Consolidated Financial Statements Years ended September, 2014 and 2013 (expressed in Canadian dollars)
December 19, 2014 Independent Auditor s Report To the Shareholders of EnWave Corporation We have audited the accompanying consolidated financial statements of EnWave Corporation and its subsidiaries, which comprise the consolidated statements of financial position as at September 30, 2014 and September 30, 2013 and the consolidated statements of loss and comprehensive loss, cash flows and changes in equity for the years then ended September 30, 2014 and September 30, 2013, 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 audits 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. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. PricewaterhouseCoopers LLP PricewaterhouseCoopers Place, 250 Howe Street, Suite 700, Vancouver, British Columbia, Canada V6C 3S7 T: +1 604 806 7000, F: +1 604 806 7806, www.pwc.com/ca PwC refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.
Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of EnWave Corporation and its subsidiaries as at September 30, 2014 and September 30, 2013 and their financial performance and their cash flows for the years then ended in accordance with International Financial Reporting Standards. (signed) PricewaterhouseCoopers LLP Chartered Accountants 2
Consolidated Statements of Financial Position (expressed in Canadian Dollars) September 30, 2014 September 30, 2013 Note $ $ Assets Current Cash and cash equivalents 5 5,850,658 5,632,045 Restricted cash 5 971,289 28,749 Trade receivables 6 1,660,845 697,045 Prepaids and other receivables 7 835,069 432,469 Inventory 8 1,242,843 514,956 10,560,704 7,305,264 Non-current Property, plant and equipment 9 2,877,167 664,424 Intangible assets 10 4,490,631 5,884,017 Goodwill 4 3,922,675 3,803,506 11,290,473 10,351,947 Total assets 21,851,177 17,657,211 Liabilities Current Trade and other payables 11 1,678,663 1,102,149 Amounts due to related parties 14c 693,024 519,269 Customer deposits and deferred revenue 17 1,573,797 86,912 Other financial liability 10 332,268 285,000 4,277,752 1,993,330 Non-current Amounts due to related parties 14 265,568 415,124 Other financial liability 10 870,328 1,150,847 Total liabilities 5,413,648 3,559,301 Equity Attributable to shareholders of the parent: Share capital 12b 50,964,155 43,743,855 Warrants 12c 586,120 - Contributed surplus 12e 5,286,569 4,969,083 Foreign currency translation reserve 326,899 101,695 Deficit (41,034,694) (34,636,366) 16,129,049 14,178,267 Non-controlling interest 4 308,480 (80,357) Total equity 16,437,529 14,097,910 Total liabilities and equity 21,851,177 17,657,211 Approved by the Board of Directors: "Timothy D. Durance" "Gary Sandberg" The accompanying notes are an integral part of these consolidated financial statements. Page 3 of 36
Consolidated Statements of Loss and Comprehensive Loss (expressed in Canadian dollars) Years ended September 30, 2014 2013 Note $ $ Revenues 17 4,553,705 5,448,207 Direct costs (3,975,349) (3,795,811) Expenses: Administrative 19 (2,116,755) (1,994,523) Sales and marketing 19 (1,165,221) (979,036) Research and development 19 (1,590,620) (2,674,631) Design and certain constructions costs 19 (313,601) (464,721) Amortization of intangible assets 10 (1,431,877) (1,905,302) Stock-based compensation 12d (608,398) (1,118,030) Acquisition costs - (348,998) Foreign exchange loss (70,454) (166,303) (Loss) gain on write-off of property, plant and equipment (105,183) 632 Finance expense 14 (277,428) (126,295) Finance income 111,382 115,346 Net loss for the year (6,989,799) (8,009,465) Deferred taxes recovery 15-119,500 Net loss for the year after tax (6,989,799) (7,889,965) Other comprehensive income: Foreign exchange translation 283,779 117,566 Total comprehensive loss for the year (6,706,020) (7,772,399) Loss attributable to: Shareholders of the parent company: Net loss (6,398,328) (7,777,400) Foreign exchange translation 225,204 101,695 Non-controlling interest: Net loss (591,471) (112,565) Foreign exchange translation 58,575 15,871 (6,706,020) (7,772,399) Loss per share - basic and diluted (0.08) (0.10) Weighted average number of shares outstanding - basic and diluted 82,763,197 77,317,132 The accompanying notes are an integral part of these consolidated financial statements. Page 4 of 36
Consolidated Statements of Cash Flows (expressed in Canadian dollars) Years ended September 30, 2014 2013 Note $ $ Cash flows from operating activities Net loss for the year (6,989,799) (7,889,965) Items not affecting cash: Depreciation and amortization 1,751,210 2,144,998 Stock-based compensation 12 608,398 1,118,030 Finance income (111,382) (115,346) Interest expense 277,428 126,295 Loss (gain) on write-off of property, plant and equipment 105,183 (632) Deferred taxes recovery - (119,500) Decrease in warranty provisions (25,424) - Foreign exchange loss 70,454 166,303 (4,313,932) (4,569,817) Changes in non-cash working capital: Increase in trade receivables (1,008,093) (117,056) Decrease (increase) in prepaid and other receivables 286,603 (277,543) Increase in inventory (609,188) (548,462) Increase (decrease) in trade and other payables 23,421 (991,309) Decrease in the amounts due to related parties (53,497) (210,413) Increase (decrease) in customer deposits and deferred revenues 1,595,792 (617,120) Net cash used in operating activities (4,078,894) (7,331,720) Cash flows from investing activities Cash outflows in business combination 4 - (688,072) Funding from non-controlling interest partner 304,732 - Redemption of short-term investments - 3,210,032 Net acquisition of property, plant and equipment (2,320,013) (438,592) Acquisition of intangible assets (37,554) (9,135) Finance income received 203,187 166,473 Net cash (used in) generated from investing activities (1,849,648) 2,240,706 Cash flows from financing activities Proceeds from private placement 12b 7,898,821 - Share issue costs (626,812) - Proceeds from exercise of stock options 243,500 912,750 Cash received from business combinations - 130,037 Credit line - restricted cash for project financing (942,540) - Repayment of related party loans (159,947) (604,506) Repayment of bank overdraft, other financial liability and interest (322,291) (6,839) Net cash generated from financing activities 6,090,731 431,442 Effect of foreign exchange translation on cash 56,424 124,377 Increase (decrease) in cash and cash equivalents 218,613 (4,535,195) Cash and cash equivalents - Beginning of the year 5,632,045 10,167,240 Cash and cash equivalents - End of the year 5,850,658 5,632,045 Non-cash transactions Fair value of warrants and agents' warrants issued for share issue costs 129,773 - Acquisition of property, plant and equipment through accounts payable 151,856 5,926 Acquisition of intangible assets through accounts payable 609 - Acquisition of intangible assets using other financial liability 10-1,164,773 The accompanying notes are an integral part of these consolidated financial statements. Page 5 of 36
Consolidated Statements of Changes in Equity (Unaudited - prepared by Management) (expressed in Canadian dollars) Attributable to shareholders of the parent Noncontrolling interest Share capital Contributed Foreign currency Amount Value Warrants surplus translation reserve Deficit Total Deficit Total equity Note # $ $ $ $ $ $ $ $ Total Balance, September 30, 2012 76,146,776 42,157,760-4,524,398 - (26,858,966) 19,823,192-19,823,192 Net loss for the year - - - - - (7,777,400) (7,777,400) (112,565) (7,889,965) Contributions from non-controlling interest partners - - - - - - - 16,337 16,337 Effects of foreign currency translation - - - - 101,695-101,695 15,871 117,566 Shares issued on exercise of options 12b 1,870,000 1,586,095 - (673,345) - - 912,750-912,750 Stock-based compensation 12d - - - 1,118,030 - - 1,118,030-1,118,030 Balance, September 30, 2013 78,016,776 43,743,855 - - 4,969,083 101,695 (34,636,366) 14,178,267 (80,357) 14,097,910 Net loss for the year - - - - - (6,398,328) (6,398,328) (591,471) (6,989,799) Contributions from non-controlling interest partners - - - - - - - 921,733 921,733 Effects of foreign currency translation - - - - 225,204-225,204 58,575 283,779 Shares issued on private placements 12b 5,645,983 7,262,511 636,309 - - - - 7,898,820-7,898,820 Share issue costs - (576,623) (50,189) - - - - (626,812) - (626,812) Shares issued on exercise of options 12b 710,000 534,412 - (290,912) - - 243,500-243,500 Stock-based compensation 12d - - - - 608,398 - - 608,398-608,398 Balance, September 30, 2014 84,372,759 50,964,155 586,120 5,286,569 326,899 (41,034,694) 16,129,049 308,480 16,437,529 The accompanying notes are an integral part of these consolidated financial statements. Page 6 of 36
1. Nature of operations EnWave Corporation ( EnWave ) was incorporated under the Canada Business Corporations Act on July 14, 1999. The Company s principal business is the design, construction, marketing and sales of food and biomaterial processing machines that utilize drying technologies which create dehydrated food and health products. The registered office of the Company is: # 2900 550 Burrard Street, Vancouver, BC V6E 0A3, Canada. On October 17, 2012, the Company acquired an 86.5% controlling interest in the shares of Hans Binder Maschinenbau GmbH ( Binder ) located in Germany, a manufacturer of dehydration equipment. The principal activities of Binder are designing, manufacturing and selling of dehydration equipment, and its assets, liabilities, and results of operations have been consolidated from October 17, 2012. On December 3, 2012, the Company incorporated a US subsidiary, EnWave USA Corporation ( EnWave USA ), for the purpose of entering into a partnership agreement on February 26, 2013, to establish NutraDried LLP ( NutraDried ) in the US. NutraDried develops, manufactures, markets and sells certain dehydrated products under the Company s nutradried trademark through North America. EnWave, Binder and NutraDried are collectively referred to as the Company. The Company has not yet realized profitable operations and it has relied on non-operational sources of financing to fund operations and as at September 30, 2014, the Company had a consolidated working capital of approximately $6.3 million and consolidated accumulated deficit of approximately $41 million. The Company s ability to achieve its objectives, meet its ongoing obligations and recover its investments in patents and other assets will depend on management s ability to successfully execute its business plan, achieve profitable operations and obtain additional financing, if or when required. There is no assurance that these initiatives will be successful; see note 16 on liquidity risk. 2. Basis of preparation Statement of compliance These annual consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standard Board ( IASB ). These consolidated financial statements were approved by the Board of Directors for issue on December 17, 2014. Critical accounting estimates The preparation of consolidated financial statements requires management to use estimates and assumptions about the future. Estimates are continuously evaluated and are based on management s experience and other factors, including expectations about future events that are believed to be reasonable under the circumstances. The following discusses the most significant accounting estimates made in the preparation of these consolidated financial statements: Page 7 of 36
Revenue recognition The recognition of revenue as of the consolidated statement of financial position date requires the management to make significant estimates primarily relating to the percentage-ofcompletion method to determine the amount of work performed. The stage of completion is measured by reference to the actual contract costs incurred as a percentage of total estimated costs for each contract. Impairment of goodwill and intangible assets The Company tests annually whether goodwill is impaired, in accordance with the accounting policy stated in note 3. The recoverable amounts of cash-generating units have been determined based on value-in-use calculations. These calculations require the use of estimates. If the budgeted net income used in the value-in-use calculation had been 10% lower than management s estimates at September 30, 2014, there would be no change to the impairment assessment. Other financial liability - Royalties payable Note 10 sets out the terms of license agreements for the sub-licensing rights to the MIVAP ( Microwave Vacuum Processor ) technology. The fair value of the liability on initial recognition was added to the cost of the intangible asset at the date of purchase. Subsequent changes in the liability is measured at amortized cost and recorded in the consolidated statement of comprehensive loss. The Company estimated the liability at September 30, 2014 to be $1,202,596 (2013: $1,435,847) is based on the present value of minimum royalties payable to INAP GmbH (Industrie-Anlagen-Planung INAP ), a private German company, over the life of the agreement discounted at rates of 6%. The potential variability of this estimate is significant given that it will be highly sensitive to the number of additional sub-licensees and their ultimate use of the technology. Given the length of the 5-10 year term over which the royalty is calculated, and the Company's lack of control over the licensee's actual and ultimate use of the technology which gives rise to the royalty, the Company cannot practicably determine how current estimates may change. These amounts are assessed annually. Critical judgements in applying the entity s accounting policies Leases Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease. The Company leases certain property, plant and equipment and assesses whether substantially all the risks and rewards of ownership rests with the Company or the customer. When assessed that substantially all the risks and rewards of ownership rests with the Company the Company records the lease payments earned; however, when assessed as a finance lease, the amounts are capitalized at the lease s commencement at the lower of the fair value of the leased property and the present value of the minimum lease payments. Page 8 of 36
Revenue recognition The Company recognises revenue for sales of machines to certain customers. The buyer has the right to return the goods if the machine is not operating as prescribed. The Company believes that, based on past experience with similar sales, the dissatisfaction rate will not exceed 1%. The Company has therefore recognised revenue on this transaction with a corresponding provision against revenue for estimated returns. If the estimate changes by 1%, revenue will be reduced by $33,600. 3. Significant accounting policies The significant accounting policies used in the preparation of these consolidated financial statements are as follows: Basis of measurement The consolidated financial statements have been prepared under the historical cost convention. Principles of consolidation and non-controlling interest Subsidiaries are all entities over which the Company has the power to govern the financial and operating policies. Subsidiaries are consolidated from the date on which control is transferred to the Company. They are de-consolidated from the date that control ceases. The Company recognises any non-controlling interest in an acquisition-by-acquisition basis at the non-controlling interest s proportionate share of the recognised amounts of acquiree s identifiable net assets. Acquisition-related costs are expensed as incurred. The Company s subsidiaries are: Hans Binder Maschinenbau GmbH, of Marzling, Germany. EnWave USA Corporation, incorporated in the state of Delaware, USA, in turn a majority partner in NutraDried. Inter-company balances and transactions, including income and expenses arising from intercompany transactions, are eliminated in preparing the consolidated financial statements. Foreign currency translation (a) Functional and presentation currency Items included in the financial statements of each of the Company s entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency). These consolidated financial statements are presented in Canadian dollars, which is the Company s presentation currency. (b) Transactions and balances Foreign currency transactions are translated into the functional currency of each entity using the exchange rates prevailing at the dates of the transactions or valuation where items are re-measured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at period-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the consolidated statement of loss and comprehensive loss. Page 9 of 36
(c) Consolidation The results and financial position of all the companies that have a functional currency different from the presentation currency are translated into the presentation currency as follows: i) assets and liabilities for each statement of financial position consolidated and presented are translated at the closing rate at the date of that statement of financial position; ii) iii) income and expenses are translated at average exchange rates; and all resulting exchange differences are recognized in other comprehensive income (loss) and accumulated in other comprehensive income within equity. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. Exchange differences arising are recognized in other comprehensive income (loss). Cash and cash equivalents Cash and cash equivalents include cash on hand, deposits held with banks, and other shortterm highly liquid investments with original maturities of three months or less. Restricted cash Restricted cash is cash that has been pledged as collateral for the Company s credit card and as bank guarantees for some of Binder s projects. Financial instruments The Company classifies its financial instruments based on the purpose for which the financial assets and liabilities were acquired. Management determines the classification of the financial assets and liabilities at initial recognition. The Company has the following types of financial assets and liabilities: a) 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 trade and other receivables and cash and cash equivalents, restricted cash and short-term investments, and are included in current assets due to their short-term nature. Loans and receivables are initially recognized at the amount expected to be received and subsequently carried at amortised cost using the effective interest rate method with gains and losses recorded in the consolidated statement of loss. b) Other liabilities: other liabilities carried at amortized cost and include trade and other payables, amounts due to related parties and other financial liability. They are initially recognized at the amount required to be paid, and subsequently measured at amortized cost using the effective interest rate method with gains or losses recorded in the consolidated statement of loss. Page 10 of 36
Impairment of financial and non-financial assets Financial assets The Company assesses its financial assets which include loans and receivables at each reporting date to determine whether there is any objective evidence that they are impaired. A financial asset is considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset. An impairment loss in respect to loans and receivable is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the original effective interest rate. All impairment losses are recognized in the statement of loss and comprehensive loss. Non-financial assets The carrying amounts of the Company's non-financial assets, which include goodwill and intangible assets (which are separately assessed), are reviewed each reporting date to determine whether there are any events or changes that are indicators of impairment. If such indication exists, then the asset's recoverable amount is estimated. For the purpose of impairment testing, assets are grouped together in the smallest group of assets that generates cash inflows from continuing use that is largely independent of the cash inflows of other assets or groups of assets (the cash-generating unit or CGU ). The recoverable amount of an asset or CGU is the greater of its value in use and fair value less costs to sell. In assessing value in use, future discounted cash flows are estimated. An impairment loss is recognized if the carrying amount of an asset or its CGU exceeds its estimated recoverable amount. Impairment losses are recognized in the statement of loss and comprehensive loss. The Company evaluates impairment losses for potential reversals (other than goodwill) when events or circumstances warrant such consideration. Inventories Inventories comprise raw materials, parts and equipment. Inventories are valued at the lower of cost and net realizable value. Cost is determined using the weighted average basis. Net realizable value represents the estimated selling price for inventories less all estimated costs of completion and costs necessary to make the sale. 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 that 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. Repairs and maintenance costs are charged to the statement of loss and comprehensive loss during the period in which they are incurred. Depreciation is provided using the straight-line method at the following annual rates: Page 11 of 36
Office plant and equipment Manufacturing plant and equipment Leasehold improvements 3 to 5 years 3 to 10 years Shorter of the lease term and useful life 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. The carrying amount of a replaced part is derecognized when replaced. Residual values, method of depreciation and useful lives of the assets are reviewed annually and adjusted if appropriate. Intangible assets The Company s intangible assets are stated at cost less accumulated amortization and include acquired licensed technology with finite useful lives. These assets are capitalized and amortized on a straight-line basis over their expected useful lives as follows: Computer software Acquired patents and licensed technologies 3 years Over the period of the agreement of 5 to 10 years The estimated useful life and amortization method are reviewed at the end of each reporting period, with the effect of any changes in estimate being accounted for on a prospective basis. The Company evaluates the recoverability of intangible assets based on the expected utilization of the underlying technologies. Provisions Provisions are recognized when the Company has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation, and the amount has been reliably estimated and discounted where the effect is material. The Company s provisions include estimates in relation to warranties offered on sales of the machines as well as an estimation of the right of return. Share capital Incremental costs directly attributable to the issuance of shares are recognized as a deduction from equity. Loss per share Basic loss per share are calculated by dividing the net loss/income for the period attributable to equity owners of the Company by the weighted average number of common shares outstanding during the period. Diluted loss per share is calculated by adjusting the weighted average number of common shares outstanding for dilutive instruments. The Company s potentially dilutive common shares comprise stock options granted and warrants. Page 12 of 36
Revenue recognition Construction contracts The Company designs and builds equipment to meet customers specific needs. A construction or engineering contract is defined by International Accounting Standards ( IAS ) 11, Construction Contracts, as a contract specifically negotiated for the construction of an asset. When the outcome of a construction contract can be estimated reliably and it is probable that the contract will be profitable, contract revenue is recognized over the period of the contract by reference to the stage of completion. Contract costs are recognized as expenses by reference to the stage of completion of the contract activity at the end of the reporting period. When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognized as an expense immediately. When the outcome of a construction contract cannot be estimated reliably, contract revenue is recognized only to the extent of contract costs incurred that are likely to be recoverable. The Company uses the percentage-of-completion method to determine the appropriate amount to recognize in a given period. The stage of completion is measured by reference to the contract costs incurred up to the end of the reporting period as a percentage of total estimated costs for each contract. Costs incurred in the year in connection with future activity on a contract are excluded from contract costs in determining the stage of completion. On the statement of financial position, the Company reports the net contract position for each contract as either an asset or a liability. A contract represents an asset (contracts in progress) where costs incurred plus recognized profits (less recognized losses) exceed progress billings; a contract represents a liability (customer deposits and deferred revenues) where the opposite is the case. Sales of products Sales of products are recognized when the significant risks and rewards of ownership have been transferred to the customer, the sales price and costs can be measured reliably, and it is probable that the economic benefits will flow to the Company. Revenue is adjusted for the value of expected returns. These criteria are generally met at the time the product is shipped, delivered to the customer, title and risk have passed to the customer and acceptance of the product, when contractually required, has been obtained. Revenue is measured based on the price specified in the sales contract and net of discounts at the time of sale. Royalty and commission income Royalty and commission income are recognized when there is a binding right to receive such payments pursuant to the terms of the relevant agreement. Research and development Research costs are expensed as incurred to the statement of loss and comprehensive loss. Development costs are expensed as incurred unless capitalization criteria under IFRS are met for deferral and amortization. Research and development expenses are net of research and development contributions from potential customers for product tests. Page 13 of 36
Employee benefits Pension plans As a result of the acquisition of Binder in fiscal 2013, the Company is now committed to two separate pension plans for the benefit of the previous owners who have continued to be employees of the Company. The pension plans are generally funded through payments to insurance companies. The defined contribution plan requires the Company to pay a fixed monthly contribution in accordance with a contractual agreement and has no further obligations once these payments have been made. The defined benefit plan commits the Company to provide an amount of pension benefit to be paid upon retirement dependent on age and years of service of the two individuals included in the plan. The arrangement is funded through payments to an insurance company and the Company recognizes a liability for the cost of pensions using the projected unit credit method. Actuarial gains and losses arising from expense adjustments and changes in actuarial assumptions are charged or credited to equity as other comprehensive loss in the period in which they arise. Past service costs are recognized immediately into income. Stock-based compensation The Company grants stock options to certain employees and directors of the Company as equity settled, stock-based compensation. Stock options vest equally over the terms approved by the Board of Directors for each specific grant, which is usually in three equal tranches every six months over an 18-month period. Each tranche in an award is considered a separate award with its own vesting period and grant date fair value. Expected volatility is computed based on the Company s historical share prices. The fair value of each tranche is measured at the date of grant using the Black-Scholes option pricing model. Compensation expense is recognized over the tranche s vesting period by increasing contributed surplus based on the number of awards expected to vest. This number is reviewed at least annually, with any change in estimate recognized immediately in compensation expense with a corresponding adjustment to contributed surplus. Current and deferred income taxes Income tax comprises current and deferred tax. Income tax is recognized in the statement of loss and comprehensive 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 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 statement of financial position 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. Deferred income tax is provided on temporary differences arising on investments in subsidiaries and associates, except, in the case of subsidiaries, 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. Deferred income tax assets and liabilities are presented as non-current. Page 14 of 36
Comparatives Certain amounts are reclassified to conform with the presentation adopted in the current year. Accounting standards and amendments issued and adopted in the current year or not yet adopted The Company adopted the following new and revised accounting standards during the year: a) Amendments to IAS 1 Presentation of Items of Other Comprehensive Income: The amendments retain the option to present profit or loss and other comprehensive income either in one continuous statement or in two separate but consecutive statements. Items of other comprehensive income are required to be grouped into those that will and will not be subsequently reclassified to income. Tax on items of other comprehensive income is required to be allocated on the same basis. The measurement and recognition of items of income and other comprehensive income are not affected by the amendments. The Company has classified all items of other comprehensive income as those that may subsequently be reclassified to income. b) IFRS 10 Consolidated Financial Statements: IFRS 10 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. The application of IFRS 10 did not have a material impact on the consolidated financial statements. c) IFRS 12 Disclosure of Interests in Other Entities: IFRS 12 is a disclosure standard and is applicable to entities that have interests in subsidiaries, joint arrangements, associates or unconsolidated structured entities. IFRS 12 establishes disclosure objectives and specifies minimum disclosures that entities must provide to meet those objectives. The objective of IFRS 12 is that entities should disclose information that helps users of financial statements evaluate the nature of and risks associated with its interests in other entities and the effects of those interests on their financial statements. The application of IFRS 12 did not have a material impact on the consolidated financial statements. Annual Improvements to IFRS The IASB issued narrow-scope amendments to various standards as part of its annual improvements process in December 2013. Most amendments will be applicable prospectively for annual periods beginning on or after October 1, 2014. Amendments were made to clarify the following in their respective standards: Definition of vesting condition in IFRS 2, Share-based Payment; Classification and measurement of contingent consideration; and scope exclusion for the formation of joint arrangements in IFRS 3, Business Combinations; Disclosures on the aggregation of operating segments in IFRS 8, Operating Segments; Measurement of short-term receivables and payables; and scope of portfolio exception in IFRS 13, Fair Value Measurement; and Definition of related party in IAS 24, Related Party Disclosures. Page 15 of 36
The Company intends to adopt these amendments where relevant in its consolidated financial statements for the year commencing October 1, 2014; the extent of the impact of adoption of the amendments has not yet been determined. a) IFRS 9 - Financial Instruments (IFRS 9) IFRS 9 is tentatively effective for years commencing on or after January 1, 2018, and will replace IAS 39, Financial Instruments: Recognition and Measurement. Under IFRS 9, financial assets will be classified and measured based on the business model in which they are held and the characteristics of the associated contractual cash flows. IFRS 9 also includes a new general hedge accounting standard which will better align hedge accounting and risk management. The Company intends to adopt IFRS 9 in its consolidated financial statements for the year commencing January 1, 2018; the extent of the impact of adoption of the amendments has not yet been determined. b) IFRS 15 - Revenue from Contracts with Customers (IFRS 15) IFRS 15 is effective for years commencing on or after January 1, 2017, and replaces IAS 11, Construction Contracts; IAS 18, Revenue; International Financial Reporting Interpretations Committee (IFRIC) IFRIC 13, Customer Loyalty Programmes; IFRIC 15, Agreements for the Construction of Real Estate; IFRIC 18, Transfer of Assets from Customers; and Standards Interpretations Committee (SIC) 31, Revenue - Barter Transactions Involving Advertising Services. The standard contains a single model that applies to contracts with customers and two approaches to recognizing revenue: at a point in time or over time. The model features a contract-based five-step analysis of transactions to determine whether, how much and when revenue is recognized. New estimates and judgemental thresholds have been introduced, which may affect the amount and/or timing of revenue recognized. The Company intends to adopt IFRS 15 in its consolidated financial statements for the year commencing October 1, 2017. The extent of the impact of adoption of the standard has not yet been determined. 4. Business combinations a) Binder acquisition On October 17, 2012, EnWave acquired an 86.5% controlling interest in Binder for cash consideration of $2,546,168. The transaction has been accounted for as a business combination. Binder was incorporated in Germany on November 10, 1982, and expertise in constructing high quality food processing machines was complementary to the Company s principal business of marketing and selling machines utilizing its technology. The following table summarizes the fair value of assets acquired and obligations assumed at the acquisition date. The excess of acquisition cost over the net identifiable assets acquired represents goodwill. Page 16 of 36
Cash consideration paid on acquisition 2,546,168 Recognized amounts of identifiable assets acquired and liabilities assumed: Cash and cash equivalents 2,548,206 Value of future and potential contracts 478,000 Trade and other receivables and prepaids 345,416 Inventories 218,793 Amounts due from customers on contracts 182,959 Property, plant and equipment and intangible assets 38,523 Deferred tax asset (119,500) Bank overdraft (690,110) Customer deposits / Deferred revenue (809,227) Amounts due to related parties (1,507,419) Trade and other payables and warranty provision (1,818,935) Total identifiable net assets at fair value (1,133,294) Non-controlling interest 150,956 Goodwill 3,528,506 Purchase consideration transferred 2,546,168 The non-controlling interest is based on the proportionate interest in the recognized amounts of the assets and liabilities. Goodwill arose on this business combination principally because of the following: (1) The synergies of combining Binders manufacturing expertise with the Company s technology and marketing expertise; (2) an established management and employed work force with many years of experience working for Binder. Subsequent to the 2013 fiscal year end, the Company finalized the allocation of the purchase price to the fair values of assets and liabilities acquired with no changes in the amounts reported. Goodwill Euro Cdn $ Balance, October 17, 2012 2,771,621 3,528,506 Adjustment for foreign exchange 275,000 Balance, September 30, 2013 2,771,621 3,803,506 Adjustment for foreign exchange 119,169 Balance, September 30, 2014 2,771,621 3,922,675 In connection with this business combination, during the year ended September 30, 2014, the Company incurred $Nil (2013 - $348,998) of acquisition costs. These costs were recognized on the consolidated statement of loss and comprehensive loss. Page 17 of 36
b) NutraDried On February 27, 2013 the Company contributed an initial investment of $300,000 to the NutraDried, for a 70% controlling interest at the outset while the non-controlling interest contributed $130,000 During the year ended September 30, 2013, the Company also entered into a royaltybearing License with NutraDried for the right to use Radiant Energy Vacuum (REV ) technology. NutraDried will pay the Company a revenue-based royalty of between 5% and 10% based upon future revenues. The non-controlling interest is based on the non-controlling interest s proportionate interest in the recognized amount of assets, liabilities, income or loss. Pursuant to the Partnership Agreement, the other Partner was granted an option by the Partnership to subscribe for additional interests increasing its ownership to no greater than 49%. On November 21, 2013 this option was exercised in full with the other Partner purchasing an additional 19% interest for $160,236, reducing the Company s interest to 51%. 5. Cash and cash equivalents and restricted cash As at September 30, 2014, cash and cash equivalents consist of $1,214,628 (2013 - $509,220) held in current accounts, and $4,636,030 (2013 - $5,122,825) held in short term investments such as GICs with maturity dates of less than or equal to three months and cashable within 90 days. Of the total restricted cash of $971,289 (2013 - $28,749), $28,749 is used as collateral for a Company credit card, and EUR 916,525 ($916,443), was held as guarantees for collateral.. The company has a credit line of EUR 100,000 ($141,530) (2013 EUR 100,000 ($139,200) which bears an interest rate of 8.55%, the full amount of the facility was available at September 30, 2014 (EUR 62,103 ($86,447) was available at September 30, 2013). The company also has guarantee facilities available of EUR 2M (2013 - Nil) and utilized EUR 1,163,820 at September 30, 2014 (2013 - Nil). These facilities are collateralized by amounts held as restricted cash totalling EUR 647,525 (Cad $942,500) (2013 Nil) and a mortgage by a related entity for EUR 766,938 (2013 1,533,875) 6. Trade receivables The following amounts are receivables from customers in the normal course of business: September 30, 2014 September 30, 2013 $ $ Trade receivables 1,739,749 713,194 Less: Allowance for doubtful accounts (78,904) (16,149) 1,660,845 697,045 Page 18 of 36
7. Prepaids and other receivables: 2014 2013 $ $ Prepaid expenses 164,286 356,791 Indirect tax receivables 18,838 74,110 Receivables from related parties and other 627,828 1,568 Provision 24,117-835,069 432,469 The increase in receivables is related to a pending contribution to NutraDried from the minority partner. 8. Inventory Inventories consist of the raw materials used in the construction of dehydration equipment and food products available for sale. September 30, 2014 September 30, 2013 $ $ Machinery: parts and work in progress 980,259 354,402 Food products 237,387 160,554 Packaging supplies 25,197-1,242,843 514,956 Page 19 of 36
9. Property, plant and equipment Office plant and equipment Manufacturing plant and equipment Leasehold improvements Total $ $ $ $ At October 1, 2012 Cost 95,180 745,376 195,291 1,035,847 Accumulated depreciation (56,039) (487,183) (86,574) (629,796) Net book value 39,141 258,193 108,717 406,051 Year ended September 30, 2013 Opening net book value 39,141 258,193 108,717 406,051 Acquired through business combination 28,447 25,250-53,697 Additions 85,677 125,845 234,900 446,422 Disposals (4,951) (926) - (5,877) Depreciation (34,062) (144,665) (60,969) (239,696) Currency translation adjustments 2,165 1,670 (8) 3,827 Closing net book value 116,417 265,367 282,640 664,424 At September 30, 2013 Cost 204,353 895,545 430,191 1,530,089 Accumulated depreciation (87,937) (630,178) (147,550) (865,665) Closing net book value 116,416 265,367 282,641 664,424 Year ended September 30, 2014 Opening net book value 116,416 265,367 282,642 664,425 Additions 20,753 2,358,950 89,886 2,469,589 Disposals - (2,160) - (2,160) Depreciation (34,192) (188,092) (97,049) (319,333) Currency translation adjustments 2,169 50,427 12,050 64,646 Closing net book value 105,146 2,484,492 287,529 2,877,167 At September 30, 2014 Cost 225,105 3,252,335 520,077 3,997,517 Accumulated depreciation (119,959) (767,843) (232,548) (1,120,350) Net book value 105,146 2,484,492 287,529 2,877,167 Page 20 of 36
10. Intangible assets Acquired patents and technology licenses Computer software Total $ $ $ At October 1, 2012 Cost 7,886,839 33,850 7,920,689 Accumulated amortization (1,760,220) (29,849) (1,790,069) Net book value 6,126,619 4,001 6,130,620 Year ended September 30, 2013 Opening net book value 6,126,619 4,001 6,130,620 Acquired through business combination - 6,330 6,330 Additions (2) 1,648,398 3,568 1,651,966 Disposals - (10) (10) Amortization (1,896,260) (9,042) (1,905,302) Currency translation adjustments - 413 413 Closing net book value 5,878,757 5,260 5,884,017 At September 30, 2013 Cost 9,535,237 44,330 9,579,567 Accumulated amortization (3,656,480) (39,070) (3,695,550) Net book value 5,878,757 5,260 5,884,017 Year ended September 30, 2014 Opening net book value 5,878,757 5,260 5,884,017 Additions (2) 10,381 28,125 38,506 Disposals - - - Amortization (1,418,322) (13,555) (1,431,877) Currency translation adjustments 490 (505) (15) Closing net book value 4,471,306 19,325 4,490,631 At September 30, 2014 Cost 9,545,618 72,455 9,618,073 Accumulated amortization (5,074,312) (53,130) (5,127,442) Net book value 4,471,306 19,325 4,490,631 (1) On December 6, 2010, the Company entered into an Asset Purchase Agreement (the Original INAP APA) to acquire the patents and know-how for the MIVAP vacuum microwave dehydration technology. The license covered the US and North American rights and cost $1,607,500 in cash and common shares. By virtue of the business combination summarized in note 4, INAP became a related party as its shareholders are also now management of the Company. Page 21 of 36
Pursuant to the INAP APA, a portion of the license or royalty fees collected from the Company s customers who purchase MIVAP technology is remitted to INAP; in the case of North American food applications the percentage is 25%, and for non-food applications in North American markets is 12.5%. For non-north American usage, the Company remits to INAP 50% of license or royalty fees collected from food applications, and 25% for non-food. (2) On October 25, 2012, the Company entered into a Patent and Know-how Licensing agreement with INAP, to acquire the worldwide rights of INAP s MIVAP technology. Pursuant to this agreement the Company agreed to pay INAP 50% of the royalties earned under the agreement, The Company is committed to minimum royalties during the first five years of the agreement totalling EUR 1,356,465, of which EUR 332,293 equivalent to $461,408 (2013 EUR 140,217 equivalent to $187,246) have been paid to date. The acquired intangible was recorded at the fair value of the minimum royalty amounts and subsequently at each reporting date at amortised cost less repayments. At September 30, 2014 the outstanding balance of the liability was $1,202,596 (2013: $1,435,847). The corresponding intangible asset is being amortized over the useful life of the technology. On March 31, 2011, the Company entered into a License Termination and Patent Assignment Agreement ( the UBC Patent Agreement ) to acquire all patents and know-how previously licensed from the University of British Columbia ( UBC ) for Radiant Energy Vacuum ( REV ) dehydration technology ( the Technology ). The cost of acquisition was $6,185,589 in a combination of cash and common shares of the Company. As at September 30, 2014, the remaining amortization period for intangible assets range from 1 to 7 years (September 30, 2013 2 to 8 years). 11. Trade and other payables September 30, 2014 September 30, 2013 $ $ Trade payables 802,380 384,782 Pension accrual 173,202 170,830 Personnel related accruals other than related parties 180,551 269,408 Other accrued liabilities 241,191 221,449 VAT and other taxes payable 249,212 - Provision for warranty 32,127 55,680 1,678,663 1,102,149 At September 30, 2014 the Company utilised $Nil (2013; $38,558) of its provision related to sale of its equipment. 12. Share capital a) Authorized: Unlimited number of voting common shares without par value. Issued and outstanding: 84,372,759. Unlimited number of voting preferred shares, issuable in series. Issued and outstanding: Nil. Page 22 of 36