Consolidated Financial Statements and
August 23, 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 income (loss), comprehensive income (loss), changes in equity 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: +1 418 522 7001, F: +1 418 522 5663 PwC refers to PricewaterhouseCoopers LLP/s.r.l./s.e.n.c.r.l., an Ontario limited liability partnership. (1)
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 22 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. A112256 (2)
Consolidated Statements of Financial Position Assets Current assets Cash 743,066 397,002 Accounts receivable (note 8) 9,051,777 11,722,295 Inventories (notes 5 and 8) 5,697,931 7,000,266 Prepaid expenses 315,858 475,262 15,808,632 19,594,825 Property, plant and equipment (notes 6 and 8) 9,517,946 10,136,541 Intangible assets (notes 7 and 8) 2,156,446 2,600,821 Liabilities 27,483,024 32,332,187 Current liabilities Bank loan (note 8) 6,405,163 8,068,600 Trade and other payables 6,439,973 7,574,379 Deferred revenues 398,419 168,544 Current tax liabilities 48,584 75,518 Current portion of long-term debt (note 9) 7,761,872 10,903,095 Deferred gain (note 1d) 107,797 107,797 21,161,808 26,897,933 Long-term debt (note 9) 2,746,128 427,266 Deferred gain (note 1d) 628,818 754,582 Equity 24,536,754 28,079,781 Share capital (note 10) 13,521,142 13,521,142 Debenture conversion options 210,000 100,000 Contributed surplus 2,891,983 2,891,983 Accumulated other comprehensive income 620,911 677,841 Deficit (14,297,766) (12,938,560) 2,946,270 4,252,406 Commitments and contingencies (notes 20 and 21) 27,483,024 32,332,187 Subsequent events (note 22) Approved by the Board of Directors Denis Bertrand (signed), Director Roger Demers (signed), Director The accompanying notes are an integral part of these consolidated financial statements. (3)
Consolidated Statements of Income (Loss) For the years ended and (expressed in Canadian dollars, except per share data) Revenues (note 13) 62,163,092 73,696,436 Cost of sales and operating expenses (excluding depreciation and amortization) before the following items (note 14) 60,309,564 69,341,184 Income from operations 1,853,528 4,355,252 Financial expenses 1,967,744 2,357,314 Depreciation and amortization 1,366,675 1,816,403 Foreign exchange gain (143,703) (329,345) Loss (gain) on disposal of property, plant and equipment 4,006 (167,962) Gain on debt settlement (note 1c) - (2,518,104) Other operating expenses 3,194,722 1,158,306 Income (loss) before income taxes (note 16i) (1,341,194) 3,196,946 Income tax expense (note 12) 18,012 55,850 Net income (loss) (1,359,206) 3,141,096 Basic and diluted net earnings (loss) per share (note 17) (0.116) 0.268 Weighted average number of shares outstanding (note 17) Basic and diluted 11,724,775 11,724,775 Consolidated Statements of Comprehensive Income (Loss) For the years ended and Net income (loss) (1,359,206) 3,141,096 Other comprehensive loss Exchange difference of foreign operations' financial statements (56,930) (415,384) Comprehensive income (loss) (1,416,136) 2,725,712 The accompanying notes are an integral part of these consolidated financial statements. (4)
Consolidated Statements of Changes in Equity For the years ended and Share capital Debenture conversion options Contributed surplus Accumulated other comprehensive income Deficit Total equity Balance April 30, 2011 13,521,142 100,000 2,891,983 1,093,225 (16,079,656) 1,526,694 Net income - - - - 3,141,096 3,141,096 Other comprehensive loss - - - (415,384) - (415,384) Comprehensive income - - - (415,384) 3,141,096 2,725,712 Balance 13,521,142 100,000 2,891,983 677,841 (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 - - - 110,000 Balance 13,521,142 210,000 2,891,983 620,911 (14,297,766) 2,946,270 The accompanying notes are an integral part of these consolidated financial statements. (5)
Consolidated Statements of Cash Flows For the years ended and Cash flows provided by (used in): Operating activities Net income (loss) (1,359,206) 3,141,096 Adjustments for: Depreciation and amortization 1,366,675 1,816,403 Amortization of deferred gain (125,764) - Loss (gain) on disposal of property, plant and equipment 4,006 (167,962) Interest capitalized on long-term debt 217,197 27,266 Gain on debt settlement (notes 1c and 9d) - (2,518,104) Financial expenses 1,750,547 2,349,301 Interest on bank loan and bank charges (1,181,336) (1,311,386) 672,119 3,336,614 Changes in items of working capital (note 16ii) 3,152,225 (610,759) 3,824,344 2,725,855 Investing activities Additions to property, plant and equipment, net of investment tax credits (273,794) (288,648) Additions to intangible assets (39,834) (55,962) Proceeds from disposal of property, plant and equipment 1,029 336,862 Proceeds from disposal of a subsidiary - 1 Expenses incurred upon the disposal of a subsidiary - (157,388) Proceeds from disposal of intangible assets 4,888 - (307,711) (165,135) Financing activities Increase in long-term debt and debenture conversion options 555,000 - Variation in bank loan (1,663,437) 475,122 Increase in bank indebtedness - 237,093 Payments on long-term debt (1,498,039) (1,837,436) Interest on long-term debt (551,816) (1,004,060) Financing fees paid (10,000) - (3,168,292) (2,129,281) Effect of exchange rate changes on cash (2,277) (217,956) Increase in cash 346,064 213,483 Cash at the beginning 397,002 183,519 Cash at the end 743,066 397,002 Additional information Interest paid 1,307,960 1,654,349 Income tax paid (recovery) 56,452 (37,536) The accompanying notes are an integral part of these consolidated financial statements. (6)
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, 2008. 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. PNS-Tech (c) Reorganization U.S. subsidiary On December 1, 2009, the company announced that its subsidiary, Sigma OH Industries Inc. (Sigma OH), filed for protection under Chapter 11. Sigma OH continued to operate as the "debtor in possession" under the applicable provisions of the U.S. Bankruptcy Code. During fiscal 2011, the company took the necessary steps for the winding-up of its subsidiary Sigma OH. On October 17, 2011, the company's winding-up was completed, and the company deconsolidated this subsidiary, thus resulting in the cancellation of its trade, provisions and other payables amounting to 2,204,870 (US2,103,483) and its long-term debt amounting to 157,884 (US150,624), and in the recognition of a gain recorded in the statement of income (loss). Also, a creditor agreed to write off a loan to the company. As a result of this write-off, a gain of 155,350 (US155,240) has been recognized in the statement of income (loss). (7)
The gain on debt settlement resulting from the reorganization for the year ended is as follows: Accounts payable and accrued liabilities written off 2,204,870 Long-term debt written off 313,234 Total 2,518,104 (d) Disposal of a subsidiary On March 2,, 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. 8 years. The assets and liabilities of Sigma 2010 Inc. prior to the disposal were as follows: Assets Accounts receivable 146,696 Property, plant and equipment 3,206,916 Intangible assets 19,040 Liabilities Trade and other payables 47,225 Long-term debt 4,511,391 Deferred financing expenses (166,198) Net liabilities 1,019,766 Proceeds from the disposal of the subsidiary 1 Expenses incurred upon the disposal of the subsidiary (157,388) Net deferred gain 862,379 (8)
(e) 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 one financial ratio relating to the term loan amounting to 2,086,379 (note 9b). However, the company obtained a waiver and certain amendments were made to the financing agreement in August (note 22)., the company was also in default regarding one financial ratio relating to the credit facilities (note 8) and the bank loans amounting to 7,529,265 (note 9a). Certain amendments were made to the financing agreement relating to these loans in August (note 22). The company will have to renegotiate its credit facilities and its revolving bank loan that mature in August 2014. Although the company has renewed its credit facilities in the past, there is no assurance that it would be successful renewing their facilities at maturity, that is, in August 2014, 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 23,. 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. 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. (9)
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 income (loss). Financial instruments Financial assets and 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 liabilities are offset and the net amount is reported in the 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 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. (10)
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 liabilities at fair value through profit or loss A financial asset or 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 in the cost of sales and operating expenses or in finance expenses. Financial instruments in this category are recognized initially and subsequently at fair value. Transaction costs are recorded in the statement of income (loss). Gains and losses arising from changes in fair value are presented in the statement of income (loss) within other gains and losses in the period in which they arise. Financial assets and 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 and 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 statement of income (loss) as part of interest income. Dividends on available-for-sale equity instruments are recognized in the statement of income (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 statement of income (loss) as part of other gains and losses. The company has no available-for-sale financial assets. (11)
(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. (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 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. (12)
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; (iii) it becomes probable that the borrower will enter bankruptcy or other financial reorganization. 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 statement of income (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. (13)
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 write-down is recognized. The write-down 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 statement of income (loss) during the period in which they are incurred. The major categories of property, plant and equipment are depreciated on a straight-line basis over their useful lives as follows: Buildings 30 and 35 years Machinery and equipment Office furniture 10 years Computer equipment 5 and 10 years Automotive equipment5 and 10 years 10 to 25 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 income (loss). (14)
Intangible assets Identifiable intangible assets are recorded at cost. The major categories of intangible assets are capitalized and amortized in the consolidated statement of income (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. 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. (15)
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 statement of income (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. 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. (16)
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. 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 for the period attributable to equity owners of the company by the basic weighted average number of common shares outstanding during the period. (17)
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 The following standards were issued by the IASB in May 2011, except for IFRS 9 which was issued in November 2009. Each of these standards is effective for annual periods beginning on or after January 1,, except for IFRS 9 which is effective for annual periods beginning on or after January 1, 2015. Early adoption is permitted. The company has not yet assessed the impact of these standards or determined whether it will adopt them early. IFRS 9, Financial instruments, addresses the classification, measurement and recognition of financial assets and financial liabilities. IFRS 9 was issued in November 2009 and October 2010. It replaces the parts of IAS 39 that relate to the classification and measurement of financial instruments. IFRS 9 requires financial assets to be classified into two measurement categories: those measured at fair value and those measured at amortised cost. The determination is made at initial recognition. The classification depends on the entity s business model for managing its financial instruments and the contractual cash flow characteristics of the instrument. For financial liabilities, the standard retains most of the IAS 39 requirements. The main change is that, in cases where the fair value option is taken for financial liabilities, the part of a fair value change due to an entity s own credit risk is recorded in other comprehensive income rather than the income statement, unless this creates an accounting mismatch. IFRS 10, Consolidated financial statements, builds on existing principles by identifying the concept of control as the determining factor in whether an entity should be included within the consolidated financial statements of the parent company. The standard provides additional guidance to assist in the determination of control where this is difficult to assess. IFRS 12, Disclosures of interests in other entities, includes the disclosure requirements for all forms of interests in other entities, including joint arrangements, associates, special purpose vehicles and other off balance sheet vehicles. IFRS 13, Fair value measurement, aims to improve consistency and reduce complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across IFRSs. The requirements, which are largely aligned between IFRSs and US GAAP, do not extend the use of fair value accounting but provide guidance on how it should be applied where its use is already required or permitted by other standards within IFRSs or US GAAP. Amendment to IAS 1, Financial statement presentation, regarding other comprehensive income. The main change resulting from these amendments is a requirement for entities to group items presented in "other comprehensive income" (OCI) on the basis of whether they are potentially reclassifiable to profit or loss subsequently (reclassification adjustments). The amendments do not address which items are presented in OCI. (18)
4 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 financial statements. Those estimates and assumptions also affect the disclosure of contingencies at the date of the 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. 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. 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. (19)
5 Inventories Raw materials 3,418,791 4,130,514 Work in progress 807,567 803,801 Finished goods 1,471,573 2,065,951 5,697,931 7,000,266 The company expects full recovery of this amount in the next fiscal year. 6 Property, plant and equipment Net carrying amount Land Buildings Machinery and equipment Office furniture Computer equipment Automotive equipment Total April 30, 2011 Cost 550,542 7,933,418 13,988,841 331,332 509,822 88,917 23,402,872 Accumulated depreciation - 1,473,156 7,065,123 198,643 380,725 54,701 9,172,348 550,542 6,460,262 6,923,718 132,689 129,097 34,216 14,230,524 April 30, 2011 550,542 6,460,262 6,923,718 132,689 129,097 34,216 14,230,524 Additions - 43,525 115,415 1,534 47,637 80,537 288,648 Disposals - - (156,257) - - (12,643) (168,900) Depreciation - (194,160) (821,901) (26,035) (69,046) (45,622) (1,156,764) Exchange differences 5,486 48,689 93,172 1,191 618 793 149,949 Disposal of assets (note 1d) (128,518) (1,105,906) (1,930,905) (24,220) (7,929) (9,438) (3,206,916) Transfers - (44,637) 27,190-11,339 6,108-427,510 5,207,773 4,250,432 85,159 111,716 53,951 10,136,541 Cost 427,510 6,697,709 8,830,230 296,204 522,879 105,492 16,880,024 Accumulated depreciation - 1,489,936 4,579,798 211,045 411,163 51,541 6,743,483 427,510 5,207,773 4,250,432 85,159 111,716 53,951 10,136,541 (20)
Net carrying amount Land Buildings Machinery and equipment Office furniture Computer equipment Automotive equipment Cost 427,510 6,697,709 8,830,230 296,204 522,879 105,492 16,880,024 Accumulated depreciation - 1,489,936 4,579,798 211,045 411,163 51,541 6,743,483 Total 427,510 5,207,773 4,250,432 85,159 111,716 53,951 10,136,541 427,510 5,207,773 4,250,432 85,159 111,716 53,951 10,136,541 Additions - 82,752 118,185 39,640 33,217-273,794 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 3,685,178 102,450 87,514 39,107 9,517,946 Cost 427,510 6,825,098 8,948,415 335,844 554,010 102,543 17,193,420 Accumulated depreciation - 1,648,911 5,263,237 233,394 466,496 63,436 7,675,474 427,510 5,176,187 3,685,178 102,450 87,514 39,107 9,517,946 7 Intangible assets Net carrying amount Indefinitelived trademark Patents Customer relationships Technologies Software Total April 30, 2011 Cost 268,158 166,934 5,508,431 2,277,137 395,849 8,616,509 Accumulated amortization - 73,321 2,907,394 2,132,565 281,491 5,394,771 268,158 93,613 2,601,037 144,572 114,358 3,221,738 April 30, 2011 268,158 93,613 2,601,037 144,572 114,358 3,221,738 Additions - 23,461 - - 32,501 55,962 Amortization - (13,275) (465,282) (126,506) (54,576) (659,639) Exchange differences - - - - 1,800 1,800 Disposal of assets (note 1d) - - - - (19,040) (19,040) 268,158 103,799 2,135,755 18,066 75,043 2,600,821 Cost 268,158 190,395 5,491,920 2,277,137 328,044 8,555,654 Accumulated amortization - 86,596 3,356,165 2,259,071 253,001 5,954,833 268,158 103,799 2,135,755 18,066 75,043 2,600,821 (21)
Net carrying amount Indefinite-lived trademark Patents Customer relationships Technologies Software Total Cost 268,158 190,395 5,491,920 2,277,137 328,044 8,555,654 Accumulated amortization - 86,596 3,356,165 2,259,071 253,001 5,954,833 268,158 103,799 2,135,755 18,066 75,043 2,600,821 268,158 103,799 2,135,755 18,066 75,043 2,600,821 Additions - 23,458 - - 16,376 39,834 Disposals - - - - (4,888) (4,888) Amortization - (16,078) (419,522) (18,066) (25,655) (479,321) Exchange differences - - - - - - 268,158 111,179 1,716,233-60,876 2,156,446 Cost 268,158 213,853 5,491,920 2,277,137 339,532 8,590,600 Accumulated amortization - 102,674 3,775,687 2,277,137 278,656 6,434,154 268,158 111,179 1,716,233-60,876 2,156,446 The customer relationships result mainly from the acquisition of the subsidiary Rene in 2006 and will be fully amortized in 2021. The indefinite-lived trademark results from the acquisition of the subsidiary Rene in 2006. Assessment of the indefinite useful life is based on the company's intent to retain and operate the trademark over an undeterminable term. This trademark provides a significant competitive advantage to the company. 8 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 1,017,000 (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 December. Under these agreements, the company has agreed to respect certain conditions and financial ratios., one financial ratio was not met (note 22)., all these financial ratios were met. (22)
9 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 December. 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 22) (a) 7,293,542 8,445,158 Bank loan, bearing interest at prime rate plus 3%, payable in monthly principal instalments of 5,953, with the outstanding principal balance maturing in December. 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 22) (a) 235,723 307,147 Term loan, bearing interest at prime rate until November and at prime rate plus 1% afterwards, payable in monthly principal instalments of 41,667 starting 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 (note 22) (b) 2,086,379 1,916,666 Convertible debentures, 12%, payable in quarterly instalments, convertible at any time until November 10, 2015 inclusively, in whole or in part, into units of the company. Should the debt be converted, each unit issued with a value of 0.10 would consist of one common share at 0.10 per share and one warrant for one common share of the company at 0.10 per share; the exercise of warrants shall not exceed the maturity date of the debentures. Debentures are redeemable from November with a 30-day notice provided the weighted average closing price for the company's shares during this 30-day period is 0.50 or above (c) 446,973 427,266 Convertible debentures, 12%, payable in quarterly instalments, convertible at any time until November 10, 2015 inclusively, in whole or in part, into units of the company. Should the debt be converted, each unit issued with a value of 0.10 would consist of one common share at 0.10 per share and one warrant for one common share of the company at 0.12 per share; the exercise of warrants shall not exceed the maturity date of the debentures. Debentures are redeemable from November with a 30-day notice provided the weighted average closing price for the company's shares during this 30-day period is 0.50 or above (c) 472,778 - Note payable to a company controlled by certain directors and shareholders of the company, bearing interest at 18%, payable on demand (c) - 268,914 Deferred financing expenses (27,395) (34,790) 10,508,000 11,330,361 Less: Current portion 7,761,872 10,903,095 2,746,128 427,266 (23)