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					2011
ANNUAL
REPORT




  BECOMING THE BEST SAFETY COMPANY IN THE WORLD
ANNUAL GENERAL MEETING OF SHAREHOLDERS
Wednesday, May 16, 2012, 3:00 pm
Calgary Petroleum Club, Cardium Room
319 – 5th Avenue SW
Calgary, Alberta



TABLE OF CONTENTS
Report to Shareholders .................................................................................................. 1
Management Discussion and Analysis ........................................................................... 4
Management’s Report .................................................................................................. 20
Independent Auditors’ Report ....................................................................................... 21
Consolidated Financial Statements .............................................................................. 22
Notes to Financial Statements...................................................................................... 27
Corporate Information.......................................................................... Inside Back Cover
RepoRt to ShaReholdeRS
By Tom Hickey, President and Chief Executive Officer
The 2011 fiscal year marked a         of HSE. This included systems        ond, increase our U.S. presence
turning point for HSE Integrated.     and processes for accounting,        and emphasize growth within
The Corporation has just complet-     information technology, human        North America.
ed a year with the best operating     resources, legal, operational, and
recorded income in the company’s      internal safety. The objective was   The logic here was simple: until
history. We have grown revenue,       to take the best policies and pro-   HSE becomes a dominant player
margin, and market share across       cedures from multiple companies      in the U.S., there is no need for us
Canada and into the United            and consolidate them to create       to look further for growth in more
States.                               one efficient industrial safety      unstable economic and political
                                      company.                             environments.
I first want to thank our employees
and management for their com-         During the economic downturn in      The 2011 year not only marked
mitment to making this happen.        2009, the Corporation’s strategy     a return to profitability, but also a
Congratulations to you all.           was to reduce costs and maintain     return to growth.
                                      a strong balance sheet. In 2010,
To briefly recap HSE Integrated       as the economy began to recover,     We’re now ready to take our busi-
Ltd.’s history, in 2000 the Corpo-    HSE continued to standardize         ness model for a diversified, inte-
ration first began trading on the     its systems and processes and        grated safety services company
TSX Venture Exchange under the        undertake a conservative program     to new levels and move towards a
name Patch Safety Services Ltd.,      of organic expansion.                strong North American expansion
reflecting its oil and gas industry                                        into the U.S. markets.
focus at the time.                    Our infrastructure, equipment, and
                                      personnel are now in place and
In 2004, to better reflect its        we are ready to grow again.
expansion to other markets, the
Corporation was renamed HSE           In late 2010, when I returned to
Integrated Ltd. and began trading     the Corporation, my focus was
on the TSX Venture Exchange           on offering the highest standard
under the symbol “HSL”. In 2007       of safety services, which inspired
the Corporation moved its listing     a new mission statement: “to
to the main TSX Exchange.             become the best safety services
                                      company in the world.” While
From 2004 to 2007 HSE em-             we’re not there yet, we believe
barked on a path of expansion         that our accomplishments in 2011
through acquisition, and focused      prove that we’re well on our way
on consolidating the HSE Inte-        to realizing our mission.
grated brand across Canada.
                                      The main goal for 2011 has been
Through the leadership of our for-    to make money every quarter and
mer CEO, this goal was achieved       add consistency to our profits.
by bringing together 17 Canadian      Last year also saw the develop-
firms from British Columbia to        ment of a strategic plan that had
Nova Scotia to create the largest     several objectives.
health and safety company in
Canada.                               First, to become more profitable,
                                      and concentrate on organic
The next step in the process was      growth in key Canadian markets
to consolidate the infrastructure     where we currently operate. Sec-

Report to Shareholders                                          HSE Integrated Ltd. 2011 Annual Report         1
2011 Financial                         internal initiatives For              emPloyee retention
PerFormance                            GrowinG ProFitably                    While the upside of a healthy
                                                                             economy is increased profitability,
Last year our total revenue in-        Virtually all of HSE’s expansion
                                                                             the downside is the difficulty in
creased 19.8% from $82 million in      in 2011 was organic. In 2010 we
                                                                             filling the demand for trained,
2010 to $98 million in 2011. SG&A      launched a strategic plan to in-
                                                                             qualified, and committed employ-
was $10 million for the year, an in-   crease our market share in seven
                                                                             ees. In response to this, in 2011
crease of 25.4% from $7.9 million      key regions where we are already
                                                                             HSE announced two new human
the prior year.                        well established.
                                                                             resources programs aimed at em-
                                                                             ployee retention.
Our operating margin increased         Last year we increased sales by
56.5% from $15 million to $23          20% by expanding our customer
                                                                             In November we announced the
million.                               base in these key target areas,
                                                                             Employee Share Ownership Plan
                                       proving not only that there is a
                                                                             (ESOP). This initiative is designed
Both EBITDA and net earnings           market for our services, but that
                                                                             to help all full-time employees
grew as well. EBITDA was up by         we can effectively tap that market.
92.8%, while net earnings went
from $0.4 million to $6.0 million.     We also embarked on an initia-
                                       tive to improve our bottom line by
                                       increasing efficiency in several
                                       ways.

                                       We are facilitating analyses to
                                       determine which service lines
                                       provide the greatest margins. This
                                       project is still ongoing. We also
                                       initiated a program of enhanced
                                       performance metrics.


                                       internal saFety
                                       In 2011 the Corporation launched
                                       a proactive program to increase
                                       our internal safety performance.
                                       Since safety is our business, our
                                       objective is to create a safety
                                       culture that emphasizes practicing
                                       what we preach.

                                       This initiative requires commit-
                                       ment from all levels of manage-
                                       ment, beginning with the execu-
                                       tive team. We are all being held
                                       accountable for the Corporation’s
                                       safety performance in 2012 and
                                       beyond.




2    HSE Integrated Ltd. 2011 Annual Report                                             Report to Shareholders
                         acquire shares in our Corporation        multi-year master services agree-
                         by matching personal purchases           ment under which HSE may be
                         of HSE Integrated stock one-to-          called upon to provide services to
                         one to a maximum of $1,200 per           Flint across North America.
                         employee per year.
                                                                  The Corporation’s expansion in
                         This is the Corporation’s way of         the United States will be largely
                         encouraging employees to ac-             undertaken under the auspices of
                         quire a meaningful stake in HSE’s        Boots & Coots HSE Services LLC
                         long-term success by becoming            (BCHSE). Established in 2008,
                         owners. It is hoped that in three        the subsidiary (90% owned by
                         years there will be 700 new “in-         HSE; 10% owned by Halliburton)
                         side owners” at the Corporation.         showed a 181% increase in rev-
                         The ESOP program commenced               enue in 2011 over 2010. With its
                         on January 1, 2012.                      infrastructure and business model
                                                                  firmly in place, BCHSE is poised
                         Late in 2011 the company also an-        to increase its share of the oilfield
                         nounced a management training            safety market in the U.S. Plans
                         program to ensure that key em-           are in place for at least one new
                         ployees receive the training they        American BCHSE location.
                         require to be successful in their
                         roles, and to realize their personal     The Corporation will also continue
                         career-advancement objectives            to focus on gaining organic market
                         within HSE. The program will take        share in Canada. Management
                         up to two years for participants         feels that significant growth is still
                         to complete, and Management is           possible in the key areas identified
                         confident that it will contribute to a   in our 2011 strategic plan.
                         corporate culture that encourages
                         engaged employees and fosters            HSE anticipates that revenue from
                         commitment to the Corporation.           its oilfield business will continue
                                                                  to increase from its low point in
                         One of the key components of a           2009.
                         healthy corporate culture is com-
                         munication. With this in mind, the       Growth in Canada and the U.S.
                         Corporation is working on a com-         will be facilitated by the service-
                         pany-wide internal communica-            line analyses project launched last
                         tions strategy. This includes such       year.
                         components as an expansion of
                         functionality of the corporate in-       Management is extremely excited
                         tranet, and a regular CEO blog.          about the Corporation’s prospects
                                                                  for 2012. Thanks to the contribu-
                                                                  tions of our capable and dedicated
                         2012 and beyond                          staff, we have laid the foundations
                                                                  for efficiency, profitability, and
                         HSE’s plans for 2012 include an
                                                                  growth in 2012 and beyond.
                         aggressive expansion in North
                         America. One of the first steps in
                                                                  On behalf of the Board of
                         HSE’s expansion strategy was the
                                                                  Directors,
                         acquisition of the Flint Safety Unit
                         of Flint Field Services Ltd. This
                         purchase – which was announced
                         in November 2011 and completed
                         in February 2012 – includes a            Tom Hickey, President and CEO

Report to Shareholders                                HSE Integrated Ltd. 2011 Annual Report        3
ManageMent diScuSSion and analySiS
For the years ended December 31, 2011 and 2010
The following Management Discussion and Analysis (“MD&A”) is                         tional Financial Reporting Standards has been applied. This
dated March 27, 2012 and is a review of the financial results of                     MD&A takes into consideration information available to Man-
HSE Integrated Ltd. (“HSE”, the “Corporation”, “we” or “our”) for                    agement up to March 27, 2012. Unless otherwise stated, tabular
the fiscal years ended December 31, 2011 and 2010. This MD&A                         amounts presented are expressed in thousands of Canadian
should be read in conjunction with HSE’s other documents filed                       dollars and per share figures in dollars per weighted average
on SEDAR at www.sedar.com. The consolidated financial                                common share. The following MD&A contains forward-looking
information is presented in accordance with International                            information and statements. Please refer to the end of the
Financial Reporting Standards (“IFRS”) for consolidated annual                       MD&A for the disclaimer on forward-looking statements.
financial statements and IFRS 1 – First-time Adoption of Interna-


selected Financial inFormation
                                                                              Year ended                                        Year ended             Year ended
                                                                            December 31,          Year-over-year              December 31,           December 31,
                                                                                    2011               % change                      2010(2)                2009(2)
 Revenue                                                             $               98,249                 19.8%      $               82,028                81,601
 Direct operating expenses                                                           75,203                 11.7%                      67,301                72,530
 Operating margin                                                                    23,046                 56.5%                      14,727                  9,071
 Operating margin %                                                                   23.5%                                             18.0%                 11.1%
 Selling, general and administrative                                                  9,951                 25.4%                       7,936                  8,226
 Net earnings (loss)                                                                  6,010             1,269.0%                           439               (6,634)
     Per share basic                                                                    0.15                                              0.01                (0.18)
     Per share diluted                                                                  0.14                                              0.01                (0.18)
 EBITDA   (1)
                                                                     $               13,095                 92.8%      $                6,791                       845
 EBITDA %                                                                             13.3%                                              8.3%                   1.0%
 Total assets                                                        $               58,113                 17.8%      $               49,313                50,722
 Total long-term liabilities                                         $                9,480                  4.3%      $                9,085                  5,429

(1) See “Non-GAAP Measures” (page 17).
(2) IFRS transition date was January 1, 2010; 2010 financial results have been adjusted to conform to IFRS; 2009 financial results have not been restated and are
    presented in previous Canadian GAAP.



Financial review
overview
HSE operates in two geographic segments – Canada and the                             Total revenue for the fiscal year ended December 31, 2011
United States – providing health and safety services to industry                     increased 19.8% from $82,028 in 2010 to $98,249 in 2011.
and the public sector. The Corporation offers a package of                           Virtually all of HSE’s revenue growth in 2011 was organic. Operat-
integrated asset, worker and community health and safety                             ing margin (see “Non-GAAP Measures”) was $23,046 or 23.5% of
protection services including: onsite safety supervision; gas                        revenue compared to $14,727 or 18.0% of revenue in the prior
detection; fixed and mobile air quality monitoring; breathing                        year. SG&A was $9,951 for the year, an increase of 25.4% from
equipment rentals and services; fixed and mobile firefighting                        $7,936 in the prior year. As a percentage of revenue, SG&A
and fire protection services and equipment; worker shower                            increased from 9.7% of revenue in 2010 to 10.1% in 2011. The
(decontamination) services; onsite medical services; first aid;                      company reported earnings of $6,010 or $0.15 per share com-
emergency medical response; worker safety training; industrial                       pared to $439 or $0.01 per share for the 2010 fiscal year. EBITDA
hygiene services; and safety consulting and supervision.                             (see “Non-GAAP Measures”) for the period was $13,095 or 13.3%
                                                                                     of revenue, compared to $6,791 or 8.3% of revenue a year ago.

4       HSE Integrated Ltd. 2011 Annual Report                                                              Management Discussion and Analysis
revenue                                                                 repair activities on client facilities. Industrial also includes
                                                                        worker safety training and safety consulting services. =
The Corporation provides health and safety services to custom-
                                                                        Oilfield operations are associated exclusively with conventional
ers in two distinct client classifications: Industrial and Oilfield.
                                                                        upstream oil and gas activity, and are often short-term, remote,
The differentiation takes place primarily because of the indus-
                                                                        mobile, and temporary because they are related to interruptible
tries served and activity drivers that affect demand.
                                                                        exploration, drilling, completion, and workover activities.
Industrial health and safety services are those provided to             Demand for Oilfield health and safety services is historically
multiple industries and the public sector and include a wide            cyclical due to external factors such as commodity prices,
range of clients including manufacturing, processing, refining          currency exchange rates, capital markets, weather, and govern-
and other facilities that operate continuously on a year-round          ment policy. Even if other factors are stable, demand for Oilfield
basis. The customers operate in diverse industries and the public       health and safety services is highly seasonal in Canada because
sector including: non-conventional upstream oil development             field activity is greatly affected by weather and road access.
and production (including oilsands extraction); oil and gas
                                                                        The Corporation tracks billings to customers by defined revenue
processing and refining; petrochemicals; pulp and paper;
                                                                        groupings, but uses a common pool of equipment and manpow-
utilities; power generation; agriculture; food and beverage;
                                                                        er resources to provide these services. Management, operation-
offshore operations; and manufacturing industries. Industrial
                                                                        al support and administration services are provided from a
revenue includes a mix of year-round contracts and “shut-
                                                                        common personnel pool.
downs”, which are scheduled major maintenance projects and
                                                                        The revenue for these business areas is shown below:

                                                           December 31, 2011                December 31, 2010                      Change (%)
 Industrial                                      $                     54,261     $                       47,274                           14.8%
 Oilfield                                                              43,988                             34,754                           26.6%
 Total revenue                                   $                     98,249     $                       82,028                           19.8%
 As a percentage of revenue
     Industrial                                                         55.2%                             57.6%
     Oilfield                                                           44.8%                             42.4%
 Total revenue                                                         100.0%                            100.0%

For the years ended December 31, 2011 and 2010, one custom-             year ended December 31, 2010. This was primarily due to
er provided more than 10% of the Corporation’s revenue. Sales           increased activity in the Western Canadian Sedimentary Basin
to this customer during 2011 amounted to $10,300 (2010:                 (“WCSB”) and penetration into the U.S. market. Factors behind
$8,476) related to ongoing long-term energy-related projects            the recovery of activity in the WCSB include rising oil prices and
located entirely in Canada. Of the revenue amounts, $967 (2010:         continued success by exploration and production (“E&P”)
$1,510) were included in accounts receivable at the respective          companies using horizontal drilling and multi-stage fracturing
year ends.                                                              extraction technologies. There has also been a trend towards a
                                                                        higher number of drilling days per well, partly because of an
industrial                                                              increase in the number of deeper-zone targets and partly
For the year ended December 31, 2011, the Industrial health             because it takes additional time to reach total depth in a
and safety services component of the Corporation’s total                horizontal well. Increased drilling days may increase the number
revenue increased $6,987 (14.8%) to $54,261 from $47,274 for            of days medical services may be required, while deeper well
2010. This was due to a large industrial project that ran from          depths increase the likelihood that sour gas may be encountered
January through July, a large shutdown in Newfoundland, and an          (sour wells require the use of breathing air and gas detection
overall increase in plant shutdown work, particularly during May,       services). As well, multi-stage fracturing can require the use of
June, and September. Industrial health and safety services              acid or hydrocarbon fluids, which increases demand for the
generated 55.2% of total revenue for 2011 compared to 57.6%             Corporation’s shower and fire protection services. Although our
in 2010.                                                                service demands for oilfield activity have changed, the Corpora-
                                                                        tion has benefited from the opportunity of offering diversified
oilField                                                                services to the same customers.
Oilfield revenue in the 2010 fiscal year increased by 26.6% in          In the United States, for the year ended December 31, 2011
2011 compared to 2010. Oilfield revenue was $43,988 for the             revenue was $4,232, an increase of 181% over the $1,507
year ended December 31, 2011 compared to $34,754 for the                generated in the year ended December 31, 2010. The customers



Management Discussion and Analysis                                                HSE Integrated Ltd. 2011 Annual Report                      5
of Boots & Coots HSE Services LLC (BCHSE) are typically larger
E&P companies whose corporate governance policies require
                                                                       ebitda and net earninGs
more attention to the health and safety records of their compa-        EBITDA for the year was $13,095, up 92.8% from $6,791 in 2010.
nies and their subcontractors. A portion of the work is ongoing        This EBITDA increase was the result of the previously mentioned
work attached to specific drilling rigs where, as long as the rig is   improvements in operating margin and control of expenses.
active, BCHSE has rental equipment and personnel on location.          Improved financial performance by BCHSE was also a contribut-
                                                                       ing factor as BCHSE contributed $1,467 in EBITDA for 2011
direct oPeratinG exPense                                               compared to $197 in 2010.

and oPeratinG marGin                                                   Property and equipment depreciation for the year ended Decem-
                                                                       ber 31, 2011 was $4,884, down from $5,720 in 2010. This is
Direct operating expenses consist of costs directly attributable to    primarily a result of the Corporation’s method of replacing light
the delivery of health and safety services to customers. These         vehicles. Units are generally taken out of the fleet and sold during
include: wages and benefits for field employees and contractors;       the second quarter, then replaced in the fourth quarter in time for
equipment rentals and leases; field service center property costs;     the winter drilling season. Of the $4,274 of light vehicle additions
transportation; fuel; consumables; equipment repairs and               during the year, $2,643 were added in the fourth quarter. Offset-
maintenance; and field office administration, including field sales.   ting this was a larger capital expansion program in 2011 than in
For the year, direct operating expense totaled $75,203 or 76.5%        the prior two years. Year-to-date capital additions (excluding light
of revenue compared to $67,301 or 82.0% of revenue for the             duty vehicles added through finance leases) totaled $3,848 in
year ended December 31, 2010. Operating margin increased               2011, compared to $2,310 in 2010 and $1,644 in 2009 1.
from $14,727 or 18.0% of revenue in 2010 to $23,046 or 23.5%           Intangible asset amortization for the year ended December 31,
of revenue in 2011.                                                    2011 was $492, up from $412 in 2010. The increase in amortiza-
                                                                       tion is a result of the intangible assets acquired as part of the
While operating margins will increase as revenue increases since
                                                                       Taylored Safety Services Inc. acquisition that occurred on
the fixed cost portion of the expense is spread over a higher
                                                                       January 24, 2011.
revenue base, several initiatives that commenced in 2011
contributed to this improvement. These included more effective         Share-based compensation for the year ended December 31,
fleet and equipment management, focusing on labour efficien-           2011 was $372 (2010: $185) consisting of equity settled awards
cies, and managing daily costs.                                        of $222 (2010: $206) and cash-settled awards of $150 (2010:
                                                                       $(21)). The change in DSU expense is related to changes in the
The allowance for doubtful accounts receivable was $350 or
                                                                       Corporation’s share price during the quarters at which the DSUs
1.5% of trade accounts receivable at December 31, 2011
                                                                       are valued. The increase in the expense for equity settled awards
compared to $1,100 or 5.7% of trade accounts receivable at
                                                                       relates to year-over-year increases in stock option strike prices
December 31, 2010. The major reason for the change in the
                                                                       as the Corporation’s share price improves.
allowance was the write-off in second quarter of two accounts
totaling $641 against amounts previously included in the               For the year ended December 31, 2011 finance costs totaled $770,
allowance. In addition, a reversal to the allowance for doubtful       up from $754 for the same period in 2010. The non-revolving term
accounts of $109 was recorded to reflect a reduction in overall        facility decreased in 2011, as scheduled principal payments
bad debt experience.                                                   totaling $1,304 were made, while the balance for finance leases
                                                                       increased as payments of $2,611 were offset by new leases
sellinG, General and                                                   totaling $4,274. Finance costs also increased as a result of interest
                                                                       and accreted interested on the convertible debenture.
administrative exPense                                                 For the year ended December 31, 2011, the tax expense was
Selling, general and administrative (“SG&A”) expense consists of       $1,549 compared to a recovery of $24 in the prior year. The
costs not directly attributable to the delivery of services to         difference relates primarily to improved profitability, offset by
customers. These include executive management; corporate               the recognition of a deferred tax asset related to carry-forward
head-office functions and support services; administrative             losses applied to income earned by BCHSE.
personnel; corporate sales and marketing costs; liability insur-
ance; professional fees; and public company costs.                     The Corporation recognized a reduction of $1,015 in the amount
                                                                       previously recognized as a provision for onerous contracts as
For the year ended December 31, 2011, SG&A increased to                itnegotiated a sublease in November 2011 for a leased facility
$9,951 from $7,936 in the prior year. As a percentage of rev-          that was excess to the Corporation’s needs.
enue, SG&A increased to 10.1% from 9.7% in 2010. The increase
is related to the establishment of the Corporation’s Business          As a direct result of the above factors, net earnings for the year
Development group, increased sales and marketing costs, higher         improved to $6,010 or $0.15 per basic share ($0.14 per diluted
bonus accruals as a result of improved profitability, and the          share) compared to $439 in the prior year, or $0.01per basic and
recognition of a liability of $345 for post-employment benefits        diluted share.
on the transition between CEOs in August, 2011.
                                                                       1. Previous Canadian GAAP


6      HSE Integrated Ltd. 2011 Annual Report                                             Management Discussion and Analysis
acquisitions                                                                 services agreement under which HSE may be called upon to
                                                                             provide services to Flint across North America.
On January 24, 2011 the Corporation acquired all of the out-
standing common shares of Taylored Safety Services Inc.
(“Taylored”) with the issue of 1,137,532 shares at a price of
                                                                             liquidity and caPital resources
$0.54. Taylored provided safety consulting and industrial health             The Corporation’s principal sources of capital are cash flows
services in Halifax, Nova Scotia.                                            from operations, borrowings under an established credit facility
                                                                             with its lender, convertible debentures, finance leases and
Subsequent to year end, on February 15, 2012, HSE Integrated                 equity financing.
Ltd. completed the acquisition of the business assets of the Flint
Safety Unit of Flint Field Services Ltd., a subsidiary of Flint Energy       The Corporation, through the conduct of its operations, has
Services Ltd. (“Flint”), for $2.2 million in cash, subject to adjust-        undertaken certain contractual obligations as noted in the
ments. HSE Integrated has also signed a multi-year master                    following table:

 Years ended December 31                              2012          2013            2014         2015          2016   Thereafter         Total
 Finance lease obligations                      $    2,262    $    1,315       $      980   $      715   $        –   $        –        5,272
 Rental facilities and equipment                     3,426         2,922            2,304        1,806          967        2,638       14,063
 Convertible debentures(1)                                –              –          2,000            –            –            –        2,000
 Term debt   (1)
                                                     1,304         1,304              435            –            –            –        3,043
 Total contractual obligations                  $    6,992    $    5,541       $    5,719   $    2,521   $      967   $    2,638       24,378

(1) Principal portion only

liquidity                                                                    On December 21, 2010 ($1,925) and January 15, 2011 ($75), the
                                                                             Corporation issued $2,000 in Subordinated Secured Convertible
At December 31, 2011, the Corporation had cash on hand of                    Debentures (“Debentures”). The Debentures mature on January
$2,950.                                                                      15, 2014 and bear interest at 10.0% per annum, payable
The Corporation’s primary debt facility is a $15,000 credit facility         quarterly in arrears on April 15, July 15, October 15, and January
with a regional financial institution. The facility consists of a            15 in each year beginning April 15, 2011. The proceeds from the
$10,000 revolving operating loan facility for general operating              convertible debenture were used to fund part of the Corpora-
purposes and a $5,000 non-revolving reducing loan facility.                  tion’s 2011 capital program.

The $5,000 non-revolving term facility is repayable in monthly               The Debentures consist of both debt and equity components
payments of $109 starting July 1, 2010. The facility is payable in           that are presented separately in the Corporation’s consolidated
full 48 months after initial drawdown. The operating facility is             balance sheet. The debt component is measured by calculating
renewable annually and is margined to accounts receivable. Both              the present value of both the quarterly interest obligation and
facilities bear interest at prime plus a fixed percentage. A standby         the principal payment due at maturity, using the rate of interest
fee is also required on any unused portion of the operating                  that would have been applicable to a non-convertible debt
facility. Both facilities are subject to certain covenants including a       instrument of the comparable term and risk at the date of issue.
working-capital covenant, a debt to equity covenant, a fixed                 The residual portion of the Debenture proceeds is allocated to
charge-coverage ratio, and other positive and negative covenants.            equity. As a result the debt component of the Debentures is less
The facilities are collateralized under a general security agreement         than the principal amount that would be paid at maturity,
that includes accounts receivable and property and equipment.                assuming no conversion occurs. The discount to face value of the
                                                                             debt component presented on the consolidated balance sheet
On May 13, 2011, the Corporation signed a revised commitment                 will be accreted using the effective interest method over the
letter which adjusted certain covenant calculations to reflect the           term of the Debenture. At December 31, 2011 the debt compo-
effects of the conversion to IFRS.                                           nent of the convertible debenture was $1,845 all of which is
                                                                             long-term.
On November 10, 2011 the Corporation signed a commitment
letter which provided an additional $3,000 non-revolving                     The Debentures are convertible, at the holder’s option, to
reducing term facility with a one-time draw to finance the                   common shares of the Corporation at a deemed price of $0.50
purchase of the Flint Safety Unit assets. At December 31, 2011               per share. The shares are redeemable at the Corporation’s
the amount drawn under this facility was $nil. Subsequent to                 option (provided certain conditions are met) at any time after
year end, on January 31, 2012, $2,310 was drawn on this facility.            January 15, 2012. As at March 27, 2012 the market share price
                                                                             exceeded 133% of the conversion price, and therefore the
The Corporation complied with all covenants under the credit
                                                                             debentures were eligible for redemption by the Corporation. See
facility at December 31, 2011.


Management Discussion and Analysis                                                    HSE Integrated Ltd. 2011 Annual Report                7
note 13(B) of the Corporation’s annual Financial Statements for      oilField
a complete list of redemption conditions.
                                                                     Management expects HSE’s Oilfield business to continue to
The Corporation also has finance leases related to its light duty    increase from its low point in 2009. While the Corporation’s
vehicles. The lease terms range from three to five years. The        Oilfield revenue is not always directly proportional to wells
Corporation’s obligations under finance leases are secured by        drilled or rig operating days, it is correlated to drilling activity
the lessors’ title to the leased assets. The terms and conditions    and the Corporation’s expectation is Oilfield activity will remain
of the finance lease contract do not specify any contingent rents,   relatively strong for 2012.
escalation clauses or any financial restrictions, conditions or
covenants in respect of the Corporation’s financial position or      In its November 8, 2011 forecast release, the Canadian Associa-
the related leased assets. At December 31, 2011 the total            tion of Oilwell Drilling Contractors (“CAODC”) forecasted a
outstanding on the finance leases was $4,874, of which $2,068        marginal activity increase of 1% and estimated that the well
was current.                                                         count for 2012 will remain stable at approximately 12,672. The
                                                                     Petroleum Services Association of Canada (“PSAC”) updated
cash Provided by oPerations                                          2012 Canadian Drilling Activity Forecast issued January 27, 2012
                                                                     decreased the estimated number of wells to be drilled across
Cash provided by operations for the year ended December 31,          Canada by 1,700 wells to 13,350 wells. This is a decrease of 11%
2011 was $8,752 compared to $4,896 in 2010. Improved                 from PSAC’s original 2012 forecast; however, this still represents
revenue levels and operating margins during the period resulted      an increase of four per cent over final 2011 drilling levels of a
in higher operating cash flow before considering changes in          total of 12,917 wells.
working capital. The increase in non-cash working capital of
$3,294 was primarily due to higher trade receivables in the          Natural gas drilling continues to be focused on resource plays
period.                                                              containing high liquids content.

cash Flows From FinancinG and investinG                              Despite significant drilling activity and the strength of crude oil
                                                                     prices, several potential threats exist to expected future activity
During the year, the Corporation made payments totaling $1,333       on both a Canadian and global scale. Skilled labour remains one
($1,304 against its existing term debt facility and $29 assumed      of the most significant challenges faced by the energy sector,
on the purchase of Taylored) and $2,611 towards outstanding          with the total number of industry workers expected to rise to
finance leases.                                                      220,000 by 2017 from 180,000 in 2012. Employee retention is a
Purchases of property and equipment for the year amounted to         major challenge for all companies in our industry. To mitigate the
$3,848, the majority of which was for revenue-generating health      risk of having demand that cannot be met due to labour
and safety services rental equipment. Proceeds from the              shortages, HSE continues to invest in its people and explore new
disposal of property and equipment were $519.                        and innovative ways to both attract and retain skilled workers.
                                                                     The Corporation has undertaken two major employee retention

workinG caPital                                                      programs. Firstly, HSE launched an Employee Share Ownership
                                                                     Plan (“ESOP”) in the first quarter of 2012. Secondly, HSE will be
At December 31, 2011, the Corporation had working capital of         introducing a management trainee program for all key location
$16,067. This compares to $12,016 at December 31, 2010. The          managers within the company. This program will take up to two
increase of $4,051 is a result of increased profitability combined   years for employees to complete.
with activity-related increases in accounts receivable, partially    On a macro-economic scale, economic uncertainty continues to
offset by increases in accounts payable and accrued liabilities.     play a prominent role in world markets. The European debt crisis
Days-sales-outstanding (“DSO”) was 84 days at December 31,           and political instability in the Middle East have resulted in
2011 compared to 74 days at December 31, 2010. Delays in             significant volatility in capital and commodity markets. Commod-
receiving payment for a significant shutdown completed in July       ity price volatility has resulted in several major oil producers
contributed to the increased DSO for accounts receivable.            making public their intentions to monitor pricing and alter their
Subsequent to year end, payment for the full amount of $1,236        capital spending budgets accordingly. Further, depressed natural
was received related to this account.                                gas prices have resulted in several major natural gas producers
                                                                     reducing their capital spending budgets for wells targeted at
outlook                                                              traditional natural gas, and “shutting in” current production in
                                                                     an attempt to address the excess supply of natural gas. Reduc-
The Corporation remains optimistic about 2012, expecting             tions in capital spending by major oil and gas producers could
consistent revenue growth from existing markets and new growth       impact activity for HSE’s oilfield services.
from the acquired safety assets and new markets in the United        According to Baker Hughes, as of February 17, 2012 there were
States. More importantly, Management expects this growth to be       1,994 active rigs in the United States, an increase of 281 rigs from
consistent and profitable. After completing three years of strict    the prior year. Future activity in the United States is subject to
cost management, HSE is excited about 2012 opportunities.            many of the same risks as Canada, including stock and commod-
                                                                     ity price volatility. As in Canada, if oil prices fell substantially, cash


8      HSE Integrated Ltd. 2011 Annual Report                                             Management Discussion and Analysis
flows and capital expenditures for many of the Corporation’s U.S.                    from Taylor, Michigan (a suburb of Detroit), and Boots & Coots
customers would likely be reduced and a decrease in oil and                          HSE Services LLC (“BCHSE”), which operates from a head office
liquids rich gas play drilling activity is likely to occur.                          in Houston, Texas.

industrial                                                                           CRS contributed $2,231 to revenue for the year ended Decem-
                                                                                     ber 31, 2011, compared to $2,810 for the same period in 2010.
Industrial revenue is derived from a combination of long-term                        CRS benefitted from a large turnaround (approximately $1
safety work, shutdowns and other project work. Long-term                             million) during 2010 that did not recur in 2011. Although this
contracts include provision of safety, medical or fire and shower                    market is more mature and competition is stiff, HSE believes that
protection for construction projects and operating facilities.                       in the future, further penetration of the larger U.S. industrial
Revenue from these sources tends to be fairly stable. With major                     health and safety services market is possible.
oilsands projects being contemplated over the next several
years, northeast Alberta will be a significant driver of growth.                     BCHSE contributed $4,200 to revenue for the year ended
The size and duration of shutdowns and project work can vary                         December 31, 2011, compared to revenue of $1,507 for the
significantly. While plant shutdowns are recurring, they may not                     same period in 2010. The Corporation’s 2011 capital budget
occur every year. Each shutdown or project is bid and Industrial                     included $830 for rental equipment expansion for BCHSE. In July,
revenue for a given year will be partially dependent on the                          an additional $250 was approved to respond to customer
number of contracts awarded to the Corporation for shutdowns                         demand for more equipment. Customers have responded to the
in that year.                                                                        quality of work and equipment with requests for more work.
                                                                                     During the fourth quarter, BCHSE signed a MSA with the U.S.
The bidding process for the 2012 shutdown season is under way,                       subsidiary of a Canadian intermediate oil and gas company.
and results look promising. The order book contains jobs from all
markets including field hydrocarbon processing facilities in                         The Corporation continues to establish and grow its position in
Alberta, oilsands plants in northeast Alberta, and refineries in                     the United States market. HSE has committed $1.1 million in
Eastern Canada.                                                                      2012 to capital expansion in the United States to acquire
                                                                                     additional revenue-generating assets to meet the current
HSE’s chosen position in the Industrial safety market continues                      demand for equipment. Of this amount, $1 million has been
to be that of quality and capacity. The Corporation is focused on                    directed to Oilfield activities being undertaken by BCHSE. The
national standards, consistent operating procedures, trained                         remainder is being used by CRS. CRS’s work tends to be less
personnel, quality equipment, and the capacity to take on larger                     capital intensive and more labour intensive than BCHSE’s work.
projects and expand ongoing assignments as required.                                 HSE expects to grow its existing U.S. operations in 2012. The
                                                                                     Corporation is also examining the possibility of expansion into
u.s. oPerations                                                                      other oil-producing areas in the United States
HSE has reported segmented financial information for its two
U.S. operations: CRS Technologies Inc. (“CRS”), which operates

quarterly results
                                                                                                 2011                                                2010(2)
                                                     Q4             Q3              Q2             Q1            Q4           Q3           Q2           Q1
 Revenue                                   $ 24,586        $ 24,277        $ 24,905       $ 24,481        $   22,422   $   20,349   $   18,350   $   20,907
 Net earnings (loss)                             3,128           1,834             541            507           923          175         (783)          124
 Per share
     Basic                                         0.08           0.05            0.01           0.01           0.02         0.00       (0.02)         0.00
     Diluted                                       0.07           0.04            0.01           0.01           0.02         0.00       (0.02)         0.00
 EBIITDA(1)                                $     3,482     $     3,879     $    3,248     $     2,486     $    2,458   $    1,956   $     411    $    1,966
(1) See “Non-GAAP Measures” (Page 17).
(2) IFRS transition date was January 1, 2010; 2010 financial results have been adjusted to conform to IFRS.

HSE’s business in Canada has two seasonal components. Revenue for Oilfield health and safety services is historically highest in the
first and fourth quarters and lowest in the second quarter because this sector uses equipment that can only access well locations
during certain times of the year, and because of the effects of weather on field activity. Industrial revenue includes a mix of year-
round contracts and shutdowns. These shutdowns tend to be scheduled during the second and third quarters to avoid the possibility
of adverse effects from freezing weather. As a result, Industrial revenue tends to be highest in the second and third quarters.



Management Discussion and Analysis                                                               HSE Integrated Ltd. 2011 Annual Report                  9
Revenue by quarter for the last eight quarters is as follows:

                                                                                                 2011                                                 2010(1)
                                                     Q4             Q3              Q2             Q1             Q4           Q3            Q2          Q1
 Industrial                                $ 12,090        $ 12,915        $ 16,699       $ 12,557        $    12,040   $   11,384   $   11,926   $   11,924
 Oilfield                                       12,496         11,362           8,206          11,924          10,382        8,965        6,424        8,983
 Total revenue                             $ 24,586        $ 24,277        $ 24,905       $ 24,481        $    22,422   $   20,349   $   18,350   $   20,907
(1) IFRS transition date was January 1, 2010; 2010 financial results have been adjusted to conform to IFRS.


Fourth quarter 2011 results                                                          EBITDA margin of 11.0% in the fourth quarter of 2010. Improved
                                                                                     financial performance by BCHSE was a significant contributing
versus Fourth quarter 2010                                                           factor as BCHSE contributed $853 in EBITDA compared to $96 in
                                                                                     the fourth quarter of 2010.
In the fourth quarter of 2011, total revenue was $24,586, an
increase of 9.7% over revenue of $22,422 for the same period in
2010. In the fourth quarter of 2011, revenue from Oilfield health                    Fourth quarter 2011 results
and safety services increased by $2,114 (20.4%) over the same                        versus third quarter 2011
period in 2010. Industrial revenue increased slightly from
$12,040 to $12,090. BCHSE contributed $1,747 to revenue in the                       Revenue for the fourth quarter increased 1.3% to $24,586 from
fourth quarter of 2011 compared to $538 in 2010.                                     $24,277 in the previous quarter. Oilfield health and safety
                                                                                     revenue increased by $1,134 for the fourth quarter compared to
Direct operating expenses increased by $322 to $18,242 from                          third quarter and Industrial health and safety revenue decreased
$17,920 in the fourth quarter of 2010. Operating margin for the                      by $825 for the same period. As is typical, drilling activity
fourth quarter increased to $6,344 (25.8% of revenue) in 2011                        increased during the fourth quarter as remote locations were
from $4,502 (20.1 % of revenue) in 2010. Operating margin                            accessible, while shutdown activity declined.
improvements are due to higher revenue, improved utilization of
personnel and equipment, and a continued focus on managing                           Direct operating expenses increased by $495 from $17,747 in
costs.                                                                               third quarter to $18,242 in fourth quarter resulting in a slight
                                                                                     decrease in operating margin of $186 for fourth quarter.
SG&A increased to $2,862 (11.6% of revenue) in the fourth
quarter of 2011, up from $2,045 (9.1% of revenue) for the same                       SG&A increased from $2,651 in the third quarter to $2,862 in
period in 2010. The increased costs were due to increased bonus                      fourth quarter primarily due to increased legal and other
accruals as a result of improved financial results, increases in                     expenses related to the acquisition of certain of the Flint Safety
wages due to increased activity, and legal and other expenses                        Unit assets.
related to the acquisition of certain of the Flint Safety Unit                       EBITDA decreased $397 from $3,879 in the third quarter, to
assets.                                                                              $3,482 for the fourth quarter. The EBITDA margin was 14.2%
EBITDA increased to $3,482 from $2,458 in the fourth quarter of                      compared to 16.0% in the third quarter. The primary reason for
2010. The EBITDA margin was 14.2% for the quarter, up from an                        the change was increased vehicle costs, as well as costs incurred
                                                                                     related to the acquisition of cetain of the Flint Safety Unit assets.

related-Party transactions
transactions with key manaGement Personnel
     Key Management Personnel Compensation

                                                                                                                  December 31, 2011      December 31, 2010
      Short-term employee benefits                                                                                $             1,642    $               844
      Termination benefits                                                                                                       350                       –
      Share-based payments                                                                                                       100                      89
                                                                                                                  $             2,092    $               933

     Key management personnel are comprised of the Corporation’s executive officers and directors.



10            HSE Integrated Ltd. 2011 Annual Report                                                          Management Discussion and Analysis
    Key Management Personnel and Director Transactions
    Directors and executive officers of the Corporation control 17.3% (December 31, 2010: 13.0%; January 1, 2010: 15.7%) of the
    voting shares of the Corporation.
    Members of key management personnel, officers or directors, or their related parties, hold positions in other entities that result
    in them having control or significant influence over the financial or operating policies of these entities. A number of these enti-
    ties transacted with the Corporation in the reporting period. The aggregate value of transactions and outstanding balances relat-
    ing to key management personnel and entities over which they have control or significant influence were as follows:

                                                                                   Transaction value year
     Purchased good and services                                                     ended December 31                                        Balances as at
     Director/key
     management                                                                                                      Dec. 31,          Dec. 31,        Jan. 1,
     personnel                Transaction                         Note                 2011               2010         2011              2010           2010
     Director                 Office rent and property taxes        (i)        $        269       $        275   $             –   $           –   $        –
                              Supplies and sublicense fees (per
     Director                 agreement)                            (ii)       $        941       $        265   $           25    $         55    $        –
     Key Manager              Office rent and property taxes       (iii)       $        357       $        347   $             –   $           –   $        –
     Directors/Officers       Convertible debentures               (iv)        $         40       $        335   $           375   $         335   $        –
     Director                 Termination benefit                   (v)        $        345       $          –   $           287   $           –   $        –

    (i)   The Corporation paid rent and property taxes for one of its regional offices to a corporation, which is controlled by a
          member of the Board of Directors. The term of the lease is 15 years and expires on January 31, 2019.
    (ii) The Corporation purchased various safety supplies and performed maintenance on safety equipment under a sub-license
         agreement with a corporation which is controlled by a member of the Board of Directors.
    (iii) The Corporation paid rent and property taxes for one of its regional offices to a corporation controlled by a Senior Manager
          for a subsidiary in the United States. The term of the lease is five years and expires on December 31, 2015.
    (iv) The Corporation issued convertible debentures iwth a face value of $1,925 in December 2010 and $75 in January 2011. Of
         these amounts, $40 (2010: $335) were issued to directors, family of directors, and officers of HSE.
    (v) The Corporation recognized a liability for termination benefits of $345 on the transition between CEOs in August 2011. The
        benefit is payable monthly over a two-year term and expires August 31, 2013.

other related-Party transactions
                                                                  Transaction value year
                                                                    ended December 31                                          Balances outstanding as at
                                                                                                      December 31,       December 31,              January 1,
 Sale of goods and services                                       2011                  2010                 2011               2010                    2010
 Levitt Safety Limited                                     $         34    $                  2       $              4   $               2    $             –
 Atlantic Road Construction & Paving                       $         18    $                  –       $              6   $               –    $             –

All outstanding balances with these related parties are to be settled in cash within six months of the reporting date. None of the
balances are secured.




Management Discussion and Analysis                                                 HSE Integrated Ltd. 2011 Annual Report                              11
siGniFicant subsidiaries
                                                                                                                    Ownership interest

                                                 Country of incorporation                2011                2010      January 1, 2010
 HSE Integrated Inc. (“INC”)                               USA                           100%                100%                100%
 Boots & Coots HSE Services, LLC (“BCHSE”)                 USA                            90%                 90%                 90%
 CRS Technologies Inc. (“CRS”)                             USA                           100%                100%                100%


critical accountinG Policies                                         The recoverable amount is the higher of fair value less costs to
                                                                     sell (“FVLCS”) and value in use (“VIU”). FVLCS is the amount
and estimates                                                        obtainable from the sale of an asset or CGU in an arms-length
                                                                     transaction between knowledgeable, willing parties, less the
This MD&A summarizes HSE’s financial condition and results of        costs of disposal. The determination of VIU requires the estima-
operations based upon its Consolidated Financial Statements,         tion and discounting of cash flows, which involves key assump-
which were prepared in accordance with IFRS. The consolidated        tions that consider all information available on the respective
financial statements require Management to select significant        testing date. Management uses its judgment, considering past
accounting policies which are contained within the notes to          and actual performance as well as expected developments in the
statements. These significant accounting policies involve critical   respective markets and in the overall macro-economic environ-
accounting estimates due to complex judgments and require            ment and economic trends to model and discount future cash
that assumptions be made by Management. These estimates,             flows.
judgments and assumptions are based on the circumstances
that exist at the reporting date and may affect the reporting        ProPerty and equiPment and intanGible assets
amounts of earnings and expenses during the reporting periods
and the carrying amounts of assets, liabilities, accruals, provi-    Property and equipment and intangible assets are recorded at
sions, contingent liabilities, and other financial obligations, as   cost less accumulated depreciation and accumulated impair-
well as the determination of fair values.                            ment losses. The depreciation methods used and estimates of
                                                                     useful lives and residual values of assets are established by
allowance For doubtFul accounts receivable                           Management based on industry norms, historical experience
                                                                     and other information. If these estimates are incorrect, asset
The Corporation assesses any impairment of trade receivables         values, depreciation expense and gain / loss on disposal of
through a continuous process of reviewing its receivables both       assets could be affected.
on an individual customer basis and on an overall basis. The
review includes an assessment, performed at least monthly, of        lease classiFication
the aging status of customers, historical collection experience,
financial condition of customers, industry economic trends, and      The classification of a lease as operating or financing depends
other factors. Based on the review, allowances for specific          upon whether substantially all the risks and rewards of the asset
customers are determined. The process involves a high degree         are transferred to the Corporation. The Corporation has deter-
of judgment and can frequently involve significant dollar            mined that its facility leases are operating leases since the rent
amounts. Accordingly, the Corporation’s financial position,          paid to the landlords is increased to market rates at regular
results of operations, and cash flows can be affected by adjust-     intervals and the Corporation does not participate in the residual
ments to the allowance when actual losses differ from esti-          value of any of the buildings. The Corporation has determined
mates.                                                               that its light duty vehicles are finance leases since the lease
                                                                     payments cover effectively 100% of the value of the leased
imPairment oF assets                                                 asset.
At the end of each reporting period, the Corporation assesses        income taxes
whether there is an indication that an asset group may be
impaired. If any indication of impairment exists, HSE estimates      Tax interpretations, regulations and legislation in the various
the recoverable amount of the asset group. External triggering       jurisdictions in which the Corporation and its subsidiaries
events include, for example, changes in customer or industry         operate are subject to change. In addition, the Corporation’s tax
dynamics, commodity prices, drilling activity levels, and eco-       liabilities may be affected by complexities introduced as a result
nomic declines. Internal triggering events for impairment include    of business acquisitions. As such, income taxes are subject to
lower profitability or obsolescence. Goodwill and indefinite-lived   measurement uncertainty and the interpretations can impact
intangible assets are tested annually for impairment.                net earnings through the income tax expense arising from the
                                                                     change in current and deferred income tax assets or liabilities.
HSE’s impairment tests compare the carrying amount of the
asset or cash generating unit (“CGU”) to its recoverable amount.


12        HSE Integrated Ltd. 2011 Annual Report                                        Management Discussion and Analysis
Provision For onerous contracts                                         acquired. IFRS 1 allows cumulative translation gains or loss-
                                                                        es to be reset to zero at the transition date of January 1,
The provision for onerous lease contracts represents the present        2010. The Corporation has elected to reset all cumulative
value of the future lease payments that the Corporation is              translation losses to zero in the opening retained earnings
presently obligated to make under non-cancellable onerous               (deficit) at January 1, 2010.
operating lease contracts, less revenue expected to be earned
on the lease, including estimated future sub-lease revenue,
where applicable. The estimate may vary as a result of changes      Future accountinG Pronouncements
in the utilization of the leased premises and sub-lease arrange-
ments where applicable. The unexpired terms of the leases
                                                                    iFrs 9 – Financial instruments
range from two to eight years.                                      IFRS 9 (2010) supersedes IFRS 9 (2009) and is effective for annual
                                                                    periods beginning on or after January 1, 2015, with early
chanGe in accountinG Policies                                       adoption permitted. For annual periods beginning before
                                                                    January 1, 2015, either IFRS 9 (2009) or IFRS 9 (2010) may be
initial adoPtion oF iFrs                                            applied. The Corporation intends to adopt IFRS 9 (2010) in its
                                                                    consolidated financial statements for the annual period begin-
The consolidated financial statements for the year ended            ning on January 1, 2015. The extent of the impact of adoption of
December 31, 2011 are HSE’s first IFRS annual financial state-      IFRS 9 (2010) has not yet been determined.
ments and IFRS 1 – First-time Adoption of International Financial
Reporting Standards has been applied. In these consolidated         iFrs 10 – consolidated Financial statements
financial statements, previous Canadian Generally Accepted
Accounting Principles (“Canadian GAAP”) refers to the account-      As of January 1, 2013, the Corporation will be required to adopt
ing standards applied prior to the adoption of IFRS.                IFRS 10 – Consolidated Financial Statements. The IASB has stated
                                                                    that the objective of this standard is to develop a single consoli-
IFRS 1 – First-Time Adoption of International Financial Reporting   dation model applicable to all investees. Under this model, an
Standards sets forth guidance for the initial adoption of IFRS.     investor consolidates an investee when it has power, exposure to
Under IFRS 1 the standards are applied retrospectively at the       viability in returns, and a linkage between the two. The extent of
transition date with adjustments to assets and liabilities being    the impact of adoption of IFRS 10 has not yet been determined.
offset to Retained earnings (deficit) unless certain exemptions
are applied. The Corporation has applied the following exemp-       iFrs 13 – Fair Value measurement
tions to its opening consolidated IFRS statement of financial       As of January 1, 2013 the Corporation will be required to adopt
position dated January 1, 2010.                                     IFRS 13 – Fair Value Measurement. This standard provides a
    Business combination exemption                                  single source of guidance on how fair value is measured and will
                                                                    be applied when fair value is required under other IFRSs. IFRS 13
    IFRS 1 provides the option to apply IFRS 3 – Business Com-      provides a framework for determining fair value and clarifies
    binations retrospectively for all business combinations from    factors to be considered, but does not establish standards
    a particular pre-transition date elected by the Corporation     pertaining to how valuations should be performed. The extent of
    or prospectively from the transition date of January 1, 2010.   the impact of adoption of IFRS 13 has not yet been determined.
    The Corporation has elected not to retrospectively apply
    IFRS 3 to business combinations that occurred prior to Janu-
    ary 1, 2010 and such business combinations have not been
                                                                    Financial and other instruments
    restated.                                                       The Corporation’s financial instruments include cash and cash
                                                                    equivalents, accounts receivable, other long-term receivables,
    Share-based compensation exemption
                                                                    bank indebtedness, accounts payable and accrued liabilities, and
    IFRS 1 provides companies with an optional exemption not        loans and borrowing. The carrying value of these instruments
    to apply IFRS 2 – Share-Based Payments to equity-settled        approximates their fair value, either because of their short
    share-based payments granted after November 7, 2002 that        maturities or because the interest rates to which they are
    vested before the transition date of January 1, 2010. The       subject approximate market rates.
    Corporation has elected to take this exemption and has not
    restated its historical share-based payments that were          The Corporation is exposed to the following risks from its use of
    granted after November 7, 2002 and vested prior to January      financial instruments:
    1, 2010.                                                        •	 Credit risk
                                                                    •	 Liquidity risk
    Currency translation differences exemption
                                                                    •	 Market risk
    Retrospective application of IFRS would require the Cor-
                                                                    These risks, and the Corporation’s method of mitigating the
    poration to determine cumulative currency translation dif-
                                                                    risks, are described following.
    ferences in accordance with IAS 21 – The Effects of Changes
    in Foreign Exchange Rates from the date a subsidiary was


Management Discussion and Analysis                                        HSE Integrated Ltd. 2011 Annual Report                13
credit risk                                                            obligations. As a result, the Corporation is exposed to a loss of
                                                                       liquidity if its customers delay their payments beyond the levels
Credit risk is the risk of financial loss to the Corporation if a      that they have in the past. To mitigate this, the Corporation has
customer or counterparty to a financial instrument fails to meet       projected its operating cash flows under different scenarios with
its contractual obligations, and arises principally from the           respect to receivables aging to determine the effect on operat-
Corporation’s receivables from customers. The maximum credit           ing cash inflows. The Corporation monitors its receivables
exposure associated with trade accounts receivable is the              collections to ensure that if collections are delayed, there are
carrying value.                                                        sufficient operating funds available to meet its financial obliga-
The Corporation’s trade receivables are due from customers in a        tions. As well, the Corporation has access to undrawn operating
variety of industries including a significant proportion with          lines of credit of $10,000 to fund operations. These credit lines
customers operating in the energy and manufacturing industries.        are renewable annually and are margined to accounts receiv-
The ability of customers within the energy industry to pay the         able. HSE believes it has sufficient funding through these sources
Corporation is partially affected by fluctuations in the price they    to meet its obligations as they come due.
receive for various hydrocarbon products.
                                                                       market risk
The Corporation follows a credit policy under which the Corpora-       Market risk is the risk that changes in market prices of financial
tion reviews each new customer individually for credit worthi-         assets and liabilities, including foreign exchange rates, interest
ness before the Corporation’s standard payment and delivery            rates, and equity prices, will affect the Corporation’s financial
terms and conditions are offered. The Corporation’s review             position, results of operations, and cash flows.
includes external ratings, where available, and trade references.
Customers that fail to meet the Corporation’s credit worthiness        HSE is exposed to currency risk on U.S.-dollar denominated
criteria may transact with the Corporation only on a prepayment        financial assets and liabilities. The Corporation adjusts the
basis. On an ongoing basis, the Corporation also reviews the           reported amounts of foreign currency denominated financial
payment patterns of its existing customers and the customers’          assets and liabilities to their Canadian-dollar equivalent at each
continued credit worthiness.                                           balance sheet date. For amounts held directly by the Corpora-
                                                                       tion, any related foreign exchange gains and/or losses are
Trade receivables are recorded at the invoiced amount and do           recognized in the consolidated statement of earnings. For
not bear interest. Standard payment terms are net 30, however,         amounts held by the Corporation’s foreign operations, the
these may be varied by agreements with particular customers.           amount is included in other comprehensive earnings. At Decem-
As well, industry practices, particularly within the upstream oil      ber 31, 2011 the extent of this exposure was not material.
and gas industry, result in payment terms of up to 60 days.
                                                                       HSE is exposed to interest-rate risk on its prime-based revolving
The allowance for doubtful accounts is the Corporation’s best          operating facility and its non-revolving reducing loan facility.
estimate of the amount of probable credit losses in the Corpora-       Based on amounts outstanding at December 31, 2011 a 1%
tion’s existing trade receivables. The Corporation determines the      increase in the average prime interest rate for the year would
allowance by reviewing individual accounts past due for collect-       cost the Corporation $34 in additional interest expense.
ability, assessing historical write-off experience adjusted for
changes in both general and industry-specific economic condi-
tions, and overall account aging. The Corporation reviews its          business risks
allowance for doubtful accounts on an ongoing basis, but at least      The activities the Corporation undertakes involve a number of
monthly.                                                               risks and uncertainties, some of which are: economic and
                                                                       market events including disruptions in international credit
liquidity risk                                                         markets and reductions in macroeconomic activity; business
Liquidity risk is the risk that the Corporation will not be able to    cyclicality within the industries in which HSE’s customers
meet its financial obligations as they fall due. The Corporation       operate; competitive conditions including pricing pressures; risks
requires liquidity to meet financial obligations as they come due      of customer credit default; availability of financing at competi-
and to fund its operating and investing activities. The Corpora-       tive rates; changes in foreign exchange rates and interest rates;
tion’s contractual financial liabilities include interest payments,    and litigation and contingencies. Additional risks and uncertain-
trade and other payables, income taxes payable, a revolving oper-      ties that the Corporation may be unaware of, or that were
ating line of credit, a non-revolving term-debt facility, a convert-   determined to be immaterial, may also become important
ible debenture and finance leases for equipment and vehicles.          factors that affect the Corporation. Further details regarding spe-
                                                                       cific risks that may affect the Corporation are follow.
HSE manages its liquidity risk by ensuring, to the extent possible,
that it has access to funding sources at competitive rates to          business cyclicality
meet its liabilities when due, under both normal and distressed
conditions without unacceptable losses or risking damage to the        The demand for HSE’s Oilfield services is highly dependent upon
Corporation’s reputation. The Corporation generally uses               the level of expenditures made by oil and gas companies on
operating cash flow to provide liquidity to meet its financial         exploration, development and production activities. These
                                                                       expenditures are in turn affected by a number of factors:


14        HSE Integrated Ltd. 2011 Annual Report                                          Management Discussion and Analysis
•   The price received by HSE’s customers for crude oil and            and failures. These events can result in fires, vehicle accidents,
    natural gas directly impacts their cash flow available to          explosions and other similar incidents that can cause personal
    purchase the Corporation’s services. Fluctuations in crude oil     injury, loss of life, and damage to or destruction of property,
    and natural gas prices can produce periods of high and low         equipment and the environment.
    demand for the Corporation’s services. Alternatively, a
    number of factors that are beyond the control of HSE’s             availability oF qualiFied staFF and
    customers – including weather, geopolitical conditions, and        escalation oF labour costs
    the strength of the global economy – may reduce demand for
                                                                       The Corporation’s ability to provide reliable service is dependent
    their products, which in turn will reduce the price they
                                                                       upon attracting and retaining skilled employees. The demand for
    receive.
                                                                       workers with particular skills used by the Corporation is high and
•   Since crude oil and natural gas prices are normally                the supply remains limited. Due to the limited supply of quali-
    denominated in U.S. currency, fluctuations in the Canadian-        fied personnel, costs of attracting and retaining these individuals
    dollar exchange rate relative to the U.S. dollar can also affect   may increase, resulting in decreased margins.
    the cash flow available to the Corporation’s customers to
    purchase its services.                                             comPetitive conditions
•   Exploration, development and production activity levels            One of the Corporation’s competitors is its own customer base.
    within particular markets are influenced by factors including      There is a risk, typically under distressed economic conditions,
    royalties, regulatory and taxation changes, weather, and           that customers may elect to use their own personnel to perform
    access to pipeline capacity.                                       services that HSE currently provides. The Corporation attempts
                                                                       to mitigate this risk by providing staff with more training and
•   Changes in equity and debt-financing markets independent           safety service experience than the customer is able to provide
    of any individual company’s circumstances may reduce               on its own.
    access to capital that is used to fund exploration,
    development, and production activities.                            While no one competitor in Canada provides the full suite of
                                                                       services as does HSE, the Corporation has competitors in each
These fluctuations in activity can cause cyclical demand swings        market it serves. These competitors are typically privately
in the Corporation’s activity levels and operating results.            owned, regionally based companies that provide a specialized
                                                                       set of services. These competitors may provide pricing pressure
The demand for HSE’s Industrial services is exposed to business
                                                                       that may affect our margins and market position within particu-
cycles and contraction risks in the oil and gas industry and other
                                                                       lar lines of business. The Corporation attempts to mitigate this
industrial sectors such as forestry, pulp and paper, automotive,
                                                                       risk by providing an integrated suite of services that our com-
manufacturing, mineral extraction, and other segments of the
                                                                       petitors cannot provide, and by distinguishing ourselves through
economy that could experience reduced demand or significant
                                                                       higher levels of service and expertise.
fluctuations of the market value of their finished goods. As well,
a significant portion of the Corporation’s Industrial services are     Recently, a larger private-equity-financed U.S. safety services
provided to customers in the non-conventional upstream oil and         provider commenced operations in Canada. While this provider
gas industry, including oilsands extraction. These customers are       is currently restricting its activities to providing safety services
exposed to similar risks with respect to crude oil pricing as          within a small portion of the industries and geographic locations
customers for whom HSE provides Oilfield services.                     in which the Corporation provides services, there is a risk that
                                                                       this competitor may begin to market its services to a wider array
seasonality                                                            of customers and locations. Management is of the view that this
The Corporation’s business in Canada has two seasonal compo-           may provide an opportunity for additional business for the
nents. Revenue for Oilfield health and safety services is histori-     Corporation as customers may be more likely to outsource safety
cally highest in the first and fourth quarters and lowest in the       services work when there is more than one provider available.
second quarter because this sector uses equipment that can
only access well locations during certain times of the year and        customer credit
because of the effects of weather on field activity. Industrial        HSE generally invoices its customers in arrears for its services.
revenue includes a mix of year-round contracts and “shutdowns”         Because of this, the Corporation is subject to the risk that its
– scheduled major maintenance projects and repair activities on        customers may delay payment of its invoices through a variety of
client facilities. These shutdowns tend to be scheduled during         means, or fail to pay the invoice at all. Changes in economic
the second and third quarters to avoid the possibility of adverse      conditions, either in general or within a particular industry, may
effects from freezing weather. As a result, Industrial revenue         increase this risk.
tends to be highest in the second and third quarters.
                                                                       customer dePendence
oPerational risks
                                                                       The Corporation has ongoing contracts or master service
HSE’s operations are subject to hazards inherent in the indus-         agreements with a variety of customers. For certain customers
tries which we serve, such as equipment defects, malfunction           the volume of revenue generated approaches or exceeds 10% of


Management Discussion and Analysis                                           HSE Integrated Ltd. 2011 Annual Report                 15
the Corporation’s total revenue on a quarterly or annual basis.      availability oF FinancinG
While there is no indication that any of these customers are
likely to change safety service providers, if a contract were        Historically, the Corporation has funded the growth of its
cancelled and the Corporation were unable to replace the             operations and its acquisitions from bank debt, share issues, and
business with other existing or new customers, the Corporation’s     convertible debentures, in addition to cash generated from
revenue, operating results and cash flows would be adversely         operations. Continued access to bank debt at competitive rates
affected. HSE attempts to mitigate this risk by providing an         requires that the Corporation meet various financial and
integrated suite of services that are not available from a single    non-financial covenants. There is no certainty HSE will continue
competitor, by providing access to our services on a country-        to be able to obtain sufficient financing at competitive rates. The
wide basis, and by distinguishing ourselves through higher levels    Corporation’s ability to grow as planned may be limited if
of service and expertise.                                            sources of competitively priced financing are unavailable.

customer and Government saFety requirements                          income taxes
All companies are required to track and publish safety statistics.   The Corporation uses various estimates and judgments when
Certain customers require that their vendors maintain specific       preparing corporate tax returns. These returns are subject to
minimum standards with respect to safety in order to provide         audit and reassessment by various tax authorities. These
services as an accredited vendor. There is a risk that, if the       reassessments could have a material effect on reported amounts
Corporation’s safety statistics fall below an acceptable level, it   for income tax assets and liabilities as well as current tax
would not be allowed to provide services to these customers. If      expense.
this occurred, the Corporation’s revenue and profit levels would
be adversely affected.                                               ForeiGn exchanGe exPosure
                                                                     HSE’s consolidated financial statements are presented in
As well there is a risk that customer safety requirements and
                                                                     Canadian dollars, but include the results of its U.S. subsidiaries
government regulations or legislation may change either as part
                                                                     for which the functional currency is the U.S. dollar. Changes in
of an ongoing review process, or in reaction to specific events
                                                                     the U.S.-dollar exchange rate versus the Canadian-dollar rate
such as the Macondo blowout in the Gulf of Mexico. While
                                                                     may have material effects on net income and other comprehen-
changes in these requirements may provide opportunities to
                                                                     sive income reported by the Corporation’s U.S. subsidiaries.
provide health and safety personnel and equipment to the
Corporation’s customers in order to address new requirements,        litiGation and continGencies
these changes may also pose the following risks to the Corpora-
tion. First, there is a risk that additional expenses may need to    In the ordinary course of business activities, the Corporation
be incurred to refit equipment or provide additional training to     may be contingently liable for litigation and claims with custom-
staff. There is no guarantee that these costs could be passed on     ers, suppliers, former employees and fourth parties. Manage-
to customers and, as a result, the Corporation’s profits may         ment believes that adequate provisions have been recorded in
suffer if unanticipated changes are made. Second, there is a risk    the accounts where required. Although it may not be possible to
that additional regulations could make an activity or line of        accurately estimate the extent of potential costs and losses, if
business unprofitable for our customers. This could cause them       any, Management believes that the ultimate resolution of such
to exit the activity causing a reduction in the Corporation’s        contingencies would not have a material adverse effect on the
revenue as customer activity decreases.                              financial position of the Corporation.

The Corporation mitigates these risks by ensuring that its field
personnel are trained to levels that meet or exceed “best-prac-
                                                                     disclosure and internal controls
tices” levels and that its equipment meets any requirements          disclosure controls and Procedures
specified by the equipment manufacturer. The Corporation’s
industry technical specialists monitor industry sources to keep      An evaluation was performed under the supervision and with
the Corporation apprised of potential changes to regulations. As     participation of the Corporation’s Management, including the
well, the Corporation maintains a comprehensive internal safety      Chief Executive Officer (“CEO”) and Chief Financial Officer
program including regular senior management and Board of             (“CFO”), of the effectiveness of the design and operation of the
Directors review of safety results, the use of standardized          Corporation’s disclosure controls and procedures as defined in
“best-practices” procedures for all work performed, and specific     National Instrument 52-109. Based on that evaluation, the
procedures that require that all incidents be investigated to        Corporation’s Management, including the CEO and CFO, con-
determine root causes of the incident and to recommend what,         cluded that the Corporation’s disclosure controls and procedures
if any, changes to the Corporation’s procedures are necessary to     were designed to provide a reasonable level of assurance over
prevent recurrence.                                                  disclosure of material information, and are effective as at
                                                                     December 31, 2011.




16        HSE Integrated Ltd. 2011 Annual Report                                        Management Discussion and Analysis
manaGement’s rePort on internal                                        non-GaaP measures
control over Financial rePortinG
                                                                       Certain measures in this document do not have any standardized
The Corporation’s Management, including the CEO and CFO,               meaning as prescribed by IFRS and, therefore, are considered
have assessed and evaluated the design and effectiveness of the        non-GAAP measures.
Corporation’s internal control over financial reporting as defined
in National Instrument 52-109 as at December 31, 2011. In              This report makes reference to “operating margin”, a measure
making this assessment, the Corporation used the criteria              that is not recognized under IFRS. Management believes that, in
established by the Committee of Sponsoring Organizations               addition to net earnings, operating margin is a useful supple-
(“COSO”) in the “Internal Control – Integrated Framework”. The         mentary measure. Operating margin is defined as revenue less
Corporation’s assessment included documentation, evaluation,           all direct operating expenses incurred by field operations and
and testing of its internal controls over financial reporting. Based   support functions such as fleet management. This report also
on that evaluation, the Corporation’s Management, including            makes reference to EBITDA, a measure that is not recognized
the CEO and CFO, concluded that the Corporation’s internal             under IFRS. Management believes that, in addition to net
controls over financial reporting are effective and provide            earnings, EBITDA is a useful supplementary measure. EBITDA
reasonable assurance regarding the reliability of the Corpora-         provides investors with an indication of earnings before provi-
tion’s financial reporting and its preparation of financial state-     sions for interest and bank charges, taxes, depreciation, amorti-
ments for external purposes in accordance with IFRS.                   zation, foreign exchange gains or losses, gains or losses on the
                                                                       disposal of property and equipment, and the non-cash effect of
Internal control over financial reporting, no matter how well          share-based compensation expense, changes in provisions,
designed, has inherent limitations. Therefore, internal control        impairment and expiry of contingent consideration.
over financial reporting determined to be effective can provide
only reasonable assurance with respect to financial statement          Investors should be cautioned that Operating Margin and
preparation and may not prevent or detect all misstatements.           EBITDA should not be construed as an alternative to net earn-
                                                                       ings determined by IFRS as an indication of the Corporation’s
chanGes in internal controls over                                      performance. HSE’s method of calculating Operating Margin and
Financial rePortinG durinG 2011                                        EBITDA may differ from that of other companies’ and, accord-
                                                                       ingly, may not be comparable to measures used by other
There have been no significant changes in the Corporation’s            companies.
internal control over financial reporting during the year ended
December 31, 2011 that have materially affected, or are
reasonably likely to materially affect, its internal control over
financial reporting.

common shares and convertible
debentures outstandinG
At December 31, 2011, 38,713,207 common shares of HSE were
outstanding (March 27, 2012: 38,828,207; December 31, 2010:
37,575,675). At December 31, 2011, the Corporation had
options outstanding to issue 2,167,000 shares (December 31,
2010: 2,279,165) at a weighted average exercise price of $0.71
per share (December 31, 2010: $1.24). Of these options,
1,104,446 were exercisable (December 31, 2010: 1,154,479). At
March 27, 2012 there were 2,035,332 options outstanding at a
weighted average price of $0.62 per share. Of these options,
964,483 were exercisable.
At December 31, 2011 the Corporation had $2,000 convertible
debentures outstanding that were convertible to 4.0 million
shares based on the applicable conversion price. At March 27,
2012 the Corporation had $1,885 of convertible debentures
outstanding that were convertible to 3.8 million shares based on
the applicable conversion price.




Management Discussion and Analysis                                           HSE Integrated Ltd. 2011 Annual Report               17
ebitda and oPeratinG marGin calculation
 Years ended December 31                                                                                    2011                      2010(1)                     2009(1)
 Net earnings (loss)                                                                      $                6,010        $                   439   $               (6,634)
 Add (deduct)
     Depreciation and amortization                                                                         5,376                       6,132                       6,699
     Share-based compensation                                                                                   372                         185                      293
     Finance costs                                                                                              770                         754                      544
     Loss on disposal of property and equipment                                                                  33                         115                      311
     Income tax expense (recovery)                                                                         1,549                        (24)                      (2,009)
     Change in onerous contract provision                                                                 (1,015)                             –                        –
     Expiry of contingent consideration                                                                           –                    (810)                           –
     Impairment of property and equipment                                                                         –                           –                    1,641
 EBITDA                                                                                                   13,095                       6,791                         845
 Add
     Selling, general and administrative expenses                                                          9,951                       7,936                       8,226
 Operating margin                                                                         $               23,046        $             14,727      $                9,071

(1) HSE’s IFRS transition date was January 1, 2010; 2010 financial results have been adjusted to conform to IFRS; 2009 financial results have not been restated and are
    presented in previous Canadian GAAP.


quarterly ebitda calculation
                                                                                                  2011                                                            2010(1)
                                                     Q4             Q3              Q2              Q1                  Q4            Q3                Q2            Q1
 Net earnings (loss)                       $     3,128     $     1,834     $       541        $    507      $          923      $    175     $        (783)   $      124
 Add (deduct)
    Depreciation and amortization                1,355           1,298           1,382            1,341           1,465             1,467         1,508            1,692
    Share-based compensation                        182              81             38              71                  38            26                64            57
    Finance costs                                   199            157             197             217                 210           137               212           195
    (Gain) loss on disposal of
    property and equipment                           32               –           (35)              36                 313           247              (132)        (313)
    Income tax expense (recovery)                 (399)            509           1,125             314                 319           (96)             (458)          211
    Change in onerous contract
    provision                                   (1,015)               –               –              –                      –          –                 –             –
    Expiry of contingent
    consideration liability                            –              –               –              –                (810)            –                 –             –
 EBITDA                                    $     3,482     $     3,879     $     3,248        $   2,486     $     2,458         $   1,956    $         411    $    1,966
 Add
    Selling general and
    administrative expenses                      2,862           2,651           2,391            2,047           2,045             2,027         1,905            1,959
 Operating Margin                          $     6,344     $     6,530     $     5,639        $   4,533     $     4,503         $   3,983    $    2,316       $    3,925

(1) HSE’s IFRS transition date was January 1, 2010; 2010 financial results have been adjusted to conform to IFRS.




18          HSE Integrated Ltd. 2011 Annual Report                                                              Management Discussion and Analysis
Forward-lookinG statements                                            demand for the Corporation’s services by customers in various
                                                                      industries and geographic locations; pricing levels for the
Certain statements in this MD&A constitute forward-looking            Corporation’s services; commodity prices; foreign currency
information and statements (collectively “forward-looking             exchange rates; interest rates; access to financing; the Corpora-
statements”) within the meaning of applicable securities laws.        tion’s future operating results and financial condition; and
These forward-looking statements concern, among other things,         competition within particular markets or for particular services.
the Corporation’s prospects; expected revenue; expenses;
                                                                      Forward-looking statements involve significant risks and uncer-
profits; financial position; strategic direction; and growth
                                                                      tainties and should not be read as a guarantee of future perfor-
initiatives, all of which involve known and unknown risks,
                                                                      mance or results, and will not necessarily be an accurate
uncertainties and other factors that may cause actual results,
                                                                      indication of whether or not such results will be achieved. A
performance or achievements of the Corporation to be materi-
                                                                      number of factors could cause actual results to differ materially
ally different from any future results, performance or achieve-
                                                                      from the results discussed in the forward-looking statements
ments expressed or implied by such forward-looking statements.
                                                                      including, but not limited to, the factors discussed above and
When used in this MD&A, such forward-looking statements use
                                                                      other risk factors discussed herein and listed from time to time
such words as expect; anticipate; estimate; believe; may; will;
                                                                      in the Corporation’s reports and public disclosure documents
would; could; might; intend; plan; continue; ongoing; project;
                                                                      including its annual report, annual information form and other
objective; should; and other similar terms and phrases. These
                                                                      filings with securities commissions in Canada as reported under
forward-looking statements reflect the Corporation’s current
                                                                      the Corporation’s profile at www.sedar.com.
expectations regarding future events and operating performance
based on assumptions and analyses made by the Corporation             The Corporation cautions that the foregoing list of assumptions,
based on its experience and an assessment of current condi-           risks and uncertainties is not exhaustive. The forward-looking
tions, known trends, expected future developments and other           statements contained in this MD&A speak only as of the date of
factors that Management believe to be appropriate under the           this MD&A, and the Corporation assumes no obligation to
circumstances.                                                        publicly update or revise them to reflect new events or circum-
                                                                      stances, except as may be required pursuant to applicable laws.
These forward-looking statements include among others:
•	 Expectations as to the effects of increases or decreases in        additional inFormation
   drilling activity on the use of the Corporation’s services
                                                                      Additional information relating to HSE is available under the
•	 Effects of the type of contracts entered into by BCHSE on its      Corporation’s profile on the SEDAR website at www.sedar.com
   prospects for future work                                          and www.hseintegrated.com.
•	 Expectations as to the outlook for the Corporation
•	 Expectations as to general economic activity levels and their
   effect on the Corporation’s prospects
•	 Expectations as to prices for commodities, particularly oil
   and natural gas, and the effect of changes in those prices on
   activity levels for the Corporation
•	 Expectations as to activity levels in the Corporation’s existing
   markets
•	 Expectations as to the number and value of shutdown
   projects to be undertaken by the Corporation in 2012
•	 Expectations as to availability and cost for employees
•	 Expectations as to the effect of horizontal drilling technology
   on the Corporation’s Oilfield activity levels
•	 Expectations about drilling activity in the WCSB in 2012
•	 Expectations with respect to penetration into U.S. Oilfield
   and Industrial markets
The forward-looking statements contained in this MD&A reflect
several material factors, expectations and assumptions includ-
ing, without limitation: economic conditions within Canada and
the United States, both in general and within specific industries;


Management Discussion and Analysis                                          HSE Integrated Ltd. 2011 Annual Report               19
ManageMent’S RepoRt
To the Shareholders of HSE Integrated Ltd.:

The accompanying consolidated financial statements of HSE Integrated Ltd. and all of the information in this
annual report are the responsibility of Management and have been approved by the HSE Board of Directors.

Management has prepared the consolidated financial statements in accordance with International Financial
Reporting Standards (IFRS) and where alternative accounting methods exist, Management has chosen those that
it deems most appropriate.

Financial statements are not precise since they include amounts based on estimates and judgments. Such
amounts have been determined on a reasonable basis to ensure the financial statements are presented fairly in all
material respects. Management has prepared the financial information in this annual report and has ensured it is
consistent with the consolidated financial statements.

The Corporation maintains internal accounting and administrative controls designed to provide reasonable
assurance that the financial information is relevant, reliable, and accurate and that the Corporation’s assets are
appropriately accounted for and adequately safeguarded.

The HSE Board of Directors is responsible for ensuring Management fulfills its responsibilities for financial
reporting and for reviewing and approving the financial statements. This is carried out principally through the
Audit Committee. HSE’s auditors have full access to the Audit Committee.




Tom Hickey                                                Lori McLeod-Hill, CA
Chief Executive Officer                                   Chief Financial Officer
March 27, 201




20      HSE Integrated Ltd. 2011 Annual Report
                                         KPMG LLP
                                         Chartered Accountants                                                  Telephone (403) 691-8000
                                         2700 205 - 5th Avenue SW                                               Telefax   (403) 691-8008
                                         Calgary AB T2P 4B9                                                     Internet   www.kpmg.ca
                                        KPMG LLP
                                        Chartered Accountants                                                   Telephone (403) 691-8000
                                        2700 205 - 5th Avenue SW                                                Telefax   (403) 691-8008
                                        Calgary AB T2P 4B9                                                      Internet   www.kpmg.ca
                                       INDEPENDENT AUDITORS’ REPORT
                                         INDEPENDENT AUDITORS’ REPORT
                                INDEPENDENT AUDITORS’ REPORT
 To the Shareholders HSE Integrated Ltd.
 To the Shareholders ofof HSE Integrated Ltd.
 We have audited the accompanying consolidated financial statements of HSE Integrated Ltd., which
 We have audited the accompanying consolidated financial statements of HSE Integrated Ltd., which comprise the
 consolidated statements HSE Integratedof as at December 31, 2011, December 31, 2010 December 1, 2010
 comprise the consolidated statements Ltd.
To the Shareholders of of financial positionfinancial position as at December 31, 2011, and January31,2010, the
 consolidated statements of earnings and comprehensive income, changes in equity and cash flows for the years ended
 and January 1, 2010, the consolidated statements of earnings and comprehensive income, changes in
 December 31, 2011 and for the years ended and notes, comprising and December Integratedand notes,
                                                                                             Ltd., which
We have audited the accompanying consolidated financial statements of HSEsignificant accounting policies and
 equity and cash flows December 31, 2010, December 31, 2011 a summary of 31, 2010,
comprise the consolidated statements of financial position as at December 31, 2011, December 31, 2010
 other explanatory information.
 comprising a summary of significant accounting policies and other explanatory information.
and January 1, 2010, the consolidated statements of earnings and comprehensive income, changes in
 Management’s responsibility for the consolidated financial statements
 Management’s responsibility for ended December 31, 2011 and December 31, 2010, and notes,
equity and cash flows for the years the consolidated financial statements
 Management is responsible significant accountingfair presentation of these consolidated financial statements in
                                   preparation and policies and other explanatory information.
comprising a summary of for thethe preparation and fair presentation of these consolidated financial
 Management is responsible for
 accordance with International Financial Reporting Standards, and for such internal control as management determines
 is necessary in accordance with International Financial Reporting Standards, free from material misstatement,
 statements to enable the preparation of consolidated financial statements
Management’s responsibility for the consolidatedfinancial statements that areand for such internal control
 as management determines
 whether due to fraud or error. is necessary to enable the preparation of consolidated financial statements that
Management is responsible for the preparation and fair presentation of these consolidated financial
 are free from material misstatement, whether due to fraud or error.
 Auditors’ in accordance
statementsresponsibility with International Financial Reporting Standards, and for such internal control
 Auditors’ responsibility
as management determines is necessary to enable the preparation of consolidated financial statements that
 Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We
 conducted our auditsis misstatement, whether due to consolidated financial statements based on our audits.
 Our responsibility in accordance with Canadian generally or error.
are free from materialto express an opinion on these fraudaccepted auditing standards. Those standards require that
 we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the
 We conducted our audits
Auditors’ responsibility in accordance with Canadian generally accepted auditing standards. Those
 consolidated financial statements are free from material misstatement.
 standards require that we comply with ethical requirements and plan and perform the audit to obtain
 An responsibility is toabout whether the consolidated financial statements statements based on our audits.
                           express an opinion on these consolidated financial
Our audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
 reasonable assurance                                                              are free from material
We conducted our audits in accordance with Canadian generally accepted auditing standards. Those of the
 consolidated financial statements. The procedures selected depend on our judgment, including the assessment
 misstatement.
 risks of material misstatement of the consolidated financial statements, whether due to the audit to In making those
standards require that we comply with ethical requirements and plan and performfraud or error.obtain
 risk audit assurance about whether the consolidated the entity’s preparation amounts and disclosures
 An assessments, we consider internal control relevant audit evidence about are free from material
reasonableinvolves performing procedures to obtain tofinancial statements theand fair presentation of the in
 the consolidated financial statements. to design audit selected that are appropriate in the including the but
 consolidated financial statements in orderThe proceduresproceduresdepend on our judgment, circumstances,of 2 not
misstatement.                                                                                               Page 2
 for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes
 assessment of the risks of material misstatement of the consolidated financial statements, whether due to
 evaluating the appropriateness procedures policies audit evidence about the of accounting estimates made
An audit involves performingof accountingto obtainused and the reasonablenessamounts and disclosures in by
 fraud or error.             those risk assessments, we                        control relevant to the
 management, asIn making statements. The proceduresconsider internal on financial statements. entity’s
the consolidatedwell as evaluating the overall presentation of the consolidated our judgment, including the
                   financial                               selected depend
 preparation and fair presentation of the consolidated financial statements in order to design audit
 We believe of the audit evidence we have obtained in our audits is sufficient and statements, whether a basis
assessment that therisks of material misstatement of the consolidated financial appropriate to provide due to for
 procedures that                    in                              for the
Opinion error. In are appropriateriskthe circumstances, but not internalpurpose of expressing an opinion on
fraud or opinion. making those
 our audit                              assessments, we consider              control relevant to the entity’s
 the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of
In our opinion, the consolidated financial statements present fairly, in all material respects, the
preparation and fair presentation of the consolidated financial statements in order to design audit
 Opinion
 accounting policies used and the reasonableness of accounting estimates made by management, as well as
procedures that are appropriate in the Integrated Ltd. as at December 31, 2011, December 31, 2010 and
consolidated financial position of HSEcircumstances, but not for the purpose of expressing an opinion on
 evaluating the overall presentation of the consolidated financial statements.
the our 1, 2010, andthe entity’s internal control. An audit also in all material respects, flows for the years
 In
Januaryopinion, the consolidated financial statements present fairly,includes evaluating thethe consolidated financial
     effectiveness of its consolidated financial performance and its consolidated cash appropriateness of
 position of HSE Integrated Ltd. as at December 31, 2011, December 31, 2010 and January 1, 2010, and its
accounting policies 2011 and Decemberconsolidated accordance withyears ended management, to provide
 We believe financial performance and its 31, 2010 accounting estimates made and appropriate as well
                                                                              International Financial Reporting
ended December 31,used and the reasonableness of incashour auditsthe sufficientbyDecember 31, 2011 and as
 consolidated that the audit evidence we have obtained in flows for is
                         presentation
evaluating the overall accordance of the consolidated financial statements.
Standards. 31, 2010 inopinion. with International Financial Reporting Standards.
 a basis for
 December our audit
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide
a basis for our audit opinion.
 Chartered Accountants
 Calgary, Accountants
CharteredCanada
Calgary, Canada
 March 27, 2012
March 27, 2012
                           KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG
                           network of independent member firms affiliated with KPMG International Cooperative
                           (“KPMG International”), a Swiss entity.
                           KPMG Canada provides services to KPMG LLP.


                          KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG
                          network of independent member firms affiliated with KPMG International Cooperative
                          (“KPMG International”), a Swiss entity.


                                                                                                                                           21
                          KPMG Canada provides services to KPMG LLP.

                                                                                             HSE Integrated Ltd. 2011 Annual Report
conSolidated StateMent of financial poSition
                                                                                    December 31,         December 31,       January 1,
(stated in thousands of Canadian dollars)                           Note                   2011                 2010             2010
ASSETS
     Cash and cash equivalents                                      6, 13      $           2,950     $          1,479   $         460
     Trade receivables                                              7, 13                 22,326               18,099          16,156
     Inventory                                                        13                     225                 171              199
     Prepaid expenses and other receivables                         8, 13                  1,380                1,494           1,414
     Income taxes recoverable                                         14                     574                 705              398
Total current assets                                                                      27,455               21,948          18,627
     Property and equipment                                         9, 13                 27,925               25,104          29,173
     Intangible assets                                             5, 10, 13               1,924                2,132           2,544
     Goodwill                                                       5, 10                    380                   –                –
     Other receivables                                                8                      220                 129              207
     Deferred tax assets                                              14                     209                   –                –
Total non-current assets                                                                  30,658               27,365          31,924
TOTAL ASSETS                                                                   $          58,113     $         49,313   $      50,551
LIABILITIES
     Trade and other payables                                         11       $           6,858     $          5,837   $       4,582
     Provisions                                                       12                     263                 212              265
     Loans and borrowings                                             13                   3,372                3,460           8,055
     Income taxes payable                                             14                     895                 423               72
Total current liabilities                                                                 11,388                9,932          12,974
     Provisions                                                       12                     811                1,801           2,823
     Loans and borrowings                                             13                   6,208                5,578           3,056
     Deferred tax liabilities                                         14                   2,461                1,706           2,176
Total non-current liabilities                                                              9,480                9,085           8,055
TOTAL LIABILITIES                                                                         20,868               19,017          21,029
EQUITY
     Share capital                                                    15                  60,654               60,040          60,040
     Convertible debentures – equity component                                               229                 221                –
     Contributed surplus                                                                   5,192                4,969           4,763
     Accumulated other comprehensive loss                                                     (1)                (83)               –
     Deficit                                                                             (28,993)            (34,851)         (35,281)
Total equity attributable to equity holders of the Corporation                            37,081               30,296          29,522
Non-controlling interest                                              17                     164                   –                –
TOTAL EQUITY                                                                              37,245               30,296          29,522


TOTAL LIABILITIES AND EQUITY                                                   $          58,113     $         49,313   $      50,551
Contingent liabilities (note 26)
Subsequent event (note 28)
See accompanying notes to the consolidated financial statements.
On behalf of the board:



David Yager, Director                                                          Martin Hall, Director

22         HSE Integrated Ltd. 2011 Annual Report                                                   Consolidated Financial Statements
conSolidated StateMent of eaRningS
 Years ended December 31
 (stated in thousands of Canadian dollars except per share amounts)          Note              2011             2010


 REVENUE                                                                            $        98,249    $       82,028


 Direct operating expenses                                                    18             75,203            67,301
 Selling, general and administrative                                          18              9,951             7,936
                                                                                             13,095             6,791


 Depreciation of property and equipment                                       9               4,884             5,720
 Amortization of intangibles                                                  10                492              412
 Share-based compensation                                                     16                372              185
 Finance costs                                                                19                770              754
 Loss on disposal of property and equipment                                                      33              115
 Expiry of contingent consideration                                           12                  –             (810)
 Reduction in onerous contract provision                                      12             (1,015)               –


 EARNINGS BEFORE INCOME TAX                                                                   7,559              415


 Income taxes:                                                                14
     Current provision                                                                        1,097              423
     Deferred tax expense (recovery)                                                            452             (447)
                                                                                              1,549              (24)


 NET EARNINGS                                                                       $         6,010    $         439


 Earnings attributable to:
     Owners of the Corporation                                                                5,858              430
     Non-controlling interest                                                 17                152                9
 NET EARNINGS FOR THE PERIOD                                                                  6,010              439


 NET EARNINGS PER SHARE                                                       20
     Basic                                                                          $          0.15    $         0.01
     Diluted                                                                        $          0.14    $         0.01
 Weighted average SHARES OUTSTANDING (in thousands)
     Basic                                                                                   38,639            37,576
     Diluted                                                                                 42,777            37,576
See accompanying notes to the consolidated financial statements.




Consolidated Financial Statements                                     HSE Integrated Ltd. 2011 Annual Report   23
conSolidated StateMent of
coMpRehenSive incoMe
 Years ended December 31
 (stated in thousands of Canadian dollars)                         Note              2011             2010


 NET EARNINGS                                                             $          6,010   $         439


 Other comprehensive income
     Foreign currency translation adjustment                                           94              (92)


 COMPREHENSIVE INCOME                                                                6,104             347


 Comprehensive income attributable to:
     Owners of the Corporation                                                       5,940             347
     Non-controlling interest                                       17                164                –
 COMPREHENSIVE INCOME FOR THE PERIOD                                      $          6,104   $         347
See accompanying notes to the consolidated financial statements.




24         HSE Integrated Ltd. 2011 Annual Report                         Consolidated Financial Statements
conSolidated StateMent of changeS in equity
                                                                                                               Total
                                                                                                              equity
                                                                                        Accumulated     attributable
                                             Convertible                                       other       to equity
                                             debentures                                comprehensive         holders         Non-
(stated in thousands                  Share     – equity Contributed                         income           of the   controlling      Total
of Canadian dollars)                 capital component       surplus           Deficit         (loss)   Corporation       interest     equity
 BALANCE AT
 JANUARY 1, 2011                 $   60,040    $     221    $      4,969   $ (34,851)   $       (83)    $    30,296    $        – $   30,296
 Net earnings for the year                                                     5,858                          5,858           152      6,010
 Other comprehensive
 income                                                                                           82             82            12        94
 Total comprehensive
 income for the year                                                           5,858              82          5,940           164      6,104
 Transactions with owners
     Issue of common
     shares on business
     combination                        614                                                                     614                     614
     Stock compensation
     expense                                                        223                                         223                     223
     Convertible
     debentures issued –
     equity component                                  8                                                          8                       8
 BALANCE AT
 DECEMBER 31, 2011               $   60,654    $     229    $      5,192   $ (28,993)   $         (1)   $    37,081    $      164 $   37,245
 BALANCE AT
 JANUARY 1, 2010                 $   60,040    $       –    $      4,763   $ (35,281)   $          –    $    29,522    $        – $   29,522
 Net earnings for the year                                                       430                            430             9       439
 Other comprehensive loss                                                                       (83)            (83)           (9)      (92)
 Total comprehensive
 income for the year                                                             430            (83)            347             –       347
 Transactions with owners
     Stock compensation
     expense                                                        206                                         206                     206
     Convertible
     debentures issued –
     equity component                                221                                                        221                     221
 BALANCE AT
 DECEMBER 31, 2010               $   60,040    $     221    $      4,969   $ (34,851)   $       (83)    $    30,296    $        – $   30,296
See accompanying notes to the consolidated financial statements.




Consolidated Financial Statements                                               HSE Integrated Ltd. 2011 Annual Report                25
conSolidated StateMent of caSh flowS
 Years ended December 31
 (stated in thousands of Canadian dollars)                         Note               2011            2010
 CASH FLOWS FROM OPERATING ACTIVITIES
     Net earnings for the year                                             $         6,010    $        439
     Adjustments for:
          Depreciation and amortization                                              5,376            6,132
          Finance costs                                             19                 770             754
          Share-based compensation                                  16                 372             185
          Change in provisions                                      12               (939)            (215)
          Income tax expense (recovery)                             14               1,549             (24)
          Loss on disposal of property and equipment                                    33             115
          Expiry of contingent consideration                       12                    –            (810)
                                                                                    13,171            6,576
          Change in non-cash working capital                       23               (3,294)           (694)
     Cash generated from operating activities                                        9,877            5,882
     Interest paid                                                                   (599)            (616)
     Income tax paid                                                                 (526)            (370)
 NET CASH FROM OPERATING ACTIVITIES                                                  8,752            4,896
 CASH FLOWS FROM INVESTING ACTIVITIES
     Purchase of property and equipment                             9               (3,848)         (2,310)
     Purchase of intangibles                                        10                 (34)              –
     Net cash acquired on business acquisition                      5                    1               –
     Proceeds from sale of property and equipment                                      519             663
 NET CASH USED IN INVESTING ACTIVITIES                                              (3,362)         (1,647)
 CASH FLOWS FROM FINANCING ACTIVITIES
     Issue of loans and borrowings                                                      75            6,925
     Repayment of loans and borrowings                                              (1,333)         (5,986)
     Payment of finance lease liabilities                                           (2,611)         (2,879)
     Payment of transaction costs related to issue of debt                             (55)           (277)
 NET CASH USED IN FINANCING ACTIVITIES                                              (3,924)         (2,217)
 NET INCREASE IN CASH AND CASH EQUIVALENTS                                           1,466            1,032
 Cash and cash equivalents at January 1                                              1,479             460
 Effect of exchange rate fluctuations on cash held                                       5             (13)
 CASH AND CASH EQUIVALENTS AT DECEMBER 31                                            2,950            1,479
 Non-cash investing activities – property and equipment
 acquired by means of a finance lease                                     $          4,274    $        228
See accompanying notes to the consolidated financial statements.




26         HSE Integrated Ltd. 2011 Annual Report                         Consolidated Financial Statements
noteS to financial StateMentS
index to Financial statment notes                                            note 1 – rePortinG entity
NOTE 1 –        Reporting Entity ................................... 27      HSE Integrated Ltd. (“HSE” or the “Corporation”) is incorporated
                                                                             under the laws of the province of Alberta. The address of the
NOTE 2 –        Basis of Preparation ............................ 27         Corporation’s head office is 1000, 630 – 6 Avenue S.W., Calgary,
                                                                             Alberta, Canada, T2P 0S8. The consolidated financial statements
NOTE 3 –        Significant Accounting Policies ............ 29
                                                                             of the Corporation as at and for the years ended December 31,
NOTE 4 –        Determination of Fair Values ............... 35              2011 and 2010 include the Corporation and its subsidiaries.

NOTE 5 –        Acquisition ........................................... 36   The Corporation provides health and safety services in Canada
                                                                             and the United States to a range of customers in the energy,
NOTE 6 –        Cash and Cash Equivalents ................ 36                manufacturing, construction and other industries. Services
                                                                             include: safety supervision and rescue personnel, rental of
NOTE 7 –        Trade Receivables ............................... 37         breathing apparatus and associated equipment for personnel
NOTE 8 –        Prepaid Expenses and Other                                   operating in high-hazard environments, fixed and mobile
                Receivables ......................................... 37     firefighting and fire protection services and equipment, worker
                                                                             shower (decontamination) services, onsite medical services,
NOTE 9 –        Property and Equipment ...................... 38             worker safety training, hazardous gas detection, wellsite
                                                                             blowout services, industrial hygiene services, and safety
NOTE 10 – Intangible Assets and Goodwill............ 39                      consulting and supervision.
NOTE 11 – Trade and Other Payables .................. 40
NOTE 12 – Provisions ............................................ 40
                                                                             note 2 – basis oF PreParation
                                                                             A) Statement of compliance
NOTE 13 – Loans and Borrowings ......................... 41
                                                                             The consolidated financial statements have been prepared in
NOTE 14 – Income Taxes ...................................... 43             accordance with International Financial Reporting Standards
                                                                             (“IFRS”). These consolidated financial statements are HSE’s first
NOTE 15 – Capital ................................................. 46       IFRS annual financial statements and IFRS 1 – First-time Adoption
NOTE 16 – Share-Based Compensation ............... 46                        of International Financial Reporting Standards has been applied.
                                                                             In these consolidated financial statements, previous Canadian
NOTE 17 – Non-Controlling Interest....................... 47                 Generally Accepted Accounting Principles (“Canadian GAAP”)
                                                                             refers to the accounting standards applied prior to the adoption
NOTE 18 – Expenses by Nature ............................ 48                 of IFRS.
NOTE 19 – Finance Costs...................................... 48             An explanation of how the transition to IFRS has affected the
                                                                             previously reported financial position, net earnings and cash
NOTE 20 – Earnings Per Share ............................. 49                flows in the comparative periods of these consolidated financial
NOTE 21 – Financial Instruments .......................... 49                statements is provided in note 29. This note contains
                                                                             reconciliations of equity and total comprehensive income for
NOTE 22 – Operating Segments............................ 53                  comparative periods reported under Canadian GAAP to those
                                                                             reported for those periods under IFRS.
NOTE 23 – Supplementary Cash
          Flow Information .................................. 54             These consolidated financial statements were authorized for
                                                                             issue by the Corporation’s board of directors on March 27, 2012.
NOTE 24 – Operating Leases ................................ 55
                                                                             B) Basis of measurement
NOTE 25 – Capital Commitments .......................... 55
                                                                             The consolidated financial statements have been prepared on
NOTE 26 – Contingent Liabilities ........................... 55              the historical cost basis except for liabilities for cash-settled
                                                                             share-based payment arrangements, which are measured at fair
NOTE 27 – Related Parties .................................... 55            value.
NOTE 28 – Subsequent Events ............................. 57                 C) Functional and presentation currency
NOTE 29 – Explanation of Transition                                          These consolidated financial statements are presented in
          to IFRS ................................................ 57        Canadian dollars, which is the functional currency of the
                                                                             Corporation and the Corporation’s Canadian subsidiaries. The


Notes to Financial Statements                                                      HSE Integrated Ltd. 2011 Annual Report               27
U.S. dollar is the functional currency of the Corporation’s United    estimates the recoverable amount of the asset group.
States subsidiaries. All financial information presented in           External triggering events include, for example, changes in
Canadian dollars has been rounded to the nearest thousand,            customer or industry dynamics, commodity prices, drilling
except for per share amounts.                                         levels, and economic declines. Internal triggering events for
                                                                      impairment include lower profitability or obsolescence.
D) Use of accounting estimates and judgments                          Goodwill and indefinite-lived intangible assets are tested
The preparation of consolidated financial statements in               annually for impairment.
conformity with IFRS requires Management to make judgments,
                                                                      HSE’s impairment tests compare the carrying amount of the
estimates and assumptions that affect the application of
                                                                      asset or cash generating unit (“CGU”) to its recoverable
accounting policies and the reported amounts of assets,
                                                                      amount. The recoverable amount is the higher of fair value
liabilities, income, and expenses. Actual results may differ from
                                                                      less costs to sell (“FVLCS”) and value in use (“VIU”). FVLCS is
these estimates.
                                                                      the amount obtainable from the sale of an asset or CGU in
Estimates and underlying assumptions are reviewed on an               an arms-length transaction between knowledgeable, willing
ongoing basis. Revisions to accounting estimates are recognized       parties, less the costs of disposal. The determination of VIU
in the period in which the estimates are revised and in any           requires the estimation and discounting of cash flows, which
future periods affected.                                              involves key assumptions that consider all information
                                                                      available on the respective testing date. Management uses
The key judgments and estimates made in applying accounting
                                                                      its judgment, considering past and actual performance as
policies that have the most significant effect on the amounts
                                                                      well as expected developments in the respective markets
recognized in the consolidated financial statements are as
                                                                      and in the overall macro-economic environment and
follows:
                                                                      economic trends to model and discount future cash flows.
    Lease classification                                              In addition, Management is required to apply judgment
                                                                      when determining which assets are grouped into a
    The classification of a lease as operating or financing
                                                                      particular CGU. This grouping can affect the results of an
    depends upon whether substantially all risks and rewards of
                                                                      impairment test.
    the asset are transferred. This determination involves
    judgment as to whether the Corporation consumes a large           Allowance for doubtful accounts
    portion of the useful life of the leased asset, if the net
                                                                      The Corporation assesses its accounts receivable through a
    present value of the lease payments forms a substantial
                                                                      continuous process of reviewing its receivables both on an
    portion of the fair value of the lease and asset, and other
                                                                      individual customer basis and on an overall basis. The
    pertinent factors. The Corporation determined that its
                                                                      review includes assessment of current aging status of
    facility leases are operating leases since the rent paid to the
                                                                      receivables, historical collection experience, financial
    landlords is increased to market rates at regular intervals
                                                                      condition of customers, industry economic trends and other
    and the Corporation does not participate in the residual
                                                                      factors. Based on the review, allowances for specific
    value of any of the buildings. The Corporation determined
                                                                      customers are determined. The process involves a high
    that its light duty vehicles are finance leases since
                                                                      degree of judgment and can frequently involve significant
    ownership of the assets transfers to the Corporation at the
                                                                      dollar amounts. Accordingly, the Corporation’s financial
    end of the lease term.
                                                                      position and results of operations can be affected by
    Estimated useful lives of assets                                  adjustments to the allowance when actual write-offs differ
                                                                      from estimates.
    The useful lives of the depreciable assets are based on
    historical experience and judgment of Management. This            Provision for onerous contracts
    judgment includes an assessment of expected utilization,
                                                                      An onerous contract is defined as a contract in which the
    job mix assumptions, and preventative-maintenance
                                                                      unavoidable costs of meeting the obligations of the contract
    programs. Although Management believes that the
                                                                      exceed the economic benefits expected to be received
    estimated useful lives and residual values are reasonable,
                                                                      under it. The provision for onerous lease contracts
    there can be no certainty that the reduction in depreciable
                                                                      represents the present value of the future lease payments
    asset values over time matches depreciation expense using
                                                                      that the Corporation is presently obligated to make under
    estimated useful lives. If depreciation estimates are not
                                                                      non-cancellable onerous operating lease contracts, less
    correct, the Corporation may record a disproportionate
                                                                      revenue expected to be earned on the lease, including
    amount of gains or losses on disposition of these assets.
                                                                      estimated future sublease revenue, where applicable. The
    Impairment of assets                                              estimate may vary as a result of changes in the utilization of
                                                                      the leased premises and sublease arrangements where
    At the end of each reporting period, the Corporation
                                                                      applicable.
    assesses whether there is an indication that an asset group
    may be impaired. If any indication of impairment exists, HSE


28        HSE Integrated Ltd. 2011 Annual Report                                              Notes to Financial Statements
    Income tax assets and income tax liabilities                      Acquisitions of subsidiaries and businesses are accounted for using
                                                                      the acquisition method in accordance with IFRS 3 – Business
    Deferred income taxes are recorded to reflect any
                                                                      Combinations. The consideration for each acquisition is measured
    differences between the accounting and income tax basis of
                                                                      at the aggregate of the fair values (at the date of exchange) of
    an asset or liability using substantively enacted tax rates.      assets given, liabilities incurred or assumed, and equity instruments
    The Corporation does not recognize a deferred tax asset           issued by the Corporation in exchange for control of the acquiree.
    when Management believes it is not probable that future           Costs of acquisition, other than those associated with the issue of
    tax savings will be realized. Estimates of future taxable         debt or equity, are recognized in profit or loss as incurred.
    income are considered in assessing the utilization of
    available tax losses. Changes in circumstances and                C) Foreign currency
    assumptions may require changes to the recognition of the
                                                                          Functional and presentation currencies
    Corporation’s deferred tax assets.
                                                                          The individual financial statements of each legal entity are
note 3 – siGniFicant                                                      prepared in the currency of the primary economic
                                                                          environment in which that entity operates (its functional
accountinG Policies                                                       currency). For the purpose of the consolidated financial
                                                                          statements, the results and financial position of each legal
The accounting policies set out below have been applied
                                                                          entity are expressed in the functional currency of the
consistently to all periods presented in these consolidated
                                                                          Corporation and the presentation currency for the
financial statements and in preparing the opening IFRS
                                                                          consolidated financial statements. The functional currency
statement of financial position at January 1, 2010 for the
                                                                          of the Corporation’s Canadian operations is the Canadian
purposes of the transition to IFRS, unless otherwise indicated.           Dollar (“CAD”) and its U.S. subsidiaries is the U.S. Dollar
A) Basis of consolidation                                                 (“USD”), while the presentation currency adopted by the
                                                                          Corporation in its consolidated financial statements is CAD.
The consolidated financial statements incorporate the financial
statements of the Corporation and entities controlled by the              Foreign currency transactions
Corporation (its subsidiaries). Control is achieved where the             Transactions in foreign currencies are translated to the
Corporation has the power to govern the financial and operating           respective functional currencies of legal entities at exchange
policies of an entity so as to obtain benefits from its activities.       rates at the dates of the transactions. Monetary assets and
All intra-group transactions, balances, income and expenses are           liabilities denominated in foreign currencies at the reporting
eliminated in full on consolidation.                                      date are retranslated to the functional currency at the
                                                                          exchange rate at that date. Non-monetary items that are
Non-controlling interests in subsidiaries are identified separately       measured in terms of historical cost in a foreign currency
from the Corporation’s equity therein. Subsequent to acquisition          are translated using the exchange rate at the date of the
or formation, the carrying amount of non-controlling interests is         transaction. Any foreign exchange gains or losses incurred
the amount of those interests at initial recognition plus the non-        on the retranslation of foreign currency denominated
controlling interests’ share of subsequent changes in equity.             monetary assets and liabilities are included in finance costs
Total comprehensive income is attributed to non-controlling               in the Consolidated Statement of Earnings.
interests even if this results in the non-controlling interests
having a deficit balance.                                                 Foreign operations
B) Business combinations                                                  The assets and liabilities of foreign operations, including
                                                                          goodwill and fair-value adjustments arising on acquisition,
    Acquisitions prior to January 1, 2010                                 are translated to CAD at exchange rates at the reporting
    As part of its transition to IFRS, the Corporation elected to         date. The income and expenses of foreign operations are
    restate only those business combinations that occurred on             translated to CAD at exchange rates at the dates of the
    or after January 1, 2010.                                             transactions.
                                                                          Foreign currency differences are recognized in other
    Acquisitions on or after January 1, 2010
                                                                          comprehensive income. When a foreign operation is
    For acquisitions on or after January 1, 2010, the Corporation         disposed of, the relevant amount in accumulated other
    measures goodwill as the fair value of the consideration              comprehensive income is transferred to profit or loss as part
    transferred including the recognized amount of any non-               of the profit or loss on disposal.
    controlling interest in the acquiree, less the net recognized         Foreign exchange gains or losses arising from a monetary
    amount (generally fair value) of the identifiable assets              item receivable from or payable to a foreign operation, the
    acquired and liabilities assumed, all measured as of the              settlement of which is neither planned nor likely to occur in
    acquisition date. When the excess is negative, a bargain              the foreseeable future, and which in substance is
    purchase gain is recognized immediately in profit or loss.            considered to form part of the net investment in the foreign
                                                                          operation, are recognized in other comprehensive income.


Notes to Financial Statements                                               HSE Integrated Ltd. 2011 Annual Report                  29
D) Financial instruments                                                   into the other financial liabilities category. These financial
                                                                           liabilities are recognized initially at fair value less any
   Non-derivative financial assets                                         directly attributable transaction costs. Subsequent to initial
   The Corporation initially recognizes trade and other                    recognition, these financial liabilities are measured at
   receivables and deposits on the date that they originate. All           amortized cost using the effective interest method. Other
   other financial assets (including assets designated at fair             financial liabilities comprise trade and other payables, loans
   value through profit or loss) are recognized initially on the           and borrowings, which includes long-term debt and finance
   trade date at which the Corporation becomes a party to the              lease obligations.
   contractual provisions of the instrument.                               Common shares are classified as equity. Incremental costs
   The Corporation classifies non-derivative financial assets              directly attributable to the issue of common shares are
   into the following categories: financial assets at fair value           recognized as a deduction from equity, net of any tax effects.
   through profit or loss, held-to-maturity financial assets,              Convertible secured subordinated debentures
   loans and receivables, and available-for-sale financial
   assets. The Corporation de-recognizes a financial asset                 The component parts of the convertible secured
   when the contractual rights to the cash flows from the asset            subordinated debentures (“Debentures”) issued by the
   expire, or it transfers the rights to receive the contractual           Corporation are classified separately as financial liabilities
   cash flows in a transaction in which substantially all the risks        and equity in accordance with the substance of the
   and rewards of ownership of the financial asset are                     contractual arrangements and the definitions of a financial
   transferred. Any interest in such transferred financial assets          liability and an equity instrument. At the date of issue, the
   that is created or retained by the Corporation is recognized            fair value of the liability component was estimated using the
   as a separate asset or liability.                                       prevailing market interest rate for similar non-convertible
                                                                           instruments. This amount is recorded as a liability on an
   Financial assets and liabilities are offset and the net amount          amortized cost basis using the effective interest method
   is presented in the statement of financial position when,               until extinguished upon conversion or at the instrument’s
   and only when, the Corporation has a legal right to offset              maturity date.
   the amounts and intends either to settle on a net basis or to
   realize the assets and settle the liabilities simultaneously.           The value of the conversion option (labeled Convertible
                                                                           debentures – equity component) was determined at issue
   Loans and receivables                                                   date by deducting the amount of the liability component
   Loans and receivables are financial assets with fixed or                from the fair value of the compound instrument as a whole.
   determinable payments that are not quoted in an active                  This conversion option is not subsequently re-measured,
   market. Such assets are recognized initially at fair value plus         and has no deferred income tax impact. In addition, the
   any directly attributable transaction costs. Subsequent to              conversion option will remain in equity until the conversion
   initial recognition, loans and receivables are measured at              option is exercised, in which case the balance recognized in
   amortized cost using the effective interest method, less any            equity will be transferred to share capital. No gain or loss is
   impairment losses. Loans and receivables comprise cash                  recognized in the statement of earnings upon conversion or
   and cash equivalents, and trade and other receivables.                  expiration of the conversion option. As such, a
                                                                           proportionate amount of any unamortized debt issue costs
   Cash and cash equivalents comprise cash balances with
                                                                           and accretion related to the Debentures converted into
   original maturities of three months or less. Bank overdrafts
                                                                           common shares is transferred to share capital on the
   that are repayable on demand and form an integral part of
                                                                           conversion date. Any directly attributable transactions costs
   HSE’s cash management are included as a component of
                                                                           are allocated to the liability and equity components in
   cash and cash equivalents for the purpose of the statement
                                                                           proportion to their initial carrying amounts.
   of cash flows.
                                                                        E) Property and equipment
   Non-derivative financial liabilities
                                                                           Recognition and measurement
   The Corporation initially recognizes debt securities issued
   and subordinated liabilities on the date that they are                  Property and equipment are measured at cost less
   originated. All other financial liabilities (including liabilities      accumulated depreciation and accumulated impairment
   designated at fair value through profit or loss) are                    losses. Cost includes any expenditure that is directly
   recognized initially on the trade date at which the                     attributable to the acquisition of the asset. Purchased
   Corporation becomes a party to the contractual provisions               software that is integral to the functionality of the related
   of the instrument. The Corporation de-recognizes a financial            equipment is capitalized as part of that equipment. When
   liability when its contractual obligations are discharged or            identifiable components of a piece of property or
   cancelled or expired.                                                   equipment have different useful lives, each component is
                                                                           accounted for as a separate item for purposes of calculating
   The Corporation classifies non-derivative financial liabilities
                                                                           depreciation and gains and losses on disposal.


30       HSE Integrated Ltd. 2011 Annual Report                                                     Notes to Financial Statements
    When parts of an item of property and equipment have                                 review is also used to determine whether the indefinite life
    different useful lives, they are accounted for as separate                           assessment continues to be supportable. If not, the change in
    items (major components) of property and equipment.                                  the useful life assessment from indefinite to finite is made on a
    Gains and losses on disposal of an item of property and                              prospective basis.
    equipment are determined by comparing the proceeds from
                                                                                         The amortization period for the principal categories of intangible
    disposal with the carrying amount of property and
                                                                                         assets are as follows:
    equipment, and are recognized net within profit or loss.
                                                                                         Technical knowledge ........................................................10 years
    Subsequent costs
                                                                                         Computer software ............................................................3 years
    The cost of replacing a part of an item of property and
    equipment is recognized in the carrying amount of the item                           Customer relationships ..............................................3 – 12 years
    if it is probable that the future economic benefits embodied                         Company name and non-compete ...............................1 – 2 years
    within the part will flow to the Corporation, and its cost can
    be measured reliably. The carrying amount of the replaced                            Intangible assets are derecognized on disposal, or when no
    part is derecognized. The costs of the day-to-day servicing                          future economic benefits are expected from their use. Gains or
    of property and equipment (repair and maintenance) are                               losses arising from de-recognition of an intangible asset are
    recognized in the profit or loss as incurred.                                        measured as the difference between the net disposal proceeds
                                                                                         and the carrying amount of the asset and are recognized in the
    Depreciation                                                                         profit or loss.
    Depreciation is recognized in profit or loss on a straight-line                      G) Goodwill
    basis over the estimated useful lives of each component of
    an item of property and equipment, since this most closely                           Goodwill acquired in a business combination is initially
    reflects the expected pattern of consumption of the future                           measured at cost, being the excess of the cost of the business
    economic benefits embodied in the asset. Items of property                           combination over the net fair value of the acquired identifiable
    and equipment are depreciated from the date that they are                            assets, liabilities and contingent liabilities of the entity at the
    installed and are ready for use. Leased assets are depreciated                       date of acquisition. Following initial recognition, goodwill is
    over the shorter of the lease term and their useful lives                            measured at cost less any accumulated impairment losses.
    unless it is reasonably certain that the Corporation will                            Goodwill is not amortized but is reviewed for impairment
    obtain ownership by the end of the lease term.                                       annually or more frequently if events or changes in
                                                                                         circumstances indicate that such carrying value may be
    Depreciation is calculated using the straight-line method at                         impaired. For the purpose of impairment testing, goodwill is
    rates calculated to write off the cost, less estimated residual                      allocated to each of the Corporation’s cash-generating units
    value, of each asset over its expected useful life as follows:                       expected to benefit from the synergies of the combination. Any
    Field equipment ..................................................3 – 20 years       impairment is recognized immediately in profit or loss and is not
                                                                                         subsequently reversed. On the subsequent disposal or
    Heavy duty vehicles and trailers..........................5 – 20 years               termination of a previously acquired business, any remaining
    Light duty vehicles .......................................................4 years   balance of associated goodwill is included in the determination
                                                                                         of the profit or loss on disposal or termination.
    Office and shop equipment .................................3 – 15 years
                                                                                         H) Leases
    Depreciation methods, useful lives and residual values are
    reviewed at each reporting date and adjusted if appropriate.                         Leases are classified as either operating or finance, based on the
                                                                                         substance of the transaction at inception of the lease.
F) Intangible assets                                                                     Classification is re-assessed if the terms of the lease are
Intangible assets acquired in a business combination and                                 changed.
recognized separately from goodwill are initially recognized at
                                                                                              Operating leases
their fair value at the acquisition date (which is regarded as their
cost). Subsequent to initial recognition, intangible assets with                              Leases in which a significant portion of the risks and rewards
finite useful lives acquired in a business combination are                                    of ownership are retained by the lessor are classified as
reported at cost less accumulated amortization and accumulated                                operating leases. Payments under an operating lease (net of
impairment losses.                                                                            any incentives received from the lessor) are recognized in
                                                                                              the profit or loss over the period of the lease.
The useful lives of intangible assets are assessed to be either
finite or indefinite. Amortization is charged to profit or loss on                            Finance leases
assets with finite lives. Amortization is recognized on a straight-
                                                                                              Leases in which substantially all the risks and rewards of
line basis over their estimated useful lives. Intangible assets with
                                                                                              ownership are transferred to the Corporation are classified
indefinite useful lives are tested for impairment annually either
                                                                                              as finance leases. Assets meeting finance lease criteria are
individually or at the cash-generating unit level. The annual
                                                                                              capitalized at the lower of the present value of the related

Notes to Financial Statements                                                                    HSE Integrated Ltd. 2011 Annual Report                              31
    lease payments or the fair value of the leased asset at the           Impairment losses recognized in respect of CGUs are
    inception of the lease. Minimum lease payments are                    allocated first to reduce the carrying amount of any goodwill
    apportioned between the finance charge and the liability.             allocated to the units, and then to reduce the carrying
    The finance charge is allocated to each period during the             amounts of the other assets in the unit on a pro-rata basis.
    lease term so as to produce a constant periodic rate of
                                                                          An impairment loss in respect of goodwill is not reversed. In
    interest on the remaining balance of the liability.
                                                                          respect of other assets, impairment losses recognized in
    Subsequent to initial recognition, the asset is accounted for
                                                                          prior periods are assessed at each reporting date for any
    in accordance with the accounting policy applicable to that
                                                                          indications that the loss has decreased or no longer exists.
    asset.
                                                                          An impairment loss is reversed if there has been a change in
I) Inventories                                                            the estimates used to determine the recoverable amount.
                                                                          An impairment loss is reversed only to the extent that the
Inventory consists of products held for sale to customers or for
                                                                          asset’s carrying amount does not exceed the carrying
consumption in the rendering of services provided by the
                                                                          amount that would have been determined, net of
Corporation. Inventories are measured at the lower of cost and
                                                                          depreciation or amortization, if no impairment loss had
net realizable value. The cost of inventories is based on the first-
                                                                          been recognized.
in first-out principle, and includes expenditures incurred in
acquiring the inventories, production or conversion costs and             Financial assets
other costs incurred in bringing them to their existing location
                                                                          Financial assets are assessed for indicators of impairment at
and condition.
                                                                          the end of each reporting period. Financial assets are
J) Impairment of assets                                                   considered to be impaired when there is objective evidence
                                                                          that, as a result of one or more events that occurred after
    Non-financial assets                                                  the initial recognition of the financial asset, the estimated
    The carrying amounts of the Corporation’s tangible and                future cash flows of the investment have been affected.
    intangible assets, other than inventories and deferred tax            For certain categories of financial asset, such as trade
    assets are reviewed at each reporting date to determine               receivables, assets that are assessed not to be impaired
    whether there is any indication of impairment. If any such            individually are, in addition, assessed for impairment on a
    indication exists, then the asset’s recoverable amount is             collective basis. Objective evidence of impairment for a
    estimated. For goodwill, and for intangible assets that have          portfolio of receivables includes the Corporation’s past
    indefinite useful lives or that are not yet available for use,        experience of collecting payments, an increase in the
    the recoverable amount is estimated each year at the same             number of delayed payments in the portfolio past the
    time. The recoverable amount of an asset or cash-                     average credit period of 60 days, as well as observable
    generating unit is the greater of its value in use and its fair       changes in national or local economic conditions that
    value less costs to sell. In assessing value in use, the              correlate with default on receivables.
    estimated future cash flows are discounted to their present
    value using a pre-tax discount rate that reflects current             The carrying amount of the financial asset is reduced by the
    market assessments of the time value of money and the                 impairment loss directly for all financial assets with the
    risks specific to the asset. For the purpose of impairment            exception of trade receivables, where the carrying amount
    testing, assets that cannot be tested individually are                is reduced through the use of an allowance account. When
    grouped together into the smallest group of assets that               a trade receivable is considered uncollectible, it is written
    generates cash inflows from continuing use that are largely           off against the allowance account. Subsequent recoveries of
    independent of the cash inflows of other assets, or groups            amounts previously written off are credited against the
    of assets (the “cash-generating unit” or “CGU”). For the              allowance account. Changes in the carrying amount of the
    purposes of goodwill impairment testing, goodwill acquired            allowance account are recognized in profit or loss.
    in a business combination is allocated to the CGU or group         K) Employee compensation
    of CGUs that is expected to benefit from the synergies of
    the combination. This allocation is subject to an operating           Short-term employee compensation
    segment ceiling test and reflects the lowest level at which
                                                                          Short-term compensation, including wages and salaries,
    that goodwill is monitored for internal reporting purposes.
                                                                          employee benefits, short-term absences, and bonuses
    HSE’s assets do not generate separate cash inflows. If there          payable, are measured on an undiscounted basis and are
    is an indication that a corporate asset may be impaired,              expensed as the related service is provided. The Corporation
    then the recoverable amount is determined for the CGU to              provides a capped Retirement Savings Plan (“RSP”)
    which the corporate asset belongs.                                    matching scheme for all of its full-time employees but does
                                                                          not provide its directors or employees with any other post-
    An impairment loss is recognized if the carrying amount of
                                                                          employment or long-term benefit plans.
    an asset or its CGU exceeds its estimated recoverable
    amount. Impairment losses are recognized in profit or loss.


32        HSE Integrated Ltd. 2011 Annual Report                                                  Notes to Financial Statements
    Share-based compensation plans                                     M) Contingencies
    The fair value determined at the grant date of the stock           Material contingent liabilities are disclosed where there is a
    options (equity-settled share-based compensation                   possible obligation unless the transfer of economic benefits is
    arrangements) to employees and others providing similar            remote. Contingent assets are only disclosed if an inflow of
    services is expensed with a corresponding increase in              economic benefits is probable.
    contributed surplus, over the vesting period, based on the
    Corporation’s estimate of common shares that will eventually       N) Revenue
    vest. At the end of each reporting period, the Corporation         The Corporation derives most of its revenue from the provision
    revises its estimate of the number of equity instruments           of services and the short-term rental of equipment. The
    expected to vest. The impact of the revision of the original       Corporation’s services are generally sold based upon service
    estimates, if any, is recognized in profit or loss such that the   orders or contracts with customers that include fixed or
    cumulative expense reflects the revised estimate, with a           determinable prices based upon daily, hourly or job rates.
    corresponding adjustment to contributed surplus.                   Revenue is recognized when the service has been provided or
    For deferred share units (cash-settled share-based                 goods are delivered, the rate is fixed or determinable, and the
    compensation arrangements), a liability is recognized for          collection of the amounts billed to the customer is considered
    the goods or services acquired, measured initially at the fair     probable.
    value of the liability. At the end of each reporting period        Customer contract terms do not include a provision for
    until the liability is settled, and at the date of settlement,     significant post-service delivery obligations.
    the fair value of the liability is re-measured, with any
    changes in fair value recognized in profit or loss for the year.   O) Income tax
                                                                       Income tax expense comprises current and deferred tax.
L) Provisions
Provisions are recognized when the Corporation has a present               Current tax
legal or constructive obligation as a result of a past event, it is        Current income tax payable is based on taxable income for
probable that the Corporation will be required to settle the               the period. Taxable income differs from net earnings as
obligation, and a reliable estimate can be made of the amount of           reported in the consolidated statement of earnings as items
the obligation.                                                            of income or expense may be taxable or deductible in other
Provisions are made for the anticipated settlement costs of legal          years or may never be taxable or deductible. The
or other disputes against the Corporation where an outflow of              Corporation’s liability for current tax is calculated by
resources is considered probable and a reasonable estimate can             applying the Corporation’s best estimate of the weighted
be made of the likely outcome. No provision is made for other              average tax rate for the full financial year for each tax
unasserted claims or where an obligation exists under a dispute            jurisdiction, using rates that have been enacted or
but it is not possible to make a reasonable estimate of the                substantively enacted by the end of the reporting period, to
amount, if any, of the obligation. Where a provision is                    the taxable income for that jurisdiction.
recognized, the amount recognized is the present value of                  Deferred tax
Management’s best estimate of the cash outflows required to
settle the obligation, taking into account the related risks and           Recognition
uncertainties. When there is virtual certainty that a portion of           Deferred income tax is recognized on temporary differences
the amount required to settle a provision will be recovered from           between the carrying amounts of assets and liabilities in the
a third party and the amount of the recovery is reliably                   financial statements and the corresponding tax bases used
measurable, a separate receivable is recognized for the expected           in the computation of taxable income. Deferred tax
recovery.                                                                  liabilities are generally recognized for all taxable temporary
                                                                           differences. Deferred tax assets are generally recognized for
    Onerous contracts
                                                                           all deductible temporary differences to the extent that it is
    Present obligations arising under onerous contracts are                probable that taxable income will be available against which
    recognized and measured as provisions. An onerous                      those deductible temporary differences can be utilized. Such
    contract is considered to exist where the Corporation has a            deferred tax assets and liabilities are not recognized if the
    contract under which the unavoidable costs of meeting the              temporary difference arises from goodwill or from the initial
    obligations under the contract exceed the economic                     recognition (other than in a business combination) of other
    benefits expected to be received under it. The provision is            assets and liabilities in a transaction that affects neither the
    measured at the present value of the lower of the expected             taxable income nor the accounting profit.
    cost of terminating the contract and the expected net cost
                                                                           Deferred tax liabilities are recognized for taxable temporary
    of continuing with the contract. The onerous contract
                                                                           differences associated with investments in subsidiaries and
    provision is re-measured at each reporting period, with
                                                                           associates, and interests in joint ventures, except where the
    changes being recognized in the Statement of Earnings.


Notes to Financial Statements                                                HSE Integrated Ltd. 2011 Annual Report                 33
    Corporation is able to control the reversal of the temporary        unamortized share-based compensation costs. Under the “if
    difference and it is probable that the temporary difference         converted” method, the weighted average number of shares
    will not reverse in the foreseeable future. Deferred tax            issued and outstanding during the year is adjusted by the
    assets arising from deductible temporary differences                number of common shares that would be issued if all Debenture
    associated with such investments and interests are only             holders converted their Debenture holdings to common shares
    recognized to the extent that it is probable that there will be     at the earliest date which the Debenture’s trust Indenture allows
    sufficient taxable profits against which to utilize the benefits    for conversion. Net earnings and other comprehensive income
    of the temporary differences and they are expected to               are adjusted to add back the after tax impact of interest and
    reverse in the foreseeable future.                                  accretion expense related to the Debentures. No adjustment is
                                                                        made to basic earnings per share if the result of the calculation
    The carrying amount of deferred tax assets is reviewed at
                                                                        would be anti-dilutive.
    the end of each reporting period and reduced to the extent
    that it is no longer probable that sufficient taxable profits       Q) Segment reporting
    will be available to allow all or part of the asset to be
                                                                        An operating segment is a unit of the Corporation that engages
    recovered.
                                                                        in business activities from which it may earn revenue and incur
    Measurement                                                         expenses, including revenue and expenses that relate to
    Deferred income tax assets and liabilities are measured             transactions with any of the Corporation’s other components.
    based on income tax rates and tax laws that are enacted or          The results of all operating segments are reviewed regularly by
    substantively enacted by the end of the reporting period            the Corporation’s CEO to make decisions about resources to be
    and that are expected to apply in the years in which                allocated to the segment and assess its performance, and for
    temporary differences are expected to be realized or                which discrete financial information is available. Segment results
    settled. The measurement of deferred tax liabilities and            that are reported to the CEO include items directly attributable
    assets reflects the tax consequences that would follow from         to a segment as well as those that can be allocated on a
    the manner in which the Corporation expects, at the end of          reasonable basis. Unallocated items comprise mainly head office
    the reporting period, to recover or settle the carrying             expenses and interest costs.
    amount of its assets and liabilities.                               The Corporation’s reportable segments are Canada and the U.S.
    Deferred tax assets and liabilities are offset when there is a      R) Finance costs
    legally enforceable right to set off current tax assets against
    current tax liabilities and when they relate to income taxes        Finance costs comprise interest expense on borrowings, finance
    levied by the same taxation authority and the Corporation           lease interest, and unwinding of the discount on provisions.
    intends to settle its current tax assets and liabilities on a net   Borrowing costs that are not directly attributable to the
    basis.                                                              acquisition, construction or production of a qualifying asset are
                                                                        recognized in profit or loss using the effective interest method.
    Current and deferred tax for the period
                                                                        Foreign currency gains and losses are reported on a net basis as
    Current and deferred tax are recognized as an expense or
                                                                        either finance income or finance cost depending on whether
    income in profit or loss, except when they relate to items
                                                                        foreign currency movements are in a net gain or net loss
    that are recognized outside profit or loss (whether in other
                                                                        position.
    comprehensive income or directly in equity), in which case
    the tax is also recognized outside profit or loss, or where         S) New accounting standards and pronouncements
    they arise from the initial accounting for a business                  not yet adopted
    combination. In the case of a business combination, the tax
    effect is included in the accounting for the business                   IFRS 9 – Financial Instruments
    combination.                                                            IFRS 9 (2010) supersedes IFRS 9 (2009) and is effective for
P) Earnings per share                                                       annual periods beginning on or after January 1, 2015, with
                                                                            early adoption permitted. For annual periods beginning
Basic per share amounts are calculated using the weighted                   before January 1, 2015, either IFRS 9 (2009) or IFRS 9 (2010)
average number of common shares outstanding during the year.                may be applied. The Corporation intends to adopt IFRS 9
Diluted per share amounts are calculated using the treasury                 (2010) in its consolidated financial statements for the
stock method for stock options and the “if converted” method                annual period beginning on January 1, 2015. The extent of
for debentures. Under the treasury stock method, the weighted               the impact of adoption of IFRS 9 (2010) has not yet been
average number of shares issued and outstanding during the                  determined.
year is adjusted by the total of the additional common shares
that would have been issued assuming exercise of all stock                  IFRS 10 – Consolidated Financial Statements
options with exercise prices at or below the average market                 As of January 1, 2013, the Corporation will be required to
price for the year, offset by the reduction in common shares that           adopt IFRS 10 – Consolidated Financial Statements. The IASB
would be purchased with the exercise proceeds plus the related

34        HSE Integrated Ltd. 2011 Annual Report                                                     Notes to Financial Statements
    has stated that the objective of this standard is to develop a      B) Non-derivative financial liabilities
    single consolidation model applicable to all investees. Under
    this model, an investor consolidates an investee when it has        Fair value, which is determined for disclosure purposes, is
    power, exposure to viability in returns, and a linkage              calculated based on the present value of future principal and
    between the two. The extent of the impact of adoption of            interest cash flows, discounted at the market rate of interest at
    IFRS 10 has not yet been determined.                                the reporting date. For finance leases the market rate of interest
                                                                        is determined by reference to similar lease agreements.
    IFRS 13 – Fair Value Measurement
                                                                        C) Share-based payment transactions
    As of January 1, 2013 the Corporation will be required to
                                                                           (i) Share options
    adopt IFRS 13 – Fair Value Measurement. This standard
    provides a single source of guidance on how fair value is               The fair value of the employee share options and the share
    measured and will be applied when fair value is required                appreciation rights is measured using the Black-Scholes
    under other IFRSs. IFRS 13 provides a framework for                     formula. Measurement inputs include share price on
    determining fair value and clarifies factors to be considered,          measurement date, exercise price of the instrument,
    but does not establish standards pertaining to how                      expected volatility (based on weighted average historic
    valuations should be performed. The extent of the impact of             volatility adjusted for changes expected due to publicly
    adoption of IFRS 13 has not yet been determined.                        available information), weighted average expected life of
                                                                            the instruments (based on historical experience and general
note 4 – determination oF Fair values                                       option holder behavior), expected dividends, and the risk-
                                                                            free interest rate (based on government bonds). Service and
A number of the Corporation’s accounting policies and                       non-market performance conditions attached to the
disclosures require the determination of fair value, for both               transactions are not taken into account in determining fair
financial and non-financial assets and liabilities. Fair values have        value.
been determined for measurement and/or disclosure purposes
based on the following methods. When applicable, further                   (ii) Deferred share units
information about the assumptions made in determining fair                  The number of deferred share units issued at grant date is
values is disclosed in the notes specific to that asset or liability.       determined by dividing the director’s fees by the
                                                                            Corporation’s closing share price on the trading day
A) Trade and other receivables
                                                                            immediately preceding the grant date. The units are
The fair value of trade and other receivables is estimated as the           revalued quarterly based on the Corporation’s share price
present value of future cash flows, discounted at the market rate           on the last day of the quarter. Any changes in value are
of interest at the reporting date. This fair value is determined for        included as an increase or decrease in share-based
disclosure purposes.                                                        compensation expense and accrued liabilities




Notes to Financial Statements                                                 HSE Integrated Ltd. 2011 Annual Report               35
note 5 – acquisition
On January 24, 2011, the Corporation acquired all of the outstanding common shares of Taylored Safety Services Inc. (“Taylored”).
Consideration for the acquisition consisted of 1,137,532 Common Shares valued at $0.54, which was the closing price for the
Corporation’s Common Shares on January 24, 2011. Taylored provides safety consulting, industrial health services and safety training
to industry and is headquartered in Halifax, Nova Scotia. The Corporation acquired Taylored as part of its strategy to expand its safety
consulting services across Canada. The results from operations are included in the Canada segment. The goodwill recognized in this
acquisition relates to the expected synergies to be experienced from the integration of the business with existing Canadian
operations. As part of the transaction, a significant shareholder of Taylored subsequently became an officer of the Corporation.
The final purchase allocation for the acquisition is as follows:

                                                                                                                                    2011
 Assets
     Non-cash working capital                                                                                 $                       53
     Property and equipment                                                                                                           24
     Intangible assets                                                                                                               250
     Goodwill                                                                                                                        380
                                                                                                                                     707
 Assumed liabilities
     Income taxes payable                                                                                                            (14)
     Long-term debt                                                                                                                  (29)
     Deferred liabilities                                                                                                            (64)
                                                                                                                                   (107)
 Net assets before cash position                                                                                                     600
     Cash position                                                                                                                     1
     Net assets                                                                                                                      601
 Consideration
     Common shares – 1,137,532 shares at $0.54
     (listed share price of the Corporation at January 24, 2011)                                                                     614
     Purchase price adjustments recoverable                                                                                          (13)
                                                                                                              $                      601

For the period from January 24, 2011 to December 31, 2011 Taylored contributed revenue of $587 and profit of $172 to the
consolidated results.

note 6 – cash and cash equivalents
                                                                         December 31 2011     December 31, 2010           January 1, 2010
 Cash and bank balances                                                 $             2,950   $            1,479      $              601
 Bank overdrafts used for cash management purposes                                        _                       _                (141)
 Cash and cash equivalents in the statement of cash flows               $             2,950   $            1,479      $              460




36        HSE Integrated Ltd. 2011 Annual Report                                                  Notes to Financial Statements
note 7 – trade receivables
                                                                December 31, 2011         December 31, 2010           January 1, 2010
 Trade receivables                                          $               22,676    $               19,199   $               17,416
 Allowance for doubtful accounts                                              (350)                  (1,100)                   (1,260)
                                                            $               22,326    $               18,099   $               16,156

The Corporation’s exposure to credit and currency risks, and allowance for doubtful debts related to trade receivables is disclosed
under Financial Instruments in note 21.

note 8 – PrePaid exPenses and other receivables
                                                                December 31, 2011         December 31, 2010           January 1, 2010
 Prepaid expenses                                           $                 1,203   $                1,127   $                1,011
 Deposits                                                                      271                       186                      289
 Other receivables                                                             126                       310                      321
                                                                              1,600   $                1,623   $                1,621
 Included in the financial statements under
     Non-current assets – other receivables                                    220                       129                      207
     Current assets                                                           1,380                    1,494                    1,414
                                                            $                 1,600   $                1,623   $                1,621

The Corporation’s exposure to credit and currency risks, and allowance for doubtful debts related to prepaid expenses and other
receivables is disclosed in note 21.




Notes to Financial Statements                                              HSE Integrated Ltd. 2011 Annual Report               37
note 9 – ProPerty and equiPment
                                                                         Heavy duty                               Office
                                                         Field          vehicles and        Light duty        and shop
                                                    equipment                trailers         vehicles       equipment                Total
 Cost
 Balance at January 1, 2011                     $       29,865      $        20,517     $      14,261    $        8,888     $       73,531
 Additions during the year                               2,583                 1,055            4,276                 208            8,122
 Disposals during the year                                 (55)                (402)          (1,598)             (174)             (2,229)
 Additions due to acquisitions                                20                   –                –                   4               24
 Effect of movements in foreign exchange                      53                  70               18                   3              144
 Balance at December 31, 2011                           32,466               21,240            16,957             8,929             79,592
 Accumulated depreciation and
 impairment losses
 Balance at January 1, 2011                             20,636               12,709             8,217             6,865             48,427
 Depreciation during the year                            2,041                 1,224            1,073                 546            4,884
 Disposals during the year                                 (37)                (363)          (1,119)             (155)             (1,674)
 Effect of movements in foreign exchange                      16                  12                2                   –               30
 Balance at December 31, 2011                           22,656               13,582             8,173             7,258             51,667
 Net book value December 31, 2011               $        9,810      $          7,658    $       8,784    $        1,673     $       27,925

 Cost
 Balance at January 1, 2010                     $       28,637      $        25,132     $      15,379    $        9,209     $       78,357
 Additions during the year                               1,430                   538              199                 339            2,506
 Disposals during the year                                (158)              (5,089)          (1,300)             (657)             (7,204)
 Effect of movements in foreign exchange                   (44)                 (64)             (17)                 (3)            (128)
 Balance at December 31, 2010                           29,865               20,517            14,261             8,888             73,531
 Accumulated depreciation and
 impairment losses
 Balance at January 1, 2010                             18,831               16,400             7,347             6,606             49,184
 Depreciation during the year                            1,924                 1,238            1,744                 814            5,720
 Disposals during the year                                (110)              (4,916)            (855)             (554)             (6,435)
 Effect of movements in foreign exchange                      (9)               (13)             (19)                 (1)              (42)
 Balance at December 31, 2010                           20,636               12,709             8,217             6,865             48,427
 Net book value December 31, 2010                        9,229                 7,808            6,044             2,023             25,104
 Net book value January 1, 2010                 $        9,806      $          8,732    $       8,032    $        2,603     $       29,173

Leased property and equipment
The Corporation leases light duty vehicles and other equipment under a number of finance lease agreements. The net carrying
amount of these leases is recorded as light duty vehicles and included in property and equipment are as follows:

                                                               December 31, 2011            December 31, 2010               January 1, 2010
 Cost                                                     $                   15,277    $                12,304   $                 13,480
 Less: accumulated amortization                                                 6,525                     6,041                      4,937
 Net book value                                           $                     8,752   $                 6,263   $                  8,543




38        HSE Integrated Ltd. 2011 Annual Report                                                    Notes to Financial Statements
note 10 – intanGible assets and Goodwill
                                                         Company
                                                         name and           Computer          Technical            Customer
                                                      non-compete            software        knowledge          relationships              Total
 Cost
    Balance at January 1, 2011                    $             –   $              –    $             104   $          5,580     $        5,684
    Additions                                                  12                 34                    –                  238              284
    Balance at December 31, 2011                               12                 34                  104              5,818              5,968
 Accumulated amortization
    Balance at January 1, 2011                                  –                  –                   63              3,489              3,552
    Amortization expense                                        8                  3                    9                  472              492
    Balance at December 31, 2011                                8                  3                   72              3,961              4,044
 Net book value at December 31, 2011              $             4   $             31    $              32   $          1,857     $        1,924
                                                                                              Technical            Customer
                                                                                             knowledge          relationships              Total
 Cost
    Balance at January 1, 2010                                                          $             104   $          5,580     $        5,684
    Additions                                                                                           –                    –                –
    Balance at December 31, 2010                                                                      104              5,580              5,684
 Accumulated amortization
    Balance at January 1, 2010                                                                         55              3,085              3,140
    Amortization expense                                                                               8                   404              412
    Balance at December 31, 2010                                                                       63              3,489              3,552
 Net book value at December 31, 2010                                                    $              41   $          2,091     $        2,132
 Net book value at January 1, 2010                                                      $              49   $          2,495     $        2,544

Impairment testing for cash-generating units containing goodwill
For the purpose of impairment testing, goodwill is allocated to the group’s business units that represent the lowest level within the
group at which the goodwill is monitored for internal management purposes, which is not higher than the group’s operating
segments. Goodwill recognized on the purchase of Taylored Safety Services Inc. (see note 5) has been allocated to the Canada CGU.
The aggregate carrying amounts of goodwill allocated to each unit are as follows:

                                                                        December 31, 2011         December 31, 2010              January 1, 2010
 Cash-generating unit
        Canada                                                          $                   380   $                    –    $                 –
        United States                                                                         –                        –                      –
 Total goodwill                                                         $                   380   $                    –    $                  –

At December 31, 2011 (“Valuation Date”) HSE Integrated Ltd. performed its annual impairment tests for goodwill and concluded that
there was no impairment of goodwill in the Canada CGU as the recoverable amount for the CGU exceeded the carrying amount.
Recognition of any impairment of goodwill would be recognized as an expense and reduce equity and net income but would not
impact cash flows.
The business-plan revenue was projected using the same rate of growth experienced in 2011, reflecting current trading conditions.
The anticipated annual revenue growth included in the cash flow projections for the years 2013 to 2016 has been based on average
growth levels experienced in the three years prior to 2009, reflecting an expectation of modest recovery in the economy at the
during 2012.



Notes to Financial Statements                                                 HSE Integrated Ltd. 2011 Annual Report                      39
A post-tax discount rate of 14.5% was applied in determining the recoverable amount of the unit. The discount rate was estimated
based on past experience, and industry average weighted average cost of capital, which was based on a debt weighting of 27% at a
market interest rate of 5%.
The values assigned to the key assumptions represent Management’s assessment of future trends in the service industry and are
based on both external sources and internal sources (historical data).

note 11 – trade and other Payables
                                                                          December 31, 2011   December 31, 2010          January 1, 2010
 Trade payables                                                           $           2,656   $            3,220 $                2,164
 Non-trade payables and accrued expenses                                              4,202                2,617                  2,418
                                                                          $           6,858   $            5,837 $                4,582

The Corporation’s exposure to currency and liquidity risk related to trade and other payables is disclosed in note 21.

note 12 – Provisions
                                                              Accrued
                                                      consideration on          Termination              Onerous
                                                       past acquisition            benefits             contracts                  Total
 Balance at January 1, 2011                       $                  –    $               –   $            2,013    $             2,013
     Additions                                                       –                 345                      –                   345
     Reduction during period                                         –                 (57)                 (212)                  (269)
     Change due to sublease                                          –                    –               (1,015)                (1,015)
 Balance at December 31, 2011                                        –                 288                   786                  1,074
 Balance at December 31, 2011
     Current liabilities                                             –                 171                    92                    263
     Non-current liabilities                                         –                 117                   694                    811
                                                  $                  –    $            288    $              786    $             1,074
 Balance at January 1, 2010                       $                810    $               –   $            2,278    $             3,088
 Reduction during year                                           (810)                    –                 (265)                (1,075)
 Balance at December 31, 2010                                        –                    –                2,013                  2,013
 Balance at December 31, 2010
     Current liabilities                                             –                    –                  212                    212
     Non-current liabilities                                         –                    –                1,801                  1,801
                                                                     –                    –                2,013                  2,013
 Balance at January 1, 2010
     Current liabilities                                             –                    –                  265                    265
     Non-current liabilities                                       810                    –                2,013                  2,823
                                                  $                810    $               –   $            2,278    $             3,088

Onerous contracts
The provision for onerous lease contracts represents the present value of the future lease payments that the Corporation is presently
obligated to make under non-cancellable onerous operating lease contracts, less revenue expected to be earned on the lease,
including estimated future sublease revenue, where applicable. The estimate may vary as a result of changes in the utilization of the
leased premises and sublease arrangements where applicable. The unexpired terms of the leases range from two to eight years.
In November 2011, a sublease arrangement was negotiated on a previously vacant building leased by the Corporation. This resulted
in a reduction of the onerous contract liability of $1,015, which was credited to profit and loss.



40        HSE Integrated Ltd. 2011 Annual Report                                                  Notes to Financial Statements
Termination benefits
The Corporation recognized a liability for termination benefits of $345 on the transition between CEOs in August 2011. The benefit is
payable monthly over a two-year term and expires August 31, 2013.
Contingent consideration
The accrued consideration on a share-purchase acquisition of $810 was derecognized at December 31, 2010. The de-recognition has
been recorded as a separate line on the Consolidated Statements of Earnings and Consolidated Statements of Cash Flows as all
goodwill from the purchase was derecognized in prior periods.

note 13 – loans and borrowinGs
This note provides information about the contractual terms of the Corporation’s interest-bearing loans and borrowings, which are
measured at amortized cost. For more information about the Corporation’s exposure to interest rate, foreign currency and liquidity
risk, see note 21.

                                                         Note        December 31, 2011       December 31, 2010       January 1, 2010
 Current liabilities
      Non-revolving term facility                          A     $               1,304   $               1,304   $             5,300
      Unamortized debt issue costs                         A                         –                      –                  (103)
      Equipment financing contracts                                                  –                      –                     25
      Finance lease liabilities                            C                     2,068                   2,156                 2,833
                                                                 $               3,372   $               3,460   $             8,055
 Non-current liabilities
      Non-revolving term facility                          A     $               1,739   $               3,043   $                   –
      Unamortized debt issue costs                         A                     (125)                   (124)                       –
      Convertible debentures                               B                     1,845                   1,704                       –
      Unamortized debt issue costs                         B                      (57)                    (76)                       –
      Equipment financing contracts                                                  –                      –                        8
      Finance lease liabilities                            C                     2,806                   1,031                 3,048
                                                                 $               6,208   $               5,578   $             3,056
 Total loans and borrowings                                      $               9,580   $               9,038   $            11,111




Notes to Financial Statements                                              HSE Integrated Ltd. 2011 Annual Report              41
Terms and debt repayment schedule
Terms and conditions of outstanding loans were as follows:

                                                                              December 31, 2011       December 31, 2010        January 1, 2010
                                                 Nominal
                                                 interest     Year of            Face     Carrying       Face     Carrying      Face Carrying
                               Note Currency       rate       maturity          value     amount        value     amount       value amount
                                                  Prime +
 Non-revolving term facility    A      CAD         1.75%        2014      $     3,043 $     2,918 $     4,347 $     4,223 $    5,300 $    5,197
 Convertible debentures         B      CAD         10.0%        2014            2,000       1,788       1,925       1,628          –          –
 Equipment financing
 contracts                             CAD         4.50%        2010                –           –           –           –         33         33
                                                  2.58% -
   Finance lease liabilities           CAD         7.35%    2010 - 2015         4,590       4,245       3,132       2,967      6,162      5,729
                                                  3.25% -
   Finance lease liabilities           USD         5.56%    2010 - 2015           682         629         237         220       166        152
 Total finance lease
 liabilities                    C                                               5,272       4,874       3,369       3,187      6,328      5,881
 Total interest-bearing
 liabilities                                                              $ 10,315 $        9,580 $     9,641 $     9,038 $   11,661 $   11,111

A) Non-revolving term facility and revolving operating loan facility
On April 27, 2010 the Corporation entered into a $15,000 credit facility with a regional financial institution. The facility consists of a
$10,000 revolving operating loan facility for general operating purposes and a $5,000 non-revolving reducing term loan facility.
The $5,000 non-revolving term facility is repayable in monthly payments of $109 starting July 1, 2010. The facility is payable in full 48
months after initial drawdown. The operating facility is renewable annually and is margined to accounts receivable. Both facilities
bear interest at prime plus a fixed percentage. A standby fee is also required on any unused portion of the operating facility. Both
facilities are subject to certain covenants including a working capital covenant, a debt to equity covenant, a fixed charge coverage
ratio and other positive and negative covenants. The facilities are collateralized under a general security agreement that includes
accounts receivable, inventory, prepaid expenses and other receivables, property and equipment and intangible assets.
On November 10, 2011 the Corporation signed a revised letter of commitment that provided an additional $3,000 non-revolving
reducing term facility to finance the purchase of certain safety services assets from Flint Energy Services Ltd. (see note 28). As at
December 31, 2011, the amount drawn under this facility was $ nil.
Deferred financing costs associated with the financing facilities have been shown as a reduction of the carrying value of the long-
term debt and are being amortized over the term of the debt using the effective interest rate method.
B) Convertible debentures
On November 9, 2010, HSE announced the issue of up to $2,000 in subordinated secured convertible debentures (the “Debentures”).
The Debentures mature on January 15, 2014 and bear interest at 10.0% per annum, payable quarterly in arrears on April 15, July 15,
October 15, and January 15 in each year beginning April 15, 2011. The component parts of the convertible secured subordinated
debentures (“Debentures”) issued by the Corporation are classified separately as financial liabilities and equity in accordance with
the substance of the contractual arrangements and the definitions of a financial liability and an equity instrument.
On December 21, 2010, HSE completed the first closing with total proceeds of $1,925. On January 18, 2011, HSE completed the final
closing with proceeds of an additional $75.
    Provision for conversion
    The Debentures are convertible at the holder’s option into common shares of the Corporation at a conversion price of $0.50 per
    share (the “Conversion Price”) at any time prior to the close of business on the earlier of the business day prior to the maturity
    date and the business day immediately preceding the date fixed for redemption of the Debentures, subject to adjustments in
    certain events including dividend protection for the declaration of dividends outside of the normal course. Holders converting
    their Debentures will receive accrued and unpaid interest thereon to the date of conversion. The ability to convert the
    Debentures would cease immediately prior to a “Change of Control” as defined in the offering document.



42         HSE Integrated Ltd. 2011 Annual Report                                                       Notes to Financial Statements
    Provision for redemption
    The Debentures will not be redeemable before January 15, 2012 except in the event of the satisfaction of certain conditions after
    a Change of Control has occurred. On and after January 15, 2012 and prior to January 15, 2013, provided that the current market
    price (as calculated pursuant to the indenture) of the shares is at least 133% of the conversion price, the Debentures may be
    redeemed at the option of the Corporation in whole or in part from time to time at a redemption price equal to their principal
    amount plus accrued and unpaid interest thereon up to (but excluding) the redemption date. On or after January 15, 2013 and
    prior to the maturity date, the Debentures may be redeemed at the option of the Corporation in whole or in part from time to
    time at a redemption price equal to 105% of their principal amount plus accrued and unpaid interest thereon up to (but
    excluding) the redemption date. If HSE wishes to redeem any Debentures, it must provide not more than 60 or fewer than 40
    days prior notice of redemption.
    Notwithstanding the foregoing, in the event of a Change of Control, the Debentures will be redeemable at the Corporation’s
    option, in whole or in part, at a price equal to 125% of the principal amount thereof plus accrued and unpaid interest for the first
    two years; thereafter, this amount will decline by 1.5% per month.
C) Finance lease liabilities
Finance lease liabilities are payable as follows:

                                         December 31, 2011                     December 31, 2010                          January 1, 2010
                                                      Present                             Present                                 Present
                              Future                 value of       Future               value of       Future                   value of
                           minimum                  minimum      minimum                minimum      minimum                    minimum
                               lease                    lease        lease                  lease        lease                      lease
                           payments    Interest     payments     payments    Interest   payments     payments     Interest      payments
 Less than 1 year      $       2,262 $    194 $        2,068 $       2,296 $    140 $      2,156 $        3,111 $       278 $      2,833
 1 to 5 years                  3,010      204            2,806       1,073       42         1,031         3,217         169         3,048
                       $       5,272 $    398 $        4,874 $       3,369 $    182 $      3,187 $        6,328 $       447 $      5,881

    Leasing arrangements
    Finance leases relate to vehicles and equipment with lease terms ranging from three to five years. The Corporation’s obligations
    under finance leases are secured by the lessors’ title to the leased assets.
    The applicable interest rate on these finance leases is between 2.58% and 7.35%.

note 14 – income taxes
A) Income tax expense

                                                                                            December 31 , 2011      December 31, 2010,
 Current tax expense
     Current period                                                                         $            1,097      $                423
     Adjustments for prior periods                                                                            –                        –
                                                                                                         1,097                       423
 Deferred tax expense (recovery)
     Origination and reversal of temporary differences                                                   1,090                      (376)
     Reduction in tax rate                                                                                  23                       (71)
     Recognition of previously unrecognized tax losses                                                    (661)                        –
                                                                                                           452                      (447)
 Total income tax expense (recovery)                                                        $            1,549      $                (24)




Notes to Financial Statements                                                HSE Integrated Ltd. 2011 Annual Report                43
Income tax recognized in other comprehensive income

                                                             Tax (expense)                                            Tax (expense)
                                                Before tax          benefit       Net of tax            Before tax           benefit        Net of tax
                                                     2011             2011            2011                   2010              2010             2010
 Foreign currency translation
 differences for foreign operations         $         124    $        (30)    $          94        $         (115)   $             23   $        (92)

Reconciliation of effective tax rate
Total income tax expense (recovery) is different from the amount computed by applying the combined Canadian Federal and
Provincial rates of 26.96% (2010: 28.00%) to earnings before income tax. The reasons for the difference are as follows:

                                                                                                                     2011                       2010
 Net earnings for the year                                                                     $                     6,010     $                  439
 Total income tax expense (recovery)                                                                                 1,549                       (24)
 Earnings before income tax                                                                                          7,559                        415
 Income tax using the Corporation’s domestic tax rate                                                                2,038                        116
 Effect of tax rates in foreign jurisdictions                                                                            75                       141
 Change in tax rate                                                                                                      (8)                    (183)
 Non-deductible expenses                                                                                              121                         123
 Non-taxable gain                                                                                                         –                     (227)
 Recognition of previously unrecognized tax losses                                                                   (661)                          –
 Other                                                                                                                (16)                          6
                                                                                               $                     1,549     $                 (24)

B) Deferred tax assets and liabilities
Unrecognized deferred tax assets
Deferred tax assets have not been recognized in respect of the following items:

                                                                                                       December 31, 2011           December 31, 2010
 Tax losses                                                                                    $                          –    $                  661

The tax losses expire between 2028 and 2031. Deferred tax assets were not recognized in 2010 in respect of these items because it
was not probable at that time that future taxable profits would be available against which the Corporation could utilize the benefits.
In 2011, $661 of previously unrecognized tax losses in the United States were recognized as Management considered it probable that
future taxable profits will be available against which they can be utilized. Management revised its estimates as a result of changes in
operating results starting in the third quarter of 2010. From that point, the subsidiary has earned income. There was not sufficient
certainty at December 31, 2010, but continued and increasing operating profits throughout 2011 suggested the estimate of future
profitably had changed. The amount has been recognized as a deferred tax asset on the balance sheet with a corresponding increase
in the subsidiary’s results from operating activities.




44         HSE Integrated Ltd. 2011 Annual Report                                                             Notes to Financial Statements
Recognized deferred tax assets and liabilities
Deferred tax assets and liabilities are attributable to the following:

                                                                        Assets                               Liabilities                                     Net
                                                     2011                2010                2011                   2010                2011               2010
 CANADA
 Property, plant and equipment           $              –     $              –       $      3,556       $        3,206     $          (3,556)    $       (3,206)
 Intangible assets                                      –                    –                312                   356                (312)               (356)
 Loans and borrowings                                1,104                 866                 39                      –               1,065                 866
 Share-based payment transactions                      50                   12                      –                  –                  50                  12
 Provisions                                           272                  518                      –                  –                 272                 518
 Other items                                           20                   43                      –                  –                  20                  43
 Total tax loss carry-forwards                          –                  421                      –                  –                   –                 421
 Tax assets (liabilities)                $           1,446    $          1,860       $      3,907       $        3,562     $          (2,461)    $       (1,702)
 USA
 Property, plant and equipment           $              –     $              –       $      1,141       $              4   $          (1,141)    $            (4)
 Loans and borrowings                                 250                    –                      –                  –                 250                   –
 Other items                                            –                    –                      –                  –                   –                   –
 Tax loss carry-forwards                             1,100                   –                      –                  –               1,100                   –
 Tax assets (liabilities)                $           1,350                   –       $      1,141       $              4   $             209     $            (4)

Movement in temporary differences during the year

                                                                      Recognized                                     Recognized Acquired in
                                                  Recognized             in other                 Recognized            in other   business
                                         Balance       in the           compre-          Balance       in the          compre-         com-              Balance
                                          Jan. 1,    income              hensive         Dec. 31,    income             hensive   binations              Dec. 31,
                                            2010 statement                income            2010 statement               income     (note 5)                2011
 CANADA
 Property, plant and equipment       $ (3,917) $              711 $              – $ (3,206) $              (350) $              – $                 – $ (3,556)
 Intangible assets                           (448)             92                –         (356)             108                 –              (64)       (312)
 Loans and borrowings                        1,559           (693)               –           866             199                 –                   –     1,065
 Share-based payment
   transactions                                19              (7)               –            12               38                –                   –        50
 Provisions                                   584             (66)               –           518            (246)                –                   –       272
 Other items                                   25              (5)            23              43                7              (30)                  –        20
 Tax loss carry-forwards                        –             421                –           421            (421)                –                   –         –
 Tax assets (liabilities)            $ (2,178) $              453 $           23 $ (1,702) $                (665) $            (30) $           (64) $ (2,461)
 USA
 Property, plant and equipment       $          2 $            (6) $             – $          (4) $ (1,137) $                    – $                 – $ (1,141)
 Loans and borrowings                           –                 –              –             –             250                 –                   –       250
 Tax loss carry-forwards                        –                 –              –             –            1,100                –                   –     1,100
 Tax assets (liabilities)                       2              (6)               –            (4)            213                 –                   –       209
 NET TAX ASSETS (LIABILITIES)        $ (2,176) $              447 $           23 $ (1,706) $                (452) $            (30) $           (64) $ (2,252)




Notes to Financial Statements                                                            HSE Integrated Ltd. 2011 Annual Report                            45
note 15 – caPital
The change in capital, which includes stated capital, contributed surplus, and the equity portion of convertible debentures was as
follows:

                                                                                          Number of common
                                                                                         shares (in thousands)               Share capital
 Balance at January 1, 2010 and December 31, 2010                                                      37,576      $               60,040
 Issued for business combination (note 5)                                                                  1,137                      614
 Balance at December 31, 2011                                                                          38,713      $               60,654

Authorized and issued share capital
An unlimited number of common shares have been authorized without par value. An unlimited number of preferred shares have
been authorized, issuable in series.

note 16 – share-based comPensation
A) Stock options
Pursuant to the stock option plan, a maximum of 10% of the issued and outstanding common shares of the Corporation are reserved
from time to time for issue to eligible participants. The directors determine option prices and vesting terms at the time of granting at
an exercise price based on the volume weighted average price for the five trading days immediately preceding the grant date. The
term of options granted does not exceed five years.
At December 31, 2011, the Corporation had options outstanding to issue 2,167,000 shares (December 31, 2010: 2,279,165) at a
weighted average price of $0.71 per share (December 31, 2010: $1.24). Of these options, 1,104,446 were exercisable (December 31,
2010: 1,154,479).
The inputs used in the measurement of the fair values at grant date are the following:

                                                                                    December 31, 2011                  December 31 2010
 Vesting period (years)                                                                                3                                3
 Forfeiture rate                                                                                    15%                              15%
 Risk-free interest rate (based on government bonds)                                              2.11%                            2.20%
 Expected life (years) (expected weighted average life)                                                5                                5
 Expected price volatility (weighted average volatility)                                          113%                              100%
 Dividend yield                                                                                      0%                               0%

The weighted average fair value of options issued in 2011 was $0.39 (2010: $0.35).
Information about outstanding stock options is as follows:

                                                                          December 31, 2011                            December 31, 2010
                                                                           Weighted average                             Weighted average
                                                              Options         exercise price               Options         exercise price
 Outstanding, beginning of year                              2,279,165       $           1.24         2,375,333          $           1.56
 Granted                                                      500,000                    0.52              890,000                   0.49
 Exercised                                                          −                       −                      −                    --
 Forfeited                                                   (612,165)                   2.53          (986,168)                     0.76
 Outstanding at end of year                                  2,167,000       $           0.71         2,279,165          $           1.24
 Exercisable at end of year                                  1,104,446       $           0.92         1,154,479          $           1.96




46           HSE Integrated Ltd. 2011 Annual Report                                                Notes to Financial Statements
The following table summarizes information about stock options outstanding at:

                                                                                                                   December 31, 2011
                                                                                  Weighted average
 Options outstanding                             Exercise prices ($)           remaining life in years            Number exercisable
            1,055,000                                   0.36 – 0.50                               3.0                         477.446
              840,000                                   0.51 – 1.00                               3.1                         355,000
              272,000                                   1.51 – 2.00                               0.2                         272,000
            2,167,000                                          0.71                               2.7                       1,104,446
                                                                                                                   December 31, 2010
                                                                                  Weighted average
 Options outstanding                             Exercise prices ($)           remaining life in years             Number exercisable
            1,509,165                                   0.25 – 1.19                               3.6                         385,812
              342,000                                   1.20 – 2.14                               1.1                         340,667
                58,000                                  2.15 – 3.09                               0.6                          58,000
              370,000                                   3.10 – 4.04                               0.3                         370,000
            2,279,165                                          1.24                               2.6                       1,154,479

B) Deferred share unit plan (cash settled)
Expense related to the deferred share units recognized during 2011 was $150 (2010: ($21)). For the year 2010 and up to August 11,
2011, the majority of directors’ retainers and meeting fees were paid with deferred share units (“DSUs”). After August 11, 2011, all
directors’ retainers and meeting fees are being paid in cash except for an annual grant for non-executive directors as provided in the
original DSU plan.
The number of deferred share units is as follows:

 Deferred share units                                                  December 31, 2011                           December 31, 2010
 Outstanding, beginning of year                                                  257,028                                      195,442
 Granted                                                                         102,241                                      204,424
 Redeemed                                                                        (56,230)                                    (142,838)
 Outstanding, end of year                                                        303,039                                      257,028


note 17 – non-controllinG interest
                                                                                     December 31, 2011             December 31, 2010
 Balance at beginning of year                                              $                              −   $                      −
 Share of profit for the year                                                                        152                             9
 Effect of movements in foreign exchange                                                                 12                        (9)
 Balance at end of year                                                    $                         164      $                      −




Notes to Financial Statements                                              HSE Integrated Ltd. 2011 Annual Report               47
note 18 – exPenses by nature
                                                                      December 31, 2011                       December 31,2010
                                                                 Direct             Selling,            Direct              Selling,
                                                              operating         general and          operating          general and
                                                              expenses        administrative         expenses         administrative
Salaries, wages and benefits                              $     48,686    $           6,033    $         43,237   $           4,347
Other personnel costs                                              814                  294                673                  151
Total employee costs                                            49,500                6,327              43,910               4,498
Travel and accommodation costs                                   6,582                  378               5,379                 278
Property rent and operating costs                                4,143                  484               3,584                 562
Vehicle lease and operating costs                                3,409                   19               2,540               (193)
Materials                                                        2,227                    –               2,511                   –
Subcontractors                                                   2,004                  608               2,153                 277
Repairs and maintenance                                          2,345                   13               2,055                   9
Equipment rentals and supplies                                   2,210                    7               2,294                  29
Office and administration costs                                    534                  849                725                  764
Communication costs                                                857                  115                936                  116
Professional fees                                                  172                  785                110                1,254
Insurance                                                          874                   35                766                   41
Advertising                                                        346                  331                338                  301
                                                          $     75,203    $           9,951    $         67,301   $           7,936


note 19 – Finance costs
                                                                              December 31, 2011               December 31, 2010
Interest on operating loan facility and standby charges           $                            47    $                           97
Interest on term facility                                                                      156                              180
Interest on obligations under finance leases                                                   209                              294
Interest, accretion interest on convertible debentures                                         273                               21
Amortization of deferred financing costs                                                        73                              123
Unwind of discount on provision                                                                 13                               42
Foreign currency (loss)                                                                        (1)                               (3)
Net finance costs recognized in earnings                                                       770                              754
Interest paid                                                     $                            599   $                          616




48          HSE Integrated Ltd. 2011 Annual Report                                         Notes to Financial Statements
note 20 – earninGs Per share
A) Basic earnings per share
Basic earnings per share is calculated as follows:

                                                                                                         2011                    2010
 Earnings attributable to common shareholders                                         $                 5,858 $                   430
 Issued common shares, beginning of period (thousands)                                                 37,576                  37,576
 Weighted average common shares issued on acquisition                                                   1,063                        –
 Weighted average number of common shares, issued and outstanding                                      38,639                  37,576
 Basic earnings per share                                                             $                   0.15 $                  0.01

B) Diluted earnings per share
In calculating diluted earnings per share, net earnings attributable to owners of the Corporation were adjusted as follows:

                                                                                                         2011                    2010
 Net earnings                                                                         $                 5,858      $              430
 Effect of finance costs from conversion of convertible debenture (net of tax)                            140                        –
 Adjusted net earnings                                                                $                 5,998      $              430
 Weighted average number of common shares – Basic (thousands)                                          38,639                  37,576
 Effect of “in-the-money” stock options                                                                   138                        –
 Effect of conversion of convertible debentures                                                         4,000                        –
 Weighted average number of common shares at end of period - Diluted (thousands)                       42,777                  37,576
 Fully diluted earnings per share                                                     $                   0.14     $              0.01


note 21 – Financial instruments
Overview
The Corporation is exposed to credit risk, liquidity risk and market risk from its use of financial instruments:
    Financial risk management
    The Board of Directors has overall responsibility for the establishment and oversight of the Corporation’s risk management
    framework. The Board, through its committees, oversees how Management monitors compliance with the Corporation’s risk
    management practices and reviews the adequacy of the risk management framework in relation to the risks faced by the
    Corporation. The Corporation’s risk management policies and procedures are established to identify and analyze the risks faced
    by the Corporation, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. The Audit
    Committee reports regularly to the Board of Directors on its activities.
    The Corporation’s risk management policies are established to identify and analyze the risks faced by the Corporation, to set
    appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are
    reviewed regularly to reflect changes in market conditions and the Corporation’s activities. The Corporation, 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.




Notes to Financial Statements                                                    HSE Integrated Ltd. 2011 Annual Report         49
Categories of financial instruments
                                                                  Note     December 31, 2011       December 31, 2010          January 1, 2010
 Financial assets
      Cash and cash equivalents                                     6      $               2,950   $              1,479   $               460
      Loans and receivables
           Trade receivables                                        7                     22,326              18,099                  16,156
           Deposits                                                 8                       271                    186                    289
           Other receivables                                        8                       126                    310                    321
                                                                           $              25,673   $          20,074      $           17,226
 Financial liabilities
      Trade and other payables                                     11                      6,858                  5,837                  4,582
      Non-revolving term facility                                  13                      2,918                  4,223                  5,917
      Convertible debenture                                        13                      1,788                  1,628                     –
      Equipment financing contracts                                13                         –                      –                     33
      Finance lease liabilities                                    13                      4,874                  3,187                  5,881
                                                                           $              16,438   $          14,875      $           16,413

Credit risk
Credit risk is the risk of financial loss to the Corporation if a customer or counterparty to a financial instrument fails to meet its
contractual obligations, and arises principally from the Corporation’s receivables from customers.
     Trade receivables
     The Corporation’s accounts receivable are due from customers in a variety of industries including a significant proportion with
     customers operating in the energy and manufacturing industries. The ability of customers within the energy industry to pay the
     Corporation is partially affected by fluctuations in the price they receive for various hydrocarbon products. The maximum credit
     exposure associated with trade accounts receivable is the carrying value.
     The Corporation follows a credit policy under which the Corporation reviews each new customer individually for credit
     worthiness before the Corporation’s standard payment and delivery terms and conditions are offered. The Corporation’s review
     includes external ratings, where available, and trade references. Customers that fail to meet the Corporation’s credit worthiness
     criteria may transact with the Corporation only on a prepayment basis. On an ongoing basis, the Corporation also reviews the
     payment patterns of its existing customers and the customers’ continued credit worthiness.
     Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is
     the Corporation’s best estimate of the amount of probable credit losses in the Corporation’s existing accounts receivable. The
     Corporation determines the allowance by reviewing individual accounts past due for collectability and by considering historical
     write-off experience, and overall account aging. The Corporation reviews its allowance for doubtful accounts on an ongoing
     basis, but at least monthly.
     Trade receivables disclosed above are classified as loans and receivables and are therefore measured at amortized cost. Due to
     the short-term nature of these items, fair value approximates carrying value.
     A) Exposure to credit risk
     The maximum exposure to credit risk for loans and receivables at the reporting date by geographic region was:

                                                               December 31, 2011             December 31, 2010                January 1, 2010
      Canada                                             $                     20,298 $                  16,470 $                     15,673
      United States of America                                                 2,028                      1,629                           483
                                                         $                     22,326 $                  18,099 $                     16,156




50          HSE Integrated Ltd. 2011 Annual Report                                                     Notes to Financial Statements
    Major customer
    For the years ended December 31, 2011 and 2010, one customer provided more than 10% of the Corporation’s revenue. Sales to
    this customer during 2011 amounted to $10,300 (2010: $8,476) related to ongoing long-term energy-related projects located
    entirely in Canada. Of the revenue amounts, $967 (2010: $1,510) were included in accounts receivable at the respective year
    ends.

    B) Impairment losses and allowances
    The movement in the allowance for impairment (provision) in respect of trade receivables during the year was:

                                                                                          December 31, 2011                 December 31, 2010
     Balance at January 1                                                       $                        1,100       $                      1,260
     Bad debt provision                                                                                    467                               258
     Recoveries                                                                                          (447)                              (244)
     Write-offs                                                                                          (770)                              (174)
     Balance at December 31                                                     $                          350       $                      1,100

    During the year certain customer balances totalling $641 were written off that were allowed for in prior years.
    The aging of trade receivables at the reporting date was:

                                                 Gross        Allowance               Gross        Allowance              Gross        Allowance
                                               Dec. 31,          Dec. 31,           Dec. 31,         Dec. 31,            Jan. 1,           Jan. 1,
                                                 2011              2011               2010              2010              2010              2010
      0-30 days from invoice date
        (current)                        $       12,411   $             –   $        10,962    $           –     $        7,938    $            –
      31-60 days from invoice date                6,839                 –             4,764                –              5,135                 3
      61-120 days from invoice date               1,894               31              2,493              120              3,433               347
      More than 120 days from
       invoice date                               1,532              319                980              980               910                910
      Total                              $       22,676   $          350    $        19,199    $       1,100     $       17,416    $        1,260

    Subsequent to year end, payment in full was received from one customer owing $1,236 aged over 120 days. Changes in
    collection estimates can affect the allowance recognized for trade and other receivables. For example, to the extent that the net
    present value of the estimated cash flows differs by ±1 % (plus/minus 1%), net trade and other receivables as at December 31,
    2011 would be $223 higher/lower (2010: $181; January 1, 2010: $162).
Liquidity risk
Liquidity risk is the risk that the Corporation will encounter difficulty in meeting the obligations associated with its financial liabilities
that are settled by delivering cash or another financial asset. The Corporation’s approach to managing liquidity is to ensure, as far as
possible, that it will always have sufficient liquidity to meet its liabilities when due and to fund future investing activities, under both
normal and stressed conditions (without incurring unacceptable losses or risking damage to the Corporation’s reputation).
The Corporation generally relies on operating cash flow to provide liquidity to meet its financial obligations. This excludes the
potential impact of extreme circumstances that cannot reasonably be predicted, such as natural disasters. In addition, the
Corporation maintains an $18.0 million credit facility with a regional financial institution consisting of the following:
•   $10.0 million operating revolving loan facility for general operating purposes. This operating revolving loan facility is renewable
    annually and is margined to accounts receivable.
•   $5.0 million non-revolving term facility is repayable in monthly payments of $109 starting July 1, 2010. The facility is payable in
    full 48 months after initial drawdown.
•   $3.0 million non-revolving reducing term facility to finance the purchase of certain safety services assets from Flint Energy Ser-
    vices Ltd. (see note 28). As at December 31, 2011, the amount drawn under this facility was $ nil.




Notes to Financial Statements                                                   HSE Integrated Ltd. 2011 Annual Report                     51
The following are the contractual maturities of financial liabilities, including estimated interest payments and excluding the impact of
netting arrangements.

 December 31, 2011                                              Less than 1 year              1 – 2 years            2 – 3 years               3 – 5 years
 Non-derivative financial liabilities
 Secured bank loans                                              $            1,421     $          1,359     $              439        $                −
 Convertible debentures                                                        200                   200                  2,000                         –
 Finance lease liabilities                                                    2,262                1,315                    980                       715
 Trade and other payables                                                     6,858                    −                      −                         −
                                                                 $           10,741     $          2,874     $            3,419        $              715
 December 31, 2010                                               Less than 1 year             1 – 2 years            2 – 3 years               3 – 5 years
 Non-derivative financial liabilities
 Secured bank loans                                              $            1,482     $          1,421     $            1,359        $              439
 Convertible debentures                                                        200                   200                    200                     2,000
 Finance lease liabilities                                                    2,296                1,005                     60                         7
 Trade and other payables                                                     5,837                    –                      −                         −
                                                                 $            9,815     $          2,626     $            1,619        $            2,446

Market risk
Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices, will affect the
Corporation’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and
control market risk exposures within acceptable parameters, while optimizing the return.
Currency risk
HSE is exposed to currency risk on U.S.-dollar denominated financial assets and liabilities. The Corporation adjusts the reported
amounts of foreign currency denominated financial assets and liabilities to their Canadian-dollar equivalent at each balance sheet
date. For amounts held directly by the Corporation, any related foreign exchange gains and/or losses are recognized in the
consolidated statement of income. For amounts held by the Corporation’s foreign operations, the amount is included in other
comprehensive income. At December 31, 2011 and 2010, the extent of this exposure was not material.
Interest rate risk
HSE is exposed to interest rate risk on its prime-based bank facilities. Based on amounts outstanding at December 31, 2011, a 1%
increase in the average prime interest rate for the year would cost the Corporation $24 (2010: $37) annually in additional interest
expense.
Fair values
    A) Fair values versus carrying amounts
    The fair values of cash and cash equivalents, loans and receivables, trade payables and accruals approximate their carrying
    amounts due to the short-term nature of these instruments. The fair value of long term debt is outlined as follows:

                                                  December 31, 2011                     December 31, 2010                              January 1, 2010
                                             Carrying             Fair          Carrying                 Fair            Carrying                     Fair
                                             amount             value           amount                 value             amount                     value
      Long-term debt
      Non-revolving term facility       $       2,918   $       2,918    $        4,223       $        4,223     $          5,197          $        5,197
      Finance lease liabilities                 4,874           4,844             3,187                3,100                5,881                   5,538
      Convertible debentures – debt
      portion                                   1,788           1,681             1,628                1,628                       −                    −
                                        $       9,580   $       9,443    $            9,038   $        8,951     $         11,078          $       10,735




52         HSE Integrated Ltd. 2011 Annual Report                                                           Notes to Financial Statements
    B) Interest rates used for determining fair value
    The interest rates used to discount estimated cash flows, when applicable, are determined based on either recent quoted
    market prices for similar instruments, or current market rates offered to the Corporation for similar terms.

                                                            December 31, 2011           December 31, 2010             January 1, 2010
      Finance lease liabilities                                           3.88%                      4.38%                      4.08%
     Convertible debentures                                                  7%                        10%                          −

Capital management
Management’s policy is to maintain an appropriate capital base that allows the Corporation to maintain investor, creditor, and market
confidence and to sustain future development of the business. The Corporation seeks to manage its capital structure to ensure that it
has the financial capacity and liquidity to fund its operating and investment activities. The Corporation generally relies on operating
cash flows to fund capital expenditures, but may occasionally need to use external sources to facilitate acquisition or expansionary
activities.
To ensure that the Corporation maintains an appropriate balance between long-term debt and shareholders’ equity, it monitors the
ratio of long-term debt to total capital. As at December 31, 2011 and 2010, these ratios were:

                                                            December 31, 2011           December 31, 2010             January 1, 2010
 Bank debt                                             $                  2,918   $                  4,223   $                  5,197
 Convertible debentures – debt component                                  1,788                      1,628                          –
 Equipment financing contracts                                                –                          –                         33
 Finance Leases                                                           4,874                      3,187                      5,881
                                                                          9,580                      9,038                     11,111
 Shareholders’ equity                                                    36,852                     30,075                     29,522
 Convertible debentures – equity component                                  229                        221                          –
 Total capitalization                                                    37,081                     30,296                     29,522
 Long-term debt to total capitalization ratio          $                   0.26   $                   0.30   $                   0.38

The Corporation is subject to various financial covenants (note 13) associated with its existing debt facility. These covenants are
monitored on a regular basis and controls are in place to maintain ongoing compliance with these covenants. The Corporation was in
compliance with all debt covenants at December 31, 2011 and 2010.
There were no changes to the Corporation’s approach to capital management during the period.

note 22 – oPeratinG seGments
The Corporation operates in two main geographic areas: Canada and the United States (“U.S.”). Each geographic area has a President
or Chief Operating Officer (“COO”) responsible for the operations and strategy of his area’s business. Personnel working within a
particular region report to the President or COO, and the President or COO reports to the Chief Executive Officer. Many of the
Corporation’s services are inter-dependent since they are bundled and sold to its customers in various combinations.
HSE provides a comprehensive and integrated suite of health, safety and environmental monitoring services to protect workers,
assets and the community in the most cost-effective manner possible. It provides these services by delivering people and assets to
meet the needs of its customers. These people and assets are inter-dependent and moved between locations on a national basis,
and are not site-specific or customer-specific. The Corporation tracks revenue, but not expenses or resources based on the industry
within which the customer operates. The same property and equipment and employees serve customers in both industry categories.
Decisions are made by the Corporation to allocate resources based on the geographic segment and not by industry.
Within each geographic segment, the Corporation uses common resources to provide services to a variety of customer industries.
The Corporation groups these customer industries into two categories. “Oilfield” services are provided to customers in the
conventional upstream, or “wellhead”, sector of the oil and gas industry. “Industrial” services are provided to customers in a variety
of other industries including: non-conventional upstream oil development and production (including oilsands extraction); oil and gas
processing; petrochemicals; pulp and paper; utilities; power generation; and manufacturing. It also includes worker safety training
and safety management services.



Notes to Financial Statements                                              HSE Integrated Ltd. 2011 Annual Report               53
Information regarding the results of each reportable segment is as follows. Performance is measured based on segment EBITDA, as
included in the internal management reports that are reviewed by the Corporation’s CEO. Segment EBITDA is used to measure
performance as Management believes that such information is the most relevant in evaluating results in comparison with other
entities operating in the same industry.
Corporate division expenses consist of salary expenses; stock compensation; office costs related to corporate employees; and public
company costs.
Information about reportable segments

                                              Canada                      U.S.                   Corporate                    Total
                                   2011         2010        2011         2010         2011           2010          2011       2010
 External revenue
    Oilfield                $    39,756 $     33,247 $     4,232 $       1,507 $          – $           – $      43,988 $   34,754
    Industrial                   52,062       44,464       2,199         2,810            –             –        54,261     47,274
 Total revenue              $    91,818       77,711 $     6,431         4,317 $          –             – $      98,249     82,028
 Finance costs                        –            –            –            –          770           754           770        754
 Depreciation and
 amortization                     5,073        5,989         303          143             –             –         5,376       6,132
 Income tax expense
 (recovery)                       1,524        (457)          25          433             –             –         1,549        (24)
 Capital expenditures             2,537        1,567       1,310          743             –             –         3,847       2,310
 Material non-cash items

    Change in onerous
    contract provision           (1,015)           –            –            –            –             –        (1,015)          –
    Expiry of contingent
    consideration                     –        (810)            –            –            –             –             –       (810)
    Property and
    equipment acquired by
    means of a finance
    lease                         3,709           88         565          140             –             –         4,274        228
 Reportable segment
 earnings (loss) before
 depreciation, amortization,
 share-based compensation,
 finance costs, gain/loss on
 disposal of property and
 equipment                   $   20,754 $     13,359 $     2,292 $       1,368 $     (9,951) $     (7,936) $     13,095 $     6,791


note 23 – suPPlementary cash Flow inFormation
                                                                                                     2011                     2010
 Changes in non-cash working capital from operations
     Inventories                                                                 $                    (54)   $                   28
     Prepaid expenses and other receivables                                                           (12)                     (41)
     Trade receivables                                                                             (4,102)                  (1,995)
     Trade and other payables                                                                         874                     1,314
 Change in non-cash working capital                                              $                 (3,294)   $                (694)




54         HSE Integrated Ltd. 2011 Annual Report                                                Notes to Financial Statements
note 24 – oPeratinG leases
Operating leases relate to leases of certain shop and office space with lease terms of between six months and 15 years. Most
operating lease contracts over five years contain clauses for renewal for a five-year term either at an agreed rate or at the prevailing
fair value rents at the time of renewal. Lease payments on certain leases are increased at a predetermined contract rate every three
to five years to reflect market rentals. None of the leases, except one, provide for additional rent payments that are based on
changes in a local price index. The Corporation does not have an option to purchase the leased building at the expiry of the lease
periods.
Two of the leased properties have been sublet by the Corporation. The leases expire in 2013 and 2019, with respective subleases
expiring in 2013 and 2017. A renewal option exists on the sublease expiring in 2017 to extend the term by two years. Sublease
payments of $318 are expected to be received during the following financial year. The Corporation has recognized a provision of $786
in respect of these leases (see note 12).
During the year ended December 31, 2011 an amount of $3,660 was recognized as an expense under operating expenses in respect
of operating leases (December 31, 2010: $3,215).
Non-cancellable operating lease rentals are payable as follows:

                                                                  December 31, 2011          December 31, 2010              January 1, 2010
 Less than one year                                          $                 3,426    $                3,401       $               2,990
 Between one and five years                                                    7,999                     9,977                       6,648
 More than five years                                                          2,638                     3,671                       4,653
                                                             $                14,063    $               17,049       $              14,291


note 25 – caPital commitments
At December 31, 2011 the Corporation had committed to purchase property and equipment for $188 (2010: $ 643).

note 26 – continGent liabilities
In the ordinary course of business activities, the Corporation may be contingently liable for litigation and claims with customers,
suppliers, former employees, and third parties. Management believes that adequate provisions have been recorded in the accounts
where applicable. Although it may not be possible to estimate accurately the extent of potential costs and losses, if any, Management
believes that the ultimate resolution of such contingencies would not have a material effect on the financial position of the
Corporation.

note 27 – related Parties
Transactions with key management personnel
The compensation of key management personnel is as follows:

                                                                                            December 31, 2011            December 31, 2010
 Employee wages and benefits                                                       $                    1,642    $                     844
 Termination benefits                                                                                    350                             –
 Share-based payments                                                                                    100                            89
                                                                                    $                   2,092    $                     933

Key management personnel include the Corporation’s executive officers and directors.
Key management personnel and director transactions
Directors and executive officers of the Corporation control 17.3% (December 31, 2010: 13.0%; January 1, 2010: 15.7%) of the voting
shares of the Corporation.




Notes to Financial Statements                                               HSE Integrated Ltd. 2011 Annual Report                   55
Members of key management personnel, officers or directors, or their related parties, hold positions in other entities that result in
them having control or significant influence over the financial or operating policies of these entities. A number of these entities
transacted with the Corporation in the reporting period. The aggregate value of transactions and outstanding balances relating to key
management personnel and entities over which they have control or significant influence were as follows:

                                                                                   Transaction value year
                                                                                     ended December 31                                        Balances as at
 Director / key                                                                                                   Dec. 31,        Dec. 31,           Jan. 1,
 management personnel          Transaction                       Note                 2011           2010           2011            2010              2010
 Director                      Office rent and property taxes        (i)       $      269    $       275     $           –   $            –     $         –
                               Supplies and sublicense fees
 Director                      (per agreement)                    (ii)         $      941    $       265     $          25   $           55     $         –
 Key Manager                   Office rent and property taxes    (iii)         $      357    $       347     $           –   $            –     $         –
 Directors /
 Officers                      Convertible debentures            (iv)          $        40   $       335     $         375   $          335     $         –
 Director                      Termination benefit                   (v)       $      345    $          –    $         287   $            –     $         –

(i) The Corporation paid rent and property taxes for a regional office to a corporation that is controlled by a member of the Board
    of Directors. The term of the lease is 15 years and expires on January 31, 2019.
(ii) The Corporation purchased various safety supplies and performed maintenance on safety equipment under a sublicense
     agreement with a corporation that is controlled by a member of the Board of Directors.
(iii) The Corporation paid rent and property taxes for a regional office to a corporation controlled by a Senior Manager for a
      subsidiary in the United States. The term of the lease is five years and expires on December 31, 2015.
(iv) The Corporation issued convertible debentures with a face value of $1,925 in December 2010 and $75 in January 2011. Of these
     amounts, $40 (2010: $335) were issued to directors, family of directors, and officers of HSE.
(v) The Corporation recognized a liability for termination benefits of $345 on the transition between CEOs in August 2011. The
    benefit is payable monthly over a two-year term and expires August 13, 2013.
Other related-party transactions
                                                        Transaction value year ended
                                                                        December 31                                              Balance outstanding at
 Transaction                                                  2011                    2010       Dec. 31, 2011         Dec. 31, 2010           Jan. 1, 2010
 Sale of goods and services
    Levitt Safety Limited                         $             34         $             2   $               4     $               2     $                –
    Atlantic Road Construction & Paving           $             18         $             –   $                6    $                –    $                –

All outstanding balances with these related parties are to be settled in cash within 6 months of the reporting date. None of the
balances are secured.

                                                                                                                                  Ownership interest at
                                                           Country of incorporation              Dec. 31, 2011         Dec. 31, 2010            Jan. 1, 2010
 HSE Integrated Inc. (“INC”)                                               USA                          100%                     100%                 100%
 Boots & Coots HSE Services, LLC (“BCHSE”)                                 USA                              90%                  90%                   90%
 CRS Technologies Inc. (“CRS”)                                             USA                           100%                    100%                 100%




56          HSE Integrated Ltd. 2011 Annual Report                                                               Notes to Financial Statements
note 28 – subsequent events                                                 (b) Share-based compensation exemption
                                                                            IFRS 1 provides companies with an optional exemption not
Asset acquisition                                                           to apply IFRS 2 – Share-Based Payments to equity-settled
On February 15, 2012 the Corporation completed the purchase                 share-based payments granted after November 7, 2002 that
of certain assets of the Flint Safety Unit (“Flint Safety Unit”) a          vested before the transition date of January 1, 2010. The
division of Flint Field Services Ltd. This division provides oilfield       Corporation has elected to take this exemption and has not
safety services across North America. The Corporation expects               restated its historical share-based payments that were
the completion of this transaction to increase property and                 granted after November 7, 2002 and vested prior to January
equipment by $2,200. The acquisition will be financed by a                  1, 2010.
$2,310 draw on the recently negotiated credit facility (note 13).           (c) Currency translation differences exemption

note 29 – exPlanation oF                                                    Retrospective application of IFRS would require the
                                                                            Corporation to determine cumulative currency translation
transition to iFrs                                                          differences in accordance with IAS 21 – The Effects of
                                                                            Changes in Foreign Exchange Rates from the date a
Overview                                                                    subsidiary was acquired. IFRS 1 allows cumulative
As stated in note 2(A), these are the Corporation’s first annual            translation gains or losses to be reset to zero at the
consolidated financial statements prepared in accordance with               transition date of January 1, 2010. The Corporation has
IFRS.                                                                       elected to reset all cumulative translation losses to zero in
                                                                            the opening retained earnings (deficit) at January 1, 2010.
The accounting policies set out in note 3 have been applied in
preparing the consolidated financial statements for the year            IFRS 1 mandatory exceptions
ended December 31, 2011, the comparative information
                                                                        IFRS 1 also outlines specific mandatory exceptions that a first-
presented in these consolidated financial statements for the
                                                                        time adopter must adhere to under certain circumstances. The
year ended December 31, 2010 and in the preparation of an
                                                                        Corporation has applied the following exceptions to its opening
opening IFRS statement of financial position at January 1, 2010
                                                                        statement of financial position dated January 1, 2010:
(the Corporation’s date of transition).
                                                                        (i) Estimates
In preparing its opening IFRS statement of financial position, the
Corporation has adjusted amounts reported previously in                     In accordance with IFRS 1, an entity’s estimates under IFRS
consolidated financial statements prepared in accordance with               at transition date must be consistent with estimates made
previous Canadian Generally Accepted Accounting Principles                  in accordance to previous Canadian GAAP unless there is
(“previous GAAP” or “CGAAP’). An explanation of how the                     objective evidence that these estimates were in error. The
transition from previous GAAP to IFRSs has affected the                     Corporation’s IFRS estimates as of January 1, 2010 are
Corporation’s financial position, financial performance and cash            consistent with its previous Canadian GAAP estimates for
flows is set out in the following tables and the notes that                 the same date.
accompany the tables.                                                   (i) Non-controlling interests
Adoption of IFRS                                                            The Corporation has applied IAS 27 – Consolidated and
(i) IFRS 1 – First-Time Adoption of International Financial                 Separate Financial Statements prospectively from January 1,
    Reporting Standards sets forth guidance for the initial                 2010, such that total comprehensive income is attributed to
    adoption of IFRS. Under IFRS 1 the standards are applied                the owners of the parent and to the non-controlling
    retrospectively at the transition date with adjustments to              interests.
    assets and liabilities being offset to Retained earnings            Reconciliations between previous
    (deficit) unless certain exemptions are applied. The                Canadian GAAP and IFRS
    Corporation has applied the following exemptions to its
    opening consolidated IFRS statement of financial position           IFRS 1 requires an entity to reconcile equity, comprehensive
    dated January 1, 2010:                                              income and cash flows for prior periods. The Corporation’s first-
                                                                        time adoption of IFRS did not have a significant impact on the
    (a) Business combination exemption                                  total operating, investing, or financing cash flows. The following
    IFRS 1 provides the option to apply IFRS 3 Business                 represents the reconciliations from previous Canadian GAAP to
    Combinations, retrospectively for all business combinations         IFRS for the respective periods noted for equity, earnings and
    from a particular pre-transition date elected by the                comprehensive income.
    Corporation or prospectively from the transition date of
    January 1, 2010. The Corporation has elected not to
    retrospectively apply IFRS 3 to business combinations that
    occurred prior to January 1, 2010 and such business
    combinations have not been restated.


Notes to Financial Statements                                                 HSE Integrated Ltd. 2011 Annual Report                57
Reconciliation of equity

                                                                    Note   December 31, 2010       January 1,2010

Total equity under previous Canadian GAAP                                  $          34,127   $          34,962

Differences increasing (decreasing) reported shareholders’ equity

    Impairment loss on property and equipment                        A               (5,775)              (7,000)

    Property and equipment under finance lease                       B                 2,668               1,609

    Property and equipment – componentization                        C                 (516)                (273)

    Deferred gain                                                    D                  319                  456

    Provisions                                                       E               (2,013)              (2,228)

    Share-based payments                                             F                   73                   35

    Prepaid expenses and other assets                                G                  (33)                 (33)

    Non-controlling interests                                        H                    –                    –

    Currency translation reserve                                     I                   10                    –

    Business acquisition costs                                       J                  (19)                   –

    Related tax effect                                               K                 1,455               1,994

Total equity under IFRS                                                    $          30,296   $          29,522




58       HSE Integrated Ltd. 2011 Annual Report                                Notes to Financial Statements
Reconciliation of net earnings
                                                                                                              Year ended
                                                                                            Note        December 31, 2010

Net loss under previous Canadian GAAP                                                              $               (1,157)

Differences in GAAP increasing (decreasing) reported earnings

    Reduction of depreciation                                                                A                      1,225

    Depreciation on property and equipment under finance lease                               B                      1,059

    Depreciation on property and equipment – componentization                                C                      (243)

    Deferred gain – amortization                                                             D                      (137)

    Provisions – onerous contract expenses                                                   E                        215

    Share-based payments                                                                     F                         25

    Business acquisition costs                                                                J                       (19)

    Related tax effect                                                                                              (529)

Net earnings under IFRS                                                                            $                  439




Reconciliation of other comprehensive income
                                                                                                              Year ended
                                                                                                        December 31, 2010

Other comprehensive loss under Canadian GAAP                                                       $               (1,249)

Differences in Canadian GAAP increasing (decreasing) reported other comprehensive income (loss)

    Differences in net earnings, net of tax                                                                         1,596

    Foreign currency translation adjustments to equity                                                                  –

Other comprehensive income under IFRS                                                              $                  347




Notes to Financial Statements                                             HSE Integrated Ltd. 2011 Annual Report    59
Reconciliation of Consolidated Statement of Financial Position as on January 1, 2010
                                                    Previous       Adjust-         Reclassi-
                                      Note           CGAAP         ments           fications         IFRS
ASSETS                                                                                                            ASSETS
Current Assets                                                                                                    Current Assets
  Cash and cash equivalents                     $         460 $              – $               – $          460     Cash and cash equivalents
  Accounts receivable                                  16,156                –                 –      16,156        Trade receivables
  Inventory                                               199                –                 –            199     Inventory
  Prepaid expenses and                                                                                              Prepaid expenses and
  other receivables                     G               1,654           (33)            (207)          1,414        other receivables
  Income taxes recoverable                                398                –                 –            398     Income taxes recoverable
Total Current Assets                                   18,867           (33)            (207)         18,627 Total Current Assets
Non-Current Assets                                                                                                Non-Current Assets
  Property and equipment              A, B, C          28,595           578                    –      29,173        Property and equipment
  Intangible assets                     A               3,260          (716)                   –       2,544        Intangible assets
                                                               –             –           207                207     Other receivables
Total Non-Current Assets                               31,855          (138)             207          31,924 Total Non-Current Assets
TOTAL ASSETS                                    $      50,722 $        (171) $                 – $    50,551 TOTAL ASSETS
LIABILITIES                                                                                                       LIABILITIES
Current Liabilities                                                                                               Current Liabilities
  Accounts payable and                                                                                              Trade and other
  accrued liabilities                   F       $       4,667 $         (35) $           (50) $        4,582        payables
                                        E                      –        215                50               265     Provisions
                                        B                      –      2,600            5,455           8,055        Loans and borrowings
  Current portion of long-term debt                     5,222                –        (5,222)                 –
  Current portion of obligation
  under capital lease                                     233                –          (233)                 –
  Income taxes payable                                     72                –                 –             72     Income taxes payable
  Current portion of deferred gain      D                 137          (137)                   –              –
Total Current Liabilities                              10,331         2,643                    – $    12,974 Total Current Liabilities
Non-Current Liabilities                                                                                           Non-Current Liabilities
                                        E                      –      2,013              810           2,823        Provisions (non-current)
                                        B                      –      2,926              130           3,056        Loans and borrowings
  Long-term debt                                          818                           (818)                 –
  Deferred gain                         D                 319          (319)                                  –
  Obligations under capital lease                         122                –          (122)                 –
  Deferred tax liabilities              K               4,170        (1,994)                   –       2,176        Deferred tax liabilities
Total Non-Current Liabilities                           5,429         2,626                    –       8,055 Total Non-Current Liabilities
TOTAL LIABILITIES                               $      15,760 $       5,269 $                  – $    21,029 TOTAL LIABILITIES


60        HSE Integrated Ltd. 2011 Annual Report                                                      Notes to Financial Statements
Reconciliation of Consolidated Statement of Financial Position as on January 1, 2010 (continued)
                                          Previous       Adjust-         Reclassi-
                               Note        CGAAP         ments           fications         IFRS
EQUITY                                                                                                EQUITY
   Share capital                      $      60,040 $              – $               – $    60,040      Share capital
   Contributed surplus          F             4,755                8                 –       4,763      Contributed surplus
   Deficit                                 (29,770)        (5,511)                   –     (35,281)     Deficit
   Accumulated other                                                                                    Accumulated other
   comprehensive                                                                                        comprehensive
   income (loss)                I              (63)            63                    –            –     income (loss)
   Total equity attributable                                                                            Total equity attributable
   to equity holders of the                                                                             to equity holders of the
   Corporation                               34,962        (5,440)                   –      29,522      Corporation
   Non-controlling interest     H                    –             –                 –            –     Non-controlling interest
TOTAL EQUITY                                 34,962        (5,440)                   –      29,522 TOTAL EQUITY
TOTAL LIABILITIES                                                                                  TOTAL LIABILITIES
AND EQUITY                            $      50,722 $        (171) $                 – $    50,551 AND EQUITY




Notes to Financial Statements                                            HSE Integrated Ltd. 2011 Annual Report                61
Reconciliation of Consolidated Statement of Financial Position as on December 31, 2010
                                                    Previous       Adjust-         Reclassi-
                                      Note           CGAAP         ments           fications         IFRS
ASSETS                                                                                                            ASSETS
   Current Assets                                                                                                 Current Assets
  Cash and cash equivalents                     $       1,479 $              – $               – $     1,479        Cash and cash equivalents
  Accounts receivable                                  18,099                –                 –      18,099        Trade receivables
  Inventory                                               171                –                 –            171     Inventory
  Prepaid expenses and                                                                                              Prepaid expenses and
  other receivables                     G               1,675           (52)            (129)          1,494        other receivables
  Income taxes recoverable                                705                –                 –            705     Income taxes recoverable
Total Current Assets                                   22,129           (52)            (129)         21,948      Total Current Assets
Non-Current Assets                                                                                                Non-Current Assets
  Property and equipment              A, B, C          25,051            53                    –      25,104        Property and equipment
  Intangible assets                     A               2,732          (600)                   –       2,132        Intangible assets
                                                               –                         129                129     Other receivables
Total Non-Current Assets                               27,783          (547)             129          27,365      Total Non-Current Assets
TOTAL ASSETS                                    $      49,912 $        (599) $                 – $    49,313      TOTAL ASSETS
LIABILITIES                                                                                                       LIABILITIES
Current Liabilities                                                                                               Current Liabilities
  Accounts payable and accrued                                                                                      Trade and other
  liabilities                           F       $       5,911 $         (74) $                 – $     5,837        payables
                                        E                      –        212                    –            212     Provisions
                                        B                      –      2,052            1,408           3,460        Loans and borrowings
  Current portion of long-term debt                     1,304                –        (1,304)                 –
  Current portion of obligation
  under capital lease                                     104                –          (104)                 –
  Income taxes payable                                    423                –                 –            423     Income taxes payable
  Current portion of deferred gain      D                 137          (137)                   –              –
Total Current Liabilities                               7,879         2,053                    –       9,932      Total Current Liabilities
Non-Current Liabilities                                                                                           Non-Current Liabilities
                                        E                      –      1,801                    –       1,801        Provisions (non-current)
                                        B                      –      1,015            4,563           5,578        Loans and borrowings
  Long-term debt                                        2,919                –        (2,919)                 –
  Convertible debentures – debt
  component                                             1,628                –        (1,628)                 –
  Obligations under capital lease                          16                –           (16)                 –
  Deferred gain                         D                 182          (182)                   –              –
  Deferred tax liabilities              K               3,161        (1,455)                   –       1,706        Deferred tax liabilities
Total Non-Current liabilities                           7,906         1,179                    –       9.085      Total Non-Current Liabilities
TOTAL LIABILITIES                               $      15,785 $       3,232 $                  – $    19,017      TOTAL LIABILITIES


62        HSE Integrated Ltd. 2011 Annual Report                                                       Notes to Financial Statements
Reconciliation of Consolidated Statement of Financial Position as on December 31, 2010 (continued)

                                          Previous       Adjust-         Reclassi-
                               Note        CGAAP         ments           fications         IFRS
EQUITY                                                                                                  EQUITY
  Share capital                       $      60,040 $              – $               – $    60,040        Share capital
  Contributed surplus           F             4,948            21                    –       4,969        Contributed surplus
  Convertible debentures –
  equity component                              221                –                 –            221
  Deficit                                  (30,927)        (3,924)                   –     (34,851)       Deficit
  Accumulated other                                                                                       Accumulated other
  comprehensive                                                                                           comprehensive
  income (loss)                 I             (155)            72                    –         (83)       income (loss)
Total equity attributable to                                                                       Total equity attributable to
equity holders of the                                                                              equity holders of the
Corporation                                  34,127        (3,831)                   –      30,296 Corporation
Non-controlling interest        H                    –             –                 –              – Non-controlling interest
TOTAL EQUITY                                 34,127        (3,831)                   –      30,296 TOTAL EQUITY
TOTAL LIABILITIES                                                                                  TOTAL LIABILITIES
AND EQUITY                            $      49,912 $        (599) $                 – $    49,313 AND EQUITY




Notes to Financial Statements                                            HSE Integrated Ltd. 2011 Annual Report                  63
Reconciliation of total comprehensive income for the year ended December 31, 2010

                                                   Previous        Adjust-
                                        Note        CGAAP          ments             IFRS
REVENUE                                        $     82,028    $             –   $   82,028       REVENUE
Costs
  Operating and materials                B           70,341         (3,040)          67,301       Direct operating expenses
  Selling, general and administrative                 7,936                  –        7,936       Selling, general and administrative
                                                      3,751           3,040           6,791
  Amortization of property and                                                                    Depreciation of property and
  equipment                             ABC           5,152             568           5,720       equipment
  Amortization of intangible assets      A              528           (116)             412       Amortization of intangible assets
  Share-based compensation               F              210            (25)             185       Stock based compensation
  Interest on long-term debt             B              339             419             758       Finance costs
  Other interest and bank charges                       148           (148)                  –
  Foreign exchange gain                                  (4)                 –              (4)   Foreign exchange gain
  (Gain) loss on disposal of                                                                        Loss on disposal of
  property and equipment                BD             (102)            217             115         property and equipment
Income (Loss) Before the                                                                          Income (Loss) Before the
Undernoted Items                                     (2,520)          2,125            (395)      Undernoted Items
  Expiry of contingent consideration                    810                  –          810       Expiry of contingent consideration
LOSS BEFORE INCOME TAX                               (1,710)          2,125             415       EARNINGS BEFORE INCOME TAX
Income taxes                                                                                      Income taxes
  Current provision                                     423                  –          423       Current provision
  Future reduction                                     (976)            529            (447)      Deferred tax expense
                                                       (553)            529             (24)
NET LOSS                                             (1,157)          1,596             439       NET EARNINGS
Other comprehensive income                                                                        Other comprehensive income
  Unrealized loss on translating
  financial statements of self-                                                                     Foreign currency translation
  sustaining foreign operations          I              (92)                 –          (92)        differences – foreign operations
                                                                                                  Total Comprehensive
Other Comprehensive Loss                       $     (1,249)          1,596      $      347       Income for the Year
                                                                                                  Earnings attributable to
                                                                                 $      430         Owners of the Corporation
                                                                                             9      Non-controlling interest
                                                                                 $      439
                                                                                                  Comprehensive income attributable to
                                                                                 $      347         Owners of the Corporation
                                                                                             –      Non-controlling interest
                                                                                 $      347



64       HSE Integrated Ltd. 2011 Annual Report                                                   Notes to Financial Statements
Explanations to the notes in reconciliations of equity, earnings    IAS 36 requires that impairment losses be first applied
and comprehensive income noted above are as follows:                against goodwill, and then to other assets on a pro-rata
                                                                    basis. Estimating fair value less costs to sell requires
    (A) Impairment loss                                             Management judgment. The estimate was based on the
    The Corporation was required to apply IAS 36 – Impairment       Corporation’s share price as of January 1, 2010, which was
    of Assets on the January 1, 2010 transition date.               $.53, and an estimation of applicable control premiums
                                                                    based on comparative companies.
    As a result, it recognized a $7,000 decrease in property and
    equipment and finite life intangibles ($6,756 in the            To assess the reasonableness of the calculated fair value,
    Canadian segment and $244 in the U.S. segment) and a            fair values were also calculated by applying Enterprise
    corresponding impact on deferred tax assets of $1,859 for a     Value/EBITDA multiples to both budgeted EBITDA and
    net increase to deficit of $5,141 on its opening Consolidated   analyst predictions of EBITDA.
    Statement of Financial Position dated January 1, 2010.
                                                                    (B) Property and equipment under finance lease
    IFRS uses a one-step approach for both testing for and
                                                                    The Corporation currently leases certain light vehicles, office
    measurement of impairment, with carrying values
                                                                    equipment, and land and buildings.
    compared directly to the higher of fair value less costs to
    sell and value-in-use (calculated using discounted cash         Under previous Canadian GAAP, a lease was classified as a
    flows).                                                         finance lease if it transferred substantially all of the risks
                                                                    and rewards relating to ownership to the lessee. All other
    Fair value less costs to sell is the amount obtainable from
                                                                    leases were operating leases. Although the qualitative
    the sale of an asset or cash generating unit in an arm’s-
                                                                    criteria of operating and finance leases are similar under
    length transaction between knowledgeable, willing parties
                                                                    previous Canadian GAAP and IFRS, previous Canadian GAAP
    less costs of disposal. Value-in-use is the present value of
                                                                    contained quantitative thresholds to be applied in the lease
    the future cash flows expected to be derived from the
                                                                    classification test.
    continuing use of an asset and from its ultimate disposal or
    from a cash-generating unit.                                    IFRS does not provide any quantitative thresholds that need
                                                                    to be met when determining the classification of a lease.
    Under IFRS, property and equipment and finite-life
                                                                    Under IFRS, a lease is classified as a finance lease when the
    intangibles are tested for impairment at the asset or cash-
                                                                    lease meets the qualitative criteria specified in IAS 17 –
    generating-unit (“CGU”) level. A CGU is the smallest group
                                                                    Leases. These criteria include: provisions allowing or
    of assets that generates cash inflows that are largely
                                                                    requiring the transfer of ownership of the asset to the
    independent of the cash inflows from other assets or groups
                                                                    lessee by the end of the lease term; lease agreements
    of assets. HSE has identified its “Canada” and “USA”
                                                                    where the lease term is for the major part of the economic
    operating segments as its cash-generating units.
                                                                    life of the asset even if title is not transferred; leases where
    Under IFRS, the estimated future cash flows used in             the leased assets are of a specialized nature; and provisions
    calculating value-in-use are discounted using the rate that     specifying that, where a lessee can cancel the lease, the
    reflects the market’s assessment of risks specific to the       lessor’s losses associated with the cancellation are borne by
    asset or cash-generating unit. A significant factor in          the lessee.
    determining whether HSE had impaired assets at January 1,
                                                                    The Corporation is treating its light vehicle leases as finance
    2010 was the fact that the carrying value of its net assets
                                                                    leases. At January 1, 2010, the net book value of property
    exceeded its market capitalization. The recoverable amount
                                                                    and equipment increased by $7,135, loans and borrowings
    was based on fair value less costs to sell.
                                                                    increased by $5,526, and opening deficit decreased by
                                                                    approximately $1,609 pre-tax.
    Consolidated statement of comprehensive income

                                                                                                   Year ended December 31, 2010
     Operating expenses
          Lease costs                                                                                $                       2,838
          Depreciation and amortization                                                                                     (1,425)
          Loss on disposal of leases                                                                                           (88)
          Finance costs                                                                                                       (265)
     Earnings adjustment before income tax                                                           $                       1,060




Notes to Financial Statements                                        HSE Integrated Ltd. 2011 Annual Report                  65
 (C) Property and equipment componentization                            contract in which the unavoidable costs of meeting the
                                                                        obligations under the contract exceed the economic
 Under IFRS, property and equipment is required to be                   benefits expected to be received under the contract.
 componentized and depreciated separately if significant                Provisions are discounted where amounts are material.
 components within an asset have different economic lives. If
 an asset has incurred a capital repair, the equivalent net             As part of a prior acquisition, HSE assumed a long-term
 book value of the part of the asset repaired is required to be         operating lease for a building. The building is not required
 derecognized. In the absence of specific criteria to define            for HSE operations at this time and is not currently
 “significant”, Management uses its judgment in determining             subleased. HSE has identified this lease as an onerous
 which costs are significant in relation to the property and            contract. HSE recorded $2,228 as a provision at January 1,
 equipment.                                                             2010 with a corresponding pre-tax increase to opening
                                                                        deficit. On an annual basis HSE expects direct operating
 The componentization of required assets resulted in a                  expense to decrease by approximately $215 per year.
 decrease to net book value of property and equipment of
 $273 and an increase in pre-tax opening deficit of $273 as at          Legal
 January 1, 2010. This change also resulted in a decrease to
                                                                        Under previous Canadian GAAP a contingency is defined as
 depreciation of $243 for the year ended December 31, 2010.
                                                                        “an existing condition or situation involving uncertainty as
 (D) Deferred gain                                                      to possible gain or loss to an enterprise that will ultimately
                                                                        be resolved when one or more future events occurs or fails
 The Corporation entered into sale and leaseback
                                                                        to occur”. Three options are provided to assess the
 transactions in 2008 for three properties owned in Fort
                                                                        probability of uncertainty: likely (high); unlikely (low) and
 McMurray, Alberta. Under previous Canadian GAAP, the
                                                                        not determinable. Lawsuits require significant judgment in
 $700 in gains were deferred and amortized over the life of
                                                                        applying these criteria. In particular, the existence of a
 the leases. Under IFRS, if a sale and leaseback transaction
                                                                        lawsuit does not necessarily mean that the Corporation has
 results in an operating lease, and it is clear that the
                                                                        a present obligation. A present obligation exists only if, and
 transaction is established at fair value, any profit or loss
                                                                        to the extent that, the claim is valid.
 must be recognized immediately.
                                                                        Typically, in a disputed lawsuit, it is uncertain whether the
 The effect was to write off the deferred gain under liabilities
                                                                        defendant has a present obligation. Under IFRS,
 and decrease deficit by $456 at January 1, 2010, and to
                                                                        Management would need to consider the available evidence
 decrease gain (loss) on disposal of property and equipment
                                                                        and to reach a judgment as to the validity of the claim. A
 by $137 for the year ended December 31, 2010.
                                                                        review of HSE legal claims was performed as at January 1,
 (E) Provisions                                                         2010 and the key criteria applied under IFRS to determine
                                                                        how they should be recognized and measured. No changes
 Onerous contracts                                                      to direct operating costs were required related to legal
 Under IFRS, if a corporation has onerous contracts, the                disputes.
 present obligation under the contract must be recognized               The impact arising from these changes are summarized as
 and measured as a provision. An onerous contract is a                  follows:

 Consolidated statement of financial position

                                                                                                                  December 31, 2010
                                                                       Onerous contracts                  Legal                  Total
  Provisions – current portion                                     $               (212)    $                 –   $             (212)
  Provisions – non-current portion                                                (1,801)                     –               (1,801)
  Adjustment to equity                                             $              (2,013)   $                 –   $           (2,013)
                                                                                                                      January 1, 2010
                                                                       Onerous contracts                  Legal                  Total
  Provisions – current portion                                     $               (215)                   (50)   $             (265)
  Provisions – non-current portion                                                (2,013)                     –               (2,013)
  Adjustment to equity                                             $              (2,228)                  (50)   $           (2,278)




66     HSE Integrated Ltd. 2011 Annual Report                                                   Notes to Financial Statements
   (F) Share-based payments                                        However, under IFRS, this capital gains tax paid in Canada is
                                                                   treated as current tax and does not qualify to be recognized
   The Corporation granted equity-settled and cash-settled         as a deferred tax asset. The effect was to write off the other
   share-based payments to directors and certain employees.        current asset resulting in a decrease of ‘prepaid expenses
   The Corporation accounted for cash-settled share-based          and other assets’ and an increase in deficit by $33 at
   payment arrangements by reference to their intrinsic value      January 1, 2010 and December 31, 2010.
   under previous Canadian GAAP. Under previous Canadian
   GAAP, the Corporation also accrued compensation cost as if      (H) Non-controlling interest
   all instruments granted were expected to vest and
                                                                   Under previous Canadian GAAP, when the non-controlling
   recognized the effect of actual forfeitures as they occurred.
                                                                   interest is not obligated to fund its share of losses, the
   Under IFRS, the liability related to cash-settled share-based
                                                                   Corporation does not attribute losses to the non-controlling
   payments has to be adjusted to reflect the fair value of the
                                                                   interest once the interest has been reduced to nil. Under
   outstanding shared-based payments. Further under IFRS,
                                                                   IFRS, the Corporation is required prospectively from January
   the estimates of the number of equity settled instruments
                                                                   1, 2010 to allocate comprehensive losses to non-controlling
   that are expected to vest are adjusted to the actual number
                                                                   interest based on their effective interest, even if this results
   that vests unless the forfeitures are due to market based
                                                                   in a deficit non-controlling interest balance (see mandatory
   conditions.
                                                                   exceptions above).
   The change in respect of equity-settled share-based
                                                                   The impact of the adjustment noted above amounted to a
   payments is to increase stock compensation expense of
                                                                   non-controlling interest of $nil at December 31, 2010 and
   employee costs by $13 for the year 2010. The January 1,
                                                                   January 1, 2010.
   2010 change was an increase of $8 to contributed surplus
   with an offsetting increase of $8 in opening deficit.           (I) Accumulated other comprehensive
   The change in respect of cash-settled share-based payments          income (loss)
   is to decrease stock compensation expense of directors by       As noted above under “Initial elections upon adoption” and
   $38 for the year 2010. The January 1, 2010 change was a         in accordance with IFRS 1, the Corporation has elected to
   decrease of $35 to DSU liability with an offsetting decrease    deem all foreign currency translation differences that arose
   of $35 in opening deficit.                                      prior to January 1, 2010 in respect of all foreign operations
                                                                   to be nil at January 1, 2010.
   (G) Prepaid expenses and other assets
                                                                   At January 1, 2010 there is no impact on total equity as $63 is
   The Corporation sold at fair value certain plant and
                                                                   transferred from accumulated other comprehensive income
   equipment from Canada to one of its subsidiaries in the U.S.
                                                                   (loss) to deficit within total equity. The foreign currency
   in the third quarter of 2008, resulting in a taxable capital
                                                                   translation amount recorded in other comprehensive income
   gain in Canada. This tax amount was paid and classified
                                                                   is an increase of $10 at December 31, 2010.
   under “prepaid expenses and other assets”. Under previous
   Canadian GAAP, the tax paid on capital gains relating to        (J) Business acquisition costs
   property and equipment sold to a subsidiary can be
                                                                   Under IFRS, expenses incurred to complete a business
   recognized as an expense only after the relevant asset is
                                                                   combination must be expensed at the time of acquisition.
   disposed of by the subsidiary or after that entity ceases to
                                                                   The Corporation increased direct operating expenses by $19
   be a subsidiary.
                                                                   at December 31, 2010.




Notes to Financial Statements                                       HSE Integrated Ltd. 2011 Annual Report                  67
 (K) Deferred tax liabilities
 The above changes (decreased) increased the deferred tax liability as follows based on a tax rate of 26%:

                                                                           Note        December 31, 2010         January 1, 2010
  Deferred tax liability under Canadian GAAP                                       $                3,161    $            4,170
  Differences increasing (decreasing) the deferred tax liability
      Impairment loss on property and equipment                              A                    (1,524)                (1,859)
      Property and equipment under finance lease                             B                      1,409                 1,792
      Property and equipment - componentization                              C                      (141)                   (74)
      Deferred gain                                                          D                         81                   117
      Provisions                                                             E                          –                   (10)
      Share-based payments                                                   F                         21                    10
      Prepaid expenses and other assets                                      G                         14                    (5)
      Onerous contracts                                                      E                      (518)                 (574)
      Finance obligations                                                    I                      (736)                (1,391)
      Debentures                                                                                     (56)                     –
      Business acquisition costs                                             J                        (5)                     –
  Deferred tax liability under IFRS                                                $                1,706    $            2,176

 (L) Reclassifications
 The amounts presented as reclassifications in the reconciliations above represent those amounts that were already recognized
 and measured under previous Canadian GAAP, but were presented under a different line item within the consolidated statement
 of financial position or the consolidated statements of earnings. These amounts are now reclassified to conform to presentation
 and disclosure requirements under IFRS.
 (M) Material adjustments to the statement of cash flows
 There were no material differences between the statement of cash flows presented under IFRS and the statement of cash flows
 presented under Canadian GAAP.




68     HSE Integrated Ltd. 2011 Annual Report                                                Notes to Financial Statements
CORPORATE INFORMATION
CORPORATE HEAD                   STOCk ExCHANGE LISTING           LEGAL COUNSEL
OFFICE, SALES OFFICE,            Toronto Stock Exchange           Blake, Cassels and Graydon LLP
INvESTOR INFORMATION             Symbol: HSL                      Calgary, Alberta
#1000, 630 – 6th Avenue SW
                                 AUDITORS                         TRANSFER AGENT
Calgary, Alberta T2P 0S8
Phone: 403-266-1833              KPMG LLP Chartered Accountants   AND REGISTRAR
Fax: 403-266-1834                Calgary, Alberta                 Canadian Stock Transfer
Email Address:                                                    Company, Inc.
information@hseintegrated.com
                                 BANkERS                          Calgary, Alberta
Website: www.hseintegrated.com   ATB Financial
                                 Calgary, Alberta




OFFICERS AND DIRECTORS
OFFICERS                         BOARD OF DIRECTORS               Bruce Levitt (1, 3)
Thomas Hickey                    David Yager (4)                  Chairman, Compensation
President and                    Chairman of the Board            Committee
Chief Executive Officer          Calgary, Alberta                 Toronto, Ontario

Lori McLeod-Hill                 Kenneth Bagan (2, 3)             Douglas Robinson (1)
Chief Financial Officer          Chairman, Corporate Governance   Lead Director
                                 Committee                        Calgary, Alberta
Glenn Roberts
                                 Calgary, Alberta
Chief Operating Officer
                                 James Brewster (2, 4)
                                 Bowden, Alberta
                                 Martin Hall (1, 2)
                                 Chairman, Audit Committee        (1) Member of Audit Committee
                                 Canmore, Alberta                 (2) Member of Governance and
                                                                      Nominating Committee
                                 James Hill (3, 4)                (3) Member of Compensation
                                 Chairman, Health and Safety          Committee
                                 Committee                        (4) Member of Health and Safety
                                 Calgary, Alberta                     Committee
#1000, 630 – 6th Avenue SW
 Calgary, Alberta T2P 0S8
   Phone: 403-266-1833
    Fax: 403-266-1834
  www.hseintegrated.com

				
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