BQE WATER INC.
(formerly BioteQ Environmental Technologies Inc.)
MANAGEMENT’S DISCUSSION AND ANALYSIS
For the years ended December 31, 2017 and 2016
1
Management’s Discussion and Analysis
April 17, 2018
The following Management’s Discussion and Analysis provides information that management believes is relevant to an
assessment and understanding of our consolidated results of operations and financial condition. We have prepared this
document in conjunction with our broader responsibilities for the accuracy and reliability of the financial statements and
the development and maintenance of appropriate information systems and internal controls to ensure that the financial
information is complete and reliable. The Audit Committee of the Board of Directors, consisting of independent directors,
has reviewed this document and all other publicly reported financial information, for integrity, usefulness, reliability and
consistency.
This 2017 Management’s Discussion and Analysis (“MD&A”) should be read in conjunction with our audited consolidated
financial statements for the year ended December 31, 2017, under International Financial Reporting Standards (“IFRS”) as
issued by the International Accounting Standards Board (“IASB”) and interpretations of the IFRS Interpretations Committee
(“IFRIC”).
Users should consider the disclosures in note 2(b) titled “Going concern assumption” of the audited consolidated financial
statements for the year ended December 31, 2017 and the sections “2017 Commentary and 2018 Outlook” and “Liquidity
and Capital Resources” in this MD&A.
All financial information is presented in Canadian dollars unless otherwise noted. Certain statements contained in the
MD&A constitute forward-looking statements. Such forward-looking statements involve a number of known and unknown
risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to
be materially different from any future results, performance or achievements expressed or implied by such forward-looking
statements. Readers are cautioned not to place undue reliance on these forward looking statements, which speak only as of
the date the statements were made and readers are advised to consider such forward-looking statements in light of the
risks.
OUR BUSINESS
BQE Water Inc. (or the “Company”) (formally BioteQ Environmental Technologies Inc.) is making the mining and
metallurgical industry more sustainable and profitable by implementing innovative water management and treatment in
this sector. We have unique expertise and intellectual property related to treatment of mine water and metallurgical bleed
streams which helps our clients minimize Life Cycle Costs and risks associated with water.
BQE Water is listed on the TSX Venture Exchange under the symbol BQE.
Additional information may be found on our website www.bqewater.com and also on SEDAR at www.sedar.com.
OUR STRATEGY
The Company is focusing on monetizing the value of its IP and expertise primarily through the service of long-term
operation and maintenance of water treatment plants (“WTP”) which generate recurring revenue that is directly linked to
plant performance. As the period between the identification of new projects and treatment plants entering their operation
phase can be lengthy, BQE Water also generates revenue from technical services that are project specific and generally
non-recurring in nature. These services include process consulting, laboratory treatability assessments, field pilot
demonstrations, and feasibility engineering studies. All these activities allow BQE Water to follow projects through the
entirety of their development phases and enable the identification of new opportunities.
Historically, the Company monetized the value of its IP by sharing the value of metals recovered from wastewater. Although
this no longer represents the focus of our business and is expected to diminish in importance, the sale of recovered metals
still represents a significant portion of BQE Water’s recurring revenues.
We recognize that in order to stay competitive and create value for our shareholders in the long-term, the Company must
remain actively engaged in innovation, improvement, and development of new water treatment technologies. While many
2
of these activities are funded directly by our clients, BQE Water also contributes its own resources towards research and
development which enable BQE Water to apply for government programs that are based on matching contributions.
Headquartered in Vancouver, British Columbia, Canada, BQE Water also has regional offices in Chile and China, which are
the two key geographical markets in our industry. Over the last two years we have strengthened the capabilities of our
regional offices which now include small mobile pilot plants and laboratory scale testing facilities.
NON-GAAP MEASURES
We use non-GAAP financial measures to supplement our consolidated financial statements presented in accordance with
generally accepted accounting principles, or GAAP, to enhance investors’ and observers’ overall understanding of the
Company's current financial performance. Non-GAAP financial measures have limitations in that they do not reflect all of
the amounts associated with our results of operations as determined in accordance with GAAP. In addition, non-GAAP
financial measures do not have any standardized meaning prescribed by GAAP and are therefore likely to be comparable to
similar non-GAAP financial measures presented by other companies. Non-GAAP financial measures should only be used to
evaluate our results of operations in conjunction with the corresponding GAAP measures.
Proportional Results
Due to changes to IFRS in 2012, the revenue and expenses associated with our Chinese joint ventures can no longer be
proportionally consolidated into the Company’s revenue and expenses as defined by GAAP. Currently, the revenue and
expenses associated with our proportionate share of activities in our joint venture are netted and disclosed as a single line
item as ‘Share of results of equity accounted joint ventures’ on our consolidated statements of loss.
To provide additional insight into our financial results, certain statements in this MD&A disclose the effective portion of
results that we would have reported if our joint venture results had been proportionately integrated into our results and
referred to as BQE Water’s proportional share (“Proportional”). All Proportional financial measures disclosed in this MD&A
are non-GAAP measures.
Proportional Revenue
The Non-GAAP financial measures of Proportional Revenue adds BQE’s shares of joint venture revenues to our revenue
reported under GAAP. Proportional Revenues for the twelve-month periods ended December 31, 2017 and 2016 are as
follows:
(in $’000s)
Reported revenues under GAAP
Share of reported revenues from joint ventures
Proportional Revenue for the year
2017
$
4,057
5,219
9,276
Adjusted EBITDA
Adjusted EBITDA (“earnings before interest, taxes, depreciation and amortization”) is derived as follows:
(in $’000s, all amounts include BQE Water’s proportionate share of joint venture results)
GAAP: Net loss
add: interest expense
add: income taxes
add: depreciation and amortization
EBITDA
add: stock-based compensation (recovery)
add: net foreign exchange loss (gain)
Adjusted EBITDA
3
2017
$
(362)
212
99
724
673
68
35
776
2016
$
3,961
4,401
8,362
2016
$
(2,325)
100
(26)
747
(1,504)
76
1,436
8
2017 OVERVIEW
Financial Highlights
• Revenues for the year as reported under GAAP were $4.1 million compared to $4.0 million in 2016;
•
Proportional revenues for the year were $9.3 million compared to $8.4 million in 2016, an 11% increase over the prior
year;
• Net loss as reported under GAAP was $362,000 compared to $2.3 million in 2016;
• Adjusted EBITDA for the year was $776,000 compared to $8,000 in 2016;
•
•
Cash reported under GAAP, as of December 31, 2017 was $1 million compared to $2.2 million at the end of 2016; and
Proportional Cash, which includes our share held in joint ventures, as of December 31, 2017 was $2.5 million compared
to $3.0 million at the end of 2016.
Financing
On July 6, 2016, we issued convertible loans (“Loan”) with an aggregate principle of $1.5 million. The Loan is with multiple
lenders which include certain directors, management, and employees of BQE Water, individual investors, and non-
management insiders of the company. The Loan bears interest at a rate of 8% per annum with interest being payable semi-
annually from the issuance date. During the term of the Loan, the lenders will hold a first charge security interest over the
assets of the company. Upon prepayment or maturity of the Loan, each lender may elect to convert all or any portion of the
unpaid principal into common shares of BQE Water at a conversion price of $0.06 cents per share. Under the original
agreement, the Loan is due for repayment 18 months from the issuance date of January 6, 2018.
On January 5, 2018, the Company replaced the original Loan with a replacement Loan which extends the maturity date for
an additional 12 months, from January 6, 2018 to January 6, 2019. The replacement Loan carries the same terms and
conditions as the original Loan. The extension with the replacement Loan will continue to be used to fund general operating
expenses and ensure we have the financial resources to continue executing on our longer term growth strategy.
Operation of Water Treatment Plants
Raglan Mine operation for Glencore Canada Corporation, Quebec
During the year, we completed our 14th operating season at the Raglan Mine owned by Glencore Canada Corporation,
where BQE Water is responsible for the ongoing operation of three WTP. Our contract is performance based and our
revenue is linked directly to the volume of water treated to the client’s specification for discharge into the environment.
The operating results for the 12 months ended December 31, 2017 are as follows:
(in ’000s)
Water discharged (cubic metres)
2017
1,168
2016
1,382
Joint venture operation with Jiangxi Copper Company, China
Our joint venture in China with partner Jiangxi Copper Company (“JCC”) operated three WTP during 2017. Although most of
the treated water is discharged into the environment, some treated water is occasionally recycled. Revenue is derived from
the sale of copper recovered from wastewater. The operating results for the 12 months ended December 31, 2017 are as
follows:
(in ’000s)
Water treated (cubic metres)
Copper produced (pounds)
2017
17,160
3,449
2016
18,180
3,609
Water Treatment Technical Services
BQE Water’s technical expertise and IP are applicable across broad areas of water management. The highlights of the
technical services provided to clients for projects globally during 2017 are summarized below.
4
Optimization of existing WTP operated by third-party
• Wastewater treatment at metal smelting and refining operations in Mexico
• Mine drainage treatment at a former US EPA Superfund site in Colorado
Environmental Assessment of new mining projects in Canada
Water management and permitting assistance
•
• Water management at a proposed new metallurgical coal mine in Canada
• Waste brine management at a mine in the US
Metal recovery from smelter waste
•
• Germanium recovery from smelter waste in Chile
Copper and zinc recovery from wastewater at Shandong, China
Selenium removal from tailings pond using BQE Water’s electro-reduction process in the Yukon, Canada
Selenium removal from mine impacted waters - development and deployment of BQE Water’s proprietary technology
•
•
•
Initial detailed engineering of BQE Water’s Selen-IX™ process for the Kemess underground project, Canada
Industrial scale demonstration of electro-reduction co-sponsored by three mining companies, Canada
Sulphate removal from smelter and mine wastewater
•
•
Pilot demonstration of BQE Water’s Sulf-IX™ process in Peru
Pilot demonstration of BQE Water’s Sulf-IX™ process at Dexing Mine in China
Cyanide recovery and recycle for gold recovery using the SART process
•
Expansion and re-start of a SART plant built by BQE Water in 2008 at Lluvia de Oro, Mexico
Selenium control at an oil refinery in Alberta, Canada
Treatability assessments using laboratory scale testing
•
• Reverse osmosis performance on mine impacted waters, Canada
•
•
Cyanide recovery from thiocyanate, Canada
Cyanide destruction, Canada
2017 COMMENTARY AND OUTLOOK FOR 2018
Overall, 2017 was very successful and the key achievements of the Company can be summarized as follows:
• Maintained a strong safety and environmental record at its operations with no accidents and environmental incidents;
• Achieved the best financial performance in its history with annual adjusted EBIDTA of $776,000, an increase of
$768,000 over 2016;
•
•
•
•
•
Increased Proportional Revenue over 2016, as non-recurring component of the Proportional Revenue stagnated for
several years;
For the first time since 2009, the Company has solid prospects for new plants to be built that includes operation
services in North America
Successful industrial scale demonstration of BQE Water’s Selen-IX™ electro-reduction technology has supported its
advancement to a commercially ready status;
Completion of mobile pilot plants in Latin America and in China, to aid business development in these key strategic
markets; and
Successful expansion and re-start of a SART plant designed by BQE Water at the LLuvia de Oro Mine in Mexico
demonstrates to the industry that BQE Water can deliver SART safely, cost-effectively, and on a tight schedule.
5
Despite significant short term/quarterly fluctuations in our financial performance, the year ended 2017 marked the third
consecutive year we achieved year-over-year improvement in our adjusted EBIDTA. We are proud of this achievement
especially due to the challenges faced by the mining sector from 2015 to 2017.
The improved financial performance in 2017 is a reflection of several factors. First, the 27% increase in the average copper
price compared to 2016 increased our share of revenues from our Dexing joint venture. The remainder of the increase was
due to increased revenue generated by technical service engagements. In this context, the results in 2017 reflect the long
sales cycle in our industry where efforts over the past three years are finally having a positive impact on revenues.
Furthermore, the reduction in Company expenses and ongoing fiscal discipline applied in recent years resulted in a dramatic
improvement in the Adjusted EBIDTA from $8,000 in 2016 to $776,000 in 2017. Our overall gross margin decreased in 2017
compared to 2016 primarily due to the lowering of our project margin on a specific project to build a new mobile pilot
plant. While this reduced our gross margin in 2017, this is unlikely to occur again in the near future. More importantly, we
believe that the new pilot plant assets will help us grow our business in these strategic markets in the future.
Despite the positive trend in the Company’s financial performance over the last three years, it is important to understand
that fluctuations in profitability are unlikely to disappear in the near future. This is primarily due to the following:
• Recurring revenue from plant operations and sales of recovered metals, which accounts for approximately 55% of our
total Proportional revenue, fluctuates intrinsically as it is dependent on climatic conditions that affect total water
volume and mass of recoverable metals reporting for treatment;
• Amortization, interest charges, and income taxes in our China joint ventures are all significant relative to our
Proportional results and this is unlikely to change in the near future; and
• General and administration expenses relating to public company expenses represent a significant component of our
total expense and the timing of these expenses contributes to quarterly fluctuations in financial performance.
As we look forward to 2018, we expect the trend of year-over-year improvement to continue. We have better visibility
about certain projects that have been in our pipeline for several years. We also have a number of projects in much earlier
stages of development and while these projects provide significant opportunities for future revenues, they are conducted in
stages, hence, timing of these stages and associated revenues and cash-flows to BQE Water are uncertain. As a result, the
primary areas of focus for the Company in 2018 are to continue to grow the project pipeline and identify avenues that
would contribute to shortening the sales cycle and assist in generating revenues in the short-term.
Overall, we expect to generate sufficient cash-flow throughout 2018 to enable us to repay the principle amount of the
convertible loan due on January 6, 2019 and have sufficient cash reserves to ensure ongoing Company operations.
However, we recognize that short-term fluctuations in our revenue combined with the timing of the dividend payout from
our China joint venture represents a risk of a temporary shortfall in working capital. Management and our Board of
Directors are actively exploring options to mitigate this risk. Although the Company has been successful in securing
financing in the past, there is uncertainty whether any financing will be available in the future on terms acceptable to the
Company.
6
FINANCIAL RESULTS
(in $’000 except for per share amounts)
Revenues
less: Plant and other operating costs (excluding depreciation)
General and administration
Sales and development
Stock-based compensation
Depreciation and amortization
Share of results of equity accounted joint ventures
Loss from operations and joint ventures
Finance costs, net
Foreign exchange loss
Bad debt recovery
Other income
Loss before income taxes
Income tax recovery (expense)
Net loss for the year
Translation (loss) gain on foreign operations
Comprehensive loss for the year
Net loss per share (basic and diluted)
Proportional Revenues1
Adjusted EBITDA1
Working capital
Total assets
Total long term liabilities
Shareholders’ equity
Notes:
1. See Non-GAAP measures
7
2017
$
4,057
2,315
1,742
1,665
1,219
68
214
(1,149)
(275)
(215)
(35)
61
2
(462)
100
(362)
(12)
(374)
(0.0)
9,276
776
2016
$
3,961
1,758
2,203
1,705
1,154
76
234
(156)
(810)
(98)
(1,427)
11
-
(2,324)
(1)
(2,325)
954
(1,371)
(0.02)
8,362
8
at December 31
2017
$
at December 31
2016
$
735
6,866
1,498
4,395
1,660
7,459
1,378
4,756
COMPARISON OF QUARTERS
Financial data for the last eight quarters:
(in $’000s)
Quarters ended
Total revenues
Plant and other operating costs
(excluding depreciation)
General and administration
Sales and development
Stock-based compensation
Depreciation and amortization
Share of results of equity
accounted joint ventures
Income (loss) from operations and
joint ventures
Other expenses
Bad debt recovery
Income tax expense
Net (loss) income
Translation gain (loss)
Comprehensive (loss) income
Non-GAAP Measures:
Proportional Revenue
Adjusted EBITDA
Dec-17
$
858
Sep-17
$
1,578
Jun-17 Mar-17
$
668
$
953
Dec-16
$
1,570
Sep-16
$
1,356
Jun-16 Mar-16
$
391
$
644
599
259
410
364
25
116
642
936
383
263
34
31
656
297
376
303
15
33
418
250
495
288
(7)
33
680
890
404
181
-
58
494
862
410
356
30
60
365
279
465
268
16
59
119
(470)
(764)
(34)
195
(160)
(291)
219
172
426
349
30
57
100
(775)
695
334
(525)
52
166
(238)
(790)
(53)
-
(53)
(881)
128
(753)
(78)
61
153
831
(97)
734
(69)
-
-
265
(51)
214
(48)
-
-
(573)
9
(564)
(36)
4
(1)
19
(94)
(75)
(49)
-
-
117
22
139
(1,415)
7
-
(1,646)
1,290
(356)
(26)
-
-
(816)
(263)
(1,079)
1,839
(559)
3,147
1,088
3,182
744
1,108
(497)
2,295
107
2,411
414
2,137
71
1,519
(584)
Quarterly results can fluctuate based on the number of plants operating in the quarter, variation in the volume and grade of
water treated and variation in commodity prices. Seasonality at each operation also impacts the timing of revenue.
Operations at Raglan typically run from May to November of each year. Copper production from the operation at Dexing
increases between April and September of each year and declines during the winter months due to variations in
precipitation and the annual maintenance schedule. Revenue from technical services relating to water management occur
based on the timing of customer requirements.
8
SUMMARY OF Q4 2017 FINANCIAL RESULTS
The following is a summary of selected financial results for the three month periods ended December 31, 2017 and 2016.
Revenue
The change in revenue and Proportional Revenue from reach revenue source is shown in the table below:
(in $’000s)
Revenue source
Water treatment plant operations
Technical services
Total revenue
Share of joint venture revenue
Total Proportional Revenue
Q4 2017
$
35
823
858
981
1,839
% of total
Q4 2016
$
% of total
Total Revenue
% Change
2%
45%
47%
53%
100%
399
1,171
1,570
725
2,295
17%
51%
68%
32%
100%
(91%)
(30%)
(45%)
35%
(20%)
Revenue from water treatment operations is generated from the Company’s seasonal operation of the WTP at the Raglan
Mine. During 2017, BQE Water extended the operating contract until the end of 2020. Revenues in Q4 2017 were
significantly less than Q4 2016 due to significantly lower volumes of water requiring treatment at the mine site. We ended
the season in mid-October 2017 compared to the end of November in the prior year.
Technical services revenue includes engineering and plant design, construction and commissioning of WTP, laboratory and
pilot demonstrations, consulting, and operation support, which represents a sum of multiple contracts of varying contract
values. Revenue from technical services decreased $348,000 from the same period in 2016. The timing of revenues from
technical services fluctuates depending on client needs.
Our share of revenue from our joint venture in China is generated from metals recovered during the operation of WTP,
which is impacted by the amount and price of copper sold. During Q4 2017, the total pounds of copper recovered increased
by 12% over the comparable period in 2016. Our share of revenue increased by 35% from Q4 2016 which was due to the
increase in copper recovered and the 21% increase in average copper prices during the period.
Plant and other operating costs (excluding depreciation)
Total plant and other operating costs (excluding depreciation) in Q4 2017 were $599,000 compared to $680,000 in Q4
2016, a decrease of $81,000. The decrease is mainly due to a one-time pilot demonstration contract during Q4 2016, which
required additional engineering and laboratory labour.
Expenses
In Q4 2017, general and administration expenses were $410,000 compared to $404,000 in Q4 2016. The change in general
and administration costs were mainly due to an increase in professional fees which were offset by a decrease in rental
expenses.
Sales and development costs in Q4 2017 were $364,000 compared to $181,000 in Q4 2016, representing an increase of
$183,000. This increase reflects a decrease of engineering and laboratory labour allocated to support technical services
projects compared to the prior year’s quarter.
Depreciation and amortization expenses were $116,000 in Q4 2017 compared to $58,000 in Q4 2016. The increase of
$58,000 was due to the additional depreciation expense recorded in order to write down the net book value of the
selenium pilot plant asset to $nil.
Stock-based compensation expense in Q4 2017 was $25,000 compared to $nil in Q4 2016. Stock-based compensation costs
reflect fair value adjustments of deferred and restricted share units between each reporting period.
Overall net loss for the quarter was $881,000 compared to a net income of $20,000 in Q4 2016.
9
SUMMARY OF 2017 FINANCIAL RESULTS
The following is a summary of selected financial results for the year ending December 31, 2017.
Revenue
The change in revenue and Proportional Revenue from each revenue source is shown in the table below:
(in $’000s)
Revenue source
Water treatment plant operations
Technical services
Total revenue
Share of joint venture revenue
Total Proportional Revenue
2017
$
1,188
2,869
4,057
5,219
9,276
% of total
13%
31%
44%
56%
100%
2016
$
1,655
2,306
3,961
4,401
8,362
% of total
20%
28%
48%
52%
100%
Total Revenue
% Change
(28%)
24%
2%
19%
11%
The revenue from WTP operations at the Raglan site in 2017 decreased by $467,000 compared to 2016. Such revenue is
mainly comprised of fees earned from the cubic metre of water discharged. The total volume of water treated during 2017
decreased by 15% compared to 2016 due to the significantly lower volume of water requiring treatment at the mine site.
The revenue from technical services includes engineering and plant design, construction and commissioning of WTP,
laboratory and pilot demonstrations, consulting, and operation support, which represents a sum of multiple contracts of
varying contract values. Revenue from technical services increased by $563,000 when compared to 2016. The increase was
attributable to a greater number of projects; particularly from customers in Latin America.
Our share of revenue from our joint venture in China is generated from the metals recovered in the operation of WTP,
which is impacted by the amount and price of copper sold. Our share of total pounds of copper recovered decreased by
81,000 pounds over the prior year due to a lower amount of water treated. The average LME annual price of copper was
USD $2.80/LB and USD $2.21/LB in 2017 and 2016 respectively, representing a 27% increase. Our share of revenue from the
joint venture increased by 19% due to the increase in average annual copper prices and slightly offset by the 5% decrease in
copper recovered.
Plant and other operating costs (excluding depreciation)
Total plant and other operating costs (excluding depreciation) were $2.3 million compared to $1.7 million in 2016, an
increase of $557,000. The 35% increase is mainly due to the increase in projects from technical services and the cost to
complete the scope of projects required during 2017. Each individual project will require different levels of technical
expertise and resources depending on the specific mine conditions and treatment requirements.
Our share of total plant and other operating costs (excluding depreciation) in the joint venture in China for 2017 was $3.0
million compared to $3.5 million in 2016. The decrease is due to the improvement in reagent usage and lower water
treated in 2017.
Expenses
In 2017, general and administration expenses were consistent with prior year expenses of $1.7 million, with a slight
decrease of $40,000. The decrease in general and administration expenses were due to savings from reduced rental
expenses in 2017.
Sales and development costs in 2017 were $1.2 million, which represent an increase of $65,000 from 2016. The variance is
due to an increase of assay costs and contractor expenses to further advance the Company’s technology development.
Total depreciation and amortization expenses were $214,000 in 2017 compared to $234,000 in 2016. The change of
$20,000 was mainly due to the acceleration of depreciation of the water treatment plant and pilot plant due to the
shortening of the asset’s life to produce economic benefits for the Company.
10
Stock-based compensation was $68,000 in 2017 as compared to $76,000 in 2016. Included in the 2017 expense are $8,000
of stock-based compensation expenses relating to the stock option grant on December 7, 2017. Other stock-based
compensation expenses were lower in 2017 mainly due to a lower fair value adjustment of deferred and restricted share
units resulting from the movement of the Company share price.
Other expenses and other income
Net finance costs were $215,000 in 2017 as compared to $98,000 in 2016. During 2017, we recorded 12 months of finance
cost accretion and interest expense related to the Loan, and recorded approximately six months of interest expense during
2016 as the Loan started on July 6, 2016.
Foreign exchange loss was $35,000 in 2017 as compared to $1.4 million in 2016. These exchange gains and losses arise
mainly from changes in the value of the US dollar, Mexican peso, Chilean peso and Chinese renminbi relative to the
Company’s reporting currency in Canadian dollars. In 2016, the Company recognized a foreign exchange loss due to the
cumulative foreign translation differences of $1.4 million upon the dissolution our Australian subsidiary. It does not reflect
results from our previous or current operating activities.
In 2017, net income tax recovery was $100,000 as compared to a net income tax expense of $1,000 in the prior year. The
income tax charges in both years contained a 10% withholding tax in China for the distributions made by the Dexing joint
venture which were $52,000 in 2017 and $39,000 in 2016. These taxes are not able to be offset against accumulated tax
benefits in other jurisdictions. Also during 2017, we reversed a withholding tax payable of $152,000 relating to withholding
taxes in Chile not realized.
Overall net loss for the year was $362,000 compared to $2.3 million in 2016.
11
OPERATION SUMMARY
Joint venture operation with Jiangxi Copper Company, China
In 2007, BQE Water entered into a 50/50 joint venture arrangement with JCC, China’s largest copper producer and in April
2008, the joint venture completed the construction and commissioning of its first water treatment plant at JCC’s Dexing
Mine site, an active copper mine in China. The plant utilizes BQE Water’s ChemSulphide® process to remove dissolved
copper from acid mine drainage generated by waste dumps and low-grade stockpiles. The high-grade copper concentrate
recovered from the water is shipped to JCC’s refinery. In 2014, the joint venture completed the construction and
commissioning of two new water treatment plants at JCC’s Yinshan Mine and Dexing Mine sites. Both plants also utilize BQE
Water’s ChemSulphide® process.
All three WTP were designed by BQE Water and are operated by the joint venture. The plants are managed jointly whereby
BQE Water is responsible for technical operations and JCC is responsible for local administrative, procurement and
government activities. The joint venture partners share 50/50 in the revenues and costs. Revenues are generated through
the sale of recovered copper from the plants based on the metal price during the day when the concentrate is shipped, less
refining costs.
Operating results for all three plants during the year were as follows:
Dexing 1
(in ’000s)
Water treated (cubic metres)
Copper produced (pounds)
Dexing 2
(in ’000s)
Water treated (cubic metres)
Copper produced (pounds)
Yinshan
(in ’000s)
Water treated (cubic metres)
Copper produced (pounds)
Total Joint Venture
(in ’000s)
Water treated (cubic metres)
Copper produced (pounds)
2017
6,368
1,585
2017
8,031
1,120
2017
2,762
744
2017
17,160
3,449
2016
6,637
1,577
2016
8,547
1,190
2016
2,996
842
2016
18,180
3,609
The volume of water treated and pounds of copper recovered at all three plants will fluctuate depending on precipitation
levels and the prevailing environmental conditions at both sites. The two plants Dexing 1 and Dexing 2 treat water from the
same source and water may be diverted from one plant to the other to optimize operations.
During 2017, all three plants met or exceeded mechanical availability and process performance. Changes in water volume
and feed grade are largely the result of environmental conditions beyond the control of the joint venture and will fluctuate
from period to period.
Raglan Mine operation for Glencore Canada Corporation, Quebec
BQE Water operates three WTP at the Raglan Mine, an active nickel mine in Northern Quebec which is owned by Glencore
Canada Corporation (“Glencore”). The three plants include: BQE Water’s ChemSulphide® processes plant, BQE Water’s
Met-IX™ process plant, and one conventional lime neutralization plant. All plants discharge treated water into the
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environment. The ChemSulphide® and Met-IX™ plants also recover nickel from wastewater which is blended into the nickel
concentrate produced by the mine. Because of the harsh winter conditions in Northern Quebec, water is not available for
processing until the spring thaw; the plant runs seasonally, typically from late spring to fall. BQE Water is responsible for all
aspects of the plant operation and charges a treatment fee per cubic metre of water discharged.
Operating results for the three plants during the year were as follows:
(in ’000s cubic metres)
Water treated - ChemSulphide® plant and Met-IX™ plant
Water treated - lime neutralization plant
Total
2017
748,000
420,000
1,168,000
2016
982,000
400,000
1,382,000
In 2017, we successfully completed our 14th operating season at the site. Due to the lack of precipitation at the mine site
resulting in lower than usual volume of water requiring treatment, BQE Water started up and operated only two of the
three plants in 2017 including the ChemSulphide® plant and the lime neutralization plant. As a result, during 2017, we
treated and discharged 24% less water from our ChemSulphide® plant as compared to 2016 when both the ChemSulphide®
and Met-IX™ plants were operating. Despite the low precipitation at site, the lime neutralization plant treated and
discharged 5% more water compared to 2016. This is due to surplus water that had accumulated at the mine over the
previous five years and was stored untreated. Nevertheless the water treatment operating season in 2017 ended in early
October and was 27 days shorter than the 2016 season.
PROJECTS SUMMARY
Plant Optimization Projects
Wastewater Treatment in Mexico
In 2017, BQE Water was hired to complete an on-site mini pilot testing to demonstrate improvements to the existing water
treatment plant. The mini pilot was completed in Q2 and the customer advanced the project to the next phase which
involves BQE Water carrying out engineering design for retrofits and design changes to the existing treatment plant. The
engineering work commenced in Q4 2017 and continued to 2018. The on-site mini pilot test results show that plant
improvements would contribute to savings in reagent cost, improve effluent water quality, and reduce the amount of
residue produced by the existing treatment, creating a return on investment.
Mine Drainage Treatment at Former US EPA Superfund Site
The year 2017 marked a third consecutive year where BQE Water was retained by the City of Breckenridge to provide
ongoing operations support for an existing water treatment plant operated by municipal operators. The plant treats a very
small flow of water and does not require dedicated operating staff. The work carried out by BQE Water in 2017 was a
continuation of work completed the previous two years. The work completed in 2018 enabled a notable increase in plant
availability, installation of a new control system, and a reduction in reagent consumption achieved through the combination
of small plant modifications, new controls, and operator training. This ongoing project is significant to BQE Water as it:
•
Establishes the viability of BQE Water’s business model of ongoing technical support when plants treat small flows of
wastewater and do not require dedicated full-time operators; and
•
Elevates BQE Water’s profile in the US market through the continued successful operations at a former US EPA
Superfund site.
Water Management and Permitting Assistance
Environmental Assessment of New Mining Projects
In 2017, BQE Water was hired by two Canadian mining companies to lead water related aspects through the early stages of
environmental assessment permitting mandated by federal and provincial authorities. While the contract values for these
projects are relatively small, the importance for BQE Water is that it represents a recognition by the industry of the
Company’s expertise, understanding of regulatory requirements, and the value we can bring to the early stages of new
mining projects when critical decisions and commitments about water are made by project proponents.
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Water Management at Proposed New Metallurgical Coal Mine
In Q3, BQE Water completed a comprehensive review of water management at a proposed new metallurgical coal
operation in Canada. The review focused on reducing costs and risks associated with water as part of a Prefeasibility Study.
Waste Brine Management at a Mine in the US
BQE Water was retained by a major world gold producer to assess options for minimizing brine production from an existing
water treatment plant using Reverse Osmosis (“RO”). Following the initial study, BQE Water completed a field trial of a
process that can be used to reduce brine generation by 60 to 80% depending on feed water quality. The results of the field
trial confirmed initial predictions but due to the short-term nature of RO deployment at the site, the process could not be
implemented in time on the full scale. Nevertheless, the results form the basis for potential future work across the client’s
portfolio of operations where RO systems are used. Moreover, since RO is used at many mine sites globally, there is a
potential that our approach to brine minimization can be applied elsewhere.
Metal Recovery from Smelter Waste
Copper and Zinc Recovery from Smelter Effluent
In 2016, BQE Water entered into a joint venture agreement with a Chinese partner Beijing MWT Water Treatment Project
Limited Company (“MWT”), to design, construct, and operate a treatment plant that would recover copper and zinc from
wastewater generated by Zhaoyuan Gold Smelting Co., Ltd (“Zhaoye”). MWT provides the majority of the project financing
in exchange for 80% of the profit from the sale of recovered metals until the project capital is paid back after which point
MWT’s share is reduced to 60% with the other 20% being transferred to Zhaoye. BQE Water provides its technology and
plant operating experience in exchange for treatment fees which are built into the operating cost during the first three
years of operation. BQE Water is entitled to 20% of the ongoing profit from the sale of recovered metals. The plant
construction started in Q3 2017 and is expected to be completed in late Q2 2018.
Germanium Recovery from Smelter Waste
During 2018, BQE Water was retained by Ecometales (wholly owned subsidiary of Codelco) to assist in the preliminary
technical assessment of germanium recovery from smelter waste. The assessment involved proof of concept/fatal flaw
laboratory testing conducted in the BQE Water laboratory in Chile and scoping level engineering to support preliminary
economic assessment.
Selenium Removal from Mine Water
Selenium Removal from Tailings Pond in Yukon
In 2017, BQE Water completed treatability assessment and initiated engineering design for water treatment at an existing
mine in the Yukon. One of the key components of the treatment involves BQE Water’s electro-reduction process for
selenium with concurrent stabilization in refractory residue suitable for long-term disposal mixed with tailings. The mine’s
water chemistry is very complex with selenium present in five different forms. This has historically been the main hurdle for
implementation of other treatment systems. The work completed for this project:
• Demonstrated the proficiency for BQE Water’s electro-reduction process to successfully remove all forms of selenium
present in tailings water. This may give a niche technical advantage to BQE Water’s selenium technology compared to
other technologies in future projects depending on feed water chemistry; and
• Garnered the client’s approval with BQE Water being tasked with implementing selenium removal treatment at the
mine site in 2018.
Initial Detailed Engineering of Water Treatment Involving Selen-IX™ for Kemess Underground Project
During the year, BQE Water completed initial detailed engineering of a water treatment plant for the Kemess underground
project. The plant includes two sequential stages of treatment including heavy metals removal followed by the Selen-IX™
process for selenium removal. BQE Water’s design was then submitted to Canadian regulatory agencies for review and
approval as part of the Environmental Assessment and Permitting processes for the Kemess project. In Q3, AuRico Metals,
the owner of the project hired Golder Associates to provide a third party review of BQE Water’s design. Overall, the review
was positive and supported BQE Water’s proposal for the industrial scale demonstration of the electro-reduction step of
Selen-IX™ to mitigate the technical risk associated with the engineering scale-up from pilot to full scale. The significance of
the work completed in 2017 is summarized as follows:
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Canadian regulatory agencies reviewed Selen-IX™ favourably and the process is gaining regulatory acceptance; and
• BQE Water’s treatment plant design forms the basis of environmental permitting of the Kemess Mine;
•
•
Independent review of Selen-IX™ by Golder was positive and supported BQE Water’s proposal for the industrial
demonstration of the electro-reduction step in Selen-IX™.
Selen-IX™ - Industrial Scale Demonstration of Electro-reduction Circuit
In Q4 2017, under contract with three Canadian companies interested in Selen-IX™ technology, BQE Water designed and
constructed an industrial scale demonstration unit of the electro-reduction circuit. This unit uses one industrial electrocell
of the exact size and style as planned for full-scale Selen-IX™ plants. The unit was commissioned in November and testing
on different waters began in December. The preliminary results indicate that performance of the demonstration unit meets
expectations generated the following insights:
•
Industrial scale demonstration mitigates the main technical risk of Selen-IX™ scale-up identified by independent
reviewers;
•
Three mining companies grouped together to co-fund the demonstration which indicates the interest and potential of
Selen-IX™ in the market place; and
• Operating experience from the demonstration unit will help improve design and shorten the commissioning schedule
of full-scale plants.
Sulphate Removal from Smelter and Mine Wastewater
Pilot Demonstration of Sulf-IX™ Technology in Peru
Under contract to a base metal producer in Peru, BQE Water constructed a mobile pilot plant to demonstrate sulphate
removal from wastewater using BQE Water’s Sulf-IX™ process. The objective of the demonstration was to enable the client
to complete an internal assessment of the feasibility of eliminating water discharge into the environment and increasing
water re-use. The role of Sulf-IX™ in the operation is to produce treated water quality that permits water reuse in multiple
applications sensitive to calcium and sulphate. The demonstration was successful and the client is currently assessing if and
when to proceed into the engineering design phase to support the company’s long-term operational goal of reducing water
consumption. While the project may not proceed to implementation in the near future, the following achievements were
realized with this project:
•
• A report describing Sulf-IX™ and summarizing the results from the pilot testing was submitted to Peruvian regulators,
The first demonstration of Sulf-IX™ in Peru where enforcement of existing sulphate regulations is expected to ramp up;
increasing their awareness of BQE Water’s technology; and
• BQE Water now has a Sulf-IX™ mobile pilot plant asset available for pilot demonstrations in South America.
Pilot Demonstration of Sulf-IX™ Technology at Dexing in China
As part of a long-term plan to mitigate risks associated with tailings water quality and reuse at the Dexing Mine, JCC
engaged the BQE-JCC joint venture to demonstrate BQE Water’s Sulf-IX™ technology with the goal of reducing calcium and
sulphate concentrations in the tailings supernatant. In Q2 2017, the joint venture constructed a mobile Sulf-IX™ pilot plant
that BQE Water subsequently operated in Q3. The pilot plant reached the target water quality and a final report was
prepared for JCC to support their internal evaluation. Although JCC may not proceed with the construction of full-scale
Sulf-IX™ plant in Dexing in the near future, the project enabled BQE Water to:
• Demonstrate Sulf-IX™ technology in China for the first time; and
•
Provided BQE Water with a Sulf-IX™ mobile pilot plant asset for future pilot demonstrations in China.
Cyanide Recovery and Recycle with SART
LLuvia de Oro Gold Mine, Mexico
Under new ownership since 2016, the LLuvia de Oro gold mine has undergone a major expansion involving the
development of the copper rich part of the ore body for which a SART (cyanide recycle) plant was initially designed and
built for by BQE Water in 2008. Following the completion of engineering to support the plant refurbishment and expansion,
plant upgrades were completed in Q3 2017. Subsequently, BQE Water successfully commissioned the plant and provided
operator training during Q4 2017. The plant currently treats up to 450 m3/hr of gold leach solution and recovers
15
approximately 100 metric tonnes of sodium cyanide and 60 metric tonnes of copper per month. This project has enabled
BQE Water to:
• Demonstrates its ability to deliver SART safely and cost effectively; and
• Gain the site owner’s support to showcase the success of SART and allow BQE Water to organize plant tours to support
business development activities.
Laboratory Scale Testing Projects
Over the course of 2017, BQE Water completed multiple laboratory scale testing projects either as stand-alone
investigations or as part of the scope of work for other projects. The main highlight of 2017 is the capability of BQE Water’s
laboratory has expanded to include cyanide destruction, reverse osmosis and electro-oxidation. This will position BQE
Water to better serve its clients and broaden the areas of expertise for future business growth.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2017, BQE Water had 93,966,672 common shares issued (93,966,672 at December 31, 2016) and
7,133,333 stock options outstanding (4,333,333 at December 31, 2016).
As of April 17, 2018, the number of common shares issued and outstanding remain unchanged from December 31, 2017;
and 6,200,000 stock options were issued and outstanding.
At December 31, 2017, the Company had Cash of $984,000, which is a decrease of approximately $1.2 million in Cash from
December 31, 2016. For the 12 months ended Dec 31, 2017, the Company’s Cash funded operating activities of $1.5 million
and financing activities of $98,000.
The Company had a working capital position at the end of the year of $734,952, a decrease of $925,218 from December 31,
2016. At December 31, 2017, BQE Water’s significant working capital items include trade and other receivables of $680,530
($613,309 at December 31, 2016) and trade payable and accrued liabilities of $783,799 ($878,891 at December 31, 2016).
The Company has commitments of $796,649 until 2022 under operating leases for office and laboratory premises and for
office equipment.
As disclosed in note 2(b) of our audited consolidated financial statements for the year ended December 31, 2017 and in the
“2017 COMMENTARY AND 2018 OUTLOOK” section of this MD&A, the Company believes it has sufficient working capital
resources to continue current operations for the next 12 months. Beyond this point, we will need to secure new sources of
working capital to continue operations. Potential sources of new working capital include new sales projects or non-
operational sources such as debt or equity investments.
The continuation of the Company as a going concern is dependent upon its ability to raise additional financing and
ultimately attain and maintain profitable operations. This assumes that the Company is able to successfully obtain financing
to fund its working capital needs, continue successful operations at its Raglan and Dexing joint venture operations, maintain
or further decrease operating expenses, successfully repatriate funds from its Dexing joint venture, and secure and
complete new sales contracts.
On July 6, 2016, we completed an 18-month secured convertible Loan with an aggregate principle of $1.5 million. The
proceeds of the Loan are used to fund general operating expenses and to ensure we have the financial resources to
continue executing on our long-term growth strategy. On January 5, 2018, the Company replaced the original Loan with a
replacement Loan which extended the maturity date for an additional 12 months, from January 6, 2018 to January 6, 2019.
The replacement Loan has the same terms and conditions as the original Loan.
Historically, we have not yet realized profitable operations and relied on non-operational sources of financing to fund our
operations. Whether and when the Company can attain profitability and positive cash flows is uncertain. While the
Company has been successful in securing financing in the past, there is uncertainty whether financing will be available in
the future on terms acceptable to the Company. Accordingly, there is a material uncertainty that may cast significant doubt
16
upon the Company’s ability to continue as a going concern. Our consolidated financial statements do not include
adjustment to the recoverability and classification on recorded assets and liabilities and related expenses that might be
necessary should the Company be unable to continue as a going concern. If the going concern assumption is not
appropriate, material adjustments to our consolidated financial statements could be required.
RELATED PARTY TRANSACTIONS
The following transactions were carried out with related parties of the Company:
a) As at December 31, 2017, the Company had trade and other receivables balance of $nil (2016 - $86,255) from their
China joint venture, arising mainly from JCC-BQE joint venture costs incurred on behalf of the joint venture. The
receivables are unsecured in nature and bear no interest. No provisions are held against such receivables. There was no
sale of goods and services with the Dexing joint venture during the year ended December 31, 2017 and 2016.
b) For the year ended December 31, 2017 and 2016, the compensation awarded to the Company’s key management,
which includes the Board of Directors and executive management, are as follows:
Salaries, fees and short-term benefits
Share-based payments (note 11(a))
2017
$
658,480
6,153
2016
$
645,826
13,502
664,633
659,328
Included in the trade payables and accrued liabilities as of December 31, 2017 is $12,231 ($59,200 at December 31,
2016) of salaries, director fees, management consulting service fees with companies owned by the Company’s
management, and termination benefits. Included in the salaries, fees and short-term benefits, are consulting services
received from companies owned by the Company’s management, which amounted to $69,000 for the year ended
December 31, 2017 (2016 - $120,000).
c) On July 6, 2016, the Company entered into an 18-month, secured, 8% per annum interest bearing convertible loan
agreements with multiple lenders totaling $1,500,000. These lenders include certain directors, shareholders,
management, and employees of the Company. Details of the convertible loan are described in note 12 of our audited
consolidated financial statements.
d)
Included in the trade payables and accrued liabilities as of December 31, 2017 is $96,400 ($nil as of December 31,
2016) of contribution of registered capital payable to the Company’s joint venture as described in note 9(b) of our
audited consolidated financial statements.
CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS
The preparation of the Company’s consolidated financial statements in conformity with IFRS requires the Company’s
management to make judgments, estimates and assumptions about the future events that affect the amounts reported in
the consolidated financial statements and related notes to the financial statements. The estimates and associated
assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may
differ from these estimates.
Estimates and assumptions are continually evaluated and are based on management’s experience and other facts and
circumstances. Revisions to estimates and the resulting effects on the carrying amounts of the Company’s assets and
liabilities are accounted for prospectively.
17
The areas which require management to make significant judgments, estimates and assumptions in determining carrying
values include, but are not limited to:
Critical judgements
Critical judgements that management has made in the process of applying the Company’s accounting policies and that have
the most significant effect on the amounts recognized in the consolidated financial statement are limited to management’s
assessment of the Company’s ability to continue as a going concern (see note 2(b) of the Company’s consolidated financial
statements).
Key sources of estimation uncertainty and assumptions
The following are the key assumptions concerning the future, and other key sources of estimation uncertainty at the end of
the reporting period, that have a significant risk of causing a material adjustment to the reported amounts of assets and
liabilities, income and expenses within the next fiscal year.
Revenue recognition
Revenue from technical services relating to water management are recognized using a percentage-of-completion method,
which requires judgment relative to assessing risks, estimating project costs for completion, and making assumptions for
technical issues. Depending on the services provided and on the contract terms, many variables are used in assessing the
revenue from the percentage completed at the reporting date.
Asset impairment
Determining the amount of asset impairment requires an estimation of the recoverable amount, which is defined as the
higher of fair value less the cost of disposal or value in use. In assessing value in use, the estimated future cash flows are
discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of
money and the risk specific to the asset. In assessing fair value less costs to sell, the price that would be received on the sale
of an asset in an orderly transaction between market participants at the measurement date is estimated. Many factors used
to assess recoverable amounts are outside of the control of management and it is reasonably likely that assumptions and
estimates will change from period to period. These changes may result in future impairments in the Company’ long-term
assets such as plant and equipment or investment in joint ventures. For example, the copper price could be lower than
projected due to economic, industry or competitive factors, or the discount rate used in the value in use model could
increase due to changes in market interest rate.
GENERAL
Disclosure Controls and Procedures and Internal Control over Financial Reporting
The Company’s management, including the Chief Executive Officer and Chief Financial Officer, believe that any disclosure
controls and procedures or internal control over financial reporting, no matter how well conceived and operated, can
provide only reasonable and not absolute assurance that the objectives of the control system are met. Further, the design
of a control system reflects the fact that there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control systems, they cannot provide absolute assurance
that all control issues and instances of fraud, if any, within the Company have been prevented or detected.
The Company’s management has evaluated the design and effectiveness of the Company’s disclosure controls and
procedures. Based upon the results of that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer
have concluded that, as of the end of period covered by this report, the Company’s disclosure controls and procedures
were effective to provide reasonable assurance that the information required to be disclosed in reports it files is recorded,
processed, summarized and reported within the appropriate time periods and forms.
The Company’s management has also evaluated the design and operating effectiveness of the Company’s internal control
over financial reporting as of the end of the period covered by this report. The risk of a significant error is mitigated by the
active involvement of senior management and the board of directors in all the affairs of the Company; open lines of
communication within the Company; the present levels of activities and transactions within the Company being readily
transparent; and the thorough review of the Company’s financial statements by management and the Board of Directors.
Based on the result of the assessment, the Company’s Chief Executive Officer and Chief Financial Officer have concluded
18
that the Company’s internal controls over financial reporting have been adequately designed. During the current year, the
Company’s management implemented a formal testing program on the operating effectiveness of its controls and
concluded that they are also effective.
There has been no change in BQE Water’s internal controls over financial reporting during the year ended December 31,
2017 that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial
reporting.
Recent Accounting Pronouncement
The Company has not early adopted any amendment, standard or interpretation that has been issued by the IASB but is not
yet effective. Changes in accounting standards not yet effective:
IFRS 9 Financial instruments
On July 24, 2014, the IASB issued the complete IFRS 9, Financial Instruments (“IFRS 9”). IFRS 9 introduces new requirements
for the classification and measurements of financial assets. Under IFRS 9, financial assets are classified and measured based
on the business model in which they are held and the characteristics of their contractual cash flows. The standard
introduces additional changes relating to financial liabilities and amends the impairment model by introducing a new
“expected credit loss” model for calculating impairment. It also includes a new general hedge accounting standard which
aligns hedge accounting more closely with risk management. The mandatory effective date of IFRS 9 is for annual periods
beginning on or after January 1, 2018 and must be applied retrospectively with some exemptions. Early adoption is
permitted. The restatement of prior periods is not required and is only permitted if information is available without the use
of hindsight.
The Company currently does not practice hedge accounting, but will continue to evaluate the impact of the change to the
consolidated financial statements based on the characteristics of financial instruments outstanding at the time of adoption
of IFRS 9.
IFRS 15 Revenues from contracts with customers
On May 28, 2014 the IASB issued IFRS 15, Revenue from Contracts with Customers (“IFRS 15”). IFRS 15 introduces a single
contract-based five-step model that applies to contracts with customers and two approaches for the recognition of
revenue: at a point in time or over time. The five steps are: identify the contract(s) with the customer, identify the
performance obligations in the contract, determine the transaction price, allocate the transaction price, and recognize
revenue when the performance obligation is satisfied. Revenue is recognized when a customer obtains control of a good or
service and thus has the ability to direct the use and obtain the benefits from the good or service. IFRS 15 also requires
enhanced disclosures about revenue to help investors better understand the nature, amount, timing and uncertainty of
revenue and cash flows from contracts with customers, and improve the comparability of revenue from contracts with
customers. The standard replaces IAS 18 Revenue and IAS 11 Construction contracts and related interpretations. The
effective date is for reporting periods beginning on or after January 1, 2018 with early application permitted.
The Company will adopt IFRS 15 effective January 1, 2018 applying the retrospective method of transition. The Company
has evaluated the potential impact of applying IFRS 15, analyzing its sale agreements. The standard requires entities to
recognize revenue when the control of the goods or services passes to the customer. For the Company's revenue earned
from the operation and maintenance of water treatment plants, the Company concluded there is no material change in the
timing of revenue recognized under the new standard as the point of transfer of risk and reward for goods and services and
transfer of control occur at the same time. In addition, the standard requires entities to apportion revenue earned from
contracts to individual performance obligations, on a relative standalone selling price basis. The Company also earns
revenue from technical services relating to water management, including engineering, laboratory and pilot demonstrations.
For technical services contracts, the Company may defer and recognize the revenue over time as each obligation within the
contracts are fulfilled. Given that the majority of our technical services contracts have the clause that allow the Company to
have an enforceable right to payment for performance completed to date, the Company concluded there is no material
change in the amount of revenue recognized as the Company will continue to recognize revenue over time based on
percentage of completion.
19
Based on the Company’s assessment, the impact of this change on the amount of revenue recognized in a year is not
expected to be significant. As a result, the Company does not anticipate any significant changes in the amounts of the
revenue recognized or a significant change in the timing of revenue recognition under the new standard.
IFRS 16 Leases
On January 6, 2016, the IASB issued IFRS 16, Leases (“IFRS 16”). IFRS 16 specifies the methodology to recognize, measure,
present and disclose leases. The standard provides a single lessee accounting model, requiring lessees to recognize assets
and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value. The standard
replaces IAS 17 Leases. The effective date is for reporting periods beginning on or after January 1, 2019 with early adoption
permitted.
The Company has not yet determined the effect of adoption of IFRS 16 on its consolidated financial statements.
RISKS AND UNCERTAINTIES
Companies operating in the process technology sector face many and varied risks. While the company strives to manage
such risks to the extent possible and practical, risk management cannot eliminate risk totally. Following are the risk factors
which the Company’s management believes are most important in the context of the Company’s business. It should be
noted that this list may not be exhaustive and other risks may apply. An investment in the Company may not be suitable for
all investors.
Uncertain Profitability, Funding Needs, Financing Risks and Dilution
The Company believes there are many sites which can benefit from the Company’s processes. The Company has designed
and/or built 17 plants to date deploying proprietary technologies developed by BQE Water and applying them to meet site
specific conditions. However, the Company has been unable to consistently generate sufficient cash flows from these
projects to cover ongoing development and administration costs to date.
BQE Water's ability to continue future operations is dependent on the Company's ability to generate positive cash flows
from existing water treatment operations and projects currently under construction, securing additional design,
engineering, construction and operating contracts, and if required, additional internal cost restructuring and financing in
the future. Sources of potential financing include, but are not limited to, a combination of strategic partnerships, joint
venture arrangements, project debt finance, issuance of equity and other capital markets alternatives. Management will
pursue such additional sources of financing when required and while management has been successful in securing financing
in the past, there can be no assurance it will be able to do so in the future or that these sources of funding or initiatives will
be available for the Company and that they will be available on terms which are acceptable to the Company.
The issuance of common shares in the capital of the Company in the future could also result in further dilution to the
Company’s shareholders. There are also outstanding securities and agreements pursuant to which common shares of the
Company may be issued in the future which will result in dilution to the Company’s shareholders.
Going Concern
There can be no assurance of the Company’s success and, therefore, any investor in securities of the Company could
potentially lose their entire investment. Please refer to the disclosure in note 2(b) of our audited consolidated financial
statements for the year ended December 31, 2017 and in the “2017 COMMENTARY AND 2018 OUTLOOK” section of this
MD&A.
Dependence on Key Personnel
The Company is substantially dependent upon a number of key employees and consultants. The loss of any one or more of
the Company’s key employees or consultants could have a material adverse effect on its business. Additionally, the
Company’s ability to develop, manufacture and market its products and compete with current and future competitors
depends, in large part, on its ability to attract and retain qualified personnel. Competition for qualified personnel in the
Company’s industry may prove to be intense and it may have to compete for personnel with companies that have
substantially greater financial and other resources than it does. Failure to attract and retain qualified personnel could have
a material adverse effect on the Company’s business operating results and financial condition.
20
Economic and Project Site Dependence
The Company currently derives its revenue from a limited number of sources (contracts). For certain contracts, the
Company has made significant investments in fixed plants that are dependent on conditions at the project site that may be
beyond the control of the Company. Changes in site conditions and/or the loss of any one contract could result in a
materially adverse effect on the Company’s financial condition.
Commodity Prices
For the Company’s joint venture operations, it generates revenue by selling recovered copper obtained from treated water.
These recovered metals face commodity price risks and thus their prices may vary based on world supply and demand.
There can be no assurance that the price of copper will maintain at current buying rates.
Currency Risk
The Company conducts business in Canada, the United States, Mexico, Chile, and China. As a result, the Company has
foreign currency exposure with respect to items not denominated in Canadian dollars. The Company’s joint venture
operations sell and incur costs mainly in Chinese RMB. This creates exposure at the operational level, which may affect the
Company’s profitability as exchange rates fluctuate. The Company has not hedged its exposure to currency fluctuations. The
Company is also exposed to currency risk through assets and liabilities denominated in currencies other than Canadian
dollar.
Technology Risk
The Company has completed the construction and commissioning of a number of plants. The operating and engineering
data from these plants is used in estimates for new projects under evaluation and/or in the design engineering stage.
Notwithstanding the foregoing, each new commercial venture undertaken by the Company has the inherent technical risk
of any continuous biological and/or chemical process, which could include the loss of the biological feedstock.
Intellectual Property Protection
The Company cannot provide any assurance that any further intellectual property applications will be approved. Even if
they are approved, such patents, trademarks or other intellectual property registrations may be successfully challenged by
others or invalidated. The success of the Company and its ability to compete are substantially dependent on its internally
developed technologies and processes which the Company will need to protect through a combination of patent, copyright,
trade secret and trademark law.
The trademark, copyright and trade secret positions of the Company’s business are uncertain and involve complex and
evolving legal and factual questions. In addition, there can be no assurance that competitors will not seek to apply for and
obtain trademarks and trade names that will prevent, limit or interfere with the Company’s BioSulphide®, ChemSulphide®,
Met-IX™, Sulf-IX™ and Selen-IX™ processes. Litigation or regulatory proceedings, which could result in substantial cost and
uncertainty to the Company, may also be necessary to enforce the intellectual property rights of the Company or to
determine the scope and validity of other parties’ proprietary rights. There can be no assurance that the Company will have
the financial resources to defend its patents, trademarks and copyrights from infringement or claims of invalidity.
The patent positions of emerging companies can be highly uncertain and involve complex legal and factual questions. Thus,
there can be no assurance that any patent applications made by or on behalf of the Company will result in the issuance of
patents, that the Company will develop additional proprietary products that are patentable, that any patents issued or
licensed to the Company will provide the Company with any competitive advantages or will not be challenged by any third
parties, that the patents of others will not impede the ability of the Company to do business or that third parties will not be
able to circumvent the patents assigned or licensed to the Company. Furthermore, there can be no assurance that others
will not independently develop similar products, duplicate any of the Company’s products or, if patents are issued and
licensed to the Company, design around the patented product developed for the benefit of the Company.
Since patent applications are maintained in secrecy for a period of time after filing, and since publication of discoveries in
the scientific or patent literature often lags behind actual discoveries, the Company cannot be certain that the investors of
the patents were the first creators of inventions covered by pending applications, or that it was the first to file patent
applications for such inventions. There can be no assurance that the Company’s patents, if issued, would be valid or
enforceable by a court or that a competitor’s technology or product would be found to infringe such patents.
21
The Company is not currently aware of any claims asserted by third parties that the Company’s intellectual property
infringes on their intellectual property. However, in the future, a third party may assert a claim that the Company infringes
on their intellectual property. If the Company is forced to defend against these claims, which may be with or without any
merit or whether they are resolved in favour or against the Company, the Company may face costly litigation and diversion
of management’s attention and resources. As a result of such a dispute, the Company may have to develop costly non-
infringement technology or enter into license agreements which may not be available at favourable terms.
Access to Proprietary Information
The Company generally controls access to and distribution of its technologies, documentation and other proprietary
information. Despite efforts by the Company to protect its proprietary rights from unauthorized use or disclosure, parties
may attempt to disclose, obtain or use its solutions or technologies. There can be no assurance that the steps the Company
has taken or will be taking will prevent misappropriation of its solutions or technologies, particularly in foreign countries
where laws or law enforcement practices may not protect proprietary rights as fully as in Canada or the United States.
Competition
The Company is aware of and does address existing competitors for metal removal opportunities. There is a possibility that
other companies will enter these markets and compete with the Company. Such competitors could possess greater
financial resources and technical facilities. Increased competition could result in significant price competition, reduced
profit margins or loss of market share. The Company may not be able to compete successfully with existing or future
competitors and cannot ensure that competitive pressures will not materially and adversely affect its business, operating
results and financial condition.
Environmental Regulation
The Company’s business and operations are subject to environmental regulation in various jurisdictions in which it
operates. There is no assurance that future changes in environmental regulation, if any, will not adversely affect the
Company’s business and operations.
Management of Growth
The Company could experience growth that could put a significant strain on each of the Company’s managerial, operational
and financial resources. The Company must implement and constantly improve its operational and financial systems and
expand, train and manage its employee base to manage growth. The Company might also establish additional water
treatment facilities which would create additional operational and management complexities. In addition, the Company
expects that its operational and management systems will face increased strain as a result of the expansion of the
Company’s technologies and services. The Company might not be able to effectively manage the expansion of its operations
and systems, and its procedures and controls might not be adequate to support its operations. In addition, management
might not be able to make and execute decisions rapidly enough to exploit market opportunities for the expansion of the
Company’s technologies and services. If the Company is unable to manage its growth effectively, its business, results of
operations and financial condition will suffer.
Conflicts of Interest
Certain directors, officers and other members of management of the Company and its subsidiaries serve (and may in the
future serve) as directors, officers, promoters and members of management of other companies and therefore, it is
possible that a conflict may arise between their duties as a director, officer or member of management of the Company or
its subsidiaries and their duties as a director, officer, promoter or member of management of such other companies. The
directors and officers of the Company are aware of the existence of laws governing accountability of directors and officers
for corporate opportunity and requiring disclosures by directors of conflicts of interest and the Company will rely upon such
laws in respect of any directors’ and officers’ conflicts of interest or in respect of any breaches of duty by any of its directors
or officers. All such conflicts will be disclosed by such directors or officers in accordance with the Business Corporations Act
(British Columbia) and they will govern themselves in respect thereof to the best of their ability in accordance with the
obligations imposed upon them by law.
Possible Volatility of Share Price
The market price of the Company’s common shares could be subject to wide fluctuations in response to, and may be
adversely affected by, quarterly variations in operating results, announcements of technological innovations or new
22
products by the Company or its competitors, changes in financial estimates by securities analysts, or other events or
factors. In addition, the financial markets have experienced significant price and volume fluctuations. This volatility has had
a significant effect on the market prices of securities issued by many companies for reasons unrelated to their operating
performance. Broad market fluctuations or any failure of the Company’s operating results in a particular quarter to meet
market expectations may adversely affect the market price of the Company’s common shares.
Lack of Dividends
No dividends have been paid to date on the Company’s common shares. The Company anticipates that for the foreseeable
future the Company’s earnings, if any, will be retained for use in its business and that no cash dividends will be paid on the
common shares.
23
BQE WATER INC.
(formerly BioteQ Environmental Technologies Inc.)
CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016
Independent Auditors’ Report
To the Shareholders of BQE Water Inc.:
We have audited the accompanying consolidated financial statements of BQE Water Inc. (formerly BioteQ
Environmental Technologies Inc.), which comprise the consolidated statements of financial position as at
December 31, 2017 and December 31, 2016, and the consolidated statements of loss and comprehensive loss,
changes in equity and cash flows for the years then ended, and a summary of significant accounting policies
and other explanatory information.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements
in accordance with International Financial Reporting Standards, and for such internal control as management
determines is necessary to enable the preparation of financial statements that are free from material
misstatement, whether due to fraud or error.
Auditors' Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We
conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards
require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance
about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the
assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud
or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s
preparation and fair presentation of the consolidated financial statements in order to design audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness
of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used
and the reasonableness of accounting estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a
basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position
of BQE Water Inc. as at December 31, 2017and December 31, 2016, and its financial performance and its cash
flows for the years then ended in accordance with International Financial Reporting Standards.
Emphasis of Matter
Without qualifying our opinion, we draw attention to Note 2(b) in the consolidated financial statements which
states that BQE Water Inc. incurred significant loss from operations, negative cash flows from operating
activities and has an accumulated deficit. This, along with other matters described in Note 2(b), indicates the
existence of a material uncertainty that may cast significant doubt about the ability of BQE Water Inc. to
continue as a going concern.
Vancouver, British Columbia
April 17, 2018
Chartered Professional Accountants
BQE WATER INC.
Consolidated Statements of Financial Position
As at December 31, 2017 and 2016
Assets
Current assets
Cash
Trade and other receivables
Inventory and work in progress
Prepaid and deposits
Total current assets
Non-current assets
Plant and equipment
Investment in joint ventures
Deposits
Total non-current assets
Total assets
Liabilities
Current liabilities
Trade payable and accrued liabilities
Income taxes payable
Deferred revenues
Deferred benefits
Deferred lease inducement
Total current liabilities
Non-current liabilities
Convertible loan
Total liabilities
Shareholders’ Equity
Share capital
Contributed surplus
Equity component of convertible loan
Accumulated other comprehensive income
Accumulated deficit
Total shareholders’ equity
Total liabilities and shareholders’ equity
Going concern (note 2(b))
Commitments (note 19)
note
6
8
9
7, 10
17
11
12
11, 13
11
12
December 31
2017
$
December 31
2016
$
984,298
680,530
-
42,956
1,707,784
42,463
5,095,256
20,386
5,158,105
2,231,798
613,309
20,018
121,028
2,986,153
217,010
4,231,567
24,601
4,473,178
6,865,889
7,459,331
783,799
-
29,198
159,835
-
972,832
878,891
152,195
157,415
128,910
8,572
1,325,983
1,497,726
1,377,532
2,470,558
2,703,515
54,719,814
10,058,149
86,575
1,398,709
(61,867,916)
4,395,331
54,719,814
10,047,271
84,614
1,410,982
(61,506,865)
4,755,816
6,865,889
7,459,331
Approved and authorized by the Board of Directors
Signed “George Poling”
George Poling, Director
Signed “Peter Gleeson”
Peter Gleeson, Director
The accompanying notes are an integral part of these consolidated financial statements.
1
BQE WATER INC.
Consolidated Statements of Loss and Comprehensive Loss
For the years ended December 31, 2017 and 2016
note
14
14
14
7, 11
8
9
15
16
17
Revenues
Operating expenses (excluding depreciation)
Operating margin before depreciation
General and administration
Sales and development
Stock-based compensation
Depreciation of plant and equipment
Share of results of equity accounted joint ventures
Loss from operations and joint ventures
Finance costs, net
Foreign exchange loss
Other income, net
Loss before income taxes
Income tax recovery (expense), net
Net loss for the year
Other comprehensive (loss) income
Items that will be reclassified subsequently to loss
Translation (loss) gain on foreign operations
Comprehensive loss for the year
Net loss per share
Basic and diluted
Weighted average number of shares outstanding
Basic and diluted
Year ended December 31
2016
$
2017
$
4,056,752
2,314,577
1,742,175
1,664,779
1,218,515
68,359
214,092
(1,149,317)
(274,253)
3,960,713
1,757,982
2,202,731
1,705,104
1,154,214
76,459
233,551
(156,289)
(810,308)
(215,108)
(34,968)
62,978
(97,973)
(1,427,094)
11,205
(461,351)
100,300
(2,324,170)
(885)
(361,051)
(2,325,055)
(12,273)
954,000
(373,324)
(1,371,055)
(0.00)
(0.02)
93,966,672
93,966,672
The accompanying notes are an integral part of these consolidated financial statements.
2
BQE WATER INC.
Consolidated Statements of Changes in Equity
For the years ended December 31, 2017 and 2016
Year ended December 31
2017
$
Number of
Shares
Year ended December 31
2016
$
Number of
Shares
note
Share Capital
Balance, beginning of the year
13
93,966,672
54,719,814
93,966,672
54,719,814
Balance, end of the year
93,966,672
54,719,814
93,966,672
54,719,814
Contributed surplus
Balance, beginning of the year
Share-based payments
Balance, end of the year
Equity component of convertible loan
Balance, beginning of the year
Issuance of convertible loan
Balance, end of the year
Accumulated other comprehensive income
Balance, beginning of the year
Other comprehensive (loss) income for the year
Balance, end of the year
Accumulated deficit
Balance, beginning of the year
Net loss for the year
Balance, end of the year
Total shareholders’ equity
Balance, beginning of the year
Share-based payments
Issuance of convertible loan
Other comprehensive (loss) income for the year
Net loss for the year
Balance, end of the year
11
12
11
12
10,047,271
10,878
10,058,149
84,614
1,961
86,575
1,410,982
(12,273)
1,398,709
(61,506,865)
(361,051)
(61,867,916)
4,755,816
10,878
1,961
(12,273)
(361,051)
4,395,331
10,033,768
13,503
10,047,271
-
84,614
84,614
456,982
954,000
1,410,982
(59,181,810)
(2,325,055)
(61,506,865)
6,028,754
13,503
84,614
954,000
(2,325,055)
4,755,816
The accompanying notes are an integral part of these consolidated financial statements.
3
BQE WATER INC.
Consolidated Statements of Cash Flow
For the years ended December 31, 2017 and 2016
Operating activities
Net loss for the year
Items not affecting cash
Income tax (recovery) expense
Deferred Income tax recovery
Bad debt (recovery) expense
Share of results of equity accounted joint ventures
Interest expense
Gain from disposal of equipment
Depreciation of plant and equipment
Amortization of deferred lease inducement
Net foreign exchange loss
Expense recognized in stock-based compensation
Change in non-cash operating working capital items
Cash used in operations
Income taxes paid
Net cash used in operating activities
Investing activities
Purchase of plant and equipment
Proceeds from disposal of equipment
Net distribution received from joint venture
Interest received
Net cash provided by investing activities
Financing activities
Financing initiation costs paid
Interest paid
Proceeds from convertible loan
Net cash (used in) provided by financing activities
Effect of exchange rate changes on cash and cash
equivalents
Change in cash
Cash, beginning of the year
Cash, end of the year
note
17
17
16
9
15
16
8
11
18
17
8
9
15
12
12
12
Year ended December 31
2016
$
2017
$
(361,051)
(2,325,055)
(100,300)
-
(60,978)
(1,149,317)
215,108
(2,000)
214,092
(23,083)
26,128
68,359
(1,173,042)
(247,971)
(1,421,013)
(52,440)
(1,473,453)
(39,544)
2,000
376,021
11,260
349,737
38,571
(37,686)
5,212
(156,289)
97,973
-
233,551
(11,430)
1,421,030
76,459
(657,664)
(108,138)
(765,802)
(38,571)
(804,373)
(18,040)
-
181,480
6,696
170,136
-
(117,552)
19,666
(97,886)
(23,652)
-
1,480,334
1,456,682
(25,898)
463
(1,247,500)
2,231,798
822,908
1,408,890
984,298
2,231,798
The accompanying notes are an integral part of these consolidated financial statements.
4
BQE WATER INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
1. DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS
BQE Water Inc. is the ultimate parent company of its consolidated group (or the “Company”). Effective March 1, 2017, the
name of the Company was changed from BioteQ Environmental Technologies Inc. to BQE Water Inc.
The Company is an integrated water services provider with unique expertise and intellectual property related to water
treatment at mines and metallurgical facilities focused on reducing Life Cycle Costs and eliminating long-term liabilities. The
Company generates revenue from two main sources: (1) operation and maintenance of water treatment plants; and (2)
technical services relating to water management, including engineering, laboratory and pilot demonstrations.
BQE Water is a publicly listed company incorporated and domiciled in Canada with limited liability under the legislation of the
Province of British Columbia. The Company’s shares are listed on the TSX Venture Exchange trading under the symbol BQE.
The address of its registered office is Suite 250 – 900 Howe Street, Vancouver, British Columbia, V6Z 2M4, Canada.
2. BASIS OF PREPARATION AND GOING CONCERN
a. Statement of compliance
These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards
("IFRS") as issued by the International Accounting Standards Board ("IASB"), and interpretations of the IFRS Interpretations
Committee (“IFRIC”), effective as of December 31, 2017.
The Company’s Board of Directors approved these consolidated financial statements on April 17, 2018.
b. Going concern assumption
The consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of
assets and the settlement of liabilities in the normal course of business.
For the year-ended December 31, 2017, the Company incurred a net loss of $361,051 ($2,325,055 in 2016) and used net cash
in operating activities of $1,473,453 ($804,373 in 2016). At December 31, 2017, the Company had a working capital position
of $734,952 ($1,660,170 at December 31, 2016) and a cumulative deficit of $61,867,916 ($61,506,865 at December 31, 2016).
The Company no longer expects to generate sufficient working capital to enable us to repay the principle amount of the
convertible loan due January 6, 2018 and have sufficient cash reserves to meet ongoing operating requirements over the next
12 months. Subsequent to the reporting date of December 31, 2017, Management and the Board of Directors of the
Company successfully replaced the original $1.5 million convertible loan due January 6, 2018 with a replacement loan due
January 6, 2019. The replacement loan will ensure that BQE Water has sufficient levels of working capital moving into 2018.
This also assumes that BQE Water is able to continue successful operations at Raglan and its Chinese joint venture plants,
market prices for metals and foreign exchange rates remain at current levels, the Company maintains or further decreases
operating expenses, successfully repatriates funds from its Chinese joint venture, and secures and completes new sales
contracts. Beyond this point, the Company will need to secure new sources of working capital to continue operations.
Historically, the Company has not yet realized profitable operations and has relied on non-operational sources of financing to
fund its operations. Whether and when the Company can attain profitability and positive cash flows is uncertain. While the
Company has been successful in securing financing in the past, there is uncertainty whether financing will be available in the
future on terms acceptable to the Company. Accordingly, there is material uncertainty that may cast significant doubt upon
the Company’s ability to continue as a going concern. These consolidated financial statements do not include adjustment to
the recoverability and classification on recorded assets and liabilities and related expenses that might be necessary should
the Company be unable to continue as a going concern. If the going concern assumption is not appropriate, material
adjustments to the financial statements could be required.
5
BQE WATER INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
c. Basis of measurement
These consolidated financial statements have been prepared under the historical cost basis except for deferred share units
and restricted share units, which are measured at fair value through profit or loss.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The principal accounting policies as set out below have been consistently applied to all periods presented in these
consolidated financial statements, unless otherwise stated. The Company did not adopt any new accounting standard
changes or amendments effective January 1, 2017 that had a material impact on these consolidated financial statements.
Certain prior year comparative figures have been reclassified to comply with the current year’s presentation.
a) Basis of consolidation
These consolidated financial statements incorporate the financial statements of the Company, and the entities controlled by
the Company, and the share of net assets and net earnings or losses in entities which the Company is a joint venture partner.
The principal subsidiaries of the Company, which are accounted for under the consolidation method, are as follows:
Entity
Biomet Mining Corporation
BioteQ Water (Chile) SpA
BioteQ Water Mexico S.A. de C.V.
BioteQ (Shanghai) Water Treatment Technologies Co. Ltd.
Country of
incorporation
and operation
Canada
Chile
Mexico
China
Ownership
interest as at
Dec. 31, 2017
100%
100%
100%
100%
Ownership
interest as at
Dec. 31, 2016
100%
100%
100%
100%
The joint ventures of the Company, which are accounted for under the equity method, are as follows:
Entity
JCC-BioteQ Environmental Technologies Co. Ltd.
Shandong MWT BioteQ Environmental Technologies Co. Ltd.
i)
Subsidiaries
Country of
incorporation
and operation
China
China
Ownership
interest as at
Dec. 31, 2017
50%
20%
Ownership
interest as at
Dec. 31, 2016
50%
20%
Subsidiaries are entities controlled by the Company. The Company controls an entity when it is exposed to, or has rights to,
variable returns from its involvement with the entity and has the ability to affect those returns through its power over the
entity. The financial statements of a subsidiary are included in the consolidated financial statements from the date that
control commences until the date that control ceases. Inter-company balances and transactions, and any unrealized income
and expenses arising from inter-company transactions, are eliminated in preparing the consolidated financial statements.
ii)
Investments in joint ventures
A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net
assets of the joint arrangement. Joint control is the contractually agreed sharing of control of an arrangement, which exists
only when decisions about the relevant activities require unanimous consent of the parties sharing control.
The results and assets and liabilities of joint ventures are incorporated in these consolidated financial statements using the
equity method of accounting. Under the equity method, an investment in a joint venture is initially recognized in the
consolidated statement of financial position at cost and adjusted thereafter to recognize the Company’s share of the profit or
loss and other comprehensive income of the joint venture. When the Company’s share of losses in the joint venture exceeds
the Company’s interest in that joint venture, the Company discontinues recognizing its share of further losses. Additional
losses are recognized only to the extent that the Company has incurred legal or constructive obligations or made payments
6
BQE WATER INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
on behalf of the joint venture. If the joint venture subsequently reports profit, the Company resumes recognizing its share of
those profits only after its share of the profits equals the share of losses not recognized.
When the Company transacts with a joint venture, profits or losses resulting from the transactions with the joint venture are
recognized in the Company’s consolidated financial statements only to the extent of interests in the joint venture that are not
related to the Company.
b) Foreign currency translation
i)
Functional and presentation currency
Items included in the financial statements of each consolidated entity in BQE Water Inc.’s group are measured using the
currency of the primary economic environment in which the entity operates (the “functional currency”). The functional
currency of the Company’s subsidiaries and its joint ventures are respective of their country’s local currency, such as Chilean
peso, Mexican peso, and Chinese renminbi (“RMB”). The consolidated financial statements are presented in Canadian dollars
(“CAD”), which is the Company’s presentation currency.
For the purpose of presenting these consolidated financial statements, entities including joint ventures that have a functional
currency different from the presentation currency (“foreign operations”) are translated into CAD as follows:
•
•
Assets and liabilities: at the closing rate at the date of the statement of financial position; and
Income and expenses: at the average rate for the period (as this is considered a reasonable approximation of
actual rates prevailing at the transaction dates).
Exchange differences arising, if any, are recognized in other comprehensive income and accumulated in equity. When an
entity disposes of its entire interest in a foreign operation, or loses control, joint control, or significant influence over a
foreign operation, the foreign currency gains or losses accumulated in other comprehensive income related to the foreign
operation are recognized in profit or loss. If an entity disposes part of an interest in a foreign operation which remains a
subsidiary, a proportionate amount of foreign currency gains or losses accumulated in other comprehensive income related
to the subsidiary is reallocated between controlling and non-controlling interests.
ii)
Transactions and balances
In preparing the financial statements of each individual BQE Water entity, transactions in currencies other than the entity’s
functional currency (“foreign currency”) are recognized at the rates of exchange prevailing at the dates of the transactions. At
the end of each reporting period, monetary items denominated in foreign currencies are retranslated at the rates prevailing
at that date. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the
rates prevailing at the date when the fair value was determined. Non-monetary items that are measured in terms of historical
cost in a foreign currency are not retranslated.
Exchange differences on monetary items are recognized in profit or loss in the period in which they arise except for the
exchange differences on monetary items receivable from or payable to a foreign operation for which settlement is neither
planned nor likely to occur (therefore forming part of the net investment in the foreign operation), which are recognized
initially in other comprehensive income and reclassified from equity to profit or loss on repayment of the monetary items.
c) Cash
Cash consists of unrestricted bank deposits, some of which are interest-bearing.
Inventory and work in progress
d)
Inventory of metal concentrate is valued at the lower of average production cost and net realizable value. Production costs
that are inventoried include the costs directly related to bringing the inventory to its current condition and location, such as
materials, labour and other direct costs (including external services) and related production overheads, but exclude
administrative and finance costs. Net realizable value is the estimated selling price in the ordinary course of business, less the
estimated costs of completion and selling expenses.
7
BQE WATER INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
Chemical and spare part inventories are valued at the lower of cost and net replacement cost, which approximates net
realizable value. Work in progress represents the costs that the Company incurred for projects that are not completed at the
statement of financial position date. This amount includes both direct materials and direct labour costs.
e) Plant and equipment
i)
Recognition and measurement
Plant and equipment are stated at historical cost less accumulated depreciation and any accumulated impairment losses.
Historical cost includes expenditures that are directly attributable to the acquisition of the items. The cost of self-constructed
plant and equipment includes the costs of materials, costs directly attributable to bringing the assets to a working condition
for their intended use such as labour, professional fees and for qualifying assets, borrowing costs capitalized in accordance
with the Company’s accounting policy. Self-constructed assets are classified to the appropriate categories of plant and
equipment and subject to depreciation when ready for their intended use. If significant components of a plant or equipment
have different useful lives, then they are accounted for as separate items (major components) of plant and equipment.
ii)
Subsequent measurement
Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, only when it
is probable that future economic benefits associated with the item will flow to the Company and the cost of the item can be
measured reliably. The carrying amount of the replaced part is derecognized. All other repairs and maintenance are charged
to the statement of profit or loss in the financial period in which they are incurred.
A plant and equipment item is derecognized upon disposal or when no future economic benefits are expected to arise from
the continued use of the asset. Any gain or loss arising from the disposal or retirement of a plant and equipment item is
determined as the difference between the sales proceeds and the carrying amount of the asset and is recognized in profit or
loss.
iii) Depreciation
Depreciation of plant and equipment is calculated using the straight-line method to allocate their cost net of their residual
values, over the shorter of their estimated useful lives and the contract life. Depreciation commences when the asset is fully
constructed and available for use. Depreciation methods, useful lives and residual values are reviewed at each financial year
end and adjusted prospectively, if appropriate. Depreciation categories and useful lives for items included in plant and
equipment are as follows:
Asset
Computer equipment
Office and lab equipment
Leasehold improvements
Pilot plants
Water treatment plants
f)
Financial Instruments
i)
Fair value estimation
Estimated useful life
3 years
5 years
Remaining lease term
3 to 5 years
Shorter of contract life or 10 to 20 years
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date, regardless of whether that price is directly observable or estimated using
another valuation technique. In estimating the fair value of an asset or liability, the Company takes into account the
characteristics of the asset or liability if market participants would take those characteristics into account when pricing the
asset or liability at the measurement date.
In addition, for financial reporting purposes, fair value measurements are categorized into Level 1, 2 or 3 based on the degree
to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value
measurement in its entirety, which are described as follows:
8
BQE WATER INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
•
•
•
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can
access at the measurement date;
Level 2 inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset or
liability, either directly or indirectly; and
Level 3 inputs are unobservable inputs for the asset or liability.
The Company classifies non-derivative financial assets into the following categories: financial assets at fair value through
profit or loss (“FVTPL”), held-to maturity financial assets, loans and receivables and available-for-sale financial assets. The
classification depends on the purpose for which the financial assets were acquired.
The Company classifies non-derivative financial liabilities as either financial liabilities at FVTPL or other financial liabilities.
Management determines the classification of financial assets and liabilities at initial recognition.
ii) Non-derivative financial assets and financial liabilities – recognition and de-recognition
The Company initially recognizes loans and receivables and debt securities issued on the date when they are originated. All
other financial assets and financial liabilities are initially recognized on the trade date. All regular way purchases or sales of
financial assets are recognized and derecognized on a trade date basis. Regular way purchases or sales are purchases or sales
of financial assets that require delivery of assets within the time frame established by regulation or convention in the
marketplace.
The Company derecognizes a financial asset when the contractual rights to the cash flows from the asset expire, or it
transfers the rights to receive the contractual cash flows in a transaction in which substantially all of the risks and rewards of
ownership of the financial asset are transferred, or it neither transfers nor retains substantially all of the risks and rewards of
ownership and does not retain control over the transferred asset. Any interest in such derecognized financial assets that is
created or retained by the Company is recognized as a separate asset or liability.
The Company derecognizes a financial liability when its contractual obligations are discharged, cancelled or expired.
Financial assets and financial liabilities are offset and the net amount presented in the statement of financial position when,
and only when, the Company has a legal right to offset the amounts and intends either to settle them on a net basis or to
realize the asset and settle the liability simultaneously.
iii) Non-derivative financial assets – measurement
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an
active market. Loans and receivables are initially recognized at the amount expected to be received plus any directly
attributable transaction costs, less, when material, a discount to reduce the loans and receivables to fair value. Subsequently,
loans and receivables are measured at an amortized cost using the effective interest method less impairment. Interest
income is recognized by applying the effective interest rate, except for short-term receivables when the effect of discounting
is immaterial.
The Company’s loans and receivables comprise of Cash and trade and other receivables (exclude value added tax receivable
such as GST/PST/QST/HST/IVA). No financial asset was designated as FVTPL, available for sale or held for maturity as at
December 31, 2017 and 2016.
iv) Non-derivative financial liabilities – measurement
Financial liabilities are classified as FVTPL when the financial liability is either held for trading or is designated as FVTPL.
Financial liabilities at FVTPL are stated at fair value, with any gains or losses arising on re-measurement recognized in profit or
loss. The net gain or loss recognized in profit or loss incorporates any interest paid on the financial liability and is included in
stock-based compensation expense or recovery.
9
BQE WATER INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
The Company has classified deferred benefits which are the provisions related to the Company’s Deferred Share Units
(“DSU”) and Restricted Share Units (“RSU”) as FVTPL.
Other financial liabilities are initially recognized at the fair value less any directly attributable transaction cost. Subsequent to
initial recognition, these liabilities are measured at an amortized cost using the effective interest method.
The effective interest method is a method of calculating the amortized cost of a financial liability and of allocating interest
expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash
payments, including all fees and points paid or received that form an integral part of the effective interest rate, transaction
costs and other premiums or discounts, through the expected life of the financial liability or a shorter period where
appropriate, to the net carrying amount on initial recognition. The Company classifies its trade payable and accrued liabilities
(exclude value added tax payable such as GST/PST/QST/HST/IVA), and convertible loan as other financial liabilities.
v)
Share capital
The Company’s ordinary common shares are classified as equity. Incremental costs directly attributable to the issue of
ordinary shares, warrants and stock options, net of any tax effects, are recognized as a deduction from equity.
g)
Impairment
i)
Plant and equipment
The Company’s plant and equipment are reviewed for indications of impairment at each financial position date. Such
indications may be based on events or changes in the market environment, or on internal sources of information. If any such
indication is present, the recoverable amount of the asset is estimated in order to determine whether impairment exists.
Where the asset does not generate cash flows that are independent from other assets, the Company estimates the
recoverable amount of the cash generating unit to which the asset belongs.
An asset’s recoverable amount is the higher of its fair value less costs of disposal ("FVLCD") and value in use (“VIU”). In
assessing value in use, the estimated future cash flows are discounted to their present value, using a pre-tax discount rate
that reflects current market assessments of the time value of money and the risks specific to the asset for which estimates of
future cash flows have not been adjusted.
If the recoverable amount of an asset or cash generating unit is estimated to be less than its carrying amount, the carrying
amount is reduced to the recoverable amount. Impairment losses are recognized in profit and loss for the period. Impairment
losses recorded may be subsequently reversed if the recoverable amount of the assets is once again higher than their
carrying value. Where impairment is subsequently reversed, the carrying amount is increased to the revised estimate of the
recoverable amount but only to the extent that it does not exceed the carrying value that would have been determined (net
of depreciation) had no impairment loss been recognized in prior periods.
ii)
Loans and Receivables
The Company considers evidence of impairment for these assets at both an individual asset and a collective level. All
individually significant assets are individually assessed for impairment. Those found not to be impaired are then collectively
assessed for any impairment that has been incurred but not yet individually identified. Assets that are not individually
significant are collectively assessed for impairment. Collective assessment is carried out by grouping together assets with
similar risk characteristics.
In assessing collective impairment, the Company uses historical information on the timing of recoveries and the amount of
loss incurred, and makes an adjustment if current economic and credit conditions are such that the actual losses are likely to
be greater or lesser than suggested by historical trends.
An impairment loss is calculated as the difference between an asset’s carrying amount and the present value of the estimated
future cash flows discounted at the asset’s original effective interest rate. Losses are recognized in profit or loss and reflected
10
BQE WATER INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
in an allowance account. When the Company considers that there are no realistic prospects of recovery of the asset, the
relevant amounts are written off. If the amount of impairment loss subsequently decreases and the decrease can be related
objectively to an event occurring after the impairment was recognized, then the previously recognized impairment loss is
reversed through profit or loss.
iii) Equity-accounted investment in joint venture
An equity accounted investment in joint venture is reviewed for indication of impairment at each financial position date.
Indications includes observable data indicating there is a measurable decrease in the estimated future cash flows of the
investee’s operations. When there is objective evidence that an investment is impaired, the carrying amount of such
investment is compared to its recoverable amount, being the higher of its FVLCD and VIU. If the recoverable amount of an
investment is less than its carrying amount, the carrying amount is reduced to its recoverable amount and an impairment
loss, being the excess of carrying amount over the recoverable amount, is recognized in the period in which the relevant
circumstances are identified. When an impairment loss reverses in a subsequent period, the carrying amount of the
investment is increased to the revised estimate of recoverable amount to the extent that the increased carrying amount does
not exceed the carrying amount that would have been determined had an impairment loss not been previously recognized. A
reversal of an impairment loss is recognized in net earnings or loss in the period in which the reversal occurs.
h) Provisions
A provision is a liability of uncertain timing or amount. Provisions are recognized when: (i) the Corporation has present legal
or constructive obligations as a result of past events; (ii) it is probable that an outflow of resources will be required to settle
the obligations; and (iii) the amount has been reliably estimated.
Provisions are measured at the present value of the expenditures expected to be required to settle the obligations using a
pre-tax rate that reflects current market assessments of the time value of money and the risk specific to the obligations. The
increase in the provision due to passage of time is recognized as interest expense. As at December 31, 2017 and 2016, the
Company did not have any liability for provisions.
i) Revenue Recognition
Revenue is recognized when the amount of revenue can be measured reliably, and is probable that the economic benefits
will flow to the entity and the costs incurred or to be incurred in respect of the transaction can be measured reliably. In
addition, for the sale of metal concentrates, revenue is recognized when the Company has transferred to the buyer the
significant risks and rewards of ownership of the goods and retains neither managerial involvement nor control over the
goods. For the sale of services, a further recognition requirement is that the stage of completion of the transaction at the end
of the reporting period can be measured reliably. Revenue is measured at the fair value of the consideration received or
receivable.
i) Operation and maintenance of water treatment plants
For revenue based on water treatment fees, the above criteria are generally met as water treatment services are performed.
The Company has an agreement with a customer for the operation of a water treatment plant. Water treatment fees revenue
are earned based on the volume of water treated and on labour hours incurred. For revenue based on metal recovery, the
above criteria are also generally met when the title of the metal concentrate passes to the customer. Revenue from metal
recovery is recorded at the fair value, based on prevailing market prices adjusted in accordance with agreed upon terms.
ii) Technical services relating to water management
The above criteria are generally met as services are performed. Engineering services include plant design, construction,
piloting, commissioning and operation support. Laboratory and pilot demonstration services include experiment design,
experimental equipment and reagent procurement, test apparatus setup, conducting of experiments, disposal of samples and
delivery of final reports on the results. The Company recognizes revenue from technical services by either the percentage of
completion or completed contract method depending on the specific circumstances of the individual contracts.
11
BQE WATER INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
j) Government grant
Grants from the governments are recognized at their fair value where there is a reasonable assurance that the grant will be
received and the group will comply with all attached conditions. Government grants are recognized as follows:
•
•
Grants relating to plant and equipment are included in non-current liabilities as deferred government grants and
are credited to the statement of profit or loss on a straight-line basis over the expected lives of the related assets.
Grants that compensate the Company for expenses incurred are deferred and recognized in the statement of profit
or loss on a systematic basis in the periods in which the intended expenses are recognized.
k) Employee benefits
i) Bonus plans
The Company recognizes a liability and an expense for bonuses based on a formula that takes into consideration the key
performance indicators of the Company. The Company recognizes a provision where contractually obliged or where there is a
past practice that has created a constructive obligation.
ii)
Defined contribution plans
Obligations for contributions to defined contribution plans are recognized as an employee benefit expense in profit or loss in
the periods during which the related service is provided by the employees.
iii) Termination benefits
Termination benefits are payable when employment is terminated by the Company before the normal retirement date, or
whenever an employee accepts voluntary redundancy in exchange for these benefits. The Company recognizes termination
benefits at the earlier of the following dates:
• When the Company can no longer withdraw the offer of those benefits; and
• When the entity recognizes costs for a restructuring that is within the scope of IAS 37 and involves the payment of
termination benefits.
Benefits falling due more than 12 months after the end of the reporting period are discounted to their present value.
Share-based payment
l)
The Company maintains a RSU plan, a DSU plan, and a stock option plan for employees and directors of the Company.
Cash-settled share-based payments, which include RSUs and DSU, are measured initially at the fair value and such liabilities
are recognized as an obligation at the grant date. At the end of each reporting period until the liability is settled, and at the
date of settlement, the fair value of the liability is re-measured, with any changes in fair value recognized in profit or loss for
in the period.
Equity-settled share-based payments, which include the stock option plan, are measured at the fair value of the equity
instruments at the grant date. Fair value is measured using the Black-Scholes pricing model. The fair value determined at the
grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on
the Company’s estimate of equity instruments that will eventually vest, with a corresponding increase in contributed surplus.
At the end of each reporting period, the Company revises its estimate of the number of equity instruments expected to vest.
The impact of the revision of the original estimates, if any, is recognized in profit or loss such that the cumulative expense
reflects the revised estimate, with a corresponding adjustment to the contributed surplus.
Equity-settled share-based payment with parties other than employees are measured at the fair value of the goods or
services received, except where that fair value cannot be estimated reliably, in which case they are measured at the fair value
of the equity instruments granted, measured at the date the entity obtains the goods or the counterparty renders the
service.
12
BQE WATER INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
Income tax
m)
The Company follows the asset and liability method of accounting for income taxes. Income tax is recognized in profit or loss,
except when they relate to items that are recognized in other comprehensive income or directly in equity, in which case, the
current and deferred tax are also recognized in other comprehensive income or directly in equity respectively. Where current
tax or deferred tax arises from the initial accounting for a business combination, the tax effect is included in the accounting
for the business combination. Income tax comprises of two components: current and deferred.
i) Current tax
The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit before taxes as reported in
the consolidated statement of profit or loss and other comprehensive income because of items of income or expense that are
taxable or deductible in other years and items that are never taxable or deductible. Current tax comprises the expected tax
payable or receivable on the taxable profit for the year and any adjustment to tax payable or receivable in respect of previous
years. Current tax also includes any tax arising from dividends. The Company’s current tax is calculated using tax rates that
have been enacted or substantively enacted by the end of the reporting period.
ii) Deferred tax
Under the asset and liability method, deferred income 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, unused tax losses and other income tax deductions. Deferred tax liabilities are generally
recognized for all taxable temporary differences. Deferred tax assets are generally recognized for all deductible temporary
differences to the extent that it is probable that taxable profits will be available against which those deductible temporary
differences can be utilized.
Deferred tax assets and liabilities are not recognized for:
•
•
•
Temporary differences on the initial recognition of assets or liabilities in a transaction that is not a business
combination and that affects neither accounting nor taxable profit or loss;
Temporary differences related to investments in subsidiaries, associates and joint arrangements, and interests in
joint ventures, to the extent that the Company is able to control the timing of the reversal of the temporary
differences and it is probable that they will not reverse in the foreseeable future; and
Taxable temporary differences arising on the initial recognition of goodwill.
Deferred tax assets are recognized for unused tax losses, unused tax credits and deductible temporary differences to the
extent that it is probable that future taxable profits will be available against which they can be used. Deferred tax assets are
reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be
realized. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they
reverse, using tax rates enacted or substantively enacted at the reporting date.
The measurement of deferred tax reflects the tax consequences that would follow from the manner in which the Company
expects at the reporting date to recover or settle the carrying amount of its assets and liabilities. Deferred tax assets and
liabilities are offset only if certain criteria are met.
n) Earnings (loss) per share
Basic earnings (loss) per share is calculated by dividing the net income (loss) for the period attributable to equity owners of
the Company by the weighted average number of common shares outstanding during the period.
Diluted earnings (loss) per share is calculated using the treasury stock method by adjusting the weighted average number of
common shares outstanding for dilutive instruments. If the Company incurs net losses in a fiscal year, basic and diluted losses
per share are the same.
13
BQE WATER INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
4. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS
The preparation of the Company’s consolidated financial statements in conformity with IFRS requires the Company’s
management to make judgments, estimates and assumptions about future events that affect the amounts reported in the
consolidated financial statements and related notes to the financial statements. The estimates and associated assumptions
are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these
estimates.
Estimates and assumptions are continually evaluated and are based on management’s experience and other facts and
circumstances. Revisions to estimates and the resulting effects on the carrying amounts of the Company’s assets and
liabilities are accounted for prospectively.
The areas which require management to make significant judgments, estimates and assumptions in determining carrying
values include, but are not limited to:
a) Critical judgements
Critical judgements that management has made in the process of applying the Company’s accounting policies and that have
the most significant effect on the amounts recognized in the consolidated financial statement are limited to management’s
assessment of the Company’s ability to continue as a going concern (note 2(b)).
b) Key sources of estimation uncertainty and assumptions
The following are the key assumptions concerning the future, and other key sources of estimation uncertainty at the end of
the reporting period, that have a significant risk of causing a material adjustment to the reported amounts of assets and
liabilities, income and expenses within the next fiscal year.
i) Revenue recognition
Revenue from technical services relating to water management are recognized using a percentage-of-completion method,
which requires judgment relative to assessing risks, estimating project costs for completion, and making assumptions for
technical issues. Depending on the services provided and on the contract terms, many variables are used in assessing the
revenue from the percentage completed at the reporting date.
ii) Asset impairment
Determining the amount of asset impairment requires an estimation of the recoverable amount, which is defined as the
higher of fair value less the cost of disposal or value in use. In assessing value in use, the estimated future cash flows are
discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of
money and the risk specific to the asset. In assessing fair value less costs to sell, the price that would be received on the sale
of an asset in an orderly transaction between market participants at the measurement date is estimated. Many factors used
to assess recoverable amounts are outside of the control of management and it is reasonably likely that assumptions and
estimates will change from period to period. These changes may result in future impairments in the Company’ long-term
assets such as plant and equipment or investment in joint ventures. For example, the copper price could be lower than
projected due to economic, industry or competitive factors, or the discount rate used in the value in use model could
increase due to changes in market interest rate.
5. RECENT ACCOUNTING PRONOUNCEMENT
The Company has not early adopted any amendment, standard or interpretation that has been issued by the IASB but is not
yet effective. Changes in accounting standards not yet effective:
IFRS 9 Financial Instruments
On July 24, 2014, the IASB issued the complete IFRS 9, Financial Instruments (“IFRS 9”). IFRS 9 introduces new requirements
for the classification and measurements of financial assets. Under IFRS 9, financial assets are classified and measured based
14
BQE WATER INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
on the business model in which they are held and the characteristics of their contractual cash flows. The standard introduces
additional changes relating to financial liabilities and amends the impairment model by introducing a new “expected credit
loss” model for calculating impairment. It also includes a new general hedge accounting standard which aligns hedge
accounting more closely with risk management. The mandatory effective date of IFRS 9 is for annual periods beginning on or
after January 1, 2018 and must be applied retrospectively with some exemptions. Early adoption is permitted. The
restatement of prior periods is not required and is only permitted if information is available without the use of hindsight.
The Company currently does not practice hedge accounting, but will continue to evaluate the impact of the change to the
consolidated financial statements based on the characteristics of financial instruments outstanding at the time of adoption of
IFRS 9.
IFRS 15 Revenues from Contracts with Customers
On May 28, 2014 the IASB issued IFRS 15, Revenue from Contracts with Customers (“IFRS 15”). IFRS 15 introduces a single
contract-based five-step model that applies to contracts with customers and two approaches for the recognition of revenue:
at a point in time or over time. The five steps are: identify the contract(s) with the customer, identify the performance
obligations in the contract, determine the transaction price, allocate the transaction price, and recognize revenue when the
performance obligation is satisfied. Revenue is recognized when a customer obtains control of a good or service and thus has
the ability to direct the use and obtain the benefits from the good or service. IFRS 15 also requires enhanced disclosures
about revenue to help investors better understand the nature, amount, timing and uncertainty of revenue and cash flows
from contracts with customers, and improve the comparability of revenue from contracts with customers. The standard
replaces IAS 18 Revenue and IAS 11 Construction contracts and related interpretations. The effective date is for reporting
periods beginning on or after January 1, 2018 with early application permitted.
The Company will adopt IFRS 15 effective January 1, 2018 applying the retrospective method of transition. The Company has
evaluated the potential impact of applying IFRS 15, analyzing its sale agreements. The standard requires entities to recognize
revenue when the control of the goods or services passes to the customer. For the Company's revenue earned from the
operation and maintenance of water treatment plants, the Company concluded there is no material change in the timing of
revenue recognized under the new standard as the point of transfer of risk and reward for goods and services and transfer of
control occur at the same time. In addition, the standard requires entities to apportion revenue earned from contracts to
individual performance obligations, on a relative standalone selling price basis. The Company also earns revenue from
technical services relating to water management, including engineering, laboratory and pilot demonstrations. For technical
services contracts, the Company may defer and recognize the revenue over time as each obligation within the contracts are
fulfilled. Given that the majority of our technical services contracts have the clause that allow the Company to have an
enforceable right to payment for performance completed to date, the Company concluded there is no material change in the
amount of revenue recognized as the Company will continue to recognize revenue over time based on percentage of
completion.
Based on the Company’s assessment, the impact of this change on the amount of revenue recognized in a year is not
expected to be significant. As a result, the Company does not anticipate any significant changes in the amounts of the
revenue recognized or a significant change in the timing of revenue recognition under the new standard.
IFRS 16 Leases
On January 6, 2016, the IASB issued IFRS 16, Leases (“IFRS 16”). IFRS 16 specifies the methodology to recognize, measure,
present and disclose leases. The standard provides a single lessee accounting model, requiring lessees to recognize assets and
liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value. The standard
replaces IAS 17 Leases. The effective date is for reporting periods beginning on or after January 1, 2019 with early adoption
permitted.
The Company has not yet determined the effect of adoption of IFRS 16 on its consolidated financial statements.
15
BQE WATER INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
6. TRADE AND OTHER RECEIVABLES
Trade receivables
Unbilled receivables
Value added tax receivables
Receivable from joint venture (note 7(a))
Other
Dec. 31, 2017
$
322,198
246,495
12,467
-
99,370
Dec. 31, 2016
$
439,573
74,096
-
86,255
13,385
680,530
613,309
7. RELATED PARTY TRANSACTIONS AND BALANCES
The following transactions were carried out with related parties of the Company:
a) As at December 31, 2017, the Company had trade and other receivables balance of $nil (2016 - $86,255) from their
China joint venture, arising mainly from JCC-BQE joint venture costs incurred on behalf of the joint venture. The
receivables are unsecured in nature and bear no interest. No provisions are held against such receivables. There was no
sale of goods and services with the Dexing joint venture during the year ended December 31, 2017 and 2016.
b)
For the year ended December 31, 2017 and 2016, the compensation awarded to the Company’s key management,
which includes the Board of Directors and executive management, are as follows:
Salaries, fees and short-term benefits
Share-based payments (note 11(a))
2017
$
658,480
6,153
2016
$
645,826
13,502
664,633
659,328
Included in the trade payables and accrued liabilities as of December 31, 2017 is $12,231 ($59,200 at December 31,
2016) of salaries, director fees, management consulting service fees with companies owned by the Company’s
management, and termination benefits. Included in the salaries, fees and short-term benefits, are consulting services
received from companies owned by the Company’s management, which amounted to $69,000 for the year ended
December 31, 2017 (2016 - $120,000).
c) On July 6, 2016, the Company entered into an 18-month, secured, 8% per annum interest bearing convertible loan
agreements with multiple lenders totaling $1,500,000. These lenders include certain directors, shareholders,
management, and employees of the Company. Details of the convertible loan are described in note 12.
d)
Included in the trade payables and accrued liabilities as of December 31, 2017 is $96,400 ($nil as of December 31, 2016)
of contribution of registered capital payable to the Company’s joint venture as described in note 9(b).
16
BQE WATER INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
8. PLANT AND EQUIPMENT
As at Dec. 31, 2016
Opening net book value
Additions
Depreciation
Foreign exchange translation
Water
treatment
plant
$
Pilot
plants
$
86,356
8,256
(94,612)
-
317,169
-
(117,287)
-
Other1
$
29,001
9,784
(21,652)
(5)
Total
$
432,526
18,040
(233,551)
(5)
Closing net book value
-
199,882
17,128
217,010
As at Dec. 31, 2016
Cost
Accumulated depreciation
Closing net book value
As at Dec. 31, 2017
Opening net book value
Additions
Depreciation
Closing net book value
As at Dec. 31, 2017
Cost
Accumulated depreciation
Closing net book value
2,113,388
(2,113,388)
580,593
(380,711)
528,224
(511,096)
3,222,205
(3,005,195)
-
-
-
-
-
-
-
-
199,882
17,128
217,010
199,882
-
(199,882)
17,128
39,545
(14,210)
217,010
39,545
(214,092)
-
42,463
42,463
580,593
(580,593)
568,065
(525,602)
1,148,658
(1,106,195)
-
42,463
42,463
1Other comprises of lease improvements, office and lab equipment and computer equipment.
17
BQE WATER INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
9. INVESTMENT IN JOINT VENTURES
Investment in joint ventures are comprised of:
Balance, January 1, 2016
Share of net income
Share of translation loss on foreign operation
Contributions made
Distributions received
Balance, December 31, 2016
Share of net income (loss)
Share of translation loss on foreign operation
Contributions made
Distributions received
JCC-BQE
$
4,708,976
156,289
(452,218)
202,920
(384,400)
4,231,567
1,170,739
(5,942)
148,379
(524,400)
MWT-BQE
$
-
-
-
-
-
(21,422)
(65)
96,400
-
Balance, December 31, 2017
5,020,343
74,913
JCC-BioteQ Environmental Technologies Co. Ltd.
a.
During 2006, BQE Water signed a definitive joint venture agreement with Jiangxi Copper Corporation (“JCC”) for the
operation of a water treatment facility located at JCC’s Dexing Mine in Jiangxi Province, China. The joint venture, which forms
a 50/50 share joint venture company between BQE Water and JCC, is called JCC-BioteQ Environmental Technologies Co. Ltd
(“JCC-BQE”). The joint venture builds and operates water treatment plants using BQE Water’s technologies. The agreement
includes a license contract whereby BQE Water will provide its patented technology on a royalty-free basis to the joint
venture company for use at the Dexing Mine and also five potential additional sites owned and operated by JCC.
The joint venture sells all of the metal concentrate recovered in its operations to the joint venture partner, JCC. All related
party sales are recorded on the date of sale at the fair market price of the metal with adjustments in accordance with the
agreed terms. Currently, the joint venture operates three water treatment plants.
Any cash distributions from the joint venture to BQE Water must be unanimously approved by both partners and comply with
Chinese tax and regulatory requirements. Distributions are also subject to Chinese withholding taxes and minimum capital
requirements as applicable. Currently, BQE Water and JCC have a standing agreement to distribute excess cash reserves
annually. The partners will take into consideration factors such as operating performance of the plants, future capital
requirements and working capital flexibility in determining the cash amount to be distributed in a given year. The Company
received a gross cash distribution of $524,400 (RMB $2,730,000) during 2017, and $384,400 (RMB $2,000,000) during 2016.
The joint venture derives its revenue from recovered copper sales, which is subject to risks that are beyond the control of the
joint venture. The copper recovery rate is dependent on the rainfall in the region and the grade of copper in the water
treated, while the revenue is exposed to the world commodity price risk. The Company’s share of net earnings in the joint
venture for the year ended December 31, 2017 were $1,170,739 ($156,289 in 2016).
18
BQE WATER INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
The financial statements of BQE Water’s 50% interest in the JCC-BQE joint venture are presented as follows:
Statement of financial position
Assets
Current assets
Cash
Trade and other receivables
Income taxes recoverable
Inventory
Prepaid expenses
Non-current assets
Plant and equipment
Deferred tax assets
Dec. 31, 2017
$
Dec. 31, 2016
$
1,562,058
28,178
58,940
33,663
977
1,683,816
4,029,345
65,254
4,094,599
783,474
87,979
55,134
100,272
857
1,027,716
4,481,601
65,321
4,546,922
Total assets
5,778,415
5,574,638
Liabilities
Current liabilities
Accounts payable and accrued liabilities
Total liabilities
Partner’s Equity
Joint venture partner equity
Accumulated other comprehensive income
Accumulated deficit
Total partner’s equity
Total liabilities and partner’s equity
758,072
1,343,071
758,072
1,343,071
3,732,403
1,443,966
(156,026)
5,020,343
3,584,024
1,449,908
(802,365)
4,231,567
5,778,415
5,574,638
19
BQE WATER INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
Statements of income and comprehensive income
Revenue
Plant and other operating costs (excluding depreciation)
General and administration
Depreciation of plant and equipment
Income from operations
Finance income (expense)
Foreign exchange (loss)
Other income
Income before income taxes
Current income tax expense
Deferred tax recovery
Net income for the year
Other comprehensive loss
Translation loss on foreign operation
2017
$
2016
$
5,218,607
2,990,909
2,227,698
366,625
509,776
1,351,297
2,989
(438)
15,705
4,401,089
3,493,374
907,715
255,003
512,545
140,167
(1,623)
(9,383)
-
1,369,553
129,161
(292,810)
93,996
(38,938)
66,066
1,170,739
156,289
(5,942)
(452,218)
Comprehensive income (loss) for the year
1,164,797
(295,929)
b. Shandong MWT BioteQ Environmental Technologies Co. Ltd.
During 2016, BQE Water signed a joint venture agreement with Beijing MWT Water Treatment Project Limited Company
(“MWT”) for the construction and operation of a water treatment plant located in Shandong Province of China. The joint
venture between BQE Water and MWT is called Shandong MWT BioteQ Environmental Technologies Co., Ltd. (“MWT-BQE”).
The joint venture will build a water treatment plant located on a vacant lot owned by Shandong Zhaojin Group Zhaoyuan
Gold Smelting Co., Ltd (“Zhaoye”). The joint venture will operate the plant using BQE Water’s patented technology to recover
and sell copper and zinc metals from Zhaoye’s industrial wastewater stream in order to generate profits. BQE Water is
entitled to 20% of the after-tax profits of the joint venture. Upon the establishment of MWT-BQE, the Company is required to
pay a cash contribution as registered capital of $96,400 (RMB $500,000), which is 4.35% of the total registered capital of the
joint venture.
As of December 31, 2017, the joint venture has begun the construction of the water treatment plant and the Company’s
share of net loss in the joint venture for the year ended December 31, 2017 were $21,487.
20
BQE WATER INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
The sections of the statement of financial position of BQE Water’s portion of interest in the MWT-BQE joint venture is
presented as follows:
Current assets
Plant and equipment
Current liabilities
Partner’s equity
Dec. 31, 2017
$
78,429
19,297
5,951
74,913
Dec. 31, 2016
$
-
-
-
-
The statement of loss of BQE Water’s 20% interest in the MWT-BQE joint venture is presented as follows:
Revenue
General and administration
Net loss for the year
Other comprehensive loss
Comprehensive loss for the year
10. TRADE PAYABLE AND ACCRUED LIABILITIES
Trade payable and accruals
Payroll liability
Payable to joint ventures (note 7(d), note 9)
Interest payable under convertible loan (note 12)
Value added tax payable
2017
$
-
21,422
(21,422)
(65)
(21,487)
2016
$
-
-
-
-
-
Dec. 31, 2017
$
319,721
305,859
96,400
59,180
2,639
Dec. 31, 2016
$
489,051
267,462
-
56,986
65,392
783,799
878,891
11. SHARE-BASED PAYMENTS
The Company’s recorded stock-based compensation (recovery) expense comprised as follows:
Stock options (a)
Deferred share units (b)
Restricted share units (c)
Dec. 31, 2017
$
10,878
55,932
1,549
Dec. 31, 2016
$
13,503
61,216
1,740
68,359
76,459
21
BQE WATER INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
a) Stock options
Under the Company’s Stock Option Plan (the “Plan”), the maximum number of shares reserved for exercise of all options
granted by the Company may not exceed 10% of the Company’s shares issued and outstanding at the time the options are
granted. The exercise price of each option granted under the Plan is determined at the discretion of the Board at no less than
the five-day volume weighted average share price preceding the grant date. Options granted under the Plan expire no later
than the fifth anniversary of the date the options were granted and vesting provisions for issued options are determined at
the discretion of the Board although the Company has a practice of having options vest over 36 months in equal installments.
Each vesting tranche in an award is considered a separate award with its own vesting period and grant date fair value. Fair
value of each tranche is measured at the grant date using the Black-Scholes option pricing model. Compensation expense is
recognized over the tranche’s vesting period by increasing contributed surplus based on the number of awards expected to
vest. The number of awards expected to vest is reviewed at least annually, with any impact being recognized immediately.
Movements in the number of share options outstanding and their related weighted average exercise prices are as follows:
2017
2016
Weighted
average exercise
price
$
0.11
0.06
0.11
0.18
0.07
0.08
Number of
options
4,333,333
4,200,000
(300,000)
(1,100,000)
7,133,333
2,933,333
Weighted
average exercise
price
$
0.14
-
-
0.29
0.11
0.12
Number of
options
5,233,333
-
-
(900,000)
4,333,333
3,466,666
Outstanding at January 1
Granted
Forfeited
Expired
Outstanding at December 31
Exercisable at end of year
The Company uses the Black-Scholes option pricing model in determining the fair value of the stock options. The following
summary provides information on the grants and inputs to the Black-Scholes model.
On December 7, 2017, the Company granted 4,200,000 options with an exercise price of $0.06 to the directors and
employees of the Company. These options have a term of five years from the grant date and vest over three years with one-
third vesting each year on the anniversary of the grant date. The fair value of these options determined using the Black-
Scholes valuation model was $0.05 per option. The significant assumptions in the valuation model were: volatility of
approximately 119.19%, an expected option life of five years and an annual risk-free interest rate of 1.65%.
Exercise price
$
0.06
0.07
0.15
0.06 to 0.15
Weighted average remaining life
(months)
60
16
1
2017 number of outstanding
share options
4,200,000
2,400,000
533,333
41
7,133,333
b) Deferred share units
The Company implemented a deferred share units (“DSU”) plan, effective July 1, 2010, pursuant to which DSUs may be
granted to management and non-employee members of the Board of Directors on an annual basis. Effective from October 1,
2013, the DSU Plan was amended to include certain senior managers of the Company.
The number of DSUs granted to a participant is calculated by dividing (i) a specified dollar amount of the participant’s
22
BQE WATER INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
compensation amount paid in DSU in lieu of cash, and by (ii) the five-day volume weighted average trading price of the shares
of the Company traded through the facilities of the Toronto Venture Exchange on the trading days immediately preceding the
date of grant. Dividends paid on the shares of the Company are credited as additional DSUs. Each DSU entitles the holder to
receive a cash payment equal to the five-day volume weighted average trading price of the shares preceding the date of
redemption. The DSUs vest immediately upon issuance and may only be redeemed within the period beginning on the date a
holder ceases to be a participant under the plan and ending on December 31 of the following calendar year.
As the Company is required to settle this award in cash, it records these awards as a liability and a corresponding charge
including changes to the fair value to stock-based compensation expense. The DSU is a financial instrument that is fair valued
at each reporting date based on the five-day volume weighted average price of the Company’s common shares.
The following table presents the changes to the DSU plan:
Balance, January 1, 2016
Fair value adjustment
Balance, December 31, 2016
Redeemed
Fair value adjustment
Balance, December 31, 2017
Number of units
2,915,075
-
2,915,075
(410,614)
-
2,504,461
Value
$
64,132
61,216
125,348
(24,751)
55,932
156,529
c) Restricted share units
The Company implemented a restricted share units (“RSU”) plan, effective August 5, 2010, pursuant to which RSUs may be
granted to the officers of the Company. Under this plan, notional RSUs are granted and vested annually over a three-year
term in general or otherwise determined by the Board. Upon vesting, the Company will settle the RSU in cash, having
payment equal to the five-day volume weighted average trading price of the number of RSUs held preceding the date of
redemption. RSU granted are accounted for and fair valued using the same methodology as DSUs.
The following table presents the changes to the RSU plan:
Balance, January 1, 2016
Fair value adjustment
Balance, December 31, 2016
Redeemed
Fair value adjustment
Balance, December 31, 2017
Number of units
82,841
-
82,841
(29,948)
-
52,893
Value
$
1,822
1,740
3,562
(1,805)
1,549
3,306
12. CONVERTIBLE LOAN
On July 6, 2016, the Company entered into an 18-month convertible loan agreement (“Loan”) with multiple lenders, which
include certain directors, management, and employees of the Company, individual investors, and non-management insiders
of the Company. The lenders agreed to advance a secured convertible loan with an aggregate principle amount of
$1,500,000. The Company grants to the lenders a security interest of all the personal property in which the Company now has
or hereafter acquires. Out of the aggregate principle, $1,441,000 are from single tranche lenders and the remaining $59,000
are from multi-tranche lenders. Single tranche lenders agreed to advance the loan on the issuance date. Multi-tranche
23
BQE WATER INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
lenders agreed to advance funds to the Company in nine monthly equal tranches starting July 31, 2016 to March 31, 2017.
Under the agreement, the convertible loan bears interest at a rate of 8% per annum with interest payable semi-annually. The
convertible loans are due for repayment 18 months from the effective date at their nominal value of $1,500,000 or
conversion into common shares of the Company at the holder’s option with the conversion price of $0.06 per share. Any
unpaid and accrued interest that is to be converted into common shares shall be equal to the greater of $0.06 or the market
price on the date such interest becomes due and payable. At any time, the Company may elect to repay all or any portion of
the principle and unpaid accrued interest prior to the maturity date.
On January 6, 2017, the Company made the first semi-annual payment of accrued interest in full to the lenders. Then on July
6, 2017, the Company made the second semi-annual payment of accrued interest in full to the lenders.
The fair value of the liability component is calculated using a market interest rate for comparable companies of 15% for an
equivalent, non-convertible secured loan at the date of issue. The residual amount, representing the value of the equity
conversion component, is included in shareholders’ equity as an equity component of the convertible loan. Transaction costs
associated with the issuance of the convertible loan are allocated to the liability and equity components in its allocated
proportion.
Subsequent to the end of the reporting date on January 5, 2018, the Company replaced the original Loan with a replacement
Loan which extends the maturity date for another 12 months, from January 6, 2018 to January 6, 2019. The replacement Loan
carries the same terms and conditions as the original Loan. This transaction has no financial effect except the classification of
the convertible loan from current liabilities to non-current liabilities on the Consolidated Statements of Financial Position as
at December 31, 2017.
The carrying amount of the liability component of the convertible loan and the interest payable are derived as follows:
Face value of convertible loan issued
Less: amounts receivable from lenders
Transaction costs
Equity conversion component on initial recognition
Liability component on initial recognition
Accumulated interest and accretion expense
Repayment of interest
Total liability component as at year end
Dec. 31, 2017
$
Dec. 31, 2016
$
1,500,000
-
(23,652)
(124,261)
1,352,087
322,371
(117,552)
1,556,906
1,500,000
(19,667)
(23,652)
(122,300)
1,334,381
100,137
-
1,434,518
Current interest payable included in accrued liabilities (note 10)
(59,180)
(56,986)
Non-current liability component balance as at year end
1,497,726
1,377,532
13. SHARE CAPITAL
Authorized: unlimited common shares without par value.
As at December 31, 2017 and 2016, the Company has 93,966,672 common shares outstanding.
24
BQE WATER INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
14. EXPENSES BY NATURE
Plant and other operating costs
Employee benefits
Consulting and contractor expenses
Travel expenses
Raw materials and consumables used
Equipment rental expenses
Other expenses
General and administration
Employee benefits
Director fees
Consulting and contractor expenses
Rental expenses
Insurance expenses
Other expenses
Sales and development
Employee benefits
Travel expenses
Rental expenses
Consulting and contractor expenses
Other expenses
15. FINANCE COSTS
The finance costs and income are comprised as follows:
Finance income
Interest expense
25
2017
$
1,277,671
591,315
254,167
133,222
26,094
32,108
2016
$
1,210,614
222,720
93,029
109,848
61,036
60,735
2,314,577
1,757,982
664,790
152,700
360,420
179,346
165,504
142,019
689,203
103,400
376,863
302,748
134,749
98,141
1,664,779
1,705,104
909,565
117,740
78,317
60,593
52,300
789,343
84,980
86,425
119,046
74,420
1,218,515
1,154,214
2017
$
11,260
(226,368)
2016
$
6,696
(104,669)
(215,108)
(97,973)
BQE WATER INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
16. OTHER INCOME
The other income are comprised as follows:
Recovery of value added tax receivable
Recovery (write-off) of trade receivables
Gain on disposal of capital assets
2017
$
49,166
11,812
2,000
62,978
2016
$
16,417
(5,212)
-
11,205
Recovery of value added tax receivable
In 2017, the Company recovered $49,166 ($16,417 in 2016) in VAT receivable from the Mexican government which was
written off in 2014.
17. INCOME TAXES
Current tax (recovery) expense for the year
Deferred tax recovery
Income tax (recovery) expense
2017
$
(100,300)
-
(100,300)
2016
$
38,571
(37,686)
885
The statutory tax rate to income tax expense was 26% (2016 – 26%) for the year-ended December 31, 2017. The tax on the
Company’s losses before tax differs from the amount that would arise using the weighted average tax rate applicable to
losses of the consolidated entities as follows:
Expected income tax recovery at statutory rates
Non-deductible expenses and (non-taxable income)
Withholding tax
Change in tax rates
Functional currency adjustments
Different statutory tax rates on foreign subsidiaries
Change in unrecognized deferred tax assets
Income tax expense
2017
$
(119,951)
(306,312)
(100,300)
(5,132)
(7,757)
(5,790)
444,942
(100,300)
2016
$
(604,284)
(39,489)
38,571
(125,871)
531,545
(78,181)
278,594
885
26
BQE WATER INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
Deferred taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and their corresponding values for tax purposes. Details of deferred tax assets (liabilities) as at
December 31, 2017 and 2016 are as follows:
Non-capital losses carry-forwards
Convertible loan
Unrealized foreign exchange gain
Investment in joint venture
Deferred tax assets (liabilities)
2017
$
614
(614)
-
-
-
2016
$
29,623
(29,623)
-
-
-
The Company’s unrecognized deductible temporary differences and non-capital losses at December 31, 2017 and 2016 are as
follows:
Canada
Plant and equipment
Investment in joint venture
Net capital losses
Non-capital losses
Investment tax credits
Deferred benefits and others
Foreign Jurisdictions
Plant and equipment
Unrealized foreign exchange loss
Non-capital losses
2017
$
2016
$
1,404,028
-
8,056,712
27,100,912
86,834
183,803
36,832,289
456
1,386,720
3,624,763
5,011,939
3,082,381
-
9,635,754
23,732,527
86,834
228,302
36,765,798
3,387
1,278,723
3,311,870
4,593,980
Total unrecognized deductible temporary differences
41,844,228
41,359,778
27
BQE WATER INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
The Company’s investment tax credits, expiring between 2018 and 2020, all of which may be used to reduce future Canadian
income taxes that are otherwise payable. As at December 31, 2017, the Company has not recognized a deferred tax asset in
respect of non-capital loss carry forwards of approximately $27,100,912 (2016 - $23,732,528) which may be carried forward
to apply against future year income tax for Canadian income tax purposes, subject to the final determination by taxation
authorities, expiring in the following years:
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
$
2,385,066
1,628,919
1,951,879
2,372,749
965,964
3,007,451
3,735,949
3,403,636
2,414,568
1,458,931
584,241
3,191,559
27,100,912
In addition, the Company has available tax losses in other jurisdictions that total $3,624,763 (2016 - $3,311,870). The
remaining losses can be carried forward to offset against future taxable income in those jurisdictions with expiry periods from
10 years to indefinitely.
As at December 31, 2017, the Company has $nil of income taxes payable (2016 - $152,195), as the Company reversed an
estimated withholding tax with the Chilean government. During 2017, the Company received confirmation with local
accountants that the Company’s Canadian entity is not liable for withholding tax for earned income while operating a Chilean
water treatment plant during 2012.
During the year ended December 31, 2017, the Company has paid off $52,440 (2016 - $38,571) for the dividend received
from JCC-BioteQ Environmental Technologies Co. Ltd. As at December 31, 2017 and 2016, the company has $nil withholding
tax payable.
28
BQE WATER INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
18. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information (included within operating activities) is as follows:
Change in non-cash working capital items
(Increase) decrease in trade and other receivables
Decrease in inventory
(Increase) decrease in prepaid and deposits
Decrease in trade payable and accrued liabilities
Decrease in deferred revenue
Decrease in deferred revenues and deferred benefits
2017
$
(66,412)
20,137
(9,314)
(49,054)
(116,772)
(26,556)
2016
$
62,367
35,001
9,171
(117,459)
(97,218)
-
Change in non-cash working capital items
(247,971)
(108,138)
19. COMMITMENTS
The Company has commitments of $796,649 under operating leases for office and laboratory premises, for laboratory assay
services, and for office equipment, as follows:
2018
2019
2020
2021
2022
$
295,752
187,738
189,269
63,606
60,284
796,649
20. SEGMENTED INFORMATION
The Company has one operating segment, being principally to build and operate water treatment plants. The Company earns
revenue from the operation of water treatment plants and technical services relating to water management.
a) Segment revenue
The Company’s sources of revenue are as follows:
Water treatment plant operations
Technical services
2017
$
1,187,686
2,869,066
2016
$
1,655,042
2,305,671
4,056,752
3,960,713
29
BQE WATER INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
b) Geographic information
The Company mainly generates revenue from Canada (country of domicile) and occasionally from other foreign countries.
The Company’s revenue by geographic locations, presented based on the location in which the sale originated from, are as
follows:
Revenue
Canada
Latin America
USA
Other
2017
$
2,534,511
1,181,146
252,012
89,083
2016
$
3,165,338
224,991
69,860
500,524
4,056,752
3,960,713
The Company’s non-current assets, excluding non-current deposits, by location of assets are as follows:
Canada
China
Dec. 31, 2017
$
42,463
5,095,256
Dec. 31, 2016
$
217,010
4,231,567
5,137,719
4,448,577
Information about major customers
c)
The following table presents revenue to individual customers exceeding 10% of annual revenue for the year ended December
31, 2017 and 2016.
Customer A
Customer B
Customer C
Customer D
Customer G
Total
2017
$
1,187,686
37,133
156,996
84,900
730,472
2016
$
1,655,042
391,299
472,365
844,438
12,262
2,197,187
3,375,406
Represents percentage of total revenue for the year
54%
85%
21. CAPITAL RISK MANAGEMENT
The Company’s objective when managing capital is to safeguard its ability to continue as a going concern in order to provide
returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost
of capital.
30
BQE WATER INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
In the management of capital, the Company includes the components of shareholder’s equity, non-current debt, and net of
Cash.
Capital (as defined above) is summarized as follows
Shareholders’ equity
Non-current convertible loan
Less:
Cash
2017
$
4,395,331
1,497,726
5,893,057
2016
$
4,755,816
1,377,532
6,133,348
(984,298)
(2,231,798)
4,908,759
3,901,550
In order to maintain or adjust its capital structure, the Company may issue new shares, purchase shares for cancellation
pursuant to a normal course issuer bid, raise additional debt financing or refinance existing debt with different
characteristics. There were no changes in the Company’s approach to capital management during the year.
22. FINANCIAL RISK MANAGEMENT
The Company’s activities exposes it to various risks, including credit risk, market risks such as foreign currency risk, liquidity
risk, and commodity price risk. The Company’s risk management activities are designed to mitigate possible adverse effects
on the Company’s performance, having regard for the size and scope of the Company’s operations, with a primary focus on
preservation of capital. Risk management activities are managed by the Board of Directors and its finance and accounting
department. The Company’s risk management policies and procedures have not changed from 2016.
a) Credit risk
Credit risk is the risk of an unexpected loss if a party to the Company’s financial instruments fails to meet their contractual
obligations. The Company’s financial assets are primarily comprised of Cash, and trade and other receivables excluding value
added tax (“VAT”) receivable. Credit risk is primarily associated with trade and other receivables; however, it also arises on
cash and cash equivalent.
The Company’s maximum exposure to credit risk is as follows:
Cash
Trade and other receivables (exclude VAT receivable)
Dec. 31, 2017
$
984,298
668,063
Dec. 31, 2016
$
2,231,798
613,309
1,652,361
2,845,107
The Company minimizes the credit risk on Cash by depositing only with reputable and highly-rated financial institutions.
31
BQE WATER INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
Credit risk on trade and other receivables is minimized by performing credit reviews, ongoing credit evaluation and account
monitoring procedures. The historical level of customer defaults is negligible and, as a result, the credit risk associated with
trade receivables at December 31, 2017 is considered to be negligible. All of the Company’s receivables have been reviewed
for indicators of impairment. The aging of trade and other receivables is as follows:
0-30
days
$
31-90
days
$
Over 90
days
$
Dec. 31, 2017
Dec. 31, 2016
Total
$
Total
$
Trade and other receivables (exclude
VAT receivable)
523,278
118,545
26,240
668,063
613,309
Of the Company’s receivables, there are no overdue balances and collection is reasonably assured. The definition of items
that are past due is determined by reference to terms agreed upon with individual customers. No trade receivables have
been challenged by the respective customers and the Company continues to conduct business with them on an ongoing
basis.
b) Currency risk
The Company conducts business in Canada, United States, Mexico, Chile, and China. As a result, the Company has foreign
currency exposure with respect to items not denominated in Canadian dollars. The three main types of foreign exchange risk
for the Company can be categorized as follows:
i)
Transaction exposure
The Company’s operations sell mainly services and incur costs in different currencies. This creates exposure at the
operational level, which may affect the Company’s profitability as exchange rates fluctuate. The Company has not hedged its
exposure to currency fluctuations.
ii) Currency risk exposure
The Company is exposed to currency risk through the following assets and liabilities denominated in currencies other than
the Canadian dollar: Cash, trade and other receivable excluding VAT receivable, and trade payable and accrued liabilities
excluding VAT payable. The currencies of the Company’s financial instruments and other foreign currency denominated
liabilities exposed to currency risk, based on notional amounts, were as follows:
Cash
Trade and other receivables (exclude VAT)
Trade and other payables (exclude VAT)
U.S.
dollar
430,544
96,141
(5,161)
Mexican
peso
152,857
14,181
(1,077)
December 31, 2017
Chinese
RMB
41,253
-
(99,099)
Chilean
peso
18,991
88,444
(272,557)
Gross balance sheet exposure
521,524
165,961
(165,122)
(57,846)
32
BQE WATER INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
Cash
Trade and other receivables (exclude VAT)
Trade and other payables (exclude VAT)
U.S.
dollar
407,812
109,925
(72,860)
Mexican
peso
14,570
-
(1,845)
December 31, 2016
Chinese
RMB
1,657
-
(1,130)
Chilean
peso
10,851
69,414
(176,605)
Gross balance sheet exposure
444,877
12,725
(96,340)
527
iii) Translation exposure
The Company’s functional and reporting currency is Canadian dollars. The Company’s foreign operations translate their
operating results from their respective functional currency to Canadian dollars. Therefore, exchange rate movements in the
U.S. dollar, Mexican peso, Chilean peso and Chinese RMB can have a significant impact on the Company’s consolidated
operating results. A 10% strengthening (weakening) of the Canadian dollar against the following currencies would have
decreased (increased) the Company’s net loss from its financial instruments presented by the amounts shown below.
U.S. dollar
Mexican peso
Chilean peso
Chinese RMB
2017
$
52,152
16,596
(16,512)
(5,785)
2016
$
44,488
1,273
(9,634)
53
46,451
36,180
Liquidity risk
c)
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company
currently settles its financial obligations out of Cash. The ability to do this relies on the Company collecting its trade
receivables in a timely manner and maintaining sufficient cash in excess of anticipated needs.
The following table shows the contractual maturities of debt commitments. The amounts presented represent the future
undiscounted principal and interest cash flows, and therefore, do not equate to the carrying amounts on the consolidated
statements of financial position.
Trade payable and other payables
(exclude VAT)
Deferred benefits
Convertible loan
Interest Payable on convertible loan
< 1 year
$
721,980
159,835
-
120,000
1-2 years
$
-
-
1,500,000
60,000
Dec. 31, 2017
Total
$
Dec. 31, 2016
Total
$
721,980
159,835
1,500,000
180,000
756,513
128,910
1,500,000
180,493
1,001,815
1,560,000
2,561,815
2,565,916
33
BQE WATER INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
Taking into consideration the Company’s current cash position, volatile equity markets, global uncertainty in the capital
markets and increasing cost pressures, the Company is continuing to review expenditures in order to ensure adequate
liquidity. A period of continuous depression in mining industry, which is the Company’s main customer base, may necessitate
the Company to seek financing opportunities in accordance to its capital risk management strategy (note 21).
d) Price risk
The Company’s net income or loss, and financial condition are subject to price risk due to fluctuations of the following:
i) Commodity price risk
The profitability of the Company’s investment in joint ventures will be significantly affected by changes in the commodity
price of copper being sold in joint venture of JCC-BQE. Copper prices fluctuate on a daily basis and are affected by numerous
factors beyond the Company’s control. The supply and demand for copper, the level of interest rates, the rate of inflation,
investment decisions by large holders of copper, including governmental reserves, and the stability of exchange rates can all
cause significant fluctuations in copper prices. A 10% change in copper prices would impact the Company’s net income or loss
before taxes and other comprehensive income or loss before taxes by $521,861 in 2017 ($440,109 in 2016).
ii) Common stock price risk
The Company is subject to price risk for changes in the Company’s common stock price per share. The Company has
implemented, as part of its long-term incentive plan, the DSU and RSU plan that the Company is required to satisfy in cash
upon vesting. The Company considers the plan a financial liability and is required to fair value the outstanding liability with
the resulting changes included in stock-based compensation expense each period: an increase in share unit award prices
would decrease the Company’s net income or loss. A 10% change in common stock prices would impact the Company’s net
income or loss before taxes and other comprehensive income or loss before taxes by $15,983 in 2017 ($12,535 in 2016).
23. FAIR VALUE MEASUREMENT
The Company defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. In assessing the fair value of a particular contract, the
market participant would consider the credit risk of the counterparty to the contract. Consequently, when it is appropriate to
do so, the Company adjusts the valuation models to incorporate a measure of credit risk. Fair value represents management’s
estimates of the current market value at a given point in time.
The Company’s financial assets and financial liabilities are classified and measured as follows:
Financial assets
Cash
Trade and other receivables
(exclude VAT)
Financial liabilities
Trade payable and other payables
(exclude VAT)
Convertible loan
Deferred benefits
Category
Dec. 31, 2017
$
Dec. 31, 2016
$
Loan and receivables at amortized cost
Loan and receivables at amortized cost
984,298
668,063
2,231,798
613,309
Financial liabilities at amortized cost
781,160
813,499
Financial liabilities at amortized cost
Financial instruments at FVTPL
1,497,726
159,835
1,377,532
128,910
The carrying values of the financial assets and liabilities presented above approximate their fair values. The Company has not
offset financial assets with financial liabilities.
34
BQE WATER INC.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2017 and 2016
The fair value hierarchy establishes three levels to classify the inputs to valuation techniques used to measure fair value as
described in note 3(f). The fair value hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3
inputs. The Company’s DSUs and RSUs are held at fair value, measured by Level 1 inputs. There were no transfers between
Levels 1, 2 and 3 during the years ended December 31, 2017 and 2016. The Company’s policy is to recognize transfers into
and transfers out of fair value hierarchy levels as of the date of the event or change in circumstances that caused the transfer.
35