Good Group Private Enterprise Inc. - Ernst & Young Group Private Enterprise Inc. 1400.09, 10, 12...

Good Group Private Enterprise Inc.

Illustrative consolidated financial statements for the year ended 31 December 2015

Based on Accounting Standards for Private Enterprises

in issue as at 1 January 2015

Introduction

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

Private Enterprise Inc. [“GGPE”] as at and for the year ended 31 December 2015. These

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

Chartered Professional Accountants of Canada [“CPA Canada”] Handbook – Accounting,

Accounting Standards for Private Enterprises [“ASPE”]. These illustrative consolidated financial

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

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

prepares its first set of financial statements in accordance with ASPE.

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

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

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

illustrative consolidated financial statements include a number of circumstances which might

typically be encountered by a private enterprise, such as contingencies, asset impairments, related

party transactions and a voluntary change in accounting policy.

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

and other disclosures for the prior period are included for comparison with the consolidated

financial statements of the current period.

These illustrative consolidated financial statements only include those accounting standards with

an effective date of 1 January 2015 or earlier. In some cases, ASPE permits more than one

accounting treatment for a transaction or event. Preparers of financial statements should select the

treatment that is most relevant to their business and circumstances as their accounting policy.

It is important to remember that these illustrative consolidated financial statements do not

encompass all aspects of financial reporting that could be encountered by a private enterprise in

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

apply to regulated or specialized industries. It is essential that entities consider their own specific

circumstances when determining which disclosures to include. For additional information, readers

should refer to the EY ASPE Presentation and Disclosure Checklist in conjunction with the ASPE

standards themselves to fully understand the implications of preparing ASPE financial statements.

For more information on ASPE, please contact your EY advisor.

Consolidated Financial Statements

Good Group Private Enterprise Inc. 31 December 2015


1400.09, 10, 12

1590.18

As at 31 December

2015 2014

$ $

ASSETS

[restated –

note 3] 1510.02

Current assets 1521.03 [a]; 1510.03, 04

Cash and cash equivalents [note 22] 186,527 69,450 1521.04 [a]

Investments [notes 4 and 22] 603,060 271,060 1521.04 [h]; 3856.38; 1510.04

Accounts receivable [notes 5, 13, 17 and 22] 840,499 268,500 1521.04 [b]

Inventories [notes 6, 13, 17 and 21] 559,900 425,000 1521.04 [f]

Prepaid expenses 175,723 140,000 1521.04 [d]; 1510.06Total current assets 2,365,709 1,174,010 1521.03 [b]

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

Loan to related party [notes 8 and 22] 191,340 187,011 1521.04 [e]; 3856.38 [a]

Property, plant and equipment [notes 9 and 17] 1,660,000 1,968,500 1521.04 [i]

Assets under capital leases [notes 10 and 16] 225,830 250,000 3065.21

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

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

5,170,879 4,395,521 1521.03 [c]

LIABILITIES AND EQ UITY

Current liabilities 1521.03 [d]; 1510.02, 08, 11

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

Accounts payable and accrued liabilit ies [notes 14 and 22] 390,215 418,715 1521.05 [a]; 3462.101

Income taxes payable 53,000 50,000 1521.05 [a]

Current portion of contingent consideration payable [note 15] 140,000 — 1521.05 [h]

Current portion of obligations under capital leases [note 16] 81,845 64,013 1521.05 [d]; 3065.21, 23

Current portion of long-term debt [note 17] 220,273 201,846 1521.05 [f]; 1510.12Total current liabilities 885,333 851,701 1521.03 [e]

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

Obligations under capital leases [note 16] 189,888 233,073 1521.05 [d]; 3065.21, 22

Long-term debt [note 17] 986,233 869,090 1521.05 [f]

Due to related party [note 18] 720,313 590,315 1521.05 [h]Total liabilities 2,781,767 2,684,179 1521.03 [f]

Commitments and contingencies [notes 23 and 24] 3280.02; 3290.18, 19; AcG-14.9

Equity 1521.06

Share capital

Common shares [note 19] 785,750 606,750 3251.05 [c]

Redeemable preferred shares – total redemption 184,000 230,000 3251.05 [c]; 3856.23

amount of $208,000 [2014 – $260,000] [note 19] 3856.47 [c] [i]

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

Contributed surplus [note 19] 119,000 40,000 3251.05 [b]

Retained earnings 1,124,362 726,592 3251.05 [a]

Shareholders’ equity 2,238,112 1,618,342

Non-controlling interest 151,000 93,000 3251.05 [e]; 1602.13

Total equity 2,389,112 1,711,342 1521.03 [g]

5,170,879 4,395,521 1521.03 [h]

See accompanying notes

On behalf of the Board:

Director Director

CONSOLIDATED BALANCE SHEET


1400.09, 10, 12

1590.18

Year ended 31 December

2015 2014

$ $

REVENUE

[restated –

note 3]

Sale of equipment [note 25] 2,780,000 2,750,000 3400.33; 1520.04 [a]

Services [notes 21 and 25] 1,007,115 450,000 3400.33; 1520.04 [a]

Commissions 1,050,000 500,000 3400.33; 1520.04 [a]

4,837,115 3,700,000 1520.03 [a]; 3400.29

EXPENSES

Cost of goods sold [notes 6 and 21] 2,202,874 1,820,816 1520.04 [o]

Selling [note 21] 348,863 323,748

General and administrative 424,460 426,009

Research and development 187,500 332,000 3064.52

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

Amortization of assets under capital leases 64,170 62,500

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

Stock-based compensation [note 19] 85,000 40,000 1520.04 [i]; 3870.67 [c]

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

3,727,367 3,387,573

Income before undernoted items and income taxes 1,109,748 312,427

Change in fair value of investments (70,000) 20,000 3856.52 [a]; 1520.04 [k] [i]

Property, plant and equipment impairment

loss [note 9] (40,000) — 1520.04 [f]; 3063.24 [c]

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

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

Interest and dividend income [note 8] 18,829 4,329 3856.A5; 3856.52 [b]

Interest expense

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

Long-term [note 20] (166,307) (155,765) 1520.04 [l]; 1520.04 [k] [iv], [l]; 3856.52 [d]; 3065.75

Loss from investment in GGSII (12,000) (6,000) 1520.03 [b] [ii]; 3051.27 [c], 28

Income before income taxes 668,270 166,445

Provision for (recovery of) income taxes [note 7] 187,000 (1,500) 3465.89 [a]

Net income for the year 481,270 167,945 1520.03 [f]

Attributable to: 1602.14

Non-controlling interest 58,000 18,000 3251.04 [a]

Owners of parent 423,270 149,945 3251.04 [a]

481,270 167,945


CONSOLIDATED STATEMENT OF INCOME


1400.09, 10, 12

1590.18

3610.03


2015 2014

$ $

[restated –

note 3]

Balance, beginning of year – as previously reported 810,442 673,647

Change in accounting policy [note 3] (83,850) (97,000) 1506.13

Balance, beginning of year – as restated 726,592 576,647

Net income attributable to owners of parent 423,270 149,945 3251.04 [a]

Premium on redemption of preferred shares [note 19] (6,000) — 3251.11[d]

Related party adjustment [note 21] (19,500) — 3840.09, 17

Balance, end of year 1,124,362 726,592


RETAINED EARNINGSCONSOLIDATED STATEMENT OF


1400.09, 10, 12

1590.18


2015 2014 1540.03, 05, 27

$ $

OPERATING ACTIVITIES

[restated –

note 3] 1540.12, 20

Net income for the year 481,270 167,945

Non-cash items:

Amortization of property, plant and equipment 388,500 381,500 1540.22 [a]

Amortization of assets under capital leases 64,170 62,500 1540.22 [a]

Amortization of intangible assets 16,000 16,000 1540.22 [a]

Amortization of discount on investments (5,000) — 1540.22 [a], 32; 3856.A5

Amortization of financing fees and transaction costs 10,542 7,625 1540.22 [a]

Accretion on interest-free government loan 20,556 20,556 1540.22 [a], 32

Property, plant and equipment impairment loss 40,000 — 1540.22 [a]

Goodwill impairment loss 60,000 — 1540.22 [a]

Change in fair value of investments 70,000 (20,000) 1540.22 [a]

Stock-based compensation 85,000 40,000 1540.22 [a]

Loss from investment in GGSII 12,000 6,000 1540.22 [a], 36

Deemed interest income on related party loan (4,329) (4,329) 1540.22 [a], 32

Net foreign exchange difference on cash and cash equivalents (24,800) (13,600) 1540.30

Net change in non-cash working capital balances

related to operations (758,122) (210,223) 1540.22 [b], [c]

Cash provided by operating activities 455,787 453,974

INVESTING ACTIVITIES 1540.12, 23

Acquisition of investments (397,000) — 1540.18 [c]

Acquisition of machinery and equipment from related party (72,000) — 1540.18 [a]

Acquisition of property, plant and equipment (67,500) (190,000) 1540.18 [a]

Cash used in investing activities (536,500) (190,000)

FINANCING ACTIVITIES 1540.12, 23

Credit facility, net (117,127) (120,418) 1540.10

Issuance of common shares 160,000 6,750 1540.19 [a]

Payment of share issue costs (10,000) — 1540.19 [a]

Redemption of preferred shares (52,000) — 1540.19 [b]

Proceeds on exercise of stock options 23,000 — 1540.19 [a]

Advance from related party 279,998 50,000 1540.19 [c]

Repayment of advance from related party (150,000) (40,000) 1540.19 [d]

Issuance of long-term debt 350,000 — 1540.19 [c]

Payment of long-term debt issue costs (17,500) — 1540.19 [c]

Repayment of long-term debt (228,028) (216,387) 1540.19 [d]

Repayment of obligations under capital leases (65,353) (58,194) 1540.19 [e]

Cash provided by (used in) financing activities 172,990 (378,249)

Net foreign exchange difference on cash and cash equivalents 24,800 13,600 1540.30

Change in cash and cash equivalents during the year 117,077 (100,675)

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

Cash and cash equivalents, end of year 186,527 69,450


CONSOLIDATED STATEMENT OF CASH FLOWS


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

31 December 2015

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. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

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

Professional Accountants of Canada Handbook – Accounting, Accounting Standards for Private

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

enterprises in Canada and includes the significant accounting policies described hereafter.

Principles of consolidation

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

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

operation of others. These consolidated financial statements include the accounts of the Company

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%

Foreign currency translation

Foreign currency transactions and integrated foreign operations

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

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

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

are translated into Canadian dollars at the exchange rate in effect at the consolidated balance sheet

date, and non-monetary items are translated at the prevailing historical rate at the time of the

transaction. Revenue and expenses arising from foreign currency transactions are translated into

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

losses resulting from foreign currency transactions and the translation of integrated foreign

operations are included in net income.

1505.03, 05, 06, 08

1400.16

1590.15

1590.03 [b]

1590.29

1651.14, 16, 20, 22, 24

3462.122 [e]

3462.124 [a]



31 December 2015

2

1590.18

Self-sustaining foreign operations

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

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

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

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

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

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

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

sheet.

Financial instruments

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

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

circumstances.

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

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

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

Subsequently, the Company measures financial instruments as follows:

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

all other investments in equity instruments at cost less impairment;

all other financial assets, which include cash and cash equivalents, investments in bonds,

accounts receivable, and the loan to related party, at amortized cost; and

all financial liabilities, which include the credit facility, accounts payable and accrued

liabilities, long-term debt, and the amount due to related party, at amortized cost.

Cash and cash equivalents

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

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

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

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

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

1651.26, 29

3856.07, 08

3840.07, 08, 18, 29

3856.07

3856.11, 12

1540.08, 09, 10, 43



31 December 2015

3

1590.18

Investments

[i] Reported at fair value

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

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

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

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

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

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

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

income in the period during which they are incurred.

[ii] Reported at cost or amortized cost

Investments in equity instruments that are not quoted in an active market, as well as investments in

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

adjusted by financing fees and transaction costs that are directly attributable to their origination,

acquisition, issuance or assumption. Investments in equity instruments are subsequently measured

at cost less any reduction for impairment and investments in debt instruments are subsequently

measured at amortized cost.

Inventories

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

the specific identification method. Cost of work in progress and finished goods includes raw

materials, direct labour and indirect manufacturing costs. Net realizable value is the estimated

selling price in the ordinary course of business less the estimated costs of completion and the

estimated costs necessary to make the sale.

Investment in GGSII

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

significant influence. The determination of when significant influence is present is a matter of

judgment. If the Company holds less than 20% of the voting interest in the investee, it is

presumed that it does not have the ability to exercise significant influence, unless such influence is

clearly demonstrated. The Company has a 30% common share investment in Good Group

Significant Influence Investment Inc. [“GGSII”].

3856.12 [a], 13

3856.07, 11 [a],

[b]

3856.A3

3031.35 [a]

3031.10, 11, 22

3051.29 3051.04, 05

3051.32



31 December 2015

4

1590.18

Property, plant and equipment and assets under capital leases

Property, plant and equipment are recorded at cost less accumulated amortization. Assets under

capital leases are recorded at cost, which corresponds to the present value of the minimum lease

payments, less accumulated amortization.

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

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

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 that is considered to have an

indefinite life and is therefore not amortized.

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

expensed as incurred.

Impairment

[i] Long-lived assets subject to amortization

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

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

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

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

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

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

value, generally determined on a discounted cash flow basis. Any impairment results in a 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 asset subsequently increases.

3061.04

3065.16

3061.16, 19

3065.17, 73 [c]

3061.24 [c]

3064.56

3064.91 [a] [iii]

3064.40, 91 [c]

3063.04, 05, 06, 09



31 December 2015

5

1590.18

[ii] Indefinite life intangible asset

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

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

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

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

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

of the related asset subsequently increases.

[iii] Goodwill

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

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

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

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

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

Goodwill impairment losses are not reversed.

[iv] Financial assets measured at cost and amortized cost

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

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

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

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

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

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

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

balance sheet; and

iii. The amount the Company expects to realize by exercising its right to any collateral held to

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

A previously recognized impairment loss is reversed to the extent that the improvement can be

related to an event occurring after the impairment was recognized, but the adjusted carrying

amount of the financial asset shall be no greater than the amount that would have been reported at

the date of the reversal had the impairment not been recognized.

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,

3856.17

3856.19

1582.41

1582.42

1582.60

3064.65, 66, 67

3064.72, 74



31 December 2015

6

1590.18

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

remeasured and any gain or loss on settlement at an amount different from its carrying value will

be recognized in net income in the period during which it is settled.

Long-term debt

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

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

straight-line basis.

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

and the cash received was accounted for as a government grant and, accordingly as a reduction of

property, plant and equipment.

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

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

liability component.

Income taxes

The Company follows the taxes payable method whereby only the cost or benefit of current

income taxes for the year is reported, as determined in accordance with the rules established by the

taxation authorities.

Revenue recognition

[i] General criteria

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

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

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

consideration received, excluding discounts, returns, and sales taxes. The specific recognition

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

[ii] Sale of equipment and commission

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

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

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

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

obtained.

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

retailers. Revenue from consignment sales is recorded when the retailer has sold the equipment, at

which point the delivery criteria have been met.

3400.31

3400.07

3400.03 [a]

3400.09 [b]

3400.08 [c]

3856.07

3856.11 [c]

3856.A8

3800.22 [a]

3856.21, 22 [a]

3465.03 [a], 04



31 December 2015

7

1590.18

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

reported on a gross or a net basis, which is based upon an assessment of whether the Company is

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

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

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

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

amount receivable, distribution revenue is reported on a gross basis as a sale of equipment. When

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

recognized as commission revenue when the general criteria are met.

[iii] Services

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

[iv] Contracts with separately identifiable components

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

considers the equipment and the services to be separately identifiable components of a single

transaction as both have standalone value to the customer. Both the equipment and the

maintenance and repair services are sold separately.

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

between the components. This allocation is completed based upon the relative, standalone selling

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

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

[v] Interest and dividends

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

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

receive payment is established.

Stock-based compensation

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

common shares are issued [the “Stock Option Plan”]. Options may not be granted with an exercise

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

settlement alternatives.

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

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

time to time.

3400.24

3400.07

3870.65

3870.66

3400.31

3400.32 3400.11

3400.12 [a]

3400.12 [c]



31 December 2015

8

1590.18

[i] Transactions with employees

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[ii] Transactions with non-employees

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

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

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

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

earlier of the date at which a commitment for performance by the counterparty to earn the equity

instruments is reached, the date the equity instruments are granted if they are fully vested and non-

forfeitable at that date or the date at which the counterparty’s performance is complete. The cost

is recognized in the same manner and in the same period as if the Company had paid cash for the

goods or the services.

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

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

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

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

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

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

achievement or non-achievement of the related performance conditions.

3870.24

3870.33

3870.48

3870.43

3870.45

3870.09

3870.14

3870.18

3870.22



31 December 2015

9

1590.18

Hedge accounting

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

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

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

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

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

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

occur at the time and in the amount designated, the Company may choose to apply hedge

accounting. The Company then formally documents the hedging relationship, identifying the

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

hedged and the intended term of the hedging relationship.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

3856.31

3856.33

3856.34

3856.36



31 December 2015

10

1590.18

3. CHANGE IN ACCOUNTING POLICY

Effective 1 January 2015, the Company changed its accounting policy for income taxes so as to

follow the taxes payable method. In previous periods, the Company followed the future income

taxes method with respect to accounting for income taxes. Under this method, future income tax

assets and liabilities were determined based on differences between the carrying amount and the

tax basis of assets and liabilities [temporary differences]. Future income tax assets and liabilities

were measured using the enacted, or substantively enacted, tax rates that would have been in effect

when the differences were expected to reverse.

This change in accounting policy has been applied retrospectively with restatement of prior period

consolidated financial statements. The effects of the change in accounting policy are as follows:

2015 2014

$ $

Increase (decrease) in:

Retained earnings, beginning of year (83,850) (97,000)

Future income tax expense — (13,150)

Future income tax recovery (69,400) —

Net earnings (69,400) 13,150

Current portion of future income tax assets (73,000) (6,000)

Future income tax assets (133,000) (136,000)

Current portion of future income tax liabilities (6,750) (16,150)

Future income tax liabilities (46,000) (42,000)

4. INVESTMENTS

Measurement 2015 2014

basis $ $

Equity instruments quoted in an active market Fair value 151,060 221,060

Equity instruments not quoted in an active

market

Cost, less

impairment 50,000 50,000

Bonds – AA-rated corporate bonds; maturity

date of 12 June 2016; coupon rate 5.50%;

yield 5.78% Amortized cost 402,000 — 603,060 271,060

1506.09 [f] 1506.35 [a]

3465.11

3465.51

3465.53

1506.35 [c], [d]

3856.38 [a],[b],[c]



31 December 2015

11

1590.18

5. ACCOUNTS RECEIVABLE

The terms and conditions for trade accounts receivable – company under common control are the

same commercial terms provided to non-related parties.

6. INVENTORIES

2015 2014 $ $

Raw materials 200,000 150,000

Work in progress 150,000 150,000

Finished goods [note 21] 209,900 125,000

559,900 425,000

The amount of inventories recognized as an expense during the year ended 31 December 2015 is

$2,092,000 [2014 – $1,720,000].

7. INCOME TAXES

Significant components of the income tax expense (recovery) are as follows:

2015

$ 2014

$

Combined basic federal and provincial income taxes at statutory rates 177,092 44,108

Difference between amortization for accounting and for tax purposes 34,930 14,310

Amounts deductible for accounting but not tax purposes 52,073 19,080

Rate differential due to foreign operations 29,745 9,028

Non-capital losses utilized — (55,857)

Manufacturing and processing profits deduction (51,840) —

Small business deduction (55,000) (32,169)

187,000 (1,500)

2015 2014 $ $

Trade 829,499 301,500

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

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

840,499 268,500

3031.35 [b] 3031.36

3031.35 [c]

3856.39

3840.51 [a], [e] 3856.42

3840.51 [e]

3465.88 [b]



31 December 2015

12

1590.18

The Company’s US subsidiary has non-capital losses totaling $670,000 [US$577,584] available

for carryforward, of which $200,000 [US$172,413] expires in 2028, $300,000 [US$258,620]

expires in 2029, and $170,000 [US$146,551] expires in 2031.

8. LOAN TO RELATED PARTY

During the year ended 31 December 2013, the Company provided a housing relocation loan to an

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

December 2017.

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

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

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

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

cash received, which amounted to $17,316, was recorded as compensation expense at the

inception of the loan. Amortization of this discount amounts to $4,329 annually and is recorded as

interest income.

9. PROPERTY, PLANT AND EQUIPMENT

2015 2014

Cost

Accumulated

amortization

Net

carrying

value Cost

Accumulated

amortization

Net

carrying

value $ $ $ $ $ $

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

Building 608,000 64,000 544,000 608,000 32,000 576,000 Office furniture 380,000 244,000 136,000 380,000 206,000 174,000

Machinery and equipment 1,840,000 1,102,500 737,500 1,910,000 1,061,500 848,500

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

3,678,000 2,018,000 1,660,000 3,718,000 1,749,500 1,968,500

During the year ended 31 December 2015, the Company determined that machinery used only in

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

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

carrying value of this machinery, with a cost of $160,000 and accumulated amortization of

$120,000, without further use to the Company and without resale or scrap value was recorded as

an impairment loss.

3061.24 [a], [b]

3061.28

3063.09 3061.27

3063.24

3063.06

3465.88 [d]

3840.51 [a]-[c], [e] 3840.58

3840.56

3840.51 [a]-[e] 3856.07, 09

3840.56, 58

3856.A3



31 December 2015

13

1590.18

10. ASSETS UNDER CAPITAL LEASES

2015 2014

Cost

Accumulated

amortization

Net

carrying

value Cost

Accumulated

amortization

Net

carrying

value $ $ $ $ $ $

Machinery and equipment 500,000 312,500 187,500 500,000 250,000 250,000

Computer hardware 40,000 1,670 38,330 — — —

540,000 314,170 225,830 500,000 250,000 250,000

Additions to computer hardware under capital leases during the year ended 31 December 2015

totalled $40,000 [2014 – nil].

11. INTANGIBLE ASSETS

2015 2014 $ $

Intangible assets subject to amortization

Patents 50,000 50,000

Less accumulated amortization on patents 20,000 14,000

30,000 36,000

Customer lists 70,000 70,000

Less accumulated amortization on customer lists 48,000 38,000

22,000 32,000

Intangible asset not subject to amortization

License 60,000 60,000

112,000 128,000

12. GOODWILL

2015 2014 $ $

Balance, beginning of year 494,000 494,000

Impairment loss (60,000) —

Balance, end of year 434,000 494,000

A loss of a major customer has resulted in continued and significant losses in the Company’s US-

based subsidiary, which provides maintenance services for highly specialized robotic assembly

line production machinery in the automotive sector.

3064.91 [a] [i]

3064.91 [b]

3064.93 [b]

3064.93 [a]

3064.72

3065.73 [a], [b]



31 December 2015

14

1590.18

As a result, the Company determined that there were indicators that the carrying amount of the

reporting unit to which goodwill is assigned may exceed the fair value of the reporting unit.

Accordingly, the Company undertook a goodwill impairment test, which was based on a

discounted cash flow analysis.

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

fair value of this reporting unit was less than its carrying amount [including goodwill] by $60,000.

A goodwill impairment loss in this amount has been recorded for the year ended 31 December

2015.

13. CREDIT FACILITY

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

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

prime rate was 3.00% as at 31 December 2015 [2014 – 2.70%]. No amounts were drawn as at

31 December 2015 [2014 – $117,127]. The Facility is collateralized by all accounts receivable and

inventories of the Company, which have a carrying value of $1,400,399 as at 31 December 2015

[2014 – $693,500]. A $20,000 tranche of the Facility [2014 – $20,000] is available for letters of

credit.

14. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

2015 2014 $ $

Trade payables and accrued liabilities 230,262 239,063

Trade – supplier controlled by a director — 46,625

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

Termination benefits 59,000 —

Government remittances payable 20,536 43,596

390,215 418,715

During the year ended 31 December 2015, as a result of an effort to streamline a number of the

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

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

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

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

$59,000 remains accrued at 31 December 2015 and will be paid in the year ending 31 December

2016.

3462.102

3840.51 [e]

3856.43 [d]

3462.102

1510.15, 16

3064.74

3064.93 [b]



31 December 2015

15

1590.18

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 2011, the Company completed a business combination in which it agreed to pay

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

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

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

settlement, if any, of the contingent consideration in November 2016. Given the actual financial

performance of the acquiree since November 2011, the estimate of the maximum amount payable

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

16. OBLIGATIONS UNDER CAPITAL LEASES

2015 2014 $ $

Obligation under capital lease for machinery and equipment,

with interest at a rate of 8%, maturing on 31 December 2018 233,073 297,086

Obligation under capital lease for computer hardware, with

interest at a rate of 7%, maturing on 30 June 2019 38,660 —

271,733 297,086

Less current portion 81,845 64,013

189,888 233,073

Future minimum lease payments, including principal and interest, under the capital leases for

subsequent years are as follows:

$

2016 111,865

2017 111,865

2018 111,865

2019 7,000

342,595

The capital leases are secured by the underlying leased assets.

3065.18

3065.74 [a], [b], [c]

3065.23

3065.76

3065.74 [d]

1508.05, 06, 07

1582.41 1582.62 [e]

3840.51 [e]



31 December 2015

16

1590.18

17. LONG-TERM DEBT

2015 2014

$ $

Senior note payable

$1,000,000, 8-year, bearing interest at the prime rate plus 4.5%,

repayable in annual instalments of interest and principal in the

amount $187,444, maturing on 31 December 2018.

Collateralized by land, building, and machinery and equipment

having a net carrying value of $1,501,500 [2014 − $1,644,500].

466,145 594,173

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

443,645 566,048

Note payable

$350,000, 5-year note payable, bearing interest at the prime rate

plus 4.5%, repayable on 31 October 2019. Collateralized by a

second-ranking lien on the totality of the Company’s trade

accounts receivable and inventories having a carrying value of

$1,400,399 [2014 − $693,500].

350,000 —

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

$350,000, 5-year, annual interest payments at the prime rate plus

3%; principal maturing on 31 December 2020. Convertible at

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

the quotient of dividing the outstanding principal and accrued

interest by $1.12.

350,000 350,000

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

348,000 346,000

Interest-free unsecured government loan

$400,000, 5-year loan, repayable in annual instalments of

$100,000 commencing in the second year of the loan and

maturing on 31 December 2016.

100,000 200,000

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

79,444 158,888

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

Less current portion 220,273 201,846

Long-term portion of long-term debt 986,233 869,090

3856.43 [a]-[d], [f]

3856.44

3856.07

3856.43 [a]-[d], [f]

3856.44

3856.07

3856.43 [a]-[d], [f]

3856.21, 22 [a]

3856.47 [a]

3856.07

3856.43 [a]-[d], [f]

3856.A3



31 December 2015

17

1590.18

The notes payable contain a number of restrictive covenants that require the Company to be in

compliance with a number of financial ratios and non-financial criteria. As at

31 December 2015, the Company was not in compliance and continues not to be in compliance

with this requirement. The Company has obtained a waiver of this requirement from the bank.

On 17 February 2016, the Company reached an agreement with the convertible debenture holders

to extend the maturity date of the instrument to 31 December 2020. Consequently, at 31 December

2015, the convertible debentures have been presented as a long-term financial liability.

During the year ended 31 December 2011, the Company received an interest-free unsecured

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

expenditures for new hires, as part of a one-time government stimulus spending project in 2010.

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

repaid, are as follows:

$

2016 240,829

2017 154,912

2018 170,404

2019 350,000

2020 350,000

1,266,145

3856.46

1510.13 [b]

3856.45



31 December 2015

18

1590.18

18. 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 repayment before 1 January 2017. Accordingly, the amount has been presented as a long-

term financial liability.

19. EQUITY

Common shares

Common shares, each share entitled to one vote, changes therein as follows:

Number of

shares

#

$

Balance as at 31 December 2014 2,015,000 606,750

Shares issued for cash consideration 200,000 160,000

Share issuance costs — (10,000)

Shares issued on exercise of stock options 20,000 29,000

Balance as at 31 December 2015 2,235,000 785,750

Redeemable preferred shares

On 1 January 2007, the Company issued 50,000 preferred shares with a stated value of $230,000

in a tax planning arrangement under Section 85 of the Income Tax Act (Canada). These preferred

shares are redeemable at the holders’ option for $5.20 per share and carry a 9.25% non-cumulative

dividend.

During the year ended 31 December 2015, 10,000 preferred shares [2014 – nil] were redeemed at

their redemption amount of $52,000. The excess of the redemption value over the $46,000

carrying value of the preferred shares of $6,000 was recorded as an adjustment to retained

earnings. The remaining 40,000 preferred shares outstanding as at 31 December 2015 are not

scheduled to be redeemed in the next five years.

1510.13 [a]

3240.20 [a] 3251.04 [d]

3240.20 [e]

3240.22 [a] 3870.67 [e]

3240.20 [b], [c]

3856.47 [c] [ii]

3240.11

3856.47 [c] [iii]



31 December 2015

19

1590.18

19. EQUITY [Cont'd]

Stock-based compensation

The Stock Option Plan is applicable to full-time employees and directors of the Company for the

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

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

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

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

Additional information concerning stock options outstanding as at 31 December 2015 and 2014

are as follows:

2015 2014

Range of

exercise

prices

Number of

options

Weighted

average

remaining

contractual

life

Weighted

average

exercise

price

Number of

options

Weighted

average

remaining

contractual

life

Weighted

average

exercise

price $ # [Years] $ # [Years] $

0.45-0.55 25,000 6.80 0.57 25,000 7.80 0.57

0.71-0.90 115,000 6.91 0.76 65,000 7.85 0.78

1.15 50,000 6.50 1.15 70,000 7.50 1.15

0.45-1.15 190,000 6.79 0.84 160,000 7.69 0.91

During the year ended 31 December 2015, the Company granted 50,000 [2014 – 45,000] stock

options with a weighted average exercise price of $0.75 [2014 – $0.60].

During the year ended 31 December 2015, employees of the Company exercised 20,000 [2014 –

nil] stock options at an exercise price of $1.15 [2014 – nil] per option. The cash consideration of

$23,000 [2014 – nil], along with the contributed surplus previously recognized on the exercised

stock options of $6,000 [2014 – nil] was recognized as an increase in common shares.

Contributed surplus

2015 2014

$ $

Balance, beginning of year 40,000 —

Stock-based compensation 85,000 40,000

Stock options exercised (6,000) —

Balance, end of year 119,000 40,000

3870.66

3870.67 [a] [i]

3870.67 [a] [ii]

3870.67 [e]

3251.04 [c]

3870.67 [d]

3870.48



31 December 2015

20

1590.18

20. INTEREST EXPENSE ON LONG-TERM OBLIGATIONS

2015 2014 $ $

Senior note payable 59,417 71,056

Interest expense on capital lease obligations 29,709 35,528

Note payable 27,708 —

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

Convertible debenture 18,375 21,000

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

166,307 155,765

21. RELATED PARTY TRANSACTIONS

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

purchases equipment for resale from a supplier controlled by a director. As at 31 December 2015,

finished goods inventory contained machinery in the amount of $50,000 [2014 – nil] which was

purchased from this related party. The Company engages a marketing firm owned by the spouse of

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

States which are included in selling expenses.

During the year ended 31 December 2015, the Company purchased machinery and equipment

from a company under common control for cash consideration of $72,000 [2014 – nil]. The

machinery and equipment had a carrying value of $52,500 [2014 – nil]. This transaction with a

related party was not in the normal course of operations and there was no substantive change in

ownership interests, and accordingly, it was measured at the carrying amount of the asset acquired.

The resulting difference of $19,500 [2014 – nil] has been recorded directly in retained earnings.

All related party transactions, with the exception of the purchase of machinery and equipment

during the year as described above, are in the normal course of operations and are measured at the

agreed upon exchange amount. The Company’s other related party transactions are as follows:

2015 2014

$ $

Revenue – maintenance services 350,000 60,000

Cost of goods sold 630,000 50,000

Selling expenses 50,000 62,000

3856.52 [d]

1520.04 [k] [iv]

1520.04 [k] [iv]

3065.75; 1520.04 [l]

1520.04 [k] [iv]

3856.A5

1520.04 [k] [iv]

3856.52 [d]

3840.51 [a], [b]

3840.53, 54, 56

3840.08, 09

3840.51 [a], [b], [c], [d]

3840.56

3840.51 [d] 3840.18

3840.51 [c], 58



31 December 2015

21

1590.18

22. FINANCIAL INSTRUMENTS – RISKS AND UNCERTAINTIES

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 automobile sector. As at 31 December 2015, two customers comprised 38% of

trade accounts receivable [2014 – one customer comprised 25%].

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.

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 US dollars and, as a result, some financial assets are exposed to foreign

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

financial assets and liabilities:

2015 2014

US$ US$

Cash and cash equivalents 103,511 80,250

Accounts receivable 300,052 75,000

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

353,443 144,704

In addition, the Company uses derivative financial instruments to mitigate its foreign currency

risk.

3856.37, 53

3856.A66 [a]

3856.A67 [a], [d]

3856.54

3856.54

3856.54

3856.A66 [b], [e]



31 December 2015

22

1590.18

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 2016, at which time the Company will

receive euros in exchange for the equipment sold. In order to fix the revenue 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

100,000 euros, 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 2016. 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.

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 debentures 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%. The

Company has elected to apply hedge accounting to this interest rate swap. 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 2015 is an interest

expense of 10% or $46,615 and a net amount of $13,052 due to the swap counterparty as at

31 December 2015. 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 and operating lease commitments.

3856.A66 [b],[e]

3856.51 [a]

3856.31

3856.32 [a]

3856.33[a]

3856.A66 [c], [e]

3856.51 [b]

3856.30 3856.31

3856.32 [c]

3856.34 [a], [b]

3856.48 [d]

3856.A66 [d]



31 December 2015

23

1590.18

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 equity instruments traded in

an active market.

23. 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 significant effect on the Company’s financial position or results of

operations.

[i] 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 2015, 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 that 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.

[ii] Employment contract litigation

During the year ended 31 December 2015, a wrongful dismissal suit has been brought forth

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 2015 consolidated financial statements.

[iii] Guarantee

The Company has guaranteed the mortgage payable of GGSII. The balance of GGSII’s mortgage

payable as at 31 December 2015 is $560,523 [2014 – $593,559], which is secured by the

underlying property. The Company is only required to act under the terms of the guarantee in the

event of default by GGSII. As at 31 December 2015, GGSII was in compliance with all

requirements under the terms of the mortgage payable.

3856.A66 [e], [f]

1508.05, 06, 07

1508.05, 06, 07

3290.18 [a]

3290.19 [a], [b]

1508.05, 06, 07

3290.18 [c]

3290.19 [a], [b]

3290.14

AcG-14.9 [a],

[b], [c], [e]



31 December 2015

24

1590.18

24. COMMITMENTS

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

annual minimum payments under these operating leases are as follows:

$

2016 12,000

2017 9,000

2018 8,000

2019 5,000

2020 5,000

Thereafter 75,000

114,000

The Company has a contractual obligation to purchase a machine during the year ended

31 December 2016 in the amount of $150,000.

25. ECONOMIC DEPENDENCE

During the year ended 31 December 2015, a contract with one of the Company’s major customers

for its extruding machines provided 65% of revenue from the sale of equipment [2014 – 30%].

During the year ended 31 December 2015, two maintenance service contracts with two automobile

manufacturers provided 70% of revenue from services [2014 – 75%]. These contracts are subject

to renewal during the year ended 31 December 2017.

3065.77

3280.02 [b]

3841.02

3841.06



31 December 2015

25

1590.18

26. SUBSEQUENT EVENT

On 31 January 2016, the Company acquired 100% of the issued and outstanding common shares

of Distribution Company Limited, a distributor of specialized industrial equipment, for cash

consideration of $500,000. The Company also incurred $63,450 of transaction costs as a result of

this transaction.

The consideration paid will be allocated to the net assets acquired based on their acquisition date

fair values and the excess of the purchase price over the fair value of the net assets acquired will

be recorded as goodwill. This acquisition will be accounted for as a business combination and,

accordingly, the results of operations from 31 January 2016 will be included in the consolidated

financial statements of the Company. The transaction can be summarized as follows1:

Net assets acquired

$

Cash 23,523

Accounts receivable 45,133

Property, plant and equipment 450,255

Customer contracts 50,760

Goodwill 45,600

Accounts payable and accrued liabilities (21,385)

Long-term debt (93,886)

500,000

1 If the acquisition date of a business combination is after the end of the reporting period but

before the financial statements are completed, and the initial accounting for the business

combination is incomplete at the time the financial statements are completed, the acquirer shall

describe which disclosures could not be made and the reasons why they cannot be made.

In such cases, the following paragraph might replace this sentence and the chart below it:

The initial accounting for the business combination was incomplete at the time the consolidated

financial statements were completed and therefore the amounts recognized as of the acquisition

date for each major class of assets acquired and liabilities assumed, including goodwill, if any, or a

gain from a bargain purchase, if any, have not been determined. As a result, the Company has not

disclosed a condensed balance sheet showing the amount recognized as of the acquisition date for

each major class of assets acquired and liabilities assumed.

3820.10, 11, 12,

13 [c]; 1582.61 [b]

1582.62 [a]-[d]

1582.62A [a]

1582.64

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

date of publication, and is intended for general guidance only. It should not

be regarded as comprehensive or a substitute for professional advice. Before

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