Professional Documents
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2015 AN N UAL R E PO R T
1 2015 at a Glance
2 Why Pure?
8 Financial Highlights
9 Message to Shareholders
11 Our Management Team
12 Managements Discussion and Analysis
34 Auditors Report to the Shareholders
35 Consolidated Financial Statements
39 Notes to Financial Statements
64 Corporate Information
At Pure, we work to protect the critical infrastructure necessary for everyday life. We
are driven to change the way this infrastructure is managed. Our technologies and
expertise are being used around the world to help manage pipeline deterioration and
reduce water, wastewater and oil and gas loss. By fostering an environment that values
and encourages creativity and innovation, we have become the world leader in the
development and application of innovative technologies for inspection, monitoring
and management of pipeline infrastructure.
ANNUAL REPORT 2015 PU R E T E C H N O LO G I E S LT D. | 1
2015 at a Glance
REVENUE FI NAN CIAL POSITI O N
n $104.4 million, up 34% year-over-year n $46.7 million of working capital; $11.1 million in cash
( 3)
ADJ USTE D E B ITDA
n $13.3 million compared to $15.6 million in 2014
n Return to strong and increasing cashflow expected through
sharp focus on improved management processes, cost
reductions and integration of acquisitions(4)
13%
Other
Countries
83%
Water & Wastewater
21%
Canada 2% Bridges,
66% Buildings
United States & Structures
15%
Oil & Gas
(1) C
ompounded Annual Growth Rate 2011 to 2015.
(2) Hunter McDonnell Pipeline Services business acquired October 1, 2014; Wachs Water Services acquired April 1, 2015.
(3) A
djusted EBITDA is defined as EBITDA before gains or losses on foreign exchange, earn-out provisions related to acquisitions, costs directly attributable to
acquisitions, stock-based compensation expense, restructuring costs and other significant one-time expenses. See Non-GAAP Measures.
(4) See MD&A (period ended December 31, 2015) for details on Growth and Optimization Plan.
2 | PU R E T E C H N O LO G I E S LT D. ANNUAL REPORT 2015
water
ANNUAL REPORT 2015 PU R E T E C H N O LO G I E S LT D. | 3
4 | PU R E T E C H N O LO G I E S LT D. ANNUAL REPORT 2015
fuel
ANNUAL REPORT 2015 PU R E T E C H N O LO G I E S LT D. | 5
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Pure
ANNUAL REPORT 2015 PU R E T E C H N O LO G I E S LT D. | 7
8 | PU R E T E C H N O LO G I E S LT D. ANNUAL REPORT 2015
(1) Adjusted EPS is defined as the tax affected earnings per share adjusted for the effects of acquisitions, and any non-recurring, extraordinary items.
(2) Includes capitalized development costs and $2.2 million of ERP related costs in 2015.
ANNUAL REPORT 2015 PU R E T E C H N O LO G I E S LT D. | 9
Message to Shareholders
2015 was a landmark year for Pure. For the first time in
our history, we exceeded $100 million in revenue and we
have consolidated our position as the world leader in
water pipeline condition assessment.
Through the acquisition of Wachs Water Services (WWS) on April 1, 2015 and John F. Elliott
President and
our continuing focus on research and development, we have broadened the range
Chief Executive Officer
of services and solutions we can provide to the water sector. We have assembled
a core group of experts in the field of assessment and risk analysis of critical
water and wastewater pipeline assets and we are quickly becoming recognized as
the preeminent authority on issues relating to water network sustainability and
associated capital planning.
Looking beyond water, our acquisition of the Hunter McDonnell Pipeline Services
Inc. (HM) business on October 1, 2014 has allowed us to penetrate the large and Even in an environment
established market of providing integrity services to oil and gas pipeline operators
of depressed oil and gas
while introducing new technologies and ideas to this sector. The reputation for
prices, the requirement to
superior service and innovation that HM was known for has made this process
easier. The PureHM team has embraced the access to capital and technical
maintain integrity of the vast
resources that Pure has brought, resulting in robust growth for this part of our existing base of pipeline
business. Even in an environment of depressed oil and gas prices, the requirement infrastructure provides us
to maintain integrity of the vast existing base of pipeline infrastructure provides the opportunity to materially
us the opportunity to materially expand our business. We are one of the few expand our business.
companies with exposure to the oil and gas sector that is actually growing. Through
PureHM, we intend to accelerate this growth and we are confident that our ability
to offer cost-effective integrity management solutions to pipeline operators will
allow us to continue this growth in the future.
The year was not without its challenges. The postponement and delay of several
anticipated large projects, combined with a temporary slowdown in the WWS core
business, resulted in revenue that was below our expectations with consequent
margin compression. The integration of two significant acquisitions, together
with the introduction of a new enterprise resource planning system, added to the
excitement. Nevertheless, we took the opportunity to implement aggressive cost
reductions throughout our organization and we believe that this, combined with
improved management processes and a strong focus on efficient project delivery,
will deliver a return to strong operating margins and increasing free cashflow in
2016 and beyond. Despite these challenges, we exited 2015 in a position of financial
strength with no debt and over $11 million of cash on hand.
10 | P U R E T E C H N O L O G I E S L T D . ANNUAL REPORT 2015
The macro environment in the water infrastructure sector continues to indicate The macro environment
increasing momentum for our business. Several industry studies, combined with in the water infrastructure
catalysts such as the Flint, Michigan lead crisis, suggest that buried infrastructure
sector continues to indicate
will be an increasingly important focus for the media, politicians and regulators
increasing momentum for
in the future. We are perfectly positioned to benefit from this trend. Aging energy
pipelines will continue to attract increasing scrutiny from regulators, and pipeline
our business.
operators will be looking for additional cost efficiencies throughout their sys-
tems, including integrity management. We plan to and will be an integral part of
this evolution.
I am confident that the platforms we have built in the water, wastewater and
energy pipeline sectors, combined with the improved management processes we
have implemented will drive aggressive revenue and margin expansion in 2016
and beyond. I want to take the opportunity to thank our dedicated and passionate
employees (our Pipeline Superheroes!), our Board of Directors and our clients
for their continuing support and inspiration.
Sincerely,
Unless otherwise indicated, all financial information presented in this Management Discussion and Analysis (MD&A),
including tabular amounts, is in thousands of Canadian dollars, and is prepared in accordance with International Financial
Reporting Standards (IFRS). Reference in this MD&A to the Company or to Pure means, as the context may require,
Pure Technologies Ltd. and all or some of its subsidiaries or joint ventures.
Managements Discussion and Analysis is designed to provide the reader with a greater understanding of the Companys
business, the Companys business strategy and performance, the Companys expectations of the future and how the Company
manages risk and capital resources. It is intended to enhance the understanding of the audited consolidated financial state-
ments for the years ended December 31, 2015 and 2014 and accompanying notes (the financial statements), and should
therefore be read in conjunction with this document. Additional information relating to the Company, including the Annual
Information Form, is available on SEDAR at www.sedar.com.
NON-GAAP MEASURES
Some indicators used by the Company to analyze and evaluate its results represent non-GAAP financial measures. Consequently,
they do not have a standard meaning as prescribed by GAAP, and are therefore unlikely to be comparable to similar measures
presented by other issuers. Management believes that these indicators nevertheless provide useful information because they
allow for the evaluation of the performance of the Company and its components based on various aspects, such as past, cur-
rent and expected profitability and financial position. These non-GAAP financial measures include the following Company
indicators:
EBITDA is defined as income from continuing operations before interest, income taxes and depreciation and amortization on
property and equipment and intangible assets.
Adjusted EBITDA and Adjusted Profit is defined as EBITDA and/or Profit before gains or losses on foreign exchange,
earn-out provisions related to acquisitions, costs directly attributable to acquisitions, stock-based compensation expense,
restructuring costs, one-time training costs for the Companys ERP implementation, and other significant one-time expenses.
Management believes that adjusted EBITDA and/or profit provides an indicator as to the ongoing ability of the Company to
generate cashflow through removal from EBITDA of significant non-recurring items comprised of costs directly attributable
to acquisitions as well as non-cash expenses comprised of stock based compensation expense. In addition, foreign currency
gains (losses) are also excluded as they are not operational in nature but rather primarily arise from fluctuations in foreign
exchange rates on the Companys foreign currency denominated monetary balances.
Net marketing, and net engineering and operations expenses are marketing, and engineering and operation expenses
excluding depreciation and stock based compensation expense. Adjusted general and administrative expenses are general
and administrative expenditures excluding stock based compensation, depreciation and non-recurring items such as trans-
action costs on acquisitions and ERP training costs. These measures are provided to give readers an indication of the ongoing
cash components of operating expenditures to better understand future cash needs of the business excluding the impact of
new capital investment.
Readers are cautioned that EBITDA and Adjusted EBITDA, Adjusted EBITDA percentage, Adjusted Profit, Net marketing
and engineering and operations expenses, and Adjusted general and administrative expenses should not be construed as
alternatives to profit as determined in accordance with IFRS.
M A N A G E M E N T S D I S C U S S I O N & A N A LY S I S
ANNUAL REPORT 2015 PU R E T E C H N O LO G I E S LT D. | 13
Gross profit is defined as revenue less cost of sales. Gross margin is revenue less cost of sales divided by revenue expressed as
a percentage. Cost of sales includes direct materials, sub-trades and travel related expenditures, but excludes labour.
Cash flow from operations before working capital changes is defined as the amount of cash generated from revenues
excluding cash spent on capital investments, financing income or costs, and changes in current assets and current liabilities.
Management believes that this measure, in conjunction with Adjusted EBITDA, provides further indication of the cash gener-
ation of the business through exclusion of the impacts of timing of collection and payment of working capital.
PUR ES BUSINESS
Pure is a world leader in the development and application of innovative technologies for inspection, monitoring and manage-
ment of aging physical infrastructure. From monitoring the health of large bridges and structures, to assessing the health of
water, wastewater and oil & gas pipelines, the Companys technologies and expertise are being used around the world to help
manage deterioration and reduce loss. Detailed information on each of the Companys technologies and services can be found
at: www.puretechltd.com.
1. Sale of proprietary, real-time monitoring systems for pipelines, bridges and structures
The Company has developed and acquired innovative, one of a kind technologies which are used around the world to
provide continuous remote health monitoring of critical infrastructure including bridges, buildings and water and waste-
water pipelines.
Pure designs, installs, commissions and maintains all equipment it sells prior to real-time monitoring which generates
recurring revenue. The high-strength steel wire, or cables of bridges, and the tendon systems in buildings and structures
are continuously monitored under related contracts. In the case of large-diameter pre-stressed concrete cylinder pipe
(PCCP) water and wastewater pipelines, Pures monitoring systems track the condition of each pipe section and can
quickly alert clients to intervene when there are signs of rapid deterioration, which without intervention can lead to cata-
strophic and costly pipeline ruptures. Pure also provides pig tracking services for large diameter oil and gas pipelines and
is actively working to adapt the related technology to include real time and permanent monitoring of affected pipelines
for environmental and condition changes.
The PCCP market represents approximately 3% of the total North American water pipeline inventory (over 862,000 miles
installed U.S. EPA, 2009). While sales of monitoring equipment to this market has and will continue to be an integral
component of Pures total revenue, sales will likely decline as an overall percentage moving forward as Pures service
offering expands.
Technology brief:
n SoundPrint acoustic monitoring technology is a patented system used to provide continuous remote health monitor-
ing of water and wastewater pipelines, bridges, buildings, parking structures and other infrastructure components.
n SoundPrint Acoustic Fibre-Optic (AFO) technology is a patented, acoustic fibre-optic monitoring system for struc-
tural monitoring of prestressed concrete water and wastewater pipelines.
n Armadillo Tracks Remote Tracking Units, a PureHM technology acquired in 2014, is an internet based pig tracking
and pipeline monitoring system that integrates acoustic geophones, magnetic sensors and other technologies to mon-
itor pipelines for pig passages and environmental changes which could be indicative of threats to pipeline integrity.
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14 | P U R E T E C H N O L O G I E S L T D . ANNUAL REPORT 2015
2. Technical services utilizing proprietary pipeline inspection, leak detection and condition assessment
technologies and associated field services including proactive valve and hydrant maintenance programs
Aging pipelines, increasing costs of failures and high replacement costs are significant challenges facing pipeline owners
worldwide. Pures leading edge technologies and services for pipeline system management for in-line and over-line indi-
rect pipeline inspection and assessment address this ongoing need, providing valuable information to maximize the life
of these assets, and are used to assess the current health of water and wastewater and oil and gas pipelines.
Technology brief:
n
PureEM electromagnetic technology is a system which provides a snapshot of the condition of large-diameter
water and wastewater transmission pipelines. PureEM technology can be used to inspect PCCP (and all other types
of concrete pipe) and metallic pipelines.
n
SmartBall in-line inspection technology is a patented, innovative leak detection system. It consists of a free-swim-
ming ball with an instrumented aluminum core capable of detecting and locating very small acoustic events in water,
wastewater and oil and gas pipelines. It can also log pressure and temperature. The SmartBall system can be inserted
in a pipeline and travels with the water or oil flow for many hours, collecting information over several kilometers of
pipeline in a single deployment. SmartBall Pipe Wall Assessment (PWA) technology identifies and locates pipe wall
stress within metallic pipelines and has all the original features of the SmartBall technology.
n
Sahara in-line inspection system is a patented, leak detection and high resolution video inspection system used
for detecting and locating leaks, gas pockets, illegal taps and other anomalies in water and wastewater pipelines.
Inspections are conducted while the pipeline remains in service by inserting tethered sensors into the line. Additional
enhancements have been made to this inspection platform including the aforementioned PWA technology.
n
PipeDiver in-line inspection system is an innovative, free-swimming condition assessment platform specifically
designed for in-service inspection of water and wastewater pressure pipelines. In conjunction with PureEM sensor
arrays, the system can be used to inspect PCCP (and all other types of concrete pipe) and metallic pipe.
n
PureRobotics inspection system is a powerful modular robotic pipeline inspection platform capable of performing
long-range multi-sensor inspections in dry pipe or while submerged.
n
PureMFL is an electromechanical method of non-destructive testing used to detect, locate and quantify corro-
sion-induced wall loss in metallic pipe. This technique, commonly known as smart pigging has been actively used
in the oil and gas sector for over 40 years. Pure has enhanced the technique to provide higher resolution and has
adapted it for use in metallic water pipelines.
n
Armadillo Tracks Remote Tracking Units, described previously, are used to track pipeline pigs and to benchmark
inline inspections to allow correlation of anomalies inside the buried pipeline with above ground features on the
right of way. Armadillo Tracks can be used to track the SmartBall technology, PureMFL, and can also be used to
track and benchmark any inline inspection or smart pig used in the oil and gas or water industry.
n
Spectrum XLI technology, a PureHM technology acquired in 2014, is a patented, advanced and comprehensive
above ground indirect auditable inspection system for buried pipelines, combining global positioning and geograph-
ic information system mapping, depth of cover, depth of water, gas leak detection, cathodic protection survey, coating
condition assessment, and more.
n
PipeWISE is an integrity data management software that is specifically designed to manage inspection data for
pipelines, to facilitate correlation of inspection and repair data, and for the analysis of the pipelines fitness for service.
M A N A G E M E N T S D I S C U S S I O N & A N A LY S I S
ANNUAL REPORT 2015 PU R E T E C H N O LO G I E S LT D. | 15
Wachs Valve and Hydrant Services (WWS), acquired by Pure on April 1, 2015, provides proactive valve and hydrant
maintenance programs among other complementary services, utilizing a fleet of vehicles with specialized equipment and
a trained workforce. Locating and maintaining valves and hydrants is critical in minimizing the impact area around a
water pipe failure. The combined Pure and WWS offering provides a unique risk mitigation strategy and allows water
utilities to manage their network with increased confidence.
3. Specialized engineering services in areas related to asset management, primarily in the area of
pipeline condition assessment for water and wastewater infrastructure
Pure provides its clients with actionable information for the proactive management of their underground assets. Its inno-
vative Assess and Address strategy, which uses advanced analytical modeling and risk analysis fed by data collected
by Pures inspection and monitoring technologies, is increasingly being adopted by water and wastewater utilities as a
cost-effective alternative to conventional asset replacement strategies.
As part of its services, Pure provides an integrated utility data solution known as PureNet. PureNet is a proprietary
software solution that consolidates information from existing utility databases such as billing systems, hydraulic models,
workload programs and maintenance management systems into one platform to improve efficiency. The solution is able
to merge pipeline condition assessment and monitoring data into the platform to provide operators with valuable and
comprehensive information on asset condition and to facilitate a risk based approach to inspection prioritization.
4. Recurring revenue
Pure generates recurring revenue as a result of its monitoring installations, using the proprietary monitoring equipment
listed above, including data analysis and site maintenance, and from technology licensing contracts.
STR ATEGY
Pures mission is to promote a sustainable future by providing owners and users of critical infrastructure with innovative,
cost effective solutions that reduce the risk and consequence of failures and maximize value. Using complementary busi-
ness streams, the Company provides its clients with a comprehensive understanding of the condition of their infrastructure
assets, ultimately allowing for proactive management and asset optimization at a fraction of the cost of complete replacement
programs.
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To date, Pure has completed or commenced the following efficiency initiatives, the impacts of which in 2015 and 2016 are
outlined below:
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ANNUAL REPORT 2015 PU R E T E C H N O LO G I E S LT D. | 17
The remaining additional operational and administrative improvements being undertaken in 2016 include:
n
Improved project management through better process, governance and performance management systems. Much
of this work is underway in conjunction with the Companys ERP implementation, expected to go live in the second
quarter of 2016;
n
Strengthening short and medium term project forecasting and scheduling to facilitate better resource (human and
capital) management and asset allocation and expense optimization. Progress has been made with respect to organi-
zational planning with further refinements in 2016; and
n
Continued rationalization of non-essential and discretionary expenditures including spending on corporate initia-
tives without compromising future growth or execution of Pures business strategy.
Pure's management believes execution of this plan will result in a more focused and productive business which will result in
an improved service to our customers, a dynamic and flexible work environment for employees and an increased return to
our investors.
The Company made significant strides in 2015 in establishing a foundation for growth in 2016 and beyond, more than doubling
its workforce through two acquisitions since 2014, broadening its service offerings and expanding its customer base in its
core water business, the wastewater sector and the oil and gas sector. As integration concludes and sales and execution of the
aforementioned initiatives take hold, the Company expects EBITDA margins to return to or exceed its stated target of 20%.
OUTLOO K
In 2015, Pure continued to develop its core North American water, wastewater and oil and gas markets while remaining
opportunistic in its international expansion activities. Over the last two years, Pure has grown its revenues by 71%, both
organically and through the acquisitions of PureHM and WWS, to $104.4 million in the current year from $60.9 in 2013. As a
consequence, the Company spent much of 2015 with a heavy internal focus on the integration of PureHM and WWS, process
redesign and executing on the aforementioned growth and cost optimization plan. Core to continued growth is providing the
highest quality of service delivery and project management, resulting in increased profitability, whilst reducing near term and
inter-quarter volatility in revenues and profit margins. This focus is within the context of the Companys long-term growth
strategy of being the leading provider of pipeline condition assessment and network management services in both the water
and oil and gas industries.
The strength of Pures financial position, combined with strong cash flow and low capital requirements provides a financial
foundation that will facilitate this growth plan execution. Additionally, Pure has benefited from a strengthening U.S. dollar,
in which over two thirds of sales are denominated. Pure ended the year with $11.1 million of cash, excluding $0.8 million of
restricted cash, and $46.7 million of working capital, an increase of $1.3 million in cash and $1.1 million of working capital
from the third quarter of 2015. Pure expects these balances to grow through 2016 as revenue and profitability increase.
In the Americas water and wastewater sector, revenues grew by 42% or $22.2 million over 2014. A $27.2 million increase in
inspection and consulting services more than offset a $6.5 million reduction in equipment sales activity. Excluding WWS and
the impact of foreign exchange, inspection and consulting revenues in the Americas region grew by 15% over last year (33%
inclusive of the impact of the strong U.S. dollar) despite contract delays in the first quarter on the renewal of a significant
program in the U.S. Inspection and consulting revenues in the Americas are expected to increase in 2016 on account of a
strong U.S. dollar, and delivery on two significant programs in the U.S.
WWS, acquired in the second quarter of 2015, is a key part of the Americas growth strategy. It expands Pures services towards
a full network management offering, including valve, hydrant and non-revenue water (NRW) services and broadens Pures
customer base to include more small and medium sized utilities. The combination of Pure and WWS forms the platform for
significant growth in 2016 and beyond. Revenues and resulting EBITDA margins from WWS were negatively impacted by the
loss of certain sales personnel, the timing of awards of certain projects and integration activities. Specific efforts to refocus the
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business development activities combined with the elimination of certain administrative cost redundancies in mid-2016 are
expected to result in improved performance in 2016.
As a result of our recent acquisitions and investment in strategic initiatives for wastewater and metallic pipe condition assess-
ment, Pure is moving quickly away from past dependency on a small number of large projects to a broader and more diverse
revenue mix. This should lead to less revenue volatility as the Company grows.
Internationally, Pure continues to build a foothold in key strategic markets as several regions turn their attention towards the
benefits of condition assessment over capital replacement. International revenues declined 27% from 2014 mainly as a result
of project deferrals in Mexico. Low oil and gas prices have impacted the Mexican economy resulting in ongoing governmen-
tal budget constraints. This has stalled work on Pures inspection and monitoring program for the agency responsible for
bulk water supply to Mexico City. Consequently, approximately $6.0 million of anticipated projects and revenue for 2015 was
deferred. The timing and likelihood of these projects at this point, however, is unknown.
In Europe and Africa, the investment in a new Regional Director, combined with an increasing industry focus on condition
assessment, is beginning to pay dividends with the first PipeDiver project in Europe executed in 2015 and with the expectation
for more in 2016 as part of a multi-year program. Long-term programs also continue in Australia and Asia, where Pure has
restructured and optimized shared regional resources while continuing to pursue strategic opportunities. In the Middle East,
Pures leak detection contracts in Qatar and Saudi Arabia have demonstrated the validity of the Companys technology in the
region and are expected to facilitate expansion within the region.
A critical component of the Companys strategy, however, is to minimize overhead internationally given the current variability
in project size and duration, while increasing the number of project opportunities to offset project scheduling risk. Measures
already taken, as discussed previously, are expected to reduce overall sales and marketing expense in 2016 without adversely
affecting Pures capacity to pursue high-value opportunities overseas.
The Company continues to capitalize on its PureHM acquisition, which is Pures fastest growing business segment with pro
forma organic growth in 2015 of 12% over 2014. In the fourth quarter of 2015, organic growth over the same period of 2014
was 57% as product acceptance increased for both the Spectrum XLI and SmartBall technology for the oil and gas sector. The
focus of PureHMs growth strategy includes expansion into the U.S. and other western states, resulting in large contracts
being awarded in California; increasing services to existing clients; and targeting of other major pipeline companies for new
business. A proactive approach to sales in this division is resulting in an increased amount of work being booked into the first
quarter of 2016 relative to the same period of 2015.
The Company continues to invest in research and development initiatives that are focused on increasing the capability and
efficiency of Pures technology platforms in both the water and oil and gas sectors. Pure anticipates commercialization of
several of these initiatives in late 2016 and 2017 with corresponding positive impacts on revenue and profitability.
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ANNUAL REPORT 2015 PU R E T E C H N O LO G I E S LT D. | 19
Total revenue is derived from several product groups, each with varying gross margins and which, in isolation or in combina-
tion, is subject to volatility in part due to contract timing, seasonality and the unique needs of clients.
While revenue grew by 34% to $104.4 million over $77.8 million in 2014, actual performance was lower than the Companys
expectations. Of this $26.6 million increase, $24.9 million was due to the WWS and PureHM acquisitions, which each contrib-
uted $15.3 and $9.6 million in incremental revenue, respectively. Excluding the acquisitions, revenues increased 2% over 2014.
A 33% increase in inspection and consulting revenues in the Americas region due to organic growth of 15% and the benefit of
a strong U.S. dollar was substantially offset by lower equipment sales in the Americas and reduced International revenues. It is
important to note that inspection and consulting revenue included the negative impact of a two quarter delay in the renewal
of a significant contract in the U.S. and a one quarter delay in implementing master service agreements in PureHM, which
was acquired in the fourth quarter of 2014. Both these delays have since been remedied. International revenues were negatively
impacted by a lack of activity in Mexico due to adverse economic conditions. In 2014, the Mexico region contributed $5.9
million compared to nil in 2015.
Gross margin percentage for 2015 was 76% compared to 78% in 2014. Gross margin decreased in 2015 compared to the prior
year as a result of a greater proportion of lower margin inspection and consulting revenues, mainly due to pass through
costs in Australia and the inclusion of lower margin revenues from WWS. Pure expects that, with the inclusion of WWS and
PureHM, gross margins will continue to be slightly lower relative to historical averages due to the higher direct cost bases of
these businesses.
Operating expenses, excluding gains on asset disposal and changes in provisions, for the year ended December 31, 2015 were
$79.7 million or 76% of revenue, compared to $53.8 million or 69% of revenue for 2014. The increase reflects: (1) $16.6 million of
incremental costs attributable to the PureHM and WWS businesses; (2) increased average headcount, relative to prior year, as a
result of hiring of salaried personnel in the second half of 2014 to support future growth; (3) the adverse impact of a weakening
Canadian dollar; and (4) $0.7 million of direct costs of acquiring WWS incurred in the second quarter. Pure is committed to
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improving the efficiency of its operating expenditures, as previously explained, with corresponding restructuring costs of $1.4
million in 2015. Restructuring activities in 2014 associated with certain management changes totaled $1.1 million.
The Company recorded Adjusted EBITDA of $13.3 million or 13% of revenues in 2015 compared to Adjusted EBITDA of $15.6
million or 20% in 2014. Despite overall increased revenues, the impact of a slower first quarter combined with a higher fixed
cost base, discussed previously, resulted in a reduction in Adjusted EBITDA on a full year basis. Cash flow from operations
before working capital changes decreased to $11.4 million (2014 $14.2 million) for the same reasons as the changes in Adjusted
EBITDA.
Management believes the growth and cost optimization plans, discussed previously, will result in improvements in the
Companys efficiency metrics.
The 2015 loss of $0.1 million (2014 $3.9 million loss) included a $1.6 million recovery on the accounts receivable from a
customer in Libya, which was fully provided for in 2014. The loss in 2014 was driven by the inclusion of the $12.7 million
provision taken on the Libyan customers accounts receivable. Profits were impacted by first quarter losses resulting from slow
integration of PureHM and the impact of a higher fixed cost base on seasonally slow project delivery, which is being remedied
as previously discussed. The impact of non-deductible costs on current taxes is magnified in the current year given the lower
level of profitability.
The 2014 Adjusted profit of $5.8 million decreased to a loss of $1.4 million in 2015. The decrease reflects the EBITDA changes
above, combined with $3.2 million in additional depreciation, a result of the increased asset base from acquisitions, and higher
stock based compensation.
Total revenue grew by 34% for the year ended December 31, 2015 as compared to the prior year. The increase is primarily due
to incremental revenue from the PureHM ($9.6 million) and WWS ($15.3 million since acquisition on April 1) acquisitions
combined with increased inspection and consulting revenue and the impact of a strong U.S. dollar. These increases were
partially offset by lower equipment sales in the year.
Equipment Sales
Equipment sales declined for the year ended December 31, 2015 to $7.7 million from $17.5 million in 2014. The decrease reflects
a lower level of installation activity in Canada, the United States and Mexico. In 2014, a significant portion of equipment sales
related to projects in Mexico, which are not expected to recur until there are improvements in the Mexican economy. Lower
sales were slightly offset by the sale of AFO equipment to Pure Technologies China Ltd. (PTCL) in the first quarter. Pure
owns 50% of PTCL and it is accounted for using the equity method.
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ANNUAL REPORT 2015 PU R E T E C H N O LO G I E S LT D. | 21
Inspection and consulting services revenues were $63.0 million from the Americas region in 2015 compared to $35.8 million in
2014. Of the $27.2 million increase, $15.3 million is attributable to the acquisition of WWS, with the balance due to increased
inspection and consulting activity in the U.S. and the benefit of a strong U.S. dollar. Excluding the impact of the strong U.S.
dollar, inspection and consulting revenues grew organically by 15% in the Americas region.
Pure generated $13.5 million in the current year from oil and gas inspection and consulting services compared to $4.4 million
in 2014, due primarily to the acquisition of PureHM on October 1, 2014.
International inspection and consulting revenue decreased by $0.9 million to $10.7 million for the year. The decline from 2014
is due to the previously noted reduction in activity in Mexico along with lower than expected activity in South Africa. In 2015,
international revenues were mostly from targeted areas in Europe, Australia, Asia and the Middle East where the Company
has focused its marketing efforts.
Overall, there continues to be a shift by water and wastewater utilities towards the implementation of proactive asset manage-
ment strategies versus cost prohibitive pipeline replacement programs. The pace of this transition, however, varies by region
and by country. Pure expects this shift will ultimately drive additional deployments of the Companys technologies into water
and wastewater pipelines in the future.
The continued sale of new water pipeline monitoring systems in the Americas is expected to contribute to this product group
in the future.
Cost of sales includes direct materials, contract labour, sub-trades and travel related expenditures. The internal labour used to
generate such revenue is included in engineering and operations expense. Gross margins decreased to 76% in 2015 from 78% in
2014 as gross margin percentages in 2015 were largely impacted by the addition of WWS to the sales mix and significant flow
through subcontractor costs on a project in Australia that increased reported revenues and cost of sales. Additionally, in the
fourth quarter management evaluated the estimated warranty provision as the Company has a longer-term understanding of
costs incurred and forecast of future warranty costs, and adjusted the provision by $0.7 million which had a positive impact on
current year gross margin. Prior year gross margins benefited from sales with a significantly lower proportion of flow-through
expenditures.
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22 | P U R E T E C H N O L O G I E S L T D . ANNUAL REPORT 2015
The Companys total revenue is derived from product groups which may be, in isolation and/or in combination, subject to
volatility in part due to contract timing, seasonality and the unique needs of clients. Furthermore, gross margin is calculated
by combining the effects of varying margin in each product group that make up total revenue. Given these factors, gross
margin can vary over shorter time periods given more pronounced changes in sales mix.
Operating Expenses
($000s CAD)
For the year ended December 31 2015 2014 $ Change % Change
Marketing 13,742 11,431 2,311 20
Engineering and operations 38,777 24,450 14,327 59
General and administrative 26,331 16,391 9,940 61
Research and development 822 1,561 (739) (47)
79,672 53,833 25,839 48
The Companys operating expenses are largely fixed and have increased over the prior year due to planned increases in salaried
workforce capacity in the latter half of 2014 to support expected operational growth, one time acquisition costs related to
WWS, impacts of foreign exchange on U.S. denominated costs as well as higher depreciation and stock based compensation
costs.
Total operating expenses for the year increased by $25.8 million over the prior year. As previously noted, the increase reflects
incremental operating expenses related to PureHM and WWS, acquired on October 1, 2014 and April 1, 2015, respectively,
increased depreciation, higher stock based compensation costs, and the impact of the weakening Canadian dollar on U.S.
dollar denominated costs. Additionally, the Company incurred acquisition costs related to WWS in the second quarter. Each
of these is discussed in more detail below in its respective expense category.
Marketing
($000s CAD)
For the year ended December 31 2015 2014 $ Change % Change
Marketing expenses 13,742 11,431 2,311 20
Depreciation (22) (18) (4) 22
Stock based compensation (302) (315) 13 (4)
Net marketing expenses 13,418 11,098 2,320 21
In 2015, marketing expenses were $13.7 million compared to $11.4 million in 2014. Increases in marketing expenses related to
PureHM and WWS, $0.5 million and $1.0 million, respectively, were offset by the impact of restructuring activities under-
taken in the second and third quarters of 2014 which resulted in the subsequent allocation of costs of certain personnel to
general and administrative expense. Additional increases related to the increase in the U.S. dollar, and hiring of additional
marketing resources in 2015.
Further details on business development initiatives within Pures major regions can be found in the reportable segment sum-
mary below.
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ANNUAL REPORT 2015 PU R E T E C H N O LO G I E S LT D. | 23
For the year ended December 31, engineering and operations expenses increased to $38.8 million in 2015 from $24.5 million
in 2014. WWS and PureHM contributed $7.2 million and $4.5 million, respectively, to the increase. The increase over the prior
year was also a result of the hiring of additional personnel during the second half of 2014 to service existing contracts and to
execute the Companys anticipated future growth plans, higher depreciation charge as a result of prior year investments in
tools and equipment, and the impact of foreign exchange on U.S. dollar denominated expenses. As a percentage of revenue,
engineering and operations expense increased to 37% in 2015 from 31% in 2014 largely due to the impact of the increase in fixed
costs on first and second quarter revenues. It is expected that as a result of cost optimization plans underway, the fixed portion
of these costs will reduce and engineering and operations expense will be more variable with activity levels.
As at the end of December, general and administrative costs increased from $16.4 million in 2014 to $26.3 million in 2015.
Half of the increase is attributable to an additional $2.9 million and $2.1 million of incremental costs related to the PureHM
and WWS acquired businesses with the remainder being attributable to the aforementioned increased depreciation and stock
based compensation costs, one-time WWS acquisition costs and the impact of foreign exchange on foreign denominated
costs. Training costs, adjusted above, relate to direct costs associated with the Companys ERP implementation. Additional
training costs are expected in the first half of 2016. In addition, general and administrative expenses increased as a result of
the reclassification of certain personnel costs from marketing to general and administrative expense following restructuring
activities in the second quarter of 2014.
In the current year, the Company has incurred or provided for $1.4 million for: severance for involuntary departures under
the Companys cost optimization plan; expected severance costs associated with the consolidation of shared services of WWS;
and expected future losses under WWSs lease obligations. These costs related to restructuring activities below the executive
level and are not expected to recur and were offset by the recovery of $1.6 million of previously provided for Libyan accounts
receivable.
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24 | P U R E T E C H N O L O G I E S L T D . ANNUAL REPORT 2015
capital balances held in Canada. The Company is continuing to evaluate its overall cash and foreign currency management
strategies to minimize such volatility. An additional $6.3 million translation adjustment, which is included in comprehensive
income, was recognized in 2015 (2014 $0.1 million). The adjustment is more pronounced than the prior year due to both the
weakening Canadian dollar and a higher net asset position (the basis for translation), of the Companys foreign subsidiaries
due to increased investment and activity and mainly as a result of the WWS acquisition.
Income Taxes
Income tax expense consisted of a $1.7 million expense for 2015 compared to recovery of $2.0 million in 2014. The increase in
effective tax rate in 2015 is on account of: the impact of permanent differences such as non-deductible stock based compen-
sation; unrecognized deferred tax assets in certain foreign subsidiaries; and adjustments to prior period tax balances from
current period assessments, which, given their size relative to current year profit before taxes results in a higher effective tax
rate than the prior year. In 2014, the Company increased its deferred income tax asset and recovery in the amount of $0.8
million for a correction arising from a misallocation of Scientific Research and Experimental Development and operating loss
deductions relating to 2010 2013.
The Company recorded adjusted EBITDA of $13.3 million in 2015 (2014 $15.6 million). The reasons for the change have been
discussed in the preceding sections. Adjusted profit decreased from adjusted profit of $5.8 million in 2014 to a $1.4 million
adjusted loss in 2015. The change in profitability is a result of noted revenue and cost factors, and higher depreciation and stock
based compensation in 2015.
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ANNUAL REPORT 2015 PU R E T E C H N O LO G I E S LT D. | 25
Prior year SmartBall inspection and licensing revenues related to oil and gas pipelines in the Americas have been reflected
in the PureHM segment to align with current year presentation. Additionally, the results of Mexico and South America have
moved to the International segment to conform to changes in the management reporting structure within Pure.
($000s CAD)
For the year-ended December 31, 2015 Americas International PureHM Total
Revenue
Equipment sales 5,852 1,679 199 7,730
Inspection and consulting services 63,023 10,734 13,523 87,280
Monitoring, licensing & technical support 6,117 1,548 1,748 9,413
74,992 13,961 15,470 104,423
Profit before corporate expenditures and taxes 21,508 64 3,685 25,257
($000s CAD)
For the year-ended December 31, 2014 Americas International PureHM Total
Revenue
Equipment sales 12,386 5,011 119 17,516
Inspection and consulting services 35,792 11,628 4,426 51,846
Monitoring, licensing & technical support 4,663 2,477 1,304 8,444
52,841 19,116 5,849 77,806
Profit before corporate expenditures and taxes 20,536 7,086 2,938 30,560
The Americas
The Americas segment revenue grew by 42% to $75.0 million in 2015 from $52.8 million in 2014. 2015 growth was primarily
driven by the $15.3 million of incremental revenue from the WWS acquisition. Increased inspection and consulting work and
the strong U.S. dollar on U.S. based revenues more than offset lower equipment sales. Excluding foreign exchange impacts,
inspection and consulting revenues increased 15% which offset a 57% decline in equipment sales. Americas revenue continues
to be driven by the successful Assess and Address approach where pipeline condition assessment and isolated spot repairs are
implemented. This approach mitigates pipeline risk for significantly reduced capital costs as compared to the conventional
approach of complete replacement.
While delivering this growth, the Americas segment strengthened its geographical regions by further developing its regional
operational capacity, business development resources, and management strength. Increasing capabilities in geographical
regions will allow Pure to develop deeper and longer lasting client relationships and also to ensure the business is prepared to
deliver on anticipated growth.
The marketing efforts in the Americas continue to focus on diversification in both services offered and client distribution.
Pures metallic pipe initiative is focused on developing pipeline management solutions for metallic water mains which consti-
tute approximately 65% of water mains in the U.S. (source: AWWA Distribution Survey 2002).
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26 | P U R E T E C H N O L O G I E S L T D . ANNUAL REPORT 2015
The Americas business segment continues to integrate WWS into Pures service offerings. WWSs client base is composed
largely of small and medium sized utilities, providing an entrance point for Pure to place significant focus on a segment that
is currently underserved by Pure.
International
Internationally, Pure continues to see opportunities for growth in its regional markets. The 2015 annual revenue decreased
to $14.0 million from $19.1 million for 2014. The primary reason for the decrease is the previously mentioned project delays in
Mexico. In 2016, much of Pures international growth is expected to be driven mainly from the European region. International
activity has historically been driven by large projects, however, resulting in inter-quarter and year over year volatility.
During the third quarter of 2015, Pures first European PipeDiver project was executed. This followed a successful SmartBall
inspection for the same client, performed with Pures UK partner earlier in the year. Additional inspections using both
technology platforms are planned in Europe for 2016 as utilities work on risk mitigation and capital spending optimization
strategies.
Pures Australia office had combined revenues from multiple services of approximately $4.3 million in 2015 compared to
$3.9 million in 2014. Projects included PureEM and SmartBall inspections for water and wastewater pipelines, along with
specialized engineering services.
In the Middle East, operations continued under the long term contract in Qatar, contributing regular and predictable revenue
to the region, with further potential opportunities being evaluated in the water and wastewater markets.
Pure delivered its first AFO project to China in 2015 via PTCL. China has approximately 20,000 km of PCCP, making it one
of the worlds biggest markets for Pures specialized solutions. Elsewhere in Asia, where reducing leakage is a major focus for
water utilities, Pures large diameter leak detection solutions are being used to manage large NRW programs.
PureHM
The PureHM segment includes revenues from inspections of oil and gas pipelines using the Armadillo Tracks remote tracking,
Spectrum XLI, SmartBall technology, and the PipeWISE technologies and equipment sales. In 2015, PureHM had revenues
of $15.5 million (2014 $5.8 million) and profit, before corporate expenditures and taxes, of $3.7 million (2014 $2.9 million).
Revenues were generated primarily on services being performed in Canada and California.
PureHMs strategy for 2015 was to grow its legacy business of oil and gas pipeline inspections organically and by offering
enhanced service offerings to new and existing clients. Geographic expansion is being leveraged through existing Pure offices
in the U.S. Growth in 2015 was a result of significant project awards in the U.S., and through organic growth with PureHMs
existing clients in Canada. Two of PureHMs major technologies, Spectrum XLI and Armadillo Tracks remote tracking, were
only commercialized in 2013, therefore, these new and innovative solutions will continue to be introduced to the market
in 2016.
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ANNUAL REPORT 2015 PU R E T E C H N O LO G I E S LT D. | 27
($000s Canadian dollars, unless otherwise indicated) Q4 2015 Q3 2015 Q2 2015 Q1 2015
Revenue 30,787 29,559 29,411 14,666
Adjusted EBITDA (see non-GAAP measures) 6,895 3,883 4,595 (2,085)
Profit (loss) for the year 677 1,076 416 (2,303)
Profit (loss) per share
basic 0.01 0.02 0.01 (0.04)
diluted 0.01 0.02 0.01 (0.04)
Weighted average common shares outstanding
basic 53,822,149 52,531,536 52,504,834 52,693,817
diluted 54,073,387 54,366,100 54,441,080 52,693,817
($000s Canadian dollars, unless otherwise indicated) Q4 2014 Q3 2014 Q2 2014 Q1 2014
Revenue 27,614 17,118 20,454 12,620
Adjusted EBITDA (see non-GAAP measures) 8,716 2,120 4,218 575
Profit (loss) for the year (4,729) (218) 454 607
Profit (loss) per share
basic (0.09) (0.00) 0.01 0.01
diluted (0.09) (0.00) 0.01 0.01
Weighted average common shares outstanding
basic 52,216,626 51,857,137 51,680,871 51,453,458
diluted 52,216,626 51,857,137 52,715,291 52,589,878
Revenues increased compared to prior year on account of incremental revenue from WWS of $4.3 million, a 57% increase
in fourth quarter PureHM revenues, and the aforementioned impact of a strong U.S. dollar. These increases were more than
offset by lower equipment sales in 2015 and a significant inspection in South Africa in 2014 that did not recur in 2015.
Operating costs in the fourth quarter increased from the prior year as a result of the increase in headcount to execute on
the Companys growth, the acquisition of WWS, as well as the increase in depreciation on account of prior period capital
investment, also undertaken to support growth.
For many customers, Pure has evolved into a long-term trusted solution provider as opposed to a single technology vendor
or one-off project manager. As a result, the product mix is dependent on unique customer needs, scheduling and project
planning, which may create the impression of volatility in a single product group for a particular quarter; reviewing total
yearly revenue may be a better reflection of performance over time versus quarterly comparisons or reviewing each product
group in isolation.
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28 | P U R E T E C H N O L O G I E S L T D . ANNUAL REPORT 2015
The Companys cash position as at December 31, 2015 was $11.1 million, excluding $0.8 million of restricted cash, compared to
$33.6 million at December 31, 2014. The decrease is primarily attributable to the acquisition of WWS on April 1, 2015 for which
cash consideration was USD $13.5 million and the payment of $6.4 million in dividends during the year. The decline in cash
also reflects the timing of cash receipts from sales, timing of certain annual pre-paid expenditures, and capital investments
offset by cash received on the exercise of employee stock options.
The Company closed the WWS acquisition on April 1, 2015 and funded the purchase with cash on hand and with shares issued
or to be issued from treasury. The Company expects that in 2016 it will generate cashflow from operations that is more than
sufficient to finance its 2016 capital spending.
On July 22, 2015, the Company entered into a secured credit facility (the Facility) with a Canadian Chartered Bank (the
Lender). The Facility consists of: (i) a revolving facility of $10.0 million, (ii) a letter of credit facility of $10.0 million, (iii) a
risk management facility of $2.0 million, (iv) a credit card facility of $1.0 million; and (v) an uncommitted accordion facility
for acquisitions of $20.0 million. Other than the accordion facility, the Facility is committed for 3 years and payable in full on
maturity. The revolving credit facility is subject to a borrowing base comprised of certain accounts receivable and inventory
amounts. Interest and standby fees are tiered based on the Companys debt to earnings before interest, depreciation and
amortization ratio. No funds have been drawn on the Facility as at the date hereof. Further details on the Facility are available
in Note 12 of the Companys financial statements.
The obligations and indebtedness under the Facility are secured by all of the assets of the Company and its material subsidiar-
ies and are subject to covenants customary to credit facilities of a similar nature to the Facility.
At December 31, 2015, $1.5 million in letters of credit were issued on the new letter of credit facility and $0.8 million of cash was
restricted to secure outstanding historical letters of credit and credit cards. Since year end, the Company issued $0.8 million in
letters of credit on the new facility to replace the historical letters of credit. There were no amounts outstanding on the other
facilities at December 31, 2015.
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ANNUAL REPORT 2015 PU R E T E C H N O LO G I E S LT D. | 29
Financial Position
The following chart highlights significant changes in the Condensed Consolidated Interim Statements of financial position
from December 31, 2014 to December 31, 2015.
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30 | P U R E T E C H N O L O G I E S L T D . ANNUAL REPORT 2015
Restructuring Provision
Management has made estimates in its restructuring provision related to the expected cost of severance and retention for
employees impacted, and the future cost of contracts that are expected to become onerous. Management believes the provision
recorded at the end of 2015 is complete based on plans in place. Should plans or costs change, the provision and associated
restructuring expense could increase or decrease.
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ANNUAL REPORT 2015 PU R E T E C H N O LO G I E S LT D. | 31
Revenue Recognition
Revenues under certain contracts provide for receipt of payment based on achieving defined milestones. Revenues are rec-
ognized under these contracts based on managements estimate of progress achieved against these milestones or on the pro-
portionate performance method of accounting. Changes in managements estimated proportion of performance or costs to
complete a contract may result in an adjustment to previously recognized revenues.
Income Taxes
The Company follows the asset and liability method of accounting for income taxes. Under this method, deferred income taxes
are recognized for the deferred income tax consequences attributable to differences between the financial statement carrying
values of assets and liabilities and their respective income tax bases (temporary differences) and for loss carry-forwards. Key
estimates in accounting for income taxes include the assessment of probability of realizing tax benefits, and the estimate of tax
rate at the time of reversal of temporary differences.
The effect on deferred income tax assets and liabilities, of a change in tax rates, is included in income tax expense or recovery
in the period that includes the substantive enactment date. Deferred income 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.
In May 2014, the IASB published IFRS 15, Revenue From Contracts With Customers (IFRS 15) replacing IAS 11,
Construction Contracts, IAS 18, Revenue and several revenue-related interpretations. IFRS 15 establishes a single revenue
recognition framework that applies to contracts with customers. The standard requires an entity to recognize revenue to
reflect the transfer of goods and services for the amount it expects to receive, when control is transferred to the purchaser.
Disclosure requirements have also been expanded. The new standard is effective for annual periods beginning on or after
January 1, 2018. The standard may be applied retrospectively or using a modified retrospective approach.
In January 2016, the IASB issued IFRS 16, Leases (IFRS 16), which requires entities to recognize lease assets and lease
obligations on the balance sheet. For lessees, IFRS 16 removes the classification of leases as either operating leases or finance
leases, effectively treating all leases as finance leases. Certain short-term leases (less than 12 months) and leases of low-value
assets are exempt from the requirements, and may continue to be treated as operating leases. Lessors will continue with a dual
lease classification model. Classification will determine how and when a lessor will recognize lease revenue, and what assets
would be recorded. IFRS 16 is effective for years beginning on or after January 1, 2019, with early adoption permitted if IFRS
15 has been adopted.
Early adoption of these standards is permitted. The Company does not intend to early adopt these standards and is currently
evaluating the impact of these new standards on the Financial Statements.
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32 | P U R E T E C H N O L O G I E S L T D . ANNUAL REPORT 2015
It should be noted that while the Companys Chief Executive Officer and Chief Financial Officer believe that the Companys
disclosure controls and procedures provide a reasonable level of assurance that they are effective, they do not expect that the
Companys disclosure controls and procedures or internal control over financial reporting will prevent all errors and fraud.
A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met.
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ANNUAL REPORT 2015 PU R E T E C H N O LO G I E S LT D. | 33
These forward-looking statements include, but are not limited to, statements regarding:
n the timing of new and existing projects;
n the Companys ability to capitalize on future growth opportunities, sales growth and cost optimization and rational-
ization initiatives;
n the Companys ability to successfully integrate and leverage its strategic acquisitions;
n other expectations, beliefs, plans, goals, objectives, assumptions, information and statements about possible future
events, conditions and results.
Factors that could cause actual results to differ materially from these forward-looking statements include, among others:
n the costs and timing of projects;
n the Companys ability to deliver services in a timely and cost effective manner;
n changes in technology;
n the regulatory and political environments in the jurisdictions where the Company operates;
n other risks identified in the filings made by the Company with securities regulatory authorities.
Readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to
place undue reliance on these forward-looking statements. The forward-looking statements included in this document are
made only as of the date hereof and the Company does not undertake to publicly update these forward-looking statements to
reflect new information, future events or otherwise, except as required by applicable laws.
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34 | P U R E T E C H N O L O G I E S L T D . ANNUAL REPORT 2015
We have audited the accompanying consolidated financial statements of Pure Technologies Ltd., which comprise the
consolidatedstatements of financial position as at December 31, 2015 and December 31, 2014, the consolidated statements of
comprehensive income (loss), changes in equity and cash flows for the years then ended, and notes, comprising a summary of
significant accounting policies and other explanatory information.
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 our 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, we
consider internal control relevant to the entitys 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 entitys 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 consolidated financial position
of Pure Technologies Ltd. as at December 31, 2015 and December 31, 2014, and its consolidated financial performance and its
consolidated cash flows for the years then ended in accordance with International Financial Reporting Standards.
Chartered Accountants
CO N S O L I DAT E D FI N A N C I A L S TAT E M E N T S
ANNUAL REPORT 2015 PU R E T E C H N O LO G I E S LT D. | 35
The accompanying notes are an integral part of these consolidated financial statements.
CO N S O L I DAT E D FI N A N C I A L S TAT E M E N T S
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The accompanying notes are an integral part of these consolidated financial statements.
CO N S O L I DAT E D FI N A N C I A L S TAT E M E N T S
ANNUAL REPORT 2015 PU R E T E C H N O LO G I E S LT D. | 37
Number of
Common Share Contributed Translation Total
Shares Capital Surplus Reserve Deficit Equity
The accompanying notes are an integral part of these consolidated financial statements.
CO N S O L I DAT E D FI N A N C I A L S TAT E M E N T S
38 | P U R E T E C H N O L O G I E S L T D . ANNUAL REPORT 2015
The accompanying notes are an integral part of these consolidated financial statements.
CO N S O L I DAT E D FI N A N C I A L S TAT E M E N T S
ANNUAL REPORT 2015 PU R E T E C H N O LO G I E S LT D. | 39
Reporting entity
Pure Technologies Ltd. (Pure or the Company) is a publicly-traded company, listed on the Toronto Stock Exchange
under the trading symbol PUR, incorporated under the laws of the Province of Alberta and domiciled in Canada with
a registered office located at 3rd Floor, 705 11 Avenue SW, Calgary, Alberta, T2R 0E3.
The consolidated financial statements (the financial statements) of the Company as at December 31, 2015 and 2014
and for year ended December 31, 2015 and 2014 comprise the Company and its subsidiaries and joint arrangements. The
financial statements were approved and authorized for issue on March 15, 2016 by the Board of Directors.
Nature of operations
Pure is a world leader in the development and application of innovative technologies for inspection, monitoring and
management of physical infrastructure including water and hydrocarbon pipelines, buildings and bridges. Pures oper-
ations are seasonal, impacted by scheduling of public utility clients and winter weather on operations in North America.
Basis of presentation
These financial statements have been prepared in accordance with International Financial Reporting Standards
(IFRS) as issued by the International Accounting Standards Board (IASB).
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are
recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the
revision and future periods if the revision affects both current and future periods.
In the application of the Companys accounting policies, which are described in note 2, management is required to
make judgments, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily
apparent from other sources. 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.
N OT E S TO CO N S O L I DAT E D FI N A N C I A L S TAT E M E N T S
40 | P U R E T E C H N O L O G I E S L T D . ANNUAL REPORT 2015
or on the proportionate performance method of accounting. Changes in managements estimated costs to complete
a contract may result in an adjustment to previously recognized revenues.
(b) Goodwill
The values associated with goodwill involve significant estimates and assumptions, including those with respect to
the determination of cash generating units (CGUs), future cash inflows and outflows, discount rates, and asset
lives. At least annually, the carrying value of goodwill is reviewed for potential impairment. Among other things,
this review considers the recoverable amounts of the CGUs based on the higher of value in use or fair value less cost
to sell using discounted estimated future cash flows. These significant estimates require considerable judgment,
which could affect the Companys future results if the current estimates of future performance and fair values
change.
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ANNUAL REPORT 2015 PU R E T E C H N O LO G I E S LT D. | 41
(d) Provisions
Management has made estimates for restructuring provision related to the expected cost of severance and reten-
tion for employees impacted, and the future cost of contracts that are expected to become onerous. Management
believes the provision recorded in the fourth quarter of 2015 is complete based on plans in place.
Provisions set aside for warranty exposures are estimated based on historical experience under contractual war-
ranty obligations or specific provisions created in respect of expected repair and warranty costs. Management
believes the provided warranty provisions is sufficient.
Should plans or costs change, the provisions and associated expenses could increase or decrease.
The accounting policies set out below have been applied consistently to the Company and its subsidiaries for all periods
presented in these financial statements, unless otherwise indicated.
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42 | P U R E T E C H N O L O G I E S L T D . ANNUAL REPORT 2015
Any contingent consideration payable is measured at fair value at the acquisition date. If the contingent con-
sideration is classified as equity, then it is not re-measured and settlement is accounted for within equity.
Otherwise, subsequent changes in the fair value of the contingent consideration are recognized in profit or loss.
Revenues under certain contracts provide for receipt of payment based on achieving defined milestones. Revenues
are recognized under these contracts based on managements estimate of progress achieved against these mile-
stones or on the proportionate performance method of accounting. Changes in managements estimated costs to
complete a contract may result in an adjustment to previously recognized revenues.
Revenue from monitoring and technical support contracts is recognized on a straight-line basis over the term of
the contract.
Revenue from inspection and consulting services is recognized when the services are provided.
When a contract contains more than one separately identifiable component, consideration is allocated to the sep-
arate components based on relative fair values.
(c) Inventories
Raw materials and work in progress inventories are measured at the lower of cost and net realizable value following
the specific item method.
The cost of inventories is based on the first-in-first-out principle, and includes expenditures incurred in acquiring
the inventories, production or conversion costs and other costs incurred. In the case of manufactured inventories
and work in progress, cost includes materials. Costs of materials are determined on an average per unit basis.
Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of
completion and selling expenses. In establishing any impairment of inventory, management estimates the likeli-
hood that inventory carrying values will be affected by changes in market demand, technology and design, which
would impair the value of inventory on hand.
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When parts of items of property and equipment have different useful lives, those components are accounted
for as separate items of property and equipment.
Any gain or loss on disposal of an item of property and equipment (calculated as the difference between the net
proceeds from disposal and the carrying amount of the item) is recognized in profit or loss.
(ii) Depreciation
Property and equipment are depreciated from the date of acquisition or, in respect of internally constructed
assets, from the time an asset is completed and ready for use.
Depreciation is provided using the straight-line method less residual value at the following estimated useful
lives:
Pipeline equipment 3 to 5 years
Field equipment 5 to 10 years
Computer and other equipment 3 years
Each assets estimated useful life, residual value and method of depreciation are reviewed and adjusted if
appropriate at each financial year-end. Any such change would be considered a change in estimate and as such
would be accounted for prospectively, without retroactive restatement of prior periods. No depreciation is
charged on assets under construction.
(ii) Amortization
Intangible assets are amortized using the straight-line method, over the following estimated useful lives:
Intellectual Property 5 to 10 years
Customer contracts and relationships 1 to 5 years
Employment contracts and non-compete agreements 3 to 5 years
Intellectual property includes the cost of patents, trademarks, licences, proprietary software, technical draw-
ings, and other assets associated with the Companys technology portfolio.
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The estimated useful lives, residual values and amortization method are reviewed and adjusted if appropriate
at each financial year-end. Any such change would be considered a change in estimate and as such would be
accounted for prospectively, without retroactive restatement of prior periods.
(f) Goodwill
Goodwill is recognized as the fair value of the consideration transferred, including the recognized amount of any
non-controlling interest in the acquiree, less the fair value of the identifiable assets acquired and liabilities as-
sumed, as of the acquisition date. Subsequent to initial recognition, goodwill is measured at cost less accumulated
impairment losses.
Goodwill acquired in a business combination is allocated to groups of cash generating units that are expected to
benefit from the synergies of the combination.
(g) Impairment
Financial assets
A financial asset not accounted for at fair value is assessed at each reporting date to determine whether there is
objective evidence that it is impaired. A financial asset is impaired if there is objective evidence of impairment as
a result of one or more events that occurred after the initial recognition of the asset, and that loss event(s) had an
impact on the estimated future cash flows for that asset that can be estimated reliably.
The Company considers evidence of impairment for financial assets measured at amortized cost (receivables) at a
specific asset level. An impairment loss in respect of a financial asset measured at amortized cost is calculated as
the difference between the carrying amount and the present value of the estimated future cash flows. Losses are
recognized in profit or loss and reflected in an allowance account against receivables. When an event occurring
after the impairment was recognized causes the amount of impairment loss to decrease, the decrease in impair-
ment loss is reversed through profit or loss.
Non-financial assets
The carrying amounts of the Companys non-financial assets other than inventories are reviewed at each reporting
date to determine whether there is any indication of impairment. If any such indication exists, then the assets re-
coverable amount is estimated. For goodwill and intangible assets that have indefinite useful lives, the recoverable
amount is estimated annually.
The recoverable amount of an asset or CGU is the greater of its value in use and its fair value less costs to sell.
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 the purposes of impairment testing, assets that cannot be tested individually are grouped together into the
smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash
inflows of other groups of assets. CGUs, to which goodwill has been allocated, reflects the lowest level at which
goodwill is monitored for internal reporting purposes.
An impairment loss is recognized if the carrying amount of an asset or its CGU exceeds its estimated recoverable
amount. Impairment losses are recognized in profit (loss). Impairment losses recognized in respect of the CGUs
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are allocated first to reduce the carrying amount of any goodwill allocated to the units, and then to reduce the
carrying amounts of the other assets in the unit on a pro-rata basis.
An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognized
in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer
exists. An impairment loss is reversed only to the extent that the assets carrying amount does not exceed the
carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had
been recognized. The Company performs the annual review of goodwill as at December 31 of each year or more
often if events or changes in circumstances indicate that it might be impaired.
Development activities involve a plan or design for the production of new or substantially improved products or
processes. Development expenditure is capitalized only if development costs can be measured reliably, the prod-
uct or process is technically and commercially feasible, future economic benefits are probable, and the Company
intends to and has sufficient resources to complete development and to use or sell the asset. The expenditure cap-
italized includes the cost of materials, direct labour, and overhead costs that are directly attributable to preparing
the asset for its intended use. It is measured at cost less accumulated amortization and accumulated impairment
losses. Other development expenditure is recognized in profit or loss as incurred.
Government assistance received in the form of grants for research and development activities are applied as a
reduction of the cost of the related property and equipment or as a reduction of the applicable research and devel-
opment expenses when there is a reasonable assurance of their ultimate collection.
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Financial assets and liabilities classified as fair value through profit or loss are measured at fair value with gains and
losses being recognized as profit or loss during the period they occur. Financial assets classified as available-for-sale
are measured at fair value with unrealized gains and losses, net of tax, being recognized in other comprehensive
income or loss until the asset is sold, or if an unrealized loss is considered other than temporary, the unrealized
loss is recognized as a loss during the period it occurs. Financial assets classified as held-to-maturity and loans and
receivables and financial liabilities classified as other liabilities are measured at amortized cost using the effective
interest rate method. Transaction costs directly attributable to the acquisition or issue of a financial asset or liabil-
ity not measured at fair value are added to the carrying value of the respective financial asset or liability. The fair
value of cash and cash equivalents, accounts receivable and accounts payable and accrued liabilities approximate
their carrying values due to their short term to maturities.
Loans and receivables include cash and cash equivalents and accounts receivables. Other financial liabilities in-
cludes accounts payable and accrued liabilities.
The financial statements have been prepared on the historical cost basis, except for held for trading financial assets,
which are measured at fair value with changes in fair value recorded in earnings.
The Company uses a hierarchy ranking that reflects the significance and transparency of the inputs used to mea-
sure the fair values of financial assets and liabilities. The three levels of the fair value hierarchy are:
Level 1 determined by reference to quoted prices in active markets for identical financial assets and liabilities;
Level 2 inputs to the valuations, other than quoted prices, are observable for the financial assets and liabili-
ties, either directly or indirectly; and
Level 3 inputs to the valuations are based on inputs that are not observable for the financial assets and
liabilities.
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The Company derecognizes a financial liability when its contractual obligations are discharged or cancelled or
expire.
The liabilities are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to
initial recognition, these financial liabilities are measured at amortized cost using the effective interest method.
(k) Leases
Rental payments made under operating leases are recorded as expenses on a straight line basis over the term of the
related lease. Lease incentives received are recognized as an integral part of the total lease expense, over the term
of the lease.
Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates en-
acted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years.
Deferred tax is recognized in respect of temporary differences between the carrying amounts of assets and liabil-
ities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognized
for the following temporary differences: 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, and differences relating to
investments in subsidiaries and jointly controlled entities to the extent that it is probable that they will not reverse
in the foreseeable future. In addition, deferred tax is not recognized for taxable temporary differences arising on
the initial recognition of goodwill. Deferred tax is measured at the tax rates that are expected to be applied to
temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the
reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax
liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or
on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets
and liabilities will be realized simultaneously.
A deferred tax asset is recognized for unused tax losses, 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 utilized. 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.
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The initial fair value of equity-settled share-based payments is recognized as compensation expense with a corre-
sponding increase in equity reserves over the related service period provided to the Company. Estimates related to
vesting conditions are reviewed regularly with any adjustments recorded to compensation expense. On the vesting
date, the Corporation revises, if necessary, the estimate to equal the number of equity instruments ultimately
vested and adjusts the corresponding compensation expense and equity reserves accordingly.
Market conditions attached to certain equity-settled share-based payments are taken into account when estimat-
ing the fair value of the equity instruments granted. Upon exercise or settlement of equity-based instruments,
consideration received, if any, together with amounts previously recorded in the equity reserves, are recorded as
an increase in share capital.
Cash-settled share-based payments are measured based on the fair value of the cash liability. The amount deter-
mined is recorded as compensation expense at the date of the grant. The liability is re-measured each period with
a corresponding adjustment to the related compensation expense until the date of settlement.
Segmented results that are reported to the CEO include items directly attributable to a segment as well as those
that can be allocated on a reasonable basis. Unallocated items are comprised mainly of corporate costs, interest
and income tax provisions.
In May 2014, the IASB published IFRS 15, Revenue from Contracts with Customers (IFRS 15) replacing IAS
11, Construction Contracts, IAS 18, Revenue and several revenue related interpretations. IFRS 15 establishes a
single revenue recognition framework that applies to contracts with customers. The standard requires an entity to
recognize revenue to reflect the transfer of goods and services for the amount it expects to receive, when control is
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transferred to the purchaser. Disclosure requirements have also been expanded. The new standard is effective for
annual periods beginning on or after January 1, 2018.
In January 2016, the IASB issued IFRS 16, Leases (IFRS 16), which requires entities to recognize lease assets
and lease obligations on the balance sheet. For lessees, IFRS 16 removes the classification of leases as either oper-
ating leases or finance leases, effectively treating all leases as finance leases. Certain short-term leases (less than
12 months) and leases of low-value assets are exempt from the requirements, and may continue to be treated as
operating leases. Lessors will continue with a dual lease classification model. Classification will determine how
and when a lessor will recognize lease revenue, and what assets would be recorded. IFRS 16 is effective for years
beginning on or after January 1, 2019, with early adoption permitted if IFRS 15 has been adopted.
Early adoption of these standards is permitted. The Company does not intend to early adopt these standards and is
currently evaluating the impact of these new standards on the Financial Statements.
Segment revenues and segment profit (loss) represent the primary financial measures used by senior management in
assessing performance and allocating resources, and include revenues, cost of sales and expenses for which manage-
ment is held accountable. All of the segmented revenues reported below are from external customers. There were no
inter-segment sales reported in the periods presented. Revenues earned from SmartBall inspections and licencing for
oil and gas pipelines have been reflected in the PureHM segment in 2014 to conform with the current period presenta-
tion. Additionally, the results of Mexico and South America have moved to the International segment to conform with
changes in the management reporting structure within Pure.
($000s CAD)
For the year-ended December 31, 2015 Americas International PureHM Total
Revenue
Equipment sales $ 5,852 $ 1,679 $ 199 $ 7,730
Inspection and consulting services 63,023 10,734 13,523 87,280
Monitoring, licensing & technical support 6,117 1,548 1,748 9,413
74,992 13,961 15,470 104,423
Profit before corporate expenditures, other
expenses, and taxes 21,508 64 3,685 25,257
Corporate expenditures and other expenses
Marketing 2,189
Engineering and operations 9,629
General and administrative 13,388
Research and development 822
Gain on asset disposal (357)
Net finance expense 116
Foreign exchange gain (1,944)
Libyan AR and other provisions 1,371 (1,562) (191)
Profit before taxes $ 1,605
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($000s CAD)
For the year-ended December 31, 2014 Americas International PureHM Total
Revenue
Equipment sales $ 12,386 $ 5,011 $ 119 $ 17,516
Inspection and consulting services 35,792 11,628 4,426 51,846
Monitoring, licensing & technical support 4,663 2,477 1,304 8,444
52,841 19,116 5,849 77,806
Profit before corporate expenditures,
other expenses, and taxes 20,536 7,086 2,938 30,560
Corporate expenditures and other expenses
Marketing 1,629
Engineering and operations 9,492
General and administrative 12,464
Research and development 1,561
Gain on asset disposal (106)
Net finance income (154)
Foreign exchange gain (1,697)
Libyan AR and other provisions 500 12,723 13,223
Loss before taxes $ (5,852)
As at December 31, 2015, Americas comprised 94% of total non-current assets, excluding deferred tax assets (December 31,
2014: 93%).
The Company provides its products and services in a number of geographical locations. The revenue in those locations
is as follows:
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($000s CAD)
Cash (USD $13.5 million) $ 16,899
878,640 common shares (1) 7,266
Total purchase consideration $ 24,165
Cash $ 954
Accounts receivable 5,194
Prepaid expenses 360
Property and equipment (2) 2,408
Tradenames 327
Non-competition agreements 465
Customer relationships 1,483
Goodwill (expected to be tax deductible) (2) 16,204
Accounts payable and other current liabilities (2) (3,230)
$ 24,165
(1) The 878,640 common shares had a market value of $7.3 million on acquisition date and are issuable in equal tranches on each of the 6, 12 and
18 month anniversaries of the closing date of the transaction. 292,880 common shares were issued on October 1, 2015.
(2) Since the issuance of the third quarter financial statements, management corrected the previously presented purchase equation of WWS.
WWS had various arrangements for its truck leases and certain ones previously identified as operating leases meet the definition of capital
leases. This correction increased property and equipment and corresponding lease obligation by $0.5 million, and operating lease expenses
recorded in cost of sales subsequent to acquisition of $0.2 million was reduced and replaced by $0.2 million of depreciation. The second
adjustment was the identification of $0.2 million of payroll liabilities not previously accrued, the offsetting adjustment was an increase to
goodwill. These adjustments are not considered to be material to the financial statements of Pure as a whole, and have been reflected in the
year-end financial statements.
Goodwill is attributable to the trained employees joining the Company, and value attributable to adding to Pures un-
derground asset management service offering, and allowing for comprehensive asset management solutions to clients
as well as increasing Pures exposure to the currently underserved small and medium sized utilities markets.
The Company incurred $0.7 million of transaction cots to complete the Acquisition.
Since acquisition, WWS has contributed $15.3 million of revenue and $0.1 million of loss before tax. Had the acquisition
taken place on January 1, 2015, WWS would have contributed an additional USD $4.2 million of revenue and USD $0.2
million of net income before tax to the Companys results.
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($000s CAD)
Cash $ 6,036
256,082 common shares (1) 2,000
Total purchase consideration $ 8,036
Prepaid expenses $ 36
Inventory 788
Property and equipment 1,614
Patents 1,827
Customer relationships 1,071
Non-competition agreements 480
Goodwill ($1.8 million is expected to be deductible for tax purposes) 2,585
Automobile loans (repaid in October 2014) (297)
Deferred tax liabilities (68)
$ 8,036
(1) The 256,082 common shares had a market value of $2.0 million on acquisition date and are issuable in equal tranches on each of the first,
second, and third anniversaries of the closing date of the transaction. 85,361 common shares were issued on October 1, 2015.
Had the acquisition taken place on January 1, 2014, PureHM would have contributed $11.1 million of revenue and $2.2
million of net income before tax to the Companys 2014 results.
Costs directly attributable to the acquisition of $0.3 million were included in general and administrative expenses
in 2014.
Goodwill is attributable to the trained employees joining the Company, and value in the operational plan of the com-
bined entities, including the accelerated expansion into the oil and gas pipeline sector and the expected synergies
resulting from using HMs technologies to track Pures SmartBall technology.
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At December 31, 2015, a total of $11.1 million was due from one customer located in Libya (December 31, 2014: $12.7
million). In December 2014, the Company recorded a full valuation allowance against these receivables given the high
degree of uncertainty in the country due to the increasing conflict and lack of significant payment on these receivables
to date. Unrest in the country severely disrupted local working conditions, and as a result the customers had been
physically unable to process payments to Pure at the Libyan bank. While the customer had reaffirmed their intent to
pay outstanding amounts and continue working with Pure, the customer had been unable to make payments on the
outstanding invoices due to the escalating conflict in Libya.
In April, 2015, $1.6 million of these receivables was collected, and as such, the Company reversed its allowance related
to the collected receivables. Given the continuing uncertainty in the region, the Company has maintained its allowance
on the unpaid receivables and any amounts collected in future periods will be recognized in comprehensive income in
the period of, or when there is greater assurance of, collection.
6. I NV E NTO RY
For the year ended December 31, 2015, $11.8 million of raw materials and work in progress was recognized as cost of
sales (2014: $10.5 million). Approximately $0.1 million of inventory was written down in the current period (2014: $0.1
million).
7. PRO PE R T Y AN D EQU I PM E NT
($000s CAD)
Pipeline Office
Cost equipment equipment Total
Balance at January 1, 2014 $ 19,073 $ 5,320 $ 24,393
Additions 2,170 3,155 5,325
Acquired (Note 4) 1,714 1,714
Disposals (1,507) (16) (1,523)
Effect of movements in exchange rates 427 (99) 328
Balance at December 31, 2014 $ 21,877 $ 8,360 $ 30,237
Additions 3,841 3,257 7,098
Acquired (Note 4) 1,568 840 2,408
Disposals (475) (3) (478)
Effect of movements in exchange rates 2,082 476 2,558
Balance at December 31, 2015 $ 28,893 $ 12,930 $ 41,823
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($000s CAD)
Pipeline Office
Accumulated depreciation equipment equipment Total
Balance at January 1, 2014 $ 12,440 $ 3,333 $ 15,773
Depreciation for the year 2,737 1,148 3,885
Disposals (952) (1) (953)
Effect of movements in exchange rates 378 332 710
Balance at December 31, 2014 $ 14,603 $ 4,812 $ 19,415
Depreciation for the year 4,098 1,821 5,919
Disposals (205) (2) (207)
Effect of movements in exchange rates 1,099 248 1,347
Balance at December 31, 2015 $ 19,595 $ 6,879 $ 26,474
($000s CAD)
Pipeline Office
Carrying amounts equipment equipment Total
At December 31, 2014 $ 7,274 $ 3,548 $ 10,822
At December 31, 2015 $ 9,298 $ 6,051 $ 15,349
8. I NTAN G I B LE A SSE T S
($000s CAD)
Intellectual
Cost Property Other Total
Balance at January 1, 2014 $ 9,962 $ 7,121 $ 17,083
Additions 3,188 3,188
Acquired (Note 4) 4,001 1,151 5,152
Effect of movements in exchange rates 28 13 41
Balance at December 31, 2014 $ 17,179 $ 8,285 $ 25,464
Additions 5,533 5,533
Acquired (Note 4) 2,275 2,275
Effect of movements in exchange rates 63 182 245
Balance at December 31, 2015 $ 22,775 $ 10,742 $ 33,517
($000s CAD)
Intellectual
Accumulated depreciation Property Other Total
Balance at January 1, 2014 $ 5,502 $ 3,365 $ 8,867
Depreciation for the year 2,516 750 3,266
Effect of movements in exchange rates (134) 9 (125)
Balance at December 31, 2014 $ 7,884 $ 4,124 $ 12,008
Depreciation for the year 3,145 1,295 4,440
Effect of movements in exchange rates 10 50 60
Balance at December 31, 2015 $ 11,039 $ 5,469 $ 16,508
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($000s CAD)
Intellectual
Carrying amounts Property Other Total
At December 31, 2014 $ 9,295 $ 4,161 $ 13,456
At December 31, 2015 $ 11,736 $ 5,273 $ 17,009
The amortization of intangible assets is included under general and administration expenses on the consolidated state-
ment of comprehensive income.
9. G O O DWI LL
($000s CAD)
Cost
Balance at January 1, 2014 $ 23,546
Effect of movements in exchange rates 323
Acquisition of HM (Note 4) 2,585
Balance at December 31, 2014 $ 26,454
Effect of movements in exchange rates 2,845
Acquisition of WWS (Note 4) 16,204
Balance at December 31, 2015 $ 45,503
The Company performed its annual impairment test which resulted in no impairments. For the purpose of impairment
testing, goodwill is allocated to the Companys CGUs. The aggregate value of goodwill attributable to each CGU is as
follows:
The Company determines the recoverable amount for all its CGUs based on value-in-use, determined as the discounted
future cash flows generated from the Companys continuing use of the CGU. The primary sources of cash flow informa-
tion are derived from past experience, historical trends, actual operating results, the budget and business plan for the
immediate year, and the Companys five year strategic plan. Cash flows are extrapolated using growth rates between
0 and 20% with adjustments reflecting an expectation of a recovery in the general economy, forecasted changes in the
CGUs respective markets and in the overall macro-economic environment and represents the Companys best estimate
of the set of economic conditions that are expected to exist over the forecast period. Gross margin and operating costs
were estimated with respect to the Companys current and budgeted costs, and increased with respect to the revenue
growth and inflation. The pre-tax discount rate applied to cash flow projections ranged from 10 and 15%. The Company
has not noted any reasonably possible changes in key assumptions which would result in the carrying amount of good-
will to exceed the recoverable amount.
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10. J O I NT AR R AN G E M E NT
The Company applies the equity method of accounting for its investment in Pure Technologies (China) Limited
(PTCL). PTCL has net cumulative losses of $0.6 million (December 31, 2014 $1.0 million) and as such has not
been recognized in these financial statements as the accounting book value of the Companys investment in PTCL is
negative. The Company has a $1.8 million receivable due from the joint arrangement. The Company has a $1.8 million
receivable due from the joint arrangement of which $0.6 million was collected after year-end. No allowance has been
taken on the receivable as operations are growing in China.
In 2014, the Company recognized a $0.5 million provision relating to a potential constructive obligation made upon
the discovery of under-reported employee income to foreign tax authorities for certain employees in prior periods. The
Company committed to assist the affected employees in remedying any incremental employee tax liability. This was a
one-time charge included on the statement of comprehensive income for the period ended December 31, 2014.
In 2015, $0.4 million of this provision was paid to foreign tax authorities and employees for penalties incurred leaving a
remaining balance of $0.1 included in other provisions as at December 31, 2015.
During the year, the company recorded $1.4 million in restructuring charges, comprised of $0.2 million in current
period severance costs, and a $1.2 million provision for 2016 planned severance costs and expected future losses under
lease commitments.
On July 22, 2015, the Company entered into a bank facility with a Canadian Chartered Bank (the Lender), comprised
of a $10 million revolving credit facility, $10 million letter of credit facility, $2 million risk management facility and
$1 million credit card facility, as well as an uncommitted $20 million accordion facility for acquisitions. Except for
the accordion facility, all the facilities are committed for three years and payable in full on maturity. The revolving
credit facility is subject to a borrowing base comprised of certain accounts receivable and inventory amounts. Interest
and standby fees are tiered based on the Companys debt to earnings before interest, depreciation and amortization
(EBITDA) ratio.
The Lender has a general security agreement with a first ranking interest over the Companys assets. Covenants are
considered normal for similar bank facilities and by industry standards. Financial covenants include a maximum debt
to EBITDA ratio, and a minimum free cash flow to debt service payment ratio.
At December 31, 2015, $1.5 million in letters of credit were issued on the new letter of credit facility and $0.8 million of
cash was restricted to secure outstanding historical foreign letters of credit and credit cards. No amounts were drawn
on the other facilities as at December 31, 2015. Subsequent to year-end, the historical foreign letters of credit were
re-issued under the new facility.
The authorized share capital of the Company consists of an unlimited number of voting common shares without par
value and an unlimited number of preferred shares issuable in series without par value.
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The Company has a stock option plan (the Plan) whereby the aggregate number of shares reserved for issuance shall
not exceed 10% of the issued and outstanding common shares (calculated on a non-diluted basis) as at the time of grant
of any options. Options granted vest 1/3 every year over a 3 year period from the date of grant and expire 5 years from
grant. All options are to be settled by physical delivery of shares. Under the Plan, the Board of Directors may, at its dis-
cretion, grant options to purchase shares in the Company to certain employees, officers and directors of the Company.
The exercise price is determined by the Board of Directors.
The number and weighted average exercise prices of share options are as follows:
Stock options granted during the period had a weighted average grant date fair value of $2.19 (2014: $1.94). The fair
value of each option granted is estimated using the Black-Scholes option pricing model assuming: a 3.5 year expected
life (2014: 3 years); a 1% dividend yield; a 1% risk free interest rate (2014: 1%); and a 40% expected volatility (2014: 38%).
For the year ended December 31, 2015, stock-based compensation costs included in comprehensive income totalled $2.2
million (2014 $1.6 million). These amounts are included under marketing, engineering and operations, general and
administration, and research and development expenses on the consolidated statement of comprehensive income (loss).
The following table summarizes information about options outstanding at December 31, 2015:
N OT E S TO CO N S O L I DAT E D FI N A N C I A L S TAT E M E N T S
58 | P U R E T E C H N O L O G I E S L T D . ANNUAL REPORT 2015
The fair value of the liability and the corresponding expense is charged to profit or loss at the grant date. Subsequently,
at each reporting date between grant date and settlement date, the fair value of the liability is remeasured with any
changes in fair value recognized in profit or loss for the period. There were 74,529 DSUs outstanding at December 31,
2015 with a fair value of $0.3 million which is included in non-current liabilities on the statement of financial position.
The fair value of the PSUs on the date of issuance, calculated with reference to managements estimate of meeting the
performance conditions, is expensed over the vesting period. Management has estimated it will achieve the target per-
formance levels for Revenue Growth and EBITDA. Accordingly, $0.2 million was expensed during the year attributable
to the 118,750 PSUs granted on May 15, 2015.
15. D IV I D E N DS
On March 1, 2016 the Board of Directors declared a quarterly dividend of $0.03 per common share to be payable on
March 31, 2016.
N OT E S TO CO N S O L I DAT E D FI N A N C I A L S TAT E M E N T S
ANNUAL REPORT 2015 PU R E T E C H N O LO G I E S LT D. | 59
The tax rate consists of the combined federal and provincial statutory tax rates for the Company and its subsidiaries for
the years ended December 31, 2015 and 2014. The combined federal and provincial tax rate increased to 25.75% in 2015
from 25.31% in 2014 due to the Alberta corporate tax rate increasing from 10% to 12% effective July 1, 2015.
N OT E S TO CO N S O L I DAT E D FI N A N C I A L S TAT E M E N T S
60 | P U R E T E C H N O L O G I E S L T D . ANNUAL REPORT 2015
($000s CAD)
December 31, 2015 Assets Liabilities Net
Operating losses $ 3,133 $ $ 3,133
Research and development expenditures 4,792 4,792
Property and equipment 339 (835) (496)
Intangible assets (1,639) (1,639)
Other 2,076 (365) 1,711
Deferred taxes $ 10,340 $ (2,839) $ 7,501
($000s CAD)
December 31, 2014 Assets Liabilities Net
Operating losses $ 3,762 $ $ 3,762
Research and development expenditures 4,549 4,549
Property and equipment 236 (520) (284)
Intangible assets (1,620) (1,620)
Other 1,887 (537) 1,350
Deferred taxes $ 10,434 $ (2,677) $ 7,757
Deferred tax assets have not been recognized in respect of the following items:
The following tables summarize the movement of temporary differences during the period:
Foreign
Exchange/
Balance Acquired Balance
January Recognized in in business December 31,
($000s CAD) 1, 2015 profit or loss combination 2015
Operating losses $ 3,762 $ (629) $ $ 3,133
Research and development expenditures 4,549 243 4,792
Property and equipment (284) (212) (496)
Intangible assets (1,620) (19) (1,639)
Other 1,350 332 29 1,711
Net deferred taxes $ 7,757 $ (285) $ 29 $ 7,501
Foreign
Exchange/
Balance Acquired Balance
January 1, Recognized in in business December 31,
($000s CAD) 2014 profit or loss combination 2014
Operating losses $ 738 $ 3,024 $ $ 3,762
Research and development expenditures 3,602 947 4,549
Property and equipment (211) (73) (284)
Intangible assets (873) (679) (68) (1,620)
Other 917 433 1,350
Net deferred taxes $ 4,173 $ 3,652 $ (68) $ 7,757
N OT E S TO CO N S O L I DAT E D FI N A N C I A L S TAT E M E N T S
ANNUAL REPORT 2015 PU R E T E C H N O LO G I E S LT D. | 61
The Board of Directors has overall responsibility for the establishment and oversight of the Companys risk manage-
ment framework.
The Companys risk management policies are established to identify and analyze the risks faced by the Company, to
set appropriate risk limits and controls, and to monitor risk and adherence to limits. Risk management policies and
systems are reviewed regularly to reflect changes in market conditions and the Companys activities. The Company,
through its training and management standards and procedures, aims to develop a disciplined and constructive control
environment in which all employees understand their roles and obligations. The Companys Audit Committee oversees
how management monitors compliance with the Companys risk management policies and procedures and reviews the
adequacy of the risk management framework in relation to the risks faced by the Company.
($000s CAD)
2015 Gross Allowance Net
Current $ 11,222 $ $ 11,222
Past due 31 - 60 days 7,284 7,284
Past due 61 - 90 days 4,175 4,175
Over 90 days (Note 5) 19,701 (11,935) 7,766
Accrued revenues 6,730 6,730
Other receivables 1,086 1,086
Balance, end of year $ 50,198 $ (11,935) $ 38,263
($000s CAD)
2014 Gross Allowance Net
Current $ 11,741 $ $ 11,741
Past due 31 - 60 days 1,928 1,928
Past due 61 - 90 days 3,178 3,178
Over 90 days (Note 5) 15,338 (12,976) 2,362
Accrued revenues 8,302 8,302
Other receivables 838 838
Balance, end of year $ 41,325 $ (12,976) $ 28,349
N OT E S TO CO N S O L I DAT E D FI N A N C I A L S TAT E M E N T S
62 | P U R E T E C H N O L O G I E S L T D . ANNUAL REPORT 2015
The following are the Companys contractual obligations as at December 31, 2015:
Interest rate fluctuations do not have a material impact on the Companys income or the value of its holdings of
financial instruments.
The Company has an exposure to foreign currency exchange rates on sales and purchases that are denominated in
currency other than the respective functional currencies of the Companys subsidiaries.
The following tables show the breakdown of the Companys significant foreign currency denominated financial
instruments, denominated in thousands of Canadian dollars. All other factors being equal, a 1% change in the
Canadian dollar would have a $0.3 million impact on profit or loss before tax (2014 $0.3 million).
For the year-ended December 31, 2015 USD GBP MXP AUD AED
Cash and cash equivalents 6,159 92 58 548 399
Accounts receivable 24,516 1,672 435 636 1,222
Accounts payable and accrued liabilities (6,970) (335) (204) (459) (278)
23,705 1,429 289 725 1,343
For the year-ended December 31, 2014 USD GBP MXP AUD AED
Cash and cash equivalents 6,665 231 5,551 1,310 714
Accounts receivable 13,295 1,362 451 315 1,366
Accounts payable and accrued liabilities (5,087) (179) (316) (284) (146)
14,873 1,414 5,686 1,341 1,934
N OT E S TO CO N S O L I DAT E D FI N A N C I A L S TAT E M E N T S
ANNUAL REPORT 2015 PU R E T E C H N O LO G I E S LT D. | 63
The Companys capital is composed of its shareholders equity and its primary uses are to finance acquisitions,
increases in non-cash working capital and capital expenditures for capacity expansion and research and devel-
opment. The Company believes that current cash balances and future funds generated through its operations
will be sufficient to meet cash requirements currently and for the foreseeable future. If the Company were to
experience a significant reduction in its cash flows from operations, it currently has a variety of options for raising
capital for short-term cash needs, including an unused demand bank loan facility. There were no changes in the
Companys approach to capital management during the year ended December 31, 2015 compared to the year ended
December 31, 2014.
The Company leases a number of facilities and office equipment under operating leases which typically run for a period
of 5 years. Some lease payments are increased every one to two years to reflect market rate of rentals.
Key management personnel compensation was $6.9 million (2014 $5.5 million) in salary and short-term employee
benefits and $0.9 million in stock based compensation (2014 $0.8 million). In addition to their salaries, key manage-
ment personnel receive employee benefits, including parking, and are entitled to participate in the Companys share
purchase plan.
N OT E S TO CO N S O L I DAT E D FI N A N C I A L S TAT E M E N T S
64 | P U R E T E C H N O L O G I E S L T D . ANNUAL REPORT 2015
Corporate Information
B OAR D O F D I R E C TO R S O FFI CE R S AU D I TO R S
James E. Paulson James E. Paulson KPMG LLP
Executive Chairman 3100, 205 5th Avenue SW
Peter O. Paulson
Calgary, Alberta T2P 4B9
John F. Elliott Peter O. Paulson
Vice Chairman and BAN K
Raymond D. Crossley
Chief Technology Officer Bank of Montreal
Sara C. Elford
350 7th Avenue SW
John F. Elliott
Charles W. Fischer Calgary, Alberta T2P 3N9
President and
Michael M. Kanovsky Chief Executive Officer R E G I S T R AR AN D T R AN S FE R AG E N T
Scott I. MacDonald Computershare Trust
Mark W. Holley
David H. McDermid Executive Vice President and Company of Canada
Chief Operating Officer 600, 530 8th Avenue SW
Calgary, Alberta T2P 3S8
Geoffrey D. Krause
Chief Financial Officer S TO CK E XCH AN G E LI S T I N G
TSX Exchange
Nicole D. Springer Symbol: PUR
Chief Legal Officer and
Corporate Secretary
Robert Budianto
Senior Vice President
Engineering, Operations and
Production
Michael Higgins
Senior Vice President, North America
Michael R. Wrigglesworth
Senior Vice President, International
ANNUAL REPORT 2015 PU R E T E C H N O LO G I E S LT D. | 65
Corporate Information
H E AD O FFI CE PU R E T E CH N O LO G I E S ( AUS) P T Y. LT D.
3rd Floor 7/7-12 Pyrmont Bridge
705 11th Avenue SW Pyrmont, New South Wales,
Calgary, Alberta, Canada T2R 0E3 2009 Australia
Telephone: (403) 266-6794 Telephone: 61 2 9550 1777
Toll-Free (North America): Fax: 61 2 8022 3990
1-855-280-PURE (7873)
Fax: (403) 266-6570 PU R E AB U D H AB I
Email: investor.relations@puretechltd.com P.O. Box 108726
Website: www.puretechltd.com Al Odaid Office Tower, 11th Floor,
Airport Road, Abu Dhabi, United Arab Emirates
PU R E T E CH N O LO G I E S U. S. I N C Telephone: 971 2 4146772
Suite D Fax: 971 2 4146600
8920 State Route 108
PU R E T E C H N O LO G I E S (C H I N A) LT D.
Columbia, Maryland, USA 21045
Telephone: (443) 766-7873 10th Floor, Hing Lung Commercial Building
Fax: (443) 766-7877 68-74 Bonham Strand
Sheung Wan, Hong Kong
PU R E I N S PE C T I O N T E CH N O LO G I E S SA D E C V Telephone: (852) 2345 5538
Calle El Olivo No.88 Fax: (852) 8148 7764
Col. Florida
PU R E H M I N C .
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Mexico D.F. CP 01030 Building 3, 9703 45 Ave NW
Telephone: (55) 5559-1078 Edmonton, Alberta, Canada T6E 5V8
Telephone: (780) 436-4400
PI PE LI N E T E CH N O LO G I E S PH I LI PPI N E S CO R P. Toll Free: 1-866-434-7872
Unit 1505 Cityland 10 Fax: (780) 989-0040
Tower 1
H.V. Dela Costa Street PU R E H M U. S. I N C .
Makati City, Philippines 1209 Suite 190, 1400 N Sam Houston Parkway E
Telephone: +63 (917) 898-7873 Houston, Texas, USA 77032
Fax: +63 (2) 621.0853 Toll Free: 1-866-434-7872
WACH S WAT E R S E RV I CE S
801 Asbury Drive
Designed and produced by Rhino Corporate Communications Inc.
PU R E T E CH N O LO G I E S M I SS I SSAU G A
Unit 7, 5055 Satellite Drive
Mississauga, Ontario, Canada L4W 5K7
Telephone: (905) 624-1040
Toll-free: 1-877-275-7742
Fax: (905) 624-4777
PURE TECHNOLOGIES LTD.
3rd Floor, 705 11 Avenue SW
Calgary, Alberta, Canada T2R 0E3
Telephone: (403) 266-6794
Fax: (403) 266-6570
p
Toll Free (North America): 1-855-280-PURE (7873)
Email: investor.relations@puretechltd.com
www.puretechltd.com
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