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CONSOLIDATED FINANCIAL STATEMENTS April 30, 2012 and April 30, 2011 Deloitte & Touche LLP Suite 700 850 – 2nd Street SW Calgary AB T2P 0R8 Tel: (403) 267-1700 Fax: (403) 264-2871 www.deloitte.ca INDEPENDENT AUDITOR’S REPORT To the Shareholders of Galvanic Applied Sciences Inc.: We have audited the accompanying consolidated financial statements of Galvanic Applied Sciences Inc., which comprise the consolidated balance sheets as at April 30, 2012, April 30, 2011 and May 1, 2010, and the consolidated statements of operations, consolidated accumulated other comprehensive income (loss), consolidated statements of comprehensive income, consolidated statements of changes in equity and consolidated statements of cash flows for the years ended April 30, 2012 and April 30, 2011, and the notes to the consolidated financial statements. Management’s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Galvanic Applied Sciences Inc. as at April 30, 2012, April 30, 2011 and May 1, 2010 and its financial performance and its cash flows for the years ended April 30, 2012 and April 30, 2011 in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. Chartered Accountants July 23, 2012 Calgary, Alberta CONSOLIDATED BALANCE SHEETS AS AT, April 30 April 30 May 1 2012 2011 2010 Note ( Note 25) (Note 25) (Cdn $) $ $ $ Assets Current Cash and cash equivalents 6 6,425,315 3,381,759 2,962,655 Trade and other receivables 7 2,107,720 1,881,036 1,623,460 Income taxes recoverable ‐ ‐ 48,117 Inventory 8 2,780,584 2,773,435 2,450,797 Prepaid expenses 87,386 197,816 134,981 Total current assets 11,401,005 8,234,046 7,220,010 Non‐current Restricted cash 1,200 1,200 1,200 Investments in marketable securities 9 1,712,854 ‐ ‐ Intangible assets 10 3,116,346 3,141,568 2,990,248 Property, plant and equipment 12 262,396 352,100 591,306 Total non‐current assets 5,092,796 3,494,868 3,582,754 Total assets 16,493,801 11,728,914 10,802,764 Liabilities and equity Current Trade payables, accruals and deposits 13 1,075,541 720,501 803,717 Income taxes payable 14 737,496 42,552 ‐ Total current liabilities 1,813,037 763,053 803,717 Non‐current Deferred tax liabilities 14 630,453 688,168 521,053 Total non‐current liabilities 630,453 688,168 521,053 Equity 15 Share capital 5,003,473 5,003,473 5,003,473 Contributed surplus 574,378 574,378 574,378 Share based compensation reserve 399,480 382,539 369,422 Accumulated other comprehensive income (loss) 78,479 (147,261) ‐ Retained earnings 7,994,501 4,464,564 3,530,721 Total equity 14,050,311 10,277,693 9,477,994 Total liabilities and equity 16,493,801 11,728,914 10,802,764 Commitments and contingencies ‐ Note 24 The accompanying notes are an integral part of these consolidated financial statements. Approved by the Board of Directors WALTER CHAYKA GRANT REEVES Director Director 1 Galvanic Applied Sciences Inc. CONSOLIDATED ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) Foreign Currency Marketable Translation Securities Total (Cdn $) $ $ $ Balance at May 1, 2010 ‐ ‐ ‐ Change in foreign currency translation loss (147,261) ‐ (147,261) Balance at April 30, 2011 (147,261) ‐ (147,261) Change in unrealized gain on investments in marketable securities ‐ 179,465 179,465 Change in foreign currency translation gain 46,275 ‐ 46,275 Balance at April 30, 2012 (100,986) 179,465 78,479 The accompanying notes are an integral part of these consolidated financial statements. 2 Galvanic Applied Sciences Inc. CONSOLIDATED STATEMENTS OF OPERATIONS Year ended April 30, Note 2012 2011 (Note 25) (Cdn $) $ $ Revenue 4 16,662,210 12,102,600 Cost of sales 4, 8, 18 9,220,541 7,408,867 Gross profit 7,441,669 4,693,733 Other expenses Selling and marketing 1,141,376 1,349,505 Administrative expenses 1,621,520 1,542,184 Foreign exchange (gain) loss (77,649) 140,884 Amortization and depreciation 10,12 632,134 625,891 Total other expenses 3,317,381 3,658,464 Finance income 74,452 ‐ Income before income taxes 4,198,740 1,035,269 Income taxes 14 668,803 101,426 Net income 3,529,937 933,843 Earnings per share Basic and diluted 16 0.22 0.06 The accompanying notes are an integral part of these consolidated financial statements. 3 GALVANIC APPLIED SCIENCES INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Year ended April 30, Note 2012 2011 (Note 25) (Cdn $) $ $ Net income 3,529,937 933,843 Other comprehensive income (loss) Foreign currency translation 46,275 (147,261) Unrealized gain on investments in marketable securities 9 179,465 ‐ Total comprehensive income 3,755,677 786,582 CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY Years ended April 30, Accumulative Stock Based Other Share Contributed Compensation Comprehensive Retained Capital Surplus Reserve Income (Loss) Earnings Total Equity (Note 25) (Note 25) (Note 25) (Cdn $) $ $ $ $ $ Balance at May 1, 2010 5,003,473 574,378 369,422 ‐ 3,530,721 9,477,994 Net income ‐ ‐ ‐ ‐ 933,843 933,843 Other comprehensive loss ‐ ‐ ‐ (147,261) ‐ (147,261) Stock‐based compensation ‐ ‐ 13,117 ‐ ‐ 13,117 Balance at April 30, 2011 5,003,473 574,378 382,539 (147,261) 4,464,564 10,277,693 Net income ‐ ‐ ‐ ‐ 3,529,937 3,529,937 Other comprehensive income ‐ ‐ ‐ 225,740 ‐ 225,740 Stock‐based compensation ‐ ‐ 16,941 ‐ ‐ 16,941 Balance at April 30, 2012 5,003,473 574,378 399,480 78,479 7,994,501 14,050,311 The accompanying notes are an integral part of these consolidated financial statements. 4 GALVANIC APPLIED SCIENCES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended April 30, Note 2012 2011 (Cdn $) $ $ Cash flows from operating activities Net income 3,529,937 933,843 Adjustment for non‐cash items: Amortization and depreciation 10, 12 632,134 625,891 Deferred income taxes 14 (57,715) 167,115 Stock‐based compensation 15 16,941 13,117 Unrealized foreign exchange (gain) loss (35,540) 29,472 Changes in non‐cash working capital 17 969,030 (635,596) Income taxes paid (42,448) ‐ Net cash from operating activities 5,012,339 1,133,842 Cash flows used in investing activities Purchases of marketable securities 9 (1,533,389) ‐ Additions to property, plant and equipment 12 (28,402) (11,469) Deferred development costs 10 (488,806) (526,535) Net cash used in investing activities (2,050,597) (538,004) Effect of foreign exchange rate changes on cash 81,814 (176,734) Net increase in cash and cash equivalents 3,043,556 419,104 Cash and cash equivalents, beginning of year 3,381,759 2,962,655 Cash and cash equivalents, end of year 6,425,315 3,381,759 The accompanying notes are an integral part of these consolidated financial statements. 5 GALVANIC APPLIED SCIENCES INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – INDEX NOTE PAGE 1. DESCRIPTION OF THE BUSINESS 7 2. BASIS OF PRESENTATION 7 3. SIGNIFICANT ACCOUNTING POLICIES 9 4. RECLASSIFICATION OF PRIOR YEAR FINANCIAL STATEMENTS 17 5. CREDIT FACILITY 17 6. CASH AND CASH EQUIVALENTS 18 7. TRADE AND OTHER RECEIVABLES 18 8. INVENTORY 18 9. INVESTMENT IN MARKETABLE SECURITIES 18 10. INTANGIBLE ASSETS 19 11. IMPAIRMENT 20 12. PROPERTY, PLANT AND EQUIPMENT 21 13. TRADE PAYABLES, ACCRUALS, AND DEPOSITS 22 14. INCOME TAXES 22 15. SHARE CAPITAL 23 16. EARNINGS PER SHARE 25 17. CHANGES IN NON‐CASH WORKING CAPITAL 26 18. EMPLOYEE BENEFIT COSTS 26 19. SEGMENTED INFORMATION 26 20. FINANCIAL INSTRUMENTS RISK MANAGEMENT 29 21. FAIR VALUE OF FINANCIAL INSTRUMENTS 31 22. CAPITAL MANAGEMENT 32 23. RELATED PARTY TRANSACTIONS 33 24. COMMITMENTS AND CONTINGENCIES 33 25. FIRST TIME ADOPTION OF IFRS 34 6 GALVANIC APPLIED SCIENCES INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. DESCRIPTION OF THE BUSINESS Galvanic Applied Sciences Inc. (“the Company”) designs, manufactures, services, and sells an array of analytical measurement equipment into the gas processing industry and industrial process markets. The Company was incorporated under the laws of the Province of Alberta and is headquartered in Calgary, Alberta. The address of its registered office is 7000 Fisher Rd. SE, Calgary, Alberta, T2H 0W3. The Company is a publically traded Company listed on the Toronto Stock Venture Exchange under the symbol “GAV“. The accompanying consolidated financial statements include the accounts of its wholly owned subsidiary, Galvanic Applied Sciences U.S.A. Inc. 2. BASIS OF PREPARATION Statement of compliance These consolidated financial statements have been prepared by management in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board. The Company adopted IFRS effective May 1, 2011, with a transition date of May 1, 2010; therefore, this represents the Company’s first annual consolidated financial statements issued in accordance with IFRS and the application of IFRS 1 “First‐time Adoption of International Financial Reporting Standards”. IFRS 1 requires that a Company develop accounting policies based on the current interpretations effective as at the reporting date and apply these policies for all periods presented in the financial statements. The accounting policies are outlined in Note 3. These policies have been retrospectively and consistently applied except where specific exemptions permitted an alternative treatment upon transition to IFRS in accordance with IFRS 1. The financial statements for 2011 were prepared in accordance with Canadian generally accepted accounting principles (Canadian GAAP). Canadian GAAP differs from IFRS in certain areas; therefore, the financial statements for the comparative periods have been re‐stated under IFRS. Reconciliations and the effect of the transition from Canadian GAAP to IFRS are disclosed in Note 25. The consolidated financial statements were authorized for issue by the Board of Directors on July 17, 2012. Basis of measurement The consolidated financial statements have been prepared on the historical cost basis except for investments in marketable securities which are recorded at fair value (Note 20). Functional and presentation currency The financial statements of the Company’s entities are measured using the currency of the primary economic environment in which the entity operates (functional currency). These consolidated financial statements are presented in Canadian dollars which is the functional and presentation currency of the Canadian Company. The functional currency for its wholly owned subsidiary is US dollars. 7 GALVANIC APPLIED SCIENCES INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 2. BASIS OF PREPARATION (Continued) Use of estimates and judgments The preparation of the consolidated financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. These estimates and judgments are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The estimation of anticipated future events involves uncertainty and, consequently, the estimates used in preparation of the consolidated financial statements may change as future events unfold, more experience is acquired or the Company’s operating environment changes. Actual results may differ from these estimates under different assumptions or conditions. Estimates and judgments are reviewed on an on‐going basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected. The most significant of these estimates requiring significant judgment and estimation that may have an impact on reported results and the financial position are: Intangible assets ‐ capitalized development costs The Company capitalizes certain development costs when it is probable that a development project will generate future economic benefits and when certain criteria, including commercial and technological feasibility, have been met. Should a product fail to substantiate its estimated feasibility or life cycle, material development costs may be required to be written‐off in future periods. Cash generating units A cash generating units (CGU) is the smallest identifiable group of assets that generate cash flows that are independent of cash flows from other assets or groups of assets. The determination of CGU's requires judgment from management with regards to the shared infrastructure, geographical location, exposure to market risks, and materiality. Assessment of the recoverability of intangible assets Deferred development costs and goodwill comprise the majority of the Company’s intangible assets. Intangible assets are reviewed for impairment every reporting period. Write offs are possible in future periods if the carrying value exceeds the recoverable amount. The recoverable amounts for capitalized development costs and goodwill have been determined based on the expected future cash flows attributable to the asset or cash‐generating unit discounted to present value. The key assumptions applied in the determination of recoverable amount include discount rate, length of an explicit forecast period, estimated growth rates, profit margins and level of operational and capital investment. Amounts estimated could differ materially from what will actually occur in the future. (Note 10) 8 GALVANIC APPLIED SCIENCES INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 2. BASIS OF PREPARATION (Continued) Income taxes Management judgment is required in determining current tax expense, tax provisions, deferred tax assets and liabilities and the extent to which deferred tax assets or liabilities can be recognized. Uncertainties exist with respect to the interpretation of complex tax regulations, changes in tax laws, and the amount and timing of future taxable income. Differences arising between the actual results and the assumptions made, or future changes to such assumptions, could necessitate future adjustments to tax income and expense already recorded. Stock‐based compensation expense The Company has a stock option plan available to employees. The Company uses an option pricing model to determine fair value of stock‐based compensation awards. Inputs to the model require certain assumptions to be made, including, risk free interest rates, forfeiture rates, expected life, and expected volatility. 3. SIGNIFICANT ACCOUNTING POLICIES The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements and in preparing the opening IFRS statement of financial position at May 1, 2010 for the purposes of the transition to IFRS, unless otherwise indicated. Basis of consolidation The consolidated financial statements include the accounts of the Company and its wholly‐owned subsidiary, Galvanic Applied Sciences USA Inc. The financial statements of this subsidiary are prepared for the same period as the parent entity, using consistent accounting policies. All significant inter‐company balances, transactions and any unrealized gains and losses arising from intercompany transactions, have been eliminated. The Company does not hold investments in any companies where it exerts significant influence and does not hold interest in any special‐purpose entities. Foreign currency Foreign currency transactions Transactions in foreign currencies are recorded in the entities functional currency at the rates of exchange prevailing at the dates of the individual transaction. In subsequent reporting periods, the unsettled balances relating to foreign currency denominated transactions are valued at the rate of exchange prevailing at the end of the reporting period. Gains and losses arising from subsequent changes in exchange rates related to balance sheet items are recorded in foreign exchange gains or losses in the Statement of Operations. Foreign currency translation The consolidated financial statements of the Company include the wholly owned subsidiary which has US dollars as its functional currency. As a result, the wholly owned subsidiary must be translated to Canadian dollars which is the presentation currency of the Company. Assets and liabilities are translated using the closing exchange rate on the date of the balance sheet. Income and expenses are translated using average exchange rates. Differences resulting from the translation of income and expenses at the average rate and assets and liabilities at the closing rate are recognized in Other Comprehensive Income. 9 GALVANIC APPLIED SCIENCES INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 3. SIGNIFICANT ACCOUNTING POLICIES (Continued) Financial instruments 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 of the Company include cash and cash equivalents, restricted cash, trade and other receivables, and investments in marketable securities. Financial liabilities of the Company include trade payables, accruals, provisions and deposits. Financial instruments are recognized in the balance sheet when the Company becomes a party to the contractual obligations of the instrument. Initially, financial instruments are recognized at their fair value plus, in the case of financial instruments not a fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial instrument. Subsequent to initially recognition, financial instruments are measured according to the category to which they are assigned, which are, (a) financial instrument designated as fair value through profit and loss (b) available‐for‐sale (c) held‐to‐maturity (d) loans and receivables or (e) financial liabilities at amortized cost The classification is determined by management on initial recognition based on the purpose for their acquisition. Financial instruments are subsequently measured at amortized cost, unless they are classified as available for sale or held of trading or designated as fair value through profit or loss, in which case they are subsequently measured at fair value. The Company has the following non‐derivative financial assets: Financial assets at fair value through profit or loss A financial asset is classified at fair value through profit or loss if it is classified as held for trading or is designated as such upon initial recognition. Financial assets are designated at fair value through profit or loss if the Company manages such investments and makes purchase and sale decisions based on their fair value in accordance with the costs are recognized in the statement of operations as incurred. Financial assets at fair value through profit or loss are measured at fair value, and changes therein are recognized in the statement of operations. The Company’s cash and cash equivalents and restricted cash are classified as “fair value through profit or loss”. Loans and receivables Loans and receivables are non‐derivative financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are recognized initially at fair value plus any directly attributable transaction costs less any impairment losses. Trade receivables are subject to periodic impairment review and are classified as impaired when there is objective evidence that an impairment loss has been incurred. Trade and other receivables are classified as “loans and receivables”. Available‐for‐sale financial assets Available‐for‐sale financial assets are accounted for at fair value if reliably measurable, with unrealized gains and losses included in Other Comprehensive Income. When a decline in the fair value of an available for sale financial assets has been recognized in Other Comprehensive Income and there is objective evidence that the asset is impaired, the cumulative loss equal to the difference between the acquisition cost of the investments and its current fair value, less any impairment loss on that financial asset previously recognized in net income, is removed from Accumulated Other Comprehensive Income and recognized in net income. 10 GALVANIC APPLIED SCIENCES INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 3. SIGNIFICANT ACCOUNTING POLICIES (Continued) Financial instruments (Continued) Available‐for‐sale financial assets (Continued) The Company’s investments in marketable securities are classified as “available‐for‐sale” financial assets. Non‐derivative financial liabilities The Company has the following non‐derivative financial liabilities: trade payables, accruals, and deposits. Such financial liabilities are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, these financial liabilities are measured at amortized cost using the effective interest method. The Company derecognizes a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. The Company derecognizes a financial liability when its contractual obligations are discharged or cancelled or expire. Financial assets and liabilities are offset, and the net amount presented in the statement of financial position when, and only when, the Company has a legal right to offset the amounts and intends either to settle on a net basis or to realize the asset and settle the liability simultaneously. Impairment of financial assets Financial assets not carried at fair value through profit or loss are assessed at each reporting date to determine whether there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been impacted. A financial asset is impaired if evidence indicates that a loss event has occurred after the initial recognition of the asset, and that the loss event had a negative effect on the estimated future cash flows of that asset that can be reliably estimated. An impairment loss of a financial asset measured at amortized cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the original effective interest rate. Objective evidence that financial assets are impaired can include default or delinquency by a debtor, indications that a debtor or issuer would enter bankruptcy, or the disappearance of an active market for a security. Evidence of impairment for receivables is considered at a specific asset level. All individually significant receivables are assessed for specific impairment. In assessing impairment, the Company uses historical trends of the profitability of default, timing of recoveries, and the amount of loss incurred. Losses are recognized in the statement of operations and reflected in an allowance account against receivables. When a subsequent event causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through the statement of operations. All impairment losses are recognized in the statement of operations. An impairment loss is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognized. 11 GALVANIC APPLIED SCIENCES INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 3. SIGNIFICANT ACCOUNTING POLICIES (Continued) Cash and cash equivalents Cash and cash equivalents comprise of cash on deposit and high liquids short‐term investments with original maturities of three months or less. Trade and other receivables Trade and other receivables are carried at the original amount due from customers, which is considered to be fair value, less allowances for doubtful accounts. Allowance for doubtful accounts is based on a review of all outstanding amounts, where significant doubt about collectability exists, including an analysis of historical bad debts, customer creditworthiness, and any changes in customers’ ability to pay. Bad debts are written off when identified as uncollectible, and are included within other operating expenses. Inventory Inventory of raw materials, work‐in‐process and finished goods are stated at the lower of cost or net realizable value. The cost of raw material inventory is determined on a weighted average basis. The cost of work‐in‐process inventory and finished goods inventory includes the cost of raw materials and direct labour. Net realizable value is the amount that would be realized from the sale of the inventory in the ordinary course of business costs to match the sales. An allowance is recorded for obsolescence and excess inventory based on the lower of cost or net realizable value. Property, plant and equipment Property, plant and equipment are stated at cost, less accumulated amortization and depreciation. Cost includes expenditures directly attributable to the acquisition of the item. Depreciation is calculated based on the cost of property and equipment less the residual value over its useful life and recognized in the statement of operations. Assets with different useful lives and different components are depreciated separately. Depreciation is calculated using the following methods: Straight‐Line Declining Balance Office, shop, and demonstration equipment 20% Computer equipment 30% Manufacturing equipment 10 years Leasehold improvements 7 years Gains and losses on the disposal of fixed assets are included in the statement of operations and the cost of assets retired or otherwise disposed of and the related accumulated depreciation are eliminated from these accounts. Depreciation methods, useful lives and residual values are reviewed at each financial year‐end and adjusted if appropriate. Intangible assets Intangible assets are stated at cost less accumulated amortization and impairment losses and include goodwill and deferred development costs. 12 GALVANIC APPLIED SCIENCES INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 3. SIGNIFICANT ACCOUNTING POLICIES (Continued) Intangible assets (Continued) Deferred development costs Internally developed intangible assets include costs incurred primarily for the development and production of new or substantially improved analytical instruments. These costs are capitalized only when certain criteria for deferral has been met, such as, the costs can be measured reliably, the product is technologically and commercially feasible, the Company has the technical ability, financial resources, and intent to commercially produce and sell the product, a market exists and future economic benefits are probable. Capitalized costs include the cost of materials consumed in development activities and direct labour costs that are directly attributable to the product or project. Subsequent expenditures on development projects are capitalized only when it increases the future economic benefits embodied in the specific asset to which it relates. Capitalized development costs are amortized using the declining balance method over the estimated average sales life in the year in which the new products begin generating revenue. The estimated average sales life of products averages five to ten years. Amortization expense is recorded as part of depreciation and amortization in the statement of operations. However, if at any time a product is deemed no longer commercially viable; the balance of the related deferred cost is expensed in the statement of operations. Useful lives and amortization methods are reviewed at each financial year‐end and adjusted if appropriate. Goodwill Goodwill is recorded through acquisition and is the excess of the total purchase price over the fair value of the net identifiable assets acquired and the liabilities assumed in business combinations. Identifiable assets and liabilities assumed includes contingent consideration which is measured at fair value on the acquisition date. Transaction costs are expensed in the statement of operations. When the difference is negative, the amount is recognized in the statement of operations immediately. Goodwill is allocated to cash generating units that are expected to benefit from the synergies of the business combination. Impairment The carrying amounts of the Company’s intangible assets are reviewed at each reporting date to determine any indication of impairment. Judgments and assessments are made to determine whether an event has occurred that indicates a possible impairment. Factors that could trigger an impairment review include significant underperformance relative to historical or projected future results, significant changes in technology or the strategy for the business and significant negative industry or economic trends. When an indicator of impairment exists, the Company prepares a formal estimate of the recoverable amount for the asset or cash generating unit. The recoverable amount of an asset or cash‐generating unit (CGU) is the higher of its value in use and its fair value less costs to sell. Goodwill is tested annually. 13 GALVANIC APPLIED SCIENCES INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 3. SIGNIFICANT ACCOUNTING POLICIES (Continued) Intangible assets (Continued) Impairment (Continued) Cash‐generating unit, as determined for purposes of impairment testing, is the smallest group of assets generating cash inflows that are largely independent of the cash inflows from other asset or groups of assets. In testing a cash‐generating unit for impairment, the Company identifies all assets that relate to the cash‐generating unit and those assets are allocated on a reasonable and consistent basis to the relevant units. The aggregate total carrying amount of the unit, including the portion of the carrying amount of the assets allocated to the unit, is compared with its recoverable amount. In assessing its recoverable amount, the estimated future cash flows are discounted to their present value using a discount rate that reflects the current market’s assessment of the time value of money and the risk specific to the cash generating unit. An impairment loss is recognized if the recoverable amount is less than the carrying amount. Impairment losses are recognized in the statement of operations and are allocated first to reduce goodwill in a cash generating unit then to reduce the carrying amounts of the other assets on a pro‐rata basis. Impairment losses on goodwill are not reversed. For other assets, impairment losses would be reversed only to the extent that the carrying value does not exceed the carrying amount net of amortization that would have been determined if no impairment had been recognized. Short‐ term employee benefits Short term benefits include salaries, bonuses, and employer contributions to private and government benefit plans. Short‐term benefits are measured on an undiscounted basis and are recognized in general and administrative, marketing and sales, cost of sales and deferred development costs as the service is provided. Stock‐ based compensation expense The Company has a stock option plan open to directors, officers, and employees of the Company. The stock option plan is accounted for using a fair value method using the Black‐Scholes option pricing model, whereby the fair value of the stock options are determine on their grant date and recorded as compensation expense over the period that the employees unconditionally become entitled to the awards, with a corresponding increase to contributed surplus. For awards with graded vesting, the fair value of each tranche is recognized over the respective vesting period. When stock options are exercised, related amounts previously accumulated as contributed surplus are credited to share capital. Provisions Provisions are recognized in the Balance Sheet when the Company has a legal or constructive obligation as a result of past events, it is more likely than not that an outflow of resources will be required to settle the obligation, and the amount can be reliably estimated. The amount recognized as a provision would be the best estimate of the expenditure required to settle the present obligation at the end of the reporting period. If the effect is material, provisions are determined by discounting the expected future cash flows at an appropriate pre‐tax discount rate. The unwinding of the discount is recognized as a finance cost. 14 GALVANIC APPLIED SCIENCES INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 3. SIGNIFICANT ACCOUNTING POLICIES (Continued) Revenue Revenue is primarily derived from the sales of measurement instrumentation. The Company recognizes revenue when title transfers, evidence of sales arrangement exists, delivery occurs, the sales price is fixed or determinable, and collectability is reasonably assured. Cost of sales Cost of sales includes the cost of components, direct and indirect labor, a proportionate share of overhead cost and the costs of shipping. Leases Payments made under operating leases are recognized in expense in accordance with the terms and conditions of the lease which typically results in payments being recognized on a straight line basis over the term of the lease. The Company does not currently have any finance leases. Finance income Finance income includes interest income and dividends earned on the Company’s investments in marketable securities and short‐term cash deposits. Interest income is recognized as it accrues and dividend income is recognized as it is received in the statement of operations. Income taxes Income taxes comprise current and deferred tax. Current tax and deferred tax are recognized in the statement of operations except to the extent that it relates to a business combination, or items recognized directly in equity or in other comprehensive income. Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustments to tax payable in respect of previous years. Current tax is computed on the basis of tax profit which differs from net profit. The Company is eligible for certain investment tax credits. Based on the technical merit of its claim and management’s assessment of the certainty of realization, tax benefits associated with investment tax credits are recorded as part of the current income tax provision. The Company uses the liability method of accounting for income taxes. Under this method, deferred taxes are recognized for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the statement of operations in the period in which the change is substantively enacted. A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probably that future taxable profits will be available against which they can be utilized. 15 GALVANIC APPLIED SCIENCES INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 3. SIGNIFICANT ACCOUNTING POLICIES (Continued) Earnings per share Basic earnings per common share are computed by dividing profit available to common shareholders of the Company by the weighted average number of common shares outstanding during the year. Diluted earnings per share is determined by using the treasury stock method; adjusting the profit available to common shareholders and the weighted average number of common shares outstanding, adjusted for the effects of all dilutive potential common shares, which are comprised of stock options when they are “in the money.” Segment reporting An operating segment is a component of the Company that engages in business activities from which it earns revenues and incurs expenses, including revenues and expenses that relate to transactions with any of the Company’s other segments. All operating segments’ results are reviewed regularly by senior management to make decisions about resources to be allocated to the segment and assess its performance and, for which, discrete financial information is available. Segment results that are reported include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items comprise mainly corporate assets and costs that benefit more than one operating segment which cannot be reasonably allocated. Segment capital expenditures are the total cost incurred during the period to acquire property, plant and equipment and intangible assets other than goodwill. Standards and interpretations not yet adopted Management is currently assessing the impact of the following standards: IAS 1 Presentation of Financial Statements – this amendment relates to the presentation of items of other comprehensive income. The standard is effective for annual periods beginning on or after January 1, 2012 and is to be adopted on a prospective basis. IFRS 7 Financial Instruments was amended to require additional disclosures in respect to risk exposures arising from transferred financial assets. The standard is effective for annual periods beginning on or after July 1, 2011. IFRS 9 Financial Instruments was issued in November 2009 and addresses the classification and measurement of financial assets. This new standard reduces the number of categories and measurement options for financial assets. This new standard also amends the measurement of equity instruments whereas these instruments are either recognized at fair value through profit or loss or at fair value through other comprehensive income. This standard must be applied for years beginning January 1, 2015. IFRS 10 Consolidated Financial Statements was issued in May 2011. IFRS 10 provides a single model to be applied in the control analysis for all investees, including entities that currently are special purpose entities in the scope of SIC‐12. In addition, the consolidation procedures are carried forward substantially unmodified from IAS 27 (2008). This standard is effective for annual periods beginning on or after January 1, 2013, with early adoption permitted. IAS 12 Income Taxes – this amendment relates to deferred tax: recovery of underlying assets. The standard is effective for annual periods beginning on or after January 1, 2012 and is to be adopted on a retrospective basis. 16 GALVANIC APPLIED SCIENCES INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 3. SIGNIFICANT ACCOUNTING POLICIES (Continued) Standards and interpretations not yet adopted (Continued) IFRS 13 Fair Value Measurement was issued in May 2011. IFRS 13 replaces the fair value measurement guidance contained in various IFRS standards with a single source of fair value measurement guidance. It defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, i.e. an exit price. The standard also establishes a framework for measuring fair value and sets out disclosure requirements for fair value measurements to provide information that enables financial statement users to assess the methods and inputs used to develop fair value measurements and, for recurring fair value measurements that use significant unobservable inputs (Level 3), the effect of the measurements on profit or loss or other comprehensive income. This standard is effective for annual periods beginning on or after January 1, 2013. 4. RECLASSIFICATION OF PRIOR YEAR FINANCIAL STATEMENTS Certain prior year comparatives have been reclassified to conform to the presentation in the current year. Revenue, cost of sales, and selling and marketing expenses have been reclassified to recognize revenue earned from its service activities and to re‐classify any related costs. As part of the Company’s sales function the Company provides service support for its customers. Revenue generated from this support activity has not been significant and revenue generated from this support activity has been recorded as a reduction to costs related to this activity. At April 30, 2012, revenue from service support activities in the amount of $344,900 has been reclassified and included with instrumentation sales (April 30, 2011 ‐$340,466), with a corresponding increase in cost of sales at April 30, 2012. Additional costs associated with service activities in the amount of $37,304 at April 30, 2012 have been reclassified to cost of sales with a corresponding decrease in selling and marketing activities (April 30, 2011 ‐ $37,976). This reclassification did not have a material impact on gross margin or net income at April 30, 2011. 5. CREDIT FACILITY The Company has a $2,550,000 undrawn revolving operating line of credit which bears interest at the prime rate plus 0.850%. This facility is subject to annual review. The availability of the operating facility is subject to a monthly borrowing base calculation that considers eligible accounts receivable. Operating advances are payable on demand and are secured by a general security agreement providing a general charge on all assets of the Company and its subsidiaries. The Company is not required to meet any financial covenants. At April 30, 2012, April 30, 2011, and May 1, 2010 no amounts were drawn on this facility. 17 GALVANIC APPLIED SCIENCES INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 6. CASH AND CASH EQUIVALENTS April 30, 2012 April 30, 2011 May 1, 2010 $ $ $ Cash on deposit 1,926,718 1,813,140 1,360,903 Short‐term investments 4,498,597 1,568,619 1,601,752 6,425,315 3,381,759 2,962,655 The effective interest rate (%) on short‐term investments 0.88% 0.83% 0.83% At April 30, 2012 finance income includes $22,112 (April 30, 2011 ‐ $ Nil) of interest income related to its investments in short‐term deposits. 7. TRADE AND OTHER RECEIVABLES April 30, 2012 April 30, 2011 May 1, 2010 $ $ $ Trade receivables 2,082,706 1,938,393 1,640,705 Allowance for doubtful accounts (18,037) (124,469) (82,070) Other receivables 43,051 67,112 64,825 2,107,720 1,881,036 1,623,460 8. INVENTORY April 30, 2012 April 30, 2011 May 1, 2010 $ $ $ Raw materials 1,843,713 2,062,091 1,962,270 Work‐in‐progress 546,302 419,175 207,033 Finished goods 390,569 292,169 281,494 2,780,584 2,773,435 2,450,797 At April 30, 2012, the carrying amount of inventory charged to cost of sales was $6,042,583 (April 30, 2011 ‐ $4,217,974). This includes a loss of $83,002 on inventory written down to its net realizable value (April 30, 2011 ‐ $ Nil). 9. INVESTMENT IN MARKETABLE SECURITIES $ Balance ‐ April 30, 2011 and May 1, 2010 ‐ Purchases of securities 1,533,389 Unrealized gain on marketable securities 179,465 April 30, 2012 1,712,854 18 GALVANIC APPLIED SCIENCES INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 9. INVESTMENT IN MARKETABLE SECURITIES (Continued) At April 30, 2012 finance income included $52,340 of dividend income (April 30, 2011 ‐ $nil) related to its investments in marketable securities. As at April 30 2012, an unrealized change in fair value of $179,465 was recognized in other comprehensive income (April 30, 2011 ‐ $nil) 10. INTANGIBLE ASSETS Deferrred Development Goodwill Costs Total Note $ $ $ INTANGIBLE ASSETS Balance, May 1, 2010 3,442,693 7,709,739 11,152,432 Additions – internally developed ‐ 526,536 526,536 Balance, April 30, 2011 3,442,693 8,236,275 11,678,968 Additions – internally developed ‐ 488,806 488,806 Balance, April 30, 2012 3,442,693 8,725,081 12,167,774 IMPAIRMENT LOSS AND AMORTIZATION Balance May 1, 2010 25 2,833,710 5,328,474 8,162,184 Amortization ‐ 375,216 375,216 Balance, April 30, 2011 2,833,710 5,703,690 8,537,400 Amortization ‐ 514,028 514,028 Balance, April 30, 2012 2,833,710 6,217,718 9,051,428 NET CARRYING AMOUNTS May 1, 2010 608,983 2,381,265 2,990,248 April 30, 2011 608,983 2,532,585 3,141,568 April 30, 2012 608,983 2,507,363 3,116,346 For the year ended April 30, 2012, amortization of $514,028 (April 30, 2011 ‐ $375,216) was recognized in the statement of operations. 19 GALVANIC APPLIED SCIENCES INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 11. IMPAIRMENT Deferred development cost The Company reviewed impairment indicators and determined that there were no significant changes in circumstance or occurrence of events that suggests that the value of its deferred development costs may not have been recoverable. As there were no indicators of impairment, the Company did not undertake to make a formal estimate of the recoverable amount of its deferred development costs at April 30, 2012 and April 30, 2011. In making its assessment as to the possibility of impairment losses, the Company considered the historical cash flows generated and budgeted cash flow projections for the upcoming fiscal year. Assumptions with respect to the market, demand, customer base, and product life cycle have not changed since fiscal 2011. This suggests that deferred development costs, net of amortization at April 30, 2012 and April 30, 2011 are fairly stated. This determination was based on assumptions that the Company would continue to have a market for its products in the gas processing, refining and distribution markets, it would be able to retain its customer base in these markets, it would have the ability to maintain its prices and demand for its portfolio of instruments, and that there would be no significant product life cycle changes or requirements. Management also assumed that new product under development would be successfully commercialized. Goodwill For purposes of impairment testing, goodwill of $608,983 was allocated to one cash generating unit, which corresponds to the Company’s Canadian operating segment, Galvanic Canada. The allocation is made to the cash‐generating units that are expected to benefit from the synergies of the business combination in which the goodwill arose. Included in the Canadian CGU are all the deferred development costs associated with the development and upgrade of its complete line of analytical instrumentation. The recoverable amount for the Canadian cash generation unit is based on value in use calculations. A discounted cash flow calculation was used to estimate the value in use for the CGU. Cash flow projections determined by management are based on information available, to reflect the present value of the future cash flows expected to be derived through the continuing marketing and sales of its complete line of analytical instrumentation. The value in use of the Canadian CGU is determined on a pre‐tax value basis including pre‐tax cash flows and pre‐tax discount rate. The cash flow projection was based on the Company’s annual cash flow budget, with no growth projected, and constant cash flows over a five year time horizon. The main input for management’s net cash flow projections include an estimation of average sales prices, projected unit volumes, and margins to be achieved. This takes into consideration the market and competitive factors, product life cycles, technological enhancements and obsolescence in the industry, changes in environmental legislation, and historical results. This analysis did not give rise to impairment. 20 GALVANIC APPLIED SCIENCES INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 12. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment $ COST Balance, May 1, 2010 2,926,274 Additions 16,957 Disposals (2,486) Balance, April 30, 2011 2,940,745 Additions 28,402 Disposals ‐ Balance, April 30, 2012 2,969,147 AMORTIZATION Balance May 1, 2010 2,334,968 Amortization 253,677 Balance, April 30, 2011 2,588,645 Amortization 118,106 Balance, April 30, 2012 2,706,751 NET CARRYING AMOUNTS May 1, 2010 591,306 April 30, 2011 352,100 April 30, 2012 262,396 Costs included in property plant and equipment includes office, shop, and demonstration equipment, computer, manufacturing equipment and leasehold improvements. During the year ended April 30, 2012 the Company recorded depreciation of $118,106 (April 30, 2011 ‐ $253,677) in respect of its property, plant and equipment. 21 GALVANIC APPLIED SCIENCES INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 13. TRADE PAYABLES, ACCRUALS AND DEPOSITS April 30,2012 April 30, 2011 May 1,2010 $ $ $ Trade payables 626,013 453,945 476,654 Non‐trade payables and accrued expenses 346,629 237,934 312,490 Customer deposits 102,899 28,622 14,573 1,075,541 720,501 803,717 Customer deposits represent amounts received in advance on purchase commitments for instruments. 14. INCOME TAXES April 30, 2012 April 30, 2011 $ $ Current tax expense 726,518 139,672 Deferred tax expense (57,715) (38,246) Total income tax expense 668,803 101,426 The provision for income taxes, including deferred taxes, reflect an effective income tax rate that differs from the actual combined Canadian federal and provincial statutory rates of 26% (2011‐ 28%). The Company’s US subsidiary is subject to a federal and state statutory tax rate of approximately 34% (2011 ‐ 28%). The main differences are as follows: April 30, 2012 April 30, 2011 $ $ Income before income taxes 4,198,740 1,035,269 Expected income tax at statutory rate 27.70% 28.00% Expected income tax expense 1,163,051 289,875 Increase (decrease) resulting from: Non‐deductible charges 3,312 10,568 Non‐deductible stock‐based compensation 4,413 3,673 Deductible restructuring costs ‐ (10,645) Change in previously estimated tax pools ‐ (16,000) Recapture of investment tax credits ‐ 20,311 Tax deductible expenses ‐ (19,529) Deductible tax amounts not previously recognized (476,935) ‐ Other (25,038) (176,827) Total income tax expense 668,803 101,426 22 GALVANIC APPLIED SCIENCES INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 14. INCOME TAXES (Continued) Deferred tax liabilities are comprised of the following: April 30, 2012 April 30, 2011 May 1, 2010 $ $ $ Deferred development costs (639,378) (691,631) (650,085) Property, plant and equipment 8,925 30,906 76,548 Tax loss carry‐forwards ‐ (27,443) 52,484 Deferred tax liabilities (630,453) (688,168) (521,053) All deferred taxes are classified as non‐current, irrespective of the classification of the underlying assets or liabilities to which they relate, or the expected reversal of the temporary differences. In addition, deferred tax assets and liabilities have been offset if there is a legally enforceable right to offset current tax liabilities, and they relate to income taxes levied by the same tax authority on the same taxable entity. 15. SHARE CAPITAL Authorized Unlimited number of common and preferred shares, without nominal or par value. The holders of common shares are entitled to receive dividends, as declared, and are entitled to one vote per share at meetings of the Company. Issued Number of Amount Shares $ Balance, April 30, 2012, April 30, 2011, and May 1, 2010 15,741,072 5,003,473 Stock option plan The Company has a fixed stock option plan open to directors, officers and employee to purchase shares of the Company. Under the plan, the exercise price generally equals the market price of the Company’s stock on the day prior to the date of grant, generally vest over three to five year period, and an option’s maximum term is five years. As at April 30, 2012, 870,000 (April 30, 2011 – 780,000) options were outstanding for common shares at exercise prices ranging from $0.30 to $0.72 per share, expiring between 2013 and 2017. Under this plan, the Company may grant options to a maximum of 10% of the issued and outstanding common shares of the Company on a non‐diluted basis. 23 GALVANIC APPLIED SCIENCES INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 15. SHARE CAPITAL (Continued) The following table summarizes information about outstanding stock options: 2012 2011 Number of Weighted Number of Weighted Shares Average Shares Average Under Exercise Exercise Option Price Under Option Price Outstanding, beginning of year 780,000 0.33 840,000 0.37 Granted 90,000 0.72 60,000 0.47 Expired ‐ ‐ (120,000) 0.50 Outstanding, end of year 870,000 0.37 780,000 0.33 Exercisable, end of year 553,333 0.33 386,666 0.31 Available for grant, end of year 704,107 ‐ 794,107 ‐ At April 30, 2012, 470,000 (April 30, 2011 ‐ 380,000) of these options are held by key management personnel. Stock option grant During the fiscal year, the Company granted options to certain employees of the Company to purchase 90,000 common shares (April 30, 2011 – 60,000) at the market price of $0.72 per common share (April 30, 2011‐ $0.47) at the date of the grant. The options vest equally over a three year period and have a five year life. Stock‐based compensation of $16,941 has been included in general and administrative expenses for the year‐ended April 30, 2012 (April 30, 2011‐ $13,117). Fair value of the options has been estimated using the Black‐Scholes option‐pricing mode. Weighted average assumptions for options granted in the year are as follows: April 30, 2012 April 30, 2011 Fair value of stock options ($) 25,413 20,858 Forfeiture rate (%) ‐ ‐ Risk‐free interest rate (%) 1.44 2 Expected option life (years) 5 5 Expected volatility (%) 43.01 97.89 Expected annual dividends per share (%) ‐ ‐ 24 GALVANIC APPLIED SCIENCES INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 15. SHARE CAPITAL (Continued) The following table summarizes information about stock options outstanding at April 30, 2012: Weighted Weighted Options Outstanding Average Exercisable Average April 30, 2012 Remaining Life Exercise Price (Vested) Exercise Price (#) (years) ($) (#) ($) 400,000 1.25 0.30 320,000 0.30 320,000 2.58 0.35 213,333 0.35 60,000 3.92 0.47 20,000 0.47 90,000 4.92 0.72 ‐ 0.72 870,000 2.30 0.37 553,333 0.33 16. EARNINGS PER SHARE Basic earnings per share The calculation of basic earnings per share at April 30, 2012 was based on profit accruable to common shareholders of $3,529,937 (April 30, 2011 ‐ $933,843), and a weighted average number of common shares outstanding of 15,741,072 (April 30, 2011 – 15,741,072) Diluted earnings per share The calculation of diluted earnings per share was based on a weighted average number of common shares outstanding after adjustment for the effect of all dilutive effects of stock options calculated as follows: April 30, 2012 April 30, 2011 $ $ Weighted average number of common shares (basic) 15,741,072 15,741,072 Effect of stock options 338,207 126,231 Weighted average number of common shares (diluted) 16,079,279 15,867,303 Basic and diluted earnings per share 0.22 0.06 Options are excluded from the above calculation if their effect would have been anti‐dilutive. 90,000 options were excluded from the above calculation (April 30, 2011 – 150,000 options). The average market value of the Company’s shares for purposes of calculating the dilutive effect of share options was $0.589 (April 30, 2011 ‐ $0.394) based on quoted market prices for the year during which the options were outstanding. 25 GALVANIC APPLIED SCIENCES INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 17. CHANGES IN NON‐CASH WORKING CAPITAL April 30, 2012 April 30, 2011 $ $ Trade and other receivables (226,684) (257,576) Income taxes recoverable ‐ 48,117 Inventory (7,149) (322,638) Prepaid expenses 110,430 (62,835) Trade payables, accruals and deposits 355,041 (83,216) Income taxes payable 737,392 42,552 969,030 (635,596) 18. EMPLOYEE BENEFIT COSTS April 30, 2012 April 30, 2011 $ $ Wages, salaries and other benefits 3,961,419 3,974,736 Stock‐ based compensation (Note 15) 16,941 13,117 Total employee benefit costs 3,978,360 3,987,853 Employee benefit costs are included in cost of goods sold, selling and marketing, and administration. Employee benefit costs are also included as costs capitalized as a part of work‐in‐ process and finished goods inventory and deferred development costs. 19. SEGMENTED INFORMATION The Company currently has two operating segments which are the Company’s business units. Each of the business units is managed separately and markets its products to different market segments. Senior management reviews internal management reports on each of these segments on a monthly basis. The operating segments include Galvanic Canada and Galvanic Lowell. Galvanic Canada The operations for the natural gas industry are primarily conducted by the Company through its Calgary and Houston offices, and its products include instrumentation for the measurement of the composition of natural gas. This operating segment’s product line can be broadly categorized into two groups. The first is analytical products, which measure hydrogen sulfide (H2S) sulfur and total sulfur, and gas chromatographs. The markets for such products are the natural gas processing industry, sulfur recovery plants, tail gas clean‐up units, gas sweetening process, and sulphur degassing and forming. The second product line is electronic flow and pressure measurement products, which consist primarily of equipment that is designed to correct the volume reading of gas flow through a meter located at a commercial site. 26 GALVANIC APPLIED SCIENCES INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 19. SEGMENTED INFORMATION (Continued) Galvanic Lowell The Company’s operation in the liquids process market is operated from Lowell, Massachusetts. This operation includes three product lines that utilize varying technologies that measure chemical concentrations, viscosity, turbidity and suspended solids for the liquids process industry. Information regarding the results of each operating segment is included below. Performance is measure based on operating profit as included in internal management reports. Operating profit is used to measure performance as management believes that such information is the most relevant in evaluating the results. Inter‐segment pricing is determined on an arm’s length basis. The Company sells its product into three geographic segments: Canada, the United States and internationally. April 30, 2012 Galvanic Galvanic Total Canada Lowell Enterprise Revenue $ $ $ Canada 4,758,288 201,481 4,959,769 United States 2,160,828 1,822,207 3,983,035 Other international sales 5,304,063 2,415,343 7,719,406 Total revenue 12,223,179 4,439,031 16,662,210 Finance income 74,452 ‐ 74,452 Cost of sales 6,586,161 2,634,380 9,220,541 Other expenses 1,761,743 923,504 2,685,247 Amortization and depreciation 624,100 8,034 632,134 Income taxes 412,135 256,668 668,803 Net segment income 2,913,492 616,445 3,529,937 Segment assets ‐including goodwill 14,080,598 2,413,203 16,493,801 Segment liabilities 1,972,476 471,014 2,443,490 Goodwill 608,983 ‐ 608,983 Expenditures for property, plant and equipment 28,067 335 28,402 Expenditures for development costs 488,806 ‐ 488,806 No single customer represents more than 10% of consolidated revenues. 27 GALVANIC APPLIED SCIENCES INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 19. SEGMENTED INFORMATION (Continued) April 30, 2011 Galvanic Galvanic Total Canada Lowell Enterprise $ $ $ Revenue Canada 3,525,461 187,651 3,713,112 United States 2,419,602 1,916,343 4,335,945 Other international sales 2,653,510 1,400,033 4,053,543 Total revenue 8,598,573 3,504,027 12,102,600 Finance income ‐ ‐ ‐ Cost of sales 5,176,210 2,232,657 7,408,867 Other expenses 1,962,556 1,070,017 3,032,573 Amortization and depreciation 616,366 9,525 625,891 Income taxes 86,365 15,061 101,426 Net segment income 757,076 176,767 933,843 Segment assets ‐including goodwill 10,223,230 1,505,684 11,728,914 Segment liabilities 1,176,814 274,407 1,451,221 Goodwill 608,983 ‐ 608,983 Expenditures for property, plant and equipment 11,469 ‐ 11,469 Expenditures for development costs 526,535 ‐ 526,535 No single customer represents more than 10% of consolidated revenues. May 1, 2010 Galvanic Galvanic Total Canada Lowell Enterprise $ $ $ Segment assets ‐including goodwill 9,325,026 1,477,738 10,802,764 Segment liabilities 1,080,636 244,134 1,324,770 Goodwill 608,983 ‐ 608,983 28 GALVANIC APPLIED SCIENCES INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 20. FINANCIAL INSTRUMENTS RISK MANAGEMENT The Board of directors has overall responsibility for the establishment and oversight of the Company’s management framework. The Board of Directors has implemented and monitors compliance with risk management policies. The Company’s risk management policies are established to identify and analyze the risks faced by the Company, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are regularly reviewed and updated to reflect changes in market conditions and the Company’s activities. The Company has exposure to the following risks from its use of financial instruments: Credit risk Credit risk refers to the possibility that a customer or counterparty will fail to meet its contractual obligations, resulting in the Company incurring a financial loss. Financial instruments that potentially subject the Company to credit risk consist primarily of its accounts receivable balances. The Company assesses the credit worthiness of its customers on an ongoing basis, and establishes credit limits for each customer based on internal analysis, historical experience with the customer, and external credit reports. In some instances, the Company will take additional measures to reduce credit risk including letters of credit and prepayments from customers. The Company also monitors the amount and aging of accounts receivable balances on an ongoing basis. The Company also insures its international receivables through the Export Development Corporation. The Company makes provisions for specific accounts to recognize potential impairments which have been included in the accounts through its allowance account. Based on a review of customer balances outstanding, no further allowance was deemed necessary. The carrying amount of cash and cash equivalents, restricted cash, and trade and other receivables represents the maximum credit exposure. The credit risk is generally considered low since substantially all of its customers are well‐established and financed companies. April 30, 2012 April 30, 2011 May 1, 2010 $ $ $ Current 1,914,026 1,692,627 1,431,390 Greater than 90 days 211,731 312,878 274,140 Allowance for doubtful accounts (18,037) (124,469) (82,070) Trade and other receivables 2,107,720 1,881,036 1,623,460 Liquidity risk Liquidity risk is the risk that the Company may not be able to meet its financial obligations as they become due. The Company’s approach to managing liquidity is to ensure that it will always have sufficient liquidity to meet its liabilities when due. This is achieved through maintaining a strong working capital position, including a significant cash balance. At April 30, 2012 and April 30, 2011, this risk was limited due to having cash balances significantly in excess of total current liabilities. 29 GALVANIC APPLIED SCIENCES INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 20. FINANCIAL INSTRUMENTS RISK MANAGEMENT (Continued) Market risk Market risk is the risk that changes in market variables, such as interest rates, foreign exchange rates, and equity prices and their volatility, may affect the Company’s net income or the value of the assets and liabilities. The objective of market risk management is to manage and control market risk exposures within acceptable limits while maximizing returns. All such transactions are conducted in accordance with risk management policies. The Company’s short term cash invested in Canadian banks are not insured by the Canada Deposit Insurance Corporation (CDIC). The Board of Directors has reviewed the financial statements of the banks and determined that the risk is nominal. Equity price risk The Company is exposed to equity price risk as the result of changes in market conditions and fluctuations in market prices that may affect the market value of its portfolio of securities held mainly for investment purposes. These securities are classified and accounted for as available‐ for‐sale financial instruments and carried at fair‐value. The fair value of equity investments which are subject to equity price risk at April 30, 2012 was $1,712,854 (April 30, 2011 and May 1, 2010 – nil). The Board of Directors is responsible for the management and oversight of its investment portfolio. As part of its risk management strategy, extensive corporate governance policies and practices have been applied. The primary investment objective is to optimize the return on surplus cash while preserving the Company’s capital. The strategy is to invest in large publically traded companies listed on stock exchanges with a long history of paying regular dividends. Each individual investment is evaluated separately and trading guidelines identified. Economic and sector research influences the overall investment weighting. Limits are also established for the portfolio value at risk. Interest rate risk The Company earns investment income with respect to its short‐term invested cash and cash equivalent and exposed to interest rate risk. For the years ended April 30, 2012 and 2011, a change in the interest rate will not cause the value of the short‐term investments to change and any increases or decreases in the interest rate will have a nominal impact on finance income. Currency risk The types of foreign exchange currency risk can be categorized as follows: Transaction exposure The Canadian Company’s international business activities are primarily denominated in U.S. dollars and as a result there is a foreign exchange currency risk relative to the U.S. dollar and as a result is exposed to foreign currency risk on U.S. denominated financial assets and liabilities with fluctuations in the rates recognized as foreign exchange gains or losses in the consolidated statements of operations. Translation exposure The functional currency of the Company’s U.S. subsidiary is U.S. dollars. Accordingly, assets and liabilities are translated into Canadian dollars using the exchange rates in effect at the balance sheet dates. Unrealized translation gains and losses are included in accumulated other comprehensive income. 30 GALVANIC APPLIED SCIENCES INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 20. FINANCIAL INSTRUMENTS RISK MANAGEMENT (Continued) Market risk (Continued) Currency risk (Continued) Translation exposure (Continued) As the Company has no other significant foreign exchange balances in other countries; transaction exposure to foreign currency risk relates primarily to the US dollar as follows: April 30, 2012 April 30, 2011 Canadian Canadian Operations Operations U.S. $ U.S. $ Cash 2,295,342 2,445,891 Accounts receivable 515,664 561,466 Accounts payable and accrued (132,437) (92,536) liabilities Net foreign currency balance sheet 2,678,569 2,914,821 exposure Sensitivity analysis Based on the Company’s closing net foreign balance sheet exposure, and assuming the elimination of intercompany debt, for every $0.01 variation in the value of the US/Canadian dollar net income and other comprehensive income would have been impacted as follows: April 30, 2012 April 30, 2011 Canadian Canadian Operations Operations $ $ Impact of $0.01 change in the U.S. dollar to Canadian dollar exchange rate on net earnings 31,188 30,446 21. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company’s financial instruments include cash and cash equivalents, trade and other receivables, investments in marketable securities, restricted cash, trade payables, accruals, and deposits, and credit facility. Fair value amounts disclosed in these consolidated financial statements represent the Company’s estimate of the price at which a financial instrument could be exchanged in a market in an arm’s length transaction between knowledgeable, willing parties who are under no compulsion to act. These estimates may change in subsequent reporting periods due to market conditions or other factors. 31 GALVANIC APPLIED SCIENCES INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 21. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued) A fair value hierarchy is used to categorize the inputs used to measure fair value. Financial instruments measured at fair value are classified into one of three levels in the fair value hierarchy according to the relative reliability of the inputs used to estimate the fair values. The three levels of the fair value hierarchy are as follows: Level 1 ‐ include financial assets and liabilities that are measured in whole or in significant part by reference to published quotes in an active market at the measurement date. A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency and those prices represent actual and regularly occurring market transactions on an arm’s length basis. This category includes the Company’s investments in cash and cash equivalents, restricted cash, and marketable securities. Level 2 ‐ include financial assets and liabilities using valuation technical based on assumptions that are supported by prices from observable current market transactions. The Company has no assets in this category. Level 3 ‐ include financial assets and liabilities measure using valuation techniques based on non market observable inputs. This means that fair values are determined in whole or in part using a valuation model based on assumptions that are neither supported by prices from observable current market transactions in the same instrument nor are they based on available market data. The Company has no assets in this category. The fair value of cash and cash equivalents, restricted cash, trade and other receivables, and trade payables, accruals, and deposits is approximates their carrying value due to the short‐term nature and limited credit risk of these assets and liabilities. For the year ended April 30, 2012, total gains from Level 1 investments in marketable securities included in other comprehensive income amount to $179,465 (April 30, 2011 ‐ nil). 22. CAPITAL MANAGEMENT The Company considers its capital structure to include shareholders’ equity and working capital. April 30, 2012 April 30, 2011 May 1, 2010 $ $ $ Working capital 9,587,968 7,470,993 6,416,293 Shareholders’ equity 14,050,311 10,277,693 9,477,994 The Company’s objective when managing its capital structure is to sustain future development of the business, to maintain financial flexibility to preserve its ability to meet its financial obligations, and preserve investor and creditor confidence. 32 GALVANIC APPLIED SCIENCES INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 22. CAPITAL MANAGEMENT (Continued) The Company monitors capital based on funds from operations from sales of analytical instrumentation which are utilized to fund its ongoing operations and development activities. The Company prepares annual budgets which identify development projects and operating requirements. These are reviewed and approved by the Company’s Board of Directors. The Company manages its capital structure and makes adjustments based on changes in economic conditions. To manage the capital structure, the Company may from time to time adjust its spending, revise the terms of its operating lines of credit, issue new shares, or purchase shares for cancellation pursuant to a normal course issuer bid. The Company’s share capital is not subject to external restrictions. There has been no change in the Company’s approach to capital management during the year ended April 30, 2012. 23. RELATED PARTY TRANSACTIONS Key management compensation Key management includes the officers and directors of the Company. Compensation paid or payable to key management is as follows: April 30,2012 April 30,2011 $ $ Salaries, directors fees and other short term benefits 380,805 320,134 Stock‐based benefits (Note 15) 16,941 13,117 Total key management compensation 397,746 333,251 The majority of these costs are included in administrative expenses. Transactions with subsidiary – Galvanic Applied Sciences U.S.A. Inc. In the normal course of business, the Company purchases and sells certain components to its wholly owned subsidiary. These transactions are not considered to be material and have been eliminated through consolidation. These transactions are recorded at the exchange amount which approximates comparable transactions with third parties. 24. COMMITMENTS AND CONTINGENCIES Performance bonds Pursuant to its international sales agreements, the Company is sometimes required to post performance bonds as a guarantee that products shipped will be received in good working order. Performance bonds outstanding at year end have been recorded as restricted cash. Any performance bonds that expire during the fiscal year will be transferred to the Company’s general cash position. 33 GALVANIC APPLIED SCIENCES INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 24. COMMITMENTS AND CONTINGENCIES (Continued) Operating lease commitments The Company has commitments under various operating leases, primarily for facilities and vehicles. Operating lease expense at April 30, 2012 was $479,179 (April 30, 2011 ‐ $491,784). A proportionate share of operating lease expenses is included in costs of sales with the balance in general and administrative expenses in the consolidated statement of operations. The Company has entered into a sublease arrangement in respect of its lease related to premises in the Canadian operating segment. Leases for its premises expire in fiscal 2013 and 2014 with no renewal options. As of July 23, 2012, the Company has renegotiated its lease for the Galvanic Canada operating segment for a five year term with two renewal options. Minimum rent payable under the lease has been included in the following table. Payments required are as follows: April 30, 2012 $ 2013 457,953 2014 309,655 2015 224,986 2016 220,398 Thereafter 108,713 Contingencies The Company is involved in a legal action which has occurred in the normal course of business. Management is of the opinion that losses, if any, arising from this action would not have a material effect on these consolidated financial statements. 25. FIRST TIME ADOPTION OF IFRS The consolidated financial statements for the year ended April 30, 2012 represent the Company’s first annual financial statements under IFRS. The Company adopted IFRS in accordance with IFRS 1 “First time adoption of International Financial Reporting Standards” on May 1, 2010 using the significant accounting policies outlined in Note 3. Until the year ended April 30, 2011, the Company had prepared their financial statements in accordance with previous Canadian generally accepted accounting principles (“Canadian GAAP”). An explanation of how the transition from previous Canadian GAAP to IFRS has affected the Company’s financial position, financial performance, and cash flows is set out in the following notes and tables. As part of the Company’s adoption to IFRS, the following elections were made under IFRS 1: In preparing these consolidated financial statements in accordance with “First‐time Adoption of “International Financial Reporting Standards” (IFRS 1), the Company has applied certain of the optional exemptions from full retrospective application of IFRS. The option exemptions applied are described below: 34 GALVANIC APPLIED SCIENCES INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 25. FIRST TIME ADOPTION OF IFRS (Continued) (a) Share‐based payment transactions The Company has a stock option program. Under previous Canadian GAAP, the Company accounted for these stock‐based payment arrangements by reference to their fair value based upon the Black‐Scholes pricing model. The Company has elected to apply the IFRS exemption with respect to stock options granted after November 7, 2002 that was vested before the transition date. The Company has only applied IFRS 2 to stock options outstanding at the date of IFRS transition that were granted on or after November 7, 2002, but which had not vested by the date of transition using the Black‐Scholes tranche level accelerated amortization model. The application of IFRS 2 did not result in any adjustments to compensation expense at the date of transition. (b) Business combinations The Company has elected not to apply IFRS 3 Business Combinations retroactively to past business combinations. Accordingly, the Company has not restated business combinations that took place prior to May 1, 2010. In respect of acquisitions prior to May 1, 2010, goodwill represents the amount recognized under previous Canadian GAAP, the Company’s previous accounting framework. Under Canadian GAAP, transaction costs were included in the purchase price of the business acquisition. (c) Cumulative translation differences IFRS 1 permits the Company to reset the previously accumulated translation gains, which were included in Accumulated Other Comprehensive Income (loss), prior to the date of transition to zero. The Company has elected to reset its cumulative translation gain of $373,000 to zero in opening retained earnings at its transition date of May 1, 2010. Mandatory exceptions to retrospective application In preparing these consolidated financial statements in accordance with IFRS 1, the Company applied certain mandatory exceptions from full retrospective application of IFRS. The mandatory exceptions applied from full retrospective application of IFRS are described below. Estimates The Company’s IFRS estimates as of May 1, 2010 are consistent with its Canadian GAAP estimates for the same date. Previous Canadian GAAP to IFRS Financial Statement Adjustments Impairment on transition to IFRS – May 1, 2010 Goodwill and deferred development costs On May 1, 2010, the date of transition to IFRS, the Company conducted impairment tests on goodwill and development costs, and recognized an impairment loss of $2,833,710 to reduce the carrying amount of the Lowell cash generating unit to its recoverable amount. This impairment loss is presented as an adjustment to retained earnings in the opening balance sheet on the date of transition – May 1, 2010. Impairment testing for the Canadian cash generating unit did not result in any impairment charges for the Canadian cash generating unit. 35 GALVANIC APPLIED SCIENCES INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 25. FIRST TIME ADOPTION OF IFRS (Continued) Goodwill and deferred development costs (Continued) At the date of transition to IFRS, the Company identified two cash generating units which are Galvanic Canada and Galvanic Lowell. The Company allocated goodwill associated with the acquisition of the Brimstone assets of $608,983 to Galvanic Canada and $2,833,710 associated with the Metrissa acquisition to Galvanic Lowell. Galvanic Canada also includes all the capitalized deferred development costs for its complete line of analytical instrumentation. Under Canadian GAAP, the Company assessed intangible assets for impairment whenever events or changes in circumstances indicated that its carrying amount may not be recoverable. The carrying amount would not be recoverable if the carrying amount exceeds the sum of the undiscounted cash flows expected to result from its use and eventual disposition. An impairment loss would then be measured as the amount by which the carrying amount exceeds its fair value. Goodwill is assigned to a reporting unit and is assessed for impairment on an annual basis and whenever events or circumstances occur that reduce the fair value of a reporting unit below its carrying amount. If the fair value of the reporting unit exceeds the carrying amount, the fair value of the reporting unit's goodwill would be compared with its carrying amount in order to determine the amount of the impairment loss. The Company under Canadian GAAP prepared the undiscounted cash flow projection over ten years, which reflects the average life cycle for the Company’s products. The Company determined that there was no impairment in the Galvanic Canada CGU and Galvanic Lowell CGU under Canadian GAAP. Under IFRS, the Company is required to assess for indicators of impairment at the end of each reporting period. If indicators exist, the Company would prepare an estimate of recoverable amount which is the higher of the fair value less costs to sell and value in use. Value in use is defined as the present value of the future cash flows expected to be derived. An impairment loss would be determined by the amount that the carrying value exceeds recoverable amount. Goodwill is allocated to cash generating units as appropriate. Cash generating units with goodwill are tested for impairment annually and whenever there is an indication that the unit may be impaired by comparing the carrying amount including goodwill to the recoverable amount of the cash generating unit. If an impairment loss is recognized, it would first be applied to the carrying amount of any goodwill allocated to the cash‐generating unit and then to the other assets on a pro rata basis. The recoverable amount for the Galvanic Canada and Galvanic Lowell CGU’s are based on value in use calculations. A discounted cash flow calculation was used to estimate the value in use. Cash flow projections were based on the 2011 budget and adjusted for past experience from actual operating results. Cash flows were extrapolated over five years and a 16% discount rate. The Company determined that there was no impairment in the Galvanic Canada CGU and an impairment loss of $2,833,710 in the Galvanic Lowell CGU. This impairment loss was recorded as an adjustment to retained earnings at the date of transition to IFRS. Material Adjustments to the Statement of Cash Flows There are no material changes to the statement of cash flows for any of the periods. 36 GALVANIC APPLIED SCIENCES INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 25. FIRST TIME ADOPTION OF IFRS (Continued) Reconciliations between Canadian GAAP and IFRS The following are reconciliations of the financial statements previously presented under Canadian GAAP to the financial statements prepared under IFRS: I. Balance Sheet at date of transition – May 1, 2010 II. Balance Sheet at April 30, 2011 III. Statement of Operations and Comprehensive Income for the year ended April 30, 2011 Reconciliation of Assets, Liabilities and Equity as reported under Canadian GAAP to IFRS April 30, 2011 May 1,2010 Notes Canadian Canadian 24 GAAP Adj. IFRS GAAP Adj. IFRS $ $ $ $ $ $ Assets Current Cash and cash equivalents 3,381,759 ‐ 3,381,759 2,962,655 ‐ 2,962,655 Trade and other receivables 1,881,036 ‐ 1,881,036 1,623,460 ‐ 1,623,460 Income taxes recoverable ‐ ‐ ‐ 48,117 48,117 Inventory 2,773,435 ‐ 2,773,435 2,450,797 2,450,797 Prepaid expenses 197,816 ‐ 197,816 134,981 ‐ 134,981 Total current assets 8,234,046 ‐ 8,234,046 7,220,010 ‐ 7,220,010 Non‐current Restricted cash 1,200 ‐ 1,200 1,200 ‐ 1,200 Intangible assets 5,975,278 (2,833,710) 3,141,568 5,823,958 (2,833,710) 2,990,248 Property, plant and equipment 352,100 ‐ 352,100 591,306 ‐ 591,306 Total non‐current assets 6,328,578 (2,833,710) 3,494,868 6,416,464 (2,833,710) 3,582,754 Total assets 14,562,624 (2,833,710) 11,728,914 13,636,474 (2,833,710) 10,802,764 Liabilities and Equity Current Trade payables, accruals, and deposits 720,501 ‐ 720,501 803,717 ‐ 803,717 Income taxes payable 42,552 ‐ 42,552 ‐ ‐ ‐ Total current liabilities 763,053 ‐ 763,053 803,717 ‐ 803,717 Non‐current Deferred tax liabilities 688,168 ‐ 688,168 521,053 ‐ 521,053 Total non‐current liabilities 688,168 ‐ 688,168 521,053 ‐ 521,053 Equity Share capital 5,003,473 ‐ 5,003,473 5,003,473 ‐ 5,003,473 Contributed surplus 956,917 ‐ 956,917 943,800 ‐ 943,800 Accumulated other comprehensive loss (520,243) 372,982 (147,261) (372,982) 372,982 ‐ Retained earnings 7,671,256 (3,206,692) 4,464,564 6,737,413 (3,206,692) 3,530,721 Total equity 13,111,403 (2,833,710) 10,277,693 12,311,704 (2,833,710) 9,477,994 Total liabilities and equity 14,562,624 (2,833,710) 11,728,914 13,636,474 (2,833,710) 10,802,764 37 GALVANIC APPLIED SCIENCES INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 25. FIRST TIME ADOPTION OF IFRS (Continued) Reconciliation of Statement of Operations as reported under previous Canadian GAAP to IFRS April 30, 2011 Canadian Reclass GAAP Adj IFRS (Note 4) IFRS $ $ $ Revenue 11,762,134 ‐ 11,762,134 340,466 12,102,600 Cost of sales 7,030,425 ‐ 7,030,425 378,442 7,408,867 Gross profit 4,731,709 ‐ 4,731,709 (37,976) 4,693,733 Other expenses Selling and marketing 1,387,481 ‐ 1,387,481 (37,976) 1,349,505 Administrative expenses 1,542,184 ‐ 1,542,184 ‐ 1,542,184 Foreign exchange loss 140,884 ‐ 140,884 ‐ 140,884 Amortization and depreciation 625,891 ‐ 625,891 ‐ 625,891 Total other expenses 3,696,440 ‐ 3,696,440 (37,976) 3,658,464 Revenue less other expenses 1,035,269 ‐ 1,035,269 ‐ 1,035,269 Finance income ‐ ‐ ‐ ‐ ‐ Income before income taxes 1,035,269 ‐ 1,035,269 ‐ 1,035,269 Income taxes 101,426 ‐ 101,426 ‐ 101,426 Net income 933,843 ‐ 933,843 ‐ 933,843 Other comprehensive income Foreign currency translation (147,261) ‐ (147,261) ‐ (147,261) Total comprehensive income 786,582 ‐ 786,582 ‐ 786,582 Earnings per share Basic 0.06 0.06 0.06 Diluted 0.06 0.06 0.06 The transition to IFRS at May 1, 2010 did not result in any restatements to the Statement of Operations and Comprehensive Income for the year ended April 30, 2011. Canadian GAAP and IFRS prior year comparatives have been reclassified to conform to the presentation in the current year (Note 4). 38 GALVANIC APPLIED SCIENCES INC.
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