sale of equity method investee. The Company has an amount due to Mass Financial in the amount of $0.6 million as at June 30, 2007 and 2006, respectively.
These transactions were in the normal course of operations and were measured at the exchange value, which is the amount of consideration established and agreed to by the affiliated parties.
C. Interests of experts and counsel.
None of the named experts or counsellors employed on a contingent basis owns shares in our Company or our subsidiaries or has a material, direct or indirect economic interest in our Company.
Item 8. Financial Information
A. Consolidated statements and other financial information.
Our financial statements are stated in United States dollars and are prepared in accordance with accounting principles generally accepted in the United States of America.
Financial Statements filed as part of this annual report:
The following financial statement of our Company are filed as part of this annual report:
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Legal Proceedings
There are no legal proceedings to which we are a party and, to our knowledge, no such proceedings are pending.
Cash Distributions
During our fiscal year ended June 30, 2007, our board of directors declared and paid a cash distribution of $0.25 per share on our issued and outstanding ordinary shares to our shareholders of record as of April 2, 2007. We distributed an aggregate of $3,785,709 to our shareholders of record. Additionally, our board of directors declared and paid a cash distribution of $0.25 per share on our issued and outstanding ordinary shares to our shareholders of record as of September 18, 2006. We distributed an aggregate of $3,785,709 to our shareholders of record. During our fiscal year ended June 30, 2005, our board of directors distributed $1.8 million to KHD Humboldt Wedag International prior to the distribution of our ordinary shares to the shareholders of KHD Humboldt Wedag International.
We may pay additional cash distributions on our shares in the foreseeable future. However, any future payment of dividends or distributions will be determined by our board of directors on the basis of our earnings, financial requirements and other relevant factors. Successful operation of the cobalt assets is subject to a number of risks and uncertainties, including those described under the heading "Risk Factors".
B. Significant changes.
Our management is not aware of any significant changes.
Item 9. The Offer and Listing
A. Offer and listing details.
Our ordinary shares were first published by the Pink Sheets LLC on May 26, 2005. The following table sets forth the high and low sales of prices of our ordinary shares on the Pink Sheets LLC for the periods indicated.
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| Pink Sheets | |||
| High | Low | ||
| (U.S.$) | (U.S.$) | ||
| Annual Highs and Lows | |||
| For the Fiscal Year Ended June 30, 2007 | 2.40 | 1.10 | |
| Quarterly Highs and Lows | |||
| For the Fiscal Year Ended June 30, 2007 | |||
| Quarter ended September 30, 2006 | 1.70 | 1.10 | |
| Quarter ended December 31, 2006 | 2.02 | 1.36 | |
| Quarter ended March 31, 2007 | 2.40 | 1.72 | |
| Quarter ended June 30, 2007 | 2.38 | 1.75 | |
| Monthly Highs and Lows Subsequent | |||
| to the Fiscal Year Ended June 30, 2007 | |||
| July | 2.24 | 1.90 | |
| August | 2.14 | 1.75 | |
| September | 2.65 | 1.91 | |
| October | 2.50 | 1.30 | |
| November | 1.70 | 1.10 | |
The transfer of our ordinary shares is managed by our transfer agent, Mellon Investor Services, LLC, 480 Washington Boulevard, Jersey City, NJ 07310.
B. Plan of distributions.
Not applicable.
C. Markets.
Our ordinary shares quoted on the Pink Sheets LLC under the symbol "BUERF".
D. Selling shareholders.
Not applicable.
E. Dilution.
Not applicable.
F. Expenses of the issue.
Not applicable.
Item 10. Additional Information
A. Share capital.
Not applicable.
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B. Memorandum and articles of association.
Incorporation
We were incorporated in the British Virgin Islands on November 25, 2003 under the name Nature Extrac Limited. We formally changed our corporate name to Blue Earth Refineries Inc. effective July 8, 2004.
2006 Amendment to Memorandum and Articles of Association
On October 27, 2006, our board of directors filed an amendment to our Memorandum of Association and Articles of Association with the Registry of Corporate Affairs, British Virgin Islands. As a result of the amendments, we changed our authorized share capital from $100,000,000 without par value to 100,000,000 ordinary shares with a par value of $1.00 each. As of November 14, 2007, the authorized capital of our Company consists of 100,000,000 ordinary shares of $1.00 par value and 100,000,000 Class A Preferred shares without par value.
C. Material contracts.
Other than the term sheet dated November 30, 2006, between our Company and First Equity Securities, whereby we agreed to sell all of our interest in 36569 Yukon, we have not entered into any material contracts during the last twenty-four months from the date of this annual report which were not otherwise entered into in the normal course of business.
D. Exchange controls.
There are no restrictions on foreign exchange in the Territory of the British Virgin Islands.
E. Taxation.
United States Federal Income Taxation
The following is a general discussion of the material United States federal income tax consequences which may be applicable to a US holder of our ordinary shares who holds such shares as capital assets. This discussion does not address all relevant federal income tax matters and it does not address consequences peculiar to persons subject to special provisions of federal income tax law, such as those described below and excluded from the definition of a US holder. In addition, this discussion does not cover any state, local or foreign tax consequences.
The following discussion is based on sections of theInternal Revenue Code of 1986, as amended, treasury regulations, published Internal Revenue Service rulings, published administrative portions of the IRS and court decisions that are currently applicable, any or all of which could be materially and adversely changed, possibly on a retroactive basis, at any time. In addition, this discussion does not consider the potential effects, both adverse and beneficial, of any recently proposed legislation which, if enacted, could be applied, possibly on a retroactive basis, at any time.
The following discussion is not intended to be, nor should it be construed to be, legal or tax advice to any holder of our ordinary shares, and no opinion or representation with respect to the US federal income tax consequences to any such holder or prospective holder is made. Accordingly, holders of our ordinary shares should consult their own tax advisors about federal, state, local and foreign tax consequences.
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As used herein, a "US holder" includes a holder of our ordinary shares who is a citizen or resident of the United States, a corporation created or organized in or under the laws of the United States or of any political subdivision thereof, any entity which is taxable as a corporation for US tax purposes and any other person or entity whose ownership of our ordinary shares is effectively connected with the conduct of a trade or business in the United States. A US holder does not include persons subject to special provisions of US federal income tax law, such as tax-exempt organizations, qualified retirement plans, financial institutions, insurance companies, real estate investment trusts, regulated investment companies, broker-dealers, non-resident alien individuals or foreign corporations whose ownership of ordinary shares is not effectively connected with the conduct of a trade or business in the United States and shareholders who acquired their shares through the exercise of employee stock options or otherwise as compensation.
Distributions
A distribution to a US holder of our ordinary shares will generally be taxed as follows: first, as a taxable dividend to the extent of the shareholder's pro rata share of our current and accumulated earnings and profits; second, as a return of capital and reduction of the shareholder's basis in the our ordinary shares to the extent the distribution exceeds the shareholder's pro rata share of current and accumulated earnings and profits; and third, as capital gain to the extent the distribution exceeds both theshareholder's pro rata share of current and accumulated earnings and profits and such shareholder's cost basis in our ordinary shares.
Foreign Tax Credit
The following is a general discussion of certain possible United States federal foreign income tax credits under current law, generally applicable to a US holder of our ordinary shares who holds such shares as capital assets. This discussion does not address all relevant United States federal income tax matters and it does not address consequences peculiar to persons subject to special provisions of United States federal income tax law, such as those described below and excluded from the definition of a US holder. In addition, this discussion does not cover any state, local or foreign tax consequences.
A US holder who pays (or has withheld from distributions) Canadian income tax with respect to the ownership of our ordinary shares may be entitled, at the option of the US holder, to either a deduction or a tax credit for such foreign tax paid or withheld. Generally, it will be more advantageous to claim a credit because a credit reduces United States federal income taxes on a dollar-for-dollar basis, while a deduction merely reduces the taxpayer's income subject to tax. This election is made on a year-by-year basis and generally applies to all foreign income taxes paid by (or withheld from) the US holder during that year. There are significant and complex limitations which apply to the credit, among which is the general limitation that the credit cannot exceed the proportionate share of the US holder's United States income tax liability that the US holder's foreign source income bears to his or its worldwide taxable income. In determining the application of this limitation, the various items of income and deduction must be classified into foreign and domestic sources. Complex rules govern this classification process. There are further limitations on the foreign tax credit for certain types of income such as "passive income", "high withholding tax interest", "financial services income", "shipping income", and certain other classifications of income. The availability of the foreign tax credit and the application of the limitations on the credit are fact specific and holders of our ordinary shares should consult their own tax advisors regarding their individual circumstances.
Passive Foreign Investment Company
The following is a general discussion of certain possible United States federal income tax consequences generally applicable to a US holder of a passive foreign investment company. This discussion does not
32
address all relevant United States federal income tax matters and it does not address consequences peculiar to persons subject to special provisions of United States federal income tax law and excluded from the definition of a US holder. We have not made a determination as to whether we would be considered a passive foreign investment company.
If a US holder disposes of shares in a passive foreign investment company, any resultant gain will be subject to a tax that is determined by apportioning the gain pro rata over the entire holding period of the shares. The amount of gain that is apportioned to the current year, and to any pre-1987 holding period, is included in the US holder's current income.
The tax on the amount apportioned to any prior years beginning with 1987 is calculated using the highest tax rate in each applicable year. In addition, interest compounded daily is charged on the tax due for each prior year from the due date of the return for the respective year to the due date for the current year. The interest rate is set quarterly. The US holder's current year tax is increased by the special tax and interest on amounts apportioned to prior years.
A US holder can avoid this special tax and interest charge by making a permanent election to treat a passive foreign investment company as a "qualified electing fund" and to report in each year thereafter such shareholder's pro rata share of the ordinary earnings and net capital gains of a passive foreign investment company. If the election is not made in the first year that the US holder owns the shares, a special election would have to be made to cleanse the effect of the prior year's holding periods.
These rules apply similarly to distributions from a passive foreign investment company that would be considered excess distributions. Complex rules govern the determination of applicable gains and excess distributions, the calculation of the amounts allocated pro rata to prior years, the resultant tax and applicable interest, and the qualified electing fund elections whether as pedigreed or non-pedigreed. Holders and prospective holders of ordinary shares of a passive foreign investment company should consult their own tax advisor regarding their individual circumstances.
F. Dividends and paying agents.
Not applicable.
G. Statements by experts.
Not applicable.
H. Documents on display.
We are subject to the informational requirements of theSecurities Exchange Act of 1934, as amended, and we file reports and other information with the SEC. You may read and copy any of our reports and other information at, and obtain copies upon payment of prescribed fees from, the Public Reference Room maintained by the SEC at 100 F Street, N.E., Washington, DC 20549. In addition, the SEC maintains a web site that contains reports and other information regarding registrants that file electronically with the SEC at HTTP://www.sec.gov. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-732-0330.
We will provide without charge to each person, including any beneficial owner, on the written or oral request of such person, a copy of any or all documents referred to above which have been or may be incorporated by reference in this report (not including exhibits to such incorporated information that are not specifically incorporated by reference into such information). Requests for such copies should be
33
directed to us at the following address: Suite 803, 8/F, Ruttonjee House, Dina Centre, 11 Duddell Street, Central, Hong Kong SAR, China.
I. Subsidiary Information
As at December 1, 2007, our subsidiaries were as follows:
| Shareholding of | ||||||
| Jurisdiction | Owner | the Owner of | ||||
| Name | of Organization | of Interests | Interests | |||
| Kasese Cobalt Company Limited | Uganda | Blue Earth Refineries Inc. | 75.0% | |||
| Blue Earth Refineries (Canada) Inc. | Yukon Canada | Blue Earth Refineries Inc. | 100.0% |
Item 11. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks from changes in foreign currency exchange rates which may affect our results of operations and financial condition and, consequently, our fair value. We manage these risks through internal risk management policies.
Many of our strategies are based on historical trading patterns and correlations and our management's expectations of future events. However, these strategies may not be fully effective in all market environments or against all types of risks. Unexpected market developments may affect our risk management strategies during this time, and unanticipated developments could impact our risk management strategies in the future. If any of the variety of instruments and strategies we utilize are not effective, we may incur losses.
Foreign Currency Exchange Rate Risk
Our reporting currency is the United States dollar. Prior to the sale of 36569 Yukon in December 2006, we held a long-term income debenture €4,242,000 (principal amount) and a receivable of CDN$2,142,104 under a credit facility held by 36569 Yukon, which subjected us to currency exchange rate risk. We also hold trading securities which are denominated in Euros. A depreciation of the Euro or Canadian dollar against the United States dollar during this time decreased the fair value of our financial instrument assets. An appreciation of the Euro or Canadian dollar against the United States dollar during this time increased the fair value of our financial instrument assets. The following table provides information about our exposure to foreign currency exchange rate fluctuations for the carrying amount of the investment that may be sensitive to such fluctuations as at June 30, 2007 and 2006 and expected cash flows from these instruments.
As at June 30, 2007 (in thousands)
| Expected Cash Flow | ||||||||
| Carrying | Fair | |||||||
| Value | Value | 2008 | 2009 | 2010 | 2011 | 2012 | Thereafter | |
| Trading | ||||||||
| securities(1) | $4,526 | $4,526 | $4,526 | $ - | $ - | $ - | $- | $ - |
| (1) | Represents highly liquid investment bonds denominated in Euros that are not asset-backed securities. |
34
As at June 30, 2006
(in thousands)
| Expected Cash Flow | ||||||||
| Carrying | Fair | |||||||
| Value | Value | 2007 | 2008 | 2009 | 2010 | 2011 | Thereafter | |
| Equity | ||||||||
| method | ||||||||
| investments(2) | $1,699 | $2,244 | $2,244(1) | $ - | $ - | $ - | $- | $ - |
| (1) | Representing the net consideration to be received from the investment sold subsequent to the fiscal year ended June 30, 2006. |
| (2) | Consisting of debt securities and advances. |
Equity Price Risk
Changes in trading prices of securities may affect the fair value of securities. An increase in trading prices will increase the fair value and a decrease in trading prices will decrease the fair value of securities. Our financial instruments which may be sensitive to fluctuations in equity prices are trading securities and available-for-sale securities. The following table provides information about our exposure to fluctuations in equity prices for the carrying amount of financial instruments sensitive to such fluctuations as at June 30, 2007 and expected cash flows from these instruments. We did not have any financial instrument sensitive to such fluctuations as at June 30, 2006.
| As at June 30, 2007 | ||||||||
| (in thousands) | ||||||||
| Carrying | Fair | |||||||
| Value | Value | 2008 | 2009 | 2010 | 2011 | 2012 | Thereafter | |
| Trading | ||||||||
| securities | $4,526 | $4,526 | $4,526 | $ - | $ - | $ - | $- | $ - |
| Available | ||||||||
| -for-sale | ||||||||
| securities(1) | $2,688 | $2,688 | $- | $- | $- | $- | $- | $2,688 |
| (1) | Consisting of units in open-ended investment companies that are not asset-backed securities. |
Item 12. Description of Securities Other than Equity Securities
Not applicable.
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies
Not applicable.
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
Not applicable.
Item 15. Controls and Procedures
As required by Rule 13a-15 under the Exchange Act, we have carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the
35
period covered by this annual report, being June 30, 2007. This evaluation was carried out under the supervision and with the participation of our management, including the President.
Based on this evaluation, the President has concluded that our disclosure controls and procedures as at June 30, 2007 were effective to provide reasonable assurance that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported as and when required and that it is accumulated and communicated to our management, including the President, as appropriate, to allow timely decisions regarding required disclosure.
In light of the conclusion that our Company's disclosure controls and procedures were effective as of June 30, 2007, we have applied procedures and processes as necessary to ensure the reliability of our financial reporting in regards to this annual report. Accordingly, management believes, based on its knowledge, that (i) this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading with respect to the period covered by this report and (ii) the financial statements, and other financial information included in this report, fairly present in all material respects our financial condition, results of operations and cash flows as at, and for, the periods presented in this report.
Item 16. [Reserved]
Item 16A. Audit Committee Financial Expert
Our board of directors has determined that it does not have a member that qualifies as an "audit committee financial expert" as defined in Item 401(e) of Regulation S-B, and is "independent" as the term is used in Item 7(d)(3)(iv) of Schedule 14A under the Securities Exchange Act of 1934, as amended.
We have been unable to retain the services of a person who qualifies as an "audit committee financial expert." Until we appoint such a person, we believe that the members of our board of directors are collectively capable of analyzing and evaluating our financial statements and understanding internal controls and procedures for financial reporting.
Item 16B. Code of Ethics
As a foreign private issuer, we have not yet adopted a code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. Our board of directors believe that the members of our board and the sole executive officer are collectively capable of ensuring honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships among the directors and management of our Company. The board of directors of our Company does not believe that it is necessary to have a code of ethics due to the limited number of directors and executive officers of our Company.
Item 16C. Principal Accountant Fees and Services.
Audit Fees
Our board of directors appointed Deloitte & Touche LLP as independent auditors to audit our financial statements for the fiscal year ended June 30, 2007.
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The aggregate fees billed by Deloitte & Touche LLP for professional services rendered for the audit of our annual financial statements for the fiscal years ended June 30, 2007 and 2006 were $22,000 and $76,000, respectively.
Audit Related Fees
For the fiscal years ended June 30, 2007 and 2006, Deloitte & Touche LLP did not perform any assurance and related services which are not reported under the caption "Audit Fees" above.
Tax Fees
For the fiscal years ended June 30, 2007 and 2006, the aggregate fees billed for tax compliance, tax advice and tax planning on tax matters by Deloitte & Touche LLP were $nil and $nil, respectively.
All Other Fees
For the fiscal years ended June 30, 2007 and 2006, Deloitte & Touche LLP did not perform any other non-audit professional services, other than those services listed above.
The board of directors pre-approves all services provided by our independent auditors. All of the services and fees described under the categories of "Audit Related Fees", "Tax Fees" and "All Other Fees" were reviewed and approved by the board of directors before the respective services were rendered and none of such services were approved by the board of directors pursuant to paragraph (c)(7)(i)(c) of Rule 2-01 of Regulation S-X.
The board of directors will consider the nature and amount of the fees to be billed by Deloitte & Touche LLP, and will examine the provision of the services for activities unrelated to the audit is compatible with maintaining Deloitte & Touche LLP's independence.
Item 16D. Exemption from the Listing Standards for Audit Committees
Not applicable.
Item 16E. Purchases of Equity Securities by our Company and Affiliated Purchasers
During our fiscal year ended June 30, 2007, we did not repurchase any securities.
PART III
Item 17. Financial Statements
See Item 18. Financial Statements
Item 18. Financial Statements
Financial Statements filed as part of this annual report:
The following financial statements of our Company are filed as part of this annual report:
| Report of Independent Registered Chartered Accountants dated December 14, 2007 |
| Report of Independent Registered Public Accounting Firm dated December 2, 2005 |
37
The following financial statements of 4025776 Canada Inc., an investee accounted for by the equity method, are filed as part of this annual report:
38
BLUE EARTH REFINERIES INC.
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2007, 2006 and 2005
39
Report of Independent Registered Chartered Accountants
To the Board of Directors and Shareholders of
Blue Earth Refineries Inc.
We have audited the accompanying consolidated balance sheets of Blue Earth Refineries Inc. and subsidiaries (the "Company") as of June 30, 2007 and 2006, and the related consolidated statements of operations, comprehensive income (loss), changes in stockholders' equity, and cash flows for each of the two years in the period ended June 30, 2007. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Blue Earth Refineries Inc. and subsidiaries at June 30, 2007 and 2006, and the results of their operations and their cash flows for each of the two years in the period ended June 30, 2007, in conformity with accounting principles generally accepted in the United States of America.
The consolidated financial statements of the Company for the years ended June 30, 2005 was audited by other auditors whose report, dated December 2, 2005, expressed an unqualified opinion on those statements.
/s/ Deloitte & Touche LLP
Independent Registered Chartered Accountants
Vancouver, Canada
December 14, 2007
| DAVIDSON&COMPANYLLP | A Partnership of Incorporated Professionals | ||
| Chartered Accountants |
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Blue Earth Refineries Inc.
We have audited the accompanying consolidated statements of operations, comprehensive income (loss), shareholders' equity and cash flows of Blue Earth Refineries Inc. for the year ended June 30, 2005. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the results of operations and cash flows of the Company for the year ended June 30, 2005, in conformity with generally accepted accounting principles in the United States of America.
| &nbs p; | “DAVIDSON& COMPANY LLP” |
| Vancouver, Canada | Chartered Accountants |
| December 2, 2005 |
| A Member ofSCINTERNATIONAL | ||
| 1200 - 609 Granville Street, P.O. Box 10372, Pacific Centre, Vancouver, BC, Canada, V7Y 1G6 | ||
| Telephone (604) 687-0947 Fax (604) 687-6172 | ||
41
BLUE EARTH REFINERIES INC.
CONSOLIDATED BALANCE SHEETS
(US Dollars in thousands, except per share amount)
AS AT JUNE 30
| 2007 | 2006 | |||||
| ASSETS | ||||||
| Current Assets | ||||||
| Cash | $ | 1,558 | $ | 1,755 | ||
| Trading securities | 4,526 | - | ||||
| Due from affiliates | 4,833 | 3,484 | ||||
| Inventories | 7,503 | 5,789 | ||||
| Prepaid expenses and other | 447 | 627 | ||||
| Total current assets | 18,867 | 11,655 | ||||
| Long-term Assets | ||||||
| Investment in and advances to an equity method investee | - | 1,699 | ||||
| Available-for-sale securities | 2,688 | - | ||||
| Property, plant and equipment, net | 28,210 | 33,393 | ||||
| 30,898 | 35,092 | |||||
| Total assets | $ | 49,765 | $ | 46,747 | ||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||
| Liabilities | ||||||
| Current liabilities | ||||||
| Accounts payable and accrued liabilities | $ | 1,124 | $ | 244 | ||
| Accrued power charges | 8 | 240 | ||||
| Accrued cobalt royalties | 659 | 976 | ||||
| Due to affiliates | 613 | 617 | ||||
| Total current liabilities | 2,404 | 2,077 | ||||
| Rehabilitation provision | 1,209 | 1,008 | ||||
| Total liabilities | 3,613 | 3,085 | ||||
| Shareholders’ equity | ||||||
| Preferred stock – no par value; authorized – 100,000,000 shares | ||||||
| Issued and outstanding – none | - | - | ||||
| Common stock – $1.00 par value per share; authorized – 100,000,000 | ||||||
| ordinary shares | ||||||
| Issued and outstanding – 15,142,836 at June 30, 2007 and 2006, | ||||||
| respectively | 15,143 | 15,143 | ||||
| Additional paid-in capital | 37,839 | 37,839 | ||||
| Accumulated deficit | (7,275 | ) | (10,080 | ) | ||
| Accumulated other comprehensive income | 445 | 760 | ||||
| Total shareholders’ equity | 46,152 | 43,662 | ||||
| Total liabilities and shareholders’ equity | $ | 49,765 | $ | 46,747 |
The accompanying notes are an integral part of these consolidated financial statements.
42
BLUE EARTH REFINERIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(US Dollars in thousands, except per share amount)
FOR THE YEARS ENDED JUNE 30
| 2007 | 2006 | 2005 | |||||||
| Sales of cobalt | $ | 28,255 | $ | 18,134 | $ | 15,419 | |||
| Cost of operations, excluding depreciation | (11,332 | ) | (10,562 | ) | (7,760 | ) | |||
| Depreciation | (5,008 | ) | (5,788 | ) | (4,557 | ) | |||
| Rehabilitation expense | (201 | ) | (168 | ) | (140 | ) | |||
| Gross profit | 11,714 | 1,616 | 2,962 | ||||||
| EXPENSES | |||||||||
| General and administrative expenses | (3,589 | ) | (3,258 | ) | (3,811 | ) | |||
| Operating income (loss) | 8,125 | (1,642 | ) | (849 | ) | ||||
| OTHER ITEMS | |||||||||
| Loss from an equity method investee | - | (1,930 | ) | (2,930 | ) | ||||
| Gain on sale of equity method investee | 1,305 | - | - | ||||||
| Other income | 946 | 248 | 55 | ||||||
| Income (loss) before income tax | 10,376 | (3,324 | ) | (3,724 | ) | ||||
| Income tax | - | - | - | ||||||
| Net income (loss) for the year | $ | 10,376 | $ | (3,324 | ) | $ | (3,724 | ) | |
| Basic and diluted earnings (loss) per ordinary share | $ | 0.69 | $ | (0.22 | ) | $ | (0.24 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
43
BLUE EARTH REFINERIES INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(US Dollars in thousands)
FOR THE YEARS ENDED JUNE 30
| 2007 | 2006 | 2005 | |||||||
| Net income (loss) | $ | 10,376 | $ | (3,324 | ) | $ | (3,724 | ) | |
| Other comprehensive income (loss): | |||||||||
| Unrealized gain on securities | 445 | - | - | ||||||
| Change in foreign currency translation adjustment | (760 | ) | 288 | (35 | ) | ||||
| (315 | ) | 288 | (35 | ) | |||||
| Total comprehensive income (loss) | $ | 10,061 | $ | (3,036 | ) | $ | (3,759 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
44
BLUE EARTH REFINERIES INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(US Dollars in thousands)
FOR THE YEARS ENDED JUNE 30
| Common Stock | |||||||||||||||||
| Accumulated | |||||||||||||||||
| Additional | Other | ||||||||||||||||
| Number | Paid-In | Accumulated | Comprehensive | ||||||||||||||
| of Shares | Amount | Capital | Deficit | Income | Total | ||||||||||||
| Balance at June 30, 2004 | 15,555,269 | $ | 15,555 | $ | 38,898 | $ | (3,032 | ) | $ | 507 | $ | 51,928 | |||||
| Capitalization of deficit account | - | - | (1,842 | ) | 1,842 | - | - | ||||||||||
| Dividend paid | - | - | - | (1,842 | ) | - | (1,842 | ) | |||||||||
| Contribution of advances to equity method investee | - | - | 394 | - | - | 394 | |||||||||||
| Net loss | - | - | - | (3,724 | ) | - | (3,724 | ) | |||||||||
| Other comprehensive loss | - | - | - | - | (35 | ) | (35 | ) | |||||||||
| Balance at June 30, 2005 | 15,555,269 | 15,555 | 37,450 | (6,756 | ) | 472 | 46,721 | ||||||||||
| Repurchase and cancellation of shares | (412,433 | ) | (412 | ) | 389 | - | - | (23 | ) | ||||||||
| Net loss | - | - | - | (3,324 | ) | - | (3,324 | ) | |||||||||
| Other comprehensive income | - | - | - | - | 288 | 288 | |||||||||||
| Balance at June 30, 2006 | 15,142,836 | 15,143 | 37,839 | (10,080 | ) | 760 | 43,662 | ||||||||||
| Dividend paid | - | - | - | (7,571 | ) | - | (7,571 | ) | |||||||||
| Net income | - | - | - | 10,376 | - | 10,376 | |||||||||||
| Other comprehensive loss | - | - | - | - | (315 | ) | (315 | ) | |||||||||
| Balance at June 30, 2007 | 15,142,836 | $ | 15,143 | $ | 37,839 | $ | (7,275 | ) | $ | 445 | $ | 46,152 | |||||
The accompanying notes are an integral part of these consolidated financial statements.
45
BLUE EARTH REFINERIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(US Dollars in thousands)
FOR THE YEAR ENDED JUNE 30
| 2007 | 2006 | 2005 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | |||||||||
| Net income (loss) | $ | 10,376 | $ | (3,324 | ) | $ | (3,724 | ) | |
| Adjustments for: | |||||||||
| Loss from an equity method investee | - | 1,930 | 2,930 | ||||||
| Gain on sale of equity method investee | (1,305 | ) | - | - | |||||
| Unrealized gain on trading securities | (43 | ) | - | - | |||||
| Accretion of rehabilitation expense | 201 | 168 | 140 | ||||||
| Depreciation | 5,008 | 5,788 | 4,557 | ||||||
| Changes in non-cash working capital items: | |||||||||
| Due from affiliates | (1,349 | ) | (3,947 | ) | 886 | ||||
| Trading securities | (4,483 | ) | - | - | |||||
| Inventories | (1,399 | ) | 700 | (2,520 | ) | ||||
| Prepaid expenses and other | 179 | 163 | 263 | ||||||
| Accounts payable and accrued liabilities | 332 | (284 | ) | 704 | |||||
| Due to affiliates | (3 | ) | 137 | (497 | ) | ||||
| Net cash flows provided by operating activities | 7,514 | 1,331 | 2,739 | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | |||||||||
| Purchases of property, plant and equipment | (140 | ) | (203 | ) | (264 | ) | |||
| Net cash flows used in investing activities | (140 | ) | (203 | ) | (264 | ) | |||
| CASH FLOWS FROM FINANCING ACTIVITIES | |||||||||
| Repurchase of shares | - | (23 | ) | - | |||||
| Dividend paid | (7,571 | ) | - | (1,842 | ) | ||||
| Net cash flows used in financing activities | (7,571 | ) | (23 | ) | (1,842 | ) | |||
| Increase (decrease) in cash | (197 | ) | 1,105 | 633 | |||||
| Cash, beginning of year | 1,755 | 650 | 17 | ||||||
| Cash, end of year | $ | 1,558 | $ | 1,755 | $ | 650 | |||
| Supplemental cash flow information | |||||||||
| Interest paid | $ | - | $ | - | $ | - | |||
| Income taxes paid | $ | - | $ | - | $ | - |
The accompanying notes are an integral part of these consolidated financial statements.
46
| BLUE EARTH REFINERIES INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| JUNE 30, 2007 |
| 1. | NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES |
The Company | |
Blue Earth Refineries Inc. and subsidiary (“the Company”) is in the cobalt refining business. It was a wholly-owned subsidiary of Mass Financial Corp. (and its subsidiaries – “Mass”). The Company was incorporated in the Territory of the British Virgin Islands (“BVI”) on November 25, 2003, under the name Nature Extrac Limited. The Company changed its name to Blue Earth Refineries Inc. effective July 8, 2004. | |
On December 30, 2004, KHD Humboldt Wedag International Ltd. ("KHD") effected a stock split of the shares of the Company and then distributed ordinary shares of the Company to KHD’s shareholders and the Company ceased to be an indirect subsidiary of KHD. Holders of KHD common shares received one share of the Company for each common share of KHD held on December 30, 2004. All references to numbers of shares and per share amounts have been restated to reflect the share split. Mass currently owns approximately 9.99% of the Company’s ordinary shares and is related by way of a common director and officer. | |
The Company’s cobalt operation is conducted through its 75%-owned subsidiary, Kasese Cobalt Company Ltd. (“KCCL”), a Ugandan corporation. KCCL operates a cobalt processing plant located in southwest Uganda that recovers the cobalt contained in a pyrite stockpile from a former copper mine. KCCL’s metal refining operations involve the bioleaching of the pyrite concentrate, solvent extraction of the dissolved cobalt, and recovery through electrowinning. KCCL also owns a hydroelectric power station that provides some of the power for the cobalt processing facility and occasionally generates excess power for sale to a Uganda government power company. KCCL is 25%-owned by the Government of Uganda through Kilembe Mines Ltd. (“KML”). | |
The Company is subject to the risks of operating in Uganda. These include risks associated with the political and economic environment, foreign currency exchange, changes in legislation, availability of electrical power and adverse weather conditions. The economy of Uganda differs significantly from the economies of North American and European nations in such respects as structure, level of development, resource allocation, self-sufficiency, rate of inflation and the level of development and enforcement of existing laws. The Company has sole access to a cobalt stockpile which is located at the processing facility site under an agreement with KML. The agreement is to expire in June 2012 unless KCCL elects to extend it for an additional maximum of 25 years. However, KCCL may terminate the agreement at any time. KCCL is subject to a labor union agreement which is to expire in February 2008. The Company’s revenues are also subject to risk due to the cyclical nature of the international market for cobalt and the production capability of the processing plant. | |
Principles of Consolidation | |
These consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. All intercompany accounts and transactions have been eliminated. The consolidated financial statements’ notes are stated in U.S. dollars, as rounded to the nearest thousands (except per share and per pound amounts), unless otherwise stated. |
47
| BLUE EARTH REFINERIES INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| JUNE 30, 2007 |
| 1. | NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES(cont’d…) |
Allowance for Doubtful Accounts | |
The Company’s allowance for doubtful accounts is maintained at an amount considered adequate to absorb estimated credit-related losses. Such allowance reflects management’s best estimate of the losses in the Company’s credit portfolio and judgments about economic conditions. Estimates and judgments could change in the near-term, and could result in a significant change to a recognized allowance. Credit losses arise primarily from receivables but may also relate to other credit instruments such as guarantees and letters of credit. An allowance for doubtful accounts may be increased by provisions which are charged to income and reduced by write-offs net of any recoveries. | |
Specific provisions are established on an individual receivable basis. A general provision may be established to absorb potential credit losses attributable to the deterioration of credit quality on aggregate exposures for which specific provisions cannot yet be determined. A country risk provision may be made based on exposures in less developed countries and on management’s overall assessment of the underlying economic conditions in those countries. Write-offs are generally recorded after all reasonable restructuring or collection activities have taken place and there is no realistic prospect of recovery. Management has determined that no allowance is necessary for receivables at June 30, 2007 or 2006, other than $1,634 for a receivable from KML. | |
Inventories | |
Inventories are comprised of spare parts and materials and cobalt work in progress and finished goods. Spare parts and materials are stated at the lower of weighted-average cost or replacement cost. Work in progress is stated at the lower of weighted-average production cost or the net realizable value of the finished products less additional costs to complete. Finished goods are stated at the lower of weighted- average production cost or net realizable value. | |
Securities | |
The Company’s available-for-sale and trading securities are stated at their bid prices. Realized gains or losses of investments are included in the results of operations. Any unrealized holding gains or losses for trading securities are included in the result of operations. Any unrealized holding gains or losses for available-for-sale securities are reported as a separate component of comprehensive income until realized. If a loss in value in available-for-sale securities is considered to be other than temporary, it is recognized in the determination of net income. | |
Equity Method Investment | |
Long-term investments in which the Company has significant influence are accounted for using the equity method whereby the investment is initially recorded at cost and adjusted to recognize the Company’s proportionate share of net earnings or loss in the investee. When there is an other than temporary decline in value, the investment is written down and the unrealized loss is included in the results of operations. |
48
| BLUE EARTH REFINERIES INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| JUNE 30, 2007 |
| 1. | NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES(cont’d…) |
Property, Plant and Equipment | |
Property, plant and equipment are recorded at cost. Depreciable assets are depreciated, net of residual value, over the estimated life of the stockpile located at the processing plant site on a units-of-production basis except where the useful life of a depreciable asset is less than the life of the stockpile. In that case, depreciation is recorded on a straight-line basis over its useful life. The units-of-production basis is applied utilizing the tonnage of the stockpile concentrate fed to the plant in relation to the estimated stockpile reserve tonnage. Based on estimates of the stockpile reserves and expected production capacity, all buildings and equipment are estimated to be fully depreciated in 2012. Property, plant and equipment are tested for recoverability whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable and an impairment loss is measured as the amount by which their carrying amounts exceed their fair value using the estimated future undiscounted cash flows. Any resulting write-downs to fair value are charged to the results of operations. The Company has determined that all buildings and equipment have no residual value. | |
Use of Estimates | |
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, as well as disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. | |
Rehabilitation Provision | |
The Company recognizes the fair value of a liability for an asset retirement obligation in the year in which it is incurred when a reasonable estimate of fair value can be made. Changes in the liability for an asset retirement obligation due to the passage of time will be measured by applying an interest method of allocation. The amount will be recognized as an increase in the liability and an accretion expense in the statement of operations. | |
Revenue Recognition | |
Cobalt revenue is recognized when the cobalt is delivered to the port where the buyers take over title of the goods, the amount of revenue is fixed or determinable, and collectibility is reasonably assured. Cobalt revenue is recorded net of agency fees. Power revenue is recognized as power is delivered, the amount of revenue is fixed or determinable, and collectibility is reasonably assured. | |
Foreign Currency | |
The functional and reporting currency of KCCL is the U.S. dollar. Foreign currency transaction gains amounting to $41, $52 and $47 for the years ended June 30, 2007, 2006 and 2005, respectively, are included in general and administrative expenses in the consolidated statements of operations. | |
Translation adjustments are a result of the process of translating the Company’s Canadian equity method investee, including the carrying value of debentures, to U.S. dollars. Translation adjustments are not included in determining net income for the period but are accumulated as a separate component of comprehensive income until sale or until complete or substantially complete liquidation of the Company’s Canadian equity method investee takes place. |
49
| BLUE EARTH REFINERIES INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| JUNE 30, 2007 |
| 1. | NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES(cont’d…) |
Taxes on Income | |
The Company uses the liability method of accounting for income taxes. Under the liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and for tax losses and other deductions carried forward. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply when the asset is realized or the liability settled. A reduction in respect of the benefit of a deferred tax asset (a valuation allowance) is recorded against any deferred tax asset if it is not likely to be realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the statement of operations in the period in which the change is enacted. | |
Earnings Per Share | |
Basic earnings per share is computed by dividing income available to holders of ordinary shares by the weighted average number of ordinary shares outstanding during the year. The weighted average number of ordinary shares was 15,142,836, 15,374,852 and 15,555,269 for 2007, 2006 and 2005, respectively. Diluted earnings per share takes into consideration ordinary shares outstanding (computed under basic earnings per share) and potentially dilutive securities. The Company has not issued any stock options or warrants, and there are no dilutive potential ordinary shares outstanding during 2007, 2006, and 2005. | |
New Accounting Standards | |
Statement of Financial Accounting Standards (“SFAS”) No. 157:Fair Value Measurements,defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Management is analyzing the requirements of this new standard. | |
SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities –Included an amendment of SFAS No. 115.This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. This Statement applies to all entities, including not-for- profit organizations. Most of the provisions of this Statement apply only to entities that elect the fair value option. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. Management is analyzing the requirements of this new standard and believes that its adoption will not have any significant impact on the Company's financial statements. | |
FASB Staff Position (“FSP”) No. FIN 46 (R)-7,The Application of FASB Interpretation No. 46 (R) to Investment Companies,amends interpretation 46 (R) to provide an exception to the scope of the Interpretation for companies within the scope of the AICPA Audit and Accounting Guide (“Guide”). This FSP concludes that no additional consolidation guidance is necessary to the Guide. The Company’s preliminary assessment does not indicate that this FSP will have a significant impact on the financial statements. |
50
| BLUE EARTH REFINERIES INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| JUNE 30, 2007 |
| 1. | NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES(cont’d…) |
New Accounting Standards(cont’d…) | |
FASB Interpretation (“FIN”) No. 48:Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No.109, clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109,Accounting for Income Taxes. This interpretation (1) prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return and (2) provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. This interpretation is effective for fiscal years beginning after December 15, 2006. Management is analyzing the requirements of this new standard. | |
| 2. | SHARE CAPITAL |
Upon inception, the Company authorized 100 million ordinary shares with a par value of $1.00 each. In July 2004, the Company changed its authorized share capital from ordinary shares with a par value of $1.00 each to ordinary shares with no par value. In October 2006, the Company changed its authorized share capital which resulted again having ordinary shares with par value of $1.00 each. As at June 30, 2007, the Company has authorized 100 million ordinary shares with $1.00 par value per share. | |
In September 2004, the Company was authorized to split its ordinary shares, pursuant to which, 50,000 ordinary shares were split into 15,555,269 ordinary shares in December 2004. | |
On December 30, 2004, prior to the distribution of the ordinary shares of the Company to KHD’s shareholders, the Company reduced its capital by transferring $1,842 out of its additional paid-in capital account to accumulated deficit account, and declared and paid a dividend of $1,842 to KHD. | |
In October 2005, the Company announced its odd-lots repurchase program. The Company offered $1.82 per share for shareholders who held fewer than 100 common shares of the Company. As a result, 12,507 shares were repurchased and cancelled. Accordingly, the Company recorded $13 to common stock, $10 to additional paid-in capital, and paid cash of $23. | |
In January 2006, the Company received 399,926 common shares owned by KHD for cancellation. Accordingly, the Company recorded $399 to common stock and additional paid-in capital, respectively. | |
| 3. | SECURITIES |
At June 30, 2007, trading securities included investment in highly liquid investment bonds of $4,526. An unrealized holding gain of $43 has been included in the results of operations for the year ended June 30, 2007. | |
Available-for-sale securities consist of units in two British Virgin Islands open-ended investment companies. These investments were acquired in connection with the sale of the Company’s economic interest in the equity method investee in December 2006(see Note 9). The fair value of available-for-sale securities was $2,688 and $Nil as at June 30, 2007 and 2006, respectively. An unrealized gain of $445 was recorded in comprehensive income of $445 in the year ended June 30, 2007. | |
As at June 30, 2007 and 2006, the Company did not have any asset-backed securities. |
51
| BLUE EARTH REFINERIES INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| JUNE 30, 2007 |
| 4. | INVENTORIES |
| 2007 | 2006 | ||||||
| Spare parts and materials | $ | 4,706 | $ | 4,104 | |||
| Work in progress | 852 | 1,090 | |||||
| Finished goods | 1,945 | 595 | |||||
| $ | 7,503 | $ | 5,789 |
| 5. | PROPERTY, PLANT AND EQUIPMENT |
| 2007 | 2006 | ||||||
| Buildings | $ | 1,000 | $ | 1,000 | |||
| Equipment | 44,683 | 44,543 | |||||
| 45,683 | 45,543 | ||||||
| Accumulated depreciation | (17,473 | ) | (12,150 | ) | |||
| $ | 28,210 | $ | 33,393 |
| 6. | REHABILITATION PROVISION |
The Company’s rehabilitation provision consists of reclamation and closure costs for its production facility. The present value of obligations is estimated to be $1,209, reflecting payments in approximately five years. Significant reclamation and closure activities include remediation for site contamination and demolition. The undiscounted value of this liability is $3,000. An accretion expense of $201 has been charged to operations in 2007 (2006 - $168, 2005 - $140) to reflect an increase in the carrying amount of the rehabilitation provision which has been determined using a discount rate of 20%. | |
The changes in the rehabilitation provision for the years ended June 30 are attributable to the following: |
| 2007 | 2006 | ||||||
| Balance, beginning of year | $ | 1,008 | $ | 840 | |||
| Accretion | 201 | 168 | |||||
| Balance, end of year | $ | 1,209 | $ | 1,008 |
52
| BLUE EARTH REFINERIES INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| JUNE 30, 2007 |
| 7. | INCOME TAXES |
Income (loss) before income taxes for the years ended June 30 includes the results of operations in Uganda and the Company’s share of loss from the equity method investee. The Company is not required to pay income tax in BVI. | |
However, KCCL is subject to income tax in Uganda. A reconciliation of the provision for income taxes calculated at the statutory rates to the provision in the consolidated statements of operations is as follows for the years ended June 30: |
| 2007 | 2006 | 2005 | ||||||||
| Income (loss) before income taxes | $ | 10,376 | $ | (3,324 | ) | $ | (3,724 | ) | ||
| Computed (provision for) benefit from | ||||||||||
| income taxes at statutory rates in BVI | $ | - | $ | - | $ | - | ||||
| (Increase) decrease in taxes resulting from: | ||||||||||
| Recovery (provision) of income taxes at | ||||||||||
| higher statutory tax rate in Uganda | (3,209 | ) | 711 | 484 | ||||||
| Non-taxable income | - | - | - | |||||||
| Permanent differences | (60 | ) | 44 | 12 | ||||||
| Changes in valuation allowance | 3,269 | (755 | ) | (496 | ) | |||||
| Provision for income taxes | $ | - | $ | - | $ | - |
The tax effect of temporary differences in Uganda that give rise to significant components of deferred tax liabilities and assets are as follows for the years ended June 30:
| 2007 | 2006 | ||||||
| Non-capital tax loss carryforwards in Uganda | $ | 43,390 | $ | 48,417 | |||
| Other | 391 | 435 | |||||
| Deferred income tax assets | 43,781 | 48,852 | |||||
| Deferred income tax liabilities | (11,777 | ) | (13,559 | ) | |||
| Valuation allowance | (32,004 | ) | (35,293 | ) | |||
| Net deferred income tax asset | $ | - | $ | - |
Management believes that, due to the cyclical nature of its operations and other risks, the Company’s available tax loss carryforwards in Uganda may not be utilized. Therefore, the resulting tax benefit has been fully reserved at June 30, 2007 and 2006. At June 30, 2007, the Company had estimated accumulated non-capital losses in Uganda of $144,633 that do not expire.
53
| BLUE EARTH REFINERIES INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| JUNE 30, 2007 |
| 8. | FAIR VALUE OF FINANCIAL INSTRUMENTS |
The Company’s financial instruments comprise primarily of cash, trading and available-for-sale securities, due from (to) affiliates, advances to an equity method investee and accounts payable and accrued liabilities. Their fair values approximate to their carrying values due to the short maturities of those instruments, except for advances to the equity method investee whose fair value was $2,244 and carrying amount was $1,699 as of June 30, 2006. | |
| 9. | EQUITY METHOD INVESTEE |
The original purchase of the cobalt refinery was financed mostly by the issuance of debentures payable. Mass contributed its interest in the debentures to the Company at a carrying value of $4,660. These debentures had a stated principal balance in Euros of 4,242 (amount is in thousands of euros). The debentures were secured by the equity method investee's refinery assets. Interest on the debentures accrued at the three-month LIBOR rate plus 3%. | |
Mass had agreed to provide up to $5,381 in a credit facility against which $1,921 had been advanced and assigned to the Company. Interest on this credit facility accrued monthly at the Royal Bank of Canada prime rate plus 3%. Principal and interest were due on demand. The note was secured by the equity method investee's refinery assets. The Company did not recognize any of the interest from the equity method investee because it had not been paid. | |
The equity method investee’s common shares was assigned no value when it was contributed to the Company. The Company’s proportionate share of the results of operations of the investee had been included in these consolidated financial statements since August 2003 until June 30, 2006. The Company’s reported loss from this equity method investee were $Nil, $1,930 and $2,930, which included the Company’s share of the investee’s loss less $Nil, $465 and $362 of unrealized intercompany interest expense, for the year ended June 30, 2007, 2006 and 2005, respectively. | |
In December 2006, the Company sold all of its economic interest in the investee for net consideration of $2,244 in exchange for units in two British Virgin Islands open-ended investment companies, resulting in an accounting gain of $445 in the year ended June 30, 2007. | |
| 10. | TRANSACTIONS WITH AFFILIATES |
In 2004, Kasese Cobalt Company entered into an exclusive distribution agreement for an initial term ending December 31, 2014, to sell all of the cobalt produced by Kasese Cobalt Company with Mass. In June 30, 2005, Mass charged agency fees of $1.50 per pound of cobalt sold. Our Company renegotiated agency fees with Mass and from July 1, 2005 to June 30, 2006, the agency fees were revised to $0.50 per pound of cobalt sold. Mass also charged fees for additional services rendered to our Company. Total marketing cost of $1,330, $1,298 and $2,175 were paid or payable to Mass for the years ended June 30, 2007, 2006 and 2005, respectively. | |
The Company has an amount due in the ordinary course from (to) Mass in the amount of $4,833 and $3,484 at June 30, 2007 and 2006, respectively. During the years ended June 30, 2007, 2006 and 2005, the Company purchased supplies and materials amounting to $Nil, $Nil and $1,407 from Mass. |
54
| BLUE EARTH REFINERIES INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| JUNE 30, 2007 |
| 10. | TRANSACTIONS WITH AFFILIATES (cont’d…) |
KML owes the Company $1,634 in an unsecured loan which is payable through forfeiture of any future dividends if payable by KCCL. This amount is fully reserved because of the uncertainty that KCCL will pay dividends. | |
During 2007, the Company paid $195 to Mass as a commission to arrange the sale of equity method investee. The Company has an amount due to Mass in the amount of $613 and $617 at June 30, 2007 and 2006, respectively. | |
These transactions were in the normal course of operations and were measured at the exchange value, which is the amount of consideration established and agreed to by the affiliated parties. | |
| 11. | COMMITMENTS AND CONTINGENCIES |
Effective January 1, 2005, KCCL is required to pay royalties at 3% of cobalt sales to the Geological Survey of Mines of Uganda. Prior to January 1, 2005, the royalty was charged at 2% of cobalt sold. Royalties $504, $617 and $261 were incurred during the years ended June 30, 2007, 2006 and 2005, respectively. Accrued cobalt royalties of $49 and $976 were outstanding at June 30, 2007 and 2006, respectively. | |
KCCL is required to pay royalties to a third party equal to 10% of net cash flow, as defined in the royalty agreement, resulting from operations of the KCCL cobalt processing plant up to an aggregate maximum of $10,000. For the years ended June 30, 2007, 2006 and 2005, royalties of $1,685, $193 and $341 were incurred, respectively. Accrued royalties of $610 and $Nil were outstanding at June 30, 2007 and 2006, respectively. | |
The Company charges the royalties to costs of sales. | |
| 12. | SUBSEQUENT EVENTS |
In September 2007, the Company entered into a Syndicated Unpriced Forward Sale Derivative Agreement with Mass. The Company agrees to deliver 696 metric tons of the Company’s cobalt products over a term of one year in exchange for an initial prepayment amount of $18,400, with a floor price of $12 per lb. Adjustment amounts, first six months being 45% of balance between the floor price and the Resale Price, and seven to twelve months being (i) in case the Resale Price per lb. is equal or less than $20, 75%, or (ii) in case the Resale Price exceeds $20, 75% of the balance between the floor price and $20 plus 25% of the balance between $20 and the Resale Price, as determined in the future will be paid 15 days after each calendar quarter. Pursuant to an Underwriting and Syndication Agreement between the Company and Mass, the Company agreed to pay Mass an underwriting fee of 10% of the prepayment amount and a syndication fee of $670. The syndication fee was paid by 239,286 common stock of the Company valued at $2.80 per share. |
55
| BLUE EARTH REFINERIES INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| JUNE 30, 2007 |
| 12. | SUBSEQUENT EVENTS (cont’d…) |
In September 2007, the Company declared a cash distribution of $1.00 per share to its holders of ordinary shares, totalling $15,494. | |
In September 2007, the Company authorized a share repurchase program, for the repurchase of up to 20% of its common shares. | |
In August 2007, the Company issued 750,000 stock options to its employees pursuant to the terms of the Stock Option and Subscription Agreements. The options vested upon the date of grant, and each option entitles the holder to acquire one ordinary share at the exercise price of $2.05 until August 9, 2010. | |
In December 2007, the Company received a report from the former majority shareholder of KCCL which stated that, pursuant to its interpretation of the royalty agreement (see Note 11), the Company underpaid it by $1,428, including interest, up to the period ended September 30, 2005. Management of the Company believes that the Company has complied with the terms of the royalty agreement. In the opinion of management, the estimated outcome of this request for underpaid amount will not have a material effect on the Company's financial statements. |
56
4025776 CANADA INC.
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006 and 2005
57
| DAVIDSON&COMPANYLLP | A Partnership of Incorporated Professionals | ||
| Chartered Accountants |
INDEPENDENT AUDITORS’ REPORT
To the Board of Directors and Shareholders of
4025776 Canada Inc.
We have audited the consolidated balance sheets of 4025776 Canada Inc. as at June 30, 2006 and 2005 and the consolidated statements of operations, changes in shareholders’ deficiency and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at June 30, 2006 and 2005 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles.
| &nbs p; | “DAVIDSON& COMPANY LLP” |
| Vancouver, Canada | |
| Chartered Accountants | |
| January 16, 2007 |
| A Member ofSCINTERNATIONAL | ||
| 1200 - 609 Granville Street, P.O. Box 10372, Pacific Centre, Vancouver, BC, Canada, V7Y 1G6 | ||
| Telephone (604) 687-0947 Fax (604) 687-6172 | ||
58
4025776 CANADA INC.
CONSOLIDATED BALANCE SHEETS
AS AT JUNE 30
(Canadian Dollars, in Thousands except par value amount)
| 2006 | 2005 | |||||
| ASSETS | ||||||
| Current | ||||||
| Cash | $ | 62 | $ | 109 | ||
| Other | 85 | 91 | ||||
| 147 | 200 | |||||
| Property and equipment | 6,057 | 11,057 | ||||
| $ | 6,204 | $ | 11,257 | |||
| LIABILITIES AND SHAREHOLDERS' DEFICIENCY | ||||||
| Current liabilities | ||||||
| Accounts payable and accrued liabilities | $ | 51 | $ | 43 | ||
| Accrued interest payable to shareholders | 3,065 | 1,985 | ||||
| Due to a related party | 300 | 300 | ||||
| Due to a shareholder | 705 | 199 | ||||
| Note payable to shareholders | 3,757 | 3,757 | ||||
| 7,878 | 6,284 | |||||
| Rehabilitation provision | 307 | 307 | ||||
| Debentures payable to shareholders | 13,600 | 14,155 | ||||
| 21,785 | 20,746 | |||||
| Shareholders' deficiency | ||||||
| Common stock, $0.01 par value; 16,367 shares authorized; 16,202 shares | ||||||
| issued and outstanding | - | - | ||||
| Accumulated deficit | (15,581 | ) | (9,489 | ) | ||
| (15,581 | ) | (9,489 | ) | |||
| $ | 6,204 | $ | 11,257 |
| /s/ Markus Muller | |
| Director |
The accompanying notes are an integral part of these consolidated financial statements.
59
4025776 CANADA INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Canadian Dollars, in Thousands except per share numbers)
| Year ended June 30 | ||||||
| 2006 | 2005 | |||||
| Revenue | $ | - | $ | - | ||
| Cost of operations | - | - | ||||
| Gross profit | - | - | ||||
| Expenses | ||||||
| General and administrative expenses | (554 | ) | (911 | ) | ||
| Loss before other items | (554 | ) | (911 | ) | ||
| Other items | ||||||
| Interest expenses | (1,129 | ) | (1,097 | ) | ||
| Impairment charge | (5,000 | ) | (7,266 | ) | ||
| Exchange gain (loss) | 586 | 1,496 | ||||
| Other income | 5 | 104 | ||||
| (5,538 | ) | (6,763 | ) | |||
| Net loss for the year | (6,092 | ) | (7,674 | ) | ||
| Basic loss per common share | $ | (376.00 | ) | $ | (473.65 | ) |
| Weighted average number of common shares outstanding | 16,202 | 16,202 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
60
4025776 CANADA INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIENCY
(Canadian Dollars in thousands)
FOR THE PERIODS ENDED JUNE 30
| Common Stock | ||||||||||||
| Number | Accumulated | |||||||||||
| of Shares | Amount | Deficit | Total | |||||||||
| Balance at June 30, 2004 | 16,202 | - | (1,815 | ) | (1,815 | ) | ||||||
| Net loss | - | - | (7,674 | ) | (7,674 | ) | ||||||
| Balance at June 30, 2005 | 16,202 | - | (9,489 | ) | (9,489 | ) | ||||||
| Net loss | - | - | (6,092 | ) | (6,092 | ) | ||||||
| Balance at June 30, 2006 | 16,202 | $ | - | $ | (15,581 | ) | $ | (15,581 | ) | |||
The accompanying notes are an integral part of these consolidated financial statements.
61
4025776 CANADA INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Canadian Dollars, in Thousands)
| Year ended June 30 | ||||||
| 2006 | 2005 | |||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||
| Net loss for the year | $ | (6,092 | ) | $ | (7,674 | ) |
| Items not affecting cash | ||||||
| Impairment charge | 5,000 | 7,266 | ||||
| Unrealized foreign exchange | (555 | ) | (1,388 | ) | ||
| Changes in non-cash working capital items | ||||||
| (Increase) decrease other assets | 6 | (84 | ) | |||
| Increase in accounts payable and accrued liabilities | 8 | 33 | ||||
| Increase in accrued interest payable | 1,080 | 984 | ||||
| Net cash used in operating activities | (553 | ) | (863 | ) | ||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||
| Business acquisition | - | - | ||||
| Additions to property and equipment | - | - | ||||
| Net cash used in investing activities | - | - | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||
| Due to a related party | - | 300 | ||||
| Due to a shareholder | 506 | 199 | ||||
| Proceeds from note payable | - | 422 | ||||
| Net cash provided by financing activities | 506 | 921 | ||||
| Change in cash for the year | (47 | ) | 58 | |||
| Cash, beginning of year | 109 | 51 | ||||
| Cash, end of year | $ | 62 | $ | 109 | ||
Supplemental disclosure with respect to cash flows ( Note 8)
The accompanying notes are an integral part of these consolidated financial statements.
62
| 4025776 CANADA INC. |
| NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
| JUNE 30, 2006 |
| 1. | THE COMPANY |
4025776 Canada Inc. was incorporated in April 2002 in Canada. In August 2003, the Company acquired cobalt refining assets from another company which constituted a business. The acquisition was made consistent with the Company's plans to process and sell cobalt. The aggregate purchase price was $17,714 and consisted of cash in the amount of $2,500 and debenture payable amounting to $15,214 (Euro 9,547). The Company, through its wholly owned subsidiary 36569 Yukon Inc., holds the cobalt processing facility located in Ontario, Canada. The facility is to produce cobalt compounds utilizing environmentally compatible and commercially proven technologies. The Company is presently investigating its alternative uses. | |
These consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All significant intercompany accounts and transactions have been eliminated. | |
These consolidated financial statements have been prepared assuming the Company will continue on a going concern basis. The Company has incurred losses since inception and the ability of the Company to continue as a going-concern depends upon its ability to develop profitable operations and to continue to raise adequate financing. In order for the Company to meet its liabilities as they come due and to continue its operations, the Company is solely dependent upon its ability to generate such financing. | |
There can be no assurance that the Company will be able to continue to raise funds in which case the Company may be unable to meet its obligations. Should the Company be unable to realize on its assets and discharge its liabilities in the normal course of business, the net realizable value of its assets may be materially less than the amounts recorded on the consolidated balance sheets. | |
The dollar amounts in the footnotes are in Canadian dollars, as rounded to the nearest thousand, unless otherwise indicated. | |
| 2. | SIGNIFICANT ACCOUNTING POLICIES |
Use of estimates | |
The preparation of financial statements in accordance with Canadian generally accepted accounting principles requires management to make estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. | |
Cash | |
The Company regularly maintains cash balances in financial institutions in excess of insured limits. |
63
| 4025776 CANADA INC. |
| NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
| JUNE 30, 2006 |
| 2. | SIGNIFICANT ACCOUNTING POLICIES(continued) |
Property and Equipment | |
Property and equipment is recorded at cost, which includes the cost of renewal and betterments. Depreciation will be charged when the assets are ready for use. | |
Impairment of Long-Lived Assets | |
The Company periodically evaluates long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing the review of recoverability, the Company estimate future cash flows expected to result from the use of the asset and its eventual disposition. An impairment loss is measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value. | |
Rehabilitation Provision | |
The Company recognizes the fair value of a liability for an asset retirement obligation in the year in which it is incurred when a reasonable estimate of fair value can be made. Changes in the liability for an asset retirement obligation due to the passage of time will be measured by applying an interest method of allocation. The amount will be recognized as an increase in the liability and an accretion expense in the statement of operations. | |
Revenue Recognition | |
Cobalt revenue is recognized net of agency fees when the title of cobalt passes to the buyers, the amount of revenue is fixed or determinable, and collectibility is reasonably assured. | |
Foreign currency | |
Foreign currency activities are translated to Canadian dollars at the exchange rate in effect on the transaction date. Foreign currency denominated monetary assets and liabilities are revalued to Canadian dollars at the exchange rate in effect at the balance sheet date. Foreign exchange gains or losses are included in the results of operations for the year. | |
Income taxes | |
Future income taxes are recorded using the asset and liability method whereby future tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Future tax assets and liabilities are measured using the enacted or substantively enacted tax rates expected to apply when the asset is realized or the liability settled. The effect on future tax assets and liabilities of a change in tax rates is recognized in income in the period that substantive enactment or enactment occurs. To the extent that the Company does not consider it more likely than not that a future tax asset will be recovered, it provides a valuation allowance against the excess. |
64
| 4025776 CANADA INC. |
| NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
| JUNE 30, 2006 |
| 2. | SIGNIFICANT ACCOUNTING POLICIES(continued) |
Earnings per share | |
Basic earnings per share is determined by dividing net income applicable to common shares by the weighted average number of common shares outstanding for the year. Diluted earnings per share is determined using the same method as basic earnings per share except the weighted average number of common shares outstanding includes the potential dilutive effect of stock options, warrants and convertible debt. No stock options, warrants and convertible debenture were outstanding as of June 30, 2006, 2005 and 2004, respectively. As a result, there was no potential dilutive impact in these years. | |
Comparative Figures | |
Certain comparative figures have been reclassified to conform with current year's presentation. | |
Future Changes to Accounting Standards | |
Financial Instruments | |
AcSB issued Canadian Institute of Chartered Accountants ("CICA") Handbook Section 3855,Financial Instruments – Recognition and Measurement, which establish the standards for recognizing and measuring financial assets, financial liabilities and non-financial derivatives. This section applies to interim and annual financial statements relating to fiscal years beginning on or after October 1, 2006. | |
AcSB issued CICA Handbook Section 3861Financial Instruments – Disclosure and Presentation, which establishes standards for presentation of financial instruments and non-financial derivatives, and identifies the information that should be disclosed about them. The presentation paragraphs deal with the classification of financial instruments, from the perspective of the issuer, between liabilities and equity, the classification of related interest, dividends, losses and gains, and the circumstances in which financial assets and financial liabilities are offset. The disclosure paragraphs deal with information about factors that affect the amount, timing and certainty of an entity's future cash flows relating to financial instruments. This section applies to interim and annual financial statements relating to fiscal years beginning on or after October 1, 2006. | |
AcSB issued CICA Handbook Section 3862,Financial Instruments – Disclosures,which requires entities to provide disclosures in their financial statements that enable users to evaluate (a) the significance of financial instruments for the entity's financial position and performance; and (b) the nature and extent of risks arising from financial instruments to which the entity is exposed during the period and at the balance sheet date, and how the entity manages those risks. The principles in this section complement the principles for recognizing, measuring and presenting financial assets and financial liabilities in Section 3855, | |
Financial Instruments – Recognition and Measurement,Section 3863,Financial Instruments – Presentation,and Section 3865,Hedges.This section applies to interim and annual financial statements relating to fiscal years beginning on or after October 1, 2007. | |
AcSB issued CICA Handbook Section 3863,Financial Instruments – Presentation,which is to enhance financial statement users' understanding of the significance of financial instruments to an entity's financial position, performance and cash flows. This section establishes standards for presentation of financial instruments and non-financial derivatives. It deals with the classification of financial instruments, from the |
65
| 4025776 CANADA INC. |
| NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
| JUNE 30, 2006 |
| 2. | SIGNIFICANT ACCOUNTING POLICIES(continued) |
Future Changes to Accounting Standards (continued) | |
perspective of the issuer, between liabilities and equity, the classification of related interest, dividends, losses and gains, and the circumstances in which financial assets and financial liabilities are offset. This section applies to interim and annual financial statements relating to fiscal years beginning on or after October 1, 2007. | |
Hedges | |
AcSB issued CICA Handbook Section 3865,Hedges, which describe when and how hedge accounting may be applied. The section is effective for years beginning on or after October 1, 2006. | |
Shareholders' Equity | |
AcSB issued CICA Handbook Section 1530,Comprehensive Income, which establishes standards for reporting and display of comprehensive income. This section is effective for years beginning on or after October 1, 2006. | |
AcSB also revised CICA Handbook Section 3250,Surplus, and reissued it as CICA Handbook Section 3251,Equity. The section is also effective for years beginning on or after October 1, 2006. The changes in how to report and disclose equity and changes in equity to provide consistency with the new requirements of Section 1530,Comprehensive Income. | |
AcSB issued CICA Handbook Section 1535, which establishes standards for disclosing information about an entity's capital and how it is managed. This section applies to interim and annual financial statements relating to fiscal years beginning on or after October 1, 2007. | |
Accounting Changes | |
AcSB issued CICA Handbook Section 1506. The main features of this new standard are (a) voluntary changes in accounting policy are made only if they result in the financial statements providing reliable and more relevant information; (b) changes in accounting policy are applied retrospectively unless doing so is impracticable (as defined in the section); (c) prior period errors are corrected retrospectively; and (d) new disclosures are required in respect of changes in accounting policies, changes in accounting estimates and correction of errors. This new standard is effective for fiscal years beginning on or after January 1, 2007. | |
Management is analyzing the requirements of these new sections. |
66
| 4025776 CANADA INC. |
| NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
| JUNE 30, 2006 |
| 3. | PROPERTY AND EQUIPMENT |
| June 30, 2006 | June 30, 2005 | ||||||
| Land | $ | 1,725 | $ | 1,725 | |||
| Buildings | 250 | 250 | |||||
| Equipment | 4,082 | 9,082 | |||||
| $ | 6,057 | $ | 11,057 |
Due to a change in economic conditions and the facility has not been put into use, the Company performed a review of recoverability of its long-term assets. As a result, an impairment charge of $5,000 and $7,266 were recognized in 2006 and 2005, respectively to reflect the estimated net realizable value of the long- term assets. | |
| 4. | REHABILITATION PROVISION |
The Company's rehabilitation provision consists of reclamation and closure costs for its production facility. The present value of obligations is estimated to be $307, reflecting payments in approximately ten years. Significant reclamation and closure activities include remediation for site contamination and demolition. The undiscounted value of this liability is $483. The rehabilitation provision which has been determined using discount rate of 7.25%. No accretion has been recorded for the years ended June 30, 2006, 2005 and 2004 as it was considered to be insignificant. | |
| 5. | TRANSACTION WITH AFFILIATES |
The Company has entered into a credit facility with Blue Earth Refineries Inc. ("Blue Earth"), a shareholder which owns 49.2% of the Company's common stock, that allows the Company to draw up to $6,000 to finance operations and capital acquisitions. Interest accrues monthly at the Royal Bank of Canada prime rate plus 3% (9.00% at June 30, 2006 and 7.25% at June 30, 2005). Principal and interest are due on demand. The note is secured by property and equipment. Amounts drawn on the facility amounted to $2,142 at June 30, 2006 and 2005, respectively. Accrued interest was $413 and $239 at June 30, 2006 and 2005, respectively. The Company has an amount due to a company with a common director with Blue Earth in the amount of $300 at June 30, 2006 and 2005, respectively. | |
The Company also entered into a credit facility with First Equity Securities AG ("First Equity"), a shareholder which owns 45% of its common stock, that allows the Company to draw up to $5,000 to finance operations and capital acquisition. Interest accrues monthly at the Royal Bank of Canada prime rate plus 3% (9.00% at June 30, 2006 and 7.25% at June 30, 2005). Principal and interest are due on demand. The note is secured by property and equipment. Amounts drawn on the facility amounted to $1,615 at June 30, 2006 and 2005, respectively. Accrued interest was $355 and $225 at June 30, 2006 and 2005, respectively. During 2006, certain expenses of the Company were funded by First Equity in the amount of $506 (2005 - $199, 2004 - $nil). As a result, the Company has an amount due to First Equity in the amount of $705 and $199 at June 30, 2006 and 2005, respectively. | |
The Company has debentures payable to the Company's shareholders and are secured by the Company's property and equipment. Interest on the debentures accrues at the three-month LIBOR rate plus 3% (resulting in a rate of 6.84% at June 30, 2006 and 5.70% at June 30, 2005). Interest is to be paid each |
67
| 4025776 CANADA INC. |
| NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
| JUNE 30, 2006 |
| 5. | TRANSACTION WITH AFFILIATES (cont'd…) |
March 31 provided the Company reaches certain levels of operating cash flow, as defined by the indenture. These cash flow levels have not been reached. The debentures are due in August 2013. Accrued interest amounted to $2,346 and $1,521 at June 30, 2006 and 2005, respectively. | |
| 6. | INCOME TAXES |
A reconciliation of income taxes at statutory rates is as follows: |
| 2006 | 2005 | ||||||
| Net loss for the year | $ | (6,092 | ) | $ | (7,674 | ) | |
| Expected income tax benefit | $ | 2,199 | $ | 2,770 | |||
| Changes in taxes resulting from: | |||||||
| Non-deductible mining expenses | (25 | ) | (93 | ) | |||
| Unrealized foreign exchange gain (loss) | (200 | ) | (505 | ) | |||
| Impairment charges | (1,805 | ) | (2,623 | ) | |||
| Change in valuation allowance | (169 | ) | 451 | ||||
| Income tax expense | $ | - | $ | - |
The significant components of the Company's future income tax assets are as follows:
| 2006 | 2005 | ||||||
| Future income tax assets: | |||||||
| Non-capital loss carry-forwards | $ | 1,674 | $ | 1,104 | |||
| Capital assets | 3,705 | 1,900 | |||||
| Valuation allowance | (5,379 | ) | (3,004 | ) | |||
| Net future income tax assets | $ | - | $ | - |
The Company has available for deduction future taxable income against non-capital losses of approximately $4,635. The non-capital losses, if not utilized, will expire through 2026. Future tax benefits which may arise as a result of these non-capital losses have been fully reserved for in these financial statements.
68
| 4025776 CANADA INC. |
| NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
| JUNE 30, 2006 |
| 7. | FINANCIAL INSTRUMENTS |
The Company's financial instruments consist of cash, accrued interest payable, due to a related party, due to a shareholder, accounts payable and accrued liabilities, note payable and debentures payable. Unless otherwise noted, it is management's opinion that the Company is not exposed to significant credit risks arising from these financial instruments. The fair value of debentures payable to shareholders cannot be determined due to the uncertainty of the liquidity of the Company and the ultimate realization of the debt. The fair value of the remaining financial instruments approximates their carrying value, unless otherwise noted. | |
Interest rate risk | |
Interest rate risk arises from the possibility that the value of, or cash flows related to, a financial instrument will fluctuate as a result of changes in market interest rates. The Company is exposed to financial risk from the interest rate differentials between the market rate and the rates used on their financial instruments. | |
Currency risk | |
The Company is exposed to financial risk arising from fluctuations in foreign exchange rates. The Company does not use derivative instruments to manage its exposure to foreign currency risk. | |
| 8. | SUPPLEMENTAL DISCLOSURE WITH RESPECT TO CASH FLOWS |
| 2006 | 2005 | ||||||
| Cash paid during the year for interest | $ | - | $ | - | |||
| Cash paid during the year for taxes | - | - |
In addition to non-monetary transactions that are disclosed elsewhere in these financial statements, the Company entered into a non-monetary transaction in 2004 pursuant to the issuance of a debenture payable for property and equipment in the amount of $15,214. | |
| 9. | SEGMENTED INFORMATION |
All of the Company's operations are in a single reportable segment located in Canada. |
69
| 4025776 CANADA INC. |
| NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
| JUNE 30, 2006 |
| 10. | UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES |
The Company's consolidated financial statements have been prepared in accordance with generally accepted accounting principles in Canada. There are no reconciling items between Canadian and United States generally accepted accounting principles for the Company. | |
New Accounting Standards | |
Statement of Financial Accounting Standards ("SFAS") No. 154,Accounting Changes and Error Corrections,replaces Accounting Principles Board ("APB") Opinion No. 20,Accounting Changes, and SFAS No. 3,Reporting Accounting Changes in Interim Financial Statements, and changes the requirements for the accounting for and reporting of a change in accounting principle. This Statement applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Management is analyzing the requirements of this new standard and believes that its adoption will not have any significant impact on the Company's financial statements. | |
SFAS No. 157:Fair Value Measurements,defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Management is analyzing the requirements of this new standard. | |
FASB Staff Position ("FSP") No. FAS 115-1 and FAS 124-1,The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,addresses the determination as to when an investment is considered impaired, whether that impairment is other than temporary and the measurement of an impairment loss. This FSP also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairment. This FSP shall be applied to reporting periods beginning after December 15, 2005. The Company's preliminary assessment does not indicate that this FSP will have a significant impact on the financial statements. | |
FASB Interpretation ("FIN") No. 48:Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No.109, clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with SFAS No. 109,Accounting for Income Taxes. This interpretation (1) prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return and (2) provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. This interpretation is effective for fiscal years beginning after December 15, 2006. Management is analyzing the requirements of this new standard. | |
The Emerging Issues Task Force ("EITF") reached consensus on EITF 04-13,Accounting for Purchases and Sales of Inventory with the Same Counterpartythat two or more inventory purchase and sales transactions with the same counterparty that are entered into in contemplation of one another should be |
70
| 4025776 CANADA INC. |
| NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
| JUNE 30, 2006 |
| 10. | UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (continued) |
New Accounting Standards (continued) | |
combined for purposes of applying Opinion 29,Accounting for Nonmonetary Transactions. The EITF also reached consensus that a nonmonetary exchange whereby an entity transfers finished goods inventory in exchange for the receipt of raw materials or WIP inventory within the same line of business is not an exchange transaction to facilitate sales to customers for the entity transferring the finished goods and, therefore, should be recognized by that entity at fair value if (a) fair value is determinable within reasonable limits and (b) the transaction has commercial substance. All other nonmonetary exchanges of inventory within the same line of business should be recognized at the carrying amount of the inventory transferred. This EITF issue should be applied to new arrangements entered into, and modifications or renewals of existing arrangements, beginning in the first interim or annual reporting period beginning after March 15, 2006. Management has analyzed the requirements of this new standard and determined that there will be no significant impact on the Company's financial position. | |
FSP AUG AIR-1,Accounting for Planned Major Maintenance Activities, prohibits the use of the accrued- in-advance method and requires the application of the same method of accounting for planned major maintenance activities in annual and interim financial reporting periods. This standard is effective for fiscal years beginning after December 15, 2006. Management has analyzed the requirements of this new standard and determined that there will be no significant impact on the Company's financial position. | |
In September 2006, the SEC issued Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements" ("SAB 108"). SAB 108 provides guidance on how prior year misstatements should be considered when quantifying misstatements in the current year financial statements. SAB 108 requires registrants to quantify misstatements using both a balance sheet and an income statement approach and evaluate whether either approach results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. SAB 108 is effective for fiscal years ending after November 15, 2006. The Company's preliminary assessment does not indicate that this SAB will have a significant impact on the financial statements. |
71
4025776 CANADA INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 2006
72
4025776 CANADA INC.
CONSOLIDATED BALANCE SHEETS
AS AT NOVEMBER 30
(UNAUDITED)
(Canadian Dollars, in Thousands except par value amount)
| 2006 | |||
| ASSETS | |||
| Current | |||
| Cash | $ | 44 | |
| Other | 85 | ||
| 129 | |||
| Property and equipment | 6,057 | ||
| $ | 6,186 | ||
| LIABILITIES AND SHAREHOLDERS' DEFICIENCY | |||
| Current liabilities | |||
| Accounts payable and accrued liabilities | $ | 2 | |
| Accrued interest payable to shareholders | 3,065 | ||
| Due to a related party | 300 | ||
| Due to a shareholder | 889 | ||
| Note payable to shareholders | 3,757 | ||
| 8,013 | |||
| Rehabilitation provision | 307 | ||
| Debentures payable to shareholders | 13,600 | ||
| 21,920 | |||
| Shareholders' deficiency | |||
| Common stock, $0.01 par value; 16,367 shares authorized; 16,202 shares | |||
| issued and outstanding | - | ||
| Accumulated deficit | (15,734 | ) | |
| (15,734 | ) | ||
| $ | 6,186 |
73
4025776 CANADA INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR FIVE MONTHS ENDED NOVEMBER 30 (UNAUDITED)
(Canadian Dollars, in Thousands except per share numbers)
| 2006 | |||
| Revenue | $ | - | |
| Cost of operations | - | ||
| Gross profit | - | ||
| Expenses | |||
| General and administrative expenses | - | ||
| Loss before other items | - | ||
| Other items | |||
| Interest expenses | - | ||
| Impairment charge | - | ||
| Exchange gain (loss) | - | ||
| Other income | - | ||
| - | |||
| Net loss for the year | - | ||
| Basic loss per common share | $ | - | |
| Weighted average number of common shares outstanding | 16,202 |
74
Item 19. Exhibits.
Exhibits Required by Form 20-F
| Exhibit | |
| Number | Description |
| 1.1 | Certificate of Incorporation underThe International Business Companies Act(British Virgin Islands)(1) |
| |
| 1.2 | Memorandum of Association and Article of Association(1) |
| |
| 1.3 | Amendment to Memorandum of Association and Articles of Association(2) |
| |
| 4.1 | Distribution Agreement dated June 5, 2004 between Kasese Cobalt Company and Danzas relating to the sale and distribution of Kasese Cobalt Company cobalt cathodes(1) |
| |
| 4.2 | Arrangement Agreement dated July 13, 2004 among MFC Bancorp (now known as KHD Humboldt Wedag International Ltd.), Sutton Park, Blue Earth, New Sutton Canco, New Nature Canco and 4025750 Canada(1) |
| |
| 4.3 | Term Sheet dated November 30, 2006 between Blue Earth and First Equity Securities AG(2) |
| |
| 8.1* | |
| |
| 12.1* | Section 302 Certification under Sarbanes – Oxley Act of 2002 for Michael J. Smith |
| |
| 13.1* | Section 906 Certification under Sarbanes – Oxley Act of 2002 for Michael J. Smith |
| (1) | Incorporated by reference from our Form 20-F filed on October 1, 2004. |
| (2) | Incorporated by referenced from our Form 20-F filed on March 5, 2007. |
* Filed herewith.
75
SIGNATURE
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
BLUE EARTH REFINERIES INC.
/s/ Michael J. Smith
Michael J. Smith
President and Secretary
Date: December 19, 2007
