Pyrogenesis Canada Inc.: Financial Statements

PyroGenesis Canada Inc.
Financial Statements
December 31, 2011
See accompanying Notes to the Financial Statements -1-

December 31, 2011
Contents
Independent auditors report Financial statements Statement of financial position Statement of comprehensive loss Statement of changes in equity Statement of cash flows Notes to the financial statements 5 6 7 8 9-42 4

Statement of Financial Position
At December 31, 2011 $ December 31, 2010 $ January 1, 2010 $
Assets Current assets Cash and cash equivalents Accounts receivable [note 6] Sales tax receivable Investment tax credits receivable [note 7] Prepaid expenses Total current assets Machinery and equipment [note 8] Licenses and intellectual property [note 9] Total assets Liabilities Current liabilities Bank indebtedness [note 10] Accounts payable and accrued liabilities [note 11] Current portion of obligation under finance lease Billings in excess of costs and profits on uncompleted contracts Loans - other [note 13] Long-term debt - current portion [note 14] Total current liabilities Non-interest bearing loans - company under common control Obligation under finance lease Long-term debt Loans - other [note 13] Total liabilities Shareholders equity [note 15] Common shares Share capital - preferred Contributed surplus Other equity Deficit
481,396 1,158,850 64,531 1,944,518 50,522 3,699,817 1,460,823 6,984,969 12,145,609
237,291 576,551 114,509 3,800,000 49,239 4,777,590 1,338,334 463,574 6,579,498
722,941 868,525 295,752 3,177,000 27,164 5,091,382 353,201 540,837 5,985,420
240,000 2,414,353 606,202 548,050 976,396 4,785,001 7,762,388 12,547,389
3,341,000 1,427,986 3,873 57,413 1,000,000 5,830,272 535,270 6,365,542
1,190,000 999,515 13,315 2,423,911 4,626,741 100,738 3,873 1,000,000 507,345 6,238,697
10,596,651 821,341 30,966 (11,850,738) (401,780) 12,145,609
4,026,588 1,093,800 (4,906,432) 213,956 6,579,498
2,472,271 (2,725,548) (253,277) 5,985,420
Contingent liability and subsequent events [notes 21 and 22]

Statement of Comprehensive Loss
Year ended December 31, 2011 $ 5,065,581 2010 $ 7,715,131
Revenue
Expenses Cost of sales and services Selling, general and administrative Financing charges
5,879,281 4,628,504 859,189 11,366,974
6,237,319 3,391,370 292,126 9,920,815 (2,205,684) 24,800 (2,180,884)
Loss from operations Other income Public company listing [note 2] Total comprehensive loss
(6,301,393) 51,964 (694,877) (6,944,306)
Basic and fully diluted loss per share Weighted average number of common shares outstanding - basic and diluted [note 19]
(0.12) 55,917,121
(0.05) 47,371,377

Statement of Changes in Equity
Year ended December 31 On March 22, 2011, the Class A shares were subdivided on a 21.08 for 1 basis. Prior year numbers have been restated to reflect the stock subdivision. Broker Number Number warrant Common Preferred and of of common Share preferred Share options Contributed Other Total capital capital shares shares number surplus Equity Deficit equity $ $ $ $ $ $ Balance - January 1, 2010 Preferred shares issued Cash deposit for shares Share issue costs [note15(xiii)] Net loss during year Balance - December 31, 2010 Non-brokered private placement [note 15(iii)] Shares issued for deposit above [note 15(xiii)] Conversion of debenture Professional fees related to FIER loan Private placement subscription receipts [note 15(iv)] Commissions and fees private placement Agents warrants Purchase of IGIC net assets
[note 2] [note 15(v)] [note 15(xiii)] [note 15(xii)]
47,371,377 2,472,271 1,750,000 (195,683) -
355,827 3,150,000 3,505,827
110,306 711,035 821,341
(2,725,548) -
(253,277) 1,093,800
1,093,800 1,093,800 -
1,750,000 (195,683) (2,180,884) (2,180,884) (4,906,432) 213,956 250,000 1,000,000 (99,620) 4,066,600 (734,474) 1,040,000 64,063 711,035 30,966 (401,780)
47,371,377 4,026,588 1,093,800 1,093,800 312,500 2,187,500 250,000 -
1,388,889 1,000,000 (99,620)
5,083,250 4,066,600 (734,474) (110,306)
1,300,000 1,040,000 103,328 64,063
Stock options exercised

[note 15(vii)]
Conversion of preferred shares

[note 15(vi)]
1,367,250 1,093,800 (1,093,800) (1,093,800) -
30,966 -
Stock based compensation

[note 15(ix)-(xi)]
Equity portion of convertible debenture [note 14] Net loss during the period Balance - December 31, 2011
(6,944,306) (6,944,306)
59,114,094 10,596,651
30,966 (11,850,738)

Statement of Cash Flows
2011 $ Cash flows provided (used) by Operating activities Net loss Items not requiring an outlay of cash: Public company listing Expenses paid through issuance of options [note 15] Amortization of machinery and equipment Accretion of convertible debenture Amortization of licenses Net change in non-cash operating working capital items [note 16] 2010 $
(6,944,306) 694,877 711,035 322,100 7,362 1,115,031 (4,093,901) 2,848,142 (1,245,759)
(2,180,884) 149,323 77,263 (1,954,298) (2,109,885) (4,064,183)
Investing activities Purchase of machinery and equipment [note 15(xii)] Cash acquired as a result of amalgamation
(444,589) 467,790 23,201
(40,656) (40,656)
Financing activities (Decrease) Increase in bank indebtedness Repayment of obligation under finance lease Repayment of non-interest bearing loans company under common control Increase in loans - other Repayment of loans - other Proceeds from long-term debt Proceeds of issuance of subscription receipts Proceeds from issuance of common shares Costs related to equity issues
(3,101,000) (3,873) 227,926 (89,184) 1,000,000 4,380,663 (947,869) 1,466,663
2,151,000 (13,315) (100,738) 27,925 1,750,000 (195,683) 3,619,189
Increase (decrease) in cash Cash and cash equivalents - beginning of year Cash and cash equivalents - end of year
244,105 237,291 481,396
(485,650) 722,941 237,291

Notes to the Financial Statements
For the year ended December 31, 2011 1. Nature of operations and going concern disclosure
(a) Nature of operations PyroGenesis Canada Inc. (the Company) was formed by the amalgamation of PyroGenesis Canada Inc. with Industrial Growth Income Corporation (IGIC) on July 11, 2011 (Note 2). Information prior to this date, presented in these financial statements, represent the operations of PyroGenesis Canada Inc., a private company, (incorporated on June 5, 2006). The Company owns patents of advanced waste treatment systems technology and provides such systems to its clients. The Company is domiciled at 1744 William Street, Suite 200, Montreal, Quebec. The Company is publicly traded on the TSX Venture Exchange under the Symbol PYR. These financial statements were approved and authorized for issuance by the Board of Directors on April 27, 2012. (b) Going concern These Financial statements have been prepared using International Financial Reporting Standards (IFRS) applicable to a going concern, which contemplates the realization of assets and settlement of liabilities in the normal course of business as they become due. Several adverse conditions and events cast substantial doubt upon the validity of this assumption. The company has a history of operating losses and negative cash flows and its ability to continue as a going concern is uncertain and is dependant on its ability to fund its working capital, complete the development of its products, and eventually to generate positive cash flows from the products that it has developed. Management plans to explore all alternatives possible, including equity financing. These financial statements do not reflect the adjustments to the carrying values of assets and liabilities and the reported expenses and statement of financial position classifications that would be necessary were the going concern assumption inappropriate, and these adjustments could be material. 2. Basis of preparation
(a) Statement of compliance: The financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS"), issued by the International Accounting Standards Board ("IASB"). This is the first time the Company has prepared its annual financial statements in accordance with IFRS, having previously prepared its financial statements in accordance with Canadian Generally Accepted Accounting Principles ("Canadian GAAP"). IFRS 1 First Time Adoption of International Financial Reporting Standards ("IFRS 1") has been applied in preparing these financial statements. An explanation of how the transition to IFRS has affected the Company's accounting policies as compared to those disclosed in the Company's annual audited Financial Statements for the period ended December 31, 2010 issued under GAAP is provided in Note 27 along with reconciliations presenting the impact of the transition to IFRS for the comparative period of January 1, 2010, and for the year ended December 31, 2010. (b) Functional and Presentation Currency These financial statements are presented in Canadian dollars, which is the Companys functional currency.
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For the year ended December 31, 2011 2. Basis of preparation (continued)
(c) Basis of measurement The financial statements have been prepared on the historical cost basis except for the following item in the statement of financial position:
Financial instruments classified as fair value through profit or loss and available for sale are measured at
fair value. (d) On July 11, 2011, PyroGenesis amalgamated with IGIC (the Qualifying Transaction). Each holder of a PyroGenesis share received one amalgamation share. Each holder of an IGIC share received 0.32298 amalgamation shares. Upon Completion of the transaction IGIC shareholders owned approximately 2.2% of the amalgamation shares and PyroGenesis shareholders owned 97.8%. Accordingly, PyroGenesis was considered to be the acquirer. The amalgamation was accounted for as an acquisition of a non-trading shell company within the meaning ascribed by IFRS 2 share based payment. The fair value of the shares issued to IGIC was based on the share value used in private placements. The consideration of 1,300,000 shares at $1,040,000 was allocated to identifiable assets and liabilities of IGIC as follows: $ Cash Sales tax receivable Accounts payable Purchase price of net assets Public listing expense Total consideration 467,790 2,966 (11,858) 458,898 581,102 1,040,000 The excess of the
IGIC share capital and contributed surplus have been eliminated upon consolidation. purchase price over net assets acquired has been recorded as public listing expense.
An additional $113,775 of professional fees related to the amalgamation was also recorded as public listing expenses. 3. Significant accounting policies
(A) Revenue recognition Revenues relating to research and equipment contracts are recognized on the percentage-of-completion basis. The degree of completion is assessed based on the proportion of labour incurred to date, in relation to performance, compared to total labour anticipated to provide the service and other deliverables required under the entire contract. Provisions are made for the entire amount of expected losses, if any, in the period in which they are first determinable. The percentage-of-completion method requires the use of estimates to determine the recorded amount of revenues and work-in-progress. Given this estimation process, it is possible that changes in future conditions could cause a material change in the recognized amount of revenues and unbilled work-in-progress and accrued expenses.
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For the year ended December 31, 2011 3. Significant accounting policies (continued)
(B) Foreign currency translation The financial statements are presented in Canadian dollars, which is the Companys functional currency. Foreign currency balances are translated at year-end exchange rates for monetary items and at historical rates for non-monetary items. Revenues and expenses are translated using average exchange rates prevailing at the time of the transaction. Translation gains or losses are included in the determination of comprehensive loss. (C) Financial instruments Financial assets i) Initial recognition A financial instrument is any contract that gives rise to a financial asset of one party and a financial liability or equity instrument of another party. Financial assets and financial liabilities are recognized on the statement of financial position when the Company becomes a party to contractual provisions of the instrument. On initial recognition, all financial instruments must be measured at fair value which is the amount of consideration that would be agreed upon in an arms length transaction between knowledgeable willing parties who are under no compulsion to act. Subsequent to initial recognition, the fair value of financial instruments is dependent on the purpose for which the financial assets were acquired or issued, their characteristics and the Companys designation of such instruments. Transaction costs are included in the initial measurement of financial instruments except financial instruments classified as fair value through profit or loss. IAS 39, Financial Instruments: Recognition and measurement require that all financial assets be classified as financial assets at fair value through profit or loss, held-to-maturity, available-for-sale or loans and receivables. The Companys financial assets include cash and cash equivalents, accounts receivable and sales tax receivable and investment tax credits receivable. ii) Subsequent measurement Financial assets at fair value through profit or loss: Financial assets at fair value through profit or loss are measured at fair value, with gains or losses, recorded in the statement of operations and comprehensive loss for the period in which they arise. A financial asset at fair value through profit or loss includes assets held for trading and financial assets that are so designated. Held-for-trading securities are usually held for a short term and are actively traded. Loans and receivables: Loans and receivable financial assets are measured at amortized cost using the effective interest rate method. Interest income calculated using the effective interest rate method is recorded in financing income in the period in which it arises. Gains and losses are recognized in the statement of comprehensive loss when these assets are impaired or derecognized. Held-to-maturity: Non-derivative financial assets that are purchased and have a fixed maturity date and which management has the intention and the ability to hold to maturity are classified as held-to-maturity. These instruments are accounted for at amortized cost using the effective interest rate method and charged to income in the period of amortization. The Company currently does not hold any of these assets. Gain and losses are recognized in the statement of comprehensive loss when the assets are impaired or derecognized.
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Available-for-sale: Available-for-sale financial assets are non-derivative financial assets and are measured at fair value, except for investments in equity instruments that do not have a quoted market price in an active market, which are measured at cost. Unrealized gains and losses, including the effect of changes in foreign exchange rates, are recognized directly in Other Comprehensive Income. Upon derecognition of the financial asset, the cumulative gains or losses, previously recognized in Accumulated Other Comprehensive Income (AOCI) are reclassified to net income. As a result, the following classifications were determined: i) ii) Cash and cash equivalents are classified as financial assets at fair value through profit or loss. Accounts receivable, sales tax receivable and investment tax credits receivable are classified as loans and receivables.
Financial liabilities i) Initial recognition
IAS 39, Financial Instruments: Recognition and Measurement requires that all financial liabilities be classified as: financial liabilities at fair value through profit or loss, loans and borrowings, or as derivatives designated as hedging instruments. Classification is determined at the time of initial recognition. Initially, financial liabilities are recognized at fair value. The Companys financial liabilities include bank indebtedness, accounts payable and accrued liabilities, obligation under capital lease, loans and long-term debt. ii) Subsequent measurement Financial liabilities at fair value through profit or loss: Financial liabilities at fair value through profit or loss include financial liabilities that are held for trading (acquired for purpose of selling in the near term) or financial instruments that are so designated. Financial liabilities are measured at fair value. Gains and losses on liabilities held-for-trading are recognized in the statement of comprehensive loss. Loans and borrowings: Financial liabilities classified as loans and borrowings are measured at amortized cost using the effective interest method. Interest expense is recorded in financing expense in the period. As a result, the following classifications were determined: i) Bank indebtedness is classified as financial liabilities at fair value through profit or loss.
ii) Accounts payable and accrued liabilities, loans and long-term debt, including interest payable, as well as capital lease obligations are classified as loans and borrowings, all of which are measured at amortized cost using the effective interest rate method.
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(D) Impairment of financial assets At each reporting date the carrying amounts of financial assets, other than those to be measured at fair value through profit or loss, are assessed to determine whether there is objective, significant evidence of impairment (e.g. a debtor is facing serious financial difficulties, or there is a substantial change in the technological, economic, legal or market environment of the debtor). For equity instruments, a significant or prolonged decline in fair value is objective evidence for a possible impairment. The Company has defined criteria for the significance and duration of a decline in fair value. The amount of the impairment loss on loans and receivables is measured as the difference between the carrying amount of the asset and the present value of estimated future cash flows (excluding expected future credit losses that have not been incurred), discounted at the original effective interest rate of the financial asset. The amount of the impairment loss is recognized in profit or loss. If, in a subsequent reporting period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed and recognized in profit or loss. The impairment loss on loans and receivables is recorded using allowance accounts. The decision to account for credit risks using an allowance account or by directly reducing the receivable depends on the estimated probability of the loss of receivables. When receivables are assessed as uncollectible the impaired asset is derecognized. If an available-for-sale financial asset is impaired, the difference between its cost (net of any principal payment and amortization) and its current fair value, less any impairment loss previously recognized in the statement of comprehensive loss is reclassified from direct recognition in equity to the statement of operations and comprehensive loss. Reversals with respect to equity instruments classified as available-for-sale are not recognized in the statement of comprehensive loss. A reversal of an impairment loss on a debt instrument is reversed through the statement of comprehensive loss if the increase in fair value of the instrument can be objectively related to an event occurring after the impairment loss is recognized in income. (E) Offsetting financial instruments Financial assets and liabilities are offset and the net amount presented in the statement of financial position if, and only if, the Company has a legal right to offset the amounts and there is an intention to either settle on a net basis or to realize the assets and settle the liabilities simultaneously.
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(F) Deferred income taxes i) Current income tax Current income tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the statement of financial position date. ii) Deferred income tax The Company follows the liability method for calculating deferred income taxes. Differences between the amounts reported in the financial statements and the tax bases are applied to tax rates in effect to calculate the deferred tax asset or liability. The effect of any change in income tax rates is recognized in the current period income. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, based on tax rates and tax laws that have been enacted or substantively enacted by the statement of financial position date. Discounting of deferred tax assets and liabilities is not permitted. Deferred tax assets and liabilities are offset if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes related to the same taxable entity and the same taxation authority. Deferred tax is provided in full for all temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements, except when the temporary differences arise from the initial recognition of goodwill, or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss. (G) Earnings (loss) per share The basic loss per share is computed by dividing the net loss by weighted average number of common shares outstanding during the year. The diluted loss per share reflects the potential dilution of common share equivalents, such as outstanding stock options, in the weighted average number of common shares outstanding during the year, if dilutive. For this purpose, the treasury stock method is used for the assumed proceeds upon the exercise of stock options that are used to purchase common shares at the average market price during the year. (H) Machinery and equipment Machinery and equipment are measured at cost less accumulated amortization and accumulated impairment losses if applicable. Cost includes expenditures that are directly attributable to the acquisition of the asset. When major parts of an item of machinery and equipment have different useful lives, they are accounted for separately. Machinery and equipment are amortized from the acquisition date. Amortization is calculated using the declining balance method as follows: Computer hardware Computer software Machinery Computer hardware under capital lease 45% 50% 20% 45%
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Amortization methods, useful lives and residual values are reviewed at each financial year-end and adjusted prospectively if appropriate. Gains and losses on derecognition (on disposal or when it is determined that there are no future economic benefits) of property, plant and equipment are determined by comparing the net disposal proceeds with the carrying amount of property, plant and equipment, and are recognized in the statement of operations and comprehensive loss in the period of derecognition. (I) Impairment - Non-financial assets The carrying amounts of the Companys non-financial assets are assessed at each reporting date to determine whether there is an indication of impairment. If any such indication exists, then the assets recoverable amount is estimated. The recoverable amount of an asset or cash-generating unit (CGU) is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Assets that cannot be tested individually are grouped into the smallest independent group of assets that generate cash inflows from continuing use. An impairment loss is recognized if the carrying amount of an asset or its CGU exceeds its recoverable amount. Impairment losses are recognized in the statement of operations and comprehensive loss. Impairment losses recognized in respect of the CGU are allocated first to reduce the carrying amount of goodwill allocated to the units, and then to reduce the carrying amounts on a pro-rata basis of the other assets in the unit. Impairment losses recognized in prior periods are assessed at each reporting date as to whether there are any indications that the previously recognized losses may no longer exist or may be decreased. An impairment loss is reversed only to the extent that the assets carrying amount does not exceed the carrying amount that would have been determined, net of amortization, had no impairment loss been recognized for the asset in prior years. (J) Government assistance and investment tax credits Investment tax credits are comprised of scientific research and experimental development tax credits. Government assistance and investment tax credits are recognized when there is reasonable assurance of their recovery using the cost reduction method. Investment tax credits are subject to the customary approvals by the pertinent tax authorities. Adjustments required, if any, are reflected in the year when such assessments are received. (K) Intangible assets Acquired intangible assets are measured at cost on initial recognition. Following initial recognition, intangible assets are carried at cost less any accumulated amortization and any accumulated impairment losses. Intangible assets with finite lives are amortized over the useful life of the asset and assessed for impairment whenever there is an indication of impairment. The amortization period and method for an intangible asset with a finite life is reviewed at least at each financial year end. Changes in useful life or consumption are accounted for by changing the amortization period or method, and are treated prospectively as changes in accounting estimates. Amortization expense on the intangible assets with finite lives is recognized in the statement of operations and comprehensive loss. Gains or losses arising from derecognition are recognized in the statement of comprehensive loss at the time that the asset is derecognized.
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Intangible assets represent that value of licences that were acquired from a related party during the period. The estimated useful life of the licence acquired is 10 years. Amortization is calculated on a straight line basis over the life of the asset. Research and development costs Research costs are charged to earnings in the year they are incurred, net of related investment tax credits. Development costs are charged to earnings in the year they are incurred net of related investment tax credits unless they meet specific criteria related to technical, market and financial feasibility in order to be recognized as an intangible asset: the technical feasibility of completing the intangible asset so that it will be available for use or sale; its intention to complete and its ability to use or sell the asset; how the asset will generate future economic benefits; the availability of resources to complete the asset; and the ability to measure reliably the expenditure during development. Amortization of the asset begins when development is complete. During the period of development, the asset is tested annually for impairment. (L) Cash and cash equivalents Cash and cash equivalents include short term investments with maturities of 90 days or less when acquired. (M) General provisions Provisions are recognized when the Company has a present obligation as a result of a past event, it is probable that an outflow of resources will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. The present value of expected future cash outflows is recognized as a liability and the increase to the liability due to the passage of time is recorded as a finance expense. (N) Warranty provision At the time of sale, a warranty cost is recorded. The warranty provision is based on management estimates of the expected number of warranty claims and the expected cost of these claims. The warranty provision is based on past experience and on the nature of the contract. (O) Leases Leases where the Company assumes substantially all the risks and rewards of ownership are classified as finance leases. At the commencement of the lease, the leased property is measured at the lower of its fair value and the present value of the minimum lease payments. Lease payments are apportioned between finance charges and reduction of the outstanding liability. So as to produce a constant periodic rate of interest on the remaining balance of the liability. Operating lease payments are expensed in the statement of comprehensive loss on a straight line basis over the lease term. (P) Joint operations The Company conducts some of its activities through interests in jointly controlled assets and operations where it has a direct ownership interest in and it jointly controls the assets and/or operations. The company recognizes its proportionate share of the income, expenses, assets, and liabilities of these jointly controlled assets and/or operations in the financial statements.
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(Q) Share-based payments The Company applies a fair value based method of accounting to all share-based payments. Employee and director stock options are measured at their fair value of each tranche on the grant date and recognized in its respective vesting period. Non-employee stock options are measured based on the service provided to the reporting date and at their then-current fair values. The cost of stock options is presented as share-based payment expense when applicable. On the exercise of stock options share capital is credited for consideration received and for fair value amounts previously credited to contributed surplus. The Company uses the BlackScholes option-pricing model to estimate the fair value of share-based payments. (R) Government grants Government grants are recognized in profit or loss on a systematic basis over the periods in which the Company recognizes expenses as related costs for which funded expenditures are incurred. Government grants are recognized when there is reasonable assurance that the Company will comply with the terms and conditions associated with the grants and the grants will be received. 4. Significant accounting judgments, estimates and assumptions
The preparation of financial statements requires management to make judgments, estimates and assumptions based on currently available information that affect the reported amounts of assets, liabilities and contingent liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Estimates and judgments are continuously evaluated and are based on managements experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. However, actual results could differ from those estimated. By their very nature, these estimates are subject to measurement uncertainty and the effect of any changes in estimates on the financial statements of future periods could be material. In the process of applying the Companys accounting policies, management has made the following judgments, estimates, and assumptions which have the most significant effect on the amounts recognized in the financial statements: (a) Revenue recognition Revenues relating to research and equipment contracts are recognized on the percentage-of-completion basis. The degree of completion is assessed based on the proportion of labour incurred to date, in relation to performance, compared to total labour anticipated to provide the service and other deliverables required under the entire contract. Provisions are made for the entire amount of expected losses, if any, in the period in which they are first determinable. The percentage-of-completion method requires the use of estimates to determine the recorded amount of revenues and work-in-progress. Given this estimation process, it is possible that changes in future conditions could cause a material change in the recognized amount of revenues and unbilled work-in-progress and accrued expenses. (b) Warranty provision At the time of sale, a warrant cost is recorded. The warranty provision is based on management estimates of expected number of warranty claims and the expected cost of these claims. The warranty provision is based on past experience and on the nature of the contract and is reviewed each reporting date by management. Should these estimates differ materially from actual warranty cost, the Company may incur costs that differ from the provision. Such costs are recorded in costs of sales and services.
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For the year ended December 31, 2011 4. Significant accounting judgments, estimates and assumptions (continued) (c) Stock-based compensation The company uses the fair value method of valuing compensation expense associated with the Companys stock option plan. Estimating fair value requires determining the most appropriate valuation model for a grant of equity instruments, which is dependent on the terms and conditions of the grant. This also requires determining the most appropriate inputs to the valuation model including the expected life of the option, volatility, expected forfeitures and distribution yield. The assumptions and models are discussed in note 15. (d) Assessment of impairments The Companys impairment test for licenses is based on value in use calculation, which uses a discounted cash flow model. Cash flows are derived from budgets for the next three years and exclude restructuring activities that the Company is not yet committed to or future investment which enhance the asset base of the cash generating unit being tested. The recovered amount is most sensitive to the discount rate that is used for the discounted cash flow model, as well as expected future cash inflows and the growth rate. 5. Changes in accounting policies and practices
Recent accounting pronouncements and amendments The following pronouncements and amendments are effective for annual periods beginning on or after January 1, 2013 unless otherwise stated. IAS 1 Presentation of financial statements The amendment to IAS 1, issued June 2011, requires items in other comprehensive income and their related income tax effects to be grouped on the basis of whether they may subsequently be reclassified to profit or loss. The amendment will only affect disclosure and is effective for annual periods beginning on or after January 1, 2012. IAS 12 Income taxes The amendment to IAS 12, issued in December 2010, incorporates the SIC 21 Income taxes - Recovery of revalued non-depreciable assets consensus, which requires deferred tax liabilities/assets relating to revalued non-depreciable assets, to reflect the tax consequences of recovering the carrying amount through sale. It also introduces a rebuttable presumption that the carrying amount of investment property at fair value will be recovered through sale. The amendment, which supersedes SIC 21, is effective for annual periods beginning on or after January 1, 2012. The Company is currently assessing the impact of this amendment on its financial statements. IFRS 7 Financial instruments: disclosures The amendment to IFRS 7, issued in October 2010, provides greater transparency around risk exposures relating to transfers of financial assets that are not derecognized in their entirety, and derecognized in their entirety, but with which the entity continues to have some continuing involvement. The amendment will only affect disclosure and is effective for annual periods beginning on or after July 1, 2011.
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For the year ended December 31, 2011 5. Changes in accounting policies and practices (continued)
IFRS 9 Financial Instruments As of January 1, 2015, the Company will be required to adopt IFRS 9 Financial Instruments, which is the result of the first phase of the IASB"s project to replace IAS 39 Financial Instruments: Recognition and Measurement. The new standard replaces the current multiple classification and measurement models for financial assets and liabilities with a single model that has only two classifications: amortized cost and fair value. Portions of the standard remain in development and the full impact of the standard on the Company's financial statements will not be known until the project is complete. IFRS 11 Joint Arrangements IFRS 11 Joint Arrangements will apply to interests in joint arrangements where there is joint control. IFRS 11 would require joint arrangements to be classified as either joint operations or joint ventures. The structure of the joint arrangement would no longer be the most significant factor when classifying the joint arrangement as either a joint operation or a joint venture. In addition, the option to account for joint ventures, previously called jointly controlled entities, using proportionate consolidation may be removed, and equity accounting may be required. Venturers would transition the accounting for joint ventures from the proportionate consolidation method to the equity method by aggregating the carrying values of the proportionately consolidated assets and liabilities into a single line item. These amendments are effective for annual periods beginning on or after January 1, 2013 and early adoption is permitted. The Company is currently assessing the impact of the new standard on the financial statements. IFRS 13 Fair Value Measurement IFRS 13 establishes a single source of guidance for fair value measurements, when fair value is required or permitted by IFRS. The key features of IFRS 13 include: a single framework for measuring fair value while requiring enhanced disclosures when fair value is applied, fair value would be defined as the 'exit price', and concepts of 'highest and best use' and 'valuation premise' would be relevant only for non-financial assets and liabilities. IFRS 13 is effective for annual periods beginning on or after January 1, 2013 and early adoption is permitted. The Company has not yet assessed the impact of the new standard on the Financial statements. IAS 27 Separate Financial Statements As a result of the issue of the new suite of consolidation standards, IAS 27 Separate Financial Statements has been reissued, as the consolidation guidance will now be included in IFRS 10. IAS 27 will now only prescribe the accounting and disclosure requirements for investments in subsidiaries, joint ventures and associates when an entity prepares separate financial statements. These amendments are effective for annual periods beginning on or after January 1, 2013 and early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company's financial statements. IAS 28 Investments in Associates and Joint Ventures As a consequence of the issue of IFRS 10, IFRS 11 and IFRS 12, IAS 28 has been amended and will provide the accounting guidance for investments in associates and to set out the requirements for the application of the equity method when accounting for investments in associates and joint ventures. The amended IAS 28 may be applied by entities that are investors with joint control of, or significant influence over, an investee. These amendments are effective for annual periods beginning on or after January 1, 2013 and early adoption is permitted. The Company is currently assessing the impact of the new standard on the financial statements.
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For the year ended December 31, 2011 5. Changes in accounting policies and practices (continued) IAS 32 Financial Instruments: Presentation This amendment provides clarification on the application of offsetting rules. The amendments are effective for annual periods beginning on or after July 1, 2012. The Company is currently assessing the impact of the new standard on the financial statements. 6. Accounts receivable
Accounts receivable are carried on the balance sheet net of an allowance for doubtful accounts. This provision is established based on the company's best estimates regarding the ultimate recovery of balances for which collection is uncertain. Uncertainty of ultimate collection may become apparent from various indicators, such as a deterioration of the credit situation of a given client and delay in collection beyond the contractually agreed upon payment terms. Management regularly reviews accounts receivable, monitors past due balances and assesses the appropriateness of the allowance for doubtful accounts. The provision for 2011 was nil (2010 - nil). Details of accounts receivable were as follows: December 31, December 31, 2011 2010 $ $ 1 30 days 30 60 days 61 90 days Greater than 90 days Total Receivable from joint operator Other receivable Total accounts receivable 7. Government assistance 251,916 63,778 7,338 434,711 757,743 401,107 1,158,850 410,293 29,182 137,076 576,551 576,551 January 1, 2010 $ 560,756 203,534 7,381 94,769 866,440 2,085 868,525
Research and development tax credits in the amount of $1,058,192 (2010 - $1,877,508) have been included as a reduction of $3,019,293 (2010 - $2,719,321) of related research and development expenses. The research and development tax credit arise from projects over the following years: Project year 2008 2009 2010 2011 2011 $ 85,034 73,158 900,000 1,058,192 2010 $ (122,000) 1,999,508 1,877,508
Government assistance in the amount of $36,653 (2010 - $45,557) has been included as a reduction of related expenses.
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For the year ended December 31, 2011 8. Machinery and equipment Computer hardware Torch under asset capital under Machinery lease construction $ $ $ 1,538,931 6,329 1,545,260 25,859 25,859 359,269 359,269
Computer Computer hardware software $ $ Cost: Balance at January 1, 2011 Additions Disposals Balance at December 31, 2011 Accumulated amortization: Balance at January 1, 2011 Amortization Disposals Balance at December 31, 2011 Net book value 113,765 15,605 129,370 139,497 63,386 202,883
Total $ 1,818,052 444,589 2,262,641
(68,904) (23,699) (92,603) 36,767
(91,466) (39,862) (131,328) 71,555
(304,512) (247,516) (552,028) 993,232
(14,836) (11,023) (25,859) -
359,269
(479,718) (322,100) (801,818) 1,460,823
Computer hardware $ Cost: Balance at January 1, 2010 Additions Disposals Balance at December 31, 2010 Accumulated amortization: Balance at January 1, 2010 Amortization Disposals Balance at December 31, 2010 Net book value 104,342 9,423 113,765
Computer software $ 112,736 26,761 139,497
Machinery $ 440,659 1,098,272 1,538,931
Computer hardware Torch under asset capital under lease construction $ $ 25,859 25,859 -
Total $ 683,596 1,134,456 1,818,052
(36,054) (32,850) (68,904) 44,861
(56,815) (34,651) (91,466) 48,031
(231,709) (72,803) (304,512) 1,234,419
(5,818) (9,018) (14,836) 11,023
(330,396) (149,322) (479,718) 1,338,334
Annual impairment assessment was done for 2011 and 2010. No impairment charge was required in any of these years.
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For the year ended December 31, 2011 9. Licenses and intellectual property Intellectual property $ 7,636,426 772,625 8,409,051
Intangible assets are made up of licenses as follows: Licences $ Cost: Balance at January 1, 2011 Additions Reclassification on acquisition of property Balance at December 31, 2011 Accumulated amortization: Balance at January 1, 2011 Amortization Reclassification on acquisition of property Balance at December 31, 2011 Net book value 772,625 (772,625) Total $ 772,625 7,636,426 8,409,051
(309,050) (77,263) 386,313 -
(1,037,769) (386,313) (1,424,082) 6,984,969 Intellectual property $ -
(309,050) (1,115,032) (1,424,082) 6,984,969
Licences $ Cost: Balance at January 1, 2010 Amortization Disposals Balance at December 31, 2010 Accumulated amortization: Balance at January 1, 2010 Amortization Disposals Balance at December 31, 2010 Net book value 772,625 772,625
Total $ 772,625 772,625
(231,788) (77,263) (309,051) 463,574
(231,788) (77,263) (309,051) 463,574
On March 19, 2011, intellectual property and know-how was sold to PyroGenesis for $14,280,000 from a company controlled by the Companys controlling shareholder and will be payable in equal monthly instalments of $40,000 (Note 13) without interest. The payments commence on April 1, 2011 until December 31, 2040. The fair market value of this property is estimated to be $7,636,426. The intellectual property and know-how is being amortized on a straight line basis over the remaining useful life of 5.79 years.
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For the year ended December 31, 2011 10. Bank indebtedness The Company has available, an investment tax credit demand facility of $500,000, based on the 2010 claim. The facility bears interest at prime rate plus 2.4% (5.4% at December 31, 2011). The loan is secured by a first ranking moveable hypothec of $500,000 on all present and future investment tax credits. The Company also has available a revolving demand loan facility of $740,000 (2010 - $1,500,000) which bears interest at the bank's prime rate plus 3.25% (6.25% at December 31, 2011). The loan is secured by a first rank moveable hypothec in the amount of $1,500,000 on accounts receivable, inventory and work-in-process. Subsequent to year end, the Company paid off its loan balances owing and terminated its facilities with its bank. 11. Accounts payable and accrued liabilities December 31, 2011 $ Accounts payable trade Accrued liabilities Accounts payable to a company under common control Accounts payable - shareholder Accounts payable - trust beneficially owned by the shareholder Accounts payable - joint operator 1,353,078 606,970 40,751 160,000 7,595 245,959 2,414,353 Accrued liabilities include a warranty accrual of $50,000 (2010 - $100,000). 12. Joint operations PyroGenesis entered into an agreement with another company to share costs, benefits and risks associated with the development of a pilot plasma destruction unit. PyroGenesis has a 50% share in the joint operations. The only activities to date have been the construction of a torch asset which is included in machinery and equipment in Note 8. December 31, 2010 $ 495,357 462,501 167,132 150,000 152,996 1,427,986
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For the year ended December 31, 2011 13. Loans - other 2011 $ Balance of sale - company under common control Amounts payable - shareholder Amounts payable - trust beneficially owned by the shareholder Promissory note payable - company under common control Current portion 7,547,242 224,093 339,103 200,000 8,310,438 548,050 7,762,388 2010 $ 212,972 322,298 535,270 535,270
This balance of sale is payable in monthly instalments of $40,000 from April 1, 2011 until December 31, 2040 and bears interest at an implicit rate of 4.753% per annum (see Note 9). Amounts payable - shareholder and amounts payable - trust beneficially owned by the shareholder bear interest at 6% and have no set terms of repayment. These loans were repaid after year end. Promissory note payable - company under common control is non-interest bearing and is due December 2012. 14. Long-term debt current portion 2011 $ $1,000,000 convertible debenture, including accumulated accretion of $23,604 (2010 nil) FIER debenture (non-convertible) 976,396 2010 $ 1,000,000
On October 1, 2011, the Company exchanged its existing FIER debenture of $1,000,000 for a convertible debenture of the same amount, due June 30, 2012, with interest paid monthly at 15% per annum compounded monthly. The debenture is secured by a second rank hypothec on the building which is beneficially owned by a person related to the controlling shareholders, an additional hypothec of $75,000 and personal guarantees by the shareholders. The convertible debenture, together with all interests, bonuses, penalties, fees and other amounts payable by the Company to the Holder, is convertible to common shares at the option of the holder, at any time prior to the earlier of the maturity date or redemption date, at a price per share equal to the lower of the following prices: a. the price per share of the last issuance of shares preceding the date of the holder's notice to the Company of its intent to convert all or part of the debenture, less an amount of ten percent (10%) of such price; b. the price which is the fair market value of the shares at the date of the holder's notice to the Company of its intent to convert all or part of the debenture, as determined by mutual agreement between the Company and the holder or by way of an expert in valuation who is a member of a national Canadian firm of accountants or valuators chosen by the holder, less an amount of ten percent (10%) of such fair market value, it being understood that all the costs of such valuator and valuation shall be solely assumed by the Company. The convertible debenture is being accounted for in accordance with its substance and is presented in the financial statements in its component parts, measured at its respective fair values at the time of issue.
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For the year ended December 31, 2011 14. Long-term debt current portion (continued) The debt element of the instruments has been initially recorded on the statement of financial postion as a debt of $969,034, calculated as the present value of the Company's obligation to make interest and principal payments discounted at a rate approximating the interest rate that would have been applicable to nonconvertible debt at the time the debt was issued. Over the term of the convertible debenture, the debt element will be accreted to the face value of the convertible debenture by the recording of additional interest expense. The effective interest rate on the debt is 20%. The difference of $30,966 between the face amount and the estimated fair value of the debt element represents the conversion rights and is classified as a component of equity. Subsequent to December 31, 2011, the Company exercised its right under the loan agreement and paid off in full the outstanding value of the debenture plus all accrued interest. 15. Shareholders equity Authorized: The Corporation is authorized to issued an unlimited number of common shares without par value. Issues during 2011: (i) On March 21, 2011, the holder of the 1,093,800 class F shares of PyroGenesis, prior to going public, waived and renounced any and all rights to receive dividends or redemption of these shares. Furthermore, the holder agreed to grant PyroGenesis the sole right to demand the exchange of all 1,093,800 class F shares for a total of 1,367,250 Class A shares of PyroGenesis. (ii) On March 22, 2011, the Class A shares of PyroGenesis were consolidated on a 0.0485097 for one basis and on March 29, 2011 the shares were subdivided on a 21.08 for one basis. (iii) On March 29, 2011, PyroGenesis completed a non brokered private placement for a total of 312,500 Class A shares at a price of $0.80 per share for gross proceeds of $250,000. (iv) On March 30, 2011, PyroGenesis completed a private placement of 5,083,250 subscription receipts to acquire Class A shares at a subscription price of $0.80 per subscription receipt for net proceeds of $3,332,127 after a cash commission paid to the agents of $470,225 and professional fees of $264,248. On closing, the agents received 355,827 warrants at a price of $0.80 which can be exercised until March 30, 2012. In accordance with the Black Scholes pricing model, PyroGenesis has allocated a value of $0.31 to the warrants for a total cost of $110,306 which has been credited to contributed surplus. The following assumptions under the Black Scholes model were used to arrive at this cost: Risk free interest rate Expected volatility Expected dividend yield Expected life 1.35% 100% nil 1 year
(v) On March 22, 2011, FIER Croissance Durable (FCD) signed a convertible debenture agreement with the company. The $1,000,000 convertible debenture was originally due December 31, 2012 and bore interest at 15% per annum commencing April 1, 2011. The convertible debenture was converted into 1,388,889 shares upon the completion of the Qualifying Transaction. Net proceeds from the debenture were $900,380 after payment of fees of $99,620 which was charged against share capital. -25-

For the year ended December 31, 2011 15. Shareholders equity (continued) (vi) (vii) On June 2, 2011, the 1,093,800 preferred shares were converted to 1,367,250 Class A common shares. 103,328 stock options with an exercise price of $0.62 were exercised by former officers of IGIC.
(viii) The Company has a stock option plan authorizing the Board of Directors to grant options to directors, officers, employees and consultants to acquire common shares of the Company at a price computed by reference to the closing market price of the shares of the Company on the business day before the Company notifies the stock exchanges of the grant of the option. The number of shares which may be granted to any one person shall not exceed 5% (2% for consultants) of total share capital over a twelve month period. (ix) On July 20, 2011, two directors were granted options to acquire an aggregate of 40,000 Common shares at an exercise price of $0.80 per share. These options will vest over two years starting on the date of grant. The value of each option under the Black Scholes pricing model is $.93 for a total value of $36,828 of which $22,683 has been credited to contributed surplus in the current year. The following assumptions under the Black Scholes model were used to arrive at this cost: Risk free interest rate Expected volatility Expected dividend yield Expected life Expected forfeiture rate (x) 2.33% 80% Nil 5 years 2%
On July 20, 2011, two directors were granted options to acquire an aggregate of 200,000 common shares at an exercise price of $0.80 per share. These options will vest quarterly over four years starting on the date of grant. The value of each option under the Black Scholes pricing model is $.93 for a total value of $180,494 of which $68,283 has been credited to contributed surplus in the current year. The following assumptions under the Black Scholes model were used to arrive at this cost: Risk free interest rate Expected volatility Expected dividend yield Expected life Expected forfeiture rate 2.33% 80% Nil 5 years 2%
(xi)
On July 20, 2011, two directors were granted options to acquire an aggregate of 900,000 shares, three officers were granted options to acquire an aggregate of 550,000 shares and 14 employees were granted options to acquire an aggregate of 1,460,000 shares. All of these options have an exercise price of $0.80 per share. Ten percent of these options are vested at the date of grant, 20% vest at the first anniversary of the grant, 30% vest at the second anniversary of the grant and 40% vest at the third anniversary of the grant. The value of each option under the Black Scholes pricing model is $.93 for a total value of $2,599,663 of which $620,069 which has been credited to contributed surplus in the current year. The following assumption under the Black Scholes model were used to arrive at this cost. Risk free interest rate Expected volatility Expected dividend yield Expected life Expected forfeiture rate 2.33% 80% Nil 5 years 2%
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For the year ended December 31, 2011 15. Shareholders equity (continued) Issued during 2010: (xii) On November 10, 2010, a shareholder transferred machinery with a fair market value of $1,093,800 in exchange for 1,093,800 Class F shares. The Class F shares are exchangeable for Class A common shares at the discretion of the company.
(xiii) On November 26, 2010, a trust that is beneficially owned by a shareholder advanced to the company $1,750,000 in exchange for 2,187,500 subscription receipts. These subscription receipts were acquired in anticipation of the amalgamation transaction that made the company a publicly traded company, and in return the trust was granted 2,187,500 shares of the amalgamated company. The amalgamation transaction is anticipated to occur on or before October 1, 2011. In the event that it does not occur, the subscription for common shares will remain in force, and the subscription terms will be adjusted on the basis of a pre-investment valuation of the company. This would result in the Trust receiving 4,053,451 shares of the company. On December 14, 2010, the Class A shares were subdivided on a 20.6144 for 1 basis. Stock option plan The option activity, under the share option plan and information concerning outstanding and exercisable options, is as follows: Weighted Average Options exercise issued price $ Balance January 1, 2010 Options granted (*) Options forfeited Balance December 31, 2010 Options granted (*) Options forfeited Options exercised Balance December 31, 2011 3,150,000 3,150,000 0.80 0.80
(*) The following amounts were recorded as value of stock options granted to directors and consultants (stockbased compensation) and credited to contributed surplus for options vesting in the period: For the years ended December 31, Directors and management compensation Consultants compensation Charged to earnings 2011 $ 711,035 711,035 2010 $ -
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For the year ended December 31, 2011 15. Shareholders equity (continued) As at December 31, 2011, the outstanding options, as issued under the stock option plan to directors, officers, employees and consultants for the purchases of one common share per option, are as follows: Granted 40,000 200,000 2,910,000 3,150,000 Exercisable 20,000 50,000 219,000 289,000 Weighted averaged exercise price 0.80 0.80 0.80 0.80 Expiry date July 2016 July 2016 July 2016
16. Supplemental disclosure of expenses and cash flow information (i) Net changes in non-cash components of operating working capital 2011 $ Decrease (increase) in: Accounts receivable Sales tax receivable Investment tax credits receivable Prepaid expenses Increase (decrease) in: Accounts payable and accrued liabilities Billings in excess of costs and profits on uncompleted contracts (582,299) 52,944 1,855,482 (1,283) 974,509 548,789 2,848,142 2010 $ 291,974 181,243 (623,000) (22,075) 428,471 (2,366,498) (2,109,885)
Included above, in sales tax receivable is an amount of $2,966 and in accounts payable and accrued liabilities an amount of $11,858. These amounts represent assets and liabilities that were acquired in the amalgamation with IGIC (see Note 2(d)). (ii) non-momentary transactions On March 19, 2011, the Company signed an agreement to purchase licenses from a company controlled by a shareholder having a fair market value of $7,636,426. Long-term debt of $7,636,426 was assumed on the sale. 17. Other information The Company is exposed to gains and losses as a result of foreign currency exchange fluctuations. Included in cost of sales and services is a foreign exchange gain of $1,160 (2011 - $64,586 foreign exchange loss),
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For the year ended December 31, 2011 18. Related party transactions Rent was charged by a trust of which at least one of the trustees and beneficiaries is a shareholder and director of the Company in the amount of $109,976 (2010 - $117,771). A balance due of $7,595 is included in accounts payable and accrued liabilities. Interest on long-term debt was charged by a trust of which at least one of the trustees and beneficiaries is a shareholder and director of the company in the amount of $16,805 (2010 - $97,772). Interest on long-term debt was also charged by a shareholder in the amount of $11,120 (2010 - $11,120). The balance of interest on long-term debt that has not been paid of $16,805 (2010 - $69,847) is included in loans - other. Interest on long-term debt was charged by a company under common control in the amount of $270,815 (2010 nil). Fees of $86,221 were charged by a director (2010 - $55,000). A balance of $43,816 (2010 - $5,785) is included in accounts payable and accrued liabilities. Salaries to key management personnel amounted to 450,000 (2010 - $449,000). In addition, stock based compensation of $ 837,000 (2010 - $nil) was granted to key management personnel. Rent of $421,900 (2010 - $440,400) was charged by a company under common control. A balance due of $40,751 (2010 - $167,134) is included in accounts payable and accrued liabilities. Royalties of $75,000 (2010 - $300,000) were charged by a company controlled by a shareholder. These transactions are in the normal course of business and are measured at the exchange amount which is the amount of consideration established and agreed to by the related parties. 19. Basic earnings per share Basic earnings per share amounts are calculated by dividing net profit for the year attributable to ordinary equity holders by the weighted average number of ordinary shares outstanding during the year. The earnings and weighted average number of ordinary shares used in the calculation of basic earnings per share are as follows: 2011 2010 $ $ Net loss for the period Weighted average number of common shares basic and diluted Basic and diluted loss per share (6,944,306) 55,917,121 (0.12) (2,180,884) 47,371,377 (0.05)
The diluted weighted average number of shares is calculated assuming the proceeds that arise from the exercise of outstanding and in the money options are used to purchase common shares of the Company at their average market price for the period. For the years ended December 31, 2011 and 2010, potential shares from all outstanding options have been excluded from the calculation of diluted loss per share as their inclusion is considered anti-dilutive in periods when a loss is incurred.
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For the year ended December 31, 2011 20. Financial instruments As part of its operations, the Company carries a number of financial instruments. It is management's opinion that the Company is not exposed to significant interest, currency or credit risks arising from these financial instruments except as otherwise disclosed. The Company's overall risk management program focuses on the unpredictability of the financial market and seeks to minimize potential adverse effects on the Company's financial performance. The Company does not use derivative financial instruments to hedge these risks. Foreign currency risk The Company enters into transactions denominated in US Dollars for which the related revenues, expenses, accounts receivable and accounts payable balances are subject to exchange rate fluctuations. As at December 31, 2011, the following items are denominated in foreign currencies: US $ Cash and cash equivalents Accounts receivable Accounts payable and accrued liabilities Total 559,914 579,140 (92,388) 1,046,666 CHF SF CDN $ 570,922 590,526 (94,198) 1,067,250
As at December 31, 2010, the following items are denominated in foreign currencies US $ Cash and cash equivalents Accounts receivable Accounts payable and accrued liabilities Total 230,353 326,539 (174,616) 382,276 CHF SF (13,077) (13,077) CDN $ 230,339 326,373 (188,234) 368,478
Foreign 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. Management has implemented a policy to manage foreign exchange risk by using its purchases in U.S. dollars as a natural hedge against its revenue stream. Therefore the Company does not hold derivative financial instruments to manage the fluctuation of exchange rate risk. Sensitivity analysis At December 31, 2011, if the US Dollar had weakened 10% against the Canadian dollar with all other variables held constant, after-tax loss for the year would have been $104,700 (2010 - $38,200) higher. Conversely, if the US Dollar had strengthened 10% against the Canadian dollar with all other variables held constant, after-tax loss would have been $104,700 (2010 - $38,200) lower.
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For the year ended December 31, 2011 20. Financial instruments (continued) Credit concentration As at December 31, 2011, three customers accounted for 83% (2010 - three customers for 74%) of revenues from operations and three customers accounted for 89% (2010 - two customers for 66%) of the accounts receivable, representing the Company's maximum credit risk exposure. The Company believes that there is no unusual exposure associated with the collection of these receivables. The Company manages its credit risk by performing credit assessments of its customers and provides allowances for potentially uncollectible accounts receivable. The Company does not generally require collateral or other security from customers on accounts receivable. Fair value of financial instruments Financial instruments comprise of cash and cash equivalents, accounts receivable, sales tax receivable, investment tax credits receivable, bank indebtedness, accounts payable and accrued liabilities, loans, and long-term debt. There are three levels of fair value that reflect the significance of inputs used in determining fair values of financial instrument: Level 1 quoted prices (unadjusted) in active markets for identical assets or liabilities Level 2 inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices) Level 3 Inputs for the asset or liability that are not based on observable market data The fair values of cash and cash equivalents, accounts receivable, sales tax receivable, investment tax credits receivable, bank indebtedness, accounts payable and accrued liabilities approximate their carrying amounts due to their short-term maturities. Cash and cash equivalents are measured using level 1 inputs. The classification of financial instruments at their carrying amount and fair values is as follows: 2011 Fair value through profit and loss $ Financial assets: Cash and cash equivalents Accounts receivable Sales tax receivable Investment tax credit receivable 481,396 481,396 Carrying value Available for sale $ Loans and receivables $ 1,158,850 64,531 1,944,518 3,167,899 Fair value
Total $ 481,396 1,158,850 64,531 1,944,518 3,649,295
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For the year ended December 31, 2011 20. Financial instruments (continued) 2011 Carrying value Fair value through profit and loss $ Financial liabilities: Bank indebtedness Accounts payable and accrued liabilities Loans - other Long-term debt 2010 Fair value through profit and loss $ Financial assets: Cash and cash equivalents Accounts receivable Sales tax receivable Investment tax credit receivable 237,291 237,291 2010 Carrying value Available for sale $ Loans and receivables $ 576,551 114,509 3,800,000 4,491,060 Carrying value Fair value through profit and loss $ Financial liabilities: Bank indebtedness Accounts payable and accrued liabilities Loans - other Long-term debt Loans and receivables $ 3,341,000 1,427,986 535,270 1,000,000 6,304,256 Loans and receivables $ 240,000 2,414,353 8,310,438 976,396 11,941,187 Fair value
Total $ 240,000 2,414,353 8,310,438 976,396 11,941,187 Fair value
Total $ 237,291 576,551 114,509 3,800,000 4,728,351 Fair value
Total $ 3,341,000 1,427,986 535,270 1,000,000 6,304,256
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For the year ended December 31, 2011 20. Financial instruments (continued) Interest rate risk Interest rate risk is the risk that the value of a financial instrument might be adversely affected by a change in the interest rates. Changes in market interest rates may have an effect on the cash flows associated with some financial assets and liabilities, known as cash flow risk, and on the fair value of other financial assets or liabilities, known as price risk. Sensitivity analysis The Company is exposed to fluctuations in future cash flows arising from changes in interest rates with respect to bank indebtedness, which is subject to a floating interest rate of prime plus 2.25%. Based on the bank indebtedness as at December 31, 2011, the impact on interest expense of a 1% change in interest rate would be approximately $2,400. Liquidity risk Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities that are settled by delivery of cash or another financial asset. The company's ability to continue as a going concern is dependent on management's ability to raise required funding through future equity issuance and to generate positive cash flows from operations. The company manages its liquidity risk by forecasting cash flows from operations and anticipating any investing and financing activities. Management and the Board of Directors are actively involved in the review, planning and approval of significant expenditures and commitments. The company has access to sufficient funds to meet its current and foreseeable financial requirements which are due less than thirty (30) days. The following table summarizes the contractual maturities of financial liabilities as at December 31, 2011. Less than 1 year 240,000 2,414,353 548,050 976,396 4,178,799 Over 3 years 7,446,117 7,446,117 With no specific maturity -
Financial liability Bank indebtedness Accounts payable and accrued liabilities Loans - other Long-term debt
Total 240,000 2,414,353 8,310,438 976,396 11,941,187
1-3 years 266,271 266,271
The following table summarizes the contractual maturities of financial liabilities as at December 31, 2010 With no Less than Over 3 specific Financial liability Total 1 year 1-3 years years maturity Bank indebtedness Accounts payable and accrued liabilities Loans - other Long-term debt 3,341,000 1,427,986 535,270 1,000,000 6,304,256 3,341,000 1,427,986 4,768,986 1,000,000 1,000,000 535,270 535,270
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For the year ended December 31, 2011 21. Contingent liability Government assistance of approximately $800,000 which was received and recorded in prior years is potentially repayable to the government. The assistance received was granted to assist with the development of a new system of advanced waste treatment systems technology. If the company is able to sell this system to any other customers within the next 10 years, the assistance will be repayable at the rate of 3% of these sales to a maximum of the assistance received. 22. Subsequent event On March 29, 2012, the Company closed a fully marketed offering of 4,424,555 units (shares and warrants) for $3,539,644. On April 16, 2012, the Company exercised it right under the loan agreement regarding the FIER debenture (Note 14) and paid off in full the outstanding value of the debenture plus all accrued interest. 23. Capital management The Companys objectives in managing capital are: a) To ensure sufficient liquidity to support its current operations and execute its business plan; and b) To provide adequate return to the shareholders The Companys primary uses of capital are to finance increases in working capital for operations and product research and development. The Company currently funds these requirements from cash flows from operations and with financing arrangement with its banker, shareholders (directors) and other lenders. The company is not subject to any externally imposed capital requirements other than those referred to in Note 10. The management of capital includes share capital of $10,723,155 (2010 - $5,120,388) and long-term debt of $8,838,784 (2010 - $1,535,270). The company monitors its working capital in order to meet its financial obligations. As at December 31, 2011, the companys working capital was calculated as negative $1,085,184 (2010 negative 1,052,682).
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For the year ended December 31, 2011 24. Tax loss and other expenses to carry forward (a) provision for income taxes The provision for income taxes differs from the combined Canadian federal and provincial statutory rates as follows: 2011 Federal Provincial Combined $ $ $ Loss before income taxes Income tax rates Tax effect Stock based compensation Non-deductible meals Non-deductible automobile Financing fees Donation Change in deferred tax benefits not recognized Income taxes (6,944,306) 16.5% (1,145,810) 117,321 6,451 610 95,882 216 925,330 (6, 944,306) 11.9% (826,801) 84,613 4,653 440 69,151 156 667,788 (6, 944,306) 28.4% (1,972,611) 201,934 11,104 1,050 165,033 372 1,593,118 -
Federal $ Loss before income taxes Income tax rates Tax effect Non-deductible tax on capital gains Non-deductible meals Non-deductible automobile Donation Change in deferred tax benefits not recognized Income taxes (2,180,884) 19.00% (414,368) 285 7,363 703 361 405,656 -
2010 Provincial $ (2,180,884) 11.90% (259,525) 179 4,612 440 226 254,068 -
Combined $ (2,180,884) 30.90% (673,893) 464 11,975 1,143 587 659,724 -
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For the year ended December 31, 2011 24. Tax loss and other expenses to carry forward (continued) (b) Deferred income taxes assets and liabilities The company has operating losses and other costs which are being carried forward and which can reduce the future taxable income. The components of the deferred income tax assets (liabilities) were as follows: Federal $ Share issue costs Tax cost of property and equipment in excess of carrying value Research and development tax credit carryforward Non-capital losses carried forward Deferred tax benefits not recognized 22,196 (8,157) (80,355) 1,075,879 1,009,563 (1,009,563) 2011 Provincial $ 16,008 (5,883) (57,953) 1,126,183 1,078,355 (1,078,355) 2010 Provincial $ 10,353 (491) (133,875) 746,368 622,355 (622,355) Combined $ 38,204 (14,040) (138,308) 2,202,062 2,087,918 (2,087,918) -
Federal $ Share issue costs Tax cost of property and equipment in excess of carrying value Research and development tax credit carryforward Non-capital losses carried forward Deferred tax benefits not recognized 16,530 (784) (213,750) 712,500 514,496 (514,496) (c) Losses
Combined $ 26,883 (1,275) (347,625) 1,458,868 1,136,851 (1,136,851) -
The company has the following non-capital losses and share issue costs available to reduce future income taxes. The losses and costs expire as follows: Expiry date 2027 2028 2030 2031 Federal $ 1,163,000 1,596,000 4,163,000 6,922,000 Provincial $ 291,000 2,403,000 2,634,000 4,535,000 9,863,000
$400,000 of the potential tax benefits relating to these losses have been recognized in the financial statements to reduce deferred income taxes.
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For the year ended December 31, 2011 25. Comparative figures The comparative financial statements have been reclassified from statements previously presented to conform to the presentation adopted in the current year. 26. Commitments (a) Premises This Company has entered into a long-term lease for premises. The lease ends January 2017. The minimum lease payments (including taxes and utilities) due over the next five years to a trust beneficially owned by the shareholders of the Company are as follows: $ 2012 2013 2014 2015 2016 2017 117,976 117,976 117,976 117,976 117,976 9,831 599,711 (b) Vehicle The company has entered into long-term leases for vehicles. The leases end May 2013. The minimum lease payments are as follows: $ 2012 2013 25,370 10,570 35,940 27. First time adoption of IFRS The Company has prepared its financial statements in accordance with Previous GAAP for all periods up to including the year ended December 31, 2010. These financial statements for the year ended December 31, 2011 are prepared in accordance with International Financial Reporting Standards (IFRS). The Company has prepared these financial statements which comply with IFRS applicable for periods beginning on or after January 1, 2011 and the significant accounting policies meeting those requirements are described in Note 3. The Company has prepared its opening statement of financial position using IFRS as at January 1, 2010, the date of transition to IFRS. IFRS 1 First-time Adoption of International Financial Reporting Standards allows first-time adopters certain exemptions from the general requirement to apply IFRS retrospectively. Estimates: Hindsight is not used to revise estimates. Estimates that were previously made under Canadian GAAP were not revised for application of IFRS. An exception to this is, revisions to reflect differences in accounting policies.
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For the year ended December 31, 2011 27. First time adoption of IFRS (continued) The following is a reconciliation of the statement of financial position at January 1, 2010 from Canadian GAAP to IFRS: Previous GAAP January 1, 2010 $ Assets Cash and cash equivalents Accounts receivable Sales tax receivable Investment tax credits receivable Prepaid expenses Total current assets Machinery and equipment Licenses Total assets Adjustments on Transition to IFRS $
IFRS January 1, 2010 $
722,941 868,525 295,752 3,177,000 27,164 5,091,382 353,201 540,837 5,985,420
722,941 868,525 295,752 3,177,000 27,164 5,091,382 353,201 540,837 5,985,420
Liabilities Current liabilities Bank indebtedness Accounts payable and accrued liabilities Current portion of obligation under capital lease Billings in excess of costs and profits on uncompleted contracts Total current liabilities Non-interest bearing loans - company under common control Obligation under capital lease Loans - other Long-term debt Total liabilities
1,190,000 999,515 13,315 2,423,911 4,626,741 100,738 3,873 507,345 1,000,000 6,238,697
1,190,000 999,515 13,315 2,423,911 4,626,741 100,738 3,873 507,345 1,000,000 6,238,697
Shareholders equity Share capital - preferred Deficit
2,472,271 (2,725,548) (253,277) 5,985,420
2,472,271 (2,725,548) (253,277) 5,985,420
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For the year ended December 31, 2011 27. First time adoption of IFRS (continued) The following is a reconciliation of the statement of financial position at December 31, 2010 from Canadian GAAP to IFRS: Previous GAAP as at December 31, 2010 $ Assets Current assets Cash and cash equivalents Accounts receivable Sales tax receivable Investment tax credits receivable Prepaid expenses Total current assets Machinery and equipment Licenses Total assets Liabilities Current liabilities Bank indebtedness Accounts payable and accrued liabilities Current portion of obligation under finance lease Current portion of long-term debt Billings in excess of costs and profits on uncompleted contracts Total current liabilities Loans - other Long-term debt Total liabilities Shareholders equity Share capital Share capital - preferred Deficit Adjustment s on Transition to IFRS $
IFRS as at December 31, 2010 $
237,291 576,551 114,509 3,800,000 49,239 4,777,590 1,338,334 463,574 6,579,498
237,291 576,551 114,509 3,800,000 49,239 4,777,590 1,338,334 463,574 6,579,498
3,341,000 1,427,986 3,873 57,413 4,830,272 535,270 1,000,000 6,365,542
1,000,000
(5)
3,341,000 1,427,986 3,873 1,000,000 57,413 5,830,272 535,270 6,365,542
(1,000,000)
(5)
4,026,588 1,093,800 (4,906,432) 213,956 6,579,498
4,026,588 1,093,800 (4,906,432) 213,956 6,579,498
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For the year ended December 31, 2011 27. First time adoption of IFRS (continued) The following is a reconciliation of the statement of comprehensive loss for the year ended December 31, 2010 from Canadian GAAP to IFRS. Previous GAAP December 31, 2010 $ Revenue Expenses Cost of sales and services Selling, general and administrative Financing charges Amortization of machinery and equipment Amortization of licenses 7,715,131 Adjustments on Transition to IFRS $ -
IFRS December 31, 2010 $ 7,715,131
6,160,056 3,242,047 292,126 149,323 77,263 9,920,815
77,263 149,323 (149,323) (77,263) -
(4) (4)
6,237,319 3,391,370 292,126 9,920,815 (2,205,684) 24,800 (2,180,884) (2,725,548) (4,906,432)
Loss from operations Other income Net loss Deficit - beginning of period Deficit - end of period
(2,205,684) 24,800 (2,180,884) (2,725,548) (4,906,432)
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For the year ended December 31, 2011 27. First time adoption of IFRS (continued) Reconciliation of Canadian GAAP to IFRS (continued) IFRS requires an entity to reconcile equity, comprehensive income and cash flows from prior periods. The first time adoption of IFRS did not have an impact on equity and cash flows. The adoption of IFRS resulted in some reclassifications to the statement of operations and comprehensive loss. The following explains significant differences between previous historical Canadian GAAP accounting policies and IFRS accounting policies, that pertain specifically to the Company. (1) property, plant and equipment Canadian GAAP - The cost model is used for all property, plant and equipment IFRS - May use either the cost model or a revaluation model Reconciliation - The Company has elected to use the cost method and as such there is no impact to property, plant and equipment balances. (2) Impairments a) Recoverable amount Canadian GAAP - Undiscounted expected future cash flows are compared to the carrying amount and an impairment loss, if any, is recorded for the excess of the carrying amount over the fair value. IFRS - Impairment loss is based on the excess of the carrying amount over the recoverable amount. The recoverable amount is the higher of the assets fair value less costs, and value in use. Value in use is the discounted expected future cash flows from the asset. Reconciliation - The Company determined that the adoption of this standard does not result in any changes to property, plant and equipment or intangible assets. b) Reversal of impairments Canadian GAAP - Reversals of impairment losses are disallowed. IFRS - Reversals of certain impairment losses other than goodwill, are allowed if certain criteria are met. Reconciliation - The Company determined that the adoption of this standard does not result in any change to property, plant and equipment or intangible assets. (3) Provisions Canadian GAAP - A provision is required when payment is considered likely and can be reasonably estimated. For measurement purposes, the lower end of a range of estimates is used. IFRS - A provision is required if the payment is considered probable, which requires less certainty than the criteria Canadian GAAP assessment of likely. For measurement purposes the mid-point of a range of estimates is used. Reconciliation -The Company determined that the adoption of this standard does not result in any adjustments to the financial statements.
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For the year ended December 31, 2011 27. First time adoption of IFRS (continued) (4) Income statement presentation Canadian GAAP - Income statement expenditure can be presented as a mix of classification by function and classification by nature. IFRS - The income statement expenditure must all be classified by function or all be classified by nature. Reconciliation -The Company has elected to classify expenses by function. As a result, amortization of machinery and equipment has been reallocated to selling, general and administrative expense and amortization of licenses has been reallocated to costs of sales and services. (5) Classification of loans as current Canadian GAAP - If loan maturities or other terms are renegotiated prior to the release of the financial statements, then the loan can be presented based on these renegotiated terms. IFRS - If renegotiated terms are not finalized prior to the year end date, then the loan cannot be presented based on the renegotiated terms. Reconciliation - On March 19, 2011, an amending agreement was signed which extended the maturity date of the long term debt to June 30, 2012. Under Canadian GAAP, the loan was presented as long term. Since this amendment was not effective at December 31, 2010, under IFRS, the loan must be presented in current liabilities.
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Pyrogenesis Canada Inc.: Financial Statements

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See accompanying Notes to the Financial Statements -1-