Sigma Industries Inc. Consolidated Financial Statements April 26, 2014 and April 27, 2013

Transcription

1 Consolidated Financial Statements and

2 August 25, Independent Auditor's Report To the Shareholders of Sigma Industries Inc. We have audited the accompanying consolidated financial statements of Sigma Industries Inc. and its subsidiaries, which comprise the consolidated statements of financial position as at and and the consolidated statements of loss, comprehensive loss, changes in equity (deficit) and cash flows for the years then ended, and the related notes, which comprise a summary of significant accounting policies and other explanatory information. Management's responsibility for the consolidated financial statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor's responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. PricewaterhouseCoopers LLP/s.r.l./s.e.n.c.r.l. Place de la Cité, Tour Cominar, 2640 Laurier Boulevard, Suite 1700, Québec, Quebec, Canada G1V 5C2 T: , F: PwC refers to PricewaterhouseCoopers LLP/s.r.l./s.e.n.c.r.l., an Ontario limited liability partnership. (1)

3 We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Sigma Industries Inc. and its subsidiaries as at and and their financial performance and their cash flows for the years then ended in accordance with International Financial Reporting Standards. Emphasis of matter We draw attention to note 23 to the consolidated financial statements, which describes the renewal of the credit agreement. Our opinion is not qualified in respect of this matter. 1 CPA auditor, CA, public accountancy permit No. A (2)

4 Consolidated Statements of Financial Position Assets Current assets Cash 749, ,066 Accounts receivable (note 9) 8,908,108 9,051,777 Inventories (notes 6 and 9) 4,999,064 5,697,931 Current tax assets (note 13) 24,695 - Prepaid expenses 320, ,858 15,002,048 15,808,632 Property, plant and equipment (notes 7 and 9) 8,579,600 9,517,946 Intangible assets (notes 8 and 9) 1,762,148 2,156,446 Liabilities 25,343,796 27,483,024 Current liabilities Bank indebteness 998,879 - Bank loan (note 9) 6,044,163 6,405,163 Trade and other payables 8,310,939 6,439,973 Deferred revenues 679, ,419 Current tax liabilities - 48,584 Current portion of long-term debt (note 10) 5,694,542 7,761,872 Deferred gain (note 1 c) 107, ,797 21,836,055 21,161,808 Long-term debt (note 10) 3,496,590 2,746,128 Deferred gain (note 1 c) 521, ,818 Equity (Deficit) 25,853,666 24,536,754 Share capital (note 11) 13,521,142 13,521,142 Debenture conversion options 389, ,000 Contributed surplus 2,891,983 2,891,983 Accumulated other comprehensive income 559, ,911 Deficit (17,872,523) (14,297,766) (509,870) 2,946,270 Commitments and contingencies (notes 21 and 22) 25,343,796 27,483,024 Subsequent events (note 23) Approved by the Board of Directors (signed) Denis Bertrand, Director (signed) Roger Demers, Director The accompanying notes are an integral part of these consolidated financial statements. (3)

5 Consolidated Statements of Loss For the years ended and (expressed in Canadian dollars, except per share data) Revenues (note 14) 54,680,262 55,460,510 Cost of sales and operating expenses (excluding depreciation and amortization) before the following items (note 15) 54,539,178 53,974,773 Income from operations 141,084 1,485,737 Financial expenses 1,975,683 1,833,248 Depreciation and amortization 1,246,007 1,300,736 Foreign exchange gain (405,914) (136,255) Loss on closure of USA operations (note 1 c) 1,168,437 - Loss on disposal of property, plant and equipment - 4,006 Other operating expenses (note 15) 3,984,213 3,001,735 Loss before income taxes (note 17 a) (3,843,129) (1,515,998) Income tax recovery (note 13) (90,595) (12,425) Net loss from continuing operations (3,752,534) (1,503,573) Net income from discontinued operations (note 4) 177, ,367 Net loss (3,574,757) (1,359,206) Loss per share (note 18) Basic and diluted from continuing operations (0.32) (0.13) Basic and diluted from continuing and discontinued operations (0.30) (0.12) Weighted average number of shares outstanding (note 18) Basic and diluted 11,724,775 11,724,775 The accompanying notes are an integral part of these consolidated financial statements. (4)

6 Consolidated Statements of Comprehensive Loss For the years ended and Net loss (3,574,757) (1,359,206) Other comprehensive loss Exchange difference of foreign operations' financial statements (61,222) (56,930) Comprehensive loss (3,635,979) (1,416,136) The accompanying notes are an integral part of these consolidated financial statements. (5)

7 Consolidated Statements of Changes in Equity (deficit) For the years ended and Share capital Debenture conversion options Contributed surplus Accumulated other comprehensive income Deficit Total equity (deficit) Balance April 28, ,521, ,000 2,891, ,841 (12,938,560) 4,252,406 Net loss (1,359,206) (1,359,206) Other comprehensive loss (56,930) - (56,930) Comprehensive loss (56,930) (1,359,206) (1,416,136) Debenture conversion options - 110, ,000 Balance 13,521, ,000 2,891, ,911 (14,297,766) 2,946,270 Net loss (3,574,757) (3,574,757) Other comprehensive loss (61,222) - (61,222) Comprehensive loss (61,222) (3,574,757) (3,635,979) New loan and debentures conversion options (notes 10 c and 10 d) - 215, ,000 Debentures conversion options (note 4) - (35,161) (35,161) - 179, ,839 Balance 13,521, ,839 2,891, ,689 (17,872,523) (509,870) The accompanying notes are an integral part of these consolidated financial statements. (6)

8 Consolidated Statements of Cash Flows For the years ended and Cash flows from continuing and discontinued operations provided by (used in): Operating activities Net loss (3,574,757) (1,359,206) Adjustments for: Depreciation and amortization 1,274,665 1,366,675 Amortization of deferred gain (107,797) (125,764) Loss (gain) on disposal of property, plant and equipment - 4,006 Interest capitalized on long-term debt 59, ,197 Financial expenses 1,856,936 1,750,547 Interest on bank loan and bank charges (1,212,400) (1,181,336) Gain on disposal of assets of a subsidiary (note 4) (100,000) - The accompanying notes are an integral part of these consolidated financial statements. (1,803,664) 672,119 Changes in items of working capital (note 17 b) 1,747,048 3,152,225 (56,616) 3,824,344 Investing activities Additions to property, plant and equipment, net of investment tax credits (654,514) (273,794) Additions to intangible assets (12,087) (39,834) Proceeds from disposal of assets of a subsidiary (note 4) 1,916,000 - Proceeds from disposal of intangible assets - 4,888 Proceeds from disposal of property, plant and equipment - 1,029 1,249,399 (307,711) Financing activities Increase in long-term debt and debenture conversion options 1,075, ,000 Variation in bank loan (361,000) (1,663,437) Payments on long-term debt (2,213,707) (1,498,039) Interest on long-term debt (627,136) (551,816) Financing fees paid (75,406) (10,000) (2,202,249) (3,168,292) Effect of exchange rate changes on cash 16,721 (2,277) Increase (decrease) in cash (992,745) 346,064 Cash at the beginning 743, ,002 Cash (bank indebtedness) at the end (249,679) 743,066 Additional information Interest paid 1,283,364 1,307,960 Income tax paid 48,584 56,452 * Cash includes cash less bank indebtedness. (7)

9 1 General information (a) Nature of activities Sigma Industries Inc. (the company) is a manufacturing company specializing in the production of composite and metal components. The company is active in the growing heavy-duty truck, coach, transit and bus, machinery, agriculture and wind energy market segments. The company sells its products mainly in Canada and the United States. The company, whose common shares trade under ticker symbol SSG on the TSX Venture Exchange, was incorporated under the Alberta Business Corporations Act on September 5, 2001 and continued under the Canada Business Corporations Act on February 6, The address of its registered office is 55 Route 271 Sud, Saint-Éphrem-de-Beauce, Quebec, G0M 1R0. (b) Basis of presentation These consolidated financial statements have been prepared on a going concern assumption, meaning that the company will be able to realize assets and discharge liabilities in the normal course of operations in accordance with International Financial Reporting Standards (IFRS). They include the accounts of the company and of all its wholly-owned subsidiaries. Intercompany transactions and related balances have been eliminated., the company's main subsidiaries are as follows: Rene Composite Materials Ltd. and its subsidiary, RMC USA Inc. Faroex Ltd. (c) Reorganization On March 2, 2012, the company transferred certain assets and liabilities of Sigma 2010 Inc. into a new U.S. subsidiary, RMC USA Inc. Subsequently, it sold the shares of Sigma 2010 Inc. for a cash consideration of 1. Finally, the property, plant and equipment and intangible assets disposed of further to the sale of the subsidiary Sigma 2010 Inc. were leased by the company under an operating lease entered into between the company and the acquirer of Sigma 2010 Inc.'s shares. As a result of these transactions, a gain in the amount of 862,379, net of expenses of 157,388 that were incurred upon the disposal of the subsidiary, has been recognized as a deferred gain on the company's consolidated statement of financial position and is amortized on a straight-line basis over the term of the lease, i.e. eight years. On March 17,, the company announced it's intention to shut down RMC USA Inc.'s operations. The facility closed on July 30,. The main objective of the company is to reduce open mold operations and its fixed cost. The majority of the contracts have been transferred to the Canadian operations. The loss on closure of USA operations includes all costs incurred and all the provisions necessary to the closure of the facility. (8)

10 (d) Liquidity and financial ratio risks In the last fiscal years, the company has faced a number of operational challenges resulting, in particular, from the economic crisis, which led to lower sales and a decline in gross margins., the company was in default regarding two financial ratios relating to the term loan amounting to 2,000,000 (note 10 b). However, the company obtained a waiver., the company was also in default regarding one financial ratio relating to the convertible term loan (note 10 c). However, the company obtained a waiver., the company was also in default regarding some financial ratios relating to the credit facilities (note 9) and the bank loans amounting to 5,711,937 (note 10 a). Certain amendments were made to the financing agreement relating to these loans in August (note 23). The company will have to renegotiate its credit facilities and its bank loan that mature in August Although the company has renewed its credit facilities in the past, there is no assurance that it will be successful renewing its facilities at maturity, that is, in August 2015, and that the financial ratios of all loans will be met up to that date. 2 Basis of preparation The company prepares its financial statements in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). These consolidated financial statements were approved by the Board of Directors on August 25,. 3 Summary of significant accounting policies The significant accounting policies used in the preparation of these consolidated financial statements are described below. Basis of measurement These consolidated financial statements have been prepared under the historical cost convention. Consolidation The consolidated financial statements of the company consolidate the financial statements of Sigma Industries Inc. and its subsidiaries. All intercompany transactions, balances and unrealized gains and losses from intercompany transactions are eliminated on consolidation. (9)

11 Subsidiaries are those entities which Sigma Industries Inc. controls by having the power to govern the financial and operating policies. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether Sigma Industries Inc. controls another entity. Subsidiaries are fully consolidated from the date on which control is obtained by Sigma Industries Inc. and are deconsolidated from the date that control ceases. Discontinued operations Classification as a discontinued operation occurs on disposal or when the operation meets the criteria to be classified as held for sale. Results from discontinued operations, including the loss on remeasurement to fair value less costs to sell, net of related income taxes, are presented in the consolidated statement of loss as net income (loss) from discontinued operations. When an operation is classified as discontinued, the comparative statement of loss presents the discontinued operations reclassified for consistent presentation with the current year. Foreign currency translation (i) Functional and presentation currency Items included in the financial statements of each consolidated entity of the company are measured using the currency of the primary economic environment in which the entity operates (the functional currency). The Canadian dollar is the presentation currency of the consolidated financial statements of the company as well as Sigma Industries Inc.'s functional currency. The financial statements of entities that have a functional currency different from that of Sigma Industries Inc., i.e. foreign operations, are translated into Canadian dollars at the closing rate at the date of the statement of financial position for assets and liabilities, and at the average rate of the period as this is considered a reasonable approximation to actual rates for revenues and expenses. All resulting changes are recognized in other comprehensive income (loss) as an exchange difference of foreign operations' financial statements. When an entity disposes of its entire interest in a foreign operation, or loses control, joint control, or significant influence over a foreign operation, the cumulative amount of the exchange differences related to that foreign operation, previously recognized in other comprehensive income (loss), is recognized in profit or loss. On a partial disposal of its interest in a foreign operation which remains a subsidiary, the entity reattributes the proportionate share of the cumulative amount of the exchange differences recognized in other comprehensive income (loss) related to the subsidiary between controlling and non-controlling interests. (ii) Transactions and balances Foreign currency transactions are translated into the functional currency using the average exchange rate as of the last day of the previous month (as this is considered a reasonable approximation to rates prevailing at the dates of the transactions). Generally, the exchange differences resulting from the settlement of foreign currency transactions and from the translation, at year-end exchange rates, of monetary assets and liabilities denominated in currencies other than an operation's functional currency, are recognized in the statement of loss. (10)

12 Financial instruments Financial assets and financial liabilities are recognized when the company becomes a party to the contractual provisions of the instrument. Financial assets are derecognized when the rights to receive cash flows from the assets have expired or have been transferred and the company has transferred substantially all risks and rewards of ownership. Financial liabilities are derecognized when the obligation specified in the contract is discharged, cancelled or expires. Financial assets and financial liabilities are offset and the net amount is reported in the consolidated statement of financial position when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously. Transaction costs related to financial instruments that are not classified as financial assets and financial liabilities at fair value through profit or loss are recognized in the consolidated statement of financial position as an adjustment to the cost of the financial instrument upon initial recognition and amortized using the effective interest rate method. The fair value of a financial instrument is the amount of consideration that would be agreed upon in an arm's length transaction between knowledgeable, willing parties who are under no compulsion to act. The fair value of a financial instrument on initial recognition is the transaction price, which is the fair value of the consideration given or received. Subsequent to initial recognition, the fair value of financial instruments that are quoted in active markets is based on bid prices for financial assets. At initial recognition, the company classifies its financial instruments in the following categories depending on the purpose for which the instruments were acquired: (i) Financial assets and financial liabilities at fair value through profit or loss A financial asset or financial liability is classified in this category if acquired principally for the purpose of selling or repurchasing in the short-term. Derivatives are also included in this category unless they are designated as hedges. The company uses derivatives in the form of forward exchange contracts to manage risks related to its variable rate debt. All derivatives have been classified in this category and are included in the statement of financial position. Gains and losses on remeasurement to fair value of derivatives are included consolidated in the cost of sales and operating expenses or in finance expenses. (11)

13 Financial instruments in this category are recognized initially and subsequently at fair value. Transaction costs are recorded in the consolidated statement of loss. Gains and losses arising from changes in fair value are presented in the consolidated statement of loss within other gains and losses in the period in which they arise. Financial assets and financial liabilities at fair value through profit or loss are classified as current, except for the portion expected to be realized or paid beyond twelve months after the reporting period, which is classified as non-current. and, the company has no financial assets or financial liabilities at fair value through profit or loss. (ii) Available-for-sale financial assets Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. Available-for-sale financial assets are recognized initially at fair value plus transaction costs and are subsequently carried at fair value. Gains or losses arising from changes in fair value are recognized in other comprehensive income (loss). Available-for-sale financial assets are classified as non-current, unless the investment matures within twelve months, or management expects to dispose of them within twelve months. Interest on available-for-sale financial assets, calculated using the effective interest method, is recognized in the consolidated statement of loss as part of interest income. Dividends on available-for-sale equity instruments are recognized in the consolidated statement of loss as part of other gains and losses when the company's right to receive payment is established. When an available-for-sale financial asset is sold or impaired, the accumulated gains or losses are moved from accumulated other comprehensive income to the consolidated statement of loss as part of other gains and losses. The company has no available-for-sale financial assets. (iii) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. The company's loans and receivables comprise cash and accounts receivable and are included in current assets due to their short-term maturity. Loans and receivables are initially recognized at the amount expected to be received, less, when material, a discount to reduce the loans and receivables to fair value. Subsequently, loans and receivables are measured at amortized cost using the effective interest method, less a provision for impairment. (iv) Financial liabilities at amortized cost Financial liabilities at amortized cost include bank loan, trade and other payables, and long-term debt. Trade and other payables are initially recognized at the amount required to be paid, less, when material, a discount to reduce the payables to fair value. Subsequently, trade and other payables are measured at amortized cost using the effective interest method. The bank loan and the long-term debt are recognized initially at fair value, net of any transaction costs incurred, and subsequently at amortized cost using the effective interest method. Financial liabilities are classified as current liabilities if payment is due within twelve months. Otherwise, they are presented as non-current liabilities. (12)

14 (v) Derivative financial instruments A specific accounting treatment is required for derivatives designated as hedging instruments in cash flow hedge relationships or in a net investment in a foreign operation. To qualify for hedge accounting, the hedging relationship must meet several strict conditions with respect to documentation, probability of occurrence of the hedged transaction and hedge effectiveness. All derivative instruments used for hedge accounting are recognized initially at fair value and reported subsequently at fair value in the consolidated statement of financial position. To the extent that the hedge is effective, gains and losses of derivatives designated as hedging instruments in cash flow hedges or in a net investment in a foreign operation are recognized in other comprehensive income (loss) and included in Accumulated other comprehensive income in equity. Any effectiveness in the hedge relationship is recognized immediately in profit or loss. At the time the hedged item affects profit or loss, any gain previously recognized in other comprehensive income (loss) is reclassified from equity to profit and loss and presented as a reclassification adjustment within other comprehensive income (loss). However, if a non-financial asset or liability is recognized as a result of the hedged transaction, the gains and losses previously recognized in other comprehensive income (loss) are included in the initial measurement of the hedged item. If a forecast transaction is no longer expected to occur or if the hedging instrument becomes ineffective, any related gain or loss recognized in other comprehensive income (loss) is transferred immediately to profit or loss. All other derivative financial instruments are accounted for at fair value through profit or loss. The company has not provided the required documentation regarding the identification, designation and efficiency of forward exchange contracts pursuant to hedge accounting. Therefore, the company's forward exchange contracts that are used to cover the anticipated sales denominated in foreign currencies are recorded at fair value. Foreign exchange gains or losses are recognized in profit or loss. and, the company has no derivative financial instruments. Impairment of financial assets At each reporting date, the company assesses whether there is objective evidence that a financial asset (other than a financial asset classified at fair value through profit or loss) is impaired. The criteria used to determine if there is objective evidence of an impairment loss include: (i) significant financial difficulty of the obligor; (ii) delinquencies in interest or principal payments; and (iii) it becomes probable that the borrower will enter bankruptcy or other financial reorganization. (13)

15 If such evidence exists, the company recognizes an impairment loss, as follows: (i) Financial assets carried at amortized cost The impairment loss is the difference between the amortized cost of the loan or receivable and the present value of the estimated future cash flows, discounted using the instrument's original effective interest rate. The carrying amount of the financial asset is reduced by this amount either directly or indirectly through the use of an allowance account. (ii) Available-for-sale financial assets The impairment loss is the difference between the original cost of the asset and its fair value at the measurement date, less any impairment losses previously recognized in the consolidated statement of loss. This amount represents the cumulative loss in accumulated other comprehensive income that is reclassified to profit or loss. Impairment losses on financial assets carried at amortized cost are reversed in subsequent periods if the amount of the loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized. Impairment losses on available-for-sale equity instruments are not reversed. Inventories Inventories are stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out method for raw materials. The cost of finished goods and goods in process is determined using the absorption costing method, which includes raw materials, labour and general manufacturing expenses. Net realizable value is the estimated selling price less applicable selling expenses. Raw materials held for inventory production purposes are not depreciated below cost if the finished goods in which they will be integrated are expected to be sold at cost or beyond cost. Otherwise, market value corresponds to the replacement cost. If the carrying value exceeds the net realizable amount, a writedown is recognized. The writedown may be reversed in a subsequent period if the circumstances which caused it no longer exist. Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset. Subsequent costs are included in the asset's carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the company and the cost can be measured reliably. The carrying amount of a replaced asset is derecognized when replaced. Repairs and maintenance costs are charged to the consolidated statement of loss during the period in which they are incurred. (14)

16 The major categories of property, plant and equipment are depreciated on a straight-line basis over their useful lives as follows: Buildings Machinery and equipment Office furniture Computer equipment Automotive equipment 30 and 35 years 10 to 25 years 10 years 5 and 10 years 5 and 10 years The company allocates the amount initially recognized in respect of an item of property, plant and equipment to its significant parts and depreciates separately each such part. Residual values, method of depreciation and useful lives of the assets are reviewed annually and adjusted if appropriate. Depreciation of an asset begins when it is available for use and does not cease when it becomes idle. Gains and losses on disposals of property, plant and equipment are determined by comparing the proceeds with the carrying amount of the asset and are reflected in the consolidated statement of loss. Intangible assets Identifiable intangible assets are recorded at cost. The major categories of intangible assets are capitalized and amortized in the consolidated statement of loss using the methods mentioned below and over the period of their expected useful lives as follows: Methods Periods Patents Straight-line 7 and 10 years Customer relationships Sum-of-the-years-digits 15 years Technologies Sum-of-the-years-digits 6 years Software Straight-line 5 and 10 years The trademark is an intangible asset with an indefinite useful life and is not amortized. Impairment of long-lived assets Property, plant and equipment and intangible assets are tested for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. Long-lived assets that are not amortized are subject to an annual impairment test. For the purpose of measuring recoverable amounts, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units or CGUs). The recoverable amount is the higher of an asset's fair value less costs to sell and value in use (being the present value of the expected future cash flows of the relevant asset or CGU). An impairment loss is recognized for the amount by which the asset's carrying amount exceeds its recoverable amount. The company evaluates impairment losses for potential reversals when events or circumstances warrant such consideration. (15)

17 Leases Leases are classified as finance leases if they transfer substantially all the risks and rewards incidental to ownership. All other leases are classified as operating leases. (i) Finance leases Assets held under finance leases are initially recognized as company's assets at amounts equal to the fair value of the leased property or, if lower, the present value of the minimum lease payments, each determined at the inception of the lease. The related liability to be paid to the lessor is recognized in the consolidated statement of financial position as a debt resulting from a finance lease. Lease payments are apportioned between the finance charge and the reduction of the outstanding liability so as to produce a constant periodic rate of interest on the remaining balance of the liability. Finance charges are recognized directly through profit or loss unless they are directly attributable to a qualifying asset, in which case they are capitalized based on the general policy used by the company in accounting for borrowing costs (see the note dealing with borrowing costs). Contingent rents are charged as expenses in the periods in which they are incurred. (ii) Operating leases Lease payments under operating leases are recognized as expenses on a straight-line basis over the lease term unless another systematic basis is more representative of the time pattern of the user's benefit. Contingent rents resulting from operating leases are charged as expenses in the periods in which they are incurred. Income tax Income tax comprises current and deferred tax. Income tax is recognized in the consolidated statement of loss except to the extent that it relates to items recognized directly in equity, in which case the income tax is also recognized directly in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted, at the end of the reporting period, and any adjustment to tax payable in respect of previous years. In general, deferred tax is recognized in respect of temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred income tax is determined on a non-discounted basis using tax rates and laws that have been enacted or substantively enacted at the reporting date and are expected to apply when the deferred tax asset or liability is settled. Deferred tax assets are recognized to the extent that it is probable that the assets can be recovered. A deferred tax asset or liability is provided on temporary differences arising on investments in subsidiaries, except where the timing of the reversal of the temporary difference is controlled by the company and it is probable that the temporary difference will not reverse in the foreseeable future. (16)

18 The assessment of the probability of future taxable profit in which deferred tax assets can be utilized is based on the company's latest approved consolidated budget forecast, which is adjusted for significant non-taxable expenses and revenues and specific limits to the use of any unused tax loss or credit. The tax rules in the numerous jurisdictions in which the company and its subsidiaries operate are also carefully taken into consideration. If a positive forecast of taxable profit indicates the probable use of a deferred tax asset, especially when it can be utilized without a time limit, that deferred tax asset is usually recognized in full. The recognition of deferred tax assets that are subject to certain legal or economic limits or uncertainties is assessed individually by management based on the specific facts and circumstances. Deferred income tax assets and liabilities are presented as non-current. Tax on income in interim periods is accrued using the tax rate that would be applicable to expected total annual earnings. Revenues Revenues from the sale of goods are recognized when it is probable that the economic benefits will flow to the company and delivery has occurred, the sales price is fixed or determinable, and collectibility is reasonably assured. These criteria are generally met at the time the product is shipped and delivered to the customer and, depending on the delivery conditions, title and risk have passed to the customer and acceptance of the product, when contractually required, has been obtained. Revenues from the sale of goods are measured based on the price specified in the sales contract, net of discounts and estimated returns at the time of sale. Historical experience is used to estimate and provide for discounts and returns. Volume discounts are assessed based on anticipated annual purchases. The company does not have any multiple element arrangements regarding revenues from the sale of goods. Cost of sales Cost of sales includes costs related to shipping and handling and the cost of finished goods. Research and development expenses Management monitors progress of internal research and development by using a project management system. Significant judgment is required in distinguishing research from the development phase. Development expenses are recognized as an asset when all the criteria are met, whereas research costs are expensed as incurred. To distinguish any research-type project from the development phase, it is the company's accounting policy to require a detailed forecast of sales or cost savings expected to be generated by the intangible asset. The forecast is incorporated into the company's overall budget forecast as the capitalization of development expenses commences. This ensures that managerial accounting, impairment testing procedures and accounting for internally-generated intangible assets are based on the same data. The company's management also monitors whether the recognition requirements for development expenses continue to be met. This is necessary as the economic success of any product development is uncertain and may be subject to future technical problems after the time of recognition. (17)

19 Share capital Common shares are classified as equity. Incremental costs directly attributable to the issuance of shares are recognized as a deduction from equity. Earnings (loss) per share Basic earnings (loss) per share are calculated by dividing the profit or loss attributable to equity owners of the company by the basic weighted average number of common shares outstanding during the year. Diluted earnings (loss) per share are calculated by adjusting the basic weighted average number of common shares outstanding for dilutive instruments. The number of shares is computed using the treasury stock method for share options and under the if-converted method for convertible debentures. The company's potentially dilutive common shares comprise share options granted to employees, officers, directors and consultants as well as shares and warrants related to convertible debentures. Accounting standards issued but not yet applied IFRS 9, Financial Instruments, addresses classification and measurement of financial assets and replaces the multiple category and measurement models in IAS 39 for debt instruments with a new mixed measurement model having only two categories: amortized cost and fair value through profit or loss. IFRS 9 also replaces the models for measuring investments in equity instruments, and such instruments are either recognized at fair value through profit or loss or at fair value through other comprehensive income (loss). Where such equity instruments are measured at fair value through other comprehensive income (loss), dividends, to the extent not clearly representing a return of investment, are recognized in profit or loss. However, other gains and losses (including impairments) associated with such instruments remain in accumulated comprehensive income (loss) indefinitely. Fair value changes due to credit risks for liabilities designated at fair value through profit and loss are generally recorded in other comprehensive income (loss). The IASB is also addressing hedge accounting. In December, the IASB removed the mandatory effective date of IFRS 9 until all phases of the project have been completed. The mandatory effective date has yet to be determined; however, it has been deferred beyond annual periods beginning on or after January 1, Early adoption is permitted. The company has not yet assessed the impact of this new standard or determined whether it will adopt it early. (18)

20 4 Discontinued operations PNS Tech On October 1,, the company sold all the inventories, the property, plant and equipment, and other assets of the operating unit of PNS Tech for an amount of 2,226,000. This resulted in a gain of 100,000, which has been recorded in the results of the company. The sales proceeds include payment of an amount of 1,916,000 in cash and the assumption of debentures totalling 310,000, on which an equity component of 35,161 was included and eliminated within the equity portion in the balance sheet. The cash received by the company has been applied against long-term debt in the amount of 716,379 which the remaining balance applied against the bank loan. The assets sold are as follows: Inventories 1,204,000 Property, plant and equipment 660,410 Other assets 261,590 2,126,000 The following table presents the analysis of income from discontinued operations: Years ended Revenues Canada 1,455,611 4,697,746 United States 823,936 2,004,835 2,279,547 6,702,581 Expenses Cost of sales and operating expenses 2,083,177 6,334,791 Financial expenses 15, ,496 Depreciation and amortization 28,658 65,939 Foreign exchange loss (gain) 8,093 (7,448) 2,135,870 6,527,778 Income before income tax 143, ,803 Income tax expense 65,900 30,436 Gain on disposition of assets, less related cost 100,000 - Net income from discontinued operations 177, ,367 (19)

21 Cash flows from discontinued operations are as follows: Years ended Cash flows provided by (used in): Operating activities 143, ,803 Investing activities (150,732) (53,990) Change in cash (7,056) 120,813 5 Critical accounting estimates and judgments The preparation of financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts of assets and liabilities reported in the consolidated financial statements. Those estimates and assumptions also affect the disclosure of contingencies at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the years. Management believes its estimates to be appropriate; however, actual results could differ from those estimates. Income tax The company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized based on deductible or taxable temporary timing differences between the carrying amounts and tax bases of the assets and liabilities. Deferred tax assets and liabilities are measured using substantively enacted and enacted tax rates expected to apply in the years in which the temporary differences are expected to reverse. If the estimates and assumptions are modified in the future, the company may be required to reduce or increase the value of deferred tax assets or liabilities resulting in, where applicable, a tax expense or income. The company regularly evaluates deferred tax assets and liabilities management has made reasonable estimated and assumptions to determine the amount of deferred tax assets that can be recognized in the consolidated financial statements, based upon likely timing and level of anticipated future taxable income together with tax planning strategies. The ultimate realization of the company's deferred income tax assets is dependent upon the generation of sufficient future taxable income during the periods in which those assets are expected to be realized. Useful lives of property, plant and equipment and intangible assets Management reviews the useful lives and residual values of depreciable/amortizable assets on an annual basis. Management considers the useful lives of assets to be the period of time over which these assets are expected to be used by the company. Actual useful lives could differ from estimates. (20)

22 Property, plant and equipment and intangible assets impairment test An impairment loss is recognized for the amount by which the asset or CGU exceeds its recoverable amount. To determine the recoverable amount, management estimates expected future cash flows from each asset or CGU and determines a suitable interest rate in order to calculate the present value of those cash flows. In the process of measuring expected future cash flows, management makes assumptions about future gross profits. These assumptions relate to future events and circumstances. The actual results may vary, and may cause significant adjustments to the company's assets during the next fiscal years. In most cases, the determination of the discount rate involves estimating the appropriate adjustment to market risk and the appropriate adjustment to asset-specific risk factors. 6 Inventories Raw materials 3,110,977 3,418,791 Work in progress 775, ,567 Finished goods 1,112,321 1,471,573 4,999,064 5,697,931 The company expects full recovery of this amount in the next fiscal year. (21)

23 7 Property, plant and equipment Net carrying amount Land Buildings Machinery and equipment Office furniture Computer equipment Automotive equipment April 28, 2012 Cost 427,510 6,697,709 8,830, , , ,492 16,880,024 Accumulated depreciation - 1,489,936 4,579, , ,163 51,541 6,743,483 Total 427,510 5,207,773 4,250,432 85, ,716 53,951 10,136,541 For the year ended Additions - 82, ,185 39,640 33, ,794 Disposals (2,086) (2,949) (5,035) Depreciation - (158,975) (656,249) (22,349) (43,994) (5,787) (887,354) Transfers - 44,637 (27,190) - (11,339) (6,108) - 427,510 5,176,187 3,685, ,450 87,514 39,107 9,517,946 Cost 427,510 6,825,098 8,948, , , ,543 17,193,420 Accumulated depreciation - 1,648,911 5,263, , ,496 63,436 7,675, ,510 5,176,187 3,685, ,450 87,514 39,107 9,517,946 Net carrying amount Land Buildings Machinery and equipment Office furniture Computer equipment Automotive equipment Cost 427,510 6,825,098 8,948, , , ,543 17,193,420 Accumulated depreciation - 1,648,911 5,263, , ,496 63,436 7,675,474 Total 427,510 5,176,187 3,685, ,450 87,514 39,107 9,517,946 For the year ended Additions - 182, , , ,514 Disposition of PNS (28,350) (403,499) (221,662) (2,376) (4,523) - (660,410) Write-off RMC USA - (26,118) (30,691) (6,752) - - (63,561) Depreciation - (203,045) (605,917) (20,666) (26,536) (12,116) (868,280) Exchange rate - (248) (296) (65) - - (609) 399,160 4,725,970 3,286,183 73,231 68,065 26,991 8,579,600 Cost 399,160 6,403,504 8,529, , ,484 76,416 16,167,243 Accumulated depreciation - 1,677,534 5,242, , ,419 49,425 7,587, ,160 4,725,970 3,286,183 73,231 68,065 26,991 8,579,600 (22)

24 8 Intangible assets Net carrying amount Indefinite-lived trademark Patents Customer relationships Technologies Software Total April 28, 2012 Cost 268, ,395 5,491,920 2,277, ,044 8,555,654 Accumulated amortization - 86,596 3,356,165 2,259, ,001 5,954, , ,799 2,135,755 18,066 75,043 2,600,821 For the year ended Additions - 23, ,376 39,834 Disposals (4,888) (4,888) Amortization - (16,078) (419,522) (18,066) (25,655) (479,321) 268, ,179 1,716,233-60,876 2,156,446 Cost 268, ,853 5,491,920 2,277, ,532 8,590,600 Accumulated amortization - 102,674 3,775,687 2,277, ,656 6,434, , ,179 1,716,233-60,876 2,156,446 Net carrying amount Indefinite-lived trademark Patents Customer relationships Technologies Software Total Cost 268, ,853 5,491,920 2,277, ,532 8,590,600 Accumulated amortization - 102,674 3,775,687 2,277, ,656 6,434, , ,179 1,716,233-60,876 2,156,446 For the year ended Additions - 7, ,128 12,087 Amortization - (16,081) (373,758) - (16,546) (406,385) 268, ,057 1,342,475-48,458 1,762,148 Cost 268, ,019 5,491,920 2,277, ,587 8,492,821 Accumulated amortization - 92,962 4,149,445 2,277, ,129 6,730, , ,057 1,342,475-48,458 1,762,148 The customer relationships result mainly from the acquisition of the subsidiary Rene in 2006 and will be fully amortized in The indefinite-lived trademark results from the acquisition of the subsidiary Rene in Assessment of the indefinite useful life is based on the company's intention to retain and operate the trademark over an undeterminable term. This trademark provides a significant competitive advantage to the company. (23)

25 9 Credit facilities The company has an authorized bank line of credit of 8,500,000, bearing interest at prime rate plus 3.0%. A bank credit of 1,106,000 (US1,000,000) as well as a 250,000 temporary line of credit for risks related to the settlement of electronic funds transfers are included in this 8,500,000 line of credit. The company also has an available credit facility for the purchase of foreign exchange contracts with maturities not exceeding one year and with a net risk not exceeding 2,000,000. A moveable hypothec on accounts receivable, inventories and all present and future, tangible and intangible assets has been given as security. These credit facilities are renewable annually and mature in August. Under these agreements, the company has agreed to respect certain conditions and financial ratios., some conditions and financial ratios were not met (note 23)., one financial ratio was not met. 10 Long-term debt Decreasing revolving bank loan, bearing interest at prime rate plus 3%, payable in monthly principal instalments of 95,968, with the outstanding principal balance maturing in August. A moveable hypothec on the universality of the company's present and future, tangible and intangible assets has been given as security for this loan (note 23) (a) 5,711,937 7,293,542 Term loan, bearing interest at prime rate plus 1%, payable monthly. The principal is payable in monthly instalments of 12,500 starting in September Furthermore, other annual principal may be required starting September based on an excess cash flow formula (maximum 400,000), maturing in August A junior moveable hypothec on the universality of the company's present and future, tangible and intangible assets has been given as security for this loan (b) 2,000,000 2,086,379 Convertible term loan, bearing interest at 10%, payable in monthly principal instalments of 37,500 starting in December Furthermore, other annual principal may be required starting October 2017 based on an excess cash flow formula (maximum 25% of excess cash flows). The term loan is convertible at any time until December 2018 inclusively, in whole or in part, into common shares, at 0.05 per share for the first twelve months (up to 500,000) and 0.10 thereafter, until the maximum number of shares held by Investissement Québec equals 42.6% of issued and outstanding Sigma shares, on an entirely diluted basis. The loan matures in November A junior moveable hypothec on the universality of the company's present and future, tangible and intangible assets has been given as security for this loan. Nominal value of 800,000 (c) 652,995 - (forward) 8,364,932 9,379,921 (24)