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Good Group Private Enterprise Inc.

Illustrative financial statements for the year ended 31 December 2012

Based on Accounting Standards for Private Enterprises

in issue at 31 October 2012

To our clients and other friends

This publication contains an illustrative set of consolidated financial statements for Good Group

Private Enterprise Inc. [“GGPE”] as of and for the year ended 31 December 2012. These

illustrative consolidated financial statements have been prepared in accordance with Part II of the

CICA Handbook – Accounting Standards for Private Enterprises [“ASPE”]. These consolidated

financial statements have been prepared subsequent to the first-time adoption of ASPE and do not

include the opening consolidated balance sheet and transitional disclosures required when an entity

prepares its first set of financial statements in accordance with ASPE. Refer to the 31 December

2011 GGPE consolidated financial statements for an illustrative set of consolidated financial

statements including the opening balance sheet and transitional disclosures required when an entity

prepares its first set of financial statements in accordance with ASPE which should be read in

conjunction with these.

GGPE is a manufacturer, re-seller and servicer of specialized industrial equipment. It has

operations in Canada and the United States. The functional currency of the parent company and the

presentation currency of the financial statements is the Canadian dollar. These consolidated

financial statements include a number of circumstances which might typically be encountered by a

private enterprise, such as contingencies and asset impairments.

GGPE has prepared its financial statements on a comparative basis; that is, amounts and other

disclosures for the prior period are included for comparison with the financial statements of the

current period. As such, the GGPE’s auditors could give an opinion on all periods presented (i.e.

the balance sheets as at 31 December 2012 and 2011 and for each of the years in the two-year

period ended 31 December 2012).

It is important to remember that these illustrative ASPE financial statements do not encompass all

aspects of financial reporting that could be encountered by a private enterprise in Canada.

Furthermore, this publication is not designed to reflect disclosure requirements that may apply to

regulated or specialized industries. For additional information, readers should refer to the Ernst

and Young ASPE Presentation and Disclosure Checklist in conjunction with the ASPE standards

themselves to fully understand the implications of preparing financial statements.

For more information on ASPE, please contact your Ernst & Young advisor.

Consolidated Financial Statements

Good Group Private Enterprise Inc. 31 December 2012


CONSOLIDATED BALANCE SHEET 1400.09, 10, 12

1590.18

As at 31 December

1500.04

2012 2011

$ $

ASSETS 1510.02

Current assets 1521.03 [a]; 1510.03-04

Cash and cash equivalents 236,367 69,450 1521.04 [a]

Investments [note 3] 603,060 271,060 1521.04 [e]; 1505.05

Accounts receivable [note 4] 840,499 268,500 1521.04 [b]

Government assistance receivable [note 5] 80,000 100,000 1521.04 [c]; 3800,31 [a]

Inventories [note 6] 559,900 425,000 1521.04 [f]

Foreign currency derivatives [note 7] 6,000 — 1521.04 [e]; 3856.38 [b]

Prepaid expenses 175,723 140,000 1521.04 [d]; 1510,06

Future income tax assets 73,000 6,000 1521.04 [m]; 3465,81

2,574,549 1,280,010

1521.03 [b]

Investment in GGSII 182,000 194,000 1521.04 [h] [ii]; 3051.26 [c], 28

Foreign currency derivatives [note 7] — 12,000 1521.04 [e]; 3856.38 [b]

Loan to related party [note 8] 191,340 187,011 3856.38 [a]

Property, plant and equipment [note 9] 1,660,000 1,968,500 1521.04 [i]

Assets under capital leases [note 10] 187,500 250,000 3065.21

Intangible assets [note 11] 112,000 128,000 1521.04 [j]; 3064.90

Goodwill [note 12] 434,000 494,000 1521.04 [k]; 3064.88

Future income tax assets 133,000 136,000 1521.04 [m]; 3465.81

5,474,389 4,649,521 1521.03 [c]

LIABILITIES AND EQ UITY

Current liabilities 1521.03 [d];1510.02;1510.08;1510.11

Credit facility [note 13] — 117,127 1521.05 [a]

Accounts payable and accrued liabilit ies [note 14] 765,215 418,715 1521.05 [a]

Income taxes payable 50,000 50,000 1521.05 [a]

Contingent consideration payable [note 15] 140,000 — 1521.05 [h]

Warranty provision [note 16] 35,050 30,000 1521.01

Foreign currency derivatives [note 7] 11,000 — 1521.05 [h]

Obligations under capital leases [note 17] 70,415 64,013 1521.05 [d];3065.23, 21

Long-term debt [note 18] 214,648 201,846 1521.05 [f]; 1510.12

Future income tax liabilit ies 8,000 17,000 1521.05 [b]; 3465.81

1,294,328 898,701

1521.03 [e]

Contingent consideration payable [note 15] — 140,000 1521.05 [h]

Warranty provision [note 16] 57,000 55,000 1521.01; 3065.21

Obligations under capital leases [note 17] 162,658 233,073 1521.05 [d]; 3065.21, 22

Long-term debt [note 18] 991,858 869,090 1521.05 [f]

Asset retirement obligation [note 19] 367,443 353,455 1521.05 [g]; 3110.23 [b]

Accrued benefit liability [note 20] 235,000 260,000 1521.05 [e]

Due to related party [note 21] 50,000 —

Future income tax liabilit ies 46,000 42,000 1521.05 [b]; 3465.81

3,204,287 2,851,319 1521.03 [f]

Equity [note 23] 1521.06

Share capital

Common shares 756,750 606,750 3251.05 [c]

Redeemable preferred shares - redemption 230,000 230,000 3251.05 [c]; 3856.23

amount − $230,000 3856.47 [c] [i]

Cumulative translation adjustment 25,000 15,000 3251.05 [f]

Contributed surplus [note 23] 125,000 40,000 3251.05 [b]

Retained earnings 1,046,352 813,452 3251.05 [a]

Shareholders' equity 2,183,102 1,705,202

Non-controlling interest 87,000 93,000 3251.05 [e]; 1602.13

Total equity 2,270,102 1,798,202 1521.03 [g]

5,474,389 4,649,521 1521.03 [h]

See accompanying notes

On behalf of the board


1400.09, 10, 12

1590.18

Year ended 31 December

2012 2011

$ $

REVENUES

Sale of equipment 2,780,000 2,750,000 3400.33

Services [note 25] 1,007,115 450,000 3400.33

Commission 1,050,000 500,000 3400.33

4,837,115 3,700,000 1520.04 [a]; 3400.29

EXPENSES

Cost of goods sold [notes 6 and 25] 2,202,874 1,820,816 1520.04 [o]

Selling [note 25] 310,000 300,000

General and administrative 467,375 450,399

Research and development 187,500 269,500

Government assistance [note 5] (60,000) (100,000) 1520.04 [c]; 3800.31 [a] [i] [ii]

Amortization of property, plant and 388,500 381,500 1520.04 [d];3061.26

Amortization of assets under capital leases 62,500 62,500

Amortization of intangibles assets 16,000 16,000 1520.04 [e]; 3064.91 [a] [ii]

Stock-based compensation 85,000 40,000 1520.04 [i]; 3870.67 [c]

Foreign exhange loss (gain) 10,000 (15,000) 1520.04 [j]

3,669,749 3,225,715

Income before undernoted items 1,167,366 474,285

Change in fair value of investments (70,000) 20,000 3856.52 [a]

Change in fair value of derivatives (17,000) (26,748) 3856.52 [a]

Property, plant and equipment impairment

loss [note 9] (40,000) — 1520.04 [f]

Goodwill impairment loss [note 12] (60,000) — 1520.04 [g]; 3064.89

Product liability provision [note 27] (350,000) — 1520.04 [m]

Termination benefits [note 14] (105,500) — 1520.04 [m]

Unusual expense – flood damage — (125,000) 1520.04 [m]

Interest and dividend income 18,829 4,329 3856.A5; 3856.52 [b]

Interest expense

Short-term (6,500) (8,546) 1520.04 [k]; 3856.52 [c]

Long-term [note 24] (180,295) (169,220) 1520.04 [k], [l]; 3856.52 [d];3065.75

Loss from investment in GGSII (12,000) (6,000) 1520.04 [b] [ii]; 3051.27 [c], 28

Income before income taxes 344,900 163,100

Income taxes expense (recovery)

Current 187,000 (1,500) 3465.89 [a]

Future (69,000) 14,000 3465.89 [b]

118,000 12,500 1520.04 [n]

Net income for the year 226,900 150,600 1520.03

Attributable to: 1602.14

Non-controlling interest (6,000) 18,000 3251.04 [a]

Owners of parent 232,900 132,600

226,900 150,600


CONSOLIDATED STATEMENT OF INCOME


1400.09, 10, 12

1590.18


2012 2011

$ $

Balance, beginning of year 813,452 680,852

Net income attributable to owners of parent 232,900 132,600 3251.04 [a]

Balance, end of year 1,046,352 813,452


RETAINED EARNINGSCONSOLIDATED STATEMENT OF


1400.09, 10, 12

1590.18


2012 2011 1540.03

$ $ 1540.12

OPERATING ACTIVITIES 1540.20

Net income 226,900 150,600

Non-cash items:

Amortization of property, plant and equipment 388,500 381,500

Amortization of assets under capital leases 62,500 62,500

Amortization of intangible assets 16,000 16,000

Amortization of discount on marketable securities (5,000) — 3856.A5

Amortization of financing fees and transaction costs 10,542 7,625

Amortization of interest-free loan deemed discount 20,556 20,556

Accretion of asset retirement obligation 13,988 13,455

Impairment of property, plant and equipment 40,000 —

Goodwill impairment loss 60,000 —

Future income taxes (recovery) expense (69,000) 14,000

Change in fair value of investments 70,000 (20,000)

Change in value of pension obligation (10,000) (20,000)

Stock-based compensation 85,000 40,000

Loss from investment in GGSI 12,000 6,000

Deemed interest income on related party loan (4,329) (4,329)

Net foreign exchange difference on cash and cash equivalents (4,800) (13,600) 1540.30

Net changes in non-cash working capital items (357,072) (190,333)

555,785 463,974

INVESTING ACTIVITIES 1540.12, 23

Acquisition of marketable securities (397,000) —

Acquisition of property, plant and equipment (120,000) (190,000)

(517,000) (190,000)

FINANCING ACTIVITIES 1540.12, 23

Decrease in credit facility (117,127) (120,418) 1540.10

Issuance of common shares 160,000 6,750

Payment of share issue costs (10,000) —

Advance from related party 200,000 —

Repayment of advance from related party (150,000) —

Issuance of long-term debt 350,000 —

Payment of long-term debt issue costs (17,500) —

Repayment of long-term debt (228,028) (216,387)

Repayment of capital lease obligations (64,013) (58,194)

123,332 (388,249)

Net foreign exchange difference on cash and cash equivalents 4,800 13,600 1540.30

Change in cash and cash equivalents during the year 166,917 (100,675)

Cash and cash equivalents, beginning of year 69,450 170,125

Cash and cash equivalents, end of year 236,367 69,450


CONSOLIDATED STATEMENT OF CASH FLOWS


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

31 December 2012

1

1590.18

1. DESCRIPTION OF BUSINESS

Good Group Private Enterprise Inc. [the “Company”] is incorporated under the Canada Business

Corporations Act. The Company is a manufacturer, re-seller and servicer of specialized industrial

equipment.

2. SIGNIFICANT ACCOUNTING POLICIES

These consolidated financial statements were prepared in accordance with Part II of the Canadian

Institute of Chartered Accountants [“CICA”] Accounting Handbook − Accounting Standards for

Private Enterprises, which sets out generally accepted accounting principles for non-publicly

accountable enterprises in Canada [“GAAP”] and include the significant accounting policies

described hereafter.

Principles of consolidation

The Company consolidates all subsidiaries, which are entities over which it has the continuing

power to determine the strategic operating, investing and financing policies without the co-

operation of others. These consolidated financial statements include the accounts of Good Group

Private Enterprise Inc. and the following subsidiaries:

Name Description

Functional

currency

Foreign currency

translation model Ownership

Good Group America Corp. Distribution US$ Self-sustaining 100%

Good Group 80pc Subsidiary Manufacturing C$ Integrated 80%

1505.03, 06, 08

1400.16

1590.29



31 December 2012

2

1590.18

2. SIGNIFICANT ACCOUNTING POLICIES [Cont’d]

Foreign currency transactions

Foreign currency transactions and integrated foreign operations

In the case of the Company’s foreign currency transactions and foreign operations that are

integrated in terms of financial and operational management, accounts stated in foreign currencies

are translated according to the temporal method. Under this method, monetary assets and liabilities

are translated into Canadian dollars at the exchange rate in effect at the balance sheet date, and

non-monetary items are translated at the prevailing historical rate at the time of the transaction.

Revenues and expenses arising from foreign currency transactions are translated into Canadian

dollars at the exchange rate in effect at the transaction date. The exchange gains or losses resulting

from the translation of monetary items are included in net income.

Self-sustaining foreign operations

The financial statements of foreign operations that are self-sustaining in terms of financial and

operational management are translated according to the current rate method using the foreign

currency as the measuring unit. Under this method, assets and liabilities are translated into

Canadian dollars at the exchange rate in effect at the balance sheet date, and revenues and

expenses are translated at the average exchange rate in effect during the period. The exchange

gains or losses resulting from the translation of the financial statements of these foreign operations

are presented as a cumulative translation adjustment under equity in the consolidated balance

sheet.

Cash and cash equivalents

Bank balances, including bank overdrafts with balances that fluctuate from positive to overdrawn,

are presented under cash and cash equivalents. Cash equivalents include highly liquid investments

that are readily convertible to known amounts of cash and that are subject to an insignificant risk

of changes in value. An investment normally qualifies as a cash equivalent when it has a short

maturity of approximately three months or less from the date of acquisition.

1505.03, 06, 08

1540.10 1540.43



31 December 2012

3

1590.18


Financial instruments

The Company initially records a financial instrument at its fair value except for a related party

transaction which is recorded at the carrying or exchange amount depending on the circumstances.

The Company recognizes its transaction costs in net income in the period incurred. However,

financial instruments that will not be subsequently measured at fair value are adjusted by the

transactions costs that are directly attributable to their origination, issuance or assumption.

Subsequently, the Company measures financial instruments as follows:

investments in equity instruments that are quoted in an active market at fair value;

all other investments in equity instruments at cost less impairment;

all other financial assets at amortized cost;

all financial liabilities at amortized cost; and

derivative contracts, not designated as a hedge, at fair value.

Investments

[i] Reported at fair value

Investments reported at fair value consist of equity instruments that are quoted in an active market,

as well as any investments in debt or equity securities that the Company designated to be

measured at fair value. Such designation must be made when the investment is initially

recognized. In the case of an equity instrument that was previously measured at fair value because

it was quoted in an active market, this designation may be made when the instrument ceases to be

quoted in an active market. This designation is irrevocable. Changes in fair value are recognized

in net income. Transaction costs to acquire or dispose of these securities are recognized in net

income in the period during which they are incurred.

[ii] Reported at cost or amortized cost

Investments in equity securities which are not quoted in an active market, as well as investments

in debt securities, whether or not quoted in an active market are initially recorded at fair value plus

financing fees and transaction costs that are directly attributable to their acquisition or disposal.

These equity securities are thereafter carried at cost and the debt securities are carried at amortized

cost using the straight-line amortization method.

Government assistance

Amounts received or receivable resulting from government assistance programs are reflected as

reductions of the cost of the assets or expenses to which they relate when the Company becomes

eligible to accrue them, provided there is reasonable assurance the benefits will be realized.

1505.03, 06, 08



31 December 2012

4

1590.18


Inventories

Inventories are measured at the lower of cost and net realizable value, with cost determined using

the weighted average cost method. Cost of work in progress and finished goods includes raw

materials, direct labour and indirect manufacturing costs.

Investment in GGSII

The Company uses the equity method to account for all entities over which it can exercise

significant influence over the strategic operating, investing and financing policies. The

determination of when significant influence is present is a matter of judgment. If the Company

holds less than 20% of the voting interest in the investee, it is presumed that it does not have the

ability to exercise significant influence, unless such influence is clearly demonstrated. The

Company has a 30% common share investment in Good Group Significant Influence Investment

Inc. [“GGSII”].

Property, plant and equipment and assets under capital leases

Property, plant and equipment are recorded at cost less any related government assistance. Assets

under capital leases are accounted for at cost, which corresponds to the present value of the

minimum lease payments.

Amortization of property, plant and equipment and assets under capital leases is calculated over

their estimated useful lives using the straight-line method and the following durations:

Building 25 years

Office furniture 10 years

Machinery and equipment 12 years

Computer hardware 4-6 years

Intangible assets

Intangible assets, except for those not subject to amortization, are amortized on the basis of their

estimated useful lives using the straight-line method and the following durations:

Patents 10 years

Customer lists 4-6 years

The Company has an intangible asset in the form of a license which is considered to have an

indefinite life and is therefore not amortized.

1505.03, 06, 08

3031.35 [a]

3051.29

3051.32

3061.24[c]

3065.73[c]

3064.91[a] [iii]



31 December 2012

5

1590.18


Intangible assets [Cont’d]

Expenditures incurred during the development phase of a new or substantially new product are

expensed as incurred.

Impairment

[i] Long-lived amortizing assets

Property, plant and equipment, assets under capital leases, and intangible assets subject to

amortization are reviewed for impairment whenever events or changes in circumstances indicate

that the carrying value of an asset may not be recoverable. Impairment is assessed by comparing

the carrying amount of an asset to be held and used with the total of the undiscounted cash flows

expected from its use and disposition. If the asset is impaired, the impairment loss to be

recognized is measured by the amount by which the carrying amount of the asset exceeds its fair

value, generally determined on a discounted cash flow basis. Any impairment results in a write-

down of the asset and a charge to income during the year. An impairment loss is not reversed if the

fair value of the related long-lived asset subsequently increases.

[ii] Indefinite life intangible assets

The license is tested for impairment whenever events or changes in circumstances indicate that the

carrying amount may exceed its fair value. Impairment is assessed by comparing the carrying

amount of the intangible asset with its fair value, generally determined on a discounted cash flow

basis. When the carrying amount of the intangible asset exceeds its fair value, an impairment loss

is recognized in an amount equal to the excess. An impairment loss is not reversed if the fair value

of the related long-lived asset subsequently increases.

[iii] Goodwill

Goodwill is not amortized but is instead tested for impairment if events or changes in

circumstances indicate that an impairment loss may have occurred. In the impairment test, the

carrying amount of the reporting unit, including goodwill, is compared with its fair value. When

the carrying amount of the reporting unit exceeds its fair value, a goodwill impairment loss is

recognized, up to a maximum amount of the recorded goodwill related to the reporting unit.

Goodwill impairment losses are not reversed.

1505.03, 06, 08

3064.91 [c]



31 December 2012

6

1590.18


Impairment [Cont’d]

[iv] Financial assets measured at cost and amortized cost

When there are indications of possible impairment, the Company determines if there has been a

significant adverse change to the expected timing or amounts of future cash flows expected from

the financial asset. The amount of any impairment loss is determined by comparing the carrying

amount of the financial asset with the highest of three amounts:

i. The present value of the cash flows expected to be generated by holding the asset,

discounted using a current market rate of interest appropriate to that asset;

ii. The amount that could be realized by selling the asset at the date of the consolidated

balance sheet; and,

iii. The amount expected to be realized by exercising its rights to any collateral held to secure

repayment of the asset, net of all costs necessary to exercise those rights.

Reversals are permitted, but the adjusted carrying amount of the financial asset shall be no greater

than the amount that would have been reported at the date of the reversal had the impairment not

been recognized.

Contingent consideration

The Company recognizes the fair value of any contingent consideration that is transferred to the

seller in a business combination on the date at which control of the acquiree is obtained. This

value is generally determined through a probability-weighted analysis of the expected cash flows.

Contingent consideration is classified as a liability or as equity on the basis of the definitions of an

equity instrument and a financial liability. The contingent consideration is payable in cash and,

accordingly, the Company classified its contingent consideration as a liability. It is not re-

measured and settlement at a different amount will be recognized in net income in the period

during which it is settled.

1505.03, 06, 08



31 December 2012

7

1590.18


Long-term debt

Long-term debt is initially measured at fair value, net of transaction costs and financing fees. It is

subsequently measured at amortized cost. Transaction costs and financing fees are amortized on a

straight-line basis.

With respect to the interest-free government loan, the difference between the fair value of the loan

and the cash received was accounted for as a reduction of property, plant and equipment.

With respect to the convertible debenture, the Company chose to assign a nil value to the equity

component and to allocate the entire proceeds, net of transaction costs and financing fees, to the

liability component.

Asset retirement obligation

The Company accounts for an asset retirement obligation in the period during which a legal

obligation associated with the retirement of a tangible long-lived asset is incurred and when a

reasonable estimate of this amount can be made. The asset retirement obligation is initially

measured at the best estimate of the expenditure required to settle the present obligation at the

consolidated balance sheet date, using a risk-free rate of interest for maturity dates that coincides

with the expected cash flows required to settle the obligation. A corresponding amount is added to

the carrying amount of the related asset and is then amortized over its useful life. Changes in the

liability due to the passage of time are recognized as an interest expense in net income with a

corresponding increase in the liability.

At each consolidated balance sheet date, the asset retirement obligation is reviewed and adjusted

to reflect the then current best estimate of the liability. Such adjustments may result from changes

in the assumptions used to estimate the undiscounted cash flows required to settle the obligation,

including changes in estimated probabilities, amounts and timing of settlement, as well as changes

in the legal requirements of the obligation and in the discount rate. These changes are recognized

as an increase or decrease in the carrying amount of the asset retirement obligation with a

corresponding adjustment to the carrying amount of the related asset.

3856.21, 22[a]

1505.03, 06, 08



31 December 2012

8

1590.18


Employee future benefits

The Company accounts for its defined benefit pension plan [the “Pension Plan”] using the

immediate recognition approach. In this approach, the Company recognizes the amount of the

accrued benefit obligation net of the fair value of the Pension Plan’s assets, adjusted for any

valuation allowance, in the consolidated balance sheet. Actuarial gains and losses and past service

costs are included in the cost of the Pension Plan for the year. The accrued benefit obligation is

determined based on an actuarial valuation report prepared for funding purposes. This report is

required to be prepared at least on a triennial basis by the applicable pension regulations. In years

where an actuarial valuation for funding purposes is not prepared, the Company estimates the

obligation. The Pension Plan’s assets are measured at fair value at the date of the consolidated

balance sheet.

Income taxes

The future income taxes method is used to account for income taxes. Under this method, future

income taxes are recognized for the future income tax consequences attributable to differences

between the financial statement carrying values and their respective income tax basis [temporary

differences]. Future income tax assets and liabilities are measured using substantively enacted

income tax rates expected to apply to taxable income in the years during which temporary

differences are expected to be realized or settled. The effect on future income tax assets and

liabilities of a change in tax rates is included in income in the period that includes the enactment

date. A valuation allowance is provided to the extent that it is more likely than not that future

income tax assets will not be realized.

Revenue recognition

[i] General criteria

Revenue is recognized when persuasive evidence of an arrangement exists; delivery of equipment

has occurred or services have been rendered; the selling price to the buyer is fixed or

determinable, and collection of the selling price is reasonably assured. Revenue is measured at the

fair value of the consideration received, excluding discounts, returns, and sales taxes. The specific

recognition criteria set out below must be met before revenue is recognized.

[ii] Sale of equipment and commission

Revenue from the sale of equipment is recognized when the significant risks and rewards of

ownership of the goods have passed to the buyer, which is usually upon the delivery of the goods.

The Company considers that due to the customized nature of this equipment, delivery is not

considered to have occurred until written customer acceptance of the equipment has been

obtained.

3461.155

3400.31

1505.03, 06, 08



31 December 2012

9

1590.18


Revenue recognition [Cont’d]

[ii] Sale of equipment and commission [Cont’d]

Occasionally, the Company consigns certain of its manufactured equipment to specialized

retailers. Revenues from consignment sales are recorded when the retailer has sold the equipment,

at which point the delivery criteria have been met.

When recognizing distribution revenues, the Company must consider whether revenues should be

reported on a gross or a net basis, which is based upon an assessment of whether it is acting as an

agent or a principal. When the Company has the primary responsibility for providing the

equipment [as evidenced by the Company’s responsibility for the customer’s ultimate acceptance

or rejection of the equipment], is at risk for the loss of the inventory at any point prior to sale or

during shipping, has the discretion to set prices and assumes all credit risk for the amount

receivable, distribution revenues are reported on a gross basis as a sale of equipment. When these

criteria are not met, the Company earns a fixed fee per completed equipment sale which is

recognized as commission revenue when the general criteria are met.

[iii] Services

Revenue from maintenance or repair service contracts is recognized as the services are rendered.

[iv] Contracts with separately identifiable components

Contracts to sell equipment frequently include maintenance and/or repair services. The Company

considers that the equipment and the services are separately identifiable components of a single

transaction as both have stand-alone value to the customer. Both the equipment and the

maintenance and repair services are sold separately.

Contracts with separately identifiable components require the Company to allocate the proceeds

between the components. This allocation is completed based upon the relative, stand-alone selling

price for the equipment and the services. Once the allocation has been made, the applicable

recognition criteria are applied to the sale of the equipment and the rendering of the services.

[v] Interest and dividends

Interest income is recognized on the basis of the passage of time when collectability is reasonably

assured. Dividend income is recognized when the dividends are declared and when the right to

receive payment is established.

1505.03, 06, 08

3400.31

3400.32



31 December 2012

10

1590.18


Stock-based compensation

The Company has a stock option plan for employees and directors from which options to purchase

common shares are issued [the “Plan”]. The Company may also issue options from the Plan to

non-employees to procure goods and services. Options may not be granted with an exercise price

of less than the fair value of the options at the grant date. The awards have no cash settlement

alternatives.

The vesting requirements are typically service-based and the options normally have a contractual

life of five years, although options with performance-based vesting criteria may be issued from

time to time.

[i] Transactions with employees

Stock-based compensation costs are accounted for on a fair value basis, as measured at the grant

date, which is generally the date at which both the Company and the employee have a mutual

understanding of the terms of the award. The fair value is measured using the option’s “calculated

value”, a method which substitutes the historical volatility of an appropriate industry sector index

for the expected volatility of an entity’s share price in an option-pricing model, such as the Black-

Scholes option pricing model. The resulting stock-based compensation cost is recognized on a

straight-line basis with a corresponding credit to contributed surplus over the vesting period

involved, typically three years. The compensation expense is based on the number of awards that

eventually vest, and adjustments for forfeitures are made as they occur. Any consideration paid by

employees upon exercise of the options and the previously recognized compensation cost of the

options exercised included in contributed surplus are added to share capital.

When the Company issues options with a performance condition, that is, options on which the

vesting is dependent upon the employee’s achievement of the condition, compensation cost is

recognized based on the best estimate of the number of options expected to vest, and adjusted for

subsequent changes in the expected or actual outcome in the period when the change occurs.

[ii] Transactions with non-employees

When the Company exchanges options or shares for goods and services, the measurement basis is

the fair value of the services or goods received, as this value is typically more reliably

measureable than the equity instruments themselves. Should this not be the case, the estimated

fair value of the equity instruments is used. The measurement date in both cases is generally the

earlier of the date at which a commitment to earn the equity instruments by the counterparty is

reached, the date the equity instruments are granted and the date at which the counterparty’s

performance is complete. The cost is recognized in the same manner and in the same period as if

the Company had paid cash for the goods or the services.

1505.03, 06, 08

3870.65

3870.66



31 December 2012

11

1590.18


Stock-based compensation [Cont’d]

[ii] Transactions with non-employees [Cont’d]

The Company occasionally issues options to non-employees with performance-based conditions

which, dependent upon the counterparty’s achievement of these conditions, could result in a range

of possible outcomes. At the date at which a commitment to earn the equity instruments by the

counterparty is reached, the lowest aggregate fair value is recognized based on the conditions and

variables associated with the counterparty’s performance. After this date, modification accounting

is applied to reflect incremental changes in the fair value of the options resulting from the

achievement or non-achievement of the related performance conditions.

Hedging and derivatives

[i] Hedge accounting

The Company periodically uses forward contracts to economically hedge the impacts of foreign

currency changes in anticipated transactions denominated in foreign currencies, and interest rate

swaps to mitigate the effect of changes in interest rates on variable-rate debt.

When both at the inception of a hedging relationship and throughout its term, the Company has

reasonable assurance that the critical terms of the hedging item and the hedged item are the same,

or, in the case of an anticipated transaction, it is probable that the anticipated transaction will occur

at the time and in the amount designated, the Company may choose to designate that hedge

accounting will be applied. The Company then formally documents the hedging relationship,

identifying the hedged item, the related hedging item, the nature of the specific risk exposure or

exposures being hedged and the intended term of the hedging relationship.

Forward contracts and interest rate swaps in qualifying hedging relationships are not recognized

until their maturity. When hedging anticipated transactions denominated in foreign currencies, the

anticipated transaction is recognized at the amount of consideration paid or received when it

occurs. The gain or loss on the forward contract is recorded as an adjustment to the carrying

amount of the hedged item or, when the hedged item is recognized directly in net income, the gain

or loss on the forward contract is included in the same category of net income. When hedging

interest rate risk, interest on the debt is recorded at the stated interest rate plus or minus

amortization of any initial premium or discount and any financing fees and transaction costs. Net

amounts receivable or payable on the interest rate swap are recognized as an adjustment to the

interest expense on the hedged item in the period during which they accrue.

1505.03, 06, 08



31 December 2012

12

1590.18


Hedging and derivatives [Cont’d]

[i] Hedge accounting [Cont’d]

Hedge accounting may not be electively discontinued. If the forward contract is discontinued, any

gain or loss is recognized as a separate component of equity until the anticipated transaction

occurs, at which point it is removed from equity and recorded as an adjustment to the carrying

amount of the hedged item [in the case of an asset or liability] or recorded in net income. If an

interest rate swap is discontinued, any gain or loss is recognized as an adjustment to the debt and

amortized to net income as interest payments are accrued. When it is no longer probable that the

anticipated transaction will occur in the amount designated or within 30 days of the maturity date

of the hedging item for a forward contract or within two weeks of the maturity date of the hedging

item for an interest rate swap, or if the debt is derecognized, the forward contract or the interest

rate swap is measured at fair value and any gain or loss is recognized in net income.

[ii] Derivatives

Derivatives which are not part of a qualifying hedging relationship are initially recorded at fair

value. Changes in fair value are recognized in net income; transaction costs to acquire or dispose

of these instruments are recognized in net income in the period during which they are incurred.

3. INVESTMENTS

Carrying

value

basis 2012 2011 $ $

Equity securities traded in an active market Fair value 151,060 221,060

Equity securities not traded in an active market Cost 50,000 50,000

Bonds – AA-rated corporate bonds; maturity date of

12 June 2014; coupon rate 5.50%; yield 5.78%

Amortized

cost 402,000 — 603,060 271,060

1505.03, 06, 08

3856.38 [a][b][c]



31 December 2012

13

1590.18

4. ACCOUNTS RECEIVABLE

2012 2011 $ $

Trade 818,999 294,000

Trade – company under common control 25,000 20,000

Allowance for doubtful accounts (14,000) (53,000)

829,999 261,000

Miscellaneous 10,500 7,500

840,499 268,500

The carrying amount of impaired trade accounts receivable as at 31 December 2012 totaled

$19,000 [2011 – $64,000], net of the allowance for doubtful accounts. The terms and conditions

for trade accounts receivable – company under common control are the same commercial terms

provided to non-related parties.

The amount of the impairment loss relating to trade accounts receivable is $8,000 for the year

ended 31 December 2012 [2011 – $45,000]. Reversals of an impairment loss relating to

impairment losses on trade accounts receivable recognized in previous fiscal years amount to

$42,000 [2011 – nil], resulting in a net recovery of impaired trade accounts receivable of $34,000

[2011 – net impairment loss of $45,000].

5. GOVERNMENT ASSISTANCE

The Company incurred research and development expenditures which are eligible for investment

tax credits. The investment tax credits recorded are based on management’s estimates of amounts

expected to be recovered and are subject to audit by the taxation authorities and, accordingly,

these amounts may vary.

6. INVENTORIES

2012 2011 $ $

Raw materials 200,000 150,000

Work in progress 150,000 150,000

Finished goods 209,900 125,000

559,900 425,000

3856.38 [a], 39

3840.51 [e]

3856.42

3840.51 [e]

1508.05-10

3800.31 [a] [iii]

3031.35 [b]

3031.36



31 December 2012

14

1590.18

6. INVENTORIES [Cont’d]

The amount of inventories recognized as an expense during the year ended 31 December 2012 is

$2,200,000 [2011 – $1,720,000]. The difference between these amounts and the amounts

recognized as cost of goods sold is comprised of abnormal amounts of wasted raw materials and

storage costs for finished goods.

7. FOREIGN CURRENCY DERIVATIVES

2012 2011

Maturity

Notional

amount

Carrying

value

Notional

amount

Carrying

value $ $ $ S

Assets

U.S. dollar forward

contract 12 July 2013 40,000 6,000 40,000 12,000

40,000 6,000 40,000 12,000

Liabilities

GBP futures

contract 15 May 2013 60,000 11,000 — —

60,000 11,000 — —

At the consolidated balance sheet date, the fair value of the forward contract was determined with

reference to a quotation from a derivatives dealer which the Company accepts as the fair value of

this instrument. The fair value of the futures contract was determined with reference to quotes

from an active market.

8. LOAN TO RELATED PARTY

In the year ended 31 December 2009, the Company provided a housing relocation loan to an

officer in the amount of $200,000. The loan is unsecured, non-interest-bearing and is repayable in

December 2014.

3031.35 [c]

3031.37

3856.38 [b]

3856.48 [a] [b]

3856.48 [c]

3856.49



31 December 2012

15

1590.18

8. LOAN TO RELATED PARTY [Cont’d]

A financial instrument originated with a related party whose sole relationship with an entity is in

the capacity of management must be initially recorded at fair value. Consequently, the fair value

of the loan was calculated using a 5.0% interest rate which was considered to be consistent with

market rates for similar loans at that date. The difference between the fair value of the loan and the

cash received, which amounted to $17,318, was recorded as a compensation expense at the

inception of the loan. Amortization of this discount amounts to $4,330 annually and is recorded as

other revenues.

9. PROPERTY, PLANT AND EQUIPMENT

2012 2011

Cost

Accumulated

amortization

Net

carrying

value Cost

Accumulated

amortization

Net

carrying

value $ $ $ $ $ $

Land 220,000 — 220,000 220,000 — 220,000

Building 608,000 64,000 544,000 608,000 32,000 576,000

Office furniture 380,000 244,000 136,000 380,000 206,000 174,000 Machinery and equipment 1,904,000 1,166,500 737,500 1,910,000 1,061,500 848,500

Computer hardware 630,000 607,500 22,500 600,000 450,000 150,000

3,742,000 2,082,000 1,660,000 3,718,000 1,749,500 1,968,500

During the year ended 31 December 2012, the Company determined that machinery used only in

the production of one of its highly specialized products was impaired due to a change in the

demand for this product as a result of a rapid and unexpected technological change. The $40,000

carrying amount of this machinery without further use to the Company and without resale or scrap

value was recorded as an impairment loss.

10. ASSETS UNDER CAPITAL LEASES

2012 2011

Cost

Accumulated

amortization

Net

carrying

value Cost

Accumulate

d

amortization

Net

carrying

value $ $ $ $ $ $

Computer hardware 500,000 312,500 187,500 500,000 250,000 250,000

3840.51[a]-[e]

3840.56, 58

3061.24[a] [b]

3061.28

3061.27

3063.24[a] [b]

3065.73



31 December 2012

16

1590.18

11. INTANGIBLE ASSETS

2012 2011 $ $

Intangible assets subject to amortization

Patents 30,000 36,000

Customer lists 22,000 32,000

52,000 68,000

Intangible assets not subject to amortization

License 60,000 60,000

112,000 128,000

12. GOODWILL

2012 2011 $ $

Balance, beginning of year 494,000 494,000

Impairment loss (60,000) —

Balance, end of year 434,000 494,000

The poor economic performance of the auto sector in the United States has resulted in continued

and significant losses in the Company’s U.S.-based subsidiary, which provides maintenance

services for highly specialized robotic assembly line production machinery in this industry. As a

result, the Company considered that there were indicators of an impairment loss related to the

goodwill associated with this reporting unit. Accordingly, the Company undertook a goodwill

impairment test, which was based on a discounted cash flow analysis.

Based on the results of the goodwill impairment test, the Company determined that the estimated

fair value of this reporting unit was less than its carrying amount [including goodwill] by

approximately $60,000. A goodwill impairment loss in this amount has been recorded in the year

ended 31 December 2012.

3064.91 [a] [i]

3064.91[b]

1506.36

3064.93 [a] [b]



31 December 2012

17

1590.18

13. CREDIT FACILITY

The Company has a demand credit facility [the “Facility”] with a Canadian chartered bank for a

maximum amount of $500,000, at the bank’s prime rate plus 1.75%. The relevant prime rate was

4.0% as at 31 December 2012 [2011 – 3.75%]. No amounts were drawn as at 31 December 2012

[2011 – $117,127]. The Facility is collateralized by all accounts receivable and inventories which

have a net carrying value of $1,400,399 at 31 December 2012 [2010 – $693,500]. A $20,000

tranche of the Facility [2011 – $20,000] is used for letters of credit.

14. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

2012 2011 $ $

Trade payables and accrued liabilities 144,762 139,063

Trade – supplier controlled by a director — 46,625

Product liability claim [note 27[i]] 450,000 100,000 3031.35[a]

Accrued interest – long-term debt 80,417 89,431

Termination benefits 59,000 —

Government remittances 20,536 43,596

Other 10,500 —

765,215 418,715

During the year ended 31 December 2012, as a result of an effort to rationalize a number of the

Company’s administrative functions, a staff reduction plan was approved and communicated to

the affected employees. The plan included a termination package and a timetable for departure.

The aggregate amount of the termination package was $105,500, which includes an estimate of the

costs related to vocation re-training services included in the termination package. An amount of

$59,000 remains accrued at 31 December 2012 and will be paid in the year ending 31 December

2013.

The trade accounts payable due to a supplier controlled by a director are under similar commercial

terms and conditions granted to non-related parties by this supplier.

15. CONTINGENT CONSIDERATION PAYABLE

In November 2008, the Company completed a business combination in which it agreed to pay

additional consideration to the seller in the amount of up to $400,000 at the fifth anniversary of the

acquisition based on a formula which considers the financial performance of the acquiree in each

of the five subsequent years. An amount of $140,000 has been accrued and will be adjusted only

upon the final payment, if any, of the contingent consideration in November 2013. Given the

actual financial performance of the acquiree since November 2008, the maximum amount payable

is now $300,000 and the minimum is nil.

3840.51[e]

3856.43 [d]

3461.156

1516.15 – 16

1510.11

1508.05 – 10

3840.51 [e]

3461.156



31 December 2012

18

1590.18

16. WARRANTY PROVISIONS

The Company assumes certain maintenance and repair costs under warranties offered on its products.

The warranties cover a period of three years. During the year ended 31 December 2012, the

Company recognized a $30,000 expense [2011 – $34,000] as product warranty costs. This estimated

provision is based on past experience and is a function of the estimated rate of returns, timing and

cost to repair defective or faulty parts. The actual cost that the Company may have to pay and the

timing of the repairs to be carried out are uncertain. Actual results could differ from the estimated

amount and such differences could be material.

17. OBLIGATION UNDER CAPITAL LEASES

2012 2011 $ $

Obligation under capital leases for computer hardware, with

interest at the rate of 10%, maturing on December 31, 2015 233,073 297,086

Less: current portion 70,415 64,013

162,658 233,073

Future minimum lease payments under the capital leases for subsequent years are as follows:

$

2013 93,722

2014 93,722

2015 93,722

281,166

1508.05, 06, 07

3065.74 [a] [b] [c]

3065.76



31 December 2012

19

1590.18

18. LONG-TERM DEBT

2012 2011

$ $

Senior note payable

$1,000,000, 8-year, 10% note payable, repayable in annual installments

of interest and principal in the amount $187,444, maturing on 31

December 2015. Collateralized by land, building, and machinery and

equipment having a net carrying value of $1,501,500 [2011 −

$1,644,500] 466,145 594,173

Less: unamortized financing fees and transaction costs 22,500 28,125

443,645 566,048

Note payable

$350,000, 5-year note payable, bearing interest at prime plus 4.5%,

repayable on 31 October 2017. Collateralized by a second-ranking lien on

the totality of the Company’s trade accounts receivable and inventory

having a carrying value of $1,400,399 [2011 −$693,500], and a first-

ranking lien on tax credits receivable having a carrying value of $80,000

[2011 −$100,000] 350,000 —

Less: unamortized financing fees and transaction costs 14,583 — 335,417 — Convertible debenture

$350,000, 5-year, annual interest payments at prime plus 3%; principal

maturing on 31 December 2016 [2011 – 31 December 2013]. Convertible

at any time at the option of the holder into common shares equal to the

quotient of dividing the outstanding principal and accrued interest by

$1.12 350,000 350,000

Less: unamortized financing fees and transaction costs 2,000 4,000

348,000 346,000

Interest-free unsecured government loan

$400,000, 5-year loan. Repayable in annual installments of $100,000

commencing in the second year of the loan and maturing on 31

December 2013 100,000 200,000

Less: unamortized interest-free loan deemed discount 20,556 41,112

79,444 158,888

Total long-term debt 1,206,506 1,070,936

Current portion of long-term debt 214,648 201,846

Long-term portion of long-term debt 991,858 869,090

3856.43 [a]– d] [f]

3856.44

3856.43 [a]-[d] [f]

3856.44

3856.43 [a]-[d] [f]

3856.21,22 [a]

3856.47 [a] [i]-[iv]

3856.43 [a]-[d] [f]



31 December 2012

20

1590.18

18. LONG-TERM DEBT [Cont’d]

The notes payable contain a number of restrictive covenants which require the Company to respect

a number of financial ratios and non-financial criteria. During the year ended 31 December 2012,

the Company did not respect one of these financial ratios for the senior note payable. This default

was remedied before 31 December 2012, at which time the Company was in compliance with all

restrictive covenants.

The convertible debenture is subject to certain non-financial covenants which, if not respected,

could result in a 25% decrease in the conversion price. At dates presented, these covenants were

respected. On 17 February 2013, the Company reached an agreement with the convertible

debenture holders to extend the maturity date of the instrument to 31 December 2016.

Consequently, at 31 December 2012, the convertible debentures have been presented as a long-

term financial liability.

During the year ended 31 December 2008, the Company received an interest-free unsecured

government loan in the amount of $400,000 as government assistance related to qualifying salary

expenditures for new hires, as part of a one-time government stimulus spending project in 2008.

Principal repayments to be made during the next five years, at which time the debt will be fully

repaid, are as follows:

$

2013 240,828

2014 154,912

2015 170,405

2016 350,000

2017 350,000

1,266,145

3856.46 [a] [b]

1510.13 [b]

3856.45



31 December 2012

21

1590.18

19. ASSET RETIREMENT OBLIGATION

The Company’s asset retirement obligation relates to a statutory obligation to remediate a property

on which a specialized facility used for handling polychlorinated biphenyls [“PCBs”] is situated. The

facility must be retired in 2016, at which point this facility will be remediated. During the years

ended 31 December 2012 and 2011, no amounts were paid towards the liability.

The most significant assumption in the estimate of the asset retirement obligation is the expected

timing of the remediation. There is currently a legislative proposal under study which would allow

certain smaller enterprises meeting certain criteria to delay the retirement of specified types of PCB

waste to 2021. The legislation, if passed, will be finalized in the year ended 31 December 2013. The

Company is currently assessing the applicability of this proposed legislation to its circumstances, but

is reasonably certain that if this legislation is passed in 2013, the asset retirement obligation and the

related asset would be decreased by an amount of approximately $80,000 in the 31 December 2013

consolidated financial statements.

20. EMPLOYEE FUTURE BENEFITS

The Company provides pension and post-employment benefits to most of its employees. The

Pension Plan benefits are calculated based on the number of years of service and the maximum

average eligible earnings of each employee during any period of five consecutive years. Other

post-employment benefits are contributory health care plans with employee contributions adjusted

annually.

The most recent actuarial valuation of the Pension Plan and the other post-employment benefits

for funding purposes was as of December 31, 2009.

2012 2011

Pension

Plan Other

Pension

Plan Other

$ $ $ $

Fair value of plan assets 100,000 20,000 120,000 30,000

Accrued benefit obligation 325,000 10,000 370,000 40,000

Funded status (deficit) (225,000) (10,000) (250,000) (10,000)

3110.23 [a] [c]

1508.05 -.10

3110.24

3461.154 [a]

3461.154 [f]

3461.152 [a] [b]

3461.154 [b] [c] [d]



31 December 2012

22

1590.18

21. DUE TO RELATED PARTY

Advances from Good Group Sister Company Inc., a company under common control, are non-

interest bearing, unsecured and have no specified terms of repayment. The lender has agreed not to

demand payment before January 1, 2014. Accordingly, the amount has been presented as a long-

term financial liability.

22. INCOME TAXES

The Company’s U.S. subsidiary has non-capital losses totaling $670,000 [US$ – 696,800]

available for carry-forward, of which $200,000 [US$ – 208,000] expires in 2026, $300,000 [US$ –

312,000] expires in 2027, and $170,000 [US$ – 176,800] expires in 2029. The benefits of these

loss carry-forwards have not been recognized in the consolidated balance sheet.

23. EQUITY

Common shares

Common shares, without par value, each share entitled to one vote, changes therein as follows:

Number

of shares

$

Balance as at 31 December 2011 2,015,000 606,750

Shares issued 200,000 160,000

Share issuance costs — (10,000)

Balance as at 31 December 2012 2,215,000 756,750

Redeemable preferred shares

On 1 January 2005, the Company issued 50,000 preferred shares in a tax planning arrangement

under Section 85 of the Income Tax Act (Canada). These preferred shares are redeemable at the

holders’ option carrying a 9.25% cumulative dividend at a fair value of $230,000. No shares have

been redeemed during the years ended 31 December 2012 and 2011 and none are scheduled to be

redeemed in the next five years.

3465.89 [d]

3240.20

3251.04 [d] 3240.20 [e] [a]

3240.22 [a]

3240.20 [b] [c]

3856.47 [c] [ii] [iii]



31 December 2012

23

1590.18

23. EQUITY [Cont’d]

Stock-based compensation

The Plan is applicable to full-time employees, directors and consultants of the Company for the

purchase of common shares with a maximum of 500,000 of such shares reserved for issuance.

Options are granted with an exercise price equal to the fair value of the Company’s common

shares, and may generally be exercised at a rate of 25% on each anniversary of the grant. Options

expire in 8 years from the date of grant or upon termination of employment.

Additional information concerning stock options outstanding as at 31 December 2012 and 2011

are as follows:

2012 2011

Range of

exercise

prices

Weighted

average

remaining

contractual

life

Weighted

average

exercise

price

Weighted

average

remaining

contractual

life

Weighted

average

exercise

price $ # Years $ # Years $

0.45-0.55 25,000 5.80 0.57 25,000 6.80 0.57

0.71-0.90 115,000 5.91 0.76 65,000 4.85 0.78

1.15 70,000 1.50 1.15 70,000 1.50 1.15

0.45-1.15 210,000 4.43 0.87 160,000 3.69 0.91

During the year ended 31 December 2012 the Company granted 50,000 [2011 – 45,000] stock

options with a weighted average exercise price of $0.75 [2011 – $0.60].

Contributed surplus

2012 2011

$ $

Opening balance 40,000 —

Stock-based compensation 85,000 40,000

Closing balance 125,000 40,000

3870.66

3870.67 [a] [i]

3870.67 [a] [ii]

3251.04[c]

3870.67 [d]



31 December 2012

24

1590.18

24. INTEREST EXPENSE ON LONG-TERM OBLIGATIONS

2012 2011 $ $

Senior note payable 59,417 71,056

Interest expense in capital lease payments 29,709 35,528

Note payable 27,708 —

Accretion on interest-free government loan 20,556 20,556

Convertible debenture 18,375 21,000

Accretion of asset retirement obligation 13,988 13,455

Amortization of financing fees and transaction costs 10,542 7,625

180,295 169,220

25. RELATED PARTY TRANSACTIONS

The Company provides maintenance services to a company under common control. The Company

purchases equipment for resale from a supplier controlled by a director. At 31 December 2012,

finished goods contained machinery in the amount of $50,000 which was purchased from this

related party [2011 – nil]. The Company engages a marketing firm owned by the spouse of the

controlling shareholder for certain sales and marketing services related to sales in the United

States.

All related party transactions are measured at the exchange amount. The Company’s related party

transactions are as follows:

2012 2011

$ $

Revenues – maintenance services 350,000 60,000

Cost of goods sold – distribution revenues 630,000 50,000

Selling expenses 50,000 62,000

3856.52 [d]

3065.75

3856.A5

3840.51[a] [b]

3840.54, .53, 56

3840.51[d]

3840.51[c], 58



31 December 2012

25

1590.18

26. FINANCIAL INSTRUMENTS – RISKS AND UNCERTAINTIES

The following table shows the carrying amounts of the indicated financial instruments:

2012 2011 $ $

Financial assets measured at amortized cost

Cash and cash equivalents 236,367 69,450

Accounts receivable 840,499 268,500

Government assistance receivable 80,000 100,000

Investments 402,000 —

Loan to related party 191,340 187,011

Total financial assets measured at amortized cost 1,750,206 624,961

Financial assets measured at fair value

Foreign currency derivatives 6,000 12,000

Investments 151,060 221,060

Total financial assets measured at fair value 157,000 233,060

Investments in equity instruments measured at cost less

impairment

Investments 50,000 50,000

Total investments in equity instruments measured at

cost less impairment 50,000 50,000

Financial risks

The Company is exposed to various financial risks through transactions in financial instruments.

The following provides helpful information in assessing the extent of the Company’s exposure to

these risks.

Credit risk

Credit risk is the risk that one party to a financial instrument will cause a financial loss for the

other party by failing to discharge an obligation. The Company’s main credit risk relates to its

trade accounts receivable. To mitigate this risk, the Company carries out credit evaluations of its

customers on a continuing basis. Approximately 50% of trade accounts receivable are due from

companies in the auto sector. As at 31 December 2012, two customers comprised 38% of trade

accounts receivable [2011 – one customer; 25%].

3856.37,53 [a] [b]

3856.38

3856.37, 53 [a] [b]

3856.A66[a]

3856.A67

[a] [b] [d]

3856.54



31 December 2012

26

1590.18


[Cont’d]

Credit risk [Cont’d]

The Company is also exposed to counterparty credit risk inherent in its interest rate swap agreement

and foreign currency derivatives. In all contracts, the counterparty is a Canadian chartered bank and

the Company has assessed these risks as minimal. The Company considers that the counterparty

credit risk related to exchange-traded futures contracts is minimal as a result of the mechanisms put

in place by futures exchange institution in its role as intermediary between the contracting parties.

There is also credit risk inherent in the Company’s loan to a related party. However, the Company

believes that the terms of the employment agreement with the related party mitigates this risk.

Currency risk

Currency risk is the risk that the fair value or future cash flows of a financial instrument will

fluctuate because of changes in foreign exchange rates. Approximately 40% of the Company’s

sales are denominated in U.S. dollars and, as a result, some financial assets are exposed to foreign

exchange fluctuations. The following table provides a summary of U.S. dollar denominated

financial assets and liabilities:

2012 2011

US$ US$

Cash and cash equivalents 203,511 80,250

Accounts receivable 100,052 75,000

Accounts payable and accrued liabilities (50,120) (10,546)

253,443 144,704

In addition, the Company may be a party to derivative financial instruments to mitigate its foreign

currency risk.

The Company has elected to apply hedge accounting to an anticipated sale denominated in Euros.

The sale is anticipated to be completed on 26 September 2013, at which time the Company will

receive Euros in exchange for the equipment. In order to fix the revenues of this anticipated

equipment sale in terms of Canadian dollars, the Company has entered into a foreign currency

forward contract with a Canadian chartered bank [the “Bank”]. The Company will sell Euros in

the amount of the anticipated sale at a price of $1.42 in Canadian dollars to the Bank with a

settlement date of 5 October 2013. Having met the criteria to apply hedge accounting to this

anticipated transaction, the Company has not recognized the foreign currency forward contract nor

the anticipated equipment sale in these consolidated financial statements.

3856.54

3856.54

3856.A66 [b]

3856.51 [a]



31 December 2012

27

1590.18


[Cont’d]

Currency risk [Cont’d]

The foreign currency derivatives recognized in the consolidated balance sheet were contracted to

hedge anticipated future sales and purchases in U.S. dollars and British Pounds. The Company

has elected not to apply hedge accounting. However, the Company believes that these derivatives

hedge the related foreign currency risk in these transactions.

Interest rate risk

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will

fluctuate because of changes in market interest rates. The Company is exposed to interest rate risk

on its fixed and floating interest rate financial instruments. The senior note payable, the interest-

free government loan and the investment in bonds subject the Company to a fair value risk, while

the note payable and the convertible debenture subject it to a cash flow risk.

The Company has entered into an interest rate swap agreement in order to address the interest rate

risk inherent in the senior note payable, which accrues interest at the prime rate plus 4.5%. Under

the terms of the agreement, the Company receives from the counterparty an annual payment equal

to the variable amount of interest on the note payable and pays the counterparty a fixed rate of

10%. The impact of this interest rate swap on the Company for the year ended 31 December 2012

is an interest expense of 10% or $27,708 and a net amount of $5,800 due to the swap counterparty

as at 31 December 2012. The amount due to the swap counterparty has been included in accounts

payable and accrued liabilities.

Liquidity risk

Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations

associated with financial liabilities. The Company is exposed to this risk mainly in respect of its

accounts payable and accrued liabilities, contingent consideration payable, various long-term debt

agreements, obligations under capital leases, contributions to the pension plan and operating lease

commitments.

Other price risk

Other price risk is the risk that the fair value or future cash flows of a financial instrument will

fluctuate because of changes in market prices [other than those arising from interest rate risk or

currency risk], whether those changes are caused by factors specific to the individual financial

instrument or its issuer, or factors affecting all similar financial instruments traded in the market.

The Company is exposed to other price risk through its investments in marketable securities

invested in equity securities traded in an active market.

3856.A66 [c]

3856.51 [b]

3856.48 [d]

3856.A66 [d]

3856.A66 [f]



31 December 2012

28

1590.18

27. CONTINGENCIES

The Company is involved in various claims and litigation arising in the normal course of its

business and there are legal proceedings to which the Company is a party that, in the Company’s

opinion, could have a material effect on the Company’s financial position or results of operation.

[i] Product liability claim

In 2009, the Company acquired 80% of an entity which had been named in a product liability suit

in which the plaintiffs claimed that a product was unsafe and the use of which resulted in an

abnormal frequency of non-lethal workplace injuries. An amount of $100,000 was assigned to this

contingent liability assumed as at 1 January 2010 and an additional amount of $350,000 was

recorded in the year ended 31 December 2012. This estimate is based on a range of possible

outcomes between $450,000 and $550,000. The Company has recognized the lower end of this

range as no amount within the range is indicative of a better estimate than any other. As a result,

the Company is therefore exposed to a greater loss than the amount recorded in the consolidated

financial statements. A court judgment is expected to be rendered during 2013.

[ii] Contractual dispute in arbitration

The Company and one of its former suppliers have brought suits against each other claiming

contractual non-performance. During the year ended 31 December 2012 the parties agreed to

resolve the dispute through a court-appointed arbitrator. The Company estimates that the outcome

of this arbitration is likely to result in a loss. However, due to the complexity of the determination

of any amounts which may be payable, the existence of several methods of computing the

amounts, and that the arbitration process is not disclosed to the parties, a reasonable estimate of

the loss cannot be made.

[iii] Employment contract litigation

During the year ended 31 December 2012, a wrongful dismissal suit has been instigated against

the Company which claims an amount of $250,000. The plaintiff claims that the employment

contract was breached as a result of an early termination. The Company disagrees. At this time,

the outcome of these proceedings cannot be determined. No amounts related to this litigation have

been recorded in the 31 December 2012 consolidated financial statements.

1508.05 - 10

1508.05 - 10

1506.36

3290.18 [b]

3290.19 [a] - [c]

1508.05 - 10

3290.18 [a]

3290.19 [a], [b]

1508.05 -.10

3290.18 [c]

3290.19 [a] [b]



31 December 2012

29

1590.18

28. CONTRACTUAL OBLIGATIONS

The Company has various operating leases for its premises, office equipment and vehicles. The

annual minimum payments under these operating leases are as follows:

$

2013 12,000

2014 9,000

2015 8,000

2016 5,000

2017 5,000

Thereafter 75,000

114,000

The Company has a contractual obligation to purchase a machine in the year ended 31 December

2014 in the amount of $150,000.

29. ECONOMIC DEPENDENCE

During the year ended 31 December 2012, a contract with one of the Company’s major customers

for its extruding machines provided 65% of total manufacturing revenues [2011 – 30%].

Two maintenance service contracts with two auto manufacturers accounted for 70% of

maintenance services revenues during the year ended 31 December 2012 [2011 – 75%]. These

contracts are subject to renewal in the year ended 31 December 2014.

3065.77

3280.02 [b]

3841.02-.06

Ernst & Young LLP

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This publication contains information in summary form, current as of the

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