annual report - Solar lighting solutions for infrastructure Reports/CMH 2008 AR.pdf · The risk factors identified in this Annual Report are not intended to represent a ... Roadways

2008 annual report

A810 Solar Obstruction Lighting System

2 Carmanah Technologies Corporation - Annual Report 2008

Financial Highlights 2008 Financial Summary

Forward-looking Statements

This document may contain forward-looking statements. Often, but not always, forward-looking statements can be identified by the use of words such as “expects,” “plans,” “estimates,” “intends,” “believes,” “could,” “might,” “will” or variations of such words and phrases. Forward-looking statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance, or achievements of Carmanah to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements. These statements are based on management’s current expectations and beliefs and are subject to a number of risks and uncertainties which are described under the caption “Disclosure about Risks and Financial Instruments” and elsewhere in this Annual Report for the fiscal year ended December 31, 2008. The risk factors identified in this Annual Report are not intended to represent a complete list of factors that could affect Carmanah. Accordingly, readers should not place undue reliance on forward-looking statements. Carmanah does not assume any obligation to update the forward-looking information contained in this document.

Sales: $60.6 million for 2008, up 2% from $59.3 million in 2007

Strategic sales of $34.1 million for 2008, up 40% from $24.3 million in 2007 (primarily from solar LED lighting)

Tactical sales of $26.5 million for 2008, down 24% from $35.0 million in 2007 (due to the 2008 exit of transit & distribution, and late 2007 exit of home power tactical markets)

Gross margin: 34.3% for 2008, up from 26.3% in 2007

Net income: $1.3 million (excluding the impact of the goodwill and intangible impairment charges) for 2008, compared to a net loss of ($6.9) million in 2007

Adjusted EBITDA: $4.7 million for 2008, compared to ($7.6) million in 2007

Positive cash flow from operations: $4.0 million for 2008, compared to $2.0 million in 2007

Cash balance: $7.9 million as at December 31, 2008, up from $4.1 million at the end of 2007

Goodwill and intangible impairment: $10.7 million for 2008. This impairment is non-cash and does not affect liquidity, cash flows from operating activities or impact future operations.

Nil debt: Continued debt-free operation

Carmanah Solar LED Marine Lanterns

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Performance Summary

Company Overview

For 2008, Carmanah reports the following results for its strategic and tactical business units:

Carmanah derives revenue from the manufacturing and sale of solar-powered LED lighting, solar power systems, and LED signage. In 2008, through both direct and distributor sales programs, Carmanah served the following markets:

Solar-Powered LED Lighting

Marine Marine navigation and hazard marking lights with ranges of one to six nautical miles.

Aviation Aviation taxiway edge lighting, runway lighting, obstruction lighting, apron lighting, barricade lighting and emergency lighting.

Roadways Roadways pedestrian crosswalk signals, school zone flashers, 24-hour roadway beacons, area lighting for transit stops and other pedestrian areas, internally illuminated street-name and traffic signs.

Industrial Industrial warning lights, obstruction lights, equipment-marking lights, railway track warning lights, bridge-marking lights.

Solar Power Systems

Off-grid solar power: Off-grid solar power systems and “balance of system” (BOS) components for telecommunication, oil and gas, security and other industrial applications.

Mobile solar power Mobile solar-power systems for RVs, boats, long-haul trucking and utility fleet trucks.

Grid-tie solar power Grid-tied solar power systems designed to help Canadian commercial facilities supplement electricity drawn from the grid.

LED Signs

Edge-lit LED signs for point of purchase (gaming, lottery), corporate identity (branding), and interior architectural applications.

Strategic Business

Strategic business sales were $34.1 million, up $9.8 million from the same period of 2007. Solar LED sales provided strong growth during 2008, with solar marine, aviation and obstruction beacons leading the way. This growth was offset by lower sales in Solar Power Systems, primarily due to some delayed shipments in 2008 and the fact that a significant grid tie project in Prince Edward Island was completed in the second six months of 2007. There were no such comparable large-scale projects in the same period of 2008.

Tactical Business

Tactical business sales were $26.5 million, down $8.5 million from the same period of 2007. Signage business sales increased by $1.9 million due to a large order from a major US lottery customer. This increase was offset by lower sales within the distribution businesses as the Company started to wind down its distribution warehouses in Calgary and Santa Cruz. Also, the prior year had included approximately $4.2 million of sales into the home power market, a market that Carmanah chose to exit due to the lower margins and increasing competition.

Ted Lattimore, CEO


A Message from Ted Lattimore, CEO

If 2007 was Carmanah’s year of transition, 2008 was a year of transformation. Throughout the year we controlled costs and committed our resources to focus on what we do best: delivering solar power and solar-LED lighting systems. Significant changes were required to return the company to a profitable footing. In 2008 we implemented those changes — exiting businesses that weren’t contributing, freeing up resources for those that were, outsourcing manufacturing and streamlining processes across the company. Although our path was not an easy one, we’ve come a long way over the past year and made determined strides towards our long-term goals, all the while helping to prepare Carmanah for a bright and profitable future.

As it happens, our efforts to cut costs and return the company to profitability could not have come at a better time; we can now see how last year’s broad-based restructuring has resulted in our increased strength today. Our strategic businesses have grown by 40%, and our cash balance has gone from a low of negative $2 million in early 2007 to nearly $8 million in the bank in 2008 (with no debt) — a significant advantage in today’s cautious financial climate.

Over the past year we’ve secured significant strategic partnerships with industry-leading technology and service providers, increased our commitment to product research and development, and strengthened our worldwide distributor network. While maintaining our advantage in solar power systems and solar-LED lights and beacons, we’ve introduced an exciting new innovation in solar powered general illumination; the opportunities for which are considerable.

Even during a recession, security and safety remain paramount — industries require reliable and affordable lights and power, and Carmanah remains a trusted supplier to some of the world’s largest and most resilient industrial customers. With solar energy more attractive than ever, I believe our technology is fast approaching the tipping point between industry innovation and widespread acceptance. In fact, as we enter 2009, we’re prepared to invest more than $6 million in ongoing research and development to advance the tipping point.

Looking back over 2008, I’m impressed with the distance we’ve come, and proud of the team that got us here. Even with the challenges of today’s economy, we’re in better shape than ever — our operating costs are low and scalable, our world wide distribution channel is strengthening, product reliability and advancement are fully on track, we have cash in the bank, and we maintain an overall financial position that is increasingly enviable for many companies these days.

As we plan for 2009 and beyond, I look forward to embracing the challenges that lay ahead. These are exciting times for sustainable energy alternatives, and in a world turning to solar power, Carmanah stands out as a very bright light indeed!

Ted Lattimore, CEO

Carmanah Solar LED Obstruction Lanterns

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Strategic and Tactical Focus

Business Focus

Carmanah’s balanced business strategy emphasizes the company’s key revenue-producing activities while accommodating complementary profitable opportunities within the company’s three technology groups: solar-powered LED lighting, solar power systems and LED-illuminated signage.

Corporate Mission

“Carmanah delivers standalone solar lighting and solar power systems for industrial applications, worldwide.”

Tagline

“We put solar to work”

Operations

During 2008, Carmanah modified its operations to support an ongoing focus on its core strengths while controlling costs, simplifying its organizational structure, and increasing the scalability and efficiency of its supply chain. A partnership with Flextronics International provided the means to outsource manufacturing efficiently and reliably, while partnerships with industry-leading technology providers ENCOM and Beta Lighting provided the opportunity to combine Carmanah solar-LED products with complementary best-in-class communications and lighting technology. To optimize the sales and distribution of Carmanah products on a global level, the company implemented a more efficient geographic sales model, supported by a worldwide network of partners and distributors. Together, these changes have helped Carmanah to become a more agile and responsive business, and prepared the company to excel in a challenging global economic climate.

Corporate Governance

Carmanah maintains a strict and comprehensive management reporting and review process that ensures accuracy and compliance with all reporting guidelines. This process includes a Whistleblower program that provides a way for anyone who has reasonable cause to suspect acts of fraud, accounting irregularities, material omissions of public disclosure, conflicts of interest, or other wrongdoing by the Company, to report their concerns in confidence.

Carmanah designs, manufactures and distributes a range of energy efficient and renewable-energy technology. In 2008, the company was restructured around two business segments:

Strategic

Strategic: includes the primary business units of LED lights and beacons and solar power systems for industrial and grid-tie applications. These units represent the company’s main focus over the long term.

Tactical

Tactical: includes business units such as energy-efficient LED edge-lit signage and solar component distribution. These units are generally stand-alone growth opportunities.

EverGEN Solar LED Area Lighting


Market Analysis

Market Size

An examination of Carmanah’s key markets reveals considerable opportunity.

Marine - $250 million global market – 75% in 25 countries•

Aviation - $1.5 billion global market – 11k paved airports •

Roadways - $1.5 billion global market – 400k schools•

Obstruction - 2 million cranes worldwide and booming wireless markets•

In May 2008, Carmanah introduced its new solar powered LED general illumination system. Featuring a custom-designed LED luminaire from Beta Lighting, the new EverGEN™ solar powered light represented Carmanah’s brightest solar powered area light to date: a versatile stand-alone lighting solution that can be installed in minutes to illuminate parks, paths, kiosks and other outdoor areas.

In December 2008, Carmanah launched the solar-powered A810 Obstruction Lighting System. Suitable for marking towers and other fixed obstructions up to 150 feet (46 meters) in height, this stand-alone lighting system installs quickly to produce a bright, steady red signal wherever it’s needed. Designed for dependable performance in some of the world’s harshest environments, the A810 Obstruction Lighting System offers a reliable and cost-effective alternative to hard-wired lights, in compliance with type L-810 FAA and ICAO guidelines.

Also in December, Carmanah introduced the R838 ITS solar flasher -- a wireless solar-powered flashing beacon featuring on-demand remote activation, suitable for a range of ITS (intelligent transportation systems) roadway applications such as marking road construction, emergency-vehicle crossings, approaches to weigh scales and more. Thanks to a partnership between Carmanah and ENCOM Wireless Data Solutions Inc., the R838 wireless ITS solar flasher features industry-proven ENCOM communications technology.

New products

R838 LED Solar Flashing Beacon

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2009 OutlookStrategic Direction

In 2008, Carmanah realigned sales and margin reporting, as outlined below:

Solar Lights and Power Systems

These businesses are:

Strategically important today and/or tomorrow•

The future direction and key to our long term success•

The main focus of our senior management team•

The primary basis for our market capital valuation•

They include: • solar lighting solar power products solar grid-tie projects in Canada

Tactical opportunities

These businesses are:

Tactically important today•

Entrepreneurial - stand alone growth opportunities•

Areas for employee development and training•

A source for potential new strategic businesses•

They include: • solar component distribution RV kit and inverter distribution indoor POP signs light-boxes and components

Throughout the year, Carmanah continued to follow its stated strategic objectives:

Strategic Objectives:

1. Build strategic customer relationships in select markets to ensure that we design high value-add solutions with leading quality and performance for our customers.

2. Enhance the customer’s experience by improving quality and making it easy to do business with us.

3. Create a winning, risk-taking culture where everyone has a passion to make a difference, grow, and be rewarded for their contribution.

4. Be the market leader in integrated, industrial, stand-alone solar lighting and power systems.

5. Build R&D capabilities and partnerships to achieve and maintain leadership and differentiation in robust, cost-effective, application-specific solutions for solar lights and engines.

Carmanah’s executive team (from left): Philippe Favreau, Roland Sartorius and Ted Lattimore


Carmanah’s new management team (since 2007) includes the combined expertise of three international business professionals:

Outlook

Although for many businesses, 2009 will be a year of economic instability while countries re-establish their infrastructure and spending, the means by which many countries are planning to address the economic crisis and the underlying issues about which they are concerned play strongly to Carmanah’s products and value proposition. Strong desires to reduce energy consumption and ties to the electrical grid; continued governmental, corporate and consumer desire to push for green solutions; and challenging fiscal times placing pressure on total cost of ownership all favor the growing demand for solar power systems and solar-LED lighting solutions.

Coupled with this market direction are continued gains in the underlying technology elements that go into Carmanah products. Improvements in the cost and efficiency of photovoltaic (PV) solar panels, combined with dramatic gains in the output efficiency of today’s LED components are presenting unprecedented levels of opportunity, both for designers and end users of solar technology. Carmanah’s own strong investment into R&D for 2009 and beyond also supports this direction with a commitment to optimizing energy management to maximize the gains of the PV and LED industry, and optimize energy conversion and usage throughout each stage in the process.

Ted Lattimore, CEOPresident & COO, Vodafone Romania•

Increased customer base from 700,000 to • 5.5 million subscribers in six years

Generated $286 million in shareholder • dividends

Sold $226 million high yield bond; • managed $300 million loan restructuring

+20 years senior strategic management • experience in communication and technology industries – Bell Canada, Telus

Philippe Favreau, COOGeneral Manager, Global Operations, • Workflow and Prepress Equipment, Kodak Communications Group

Corporate VP Operations, CREO, Inc.•

Operations Manager, Schneider Electric•

+20 years operations experience - product • development, manufacturing, supply chain

Roland Sartorius, CFOCFO, Infosat Communications - Bell • Canada

+12 years CFO experience with European • private equity fund and public and private international and North American-based high growth technology companies

+8 years, KPMG – Corporate Finance and • Assurance Services

Corporate Leadership

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Board of DirectorsDavid R. Green , Ph.D., P.Eng. – Chair of the Board

founder of Carmanah Technologies Inc. (1998)•

also founded or was a founding member of NxtPhase Corporation • (1997), Carmanah Research (1993), Seastar Chemicals (1988), SDL Optics (1986), Axys Instruments (1982), Axys Analytical (1980), and Axys Environmental (1974).

professional engineer experienced in the management and • operation of high-tech companies,

holds a degree in engineering physics from the Royal Military College, • Kingston, Ontario and a Ph.D. from the University of British Columbia.

Ted Lattimore – Chief Executive OfficerPresident & COO, Vodafone Romania•

Increased customer base from 700,000 to 5.5 million subscribers in • six years

Generated $286 million in shareholder dividends •

Sold $226 million high yield bond; managed $300 million loan • restructuring

+20 years senior strategic management experience in • communication and technology industries – Bell Canada, Telus

Julian Elliott – Director25 years experience in building entrepreneurial organizations and • commercializing technology in emerging markets.

experience includes CEO and executive chairman positions at start-• up companies in Silicon Valley, as well as Vice President and General Manager of Agilent Technologies, a spin-off of Hewlett Packard.

brings operational expertise in technology financing, including • venture capital and M & A activities with both private and public companies, and has served on the boards and advisory panels of several venture-funded companies.

holds an undergraduate degree in Physics from the Georgia • Institute of Technology and an MBA from the Stanford Graduate School of Business.

J. Robert Logan, MBA – Directormore than 20 years experience in the financial services industry • includes senior roles at CIBC and Citigroup Global Markets, where as Managing Director he was responsible for the firm’s Canadian fixed-income capital markets business.

has worked on or led more than a 100 offerings, raising more • than US$65 billion for a range of corporate, government and infrastructure clients.

specialist in financing growth initiatives, experienced with • capitalization and risk management decisions

holds an undergraduate degree in Economics from the University of • Waterloo, and an MBA from the University of Western Ontario.

R.G. Cruickshank – Directorserved as President of the British Columbia Technology Industries • Association (BCTIA), a not-for-profit, member-funded organization representing the BC technology industry.

Prior to joining BCTIA, served in many executive roles including • over four years as the President of BCTEL Mobility.

currently serves as Chair of the Board of Directors of Corpus Christi • and St Mark’s Colleges, Chair of the Board of Director’s of St George’s School, and as a member of the Board of the Canadian Association of Independent Schools (CAIS).

Grant M. Byers, P. Eng. – DirectorServed as Senior Vice President, Environment, for SNC-Lavalin, • one of the leading engineering and construction groups in the world.

Previously, led Morrow Environmental Consultants, an • environmental consulting firm with offices across Western Canada

Irene Schamhart, Corporate Secretaryresponsible for all aspects of Carmanah’s human resources and • administration, including compensation and benefits, performance management, training and development, staffing and recruitment, employment equity, contract administration, public company administration, and legal.

background in corporate finance and accounting, reporting and • budgeting, tax planning and administration.

experience includes more than 10 years in public practice with a • Vancouver-based CGA firm.


MANAGEMENT DISCUSSION AND ANALYSISFor the year ended December 31, 2008 (Prepared by Management)

The following is a discussion and analysis of the financial condition and results of operations for Carmanah Technologies Corporation, hereinafter “the Company”, “we”, “our” or “us”. This Management Discussion and Analysis (“MD&A”) was prepared as of February 26, 2009 and should be read in conjunction with our audited consolidated financial statements and accompanying notes for the years ended December 31, 2008 and 2007. These documents are available on SEDAR at www.sedar.com and on our Investor page on our external website - www.carmanah.com.

Unless otherwise indicated, all financial information presented in this Management’s Discussion and Analysis (“MD&A”) is in Canadian dollars, and prepared in accordance with Canadian generally accepted accounting principles (“GAAP”).

Forward Looking Statements

Our public communications and management discussion & analysis may contain forward-looking statements. Often, but not always, forward-looking statements can be identified by the use of words such as “expects,” “plans,” “estimates,” “intends,” “believes,” “could,” “might,” “will” or variations of such words and phrases. Forward-looking statements involve known and unknown risks, uncertainties, and other factors which may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements. These statements are based on our current expectations and beliefs and are subject to a number of risks and uncertainties. Readers should not place undue reliance on forward-looking statements. We do not assume any obligation to update the forward-looking information contained in this management discussion and analysis.

BUSINESS OVERVIEWFrom our headquarters in Victoria, British Columbia, Canada, we manage the development and distribution of renewable and energy-efficient technologies, including solar-powered LED lighting, solar power systems & equipment and LED illuminated signage.

Our products include solar-powered beacons for marine, aviation, and defense applications; solar-electric power systems for mobile and remote applications; grid-tie and off-grid photovoltaic systems for commercial, industrial and institutional applications; solar-powered area lighting for parks, campuses and industrial facilities; and bright, energy-efficient signage for retail, casino and architectural applications.

Our goal can be articulated as setting the standard for solar lighting innovation and performance. Our recent transition period provided much needed breadth and attention to the strategic growth engine; solar powered lighting and power systems. We see a period of growth where we will lead the market through R&D advancements and strategic partnerships. To achieve our objectives, we have specific tactics that are acted on every day regarding:

Strategic Partnerships – to assure best-in-class components, best-• in-class end products, and further research and development;

Worldwide Sales - establish, support and grow a worldwide sales • organization of local independent dealers;

Scalability – outsourcing, for lower cost, more flexible manufacturing • and supply management, and further streamlining of process management, overhead and administration cost reductions;

Investment - advancing the “tipping point” where the total cost • of ownership of solar powered area lighting is equal to today’s incumbent technology, creating a compelling reason for abandoning 100 year-old grid-based technology and creating massive growth in solar area lighting adoption and sales.

We intend to pursue a prudent growth plan which is financially conservative and is based on achieving growth while generating free cash flow. Our vision, core business, focus, and strategy and the key performance drivers and capabilities required to meet our goals have not changed since we announced our new strategic direction in mid 2008, as noted below.

Significant changes to our business in 2008

In early 2008, our new executive management team finalized a new strategic direction, which included a re-focusing on core business activities, market verticals and products that we currently perceive to be key to our long-term success. At the core of this new direction was a decision to split our products into two main groups.

“Strategic”• businesses, includes our solar lighting, solar power systems and Canadian solar grid tie projects. These products and market verticals will be the main focus of our management team on a go forward basis and have been identified as key to our long term success.

“Tactical”• businesses, includes a number of our distribution businesses (including solar components, products for the mobile

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market, and our non solar signs). These businesses, while still a significant component of our sales and contributing profitably, are tactically important, but are not expected to be key in defining our long term success but were categorized as entrepreneurial stand alone growth opportunities, areas of employee development and training and sources of potential new strategic businesses.

At the end of June 2008, based on the results of our first quarter and market trends in both of our strategic and tactical segments, we announced a decision to further refine and accelerate our focus on our strategic direction. As a result, four major restructuring initiatives were announced, effective June 25th, 2008:

1. Outsourcing the manufacturing for our core products – In order to scale up our operational capacity on a global basis, to support our strategic businesses, to focus on our core competencies and to leverage the reach and economies of scale of a top tier energy management system provider, we announced a partnership with Flextronics Inc., a worldwide electronics manufacturing service provider to outsource a significant portion of product manufacturing by the end of 2008. As a result of the outsourcing, we wound down our main manufacturing facility located in Victoria, British Columbia by December 31, 2008 and were fully relieved from our lease obligation on February 28, 2009. The transition of manufacturing to Flextronics Inc. occurred in incremental steps, starting in the third quarter of 2008, with the last of our product lines being transitioned at the end of December 2008. Through the latter part of 2008, our products were manufactured at the Calgary, Alberta, Flextronics Inc. facility and are now being transferred to their Houston, Texas manufacturing facility as a result of Flextronics Inc. consolidating their North American manufacturing facilities. The cost of moving production between the two locations will be borne by Flextronics Inc. We anticipate the move to Houston, Texas will be completed by the end of the second quarter of 2009.

2. Exiting of certain “tactical” business lines – As our solar component and solar-powered transit shelter lighting kits businesses were faced with increased commoditization and pricing pressures, we decided to further consolidate our operations and close our US solar component distribution business and warehouse operations. We closed our Santa Cruz facility during October 2008 and our Calgary, Alberta office and warehouse during November 2008. Administrative functions from the California and Calgary locations were moved to our headquarters in Victoria, BC.

3. Restructuring our sales model - To increase the efficiency of our sales organization and improve customer service, we restructured our global sales force from a product or market vertical format to a regional geographic model. In addition, we moved away from making direct sales in favor of a distribution model. This change helps us leverage established sales networks and reduce overhead costs associated with sales and order fulfillment activities. To support this structure and better serve our

customers, we hired sales staff in the various geographic regions. With our new model, each sales representative can now offer our full range of products, which should increase the potential of cross selling our products. Together with this, we are also increasing our distributor base.

4. Simplifying our business processes and reducing our overhead and administrative costs - With the aim of increasing our operational efficiency and effectiveness, as well as further reducing our operating costs, we streamlined our organizational structure, reduced staff across various departments including the executive team, operations, marketing, and general and administrative departments.

By implementing these initiatives, our employee base has declined by approximately 35% by the end of February 2009, compared to the beginning of 2008. The total anticipated cost of these initiatives was projected to be $1.9 million. The various expenditures were / will be charged to earnings over the restructuring period, the timing of which is dictated by Canadian GAAP. The cash payments associated with the restructuring were expected to be less than $1.0 million and mainly relate to employee, facility and lease–termination costs. The remaining expected expenditures encompass accelerated amortization, inventory provisions and other costs of the transition. As of December 31, 2008, we recorded $1.6 million of restructuring charges. The remaining charges will be recorded in the first quarter of 2009 as we exited our lease facility on February 28, 2009. We will record the remaining anticipated $0.3 million of restructuring charges in the first quarter of 2009.

In the fourth quarter of 2008, we highlighted the need to increase our investment into new generations of energy management building blocks that can be leveraged by our solar lighting and power systems products. We have therefore started the process to increase our engineering development expenditures and head count over the next 18 months. This will ensure that our products continue to be differentiated by excelling at energy management, which is our ability to collect and store solar energy and then release it in the most efficient way possible for a customer’s application. By focusing on this energy capture, storage and conversion process, we are able to continue to create products that are smaller, produce more light or power and run longer than competitive products. In December, 2008, we opened up a “Center of Excellence” energy management engineering office. As of February 28, 2009, we have hired 10 engineers specifically focused on energy management.

Also in the fourth quarter of 2008, we initiated an exhaustive review of our business model and requirements to support the development of an IT application architecture on which we can grow our business and which would support the outsourcing of our manufacturing and deliver sales through our global sales distributor model. We are undertaking the project with the assistance of an external firm of IT experts and anticipate selecting a new IT system by the end of the first quarter of 2009. The new IT application architecture is the main capital expenditure planned for 2009 and we are planning to complete its implementation by the end of the same year.


For the quarter and year ended December 31, 2008, as well as the respective comparative periods in 2007, we are disclosing adjusted EBITDA, a non-GAAP financial measure, as a supplementary indicator of operating performance. We define adjusted EBITDA as net income before, interest, income taxes, amortization, restructuring charges, and goodwill and intangible impairments. We are presenting the non-GAAP financial measure in our filings because we use it internally to make strategic decisions, forecast future results and to evaluate our

performance and because we believe that our current and potential investors and many analysts use the measure to assess our current and future operating results and to make investment decisions. It is a non-GAAP measure and it is not intended as a substitute for GAAP measures.

NON-GAAP FINANCIAL MEASURES

ADJUSTED EBITDA RECONCILIATION FOR THE THREE MONTHS ENDED FOR THE yEAR ENDED

($ thousands) DEC 31, 2008 DEC 31, 2007 DEC 31, 2008 DEC 31, 2007

Net income/(loss) (9,981) (4,637) (9,452) (8,915)

Add/(deduct):

Interest (7) (53) (86) 63

Income taxes 420 (269) 425 (1,922)

Amortization 473 287 1,497 1,151

Goodwill & Intangible 10,732 2,000 10,732 2,000

Restructuring charges 516 - 1,552 -

Adjusted EBITDA 2,153 (2,672) 4,668 (7,623)

For the purposes of the above EBITDA reconciliation, the amortization add back excludes amortization of $249 (Q4) and $506 (YTD) recorded in restructuring charges.

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Summary Income Statement

THREE MONTHS ENDED DECEMBER 31, 2008

12 MONTHS ENDED DECEMBER 31, 2008

$ THOUSANDS 2008 2007 VARIANCE 2008 2007 VARIANCE

SALES

Strategic 12,054 6,137 5,917 34,110 24,322 9,788

Tactical 3,765 6,949 (3,184) 26,507 34,967 (8,460)

15,819 13,086 2,733 60,617 59,289 1,328

GROSS PROFIT

Strategic 4,741 1,523 3,218 14,339 8,518 5,821

Tactical 601 923 (322) 6,463 7,059 (596)

5,342 2,446 2,896 20,802 15,577 5,225

GROSS MARGIN %

Strategic 39.3% 24.8% 14.50% 42.0% 35.0% 7.00%

Tactical 16.0% 13.3% 2.70% 24.4% 20.2% 4.20%

33.8% 18.7% 15.10% 34.3% 26.3% 8.00%

OPERATING ExPENSES

Sales and marketing 1,507 1,944 (437) 6,818 9,032 (2,214)

Research, development and engineering 235 785 (550) 2,160 2,809 (649)

General and administration 2,756 2,525 231 9,237 10,127 (890)

Subtotal 4,498 5,254 (756) 18,215 21,968 (3,753)

Amortization 406 287 119 1,372 1,151 221

Restructuring 516 - 516 1,552 - 1,552

922 287 653 2,924 1,151 1,773

OPERATING INCOME (LOSS) (78) (3,095) 3,017 (337) (7,542) 7,205

OTHER INCOME (ExPENSE)

Goodwill and intangible impairment (10,732) (2,000) (8,732) (10,732) (2,000) (8,732)

Interest and other 2 284 (282) 77 168 (91)

Foreign exchange gain/(loss) 1,247 (95) 1,342 1,965 (1,463) 3,428

(9,483) (1,811) (7,672) (8,690) (3,295) (5,395)

EARNINGS (LOSS) BEFORE TAx (9,561) (4,906) (4,655) (9,027) (10,837) 1,810

TAx 420 (269) 689 425 (1,922) 2,347

NET INCOME/(LOSS) (9,981) (4,637) (5,344) (9,452) (8,915) (537)

ADJUSTED EBITDA 2,153 (2,672) 4,825 4,668 (7,623) 12,291

.

FINANCIAL HIGHLIGHTS


Summary balance sheet – extracts$ THOUSANDS AS AT DEC 31, 2008 AS AT DEC 31, 2007

CURRENT ASSETS Cash 7,914 4,147

Receivables 14,584 11,537

Inventory 8,151 10,608

Other 581 805

31,230 27,097

Capital assets and intangibles 1,687 2,976

Intangible assets, net 192 912

Goodwill - 10,368

Investment tax credits and FIT 4,587 4,044

TOTAL ASSETS 37,696 45,397

CURRENT LIABILITy AP and accrued liabilities 9,450 7,687

Other 446 305

TOTAL LIABILITIES 9,896 7,992

TOTAL EqUITy 27,800 37,405

TOTAL LIABILITIES AND EqUITy 37,696 45,397

CURRENT RATIO (TIMES) 3.2 3.4

2008 HIGHLIGHTSyear summary

Sales of $60.6 million for 2008, up 2% from $59.3 million in 2007: •

Strategic sales of $34.1 million for 2008, up 40% from $24.3 million in 2007 (primarily from solar LED lighting).

Tactical sales of $26.5 million for 2008, down 24% from $35.0 million in 2007 (due to the 2008 exit of transit & distribution and late 2007 exit of the home power tactical markets).

Gross margin of 34.3% for 2008, up from 26.3% in 2007: •

Strategic gross margin of 42.0% for 2008, up from 35% in 2007.

Tactical gross margin of 24.4% for 2008, up from 20.2% in 2007.

Goodwill and intangible impairment of $10.7 million for 2008. This • impairment is non-cash and does not affect our liquidity, cash flows from operating activities or impact future operations:

Net income: $1.3 million (excluding the impact of the goodwill and • intangible impairment charges) for 2008, compared to a net loss of ($6.9) million in 2007:

Adjusted EBITDA of $4.7 million for 2008 compared to ($7.6) million • in 2007:

Positive cash flow from operations of $4.0 million, compared to $2.0 • million in 2007

Cash balance as at December 31, 2008 of $7.9 million, up from $4.1 • million at the end of 2007.

Fourth quarter summary Sales of $15.8 million for the fourth quarter of 2008, up 21% from • $13.1 million in 2007:

Strategic sales of $12.0 million for 2008, up 96% from $6.1 million in 2007 (primarily from solar LED lighting) .

Tactical sales of $3.8 million for 2008, down 46% from $7.0 million in 2007. (due to the 2008 exit of transit & distribution and late 2007 exit of the home power tactical markets)

Gross margin of 33.8% for the fourth quarter of 2008, up from • 18.7% in 2007;

Strategic gross margin of 39.3% for 2008, up from 24.8% in 2007.

Tactical gross margin of 16.0% for 2008, up from 13.3% in 2007.

Net income: $0.8 million (excluding the impact of the goodwill • and intangible impairment charges) for the fourth quarter of 2008, compared to a net loss of ($2.7) million in 2007.

Adjusted EBITDA of $2.2 million for the fourth quarter of 2008 • compared to ($2.7) million in 2007.

Positive cash flow from operations of $2.2 million for the fourth • quarter of 2008, compared to $2.1 million in 2007

Overall

In early 2008, our new executive management team finalized a new strategic direction, which included focusing on core business activities, market verticals and products that we currently perceive to be key to our long-term success. At the core of this new direction was a decision to split our products into two main groups.

carmanah.com 15

“Strategic” businesses, includes our solar lighting, solar power systems • and Canadian solar grid tie projects. These products and market verticals will be the main focus of our management team on a go forward basis and have been identified as key to our long term success.

“Tactical” businesses, includes a number of our distribution • businesses (including solar components, products for the mobile market, and our non solar signs). These businesses, while still a significant component of our sales and contributing profitably, are tactically important, but are not expected to be key in defining our long term success but were categorized as entrepreneurial stand alone growth opportunities, areas of employee development & training and sources of potential new strategic businesses.

At the end of June 2008, based on the results of our first quarter and market trends in both of our strategic and tactical segments, we announced a decision to further refine and accelerate our focus on our strategic direction. As a result, four major restructuring initiatives were announced, effective June 25th, 2008 (see BUSINESS OVERVIEW SECTION)

1. Outsourcing the manufacturing for our core products

2. Exiting of certain “tactical” business lines

3. Restructuring our sales model

4. Simplifying our business processes and reducing our overhead and administrative costs

Results for Operations

Over all, our sales in 2008 increased to $60.6 million from $59.3 million in 2007. Our 2008 strategic businesses sales ended at $34.1 million, up $9.8 million or 40.2% from the same period of 2007, mainly the result of our solar LED lighting business growing by 54.7% year over year. Our tactical businesses sales were $26.5 million, down $8.5 million or (24.3)% from the same period of 2007 due to our exiting the distribution business in the third quarter of 2008 and the fact that the 2007 sales figure included approximately $4.2 million of sales into the Homepower market, a market we exited late in 2007. Our solar LED lighting business sales accounted for 49.7% of our sales in 2008, up from 32.9% in 2007.

Our overall gross margin percentage for 2008 was 34.3%, an increase from 26.3% in 2007. This increase was primarily due to (1) a continued focus on lean manufacturing and supply chain management, and (2) increased sales of higher margin Solar LED products and decreased sales of lower margin home power and transit products which were exited at the end of 2007. In addition, there were significant inventory write downs associated with our distribution inventory and foreign exchange losses that occurred in the second quarter of 2007 that were not repeated in 2008.

Operating expenses, excluding restructuring and amortization charges in 2008 ended at $18.2 million, down from $22.0 million in 2007. This was a result of our continued focus on practicing lean management and cost control.

In the fourth quarter of 2008, we conducted our annual goodwill and intangibles asset impairment tests. We compared the fair value of the reporting units, determined on a discounted after-tax cash-flow basis, to their carrying value. As the goodwill impairment test indicated that the carrying value exceeded their fair value, thus impairment exists, and due to the recent fluctuations in the market and the uncertainties arising from overall economic conditions, we recorded a $10.1 million impairment to, and write-off of, goodwill. The write off of goodwill related to the remaining booked goodwill stemming from our 2003 acquisition of AVVA Technologies Inc. (now our LED signs group) and our 2005 acquisition of Soltek Powersource Ltd., now our power systems business. In 2007, we recorded a $2.0 million write down of goodwill as a result of performing the same annual impairment analysis. The 2007 impairment of goodwill related to our 2003 acquisition of AVVA Technologies Inc. The goodwill and intangible impairment charges are non-cash in nature and do not affect our liquidity, cash flows from operating activities or debt covenants and will not impact future operations.

By implementing the restructuring initiatives previously noted, our employee base has declined by approximately 35% by the end of February 2009, compared to the beginning of 2008. The total anticipated cost of these initiatives was projected to be $2.0 million. The various expenditures were / will be charged to earnings over the restructuring period, the timing of which is dictated by Canadian GAAP The cash payments associated with the restructuring were expected to be less than $1.0 million and mainly relate to employee, facility and lease–termination costs. The remaining expected expenditures encompass accelerated amortization, inventory provisions and other costs of the transition. As of December 31, 2008, we recorded $1.6 million of restructuring charges. The remaining charges, estimated to be $0.3 million will be recorded in the first quarter of 2009 as we exited our lease facility on February 28, 2009.

Without the negative impact of the $10.7 million non-cash goodwill and intangible impairment charges and the restructuring charges’ our financial results for 2008 were strong, with Adjusted EBITDA of $4.7million.

Balance Sheet

Cash increased to $7.9 million as at December 31, 2008 from $4.1 million as at December 31, 2007. This was a result of our focus on working capital management and generating cash flow from our operations.

The main change in the Balance Sheet from December 31, 2007 to December 31, 2008, resulted from the $10.7 million write-down of Goodwill and Intangible Assets. This resulted in lower total asset and shareholder’s equity balances.

Other

The following highlights other key activities and initiatives that occurred in 2008 and subsequent to year end:

During 2008, we announced the following material sales:

February 13, 2008 – purchase order for solar LED aviation lights for • airfield upgrades in United Arab Emirates


March 3, 2008 - a contract to supply New Jersey Lottery with LED-• illuminated signage

March 13, 2008 - BC’s City of Kelowna announced the deployment • of 100 Carmanah EverGEN™ solar-powered area lights

April 2, 2008 –purchase order to supply solar-powered portable • airfield lights for Bariven S.A. in Venezuela, a subsidiary of PDVSA.

May 29, 2008 - purchase order of $1.1 million from Trueform • Engineering Ltd. for London Bus Stop systems as part of an ongoing commitment to equip Transport for London transit routes with solar-powered lighting and communications technology

June 13, 2008 - provided solar-powered airfield lights for a United • States Air Force installation in the Middle East

July 8, 2008 - purchase order for solar-powered airfield lights from • the United States Marine Corp. for installations in the Middle East

September 12, 2008 - an initial order from Lyon, France-based • telecom provider TWIST to supply solar power systems for a telecommunications project in North Africa estimated to be multi million dollars over several years.

September 30, 2008 - follow up order through Dubai-based • GESOLAR, our aviation distributor in the United Arab Emirates to supply additional solar-powered portable airfield lights for civilian airfield applications.

October 14, 2008 – purchase order to supply the Illinois Lottery with • LED edge-lit EvenLit(TM) light panels

November 19, 2008 – follow up order to supply solar-powered portable • airfield lights for Bariven S.A. in Venezuela, a subsidiary of PDVSA.

During 2008 & early 2009, we announced three significant technology partnerships that leverage some key technology providers, enhance our product suite, and allow us to keep our research & development efforts focused on our core strength which is energy efficiency management. The three agreements include:

May 20, 2008 - we partnered with Ruud Lighting Inc. to deliver a • BetaLED™ solar-powered lighting solution. BetaLED developed an LED lighting fixture designed specifically for our EverGEN™ solar engine to make our EverGEN solar area light even better.

On July 15, 2008, we signed an agreement with Encom Wireless • Data Solutions Inc. to add wireless communications and software capability for our traffic beacons

On February 11, 2009 we signed an agreement with Shine Micro Inc • to add an automatic system (AIS) capability to our line of stand-alone solar powered LED marine lanterns

During 2008, we introduced the following products into the marketplace:

February 27, 2008 - LED Edge-Lit gaming signs to the Asian market • at the International Gaming and Entertainment Expo

March 26, 2008 - upgraded the LED technology of its light emitting • diode (LED) luminaries to improved high-flux LED technology, effectively doubling the raw lumen output of its LEDs

March 26, 2008 - introduced the DuraGEN solar engine, a complete • stand-alone solar power supply that provides a reliable source of high-quality power for remote applications

September 22, 2008 - introduced the M708 marine lantern, the new flagship • in its line of solar-powered marine beacons. Combining an advanced optical design with high-efficiency solar modules and high-efficacy LEDs, the M708 is our highest output LED marine lantern to date.

December 3, 2008 - introduced the solar-powered A810 Obstruction • Lighting System which is suitable for marking towers and other fixed obstructions up to 150 feet (46 meters) in height.

December 10, 2008 - introduced the R838 wireless ITS solar-powered • flashing beacon suitable for a range of ITS (intelligent transportation systems) roadway applications. The R838 flasher incorporates all components - including solar modules, LEDs (light emitting diodes), and wireless activation technology - within a compact and durable stand-alone device.

Other key initiatives that we announced or undertook in 2008 and early 2009 included:

Throughout 2008, we received industry recognition for our best in • class technology and project installations. On May 28, 2008, we received the “Judges’ Citation” Innovation Award at LIGHTFAIR International 2008, North America’s premier annual lighting industry event for architectural and commercial lighting products and services for our EverGEN™ solar -powered LED area light. As well, on December 8, 2008, we received the CanSIA “Solar PV Project of the Year Award” for a grid-tied solar power system installed on the Jean Canfield Building in Charlottetown, Prince Edward Island.

In April 2008, we entered into a new three year $10.0 million • committed revolving credit facility with the Bank of Montreal. The amount available is subject to certain covenants calculated on a quarterly basis and the facility is secured by general security agreements. On July 8, 2008, this facility formally replaced the agreement we previously held with the Royal Bank of Canada.

On June 19, 2008, we announced the appointment of Grant Byers • and Rob Cruickshank to our Board of Directors. Concurrently, Divesh Sisodraker, Kelly Edminson and Praveen Varshney left the Board. We currently have six members on our board. On the same day, we also announced that Art Aylesworth had stepped down as the Chairman and off the board and that Dave Green was appointed his replacement

During the third and fourth quarters, we exited the distribution • business and as a result closed our Santa Cruz, CA and Calgary, Alberta distribution sales offices and warehouses.

In the fourth quarter of 2008, we initiated an exhaustive review of our • business model and requirements to support the development of an IT application architecture on which we can grow our business and which would support the outsourcing of our manufacturing and deliver sales through our global sales distributor model.

In December, 2008, we opened a new “Center of Excellence” • engineering office in Burnaby, B.C. and have added 10 engineers dedicated to further enhancing our energy management systems.

On February 6, 2009, we signed a definitive agreement with Temple • Inc. of Decatur, Alabama, whereby Temple purchased the inventories and other assets of our tactical illuminated road signs business.

In February 2009, we hosted our first annual worldwide distributor • conference in Vancouver, B.C., which was attended by over 100 of our valued distributors from over 30 countries.

carmanah.com 17

2009 OUTLOOK

Although we anticipate a softening in the economies in some regions in which we operate, we believe the outlook for our company for 2009 to be somewhat insulated since we operate in a highly diverse market place globally. Results may fluctuate from quarter to quarter depending on variables such as product mix and economic factors. While there are general market concerns surrounding recent developments in the world and financing is becoming more difficult to obtain, to date, we have not experienced a material change in our market opportunities. Our business model focuses on mitigating risk by diversifying our sales across geographic regions, industries and customer profiles.

As our 2009 expectations basically remain consistent with those expressed in the third quarter of 2008, the above general economic outlook is intended to augment the update of our third quarter 2008 Management’s Discussion and Analysis Outlook section which has been partially reproduced and updated below.

During 2008, we added key global sales, marketing and business development positions to assist in our sales efforts. We also completed a major reorganization of our sales team to a regional-based model. In 2009, we will continue to focus on growing our global distributor networks. These initiatives will continue to allow us to reach and service both new and existing customers better in more markets.

On the product side, during 2008, we announced two significant technology partnerships that leverage some key technology providers, enhance our product suite, and allow us to keep our research & development efforts focused on our core strength which is energy efficiency management. The two agreements include:

1. Ruud Lighting, Inc (Racine, WI) – we will combine Ruud’s state of the art LED area lighting fixtures with our Solar Engines to provide the most efficient solar area light on the market, and

2. Encom (Calgary, AB), a wireless communications company to add an industry-leading communications and software capability to our traffic beacons for new centralized control applications in the traffic market.

In February 2009 we signed an agreement with Shine Micro Inc. (Shine, WA), a designer of microprocessor-based electronics for the marine VHF industry, to add an automatic system (AIS) capability to our line of stand-alone solar powered LED marine lanterns.

We expect gross margin to stabilize and improve in 2009 over 2008 levels as we:

exited the low margin solar component distribution and transit • businesses in 2008

sold customized road signs business in February 2009.•

make further improvements in our supply chain management.•

complete the transition of our manufacturing to the facility of our • outsourcing manufacturing partner, Flextronics Inc., to its Houston, Texas facility.

We will continue to exercise tight controls over discretionary expenditures but provide for an increase in research and product development. Having our restructuring initiatives mainly behind us, we have now highlighted the need to increase our investment into new generations of energy management building blocks that can be leveraged by our solar lighting and power systems products. We therefore have started to increase our engineering development expenditures and headcount over the next 18 months. This will ensure that our products continue to be differentiated by excelling at energy management, which is our ability to collect and store solar energy, and integration, thereby utilizing this energy in the most efficient and effective way possible for a customer’s application. By focusing on this energy capture, storage and conversion process, we will be able to continue to create products that are smaller, produce more light or power, and run longer than competitors’ products. As at December 31, 2008, we have opened a new “Center of Excellence” engineering office in Burnaby, B.C. and have added approximately 10 engineers dedicated to further enhancing our energy management systems. During 2009, our research & development investment is anticipated to increase by $2.0 million over 2008 levels. These funds will be used to advance our solar powered outdoor area lighting products to a “Tipping Point”, where the total cost of ownership of our solar area lighting is equal to today’s incumbent technology, i.e.; the AC grid powered incandescent light. We plan to advance the Tipping Point via a leadership position in our energy management systems in order to improve the light output per unit of solar by three or four times the current level, thereby creating a compelling reason for abandoning the old grid based technology and demand for solar area lighting adoption.

In the fourth quarter of 2008, we initiated an exhaustive review of our business model and requirements to support the development of an IT application architecture on which we can grow our business and which would support the outsourcing of our manufacturing and deliver sales through our global sales distributor model. We are undertaking the project with the assistance of an external firm with IT expertise and anticipate selecting a new IT system by the end of the first quarter of 2009. The new IT application architecture is the main capital expenditure planned for 2009 and we are planning to complete the implementation by the end of the year.

During 2009, we are planning to grow organically and through strategic partnerships with customers, OEM’s and suppliers. We currently have no plans for acquisitions nor do we anticipate any equity financings in the foreseeable future.


qUARTERLy FINANCIAL HIGHLIGHTS

Discussion on significant variations in quarterly results

qUARTERLy HIGHLIGHTS 2008 2007

($ THOUSANDS) FISCAL 2008 q4 q3 q2 q1 FISCAL 2007 q4 q3 q2 q1

Total sales 60,617 15,819 13,901 15,749 15,148 59,288 13,086 15,523 15,425 15,254

Gross margin 20,802 5,342 5,245 5,125 5,090 15,577 2,446 4,727 3,106 5,298

Gross margin % 34.3% 33.8% 37.7% 32.5% 33.6% 26.3% 18.7% 30.5% 20.1% 34.7%

Operating costs 21,138 5,420 5,091 5,594 5,033 23,119 5,541 5,265 6,723 5,590

Other income (expense)

(8,690) (9,483) 333 85 375 (3,296) (1,811) (538) (696) (251)

Tax 425 420 (312) (32) 349 (1,923) (270) (311) (1,263) (79)

Net income/(loss) (9,451) (9,981) 799 (352) 83 (8,915) (4,636) (765) (3,050) (464)

EPS - Basic (0.22) (0.23) 0.02 (0.01) 0.00 (0.21) (0.11) (0.02) (0.07) (0.01)

EPS - Diluted (0.22) (0.23) 0.02 (0.01) 0.00 (0.21) (0.11) (0.02) (0.07) (0.01)

Adjusted EBITDA 4,668 2,153 1,455 403 657 (7,623) (2,672) (748) (3,942) (261)

Sales –• Sales have been relatively stable over the last eight quarters except for a slight decrease in the third quarter of 2008 which was a result of reduced sales from the exiting of the tactical distribution business and from delayed shipments on certain power systems orders. Significant variations included:

In the fourth quarter of 2007 sales were lower due to negative foreign exchange impact on sales and restructuring within our US distribution business as we replaced key sales staff, which resulted in a $2.5 million drop in sales associated with this business and the exit of our home power vertical which reduced sales by, approximately, a further $0.4 million in that period.

Gross margins -• As we offer product solutions to a variety of market sectors at various margins, our blended gross margins are significantly affected by the sales mix of our various products and the related market sector. On average our gross margins are over 30%. Significant variations included:

The significant increase in gross margin in the third quarter of 2008 was due to the greater mix of higher margin Solar LED Lights sales compared to lower margin Solar Power and Tactical sales.

The relatively low margins in the second and fourth quarters of 2007 were the result of inventory write offs and higher product discounts as we reduced the surplus inventory that was acquired late in 2006.

Operating costs -• Operating costs had been increasing, quarter over quarter peaking in the second quarter of 2007, primarily the result of ramping up of head office expenditures to support anticipated sales growth. Subsequent to that, we have focused on maintaining our expenditures at a range of around $5.5 million per quarter. Significant variations included:

The second quarter of 2007 included several one time expenses related to increased provisions for bad debt and executive recruiting costs as well as additional finance and administration staff levels and information system expenses.

Starting in the third quarter of 2007, all discretionary expenses were eliminated with the goal of ensuring operating expenses leveling off at approximately $5.0 million per quarter.

At the end of the second quarter of 2008, we announced several restructuring initiatives including outsourcing manufacturing to Flextronics International Ltd., exiting of our tactical distribution businesses and simplifying and reducing the cost of the organizational structure. We expect that the initiatives will result in a restructuring provision of approximately $1.9 million to be charged to earnings over the next several quarters. The timing of accounting for these one time costs depends on the required accounting treatment as dictated by GAAP. The operating costs in the second through fourth quarters of 2008 included restructuring charges of $1.6 million. Without the restructuring charges, our operating costs in those three quarters were $5.0 million or less per quarter.

Other income (expenses) –• Other income (expenses) mainly relates to interest, foreign exchange and miscellaneous non-operating items. The quarterly swings primarily relate to changes in the foreign exchange rates between the Canadian and US dollar. Significant variations included:

All four quarters in 2007 were negatively affected by the approximate 20% strengthening of the Canadian dollar against the US dollar.

Conversely, all four quarters in 2008 were positively affected by the weakening of the Canadian dollar versus the US dollar.

carmanah.com 19

RESULTS OF OPERATIONS – yEAR OVER yEAR COMPARISON

Sales

Sales for 2008 were $60.6 million, $1.3 million higher than the same period in 2007. A summary of revenues from each of our Strategic and Tactical business segments is shown below:

SALES FOR THE yEAR ENDED DEC 31,

($ THOUSANDS) 2008 2007 CHANGE

$ Mix $ Mix $ %

STRATEGIC

Solar LED Lights 30,149 49.7% 19,483 32.9% 10,666 54.7%

Solar Power Systems 3,961 6.5% 4,839 8.2% (878) (18.1%)

34,110 56.3% 24,322 41.0% 9,788 40.2%

TACTICAL

Distribution 18,170 30.0% 28,563 48.2% (10,393) (36.4%)

Signage 8,337 13.8% 6,404 10.8% 1,933 30.2%

26,507 43.7% 34,967 59.0% (8,460) (24.2%)

Total 60,617 100.0% 59,289 100.0% 1,328 2.2%

In the fourth quarter of 2007, we started undertaking foreign exchange hedging strategies to minimize our exposure to adverse movements in exchange rates.

In the fourth quarter of 2007, a $2.0 million write down of goodwill associated with our 2003 acquisition of AVVA Technologies, which is part of our tactical signage business (previously referred to by us as the LED Signs division), was recorded.

In the fourth quarter of 2008, we recorded a $10.1 million impairment to and write-off of goodwill. The write off of goodwill related to the remaining booked goodwill stemming from our 2003 acquisition of AVVA Technologies Inc. (now our LED signs group) and our 2005 acquisition of Solteck Power Systems Inc,. (now our power systems business).

Solar LED Lights includes all of the former Solar LED Lighting division except for transit which is now part of the Tactical – Distribution. Solar Power Systems includes packaged solar power systems and grid tie systems. All other solar power products are included under Distribution in the Tactical business segment. Signage includes the former LED Signs division plus non-solar roadway signs.

Strategic Businesses - • Sales were $34.1million, up $9.8 million from the same period of 2007. Solar LED sales provided strong growth during 2008, with our solar marine, aviation and obstruction beacons leading the way. This growth was offset by lower sales in Solar Power Systems, primarily due to some delayed shipments in 2008 and the fact that a significant grid tie project in Prince Edward Island

was completed in the second six months of 2007. There were no such comparable large scale projects in the same period of 2008.

Tactical Businesses -• Sales were $26.5 million, down $8.5 million from the same period of 2007. Our signage businesses sales increased by $1.9 million due to a large order from a major US lottery customer. This increase was offset by lower sales in our distribution businesses as we started to wind down our distribution warehouses in Calgary & Santa Cruz. In addition, the prior year also included approximately $4.2 million of sales into the Homepower market, a market that we chose to exit due to the lower margins and increasing competition.

Our sales by geographical area are outlined below:

SALES By GEOGRAPHy FOR THE yEAR ENDED DECEMBER 31, 2008


$ % $ % $ %

North America 46,192 76.2% 47,882 80.8% (1,690) (3.5%)

South America 928 1.5% 870 1.5% 58 6.7%

Europe 4,732 7.8% 5,707 9.6% (975) (17.1%)

Middle East and Africa 7,176 11.8% 3,512 5.9% 3,664 104.3%

Asia 899 1.5% 914 1.5% (15) (1.6%)

South Pacific 690 1.1% 404 0.7% 286 70.8%

Total 60,617 100.0% 59,289 100.0% 1,328 2.2%The current year increase in Middle Eastern sales is primarily due to US government and other aviation orders for that region.


Gross margin

We offer product solutions to a variety of market sectors that carry different margins; as a result, our gross margin can be significantly impacted by the sales mix.

The following table outlines gross margins by division:

MARGINS FOR THE yEAR ENDED DEC 31,


$ Margin % $ Margin % $ %

STRATEGIC

Solar LED Lights 13,471 44.7% 7,152 36.7% 6,319 8.0%

Solar Power Systems 868 21.9% 1,366 28.2% (498) (6.3%)

14,339 42.0% 8,518 35.0% 5,821 7.0%

TACTICAL

Distribution 3,926 21.6% 5,284 18.5% (1,358) 3.1%

Signage 2,537 30.4% 1,775 27.7% 762 2.7%

6,463 24.4% 7,059 20.2% (596) 4.2%

Total 20,802 34.3% 15,577 26.3% 5,225 8.0%

Our overall gross margin for 2008 was $20.8 million, up from $15.6 million in the same period of 2007. As a percentage, overall margins increased from 26.3% in 2007 to 34.3% in 2008. This increase was primarily due to (1) a continued focus on lean manufacturing and supply chain management, and (2) increased sales of higher margin Solar LED products and decreased sales of lower margin home power and transit products which were exited at the end of 2007. In addition, there were significant inventory write downs associated with our distribution inventory and foreign exchange losses that occurred in the second quarter of 2007 that were not repeated in 2008.

Strategic Businesses - • The gross margin increased by $5.8 million as a result of a larger percentage of sales from Solar LED Lights compared to the same period in 2007. Solar LED Lights normally generate a higher gross margin compared to Solar Power Systems.

Tactical Businesses - • The gross margin decreased by $0.6 million, although on a percentage basis gross margin was up 4.2% from prior year due to a greater percentage contribution from our Signage business and initiation of price increases where possible.

Operating expenses

Operating expenses in 2008 totaled $21.1 million, $2.0 million or 8.7% lower than $23.1 million incurred in 2007. As a percentage of sales, our operating costs excluding the restructuring and amortization charges have decreased by 7.1% over the same period in 2007.

OPERATING ExPENSES FOR THE yEAR ENDED DEC 31,


$ % of sales $ % of sales $ %

Sales and marketing 6,818 11.2% 9,032 15.2% (2,214) (24.5%)

Research, development and engineering 2,160 3.6% 2,809 4.7% (649) (23.1%)

General and administrative 9,237 15.2% 10,127 17.1% (890) (8.8%)

18,215 30.0% 21,968 37.1% (3,753) (17.1%)

Restructuring 1,552 2.6% - 0.0% 1,552 0.0%

Amortization 1,372 2.3% 1,151 1.9% 221 19.2%

Total 21,139 34.9% 23,119 39.0% (1,980) (8.6%)

Sales and marketing• expenses were $2.2 million lower than the same period in 2007. This was primarily due to (a) lower sales and marketing salaries resulting from the restructuring, (b) lower commissions, and (c) general cost reduction as we continue to apply a more focused approach to general corporate marketing initiatives, tradeshow and samples and shipping costs. As a percentage of sales, sales and marketing expenditures fell to 11.3% in 2008 from 15.2% in 2007.

Research, development, and engineering • expenses were $2.2 million net of SR&ED investment tax credits and a government grant, down $0.6 million from $2.8 million during the same period of 2007. This decrease is due to the recognition of a $0.4 million government grant and the recognition of additional SR&ED credits previously unrecognized. These were offset by higher engineering expenditures which do not qualify for the SR&ED tax credit. Actual 2008 gross expenditures were $3.6 million, up from $3.4 million

carmanah.com 21

from the same period in 2007. As a percentage of sales, our net research, development, and engineering expenses decreased to 3.7% from 4.7% in the same period in 2007.

General and administrative• expenses declined to $9.2 million from $10.1 million in the same period of 2007. This decrease is primarily due to lower salaries and benefits resulting from the restructuring as well as overall tighter controls over discretionary spending. As a percentage of sales, general and administrative costs decreased to 15.2% in 2008 from 17.1% in 2007.

Restructuring• charge of $1.6 million is the result of several restructuring initiatives we announced, including outsourcing our manufacturing, exiting of our tactical distribution businesses, and simplifying and reducing the cost of our organizational structure.

The restructuring charge is comprised of employee severances and terminations, and inventory write downs. We expect that these initiatives will result in total restructuring charges of approximately $1.9 million. The remaining $0.3 million will be charged to earnings over the first quarter of 2009. The timing of these charges will depend on management actions and applicable guidelines under GAAP.

Amortization• expense was $1.4 million, which is $0.2 million higher than the same period in 2007. This was primarily due to changes made to the estimated useful lives of the underlying assets as a result of the recent corporate restructuring.

Other income/ (expense)

NON-OPERATING FOR THE yEAR ENDED DEC 31,



Goodwill and intangible impairments (10,732) (17.7%) (2,000) (3.4%) (8,732) 436.6%

(Gain)/loss on disposal of assets (9) (0.0%) 231 0.4% (240) (103.9%)

Interest and other 86 0.1% (63) (0.1%) 149 (236.5%)

Foreign exchange gain/(loss) 1,965 3.2% (1,463) (2.5%) 3,428 (234.3%)

Total (8,690) (14.3%) (3,295) (5.6%) (5,395) 163.7%

Non-operating costs totaled $8.7 million in 2008 versus $3.3 million in 2007. This increase is primarily due to:

In the fourth quarter, we conducted our annual goodwill and • intangibles asset impairment tests. We compared the fair value of the reporting units, determined on a discounted after-tax cash-flow basis, to their carrying value. As goodwill impairment test indicated that the carrying value exceeded their fair value, thus an impairment exists, and due to the recent fluctuations in the market and the uncertainties arising from overall economic conditions, we recorded a $10.1 million impairment to, and write-off of, goodwill. The write off of goodwill related to the remaining booked goodwill stemming from our 2003 acquisition of AVVA Technologies Inc. (now our LED signs group) and our 2005 acquisition of Soltek Power Systems Inc., (now our power systems business). In 2007, we recorded a $2.0 million write down of goodwill as a result of performing the same annual impairment analysis. The 2007 impairment of goodwill related to our 2003 acquisition of AVVA Technologies Inc. The goodwill and intangible impairment charges are non-cash in nature and do not affect our liquidity, cash flows from operating activities or debt covenants and will not impact

future operations. At the end of December 2007, we recorded a $0.3 million gain on the sale of certain assets related to our residential home power business within the Solar power systems group. The assets we disposed of primarily related to inventory, customer lists, and equipment.

During 2008, we recorded a foreign exchange gain of $2.0 • million compared to a loss of $1.5 million in 2007. These foreign exchange gains and losses arose on the translation of the foreign–denominated assets and liabilities. We minimize our exposure to foreign exchange fluctuations by matching US-dollar assets / revenues with US-dollar liabilities / expenses and where appropriate, by entering into forward contracts to buy or sell US dollars in exchange for Canadian dollars. The gain in 2008 and loss in 2007 was primarily due to the volatility of the US dollar relative to the Canadian dollar over the past two years. A significant portion of our sales and purchases are denominated in the US dollar. As at December 31, 2008, we had entered into a series of foreign currency forward contracts (CDN/USD) that provided for the purchase of $2.5 million at a rate of $1.148. The fair value of the forward contracts, estimated using market as at December 31, 2008, is $0.2 million.


Income tax expense/ (recovery)

Income tax expense (recovery) for the year was $0.4 million compared with ($1.9) million for 2007. This amount consisted of current and future tax expense (recovery) of ($1) thousand (2007 - $289 thousands recovery) and $0.4 million (2007 - $1.6 million recovery), respectively.

Our effective tax recovery rate is (4.7%), which varies from the statutory rate of 31.0%. The primary difference is due to non-deductible stock compensation ($0.8 million), the write down of goodwill ($10.1 million), as well as revisions to the estimated tax rates utilized.

INCOME TAx FOR THE yEAR ENDED DEC 31,


$ $ $

Current (1) (289) 288

Future 426 (1,633) 2,059

Total 425 (1,922) 2,347

RESULTS OF OPERATIONS – FOURTH qUARTER yEAR OVER yEAR COMPARISON

Sales

Sales for the fourth quarter of 2008 were $15.8 million; $2.7 million higher than the same period in 2007. A summary of revenues from each of our Strategic and Tactical business segments is shown below:

SALES FOR THE THREE MONTHS ENDED DEC 31,


$ Mix $ Mix $ %

Strategic

Solar LED Lights 10,149 64.2% 5,254 40.1% 4,895 93.2%

Solar Power Systems 1,905 12.0% 883 6.7% 1,022 115.7%

12,054 76.2% 6,137 46.9% 5,917 96.4%

Tactical

Distribution 1,876 11.9% 5,623 43.0% (3,747) (66.6%)

Signage 1,889 11.9% 1,326 10.1% 563 42.5%

3,765 23.8% 6,949 53.1% (3,184) (45.8%)

Total 15,819 100.0% 13,086 100.0% 2,733 20.9%

Solar LED Lights includes all of the former Solar LED Lighting division except for transit which is now part of the tactical – Distribution. Solar Power Systems includes packaged solar power systems and grid tie systems. All other solar power products are included under Distribution in the tactical business segment. Signage includes the former LED Signs division plus non-solar roadway signs.

Strategic Businesses - • Sales were $12.1 million, up $5.9 million from the same period of 2007. Solar LED sales provided strong growth in the quarter, with our aviation products leading the way.

Tactical Businesses - • Sales were $3.8 million, down $3.2 million from the same period of 2007. The decline is primarily due to lower sales from our distribution businesses as we continued to wind down two of our distribution warehouses (Calgary and Santa Cruz). The prior year also included approximately $0.8 million of sales into the Homepower market, a market that we chose to exit due to the lower margins and increasing competition.

Our sales by geographical area are outlined below:

SALES FOR THE THREE MONTHS ENDED DEC 31,


$ % $ % $ %

North America 10,966 69.3% 9,599 73.4% 1,367 14.2%

South America 520 3.3% 252 1.9% 268 106.3%

Europe 1,114 7.0% 2,194 16.8% (1,080) (49.2%)

Middle East and Africa 2,841 18.0% 619 4.7% 2,222 359.0%

Asia 259 1.6% 328 2.5% (69) (21.0%)

South Pacific 119 0.8% 94 0.7% 25 26.6%

Total 15,819 100.0% 13,086 100.0% 2,733 20.9%

carmanah.com 23

Gross margin

We offer product solutions to a variety of market sectors that carry different margins; as a result, our gross margin can be significantly impacted by the sales mix.

The following table outlines gross margins by division:

MARGINS FOR THE THREE MONTHS ENDED DEC 31,


$ Margin % $ Margin % $ %

Strategic

Solar LED Lights 4,497 44.3% 1,304 24.8% 3,193 19.5%

Solar Power Systems 244 12.8% 219 24.8% 25 (12.0%)

4,741 39.3% 1,523 24.8% 3,218 14.5%

Tactical

Distribution 236 12.6% 899 16.0% (663) (3.4%)

Signage 365 19.3% 24 1.8% 341 17.5%

601 16.0% 923 13.3% (322) 2.7%

Total 5,342 33.8% 2,446 18.7% 2,896 15.1%

Our overall gross margin for the quarter was $5.3 million, up from $2.4 million in the same quarter of 2007. As a percentage, overall margins increased to 33.8% in 2008 from 18.7% in 2007. This increase was primarily due to (1) a continued focus on lean manufacturing and supply chain management, and (2) increased sales of higher margin Solar LED products and decreased sales of lower margin home power and transit products which were exited at the end of 2007.

Strategic Businesses - • The gross margin increased by $3.2

million as a result of a larger percentage of sales from Solar LED Lights in the third quarter of 2008 compared to the same period in 2007. Solar LED Lights normally generate a higher gross margin compared to Solar Power Systems.

Tactical Businesses -• The overall margin declined by $0.3 million, although on a percentage basis gross margin increased to 16.2% from 13.3% in the same period of 2007. This was primarily due to reduced sales of lower margin product, such as Homepower.

Operating expenses

Operating expenses in the fourth quarter of 2008 totaled $5.4 million, $0.1 million or 2.2%% lower than the same period in 2007. As a percentage of sales, our operating costs excluding the restructuring and amortization charges have decreased by 14.4% over the same period in 2007.

OPERATING ExPENSES FOR THE THREE MONTHS ENDED DEC 31,



Sales and marketing 1,507 9.5% 1,944 14.9% (437) (22.5%)

Research, development and engineering 235 1.5% 785 6.0% (550) (70.1%)

General and administrative 2,756 17.4% 2,525 19.3% 231 9.1%

4,498 28.4% 5,254 40.1% (756) (14.4%)

Restructuring 516 3.3% - 0.0% 516 0.0%

Amortization 406 2.6% 287 2.2% 119 41.5%

Total 5,420 34.3% 5,541 42.3% (121) (2.2%)

Sales and marketing expenses • were $0.4 million lower than the same period in 2007. This was primarily due to (a) lower sales and marketing salaries resulting from the restructuring, (b) lower commissions, and (c) general cost reduction as we continue to apply a more focused approach to general corporate marketing initiatives, tradeshow and samples and shipping costs. As a percentage of sales, sales and marketing expenditures fell to 9.5% in 2008 from 14.9% in 2007.

Research, development, and engineering • expenses were $0.2 million net of SR&ED investment tax credits and a government grant, down $0.6 million from $0.8 million during the same period of 2007. This decrease is due to the recognition of a $0.4 million government grant and the recognition of additional SR&ED credits previously unrecognized. These were offset by higher engineering expenditures which do not qualify for the SR&ED tax credit. Actual quarterly gross expenditures were $0.9 million, up $0.1 million in the


same period in 2007. As a percentage of sales, our net research, development, and engineering expenses increased slightly to 1.5% from 6.0% in the same period in 2007.

General and administrative• expenses increased to $2.8 million from $2.5 million in the same period of 2007. This increase is primarily due to a restructuring charge, moderated by lower salaries and benefits resulting from the restructuring as well as overall tighter controls over discretionary spending. As a percentage of sales, general and administrative costs decreased to 17.4% in 2008 from 19.3% in 2007.

Restructuring • charge of $0.5 million is the result of several restructuring initiatives we announced, including outsourcing our

manufacturing, exiting our tactical distribution businesses, and simplifying and reducing the cost of our organizational structure. The restructuring charge is comprised of employee severances and terminations, and inventory write downs. We expect that these initiatives will result in total restructuring charges of approximately $1.6 million. The remaining $0.3 million will be charged to earnings over the first quarter of 2009. The timing of these charges will depend on management actions and applicable guidelines under GAAP.

Amortization• expense was $0.4 million, which is $0.1 million higher than the same period in 2007. This was primarily due to changes made to the estimated useful lives of the underlying assets as a result of the recent corporate restructuring.

Other (income)/expense

Non-operating costs totaled $9.5 million in fourth quarter 2008 versus $1.8million for the same period in 2007. This increase is primarily due to:

NON-OPERATING FOR THE THREE MONTHS ENDED DEC 31,



Goodwill and intangible impairments (10,732) (67.8%) (2,000) (15.3%) (8,732) 436.6%

(Gain)/loss on disposal of assets (5) (0.0%) 231 1.8% (236) (102.2%)

Interest and other 7 0.0% 53 0.4% (46) (86.8%)

Foreign exchange gain/(loss) 1,247 7.9% (95) (0.7%) 1,342 (1412.6%)

Total (9,483) (59.9%) (1,811) (13.8%) (7,672) 423.6%

In the fourth quarter, we conducted our annual goodwill and • intangibles asset impairment tests. We compared the fair value of the reporting units, determined on a discounted after-tax cash-flow basis, to their carrying value. As goodwill impairment test indicated that the carrying value exceeded their fair value, thus impairment exists, and due to the recent fluctuations in the market and the uncertainties arising from overall economic conditions, we recorded a $10.1 million impairment to and write-off of goodwill. The write off of goodwill related to the remaining booked goodwill stemming from our 2003 acquisition of AVVA Technologies Inc. (now our LED signs group) and our 2005 acquisition of Soltek Power Systems Inc,. (now our power systems business). In 2007, we recorded a $2.0 million write down of goodwill as a result of performing the same annual impairment analysis. The 2007 impairment of goodwill related to our 2003 acquisition of AVVA Technologies Inc. The goodwill and intangible impairment charges are non-cash in nature and do not affect our liquidity, cash flows from operating activities or debt covenants and will not impact future operations. (see “2008 OUTLOOK” section).

At the end of December 2007, we recorded a $0.3 million one • time gain on the sale of certain assets related to our residential home power business within the Solar power systems group. The assets we disposed of primarily related to inventory, customer lists, and equipment.

In the fourth quarter of 2008, we recorded a foreign exchange gain • of $1.2 million compared to a loss of $2.8 million in same period in 2007. These foreign exchange gains and losses arose on the translation of the foreign–denominated assets and liabilities. We minimize our exposure to foreign exchange fluctuations by matching US-dollar assets / revenues with US-dollar liabilities / expenses and where appropriate, by entering into forward contracts to buy or sell US dollars in exchange for Canadian dollars. The gain in 2008 and loss in 2007 was primarily due to the volatility of the US dollar relative to the Canadian dollar over the past two years. A significant portion of our sales and purchases are denominated in the US dollar. As at December 31, 2008, we had entered into a series of foreign currency forward contracts (CDN/USD) that provided for the purchase of $2.5 million at a rate of $1.148. The fair value of the forward contracts, estimated using market as at December 31, 2008, is $0.2 million.

carmanah.com 25

Income tax expense/ (recovery)

Income tax expense (recovery) for the period totaled $0.4 million compared to ($0.3) million for the comparable period in 2007. This amount consists of current and future tax expense (recoveries) of nil (2007 - $ 1 thousand) and $0.4 million (2007 - ($0.3) million), respectively.

INCOME TAx FOR THE THREE MONTHS ENDED DEC 31,


$ $ $

Current - 1 (1)

Future 420 (270) 690

Total 420 (269) 689

SELECT CONSOLIDATED FINANCIAL INFORMATION

FOR THE yEARS ENDED DECEMBER 31,

($ THOUSANDS - ExCEPT PER SHARE AMOUNTS)

2008 2007 2006

Sales 60,617 59,289 62,273

Loss (9,452) (8,915) (365)

Basic and Diluted EPS (0.22) (0.21) (0.01)

Cash dividends - - -

Total assets 37,696 45,397 55,758

Long-term debt - - 4

The 2008 $7.7 million decrease in total assets is primarily due to the write off of goodwill previously discussed. The 2007 $10.4 million decrease in total assets is primarily due to reductions in inventory.

LIqUIDITy AND CAPITAL RESOURCES

We finance our operations and capital requirements through funds generated from operations, use of our borrowing facilities and the sale of our capital stock. As at December 31, 2008, we had cash of $7.9 million, with no outstanding debt.

CASH AND CASH EqUIVALENTS

AS AT

DECEMBER 31, DECEMBER 31,


Cash, net of short-term borrowings

7,914 4,147 3,767

Net working capital 21,334 19,105 2,229

Current ratio 3.2 3.4

Our cash and cash equivalents at December 31, 2008 were held for working capital purposes and were invested primarily in interest bearing bank accounts. We do not enter into investments for trading or speculative purposes.

From our operations in 2008 we generated positive cash flow of $4.0 million, compared to $1.9 million for the same period in 2007. The positive cash flow from operations in 2008 was primarily the result of our increased focus on the operations and the related cost reductions and focus on high margin products. The positive cash from operations in 2007 was primarily due to a strong focus on working capital, with significant reductions in inventories.

Our investing activities in 2008 primarily consisted of capital and intangible assets acquisitions of $0.6 million. The asset acquired mainly related to patents, computer hardware and research equipment. Our investing activities in 2007 consistent of capital and intangible asset acquisitions of $0.9 million, offset by proceeds from the sale of investments of $1.5 million and $0.2 million from the sale of assets related to our homepower market vertical.

There were no significant financing activities during 2008. This compares with a $1.9 million repayment on our credit facility during 2007.

In April 2008, we entered into a new three year $10.0 million committed revolving credit facility with the Bank of Montreal. The amount available is subject to certain covenants calculated on a quarterly basis and the facility is secured by general security agreements. On July 8, 2008, this facility formally replaced the agreement we previously held with the Royal Bank of Canada. At December 31, 2008, we had not drawn on the operating loan.

We believe that our cash and cash equivalents, bank credit facilities and cash flow from improved operations going forward will be sufficient to satisfy our operating cash requirements in the foreseeable future. Long-term cash requirements, other than normal operating expenses, are anticipated for the continued development of new products, financing anticipated growth and possible acquisitions of businesses, products or technologies complementary to our business. On a long-term basis or to complete acquisitions in the short term, we may require additional external financing through credit facilities, sale of additional equity or other financing arrangements. There can be no assurance that we can obtain such financing on favorable terms, if at all.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

Our major lease obligations relate leases for our head office and manufacturing facilities and other production and office equipment. The total commitments under contract at December 31, 2008 were approximately $1.0 million. As at December 31, 2008, we had a commitment for our Victoria B.C. manufacturing facility beyond our operation needs. Subsequent to year-end, we have managed to be relieved from this obligation on February 28, 2009, the final day of our occupancy, as we were permitted to terminate our lease early by the landlord.

COMMITMENTS

($ THOUSANDS) 2009-2010 2011-2012 2012 + TOTAL

Operating leases 798 205 - 1,003


During the year, we entered into an agreement with a contract manufacturer to build and supply a large portion of our manufactured products. Under this agreement, we are required to provide demand forecasts to the contract manufacturer for our expected sales. The contract manufacturer utilizes these forecasts to acquire raw materials and inventory to support that demand. If our sales are below the demand forecasts, we are then required to purchase the excess inventory. As at December 31, 2008, the contract manufacturer held approximately $2.1 million in inventory and $0.5 million in outstanding committed purchase orders supporting our forecasted demand.

APPLICATION OF CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES

Our financial statements are prepared in accordance with GAAP. The application of GAAP requires that we make estimates that affect our reported amounts of assets and liabilities and the disclosure of contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the period. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ significantly from these estimates.

The significant accounting policies and estimates are discussed below:

Warranty reserve –• A provision for future potential product warranty costs is included in cost of goods sold based primarily on prior warranty experience regarding cost of claims and expected product returns. These future product warranty costs include costs associated with repair or replacement of products returned under warranty. Actual future costs in support of these claims may differ from those estimates. This provision is reviewed at least quarterly and adjusted prospectively. The total provision as at December 31, 2008 is $0.9 million, up $0.3 from December 31, 2007.

Valuation of inventory -• We evaluate inventory balances at each balance sheet date and record a provision as necessary for slow moving or obsolete inventory. In performing this review we consider such factors as forecasted sales, demand requirements, product lifecycle and product development plans, quality issues, and current inventory levels. If future demand or market conditions for our products are less favorable than forecasted or if unforeseen technological changes occur, we may be required to record write-downs which would negatively affect gross margins in the period when the write-downs are recorded and our operating results and financial position could be adversely affected. At December 31, 2008 our inventory provision was approximately $1.6 million, up $1.0 from the same date in 2007. This increase was primarily due to the phasing out of certain product / business lines as a result of the restructuring initiative previously discussed.

Allowance for doubtful accounts -• We record an allowance for doubtful accounts related to accounts receivable. This allowance is based on our knowledge of the financial condition of our customers, the aging of the receivables, the current business environment and historical experience. A change in one or more of these factors could impact the estimated allowance and provision for bad debts

recorded. At December 31, 2008, our allowance for doubtful accounts was $1.1 million, up $0.3 million from 2007 due to the deterioration of the economy in 2008.

Intangibles and Goodwill -• Intangible assets, comprised of customer lists and relationships, and goodwill were acquired on the acquisition of AVVA Light Corporation and Soltek Powersource Ltd. At least annually, we have reviewed the carrying value of our intangible assets and goodwill for potential impairment. Among other things, this review considered the fair value of the business based on discounted estimated cash flows. If circumstances indicate that impairment in the value of these assets has occurred, we would record this impairment in the earnings of the current period. In addition, we estimated the useful life of customer lists and relationships in determining the amortization period for these intangibles. During our annual impairment analysis of goodwill in the fourth quarter of 2007, we determined that the goodwill associated with our AVVA Light Corporation acquisition was impaired. Of the $3.1 million of goodwill acquired, $2.0 million was deemed impaired due to a change in our overall strategic direction which now considers this group non-core. During our annual impairment analysis of goodwill in the fourth quarter of 2008, due to the recent fluctuations in the market and the uncertainties arising from overall economic conditions, we recorded a further $10.1 million impairment to, and write-off of, goodwill. The write off of goodwill related to the remaining booked goodwill stemming from our 2003 acquisition of AVVA Technologies Inc. (now our LED signs group) and our 2005 acquisition of Soltek Power Systems Inc,. (now our power systems business). All previously recorded goodwill is now fully written off as of December 31, 2008 and only $0.2 of intangibles is still capitalized. These relate to patents which we own and relate to our technology. The goodwill and intangible impairment charges are non-cash in nature and do not affect our liquidity, cash flows from operating activities or debt covenants and will not impact future operations

Valuation of Future Income Tax and Investment Tax Credit • assets – As at December 31, 2008 we have recorded a future income tax asset of $3.0 million which reflects future tax deductions available against taxable income. We have also recorded investment tax credits of $1.6 million which are available to reduce taxes payable. The calculation of our future income tax and investment tax credit assets involves dealing with uncertainties in application of complex tax laws and regulations as well as assessing likelihood of future realization. It is also possible that tax audits may result in potential reductions of assets and that such adjustments may materially affect the amounts reported for future income tax and investment tax credit assets.

carmanah.com 27

NEW ACCOUNTING POLICIES, PRONOUNCMENTS AND DEVELOPMENTS

Adoption of new accounting standards

Effective January 1, 2008, the Company adopted the recommendations of Section 1535, “Capital Disclosures”, of the CICA Handbook. This section establishes standards for disclosing information about a company’s capital and how it is managed in order that a user of the financial statements may evaluate the company’s objectives, policies, and processes for managing capital. Beyond additional disclosure, these new standards did not have an effect on our financial position or results of operations.

Section 3031, “Inventory”, of the CICA Handbook replaces Section 3030 and provides guidance on the determination of inventory cost, subsequent recognition as expense, and write-downs to net realizable value. The new recommendations were adopted effective January 1, 2008, and had no material impact on the financial statements.

Sections 3862, “Financial Instruments – Disclosures”, and 3863, “Financial Instruments – Presentation”, of the CICA Handbook replaced Section 3861, “Financial Instruments – Disclosure and Presentation”, and were adopted by the Company effective January 1, 2008. The new standards revise and enhance the disclosure requirements on the nature and extent of risks arising from financial instruments and how a company manages those risks. Beyond additional disclosure, the adoption of these new pronouncements did not have an effect on the Company’s financial position or results of operations.

Future changes in accounting policies

CICA Handbook Section 1400, “General Standards of Financial Statement Presentation”, has been amended for new requirements relating to the assessment of an entity’s ability to continue as a going concern. The Company will adopt the amendments to this section beginning January 1, 2009. Beyond additional disclosure, the adoption of this new pronouncement is not expected to have an effect on the Company’s financial position or results of operations.

In February 2008, the CICA issued Handbook Section 3064, “Goodwill and Intangible Assets”, effective for interim and annual financial statements relating to fiscal years beginning on or after October 1, 2008. Section 3064, which replaces Section 3062, “Goodwill and Other Intangible Assets”, and section 3450, “Research and Development Costs”, establishes standards for the recognition, measurement and disclosure of goodwill and intangible assets. This new standard is effective for the Company’s fiscal year commencing January 1, 2009. The Company is evaluating the impact of the adoption of this new standard on its consolidated financial statements.

Convergence with international financial reporting standards

In 2006, Canada’s Accounting Standards Board ratified a strategic plan that will result in Canadian GAAP, as used by public companies, being evolved and converged with International Financial Reporting

Standards (“IFRS”) over a transitional period to be complete by January 1, 2011. Canadian GAAP will be converged with IFRS through a combination of two methods: as current joint-convergence projects of the United States’ Financial Accounting Standards Board and the International Accounting Standards (“IAS”) Board are agreed upon, they will be adopted by Canada’s Accounting Standards Board and may be introduced in Canada before the complete changeover to IFRS; and standards not subject to a joint-convergence project will be exposed in an omnibus manner for introduction at the time of the complete changeover to IFRS. As the IAS Board currently, and expectedly, has projects underway that should result in new pronouncements that continue to evolve IFRS, and that this Canadian convergence initiative is very much in its infancy as of the date of our financial statements, it is premature to currently assess the impact of the Canadian initiative, if any, on our company.

In February 2008, the Accounting Standards Board (“AcSB”) • confirmed that the use of IFRS will be required in 2011 for publicly accountable enterprises in Canada;

In April 2008, the AcSB issued an IFRS Omnibus Exposure Draft • proposing that publicly accountable enterprises be required to apply IFRS, in full and without modification, on January 1, 2011;

In June, 2008 the Canadian Securities Administrators (“CSA”) • issued Staff Notice 52-321, Early Adoption of IFRS which indicated that the CSA would be prepared to grant an exemption to allow Canadian financial statement issuers to adopt IFRS early on a case-by-case basis, provided that they could demonstrate that they met certain conditions. At this early stage, we are not planning to adopt IFRS early.

The adoption date of January 1, 2011 will require the restatement, for comparative purposes, of amounts reported by us for our year ended December 31, 2010, and of the opening balance sheet as at January 1, 2010. The AcSB proposes that CICA Handbook Section, Accounting Changes, paragraph 1506.30, which would require an entity to disclose information relating to a new primary source of GAAP that has been issued but is not yet effective and that the entity has not applied, not be applied with respect to the IFRS Omnibus Exposure Draft.

We commenced the IFRS conversion project in 2008 and have initiated a project governance structure. Progress reports on the IFRS conversion project occurs regularly to senior executive management (starting mid 2008), the Audit Committee (starting mid 2008) and the Board of Directors (starting March 2009). In addition to using dedicated resources within our company, we have also engaged a firm of external expert advisors to assist in the IFRS conversion project.

The IFRS conversion project consists of three phases: Scoping and Diagnostics, Analysis and Development, and Implementation and Review.

Phase One: Scoping and Diagnostics, which involved project • planning and staffing and identification of differences between current Canadian GAAP and IFRS, has been completed. The resulting identified areas of accounting difference of highest potential impact to our company, based on existing IFRS, are business combinations, fair value or revaluation of deemed cost


(property plant and equipment), revenue recognition, provisions and contingent liabilities, share-based payments and initial adoption of IFRS under the provisions of IFRS 1 First-Time Adoption of IFRS.

Phase Two: Analysis and Development is in progress, and involves • detailed diagnostics and evaluation of the financial impacts of various options and alternative methodologies provided for under IFRS; identification and design of operational and financial business processes; initial staff, audit committee and Board of Directors training; analysis of IFRS 1 optional exemptions and mandatory exceptions to the general requirement for full retrospective application upon transition to IFRS; summarization of 2011 IFRS disclosure requirements; and development of required solutions to address identified issues.

It is anticipated that the adoption of IFRS will have an impact on information technology (“IT”) requirements. Our progress on our IFRS project is well timed as it coincides with our IT strategic review project that we are also undertaking during 2009, in which we, together with a firm of external IT experts have completed a detailed assessment of our business processes and are currently in the process of deciding on and implementing a new ERP and financial reporting software during the current year. Efficiency of conversion to IFRS and internal control compliance are part of the requirements of our new software. The IT project bridges Phase Two and Phase Three of the IFRS project.

Phase Three: Implementation and Review, is expected to • commence mid-year 2009 and will involve the execution of changes to information systems and business processes; completion of formal authorization processes to approve recommended accounting policy changes; and further training programs across affected areas of our company and external stakeholders. The project will culminate in the collection of financial information necessary to compile IFRS-compliant financial statements and reconciliations; embedding of IFRS in business processes; and audit committee approval of IFRS-compliant financial statements.

We will continue to review all proposed and continuing IFRS amendments by the various regulatory bodies and update or revise our project plan accordingly to ensure we accomplish a timely and efficient transition to IFRS and that IFRS reporting is fully embedded in our operations by the end of 2009.

DISCLOSURES ABOUT RISKS AND FINANCIAL INSTRUMENTS

In the course of our operations, we are exposed to various business risks and uncertainties that can affect our financial condition. While some financial exposures are reduced through insurance, hedging and other risk management measures we have in place, there are certain cases where the market and operating risks that are driven by external factors beyond our influence and control.

Market risksWe are exposed to fluctuations in the exchange rate between the • US and Canadian dollar, as a significant portion of our sales are denominated in the US dollar. To reduce our risk because of currency fluctuations, we purchase a large amount of inventory and other

cost of sales items in US dollars. If the Canadian dollar rises relative to the United States dollar, our operating results may be negatively impacted. An increase of 1% in the value of the Canadian dollar relative to the US dollar, for example, could reduce our sales by $0.5 million, assuming no change in geographic revenue mix. Conversely, a decrease of 1% in the value of the Canadian dollar relative to the US dollar, for example, could increase our sales by $0.5 million.

From time to time, we enter into forward foreign exchange contracts • to manage foreign exchange risk. Generally, we enter into contracts that oblige us to sell U.S. dollars in the future at predetermined exchange rates. The contracts are matched with anticipated future sales in foreign currencies. We do not use these, or any other financial instruments for speculative purposes. As at December 31, 2008, we held a series of forward foreign exchange contract that required us to exchange $2.5 million US dollars for Canadian dollars at a fixed exchange rate. As a result of market fluctuations, we have recorded a derivative liability of $0.2 million associated with these contracts. The fair value of these contracts have been estimated by using the current forward exchange rates available on similar contracts as at December 31, 2008.

A significant portion of our revenues are derived from government • and military agencies, thus, any disruption in government funding or in the relationship with those agencies could adversely affect our business. We feel that our global reach, our technological leadership and our proven long standing good relationships with such agencies are important in mitigating such risk.

Economic downturns could have a negative impact on our business • since our clients may curtail investment in infrastructure projects. We manage this risk by pursuing a prudent growth plan which is financially conservative and is based on achieving growth while generating free cash flow. Our vision, core business, focus, and strategy and the key performance drivers and capabilities required to meet our goals have not changed since we announced our new strategic direction in mid 2008.

Operating risksOur exposure to credit risk consists primarily relates to accounts • receivable. We maintain reserves for potential credit losses which, on a historical basis, have been limited due to our ongoing credit granting procedures and the general credit worthiness of our customers. Three receivables accounts were greater than 5% of our total accounts receivable balance at December 31, 2008. Combined, these customers owed $3.3 million, which represents 22.6% of our receivables balance.

Our bookings and backlog trends are subject to monthly • fluctuations, unexpected adjustments and cancellations and are, therefore, uncertain indicators of our future sales & earnings. We are working very hard to ensure we are able to focus on larger long term sales in order to reduce these fluctuations.

We may have difficulty in attracting and retaining qualified staff, • which may affect our reputation in the marketplace and restrict our ability to implement our business strategy. We feel that we have reduced this risk, with the 2008 implementation of various best in class employee retention, reward and benefit programs.

carmanah.com 29

DISCLOSURE CONTROLS & PROCEDURES AND INTERNAL CONTROLS OVER FINANCIAL REPORTING

As defined in the Canadian Securities Administrators’ Multilateral Instrument 52-109, our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), collectively referred to as “Officers” are responsible for overseeing the establishment and maintenance of disclosure controls & procedures (“DC&P”) as well as internal controls (“ICFR”) over financial reporting. These controls must provide reasonable assurance that our Officers are aware of material information relating to our company, including the consolidated subsidiaries, during the period in which the annual filings are being prepared. In addition, these responsibilities include having reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. There are, however, limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and of individuals overriding the controls and procedures. These limitations are particularly important when a company, such as ours has undergone a significant restructuring project initiated in mid 2008 and expected to be completed in the early part of 2009. Such a company wide initiative, which included a reduction of and turnover of staff, reorganization of our sales structure, and the outsourcing of our manufacturing, inherently reduces the capacity of available human resources to ensure that an optimal set of control procedures are in place.

Our Officers and management have evaluated the effectiveness of our DC&P and ICFR as at December 31, 2008 as required by Canadian securities laws. Due to the size and timing of the restructuring, we engaged several professional firms & consultants in this field to independently assist in the designing, testing, evaluation & assessment process. The approach for 2008 was to look at the size, nature and

state of development of the business and thus use a “top down risk” based approach which focused on evaluating areas that were deemed to provide the greatest risk to a material misstatement. Our evaluation also took into account our corporate disclosure procedures and the functioning of our Officers, other executive officers, management, Board of Directors and Audit Committee. Based on this evaluation, our Officers noted material weaknesses in the design or operation of our ICFR relating to:

Segregation of duties and formalized policy documentation & • review: specifically certain duties within the accounting and human resource departments were not properly segregated & polices and review procedures were not formalized due to a smaller number of staff and staff turnover resulting from the restructuring. To our knowledge, none of these control deficiencies has resulted in a misstatement to the financial statements.

IT user access controls: specifically due to the limitations of our • current ERP system users are not properly restricted from access to the system. To our knowledge, none of these control deficiencies has resulted in a misstatement to the financial statements.

Our Officers and management feel that these material weaknesses are related to the restructuring project & our outdated ERP system and have started to be remediated through the business process review and IT application architecture project that we initiated in late 2008, with the help of external business process & IT experts (see BUSINESS OVERVIEW section).

Going forward, we are committed to continually improve our processes and internal controls. We will also be performing interim testing on various components of the internal controls to evaluate the effectiveness of ICFR.

OUTSTANDING SHARE DATA

AS AT

$ THOUSANDS, ExCEPT SHARE AND PER SHARE AMOUNTS

FEBRUARy 26, 2009

DECEMBER 31, 2008

SEPTEMBER 30, 2008

JUNE 30, 2008

MARCH 31, 2008

DECEMBER 31, 2007

Share price - closing ($) 0.67 0.49 0.87 1.15 0.93 1.19

Market capitalization ($) 28,441 20,800 36,792 48,634 39,247 51,236

Outstanding

Shares 42,448,651 42,448,651 42,290,006 42,290,006 42,200,609 43,055,174

Warrants 300,000 300,000 300,000 300,000 300,000 300,000

Options 1,848,850 1,848,850 2,473,100 2,579,850 4,019,583 4,263,083

Restricted share units 553,682 404,428 566,193 597,135 149,254 -

Performance based share units 245,642 189,672 214,486 236,708 55,970 -

CARMANAH TECHNOLOGIES CORPORATION - (Expressed in thousands of Canadian Dollars, except share and per share amounts)

Consolidated Notes to Financial Statements

For the years ended December 31, 2008 and 2007


AUDITORS’ REPORT TO THE SHAREHOLDERS

We have audited the consolidated balance sheets of Carmanah Technologies Corporation (the “Company”) as at December 31, 2008 and 2007 and the consolidated statements of operations, comprehensive loss and deficit, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.

In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2008 and 2007 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles.

Chartered Accountants

Vancouver, Canada

March 4, 2009




carmanah.com 31

Consolidated Balance SheetsDecember 31, 2008 and 2007 2008 2007

ASSETSCurrent assets:

Cash and cash equivalents $ 7,914 $ 4,147

Accounts receivable, net 14,584 11,537

Inventories (note 4) 8,151 10,608

Prepaid expenses and deposits 581 805

31,230 27,097

Equipment and leasehold improvements, net (note 7) 1,687 2,976

Intangible assets, net (note 6) 192 912

Goodwill (note 5) - 10,368

Investment tax credits (note 8) 1,609 842

Future income taxes (note 8) 2,978 3,202

$ 37,696 $ 45,397

LIABILITIES ANd SHAREHOLdERS’ EquITyCurrent liabilities:

Accounts payable and accrued liabilities $ 9,450 $ 7,687

Deferred revenue 271 203

Derivative liability (note 12) 175 -

Income taxes payable - 102

9,896 7,992

Shareholders’ equity:

Share capital (note 9 (b)) 42,915 43,504

Contributed surplus (note 9 (f)) 3,258 2,822

Deficit (18,373) (8,921)

27,800 37,405

$ 37,696 $ 45,397

Commitments (note 16)Subsequent event (note 19)See accompanying notes to consolidated financial statements.On Behalf of the Board:

Ted Lattimore, Chief Executive Officer Dr. David R. Green, Chair of the Board





Consolidated Statements of Operations, Comprehensive Loss and deficit

2008 2007

Sales $ 60,617 $ 59,289

Cost of sales 39,815 43,712

20,802 15,577

Operating expenses:

Sales and marketing 6,818 9,032

Research, development and engineering, net (note 13) 2,160 2,809

General and administration 9,237 10,127

Amortization 1,372 1,151

19,587 23,119

Restructuring (note 18) 1,552 -

Total operating expenses 21,139 23,119

Operating loss (337) (7,542)

Other income/(expense):

Goodwill impairment (note 5) (10,171) (2,000)

Gain/(loss) on disposal of assets (9) 259

Intangible impairment (561) -

Interest and other 86 (91)

Foreign exchange 1,965 (1,463)

(8,690) (3,295)

Loss before income taxes (9,027) (10,837)

Income tax expense (recovery) (note 8):

Current (1) (289)

Future 426 (1,633)

425 (1,922)

Loss and comprehensive loss for the year (9,452) (8,915)

Deficit, beginning of year (8,921) (6)

Deficit, end of year $ (18,373) $ (8,921)

Loss per share:

Basic and diluted $ (0.22) $ (0.21)

Weighted average number of shares outstanding:

Basic and diluted 42,314,586 42,651,299

See accompanying notes to consolidated financial statements.




carmanah.com 33

Consolidated Statements of Cash FlowsFor the years ended December 31, 2008 and 2007 2008 2007

Cash provided by (used in):

OPERATIONS:Net earnings $ (9,452) $ (8,915)

Items not involving cash:

Amortization 2,017 1,151

Loss on disposal of capital assets and intangible impairment losses 570 31

Write-down of goodwill 10,171 2,000

Gain on Homepower assets sale (note 15) - (259)

Stock-based compensation (note 9) 836 844

Future income taxes (recovery) 426 (1,635)

Derivative instruments 175 -

Investment tax credits (767) (842)

Restructuring costs (note 18) 1,044 -

Net changes in non-cash working capital (985) 9,574

4,035 1,949

INvESTING:Sale of short-term investments - 1,500

Proceeds on Homepower sale 300 200

Purchase of capital assets (510) (752)

Purchase of intangible assets (104) (161)

Proceeds from sale of capital asset 35 -

(279) 787

FINANCING:Proceeds on share issuance 11 576

Issuance/(repayment) of bank demand debt - (1,915)

11 (1,339)

Increase in cash and cash equivalents 3,767 1,397

Cash and cash equivalents, beginning of year 4,147 2,750

Cash and cash equivalents, end of year $ 7,914 $ 4,147

Supplemental cash flow information:

Cash during the year for:

Bank charges and interest paid $ 180 $ 438

Income taxes paid/(refunded) $ (106) $ 142

See accompanying notes to consolidated financial statements.





Nature of businessCarmanah Technologies Corporation (CTC, or the Company) was incorporated under the provision of the Business Corporation Act (Alberta) on March 26, 1996. The Company is in the business of developing and distributing renewable and energy-efficient technologies, including solar-power LED lighting, solar powered systems & equipment and LED illuminated signage.

1. Significant accounting policies:

(a) Basis of presentation: The consolidated financial statements of the Company have been prepared in accordance with Canadian generally accepted accounting principles (“GAAP”). These consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Carmanah Signs Inc. (formerly AVVA Light Corporation), and Carmanah Technologies Corporation (a US incorporated company). All significant inter-company transactions and balances have been eliminated on consolidation.

(b) Cash and cash equivalents: Cash and cash equivalents include cash on deposit and highly liquid investments, consisting primarily of term deposits, with terms to maturity of three months or less on inception.

(c) Inventories: Inventories are valued at the lower of cost and net realizable value. Cost is determined on a weighted average basis and includes all costs of purchase, costs of conversion (direct costs and an allocation of fixed and variable production overheads) and other costs incurred in bringing the inventory to their present location and condition.

(d) Equipment and Leasehold improvements:

Equipment and Leasehold improvements are recorded at cost, less accumulated amortization. Amortization is determined at rates which will reduce original cost to estimated residual value over the useful life of each asset.

As a result of the restructuring activities outlined in Note 17, the Company reviewed its amortization methods and related estimated useful lives for its property, plant and equipment. As a result of this review, effective July 1, 2008, capital asset amortization methods and related useful lives were revised as follows:

ASSET BASIS RATE/yEARS

Computer hardware straight-line 3 – 5

Computer software straight-line 3 – 5

Leasehold improvements straight-line Term of lease

Office, production and research equipments straight-line 5 – 7

Tradeshow equipment straight-line 5

Vehicles declining 30%




carmanah.com 35

1. Significant accounting policies (continued):

(d) Equipment and Leasehold improvements (continued): The change in estimated useful lives and related amortization methods from declining balance to straight-line, which resulted in additional amortization charges of approximately $0.5 million for the year ended December 31, 2008.

(e) Intangible assets: Intangible assets are mainly comprised of trademarks and patents and are recorded at cost less accumulated amortization. Amortization is provided on a 25% declining balance basis over the estimated useful lives, which range from 1.5 to 11 years.

(f) Goodwill: Goodwill is the residual amount that results when the purchase price of an acquired business exceeds the sum of the amounts allocated to the identifiable assets acquired less liabilities assumed, based on their fair values. Goodwill is allocated as of the date of the business combination to the Company’s reporting units that are expected to benefit from the synergies of the business combination. Goodwill is not amortized but is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired. The impairment test is carried out in two steps. In the first step, the carrying amount of the reporting unit is compared with its fair value. When the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not to be impaired and the second step of the impairment test is unnecessary. The second step is carried out when the carrying amount of a reporting unit exceeds its fair value, in which case the implied fair value of the reporting unit’s goodwill is compared with its carrying amount to measure the amount of the impairment loss, if any. The implied fair value of goodwill is determined in the same manner as the value of goodwill is determined in a business combination described in the preceding paragraph, using the fair value of the reporting unit as if it was the purchase price. When the carrying amount of reporting unit goodwill exceeds its implied fair value, an impairment loss is recognized in an amount equal to the excess and is presented as a separate line item in the consolidated statements of operations.

(g) Revenue recognition: Revenue from the sale of products and services is recognized when persuasive evidence of a sale arrangement exists, shipment of the products has occurred and/or related installation has completed, title and risk involving the products are transferred, collection of receivables is probable, and the fee is fixed or determinable. If there is a requirement for customer acceptance of any products shipped, revenue is recognized only after customer acceptance has been received. Payments received in advance of the satisfaction of the Company’s revenue recognition criteria are recorded as deferred revenue. Provisions are established for estimated product returns and warranty costs at the time revenue is recognized based on historical experience for the product. If the historical data the Company used to estimate product returns does not properly reflect actual future returns, these estimates are revised. Future returns, if they were higher than estimated, would result in a reduction of revenues.

(h) Research and development costs: The Company is engaged in research and development. Research costs are expensed as incurred. Development costs are expensed in the period incurred, unless they meet the criteria for deferral established by GAAP. No development costs have been deferred in the years ended December 31, 2008 or 2007.





1. Significant accounting policies (continued):

The Company is entitled to certain Canadian federal and provincial tax incentives for qualified scientific research and experimental development. These investment tax credits (“ITCs”) are recorded as a reduction in the related expenditures when there is reasonable assurance that such credits will be realized. These ITCs are used to reduce current and future income taxes payable.

(i) Loss per share: The Company calculates basic loss per share using the weighted average number of common shares outstanding during the period. Diluted loss per share is calculated by the treasury stock method. Under the treasury stock method, the weighted average number of common shares outstanding assumes that the proceeds to be received on the exercise of dilutive stock options and warrants are applied to repurchase common shares at the average market price for the period in calculating the net dilution impact. Stock options and warrants are dilutive when the Company has income from continuing operations and the average market price of the common shares during the period exceeds the exercise price of the options and warrants. For the year ended December 31, 2008 and 2007, all stock options and warrants were anti-dilutive.

(j) Stock-based compensation: The Company has stock-based compensation plans which are described in note 9. The Company accounts for all stock-based payments and awards under the fair value method. Under the fair value based method, stock-based payments to non-employees are measured at the fair value of the consideration received, or the fair value of the equity instruments issued, or liabilities incurred, whichever is more reliably measurable. The fair value of stock-based payments to non-employees is periodically re-measured until counterparty performance is complete, and any change therein is recognized over the period and in the same manner as if the Company had paid cash instead of paying with or using equity instruments. The cost of stock-based payments to non-employees that are fully vested and non-forfeitable at the grant date is measured and recognized at that date. Under the fair value based method, compensation cost attributable to awards to employees is measured at fair value at the grant date and recognized over the vesting period. Compensation cost attributable to awards to employees that call for settlement in cash or other assets is measured at intrinsic value and recognized over the vesting period. Changes in intrinsic value between the grant date and the measurement date result in a change in the measure of compensation cost. Compensation cost is generally recognized on a straight-line basis over the vesting period. The Company accounts for the value attributable to the granted options on the consolidated statements of operations and is included in the determination of income.

(k) Future income taxes: The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, future tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Future tax assets and liabilities are measured using enacted or substantively enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on future tax assets and liabilities of future changes in tax rates is recognized in income in the period that included the date of substantive enactment. To the extent that it is not more likely than not that a future tax asset will be realized, a valuation allowance is provided.




carmanah.com 37

(l) Foreign currency transactions: The Company’s functional currency is the Canadian dollar. Monetary assets and liabilities denominated in foreign currency are translated into Canadian dollars at the rate of exchange prevailing at the balance sheet date. Non-monetary items are translated at rates of exchange in effect when the amounts were acquired or obligations incurred. Revenues and expenses are translated at rates in effect at the time of the transaction. Foreign exchange gains and losses are recognized in the determination of net earnings in the year in which they arise.

(m) Financial Instruments: Financial instruments consist of cash and cash equivalents, short-term investments, accounts receivable and accounts payable and accrued liabilities and may include forward foreign exchange contracts. Financial instruments are initially recognized at fair value with subsequent measurement depending on classification as described below. Classification of financial instruments depends on the purpose for which the financial instruments were acquired or issued, their characteristics, and the Company’s designation of such instruments. The Company has implemented the following classifications for its financial instruments:

Cash and cash equivalents and short-term investments are classified as held-for-trading • and any period change in fair value is recorded through net income.

Accounts receivable are classified as loans and receivables and are measured at • amortized costing using the effective interest rate method. Interest income is recorded in net income, as applicable.

Accounts payable and bank demand debt are classified as other financial liabilities • and are measured at amortized cost using the effective interest rate method. Interest expense is recorded in net income, as applicable.

The Company uses certain derivative financial instruments, primarily forward foreign exchange contracts, to manage foreign currency exposures on export sales. The Company does not use derivative financial instruments for speculative purposes and has chosen not to designate them as hedges. These contracts are designated as “held for trading” on the balance sheet and fair valued each quarter. The realized and unrealized gains and losses are included in net earnings/(loss). The derivative financial instruments are measured at fair value and fair values are determined based on current market rates for the settlement of the derivative instruments.

(n) Use of estimates: The preparation of consolidated financial statements requires management to make estimates and assumptions which affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The significant areas requiring management’s estimates include the estimates of the allowance for doubtful accounts, allowance for inventory obsolescence, the useful lives of long-lived assets, the value of investment tax credits receivable and future income tax assets, goodwill, intangibles, accruals for warranty, the fair value of stock-based compensation, warrants and financial instruments.

(o) Impairment of long-lived assets: The Company monitors the recoverability of long-lived assets, including equipment and leasehold improvements, and intangible assets, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company reviews





factors such as current market value, future asset utilization and business climate and compares the carrying value of the assets to the future undiscounted cash flows expected to result from the use of the related asset. If such cash flows are less than the carrying value, the impairment charge to be recognized equals the excess.

(p) Comparativefigures: Certain comparative figures have been reclassified to conform to the presentation adopted in the current year.

2. Adoption of new accounting standards:

Effective January 1, 2008, the Company adopted the recommendations of Section 1535, “Capital Disclosures”, of the CICA Handbook. This section establishes standards for disclosing information about a company’s capital and how it is managed in order that a user of the financial statements may evaluate the company’s objectives, policies, and processes for managing capital. Beyond additional disclosure, these new standards did not have an effect on our financial position or results of operations. The new disclosures are included in Note 11.

Section 3031, “Inventory”, of the CICA Handbook replaces Section 3030 and provides guidance on the determination of inventory cost, subsequent recognition as expense, and write-downs to net realizable value. The new recommendations were adopted effective January 1, 2008, and had no material impact on the financial statements (Note 1c).

Sections 3862, “Financial Instruments – Disclosures”, and 3863, “Financial Instruments – Presentation”, of the CICA Handbook replaced Section 3861, “Financial Instruments – Disclosure and Presentation”, and were adopted by the Company effective January 1, 2008. The new standards revise and enhance the disclosure requirements on the nature and extent of risks arising from financial instruments and how a company manages those risks. Beyond additional disclosure, the adoption of these new pronouncements did not have an effect on the Company’s financial position or results of operations. The new disclosures are included in Note 12.

3. Future changes in accounting standards:

The CICA plans to converge Canadian GAAP for public companies with International Financial Reporting Standards (IFRS) over a transition period ending on January 1, 2011. The Company is currently developing an implementation plan and assessing the impact of the conversion on the consolidated financial statements and disclosures.

CICA Handbook Section 1400, “General Standards of Financial Statement Presentation”, has been amended for new requirements relating to the assessment of an entity’s ability to continue as a going concern. The Company will adopt the amendments to this section beginning January 1, 2009. Beyond additional disclosure, the adoption of this new pronouncement is not expected to have an effect on the Company’s financial position or results of operations.

In February 2008, the CICA issued Handbook Section 3064, “Goodwill and Intangible Assets”, effective for interim and annual financial statements relating to fiscal years beginning on or after October 1, 2008. Section 3064, which replaces Section 3062, “Goodwill and Other Intangible Assets”, and section 3450, “Research and Development Costs”, establishes standards for the recognition, measurement and disclosure of goodwill and intangible assets. This new standard is effective for the Company’s fiscal year commencing January 1, 2009. The Company is evaluating the impact of the adoption of this new standard on its consolidated financial statements.




carmanah.com 39

4. Inventories:

2008 2007

Raw materials $ 1,571 $ 5,425

Work-in-process 880 143

Finished goods 5,700 5,040

$ 8,151 $ 10,608

During the year, inventory expensed within cost of sales was $31 million (2007 - $35.4 million). The Company also incurred inventory write downs of $1.0 million (2007 - $0.6 million).

5. Goodwill:

Goodwill is assigned to the following operating units:

SOLAR POwER SySTEMS LEd SIGNS TOTAL

Balance as of December 31, 2007 9,258 1,110 10,368

Impairment losses (9,061) (1,110) (10,171)

Impact of release of valuation allowance (197) - (197)

Balance as of Dec 31, 2008 $ - $ - $ -

The Company completed its annual impairment test on December 31, 2008 and determined that the goodwill associated with both the LED signs and Solar power systems operating units were fully impaired as a result of recent changes in the company’s overall strategic direction and due to the deteriorating economy.

$0.2 million of the reduction to goodwill was the result of the removal of the valuation allowance on tax assets of Soltek Powersource Ltd. which were recognized initially on acquisition.

6. Intangible assets:

2008 COSTACCuMuLATEd AMORTIzATION NET BOOk vALuE

Customer relationships $ - $ - $ -

Patents, trademarks and other 367 175 192

$ 367 $ 175 $ 192


Customer relationships $ 1,338 $ 643 $ 695

Patents, trademarks and other 357 140 217

$ 1,695 $ 783 $ 912

The Company completed an impairment analysis on December 31, 2008 and determined that the customer lists previously acquired through acquisitions were fully impaired as a result of changes in the company’s overall strategic direction and due to the deteriorating economy. An impairment loss of $0.6 million was recorded.

The Company spent $0.1 million on the acquisition and maintenance of patents and trademarks in the year.





7. Equipment and leaseholds improvement, net:


Computer hardware $ 1,335 $ 906 $ 429

Computer software 1,007 929 78

Leasehold improvements 1,962 1,434 528

Office equipment 211 61 150

Production equipment 981 658 323

Research equipment 342 202 140

Vehicles 33 29 4

Tradeshow equipment 190 155 35

$ 6,061 $ 4,374 $ 1,687


Computer hardware $ 1,167 $ 536 $ 631

Computer software 945 819 126

Leasehold improvements 1,927 696 1,231

Office equipment 303 61 242

Production equipment 924 403 521

Research equipment 227 112 115

Vehicles 69 53 16

Tradeshow equipment 191 97 94

$ 5,753 $ 2,777 $ 2,976

The Company purchased Equipment and Leasehold improvements totaling $0.5 million during 2008 (2007 - $0.8 million). Total amortization expensed during 2008 was $2.0 million, $0.5 million included in restructuring charges, $0.1 million included in cost of sales, and $1.4 million recorded as amortization. Total amortization expensed during 2007 was $1.2 million, all of which was recorded as amortization on the income statement.

8. Income taxes:

Income tax expense (recovery) differs from the amounts computed by applying the combined federal and provincial tax rates of 31.00% (2007 - 34.12%) to pre-tax income from continuing operations as a result of the following:

2008 2007

Loss before income taxes $ (9,027) $ (10,837)

Computed expected tax expense (2,798) (3,698)

Non-deductible expenses 3,435 1,007

Change in tax rate and other (212) 769

$ 425 $ (1,922)Income tax expense for the year ended December 31, 2008 was $425 comprised of current income tax recovery of $1 plus future income tax expense of $426.


Non-deductible expenses consist primarily of stock-based compensation and the write down of goodwill.




carmanah.com 41

8. Income taxes (continued):

Temporary differences give rise to the following future tax assets and liabilities at December 31:

2008 2007

Future tax assets:

Warranty reserve $ 291 $ 148

Inventory 503 -

Share issue costs 78 151

Losses available for future periods 370 1,721

Scientific research and experimental development 673 1,155

Equipment 1,219 842

Other 324 -

3,458 4,017

Future tax liabilities:


Intangible assets (23) (147)

(479) (318)

Less valuation allowance - (497)

Net future tax assets $ 2,978 $ 3,202

During the year, the Company determined that based on the results of its operations, it is now more likely than not that certain losses would be realized. As a portion of the valuation allowance previously recorded related to pre-acquisition tax assets of Soltek Powersource Ltd, $0.2 million of this reduction was credited to goodwill.

In assessing the realizability of future income tax assets, management considers whether it is more likely than not that some portion or all of the future income tax assets will be realized. The realization of future income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences are deductible. Management assigned probabilities to the Company’s expected future taxable income based on significant risk factors, sensitivity analysis, and timing of noncapital tax losses resulting in the release of the valuation allowance. The amount of the future income tax asset considered realizable could change materially in the near term, based on future taxable income during the carryforward period.

As at December 31, 2008, the Company had non-capital losses of $1.3 million available to reduce taxable income otherwise calculated in future years. These losses will begin to expire in 2016. In addition, the Company has a pool of Scientific Research & Experimental Development (“SR&ED”) expenditures of approximately $2.4 million that may be available to reduce future taxable income and investment tax credits of approximately $1.6 million which may be available to reduce taxes payable.





9. Share capital:

(a) Authorized: Unlimited number of common shares without par value

(b) Issued and outstanding:

NuMBER OF COMMON SHARES AMOuNT

Balance, December 31, 2006 42,531,592 $ 42,882

Exercise of options 138,582 156

Private placement 385,000 466

Balance, December 31, 2007 43,055,174 43,504

Exercise of options 15,000 16

Vested restricted share units 248,042 274

Shares returned to treasury (869,565) (879)

Balance, December 31, 2008 42,448,651 $ 42,915

During the year ended December 31, 2008, 15,000 options were exercised resulting in the issuance 15,000 common shares for gross proceeds of $11 thousand and a reallocation of $5 thousand from contributed surplus to share capital. In addition, 248,042 restricted share units vested and were issued from treasury, resulting in a reallocation of $274 thousand from contributed surplus to share capital. During the year ended December 31, 2008, 869,565 common shares held by a former director were returned to treasury and cancelled as settlement for a $1 million receivable (note 15).

(c) Stock options: The Company maintains a fixed stock option plan that enables it to grant options to its directors, officers, employees and other service providers. Each option agreement with the grantee sets forth, among other things, the number of options granted, the exercise price and the vesting conditions of the options. The Company has reserved 2,850,000 common shares under the plan. The options vest between 18 and 36 months from the date of grant and have a maximum term of five years.

A summary of the status of the options outstanding and exercisable follows:

NuMBER OF OPTIONS wEIGHTEd AvERAGE ExERCISE PRICE

Balance, December 31, 2006 3,453,082 $ 2.76

Granted 1,801,500 1.90

Cancelled (852,917) (3.17)

Exercised (138,582) (0.80)


Granted 75,500 1.06

Cancelled (2,474,733) (2.62)

Exercised (15,000) (0.75)


During the year ended December 31, 2008, the Company offered stock option holders the ability to convert their outstanding options into restricted share units. The conversion ratio




carmanah.com 43

offered varied depending upon the exercise price of the option, and ranged from 5:1 to 3:1. A total of 1,017,600 options were converted under this offer, resulting in the issuance of 244,954 restricted share units.

The following table summarizes the stock options outstanding and exercisable at December 31, 2008:

OPTIONS OuTSTANdING OPTIONS ExERCISABLE

RANGE OF ExERCISE PRICES

NuMBER OuTSTANdING

AT dECEMBER 31, 2008

wEIGHTEd AvERAGE

REMAINING CONTRACTuAL

LIFE (years)

wEIGHTEd AvERAGE

ExERCISE PRICE

NuMBER ExERCISABLE AT

dECEMBER 31, 2008

wEIGHTEd AvERAGE

ExERCISE PRICE

$0.75 to $1.99 974,600 3.71 $ 1.42 357,967 $ 1.43

$2.00 to $2.99 603,750 2.69 2.49 423,750 2.57

$3.00 to $3.80 270,500 2.30 3.12 270,500 3.12

1,848,850 3.17 $ 2.02 1,052,217 $ 2.32

During the year ended December 31, 2008, under the fair value based method, $293 thousand (2007 - $844 thousand) in compensation expense was recorded in the consolidated statements of operations for options granted to employees. The compensation costs reflected in the consolidated statements of operations were calculated using the Black-Scholes option pricing model using the following weighted average assumptions:

2008 2007

Risk-free interest rate 3.51% 4.34%

Expected dividend yield 0% 0%

Stock price volatility 47% 39%

Expected life of options 3 years 2.6 years

The weighted average fair value of an option granted during the year ended December 31, 2008 is $0.37 (2007 - $0.54) per share.

(d) Stock units: In 2007, the Company set up a Restricted Stock Unit (RSU) Plan and a Performance Stock Unit (PSU) Plan. There are a combined 2,200,000 shares reserved under these plans. Each RSU and each PSU entitles the holder to receive one common share of the Company upon vesting. The RSU and the PSU vest between zero and 36 months from the date of grant.

A summary of the status of the restricted share units and performance share units are as follows:

RESTRICTEd SHARE uNITS PERFORMANCE SHARE uNITS

Balance, December 31, 2007 - -

Granted 461,754 236,708

Granted in exchange for stock options 244,954 -

Cancelled (54,238) (47,036)

Vested and issued (248,042) -

Balance, December 31, 2008 404,428 189,672

9. Share capital (continued):





9. Share capital (continued):

During the year ended December 31, 2008, the Company recorded compensation expense associated with these stock units of $543 thousand (2007 - $Nil). The compensation costs were calculated using fair market value of the units based on the common share price at the time of the grant. The weighted average fair value of the restricted share units granted during the year ended December 31, 2008 is $1.15 (2007 – nil) per unit. The weighted average fair value of the performance share units granted during the year ended December 31, 2008 is $1.07 (2007 – nil) per unit.

(e) Warrants: During 2005, the Company issued 300,000 warrants as contingent consideration to the principal vendors of Soltek Powersource Ltd. These warrants have an exercise price of $2.79 and expire June 30, 2010. Each warrant entitles the holder to purchase one common share of the Company.

NuMBER OF wARRANTS wEIGHTEd AvERAGE ExERCISE PRICE

Balance, December 31, 2008 and 2007 300,000 $ 2.79

(f) Contributed surplus:

2008 2007

Balance, beginning of year $ 2,822 $ 2,023

Stock compensation 836 844

Cancellation of shares returned to treasury (121) -

Transfer to share capital on exercise of options/stock units (279) (45)

Balance, end of year $ 3,258 $ 2,822

10. Credit facility:

In April 2008, the Company entered into a new three-year $10 million committed revolving credit facility with the Bank of Montreal. This facility formally replaced the agreement held with the Royal Bank of Canada. The amount available is subject to certain covenants calculated on a quarterly basis and is secured by general security agreements. At December 31, 2008, the Company had not drawn on this facility.

11. Management of capital structure:

The Company defines capital that it manages as the aggregate of short-term and long-term debt, share capital, contributed surplus, and deficit.

The Company manages its capital structure and makes adjustments to it in light of economic conditions. The Company, upon approval from its Board of Directors, will make changes to its capital structure as deemed appropriate under the specific circumstances. The current objectives are to meet the capital requirements through funds from operations. There are no current plans to issue long-term debt. The Company’s overall strategy with respect to management of capital remains unchanged from the year ended December 31, 2007.

The Company is currently not subject to any externally imposed capital requirements and does not presently utilize any quantitative measures to monitor its capital. Certain capital requirements are required to be met to utilize the credit facility outlined in Note 10.




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12. Financial instruments:

The Company’s financial instruments are primarily exposed to foreign currency and credit risks.

(a) Foreign currency: The Company operates in US and other foreign markets which gives rise to exposure to market risks from changes in foreign currency values. Most significantly, the Company is exposed to potential currency fluctuations between the US and Canadian dollars. During the year ended December 31, 2008, approximately 78% of total sales and 70% of inventory purchases were denominated in US dollars. With all other factors held constant, a one percentage point increase in the value of the Canadian dollar relative to the US dollar during the quarter ended December 31, 2008 would have reduced sales by $0.5 million and net income by approximately $0.2 million.

As at December 31, 2008, the denomination of the Company’s financial instruments were as follows:

CASH ACCOuNTS RECEIvABLE, NET

ACCOuNTS PAyABLE ANd ACCRuEd LIABILITIES

US $ 4,462 9,740 3,686

Canadian 2,048 4,260 5,692

Other 1,404 584 72

Total $ 7,914 14,584 9,450

The Company monitors the movement in currency exchange rates and, on that basis, decides on the appropriate measures to take.

(b) Credit: Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises primarily from the Company’s accounts receivable. The carrying amount of financial assets represents the maximum credit exposure. The Company is exposed to concentration of credit risk on the accounts receivable from its customers. As at December 31, 2008 approximately 34% of the trade accounts receivable balances are owed from 5 customers (December 31, 2007 – 21% owed from 5 customers). The Company’s exposure to credit risk with its customers is influenced mainly by the individual characteristics of each customer. The Company closely monitors extensions of credit and has not experienced significant credit losses in the past. As at December 31, 2008 the Company had $2.0 million ($0.5 million at December 31, 2007) in material past due trade receivables. These mainly related to government contracts that generally take longer to collect. The Company currently has a provision of $1.1 million for potential credit losses associated with accounts receivable. A reconciliation of the allowance for doubtful account is provided below.

Balance, December 31, 2007 $ 727

Write offs of specific accounts (11)

Recoveries 1

Additional provision 336

Balance, December 31, 2008 $ 1,053





12. Financial instruments (continued):

Fair value

The carrying value of cash, accounts receivable, and accounts payable and accrued liabilities approximates the fair value due to the relatively short-term maturity of these financial instruments. Fair value represents the amount that would be exchanged in an arm’s length transaction between willing parties and is best evidenced by a quoted market price, if one exists.

The derivative liability recognized as at December 31, 2008 related to a series of currency forward contracts, under which the Company was committed to exchange $2.5 million US dollars for Canadian dollars at a fixed exchange rate. The fair value of these contracts have been estimated by using the current forward exchange rates available on similar contracts as at December 31, 2008.

13. Research, development and engineering costs:

yEAR ENdEd dECEMBER 31, 2008 2007

Research, developments and engineering costs $ 3,575 $ 3,395


Government assistance (note 14) (432) -

$ 2,160 $ 2,809

14. Government assistance:

During the year, the Company entered into an agreement with the Government of Canada which provides the Company with up to $0.5 million to assist in the further development and demonstration of one of its general solar powered illumination products. The Company has completed the majority of the requirements under the agreement and has recognized and received $0.4 million of funding. This was recorded as a reduction of the related expense presented under the caption ‘Research, development and engineering, net’. The remaining $0.1 million of the funding will be recognized upon completion of the project which is expected to occur in March 2009. The funding is contingently repayable. Under the terms of the agreement the amount repayable, if any, is calculated as 3% of revenue from products developed under the agreement. The repayment period will continue for 10 years after completion of the project or until the funding has been fully repaid. Any repayments of the contribution will be recorded as an expense in the period of the related product sale.

15. Related party transactions:

During the year ended December 31, 2008, the Company paid $nil (2007 - $35 thousand) for research and development services to a director of the Company. The Company had an advisory agreement with a company controlled by a director and officer of the Company in the amount of $10 thousand per month, which expired July 2005. The advisory agreement was on a month-to-month basis until June 1, 2007 when the Company cancelled the arrangement. During the year ended December 31, 2008, the Company paid management fees of $nil (2007 - $50 thousand) under this agreement.

In December 2007 the Company sold certain assets relating to one of its tactical segments (Home power) for $1.5 million to a former director. The assets disposed of primarily consisted of related inventory, customer lists, and equipment which resulted in a gain on sale of $0.2 million. Under the terms of the agreement, the Company received cash of $0.3 million on December 31, 2007, with a further $1.3 million recorded as an accounts receivable. On January 9, 2008, $1.0 million of the related receivable was settled through the return of 869,565 of the Company’s common shares, which were subsequently cancelled and returned to treasury. The remaining $0.3 million was paid in cash in March 2008.




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16. Commitments:

The Company has operating lease agreements for the rental of premises and equipment. The minimum future annual rental payments under the leases are as follows:

yEARS ENdING dECEMBER 31:2009 $ 491

2010 $ 307

2011 $ 181

2012 $ 24

2013 and beyond $ -

During the year ended December 31, 2008, the Company entered into an agreement with a contract manufacturer to build and supply a large portion of the Company’s manufactured products. Under this agreement, the Company provides demand forecasts to the contract manufacturer for expected sales levels. The contract manufacturer utilizes these demand forecasts to acquire raw materials and inventory to support that demand. If sales are below the forecast, the Company will be required to purchase the excess inventory. As at December 31, 2008, the contract manufacturer held approximately $2.1 million in inventory and $0.5 million in outstanding committed purchase orders.

17. Segmented information:

The Company is currently focused on two business groups: Strategic and Tactical. The Strategic group primarily consists of solar lighting products and solar power systems. The Tactical group primarily consists of non solar signs, and solar component distribution. Management evaluates segment performance based on gross profit as other expenses are not generally allocated to the groups. The groups share certain inventory, equipment and leasehold improvements; therefore management does not classify net asset information on a segmented basis.

yEAR ENdEd dECEMBER 31, 2008 STRATEGIC TACTICAL TOTAL

Sales $ 34,110 $ 26,507 $ 60,617

Cost of sales 19,771 20,044 39,815

Gross profit $ 14,339 $ 6,463 $ 20,802

Gross margin % 42.0% 24.4% 34.3%

Operating expenses 21,139

Operating loss (337)

Other expense 8,690

Loss before income taxes $ (9,027)

yEAR ENdEd dECEMBER 31, 2007 STRATEGIC TACTICAL TOTAL

Sales $ 24,322 $ 34,967 $ 59,289

Cost of sales 15,804 27,908 43,712

Gross profit $ 8,518 $ 7,059 $ 15,577

Gross margin % 35.0% 20.2% 26.3%

Operating expenses 23,119

Operating loss (7,542)

Other expense 3,295

Loss before income taxes $ (10,837)





For geographical reporting, revenues are attributed to the geographic location in which the customer is located as follows:

yEAR ENdEd dECEMBER 31, 2008 2007

North America $ 46,192 $ 47,882

South America 928 870

Europe 4,732 5,707

Middle East 7,176 3,512

Asia 899 914

South Pacific 690 404

$ 60,617 $ 59,289

As at December 31, 2008 and 2007, substantially all of the assets related to the Company’s operations were located in Canada except for inventory on hand in the United States of America of $1.3 million (2007 - $1.5 million) and inventory on hand in the United Kingdom of $Nil (2007 - $19 thousand).

18. Restructuring costs:

In June 2008, the Company announced plans to further streamline its operations by exiting some of its tactical businesses, reducing administrative staffing levels, and accelerating plans to outsource manufacturing. As part of this restructuring the Company has closed its US and Calgary distribution warehouses and wound down its Victoria based manufacturing facility.

A total of 85 employees will be terminated as apart of the restructuring, primarily warehouse and administrative staff. Of these, 51 have been terminated as of December 30, 2008, with the remaining to occur in the first quarter of 2009.

Year to date, the Company has recorded $1.6 million in restructuring charges. A breakdown of the restructuring charges is outlined below:

dECEMBER 31, 2008SEvERANCE ANd

RETENTION

FACILITy ExIT COSTS & RELATEd

AMORTIzATIONASSET wRITE

dOwNS TOTAL

Restructuring charges $ 473 $ 645 $ 434 $ 1,552

Reconciliation of restructuring liability/provision

Balance at December 31, 2007 $ - $ - $ - $ -

Increase in accrued liabilities 473 124 - 597

Increase in inventory provision - - 434 434

Cash payments (384) (124) - (508)

Balance at December 31, 2008 $ 89 $ - $ 434 $ 523

19. Subsequent Events:

On February 6, 2009, the Company sold certain assets related to its illuminated road signs business to a distributor for approximately $0.9 million. The assets disposed of primarily consisted of related inventory, customer & vendor lists, marketing collateral and equipment. Under the terms of the agreement, the Company received the full sales proceeds on February 6, 2009.

Investor RelationsRolandSartorius,ChiefFinancialOfficerToll-Free (N.A.): 1.877.255.8483Telephone: 250 380.0052Fax: 250.380.0062E-mail: [email protected]

Investment Information (as of April, 2009)

Common SharesStock Exchange:

Toronto Stock Exchange (TSX) • Stock Symbol: CMH

Issued and Outstanding: 42,750,450 Common Shares as of April 07, 2009

Fully Diluted: 47,863,481 Common Shares

Corporate Financial Year-End: December 31Auditor: KPMG LLP, Vancouver, BC, Canada

Legal Counsel: McCarthy Tétrault Suite 1300, Pacific Centre 777 Dunsmuir Street Vancouver, British Columbia V7Y 1K2Tel: 604.643.7100Fax: 604.643.7900

Transfer Agent:

Annual General Meeting

The Annual General Meeting of Carmanah Technologies Corporation will be held on 21st day of May, 2009 at 9:30am PDT at the Delta Victoria Ocean Pointe Resort45 Songhees Rd.Victoria, BC V9A 6T3

© 2009 Carmanah Technologies Corp. All rights reserved. Carmanah®, EverGEN™, DuraGEN™, and MICROSOURCE® are trademarks or registered trademarks of Carmanah Technologies Corporation.

Carmanah Technologies Corp. Toll free: 1.877.722.8877 (US & Canada)Worldwide: 1.250.380.0052Fax: 1.250.380.0062Website: carmanah.com

Documents

annual report - Solar lighting solutions for infrastructure Reports/CMH 2008 AR.pdf · The risk factors identified in this Annual Report are not intended to represent a ... Roadways