Illustrative consolidated financial statements for the year ended Based on Accounting Standards for Private Enterprises in issue as at 1 January 2015
Introduction This publication contains an illustrative set of consolidated financial statements for Good Group Private Enterprise Inc. [ GGPE ] as at and for the year ended. These illustrative consolidated financial statements have been prepared in accordance with Part II of the Chartered Professional Accountants of Canada [ CPA Canada ] Handbook Accounting, Accounting Standards for Private Enterprises [ ASPE ]. These illustrative consolidated financial statements have been prepared subsequent to the first-time adoption of ASPE and do not include the opening consolidated balance sheet and transitional disclosures required when an entity prepares its first set of financial statements in accordance with ASPE. GGPE is a manufacturer, re-seller and servicer of specialized industrial equipment. It has operations in Canada and the United States. The functional currency of the parent company and the presentation currency of the consolidated financial statements is the Canadian dollar. These illustrative consolidated financial statements include a number of circumstances which might typically be encountered by a private enterprise, such as contingencies, asset impairments, related party transactions and a voluntary change in accounting policy. GGPE has prepared its consolidated financial statements on a comparative basis; that is, amounts and other disclosures for the prior period are included for comparison with the consolidated financial statements of the current period. These illustrative consolidated financial statements only include those accounting standards with an effective date of 1 January 2015 or earlier. In some cases, ASPE permits more than one accounting treatment for a transaction or event. Preparers of financial statements should select the treatment that is most relevant to their business and circumstances as their accounting policy. It is important to remember that these illustrative consolidated financial statements do not encompass all aspects of financial reporting that could be encountered by a private enterprise in Canada. Furthermore, this publication is not designed to reflect disclosure requirements that may apply to regulated or specialized industries. It is essential that entities consider their own specific circumstances when determining which disclosures to include. For additional information, readers should refer to the EY ASPE Presentation and Disclosure Checklist in conjunction with the ASPE standards themselves to fully understand the implications of preparing ASPE financial statements. For more information on ASPE, please contact your EY advisor.
Consolidated Financial Statements
As at 31 December CONSOLIDATED BALANCE SHEET 1400.09, 10, 12 $ $ ASSETS [restated note 3] 1510.02 Current assets 1521.03 [a]; 1510.03, 04 Cash and cash equivalents [note 22] 186,527 69,450 1521.04 [a] Investments [notes 4 and 22] 603,060 271,060 1521.04 [h]; 3856.38; 1510.04 Accounts receivable [notes 5, 13, 17 and 22] 840,499 268,500 1521.04 [b] Inventories [notes 6, 13, 17 and 21] 559,900 425,000 1521.04 [f] Prepaid expenses 175,723 140,000 1521.04 [d]; 1510.06 Total current assets 2,365,709 1,174,010 1521.03 [b] Investment in GGSII 182,000 194,000 1521.04 [h] [ii]; 3051.26 [c], 28 Loan to related party [notes 8 and 22] 191,340 187,011 1521.04 [e]; 3856.38 [a] Property, plant and equipment [notes 9 and 17] 1,660,000 1,968,500 1521.04 [i] Assets under capital leases [notes 10 and 16] 225,830 250,000 3065.21 Intangible assets [note 11] 112,000 128,000 1521.04 [j]; 3064.90 Goodwill [note 12] 434,000 494,000 1521.04 [k]; 3064.88 5,170,879 4,395,521 1521.03 [c] LIABILITIES AND EQUITY Current liabilities 1521.03 [d]; 1510.02, 08, 11 Credit facility [note 13] 117,127 1521.05 [a] Accounts payable and accrued liabilities [notes 14 and 22] 390,215 418,715 1521.05 [a]; 3462.101 Income taxes payable 53,000 50,000 1521.05 [a] Current portion of contingent consideration payable [note 15] 140,000 1521.05 [h] Current portion of obligations under capital leases [note 16] 81,845 64,013 1521.05 [d]; 3065.21, 23 Current portion of long-term debt [note 17] 220,273 201,846 1521.05 [f]; 1510.12 Total current liabilities 885,333 851,701 1521.03 [e] Contingent consideration payable [note 15] 140,000 1521.05 [h] Obligations under capital leases [note 16] 189,888 233,073 1521.05 [d]; 3065.21, 22 Long-term debt [note 17] 986,233 869,090 1521.05 [f] Due to related party [note 18] 720,313 590,315 1521.05 [h] Total liabilities 2,781,767 2,684,179 1521.03 [f] Commitments and contingencies [notes 23 and 24] 3280.02; 3290.18, 19; AcG-14.9 Equity 1521.06 Share capital Common shares [note 19] 785,750 606,750 3251.05 [c] Redeemable preferred shares total redemption 184,000 230,000 3251.05 [c]; 3856.23 amount of $208,000 [2014 $260,000] [note 19] 3856.47 [c] [i] Cumulative translation adjustment 25,000 15,000 3251.05 [f] Contributed surplus [note 19] 119,000 40,000 3251.05 [b] Retained earnings 1,124,362 726,592 3251.05 [a] Shareholders equity 2,238,112 1,618,342 Non-controlling interest 151,000 93,000 3251.05 [e]; 1602.13 Total equity 2,389,112 1,711,342 1521.03 [g] 5,170,879 4,395,521 1521.03 [h] See accompanying notes On behalf of the Board: Director Director
CONSOLIDATED STATEMENT OF INCOME 1400.09, 10, 12 Year ended 31 December $ $ [restated REVENUE note 3] Sale of equipment [note 25] 2,780,000 2,750,000 3400.33; 1520.04 [a] Services [notes 21 and 25] 1,007,115 450,000 3400.33; 1520.04 [a] Commissions 1,050,000 500,000 3400.33; 1520.04 [a] 4,837,115 3,700,000 1520.03 [a]; 3400.29 EXPENSES Cost of goods sold [notes 6 and 21] 2,202,874 1,820,816 1520.04 [o] Selling [note 21] 348,863 323,748 General and administrative 424,460 426,009 Research and development 187,500 332,000 3064.52 Amortization of property, plant and equipment 388,500 381,500 1520.04 [d]; 3061.26 Amortization of assets under capital leases 64,170 62,500 Amortization of intangible assets 16,000 16,000 1520.04 [e]; 3064.91 [a] [ii] Stock-based compensation [note 19] 85,000 40,000 1520.04 [i]; 3870.67 [c] Foreign exchange loss (gain) 10,000 (15,000) 1520.04 [j] 3,727,367 3,387,573 Income before undernoted items and income taxes 1,109,748 312,427 Change in fair value of investments (70,000) 20,000 3856.52 [a]; 1520.04 [k] [i] Property, plant and equipment impairment loss [note 9] (40,000) 1520.04 [f]; 3063.24 [c] Goodwill impairment loss [note 12] (60,000) 1520.04 [g]; 3064.89 Termination benefits [note 14] (105,500) 1520.04 [m] Interest and dividend income [note 8] 18,829 4,329 3856.A5; 3856.52 [b] Interest expense Short-term (6,500) (8,546) 1520.04 [k] [iii]; 3856.52 [c] Long-term [note 20] (166,307) (155,765) 1520.04 [l]; 1520.04 [k] [iv], [l]; 3856.52 [d]; 3065.75 Loss from investment in GGSII (12,000) (6,000) 1520.03 [b] [ii]; 3051.27 [c], 28 Income before income taxes 668,270 166,445 Provision for (recovery of) income taxes [note 7] 187,000 (1,500) 3465.89 [a] Net income for the year 481,270 167,945 1520.03 [f] Attributable to: 1602.14 Non-controlling interest 58,000 18,000 3251.04 [a] Owners of parent 423,270 149,945 3251.04 [a] 481,270 167,945 See accompanying notes
CONSOLIDATED STATEMENT OF RETAINED EARNINGS 1400.09, 10, 12 3610.03 Year ended 31 December $ $ [restated note 3] Balance, beginning of year as previously reported 810,442 673,647 Change in accounting policy [note 3] (83,850) (97,000) 1506.13 Balance, beginning of year as restated 726,592 576,647 Net income attributable to owners of parent 423,270 149,945 3251.04 [a] Premium on redemption of preferred shares [note 19] (6,000) 3251.11[d] Related party adjustment [note 21] (19,500) 3840.09, 17 Balance, end of year 1,124,362 726,592 See accompanying notes
CONSOLIDATED STATEMENT OF CASH FLOWS 1400.09, 10, 12 Year ended 31 December 1540.03, 05, 27 $ $ [restated OPERATING ACTIVITIES note 3] 1540.12, 20 Net income for the year 481,270 167,945 Non-cash items: Amortization of property, plant and equipment 388,500 381,500 1540.22 [a] Amortization of assets under capital leases 64,170 62,500 1540.22 [a] Amortization of intangible assets 16,000 16,000 1540.22 [a] Amortization of discount on investments (5,000) 1540.22 [a], 32; 3856.A5 Amortization of financing fees and transaction costs 10,542 7,625 1540.22 [a] Accretion on interest-free government loan 20,556 20,556 1540.22 [a], 32 Property, plant and equipment impairment loss 40,000 1540.22 [a] Goodwill impairment loss 60,000 1540.22 [a] Change in fair value of investments 70,000 (20,000) 1540.22 [a] Stock-based compensation 85,000 40,000 1540.22 [a] Loss from investment in GGSII 12,000 6,000 1540.22 [a], 36 Deemed interest income on related party loan (4,329) (4,329) 1540.22 [a], 32 Net foreign exchange difference on cash and cash equivalents (24,800) (13,600) 1540.30 Net change in non-cash working capital balances related to operations (758,122) (210,223) 1540.22 [b], [c] Cash provided by operating activities 455,787 453,974 INVESTING ACTIVITIES 1540.12, 23 Acquisition of investments (397,000) 1540.18 [c] Acquisition of machinery and equipment from related party (72,000) 1540.18 [a] Acquisition of property, plant and equipment (67,500) (190,000) 1540.18 [a] Cash used in investing activities (536,500) (190,000) FINANCING ACTIVITIES 1540.12, 23 Credit facility, net (117,127) (120,418) 1540.10 Issuance of common shares 160,000 6,750 1540.19 [a] Payment of share issue costs (10,000) 1540.19 [a] Redemption of preferred shares (52,000) 1540.19 [b] Proceeds on exercise of stock options 23,000 1540.19 [a] Advance from related party 279,998 50,000 1540.19 [c] Repayment of advance from related party (150,000) (40,000) 1540.19 [d] Issuance of long-term debt 350,000 1540.19 [c] Payment of long-term debt issue costs (17,500) 1540.19 [c] Repayment of long-term debt (228,028) (216,387) 1540.19 [d] Repayment of obligations under capital leases (65,353) (58,194) 1540.19 [e] Cash provided by (used in) financing activities 172,990 (378,249) Net foreign exchange difference on cash and cash equivalents 24,800 13,600 1540.30 Change in cash and cash equivalents during the year 117,077 (100,675) Cash and cash equivalents, beginning of year 69,450 170,125 Cash and cash equivalents, end of year 186,527 69,450 See accompanying notes
1. DESCRIPTION OF BUSINESS [the Company ] is incorporated under the Canada Business Corporations Act. The Company is a manufacturer, re-seller and servicer of specialized industrial equipment. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of presentation These consolidated financial statements were prepared in accordance with Part II of the Chartered Professional Accountants of Canada Handbook Accounting, Accounting Standards for Private Enterprises, which sets out generally accepted accounting principles for non-publicly accountable enterprises in Canada and includes the significant accounting policies described hereafter. Principles of consolidation The Company consolidates all its subsidiaries, which are entities over which it has the continuing power to determine the strategic operating, investing and financing policies without the cooperation of others. These consolidated financial statements include the accounts of the Company and the following subsidiaries: 1505.03, 05, 06, 08 1400.16 1590.15 1590.03 [b] Name Description Functional currency Foreign currency translation model Ownership 1590.29 Good Group America Corp. Distribution US$ Self-sustaining 100% Good Group 80pc Subsidiary Manufacturing C$ Integrated 80% Foreign currency translation Foreign currency transactions and integrated foreign operations In the case of the Company s foreign currency transactions and foreign operations that are integrated in terms of financial and operational management, accounts stated in foreign currencies are translated according to the temporal method. Under this method, monetary assets and liabilities are translated into Canadian dollars at the exchange rate in effect at the consolidated balance sheet date, and non-monetary items are translated at the prevailing historical rate at the time of the transaction. Revenue and expenses arising from foreign currency transactions are translated into Canadian dollars at the exchange rate in effect at the transaction date. The exchange gains or losses resulting from foreign currency transactions and the translation of integrated foreign operations are included in net income. 1651.14, 16, 20, 22, 24 3462.122 [e] 1
Self-sustaining foreign operations The financial statements of foreign operations that are self-sustaining in terms of financial and operational management are translated according to the current rate method using the foreign currency as the measuring unit. Under this method, assets and liabilities are translated into Canadian dollars at the exchange rate in effect at the consolidated balance sheet date, and revenue and expenses are translated at the average exchange rate in effect during the year. The exchange gains or losses resulting from the translation of the financial statements of these foreign operations are presented as a cumulative translation adjustment under equity in the consolidated balance sheet. Financial instruments The Company initially records a financial instrument at its fair value, except for a related party transaction, which is recorded at the carrying or exchange amount depending on the circumstances. The Company recognizes its transaction costs in net income in the period incurred. However, financial instruments that will not be subsequently measured at fair value are adjusted by the transaction costs that are directly attributable to their origination, issuance or assumption. Subsequently, the Company measures financial instruments as follows: investments in equity instruments that are quoted in an active market at fair value; all other investments in equity instruments at cost less impairment; all other financial assets, which include cash and cash equivalents, investments in bonds, accounts receivable, and the loan to related party, at amortized cost; and all financial liabilities, which include the credit facility, accounts payable and accrued liabilities, long-term debt, and the amount due to related party, at amortized cost. Cash and cash equivalents Bank balances, including bank overdrafts with balances that fluctuate from positive to overdrawn, are presented under cash and cash equivalents. Cash equivalents include highly liquid investments that are readily convertible to known amounts of cash and are subject to an insignificant risk of changes in value. An investment normally qualifies as a cash equivalent when it has a short maturity of approximately three months or less from the date of acquisition. 1651.26, 29 3856.07, 08 3840.07, 08, 18, 29 3856.07 3856.11, 12 1540.08, 09, 10, 43 2
Investments [i] Reported at fair value Investments reported at fair value consist of equity instruments that are quoted in an active market, as well as any investments in debt or equity instruments that the Company designated to be measured at fair value. Such designation must be made when the investment is initially recognized. In the case of an equity instrument that was previously measured at fair value because it was quoted in an active market, this designation may be made when the instrument ceases to be quoted in an active market. This designation is irrevocable. Changes in fair value are recognized in net income. Transaction costs to acquire or dispose of these instruments are recognized in net income in the period during which they are incurred. [ii] Reported at cost or amortized cost Investments in equity instruments that are not quoted in an active market, as well as investments in debt instruments, whether or not quoted in an active market, are initially recorded at fair value adjusted by financing fees and transaction costs that are directly attributable to their origination, acquisition, issuance or assumption. Investments in equity instruments are subsequently measured at cost less any reduction for impairment and investments in debt instruments are subsequently measured at amortized cost. Inventories Inventories are measured at the lower of cost and net realizable value, with cost determined using the specific identification method. Cost of work in progress and finished goods includes raw materials, direct labour and indirect manufacturing costs. Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. Investment in GGSII The Company uses the equity method to account for all entities over which it can exercise significant influence. The determination of when significant influence is present is a matter of judgment. If the Company holds less than 20% of the voting interest in the investee, it is presumed that it does not have the ability to exercise significant influence, unless such influence is clearly demonstrated. The Company has a 30% common share investment in Good Group Significant Influence Investment Inc. [ GGSII ]. 3856.12 [a], 13 3856.07, 11 [a], [b] 3856.A3 3031.35 [a] 3031.10, 11, 22 3051.29 3051.04, 05 3051.32 3
Property, plant and equipment and assets under capital leases Property, plant and equipment are recorded at cost less accumulated amortization. Assets under capital leases are recorded at cost, which corresponds to the present value of the minimum lease payments, less accumulated amortization. Amortization of property, plant and equipment and assets under capital leases are calculated over their estimated useful lives using the straight-line method and the following durations: 3061.04 3065.16 3061.16, 19 3065.17, 73 [c] Building Office furniture Machinery and equipment Computer hardware 25 years 10 years 12 years 4-6 years 3061.24 [c] Intangible assets Intangible assets, except for those not subject to amortization, are amortized on the basis of their estimated useful lives using the straight-line method and the following durations: Patents Customer lists 10 years 4-6 years 3064.56 The Company has an intangible asset in the form of a license that is considered to have an indefinite life and is therefore not amortized. Expenditures incurred during the development phase of a new or substantially new product are expensed as incurred. 3064.91 [a] [iii] 3064.40, 91 [c] Impairment [i] Long-lived assets subject to amortization Property, plant and equipment, assets under capital leases, and intangible assets subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Impairment is assessed by comparing the carrying amount of an asset to be held and used with the total of the undiscounted cash flows expected from its use and disposition. If the asset is impaired, the impairment loss to be recognized is measured as the amount by which the carrying amount of the asset exceeds its fair value, generally determined on a discounted cash flow basis. Any impairment results in a writedown of the asset and a charge to income during the year. An impairment loss is not reversed if the fair value of the related asset subsequently increases. 3063.04, 05, 06, 09 4
[ii] Indefinite life intangible asset The license is tested for impairment whenever events or changes in circumstances indicate that the carrying amount may exceed its fair value. Impairment is assessed by comparing the carrying amount of the intangible asset with its fair value, generally determined on a discounted cash flow basis. When the carrying amount of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to the excess. An impairment loss is not reversed if the fair value of the related asset subsequently increases. [iii] Goodwill Goodwill is not amortized but is instead tested for impairment if events or changes in circumstances indicate that an impairment loss may have occurred. In the impairment test, the carrying amount of the reporting unit, including goodwill, is compared with its fair value. When the carrying amount of the reporting unit exceeds its fair value, a goodwill impairment loss is recognized up to a maximum amount of the recorded goodwill related to the reporting unit. Goodwill impairment losses are not reversed. 3064.65, 66, 67 3064.72, 74 [iv] Financial assets measured at cost and amortized cost When there are indications of possible impairment, the Company determines if there has been a significant adverse change to the expected timing or amounts of future cash flows expected from the financial asset. The amount of any impairment loss is determined by comparing the carrying amount of the financial asset with the highest of three amounts: i. The present value of the cash flows expected to be generated by holding the asset, discounted using a current market rate of interest appropriate to that asset; ii. The amount that could be realized by selling the asset at the date of the consolidated balance sheet; and iii. The amount the Company expects to realize by exercising its right to any collateral held to secure repayment of the asset, net of all costs necessary to exercise those rights. A previously recognized impairment loss is reversed to the extent that the improvement can be related to an event occurring after the impairment was recognized, but the adjusted carrying amount of the financial asset shall be no greater than the amount that would have been reported at the date of the reversal had the impairment not been recognized. 3856.17 3856.19 Contingent consideration The Company recognizes the fair value of any contingent consideration that is transferred to the seller in a business combination on the date at which control of the acquiree is obtained. This value is generally determined through a probability-weighted analysis of the expected cash flows. Contingent consideration is classified as a liability or as equity on the basis of the definitions of an equity instrument and a financial liability. The contingent consideration is payable in cash and, 5 1582.41 1582.42 1582.60
accordingly, the Company classified its contingent consideration as a liability. It is not remeasured and any gain or loss on settlement at an amount different from its carrying value will be recognized in net income in the period during which it is settled. Long-term debt Long-term debt is initially measured at fair value, net of transaction costs and financing fees. It is subsequently measured at amortized cost. Transaction costs and financing fees are amortized on a straight-line basis. With respect to the interest-free government loan, the difference between the fair value of the loan and the cash received was accounted for as a government grant and, accordingly as a reduction of property, plant and equipment. With respect to the convertible debenture, the Company chose to assign a nil value to the equity component and to allocate the entire proceeds, net of transaction costs and financing fees, to the liability component. Income taxes The Company follows the taxes payable method whereby only the cost or benefit of current income taxes for the year is reported, as determined in accordance with the rules established by the taxation authorities. Revenue recognition [i] General criteria Revenue is recognized when persuasive evidence of an arrangement exists, delivery of equipment has occurred or services have been rendered, the selling price to the buyer is fixed or determinable, and collection of the selling price is reasonably assured. Revenue is measured at the amount of consideration received, excluding discounts, returns, and sales taxes. The specific recognition criteria set out below must be met before revenue is recognized. [ii] Sale of equipment and commission Revenue from the sale of equipment is recognized when the significant risks and rewards of ownership of the goods have passed to the buyer, which is usually upon the delivery of the goods. The Company considers that due to the customized nature of this equipment, delivery is not considered to have occurred until written customer acceptance of the equipment has been obtained. Occasionally, the Company consigns certain of its manufactured equipment to specialized retailers. Revenue from consignment sales is recorded when the retailer has sold the equipment, at which point the delivery criteria have been met. 6 3856.07 3856.11 [c] 3856.A8 3800.22 [a] 3856.21, 22 [a] 3465.03 [a], 04 3400.31 3400.07 3400.03 [a] 3400.09 [b] 3400.08 [c]
When recognizing distribution revenue, the Company must consider whether revenue should be reported on a gross or a net basis, which is based upon an assessment of whether the Company is acting as an agent or a principal. When the Company has the primary responsibility for providing the equipment [as evidenced by the Company s responsibility for the customer s ultimate acceptance or rejection of the equipment], is at risk for the loss of the inventory at any point prior to sale or during shipping, has the discretion to set prices and assumes all credit risk for the amount receivable, distribution revenue is reported on a gross basis as a sale of equipment. When these criteria are not met, the Company earns a fixed fee per completed equipment sale, which is recognized as commission revenue when the general criteria are met. 3400.24 [iii] Services Revenue from maintenance or repair service contracts is recognized as the services are rendered. [iv] Contracts with separately identifiable components Contracts to sell equipment frequently include maintenance and/or repair services. The Company considers the equipment and the services to be separately identifiable components of a single transaction as both have standalone value to the customer. Both the equipment and the maintenance and repair services are sold separately. 3400.07 3400.31 3400.32 3400.11 Contracts with separately identifiable components require the Company to allocate the proceeds between the components. This allocation is completed based upon the relative, standalone selling price for the equipment and the services. Once the allocation has been made, the applicable recognition criteria are applied to the sale of the equipment and the rendering of the services. [v] Interest and dividends Interest income is recognized on the basis of the passage of time when collectability is reasonably assured. Dividend income is recognized when the dividends are declared and when the right to receive payment is established. 3400.12 [a] 3400.12 [c] Stock-based compensation The Company has a stock option plan for employees and directors from which options to purchase common shares are issued [the Stock Option Plan ]. Options may not be granted with an exercise price of less than the fair value of the options at the grant date. The awards have no cash settlement alternatives. The vesting requirements are typically service-based and the options normally have a contractual life of five years, although options with performance-based vesting criteria may be issued from time to time. 3870.65 3870.66 7
[i] Transactions with employees Stock-based compensation costs are accounted for on a fair value basis, as measured at the grant date, which is generally the date at which both the Company and the employee have a mutual understanding of the terms of the award. The fair value is measured using the option s calculated value, a method that substitutes the historical volatility of an appropriate industry sector index for the expected volatility of an entity s share price in an option-pricing model, such as the Black- Scholes option pricing model. The resulting stock-based compensation cost is recognized on a straight-line basis, with a corresponding credit to contributed surplus over the vesting period involved, typically three years. The compensation expense is based on the number of awards that eventually vest, and adjustments for forfeitures are made as they occur. Any consideration paid by employees upon exercise of the options and the previously recognized compensation cost of the options exercised included in contributed surplus are added to share capital. When the Company issues options with a performance condition, that is, options on which the vesting is dependent upon the employee s achievement of the condition, compensation cost is recognized based on the best estimate of the number of options expected to vest, and adjusted for subsequent changes in the expected or actual outcome in the period when the change occurs. [ii] Transactions with non-employees When the Company exchanges options or shares for goods and services, the measurement basis is the fair value of the services or goods received, as this value is typically more reliably measureable than the equity instruments themselves. Should this not be the case, the estimated fair value of the equity instruments is used. The measurement date in both cases is generally the earlier of the date at which a commitment for performance by the counterparty to earn the equity instruments is reached, the date the equity instruments are granted if they are fully vested and nonforfeitable at that date or the date at which the counterparty s performance is complete. The cost is recognized in the same manner and in the same period as if the Company had paid cash for the goods or the services. The Company occasionally issues options to non-employees with performance-based conditions which, depending upon the counterparty s achievement of these conditions, could result in a range of possible outcomes. At the date at which a commitment to earn the equity instruments by the counterparty is reached, the lowest aggregate fair value is recognized based on the conditions and variables associated with the counterparty s performance. After this date, modification accounting is applied to reflect incremental changes in the fair value of the options resulting from the achievement or non-achievement of the related performance conditions. 3870.24 3870.33 3870.48 3870.43 3870.45 3870.09 3870.14 3870.18 3870.22 8
Hedge accounting The Company periodically uses forward contracts to economically hedge the impact of foreign currency changes in anticipated transactions denominated in foreign currencies, and interest rate swaps to mitigate the effect of changes in interest rates on variable-rate debt. When both at the inception of a hedging relationship and throughout its term, the Company has reasonable assurance that the critical terms of the hedging item and the hedged item are the same, and, in the case of an anticipated transaction, it is probable that the anticipated transaction will occur at the time and in the amount designated, the Company may choose to apply hedge accounting. The Company then formally documents the hedging relationship, identifying the hedged item, the related hedging item, the nature of the specific risk exposure or exposures being hedged and the intended term of the hedging relationship. Forward contracts and interest rate swaps in qualifying hedging relationships are not recognized until their maturity. When hedging anticipated transactions denominated in foreign currencies, the anticipated transaction is recognized at the amount of consideration paid or received when it occurs. The gain or loss on the forward contract is recorded as an adjustment to the carrying amount of the hedged item or, when the hedged item is recognized directly in net income, the gain or loss on the forward contract is included in the same category of net income. When hedging interest rate risk, interest on the debt is recorded at the stated interest rate plus or minus amortization of any initial premium or discount and any financing fees and transaction costs. Net amounts receivable or payable on the interest rate swap are recognized as an adjustment to the interest expense on the hedged item in the period during which they accrue. Hedge accounting may not be electively discontinued. If the forward contract is discontinued, any gain or loss is recognized as a separate component of equity until the anticipated transaction occurs, at which point it is removed from equity and recorded as an adjustment to the carrying amount of the hedged item [in the case of an asset or liability] or recorded in net income. If an interest rate swap is discontinued, any gain or loss is recognized as an adjustment to the debt and amortized to net income as interest payments are accrued. When it is no longer probable that the anticipated transaction will occur in the amount designated or within 30 days of the maturity date of the hedging item for a forward contract or within two weeks of the maturity date of the hedging item for an interest rate swap, or if the debt is derecognized, the forward contract or the interest rate swap is measured at fair value and any gain or loss is recognized in net income. 3856.31 3856.33 3856.34 3856.36 9
3. CHANGE IN ACCOUNTING POLICY Effective 1 January 2015, the Company changed its accounting policy for income taxes so as to follow the taxes payable method. In previous periods, the Company followed the future income taxes method with respect to accounting for income taxes. Under this method, future income tax assets and liabilities were determined based on differences between the carrying amount and the tax basis of assets and liabilities [temporary differences]. Future income tax assets and liabilities were measured using the enacted, or substantively enacted, tax rates that would have been in effect when the differences were expected to reverse. 1506.09 [f] 1506.35 [a] 3465.11 3465.51 3465.53 This change in accounting policy has been applied retrospectively with restatement of prior period consolidated financial statements. The effects of the change in accounting policy are as follows: $ $ Increase (decrease) in: Retained earnings, beginning of year (83,850) (97,000) Future income tax expense (13,150) Future income tax recovery (69,400) Net earnings (69,400) 13,150 Current portion of future income tax assets (73,000) (6,000) Future income tax assets (133,000) (136,000) Current portion of future income tax liabilities (6,750) (16,150) Future income tax liabilities (46,000) (42,000) 1506.35 [c], [d] 4. INVESTMENTS Measurement basis $ $ Equity instruments quoted in an active market Fair value 151,060 221,060 Equity instruments not quoted in an active market Cost, less impairment 50,000 50,000 Bonds AA-rated corporate bonds; maturity date of 12 June 2016; coupon rate 5.50%; yield 5.78% Amortized cost 402,000 603,060 271,060 3856.38 [a],[b],[c] 10
5. ACCOUNTS RECEIVABLE $ $ Trade 829,499 301,500 Trade company under common control 25,000 20,000 Allowance for doubtful accounts (14,000) (53,000) 840,499 268,500 The terms and conditions for trade accounts receivable company under common control are the same commercial terms provided to non-related parties. 3856.39 3840.51 [a], [e] 3856.42 3840.51 [e] 6. INVENTORIES $ $ Raw materials 200,000 150,000 Work in progress 150,000 150,000 Finished goods [note 21] 209,900 125,000 559,900 425,000 The amount of inventories recognized as an expense during the year ended is $2,092,000 [2014 $1,720,000]. 3031.35 [b] 3031.36 3031.35 [c] 7. INCOME TAXES Significant components of the income tax expense (recovery) are as follows: 2015 $ 2014 $ 3465.88 [b] Combined basic federal and provincial income taxes at statutory rates 177,092 44,108 Difference between amortization for accounting and for tax purposes 34,930 14,310 Amounts deductible for accounting but not tax purposes 52,073 19,080 Rate differential due to foreign operations 29,745 9,028 Non-capital losses utilized (55,857) Manufacturing and processing profits deduction (51,840) Small business deduction (55,000) (32,169) 187,000 (1,500) 11
The Company s US subsidiary has non-capital losses totaling $670,000 [US$577,584] available for carryforward, of which $200,000 [US$172,413] expires in 2028, $300,000 [US$258,620] expires in 2029, and $170,000 [US$146,551] expires in 2031. 8. LOAN TO RELATED PARTY During the year ended 31 December 2013, the Company provided a housing relocation loan to an officer in the amount of $200,000. The loan is unsecured, non-interest bearing and is repayable in December 2017. A financial instrument originated with a related party whose sole relationship with an entity is in the capacity of management must be initially recorded at fair value. Consequently, the fair value of the loan was calculated using a 5.0% interest rate, which was considered to be consistent with market rates for similar loans at that date. The difference between the fair value of the loan and the cash received, which amounted to $17,316, was recorded as compensation expense at the inception of the loan. Amortization of this discount amounts to $4,329 annually and is recorded as interest income. 3465.88 [d] 3840.51 [a]-[c], [e] 3840.58 3840.56 3840.51 [a]-[e] 3856.07, 09 3840.56, 58 3856.A3 9. PROPERTY, PLANT AND EQUIPMENT Cost Accumulated amortization Net carrying value Cost Accumulated amortization Net carrying value $ $ $ $ $ $ Land 220,000 220,000 220,000 220,000 Building 608,000 64,000 544,000 608,000 32,000 576,000 Office furniture 380,000 244,000 136,000 380,000 206,000 174,000 Machinery and equipment 1,840,000 1,102,500 737,500 1,910,000 1,061,500 848,500 Computer hardware 630,000 607,500 22,500 600,000 450,000 150,000 3,678,000 2,018,000 1,660,000 3,718,000 1,749,500 1,968,500 During the year ended, the Company determined that machinery used only in the production of one of its highly specialized products was impaired due to a change in the demand for this product as a result of a rapid and unexpected technological change. The $40,000 carrying value of this machinery, with a cost of $160,000 and accumulated amortization of $120,000, without further use to the Company and without resale or scrap value was recorded as an impairment loss. 3061.24 [a], [b] 3061.28 3063.09 3061.27 3063.24 3063.06 12
10. ASSETS UNDER CAPITAL LEASES Cost Accumulated amortization Net carrying value Cost Accumulated amortization Net carrying value $ $ $ $ $ $ Machinery and equipment 500,000 312,500 187,500 500,000 250,000 250,000 Computer hardware 40,000 1,670 38,330 540,000 314,170 225,830 500,000 250,000 250,000 3065.73 [a], [b] Additions to computer hardware under capital leases during the year ended totalled $40,000 [2014 nil]. 11. INTANGIBLE ASSETS $ $ Intangible assets subject to amortization Patents 50,000 50,000 Less accumulated amortization on patents 20,000 14,000 30,000 36,000 Customer lists 70,000 70,000 Less accumulated amortization on customer lists 48,000 38,000 22,000 32,000 Intangible asset not subject to amortization License 60,000 60,000 112,000 128,000 12. GOODWILL $ $ Balance, beginning of year 494,000 494,000 Impairment loss (60,000) Balance, end of year 434,000 494,000 3064.91 [a] [i] 3064.91 [b] 3064.93 [b] A loss of a major customer has resulted in continued and significant losses in the Company s USbased subsidiary, which provides maintenance services for highly specialized robotic assembly line production machinery in the automotive sector. 3064.93 [a] 3064.72 13
As a result, the Company determined that there were indicators that the carrying amount of the reporting unit to which goodwill is assigned may exceed the fair value of the reporting unit. Accordingly, the Company undertook a goodwill impairment test, which was based on a discounted cash flow analysis. Based on the results of the goodwill impairment test, the Company determined that the estimated fair value of this reporting unit was less than its carrying amount [including goodwill] by $60,000. A goodwill impairment loss in this amount has been recorded for the year ended 31 December 2015. 3064.74 3064.93 [b] 13. CREDIT FACILITY The Company has a demand credit facility [the Facility ] with a Canadian chartered bank for a maximum amount of $500,000, bearing interest at the bank s prime rate plus 1.75%. The relevant prime rate was 3.00% as at [2014 2.70%]. No amounts were drawn as at [2014 $117,127]. The Facility is collateralized by all accounts receivable and inventories of the Company, which have a carrying value of $1,400,399 as at [2014 $693,500]. A $20,000 tranche of the Facility [2014 $20,000] is available for letters of credit. 14. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES $ $ Trade payables and accrued liabilities 230,262 239,063 Trade supplier controlled by a director 46,625 Accrued interest long-term debt 80,417 89,431 Termination benefits 59,000 Government remittances payable 20,536 43,596 390,215 418,715 During the year ended, as a result of an effort to streamline a number of the Company s administrative functions, a staff reduction plan was approved and communicated to the affected employees. The plan included a termination package and a timetable for departure. The aggregate amount of the termination package was $105,500, which includes an estimate of the costs related to vocation re-training services included in the termination package. An amount of $59,000 remains accrued at and will be paid in the year ending 31 December 2016. 3840.51 [e] 3856.43 [d] 3462.102 1510.15, 16 3462.102 14
The trade accounts payable due to a supplier controlled by a director are under similar commercial terms and conditions granted to non-related parties by this supplier. 3840.51 [e] 15. CONTINGENT CONSIDERATION PAYABLE In November 2011, the Company completed a business combination in which it agreed to pay additional consideration to the seller in the amount of up to $400,000 at the fifth anniversary of the acquisition based on a formula that considers the financial performance of the acquiree in each of the five subsequent years. An amount of $140,000 was accrued and will be adjusted only upon settlement, if any, of the contingent consideration in November 2016. Given the actual financial performance of the acquiree since November 2011, the estimate of the maximum amount payable is now $300,000 and the minimum is nil. 16. OBLIGATIONS UNDER CAPITAL LEASES $ $ Obligation under capital lease for machinery and equipment, with interest at a rate of 8%, maturing on 31 December 2018 233,073 297,086 Obligation under capital lease for computer hardware, with interest at a rate of 7%, maturing on 30 June 2019 38,660 271,733 297,086 Less current portion 81,845 64,013 189,888 233,073 Future minimum lease payments, including principal and interest, under the capital leases for subsequent years are as follows: 2016 111,865 2017 111,865 2018 111,865 2019 7,000 342,595 The capital leases are secured by the underlying leased assets. $ 1508.05, 06, 07 1582.41 1582.62 [e] 3065.18 3065.74 [a], [b], [c] 3065.23 3065.76 3065.74 [d] 15
17. LONG-TERM DEBT $ $ Senior note payable $1,000,000, 8-year, bearing interest at the prime rate plus 4.5%, repayable in annual instalments of interest and principal in the amount $187,444, maturing on 31 December 2018. Collateralized by land, building, and machinery and equipment having a net carrying value of $1,501,500 [2014 $1,644,500]. 466,145 594,173 Less unamortized financing fees and transaction costs 22,500 28,125 443,645 566,048 Note payable $350,000, 5-year note payable, bearing interest at the prime rate plus 4.5%, repayable on 31 October 2019. Collateralized by a second-ranking lien on the totality of the Company s trade accounts receivable and inventories having a carrying value of $1,400,399 [2014 $693,500]. 350,000 Less unamortized financing fees and transaction costs 14,583 335,417 Convertible debentures $350,000, 5-year, annual interest payments at the prime rate plus 3%; principal maturing on 31 December 2020. Convertible at any time at the option of the holder into common shares equal to the quotient of dividing the outstanding principal and accrued interest by $1.12. 350,000 350,000 Less unamortized financing fees and transaction costs 2,000 4,000 348,000 346,000 Interest-free unsecured government loan $400,000, 5-year loan, repayable in annual instalments of $100,000 commencing in the second year of the loan and maturing on 31 December 2016. 100,000 200,000 Less unamortized interest-free loan deemed discount 20,556 41,112 79,444 158,888 Total long-term debt 1,206,506 1,070,936 Less current portion 220,273 201,846 Long-term portion of long-term debt 986,233 869,090 3856.43 [a]-[d], [f] 3856.44 3856.07 3856.43 [a]-[d], [f] 3856.44 3856.07 3856.43 [a]-[d], [f] 3856.21, 22 [a] 3856.47 [a] 3856.07 3856.43 [a]-[d], [f] 3856.A3 16
The notes payable contain a number of restrictive covenants that require the Company to be in compliance with a number of financial ratios and non-financial criteria. As at, the Company was not in compliance and continues not to be in compliance with this requirement. The Company has obtained a waiver of this requirement from the bank. On 17 February 2016, the Company reached an agreement with the convertible debenture holders to extend the maturity date of the instrument to 31 December 2020. Consequently, at 31 December 2015, the convertible debentures have been presented as a long-term financial liability. 3856.46 1510.13 [b] During the year ended 31 December 2011, the Company received an interest-free unsecured government loan in the amount of $400,000 as government assistance related to qualifying salary expenditures for new hires, as part of a one-time government stimulus spending project in 2010. Principal repayments to be made during the next five years, at which time the debt will be fully repaid, are as follows: 3856.45 2016 240,829 2017 154,912 2018 170,404 2019 350,000 2020 350,000 1,266,145 $ 17
18. DUE TO RELATED PARTY Advances from Good Group Sister Company Inc., a company under common control, are noninterest bearing, unsecured and have no specified terms of repayment. The lender has agreed not to demand repayment before 1 January 2017. Accordingly, the amount has been presented as a longterm financial liability. 1510.13 [a] 19. EQUITY Common shares Common shares, each share entitled to one vote, changes therein as follows: Number of shares # $ Balance as at 31 December 2014 2,015,000 606,750 Shares issued for cash consideration 200,000 160,000 Share issuance costs (10,000) Shares issued on exercise of stock options 20,000 29,000 Balance as at 2,235,000 785,750 Redeemable preferred shares On 1 January 2007, the Company issued 50,000 preferred shares with a stated value of $230,000 in a tax planning arrangement under Section 85 of the Income Tax Act (Canada). These preferred shares are redeemable at the holders option for $5.20 per share and carry a 9.25% non-cumulative dividend. During the year ended, 10,000 preferred shares [2014 nil] were redeemed at their redemption amount of $52,000. The excess of the redemption value over the $46,000 carrying value of the preferred shares of $6,000 was recorded as an adjustment to retained earnings. The remaining 40,000 preferred shares outstanding as at are not scheduled to be redeemed in the next five years. 3240.20 [a] 3251.04 [d] 3240.20 [e] 3240.22 [a] 3870.67 [e] 3240.20 [b], [c] 3856.47 [c] [ii] 3240.11 3856.47 [c] [iii] 18
19. EQUITY [Cont'd] Stock-based compensation The Stock Option Plan is applicable to full-time employees and directors of the Company for the purchase of common shares with a maximum of 500,000 of such shares reserved for issuance. Options are granted with an exercise price equal to the fair value of the Company s common shares on the grant date, and may generally be exercised at a rate of 25% on each anniversary of the grant. Options expire in eight years from the date of grant or upon termination of employment. Additional information concerning stock options outstanding as at and 2014 are as follows: Weighted average remaining Number of contractual Weighted average exercise Number of Weighted average remaining contractual options life price options life $ # [Years] $ # [Years] $ Range of exercise prices Weighted average exercise price 0.45-0.55 25,000 6.80 0.57 25,000 7.80 0.57 0.71-0.90 115,000 6.91 0.76 65,000 7.85 0.78 1.15 50,000 6.50 1.15 70,000 7.50 1.15 0.45-1.15 190,000 6.79 0.84 160,000 7.69 0.91 During the year ended, the Company granted 50,000 [2014 45,000] stock options with a weighted average exercise price of $0.75 [2014 $0.60]. During the year ended, employees of the Company exercised 20,000 [2014 nil] stock options at an exercise price of $1.15 [2014 nil] per option. The cash consideration of $23,000 [2014 nil], along with the contributed surplus previously recognized on the exercised stock options of $6,000 [2014 nil] was recognized as an increase in common shares. Contributed surplus $ $ Balance, beginning of year 40,000 Stock-based compensation 85,000 40,000 Stock options exercised (6,000) Balance, end of year 119,000 40,000 3870.66 3870.67 [a] [i] 3870.67 [a] [ii] 3870.67 [e] 3251.04 [c] 3870.67 [d] 3870.48 19
20. INTEREST EXPENSE ON LONG-TERM OBLIGATIONS $ $ Senior note payable 59,417 71,056 Interest expense on capital lease obligations 29,709 35,528 Note payable 27,708 Accretion on interest-free government loan 20,556 20,556 Convertible debenture 18,375 21,000 Amortization of financing fees and transaction costs 10,542 7,625 166,307 155,765 3856.52 [d] 1520.04 [k] [iv] 1520.04 [k] [iv] 3065.75; 1520.04 [l] 1520.04 [k] [iv] 3856.A5 1520.04 [k] [iv] 3856.52 [d] 21. RELATED PARTY TRANSACTIONS The Company provides maintenance services to a company under common control. The Company purchases equipment for resale from a supplier controlled by a director. As at, finished goods inventory contained machinery in the amount of $50,000 [2014 nil] which was purchased from this related party. The Company engages a marketing firm owned by the spouse of the controlling shareholder for certain sales and marketing services related to sales in the United States which are included in selling expenses. During the year ended, the Company purchased machinery and equipment from a company under common control for cash consideration of $72,000 [2014 nil]. The machinery and equipment had a carrying value of $52,500 [2014 nil]. This transaction with a related party was not in the normal course of operations and there was no substantive change in ownership interests, and accordingly, it was measured at the carrying amount of the asset acquired. The resulting difference of $19,500 [2014 nil] has been recorded directly in retained earnings. All related party transactions, with the exception of the purchase of machinery and equipment during the year as described above, are in the normal course of operations and are measured at the agreed upon exchange amount. The Company s other related party transactions are as follows: 3840.51 [a], [b] 3840.53, 54, 56 3840.08, 09 3840.51 [a], [b], [c], [d] 3840.56 3840.51 [d] 3840.18 $ $ Revenue maintenance services 350,000 60,000 Cost of goods sold 630,000 50,000 Selling expenses 50,000 62,000 3840.51 [c], 58 20